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by Elias J. Atienza
Tax reform has been the rallying cry of the Republican base for decades. Ronald Reagan, George H.W Bush, George W. Bush, and Donald Trump all won their elections partly based on their promise to enact tax reform. Now the grand task of reforming 70,000 pages of tax code has fallen into the hands of President Trump, who released his tax reform plan.
Tax reform is badly needed. It’s needlessly complicated as anyone who does taxes knows. We can go on and on about how corporations are hit by one of the highest corporate taxes in the world, or how there are too many loopholes and deductibles. But there is something that should be focused on. And that is something known as accrual accounting. Making sure that this damn thing doesn’t make it into back into the tax system should be a priority.
Accrual accounting is horrifyingly simple; the government taxes income that you haven’t made yet. Forgot about paying taxes on money you already have-that’s horrifying enough- but paying tax on income you haven’t made yet. It’s what Eric Peters in the Washington Examiner called the,”apotheosis of government greed”, a “phantom income tax” so to speak.
It was a part of tax reform in 2014, when the Ways and Means Committee was trying to balance both Democratic and Republican needs. Republicans were trying to lower income and corporate taxes and do away with the Alternative Minimum Tax. Of course, like everything, it needs to be “revenue neutral” because people want “tax reform” but don’t actually want to cut spending. Democrats want revenue neutral because they don’t want to cut spending and Republicans want revenue neutral so they can stay elected.
The tax reform wasn’t that bad actually. It lowered corporate tax rate to 25 percent from 35 percent and consolidated the six tax brackets into three, with a top rate of 35 percent instead of 39.5 percent. But it needed to be “revenue neutral” as discussed above.
So in order to offset lose revenue, instead of cutting spending, they decided to go about eliminating a number of tax breaks for businesses, limiting deductions for investment income, lowering the cap on a number of popular retirement-savings vehicles and reducing the tax incentives for charitable contributions as Andrew Langer in The Hill put it.
So Republicans, despite arguing for decades that lower taxes leads to more overall tax revenue (due to economic reform) fell in with Democrats to try and find revenue neutral tax reform. And they found accrual accounting.
Now Republicans control the House, the Senate, and the Presidency. They no longer need to worry about going for “revenue neutral” tax reform. But the idea of accrual accounting is still in the back of the heads of many people on the Hill and may creep up in amendments or additional bills.
It will hurt small and medium sized businesses- such as doctors, farmers, and others-because their billing cycles often don’t match up with the tax year. So the IRS is going to be taxing income that hasn’t shown up, just based on the previous year’s income. What happens if a business goes under? Or makes less than they were projected to make? Is the IRS going to say, “It’s alright, we’ll forgive you?” Or are they going to send you a strongly worded letter hinting that you better pay the tax or going to end up in jail for tax evasion?
Here’s another thing; it doesn’t raise revenue or make it “revenue neutral.” Andrew Langer in The Hill spelled it out, the Congressional Budget Office only outlines costs for the first ten years of said legislation. Accrual accounting borrows from the 11th year, which lowers the overall cost of the 10 year costs. It basically gives the government the appearance of raising more revenue while not actually having more revenue.
President Trump’s tax plan isn’t perfect. It may not even be great, once it goes through the grind and axe of Congress.
But as Jeffrey Tucker writes for Foundation of Economic Education:
“I have no regression to present to you but this much I can say out of experience and intuition. If this tax plan goes through, the entire class of entrepreneurs, investors, and merchants will receiving a loud signal: this country is safe for you to realize your dreams and make the dreams of others come true.”
I only hope that no Republican or Democrat tries to sneak in accrual accounting. If it does, let us hope that legislators on both sides fight against it.