Fixing the Income Tax: Transparency and Simplicity

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JUNE 2005 - The federal income tax has always been an area of public policy where the CPA profession can make a valuable contribution. Last year, during his term as NYSSCPA president, John Kearney appointed David A. Lifson to head a Committee on Practical Reform of the Tax System to discuss federal tax policy from a “big picture” perspective and to make recommendations to radically change the tax code.

The committee’s proposal, the Simple Exact Transparent (SET) tax, is a radical solution to our current tax system’s increasing dysfunctionality. The SET tax reduces the current overly complex tax calculations to a simple formula that most taxpayers will understand. It applies a fair and universal tax rate, and allows everyone to know exactly what taxes the government is taking to support identifiable programs. The single SET tax rate would apply to all incomes over a generous minimum threshold, reduced by simplified exclusions at an economically appropriate, socially acceptable rate. The current proliferation of credits and deductions, caps and phaseouts, and conflicting categories of income would be unnecessary and therefore eliminated.

The SET tax concept is much simpler than the current income tax. Unlike most flat tax proposals, which allow no deductions or exclusions, the SET tax would be more realistic and politically viable.

An important element of the SET proposal is that everyone must file a return, even if they owe no tax, so they are acquainted with the tax-filing system. Exempting nonpayers from filing returns creates many problems, possibly including the fostering of tax-evasive behavior and an underground economy.

Eliminating Unintentional Issues

The SET tax system would enable policymakers to give the taxpaying public an understandable tax package, encouraging voluntary compliance and fostering greater assurance that all taxes are being collected. It can also efficiently change who bears the income tax burden without the complex, often incomprehensible results of the current Internal Revenue Code. The goal of the SET system is to eliminate complex issues through which the system might unfairly and unintentionally penalize taxpayers. An excellent example is the alternative minimum tax (AMT), which the committee termed “The Phantom Menace.” The AMT was enacted in 1969 to ensure that the very wealthy were no longer able to avoid paying federal income taxes entirely. Because the AMT is not indexed to inflation, however, middle-income taxpayers have become increasingly subject to it. The AMT is not easily comprehensible by the public, either. It relies on the good faith of taxpayers to calculate their income tax twice, based on two calculations using two sets of rules. Taxpayers not using paid preparers might not even be aware of the need to perform this alternate calculation.

In short, the SET system would give every filer the means to easily determine and understand what their tax obligation is and how their taxes benefit them directly and indirectly. This level of transparency should appeal to both conservatives, because it shows the true cost of the tax system, and liberals, because it shows the benefits derived from tax revenues.

Thought Leaders and Opinion Shapers

The role of CPAs as thought leaders and opinion shapers—in addition to serving the public as advisors and as preparers of millions of tax returns—has never been so important. Having approved the committee’s SET tax proposal, the NYSSCPA leadership is moving the proposal forward. I welcome the input of every member as we move ahead.

Louis Grumet
Publisher, The CPA Journal
Executive Director, NYSSCPA




















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