WASHINGTON – Filling out tax returns would become simpler for most Americans if Congress scrapped rules that phase out tax breaks as incomes rise, says a congressional report on the complex tax code.
Among the tax breaks that should be made universal are the $500 child credit, itemized deductions and credits for child care and education, the bipartisan Joint Committee on Taxation recommended Wednesday.
Taxes such as the alternative minimum tax and century-old telephone excise tax have outlived their usefulness and should be abolished, the committee said.
The 1,300-page report marks one of the most comprehensive efforts to show Congress how to simplify a tax code that now consumes nearly 1.4 million words, generates 650 tax forms and 13,000 pages of explanation, and increasingly leads people to seek professional tax help.
The result, according to the committee: It is more costly for taxpayers to comply with the law; allows those with means can find ways to evade taxes; and increases the perception that the tax code is unfair. In addition, it becomes more difficult for the Internal Revenue Service to properly administer the laws.
"The IRS is more likely to make mistakes in the assistance provided to taxpayers," the report says.
The report leaves out several major issues because the committee decided not to tackle any part of tax law if it meant fundamentally altering the clear intent of Congress. Among the 22 untouchable issues are the deductibility of home mortgage interest, the method of determining marital status and the size of the standard tax deduction.
The report, issued in advance of a Senate Finance Committee hearing Thursday, put much of the blame on Congress and past administrations. Lack of clarity and vagueness in the law and the "use of the federal tax system to advance social and economic policies" were cited as major reasons behind the complex code.
The Finance Committee chairman, Republican Sen. Charles Grassley of Iowa, and the committee's senior Democrat, Sen. Max Baucus of Montana, said in a statement that the report should "jump-start" a much needed debate on simplifying the tax code. But they acknowledged that making such fundamental change is costly and must ensure that people are not harmed.
"The easy part is deciding to simplify taxes," they said. "The hard part is deciding how to do it."
For individuals, the Joint Committee on Taxation recommends:
--Scrapping income "phaseouts" that gradually end many tax breaks as a taxpayer's income rises. Among the examples: the overall limitation on itemized deductions and the phaseouts of personal exemptions, the $500 child tax credit, education credit, the student loan interest deduction, individual retirement accounts and the adoption credit.
"These phaseouts require taxpayers to make complicated calculations and make it difficult for taxpayers to plan whether they will be able to utilize the benefits," the report said. "This recommendation would provide simplification for up to 30 million returns."
• Ending the income limits on eligibility to make deductible contributions to IRAs, Roth IRA contributions and conversions of traditional IRAs to Roth IRAs. The report also made recommendations to streamline employer-provided pension plans and distributions from retirement plans.
• Elimination of the alternative minimum tax, which "no longer serves the purposes for which it was intended." The tax was intended to ensure that very wealthy people did not escape taxation through legal means but increasingly threatens the middle class because it was never indexed for inflation. It will strike at least 21 million taxpayers by 2011.
• Abolition of the 3 percent excise tax on telephone service, which originally began to finance the Spanish-American War. Congress last year passed such a measure, but it was vetoed by President Clinton.
• Using a single uniform definition for a child for the dependency exemption, earned income credit, child credit, dependent care credit and head of household filing status. The single definition, based on where the child actually lives for at least half of the tax year, would simplify more than 44 million returns.
• Ending the requirement that miscellaneous itemized deductions add up to at least 2 percent of a taxpayer's income.
• Elimination of an 18-line worksheet required to figure out which Social Security benefits should be counted as taxable income. In its place, a fixed percentage of taxable benefits should be imposed for everyone.