When corporations and individuals do not pay taxes because of deductions, depreciation and credits, the relevant question is to whom does the burden of taxation shift?
Do you want a simpler federal tax code that is easier to understand, pay, and administer?
If you answered yes, then are you prepared to forego your deductions, depreciation, and credits to simplify the tax code?
Theses are the questions raised in my recent Nonprofit Quarterly article “Shifting the Burdens of the Unrelated Business Income Tax: A Proposal to Nonprofits” and my earlier IRS ACT “What if?” inquiry contained in my “Concurring, Dissenting, and Sixth Recommendation…” comments which I hand-delivered to IRS Commissioner Koskinen during our public hearing in June 2014.
The issue of complexity and unfairness of the federal tax code crystallized for me while reviewing unrelated business income (“UBI”) and the corresponding unrelated business income tax (“UBIT”) for the tax year 2010 as a member of the 2014 IRS ACT committee. In that year there were approximately 43,000 corporations which generated UBI. This discrete number of corporations made the issue easier to understand and to quantify.
Nonprofit tax exempt corporations which engage in business/economic activity that is unrelated to their exempt purposes will pay corporate income tax at a rate between 15-35 per cent. Like an individual’s income tax, a corporation’s taxes are determined after reducing its taxable income because of tax deductions, depreciation, and credits.
Yet nearly two-thirds (66 per cent) of these corporations paid no corporate income tax in 2010. This finding was consistent with the trend beginning in 1992 outlined in the 2008 Chronicle of Philanthropy article “A Taxing Matter” by authors Peter Panepento and Grant Williams.
But, what if all 43,000 corporations were required to pay taxes, but only on their gross income? What is the revenue neutral rate, i.e. raising no more taxes than collectively paid in 2010? The rate is slightly more than 3%!
The corporate tax form goes from its current convoluted form to a simple formula or three line tax form:
Gross income x (Y) tax rate percent = Taxes owed
Deductions, depreciation, and credits are like a carnival shell game which disguise to whom the burden of taxation shifts while extracting money. The problem is we lose sight of this simple fact.
Can taxes used to fund public goods and services be raised in a way that is easy, effective, and efficient? Can the burden of taxation be lowered and shared more equitably? Can the tax code be simplified?
Yes, but only if we are willing to forego the deductions, depreciation, and credits!
To read more:
- Nonprofit Quarterly: Shifting the Burdens of the Unrelated Business Income Tax: A Proposal to Nonprofits, October 14, 2016.
- IRS ACT: “Concurring, Dissenting, and A Sixth Recommendation for an Economic, Financial, and Statistical Study of IRS Statistics of Income (“SOI”) and Related Data to Inform and Guide IRS Policy and Practices for Nonprofit’s Unrelated Business Income Practices and Unrelated Business Income Tax to Include Considerations of Alternative Tax Regimes.” June 2014.
- Chronicle of Philanthropy: “A Taxing Matter”, Peter Panepento and Grant Williams, January 30, 2008.
- Tax Foundation: Federal Corporate Income Tax Rates, Income Years 1909-2012.
Websites last accessed October 24, 2016.