With all this discussion of a simplified tax code for personal income, I would like to suggest a similar simplified tax alternative, an "Sch EZ-C", be promoted for reporting business income, based to some extent on Washington State's B&O tax. Those of us business owners who don't want to spend a month or more of our lives each year tearing our hair out dotting every 'i' and crossing every 't' deserve a simplified Schedule EZ-C for businesses. Those who want to fill out the details and file the current Sch C, fine, let them sit down with their accountants and play the social engineering tax game. For the rest of us business people, the EZ-C would basically be a 'Maximum Tax' that would be owed.
How would a EZ-C work? Simple :
Gross Receipts * industry profit margin = profit reported for that business.
The IRS would develop a general average profit margin for each particular industry (initially using the historically average profit margins of those that filed the long way).
Small businesses figure their profit using the general profit margin for their particular industry times their gross receipts. They don't have to waste any time keeping track of every deduction that they have. They just figure the average profit and get back to work providing jobs and quality products and services.
Businesses could optionally file the 'long way' using the current tax code if they find it to their benefit.
The EZ-C would be simple, clean and efficient as well as fair. Businesses could figure what their tax load would be and adjust their business practices to accordingly with some assurance that the tax code would remain stable for long term planning.
Take my business, dentistry, with an average net profit margin of 30%. To figure my profit for the 1040 using an EZ-C, I'd just enter my gross receipts and multiply by the average profit margin for dentistry that the IRS provided (30%). I'd enter that on the 1040 line for profit from business and get on with life. This means that when it came time to make a decision about what to buy or how to operate my business, I wouldn't have to refer to my accountant to find out how government is micromanaging my business. I could do the right thing because it was right.
As one can see, the EZ-C is a simple fast and fair business tax code. Among its other valuable features would be :
The simplicity of the EZ-C would promote people to start their own business.
One effect of the EZ-C would to provide a moderate tax cut for business. This would be adjusted by more profitable behavior since government would be out of micromanaging small businesses and the decreased cost of operating the IRS for these businesses.
It removes the nightmares of a complex tax code that might lead to an IRS audit that would ruin their business and life. There would be no reason to be audited unless one misreported their gross receipts. This would significantly reduce the overhead for running the IRS.
Eliminating the fear of the tax code from running a business would lead to gainful employment and prosperity for many who are capable of running a business except for fear of the tax code.
The adversarial role between the IRS and businesses using the EZ-C is virtually eliminated. There would little need to nit-pick over accounting details. No long fights in courts, no long sessions with accountants, etc, etc, etc. Just run the business.
The system allows for a smooth transition from the long form to the short form. Those businesses who need the complexity of the current code for their business stability can continue to rely upon the existing rules until such time as they see a benefit for changing.
The EZ-C would cut by more than half of the IRS overhead for overseeing small businesses as half of the small businesses would save filing under the EZ-C. A significant fringe group would file the EZ-C to avoid audit problems, and another group would file the EZ-C to avoid the hassles of doing it the long way. One might speculate about a 3/4 reduction in overhead to the IRS with a schedule EZ-C with greater saving in the future as more and more would find the EZ-C the way to go. The savings by the IRS would compensate for some of the modest tax cuts the EZ-C might create.
As a final note on the EZ-C (as well as on business taxes in general), it might also be suggested that all or part of any qualifying export not be counted as part of gross receipts. This would promote export trade as well as providing a good reason for businesses to stay in or locate in the United States. This would equalize the cost of US exports in the global market with nations that don't charge a VAT tax on exports. GIVE US A LAUNCH PAD TO PROSPERITY IN A GLOBAL MARKET PLACE.
Those who are familiar with Washington State's B&O tax, may recognize the EZ-C as a take off of that tax. While few people like paying any taxes, one thing that can be said for the B&O tax is that is it quick and easy to comply with. The EZ-C has several improvements over the B&O tax. It uses existing industry profit margins for reporting income, eliminating the problem with the B&O tax where the tax rates can be used to target a specific industry. The EZ-C also allows for those who need the tax breaks of the long code to file that way.
There are some minor deductions that are allowed under the B&O tax that might be allowed in the EZ-C. The B&O tax provides some guidelines there. One might suggest that employee benefits be considered a deduction to promote health care coverage and pensions be offered to employees. This would require these benefits not to be considered as part of the calculations for average profit margins and adds some modest complexity to the EZ-C. If one offered 100% deductibility of self employed health care coverage for those who provide health care coverage for their full time employees, this might be a reasonable trade off.
In summary, the EZ-C would appear to me to be a vast improvement for small business tax codes. It provides all the benefits one might look for in a simplified tax code, while not taking away any existing benefits for those who rely upon the existing 'longer form'. Most of all, it promotes people to make the attempt to create their own niche in the world and in the process create good paying jobs and prosperity for others who they may come to employ.
Submitted as written testimony to the
House Subcommittee on Small Business Taxation April 3, 1996.