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ACKNOWLEDGEMENTS

The Joint Committee on Taxation study of the overall state of the Federal tax system and recommendations to simplify taxpayer and administrative burdens is required by the IRS Restructuring and Reform Act of 1998 and funded by appropriations approved by the Congress.

The study was prepared and produced by virtually the entire Joint Committee staff. Special recognition must be given to Mary Schmitt and Carolyn Smith who helped on every stage of this project, from planning and coordinating staff teams to the final editing of the report. In addition, Rick Grafmeyer, who left the staff last year, was instrumental in assisting in the planning of this report. Cecily Rock, who contributed to various portions of the report, also coordinated the final production of the Joint Committee staff recommendations in Volume II.

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This study was prepared by the legislative staff of the Joint Committee on Taxation, each of whom contributed to this final product: Carolyn D. Abraham, Secretary; R. Gregory Bailey, Legislation Counsel; Thomas A. Barthold, Senior Economist; E. Ray Beeman, Legislation Counsel; B. Jean Best, Secretary; John H. Bloyer, Chief Clerk; Michael E. Boren, Administrative Assistant; Mary Ann Borrelli, Economist; Tanya Butler, Statistical Analyst; Roger Colinvaux, Legislation Counsel; William J. Dahl, Senior Computer Specialist; John W. Diamond, Economist; Timothy A. Dowd, Economist; Patrick A. Driessen, Senior Economist; Christopher P. Giosa, Economist; H. Benjamin Hartley, Senior Legislation Counsel; Robert P. Harvey, Economist; Patricia A. Hensley, Data Set Specialist; Harold E. Hirsch, Senior Legislation Counsel; Thomas P. Holtmann, Economist; Melani Houser, Chief Statistical Analyst; Deirdre A. James, Legislation Counsel; Ronald A. Jeremias, Senior Economist; Gary Koenig, Economist; Thomas F. Koerner, Associate Deputy Chief of Staff; Lauralee A. Matthews, Senior Legislation Counsel; Patricia M. McDermott, Legislation Counsel; Debra L. McMullen, Senior Staff Assistant; Neval E. McMullen, Staff Assistant; Brian A. Meighan, Accountant; Pamela H. Moomau, Senior Economist; Tracy S. Nadel, Director Of Tax Resources; John F. Navratil, Economist; Joseph W. Nega, Legislation Counsel; Hal G. Norman, Computer Specialist; Melissa A. O'Brien, Tax Resource Specialist; Samuel Olchyk, Legislation Counsel; Christopher J. Overend, Economist; Lindy L. Paull, Chief of Staff; Oren S. Penn, Legislation Counsel; Cecily W. Rock, Senior Legislation Counsel; Lucia J. Rogers, Secretary; Bernard A. Schmitt, Deputy Chief of Staff; Mary M. Schmitt, Deputy Chief of Staff; Todd C. Simmens, Legislation Counsel; Christine J. Simmons, Secretary; Carolyn E. Smith, Associate Deputy Chief of Staff; William T. Sutton, Senior Economist; Melvin C. Thomas, Jr., Senior Legislation Counsel; Michael A. Udell, Economist; and Barry L. Wold, Legislation Counsel. In addition, the following former staff members contributed to this report: David P. Hering, Paul M. Schmidt, and Melbert E. Schwarz.

The Joint Committee staff gratefully acknowledges the contribution of the academic and tax policy advisors for the significant commitment of time and substantive contributions they made to the development of this report. The tax policy advisors provided guidance on the principal focus of the report, and the academic advisors provided significant input on the recommendations in the report. The meetings with the advisors were a rare opportunity for our staff to engage in informative and thought-provoking discussions with former government officials and scholars. The advisors are listed in Appendices A and B, respectively, of Volume I. Special recognition is given to three of the advisors who spent significant time working as consultants to the Joint Committee staff: Patricia E. Dilley, Christopher H. Hanna, and Frances R. Hill, and to the advisors who prepared papers for inclusion in Volume III of this study: Jonathan Barry Forman, Deborah A. Geier, Frances R. Hill, Annette Nellen, George K. Yin, and David J. Shakow.

The Joint Committee staff also recognizes the significant contributions of the General Accounting Office and the Congressional Research Service to this study. The work of these organizations is reproduced in Appendices C and D, respectively, of Volume I.

Lindy L. Paull
Chief of Staff

CONTENTS

Page

B-1

C-1
D-1

PART THREE.--RECOMMENDATIONS OF THE STAFF OF THE

JOINT COMMITTEE ON TAXATION TO SIMPLIFY THE FEDERAL

TAX SYSTEM

I. ALTERNATIVE MINIMUM TAX.

II. INDIVIDUAL INCOME TAX.

A. Structural Issues Relating to the Individual Income Tax ....

1. Introduction

2. Filing status........

3. Determination of marital status ...

4. Exclusions from income

5. Deductions and credits..............

6. Above-the-line deductions and itemized deductions

7. Standard deduction ..............

8. Dependency exemption, child credit, and earned income credit ......

9. Treatment of capital gains and losses .........

10. Treatment of home mortgage interest of individuals

B. Filing Status, Personal Exemptions, and Credits .........

1. Uniform definition of qualifying child

2. Dependent care tax benefits...

3. Modifications to the earned income credit .

4. Determinations relating to filing status

C. Income-Based Phase-outs and Phase-ins.

D. Taxation of Social Security Benefits .......

E. Individual Capital Gains and Losses ........

1. Adopt a uniform percentage deduction for capital gains in lieu of

multiple tax rates

2. Definition of "small business" for capital gain and loss provisions .......

F. Two-Percent Floor on Miscellaneous Itemized Deductions

G. Provisions Relating to Education .....

1. Overview of tax provisions relating to education

2. Definition of qualified higher education expenses

3. Combine HOPE and Lifetime Learning Credits.

4. Interaction among provisions

5. Deduction for student loan interest .......

6. Exclusion for employer-provided educational assistance

7. Structural issues.........

H. Taxation of Minor Children

III. INDIVIDUAL RETIREMENT ARRANGEMENTS, QUALIFIED

RETIREMENT PLANS, AND EMPLOYEE BENEFITS ........

A. Structural Issues Relating to Qualified Retirement Plans .....

B. Individual Retirement Arrangements

C. Qualified Retirement Plans

Page

166 173 183 185 188

192

194 194 198 201

202

1. Adopt uniform definition of compensation for qualified

retirement plans ........
2. Modifications to minimum coverage and nondiscrimination rules ......
3. Apply uniform vesting requirements to all qualified retirement plans.....
4. Conform requirements for SIMPLE IRAs and SIMPLE 401(k) plans.....
5. Conform definitions of highly compensated employee and owner .......
6. Conform contribution limits for tax-sheltered annuities to contribution

limits for qualified retirement plans
7. Simplification of distribution rules applicable to qualified retirement

plans
a. Simplify minimum distribution rules ..........

b. Adopt uniform early withdrawal rules ........
8. Make 401(k) plans available to all governmental employers.....
9. Redraft section 457 to separate requirements for governmental plans

and plans of tax-exempt employers
10. Adopt uniform ownership attribution rules for qualified retirement

plan purposes.......
D. Basis Recovery Rules for Qualified Retirement Plans and IRAs..........

1. In general ..............

2. Qualified retirement plans
E. Employee Benefits......

1. Modify cafeteria plan election requirements
2. Employees excluded from application of nondiscrimination

requirements
CORPORATE INCOME TAX........
A. Structural Issues Relating to the Corporate Income Tax

1. Corporate integration .......

2. Mergers, acquisitions, and related tax-free transactions.....
B. Eliminate Collapsible Corporation Provisions ..... .....
C. Section 355 “Active Business Test” Applied to Chains of Affiliated

Corporations ...
D. Uniform Definition of a Family for Purposes of Applying Attribution

Rules ...............
E. Limit Application of Section 304
F. Post-Reorganization Transfers of Assets
G. Redemptions Incident to Divorce ....
H. Conform Treatment of Boot Received in a Reorganization with the Stock

Redemption Rules ......
PASS-THROUGH ENTITIES............
A. Structural Issues Relating to Pass-Through Entities
B. Partnership Simplification Recommendations .......

1. Modernize references to "limited partner" and "general partner"
2. Eliminate large partnership rules ..........

204 211 211 211 221 221

IV.

225 229 229 229 238 249

251

253 259 261 263

V.

267 269 269 277 277 287

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