A partner in the Washington office of law firm Venable LLP since 2003, Sam Olchyk provides general tax advice for businesses and individuals, as well as tackling federal tax issues that require representation before Congress, the Treasury Department and the Internal Revenue Service.Prior to joining the firm, Olchyk spent eight years as a tax attorney for Congress -- first as tax counsel with the Senate Finance Committee, and then as legislation counsel with the Joint Committee on Taxation, where his main responsibility was helping with the development of tax legislation affecting domestic business activity. During his time on Capitol Hill, Olchyk, who is also a CPA, worked on numerous proposals that were enacted into law, including pieces of the Job Creation and Worker Assistance Act of 2002, the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Community Renewal Tax Relief Act of 2000. In 2001, he worked on a joint committee study regarding the simplification of the federal tax laws.
In an exchange with WebCPA, Olchyk takes a look ahead at what the New Year may hold for a trio of major tax issues facing the 110th Congress, talks about what issues he thinks Congress should be tackling and offers his thoughts on the corporate tax system that exists today.
Can you speak a little about what future you see for legislation in three tax areas, beginning with the alternative minimum tax?
While there is widespread and bipartisan consensus that the current AMT rules need to be overhauled, it won't be easy to accomplish. Both incoming chairmen of the tax-writing committees -- Congressman Charles Rangel [D-N.Y.] and Sen. Max Baucus [D-Mont.] -- have said that fixing the AMT is a high-priority item. The major obstacle is the revenue loss.
Merely extending the so-called "AMT patch" for an additional one year, through 2007, is estimated to reduce tax revenues by nearly $50 billion. A complete repeal of the AMT may result in a revenue loss in excess of $1 trillion dollars over 10 years. Because of the prohibitive cost, I don't foresee a major overhaul of the AMT rules unless it is done in conjunction with fundamental tax reform.
How about the estate tax?
Back in July 2006, there was a real, but very limited, window of opportunity to permanently fix the estate tax rules. Regrettably, Congress failed to take advantage of the opportunity, so taxpayers who are trying to plan for the eventual transfer of assets to their heirs have to deal with a lot of legal uncertainty in the short run. While it is hard to gauge at this point how much interest the new Congress will have in tackling the estate tax, it clearly takes a back seat to the AMT. Adding to the uncertainty is the expected cost of any permanent estate tax fix that includes a significant increase in the unified credit exemption amount -- which would likely exceed $200 billion over 10 years.
And whatever became of tax reform?
Accomplishing any meaningful tax reform will require significant commitment by the Bush Administration. We saw this in the mid-1980s -- the Tax Reform Act of 1986 would not have happened without the commitment of President Reagan, and the significant involvement by Treasury Secretaries [Donald Regan and James Baker]. I'm not sure if the current administration shares this level of commitment. President Bush's Advisory Panel on Federal Tax Reform presented its report to the Treasury Department a little over a year ago, but little has happened since.
By its nature, tax reform will create new "winners and losers" -- and it is the losers who will remember come November that tax reform meant higher taxes. This highlights why tax reform is impossible to accomplish without bi-partisan consensus, and consensus will be difficult to achieve given the results of the recent elections -- not to mention the campaigning already underway for the 2008 elections. For this reason, I suspect that significant tax reform will be shelved until after the 2008 elections.
Another reason why tax reform might be delayed is the expiration of the individual rate cuts, which are scheduled to expire in 2010. The expiration of the rate cuts could serve as the catalyst for significant tax reform.
Are there any other major tax initiatives you see on the radar screen of Congress that the mainstream public isn’t thinking about yet? There has been a lot of talk from some politicians about the need to reduce the national tax gap -- especially at the nomination hearings of both Henry Paulson and Eric Solomon before the Senate Finance Committee.
There is a lot of discussion about the "tax gap," but there are no easy answers. Addressing the tax gap requires a comprehensive and multi-faceted strategy -- one that incorporates greater emphasis on compliance and enforcement and a far simpler set of tax rules. Like tax reform, such an effort, if it is to be successful, will require difficult policy choices that can only be accomplished by the White House and Congress working together.
In terms of other major tax initiatives, I can envision the tax-writing committees in the 110th Congress focusing some attention on the international tax rules, particularly with respect to the changes that were made as part of the American Jobs Creation Act of 2004. Another area that will garner some attention involves tax incentives for the energy industry.
Are there any tax issues that you think Congress should be getting more involved in? How about less involved in?
Personally, I would like to see Congress tackle tax reform. It has been 20 years since the enactment of the Tax Reform Act of 1986 -- our economy has changed dramatically since then, but our tax laws have not kept pace. We have a much more global economy today, not to mention an electronic commerce industry that didn't even exist back in 1986. Unfortunately, as I mentioned earlier, I am not optimistic that tax reform will happen anytime soon.
There has been much post-election discussion about an increased emphasis on Congressional oversight hearings, though it is unclear to what extent this emphasis will extend to the tax-writing committees. Increased oversight of the tax laws could be very useful -- both in terms of determining the efficacy of current law and providing guidance for future tax reform -- so long as the oversight is conducted in a fair and balanced manner, with no preconceived notions as to the outcome.
When I was a Tax Counsel for the Senate Finance Committee Republican staff in 1995, one of the first hearings I worked on involved the economic implications of a capital gains tax cut. [Federal tax expert] Ronald Pearlman was the first witness, and he provided a history of the capital gains tax and identified specific issues for consideration. A panel of four distinguished witnesses followed him -- two who supported a reduction in the capital gains tax rate and two who opposed a reduction. The panelists engaged in a lively discussion on the issue, and I believe that the Finance Committee members benefited from this discussion. If conducted in this manner, oversight hearings could be beneficial.
In a bit more of a philosophical vein, do you have any feelings on whether the corporate tax system is justified, given the argument that businesses don't pay taxes -- people pay them? For example, business taxes are ultimately paid by the consumer in the form of higher prices, the investor in the form of lower return on investment, the retiree in lower pension benefits...
I like to joke that, in my next life, I would like to come back as an economist. While I understand the philosophical argument, and I tend to agree with the argument, I'm not sure what is the "theoretically correct" answer.
Instead of focusing on the corporate tax system per se, I believe that the business entity tax rules should focus on a different distinction -- i.e., between public and non-public businesses. If an entity takes advantage of the public capital markets, then it makes sense to say that the entity should bear an additional cost in the form of an entity-level tax. If a business does not access the public capital markets, then there is less justification for the disparate tax results that are based solely on the chosen entity structure. This is particularly true given the explosive growth and acceptance of LLCs in the past 15 years.
It seems that many small corporations -- be it C corporations or S corporations -- are trapped within their current corporate entity structure and cannot convert to LLC status because of the corporate liquidation tax. This is a good example of how our tax laws have failed to keep pace with our changing economy, and why tax reform is long overdue.
