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St. Thomas Law Review

First Page

339

Document Type

Comment

Abstract

In recent years, the integrity of our nation's tax system has been challenged with every new section added to the current Internal Revenue Code ("I.R.C." or the "Code") because Congress has created an unrealistic task of tax calculation for the average taxpayer. It is goal of the Code to express progress in how we tax ourselves, which is done by striving for a certain level of fairness in horizontal and vertical equity. One of the ways that Congress attempts to meet this goal is through developing certain personal credits and deductions but then providing for the phasing-out of benefits in order to affect a target group of taxpayers. This method of promoting "progressivity," in actuality, increases the marginal tax rate of the phased-out taxpayer, and in some cases, functions as a penalty. More specifically, the Child Tax Credit and the personal exemption deduction are examples of how legislative enactments can further complicate the Code with use of phase-out provisions, especially when there are more efficient means available to meet its purpose, thereby threatening the integrity of the present tax system. Subtle changes to Section 24 of the Code that took effect on January 1, 2004, altered the effect of the Child Tax Credit on the individual taxpayer. Another aspect of the Code section that impacts the taxpayer is the surviving limitation by way of a "threshold amount" that functions as a phase-out based on "modified adjusted gross income." While the law makers have decided to leave the phase-out unaltered, they have neglected to add any type of inflation adjustment, which was also lacking in the previous version of the section. The actual function of the Child Tax Credit alone is rather basic in interpretation and computation; however, the manner (in which this credit works to meet the purpose of those who adopted it) is much less efficient than merely increasing the Personal Exemption, which would easily meet the same purpose. Analyzing the actual tax implications of both the personal exemption and the Child Tax Credit leads to the reason why there is a need for both of these sections in the Code, or, at least, why the requirements are so different. Further analysis demonstrates the slight advantage the average taxpayer may receive from an inflation adjusted phase-out and the marginal tax rate implications of all phase-outs, which are not readily obvious to the average taxpayer. To get to this analysis, there is an exploration of the legislative history and purpose of the code sections and further discussion of horizontal and vertical equity. After an analysis of the basic use of phase-outs, with efficiency and equity issues, there are proposals for possible ideas for tax reform.

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