The purpose of taxation is to raise money for our government. When designing our tax system Adam Smith resolved certain principles as guidance: Smith required our tax system to be equal (in proportion to each person’s share of the tax base), certain (so people knew exactly how much they owe), convenient (so the tax assessments arose as the taxpayer’s received the income), and efficient (a low cost of collection leaving the largest portion possible for government spending needs).
Similarly, the 1995 Joint Committee on Taxation refined these elements by asking:
1) Does the tax system hinder or promote economic efficiency?
2) Is the tax system fair?
3) Does the tax system treat similarly situated people equally?
4) Can people compute their taxable incomes and file their tax returns?
5) Can the tax system be easily administered at a low cost?
6) Does the tax system afford due process to all taxpayers so taxpayers have the ability to object to arbitrary and capricious application of tax laws?
Today, the public and tax experts alike cry for tax reformation because the current system stifles economic growth preventing the economy from prospering. The Heritage Foundation claims the current tax system, with double taxation on business income, savings, and investment, is biased, reduces incentive, discourages entrepreneurial risk taking, and is full of politically motivated credits, deductions, and exemptions. As an example, the Heritage Foundation points to the myriad of tax breaks for production and consumption of politically favored energy products, and the fact that the United States imposes the highest corporate tax rate of any country among the OECD (the 34 most industrialized countries in the world). Further, the US tax system is the only system taxing companies on their earnings world-wide (as opposed to only taxing their domestic income) creating incentive for US businesses to merge with foreign companies and move investment and production offshore. Such mergers shrink the US economy and exports jobs and capital abroad.
Tax experts Curtis Dubay and David Burton adds economic theory to the elements of tax policy with the following principles: 1) raise the least revenue required to fund constitutionally appropriate government activities, 2) apply lower rates to a broader base, 3) do not impose unreasonable burdens to anyone, 4) apply the tax system consistently without special privileges, and 5) minimize interference with free market and free enterprise. Dubay and Burton also argue that the complexity of our current system burdens taxpayers with a high cost of compliance.
The foregoing elements of our tax system are helpful when considering the respective tax policies advanced by Hillary Clinton and Donald Trump together with criticisms of their opponent’s proposals.
Whitney Sorrell is a lawyer, CPA, and former IRS Revenue Agent and senior partner of Sorrell Law Firm, PLC, in Scottsdale, AZ. Mr. Sorrell’s law practice focuses on business organizations and federal tax planning, IRS dispute resolution, asset protection planning for small business owners, and estate planning for nigh net worth individuals.