Guest post by Robert D. Flach:
The solution to our federal budget and deficit crisis comes from the title of a Jerry Lewis movie!
Despite our current budget problems, and the huge government debt, we do not need to raise tax rates. We can actually reduce both the individual tax rates and the number of tax brackets.
The way to do this is to do away with all, and I do mean all, tax “loopholes” and “preferences” – both individual and corporate.
We should actually do away with all “tax expenditures”, including exemptions from taxable income, and start from scratch – adding back only those exemptions and deductions that are appropriate.
While the term “tax expenditure” has become popular only recently, in the context of the tax reform debate, the concept has been around since the 1960s. Stanley S. Surrey, a former Assistant Treasury Secretary for Tax Policy. described tax expenditures in his 1973 book “Pathways to Tax Reform” (the highlight is mine) –
“The federal income tax system consists really of two parts: one part comprises the structural provisions necessary to implement the income tax on individual and corporate net income; the second part comprises a system of tax expenditure under which Governmental financial assistance programs are carried out through special tax provisions rather than through direct Government expenditures. This second system is grafted on to the structure of the income tax proper; it has no basic relation to that structure and is not necessary to its operation. Instead, the system of tax expenditures provides a vast subsidy apparatus and uses the mechanics of the income tax as the method of paying the subsidies. The special provisions under which this subsidy apparatus functions take a variety of forms, covering exclusions from income, exemptions, deductions, credits against tax, preferential rates of tax, and deferrals of tax.”
The Joint Committee on Taxation, which issues an annual tax expenditure report, provides the following definition (again, highlight is mine) –
“Tax expenditures are defined under the Congressional Budget and Impoundment Control Act of 1974 (the ‘Budget Act’) as ‘revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability.’ Thus, tax expenditures include any reductions in income tax liabilities that result from special tax provisions or regulations that provide tax benefits to particular taxpayers.“
Tax expenditures include the inventory of Tax-Exempt Income, Adjustments to Income, Itemized Deductions, and Tax Credits (refundable and nonrefundable). Last December the Joint Committee on Taxation has published “Estimates of Federal Tax Expenditures for Fiscal Years 2010-2014.”
Many tax expenditures, mostly those that take the form of refundable credits, not only cost millions of dollars in terms of a reduction in tax liability, but also generate millions of dollars of tax fraud. For example, the Government Accountability Office estimates that 25% of all Earned Income Credit claims for 2010 were erroneous. And several reports from the office of the Treasury Inspector General for Tax Administration document the humongous fraud resulting from the various incarnations of the First Time Homebuyers Credit.
Some worthy current tax expenditures should remain in the Tax Code; others should find their way back into the federal budget as specific benefit programs administered by the appropriate government agency, but not as tax deductions or credits. But many should disappear forever.
At my blog “The Wandering Tax Pro” I have written a series of posts with proposals of how I would rewrite the federal Tax Code. Click here to review the series.
On the corporate end, in addition to doing away with all special-interest deductions and credits and other loopholes, we should institute a “Dividends Paid Deduction”. If a corporation wants to reduce its tax liability it does not have to hire creative tax consultants and resort to questionable and interpretive tax tactics, a la Enron. All it has to do is pay out its income in dividends to shareholders.
Corporate taxable income would be determined via basic income less expenses – no special exemptions from income, deductions, or credits. And net taxable income would be reduced by issuing dividends. The remaining taxable income could be taxed at lower rates than are currently in effect.
And, as I have talked about at “The Wandering Tax Pro” in the past, there would no longer be a deduction for depreciation of real property (for any business activity – individuals filing Schedules C, E or F, partnerships or corporations).
Corporations with billions in income could no longer avoid income tax altogether by taking advantage of special interest shelters and loopholes.
As a side benefit this would do away with the current unfair “double-taxation” of corporate profits.
The answer to our economic problems is not to punish success and entrepreneurship by taxing each additional dollar of income of those with higher incomes at a higher rate. The answer is to remove from the Tax Code the various “tax expenditures” that allow high income individuals, and corporations, to pay less than their fair share of federal income taxes – or no taxes at all (what the Alternative Minimum Tax was originally supposed to do, but does not) – and that allow about half of Americans to either pay absolutely no federal income tax or actually make a profit from filing a Form 1040.
In other words – don’t raise the bridge, lower the river!
COPYRIGHT © 2011 BY TAXPRO SERVICES CORPORATION
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Robert D. Flach is a tax preparer and is known as the internet’s “Wandering Tax Pro.”
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This guest post was submitted in response to my query about how the best way to deal with the current economic situation. This post does not necessarily reflect my thoughts and feelings.
Your comments and reactions are, of course, appreciated. Just play nice. I have standards. And I don’t want to have to delete you.
