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Monday, June 16, 2008

Trends as a Guide to Tax Reform

Last week, the Center for Disease Control and Prevention (CDC) reported that life expectancy has gone up, hitting a "record high in 2006 of 78.1 years."

This kind of trend data is relevant to tax reform discussions, but not often highlighted. Tax reform discussions could be better focused if we spent more time looking at how the world has changed since most of our current rules were enacted and how it will likely continue to change.

Several years ago I started gathering data on trends and using it to show where our tax law was outdated or working contrary to a trend, that is - contrary to reality. A few simple examples:

1. Longevity - this is clearly relevant in considering our Social Security system. When Social Security was created in the 1930s, life expectancy was lower than retirement age. That is clearly not the case today.

2. Who lives in poverty - In 1959, 35.2% of people age 65 and older were in poverty. In 1996, that percentage had dropped to 10.8%. (Leatha Lamison-White, Poverty in the United States: 1996, U.S. Department of Commerce, Bureau of the Census, Table C-2, page C-5). The federal tax law (as well as some state income tax laws) include exemptions and credits for being old.
Years ago it may have been appropriate to assume that most elderly needed a tax break, but that is not true today.

3. The US share of world GDP continues to drop. Our foreign tax rules were written decades ago when US companies had a dominant role in the world markets. Today, US companies face a far more competitive environment in a global economy and our tax rules may be hindering their ability to compete.

4. Intangible assets are more varied and important today than a few decades ago. Many tax rules, even ones written in the past 20 years may not make sense in our information age. For example, PL 86-272 enacted in 1959 to provide guidance on when a multistate business could be subject to income tax within a state, only applies to sales of tangible personal property. Also, Internal Revenue Code Section 197 written in 1993 provides a 15-year amortizable life for most acquired intangibles. That life is likely too long today due to rapid changes in technology.

For an example of the type of trends analysis that could help guide tax reform discussions, click here. What you'll find there is just a sampling of trends and their relevance to tax reform discussions.

What trends and tax system flaws would you add to this starting list?