International Tax Corner: Edition 9

The International Tax Corner: Edition 9

Navigating the Complexity & Inequity of the US Tax Code

There are a lot of problems in this world. Why do some get more attention than others? Why do we read about some in the newspaper daily while others rarely get a mention? Politics; power; money; biases – it’s enough to make me nauseous. But that’s a separate story.

I’m angry about the US tax code and how it’s implemented. Of course, this isn’t new. I’ve been a tax professional since 1996. I used to work on Capitol Hill – I saw how the sausage got made. So, what’s my trigger? A call to the IRS right when its office opened. “Your wait time is estimated to be 7 minutes,” says the recording. As I’m drafting this paragraph, I’ve been on the phone for 1 hour and 40 minutes. At least I’m accomplishing other work while on hold. But are you kidding me?

This is not a partisan commentary. We’re not talking about any political party or particular person. For decades, our government has had and continues to have significant issues.

The IRS is understaffed; the people you get on the phone are often not empowered to make the decisions that would make all our lives easier; and many, many pieces of IRS mail our clients get are erroneous. So, how do we improve the system? People keep asking, how do we make the IRS better? But that’s the wrong question.

One needs to start in Congress at the House Ways and Means Committee. What follows has no reflection on the nonpartisan, technical expertise of the Joint Committee Staff. The last Chairman who actually understood the Code was Wilbur Mills. Since 1977, after his retirement, what we have had is the proverbial “blind leading the blind” producing exceedingly complex provisions not even being understood by Congress. It seems it all boils down to each member of Congress using the following principles as guidelines: (1) How much pork barrel can I dole out? (2) Do I understand what I am doing, and do I care? And (3) How much confusion can I sow by having tax provisions in other bills which have no relation to taxation? [OK – that’s a bit cynical, but we don’t get where we are by every member doing an appropriate level of diligence].

The result? Convoluted tax law (practically all the time).

The law often asks the Treasury Department to draft guidance interpreting and implementing what Congress meant when it passed the law. Therein lies a key crux; Congress does not even know what was meant. We see tax law changes like a coral reef. As animals die, they simply become part of the reef. New tax law gets loaded on top of older tax law. Code sections don’t get removed just made more complicated. Almost every tax law change makes life more complicated for taxpayers, their advisors, and the government. It’s gotten so ridiculous that there are days we feel like first-year associates. Overall, what Congress has done to the American people and the IRS is inherently unfair and frankly ridiculous.

One must express fairness and balance.

As we take a look at other countries’ legislation, one thought comes to mind, … “Did all these ‘leaders’ attend the same training sessions?” They must have. At one point, the rest of the so-called developed economies looked to the US for tax policy. For example, with the introduction of the first-ever CFC rules in 1962, there was a statement made… “This is our problem – our law allows taxpayers to shelter their passive income in other low-tax jurisdictions. We cannot lay the blame on those jurisdictions”.

Regardless of whether we like the CFC rules, that is leadership, and, to some degree, that shows in some of the legislative agenda. Nevertheless, we have allowed the OECD and the UN to influence policy and when that is combined with prevalent ignorance in Congress, we end up getting Pillars 1 and 2 from the OECD, an expensive, bureaucratic body with the US contributing the largest share. Based in Paris, the majority of members are European countries (currently, even after the expansion of non-European countries like Chile, et al), they represent approximately 63% of the members. [To digress, don’t even ask why the UN is getting into tax policies when it cannot even handle its original mandate.]

The governments of the EU, especially, have made a mess of their economies; but, unlike Congress in 1962, they blame everybody else. For Pete’s sake we saw it dating back to the mid-1990’s with their attacks on so-called tax havens. In other words, unlike the 1962 Congress saying, “Our laws are the problem”, the Europeans blame the smaller countries and bully them with threats of withholding aid and using “blacklisting”.

To this day, they (the Europeans) have not amended their laws in any meaningful way (e.g., even though there are anti-deferral rules, deferral still exists on non-passive income in substantive ways such as the participation exemption). And now, with Pillar 2, it has sneaked in cash subsidies to their own companies which do not affect the target rate of 15%. It is time for Congress to wake up; start thinking; and act smart. Stand up and do the right thing. If necessary, the President should invoke section 891 followed by an overhaul of the Code. Again, we’re not calling for more tax – just more sane and rational policy – we’re also not holding our breath.

A simpler tax code means more clarity, easier calculations, and easier to file tax returns. Yes, it might even mean some people in my shoes are out of a job. And that’s fine – we can be put to use doing more important things. The brainpower going into tax planning, recordkeeping and simply preparing unnecessarily complicated tax forms is astounding. These folks could be doing almost anything else. Engineering; efficient building; city planning; transportation planning; entrepreneurship in any field. Again, we’re not Pollyannas – but really?!

Oh, and that IRS call this morning – 1 hour 56 minutes on hold.

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The International Tax Nerds at Schwartz International team with individuals, companies of all sizes, and other accounting and law firms to provide practical international tax planning, structuring, implementation, and compliance advice.

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