Welcome to tax reform

Nation's Business, Nov, 1986 by Joan C. Szabo

Welcome To Tax Reform

Bob Haddad, partner in charge of small business tax practice at the Boston office of Price Waterhouse, the accounting firm, says the complexity of the new tax reform law "is going to kill small business."

"Fairness and simplicity are not addressed by the law for small companies--it will be a pain in the neck to live with," says Bradford L. Roller, president of Cleveland's Swiger Coil Systems, Inc., maker of electric motor parts.

Charles "Skip" Phillippi, an Albuquerque, N.M., accountant who is chairman of the American Institute of Certified Public Accountants' small business taxation subcommittee, declares: "The only people who will see simplification are the 6 million [low-income taxpayers] who are off the tax rolls."

Rep. Richard B. Cheney (R-Wyo.) holds that legislators who presented the law as opening an era of Internal Revenue Code fairness and simplicity don't really understand it: "Many of the provisions are incomprehensible to members of Congress, let alone those people who will be required to comply." Sen. Lloyd Bentsen (D-Tex.) says, "Tax accountants and lawyers will revel in this."

Those are a small sampling of similar comments being heard throughout the country. Critics argue that, whatever the benefits of the law, smaller and medium-sized businesses will pay a high price for them in terms of vastly increased paper work and costs of professional tax advice.

"Accountants and tax practitioners are in the winners' column on this law," says Steven Dickey, marketing director for H&R Block, the big tax preparation company based in Kansas City, Mo.

In addition, interviews with numerous small business owners show, there is widespread fear that the law will mean higher taxes in many cases, despite the emphasis that its congressional supporters put on its lower rates for businesses and individuals.

The apprehension sweeping through the small business community is in marked contrast to the official euphoria surrounding the measure. Much of Washington has hailed the law as (1) answering longstanding public complaints that the tax system favored special interests at the expense of the average working taxpayer and (2) recognizing business concerns that the system worked against the saving and investment needed to fuel the economy.

What Congress has produced does eliminate many deductions and preferences that were the basis for allegations that the system was unfair, and it does drastically cut income tax rates for both individuals and corporations.

But it also increases other business taxes $120 billion over five years to grant an equal amount in relief to individuals.

If not for the rate cuts, the bite out of business would be even bigger. Elimination of the investment tax credit on equipment purchases will raise business taxes more than $150 billion over the five years. In addition, the law increases business taxes by scaling back depreciation write-offs on equipment and real estate, requiring certain accounting changes and eliminating the special tax treatment of long-term capital gains.

"There are really two laws," says Emil M. Sunley, tax analysis director in the national affairs office of the accounting firm of Deloitte, Haskins & Sells in Washington. "One lowers marginal rates, and the other increases taxes."

Under this arrangement, he says, some companies "come out ahead and some behind." Specifically, the law reduces the top tax rate from 50 to 28 percent for individuals as of 1988 (though for many high income people, the marginal rate will be 33 percent; see "It's Your Money," page 79). In 1987, the top rate will be 38.5 percent. Owners of unincorporated businesses will be subject to these rates.

For corporations, the drop is from a top rate of 46 percent to 34 percent, with two lower rates for companies whose income is under $75,000. In 1987, however, a corporation that operates on a calendar year basis will face a top rate of 40 percent.

Among the new law's most outspoken critics is Leo Lauzen, chairman of Comprehensive Accounting Corporation, Aurora, Ill., whose 400 franchisees serve as accountants for 20,000 small and medium-sized businesses.

"This tax bill makes small business owners the forgotten people in the United States," Lauzen says. "Congress has once again failed in its responsibilities to them."

The measure's complexities are such, he says, that any relief provided smaller businesses will be offset to the point that they will be paying 15 to 20 percent more in taxes when the legislation is fully effective.

Overall, he says, the impact of the $120 billion in higher business taxes will fall most heavily on the nation's 16 million small firms, including those that are home-based or operated on a part-time basis.

Owners of smaller businesses and tax advisers say that, because the tax legislation is so complicated, its overall adverse effect on costs of doing business and the availability of capital will not be fully apparent for some time. They argue that claims of simplification are rebutted by just a glance at a copy of the law and supporting documents--a total of nearly 2,000 pages.