Taxable Talk

This afternoon I spoke to the Exchange Club of Irvine regarding tax law changes in 2007. One issue that came up that I couldn't give a complete answer to was the Alternative Minimum Tax (AMT). Would Congress pass another "patch" bill for 2007? Would Congressman Rangel's bill that included other tax increases pass? What would the impact be on the 2007 filing season?

Before I answer those questions, let me note that it's not just taxpayers who are concerned. The IRS Oversight Board is "gravely concerned" regarding possible delays in the filing season due to changes with the AMT. Paul Cherecwich, chair of the Board, sent a letter to the Senate Finance Committee noting the Board's concerns. The Oversight Board estimates that a late filing season start date of January 28, 2008 will result in $17 billion in delayed refunds, while a February 18, 2008 filing season start date will result in $87 billion of delayed refunds.

Other potential impacts of the delay include more taxpayers filing paper returns (the IRS can shut down electronic return processing but can't stop paper returns from being mailed) increasing expenses, increase errors, and generally make next tax season a nightmare. "In conclusion, the Oversight Board urges Congress to take quick action so as to mitigate the risks of AMT changes on taxpayers. Although it is difficult to quantify the exact impact with certainty, the risks are high and the effect on taxpayers is potentially very burdensome."

So, let me answer the questions that were posed today. Congress will pass an AMT patch that's acceptable to President Bush and Congressional Republicans because the AMT primarily impacts "Blue" states. Congressman Rangel's bill won't pass as currently written; House Democrats will have to live without their "paygo" rules. As to the impact on the tax season, let's just say that I think the rest of my hair will be gray by next April 15th.

I've been asked if I am a supporter of the "Fair Tax." The Fair Tax is an idea of scrapping the current U.S. Tax Code and replacing it with a national sales tax. You can go to the Fair Tax website and get detailed information on the program. The site gives fundamentals behind the program here.

I hadn't seen an unbiased review of the Fair Tax program until this weekend. Hank Adler, a professor of business at Chapman University, has published a lengthy critique of the Fair Tax. You can read it here (it is best read using Internet Explorer rather than Firefox). Professor Adler comes to the conclusion that while our current Tax Code may need to be replaced, the Fair Tax isn't the way to go.

I agree that our current Tax Code is not a very good system. I'm still digesting material on the Fair Tax, and haven't reached Professor Adler's full conclusion, but I do have many reservations about the Fair Tax.