National Commission on Fiscal Responsibility and Reform

July 1, 2010

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July 1, 2010

National Commission on Fiscal Responsibility and Reform

The White House

1600 Pennsylvania Avenue, NW

Washington, DC 20500

Dear Members of the Commission:

The American Institute of Certified Public Accountants (AICPA) submits these comments and suggestions to you as you begin the process of engaging in a dialogue with the public on how to best achieve the difficult and challenging objectives of deficit reduction and fiscal reform.

The AICPA is the national, professional organization of certified public accountants comprised of 360,000 members, including CPAs in public practice, business and industry, government, and education. Our members in public practice work in 44,000 accounting firms, advise clients on federal, state, and international tax matters, and prepare income and other tax returns for millions of Americans. They provide services to individuals, not-for-profit organizations, large and medium-sized businesses, as well as America’s small businesses. The views and documents cited herein represent the work product of the AICPA Tax Section, consisting of 25,000 of our members who devote significant time in tax practice. Specifically, our 15 technical tax committees and 200 CPA volunteers who serve on them have consistently supported the principles of a sound tax system. Further, the AICPA has a longstanding record of support for increased and more effective IRS enforcement efforts, as well as enhanced appropriations for the Internal Revenue Service. It is from this broad base of experience, and years of a balanced approach, that we offer our comments today.

Principles of Good Tax Policy

Every year, politicians, economists, tax practitioners, and others discuss changes to federal and state tax systems. Some proposals would make fundamental changes, for example, by replacing or supplementing the federal income tax with a consumption tax. Other proposals would make significant changes to the existing federal income tax, adjusting it as necessary to achieve the goals of reform. These alternatives are discussed in detail in the AICPA’s October 2009 report, Tax Reform Alternatives for the 21st Century.[1] Specific suggestions for improving our current tax system are included in that report, all of which deserve attention by the Administration and Congress in addressing the deficit.[2]

Every suggestion to modify tax rules – whether major or minor – raises a common series of questions about how best to analyze and compare proposals. As part of our efforts to promote sound tax policy, the AICPA has published four Tax Policy Concept Statements (TPCSs), which discuss various principles of good tax policy.[3] We urge you to consider these principles in developing your recommendations.

Tax Policy Concept Statement No. 1: Guiding Principles of Good Tax Policy:A Framework for Evaluating Tax Proposals, lays out a framework for evaluating tax provisions or proposals. The AICPA recommends employing the following widely recognized indicators of good tax policy to analyze proposed changes, whether of one provision or an entire tax system. These ten guiding principles of good tax policy are equally important, and should be considered separately and together when evaluating the impact of the current system and reform proposals.

  1. Equity and Fairness. Similarly situated taxpayers should be taxed similarly.
  2. Certainty. The tax rules should clearly specify when the tax is to be paid, how it is to be paid, and how the amount to be paid is to be determined.
  3. Convenience of Payment. A tax should be due at a time or in a manner that is most likely to be convenient for the taxpayer.
  4. Economy in Collection. The costs to collect a tax should be kept to a minimum for both the government and taxpayers.
  5. Simplicity. The tax law should be simple so that taxpayers understand the rules and can comply with them correctly and in a cost-efficient manner.
  6. Neutrality. The effect of the tax law on a taxpayer’s decisions as to how to carry out a particular transaction or whether to engage in a transaction should be kept to a minimum.
  7. Economic Growth and Efficiency. The tax system should not impede or reduce the productive capacity of the economy.
  8. Transparency and Visibility. Taxpayers should know that a tax exists and how and when it is imposed upon them and others.
  9. Minimum Tax Gap. A tax should be structured to minimize noncompliance.
  10. Appropriate Government Revenues. The tax system should enable the government to determine how much tax revenue will likely be collected and when.

Our tax system depends on voluntary compliance of the tax laws. In our Report on Civil Tax Penalties: TheNeed for Reform[4], released in August 2009, we noted that targeted, proportionate penalties that clearly articulate standards of behavior and that are administered in an even-handed and reasonable manner encourage voluntary compliance with the tax laws. Unfortunately, there are many civil tax penalties in existence today that do not reflect these principles in how they are designed, how they are enforced, or both. These penalties create an atmosphere of arbitrariness and unfairness that is likely to discourage voluntary compliance. We urge you to include the civil penalty tax system in your considerations of reform.

While the AICPA takes no position on the appropriate level of government revenues, spending or deficits, it is important to keep in mind that deficits can be reduced by adjusting the amount of expenditures or adjusting the amount of taxes imposed. We have a strong interest in tax system changes or reforms, and we sincerely hope that the corollary goals of a fair, simple, and more transparent tax system can be served in any recommendations made for deficit reduction. We strongly believe that movement in this direction would improve compliance and begin to reduce the tax gap.

We note in particular that spending through the tax system in the form of various credits, deductions and other incentives has grown significantly in the decades since the 1986 Tax Reform Act, adding complexity and increasing compliance costs for taxpayers and the government. In significant part, this submission urges the Commission to include a review of spending through tax incentives. These provisions reduce tax revenues and add to the deficit without the comprehensive, ongoing programmatic oversight by Executive or Legislative Branches of government that occurs with respect to appropriated spending. Your recommendations should urge regular and substantive reviews of tax expenditures.

In addition to increased complexity and compliance costs, these tax expenditures reduce the neutrality of the tax system, can create a perception of inequality and favored treatment, and increase complexity. The burden of administering these provisions falls upon the Internal Revenue Service, when there are other existing government agencies that may be more capable of the task and have missions and competencies more closely aligned with the purposes of the expenditures.

Tax Simplification

In recent years, the complex nature of the tax laws has undermined voluntary compliance by eroding public perceptions of tax fairness and imposing substantial compliance burdens. Simplification would greatly enhance the continued viability of our self-assessment system. To address that problem, Tax Policy Concept Statement No. 2 sets forth the following principles for tax simplification:

1. Seek the simplest and most transparent approaches to implementing desired policy or objectives;

2. Minimize compliance costs in terms of both time and money, to be commensurate with the resources and abilities of the affected taxpayers;

3.Reduce the frequency of changes in the tax law;

4.Use consistent concepts and definitions;

5.Consider the ability of the IRS to administer, provide guidance on, and enforce the laws; and

6.Avoid having tax laws that apply only to a limited set of taxpayers or for a short period of time.

We urge you to measure any tax proposals based on these principles.

Recommendations

We believe these principles of good tax policy and tax simplification must be given serious consideration in developing proposals for deficit reduction. Deficit reduction measures should also have a long-term perspective and move the country toward more permanent changes that address impending challenges. An example would be the future entitlement costs for social security and similar programs. The AICPA studied alternatives for addressing long-term social security imbalances, as discussed in our 2005 report, Understanding Social Security Reform: The Issues and Alternatives;[5] this report is still relevant today. Providing a roadmap for addressing this problem would be a major contribution the Commission could make to the Administration and Congress.

A careful review of tax provisions intended to achieve a particular social or economic goal, as opposed to those designed to measure income and the ability to pay, is long overdue. Relevant questions are: Has the goal of a particular provision actually been achieved? Is there a better way to achieve the goal in terms of being more transparent, economically efficient or administratively sound? Is the social or economic intent still relevant? Is a deduction or credit the most cost effective way to deliver a particular benefit? Examples of areas where tax provisions abound notwithstanding the fact that executive branch agencies and programs exist to address similar needs include education, child care, health care and health insurance, energy conservation and alternative fuel usage, and theearned income credit to assist low income families. As noted above, we urge regular substantive review of such provisions.

In a similar vein, actions regarding the use of temporary provisions have created uncertainty. While some measures, such as those designed for economic stimulus, are appropriate for temporary and sporadic use, temporary tax provisions, including many incentive provisions, have become far too common. These are routinely allowed to expire for a period of time, with subsequent debate and legislative action to extend them for some temporary period, thus causing disruption and costs to thousands of businesses, individuals, and the Internal Revenue Service. Whether or not the data exist to support the extension of these provisions, it is both inefficient and ineffective to make longstanding tax policy on a temporary basis.

In reality, the temporary nature of these provisions has not led to rigorous review of the incentives before their renewal. Further, the temporary nature of the incentives may have served to blunt their effectiveness in motivating taxpayer behavior.

Unfortunately, temporary provisions often result from a desire to reduce the perception of their cost for budget purposes. The current experience with the estate tax is but one egregious example of the disruption to taxpayers and added administrative burdens to the Internal Revenue Service created by temporary provisions. Similarly, phase-ins and phase-outs often serve no function other than to mask the true revenue cost and budget effect of tax provisions. We believe such devices are counter-productive and should be discouraged.

Accordingly, we hope the Commission’s recommendations will be permanent in nature and that the Commission will include in its recommendations procedural proposals to address these all too common practices employed to artificially reduce revenue costs.

Finally, if alternative tax systems are recommended to supplement or replace the current system, such as a value added tax, it is important to allow adequate time for proper implementation of that system administratively as well as by affected taxpayers and businesses charged with collection.

Conclusion

The appropriate level of federal revenues and spending is a political question. Short-term deficits may be desirable during downturns in the business cycle, especially severe downturns such as the one the nation is currently experiencing. However, the projected levels of budget deficits are unsustainable in the long run. Permitted to continue and to grow, these deficits will limit economic growth, impair the government’s ability to finance its debt and provide essential services, and impose an ever-increasing burden on future generations.

Longstanding criticisms of our current tax code, taken together with these budget concerns, may provide the impetus for undertaking serious consideration of federal tax changes to help reduce the deficit over time. We urge that the principles of good tax policy be used as criteria for change. In the end if the nation does not emerge with a system that is perceived as balanced, fair to all, administrable, economically efficient, transparent, and neutral in terms of its effect on economic activity, the effort will be a failed one.

We hope that this process will also provide the needed impetus for policy makers to address the long-ignored problem of reforming and funding future entitlements.

If you would like to discuss any of this material or have any questions, please contact me at or (202) 879-4966; Edward S. Karl, AICPA Vice President – Taxes, at r (202) 434-9228; or Thomas A. Stout, Jr., Chair, AICPA Tax Legislation and Policy Committee, at or (202) 533-4148.

Sincerely,

Alan R. Einhorn

Chair, Tax Executive Committee

[1] Available at

[2]See Tax Reform Alternatives for the 21stCentury,supra, at pp. 29-35. Topics discussed include: individual and corporate alternative minimum tax, multiple education incentives, multiple retirement savings incentives, worker classification, earned income tax credit, temporary provisions, and phase-outs.

[3]TPCS No. 1, Guiding Principles of Good Tax Policy: A Framework for Evaluating Tax Proposals (2001); TPCS No. 2, Guiding Principles for Tax Simplification (2002); TPCS No. 3, Guiding Principles for Tax Law Transparency (2003); and TPCS No. 4, Guiding Principles for Tax Equity and Fairness (2007). All four Tax Policy Concept Statements are available on the AICPA website at

[4] Available at

[5] Available at