American
Business
Conference A Coalition of Growth Companies
March 18, 2005
The attached comments are submitted to the President's Advisory Panel on Federal Tax Reform by the American Business Conference (ABC) an Association of leaders of midsize American companies
John Endean
President
American Business Conference
1828 L Street, NW, Suite 908
Washington, DC 20036
This submission is the response of the American Business Conference (ABC) to the request for comments from the President's Advisory Panel on Federal Tax Reform.
The Panel has solicited comments in regard to four issue areas: the complexity of the tax code, examples of its unfairness, specific instances in which the tax code distorts important business or personal decisions, and goals that the Panel should keep in mind as it evaluates the existing tax system and recommends options for reform.
Panel Goals A tax system should be neutral in terms of economic decision-making. Put another way, decisions that individuals and businesses would make in a hypothetical world of no taxes should be identical to those they make in the real world with taxes. It is this concept, or goal, that is basic to an evaluation of the current tax system or the development of proposals for its reform.
However conceptually simple, the development of a tax system that does not distort economic decision-making would be as a practical matter quite difficult. On the personal side, distortions in the code such as, for example, the home mortgage interest deduction, are often politically untouchable and not really thought of as distortions at all.
On the business side, our political system, which otherwise largely eschews industrial policy and gives lip service to the working of a free market, thinks nothing of introducing tax breaks and tax penalties designed to influence business behavior in one direction or another (often with the encouragement of some business interests). These provisions do indeed change business decision-making, if sometimes in ways unanticipated by the legislators who inserted them into the code.
Whether or not a tax system that does not distort economic decisions is ultimately attainable in full, we can improve on the current code. One of the current code's most basic distortions, the favoring of consumption over saving and investment, can be corrected with a system that does not double tax the latter. The recent elimination of the double tax on dividends was a small but laudable step in that direction. For a more fundamental elimination of the code's double taxes, we commend to the Panel's attention the USA Tax System, introduced into the Senate in the mid-1990s by Senators Sam Nunn and Pete Domenici and, later, into the House by Congressman Phil English.
More generally, the Panel would be well advised to point out to the nation the cost of using the tax code for purposes other than the efficient raising of revenues to finance the government. The tax code is too easily used as the default vehicle for the achievement of a variety of social or economic goals. But the code, as already noted, is a dubious instrument for such purposes. If the nation agrees that certain desirable activities are not being fully carried out through the working of a free market, it would be far better to subsidize those activities directly than to distort the tax code.
Complexities and Distortions of Business Taxation We focus on the business side of the tax system because we believe it is here where the most egregious complexities and distortions of our tax system can be found. Broadly speaking, the corporate tax embodies all of the Panel's concerns about tax complexity, tax distortions, and, therefore, tax fairness.
Compliance with the corporate income tax has become too complex for the Internal Revenue Service (IRS) to monitor. As a result, corporate taxpayers have been saddled with Schedule M-3, an extraordinarily burdensome form that attempts to reconcile financial accounting income or loss with taxable income or loss. In the name of transparency, companies can spend millions of dollars each year tracking and disclosing a multitude of transactions as a means of assisting the IRS in determining whether a return should be audited. As both a reaction to the corporate income tax's complexity and as a recent addition to that complexity, we invite the Panel's scrutiny of Schedule M-3.
The distortions created by the corporate income tax are manifold. Those distortions begin in a company's early days. Because the tax does not apply to all enterprises, how firms organize themselves is from the beginning driven by tax rather than objective economic circumstances. Today firms that essentially perform the same economic function are taxed in very different ways. This makes no sense.
Another example of distortion is the complex treatment of foreign source income under the corporate income tax. As currently constituted, the corporate income tax profoundly influences -- and makes inefficient -- how companies do business overseas and how or whether they repatriate their foreign earnings.
Finally, the corporate income tax, because it does not allow for the immediate expensing of new business investment, serves as a drag on that investment and therefore on productivity and overall economic growth.
The corporate tax is also unfair because it is a hidden tax. Ultimately, whether as workers, consumers, or investors, people, not inanimate businesses, pay the corporate income tax. Any tax reform that yields useful changes on the individual side and then offloads their cost on to business - with the idea that business is somehow picking up the tab - is really no reform at all.
The corporate tax, in our view, should be replaced, root and branch. In its place, after an appropriate transition period, should be a tax on business transactions that is completely integrated with the individual tax. It should be territorial. In addition, and crucial for economic growth, a reformed corporate tax would be based on cash flow and would allow businesses to deduct immediately, rather than amortize over time, all new capital investment. Finally, this new reformed tax should apply to all businesses, regardless of the way they have chosen to organize themselves.
Complexity of the Individual Income Tax We recognize the utility that some reform advocates find in stirring up popular resentment toward the complexities of the individual code. Even in a time when specialized computer programs, such as Turbo Tax, have vastly facilitated compliance, discontent remains.
The last time fundamental tax reform was discussed in Washington was in the 1990's. Ultimately that discussion foundered on what we regarded at the time as a misplaced emphasis on "simplifying" individual tax compliance. A national debate that began by trying to discover a reform to promote greater growth and a higher standard of living ended with fruitless promises about reducing the tax return to postcard size or, alternatively, getting rid of the Internal Revenue Service entirely.
It is urgent that this Panel resist a similar effort, which we now see developing, to restart the "simplicity" discussion. With an economy the size of our nation, and with political pressures favoring the retention of certain deductions and credits, we doubt that paying our tax obligations could ever be a wholly simple matter, even assuming that would be desirable.
Further, we strongly oppose the well-intentioned efforts of some to "simplify" the income tax by further reducing the number of taxpayers who must pay it. As many non-poor Americans as possible should pay income taxes, even if in very modest amounts, in order that they may have a stake in how their government uses that part of the nation's economic resources it extracts every April 15.
Instead of simplicity for simplicity's sake, the goal of tax reform should be to make the tax system understandable. For us, this is a distinction with a very important difference. By understandable, we mean that taxpaying citizens should find the purpose and method of raising revenues comprehensible and worthy. They should see a direct and legitimate connection between the nation's larger economic and budgetary goals and tax policy. And every taxpayer should be convinced that his or her individual tax burden is not unfairly or capriciously disproportionate to the burden borne by others. The current individual income tax meets none of these criteria, while a single-minded focus on simplicity seems destined, however inadvertently, to make taxpaying automatic if not invisible. This would not be conducive to public understanding and reflection.
It is precisely because we favor an understandable individual tax code that we favor moving the tax system toward a consumption base with an unlimited deduction for saving. Enactment of such a system would wound, probably mortally, the huge and hugely unproductive tax-shelter industry. With the passing of the tax shelter industry, the income tax would be profoundly less cumbersome and far easier to understand.
An unlimited saving deduction would also make the tax code fairer for many people in a way that really matters. Today, the income tax divides Americans. The wealthy seem to enjoy opportunities to lower their tax bill that are unavailable to wage earners.
In contrast, an unlimited saving deduction enables everyone to lower his or her tax obligation and in the same clear way: by saving. And because we all have a large stake in increasing saving, which helps secure future growth, an unlimited saving deduction would, we hope, encourage taxpayers from all walks of life to see themselves in a great common pursuit: building a stronger economy for everyone by building a better future for themselves.
The American Business Conference is a Washington-based coalition of chief executives of fast-growing, midsize American companies. ABC members advocate tax, budget, trade, regulatory, and education reforms designed to promote economic growth and a higher standard of living for all Americans.
For more information about membership in American Business Conference or about our advocacy, contact Andre Thomas or email: abc@americanbusinessconference.org
American Business Conference
1828 L Street, NW, Suite 908
Washington, D.C 20036
202-822-9300
202-467-4070 Fax
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