Everyone remembers the so-called three “R’s” of childhood education — reading, writing and arithmetic. A basic and fundamental mastery of each of these was expected of all elementary students. And, in fact, a lack of proficiency in any of these could result in severe and negative repercussions, such as flunking a grade.
The Internal Revenue Service, and by associated necessity the entire federal government, has their own variation on this theme which can be defined as the three “E’s” of tax policy. These three are: Extenders, Enforcement and Equality. Failure of Congress, the President, IRS bureaucrats and others in government to honestly address these will continue to have severe and negative repercussions — for the country as a whole.
Let’s start with extenders. These are tax provisions that are typically enacted for a relatively short period of time, then re-enacted (i.e., extended) time-and-again. Putting aside the good policy arguments for fundamental tax reform, these extenders form a large base of the current tax code, and taxpayers rely on them. Now, the problem occurs when these provisions are allowed to expire with no firm plan for their future — as happened at the end of 2013.
At present, tax credits for research and development activities and hiring disadvantaged workers, among many other credits, are at least temporarily out of the tax code. Other items such as bonus depreciation and generous expensing rules for asset purchases are also under suspension. These are just a few examples, but they highlight a major flaw in our tax policy.
Businesses have a much harder time planning for the future when they don’t know how to compute their tax liability or how much it will be. For many, taxes are their largest single expense overall. If they can’t adequately plan, it is more difficult to commit to expansion, or hiring new workers.
Now, all the provisions mentioned above — and more — may end up being re-extended retroactively to the start of 2014. However, nobody seems to know if or when this will occur.
Even if extended, the likely extension period will only be until the end of 2014, or 2015 at the latest. Again, not helpful from a longer-term planning perspective.
Enforcement is another hot-button issue. Recent statistics indicate that the likelihood of an individual’s federal tax return being audited by the IRS is less than one in 100. The current rate is .96 percent. This is a multi-year low, and the trend line is lower still due to budget cuts, retirements, focus on new responsibilities like the health care law, etc.
Further, if you call the IRS for help, there is nearly a 4-in-10 chance you won’t get through and wait times can be excessive. Many times, if you do get through, you will merely be referred to IRS resources, such as the IRS website.
Our tax system has always been built on an essential foundation of voluntary compliance. People file their returns and pay their taxes. A potential IRS exam is a great motivator.
However, if the system is basically unknowable, as highlighted by the extenders, and somewhat unenforceable, as highlighted by IRS’ own statistics, what does this mean for the future of voluntary compliance?
Finally, there is currently a great deal of discussion around the topic of income equality or inequality in the United States and worldwide. This is truly a weighty issue with passionate views on all sides.
But, given the progressive rate structure in our tax code, it is hard to argue that the well-to-do aren’t doing their part in paying taxes. In the most recent IRS statistics, the top one percent of taxpayers paid about 35 percent of all federal income taxes, while the top 10 percent paid 68 percent. The bottom 50 percent of taxpayers paid around three percent of the total.
Issues related to the three “E’s” are very likely to dominate much of the tax policy discussion for the foreseeable future. Let’s hope the politicians and bureaucrats make some genuine progress on all fronts.
Flunking a grade should never be an option for the USA.
» John Scott, CPA, is a tax partner at HORNE LLP and has more than 25 years of public accounting