The National Small Business Association has released what it is calling a Tax Reform Checklist. The nine changes identified are common-sense ideas that most elected officials should be able to support. They are:
1. Designed to tax only once
2. Stable and predictable
3. Visible to the taxpayer
4. Simple in its administration and compliance
5. Promote economic growth and fairness between large and small businesses
6. Use commonly understood finance/accounting concepts
7. Grounded in reality-based revenue estimates
8. Fair in its treatment of all citizens
In announcing the Checklist, the NSBA noted that its first choice actually would be to move to a Fair Tax. According to FairTax.org, this is a national sales tax of 23% on purchases of new goods and services, with the exception of necessities. Admittedly, that sounds steep. However, the organization points out that it just about equals the sum of the current lowest income tax bracket of 15%, plus the 7.65% employee payroll tax rate. (The Fair Tax would eliminate Federal income taxes and payroll taxes.)
While the FairTax might be the organization’s preferred option, “the dire financial situation we find ourselves in necessitates that we—lawmakers included—work together to find a solution,” said NSBA chair Chris Holman, CEO of Michigan Business Network.com and president of The Greater Lansing Business Monthly, in a statement.
Indeed, the principles outlined by the NSBA should be ones that garner solid support across the political spectrum. To examine a few:
Stable and predictable: In just 2011 and 2012, 76 temporary tax provisions were set to expire, according to a Congressional Research Service report, “An Overview of Tax Provisions Expiring in 2012.” Cluttering the tax code with temporary provisions adds complexity and expense. It becomes difficult for businesses to make intelligent investment decisions when they can’t assess the tax ramifications, due to the proliferation of temporary provisions.
Simple in its administration and compliance: The 2012 CCH Standard Federal Tax Reporter, which includes the Internal Revenue Code, along with associated regulations and explanations, weighs in at more than 73,000 pages. It’s difficult to believe that anything that takes 73,000 pages to explain is simple, either to administer or comply with.
Indeed, the IRS appropriation for fiscal 2012 was about $11.8 billion, and the Service employs more than 90,000 individuals, according to a June 2012 U.S. Government Accountability Office report on the IRS 2013 budget.
In contrast, the combined texts of the Sixteenth Amendment – one sentence giving Congress the power to collect taxes on income – along with the U.S. Revenue Act of 1913, which together generally are considered the initial tax code, consisted of about 27 pages, CCH reports.
Fair in its treatment of all citizens: As anyone who is keeping an eye on the upcoming presidential election is well aware, the tax rates paid by U.S. citizens of different income levels has become a hot button. In theory, the U.S. tax code is progressive, with tax rates rising for those with higher incomes. In reality, the plethora of deductions and credits can mean some higher income citizens pay less in taxes than their counterparts of more modest means. A growing percentage pay no taxes. The number of nontaxable returns with income of $200,000 or more in current dollars grew from 54 in 1977 to 2,268 in 2009. In percentage terms, the portion of returns with incomes of $200,000 or more that paid no income tax quintupled during this period, rising from .118 to .609. That’s according to a report in the IRS’ Statistics of Income Bulletin, Spring 2012.
Admittedly, the percentage of non-tax-paying high earners is significantly lower than the percentage of lower-income taxpayers who pay no taxes. For example, about 5.3% of tax units with 2011 income of $75,000 to $100,000 paid no income tax, according to a recent analysis by the Tax Policy Center. However, the upward trend in the numbers of high income earners who don’t pay income tax shows a tax system that increasingly seems skewed to those who are better off.
It’s hard to say whether any of the principles outlined by the NSBA will inform future debates on tax reform. Too often recently, politics trumps sound policy considerations.