|
|
|
|
AICPA
Releases Report on Tax Reform Alternatives
In January 2005, the President created the President’s Advisory Panel on
Federal Tax Reform and charged it with recommending options to make the Internal
Revenue Code simpler, fairer, and more pro-growth. In response, the AICPA has released Understanding Tax Reform: A Guide to 21st Century Alternatives, in
an effort to serve as a resource in the tax reform debate. The
report offers an unbiased review of tax reform proposals and discusses the
issues and alternatives for reform. It is intended to foster informed discussion
among policymakers by providing balanced information and analysis. The 2005 report builds on the success of
Flat Taxes and Consumption Taxes: A Guide to the Debate, released by the
AICPA in 1995. Highly regarded by tax experts, the 1995 report offered a
comprehensive and evenhanded analysis of tax alternatives. The current research
further develops key issues uncovered in 1995 and provides expanded coverage of
new alternatives being considered in the 2005 debate. The report provides a
timely, unbiased resource to those engaged or interested in tax reform. Both the
1995 and 2005 reports are available at http://www.aicpa.org/taxreform.
The 2005 report outlines three approaches to tax reform that are central to the
current debate: bottom-up, fundamental and a hybrid methodology.
“Bottom-up” is an incremental approach that would modify the
current income tax system without changing the system’s fundamental character
as an income tax. “Bottom-up” proposals address economic growth by creating
incentives for capital formation, accelerating depreciation, eliminating double
taxation of corporate profits, and increasing tax-preferred savings options. Fundamental tax reform, on the other hand, would replace the entire current tax
system (or major parts of it) with a new system – with a consumption tax being
the most frequently proposed substitute. The most dramatic manifestations of
this approach would significantly reduce tax filing by most individuals. The
report examines the five major consumption tax alternatives: a retail sales tax;
a credit-invoice value-added tax (VAT); a subtraction method VAT; “the flat
tax” (a single-rate consumption tax); and a personal consumption tax. A consumption tax system is considered simpler and more conducive to economic
growth, while income taxes are viewed as more progressive. These general
observations may not hold true for specific proposals. Both types of tax systems
have valuable characteristics, and that may be why the hybrid approach to
reform—one that encompasses both an income and consumption tax—is receiving
greater consideration. The report outlines current hybrid proposals.
In fact, our current income tax is better characterized as a hybrid
income-consumption tax than as a “pure” income tax.
This is because many forms of investment are subject to reduced tax rates
(capital gains, dividends), a zero tax rate (state and municipal bond interest),
or deferred tax rates (retirement plans, certain important features of life
insurance contracts). If delivered appropriately, each of the tax reform approaches discussed in the
report has the ability to yield positive results.
Simplification and reducing impediments to economic growth and
international competitiveness are key components to the consideration of any
proposal. Reforms should also address increasing domestic savings and reducing
the tax compliance gap. In addition, the difficulty of measuring income and
determining whether tax provisions should have a more neutral affect on
individual and business decision-making must also be considered. With this report, the AICPA does not take a position on the “best possible
solution” to reform, but supports an in-depth debate of the issues, taking
into account the goals of enacting “good tax policy.” Policymakers are
encouraged to use the AICPA’s Tax Policy Concept Statement #1: Guiding
Principles for Good Tax Policy (www.aicpa.org/members/div/tax/index.htm)
to evaluate competing reform proposals for simplicity, fairness, consistency,
transparency, and economic efficiency, and other important measures. Education
and discussion between policymakers and the public are essential to make this
tax reform effort rational, thoughtful and lasting.
For more information about the AICPA report, visit www.aicpa.org/taxreform.
|
|
