Posted on 07/28/2011
TAX REFORM ON THE HORIZON
By Robert S. Steinberg, Attorney, CPA, CVA
JULY 27, 2011
TO THE TAX LAW AN ODE:
A LABYRINTH SEWED INTO A ROBE
OF SYMBOLS, THIS CODE
THAT TORTURES OUR BRAINS,
WHILST OUR POCKETS IT DRAINS -
REFORM IT, NAY, KILL IT I SAY!
Who hasn’t felt that sentiment when facing an unexpected tax liability in April? Congress continues to waltz with the debt ceiling as the band begins to play: “It’s the last dance, we’ve come to the last dance… the orchestra’s yawning…” (Song: “The Last Dance” by Sammy Cahn and Jimmy Van Heusen, featured on Frank Sinatra concept album “Come Dance with Me,” (Capitol Records). We’ve all grown weary of congress’ dysfunction. Whatever the outcome of this political Greek Tragedy, however, everyone agrees that the Internal Revenue Code is in need of serious repair.
REVENUE RELATIONSHIP TO DEFICIT
Tax revenue is one side of the deficit coin, the other side is spending. Which is heads and which is tails is irrelevant. Some like to say that the deficit is due to spending more than revenues. But, a deficit also will result from collecting less revenue than is spent. In fact, our present deficit and debt are attributable as much to declining revenue as to increases in spending. FactCheck.org reports (July 17, 2011) that spending in 2009 was 25% of GDP, the highest since 1945. Revenue was 14.9% of GDP, the lowest since 1950 when it was 14.4% of GDP. In 1950, the
Federal revenues for fiscal year 2010 were $2.2 trillion generated mostly (80%) from individual income and payroll taxes with corporate taxes only comprising about 8% and excise, estate and gift and other taxes making up the remaining 12% (Congressional Research Service report to Congress, April 26, 2011).
THE PRESENT TAX LAW
The “tax law” is comprised of a plethora of separately enacted tax bills last amended wholesale and codified in 1986. Now, this rather bulky volume of tax law is referred to as The Internal Revenue Code of 1986, as amended (The Code). Backing up The Code are even larger multi-volumes of IRS Regulations, Revenue Rulings, procedural guidelines, IRS internal guidance materials (e.g., Internal Revenue Manual) and court cases interpreting the ever growing and evolving, complex body of tax law and rules.
WHAT NEEDS FIXING?
Complexity: The National Taxpayer Advocate’s 2010 Annual Report to Congress, Executive Summary states: “The most serious problem facing taxpayers – and the IRS – is the complexity of the Internal Revenue Code.” Apart from cost to comply, the complexity of the law brings about perverse results: An honest taxpayer may suffer indignities at the hand of IRS from an inadvertent reporting error; while, sophisticated taxpayers find every loophole to minimize taxes. The Code today has too many deductions, credits, retirement exclusions, phase-out limitations, penalties and tax brackets. Many Code provisions are pages long, read like a maze and give headaches to even seasoned tax professionals. Courts are often in disagreement about how to apply portions of the tax law to real world transactions. Author Alice Munro, although not referring to taxes said, “The complexity of things - the things within things - just seems to be endless. I mean nothing is easy, nothing is simple.” She writes about relationships which are confusion; but, why should the system we employ to pay our tax debt to society have become a convoluted monstrosity?
Efficiency: Tax provisions that cause a change in market behavior are considered inefficient. Thus, if one responds to an increase in income taxes by working less, the tax increase is inefficient. Taxes should flow seamlessly into the market economy. Nonetheless, a tax that changes behavior can be efficient if it brings about a desired result, e.g., the federal excise tax raises gasoline prices and reduces gasoline consumption.
Equity: This refers to fairness which deals with a number of concepts:
WHAT IS BEING DISCUSSED?
It is unlikely near term that reform will involve replacement of the progressive income tax with a flat tax or consumption tax (retail sales tax or value-added) as exists in most of the world. Thus, reform is likely to center on base broadening by eliminating most preferences and reducing the number of tax brackets and lowering effective rates. Some corporate preferences may be reduced in response to tax haven abuses and the perception that recent extravagant bonuses are viewed by the public as undeserved rewards for incompetence. The estate and gift tax regime, not a significant revenue enhancer, will remain in some version of its present form. The most visible change will involve personal income taxes and some or all of the following benefits (tax cost in billions to government in brackets) may be reduced or eliminated:
Doubtless The Code is complex and making it less so is itself a complicated matter. In the end American computer scientist Alan Perlis said: “Fools ignore complexity. Pragmatists suffer it. Some can avoid it. Geniuses remove it.” Well, where are the geniuses?
IMPACT OF MANDATORY EXPENDITURES (CALLED ENTITLEMENTS BY SOME)
The reality of the federal budget is that 55% of all federal spending is non-discretionary. Of this amount, 63% is for Social Security, Medicare and Medicaid. The baby boomer retirements will exacerbate the fiscal problem. Apart from these mandatory expenditures interest costs could rise dramatically if there is a loss of confidence in the U.S. Treasury which might occur in the event of a technical default by the
POLITICS OR REAL NECESSITY
Since 1980 the federal debt ceiling has been increased from $706 billion to $13,529 trillion. These debt ceiling increases correspond with federal debt levels. Of that increase, 16 debt ceiling increases totaling $3,361 trillion occurred during democratic administrations; and, 34 increases totaling $9,462 trillion occurred during republican administrations. The increase during President Obama’s term thus far has been $1,653 trillion (Miami Herald, July 27, 2011). One wonders at the timing and necessity of this debt ceiling stalemate. Debt ceiling increases have been a routine congressional matter in the past. No one doubts the urgent need to address the budget deficit and federal debt but no one seems willing to approach the problem in a truly non-partisan debate and compromise session. Tax reform, therefore, an important part of the deficit discussion is relegated to the status of a poor relative as both parties arm wrestle for leverage in the next election. The real loser in this power- grab struggle is the American people left without a functioning government. Woe to us if the rest of the world loses faith in the stability of our political system.
© 2011 by Robert S. Steinberg, Esquire
All rights reserved.