\-\-\-\--Original Message\-\-\-\--

From: Al Sheahen
\[[[mailto:alsheahen@prodigy.net]{.underline}](mailto:alsheahen@prodigy.net)\]

Sent: Friday, March 18, 2005 2:27 AM

To: comments@taxreformpanel.gov

Subject: Submission to Panel on Tax Reform

To: The President\'s Advisory Panel on Federal Tax Reform

1440 New York Avenue NW; Suite 2100

Washington DC 20220

From: Al Sheahen and Karl Widerquist

PO Box 2204

Van Nuys CA 91404

As you requested, attached is a five-page submission (double-spaced)
with the required identification and cover sheet.

The submission is directed at the second of your four questions \--
aspects of the tax system that are unfair.

Today, the standard deduction and personal exemptions are valuable to
people

who earn a certain amount of money. But low-income workers get no
benefit

at all from either of these tax breaks. This seems unfair.

We suggest making the tax system fairer by simplifying the tax code by
transforming the standard deduction into a standard tax credit.

I would be happy to appear and discuss this idea at the Panel\'s fifth
meeting in New Orleans on March 23 \-- or at any subsequent meeting.

Best wishes for a fairer tax code,

Al Sheahen

PO Box 2204

Van Nuys CA 91404

Phone: 818-981-1996

Fax: 818-981-1997

email: alsheahen@prodigy.net
\<[[mailto:alsheahen@prodigy.net]{.underline}](mailto:alsheahen@prodigy.net)\>

P.S. In case the charts don\'t transmit properly, I will mail you a hard
copy for your files.

IDENTIFICATION AND COVER SHEET

March 17, 2005

Submission to the President's Advisory Panel on Federal Tax Reform

A proposal to make the tax system fairer by transforming the standard
deduction into a standard tax credit

An individual submission by:

Al Sheahen and Karl Widerquist

PO Box 2204

Van Nuys CA 91404

Phone: 818-981-1996

Fax: 818-981-1997

Email: alsheahen@prodigy.net

A Proposal to Transform the Standard

Deduction into a Standard Tax Credit

By Al Sheahen and Karl Widerquist

This proposal transforms the standard income tax deduction into a
"refundable" standard tax

credit. Doing so will simplify the tax code and put more money into the
pockets of poor

Americans.

There is a lot of talk on Capitol Hill about tax simplification. There's
nothing wrong with

simplifying the tax code as long as it works for everybody. The income
tax system is needlessly

complex with too many different deductions.

People with low incomes have a very high tax burden. Most of it is in
sales and payroll taxes

rather than income taxes. And so, they have very little to gain from tax
simplification unless tax

simplification expands refundable tax credits.

Transforming the standard deduction into a refundable tax credit will
simplify the tax code

and put more money into the hands of people who need it most. This
proposal explains how we

can do it.

**The Standard Tax Credit**

For 25 years, refundable tax credits \-- such as the Earned Income Tax
Credit and the

"additional child tax credit" -- have proven to be simple, effective
ways to help the poor.

The logical next step is to transform the standard deduction and
personal exemptions into a

refundable **standard tax credit (STC)** of \$2000 for each adult and
\$1000 for each child. The

STC will provide all the poor with a small but badly needed tax credit,
and give a tax cut to

virtually everyone who chooses not to itemize their deductions.

Page 2 -- Al Sheahen and Karl Widerquist

The plan is simple. It removes the lines for the standard deduction and
personal exemptions

from the federal income tax forms 1040, 1040A, and 1040EZ, and replaces
them with a single

line for the standard tax credit at the bottom of the form. All tax
rates remain the same. The

STC plan does not remove the line for itemized deductions from the 1040
form. People who

itemize deductions will be allowed to take an additional \$3100
deduction to replace each of their

\$3100 individual exemptions. Therefore, those who choose to itemize
deductions will be

virtually unaffected by this proposal. The only change is that anyone
who chooses not to itemize

deductions receives the STC instead of the standard deduction (and
personal exemption).

The proposal amounts to a small change in the formula for calculating
taxes. The current

formula begins by subtracting the standard deduction and exemptions from
"adjusted gross

income" (AGI) to determine "taxable income," which is listed as zero if
AGI is smaller than the

deductions and exemptions. Then, the taxable income is multiplied by the
tax rate to

determine the amount of tax.

Under this new proposal, the formula begins by multiplying adjusted
gross income by the tax

rate to determine "gross tax." It then subtracts the standard tax credit
to determine the "net tax"

or "net refund." The following shows the change in the tax formula:

Current system: AGI less standard deduction and exemptions = taxable
income x tax rate = tax.

New system: AGI = taxable income x tax rate = "Gross tax" less STC =
"Net tax" or refund.

The current (2004) standard deduction is \$4850 for a single person,
\$7150 for "head of

household," and \$9700 for a married couple. The personal exemption is
\$3100 for each member

of the family.

The following three tables illustrate how the STC affects a single
person, a single parent

with one child, and a family of four.\*

\*These are explanatory examples only. For the sake of simplicity and
clarity, we have purposely omitted the current Earned Income Tax Credits
and Child Tax Credits from the "current system." For the exact figures
on how the proposed STC plan compares to the current tax system, please
see the Appendix at the end of this paper.

Page 3 -- Al Sheahen and Karl Widerquist

**Table 1: Single person**

**Current system:**

1 AGI 0 5,000 10,000 20,000 40,000 100,000

2 Deduction&exemption 7,950 7,950 7,950 7,950 7,950 7,950

3 Taxable income 0 0 2,050 12,050 32,050 92,050

4 Current tax 0 0 205 1,450 4,750 20,401

**Proposed new system:**

5 AGI 0 5,000 10,000 20,000 40,000 100,000

6 "Gross" tax 0 500 1,142 2,642 6,737 22,620

7 STC 2,000 2,000 2,000 2,000 2,000 2,000

8 "Net" tax/refund - 2,000 - 1,500 - 858 642 4,737 20,620

9 Increase/decrease - 2,000 - 1,500 - 1,063 - 808 - 13 219

**Table 2: Single parent with one dependent child -- "head of
household"**

**Current system:**

1 AGI 0 5,000 10,000 20,000 40,000 100,000

2 Deduction&exemption 13,350 13,350 13,350 13,350 13,350 13,350

3 Taxable income 0 0 0 6,650 26,650 86,650

4 Current tax 0 0 0 665 3,487 17,262

**Proposed new system:**

5 AGI 0 5,000 10,000 20,000 40,000 100,000

6 "Gross" tax 0 500 1,000 2,490 5,600 20,594

7 STC 3,000 3,000 3,000 3,000 3,000 3,000

8 "Net" tax/refund - 3,000 - 2,500 - 2,000 - 510 2,600 17,594

9 Increase/decrease - 3,000 - 2,500 - 2,000 - 1,175 - 887 332

**Table 3: Married couple with two dependent children**

**Current system:**

1 AGI 0 5,000 10,000 20,000 40,000 100,000

2 Deduction&exemption 22,100 22,100 22,100 22,100 22,100 22,100

3 Taxable income 0 0 0 0 17,900 77,900

4 Current tax 0 0 0 0 1,970 12,962

**Proposed new system:**

5 AGI 0 5,000 10,000 20,000 40,000 100,000

6 "Gross" tax 0 500 1,000 2,285 5,285 18,469

7 STC 6,000 6,000 6,000 6,000 6,000 6,000

8 "Net" tax or refund - 6,000 - 5,500 - 5,000 - 3,715 - 715 12,469

9 Increase/decrease - 6,000 - 5,500 - 5,000 - 3,715 - 2,685 - 493

Page 4 -- Al Sheahen and Karl Widerquist

A look through the tables shows that this proposal will give a
substantial tax cut to everyone

who chooses to take the standard credit. The smaller the taxpayer's
income, the larger the tax

cut. It can be as much as \$6000 for a family of four with an income
near zero. Thus, it gives the

most money to those who need it most. But it helps everyone who receives
it, and because it

ensures that income rises faster than taxes, it always gives the family
incentive to earn more.

**Why we need the STC**

Transforming the standard deduction into a refundable tax credit will
not eliminate poverty,

but it will be an enormous benefit to the poor who were completely
overlooked by the tax cuts of

the first Bush administration. The poor pay sales taxes, property taxes,
and many other taxes, but

because they do not pay very much in income tax, they have little to
gain from tax simplification

unless it includes something like the STC. Transforming the standard
deduction into a standard

tax credit will give a tax cut to everyone and will give the biggest tax
cut to those who need it

most.

If the STC proves popular, it can lead to future simplifications of the
tax code by

transforming other deductions, exemptions, and credits into a larger
STC. For example, an STC

at the poverty level (\$9000 for one person) can be financed by
eliminating itemized deductions,

and welfare programs such as TANF, EITC, Food Stamps, etc., and
instituting a simplified flat

tax of 35% (the current highest marginal tax rate).

\###

Al Sheahen is the author of Guaranteed Income: The Right to Economic
Security and works in the VITA (Volunteer Income Tax Assistance) program
in Los Angeles. Karl Widerquist is currently at Oxford University,
England, and is coeditor of The Ethics and Economics of the Basic Income
Guarantee.

Page 5 -- Al Sheahen and Karl Widerquist

**Appendix: How the proposed STC plan compares to the current system for
a parent with one child, who files as "head of household."**

The following tables show the lines of IRS Form 1040 that would be
affected by this proposal. It both simplifies the system and, as the
bottom line reveals, creates a substantial tax cut, especially for those
with the least income.

**Appendix Table 1: The Current System**

Line on

1040

6D No. exemptions 2 2 2 2 2 2

37 AGI 0 5,000 10,000 20,000 40,000 100,000

39. Standard deduction 7,150 7,150 7,150 7,150 7,150 7,150

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39. Subtract 39 from 37 0 0 2,850 12,850 32,850 92,850

40. Exemptions 6,200 6,200 6,200 6,200 6,200 6,200

41. Taxable income 0 0 0 6,650 26,650 86,650

42. Tax 0 0 0 665 3,487 17,262

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51. Child tax credit 0 0 0 665 1,000 1,000

62 Total tax 0 0 0 0 2,487 16,262

65 Earned Income Tax Credit 0 1,700 2,604 1,652 0 0

67. Additional Child Tax Credit 0 0 0 335 0 0

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70. Add 65 and 67 0 1,700 2,604 1,987 0 0

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70. Refund due 0 1,700 2,604 1,987 - -

74 Amount owed - - - - 2,487 16,262

**Appendix Table 2: Proposed New System**

Line on

1040

6D No. exemptions 2 2 2 2 2 2

42 Taxable income 0 5,000 10,000 20,000 40,000 100,000

43 Gross tax 0 500 1,000 2,490 5,600 20,594

51 Child tax credit 0 500 1,000 1,000 1,000 1,000

62 43 minus 51 (Total Tax) 0 0 0 1,490 4,600 19,594

65 Earned Income Tax Credit 0 1,700 2,604 1,652 0 0

69 Standard Tax Credit 3,000 3,000 3,000 3,000 3,000 3,000

70 Add 65 and 69 3,000 4,700 5,604 4,652 3,000 3,000

71 Refund due 3,000 4,700 5,604 3,162 - -

74 Amount owed - - - - 1,600 16,594

**Increase/decrease - 3,000 - 3,000 - 3,000 - 1,175 - 887 332**