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PILLA TALKS TAXES - Featured Article
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Pilla's Advice to Trump's Tax Plan Architects

"STOP TICKERING AND START REPEALING" 

President Trump campaigned heavily on the promise of tax reform.” As most candidates do during an election cycle, they point to the complex tax code as an evil in itself and promise reform” to put all taxpayers on a more level playing field. The problem is the idea of reform” is never really defined, other than in very broad (almost meaningless) terms. Republicans generally cast the idea in the context of across the board tax cuts.” Democrats promise tax increases for the rich by closing loopholes” to ensure that they pay their fair share.” Interestingly, the phrase fair share” is another completely undefined and legally meaningless concept in the ongoing tax reform” battle.

What most uninformed observers don’t understand is that tax reform,” standing alone, has never been a problem in America. We have been steeped in tax reform for decades and the ongoing process of changing the tax laws has only made the task of compliance more difficult. For example, in the decade of the 1980s, we saw over one hundred different legislative changes to the tax code. Most of the changes were brought about by two major acts of Congress. The first was the Tax Equity and Fiscal Responsibility Act of 1982. The second was the Tax Reform Act of 1986. That law alone was responsible for changing more than 2,000 code sections and subsections, and the creation of dozens of new and revised tax forms. The Tax Reform Act was part of President Reagan’s push toward a flat tax system.

Then we moved into the decade of the 1990s. The ink wasn’t dry on the 1986 Tax Reform Act when Congress started tinkering with the code, moving away from the direction taken in 1986. Four major tax acts were passed between 1996 and 1998, the culmination of which was the Internal Revenue Service Restructuring and Reform Act of 1998. In all, more than 750 code sections and subsections were changed during the 1990s.

But Congress was just getting warmed up. Nina Olson, the National Taxpayer Advocate (NTA), tells us in her 2015 Annual Report to Congress that between the years 2001 and 2014, there were 5,900 (that’s not a misprint; the number is five thousand, nine hundred) changes to the tax code, an average of more than one a day. That includes 500 changes in 2005 alone. Among the changes we were tortured with were a host of temporary provisions, dozens of phase-in and phase-out provisions, and even retroactive changes.

This constant stirring of the pot” when it comes to tax legislation leads to massive complexity. That in turn causes confusion and puts taxpayers into a position where it is more difficult to comply with the law. In 1992, then-IRS Commissioner Shirley Peterson stated that much of what we call non-compliance is really not non-compliance at all. Rather, she said it is lack of understanding of what is required in the first place.” See: How to Get Tax Amnesty, pg 8-9. Said another way, people simply do not wake up one morning and say to themselves, How can I tick off the IRS today? I know. I’ll stop paying my taxes.” Rather, there is some other factor that arises that prevents compliance, and increasingly, that factor is lack of understanding of what is required.

If Commissioner Peterson acknowledged that factor in 1992, how much more is it true today, after the blizzard of law changes we’ve endured in the past fifteen years? The NTA tells us that the tax code has reached the point where it now consists of more than 4 million words. How can one possibly say that such scope and breadth in the law is not—by itself—responsible for a great deal of errors and omissions by taxpayers, which the IRS, in its myopic and bureaucratic view, would call non-compliance?”

The NTA has clearly stated the problems with our tax code in repeated reports to Congress over the years. In 2012, she stated that a 4-million-word tax code presents the IRS with daunting challenges in enforcement and administration,” and observed that such a code is impossible to obey.” NTA’s Annual Report to Congress, 2012, pg 9. In her 2016 Annual Report to Congress, she said the code is hideously complex,” and recognized that tax law complexity is the most serious problem facing taxpayers. But that was not a new finding. In fact, nearly every year since she began making her annual reports per the IRS Restructuring Act, she has identified complexity as the most serious problem. She has recommended dozens of real simplification proposals over the years. As might be expected, Congress has ignored almost every one of them.

As such, my challenge to the Trump Administration is that we must STOP tinkering, and START repealing. Merely fiddling around the edges with more tweaks, rules and exceptions to rules does not simplify the code. It makes matters worse. Any meaningful tax reform must repeal substantial elements of the tax code. Trump’s proposed tax plan holds some promise for this.

The Repeal Elements of Trump’s Plan

I wrote extensively about the plan (to the extent that it existed then) in the November-December 2016 issue of PTT. In late April, the White House released an updated version of Trump’s plan. In it, there are three core repeal provisions that are the same as those I wrote about in December. Let me review them quickly.

            1. The Alternative Minimum Tax (AMT). Trump would repeal the AMT entirely. The AMT is the secondary flat tax system that runs alongside our regular graduated tax system. If a so-called high-income taxpayer doesn’t pay enough money under the regular tax system, AMT kicks in to raise his liability. As far as I’m concerned, the AMT is an admission that our main tax system is broken. If the main tax system were designed properly in the first place, you wouldn’t need a secondary tax system to ensure that high-income taxpayers pay enough.

            2. Repeal the Estate and Gift Tax. The estate and gift tax system is designed to ensure that the government gets its hands on a large share of the estates left by decedents upon death. An estate is the body of property a decedent has managed to accumulate during his lifetime after paying all federal, state and local taxes on all earnings and consumption over the period of his lifetime. The idea behind the estate and gift tax is that citizens who have accumulated property through legal and peaceful means should not be allowed to pass all of it to their heirs upon death. Rather, the government is somehow entitled to a substantial portion, even after the decedent has spent a lifetime paying taxes. In that sense, the estate tax is nothing but pure theft and is immoral.

            3. Repeal the 3.8 Percent Capital Gains Surtax. This is a tax added to the normal capital gains tax. It was added as part of the Affordable Care Act in 2010. That is, the way you offer free” health care is to raise taxes on everybody who sells an investment of any kind. Apart from the economic considerations, such a tax adds more layers of reporting required to comply with the law.

For more discussion on all three of these repeal proposals, see the Nov-Dec 2016 issue of PTT.

The Trump plan will also reduce certain tax rates and shrink the overall number of tax brackets. And while lower taxes are good, and fewer brackets are better, this certainly does not rise to the level of fundamental tax reform that is necessary to cure the profound problems we have with the code. Moreover, neither these changes, nor frankly, any of the elements of the Trump plan, would address the IRS crisis.

 

The IRS in Crisis 

Historically, IRS strategic planning has focused on and (at least on paper) worked to strike a balance between the agency’s two primary overarching goals. Those goals are: 

 

This is a portion of an article taken from July 2017  issue of "Pilla Talks Taxes."  
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ARTICLES FOUND IN THE LATEST 

PILLA TALKS TAXES ISSUE:

 

Pilla's Advice to Trump's Tax Plan Architects...
    "STOP TINKERING AND START REPEALING"
 

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   Dan Pilla Answers Readers' Questions

 

 

 

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