Tax Policy Concept Statement Guiding Principles for Tax Equity and Fairness Issued by the Tax Division of the American Institute of Certified Public Accountants Copyright © 2007 by American Institute of Certified Public Accountants, Inc New York, NY 10036-8775 All rights reserved For information about the procedure for requesting permission to make copies of any part of this work, please call the AICPA's authorized copyright permissions agency, the Copyright Clearance Center, at 978-7508400 For your convenience, a CCC Internet permissions request form is now available at WWW.Copyright.Com/FirstTimeUsers.Asp i Table of Contents Page Forward ii Equity and Fairness: Desirable Attributes for a Tax System .1 Definitions of Equity and Fairness The Seven Dimensions of Tax Equity and Fairness Exchange Equity and Fairness .4 Process Equity and Fairness Horizontal Equity and Fairness Vertical Equity and Fairness Time-Related Equity and Fairness Inter-Group Equity and Fairness Compliance Equity and Fairness Challenges Conclusion .10 Appendix – Desirable Attributes for Tax Systems 11 Bibliography 12 ii Foreword This is the fourth in a series of tax policy concept statements issued by the AICPA Tax Division on tax policy matters It is intended to aid in the development of federal tax legislation in directions that the AICPA believes are in the public interest Prior Tax Policy Concept Statements include: Guiding Principles of Good Tax Policy: A Framework for Evaluating Tax Proposals (2001) Guiding Principles for Tax Simplification (2002) Guiding Principles for Tax Law Transparency (2003) Tax Policy Concept Statements are approved by the Tax Executive Committee of the AICPA Tax Division, after they are developed and approved by the Division’s Tax Legislation and Policy Committee Other Division committees and technical resource panels may develop Tax Policy Concept Statements if requested to so This Statement was developed by the Tax Equity and Fairness Task Force with input from the 2006-2007 Tax Legislation and Policy Committee and the 2006-2007 Tax Executive Committees It was approved by the 2006-2007 Tax Legislation and Policy Committee and the 2007–2008 Tax Executive Committee Members of the bodies that approved this Tax Policy Concept Statement are listed below AICPA Tax Executive Committee (2007-2008) Jeffrey R Hoops, Chair Alan R Einhorn, Vice Chair Evelyn M Capassakis Stephen R Corrick Diane D Fuller Andrew D Gibson Cherie J Hennig Andrew M Mattson T Chris Muirhead Kenneth N Orbach Gregory A Porcaro Roby Sawyers Joseph Scutellaro Christopher J Sokolowski Norman S Solomon Mark A Van Deveer Brian T Whitlock Carol E Zurcher Additional AICPA Tax Executive Committee Members (2006-2007) Thomas J Purcell, III, Immediate Past Chair Janice M Johnson Dean A Jorgensen James W Sansone Patricia Thompson iii AICPA Tax Legislation and Policy Committee (2006-2007) Nicholas P Giordano, Chair Donald A Barnes, Immediate Past Chair Walter B Doggett, III John H Gardner Nicholas Lascari David A Lifson W Val Oveson Gerald W Padwe M Andrew Prior Melbert E Schwarz, II Kaye F Sheridan Thomas A Stout, Jr Deborah Walker AICPA Tax Equity and Fairness Task Force Judyth A Swingen, Chair Gerald W Padwe W Val Oveson AICPA Tax Division Staff Edward S Karl, Director Bonner Menking, Technical Manager Jean E Trompeter, Technical Manager The AICPA Tax Division gratefully acknowledges the significant contributions of Judyth A Swingen in the development of the direction and the drafting of the Statement iv Guiding Principles for Tax Equity and Fairness The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities (Adam Smith, 1776) When a number of persons engage in a mutually advantageous cooperative venture according to rules we are not to gain from the cooperative labors of others without doing our fair share (John Rawls, 1971) Equity and Fairness: Desirable Attributes for a Tax System While no one enjoys paying taxes, most recognize that taxes are the price we pay for the essential infrastructure and services provided by federal, state and local governments In a free and prosperous society, citizens will generally comply with tax levies as long as certain criteria are met First, political processes provide citizens with input as to how and to what extent they are taxed Second, public officials serve as good stewards of the resources generated by the tax system Finally, most citizens perceive that tax burdens and benefits are distributed in a fair and equitable manner In a complex economic and social environment, it may not be possible to design and administer a tax system that is fair and equitable in an absolute sense However, a tax system that is generally perceived as fair and equitable is a desirable and achievable goal This Statement’s primary purpose is to challenge tax lawmakers and administrators to more fully address the issues of tax equity and fairness We also hope this Statement will motivate further discussion and analysis by tax policy advocates and academic researchers The importance of tax equality, equity and fairness has long been recognized Adam Smith established “four maxims with regard to taxes,” one of which was the need for equality in a tax system [See Appendix.] Subsequent writers have expanded Adam Smith’s maxims, adding simplicity, transparency, neutrality, economic efficiency, and other desirable attributes for a good tax system However, tax equality, equity and fairness continue to be the most frequently cited characteristics when writers describe an ideal tax system Definitions of Equity and Fairness Baseline definitions for key terms are essential to the full discussion of any complex topic The terms equity and fairness are difficult – and some would argue impossible – to define Judgments as to whether or not a rule or action is fair can be quite subjective Prior experience and the current context clearly shape personal perceptions of equity The following observations on equity and fairness from other fields of study are offered to help formulate a definition of tax equity and fairness Fairness is a moral and social concept we are exposed to from childhood Parents and elementary school teachers patiently explain that fairness means sharing and following the rules Religious institutions provide moral codes and illustrative stories to guide behavior Most faiths teach two general rules of fairness – (1) treat others as we would want to be treated; and (2) be benevolent to those who are less fortunate As we mature, our framework for assessing fairness is further shaped by observing the behavior of friends, role models and public figures In his Nicomachean Ethics, the philosopher Aristotle equated fairness with justice In a just system “equals are to be treated equally and un-equals unequally.” The differential treatment of un-equals is not to be arbitrary, but is to be based on some relevant factor(s) The challenge in designing a just or fair system is determining what factors should be used to define equality (or inequality) and to allocate rights and/or resources Theories of distributive justice require that the rules for allocating economic resources (or imposing economic obligations) should be set in advance Ideally, these rules should also be comprehensible to those who must administer or abide by them Some commentators state that justice can only be achieved if rules (or laws) are strictly administered without discretion However, even Aristotle acknowledged that a set of rules may not anticipate all scenarios and that some administrative discretion may be needed to mitigate unfair and unintended consequences.1 In his Theory of Justice, Rawls [1971] stated that the only way to develop a totally fair system of rules would be “from behind a veil of ignorance.” It is natural to perceive a particular rule as being more or less fair if it has positive or negative impact on one’s personal wealth or wellbeing Under Rawls’ theory, rule makers could only construct a fair system if they had no knowledge of their own current or future situations, and hence, were unable to assess the personal impact of the rules they promulgate This is a state that is impossible to achieve Lawmakers at all levels of government are usually aware of how new provisions will affect them, their families and their constituents Both Aristotle and Rawls agreed that for a system of rules or laws to function in a fair and equitable manner the persons subject to that system must willingly comply If citizens perceive that a system is reasonably fair, then they will comply Noncompliance essentially negates the structural fairness that the system’s designers intended In many situations, a system for setting priorities is needed to assure fairness Educators state that fairness in the allocation of scarce resources means that each student gets what he or she needs, not necessarily everything that he or she wants Computer scientists define fairness in terms of Pareto Efficiency – i.e “all computer jobs deserve an equal share of resources, but if some jobs can use more without hurting others, that’s okay.” Medical personnel use triage systems to determine which patients should be seen first Tending to those with the most critical needs is considered fair The Innocent Spouse and the Offers in Compromise rules are examples of tax provisions designed to mitigate unintended and unfair consequences A more detailed discussion of the fairness in computer queues research done by Adam Wierman and Mor Hachol-Balter at Carnegie Mellon University can be found at www.cs.cmu/~acw/ Tax policy advocates and writers generally agree that two criteria are essential for a tax system to be perceived as equitable – horizontal and vertical equity Horizontal equity means that taxpayers who are similarly situated pay the same amount of taxes Vertical equity requires that those who have more income (or property) pay more in taxes because they are better able to pay This twodimensional model provides a useful, but simplistic, framework for discussing and evaluating tax equity issues The next section of this Statement introduces a more extensive model for considering tax law equity The Seven Dimensions of Tax Equity and Fairness The AICPA reiterates its position3 that equity and fairness is an essential attribute of a good tax system, and recommends that equity and fairness be given due consideration in both the making and administration of tax laws The AICPA further recommends that the following seven dimensions be considered in determining tax equity and fairness:4 Exchange Equity and Fairness – Over the long run taxpayers receive appropriate value for the taxes they pay Process Equity and Fairness – Taxpayers have a voice in the tax system, are given due process and are treated with respect by tax administrators Horizontal Equity and Fairness – Similarly situated taxpayers are taxed similarly Vertical Equity and Fairness – Taxes are based on the ability to pay Time-Related Equity and Fairness – Taxes are not unduly distorted when income or wealth levels fluctuate over time Inter-Group Equity and Fairness – No group of taxpayers is favored to the detriment of another without good cause Compliance Equity and Fairness – All taxpayers pay what they owe on a timely basis Before proceeding with a detailed discussion of these equity dimensions, there are two important caveats to remember First, equity should be evaluated within the context of the entire tax system, not just the income tax, and not on a proposal-by-proposal basis Vertical equity provided by progressive income tax rates may be structurally offset by sales, Social Security and property taxes Second, whether a tax system is equitable is largely a matter of perception Feelings about whether a particular aspect of the tax system is fair or unfair are influenced by prior experiences and information (or misinformation) AICPA (2001) Tax Policy Concept Statement No 1, Guiding Principles of Good Tax Policy: A Framework for Evaluating Tax Proposals The seven equity and fairness dimensions are not listed in rank order The relative importance of each will depend in part on the type of tax involved and the nature of the tax law or administrative change being considered AICPA (2005) Understanding Tax Reform: A Guide to 21st Century Alternative, p 11 Exchange Equity and Fairness – Taxes are the price we pay for the essential infrastructure and services provided by federal, state and local governments Exchange equity and fairness means that, over the long run, governmental agencies provide adequate public goods and services to meet the needs of taxpayers and their families Exchange equity does not mean that, during a specific period, the amount of taxes paid by a particular taxpayer will exactly correspond with the value of the tax benefits directly or indirectly received Tax revenues must be pooled to fund essential shared services, such as education, defense, health care, public safety, social services, and even tax administration Substantial amounts of tax revenue must be invested in long-lived assets, such as airports, bridges, highways, schools and public buildings This investment in infrastructure will benefit not only today’s, but also future taxpayers Although individuals may not currently need to use all of the facilities or services offered by governmental units, the lack of such facilities or services could have a negative impact on their quality of life For example, the presence of a police or fire department is reassuring, even if you never need to call them Exchange equity also allows for the sharing of pooled resources with others in return for the promise of future benefits if and when needed The Social Security system largely relies on the taxes paid by current workers to fund the benefits of retired workers This is done with the implicit promise that when today’s workers retire, others will fund their benefits The funding of disaster relief can also be viewed as implicit exchange equity Taxpayers are willing to assist the victims of natural or man-made disasters, not only because it is the right thing to do; but because they all have the expectation that similar aid would be available for them, if they were victims of such a disaster For a tax system based on the concept of voluntary compliance to function effectively, taxpayers must have a positive perception of exchange equity They must feel that, in the long run, they are getting their money’s worth for the taxes they pay Lawmakers should keep in mind that perceptions of insufficient exchange equity and a lack of representation in tax decisions were part of the impetus for the American Revolution Process Equity and Fairness – There are three key aspects to process equity and fairness First, political processes give taxpayers an opportunity to influence how and to what extent they are taxed Second, tax systems include safeguards that permit taxpayers to challenge the taxes assessed Third, tax administrators are expected to treat taxpayers with respect In the interest of both exchange and process equity, taxpayers should have some direct or indirect voice in how tax revenues are spent Citizens who strongly disagree with how government spends their money may be inclined to engage in tax protests or be noncompliant By agreeing to be taxed by forming a representative, democratic government, citizens have an indirect voice in tax matters when they elect legislative bodies at the national, state and local levels Congress, state legislatures, city councils, and even school boards are then responsible for Moser, Evans & Kim, 1995 approving budgets and the taxes necessary to fund those budgets In certain instances, taxpayers are given a direct voice in tax matters when state and local sales or property tax rates must be approved by referendum Unfortunately, too many taxpayers perceive that they have little or no voice in tax matters Others believe that tax agencies, rather than legislative bodies, have the primary responsibility for making tax laws.7 One danger in any tax system is that those charged with enforcing tax laws and collecting the tax will abuse their authority Safeguards to prevent abuse of power are a necessary condition for process equity in any system of laws, including the tax system Communications from tax agencies should clearly describe taxpayer obligations and the legal basis for any additional assessments or penalties There should be procedures to appeal the amount of tax to be paid There should also be appropriate limits on the methods tax agencies can use to enforce payment Any appeals procedures or taxpayer rights should be available to all taxpayers, not just those who are able to afford professional assistance Finally, taxpayers should be treated with respect and assisted with (not coerced into) meeting their tax reporting and payment obligations Federal and state governments have adopted Taxpayer Bills of Rights in recent years Respect, however, is an attitude or point of view and can not be achieved solely by legislation In many tax agencies, cultural change may be necessary to fully achieve this aspect of process equity Horizontal Equity and Fairness – Horizontal equity and fairness is the most-often-cited aspect of tax equity Horizontal equity means that taxpayers with equal amounts of income (or property) should pay the same amount of tax Horizontal equity also suggests that similarly situated taxpayers should be taxed similarly Unfortunately, these two definitions are not synonymous Taxpayers may have equal amounts of income, but different tax liabilities, because income from capital is generally taxed at more favorable rates than earned income.8 To fully explain horizontal equity, it is necessary to return to the idea that equity or fairness is related to need fulfillment Two households may earn exactly the same income, but may not be “similarly situated,” and therefore have differing abilities to pay taxes A certain amount of each family’s income is needed to provide for basic human needs – the definition of which changes as our society changes This amount should not be subject to tax The amount of income that should Tax-writing committees in Congress have a history of enacting statutory provisions that mandate Treasury to draft the detailed regulations needed to implement the statute While Treasury staff may have a better understanding of the technical issues involved, Congress erodes taxpayer perceptions of process equity by passing the primary responsibility for tax rule-making to an administrative agency Congress uses the tax system to provide economic and social incentives Preferential tax treatment of dividends and capital gains may provide economic incentives for capital investment However, these provisions may also diminish the perceived horizontal equity of the tax system not be taxed depends on several factors, including the cost of living, the size and structure of the family, the age of family members, and extenuating circumstances such as disabilities or illness Horizontal equity is the justification for personal and dependency exemptions for income taxes and homestead credits for property taxes Other income tax deductions and credits for personal expenses – such as child care, education, and medical expenses – attempt to achieve horizontal equity with varying degrees of success Unfortunately, most of these provisions increase complexity and decrease perceptions of equity for taxpayers who fail to qualify for these deductions or credits Another issue in determining whether taxpayers are similarly situated relates to family structure Income tax laws at the federal level, and in most states, employ a very traditional definition of family An individual’s filing status and tax rate is determined by marital status Married couples are then taxed as a family, rather than as individuals Historically, unmarried couples who maintained a household together paid less in taxes than married couples with a similar level of combined income.10 Although recent legislation has sought to mitigate this marriage penalty, other family-related horizontal equity issues need to be addressed Should unmarried couples, raising children together, be taxed as a family? Should extended families that include grandparents or elderly parents in the same household be given a larger tax-free base? Should credits related to children favor two-earner families or reward families with a stay-at-home parent? Extenuating circumstances can also affect the ability of an individual or family to pay taxes Individuals who are seriously ill, physically or mentally impaired, or too young or too old to care for themselves can strain family finances In the past, federal tax laws granted extra income tax exemptions for the elderly and blind 11 One problem with using this approach to enhance horizontal equity is that the list of conditions that should be given special consideration would be extremely long Further, this would be an area that could be prone to abuse and could actually favor families who have the resources to have maladies or disabilities diagnosed and documented Vertical Equity and Fairness – Vertical equity and fairness means that the tax burden should be based on the taxpayer’s ability to pay Clearly individuals with subsistence levels of income should not be subject to all types of taxes because they need all their resources to provide for themselves and their families Beyond this subsistence or poverty level of income, exchange equity suggests that all citizens should pay some taxes, even a relatively small amount This often includes the basic cost to maintain a household of modest means and could include differences among geographic locations Currently, the federal tax system does not take cost-of-living differences among geographic locations into consideration [California versus Arkansas] 10 While the income tax rules tend to penalize married couples with similar incomes, benefit distribution formulas for Social Security tend to favor married couples The “marriage benefit” still works for couples with one wage-earner or couples with widely disparate incomes 11 Increased standard deductions are available to elderly or blind taxpayers, although this only results in lower taxes for those who not itemize The income tax laws in many states still grant extra exemptions if the taxpayer or the taxpayer’s spouse is elderly or blind Vertical equity is generally the justification for progressive tax rate structures in income and wealth transfer taxes.12 As income or wealth levels rise, the tax rates rise Likewise, the marginal utility of further earnings or wealth accumulation declines If tax rates rise without limit, there is a danger that taxpayers will reach tipping points at which they either stop working or move to a different tax jurisdiction States have been particularly sensitive to the latter problems Taxpayers are mobile and can move if they perceive that state tax rates are excessive Therefore, the range between the highest and lowest income tax rates is smaller at the state level than it is at the federal level However, state taxpayers tend to reach the highest marginal rate at lower levels of income than they under federal rate structures Alternatives to the current federal income tax system – consumption tax, “flat” tax, retail sales tax, and value-added tax regimes – result in greater regressivity and lower vertical equity 13 While attractive to those with sufficient income to control discretionary spending subject to a sales or consumption tax, these taxes would be a significant burden on middle- and lower-income taxpayers who must spend all or nearly all their income on necessities Vertical equity is the one dimension of equity that is readily measurable, both as a percentage and an amount of each family’s tax burden Economists use a variety of techniques to assess the extent to which tax burdens are shifted among income classes 14 The theoretical question is to what extent tax burdens can be shifted among taxpayers with higher versus middle versus lower income or property values without impairing exchange or inter-group equity [See page 8.] Time-Related Equity and Fairness – Time-related equity and fairness means that the total tax obligation is appropriate over the long-run and not unduly distorted by fluctuations in income or wealth Two factors contribute to potential time-related inequities First, tax liabilities are based on short-term or single point-in-time measures Second, changes in the general price level affect the value of the monetary unit, as well as the relative value of various tax provisions Taxable income is measured in one-year increments, and then taxed using progressive rates Taxpayers with significantly higher income one year may potentially pay more in taxes than they would have paid if the same income had been spread over a couple of years Likewise, individuals who temporarily leave the work force to raise families, attend college, or recover from an illness experience time-related tax inequities Time-related equity within the income tax system could be improved if taxpayers were once again permitted to average income over multiyear periods Alternatively, the progressive rate structure could be replaced with a proportional rate structure, but that would impair vertical equity and fairness Home owners in areas with rapidly rising real estate values experience another form of timerelated inequity Property taxes are based on market values, whether or not property owners intend to sell their homes in the foreseeable future Market values may, in fact, drop before the 12 Advocates of a flat tax system argue vertical equity can only be achieved if a single rate is applied to all income – i.e., there are no deductions and no differential treatment of earned income versus income from capital They further suggest that progressive tax rates actually leads to vertical “inequity.” 13 See generally, AICPA, 2005, Understanding Tax Reform: A Guide to 21st Century Alternatives 14 See Anderson, Roy & Shoemaker, 2003; Seetharaman & Iyer, 1995; and Suits, 1977 home owner decides to sell his or her property Prior to a sale or exchange transaction, the true value of the home is its value in use Unfortunately, value in use is difficult to measure Inflation eventually erodes the equity of certain tax provisions Although many items are now adjusted on an annual basis for inflation, others are not Over time, taxpayers find themselves paying higher marginal tax rates, not because they have experienced real growth in earnings, but because inflation has caused “bracket creep.” Two examples of tax “benefits” that have not kept pace with inflation are the IRA contribution limit15 and the capital loss limitation.16 Increasingly frequent changes to the tax law also affect time-related equity and fairness by disrupting taxpayer expectations and making tax-planning more difficult Temporary changes that “sunset” in a few years further disrupt taxpayers’ ability to evaluate the long-term impact of the tax law, and therefore, its overall equity and fairness Inter-Group Equity and Fairness – Inter-group equity and fairness implies that no group is favored to the detriment of another without good cause While some shifting of tax burdens based on the ability to pay may be appropriate, tax burden and benefit inequities should be minimized Several examples of actual or perceived inequities can be found in the system for determining Social Security benefits.17 Women, low-income retirees, and married people receive higher rates of return when their Social Security benefits are compared to the Social Security taxes they paid Historically, retirees have received benefits far in excess of their contributions plus a normal return These higher than normal returns were made possible by increases in the wage base subject to Social Security taxes Given current demographics, that pattern cannot be sustained As the post World War II “Baby Boom” begins to retire, serious intergenerational inequities will arise as the burden of sustaining Social Security benefits shifts to younger workers 18 Tax laws tend to favor homeowners by providing deductions for property taxes and mortgage interest This indirect subsidy of home ownership could be viewed as an inter-group inequity by those, who for age, economic or lifestyle reasons, are not homeowners 15 IRAs were first available in 1975 with a $1,500 limit that remained unchanged until 1982, when it was raised to $2,000 For the next twenty years, the IRA limit remained at $2,000 The 2007 limit is $4,000 [$5,000 for taxpayers 50 or older] If the IRA limitation had been adjusted for inflation since 1975, it would be closer to $5,700 today If the limit had been indexed for inflation in $500 increments – consistent with the current method for going forward after 2008 – the same taxpayer could have contributed an additional $44,000 [$35,000 for catch-up eligible] over the same period The limit would have risen to $2,000 in 1979, be $4,000 by 1993, $5,000 by 2002, and $5,500 by 2006 [Calculations made using the “Inflation Calculator” at http://www.bls.gov/cpi/.] 16 In contrast, the capital loss limitation – initially set at $1,000 in 1942, then raised to the current $3,000 limit in 1978 – has not been adjusted for almost 30 years Indexing for inflation would have resulted in a capital loss limitation closer to $12,600 (if indexed since 1954) or $9,500 (if indexed since 1978) [Calculations made using the “Inflation Calculator” at http://www.bls.gov/cpi/.] 17 See Steuerle, Carasso & Cohen, 2004 18 AICPA (2005) Understanding Social Security Reform: The Issues and Alternatives One often overlooked aspect of inter-group equity is the shifting of tax revenues or spending mandates between levels of government The framers of the Constitution envisioned a concurrent tax system where certain public services, such as defense and transportation infrastructure, were funded at the federal level and other items, such as education and public safety were funded at the state and local level.19 Over time, the myriad of services that taxpayers expect from government, as well as the cost of infrastructure, has increased substantially, resulting in budgetary pressures Compliance Equity and Fairness – Compliance equity and fairness means that all taxpayers pay what they owe on a timely basis Significant noncompliance depresses perceptions of equity, increases tax administration costs, shifts tax burdens, and enlarges the tax gap A large current tax gap makes it necessary for legislative bodies to raise future tax rates, borrow additional funds or reduce costs or benefits Changes in tax law or tax administration that make it easier for taxpayers to comply (or more difficult to not comply) result in fairer tax systems For a tax system to achieve full and voluntary taxpayer compliance, all the other equity dimensions must also be met Taxpayers are more likely to feel a “natural moral duty” to pay their taxes if they have an adequate voice in how tax burdens and benefits are distributed and if they perceive that the tax system and its administration are fair and just 20 In addition, taxpayer compliance should improve with a perception that most are complying and those who not comply experience adverse consequences Challenges Tax laws and administration should be equitable and fair However, enhancing the equity and fairness of current tax systems presents significant challenges First, the tax legislative process should make room for consideration of equity issues Second, the tax laws should be fairly enforced Third, a comprehensive assessment of equity and fairness within the tax system should be undertaken Fourth, equity and fairness should not be considered alone, but in conjunction with other desirable attributes of a good tax system The process of writing tax law is often rushed and complicated When tax legislation is initially proposed, lawmakers call for desirable outcomes, such as equity and fairness, simplification and economic growth During the legislative process, these proposals encounter balanced-budget and political constraints and trade-offs are made Often, little time is available for thoughtful consideration of equity and fairness or input from taxpayers who will be affected by the proposed changes Employees of tax agencies have a dual obligation to enforce the law and to treat taxpayers equitably and with respect However, their desire to be fair is often thwarted Rigidly drafted tax laws may not allow administrative discretion to mitigate unintended and unfair consequences 19 See Hamilton, 1788, The Federalist Papers, No 32 20 See Lefkowitz, 2004 Agency administrators are under pressure to maximize collections, which may discourage “leniency.” One of the most significant challenges is the complexity of enhancing the equity and fairness of our tax system When evaluating the equity and fairness of any tax proposal, lawmakers at the federal, state, and local levels must consider the tax regimes of all levels of government and the interactions among these various tax rules Any given tax law change may improve equity and fairness for taxpayers in particular locations or situations, but may reduce overall equity and fairness within the larger context In Tax Policy Concept Statement No 1, the AICPA identified ten desirable attributes of a good tax system [See Appendix] Provisions that enhance equity and fairness may have either a positive or negative impact on the simplicity, transparency or certainty of the tax system Provisions intended to promote economic growth may result in horizontal inequity Interaction of these competing objectives can pose a major challenge to tax writers and administrators Conclusion Tax Policy Concept Statement No identifies and defines seven “dimensions” that should be considered when assessing tax equity and fairness This approach requires the collection and analysis of an extensive amount of information With the possible exception of vertical equity, the measurements for these dimensions will be based on soft data that are influenced by individual perceptions When the data are analyzed, the relative importance of the equity and fairness dimensions, as well as possible interactions among dimensions, will depend on the scenario being considered and the critical perspective of the analyst This does not mean that the task is impossible, but it is challenging The AICPA hopes that this Statement will: (1) challenge tax lawmakers to more fully consider the importance and scope of tax equity and fairness; (2) encourage tax administrators to strive for enhanced public perceptions of tax equity and fairness; (3) provide a useful framework for tax policy advocates and students; and (4) motivate academic researchers to develop the measures and models needed to empirically address equity and fairness issues Appendix Desirable Attributes for Tax Systems Adam Smith21 1776 Equality CEA22 1996 Fairness JEC23 1998 Fair Certainty Convenience of Payment Economy in Collection Simplicity Neutral Economic Impact Economic Efficiency Transparent Tax Avoidance Difficult and Risky AICPA24 2001 Equity and Fairness Certainty Convenience of Payment Economy of Collection Simplicity Neutrality Economic Growth and Efficiency Transparency and Visibility Minimum Tax Gap IPI25 2005 GAO26 2005 Fairness Equity Simplicity Neutrality Simplicity Economic Efficiency Visibility Transparency Appropriate Government Revenues Not Costly to Administer Not Costly to Calculate Administrability 21 Adam Smith – An Inquiry into the Nature and Wealth of Nations 22 Council of Economic Advisors – Economic Report of the President 23 Joint Economic Committee, Study by Vedder & Galloway – Some Underlying Principles of Tax Policy 24 American Institute of Certified Public Accountants – Tax Policy Concept Statement No 1, Guiding Principles for Good Tax Policy: A Framework for Evaluating Tax Proposals 25 Institute for Policy Innovation, Study by Hunter & Entin – A Framework for Tax Reform 26 Government Accountability Office – Understanding the Tax Reform Debate: Background, Criteria and Questions Bibliography AICPA (2005) Understanding Social Security Reform: The Issues and Alternatives New York: AICPA AICPA (2005) Understanding Tax Reform: A Guide to 21st Century Alternatives New York: AICPA AICPA 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Chicago: The University of Chicago Press Streuerle, C., Carasso, A & L Cohen (2004) “How Progressive is Social Security and Why?” Washington, DC: Urban Institute, Number 37 in Series “Straight Talk on Social Security and Retirement Policy.” http://www.urban.org/url.cfm?ID=311016 Suits, D (1977) “Measurement of Tax Progressivity.” American Economic Review, Vol 67, No 4, pp 747-752 Thorndike J and D Ventry (eds.) (2002) Tax Justice: The Ongoing Debate Washington, D.C.: Urban Institute Press Vedder, R & L Gallaway (1998) Some Underlying Principles of Tax Policy Joint Economic Committee Study http://www.house.gov/jec/fiscal/tx-grwth/taxpol/taxpol.htm Zajac, E (2002) “What Fairness-and-Denial Research Could Have Told the Florida Supreme Court,” Independent Review, Volume 6, Issue 3, pp 377-398 ... Horizontal Equity and Fairness Vertical Equity and Fairness Time-Related Equity and Fairness Inter-Group Equity and Fairness Compliance Equity and Fairness. .. Attributes for a Tax System .1 Definitions of Equity and Fairness The Seven Dimensions of Tax Equity and Fairness Exchange Equity and Fairness .4 Process Equity and Fairness. .. further disrupt taxpayers’ ability to evaluate the long-term impact of the tax law, and therefore, its overall equity and fairness Inter-Group Equity and Fairness – Inter-group equity and fairness implies