Innovative tax policy projects utilizing a global perspective.

King, Darwin L.

INTRODUCTION

Many university courses taught today have attempted to develop an "international flavor". Recruiters often suggest that students consider an International Business minor or at least take several courses that reflect this concept. With this in mind, the author attempted to develop a project for his taxation classes, which emphasized a comparison of foreign tax systems with the current U.S. structure. The strategy was to use the Internet as a research tool in order to accumulate information related to a number of tax policies and have the students evaluate the fairness of each of these various systems. In an effort to improve teamwork skills, the project was developed using a group presentation approach.

The author refers to this assignment as his "Adam Smith" research project. It has been used successfully during the past three years in a number of taxation classes. The emphasis of this project involves a review of the tax policy currently used in the United States compared with foreign countries in hopes of determining what features appear to be most beneficial to the stakeholders involved. In other words, what tax system principles, characteristics, and requirements would be most advantageous for both the government and the majority of the country's citizens? Students often have very strong beliefs on this subject that they freely share which creates excellent classroom discussions. By encouraging students to evaluate three different tax systems, they begin to discover significant equity and fairness differences.

The project begins with the introduction by the instructor of Adam Smith's "Canons of Taxation". A review of this famous set of criteria for good tax policy serves as the foundation for the assignment. In his book "The Wealth of Nations", Smith presented four basic characteristics of a good taxation system (Smith, 1776). His canons of equality, convenience, certainty, and economy provide the students with a benchmark for an "ideal" taxation system.

Smith believed that taxpayers should contribute to the system in proportion to the revenue that they enjoyed. This led the United States to adopt as one of its major tax principles the concept of "ability to pay". Smith also felt that both the amount and time of payment of tax should be specific and easily determined by the citizens of the country. In addition, he felt that the tax should be levied at the time when it was most convenient for the taxpayer to pay it. Finally, Smith believed that the government should take as little as possible from the taxpayers over what was brought into the treasury. In other words, the tax should be economical to assess and collect. These four canons provide valuable principles for the development and operation of any tax system and are used by students during their evaluation of alternative tax structures.

The author also reviews with the students several statements by Wilbur Mills, long time chairman of the House Ways and Means Committee, which reflect Smith's beliefs. Mills felt that tax reform should seek for greater reliance on the principle that equal incomes should bear equal tax liabilities (equality). He also felt that the tax system should interfere as little as possible with the operation of the free market mechanism in directing resources into their most productive uses. In addition, Mills believed that our tax system should have greater ease of compliance and administration in order to provide economy (Mills, 1959). The use of the Smith/Mills philosophy provides an excellent conceptual introduction to students prior to the assignment of this group research project. It provides them with some important historical literature concerning the principles of a good tax system.

THE PROJECT REQUIREMENTS

With Adam Smith's principles in mind, the author developed a group project that attempted to encourage student teams of two members (three if necessary) to construct a tax system that is as close to an "ideal" system as possible. The instructor first suggests that students review the basic United States tax regulations covered in class and then select two or three foreign countries for similar examination. The intent is to get students thinking about an "ideal system" which provides maximum benefits to both the government and its citizens at a reasonable cost. This requires students to consider what income should be taxable, what deductions should be available, and what types of tax credits would provide for a fair and efficient tax system. Also, the number of tax rates and the size of each bracket constitute still additional considerations.

Student groups are encouraged to seek information from a variety of sources. For example, library on-line services such as LEXIS-NEXIS Academic Universe and Internet research in general both provide students with resources that can be used for this project. The LEXIS-NEXIS Academic Universe, for example, contains a database of over 1.4 billion documents from over 18,300 sources. Also, the Big 5 accounting firm's home pages provide many links to foreign sites providing information on tax policy. These homepages offer the user a large database of relevant information related to currently employed taxation systems from around the world. The Big 5 URL addresses are included in the appendix of this paper.

Especially good international research materials can be found on the Ernst & Young site in the form of the EY Passport. This research database is available both on the Internet site and also in the form of a CD. The CD is free upon educator request from any E&Y office. The EY Passport contains a wealth of tax and business information from over 130 countries. The firm updates this information on a quarterly basis. The CD can be searched using both simple and advanced queries as explained in the related documentation. A visit to "www.eyi.com" provides students with a good starting point for gathering tax policy from various countries. After registering on the site, students will gain access to special reports and protected areas of the Internet site. In particular, the tax library becomes available for the student's use.

The project requires students to research the current tax structure of two foreign countries and compare them with the United States in terms of Adam Smith's characteristics of a good tax. Students normally prepare a type of SWOT (strengths, weaknesses, opportunities, and threats) analysis in order to summarize aspects of each country's tax policy that either supported or violated Smith's Canons of Taxation. The student teams would then summarize the positive features of each country's system and propose a tax system that they felt was conceptually and operationally optimal. This involves a review of policies directed to income, exclusions, deductions, and tax credits. Also, the concept of standard deductions and personal exemptions is normally included in the student's analysis as they decide on what amount should be excluded from taxation for taxpayers with low income levels.

Some groups concentrate only on individual taxation while others include information related to taxation of businesses. Although the emphasis is on income taxes, a number of groups also include a discussion of gift and estate taxes. Many of the better presentations have attempted to look at all taxes that apply to an individual in a given country. Therefore, income, gift, estate, excise, and other taxes are included in some of the presentations. Also, the types of social programs available to taxpayers such as medical and education are discussed in the process of explaining why a country has very high rates of tax. For example, Canada has high rates of Federal and Provincial taxes but as a result provides many valuable medical and educational programs for its citizens.

The concept of capital gain and loss taxation is another area that is often included in many presentations. The "fairness" of allowing capital gains to be taxed at a lower rate than ordinary income often creates considerable class discussion. In other words, many students feel that special rates applied to capital gains represent an unfair benefit to wealthy taxpayers who typically buy and sell securities. In most presentations, the three countries reviewed often have very different taxation methods and rates applied to gains from the sale of investments.

The project requires a thirty-minute presentation by the two person student teams using a PowerPoint slideshow. Each student presents for approximately fifteen minutes and then the instructor opens a question/answer or general discussion session. Presenting groups also are required to distribute a one-page lecture outline (summary) to each member of the class. Class participants use the outline to take notes and prepare questions that they ask during the discussion period. The discussion period is often nearly as long as the presentation depending on the countries reviewed and the student's definition of what constitutes "fairness and equity" in a tax system. The author has received comments from students who felt that the discussion following the actual presentation was often some of the most interesting and valuable portions of the course.

Following the group's presentation, each team also submits to the instructor an 8 to 10 page paper summarizing the major topics discussed in their presentation. Through this process, the students improve their research abilities as well as oral and written communication skills. Teamwork attitudes and analytical abilities are also developed. In addition, the student's knowledge of technology is improved through the use of the Internet, Microsoft PowerPoint, and other computer software utilized. Students often feel that this is a "real world" type of project that can provide them with improved skills useful when they become employed. The majority of students feel that this is not simply a "make work" project but instead something truly beneficial for them.

To further aid students in this type of research, the author prepared a homepage that contained links to numerous research sites. In particular, an effort was made to include URL's on the website that related to all functional area of business. Therefore, accounting and taxation, finance, marketing, management, and human resource links were all provided to aid students in any type of business research. One purpose of the homepage was to benefit students in other business courses that required a research project. This page was also used to provide updated course materials to students in each of the author's courses.

Finally, the instructor distributes handouts to students with URL's of research locations discovered during the semester. In the Fall 1999 semester, one such example was the Lex Mundi site. This is a leading association of independent law firms that has constructed an excellent homepage that includes an "International Tax Deskbook". The Deskbook includes the tax system currently employed by 24 countries. This site provides a wealth of information on countries such as Australia, France, Germany, Spain, and the U.S. For example, the French portion of this site includes 45 pages of detailed tax information including types of taxes imposed, sources of the tax law, tax administration structure, and an excellent summary of income taxes applied to business entities and individuals. This site (http://www.lexmundi.org) provides an excellent location for students to begin their global Internet taxation research.

CONCLUSION

Based upon feedback from students during the last three years, the author believes that the majority of participants have found significant value in this project. Students feel, in most cases, that the typical tax system found today in most countries contains many regulations that often violate the four Canons of Taxation proposed by Adam Smith. This project requires students to work as a team and brainstorm the very difficult process of developing a system of taxation that provides equality, convenience, certainty, and economy for both the government and its citizens. Projects of this nature benefit the student through the improvement of many skills necessary to succeed in business. The appendix of this paper includes sites used in the past by the author's students in the process of researching tax systems from around the world.

It is the author's hope that this paper will provide accounting instructors with constructive ideas that can be utilized in any of their classes. For example, a similar project could be created that compares the Financial Statement presentation or any other aspect of a foreign country's accounting system. A project of this type provides multiple benefits for both the instructor and the students. It has proven especially beneficial in creating active class discussions since many students will eagerly voice their opinion on what they feel is good tax policy. Projects such as this aid students by encouraging a truly global perspective in the research that they conduct. At the same time, oral and written communication skills, research abilities, technology knowledge, and teamwork concepts are each encouraged and developed.

APPENDIX--GENERAL RESEARCH SITES--PAGE 1

These sites provide students with a variety of accounting information that can be used for many types of research including the areas of financial and managerial accounting, auditing, information systems, and taxation. However, many of these locations provide a wealth of information specifically for research in taxation. Finally, many free newsletters are available at these locations that provide interested parties with updates resulting from a rapidly changing business environment.

AccountingNet--http://www.accountingnet.com This site allows students to sign up for a weekly newsletter, which is free. The newsletter includes updates of accounting pronouncements, scholarships offered by various accounting firms such as KPMG, weekly headlines of accounting specific items, and feature articles including topics such as "Online Masters of Accountancy Programs". AccountingNet has a wonderful research library that includes tax and financial resources, Federal resources, state resources including department of revenue and boards of accountancy, associations and societies, international resources on accounting and finance, and educational sites both in the United States and international.

AccountingStudents--http://www.accountingstudents.com This location provides a wealth of information for both faculty and students. A free weekly newsletter is also available from this site that includes articles related to topics such as ethics, scholarships available, site of the week review, and help if students do not pass the CPA exam. An excellent research area includes U.S. and international educational sites, links to major accounting firms, accounting associations and societies, and a large number of other tax and financial resources which includes many annual reports.

Accounting Web--http://www.accountingweb.com/ An extensive site that includes information on accounting changes both domestic and international, a free newsletter, and many other items of interest to accountants. The list of accounting links from this page is very extensive.

Dick Armey's Flat Tax--http://www.flattax.house.gov This location discusses the flat tax proposal by House Majority Leader Dick Armey. Students often support a plan such as this 17% proposal.

Internal Revenue Bulletin -http://www.fedworld.gov/ftp/irs-irbs/irs-irbs.htm This site allows the user to download the weekly IRB using the Adobe Acrobat Reader. The basic IRS site is http://www.irs.gov/ "Digital Daily". (Multiple newsletters are available free of charge.) Lex Mundi--http://www.lexmundi.org/taxguide.html This is an excellent site that continues to grow.

It contains 24 countries with excellent details related to the current tax policy of each listed country. Most sites are not as thorough as this one. It is an excellent site for students to begin their research in foreign taxation regulations.

Tax Analysts--http://www.taxanalysts.com/ An excellent site that contains a daily update called "TaxWire", which reviews current tax events. A comprehensive tax library CD is available for only $99. A link to state tax readings provides additional research materials.

APPENDIX--GENERAL RESEARCH SITES--PAGE 2

Tax Foundation--http://www.taxfoundation.org/index.html This site contains a huge amount of historic information that includes the typical family tax burden, burden by income class, and state tax statistics.

Tax Resources--http://www.taxresources.com/ This location provides links to local, state, and federal tax sites, which allow for downloading of forms and related instructions. It also includes links to descriptions and reviews of tax software.

Taxweb--http://www.taxweb.com This page contains an excellent combination of federal, state, and local tax developments. It has links to many federal sites and a wealth of locations providing news on the latest tax developments.

Tax Sites (D. Schmidt)--http://www.taxsites.com This is a huge collection of links to virtually any tax related area. Students can research current regulations related to all types of state taxes, as well as federal income, estate, gift, and excise taxes.

The BIG 5 Sites:

Arthur Andersen--http://www.arthurandersen.com This is also a fairly new revision of their site that is a bit more difficult for students to navigate. Like most of the other major accounting firm homepages, this site contains extensive information on career opportunities for both graduating students as well as experienced professionals.

Deloitte & Touche--http://www.dttus.com/Tax/default.htm This is the home page for tax information including both the U.S. and international updates. It also includes a "Recent News" section, which includes business information of all types from a global perspective.

Ernst & Young--http://www.ey.com/ This is the new international web site that was recently created by the company. It has an extensive taxation library that students can use for their research. In addition the CD, "EY Passport" is also available to educators for student use.

KPMG--http://www.us.kpmg.com/ Students can begin with the U.S. site and move to international information including taxation (http://www.tax.kpmg.net/). This site contains a wealth of tax information for many of the larger countries of the world. Many new topics affecting taxation such as the implications of the Euro are discussed on these pages. Also included is an international tax survey of corporation rules and tax rates. The area entitled "Country Tax Facts" includes taxation regulations in over 75 countries worldwide.

PriceWaterhouseCoopers Tax News Network--http://www.taxnews.com/tnn_public This location contains legislative updates, business tax updates, and a global tax update. It also contains a "tax sites" area with many links to global research databases. In particular, on the "International-Foreign Governments" page there are links to over twenty Departments of Revenue from major countries including Australia, Belgium, Canada, Hong Kong, Israel, Japan, New Zealand, South Africa, Sweden, and the United Kingdom.

APPENDIX--COUNTRY SPECIFIC SITES

These sites will enable students to research the tax policy applied in specific countries.

Research projects requiring the comparison of United States tax policy with foreign systems currently in use provide for an interesting assignment that regularly produces excellent class discussion.

Australia--http://www.ato.gov.au/ The official Australian Tax Office site.

Belgium--http://www.tax-advisers.be/ An excellent site for Belgium tax policy.

Brazil--http://www.fazenda.gov.br/ingles/welc.html The Ministry of Finance page with link to tax reform, which reviews the taxation system in Brazil.

Canada--http://www.rc.gc.ca/ The official Revenue Canada site.

China--http://www.chinavista.com/xiamen/invest/tax-reg.html An excellent site for research on taxation policy in China.

France--http://www.hg.org/tax-france.html A chapter from the Lex Mundi site listed above. This is one of the best for tax research on France.

Great Britain--http://www.inlandrevenue.gov.uk/ The official UK site for taxation information.

Hong Kong--http://www.info.gov.hk/info/tax.htm (Basic information with link to govt. page) India--http://www.taxnyou.com/ Use the "Go to Table of Contents" link to find an excellent review of income tax law in India prepared by a Chartered Accountant. (Ajay Gandhi) Ireland--http://www.icai.ie/cats The Chartered Accountants Taxation Summary page. Also, see http://www.revenue.ie/, which is the Revenue Department's homepage.

Italy--http://www.geocities.com/WallStreet/4019/italy.html This site was prepared by Penta Consulting, a business advisory firm.

New Zealand--http://www.treasury.govt.nz/ (Tax documents using Adobe downloads)

Poland--http://www.polandonline.com/tax.html (Information on various taxes)

Russia--http://www.conseco.ru/eng/abc/tax/index.html This site contains extensive information on the tax system currently in use in Russia. (Tax Code enacted January 1, 1999)

Saudi Arabia--http://www.arab.net/ This ArabNet site contains tax information for over 20 countries including Saudi Arabia, Egypt, Iraq, Sudan, and Syria.

Sweden--http://www.rsv.se/english/ National Tax Board (Info. In English) Switzerland--http://www.swisstax.com (Site provided by Howard Hull)

REFERENCES

Smith, A. (1776). The Wealth of Nations, 777-78.

Mills, W. (1959). Forward, in House Committee on Ways and Means, 86th Congress, 1st Session, 1 Tax Revision Compendium ix.

Darwin L. King, St. Bonaventure University