For Accountants and Economists - Lower Taxes but Fewer Tax Exemptions?

[samsmart]

I would prefer it if accountants, economists, or any others who have studied and dealt with the tax code professionally could answer a question for me.

Would lowering the tax rate but having fewer tax exemptions be a good compromise to raise tax revenue to decrease the national debt and national deficit?

I ask this because I think it may be a good compromise. We can reduce the number of things that are a tax write off, but the taxes that people have to pay would be a smaller percentage of their income. This way, a larger number of people are paying taxes, but the percentage of taxes everybody pays is less.

What would the effects of such a policy be?

 

[Gipper]

Well I've never ventured into corporate taxation so the Big Biz loopholes won't all be known to me, but the purpose of tax breaks is to encourage habits that tend to have a positive externality tacked onto them which will help others, but maybe not the corporation itself.

Tax breaks are given to corporations who hire domestically. This may be the most obvious one. If companies hire here, employment stays high here. It'd obviously be better for the bottom line if MNEs exploited cheap labor elsewhere, but it'd hurt us.

One of the problems today you're seeing is that major corporations are sitting on treasury figures that are immense compared to other periods. Because of the time value of money, idle cash is depreciating cash. In the past, you'd never see a corporate account sitting on funds. All they ever do is invest elsewhere. You'd be hard pressed to find a Fortune 500 company without at least some sort of revenue-generating capital in another Fortune 500 company. However, with the cloud of doubt in the air brought about by the administration along with decreased consumer confidence and all-time highs for MPSs for the ultimate consumer (that's marginal propensity to save, for those without an econ degree), no company will fire the first bullet and cough up the funds to help loosen a tight economy. Couple that with banks that simply will not lend despite Bernanke's wet dream to drop interest rates to never before seen lows, and it's easy to see why economists aren't predicting if the double dip arrives, but when it does.

Tax emeptions for businesses produce myriad benefits not only for themselves, but for others. It's an intricate web that needs to be stimulated at all ends.

I also don't think that reducing write-offs would matter a whole lot, as it's not a big cog come tax time unless you're dealing with industries known to be cutting-edge or tech-heavy. There has been an ongoing argument in the accounting world, specifically corporate, about whether R&D should be capitalized instead of expensed. If you mess with that, you'll really see the knife sharpen on companies like Sony and Microsoft, which - I promise you - you don't want to see.

There has to be a harmony in all this, and the exact balance is not known. I don't know that it can ever be positive, not even if you pack a think tank with the who's who of statistics and shackled them to a desk. However, just as you don't want to unhook the yoke to the animal, you don't want to pull so tight you suffocate it either.

Frankly, if it's specifically about raising tax revenue, the best solution would be to increase taxes on the poor. Half of all Americans owe no income tax, and if you try to make that up with hyper-taxing the rich and Big Biz, you'll see a toppling effect even worse than what exists today.

 

[Slartibartfast]

I guess my business degree was worth something, because I understood all the jargon :mrgreen:

 

[oldreliable67]

Would lowering the tax rate but having fewer tax exemptions be a good compromise to raise tax revenue to decrease the national debt and national deficit?

I ask this because I think it may be a good compromise. We can reduce the number of things that are a tax write off, but the taxes that people have to pay would be a smaller percentage of their income. This way, a larger number of people are paying taxes, but the percentage of taxes everybody pays is less.

What would the effects of such a policy be?

This was the essence of the '86 tax code revisions. These revisions included the elimination of various deductions (e.g., interest expense of various kinds, including credit cards) and reductions in marginal tax rates.

It has been tried at other times as well. Typically, despite the best efforts of supporters of such propositions, historically various special interest groups chip away until the resulting tax code looks nothing like the original concept/proposition.

Carried to its ultimate extension, this concept would result in the flat tax, as proposed by quite a few, of which perhaps the most notable is Steve Forbes. As is evident from his failed presidential candidacy, the idea hasn't gotten anywhere.

 

[Gipper]

I don't think that's why he couldn't make prez. You have to attach a label to yourself and then appeal to people. Ross Perot is an exception that makes the rule.

And I tried to make it reader-friendly, mega.

 

[Slartibartfast]

I don't think that's why he couldn't make prez. You have to attach a label to yourself and then appeal to people. Ross Perot is an exception that makes the rule.

And I tried to make it reader-friendly, mega.

I am just lucky you used the jargon I knew and not the jargon I didn't. It would like me talking about DSL vs PPOE over an ATM network via frequency based multiplexing.

 

[Gipper]

Did I mention that I used to do some IT work for Daimler-Chrysler back during my 20s before finishing my degree? I also dated a .net developer for quite a while.

Of course, you could easily confuse the hell out of me if you so chose to.

 

[oldreliable67]

I don't think that's why he couldn't make prez. You have to attach a label to yourself and then appeal to people. Ross Perot is an exception that makes the rule.

Agree that Forbes's advocacy of the flat tax probably wasn't the single and sole reason responsible for his failed candidacy. In fact, at the time, I wondered if without it, would his results have been even worse. Guess we'll never know.

 

[Slartibartfast]

Did I mention that I used to do some IT work for Daimler-Chrysler back during my 20s before finishing my degree? I also dated a .net developer for quite a while.

Of course, you could easily confuse the hell out of me if you so chose to.

I only use heavy jargon when I am sure that whoever I talk to will understand it. Otherwise, it wastes my time and their time.

Unfortunately that means sometimes I have to say "I am not sure how to explain it without a long boring lecture on background info"

 

[donsutherland1]

I would prefer it if accountants, economists, or any others who have studied and dealt with the tax code professionally could answer a question for me.

Would lowering the tax rate but having fewer tax exemptions be a good compromise to raise tax revenue to decrease the national debt and national deficit?

I ask this because I think it may be a good compromise. We can reduce the number of things that are a tax write off, but the taxes that people have to pay would be a smaller percentage of their income. This way, a larger number of people are paying taxes, but the percentage of taxes everybody pays is less.

What would the effects of such a policy be?

If one broadens the tax base sufficiently, some reduction in tax rates could yield tax revenue that is equal to or greater than current revenue. However, one should note that the three largest tax expenditures (impact of deductions/exemptions) are:

1. Employer health care contribution
2. Exclusion for pension contributions
3. Home mortgage deduction

Drastically reducing or eliminating any or all of those major deductions would be politically difficult, even in exchange for lower tax rates. Indeed, that was one of the major arguments made against Dick Armey's flat tax proposal of the 1990s, even as that proposal offered a single low tax rate and a substantial personal exemption.

Finally, given the magnitude of the nation's fiscal imbalances, I don't believe tax cuts are feasible if one wants to address those imbalances. Needless to say, the largest contribution toward addressing those imbalances will need to occur on the spending side, particularly with respect to the mandatory spending programs.

 

[liblady]

This was the essence of the '86 tax code revisions. These revisions included the elimination of various deductions (e.g., interest expense of various kinds, including credit cards) and reductions in marginal tax rates.

It has been tried at other times as well. Typically, despite the best efforts of supporters of such propositions, historically various special interest groups chip away until the resulting tax code looks nothing like the original concept/proposition.

Carried to its ultimate extension, this concept would result in the flat tax, as proposed by quite a few, of which perhaps the most notable is Steve Forbes. As is evident from his failed presidential candidacy, the idea hasn't gotten anywhere.

right...and who do you think had credit card balances? hint...not the rich.

 

[cpwill]

right...and who do you think had credit card balances? hint...not the rich.

consumer debt rapidly becomes a death cycle that traps the poor and helps keep them there. i am 100% in favor of not giving it an advantage.

 

[washunut]

This was the essence of the '86 tax code revisions. These revisions included the elimination of various deductions (e.g., interest expense of various kinds, including credit cards) and reductions in marginal tax rates.

It has been tried at other times as well. Typically, despite the best efforts of supporters of such propositions, historically various special interest groups chip away until the resulting tax code looks nothing like the original concept/proposition.

Carried to its ultimate extension, this concept would result in the flat tax, as proposed by quite a few, of which perhaps the most notable is Steve Forbes. As is evident from his failed presidential candidacy, the idea hasn't gotten anywhere.

For individuals the only big deductions that I know of are mortgage interest and charity giving.

Corporate taxes have the lion's share of "loopholes". People have to be careful with these things as some are fixes to our global economy, some are to promote certain industries. Then you have the special deals that often benefit one company, those should be given hard scrutiny.

A big problem is tax compliance. I just heard that it costs the government about $300 billion in taxes that should be paid that aren't. We have new industries like people selling stuff on ebay without reporting the income. The internet has cost states a ton of money in sales tax collections.

 

[oldreliable67]

right...and who do you think had credit card balances? hint...not the rich.

Predominately middle income. But really, what is your point?

 

[oldreliable67]

For individuals the only big deductions that I know of are mortgage interest and charity giving.

True now. Prior to the '86 revision, there were lots more and varied deductions.

Corporate taxes have the lion's share of "loopholes". People have to be careful with these things as some are fixes to our global economy, some are to promote certain industries. Then you have the special deals that often benefit one company, those should be given hard scrutiny.

Indeed. Tax policy has long been used to promote national objectives, as it is currently being used to promote alternative energy sources. The investment tax credit has often been the vehicle of choice for this, even though much research suggests that it isn't as effective as previously presumed, in that it all too often winds up benefiting the wrong groups. Amity Schlaes discusses this in her Bloomberg column today.

Partly as a result of the relative ineffectiveness of the R&D and investment tax credit, direct grants through vehicles like DARPA have become much more prevalent in the last decade, and thus far seem much more effective in targeting desired outcomes. Their disadvantage though, is that they are not as broad-based nor do they have as immediate an impact on the broader economy.

Over time, its interesting how a program put in place some years earlier to promote some objective deemed desirable at the time, remains in place and eventually becomes regarded as a "loophole," by some, even though the desirability of of the objective remains. The oil and gas production industry seems particularly vulnerable to this phenom. Some, of course, outlive their usefulness but remain on the books due to successful lobbying by their K Street cadre.

 

[liblady]

consumer debt rapidly becomes a death cycle that traps the poor and helps keep them there. i am 100% in favor of not giving it an advantage.

my point was that it hurt the middle class.

 

[oldreliable67]

my point was that it hurt the middle class.

But remember, the combination of tax rate cuts paired with reduced exemptions was, at least in theory, neutral, leaving taxpayers in a relatively unchanged position. In theory, no taxpayers were hurt or advantaged.

 

[washunut]

True now. Prior to the '86 revision, there were lots more and varied deductions.



Indeed. Tax policy has long been used to promote national objectives, as it is currently being used to promote alternative energy sources. The investment tax credit has often been the vehicle of choice for this, even though much research suggests that it isn't as effective as previously presumed, in that it all too often winds up benefiting the wrong groups. Amity Schlaes discusses this in her Bloomberg column today.

Partly as a result of the relative ineffectiveness of the R&D and investment tax credit, direct grants through vehicles like DARPA have become much more prevalent in the last decade, and thus far seem much more effective in targeting desired outcomes. Their disadvantage though, is that they are not as broad-based nor do they have as immediate an impact on the broader economy.

Over time, its interesting how a program put in place some years earlier to promote some objective deemed desirable at the time, remains in place and eventually becomes regarded as a "loophole," by some, even though the desirability of of the objective remains. The oil and gas production industry seems particularly vulnerable to this phenom. Some, of course, outlive their usefulness but remain on the books due to successful lobbying by their K Street cadre.

Perhaps there should be sunset legislation for all of these measures. Then they would be voted on every X years, and not just slip thru the cracks.

 

[oldreliable67]

Perhaps there should be sunset legislation for all of these measures. Then they would be voted on every X years, and not just slip thru the cracks.

Sunset legislation has become more prevalent, though far from universal, since the '80's, as witness the current debate regarding the Bush tax cuts from 2003.

 

[Slartibartfast]

Sunset legislation has become more prevalent, though far from universal, since the '80's, as witness the current debate regarding the Bush tax cuts from 2003.

These tax cuts are sunsetting because they were passed in reconciliation which gives the law a limited life span.

 

[oldreliable67]

These tax cuts are sunsetting because they were passed in reconciliation which gives the law a limited life span.

Right. So? There have been several other pieces of legislation passed in reconciliation and several passed in non-reconciliation form. IIRC, the bits about accelerated depreciation allowances was also passed in the reconciliation process and renewed one or maybe more times before being made permanent, while a couple of the oil industry production and exploration measures were passed normally and sunsetted at least once before being made permanent. You may recall one or two of the oil industry provisions, they tend to come up every campaign when some candidate starts talking eliminating oil industry loopholes.

 

[Slartibartfast]

My point is, due to the special circumstance in which this bill was passed, I would be hesitant to count it in as a voluntary sunset provision, which is what I believe you were referring to. The sunset on this one is more due to the fact that a broad consensus was not reached on the legislation.

 

[cpwill]

my point was that it hurt the middle class.

consumer debt? absolutely. so, how do we discourage it while minimizing the inevitable corruption of market signals?

 

[obvious Child]

I would prefer it if accountants, economists, or any others who have studied and dealt with the tax code professionally could answer a question for me.

Hence my job.

Would lowering the tax rate but having fewer tax exemptions be a good compromise to raise tax revenue to decrease the national debt and national deficit?

Depends. Statutory tax rates (the legislated ones) don't really mean anything. What matters is effective marginal tax rates. Lowering the statutory while reducing exemptions could in fact result in higher marginal taxes. For example, say your stated rate was 25%, but with lots of exemptions and deductions, your actual rate is 12%. This tax season I ran some marginal calculations on my clients and some went from statutory 35% to a truly pathetic 8%. They went from the highest to less then the 2nd lowest bracket. With fewer exemptions an deductions, they could end up higher. In a sense, the rich could end up seeing higher taxes under such proposals. On the flip side, some clients went as high as 49% marginal effective. Ouch. It's hard to say if it would raise more money to reduce the debt. But it would be easier to pass. Generally the public doesn't get outraged when specific exemptions and deductions are eliminated (but the Corporate World does, and gets very angry). So it would in a sense be easier to reform the individual taxation side by focusing on reducing stated rates.

I ask this because I think it may be a good compromise. We can reduce the number of things that are a tax write off, but the taxes that people have to pay would be a smaller percentage of their income.

That may be a faulty assumption. I have clients that would likely see higher taxes under such proposals as the number of deductions falls away. And corporate taxes would vary dramatically depending on what deductions were eliminated. My line of work doesn't give a crap about 179 deductions (special asset purchase deductions), but a small manufacturing firm would be crying bloody murder. Likewise, the small manufacter wouldn't care much about R&D credit suspensions, but big Pharm would be in an uproar.

This way, a larger number of people are paying taxes, but the percentage of taxes everybody pays is less.

See above.

What would the effects of such a policy be?

Depending on the deductions eliminated, big impacts on specific industries could arise.

 

[obvious Child]

For individuals the only big deductions that I know of are mortgage interest and charity giving.

Sort of. Individuals can get large deductions through their passthroughs. Basically transfering corporate deductions to individuals. Honestly, it's hard to get lots of big deductions if you aren't engaged in partnerships.

A big problem is tax compliance. I just heard that it costs the government about $300 billion in taxes that should be paid that aren't. We have new industries like people selling stuff on ebay without reporting the income. The internet has cost states a ton of money in sales tax collections.

And people expect a national sales tax to work. Crazy.