Tax principles for the digital age

The factors guiding recent tax reform efforts are different from those that influenced the debate in 1986, the last time the Internal Revenue Code received a major overhaul. The development of the internet has changed the traditional views of tax rules, administration, and compliance. Design of a tax system today should provide similar incentives for intangible and tangible property, address a broader range of business entities, and consider that people work and live longer.

Protecting taxpayer data in digital form is more important, as is the tax treatment of digital transactions that are becoming increasingly more difficult to source. A set of tax principles can help in tax system design to better ensure administrability, fairness, and economic efficiency. Like tax systems, tax principles should be evaluated regularly to ensure they address today’s ways of living and doing business.

THE UPDATED CONCEPT STATEMENT

Tax Policy Concept Statement No. 1, Guiding Principles of Good Tax Policy: A Framework for Evaluating Tax Proposals (TPCS-1), is the first in a series of AICPA statements, originally issued in 2001, intended to aid in the review and development of both existing tax rules and tax legislation.

TPCS-1 was modernized in 2017 for several reasons. First, the AICPA Tax Executive Committee (TEC) acknowledged the need to expand the application of the guiding principles beyond the federal level to consider the shared tax base of the global economy. Further, the TEC recognized that the principles should reflect changes in the way individuals conduct business—more specifically, the need to keep pace with technical and commercial developments. Finally, in this day of security breaches, the challenges of protecting taxpayer information had to be integrated into the principles.

In comparing the 2001 and 2017 versions, the most obvious change is the addition of two new principles—Principle 5, Information Security, and Principle 11, Accountability to Taxpayers—as well as the change in the title of Principle 4 from Economy in Collection to Effective Tax Administration. Certainly, the importance of information security reflects the times in which we live, where 17.6 million U.S. residents, 7% of those ages 16 or older, experienced some form of identity theft in 2014 (Bureau of Justice Statistics Report, 9/27/15, available at www.bjs.gov).

The new Principle 5 discusses not only identity theft but also the responsibility of all parties involved in tax administration to keep information secure. Accountability to taxpayers was added to recognize that transparency and the ease of providing information to the public at low cost supports public awareness that, in turn, enables a more well-informed society.

The modernization of the language is evident throughout the revision. For example, the addition of language referring to the “appropriate use of secure technology” to Principles 3 and 4 reflects the extension of methods of payment since 2001. The expansion of the principles to apply to tax policy beyond the federal level is emphasized in Principle 8, Economic Growth and Efficiency, as is added emphasis on neutrality to ensure that enactment of laws will not discriminate in favor of or against ways of doing business.

Increased attention to the tax gap is reflected in Principle 10, Minimum Tax Gap, and Principle 12, Appropriate Government Revenues, which has been significantly expanded. In addition to noting the need for flexibility and stability as well as regular review of tax systems to ensure the appropriateness of new business models, a discussion of the complementary nature of a tax system among relevant jurisdictions was included. Specifically, the need to consider the interaction of tax bases in a global economy and the effect that changes in one tax system have on other tax systems was added to the narrative. Finally, in addition to expanding from 10 principles to 12, the recently revised statement adds a table illustrating the alignment of TPCS-1 with the principles and criteria used by the Organisation for Economic Co-operation and Development, Congress’s Joint Committee on Taxation, and the U.S. Government Accountability Office to analyze tax systems.

Following is a brief explanation of the 12 guiding principles and a discussion of their value in identifying weaknesses in current rules and evaluating new tax proposals.

12 GUIDING PRINCIPLES

The 12 principles below, the first four of which are the maxims of taxation laid out by economist Adam Smith in his 1776 work, The Wealth of Nations, are ordered for reference only and do not reflect an indication of importance. Further, TPCS-1 provides a more detailed explanation of each principle and includes the description of challenges inherent in each (TPCS-1 is available at www.aicpa.org).

1. Equity and fairness: Similarly situated taxpayers should be taxed similarly.
2. Certainty: The tax rules should clearly specify how the amount of payment is determined, when payment of the tax should occur, and how payment is made.
3. Convenience of payment: Facilitating a required tax payment at a time or in a manner that is most convenient for the taxpayer is important.
4. Effective tax administration: Costs to collect a tax should be kept to a minimum for both the government and taxpayers.
5. Information security: Tax administration must protect taxpayer information from all forms of unintended and improper disclosure.
6. Simplicity: Simple tax laws are necessary so that taxpayers understand the rules and can comply with them correctly and in a cost-efficient manner.
7. Neutrality: Minimizing the effect of the tax law on a taxpayer’s decisions as to how to carry out a transaction or whether to engage in a transaction is important.
8. Economic growth and efficiency: The tax system should not unduly impede or reduce the economy’s productive capacity.
9. Transparency and visibility: Taxpayers should know that a tax exists and how and when it is imposed upon them and others.
10. Minimum tax gap: Structuring tax laws to minimize noncompliance is essential.
11. Accountability to taxpayers: Accessibility and visibility of information on tax laws and their development, modification, and purpose are necessary for taxpayers.
12. Appropriate government revenues: Tax systems should have appropriate levels of predictability, stability, and reliability to enable the government to determine the timing and amount of tax collections.

BENEFITS OF TPCS-1

One of the challenges with drafting new or evaluating existing tax rules is recognizing that tax laws often satisfy certain of the guiding principles but in so doing violate other principles. Reconciling the competing interests of each of the guiding principles can be difficult. While each principle on its own presents an ideal standard that should be considered, the reality is that often one principle must be compromised at the expense of another to achieve some common objective. (See the “Quick Checklist” for an example of a tool that can be used to analyze these competing priorities.)

For instance, a tax proposal to reduce the existing individual income tax brackets from seven to three to achieve a simpler tax calculation can satisfy Principle 6, Simplicity, but be viewed by some as violating Principle 1, Equity and Fairness, by widening the taxable income levels within each bracket. However, despite the oft-competing counter interests, the value of TPCS-1 itself can be found not in providing a conflict-free matrix to be used to magically resolve all opposing views, but rather in helping drafters become more keenly aware of all the principal considerations, which in turn will allow identifying weaknesses and recognizing potential improvements in new tax laws.

For example, for the better part of the past decade, Congress has passed certain incentive tax provisions with limited applicability, the so-called tax extenders. Among others, these provisions extended the research tax credit, increased amounts related to equipment expensing under Sec. 179, and extended bonus depreciation for certain purchases of new assets. These provisions were often passed with retroactive applicability, typically late in the calendar year. For example, the Protecting Americans From Tax Hikes (PATH) Act, P.L. 114-113, signed into law on Dec. 18, 2015, reinstated these provisions effective back to Jan. 1, 2015. While Principle 12, Appropriate Government Revenues, may have been achieved, 11½ months of retroactivity violated Principle 2, Certainty.

The 2017 version of TPCS-1 clarifies the relevance of the principles to nonfederal jurisdictions such as state governments. For instance, a November 2012 voter initiative in California increased the top individual income tax rate on income over $1 million from 10.3% to 13.3%, retroactive to the beginning of 2012 (California Proposition 30 (2012)). While the initiative represented the will of the people of California, the provision’s retroactive nature appears to have violated Principle 2, Certainty, and Principle 9, Transparency and Visibility. State and local lawmakers will benefit from adopting this framework as central to their tax law drafting process as it will help balance the competing views on what changes to make and how to explain them to the public.

PRACTITIONERS AND TPCS-1

Lawmakers continually work on tax changes ranging from minor tweaks to major reform. CPAs can provide valuable input in this process. Using the tax principles as a foundation for comments can support the process as it offers an objective framework for discussion. The principles can aid in finding weaknesses and solutions to problem areas or proposals. CPAs should also find the principles useful in explaining the rationale for tax proposals to clients.

The “Quick Checklist” provides a set of questions as one approach to identify problem areas with tax proposals. Lawmakers, as well as CPAs interested in assisting in improving tax laws, should find this tool beneficial.

LOOKING AHEAD

Since TPCS-1 was adopted in 2001, it has been successfully used by lawmakers, tax reform commissions, and those interested in policies that help produce a better tax system. The 2017 issuance of the updated standard modernizes the original statement to incorporate technological advances and to recognize the need for a more global approach. These principles of good tax policy will aid any effort to evaluate new and existing tax rules for reform and an improved tax system.

About the authors

Ellen Cook (ecook@louisiana.edu) is the assistant vice president for academic affairs, academic resources, at the University of Louisiana at Lafayette, a former member of the AICPA Tax Executive Committee (TEC), and a current member of The Tax Adviser‘s editorial board. Troy Lewis (tlewis@sisna.com) is manager of Lewis & Associates CPAs LLC and an associate teaching professor of accounting at Brigham Young University in Provo, Utah. He is the immediate past chair of the TEC. Annette Nellen (annette.nellen@sjsu.edu) is a tax professor and director of the MST Program at San José State University in San José, Calif. She is the current chair of the TEC and a member of the Tax Reform Task Force.

To comment on this article or to suggest an idea for another article, contact Sally P. Schreiber, senior editor, at Sally.Schreiber@aicpa-cima.com or 919-402-4828.

AICPA resources

Articles

• “30 Years After the Tax Reform Act: Still Aiming for a Better Tax System,” JofA, Oct. 2016
• “CPAs Helping Guide Tax Administration and Affecting Tax Policy,” JofA, May 17, 2016
• “Ways to Make Tax Compliance Less of a Nightmare for Small Business,” JofA, April 13, 2016

Online resources

• Tax Policy & Advocacy webpage, www.aicpa.org
• Tax Policy Concept Statements, www.aicpa.org
• Tax Reform Resource Center, www.aicpa.org