How about making April 30th Celebrating Taxpayers Day?

How about making April 30th Celebrating Taxpayers Day? 

A few things lead me to suggest this. The reasons mostly tie to my recent research and writing on improving transparency of our tax systems.*  I like all principles of good tax policy (I hope we all do). I think that two on the AICPA set of principles of good tax policy need more attention because doing so will help tax systems to better meet the other ten principles the AICPA promotes. These two principles:

• Transparency and visibility - Taxpayers should know that a tax exists and how and when it is imposed upon them and others.
• Accountability to taxpayers - Accessibility and visibility of information on tax laws and their development, modification and purpose are necessary for taxpayers.

If people better understand our tax rules and policies, they are more likely to question why, for example, a special rule exists or was introduced or enacted, why permanent or temporary, how a deduction benefits those in higher brackets more than those in lower brackets (unless there is a phase-out), marginal tax rates and relevance, and that the amount of one's refund has little to do with their total tax liability. They would ask better questions of elected officials and those running for office. They would be better aware of the taxes they and others owe. And, hopefully, compliance would improve and be something we are proud of and celebrate.

Here are three recent events that lead me to suggest starting a Celebrating Taxpayers Day.

1. IRS Commissioner Rettig issued a message on April 12 thanking taxpayers. The first two paragraphs follow:

"As the tax filing deadline approaches on April 15, I’d like to thank taxpayers for taking the time to file and pay their taxes. Our nation’s tax system is built around the concept of voluntary tax compliance, meaning citizens comply with their civic duty each year by preparing and filing their taxes – without direct government intervention.
  This principle has helped make our tax system a model for the entire world. Thanks to taxpayers, this system helps fund our great nation. Each year, 95% of the gross receipts of our country flows through the IRS – about $3.5 trillion last year – funding critical aspects of the U.S., ranging from roads and schools to the nation’s military."

Why not make this "thank you" an annual event on a specified date with an explanation of why taxpayers should be thanked, the importance of voluntary compliance, and seize an opportunity to build and support positive tax morale.

2. In my research I came across a 2015 OECD report, Building Tax Culture, Compliance and citizenship: A Global Source Book on Taxpayer Education. It lists activities of 28 developing countries for promoting tax compliance. A few of them have celebration days. For example, Rwanda has an annual Taxpayers Day celebrating compliance and helping citizens understand and appreciate how taxes and the country's development are connected. The president officiates at the event and a report on tax revenue data and tax agency challenges is released. Bangladesh holds a National Income Tax Day 15 days before the tax due date. There are street processions, workshops, conferences and tax clinics. They also show documentaries and dramas on taxation. 

   Celebrating Taxpayers Day in the U.S. could be educational and a reminder of the importance of taxes to our economy and society. It could also be a day where state and local governments help explain their taxes and budgets to their citizens, an opportunity for debates on current tax issues, and release of important government reports about our tax and budget systems. All levels of government release many tax and budget reports throughout the year, why not highlight some key ones on April 30 to draw greater attention to them?

3. Our tax gaps are growing - The IRS estimates the federal tax gap at $458 billion per year. This is more than we collect from the corporate income tax even before the corporate rate was lowered by the Tax Cuts and Jobs Act. A report from the Treasury Inspector General for Tax Administration (TIGTA), Expansion of the Gig Economy Warrants Focus on Improving Self-Employment Tax Compliance (2/14/19) reports some alarming data that indicates we need greater taxpayer education and to better support positive taxpayer morale. Among many findings was that 25% of individuals in a sample of 3.8 milion gig workers filed a 1040, but didn't report their gig income on either the other income line or Schedule C. And, 13% with self-employment tax income who received Form 1099-K did not include Schedule SE or pay their SE tax with their 1040. The IRS also found a 237% increase from 2012 to 2015 in discrepancies between Forms 1099-K filed and what was reported on Forms 1040. 

    A 2018 report from the California Franchise Tax Board found that about 70% of gig economy service providers receive no tax reporting form, which increases non-compliance. With understanding of tax rules and recordkeeping low, compliance without reporting forms become a bigger challenge and frustration. A 2018 QuickBooks survey found that 32% of self-employed individuals admit they don't report all of their income.

The above threee items indicate to me that a Celebrating Taxpayers Day would be a positive step in building respect for our tax systems, building a culture of filing and paying and being proud of that fact, and improving understanding of our tax systems. And, hopefully have some fun with it!

Why April 30?  Well, people are still busy on April 15 filing and sometimes due to weekends and Emancipation Day, filing day falls on April 16 or 17 or 18.  April 16 is Emancipation Day (the day in 1862 when President Lincoln signed an emancipation decree for the District of Columbia). April 30 gives preparers time to recover, and individuals getting refunds to hopefully have them in time for the celebration. In history, April 30 is the day George Washington was inaugurated (1789), the U.S. Navy was formed (1798), San Jose State University formed** (1857), the ice cream cone was unveiled in the U.S. at the World's Fair in St. Louis (1904), and the World Wide Web emerged in the public domain by Tim Berners-Lee (1989) and its source code was released to the public in 1993.

On April 30, we still have income tax filings on our mind and have time to reflect on such things as, "well, next year, I'll keep better records," or "perhaps I should adjust my withholding." So April 30 would be a good day to help taxpayer get their tax compliance needs in order (January 1 would be better, but we all have too many other things we're focused on then). Also, bills are making their way through Congress, and June and November elections are coming up, and K-12 is still in session.

Yes, there is something called Tax Freedom Day® by the well-respected Tax Foundation. They describe this day as the one marking "how long Americans as a whole have to work in order to pay the nation’s tax burden." For 2019, it is April 16. It isn't a national celebration day though. Also, this information is useful, but I find it is easily misunderstood. Most people do not work until April 16 to pay their taxes but think they do when they hear this information, which harms understanding of our tax system. But it would be a good topic for discussion for April 30 Celebrate Taxpayers Day, to help improve tax literacy and transparency.

So, Celebrating Taxpayers Day on April 30. What do you think?


*See for example, Nellen, "'Oh, I See': Suggestions for Greater Tax Transparency," State Tax Notes, 11/20/17. Also, Nellen, Suggestions for Improved Transparency and Accountability of California Taxes and Related Information, 10/12/18.

**I'm not suggesting April 30 for the SJSU connection. In fact, I wasn't focused on the exact date of the founding of Minns' Evening Normal School (how SJSU started in San Francisco); on campus, we all just say SJSU was founded in 1857 (btw, I'm one of SJSU's historians).

Future of Accounting Podcast - Principles of Good Tax Policy

In early December, I was pleased to participate in visionary Danetha Doe's podcast series on the Future of Accounting. She interviewed me about principles of good tax policy and tax reform. I hope you'll listen and check out the many other interesting topics Danetha has covered already including robotics and other technologies, building your practice, forensic accounting today, and more.

The interview is located here on:

1.      iTunes

2.      LinkedIn

3.      Branding for Accountants website


What do you think?

Tax principles for the digital age

At the start of the 21st century, I was involved with a project with the AICPA on tax reform. An outcome of our task force work was a set of ten principle of good tax policy. The goal was for lawmakers to apply these to both existing tax rules and proposals for change to identify where they did and did not meet the principles. Where not met, hopefully improvement could be made.

Another AICPA task force 15 years later (I chaired both, as I've been talking about tax reform for a long time) reviewed the 2001 principles and updated them for a more global, technology-focused perspective.

Fellow AICPA members and professors Ellen Cook and Troy Lewis and I have an article about the 12 principles of good tax policy in the May Journal of Accountancy, which you can obtain for free here. The statement can be found here.

I hope you'll take a look and see how these factors could help shape current tax reform discussions. An example of the application of the principles is illustrated below using a proposal from Congressman Israel who left the Congress last year. I hope you'll consider using the principles if you're analyzing or commenting on tax proposals. Another benefit of using the principles is it can make discussions of tax reform more objective and focused.

What do you think?

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H.R.5381 (114^th Congress)- College Preparation Tax Credit Act – This bill would add new Section 25E, Credit for college preparation expenses, to allow a credit of up to $500 for qualified college preparation expenses. The credit would be available via election for up to three years.

Criteria	Does the proposal satisfy the criteria? (explain)	+/-
Equity and Fairness	As credit, the benefit is the same regardless of income level. Thus, some vertical equity is achieved that would not exist if the benefit was instead a deduction that would provide a greater tax savings to higher tax bracket individuals. The credit is not refundable so provides no benefit to individuals who do not owe any tax although they may have a greater need for the assistance with college prep costs.	+/-
Certainty	The definition of college prep expenses might not always be clear. For example, might gymnastics coaching help if there is a scholarship prospect?
Convenience of payment	The benefit of the credit won’t be received until the taxpayer files their tax return. For individuals who need the subsidy provided by this credit in order to obtain the college prep service, the timing is not convenient.	-
Effective Tax Administration	The addition of a new rule requires the IRS to issue guidance and develop procedures to ensure proper compliance, such as new tax forms and verification.	-
Information Security	One possible compliance measure for administration of the credit could be that the taxpayer identification number of the provider of the college prep service must be reported by the taxpayer claiming the credit. This lead to an increase in identity theft as more people obtain another taxpayer’s TIN.	-
Simplicity	The credit will require guidance to define relevant terms, how to make the election and how to ensure the credit is only claimed for no more than three years.	-
Neutrality	The credit provides a preference for college prep costs relative to other post-secondary education needs such as occupational training and related applications. The credit might cause providers of college prep services to increase their fees.	-
Economic growth and efficiency	The proposal may increase the number of providers of college prep services. To the extent the credit results in greater spending in this area, spending in other areas (or savings) are reduced.	+/-
Transparency and Visibility	Taxpayers are likely to know about the credit as providers of college prep services will promote the credit.	+
Minimum tax gap	Without some type of verification, some individuals with high school age children might claim the credit beyond spending on college prep services.	-
Accountability to taxpayers	Is this legislation needed? What is the purpose? What data was reviewed? Why is it proposed to be part of the tax law rather than provided in another manner, such as via a needs-based grant or scholarship?
Appropriate government revenues	Sufficient data likely exists for a reliable estimate of the amount of reduced government revenues from the proposed credit.

Tax Reform in 2016?

While we are unlikely to see tax reform this year, there continues to be a lot of work going on in the tax committees on it.  And President Obama updated and released his framework for business tax reform this month (first report was released in Sept. 2012). I think the main impetus for the update was to address inversions to tie to the recent activities of IRS and Treasury.

At a speech to the U.S. Chamber of Commerce on April 15, Congressman Brady, chair of the House Ways and Means Committee stated:

"By June, we intend to produce a consensus blue print for comprehensive pro-growth tax reform."

There have been more hearings on tax reform including hearing proposals of members of Congress.

Senator Hatch, chair of the Senate Finance Committee, continues to work on his report on corporate integration (taxing corporate income once only).

As part of his April 15 speech, Congressman Brady also laid out his principles of tax reform.  Here they are along with those that Senator Hatch released in December 2014.

Congressman Brady:

1.Make tax code “simpler, fairer, and flatter.”

2.Close loopholes and “special interest provisions” to lower rates for all.

3.Make system competitive.

4.Encourage business activity in US & move from worldwide to territorial system.

5.Pro-growth tax reform.

6.Reform to improve tax system, not to address spending problem.

Senator Hatch (wants broader base, lower rates and territorial system):

1.Economic growth.

2.Fairness.

3.Simplicity.

4.Permanence.

5.Competitiveness.

6.Promote savings and investment.

7.Revenue neutrality.

A lot of the principles can be met by removing or cutting back the roughly 250 special tax rules in our tax system such as the exclusion for employer-provided health insurance, the mortgage interest deduction, fringe benefits, credits, preferential rates, and more. That makes the law simpler, more equitable and transparent and neutral. It also allows for lower rates. Today's high rates exist because of so many special rules.

What do you think? Do you have any principles to add to the lists of Congressman Brady and Senator Hatch?

Governors' Tax Reform Principles

The National Governors Association has released a 1-pager, set of Tax Reform Principles. The purpose is to help guide Congress in its tax reform work - and of course, consider state government interests.

Their first principle deals with sovereignty. It state: "No federal law or regulation, including their interpretation and implementation, should preempt, limit, or interfere with the constitutional or statutory rights of states to develop and operate their revenue and tax systems."  That sounds more like a principle relevant not to federal tax system changes, but possible laws Congress may very likely pass in the near future relevant to state taxation such as:

• Main Street Fairness - when might a state require a non-present vendor to collect sales tax.
• Income Tax Nexus - possible update to PL 86-272 to address more than only income taxes and more than only companies that sell tangible personal property.
• Mobile Workforce - to bring uniformity to state rules on when a temporary worker in the state is subject to tax and when their employer is required to withhold.

The next principle addresses public finance and the concern subnational governments have should the income tax exclusion for state and local bond interest be cut back. That would lead to people wanting  higher interest rate and a greater cost to state and local governments.  The exclusion is an upside-down subsidy in that it provides a greater benefit to higher income taxpayers than lower income taxpayers.  So, perhaps it could be converted to a tax credit with a cap.  Perhaps the feds can find another way to encourage bond acquisition without favoring high bracket individuals.

I encourage you to look at the NGA 1-pager. They did a good job boiling their concerns down to a few key ones, issuing this as tax reform heats up in Congress, and providing themselves a foundation on which to help draft comments on specific reform proposals.

What do you think?

Taxing the rich - interesting article in Christian Science Monitor

Saturday's Christian Science Monitor had an extensive story on the current news item about President Obama's proposal on increasing taxes on individuals with very high income. See "Tax the rich: Should millionaires really pay more?" by Jessica Bruder (10/15/11). The article provides a variety of perspectives on the issue including some of the Wall Street protesters and some wealthy individuals. It also notes that some high income individuals in France and Germany are asking their governments to raise their taxes.

Former Labor Secretary Robert Reich is quoted as saying that the current issue is not just an economic one, but also a moral one. The article also refers to IRS data indicating that the top 400 income generators had an average tax rate of about 18%.

I encourage you to read the article - it is objective and raises a variety of things to think about in the real question of tax equity - how much should people at different income levels pay in tax.

My last post noted that 10/22/11 is the 25th anniversary of the Tax Reform Act of 1986. That Act resulted in two individual tax brackets - 14% and 28% with capital gains taxed the same as ordinary income. Today, most capital gains and dividends of individuals are taxed at 15%. Meanwhile, other income can be taxed as high as 35% (39.6% after 2012; and even higher due to some phaseout rules).

Perhaps the TRA86 structure with lower ordinary income rates and a broader base and fewer tax credits should be re-examined.

I am quoted in the CSM article noting that ideally tax reform should be non-partisan. Let's look at principles of good tax policy in identifying where improvements are needed. I also observe that any good tax change is challenged today when lawmakers are combining tax reform, deficit reduction and economic stimulus together.

What do you think?