With tax season in full swing, the economy still floundering, and the federal government’s budget mess yet unresolved, it seems that no one is immune to money woes these days. That’s not likely to change anytime soon either, what with Congress acting like kids on a cross-country road trip and the economic recovery doing its best impression of the University of Maryland mascot.
We can still dream, though, can’t we? You bet. In fact, it’s actually apropos of the season. Not only is it common for those of us who live in the Northeast to begin fantasizing about warm weather and vacation time right about now, but everyone’s favorite baseball team still has a shot at the World Series and a Cinderella has yet to be crowned in college basketball. Heck, Harvard won an NCAA tournament game; we must be dreaming.
So, we asked tax experts from around the country to suspend belief for a moment and imagine a world without lobbyists, polling numbers, reelection concerns, and red tape. If they could make one change to the tax code in such a landscape, with the ultimate goal of improving our economic well-being, what would it be?
The following graph illustrates the general breakdown of their responses, and you can check out each individual’s answer below that. Don’t forget to weigh in with your own ideas in the comments section at the bottom of the page either!
Grace Allison – Qualified Tax Expert for the University of New Mexico School of Law’s Business & Tax Clinic
“In my view, the ideas set forth in the Simpson-Bowles Report, Moment of Truth, provide an excellent framework for tax reform.
Eliminating the web of itemized deductions would go a long way towards tax simplification, for example. It is important to recognize, however, that implementing a Simpson-Bowles approach will be politically difficult: the American people have not been well educated on the issues at stake. The public does not understand the degree of sacrifice that will be necessary to reduce the budget deficit. (Simpson-Bowles, although positing lower individual income tax rates, results in a higher effective tax burden).
Importantly, I do not believe that fiscal sacrifice requires us to throw the working poor ‘under the train’ by eliminating the refundable Earned Income and Child Care credits, as some have suggested. In the Simpson-Bowles plan, those credits, or a substantially equivalent alternative, would be retained. In a similar vein, both the housing and philanthropic sectors have already expressed their objections to the Simpson-Bowles proposal for a 12% credit to replace the mortgage interest and charitable deductions. I am not a housing expert, so will not comment on the mortgage interest deduction. However, my considerable personal experience tells me that the philanthropy of the affluent – who give the most, and therefore benefit the most from the charitable deduction – is not primarily tax motivated. For this reason, I think a 12% credit for charitable giving is reasonable.”
Scott Schumacher – Director of the Graduate Program in Taxation at the University of Washington School of Law
“I would reform the international corporate tax regime to discourage corporations from parking profits offshore. With the growing importance of intangibles and things like cloud computing, the ability to defer tax on worldwide income is a major problem (see, e.g., Apple, Google, etc.). While I have not thought through the matter in great detail, Jeffrey Kadet’s recent article in the Economist is an interesting starting point for the discussion.”
Brad Borden – Professor at Brooklyn Law School
“As far as tax policy changes that would most likely benefit the economy are concerned, I think Congress needs to take more action to ensure that the wealthy pay a fair share of their income in taxes. As many people have commented, the wealthy are able to take advantage of loopholes to report less tax and pay a smaller tax rate on their lower taxable income.
To solve the problem, Congress should take steps to eliminate loopholes that allow wealthy to exclude items of income, tax certain deductions, and pay a lower tax rate. Such an equitable tax system will help ensure that the government has sufficient resources to provide necessary services and that the middle and low income households have sufficient resources to cover basic needs.”
John Spry – Associate Professor of Business Economics at the University of St. Thomas Opus School of Business
“[I would] lower rates and broaden tax bases, while eliminating the double taxation of income that is taxed when you work and taxed again when you save.
This is standard economic advice, but except for rare events like the 1986 Tax Reform Act, politicians tend to prefer higher tax rates while retaining the ability to hand out lots of tax preferences.”
John Everett – Professor of Accounting at the Virginia Commonwealth University School of Business
“I think there’s still room for increasing taxes on the high side. Just from an economic standpoint, it’s better for the economy for people to spend than not to spend. And those in the lower tax brackets are the ones that spend the most on consumption and other items which helps lead to an increase in demand which causes employers to increase supply and hire more employees – the typical Keynesian cycle, whereas those who are saving their money and sitting on the sidelines aren’t doing a lot to help the economy. I was disappointed to see that that 39.6% bracket kicks in at such a high level, but it was a reasonable compromise. At least they didn’t change the rates in the lower brackets, which I think was a good thing. It leads to a little more certainty. But the more cash you can put in people’s pockets at the lower end, the better I believe.”
Barbara Weltman – Author of “J.K. Lasser’s Tax Deductions for Small Business”
“In my view, three things are needed:
- Permanence: Changing tax rules create uncertainly, which makes it impossible to plan ahead.
- A single tax: Currently, for example, a small business owner may have to figure all of the following taxes: Income tax, alternative minimum tax, self-employment tax, additional Medicare tax on earned income, and additional Medicare tax on net investment income.
- Lower tax: Every dollar a taxpayer sends to Washington is one less dollar available for spending, saving, paying for college, etc.”
Francine Lipman – William S. Boyd Professor of Law at the University of Nevada, Las Vegas School of Law
“Many working families today get the Refundable Earned Income Tax Credit, which is a significant credit that can be up to almost $6,100, based upon your income level, your wages, your earned income, and your family size. That credit is a significant refund, especially when you couple it with the Child Tax Credit. Unfortunately, families are getting this refund right around this time of year, which is a huge refund that they could really use throughout the year. So, if we could better construct the tax system such that rather than getting this very large lump-sum refund, which especially does not help these families because they have to maybe borrow, use credit cards to finance things during the year and then pay them off with the refund. That’s not good for them and it’s not good for the economy because if they had it in each paycheck, they would probably spend it vs. borrowing and getting themselves into not good financial circumstances and then waiting for the refund down the road.
In addition, where I am in Las Vegas, these very, very large refunds attract unscrupulous tax preparers because they want a piece of that, too. So you have everybody and their neighbor saying they can prepare a tax return and not doing it accurately to get a piece of that refund, and it really creates a nightmare for these arguably innocent victims – families who just want to get their tax returns prepared and their refunds. If it could come through their paycheck weekly or monthly through some sort of reverse withholding, I think that would be better for tax payers and better for our economy.”
Allison Christians – H. Heward Stikeman Chair in Tax Law at McGill University
“[I’d] adopt broad corporate tax transparency rules for public companies so that we can know whether and when companies pay their fair share of taxes. Probability: maybe 10% in the short term but growing and maybe 75% in the long term, following trend in US and Europe.”
Theodore Seto – William M. Rains Fellow at Loyola Law School, Los Angeles
“In the long run I think that it’s fairly important that we have a roughly balanced budget, by which I mean simply that our outflows don’t exceed our inflows. In the short run, it may be warranted to run a temporary deficit to provide an economic stimulus. There is a concern that if we balance the budget too abruptly, particularly in light of the fact that we’ve just had a major recession, we could throw the country back into recession.
Now, whether we should do this through tax increases or spending cuts is actually a much more complicated question than either party really articulates in the public debate. A significant portion of federal spending actually occurs in the form of what are called ‘tax expenditures.’ These are tax breaks given for particular kinds of activities. They run through the tax code, but conceptually they are just as much expenditures as the federal government sending you a check. The problem is that the way these are accounted for is different from direct spending. The direct spending is counted as spending; getting rid of tax expenditure is counted as a tax increase. The real problem that it creates is that these become especially favored expenditure programs for two reasons. One is they are generally perimeter parts of the internal revenue code, and that means that they survive unless Congress changes them, which is different from ordinary spending which has to be authorized annually by Congres. The second part is that inertia is on their side. Inertia is very much on their side.
There is a further problem with tax expenditures that is more subtle and very poorly understood, and that is that the tax expenditure budget published by the government does not fully take into account what’s called the time-value of money. This is simply the value of deferring your taxes. So, if you’ve got a major corporation that can put off paying let’s say $10 billion in taxes for 10 years, that kind of deferral is worth a lot of money. There are many provisions in the code which make such deferrals possible and they are not fully captured in the tax expenditure budget. As a result, when we talk about limiting tax expenditures as a way of balancing the federal budget, we typically are insulating that kind of specially-favored tax subsidy from change. For example, many of the subsidies for the oil and gas industries fall into that category. If you actually look into the tax expenditure budget, you won’t find much there under oil and gas and the reason is that they’re hidden.”
Douglas Shackelford – Associate Dean of MBA@UNC and Meade H. Willis Distinguished Professor of Taxation at the University of North Carolina, Chapel Hill’s Kenan-Flagler Business School
“[I would] eliminate the exemption for employer-provided health care insurance, [although that has a] very low chance of passage.”
David Neighbors – CPA, Partner at the accounting & consulting firm Gallina
“I believe tax policy that would could benefit the economy most would be raising today’s low capital gains tax rates. My belief is this would provide economic efficiency and fairness, while helping reduce deficits. The large tax preferences that capital gains enjoy over ‘ordinary’ income, such as salary and wages, add to budget deficits, widen income inequality, and do little if anything to promote economic growth.
The tax code now strongly favors capital gains — increases in the value of assets, such as stocks and real estate — over ordinary income. Not only is the capital gains tax rate far below the top tax rate on ordinary income, but taxpayers can delay paying taxes until they realize their capital gains (usually when they sell assets).”
Karl Fava – CPA, Business Financial Consultants, Inc.
“One of the best policy changes, as follows, would stimulate the economy:
There has been the long held ‘pillar’ that low capital gain rates stimulate the economy. The largest holding of capital assets are within household of the highest net worth. The argument has always been people would not invest their money if capital gain rates are high. This is ludicrous. Investors are looking to save taxes but their investment decisions are made on risk and rates of returns. If tax rates are constant on two separate investments then the tax is not part of the investment decision only risk and rate of return. An investor is not going to put their money under the mattress. If they do not want the low rates of return from a bank account they may accept higher risk of the stock market but also on the expectation of higher returns. The decision to seek a higher rate of return is not tax motivated it ‘rate of return’ motivated. If ordinary income rates were lowered for wage earners and capital gain rates were increased for investors this could be done in a way that would be revenue neutral but would provide a dramatic uptick in the economy. Wage earners are more apt to spend extra dollars coming home pay check by pay check. Obviously more spending will stimulate the economy as we saw last year with the lower social security tax that created higher tax home pay. A high net worth household is not going to spend into the economy dollars saved from lower capital gain rates.
I believe in low tax rates and am lucky that I am always falling into the highest tax bracket. Saying that, I benefit from low capital gain rates so I am not suggesting this as a finger pointer. I am suggesting this as it would work. Sadly this reform will never take place as capital gain tax rates have always had a favored place in the tax code for high income, high net worth taxpayers. It’s too bad that too much of the tax code is built for select groups within the economy.”
Raquel Alexander – Associate Professor of Accounting in the Williams School of Commerce, Economics and Politics at Washington & Lee University
“We need tax policy that encourages development of alternative energy sources and new technologies to spur economic growth. There are only three ways to fix our deficit: 1) increase taxes, 2) reduce spending and 3) grow GDP. Growing GDP is the least painful of these three choices and it is something members of both parties can agree on. Tax policy that rewards investment in research and development of new technologies, especially around alternative energies, will help us grow GDP.”
William Kulsrud – CPA, Associate Professor of Accounting in the Kelley School of Business at IUPUI
“Quit using the tax law to achieve some social or economic objective other than raise revenues. The array of provisions to incent this or accomplish that is mindboggling. And no one knows what the unintended consequences are.
As a practical matter, Congress is hanging too many ornaments on this Christmas tree and it’s about to collapse under its own weight. I’ve been teaching and writing about federal income taxes for almost 40 years and the law is just too complicated for the man on the street. For others, no one knows when the alternative minimum tax will strike. We currently have two systems: the regular tax and the AMT. Does that make any sense? If you want real tax reform do what several have suggested: eliminate withholding. When people start writing those big checks on April 15, you would see real reform and real change. Only then will people understand what they are really paying.”
David MacKusick – JD, CPA, Assistant Professor in the College of Business at Ashford University
“I believe that reducing the tax compliance burden on small businesses would be a tremendous benefit to the economy. Small businesses are the drivers of the economy and have historically produced the majority of new jobs, yet compliance with all types of government regulation is disproportionately burdensome to small businesses and tax compliance is no exception. Estimates of how much higher the cost of tax compliance is for small businesses compared to large businesses vary between 35% and 65%, but there is no dispute that the burden is significantly disproportionate to the detriment of small businesses. A discussion draft containing proposals to simplify tax compliance for small businesses released earlier this month by House Ways and Means Committee Chairman Dave Camp is a step in the right direction, and an indication that the issue is on the front burner in Washington. But whether small businesses will see meaningful relief from the tax compliance burden any time soon is anyone’s guess.”
James Hardin – Chair of the Accounting Department at the University of South Alabama
“Probably the most effective change to U.S. tax policy to boost the economy is to eliminate the ‘repatriation’ tax. U.S. companies are reported to hold over a half trillion dollars overseas because bringing that money back to the U.S. would cause it to be taxed at a corporation’s marginal tax rate which is typically 35% for a large corporation. An important change to get that money into the U.S. economy is to only tax revenues where they are earned. That is, revenue earned in a foreign country by a foreign subsidiary can come to the U.S. tax free.”
Charles Enis – Associate Professor of Accounting in the Pennsylvania State University’s Smeal College of Business
“In the tax code there is the provision called the Accumulated Earnings Tax, the AET. It is a tax that the IRS assesses against corporations that retain too much of the profits and do not pay out sufficient dividends. However, there are so many loopholes and ways to get around that that are built into the law that the AET has absolutely very little impact at all and it’s rarely ever used. And so if Congress was to strengthen the Accumulated Earnings Tax, I think you would have a lot of these corporations that had a lot of cash hoards – and these are generally overseas – if these companies were forced to take that money and distribute it to the share-holders so that the share-holders would be able to have some disposable income, that would stimulate the economy.
Another item that I think might help in the economy, probably not so much now since the housing crisis has pretty much subsided a bit, but I would think that if a person sells their personal residence for a loss there’s no tax deductions at all for that. So people are walking away from their homes and things like that. I think that there are two factors there: I think that people should be allowed a certain capital loss deduction that is capped at a certain amount, so that would make them more willing to go and take a loss on their home, and also I think that somebody that walks away from their home should not receive much relief from the provisions of the code that deal with cancellation of indebtedness. I think if you want to go and have your debt cancellation tax-free, then I think you should be able to stay in the home and start paying something in the mortgage. The idea here is that just walking away and abandoning the homes really does harm to the urban areas. It causes blight and a lot of homes are in disrepair, and I think that is just bad for the various communities.”
Kenneth Milani – Professor of Accountancy in the University of Notre Dame’s Mendoza College of Business
“The letters ‘CPA’ are the short version of a longer response:
- Consistency would be welcomed by the business community since the helter-skelter movement of rules, regulations and rates tends to create confusion and in, some cases, a let’s-wait-on-the-sidelines [approach] until Congress figures what they are going to do tax-wise.
- Predictability is another feature the business community would welcome. With so many proposals being touted by a variety of proponents, the lack of predictability develops a sense of “who knows what’s going to happen?” and the related non-action by the business community while Congress decides which route, if any, to take.
- Added incentives to invest. Capital spending is a strong driver of economic growth. When spending on machinery & equipment and other long-lasting items stagnates, that ripples through the economy.
During the Clinton years and part of the G.W. Bush years, the above factors were more-or-less present. That began to change during Bush’s final term and has continued due to the continual wrangling that is a characteristic of the current Congress. So what are the chances of the CPA proposal occurring? The Chicago Cubs (my favorite baseball team) have a better chance of winning the 2013 World Series than the proposal described above.”
Stephanie Hoffer – an associate professor of tax policy and international tax law in The Ohio State University’s Mortitz College of Law.
“In my opinion, there is no quick tax fix for an economic downturn and attempts to legislate one are misguided. With that said, there are a number of things that I would change in our current Internal Revenue Code for the long term. Since I am only able to choose one, I will focus on debt investment in businesses.
Our current tax system provides preferential treatment to foreign investors who loan money to United States businesses, but its treatment of equity investment by foreigners is not as favorable. In other words, a foreign person pays less tax to the United States if he loans money to a United States business than if he receives dividends from stock of that business (assuming that no applicable tax treaty changes this result). This is one way in which the tax code encourages our businesses to leverage themselves. In addition, businesses are able to deduct interest that they pay to their lenders. This is a second way in which our tax code encourages businesses to borrow rather than seek equity investment.
Of course, there are non-tax reasons for borrowing as well, and for some businesses, a heavy debt load is impossible to avoid. Still, I can think of no reason why the government should encourage borrowing for borrowing’s sake. United States businesses’ heavy reliance on creditors means that businesses are at risk whenever credit markets become tight. Credit markets contract periodically not only due to normal progression of the business cycle but also because the federal government’s regulation of lending and debt-related securities has been ineffective for some groups of borrowers. When these borrowers default on their loans en masse, the credit market contracts, leaving debt-reliant businesses in a bad position.
So, to conclude, if I could change only one thing in the Internal Revenue Code and my only goal was stabilization of the economy, I would equalize the treatment of debt and equity investments in business. Will this change ever take place? Not likely. Most current businesses have structured their capital with an eye toward the debt preference, and there likely would be significant opposition from institutional lenders and perhaps foreign governments.”
Jay Soled – Professor of Accounting and Information Systems in the Rutgers University Business School
“I would eliminate the difference between capital gains and ordinary income. And I’ll tell you why: half the complexity of the code could be eliminated, and to me there is no real theoretical justification for the rate differential. People have money, and they’re going to go where the greatest returns are. If tax rates are the same between interest dividends and capital gains rates, they’ll just go wherever they get the best returns. This way we can raise a tremendous amount of revenue, lower overall tax rates, and this way it won’t be biased in favor of stocks. There’s no reason to have that kind of bias. … From 1986 to 1990, before Bush 1 raised the ordinary income tax rate, the country did very well with the same rates for capital gains and ordinary income.”
Beverly Moran – Tax Law Professor at Vanderbilt Law School
“I would eliminate the difference in rates between capital gains and ordinary income.”
Frank Doti – William P. Foley II Chair in Corporate Law and Taxation at the Chapman University School of Law
“I think tax reform is going to come. Even as a long-time practitioner – a lawyer and CPA – I want to see simplification. Everybody wants to see simplification; all my colleagues do. However, simplification is going to be taking something that is so absolutely craziness – just so complex, so detailed it’s ridiculous – that what you’ll end up with if it is in fact simplified is still a complex tax code. And that is because certain types of deductions and parts of the tax law that have been around almost from the beginning, in my opinion, won’t be touched.
In other words, I’m saying the mortgage interest deduction and the real estate tax deduction, that’ll stay. And a lot of other parts of the tax code – the business deduction – they won’t touch small or even any big businesses in terms of being able to allow any appropriate deductions related to that business. That’s complex, complex accounting that won’t be touched. The things that I think should be fixed and hopefully will are the Alternative Minimum Tax, the AMT, which is nonsense. It’s ridiculous; it’s lost its usefulness – very complex. Get rid of it. That’s number one. Number two: all of the various thresholds that if your income is above a certain amount you can’t take advantage of whatever it might be – IRA deductions, charitable deductions, itemized deductions – all the numbers are different for each of the different laws. Even a brainiac that has an incredible memory could never remember all of the various numbers. … It’s nonsense, absolute nonsense. That’s where the tax law can be fixed.
The basic structure of income and deductions that has been around for 100 years is pretty damn good. We have an income tax system that I think does its job. It soaks the rich and doesn’t affect the low-income [consumers]. Overall, it’s good but it needs to be cleaned up. And I think that’s going to happen. And when that happens – I think at the same time – Congress is going to realize, “Ok, let’s beef up the budget to the IRS so they can get more money to help the budget deficit. So, again, if this is going to happen and when is a tough call because of the craziness in Congress between the Republican House and Democratic-controlled Senate.”
Clemens Sialm – Associate Professor of Finance at the University of Texas
“To improve the long-term growth prospects of the economy I would replace the corporate income tax with an environmental tax. Eliminating the corporate income tax will decrease significant distortions in the corporate sector, such as an incentive to increase leverage and to avoid taxes by shifting operations to lower-tax foreign jurisdictions. Introducing an environmental tax will enable the government to raise revenues while maintaining environmental objectives. These tax reforms would support sustainable economic growth.”
Rodney Mock – Associate Professor of Accounting in California Polytechnic State University’s Orfalea College of Business
“I would significantly broaden the tax base by eliminating or curtailing various tax benefit items so that everyone has some ‘skin in the game’ for a more accountable government while at the same time I would lower the overall effective tax rate on all those currently paying into the system.”
Gerald Moran – Professor at Florida Coastal School of Law
“ Repeal the estate taxes while eliminating step-up in basis.”
Daniel Matthews – Professor of Tax Law at the Thomas M. Cooley Law School
“The short answer is that the U.S. corporate tax rate should be cut substantially. Currently, the U.S. corporate tax rate is 35% (state corporate taxes push the rate to about 39%). If I’m not mistaken, that’s the highest of any developed country in the world. Even high tax France is lower (34.4%). Japan cut its corporate rate last year to a rate lower than the U.S.
U.S. multinationals engage in tax planning so that their “offshore” profits are not taxed in the U.S. until repatriated to the U.S. Because U.S. rates are so high, U.S. multinationals have a very strong incentive to keep these profits offshore and reinvest the profits overseas. According to some estimates, these offshore profits are about $1.4 trillion. Apple has been receiving a lot of negative press in the past few weeks because Apple reportedly has over $100 billion in offshore profits that haven’t been taxed in the U.S. As you may know, Tim Cook, Apple’s CEO, recently testified before a congressional subcommittee that the corporate rate would have to be reduced substantially before Apple repatriates its offshore profits.
In short, if corporate rates were reduced substantially (or eliminated altogether), much of the $1.4 trillion in offshore profits would make its way back to the U.S. and be reinvested in the U.S. (e.g., more hiring of U.S. workers, more investment in R&D, facilities, equipment, etc.) That would improve the U.S. economy greatly.
In my opinion, Congress may pass a token cut to the corporate rate (5% or less) in the next few years. But I think the chances of Congress reducing the rates substantially (by 15% or more) is highly unlikely.”
Richard Mandel – Associate Professor of Tax Law at Babson College
“Assuming I’m not constrained by the political feasibility of my answer, I would drastically lower income tax rates and eliminate all tax deductions and tax credits. This would bring an end to the myriad ways in which tax policy distorts economic decisions and also eliminate the government’s use of tax policy to pick winners and losers and encourage and discourage various types of activities. Government is notoriously poor at making these choices; let individuals and the market make them.”
Richard Beck – Founding Director of the Graduate Tax Program at New York Law School
“I think all members of Congress should have to do their own tax returns personally every year, and then undergo an audit.”