The need for tax reform or tax replacement.

• Author: Kleinfeld, Denis

Nearly every member of The Florida Bar has a view as to whether the current tax system needs to be reformed or replaced. The observations expressed in this article are the author's alone. It is clear, however, that tax reform is front and center. A Presidential bipartisan advisory panel known as the Commission on Tax Reform has already been established with a report due in July. It consists of a panel appointed by the President and Congressional leaders to consider proposals to reform the tax system. On January 7, 2005, President Bush named as chair former Republican senator Connie Mack III from Florida and as vice chair John B. Breaux, the former Democratic senator from Louisiana. Both are tax reform advocates. There is, no doubt, a serious effort for fundamental tax reform underway. (1)

The Congressional View

Legislation to establish a commission on tax reform was also submitted by Congress. It succinctly stated why it was important to reform the tax system. (2) In this regard, Congress pointed out eight specific problems with the tax code. The first reason clearly sums up why tax code reformation is desperately needed--namely that, "[t]he current federal tax system is fundamentally defective, economically counterproductive, and its complexity leads to staggering costs for taxpayers." (3) While we have all heard phrases similar to this for years from various tax protestor groups and erudite think tank policymakers, it is even more dramatic and takes on an air of legitimacy when a large number of the members of Congress as well as the President recognize the failure of the tax code.

Second, complex or frequent changes of the tax law cause the taxpayers administrative confusion and uncertainty. This results in difficulty in understanding tax rules and regulations "due to their lack of clarity and readability," causing taxpayers to spend a lot of money on compliance and administration. What Congress did not point out is that those working for the Internal Revenue Service, like the taxpayers, do not really understand the tax rules and regulations either. As a result, the government, like the taxpayers, wastes a lot of money on unnecessary compliance and administration. The end result? At a minimum, a vast amount of precious money lost for the taxpayer and the government.

Third, the federal tax system is being used to advance "social and economic policies." They point out that "[t]argeted benefits in the form of preferential rates, exclusions, exemptions, deductions, credits, deferrals and adjustments are examples of factors that complicate the Internal Revenue Code of 1986." (4) To me, it seems that the tax code is being used for every political and social engineering purpose except as a means to efficiently raise funds in an equal manner to pay for the necessary activities of government.

Fourth, the Congress noted that there is a dissimilar treatment of "similarly treated taxpayers." They also point out, perhaps in a lefthanded compliment to the tax bar and tax accountants, that people who have good tax advisors "are more likely to receive optimal treatment and maximum benefits." In one sense, I would suppose that it is good that Congress recognizes that knowledgeable tax advisors are able to achieve good results for their clients. Perhaps as part of the tax reform proposals, Congress could provide a tax credit for those poor souls who cannot yet afford tax advisors so that they can get professional advice and also receive optimal treatment and maximum benefits.

Fifth, Congress recognized that companies in the U.S. are at a significant disadvantage because of the tax law. As they noted, "The tax laws of the United States are among the most burdensome and uncompetitive in the world." (5) The result is that many U.S. companies are forced into a choice of going out of business, selling to a foreign competitor, or becoming a subsidiary of a foreign corporation. None of these choices are good for the U.S.

Six, noting that savings and investment are both important concepts, Congress noted that the tax system "discourages savings and depresses the level of the United States capital accumulation available for financing investment.... " Clearly, without capital there can be no capitalism. The very survival of the U.S. as a capitalistic society is dependent upon our ability to create or attract savings and investment monies. Without this, there will be no growth in the economy, no real income gain, nor any meaningful increase in living standards.

Seventh, prior efforts of tax reform have failed--miserably. The destructive problems of the Internal Revenue Code, such as complexity and distortion of economic incentives, all need to be addressed in fundamental tax reform. Although various tax reform proposals have been made, currently there is no...