With the President's Advisory Panel on Federal Tax Reform due to report Nov. 1, we asked industry leaders, many who made Accounting Today's recently released 2005 Top 100 Most Influential People list, to tell us what sort of tax system they would create.
Through the rest of October, WebCPA will post new comment collections every Friday.
This week, among others, thoughts from Internal Revenue Service Commissioner Mark Everson, U.S. Comptroller General David Walker and Grant Thornton chief executive Edward Nusbaum.
"A sound tax system should contain three elements to ensure fairness and promote compliance: It should be appropriately progressive, it should be simple enough to facilitate compliance, and it should be stable."
-- Mark Everson, Commissioner, Internal Revenue Service
"Let me answer this from our client's perspective, since at RSM McGladrey, we see our future closely intertwined with the success of our clients."An optimal tax system from our client's perspective would address the tax difficulties that U.S. firms face competing in the global marketplace. A new federal system would also treat taxpayers in different industries in an even-handed way. Under the current system, expiring tax provisions and income-sensitive phase-outs cause our clients to have difficulty engaging in multi-year planning with any degree of certainty. The alternative minimum tax causes unpredictable income tax planning and may lead to financial surprises.
"Furthermore, the overwhelming number of tax rules from state and local governments frustrate our clients and distract them from their business pursuits. To sum up, I would say any tax system with greater certainty and less administrative complexity would benefit our clients."
-- Steven Tait, President, RSM McGladrey Business Services
"A flat corporate tax and, for individuals, a progressive tax. I would not endorse the introduction of exemptions or other loopholes intended to provide various incentives for furthering certain behaviors, or differentially and indirectly funding particular activities. That is, I would propose a single-purpose tax system designed solely to produce revenue."
-- Rebecca McEnally, Director, Capital Markets Policy Group, CFA Centre for Financial Market Integrity
"Not surprisingly, a complex society has spawned a complex tax law. Americans understand the need for taxes, but don't understand the Internal Revenue Code. The code should be drastically simplified and made more equitable. It is a daunting task, but its necessity is graphically illustrated by the fact that it currently takes the average American about 26 hours to complete his or her tax return. That indicates that the system is broken and needs to be fixed."Over the years the code has resulted in unfairness. One inequity that stands out is the alternative minimum tax. Prior to 2000, the AMT affected less than 1 percent of all taxpayers. By 2010 it is anticipated that number will be about 20 percent. The AMT should be eliminated although -- as a practical matter, a likely alternative source of revenue will have to be identified."
-- Diane Rubin, Partner, Novogradac & Co.
"I would create a flatter, more streamlined and simplified income tax, supplemented with a broad-based consumption tax. I would retain an estate tax, but with a much higher exemption."
-- David Walker, U.S. Comptroller General
"Some years back I was a member of a high-level American Institute of CPAs' Tax Division Task Force on "alternative tax systems." After a very detailed study we concluded that the present tax system, with some tweaking, is still best for the vast majority of taxpayers."The alternatives we studied included the value-added tax, which we concluded is not in keeping with the way business is conducted in the United States.
"A national sales tax was determined to be a regressive tax hurting the middle- and lower-income population, and we concluded that the combined federal and state sales tax rate necessary to replace the current income tax regime would be so prohibitive that retail businesses would suffer tremendously, possibly causing a severe downturn in the economy.
"The pure flat tax was also examined, and after exhaustive study we determined that it provided an unfair result to a greater number of taxpayers than the present tax system. An accessions tax was also reviewed; however, in light of the controversy of doing away with the taxes at death, it does not appear there is any chance of success.
"So where do we stand? Let's take the present system, with graduated rates; refine and limit the deductions to those that are essential -- i.e., medical, contributions; and really, really simplify the nonsense like depreciation rates and useful lives, the definition of dependents, and elimination of credits (versus deductions). Take the good part of our present regime (a good portion of present law) and simplify the rest. The New York State Society of CPAs has made a good start with their SET Tax proposal."
-- Stuart Kessler, Managing Director, AmEx TBS
"From my personal viewpoint, I would create a variation of a national sales tax coupled with an estate tax. [It's] easy to apply, and is graduated (the more you make, the more you spend)."
-- James Metzler, Vice President of Small Firm Interest, AICPA
"There is no simple answer for a tax system in our country. The right tax system might include a varied approach with multiple dimensions, resulting in a tax where all taxpayers bear a fair burden."A flat tax sounds great, but it is regressive and fails to promote some basic American traditions like home ownership and charitable contributions. A value-added tax such as those used in Europe should be explored, but in the end, may be politically unacceptable. A tax based on income continues to have merit, but should be significantly improved over the current system. For example, the double tax on corporations should be restructured and the alternative minimum tax on individuals should be simplified or eliminated.
"Our current tax system is overcomplicated and creates burdens for taxpayers and practitioners alike. CPAs should be more actively involved in the writing and development of the tax laws and regulations to improve the logic and quality."
-- Edward Nusbaum, CEO and Executive Partner, Grant Thornton
"What is the primary purpose? To raise revenue or redistribute wealth? The "fairness" of a tax system is in the eye of the beholder."
-- James Smart, Managing Partner, Smart & Associates LLP
"The best tax system is a modified consumption system, which taxes only personal consumption, and exempts from tax income earned by businesses and income from investments. The system is modified by exempting from tax a certain amount of consumption, in order to prevent the tax burden from falling too heavily on individuals with low income."The result of such a system is that the vast majority of tax is raised from the middle-class. Supplementing this system is an estate tax, similar to what we have now, but which is imposed only on very large estates (e.g., estates valued at above $10 million). The purpose of the estate tax is both to raise revenue, and to prevent the accumulation of extreme wealth, and the power that goes with that wealth, in the hands of too few families."
-- David Hardesty, Vice President, Wilson Markle Stuckey Hardesty & Bott
"I'm a firm believer in the progressive income tax system, mainly because I think it provides a more balanced tax structure. A certain amount of protection is provided to low-income taxpayers since they earn less, including certain beneficial credits and deductions. Similarly, taxpayers earning larger salaries would pay tax rates relative to their income, creating a fair and balanced taxation system."
-- Michael Lister, Chair, President and CEO, Jackson Hewitt Tax Service Inc.
"The creation of the President's Advisory Panel on Federal Tax Reform and the work the panel is undertaking is a bold step in making changes to the code and should provide great insights on ways to improve the system."
-- Timothy Flynn, Chairman and CEO, KPMG
"Tax systems have been around for hundreds of years, and the fact that one has yet to find the perfect structure indicates that a perfect tax system does not exist. There are many simpler alternatives than the current U.S. structure; for example, the value-added tax has been a vital part of the tax system of most countries around the world. Other possibilities include a flat income tax or a greater emphasis on sales tax. Each of these comes with their own pros and cons and, perhaps, the most effective system may be a combination of various methods."However, doing this, while still keeping the system simple and effective in providing adequate revenues, will take a great deal of focus and self-control on the part of policy makers."
-- Nancy McKinstry, Chair and CEO, Wolters Kluwer
"Neither I, nor the AICPA, has an official position on what is the "best" tax system. Rather, we take the position that whatever system our politicians choose should adhere to the primary principal of fairness."To some extent, fairness is in the eye of the beholder, but we should be able to agree that to have the quality of fairness, it should be imposed in a manner that is equitable across the economic spectrum of taxpayers, and capable of being understood by those upon whom it is imposed. Secondarily, it should not impair economic activity. A third characteristic we should look for is the ease of administration.
"Any of the alternatives currently under discussion, the income tax, a flat tax, a national sales tax, or a value-added tax, could be designed in a way that would fulfill these principals."
-- Tom Ochsenschlager, Vice President of Taxation, AICPA
"I'd develop a national sales tax and exempt low-income individuals from the tax. The focus of the tax system would be simplification, so that no individual would have to file anything except those lower-income individuals who would file for refunds. The tax system should be understandable by the people who pay the taxes and simple to administer."
-- David Costello, President and CEO, NASBA
"One thing that seems clear to me: The system seems to work. It's far from perfect. But it seems to work. Most people who earn high incomes pay more taxes and most people who earn low incomes pay less taxes. As it should be. People with complex tax issues need to hire people to prepare their returns, but they can afford it. People with simple tax issues don't need a tax preparer."Yes, it seems unfortunate that the tax code is so complex, but in the absence of major societal problems attributed to the complex tax code, I think Congress' time and energies should be focused on many other pressing issues that ARE causing societal problems - like health care, terrorism, finding cures for dreaded diseases, employment, the environment, etc. The complex tax code has its plusses -- for instance, it encourages private home ownership, anyone from any walk of life can apply it, and it keeps accountants busy!
"The negative may be that some who live in this country don't pay federal taxes for various reasons.I haven't heard of any proposals that seem even remotely capable of improving this situation that works."
-- Marc Rosenberg, President, The Rosenberg Associates
"A tax system should follow the guidelines of a country's stated foundation, not the political whims of those who are in a position or have the power to drive an emotional-based change or initiative. With regards to the United States, our foundation is very simple and distinct -- "All men are created equal.""Therefore, our tax system should treat all individuals equally. That goes for institutions as well. Institutions as well as individuals should be taxed likewise. Income for individuals/profits for companies should be the only basis for taxation, and this should be consistent no matter where one lives, and where one establishes a business. The tax rate at the United States level should be a flat rate and uniform, as well as that established by each of our states. Special assessments should be allowed at the local level to support the specific needs of the local community, but again the taxation rate should be uniform for all based on the same principles. These choices at the local level should be the choice of the group that it affects.
"Additionally, there should be no yearly income tax reporting, for this should be done as part of salary payment for individuals, yearly based on company performance."
-- Terry Petrzelka, President and CEO, Tectura
"A mix of consumption taxes (fees for using resources can influence behavior in ways favorable to balanced resource consumption) and income taxes (essentially recognizing the practical need to obtain funds based on the ability to pay)."
-- Gary John Previts, Professor and Associate Dean, Weatherhead School of Management, Case Western Reserve University
"I would create a tax system similar to our current system, with several modifications. The basic structure of a progressive tax on income, with deductions allowed for certain socially desirable expenditures, is fundamentally a good system. A flat tax would disproportionately burden low-income taxpayers, while discouraging public funding of worthy causes (by eliminating deductions for charitable contributions, mortgage interest, etc.). A consumption tax, or value-added tax, would also disproportionately burden low-income taxpayers, who must utilize more of their income for living expenses than higher-income taxpayers."The primary flaw of our current system is that it is based on realized income. A wealthy individual can virtually avoid tax by structuring his or her affairs to minimize income recognition, whereas a simple wage earner has no such options. Although our current system was created as a progressive system, it actually functions as a regressive system.
"To correct this inequitability, I would propose the following modifications to our current system:
- Lower the top tax brackets, but include a tax on net worth over a certain floor. The net worth tax could be structured as roughly equal to the current tax rate times a reasonable rate of return on net worth, such as 1.4 percent (28 percent times a reasonable return rate of 5 percent) times net worth over $1 million.
- Eliminate Social Security tax and, instead, build this tax into the overall income tax. As currently structured, Social Security tax is regressive.
- This modified tax system would ensure that every taxpayer truly pays his or her fair share, whether or not assets are structured to avoid current recognition of income."
-- Sheryl Rowling, Managing Partner, Rowling, Dold & Associates
"I would create a graduated taxation plan with defined brackets that wouldn't penalize the lowest-income Americans' abilities to buy necessities. It would be easy to ideally say, a fair, simple and equal system of levying taxes, but has that ever been reality? Nothing that is simplified is fair. What is equal may also not be fair. The methods used to levy a tax liability fairly on a populace of varying means must do so in increments of equal financial inconvenience to all."Although the current federal income tax system is confusing and the subject of much criticism, there are many tax breaks in place, such as the Earned Income Tax Credit, that help low-wage earners. Tax reformers attempting to woo the public about simplifying and replacing our tax system with a "fair tax" or a "flat tax" are creating a perception that belies how these alternatives would work.
"The recently touted "fair tax" levied as a national sales tax sounds easy and simple enough. However, the public is not enlightened on the impact of its rate structure. Would the rates be tax-inclusive [rather] than tax-exclusive terms, and how would that differ in actual dollars? A "fair tax" wouldn't really be fair, since it would be levied at a higher level than proposed, but would likely generate lower revenues than anticipated.
"The "flat tax" is equally deceiving as a solution. How many taxpayers really support giving up their mortgage deductions and all other credits and current advantages to be taxed at a flat rate? Proposals like taxing 20 percent on earned income, but not on unearned income, clearly penalize working Americans at the expense of those who have inherited wealth. The "flat tax" proposals don't resolve any basic flaws of the current system, while further burdening the middle class."
-- John Hewitt, Founder, Liberty Tax Service
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