Tax Reform in a Global Economy: Shifting the Tax Burden

Article excerpt

Abstract

Tax reform is President Bush's priority as his second term progresses. This undertaking is ideologically problematic, economically complex and politically risky. It does, however, offer an opportunity to correct some systemic problems in the tax system. The shift of taxes by corporations to individuals has been in part a result of multinational companies exploiting low tax rates in foreign nations. Tax reform that taxes businesses on their economic activity in the United States rather than profits could correct this. This would be a backdoor approach to a consumption tax and would bring the U.S. tax system more in line with that of other countries. It could also provide much-needed funds to correct problems in the individual income tax structure such as the alternative minimum tax.

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Introduction

On the campaign trail in Florida, President Bush, in response to a question about whether the United States ought to consider replacing the income tax with some sort of national sales tax, remarked, "It's kind of an interesting idea that we ought to explore seriously." This was followed up by a comment from Representative Bill Thomas, Chair of the tax-writing House Ways and Means Committee, that he favored looking at "well-thought-out alternative tax structures" and that the Committee planned to do so. He added, "We have one of the more regressive tax structures in the world today that is basically a 19th century concept" [2]. President Bush has made tax reform one of his top domestic priorities for his second term. He has not, however, specified what design these reforms may take.

In his first term, President Bush made major cuts in individual income taxes, as did his predecessor, President Reagan. The centerpiece of Reagan's second term was tax reform that resulted in the 1986 Tax Act. Now the question that many people are asking is, "Will Bush, like Reagan, push for real tax changes?"

Need for Tax Reform

Tax reform is a loaded phrase. One man's reform may be another's outrage. Tax reform is much more complex than lowering or raising taxes. It implies shifting the burden among taxpayers, or changing the financial activity being taxed. Tax reform should seek to establish a system that is fairer, simpler, and guarantees to the government a stable source of revenue. A tax that is simple to understand, easy to comply with and economical to collect forms the basis of a good tax structure. Using this as a basis, one could argue that it is time to drastically change our present tax system. It was designed in a different time period for a different economy. Today, we have a global economy with multinational corporations conducting worldwide financial activity.

There are numerous justifications for reform. One is complexity. Both businesses and individuals find the Code is too complex to facilitate compliance. This complexity increases the cost of compliance, creates uncertainty of the correct tax liability and burdens the Internal Revenue Service's (IRS) enforcement efforts. In testimony before Congress, Michael Mares stated the American Institute of Certified Public Accountants' (AICPA) position as an advocate of tax simplification.

      The complexity of our tax laws has reached the point where many
      taxpayers and practitioners believe that it is undermining
      voluntary compliance. Frequent change, the lack of deliberation in
      the legislative process, and the increased magnitude and
      complexity of the Internal Revenue Code are our principal concerns
      [6].

It was not always so. Tax reform by President Reagan did overhaul much of the Code. But in the years after 1986, lawmakers started adding dozens of provisions to the individual and corporate income tax system. This contributed to its complexity and helped the tax preparation industry prosper. The majority of taxpayers are forced to seek assistance from accountants and others in order to comply. …