Numerous hearings, working papers, discussion drafts and learned studies on tax reform have surfaced during the past several years, with general agreement that the Tax Code needs to be made simpler. Most recently, the Senate Finance Committee held a series of hearings on the importance of growth and efficiency, on fairness, and the merits of simplicity in tax reform.
“Our tax system has become so incredibly complicated, even somebody who really knows her way around an accounting textbook has a hard time getting everything right,” said Sen. Ron Wyden, D- Ore., ranking member of the committee.
“Simplicity is a lofty goal in tax reform that many of us would like to see,” said Carol Markman, CPA, director of taxation for Bryn Mawr, Pa.-based EP Caine & Associates CPA LLC and past president of the National Conference of CPA Practitioners, who testified at the hearing. “However, simplicity frequently leads to unfair and/or unreasonable outcomes,” she said. “For example, the simplest type of tax is a sales tax, but it is the most regressive type of tax since it places the highest proportionate burden on those least able to pay the tax.”
“Anybody with any sense thinks our Tax Code has gotten way too complicated and we need to do something to simplify it,” agreed Roger Harris, president of Padgett Business Services. “Everyone is for it — I don’t know anyone who is against it. The devil is in the details, which means there will be winners and losers. You can’t confuse tax reform with tax reduction.”
The American Institute of CPAs has submitted tax reform suggestions to the Senate Finance Committee working groups on individual, business and retirement provisions in the code, in addition to its annual compendium of tax proposals. “The idea is that Congress will pick up and implement several ideas,” said Troy Lewis, CPA, chair of the institute’s Tax Executive Committee. “There are signs that would suggest that the parties that have a stake in the process are willing to come to the table in a meaningful way, meaning in the spirit of compromise. Everyone likes to point to the ’86 Act when everyone said it was dead, until it wasn’t. We do see some similar elements here, but there are differences. The world is a different place today than it was in 1986. We’re now dealing with a code that was structured on the notion of a mid-1980s economy.”
“One of our suggestions regarding individual reform is to simplify the education incentives,” he said. “It’s almost meaningless to explain to someone that they have over 13 different ways to save for college. We got here because well-meaning legislators saw a growing need in this area and decided to incentivize people to save, but they never got rid of what was already there. Every year, different people would come in and add to the stew. There are so many options, and the right answer will depend on not only where you are today, but where you think you will be 20 years from now. Our recommendation is, Let’s blow this back down.’ We need to get it to one or two choices, by taking some of the best options and simplifying them. There are lots of options and not one size fits all, but with too many choices the individual may make a difficult choice and hope for the best. Or they may continue to study and look for more information, but end up not acting and make no choice at all.”
Markman agreed. “Many of the education incentives have different income phase-outs, limits on the number of years the benefit is available, the number of courses the student must take, and what type of expenses qualify for the incentive,” she observed. “There is a need to coordinate the various education incentives so that the benefits are available to the desired taxpayers with less confusion. Fewer tax provisions with fewer phase-outs, per-family limits, and types of allowable expenses would go a long way to simplifying these provisions. A computer should not be needed to determine which education benefits apply and which ones provide the best tax result for a taxpayer.”
Specifically, the AICPA recommended the following changes for the existing education provisions that provide a benefit to higher education tuition and related expenses:
- Replace tax incentives (i.e., the Hope Credit, the American Opportunity Tax Credit, and the Lifetime Learning Credit) intended to help taxpayers meet current higher education expenses with one new or revised credit available on a per-student (rather than per-taxpayer) basis, for any six years of post-secondary education;
- Repeal the student loan interest deduction and the tuition and fees deduction to relieve taxpayer confusion and simplify the Tax Code;
- Repeal education savings bonds and merge Coverdell Education Savings Accounts into qualified tuition programs by allowing the transfer of savings from Coverdell accounts into Section 529 accounts;
- Create a uniform definition of “qualified higher education expenses” for all education-related tax provisions. Specifically, QHEE should include tuition, books, fees, supplies and equipment.
If it is determined that phase-outs are necessary, all education-related tax provisions should have the same adjusted gross income limitations. The concern for excessively high marginal rates resulting from coordinating phase-out provisions should be alleviated by substituting one credit for the several benefits that exist today. In addition, any remaining concerns could be addressed by widening the phase-out range, which would still permit coordination that could simplify matters for taxpayers and improve their understanding of eligibility.
“As part of the comprehensive tax reform efforts, we support a new, simplified income rate structure,” the AICPA suggested. “We suggest Congress avoid, as well as eliminate, all surtaxes as they are complicated, confusing, and lack transparency, similar to the Alternative Minimum Tax, which we advise repealing. Congress should apply a simplified rate structure with only one set of rules, as opposed to the current system, which arguably includes three vastly different taxation systems (regular tax, AMT, and net investment income tax).”
CASH SHOULD BE KING
On the business side, the AICPA focused on an expansion of the cash method of accounting, tax return due date simplification, the repeal of the AMT, and pass-through tax reform.
“AMT repeal is huge for us,” said Lewis. “It just adds a level of complexity that we don’t need.”
“Small businesses suffer a heavy burden because they often do not know whether they are affected or subject to the tax until they file their taxes and complete the complex tax computation,” the AICPA stated. “Therefore, they must constantly maintain a reserve for possible AMT, which takes away from resources that can be allocated to business needs such as hiring, expanding, and giving raises to workers.”
“The AICPA supports the expansion of the number of taxpayers that may use the cash method of accounting, which is simpler in application than the accrual method, has fewer compliance costs, and does not require taxpayers to pay tax before receiving the income,” the letter stated.
Likewise, the American Bar Association sent letters both to the Senate Finance Committee and the House Ways and Means Committee urging them to reject any proposals that would require personal service businesses to switch from the cash method to the accrual method. It noted that last year, a majority of House members and 46 senators signed letters supporting cash accounting for small businesses and opposing mandatory accrual accounting proposals.
“We’ve been pushing for a more pure cash accounting method for small business,” said Padgett’s Harris. “When income reflects cash flow, and businesses are taxed on cash flow, that makes it fairer and simpler. It also eliminates all the repair regs issues that created so much controversy. If you have real cash accounting, you don’t have these issues. When money comes in, it’s income, when money goes out, it’s expenses, and what’s left is profit. You don’t have to worry about this safe harbor or that safe harbor, what’s an expense or what gets capitalized. If you have pure cash accounting, none of that would matter.”
Part of the tax reform battle, according to Harris, is that, “Everyone is for what they would win on, and everyone is against what they would lose on. In many cases, you wouldn’t know at the beginning. For example, if tax reform lowered rates and eliminated the mortgage interest deduction, some taxpayers with an expensive mortgage might lose because they lost their deduction, or they might win because of the lower rates. The challenge will be to get legislators together and saying, We know some won’t like this and some will, but we have to make things simpler.’”
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