Cohen & Company Founder and Partner Emeritus Ron Cohen jokes about being around when the federal income tax came into creation … which would make him 101 years old.
But as a CPA and tax adviser since the 1950s, he truly has seen a lot of history and has watched our income tax system change with the times. Below is a Q&A with Ron giving his unique perspective on the tax everybody loves to hate.
In April, everyone feels overtaxed. From a historical perspective, is our current income tax burden lower, the same or higher than average?
Keep in mind, rates are not the only determining factor of a tax burden, and, often, they are less important than other elements. The way you arrive at taxable income is generally more important than the rate.
That said, current rates are significantly lower than in the past. When I started in the profession, the tax rate for individuals with taxable income in excess of $200,000 was 91%. (Ron notes there was a time in history, after World War II, when individual income tax rates reached an all-time high of 94%.) But, as the rates went down, the means of calculating taxable income changed for the IRS to capture more dollars. So, taxpayers today are paying a much lower rate, but their taxable income is greater, so their tax burden has not had as much of a reduction as you would think. Also state and local income taxes have risen dramatically over the years.
And keep in mind the $200,000 threshold back then. That would be like $1.5 million today. Of course, there were more graduated rates than there are now as well.
How has the fluctuation of tax rates over the years affected closely held business owners in particular?
The major change relative to these entities has not been the fluctuation of tax rates, per se, but has come from the adoption and widespread use of flow-through vehicles, such as S corporations and LLCs. These have allowed taxpayers to make choices that have had the effect of lowering their overall tax burden.
Do you think it’s time we should consider implementing one low flat tax for everyone?
The short answer, in my opinion, is no. What makes taxes different for everyone is not the rates, it’s how you calculate the income. People feel that if you tax everyone at the same rate and eliminate all deductions, expenses and credits, that would be the fairest thing to do. For some, certain tax-deductible expenses are merely tax-saving loopholes; for others, those same expenses are necessary to generate income. I strongly believe that taxing both situations at the same rate is unfair. I served for 12 years on the American Institute of Public Accountants’ (AICPA) executive committee. During that period, and probably several times since, we made efforts to recommend a simpler way to assess tax. However, since every taxpayer has different circumstances, one size cannot fit all. The more you address those differences to create fairness, the more complexity you add. The bottom line was that we just couldn’t come up with a simple system that was fair. One thing is for sure, though, if a flat tax is implemented, there will be dramatic winners and losers.
Where do we go from here? Are there some general best practices you suggest for taxpayers?
In business and finance, it is usually smart to make decisions that will put you in the best shape in the future. In tax planning, I believe there is too much uncertainty to accurately employ that philosophy. A truly critical best practice is to engage in tax planning at the front end of considering any transaction, not when the transaction is almost complete, or even worse — final. There may be a way to accomplish the goal in a more tax-efficient manner that may save lots of taxes over a lifetime.
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