It’s hard to imagine any circumstances under which our U. S. Senators and Representatives would have sufficient support from constituents to engage in a process leading to simplification. The sectors of our economy tied to specific tax provisions are endless. These provisions can all be justified individually. Usually it’s the critical nature of a sector to the viability of our economy and way of life. Others are based on attempts to strive for economic and social justice. The analogy of a blind person identifying an elephant by touch applies. The totality of our Federal tax system is the elephant in the room. The authors of Tax Foundation Special Report No. 138 estimate a Federal Income Tax compliance cost of a quarter-trillion dollars in 2004, increasing to almost half a trillion in 2015.
Reversing the process that created the elephant, i.e. “unjustifying” each provision one-at-a time won’t work. No sector would give-up first, anticipating that others wouldn’t follow. Success would require a fresh start.
Discussions of flat tax proposals generally focus on the taxation of returns to labor. Objections to a single tax rate deal with equity and ability to pay. An indexed tax rate would be needed, unless an excludable amount could be agreed on. It’s doubtful that a tax system and federal budget not supporting some level of transfer of wealth would win Congressional support.
Less discussed is the taxation of land and capital, the other major components of an economy. Most economists and tax systems in other countries distinguish between returns to capital, and returns to labor. Forest landowners by-in-large believe that gains that take decades to realize are fundamentally different than returns to labor -- earned income. Annual returns to land from crops or rent generating activities are currently ordinary income. We see no reason to change this.
The dual nature of timber as a crop and as capital in the form of growing stock has been debated at least since 1944 when capital gains treatment was first provided for timber held for use in a trade or business, or held primarily for sale to customers in the ordinary course of a trade or business. The only condition under which gains from timber could reasonably be considered ordinary income is from ownerships large enough to have a regulated forest, i.e. annual harvests that approximately equal annual growth. Even then the large amount of capital tied-up in growing stock argues for treatment as capital gains. The case is much clearer for family forest ownerships providing sporadic timber gains. Returns from processing timber are now and should remain ordinary income.
We believe that it would be necessary to negotiate timber owners’ position on tax simplification in good faith, but that we should take a strong position in support of a lower tax rate for gains from timber disposals.