This Paper is a Response to a Request for Comments by
the Federal Tax Reform Panel on Feb. 16th, 2005
Matt Waldis
211 Roy Street
Houston, TX 77002
Submitted Feb. 27th, 2005
Individual Submission to Federal Tax Reform Panel
Before getting into any detailed tax comments, I want to say that I voted for President
Bush in 2004 SOLELY based upon this issue and I am glad to see him follow up on his promise
to make desperately needed changes in our unfair and terribly inefficient tax code via this panel.
I have a B.S. in engineering and a M.B.A specializing in finance. I have worked for large
corporations and small businesses and lived in states with and without income taxes, so I
consider myself reasonably educated through experience and education to make informed
comments on the bigger ticket issues causing the most pain regarding tax collection. Here are
my two primary thoughts on how to minimize or eliminate some avoidable taxpayer burdens;
1. Eliminate corporate and small business income tax altogether! While the time spent
by individuals preparing their annual tax returns and the corresponding time and money
spent by the IRS enforcing the tax code on individuals are substantial and should be
minimized or even eliminated, the realist in me sees that the most obtainable and biggest
bang for our buck elimination of needless productivity lost on income taxes would be in
the form of a complete elimination of corporate and small business income taxes. Tax
revenue to the government from corporations has been on the decline for decades now as
thousands of smart and hard working Americans spend their entire professional careers
minimizing the income taxes of businesses. The percentage of tax collections from
corporations has declined from 21% in 1962 to only 7% in 2003. Let us individuals pick
up the slack for this 7%, as we have picked up the slack for the 14% lost over the last
four decades, except let’s do it in a visible transparent fashion. The privately held small
business I currently work for in Houston with four employees just wasted tens and
probably hundreds of man hours putting together all the information, in combination with
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our outside accountants, in order to file our 2004 income tax return. Separately, many of
my clients are large public corporations, and accounting issues arise almost daily which
take time away from both their and my productivity doing work to actually make money
for either of our entities. For a specific example, I spent about 3 hours a few weeks ago
explaining to a client via multiple phone conversations and emails the details of a
particular financial derivative contract that they had entered into before retaining my
services. I was not discussing this with the person whose responsibility it is to enter or
exit these types of transactions, thus talking about actual cash flow changing business
strategy. I was speaking to two accountants, who needed to know how to assess the
current value and income ramifications totaling approximately $150,000 would affect
their 2004 income statement and balance sheet. This is a company with a market
capitalization approaching $1 billion. Situations like these happen daily in corporate
America as well as small business America. It would be impossible to quantify the
increase in productivity from completely eliminating corporate income taxes, but I would
say that any estimate would likely far underestimate the effect. Further, it is time to end
the corporate advantages to anything tagged a “business expense”. Corporations get an
income tax break (essentially a 35% discount) on things like sporting events and
extravagant dinners with clients. Where is the discount for the average working class
American? Is it any wonder why a family of four can’t afford to go to a baseball game
but once a year and then sit in the third or fourth levels? The ironic thing is that a
corporation buys 10 $100 seats behind the dugout, and then gets a $350 tax break on their
income taxes at the end of the year, which brings in less money to the government which
has to be made up for by the same four person family that couldn’t afford the seats to
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begin with. Wouldn’t it further be nice to remove all the incentives for “tax aggressive”
companies to put their headquarters in the Bahamas for absolutely no real business reason
to avoid paying income taxes? It’s also time to end all the tax avoidance schemes of
businesses taking tax breaks for costs not really associated with necessary business
operations. This provides false incentives to make otherwise unsound business decisions
in order to avoid taxes. Collectively, these things hurt all of us to benefit only a few
people.
2. Phase in a national sales tax to eventually replace the individual income tax system!
It doesn’t strike me as fair when an individual such as John Kerry’s wife, making $5
million a year, pays an effective tax rate of only 15% while people making $50,000 a year
pay an effective tax rate of more than 20%. This is based on an article in the Wall Street
Journal during the 2004 election regarding the 2003 tax year. I don’t care what loopholes were used; this is an unfair system when this is allowed to happen. We need to
start dealing in reality with actual tax rates paid by individuals and companies. How
many Fortune 500 companies paid NO income tax in 2003? I don’t know the exact
number, but it is more than a handful. This is not fair. I don’t have a problem paying my
taxes, but I want it to be fair to all individuals, regardless of how many tax accountants
are in your corner. Moving to a national sales tax is the easiest way to move the system
to be fairer. Important side benefits of moving to a national sales tax would be a greater
incentive for savings (as Alan Greenspan said a few weeks ago) and making American
goods cheaper to foreigners, thereby increasing our exports and narrowing our enormous
trade deficit. The hidden corporate income taxes in the sales prices of American goods
would go away and our goods would become cheaper to the world market.
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The goal of the panel should be simple. It should be to make the tax collection system more
efficient and fair, enabling our country to allocate more resources toward value creation instead
of bean counting. It should also minimize the fertile grounds for corporations and individuals,
with access to teams of tax attorneys, to abuse the system and shortchange the government at the
expense of the rest of us. Eliminating business income taxes and moving toward a national sales
tax are the most realistic and easiest ways to accomplish these goals, in my opinion. The details
are much less important, but we need to get moving in this direction soon! Compensating for
lower income (automatic sales tax credits paid monthly or quarterly) and providing tax
incentives for certain activities (buying a home, charitable giving, having children, higher
education) could all be taken care of with certain sales tax rebates, say 25% of these amounts
paid. I wish all of you the best in making your recommendations to the President and Congress.
This is a very important task you have before you, as it will affect each and every American
significantly for years to come. Please keep in mind that your recommendations should enhance
the long term welfare of the United States population as a whole, and not simply the rich or poor
or small businesses and certainly not corporations. While it is sometimes very easy to get “lost
in the numbers”, the smartest and most successful businesspeople I have ever come across
almost all subscribe to the mantra Keep It Simple Stupid (KISS – no disrespect intended), and I
encourage you to do the same! Good luck to you in your historic task!
Sincerely,
Matt Waldis
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