Tax Reform

MAKING GOVERNMENT RESPONSIBLE means . . . raising the revenues necessary to fund all the functions of government without increasing the federal debt . . . making our system of taxation simple, equitable and consistent. . . . using the tax code as an instrument of social policy only as a last resort.

POSITION SUMMARY:  

We cannot change history. We have a huge national debt and growing budget deficits. These trends cannot be permitted to continue. Reducing aggregate government tax revenues in these times is NOT RESPONSIBLE GOVERNMENT.
 
I FAVOR a major overhaul of the Internal Revenue Code to replace the current income tax with a consumption tax that will promote saving and investment.

Short of a total overhaul of the income tax, I FAVOR (a) eliminating all deductions that benefit only specific industries, (b) making the same tax schedules applicable to all taxpayers; (c) eliminating the different treatment of income and deductions for similar transactions by individuals and businesses.

DISCUSSION:

No topic is more prevalent as a campaign issue than taxes.  And every politician having any hope of being elected to federal office has promised to do something to reform the income tax.  Proposals for "tax reform" range from the ever-popular promise to eliminate all income taxes (and Internal Revenue Service) to promises to massively amendment the Internal Revenue Code to make it simpler and more “fair.”  Unfortunately, few politicians have any real understanding of the role the Internal Revenue Code plays in government, and even less understanding of the consequences of their proposals for tax reform. 

A Few Facts About Taxes

Contrary to what many of the candidates say, Americans are NOT the most heavily taxed people in the world.  In fact, U.S. personal income tax rates are less that the average tax rate for developed countries. [See http://www.worldwide-tax.com/ ] PLUS, virtually every other country has a national sales tax (or value added tax) in addition to an income tax. and these taxes average almost 20%.

Although the U.S. corporate tax rates are among the highest in the world, the U.S. tax code also provides corporations with more deductions than the tax codes of most other countries. Therefore, American corporations are actually taxed on a smaller percentage of their earnings than most other countries. When measured as a percentage of gross domestic product -- the total value of goods and services sold -- U.S. corporate income taxes are among the lowest in the world.

I don't like taxes any more than anyone else.  But it is absurd to think we can eliminate them.  We cannot even significantly reduce taxes until we get control of government spending--and it is irresponsible for any politician to suggest otherwise.  But we can pursue a responsible tax policy. 

President Obama has promised to address the need for tax reform, and tax reform is likely to be the most important issue considered by Congress after the 2010 election.  Tax reform is too important an issue to be entrusted to Politicians who have little understanding of the tax code.

As a tax attorney, I have a special interest in tax issues and tax policy. I also have the expertise needed to evaluate proposals for tax reform in a rational, dispassionate way.   

I do not favor elimination of the income tax, and I do favor a progressive income tax. But I also favor significant revisions to the Internal Revenue Code consistent with its multiple roles.                 

The first and foremost function of the Internal Revenue Code is providing a means for the identification and collection of the revenues needed to fund government.  But this is not the only function of the Code.  For better or worse, the Code is also an instrument of social and economic policy. 
                  
I believe that it is appropriate to use of the Internal Revenue Code to promote socially beneficial activities, and inhibit detrimental activities.  The problems come when Congress uses the tax Code for purposes that do not promote national objectives and when Congress uses the Tax Code to address “problems” that should be addressed with completely different actions.

I believe that, to the maximum extent possible, taxes should be made "voluntary" by shifting the burden of taxation to non-essential activities individuals choose to indulge in--such a smoking and drinking.  

Policy Amendments for Tax Reform:

To avoid excessive taxes lump-sum distributions from pension plans, we should re-instate "income averaging."

To induce greater personal savings for retirement, we should eliminate all taxes on distributions from all individual retirement accounts to retired persons over age 65.

To reduce the tax burden on retirees, we should eliminate all capital gains taxes for retired taxpayers over the age of 65.

II. CORPORATE INCOME TAXES:

The economic crisis that began in 2008 introduced a new term into common usage – “Too Big To Fail.” Major corporations became too big to fail by virtue of their size and the impact that their failure would have throughout the economy.

It is not government’s place to overtly limit the size or dominance of individual companies. But it is government’s place to protect the nation as a whole from the risks posed by the dominance of individual companies. Companies become dominant largely by virtue of their acquisition of competing companies—whether through purchase or merger. Companies are able to acquire other companies because they have extraordinary profits. I believe that it is in the national interest to curtail the growth of the largest corporations, while at the same time promoting the expansion of smaller corporations, with a progressive corporate income tax.

A progressive corporate income tax, starting at zero for small corporations and growing to, for example, 75%, would enable smaller businesses to expand while limiting the ability of the largest corporations to become dominant by using their profits to acquire other companies. A progressive income tax on corporations would also make smaller companies more attractive as investments by increasing their relative after-tax earnings.

To prevent the largest corporations from shifting more of their business to other countries for the purpose of avoiding U.S. taxes, I would further propose that the tax rate paid on domestic earnings be determined by their world-wide profits. [This would not mean that world-wide profits are taxed by the U.S. It would only mean that the rate at which U.S. earnings are taxed would be determined by world-wide profits.]

The obvious negative consequences of higher taxes on the highest corporate profits could be mitigated by accelerating the deductibility of domestic capital investments—thereby promoting expansion (and jobs creation) in the United States. Making corporate dividends deductible to corporations would also mitigate the consequences of higher taxes by promoting the distribution of earnings and thereby adding to the spendable money available to investors. [Increased dividends would also make shares in the corporation more attractive to investors and thereby mitigate the consequences of higher taxes on the highest corporate profits on the value of the stock of the corporation.]

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