SCRAP CURRENT TAX SYSTEM

The current tax debate is healthy for the Nation and the electoral process. As a CPA for the last several decades I have experienced our ridiculous tax system first hand. President Reagan attempted to simplify the system in 1981 by just having very few brackets. It was a start. He also accelerated our depreciation system which many competing countries have already done. All this was pretty much undone by the 1986 tax reform act.   That Act created the infamous Passive Activity Rules which penalize real estate leveraged real estate investment and tax shelters. What happened promptly is the Savings and Loan and Real Estate industries were plunged into crisis.

We in the accounting professional call every new “tax reform act” the “CPA’s Welfare Act” because there is NEVER any real simplification. They all have just further convoluted an already convoluted system. Whether the rate is 15%, 20% or 39.6% nothing really changes. There are entire industries based on legal tax avoidance.

A flat tax is the only “fair” type of tax. The reason I put “fair” in quote is that most people are not objective when it comes to “fair”. To them fair is what benefits them or their group. The real word should be “objective” based on simple principles such as the amount you earn times a percentage. One of the dirty little secrets never explored by all press coverage of this issue is that the self-employed and owners of small businesses have much more control over the term “gross income” then the W-2 wage earning. Therefore any flat tax would have to use some form of standard to define “gross income”. As a CPA I would offer “GAAP”, Generally Accepted Accounting Principles” and would require a CPA to determine that that is what has taken place. 

Of course the next task would be to establish the flat tax rate. Should it be 10%, 15%? Once we have established what we think should be the flat tax rate our next task is to determine who should be taxed. Right now we tax (1) individuals, (2) trusts and (3) corporations. The unnecessary component of this triad is the corporation. If all corporations were treated as pass through entities similar to Sub Chapter S Corporations or Publicly Traded Partnerships (PTPs) it would greatly simplify the U.S. tax system and definitely capture much of the offshore income sheltered by foreign corporations.

We continually hear about the problem of offshore companies paying no tax. My plan eliminates that issue. We already have rules about “withholding at the source” for foreign owners of partnerships. In other words we can presently withhold tax on these owners. What if we were able to do this for every foreign owner of every corporation, private or public? There would be a windfall rise in tax collections

This can work. Run the numbers. Learned economists have already done so and shown the increase in revenue for the country.