Tax Lawyer: Code Reform Stymied by Dysfunctional Congress

Passage of major tax reform legislation appears unlikely soon, partly because of partisan gridlock in Congress as bad as any in the past century and a half, a noted tax lawyer told the AICPA spring Council on Tuesday in Scottsdale, Ariz.

“Now, the members aren’t even acting in their own best interest as much as posturing,” said Daniel M. Berman, a principal in McGladrey LLP’s international tax practice and adjunct professor at Boston University School of Law. “It’s all based not on whether a bill is something the country could use, it’s based on staking out a position for the next presidential election.”

Consequently, Berman said, despite recent congressional committee hearings and several pending proposals to reform the Internal Revenue Code, “There’s just no productive legislating going on, and that means there aren’t going to be any major developments in the tax law passed until something major changes in the way Congress operates. That’s not happening in the next few years.”

In fact, gridlock and dysfunction in Washington are “at a level I don’t think we’ve ever seen, at least not in the past 150 years,” Berman said. “Maybe some of this was happening around the time of the Civil War, but not since then.”

Moreover, while fiscal policy may favor revenue-neutral reform proposals, political realities render them uninspiring, he said.

The “big driver” for the Tax Reform Act of 1986, P.L. 99-514, the last major revamping of the Code, was lowering individual rates, and the forgone revenue was nearly entirely replaced by increases in corporate income tax, Berman said. But with a clamor now for lowering the nominal corporate rate from its current 35%, feasible sources of replacement revenue are scarce to nonexistent. There’s no more low-hanging fruit, he said, even from measures that would broaden the tax base.

The result is likely to be public apathy.

“People are not going to get excited about reform that doesn’t cut rates,” he said.

The possibility of more thorough reform involving a shift in U.S. tax concepts seems even more remote, such as for a European-style value-added tax—long a politically deadly “third rail” in this country, Berman said. Similarly, proposals to replace the familiar system of individual marginal progressive rates and most deductions and credits with a “flat tax” or even to rethink the “arm’s length” standard for transactions between related parties or a territorial approach to corporate taxation would require “an entirely new system” with new laws. Such approaches might reduce the current system’s complexity but possibly at the expense of “trying to get the right answer,” he said.

America is not alone in seeking to shore up its revenues. Thus, a major project of the Organisation for Economic Co-operation and Development (OECD), of which the United States is a member, is formulating a global remedy to tax-base erosion and profit shifting, which currently allows a portion of the world’s wealth to be untaxed by any jurisdiction. The scope and timetable for the OECD project are daunting.

“They’re talking about turning the world upside down in 16 months,” he said.

Even without it, however, the United States is implementing its own initiative, in effect deputizing foreign institutions and tax authorities to provide information on U.S. taxpayers’ financial assets through the Foreign Account Tax Compliance Act (FATCA), P.L. 111-147. Other nations are finding the measures useful for enforcing their own tax reporting laws.

“The world just isn’t safe for tax evaders anymore,” he said. “This is a new world order, in a sense.”

CPAs will be in the vanguard of that new order, whether or not their practices have the resources for a specialist’s understanding of international tax reporting and FATCA’s provisions.

“If you haven’t had to encounter it yet, you will,” Berman said, whether directly or indirectly, as in uncertainty over when FATCA’s provisions apply. “What does FATCA mean to me? That’s a big issue that almost nobody can avoid in this world.”

Before joining McGladrey and Boston University, Berman was legislative counsel to the congressional Joint Committee on Taxation and subsequently was deputy international tax counsel to Treasury and practiced in Washington law firms.