Simplifying the Tax Code Isn’t So Simple

Tax-is-Robbery

One of the first big news stories in Washington this week is that Congress called for Apple CEO Tim Cook to testify before the Senate’s Permanent Subcommittee on Investigations to discuss his company’s tax practices.  Specifically, the Senators wanted some explanation for  Apple’s use of technicalities in Irish and U.S. law to pay little or no corporate taxes on $74 billion over the past four years.  While an earlier Senate report shows that Apple has done nothing illegal, the issue brings up important questions regarding U.S. tax policy.

Unlike many other countries, the U.S. taxes companies for profits made in other countries, if and when those profits come back to the United States.  This has led many U.S. corporations to park those international profits in shell companies overseas, to avoid getting taxed twice on the same profits.  While this isn’t illegal, it certainly upsets a number of lawmakers.

“Apple has sought the Holy Grail of tax avoidance,” said Senator Levin (D-MI). “Apple is exploiting an absurdity, one that we have not seen other companies use.”  

While the Senate doesn’t have any legal grounds to compel Apple to change its policies, the hearing highlights just one of the many needs for reform in our nation’s tax code.  Just as with entitlement reform and government spending, both Republicans and Democrats see a need for change but are unable to agree on the type of change that is needed.  Both parties want a simplified tax code, but they have different end results in mind.  Democrats want to ensure that any tax reform includes increased revenues from corporations and the wealthiest Americans while Republicans want a tax policy that encourages businesses to stay in the U.S. and spur economic growth.

“Everyone hates the IRS and corporations not paying taxes,” said Stan Collender, a budget expert at Qorvis Communications, a Washington consulting firm. “That may gin up a little bit of the intensity level. But I don’t think it changes the politics of this at all. I’m still telling clients that tax reform is still three years away.”

Personally, I think Stan’s three-year estimate is too generous.  Reforming the tax code is an incredibly daunting task.  How do you balance the different issues in the most efficient way?  We want to make sure that people and corporations are paying the appropriate amount of taxes, but we also do not want a tax code that scares away more businesses and ships more jobs overseas.  I am neither an economist or a tax expert, so I don’t claim to have any answers here.  Sadly, the various economists and tax experts out there can’t seem to agree on the proper solutions either.

There is no shortage of ideas on simplifying the tax code.  The Sunlight Foundation issued a report that looks at how 2,221 organizations in 336 sectors spend an estimated combined $773 million to hire 6,503 different lobbyists to advocate on 1,454 bills in a single two-year Congress.  Wow.  But which proposal is best?  The CATO institute issued a report that favors a consumption-based tax base that taxes income but excludes investment.

Consumption-based taxation would be far superior to the current income tax for both growth and simplification reasons. A consumption-based tax—such as the Hall-Rabushka flat tax—would get rid of two of the most complex parts of the current code—capital gains and the capitalization of investment (which involves depreciation and amortization).

The Hall-Rabushka flat tax is an interesting place to start, but it doesn’t address the specific rate at which individuals are taxed, and it does not specifically address its applicability to corporate taxation.  Just thinking about all of the different proposals that could be debated gives me a migraine.  Of the few proposals I have reviewed, I am still not sure which one is the most efficient.  What about you?  What do you think is the best option for tax reform?

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