National taxpayer advocate Nina Olson’s report identified the need for tax reform, arguing the existing tax code makes compliance tough and requires taxpayers to devote “excessive time” to the preparation and filing of tax returns.
“The existing tax code makes compliance difficult, requiring taxpayers to devote excessive time to preparing and filing their returns. It obscures comprehension,” said Olson. “It facilitates tax avoidance by enabling sophisticated taxpayers to reduce their tax liabilities and provides criminals with opportunities to commit tax fraud; and it undermines trust in the system by creating an impression that many taxpayers are not compliant, thereby reducing the incentives that honest taxpayers feel to comply.”
The report calls on Congress to “greatly simplify” the tax code to “reduce taxpayer burden and enhance public confidence in the integrity of the tax system”. Specifically, it questions the necessity of tax expenditures.
The complexity of the code is reinforced by the fact that it expands, on average, by more than one provision every day. Since 2001, Congress has made around 5,000 changes to the code.
Al Groff, of Shearman & Sterling, agrees with Olson’s conclusion that the tax code places a significant burden on taxpayers when it comes to compliance.
“The National Taxpayer Advocate is entirely correct on this score,” said Groff, speaking in a personal capacity. “Compliance cost in relation to the tax dollar yield is way out of proportion, especially in relation to the federal income tax. Compliance costs do not have to be so weighty. Note that the relatively simple social security tax involves compliance costs representing only one or two percent of the tax dollar yield to the government.”
Olson also commented on the irony and counter-productivity of deficit fears leading to the IRS budget being cut, when such cuts are increasing the deficit. Last year, the IRS had a budget of $11.8 billion and brought in about $2.52 trillion. The IRS Commissioner has also warned of the detrimental impact of slashing the IRS budget, claiming that every dollar cut would mean $7 lost in tax collection.
“To elaborate on this funding challenge,” said Olson, “no business would fail to fund a unit that, on average, brought in $7 for every dollar spent. Shareholders would rebel and bring lawsuits, or at least oust the management or board of directors.”
Groff said he does not necessarily share Olson’s concern on this point, saying he is not too worried about the IRS’s budget.
“The IRS has become increasingly intrusive as a result of mandates imposed on it. It would be better to simplify the tax law and reduce the IRS’s mandate,” he said.
Expenditures
A statement released alongside the report stated the findings reinforce House Ways & Means Committee chairman Dave Camp’s assertion that the US tax code is “ten times the size of the Bible with none of the good news”.
“To reduce taxpayer burden and enhance public confidence in the integrity of the tax system, the report urges Congress to greatly simplify the tax code. In general, this means Congress should reassess the need for existing income exclusions, exemptions, deductions and credits (generally known as tax expenditures),” said the report.
But this is precisely why tax reform is proving so difficult to achieve, as Groff explains.
“The elimination of a tax expenditure is a form of tax increase, albeit imposed on a particular group of taxpayers rather than on all taxpayers. When there is talk of what tax expenditures to eliminate, it always comes down to whose ox will be gored,” said Groff. “The resulting resistance by particular groups is why it is so hard to simplify the tax code.”
The difficulty in addressing the expenditures question – and thereby creating winners and losers which will translate into advocates and opponents of reform – has led various stakeholders to consider the need for a US VAT. In Europe, some policymakers are favouring raising consumption taxes and reducing income taxes, and Groff thinks the US should follow suit.
“My policy preference, personally, would be – largely – to eliminate the individual and corporate federal income taxes and replace them with a VAT and a higher gasoline tax. I would think, though, that there should probably still be a surtax on higher income individuals and a negative income tax on low income individuals to preserve progressivity,” said Groff. “Obviously, something along these lines will never happen, though note that the state of Louisiana is now considering complete elimination of corporate and individual income tax.”
Louisiana Governor Bobby Jindal is championing a proposal to end all corporate and income taxes to drive economic investment in a revenue neutral way by raising state and local sales taxes
“It’s time to change so people can keep more of their own money and foster an environment where businesses want to invest and create good-paying jobs,” said Jindal.
However, his proposal is attracting criticism because it would place a greater burden on lower income families.
Despite the National Taxpayer Advocate report calling for action on business tax reform, Hank Gutman, principal with KPMG and former chief-of-staff of the US Congress Joint Committee on Taxation, is not optimistic about the likelihood of reform in the near future.
“I don’t see tax reform as very prominent in the minds of Congress in general. The caveat to that is that chairman Camp has said he is going to report legislation out of the Ways & Means Committee during this congressional session and I expect that will happen,” said Gutman. “So the contours of business tax reform in terms of actual legislative activity is going to occur first, I think, in the Ways & Means Committee along the lines chairman Camp has already suggested with respect to his draft proposal regarding a move to a territorial system and the aspirational notion of getting the corporate tax rate to 25%.”
Opportunities for action
Gutman said it is clear that this is not going to be easy and that there will be “heavy lift along the way”. And despite the fact he expects to see a lot of “jockeying around”, he said there are three opportunities to make significant progress on discussions surrounding corporate tax reform.
“The debt ceiling, sequestration and the continuing resolution [government agencies’ funding mechanism] provide three opportunities for those issues to be discussed [all three must be addressed by March],” he said.
