Tax Reform

Taxing Digital Products - Let's Also Use the Technology to Modernize Collection

Annette Nellen — Mon, 23 Jun 2008 12:47:00 -0400

When today's forms of taxes were created decades ago, there wasn't any technology to consider in making computations and collection easy. But that is not true today. While some states are slowly modernizing their laws to address new ways of living an doing business that are partly due to changes in technology, the technology as a tool of tax compliance and administration is often overlooked.

Tennessee enacted various tax law changes which the governor signed on June 5, 2008, including expanding its sales tax to include most digital goods provided the tangible equivalent is something already subject to sales tax. [SB 4173 enacted as Public Chapter Number 1006]

"The retail sale, lease, licensing, or use of specified digital products transferred to or accessed by subscribers or consumers in this state shall be subject to the tax levied by this chapter on the sales price or purchase price thereof at a rate equal to the rate of tax levied on the sale of tangible personal property at retail by the provisions of § 67-6-202."

The law defines various types of digital goods and notes a few exemptions. To determine where the buyer resides, the new law provides:

"(g) The tax imposed by this section shall apply to retail sales in this state, indicated by the residential street address or the primary business street address of the subscriber or consumer."

Thus, Tennessee joins New Jersey, Nebraska and a few other states that have modernized their sales taxes to include today's forms of consumption, although they don't also address using the technology for collection ease. For equity reasons and continuation of the tax base, as forms of consumption progress beyond what yesterday's legislators ever envisioned, such as the digital equivalent of tangible goods, including software and music downloads, a state needs to update its laws.

First - why include digital downloads in the sales tax base? As a consumption tax, there is no reason to tax a song sold on a CD that you'll play in your CD player, but not one downloaded online onto your MP3 player or computer to listen to. The result in both situations is the same - you enjoy the music. And both forms are consumption which is what a sales tax is designed to tax.

One argument sometimes voiced about including digital downloads in the sales tax base is that you may not know the location of the buyer. But, unless the song is free (in which case it is unlikely to be taxed unless it was bundled with something else that is taxable), the consumer is using a credit card which includes their address. While the credit card user could have the card registered in a different state, it is unlikely and there are ways to still require the user to let the credit card company know where the cardholder is located.

Another argument against taxing digital goods is that it will hurt Internet companies. This is a distractor argument. The sales tax is paid by the consumer, although collected by the seller if the seller has a physical presence in the state (if not, the buyer pays use tax on their own). Will people stop buying digital downloads because of sales tax? It seems unlikely because if they really want the product, their alternative is to buy the taxable tangible equivalent. Also, retailers of tangible personal property have been collecting sales tax for decades and they seem to be able to remain in business. Certainly, moving something from being non-taxable to taxable is shocking at first, but people will get used to it. If the states that are modernizing their laws to comport with today's ways of consuming and doing business help explain why the change is needed - equity, fairness, neutrality, to keep state tax bases from eroding, consumers are more likely to understand. And, the sooner the states update their laws, the better because the longer the delay, they are really indirectly educating consumers that digital consumption is not subject to sales tax.

Many states with sales tax, added it in the 1930s when digital goods were not in existence. So, most laws were written to apply to the key type of consumption - tangible personal property. If states had originally written their laws to apply to consumption of goods without using the word "tangible", digital downloads would have been taxable from the start and I don't think consumers would have questioned it. After all, if you pay sales tax on your music CD, why wouldn't you also pay it when you download the music onto your MP3 player to enjoy.

Another issue sometimes raised is the cost to vendors of collecting the tax on digital items. This is also a distractor in that other vendors have been incurring costs for decades to collect sales tax on the tangible items they sell. I do think though that vendors should recieve some relief for these costs, something very few states do today. I also think this is an area where technology could be better used to collect the tax. Again, when sales taxes were enacted decades ago, the use of technology to collect the tax was primarily paper and pencil.

Better Use of Technology:

Today, the sales tax could be collected by the state tax agency at the same time the buyer's credit card is billed for the item. This would enable the state tax agency to get the money sooner, there would be no need for the vendor to file any reports and it would still be transparent in that the buyer would see the sales tax charge when they buy the item. Checks and balances could still be in place in that in auditing a vendor, the state agency would primarily review the system for charging to see that it works as intended and check a sample of transactions to be sure the collected tax was charged by the correct state tax agency.

This sales tax billing system could also be used for tangible goods. Whenever the credit card is charged, the sales tax portion gets charged by the state tax agency. The credit card or other payment card would just need to have the customer's state noted or they could be asked at the register (already, many stores ask for a zip code - apparently for marketing purposes).

Let's truly act like we're in the 21st century and not only modernize sales tax to apply to the digital equivalent of tangible consumption, but use technology to make it easier and more cost effective for vendors, consumers and state tax agencies.

[For further information, see my 21st Century Taxation website.]

Health Care Spending versus Extending 2001/2003 Tax Cuts - Tough Issues

Annette Nellen — Fri, 20 Jun 2008 21:00:00 -0400

On June 16, the Senate Finance Committee sponsored a Health Reform Summit. The presentations focused on costs and possible improvements to the delivery and insurance system.

CBO Director Peter Orszag's first part of his testimony helps put the immense financial problems facing us in the next few years in perspective. He says:

"The single most important factor influencing the federal government’s long-term fiscal balance is the rate of growth in health care costs. The Congressional Budget Office (CBO) projects that, without any changes in federal law, total spending on health care will rise from 16 percent of the gross domestic product (GDP) in 2007 to 25 percent in 2025 and 49 percent in 2082, and net federal spending on Medicare and Medicaid will rise from 4 percent of GDP to almost 20 percent over the same period.1 Many of the other factors that will play a key role in determining future fiscal conditions— including the actuarial deficit in Social Security and a decision about extending the 2001 and 2003 tax legislation past its scheduled expiration in 2010—pale by comparison over the long term with the impact and challenges of containing growth in the cost of federal health insurance programs."

And he didn't mention the cost of AMT reform. As noted in my last blog entry - the dollars involved in both tax and health care reform are so immense that the discussions need to be better merged in some way. Otherwise, it might be a race to see which issue gets solved first - finding a way to extend all or part of the 2001-2003 tax cuts or finding ways to address health care spending. Also, there are a lot of health care dollars in the tax law that could be used for either tax reform or health care reform. It seems that the Senate Finance Committee may be going in that direction given that they have held information hearings on both topics to help get ready for work needed in the 111th Congress.

Another link between tax and health care reform is that the increaing cost is hurting the ability of US employers to compete due to the decades old (and odd) linkage of health insurance and employment. One reason cited for business tax reform is to help companies to be more competitive in the global market place. But it isn't just a high tax rate that is a problem, it is health care spending (and for some companies today with an effective tax rate well below 35%, exploding health care costs might be a bigger concern). Craig Barrett, Chairman of Intel, also testified at the Health Reform Summit. He stated:

"Without providing some major fixes, US business will continue to export jobs directly as a result of healthcare costs. I conclude that healthcare is pricing itself out of business, and in the process is just going to drive CEOs to make decisions to put resources elsewhere where the healthcare cost is much more affordable."

That will certainly make our problems even worse if we lose jobs.

Mr. Barrett also expressed concern that the health care debate wasn't focused sufficiently on how to control escalating costs, but instead tended to look at who should pay. He said:

"Sadly, the current debate typically centers on “who pays”? This leads to endless discussion on which financing mechanism to utilize to increase the funds deemed necessary to change our healthcare system. While entertaining, it does not address the inherent problem in the current model; namely the excessive costs."

These two reform efforts are extremely challenging due to their magnitude, but also very crucial. Even if the 2001-2003 tax cuts expire, there is still the AMT problem to fix which is also costly. How to approach solving these difficult issues are good questions to ask of candidates for Congress and President this year. I proposed a few questions on these budget matters a few months ago.

What would you want to ask the candidates?

What do you think can be done to address the enormous fiscal challenges that lie ahead?

Tax Reform and Health Care Reform

Annette Nellen — Wed, 18 Jun 2008 17:06:00 -0400

We hear lots of talk about tax reform and lots about health care reform, but rarely hear about the two together. While there are proposals to change the exclusion for employer-provided health care, such as President Bush's proposal to remove it and provide a standard deduction for health insurance, they typically don't consider either the entire health care or tax reform picture.

There are significant dollars in the tax code that should be on the table in reforming health care. All of the government dollars should be in the picture in looking at how to fund any change, such as universal coverage. The largest federal tax expenditure is the one where employees are not required to include in taxable income the value of the health insurance their employer provides to them. The estimated cost of this expenditure in 2007 was $134 billion. There are other health care tax breaks as well such as the itemized deduction for medical care and health savings accounts.

The employer-provided health care exclusion is a tremendous benefit to employees. For example, Susan's employer provides health insurance to employees. Susan pays about 20% of the cost and the employer pays the rest - about $10,000 per year. Susan's marginal federal and state tax rate is 30%. Thus, she saves $3,000 of taxes from the exclusion. BUT, if the exclusion were removed, she'd end up getting $10,000 of coverage for $3,000 - still a good deal!! And, she'd likely find that she really doesn't need as much insurance as she selected from her employer. She'd also know how much it costs (today, most employees don't have any idea of what their health insurance costs). And removal of the exclusion would mean that more Social Security and Medicare taxes would be collected.

For employees in a lower tax bracket, perhaps some tax relief could still be provided.

For more information on the topic of the intersection of health care and tax reform, see a recent short article of mine from the AICPA Taxation Insider - Pot of Gold in the Employer-Provided Healthcare Exclusion (6/08). It has more of the details as well as links to various proposals and reports.

New America recently released a report about the challenges businesses face with employer-provided health care particularly given increasing costs of this fringe benefit.

There is a lot of money in the employer-provided health care exclusion (a pot of gold!). It is time to make a significant modification to it in order to better target the government dollars in this tax break, remove the adverse impact it has on health care spending, recognize the changed ways of living and working such that expectations of getting health insurance from your employer rather than on your own are outdated and too costly in our global economy, and to improve the federal income tax by broadening the base and lowering the rates.

Trends as a Guide to Tax Reform

Annette Nellen — Mon, 16 Jun 2008 16:17:00 -0400

Last week, the Center for Disease Control and Prevention (CDC) reported that life expectancy has gone up, hitting a "record high in 2006 of 78.1 years."

This kind of trend data is relevant to tax reform discussions, but not often highlighted. Tax reform discussions could be better focused if we spent more time looking at how the world has changed since most of our current rules were enacted and how it will likely continue to change.

Several years ago I started gathering data on trends and using it to show where our tax law was outdated or working contrary to a trend, that is - contrary to reality. A few simple examples:

1. Longevity - this is clearly relevant in considering our Social Security system. When Social Security was created in the 1930s, life expectancy was lower than retirement age. That is clearly not the case today.

2. Who lives in poverty - In 1959, 35.2% of people age 65 and older were in poverty. In 1996, that percentage had dropped to 10.8%. (Leatha Lamison-White, Poverty in the United States: 1996, U.S. Department of Commerce, Bureau of the Census, Table C-2, page C-5). The federal tax law (as well as some state income tax laws) include exemptions and credits for being old. Years ago it may have been appropriate to assume that most elderly needed a tax break, but that is not true today.

3. The US share of world GDP continues to drop. Our foreign tax rules were written decades ago when US companies had a dominant role in the world markets. Today, US companies face a far more competitive environment in a global economy and our tax rules may be hindering their ability to compete.

4. Intangible assets are more varied and important today than a few decades ago. Many tax rules, even ones written in the past 20 years may not make sense in our information age. For example, PL 86-272 enacted in 1959 to provide guidance on when a multistate business could be subject to income tax within a state, only applies to sales of tangible personal property. Also, Internal Revenue Code Section 197 written in 1993 provides a 15-year amortizable life for most acquired intangibles. That life is likely too long today due to rapid changes in technology.

Here is an example of the type of trends analysis that could help guide tax reform discussions. This is just a draft - there are many more examples of trends and of current tax system flaws they help point out. (Click here for a pdf of the following chart - it's easier to read.)

Trend and Examples

Relevance to Tax Law Design

U.S. businesses face an increasingly greater competitive environment

§ Technology and tax or financial incentives have lowered the barriers to entry into many markets § Economic growth is projected in non-OECD countries post-2000§ Reduction in trade barriers (NAFTA for example)§ Growth in E-commerce

§ Double taxation of corporation income increases the cost of capital in the U.S. Many other countries have an integrated corporate/individual tax system.

§ Many countries offer research incentives. U.S. research tax credit is a temporary measure. § U.S. tax treaty network is not complete. § Withholding rates may not align with free trade policies.

§ Some tax rules don’t work well with e-commerce, such as sales tax collection and sourcing of transactions

§ Corporate tax brackets are not adjusted for inflation.

Shift from industrial age to information age

· Decrease in tangible goods as percentage of GNP, and growth in services · Changes in consumption patterns (such as consuming more services and intangibles and less tangible goods)

§ For many intangibles, 15-year life under IRC Section 197 is often too long.

§ Eroding tax bases for state and local governments - typically, property and sales tax bases do not include intangibles and services. § P.L. 86-272 - the protections and clarifications of this law only apply to income taxes and tangible personal property.§ Consumer Price Index (CPI) has reportedly not kept up with product and consumer changes. The CPI has tax implications: annual inflation adjustments to personal exemptions, standard deduction and non-corporate tax brackets. A 1997 estimate noted that failure to correct the CPI (downward) reduced federal revenues.," March 1997; http://www.house.gov/jec/fed/inflat/cpi-tax/cpi-tax.htm.

Taxation shifts to payroll and personal income taxes, base broadening, and environmental tax considerations

· Decline in marginal tax rates and broadening of tax base · Expanding view of tax as an incentive tool · Shift from corporate income and property taxes to individual income and payroll taxes · Growth in use of consumption taxes and environmental taxes (worldwide)

§ Increased cost of non-taxable fringe benefits, including employer-provided health insurance, erodes payroll and personal income tax bases.

§ Increase in deductions, exclusions and credits makes the law less neutral and creates inefficiencies. Such provisions also make the law more complicated.§ P.L. 86-272 - The protections and clarifications of this law only apply to income taxes. § The U.S. is the only OECD country that does not have a VAT. § Opportunity to address environmental concerns with polluter pays taxes and have a tax shift that may improve efficiencies in other taxes.

Changes in business operations

· Growth of virtual workplaces and markets · Telecommuting and distant workers, global work teams · Increasing need for special expertise on an as-needed basis · Shorter product life cycles due to global competition · Changed production techniques: JIT, outsourcing, ability to address specialized customer needs

§ Some depreciation (MACRS) lives may be too long.

§ Inventory valuation rules (Sec. 263A) are fairly complex and require more costs to be treated as inventoriable than is required for financial reporting purposes (GAAP). Rapid turnover and quick obsolescence of goods may not have been considered in 1986 when these rules were adopted. § Property tax valuation/obsolescence schedules may be too conservative. § For many intangibles, 15-year life under IRC Section 197 is often too long. § Temporary nature of research tax credit limits the benefits of this credit to the U.S. economy. § Nexus standards need to be reviewed and standardized among states. For example, should location of telecommuting employee in a state cause employer to have nexus in that state?§ The tax law should not hinder alternative compensation techniques, including equity compensation. § Outdated and complex worker classification rules play too great a role in hiring practices which adversely affects both employers and workers.

Increasing gaps

· Increasing gap between high-income and low-income individuals (such as in California – see CBPP report)· Education opportunities · Access to technology (such as broadband, opportunities for skill development/enhancement)

§ Some low-income individuals may face high marginal tax rates due to phase-outs of earned income tax credit (EITC), child-care credit, education credits, etc.

§ States as a whole rely on the regressive sales tax and excise taxes for about 50% of their revenues. See Census information at www.census.gov/ftp/pub/govs/www/statetax.html.§ Tax breaks for higher education are not refundable and therefore are not helping those most in need.§ Some state income tax systems are not as progressive as the federal income tax system. In states with incomes tax, the number of tax rate brackets ranges from one to ten, some states, such as Colorado and Michigan have a single flat tax rate. See FTA at http://www.taxadmin.org/fta/rate/ind_inc.html. § Many states do not have the equivalent of the federal EITC (see 2008 report of the Center for Budget and Policy Priorities). § Tax compliance costs tend to be high due to complications of the filing system in general and calculating the EITC in particular. Over 70% of individuals claiming the EITC used a preparer (AICPA, Understanding Tax Reform, 2005, p 3).

What trends and tax system flaws would you add to this starting list?

Global warming, reality, and gas prices (including taxes)

Annette Nellen — Wed, 04 Jun 2008 13:10:00 -0400

Senate debate this week on addressing climate change is raising concerns about further raising the cost of gasoline (see NY Times article and Senate Environment and Public Works Committee website for debate info). While higher prices are hard to sell to the public, it sounds like we're missing the point. If we want to address climate change, we need to reduce greenhouse gas emissions. The most significant greenhouse gas is carbon (CO2) from burning fossil fuels such as oil. Economics would say to reduce demand of something, raise its price.

I'd like to see the Senate consider a carbon tax that would not only help reduce demand for gasoline, but if applied broadly, would help everyone to understand that burning fossil fuels produces greenhouse gas emissions. Just as higher gas prices today have caused people to consolidate trips, reduce driving, consider buying cars that get greater miles per gallon, and use public transportation, a carbon tax could do the same. It would be a polluter pays tax that adds the cost of environmental damage to the price we pay for activities that cause that environmental damage. The funds could be used to fund R&D on ways to produce energy that does not harm the environment and to reduce an existing tax (a "tax shift") - perhaps the AMT since it is not making our income tax system be simple or efficient.

Also, transitional and equitable relief must be considered. Certainly it would be very disruptive to people's lives and the economy to start a carbon tax on utility companies and/or their customers today because they can't overnight change so as to not burn fossil fuels. A tax should be implemented in over several years. Initial revenues can be used to help coal burning utilities to reduce their greenhouse gas emissions, such as by also using renewable energy sources. Also, equitable relief should be provided such as rebates on utility bills for low-income individuals.

BUT - we should not avoid doing something about climate change because gas prices will go up because of course they need to go up if we want to discourage so much burning of oil so we can start to reduce greenhouse gas emissions.

Decennial Tax System Discussions

Annette Nellen — Mon, 26 May 2008 04:45:00 -0400

At least once every decade since at least the 1960s, there has been talk of serious tax reform in Congress. I came across a 1998 quote from then chair of the Senate Finance Committee, Senator Roth announcing his desire to review the international tax provisions in light of the current state of global markets. He stated: "We need to fundamentally rethink the tax code with a view to enhancing American competitiveness in the new global economy and helping the American workforce. In order to ensure that we enact policies that will lead the United States into the 21st Century at the forefront of competition, as Chairman of the Finance Committee, I intend to hold hearings over the coming year to explore the ramifications of the changing world economy and the needed reforms in both the international tax and trade areas. The cornerstones of these hearings will be ensuring economic growth in our domestic economy and competitiveness overseas. We must determine how our existing international tax regime, which was designed to address the needs of a totally different age, can be reengineered to complement the changing international marketplace and changing business profiles. We must also strive to encourage the creation of more jobs that draw on these new opportunities." [Source: "U.S. Finance Committee Chair Roth's Address at Forum on Taxation of Multinationals," 98 TNI 192-24, October 1, 1998.]

Wow! It sounds like this could have been said in 2008. The Senate Finance Committee held a hearing on 4/15/08 to get ready for tax reform discussions. Treasury held a conference and issued a background report on reform proposals in 2007. The Joint Committee on Taxation has issued reports on international tax issues and reforms in the past few years (2007 and 2006). In 2006, the House Ways and Means Committee held a hearing on international competitiveness and tax reform.

Other than repeal of FSC rules, not much has happened for fundamental international tax reform. Discussions on worldwide versus territorial taxation will continue, along with discussions on border-adjustable taxes, tax havens and more.

What do you think we'll be talking about in 2018?

Helping the Federal Income Tax Cry Out for Reform

Annette Nellen — Mon, 19 May 2008 20:41:00 -0400

While well-intentioned and needed, a recent bill passed by a tax-writing committee also indicates the need for a serious look at our federal income tax system to see how it can be simplified, made more logical in terms of what we want it to do in addition to raising revenue, and how it can support economic growth. This bill makes it even more obvious that our federal income tax is in need of some type of reform.

On May 15, 2008, the House Ways & Means Committee passed HR 6049 which makes many changes to our federal income tax. Many of these changes are 1 year extenders of provisions that expired at 12/31/07, such as the itemized alternative deduction for sales tax, the deduction for qualified tuition and expenses, and some energy incentives. In total, 33 expired provisions were extended for one more year! That avoids the issue of having to determine if they should be made permanent or if they have served their purpose and are no longer needed. These temporary provisions make tax planning difficult (for example, will the benefit be renewed or should alternatives be pursued by taxpayers).

HR 6049 also includes a few new provisions, such as a temporary above-the-line deduction for real property taxes, limited to $350 ($700 for a joint return). Why? What is the rationale for allowing a deduction for state and local taxes? [For more on this topic, see a short article - Goodbye State Tax Deduction (5/08); perhaps I should have called it "Hello new state tax deductions."]

Some of the funding for HR 6049 comes from a temporary modification in corporate estimated tax payments (a non-permanent source of funding).

These elements of HR 6049 are an indication that it is time for some type of tax reform. Isolated changes, such as the temporary deduction for real property taxes by non-itemizers, should instead be done in the larger context of what type of income tax do we want/need and how do we get there. For example, do we want an income tax wtih a broader base and lower rates? Do we want an income tax with lots of temporary provisions? The presence of so many temporary provisions in the tax system add to its complexity, hinders effective tax planning, and takes time away from serious tax reform discussions. It also perhaps helps those wanting reform to point to a tax law in even greater need of reform!

REFORM: Health and Taxes -- VAT's That?

Joanne Kenen — Thu, 15 May 2008 17:22:00 -0400

Ordinary Americans may not realize how closely linked their health care is to the U.S. tax code, but a bevy of analysts and economists could give them an earful. The major health reform plans on the table involve changes—in some cases pretty significant changes to tax treatment of health insurance, particularly the tax breaks for insurance we get through our jobs. Over at the Taxvox blog, sponsored by a joint program of the Urban Institute and the Brookings Institution, Howard Gleckman explains some of the options in a post nicely titled, "Forget Death and Taxes, How About Health and Taxes?"

Gleckman focuses on proposals for a Value Added Tax or VAT, a model seen in several European countries. VAT scenarios are circulating more in the academic/think tank world right now than in the political discourse about health care, but as Gleckman points out:

"The expiration of the Bush tax cuts and the ongoing Alternative Minimum Tax mess will surely drive big tax changes in 2009 or 2010. Health reform is also on the table, although short-term odds for reform may be longer. The question is: How will these two mega-issues fit together?"

A second question, of course, is how would a VAT be implemented—what other subsidies, refunds, credits, exemptions, etc. would cushion poor people from what would otherwise be a regressive tax? VAT isn't the focus of the New America health policy program but we're open to all sorts of ideas that could help us cover all Americans, control costs, and improve quality.

VAT - Why do we avoid the word in tax reform debates?

Annette Nellen — Mon, 12 May 2008 21:48:00 -0400

A few days ago, the GAO released a report - Value-Added Taxes: Lessons Learned from Other Countries on Compliance Risks, Administrative Costs, Compliance Burden, and Transition.

Why? Doesn't the GAO know that the US doesn't like the VAT?

In the report, the GAO notes that tax reform includes discussion of a VAT and that it was asked to do this report by Congressmen Jim McCrery and Jim Ramstad of the House Ways & Means Committee. The countries reviewed by the GAO in this report are Australia, Canada, France, New Zealand and the UK.

A search of bills in the 110th Congress with the word VAT only produced H.R. 2600 dealing with the WTO and border adjustments. Of course, there are proposals that are VAT variations, but they do not use that word. For example, the Freedom Flat Tax (H.R. 1040) appears to be the Hall/Rabushka model that was also promoted for years by Congressman Armey. That tax is a modified subtraction method VAT for businesses. The key modification is that businesses get a deduction for wages (which they would not get under a VAT because wages are a key element of valued added - which is taxed). But, the wages are taxed at the employee level to allow for a large personal/dependency exemption designed to alleviate some of the regressivity of a VAT.

But H.R. 1040 doesn't use the term VAT. Former Congressman Armey took the same approach. Years ago, I tracked down a few quotes from him including that the VAT is "possibly the most insidious tax scheme ever devised." [See article by Armey, Caveat Emptor: The Case Against the National Sales Tax, Policy Review, Summer 1995, p 31 and Anne Reilly Dowd, Politics and Policy: Real Tax Reform Gathers Steam, Fortune, 3/16/95, p 14 quoting Congressman Armey as saying, "a VAT is an insidious hidden tax, which I will fight forever!"] Congressman Armey had a PhD in Economics so it is likely he knew the flat tax was a modified subtraction method VAT. Perhaps it was the simpler credit invoice method he thought was awful.

In 1996, Congressman Gibbons introduced H.R. 4050 which specifically used the term VAT. This bill called for a 20% subtraction method VAT. This proposal kept an income tax for high income individuals to help preserve the distributional neutrality of the current tax system.

The AICPA and ABA Tax Sections (among others) have issued reports (years ago) on the credit invoice VAT. People have talked about it and many businesses today deal with it.

The US is the only industrialized country that doesn't have a VAT. In the tax reform discussions in the mid-1990s, Australia was also without a VAT, but it added a goods and services tax (GST) in 2000; the GST is a VAT.

Almost all states use a sales tax and some use either as an addition to a sales tax or instead of a sales tax, a gross receipts tax (GRT). The sales tax and GRT have flaws that could be eliminated with a VAT - notably pyramiding where a tax is paid on a tax because of the continual payment of sales tax or GRT along the production and distribution chain (although states do not impose sales tax on good purchased for resale, there is still sales tax paid on other items by businesses).

So, it seems that lawmakers may have a notion that the public doesn't want a VAT. While a VAT (as well as any tax), can be designed to be simple, the addition of special rates and exemptions creates complexity. The GAO report helps explain where complexities exist and the experiences in other countries - we can learn from the many examples out there of how to create a simple VAT.

While I'm not necessarily advocating for a VAT, I would say that as states continue to struggle with a variety of sales tax issues and some consider GRTs, and the feds consider a flat tax, national retail sales tax and other forms of consumption taxes, a VAT should also be considered. It should not be left out of the debate under some notion that the public has VAT-phobia or that VATs are too complex. And if the public and perhaps lawmakers have VAT-phobia, then we need to help educate people on how a VAT works, the forms of VAT and its advantages and disadvantages compared to other types of taxes we are familiar with.

In addition to the GAO report, some additional background information can be found at:

A brief summary on consumption taxes with VAT examples (by me)
A report on tax reform by the AICPA (2005)
GAO, Understanding the Tax Reform Debate (2005)
Links to a variety of information on tax reform (my tax reform website)

What do you think about a VAT? What do you think about being more honest in tax reform debates as to which proposals are VAT variations?

Can You Name All of the Tax Breaks to Support Higher Education?

Reid Cramer — Mon, 12 May 2008 18:21:00 -0400

The tax code is a mess. Even those pointy-headed economists that can bicker about anything (except the gas tax) agree that it is too complicated. They cry in virtual unison that the growth of tax deductions, credits, and deferrals leads to inefficiencies and market distortions (yikes!).

To confirm these fears, we need look no further than the education arena. Do you know how many tax provisions there are designed to support post secondary education and workforce training? It's a long list.

There are tax breaks for contributions to specific accounts and savings plans such as Coverdell education savings accounts, section 529 college savings plans, pre-paid tuition plans, and penalty-free withdrawals from IRAs. Further, there are other tax breaks that cover the treatment of educational expenses. These include the Hope Credit, Lifetime Learning Credit, deduction for tuition and fees, and the deduction for interest on student loans. So, that's a count of at least 8.

Many of these overlap and as such they cause a great deal confusion among consumers. Last week the House Ways and Means Commitee held a hearing on this topic and I sent in some testimony that offered my take on the matter.

I’m in favor of serious tax reform. We probably need to consolidate and simplify. That said, we have learned a great deal with the experience of 529 college savings plans over the past few years which provides a blueprint for how to construct an attractive savings platform for education and training. We need to stop adding tax breaks to support savings for a growing number of purposes and spend more energy looking at how to create the institutional supports that maximize savings. I'll gladly make this point again when serious tax reform is put back on the political front burner.