TAX EXPENDITURES AND TAX REFORM

The US Tax Code says “everything is taxable, except” and “nothing is deductible, except”.  It is the “excepts” that make the current code such a confusing and convoluted mucking fess.

 

The “excepts” are known as “tax expenditures” – deductions, credits, and exclusions from taxable income - and, according to the recent 2016 Annual Report to Congress by IRS Taxpayer Advocate Nina Olson, they cost the Treasury $1.42 Trillion in FY 2016.   

 

“Tax expenditures” include -

 

·   The distribution of federal social program benefits – such as welfare via the Earned Income Credit and refundable Child Tax Credit, student financial aid via the multiple education tax credits and deductions, assistance in paying for health insurance premiums and excessive medical expenses via the Premium Tax Credit and the deduction for medical expenses in excess of 10% of AGI, and rebates for energy-efficient purchases via the energy credits.  These are expenses of the federal government that are not paid directly from the budget and properly recorded by category, but “washed” through the Tax Code and distributed via the 1040 or 1040A, resulting in reduced gross income.  This does not belong in the Tax Code!

 

·   Incentives to encourage certain behavior – such as savings and investment, home ownership, and charitable giving. 

 

·   Allowance for the costs of generating taxable income – such as the itemized deductions for investment interest, employee business expenses and investment expenses.

The National Taxpayer Advocate is required by law to submit two annual reports to the House Committee on Ways and Means and the Senate Committee on Finance.  In the report just issued the Taxpayer Advocate has identified as the #1 legislative recommendation for Congress “TAX REFORM: Simplify the Internal Revenue Code Now” -
 
 “It has now been more than 30 years since Congress enacted the Tax Reform Act of 1986 to substantially simplify the tax code, and since that time, the code has grown more complex by the year, as evidenced by the fact that Congress has made more than 5,900 changes to the code — an average of more than one a day — just since 2001. The compliance burdens the tax code imposes on taxpayers and the IRS alike are overwhelming, and we urge Congress to act this year to vastly simplify it.”

 

Nina believes the current US Tax Code –

 

“Undermines trust and confidence in the tax system, as many taxpayers do not understand how their taxes are computed or even what rate of tax they pay.”

 

And –

 

“Leads to lower levels of tax compliance, as taxpayers make high rates of both inadvertent and deliberate errors, and the complexity of tax returns limits the IRS’s ability to detect noncompliance through audits or other means.”

 

As pointed out in a recent blog post by Ashlea Ebeling at FORBES.COM, she has recommended, as I have been recommending for years now –

 

“. . . that Congress start with a tax code without any tax expenditures, and then add a provision back in only if lawmakers decide that the public policy benefits of running the provision through the tax code outweigh the tax complexity burden the provision creates for taxpayers and the IRS.”

 

Nina has been calling for tax simplification and reform in her reports to Congress for years now, as I have in my posts here and editorials elsewhere.  She also correctly continues to call for, as I do, the repeal of the dreaded Alternative Minimum Tax.

 

I have identified my “Principles of Tax Reform” at my website A TAX PROFESSIONAL FOR TAX REFORM.  I also explain there why federal social welfare program benefits should not be distributed via the tax return.

 

For the first time in years everything is in place for substantive federal tax reform.  I expect tax reform legislation to be enacted relatively early in the year.  While I am almost certain that the idiots in Congress will not completely “get it right” – I can certainly hope.

 

TTFN