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Tax Obligations of the Profession

Literature Review: A taxing experience

To address the essence of revealing the true nature of the interaction between the state and the private sector in the dealings of tax collection, sources are compiled and presented as a library on paper, where each source contains its own claimed facts and perceived opinions. Therefore a unique format is required to present the wide range of diversity in comparison to the complexity of each source. Before each literature review, I will give a brief overview of what the source is and the format that will pursue.

Sources for topical references in order: The FairTax Book, President’s Advisory Panel on Federal Tax Reform, Internal Revenue Service, Joint Committee on Taxation, and The Tax Foundation.

The FairTax Book

Harper 2005

NEAL BOORTZ & JOHN LINDER

The FairTax book is a hardcopy which presents many of the different avenues needed to be explored in addressing tax collection. The book is briefly described and its contents are summarized with the authors’ subjective opinions.

Written by Neal Boortz and John Linder, the New York Times Bestseller explains H.R. 25, a tax bill introduced by the House of Representatives in 2007, with a distain for the current income tax system and with full support behind the FairTax. Written to be an easy read, the book briefly introduces many of the topics that accompany tax discussion. Within 200 pages the paperback: explains the history of the tax system, brings forth the concept of embedded taxes, argues for an overhaul of the collection process, highlights unique characteristics of H.R.25 apart from other taxing methods, and addresses some of the opposition and inherent concerns.

A Brief History:

Original deemed unconstitutional, through partisan politics the constitution was amended to allow a federal income tax. Ratification of the 16th amendment, February 12, 1913 referred as a day of infamy, deemed a “weapon of class warfare”. The bill was introduced by Joseph Bailey in a “scheme to humiliate congressional Republicans.” Supposedly Bailey opposed the idea, but was surprised when Republicans actually came out in support of the bill. Not expecting three-fourths of the states to approve, constituents were persuaded that the tax would not affect them; on arrival “only one-half of 1 percent… paid any income tax.”

In the beginning taxpayers waited till the end of the fiscal year to pay their taxes, then came withholding with the passing of the Current Tax Payment Act of 1943, and according to the U.S. Treasury withholding…

”… greatly eased the collection of the tax for both the taxpayer and the Bureau of Internal Revenue. However, it also greatly reduced the taxpayer's awareness of the amount of tax being collected, i.e. it reduced the transparency of the tax, which made it easier to raise taxes in the future.”

To make the necessary transition for tax collection, the Ruml Plan named after Beardsley Ruml was devised to appear like a tax break while maintaining the revenue stream. It allowed immediate collection from paychecks and “forgiveness” for the previous year’s [‘42] tax burden.

Embedded Tax:

Along with individuals, businesses pay taxes on products and services utilized during operation. With the current system, compensation for services performed by the legal individual is taxed and in turn reduces potential profits earned by the business entity. This loss is reflected in the consumer price. Also evident, are compliance costs associated with paying tax; “…in the neighborhood of $500 billion…is spent to comply with the code,” one third of the total amount collected by the IRS. It is also believed that corporations don’t really pay taxes. “The burden–all of it–falls on us?”

The Overhaul:

Inspiration for a consumption tax plan started with a Texas businessman, who felt that businesses wasted too much time discussing tax implications for just about every decision that had to be made. This inspiration grew to become the FairTax.org movement. The movement focuses “on a system that would be far less difficult to understand and far more efficient at raising required revenues for the operation of the federal government-a method of taxation that would be totally voluntary.”

All federal taxes will be repealed with the implementation of the FairTax. The national retail sales tax represents the revenue stream, instead the multiply avenues taken for collection nowadays.

Comparison:

The Income Tax is: levied on corporate and individual income, not just from the paycheck but from all assents acquired by the entity, new or used; enforced on interest and retirement earnings; complicated and extremely wordy, to the point where many taxpayers are left to seek advice from professional tax experts; progressive in nature; said to be voluntary, pay or go to jail.

The FairTax is: a onetime tax at the retail level imposed only on new goods, and services rendered; based on consumption, acquisition of wealth is not taxed, i.e. savings, retirement, inheritance, sales of used goods, etc.; transparent, shown as a single-rate at the bottom of a cashier’s receipt; revenue neutral; truly voluntary, pay taxes when choosing to spend.

VAT (value added tax) is: a system that taxes goods and services rendered during the production and final sell of a good or service; virtually hidden, hard to calculate how much was spent in taxes by the end-user; a method that pins American businesses at a disadvantage to European businesses.

Concerns:

How will the FairTax address basic necessities, education, new home sales, Social Security, Medicare, the underground and offshore economies, the global market?

For basic necessities the FairTax implements a monthly prebate for every head of household. This prebate is coverage of the taxes expected to be paid by the consumer for the basic necessities. The amount is defined by the poverty level, which is adjusted annually by the Department of Health and Human Services.

Many are concerned that the FairTax will tax education; in fact education endeavors are consider investments by the plan and thus are not taxed.

The FairTax will impose a 23 percent tax on new homes, but currently economists estimate that new homes incur a 25 percent embedded tax. New home prices may even drop.

Social Security and Medicare will be fueled along with all other government programs by a single retail sales tax.

The tax burden will broaden with the FairTax. The consumption tax will be enforced on all visitors, and the underground economy. Tourist and illegal aliens will be paying taxes on products purchased. Drug dealers will be funding programs that are designed to put them out of business. The wealthy will no longer need to utilize offshore banking practices to hide from taxes.

American businesses will gain a competitive advantage in the global market place. The FairTax eliminates corporate and payroll taxes. American products will be lifted from the tax burden they currently possess. Out-of-country businesses will need to invest in America to stay competitive. American work ethics will be utilized to boost the economy.

References found under The FairTax Book portion under references.

April 13, 2005

President’s Advisory Panel on Federal Tax Reform

The opening paragraph taken from a document entitled “America Needs a Better Tax System” by the President’s Advisory Panel on Federal Tax Reform, because it reveals a scene that has been witnessed and experienced on an annual bases. I personally am not a 100% confident that I pay the correct amount of taxes, if a correct amount can be calculated by a consistent method.

“For millions of Americans, the annual rite of filing taxes has become a headache of burdensome record-keeping, lengthy instructions, and complicated schedules, worksheets, and forms – often requiring multiple computations that are neither logical nor intuitive. Not only is our tax system maddeningly complex, it penalizes work, discourages saving and investment, and hinders the competitiveness of American businesses. The tax code is riddled with tax provisions that treat similarly situated taxpayers differently and create perceptions of unfairness.”

Internal Revenue Service

2008

www.irs.gov

The Internal Revenue Service’s homepage was used to search for topics concerning issues demonstrated by your author’s study. The following statistics are taken from documents and their respective quotes are referenced by subscripts.

The government calculates the amount of taxes owed and knows the amount collected, and as it turns out these quantities don’t match. In 2001 the discrepancy was a $345 billion tax gap, and in trying to close this gap the IRS was able to recover $55 billion. Enforcement is necessary because “people who aren’t paying their taxes shift the burden to the rest of us.”1 The IRS states, “The complexity of the tax law is a significant factor in causing the tax gap.”2 Reform and simplifications are needed to address the problem but until then enforcement is the primary way in reducing the gap. Currently the IRS views its self as a “sound investment” with an overall budget of little more than $10 billion. “Our enforcement revenues yield a 4-1 direct return on every dollar invested in tax administration.”3 It has become the IRS’s goal to increase the audit rate.

Offshore tax evasion accounts for a revenue lost of at least $70 billion. Tax havens are used to “exploit the way the U.S. taxes foreign persons as opposed to U.S. persons.”4

Compliance cost for the individual tax payer averages 25.5 hours of time and $149 per return. Self-employed tax payers account for 60% of this burden.

The Joint Committee on Taxation

2008

www.jct.com

Statistics and sediments are taken from a document entitled “Tax Reform: Selected Federal Tax Issues Relating to Small Business and Choice of Entity” presented by the joint House and Senate committee.

The congressional committee prepared a document for a public hearing discussing business entities and the inherent tax that comes with each type (S-corporation, C-corporation, Partnerships, Sole proprietor, etc.). The tax burden is altered depending on which type of formation a legal entity undergoes. A savvy businessperson mixes and matches the legal requirements, i.e. search and utilize loopholes, to concoct a balance of legality and tax evasion. The IRS National Research Program (NRP) estimates $39 billion in self-employment taxes and $20 billion in FICA and unemployment taxes were attributing to the 2001 tax gap. A growth in S-corporations has been attributed to the avoidance of self-employment taxes by single-owner businesses.

The Tax Foundation

2008

www.taxfoundation.org

The Tax Foundation is a nonpartisan tax research group and their homepage contains a large archive of documents concerning tax related issues. The following sediments are taken from testimony before the Senate Committee on Finance.

Summary of Testimony by Robert J. Carrol

“The economic sluggishness we read about each day has prompted many suggestions of short-term economic fixes, but tax reform remains one of the most important long-term economic challenges. Tax reform offers significant opportunities to promote a growing economy by removing or minimizing the many ways in which our tax system interferes with economic decision making and create in its place a tax system where household and business decisions are based more on economic merit than on an array of complex and difficult to understand tax rules.”5 Carrol’s testimony continues to echo the sediments felt by many proponents of the FairTax. Citing the IRS, $140 billion is spent on compliance alone and the complexity of the tax code is resulting in the need of third-party tax preparers or software. Businesses along with households are deviating from economic merit and basing decisions on tax implications. The testimony addresses the following questions: method of collection; distribution of the tax burden; interaction between the IRS and tax payer; the current system within the global marketplace.

Method of Collection:

There are two extremes in collection methods, income based or consumption based or a compromise between the two. Taxes reliant on income earnings reduce labor productivity, because it taxes the return to saving and investment, giving “workers less capital with which to work.” It is believed that a consumption taxing method would enlarge the economy; “the overall size of the economy would be 9 percent larger.” The President’s Advisory Panel suggests a growth of 2.5 to 3 percent.

Distribution of the Tax Burden:

It is believed by some that a consumption tax would be regressive in nature, because taxes relating to returns on saving and investment would be eliminated on abandonment of the current system. This settlement is contradictory to the effect that would actually occur on lower real wages, based on research brought forward. “Generally… countries that have reduced their corporate taxes the most have experienced the largest increases in real manufacturing wages and… workers, not owners of capital, bear a substantial portion of the corporate tax.” Furthermore, The President’s Advisory Panel suggests a comprehensive consumption system will widen the current tax base by eliminating many of the deductions that are utilized in the current system.

Tax Payers Responsibility:

The reduction of entities from the income tax system could simplify the collection process. With a value-added tax, the burden of reporting taxes relies on businesses and not households; the price of doing business is then reflected in the consumer price. [No mention of the FairTax]

Global Marketplace:

The United States is losing its economic dominance in a continually opening global market. The U.S. has the second highest corporate tax rate among OECD nations. Corporate taxes strain investment opportunity, and while many countries are currently lowery their corporate tax rates, U.S. businesses are being put at a disadvantage with increasing cost to capital. “The United States will be a less attractive place in which to invest, innovate, and grow.”

References:

The FairTax Book

Americans for Fair Taxation, http://www.fairtax.org

Boortz Neal, Linder John, “The FairTax Book,” HarperCollins Publishers Inc., 2005

The Cato Institute, http://www.cato.org
Twight Charlotte, “Evolution of Federal Income Tax withholding: The Machinery of Institutional Change,” Cato Journal, Vol. 14, No. 3, pp359-395 (Winter 1995), http://ec.boisestate.edu/faculty/Twight.htm

The Library of Congress, http://thomas.loc.gov
H.R.25, Fair Tax Act of 2007

Tax Analysts: Tax History Project, http://www.taxhistory.org
Ventry Jr. Dennis, Thorndike Joseph, “The Plan That Slogans Built: The Revenue Act of 1943,” September 1, 1997, http://www.taxhistory.org/thp/readings.nsf/cf7c9c870b600b9585256df80075b9dd/671f701c110a19d985256e430079173d?OpenDocument

U.S. Department of Treasury, “History of the U.S. Tax System,”
http://www.ustreas.gov/education/fact-sheets/taxes/ustax.shtml

Wikipedia, http://www.wikipedia.org

President’s Advisory Panel on Federal Tax Reform

http://www.taxreformpanel.gov

“America Needs a Better Tax System,” April 13, 2005

Internal Revenue Service

1 “IRS Updates Tax Gap Estimates,” IR-2006-28, February 14, 2006
2 “New IRS Study Provides Preliminary Tax Gap Estimate,” IR-2005-38, March 29, 2005
3Everson Mark, “Enforcement Revenue Reaches Record in 2004,” November 18, 2004
4 “Abusive Offshore Tax Avoidance Schemes – Talking Points”
Toder Eric, “Estimating the Compliance Cost of the U.S. Individual Income Tax,” 2003

Joint Committee on Taxation

http://www.jct.gov
“Tax Reform: Selected Federal Tax Issues Relating to Small Business and Choice of Entity,” [JCX-48-08, June 4, 2008]

The Tax Foundation

http://taxfoundation.org
5“Tax: Fundamentals in Advance of Reform,” Testimony of Robert J. Carrol before the Senate Committee on Finance, April 15, 2008, http://taxfoundation.org/research/show/23123.html
Hodge Scott, Moody J., Warcholik Wendy, “The Rising Cost of Complying with the Federal Income Tax,” January 10, 2006, http://taxfoundation.org/research/show/1281.html