Tune it up or trade it in?

• Position: US tax code - Panel Discussion

When your old car doesn't run right, you've got to decide whether to fix it or get rid of it. The same could be said for the United States tax code. Everyone agrees the system's broken. What's debatable is whether to scrap it or rebuild the existing tax engine. To find out what financial executives think about all this, Peter Merrill, principal at Price Waterhouse LLP's Washington, D.C., national office, led a teleconference in which three members of Financial Executives Institute's Committee on Taxation discussed the tax code's foibles and possible fixes.

MERRILL: Should the income tax system be replaced with a new system, as in the case of the flat tax proposal, or should the current system undergo reform, as the White House has argued? Is the income tax system really beyond repair?

CONWAY: I don't think it's beyond repair, but everyone recognizes there's a need for change. The proponents of tax reform have raised compelling points about the current system's complexity and the cost of compliance, and about a number of economic factors, such as the low savings rate in the United States.

We need to distinguish between taxes on individuals and on businesses. In the case of individuals, it's clear we need to make the system simpler and more efficient. Corporations are a different matter. They have global operations, so changes in the tax structure would involve international trade and other issues, which haven't yet been fully defined.

THREADGILL: Although I believe constructive changes can be made to the current system, at what point do you stop repairing and start overhauling? The present system must be made less complicated, less intrusive and more fair.

KENT: The current system is also economically inefficient and expensive, and it lacks stability. Today, tax policy is driven more by budget policy than anything else. The Kemp Commission has made a good start in identifying what's wrong with the current system and basic concepts to include in a new system.

MERRILL: The 1986 Tax Reform Act started out as President Reagan's direction to the Treasury to simplify the tax system, but it didn't end up that way. Can Congress make a major change in the tax system and simplify it at the same time?

CONWAY: Yes, we can have change and simplification, but we've been constrained by deficit and revenue considerations. By '86 we'd made progress on simplification for individuals, but because of the need to raise revenue, we wound up with some changes that added complexity for corporations. We must deal with the revenue and the deficit issues at the same time. If we don't, we're going to end up with continued complexity.

KENT: The government is especially hard to move in the area of simplification, mostly because of fears of revenue "leakage" and an insatiable desire for accuracy. One example is the battle fought over changing the way exchange rates are applied to foreign tax payments when a foreign dividend is paid - on the day of the dividend or on the dates tax payments were made, which is more accurate but incredibly complicated and costly. The suggestion was made to go back to making the currency change on the day the dividend is paid. But the government has continued to resist, because even though that plan might be a winner for the government, it's not a guaranteed winner.

MERRILL: When I was chief economist of the Joint Committee on Taxation of the U.S. Congress, every tax proposal I worked on met with the same questions from the committee members: What's the revenue estimate? Yet, I can count on one hand the number of times a member asked about the effect on compliance costs or how much complexity the proposal would add to the system.

Let's turn a corner here and focus on changing the tax rules governing U.S. multinational operations. Most of the leading tax restructuring proposals call for a territorial tax system that wouldn't attempt to tax business activities conducted abroad. What are the implications of a territorial tax system for your company?

THREADGILL: If there's a part of the tax code...