Tuesday, May 12, 2009

TAX PHILOSOPHY

A new “follower” on Twitter is fellow tax blogger Monica – “THE TAX CPA”.

She also writes the blog “CONFESSIONS OF A CPA” - a tax manager's thoughts on life in public accounting. However I have no interest in public accounting anymore (been there – did that), so only THE TAX CPA has been added to my list of daily blog wanderings.

Taking a cue from Peter Pappas’
THE TAX LAWYER’S BLOG Monica has published her tax philosophy “in a nutshell” in her post “Bias Disclosure”.

Here is her philosophy -

Everyone should pay their taxes. “Taxes are what we pay for civilized society.” (U.S. Supreme Court Justice Oliver Wendell Holmes). “Taxes, after all, are dues that we pay for the privileges of membership in an organized society.” (Franklin D. Roosevelt)

· No one should pay more than they are required. “The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted.” (US Supreme Court, Gregory v. Helvering, 55 S Ct. 266, 1/7/1935)

· Figuring out your taxes shouldn't be so hard. The average taxpayer should be able to figure out their taxes, since the average taxpayer has to pay them.

· Raising taxes won't fix all our problems. If we are to encourage innovation, industry, and entrepreneurship, we must let people keep most of their income
."

A pretty good philosophy, if you ask me. I have never actually sat down and written out my tax philosophy, but if I did it would certainly include the above items.

I would change the first item to read "Everyone should pay taxes". As I have blogged many times before, under BO about 50% of Americans will become “tax non-payers” (it was about 40% under GWB – so the blame is not limited). And many of this group will actually “make a profit” by filing a tax return - due to refundable credits like the Earned Income Credit. The Alternative Minimum Tax should be replaced with a “True Minimum Tax”. Every American should pay something – say at least $100 - in federal income tax.

The second item reflects basically what I do for a living – making sure that my clients pay the absolute least amount of federal, state and local taxes possible under the law for their individual situation.

One might think that item #3 is not in my best interest as a tax preparer. You might say that if the average taxpayer is able to figure out their own taxes then there would be no need for tax preparers. Not so.

As I have written in the past, I am not worried about how a simpler tax system would affect the tax profession. I do not believe that such a tax system would put me out of business, or even reduce my net income. I actually welcome such a tax system.
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If I were to spend each day during the tax season preparing only 1040A forms I guarantee that I would bill more fees, spend less money, reduce my potential liability, and have less agita to deal with both during and after the tax season. While I obviously charge a higher fee for more complicated returns, I make less profit per hour on these returns. I honestly believe that a true 1040-SIMPLE form would increase both my efficiency and my bottom line.

I do not see my clients leaving me en masse to do their own returns if the system is simplified. A majority of my current clients are fully capable of preparing their own tax returns under current law. They come to me because they do not want to be bothered with the task of doing it themselves. Because my fees are reasonable it is easier, and more cost and time effective, to have me do it. Plus they want to be sure they do not miss anything.
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While a flat tax system would include a great deal of simplification, there would still remain enough complexity in certain areas of the tax code to keep me busy. I expect I would still need to prepare some kind of Schedule C for business income, Schedule D for capital gains and losses, and Schedule E for rental and pass-through income.

As for the last item – like Monica I do not feel that the answer to all problems is to raise taxes. While everyone should pay their fair share I do not believe in a progressive tax system. Everyone should pay their fair share of taxes, but no one should be excessively penalized for being financially successful.

My philosophy would also contain some of the items included in the Tax Foundation in “Ten Principles of Sound Tax Policy”. Several of the principles are included in Monica’s philosophy. My philosophy would add these principles –

"2. Be neutral. The fundamental purpose of taxes is to raise necessary revenue for programs, not micromanage a complex market economy with subsidies and penalties. {The Tax Code should not be used to “redistribute” wealth - rdf}.

5. Stability matters. Tax law should be not change continuously, and tax changes Should be permanent and not temporary.
{No more need for temporary one or two-year extensions of tax benefits. If a tax deduction is appropriate it should be permanent. And no more need for an annual AMT fix. Fix it for good once and for all - rdf}."

So what is your “tax philosophy”?

TTFN

2 comments:

Monica said...

Thanks for the mention, and thanks for sharing your philosophy. I definitely agree with you! Glad to know I'm not alone in my quest or a more manageable system.

ian ho said...

Thank you for a very concise explanation of tax ideals.