The current version of the Internal Revenue Code is large, complex, and flawed. There have been calls on both sides of the aisle in Congress to substantially revise it, and there are several compelling reasons to do so:
- It’s been a long time since we’ve had a new version. The time between the 1939 Code and the 1954 Code was 15 years. The time between the 1954 Code and the 1986 Code, which is the current version, was 32 years. It’s now been 28 years since enactment of the 1986, so it’s really time for a change.
- There are many tax rules that are outdated or mean to help a specific taxpayer or industry (e.g., special write-off allowances for film and TV and motorcross arenas). Several rules were created to incentivize certain actions by individuals and businesses; they may no longer be necessary or desirable. For example, there were a slew of energy-related tax breaks (some of which expired but could be extended).
I’d like to suggest another reason for a change:
A number of rules have fixed dollar limits that have not been updated in years. (Dozens of tax rules are indexed annually for inflation, but many are not.) As a result of inflation, however modest in recent years, these fixed dollar limits are ridiculous and do not reflect Congress’ original intent. Examples:
- The dollar limit on deducting business gifts is $25 per person per year. This limit was fixed in 1962. In today’s dollars, it would have to be $197.30 (based on the BLS inflation calculator).
- The dollar limit on deducting capital losses in excess of capital gains (the amount that can offset ordinary income is $3,000). This limit became effective in 1978. In today’s dollars, it would be $10,966.70.
- The dollar limit for treating losses from Sec. 1244 (small business) stock as ordinary income is $50,000, or $100,000 on a joint return. This limit became effective for stock issued after November 6, 1978. In today’s dollars, it would be $182,778.37, or 365,556.75 on a joint return.
- The dollar limit for excluding dependent care assistance (employer paid or an employee-funded FSA) is $5,000. The limit was set in 1986. In today’s dollars, it would be $10,873.31.
It’s time to have a national discussion about what we want the Tax Code to be. (The House Ways and Means Committee started the discussion with the release of a bill entitled The Tax Reform Act of 2014, which would cut the size of the code by 25% and make other dramatic changes.)
Here are some questions I’d pose in the discussion about a new Tax Code:
- Should it be a sure revenue raiser so the federal government has the funds to pay its bills as well as start to pay down the national debt?
- Should it encourage certain activities by individuals and businesses (e.g., going “green;” hiring certain types of workers; purchasing capital equipment)?
- Should it be an anti-poverty tool? (That’s what Nina Olsen, the National Taxpayer Advocate, called the earned income tax credit.)
- Should it make U.S. corporations competitive with those in other developed countries?
- Should it eliminate the marriage penalty entirely (so that it makes no difference taxwise whether a couple is married or not)?
I’m up for this discussion. Is Congress?