How Would Proposed Tax Reform Affect You?

Short answer: It depends on who you are.

But let’s step back for a moment. Almost everyone agrees that the current U.S. Tax Code is overly-complicated, inefficient, and unfair. Corporations note that the U.S. corporate tax rate is among the highest in the developed world. Individuals complain that they have to navigate a maze of deductions, credits, and exemptions to avoid paying more in taxes than they have to.

In his campaign, President Obama made an overhaul of the tax code, along with healthcare reform, one of his major campaign promises. The White House recently assembled a panel, and asked it to draft recommendations for a new tax code that would be easier to navigate, increase government revenue, and promote long-term economic growth.

They responded with a fairly simple proposal: eliminate virtually every special deduction and tax credit that’s been inserted into the code over the years (mostly through the lobbying of special interest groups). This would allow tax rates to be lowered across the board while actually increasing the overall amount of tax revenue the government gets.

Although tax rates would be lower, most people will end up paying slightly more in taxes when all is said and done, the theory is that the overall benefits of the new system would more than offset the slightly higher tax bill that most of us would receive. For businesses which would no longer need to hire armies of accountants and tax lawyers to comply with the tax code, the savings in time and resources should be particularly pronounced.

However, if you’re an individual, many tax breaks that most of us take for granted will disappear. On the chopping block is one of the biggest tax perks enjoyed by individuals: the mortgage interest deduction. Any interest paid on a mortgage for a residence is completely deductible from one’s taxable income, a policy designed to encourage homeownership. If this proposal becomes law (a big “if”), it could be argued that it would put homeownership on a more even economic footing with other arrangements, such as renting, allowing individuals to make economic decisions that make the most sense for their individual circumstances, without the government created skewed incentives.

Whatever happens, the tax code is almost certainly going to undergo some changes in the coming year, since members of both political parties agree that change is needed. It’s not clear what the final proposal will look like, but it will be important to keep abreast of new developments.

John is a writer for LegalMatch.com and the LegalMatch.com Law Blog.

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