By Roach, Michael E.; Jens, William G.
The CPA Journal , Vol. 82, No. 10
The Election Season Raises a Familiar Question
The concept of reforming the current tax code has gained traction in recent years. Every potential challenger in the present presidential campaign has offered a tax reform proposal as part of their platform. President Obama put forth his own 'Buffett Rule," spurred by an acknowledgement that one of the world's richest men pays a lower tax rate than his secretary. The current economic climate and the election campaign season have gotten people thinking about the concept of fairness and equity within the existing tax code. The following discussion looks at some of the issues involved in reforming the present tax code and offers some insight as to the feasibility of significant tax reform, defined as more than just the periodic code revisions that happen regularly.
Because most of the calls for reform center on a desire for economic stimulus and parity, it is necessary to look at both corporate and personal taxes. The U. S. corporate income tax rate, a combination of bom federal and state taxes, is one of the highest among members of the Organization for Economic Cooperation and Development (OECD), which comprises the world's industrialized nations. But at the same time, U.S. corporate tax revenue as a percentage of GDP is well below the OECD average, in part because the U.S. tax code is full of deductions, credits, and exemptions. In addition, the United States is among a handful of countries that tries to tax multinational companies on their foreign earnings while allowing them to avoid these taxes by keeping mese profits overseas. While the primary purpose of any country's tax code is to raise sufficient revenues to fund government expenditures, a reasonable assumption would be that mis process should not be detrimental to the country's economic development.
Personal tax reform is no less complex and confusing man corporate tax reform. Anyone filing more than a Form 1040EZ faces a plethora of forms, regulations, and requirements so complex that most surrender and seek professional help. Options to address mis complexity include commercial electronic filing packages, such as TurboTax; professional preparers like H&R Block; or CPAs and tax attorneys specializing in tax return preparation. The Internal Revenue Code (IRC) even allows a deduction for the cost of preparing a tax return by allowing it as a business expense for businesses and as an itemized deduction for individuals, even though the tax code is so complex that most taxpayers do not realize that the individual deductions rarely produce tax savings. The IRC has become so complex that, in most instances, it can only be managed and interpreted by those who can afford to pay "experts" to chart their course through the maze of law and regulations. For this and other reasons that will be explained in further detail below, making a case for substantial revision to the present tax code is not difficult. Before changing it, however, it is important to have some understanding of how the present tax structure arose, including congressional intent.
U.S. Tax History
Income taxes were first constitutionally sanctioned by the ratification of the Sixteenth Amendment to the United States Constitution in 1913. Prior to this amendment, direct taxation was permitted by Artide I of the Constitution (in particular, sections 2, 8, and 9). The Constitution provided that any direct taxes had to be apportioned among the various states based on census data and uniformly applied. Thus, while the concept of direct taxation has been with us since the country's beginning, the taxes assessed were either a direct tax on property or a capitation tax, the most common of which was the poll tax.
Prior to 1913, Congress had only imposed a direct tax on income during the Civil War (Ch.173, sec. 116, 13 Stat 223, 281 ), and again 30 years later when Congress imposed a 2% tax on any income in excess of $4,000 (Ch. …