What Kind of Tax Reform Do We Need?

This is an introduction to a package of five articles offering opinions on what kind of tax reform would be best. Scroll down below the introduction to see the articles. There’s one thing about corporate tax reform that everyone agrees on: that we should have it. But what should it look like? On that point, opinions are scattered. It was not difficult for CFO to find strong opinions on this topic. We’ve gathered the perspectives of a CFO, a principal of a Big Four firm, a university pr ..

This is one of five articles offering opinions on what kind of tax reform would be best. See the others, below left.

With the ascent of Rep. Paul Ryan (R-Wis.) to Speaker of the House, there may be reason for renewed optimism that tax reform will get the legislative attention that many advocates have long sought. Still, even with Ryan at the helm and experienced tax-writing committee chairmen lending a hand, tax reform will not be easy.

John Gimigliano

John Gimigliano

Compromises will be required and a better, but still imperfect, tax code is perhaps the best we can hope for. But in asking what kind of tax reform we need, one outcome should be non-negotiable: simplicity.

There are 535 members of Congress, and virtually all of them may say that tax reform is a necessary and overdue legislative agenda. When asked, though, what tax reform should look like, they’re likely to provide roughly 535 reform models. This diversity of viewpoints would likely be arrayed around a number of often competing policy objectives. Those most cited include:

  • Lowering taxes
  • Increasing competitiveness
  • Increasing efficiency
  • Increasing fairness
  • Decreasing deficits

It’s almost impossible to imagine a version of revenue-neutral tax reform that accomplishes all these goals simultaneously. Thus, hard choices inevitably will have to be made.

No matter what vision of tax reform Congress may ultimately pursue, one goal that need not be compromised is decreasing the tax code’s complexity.

A few IRS statistics from a 2012 report highlight just how complex the code has become:

  • In 1940, there were two pages of instructions for the 1040 individual tax return form, compared to 200 pages in 2013.
  • In 2010, taxpayers spent 6.1 billion hours complying with tax-filing requirements, the equivalent of more than 3 million employees putting in a year’s worth of 40-hour weeks.
  • The cost of complying with tax-return filing requirements is $168 billion, or 15 cents of every dollar the IRS collects.
  • The tax code keeps growing, with an average of one new change enacted daily since 2001. The code is more than 4 million words long; War and Peace, a modest 560,000.

While we may never return to the simplicity of 1940, Congress has the power to improve on the current state of affairs. One need look no further than The Tax Reform Act of 1986, which significantly reduced the length and complexity of the code by eliminating scores of preferences and other items that made compliance more difficult.

We can learn two important lessons from the 1986 experience.

The first is that it is possible to halt, and even reverse, the seemingly unstoppable trend toward greater complexity. Make no mistake, tough choices and rough justice were involved in slimming down the Code those 30 years ago, but on balance, the tax system was better off for it.

The second is that Congress must remain vigilant in policing complexity. Despite the successes of 1986, by the end of that decade the tax code and its complexity were growing again, leading us to our current state.

The benefits that a more simple code would bring to businesses, to individuals, and to the government are well known — easier, less-expensive compliance and more predictable enforcement. No matter what path of reform Congress pursues, decreasing the complexity of the tax code would be, by itself, a substantial accomplishment.

John Gimigliano ([email protected]) is principal-in-charge of Federal Legislative & Regulatory Services in the Washington National Tax practice of KPMG LLP. He’s also former senior tax counsel for the U.S. House of Representatives’ Committee on Ways and Means.

These comments represent the views of the author only and do not necessarily represent the views or professional advice of KPMG. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

, , ,

3 responses to “Tax Reform’s First Goal Should Be Simplicity”

  1. One Paragraph Tax Reform
    Imagine an income tax with rates ranging from 8 to 28 percent where each taxpayer could chose the rate. Each income tax rate would be pared with a net wealth tax rate that would range from 2% down to 0 for the top 28% income rate. So for example a taxpayer could elect a 12% income tax rate and 1.5% net wealth tax rate or a 16% income tax rate and 1% wealth tax rate. To make the system fair and encourage appropriate life cycle savings, each taxpayer would be able to save up to $500,000 for retirement, education or health purposes – exempt of any wealth taxes. Any money paid in net wealth tax could be carried and used to offset estate and gift taxes set at a flat 28%. A 4% VAT and C corporation rate of just 8% is all that is needed for business tax reform.

  2. Hi. Interesting article. I had a professor that recently had a book published called Sensible Tax Reform: Simple Just and Effective. Most readable book on tax I think that’s ever been written. If anyone is interested on the topic, Dr. Korth does a really good job at explaining what we have, what we need, and how to get there. Just my two cents. Thank you!

  3. …and the 1986 act also introduced the alternative minimum tax, which hugely obfuscates tax planning. Any change in the tax code must repeal the alt min!

Leave a Reply

Your email address will not be published. Required fields are marked *