“Save the IRS!” cried the Bangor Daily News Editorial Board on Feb. 3, calling for more spending on enforcement and service personnel and blaming the GOP for the lack thereof. Because tax compliance is the most pressing problem facing our nation, right?
I kid my editorial overlords, of course. They have a point; public-facing government agencies, including tax collectors and permit processors, should have robust customer service functions to help the citizenry who seek to comply with the law.
But an agency that needs 14,000 employees devoted to assisting people in following the law indicates a different problem. Specifically, an overly complicated tax system. The IRS itself, in its 2008 report to Congress, named the byzantine code the “Most Serious Problem” facing taxpayers. That has been exacerbated with the Affordable Care Act; compliance with “ObamaCare” is administered through the tax code.
Meanwhile, our legislature looks like it may add to that complexity by forcing businesses to carry two different sets of books, one for federal tax purposes and another for Maine taxes. The advocates who oppose parts of these federal expensing provisions make some valid policy points. They, including my aforesaid editorial overlords, extrapolate those points into an argument on why Maine should not follow suit.
But, as is often the case, small- and medium-sized businesses are the ones who get whacked by nonconformity; their compliance costs are significantly more than large corporations on a percentage basis. This forces them to spend money on accountants and lawyers, instead of putting dollars into growth and investment. That is especially true for those capital-intensive businesses most helped by conformity, such as manufacturers and farmers.
So what is the solution? On the state level, abolishing the income tax would certainly be one way to reduce complexity; that is a conversation for another day. Federally, serious, substantive tax reform could become a legitimate item of discussion for our presidential candidates instead of wish-lists of platitudes. With real White House leadership, real tax reform could become a reality.
The last time we had a comprehensive federal tax overhaul, the Soviet Union existed and Zack Morris cell phones were all the rage. It was 1986; I was 2. Some commentators look back fondly on the days before that reform, when marginal tax rates were at 70 percent or higher.
Of course, when it comes to taxes, it is all about “effective rate,” or what percentage of their income people really pay. Back in the days of high marginal rates, high-earning individuals — lawyers, bankers, doctors — would shelter their income within the tax code, via things like real estate investments. The effective tax rate for those taxpayers was similar to their effective rates today. When certain tax shelters were demolished, asset prices deflated, contributing to the Savings and Loan crisis of the 1980s.
The 1986 reform made taxes simpler. It merged effective and marginal rates, reducing the latter to try and match the former. To do so responsibly, it made taxes agnostic as to the source of income. Capital gains and ordinary income were taxed at the same rate. But it also severely reduced opportunities to shelter taxable income by limiting special tax privileges and favors for the privileged and favored. Yet those shelter “opportunities” have a way of coming back.
For example, today’s tax code provides tax credits for those who invest in affordable housing and renewable energy. Increasing the capacity for both is a laudable objective. But, by funding these initiatives with tax credits, we let people buy privately owned assets with their tax dollars.
Those assets, managed correctly, ultimately generate a return for their owners — a return made possible by not paying taxes. If the ventures fail, the investor’s damage is limited, since those dollars would have otherwise gone into the public treasury. Sound perverse? These are the challenges with an overly complicated code that sophisticated individuals can play like a fiddle. It socializes losses and privatizes gain.
So instead of chastising Republicans for not spending enough money on IRS employees, maybe the BDN editorial board could change course. Maybe they should chastise political leaders of all stripes for a tax system that subsidizes private gain, yet requires thousands of IRS employees to assist normal people in staying on the right side of the law. If we want “fairness” in our tax system, let’s start with simplicity and clarity.