Tax

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:

1. Tweaks to the federal tax law to make compliance and doing business easier for small businesses.
2. 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:

In reaction to a US Supreme Court decision - Northwestern Cement v. Minn., 358 US 450 (1959), which many members of Congress thought would lead states to tax businesses beyond what they should under the commerce clause, Congress enacted Public Law 86-272 on September 14, 1959. Despite the lack of an expiration date in this legislation, it was described as a temporary measure while Congress further studied state taxation (a study established by PL 86-272). The report was completed in the mid-1960s (referred to as the Willis Commission report after the Congressman who chaired the subcommittee). However, PL 86-272 was not revised.

PL 86-272 explains when a state may impose income taxes on multistate businesses selling tangible personal property. Businesses selling services or intangibles, get no protection (or guidance) from the federal law. With more businesses selling services and intangibles today than in 1959, PL 86-272 is in need of updating.  There have been various congressional proposals in the past few years, but no changes have been enacted and there are differences of opinion between state governments and businesses on what the reforms should be. Also, recent court decisions have held that "economic presence" is sufficient for a state to be able to impose income tax obligations on a business (businesses believe that "physical presence" should be the standard). The US Supreme Court has declined to hear any of these cases. Meanwhile, the 50th anniversary of this stopgap legislation is approaching.

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."

In efforts to either raise new revenue or change behavior, or both, we sometimes see some unusual tax proposals from lawmakers. Here are a few recent examples, some of which were enacted: