January 24, 2011
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On January 20, the House Ways and Means Committee held the first in what will be a series of hearings on tax reform. The hearing focused on the economic and administrative burdens imposed by the current structure of the federal income tax system.

Chairman David Camp (R-MI) began the hearing with prepared remarks in which he lauded the passage of the landmark Tax Reform Act of 1986, which he said has since been reduced to a shell of its former self as members of Congress from both sides of the aisle have loaded the tax code with a dizzying array of credits, deductions, exclusions, and exemptions. He stated that regardless of the merits of any individual tax expenditure, the Internal Revenue Code (Code) is too complex, too costly, and takes too much time to comply with.

Camp noted that the President’s Deficit Commission, on which he served, concluded that taxpayers foot the bill for those expenditures in the form of higher tax rates.

Ranking Member Sander Levin (D-MI) noted that while the Code is complex, the reform task will not be easy. He laid out certain basic principles that he will keep in mind as the reform debate progresses, namely that the tax system should help to create jobs and economic growth, that reform has to be fiscally responsible, and that the Code ultimately has to benefit the working families of America.

While three out of the five witnesses focused primarily on the need for reducing the corporate tax rate in order to maintain U.S. competitiveness internationally, all five witnesses and all members of the Committee participating in the hearing agreed that the Code as it stands is too complex and seriously in need of reform. One witness, Dr. Martin Sullivan, of the organization Tax Analysts, urged the members to look at tax expenditures in the same way as federal spending, stating that everything should be on the table.

Nina Olson, the National Taxpayer Advocate stated bluntly that the tax code today is a mess. She identified the complexity of the Code and the confusion and distrust it engenders as the most serious problem facing taxpayers—and the IRS. To put the debate into context, she cited an analysis of IRS data conducted by her office which found that individuals and businesses spend about 6.1 billion hours a year complying with the filing requirements of the Code, not including the millions of additional hours that taxpayers must spend when they are required to respond to IRS notices or audits. In addition, she noted, t there have been approximately 4,428 changes to the Code over the past 10 years, an average of more than one per day, including an estimated 579 changes in 2010 alone.

She emphasized, however, that despite the existence of many narrow special interest tax breaks, the overwhelming majority of tax breaks by dollar value accrue to large segments of the taxpaying public. She said that, if tax rates are to be lowered substantially with overall tax liabilities remaining on average unchanged, virtually every taxpayer will have to give up cherished tax breaks. According to an analysis published by the Joint Committee on Taxation, tax expenditures total about $1.1 trillion per year.

Olson suggested utilizing a “zero-based budgeting” approach, meaning that the starting point for discussion would be a tax code without exclusions or reductions in income or tax. A tax break or IRS-administered social program should be added only if lawmakers decide, on balance, that the public policy benefits of running the provision or program through the tax code outweigh the tax complexity challenges that doing so create for taxpayers and the IRS. She said factors to consider in making this assessment include whether the government continues to place a priority on encouraging the activity for which the tax incentive is provided, whether the incentive is accomplishing its intended purpose, and whether a tax expenditure is more effective than a direct expenditure for achieving that purpose.

Olson did not suggest that all tax expenditures be eliminated. In fact, she noted that there are excellent public policy or administrative reasons for including some programs in the Code whether they benefit individuals, small businesses, or entire industries—although she did not cite any specific tax expenditures by name. Finally, she cautioned against pursuing deficit reduction through tax reform for fear of derailing meaningful reform.

Warren Hudak, a small business owner and tax professional assisting small businesses, testified that small businesses account for approximately 50 percent of GDP and 50 percent of employment in the overall economy. He stated that one of the largest challenges to sound business planning is that too many provisions of the tax code are temporary, adding unnecessary confusion and complexity. He said the National Federation of Independent Business’ most recent survey found that frequent changes in federal tax laws was one of the top tax problems cited by its members. Hudak noted also that the tax implications of choosing pass-through status should play a major role in the tax reform debate because 75 percent of small businesses are pass-through entities. Thus, the importance of the individual tax rates that most small businesses pay should be part of any debate about tax reform.

Committee member Earl Blumenauer (D-OR) asked if individual and corporate tax rate reform needed to be addressed together or if they could be tackled separately. Witnesses Sullivan, Hudak, and Olson agreed that due to the pass-through nature of many small businesses, both rates would need to be addressed together.

While Camp did not offer any specific recommendations at this early stage, he encouraged the active participation on this issue of all members of the Committee and urged everyone to keep their current focus on understanding the scope of the challenge.