[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
THE IMPACT OF THE COMPLEXITY OF THE TAX CODE ON SMALL BUSINESS: WHAT
CAN BE DONE ABOUT IT?
=======================================================================
HEARING
before the
SUBCOMMITTEE ON TAX, FINANCE, AND EXPORTS
of the
COMMITTEE ON SMALL BUSINESS
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
WASHINGTON, DC, SEPTEMBER 7, 2000
__________
Serial No. 106-70
__________
Printed for the use of the Committee on Small Business
U.S. GOVERNMENT PRINTING OFFICE
67-831 WASHINGTON : 2001
_______________________________________________________________________
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC
20402
COMMITTEE ON SMALL BUSINESS
JAMES M. TALENT, Missouri, Chairman
LARRY COMBEST, Texas NYDIA M. VELAZQUEZ, New York
JOEL HEFLEY, Colorado JUANITA MILLENDER-McDONALD,
DONALD A. MANZULLO, Illinois California
ROSCOE G. BARTLETT, Maryland DANNY K. DAVIS, Illinois
FRANK A. LoBIONDO, New Jersey CAROLYN McCARTHY, New York
SUE W. KELLY, New York BILL PASCRELL, New Jersey
STEVEN J. CHABOT, Ohio RUBEN HINOJOSA, Texas
PHIL ENGLISH, Pennsylvania DONNA MC CHRISTENSEN, Virgin
DAVID M. McINTOSH, Indiana Islands
RICK HILL, Montana ROBERT A. BRADY, Pennsylvania
JOSEPH R. PITTS, Pennsylvania TOM UDALL, New Mexico
JOHN E. SWEENEY, New York DENNIS MOORE, Kansas
PATRICK J. TOOMEY, Pennsylvania STEPHANIE TUBBS JONES, Ohio
JIM DeMINT, South Carolina CHARLES A. GONZALEZ, Texas
EDWARD PEASE, Indiana DAVID D. PHELPS, Illinois
JOHN THUNE, South Dakota GRACE F. NAPOLITANO, California
MARY BONO, California BRIAN BAIRD, Washington
MARK UDALL, Colorado
SHELLEY BERKLEY, Nevada
Harry Katrichis, Chief Counsel
Michael Day, Minority Staff Director
------
Subcommittee on Tax, Finance, and Exports
DONALD A. MANZULLO, Illinois, Chairman
STEVEN J. CHABOT, Ohio CAROLYN McCARTHY, New York
PHIL ENGLISH, Pennsylvania RUBEN HINOJOSA, Texas
PATRICK J. TOOMEY, Pennsylvania CHARLES A. GONZALEZ, Texas
GRACE F. NAPOLITANO, California
Philip Eskeland, Senior Professional Staff Member
C O N T E N T S
----------
Page
Hearing held on September 7, 2000................................ 1
WITNESSES
Sununu, John E., a Representative in Congress from the State of
New Hampshire.................................................. 2
Davidoff, Martin, Martin Davidoff & Associates................... 4
Tauzin, W.J. ``Billy'', a Representative in Congress from the
State of Louisiana............................................. 6
Oveson, W. Val, National Taxpayer Advocate, Internal Revenue
Service........................................................ 9
Olson, Pamela, Chair, Tax Section of the American Bar Association 11
Lifson, David, Chair, Tax Executive Committee, American Institute
of Certified Public Accountants................................ 13
Moody, Scott, Economist, Tax Foundation.......................... 15
McCraken, Todd, President, National Small Business United........ 17
APPENDIX
Opening statements:
Manzullo, Hon. Donald A...................................... 23
Prepared statements:
Sununu, John E............................................... 25
Davidoff, Martin............................................. 29
Tauzin, W.J. ``Billy''....................................... 42
Oveson, W. Val............................................... 53
Olson, Pamela................................................ 60
Lifson, David................................................ 80
Moody, Scott................................................. 99
McCraken, Todd............................................... 103
Additional material:
``Tax Complexity Factbook'', April 2000, Joint Economic
Committee Staff Report..................................... 115
Letter to Mr. Manzullo from Edward Mezner, Certified Public
Accountant................................................. 136
Letter to Mr. Manzullo from Donald Benning, Millikin Benning
Kleckler................................................... 143
Letter to Mr. Manzullo from Henry Fleming, Certified Public
Accountant................................................. 145
Letter to Mr. Manzullo from Richard Lamm, Lindgren, Callihan,
Van Osdol & Co., LTD....................................... 148
Letter to Mr. Manzullo from Glenn Miller, CPA & CVA.......... 154
Letter to Mr. Manzullo from Leland Freberg, CPA.............. 155
FY 1999 National Taxpayer Advocate's Annual Report to
Congress................................................... 157
THE IMPACT OF THE COMPLEXITY OF THE TAX CODE ON SMALL BUSINESS: WHAT
CAN BE DONE ABOUT IT?
----------
THURSDAY, SEPTEMBER 7, 2000
House of Representatives,
Subcommittee on Tax, Finance and Exports,
Committee on Small Business,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:05 a.m., in
room 2360, Rayburn House Office Building, Hon. Donald A.
Manzullo (chairman of the Subcommittee) presiding.
Chairman Manzullo. We are going to get started in an a
little unusual manner. We are waiting for two Members of
Congress to come who constitute the first panel. They are on
their way. I would like to take half of the second panel and
get started with their testimony. We are going to have a
tyranny of the bells today with voting going on, etc.
Martin Davidoff is here. Martin, why don't you take the
seat on the end here? Who else is here from our second panel?
Okay. Why don't you come on up, and let's get half of the
second panel. Leave two chairs on the end for the Members of
Congress, and as soon as they come in, if you don't mind, we
will interrupt your testimony in order to accommodate them so
they can get on with their other duties.
Mr. Tauzin has been a little busy, if you know from
watching C-SPAN. When I was going to bed last night, he was
still grilling Firestone.
I want to immediately get into the testimony. I will not do
much in the way of introductions, except that I am going to
start with Martin Davidoff of Martin Davidoff & Associates from
Dayton, New Jersey, who is here on behalf of the National
Federation of Independent Businesses.
We have the 5-minute rule here. When it turns yellow, you
have 1 minute. When it turns red, the gravel comes down.
[Mr. Manzullo's opening statement may be found in the
appendix.]
Chairman Manzullo. Mr. Davidoff.
Mr. Davidoff. Thank you, Mr. Chairman, Members and their
staff which have been most helpful. First of all, I would like
my written statement entered into the record.
Chairman Manzullo. Without objection, all written
statements will be admitted.
Martin, I will interrupt.
Mr. Sununu, do you want to come up? And we will start with
you.
Mr. Davidoff, we will be back to you shortly.
Mr. Davidoff. Thank you.
Chairman Manzullo. It is my pleasure to introduce to you
Congressman John Sununu from the great State of New Hampshire.
And, Congressman Sununu, we are on the 5-minute rule that I
enforce, so if I get somebody who can operate this timer.
Please start.
STATEMENT OF HON. JOHN E. SUNUNU, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF NEW HAMPSHIRE
Mr. Sununu. Thank you, Mr. Chairman. I am familiar with the
5-minute rule, and I will do my best to comply. And I apologize
for arriving a little bit late and hope that the panelists and
in particular Mr. Davidoff won't hold it against me in any way.
It is a pleasure to be here. I am pleased that you are
holding this hearing today on the complexity of our Tax Code
and in particular its effect on small business. For anyone that
has traveled around the country and spent a little bit of time
with small business owners and entrepreneurs, the Tax Code is
probably the first thing that comes up, even, in most cases,
before regulation, because it is something they deal with year
in and year out. And it is not just once a year when they pay
their taxes. It is every day, as I will describe, and it is a
source of endless frustration for entrepreneurs.
In a previous part of my career, I worked as chief
financial officer and director of operations for a small
electronics firm of about 30 employees and dealt with the
financial issues for the owner of a firm that was a Sub-Chapter
S corporation, and dealt with a lot of these issues on a
personal level. So in many cases I speak from anecdotal, but
really personal experience as well.
The complexity of the Tax Code and its impact on small
business, I think, is felt in three particular areas. There is
the outright cost of the complexity, the cost of doing your
returns every year, paying someone to prepare your returns and
submitting them.
Of course, there is also the opportunity cost, the time
that is lost, lost not just from business operations, but from
time from the family as well, because so many small businesses
are family-owned, and so many entrepreneurs and managers put in
such an extraordinary amount of their personal time in their
companies.
The third cost of the complexity of our Code is in what I
just call distrust. The complexity breeds distrust. It breeds
uncertainty as to whether or not the same system applies to
both larger and smaller corporations. I think that undermines
public confidence in the way we tax and raise revenues for the
Federal Government.
We can solve this problem. We can do better. And I am here
to testify on behalf of tax reform, fundamental tax reform, and
the implementation of a flat tax, an issue that I have worked
very hard on with the Majority Leader Dick Armey. He has taken
a strong leadership role on the objective of scrapping the
current Code and replacing it with a system that is simple,
honest and fair and that addresses each of these costs that I
mentioned.
First a few words about the exact complexity of the system
and its effect on small businesses. First, the estate taxes. An
inordinate amount of time at the small business level and at
the family business level is taken in preparing, avoiding,
understanding our complex estate taxes, trying to maintain the
small business flavor, and that means keeping the small
business in a family. An entrepreneur often has worked hours,
years managing a business. He has had his family members
involved. They want to keep it in the family, but the estate
tax burden can be crushing, and the complexity of the estate
taxes can be overwhelming on a yearly basis.
Depreciation schedules. We have called on small businesses
to depreciate equipment, sometimes, for example, computers,
over 5 or 7 years, which doesn't make any sense in and of
itself in that we ask small businesses to keep separate books
for depreciation for an income-reporting basis and for IRS
purposes. Keeping multiple books doesn't serve any real useful
purpose, and, of course, the time and effort required to keep
on top of the depreciations rules can be very burdensome for a
business that only has 10 or 15 or 20 employees.
Capital gains taxes. Small businesses spend an enormous
amount of time dealing with the complexities of employee stock
ownership plans, the Sub-Chapter S filings and the impact of
potential sales of stocks on their capital gains liability.
And finally retirement savings, IRAs and 401(k)s for
employees, but also retirement savings plans that are necessary
to avoid the crushing burden of estate taxes.
All of these complexities have the impact of raising the
cost of running a small business, taking up an inordinate
amount of management time and, of course, undermining
confidence in the way we fund government.
How can a flat tax solve this problem? I believe that a
flat tax would have enormous benefits for both individuals and
corporations, but in particular for small businesses because
now small business is going to be able to take a look at its
revenues for the years, deduct all of its legitimate expenses,
cost of goods, wages, salaries, all capital equipment and
investment and then pay a simple, honest, fair rate. The same
system applies to corporations large and small. It is
understandable. You don't have to keep two sets of books. You
don't have to go through the complexity of estate tax planning.
In fact, there would be no estate taxes, no capital gains
taxes, no inheritance taxes, no taxes on Social Security
benefits, and no depreciation schedules.
All of those add to the burden of running a small business.
They would be eliminated. And by having the same system for
everyone, we restore public confidence in the way that we
finance government. I think it would make an enormous
difference for the small business community in time, in money,
and in confidence, and it would create the right set of
incentives for entrepreneurs to invest in their employees,
invest in their firms and create economic opportunity. And that
ultimately should be our goal here, not to try to distort the
market, but to create an environment where entrepreneurs can do
the job of creating economic opportunity.
Thank you, Mr. Chairman.
Chairman Manzullo. Thank you, Congressman Sununu.
[Mr. Sununu's statement may be found in the appendix.]
Chairman Manzullo. If you would like to join us on the
panel, you are welcome to.
Mr. Sununu. I have a commitment, Mr. Chairman. I would like
to thank you for having the hearing and thank the panelists for
being here. My experience in this regard, as I said, working
for 4 years in a small business setting, but my guess is the
panelists have far more depth of experience with the kinds of
frustrations I have touched on in my testimony.
Chairman Manzullo. Thank you very much. I appreciate it.
Martin, we will start with you again, knowing full well
that if Mr. Tauzin comes in, which he probably will after six
words of your testimony, we will have to interrupt you again.
If you are almost through, we will make sure we finish up.
STATEMENT OF E. MARTIN DAVIDOFF, E. MARTIN DAVIDOFF &
ASSOCIATES, DAYTON, NJ, ON BEHALF OF THE NATIONAL FEDERATION OF
INDEPENDENT BUSINESS
Mr. Davidoff. Thank you. Thank you very much. I am here
representing 600,000 small businesspersons on behalf of the
NFIB. I come before you with a unique perspective, one of an
attorney, a CPA, a small business owner myself, having
participated in two White House conferences, and an advisor to
hundreds of small businesses. So I see this day in and day out.
Every time Congress attempts to deal with simplification
and simplifying the Tax Code, we get something called
``complification''. We get a morass of tax law that is even
more complex. Just take a look at what has happened in the last
couple of years.
In 1996, Steve Forbes is talking about the flat tax and
simplification, and everybody was gung-ho, yes, let's do it.
Then in 1997, 1998 and 1999, you added infinitely more
complexity. Just a couple of examples, we changed the safe
harbor for estimated taxes for high-income taxpayers three
times. If you look at page 5 of my testimony, you will see a
table that shows public laws and the percentages that were
changed time in and time out. One of the bills was just to
change it from 105 to 106 percent for 2 of the 4 or 5 years
that are in the table. It is really crazy the way Congress goes
about it. Instead of changing the tax rates, they add
complexity to the tax law because they don't want to tell the
American people the correct tax rates.
Other things that have been done, you added a child credit,
but then from $110,000 to $130,000 you are phasing out that
credit. You added complicated learning credits and retirement
alternatives, each with its own phaseout limitations.
And that takes us to really the most complex problem for
all taxpayers, not just for small business, and that is the
phaseout. It started with Congressman Claude Pepper in phasing
out 3 percent of your itemized deductions to the extent that
your income exceeded a base and in phasing out exemptions. They
are bad ideas. Why are they bad ideas? Because what happens
here is you have changed the tax law to look not at taxable
income, but you are looking at adjusted gross income. For
example, with the phaseout of exemptions, if I am making
$200,000 a year adjusted gross income, and I am a family of
four, you are adding 3.3 percent to my 36 percent tax rate. My
real tax rate is 39.3 percent, even though the stated original
rate is 36 percent. And after I am phased out, the tax rate
comes back. So what have you done?
We have all argued should there be a flat tax, or should
there be a progressive income tax like we have? What you have
done with phaseouts is you have given us a regressive tax. The
tax rate is lower for people who get beyond the thresholds. And
when you have thresholds of $110,000 for learning credits and
$74,000 for double E bonds, and all these phaseins and
phaseouts at different levels, all you are doing is you are
imposing a higher tax rate.
And I say to you bring back taxable income. Congress
defined taxable income as the basis on which you are going to
set one's ability to pay. I will throw out the following
example: If you have two families--one with 10 exemptions, 10
children, and one with zero children. Let's say they are making
$300,000, so they have fully phased out their exemptions. Are
you telling me that the family with 10 children is in a
position to pay the same tax as the family with no children?
Clearly not.
On every level you look at this, regression of taxation, or
fairness, phaseouts don't work. They are a terrible idea. Get
rid of them, please.
Let's go to a couple of specific examples about small
business. First of all, we have meals and entertainment
expenses. It is a complexity issue. If somebody comes down to
Washington on business, and they stay in a hotel they turn in
their bill back to the comptroller back in the office, and the
comptroller says, okay, I will classify that as travel. That is
what it used to be. But now they have to look at that bill and
segregate out the meals, because meals are only 50-percent
deductible. And they have to put that in a different account
called meals and entertainment. But then if I have a picnic for
all my employees, I have to put it in another account because
picnics for employes comes into one of the 10 exceptions under
Section 274 that say you can deduct 100 percent.
Chairman Manzullo. Just eat outside every time.
Mr. Davidoff. Eat outside every time. Well, you have to pay
for your employees every time. That is the bottom line.
So basically what we have here is we have a situation with
meals and entertainment that adds much complexity. And people
talk about the three-martini lunch. You have plenty of
provisions in section 274 that prevent abuse.
I see that my time is almost up, so let me just wrap up
with two concepts. One other concept is a tax trap. Congress
has come forward and said, we are going to let everyone deduct
$20,000 with certain exceptions for capital improvements. So
Joe Taxpayer files his tax return, and he says, I know about
that $20,000 rule. I have purchased a $3,000 computer for my
business. It is classified as office supplies, and those who
work with real taxpayers know that happens. The fax machine,
everything ends up in office supplies. He deducts it on the
return. It is $3,000. He is perfectly entitled to it under the
law. However the law says you have to make an election. He
didn't make the election, and there are approximately a dozen
court cases that basically take that deduction away for failure
to make the election. In my materials there are citations of a
couple of those cases. And a very simple change that you can
make that would probably be practically revenue-neutral that
would just say if somebody takes a deduction, let's deem it to
be an election.
My time is up. I just wanted to say I would like to thank
the Chairman for taking his time to fix the installment sales
problem for accrual-based taxpayers and to say that for cash-
basis taxpayers that we ask that we index for inflation the $5
million threshold of 1986 and increase that to apply to
businesses of similar size back then, which today would be
businesses of $6 and $7 million. Thank you very much.
Chairman Manzullo. Thank you, Mr. Davidoff. I appreciate
it.
[Mr. Davidoff's statement may be found in the appendix.]
Chairman Manzullo. Good timing. Congressman Billy Tauzin.
What time did you finish last night?
Mr. Tauzin. I think I have been called and recalled. We
finished about 11 o'clock.
Chairman Manzullo. Well, you are up.
Mr. Tauzin. Thank you, sir.
Chairman Manzullo. And we have the 5-minute rule here.
STATEMENT OF HON. W.J. ``BILLY'' TAUZIN, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF LOUISIANA
Mr. Tauzin. I will hit it really quickly for you.
In a nutshell we have an outdated, outmoded Tax Code, and
Americans know it; 7 million words of instructions from
Washington, D.C., that nobody can understand anymore. And if
you try to get information on what it means, even from the IRS,
you get wrong answers all too often. It is a mess. More
importantly, it is a set of instructions on how to live your
life from Washington, D.C.; if you think about it, 7 million
words about how you should earn, spend, save, what you ought to
do with your money. There are government preferences built all
over it. We set them. We change them every now and then.
In fact, since Ronald Reagan left town and simplified the
Code--do you remember--from 14 different rates down to a
couple, we are back up to five effective rates, over 5,000
changes later. Many of those changes we put in thinking we are
doing a good thing for America. But we ``complexed'' that Code
up, and we literally give instructions through it about how to
live your life.
When you look at the instructions, you ought to think about
what instructions we are getting. Think about it. The power to
tax is the power to discourage or destroy. So look at what the
Code tells you. What does it discourage? Look at what it taxes.
It discourages you from earning income. It taxes incomes. It
taxes savings; therefore, that must be bad. It taxes
investments. It taxes gifts to your kids in life. It taxes
gifts to your family in death. And worst of all, it even taxes
you for buying an American product and rewards you for buying a
foreign product. You haven't thought about that one. Think
about it.
Dr. Dale Jorgenson at Harvard University, who is the dean
of the economics department, did a paper on the subject, and
his paper says in effect that the income tax adds on average 25
percent to the cost of every product and service made in
America. That is on average. The price of bread, for example,
is 35 percent. The reason that is true is every person in the
manufacturing process, from the farmer all the way to the
retailer, has to pay taxes. The employer pays taxes. You pay
taxes on the business. You pay taxes on compliance costs. You
have to hire accountants and lawyers. All that adds up to the
point where by the time we buy a loaf of bread, instead of it
costing $1.30, it costs $2. That is a fact, according to
Harvard School of Economics, not necessarily a bastion of
conservative thought.
What does that tell us? That tells us the income tax code
is really pernicious. It taxes your income when you earn it,
and then if you dare buy anything that was made in America,
made with your own hands in some cases, you get taxed again
with a hidden tax of 25 percent or so. If you buy a foreign
product, on the other hand, very often those products--they are
burdened with some income taxes overseas, but they are not
burdened by the other taxes that are assessed overseas, the VAT
taxes. The VAT tax, the value added taxes, are rebated back to
the manufacturer before products are shipped into this country.
An American product burdened with our income tax goes over
there and pays the VAT tax again. It gets taxed twice. Their
product comes in and escapes the second tax. So we have a tax
system in a global free trade economy that in effect tells
American workers it is better to buy foreign goods. We will tax
you twice if you buy an American good.
If I am an American worker, and my government is penalizing
me for buying my own products, I should be hopping mad. I would
want to get rid of that system. I would want a border
adjustable tax system that is fair, decent, taxes me only once,
and rewards me for doing the right things instead of punishing
me for doing the right things.
So we built one. We have offered you a bill to replace the
income tax code with a simple, fair, national retail sales tax.
It is automatically border-adjustable. Here is how it works.
You get rid of income taxes, gift taxes, inheritance taxes,
corporate taxes, individual taxes. All the income taxes are
gone in our plan. We get rid of the gift and inheritance taxes
so you don't have all this double taxation on income. We simply
say, when you buy something at retail, not when you buy it for
business purposes to make a product or to help your business
along, but when you buy it at retail, you pay a retail tax.
Whether it is a foreign product or a domestic product, you pay
the same tax.
And we figured out a rate equivalent to the amount of money
we needed to collect if we repealed all those other taxes. We
did it very simply. We took those taxes and divided it into the
amount of consumption in this country, and you come up with a
number. It is 12.9 percent. We came up with a 15 percent rate,
and I will tell you why. That extra 2 percent we put into and
the extra 1/10 is all factored in for tax compliance problems
as well as to cover the cost of something important in our
plan.
You have probably often heard that retail taxes are bad
because they are regressive. They tax poor people more than
rich people. In a sense that is correct because poor people who
have to spend all of their income to survive obviously would
pay a bigger proportion of their income intaxes than a rich
person who doesn't have to spend all his income. So we provide a total
protection for income earned under poverty.
The way we do it is we also repeal the payroll tax, the
7\1/2\ percent you pay and your employer pays into the system
on income earned under poverty. The 2 percent of sales tax pays
for that and goes back into Social Security and Medicare Trust
Funds to cover that loss for the Treasury.
So we have got a plan that protects income at the bottom,
that provides cheaper American products. According to the
Harvard study, if you got rid of income taxes, products in
America would cost 25 percent less than they do today or in
cost of production. In a competitive marketplace you get
cheaper prices. You have cheaper prices. You have more dollars
to buy them with, and you are no longer penalized when you buy
an American product.
The Harvard study says our exports would jump 29 percent.
That would get rid of the trade deficit. That is 19,000
American jobs lost for every billion of that trade deficit, and
we are over 300 billion today. Multiply that out; 6 million
jobs or better. We get rid of the trade deficit. Our exports
climb 29 percent on average yearly because now we are
competitive overseas. We are not double-taxing our products.
They get taxed once when they go overseas. They don't get taxed
over here, just like their products only get taxed once when
they come to America under our plan.
Thirdly, according to the Harvard study there would be an
80 percent shift of investment back into America. Why wouldn't
you want to build your plant here and your manufacturing here
if you didn't have to pay income taxes here, and there would
simply be a retail consumption tax in its place? Why wouldn't
you want to build closer to your markets instead of building
somewhere else in the word? And the Harvard study confirms
that.
Here is the bottom line. We have presented you with an
alternative that instead of punishing you for earning income,
it rewards you. No income taxes. Instead of punishing you for
saving, it rewards you. No taxes on savings interest earned.
Instead of punishing you for investing, no capital gains taxes.
No investment taxes. No need for Washington to incentivize you
to invest anymore, to tell you how to spend your money or save
it. No gift taxes, so you can give things to charities and your
kids and anyone you want to without fear of double taxation. No
inheritance taxes; you can pass your businesses on without the
death tax. And all of a sudden no penalty for buying American
products. Equalized border taxation in a global free trade
marketplace. We get rid of the trade deficit.
We got a simple taxation system now instead of this complex
one, and the States administer it. They collect the commission
for doing it under our plan, as well as the retailers who
collect the tax while they are collecting the State sales taxes
in 45 States of America that have such systems. For the five
that don't, we would put a system in. If they would not want to
do it, they would have the right to put it in for us and
collect the commission.
It is a simple plan, much simpler than this complex Code.
Hard to get to. It takes some courage to make that kind of
change, but if we had the courage, Americans would love us for
it.
Thank you, Mr. Chairman.
[Mr. Tauzin's statement may be found in the appendix.]
Chairman Manzullo. Well spoken. Can you stay here for a
while, Congressman Tauzin?
Mr. Tauzin. Sure.
Chairman Manzullo. What happened to Scott?
Mr. Tauzin. You have to talk to Dr. Evil about that.
Chairman Manzullo. Scott, do you want to come up here and
sit to Billy Tauzin's right? I know he might get offended with
anybody sitting to his right, but that is okay. Is that okay?
There we are. Thank you.
Mr. Tauzin. Hello, Scott.
Chairman Manzullo. Let's go with Mr. Oveson, and then we
will go back to Ms. Olson.
STATEMENT OF W. VAL OVESON, NATIONAL TAXPAYER ADVOCATE,
DEPARTMENT OF THE TREASURY, INTERNAL REVENUE SERVICE
Mr. Oveson. Thank you very much, Mr. Chairman and
distinguished members of the Committee.
Chairman Manzullo. Would you pull the mike up closer?
Mr. Oveson. I appreciate being invited to be here today and
speak with you. Again, I view my role as a national taxpayer
advocate as working within the existing Code and will not get
to other suggestions and ideas as has been talked about, but
there is certainly a lot that can be done within the existing
Code to simplify and make things better for small business.
There is both legal and administrative complexity in the
Tax Code, and during the last 2 years that I have been the
taxpayer advocate, I have mentioned in my annual report that
complexity of the Code was the number one problem facing
taxpayers. Based on the cases that we handle each year and
input from practitioners and stakeholder groups, we have
identified several areas of the law that are a particular
burden and adds costs to small business. I will mention them
today and put them in my written testimony.
The first issue is penalty administration. A lot has been
done with penalty administration. The Joint Committee on
Taxation has produced a report on that, but the number of
penalties is staggering, and they have increased from 10 to
over 100 in the last 7 or 8 years. And this is particularly
true for small business. In the Taxpayer Advocate Service we
see a large number of cases where taxpayers can't reasonably
expect to pay off their liabilities because of one reason or
another. Over time the amount of penalties that has been
assessed and the interest that has accrued has been an
insurmountable obstacle for the taxpayer.
One suggestion that we have made in the annual report is to
completely repeal the failure to pay penalty. In my experience,
few taxpayers are aware of the failure to pay penalty, so it
really isn't an effective motivator to comply with it if they
don't know about it. In fact, when a taxpayer is in financial
trouble or hasn't filed returns for many years, the failure to
pay penalty actually becomes a barrier to compliance rather
than an enhancer.
The next issue I want to mention is capitalization and
depreciation. That has been mentioned this morning in a couple
of different ways. The depreciation section of the Internal
Revenue Code has been altered many times over the last few
years, and it just gets more and more complicated. Depreciation
and capitalization are consistently among the most litigated
issues that we see in the system. I believe it is time to
revise the depreciation rules or replace them with a simple or
more consistent system.
One bold proposal that I have made the last 2 years in my
annual report is to allow the section 179 expense deduction for
all capital assets purchased. In some ways this is a back door
to some of the other proposals. I acknowledge that. But a more
modest approach would be a system that would mix the section
179 deduction with other depreciation rules. It is important
that we have a simple set of rules.
I want to add that this suggestion is a major policy
change, and the impact would be substantial. That analysis is
beyond the scope of my office.
The third problem area is the employer/independent
contractor dilemma. It has long been a thorn in the side of
small businesses and even valiant attempts to solve this
problem have fallen short. Small businesses have to weigh the
common law requirements or the section 530 safe harbor rules to
determine whether individuals who work for them are treated as
independent contractors or employees. If the employer makes the
wrong decision, they face potentially huge delinquent
employment tax liabilities and just lots and lots of problems.
The inequality in this area also creates distinct competitive
advantages for some businesses that are not complying as
compared with those that are, and I urge you to address this
issue again.
You have asked me to highlight some of the areas that we
can play a role in helping resolve complex problems with the
small business owners. I give you three.
First, we can advocate changes in the law, as I am doing
right now, and procedures and regulations. We have met with
business groups and their practitioners to get their input. And
this testimony and my annual report to Congress serve as
examples of how we can gather information and make meaningful
recommendations for change to the existing statutes.
Second, we can advocate for educational programs. For
example, all new businesses should be invited to attend a local
training session where their tax obligations can be thoroughly
and completely explained and discussed.
And third, the primary service that we offer to individuals
is to help them with their individual account issues. Business
owners who encounter problems should contact their local
taxpayer advocate. And while we can't guarantee a favorable
result, we can guarantee a fresh look at the problem.
Mr. Chairman, thank you for inviting me here today. I am
passionate about reducing the complexity in the tax law, and I
think my recommendations here, and others that I have made over
the last 2 years, show that. I applaud you for your efforts and
wish you well in making a better system for the small business
owners of the country. Thank you, sir.
[Mr. Oveson's statement may be found in the appendix.]
Chairman Manzullo. We appreciate your distinguished service
to the taxpayers--I was going to say to the government, but it
is to the taxpayers--in trying to simplify this code, and we
wish you well in the private sector. Please stay in contact
with us. Undoubtedly you will be back as a private sector
witness. I appreciate that again.
Pamela Olson.
STATEMENT OF PAMELA OLSON, CHAIR, TAX SECTION, AMERICAN BAR
ASSOCIATION, WASHINGTON, DC
Ms. Olson. Thank you, Mr. Chairman.
My name is Pam Olson, and I appear before you today in my
capacity as Chair of the ABA Section of Taxation to present
testimony on behalf of the Section of Taxation. This testimony
has not been approved by the House of Delegates or the Board of
Governors of the ABA and accordingly should not be construed as
representing the policy of the ABA.
The Section appreciates the opportunity to appear before
the Subcommittee today to discuss the critically important
topic of tax simplification. On behalf of the Section, I want
to thank the Chairman and the members of this Subcommittee for
their focus on eliminating complexity in the Internal Revenue
Code. I also want to compliment Val Oveson on his work over the
years. We will miss him very much when he returns to Utah.
Over a year ago the Section of Taxation testified before
the House Ways and Means Oversight Subcommittee and the Senate
Finance Committee on simplification of the Internal Revenue
Code. On February 25th of this year, the Section of Taxation
together with the AICPA Tax Division and Tax Executives
Institute released identical simplification proposals.
Although tax law complexity adversely effects all
taxpayers, it has a particularly adverse effect on small
businesses because they are ill-equipped to deal with the
complexity. For that reason our previous testimony has included
a number of recommendations important to the small business
community.
In recent years the tax law has become more and more
complex as Congress and various administrations have sought to
address difficult issues, target various tax incentives, and
raise revenue without explicit rate increases. As the
complexity of the tax law has increased, so has the complexity
of the regulations that the IRS and Treasury have issued to
interpret it. Moreover, the sheer volume of the tax law changes
has made learning and understanding these new provisions
difficult for taxpayers, tax practitioners, and IRS personnel
alike.
The volume of changes, especially recent changes, that
affect average taxpayers has created the impression of
instability and unmanageable tax complexity. This takes a
tremendous toll on taxpayer confidence. Our tax system relies
heavily on the willingness of the average taxpayer to
voluntarily comply with his or her tax obligations. The
willingness and ability to keep up with the pace and complexity
of changes is now under serious stress.
We want to point out that simplification necessitates hard
choices and a willingness to embrace proposals that are often
dull and without passionate political constituencies.
Simplification also requires that easy, politically popular
proposals be avoided if they would add significantly to
complexity in the Code. Simplification or just preventing
greater complexity may not garner political capital or
headlines, but it is crucial.
In our view the tax law is replete with provisions, the
complexity of which far exceed the perceived abuse to which the
provision was directed or the benefit that was deemed gained by
its addition. Furthermore, the tax law contains many provisions
that at the time of enactment may well have been desirable, but
with the passage of time or, more importantly, the enactment of
other changes have truly become dead wood. Despite the lack of
utility of these provisions whether in a relative or absolute
sense, analysis of their effect may nevertheless be required
either in the preparation of a tax return or in simply planning
business affairs.
The elimination of these provisions would greatly simplify
the law, but, again, the work necessary to do so will be dull
and unlikely to garner political headlines. Nevertheless in our
view it is essential.
Our written statement includes--and this is lengthy--
several examples of provisions that when analyzed do not
justify their continuation in the law. These are but a few
examples, not an extensive analysis, of all the complexity that
could be addressed in the tax law.
I would like to briefly mention a few areas of particular
importance to small business. The first is an area of which
this Committee is well aware: Accounting methods. You have
already addressed this year the problems caused by the repeal
of the installment method of accounting for accrual-method
taxpayers. You are also aware of our proposal to expand the use
of the cash method of accounting for small businesses that
satisfy the $5 million gross receipts test included in section
448, even when the purchase, production or sale of merchandise
is an income-producing factor. In addition, we have proposed
permitting those same small businesses to elect not to maintain
inventories and to deduct materials and supplies as purchased
rather than capitalizing them as materials and supplies under
the regulations.
There are other significant accounting issues that have
been alluded to this morning, whetheran expense must be
capitalized or may be deducted, the depreciation rules, the uniform
capitalization rules. Another area is the rules governing pension
plans. The tax rules in this area contain numerous traps for the
unwary. Among the rules that are badly needed to be simplified are the
minimum distribution rules and the top heavy rules.
A related area requiring attention is another that has been
mentioned this morning, and that is the test for determining
whether a worker is an employee or independent contractor. This
determination is based on a 20-factor common law test. The
factors are subjective, given to varying interpretations, and
there is precious little guidance on how or whether to weigh
them. The current complex and highly uncertain determination
should be replaced with an objective test that applies for
Federal income tax purposes and for retirement plan purposes as
well.
Another area requiring simplification is the multiple rules
limiting the ability of a taxpayer to use losses. These include
sections 465, 469, 704(d) and 1366(d).
The fifth area is the international tax rules. Although the
complexity of the international rules has generally been the
problem of large business, the growth of global business
opportunities is exposing an increasing number of small
businesses to the complexity of these rules.
Finally, let me point out the importance of addressing some
individual provisions that often affect small business owners.
These include the individual AMT, which no longer serves the
purpose for which it was enacted, the rules for calculating
estimated income taxes that Marty mentioned, the 2 percent
floor on miscellaneous itemized deductions, the capital gains
regime, and the estate tax and special rules within the estate
tax.
We appreciate your attention and interest in these matters,
and we will be pleased to work with the Committee and its staff
on these important issues as well as other tax issues of
significance to small business. Thank you.
Chairman Manzullo. Thank you very much.
[Ms. Olson's statement may be found in the appendix.]
Chairman Manzullo. Congressman Tauzin was nodding his head
with an ``I told you so'' in his eye, with all these different
types of taxes.
David Lifson.
STATEMENT OF DAVID A. LIFSON, CHAIR, TAX EXECUTIVE COMMITTEE,
AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS, NEW YORK,
NY
Mr. Lifson. Thank you, Mr. Chairman and members of this
distinguished Committee. I am David Lifson, the chairman of the
Tax Executive Committee of the American Institute of Certified
Public Accountants, and I come before you representing more
than 330,000 members, who in turn represent countless millions
of small business taxpayers, many of whom work daily with small
business units that are responsible to comply with the tax
provisions that you enact.
I would like to mention with respect to the competing
alternate proposals for tax systems, the AICPA has published a
book ``Flat Taxes, A Guide To The Debate'' that analyzes four
of the more popular, brand new ideas to revamp the Internal
Revenue Code. I would suggest that each of these ideas sound
like a very efficient and good idea until you analyze the
details, and as they say, the devil is in the details. Those
same details are horribly weighing down our tax system right
now, and I think the analysis has to be made of the competing
details, as opposed to the competing concepts of equity and
fairness, and just and appropriate tax systems to fund our
society.
The fourth alternative to the four competing tax systems is
the alternative that we came here today to speak of, and that
is the alternative of fixing the Code, we have rather than
adopt a brand new, untested system. We don't take a position
whether the solution is the fifth or any one of the first four,
but offer you an analysis of each.
Our tax laws are certainly too complicated. There appears
to be very broad agreement on that level here. The current
outcry for tax simplification is not new. In fact, the AICPA
has warned Congress for more than a decade that the tax law is
growing so dense that it threatens to undermine voluntary
compliance. Small businesses in particular need an advocate
such as the AICPA to collect and voice their concerns about the
burdens that are imposed on them.
As you know, we are not alone in our deep concerns about
the ill effects of complexity in our tax system. Last year we
were pleased to join with the American Bar Association's
Section of Taxation and the Tax Executives Institute in a
bipartisan effort to work toward the common goal of suggesting
ways to make our current tax system simpler and more rational
for a broad range of business and individual taxpayers.
In collaboration with our professional colleagues, we
developed an initial big-picture package of tax simplification
recommendations that was submitted to Congress in February of
this year. You need to know that there are a growing number of
taxpayers who perceive the law to be unfair, that complexity
impedes the continuing efforts of the Internal Revenue Service
to administer and enforce the law, that the cost of compliance
for taxpayers is increasing disproportionately with everyone's
income, and that complexity interferes with economic
decisionmaking.
The worst part of all of this is that the end result is
erosion of voluntary compliance, and we have the voluntary
compliance system that is the envy of the rest of the world.
Now, by and large our citizens obey the law, but it is only
human to disobey a law if you do not or cannot understand the
rules. The dynamic American economy is changing and moving
rapidly against an unnecessarily cumbersome and in some areas,
an absolutely outdated income tax system.
There are various types of simplification. You can simplify
calculations. You can simplify the filing burden. But most
importantly, you can reduce the chance of having a dispute
between the IRS and the taxpayer.
Now, the first two types of simplification are sometimes
the easiest to identify and fix, although the repairs involve
some very hard choices. Computers help, forms help, technology
will help. But this is not just about math. The last type of
problem, adding certainty to the law and thereby reducing the
likelihood of a dispute, is the most difficult to effectuate,
yet, in my view, the most important. Clarifying law that is
hard to understand must be a priority if we are to achieve a
simpler system that is based on anything like our current
Internal Revenue Code.
Now, the AICPA, in their blueprint for Tax Simplification
issued back in 1992, identified four elements to consider in
creating a simpler tax system. That blueprint was largely
adopted as part of your 1997 legislative action. But starting
to consider simplification falls way short of delivering less
complex tax rules. The blueprint, the related complexity index
and our written remarks submitted for the record go into
greater detail, and I hope you will review both.
The bottom line is there has been much talk about
simplification, but simplification still has a difficult time
finding its way into enacted legislation. Nevertheless, the
basic principles outlined above still apply and should be used
in today's tax legislation environment. We need to look at
worker classification, capitalization versus expensing,
installment sales of business, and safe harbors; especially
safe harbors from the most complex rules, and particularly when
those rules were designed for large corporations. Many of the
other witnesses have discussed these items.
I thank you for your time. We recognize that a tax system
that is simple for all taxpayers may never be designed, but we
do believe a simpler system is attainable.
Thank you for the opportunity to voice our concerns.
Chairman Manzullo. Thank you very much.
[Mr. Lifson's statement may be found in the appendix.]
Chairman Manzullo. Scott Moody. Do you want to pull that
mike close to your face?
STATEMENT OF SCOTT MOODY, ECONOMIST, TAX FOUNDATION,
WASHINGTON, DC
Mr. Moody. Thank you, Mr. Chairman and members of the
Committee. My name is Scott Moody, and I am an economist with
the Tax Foundation.
It is an honor for me to be here before your Committee
today on behalf of the Tax Foundation to discuss tax complexity
on small businesses.
The Tax Foundation is a nonprofit, nonpartisan educational
organization that has been monitoring fiscal policy at all
levels of government since 1937. The Tax Foundation is neither
a trade association nor a lobbying organization. As such we do
not take a position on specific legislative proposals.
Our goal is to explain precisely and as clearly as possible
the current state of fiscal policy in light of established tax
principles. According to these principles a good tax system
should be as simple as possible, not be retroactive, be neutral
in regards to economic activities and, of course, be stable.
All of the studies that the Tax Foundation has ever
undertaken on tax complexity demonstrate that there are
economies of scale when it comes to tax compliance. For
instance, in 1996, small corporations, those with less than a
million dollars in assets, spent at least 27 times more on
compliance as a percent of assets than the largest U.S.
corporations or those with more than 10 billion in assets.
This is especially important to consider because most
smaller corporations, 90 percent in fact, have assets of less
than $1 million.
While some tax simplification for small business has
occurred since 1996, most notably the Taxpayer Relief Act of
1997, we believe our results remain illustrative of the
magnitude of the tax burden faced by small businesses. For
instance, two important measures of the tax complexity, the
size of the Tax Code and the instability of the Tax Code, have
been continuing to increase. The number of words in the Tax
Code, for example, have been steadily increasing. We have
looked back in time, and since 1955, there were slightly more
than 400,000 words that we estimate in the Internal Revenue
Code. Today there are more than 1.6 million, and that is up by
200,000 words only 5 years ago.
In addition, the number of sections in the Internal Revenue
Code have been climbing even faster than the word count. In
1954, there were 103 sections in the Tax Code. Today there are
725. That is an increase of over 600 percent.
In addition to the complexity associated with the sheer
size of the Tax Code, small businesses must also contend with
the instability of the Tax Code itself. In other words, it is
not just a matter of learning the Tax Code a single time,
rather it is an ongoing process of keeping up to date with the
latest legislative changes, regulatory changes, and Tax Court
rulings.
In terms of legislative changes, the Tax Foundation
research has estimated that on average every section of the
Internal Revenue Code is amended once every 4 years. This is a
direct result of the 32 significant Federal tax enactments that
have taken place since 1954, or approximately one every 1.4
years. However, this legislative instability does not take into
account the fact that when tax law changes, so do regulations.
As a general rule, surges in proposed IRS regulations occur
within the first 3 years after significant tax legislation has
been enacted.
So you can see between the changes in legislation and
regulation, the Tax Code is almost always in a state of
constant fluctuation. Such instability also spills over into
the tax courts, and since it typically takes a taxpayer's
dispute 3 years to appear on court dockets, small businesses
are at an inherent disadvantage.
If small business owners cannot accurately predict the
consequence of a particular economic activity either because of
the size or instability in the Tax Code, then the tax policy is
handicapping the growth of small businesses and the U.S.
economy in general. The benefits of reducing tax complexity
would dramatically benefit small businesses since they
currently bear a disproportionate amount of the burden. This
could be done in a comprehensive revision of the Tax Code
guided by established tax principles. In addition, such tax
reform would diminish the need for future corrective tax
legislation and thereby increase the stability of the Tax Code
and regulations.
Thank you very much.
Chairman Manzullo. Well, thank you. I appreciate it very
much.
[Mr. Moody's statement may be found in the appendix.]
Chairman Manzullo. Congressman Tauzin, I know you have an
11 o'clock Subcommittee hearing, so if you have to leave us you
are excused. If you want to stick around that would be fine,
too.
Mr. Tauzin. Thank you. I have to leave. I really enjoyed
the presentations, and let me say big kudos to Scott. That was
excellent.
I want to say one more thing. I don't know--certainly not
in this session of Congress, but there are growing cries for
tax reform. And Dick Armey and I went on a tax debate around
the country. We did 40 cities in the last several years. I have
never touched a hotter political button. Americans are so ready
for us to do major reform, not just little fixes, not just
minor reforms, but major reforms that really simplify matters.
And I agree with the accountants. I have been close with
the accountants for many years. We have worked closely
together. There are a lot of good plans out there. I don't have
any pride of authorship. I think we have a good one, and I will
defend it with anyone, but if someone has a better one, bring
it on. Americans are ready for this, and small businesses in
particular, and people generally who have less resources, the
small business community than the big business community, are
indeed the ones most impacted.
Let me urge you to keep up your good work. Count on me to
help you any way I can.
Chairman Manzullo. Thank you very much. I appreciate that.
Todd McCracken.
STATEMENT OF TODD McCRACKEN, PRESIDENT, NATIONAL SMALL BUSINESS
UNITED, WASHINGTON, DC
Mr. McCracken. Thank you, Mr. Chairman. It is a pleasure to
be here today. Again, my name is Todd McCracken. I am president
of National Small Business United. We are the Nation's oldest
small business advocacy organization. I appreciate the
opportunity to be here today and to make a few comments about
the problems that small businesses have with thecomplexity of
the Tax Code. I would like to take time to discuss a tax proposal that
we have endorsed that I believe could really revolutionize the existing
tax system.
Mr. Chairman, the NSBU was founded when the income tax was
only 23 years old, with only two pages in forms and several
pages of instructions. While we have not grown at the
exponential rate of the income tax laws, we do now represent
65,000 small businesses nationwide.
We have given a great deal of thought and attention to the
problem of simplification and agree with every one of the areas
that were mentioned here this morning as important areas that
need to be simplified for small business, but as you can see,
when you put up those--and what we have heard this morning are
for the most part broad areas, and within each of those broad
areas are enormous numbers of issues that need to be addressed
to simplify the Code for small business.
It is a monumental chore that we are faced with to truly
simplify the system for small businesses, and the reason this
is the case is because we insist on continuing to tax income,
which means we have to define income, which means we have to do
it in an equitable way.
We are faced with so many political agendas in trying to do
that, and there are so many political advantages to simplifying
the current system that we have grown unfortunately cynical and
skeptical that this system can really be fixed and simplified
for small business. And to the extent that it can be, and we
are prepared to work with anybody on any of these proposals to
truly get some additional simplification in the Code, we are
also unfortunately of the belief that any simplification that
we do see is likely to be temporary, just given the lessons
that we have seen since 1986 and even before that the forces
that work on this Code continued to make it more complex and
continued to make it more unwieldy for smaller businesses.
Most entrepreneurs, that is unless they make a career of
selling tax shelters, correctly see the current system we have
as punishing each step toward the American dream. Every step of
a business's life faces significant tax obstacles. At the
start-up level the savings are taxed and start-up costs are not
deductible. Capital investments are made from after-tax dollars
and then taxed multiple times when the income is earned and
when the underlying asset that generates that income is sold.
They are taxed when growing because the government takes an
increasing share of income as more money is made. They are
taxed on exporting because U.S. taxes raise the price of our
goods relative to foreign goods. They are taxed when they add
jobs because of our extraordinarily high payroll taxes,
increased costs of hiring.
Family businesses are discouraged because they are taxed
when they are sold. And finally the owner gets to meet the
undertaker and the IRS on the same day as the government
effects a leveraged buyout of the business.
In February of this year, a national survey conducted by
American Express confirmed what NSBU already knew. A survey
showed that 74 percent of entrepreneurs consider tax reform a
top priority, but since the majority of Americans share our
common dislike for our present system, it is unfortunately
easier to demagogue the current system than to reach consensus
on what a new and more ideal system should look like.
NSBU leads entrepreneurial organizations not only by
defining the principles on which tax reform should be based,
but lending our full support for a specific proposal, the
FairTax national sales tax plan. The FairTax, we believe, is an
enlightened policy. The FairTax abolishes all Federal income,
FICA, estate and capital gains taxes, and so it allows small
businesses to prosper as never before in this country by
instituting a 23 percent tax on all end-use goods and services.
The FairTax would sweep away the burdens of the current tax
system and create a new dawn of American entrepreneurship and
economic growth.
The FairTax would allow small businesses to begin with
savings put aside with pre-tax dollars. It would allow them to
grow unfettered by the income tax, and without an eye on the
capital gains tax. It would allow them to hire without
discouragement from the payroll tax. It would allow them to
export unfettered by punitive American taxes on our exports. It
would allow them to make capital investments, unfettered by
hidden costs in the capital assets. It would not penalize good
years and bad by implementing the best of income averaging, a
zero rate of tax. It would discontinue the charade of taxing
income multiple times. But most importantly, it would repeal
the self-employment taxes that are the most despised by
entrepreneurs.
The FairTax would tax Americans on income, but only at the
point that they consume that income, not when they invest and
save. Small business owners would have greater access to
capital, the lifeblood of a free economy. Small business owners
would be able to pass their businesses on to their children.
I would like to make one final point about this kind of
system that I think gets on the point that other people made,
and then I will end.
As the complexity disappears, we would reinstate the novel
concept that Americans have the right to understand the law to
which they are subject. Moreover, they will immediately see and
understand the tax rates and any changes that occur.
The current complexity of the Code leaves most Americans,
rightly or wrongly, feeling that they bear an unfair share of
the tax burden. The poor believe that advantages must lie with
those who are well off. The wealthy see the high marginal rates
and limited deductions and feel singled out by the tax system.
The middle class assume that credits for the poor and loopholes
for the wealthy mean they alone bear the country's tax burden.
While there are fallacies and accuracies in each group's
assumption, the unfortunate side effect is a polarization of
the country and a universal feeling of victimization. It should
be clear to any observer that this feeling leads to tax
avoidance and cheating on an unprecedented scale.
If we can remove these hard feelings about the Tax Code, we
can markedly improve compliance and give a boost to the
national comity at the same time.
There are all kinds of other reasons that Mr. Tauzin got
into for moving to this kind of system, but I appreciate the
opportunity to be here and look forward to talking some more
about this topic. Thank you.
Chairman Manzullo. Thank you very much.
[Mr. McCracken's statement may be found in the appendix.]
Chairman Manzullo. I have a few questions.
Scott, do you want to scoot around there so you can share
the mike there with Mr. McCracken?
First of all, we want to thank you for coming. We did get
the testimony in prior to the bells going off.
And, Mr. Oveson, this question is to you. We have a
constituent who has a petition for a private letter ruling
pending before the IRS for 6 years. And I have a phone
conference call with Mr. Rossotti today between noon and 12:30,
I have found him to be extremely helpful in going right to the
top on helping to move some things. It involves approval of
some pension plans. I just don't want to get into great detail.
But I am willing to go to the floor next week if we don't get
action from the IRS and mention specifically the people within
the IRS who refuse to answer a Congressman's phone call. That
will take full use of the liability immunity under the
Constitution in order to move these bureaucrats off center so
they can do their specific jobs.
That may sound like a threat, and it certainly is. But
unfortunately sometimes the only way to get something done
around this city is to threaten to expose people by name, and
then all of thesudden something miraculously gets done.
But notwithstanding that, we have found Mr. Rossotti to be
extremely helpful. Some of you may have dealt with him. He is
the first--and forgive me, Pam, because I am an attorney also--
non-tax lawyer to take over the IRS. He is a systems person. He
understands analysis. He understands the concepts you are
talking about in terms of predictability and ability for small
businesses to thrive. So I have a lot of respect for him.
Val, let me ask you this question: In terms of your office,
what type of independence do you have from IRS? Tell us how you
are set up legally.
Mr. Oveson. I am not independent from the IRS. There were
various proposals that----
Chairman Manzullo. Legally.
Mr. Oveson [continuing]. That came up that would have had
me, the taxpayer advocate, be independent, but I report to
Commissioner Rossotti, whom you have appropriately praised. I
feel the same way about him. I report to him. He does my
evaluations. I am not independent from the IRS. The
independence that is talked about is with the individual
taxpayer advocates out in the field of which the law requires
there be at least one per State.
Chairman Manzullo. Explain how that works.
Mr. Oveson. They are independent from the district
directors, from the regional commissioners in the current
system, from the unit commissioners in the future system.
Chairman Manzullo. How are they paid?
Mr. Oveson. They are IRS employees.
Chairman Manzullo. Through IRS, but they have true legal
independence in terms of their thoughts?
Mr. Oveson. Well, they report up to me rather than to the
other parts of IRS, so they are independent in the same way
that appeals is independent from the other portions of the IRS.
But this issue is one that I deal with and answer daily around
the country with the perception or misperception that we are
independent from the IRS, which we are not. We are independent
within the IRS and not independent from the IRS. Does that
help?
Chairman Manzullo. That does. We have a similar situation
with Jerry Glover in SBA, who heads the Office of Advocacy. He
ends up going head to head with other government agencies. We
appreciate that.
I have a question for Pam Olson, and for any of you who may
want to answer too. Everyone agrees the present system is
anywhere from bankrupt or corrupt to unfair. Where do you
start? Where do you start without getting somebody else's
feathers up? Can there be a consensus of 10 points upon which
everybody agrees, or even one point in this whole process of
reforming?
Pam, do you want to start with that?
Ms. Olson. Well, yes, that is a question you could probably
spend a couple of days talking about. I guess I would say there
are two sources--there are millions of sources--but two sources
of complexity we need to address.
One of them comes from the IRS, and I actually share your
admiration of Commissioner Rossotti. And long before a non-tax
lawyer was appointed to the Commissioner's job, I suggested to
people that I thought it was an appropriate thing to do because
I don't think that all tax lawyers have the predisposition
needed to run an organization the size of the Internal Revenue
Service. And I think bringing somebody into the IRS from the
outside business community was a very smart thing to do.
Lawyers have too much of a tendency to dot every I and cross
every T and not enough sense that what we are doing here is
running a very large business institution. It has got to be run
like a business institution.
For the same reason I applauded bringing in Val Oveson from
outside the IRS, somebody with a different mindset about how
things have to get done and what you have to do to run the
system. That attitude on the part of Mr. Rossotti and Mr.
Oveson needs to spill over into the Chief Counsel's Office and
needs to permeate down through the Agency so that there is an
appreciation for the fact that we need to make decisions; we
need to have those decisions whenever possible have prospective
effect, not retroactive effect, so that people can plan; and
the answers need to be clear, simple and administrable. We
can't spend our time splitting hairs forever, because if we do,
we end up with a law that is so complex that nobody can comply
with it.
Chairman Manzullo. We have 5 minutes. It gives everybody
here about a minute.
Martin.
Mr. Davidoff. I agree with Pam. Also, the constituency of
the ABA and the AICPA have come forth with proposals that I
think very few people could disagree with, and you can start
with that as a means. Also I think Mr. Oveson in his annual
report has talked about phaseouts and getting rid of that,
which I have talked about today. I don't think anybody really
disagrees with that, other than people who want to trick the
American public on what the tax rate is.
I want to comment on the reason why Mr. Oveson and everyone
else thinks the National Taxpayer Advocate is independent even
though they are not is the way that Mr. Oveson has run that
office and Mr. Rossotti has given him the freedom to run the
office, and I think they have done a magnificent job.
But there are plenty of proposals on the table today; I
mean, section 179 traps, and a lot of other things. If you
dedicated yourself to spending the next 2 years to doing that
and avoiding things like changing estimated tax, safe harbors
and consulting us before you do things like you did last year
with the installment sales, we wouldn't do this. The problem is
Congress too often says, I need revenue, and refuses to go back
to the American public and say, I need to increase the rate.
Well, now you have an opportunity. You have a surplus. So
instead of saying we are going to give a 10 percent across-the-
board tax cut, say we are going to start fixing some of these
things, because we have the revenue, and now we can undo some
of these things and make them more fair.
Chairman Manzullo. I appreciate that.
David.
Mr. Lifson. We all know that simplification is complex. And
in the words of a former IRS Commissioner who happened to be a
tax attorney, but a very insightful one, I think one of the
keys is the appropriate balance of rough justice. And the
difficulty with simplification is enacting a single act of
simplification which often leads to a rough justice where there
are winners and losers in that particular thought or in that
particular change.
If you actually were on a mission to create simplification
and you took 10, 20 or 30 simplification ideas, it would blur
the winners and losers because so many people would be affected
by multiple changes that by the time you were all done, you
would wind up with a system that, I am sure, you could find one
person in some small town somewhere got cheated; but in the end
of the game, you will have your rough justice system and the
advantages of understanding, and, in our view, the increase in
the tax compliance rate would more than pay for the revenue
losses from averaging down or simplifying the law so a few
people paid a little bit less tax.
Chairman Manzullo. Does anybody else want to respond to the
same question? We will conclude here.
Mr. McCracken. I think the most important thing to be
done--obviously, a lot of thesethings that have already
happened have to be addressed or need to be addressed. I agree with
something somebody else said earlier, and that is the foremost thing is
to stop making it more complex. And probably the smartest way to do
that is, yes, we have a surplus now, and most of the talk is not how do
we raise taxes, but how to find some consensus on lowering them. I
guess my admonition would be avoid highly targeted, phased-in strange
things in the Tax Code. If you are going to change the tax system,
change it.
Mr. Davidoff. Here, here.
Mr. McCracken. And stay away from ``targeted'' tax cuts--
targeting always sounds nice because we will help the people
that really need the help, but it usually ends up meaning we
are adding enormous complexity to the Tax Code.
Chairman Manzullo. Scott or Val, do you want to add
anything to that?
Mr. Oveson. I just want to reemphasize that every change or
every deduction credit or line you add to the Code
geometrically complicates the Code.
Chairman Manzullo. Scott, did you want to have the last
word on that?
Mr. Moody. One thing I wanted to mention is the
instability. There is a trade-off. Every time you make these
small changes, you are increasing the instability, and
instability is a huge component of tax complexity. It is hard
to measure, but it is something that is there.
Chairman Manzullo. I want to thank you very much. Our goal
was to conclude the hearing before the votes started, and we
accomplished that. This is extremely significant in terms of
the small businesses that we represent. My brother has a small
restaurant with 13 tables, and he literally just pulls his hair
out because he doesn't know what to do. He does not know what
is expected of him with the complexities of the tax code.
What bothers me, and it did not come up here, is the social
consequence of a complex Tax Code which is to push small
businesses out of business and make way for larger chain
stores. I am not saying there is anything wrong with that, but
people ask what happened to the corner drug store? What
happened to the corner grocery store? What happened to this?
The corners are gone now because the trucks have to make right
turns, and along with them the businesses are gone. But so
often they are gone because they just can't keep up with all
the regulations and all the taxation, and they end up selling
out.
Our Ranking Minority Member Mrs. McCarthy is having
emergency dental surgery. Otherwise she would have been here.
She is always at these meetings, and we miss her. If she wanted
to submit some statement to the record, we will do that.
And this Subcommittee is adjourned. Thank you.
[Whereupon, at 11:14 a.m., the Subcommittee was adjourned.]
[GRAPHIC] [TIFF OMITTED]67831A.001
[GRAPHIC] [TIFF OMITTED]67831A.002
[GRAPHIC] [TIFF OMITTED]67831A.003
[GRAPHIC] [TIFF OMITTED]67831A.004
[GRAPHIC] [TIFF OMITTED]67831A.005
[GRAPHIC] [TIFF OMITTED]67831A.006
[GRAPHIC] [TIFF OMITTED]67831A.007
[GRAPHIC] [TIFF OMITTED]67831A.008
[GRAPHIC] [TIFF OMITTED]67831A.009
[GRAPHIC] [TIFF OMITTED]67831A.010
[GRAPHIC] [TIFF OMITTED]67831A.011
[GRAPHIC] [TIFF OMITTED]67831A.012
[GRAPHIC] [TIFF OMITTED]67831A.013
[GRAPHIC] [TIFF OMITTED]67831A.014
[GRAPHIC] [TIFF OMITTED]67831A.015
[GRAPHIC] [TIFF OMITTED]67831A.016
[GRAPHIC] [TIFF OMITTED]67831A.017
[GRAPHIC] [TIFF OMITTED]67831A.018
[GRAPHIC] [TIFF OMITTED]67831A.019
[GRAPHIC] [TIFF OMITTED]67831A.020
[GRAPHIC] [TIFF OMITTED]67831A.021
[GRAPHIC] [TIFF OMITTED]67831A.022
[GRAPHIC] [TIFF OMITTED]67831A.023
[GRAPHIC] [TIFF OMITTED]67831A.024
[GRAPHIC] [TIFF OMITTED]67831A.025
[GRAPHIC] [TIFF OMITTED]67831A.026
[GRAPHIC] [TIFF OMITTED]67831A.027
[GRAPHIC] [TIFF OMITTED]67831A.028
[GRAPHIC] [TIFF OMITTED]67831A.029
[GRAPHIC] [TIFF OMITTED]67831A.030
[GRAPHIC] [TIFF OMITTED]67831A.031
[GRAPHIC] [TIFF OMITTED]67831A.032
[GRAPHIC] [TIFF OMITTED]67831A.033
[GRAPHIC] [TIFF OMITTED]67831A.034
[GRAPHIC] [TIFF OMITTED]67831A.035
[GRAPHIC] [TIFF OMITTED]67831A.036
[GRAPHIC] [TIFF OMITTED]67831A.037
[GRAPHIC] [TIFF OMITTED]67831A.038
[GRAPHIC] [TIFF OMITTED]67831A.039
[GRAPHIC] [TIFF OMITTED]67831A.040
[GRAPHIC] [TIFF OMITTED]67831A.041
[GRAPHIC] [TIFF OMITTED]67831A.042
[GRAPHIC] [TIFF OMITTED]67831A.043
[GRAPHIC] [TIFF OMITTED]67831A.044
[GRAPHIC] [TIFF OMITTED]67831A.045
[GRAPHIC] [TIFF OMITTED]67831A.046
[GRAPHIC] [TIFF OMITTED]67831A.047
[GRAPHIC] [TIFF OMITTED]67831A.048
[GRAPHIC] [TIFF OMITTED]67831A.049
[GRAPHIC] [TIFF OMITTED]67831A.050
[GRAPHIC] [TIFF OMITTED]67831A.051
[GRAPHIC] [TIFF OMITTED]67831A.052
[GRAPHIC] [TIFF OMITTED]67831A.053
[GRAPHIC] [TIFF OMITTED]67831A.054
[GRAPHIC] [TIFF OMITTED]67831A.055
[GRAPHIC] [TIFF OMITTED]67831A.056
[GRAPHIC] [TIFF OMITTED]67831A.057
[GRAPHIC] [TIFF OMITTED]67831A.058
[GRAPHIC] [TIFF OMITTED]67831A.059
[GRAPHIC] [TIFF OMITTED]67831A.060
[GRAPHIC] [TIFF OMITTED]67831A.061
[GRAPHIC] [TIFF OMITTED]67831A.062
[GRAPHIC] [TIFF OMITTED]67831A.063
[GRAPHIC] [TIFF OMITTED]67831A.064
[GRAPHIC] [TIFF OMITTED]67831A.065
[GRAPHIC] [TIFF OMITTED]67831A.066
[GRAPHIC] [TIFF OMITTED]67831A.067
[GRAPHIC] [TIFF OMITTED]67831A.068
[GRAPHIC] [TIFF OMITTED]67831A.069
[GRAPHIC] [TIFF OMITTED]67831A.070
[GRAPHIC] [TIFF OMITTED]67831A.071
[GRAPHIC] [TIFF OMITTED]67831A.072
[GRAPHIC] [TIFF OMITTED]67831A.073
[GRAPHIC] [TIFF OMITTED]67831A.074
[GRAPHIC] [TIFF OMITTED]67831A.075
[GRAPHIC] [TIFF OMITTED]67831A.076
[GRAPHIC] [TIFF OMITTED]67831A.077
[GRAPHIC] [TIFF OMITTED]67831A.078
[GRAPHIC] [TIFF OMITTED]67831A.079
[GRAPHIC] [TIFF OMITTED]67831A.080
[GRAPHIC] [TIFF OMITTED]67831A.081
[GRAPHIC] [TIFF OMITTED]67831A.082
[GRAPHIC] [TIFF OMITTED]67831A.083
[GRAPHIC] [TIFF OMITTED]67831A.084
[GRAPHIC] [TIFF OMITTED]67831A.085
[GRAPHIC] [TIFF OMITTED]67831A.086
[GRAPHIC] [TIFF OMITTED]67831A.087
[GRAPHIC] [TIFF OMITTED]67831A.088
[GRAPHIC] [TIFF OMITTED]67831A.089
[GRAPHIC] [TIFF OMITTED]67831A.090
[GRAPHIC] [TIFF OMITTED]67831A.091
[GRAPHIC] [TIFF OMITTED]67831A.092
[GRAPHIC] [TIFF OMITTED]67831A.093
[GRAPHIC] [TIFF OMITTED]67831A.094
[GRAPHIC] [TIFF OMITTED]67831A.095
[GRAPHIC] [TIFF OMITTED]67831A.096
[GRAPHIC] [TIFF OMITTED]67831A.097
[GRAPHIC] [TIFF OMITTED]67831A.098
[GRAPHIC] [TIFF OMITTED]67831A.099
[GRAPHIC] [TIFF OMITTED]67831A.100
[GRAPHIC] [TIFF OMITTED]67831A.101
[GRAPHIC] [TIFF OMITTED]67831A.102
[GRAPHIC] [TIFF OMITTED]67831A.103
[GRAPHIC] [TIFF OMITTED]67831A.104
[GRAPHIC] [TIFF OMITTED]67831A.105
[GRAPHIC] [TIFF OMITTED]67831A.106
[GRAPHIC] [TIFF OMITTED]67831A.107
[GRAPHIC] [TIFF OMITTED]67831A.108
[GRAPHIC] [TIFF OMITTED]67831A.109
[GRAPHIC] [TIFF OMITTED]67831A.110
[GRAPHIC] [TIFF OMITTED]67831A.111
[GRAPHIC] [TIFF OMITTED]67831A.112
[GRAPHIC] [TIFF OMITTED]67831A.113
[GRAPHIC] [TIFF OMITTED]67831A.114
[GRAPHIC] [TIFF OMITTED]67831A.115
[GRAPHIC] [TIFF OMITTED]67831A.116
[GRAPHIC] [TIFF OMITTED]67831A.117
[GRAPHIC] [TIFF OMITTED]67831A.118
[GRAPHIC] [TIFF OMITTED]67831A.119
[GRAPHIC] [TIFF OMITTED]67831A.120
[GRAPHIC] [TIFF OMITTED]67831A.121
[GRAPHIC] [TIFF OMITTED]67831A.122
[GRAPHIC] [TIFF OMITTED]67831A.123
[GRAPHIC] [TIFF OMITTED]67831A.124
[GRAPHIC] [TIFF OMITTED]67831A.125
[GRAPHIC] [TIFF OMITTED]67831A.126
[GRAPHIC] [TIFF OMITTED]67831A.127
[GRAPHIC] [TIFF OMITTED]67831A.128
[GRAPHIC] [TIFF OMITTED]67831A.129
[GRAPHIC] [TIFF OMITTED]67831A.130
[GRAPHIC] [TIFF OMITTED]67831A.131
[GRAPHIC] [TIFF OMITTED]67831A.132
[GRAPHIC] [TIFF OMITTED]67831A.133
[GRAPHIC] [TIFF OMITTED]67831A.134
[GRAPHIC] [TIFF OMITTED]67831A.135
[GRAPHIC] [TIFF OMITTED]67831A.136
[GRAPHIC] [TIFF OMITTED]67831A.137
[GRAPHIC] [TIFF OMITTED]67831A.138
[GRAPHIC] [TIFF OMITTED]67831A.139
[GRAPHIC] [TIFF OMITTED]67831A.140
[GRAPHIC] [TIFF OMITTED]67831A.141
[GRAPHIC] [TIFF OMITTED]67831A.142
[GRAPHIC] [TIFF OMITTED]67831A.143
[GRAPHIC] [TIFF OMITTED]67831A.144
[GRAPHIC] [TIFF OMITTED]67831A.145
[GRAPHIC] [TIFF OMITTED]67831A.146
[GRAPHIC] [TIFF OMITTED]67831A.147
[GRAPHIC] [TIFF OMITTED]67831A.148
[GRAPHIC] [TIFF OMITTED]67831A.149
[GRAPHIC] [TIFF OMITTED]67831A.150
[GRAPHIC] [TIFF OMITTED]67831A.151
[GRAPHIC] [TIFF OMITTED]67831A.152
[GRAPHIC] [TIFF OMITTED]67831A.153
[GRAPHIC] [TIFF OMITTED]67831A.154
[GRAPHIC] [TIFF OMITTED]67831A.155
[GRAPHIC] [TIFF OMITTED]67831A.156
[GRAPHIC] [TIFF OMITTED]67831A.157
[GRAPHIC] [TIFF OMITTED]67831A.158
[GRAPHIC] [TIFF OMITTED]67831A.159
[GRAPHIC] [TIFF OMITTED]67831A.160
[GRAPHIC] [TIFF OMITTED]67831A.161
[GRAPHIC] [TIFF OMITTED]67831A.162
[GRAPHIC] [TIFF OMITTED]67831A.163
[GRAPHIC] [TIFF OMITTED]67831A.164
[GRAPHIC] [TIFF OMITTED]67831A.165
[GRAPHIC] [TIFF OMITTED]67831A.166
[GRAPHIC] [TIFF OMITTED]67831A.167
[GRAPHIC] [TIFF OMITTED]67831A.168
[GRAPHIC] [TIFF OMITTED]67831A.169
[GRAPHIC] [TIFF OMITTED]67831A.170
[GRAPHIC] [TIFF OMITTED]67831A.171
[GRAPHIC] [TIFF OMITTED]67831A.172
[GRAPHIC] [TIFF OMITTED]67831A.173
[GRAPHIC] [TIFF OMITTED]67831A.174
[GRAPHIC] [TIFF OMITTED]67831A.175
[GRAPHIC] [TIFF OMITTED]67831A.176