By Paul N. Gada, Toolkit Staff Writer, and Jeff Carlson, CCH News Staff Writer
Talk is cheap, but sometimes that's all we can afford. This certainly applies to any discussion of reforming our tax laws.
On September 20, 2006, members of the business community and federal tax analysts made their case to the Senate Finance Committee for substantial reform of the current business tax policy. Though not much of a shock for most people, these experts conclude that we have a flawed tax system that serves as a drag on economic growth.
Former IRS Commissioner Charles O. Rossotti stated the problem in the simplest of terms: tax complexity continues to get worse every year. Since the adoption of the Tax Reform Act of 1986, Congress has passed 14,400 amendments to the tax code, resulting in greater compliance burdens and approximately $300 billion in tax revenue lost to U.S. coffers annually, in part because of the complexity of the Code.
Rossotti, along with many of the witnesses testifying before the committee, advocated a simpler tax system that would level the playing field among businesses and, in the process, introduce lower statutory rates while raising the same amount of revenue. The former Commissioner argued that lower rates, rather than special preferences, would better serve the business community, but he also urged simpler rules for smaller businesses than for their large counterparts. In addition, he said that the government should reduce or eliminate the double taxation of businesses, but that all business income should be taxed once at the approximately the same rates.
Regarding foreign income, Rossotti told lawmakers that he personally favored shifting the entire measurement of taxable income of large corporations to that reported under Generally Accepted Accounting Principles on a worldwide basis, with a simplified system for crediting foreign taxes paid. David M. Walker, Comptroller General of the United States, echoed similar sentiments, testifying that any new system proposals should offer as broad a tax base as possible in order to minimize overall tax rates and reduce tax preferences and complexity while increasing transparency.
"To the extent other goals, such as equity and simplicity, allow, the tax system should aim for increased economic efficiency by remaining as neutral as possible in its other structural features," said Walker, citing differences in taxation based on legal form of organization, sources of financing or type of assets.
Focusing on taxation of business investments, Treasury Deputy Assistant Secretary for Tax Analysis Dr. Robert Carroll testified that there were a number of different policy avenues for influencing tax on capital treating different types of investment more uniformly, each with its own set of inherent trade-offs. As an example, Carroll offered the choice of allowing faster write-off of investment versus lowering the corporate tax rate.
"One difficulty with faster write-off of investment or expensing is the disparate treatment between old and new investment, "said Carroll, noting that because new investment receives more favorable treatment, the market value of existing capital may, in some instances, fall, relative to new investment. This gives rise to the potential need for transition relief to address changes in asset values that result from the disparate treatment of existing capital and new investment. Corporate rate reduction, he noted, avoids this difficulty because it applies to the return from both existing capital and new investment.
Following witness testimony, Committee Chairman Charles E. Grassley (R-Iowa) said that the hearing set the stage for future hearings that will examine specific aspects of business tax reform in greater depth. "Tax reform will take a bipartisan, national consensus," he said. "I think the consensus is there, that the business tax system is in desperate need of reform."
Given the lackluster history of tax reform, some divine intervention and a miracle or two may be needed to spur things along. In 2005, for example, the Bush administration and the 109th Congress indicated that tax reform would be high on the legislative agenda. In early 2006, however, the push for tax reform lost steam, and other legislative priorities took its place. With 2006 nearly over, there is little that can be done this year.
As Chicagoans say about their baseball teams, there is always next year (and the year after that), though. According to Treasury Secretary John Snow, tax reform could be "very much at the center stage of consciousness of the administration and Congress" in 2007 or 2008.
Meanwhile, without major reform, the IRS is managing to make do with what it's got. Most recently, the agency has been actively working on improving its effectiveness as a tax collector and narrowing the unpaid tax gap.
The IRS continues to increase the number of audits it conducts. Total audits of individuals exceeded 1,200,000 in 2005; a 20 percent increase from 2004. Audits of high-income individuals doubled from 2002 to 2005. Enforcement revenues jumped from $33.8 billion in 2001 to $47.3 billion in 2005.
IRS Commissioner Mark W. Everson said that the IRS "is very serious about reducing the tax gap." In particular, the understatement of business income by individuals and small businesses, where there is no third-party reporting, exceeds 50 percent. Because of this, the IRS plans to increase audits of this sector.
So, small business owners should take their cue from the IRS. Instead of waiting for the tax laws to change for the better, take some time to figure out what the current tax code requires of small business owners. This will make next year's filing a breeze and help keep the IRS off your back.
Now, about Social Security. . .
- Related items:
- Tax Rate Projections for 2007
- IRS Announces Long-Distance Telephone Tax Refund Amounts
- IRS Outlines Taxpayer Protections in Private Debt Collection Program
- IRS Releases First Fact Sheet To Address Business Income Tax Gap; More To Come
- IRS Reports $345 Billion in Taxes Went Unpaid for 2001 Tax Year
Added to the news on October 12, 2006.
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