July 2015

Election 2016 and Tax Reform

By John Hendrickson

As the 2016 election looms closer many candidates are focusing on tax reform. This includes several Republicans who are running for the presidential nomination who are campaigning on tax reform, which includes lowering rates and Democrats who are also seeking their respective party’s nomination who are campaigning on creating a more progressive income tax system with higher rates — especially on upper income earners. Congress is also considering tax reform, but history has demonstrated that passing significant tax reform is very difficult and takes compromise. Perhaps one substantial piece of legislation to protect taxpayers has recently been introduced by Senator Chuck Grassley (R-IA) and Senator John Thune (R-SD). The Taxpayer Bill of Rights Enhancement Act is meant to provide further protections of taxpayers against abuse and corruption from the Internal Revenue Service (IRS).[1]

The objective of the Taxpayer Bill of Rights Enhancement Act is to pass “comprehensive legislation to improve customer service at the IRS, create new taxpayer protections, and update and strengthen existing taxpayer protections.”[2] Strengthening and protecting taxpayers against abuse “comes amid gross mismanagement and inappropriate actions by IRS employees that have shaken what little confidence taxpayers may have had in the agency.”[3]

This is true when the IRS was exposed for abusing their power especially against politically conservative individuals and organizations. As Senator Thune stated:

This bill is intended to enact a much needed culture change at the IRS, an agency whose reputation and trustworthiness has severely deteriorated with the American people over the last several years. No American should have to fear that politics could play a role in their confidential tax information being disclosed to a third party, that they will be targeted based on their political beliefs, or that the IRS would not properly retain its employees’ emails.[4]

Some of the taxpayer protections in the proposed legislation include:

  • Significantly increases civil damages and criminal penalties for the unauthorized disclosure or inspection of tax return information and significantly increases civil damages for improper IRS collection activities.
  • Imposes an affirmative duty on the commissioner of the IRS to ensure that IRS employees are familiar with and act in accordance with all taxpayer protections.
  • Updates the “10 deadly sins” established by the IRS Restructuring and Reform Act of 1998, those actions by IRS employees that require mandatory termination, to include official actions taken for political purposes.
  • Permits the Treasury Department to provide status updates, and in certain instances require status updates, regarding investigations into misconduct by IRS employees — or in some circumstances third parties – to taxpayers who are the subject of the misconduct.
  • Puts the bite back into a provision, recently called a “toothless tiger” by Tax Notes, that permits taxpayers to bring a cause of action against the IRS for unauthorized collections actions.
  • Extends the declaratory judgment remedy currently available to 501(c)(3) to other 501(c) groups, including 501(c)(4) social welfare organizations, in instances where the IRS fails to act on an application in a timely manner or makes a negative determination as to their tax-exempt status.
  • Prohibits IRS officers and employees from using personal email accounts to conduct official business.
  • Provides additional authority concerning the use of taxpayer information to the IRS for the purpose of locating taxpayers due a tax refund.
  • Requires tax-exempt organizations to file Form 990 electronically and mandates that the IRS make such information available in a timely manner.
  • Imposes new requirements on the IRS with respect to email retention consistent with the existing directive from the Office of Management and Budget and the National Archives.[5]

Along with the Grassley-Thune Taxpayer Bill of Rights Enhancement Act, a number of Republicans seeking the Party’s presidential nomination will be campaigning and releasing a variety of tax reform proposals. Some proposals have already been offered and most, if not all, of the Republican candidates are looking to lower tax rates in order to create economic growth. As Michael Tanner, a Senior Fellow at Cato Institute, wrote:

All the GOP’s major 2016 candidates are expected to propose some reduction in taxes. But with tax cuts, perhaps even more than with other issues, the devil is in the details. What taxes do they propose to cut and by how much? Are the cuts designed to increase economic growth? Are they accompanied by spending cuts, or will they increase the deficits? (No, not all tax cuts pay for themselves).[6]

One of the more interesting proposals offered to reform the tax system (by lowering rates and eliminating corruption) has been offered by Senator Rand Paul (R-KY). Senator Paul, who is seeking the Republican presidential nomination, wrote in The Wall Street Journal that “the tax code has grown so corrupt, complicated, intrusive, and antigrowth that I’ve concluded the system isn’t fixable.”[7] Senator Paul has proposed a sweeping tax-reform proposal, as he explains:

I am announcing an over $2 trillion tax cut that would repeal the entire IRS tax code — more than 70,000 pages — and replace it with a low, broad-based tax of 14.5% on individuals and businesses. I would eliminate nearly every special-interest loophole. The plan also eliminates the payroll tax on workers and several federal taxes outright, including gift and estate taxes, telephone taxes, and all duties and tariffs. I call this ‘The Fair and Flat Tax.’[8]

Senator Paul described some of the details of his proposal:

My tax plan would blow up the tax code and start over. In consultation with some of the top tax experts in the country, including the Heritage Foundation’s Stephen Moore, former presidential candidate Steve Forbes and Reagan economist Arthur Laffer, I devised a 21st-century tax code that would establish a 14.5% flat-rate tax applied equally to all personal income, including wages, salaries, dividends, capital gains, rents, and interest. All deductions except for mortgage, and charities would be eliminated. The first $50,000 of income for a family of four would not be taxed. For low-income working families, the plan would retain the earned-income tax credit. I would also apply this uniform 14.5% business-activity tax on all companies — down from as high as nearly 40% for small businesses and 35% for corporations. This tax would be levied on revenues minus allowable expenses, such as the purchase of parts, computers, and office equipment. All capital purchases would be immediately expensed, ending complicated depreciation schedules.[9]

Senator Paul argues that tax reform means that “everyone plays by the same rules” and “no one of privilege, wealth, or with an arsenal of lobbyists can game the system to pay a lower rate than working Americans.”[10] Senator Paul correctly argues that the tax code is too complicated and too large:

Here’s why we have to start over with the tax code. From 2001 until 2010, there were at least 4,430 changes to tax laws — an average of one ‘fix’ a day — always promising more fairness, more simplicity, or more growth stimulants. And every year the Internal Revenue Code grows absurdly more incomprehensible, as if it were designed as a jobs program for accountants, IRS agents, and tax attorneys.[11]

It is this tax code, along with the out-of-control spending and regulation, that has created slow economic growth in the aftermath of the Great Recession. The objective of any tax reform is to not only provide certainty in regard to taxes, but also have low enough rates to encourage economic growth. As Senator Paul argues:

Most important, a smart tax system must turbocharge the economy and pull America out of the slow-growth rut of the past decade. We are already at least $2 trillion behind where we should be with a normal recovery; the growth gap widens every month. Even Mr. Obama’s economic advisers tell him that the U.S. corporate tax code, which has the highest rates in the world (35%), is an economic drag. When an iconic American company like Burger King wants to renounce its citizenship for Canada because that country’s tax rates are so much lower, there’s a fundamental problem.[12]

Senator Paul also argues, just as Senators Grassley and Thune, that the tax code has allowed the IRS to become too powerful and corrupt. As Senator Paul argues:

Another increasingly obvious danger of our current tax code is the empowerment of a rogue agency, the IRS, to examine the most private financial and lifestyle information of every American citizen. We now know that the IRS, through political hacks like former IRS official Lois Lerner, routinely abused its auditing power to build an enemies list and harass anyone who might be adversarial to President Obama’s policies. A convoluted tax code enables these corrupt tactics.[13]

As the 2016 campaign season unfolds it appears that citizens will have an opportunity to support policies that not only reform and lower tax rates, but also protect taxpayers from abuse and corruption.

John R. Hendrickson is a Research Analyst at Public Interest Institute.

The views expressed herein are those of the author and not necessarily those of Public Interest Institute or Tax Education Foundation. They are brought to you in interest of a better-informed citizenry.

[1] Senator Chuck Grassley, “Grassley, Thune Introduce Comprehensive Taxpayer Bill of Rights Legislation,” Office of United States Senator Chuck Grassley, Press Releases, June 16, 2015, <http://www.grassley.senate.gov/news/news-releases/grassley-thune-introduce-comprehensive-taxpayer-bill-rights-legislation> accessed on June 18, 2015.

[2] Ibid.

[3] Ibid.

[4] Senator John Thune, Quoted in “Grassley, Thune Introduce Comprehensive Taxpayer Bill of Rights Legislation.”

[5] Grassley. A summary of the Taxpayer Bill of Rights Act of 2015, S.1578, can be found at, <http://www.grassley.senate.gov/sites/default/files/news/upload/TBORE%20section%20by%20section%20summary.pdf> accessed on June 18, 2015.

[6] Michael D. Tanner, “Rating the GOP Contenders on Taxes,” Cato Institute, June 3, 2015, <http://www.cato.org/publications/commentary/rating-gop-contenders-taxes> accessed on June 18, 2015.

[7] Senator Rand Paul, “Blow up the tax code and start over,” The Wall Street Journal, June 17, 2015, < http://www.wsj.com/articles/blow-up-the-tax-code-and-start-over-1434582592> accessed on June 18, 2015.

[8] Ibid.

[9] Ibid.

[10] Ibid.

[11] Ibid.

[12] Ibid.

[13] Ibid.