THE FAIR TAX, the UNFAIR TAX, and the SIMPLIFIED TAX
I have spent the past three weeks in a series of intensive tax courses, and only now have come up gasping for air. It is good to be back in the real world once again.
During these three weeks, some recurring thoughts have become apparent, and I would like to share them with you.
I should say at the outset that these thoughts are my own, and in no way reflect the opinion of the Magazine or itself. Nor are these thoughts aligned with any political party or tax theory. These are merely my thoughts developed over years of a local tax practice.
With those caveats, let's get started.
THE FAIR TAX
This idea is seductively simple, and makes good sense, if we could only figure out what is fair. Back in 1917 the Russian Revolutionaries worked out a similarly seductive formula: From each according to his abilities; to each according to his needs.
A similarly noble ideal, and look where it got them!
The reality is that the programs of the Federal government are seriously underfunded, which is why we have deficits every year, and recurring Congressional resolutions, extending the funding.
Incidentally, I was talking to a friend in IRS recently. She was talking about how low the morale is in the IRS these days. They don't know how secure their jobs are, because they've been through 4 of these resolutions in 2011. The last one, at the end of December, went right down to the wire, and they had distributed contingency plans about how they would shut down if the funding had not been extended.
Talk about living from paycheck to paycheck!
Low morale in the IRS. Who of us in Small Business has not been there? I wanted to say, Welcome to the Real World!
So, what is fair, and how do we decide and agree on fair? The Congress and the Administration in Washington spent a year deciding they could not decide the answers to these questions. The fair thing to do, evidently, is to maintain the 30,000 pages of the US Tax Code without a fundamental overhaul. Maybe 32,000 pages by now.
THE UNFAIR TAX
There is one thing the policy-makers in Washington do agree on, though. And that is that people who deliberately hide their tax liability are not paying their fair share, and should be caught and made to pay.
Not paying your tax is the most unfair tax of all, because it leaves the rest of the tax-paying public to shoulder more of the burden.
Were talking about The Tax Gap, or the difference between the taxes owed and the taxes paid.
IRS and the Congress know where this Tax Gap comes from - it's coming from Small Business America. More specifically, people who just don't file a return, or don't pay the taxes due on their return account for 16% of The Gap.
By far the biggest component of the Gap - almost 4 times the non-filers and non-payers - are the small family businesses. IRS thinks we underreport our revenues and overstate our expenses. In doing so, we shave our profits and ultimately pay less taxes.
Absent coherent tax policy from above (see Fair Tax), guess where the IRS pressure is going to go? Mr. and Mrs. Joe Sixpack, who operate a small company with a few employees. That's 90% of the businesses in America.
THE SIMPLIFIED TAX
In New York they would say, FUGGETABOUTIT! AINT GONNA HAPPEN! In Fort Mill I would say, They spent a year, and couldn't agree on anything substantial, so how can they put together something as complex as a simplification of the Tax Code?
Don't think of the IRS as the Bad Guy in all this. They merely execute the laws the Congress passes. And if Congress (hopefully working with whoever is in the White House) doesn't pass overhaul legislation, the IRS will continue to enforce the laws that are on the books.
But that's not the whole story. Good little public servants that they are, if they can't get a Fair Tax, and if they can't get a Simplified Tax, they'll go after the Unfair Tax. While they don't know precisely who to look at, they know exactly where to go to find them.
Every year their computers get better. What you don't see is that they are moving to a common, real-time database that is both huge and complex.
The theory is that they can run database queries to identify taxpayers that are good bets to have shaved their taxes.
The next few years are going to be about policing The Unfair Tax. If you're in Small Business, now is a good time to make sure your tax reporting is as accurate as you can make it, and that you can prove everything you say happened.
Beacon Small Business Solutions