[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]





 WHAT IS THE BUSH ADMINISTRATION'S ECONOMIC GROWTH PLAN COMPONENT FOR 
                          PAPERWORK REDUCTION?

=======================================================================

                                HEARING

                               before the

                 SUBCOMMITTEE ON ENERGY POLICY, NATURAL
                    RESOURCES AND REGULATORY AFFAIRS

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 20, 2004

                               __________

                           Serial No. 108-197

                               __________

       Printed for the use of the Committee on Government Reform


  Available via the World Wide Web: http://www.gpo.gov/congress/house
                      http://www.house.gov/reform


                                 ______

                    U.S. GOVERNMENT PRINTING OFFICE
95-798                      WASHINGTON : 2004
____________________________________________________________________________
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                     COMMITTEE ON GOVERNMENT REFORM

                     TOM DAVIS, Virginia, Chairman
DAN BURTON, Indiana                  HENRY A. WAXMAN, California
CHRISTOPHER SHAYS, Connecticut       TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida                PAUL E. KANJORSKI, Pennsylvania
MARK E. SOUDER, Indiana              CAROLYN B. MALONEY, New York
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
DOUG OSE, California                 DENNIS J. KUCINICH, Ohio
RON LEWIS, Kentucky                  DANNY K. DAVIS, Illinois
JO ANN DAVIS, Virginia               JOHN F. TIERNEY, Massachusetts
TODD RUSSELL PLATTS, Pennsylvania    WM. LACY CLAY, Missouri
CHRIS CANNON, Utah                   DIANE E. WATSON, California
ADAM H. PUTNAM, Florida              STEPHEN F. LYNCH, Massachusetts
EDWARD L. SCHROCK, Virginia          CHRIS VAN HOLLEN, Maryland
JOHN J. DUNCAN, Jr., Tennessee       LINDA T. SANCHEZ, California
NATHAN DEAL, Georgia                 C.A. ``DUTCH'' RUPPERSBERGER, 
CANDICE S. MILLER, Michigan              Maryland
TIM MURPHY, Pennsylvania             ELEANOR HOLMES NORTON, District of 
MICHAEL R. TURNER, Ohio                  Columbia
JOHN R. CARTER, Texas                JIM COOPER, Tennessee
MARSHA BLACKBURN, Tennessee          ------ ------
PATRICK J. TIBERI, Ohio                          ------
KATHERINE HARRIS, Florida            BERNARD SANDERS, Vermont 
                                         (Independent)

                    Melissa Wojciak, Staff Director
       David Marin, Deputy Staff Director/Communications Director
                      Rob Borden, Parliamentarian
                       Teresa Austin, Chief Clerk
          Phil Barnett, Minority Chief of Staff/Chief Counsel

Subcommittee on Energy Policy, Natural Resources and Regulatory Affairs

                     DOUG OSE, California, Chairman
EDWARD L. SCHROCK, Virginia          JOHN F. TIERNEY, Massachusetts
CHRISTOPHER SHAYS, Connecticut       TOM LANTOS, California
JOHN M. McHUGH, New York             PAUL E. KANJORSKI, Pennsylvania
CHRIS CANNON, Utah                   DENNIS J. KUCINICH, Ohio
NATHAN DEAL, Georgia                 CHRIS VAN HOLLEN, Maryland
CANDICE S. MILLER, Michigan          JIM COOPER, Tennessee
PATRICK J. TIBERI, Ohio

                               Ex Officio

TOM DAVIS, Virginia                  HENRY A. WAXMAN, California
                   Barbara F. Kahlow, Staff Director
              Carrie-Lee Early, Professional Staff Member
                          Lauren Jacobs, Clerk
                     Krista Boyd, Minority Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on April 20, 2004...................................     1
Statement of:
    Clifton, Daniel, Federal affairs manager, Americans for Tax 
      Reform; Paul Hense, president, Paul A. Hense, CPA, P.C., 
      Grand Rapids, MI, on behalf of the National Small Business 
      Association; and Raymond J. Keating, chief economist, Small 
      Business Survival Committee................................   107
    Graham, John D., Administrator, Office of Information and 
      Regulatory Affairs, Office of Management and Budget; Mark 
      W. Everson, Commissioner, Internal Revenue Service and 
      former Deputy Director for Management, Office of Management 
      and Budget; and Patricia A. Dalton, Director, Strategic 
      Issues, General Accounting Office..........................    21
Letters, statements, etc., submitted for the record by:
    Clifton, Daniel, Federal affairs manager, Americans for Tax 
      Reform, prepared statement of..............................   110
    Dalton, Patricia A., Director, Strategic Issues, General 
      Accounting Office, prepared statement of...................    64
    Everson, Mark W., Commissioner, Internal Revenue Service and 
      former Deputy Director for Management, Office of Management 
      and Budget, prepared statement of..........................    43
    Graham, John D., Administrator, Office of Information and 
      Regulatory Affairs, Office of Management and Budget, 
      prepared statement of......................................    23
    Hense, Paul, president, Paul A. Hense, CPA, P.C., Grand 
      Rapids, MI, on behalf of the National Small Business 
      Association, prepared statement of.........................   118
    Keating, Raymond J., chief economist, Small Business Survival 
      Committee, prepared statement of...........................   128
    Ose, Hon. Doug, a Representative in Congress from the State 
      of California, prepared statement of.......................     4
    Waxman, Hon. Henry A., a Representative in Congress from the 
      State of California, prepared statement of.................    16

 
 WHAT IS THE BUSH ADMINISTRATION'S ECONOMIC GROWTH PLAN COMPONENT FOR 
                          PAPERWORK REDUCTION?

                              ----------                              


                        TUESDAY, APRIL 20, 2004

                  House of Representatives,
  Subcommittee on Energy Policy, Natural Resources 
                            and Regulatory Affairs,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2 p.m., in 
room 2154, Rayburn House Office Building, Hon. Doug Ose 
(chairman of the subcommittee) presiding.
    Present: Representatives Ose, Schrock, Cannon, Tierney, and 
Waxman (ex officio).
    Staff present: Barbara F. Kahlow, staff director; Carrie-
Lee Early, professional staff member; Lauren Jacobs, clerk; 
Phil Barnett, minority staff director; Karen Lightfoot, 
minority communications director/senior policy advisor; Anna 
Laitin, minority communications & policy assistant; Krista Boyd 
and Alexandra Teitz, minority counsels; Earley Green, minority 
chief clerk; and Jean Gosa, minority assistant clerk.
    Mr. Ose. Good afternoon. Welcome to this afternoon's 
hearing in the Subcommittee on Energy Policy, Natural Resources 
and Regulatory Affairs.
    This is the subcommittee's sixth annual April hearing to 
assess progress in paperwork reduction. Last week, Americans 
who prepared and filed their tax returns experienced firsthand 
the kind of burdensome paperwork that the government imposes. 
In February of this year, the fiscal year 2005 budget of the 
U.S. Government outlined the President's six-point economic 
growth plan. Point No. 4 is, ``streamlining regulations and 
reporting requirements.'' The IRS imposes over 80 percent of 
all paperwork burden levied on the public. As a consequence, 
IRS compliance simplification should be the administration's 
paramount paperwork reduction priority.
    Today, our subcommittee will examine the Bush 
administration's economic growth plan component for paperwork 
reduction, especially for IRS paperwork reduction.
    The Office of Management and Budget estimates the Federal 
paperwork burden on the public at over 8 billion hours. In its 
June 1993 final first-year task force report for the Small 
Business Paperwork Relief Act, OMB estimated that the price tag 
for all paperwork imposed on the public is $320 billion a year. 
Let me just repeat that, $320 billion a year.
    In 1980, Congress passed the Paperwork Reduction Act and 
established an Office of Information and Regulatory Affairs 
within OMB. By law, OIRA's principal responsibility is 
paperwork reduction. In 1995, Congress passed amendments to the 
Paperwork Reduction Act and set governmentwide paperwork 
reduction goals of 10 percent or 5 percent per year during 
fiscal years 1996 to 2001.
    After annual increases in paperwork, instead of decreases, 
Congress attached paperwork riders to the fiscal year 1999 and 
fiscal year 2001 Treasury-Postal Appropriations Acts. In 
addition, the House report for the fiscal year 2003 Treasury-
Postal Appropriations Act included an instruction for OMB to 
focus on IRS paperwork.
    In 1983, after issuance of President Reagan's 1981 
Executive Order 12291, which initiated OMB review of agency 
regulatory proposals, OMB signed a memorandum of agreement with 
the Treasury Department relating to its regulatory reviews. 
Nothing therein or subsequently has limited OMB's statutory 
responsibility for review and approval of each IRS paperwork 
requirement.
    As evidenced by its actions, paperwork reduction is of 
great concern to Congress, especially for tax and regulatory 
paperwork. Nonetheless, the GAO will report today that 
paperwork burden has increased, not decreased, in each of the 
last 8 years.
    GAO differentiates between substantive program changes in 
paperwork, such as a reduction from quarterly to annual 
reporting, and adjustments, such as a reestimate of the time it 
takes to complete a form. For adjustments, the public 
experiences no relief whatsoever.
    Last month, at OMB's annual House appropriations 
subcommittee hearing, Members of Congress emphasized to OMB 
Director Josh Bolten that mere reduction in the rate of growth 
of regulatory burden is insufficient. They emphasized that OMB 
must instead do more to examine and reduce the base of existing 
regulatory and paperwork burden. Under the Paperwork Reduction 
Act, OMB is the watchdog for paperwork. However, the evidence 
points to OMB's continued failure to focus on paperwork 
reduction. OMB has not pushed the IRS or other Federal agencies 
to cut existing paperwork.
    IRS itself has had a dismal record in accomplishing 
paperwork reduction. Last May, IRS promised to identify all 
paperwork thresholds within the Commissioner's discretion to 
adjust. I look forward to discussing the results of IRS's 
analysis.
    Today, we will learn if the President's six-point economic 
growth plan can be realized by specific paperwork reduction 
efforts identified by OMB and the IRS.
    I want to welcome our witnesses today. Our first panel 
includes the Office of Management and Budget's OIRA 
Administrator Dr. John D. Graham; also the IRS Commissioner and 
former OMB Deputy Director for Management Mr. Mark W. Everson; 
and the Director for Strategic Issues at the General Accounting 
Office Ms. Patricia Dalton. We welcome you all on the first 
panel.
    Our second panel is comprised of Mr. Daniel Clifton, 
Federal Affairs Manager for Americans for Tax Reform; Mr. Paul 
Hense, the President, Paul A. Hense CPA, on behalf of the 
National Small Business Association; and, Mr. Raymond J. 
Keating, the Chief Economist for the Small Business Survival 
Committee.
    Now, I see this hearing has generated substantial interest. 
I want to welcome my friend from Massachusetts for the purpose 
of an opening statement.
    [The prepared statement of Hon. Doug Ose follows:]

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    Mr. Tierney. Thank you, Mr. Chairman. Dr. Graham, once 
again for you, Mr. Everson, and to Ms. Dalton, thank you for 
your testimony today. I apologize in advance for the fact that 
I'll be leaving in a brief while because of a conflict, and 
normally I would defer to Mr. Waxman as the chairman of the 
committee, but he's been kind enough to allow me to go first 
here today so I can make the other appointment on time.
    Today, the minority staff report prepared for Mr. Waxman 
and for me by staff has been released, and it concerns the 
government paperwork burdens. It reflects that, using General 
Accounting Office reports and Office of Management and Budget 
data, the burden of government paperwork on American citizens 
has substantially increased under the Bush administration.
    Now, this is despite the fact that we had to listen to the 
President--and all of his rhetoric during the 2000 campaign and 
time and time again since his election--telling us how bad 
paperwork is a burden to the small business persons and on 
families and what a reduction we could expect during his 
administration.
    However, when we look at the administration, we see that, 
in fiscal year 2000 the annual paperwork burden imposed by the 
Federal Government measured at 7.4 billion hours, and that is 
how it stood as this administration took office. By the end of 
fiscal year 2003, however, that burden had gone up to 8.1 
billion hours, an increase of some 10 percent.
    If we average that across the 109 million families in the 
United States, households, it would be a 6 hour per household 
increase annually.
    The IRS accounts for more than any other agency, as the 
chairman indicated, that being 81 percent of the burden. So, 
you can see the increase in 2000, 7.4 billion hours; in 2001, 
7.6 billion, an increase of 290 million hours; in 2002, an 
increase of 570 million hours, up to 8.2 billion hours of 
burden. A significant cause of that increase was the Economic 
Growth and Tax Relief Reconciliation Act of 2001. The amount of 
paperwork required by the Internal Revenue Service in fiscal 
year 2002 to implement that new law and other IRS regulations 
increased by 330 million hours.
    So, 7.4 when this administration took office, up to 7.6 the 
next year, 8.2 the following year, to 8.1 billion in 2003, but 
even that figure of 8.1 billion, which is 0.1 down from the 
previous year is only as a matter of adjustments and not the 
result of direct Federal Government action. Instead, the 
General Accounting Office tells us that, even at a slight 
decrease, it was caused by other factors, such as agency 
reestimates of burdens associated with the collection of 
information.
    The General Accounting Office concludes that, exclusive of 
those adjustments, the burden would be again up in fiscal year 
2003 by some 72 million burden hours. Once again, that is 
probably attributable to changes in the tax laws in 2003. They 
generated an estimated 113.9 million additional hours of 
burden.
    Now, I make those notes not because I think the IRS can't 
do anything about improving the burden of paperwork but because 
they also have to be helped by legislation that this Congress 
passes and the President proposes and fights to get passed by 
this body.
    Also, I'll make note, Mr. Everson, that in my district 
there are people working at the Andover IRS Service Center 
being told that their jobs are in jeopardy because of a 
decrease in paperwork, when, in fact, we see quite the opposite 
is true. And, I hope we can take an evaluation of those changes 
in light of the information we find out of increasing paperwork 
burdens.
    Also, just because I won't be here to ask questions, I want 
to raise for you the issue of, in that Andover IRS Service 
Center, they're projected to stop processing paper returns in 
2008 and 2009, but we're told also that people working on the 
e-filing component may also lose their jobs as being 
transferred elsewhere, and I'd like to think that you might at 
some time have your people respond to this--to my office and 
indicate--and the committee, and indicate whether or not we can 
do something about that. Those people involved with the e-
filing of returns, hopefully they will be able to continue 
their work at the Andover center, because they are not 
connected with the paperwork processing end of that. So, I'd 
appreciate it if you could respond to that either in writing or 
on the record and we'll take a look at that when I get back.
    Mr. Everson. If I could just say something now since you're 
about to go. I was in Andover on--if that is OK?
    Mr. Ose. It's not.
    Mr. Tierney. Sorry about that, but I will try to get that 
information. I would love to have a conversation with you about 
that, and I appreciate your willingness to respond on that.
    My last comment before I close here is that we are 
continually told about the burden of taxes in this country, but 
I think it's notable when we look at the information that the 
burden of taxes taken up by the corporate, the powers that be 
in this country, is somewhat reduced from almost 20 percent in 
past years now down to as low as--between 7 and 8 percent, and 
I would like to think that we have the proper attention to 
auditing and given the resources that the IRS needs in order to 
pursue those that might be shifting burdens in tax transfer 
policies or taking other evasive action to avoid their 
responsibilities. We can still look at people in the Earned 
Income Tax Credit, and I discussed this with you, Mr. Everson, 
at one of the other committee hearings that we had on the joint 
committee. We can do both, but the fact that we are putting so 
many efforts against those who are taking the EITC advantage on 
their taxes is a small return compared to your information that 
you gave us of the anticipated return if we give you the 
resources to go after the people that are really avoiding their 
fair share of the burden in a large way.
    So, I appreciate your continued work in that regard. I'd 
like to hear more about what you're doing there and understand 
always that we have not been reducing this paperwork and I 
certainly hope that, as we move forward, our tax laws and other 
actions that we take as a Congress and at the White House will 
certainly make your job easier in that regard. I yield back.
    Mr. Ose. For the gentleman from Massachusetts, the record 
will be left open for you to compose those in writing for Mr. 
Everson or any of the other witnesses.
    Mr. Tierney. Thank you.
    Mr. Ose. The gentleman from Virginia.
    Mr. Schrock. Thank you, Mr. Chairman, and thank you for 
calling this very timely hearing. Last week, many of us had the 
unfortunate responsibility of filing our Federal taxes, but 
thankfully the financial burden on American taxpayers is lower 
because of the aggressive administration and Congress' 
administration. Several tax relief measures have lowered taxes 
for American families and small business owners, and we have 
seen numerous positive impacts that tax relief has made on our 
economy. Unfortunately, this relief has not been extended in 
the form of meaningful relief from the paperwork burden that 
Americans must face in their personal and professional lives in 
dealing with their tax paperwork and other regulatory paperwork 
requirements. Hours upon hours and millions of dollars are 
spent dealing with this burden, taking away valuable time that 
could have been spent on more worthwhile activities.
    There is a light at the end of the tunnel, though. The 
President has made regulatory reform and paperwork relief a 
central part of his economic growth plan. Congress and this 
committee have shown on numerous occasions that we're ready to 
be partners in this effort, and we've passed a number of pieces 
of legislation to combat the regulatory burden placed on 
American individuals and small business.
    This hearing is going to focus on the plans that the 
administration has for implementing its relief program. I 
welcome the input from all of our folks testifying today, and I 
look forward to working with them to continue the efforts of 
this committee in addressing the regulatory and paperwork 
burden as a means of driving economic growth in America. 
Thanks, Mr. Chairman.
    Mr. Ose. The gentleman from California.
    Mr. Waxman. Thank you very much, Mr. Chairman. This topic 
for today's hearing is an important one. The time and effort 
that Americans spend on filling out government paperwork, under 
the Paperwork Reduction Act, paperwork burdens are supposed to 
be getting smaller; but, in fact, just the opposite is 
happening. In preparation for this hearing, as Mr. Tierney 
indicated, we asked our staffs to examine what the President 
has said on this topic and to compare it to what has actually 
happened under the Bush administration.
    We're releasing a report today. It shows that government 
paperwork burdens have increased substantially under the Bush 
administration. This report is based in large part on 
information that will be presented at this hearing by the 
General Accounting Office and the government witnesses.
    This report calls into doubt the administration's 
commitment to reducing government paperwork. Over and over 
again, the President has promised that his administration will 
reduce the amount of time that Americans spend filling out 
government paperwork, but, what the report shows is that the 
President's rhetoric is directly at odds with his actions. 
Americans are spending dramatically more time on government 
paperwork since President Bush took office.
    In the minds of many Members, it's becoming increasingly 
difficult to rely on what the President and his administration 
say. Over and over, President Bush and his top officials say 
one thing, but then they do the opposite. President Bush's 
promises on paperwork are another example of saying one thing 
and doing the opposite.
    As a candidate, Governor Bush criticized Federal paperwork 
and promised my administration will do things differently. In 
January 2001, President-elect Bush said, ``On the Federal 
level, we require about 60 percent of the paperwork, and that's 
going to change.'' In May 2003, President Bush said, ``this 
administration has launched a task force to find ways to reduce 
paperwork for small business owners in America.'' In September 
2003, President Bush said, ``We need to continue to work for 
regulatory relief on small and large businesses so that instead 
of filing needless paperwork you're working to make your work 
force more productive.''
    And, then, in November 2003, President Bush said, ``We need 
to make sure our entrepreneurs are focused on job creation, not 
filling out needless paperwork.'' And, then, in February of 
this year, President Bush said, ``The Federal Government must 
do everything we can to make the paperwork burden less on small 
businesses, not more.''
    Well, it can't be any more clear. The President has said 
the same thing over and over and over again, but the reality is 
that according to the administration's own reports, the amount 
of time Americans spend on government paperwork has soared 
under President Bush.
    Last year, Americans spent 700 million more hours filling 
out government forms than they did during the last year of the 
Clinton administration. For the average household, paperwork 
burdens have increased more than 6 hours per year under the 
Bush administration.
    This is a serious problem in its own right. Paperwork 
requirements represent a real cost to businesses and citizens. 
If reduction is important to the President's economic growth 
plan, well, maybe that's why the economic growth plan is not 
producing jobs, because we're spending more money on paperwork, 
and the requirements represent a cost that is being passed on. 
It's another one of those unfunded mandates. The States are 
getting their unfunded mandates. Businesses are forced to do 
things. Individuals are being forced to spend money on more and 
more paperwork. That's a problem, but I would submit that 
there's an even deeper problem here. The most valuable asset a 
government can have is the trust of the people. This trust is 
eroded when the commitments our President makes--not once but 
over and over and over again--are not borne out by his actions.
    So, I'm pleased that we're having this hearing to explore 
this matter further. I would submit that this report we've 
done, which tries to use as few pages as possible with the 
writing on both sides, will give a very clear picture, not 
based on what we say but on what this administration's own 
people and what the GAO has to tell us, of what is really going 
on in this area of increased paperwork demands.
    Mr. Ose. Does the gentleman wish to submit that for the 
record?
    Mr. Waxman. Yes, I do.
    Mr. Ose. Without objection.
    [The prepared statement of Hon. Henry A. Waxman follows:]

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    Mr. Ose. OK. There being no other Members--before we 
proceed, I do want to introduce the new vice chairman of this 
subcommittee. That would be the gentleman from Virginia, Mr. 
Schrock. So congratulations, I think.
    As is the custom in Government Reform, we swear in all of 
our witnesses. It's not that we're singling you out or 
anything. We do this to everybody; so, if you'd all please 
rise.
    [Witnesses sworn.]
    Mr. Ose. Let the record show that the witnesses answered in 
the affirmative.
    All right. Our first witness today is the Administrator of 
the Office of Information and Regulatory Affairs at the Office 
of Management and Budget, Dr. John Graham. Dr. Graham, you're 
always welcome here. It's nice to see you again. You're 
recognized for 5 minutes.

    STATEMENTS OF JOHN D. GRAHAM, ADMINISTRATOR, OFFICE OF 
 INFORMATION AND REGULATORY AFFAIRS, OFFICE OF MANAGEMENT AND 
BUDGET; MARK W. EVERSON, COMMISSIONER, INTERNAL REVENUE SERVICE 
AND FORMER DEPUTY DIRECTOR FOR MANAGEMENT, OFFICE OF MANAGEMENT 
AND BUDGET; AND PATRICIA A. DALTON, DIRECTOR, STRATEGIC ISSUES, 
                   GENERAL ACCOUNTING OFFICE

    Mr. Graham. Thank you very much, Mr. Chairman, and I'm 
delighted to be here this afternoon, particularly since we do 
have some good news to report in the area of paperwork and 
regulatory burden.
    The first point is that the overall magnitude of paperwork 
burden imposed by the Federal Government has declined in fiscal 
year 2003. This is the first recorded decline in paperwork 
burden since 1996. The percentage reduction, about 1.5 percent, 
will sound small, but it translates into 100 million fewer 
hours of hassle for citizens and small businesses. Indeed, if 
you look closely at the report that we have issued today, the 
specific actions of the executive agencies--of the 
administration--account for 53 million hours in reduction of 
paperwork burden.
    Now, you have heard other members of the committee suggest 
that, in fact, paperwork burden has been increasing. But one 
thing that's important to keep in mind is that the actions of 
Congress also have a role to play in how much paperwork burden 
there is. In fact, this reduction would have been 110 million 
hours larger in the last year if Congress had not passed new 
laws that generate paperwork burden.
    For example, Mr. Chairman, you and I have discussed the 
country of origin labeling requirement, which is a concrete 
example of Congress forcing the administration into additional 
recordkeeping and reporting requirements. We are making 
progress, but, of course, we need the help of Congress to 
accelerate that progress.
    Point two: the frequency of paperwork violations has 
plummeted in the Bush administration. A paperwork violation is 
when the Federal Government, usually a regulatory agency, 
imposes a burden on citizens or businesses without 
authorization from Congress or the Office of Management and 
Budget. This flip chart on the left gives you the data, the 
most recent data we have on the frequency of these unresolved 
paperwork violations. You see that since the beginning of the 
Bush administration there has been a 90 percent reduction in 
the number of paperwork violations, from 200 to less than 20 
unlawful impositions of paperwork burden on citizens and small 
businesses.
    Why has this 90 percent reduction occurred? It has occurred 
because, early in the administration, we adopted a zero 
tolerance policy on violations, and I might add, Mr. Chairman, 
I had some considerable encouragement from you to move in this 
direction. Indeed, we appreciated that tailwind in our efforts 
to reduce the paperwork reduction.
    Point No. 3: This administration has blocked the growth in 
costly major regulations. You will notice that the fourth plank 
of the President's six-point plan is streamlined regulations 
and paperwork requirements, and let me give you a quantitative 
feel of the progress this administration has made in the 
regulatory area. We have insisted that new regulations be based 
upon science and engineering and economics, and the consequence 
of this stricter scrutiny is that we are slowing the growth of 
major costly regulations.
    In the reports we have shared with you from 1987 to the 
year 2003, there were $103.6 billion in new costs of major 
regulations imposed on the private sector and State and local 
governments. This $103 billion are impositions on the private 
sector or on State and local governments. It doesn't account 
for any of the additional costs that are in the Federal budget 
itself.
    Now, if you compare that, over that 17-year period, it's an 
average increase of $6.1 billion per year. For the first 3 
years of the Bush administration, we have slashed that number 
by 80 percent, to $1.6 billion per year. The Bush 
administration has reduced the growth rate in costly 
regulations by 80 percent.
    You might ask, Dr. Graham, why are you only talking about 
the growth of Federal regulation? Why don't you reduce the 
overall amount of regulation? I think you know the answer to 
that question. We are going to need the help from the Congress 
to actually make a reduction in the overall size of the 
regulatory burden. We can't have Congress forcing us to adopt 
new regulations at the same time as we seek to reduce 
regulatory burden.
    We do have a major challenge ahead of us on the sea of 
existing regulations. 1,000 of these major rules have been 
adopted since 1980. We have a modest housekeeping effort 
underway: 100 of them are being examined. With your help, we 
will try to do a better job in this area, but the good news is 
the trend lines are in the right direction, and the President's 
economic plan is making a difference. Thank you very much.
    [Note.--The information is available in subcommittee files 
and at http://www.whitehouse.gov/omb/infoeg/
2004--icb--final.pdf.]
    [The prepared statement of Mr. Graham follows:]

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    Mr. Ose. Thank you, Dr. Graham.
    Our next witness joins us, I think, for the first time, the 
Commissioner of the Internal Revenue Service--joining us for 
his initial foray here--Mr. Mark Everson. Sir, welcome to the 
witness table. You're recognized for 5 minutes.
    Mr. Everson. Thank you, Mr. Chairman, Mr. Vice Chairman, 
for the opportunity to testify on the IRS's efforts to reduce 
unnecessary taxpayer burden. Our goal is to impose the least 
amount of burden necessary for taxpayers to meet their tax 
responsibilities. Our working equation at the IRS is simple: 
service plus enforcement equals compliance. Service means 
helping taxpayers understand their tax obligations and 
facilitating their participation in the system. Excessive 
paperwork costs taxpayers time and money and causes uncertainty 
and anxiety. It hinders the ability of the taxpayer to comply 
with the tax laws and weakens our ability to enforce those 
laws.
    As to compliance with the Paperwork Reduction Act, I want 
to assure this subcommittee that this is a high priority. I 
would note, that of the 223 violations of the act which GAO 
identified as occurring during fiscal year 2003, none, none 
were from the IRS, despite the fact that just over 80 percent 
of the total paperwork burden is generated by the Tax Code. I 
think that's a laudable record.
    As you know, the overall paperwork burden is significant. 
According to our estimates, in tax year 2002, the total burden 
of individual taxpayers was almost 26 hours per return filed, 
for a total of 3.3 billion hours. Similarly, the out of pocket 
taxpayer cost was estimated at $157 per return, or about $20 
billion.
    I would like to point out that these numbers reflect an 
initial roll-up of data from a new, more accurate and 
comprehensive method of measuring taxpayer burden, which we 
have been working with Treasury and OMB to implement. The new 
estimate of burden is somewhat higher than that of the old 
model, especially for self-employed individuals.
    Our Office of Taxpayer Burden Reduction has aggressively 
pursued burden reduction initiatives. Since the Office was 
launched in 2002, we have reduced burden by over 100 million 
hours. Here are some accomplishments. We are expanding the use 
of the standard mileage rate for taxpayers with multiple 
vehicles used for business purposes, reducing recordkeeping 
burden by an estimated 8 to 10 million hours.
    Mr. Chairman, you've noted yourself that this reduction in 
tax recordkeeping is a step in the right direction. We've 
redesigned forms 1040 and 1040A, reducing burden by almost 12 
million hours, and most importantly, we've also helped more 
taxpayers go online to file returns, pay taxes and to 
communicate with us electronically. E-filing requires less 
paper, is more accurate and the computer program catches many 
mistakes that would have been made on paper. It also makes it 
easier for the IRS to solve taxpayer problems. Refunds come 
back in half the time.
    Mr. Ose. Mr. Everson, hold on. Dr. Graham, is your mic on? 
Please proceed.
    Mr. Everson. Perhaps the clearest sign that e-filing is 
working is that the number of e-filers is rising rapidly. It's 
up 15 percent so far this year compared to a year ago, and, for 
the first time, corporations and tax-exempt organizations are 
now able to file annual tax returns electronically.
    By next year, even the largest corporations will be able to 
avoid delivering literally box loads of paper documents to our 
doorstep. That is true paperwork reduction.
    We have more projects in store for next year. These include 
annualization of quarterly employment tax returns, extension of 
time to file returns to make all extensions uniform and 
automatic, and redesigning the quarterly employment tax return 
and Schedules K-1. In my view, we also need to look at a 
broader effort to simplify form 1040. We have made this 
progress despite the growing complexity of the Code. As you 
know, the total number of pages in the Tax Code regulations and 
IRS rulings has grown from approximately 20,000 pages to 60,000 
over the last 3 decades. Frequent changes to the Code and 
rising complexity are perhaps the greatest obstacles to 
reducing paperwork burden. I am concerned that tax law 
complexity may discourage taxpayers and adversely impact 
voluntary self-assessment that is at the heart of our tax 
system.
    Over the long term, simplification of the Tax Code is the 
best way to reduce burden.
    Thank you for inviting me here today, and I'm happy to take 
your questions.
    [The prepared statement of Mr. Everson follows:]

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    Mr. Ose. Thank you, Mr. Everson.
    Our third witness today I believe also is a new appearance 
here, that being Ms. Patricia Dalton, who is the Director of 
Strategic Issues at the General Accounting Office. Ma'am, 
welcome. You're recognized for 5 minutes.
    Ms. Dalton. Thank you. Mr. Chairman, members of the 
committee, it is truly a pleasure to be here to discuss the 
implementation of the Paperwork Reduction Act of 1995. This act 
established goals to reduce the governmentwide paperwork burden 
approximately 35 percent to about $4.6 billion by September 30, 
2001. Instead, burden has steadily climbed, reaching 8.2 
million hours in fiscal year 2002. This year the story, while 
on the surface may appear encouraging, continues to show an 
increase in burden due to Federal actions. The data we obtained 
from OIRA indicates that governmentwide paperwork estimates, as 
of September 30, 2003, stood at 8.1 billion burden hours.
    While it appears that there was a drop of approximately 116 
million burden hours from the previous year, were it not for 
adjustments to the burden estimate, the Federal Government 
actually experienced an increase of about 72 million burden 
hours in paperwork burden.
    Further, only a few agencies' paperwork estimates changed 
substantially during fiscal year 2003. Three departments, 
Defense, Labor and Treasury, exhibited substantial decreases.
    It is important to understand how the agencies accomplish 
these results. OIRA classifies modifications, either increases 
or decreases in agencies' burden hour estimates, as either 
program changes or adjustments. Adjustments are not the result 
of direct Federal Government actions but are rather caused by 
factors such as changes in the population responding to an 
existing requirement, or agency reestimates of the burden 
associated with the collection of information.
    In fact, the number of burden hours attributable to program 
changes has increased in every fiscal year.
    The IRS accounts for about 81 percent of the governmentwide 
burden estimate. Because IRS constitutes such a significant 
portion of the governmentwide estimate, it clearly has a 
significant and even determinative effect on the governmentwide 
estimate. Treasury's submission indicates that the decrease in 
the department's estimate during fiscal year 2003, about 162 
million burden hours out of an estimated 6.6 billion hours, was 
largely achieved through adjustments. Decreases of only 70 
million burden hours due to agency actions and 190 million 
hours due to adjustments were reported, while there was an 
increase of 105 million burden hours due to statutory 
requirements.
    Of the 70 million burden hours due to agency actions, we 
identified only 11 agency actions that reduced burden at least 
250,000 hours, with all of them over a 500,000-hour reduction. 
Five information collections resulted in a reduction of over 64 
million burden hours. There were three of these actions that 
were specifically directed at the small business community.
    I'd now like to turn to another area in governmentwide 
paperwork burden. That is the PRA violations. The agencies 
indicated in their ICB submissions that 223 violations occurred 
during fiscal year 2003. The 223 reported for fiscal year 
2003--is slightly less than the number of violations reported 
in the previous fiscal year but still reflects significant 
progress from the 850 violations reported in fiscal year 1998.
    OIRA, under Dr. Graham's leadership, is to be commended for 
the steps that they have taken to reduce violations. OIRA and 
the agencies have clearly made progress in reducing the overall 
number of Paperwork Reduction Act violations in recent years. 
However, more clearly needs to be done. Agencies can and should 
achieve OIRA's goal of zero violations. OIRA certainly has 
taken steps during the past year to address this problem. We 
believe these actions resulted in improvements that occurred 
during the fiscal year 2003 and will have positive benefits for 
years to come.
    However, there are still actions that we previously 
recommended to improve compliance with the Paperwork Reduction 
Act that need to be taken. For example, OIRA could notify the 
budget side of OMB that an agency is collecting information in 
violation of the act and encourage appropriate resource 
management officers to use their influence to bring the agency 
into compliance.
    OIRA could also encourage the use of best practices in 
agencies with good records of compliance, such as the 
Department of Labor, the Departments of Transportation and 
Treasury.
    We also recognize that OIRA cannot eliminate violations by 
itself. Federal agencies committing these violations needs to 
demonstrate a similar level of resolve. The President's 
initiative to reduce regulatory reporting requirements can 
serve as a vehicle to achieve zero violations. It also can 
serve as a vehicle to get to even further reductions in 
paperwork burden itself.
    Mr. Chairman, that completes my statement. I'd be pleased 
to answer any questions.
    [The prepared statement of Ms. Dalton follows:]

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    Mr. Ose. Thank you. I want to thank the witnesses for not 
only their written but also the oral testimony.
    Before we get to questions, I want to make sure that you 
understand how I look at this universe here. It seems to me 
that there are two groups of regulations we're dealing with. 
One is those that existed before the year 2000 and those that 
existed since I became chairman or those that have come to the 
fore since I became chairman.
    Now, within those two universes, as it relates to those 
that have come into existence since I became chairman, Dr. 
Graham, you've done a remarkable job in terms of looking at the 
content of those proposed new regulations, using prompt letters 
to keep the agencies focused on what congressional intent is, 
and processing the appropriate rules and regulations for it, 
and that's reflected in that chart by the decline in the rate 
of growth accordingly.
    Part and parcel of your consideration in those regulations 
that have been considered since the year 2000 has been, you 
know, the practical utility of the information being collected, 
the periodicity of the reports, and the threshold requirements 
for actually submitting the reports.
    One of the things that we're concerned about in the context 
of this entire universe, not only just the stuff since 2000 but 
previous to 2000, is the periodicity of reports, the threshold 
requirements, and the public utility of the information being 
collected.
    The reason I put this out here is that I want you to 
frankly consider your answer in terms of how I'm looking at 
this thing. I think Congressman Schrock shares much of my 
perspective. He's probably got a more eloquent way of saying 
it, but that's what I'm trying to get at is not only new versus 
old but as it relates to periodicity, threshold reporting, and 
the public utility of the information being collected.
    Having said that, Dr. Graham, our invitation asked for you 
to address four specific subjects. One is the detailed plan 
within the President's six-point economic growth plan for 
streamlining regulations and reporting requirements.
    On pages 7 and 8 of your statement, Dr. Graham, you briefly 
discussed this component, and you mention several changes made 
by the administration in the regulatory process. For instance, 
data quality and peer review. What I'm interested in is what 
specific proposed paperwork reduction initiatives have you been 
able to identify to meet the President's economic growth plan 
component for streamlining the reporting requirements, and then 
whether or not you've been able to do a calculation as to the 
cumulative number of burden reduction hours associated with 
them?
    Mr. Graham. Mr. Chairman, the approach we've taken, as you 
know, on these existing regulations and paperwork requirements 
is a public nomination process where people, businesses or 
citizens who are experiencing these burdens, have the 
opportunity to nominate specific rules and paperwork 
requirements that they feel need to be reformed. We did that in 
2001 and in 2002, and we had roughly 300 nominations from 
around 1,700 commenters.
    It's interesting to notice that the vast majority of those 
nominations addressed regulations rather than paperwork 
burdens, and the reason we believe that's true at OMB is that 
many of the paperwork burdens that we're all concerned about 
are rooted in regulation.
    While it is possible on occasion to reduce the paperwork 
burden without touching the regulation, the more common 
scenario is you have to change the regulation in order to 
reduce the paperwork burden. Even more frustratingly, you may 
have to change the entire law or the underlying statute, and 
I'm sure we'll talk about that more in just a moment.
    So, what we have found and heard from the regulated 
community is keep your eye on the ball as the executive branch 
on the regulatory burdens themselves, and a lot of the 
paperwork burden reduction will follow. You see in that chart 
on your left, for anybody who believes in numeric performance 
in terms of results, this administration has dramatically 
reduced the growth rate of Federal regulatory costs.
    Now, as you say, the existing regulatory burden is a much, 
much bigger challenge, and we're humbled by it, quite frankly.
    Mr. Ose. Even within the 300 nominees from the 1,700 
comments, I'm not trying--and I don't think Congressman Schrock 
is trying--to second-guess whether or not this or that 
regulation is properly constructed in terms of impact. What we 
are trying to find out is whether or not, for instance, the 
reporting periods are the proper length of time. I think Mr. 
Everson talked about the 941 reports, scheduled in year 2006 to 
go to an annual basis rather than a quarterly basis. That's the 
kind of thing that I'm focused on, because in effect, what 
you're doing as it relates to that report is reducing the 
paperwork by a factor of 75 percent.
    I'm trying to find out whether or not OMB has identified 
any such opportunities.
    Mr. Graham. Yes. The classic work of the OIRA desk officer 
on a paperwork request from an agency is to examine the issues 
you've just described, and they do it with regard to all of the 
various agencies that produce and provide information 
collection requests to OIRA. In this report, we are actually 
giving you the concrete examples of where we have made progress 
in reducing that paperwork burden. This year, for the first 
time, we introduced a separate chapter on IRS that involves not 
only the progress they've made but what their anticipated 
objectives are in the future. Where they can, they've actually 
quantified the accomplished or the anticipated burden 
reduction. I don't have all those numbers right off the top of 
my head, but they're right in there in that separate chapter on 
IRS.
    Mr. Ose. The IRS number is----
    Mr. Graham. We have all the agencies, but as you have 
persuaded us over the years, since IRS accounts for over 80 
percent of the overall burden, it would seem appropriate that 
we would have a considerable emphasis on the Tax Code's 
associated burdens in this report, and we have done so.
    Mr. Ose. And, again, we're not talking about the substance 
of the tax law or how it's applied. We're talking about the 
thresholds and the periodicity reporting requirements within 
the--I mean, we're not talking about----
    Mr. Graham. I'm not going to agree to that premise quite so 
easily. It's a lot more complicated. What we have found at OMB 
is that, when you get into a desk officer's job of reviewing 
IRS information collection requests, and we have been more 
aggressive in the last year working with my deputy director and 
our desk officer working on these problems--we find that the 
distinction between paperwork review and tax policy is not easy 
to make. Quite frankly, inevitably you get into questions about 
how much documentation should a taxpayer have to have in order 
to claim this particular deduction or credit or whatever. And, 
oftentimes, the recordkeeping requirements, for example, are 
motivated or are instigated by these types of provisions. Once 
you start to ask questions about that, which we do with our 
colleagues from IRS and Treasury, then they come back to us and 
inevitably we find ourselves in a discussion of tax policy. 
And, when that goes up in the chain at OMB you know the answer 
at that point.
    Mr. Ose. And, that's proper. I mean, I----
    Mr. Graham. So, I think paperwork review and tax policy are 
losely intertwined.
    Mr. Ose. Let's go back to this desk officer. In terms of 
the paperwork reductions that the desk officer has either 
suggested or forced upon the agencies, can you give us some 
sense of any that have been accomplished?
    Mr. Graham. Well, I think in the testimony from IRS, Mr. 
Everson can give you the details on it. IRS has made 
significant progress, and we would argue that most of that 
activity was initiated by IRS. We would not be here today 
suggesting that OMB initiated that activity. However, we have 
collaborated with IRS in the development of its improved model 
to actually measure burden, which allows us to get at the 
question of how much progress are we actually making.
    Mr. Ose. If the gentleman from Virginia would just bear 
with me here, have there been--separate and apart from the IRS, 
has the desk officer charged with this responsibility at OMB 
been able to identify any other paperwork reductions?
    Mr. Graham. You mean separate from IRS?
    Mr. Ose. Separate from your accomplishments so far, 
collaboratively or otherwise, with the IRS?
    Mr. Graham. Right.
    Mr. Ose. Has the desk office been able to identify 
paperwork reductions that have been able to be implemented?
    Mr. Graham. Certainly. And I can give you, if you'd like to 
put that into writing, some examples.
    Mr. Ose. We'll do that. We would appreciate having some 
examples.
    The gentleman from Virginia.
    Mr. Schrock. Thank you, Mr. Chairman. Thank you all for 
being here.
    Your comment about Tax Code reform is squarely right on, 
and I think there are two Members of Congress, Senator Saxby 
Chambliss and Congressman John Linder from Georgia, who are 
beating that drum. Over the 2-week break we had, if I heard 
them on the radio once, I heard them five or six times. It's a 
daunting task, and however we need to get our hands around it, 
it's a mystery to me: but, at some point it has to be done.
    Commissioner, I want to ask you a few questions about your 
new burden model for small businesses, and you said it will 
take into account all out-of-pocket expenses. In your testimony 
that's what it said. Will this model include in your burden 
estimates of the costs of paying someone else to fill out the 
tax returns for you or the cost of purchasing software?
    Mr. Everson. That number I referred to earlier for the 
individuals, 157, and we're developing other pieces of the 
model as we go. That does include the paid professional or the 
software does. My understanding is that the old model was last 
updated back in the 1980's. There was an assumption as to what 
a line on a return or on a form cost in terms of burden. That 
clearly was an incomplete picture.
    As we look at this, I'm struck by how complex a subject 
this is and how much work it needs. In terms of an ongoing 
review, we're doing that with OIRA, working with SBA, and the 
Department of the Treasury. As I understand it, even now the 
new model won't capture things from electronic filing, such as 
post filing burden. This is a huge change, where if things are 
simplified and the returns come in electronically and there are 
fewer errors in them, then there are fewer notices generated 
back to the taxpayer. That's a reduction of burden, too, that 
we don't yet contemplate. So there are lots of ramifications on 
all of that that over time need to be factored into our work.
    Mr. Schrock. Will this burden model also be able to 
calculate how many more people will pay someone else to prepare 
their taxes as a result of the added complexity which seems to 
mount every year?
    Mr. Everson. We track that every year as it is. The 
percentage of people that are actually paying someone else to 
prepare their return is now over 50 percent. It's 56 percent. 
As I indicated in the statement, 15 percent more people are 
filing electronically. That actually is good news, because what 
happens is it's more reliable, it's faster in terms of getting 
the refund done. The returns don't get lost in the mail. That's 
all good news, but I think it does reflect the burden, the fact 
that people will buy this package, if you will, or go down to 
their paid preparers because they're a little bit frustrated by 
the complexity of the Code themselves.
    Now, I use one of these packages myself for my own return, 
and I think it was quite good, because it gives you a series of 
yes or no or fill in the blank alternatives, because, if you've 
got to go through these forms, my goodness, they are quite 
complex. I agree that's not a viable way to go.
    Mr. Schrock. You do your own taxes?
    Mr. Everson. I've done my own taxes a couple of years. It 
was a little more complicated. I used to live overseas and 
that's really complicated. I had someone else do it in those 
days.
    Mr. Schrock. I don't dare. I don't take the chance. Well, 
seriously, I just want to make sure they are done right.
    As an aside here, my tax guy does it electronically now, 
and he's in San Diego and I'm in Virginia Beach, but I still 
sign paperwork. What's going to happen when it's all 
electronic? How am I going to be able to do that, because I 
intend to keep him for as long as I----
    Mr. Everson. We're working with the practitioners to speed 
and increase the number of electronic options. Right now, we've 
just introduced a new set of options whereby a practitioner can 
file--for instance, for an employer identification number 
online, we've had a number of those applications. This is a 
dramatic change. I just happened to have some testimony, if 
you'll indulge me for just a second, from the Ways and Means 
Committee from the National Association of Enrolled Agents, and 
this was just a couple weeks ago. He said that, in January of 
this year, the IRS reached a major milestone in the development 
of new electronic capabilities that will revolutionize the way 
we as tax practitioners will conduct future business with the 
IRS. He talks about these various services. Then, he says the 
new set of e-services products which will allow tax 
practitioners to represent their clients electronically and in 
a highly secure environment has left me utterly speechless. I 
can assure you that I do not make this statement lightly. 
There's a real excitement out there because of these changes.
    Mr. Schrock. I know it had nothing to do with the hearing, 
but I had to understand that. Mr. Chairman, I know my time has 
run out.
    Well, can you share with us the calculations and 
assumptions that go into the production of your model, and will 
it be transparent, or do you plan to keep that away from public 
view? And, will taxpayers and small business groups have the 
opportunity to comment on your model and make suggestions for 
improvements?
    Mr. Everson. Yes, sir. We'll do all those things.
    Mr. Schrock. Every one of those? OK.
    Will your new model be able to calculate the cumulative 
burden on a small business of the new paperwork?
    Mr. Everson. I missed a word in there, sir. Will it be able 
to calculate what?
    Mr. Schrock. I probably skipped one. Will your new model be 
able to calculate the cumulative burden on a small business of 
a new paperwork requirement in comparison to the current 
imposed burden so that regulatory decisions can be made about a 
new requirement's impact in the context of the currently 
imposed burden?
    Mr. Everson. I think that's exactly what the intent is, 
that, as we roll this out to the other piece of the overall 
burden beyond the individuals, we will be able to do that, yes, 
sir.
    Mr. Ose. I want to expand on that for just a minute. So, 
you're saying that the new model allows you to kind of go an 
either-or analysis, a comparative basis? You've got people 
behind you going like that.
    Mr. Everson. Listen to them. Don't listen to me.
    Mr. Ose. So you'll be able to game the system from an 
analytical standpoint and say, OK, if we're going this way, the 
burden is X, and, if we go this way, it's Y?
    Mr. Everson. I think that's right, that we'll be able to 
check and see what the various ramifications will be, and it 
will obviously help us select the projects that we want to work 
on.
    Mr. Ose. Could you be able to take it piece by piece so you 
can kind of take your base model and then put a piece in, take 
it out, and put it----
    Mr. Everson. That's exactly right. If you only have a model 
that deals with lines, that gives you a very incomplete 
picture. This is a better model, but I'm not suggesting it is 
foolproof. Don't get me wrong here, but it's a lot better than 
what we had.
    Mr. Ose. I just wanted to expand on that. I thank the 
gentleman.
    Mr. Schrock. Dr. Graham, the 2002 Small Business Paperwork 
Relief Act required each agency to submit its initial agency 
enforcement report to Congress by the last day of last year, 
and, during our joint hearing on January 28th of this year, we 
displayed a chart showing 42 agencies--I don't know if we have 
that up or not--that had not yet submitted statutorily required 
reports. On behalf of the Office of Management and Budget, you 
agreed to followup with the noncompliant agencies. When will 
those missing reports be submitted, especially for Justice and 
Treasury Departments, both of which levy fines on small 
businesses? Can you provide an expected submission date for 
each agency for today's hearing record?
    Mr. Graham. Yes, sir. We will do so.
    Mr. Schrock. Thank you, Mr. Chairman.
    Mr. Ose. No doubt you can read this chart on this screen 
again?
    Mr. Everson. It looks like one of my forms, I would say.
    Mr. Ose. Dr. Graham, I want to go back to something and 
make sure I understand it. When we were conversing earlier, we 
were talking about paperwork reductions as opposed to 
regulatory reforms, and I want to make sure I've got it 
correct. You asked that we submit that question in writing 
regarding specific paperwork reductions that we've been able to 
accomplish. As it relates to regulatory reforms, your chart 
over here indicates significant success dealing with the manner 
in which regulatory issues are being imposed upon the American 
public relative to previous administrations. What I'd like to 
do is make sure I understand. You talked about 300 nominations 
from 1,700 submittals. Now, those 300 nominations were 
paperwork only, or they were regulatory--paperwork reduction or 
regulatory reform submittals?
    Mr. Graham. The public was provided the opportunity to 
nominate regulations, guidance documents or paperwork 
requirements that they felt were overly burdensome or for some 
reason or another needed reform.
    We received 316 nominations from 1,700 commenters, and I 
note that most of the nominations dealt with regulation and 
guidance documents. Relatively few of them dealt with paperwork 
burdens.
    Mr. Ose. So, then, my earlier question----
    Mr. Graham. Which is not to say that paperwork isn't 
important.
    Mr. Ose. I understand.
    Mr. Graham. It's to say, as I was trying to argue, that the 
commenters realize that the paperwork burden is inevitably or 
often imbedded in the regulation or the guidance document.
    Mr. Ose. All right. Our earlier conversation was about 
specific proposed paperwork reduction initiatives, to which we 
are going to send you a question in writing. My question right 
now is specific proposed regulatory reform initiatives that you 
have been able to identify within those 316.
    Mr. Graham. Right.
    Mr. Ose. Could you provide us with a detailed list of that 
for the record?
    Mr. Graham. Yes, sir. Will do that.
    Mr. Ose. All right.
    Ms. Dalton, in your testimony there is a comment on page 10 
that the paperwork reduction goals and means of achieving those 
goals were not articulated within the President's 2005 budget. 
Now, have you--or, excuse me, has GAO been able to find 
evidence of major new agency initiatives within the agency's 
ICB submissions? In other words, are the agencies proposing a 
whole bunch of stuff that you are seeing?
    Ms. Dalton. Well, we have seen very few initiatives. When 
we looked at the 2003 ICB submissions, other than IRS, what we 
were able to identify were just 17 agency actions which reduced 
paperwork burdens 250,000 hours or more. For the entire 
government that's not a lot. We also haven't seen any plans or 
strategies that really would implement the President's 
initiative related to paperwork burden, which I think is along 
the lines of the questioning here.
    Mr. Ose. Now, it may be that those initiatives are under 
development.
    Dr. Graham, are we trying to count something that's not yet 
countable? Are we 9 months away from being able to count such 
numbers?
    Mr. Graham. No. Let me step back and say that you can think 
about the strategy of paperwork reduction as the plumber's 
approach, which is you get at each information collection 
request and you target it and you try to reduce frequency of 
reporting, etc. Or you can do what I'll call a systems 
approach, where you try to set in motion certain standards or 
guidelines that agencies have to follow and then agencies 
generate the paperwork reduction. Or, you use a public 
participation approach, where you ask the regulating community 
predominantly to tell you which of the specific paperwork 
requirements or regulations are in need of reform.
    Our experience in this administration is that the most 
successful strategies for actually accomplishing reduction in 
burden due to regulation and paperwork are through the systems 
approach and through the public participation approach. We are 
not convinced that the plumber's approach at OMB in the final 
analysis, will get you very far. I think this is for a 
straightforward reason: we don't have the resources at OMB to 
be at that level of review on every single paperwork 
requirement.
    Mr. Ose. Any of those paths is not mutually exclusive?
    Mr. Graham. Right. It's a mix, the question of what mix of 
those strategies to use.
    Mr. Ose. Well, you can understand my confusion then. We 
talked earlier about a desk officer looking at these things 
coming through the pipeline. I presume that's kind of like the 
plumber approach?
    Mr. Graham. That's right.
    Mr. Ose. OK.
    Mr. Graham. And, if that's your primary approach, you are 
in trouble.
    Mr. Ose. Well, my point in asking whether they are mutually 
exclusive is to ascertain whether we vested all of our--we are 
laying down all our cards on one or the other path. Now it 
looks by this chart as if we have invested quite a bit of our--
or laid our cards down rather significantly on the 
comprehensive approach that's paired between the two of the 
three that don't fall under the plumber's thing.
    Mr. Graham. Systems approach, public participation.
    Mr. Ose. Right. But, it would seem to me when you get to 
the technical or more mundane issues of what within a specific 
agency's form, whether it be Agriculture or Treasury or HHS or 
whomever, it seems to me when you have those forms that those 
agencies use having to cross a desk officer's desk and they are 
proposing a threshold of X, is someone asking the question 
whether or not that threshold is appropriate, or are they 
rubber-stamping them?
    Mr. Graham. That's a good question.
    The kinds of things that we train our desk officers to look 
at are, No. 1, is this a new paperwork request or has this one 
already been reviewed previously? Certainly, new paperwork 
requests would get a more intensive review than would renewals 
of previously approved paperwork requests.
    Mr. Ose. Logically. I understand that.
    Mr. Graham. The second thing that we would train a desk 
officer to do is ask, on a renewal request, have there been any 
significant changes in the nature of the approval request that 
might cause us to think we had better take a look at this? And, 
that's obviously a significant factor.
    And, I think in the third case we are always looking in 
some sense at the overall magnitude of the collection. It is a 
new collection? It is an existing collection? What is the 
magnitude of it? And, as you well know, the big ticket items, 
the big dogs in this game are from the IRS.
    Mr. Ose. Let's dwell on one that we have talked about in 
the past, whether or not we can incorporate into this or that 
agency's a line item that says no change from last year with a 
check box by it for people who otherwise have to fill out this 
or that form? Have the desk officers at OMB found any 
opportunity in any agency to suggest to an agency that they 
should add a line that says, ``no change from last year,'' with 
a box they can check and sign the bottom and send back? Has any 
such activity occurred since we last had the opportunity to 
discuss this?
    Mr. Graham. Well, to be candid with you, the last thing I 
recall on this is you training me about the Bureau of 
Reclamation in the need of one of its forms to have such a box. 
I'm happy to work with my staff to find out whether we have 
made any additional progress. But, quite candidly, that's my 
memory of the quite sensible suggestion that maybe there should 
be a ``no change'' box.
    Mr. Ose. Have you spoken with your staff or whomever that 
would then implement that kind of a question within the library 
of questions a desk officer would ask?
    Mr. Graham. Right. We are in the process now, in the 
systems approach to paperwork reduction, of developing 
basically a guidance document to agency paperwork reducers.
    Mr. Ose. Training----
    Mr. Graham. Training materials. And, one of the logical 
things we should add, in fact, I'm going to go back and read 
our draft to see if it's in there--is the question you just 
asked: Does this form actually provide an opportunity of no 
change from last year? That sounds like a sensible thing that 
should be in that guidance.
    Mr. Ose. All right. Now, my time has expired. I've got to 
go back to Mr. Schrock. The gentleman from Virginia.
    Mr. Schrock. Thank you, Mr. Chairman.
    I'm really concerned about the IRS burdens on small 
businesses. In particular, Commissioner, Drs. Mark Crain and 
Thomas Hopkins said in their testimony here, or in a report 
they had in August 2001, that was commissioned by the SBA, 
found that small businesses spend twice as much on compliance 
as large companies. I think it's $1,202 as opposed to $562. 
Small businesses face more than 200 IRS forms, including more 
than 8,000 lines, boxes, and data requirements.
    In the subcommittee's paperwork hearings in April 1999, 
2000, 2001, and 2002, former IRS Commissioner Rossotti 
acknowledged there is much duplication of IRS's reporting 
requirements for small businesses as opposed to big business. 
What specific paperwork reduction requirements did IRS pursue 
in 2004 to date and will IRS pursue in the rest of 2004 to 
actually reduce the paperwork burden on small businesses as 
opposed to re-estimating taxpayer burden through a new model 
and notice redesigns and electronic filing and others? And, 
what is IRS's estimate for the burden reduction hours 
associated with those initiatives?
    Mr. Everson. That is an important subject for us. Small 
business is something where there has historically been--I 
would characterize it as probably difficult relationships 
between small businesses and the Service. I believe things have 
gotten an awful lot better in the last several years largely 
through the reorganization of the IRS around customer lines of 
business, so that one of our four principal operating units 
deals with small businesses and self-employed people. So, we 
have now a more focused relationship with small businesses, a 
lot more education. I've met with people from the NFIB and 
other organizations that are helping us to address these 
issues, and we are much more sensitive to those challenges.
    We have done a few things that I think you are familiar 
with. We mentioned the cars and meal allowances for day care 
providers. We have other things under way in terms of 
annualization of certain employment filings and redesigns of 
form 941 and others. All of these are bits and pieces that will 
contribute in the tens of millions of hours of burden 
reduction.
    I will give you a comprehensive list of those for the 
record, but I don't want you to be under any impression that 
represents anything other than a starting point as we continue 
to go forward.
    Mr. Schrock. So we will continue that process?
    Mr. Everson. Absolutely. As I indicated in my opening 
remarks, our formula is: service plus enforcement equals 
compliance. Service has its element of communication, 
understanding and simplification where possible. If you can't 
understand the Code, and certainly simplification of reporting 
requirements helps understand it, then it's very hard to 
comply. So it's in our interest to make sure we continue to 
work on this.
    Mr. Schrock. You work with NFIB closely on this?
    Mr. Everson. Yes. We have an outreach organization within 
the small business division, and I meet from time to time with 
the leadership of these groups because they keep us pretty 
closely on point if we have a proposal or something that's 
going in the wrong direction, they tend to let us know, and 
they let us know from time to time from going to folks such as 
yourself.
    Mr. Schrock. I think there are a lot of people sitting 
behind you who are listening very carefully.
    Mr. Graham. Mr. Chairman, could I just add? There was a lot 
of modesty in that answer that I would like to just cut through 
for a moment. This is the first year since fiscal year 1996 
that overall paperwork burden in this country has declined. Why 
did it do so? If you look at this report carefully, it is the 
initiatives of the Internal Revenue Service that are driving 
that number. It hasn't happened very much. Only eight times in 
the last 24 years has overall paperwork burden gone down, and 
it has gone down because the Treasury Department and IRS have 
made some significant progress. Let's just cut through it and 
talk about what the specific facts are in this situation.
    Mr. Everson. I would never quibble with OMB.
    Mr. Graham. Boy, he was different when he was at OMB, I 
will tell you that.
    Mr. Ose. Will the gentleman yield?
    Mr. Schrock. Yes, I yield.
    Mr. Ose. Dr. Graham, are the totals due to adjustments in 
the estimates or are they true reductions?
    Mr. Graham. Good question. GAO has already testified that 
some substantial percentage of the overall reduction we 
experienced in the last year is simply due to adjustments 
without program effects. But, when you isolate the reductions 
due to program changes, which are still substantial overall and 
in the order of 50 million hours, what's driving those numbers 
predominantly is the Treasury Department and, in particular, 
the efforts of a rather substantial office within the IRS 
that's worried about the issues that this hearing is about.
    Mr. Ose. I just want to make it clear. I'm trying to get to 
a position where I can brag about what you are doing.
    Mr. Graham. That's why I interjected, because this is a 
very different story this year than it's been in a very long 
time.
    Mr. Ose. You are not talking about adjustments to 
estimates?
    Mr. Graham. There are separate estimates in here for 
adjustments and for specific executive branch actions, 
administrative actions; and they quantify the reductions due to 
those actions. Now, unfortunately--and I have to get one needle 
in--the reduction of 53 million was partly compensated, 
unfortunately, by a 100 million increase due to new laws passed 
by the Congress in that same year. But we should not take away 
from the Treasury Department and what they have done with 
regard to the 53 million hours.
    Mr. Ose. I thank the gentleman.
    Mr. Schrock. Ms. Dalton, I want to bring you on board with 
this, too, as we talk about the reduction of small business. 
How many significant program decreases of 250,000 hours or more 
did GAO find that IRS has made since the last hearing for small 
businesses? Is that possible to determine?
    Ms. Dalton. There were three reductions that we could 
identify specifically related to the IRS that had a direct 
impact on small business, and I think it amounted to over 40 
million burden hours in reduction. There may have been others, 
but they weren't specifically directed at small business but 
the more general business community.
    Mr. Schrock. That's a lot. That's a lot of hours.
    Thank you, Mr. Chairman.
    Mr. Ose. Mr. Everson, I was--my curiosity was piqued. You 
were speaking earlier about employee reporting and employer 
reporting and the burden that comes with the 941 and the like. 
One of the things in the real estate business that I've learned 
to deal with is whether someone is an employee or an 
independent contractor. That's a serious question. There is 
lots of case law on it, lots of exposure for developer, whether 
they are an employee or a contractor kind of thing.
    The National Taxpayer Advocate in the fiscal year 2003 
annual report to Congress identified nonfiling and 
underreporting by self-employed taxpayers as the second most 
serious problem encountered by the IRS; and, as a result, the 
Advocate proposed a new requirement for what I think the 
Advocate described as employers to withhold payments in certain 
categories for nonwage workers or independent contractors. I 
presume they are referring to Social Security or withheld 
income tax and the like.
    What I'm trying to find out was whether the Service, your 
office, has taken a position on the Advocate's suggestion in 
this particular area?
    Mr. Everson. If you will indulge me for a minute to put 
this in context. The Advocate doesn't develop those numbers. We 
have a research organization that works to look at the whole 
tax gap; and the whole tax gap that the country confronts is 
over, by our estimate, a quarter of a trillion dollars a year. 
Now, again, this is a lot like a burden reduction model. It's 
based on an old model. It goes back to the 1980's. We are now, 
through new auditing, updating that model; and probably that 
quarter trillion dollars a year will actually be larger.
    The President is aggressively attacking that tax gap, and 
we have a 10.7 percent budget increase requested for the IRS to 
go after improvement of compliance. Two-thirds of those moneys 
are directed at corporations and high-income individuals and to 
increasing criminal investigations. So that, to develop this 
sense of fairness, where we are devoting the bulk of our effort 
is at the higher end, because it is terribly important that 
individuals--and 80 percent of Americans feel this way--that 
the IRS enforce the law particularly in those sectors.
    When you turn to the smaller businesses, it is true, as the 
Advocate suggests, that there is a big compliance problem 
there. I do not favor the recommendation that's been made. What 
I believe we need to do is to rebuild the enforcement resources 
of the IRS, which were drawn down after 1996 by over 25 
percent. That's to say the number of revenue agents, revenue 
officers, and criminal investigators went down rather 
dramatically while we were continuing to improve our service 
side. If we do that and we do more on the compliance side, we 
need to do that first before we would consider anything of the 
nature that she's suggested.
    Mr. Ose. Well, I want to note for the record that the 
numbers that are the Advocate's recommendation are an estimate 
by the IRS of the tax gap at $310.6 billion for the year 2001.
    Mr. Everson. That's correct.
    Mr. Ose. So we're talking about what's estimated to be a 
lot of money.
    Mr. Everson. It's over a quarter of a trillion dollars. 
That $300 is before about $55 billion that we get back in 
people who pay over time or through our enforcement efforts. 
The floor on this--and it's something that each Member of 
Congress needs to be very aware of as they review the 
President's budget request, and I ask for your support on that 
request--the floor of this problem is over a quarter trillion 
dollars a year. And, again, like the conversation we are having 
about the burden reduction model, it's based on old models that 
don't take into account changes in behavior for these abusive 
shelters, the internationalization, some of the things that 
have been happening in corporations, all of these abuses that 
we are very aggressively attacking. It's a serious problem, and 
it needs your help, if I could say so.
    Mr. Ose. Well, the reason it caught my attention was that 
the Advocate's approach appears to be to require the 99.9 
percent of the people who are in compliance with reporting, 
whether they use a 1099 or something else, to now have to 
undergo withholding and the like in their relationships with 
the general contractor, whoever it is they are working with; 
and that, to me, is a paperwork increase. So that's what caught 
my attention in terms of the Advocate's proposal.
    I am pleased to hear you say that the better avenue for 
dealing with this is to reallocate resources to focus on those 
who are not complying, rather than to burden those who are.
    Mr. Everson. That's absolutely, sir, what I am trying to 
do. We are improving our models for risk assessment so that we 
can devote resources to the proper challenges. We are redoing 
our enforcement processes to become more efficient. This gets 
into what Congressman Tierney was talking about before. As we 
reap the gains of improvement in processes on the service side, 
we are redeploying those to enforcement. We are very conscious 
of the need to augment our efforts through more money, and we 
are doing that where we need to.
    Mr. Ose. I've learned to ask my question two or three 
different ways. So, are you saying that at present the Service 
does not have the intention of leveling on independent 
contractors a requirement for withholding?
    Mr. Everson. That's correct.
    Mr. Ose. My time has expired.
    The gentleman from Virginia.
    Mr. Schrock. Thank you, Mr. Chairman.
    It just dawned on me. Commissioner, you said you have to 
use software to do your taxes. You probably understand how to 
do it better than anybody. Shouldn't we get to the point where 
the IRS is so user friendly and the forms are such that nobody 
has to use any software, so John Q. Public out there can do his 
taxes without having to use software or anything else? Is that 
a fair question?
    Mr. Everson. It's a very interesting question. Congress 
some years ago established----
    Mr. Schrock. Not fair, but interesting.
    Mr. Everson. Like anything approaching taxes, it's a 
complicated question.
    Mr. Schrock. It is.
    Mr. Everson. Congress some years ago set an 80 percent 
requirement for electronic filing by the year 2007. We are 
progressing toward that goal. I do not believe we will achieve 
it by 2007, nor do I think that we want to force that to 
happen. There are segments of the tax-paying public that are 
neither wired nor necessarily participating in large numbers, 
such as immigrants coming into our country. If we force people 
to go through a certain system, we will not actually be as user 
friendly in terms of bringing them into participation in our 
system. So, as we get closer to 80 percent, we need to very 
carefully assess when we mandate things or don't.
    I do believe, on the other hand, that we will want to 
mandate soon electronic filing for corporations. We would have 
to establish a threshold for businesses before they would be 
required to do that. But, certainly the big outfits, they are 
all doing everything electronically anyway, and doing things by 
paper doesn't make any sense.
    Mr. Schrock. But, the software is making it simple. Why 
can't the forms for those who can't use or don't want to use 
software or don't have the capability of using the software, 
why can't the forms be made as simple as the software?
    Mr. Everson. We are improving the access to the electronic 
filing. We have something you may have heard of, the Free File 
Alliance. That's a group of over a dozen corporations, many of 
whom have these preparation businesses where they have 
developed this software. Now over 60 percent of Americans are 
eligible to actually file for free. They can go on IRS.gov and 
then get directed to a page which will help them pick out one 
of these corporations.
    I did this with my son. We went to the Cherrydale library, 
and he just got his check back for $112 from the IRS and he 
filed for free. He was a bag boy at Safeway last year.
    So that's working. And, this year it's over 3 million 
people so far have taken advantage of that option. It's up over 
20 percent from a year ago.
    Mr. Schrock. It's just breaking old habits and learning how 
to do that, I guess.
    Mr. Everson. That's a piece of it. It's interesting to me--
if you will indulge me 1 more minute. I was a little skeptical 
about just how this would continue to grow, the e-filing; the 
fact that it's up this year about 15 percent is quite striking. 
I think it may have reached a critical mass where more and more 
people are saying to neighbors, hey, look, this is the way to 
go. It really is a lot easier, and I got the refund in half the 
time. So, I have been pleased by the growth of it.
    Mr. Schrock. My accountant has changed his whole paperwork 
procedures because of the electronic filing; and it was so easy 
for Judy and me this year, I couldn't believe it. It took me 
about a third of the time, and----
    Mr. Everson. That's right.
    Mr. Schrock [continuing]. And I know my chances of going to 
jail are a lot less by filling out those forms.
    Mr. Everson. Well, you make mistakes and the software says 
you didn't fill in box 7 or something. And, it's better.
    Mr. Schrock. I think that's all, Mr. Chairman.
    Mr. Ose. I've got a couple others. Before we leave this 
issue of tax preparation, from an electronics standpoint, are 
you able to take the K-1s electronically as well as the returns 
themselves?
    Mr. Everson. I believe we have just started with the K-1s. 
I'm not entirely certain on that. But, what we just did was 
allow 95 percent of corporations to file electronically dozens 
of forms that just a couple weeks ago were all put on line. The 
5 percent of the biggest corporations can't yet do that. By the 
end of the year, they will be able to do that.
    I'm not sure about the K-1s. But the K-1s, what they are 
doing there is--believe it or not, this gets back into our 
compliance problems. Until a couple years ago, the IRS wasn't 
even entering K-1 data into our data bases so we didn't have 
any ability to match all of these complicated figures that were 
coming from these partnerships and flow-through entities and to 
see whether the taxpayer was reporting all the income or not.
    Mr. Ose. Your testimony is that you are now able to cross-
reference those?
    Mr. Everson. Now, we are starting to do that. We are 
entering the data, but I'm not sure whether it's all coming 
electronically. That's the difference. We are entering the 
data, though; and, I believe it's still manually.
    Unidentified Voice. But, it will be scannable so that they 
will all be able to be matched.
    Mr. Everson. It will be scannable, but right now it is 
still a data entry process.
    Mr. Ose. All right. I want to dwell on something that we 
have had to work our way through here.
    In my opening statement, I talked about President Reagan's 
1981 Executive Order 12291 which initiated OMB review of agency 
regulatory proposals. In effect, what happened was that there 
was a memorandum of agreement or understanding or whatever you 
want to call it between Treasury and OMB relating to regulatory 
reviews. I've got a copy of that agreement. I don't see 
anything in there and I'm not aware of anything subsequent to 
that that would suggest that OMB's review deals with anything 
other than form rather than substance of the statute dealing 
with taxes; and--I mean, we are all concerned about using the 
Tax Code for inappropriate purposes, but we are also--because 
you sit atop the regulatory behemoth, we are also interested in 
working with you to reduce the size of that regulatory 
requirement.
    Does the memorandum of agreement, the memorandum of 
understanding, whichever it is, between Treasury and OMB allow 
OMB sufficient ability to review Treasury's paperwork without 
going to the point of unduly influencing who pays what?
    Mr. Everson. I'm very comfortable with the situation as it 
exists today, which I believe to be consistent with those 
practices and consistent with what's been taking place really 
for the last 20 years. As we said some time ago, we are in 
compliance with the Paperwork Reduction Act, and that's because 
we go through a whole series of procedures even before we bring 
things to John's people. We take that effort very seriously. 
And, he says in his written testimony--and I agree with this 
entirely. He says, although the primary work and responsibility 
in this area resides in the IRS, OMB's review of recurrent 
submissions from IRS over a 20-year period has had a sentinel 
effect and contributed positively toward curbing excess IRS 
paperwork.
    I agree with that. But when you get back to what John said 
before--and I would not call it tax policy. I would call it tax 
administration. When you get into the regulatory arena, you 
start getting into tax administration issues. I would not want 
to disturb where we are right now because we are in election 
season right now. You have already seen requests for IG 
investigations on some of the analyses that Treasury has done. 
God forbid if we went down a road where we would have more--
even more back and forth on some of the independent calls that 
our folks are taking. So, I'm OK with where we are right now, 
and I think the relationship is just right.
    Mr. Ose. Your testimony is that for 20 years the system has 
worked fine, that there hasn't been gaming of the system, that 
the reviews have been constrained not to policy but to form?
    Mr. Everson. I do not believe that they have interfered 
with the IRS's ability to impartially and fairly administer the 
law. That's correct. But, I'm going to say--what I'll say is a 
little bit like your view of 2000. I've been on the job a year, 
and I can tell you in the year I've been here for sure that 
I've been very comfortable with everything.
    Mr. Ose. All right. Dr. Graham, you are comfortable with 
the MOU in terms of how it relates to your role at OIRA and 
Treasury's reporting requirements?
    Mr. Graham. The way I would describe it is OMB has had an 
influence on Treasury and paperwork through the system's 
approach and through the public participation approach. The 
plumber's approach, which we do use quite aggressively on a lot 
of other agencies, is not used as aggressively on Treasury for 
the reasons that you and I talked about for several years. I'm 
comfortable with that approach, and clearly it's going to 
require something very significant both within the Congress and 
the administration to change that relationship. That's my 
reading of the situation.
    Mr. Ose. Well, let me dwell on this a little bit. You and I 
have talked at length about whether or not OMB or OIRA, more 
specifically, has a person dedicated to Treasury paperwork and 
the like. Does OMB or OIRA have some such person, a desk 
officer, if you will you?
    Mr. Graham. Yes. In the last year we have had the IRS desk 
officer devoting closer to full time on this activity. And my 
deputy, Don Arbuckle, due to your interest and the Congress's 
interest, has been devoting more energy in this area.
    The conclusion that we drew from that activity was that 
when you get into the plumber approach, you very easily get 
into what Mark has referred to as this tax administration or 
what I refer to as tax policy. And, quite frankly, our desk 
officers don't have an ability, if they would disagree with Mr. 
Everson's people to elevate that issue and get results because 
of the current nature of the relationship between OMB and 
Treasury. Until you provide our desk officers an ability to 
make an independent judgment and elevate when necessary, you 
don't really have the same relationship that you have with the 
other agencies.
    Mr. Ose. That begs the question. The desk officer is there 
for some purpose. What is their job if--I mean, give us an 
example?
    Mr. Graham. It's a question of the degree. It's a question 
of the intensity.
    Mr. Ose. Give us an example of what the desk officer could 
or could not do?
    Mr. Graham. I think that the examples of various terms that 
you gave in your own statement about the kinds of changes that 
can be made about the level of intensity of review we have on 
Treasury and IRS is different than other agencies precisely for 
the reason that you have said in that statement: the history of 
that relationship and the memorandum of understanding. So I 
don't want to represent to you that we are, in fact, doing the 
same thing on each one of those IRS proposals.
    I think I can live with that arrangement in the current 
situation. I'm not suggesting that needs to be changed. But, 
you need to understand exactly the realities of what's going on 
so you can make your own assessment of that situation.
    Mr. Ose. One of the things that I'm trying to get at is 
there are certain things that are defined by statute, like 
rates. The marginal income tax rate's pretty well defined by 
statute. But, there are other things dealing with periodicity 
of reports or reporting threshold requirements and the like 
which have been defined by regulatory decision, for instance. 
Are there any examples you can give to us where the desk 
officer at OMB has suggested back to Treasury that either the 
periodicity is too long or too short or that the threshold is 
too high or too low?
    Mr. Graham. That's a good question. If you give it to me in 
writing, I will try to get an answer to you.
    But, you used regulation in your question----
    Mr. Ose. I understand.
    Mr. Graham [continuing]. And the IRS interpretive 
regulations, which are the vast majority of the regulations 
that they issue, are covered by the memorandum of 
understandings. I hope you are not going to look for a long 
list of answers from me in response to that question. It's not 
just the Tax Code that is in a sense interpreted within 
Treasury without rigorous OMB review; it is also the 
interpretive regulations which implement the statute. We don't 
have the level of review on Treasury that we do on other 
agencies; and, as you know, it has a very long history and 
explanation for why that's the case.
    Mr. Ose. But, just as I use the word ``regulation'' in my 
comment, you use the word ``interpretive'' in yours.
    Mr. Graham. Fine. Delete the word. Delete the word 
interpretive. Because most of the rules coming out of the IRS 
are--they would describe them in that way on the issues we are 
talking about here.
    Mr. Ose. I'm not arguing the point about statutorily 
defined things. That's not my issue.
    Mr. Graham. I know. But the memorandum of understanding 
covers regulations as well as what's statutorily driven.
    Mr. Ose. Well, the manner in which the regulation is 
interpreted evolves; let me give you an example. In 1980, we 
didn't have computers to speak of. Now, nobody competes without 
them. I mean, things change. It would seem to me that, over 
time, that the threshold of reporting as well as the 
periodicity within the report would evolve also, and what I'm 
trying to find out is whether or not we are, in fact, applying 
such a common sense standard to not the substance of the report 
but the submittal of the report, and what I'm unclear on is 
whether or not the MOU provides you with that opportunity?
    Mr. Graham. Well, what my staff tells me on this, who in 
the last year have had several meetings with IRS where they 
have worked through these issues, is that, compared to other 
Federal agencies, IRS, both in itself and at the Secretary's 
office in the Treasury, has a much more closer look at those 
set of issues, even the reporting issues that you just 
described, than most other paperwork-producing Federal 
agencies. So, in that sense, the need for an OMB plumber's 
approach is less even though IRS accounts for such a huge part 
of the overall burden.
    Mr. Everson. If I could just add a point or two on this.
    Mr. Ose. I was just coming to you.
    Mr. Everson. We work very hard before we put a form out to 
focus groups and others. Just as John is saying, because of the 
direct impact that is so dramatic, it's subject to a lot of 
review and there is--to use a word you used earlier, there is a 
lot of transparency on all of this. So, I think we are 
attentive to it.
    As John indicated, over the last year we have done more in 
the way of meetings that involve OMB, Treasury and the SBA, to 
try and push these things along. I would be concerned if we go 
beyond this because--I understand you are trying to limit this 
to the periodicity or threshold question, but you very quickly 
get into what you need to enforce the law, and that is a 
question that must be reserved for the IRS with some 
appropriate participation from Treasury.
    Once you start to make a judgment that you don't really 
need that and someone from OMB is saying that, you run the risk 
that an administration could say: We don't really want to 
vigorously enforce this portion of a law or this law. And, I am 
uncomfortable with departing from really where we are because I 
think it is working.
    I think, as OMB is indicating, we are making a legitimate 
effort here. GAO hasn't detected any violations of the 
Paperwork Reduction Act; so, at least mechanically, we are 
doing the right things. Do we need to do more here? Yes, sir, 
of course we need to do more here; and I will commit to you 
that we will continue to work to do more.
    Mr. Ose. Well, let me examine then one aspect of this 
having to do with the quarterly submittal of 941. At some point 
or another you were able to determine that the periodicity four 
times a year can be lengthened. In other words, you are going 
to an annual report come January 1, 2006. OK. What can't that 
be 2005?
    Mr. Everson. Why can't it be 2005? The IRS is a large, 
complex organization. One thing is for sure, we are neither 
speedy nor agile. I've been giving a great deal of push to our 
people to improve our processes, but when we do things we have 
to absolutely be 100 percent certain that we get it right.
    We will look at that date again, but we have some changes 
that are being made for 2004 calendar year or tax year with 
filing in 2005. But, we have complicated systems, changes we 
need to make for processing all these forms. We can't afford to 
have a problem were things to go awry.
    Right now, for instance, we are midway through our filing 
season preparations for next year. We are finishing up. We are 
working on all the returns right now, but we are looking at all 
the Code changes that we need to make to our computer systems 
to be able to file for next year. So, it does take a little bit 
of time.
    Mr. Ose. So you have made the decision to go ahead and 
implement effective January 1, 2006 to go to the annual versus 
the quarterly?
    Mr. Everson. Um-hmm.
    Mr. Ose. Because I've seen some form up here in my papers. 
I mean, it's basically already printed out. Is that right? 
Well, that's not a form that's been approved by OMB? So OMB has 
approved?
    Mr. Everson. I'm not sure of the specifics. I'll have to 
look at it and get back to you on the specifics of the 
mechanics. But we have identified this as an important thing to 
do that will help reduce the burden. We are looking at some 
other things. And, you have my assurance we're going to move as 
quickly as we can, but again we don't want to promise something 
we can't deliver.
    Mr. Ose. So, if I'm correct then and I need to correct my 
statement, the proposed form to convert from quarterly to 
annual report on the 941, that has not gone to OMB--this is the 
question: Has that gone to OMB for approval?
    Mr. Everson. I don't think it has.
    Because, again, one of the issues you face here is when we 
make a change it doesn't usually only affect us. We have a lot 
of other stakeholders, be they the Census Bureau, Social 
Security Administration. This is a complicated web. When we 
collect data, it's used in lots of places. So, we do have a 
more cumbersome process that we need to go through on questions 
like this. So, we take the time to do that.
    Mr. Ose. The gentleman from Virginia.
    Mr. Schrock. Thank you, Mr. Chairman.
    Let me go one other avenue here. I want to talk for a 
minute what steps the IRS is taking to improve the paperwork 
reduction performance.
    First, with SES or SES employees, does the IRS now include 
paperwork reduction in their annual performance appraisals 
under their executive performance agreements, as the chairman 
had previously recommended? And, two, did the IRS make 
paperwork reduction a GPRA goal and target in its annual 
performance plan, as the chairman recommended? And, if not, are 
you going to do that and when?
    Mr. Everson. We are just now in the process of finishing 
our strategic plan under GPRA, which will cover the years 2005 
through 2009; and it has three overall goals: improving 
service, modernization of the IRS, and enhancing enforcement. 
As I indicated before, service for us means helping people 
understand their obligation and facilitating their 
participation in the system. So, this document will drive all 
of our annual operating plans over the next 5 years. And, it 
does, yes, include a component of simplification and cleaner 
notices. We want to go to our notices and make them be 
understandable to individuals. This has an impact on the burden 
reduction.
    As we come into fiscal year 2005, which will be the first 
year under that plan, we will for sure have all of the annual 
goals as part of the President's management agenda, to the 
funding request we will follow these goals and also then the 
objectives for our business units and then the accountability 
of our officers to follow that. So, yes, that will be a 
component.
    Mr. Schrock. Thank you.
    Thanks, Mr. Chairman.
    Mr. Ose. Mr. Everson, I have been beating this quarterly to 
the annual thing.
    Mr. Everson. Mr. Chairman, I've already told you more than 
I know.
    Mr. Ose. I'm through beating it. I think the horse is dead, 
but let me kick the cow over here a little bit.
    Relative to the issue of thresholds within the information 
collected by the IRS, you have--or testimony last year was that 
there were a number of initiatives or analyses--there is a 
large analysis under way in terms of thresholds that the IRS 
may wish to change as it relates to reporting requirements, for 
instance, on Schedule B or Schedule C or what have you. You 
talked about that a little bit in your written statement in 
terms of this not-yet-completed analysis. What I'm trying to 
identify is whether or not you have a list of the discretionary 
thresholds that you are looking at and what the potential 
burden reduction may be from each of them?
    Mr. Everson. We have a partial list. I'm aware of Acting 
Commissioner Wenzel's testimony about a year ago, shortly 
before I came into the job. What we initially did after that 
was go through the Code on a pretty deliberate basis to see 
what thresholds there were and whether or what could be revised 
through our own actions versus what would require statutory 
intervention, and I think we concluded over a period of months 
that was not an all-encompassing effort.
    And, now we've redirected the efforts a little bit, and 
we're looking at areas where there aren't thresholds, and maybe 
some thresholds could be introduced to alleviate burden from 
folks who perhaps wouldn't need to file a particular form. We 
listed a few of those threshold initiatives.
    In the testimony, we indicate this is going to be an 
ongoing effort that will take several years for us to do; and I 
think we will work our way through the different areas with a 
view of again not only of looking at what's in law, because a 
lot of the thresholds, as you know, are actually in law, but 
also looking at this whole question of interpretive decisions 
that we've taken.
    Examples are, as I understand it, looking at 1040 EZ or 
1040A. Maybe we'd lift that threshold from--I guess it's 
$50,000 now to a higher level. Another example, as we have 
indicated, involves who would need to file officially for a 
501(c)(3) exemption.
    But, we want to be careful here. We have established four 
enforcement priorities. One of them is to make sure we don't 
have abuses within tax exempt and government entities. So, we 
don't want to do something to alleviate burden, to the 
charitable area that actually provides an avenue for terrorists 
or other people who are being abusive. So, because of that 
factor and because of all these linkages to other agencies and 
the Census Bureau and the use of our data, we have to be pretty 
careful.
    Mr. Ose. Presumably these issues might fall into different 
groups: one, some that are pretty straightforward, some that 
are highly complex, and some that fall somewhere in between?
    Mr. Everson. Yes.
    Mr. Ose. Do you have any that fall into the fairly 
straightforward category and do you have a date by which some 
of those within this fairly straightforward category might be 
resolved?
    Mr. Everson. I want to think about that and talk to our 
people as to what would fall into which bucket scenario.
    Mr. Ose. Why don't I send you a question in writing?
    Mr. Everson. That would be great.
    Mr. Ose. OK.
    Now, Dr. Graham, you and I have talked about this before, 
and I don't remember the answer. We talked about the 
initiatives within the respective agencies to improve their 
program performance by basically enhancing the information 
collection and by reducing burden on small businesses. And, you 
have, in response to my requests, asked these agencies to 
provide at least one new initiative in this regard. What I'm 
trying to inquire about is, why did we restrict it to--I'm kind 
of greedy. Why did we say only one? I mean, was it at least one 
or was it only one? It's my understanding that it was, I mean, 
you kind of threw it down and said, give me one?
    Mr. Graham. Well, I think one of the answers is, is that 
these burden reduction initiatives, in order to really make a 
meaningful difference, extend over 1 year. So, if you actually 
start a burden reduction initiative at time period one, you 
don't want that thing to be shut down at the end of that year 
as they start a new one. If you do a new one every year, over 
time you are actually carrying several of those. So I think, as 
a practical matter, our staff are engaging--what can we get out 
of these agencies but not push them so hard that they are 
basically not in a position to be responsive to us? So, it is 
that kind of balance.
    But, let me try to get you more details on the level of 
responsiveness we have had and what we've been able to 
accomplish with that, and we will see if we can't push a little 
harder. We are open to that suggestion.
    Mr. Ose. Well, I'm not quite----
    Mr. Graham. Not there yet?
    Mr. Ose. So, it's not that I'm questioning that. It's just 
I want to make sure I understand. Are you asking agencies for 
one new initiative each year?
    Mr. Graham. Um-hmm.
    Mr. Ose. So like it could be initiative A in 2003, but then 
in 2004 it's got to be initiative B?
    Mr. Graham. And, we don't want the first one to shut down.
    Mr. Ose. That's my question. So they can run concurrently? 
They are not mutually exclusive?
    Mr. Graham. That's right.
    Mr. Ose. All right. So in the 10th year, we will have at 
least some of them done, and we may have six or seven pending? 
Am I correct in my understanding?
    Mr. Graham. That's right.
    Mr. Ose. All right.
    Ms. Dalton, we didn't mean to ignore you. That was not our 
intention. I have to say, your written statement was 
comprehensive and very informative.
    Ms. Dalton. Thank you, Mr. Chairman.
    Mr. Ose. It's interesting to find third-party corroboration 
as to whether I'm right or wrong on some things. I have to 
compliment you. You were right on button. So I thank you for 
coming.
    Ms. Dalton. Thank you.
    Mr. Ose. Mr. Everson, Dr. Graham, we thank you for your 
appearance. We will leave the record open; and, as we'd 
indicated, there are a number of written questions we will be 
submitting to each of you. We would appreciate a timely 
response.
    Dr. Graham, I'm not sure we are going to have this fun next 
year.
    Mr. Graham. I was about to say, we have let you have your 
last hearing on good news: Paperwork burden is down, 90 percent 
reduction in violations under this President and we have 80 
percent reduction in the growth of the Federal regulatory 
state, part of the President's economic plan, thanks to 
tailwind. Thank you very much.
    Mr. Ose. Well, you are doing the heavy lifting. I will be 
watching my remaining months, and I presume Mr. Schrock will be 
in behind me. So, again, we appreciate your effort.
    Mr. Everson, we look forward to working with you in the 
days ahead.
    We are going to take a 5-minute recess here. If the second 
panel could gather, we would appreciate it. Thank you all.
    [Recess.]
    Mr. Ose. All right. I want to welcome our second panel to 
our hearing today.
    As you saw in the first panel, it's not a function of 
picking on you, but we swear everybody in. So, if everybody 
would please rise, raise your right hands.
    [Witnesses sworn.]
    Mr. Ose. Let the record show the witnesses answered in the 
affirmative.
    Our second panel today to talk about the Bush 
administration's economic growth plan component for paperwork 
reduction is Mr. Daniel Clifton, who is the Federal affairs 
manager for the Americans for Tax Reform. Welcome, sir.
    He is joined by Mr. Paul Hense, who is the president of 
Paul A. Hense, CPA, from Grand Rapids, MI. He is testifying 
here on behalf of the National Small Business Association.
    And, our third witness is the Chief Economist for the Small 
Business Survival Committee, Mr. Raymond Keating.
    Gentlemen, welcome. We have received your written 
statements for the record. As you saw in the earlier panel, we 
go for 5 minutes, so you can summarize; and we appreciate your 
being here.
    Mr. Clifton you are recognized for 5 minutes.

    STATEMENTS OF DANIEL CLIFTON, FEDERAL AFFAIRS MANAGER, 
AMERICANS FOR TAX REFORM; PAUL HENSE, PRESIDENT, PAUL A. HENSE, 
 CPA, P.C., GRAND RAPIDS, MI, ON BEHALF OF THE NATIONAL SMALL 
BUSINESS ASSOCIATION; AND RAYMOND J. KEATING, CHIEF ECONOMIST, 
               SMALL BUSINESS SURVIVAL COMMITTEE

    Mr. Clifton. Thank you, Mr. Chairman. It's great to be here 
today. Some of my testimony has been repeated earlier, so I 
will kind of summarize my written remarks.
    My name is Daniel Clifton. I'm Federal affairs manager for 
Americans for Tax Reform. Our organization is a coalition of 
taxpayer and taxpayer groups from across the country that 
believe in lower taxes, fewer regulations, and free markets.
    The timing of this hearing is very timely, given that last 
week was Tax Day. This is the most appropriate time for 
taxpayers to see the burden imposed on them by the government, 
both from a financial perspective and from a time perspective.
    The good news is, from a financial perspective, taxes are 
lower this year due to legislation passed by this Congress and 
signed into law by President Bush. The average family is saving 
over $1,500 because of the tax cuts from 2001 and 2003. Just 
from last year's tax cut, a family of four making $40,000 had a 
96 percent tax reduction, meaning they are virtually paying no 
taxes.
    At the same time, the average refund this year will be over 
$2,000, and more than 14 million low-income Americans have been 
removed from the tax rolls and are now paying no taxes since 
2005.
    At the same time, this worked to boost the economy. The 
average gross domestic product has been over 6 percent since 
the tax cut was put in place. The stock market has generated 
$2.5 trillion of shareholder wealth.
    Dividend issue is up 60 percent, and initial unemployment 
claims are down 25 percent, and jobs--700,000 jobs since the 
Tax Code has been put in place.
    All in all, the tax cut is working. However, when we make 
these tax changes, it has made the Tax Code much more complex. 
In fact, as this hearing has found, 80 percent of the change in 
the entire Federal Government paperwork burden is through the 
IRS and the Tax Code. That's about 6.7 billion hours.
    So, how do we get to this point? Our tax system was 
supposed to be a system where we raise revenue. Instead, it's 
become a system of new deductions, special interest provisions, 
with limits and qualifiers on existing rules, and that's what's 
adding to the paperwork. The results of these actions have been 
to move the paperwork burden in the wrong direction even in the 
wake of the Paperwork Reduction Act. The fact is, we are now at 
a point of near collapse, and the system needs to be fixed.
    It is my belief that both the IRS and the Office of 
Management and Budget have moved to make changes. However, this 
effort has been akin to running up a downward-moving escalator, 
trying to run up a downward-moving escalator. As minor changes 
are made that they reported on today, more complexity has been 
added, leaving a net increase in the burden.
    In fact, since the passage of the Paperwork Reduction Act 
in 1995, the number of lines on the 1040 form has increased 
from 66 to 73, while the 1040 instruction page booklet has 
increased from 84 pages to 131 pages. Without question, the 
number of rules, limits, terms of conditions, and other 
qualifiers are increasing the paperwork burden on taxpayers.
    A recent study by the National Taxpayers Union places this 
in context, ``If the Treasury Department were to reduce its 
burden by the average amount mandated by the 1995 Paperwork 
Reduction Act, the burden would have declined to 3.702 billion 
hours in 2005. Instead, the Treasury overshot that target by 
2.429 hours.'' The result has been a 15 percent increase from 
1995 through 2000, instead of the mandated 31 percent reduction 
target set by the law.
    This also has an economic cost. The Tax Foundation has 
reported that the cost of just complying with the Tax Code is 
$203 billion. To place that in context, that is larger than the 
revenues of America's second largest company, Exxon Mobil.
    With the accelerating tax compliance burden, taxpayers are 
now spending 35 percent more time filling out their tax forms 
than 1995. Even the EZ file is significantly increasing. The 
tax complexity, as the IRS Commissioner testified earlier, also 
increases noncompliance. The best way to have compliance is to 
have a simple form that taxpayers are comfortable filling out. 
The growing tax compliance cost also places a negative drag on 
the economy by stifling productivity and allocating resources 
less efficiently.
    Paid preparers are now up 60 percent since 1980 and 25 
percent, so the Code has become the full employment act for 
creative accountants. This is redirecting the accountants away 
from productive activities like auditing Enron and instead 
making them try and find the deductions and loopholes that 
drive the cost up for all taxpayers.
    I can go on all day with statistics about the growing 
complexity of the Tax Code, but I would like to use one 
example. There could be many, such as the alternative minimum 
tax, the business expensing provisions, but I want to talk 
about the savings provisions which are used by millions of 
Americans for retirement, education, and health care.
    The IRS publication explaining retirement accounts is now 
104 pages long. In 1982, that publication was just 12 pages. As 
a result of congressional action, there are now six different 
accounts, all with special and clever acronyms which make 
little sense to the mother who is worried about getting her 
children to band practice and a soccer game.
    To participate, Americans have to know whether their income 
qualifies, how much money they can put in. The rules have 
become so complex you need a tax preparer to understand whether 
you can just participate in the program. This program is 
completely frustrating.
    But, we have evidence simplifying it, as Ronald Reagan did 
in 1981, will increase participation. From 1980 to 1986, 
contributions rose after liberalization from $4 billion to $38 
billion. When Congress restricted the deductibility of IRA 
contributions and added greater complexity, the level of 
contributions fell sharply and never recovered to $15 billion 
in 1987 and $8.4 billion in 1995. This affected families who 
weren't even affected by the regulations, but the complexity 
made it more difficult to figure out whether they could be 
included in the participation of the program.
    Mr. Ose. Mr. Clifton.
    Mr. Clifton. Yes.
    Mr. Ose. Are you about to wrap up?
    Mr. Clifton. Thank you.
    Mr. Ose. That's a question.
    Mr. Clifton. Just my recommendations are: Reform the Tax 
Code. It's the only way to do it. We can't keep making these 
quirky changes and then increasing the complexity. Thank you.
    Mr. Ose. Thank you.
    [The prepared statement of Mr. Clifton follows:]

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    Mr. Ose. Our next witness is the president of Paul Hense 
CPA from Grand Rapids, MI. That would be Mr. Paul Hense 
speaking on behalf of the National Small Business Association. 
Sir, welcome.
    Mr. Hense. I thank you for having me here. It's an honor 
for a small, humble CPA from Grand Rapids, MI, to be here to 
explain the role of the CPA in this end.
    It's a little bit--everyone knows that a plague is a 
horrible thing unless you are an undertaker, and I hear all 
this conversation about the complexity of the Tax Code. I'm 
going to buy a new fishing boat in a couple months, and I was 
going to name it the Hense Fourth, because I'm the fourth of 
the Hense boys. I may change it at this time to the name of the 
AMT just in honor of what has made my business grow.
    I'm a small business advocate, and I make fun of these 
things, but the reality of it is that I'm from where the rubber 
meets the road. I'm not a lobbyist. I'm not a politician. This 
is what I do, and I do it all year around. And, during tax 
season, I do it all day round.
    It's an interesting business; I actually prepare the forms, 
300-some tax returns. I do have a small office. I have three 
very good employees who help me get through this stuff.
    The problem that I see is, the problem isn't with the 
Internal Revenue Service. The problem is with the laws that are 
delivered to them to put into some format that works.
    It's akin to giving somebody a couple of tin cans and some 
barbed wire and say, make me a Mercedes out of this. You know 
they can't do it. You give the IRS incomprehensible tax laws 
and ask them to put it into a simple format, it ain't going to 
happen.
    The worst area that this happens is in the area of 401(k)'s 
as an example, where, for some reason, some decision was made 
in the last 25 years that, if you're in a large business, you 
should be able to put lots and lots of money into your pension 
plan; but, if you're a small business, by the nature of your 
complexity, you're not going to get those same pension 
benefits.
    Same way with the section 125 plan. The owner of the 
business for some bizarre reason, in a small business, can't 
have the same benefits that the employees can have. So, I'm 
assuming this kind of happened accidentally, but it makes no 
sense. The alternative minimum tax--I spent an hour and a half 
with the business editor of the Grand Rapids Business Journal 
on April 11th trying to explain the alternative minimum tax to 
her, and after an hour and a half we gave up, because she did 
the best she could, but it's incomprehensible. And, frankly, to 
me, that's a profitmaker.
    Depreciation, for a client, a small business client, you 
have to have maker's depreciation for the tax return. Then you 
have to remember if you're going to take the bonus--if you're 
not going to take the bonus depreciation, you have to file a 
statement saying you're not taking it. Then, you have to have 
alternative minimum tax depreciation, and then, for your 
financial statements for the bank, you have to have book 
depreciation. I love it. But, the problem is, in the long run 
it's a bad thing.
    The effects are the small business owners often don't have 
401(k) plans. They will have a simple plan which is very 
limited in what you can put into it. They won't have a section 
125 plan, because why would they set up something they can't 
contribute to?
    The real proof in this to me--people come in here and they 
talk about they have numbers. I don't have exact numbers. All I 
can tell you is ADP, H&R Block, and Paychecks are growing like 
crazy. Their revenues are up by billions of dollars over the 
last 3 or 4 years, and they're projected to go up by more 
billions of dollars. At the same time, we're losing our 
manufacturing base; why shouldn't that money be going for 
research and development and to build new factories and buy new 
equipment and hire more people? It's coming to me, and I'm not 
sure that's the best thing, and people who do what I do.
    There's another thing. We'll have somebody come into our 
office who wants to start a business, and often they're not--
you know, they're not going to get a lot of sympathy for 
somebody driving a Mercedes, making a lot of money, over the 
problems with the tax issues. But, how about somebody who wants 
to get off welfare and start a business or get out of a menial 
nothing job and get into owning a business? And, by the time 
they get done talking to me, they decide they don't want to do 
it, because by the time they get done with the paperwork 
requirements, the tax requirements--and one of the things I 
want to tell you, I'm a small business consultant. Don't hire 
people. The software for fundamental accounting is about $125. 
Add payroll, you add another couple hundred dollars to your 
software program, because payroll is a big complication. Once 
you've got payroll, then you've got worker's compensation. Then 
you've got Federal unemployment or whatever State's 
unemployment. You've got this organization, that organization. 
So, what do you want to do? You want to subcontract it out, as 
had been discussed earlier relative to real estate development. 
So, then you can run a file of the IRS doing that.
    So, in the proposal I was delighted with the head of--the 
IRS's statement on the 1099s, the withholding. How would you 
ever figure out how much to withhold, from whom, who is going 
to pay it, who is going to get it and how, what form are you 
going to fill out, on and on and on? Made my heart just warm up 
knowing that they're not going to do that.
    The summation is really kind of simple----
    Mr. Ose. Mr. Hense, actually I think he said they had no 
current plans to do that.
    Mr. Hense. Well, yes, but I'm sure it will stay that way. I 
mean, what would influence them to change?
    This tax system is broken beyond repair. This can't be 
fixed. I believe politically--and I'm a CPA, so I'm a CPA 
talking about politics, so take it for what it's worth. But, I 
don't think this can be fixed, because it's so broken that to 
fix it would be impossible. So, I guess it has to be scrapped.
    Five years from now, please--I'm 61, and if you'll wait, I 
can get Social Security in 5 years and 10 months. If you're 
going to fix it, fix it then, not now. But, it can't be fixed, 
and so there are discussions about a national sales tax, value-
added taxes, on and on and on. There are pros and cons to 
everything. We could sit here and argue forever, as the 
argument in the Middle Ages was how many angles can sit on the 
point of a pin? Who knows? What is the right tax system? 
Smarter people than I will decide that, but this is not the 
right tax system.
    Mr. Ose. Thank you, Mr. Hense.
    [The prepared statement of Mr. Hense follows:]

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    Mr. Ose. Our next witness is the chief economist for the 
Small Business Survival Committee, Mr. Keating. Welcome to our 
subcommittee. You're recognized for 5 minutes.
    Mr. Keating. Thank you. I appreciate it. I never thought 
I'd have to be concerned about following an accountant, but 
apparently I do.
    Thank you for the opportunity to speak here today. I serve 
as chief economist for the Small Business Survival Committee, 
and we're a small business advocacy group with some 70,000 
members across the Nation. The idea that small businesses serve 
as the backbone of the U.S. economy is not mere rhetoric, it's 
economic reality. We've heard various statistics over the 
years. More than 99 percent of all employers are small 
businesses. They employ more than half of the private sector 
work force. They create 60 to 80 percent of the new jobs each 
year, generate 51 percent of the private sector output, and 
account for 96 percent of all U.S. exporters.
    Nonetheless, the entrepreneurial sector of our economy must 
overcome many obstacles, costly obstacles inflicted by 
government. The costs of taxation generally fall within three 
major categories. The first and most obvious is the amount of 
resources extracted from the private sector for use by the 
government.
    Second, taxes impose a significant cost in terms of lost or 
redirected economic opportunity and activity. And, third, what 
we're here to talk about today are the costs of regulation, 
compliance, and collection.
    Unfortunately, regulatory costs, including tax compliance, 
hit small businesses hardest. That was illustrated by Mark 
Crain and Thomas Hopkins in their 2001 report for the Office of 
Advocacy. The per-employee cost of Federal regulations 
registered almost $7,000 for firms with fewer than 20 
employees, compared to $4,700 for all firms. Tax compliance per 
employee costs came in at $1,202 for firms with fewer than 20 
employees compared to almost double the $665 for all 
businesses.
    One recent survey by the National Federation of Independent 
Business noted that paperwork and recordkeeping cost small 
businesses $48.72 per hour, with tax-related costs as the most 
expensive at $74.24 cents per hour.
    Another estimate, another study, noted that tax compliance 
costs for the entire economy came in at a staggering $203 
billion in 2003, and that's about 2 percent of U.S. GDP.
    Again, the small business owner, the entrepreneur, gets hit 
hard. A 2003 analysis of compliance costs on individual tax 
returns performed by the IRS--and it was with consultants from 
IBM--they found that, while self-employed taxpayers represent 
only 25 percent of all individual taxpayers, they experience 60 
percent of the time and money burden in terms of compliance. 
And, it was also determined that tax return complexity is 
markedly higher for self-employed returns.
    I spoke to a few business owners last week in preparation 
for these hearings, and I asked them about government paperwork 
and taxes in particular, and I got a lot of anger and 
resignation, frustration, all of those things, but they noted 
that the costs were paid one way or another. They either had to 
have outside accountants or lawyers--or hire staff internally 
to deal with the paperwork the government inflicts. And, the 
question here from an economic standpoint is what would those 
resources be used for if not lost on paperwork? The same 
question goes for making tax compliance somewhat easier with 
tax software. I do that myself, but the question is, what would 
all those software writers be doing if they didn't have to deal 
with the messy Tax Code?
    So, what can be done? First, it's got to be acknowledged 
that complexity starts with the Code itself. In its 2000 report 
to Congress, the National Taxpayer Advocate noted that the top 
two problems facing taxpayers were complexity for individuals 
and complexity for businesses. That complexity arguably has 
increased since then. Consider the 2001 and 2003 tax cuts 
passed by Congress. These had enormous positive benefits for 
the economy, particularly through reductions in personal 
income, capital gains, dividend tax rates, and the eventual 
elimination of the death tax. At the same time, though, the 
phase-ins and phase-outs of these tax measures have added to 
the system's complexity and costs, as well as creating economic 
uncertainty.
    An obviouis answer is to make these tax cuts permanent, but 
over the long haul we need to look at a fairer, simpler, less 
costly, and more pro-growth tax system. Also, Congress needs to 
zero in on current major sources of complexity.
    My colleague mentioned the AMT. I have various statistics 
in my written testimony about the cost of the alternative 
minimum tax for individuals. We agree with the National 
Taxpayer Advocate in recommending the repeal of the individual 
AMT, and quite frankly, we'd like to see the corporate AMT go 
as well.
    Third, we don't want to make things worse. We don't want to 
see the current system get worse. One area that was mentioned 
earlier where we strongly disagree with the National Taxpayer 
Advocate in the latest report to Congress was the 
recommendation for Congress to implement a mechanism to 
withhold on certain categories of nonwage workers. There are 
costs involved for those having to deal with withholding. It 
complicates taxes on both ends, and it really doesn't, in my 
view--I don't see how it accomplishes much in terms of 
conforming to the Tax Code.
    In addition, it's important to understand withholding comes 
with economic costs. Business owners, perhaps better than 
anyone else, understand the true costs of government because 
they have to quarterly write out that check to the Federal 
Government and to their State governments. So, they understand 
the costs of government. I think that's important for voters 
and taxpayers to understand that. When you have withholding, 
that's lost on a lot of people. They look at what the take-home 
pay is and forget what the total pay is in terms of what they 
should be receiving.
    There are other suggestions that we have. I see my time is 
up. We obviously would like to see the Tax Code--the IRS make 
it--their instructions easier, clearer, use plain English, 
correspondence. Please use plain English. Perhaps we mentioned 
in the written testimony, enhance visual aids, you know, give 
somebody the opportunity to see something in a different way, 
an easier way than perhaps just jam-packed with text and pages 
and pages of material.
    We also think the Taxpayer Advocate Service needs to better 
get the word out in terms of its duties in representing 
taxpayer interests and formulation of policies and procedures 
and identifying and developing proposals for simplifying the 
Tax Code and reducing taxpayer burden.
    Thank you for this opportunity. I look forward to any 
questions you might have.
    Mr. Ose. I thank the gentleman.
    [The prepared statement of Mr. Keating follows:]

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    Mr. Ose. Mr. Schrock, why don't you proceed first?
    Mr. Schrock. I've got a million questions. Daniel Clifton, 
you said it best. We've got to reform the Tax Code. If we 
reform it, you won't have SS AMT. But how do we do it? How do 
we do it?
    Saxby Chambliss--you heard me say Saxby Chambliss and John 
Linder out there, I think it's the flat tax they're talking 
about. Will that work? What's the answer to this? It's 
incredibly complicated and gets no better. Every time we pass a 
law, it just makes it more and more burdensome on everybody. 
What's the answer?
    Mr. Clifton. That's a great question, Congressman. We see 
the way to do this is to remove the double taxes on savings and 
investment, and, in the 1990's, we had a debate about tax 
reform, and people thought whether it was going to be the fair 
national sales tax, what Congressman Linder is doing now.
    Mr. Schrock. Fair tax.
    Mr. Clifton. Or Dick Armey's flat tax, and Congressman 
Tauzin and Congressman Armey went around the countryside and 
had a debate about it. They said they were going to rip up the 
IRS and we were going to start all over.
    Mr. Schrock. And, it didn't happen.
    Mr. Clifton. It didn't happen. This President has moved in 
a different path of tax reform, and he said let me do this 
piece by piece. And, there's essentially five steps that unite 
the fair-taxers and the flat-taxers. One, lowering marginal 
rates, we've done that. We've moved the top rate from 39 to 35 
in each step, accordingly.
    Two, remove double taxation, such as the death tax, which 
we have permanently repealed for 1 year. The capital gains and 
dividend reductions made the Tax Code much more complex. If we 
had eliminated that, then you would have had much more 
simplicity, and that's what we really need to do. I mean, 
Schedule D takes hours to fill out now, and what is a qualified 
dividend now under the new rate versus a nonqualified? It just 
gets crazy.
    The third is international tax reform, which Chairman 
Thomas tried to do in his FSC-ETI repeal legislation that is 
moving both through the House and the Senate to come into 
compliance with WTO tariffs.
    The fourth is moving to full business expensing. Everybody 
here spoke about depreciation schedules and the impact that has 
on businesses. We've moved in that direction and gone to a 50 
percent system, but we really needed to make 100 so that we 
have full business expensing. I think politically the only way 
to do it is incrementally, but I think that, if we remove all 
double tax on savings and investment and follow the path, we 
will get to simplicity much easier than trying to do it all at 
once.
    Mr. Schrock. When will we get there? In your lifetime? I 
doubt it.
    Mr. Clifton. Every time we take a step forward, we take two 
steps back, so it is a real challenge. There are people who 
have a vested interest in this Tax Code, and every time we go 
to make a change, they come roaring at us, and it's very hard 
to do.
    Mr. Schrock. Who?
    Mr. Clifton. I want to give you one example. I spoke about 
savings accounts. The President's budget has a proposal for 
lifetime savings accounts and retirement savings accounts. That 
is the closest incremental step we can have toward fundamental 
tax reform. Congressman Johnson just introduced legislation, 
and the people in the retirement business, when--in the 
retirement savings business went crazy at this proposal, 
thinking that $1 of immediate savings for me, a young guy 
saving for a home, is going to supplement $1 of my retirement 
security. It's not a fixed pie, and we really got a big hit 
back on that, and that legislation is moving nowhere. That 
would simplify the Tax Code more than anything we could do on 
an incremental step without doing fundamental tax reform.
    Mr. Schrock. Mr. Hense.
    Mr. Hense. In everything that happens, there are winners 
and losers, and the whole tax law is built around making 
winners and losers. There's an example. On the flat tax, I was 
able to participate in a panel discussion with Alvin Rabushka 
and Dick Armey, and they weren't going to tax interest and 
dividend income. I understand the philosophical context behind 
that. But, sell that idea to a production line worker in Flint, 
MI, that the rich East coast people who inherited a fortune are 
not going to pay any income tax on what they get, and a guy 
working in the line is going to pay taxes on his income. That 
ain't going to fly. In each one of these--in the fair tax, 
there's winners and losers. In the income tax, there's winners 
and losers.
    I want to address--I have seen some interesting things. As 
an example, this is going to happen. There are good things and 
bad things that are going to happen, hopefully more good than 
bad. There's a simple way to fix the pension problem. Everybody 
gets to put aside 15 percent of their income, up to $30,000 a 
year, period. Doesn't make any difference where you work, 
doesn't make any difference what you do, doesn't make any 
difference whether you're a C corporation, an S corporation. 
Whatever you do, you get to put aside that amount of money 
every year, tax deductible, and that's it. There's no 
regulations. It's just everybody gets to put aside a share of 
their income----
    Mr. Schrock. Tax deductible or deferred?
    Mr. Hense. Or deferred. That's correct, deferred. We're 
actually already doing that in a sense with Social Security. 
It's a forced savings plan. It doesn't really work out that way 
in the end, it doesn't look like, but that's what the plan was.
    But, anyway, in the simplification of the income tax, 
they're trying to help the people at the bottom, and they've 
made the Earned Income Tax Credit--all these child--it's so 
complicated that without the software, I couldn't do it. And 
that's for somebody making under $20,000 a year with a couple 
of kids. Anybody who owns a business who does not use a CPA is 
a fool, because it is so complicated with this depreciation, 
that depreciation, you can--if you buy a vehicle over 6,000 
pounds, you get to take that write-off; if it's under 6,000 
pounds, you get this write-off. It's all various pressure 
groups getting what they want. I don't really foresee the day 
it will really go away. I think it would be a little bit here, 
a little bit there, and then--just as this gentleman said, then 
we'll turn around in the next couple of years, it will come 
back with a whole bunch of--the best example being the tax on 
capital gains and dividends, if it was after May 5th or 
whatever, if it was before May 5th.
    We have a client who sold an apartment building on May 4th. 
He wanted to go back and change the paperwork, and I explained 
to him you can't do that. So, it's political pressure. This 
goes on and on.
    Actually, what happens, people like us have to keep up the 
battle or we will go backward. If we don't come here and make 
our case and continue to come back and make our case--a radio 
newsman asked me yesterday morning when I was talking, after we 
got done with the interview, he said, you don't really think 
you're going to make a difference, do you? I said, I don't 
know, but I know I won't if I don't do anything.
    Mr. Schrock. If the chairman will indulge me for just a 
minute, one of the things that used to gall me, when our son 
was born, my wife was a teacher. She didn't teach until Randy 
was 4. He went to school, she started teaching, and the 
agreement was 50 percent of her pay would go into a Uniform 
Gift to Minors Act account for his college education, but the 
doggone government kept taking a lot of it. Now, what nonsense 
is that? We're trying to provide for our kid's education, doing 
what we think is right, and we're being penalized. That's just 
one example.
    Fortunately--in fact, he was born 28 years ago tomorrow, 
so, that's when the markets went up and he made a ton of money; 
still has it. But, I mean, why should the government take that 
when we're trying to fund his education? That's just one small 
example.
    Mr. Hense. But, you spent some money getting that done.
    Mr. Schrock. We spent a lot of money getting that done.
    Mr. Hense. You spend money for attorneys, you spend money 
for accountants, which isn't all bad, but a lot of money is 
spent----
    Mr. Schrock. Wait a minute. Say that again.
    Mr. Hense. I said there's a lot of money spent on 
accountants. That's not all bad.
    Mr. Schrock. But, it was with lawyers.
    Mr. Hense. It all depends on whose ox is getting gored, 
something like that. Tort reform I'm for. Tax reform I'm 
ambivalent about. But, that's exactly the problem. That is 
exactly the problem. When you talk about a national sales tax, 
I'm to the point in life where, you know, I've kind of bought 
everything. I might want to buy a few more things, but the 
national sales tax, I could quit mine, because my kids are 
grown, I've got my house, I don't know; but the national sales 
tax for young people, they're still buying houses, buying cars, 
clothes, food, raising kids. So, for all of these, there are 
positives and negatives, and what I'm hoping will happen is 
that the organizations that we represent, the National Small 
Business Association, all of these organizations that we 
represent will continue the battle in the hopes that we can 
correct some of these things. But, if we give up, it will get a 
lot worse real fast.
    Mr. Schrock. There needs to be two tax codes, one for those 
raising kids, paying mortgages and----
    Mr. Hense. You know what, that could almost happen. Look at 
what's already happened. You can almost see something like that 
happen.
    Mr. Schrock. I don't mean to ignore you, Mr. Keating. I 
want to hear from you.
    Mr. Keating. No, that's OK. I agree with the fact that we 
have to, as representatives of our groups, continue this fight. 
Obviously on the other side, though, there's got to be 
political leadership. I think--call me crazy. I mean, I'll take 
whatever tax cut I can get along the way, but I think the tax 
simplification debate is a positive political issue that can be 
worked to elected officials' advantage.
    You mentioned the flat tax and the national sales tax, and 
I went back and I had somebody from our staff--I couldn't 
remember when I wrote it. It was way back in May 1995. And, I 
love these. Remember the Armey-Shelby plan? This was for 
individuals, and this was for businesses. I mean, wow, where 
has that debate gone? I mean, maybe it's been fumbled on our 
end, as well, as groups, but that's something that we have to 
keep hammering away and advancing. Obviously along the way we 
take what we can get, but I don't think that tax simplification 
should just be tossed aside as something that's a dream way 
down the road.
    Mr. Schrock. So, I think what I hear you all saying is 
political pressure on Members of Congress by special interest 
groups are preventing this from happening, period?
    Mr. Hense. But, we're part of that. But, the understanding 
has to be that we're here today saying that--take an example of 
100 percent expensing. I can see that from both sides. I can 
see where I like it. If I can buy--right now I can go up to 
$100,000 of computers and deduct it in 1 year. There are some 
negatives of that, one of them being that you then don't have 
any deductions for the next 5 years once you expense it all in 
the first year. But, I can understand where somebody who was 
not in business would say, whoa, wait a minute. So, he can go 
out and buy these computers and pay no tax that year, and the 
way this happens, then somebody says, well, let's do this. 
Let's have something in there so, if he buys $100,000 worth of 
computers and he has no tax, we add a tax that taxes part of 
what he wrote off. That's where the alternative minimum tax 
came from.
    So, basically there are some simple things. This is kind of 
what you asked for. There are some simple things. Like with the 
pension plans, 15 percent for everybody up to $30,000. That's 
it. You don't get any--that's the whole pension plan for the 
country. On the alternative minimum tax, it has to be done away 
with. It's just an insanity.
    But, if we can't reform the whole thing, which I think 
realistically I'd like to see it happen in 5 years, but it's 
not going to happen now, that we will have to nick away at 
this, you know, take it away layer by layer. But, we have to 
remember there are people who aren't going to like that, who 
will argue from the other side.
    Mr. Keating. Can I respond to one point there? I think most 
people actually would understand--I own a business, I went out 
and bought $100,000 worth of equipment and I write that off in 
the year that I bought it. I think people would better 
understand that concept than, you know, a depreciation table 
which is basically designed by politicians. I think people 
would better understand something like expensing. Now, there's 
an example that we can make that point in terms of the people 
that we're representing. Members of Congress hopefully do the 
same thing. So, I think, you know, you take one at a time, but 
I think these issues are very much answerable from a general 
fairness perspective from the public's perspective.
    Mr. Schrock. And, I think, if you're starting a new 
business and you're brand new and you have $100,000 in 
equipment expenses, the first year more than ever you want that 
write-off so you can survive to the second and third and fourth 
and fifth year.
    Mr. Chairman, I've taken up too much time.
    Mr. Ose. Mr. Hense, you just said you had, like, 300 
clients?
    Mr. Hense. About 325, 330. I haven't finished the count 
yet.
    Mr. Ose. I think your testimony was you prepare about 300 
returns?
    Mr. Hense. Yes.
    Mr. Ose. In those returns, do you have different reporting 
requirements that are, in your judgment, pointless?
    Mr. Hense. Almost all of it. The whole thing becomes 
pointless, because you spend so much time--I've heard several 
people comment on the amount of time that accountants spend on 
this. It could probably be spent on something more worthwhile. 
Maybe you'd have an engineer instead of an accountant. I think 
we need more engineers than we need accountants. In order to 
try to make this tax law meet these political needs, it has 
become so convoluted. And, to give you an example, probably the 
form--the worst form is the alternative minimum tax. That's the 
worst.
    But, let me give you another--I was asked one time what the 
form is that accountants charge the most for, which is probably 
the most worthless. And, I would say it's probably the office 
in a home expense. It takes a lot of figuring to come up with 
an office in the home expense. If somebody owns a business, it 
has some validity to it. If they're employed and they're taking 
it as an unreimbursed employee expense, you've got to get an 
awful large office in the home deduction before it has any 
meaningful impact.
    There's just a lot of--the depreciation schedules, doing 
the tax depreciation schedule, then doing the AMT depreciation 
schedule, then doing the book depreciation schedule. There's 
just so much to it, I'd have a hard time figuring out 
individually----
    Mr. Ose. Well, let me phrase the question a different way. 
On equipment used in a business, we raised the annual deduction 
from $25,000 to $100,000 in effect. For many businesses that's 
a paperwork reduction. You just said whatever it is you bought 
under $100,000, that's the way it is. You don't have to do 
depreciation schedule. It's all done.
    Mr. Hense. You still have to keep track of it, because when 
you sell it you have to recapture it. So, you still have to 
keep track of it. And, there's another thing. Everything in 
taxes isn't that simple. If you take a--say you make $50,000 a 
year. The accountant has to figure out what the optimum use of 
that $100,000 deduction is, because you can take too much. And, 
then, if the business is looking profitable, you have a 
situation where in a graduated tax, you will actually--it can 
actually end up costing you money to use the section 179. Then 
you get into the issue with the 50 percent bonus depreciation. 
Do you take that and carry the loss back to previous years to 
get a refund of previous years' taxes, and will you get more 
out of doing that than you would out of carrying it forward?
    And, so this is what I meant when I said a small business 
owner in starting a business, it's really foolhardy not to have 
a CPA, because just by the nature of the thing, it is so 
complicated, and many of these decisions, once made, are set in 
stone.
    Mr. Ose. What I'm looking for is some specific example from 
your experience, either in terms of raising the threshold or 
eliminating a requirement--I'm looking for some specific 
example from your experience--and, Mr. Clifton, Mr. Keating, 
we'll get to you on your recommendations for this--that we 
could use as an example of increasing the threshold and 
reducing paperwork burden. In other words, we raise--well, we 
go from $25,000 to $50,000 in terms of--we go to $30,000 what 
you can contribute to your retirement program. All you have to 
do is check a box and that's that.
    Mr. Hense. That would be one. That would be wonderful. A 
CPA praising the IRS is a little like a minister praising the 
devil. You don't hear this very often, but the IRS and the 
Congress have changed some things that have had a positive 
impact, and I'm having to get used to a new relationship with 
the Internal Revenue Service. There has been some significant 
improvement there. And, some of the things that have been done, 
as an example, is on small business corporations raising the 
threshold for the AMT. I sometimes come up with ATM which 
really confuses people, but it's AMT. Raising the threshold for 
the AMT for small corporations and then having an average that 
they work with before the actual hit. We have some clients who 
buy very significant amounts of equipment every year. If they 
had to pay AMT, it would severely limit their growth. There's 
an example of something that has been actually done where the 
AMT was removed. I believe it's at $7 million, you don't pay 
alternative minimum tax in a corporation.
    One of the things--another thing that's being done is 
changing the filing requirement to 1 year. You kept hitting on 
that for the 941. That will have significant savings for a 
business owner. The one thing that concerns me about that is 
that they will have to be aware that they owe this money. I 
mean, the quarterly filing lets the IRS know if they're 
following behind.
    Mr. Ose. Also, they're going to end up setting a threshold, 
something other than annual----
    Mr. Hense. They're going to need to. But, some of this has 
been done. I'm trying to think of some other areas. The one big 
thing, if they did away with the alternative minimum tax, it 
would do away with the multiple depreciation schedules, and it 
would also do away with a lot of computations we have to do to 
see whether or not the person--even if they don't have to----
    Mr. Ose. What the impact is.
    Mr. Hense. Yeah. We have to check to see--and then also 
clients call me. As an example, a client was buying a house in 
Florida for future retirement, and thank God he called me----
    Mr. Ose. A low-tax State.
    Mr. Hense. Yeah, a wonderful low-tax State, and it has some 
real advantages, but a high property tax.
    Mr. Ose. I understand.
    Mr. Hense. OK. So, this is a high-income individual. People 
shouldn't inadvertently stumble into a tax problem, and he very 
well could have, had he not called me. He called me about 
something else and this came up. And, I said, oh my God, we've 
got to do a computation to see what this does to your AMT, and 
the property taxes on that home put him into the alternative 
minimum tax. It affects mainly upper-income people now, but 
it's working its way down to everybody.
    Mr. Ose. Mr. Clifton, do you have any suggestions as to 
specific examples? Mr. Hense has AMT.
    Mr. Clifton. I would say in the meantime as well you need 
to index the AMT right away. I mean, that's something that's 
doable in the short term. The reason why we're in this mess and 
more people are being hit with it is because it wasn't indexed 
in the early 1990's.
    Mr. Ose. It's my understanding that requires a statutory 
fix that cannot be done regulatorily?
    Mr. Clifton. Right, that's correct. On top of that, I would 
go back again one more time to the savings programs which could 
be done by regulatory change, even some by legislation. The 
rules that are implemented by the IRS of who can pull in--you 
know, when you have to do a minimum distribution, that's not 
legislation, that's regulatory powers. And, I can go back in 
and do a full review for you and get back to you on what is 
done through regulation versus----
    Mr. Ose. We'll send you the specific written question.
    Mr. Clifton. Great. I would love that.
    Mr. Ose. Mr. Keating, anything specific?
    Mr. Keating. Well, he stole my thunder. I would agree with 
everything that Paul said on the AMT, and I would also agree 
with indexing. I think those are key issues. You know, we've 
got--in so many different areas the phasing out of tax benefits 
at various income levels up--to the extent that they can be 
raised, great; but to the extent they can be phased out and 
eliminated, so much the better. It not only would help in terms 
of reducing tax complexity, but most of those things have to do 
with savings and investment incentives, and anytime you can 
enhance those, those are obviously benefits for the economy 
overall.
    Mr. Ose. Mr. Clifton, you mentioned the savings and 
dividends. I've often wondered why we tax interest. I don't 
quite understand why that is. But, what level, if any, would 
you set--what threshold would you set for interest income below 
which you don't have to report it?
    Mr. Clifton. There was a change made last year----
    Mr. Ose. The amount has been rising.
    Mr. Clifton. Right. I can't honestly answer that question, 
because I haven't looked at it enough. Personally, we'd like to 
abolish all forms of double taxation, including dividend 
income. I mean, we pushed to pass the President's plan last 
year, and, in the end, we got something that made it much more 
complex. But, let me tell you why. We are worried about the 
paperwork burden. This proposal, when it passed, actually 
created more of a paperwork burden. However, I would say to 
continue to do it. The results have been extremely successful 
from an economic perspective where there's more cash in 
shareholders' hands, but also at the same time it improved 
corporate governance, as companies are now returning that cash 
back to their shareholders rather than hoarding it, which led 
to a lot of the corporate scandals.
    So, we think, on net, that it was an overall benefit, and 
that's one of our recommendations, is going back into the 1998 
IRS Restructuring Act and saying let's do a full cost-benefit 
analysis of the economic benefits and the regulatory benefits 
and weighing that with the costs; because, on that one, while 
the regulatory burden went up, the economic benefits were so 
much greater. On some of these other changes, that may not be 
the case.
    Mr. Ose. Mr. Keating, there's----
    Mr. Keating. Can I say one thing?
    Mr. Ose. Certainly.
    Mr. Keating. Just the economics of taxing capital gains, 
dividends, and interest I think has to be understood. You know, 
you earn a dollar when you're working. What can you do with 
that dollar? You can either use it for consumption, or you can 
save it, invest it. And, so often when you use it for 
consumption, the Federal Government doesn't tax you that much. 
When you turn around and invest it, your returns are socked 
again with taxes. So, I just want to reiterate the double 
taxation that is in effect now. We've benefited tremendously 
from bringing the dividend tax rate down; especially, I would 
argue, the capital gains tax rate for investment in 
entrepreneurship. Those are all great, but I just want to make 
sure that we understand that it is still a double-taxation 
scenario.
    Mr. Hense. And for small business--and I'm glad we took a 
few more minutes, because a big one hit me. Sub S corporations, 
C corporations, LLCs, a multitude of entities, sole 
proprietorships, all taxed different. A C corporation, a small 
business might want to be a C corporation so they can get 
deductibility of its health care as an expense, and they may 
want to be a C corporation to be at the lower tax rate to build 
inventory to build the business. But, if they sell the business 
while they're a C corporation, or within 10 years of converting 
to an S corporation, they have a double--there used to be a 
general utilities rule. You only paid taxes once. I believe it 
was 1986 they did away with that. It's one thing when somebody 
gets a dividend from IBM and IBM pays the taxes on it, and then 
the individual pays the taxes on it, but then a manufacturer 
gets an offer he can't refuse on his business and he has to pay 
taxes on the profit in the business, and then he has to pay the 
taxes on the proceeds when it comes out of the business. The 
double taxation issue is huge.
    You had asked me what single thing, and I was thinking of 
individuals. We just got done with 1040 season. For businesses, 
for small businesses that are C corporations, there should 
never be a double taxation. That's obscene. For S corporations, 
the 2 percent rule--I'll give you an example. One of my 
employees, a 41-year-old woman, she and I were discussing her 
becoming a partner in my business, and one way or another 
that's going to happen because she's a wonderful employee. 
She's the classic person you want as an owner.
    Mr. Ose. So, we have that on the record?
    Mr. Hense. You have that on the record.
    Mr. Ose. I'm her agent and I'm----
    Mr. Hense. You're her agent, and this is going to cost me. 
Then we went into what she loses if she gets 2 percent of the 
business. She loses her section 125 plan, she becomes limited 
on her pension plan. And, she actually said this to me: ``Well, 
Paul, why would I want to be a part owner in this business?'' 
Very pragmatic woman. ``I have kids to raise, I have issues, 
and once I'm 2 percent owner of this business, I come under all 
the stupid rules that you come under.'' So, it's a disincentive 
for this young lady to become an equity owner in my business, 
because she loses benefits. Why, I can't imagine.
    Mr. Ose. Beyond the tax issues--in particular Mr. Keating, 
I'd direct this at you, but beyond the tax issue, we have 
reporting requirements for, like, the toxic release inventory 
and a variety of other things. Beyond the tax issues, are there 
suggestions you'd make in terms of reporting requirements, 
paperwork and the like?
    Mr. Keating. We surveyed small business owners going back a 
few years, and the IRS was No. 1 in terms of the paperwork 
burden. EPA, OSHA, Labor were all in there. When I spoke to 
some folks last week, some business owners, I was kind of 
surprised. I don't know if it was just by chance, but there 
were two manufacturers that told me about Commerce Department 
surveys they had to fill out on a quarterly basis, you know, 
for capacity levels and so on and so on, and it was a nightmare 
for them.
    Now, I'll go back and find out exactly what--I don't know 
particularly what surveys they were talking about in terms of 
our conversation, but I would be glad to go back and find out, 
because they're pretty darn animated about these surveys.
    But, I'll go back and try to get some specific 
recommendations, but what I heard was Department of Labor was a 
tremendous burden, and, which came as a bit of a surprise, the 
Department of Commerce, after the IRS in terms of the folks I 
spoke to last week. But, I gladly would track down some more 
specifics and get them to the committee.
    Mr. Ose. We'll give you a question in writing to which you 
can respond.
    Mr. Schrock.
    Mr. Schrock. I can't imagine what else I would have. I 
think our questions pale in comparison to the discussion we've 
had. You three have been magnificent, really. It's all 
political will on our part to get it done, but there's so many 
of us who have so many people on them, special interest groups, 
quite frankly, that's what causes a lot of this. And, you know, 
we complain that the paperwork reduction hasn't been as fast as 
we want, yet we sit up here every year creating more 
legislation, creating more paperwork on what they try to knock 
down.
    Somebody said you take one step forward and two back, and 
that's about the truth. We just have to have the political will 
to do it. I think I do. I just need 434 others on this side of 
the--you know, in the House to do the same thing. And, I think 
it's going to be very hard to do.
    You know, we talked about the Linder-Chambliss--do you 
agree with that? Do you think that's the way to go, the fair 
tax? Is Dick Armey's flat tax the way to go?
    Mr. Clifton. Americans for Tax Reform supports the flat 
tax, the Dick Armey concept. We support what Congressman Linder 
and Saxby Chambliss are trying to do. However, there's 
something called the 16th amendment that allows the income tax 
to be there, and we don't believe that we're going to be able 
to repeal the 16th amendment and do this gigantic tax reform 
all at once.
    With that said, all it takes is somebody like Howard Dean 
to become President, and we have an income and a sales tax at 
the same time. And, we want to avoid that. Again, there's so 
much that we can do together that unite the fair-taxers and the 
flat-taxers.
    I would also point out that Congressman Burgess is the one 
who reintroduced the Armey flat tax. His is a bit of a 
variation which has an opt-in/opt-out system with safeguards. 
What that means is that people who have already invested in 
depreciation schedules can stay under the existing code, 
individuals and businesses, and it addresses some of the 
concerns that were spoken about today. Or, you can just write 
off into a flat tax. There are protections for that. Americans 
for Tax Reform fully supports that legislation and----
    Mr. Schrock. You were saying it would be a hard sell to 
repeal the 16th amendment? I'll bet you if you put that before 
the voters of America, you'd get 100 percent support.
    Mr. Clifton. You're absolutely right. I absolutely agree 
with you.
    Mr. Schrock. People are absolutely fed up with it. I have 
to have an accountant, because I don't understand that stuff at 
all, and it's better than going to jail. I know your business 
depends on it, and we'll hold off for another 3 years for you 
to retire, but I don't know where we go. I really don't.
    Mr. Hense. One of the things, see, with the flat tax, if 
you exempt dividend and interest--and it's been a long time 
since I looked at the flat tax, but there are some deductions 
that aren't allowed. And, in every one of these tax ideas, 
there are unintended consequences. As an example, the real 
estate business has been mentioned. I do not know what would 
happen if we took away the interest and tax deduction, whatever 
tax system we did, I don't know what would happen to the real 
estate market. I don't think anybody really knows.
    Mr. Ose. Those of us who have no debt would prosper.
    Mr. Hense. This may be true. In the fair tax--in the 
national sales tax, the one thing in that is that it lends 
itself to simplicity. It's simply--it is just simple. And, then 
I start hearing the variations people want to put on it, and it 
starts not being so simple. But, every form of refuge has its 
price, and whatever we turn to will have its upside and its 
downside to it, and we need to keep this debate going, because 
it's critical to the country.
    Mr. Schrock. The tax deduction debate on houses is amazing. 
My tax guy--we have a rather large house that we've had for a 
long time, and our mortgage was--he said, you can't do that 
anymore. So, I refinanced the thing and we're going to tear 
part of it down and rebuild it. But, I have a huge write-off 
now, and, if they did a flat tax, would that go away? And, 
that's a real consideration. But, the chairman said that real 
estate would boom.
    Mr. Ose. No. I said people with no debt would prosper.
    Mr. Schrock. Oh, I see.
    Mr. Hense. Absolutely. It would take away a lot of the debt 
that Americans go into that's probably unhealthy just to get 
the tax break.
    Mr. Keating. I'll tell you, I live in New York.
    Mr. Ose. I'm sorry.
    Mr. Keating. I accept your sympathy, believe me, and I live 
on Long Island, so I have some of the highest property taxes in 
all of the land, and I have a good solid mortgage. I can only 
speak for myself. You bring the rate down low enough, I'll take 
the lower rate, but that has to be figured out. We can't go at 
this and just stab at a rate. We have to bring all those things 
into the calculation.
    And, on the national sales tax, you know, as an economist, 
I think the national sales tax makes the most sense because 
you're taxing at the end of the economic process you're taxing 
at the end. You're taxing when consumption is happening. But, 
we have questions. You know, the biggest one, as Dan mentioned, 
is you don't want to have a national sales tax and then have an 
income tax come back because the 16th amendment is still 
around. There are other questions about, again, where's the 
rate set at, does a 20 percent something national sales tax 
rate--what does that do in terms of incentives for tax 
avoidance, everything else? All those things are big questions 
that have to be wrestled with, but I think we should be 
wresting with them.
    Mr. Schrock. Maybe when Mr. Hense retires in 3 or 4 years, 
you can come to Washington and take on that matter with Grover 
and a few others. Thank you, Mr. Chairman.
    Mr. Ose. I want to thank our witnesses here, the second 
panel, for joining us. It's been very elucidating. It kind of 
makes me pine for the private sector. We've heard today a vast 
horizon, if you will, a vast spectrum of where we're going. Our 
first panel talked about the difficulties in reducing paperwork 
burden for what I will describe as administrative reasons, 
whether it be periodicity, thresholds, utility and the like.
    One of the things I find interesting is that, in the 
context of our opening statements, all four of us up here all 
argued that we aren't doing enough, we aren't doing enough to 
reduce the paperwork burden, we aren't doing enough to reduce 
regulatory burden. I think our friend--my friends on the other 
side in particular registered certain criticisms of the 
administration's record. I think that gives us, Congressman 
Schrock, the opportunity to reach out to them and facilitate 
the passage of a renewal of this particular legislation as the 
opportunity presents itself. It's a unique set of circumstances 
that finds both parties in agreement about the efficacy of 
existing legislation and the need to, frankly, prepare it.
    So, in the context that you were able to bring, at least 
the four of us together, and force a discussion of that, you 
have been successful.
    Mr. Hense, I don't know what 5 years and 10 months from now 
holds for you, but we'll do our best to make your life, you 
know, a disappointment at that point.
    Again, I do want to thank you, all three of you for joining 
us today. With that--oh, the record is going to be open for 10 
days. We may send you some questions to which we'd appreciate 
timely responses, as well as the minority may do that, too. 
With that, we appreciate your participation.
    [Whereupon, at 4:54 p.m., the subcommittee was adjourned.]
    [Additional information submitted for the hearing record 
follows:]

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