Peter G. Masullo, CPA
Attorney at Law
NY CPA & Tax
Accountant
October 25, 1999
Steve Forbes
Forbes 2000, Inc.
209 Madison Street
Alexandria, VA 22314
Dear Mr. Forbes:
I got a weird feeling of deja vu upon perusing your web site at forbes2000.com. It reminded me of the last major tax overhaul we had in 1986. I have vivid recollections of our senators applauding themselves for achieving a "bipartisan simplification of the tax code." They even called it the "Tax Simplification Act." That was certainly a misnomer, if not an outright fraud on the American public. In their "simplification" process they enacted some of the most mind boggling legislation ever conceived of by human kind. Take, for example, the "Passive Loss Activity Rules," or the "Alternative Minimum Tax." As I predicted back then, these abrupt, ill-conceived tax provisions led to a crash in the real estate markets, particularly in the New York area. I also believe this poor legislation was a significant cause of the stock market crash of 1987.
With this in mind, I hope you will forgive me for being skeptical every time a politician comes around telling me we should be able to file our tax returns on a post card. (Although your web page claims you are a businessman, and not a politician, you have been running for office and pushing this flat tax idea for as long as I can remember, so I consider you a politician). With every mention of your "post card" idea an alarm goes off in my head warning me "Now they’re going to take away the rest of my deductions!"
You seem to have a solution for my concern by allowing us to choose between the current tax regime and your new flat tax. This seems awfully complicated to me. You did a lot of complaining about the massive amounts Americans spend to prepare their taxes, but you didn’t say anything about how much it would cost to figure out which of your tax systems would work out better. I predict Americans will spend just as much, if not more, on tax consulting and preparation services if your system is ever implemented. Based on past experience, I can tell you that major change to the tax code always results in unanticipated complications. People start to ask me, "What do I do with my IRA? What if I already rolled over to a "Roth" IRA? Should I continue my 401k contributions? Should I pay off my mortgage?" and so on.
There still would be a need to define income under your plan. The courts have been deliberating this question since the Internal Revenue Code of 1913. Are you proposing that we throw away our history of judicial decisions and legal principals that have evolved over the years? It would be nice if we could live in a simple society with simplistic rules. Unfortunately, modern financial matters do not often lend themselves to simple solutions. How would you define income from "hedging transactions" under your plan? Where would I deduct my "oil depletion allowance?" How would I account for any other item that may be peculiar to my industry or investments? Where would I compute my "home office" expense on your post card? Are you saying there are no special forms to compute my business deductions and casualty losses? You mean you’re going to accept all my postcard figures, without explanation or summarization of any kind? Or are you telling me that you are just going to disallow them altogether?
It is clear to me that your flat tax plan raises more questions and complexities than it resolves. For that reason it fails in it’s primary objective and does nothing to simplify our lives.
There is one point in your platform that I totally agree with. I share your disdain for special treatment for special interest groups. But we need not worry about giveaways under your plan since you have already given just about everything away. You want to raise the personal exemption from $2,700 to $13,000, reduce the top rate from 39.6% to only 17%, eliminate tax on savings, eliminate tax on social security benefits, eliminate tax on pension income, eliminate tax on dividend income, eliminate capital gain taxes, and eliminate the estate tax. You cite numerous studies, including one performed by the AICPA stating "The Flat Tax appears to provide tax relief to nearly all individual taxpayers." However, you did not cite even one study stating that this plan was economically viable. How the hell are you going to pay for all of this tax relief? I searched, but could not find a clue on your web site. This unrealistic placation is another fundamental flaw in your plan. Shame on you for making promises that would be impossible to keep.
If we must have a tax code, it should be used to foster socially responsible growth and desired social goals. Thus, I favor deductions for education costs, credits for creating jobs in economically depressed areas, investments in scientific and medical research etc. If we have to file a few extra forms to claim these credits, so be it. We live in a heavily regulated society and if we can tolerate forms and paperwork for everyday activities like receiving medical care, we can certainly tolerate the paperwork required to claim our charitable contribution, or other socially worthwhile deduction.
The AICPA recently conducted a study on tax reform. They made numerous recommendations for simplification, including elimination of the numerous "phase-outs" of tax benefits and elimination of the "Alternative Minimum Tax." Perhaps the most interesting recommendation was the proposal to declare a moratorium on change, at least until the effects of that change could be figured out. I would take it a step further by proclaiming that the best way to simplify the code is to stop messing around with it. Let us plan our lives and transactions with certainty from year to year. Life is complicated enough without having to worry that someone is going to change the rules in the middle of the game.
Respectfully yours,
Cc: World Wide Web
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