Tax Reform: How Do We Catch Up with the Maldivians?

Get ready for a test. What will be the biggest driver of fundamental tax reform?

Bipartisan compromise?
Congressional leadership changes?
Current events?
Revenues?
Good tax policy?

In my last blog, I predicted that fundamental tax reform would not come before 2014 so we have some time before the test answer arrives. But I do want to talk about good tax policy in this blog.

A 2013 study by the World Bank Group and PwC, Paying Taxes: The Global Picture, ranks business tax systems in 185 countries. The United Arab Emirates ranks first. The United States, unfortunately, ranks 68 slots below, trailing other countries such as Cambodia and the Maldives, a small and obscure island in Asia. The United States’ tax rate is too high, according to the report, but the biggest obstacle to U.S. competitiveness is tax administrative complexity. The explosion of new income tax provisions since the Tax Reform Act of 1986, the last serious effort at fundamental tax reform, has led to compliance hurdles for taxpayers, administrative complexity, and enforcement challenges for the IRS. Can anything be done? Is there a constituency for good tax policy? The AICPA has a longstanding tradition of advocating for sound tax policy and assisting lawmakers on tax policy matters. Indeed, our Tax Section’s mission statement says, in part, that the AICPA “promotes sound tax policy and effective tax administration.” We have consistently supported tax reform simplification efforts because we are convinced such actions will significantly reduce taxpayers’ compliance costs, encourage voluntary compliance through an understanding of the rules, and facilitate enforcement actions.

The AICPA does not take a position on tax rates or specific approaches, e.g. a territorial versus a worldwide tax system. Instead, we have focused on providing unbiased facts and analysis to foster informed discussion, urge conformity with our Principles of Good Tax Policy and keep a vigilant eye on the end goal: Emerging with a system that is perceived as balanced, fair to all, administrable, economically efficient, transparent, and neutral in its effect on economic activity.

Where do we take a position? Areas of the tax code that are causing taxpayers a lot of grief (I know, which one isn’t?) A few examples of recommendations we have made to Congress that would make compliance easier are:

Harmonizing and simplifying the various education incentives.
Establishing a logical set of tax return due dates focused on promoting a chronologically correct flow of information between pass-through entities and their owners.
Reforming civil tax penalties to deter bad conduct in a manner that encourages voluntary compliance.
Providing a simplified and realistic way to deal with the proliferation of corrected Form 1099s.

The AICPA has testified on tax reform before the House Ways and Means Committee and the Senate Finance Committee and met with the staffs of those two key committees numerous times. We have submitted technical recommendations to congressional study groups (Education & Family Benefits, Pensions/Retirement, Small Business/Passthroughs, Income and Tax Distribution and Charitable/Exempt Organizations), whose findings will shape legislation expected later this year. Our Compendium of Legislative Proposals submitted to Congress earlier this year, includes over 20 proposals that promote simplicity and fairness in the tax code.

Oliver Wendell Holmes once said: “I like to pay taxes. It is purchasing civilization.” I’m just hoping that after all this effort, we can make paying taxes a little more civilized!

Edward S. Karl, CPA, Vice President of Taxation, American Institute of CPAs.