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McCain Tax Simplification Plan May Find Fertile Ground in Congress

Posted on October 8, 2008 by Meg Shreve
Document originally published in
Tax Notes Today on October 7, 2008.

A proposal to create an alternative, optional tax system could quickly gain support among Senate Republicans if GOP presidential nominee Sen. John McCain of Arizona wins the White House and gives the proposal a needed push, observers say.

Tax simplification has been a mainstay of McCain's stump speeches since April, when he backed creation of an optional second tax system based on a two-rate structure. "We will simplify the tax code so people can understand it and do their tax returns themselves," McCain said in a September speech.

A similar plan has already taken root among some House Republicans. Last October the Republican Study Committee introduced the Taxpayer Choice Act of 2007 (H.R. 3818), which could be a starting point for action in 2009. Introduced by House Ways and Means Committee member Paul Ryan, R-Wis., the bill's 90 cosponsors include a handful of other Ways and Means members, including Reps. Dave Camp, R-Mich., Wally Herger, R-Calif., and Ron Lewis, R-Ky.

Across the Capitol, by contrast, the optional alternative system idea has made little headway. A similar bill (S. 2416) introduced in December 2007 by Sen. Jim DeMint, R-S.C., has yet to pick up a single cosponsor, much less the backing of a Finance Committee member.

The Senate's lack of enthusiasm, however, could well change if McCain were to win the White House and give his plan a push. "If a President McCain was going to pursue that, it's going to get a lot of attention," Senate Finance Committee ranking minority member Chuck Grassley, R-Iowa, told Tax Analysts in a recent interview.

The McCain campaign has offered few new details on how an alternative tax system would work. But the study committee's bill would create a two-rate structure. It would allow taxpayers to choose between filing under the current code or a second system based on a "simplified tax" with a two-rate structure of 10 percent on adjusted gross income up to $50,000 for single filers ($100,000 for joint filers) and 25 percent on AGI above those amounts.

The McCain campaign has characterized its proposal as revenue neutral. The nonpartisan Tax Policy Center, however, in a recent analysis of the presidential candidates' tax plans called that premise "implausible."

"Offering taxpayers an option to pay taxes under an alternative system would almost certainly cost the Treasury money," according to the center. "Although some taxpayers might choose to pay additional tax in exchange for a simpler return, most taxpayers would elect the alternative system only if it cuts their tax bill."

Grassley, who said he was open to a plan for an alternative tax system but would need to study details, pointed to revenue projections as a potential sticking point if a President McCain sent such a plan to Congress.

"I don't think you can have something show a lot of revenue loss," said Grassley. He added that he was not sure how the Joint Committee on Taxation would score the plan and questioned whether McCain could sell the idea to lawmakers. "I think it goes back [to], Is it going to bring in the same amount of revenue?" Grassley said.

Other observers agree that if McCain gets elected and proposes an alternative tax system, Republicans will fall behind their party's leader. McCain would find "significant" interest from Republicans on both sides of the Capitol, Mel Schwarz, a partner in the national tax office of Grant Thornton LLP, told Tax Analysts. "My guess is they'll want to have some involvement in it."

Also boding well for McCain's approach is the fact that Democratic presidential nominee Sen. Barack Obama of Illinois, who currently leads in the opinion polls, also has a tax simplification plan, one that relies on precompleted tax forms from the IRS that would require that taxpayers merely sign and return.

Under an Obama presidency, observers say, the question in Congress would become: What do Republicans offer as an alternative? "At that point the Republicans will need a simplification plan," Schwarz said. That opens the door for Senate Republicans to take a "fresh look" at the House Republican proposal, he said.