Tax reform: challenges and opportunities.
TEI's testimony is reprinted elsewhere in this issue, but I want to discuss briefly the four straightforward principles that the Institute identified as essential to successful tax reform.
First, U.S. Business Does Not Operate in a Closed System. The current system places American companies at a competitive disadvantage, and TEI testified that Congress must act to create a tax environment that allows U.S. companies to compete around the world while retaining research, manufacturing, and jobs at home. America's foreign trading partners are not shy in vying for new plants, research facilities, and distribution centers, and--if the United States is to remain competitive--our rules must change.
Second, the U.S. Tax Rate Must Be Competitive. Historically, TEI has shied away from endorsing any particular tax rate, and at this stage, we have no plans to change our practice. We have not been reluctant, however, to point out our trading partners have made rate reductions the rule of the day, and the result has been that the United States has gone from having one of the lowest corporate rates in the mid-1980s to having one of the highest. Leveling the "rate playing field" will make the U.S. tax system more competitive. Moreover, we testified, lower rates do not necessarily mean lower revenue, both because of complementary changes to the tax base and the dynamic effect of rate reductions.
Third, the Tax System Should Not Pick "Winners" and "Losers." This may be the trickiest of the four principles for TEI to embrace, but there is a growing consensus that favors lower rates and a broader tax base over targeted incentives to reduce complexity, ease tax administration, and minimize the government's role in picking "winners" and "losers.
To be sure, there is truth in the saying "where you sit depends on where you stand"--and there may be public policy considerations dictating a different result (as has been the case in respect of education and research incentives)--but more and more people have concluded that the goal of lower tax rates should generally take precedence over a patchwork of tax incentives and inducements. It can be argued, of course, that tax reform itself will produce "winners" and "losers," just a different group than under the current Code. While this may be true, especially on a transition basis, TEI testified that it should not staunch the debate.
Fourth, the Tax System Must Be Simpler. Clearly, it's not rocket science to say that the tax law is too complex, that complexity is expensive to deal with and, moreover, that complexity can both lead to noncompliance and spawn unintended consequences. In its testimony, TEI acknowledged that achieving and maintaining an effective balance between fairness and simplicity is not easy. We also acknowledged that American society is complex and the tax rules must reflect that. We asserted, however, that they need not be consumed by it. Simple is good, not only on its own account, but because complexity represents a daunting, hidden tax on American business.
We also asserted that a simpler tax system will be easier for the IRS, which currently spends a disproportionate amount of its resources plugging so-called loopholes, often creating unintended (and expensive) consequences. We pointed out that the more complex the Code, the greater the likelihood for taxpayers to confront interpretative issues and questions that, if not addressed, will spawn opportunities for lawful tax avoidance that may eventually be deemed inappropriate (by the IRS or Congress if not the courts). Simplifying the Code will also reduce the heavy proxy tax of recordkeeping that can impede routine, day-to-day business transactions.
What Lies Ahead
While the September hearing was only one step in what likely will be a very long process, I believe it was important for TEI to accept the Finance Committee's invitation to testify, even though it could be said that we "ducked" some of the fundamental issues (such as whether some form of national consumption tax should be part of the "tax reform solution"). First, it is important for Congress to know that there is not unanimity in the business community over all the specifics of a "reformed" Internal Revenue Code.
Second, while our diversity may limit our ability to address the substantive merits of certain proposals, it should burnish our credibility in respect of other issues or in commenting generally on the need for Congress to devote more time and attention to how and whether provisions will work. Thus, while noting that many TEI members support both the research tax credit and the manufacturing deduction, we candidly testified about the compliance challenges embedded in sections 41 and 199, and suggested that, with a low enough corporate rate, the need for such cumbersome provisions would be tempered. More fundamentally, we pledged to remain active participants in the debate over how to make our system of taxation more competitive and less complex.
TEI's Tax Reform Task Force will continue to monitor developments in the area. Depending on the results of November's election, 2007 may be a significant year for tax reform. We invite your feedback on the Institute's testimony, as well as your suggestions for how we proceed. By the way, one of the questions posed at the hearing (but not to me) was "how low does the corporate rate have to be to eliminate the push for targeted incentives?" How would you have responded? (Please send your response to firstname.lastname@example.org.)
Financial Reporting--The Topic du Jour
For the past several years, the Financial Accounting Standards Board has grappled with proposed revisions of financial reporting standards that are fundamental to the day-to-day work of tax executives. Coupled with section 404 of Sarbanes Oxley, the changes to the stock-based compensation rules of FAS 123-R and the recent interpretation of FAS 109 on accounting for uncertain tax positions (FIN 48) have made financial reporting for income taxes and the corresponding risk management "Topic A" at many TEI meetings. Indeed, the Institute's 2004 and 2005 financial reporting seminars were both oversubscribed, and the combined attendance at those two programs plus two recent Telephone seminars on financial reporting exceeded 1,000. More dramatically, the Institute's 2006 FAS109 program (set for November) was sold out even before the seminar brochure was mailed to TEI members. This is a testament to the strength of the program put together by our Continuing Education Committee, to the high caliber of our faculty, and most of all, to the compelling nature of the subject matter. As more than one person has remarked, only partly in jest, "Fear is an amazing motivating factor."
TEI's response to this unprecedented demand was itself unprecedented--it undertook to repeat the program, less than a month later (and only a couple of weeks before Christmas). Based on registrations received before October 1 (again, before the printed brochure reached our members), this program, too, will likely sell out. I want to thank the faculty for the two programs--top practitioners in the field--for clearing their schedules. I also want to thank the Institute's staff for their efforts (especially in the throes of preparing for the Annual Conference) in planning the added seminar.
Last but not least, I want to mention something that presumably every reader of The Tax Executive has already noticed: the dramatic redesign of the magazine. I commend TEI's new Publication Manager, Christine Hayes, for her outstanding work, and invite your suggestions for further improvements.
TEI President David L. Bernard
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|Title Annotation:||President's Corner|
|Author:||Bernard, David L.|
|Date:||Sep 1, 2006|
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