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Fitting Tax Policy
into
Editor: Editor’s note: Professor Nellen is a former member of the AICPA Tax Divisions Strategic Planning Task Force and Tax Executive Committee. For more information about this column, contact Prof. Rupert at t.rupert@neu.edu or (617) 373-5165. Professors have heeded tax professionals calls for increased emphasis on communication, technology and interpersonal skills, and have developed assignments that build them into their tax curricula. However, while the AICPAs Model Tax Curriculum (MTC) recommends six credit hours of undergraduate tax courses, many institutions continue to require just a single tax course of their undergraduate accounting majors (for information on the MTC, see www.aicpa.org/members/div/career/edu/introduc.htm). Thus, it is not surprising that professors have limited time and resources to devote to policy issues. Nevertheless, a number of creative approaches are being employed to ensure that even students with just a single undergraduate tax course can develop an appreciation for tax policy.
Practitioner Partnering Professors are using a variety of techniques to introduce tax policy issues to students. The students benefit from the broader perspective that this affords, which ultimately better prepares them for their roles as tax practitioners. However, input from practitioners would help to provide insight into significant issues. Students are very responsive to presentations by practitioners, and are interested in hearing their views about current policy concerns. Partnerships between tax professors and practitioners could make this happen in many colleges and universities. Similarly, it would be beneficial to engage new tax staff in policy discussions, which would help them to avoid a narrow focus on specific returns and assignments; see the sidebar below.
Benefits of Tax Policy Curriculum Incorporating tax policy topics into the tax curriculum offers several benefits. First, it increases student interest in the subject. Tax policy topics readily lend themselves to class discussion (some even generate lively debate). For example, a discussion of the current tax rate structure will identify students who genuinely disagree about the fundamentals of horizontal versus vertical equity. Devoting time to tax policy topics stimulates students to look at tax provisions more carefully and to understand better why the Code is so complex. Another benefit of focusing on tax policy is that it increases students awareness that tax rules are not set in stoneby rising above the detailed rules and regulations, they can develop an appreciation for how tax law is influenced by politics, special interest groups and the economic climate. They also learn how to put the rules into a richer context. While a detailed history of tax law is beyond the scope of most courses (and the grasp of most students), some discussion of how the law has evolved helps students to understand that it is designed to achieve many (often competing) objectives that change over time. Finally, in covering tax policy issues, tax professors help students to understand that not only do tax rules change, but how and why. This can lead to a very beneficial skillthe ability to anticipate future law changeswhich will prove to be priceless when advising clients. It also demonstrates the value of engaging fledgling tax staff in discussions about tax policy, to help them further consider the issues and to hone this effective skill.
Tax Policy Considerations to Introduce the Tax Course The MTC recommends covering the criteria of a good taxequity, certainty, convenience and economy, for exampleand briefly addressing the history and objectives of the Federal income tax in the introduction of the first course in tax. While these topics are supposed to be only part of an initial three-hour module, they can be reinforced frequently throughout the course. Further, a compelling first exposure to these issues can engage students right from the start, increasing the likelihood that they will be open and attentive to policy matters discussed later. An interesting class exercise to accomplish this objective involves surveying students on the first day of class to elicit their opinions on a fair tax burden. For example, they can be asked to allocate a fixed tax burden among five taxpayers, each of whom has a different level of income (some earned and some unearned, which further complicates matters). Another version of this exercise would be to ask students to determine the fair tax burden (in dollars or as a percentage of income) for several different taxpayers with different types of jobs and widely different salaries (e.g., a daycare worker, staff accountant, medical doctor and professional athlete). The key to this exercises effectiveness is providing a summary of the tax rate schedules emerging from the students responses. While typically, the majority favors a progressive rate structure, there is considerable variation in the preferred degree of progressivity. Further, there is often a sizable minority that prefers a proportional tax, and a small minority that suggests a regressive rate structure. These results generate a great deal of student discussion. Another effective opening exercise is to ask students to form teams to work on developing an ideal income tax system. Each team can be assigned the task from a different perspective (individuals with different levels of income, special interest groups, etc.). This unstructured exercise leads students to identify differences of opinion quickly, as well as the many practical difficulties encountered in arriving at a consensus.
Integrating Tax Policy Considerations throughout the Course Tax policy matters can be reinforced throughout the course with discussion questions and other assignments designed to encourage students to consider the tax policy reasons for selected provisions, and/or the implications of selected tax rules. For example, many elements of the tax law can be evaluated within the good criteria context; see the AICPA Tax Divisions Tax Policy Concept Statement Number 1, Guiding Principles of Good Tax Policy: A Framework for Evaluating Tax Proposals, a useful reference for this activity, available at http://ftp.aicpa.org/public/download/members/div/tax/3-01.pdf. Students quickly discover the need for tradeoffs, as well as the significance of honest differences of opinion (e.g., for what constitutes equity). As different exclusions and deductions are introduced, students assessing these provisions in light of the criteria develop a strong appreciation for policy issues.
Exhibit 1 above identifies several tax topics that open the door to interesting discussions. Exhibit 2 below provides sample discussion questions for some of these topics. These questions can be assigned for in-class review or out-of-class discussion via an electronic discussion board. An advantage of the latter is that tax practitioners views could be brought into the discussion after students have had an opportunity to articulate their ideas; see the sidebar.
Another tax policy issue that is easily integrated into a tax course at any level is the concept of stated versus effective marginal tax rates. After students have become familiar with the tax rate schedule, they will learn of the many provisions (including phase-ins, phaseouts and caps) and other stipulations that effectively change the marginal tax rate of affected taxpayers. By calculating effective marginal tax rates, students gain an understanding of the sometimes counter-intuitive results such provisions can cause. For example, it is easy to develop examples in which a low-income taxpayer has a very high marginal tax rate, because the taxpayer is in the phaseout range of the earned income credit (EIC). Similarly, taxpayers in the phase-in range may actually have a negative marginal tax rate. There are numerous provisions that affect the marginal tax rates of taxpayers at all income levels, which students can analyze. Several of these are identified in Exhibit 1.
The Role of Major Projects in Developing Tax Policy Knowledge While most tax courses require a heavy emphasis on technical material and do not allow an in-depth exploration of tax policy matters, some institutions offer a stand-alone course in tax policy that lends itself to a major project. This typically involves a research paper and/or presentation on an issue currently in the media. While it is possible to allow students to choose individual topics, some professors have decided to have an entire class focus on a single issue, often assigning different aspects of a complex issue to different students. Recent examples include Social Security reform and corporate integration. The advantage of a major project is that it allows students to explore a particular topic in depth, developing a higher level of expertise. For example, in exploring Social Security reform, individual students (or small groups) might research and evaluate different proposals for reform and report their findings to the class, which could then vote on the best approach.
To research corporate
integration, students can be assigned background articles with various
proposals on how to achieve corporate integration (see, e.g., Graetz and
Warren, Integration of Corporate and Individual Income Taxes: An
Introduction, Tax Analysts (9/27/99), available at
www.taxanalysts.com/www/taxpolicyreadings.nsf/0/ While this type of assignment is geared toward a policy class, it could be used anywhere in the tax curriculum, when time permits. Also, in light of the number of possible topics, this type of assignment can be used in any level of tax classfrom introductory to advanced.
Summary Students future contributions to clients and firms will be greater if they are able to anticipate and evaluate changes in tax law, and to communicate an understanding of tax policy. While the process begins in the classroom, it must continue into the professional work environment; practitioners can help toward that end. |
