Attacks on a Tax: An Alternative to the Earned Income Tax Credit to Remedy the Unfairness in the Payroll Tax System – Note by Dan Seltzer

From Volume 77, Number 1 (November 2003)

The United States raises revenue through a variety of taxes that are fragmented or “disaggregated” into multiple components. Although most Americans think of taxes primarily in terms of the income tax, its lesser known cousin, the payroll tax, produces nearly identical revenues while falling disproportionately on the poor and middle-class. Disaggregating the tax system into several component taxes thus conceals the true aggregate tax burden on taxpayers. This misleading effect is exaggerated because the media and politicians focus on the income tax while ignoring the equally significant payroll tax.

In recent years, taxes have played a central role in most major political campaigns. President George W. Bush centered his campaign on tax issues, and passage of his 2001 tax relief package, the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”), was one of the first major accomplishments of his administration. Yet, despite this pronounced emphasis on reducing taxes, the media and politicians from both parties appear oblivious to the payroll tax, even though it represents the single largest tax for two-thirds of all Americans. Indeed, even as President Bush made tax cuts for the working poor a priority for his administration, these cuts generally affected only income taxes. His 2001 budget included extensive discussion on the income tax, but the sole mention of the payroll tax appeared in a footnote.



Supplying the Tax Shelter Industry: Contingent Fee Compensation for Accountants Spurs Production – Note by Ben Wang

From Volume 76, Number 5 (July 2003)

The use of abusive tax shelters by major corporations has been called “‘the most serious compliance issue threatening the American tax system . . . .’” Losses to the Department of the Treasury (“Treasury”) are estimated to range anywhere from $7 billion to $30 billion per year. Meanwhile, corporate profits have risen 23.5% while their corresponding tax obligations rose by only 7.7%. Personal income taxes, on the other hand, are up 44%, which represents 79% of the total federal income tax and is estimated to increase to 85% by the year 2004. Also astounding is that the corporate tax-to-profit ratio has dropped between 1.5% and 2.9%, roughly translating into a decrease in corporate income tax receipts between $13 and $24 billion. Although the decrease in corporate tax receipts is unlikely to be attributed to a single cause, many commentators point to the growing acceptance of abusive tax shelters by large corporations as a major contributor.

The growing acceptance of abusive tax shelters by large corporations has been characterized as a “race to the bottom.” The perception that competitors are actively participating in abusive tax shelters has created an environment ripe for the promotion of tax schemes promising to zero out a corporation’s taxes. The major accounting firms are using armies of professionals to promote these schemes. Moreover, they have developed the resources, both in expertise and manpower, to capitalize on and perpetuate the perception. The role played by the Big Five in the tax shelter industry is extensive. They have created for themselves a vested interest in the proliferation of tax shelters through the use of contingency fees.