Contributing Author: David M. Maloney
Many would assert that significant reform of our nation’s income tax law is overdue because the current Internal Revenue Code is indefensible, in one way or another. Like many things in life, when talking tax reform, it is easy to find fault with the status quo, but difficult to develop a plan that would be a viable alternative for most. In part, this is because the tax law attempts to satisfy various and, sometimes conflicting, policy objectives.
Tax reform invariably involves making tradeoffs, which can be difficult to accept for specific taxpayers in particular cases. For example, if legislators want to lower individual or corporate tax rate, while not increasing the national debt, the tax base would need to increase (e.g., by eliminating deductions and/or exclusions). Of course, for many taxpayers, the primary metric used to evaluate a proposal is a function of how he or she would be affected by an expanded tax base.
One objective of tax reform could be to develop a system that could lead to higher economic growth. Another objective could be to simplify the law so it is less daunting and where compliance is easier. In many ways, tax simplification would be a goal difficult to oppose (i.e., who could argue against the desire to have a tax system that people can understand?), but the goal may be more difficult to support when specific provisions are considered. Many current tax law provisions could be used as examples—below are a few—that if changed with an eye toward simplification, could run counter to other tax law objectives.
Individual Tax Rates
During his campaign, President Trump released a proposal indicating that “… Americans will get a simpler tax Code with four brackets – 0%, 10%, 20% and 25% – instead of the current seven.” But in response to this suggestion, one may wonder:
• When it comes to calculating the tax, whether using the tax table or tax rate schedule, would the mathematical computation really be simpler with fewer rate brackets?
• Under this proposal, the highest marginal tax rate is reduced from 39.6% to 25%. What segments of the population will benefit the most from this proposal and what could be the expected consequences?
• Will this lead to a fairer tax system? What base broadening proposals would need to be considered when addressing the equity question?
Eliminate Deductions and Credits
In H.R. 1 (2014 Camp Plan), introduced by former Chair Dave Camp of the House Ways and Means Committee, a simplification measure calls for the elimination of a number of tax deductions. For example, among others, the following deductions and credits would be eliminated:
• State and local tax deduction
• Deduction of interest on education loans
• Deduction for medical expenses
• Deduction for moving expenses
• Deduction for tax preparation expenses
• Adoption tax credit
• Green energy residential improvements
• Credits for qualified electric vehicles and alternative motor vehicles
While the elimination of these deductions and credits may “declutter” the tax law, what consequences would arise with each provision off the books? What would be given up in exchange for this paring back of the tax law? To answer such questions, it would be interesting to know the historical and current rationale for each provision. For example, what has been the justification for the state and local tax deduction? What was the adoption credit designed to accomplish? Do these rationales exist any longer and, if so, are they worthy of continued support from the government?
Eliminate Deferral Provisions
Some argue that the House GOP Blueprint may lead to an elimination of the popular like-kind exchange provision (§ 1031), which would broaden the tax base. To eliminate such a complex provision would, no doubt, lead to simplification, but at what cost? One possible reason for eliminating the provision would be that it could help “pay” for lower tax rates that many would find attractive. But questions such as the following also should be considered:
• How would the nation’s economy be impacted by such a change?
• Who would bear the burden of such a change?
• What industries would be most directly affected, and could others not directly impacted feel an indirect consequence?
Ideas for Class Assignments and Discussion
David M. Maloney, Ph.D., CPA, is the Carman G. Blough Professor of Accounting Emeritus at the University of Virginia’s McIntire School of Commerce. He completed his undergraduate work at the University of Richmond and his graduate work at the University of Illinois at Urbana-Champaign. Upon joining the Virginia faculty in January 1984, Dr. Maloney taught Federal taxation in the graduate and undergraduate programs and was a recipient of major research grants from the Ernst & Young and KPMG Foundations. Dr. Maloney has published work in numerous professional journals, including Journal of Taxation, The Tax Adviser, Tax Notes, Corporate Taxation, Accounting Horizons, Journal of Taxation of Investments, and Journal of Accountancy.
You must be a registered user to add a comment. If you've already registered, sign in. Otherwise, register and sign in.