I wrote an article for the Summer 2011
issue of NATP’s quarterly TAXPRO JOURNAL titled “Shred the Tax Code!”. Actually my original title was “The Tax Code
Must Be Destroyed” (a reference to the Hammer horror films I enjoyed in my
youth). You can find the article in the
TAXPRO JOURNAL archives at the NATP website.
The JOURNAL does not have a “letters to the
editor” section allowing members to comment on articles and editorials. A member – Enrolled Agent Michael A. Poretsky
– sent a commentary on my article to my Editor, who passed it along to me.
Below is Michael’s commentary, in italics,
and my responses in blue.
There
are some parts of Robert D. Flach’s article, “Shred the Tax Code” with which I,
or anyone else, can readily agree:
· The code should be written in plain (I would say,
clear) English. Of course, one has to be careful when writing any legal
document since words have even more power in a piece of legislation than in
casual conversation. The current code has a history of court cases and interpretation
which a careless rewrite could readily overturn leading to more, not less,
confusion about how to properly prepare tax returns.
{I would accept “clear” as an alternative to “plain”
English, and do realize that the actual verbiage in the Code is important. –
rdf}
· There should be only one system; the Alternate Minimum
Tax should be eliminated as part of any overhaul of the Code.
· Adjustments for inflation should be applied uniformly
to all deductions and credits.
Mr.
Flach and I part company on other matters:
· While the original intention of the tax code might have
been only to collect revenue to fund governmental operations, that lasted only nanoseconds.
Virtually since the beginning of the income tax as we know it, the code has
been a tool to frame policy and encourage or discourage various kinds of
investments. And, yes, to redistribute income to some extent.
{I do agree that over the years the idiots in Congress
have used the Tax Code as “a tool to
frame policy” and “to redistribute
income to some extent”. My point is
that the Tax Code should not be so used. I agree that the Tax Code can be used to
encourage savings and investment, i.e. via tax-deferred and tax-free retirement
savings vehicles and beneficial treatment of long-term capital gains, but it should not be used as a vehicle to
distribute social policy benefits. – rdf}
· Everything is taxable? Including municipal bond
interest (as just one example)? There is bound to be significant push back from
State and Local governments who rely on the attractiveness of tax-free income
to fund capital projects at reasonable rates of interest.
{I believe Michael is referring to the following statement
from the article -“The basic concept
would not be much different than that of the current Code—everything is taxable
except . . . and nothing is deductible except . . . .It’s the exceptions that
would be reformed.
What
I am saying is that the “starting point” for the new Tax Code is “everything is
taxable” and “nothing is deductible”. We
would then add back only those “excepts” that are appropriate and
necessary. I did not say that everything should be taxed. One of the “excepts” that could be added back
to “everything is taxable, except” is municipal bond interest. I am not saying we should tax currently
exempt municipal bond interest, although it is something that may be
considered. – rdf}
· Mr. Flach writes, “… the Tax Code should be permanent …
[with no changes permitted] …for ten years…[with exemptions for] … natural
disasters and identifiable national emergencies.” Does he really think that the
economy and the world as a whole will be the same ten years after any code is
adopted? Five years? One? We can be certain that national emergencies will be
declared with some frequency as an excuse to tweak the code.
I would prefer some limitation on the number of times the code could be changed in any one year and a deadline such as, no new tax legislation after September 30th. That would give IRS time to write instructions and taxpayers time to figure out their tax strategies.
{I do not believe that the Tax Code should be able to be
changed at the drop of a hat to provide “stimulus” in times of economic
troubles or for any other poorly thought out quick and easy way for the idiots
in Congress to make believe they are actually responding to a problem. Other avenues should be used if a “stimulus”
is needed. Taxpayers, especially small
business owners, need consistency to be able to properly plan.
When
I speak of natural disasters I mean that there could be the potential for
temporary exemptions from tax or additional deductions for victims of such
natural disasters – such as was done in response to Katrina – if appropriate
and necessary. And when I refer to
national emergencies I mean true national emergencies, such as times of, God
forbid, a real war. – rdf}
· All of the various tax credits listed in Mr. Flach’s
article do, in fact, encourage certain behaviors our legislators and the
president have decided are valuable. Yes, there is fraud, but - speaking as a
Certified Fraud Examiner (Retired) - taking these items out of the code and
distributing the benefits through other means will change the fraud but not
reduce it. In addition, there will likely be new bureaus created to track those
benefits allocated outside the tax system. There are, I believe, better ways to
address these issues.
{While there will always be fraud, I do believe that there
would be less fraud if the distributions of the targeted benefits were done via
the appropriate departments and not through the Tax Code. And specifically “tax preparers would no longer need to take on the added responsibility
of having to verify if a taxpayer qualified for a government benefit”.
Under
the current system a taxpayer defrauds the government by filing a false tax
return, getting a refund up front. The
IRS then has to actually discover and verify the existence of the fraud and try
to get the money back. If a person’s
qualifications to receive a government benefit were investigated up front,
before any money was paid out, there would be less actual accomplished fraud.
The
bureaus to distribute the benefits already exist in most cases. Student financial aid is already administered
via an existing government system. The
Earned Income Credit is basically welfare – specifically Aid to Parents with
Dependent Children – and there already exists a system to distribute this type
of welfare.
The “Cash
for Clunkers” program proved that rebates for specified purchases, such as
energy efficient products, can be done easily at the point of purchase outside
of the Tax Code.
Recent
studies by TIGTA have proven that refundable tax credits are not efficient and
are magnets for excessive fraud. – rdf}
· Under Mr. Flach’s structure, everyone (especially those
receiving government benefits) would “… actually paying federal income tax.” My
question is, if an individual must pay $1,000 in federal income tax to be
entitled to and receive $5,000 in government benefits, how are we ahead of the
game?
{Different
individuals receive differing “returns on investment” on the income taxes paid
at different times. This is nothing
new. As I said in the article, by taking
social benefit programs out of the Tax Code and placing them where they belong
–
“Qualifying individuals would get the money at the point of purchase when it’s really needed. They won’t have
to pay out of pocket up front and wait to be reimbursed when they file their
tax return.” (taxpayers need money to pay for college tuition when the
tuition is due, and not 6 – 12 months later).
And -
“We could measure the true cost
of education, housing, health and welfare programs in the federal budget
because the various subsidies would be properly allocated to the appropriate
departments and not be reported as a part of net income collected via income
tax.”
And -
“The Tax Code would be much less complicated, the cost to the public for
preparing a tax return would be reduced, and the IRS would have much less to
process and to audit.”- rdf}
I was
disappointed in Mr. Flach and the editors of Tax Pro Journal, that he wrote and
they passed on an erroneous explanation of the depreciation of real property.
He
says, “… real estate does not depreciate. A building has a life of much more
that 27.5 or 39 years.” Maybe.
Certainly,
land does not depreciate. The useful life of any other asset, including
buildings, could easily be more or less than the allowable depreciable life.
And I challenge his contention that the “… value of real estate as a component
of the value of a business does not drop as it ages.” Perhaps he has never had
the misfortune to stay at an older motel or consulted on changing the use of a
building.
{There was no “erroneous explanation of the depreciation of
real property”. Historically, as a
general rule, the value of real estate, both land and improvements, appreciates over time. Obviously there exist exceptions to
everything – such as cheaply built motels losing value with age. But even in this situation if the motel was
properly maintained and upgraded over the years I expect it would retain and
increase its value.
Let’s be honest – with the
exception of market adjustments as have occurred recently (real estate was
grossly overvalued at purchase in many areas of the country and the market
eventually corrected to reflect reality) – the value of a residential or
commercial building does not go down
over time.
What I am saying is that,
historically, the sale price of real estate is generally more than the original
purchase price.
A few years back my parents
sold partially rented residential real estate that was 100 years old. I don’t have to tell you that the sale price
was certainly more than the cost of the property when it was built, and more than what my grandparents had paid for it 60+ years ago. In my 40 tax seasons of preparing 1040s I
have rarely, if ever, come across a capital loss on the sale of real estate
(even after discounting depreciation).
The depreciation deduction
for rental real estate eventually causes problems and agita for the owners, and
their tax preparers, when the property is sold.
And this deduction does truly distort the economic reality of the
investment. If a person actually realizes
a economic loss on the sale of real estate this will result in a deduction when
sold. – rdf}
I
agree that the tax code needs to be rewritten.
While
the tax code is not the economic engine that runs our nation, it has the
potential to either stimulate our economy or drag it down. The code reflects
what we value as a nation and a people.
Any
changes to the tax code need to be considered very, very carefully.
{I stand by my
original article, and my contention that the purpose of the federal income tax
is to raise money to run the government. – rdf}
I thank Michael for taking the time to
comment on my article. I also welcome
the comments of my readers, especially other tax professionals, either on my
original article, Michael’s comments, or my responses to Michael.
TTFN
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