Tax principles for the digital age

At the start of the 21st century, I was involved with a project with the AICPA on tax reform. An outcome of our task force work was a set of ten principle of good tax policy. The goal was for lawmakers to apply these to both existing tax rules and proposals for change to identify where they did and did not meet the principles. Where not met, hopefully improvement could be made.

Another AICPA task force 15 years later (I chaired both, as I’ve been talking about tax reform for a long time) reviewed the 2001 principles and updated them for a more global, technology-focused perspective.

Fellow AICPA members and professors Ellen Cook and Troy Lewis and I have an article about the 12 principles of good tax policy in the May Journal of Accountancy, which you can obtain for free here. The statement can be found here.

I hope you’ll take a look and see how these factors could help shape current tax reform discussions. An example of the application of the principles is illustrated below using a proposal from Congressman Israel who left the Congress last year. I hope you’ll consider using the principles if you’re analyzing or commenting on tax proposals. Another benefit of using the principles is it can make discussions of tax reform more objective and focused.

What do you think?

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H.R.5381(114th Congress)- College Preparation Tax Credit Act – This bill would add new Section 25E, Credit for college preparation expenses, to allow a credit of up to $500 for qualified college preparation expenses. The credit would be available via election for up to three years.

Criteria

Does the proposal satisfy the criteria? (explain)

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Equity and Fairness

As credit, the benefit is the same regardless of income level. Thus, some vertical equity is achieved that would not exist if the benefit was instead a deduction that would provide a greater tax savings to higher tax bracket individuals. The credit is not refundable so provides no benefit to individuals who do not owe any tax although they may have a greater need for the assistance with college prep costs.

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Certainty

The definition of college prep expenses might not always be clear. For example, might gymnastics coaching help if there is a scholarship prospect?

Convenience of payment

The benefit of the credit won’t be received until the taxpayer files their tax return. For individuals who need the subsidy provided by this credit in order to obtain the college prep service, the timing is not convenient.

Effective Tax Administration

The addition of a new rule requires the IRS to issue guidance and develop procedures to ensure proper compliance, such as new tax forms and verification.

Information Security

One possible compliance measure for administration of the credit could be that the taxpayer identification number of the provider of the college prep service must be reported by the taxpayer claiming the credit. This lead to an increase in identity theft as more people obtain another taxpayer’s TIN.

Simplicity

The credit will require guidance to define relevant terms, how to make the election and how to ensure the credit is only claimed for no more than three years.

Neutrality

The credit provides a preference for college prep costs relative to other post-secondary education needs such as occupational training and related applications. The credit might cause providers of college prep services to increase their fees.

Economic growth and efficiency

The proposal may increase the number of providers of college prep services. To the extent the credit results in greater spending in this area, spending in other areas (or savings) are reduced.

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Transparency and Visibility

Taxpayers are likely to know about the credit as providers of college prep services will promote the credit.

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Minimum tax gap

Without some type of verification, some individuals with high school age children might claim the credit beyond spending on college prep services.

Accountability to taxpayers

Is this legislation needed? What is the purpose? What data was reviewed? Why is it proposed to be part of the tax law rather than provided in another manner, such as via a needs-based grant or scholarship?

Appropriate government revenues

Sufficient data likely exists for a reliable estimate of the amount of reduced government revenues from the proposed credit.

Source: http://21stcenturytaxation.blogspot.com/2017/05/tax-principles-for-digital-age.html

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