If there is one word that has characterized the campaign of President Obama that word is "change." So it seems a fair question to ask what the new Administration might have in mind, or could have in mind, or should have in mind, by way of change to the United States tax system. After all, that system is the very lifeblood of the country and yet it is a system that -- alas -- stands much in need of change.
H. David Rosenbloom writes: The Obama Administration would approach that task with two enormous advantages: First, ours is fundamentally a tax compliant country. Americans generally understand the need for taxes and, by and large, voluntarily comply with the tax rules. That is far more unusual and important than most people realize. There are many countries in the world where taxes are viewed either with suspicion or as some sort of national game. We exhibit those tendencies as well, but for the most part at the margin. The fact that Americans can be counted upon to pay attention and attempt to follow the rules represents an invaluable "natural resource."
Second, we have the best tax administration in the world, bar none. The Internal Revenue Service is a fantastic agency, which regularly collects the enormous sums needed for our government to function, with a minimum of corruption and error. This much under-appreciated arm of government is a treasure, an international rarity, and one that the Obama Administration would be well advised to support and encourage.
...
The political situation, insofar as tax change is concerned, is perhaps not as clear as some observers may think. Although President Obama enjoys substantial majority support in both the House and the Senate, he does not necessarily have the 60 votes needed in the Senate to close off a filibuster. It all depends on whether the fifty-eight or fifty-nine Democrats can be counted upon to step forth in support of what he proposes and on whether he can entice a couple of Republicans to do the same. More importantly, the Executive never obtains exactly what it wants when it submits tax proposals to Congress.
...
First, the “small” stuff: For individuals it seems inevitable that the top marginal rate of 35 percent will need to be raised... back to something like the nominal top rate of 39.6 percent that prevailed [in the Clinton Administration]...
We obviously also need to have the estate tax maintained, something President Obama has unequivocally endorsed. That tax falls on a narrow group of extremely wealthy families, and it would be foolhardy in the extreme to concede the revenue it raises much less to repudiate the modest redistributive effects that the tax produces.
We probably have to deal, as well, with the alternative minimum tax. The AMT has been another utterly non-transparent way for Congress to deal with raising taxes, but has become something of an albatross because its non-indexed rates and exemptions make it apply increasingly to the middle class.
...
Now for a BOLD MOVE: If the Obama Administration really wants change in the tax area, what it should do, in addition to the relatively small-bore items just mentioned, is to move aggressively to fund the Internal Revenue Service so that it can do its job. The agency has been starved for resources for years, as the economic world in which it operates has grown increasingly more sophisticated. If the Administration wants to do something dramatic, it should prod Congress for sufficient funding for IRS so that it can cope with the enormous task of tax administration entrusted to it.
...
On the business front, what change is in store? It would appear that the top corporate tax rate will have to be reduced. The United States currently has one of the highest corporate tax rates in the developed world.
...
As far as U.S. taxation of cross-border investment is concerned, there is surely a need to take a close look at the foreign tax credit, a little understood but highly intricate set of rules that could be vastly simplified and tightened. It would seem that this area, which Congressman Rangel proposed to reform in a Bill introduced in October 2007, would be far more fruitful than another attempt to repeal "deferral," the non-taxation of the active foreign income of controlled foreign corporations.
...
For inbound taxation, involving investments by foreign persons in the United States, the Obama Administration should take a careful look at earnings stripping, the practice whereby deductible interest payments "strip" income from the U.S. tax base and thus preclude substantial tax. The current rules are both inordinately complex and ineffective, an unappealing combination. In addition, serious attention needs to be paid to the issue of treaty shopping.
...
More BOLD MOVES? But, of course: How about a serious effort to achieve radical simplification in our tax laws? As the saying goes, “yes, we can.” All we have to do is accept "rough justice" tax rules that are fair in general but that do not attempt to be "fair" to each and every taxpayer individually.
...
Finally, for the tax treaties, a BOLD MOVE would be to attempt to integrate these agreements more closely into the process of tax policy decision-making... A bit of statesmanship could go a long way toward bringing the treaties more closely into alignment with overall U.S. international tax policy. Such alignment could be of great utility, both in helping US industry in its foreign investment and in more carefully applying the tax laws to the investments that we welcome from abroad.
Subscribers can access the complete commentary on the LexisNexis Tax Center. Additional fees may be incurred.