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Tax Reform

Reflecting Our Values

Mary-Jo Kranacher, MBA, CPA/CFF, CFE

Throughout the history of taxation in the United States, taxes have been used to encourage or discourage certain types of behavior. For example, personal deductions for real estate taxes and mortgage interest on primary and secondary residences have encouraged home ownership, while high excise taxes on tobacco products, heating oil, and gasoline have attempted to curtail their use.

Of late, there has been much discussion among our legislators and those in the media about the need for tax reform, to reduce complexity and to enhance the system's overall fairness. But there are differing opinions on how to define the concept of equity and what direction reform should take—generally along partisan lines.

Historically, equality and progressivity have been cornerstones of the U.S. tax structure—a progressive tax structure applies a higher marginal rate to higher income earners—but over the past few decades, our federal tax system seems to be moving away from these goals. For example, the alternative minimum tax (AMT) has been steadily affecting more and more middle class taxpayers because it has not been adjusted for inflation since 1969 when it was first enacted. And the Social Security payroll tax applies only up to a cap (106,800 for 2011); taxpayers with incomes above this cap do not pay any more in taxes as their income rises.

Reducing Unemployment

Many argue that we can't raise taxes on the wealthy because they are the job creators. But where are the jobs? Unemployment and housing foreclosures are the desperate reality for many in our society. Providing tax credits for a business that incrementally increases its workforce could encourage businesses to hire more employees; historically, these tax credits were restricted to hires from certain groups, such as veterans, the physically challenged or long-term unemployed. Our tax code has a history of providing incentives to achieve desired social and economic goals. Let's use it to help create more job opportunities for all workers. Such a program could potentially pay for itself because of the added income tax revenue that would be collected from a larger workforce.

Growing the Economy

As part of last December's Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act, Congress enacted a one-year tax holiday that reduced the Social Security withholding rate by two percentage points for employees—from 6.2% to 4.2%. Its cost was approximately $120 billion and it expired as of December 31, 2011. By most economists' assessments, the extension of this tax cut is essential to the health of our economy. But how do we pay for it without running up an even larger debt?

  • At the time The CPA Journal went to press, the U.S. Senate had agreed to a two-month extension but House Republicans had publicly opposed the bill. There were reports in the media that Democrats proposed to fund this plan by raising taxes on taxpayers earning more than $1 million annually. But instead the proposal pays for the tax cut extension with new fees on Fannie Mae and Freddie Mac, the mortgage lending giants. These fees will, no doubt, be passed on to home buyers, and will further exacerbate problems in the housing market.

Shore Up Housing

According to the U.S. Department of Housing and Urban Development's Office of Policy Development and Research, “Housing data for the third quarter of 2011 indicate that the recovery in the housing market continues to remain fragile” (“U.S. Housing Market Conditions,” November 2011). For most Americans, their home is their largest single investment. Unless we can establish tax policies that will help our housing sector bounce back from its economic ailments, prospects for an economic recovery will likely remain elusive.

Timeless Advice

A message that President Roosevelt wrote to Congress on June 19, 1935—advocating an inheritance tax in addition to an estate tax—continues to have relevance today. In the message he said:

  • Our revenue laws have operated in many ways to the unfair advantage of the few, and they have done little to prevent an unjust concentration of wealth and economic power. … Therefore, in spite of the great importance in our national life of the efforts and ingenuity of unusual individuals, the people in the mass have inevitably helped to make large fortunes possible. … Whether it is wealth achieved through the cooperation of the entire community or riches gained by speculation—in either case, the ownership of such wealth or riches represents a great public interest and a great ability to pay.

  • As always, I welcome your comments.

Mary-Jo Kranacher, MBA, CPA/CFF, CFE. Editor-in-Chief, ACFE Endowed Professor. Fraud Examination, York College, The City University of New York (CUNY) mkranacher@nysscpa.org.

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