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Friday, March 22, 2013

Senate Finance Committee's New Approach to Tax Reform

The Senate Finance Committee recently announced that it will be holding weekly meetings to discuss various topics.  There will be "tax policy option papers" posted to their website that list a variety of reforms and their source.  This seems more for discussion purposes because they also note that just because a suggestion is included in an option paper doesn't mean it is endorsed the the Chair or Ranking Member.

The first paper posted is on Simplification for Families and Businesses.  Simplification is a good topic to start with. That is likely the most serious problem with our tax system.  The complexity stems, though, from both the rules themselves and transactions that can be complex (both for families and businesses). The simplification topics also include ones focused on administration of the tax laws. They note the following key problems areas regarding administration:

Some specific concerns about tax administration today include the following:
  • Overall complexity
  • Identity theft
  • Tax gap
  • Problems with the filing schedule
  • Regulating paid return preparers 
Here are a few interesting reforms (I think) from the list and my commentary:
  • Repeal AMT - yeah! This is not only simplification but brings some logic to the system. Why should there by two taxes - your actual one and your perceived minimum one?
  • Repeal phase-outs for itemized deductions and personal exemptions - yeah! These phase-outs disguise a higher tax rate and make it difficult for affected individuals to know their marginal tax rate.
  • Change due dates to enable taxpayers and IRS to get certain information earlier - yeah! It is difficult to file a return with missing K-1s. Also, former Commissioner Shulman's idea to have the IRS take the information returns and prepopulate returns for taxpayers so they know before they file (rather than a few years later) what 1099s and W-2s they have. Click here to see the AICPA proposal on this.
  • If the IRS is not successful in its appeal in the Loving case on the paid return preperer system, provide a statutory solution - yeah!  I think there is value in having Circular 230 cover more than attorneys, CPAs and Enrolled Agents. Attorneys and CPAs are already subject to regulation by their licensing bodies.  Why have a system where about 50% of the preparers are not subject to rules of conduct regarding due diligence, return preparation standards, and more. While the preparers are subject to penalties, why not lay out some rules of conduct for them to help them avoid the penalties.
  • Revoke or deny passports for individuals who are seriously delinquent - interesting.  If you want someone to do something, consider a carrot or a stick.  If the stick of penalties isn't working, why not deny them something they want. Of course, not everyone wants a passport.
Here are a few I think should be on the committee's list:
  • Simplify depreciation rules.  Today, the rules on depreciation are scattered over at least 4 Code sections (167, 168, 179, 280F) and over 60 pages, not counting regulations. Depreciation should not be this difficult.  It is because of special rules, often designed to address some perceived abuse (such as the mid-quarter convention and the limitation on depreciation of passenger cars).  [I have a paper with some ideas on this topic.]
  • Remove special rules where divorced parents can decide which parent claims a child as a dependent. Just leave it as going to the parent who has the child residing them with the majority of the time. If the parents want a different financial result, work it out through child support and alimony. The tax law is not intended to solve problems, but to raise revenue for government operations.
  • Repeal the kiddie tax.  This is intended to address the situation where parents or someone else gives income-producing assets to a child who is in a lower tax bracket. Well, if it is a valid transfer of assets, let the child pay based on their rate bracket.  Also, if tax reform does result in broadening the base and lowering tax rates, this is not as significant of an issue.
  • Repeal the uniform capitalization rules (Section 263A).  Doing so will enable manufacturers and retailers to use their book method for identifying inventoriable costs and save compliance costs due to not requiring a separate set of inventory records and calculations.
I have a few more, but would like to see what you have.  What would you do to simplify the income tax?

2 comments:

Anonymous said...

1. Having "payroll" taxes determined based on AGI.
2. Bring capital gains rates closer to ordinary income rates.
3. Try to eliminate or mitigate dual taxation of dividends.
4. Reduce types of legal entities (or at least make the tax rules consistent).

Anonymous said...

The size of the tax code isn't always a problem. Sometimes, especially with California's revenue code, there are important details left up to the taxpayer, who, if he or she wants a safe harbor, the time spent sifting through court history, second guessing, and paying other professionals for their expertise (guesses) leaves one to think that there should have been more rules and laws in the tax code to cover the bases. Specifically, California's revenue code, as it pertains to asset depreciation and the like, cannot consider sparseness a virtue. Similar reasoning holds related to the Federal code, and in the nontax area, international "principles" based accounting standards versus FASB, which is more spelled out.