**Submission of Comments**

Submitter: Christopher W. Hesse, CPA

LeMaster & Daniels PLLC

1350 S. Pioneer Way

Moses Lake, WA 98837

509-765-1281 (voice)

509-765-1931 (fax)

March 5, 2005

chesse@lemasterdaniels.com

**[Headaches, unnecessary complexity, and burdens:]{.underline}**

In 25 years of experience, it becomes increasingly more difficult to
prepare income tax returns, especially individual income tax returns,
without the benefit of the computer. For our clientele, we are assured
of phase-outs, phase-ins and elections which require recomputation due
to the smallest change in adjusted gross income or taxable income.
Elections provided in order to "simplify" income taxes result in
multiple computations in order to determine which alternative among many
result in the lowest overall tax liability. For example, a Section 179
deduction of \$102,000 requires the tax advisor to review varying
deduction levels to target a specific taxable income, not just for the
current year, but taking into account the reduced depreciation that will
be available in future years.

Changing income tax rates and laws due to the scoring of tax bills
result in planning, not for just one tax year, but over periods of ten
years or more as effects of scheduled changes are considered. In
addition, few believe the scheduled changes in the tax law will remain
as stated in the original law; expectations for additional changes and
extensions of tax provisions exist, requiring taxpayers to gaze into the
crystal ball to plan appropriately.

**[Aspects of the tax system that are unfair:]{.underline}**

The Internal Revenue Code provides for six stated tax brackets, but in
reality, the number of tax brackets is nearly infinite. For example, a
Social Security recipient may experience a 22.5% tax bracket as 50% of
Social Security benefits become taxable, even though the taxpayer is in
the stated 15% tax bracket. Likewise, additional capital gain income
received in the phase-in period results in a higher than the stated 5%
capital gains tax rate. All phase-outs have a similar effect.

The examples, as with the tax brackets, are nearly endless. Taxpayers
may believe that they are subject to a 25% tax bracket, but with credit
and deduction phase-outs, substantially greater effective marginal rates
occur. Rather than provide phase-outs and phase-ins, the Internal
Revenue Code should be written to be more "honest" in its application.
If a taxpayer is in the 25% tax bracket, an additional \$10,000 of
taxable income should result in an additional \$2,500 of tax. That is
rarely the case. The phase-ins and phase-outs should be eliminated with
the tax difference provided through an increase in the stated tax rate.

Phase-ins and phase-outs are patently unfair. If it is appropriate that
a taxpayer be granted a deduction for itemized deductions, such
deductions should not be reduced merely because the taxpayer has greater
taxable income. The taxpayer is already subject to higher tax brackets
due to earning higher taxable income. The phase-out of deductions and
credits is a "hidden tax," a surtax if you will. Income taxes should be
transparent.

In addition to the unfairness of phase-ins and phase-outs, the
Alternative Minimum Tax needs to be re-worked. Originally intended to
require higher income taxpayers to pay a minimum amount of tax, the AMT
is now affecting middle-income taxpayers. Since the maximum AMT rate is
28% (for individuals), taxpayers in the higher brackets are less likely
to be subject to the AMT. As income rises, the taxpayer is less likely
to be subject to AMT (additional income is subject to a 28% AMT but
perhaps a 35% regular tax rate). The AMT should have 10% and 15%
brackets, together with a smaller exemption, so that lower-earning
taxpayers are not as likely to be subject to the tax. And such brackets
and exemption should be indexed for inflation, as are the regular tax
brackets.

Those items which are not viewed as "tax preference items" should not be
subject to the AMT. Taxpayers are being subject to AMT solely due to
personal exemptions and the standard deduction. Other taxpayers are
subject to AMT due to state tax deductions, something not within the
control of the taxpayer. The regular tax provides certain tax incentives
(accelerated depreciation, for example). The AMT was created so that
taxpayers who received too many tax incentives would pay a minimum
amount of tax. The AMT has evolved beyond this original intent, now
trapping unsuspecting taxpayers and those who otherwise have no control
over their tax situation.

The current tax system promotes an amount of "class warfare." "When a
government robs Peter to pay Paul, it can always count on the support of
Paul."---George Bernard Shaw. This is truer today, when 50% of the
taxpayers pay over 96% of the income tax. The system will collapse, as
the lower-earning 50% vote themselves ever-increasing benefits from the
Federal government, requiring ever-increasing taxes to be paid from the
other 50%.

**[Tax Code distorts business or personal decisions:]{.underline}**

The Internal Revenue Code discourages taxpayers to be employees.
Taxpayers see neighbors who own their own businesses drive "business"
automobiles and pickups for personal use. It is commonly believed that
self-employed persons have the ability to deduct substantial expenses
that, for an employee, become worthless deductions as 2% miscellaneous
itemized deductions.

The increased standard deduction changes economic behavior. Taxpayers
target state taxes and charitable contributions for every other year.
The home mortgage interest deduction encourages home ownership, but to
what end (an "American Dream")? Home mortgage interest is already
subsidized through Fannie Mae. The home equity interest deduction
encourages the taxpayer to secure a debt with the house, perhaps the
last asset that should be used as security.

Business expenses should be allowed as deductions because the
expenditure is an appropriate economic decision, not because there is a
tax incentive provided. If the U.S. tax rate is too high, thereby
requiring a separate incentive to encourage "research and
experimentation," the answer should be to lower the tax rate on
business, not to draft a separate, unworkable scheme for "incremental
research" that is not possible to define and more difficult to enforce.

Corporations should not be subject to a double tax. Dividends paid
should be allowed as deductions, akin to interest expense, to eliminate
the distinctions between equity and debt financing which cause
considerable complexity. The non-deductibility of dividends encourages
the use of partnership and S corporation taxation, which further
discourage business decisions without first determining the effect,
tax-wise, on the individual owners. Integrating the corporate-individual
tax system by allowing the deductibility of dividends (and not the
non-taxation of dividend income to the recipient) will greatly increase
efficiency in the tax planning and reporting system.

**[Goals that the Panel should try to achieve:]{.underline}**

The Panel should seek a tax system that does not distort economic
decisions made or to be made by the taxpayer. In addition, the tax
system should not create, encourage or continue a "class warfare"
system.

All who receive benefits from the Federal government should have a stake
in its tax system.

The tax system should not be used for social policy. Social incentives
(child credit, dependent care credit, earned income credit, home
mortgage deduction, charitable contributions deduction, medical expense
deductions, education incentives, to name a few) should be accounted for
on the expenditure side of the government ledger, not as reductions from
the revenue. It is dishonest to do so otherwise.

The tax system should be economically neutral. The tax system should be
used to fund the government. Economic decisions are best left to the
laws of supply and demand.