Back in Action

For readers that paid attention to this blog in the second half of 2011, I apologize. I intended to take a one-month hiatus in December. The one-month hiatus turned into two months and then three months.

Meanwhile, there has been no shortage of "tax news." Most of it is politically motivated rubbish. Team Obama continues to hype its class warfare fantasy that increased taxes on the "rich" will solve virtually every social, economic and environmental problem that has surfaced in the past decade. The political right has countered with its own policy lies and distortions. It's going to be a long year for us political independents.

I can't possibly "catch up" on the barrage of tax news clippings over the past 10 or 11 weeks. So I'll jump back into the fray as developments catch my eye.

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As I've previously observed, Team Obama is completely incoherent when it comes to tax policy. Sometimes, Obama talks the talk of common sense tax reform. Mostly, Obama walks the walk of a populist Robin Hood. Sure, he wants tax simplification ... but he also wants to expand tax incentives for "favored" industries and activities. Sure, he wants to improve the competitiveness of U.S. businesses ... so long as the government can use tax policy to shape the winners and losers in the domestic business landscape.

The President's fiscal 2013 budget proposal reflects his irreconcilable tax priorities: simplification; competitiveness; corporate welfare; income redistribution. The former two goals would be good for all of us. The latter two goals are good for politicians seeking annuities -- in the form of political donations -- from corporate lobbyists, unions, and other special interest groups. Martin Sullivan puts it this way:

As it is trying to promote tax reform [in its fiscal 2013 budget proposal], the Obama administration is defying the logic of real tax reform -- the economic logic that tax neutrality is best for growth and job creation except in extraordinary circumstances.

What administration incentives hinder true tax reform efforts? A conversion of the already complicated section 199 manufacturing deduction into a two-tiered incentive. A temporary incremental wage credit for small business. A tax credit for investment in communities that have experienced a job loss event. A tax credit for moving expenses when companies move jobs to the United States. New tax credits for alternative energy to replace the existing ineffective and outdated ones.

This is big government through tax policy. The complexity of these new tax breaks is extraordinary even by the standards of our tax code... And as for the coming corporate tax reform, there is no more place for them there than there is for a fox in the henhouse. (134 Tax Notes 922 (Feb. 20, 2012))

In his 2008 election campaign, President Obama vowed that he would renounce "politics as usual." That empty promise, like so many others, was simply "politics as usual." No surprise that, come 2012, we're getting more "politics as usual."

Team Obama is not interested in, nor committed to, fundamental tax reform. The existing system creates winners and losers, and the Obama administration believes that the government exists to create winners and losers. Team Obama is very comfortable with the status quo, so long as it can influence the choice of winners and losers.

The media and the blogosphere will spill much ink on the topic of "fundamental tax reform" this year. The Obama administration will give a wink to simplification and a nod to increased competitiveness. But it's all about distraction in 2012. Any debate about "tax reform" takes some of the focus off trillion dollar budget deficits as far as the eye can see. It's savvy "politics as usual" from a master of smoke and mirrors.

Get a Real Job

The chair of the American Bar Association Section of Taxation wants tax advisors to get a real job. (Thanks to Paul Caron for archiving the PDF copy of the Tax Notes article.)

On June 9, 2011, Egerton mused that:

The goal that Congress ought to have is to put as many of us out of business as possible. Now I say that with full confidence that it's not going to happen," said Charles H. Egerton. Although Congress may stop short of completely restructuring the code, he said, "we'll have to reinvent ourselves. That's a price we need to be willing to pay."

Egerton's comments in an obscure industry publication for tax nerds won't receive much attention. That's a shame. I believe that Egerton is onto something. As he says, our "[Income Tax Code] is just an inscrutable mess. It is complex. It is largely inadministrable." And he's not even considering state tax rules and regulations!

Take a few moments to consider the bigger picture. In America, our quality of life is driven by our political freedom and economic prosperity. Our economic prosperity is driven by the creativity and innovation of our entrepreneurs, technologists and business leaders over the past two centuries. Sure, we had a good "business climate" to promote economic growth (stable rule of law, property rights, market-based capitalism, etc.). But within that temperate climate, Americans have built a remarkable economic engine. We have been really good at developing, financing, producing and marketing goods and services into domestic and international markets. Or more simply: making and selling things.

Where do tax professionals fit into that picture? What value do tax professionals add to the "commercial matrix" of development, finance, production and marketing? The answer may bruise the egos of practitioners and academics from both sides of the political spectrum. The answer is: absolutely none. With respect for your virtues, brothers and sisters, we are simply leeching off a "complex, inscrutable and inadministrable" regulatory regime.

So we have developed an army of tax professionals -- intelligent, earnest, focused men and women -- who contribute virtually nothing to the long-run evolution of the "real economy." As a nation, we allocate nearly half a trillion dollars to tax planning and tax compliance each year -- half a trillion dollars that could be used in more productive activities. Sure, some of us will argue that 'tax professionals help clients comply with the tax rules as they are, and that keeps more cash in the private economy where it will be invested more efficiently than cash in the government coffers.' However, that argument rings hollow. We aren't making things better by leeching off the commercial matrix. We shouldn't (and we don't) need an army of tax professionals to tend to the clients. We need a better, simpler tax regime. And we need more intelligent, earnest, focused men and women involved in the "real economy."

I believe that the tax community should take Egerton's challenge to heart, and begin working on serious proposals to "downsize" our ranks by drastically simplifying the U.S. tax regime. Many tax professionals will resist the challenge, because they earn a comfortable living. And let's face it: displacement from a specialty niche in tax would be socially jarring and economically painful for many. But no pain, no gain. We are currently part of the problem. One of our cultural legacies is our ability to troubleshoot problems. Perhaps the U.S. tax community can rise to the challenge.