Highlights of Tax Research: Studies Examine the Benefits of Tax Incentives and the Effects Different Compensation Structures Have on Tax Directors' Tax Planning

By Bolt-Lee, Cynthia E.; Plummer, Elizabeth | Journal of Accountancy, July 2013 | Go to article overview

Highlights of Tax Research: Studies Examine the Benefits of Tax Incentives and the Effects Different Compensation Structures Have on Tax Directors' Tax Planning


Bolt-Lee, Cynthia E., Plummer, Elizabeth, Journal of Accountancy


With tax reform in the news, it is helpful to understand the origins of some popular and long-lived tax incentives, such as the favorable tax treatment of people over 65 and tax incentives that encourage people to save. As the economy takes fitful steps to recover, insight into the efficacy of property tax incentives offered by states and municipalities to attract businesses to their jurisdictions is also timely. A final study examines the relationship between a tax director's compensation structure and the level of tax planning handled in that position. This article examines recent research on these topics in prominent accounting and tax research journals.

INCOME TAX BREAKS FOR SENIORS: A LEGISLATIVE HISTORY

Tax breaks for seniors have been around since the 1940s. As the Baby Boomers enter retirement age, this popular tax policy will continue to have a widespread and material effect on federal and state budget deficits. "The Genesis of Senior Income Tax Breaks," published in the December 2012 National Tax Journal, investigates the origin of state and federal tax laws to determine how tax breaks for retirement-age individuals ended up where they are today.

Authors Karen Conway and Jonathan Rork analyze two main income tax breaks: (1) tax exemptions, deductions, or credits based on a taxpayer's age and (2) exemptions or exclusions for pension and retirement income. Results of the study reveal that these two categories of tax breaks began in very different ways and that, interestingly, neither occurred as a result of political pressure or election strategy.

In 1948, Congress began providing age-related exemptions for individuals 65 or over, arguing that seniors who experienced low income were also unable to find work to help with the increasing cost of living. In an effort to gain President Harry Truman's approval for the age-related exemption, the general personal exemption and the exemption for the blind, both of which existed at the time of the proposal, were increased as well. The opposing minority view held that the high cost of living equally affected younger, low-income individuals and that tax breaks for people over 65 would be inequitable. However, the increase in the general exemption from $500 to $600 was popular among voters and paved the way for the passage of the law. As an additional incentive for passage, those in favor of the $600 old-age exemption argued that failure to increase Social Security benefits to meet post-World War II cost-of-living increases created a hardship for the elderly.

Passage of the federal age-based exemption caused a ripple effect in states' tax laws, with Vermont becoming the first state to offer the exemption. By 1980, more than 90% of the states had some type of tax break based on advanced taxpayer age.

The taxability of retirement income was an issue addressed separately from the age-based exemption. When Social Security was enacted in 1935, federal law did not address its taxability, but by 1941, the federal government officially acknowledged the exclusion of Social Security benefits from taxable income in an office ruling.

This ruling, from the Bureau of Internal Revenue (the IRS's predecessor), appears to have "accidentally" created the exclusion of Social Security benefits. As the federal tax break became official, many states followed, but not without concern about the loss of revenue.

While the federal government has always taxed non-Social Security retirement income, the states chose a different path. The first state tax break for pension income occurred, once again, in Vermont in 1931, and, once again, appeared to have occurred by oversight. However, the Vermont pension exemption was short-lived and was soon replaced by an old-age exemption in 1947.

A few states followed, mostly by failing to include non-Social Security pension income in their tax base when laws were originally written. …

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