Time for Republicans to shelve accrual accounting

Comprehensive tax reform has become something of a white whale for policymakers in Washington. It lurks just out of reach, taunting those who chase it. And just like Captain Ahab, tax writers have made some reckless decisions in their pursuit of the elusive prize.

I applaud President Trump and his Republican allies in Congress for making tax reform a major priority of the new administration. It’s been three decades since the last major overhaul, and our tax code has grown even more bloated and unwieldy, saddling individual taxpayers with a thicket of paperwork and businesses with the highest corporate tax rate in the developed world.

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But I worry Congress and the new president may make some unfortunate decisions in their zeal to land the big one. Lowering tax rates on individuals and businesses is an expensive proposition, forcing lawmakers to find additional revenue streams either by raising rates elsewhere or relying on budget gimmicks that force the infinitely fallible scorekeepers at the Congressional Budget Office into pretending the legislation won’t add to the deficit.

 

I generally oppose raising taxes, but there are obviously some loopholes that should be closed – look no further than the so-called “extenders” package Congress approves every few years to continue tax breaks for individual industries and, in the most egregious example, individual companies. However, it’s the gimmicks that worry me most.

A few years ago, the Ways and Means Committee took the brave step of unveiling a blueprint for comprehensive tax reform that lowered the corporate tax rate to 25 percent from its current 35 percent and consolidated the existing six tax brackets into three, with a top rate of 35 percent, down from the current 39.5 percent.

In order to offset the lost revenue, the Ways and Means Committee proposed a number of controversial changes to the tax code that included: eliminating a number of tax breaks for businesses, limiting deductions for investment income, lowering the cap on a number of popular retirement-savings vehicles and reducing the tax incentives for charitable contributions.

Unfortunately, they also resorted to some accounting gimmicks that helped them appease the green-eyeshade crowd at the CBO but failed to generate actual revenue – and could impose big new costs on a number of individuals and businesses. Fake revenue that would result in real pain.

The worst example of this budgetary sleight-of-hand would force nearly 90,000 American businesses to pay taxes on money that might not even have. Under current law, partnerships – think doctors, lawyers, architects and even farmers – can choose either of two popular accounting methods to record their income and expenses.

In its simplest form, one method requires these businesses to record income when the bill is sent and expenses when the order is placed. The other records income when the money comes in and the expenses are paid for. Most partnerships opt for the latter, not the former, because why count money before you are actually paid?

Under the Ways and Means Committee's draft, these businesses would no longer have that choice; instead, they would be forced to use the less-popular method, known as accrual accounting. That means the IRS would force these businesses to pay taxes on money they are owed rather than the money they have been paid. That hardly seems fair.

Even more ridiculous: This change doesn’t raise any real revenue. It’s a total shell game. When the CBO prices legislation, they only outline the costs for the first 10 years. By forcing these businesses to adopt the so-called accrual accounting method, authors of the Ways and Means’ plan were able to essentially borrow money from the 11th year to help lower the price tag over the first decade.

In other words, it wouldn’t increase the amount of money collected by the government. It would just give the appearance that the government would collect more money.

That hardly seems like simplifying the tax code or making it fairer.

Andrew Langer is president of the Institute for Liberty, a conservative public policy advocacy organization.


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