Reform Party policy paper
Small business policy goals - 1
Tax code reform
Introduction
This policy paper is the first in a series that the Reform Party anticipates publishing as part of its ongoing effort to articulate the party's initial positions in various policy areas. Initial policy goals and proposals will be followed by refinements, including inputs from various stakeholders or other interested sources. The Reform Party understands that articulating policies without inputs from various interested sources can lead to insufficient context and data to properly understand problems and issues that various interests face. The party has previously described some of the context and intellectual framework in which the party's efforts to articulate and refine its policy recommendations will occur.[1] Articulation of the Reform Party's context and intellectual framework is incomplete, but the effort continues.
The top ten small business problems and priorities
Independent businesses having fewer than 500 employees are considered to be "small businesses" under U.S. law. Firms having 20-499 employees accounted for 67 percent of new jobs that were created from 2009 until 2011.[2] Small businesses generally account for about 60-65% of new jobs and about 49% of U.S. private sector employment. According to the National Federation of Independent Business (NFIB), the top five problems that small businesses faced in 2012 were (1) the high cost of health care insurance, (2) uncertainty over economic conditions, (3) high fossil fuel costs, (4) uncertainty over government action and (5) unreasonable government regulation.[3] Fifty two percent of small business owners regarded health care costs as a critical problem. The next five top problems were high local, state and federal taxes, complex tax laws and frequent tax law changes.The NFIB's most recent survey (2102) of small business owners about the problems they face noted that assertions about problems that confront small business owners typically have little or no empirical evidence in support of the assertion.[3] That is often the case for politics in general. To blunt the impact of that problem, the Reform Party will engage in an ongoing effort to gather data to arrive at reasonable policy choices that serve both small business needs and the broader public interest.
Tax code reform: A rationale to simplify tax laws
and limit the frequency of tax law changes
and limit the frequency of tax law changes
Given the scope and role of government, it is clear from the problems mentioned above that intelligent government action can do much to ameliorate some of these problems, while having less or no capacity to affect others. The NFIB recognizes this.[3] It is also clear that the cost to taxpayers of implementing some of these changes is marginal to low, while the cost for others is higher or not immediately apparent. For example, there is no obvious reason to believe that there must be a significant cost to simplify tax laws applicable to small businesses or to statutorily limit the frequency of changes to the main tax laws that affect small businesses. There could be costs to the U.S. treasury associated with changes to simplify complex laws that apply to small businesses. Those costs could be offset by, e.g., increased revenue from increased voluntary compliance and/or from increased tax law enforcement at the federal level and probably also at the state and local levels as well.[4]
Policy aimed at tax code simplification and limiting changes should, to varying degrees, affect six of the ten problems mentioned above. Tax law simplification and limiting the frequency of changes after simplification would (i) reduce uncertainty over government action regarding tax laws (ii) reduce the frequency of tax law changes and (iii) begin to address unreasonable government regulation, which includes some degree of unreasonable regulation via the tax code. It should be the case that simplifying laws and limiting the frequency of changes would reduce the cost of tax code compliance. If that effect is significant, it could be possible to reduce tax rates at the local, state and federal levels without causing a significant reduction in government revenues. That would be a win-win scenario.
There are potential major payoffs from simplifying the tax code that could benefit small businesses. Simplifying the tax code could lead to a decrease in the net tax gap, which the Reform Party has estimated is running at about $420-$440 billion/year.[5] The net tax gap is the amount of taxes owed to the U.S. treasury but not collected. If tax code simplification reduces the net tax gap, then the federal debt could be ameliorated somewhat, e.g., an additional $210-$220 billion/year would flow into the treasury if the tax gap is reduced by half. Some of the added revenue could and should be used to reduce small business tax rates, further enhancing their competitiveness.Tax code reform should also be used to level the unfair playing field with our trade partners/competitors.[6] Doing that will require careful thought, but if done effectively, it will help to build a coherent framework for exporting and importing services and products.
According to testimony in 2006 from the Treasury Inspector General for Tax Administration, tax code complexity cost the U.S. economy $140 billion/year and required about 3.5 billion hours for compliance.[7] If the tax compliance burden can be reduced, the savings in effort and resource could be available to enhance small business efficiency and profitability.
Although making the tax code simpler may sound relatively easy in theory, that will not be the case in practice. Complexity arises from multiple sources, e.g., a lack of clarity and readability of existing law, use of the tax code to advance social and economic policies and complicated interactions between Federal tax laws and state tax laws, other Federal laws, international treaties and so on.
Despite the complexity, tax code reform is important for more than just the burden that compliance imposes on small businesses. Tax law complexity tends to foster perceptions that the tax system is unfair. That perception, reasonable or not, leads to decreased voluntary tax compliance. In short, a complex tax code facilitates tax evasion.[8] In addition to a perception of unfairness, tax evasion is subsidized by honest taxpayers, which is in fact unfair. Tax code complexity also leads to economically inefficient activity incentivized by reduced tax payments. When possible, tax laws should incentivize or reward economic efficiency and penalize economic activity that is inefficient or occurs simply to exploit tax advantages.
Simplifying the tax code will require a major, focused effort by congress. Individuals and entities that want to retain the code as is will oppose any meaningful reform effort that they perceive to be a threat to their tax breaks. The effort effort will likely require incremental changes over several years or a major single effort followed by fixes when problems with the new code become apparent. Many tax code changes would probably need to be phased in over a reasonable period of time to minimize damage to business plans that were implemented under existing tax law. Intelligent tax code reform will require skill, time and patience.
Tax simplification will be complicated and require much effort, but the payoff should be worthwhile to both small businesses and all other tax paying individuals and entities. An initial goal of reducing by at least half the annual cost and effort to comply with tax law within 3 or 4 years may be a reasonable estimate of some of the benefits of reform. Desirable goals of reform should include identifying and preserving tax code provisions that effectively serve the public interest and minimizing provisions that do not, while finding provisions that generate win-win, or at least neutral, revenue and incentive scenarios for both small businesses and the public interest.
Congressional status
The Reform Party recently pointed out that there is a nascent effort underway in the U.S. senate to start a tax code reform project.[5] Breathing life into that effort will require pressure from outside the two-party system. It is highly likely that the Tea Party and most other republicans in the house will not cooperate if tax reform is revenue neutral or enhancing. The ideological goal there is to reduce federal revenues when they can. At present, the house is staunchly opposed to revenue enhancing tax reform on ideological grounds. Senate majority leader Harry Reid has told senate finance committee chair Max Baucus (D-MT) not to bother with tax code reform unless it significantly increases revenues, putting the idea of reform at risk.[9] Reid's comment virtually guarantees gridlock on this issue given conservative intransigence. Senator Baucus is looking for public support as a way to generate some momentum for reform and he sorely needs it. Given the politics, congress will not act unless forced from outside the two-party system.
Next steps
The Reform Party has urged the public to support the senate's tax reform effort. The party will approach small business and other interested organizations to explore ways to collaborate to create pressure on congress and to generate specific tax code proposals for congress to consider. Given our unacceptable and unworkable tax code, competing overhaul options should be considered, e.g., various flat tax and/or value-added tax schemes. Because conventional two-party thinking and politics got us here, there is no compelling reason to believe that it can get us out. Competing options must stand or fall on the merits or reform will be weak and ineffective.As mentioned above, interests who benefit from the status quo will oppose threats to their tax breaks or revenue streams. It is unreasonable to expect interests who benefit from economically ineffective tax breaks or benefits of any kind to simply allow their breaks or benefits to go. Opposition will be well-funded, sustained and, of course, go on behind closed doors and out of public sight. To blunt opposition, intense public pressure on congress must be sustained. This policy paper continues the Reform Party's effort to generate pressure on an unresponsive two-party system.
Footnotes:
1. Links to context and intellectual framework: http://reformparty.org/reform-party-of-california-essays-6-what-is-the-public-interest-and-how-is-it-best-served/; http://reformparty.org/reform-party-of-california-essays-self-interest-vs-public-interest/; http://reformparty.org/reform-party-of-california-essays-politics-and-special-interest-money/.
2. Link: http://www.sba.gov/sites/default/files/FAQ_Sept_2012.pdf.
3. Links: http://www.nfib.com/research-
4. Links: http://reformparty.org/the-tax-gap/; http://www.gao.gov/products/GAO-12-651T; https://www.ftb.ca.gov/Tax_Gap/index.shtml; http://www.wisconsinsfuture.org/publications_pdfs/tax/TAX_GAPApril_2010.pdf.
5. Link: http://reformparty.org/the-tax-gap/.
6. Link: http://reformparty.org/reform-party-of-california-commentary-business-on-an-uneven-playing-field/.
7. Link: http://www.treasury.gov/tigta/congress/congress_07262006.pdf, see page 13 of the testimony.
8. Tax evasion as used here means the failure or refusal of individuals or entities to pay the taxes they owe, e.g., by putting unreported income in secret Swiss bank accounts. Tax evasion is illegal. By contrast, tax avoidance is taking steps to pay the lowest amount of tax allowed by law, e.g., forming an offshore company in a low-tax country. Tax avoidance is legal. Some members of congress occasionally complain that some tax avoidance schemes are unintended consequences of tax laws and/or flout the “spirit” of a law, whatever that means. The Reform Party has no sympathy for those folks in congress or their complaints. The tax laws are the purview of congress. If congress doesn't like things the way they are, then congress should change it. The Reform Party sees nothing wrong with any individual or entity engaging in aggressive tax avoidance, even if it means that hundreds of billions or, more likely, trillions of tax dollars unintentionally did not flow into the U.S. treasury over the years. That situation is a failing of two-party politics and, as the Reform Party has argued before, it is mostly a consequence tax code complexity and/or the preferred payback mechanism for political contributions from wealthy donors (http://reformparty.org/reform-party-of-california-essays-politics-and-special-interest-money/).
9. Links: http://www.politico.com/story/2013/07/max-baucus-tax-reform-94894.html; http://thehill.com/blogs/on-the-money/domestic-taxes/313557-reid-schumer-senate-budget-should-be-framework-for-tax-reform.
CATO: Tax gap is a mirage (http://www.cato.org/sites/cato.org/files/pubs/pdf/tbb_0306-44.pdf) citing http://www.treasury.gov/tigta/congress/congress_07262006.pdf
http://www.nfib.com/advocacy/item/cmsid/58652
http://www.nfib.com/advocacy/government-and-regulatory-reform
http://www.nfib.com/advocacy/item/cmsid/51153
http://www.sba.gov/advocacy
http://www.sba.gov/advocacy/847
http://www.smallbusinessadvocacycouncil.org/
http://www.smallbusinessadvocacycouncil.org/advocacy-category/policies-and-positions
http://www.smallbusinesscalifornia.org/
http://www.aboutcsbe.org/ - small businesses hit by climate change want to do something about climate change; what do the others want?
advocacy:
link: http://kstreetcafe.com/5-things-advocacy-organizations-can-learn-from-small-businesses/#ixzz2awFzH9NF
Facts are boring. People support campaigns with good, relatable stories; few people are driven to action by a list of facts and figures. To be impactful, you must make it personal.
