Modernizing the Tax Law for Small Businesses

Annette Nellen — Sun, 13 Apr 2008 16:59:00 -0400

On April 10, 2008, the House Small Business Committee held a hearing - “Modernizing the Tax Code: Updating the Internal Revenue Code to Help Small Businesses Stimulate the Economy." The Committee also issued its own report - “Seven Ways to Stimulate the Economy by Updating the Internal Revenue Code." In addition to having witness testimony online in written form, the Committee has videos on YouTube about the hearing. This can all be accessed at this summary of the hearing.

I think the ideas presented by witnesses and in the Committee's report fall into two categories:

Tweaks to the federal tax law to make compliance and doing business easier for small businesses.
Changes that reflect the fact that most of the federal tax law was written before we entered our global, interconnected, knowledge-based economy and society and thus is in need of modernization.

Examples of Category 1 suggestions:

Repeal the AMT
Make the 2001 and 2003 tax cuts permanent
Allow greater choice of tax year for non-corporate businesses
Increase meals deduction for small businesses

Examples of Category 2 suggestions:

Allow non-resident aliens to be shareholders in S corporations
Stop treating cell phones and PDAs as listed property for depreciation purposes since these are not luxury items, but necessities of operating a business; detailed recordkeeping of use is not productive
Create a simpler tax systems, even with less incentives, due to the significant compliance costs small businesses face
Simplify the home office deduction to be a standardized deduction
Shorten some depreciation lives to be more in line with today's technology

The focus of the hearing was improving tax rules for small business to stimulate the economy, not just to modernize the tax law. However, there were several good ideas that remind us how out-of-date the tax law is (such as treating cell phones as questionable business items and giving personal computers a 5-year depreciation life).

What are your ideas to modernize the tax law to better help small businesses succeed in today's economy?

Taxes and the Modern Economy

Annette Nellen — Thu, 27 Mar 2008 17:22:00 -0400

Ideally, tax reforms, of any size, should follow the principles of good tax policy. There are many views of exactly what these principles are, dating back to at least Adam Smith in the late 1700s (and even back to Aristotle if considering "fairness" in general - "equals should be treated equally and unequals unequally"). Most of the lists are fairly similar (see this chart for an example).

A while back I came across a 1967 report of the Ohio Tax Study Commission that included a principle to follow in its work that we don't often see. It ties well to the point of the 21st Century Taxation Blog. The extra Ohio principle was:

"Relationship to the Modern Economy

Insofar as possible, a tax or tax structure should be capable of growing with the economy of the state and should be revised from time to time so as to correspond with the true makeup of that economy as it develops and changes. Some products, habits of consumption, and classes of enterprise decline, while others rise to take their place. Ideally, a tax structure should be reviewed and revised as necessary so as to bear a relationship to the way people are doing things, regardless of whether additional revenues are needed at a given time."

That's great ! Tax systems should be reviewed even when revenue isn't needed. Actually, that is likely the best time for reforms because in dire budget times, principles of good tax policy are often overlooked, which may put the state into a chronic state of budget problems.

btw - the other factors used by the 1967 Ohio Tax Study Commission to evaluate tax policy were:

Effect on economic growth
Neutrality
Equity, or Fairness
Administrative feasibility
Compliance costs

Modernization

Modernizing the Tax Law for Small Businesses

Taxes and the Modern Economy