The Clean Slate

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Start With a Clean Slate

By Keith Libbey and Evan Thomas

Keith Libbey is chair emeritus of Fredrikson &
Byron PA in Minneapolis. Evan Thomas is a former
editor and now occasional contributor at Newsweek 
with Tom Garton and Jonathan Libbey.

The authors propose a ‘‘Clean Slate’’ system, which
would eliminate tax expenditures and individual tax
returns and cut income and payroll taxes by 25
percent. Individual taxes would be collected through
withholding.


We propose that Congress eliminate all tax expenditures,
reduce income and payroll tax rates by
25 percent, and eliminate tax returns for all individuals.
Individual taxes can instead be collected
through withholding. Our proposal would be
known as the ‘‘Clean Slate’’ system, which is revenue
neutral. A 20 percent cut in the tax rate could
cut the deficit by $4 trillion in 10 years — the target
set by the National Commission on Fiscal Responsibility
and Reform (Bowles-Simpson plan).

Tax reform is the order of the day. President
Obama said, ‘‘We’ve got to have tax reform.’’ Administration
officials said, ‘‘The objective is to rid
the code of its complex buildup of deductions,
credits and exemptions, thereby broadening the
base of taxes collected and allowing for lower
rates.’’1 According to the national taxpayer advocate’s
2010 annual report, taxpayers spend 6.1 billion
hours per year completing their tax returns.2 Also,
the complexity of the code was criticized by the
‘‘Report on Tax Reform Options: Simplification,
Compliance, and Corporate Taxation,’’ which said
that the code has been amended 15,000 times since
1986.3 The national taxpayer advocate’s report
stated that even the actual length of the code is
undetermined.

Those reports and many others have correctly
identified the source of the problem: The thousands
of deductions, exclusions, credits, and exemptions,
commonly called tax expenditures, require the filing
of individual tax returns by 130 million taxpayers.
Although advocates of reform have correctly
identified the problem with tax expenditures, many
of their proposals do not go far enough. They
propose minor changes to the existing system,
meaning taxpayers would continue to file returns
and have to try to figure out the new provisions and
constant changes to the code. It is widely agreed
that the present system is terrible, so proposals that
simply change that system are not a real solution. If
the problem is the system of tax expenditures, isn’t
the solution to eliminate the expenditures altogether?

We need a clean slate. Eliminating all tax expenditures
would allow for the collection of all
individual taxes by withholding taxes at the source
— a ‘‘pay as you go’’ system. The Clean Slate
system wipes out all tax expenditures, establishes a
withholding system through the existing electronic
payment system, and thereby eliminates all individual
tax return filing requirements. It cuts income
and payroll taxes by 25 percent, broadens the tax
base, is progressive, and could provide a way for
Congress to cut the deficit by $4 trillion in 10 years
by cutting the tax rate by 20 percent. It also eliminates
alternative minimum tax.

Establishes a Withholding System

The Clean Slate would establish an electronic
withholding and payment system. Services like
ADP, Ceridian, and others now collect and pay
much of the withholding, payroll, Medicare, and
related taxes, along with 401(k) and other retirement
contributions. Those payroll services are fully
equipped to deal with the tax code and its changes
efficiently, and their tax experts make the necessary
changes for millions of taxpayers instead of each
taxpayer needing her own expert. They could be
part of the overall withholding system, along with
banks, brokers, credit card companies, and employers.

Cuts Income and Payroll Tax Rates

The Clean Slate is revenue neutral and cuts
income and payroll tax rates by 25 percent as shown
below.

1Jackie Calmes, ‘‘Obama Considers Tax Code Overhaul,’’ The
New York Times, Dec. 10, 2010, at A1.
2National Taxpayer Advocate Nina Olson, ‘‘2010 Annual
Report to Congress’’ (Dec. 31, 2010), at 2, Doc 2011-220, 2011 TNT
4-23.
3President’s Economic Recovery Advisory Board, ‘‘The Report
on Tax Reform Options: Simplification, Compliance, and
Corporate Taxation’’ (Aug. 27, 2010), at 3.

(C) Tax Analysts 2011. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.

TAX NOTES, 
April 25, 2011 401

In addition to those new rates, incomes exceeding
$1 million would be taxed at approximately 28
percent. All investment income (capital gains, dividends,
interest, rents, and royalties) would be taxed
at the same rate: approximately 18 percent.

Broadens the Tax Base

The Clean Slate would broaden the tax base and
would collect more taxes at far less expense through
withholding. The Clean Slate is a fair and transparent
system in which expensive tax advisers would
no longer be able to develop tax dodges for the
wealthy. The Tax Policy Center has estimated that a
simple withholding system would allow about 5
percent evasion, while a self-reporting system allows
up to 50 percent evasion. The Clean Slate
would move U.S. evasion rates closer to 5 percent,
as opposed to the current rate of 15 percent. The
National Taxpayers Union has estimated that our
taxes are 20 percent higher than they should be
because of tax evasion. A recent poll revealed that
85 percent of the public thinks the present tax code
is unfair and too complicated. The top 400 earners
in America paid a 16.6 percent tax rate, according to
the IRS. Noncompliance has risen as the perception
of unfairness has risen. The amount of revenue lost
through noncompliance has reached approximately
$350 billion per year — significantly higher than 10
years ago.

Could Cut Deficit, Break Political Deadlock

The Clean Slate could have significant economic
and political advantages. By cutting tax rates to 20
percent, Congress could hit the deficit reduction
target set by the Bowles-Simpson plan: $4 trillion
over 10 years. By eliminating the burden of filing
tax returns and dealing with the IRS, the Clean Slate
eliminates one source of irritation between the
public and government. And instead of tinkering
with some of the tax expenditures that invite special
interest groups to attack each proposed change, the
debate can shift to overall fairness and simplicity.

Potential Objections to the Clean Slate Proposal
While the Clean Slate proposal may sound too
simple, we have compiled a list of preliminary
answers to questions that might be raised regarding
its viability.

First, what about corporations and proprietorships?
There would be no change to their tax
system. Proprietorships with more than $5,000 of
business revenue would be taxed like all other
businesses. They could be required to file the
equivalent of a Form 1040 Schedule C, or alternatively,
migrate to an expanded system of withholding
through banks or payroll services.

How would companies set withholding rates for
payees with several jobs or who change jobs? The
IRS now collects payment information from all
sources for each person. The IRS can add them up
and notify each company what the withholding rate
is for each person based on the total. Alternatively,
employers could check a secure IRS website for that
information through an automated database inquiry.

How would companies withhold on capital gains
if they don’t have the tax basis? Many companies
like banks and brokers already have the basis
information and starting this year must report basis
and holding period to the IRS on specific transactions.
In other cases, the company would have to
get the information from the taxpayer. If the taxpayer
does not supply it, the full amount would be
taxed, so there is every reason to provide the tax
basis to the payer for withholding purposes. The
information provided would be subject to normal
tax reporting fraud rules.

What about negative income tax payments? Currently,
some low-income taxpayers who pay no
income taxes receive payments from the IRS when
they file a return. Those payments should be
handled by the Department of Health and Human
Services within a comprehensive program of government
assistance based on total need, rather than
just a tax return.

COMMENTARY / VIEWPOINTS
402 TAX NOTES, April 25, 2011
(C) Tax Analysts 2011. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.

How would you handle the very popular mortgage
interest deduction?A25 percent rate reduction
is worth more than the interest deduction. Eliminating
the mortgage interest deduction is good public
policy. However, it can be preserved in a withholding
system by paying the same amount of tax
expenditure dollars directly to mortgagees to reduce
the monthly payment. That would be fairer to
all taxpayers who do not currently itemize. The
mortgage interest deduction shifts the tax burden
from itemizers to those who use the standard
deduction.

What about the charitable deduction? It should
be eliminated. However, the charitable deduction
could be preserved in a withholding system by
making it a pretax exclusion and directing the
company collecting withholding taxes to send the
charitable contribution to one of the donor-directed
funds just as they do with retirement contributions.
Currently, only the few taxpayers who itemize get
any benefit from the charitable deduction. The
Clean Slate system would be fairer.

Finally, who would win and who would lose
under the Clean Slate system? Fairness, simplicity,
and clarity are more important to most people than
having a system of competing special interests. The
current system is so full of winners and losers that
the public does not support it anymore. ‘‘Four in
every five adults say the federal tax code is complex
(85 percent) and say that the tax system needs to be
completely overhauled or needs major changes (82
percent),’’ according to a 2009 poll by Harris Interactive
for the Tax Foundation.

In summary, we think the Clean Slate system is
simple, comprehensible, and fair. It has political
appeal and it could be used to reduce the deficit.

(C) Tax Analysts 2011. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.

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