Protecting Small Businesses from IRS Abuse (Part II)

Comments for the Record

United States House of Representatives

Committee on Ways and Means

Subcommittee on Oversight

Hearing on Protecting Small Businesses from IRS Abuse (Part II)

Wednesday, May 25, 2016, 9:30 A.M.

By Michael G. Bindner

Center for Fiscal Equity

Chairman Roskam and Ranking Member Lewis, thank you for the opportunity to submit these comments for the record to the House Ways and Means Oversight Subcommittee.  As usual, we will preface our comments with our comprehensive four-part approach.

• A Value Added Tax (VAT) to fund domestic military spending and domestic discretionary spending with a rate between 10% and 13%, which makes sure very American pays something.
• Personal income surtaxes on joint and widowed filers with net annual incomes of $100,000 and single filers earning $50,000 per year to fund net interest payments, debt retirement and overseas and strategic military spending and other international spending, with graduated rates between 5% and 25%.  
•  Employee contributions to Old Age and Survivors Insurance (OASI) with a lower income cap, which allows for lower payment levels to wealthier retirees without making bend points more progressive.
• A VAT-like Net Business Receipts Tax (NBRT), which is essentially a subtraction VAT with additional tax expenditures for family support,  health care and the private delivery of governmental services, to fund entitlement spending and replace income tax filing for most people (including people who file without paying), the corporate income tax, business tax filing through individual income taxes and the employer contribution to OASI, all payroll taxes for hospital insurance, disability insurance, unemployment insurance and survivors under age 60.

Under our proposals, small businesses will collect the basic value added tax, the Social Security Employee contribution and the Net Business Receipts Tax/Subtraction VAT.

The first VAT will likely be a Goods and Services Tax on all value added and few deductions, save the receipts for VAT paid in invoices so that VAT is only charged once (prior GST payments are not taxable a second time, provided the amount paid to date is on the receipt).  A state level version of this tax will likely replace retail sales taxes and state revenue departments will collect both.  The only way there could be trouble is if receipts are doctored or manufactured, assuming that transactions are not electronic.

The Social Security Employee contribution will be collected as it already is with no change.

The Net Business Receipts Tax/Subtraction VAT may also be a dual state/federal levy with a common base and even some common tax credits and deductions, although states will set their own tax rates while passing through the federal rate.  Money will be collected at the state level, but technical support on the various deductions will likely come from both the state and federal level, although the system could be devised so that all collection and investigation occurs on the state level.

Small business will no longer use personal income taxes to file and taxes will only be paid on net incomes transferred to the business owners as wages or profits – and then only above the income levels specified.  Note that this tax will be very much simplified, with deductions for charity, stock sales to a qualified ESOP and possibly municipal bonds (although every deduction allowed necessitates higher rates).

Let us also consider the premise of the question, that small businesses are being victimized by some IRS agents.  If that is the case, then Congress has only itself to blame.  Government employees who are overworked tend to take out their frustrations on those they regulate, although I have found the IRS to be more than kind, even in matter of collection.  To prevent friction, hire more agents and give them adequate equipment and training.  Anecdotal reports of abuse should go down.  Hopefully, state revenue departments will take the lesson and adequately staff, train and equip their employees for any new responsibilities due to tax reform.

Thank you for the opportunity to address the committee.  We are, of course, available for direct testimony or to answer questions by members and staff.