[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]



 
                               TAX REFORM

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

                                HEARING

                               before the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                              JUNE 8, 2005

                               __________

                           Serial No. 109-23

                               __________

         Printed for the use of the Committee on Ways and Means


                    U.S. GOVERNMENT PRINTING OFFICE
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                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

E. CLAY SHAW, JR., Florida           CHARLES B. RANGEL, New York
NANCY L. JOHNSON, Connecticut        FORTNEY PETE STARK, California
WALLY HERGER, California             SANDER M. LEVIN, Michigan
JIM MCCRERY, Louisiana               BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan                  JIM MCDERMOTT, Washington
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. MCNULTY, New York
PHIL ENGLISH, Pennsylvania           WILLIAM J. JEFFERSON, Louisiana
J.D. HAYWORTH, Arizona               JOHN S. TANNER, Tennessee
JERRY WELLER, Illinois               XAVIER BECERRA, California
KENNY C. HULSHOF, Missouri           LLOYD DOGGETT, Texas
RON LEWIS, Kentucky                  EARL POMEROY, North Dakota
MARK FOLEY, Florida                  STEPHANIE TUBBS JONES, Ohio
KEVIN BRADY, Texas                   MIKE THOMPSON, California
THOMAS M. REYNOLDS, New York         JOHN B. LARSON, Connecticut
PAUL RYAN, Wisconsin                 RAHM EMANUEL, Illinois
ERIC CANTOR, Virginia
JOHN LINDER, Georgia
BOB BEAUPREZ, Colorado
MELISSA A. HART, Pennsylvania
CHRIS CHOCOLA, Indiana
DEVIN NUNES, California

                    Allison H. Giles, Chief of Staff

                  Janice Mays, Minority Chief Counsel

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.


                            C O N T E N T S

                               __________
                                                                   Page

Advisory of June 8, 2005 announcing the hearing..................     2

                               WITNESSES

Burch Center for Tax Policy and Public Finance, University of 
  California at Berkeley, Alan J. Auerbach.......................     9
Columbia University's Graduate School of Business, R. Glenn 
  Hubbard........................................................    37
The Heritage Foundation, William Beach...........................    15
Office of Tax Policy Research, University of Michigan, Ann Arbor, 
  Joel B. Slemrod................................................    42
Urban Institute, Leonard E. Burman...............................    19

                       SUBMISSIONS FOR THE RECORD

American Farm Bureau Federation, statement.......................    79
Ancona, Daniel F., ReformAMT, San Francisco, CA, statement.......    81
Anderson, Susan Schroeder, Mountain View, CA, letter.............    83
Aubut, Michael and Laura, Hopkinton, MA, joint letter............    84
Barrett, Joyce, Talking Rock, GA, letter.........................    85
Bernstein, Rachelle, National Retail Federation, statement.......    86
Bickel, JP and Larisa, Cedar Rapids, IA, joint statement.........    88
Brown, Michael, Manchester, MI, statement........................    89
Bullock, William, Reston, VA, letter.............................    90
Calderon, Dan, WCKV-TV Clarksville, TN, letter...................    91
Carlson, Timothy, Arlington, VA, statement.......................    91
Chesser, Craig, New York, NY, letter.............................    93
Chou, Jeffrey, Foster City, CA, letter...........................    94
Cole, John, Durham, NC, letter...................................    95
Coleman, Dorothy, National Association of Manufacturers, 
  statement......................................................    97
Curcio, Joyce, Cumberland, RI, statement.........................    97
Daniels, Steve, Carson City, NV, letter..........................    98
Delore, Eric, Alameda, CA, statement.............................    99
Dudley, Thomas, Andover, MA, statement...........................   101
Eden, Jeffrey, Lawrence, KS, letter..............................   102
Eyster, Noel, Evans, WV, letter..................................   103
Fermanis, Michael, New Orleans, LA, letter.......................   104
Fleisher, Mike, San Francisco, CA, letter........................   105
Flores, Jolynne M., American Society of Pension Professionals and 
  Actuaries, Arlington, VA, statement............................   106
Frank, Kevin, Cary, NC, statement................................   110
Frisoni, Scott, Chicago, IL, letter..............................   110
Fuchs, Brian, Thousand Oaks, CA, letter..........................   111
Gaffney, Susan, Government Finance Officers Association, 
  statement......................................................   112
Galitzer, Shari, Madison, WI, letter.............................   115
Garcia, Liles and Naomi, Aloha, OR, joint letter.................   116
Garille, Leonard, Southbury, CT, letter..........................   116
Garner, Mark, Paso Robles, CA, letter............................   116
Gorokhov, Mark, Germantown, MD, letter...........................   118
Greenstein, Howard, Reform Amt, San Jose, CA, letter.............   118
Griffin, Kayla, Arlington, TN, letter............................   119
Guzak, Lauren, San Diego, CA, letter.............................   120
Hamerquist, Karen, Reform Amt, Orland, CA, letter................   121
Hamor, Kathy, The Savings Coalition of America, statement........   121
Hansen, Michael, Village of Lakewood, IL, letter.................   123
Hartley, Angela, San Diego, CA, letter...........................   124
Hartman, David, Lone Star Foundation, Austin, TX, statement......   125
Hasegawa, Dawn and Jay Cena, ReformAMT.org, Cupertino, CA, joint 
  letter.........................................................   132
Hernandez, Kathryn, La Canada, CA, letter........................   133
Kadillak, Tony, New York, NY, letter.............................   134
Keeling, J. Michael, The ESOP Association, statement.............   134
Keen, Todd, Westminster, MA, letter..............................   138
Kelly, Debra and John, Amt Reform, San Leon, TX, statement.......   140
Kennedy, Sandra, Retail Industry Leaders Association, Arlington, 
  VA, letter.....................................................   141
Koenig, David, American Forest & Paper Association, statement....   142
Kramp, Vivian, San Jose, CA, statement...........................   146
Krauss, Kirk, Felton, CA, letter.................................   146
Lachman, Hans, Mountain View, CA, letter.........................   147
Lacy, Leroy, Reformamt, Ben Lomond, CA, letter...................   147
Lacy, Linda, Mogadore, OH, statement.............................   149
Lapaglia, John, Hutto, TX, letter................................   150
Lazar, William, Mountain View, CA, letter........................   151
Linbeck, Leo, Americans for Fair Taxation, Houston, TX, statement   151
Lund, Hendy, Ben Lomond, CA, statement...........................   158
Masters, Timothy, ReformAMT.org, Boca Raton, FL, letter..........   159
Mazingo, Steve, Fallbrook, CA, letter............................   160
McGuire, Monica, AMT Coalition for Economic Growth, letter.......   160
Miller, Arthur & Rita, Reform AMT, Catonsville, MD, joint 
  statement......................................................   163
Montague-Hill, Ashlyn, A Tax-paying, Marietta, GA, letter........   163
Montgomery, Nield, Las Vegas, NV, statement......................   164
Moyle, David, Beaverton, OR, statement...........................   166
Olson, Thomas, Bozeman Granite Works, Bozeman, MT, letter........   167
Pang, Kimhoe, Cupertino, CA, letter..............................   168
Pessemier, Bob and Susan, Money Metrics, Issaquah, WA, joint 
  letter.........................................................   169
Pintner, Steven and D., ReformAMT, Sunnyvale, CA, joint letter...   169
Priddy, Philip, Baton Rouge, LA, statement.......................   170
Pritchett, Michael, Network Appliance Inc., Barrington, IL, 
  letter.........................................................   171
Ralph, Gregory, San Diego, CA, statement.........................   171
ReformAMT.org, statement.........................................   172
Rekemeyer, Floyd and Robbin, Cedar Rapids, IA, joint letter......   175
Reynaud, Becky, letter...........................................   175
Rieman, Garth, National Council of State Housing Agencies........   175
Robinson, Marile, Aptos, CA, letter..............................   178
Simmons, Monte, Dayton, OH, letter...............................   179
Simonard, Stephanie, Association of Americans Resident Overseas, 
  letter.........................................................   180
Speltz, Ron, Ely, IA, letter.....................................   180
Taylor, Daniel, Flossmoor, IL, letter............................   181
Terpening, Ed, Redwood City, CA, letter..........................   182
Thaxton, Christy, Pleasant Ridge, MI, letter.....................   183
The Honorable Rahm Emanuel, a Representative in Congress from the 
  State of Illinois, letter......................................   183
Thompson, Phillip, Shoreview, MN, letter.........................   184
Tiedemann, Sunnye, Overland Park, KS, statement..................   185
Timmons, Susan, Reform Amt, Tewksbury, MA, letter................   188
Treacy, Claudia, Indianapolis, IN, letter........................   189
Trowell, Christopher, Palm Coast, FL, statement..................   191
Vasaturo, Ronald, Winnetka, IL, letter...........................   192
Veeck, Alan, Pittsburgh, PA, statement...........................   193
Wellston, Robert, Acworth, GA, statement.........................   194
Wertheim, Michael, Oakland, CA, statement........................   196
Wienrich, Jeff, Gilbert, AZ, letter..............................   197
Woodward, Raymond, Lombard, IL, statement........................   198
Yomtov, Adam, Americans for Fair Taxation, Elmsford, NY, letter..   201
Youskauskas, Heather and John, Eldersburg, MD, joint statement...   202


                               TAX REFORM

                              ----------                              


                        WEDNESDAY, JUNE 8, 2005

                     U.S. House of Representatives,
                               Committee on Ways and Means,
                                                    Washington, DC.

    The Committee met, pursuant to notice, at 10:00 a.m., in 
room 1100, Longworth House Office Building, Hon. Bill Thomas 
(Chairman of the Committee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
June 08, 2005
No. FC-11

                 Thomas Announces Hearing on Tax Reform

    Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways 
and Means, today announced that the Committee will hold a hearing on 
tax reform. The hearing will take place on Wednesday, June 8, 2005, in 
the main Committee hearing room, 1100 Longworth House Office Building, 
beginning at 10:00 a.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. 
Witnesses will include scholars from Columbia University, University of 
Michigan, University of California at Berkeley, and the Heritage 
Foundation. However, any individual or organization not scheduled for 
an oral appearance may submit a written statement for consideration by 
the Committee and for inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    On January 7, 2005, President Bush established the Advisory Panel 
on Federal Tax Reform. The Panel has been holding hearings throughout 
the country to solicit the opinions of leading experts, academics, and 
practitioners on reforming the tax code. Recognizing the burden imposed 
by the current Federal tax code in terms of compliance and growth 
incentives, the President's stated goal is to explore options to reform 
the tax code to make it simpler, fairer, and more pro-growth. The Panel 
shall report to the Secretary of the U.S. Department of the Treasury by 
July 31, 2005.
      
    More than 14,000 changes have been made to the tax code since the 
last major reform effort in 1986. The tax code imposes economic 
distortions that cost the U.S. economy as much as 50 cents for every 
additional dollar raised, and causes taxpayers to waste 3.2 billion 
hours and as much as $100 billion complying with an increasingly 
complex system.
      
    The 2005 Economic Report of the President noted: ``The current 
Federal tax system is unnecessarily complex and distorts incentives for 
work, savings, and investment. As a result, it imposes large burdens on 
taxpayers and on the U.S. economy as a whole in the form of high 
compliance costs and distortions in economic decisions.''
      
    In announcing the hearing, Chairman Thomas stated, ``In 
anticipation of recommendations from the Treasury Secretary on tax 
reform, this hearing will be the first of several to inform Congress on 
the need for and benefits of reforming the current tax code.''
      

FOCUS OF THE HEARING:

      
    The focus of the hearing will be on attaining a broad overview of 
the principle economic objectives of tax reform with a focus on 
fairness, simplicity, and impacts on growth. In particular, the hearing 
will explore: (1) ways to make compliance and understanding of the tax 
code simpler for American workers and businesses, (2) economic 
distortions and incentives imposed by the tax code, and (3) various 
measures of tax burdens.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
for the hearing record must follow the appropriate link on the hearing 
page of the Committee website and complete the informational forms. 
From the Committee homepage, http://waysandmeans.house.gov, select 
``109th Congress'' from the menu entitled, ``Hearing Archives'' (http:/
/waysandmeans.house.gov/Hearings.asp?congress=17). Select the hearing 
for which you would like to submit, and click on the link entitled, 
``Click here to provide a submission for the record.'' Once you have 
followed the online instructions, completing all informational forms 
and clicking ``submit'' on the final page, an email will be sent to the 
address which you supply confirming your interest in providing a 
submission for the record. You MUST REPLY to the email and ATTACH your 
submission as a Word or WordPerfect document, in compliance with the 
formatting requirements listed below, by close of business Wednesday, 
June 22, 2005. Finally, please note that due to the change in House 
mail policy, the U.S. Capitol Police will refuse sealed-package 
deliveries to all House Office Buildings. For questions, or if you 
encounter technical problems, please call (202) 225-1721.
      

FORMATTING REQUIREMENTS:

      
    The Committee relies on electronic submissions for printing the 
official hearing record. As always, submissions will be included in the 
record according to the discretion of the Committee. The Committee will 
not alter the content of your submission, but we reserve the right to 
format it according to our guidelines. Any submission provided to the 
Committee by a witness, any supplementary materials submitted for the 
printed record, and any written comments in response to a request for 
written comments must conform to the guidelines listed below. Any 
submission or supplementary item not in compliance with these 
guidelines will not be printed, but will be maintained in the Committee 
files for review and use by the Committee.
      
    1. All submissions and supplementary materials must be provided in 
Word or WordPerfect format and MUST NOT exceed a total of 10 pages, 
including attachments. Witnesses and submitters are advised that the 
Committee relies on electronic submissions for printing the official 
hearing record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. All submissions must include a list of all clients, persons, 
and/or organizations on whose behalf the witness appears. A 
supplemental sheet must accompany each submission listing the name, 
company, address, telephone and fax numbers of each witness.
      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://waysandmeans.house.gov.
      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.

                                 

    Chairman THOMAS. I want to welcome you all to the 
Committee's first hearing on Federal tax reform since the 
President appointed an advisory panel on Federal tax reform to 
explore this important issue that is going to affect nearly 
every American household. I know some folks are wondering why 
we are holding hearings now on tax reform before the 
President's panel issues its recommendations. As the one 
Committee in the House that is charged with understanding and 
evaluating the product from the President's panel, the Chair 
thought it might be useful to begin an analysis of those kinds 
of criteria that would be useful in making choices based upon 
some of the panel's suggestions. The President has appointed a 
highly qualified panel to examine the growing problem with our 
current Tax Code, and I would really like to thank especially 
the chairman and the vice chairman of this panel, former 
Senators Connie Mack and John Breaux for their service. It 
truly is a service. It will be a very difficult task in a 
relatively short period of time for them to pull together the 
alternatives as they have been asked to do. I do believe they 
will do it, but before the release of the advisory panel report 
and subsequently the U.S. Department of the Treasury 
Secretary's recommendation, as I said, this Committee as the 
tax writers in the House of Representatives really need to lay 
the groundwork and provide some degree of uniformity of 
comparison between approaches as we examine suggested changes 
in the Tax Code.
    You will hear over and over again that there are three 
major priorities that we need to focus on. We have in front of 
us a distinguished panel of economists. Although they will do 
their best to try to sound as objective as they possibly can, 
to a certain degree, there is some subjectivity as you discuss 
the question for example, simplicity. We have seen significant 
changes since the last major restructuring of the Tax Code in 
1986. One of our witnesses will mention in his testimony that 
the complexity of the current system has caused taxpayers to 
spend 3.2 billion hours preparing their taxes in 2000. Or we 
paid someone else to add to that 3.2 billion hours to prepare 
our taxes. I think most people can find a more productive use 
of their time. Of course the compliance cost is very expensive, 
estimated as high as $135 billion. If that is the truth, what 
we are saying is that it costs a dollar in compliance costs for 
every $7 in Federal income taxes paid.
    A second priority that will be discussed is fairness. 
Clearly, from an objective versus subjective point of view, 
this is as much as any in the eye of the beholder. However, 
there are some metrics by which you can at least decide to 
judge the question of fairness. I think this panel can be very 
helpful in providing choices, even though you may choose from 
among those choices, at least we have a common knowledge base 
as we discuss what we mean by fairness. I guess a fundamental 
one would be that similarly situated taxpayers should bear 
similar tax burdens. Of course, the Code is limited, littered 
with preferences and disincentives, credits and deductions 
which make it difficult to truly compare in terms of fairness. 
All of us would agree, that it makes no sense to use taxes to 
fund the government raised in a way that discourages economic 
growth. There will be some discussion over whether or not 
certain types of taxes encourage economic growth, or, in fact, 
don't have much effect. I hope Members will listen to these 
discussions because once again, although some people feel very 
strongly about a particular approach, it may be that the 
difference between different approaches in terms of economic 
growth is not that much.
    In some instances, I think there may be significant 
differences and we need to be aware of that as we take a look 
at something in the area of a trillion dollars that may be 
affected by particular options that we might choose that would 
be raised or not raised that would stimulate the economy or not 
stimulate the economy. The Chair is more than willing to accept 
applications by Members of the Committee for some degree of 
college credit for the discussion that we may be engaged in, 
but frankly, we just have to have a particular understanding of 
economic terms and approaches so that we can share a common 
knowledge base as we begin to examine these various approaches. 
The Chair appreciates the attendance today, as always, and 
looks forward to Members' questions based upon the testimony 
provided by witnesses. With that, I would recognize the 
gentleman from New York for any opening statement he may make.
    [The prepared statement of Chairman Thomas follows:]

    Opening Statement of The Honorable Bill Thomas, Chairman, and a 
        Representative in Congress from the State of California

    Good morning. Welcome to the Committee's first hearing on Federal 
tax reform since the President appointed an Advisory Panel on Federal 
Tax Reform to explore this important issue that affects nearly every 
American household.
    The President has appointed a highly qualified panel to examine the 
growing problems with our current tax code and it has held many 
hearings across the country and will soon be reporting its 
recommendations to the U.S. Treasury Secretary. I'd like to thank the 
Members of this panel--particularly the Chairman and Vice-Chairman, 
former Senators Connie Mack and John Breaux--for their service, and I 
look forward to reviewing the Panel's recommendations.
    But before the release of the Advisory Panel report, and 
subsequently the Treasury Secretary's recommendations, this Committee, 
as the tax writers in the Legislative Branch, intends to lay the 
groundwork and explore why we need to reform the tax code and the 
benefits of comprehensive reform.
    Today's hearing will focus on the three major priorities that 
should be the driving force behind any tax reform we enact.
    One priority should be simplicity. According to the President 
Advisory Panel, more than 14,000 changes have been made to the code 
since the last comprehensive overhaul in 1986. As one of our witnesses 
will mention in his testimony, the complexity of the current system 
caused taxpayers to spend 3.2 billion hours preparing their taxes in 
2000. Clearly, there are more productive uses of Americans' time. The 
annual cost of complying with today's Federal tax system has been 
estimated to be $135 billion. In other words, it costs $1 in compliance 
costs for every $7 in Federal income taxes paid.
    A second priority is the fairness of the current tax code. Some may 
suggest that ``fairness'' is simply in the ``eye of the beholder'' but 
as we will hear today, there are some metrics that everyone should 
agree with. For one, similarly situated taxpayers should bear similar 
tax burdens. The current tax code is littered with preferences and 
disincentives, credits and deductions so that tax burdens can vary 
widely even among taxpayers with equal incomes.
    Finally, the tax code should not discourage economic growth, as 
many indicate that the current system does. Estimates of various tax 
reform options indicate that the stakes are large--roughly $1 trillion 
in present dollar terms, according to research done by one of today's 
witnesses--but also that it would take some time for these benefits to 
accrue.
    The witnesses before us today will discuss these three priorities 
in more detail. Professor Joel Slemrod will talk about the complexity 
of our current tax code and how it could be simplified. Bill Beach will 
discuss the inequities in the current code and Professors Hubbard and 
Auerbach will address how the tax code distorts economic growth and how 
tax reform could alleviate these distortions.
    I now recognize the gentleman from New York, Mr. Rangel, for any 
opening statement he may have.

                                 

    Mr. RANGEL. Thank you, Mr. Chairman. The last time this 
Committee had hearings on tax simplification and reform was in 
1995 where the distinguished gentleman from Texas, Chairman 
Archer led us into hearings. As a matter of fact, I tried to 
get invited on his buses to go around the country to pull up 
the Tax Code by the roots. Since that time, the Tax Code has 
doubled in terms of pages and complexities. It just seems to 
me, as I had thought with Social Security, that when you are 
going to make changes with such complex legislation, that it 
just screams out for bipartisanship, because if we are going to 
have revenue neutrality in whatever we come up with, not that I 
truly believe we are going to come up with anything, but 
assuming that you and the President talk with each other and we 
are going to have a bill, it would seem to me that we should 
find some degree of agreement as to which deductions and which 
credits are going to be eliminated, how we have got to handle 
the dramatic differences in which we tax the very rich and how 
the middle class has got caught in a trillion dollar package of 
tax increases with the Alternative Minimum Tax (AMT).
    However, I recognize that the chairman's style in 
leadership is to try to do this with just Republicans, as we 
find ourselves with the dilemma of Social Security and Central 
American trade agreement, the only problem I have is not even 
the Republicans on the Committee have the slightest idea as to 
where we are going. So, I can't complain about lack of 
bipartisanship there. It seems to me that this is such an 
important issue that if we are talking about flat taxes and 
value-added tax (VAT), that at some point the chairman may 
share with us whether or not we are going to take the Social 
Security reform bill and include that with a tax reform bill in 
order to get some incentives for the Social Security bill to 
have a new life. Now, I only know where you intend to take this 
from your press conferences and appearances on television. I do 
know that you want to expand Social Security beyond just 
retirement and disability and survival. But, it might be that 
we are going to have just one big reform package of Social 
Security and taxes.
    So, I hope the witnesses are prepared to deal with private 
accounts and all those other things in Social Security, so at 
the end of the day, the American people and the Congress as a 
whole will have some idea where this august and powerful 
Committee intends to go. I want to thank the witnesses, in 
particular, for sharing their views with us. I only wish you 
were on this Committee so that could you give us at least a 
little more precise information as to where we should go. You 
are the only people we have had in 10 years to talk about 
reforming the Social Security system, and I hope and pray that 
we don't double the Tax Code in terms of size and volume as a 
result of this initiative. It is always interesting being on 
this Committee because there is no telling what might happen 
next. So, I thank the witnesses and we will see what happens. 
Thank you, Mr. Chairman.
    Mr. LINDER. Mr. Chairman.
    Chairman THOMAS. I thank the gentleman.
    Mr. LINDER. Mr. Chairman, I ask unanimous consent to have a 
written statement as part of the record.
    [The prepared statement of Mr. Linder follows:]

  Opening Statement of The Honorable John Linder, a Representative in 
                   Congress from the State of Georgia

    The President's Advisory Panel on Federal Tax Reform has been 
gathering testimony throughout the country and it is becoming clear to 
all--finally--that the current code is unfair, it undermines economic 
growth, and it places tremendous burdens on the American workers and 
businesses.
    The current system is a nightmare of complexity that punishes work, 
saving, investment, risk-taking, and entrepreneurship. If there was a 
nationwide competition to come up with the most complex and unfair 
system that would be so indecipherable that even the agency that is 
tasked to oversee it cannot completely understand it--this would be the 
system that would be victorious.
    Should we reform the tax system? Of course! Does it hinder economic 
growth? Of course! Can the United States meet its commitments under the 
current system? Of course not!
    The GAO presented to this committee a study that shows that if we 
continue to tax at the current percent of GDP and continue our 
discretionary spending at its current percent of GDP, in just 35 years 
from today the entire Federal revenue stream will be insufficient to 
pay the interest on the debt.
    We could, of course, raise taxes. Every tax increase in this 
nation's history has slowed economic growth. How is this helpful? We 
could cut discretionary spending. That has never garnered 218 votes in 
the last 50 years.
    What to do?
    A study commissioned in 1997 from Harvard argues that, on average, 
22% of the price system represents the embedded cost of the current IRS 
system. You are paying the income tax costs, the payroll tax costs and 
the compliance costs of every business entity that has had a roll in 
delivering that good or service to you. In addition, the payroll tax, 
part of that embedded cost, is the largest hidden tax component in the 
prices of our goods and services and is the most regressive of the 
existing taxes.
    Our exports also go abroad burdened by this hidden tax component. 
This makes us uncompetitive in the global economy and forces American 
businesses to build plants in nations with a lower tax on capital and 
labor. Those jobs are gone. America needs a tax system that is border-
neutral that ensures that imports receive the same tax treatment at the 
checkout counter as domestically-produced goods.
    The Tax Foundation produced a study that concludes that in 2004 we 
spent 6.6 billion hours filling out IRS paperwork costing Americans 
$203 billion. They predict that, due to complications passed in the 
last few years, the cost in 2007 will be $350 billion. Studies show 
that it costs the average small business $724 to collect, comply with 
the code and remit $100 to the Federal Government.
    There is no way to estimate how much we spend calculating the tax 
implications of a business decision. The Director of the CBO tells me 
of a study that says we lose 18% of our economy to making ``tax 
decisions'' rather than ``economic decisions.'' Add all of this up and 
it is costing us somewhere between $400 and $500 billion just to send 
in about $1.5 trillion in income taxes. That is not inefficient. That 
is stupid!
    The IRS admits that the current code has driven at least $1.5 
trillion into the underground economy. That is probably half of the 
real number. Those dollars are not paying for the government services 
that protect them.
    Two recent studies have concluded that the amount of money held in 
Offshore Financial Centers in dollar denominated deposits now is 
between $9 and $11 trillion. Those are dollars that desire safety and 
secrecy. They exist offshore because of the IRS.
    Nibbling at the margins of our current system will fix none of the 
above. Getting rid of the income tax, the payroll tax and the 
compliance costs will fix them all.
    Why do we not want the underground economy to participate in our 
government? Why do we not want $10 trillion in our markets and banks? 
Why are we timid when we know that bold change will dramatically 
increase economic growth, investment, jobs and the values of our 
markets and thus solve the legacy costs of old manufacturing?
    We must replace the current tax system that punishes 
entrepreneurship, success and thrift with a system that untaxes every 
citizen on the purchase of necessities and then treats everyone exactly 
the same.
    America needs a tax system that is simple to understand and is not 
vulnerable to the continual alteration and amendment. Even when the 
current code is simplified, which was done in 1986 when many deductions 
were eliminated and tax rates were drastically lowered to only two 
levels, it is ultimately amended thousands of times. The end result is 
a system that is not simple and is not fair.
    This can only be achieved by a pure consumption tax. A tax on the 
final purchase of new goods and services. With services becoming an 
increasing player in our economy they must be taxed just as goods are 
in 45 states today. Government ought to be neutral. It ought not pick 
winners and losers. I spent 14 years as a dentist in our legislature 
making a good living. It was never fair that I could make that living 
without ever taxing my source of income when all of my neighbors had 
to.
    We owe it to our citizens to put in place a system that makes every 
taxpayer a voluntary taxpayer paying taxes when they choose, as much as 
they choose, by how they choose to spend. And we must give Americans 
the privilege that a free society owes to its citizens. The privilege 
of anonymity. No government agency should know more about us than we 
are willing to tell to our family.
    America needs a tax system that is fair and simple, protecting the 
poor, treating all Americans the same, and is easy to understand. This 
new system must be voluntary, not coercive or intrusive. It must be 
transparent, eliminating hidden taxes and ensuring that all Americans 
know what the government costs. Our reform efforts must also be border-
neutral so that our exports are free of the burden of the tax code and 
can become competitive around the world. Finally, fundamental reform 
must stop picking winners and losers through the tax code and ensure 
the long-term solvency of Social Security and Medicare.
    With today's hearing, our Committee hopefully will begin the 
process of advancing such a tax code.

                                 

    Chairman THOMAS. Without objection. Other Members who have 
a written statement can certainly make it a part of the record. 
Just respond briefly to the gentleman. I have written letters 
to Members in the past and I have written them recently, every 
Member, and have requested input as to where they might like 
the Committee to go. Those letters are never answered. They 
are, in fact, sent to you and you then send me a letter. I 
continue to invite comments by Members as to where we might go. 
If Members choose not to respond to the chairman, that is, of 
course their privilege, but the accusation that there hasn't 
been an attempt to reach out simply is not true. Let me also 
say that at this point, one of the reasons we have such a 
distinguished panel of economists in front of us, prior to the 
President's panel presenting their options for tax reform, is 
to begin a dialog among ourselves and with experts about 
fundamental concepts of taxation before we look at particular 
proposals so that we can have an opportunity to carry on a 
dialog among ourselves.
    The Chair will, as he has done consistently, reach out to 
Members to participate in that. If Members choose not to do 
that, that is the Members' choice, not that they have been 
refused participation, but they choose on their own not to 
participate. So, sometimes, notwithstanding the belief that 
there is some preconceived notion, the Chair firmly believes 
that the going is the goal, and that as you begin the process, 
you begin to see options available to you that may not be able 
at the beginning of the process. This hearing is primarily to 
provide us with the tools to recognize and perhaps understand a 
level of conceptual and communicative ability to discuss the 
relative aspects of different approaches, weigh choices and 
understand the outcome of those choices prior to making them.
    With that, the Chair thanks you, given the very important 
and diverse lives that you have, for your willingness to come 
before the Committee for a period of time. Your written 
statement will be made a part of the record and the Chair 
invites you to address the Committee in any way that you see 
fit over your prepared statement, but that the Chair hopes that 
questions by the Members will stimulate some discussion among 
the panel because once you read your testimony I find quite 
interesting that a number of you have paired up on various 
monographs and you certainly footnote each other, if you didn't 
footnote yourself occasionally. It means you are very 
conversant with each others' work. I thank you very much for 
your time, as I said.
    Chairman THOMAS. Starting with Dr. Auerbach and moving 
across the panel.

  STATEMENT OF ALAN J. AUERBACH, ROBERT D. BURCH PROFESSOR OF 
 ECONOMICS AND LAW, UNIVERSITY OF CALIFORNIA AT BERKELEY, AND 
   DIRECTOR, BURCH CENTER FOR TAX POLICY AND PUBLIC FINANCE, 
                      BERKELEY, CALIFORNIA

    Mr. AUERBACH. Thank you very much Mr. Chairman. It is a 
great pleasure to be here again to talk about, again, about tax 
reform. In my written comments I focus on the effect of tax 
reform on competitiveness and economic growth. In particular, I 
also highlight one popular objective that sometimes is 
associated with what tax reform can do that I think is probably 
misdirected. In the end, after I go through various issues, I 
come up with what I hope are a useful list of recommendations 
for how to think about tax reform as opposed to supporting any 
particular proposal. If one starts talking about 
competitiveness, and that is obviously a major concern, given 
that the United States has been experiencing really massive 
trade deficits, close to 6 percent of gross domestic product 
(GDP) in the first quarter of this year. The first question one 
has to address is exactly how we measure competitiveness. I 
mean, we commonly think about competitiveness by looking at our 
cost relative to the cost of foreign producers, but that is 
actually a hard thing to do because exchange rates move around.
    Of course, there has been a lot of discussion about 
exchange rates, for example the exchange rate with China 
recently. Given that exchange rates move around, it is not a 
very stable measure of competitiveness, and I argue in my 
testimony that a better approach to measuring competitiveness 
is measuring our productivity, because the more we can produce 
ultimately the higher standard of living we can have. We can't 
consume more than we produce in the long run, although in 
recent years we have come close to doing that. So, our 
objective as a society in thinking about competitiveness should 
be to have as high a level of productivity and a rising level 
of productivity. When we focus on international trade, we would 
should simply see that as a means for achieving a higher level 
of productivity and a higher standard of living, rather than an 
end in itself. That is, we shouldn't take a mercantilist 
approach of trying to have trade surpluses or strong exports as 
an end in themselves but simply as a goal toward achieving a 
higher standard of living and a higher degree of productivity.
    Now, productivity is caused by several factors, many of 
which are influenced by the tax system in important ways. The 
condiments generally emphasize three types of capital 
accumulation as augmenting simple labor and the production of 
higher levels of GDP: tangible capital, plant and equipment of 
course, but also intangible capital, ideas, and further, human 
capital, the education and training that makes workers more 
skilled. We should focus on all three because all three are 
important components of achieving higher productivity. 
Sometimes we focus just on tangible capital, and I think that 
is probably a mistake. Certainly if you look within any 
category and across categories you can see that our tax system 
does not treat the different forms of capital accumulation in a 
uniform manner. That leads to a number of distortion of the 
choices and makes our tax system less effective. Now, I focus, 
although I discuss all three types of capital, I focus most on 
tangible capital. I point out there that there are four 
dimensions in particular. You can think of the types of effects 
that the tax system has as four dimensions in which they vary. 
First whether they are broad or targeted, second whether they 
are temporary or permanent, third whether they are aimed at 
savers or investors, and fourth, and perhaps the one I 
emphasize the most, whether they apply to capital assets 
already in place as opposed to prospective investments.
    There is sort of a loose sense that things that are good 
for capital are good for investment. We should really think 
about these things separately. Some provisions, provisions if 
you want to encourage investment and saving, then you want 
provisions that are targeted toward investment and saving. 
Sometimes you also have to give subsidies to existing assets as 
well. That is not really something that helps you accomplish 
additional capital formation and productivity. I also talk 
about one thing that tax reform cannot do, and the reason I 
single this out is it comes up over and over again in the tax 
reform debate. There is a sense that some consumption tax 
proposals, like a value-added tax or retail sales tax that 
provide border adjustments, that is, don't tax exports and do 
tax imports, that those systems somehow, by that provision, 
help the trade balance. I, in my comments, in my written 
comments I go through why that really isn't right. I think it 
is generally accepted by economists that that is not an 
important reason or an important way in which a consumption tax 
proposal or other proposal will affect the trade balance. There 
are other indirect ways, but not that. Then finally at the end, 
and perhaps if I have time in a question and answer session, I 
will go through the recommendations that I have. They are 
listed at the end of my testimony. Thank you, Mr. Chairman.
    [The prepared statement of Mr. Auerbach follows:]

 Statement of Alan J. Auerbach, Robert D. Burch Professor of Economics 
  and Law, Director, Burch Center for Tax Policy and Public Finance, 
       University of California at Berkeley, Berkeley, California

    I am pleased to have this opportunity to offer my views on the 
effects of the tax system on economic growth and international 
competitiveness and the role that tax reform can play in promoting 
both. Today, I will discuss the design of effective tax incentives and 
how the current tax system measures up. I will also highlight one 
potential goal that tax policy cannot achieve. Finally, I will draw 
some conclusions regarding the design of fundamental tax reform and how 
potential reform plans should be evaluated.
What is Competitiveness?
    The United States has experienced massive trade deficits in recent 
years, with net imports in the first quarter of 2005 approaching 6 
percent of GDP. This has led to concerns that U.S. producers may be 
losing their ability to compete in the global marketplace. But how 
should one define competitiveness?
    The simplest definition of competitiveness, perhaps, involves a 
comparison of domestic and foreign costs of production; U.S. producers 
are ``competitive'' if their costs of production are lower. But this 
measure of competitiveness suffers from two logical problems. First, 
the costs of foreign producers, measured in U.S. dollars, depend on the 
exchange rates between the dollar and the respective foreign 
currencies. A low enough dollar would make all U.S producers 
competitive according to this definition, even with no changes in 
domestic or foreign production techniques or local labor costs. Thus, 
U.S. producers could be competitive even in our weakest industries or, 
at a different configuration of exchange rates, not competitive even in 
our strongest. Second, the most fundamental economic concept of 
international trade--Ricardo's principle of comparative advantage--
dictates that a country will export the goods and services in which it 
is relatively competitive, and import the goods and services in which 
it is not--even if it is extremely efficient at producing goods and 
services in the latter category. By definition, a country cannot have a 
comparative advantage in producing everything, and thus it cannot have 
a uniform cost advantage. Thus, a comparison of domestic and foreign 
costs, though perhaps intuitively appealing, is not a useful measure of 
competitiveness.
    A better approach to measuring competitiveness relies on a 
comparison of productivity, the amount of goods and services produced 
per worker hour. Higher productivity means a higher attainable standard 
of living, for over the long term a society cannot consume more than it 
produces. Our objective, as a society, should be a high and rising 
standard of living. International trade is only a means to achieving 
this ultimate objective; strong exports or a trade surplus are not ends 
in themselves.

The Determinants of Productivity
    Productivity per worker hour depends on a range of factors, many of 
which are influenced by taxation. We should consider the impact of 
taxation on human capital, tangible capital, and intangible capital--
the three types of capital that increase productivity by augmenting 
basic, unskilled labor. All three types of capital are important 
determinants of productivity and policies to foster capital 
accumulation should be designed with all three types in mind (not just 
tangible capital). Our present tax system does not treat the different 
types of capital uniformly, thereby creating uneven incentives for 
capital accumulation.

Tax Policy and Human Capital
    The costs of accumulating human capital through education, on-the-
job training and workplace experience receive relatively favorable 
treatment under current law. A primary cost of education and training 
is forgone earnings--the earnings given up by staying in school or by 
accepting a lower current salary in order to gain valuable job 
experience--and this cost is effectively tax-deductible, because income 
and payroll taxes are avoided when earnings are forgone. The 
progressivity of the tax rate schedule offsets the benefit of being 
able to expense costs immediately, for those who accumulate human 
capital will have higher future incomes and thus face higher marginal 
tax rates. But there is another aspect of the ``success'' tax that is 
often ignored, that a progressive rate structure also provides 
insurance against income uncertainty. Success may be the result of 
education and hard work, but it also depends on luck: by choosing the 
right field of study, working for a successful employer, or avoiding 
debilitating illness. Indeed, recent research suggests that moving to a 
less progressive rate structure might be undesirable, if one takes the 
reduction in this insurance function into account.\1\
---------------------------------------------------------------------------
    \1\ Shinichi Nishiyama and Kent Smetters, ``Consumption Taxes and 
Economic Efficiency in a Stochastic OLG Economy,'' National Bureau of 
Economic Research Working Paper No. 9492, February 2003.
---------------------------------------------------------------------------
    The marginal tax rate reductions of recent legislation, then, have 
offsetting effects on incentives for human capital accumulation, 
increasing after-tax investment returns, but also increasing the 
uncertainty of these returns. However, there is another important 
aspect of recent policy that discourages human capital investment--the 
fact that we are on an unsustainable fiscal path. That is, there is a 
significant risk of large future tax increases. The decision to invest 
in human capital relies on a very long time horizon, since the returns 
to education and training may be realized only after several years. The 
prospect of higher future taxes and the uncertainty regarding the form 
and level of these taxes each discourage human capital investment. A 
tax system's instability, in itself, discourages human capital 
investment (and indeed, other types of investment as well), and it is 
difficult to maintain a stable tax system when there is a large and 
growing imbalance between taxes and spending.

Tax Policy and Intangible Capital
    Intangible capital investments generally face more favorable tax 
incentives than do investments in human capital. Not only can investors 
write off such investments immediately, but qualifying investments are 
eligible for the Research and Experimentation credit. Because the 
immediate write-off, by itself, effectively eliminates the tax on new 
investments, the combination of immediate write-off and the R&E credit 
delivers an outright subsidy to investments in intangible capital. Does 
such favorable treatment have any justification? The answer is yes, 
because many intangible investments have the capacity to convey 
positive ``spillovers'' to others in society. Put another way, if 
investors cannot capture all the benefits of their investments, they 
need some sort of compensation from the rest of society--those who also 
gain from these investments--and a tax subsidy is therefore fair. The 
right level and scope of the subsidy are difficult to determine, 
however, for it is hard to identify the social payoffs to different 
types of investments in intangible capital.
    It should also be remembered that intangible capital depends on 
more than research and development investment, and is influenced 
substantially by government policy beyond the realm of taxation. Our 
ability to achieve high levels of production relies on the clarity and 
force of our legal system, the rationality of our regulations, the 
flexibility of our employment relationships, and so forth. We should 
view tax policy toward intangible capital as but one component of a 
portfolio of policy tools.
Tax Policy and Tangible Capital
    Incentives to invest in tangible capital, primarily plant and 
equipment, are affected by myriad tax provisions. In thinking about the 
nature of the provisions, it is useful to distinguish four dimensions 
in which tax provisions may vary:

    1.  Are they broad or targeted?
    2.  Are they temporary or permanent?
    3.  Are they aimed at savers--those who supply the funds for 
investment--or at the companies that actually spend the funds?
    4.  How do they apply to capital assets already in place, as 
opposed to prospective investments?
Broad versus Targeted
    One of the key principles of tax design is that taxes should have 
as broad a base as possible, so as to permit the lowest possible tax 
rate for a given revenue requirement. A broad-based, low-rate system 
promotes efficiency by limiting the distortions of economic decisions, 
and may also be simpler and easier to administer than alternative 
systems.
    Why deviate from this appealing norm? For example, why implement an 
investment tax credit for investment in equipment, as we did prior to 
1986? One argument is that the favored investment provides significant 
social spillovers, basically the same rationale as for the favorable 
treatment of investments in intangible capital. But there is no 
convincing empirical support for the argument that certain types of 
equipment investment generate such positive spillovers, so this 
argument is weak. A second defense of targeted provisions is that they 
offset existing benefits available to other investments. For example, 
prior to the changes introduced by the Tax Reform Act of 1986, some 
argued that real estate investment enjoyed a variety of tax benefits, 
so that the investment credit simply leveled the playing field. While 
such an argument may have had merit, at least before 1986, it is 
extremely difficult to get such offsets right, as the tax provisions 
one must weigh in seeking balance are typically quite different.
Temporary versus Permanent
    No tax provision is truly permanent, because each year brings the 
possibility of new tax legislation. But some provisions are explicitly 
temporary. The bonus depreciation provisions introduced in 2002 and 
enhanced and slightly extended in 2003 had this characteristic; indeed, 
bonus depreciation has now expired.
    Why adopt temporary provisions? The strongest potential 
justification is as a stabilization device, to dampen swings in the 
economy. For example, bonus depreciation was introduced while the 
economy was still recovering from the 2001 recession, which had been 
characterized by a steep drop in equipment investment. Historically, 
adjustments of the investment tax credit were often motivated by 
similar concerns. There is plenty of evidence that fluctuations in 
investment incentives altered the path of investment, but no evidence 
that such effects served the purpose of stabilization.\2\ Very short-
lived provisions, such as the bonus depreciation scheme, are especially 
tricky to implement because they provide more powerful incentives for 
longer-lived assets, allowing investors to lock in ``cheap'' capital 
for a long time. The variations in incentives across assets depend on 
how temporary the provisions are, making the tailoring of provisions to 
provide uniform incentives extremely difficult in a dynamic tax 
environment.
---------------------------------------------------------------------------
    \2\ Alan J. Auerbach and Kevin Hassett, ``Tax Policy and Business 
Fixed Investment in the United States,'' Journal of Public Economics 
47(2), March 1992, pp. 141-170.
---------------------------------------------------------------------------
Saving versus Investment
    With the existence of international capital flows, saving and 
investment can occur in different countries. That is, savers in the 
United States can supply funds for foreign investment, and businesses 
in the United States can attract funds for their investment from 
abroad. If U.S. capital accumulation is our goal, is it U.S. saving or 
U.S. investment we should be encouraging?
    The argument for encouraging U.S. saving is straightforward, for 
increasing saving expands national wealth, whether this wealth is 
invested abroad or at home. An increase in U.S. saving would also 
contribute to a reduction in our trade and current account imbalances, 
for, as discussed further below, the share of our domestic production 
not claimed by domestic investment or government and private 
consumption is available for export.
    The argument for encouraging U.S investment, as opposed to U.S. 
saving, is less obvious, unless one subscribes to the view that such 
investment generates large social spillovers, a view that I have 
already dismissed. In the end, though, there is less distinction than 
there may appear to be between policies that encourage saving and 
policies that encourage investment, because investment and saving tend 
to move together.\3\ Thus, policies that encourage saving encourage 
investment, and policies that encourage investment encourage saving.
---------------------------------------------------------------------------
    \3\ Martin Feldstein and Charles Horioka, ``Domestic Saving and 
International Capital Flows,'' The Economic Journal 90(358), June 1980, 
pp. 314-329.
---------------------------------------------------------------------------
New Capital versus Old Capital
    Some people seem to believe that provisions that benefit capital 
necessarily benefit investment, but capital and investment are 
distinct. Provisions may reduce the tax burden on existing capital more 
or less than they reduce the tax burden on new investment. If 
stimulating investment is our aim, then we should seek to reduce the 
tax burden on investment. Although reducing the tax burden on existing 
capital at the same time may be unavoidable, doing so may actually 
discourage saving and investment, for example, by increasing asset 
values and stimulating the consumption of goods and services.
    Historically, proposals and actual policies have varied 
considerably in their relative treatment of old and new capital. The 
following diagram illustrates this variation, with provisions favoring 
old capital more toward the left, and those favoring new capital more 
toward the right.

[GRAPHIC] [TIFF OMITTED] T4645A.001


    A reduction in the corporate tax rate lowers the tax burden on both 
new and old capital, though it may help old capital more to the extent 
that depreciation deductions are more favorable for new assets and 
shield more of their income from taxation. An investment tax credit, on 
the other hand, provides no benefit at all to existing capital. Moving 
in the other direction, a reduction in the capital gains tax rate 
favors old capital substantially more than new capital. A cut in the 
capital gains tax rate reduces the tax burden not only on future income 
from existing assets but also on these assets' past income--gains that 
have already accrued but have yet to be realized.
    Focusing tax provisions on new capital makes the provisions more 
efficient at achieving their goal, but there are limits to the 
feasibility of doing this. For example, an incremental investment tax 
credit, applicable to investment in excess of some base level, would be 
an even more cost-effective way of encouraging investment. But though 
the incremental ITC has occasionally been proposed, the determination 
of its base investment level is complex and involves potentially 
perverse side effects of the type that have plagued the R&E credit over 
the years.
    The way a tax provision is implemented also affects the extent to 
which it favors old or new capital. For example, phasing in a reduction 
in the corporate tax rate rather than adopting the reduction 
immediately concentrates more of the overall benefit on new capital. 
Because investment decisions are forward looking, a prospective 
corporate tax cut may be almost as effective at stimulating investment 
as an immediate one. But the phase-in procedure will save revenue and 
limit windfalls to capital already in place, the source of current 
income. By this logic, the dividend and capital gains tax reductions of 
2003 get things almost exactly backward. If investors believe that the 
scheduled sunset after 2008 will occur, then the tax reductions will 
have almost no impact on the incentive to invest while still providing 
substantial tax benefits to the owners of existing assets.
    Finally, it is important to look at substance rather than form in 
estimating the extent to which a tax provision favors new or existing 
capital. Provisions labeled ``savings incentives'' appear aimed at the 
generation of new savings, and hence targeted at new capital. Any 
provision that provided a tax benefit only for new saving would indeed 
be an incentive to save. But many tax incentives for ``saving'' are 
available to individuals who simply transfer existing assets into a 
qualifying account. Such asset transfers do not constitute new saving, 
and the associated tax benefits represent windfalls to existing assets. 
Legislators should keep this caveat in mind when considering the 
expansion of such schemes.
Measuring the ``Bang for the Buck''
    As just discussed, capital income tax provisions vary in the extent 
to which they provide windfalls to existing capital rather than 
incentives for new investment. For a given investment incentive, a 
provision that limits windfalls will have a lower revenue cost and 
hence a higher ``bang for the buck''--a greater investment stimulus per 
dollar of lost revenue. But comparing the revenue lost by different 
provisions is tricky because the provisions may vary in their timing. 
Provisions that provide ``front-loaded'' incentives may appear more 
costly over a short revenue window than comparable provisions that are 
``back-loaded.'' A familiar recent example is the comparison between 
traditional IRAs and Roth IRAs. The two types of accounts offer similar 
tax benefits to depositors when calculated over the long term, but the 
tax benefits of the Roth IRAs are received by a depositor over time 
(through the exemption of earnings from tax), while the traditional IRA 
delivers its benefits through an immediate tax deduction. Thus, over a 
short period, say a ten-year budget window, the Roth IRA will appear 
less expensive and seem to have a bigger bang for the buck than the 
traditional IRA even though this is not the case.
    Another example comes from the Tax Reform Act of 1986, which 
reduced the corporate tax rate while repealing the investment tax 
credit. As discussed above, the investment tax credit is focused more 
on new capital than is a corporate tax rate reduction, so trading in 
the ITC for a tax rate cut seems like a move in the wrong direction, at 
least in terms of potential bang for the buck. But the ITC is a front-
loaded incentive, which makes it appear more expensive over a short 
time period than a corporate tax rate reduction with a similar impact 
on the incentive to invest. As the 1986 reform aimed at short-term 
revenue neutrality, the process was biased against the ITC.\4\
---------------------------------------------------------------------------
    \4\ Indeed, the one-year revenue effects of these two tax 
provisions were roughly offsetting. See Alan J. Auerbach and Joel 
Slemrod, ``The Economic Effects of the Tax Reform Act of 1986, Journal 
of Economic Literature 35(2), June 1997, pp. 589-632.
---------------------------------------------------------------------------
What Tax Reform Cannot Do
    There are, of course, many things that tax reform cannot 
accomplish, but there is one objective so closely tied to tax reform in 
the minds of some that it deserves explicit attention, lest reform 
efforts be misdirected. Tax reform cannot reduce the trade deficit, at 
least not through the tax treatment of exports and imports.
    The trade deficit, by definition, equals the amount by which 
domestic investment spending plus non-investment purchases by 
government and households exceed domestic production, i.e., GDP; we 
must import the excess of what we spend over what we produce 
domestically. Unless we reduce domestic investment spending--clearly 
not an objective of tax reform--the only ways to reduce the trade 
deficit are to increase domestic production or to reduce spending by 
government and households. Either one of these changes--increasing 
production or reducing non-investment spending--amounts to an increase 
in U.S. national saving, so reducing the trade deficit (assuming we 
don't sacrifice domestic investment) requires an increase in national 
saving. Thus, tax reform must increase national saving in order to 
reduce the trade deficit.
    Tax reform can increase national saving by expanding the economy's 
productivity, and hence the size of potential GDP, as well as by 
encouraging saving directly, encouraging households to spend less and 
save more of their current income. (Other government policies, too, can 
reduce the trade deficit, notably deficit reduction policies that 
reduce government spending and, through tax increases that reduce 
household disposable income, reduce household spending.) But tax reform 
cannot increase national saving simply by its treatment of exports and 
imports.
    Some consumption tax proposals, such a value added tax or a retail 
sales tax, incorporate border adjustments--they are not imposed on 
exports, but are imposed on imports. Other proposals do not include 
border adjustments; they do not relieve the tax on exports and do not 
tax imports. In comparing the approaches with and without border 
adjustments, some have argued that inclusion of border adjustments 
would reduce the trade deficit by making our exports cheaper abroad and 
our imports more expensive at home. But, with no other differences in 
economic fundamentals in the United States or abroad, border 
adjustments will simply strengthen the dollar, putting importers and 
exporters in the same competitive positions no matter which approach is 
adopted.\5\ Ironically, the stronger dollar that border adjustments 
would induce would also provide windfalls to foreigners holding dollar-
denominated assets--the very ones who have financed our recent trade 
deficits.
---------------------------------------------------------------------------
    \5\ See Alan J. Auerbach, ``The Future of Fundamental Tax Reform,'' 
American Economic Review 87(2), May 1997, pp. 143-146.
---------------------------------------------------------------------------
    In summary, tax reform can help the trade balance, but only 
indirectly, through its impact on national saving. The decision whether 
to include border adjustments as part of a tax reform package should 
hinge primarily on other factors, such as simplicity, compliance costs 
and ease of administration.

Implications for Fundamental Tax Reform
    On the basis of the preceding discussion, I offer the following 
guidelines for tax reform design.
    1. In thinking about the sources of productivity, keep all forms of 
capital, not just tangible capital, in mind.
    2. With few exceptions, avoid narrowly targeted tax provisions. 
Such measures may be justified in exceptional cases, but more often are 
a source of complexity and distortion.
    3. Focus on incentives. Provisions formally associated with 
``capital'' or ``saving'' do not necessarily encourage capital 
accumulation very much. Providing windfalls to existing assets does not 
stimulate investment or saving.
    4. Take future revenue consequences into account. Proposals can be 
tailored to minimize short-run revenue costs or maximize short-run 
revenue gains with little impact on the proposals' economic effects or 
long-run revenue consequences. The attractiveness of these proposals 
should not hinge on such cosmetic alterations.
    5. Pay close attention to the design of transition provisions. 
Phase-in provisions can be an effective method of focusing tax benefits 
on investment rather than on existing assets. But the piecemeal 
application of tax incentives can also introduce opportunities for tax 
arbitrage, where individuals receive tax benefits simply by 
transferring existing assets to achieve tax-favored status.
    6. Do not conceive of tax reform as providing simple solutions to 
the U.S. trade deficit.
    7. Remember that the objectives of tax reform will be undercut if 
the overall fiscal system is unstable. Tax reform and broader fiscal 
reform are complementary.

                                 

    Chairman THOMAS. I thank you very much, Dr. Auerbach. Mr. 
Beach.

    STATEMENT OF WILLIAM BEACH, DIRECTOR OF CENTER FOR DATA 
               ANALYSIS, THE HERITAGE FOUNDATION

    Mr. BEACH. Thank you very much, Mr. Chairman. My name is 
William Beach, and I am from the Heritage Foundation. I do 
appreciate the decision by your staff to assign me the one 
topic which is only true if it is the eye of the beholder that 
is making the decision. I think there are some rules, though, 
that we can apply to the whole business of justice. Attaining a 
simple fair and pro-growth tax system involves disciplined 
thinking of by policy makers about a number of important 
changes to current law. I would like to draw your attention to 
some of the considerations you should make when thinking about 
fairness. If you lived in a simple political and tax world, 
which none of us do, then every change to the Nation's tax law 
would have to pass the test. Does the change treat equals 
equally? Does it reinforce vertical proportionality of the tax 
system? That is as your income rises do you pay more tax? Does 
the change to tax policy disturb the peaceful and lawful work 
of taxpayers toward their economic and social goals? 
Unfortunately, we do not live in this perfect world even though 
this model is a key to the survival of good policy in a 
political environment awash with conflicting interests. Also, 
unfortunately, the analytical tools you have at your disposal 
for evaluating the equity elements of proposed changes are 
rather crude, unfortunately, easily abused and not well suited 
for answering many of these key equity questions. Nearly every 
tax bill is challenged to prove that it is fair. Fairness, 
however can and probably does mean something different to each 
person who thinks about it. I imagine that there are 
differences on this subject even on this Committee.
    Chairman THOMAS. Mr. Beach, There are some people who are 
not able to hear you clearly. If you will, pull that mike down 
closer to your mouth. Thank you very much.
    Mr. BEACH. Thank you very much. I imagine that there are 
differences on this subject, even on this Committee. Since you 
cannot entertain an infinite number of different definitions of 
fairness but must instead be governed by a definition that 
enjoys wide support and also allows you to make decisions on 
fairness, it is appropriate to start with the question of what 
is tax fairness. In a moment or two, I am going to try to 
answer that. I think we can all agree that tax fairness at 
least means that everyone pays their fair share. That is the 
total amount of taxes a person pays is proportional to their 
economic ability to pay taxes. Thus taxes paid are proportional 
to income or consumption or to some other measurement of our 
use of government. Tax fairness also should mean, and I think 
generally does mean the tax policy enacted today will act on 
each person's taxable income so as to disadvantage no type of 
taxpayer over another achieving their economic ends. This 
forward equity of the Tax Code is crucial but seldom noted 
fairness consideration. Vertical equity, horizontal equity and 
forward equity are crucial. Three elements of equity. For 
example, do tax changes made today raise barriers to women 
reentering the work force years from now after raising a 
family, or to immigrants starting micro businesses or to 
retirees pursuing part time work? Do policy changes make it 
more or less difficult for young people to achieve their goals?
    Now economists, and many on this panel, have developed 
techniques for analyzing how tax policy changes effect 
taxpayers and non taxpayers. This family of techniques is known 
as distribution analysis, and provides policy makers with crude 
but sometimes effective tools for determining whether their 
policy changes meet the test of vertical horizontal and forward 
equity. I would suspect that in the course of your 
deliberations over the next several months, maybe even over the 
next year you will have presented to you tables that show the 
distribution of proposed changes. There are many things that 
the Members need to keep in mind when looking at those tables. 
First off, against which kind of a concept is the tax policy 
change distributed? Most often it is income. So, you will see 
tables that will have on the vertical axis income, and it will 
be broken up into 20 percentiles or deciles or some sort of 
measurement. Ask yourself what income is being looked at here? 
Does it include, for example, only income in the year that the 
analysis is made, salary and wages, or does it include net 
worth or does it include the imputed value of your house? 
Crucial because one group will tell you, here is what this tax 
policy change will mean. They may use a different definition of 
income than another group. So, it is crucial that the Committee 
think what is the definition of income that we want to look at 
consistently from policy change to policy change.
    Second, some people will say, oh, it is not appropriate to 
use income since it is so difficult to define. Let us use 
consumption. Well, consumption is, after all, a fairly public 
thing. We consume things at a grocery store. We all observe 
other people consuming it. Surely this must be more fair than 
income. Yet, if you think about consumption, our big 
consumption happens when we are young, when we are buying 
houses, when we are paying off education, when we are raising 
families. When we reach middle age like myself, family's gone 
and I am now building net worth. My consumption falls. As I 
retire, I use up my savings. So, there is even a question, does 
consumption measure what we are trying to look at when we look 
at tax policy changes. This whole business of fairness, and I 
will conclude with this, needs to be governed by principles. 
First off, look at vertical, horizontal and what I call forward 
equity. I think that is crucial. Then you need determine how 
are you going to measure from one proposal to the next 
proposal, what happens to the distribution of income or the 
distribution of tax burden or the incidence of tax burden. That 
means you have to do some things behind closed doors, and that 
is, decide the metric you are going to use to evaluate the 
policy changes that will be presented to you by many, many 
people in this town. Thank you very much.
    [The prepared statement of Mr. Beach follows:]

 Statement of William Beach, Director of Center for Data Analysis, The 
                          Heritage Foundation

    The President's call for fundamental tax reform combined with this 
committee's continued interest in repairing and improving our tax code 
provides an enormous opportunity for expanding the social and economic 
well-being of all Americans. Attaining a simple, fair, and pro-growth 
tax system, however, involves disciplined thinking by policy makers 
about a number of important changes to current law. I would like to 
draw your attention to some of the considerations you should make when 
thinking about fairness.
    Let me ask you to hold a mental construction in mind for the next 
few minutes. It is this: in a perfect tax world, every taxpayer at each 
income level would be treated equally and the more people made in 
taxable income the more tax they would pay. In this world, as well, the 
taxes levied to raise the necessary revenues for needed government 
would not interfere with the equal right of all taxpayers to use their 
labor and capital in such a way as to achieve their economic and social 
goals.
    That simple mental construction is crucial to the work you do day 
in and day out and especially to the product we all hope will flow from 
this committee once the President's Advisory Panel on Federal Tax 
Reform completes its work. You need to have a model against which you 
can evaluate the horizontal, vertical, and forward equity of changes to 
our current tax code.
    If you lived in this simple tax world, then every change to the 
nation's tax law would have to pass the test: does the change treat 
equals equally, does it re-enforce vertical proportionality of our tax 
system, and does the change disturb the peaceful and lawful work of 
taxpayers toward their economic and social goals.
    Unfortunately, we do not live in this perfect world, even though 
this model is a key to the survival of good policy in a political 
environment awash with conflicting interests. Also unfortunately, the 
analytical tools you have at your disposal for evaluating the equity 
elements of proposed changes are rather crude, easily abused, and not 
well suited for answering these key equity questions.
    As I observed, nearly every major tax bill is challenged to prove 
that it is fair. Fairness, however, can (and probably does) mean 
something different to each person who thinks about it. I imagine there 
are differences on this subject even on this committee. Since you 
cannot entertain an infinite number of different definitions of 
fairness but must instead be governed by a definition that enjoys wide 
support and also allows you to make decisions on fairness, it is 
appropriate to start with the question: What is tax fairness?
    I think we all can agree that ``tax fairness'' at least means that 
everyone pays their fair share. That is, the total amount of taxes a 
person pays is proportional to their economic ability to pay taxes. 
Thus, taxes paid are proportional to income or to consumption or to 
some other measure of our use of government.
    ``Tax fairness'' also should mean (and I think generally does mean) 
that tax policy enacted today will act on each person's taxable income 
so as to disadvantage no type of taxpayer over another in achieving 
their economic ends. This forward equity of the tax code is a crucial 
but seldom-noted fairness consideration. Lawmakers should consider 
whether policy change facilitates individual economic, social, and 
personal choices that set in motion a sequence of activities that lead 
to goals a person sets for him or herself. For example, do tax policy 
changes made today raise barriers to women re-entering the workforce 
years from now after raising a family, or to immigrants starting micro-
businesses, or to retiree pursuing part-time work? Do policy changes 
make it more or less difficult for young people to achieve their goals?
    Economists have developed techniques for analyzing how tax policy 
changes affect taxpayers and non-taxpayers. This family of techniques, 
known as distribution analysis, provides policy makers with crude but 
sometimes effective tools for determining whether their policy changes 
meet the tests of vertical, horizontal, and forward equity.
    Distribution analysis, however, often flounders on two, central 
problems: 1) what should we use to measure tax incidence against and 2) 
how does the passage of time affect the distribution of taxes.
    What policy makers frequently want to know is simply enough stated 
(how will tax policy change affect the economic well-being of 
taxpayers), but just as frequently is hard to answer. How do you 
measure the relationship between tax policy and economic well-being? 
Because we cannot measure all of the things that affect a taxpayer's 
well-being, economists often settle on proxies for those data we cannot 
obtain or activities we cannot observe. Certainly, the most common of 
such proxies is income.
    However, what is income? Most people think of income as the total 
amount of money they make each year. But, does that amount count the 
income from previously taxed income, like interest on a savings account 
or dividends from an investment? Is ``income'' the total amount that is 
spent on all goods and services and leisure? Does it include net worth? 
Do we count non-cash compensation when distributing the effects of a 
tax policy change?
    Even if we could settle on an income concept that most analysts 
would accept, how good are the income data that we would use to create 
distribution tables. For example, the U.S. Census Bureau obtains a 
pretty good idea about household and individual income at each 
decennial census. During the intervening decade, Census regularly 
surveys the population and produces updates to its decennial estimate 
of income (most notably the March supplement each year) that form the 
basis for so much of our economic work on taxes.
    This important dataset, however, is composed of only 60,000 
households out of total population of over 110,000,000 households. 
While that survey size assures statistical significance on most 
demographic concepts, it produces at best a crude representation of the 
types and ranges of income, particularly among high-income households.
    What about distributing tax policy changes by consumption? 
Consumption generally is a public act, and the very fact that 
consumption leaves highly visible footprints means that using it for 
distributional purposes avoids many of the definitional problems 
surrounding ``income.'' If we were to use consumption as the metric 
against which to measure the fairness of a tax system, we would assume 
that levels of tax payments would follow levels of consumption.
    Simple enough, but what do you do with young taxpayers? They are 
consuming very expensive education that they pay off over time, buying 
homes to start a family that are paid through mortgages, buying their 
first car, their furniture, and raising children (by itself an 
expensive proposition). Short-term and long-term consumption get mixed 
together in real life, which raises problems for distributional 
analysts.
    Anyway, consumption patterns tend to follow the cycle of life: high 
consumption and debt early on, followed by increases in net worth and 
less consumption in middle life, which ends with low consumption and 
depletion of savings over retirement. If a tax system followed that 
pattern of consumption, would it be fair? Probably not.
    Finally, some analysts argue that we can learn a great deal about 
the fairness of a tax system by studying the actual marginal tax rates 
faced by taxpayers across income. If a tax system meets the vertical 
and horizontal tests for fairness, then marginal tax rates will be 
roughly the same for all taxpayers in each income class.
    However, our current tax policy is, if anything, one of targets, 
not of equal treatment. That is, Congress has decided to use the tax 
system to achieve specific social and economic goals, which has 
resulted in a significant decay in vertical equity. To illustrate this 
point, I have provided in my full testimony a wonderful graph prepared 
by Kevin Hassett of the American Enterprise Institute, a tax economist 
well known to this committee. Dr. Hassett compares the current tax code 
to tax law in 1986 and 1988 and how tax policy has affected the 
marginal income tax rates faced by a family of four. While this graphic 
shows many things, its single most important message is how targeting 
tax relief has produced significant equity distortions in the code.
    As Dr. Hassett's chart shows, drifting away from a tax system 
governed by principles has led to tax law that is less just. Achieving 
a significantly better tax code obviously involves major legislative 
efforts. Having guiding principles before the members of the House and 
the Senate should help them extract our tax code from the dramatic 
difficulties into which it has fallen.

[GRAPHIC] [TIFF OMITTED] T4645A.002


                                 

    Chairman THOMAS. Thank you very much, Mr. Beach. Dr. 
Burman.

   STATEMENT OF LEONARD E. BURMAN, CO-DIRECTOR OF TAX POLICY 
           CENTER AND SENIOR FELLOW, URBAN INSTITUTE

    Mr. BURMAN. Chairman Thomas, Ranking Member Rangel and 
distinguished Members of the Committee, thank you for inviting 
me to testify on the principles that should guide reform of the 
tax system. I applaud the Committee for taking on this 
crucially important subject. I came to Washington 20 years ago 
to work at the Treasury Department on what became the Tax 
Reform Act 1986 (P.L. 99-514). Although it was far from 
perfect, that reform was guided by the bedrock principles of 
fairness, simplicity and economic efficiency. Although some 
parts of the final bill weren't simple, it clearly made the tax 
system fairer and more efficient. I would be delighted to see 
if we would could repeat the trick again today while also make 
the tax system simpler. In my testimony, I focus on how the 
income tax system affects low and middle-income taxpayers and 
the potential effects of tax reform on those populations. Low-
income families depend heavily on the income tax system. 
Although they don't benefit from traditional deductions and 
credits, most do benefit from refundable tax credits which are 
available even if a tax filer doesn't owe income tax.
    In fact, the refundable Earned-Income Tax Credit (EITC) is 
the largest source of cash assistance for low income families 
bigger in the aggregate than Temporary Assistance for Needy 
Families (TANF) or food stamps. The Economic Growth and Tax 
Relief Reconciliation Act of 2001 (EGTRRA, P.L. 107-16) also 
substantially increased the refundable child tax credit. Both 
of these credits encourage work and help families with children 
meet basic needs. Since the EITC and the child tax credit phase 
in with earnings they encourage labor force participation among 
low income single parents. These two refundable tax credits now 
represent a very large portion of income for low income 
households with children. The typical household with one 
eligible child and income between $10,000 and $15,000 receives 
tax credits worth $2,523 or almost 23 percent of income in 
2005. A household with 2 children and the same income would 
receive $3,764 or almost 35 percent of income in those credits. 
Even at incomes of $25,000 to $30,000 the EITC and child tax 
credit boost income by more than 15 percent for families with 
two or more children.
    The great value of these credits also poses a risk for tax 
reform. Any new tax reform that eliminated or reduced these 
credits would devastate low income households unless new 
spending programs were created to provide cash assistance. For 
middle income families, a complex hodgepodge of tax benefits, 
all with separate eligibility rules and income tests, creates 
enormous variation in effective tax rates. As documented in my 
written testimony, similar families can receive very dissimilar 
tax treatment. Income phase-outs for credits and reductions in 
the AMT create hidden taxes and needless complexity. The best 
thing the tax reform could do for these families would be to 
consolidate income support programs and simplify eligibility. 
To the extent possible, the hidden rates created by phase-outs 
in the AMT should be replaced by explicit adjustments to the 
tax rates schedules or financed by closing loopholes. For 
example the phase-out of the child tax credit of incomes over 
$110,000 adds 5 percentage points to marginal tax rates in that 
income range. A better and equally progressive option would be 
to eliminate the phase-out and raise statutory tax rates 
slightly starting at the same income level.
    Many tax reform proposals which shift away from a tax based 
on income to a tax based on consumption. Although these 
proposals are often motivated by concerns about complexity and 
efficiency, they would almost inevitably shift tax burdens on 
to middle and/or lower income groups. Consumption is a much 
larger share of income for lower- and middle-income households 
than for those with high incomes. Families earning less than 
$30,000 spend virtually all of their income, while those with 
incomes over $200,000 spend less than 40 percent. Compared with 
the comprehensive income tax, the consumption tax would exclude 
two-thirds of income from the tax base for the highest income 
households. Thus, a consumption tax rate would have to be three 
times as large an income tax rate to keep the same tax burden 
on those families. Otherwise the tax burden would inevitably 
shift on to lower and middle income households. Despite the 
concerns about equity, a consumption tax might still be 
worthwhile if there were huge economic benefits. There aren't 
likely to be. Most of the claimed benefits of switching to a 
consumption tax come from base broadening and the large tax 
imposed on existing capital during the transition period to a 
new tax. Base broadening could just as well be done under the 
income tax and the lump sum tax on old capital that excites 
economists, that is a big tax on senior citizens doesn't seem 
like it is going to happen from my perspective.
    Beyond that, it is not a given that a consumption tax would 
raise economic efficiency more than a similarly comprehensive 
income tax would. Exempting capital income from tax necessarily 
means that you have to raise the tax burden on labor, so you 
are reducing distortion on one margin, the discouragement of 
savings, but you are increasing it on another by discouraging 
work. The economic evidence suggests that those things about 
balance out. The overall efficiency gains are likely to be very 
small. One last point, just that a surprising effect of 
switching to a consumption tax in the real world is that it 
might not even encourage saving, and that is because currently, 
certain kinds of savings accounts, retirement savings accounts 
receive special tax breaks, 401(k)s, pensions. If you 
eliminated those tax breaks and said everything was tax free, 
everything received the same tax treatment, it is possible that 
workers would end up saving less than they do currently. There 
is more in my written testimony but I would be happy to answer 
your questions in the questions and answers.
    [The prepared statement of Mr. Burman follows:]

 Statement of Leonard E. Burman, Co-Director of Tax Policy Center and 
                     Senior Fellow, Urban Institute

    Chairman Thomas, Ranking Member Rangel, and distinguished members 
of the Committee. Thank you for inviting me to testify on the 
principles that should guide efforts to reform the tax system.
    I applaud the committee on taking on this crucially important 
subject. I came to Washington 20 years ago to work for the Treasury 
Department on what became the Tax Reform Act of 1986. Although far from 
perfect, that reform was guided from the start by the bedrock tax 
policy principles of fairness, simplicity, and economic efficiency. 
Although some parts of the final bill were simple and some weren't, it 
clearly made the tax system fairer and more efficient. I would be 
delighted if we could repeat the trick again today, while also making 
the tax system simpler.
    Although I think people exaggerate when they claim that the 1986 
Tax Reform has been fully undone in the intervening two decades, the 
tax code is once again in need of reform. It is needlessly complex. It 
is riddled with loopholes. It imposes vastly different tax burdens on 
people with similar abilities to pay. And it does not raise enough 
revenue to finance current government operations, much less the growing 
costs of the retirement of the baby boom generation.
    In my testimony, I will focus on how the income tax system affects 
low- and middle-income taxpayers and the potential effects of tax 
reform on those populations. I have six main conclusions:

      First, despite its flaws and some recent erosion, the 
income tax is highly progressive. In other words, low- and middle-
income families bear much smaller proportional tax burdens than those 
with high incomes. This mitigates the effects of other regressive 
taxes, such as federal payroll and excise taxes and state and local 
sales taxes.
      Second, the income tax code is an important source of 
income support for low-income households.
      Third, tax reform could help low- and middle-income 
households by reducing their tax burdens further--both by lowering 
their rates and by simplifying and consolidating tax benefits to which 
they are entitled.
      Fourth, some so-called fundamental tax reform proposals 
could shift the tax burden away from those most able to pay to those 
least able.
      Fifth, the claimed economic gains from such proposals are 
speculative at best, based solely on theoretical models that have 
little relationship to economic reality.
      And, last, systemic tax reform presents the ideal 
opportunity to bring our fiscal system back into balance. If it closed 
loopholes under the income tax and used the revenues to reduce the 
budget deficit, such reform would spur economic growth by making the 
tax system more neutral, increasing national savings, and lightening 
tax burdens on future generations.
I. Current Situation
    The President's executive order establishing the Advisory Panel on 
Tax Reform called for revenue-neutral tax reform that would advance 
these objectives: ``(a) simplify Federal tax laws . . . (b) share the 
burdens and benefits of the Federal tax structure in an appropriately 
progressive manner . . . and (c) promote long-run economic growth.'' 
Although I think revenue neutrality is a misplaced priority given our 
current fiscal situation, the President's objectives stand on the 
bedrock principles of public finance--simplicity, fairness, and 
economic efficiency.
    Let's first consider the President's all-important desire to share 
the burden progressively and look at how the current Federal tax code 
affects low- and middle-income Americans. Its glaring flaws 
notwithstanding, the current income tax does have many strengths. To 
start, it is highly progressive. In 2005, the Tax Policy Center 
estimates that 87 percent of the individual income tax will be paid by 
the highest-income 20 percent of households ranked in terms of cash 
income. (Table 1.) Almost 61 percent will be paid by the top 5 percent. 
By comparison, the bottom 40 percent of households receives more in 
refundable tax credits than they pay in taxes on average. Collectively, 
the bottom fifth receives net tax credits worth 5.5 percent of income; 
the top 1 percent pays taxes averaging 20.1 percent of income.
    Although the estate tax and the corporate income tax are also quite 
progressive, federal payroll taxes are regressive, consuming a much 
larger share of income for low- and middle-income households than for 
those at the top.\1\ And here's the rub: since payroll taxes are the 
second largest share of revenue after the individual income tax, and 
much larger than the other federal taxes, the overall tax system is 
less progressive than the income tax. Including state and local taxes--
which rely much more heavily on regressive sales taxes--some analysts 
conclude that the overall tax system is not progressive at all.\2\
---------------------------------------------------------------------------
    \1\ The progressivity of the estate tax is understated somewhat in 
the table because it is distributed in terms of cash income. Some 
people who are quite wealthy can have very modest cash incomes--for 
example, because most of their income is in the form of unrealized 
capital gains. If households are ranked in terms of economic income 
(including the imputed income generated by unrealized assets), then 98 
percent of the estate tax falls on the highest-income 5 percent of 
households.
    \2\ See McIntyre, Bob. 2004. ``Overall Tax Rates Have Flattened 
Sharply Under Bush: Total Federal, State & Local Rate on Richest Now 
Only Slightly Higher than on Middle Ranges,'' Citizens for Tax Justice, 
April 12. Available at http://www.ctj.org/pdf/fsl2004.pdf.
---------------------------------------------------------------------------
    Recent federal tax changes have provided important benefits to 
lower-income households. The Economic Growth and Taxpayer Relief Act of 
2001 (EGTRRA) increased the child tax credit (CTC) and made it 
partially refundable, expanded the earned income tax credit (EITC), 
increased the standard deduction for married couples, and created a new 
10-percent tax bracket.\3\ Legislation enacted in 2003 and 2004 sped up 
the effective date for some of these provisions. Nonetheless, by 
cutting top individual income tax rates, phasing out the estate tax, 
cutting the corporate income tax, and expanding opportunities for tax-
free saving, the 2001-2004 tax cuts on balance made the tax system less 
progressive. Measured as a share of income, the top tenth of one 
percent of taxpayers--that's one in one thousand--got tax cuts 18 times 
as large as the bottom fifth got. (Table 2.)
---------------------------------------------------------------------------
    \3\ See Leonard E. Burman, Elaine Maag, and Jeff Rohaly, 2002, 
``The Effect of the 2001 Tax Cut on Low- and Middle-Income Families and 
Children,'' available at: http://www.taxpolicycenter.org/publications/
template.cfm?PubID=410465.
---------------------------------------------------------------------------
    Table 2 also shows that households in every income class benefited 
from the tax cuts, but that view is misleading. Since none of the tax 
cuts were offset by tax increases or spending cuts elsewhere, it is 
impossible to say who the winners and losers are. If the resulting 
budget deficits lead to cuts in programs mostly benefiting middle- and 
lower-income households, then they and their children will be the big 
losers. If burgeoning debt starves businesses of capital, tomorrow's 
families may bear the brunt. If instead middle-class benefits are 
politically too popular to curtail and Congress can't or won't cut 
spending, then high-income people may end up worse off than they would 
have been without the tax cuts.
    The bottom line is that it is impossible to assess the winners and 
losers from tax changes that are not revenue neutral: we cannot gauge 
the effects of the 2001 to 2004 tax cuts until we see how Congress 
ultimately finances them.\4\
---------------------------------------------------------------------------
    \4\ See William G. Gale, Peter Orszag, and Isaac Shapiro, 2004, 
``Distribution of the 2001 and 2003 Tax Cuts and Their Financing,'' Tax 
Notes, June 21, pp. 1539-1548.
---------------------------------------------------------------------------
A. How the income tax affects low- and middle-income households
    The tax system is a mixed bag for low- and middle-income 
households. On the one hand, it is overly complex. Tax filers must fill 
out numerous worksheets and forms to claim tax credits for working, 
children, child care, education, and many other activities. On the 
other hand, these programs provide significant income support for 
households that are struggling to meet essential needs. A better tax 
system would not make families jump through so many hoops to get this 
support, but tax reform that just swept all of these subsidies away to 
help broaden the tax base would eviscerate income support for low- and 
middle-income households.

1. Refundable tax credits for low-income families
    Low-income families rely particularly heavily on the income tax 
system. Although they do not benefit from traditional deductions and 
credits because most do not owe income tax, they do benefit from 
refundable tax credits, which are available even if a tax filer does 
not owe income tax.
    In fact, the refundable EITC is the largest source of cash 
assistance for low-income families--bigger in the aggregate than 
temporary assistance for needy families (TANF) or food stamps. EGTRRA 
also substantially increased the refundable child tax credit in 2001. 
In 2005, families could claim a refundable child tax credit up to 15 
percent of earnings over $10,800.\5\
---------------------------------------------------------------------------
    \5\ The threshold is indexed for inflation.
---------------------------------------------------------------------------
    Both of these credits encourage work and help families with 
children meet basic needs. Since the EITC and CTC phase in with 
earnings, they encourage labor force participation among low-income 
single parents. The phase-out of the EITC can discourage a spouse from 
working, but since most EITC recipients are single heads of household 
this isn't a major concern.\6\ Research suggests that, on balance, the 
EITC encourages work among recipient households.\7\
---------------------------------------------------------------------------
    \6\ See Nada Eissa and Hilary W. Hoynes, 2004, ``Taxes and the 
Labor Market Participation of Married Couples: The Earned Income Tax 
Credit,'' Journal of Public Economics, Vol. 88, pp. 1931-1958.
    \7\ See Nada Eissa and J. Liebman, 1996, ``Labor Supply Responses 
to the Earned Income Tax Credit,'' Quarterly Journal of Economics, Vol. 
111, pp. 605-637; and B. Meyer and D. Rosenbaum, 2001, ``Welfare, the 
Earned Income Tax Credit, and the Labor Supply of Single Mothers,'' 
Quarterly Journal of Economics, Vol. 116, pp. 1063-1114.
---------------------------------------------------------------------------
    These two refundable tax credits now represent a very large portion 
of income for low-income households with children. The typical 
household with one eligible child and income between $10,000 and 
$15,000 receives tax credits worth $2,523, or 22.9 percent of income, 
in 2005. (Table 3.) A household with two children and the same income 
receives $3,764, or 34.5 percent of income, in refundable child tax 
credits and EITC. For the average household with three or more 
children, the credits are worth almost $4,000, or 36 percent of income. 
Families with incomes between $15,000 and $20,000 receive even larger 
tax benefits, though they amount to a smaller share of income. Even at 
incomes of $25,000 to $30,000, the EITC and CTC boost income by more 
than 15 percent for families with two or more children.\8\
---------------------------------------------------------------------------
    \8\ Very low-income households without children qualify for a small 
EITC, but not the CTC. It is worth an average of $229 for recipient 
households; only 3 percent of childless households qualify.
---------------------------------------------------------------------------
    A very large percentage of households with children receive these 
benefits. Almost 74 percent of one-child households and 83 percent or 
more of households with two or more children benefit from the CTC or 
the EITC or both. Participation is lower for very low-income households 
because more of them do not have earnings, and for higher income 
households because more of them have incomes above the phase-out 
thresholds for the credits. But, among eligible households, 
participation is very high.\9\
---------------------------------------------------------------------------
    \9\ See Leonard E. Burman and Deborah Kobes, 2003, ``EITC Reaches 
More Eligible Families Than TANF, Food Stamps,'' Tax Notes, March 17, 
p. 1769.
---------------------------------------------------------------------------
    The great value of these credits also poses a risk for tax reform. 
Any tax reform that eliminated or reduced these credits would devastate 
low-income households, unless new spending programs were created to 
provide cash assistance. In fact, although many tax incentives are 
probably less effective than comparable spending programs, the EITC and 
CTC have a lot to recommend them. Despite being overly complex, the 
EITC is a very efficient way to provide cash support for low-income 
households.\10\ Most recipients of the tax credits would be filing 
returns anyway to get refunds of withheld income taxes, and much of the 
information about income eligibility is already reported on tax 
returns. The refundable credits also avoid the stigma associated with 
traditional welfare programs. And, despite the complexity, filing a tax 
return is often easier for low-income working families than waiting in 
line at a welfare office during working hours.\11\
---------------------------------------------------------------------------
    \10\ Most EITC recipients use paid preparers to file their tax 
returns. See Elaine Maag, 2004, ``Tax Preparation for Low-Income 
Households, Knowledge of the EITC,'' Tax Notes, August 2, p. 555. This 
is in part a function of the complexity of the EITC relative to the 
functional capacity of some recipients and partly due to the popularity 
of refund anticipation loans offered by some tax return preparers.
    \11\ Janet Holtzblatt and Janet McCubbin, 2004, ``Issues Affecting 
Low-Income Filers,'' in Henry J. Aaron and Joel Slemrod, eds., The 
Crisis in Tax Administration (Washington, DC: The Brookings Institution 
Press): 148-188.
---------------------------------------------------------------------------
2. Tax subsidies for middle-income families
    Middle-income families benefit from an ever-growing panoply of 
social programs that have been injected into the tax code. Among them 
are credits for childcare expenses, credits and deductions for 
education, a tax credit for adoption expenses, and itemized deductions 
for mortgage interest, charitable contributions, state and local 
income, sales, and property taxes, and exclusions from income for such 
employer-provided fringe benefits as pensions and health insurance. The 
nonrefundable tax credits are often of limited value to lower-middle-
income taxpayers because they have limited tax liability, and the 
deductions and exclusions are worth the most to those with the highest 
incomes. The value of a deduction is equal to the deduction amount 
multiplied by the marginal tax rate for those who itemize deductions. 
Since higher income households tend to have more and larger deductions 
and also the highest marginal tax rates, they get the largest benefits 
from deductions and exclusions.
    The consequences of this hodge-podge of targeted tax benefits are 
complexity and inequity. Households with similar ability to pay tax can 
end up owing much different amounts, depending on how many hoops they 
jump through to qualify for credits and deductions. Table 4 shows that 
there can be considerable variation in average tax rates for similar 
families with comparable incomes. The variation arises from differences 
in use of credits and deductions and whether households are eligible 
for benefits (for example, based on the age of children). A homeowner 
in a high-tax state can pay much less tax than a renter in a low-tax 
state, for example. Variations among lower-income families with 
children can be enormous, depending on whether they qualify for the 
EITC and CTC.
    Table 5 shows that there is even more variation in effective 
marginal tax rates--that is, the amount of additional tax paid on a 
dollar of additional income.\12\ The negative tax rates for lower-
income families and individuals arise from the phase-in of eligibility 
for the EITC and CTC. The positive tax rates arise from the statutory 
tax brackets, the phase-out of eligibility for benefits, and the 
individual alternative minimum tax, which raises effective marginal tax 
rates for most taxpayers who must pay it.\13\
---------------------------------------------------------------------------
    \12\ For a discussion, see Leonard E. Burman and Mohammed Adeel 
Saleem, 2004, ``Income Tax Statistics for Sample Taxpayers, 2003,'' Tax 
Notes, January 19, pp. 413-418. The Table shows the marginal tax rate 
on earnings. Marginal tax rates on other forms of income would often be 
different. Marginal tax rates are calculated by increasing income by a 
small amount and calculating the increment in tax liabilities after 
credits per dollar of additional income. The marginal increase in 
income is the maximum of $100 and the minimum of one percent of AGI and 
$1,000. This is done to smooth out some kinks in explicit and implicit 
tax rate schedules. The effective marginal tax rates might not add up 
exactly because of rounding or because the formulae for them are not 
exactly continuous.
    \13\ See Leonard E. Burman, 2005, ``The Expanding Reach of the 
Individual Alternative Minimum Tax: Testimony submitted to the United 
States Senate Subcommittee on Taxation and IRS Oversight of the 
Committee on Finance,'' May 23, available at http://www.urban.org/
UploadedPDF/900812_Burman_052305.pdf.
---------------------------------------------------------------------------
    A major source of variation arises from the notion that every tax 
incentive must be progressive: the EITC, CTC, education tax incentives, 
and many other provisions phase out at certain income levels. A major 
reason why ever more taxpayers must pay the AMT is the phase-out of the 
exemption allowed to calculate taxable income for AMT purposes, which 
raises effective marginal tax rates by 25 percent. Although phase-outs 
reduce the revenue losses from each provision, they also add complexity 
and make it hard for some families to know in advance whether they will 
be eligible for a subsidy and. if so, how much. As noted, these phase-
outs create hidden tax surcharges that are tantamount to higher 
statutory tax rates.
    To return to the AMT for a moment, a special problem is that it 
will affect more and more middle-income households in coming years. By 
2010, almost all married taxpayers with incomes between $75,000 and 
$100,000 and with two or more children will be subject to this 
pointlessly complicated tax. Its effect, like that of the phase-outs, 
is to raise marginal tax rates on most families subject to the tax.
    The best thing that tax reform could do for low- and middle-income 
families would be to consolidate income-support programs and simplify 
eligibility. To the extent possible, the hidden taxes created by phase-
outs and the AMT should be replaced by explicit adjustments to the tax 
rate schedules or financed by closing loopholes. For example, the 
phase-out of the CTC at incomes over $110,000 adds 5 percentage points 
to marginal tax rates in that income range. A better and equally 
progressive option would be to eliminate the phase-out and raise 
statutory tax rates slightly starting at the same income level.

II. Effects of tax reform
    The consequence of moving so much economic support into the tax 
system is that ``tax reform'' could lead to a massive cut in income 
support for low- and middle-income families. Base broadening is 
equivalent to slashing cash transfers.
    Base broadening is a good idea, but policymakers would need to 
adjust refundable credits and tax rates to hold low- and middle-income 
households harmless, on average. Even then, there would be many winners 
and losers.\14\ Arguably, it might make sense to consolidate cash 
assistance programs in the tax code into a couple of refundable 
credits. For example, a 20-percent work tax credit for the first 
$10,000 of wages for each nondependent, non-student, adult worker, and 
a $1,500 per child fully refundable child tax credit would provide 
about the same amount of assistance to a single mother with two 
children and $20,000 of earnings as current law. If eligibility for the 
work credit was based solely on work (and not the presence of children) 
and all children were eligible for the child tax credit, then 
administration and compliance would be vastly simplified. All workers 
would be eligible for the work credit, whether or not they had 
children, and all households with children would be eligible for the 
child benefit, regardless of income.\15\
---------------------------------------------------------------------------
    \14\ That is an inevitable consequence of revenue-neutral tax 
reform so not necessarily an impediment.
    \15\ Jonathan Barry Forman, Adam Carasso, and Mohammed Adeel 
Saleem, forthcoming, ``Designing a Work-Friendly Tax System: Options 
and Trade-offs,'' Tax Policy Center Discussion Paper Number 20.
---------------------------------------------------------------------------
    To make that work, tax rates would have to be adjusted to raise the 
same amount of revenue (effectively ``taking back'' the credits from 
higher income households).
    But barring such an offset, even fundamental income tax reform 
could end up hurting the most vulnerable members of society.

1. Consumption taxes
    Many tax-reform proposals would shift away from a tax based on 
income to a tax based on consumption. Such proposals include the value 
added tax; the flat tax, which is effectively a subtraction-method VAT 
in which the wage portion of the tax is collected from workers rather 
than firms and which is somewhat progressive since it exempts some 
portion of wages; a national retail sales tax, which is collected 
entirely at the retail stage; and a consumed income tax, which is a 
progressive variant on the consumption tax.
    Although these proposals are often motivated by concerns about 
complexity and efficiency, they would almost inevitably shift tax 
burdens onto middle- and/or lower-income groups. Consumption is a much 
larger share of income for lower- and middle-income households than for 
those with high incomes. Data from the Consumer Expenditure Survey 
suggest that families earning less than $30,000 (in 2003 dollars) spend 
virtually all of their income while those with incomes exceeding 
$200,000 spend less than 40 percent.\16\ (Table 6.) This pattern is 
most pronounced for necessities, such as food, housing, and clothing. 
Families earning $10,000 to $20,000 spend three-quarters of their 
incomes on those items, compared with one-sixth of income for those 
earning more than $200,000.
---------------------------------------------------------------------------
    \16\ Many researchers have commented on the implausible ratio of 
consumption to income for those with very low incomes. Income is 
probably underreported, especially for low-income households, which is 
a special risk because the focus of the survey is consumption rather 
than income. It also excludes gifts from friends and relatives.
---------------------------------------------------------------------------
    Proposals for consumption taxes often include measures to reduce 
their regressivity, such as demogrants--cash transfers to offset the 
tax due on a basic level of consumption--for low-income households, tax 
exemptions for some necessities, or even progressive rates. All of 
those options raise issues, but most salient is that effective 
consumption tax rates for high-income households would have to be very 
large to be as progressive as the current tax system. Compared with a 
comprehensive income tax, a consumption tax would exclude two-thirds of 
income from the tax base for the highest-income households. Thus, a 
consumption tax rate would have to be three times as large as an income 
tax rate to keep the same tax burden on high-income households.\17\ 
Otherwise, the tax burden would inevitably shift onto at least some 
lower- and middle-income households.
---------------------------------------------------------------------------
    \17\ In fact, our tax system is far from a comprehensive income 
tax, so conceivably a shift to a comprehensive consumption tax could be 
accomplished with much more modest rates, but that assumes that the 
political pressures for exemptions such as for fringe benefits, 
mortgage interest, charitable contributions, and so on, could be 
avoided under a consumption tax. It is worth noting, in that context, 
that the President has insisted that any tax reform retain incentives 
for homeownership and charitable contributions.
---------------------------------------------------------------------------
    Another way to look at a consumption tax is as an income tax with 
an unlimited exemption for capital income and no deduction for 
interest.\18\ In other words, the tax base would be wages rather than 
income. Wages, like consumption, decline as a share of income as income 
increases. (Table 7.) Wages and salaries make up 28 percent of income 
for households with incomes over $1 million in 2005, compared with 68 
percent for households with incomes between $75,000 and $100,000. Among 
households headed by someone under age 65, almost 80 percent of income 
is wages for those with incomes between $30,000 and $75,000, compared 
with 32 percent for those with incomes over $1 million. Under a wage 
tax, more than two-thirds of income of the highest-income households 
would be exempt. In other words, they would either face very high tax 
rates or end up paying less tax than under an income tax.
---------------------------------------------------------------------------
    \18\ Although this equivalence holds in the long run under certain 
circumstances, there are significant differences in the two tax bases 
in the short run. A new consumption tax would increase the price of all 
consumer goods or reduce the real value of old capital, placing a large 
burden on older people. A new wage tax would effectively exempt all 
capital income from tax, effectively granting a large windfall on older 
people who are living off of their accumulated savings.
---------------------------------------------------------------------------
    In principle, it is possible to design a progressive ``consumed 
income'' tax that would maintain the same distribution as current law 
(on average). But the Treasury Department, after examining such 
proposals, concluded that they would be much more complex than current 
law and basically unworkable.\19\ The implication is that a real-world 
consumption tax would inevitably shift the tax burden away from those 
with the highest incomes to those with more modest incomes. Although 
some proposals would protect the poor through a demogrant that would 
simply squeeze middle-class households even more.
---------------------------------------------------------------------------
    \19\ See Eric Toder, 1995, ``Statement of Eric Toder, Deputy 
Assistant Secretary (Tax Analysis), Department of the Treasury, Before 
the Senate Budget Committee,'' February 22.
---------------------------------------------------------------------------
    Despite concerns about equity, a consumption tax might still be 
worthwhile if there were huge economic benefits. But there aren't 
likely to be. Most of the claimed benefits of switching to a 
consumption tax come from base broadening and the large tax imposed on 
existing capital during the transition to the new tax.\20\ Base 
broadening--that is, eliminating all credits and deductions--is 
probably no more politically feasible under a consumption tax than 
under an income tax. In fact, in his executive order establishing to 
the Advisory Panel on Federal Tax Reform, the President insisted that 
incentives be maintained for homeownership and charitable 
contributions. Most likely, these two tax breaks are simply the tip of 
the iceberg.
---------------------------------------------------------------------------
    \20\ See David Altig, Alan J. Auerbach, Laurence J. Kotlikoff, Kent 
A. Smetters, and Jan Walliser, 2001, ``Simulating Fundamental Tax 
Reform in the United States,'' American Economic Review, Vol. 91, pp. 
574-595; and Don Fullerton and Diane Lim Rogers, 1993, Who Bears the 
Lifetime Tax Burden? (Washington, DC: Brookings Institution Press).
---------------------------------------------------------------------------
    As for the transition, switching from an income to a consumption 
tax would effectively devalue all existing capital. For example, if the 
income tax were replaced with a VAT or a national retail sales tax, the 
prices of all taxed goods and services would immediately rise by the 
amount of the VAT. The Federal Reserve Board could tighten the money 
supply to prevent this price increase, but the resultant increase in 
interest rates would reduce the value of existing capital. In either 
case, old people would find that their savings could buy much less than 
they did the day before the new tax regime was announced. Although such 
a lump-sum tax is doubtless efficient--effectively, the government is 
raising revenue by confiscating a portion of outstanding wealth--it is 
unlikely to be politically feasible.
    But if the government provided transition relief (for example, by 
continuing to allow companies to take depreciation deductions on old 
capital), tax rates would have to be much higher to make up the lost 
revenue. Old people would come out ahead, since their capital assets 
are worth the same amount as before and all future income from those 
assets is tax-free. But most other groups end up worse off because the 
higher taxes more than offset gains from a more efficient tax base.\21\
---------------------------------------------------------------------------
    \21\ See Altig, et al., 2001.
---------------------------------------------------------------------------
    In fact, it is not a given that a consumption tax would raise 
economic efficiency more than a similarly comprehensive income tax 
would. Exempting capital income from tax would eliminate the tax 
penalty on saving, but raise the burden on labor. The reason is simple: 
if the return to saving is exempted from the tax base, then taxes have 
to increase on what is left, which is wages and salaries. If labor 
supply is very sensitive to taxation, and saving is not sensitive, then 
a consumption tax could harm the economy in the long run (and in the 
short run too if there is transition relief).\22\ In fact, the economic 
evidence seems to suggest that both labor supply and saving are 
relatively insensitive to taxes, so any efficiency gains are likely to 
be modest.
---------------------------------------------------------------------------
    \22\ See William C. Randolph and Diane Lim Rogers, 1995, ``The 
Implications for Tax Policy of Uncertainty About Labor-Supply and 
Savings Responses,'' National Tax Journal, Vol. 48, pp. 429-446.
---------------------------------------------------------------------------
    The models discussed so far are largely based on empirical evidence 
about responsiveness of savings and labor supply to taxation, but there 
is another line of argument that relies almost entirely on theory to 
argue that taxing capital would never be optimal. The relatively simple 
version of this theory was advanced by Peter Diamond and James 
Mirrlees.\23\ They showed that if there are no restrictions on 
commodity taxes and if economic profits either do not exist or can be 
taxed away, then it would never be optimal to tax capital or other 
inputs to the production process. But, as, Joel Slemrod points out, 
that the underlying assumptions behind this oft-cited economic result 
are extreme.\24\ Tax authorities cannot measure economic profits (that 
is, those profits over and above the ``normal'' or required return to 
capital) and, even if they could, it would be politically problematic 
to apply a 100-percent tax to them.
---------------------------------------------------------------------------
    \23\ See P.A. Diamond and J.A. Mirrlees, 1971, ``Optimal Taxation 
and Public Production I: Production Efficiency,'' American Economic 
Review, Vol. 61, pp. 8-27.
    \24\ See Joel Slemrod, 1990, ``Optimal Taxation and Optimal Tax 
Systems,'' Journal of Economic Perspectives, Vol. 4, pp. 157-178.
---------------------------------------------------------------------------
     Similarly, there are many constraints on commodity taxes. For 
starters, it would be virtually impossible to tax household production 
(e.g., caring for children, cooking, house cleaning, home repairs, 
gardening, etc.)--a requirement for production efficiency in the 
Diamond-Mirrlees set up. Policymakers might also blanch at the notion 
of assessing high taxes on necessities, such as insulin, even though 
such taxes are highly efficient since people's demand for life-saving 
drugs is quite insensitive to price.
    A more recent line of argument has been advanced in separate papers 
by Christopher Chamley and Kenneth Judd.\25\ Although mathematically 
elegant, these models rest on even less realistic assumptions about 
policy than the Diamond-Mirrlees model. In these models, individuals 
live forever and have perfect foresight. Exempting capital income from 
tax in the long run is economically efficient, but only after the 
government has levied the maximum feasible tax on capital long enough 
to endow the government with a huge surplus, from which it can finance 
all future government operations without taxing capital or labor! If 
people do not live forever or have unlimited ability to borrow, capital 
owners might strongly object to that transition path. And I would bet 
that there would not be many votes in Congress for establishing the 
government endowment fund, much less any feasible mechanism for 
preventing government from tapping into principal to pay for increased 
cash transfers or more spending. (Consider the Social Security trust 
fund as a less ambitious experiment on the feasibility of financing 
future operations with government endowments.)
---------------------------------------------------------------------------
    \25\ See Christophe Chamley,1986, ``Optimal Taxation of Capital 
Income in General Equilibrium with Infinite Lives,'' Econometrica, Vol. 
54, No. 3, pp. 607-622; and Kenneth L. Judd,1985, ``Redistributive 
Taxation in a Simple Perfect Foresight Model,'' Journal of Public 
Economics, Vol. 28, pp. 59-83.
---------------------------------------------------------------------------
    Moreover, these models ignore human capital--that is, investments 
people make in themselves to build skills that will pay future returns 
through higher wages. Larry Jones, Rodolfo Manuelli, and Peter Rossi 
showed that if it is optimal to exempt the returns on physical capital, 
then it is also optimal to exempt the returns on human capital.\26\ 
Indeed, the logical extension of the Judd-Chamley models is that wages 
should also be exempt from tax. So in this economic utopia, nothing 
would be taxed!! But, if Congress cannot build a huge endowment, this 
model provides no practical guide to public policy.
---------------------------------------------------------------------------
    \26\ See Larry E. Jones, Rodolfo Manuelli, and Peter Rossi, 1997, 
``On the Optimal Taxation of Capital Income,'' Journal of Economic 
Theory, Vol. 73, pp. 93-117.
---------------------------------------------------------------------------
    Incredibly, a follow-up paper by Judd argued that in general the 
optimal tax rate on capital should be negative. In short, not only 
should capital not be taxed, but tax incentives for investment are 
warranted. To derive that result, the paper resurrected the heroic 
assumptions of the Diamond-Mirrlees model.\27\
---------------------------------------------------------------------------
    \27\ See Kenneth L. Judd, 1997, ``The Optimal Tax Rate for Capital 
Income is Negative,'' NBER Working Paper No. 6004.
---------------------------------------------------------------------------
    Utopian models aside, there are other concerns about consumption 
taxes. If capital is exempt from tax, high-income people will seek out 
tax shelters to make wages look like capital (as they already do with 
capital gains). Self-employed people and small businesses will have an 
incentive to incorporate, pay the owner a low wage, and accumulate 
large untaxed profits. Some entrepreneurs already do this to avoid the 
payroll tax.
    Not every theoretical argument favors consumption taxation. 
Shinichi Nishiyama and Kent Smetters argue that a progressive income 
tax is equivalent to a kind of insurance that is not available in the 
marketplace; it basically smooths after-tax income.\28\ As income 
varies over time, taxpayers pay lower taxes (as a share of income) in 
bad years than they do in good. The progressive income tax could be 
viewed as a flat-rate income tax bundled with an insurance policy that 
pays off when income falls, offsetting part of the income tax burden. 
For risk-averse taxpayers, this can be quite valuable.
---------------------------------------------------------------------------
    \28\ Shinichi Nishiyama and Kent Smetters, Forthcoming, 
``Consumption Taxes and Economic Efficiency with Idiosyncratic Wage 
Shocks,'' Journal of Political Economy.
---------------------------------------------------------------------------
    Perhaps most surprising, in the real world shifting from an income 
to a consumption tax would not necessarily increase saving, at least 
not for middle-income families. Currently, middle-income families save 
mainly by contributing to pensions and 401(k)-type plans. Employees 
have an incentive to participate because they avoid income tax on 
contributions. Nondiscrimination rules give employers an incentive to 
induce lower-income workers to participate. But, under a consumption 
tax, all saving is exempt from tax so there is nothing special about 
pensions. Without the inducement of a subsidy, many workers would 
choose to keep all of their savings in less restrictive accounts. But 
behavioral economics (the study of how real people, rather than homo 
economicus, behave) suggests that without the restrictions that apply 
to pension plans people would be much less likely to contribute without 
the inducements offered by employers and tax savings and more likely to 
withdraw balances before retirement.
    There are also some connections between income taxes and other 
programs that help low-income families. Many tax and expenditures 
programs for low-income people (e.g., food stamps and EITC) phase out 
as income rises. But it does not make sense to phase them out based on 
consumption or wages only. Would we want to preserve an income tax only 
for low-income families?
    Finally, a federal switch to a consumption tax would undermine 
state governments' ability to raise revenue. States rely much more on 
consumption taxes (mostly retail sales taxes) than the Federal 
Government does. But if the Federal Government imposed its own retail 
sales tax, the combined federal and state rates could be quite 
high.\29\ In consequence, compliance with state sales taxes would fall 
sharply. But at the same time, if the Federal Government is no longer 
collecting income taxes, it would be very hard for the states to 
maintain their own income tax systems. Further, many of the claimed 
benefits of simplifying the consumption tax would be lost if states 
continued to collect income tax. As a result, states would likely have 
to sharply curtail services, which could further harm low- and middle-
income households.
---------------------------------------------------------------------------
    \29\ See William G. Gale, 2005, ``The National Retail Sales Tax: 
What Would the Rate Have to Be?'', Tax Notes, May 16, pp. 889-911.
---------------------------------------------------------------------------
III. Conclusion
    Tax reform would be a singular accomplishment if it made the tax 
system simpler, fairer, and more conducive to economic growth. Good 
starting points would be fixing the income tax to reduce incentives for 
inefficient tax sheltering, eliminating or retargeting the individual 
alternative minimum tax, consolidating income--support programs for 
low- and middle-income taxpayers, and eliminating complicated 
eligibility rules and phase-out provisions, adjusting tax rates to 
raise the desired level of revenue.\30\
---------------------------------------------------------------------------
    \30\ More specific proposals to simplify the tax system are in 
Leonard E. Burman and William G. Gale, 2001, ``A Golden Opportunity to 
Simplify the Tax System,'' available at: http://taxpolicycenter.org/
publications/template.cfm?PubID=7599.
---------------------------------------------------------------------------
    But tax reform poses risks for vulnerable populations that have 
come to rely on the tax system for substantial income support. 
Broadening the base by eliminating refundable tax credits, for example, 
would devastate low-income families. Switching the base of the tax 
system from income to consumption would shift the tax burden away from 
those most able to pay onto those who are less able. Meanwhile, the 
claimed economic benefits from such a radical shift reflect 
questionable unproven assumptions.
    Rather than radical tax reform, a surer path to economic growth is 
to reduce the deficit, which would increase national savings directly 
(by reducing public dissaving). Tax reform would be an ideal 
opportunity to address the deficit. Even revenue--neutral tax reform 
spells tax increases on many Americans. The losers from tax reform may 
be more willing to shoulder the greater burden if they knew that their 
children would pay lower taxes and enjoy a healthier economy as a 
result. And the best way to reduce the deficit would be to close the 
loopholes that allow businesses and high-income individuals to avoid 
their fair share of tax.

                                 Table 1. Current-Law Distribution of Federal Taxes by Cash Income Percentiles, 2005 \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                      Share of Total                                                         Average Effective Tax Rate
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                  All
  Cash Income      Cash      Individual     Payroll     Corporate     Estate       All       Individual     Payroll     Corporate     Estate    Federal
   Class \2\      Income     Income Tax     Tax \4\    Income Tax      Tax       Federal     Income Tax       Tax      Income Tax      Tax       Income
                                \3\                                              Tax \5\                                                          Tax
--------------------------------------------------------------------------------------------------------------------------------------------------------
            Lowest 2.4         -1.4          2.2          1.1          0.2        0.4          -5.5          7.5          1.2          0.0        3.2
     Quintile
--------------------------------------------------------------------------------------------------------------------------------------------------------
      Second       6.3         -1.9          6.9          2.7          0.4        2.2          -3.0          9.1          1.1          0.0        7.2
     Quintile
--------------------------------------------------------------------------------------------------------------------------------------------------------
      Middle      11.4          3.1         14.6          4.1          1.6        7.8           2.6         10.6          0.9          0.0       14.2
     Quintile
--------------------------------------------------------------------------------------------------------------------------------------------------------
      Fourth      19.7         13.2         25.5          8.9          0.9       17.5           6.5         10.8          1.1          0.0       18.4
     Quintile
--------------------------------------------------------------------------------------------------------------------------------------------------------
Top Quintile      60.5         87.0         50.7         82.3         93.6       72.0          14.0          7.0          3.4          0.4       24.7
--------------------------------------------------------------------------------------------------------------------------------------------------------
         All     100.0        100.0        100.0        100.0        100.0      100.0           9.7          8.3          2.5          0.2       20.7
--------------------------------------------------------------------------------------------------------------------------------------------------------
    Addendum
--------------------------------------------------------------------------------------------------------------------------------------------------------
Top 10 Percent    44.9         73.2         30.5         74.4         89.5       56.5          15.9          5.6          4.1          0.5       26.1
--------------------------------------------------------------------------------------------------------------------------------------------------------
Top 5 Percent     33.7         60.8         17.1         67.2         83.8       44.4          17.6          4.2          4.9          0.6       27.3
--------------------------------------------------------------------------------------------------------------------------------------------------------
Top 1 Percent     18.6         38.3          4.6         50.8         58.0       26.6          20.1          2.0          6.8          0.7       29.6
--------------------------------------------------------------------------------------------------------------------------------------------------------
     Top 0.5      14.7         30.8          2.8         44.5         49.1       21.5          20.5          1.6          7.5          0.8       30.4
      Percent
--------------------------------------------------------------------------------------------------------------------------------------------------------
     Top 0.1       8.5         18.0          1.0         32.0         28.8       13.0          20.7          1.0          9.3          0.8       31.9
      Percent
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Urban-Brookings Tax Policy Center Microsimulation Model (version 0305-1), Table T05-0700, http://www.taxpolicycenter.org/TaxModel/tmdb/Content/
  Excel/T05-0070.xls.
(1) Calendar year.
(2) Tax units with negative cash income are excluded from the lowest quintile but are included in the totals. Includes both filing and non-filing units.
  Tax units that are dependents of other taxpayers are excluded from the analysis. For a description of cash income, see http://www.taxpolicycenter.org/
  TaxModel/income.cfm
(3) After tax credits (including refundable portion of earned income and child tax credits).
(4) Includes both the employee and employer portion of Social Security and Medicare tax.
(5) Excludes customs duties and excise taxes.


Table 2. Effect of 2001-2004 Tax Cuts on Effective Federal Tax Rates, by
                     Cash Income Class, 2005 \1, 2\
              Effective Federal Tax Rates (in Percent) \3\
------------------------------------------------------------------------
  Cash Income Class     Pre-EGTRRA Law     Current Law        Change
------------------------------------------------------------------------
                Lowest Quinti3.5              3.2             -0.2
------------------------------------------------------------------------
 Second Quintile             9.1              7.2             -1.9
------------------------------------------------------------------------
 Middle Quintile            16.4             14.2             -2.2
------------------------------------------------------------------------
 Fourth Quintile            20.3             18.4             -1.9
------------------------------------------------------------------------
    Top Quintile            27.3             24.7             -2.6
------------------------------------------------------------------------
             All            23.1             20.7             -2.4
------------------------------------------------------------------------
        Addendum
------------------------------------------------------------------------
  Top 10 Percent            28.8             26.1             -2.7
------------------------------------------------------------------------
   Top 5 Percent            30.1             27.3             -2.7
------------------------------------------------------------------------
   Top 1 Percent            32.7             29.6             -3.1
------------------------------------------------------------------------
 Top 0.5 Percent            33.7             30.4             -3.3
------------------------------------------------------------------------
 Top 0.1 Percent            35.5             31.9             -3.6
------------------------------------------------------------------------
Source: Urban-Brookings Tax Policy Center Microsimulation Model (version
  0304-3), Tables T04-0113 and Table T04-0096.
\1\ Baseline is pre-EGTRRA law. Includes provisions in EGTRRA, JGTRRA,
  and WFTRA affecting the following: marginal tax rates; the 10-percent
  bracket; the child tax credit; the child and dependent care credit;
  the AMT; the standard deduction, 15-percent bracket, and EITC for
  married couples; tax rates on long-term capital gains and dividends;
  pension and IRA provisions; expansion of student loan interest
  deduction (excludes other education provisions); and estate tax
  exemption, rates, and state death tax credit.
\2\ Tax units with negative cash income are excluded from the lowest
  quintile but are included in the totals. For a description of cash
  income, see http://www.taxpolicycenter.org/TaxModel/income.cfm
\3\ Average federal tax (includes individual and corporate income tax,
  payroll taxes for Social Security and Medicare, and the estate tax) as
  a percentage of average cash income.


  [GRAPHIC] [TIFF OMITTED] T4645A.003
  


             Table 4. Variation in Average Tax Rates by Marital Status and Number of Children, 2005
----------------------------------------------------------------------------------------------------------------
                                                                                                 Percentile
                   Cash Income Class                      Tax Units      Mean     Standard ---------------------
                                                                                 Deviation     5th        95th
----------------------------------------------------------------------------------------------------------------
$15,000 to $20,000
----------------------------------------------------------------------------------------------------------------
Married Filing Jointly                                   2,368,415      -4.03       9.14     -27.93        0.0
----------------------------------------------------------------------------------------------------------------
Singles and HOH                                          8,502,452      -3.35      10.82     -27.04       5.90
----------------------------------------------------------------------------------------------------------------
MFJ 0 Children                                           1,867,464       0.03       0.41       0.00       0.00
----------------------------------------------------------------------------------------------------------------
MFJ 1 Child                                                210,763     -13.79       7.11     -19.99       0.00
----------------------------------------------------------------------------------------------------------------
MFJ 2+ Children                                            290,188     -23.02      10.41     -31.63       0.00
----------------------------------------------------------------------------------------------------------------
Singles and HOH 0 Children                               6,291,330       2.59       2.59       0.00       6.60
----------------------------------------------------------------------------------------------------------------
Singles and HOH 1 Child                                  1,212,148     -15.59       3.97     -19.96      -8.32
----------------------------------------------------------------------------------------------------------------
Singles and HOH 2+ Children                                998,974     -25.97       4.44     -31.54     -19.47
----------------------------------------------------------------------------------------------------------------
$50,000 to $55,000
----------------------------------------------------------------------------------------------------------------
Married Filing Jointly                                   1,630,697       3.29       3.25      -2.06       7.93
----------------------------------------------------------------------------------------------------------------
Singles and HOH                                          2,120,734       8.55       3.98       1.15      13.20
----------------------------------------------------------------------------------------------------------------
MFJ 0 Children                                             851,275       4.91       2.69       0.00       8.06
----------------------------------------------------------------------------------------------------------------
MFJ 1 Child                                                336,897       3.61       1.74       0.39       5.74
----------------------------------------------------------------------------------------------------------------
MFJ 2+ Children                                            442,525      -0.07       2.49       0.39       5.74
----------------------------------------------------------------------------------------------------------------
Singles and HOH 0 Children                               1,566,384      10.03       3.00       4.40      13.30
----------------------------------------------------------------------------------------------------------------
Singles and HOH 1 Child                                    375,533       5.87       2.24       2.55       8.98
----------------------------------------------------------------------------------------------------------------
Singles and HOH 2+ Children                                178,817       1.26       3.35      -6.75       6.11
----------------------------------------------------------------------------------------------------------------
$100,000 to $105,000
----------------------------------------------------------------------------------------------------------------
Married Filing Jointly                                     825,856       7.92       2.89       3.62      12.29
----------------------------------------------------------------------------------------------------------------
Singles and HOH                                            219,668      13.24       4.20       2.40      18.40
----------------------------------------------------------------------------------------------------------------
MFJ 0 Children                                             383,282       9.58       2.55       4.97      12.65
----------------------------------------------------------------------------------------------------------------
MFJ 1 Child                                                169,704       7.85       2.19       4.76      11.47
----------------------------------------------------------------------------------------------------------------
MFJ 2+ Children                                            272,870       5.62       1.98       2.12       8.96
----------------------------------------------------------------------------------------------------------------
Singles and HOH 0 Children                                 182,038      13.73       4.00       5.75      18.42
----------------------------------------------------------------------------------------------------------------
Singles and HOH 1 Child                                     28,181      10.91       4.49       2.40      15.37
----------------------------------------------------------------------------------------------------------------
Singles and HOH 2+ Children                                  9,449      10.69       3.88       1.28      15.73
----------------------------------------------------------------------------------------------------------------
Source: Urban-Brookings Tax Policy Center Microsimulation Model (version 0305-3a).
Notes: MFJ refers to married filing joint returns; HOH refers to returns filing as head of household


             Table 5. Variation in Marginal Tax Rates by Marital Status and Number of Children, 2005
----------------------------------------------------------------------------------------------------------------
                                                                                                 Percentile
                   Cash Income Class                      Tax Units      Mean     Standard ---------------------
                                                                                 Deviation     5th        95th
----------------------------------------------------------------------------------------------------------------
$15,000 to $20,000
----------------------------------------------------------------------------------------------------------------
Married Filing Jointly                                   2,368,415      -0.89       7.21     -14.95       7.61
----------------------------------------------------------------------------------------------------------------
Singles and HOH                                          8,502,452       7.72      15.97     -14.93      25.86
----------------------------------------------------------------------------------------------------------------
MFJ 0 Children                                           1,867,464       0.33       2.38       0.00       0.00
----------------------------------------------------------------------------------------------------------------
MFJ 1 Child                                                210,763      -2.66      12.52     -33.83      15.95
----------------------------------------------------------------------------------------------------------------
MFJ 2+ Children                                            290,188      -7.43      14.80     -40.00       6.05
----------------------------------------------------------------------------------------------------------------
Singles and HOH 0 Children                               6,291,330       9.16      15.33       0.00      17.39
----------------------------------------------------------------------------------------------------------------
Singles and HOH 1 Child                                  1,212,148       7.53      16.12     -14.99      25.96
----------------------------------------------------------------------------------------------------------------
Singles and HOH 2+ Children                                998,974      -1.12      16.81     -40.00      21.02
----------------------------------------------------------------------------------------------------------------
$50,000 to $55,000
----------------------------------------------------------------------------------------------------------------
Married Filing Jointly                                   1,630,697      15.59       9.31       0.00      24.98
----------------------------------------------------------------------------------------------------------------
Singles and HOH                                          2,120,734      21.79       7.31      14.97      30.95
----------------------------------------------------------------------------------------------------------------
MFJ 0 Children                                             851,275      16.30      11.52       0.00      27.72
----------------------------------------------------------------------------------------------------------------
MFJ 1 Child                                                336,897      15.39       3.35      14.79      22.25
----------------------------------------------------------------------------------------------------------------
MFJ 2+ Children                                            442,525      14.38       7.26      14.79      22.25
----------------------------------------------------------------------------------------------------------------
Singles and HOH 0 Children                               1,566,384      23.87       6.91      14.97      33.82
----------------------------------------------------------------------------------------------------------------
Singles and HOH 1 Child                                    375,533      16.16       4.22      14.97      27.21
----------------------------------------------------------------------------------------------------------------
Singles and HOH 2+ Children                                178,817      15.45       5.74       6.05      30.72
----------------------------------------------------------------------------------------------------------------
$100,000 to $105,000
----------------------------------------------------------------------------------------------------------------
Married Filing Jointly                                     825,856      22.24       5.69      14.98      28.19
----------------------------------------------------------------------------------------------------------------
Singles and HOH                                            219,668      25.78       6.50      24.97      30.58
----------------------------------------------------------------------------------------------------------------
MFJ 0 Children                                             383,282      23.28       5.39      14.99      26.40
----------------------------------------------------------------------------------------------------------------
MFJ 1 Child                                                169,704      22.66       5.69      14.99      32.63
----------------------------------------------------------------------------------------------------------------
MFJ 2+ Children                                            272,870      20.51       5.70      14.98      27.00
----------------------------------------------------------------------------------------------------------------
Singles and HOH 0 Children                                 182,038      25.96       4.99      24.98      29.75
----------------------------------------------------------------------------------------------------------------
Singles and HOH 1 Child                                     28,181      24.00      12.50      14.98      33.52
----------------------------------------------------------------------------------------------------------------
Singles and HOH 2+ Children                                  9,449      27.61       4.85      14.98      30.95
----------------------------------------------------------------------------------------------------------------
Source: Urban-Brookings Tax Policy Center Microsimulation Model (version 0305-3a).
Notes: MFJ refers to married filing joint returns; HOH refers to returns filing as head of household.


                             Table 6. Consumption as a Percentage of Income, by Type
----------------------------------------------------------------------------------------------------------------
                                                          All
                      Income                         Expenditures      Food     Housing    Clothing  Necessities
----------------------------------------------------------------------------------------------------------------
$1-10K                                                       254         52         81         10          143
----------------------------------------------------------------------------------------------------------------
10K-20K                                                      137         25         45          5           75
----------------------------------------------------------------------------------------------------------------
20K-30K                                                      104         18         31          4           54
----------------------------------------------------------------------------------------------------------------
30K-40K                                                       87         15         24          4           43
----------------------------------------------------------------------------------------------------------------
40K-50K                                                       75         13         21          4           37
----------------------------------------------------------------------------------------------------------------
50K-75K                                                       68         11         18          3           32
----------------------------------------------------------------------------------------------------------------
75K-200K                                                      56          8         15          3           26
----------------------------------------------------------------------------------------------------------------
Over $200K                                                    37          5          9          2           16
----------------------------------------------------------------------------------------------------------------
Source: Tax Policy Center calculations based on Consumer Expenditure Surveys from 1993:1 to 1998:2
Note: Income is composed of earned and unearned income, and government transfers.
All items in 2003 dollars.


               Table 7. Wages and Salaries as a Percent of Income, by Cash Income Class, 2005 \1\
----------------------------------------------------------------------------------------------------------------
                        All Tax Units                   65 and Over \4\                    Age Under 65
              --------------------------------------------------------------------------------------------------
 Cash Income       Tax Units \3\        Wages       Tax Units \3\        Wages       Tax Units \3\        Wages
    Class     -----------------------    and   -----------------------    and   -----------------------    and
(thousands of                         Salaries                         Salaries                         Salaries
2005 dollars)                           as a                             as a                             as a
     \2\          Number     Percent   Percent     Number     Percent   Percent     Number     Percent   Percent
               (thousands)  of Total     of     (thousands)  of Total     of     (thousands)  of Total     of
                                       Income                           Income                           Income
----------------------------------------------------------------------------------------------------------------
            Less 19,560       13.5      43.5       4,083       13.8       4.7                   13.5
----------------------------------------------------------------------------------------------------------------
       10-20     25,611       17.7      48.6       7,774       26.2       5.3      17,837       15.5      67.0
----------------------------------------------------------------------------------------------------------------
       20-30     19,953       13.8      61.5       4,450       15.0       6.7      15,503       13.5      76.9
----------------------------------------------------------------------------------------------------------------
       30-40     15,289       10.6      67.5       2,570        8.7       7.0      12,719       11.1      79.7
----------------------------------------------------------------------------------------------------------------
       40-50     11,738        8.1      67.8       2,043        6.9      11.3       9,696        8.4      79.6
----------------------------------------------------------------------------------------------------------------
       50-75     20,700       14.3      67.1       3,918       13.2      15.5      16,782       14.6      79.1
----------------------------------------------------------------------------------------------------------------
      75-100     11,936        8.3      68.0       1,969        6.6      16.9       9,967        8.7      78.1
----------------------------------------------------------------------------------------------------------------
     100-200     14,432       10.0      66.6       2,014        6.8      17.1      12,418       10.8      74.6
----------------------------------------------------------------------------------------------------------------
     200-500      3,797        2.6      53.0         664        2.2      14.1       3,133        2.7      61.4
----------------------------------------------------------------------------------------------------------------
   500-1,000        642        0.4      40.2         120        0.4      11.6         523        0.5      46.8
----------------------------------------------------------------------------------------------------------------
   More than        335        0.2      27.9          68        0.2      10.7         267        0.2      32.0
        1,000
----------------------------------------------------------------------------------------------------------------
         All    144,573      100.0      58.5      29,690      100.0      12.7     114,884      100.0      68.6
----------------------------------------------------------------------------------------------------------------
Source: Urban-Brookings Tax Policy Center Microsimulation Model (version 0305-3a).
\1\ Calendar Year.
\2\ Tax units with negative cash income are excluded from the lowest income class but are included in the
  totals. For a description of cash income, see http://www.taxpolicycenter.org/TaxModel/income.cfm
\3\ Includes both filing and non-filing units. Tax units that are dependents of other taxpayers are excluded
  from the analysis.
\4\ For married couples, at least one spouse is age 65 or over.


                                                         


    Chairman THOMAS. Thank you very much, Dr. Burman. Dr. 
Hubbard.

  STATEMENT OF R. GLENN HUBBARD, DEAN, COLUMBIA UNIVERSITY'S 
        GRADUATE SCHOOL OF BUSINESS, NEW YORK, NEW YORK

    Mr. HUBBARD. Thank you very much, Mr. Chairman, Ranking 
Member Rangel, and Members of the Committee. This is an 
important subject and I appreciate your willingness to listen 
to five economists. I also appreciate Mr. Rangel's admonition. 
I visited with you all in 1995, but I swear I bear no 
responsibility for the complexity. I think this is a big 
subject because policy normally works around the edges and this 
isn't around the edges. Potential gains in-household incomes 
annually from true fundamental tax reform could be as large as 
9 percent. True, fundamental tax reform could reduce 
significantly complexity cost the chairman alluded to and 
maintain tax fairness. There is an elephant in the room in the 
discussion of fundamental tax reform, and that is really 
capital taxation and business taxation issues generally. 
Capital income taxation as we currently implement it in the 
United States lies at the core of the efficiency costs of the 
current tax system, complexity and tax avoidance strategies 
that frankly undermine fairness.
    Beyond capital accumulation, the way we tax business and 
capital in the United States also discourages risk taking and 
entrepreneurship, and we have recent cross country evidence to 
suggest very strong links to economic growth and to wages and 
competitiveness. I would submit to you that an interesting 
place for you to start as you look at alternative proposals are 
proposals that try to tax economic activity or income once. I 
would suggest a family of two-tier systems, a business tax and 
a household tax. Under the business tax, I would have a 
business tax, not a separate corporate tax that is based on 
sales, less purchases from other firms, less compensation, less 
a portion of capital spending. That would be depreciation under 
an income tax, expensing under a consumption tax. On the 
household tax, I would suggest a household tax on compensation. 
That kind of system can be as progressive as you like. You can 
have exemptions, you can have rates under the top rate. It is 
not difficult to replicate the progressivity of the current 
code.
    I would also caution, and we can come back to this in 
questions and answers, the distinction between an income tax 
reform and consumption tax reform is not as large as you might 
hear from economists. The flip side of that is also the 
consumption tax reform is--can't possibly be that much more 
regressive if at all than income tax reform. That is a critical 
point on both efficiency and fairness. What are some good 
outcomes as a consequence of this family of tax reforms? No 
taxation of investor level returns, that is, you would collect 
the tax on businesses once at the business level. No tax 
distinction between debt and equity which has enormous 
efficiency cost. We have also seen the pernicious role of that 
tax distortion in corporate governance scandals. This does not 
again mean the capital income isn't taxed, only that it is 
taxed once at the business level. Second implication of these 
kinds of reforms would be a move toward a more territorial tax 
system for multi national companies enhancing our 
competitiveness and substantially enhancing simplicity. If we 
were to go to the consumption tax version of this, there would 
be a substantial additional stimulus to business investment 
spending from equipment expensing.
    What are some big challenges here? One is the tax treatment 
of interest at the business level. Virtually any fundamental 
tax reform prototype you look at, income or consumption tax 
would disallow some or all interest deductions while not taxing 
interest income for investors. That is a big change. Special 
provisions in the business community would need to be swept 
aside. Transition costs are always mentioned to you as a big 
issue. Respectfully, I don't agree. We can come back to this. I 
think the transition costs of many tax reforms are relatively 
modest. Household tax challenges have to do principally with 
broadening the base. I assume in your discussions you would 
also discuss eliminating the AMT as well. It is possible to 
have a household tax that has roughly the same distribution as 
you have now. That distribution would not be accomplished with 
ever higher rates but with broadening the tax base.
    Can we get there from here? Absolutely. Recent tax changes 
that this Committee has played a central role in point the way. 
Reductions in marginal tax rates, investment incentives and 
reduced taxation of dividends and capital gains all under the 
stewardship of this Committee were exactly the right way, and 
the distributional concerns can be easily satisfied so that 
high income taxpayers pay the same or greater burden as they 
currently do. Compromises could be a more scheduler version of 
what I have suggested, maybe small but not zero taxation of 
capital at the investor level. Just to close, I would like to 
leave you with a quick thought on the infrastructure, if you 
will, as you analyze any of these proposals, remembering that 
the growth effects are potentially large as you look at revenue 
estimates I would invite you to consider that. Second, 
following up on what some of the colleagues have said before, 
that you remember distributional analysis needs to take into 
account the fact that you can do many things in the Code at 
once. Finally, the obvious admonition of don't let the best be 
the enemy of the good. There are many of these proposals that 
are very close in terms of their effects. Thank you, Mr. 
Chairman.
    [The prepared statement of Mr. Hubbard follows:]

  Statement of R. Glenn Hubbard, Dean, Columbia University's Graduate 
                 School of Business, New York, New York

    Thank you, Mr. Chairman, for the opportunity to appear before the 
Committee today to discuss options for fundamental reform of the 
Nation's tax code. The discussion that you and the President are 
leading offers an opportunity for public policy to improve living 
standards for all Americans, while providing a simpler and fairer tax 
code. Indeed, given recent estimates that annual gains in household 
income made possible by tax reform are as high as nine percent, few 
policy changes you evaluate are as significant.

                  CAPITAL INCOME TAXATION AS A PROBLEM

    The bulk of the considerable efficiency gains from fundamental tax 
reform are achieved by reducing the burden of capital income taxation, 
which arises from the multiple layers of taxation on certain forms of 
productive business investment. Capital income taxation is also at 
center stage in the complexity of the present tax system (for example, 
measurement of capital gains and depreciation and the numbing 
complexity of tax rules governing multinational companies).
    President George W. Bush has pursued an agenda of reducing the 
efficiency and complexity costs associated with capital income 
taxation. Yet fundamental tax reform--moving from the current tax 
system to a broad-based income tax or consumption tax with a simpler 
structure and lower marginal rates--would be on the watch list for 
action even without the President's interest. Part of this emphasis 
reflects the concerns of economists and policy mavens that tax reform 
could improve the efficiency of the economy and generate extra income 
for U.S. citizens. But practical factors in policy debates loom much 
larger--the perceived declining competitiveness of U.S. firms, the low 
rate of saving by most Americans, and the growing reach of the 
alternative minimum tax into the lives of millions of middle-income 
households.
    These real-world pressures supported President Bush's tax cuts of 
2001, 2002, and 2003. By means of his tax cuts and discussions of tax 
reform, President Bush has quietly made the case for a simpler tax 
system that would remove or at least sharply reduce the current-law tax 
bias against saving and investment. Indeed, the president's framing of 
the tax reform debate has corralled the real-world pressures for reform 
into a discussion of a consumption tax as a way of flushing out the 
familiar ``simpler, fairer, flatter'' goals of tax reform. And one 
would hope that this discussion will focus on how to broaden the tax 
base to make the marginal tax rates on investment (and work and 
entrepreneurship) as low as possible.
    So, if capital income taxation is the ``elephant in the room'' of 
tax reform discussions, why is fundamental tax reform so difficult to 
accomplish? This framing will likely provoke loud outcries that 
consumption-based tax reform is unfair or, in the language of 
economists, ``regressive.''
    One ``fairness'' concern about any fundamental tax reform that 
would broaden the tax base and reduce marginal tax rates is that top 
rate reductions would benefit only a handful of affluent taxpayers. 
This ``snapshot'' distributional analysis calls to mind the imagination 
of Tevye the Milkman in Fiddler on the Roof, who in the song ``If I 
Were a Rich Man'' thinks of one staircase just going up and another 
just going down. But in the same way that actual staircases allow for 
both upward and downward mobility, the tax system sees considerable 
income and tax rate mobility on the part of households. As a result, 
the reductions in marginal rates made possible by tax reform affect 
many more individuals than a snapshot would suggest.
    In 2003, the White House Council of Economic Advisers used Treasury 
Department Data on households for the years 1987 to 1996 to study how 
households change income tax brackets over time (see Council of 
Economic Advisers, 2003, Exhibit 5.4). More specifically, the 
economists used the data to ask what tax rates would households have 
faced had President Bush's Economic Growth and Tax Relief 
Reconciliation Act of 2001 been in place over this period. The 
tabulations revealed that more than half of taxpayers were in a 
different tax rate bracket at the end of the period and that the upward 
and downward mobility was significant: Two-thirds of taxpayers in the 
lowest bracket had moved to a higher bracket after ten years, and four 
times more taxpayers were subject to one of the top two tax rates in at 
least one of the ten years than was indicated by the initial snapshot.
    Another significant ``fairness'' concern about tax reform in the 
form of a consumption tax is the claim that such a tax would exempt 
income from saving from tax. To the extent that higher-income and 
wealthier houses save more, a shift to a consumption tax might appear 
to favor these households. Such an argument is intuitive--but wrong 
(see Hubbard, 2005). A broad-based consumption tax need not be more 
regressive than a broad-based income tax. The real challenge for tax 
reform is to accomplish either one.

                       BENCHMARKS FOR TAX REFORM

    I suggest as benchmark tax reforms systems that would tax income 
once. To facilitate comparison between ``income tax'' and ``consumption 
tax'' versions of reform, I focus on two-part tax systems, with a 
business tax and a household tax. While I describe examples with a 
uniform rate of tax, it is easy to introduce progressivity with 
multiple tax brackets and an exemption in the household tax.
    Proposals for fundamental tax reform typically suggest moving to 
either a more pure income tax or a more pure consumption tax. Although 
these two proposals appear to be on opposite ends of a spectrum, the 
purer income tax and the purer consumption tax may affect economic and 
corporate financing decisions in similar ways. Moving to a purer tax 
system of either type also would reduce tax-planning opportunities 
because tax-minimizing strategies often involve combining transactions 
with different tax treatments (that is, part of the transaction 
receives pure income-tax treatment, while another part receives 
consumption-tax treatment) or by taking advantages of disparities in 
tax rates across investors.
Broad-Based Income-Tax Reform
    For economic and corporate financing decisions, the critical 
element of fundamental reform of the income tax is the integration of 
the corporate and the personal income-tax systems. In theory, 
integrating the systems would eliminate two distortions from the 
current tax system. First, integration would eliminate the distinction 
between corporate and noncorporate businesses by abolishing the double 
taxation of corporate income. Second, this reform would remove the 
differential taxation of debt and equity financing.
    The U.S. Treasury Department's study of corporate tax integration 
(see U.S. Department of the Treasury, 1992) presents several 
alternative approaches to integrating the individual and corporate tax 
systems. One proposal, the Comprehensive Business Income Tax (CBIT) 
seeks is to tax business income once. CBIT is a business-level tax on 
the return to capital of businesses. Broadly speaking, the business-
level tax base under CBIT is revenue from the sale of goods or real 
assets less wages, material costs, and depreciation allowances for 
capital investments. To conform to standard income accounting 
principles, the CBIT base uses depreciation allowances that follow as 
closely as possible economic depreciation. CBIT does not distinguish 
whether investment is financed by debt or equity. That is, in contrast 
with the current tax system, CBIT would not allow businesses to deduct 
interest payments from their tax base. Because CBIT taxes business 
income at the entity level, there is no need for investor-level taxes 
on capital gains, interest, or dividends received. CBIT can be thought 
of as the capital income tax component of a broad-based income tax that 
collects taxes form labor income through a household-level wage tax.
Converting the Income Tax into a Consumption Tax
    Converting CBIT into a consumption tax turns out to be quite 
straightforward. Instead of measuring business income through 
depreciation allowances, a consumption-tax version of CBIT would allow 
businesses a deduction for capital investments when assets are 
purchased. This ``expensing'' adjustment converts the combination of 
CBIT and a wage tax into the flat tax proposed by Hall and Rabushka 
(1983).
    Having described CBIT and the flat tax in this way, we can see that 
the flat tax does not exempt all of what is commonly called ``capital 
income'' from taxation (see also Gentry and Hubbard, 1997, 1998). Under 
the business cash-flow tax component of the flat tax, the present value 
of depreciation allowances for one dollar of current investment is one 
dollar, while the present value is less than one dollar under the 
income tax. For an investment project, the tax savings from 
depreciation allowances represent risk-free flows, which the firm would 
discount at the risk-free rate of interest. For a marginal investment 
(in which the expected rate of return just equals the discount rate), 
the upfront subsidy to investment provided by expensing equals the 
expected future tax payments. It is only in this sense that the 
``return to capital'' is not taxed under a cash-flow tax or a 
consumption tax. But returns attributable to entrepreneurial skill or 
risk bearing are, in principle, taxed equivalently under fundamental 
income or consumption tax reform prototypes.
    To summarize, then, I use the term ``fundamental tax reform'' to 
represent tax proposals with the following characteristics:

    1.  It is a combination of a business-level tax (with either cash 
flow or business income as the base) and a household wage tax.
    2.  For an income-tax version of reform, depreciation allowances 
are as close to economic depreciation as possible; for a consumption-
tax version of reform, businesses will deduct capital expenditures.
    3.  The business-level tax does not distinguish between debt and 
equity financing.
    4.  In order to minimize the differences in marginal tax rates 
across business entities and investments, firms carry net operating 
losses forward with interest.
    5.  There are lower marginal tax rates with a single marginal tax 
rate across business entities and households; the household tax can 
have a personal or family exemption.
    Fundamental income tax reform and consumption tax reform contribute 
to economic efficiency by accomplishing corporate tax integration. 
Returns to business investment would be taxed once at the business 
level and not again at the household level. Both reforms eliminate 
financial distortions under current law (that arise from the tax bias 
against corporate equity and dividends--see, for example, Gertler and 
Hubbard, 1993) and organizational distortions under current law (that 
arise from the tax bias against C corporations). Both reforms are 
consistent with a ``dividend exemption'' or territorial tax system for 
multinational companies, and this consistency is desirable (Devereux 
and Hubbard, 2003).
    The consumption tax version of tax reform offers an added benefit: 
the benefit of expensing of business investment will stimulate 
investment, capital formation, and economic activity. Such a business 
tax system would also be simpler. While expensing entails a greater 
revenue cost than depreciation, one must be careful to note that over 
the long run, the difference is only the time value of money on 
depreciation allowances (that is, comparing the value of allowances all 
at once--expensing--versus allowances taken over time--depreciation).
    Substantial efficiency gains estimated for corporate tax 
integration (see, for example, U.S. Department of the Treasury, 1992; 
Altig, et al., 2001; and Hubbard, 2003) do not capture all the possible 
sources of economic gains. First, as noted above, expensing offers an 
incremental gain. Second, reductions in marginal tax rates can increase 
growth through human capital investment (as in Lucas, 1988) and 
entrepreneurial risk taking (Gentry and Hubbard, 2004; and Cullen and 
Gordon, 2002). A third channel arises if base broadening in tax reform 
permits a lower business tax rate. Lee and Gordon (2005) estimate using 
cross-country data that a lower corporate tax rate is associated with 
more rapid economic growth, a correlation they attribute to a lower 
corporate tax encouraging more entrepreneurial activity.

                            THE WAY FORWARD

    Mr. Chairman, this Committee has the opportunity to reform the 
nation's tax code in ways that will enhance living standards, improve 
tax fairness, and reduce the enormous complexity that wastes billions 
of dollars each year. Reform of business taxation will be a major 
element of the overall reform debate, particularly given the 
overarching interest of tax reform in reducing tax burdens on saving 
and investment to promote economic growth.
    As you evaluate options for tax reform, I urge you to focus on 
prospects for improving growth. You can address tax fairness concerns 
as well by broadening the tax base of both the business and household 
tax systems. I also urge you to include estimated effects on economic 
growth and incomes of tax reform in your evaluation of revenue and 
distributional impacts of tax reform. While many interests will 
approach you for ``transitional relief,'' the case for large 
``transition costs'' of tax reform for businesses as a whole is more 
difficult to make than is often thought (see, for example, the 
discussion in Hassett and Hubbard, 2001). Finally, as you know well, it 
is possible to implement tax reform as a series of steps, necessitating 
caution in evaluating a ``horse race'' among proposals for fundamental 
tax reform.
    Thank you, again, Mr. Chairman, for the opportunity to appear 
before you today on the important subject of fundamental tax reform. I 
look forward to your questions.
                                 ______
                                 
    REFERENCES

    Altig, Davie, Alan J. Auerbach, Laurence J. Kotlikoff, Kent A. 
Smetters, and Jan Walliser. ``Simulating Fundamental Tax Reform in the 
United States.'' American Economic Review 91 (June 2001): 547-595.
    Bradford, David F. ``A Tax System for the Twenty-First Century.'' 
In Alan J. Auerbach and Kevin A. Hassett, eds., Toward Fundamental Tax 
Reform. Washington, D.C.: AEI Press, 2005.
    Council of Economic Advisers. Economic Report of the President. 
Washington, D.C.: U.S. Government Printing Office, 2003.
    Cullen, Julie Berry, and Roger H. Gordon. ``Taxes and 
Entrepreneurial Activity: Theory and Evidence for the U.S.'' NBER 
Working Paper No. 7980, 2000.
    Devereux, Michael, and R. Glenn Hubbard. ``Taxing Multinationals.'' 
International Taxation and Public Finance 10 (2003):469-487.
    Gentry, William M., and R. Glenn Hubbard. ``Distributional 
Implications of Introducing a Broad-Based Consumption Tax.'' In James 
M. Poterba, ed., Tax Policy and the Economy, vol. 11. Cambridge: MIT 
Press, 1997.
    Gentry, William M., and R. Glenn Hubbard. ``Fundamental Tax Reform 
and Corporate Financial Policy.'' In James M. Poterba, ed., Tax Policy 
and the Economy, vol.12. Cambridge: MIT Press, 1998.
    Gentry, William M., and R. Glenn Hubbard. ``Tax Policy and 
Entrepreneurial Entry.'' Working Paper, Columbia University, 2004.
    Gertler, Mark, and R. Glenn Hubbard. ``Corporate Financial Policy, 
Taxation and Macroeconomic Risk.'' RAND Journal of Economics 24 (Summer 
1993): 286-303.
    Hall, Robert E., and Alvin Rabushka. Low Tax, Simple Tax, Flat Tax. 
New York: McGraw-Hill, 1983.
    Hassett, Kevin A. and R. Glenn Hubbard, eds., Transition Costs of 
Fundamental Tax Reform. Washington, DC: AEI Press, 2001.
    Hubbard, R. Glenn. ``Economic Effects of the 2003 Partial 
Integration Proposal in the United States.'' International Tax and 
Public Finance 12 (2005):97-108.
    Hubbard, R. Glenn. ``Would a Consumption Tax Favor the Rich?'' In 
Alan J. Auerbach and Kevin A. Hassett, eds., Toward Fundamental Tax 
Reform. Washington, D.C.: AEI Press, 2005.
    Lee, Young, and Roger H. Gordon. ``Tax Structure and Economic 
Growth.'' Journal of Public Economics 89 (2005):1027-1043.
    Lucas, Robert E. ``On the Mechanics of Economic Development.'' 
Journal of Monetary Economics 22 (1988):3-42.
    U.S. Department of the Treasury. Integration of the Individual and 
Corporate Tax Systems: Taxing Business Income Once. Washington, D.C.: 
U.S. Government Printing Office, 1992.

                                 

    Chairman THOMAS. Thank you very much, Dr. Hubbard. Dr. 
Slemrod.

  STATEMENT OF JOEL B. SLEMROD, PAUL W. MCCRACKEN COLLEGIATE 
PROFESSOR OF BUSINESS ECONOMICS AND PUBLIC POLICY, PROFESSOR OF 
 ECONOMICS, AND DIRECTOR OF THE OFFICE OF TAX POLICY RESEARCH, 
          UNIVERSITY OF MICHIGAN, ANN ARBOR, MICHIGAN

    Mr. SLEMROD. Thank you for the opportunity to address this 
Committee. I have been asked to talk about tax complexity and 
simplification. Certainly, one objective of tax reform should 
be to simplify the tax system. The complexity of the current 
system is one reason why the cost of collecting taxes is so 
high. In the written testimony I have submitted to this 
Committee, I provide details underlying my estimate that this 
cost now comes to $135 billion per year, more than 10 percent 
of revenues raised and more than 1 percent of GDP. The major 
part of this cost is the over 3 billion hours of taxpayers' 
time. Equivalent to 1.5 million extra Internal Revenue Service 
(IRS) employees. The $135 billion is the value of the resources 
used up each year in the process of collecting taxes and the 
amount of resources that could, if taxes could be collected 
costlessly, be freed up for whatever else Americans would 
prefer to use their time and money for. The negative 
consequences of tax complexity though go beyond dollars. 
Complexity causes a capricious and inequitable distribution of 
tax burdens because it rewards those who have the means and 
inclination to find all the tax angles and leaves the dutiful 
among us holding the bag. It undermines trust in the fairness 
of the tax system which may, in turn, undermine voluntary 
compliance. It reduces the transparency of the tax system, 
which I believe is inimical to a properly functioning 
democracy.
    Because of these consequences tax simplification deserves 
to be taken seriously. Supporting tax simplification in the 
abstract is like supporting motherhood and apple pie. We must 
move beyond simple support for simplification and address how 
and how much to simplify the tax system. In so doing, it is 
critically important to consider three separate aspects of the 
tax system, the rate structure, including whether it should 
have one rate for all or is graduated, base integrity, that is, 
whether the base is messy or clean; and third, base choice, 
whether the base is income or consumption or something in 
between. Another fundamental point is that the simplest way to 
collect tax is not the best. There are almost always tradeoffs 
between simplicity and the other criteria we use to evaluate 
our tax system. We could have exactly the same tax burden for 
everyone, Bill Gates and everyone else. Most of us, maybe all 
of us, would judge that very, very simple tax system to be 
very, very unfair.
    As another example, loosening enforcement would save both 
administrative and compliance costs but would also unfairly 
shift the tax burden toward those who view paying what they owe 
as a civic duty. Can a messy tax base be justified by an appeal 
to fairness? In some cases, yes, but most of the deductions, 
the credits and the adjustments in our current tax system 
cannot be justified in this way. A thorough going pruning of 
these programs would I believe not only significantly simplify 
the tax system, but would also be good for the economy. I have 
no suggestions for how to stiffen congressional resistance to 
the special interest pleading that opposes such a pruning, 
although I suspect a thorough going, rather than a piecemeal 
reform provides Congress with the opportunity to shrug its 
shoulders and say we are doing it to everyone.
    One key to simplifying the tax system is thus, to minimize 
fine tuning the tax liability of individuals and fine tuning 
the economy by subsidizing and rewarding activities deemed to 
be especially valuable. Note, though, that is illusory 
simplification and probably not simplification at all if the 
same set of subsidies and rewards is reconstructed outside the 
tax system. If we are going to have these subsidies and rewards 
in any event, arguably they should be implemented through the 
tax system rather than by operating separate bureaucracies.
    Simplifying the tax system enough along these dimensions 
would allow us to take advantage of large scale withholding by 
businesses through a return free income tax system where as 
many as two-thirds of individual taxpayers need not file tax 
returns at all. Do we need a consumption tax instead of an 
income tax to get a less complex tax system? I think not. 
Replacing the income tax with a consumption tax base is neither 
necessary nor sufficient for significant tax simplification. 
European experience with a consumption based VAT shows that 
consumption taxes can be as costly to operate as real live 
income tax. Adopting a consumption tax is not necessary for 
simplification because a clean base return free structurally 
improved tax system can achieve a lot.
    I do not mean to dismiss the potential inherent simplicity 
advantages of basing tax liability on consumption rather than 
income. There are certainly structural problems that will not 
go away with income tax reform. We should not though fall 
victim to a grass-is-greener fallacy for a few reasons. With 
more than a trillion dollars at stake, there will be plenty of 
people of who will find loopholes in the consumption tax 
system. The transition to a consumption tax system even to one 
that eventually would be much simpler can be incredibly complex 
and riddled with loopholes that erode both revenues and 
fairness. In conclusion, the potential benefit from tax 
simplification is substantial. Choosing the right path to a 
simpler tax system requires facing up to several difficult 
trade offs. It should not be surprising because dealing with 
tax complexity requires addressing the most fundamental 
questions about the relationship between government and the 
people it serves. How activist the government should be, how 
intrusive it should be and when should it settle for rough 
justice. Thank you.
    [The prepared statement of Mr. Slemrod follows:]

Statement of Joel B. Slemrod, Paul W. McCracken Collegiate Professor of 
   Business Economics and Public Policy, Professor of Economics, and 
Director of the Office of Tax Policy Research, University of Michigan, 
                          Ann Arbor, Michigan

    One-third of Americans say that complexity bothers them more than 
anything else about the tax system. This is more than twice as many who 
say their biggest complaint is ``the large amount of taxes they paid.'' 
Half of Americans rate the system as ``very complex,'' and someone 
holding that belief is 10% more likely to favor scrapping the income 
tax for another system. In this testimony I address the cost of 
collecting taxes under the current system, what causes this cost, and 
what kinds of tax reform promise to simplify and reduce the cost of 
collecting taxes.
    Tax complexity has many dimensions. To suggest its magnitude, some 
count the number of pages or words in the tax code or forms. Others 
stress that even tax experts rarely agree on the true tax liability for 
a tax return of even moderate complexity, or note that it often takes 
several years to finally resolve the tax liability of a big 
corporation.
    In my view the most informative measure of tax complexity is the 
resource cost of collecting taxes. This is equal to the IRS budget plus 
the value of the time and money spent by the taxpayers and third 
parties to the collection process (such as employers who withhold tax 
for their employees.) Measuring the IRS budget is straightforward, but 
measuring the other components of the collection costs--known as 
compliance costs--is not. What do we know?
    A recent comprehensive study done by IBM Business Consulting 
Services under contract to the IRS concluded that, in tax year 2000, 
the 125.9 million individual taxpayers had a total compliance burden of 
3.21 billion hours and $18.8 billion in monetary expenditures. This 
translates into an average burden of 25.5 hours and $149 per taxpayer. 
Although self-employed taxpayers represent only about 25% of all 
individual taxpayers, they experienced approximately 60% of the time 
and money burden. As a result, the average time and money burden of 
self-employed taxpayers (59.5 hours, $363) was substantially greater 
than that of those taxpayers with only wage and investment income (13.8 
hours, $75). Not surprisingly, the average compliance burden was also 
consistently higher among taxpayers who have more complex tax returns; 
for example, non-self-employed taxpayers who itemize their returns 
spend an average of 21.3 hours and $114 on tax compliance, compared 
with 11.4 hours and $63 for non-itemizers. The current system is not, 
however, complicated for everyone, and is generally not that 
complicated or costly for the tens of millions of taxpayers who file 
Form 1040EZ or 1040A; survey evidence suggests that 30% of taxpayers 
spend fewer than five hours on all tax matters over an entire year. By 
applying a range of dollar values to each hour of time burden, IBM 
estimated that the annual resource cost of compliance for individual 
taxpayers is between $67 billion and $99 billion.
    A series of analyses by the Office of Tax Policy Research at the 
Ross School of Business at the University of Michigan, under contract 
to the IRS, have examined the compliance cost of large and medium-sized 
businesses. In 1996 the total compliance cost for the 1,500 largest 
companies exceeded $2 billion, or over a million dollars per company; 
for Fortune 500 companies, the average cost was nearly $4 million. For 
businesses smaller than the biggest 1,500, but with assets in excess of 
$5 million, in 2002 the total compliance cost came to about $22 
billion. There is clear evidence that business compliance costs are 
regressive--costs as a percentage of company size are higher for 
smaller companies than they are for larger companies. For instance, 
companies with between $100 million to $250 million of assets have only 
about seven times higher compliance costs than companies with between 
$5 million to $10 million of assets, even though they are between 10 
and 50 times bigger.
    In written testimony I submitted to this committee on June 15, 
2004, I drew on these and other studies to estimate the total annual 
cost of collecting the federal income tax in 2004. My best estimate 
came to $135 billion per year. Of this total, $85 billion consists of 
the total compliance cost borne directly by individuals (including sole 
proprietorships), and another $40 billion relates to business. Adding 
an IRS budget of about $10 billion produces the overall collection cost 
estimate of $135 billion. This is 14.5% of individual and corporation 
income tax receipts in fiscal year 2004, and about 1.2% of 2004 GDP.
    The $135 billion annual cost of complexity is the value of the 
resources used up in the process of collecting taxes, and the amount of 
resources that could--if taxes could be collected costlessly--be freed 
up for whatever else Americans would prefer to use their time and money 
for. This is an economic cost of collecting taxes that should be added 
to the cost incurred when the tax system discourages people from 
working as much as otherwise, businesses from investing as much as 
otherwise, and so on.
    The negative consequences of tax complexity, though, go beyond what 
can be estimated in dollars. Complexity causes a capricious and 
inequitable distribution of tax burdens because it rewards those who 
have the means and inclination to find all the tax angles, and leaves 
the dutiful among us holding the bag. Moreover, the unfairness 
complexity causes--and the complexity itself--undermine trust in the 
fairness of the tax system, which may in turn undermine voluntary 
compliance. Complexity reduces the transparency--who bears how much 
burden and why--of the tax system, which I believe is inimical to a 
properly functioning democracy.
    The rapid computerization of tax matters--in 2003 over two-thirds 
of self-prepared returns were done with software on a computer, 
compared to less than 20% in 1993--is a double-edged sword. Although it 
has undoubtedly facilitated the tax collection process, I am concerned 
that computerization also may erode taxpayer understanding of the 
formula that turns the inputted items into what one owes the 
government. Tax return software may be helping to turn the tax system 
into a black box--a more efficient black box, to be sure, but a black 
box nevertheless.
    Given a $135 billion annual resource cost, plus unquantifiable but 
significant negative effects on equity and even the functioning of 
democracy, tax simplification deserves to be taken seriously. We must, 
though, move beyond platitudinous support for simplification and 
address how, and how much, to simplify the tax system. As we begin what 
I hope will be a serious discussion of how we should tax ourselves, it 
is critically important to separately consider three important aspects 
of the tax system: 1) rate structure, including whether the rate 
structure has one rate for all or is graduated, 2) base integrity, that 
is whether the base is messy or clean, and 3) base choice, whether the 
base is income or consumption, or something in between.
    Another fundamental point is that the simplest way to collect tax 
is not the best, and there are almost always tradeoffs between 
simplicity and the other criteria we use to evaluate our tax system. 
For example, consider the following simple tax system. Start with the 
annual revenue needs of about a trillion dollars and divide that by the 
130 million or so individual taxpayers; this division yields about 
$8,000 per return. Here's a tax system: everybody owes $8,000 per year, 
period, including Bill Gates, a single mother earning $10,000 per year, 
and everyone else. Most of us, maybe all of us, would judge that very, 
very simple tax system to be very, very unfair.
    As the example illustrates, in part tax complexity reflects a 
belief that simpler systems can cause an unfair distribution of the tax 
burden. Achieving a progressive distribution of the tax burden--one in 
which taxes as a fraction of income are higher for higher-income 
families--requires measuring, reporting and monitoring a measure of 
well being, such as income.
    A simpler, or less costly, tax system may compromise the fairness 
of the tax burden in other ways. For example, loosening enforcement 
would save both administrative and compliance cost, but would also 
shift the tax burden toward those who view paying what they owe as a 
civic duty. Thus, the simplicity of a tax system can be assessed only 
with respect to a standard of enforcement and, ultimately, fairness. 
For this reason even the most thoroughgoing simplification imaginable 
that also meets our shared standards of fairness would cut the resource 
cost of collection by no more than in half or, at most, two-thirds.
    Can a messy tax base be justified by an appeal to fairness? In some 
cases, yes. A deduction for involuntary medical expenses arguably 
improves how well taxable income measures a family's true well-being 
and thereby improves fairness. But most of the deductions, credits, and 
adjustments in our current system cannot be justified in this way. The 
fact is that the U.S. income tax system is an awkward mixture of a 
revenue-raising system plus scores of incentive and reward programs. A 
few of these programs may be justified, but most cannot, and a 
thoroughgoing pruning of these programs would, I believe, not only 
significantly simplify the tax system but would also be good for the 
economy.
    Cleaning the tax base may be the hardest aspect of tax reform to 
achieve politically, because nearly every bell and whistle has a 
constituency behind it. Many observers and many taxpayers are cynical 
about the ability of Congress to keep its collective hands out of the 
cookie jar, leading some to question the wisdom of cleaning up the tax 
system only for it to get dirty again. The most cynical of all expect 
base-cleaning tax reform to happen precisely so the base exceptions can 
be introduced again for political rewards. I have no suggestions for 
how to stiffen Congressional resistance to special interest pleading, 
although I suspect that a thoroughgoing--rather than piecemeal--reform 
provides Congress with the opportunity to shrug its shoulders and say 
``we're doing it to everyone.'' In any event, if tax reform needs to be 
revisited every twenty years, so be it; that strikes me as a much 
better outcome than pursuing only policies that are likely to last 
forever.
    Flaws in the political system also underlie an argument one hears 
in favor of a costly tax system--that it undermines big government. The 
idea is that the political system is flawed in such a way that we do 
not get the size of government we want--we get something bigger. 
Although the government cannot be downsized directly, the argument 
continues, it does contract when its source of funding gets more 
expensive. From this perspective, making the tax system more painful 
and more costly is a good thing. This argument (along with the separate 
and also controversial argument that it would make the tax burden more 
visible) lies behind the suggestion to abolish employer withholding and 
remittance of employees' income tax liability, which certainly makes 
the system much less costly to administer fairly. I don't buy this 
argument at all, because it relies on several arguable or dubious 
assumptions--that the political system systematically spends ``too 
much,'' that spending responds more to raising the cost of funds than 
to direct political reform and that, if the muck-up-the-tax-system 
strategy is effective, the benefits of reducing spending exceed the 
higher costs of raising revenue. Whether one agrees with this argument 
or not, the important point is this: before we embark on serious tax 
reform we'd better get straight whether the objective is to make the 
tax system more, or less, costly. I recommend the latter, and so turn 
next to tax simplification.
    One key to simplifying the tax system follows from the causes of 
tax complexity: minimize fine-tuning the tax liability of individuals 
and fine-tuning the economy by subsidizing and rewarding activities 
deemed to be especially valuable. Note, though, that this is illusory 
simplification--and probably not simplification at all--if the same set 
of subsidies and rewards is reconstructed outside of the tax system. If 
we're going to have these subsidies and rewards in any event, arguably 
they should be implemented through the tax system rather than by 
operating separate bureaucracies--by having just one financial account 
between the government and the people.
    Simplifying the system enough along these dimensions would allow us 
to take advantage of large-scale final withholding by businesses 
through a return-free income tax system. Twenty years ago in its famous 
report that preceded the Tax Reform Act of 1986, the Treasury 
Department noted that, with significant base cleaning, as many of two-
thirds of individual taxpayers need not file tax returns at all. Thus, 
base cleaning alone can, for the majority of taxpayers, achieve the 
ultimate simplification--no return at all--that is a natural feature of 
either a value-added tax (VAT) or a retail sales tax. This is, to be 
sure, a ``populist'' simplification, in that it would simplify the 
system for those (many) people whose tax matters are already relatively 
simple.
    Structural changes to the way we now tax corporations, including 
multinational corporations, also have potential to simplify the tax 
system. Rationalizing the separate entity-level taxation of 
corporations (and the double taxation of dividends that accompanies it) 
would simplify tax matters by reducing or eliminating the need for 
complicated rules delineating when income passes from the corporation 
to the shareholder. This sort of reform, known as integration, has long 
been advocated by supporters of a comprehensive income tax, and is not 
inherently related to the choice of a consumption versus and income tax 
base, although it accomplished by all of the leading consumption tax 
proposals.
    Although abandoning progressivity or thoroughly cleaning the tax 
base (or, for that matter, a rationalization of how we tax corporation-
source income) would to my mind certainly qualify as fundamental 
reform, in recent years the idea of fundamental reform has become 
linked to basing taxation on consumption rather than income. Do we need 
fundamental reform in this sense to get a less complex system?
    No. Replacing the income tax with a consumption base is neither 
necessary nor sufficient for significant tax simplification. European 
experience with the VAT has shown that a consumption tax is not 
sufficient for simplification: real-life VATs can be as costly to 
operate as real-life income taxes. Adopting a consumption tax is not 
necessary for simplification because a clean-base, largely return-free, 
structurally-improved income tax system can achieve a lot.
    Recall that the three key aspects of tax systems--clean or messy 
base, progressive rate structure or not, and income or consumption 
base--are separate issues. A consumption tax can have a clean or a 
messy base, and can feature flat or graduated rates. So can an income 
tax. Most consumption tax proposals not only adopt a new base but also 
radically clean the base and sharply curtail progressivity.
    By arguing that a consumption base is neither necessary nor 
sufficient for tax simplification, I do not mean to dismiss the 
potential inherent simplicity advantages of basing tax liability on 
consumption rather than income. All other things equal, and with some 
exceptions, tax systems are simpler when the base is cleaner, when the 
rate structure is flatter, and when the base is consumption. Although a 
reformed income tax can substantially simplify the system, it leaves 
some potential simplification opportunities on the table. Consumption 
taxes can dispense with the accrual accounting required for income 
taxation--depreciation, inventory accounting, and so on--and its 
inherent problems in an inflationary environment. Consumption tax 
systems need not measure real capital income; any system of taxing 
capital income is prone to inconsistencies that reward complicated 
transactions such as tax shelters and tax-oriented financial products. 
These structural problems will not go away with income tax reform.
    We should not, though, fall victim to a ``grass-is-greener'' 
fallacy, for a few reasons. With more than a trillion dollars at stake, 
there will plenty of people looking for inconsistencies in a 
consumption tax system, and some will be found. Consumption taxes based 
on taxing retail sales are probably not administrable at our usual 
standards of equity and intrusiveness. Depending on how it is handled, 
the transition to any consumption tax system, even one that eventually 
would be much simpler, can be incredibly complex and riddled with 
loopholes that erode both revenues and fairness.
    Abolishing the federal income tax would also eliminate the 
availability of a fairly reliable measure of the financial standing of 
families (as well as businesses) that is widely used throughout the 
economy. If individuals did not have to file income tax returns, they 
would still need to keep some records. But which ones? For example, 
what records would they have to provide mortgage lenders or college 
financial aid officers? Many federal transfer and other programs now 
rely on an annual measure of comprehensive income, for which labor 
income alone will not suffice. If many states continue to levy 
comprehensive income taxes, the compliance cost saving is reduced if 
taxpayers of those states still have to calculate income. To the extent 
that alternative ways of verifying income would arise, these new costs 
need to be netted out to obtain the true cost saving from moving away 
from an income base.
    It costs us about $135 billion a year to collect the trillion 
dollars or so of income tax revenue. The complexity that contributes to 
this cost also undermines the fairness of the tax burden and erodes the 
transparency of the tax system. Some of the cost arises because we have 
high standards for the fairness of our tax system, and would remain 
under any system that meets those standards. Some of the cost occurs 
because we use the tax system for many things other than raising 
revenue, and could be eliminated if the tax base were cleaned of these 
features. Some of it occurs because of structural problems--some 
fixable, and some inherent--in the income tax system. Moving to a 
consumption tax base addresses some but not all of the sources of 
complexity.
    The potential benefit from tax simplification is substantial, but 
choosing the right path to a simpler tax system requires facing up to 
several difficult tradeoffs. This should not be surprising, because 
dealing with tax complexity requires addressing the most fundamental 
questions about the relationship between government and the people it 
serves: how activist should the government be, how intrusive should it 
be, and when should it settle for rough justice?
                                 ______
                                 
    Key References

    Guyton, John L., John F. O'Hare, Michael P. Stavrianos and Eric J. 
Toder. 2003. ``Estimating the Compliance Cost of the U.S. Individual 
Income Tax.'' National Tax Journal 56(3) (September): 673-88.
    Slemrod, Joel. 1996. ``Which is the Simplest Tax System of Them 
All?'' in H. Aaron and W. Gale (eds.), The Economics of Fundamental Tax 
Reform, Washington, D.C.: The Brookings Institution, 355-91.
    Slemrod, Joel. 2004. Testimony Submitted to the Committee on Ways 
and Means, Subcommittee on Oversight, Hearing on Tax Simplification, 
Washington, D.C., June 15.
    Slemrod, Joel and Jon Bakija. 2004. Taxing Ourselves: A Citizen's 
Guide to the Debate over Taxes. Third edition. Cambridge: MIT Press.

                                 

    Chairman THOMAS. Thank you very much. We went through the 
examinations of fairness, simplicity and growth in 1986 when we 
were examining it. The question I am going to ask, I always 
like to try to get five economists to agree, and sometimes I 
have to go pretty high up on the abstract level to get 
agreement. I hope I don't have to go up too high. It seemed to 
me that back then, in looking at fairness, simplicity and 
growth, it was basically, without a whole lot of discussion how 
to change the then-present income tax structure to make it 
fairer, simpler, and provide growth. We all look for analogies 
we are more familiar with. I know in auto racing, everybody 
wants fast durable and cheap. The builder says I can give you 
two of the three. Which two do you want?
    You have indicated there is a clear requirement to trade 
off to a degree. My question is not that. Obviously we are 
going to have to deal with that. My question is this: in the 
roughly two decades since we last went through the simplicity 
fairness and growth juggling, do you believe that both 
academically and in the real world, we have discovered, we have 
understood, we have conceptualized so that we have more tools 
today available? We may examine particular options and discard 
them and go back to something that we would may want to deal 
with, but do you believe that examining the various options is 
worth the Committee's effort to perhaps get out of the 
conceptual framework they have and examine some others because 
the value of that means we have a better chance to get a better 
trade off to produce a better product in blending fairness, 
simplicity and growth? Anybody respond to that?
    Mr. HUBBARD. If I might, Mr. Chairman, I think that would 
be an excellent activity. One reason I was suggesting a family 
of two-tier taxes that nests income and consumption taxes, you 
could show yourself what the gains in economic activity are, 
what the distributions of the tax burden are there. I mean, 
that is, the tradeoff, of course, is something economists can't 
help you with. Those are your political judgments. I think 
there has been an abundant body of academic work over the past 
two decades that would help inform that, including some very, 
very recent papers, so I do think it is worth the candle.
    Mr. BEACH. Mr. Chairman, on the very last page of my 
submitted testimony is a graphic. It is the only graphic of my 
testimony. It shows how many tools you have invented since 1986 
and how well you have used them. There is a line on this 
graphic which looks at the marginal tax rates that a 
hypothetical family of four faced in 1986 as their income 
changed. Then it compares it to in 1988, and then to today. 
There has been a vigorous application of well meaning tools, 
but it has created a situation in which it is very difficult to 
say that the current system is a fair and just system. So, 
there is the sort of catch-22 of having good tools, well 
meaning and the application kind of moving against the 
principles. I would say the principles, as Alan and I were 
talking just before the hearing, that principles are pretty 
much the same as 20 years ago. The tools are more vigorous but 
you have to be governed by the principles in order to establish 
a fair and just system.
    Chairman THOMAS. My concern is that as we begin to learn 
some of these new concepts, we latch on to them in ways that 
perhaps limit us in our ability to be as facile as we need to 
be in a comparison. This is where you are going to need to help 
us. For example, on page 7 of Dr. Burman's testimony, he makes 
this statement, and I wonder if anyone here strongly disagrees 
with you or if all of you tend to agree with it, in which he 
says the flat tax, which is effectively a subtraction method 
VAT, in which the wage portion of the tax is collected from 
workers rather than firms and which is somewhat progressive 
since it exempts some portion of wages. Anyone disagree with 
that statement? Because you see, we have begun to engage in a 
discussion between a flat tax and value-added taxes. Sometimes 
people don't walk across models to understand that with some of 
the minor changes, Dr. Hubbard, as you suggested, you can turn 
one thing into another and improve on the simplicity or the 
fairness or the growth issue. My goal is to not get people 
locked up in terminology which doesn't allow them to be 
flexible enough to understand, regardless of what label is 
placed on it, the fundamentals need to be examined because you 
are going to get tradeoffs no matter which basic concept you 
are dealing with. Dr. Auerbach for a final statement.
    Mr. AUERBACH. Yes, Chairman Thomas, there is one difference 
that some people point to as a difference between a value-added 
tax and a flat tax. It relates to a point in my testimony which 
is the lack of border adjustments under of the flat tax. It 
makes it look to some people less like a consumption tax or a 
value-added tax. Some people have seen that as a disadvantage. 
As I suggested in my testimony, that really is not an important 
difference. So, in viewing--I think it is right to view the 
flat tax as basically a subtraction method value-added tax 
except for the progressive portion for low income wage earners.
    Chairman THOMAS. Thank you. To the degree all of the 
economists were talking about or open a border adjustable tax 
is taken care of in the situation of one country versus another 
based on currency fluctuations and a number of other factors so 
that it all works out in the wash as we say. Thank you very 
much. Gentleman from New York.
    Mr. RANGEL. Thank you. If we ever get seriously involved in 
reformation we can't do it without you, because I came to the 
Congress to close up all the tax loopholes. How little did I 
know that so many would be incentives, and so the targeted jobs 
credit empowerment zones, earned income tax credits, incentives 
to hire people for jobs, incentives for education, incentives 
for employers who provide health care, mortgage interest 
deduction, business deductions for their equipment. There is a 
long list of things and a lot of them are political. A lot of 
them are special interests. A lot of them are well intended. If 
we went toward a flat tax, a consumption tax or national resale 
tax, are any of you prepared to distinguish between what has no 
economic benefit and what is purely political and what is 
special interest? Because that is one way I see that you can't 
do this without winners and losers. We would have to make--we 
would need you to help us not to make political decisions so 
that we can work together, assuming it was possible for us to 
work together. Since all of this is academic you don't have to 
worry about that. How would we handle those credits and 
deductions that have no economic benefits at all? Would you, 
any of you be able to help us to make that decision? Yeah, you 
because you mentioned it, Doctor.
    Mr. SLEMROD. The one thing I think you should have a high 
hurdle for arguments that go against a clean base, not only for 
simplicity purposes, but just because most of the deviations, I 
think, do not have a good economic justification.
    Mr. RANGEL. Well, just for academic reasons, where would 
you put the deduction of mortgage interest?
    Mr. SLEMROD. Myself, I think the tax system should not 
embed a favoritism toward owning a house versus renting a 
house.
    Mr. RANGEL. Where would you put charitable contributions.
    Mr. SLEMROD. I think a justification, a subsidy for charity 
is fine, but not the way it is done within the current tax 
system where the subsidy is higher for high income people.
    Mr. RANGEL. Where would you put religious institutions?
    Mr. SLEMROD. I would keep the rules for determining a 
charity that gets the subsidy the same as it is now.
    Mr. RANGEL. You mean some churches could be taxed?
    Mr. SLEMROD. No. The same rules about what qualifies as a 
deductible charitable contribution.
    Mr. RANGEL. Okay. Where would you put research and 
development?
    Mr. SLEMROD. Research and development, I think most 
economists, and I imagine a majority of this panel would find 
an economic justification for.
    Mr. RANGEL. Where would you put the earned income tax 
credit?
    Mr. SLEMROD. On the list that we need to take very 
seriously the impact of the tax system on vertical equity and 
that many of--can I--I am willing to answer all your particular 
questions, but can I stop for a second and say that this string 
of questions illustrates why consideration of any radical tax 
reform such as a flat tax does many, many things. In fact, a 
flat tax has a fundamental change on the three aspects of the 
tax system I said we should keep separate. It changes the rate 
structure radically and therefore the distribution of tax 
burden. It cleans the base up radically and gets rid of almost 
all of the provisions on the list I have heard so far and maybe 
on the rest of the list. It moves from an income tax base to a 
consumption tax base. These are separable things. So, we would 
could consider cleaning the base, we can consider change the 
rate structure and we should consider cleaning up the base, be 
it income or consumption. A flat tax for example, or a value 
added tax would get rid of every one of the provisions every 
one of the subsidies you have mentioned so far.
    Mr. RANGEL. We would need you to help politically to 
justify it in terms of Republicans and Democrats working 
together to ease the political pressure of the losers, right?
    Mr. SLEMROD. I imagine that there would be more consensus 
among the economists on a panel like this on those issues than 
you might expect.
    Mr. RANGEL. So, if the chairman and I continue to send 
letters to each other, we would be moving forward in a very 
dramatic way, wouldn't you think? Are there any other comments? 
No. I ran out of time. Thank you so much.
    Chairman THOMAS. Mr. Burman, do you want to briefly 
respond?
    Mr. BURMAN. One of the things that strikes me is that we 
have a tax system now where basically people owe, middle income 
people owe a fair amount of income and tax to the government. 
Then if they jump through a whole bunch of hoops, they can get 
a bunch of it back. So, we make it sound like we are giving 
people a mortgage interest deduction, a charitable deduction 
and all of these things. In fact, you know, we are saying that 
certain people get a benefit. Other people don't. People are 
working really hard to determine their tax liability. Really, 
as Joel said, there really ought to be a very high hurdle on 
the tax breaks that you put into the Code because you have to 
raise taxes elsewhere to pay for it. So, it is not like, you 
know, there has been this notion lately that tax cuts benefit 
everybody. They have to be paid back one way or another, future 
deficits or higher taxes.
    Chairman THOMAS. My concern is as we try to incentivize 
people, I am just very concerned about having people chase 
asset benefits through the Code as we change it and you are not 
getting a real value, but you clearly are rewarding particular 
people in particular ways when you don't think you are. 
Gentlewoman from Connecticut wish to inquire?
    Mrs. JOHNSON. Thank you, Mr. Chairman. I thank the panel 
for their really excellent presentations. It is extremely 
helpful to have sort of fairness laid out in a vertical, 
horizontal and forward manner and to hear this discussion of 
simplicity versus fairness. I find very troubling economists--
this is gross generalization--economists general disregard for 
the relationship between tax benefits and incentives for 
actions that we as a society value, because I think the record 
demonstrates their power. For example, look what is happening 
to people when they roll over their 401(k). They are not saving 
it. They are not putting it in an annuity. Too often it is not 
going to be there for retirement security. On the other hand, 
the tax incentives to save are having people save. We have had 
testimony that if there was an opt out rather than an opt in 
many more people would save. You look at low income housing. 
There is a lot of reasons why low income housing is higher risk 
to build than other kinds of housing. It certainly takes more 
careful management. The incentive to combine--the incentives 
that the low-income housing tax credit puts out there to 
combine good quality construction with good management to 
provide affordable housing is kind of--has been the primary way 
now we are creating affordable housing.
    So, I don't see how you--I mean, I don't want to ignore the 
power of tax incentives to produce things that a market economy 
wouldn't necessarily produce. It is hard at market rates to 
produce affordable housing. Now you can subsidize them through 
rent subsidies or you can subsidize them by lowering the cost 
of construction and not be into rent subsidies all those years. 
Let me just conclude by saying there is an EITC demonstration 
going on now for effectiveness. My district happened to be one 
of those districts. It was resisted. It is a very progressive 
view. One of the things that the IRS told me in talking about 
it was that tax incentives are less costly to administer and 
reach a larger portion of the population they are intended to 
reach as opposed to administered programs which are more 
expensive to administer and tend to reach a narrow number, 
narrower number of the eligible individuals. We certainly see 
that over and over again in health programs for children. So, 
you know, if you say the EITC and the child credit are serious 
income expanders for low income families and we would have to 
think about doing it a different way, well, the other way may 
be much more costly and much less effective. So, I just want to 
put my marker down to--you have got to have better information 
for me to convince me that tax credits aren't powerful and 
important in structuring a society that has the income you need 
when children are young, that plans for retirement, that is 
able to produce affordable housing and so on. So, if any of you 
would like to comment on that, I would be interested in your 
thoughts.
    Mr. HUBBARD. If I might, Mrs. Johnson, I think that most 
economists believe these tax provisions are powerful. The 
question--they do stimulate the desired activity almost always. 
The question is are they the best way of doing that either in 
terms of economic efficiency or costs. You mentioned some 
economists won't agree on all these things. Savings incentives 
an area, me speaking only for myself on the panel, I believe 
the Tax Code has had a very constructive and powerful and 
potent effect, and I think you all deserve a lot of credit for 
that. I would not put the low income housing tax credit in that 
camp. I think there are more efficient ways for the taxpayers 
to address low income housing if that is something that you 
politically want to do. So, I don't think it is a disagreement 
that these aren't effective. I think people think they are 
effective in terms of stimulating the activity. The question, 
given your political judgment that you want to do that, is 
whether there are better ways to do it that are also perhaps 
more fair.
    Mrs. JOHNSON. Well, I do think we need to have a better 
discussion about what are the other ways to achieve affordable 
housing. section 8 has really bottomed out. So, that is a 
longer discussion. My time is up and I am sorry Mr. Chairman. 
My red light is on. It is yellow there, but----
    Mr. BURMAN. I would just like to make one clarification. I 
think the EITC and child tax credit do a huge amount of good. 
My suggestion in the testimony actually is that there are ways 
you could simplify them so that a lot of the compliance 
problems they are looking at in Hartford would go away. If the 
EITC was really focused as a work subsidy and it wasn't tied 
into where the children live, who provides the support, and the 
child credit were just tied to presence of children, it would 
actually be a lot easier for the IRS to administer and make 
sure the money goes to families that need the help.
    Mrs. JOHNSON. Thank you.
    Chairman THOMAS. Thank you very much. Gentleman from 
Michigan, Mr. Levin wish to inquire?
    Mr. LEVIN. Thank you, Mr. Chairman. I am tempted, Dr. 
Auerbach, to talk about the Ricardo principle of comparative 
advantage, but let us do that some other time. So, let us talk 
about fairness, because we started talking about that. I do 
think, and I think the chairman, you would agree that we have 
to find some principle other than fairness is in the eye of the 
beholder. Mr. Beach, you suggested one standard and that is 
that everybody pays their fair share, that is the total amount 
of taxes a person pays is proportional to their economic 
ability to pay taxes. So, let me ask any of you who want to, to 
comment on this article in the New York Times on Sunday about 
tax fairness.
    About tax fairness, surely it would apply to the principle 
that Mr. Beach and others have outlined. The article says the 
share of the Nation's income earned by those in this uppermost 
category has more than doubled since 1980 to 2.7 percent. The 
share of income earned by the rest of the top 10 percent rose 
far less, and the share earned by the bottom 90 percent fell. 
Then this analysis relates to fairness. I quote, ``Under the 
Bush tax cuts, the 400 taxpayers with the highest incomes, a 
minimum of 87 million, in 2000, the last year for which 
government will release such data, now pay income, Medicare and 
Social Security taxes amounting to virtually the same 
percentage of their income as people making $50,000 to 
$75,000.'' Again, I quote, ``those earning more than $10 
million a year now pay a lesser share of their income in these 
taxes than those making $100,000 to $200,000.'' Now, I would 
ask the five of you, if you use the principle Mr. Beach 
outlined, how in the world is our Tax Code as recently amended 
fair?
    Mr. BEACH. If I could just lead off, because I made that 
statement, I think there is almost complete agreement, complete 
agreement in the tax economics community on the validity of 
that particular measure of equity. That is, for example, 
someone makes ten times more than me, they should pay ten times 
the tax. It is a simple way of looking at proportionality. Now, 
we get into the question, how has the Tax Code produced the 
sorts of things we are seeing across income, not just at the 
top but at the bottom and at the middle, with this; anomalies 
where people similarly situated in income pay very much, very, 
very different kinds of taxes?
    Mr. LEVIN. I agree. But one problem is the parity within 
income groups. We have this huge discrepancy between and among 
them. I wanted you to comment on that. Dr. Auerbach, maybe we 
can quickly go down the row.
    Mr. AUERBACH. There is no doubt that incomes have been 
rising at the top faster than in the rest of the income 
distribution. There is a dispute in the economics profession 
how much of it is associated with the tax system, how much of 
it is associated with other economic factors. I think it is 
certainly relevant when one designs tax policy to think about 
the pretax distribution of income. The fact that income is more 
unequal in the United States now than it was say 20 years ago 
obviously should be cause of concern and also should be 
relevant as we think about the appropriate progress of the tax 
system.
    Mr. BEACH. Just as a footnote to what I was saying, Mr. 
Congressman, another factor that this Committee has to deal 
with, as you do tax reform, you're going to have to deal with--
what every Committee on the Hill is dealing with is that Baby 
Boomers are reshaping income distribution, and some of the 
rapid growth at the top is the fact that my generation is at 
its key top-earning capacity. We are making probably as much as 
we will ever make, so you have to sort that out as you go 
through, what has the Tax Code done to prevent these anomalies?
    Mr. BURMAN. Table 2 shows the effect of the 2001-2004 tax 
cuts on the overall distribution of tax rates. You can see that 
the biggest proportion of reduction in rates applies to very, 
very wealthy people; top tenth of 1 percent get a 3.6-percent 
cut of share of income as compared to 2.2 percent for people in 
the middle. Now one thing that the testimony also notes is that 
we really don't know who the winners and losers are of these 
tax cuts because they're all financed by deficits. But overall, 
it could actually turn out to be a lot worse if it turns out 
that the deficits are closed by cutting many programs that help 
low- and middle-income families. It can be high-income people 
end up worse off in the long rung if the deficits are closed 
off by keeping the new middle class tax rates and raising rates 
at the top. I wish there was a principle in general that tax 
changes ought to pay for themselves, especially when you look 
at the looming deficits that are facing us now and the 
projections for the future; they are just horrifying.
    Mr. LEVIN. I don't know, Mr. Chairman, if they can 
continue.
    Chairman THOMAS. Briefly.
    Mr. HUBBARD. An observation and on your question about the 
New York Times story, I do think that most of the discussion 
that we have in economics suggests that the big gains in pretax 
incomes are just that, and Tax Code, as far as I know, plays a 
relatively small role. The New York Times story failed three 
tests that an editor could have easily used to pull such a 
story. One is it failed to account for distribution of business 
tax burdens. Second, that it assumed the AMT was permanent as a 
part of the President's tax agenda. He said exactly the 
opposite. Third is that it totally abstracted from any effects 
on economic growth and incomes. It was simply an unreasonable 
calculation of it, on its face
    Mr. SLEMROD. I would like to take issue with Mr. Beach's 
characterization that there is a consensus among economists 
that a fair distribution of tax burden is the same as a 
proportional. I think that is not true at all. I think, in 
fact, I think the consensus is that conclusions about fairness 
are not a matter of economics. If anything, the economic theory 
of taxation suggestions that if pretax income is getting more 
concentrated, as it certainly has over the last two decades, 
the proper response of the tax system is to become more 
progressive.
    Mr. LEVIN. Thank you.
    Chairman THOMAS. Thank you very much. You've restored my 
faith in the panel for not continually agreeing. We need to 
hear learned opinion. Gentlemen from California, wish to 
inquire?
    Mr. HERGER. Yes, thank you, Mr. Chairman, Mr. Beach, one 
option that has been--which has received attention in the tax 
reform discussion has been some form of a VAT. As I understand 
the concept, a VAT is applied at every stage of consumption 
from wholesale to retail and is passed along until it becomes a 
hidden and cloaked component of price, much like the cost of 
transportation or raw materials. In my view, the single largest 
drawback to evaluate a VAT is the fact that as a tax hidden 
from consumption, government can repeatedly and steadily 
increase the taxes without attracting the ire of the public. In 
fact, Europe and the United States had roughly comparable 
amount of taxes collected prior to Europe's introduction of the 
VAT in the 19sixties, but since that time, taxes have 
skyrocketed in Europe and have remained basically steady here 
in the United States. My question, shouldn't the experience of 
Europe with a VAT caution us in today's debate about 
fundamental tax reform?
    Mr. BEACH. Well, yes, I would certainly agree with what 
you've said. I just would add one thing that what Europe did 
was, well, what many European countries did was adopt this 
credit VAT and, at the same time, not do anything with 
eliminating their income taxes. Maybe countries had that, and 
so the combination of the two was a fairly steady increase in 
overall tax burden as countries decided, well, the VAT must 
fall most heavily on low-income people, so we have to raise the 
top income-tax brackets or top two-thirds of income tax 
brackets in order to achieve some distributional equity. If we 
were to eliminate income taxation in the United States by 
repeal of the operative amendment to the constitution, the VAT 
would probably be a positive thing if we could get rid of the 
income tax. I would strongly urge the Congress not to put both 
of them in place. Just look at the complexity issues, 
compliance issues. You may decide to tax one kind of candy bar 
but not another kind of candy bar. I used to do tax analysis 
for the State of Missouri. And every year, my greatest fear was 
to see all the sales tax lobbyists knock on my door. It is an 
extraordinarily difficult exercise to go through, and then it 
shuts off economic growth, Congressman. If you look at the 
growth rates of Europe, for many years, they have slowed down. 
Part of that is aging and financial problems, but clearly, I 
think a lot of economists, perhaps everybody even on this 
table, would agree that their tax system has something to do 
with those growth rates. So, I think there is a lot of serious 
thinking that the Congress must do before it goes down the 
route of recommending and adopting a credit form of the VAT.
    Mr. HERGER. You mentioned that it might not be as bad, even 
though I think it would be, bad anyway because of the hidden 
tax factor, the fact that the consumer is not aware of the 
taxes they're paying, and that you mentioned that perhaps if we 
did away with income tax, wouldn't you agree the chances of us 
doing away with the income tax are, very, very slight? To 
change our constitution, we know, would take a two-thirds vote 
in the House, three-quarters of the State legislatures or two-
thirds of the State legislatures and again three-quarters 
ratifying. I mean, the chances of that happening are pretty 
slight.
    Mr. BEACH. I see no likelihood of that happening in my 
lifetime, sir.
    Mr. HERGER. The proponents of that also argue that it has a 
few advantages, namely, business assets, expensing, border 
neutrality and taxing savings-only ones. Can't this be done in 
many other ways such as through a flat tax or national retail 
sales tax? Wouldn't these methods at least keep taxation 
transparent?
    Mr. BEACH. Yes, as Glenn Hubbard has said in his testimony 
and as others have written, there are many ways of achieving 
those goals besides going to a credit form of the VAT. Most of 
the consumption taxes we have entertained, the flat tax, which 
is, as the chairman said, is a subtraction VAT because it 
recognizes the expenses of other firms as deductible; all of 
those have in some fashion or another the attributes, the 
positive attributes, of the VAT.
    Mr. HERGER. Thank you very much, thank you, Mr. Chairman.
    Chairman THOMAS. The Gentleman would yield on his remaining 
time?
    Mr. HERGER. Yes.
    Chairman THOMAS. Mr. Beach, would you make the same 
criticisms of the subtraction method Mr. Shaw made of the 
credit, i.e., a comparison between Europe and Japan? I think 
the subtraction form of the VAT works a little better because 
you have an income-tax base you're working with. When you say 
VAT tax, you carefully qualify your tax as a credit.
    Mr. BEACH. Yes.
    Chairman THOMAS. Value-added, which was appropriate given 
the example of Europe, but to examine that tax in their 
entirety, in the various forms that they have, you would have 
to look at other methods of determining a VAT, and then you 
would have to compare cultural differences and ask yourself if 
you wind up with the same criticism. That is the only point I'm 
making.
    Mr. BEACH. That is very, very true, and I believe that that 
is a valid consideration, every time we look at other countries 
and their tax systems, to look at all the differences which 
come in and surround those tax systems; culture being one, the 
application of traditional law being the other, and the way 
they have raised up their different tax systems from all kinds 
of behaviors is the third.
    Chairman THOMAS. Thank you. Gentleman from Maryland wish to 
inquire.
    Mr. CARDIN. I thank you, Mr. Chairman, and I thank you for 
conducting this hearing, and I thank our panelists for their 
testimony. I would like to see us simplify the Tax Code. I 
think that is an important standard for us to reach, a goal for 
us to try to attain, but I also want to encourage growth, and I 
think that is an issue we need to talk about and savings. I 
have been working a long time in Congress to try to encourage 
personal savings in this country, so I think that is a very 
important goal. I think when we talk about tax reform you have 
to look at it as revenue-neutral; otherwise, it no longer takes 
off the mantle of being real true tax reform but as a reason to 
cut taxes or to raise revenue. I want to concentrate on another 
objective that I have, and that is, I believe ability to pay 
should be a factor in paying taxes. I think the progressiveness 
of our tax structure or regressiveness is something that we 
need to be mindful of. One would argue as to whether our 
current tax structures is properly progressive or not, and we 
could get into that debate. I would certainly not want to see 
us do a major tax reform and find out we end up with a more 
regressive way of collecting taxes here in our National 
government. So, let me start with Dr. Burman, see if he has any 
thoughts, how do you maintain as least as progressive of a tax 
structure as we have today if we were to abolish the income tax 
as we know it? Can it be done?
    Mr. BURMAN. Well, obviously, Glenn and I disagree on this, 
but I think it would be extremely difficult to do it in the 
context of the consumption tax. There have been proposals for 
so-called consumed income tax where you start with the income 
tax base and then you subtract savings from the base. Then 
there is a progressive schedule of tax that people know more 
about than I do. The Treasury Department looked at this in the 
mid-nineties. They examined it and basically concluded it would 
be unworkable; it would be more complex than the current tax 
system. The tax rates at the top, if your tax base is 
consumption, would have to be a lot higher than the tax rates 
are now, and that raises a lot of issues. It sounds like we are 
measuring consumption as an easy thing whereas measuring income 
isn't. I think, as Joel mentioned, if you're exempting savings 
from tax, then there is a tremendous incentive for high-income 
people to try to make wages and salaries look like savings, and 
they will find ways to do that. You have to do very complicated 
rules to avoid that, so there is--I think a consumption tax as 
progressive as the current system would be a very difficult one 
to attain.
    Mr. CARDIN. It is clear that whenever you bring in income 
to a non-income tax, you're going to add complexity. That is a 
given. We understand that. However, it would be difficult to 
find a tax structure that is more complicated than our tax 
structure. It is pretty hard for the average taxpayer to 
understand all the different lines on a tax return. One 
suggestion that has been made on the consumption tax is that we 
just exempt a certain level of consumption through the form of 
a tax refund. Is that workable? Can that be done? If there is a 
way of putting that into a tax structure, that actually in fact 
could calibrate a new tax structure to make it no less 
progressive than the current and still maintain a degree of 
simplification. Mr. Auerbach, you seem to be interested in 
that.
    Mr. AUERBACH. The flat tax or versions of that so-called 
graduated flat tax or an X-tax can give you any desired degree 
of progressivity toward the bottom through very high exemption 
levels. Basically, it is like a VAT except wages and salaries 
are taxed to individuals rather than to the businesses. Then 
you can have an exemption or a rebate, a tax rebate to lower 
income individuals. You can even layer an earned tax credit on 
top of it to keep a significant degree of progressivity at the 
bottom. I think the real challenge for any consumption tax 
proposal that one included is maintaining progressivity at the 
top. That is, you can get progressivity between low-income 
individuals and middle-income individuals. What is very 
difficult to do is to, if you're looking at the top percent of 
the income distribution, for example, is to preserve the same 
burden at that level. That is very difficult to do through a 
consumption tax alone.
    Mr. CARDIN. So, you have to combine with some form of 
income-related taxes if you want to maintain the 
progressiveness at the higher end.
    Mr. AUERBACH. There have been proposals to do that, for 
example, to do a consumption tax of one form or another up to 
$100,000, for example, followed with some sort of income tax 
maintained. It is a significant tradeoff though that keeps the 
complexity. Most of the complexity of the income tax is at the 
top. It is among high-income individuals and corporations. So, 
if you seek to keep that piece as really the only way of 
maintaining progressivity at the top, you're also losing a 
large share of the benefits of moving to a consumption tax. I 
think that is a decision you have to make. I'm not sure that 
there is any way around that.
    Mr. CARDIN. Thanks. Thank you, Mr. Chairman.
    Chairman THOMAS. Just briefly on that. Obviously, if you're 
talking about changing the fundamental system, i.e., income 
versus consumption, should you at the same time take into 
consideration what other aspects, pensions or others, that are 
based on income that you're going to have to rethink 
statutorily? Or should you not worry about that because it will 
take care of itself if you come up with a new system? Just 
briefly because I've been given the idea that somehow to go 
from an income tax to a consumption tax, you ignore all the 
laws that are based upon income to produce a pension system and 
others. You're going to have to take that into consideration; 
at least understand you're going to have to deal with it.
    Mr. SLEMROD. I agree, Mr. Chairman. It is not only other 
parts of the law; it is other parts of the economy that have 
come to rely on income measurement from income tax returns, 
such as financial aid officers and mortgage loan officers. If, 
in the absence of an income tax system, some other system of 
measuring well-being arises, we have to net out the cost of 
that.
    Chairman THOMAS. Not that the result wouldn't be useful or 
appropriate. You are just going to have to think about it. 
Okay, the gentleman from Louisiana wish to inquire?
    Mr. MCCRERY. Yes, thank you, Mr. Chairman. I would like for 
you to talk about the goals of a tax system. Several of you 
mentioned fairness, and you tried to describe what fairness 
would mean. In your discussions of fairness, you didn't say 
much about economic growth and how economic growth might factor 
into fairness. For example, if we have a tax policy that 
encourages capital formation, job creation, and we have a lower 
unemployment rate in the country, so more people have jobs, 
isn't that fairer than a tax system which discourages job 
creation, say, Europe, for example? Many countries in Europe 
have very high unemployment. They have very burdensome tax 
systems, very high benefit structures, Federal Government 
benefit structures, but the tax system seems to inhibit 
economic growth and job creation, so it seems to me that would 
be unfair for people who want to work and have jobs. So, 
shouldn't we factor in the growth policies inherent in a tax 
system as part of the fairness discussion?
    Mr. HUBBARD. I would think absolutely, Mr. McCrery. I think 
probably the biggest reason you're here at the table is exactly 
economic growth. In fact, in fairness, you know, when 
economists talk about the subject, there are really two topics 
that get conflated, and one--I think Alan Auerbach made this 
point very well--concern for low-income taxpayers as opposed to 
a concern for inequality itself. There are many ways you can, 
through the Tax Code or spending, address the needs of low-
income individuals, much of which falls under the rubric of 
fairness. At the top, it comes with enormous costs in economic 
growth. The most stimulating margins for investment, for 
entrepreneurship, for risk-taking are taxpayers at the top, not 
the bottom, of the income distribution. So, I would urge you 
very carefully to think about what it is, your concern for 
poverty as opposed to a concern for inequality, but yes, I 
think your concern is well placed.
    Mr. MCCRERY. Anybody else want to make comments on that?
    Mr. BURMAN. You're absolutely right that there is a 
tradeoff, and if you just focused on one or the other, you 
would end up with counterproductive results. One thing that 
actually people in our panel and the rest of the people in our 
profession have failed the people on this Committee is that 
there is no consensus yet on what the growth effects are. Glenn 
believes that people are very sensitive to taxes at the top. 
There is a lot of evidence that suggests that they're not so 
much, but I think the hardest thing about your job is that your 
going to evaluate the evidence and make these tradeoffs, but it 
is not either/or. You have to look at both of them.
    Mr. SLEMROD. Can I say briefly, Mr. McCrery, I think 
fairness is a code word for the fact that the objective is not 
only to maximize GDP--we could probably all agree that if we 
find some Tax Code that would increase GDP from $11 trillion to 
$14 trillion but, in so doing, all the income went to one 
person, that wouldn't be appropriate. So, we care not only 
about GDP but about its distribution. As your question 
suggests, we should care not only about distribution of income 
today but in the future and the economy growth more. Otherwise, 
incomes will be higher and what we don't agree as economists is 
how to trade off total GDP in a way with the distribution, and 
we need to hand that over to you to do that----
    Mr. BEACH. I think, Congressman, we know a lot more today 
than we did 20 years ago about how the passage of time effects 
individuals who are subject to a certain tax regime. So, it 
would be, I think, appropriate for you to drop into the 
economics community and say, Well, what do we know about 
savings and the role of taxes on savings, because we know more 
today than we did 20 years ago? What do we know about the 
barriers taxes raise to entrepreneurship and on the reentry of 
women into the work force? Those are the kinds of equity 
concerns that are tied into economic growth, but we can answer 
better today than when we did last time.
    Mr. MCCRERY. Earlier this year, our Joint Committee on 
Taxation here in Congress released a report analyzing three tax 
changes, each one costing about $500 billion over 10 years. One 
was a reduction in individual tax rates; another corporate tax 
rates; and another was personal exemption increases, the 
personal exemption. The Joint Tax Committee found that, of 
those three, the largest economic benefit was realized by the 
cut in the corporate tax rate. Also, that particular change had 
more feedback which reduced the actual costs, so to speak, to 
the Treasury. Is that plausible that that would be the winner 
among those three? Dr. Auerbach, you're nodding.
    Mr. AUERBACH. Yes, it is. I mean, nobody would increase the 
personal exemption as a way of stimulating growth or capital 
formation. That is, there as an element of fairness as a part 
of an overall tax system.
    Mr. MCCRERY. Agree that that is a plausible result? Thank 
you.
    Chairman THOMAS. Gentleman from Michigan, Mr. Camp, wish to 
inquire?
    Mr. CAMP. Thank you, Mr. Chairman, thank you all for being 
here. We have heard a lot of discussion about the potential 
problems with our current system and certainly with a variety 
of the reforms, VAT tax, sales tax, flat tax, et cetera. I say 
this somewhat rhetorically, but can anyone imagine a system in 
whatever shape worse in terms of complexity and impact on 
family budgets and savings rates than the current one we have? 
I think it was Dr. Slemrod who, in your written testimony, you 
have quite a bit about the complexity of the current system and 
the compliance burden, particularly with the self-employed. I'm 
wondering about certainly the issue you mentioned about 
computer programs making some of these calculations easier and 
making it more difficult. How much emphasis should we put on 
simplification if we start looking at ways to reform the Tax 
Code?
    Mr. SLEMROD. I think you should think about simplification 
not as an end in itself but as a way to make the taxpayer, to 
make the burden on taxpayers lower because of compliance costs 
and other things. The estimates suggest that the cost, the 
resource cost is quite high. So, that, and that could be 
significantly lowered with clever simplification, and I think 
there are unfairness issues built into the system because of 
the complexity. Some people profit from it. Other people lose 
from it. So, I would urge you, in thinking about simplicity, to 
always think about it ultimately in its effect on the cost of 
the economy and the fairness in which the tax burden is 
distributed among the population.
    Mr. CAMP. I think you mentioned particularly those large 
businesses which have economies of scale deal with the 
complexity problems. It is the smaller--or medium-sized 
businesses that really have the higher burden, compliance 
burden, there.
    Mr. SLEMROD. You know that economists don't agree on much, 
but I think this is a case where everyone who has studied 
compliance costs pined that the costs are regressive. The 
businesses, bigger businesses have lower compliance costs as a 
share of their scale than smaller businesses. Although, it must 
be said that small businesses are problematic for just about 
every tax system there is. Many VAT systems, for example, 
simply exempt small businesses, which is certainly a way to 
lower the compliance costs, but have other problems for the 
structural integrity of the tax system.
    Mr. CAMP. Mr. Beach, with regard to fairness, which 
obviously is an important consideration as all of you have 
mentioned, you talked about the lifetime consumption patterns 
and how those vary, and obviously, that affects the tax burden. 
How do we really sort that out with regard to tax fairness as 
we look at tax reform?
    Mr. BEACH. Well, it sort of depends on how you want to 
define the tax base from which you draw the revenues. Keeping 
in mind that to tax individuals at certain stages of life means 
to tax a different composition of their income versus their 
savings versus their consumption pattern. If we were to, in the 
illustration I used in my testimony, rely strictly on 
consumption, it is the case that individuals who are very young 
are taking on large packages of consumed things, buying a 
house, raising a family, paying for education. If we just 
looked at the total value, net present value of their 
consumption and taxed that, it would be very, very unfair. So, 
that needs to be taken into consideration. We're coming up with 
Social Security reform, Medicare reform. We have got to be very 
careful now to recognize that the assets of people in their 
fifties, perhaps, are going to be very useful from a public 
policy standpoint when they're in their seventies, so perhaps 
we have to think about pulling tax burden off of those saved 
assets. Look, we save a lot in our houses these days. To what 
extent is the public purpose achieved here by recognizing that 
people may have to negotiate some of those equity things that 
we are currently not thinking about as perhaps pulling out of 
the tax base and allowing people to use them for other 
purposes. So, yes, clearly, a consideration, there are 
individuals here in the audience who spend their careers 
looking at the lifecycle of taxation and a lot of good 
literature on that, Congressman.
    Mr. CAMP. Thank you very much. Thank you, Mr. Chairman.
    Chairman THOMAS. Thank you. The gentleman from Georgia, Mr. 
Lewis, care to inquire?
    Mr. LEWIS OF GEORGIA. Thank you very much, Mr. Chairman. 
Let me take a moment to thank each Member of the panel for 
being here today. Dr. Burman, I would like for you to assess 
something, comment on the evolution of the AMT. Is it true that 
the AMT was designed to address a situation which arose in 1966 
where 155 taxpayers making over $200,000 per year paid no 
income tax? If you just fast-forward to today, 3.8 million 
taxpayers were hit by the AMT in 2004, and now it has been 
paid, not by the richest, but by the hardworking taxpayers with 
four kids making $65,000 per year. Does this seem fair to you? 
Is this really the intended target for the AMT? Would you agree 
that any talk of real tax reform must include a real fix for 
the AMT problem? It should be done now, not putting it off down 
the road to some weeks or months or years later. I've seen 
figures that said that, by 2010, 35 percent of all taxpayers 
will be subject to the AMT. If we don't address this growing 
problem, aren't we in effect subsidizing tax cuts for the very 
rich on the backs of the middle class? Isn't this really a 
sneaky backdoor tax increase on the middle class?
    Mr. BURMAN. Congressman, I agree that the AMT has very 
little justification in current law. It was supposed to be a 
tax law on the rich, and increasingly, it is a tax on the 
middle class. Already, people earning, you know, between 
$100,000 and $500,000 are much more likely to be on the AMT 
than people earning over a million dollars. By the end of the 
decade, something like 90 percent of households with two or 
more children with incomes between $75,000 and $100,000 will be 
on the AMT. They were never the intended target. The problem 
with the AMT is that it brings in so much revenue. If you just 
eliminated the AMT, under current law, it would cost something 
like $700 billion, it would reduce Federal revenue by $700 
billion over the next decade. If the President's tax cuts are 
extended, it reduces revenues by about $1.2 trillion.
    Chairman THOMAS. Dr. Burman, if it would only cost us $700 
billion, I'd do it today. I think we are over a trillion and 
moving quickly, but that is okay. So, it is even greater.
    Mr. BURMAN. It is over a trillion against the President's 
baseline, if the tax cuts are extended.
    Chairman THOMAS. We are assuming certain things, yes, of 
course.
    Mr. BURMAN. I can't really say much to defend the AMT. It 
is increasingly a tax on the--AMT, it is pointless complexity, 
for most people, and it really does not have much to do with 
tax shelters, which was its original purpose.
    Mr. LEWIS OF GEORGIA. Would other Members of the panel like 
to respond?
    Mr. SLEMROD. I agree with Len that if one could find a way 
to maintain the distributional implications without the 
complexity of the AMT, we should get rid of it.
    Mr. AUERBACH. Yes, I think one of the problems with the AMT 
is that it codes this with the regular income tax. You could 
conceive of a tax reform based on the AMT as the primary tax 
system rather than the regular individual income tax. There are 
some elements of the AMT that present a broader tax base than 
the regular tax. The problem is that there are various defects 
in the AMT that cause it to affect more and more people over 
time, but you could take a path of repealing the regular income 
tax and fixing the AMT and keeping that. The current system is 
clearly not the place you want to be in the long run with both 
tax systems co-existing.
    Mr. LEWIS OF GEORGIA. Do any of you have any idea, could 
you explain maybe to me how a consumption tax would affect the 
elderly? These are people who have worked all their lives, and 
now they live on a fixed retirement income. How would a 
consumption tax affect the elderly? Would it have adverse 
impacts on the elderly.
    Mr. AUERBACH. It would depend on the type of consumption 
tax adopted. For example, if you adopted a VAT, the price 
level--the prices would likely go up to reflect the higher cost 
of the value-added tax. Social Security benefits are now 
calculated would--or are price level indexed, and therefore, 
recipients of Social Security benefits would be protected 
against the increases in the VAT, the cost of living through 
the value-added tax. Other types of consumption tax, that tax 
consumption directly, for example, would not necessarily 
provide that protection. Then there are still other types of 
consumption taxes which would provide some sort of explicit 
exemption or transition relief for people who have previously 
accumulated assets. So, that, really, it is, you have to look 
at the details of the consumption tax rather than just the 
concluding that a consumption tax taxes elderly. It is more 
complicated.
    Mr. LEWIS OF GEORGIA. I know my time is up, but could this 
lead to double taxation for the elderly, for a certain segments 
of the society?
    Mr. AUERBACH. It could, and as one of the other people 
pointed out and unfortunately, that is one of the quote-unquote 
economic benefits of consumption tax. Sometimes, in studies 
that people do, including some that I've done, estimate the 
growth effects of consumption taxation, some of the consumption 
taxes studies, do impose double taxation on the elderly and 
holders of previously accumulated wealth. If you try to relieve 
some or all of that double taxation, it may be a fairer tax 
system to the asset-holders, and it may also be one that 
provides lower growth opportunities.
    Mr. LEWIS OF GEORGIA. Thank you. Thank you, Mr. Chairman.
    Chairman THOMAS. Thank you. Gentleman from Pennsylvania, 
Mr. English, may inquire.
    Mr. ENGLISH. Thank you, Mr. Chairman. Dr. Hubbard, I 
noticed that several of the panelists have discussed in their 
testimony the size of the trade deficit in recent years which 
is, frankly, a matter of great concern to me, representing as I 
do a manufacturing district. I know one possible reason among 
several for our disadvantage in this area may actually be a 
matter of trade policy. I've come to realize that every one of 
our major trading partners employs a border-adjustable tax 
system for their imports and exports. We do not. Taking into 
consideration that some of our largest trading partners also 
fail to apply free-market principles to their economic and 
monetary policies, what would be the impact on economic growth 
here in the United States if we were to utilize a border-
adjustable tax system? In particular, could you discuss for us 
the short--and medium-term impacts of moving to that kind of a 
system?
    Mr. HUBBARD. Well, I think, first, in understanding the 
current account deficit, it is important to look at the really 
big trends, which are the fact that we have some large 
economies in the world, particularly in Asia that are not able 
and/or willing to absorb domestic savings. The United States 
has investment being more desirable here currently than saving 
is. I think that there are a number of tax policies that 
inhibit competitiveness, the corporation income tax itself, the 
lack of a territorial tax system. The Tax Code probably is not 
the single biggest feature if I were to think of public 
policies, I would put the tort system easily equal to that. I 
don't think you should expect a border-adjustable tax per se to 
have large positive benefits. I think the positive benefits 
come from the tax reforms that would in fact cut the tax burden 
on American corporations, and I agree with you; those are 
highly desirable.
    Mr. ENGLISH. Intuitively, I'm trying to go from, the 
macroeconomic, to more of a microeconomic perspective. If we 
are imposing a tax burden on our exports that is substantially 
greater than the tax burden being carried by the products that 
are from our trading partners, whether it is competing in our 
market or in their market or in a third market, doesn't that 
over time, particularly in manufacturing where there tends to 
be a relatively thin profit margin, doesn't that tend to be a 
significant negative factor?
    Mr. HUBBARD. I think it is a significant negative factor, 
Mr. English. I just don't think it is that much related to 
border-adjustments, per se. I think it would be worthwhile your 
considering cutting the rate of corporation income tax. It 
would be worthwhile for the Congress generally to consider tort 
reform. All those things would help American manufacturers 
greatly. My gentle pushback would be that border adjustability 
per se is not the source of those gains. It is the reforms.
    Mr. ENGLISH. I know, Dr. Auerbach, you've also taken a 
position on this. Would you give us an insight into how you 
think border adjustability might or might not have an impact on 
our trade balance?
    Mr. AUERBACH. I agree with what Dr. Hubbard just said, 
which is that there are things you can do in tax reform, in 
particular, encourage national saving, which would reduce the 
trade deficit. That could come from any number of tax reforms, 
border adjustments or not. Border adjustments appear to make 
our exports more competitive, but I think the economists 
generally agree that the result would be an appreciation of the 
dollar. So, that would undercut the apparent benefits of border 
adjustment. I should say, I mentioned in my testimony, it is 
sort of ironic because the main beneficiaries of border 
adjustments would be the holders of foreign holders of U.S. 
dollar denominated assets.
    Mr. ENGLISH. Here, again, aren't you applying a 
macroeconomic analysis to what in many cases is a microeconomic 
problem that individual products when they face, you know, when 
they are sold at 12-percent more--let's say the cost of the tax 
system, relative to similar products in a third market or in a 
foreign market or even in our market if imports are coming in, 
in effect, without the cost of our tax system built in, isn't a 
12-percent differential or some such fairly significant for 
individual products?
    Mr. AUERBACH. It certainly is significant. I don't disagree 
with that. All I'm saying is that that imbalance, whatever it 
is, would not be affected by introducing--by the active border 
adjustment. That is, it might be affected by lower costs, lower 
corporate income taxes, lower costs of production. It won't be 
affected by the simple fact of border adjustment taxes, that 
is, relieving the tax on exports, extending it to imports, 
simply because the exchange rate will adjust, and whatever 
benefit would have been conveyed by the reduced tax on exports, 
for example, or the higher tax on imports would be undone by an 
offsetting appreciation of the dollar, which makes our exports 
more competitive--less competitive and makes imports more 
attractive to us. So, the producers facing this disadvantage, 
you suggest in your hypothetical example would continue to face 
that disadvantage in the presence of border adjustments if 
other provisions were the same. Of course, tax reform can lower 
costs in many ways, make producers more competitive in many 
ways; it is simply not the border adjustment activity. It is 
everything else that goes on, in addition.
    Mr. ENGLISH. Thank you. Thank you, Mr. Chairman.
    Chairman THOMAS. Thank you. Gentlemen from Kentucky, Mr. 
Lewis, wish to inquire.
    Mr. LEWIS OF KENTUCKY. Thank you, Mr. Chairman. Dr. 
Hubbard, would you describe the tax legislation enacted in 2001 
as simply changes to the Tax Code or would you say they have 
been incremental steps toward a more pro-growth tax system?
    Mr. HUBBARD. Well, I think they are certainly both. They 
are important changes in the Tax Code. Each is pro-growth and 
also consistent with fundamental tax reform. Review what you 
did, you cut marginal rats in the first tax act. You introduced 
investment incentives, albeit it temporary in the second; and 
third, the reduction in dividend and capital gains taxes. I 
think these are all good steps. I would prefer to see a bit 
more of a continuation in those steps and cleaning up the base 
of the tax to pay for the reforms. Yes, I think they are 
excellent steps for tax reform.
    Mr. LEWIS OF KENTUCKY. Are we seeing results from that tax 
legislation through--are seeing a decrease in the deficits 
because of the growth in the economy because of the tax cuts?
    Mr. HUBBARD. I think it is certainly the case that economic 
activity was bolstered by all three tax cuts, focusing on the 
second, on the investment incentives. I think they played a 
particularly powerful role in the investment recovery. I think 
the cuts in marginal rates and dividend capital gains taxes 
have been important. Taxes don't, in and of themselves, don't 
pay for themselves. They certainly contributed to economic 
activity but not sufficient to pay their costs.
    Mr. LEWIS OF KENTUCKY. Yes, thank you, that is all.
    Chairman THOMAS. Thank the gentleman. Gentleman from 
Massachusetts, Mr. Neal, wish to inquiry.
    Mr. NEAL. Thank you, Mr. Chairman. Dr. Burman, we have all 
suggested, and for many years here now, the difficulty that the 
AMT presence. What do you think the economic impact might be of 
repealing the AMT?
    Mr. BURMAN. I guess it would depend on how you did it. If 
it was done in revenue-neutral fashion, say by closing 
loopholes, broadening the base, I think the economic impact 
would be positive. Most of the people who are on AMT actually 
face higher marginal tax rates under the AMT than they do under 
the regular tax system. That means that there are disincentives 
for working and saving. The AMT is a source of pointless 
complexity. Some of the compliance costs that Joel counted up 
is that everybody has to fill out the AMT form. By the end of 
the decade, it will be 30 million household will have much more 
costly tax compliance than they do now. Also, to the extent 
that you think that economic incentives in the Tax Code have 
some purpose, the fact that people don't know whether they are 
going to benefit from those incentives depending on whether 
they are on the AMT or not in the year is a bad thing. So, I 
mean, I can't tell you how much it would help, but the science 
would definitely be positive.
    Mr. NEAL. I think the chairman indicated that it was his 
estimate that it might cost more than a trillion dollars to 
repeal the AMT.
    Chairman THOMAS. Would the gentleman yield briefly?
    Mr. NEAL. Yes.
    Chairman THOMAS. When it was a $300 billion problem, it was 
hard to deal with. Now that its $700 billion moving toward a 
trillion, it seems that we might be able to deal with it.
    Mr. NEAL. Is it the position of the entire panel that it is 
worth getting rid of the AMT?
    Mr. BEACH. If I could just say, Congressman, one of the 
things that concerns me and, sitting next to the world's 
leading expert of the AMT here, one of the things that concerns 
me is, how is behavior changing today among taxpayers who are 
not yet subject to the AMT in anticipation of their being 
subject to the AMT? That is one of the costs that is hidden 
here, but the Committee should recognize that people may be 
changing dramatically, maybe family formation organization, and 
they may be changing their decisions to buy certain kinds of 
properties that would trigger an AMT. So, these are the kinds 
of issues that surround that, and you ought to also be aware 
and I think we are probably all should be concerned about its 
effects.
    Mr. NEAL. Suggestions from the panel on how we fix a $700 
billion problem, maybe a $1 trillion problem, Dr. Burman?
    Mr. BURMAN. One of the original purposes of the AMT was to 
discourage tax shelters, and before 1987, the biggest AMT 
preference item, the thing that was added back was the 
difference between tax rates on capital gains and ordinary 
income. Virtually any kind of individual income tax shelter you 
can think of is designed to take advantage of the lower rates 
on capital gains. So, one thing you could do, and I discuss 
this in my testimony before a financial services Subcommittee a 
couple weeks ago is, you could restore the differential, 
restore capital gains as a preference item under the AMT--they 
would be taxed the same as other income--and then use the money 
that was brought in by that to allow people to claim their 
children as deductions against the AMT, index the threshold and 
the rates for inflation--so people don't get thrown on the AMT 
just by inflation--and making some other changes. It would 
reduce the number of people on the AMT by 2010 by 30 million to 
3 million tax returns. I wouldn't eliminate the AMT all 
together. You could eliminate the AMT by just building, by 
adjusting the tax rates to offset the revenue that you've lost. 
It is an unattractive prospect politically because you're 
replacing a hidden tax with an explicit tax, but in fact, we 
are taxing people anyway. By the way, the reason I emphasize 
revenue neutrality is that, if you finance this through 
deficits, I think the positive effects on the economy would 
unbalance the negative. It would push up interest rates over 
the long run, and it would crowd out private investment.
    Mr. NEAL. Dr. Hubbard, Member of the Bush Administration, 
you indicated it was not the position of the Administration to 
make sure that AMT was a permanent part of the tax structure. 
Didn't you say that earlier?
    Mr. HUBBARD. I did, and first, let me note, the AMT is a 
cautionary tale of what happens when you focus so much on a 
handful of distributional objectives. We now find ourselves in 
a complicated box because of that original jihad. I think it is 
important to replace the revenue loss of the AMT. There is no 
principled reason for having an AMT. You, in your wisdom, 
legislate tax preferences. You shouldn't be in the business of 
taking them away. I would not put as candidates what Dr. Burman 
said of getting rid of all the pro-growth features in the Tax 
Code. I think probably better would be State and local tax 
deductions, home mortgage interest deductions, base broadeners 
that might have the similar distribution that your trying to 
achieve. That's what I would suggest you look at.
    Mr. NEAL. Your indication was that the Administration did 
not foresee this as being a permanent part of the tax 
structure. Do you have any indications of when the 
Administration might send a recommendation over to the 
Congress? We have questioned the Secretary of the Treasury many 
times since he's been here, and we all acknowledge it is a 
problem. I don't know that the Administration has suggested 
anything in terms of getting rid of it yet.
    Mr. HUBBARD. Of course, the President has a tax reform 
panel that will advise Secretary Snow. It would be hard to 
believe that any fundamental tax reform that came out the 
Administration wouldn't involve some serious restructuring of 
the AMT.
    Mr. NEAL. Thank the Chairman.
    Chairman THOMAS. Thank the gentleman. Gentleman from 
Wisconsin wish to inquire?
    Mr. RYAN. I do, Mr. Chairman. Dr. Hubbard, I was intrigued 
by some of the things you said in your opening statement on 
transition costs. See if I can summarize this. I just want to 
ask you to elaborate on this. Whether we go toward an income 
base or consumption base, all roads kind of lead to the same 
position if we adopt the principle of taxing income once at its 
source, meaning no taxation on savings and investments, they're 
on very similar tax bases. Correct?
    Mr. HUBBARD. That's correct. The difference between a 
fundamental income tax reform along the lines of what the 
Treasury did in the early nineties or the American Law 
Institute and something like the flat tax would be very modest. 
It would be the time, value of money on depreciation 
allowances. That is it.
    Mr. RYAN. Exactly. So, let's go into the transition cost 
issue. Anybody else, I would be interested. We in this 
Committee will deal with an avalanche of interests coming to 
this Committee trying to protect preferences they have in the 
Code. We'll probably hear of a lot of concern about transition 
costs. Give us the economic, your economic assessment of 
transition costs, how best to deal with those things. It seems 
to me you just allow a carryover of past credits and 
depreciation schedules, things like that moving into a new 
system where you sort of have a grandfather period, and that 
ought to settle the issue. If I'm oversimplifying, let me know.
    Mr. HUBBARD. You have a fundamental choice. You can 
grandfather in some we hold harmless from the past. I have 
argued and some others have argued as well that the whole 
notion of transition costs may be overstated for industry in 
general. For example, the movement to expensing would reduce 
corporate equity values, but reducing dividend and capital 
gains taxes goes the other way. I think, on balance, transition 
costs may be more modest. Where they're going to be large and 
where you will definitely hear from people are special 
provisions in the Code. Those, I think, you know, economists 
would generally argue to resist such temptations. Those will be 
the really large changes, and that of course will be the core 
of your----
    Mr. RYAN. From a macroeconomic standpoint, it ought to be 
superior for the U.S. economy as a whole.
    Mr. HUBBARD. There is no silver bullet here. If you keep a 
grandfathering system, you may think of that as simple, but it 
actually creates enormous tax planning opportunities. On the 
other hand, the cold turkey method that I'm suggesting is 
simpler, won't create the tax planning, will cause some rough 
justice. So, there is no silver bullet for you in that.
    Mr. RYAN. Anyone else wish to comment on that?
    Mr. BEACH. Also the tradeoff of higher rates during the 
transition, or higher rates permanently if you bring in 
grandfathering as well, taught us in the 1986 situation, where 
we ultimately began to see the value of trading certain 
preferences for lower rates, and that may be the discussion you 
have on this.
    Mr. SLEMROD. I agree that there are very large tradeoffs to 
face in determining how to do this transition. If you, for 
example, as you suggested, allow depreciation to consider past 
assets, and moving to expense is an enormous revenue cost. If 
you try to keep the old rules on with the new rules, as has 
been suggested, you have two parallel systems which can be very 
complex. So, all of the tradeoffs that one faces in designing a 
new system come up in thinking about the transition to a system 
that we might all agree is better.
    Mr. RYAN. One more question, Dr. Auerbach. I want to ask 
you to elaborate on the exchange-rate argument. We hear this 
quite often about border adjustability, and the exchange rates 
will wash out the benefits. Is that not a measurement of long-
term exchange-rate fluctuations versus medium--or short-term 
advantages or disadvantages that are attributed to border 
adjustability? Do those happen in the same time equation or 
not, meaning if, in the next 1 to 5 years, we border adjust our 
taxes, does that not give us a competitive advantage that would 
not be fully washed away from adjustments in the exchange 
rates?
    Mr. AUERBACH. No. I think in this case--this is theory, 
because we don't have a clean experiment where we have said, 
let's have border adjustments and now let us get rid of them. 
Our theory tells us pretty certainly that the exchange-rate 
adjustment would be immediate. So, the producers would never 
see the advantage.
    Mr. RYAN. Anybody else wish to comment on that point? All 
right, thank you very much.
    Chairman THOMAS. Gentleman yield the time he has briefly?
    Mr. RYAN. Yes.
    Chairman THOMAS. I think everyone understands the tradeoff 
between credits and deductions in a lower rate. My question, 
strictly based on historical analysis, is how long are you 
going to keep the lower rates? They didn't even last 5 years 
the last time the tradeoff was made. So, there has to be some 
commitment to a long-term exchange rather than a short-term 
one. Gentlemen from Louisiana, Mr. Jefferson, wish to inquire?
    Mr. JEFFERSON. Thank you, Mr. Chairman. The President has 
laid down at least three markers with this tax reform panel. 
One is that he wants them to come up with a revenue-neutral 
result. Second is he wants them to not affect home mortgage 
deductions. Third is he doesn't want to effect charitable 
deductions. Do you think, starting out with these premises, 
that there is a chance to achieve true tax reform?
    Mr. BURMAN. One of the two big sources of efficiency gains 
from tax reform is broadening the base. The fact is that, you 
know, if you went to say a flat tax or a consumption tax, there 
would be as much pressure to put things like charitable 
contributions, home mortgage interest deductions into the Code 
as there is under the income tax. Obviously, it is upon this 
Committee and the Congress to decide what goes into the 
package. It is actually a poor signal that, even before you 
started, that there are two of the largest tax expenditures off 
the table for significant reform.
    Mr. JEFFERSON. Any other comment on it?
    Mr. HUBBARD. I wouldn't put it quite that way. I think 
there is a legitimate argument to be made for charitable 
deductions, for home mortgage interest deductions. I at least 
didn't hear the President say it was off the table. He said it 
was there. We already have a cap on the home mortgage interest 
deduction. I think it is possible to have revenue-neutral and 
distributionally neutral pro-growth reform that has what the 
President had in mind, and it eliminates the tax on savings at 
the investor level. I think all those things can be 
accomplished.
    Mr. JEFFERSON. Let me ask another question. This business 
about pro-growth and revenue-neutrality, you all made comments 
that the budget deficits are retardant to economic growth and 
that we need to fix that. How can we accomplish these goals, 
both these goals simultaneously, a revenue-neutral approach to 
reform and attacking these deficits? It seems that one has 
quite an effect on the other.
    Mr. HUBBARD. You're leaving out one part of the equation, 
which is spending, and I would invite you to look at the 
CBO's----
    Mr. JEFFERSON. Let's assume we keep the idea of spending. 
We don't do anything with it. Let's assume you keep it just 
like it is----
    Mr. HUBBARD. You just eliminated the chance for adjustment, 
Congressman, because if you look at the CBO's analysis of the 
fiscal picture over the next 25 or 30 years, it is entirely a 
spending story. That is, revenue shares and GDP are roughly 
constant. Suspending is accelerated. The fiscal crisis facing 
the country----
    Mr. JEFFERSON. The revenue share of GDP, you know, it may 
be constantly going forward, but has been cut quite 
substantially from about 20 percent to now somewhere around 16 
percent. So, it isn't accurate to make that point.
    Mr. HUBBARD. Congressman, Social Security and Medicare 
alone will consume about 10 percentage points of GDP more in 30 
years than they do today under current law. The Federal tax 
share in GDP let's say were 18 percent, was a target. That size 
of a tax increase is what you're looking for. That is 50 
percent if you're looking at this as a tax problem. I would 
submit humbly to you that it is a spending problem.
    Mr. JEFFERSON. If it is a spending problem, and we are the 
Committee on Ways and Means, it seems that we have got to 
figure something out with respect to that. If we are making a 
tax policy here as opposed to taking care of the requirements 
of government, you can't leave the requirements out. At some 
point down the line, I suppose, there may be some changes made 
to Social Security and Medicare, whatever you're talking about 
is the entitlement programs that are driving spending. If we 
approach this tax reform without regard to the budget deficits, 
what I'm hearing from every panelist here is that it is quite 
an impossible task to have a revenue-neutral approach to this, 
and that means we're locked into deficits, even if you make 
changes in the spending and even if you didn't go any farther 
than this today. Here we are spending X on Social Security, 
Medicare, and X on everything else, and we still have deficits. 
If you stop spending on those things right now, today, we 
couldn't fix the deficit with a revenue-neutral approach. I'm 
just trying to figure out if we have made decisions already 
with respect to our taxing program that have us locked on to a 
kind of a slope now that won't permit us to make genuine tax 
reform without reviewing everything that has happened in the 
last few years and everything that may happen in the future and 
not just starting now and looking forward.
    Mr. SLEMROD. Congressman, I agree with the thrust of your 
comment, that putting on the table incentives for homeownership 
and charity are in a way constraining the clean base that tax 
reform could achieve. Your second point, that putting on the 
table at the beginning that the tax reform has to be revenue-
neutral is also constraining in a big-picture approach to the 
fiscal challenges that the country faces. So, I'm very 
sympathetic to that line of questioning.
    Mr. BEACH. Congressman, I was disappointed to hear that 
that was the opening gambit. However, as you know, being an 
observer of Washington, making a good tax bill is hard enough. 
Reforming the Tax Code is almost impossible. It might be 
useful, for discussion purposes, leaving up to this Committee--
as the President said, revenue-neutrality, home-owner 
deductions are off the table and charitable deductions remain 
neutral. I doubt very seriously whether we can have a tax 
reform and maintain those three principles in place.
    Mr. BURMAN. I think it would be better if tax reform were 
an opportunity to deal with the deficit problem. The problem 
with revenue-neutral tax reform from, a political problem, is 
that any kind of sensible reform is going to raise taxes on 
millions of people. You couldn't have a sensible tax system 
that would look like the current one. It would be a hard sell 
if you're not raising taxes overall. I think if tax reform were 
packaged with telling people that the consequences of tax 
reform is going to be lowering the taxes of our children, 
reducing this crushing debt burden, I think that would be 
positive. You could do tax reform in a way that you could raise 
revenue without diminishing economic incentives. There is still 
a lot of corporate tax breaks that have companies chasing tax 
incentives rather than doing their business, and you could 
raise a lot of revenue that way.
    Chairman THOMAS. The Chair was intending to end the hearing 
at 12:30 p.m. We have a number of Members who wish to inquire. 
The Chair would offer, with unanimous consent, that the 
remaining Members voluntarily limit their inquiries to a 3-
minute timeframe. Is that acceptable? If it is, then everybody 
probably can make it. With that I recognize the gentleman from 
Georgia.
    Mr. LINDER. Thank you, Mr. Chairman.
    Chairman THOMAS. Thank you very much, Members.
    Mr. LINDER. We have a Tax Code today that is in fact a flat 
tax on income, 93 years later. We flattened it out again in 
1986 only to have amended it 14,000 times since then. Does 
anybody believe for a moment that future Congresses will keep 
their hands off it? Does anybody believe for a moment that we 
can broaden the base? We have removed 50 percent of the income 
earners from the income tax roles essentially. Are we going to 
put them back on? I doubt it. Dr. Slemrod, you said keep it 
clean. That would take a supermajority to change it. Do you 
think that we could pass that? I doubt it. Let me get to your 
compliance cost. You and I have discussed this one other time. 
You say $135 billion. Does that take into consideration the 
cost of the considering the tax implications of a business 
decision?
    Mr. SLEMROD. The $135 billion figure that I refer to is the 
collection cost, the time and money that the taxpayers put in, 
the IRS budget, and third parties such as employers doing 
withholding. It doesn't take into account the cost to the 
economy when the tax system distorts decisions such as business 
investment decisions or labor supply decisions.
    Mr. LINDER. Nor does it take into account business or 
opportunity costs.
    Mr. SLEMROD. It does take into account the opportunity 
costs of the taxpayers' time that they put into dealing with 
their taxes.
    Mr. LINDER. Why does your 3.2 billion figure differ so 
largely from the Tax Foundation's 6.6 billion hours figure?
    Mr. SLEMROD. I am not--I don't know how to reconcile the 3 
billion with the 6 billion hours' figure. There was a very 
extensive study done by IBM Consulting which came up with a 
number at 3 billion. I think that we can probably agree that 
whether it is 3 billion hours or 6 billion hours, it is a lot 
of hours.
    Mr. LINDER. It is too much. Dr. Burman, you talked a good 
bit about protecting the poor. We have got a study from 1997 by 
Dale Jurgensen who argues that 22 percent at the producer price 
level represents a tax component, and the poor are paying that. 
If you were to get rid of all tax on income for consumption 
tax, that would go out of the system, prices would be lower, 
and a rebate would totally untax them. What is wrong with doing 
that?
    Mr. BURMAN. I don't quite understand.
    Mr. LINDER. Twenty-two percent of the price system today 
represents a tax component. People who are living at or below 
the poverty level are losing 22 percent of their purchasing 
power to the current system.
    Mr. BURMAN. What you are saying is that there is--the 
efficiency cost of the tax system shows up in prices. I mean I 
don't argue that there is an efficiency cost that shows up. The 
fact is that the current system does a lot to help low-income 
people. They get, you know, as I noted in my testimony, low-
income families get $4,000 or $5,000 a year in tax breaks. You 
know, a lot of these are families that are working full time 
and struggling to get by. It makes a huge difference. In a flat 
consumption tax or a flat rate tax, without some kind of cash 
grant to low-income people, I think they would be in big 
trouble.
    Mr. LINDER. Mr. Beach, one quick question. Mr. Chairman, 
may I?
    Chairman THOMAS. Very briefly.
    Mr. LINDER. You say that a consumption tax 
intergenerationally hurts young people who purchase more at a 
young age. Dr. Kotlikoff has published that cross-generational 
taxes are very progressive because for the first time in 
history we tax wealth instead of just wages. Would you comment 
on that?
    Mr. BEACH. Well, I think you need to keep that as one of 
your considerations, is how does the tax burden change as life 
goes forward, as we go through the life cycle? Lawrence 
Kotlikoff is very, very gifted on this. He is talking about an 
intergenerational effect. I think I was talking about an 
intragenerational effect. It will be something you will be 
thinking about, I am sure.
    Chairman THOMAS. Thank the gentleman. Gentleman from 
California, Mr. Becerra. You will pass? Gentleman from Texas, 
Mr. Doggett. We had agreed to limit our comments to 3 minutes.
    Mr. DOGGETT. Thank you very much. Thanks to the panel. You 
are here with us, of course, on the month of D-Day, and I refer 
not just to the very important historic event, but that this is 
the D-Day month, as our Chairman and the Ranking Member on the 
Subcommittee on Social Security have indicated, when we will 
see a legislative proposal before the Committee to implement 
the President's Social Security proposal. Let me just ask you 
first if there is anyone on the panel who thinks the idea of 
having individuals put part of their Social Security taxes into 
private accounts, if they oppose that idea.
    Mr. AUERBACH. I----
    Chairman THOMAS. I take it that there is no one that 
opposed that concept.
    Mr. AUERBACH. I think you--one needs to say more. I think 
it certainly should not be viewed as a way to get a higher rate 
of return or as a solution to the funding problem. It has other 
potential advantages and those can be discussed.
    Mr. DOGGETT. Okay. You have, I assume, some objection to 
it.
    Mr. AUERBACH. I have some concerns about lending money, 
essentially offering a margin loan to individuals who may have 
very little experience in capital markets, and I think 
considerable protections would have to be given to them.
    Mr. BURMAN. I think there are a lot of issues associated 
with that and Alan's point, as well as just the fact that----
    Mr. DOGGETT. Because my time has been limited I will let 
you amplify on it more later, but I assumed you might be one 
Member of the panel who had questions about it. Of course, we 
have been told also that this proposal won't be able to stand 
on its own, that it will need to be cloaked, covered, combined 
with, merged with some kind of action on taxes, which is I 
suppose the only reason that all of you have been called here 
this morning. As far as tax simplification, since we know that 
the length of the Tax Code has almost doubled under Republican 
leadership here in the House, are there any proposals that the 
Republicans have added in the last decade that have added to 
tax complexity that you propose specifically should be 
repealed? I assume you have some and I would be delighted to 
have you amplify on them. Is there anyone else who sees--on the 
panel who sees specific measures that the Republicans have 
added complexity in the length the Tax Code that you would want 
to see repealed?
    Mr. BEACH. Congressman, it may shock you to learn that the 
Heritage Foundation doesn't distinguish between Democrats and 
Republicans with respect to----
    Mr. DOGGETT. Well, I will settle for just what the Congress 
has done in the last 10 years while the Republicans have been 
in the majority.
    Mr. BEACH. We would eliminate many of those credits which 
are in the Code right now.
    Mr. DOGGETT. Many of the tax credits?
    Mr. BEACH. Yes. Deductions, of course, if we had the right 
kind of alternative system in place. We are on the record on 
that.
    Mr. DOGGETT. Thank you very much.
    Chairman THOMAS. The gentleman's time has expired. 
Gentleman from Colorado, Mr. Beauprez, wish to inquire?
    Mr. BEAUPREZ. Thank you, Mr. Chairman. As a small 
businessperson all my life until I came to Congress a couple of 
years ago, believe me, I would love to spend considerable time 
with you gentlemen. I am going to be very brief and yield to my 
colleague from Georgia, though, in just a moment. What shocks 
me as I look at this, whether it is the 1.6 billion work years 
by your calculation, Dr. Slemrod, or about twice that from the 
Tax Foundation, it is a staggering amount. I submit to you, Dr. 
Burman, that if we want to eliminate the deficit, as I 
desperately would like to, I would like to see those couple 
billion work years put to use in this country actually 
producing something other than just trying to figure out how 
many dollars to send to Washington. With that statement, I am 
going to yield to the gentleman from Georgia, who I think has 
put more time and effort into this subject matter than almost 
any other Member of Congress I can imagine.
    Mr. LINDER. I thank the gentleman. I have spent a good bit 
of time over the last 10 years on this. Dr. Burman, you said in 
your printed statement that it is not likely to see any 
economic benefits from moving to a consumption tax. Over 10 
years, you are the first economist I have ever heard say that. 
Is that a hunch or is that a study?
    Mr. BURMAN. Well, there is a lot of evidence. I don't know 
that I--I think I said that I thought the economic benefits 
were relatively small. Most of the benefits come from the 
transition tax on old people which I think would be hard to 
implement, and from base broadening which you can do under the 
regular income tax. The fact is that the other economic effects 
are mixed. You cut taxes on savings, you increase taxes on 
work. Dr. Auerbach and his colleagues have done some research. 
They show small economic improvements from switching to a 
consumption tax, but it is not going to turbocharge the 
economy. There are other economists find larger effects.
    Mr. LINDER. Merrill Lynch, Cap Gemini, McKenzie and Boston 
Consulting Group have concluded between the two of them, that 
there is between $9 and $10 trillion in offshore accounts right 
now. They are seeking both safety so they are in dollar-
denominated deposits, and they seek secrecy. As long as we keep 
the IRS in place, will that money ever find its way into our 
economy? If we get rid of the IRS will that money find its way 
into our economy?
    Mr. BURMAN. I am not an expert on the business issues. I 
mean, I know doing things to reduce the tax incentives that 
create these corporate tax shelters would, in my view, would 
improve economic efficiency and deal with some of those 
problems. I don't know that that is specifically a problem with 
the income tax versus consumption tax. It is with these 
asymmetries that you tax some kinds of income different from 
others and you create these incentives for tax sheltering.
    Mr. LINDER. Anyone else care to comment on the offshore 
money? Thank you. Thank you, Mr. Chairman.
    Chairman THOMAS. Thank the gentleman. Gentleman from North 
Dakota wish to inquire?
    Mr. POMEROY. Yes, Mr. Chairman. I would follow up on some 
questions asked by Congressman Levin. As he referenced the New 
York Times article, the richest are leaving even the rich far 
behind. The analysis states in this article, and I will just 
quote: ``The Times analysis also shows that over the next 
decade the tax cuts Mr. Bush wants to extend indefinitely would 
shift the burden further from the richest Americans with 
incomes of more than a million or so. They would get the 
biggest share of the breaks in total amounts and in the drop in 
the total amounts and in the drop of their share of Federal 
taxes paid.'' I would ask the panel, have you had a chance to 
analyze the work of the New York Times reporters that wrote 
this analysis, and do you agree or take issue with it?
    Mr. BEACH. Congressman, if I could just say, in that 
particular article--and I believe that is the one by David K. 
Johnson that you are referring to?
    Mr. POMEROY. Yes, sir.
    Mr. BEACH. He says in there that the Heritage Foundation 
looked and approved of these numbers. I would like to just 
clarify that we have not done that yet. Len and I were talking 
just a moment ago before the hearing that he is going to share 
the data with me. Len Burman's operation supplied a great deal 
of that data for that analysis. I will point out in addition to 
what Glenn has said about the defects of the study, I did note 
that it did not rely on an estimate of the macroeconomic 
effects of the Bush tax cuts.
    Mr. POMEROY. Dynamic scoring. I have 3 minutes. That is all 
I get from you. Len?
    Mr. BURMAN. The dynamic effects of the 2001 to 2004 tax 
cuts have been looked at by the CBO and Joint Committee on 
Taxation and they conclude that this sort of depends on how you 
close deficits. The effect of the deficits could offset a lot 
or even all of the economic benefits, and that the trends that 
David was talking about in the study I think are unmistakable.
    Mr. POMEROY. You know, maybe this is not an economics-type 
question, but I am trying to rank the biggest problems facing 
our country. You have got the financial deficit, you have got 
the trade deficit, you have got the structure of the Tax Code. 
Do you have a--how would you rank those issues? Anyone care to 
venture? Dr. Hubbard.
    Mr. HUBBARD. Well, to me, if you are restricting it to 
economic policy--because I can surely think of some noneconomic 
policy concerns that are more uppermost in my mind. In terms of 
economic policy concerns, the entitlement problems in the 
United States are clearly the largest. That is the fiscal 
debate over the next many years that you all will have to have.
    Mr. AUERBACH. One should keep in mind that these are 
complementary solutions to existing problems. If, for example, 
one of the ways you contemplate dealing with Social Security is 
by uncapping or raising the cap on the payroll tax, that is 
going to represent an increase in marginal tax rates. It would 
make it even more important in an individual tax reform to 
reduce marginal tax rates to make room for that increase. So, 
dealing with Social Security, dealing with other entitlements, 
in a sense makes it even more important that the tax system be 
as efficient in pro-growth as possible.
    Mr. SLEMROD. In one sense, I think tax reform ranks up with 
these other problems in that it is the most common point of 
contact between the government and its citizens. As I said in 
my closing remarks, how we do tax reform affects how activist 
the government is, how intrusive it is to its citizens. So, it 
is hard to put a dollar value on those things but I think it is 
a very important aspect of government.
    Chairman THOMAS. The gentleman from Connecticut, Mr. 
Larson, wish to inquire?
    Mr. LARSON. Thank you, Mr. Chairman. I would like to go 
back to a question that Mr. Neal asked before, and, Dr. Burman, 
I believe you answered; and I wanted to be clearer on this. 
With regard to addressing the AMT and looking at its potential 
growth, I believe you said going to 30 million, how do you get 
that back down? You had some specific recommendations. Did I 
hear that right?
    Mr. BURMAN. We have a number of different options we have 
looked at. One is restoring capital gains as a tax preference 
and using that as a way to take the AMT off the middle-class 
families. Dr. Hubbard mentioned the idea of repealing State and 
local tax deduction. That raises issues. That would--under 
current law that would raise enough revenue to pay for 
eliminating the AMT. You could also build the explicit taxes in 
the AMT into the regular tax system.
    Mr. LARSON. Dr. Slemrod, do you agree with that? Or how 
would you approach the AMT issue?
    Mr. SLEMROD. I think both of the options that Dr. Burman 
mentioned are worth considering. Eliminating the State and 
local income tax deduction isn't something that I would put on 
the top of my list for tax reform, but I think it should 
certainly be considered in a package which cleans the tax base.
    Mr. LARSON. Following along with what Mr. Pomeroy had to 
say with regard to--Dr. Hubbard, you mentioned entitlements. I 
think the question was specifically as it related to rank 
ordering in terms of economic impact, either the national debt, 
the trade deficit, or in fact the structural nature of our tax 
system. Given those three options, how would you rank order 
those in terms of importance? Or would you? Or would you come 
up with something else? Let's start with Dr. Auerbach.
    Mr. AUERBACH. Well, I think--I don't really think there is 
a need to rank them. You have to deal with--if you are going 
to, for example, deal with Social Security and Medicare, there 
may be benefit cuts, there may be tax increases. The impact of 
those tax increases, for example, would be very much influenced 
by the underlying tax structure in which they occur. So, even 
if dealing with--I think clearly dealing with the imbalance 
between spending and taxes is the first order of business. As 
you are doing it, a tax reform is complementary to that effort; 
and so even if it isn't as important in itself, it is part of 
the overall task.
    Mr. LARSON. Anyone else care to comment on that?
    Mr. SLEMROD. Another reason not to make the sharp 
distinction is that cleaning up the tax base you are 
essentially dealing with scores of expenditure programs that 
are working through the tax system. If by eliminating some of 
those they just come up, you know, are reproduced outside the 
tax system, we may not be accomplishing what we thought we 
were.
    Mr. LARSON. So, the panelists were pretty much in 
agreement, though, when it comes to dealing with cleaning up 
the basis. It is just a question of how you get to cleaning it 
up, whether you go to a flat tax or a VAT or whether or not you 
use the existing system but make the clean-up throughout. Is 
that fair to say? Thank you.
    Chairman THOMAS. That certainly makes our job easier. 
Gentlewoman from Pennsylvania wish to inquire.
    Ms. HART. I do, Mr. Chairman. Thank you all for being here. 
I think we could all design a system that we think would work 
the best and they would all be different. So, we are going to 
have to try to figure out, I think on two levels, what isn't 
working and, of course, on the other level what might work 
better. I want to start with Dr. Hubbard. You mentioned in a 
Business Week article that tax reform needs to reduce the 
Code's bias against savings and earnings. Can you give a couple 
of examples of what specifically foremost in the Code really 
demonstrated that bias?
    Mr. HUBBARD. Well, as I said in my remarks, I think the 
elephant in the room really is capital income taxation, both 
for capital accumulation in your question and for risk-taking 
and entrepreneurship. We double tax and in some cases triple 
tax, some returns on saving. We have a Tax Code that distorts 
how businesspeople make investment decisions. It would be 
possible for us to have a tax system that is neutral with 
respect to those decisions.
    Ms. HART. Would the rest of the panel agree with his 
statement that it does have a pretty well demonstrated bias 
against savings and earnings? Dr. Slemrod?
    Mr. SLEMROD. I think there would be wide agreement among 
economists that the way we tax corporate source income needs to 
be rationalized. I would add that although there are examples 
of double taxation in addition to single, there are also 
examples of zero taxation. I would include in a rationalization 
of the tax system emphasis on corporate tax avoidance.
    Ms. HART. Mr. Beach, your light is on. Did you have a----
    Mr. BEACH. My light was actually not on. I always have a 
comment. Yeah, I would definitely say, as Glenn has mentioned, 
that this capital taxation is key to growth; and the key to 
growth is the key to a lot of problems that the Congress faces. 
So, yes.
    Ms. HART. It is a timing light I see. That is okay. You get 
the green light anyway. You know, ultimately I think a lot of 
us probably in this Committee like the idea of a flat tax, and 
I know some of you have expressed your interest in continuing 
benefits for people who are low income. I think it is mostly--
Dr. Burman, just real quickly, could you tell me if there is a 
way we could do a flat tax without hurting the low-income?
    Mr. BURMAN. Actually I don't think it is hard to protect 
low-income people. You could, as several panelists I think have 
mentioned, you could include something like the earned income 
tax credit or even child tax credit as part of a flat tax. The 
bigger concern is the shift in tax burden from high-income 
people on to middle, which would be harder to avoid.
    Ms. HART. Okay. Dr. Auerbach, do you have a thought on 
that? I mean without--obviously, if you have a flat tax you 
wouldn't want to have any tax credits. So, is there a way to 
maybe do something else?
    Mr. AUERBACH. Well you could--well, you say you wouldn't 
want to have tax credits. There is nothing structurally about a 
flat tax. It includes a tax on compensation. So, anybody who is 
working and being paid wage and salary income could be given 
tax credits. Whether you choose to is a different issue.
    Ms. HART. Okay. Thank you, Mr. Chairman.
    Chairman THOMAS. Thank you. Gentleman from Illinois wish to 
inquire?
    Mr. EMANUEL. Yes. Thank you, Mr. Chairman. You know, I 
appreciate you holding this hearing. One way--some of you have 
mentioned, obviously, your comments about the complexity, or 
difficulty rather, of getting something done on tax reform. One 
way to look at this is if you could not do--although I think it 
is worthy of looking at the entire Code--is to take both the 
home mortgage, the earned income tax credit, the per child and 
dependent, college savings and then retirement, the four kind 
of pillars of middle-class life, and reforming the Code in each 
of those areas to bring simplicity and the access to a middle-
class dream, make it closer. The ideas of--there are five 
separate different education breaks. You can make them a single 
break at $3,000 per child rather than $4,000 per family, with 
some service notion attached to it that would bring simplicity 
to the higher education component. We have, in the last 30 
years, we have done 16 separate different vehicles in the Tax 
Code for savings; one universal 401(k) that is portable and 
brings simplicity as well as progressivity and maintains, kind 
of square, both simplicity and progressivity. You could make 
the mortgage deduction available not just to those who itemize 
but to those who don't, and I think it would bring a great 
piece of the American dream closer.
    Then last, something I have introduced myself, which is a 
simplified family credit that took the EITC and the per child 
and the dependent care, eliminate 200 pages of the Code and 
bring it down to about 12 questions. Although I think it is 
worthy of looking at the task of taking the entire Code now and 
trying to bring simplicity to it, I think all those are 
attainable and would bring tremendous simplicity to the Code, I 
think would accomplish maintaining I think principles, whether 
it is you work for a living--that is the earned income tax that 
rewards work over dependency--the access to college education, 
and so forth. I don't want to repeat myself. Do you think that 
is worth at least looking at if we could not see universal tax 
reform as an attainable goal, from a political standpoint or 
economic, and not get an agreement that taking at least a look 
at those four areas: homeownership, retirement security, access 
to higher education, and then obviously revaluing the principle 
of work over dependency?
    Mr. HUBBARD. I think it is clear the areas you have 
mentioned are worthy of enormous simplification. In many of 
those areas, we don't treat the American people like adults. We 
have too many opportunities. You shouldn't kid yourself that 
that is going to be a major increase in economic growth. If the 
reason for the discussion is simplification, I agree with you. 
It is a worthy agenda. If your agenda is economic growth, I am 
afraid that would fall way short of the mark.
    Mr. EMANUEL. Two points. One is I run tax clinics in my 
congressional office from January 1 to close to April, and we 
have resulted in--I know I am over the time, Mr. Chairman, and 
I will be very quick. We have ended up returning to people a 
little over a million dollars when it comes to the earned 
income tax. Some people think there is about $8 billion--I am 
just using one of the areas I talked about--that, you know, 
there is about $8 billion worth of fraud there. I would suggest 
that complexity is the problem, not fraud. I believe that if 
you brought simplicity to that area, and I do believe, to tell 
you the truth, if you were end up, whether it is on home 
ownership, college savings, or retirement security, and also 
the earned income tax, I think that would lead to economic 
growth. My colleague and I have talked often about the 
consumption tax. I think it would be ironic that we would go to 
Europe, which has the most lethargic economic growth over 20 
years compared to the United States, and use that as a tax 
model of bringing economic growth when one of the things that 
everybody always talks about is how in the last 20 years we 
have had huge economic growth and we haven't had the 
consumption tax. Europe has had a consumption tax and they have 
had the worst growth of any industrialized area. Thank you, Mr. 
Chairman.
    Chairman THOMAS. Thank the gentleman. I do think as we look 
at the Tax Code that it really is unfair that if there appears 
to be something there, but that the burden of getting there 
denies it to a number of people is something that we have to 
look at. Gentleman from Indiana, Mr. Chocola, wish to inquire?
    Mr. CHOCOLA. Yes. Thank you, Mr. Chairman. Thank you all 
for being here. I represent a district that is heavily reliant 
on manufacturing. I used to be in the manufacturing business in 
a very capital-intensive business. Something we haven't talked 
a lot about this morning is really how tax policy impacts when, 
where, and how capital is invested. I think we would all agree 
that the more capital available to invest in our economy the 
better. We can't have that conversation on tax reform in a 
vacuum because other countries are trying to compete for the 
same capital we are. Just briefly--probably, Dr. Hubbard, I 
would start with you. If you could comment on really some of 
the policies we have of double taxation, tax corporate profits, 
tax distribution of dividends, what that has on our 
competitiveness worldwide; and how capital is allocated, and 
also what the full taxation of U.S. foreign income has on our 
competitive ability to compete in a global economy.
    Mr. HUBBARD. Well, two aspects. One, I think the tax 
treatment of business investments still needs work. I think it 
is possible, through any of the tax reforms various people have 
talked about today, to substantially lower the tax part of the 
cost of capital for business investment, and I would encourage 
you to do that. It is also important, though, to think about 
multinational companies. I would urge you not just to think 
about domestic investment as being the touchstone of reform. We 
as Americans own our multinationals as well, and I think we 
also want a Tax Code that makes sure that they have the ability 
to compete in foreign markets as well as here at home. So, I 
would urge you to consider both of those.
    Mr. CHOCOLA. Anybody else have any comments on that? 
Daimler Chrysler has a very large facility in my district. Does 
our Tax Code impact why it is called DaimlerChrysler rather 
than ChryslerDaimler?
    Mr. BEACH. Congressman I think everyone--well, several of 
us have said that lowering the corporate income tax rate in 
line with the rest of the world is a good move. It is expensive 
but it is very pro-growth and it does address some of the 
problems that manufacturers in this country have had in 
competing with foreign companies. I think it does explain in 
part perhaps why you have that DaimlerChrysler.
    Mr. CHOCOLA. I mean just as a general concept, we would all 
agree that whenever we consider tax reform we consider how do 
we make U.S. companies more competitive in a global marketplace 
is a very critical aspect of this whole discussion.
    Mr. SLEMROD. I am going to have to demur slightly on that, 
because making a company more competitive than a foreign 
company isn't the same as nor will it necessarily lead to 
making our citizens better off. Competitiveness is a buzz word 
that most economists would counsel that we have to be careful 
about using. Getting tax reform that is fair and simpler and 
pro-growth is the right way to think about it. I don't think 
focusing on the competitiveness of our companies adds anything 
to those criteria.
    Mr. CHOCOLA. Well, a policy that helps create U.S. jobs by 
allowing companies to be more competitive in a global 
marketplace which results in more U.S. jobs is a good thing. I 
think we can agree on that.
    Mr. SLEMROD. You are getting closer on that. Yep.
    Mr. CHOCOLA. Thank you, Mr. Chairman.
    Chairman THOMAS. Thank all of you. The Chair is mindful 
that although this is the first hearing, that the Chair may 
call on some of you in a kind of a seminar I structured around 
particular aspects that we have developed here today for 
Members. I hope if at all possible you would make yourself 
available. The Chair thanks you, thanks you for your 
contributions and knows that ongoing work with you and your 
colleagues can only make us better at some very difficult 
judgments that we are going to have in front of us. With that, 
the Committee stands adjourned.
    [Whereupon, at 12:42 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]
              Statement of American Farm Bureau Federation
    Farm Bureau believes there is a better way for the Federal 
Government to raise the money it needs to operate the government. We 
support replacing the current federal income tax system with a new tax 
code that encourages savings, investment and entrepreneurship. The 
replacement system must be fair to agricultural producers and should 
meet the following objectives:

      Be revenue-neutral so as not to produce a tax increase.
      Eliminate payroll taxes and self-employment taxes.
      End death taxes and capital gains taxes.
      Eliminate personal and corporate income taxes and the 
alternative minimum tax.
      Change the Constitution to prevent the reinstitution of 
the income tax.
      Require a two-thirds majority vote in Congress to raise 
taxes.
      Be transparent and require a minimum of personal 
information.
      A replacement income tax should be based on net income.
      A consumption tax should not tax business-to-business 
transactions unless for final consumption.

    U.S. farmers and ranchers operate in world markets. About 22 
percent of the agricultural commodities produced in the United States 
move into international markets. Roughly 11 percent of the food 
consumed in the United States now comes from foreign sources. Farm 
Bureau favors even greater reliance on the global marketplace and 
favors continued reductions in trade barriers through trade agreements, 
but tax policy should not place U.S. products at a competitive 
disadvantage in either domestic or international markets.
    Horizontal equity is the concept that two taxpayers with the same 
amount of income and tax filing status should have roughly the same tax 
load. Due to the capital intensive nature of production agriculture and 
the unevenness of income due to weather variability and price 
fluctuations, farmers and ranchers can often pay more taxes than others 
with the same income. Any new or revised taxing system must address 
horizontal equity.

COMPLEXITIES, BURDENS, UNFAIRNESS AND DISTORTIONS OF THE CURRENT TAX 
        SYSTEM
    Achieving international tax competitiveness and horizontal tax 
equity for farmers and ranchers will require substantial changes in the 
current federal tax system. Farm Bureau believes that removing 
complexity, reducing burden, eliminating unfairness and limiting 
distortions are best achieved through a complete rewrite of the federal 
tax code. Until a replacement code is enacted, the following issues 
should be addressed through incremental reform.
    Death Taxes--Because of the capital intensive nature of farming and 
ranching, many operations are multi-generational. Current income from 
farm land is usually quite low at about five percent or less per year. 
As land continues to increase in value for reasons other than its 
productive agricultural value, multi-generation farms can face large 
estate tax bills at times when their incomes are small. When the forced 
sale of farm assets is the result, the economic viability of farms and 
ranches can be ruined.
    Owners of other businesses that are less capital intensive and 
generate more income per dollar of assets do not suffer as much from 
the death tax. Analysis completed by Farm Bureau in late 2003 indicated 
that farm estates liable for death taxes will increase from four 
percent in 2001 to eight percent in 2011, assuming a unified credit of 
$1.3 million in both years. Roughly twice as many farm estates 
currently pay death taxes compared to estates in general, a clear 
distortion.
    Permanent repeal of the death tax continues to be Farm Bureau's top 
tax priority. Increasing the unified credit has removed the burden from 
some producers, but as long as this tax structure remains the chance 
exists for a future Congress to lower the unified credit and/or 
increase the tax rate. As long as the death tax remains, farmers and 
ranchers will be forced to continue some level of estate planning as a 
way to protect assets against future tax liability.
    Capital Gains--For agriculture, the capital gains tax is a tax on 
transferring assets from one form to another. While tax rates have been 
reduced to a maximum of 15 percent, this is still a tax on asset 
transfers that most other taxpayers do not pay. Frequently a problem at 
retirement, the tax occurs any time a farmer or rancher wishes to 
redirect assets from one enterprise to another. Capital gains taxes 
have to be paid on the assets sold even though the operator wants to 
invest all of the proceeds back into the business. As with the death 
tax, the proper approach to the capital gains tax is to repeal it. This 
would reduce both complexity and the amount of record keeping needed.
    Alternative Minimum Tax (AMT)--The AMT clearly adds to the 
complexity of tax filings. Many farmers and ranchers who include tax 
management in their business planning find they may owe AMT after 
irreversible business decisions have been made. Farm Bureau supports an 
end to AMT.
    Variable Income Issues--Progressive tax rates can push farmers and 
ranchers into higher tax brackets when they have a good income year. 
Cash accounting and income averaging provides some help to farmers and 
ranchers dealing with wide swings in gross income and net income. Cash 
accounting continues to be an effective way to simplify tax record 
keeping and reduce the compliance burden, while also contributing to 
horizontal tax equity. Income averaging is helpful, but is not a 
substitute for cash accounting, and should be extended from three to 
five years.
    Matching Income and Expenses--Under the current system, there is 
often a total mismatch between gross income and depreciation. Taxpayers 
can be forced to carry depreciation forward or try to increase gross 
income to use available depreciation. Direct expensing would simplify 
the code and create horizontal equity. Congress has moved toward direct 
expensing with Section 179 expansion and bonus depreciation. Farm 
Bureau supports further expansion of Section 179 and indexing the 
provision for inflation. Bonus depreciation should be continued with a 
full year's depreciation allowed for purchases made any time during the 
year.
    Retirement Savings--Farmers and ranchers invest much of their 
savings in their farming or ranching operations and use part of the 
value of the operation as a retirement plan. This is unlike employees 
who have employer-sponsored retirement plans that can be funded on a 
tax-deferred basis. Self-employed professionals can use tax deferred 
401K, SEP and IRA plans. Farmers and ranchers who use their businesses 
to finance retirement are doing so with after-tax dollars and are not 
treated equally.
    Disaster Payments--Weather disasters are a fact of life for most 
farming and ranching operations and introduce tax complexities not 
found in most other businesses. The help provided by Federal Government 
disaster assistance programs can be diminished by requiring payments to 
be taxable income in the year received. Taxes are owed, even though the 
taxpayer continues to struggle with the economic consequences of the 
disaster. Farm Bureau supports not taxing payments associated with 
weather disasters. Breeding livestock are sometimes sold during weather 
disasters with the proceeds treated as capital gains. Farm Bureau 
supports deferring taxes until two years after the disaster has ended 
and a ten-year carry forward for income from a forced sale of livestock 
with no taxes owed if livestock is replaced during that period of time.
    Application of Self-employment Taxes--Problems with the federal tax 
system are not confined to income taxes and estate taxes. Farmers and 
ranchers also struggle with issues associated with taxes for Social 
Security and Medicare. In most years, more farmers and ranchers pay 
more money in self-employment taxes than they pay in income taxes. 
Defining income for self-employment taxes is complicated. For example, 
cash rent and payments for idling land in the USDA Conservation Reserve 
Program are a return to capital, not wage income. The IRS wrongly 
characterizes these payments as farm income subject to self-employment 
taxes for Social Security and Medicare.
    Health Care Plan Deductions--After years of effort by Farm Bureau 
and other groups, the self-employed can now deduct 100 percent of 
health care plan costs from their adjusted gross income. However, the 
deduction does not reduce self-employment income for taxes for Social 
Security and Medicare. Employees with employer-provided health care 
plans can reduce their income for payroll tax purposes by placing money 
spent for health care in flexible spending accounts. A deduction in 
both income and self-employment taxes for health care plan costs would 
help both farmers and ranchers achieve horizontal equity with other 
taxpayers.

                                 

      Statement of Daniel F. Ancona, IV, Santa Barbara, California
    First of all, thank you very much for undertaking the important and 
awesomely challenging work of simplifying the U.S. tax code. Based on 
my experience with the Alternative Minimum Tax and the studies of 
taxation and economics that I've undertaken since being affected by it 
in 2000, I believe this to be among the most important work going on 
currently in the Congress. It's easy to get lost in the details and the 
thousands of pages of the tax code, but how we decide to pay for our 
government is an issue of fundamental import to our democracy.
    I am not generally an anti-tax zealot, as it seems obvious to me 
that the taxes we pay and the government they fund have clearly played 
a significant role in what has made this country great. Yet the 
complexity of how we go about collecting those taxes seems to have 
grown out of control, partially through the deliberate rigging of the 
system by unscrupulous individuals and organizations, but even more so 
because of structural and organizational phenomena that can only be 
effectively counteracted by the work of committees such as yours.
    I've included, below, a timeline of the exact details of my 
personal AMT disaster. In summary: four years ago, I was charged 
$55,000 worth of tax on money I literally never saw due to a botched 
Incentive Stock Option transaction. It was as if I walked into a casino 
and was taxed on the money I might have won but did not. I spent 
hundreds of hours on the phone with numerous branches of the IRS trying 
to resolve this, but only found relief after I finally found an 
accountant (after six tries) who understands the AMT credit--and, when 
the IRS classified me as a ``hardship case'' because I was cut to half 
time at my job. Therefore, the IRS has postponed further collection 
actions against me. Oddly--the IRS did not consider me losing my 
business, being plunged into debt and having to move 350 miles a 
hardship!
    This tax severely punishes the risk-takers, technologists and 
companies that are willing to democratically share the fruits of the 
market through incentive stock options. If these people and companies 
are truly the growth engines of the new economy, while they don't 
require special treatment, they certainly ought not to be subject to an 
arbitrarily cruel, unusual and specific tax. Indeed, I was in the 
process of trying to start a technology company and create such jobs 
when this tax cut my dream short.
    I've never tried to game the tax system, I've never looked for 
loopholes or been anything other than perfectly honest in dealing with 
the IRS and the California Franchise Tax Board, yet my good faith 
attempts at resolving this have been met with bureaucratic 
inflexibility, stonewalling and buck-passing, wage garnishments and a 
credit-rating ruining series of liens. I'm quite happy to pay my fair 
share every April 15th, but I don't believe that ought to cause 
personal financial devastation.
    If there's an upside to this situation, perhaps it's this: there's 
a saying that goes ``you may not take an interest in politics, but at 
some point, politics might take an interest in you.'' My AMT disaster 
occurred in 2000, and by the end of 2002 it was one factor (admittedly 
of many) driving my engagement in the political process. Since then I 
have volunteered hundreds of hours in city, state and national 
campaigns and in building local party organizations.
    I've never asked for special consideration in resolving my AMT 
problems in return, and I'm certainly not doing so now. I simply have 
come to the conclusion that greater citizen participation can mitigate 
problems like this; problems that are essentially inevitable in a 
society and economy as complex as ours.
    But for this to work, the leaders have to be willing to listen, and 
your presence on this committee indicates that you are among those who 
are willing to do so. So again I thank you for your work, for the 
opportunity to enter this testimony into the public record, and for 
your help in finally resolving this matter equitably.
                                 ______
                                 
    AMT Disaster Timeline--Daniel Ancona
    As of June 2004
    January 1999--I leave a startup that had been absorbed by Platinum, 
Inc. to join pre-IPO email company Critical Path (CPTH) as a software 
engineer. As a signing bonus I'm granted 20,000 Incentive Stock Options 
(ISOs) at a price of around $1, to vest completely over four years with 
a one year cliff.
    Early Spring 1999--In preparation for the public offering, a 5:2 
reverse split leaves me with 8,000 shares.
    Spring 1999--CPTH goes public, opens at $16 and spikes to $67 on 
the first day of trading. Price goes to above $120 a few months later.
    January 1999--At an all hands meeting, the CPTH management team 
tells the assembled employees ``The end of the boom is coming and we 
all know it, but we have a real business model and we'll be one of the 
companies left standing.'' I vest one quarter of my shares and begin 
working nights on my own startup.
    July 2000--I prepare to leave CPTH to pursue my own startup full-
time, having vested 2173 shares. Believing the company's fundamentals 
to be sound and this to be the optimum capital gains strategy, I sell 
around half my shares to live on while I get my company started and 
execute an ``exercise and hold'' of the remaining shares, priced at 
$67.
    Neither the accountant nor the broker I was working with at the 
time cautions me against this transaction, but (unbeknownst to me at 
the time) this is the transaction that triggers the AMT. I was charged 
AMT tax at 26% on the amount of money I would've made IF I'd sold the 
stock that day, which would've netted me $135,000 or so. But I HELD 
half the stock instead of selling it, thinking this was actually the 
more conservative move. I was literally charged tax on money that I 
never saw.
    January 2001--After around five months of intense work, I decide 
that the timing is bad for my startup and I begin looking for work. 
About a week later, the SEC announces it's investigating CPTH officers. 
CPTH would later go on to be #2 in shareholder lawsuits--behind Enron--
but as of this writing the investigation is ongoing, and no plan for 
victim compensation has been announced.
    The stock drops from the mid twenties down to $2 in a matter of 
weeks. The stock I had left as my insurance pillow is suddenly almost 
worthless.
    Early April 2001--I get my tax bill for 2000. I owe around $46,000 
to the IRS and around $12,000 to the FTB, on top of my regular taxes, 
due to the AMT.
    Mid April 2001--I fire my accountant and broker, and begin looking 
into bringing suit against them but am cautioned against it. I begin 
negotiations with the IRS and FTB.
    January 2001 to April 2001--I attempt to find a job, sending out 
more than 80 resumes. I finally find a job at UC Santa Barbara and 
move, but not before nearly running completely out of money and 
narrowly avoiding complete bankruptcy.
    Fall 2002--I receive my first OIC denial from the FTB and am faced 
with a lowest offer of $400 per month over five years.
    January 2003--I receive my first OIC denial from the IRS and am 
faced with a lowest offer of $1100 per month over 46 months.
    Summer 2003--After three more tries, I finally find an accountant 
who understands the AMT credit. He refiles my 2001 and 2002 taxes to 
take this into account, cutting my total liability by around $10,000.
    November 2003--Due to NSF and Iraq-war related budget cuts, I'm cut 
to half my former salary at my university job.
    January 2004--I convince the IRS and FTB of my layoff-related 
hardship, and they both grant 1 year reprieves against further 
collection action. I plan to continue to file for the AMT credit over 
however many more years it takes to pay off the original loss.

                                 
                                    Mountain View, California 94041
                                                      June 17, 2005
    To the members of the Committee on Ways and Means:

    Thank you for taking the time to read this letter. I believe the 
Alternative Minimum Tax (AMT) and its treatment of pre-taxation on 
Incentive Stock Options is wrong. I feel that this tax, which was 
originally created because 155 wealthy businessmen didn't pay any 
taxes, was not intended to financially ruin the middle class worker. It 
is an unfair tax and should be abolished immediately. This tax has 
caused our family undue stress and anguish.
    Here is my story: In 1995 I joined a start-up high tech company 
called VeriSign. I was hired as an Executive Assistant to the President 
and my salary was $45,000. Over the years, I was granted Incentive 
Stock Options (ISO). I tried to regularly exercise and hold my ISOs for 
one year in order to pay long-term capital gains on the stock. In July 
2000, I decided to leave my job so that I could plan my wedding and 
also start to plan a family. I had stock that needed to be purchased 
when I quit my job in July of 2000, so I exercised the stock. As 
everyone knows, the stock market then suffered the worst stock market 
downturn in history! At the time, I did not sell my stock in hopes that 
the market may recover. Had I known about the AMT, I would have sold 
the stock immediately. I come from a middle class background; my father 
worked for AAFES (Army & Air Force Exchange Service) and my mother was 
a nurse. I could not go to my parents for advice regarding my stock 
options because they had no experience with stock. I tried to get a 
financial advisor but had a difficult time finding one since, at the 
time, here in the Silicon Valley, financial advisors would only take 
people with large portfolios. My only financial advisor was the broker 
that I used through VeriSign, who was biased since they worked for 
VeriSign--they suggested I hold my stock. Many people had similar 
situations to mine. My tax preparer told me that I would be subject to 
the Alternative Minimum Tax and that I could receive a tax credit and I 
could use that to offset a sale later on. Unfortunately, my tax 
preparer wasn't aware that I would only be able to recover $3000 per 
year in my AMT tax credit. At the time, most tax preparers hadn't had 
much experience with AMT and therefore, could not give any detailed 
advice on how to handle the stock. At that time, my salary for 2000 was 
$50,747 and my taxes paid to AMT were $408,627--over 8 times my annual 
salary on money that I did not have nor received!! I had to take all 
the stock and sell it and take a loan in order to pay my taxes. On top 
of that, I had to pay lawyers and accounts in excess of $20,000 to help 
me to understand AMT and to try to fix this problem. The amount of 
stress was and is still unbelievable.
    I never received any benefit from my ISOs--in fact, I now have a 
tax credit that I will never be able to use in my lifetime. Since AMT 
is also a self-reported tax, I have many sleepless nights thinking 
about how I shouldn't have reported the stock to the IRS, how it 
doesn't pay to be honest, etc. I personally know many people did not 
report this tax because they felt that the chances of being audited 
were very slim. At the time, I did consider this but having spent my 
entire life working and paying taxes, I knew in my heart that I was not 
the kind of person to lie to the government.
    AMT was never intended to trap the little guy. It was originally 
intended to make sure the very rich, who years ago had tons of 
loopholes to hide their money, would pay taxes. This law is flawed on 
so many levels:

    1.  It's self-reported, the IRS has no way to track who reports and 
who doesn't;
    2.  You are pre-taxed on gains that have never been realized;
    3.  After paying AMT, you are given a tax credits that never gains 
any interest (on the flip side, if we owe the IRS money, we have to pay 
interest plus penalties);
    4.  The AMT tax credits will never be fully used--mine is $408,627 
and it would take me 136 years to use this credit.

    The mental anguish over this tax is unbelievable. I know that many 
people think that those of us who were caught in the AMT ISO trap were 
greedy but that isn't the case. I personally feel that my lack of 
understanding ISOs and the stock market along with the confusing way 
that AMT is calculated helped to get me in this AMT mess. I just didn't 
have the knowledge to fully understand the ramifications of this law. 
Those of us who found out the hard way had to make a decision, either 
report it or not--many did not. I chose to report the tax even though I 
felt it unjust and unfair. However, my honesty only got me a huge AMT 
bill while others walked away and didn't report their AMT. Those who 
didn't report, wait for the statute of

limitations to go by and then breathe a huge sigh of relief when they 
find they haven't been audited. The IRS has no way of tracking stock 
sales and exercises and they rely solely on the taxpayer to supply this 
information--this seems awfully stupid to me as it can lead to under 
reporting, etc. of this and other taxes.
    I am working with a law firm to try to recover some of the AMT that 
I've paid. My amended returns have been with the IRS for over two 
years. The IRS holds amended returns ``hostage'' so they can sit out 
the statute of limitations instead of making decisions regarding our 
arguments for getting credits back faster. I believe they do this 
because they are afraid to do the ``right'' thing and call this law 
unfair. The IRS refuses to respond to my amended returns. The only 
recourse that I have is to take the IRS to court--which means spending 
another $15,000-25,000 of money that I don't have--and then knowing 
that the courts don't want to make the ``fair'' decision but want to 
make the ``constitutional'' decision (following the law). If I did go 
to court--I could be tied up in court for another 5 years. The only way 
to get justice is for the law to actually change.
    I hope that my letter puts a ``face'' on what this horrible law has 
done to the average person. I am not an executive, I am not a founder 
of a company, I ended my career at VeriSign as a Project Manager--
nothing fancy. If you saw my tax returns for the last 10 years--you 
would see that I never made over $75,000 a year in actual salary. I 
always paid my taxes on time. I'm a responsible, citizen who has voted 
in every election since I turned 18. I believe that my government will 
do the right thing. However, in the future, I would never accept stock 
in lieu of salary like I did at VeriSign. I don't ever want to be in a 
position of having to make decisions that will ruin my financial life 
and the life of my family.
    I hope and pray that the Ways and Means Committee will have the 
courage to listen to all the comments from people like myself and make 
some real changes in this law. We did what we thought was right, we 
reported our stock exercises and then ended up paying millions of 
dollars in pre-tax to the government on stock that we never saw any 
financial gain. It's wrong. Plain and simple. If it happened to you or 
to one of your family members--you would be outraged. Time is running 
out for those of us who couldn't pay their AMT--if the Ways and Means 
Committee does nothing--many will loose everything they ever worked 
for--their savings, 401Ks, their children's education funds, their 
homes. Please do something about this before these honest citizens end 
up homeless.
            Sincerely,
                                           Susan Schroeder Anderson

                                 

                                     Hopkinton, Massachusetts 01748
                                                      June 22, 2005
Dear Chairman Thomas and Committee Members,

    During 2000, my (then) fiancee, Laura Perkins, exercised and held 
ISOs from her company based on advice she received from our accountant. 
This exercise subjected Laura to the Alternative Minimum Tax (AMT), 
substantially increasing her 2000 Federal tax liability. Instead of 
receiving a return of approximately $1,050, Laura owed the IRS $174,272 
on what was considered a paper gain. This was a substantial debt given 
that Laura's W-2 wages for that year were $84,997. Prior to finding out 
the magnitude of her 2000 tax liability because of AMT, Laura had 
exercised more shares in January 2001 and, based on guidance from our 
tax accountant; she also planned to hold these shares. However, in 
March 2001, our accountant explained to us the huge tax obligation 
Laura had for 2000 because of the shares she exercised that year. To 
pay this debt ($174,272), Laura sold 8000 shares of stock.
    After Laura and I wed in September 2001, our accountant again 
described ways of minimizing our 2001 tax liability based on the 
January 2001 exercise. Our accountant calculated our approximate 2001 
AMT liability as approaching $1 million if we held all the shares 
exercised in 2001. This liability was greater than the value of all the 
shares we currently had available to sell. Realizing our only option 
was to heed our accountant's advice, we sold the remaining shares of 
the 2001 exercise. The continued decline in the stock price caused us 
to realize only 20% of the stock's original value. Originally, we had 
planned on selling the shares exercised in 2000 but knew that, due to 
AMT, this was not an option. The proceeds from the sale of all the 2001 
shares were now considered real ``income'' and would be subject to our 
actual tax rate instead of being considered for AMT as unrealized 
gains. This would still create a huge tax amount, but it was one that 
we could possibly pay by leveraging other assets.
    In February 2002, our accountant did the final calculation for our 
2001 taxes and determined that our liability was much larger than we 
could afford. We knew we would have to use the proceeds from the 
earlier mentioned sale (as this is why we sold them). We also took out 
multiple margin loans against our balance of shares to pay our 
anticipated 2001 liability. (We filed an extension in April that 
resulted in late fees) While we continued working on our taxes 
throughout the summer we were advised that our liability was $20,000 
more than originally filed. We didn't have any more money to send and 
at the same time the stock we had margined against was falling through 
the floor causing us to get weeks of margin calls and eventually the 
brokers began to sell whatever shares of stock we had left.
    To satisfy all of our creditors (that were due to our taxes) we 
decided to refinance our house. We refinanced through a local bank and 
even though we expressed our desire to have it go through as quickly as 
possible it still took them more then a month and a half to finally be 
ready to settle the new mortgage. (Due to the huge volume of 
refinancing activity) Once we closed on the new mortgage we filed our 
final 2001 taxes, paid in full.
    While dealing with this financial mess, we planned for, and paid 
for, our September 2001 marriage. We have now paid our 2000 and 2001 
taxes--for a grand total of $294,278 in Federal Taxes, and well over 
$5,000 in accountant fees to help us understand these complicated 
provisions of the tax code. This amount greatly exceeds our annual 
salaries for that timeframe, and we will probably never see the 
majority of the tax we paid on theoretical stock gains. We live 
paycheck to paycheck and have to decide which household bills we will 
pay late even though my wife has worked for her employer for more than 
20 years. We abided by the tax code, and because of the burden placed 
on us due to phantom (never realized) stock gains, we struggle to 
resume our middle class life we enjoyed prior to filing our taxes under 
AMT. Please take our case into consideration when you are reviewing 
possible changes to AMT.
    Thank you for your time and consideration,
                                            Michael and Laura Aubut

                                 

                                        Talking Rock, Georgia 30175
                                                       June 3, 2005
Dear Sirs,

    I would like to submit my request that you seriously consider 
abolishing the Internal Revenue Service and establishing a national 
sales tax as the means to collect taxes.
    I am a mother of five and a grandmother of eight. I am sixty-eight 
years old and have been paying payroll taxes since I was eighteen years 
old. I want my heirs to have a more fair, more humane, system to pay 
taxes.
    I do not begrudge contributing to the support of our government. I 
do begrudge the method of collection.
    I begrudge that criminals who do not earn money legally and have no 
payroll check, do not pay taxes. I begrudge that wealthy people can 
afford tax experts to find loopholes to see that they do not pay as 
much in taxes as a person who earns a fraction as much. I begrudge that 
illegal aliens do not pay taxes.
    A national sales tax would address these faults.
    Most of all, I think, a national sales tax would immediately raise 
the happiness levels of all working Americans. We would have a choice. 
We would be free of the oppression of the IRS. Sirs, can you imagine 
what American would be like if all it's workers were happy?
    I have studied the plan of Americans For Fair Tax (AFFT). I agree 
with their findings:

      Creates jobs where IRS destroys them
      Cuts the cost of goods and services
      Dramatically lowers tax rates on lower and middle class
      Raises the same amount of revenue for the Federal 
Government
      Will bring jobs back to America

    There are many more reasons for a national sales tax. I hope at 
least one of the persons testifying in this hearing will cover them 
all. I also hope each one of you will commit to a thorough study of the 
AFFT.
    I beg you to take advantage of this window of opportunity afforded 
this Country. An opportunity to give back the dignity to it's workers--
the dignity and work ethic that my parents and grandparents enjoyed--
before worker's hard earned money was illegally taken from them--before 
social security taxes.
    My children and grandchildren will be able to afford health 
insurance. They will have more money to save and invest without double 
taxation.
    Please do the right thing for America and the working people. 
Abolish the IRS and institute a national sales tax.
            Sincerely,
                                                  Joyce Ann Barrett

                                 

      Statement of Rachelle Bernstein, National Retail Federation

    The National Retail Federation is the world's largest retail trade 
association, with membership that comprises all retail formats and 
channels of distribution including department, specialty, discount, 
catalog, Internet and independent stores as well as the industry's key 
trading partners of retail goods and services. NRF represents an 
industry with more than 1.4 million U.S. retail establishments, more 
than 23 million employees--about one in five American workers--and 2004 
sales of $4.1 trillion. As the industry umbrella group, NRF also 
represents more than 100 state, national and international retail 
associations.

Summary of Comments
    Members of the National Retail Federation believe that the most 
important aspect of any tax reform measure is its impact on the economy 
and jobs. Consumer spending represents two-thirds of GDP, and one-in-
five Americans are employed in the retail industry. The NRF believes 
that replacing our current tax system with a consumption tax, or adding 
a consumption tax to our current tax system, will present an 
unnecessary risk to our economy. The NRF believes that a reform of the 
income tax, by providing a broad base and low rates, will bring the 
greatest economic efficiency and will not cause the economic 
dislocations inherent in the transition to a new tax system.
    The NRF believes it is better to engage in substantial reforms of 
the income tax that are designed to eliminate some of the major 
complications in the current Internal Revenue Code and stimulate 
economic growth, without causing major economic dislocation.
    As many of the witnesses who appeared before the President's 
Advisory Panel on Federal Tax Reform admonished, a fundamental goal of 
reform must be to ``do no harm.'' According to a study of major tax 
reform proposals performed for the NRF Foundation, transitioning to a 
consumption tax system will lead to a decline in the economy for 
several years and a loss of jobs, without stimulating much additional 
economic growth for a ten-year period. The United States should not 
experiment with a brand new tax system that will put our economic 
future at risk.
    The NRF also opposes using tax reform as a guise to fund increases 
in government spending. Many witnesses appearing before the Advisory 
Panel suggested adopting a VAT or National Retail Sales Tax (NRST) in 
addition to the income tax to provide a revenue source to pay for 
growing entitlements, health care reform and modifications to the 
income tax. The NRF believes policymakers need to be forced to make 
choices with respect to how taxpayer dollars are spent, rather than 
being provided with a money machine to finance entitlements and other 
government programs.

Proposals to Replace the Income Tax with a Consumption Tax
    Various options for replacing the income tax with a consumption tax 
were presented to the Advisory Panel, including proposals for an NRST, 
VAT, Flat Tax, and consumed income tax. Economists generally agree that 
the economic impact of various forms of consumption taxes is similar, 
although the application of the taxes may differ.
    In 2000, PricewaterhouseCoopers prepared a study on Fundamental Tax 
Reform for the NRF Foundation.\1\ The study examined the impacts of 
replacing the income tax with an NRST or a Flat Tax. The study's 
conclusions are in line with the testimony of many of the Advisory 
Panel's witnesses--although replacing the income tax with a consumption 
tax might bring long-term economic growth, there could be very harmful 
short-term and mid-term economic results.\2\ The study also found that 
the economic growth that occurred during the ten-year modeling period 
was relatively modest compared to the disruptions to the economy during 
the transition years. Specifically, the study found that following the 
enactment of an NRST, the economy would decline for three years, 
employment would decline for four years, and consumer spending would 
decline for eight years. The study found that following the enactment 
of a Flat Tax, the economy would decline for five years, employment 
would decline for five years and consumer spending would decline for 
six years.
---------------------------------------------------------------------------
    \1\ PricewaterhouseCoopers LLP, Fundamental Tax Reform: 
Implications for Retailers, Consumers, and the Economy, April 2000. The 
study is available on NRF's website: http://www.nrf.com/content/
default.asp?folder=govt&file=pubs.htm
    \2\ The PwC model was developed specifically to analyze tax reform 
plans. It combined microsimulation models for individual and corporate 
income taxes with a macro-economic forecasting model, which allowed it 
to provide short-term transition results on an annual basis. Id at p. 
119.
---------------------------------------------------------------------------
    In addition to the overall impact of consumption taxes on the 
economy, retailers are particularly concerned with the impact of 
consumption taxes on our customers. Consumption taxes are highly 
regressive and will raise the tax burden on lower and middle-income 
Americans. This occurs because lower-income households tend to spend a 
higher portion of their incomes, so they will pay a higher tax relative 
to income level under a consumption tax than will upper income 
households.
    Many witnesses appearing before the Advisory Panel suggested that 
the regressive nature of consumption taxes can be addressed through the 
drafting process. It is impossible to speculate with respect to all of 
the drafting variations that might be developed to address this 
problem, but it cannot easily be fixed if the current tax system is 
replaced on a revenue neutral basis. If taxes are cut for the wealthy, 
which will occur if savings are not subject to tax, then taxes will be 
increased on lower and middle income taxpayers. To illustrate, we 
critique a few proposals that have been presented to the Advisory 
Panel:

      H.R. 25, a proposal to replace the income, payroll, and 
estate and gift taxes with an NRST, attempts to address regressivity in 
two ways. First, it repeals the payroll tax. Second, it provides a 
rebate of the sales tax up to the poverty level. A January 2005 study 
\3\ of the distributional impact of H.R. 25 found that if that bill 
were enacted, families with income less than $18,000 a year would get a 
tax cut, and families with income over $100,000 would get a tax cut. 
However, families with incomes between $18,000 and $100,000 a year 
would have a tax increase. Families earning between $18,000 and $35,000 
a year would have the largest percentage increase in taxes.
---------------------------------------------------------------------------
    \3\ The study was performed for the National Retail Federation by 
the Barcroft Consulting Group.
---------------------------------------------------------------------------
      The BEST \4\ proposal would replace the income and estate 
and gift taxes with a combination of an NRST and a business transfer 
tax (BTT). The proposal includes a rebate of the sales tax up to the 
poverty level, which is supposed to operate similarly to the rebate in 
H.R. 25.\5\ The proposal does not include repeal of the payroll tax, so 
it will cause even more of a tax increase on those earning less than 
$90,000 a year than was the case with H.R. 25.
---------------------------------------------------------------------------
    \4\ This proposal was presented to the panel by David Burton, who 
indicated that it is expected to be introduced as a bill in the Senate.
    \5\ It is unclear whether the rebate will be based on the tax rate 
for both the NRST and BTT, or only the tax rate for the NRST. If it is 
the latter, the proposal will be even more regressive.
---------------------------------------------------------------------------
      The Four-Piece Fair and Balanced Proposal \6\ would 
impose an income tax only on upper income Americans, but would also 
impose a 10-14% VAT. To address the regressivity of the VAT, the 
proposal includes a refundable payroll tax offset. This proposal would 
impose a tax increase on lower and middle-income seniors, who are 
currently in a consumption stage of their lives and who receive no 
benefit from the payroll tax offset, since they generally do not work.
---------------------------------------------------------------------------
    \6\ This proposal was presented to the panel by Michael Graetz.
---------------------------------------------------------------------------
Consumption Tax as an Addition to the Income Tax
    Several witnesses that appeared before the Advisory Panel suggested 
that a VAT be enacted as an add-on to the current income tax system, as 
a means to finance social security, pay for repeal of the alternative 
minimum tax and other income tax reforms, and fund other governmental 
priorities. This model is similar to that used in many European 
countries.
    Adopting a VAT in addition to the income tax will lead to a higher 
overall level of taxes as a percent of GDP, which will not foster 
economic growth. An early NRF study of an add-on VAT found that GDP 
would decline for four years after enactment and consumer spending 
would decline even longer \7\ Projections will change depending on how 
the VAT is designed, but the study demonstrates that even when the VAT 
does not replace the income tax, there may be economic dislocations for 
a multi-year transition period.
---------------------------------------------------------------------------
    \7\ Cambridge Research Institute, Value Added Tax, June 1980. This 
study was performed for the NRF's predecessor, the American Retail 
Federation, the last time that serious consideration was given to 
enacting a VAT in addition to the income tax.
---------------------------------------------------------------------------
    The best evidence that a VAT will lead to substantial growth in the 
level of federal taxation comes from the European example. Dan Mitchell 
of The Heritage Foundation published a recent analysis of the European 
experience with VATs \8\ According to Mitchell, in the mid-1960's, 
before any European country adopted a VAT, the burden of government in 
Europe was only slightly higher than it was in the United States. In 
Europe tax revenues were about 30% of GDP, while in the United States 
tax revenues were about 27% of GDP. Forty years later, taxes in Europe 
amount to approximately 41% of GDP, while taxes in the United States 
remain at about 27% of GDP. The VAT proved to be a very easy tax to 
raise to fund increased government spending because it is built into 
the price of goods and hidden from consumers. As Mitchell points out, 
this explosion in social welfare spending has also created a drag on 
European economies.
---------------------------------------------------------------------------
    \8\ Mitchell, Daniel J. A Dangerous ``VAT'' of New Tax Revenue, 
Heritage Foundation, February 24, 2005.
---------------------------------------------------------------------------
    Many of the witnesses appearing before the Advisory Panel warned 
that adding a consumption tax to the income tax will unnecessarily 
increase the overall level of complexity of our tax system.\9\The dual 
tax system may be particularly, burdensome for small businesses, which 
have enough trouble meeting the burdens of collecting and remitting 
payroll and income tax withholdings.
---------------------------------------------------------------------------
    \9\ For example, see remarks of Martin Feldstein at May 17, 2005 
hearing of Tax Reform Advisory Panel.
---------------------------------------------------------------------------
Conclusion
    We urge this Committee to develop legislation that would reform the 
income tax to simplify administration of the system and encourage 
economic growth, without shifting the burden to those that can least 
afford to pay.

                                 

         Statement of Larisa and JP Bickel, Cedar Rapids, Iowa

    An article published in the Cedar Rapids Gazette on Saturday, 
December 15, 2001, describing Senator Grassley's efforts to reform the 
Alternative Minimum Tax, ``Grassley offers relief from `unfair tax' '' 
really hit home with my family. My husband and I are 30 and graduates 
of Luther College in Decorah, Iowa. My husband has worked for McLeodUSA 
since graduating (for over 7 years) and I have worked at a private 
school. We have been very careful to live within our means.
    We have lived a very conservative lifestyle and thought we were 
planning responsibly for the future of our family. We have a son who is 
five years old who was born prematurely with a hearing loss and 
multiple other issues that have required hearing aids (which insurance 
does not cover), physical therapy, occupational therapy and speech 
therapy to this point. Shortly after our second son was born I 
hospitalized after requiring an emergency hysterectomy. Because of our 
prior financial planning and saving, we had always been able to meet 
his needs financially. The ATM tax has overwhelmed us financially, when 
we could have been able to me other unexpected expenses in life.
    In the fall of 2000, we vested a portion of my husband's McLeodUSA 
stock options for the first time when the stock was at $18. We borrowed 
almost $40,000 to pay for the stock. As the article outlined, we did 
not sell any of the options in anticipation of ``holding the stock for 
one year after exercise in order to avoid taxation at the ordinary 
income on the value at the point of exercise.'' As a result, we paid 
approximately $80,000 in alternative minimum taxes. We were able to pay 
for about one-third of this out of our own savings, but then had to 
take out a home equity loan for the remaining two thirds.
    The stock's present value is approximately $.09 per share--which is 
after the stock went through a reverse split of 17 to 1--leaving us 
with nothing of value to sell and burdening us with the reality that we 
took a $50,000 loan for the alternative minimum tax which is 
essentially an interest free loan to the government because we can not 
simply obtain a refund of the overpayment. We also owe $40,000, the 
purchase price of the stock, which is now essentially worthless. The 
reality is that this situation has been devastating for us. We are 
overwhelmed by the burden of the debt created by paying this tax. 
Because of paying this tax, we are unable to start a college education 
fund for our son, provide the financial resources needed to fund the 
special help he will require during his primary school years, and fund 
our retirement account. We are forced to live at a barely subsistent 
level.
    We want you to know that this is financially and emotionally 
devastating to our modest-income family. We thought we were doing 
everything right to become financially independent and now our reality 
is far from that, with an incredible debt in store for the future. This 
alternative minimum tax is devastating to those affected in the modest-
income level, as well.
    We thank Senator Grassley and others immensely for their efforts to 
help right this situation. Please let us know if there is anything we 
can do to assist you in this matter.

                                 

            Statement of Michael Brown, Manchester, Michigan
    To House Ways and Means Committee on Tax Reform:

    I am an average middle class American living in Michigan (District 
7) and working in the high tech computer industry. I have been employed 
by Network Appliance for over 7 years. Upon my hiring, I was granted 
ISO stock options as part of my compensation package. During the 
internet boom in the stock market, my ISO stock options had a 
theoretical paper value of approximately $2M. I never saw this money 
due to the dramatic rise and then crash of the stock market valuations. 
In the year 2000, I had income of $100,000.
    However, when my accountant calculated out what I owed due to AMT, 
the amount equaled $371,000 . . . 371% tax rate. This is due to 
unintended consequences of the AMT laws and over-inflated valuations of 
stock which created phantom gains. Furthermore, this was exacerbated by 
the dramatic crash of the stock market. I was absolutely certain the 
accountant was wrong, because how could tax rates exceed my entire 
income! I checked with many attorneys and tax accountants to find that, 
in fact, the accountant was correct and it was due to a little known 
tax called Alternative Minimum Tax, which is basically an interest-free 
loan to the government that gets credited back to you at $3,000 per 
year.
    So, I entered the paperwork that says I owe $371,000, however I did 
not have the money, nor do I have it today. In, fact that stock that 
was valued at $150 per share was now trading at $5 per share and my 
option price was $4.28 per share. So, my stock value that was left was 
less than $10,000. As you can see the AMT is not working the way it was 
intended. I conducted a lot of research into the tax, the history, and 
joined an organization that is made up of many other hardworking, 
honest taxpayers that this has affected.
    What I found was very interesting. The root development of the AMT 
was due to 155 taxpayers in 1968 that made over $200,000 and paid zero 
tax. I can completely understand that something had to be done, however 
what really confuses me is how in the year 2003 over 4000 people made 
over $200,000 and paid zero tax!!! Obviously, the AMT is not the way to 
address this loophole these folks have found. My wages are currently 
being garnished by the IRS and I am only allowed to take home $332 per 
week. I am borrowing money weekly to stay afloat financially and going 
into more debt by the day . . . My life is being destroyed by a huge, 
unfair tax burden and since I am also raising 2 children, I am barely 
able to buy them groceries, let alone put money away for their college 
education.
    I have filed for an installment agreement with the IRS and that was 
denied. I have filed an appeals with the IRS and that was denied. I am 
currently looking for help in any fashion to pay the IRS a reasonable 
amount to move on and get on with my life. When the accountant did my 
taxes without AMT for 2000, the tax would have been $10,000 extra over 
what I paid thru the year. However, even when I offered to pay the IRS 
$1,000 every month for the next 7 years, ($84,000) they refused and 
continue to take my paychecks except the $332 per week they think I can 
live on. Please support reforming AMT especially with regards to how 
ISO stock options are treated. http://www.reformamt.org Thank you.

                                 

                                             Reston, Virginia 20194
                                                      June 21, 2005
    Although Congress has responded to many of the corporate fraud 
problems brought to light by incidents at WorldCom and others and the 
relationships between corporations and Investment Banks Congress has 
not yet addressed the impact on taxpayers who subsequently faced 
excessively high AMT bills with no means of satisfying their debts. I 
was an employee of WorldCom and this is my story.
    Smith Barney (who had obvious conflicts of interest because it 
owned a great deal of WorldCom stock and had a ``too cozy'' 
relationship with WorldCom executives while managing the employee stock 
program) urged me and other employees to hold our WorldCom stock at all 
costs. Smith Barney did not offer us diversification and collaring 
strategies; in fact it actually discouraged such practices. Jack 
Grubman, Smith Barney's now infamous former telecom analyst, constantly 
barraged us with reports.
    Even as the stock slid with other telecoms (long before the massive 
fraud and lack of regulation about Corporate/Banking relationships 
became known), Smith Barney and WorldCom inundated us with information 
encouraging us to continue holding our WorldCom stock and simply borrow 
against it with margin loans.
    I was originally a UUNET employee and that was who granted 
incentive stock options to me. MFS bought UUNET and then WorldCom 
bought MFS. I exercised options for a dollar or so even though WorldCom 
stock was trading significantly higher than that. I didn't know about 
the AMT and followed the advice I received to hold the stock for a year 
to pay a lower capital gains tax. Of course, the rest is history. The 
stock started to fall along with the tech market, but eventually 
crashed completely due to the fraudulent activities that are now 
legendary.
    I never saw any money from the stock and now I have spent years 
dealing with the IRS which wants to collect over $240,000 (taxes, 
penalties, interest from 1999) on money I never had. The ``gain'' was 
simply in my account as WorldCom stock. Between tech layoffs and job 
searches, I have managed to earn enough money to pay untold thousands 
in ``legitimate'' taxes and have had the IRS take my refunds every 
year. So far, I've paid about $70,000 or so towards this bill, which 
was originally about $165,000, but with mounting penalties and 
interest, I still owe much more than I did originally.
    So many taxpayers were caught in the AMT/ISO trap, but the 
government makes so much noise, continues to prosecute, and passed 
regulations to supposedly punish the evildoers and protect the 
taxpaying citizenry, but the government seems to have missed this 
point. Many of us are now suing WorldCom and/or Smith Barney, but it 
would really help if the government provided some AMT relief for 
victims of corporate fraud.
    The way the AMT is interacting with ISOs is squashing innovation. 
Along with some other ex-uunet'ers, I recently founded a startup. Our 
tech jobs proved unstable, our 401(k)s were wiped out and all other 
accounts were liquidated. Luckily, with the appreciation of our homes 
and low interest rates we were able to borrow against our last assets 
to start a business in June 2003. Money is tight and the road is rough 
but we continue to strive to build a company to give people jobs which 
would actually increase the tax base far beyond what would be taken in 
by ruining us.
    However, so many facing AMT/ISO problems can't start their own 
business. You can't borrow money when the IRS puts liens on your credit 
report and it's hard to concentrate with the knocks at the door to 
receive the latest registered mail from the IRS constantly threatening 
to seize all you have left.
    Quite frankly, it seems un-American. The AMT is crushing a very 
innovative segment of American society by devastating these (more often 
than not) technology-savvy folks who are caught in a situation that was 
not their fault. Will they want to try again? Will they be able to?
    Congress should amend the law to afford relief to individuals who, 
like me, not only lost their investments, but their jobs as a result of 
corporate fraud and still face huge AMT liabilities or who have useless 
credits on their AMT account. Again, it just seems plain wrong, and 
defies common sense and fairness, to ask victims of fraud to pay a tax 
on a future capital gain that will, most likely, never materialize. 
Paying tax on money you never made is just wrong, is it not?
    I am currently being told by an IRS agent (who has come to my house 
to tell me such news), that they are going to seize my home. I have met 
with them and nothing changed. They seem unwilling, or unable, to work 
anything out that would allow me to keep my home and not disrupt my 
business as we work out of the home as well. All I got were flippant 
comments like, ``didn't it seem to good to be true?'' etc. alluding to 
the stock gains of the tech bubble. Actually, I agree. It did seem too 
good to be true which is why I was positioning to sell the stock before 
the bottom fell out. My only option seems to be selling my home, 
completely disrupting my family and business, and/or accepting a 
payment plan that allows me a ``living wage'' that is nowhere near the 
realities of even renting an apartment in the greater Washington, DC 
area.
    Thank you for your consideration.
                                                       Bill Bullock

                                 

                                                            WCKV-TV
                                       Clarksville, Tennessee 37040
                                                      June 10, 2005
Dear Ways & Means Committee,

    As the owner of a small business I have studied the various 
alternatives being proposed to reform our tax system. The FairTax 
proposal (HR 25, S 25) is the only one that clearly, simply, and fairly 
provides the best solution. I have looked for the loopholes in the 
FairTax and I cannot find them.
    Furthermore, as a first generation Minority, I have come to 
appreciate how the FairTax takes care of those at the lower end of the 
income spectrum. Additionally, as one who diligently pays his fair 
share of taxes, I am most excited that the FairTax would finally 
capture taxes from those who currently cheat the existing IRS-based tax 
system.
    Please seriously consider approving the FairTax so we can free our 
economy to be competitive in the world as well as providing for the 
needs domestically.
    Thank you for your diligent consideration.
            Sincerely,
                                                       Dan Calderon
                                                          President

                                 

   Statement of Tim Carlson, Coalition for Tax Fairness, Arlington, 
                                Virginia

    The Coalition for Tax Fairness first would like to thank Chairman 
Thomas and the Ways and Means Committee for the opportunity to present 
the urgent need for legislation addressing a tax crisis caused by the 
Alternative Minimum Tax Treatment of Incentive Stock Options.
The Problem
    Tens of thousands of American families are being financially 
destroyed by tax rates exceeding 100%--and reaching as high as 500% or 
more--of their entire income. These Americans belong to the 
hardworking, entrepreneurial group of workers that are the engines of 
the U.S. economy. They were caught in the ``Perfect Storm'' of events 
in early 2000, trapped by a complex, unintended anomaly in the tax code 
that subjected them to colossal taxes on phantom ``income'' they never 
will receive.
    Engineers and administrative assistants owe $200,000 or more, and 
mid-level executives owe $1,000,000 or more on stock on which they 
never saw financial gain. It is almost unbelievable this is happening 
in America.
The Irony
    These Americans are being driven into bankruptcy and ruin as a 
result of:

      an element of their compensation, incentive stock options 
(ISOs), that was intended to reward their hard work, sacrifice, and 
investment in their company;
      their honesty in reporting a tax element on phantom gain, 
that the IRS cannot independently discover or track (those who didn't 
report are paying nothing);
      their compliance with SEC insider trading laws and 
company ethics policies;
      their decision not to sell inflated stock and foist 
losses on the unsuspecting public;
      the AMT--a tax provision that was intended to ensure the 
ultra-rich paid some tax;
      a tax provision that didn't contemplate the effects of an 
economic meltdown.

The Tax Code Complexity and Resulting Unfairness
    While one can argue that many provisions of the AMT create 
unfairness and undermine confidence in the tax system, by far the most 
severe and devastating impact to individual taxpayers has occurred as a 
result of the AMT treatment of incentive stock options. The complex 
interaction between the incentive provisions of the regular tax code 
and the prepayment provisions of the AMT code as applied to ISOs 
created a crisis of unfairness in the economic meltdown of 2000. 
Taxpayers who followed the incentives Congress put in place, worked 
hard and invested in their companies, and followed the law, are being 
forced to pay tens of thousands, hundreds of thousands, and even 
millions of dollars in taxes based on phantom income, literally ruining 
them financially.
    In normal economic times, the ISO provisions of the regular tax 
code and AMT code interact awkwardly, but in general balance the 
competing incentive and prepayment goals. However, in the challenging 
economy of early 2000, the conflicting provisions became a volatile mix 
that trapped, destroyed and is continuing to destroy tens of thousands 
of American taxpayers and their families, impacting hundreds of 
thousands of people and hundreds of companies. The tax prepayment 
provisions of the AMT levied on phantom income are forcing taxpayers to 
make gargantuan, permanent interest-free loans to the government.
    Those who cannot sell other assets, or borrow by leveraging other 
assets, to fully pay these excessive taxes are driven to bankruptcy; 
many have quit working altogether as they face decades of what amounts 
to indentured servitude to the IRS; those who are working are having 
huge portions of their income taken by the IRS to prepay taxes they'll 
never really owe; others have fled the country. All these significant 
tax overpayments create useless AMT ``credits'' that will never be 
recovered or returned in the taxpayer's lifetime. People's financial 
lives are destroyed, as they lose their homes, retirement accounts, 
education accounts and future income, solely to build up massive tax 
overpayments that trickle back a maximum of $3,000 per year.
Distortion of Business and Personal Decisions and Congressional Intent
    Congress created incentive stock options as a tool for businesses 
to attract and retain talented employees, and to provide employees an 
incentive for long-term investment in companies. To that end, ISOs were 
not taxed upon exercise (unlike nonqualified stock options) and 
employees receive the long term capital gains rate if they hold the 
stock at least two years from date of grant and one year from date of 
exercise.
    The AMT, however, imposes a ``prepayment tax'' upon exercise that 
generates a credit offset on expected future gain. The critical 
failings of the current AMT model lie in the fact that (i) the AMT code 
did not contemplate the possibility of a major decline in stock value 
between exercise and the expiration of the ISO holding period, (ii) the 
AMT code did not provide for a proper ``true up'' of credits to actual 
tax owed upon sale, especially when the value at exercise greatly 
exceeds the value at sale, and (iii) the prepayment rate (28%) was not 
synchronized with the current capital gains rate (15%), forcing 
employees to generate overpayment credits even when the stock maintains 
its value between exercise and sale.
    The inconsistencies of these provisions in the current tax code are 
resulting in the following undesirable distortions of business and 
personal decisions:

      businesses have lost a key component of entrepreneurial 
incentive as employees are viewing ISOs as a ``trap'' rather than a 
reward for hard work and investment in their company. (In a Select 
Revenue Measures Hearing September 2004, Chairman Jim McCrery responded 
to Rep. Zoe Lofgren's statements regarding this ISO AMT crisis by 
stating ``incentive stock options [] are around in your district, but 
certainly everywhere across the country, that is a tool that companies 
can use and they want to use; and employees like it, so we ought not 
discourage the use of that through the tax treatment on the alternative 
minimum tax.'');
      employees who exercised incentive stock options in the 
past have virtually all their financial decisions distorted by ISO AMT, 
as they are borrowing and selling assets to prepay tax on money they 
never will have, quitting work because they cannot earn a living with 
the extent of wage garnishment from the IRS, and losing the retirement 
assets they worked their entire lifetime to acquire;
      employees who were able to pay their ISO AMT taxes and 
now have huge AMT credits, are spending thousands of dollars with 
accountants and financial advisors to try and manage their financial 
affairs to get some of these massive overpayments back in their 
lifetime;
      employees who have incentive stock options now are either 
not exercising them at all, or are exercising them and immediately 
selling to avoid being trapped and financially destroyed--just the 
opposite of what Congress intends;
      employees who receive incentive stock options do not view 
them as a benefit and encouragement to build value in their company, 
but rather as a dangerous trap that should be either never exercised at 
all or sold immediately upon exercise;
      the IRS is spending tremendous resources fighting 
taxpayers in offers in compromise, Tax Court, District Court, Appeals 
Court, and Bankruptcy Court in attempts to collect unfair taxes from 
people who have no money with which to pay the disproportional tax; 
this is neither an efficient use of resources, nor is it right.
The Critical Need for a Timely Solution
    This crisis began for many taxpayers in 1999. Those honest 
taxpayers who reported their ISO AMT ``income'' and trusted in the 
system to work to bring about some measure of fairness, have been 
sorely disappointed. The IRS has refused to grant any offer in 
compromise unless it is based on ``inability to pay,'' meaning that 
hardworking Americans trapped by this unintended result are losing 
everything they have ever worked for their entire lives--and also 
having their future wages garnished. The Tax Court recently affirmed 
the IRS's refusal to consider fairness or proportionality, stating that 
Congress must be the one to fix this problem. As a result, these honest 
Americans who have done nothing wrong, are being treated as tax dodgers 
or tax avoiders, in spite of having overpaid tens of thousands, 
hundreds of thousands, and millions of dollars in taxes.
    After four years of struggle, the appeal process for these 
taxpayers is now coming to a close, and these hardworking Americans are 
on the brink of financial ruin. If immediate action is not taken this 
year in 2005, the solution will come to late to prevent loss of homes, 
retirement savings, education accounts--all due to an unexpected and 
unintended result of a complex tax code applied to an unprecedented 
time of economic crisis.
These Americans Are Only Asking for Fair and Just Treatment
    These Americans have worked hard and lost everything. They are not 
asking for a return of the value they lost--they are merely asking not 
to be destroyed by being unfairly taxed on money they never received. 
They have waited more than four years for relief, borrowing money to 
prepay taxes on phantom income, paying high interest rates so they can 
lend that money interest-free to the IRS, following the laws and 
working within the system to try to bring about justice, all the while 
facing imminent financial ruin.
    This issue has been highlighted as a critical taxpayer issue in, 
among others, the following venues:

      The June 2004 Ways and Means Oversight Subcommittee 
Hearing
      The September 2004 Select Revenue Measures Subcommittee 
Hearing
      The National Taxpayer Advocates 2002, 2003 and 2004 
Reports to Congress
      Numerous Bi-partisan House and Senate Bills in the 107th 
and 108th Congresses
      Countless newspaper and magazine articles over the last 
four years
      CBS Broadcasts the last two years highlighting the Speltz 
family from Iowa, (destroyed by an over $200,000 ISO AMT tax bill on 
stock sold for a loss).

    The Coalition for Tax Fairness thanks Chairman Thomas and the Ways 
and Means Committee for the opportunity to present the urgent need for 
legislation addressing the ISO AMT tax crisis. CTF urges the Ways and 
Means Committee to support much needed immediate relief for these 
American taxpayers trapped by a complex tax provision and subjected to 
an unintended, devastating, and unfairly disproportionate taxation 
caused by the AMT treatment of incentive stock options.

                                 

                                           New York, New York 10016
                                                      June 20, 2005
Dear Chairman Thomas and Committee Members:

    I incurred a devastating Alternative Minimum Tax of over $125,000 
when I exercised options in my employer, whose stock became nearly 
worthless before I could sell my shares. It was my first ever stock 
option exercise and even though I was in a finance profession, I was 
unfamiliar with the details of AMT and how it worked. I have since 
found that few tax practitioners have a good working knowledge of AMT 
either. Those who do seem to universally abhor it due in part to its 
complexity, but more importantly due to the way it imposes cash taxes, 
often astronomical taxes, on gains that only exist on paper and may 
permanently evaporate before any realization occurs. Even in cases 
where the ultimate loss realized is total, the present AMT code 
perversely compounds the loss because most or all of the taxes paid on 
the paper gain can be impossible to recover. This of course is a severe 
and blatant violation of any principle of fairness the tax code may 
otherwise strive to achieve.
    I exercised my options in December 1999 with the intent of selling 
the stock after my company announced earnings in February. I exercised 
early because (a) my company's captive broker did not reliably execute 
trades in a timely manner; (b) I had time to do the exercise and 
account setup paperwork and I knew I would have very little time after 
the end of the year; and (c) even as a finance professional, I never 
suspected AMT would have such a hugely devastating, unfair effect--
taxing me on gains I never actually realized.
    I didn't realize that by exercising in one calendar year and 
holding the stock for sale just a short time later, but in a different 
calendar year, I was automatically subjecting myslf to AMT. By the time 
I should have been able to sell, my company prohibited me from selling, 
and I was stuck with the stock, which was rapidly diminishing in value. 
I had exercised the options on margin, and to pay off the margin debt I 
had to sell my house.
    AMT turned what could have been just a lost opportunity to make 
money on stock options into a devastating, life-changing event that 
gutted my savings and cost me my home. All this to pay tax on phantom 
gains that had evaporated by the time I filed my income tax return the 
next year. This is truly the most twisted, broken, and unjust aspect of 
the tax code.
                                                      Craig Chesser

                                 

                                      Foster City, California 94404
                                                       June 8, 2005
To the Honorable Members Ways and Means Committee:

    Thank you for giving me the opportunity to write to you concerning 
tax reform. Specifically, I would like to address the Alternative 
Minimum Tax.
    My name is Jeffrey Chou, and I have a wife and 2 daughters--one is 
4 years old, and the other is 1 year old. We currently face an AMT 
bill, from exercising Incentive Stock Options, which is greater than 
all our assets.
    In 1996, I left a secure, stable job at a large company to help 
start a communications company as an engineer. My compensation 
consisted of an annual salary of $80,000 and Incentive Stock Options. 
Cisco Systems eventually acquired us. It was a happy time for my 
family, thinking that my hard work in helping to build a company would 
finally pay off.
    In 2000, we decided to exercise my stock options, and were advised 
to hold the stock for 1 year. We did not and do not live extravagant 
life styles. We live in a 3 bedroom townhouse--I drive a 1997 Toyota, 
and my wife drives a 1998 SUV. We have good credit and have always paid 
our taxes in full and on time. In April 2001, following my exercise of 
the Incentive Stock Options, we faced federal and state taxes of $2.4M, 
more than 6,000% of our normal income tax and more than everything we 
owned. We also faced an ethical and moral dilemma. As we sought 
professional help to deal with this tax liability, several CPAs advised 
us not to comply with the law--to simply omit reporting the exercise 
and the tax. We discovered that the AMT on exercising stock options is 
a self-reported tax. Many of my friends and colleagues took this 
approach, did not report their exercise of stock options, and to this 
day, live happy lives.
    However, we decided to ``do the right thing'' and comply. We had 
faith that our country, in return, would also ``do the right thing'' 
and not ruin its honest tax payers. Since then, the IRS has sent us 
threatening letters, placed a lien on our names, attempted to levy our 
accounts, and actually visited our house demanding payment. The IRS 
rejected our Offer In Compromise and we appealed. The appeals officer 
admitted to us that our offer was in good faith and was reasonable, but 
that he still could not accept it. Today, we are in IRS collections.
    I do know that those who did not report are certainly glad they 
didn't. And I also know that among the many honest people I have met 
over the last 3 years whose situation is similar to mine, few or none, 
if faced with the same choice, would comply again. Why volunteer for a 
100% guarantee of ruin, when you can win the audit roulette 99.9% of 
the time? My friends, if caught, will simply claim ignorance of the 
law. I am told it will be hard to prove that they were not ignorant of 
the law given how many tax experts are unaware of the consequences of 
the interaction of the AMT with Incentive Stock Options.
    You may ask ``Why didn't you sell?''
    We are not sophisticated investors. I am an engineer; and my wife 
is a stay-at-home mom. We listened to advice that told us to hold for 1 
year. At the time, I had no knowledge of diversification or hedging 
strategies. I worked 12 hour days trying to build products and meet 
schedules. At night, I returned home to help my wife with our new born 
daughter. That was my life. In addition, our CEO, all throughout 2000, 
even as late as December, kept touting Cisco's optimistic future, 
saying ``we will be the most powerful company in history'', ``we are 
growing 30 to 50% every year'', and ``we are breaking away from our 
competitors.'' At the time, he was never wrong before, so I felt no 
sense of danger for my job, for my company, or for the stock. I had 
faith in my company and its leaders.
    I sincerely ask Congress to help those in my situation. We are all 
honest tax payers who want to do what is right for the country. Most of 
us are hard working Americans who helped build a company and who wanted 
to remain part of that company instead of ``cashing in.'' We also want 
to pay our fair share of taxes--but please tax us like any other 
investor--tax us when we realize our gains, not on what we might have 
gained.
    I believe things happen for a reason. If I can be a small part in 
helping to correct this injustice, the faith I have in this great 
country is justified.
    This is the highest priority of my life. Please do not hesitate to 
contact me any time for any reason.
            Thank you.
                                                       Jeffrey Chou

                                 

                                       Durham, North Carolina 27705
                                                      June 20, 2005
Dear Chairman Thomas and Committee Members:

    My name is John Cole, and I am writing to you to share my story of 
a severe problem related to the Alternative Minimum Tax (AMT) and the 
way it is has been applied to employee stock options. If you will bear 
with me I would like to begin by providing some personal background 
information.
    I was born in 1958, and grew up in Durham, NC. In 1977 at the age 
of 19 I moved to the San Francisco Bay Area, and for the next dozen 
years had a variety of blue collar jobs including home construction, 
cooking and waiting tables in restaurants, and working for moving 
companies. In 1989 at the age of 31 I went back to California Community 
College where I studied Computer Science for two years. When I was 18 I 
had attended College for 1 year, but had no clear direction and did not 
do well, which ultimately led to my withdrawing from school and heading 
West. However, the second time around I was highly motivated and 
extremely focused, and although I did not earn a degree I took 2-3 
classes a semester while working, and maintained a perfect 4.0 average.
    I was determined to provide myself with a solid foundation so that 
I could break into the growing world of hi tech, but being over 30 
years of age with no job experience turned out to be a significant 
drawback: I applied for literally scores of entry level jobs and was 
consistently turned down, most often without ever having opportunity to 
interview with anyone.
    Nonetheless I persevered and finally in March of 1992 was able to 
land a job initially paying $10/hour with a small startup software 
company, and over the next 3 years was able to grow within that outfit 
to where when I left I was the Senior Systems Engineer, and was the 
primary Technical Account Manager for many corporate customers which 
had site licenses for our e-mail package, including several large firms 
based in New York City, also Motorola and Ford Motor Company. It was 
the norm during that period to work 70-80 hour weeks, but I loved it: 
It was a period of tremendous personal growth for me, and coincided 
exactly with the emergence of the Internet as a public phenomenon.
    In January of 1996 I joined another software startup located in 
Silicon Valley. As was common practice at that time as part of a 
standard compensation package in addition to a base salary I was issued 
a modest number of Incentive Stock Options (ISOs) which would vest over 
a 4 year period. This was a model which allowed employees to feel they 
had a stake in the company, and again I worked on average well above a 
standard 40 hours/week, doing my part to help make the company a 
success.
    In May of 1998 the company was acquired by Cisco Systems, and my 
startup options converted to Cisco options numbering roughly 3,000 
total. A drop in the bucket compared to what management was issued, but 
a very healthy number for a rank-and-file employee like me. And over 
the next two years the stock split 2-for-1 twice, and 3-for 2 once, for 
an effective 6X increase, bringing my ISO total to 18,000!
    Due to the death of my sister after a long battle with cancer I 
decided in March of 2000 to leave Cisco and take some time off, stay 
close to home, and spend time with my mother, who was then 85. It just 
so happened that my leaving Cisco coincided precisely with the high 
water mark for the stock market, with the result being that the ISOs I 
had to ``use or lose'' within 90 days triggered a huge paper gain which 
ultimately resulted in over $225,000 in AMT liability. Unfortunately by 
the time the tax came due in April of 2001 the value of the stock had 
dropped by roughly 80% from its high point a year earlier, with the 
result being my tax bill exceeded the value of the stock assets that 
triggered it!
    I never sold any of the stock, never had any money whatsoever pass 
through my hands, never in any way benefited from owning the stock, yet 
I was about to be wiped out simply from exercising and holding on to 
what appeared to be an excellent investment in a very good company with 
real products used by organizations of every kind worldwide!
    I filed my year 2000 Federal return with an installment plan, but 
it was rejected due to the large amount of the tax liability. I called 
the IRS and attempted to expedite processing of my case, but was told I 
was ``in the queue and would just have to wait to be contacted by 
someone in IRS Collections''. For the next year while waiting for that 
contact on my own initiative as a sign of good faith I made monthly 
payments which ultimately totaled over $67,000 toward my pending tax 
bill! Finally in late June 2002 I was contacted by a local Revenue 
Officer who was unwilling or unable to discuss anything other than 
collection of my assets, so I engaged a former IRS Collections Officer 
practicing as an ``Enrolled Agent'' and submitted an Offer In 
Compromise (OIC) in July 2002.
    Cisco, Nortel and other large employers in the RTP area of North 
Carolina had not only stopped hiring, they had laid off thousands of 
workers, flooding the local job market with highly qualified job 
seekers. The tech job market had completely dried up, and not for lack 
of trying I had been unable to secure work. Save for a failed attempt 
to establish myself as an independent consultant which resulted in only 
a single paying job I remained largely unemployed for over 2 years and 
my tax bill (which had grown due to penalties and interest) exceeded my 
net worth by roughly 150%, yet my OIC was rejected at the field level 
due to an insistence that I could pay it off in total!
    I was actually told in a letter from the IRS Offer Specialist 
handling my case that ``Mr. Cole has the ability to pay the taxes 
outstanding in full and should withdraw his offer from consideration. . 
. . no offer amount is sufficient, and no offer would be accepted''. 
The Asset/Equity and Income/Expense tables the Offer Specialist used to 
justify that claim contained several computational errors, but the most 
egregious was that my ``ability to pay'' was substantiated by the Offer 
Specialist counting my remaining Cisco stock asset both as a source of 
ongoing monthly income, (to the tune of over $5,000/month), as well as 
a lump sum asset. In other words, the stock was counted twice, with 
ongoing income from it assumed after it was liquidated!!
    My representative pointed out this flawed logic to the Offer 
Specialist, but to no avail: The OIC was rejected at the field level. I 
appealed, and after another 13 months the IRS Appeals office finally 
accepted my OIC, but only after adjusting it to a dollar amount that 
reflected my net worth at that time, with terms of 50% of the 
settlement amount to be paid within 30 days, another 25% within 120 
days, and the final 25% within 240 days. I was able to make the first 
(50%) and second (25%) payments, but I have not been able to find more 
gainful employment, and at this point am unsure exactly how I'm going 
to make the final 25% payment, which is due mid August, 2005.
    I filed and paid all my state and federal taxes for the last ten 
years, and have no outstanding tax issues other than these problems 
associated with ISO transactions from the year 2000. I was finally able 
to find full time employment in August 2003, yet ironically back at 
Cisco, working in a group which has been outsourced to a vendor which 
pays less than a \1/3\ what I was making when I was previously a direct 
Cisco employee. I am grateful to have the job, yet the income barely 
pays my basic living expenses, and now on top of dealing with the final 
OIC payment I'm also trapped in a cycle of credit card debt, with high 
interest rates and monthly service charges. I have been trying to build 
on being back in the tech workplace and find more gainful employment, 
but to date have been unable to do so. I guess I'm one of the few lucky 
ones who have been able to secure an OIC settlement, but at this point 
it doesn't feel that way; I just don't know how I'm going to make ends 
meet going forward.
    The payments I made proactively toward my year 2000 tax bill and 
the OIC settlement amount total up to about $180,000. Ironically, I 
have an AMT Credit available which can offset regular income tax for 
years to come, yet the IRS would not consider that credit as an asset 
to be considered as part of an OIC settlement, and due to the 
relatively small yearly income I make now I can't take significant 
advantage of that credit. The one thing that could help me stay afloat 
would be to return some or all of that AMT credit sooner. I implore you 
to consider that avenue of relief.
    Thank you for taking the time to consider my case, and of those in 
similar situations.
            Sincerely,
                                                          John Cole

                                 

  Statement of Dorothy Coleman, National Association of Manufacturers
    The National Association of Manufacturers, the nation's largest 
industrial trade association representing small and large manufacturers 
in every industrial sector, applauds current efforts to develop 
proposals to reform the nation's tax laws. The U.S. manufacturing 
sector accounts for about 13% of GDP and 11% of U.S. jobs. Because of 
the importance of manufacturing to our nation's economy, NAM supports 
the thoughtful consideration of an appropriate and timely path to make 
the tax code fairer and simpler. In developing a tax reform plan, 
policy makers should be guided by principles that will promote economic 
growth and job creation.
    To this end, the NAM recently adopted the following principles on 
tax reform. These principles, which reflect NAM's long-standing 
policies on fundamental tax reform, will serve as a framework for the 
NAM to use in evaluating proposals and developments as the tax reform 
debate moves forward. Specifically, any reform plan should:

      Encourage savings and investment while minimizing the 
double taxation of corporate earnings;
      Include rules that permit U.S.-based manufacturers to 
compete on a level playing field in the global marketplace;
      Recognize the important role of research and technology 
investment in the growth of U.S. jobs and innovation;
      Eliminate both the individual and corporate alternative 
minimum tax rules, which are inherently complex and unfair;
      Strive to raise the required amount of revenue for the 
government without distorting a business's decision to invest capital 
and hire new workers;
      Include broad and strong transition rules that provide 
fair and equitable treatment for taxpayers who have committed 
substantial resources based on current law;
      Not result in a net increase in business taxes; and
      Incorporate rules that make it easier for Treasury to 
administer the law and for taxpayers to comply with the law. 
Unnecessary complexity is not productive from an economic perspective 
and undermines taxpayers' confidence in the fairness of the law.

    Members of the National Association of Manufacturers believe that 
the current tax code represents a major drag on our economy and look 
forward to working with policy makers to move towards a simpler and 
fairer tax code that promotes economic growth.

                                 

         Statement of Joyce E. Curcio, Cumberland, Rhode Island

    My name is Joyce Curcio and I am submitting this statement on 
behalf of my husband, Matthew Curcio. We, along with so many others, 
have been affected by the Alternative Minimum Tax and I would like to 
share with you our particular story.
    Matthew and I were living in San Francisco in 1998 when he obtained 
a position with Biomarin Pharmaceuticals based in Marin County, CA. He 
was a biochemist, earning roughly $50,000 per year. He also received 
Incentive Stock Options (ISOs). The market was doing fairly well at 
that time and Matthew thought about cashing in on some of the options. 
He was advised by a financial consultant for the company to hold onto 
the options which he did. Subsequently, the market took a large drop 
and the value of that stock was lowered considerably.
    When tax time April 2000 came along, it came as a shock when we 
were told by our CPA that we now owed @$20,000 to the state of 
California and @$60,000 to the Federal Government. How was it possible 
to be taxed on so-called ``income'' that was never realized? We were 
completely incredulous as to why this was happening.
    We paid off the state to satisfy that debt. The IRS bill was 
something we could not even fathom paying. We continued to receive 
threatening letters, with warning of liens, garnishing of wages and 
ultimate financial ruin. As long as we have been working citizens, we 
have duly paid our taxes, every year and in full. However, this tax 
seemed so unfair and unjust that we simply had to fight it. We 
contacted a tax attorney and looked into the OIC program. Subsequently, 
we moved back east to be closer to our families. Due to the move, as 
well as the slow process of this negotiation, our case is still in OIC 
in 2005. Our lives are literally at a standstill. We will owe a hefty 
legal bill when all of this is resolved. We are not able to purchase a 
home due to our this outstanding tax bill and our ``bad credit''. The 
stress and strain this has put on ourselves is unimaginable.
    Please, I urge you to take action and reform this outdated tax code 
and lift the burden for so many hard-working American like ourselves.

                                 

                                          Carson City, Nevada 89701
                                                      June 20, 2005
Dear Chairman Thomas and Committee Members:

    I would like to take this opportunity to answer some of the 
questions raised at the tax hearing.
How the ISO/AMT tax code affects compliance and your understanding of 
        the tax code
    As reported in the Taxpayer Advocate 2004 annual report to 
congress, section one, page 2, ``The Internal Revenue Code (IRC) now 
consists of substantially more than a million words.``There are only 
790,871 words in the bible (1611 King James Version), which is much 
more readable than the IRC.
    This fact alone demands professional assistance in tax matters. In 
my attempts at reading the IRC, I came to realize that it's the result 
of many years of tinkering--at times in the name of tax code 
simplification, yet on each of these attempts, word count and 
obfuscation have risen. Taxpayers who use professional assistance 
assume those professionals both understand tax law and have the 
taxpayer's interests at heart. But if that professional assistance 
fails, it's the taxpayer who pays, and pays dearly.
    In my case, I sued the CPA who masked my AMT liability, and delayed 
the timely filing of my return. The lawsuit resulted in a substantial 
settlement, in spite of the fact he wasn't paying his insurance 
premiums. The CPA never completed my return. The lion's share of this 
settlement was sent to the IRS. It only covered about \1/5\ the Federal 
AMT liability.
    With IRS interests and penalties, I'd expect the settlement to have 
been consumed by now. All this to prepay taxes on income never 
received, to generate credits I will never recover.
    The State of California has an AMT as well. My home was forced to 
sell to satisfy that liability in order to pay huge taxes on the 
phantom gain.
    I reported my ISO/AMT liability, after moving to a new CPA and 
having that number computed. I could have chosen not to report the 
phantom gain, as some have done. Instead, I reported the liability as 
required, and was immediately sent to collections.
    My first Face to face meeting with the IRS was staffed by a 
collections agent. In that face to face meeting the agent stated ``I 
hope you have relatives with money who are going to die soon.'' I have 
NEVER sought a face to face meeting since then. This is happening to 
hardworking, honest taxpayers.
    The fact of the matter is that IRS Collections agents do not set 
tax policy. Thus, they are a poor choice for a face to face meeting 
over liabilities resulting from flawed tax policy.
How the ISO/AMT tax code distorts your financial economics and 
        incentives
    Given the result of my experience, I find it difficult to put any 
further trust in Incentive Stock Options, because what should have been 
an incentive for me to make my company successful has quite literally 
destroyed my life. Why would I repeat the experience?
    The tax code, mixed with prevailing market conditions, timing of 
IPO's, blackout periods and so on, presents a Hobson's choice for the 
taxpayer, for example:
    IRC sec. 422 permits companies to issue ISO's to employees, and if 
the employees meet sec. 422 holding requirements, they will qualify for 
the lower long term capitol gain rate.
    IRC sec. 83 Taxpayers exercising ISO's must claim the fair market 
value on the date of exercise, even if those taxpayers are legally 
prevented from selling the stock for an extended period.
    IRC sec. 56(a)(3) states that the spread between a stock's fair 
market value and its exercise price is a tax preference for AMT 
purposes.
    For a full description of the interplay, and further background, 
see www.taxprophet.com/hot_topic/August_02.shtml
How the ISO/AMT tax is a burden
    My continuing status of being a tax debtor, and the uncertainty of 
my situation have had a most damaging effect on my ability to generate 
an income. Homelessness doesn't help either.
    Charity is out of the question. Does this kind of tax policy and 
enforcement promote homeownership, saving, job creation, investment and 
competitiveness in America? Absolutely not
    Unfortunately, as I have discovered, it can cost 20 years of an 
individual's efforts and a 20 year marriage. In essence, my life has 
been destroyed by a huge, unfair tax burden. As I write this, I'm 
beginning the process of bankruptcy, which is something I never wanted 
to do, yet I'm being forced to as a result of this situation and the 
upcoming change in bankruptcy laws.
    I would hope that congress has the wisdom to bring some sanity and 
morality to the IRC, to make the IRC and indeed the entire tax system a 
more transparent, balanced and fair system to the benefit of both 
taxpayers and the government.
    Once again, I would like to thank the Honorable Chairman William M. 
Thomas and House Ways and Means Committee for this opportunity to make 
my individual experience known. Please do not hesitate to contact me if 
you have any questions.
            Respectfully,
                                                      Steve Daniels

                                 

             Statement of Eric Delore, Alameda, California

Dear Chairman Thomas and Committee Members:

    I owe $420,000 of Alternative Minimum Tax (AMT) on under $5,000 of 
actual income derived from the sale of frightfully deflated Incentive 
Stock Options (ISOs), and the IRS's aggressive and disorganized 
collection activities threaten to destroy my peace of mind and ruin my 
family. I am not wealthy. I am a middle-classed citizen struggling to 
raise a family on a single income.
    I have already paid the IRS $37,000 of taxes, but they want more. 
They want everything. One collection agent suggested that I sell my 
home and give them all the proceeds. Bear in mind that by raiding 
various immediate and extended family bank accounts, I have already 
paid the California State Franchise Tax Board $100,000 of AMT tax on 
this same $5,000 of income. That is almost $140,000 of taxes paid to 
date.
    Like many technology professionals during the dotcom boom years, I 
exercised and held unvested ISOs from my company, Commerce One, so that 
the long-term capital gains tax period would run concurrently with the 
vesting of the stock options. This way, by the time the shares fully 
vested, I would be able to sell them and pay the lower long-term 
capital gains tax rate. However, the value plummeted while they were 
vesting and insider trading rules periodically restricted me from 
selling the shares that vested along the way. At exercise, the ISOs 
were worth 1.1 million. By the time I was able to sell the shares, they 
were worth under $5,000. Disastrously, the outdated and onerous AMT 
code forces me to pay taxes on the value of ISOs at the time of 
exercise, 1.1 million dollars, not at the time of sale, less than 
$5,000.
    I hired tax attorneys, and we made two Offers In Compromise (OIC) 
to pay the IRS an additional $100,000 of taxes. They rejected both 
offers, one without comment and another time because between the time 
we made the offer and the time they responded, almost six months, the 
value of my house had increased and they wanted that equity, too.
    We then were thrust into the jaws of the Automated Collection 
Service (ACS). The IRS cleaned out my bank accounts and intercepted my 
paychecks twice. They have also intercepted my state and federal tax 
refunds since the year 2001. My employer, Commerce One, then declared 
bankruptcy and laid off almost all of their work force, including me. 
At that point, the ACS decided to have me make another OIC, despite the 
fact that another IRS agent had told us that it would be impossible for 
us to submit another OIC. We submitted all the OIC forms and waited for 
months. After several months, we received a notice from a specific IRS 
agent, asking us to resend much of the same information and to 
correspond only with him. We submitted the information again and waited 
months again. After several more months, we received a letter from a 
different IRS agent asking us to resubmit much of the same information 
and to correspond only with her. We just resubmitted and are hunkering 
down for another several months wait. If the IRS rejects this OIC, this 
leaves only bankruptcy available to me, which basically amounts to, ``I 
quit, come and sell everything I own to get your money.'' This would be 
a very hard step for me to take, considering that I have paid all my 
other taxes on time and I do not have any other debts aside from my 
mortgage.
    The effect of this AMT debt on my family has been terrible and 
pervasive. I am on the brink of bankruptcy. I am on antidepressants to 
dull the clinical depression and dark thoughts triggered by this 
situation. I love these United States of America and I do have 
confidence in our government, but this situation has spawned in me a 
deep and, perhaps, irrational loathing of the IRS and State tax 
agencies that I struggle every day to mitigate and overcome. This 
loathing infects my every night's sleep, thought, decision, and 
familial interaction.

Headaches, unnecessary complexity, and burdens that taxpayers--both 
        individuals and businesses--face because of the existing system

      AMT Tax--Forces taxpayer to compute taxes twice for 
regular income and AMT income. Hard to understand how to compute this. 
Places unfair burden on average taxpayers to render tax on huge phantom 
gains resulting from the early exercise and holding of ISOs.
      OIC Process--Lack of continuity. Slow response times. 
Often deal with different agents along the way who need months to come 
up to speed on each case.
      Tax code--Too complex. Requires accountants to complete 
all the forms.
      IRS Coordination--Had to inform IRS several times we had 
a power of attorney on file and not to contact us directly. One such 
instance resulted in the levying of all our money that we had to foight 
to reverse.
Aspects of the tax system that are unfair

      AMT on ISOs--Requires taxpayer to pay huge taxes on 
phantom gains realized at the exercise of ISOs rather than at the sale 
of the associated vested stocks. AMT credit policy is laughable. The 
amount the IRS refunds every year is so small that only a taxpayer with 
a life expectancy of 500 years could ever hope to recover the entire 
AMT credit.
      OIC Process--IRS refusal to accept OICs based on 
Ineffective Tax Administration claim when the claim arises from AMT on 
ISOs is unfair. Prolonged OIC process results in increased interest and 
penalties assessed against the petitioner.
      ACS--Unfair to levy bank accounts and salary after 
leaving a cryptic message on an answering machine, such as, ``This is a 
message for Eric Delore. Please call me at xxx.xxx.xxxx regarding case 
number xxxxxx.''
Specific examples of how the tax code distorts important business or 
        personal decisions

      Because of the AMT on ISOs and the unfair and 
unpredictable associated IRS processes, we have avoided starting a 
business because we fear the IRS would just take all the money we made 
anyway, and postponed having another child because we thought we'd bee 
too poor to afford it and we can see the effects of this situation on 
our two young daughters. They haven't had vacations in years because we 
did not want the IRS to assert that if we can afford vacations, then we 
could afford to pay them 400k. We also feel that Tax law compliance is 
a risky choice. I voluntarily informed the IRS that I had early 
exercised ISOs. The unfair nature of the IRS treatment of AMT on ISOs 
may compel otherwise law-abiding citizens towards non-compliance.
Goals that the committee should try to achieve

      Fair and Simple--Simplify tax code. Repeal AMT tax laws. 
Adopt a flat tax or Value Added Tax (VAT).
      OIC for AMT on ISOs--Allow claims of Ineffective Tax 
Administration
      Retroactive remedy--Forgive tax AMT on ISOs tax debt for 
those people affected by the dotcom stock crash.

                                 

           Statement of Thomas Dudley, Andover, Massachusetts

    Dear Chairman Thomas and Committee Members: My name is Thomas 
Dudley and I am writing on behalf of myself and my family. We 
appreciate this opportunity to discuss the burden and unfairness of the 
ISO/AMT tax and the specific impact on our family.
    Much as an individual who has been scammed by unscrupulous workmen, 
I am embarrassed and very hesitant to speak about the specific 
financial impact on my family. My family supported my decision to leave 
a secure job at a large company to pursue a goal of financial 
independence that might be possible through diligent efforts building a 
small company. We gave up family vacations, weekends and evenings 
together, had the disruptions of two moves and mounted financial debts. 
We thought the hard work and sacrifices finally paid off when my 
company (CoreTek) was acquired by Nortel Networks. Suddenly, the 
incentive stock options (ISOs) became quite valuable and our ``paper'' 
wealth was beyond anything we could have imagined. The newfound wealth 
was welcome, but also scary. We hired a financial advisor and an 
accountant to guide us through the process of exercising the options 
and managing our money. Without experience, we followed their advice, 
with the exception of large donations to charity and gifts to parents 
to allow them to retire. We made decisions on donations and gifts 
without consideration of the tax consequences because it was the right 
thing to do.
    I felt that I had obligations to the acquiring company and believed 
that if I worked hard for the success of the business, everything else 
would fall into place. I thought the advice of my advisors was sound 
and I agreed to exercise and sell approximately 38% of the available 
options at $80 per share in July 2000, which provided me with sizable 
real wealth. The balance of the options were exercised at the same 
price and held. At the time this appeared to be a very sound financial 
plan.
    The financial plan began to unravel as I learned of the tax 
consequences in early 2001. I was prepared to pay income tax at the 
highest marginal rate on my substantial year 2000 income which was 
driven by the exercise and sale of the stock options. I was not 
prepared for the shock of the alternative minimum tax on the ISOs that 
were exercised and held. Again, I prefer not to share exact dollar 
amounts, but we ended up paying over 90% of year 2000 income in federal 
taxes and over 100% when state and other taxes were included. Because 
of the distortions of the large income in year 2000, I estimate that we 
have paid between 65% and 70% of our lifetime earnings since 1974 in 
federal income tax and higher if other income taxes are included. To 
add insult to injury, the alternative minimum taxes we paid were on 
paper profits that no longer existed, as Nortel Networks stock had 
fallen to below $13 per share by the time year 2000 income taxes were 
due and eventually went to a low of under $0.50 per share.
    I'm thankful that I was able to walk away from the experience free 
of debt (except for a mortgage), and I left Nortel with an excellent 
reputation for integrity. The payoff for all the hard work never did 
materialize and we have a large AMT credit that will probably never be 
realized. I'm still paying a mortgage, struggling to make tuition 
payments for two daughters and am working out of state and commuting 
home on weekends in order for my wife, who is battling cancer, to be 
able to continue treatment with her current set of doctors.
    I'm comfortable paying my fair share of taxes, but the alternative 
minimum tax is one that penalizes hard work, success, and what 
otherwise would be considered sound long term financial planning. The 
complexity of the tax is mind-boggling and I'm not sure that I 
completely understand all the details of the alternative minimum tax 
even today.
    I request that you consider changes to the tax code to eliminate 
the alternative minimum tax and to right the wrong to those who met an 
unfair tax burden through the exercise of incentive stock options.
    Thank you.

                                 
                                             Lawrence, Kansas 66046
                                                      June 20, 2005
Dear Chairman Thomas and Committee Members:

    My name is Jeff Eden, I am recently married, have been severely 
affected by the AMT law and I want to share my story with Congress.
    My AMT issue resulted from the exercise (purchase, not sale) of 
incentive stock options for Critical Path in August 2000. I was laid 
off from my job and had to either exercise my options or lose them. 
They were one of the only retirement vehicles I had ever had and I had 
worked very hard (60+ hours per week) for several years to vest the 
options, so I exercised them thinking they would serve as a nice nest 
egg for my future family. My broker advised me to hold the stock for a 
year for long-term gain purposes.
    Then the stock market crashed in early 2001. Unknown to me (and 
apparently tens of thousands of other people), under the current AMT 
law a taxpayer who exercises incentive stock options are required to 
pay a tax on the VALUE of the stock the day it is exercised (purchased, 
not sold) even though income has not yet been earned (they had yet to 
be sold). I used the only savings I had to exercise (buy) the stock and 
I was not aware of the AMT tax until my return was prepared in March 
2001. I ended up owing more than $80,000 in AMT to the IRS and over 
$10,000 to the State of Colorado for a stock purchase that actually 
resulted in a loss (I paid more for the options than I could sell them 
for). The IRS was asking for money I did not have, for income I never 
realized since it was all on paper and was now nearly worthless.
    Up until the AMT problem I have paid my taxes on time and in full 
my entire working life. I am a hard working person who has been dealt a 
tremendous blow from a tax law (AMT) that even the IRS recognizes is 
flawed.
    I have had to borrow money from family members, drain my savings 
and re-mortgage my home to pay my AMT tax liabilities (including 
substantial interest and penalties) in Colorado and to the IRS. In 
total, I have paid over $100,000 with my life savings and borrowed 
money to pay my AMT liabilities. I borrowed for and paid my tax 
liability as quickly as I could because I didn't want to be in trouble 
with the IRS or the State of Colorado. I was hoping my only recourse, 
the Offer in Compromise system, would somehow correct this inequity.
    In the summer of 2003, after two years in the IRS Offer In 
Compromise system (two full years with interest), bounced between 4 
offices across the country, over 50 hours of calls, meetings, re-
submissions (four times) of personal and financial data to the IRS, 
over two thousand dollars in legal and accountant fee's and after I had 
paid my principle tax liabilities in full, the IRS rejected my OIC that 
I filed under the Effective Tax Administration rule. I was totally 
shocked because I thought if there ever was a reason to claim the need 
for Effective Tax Administration, my AMT problem was it. Two years 
later I am still shocked by how unfair this whole problem has been and 
I'm left without much hope to recoup my life savings.
    I will spend the next 10 years paying back the debts I incurred to 
pay the IRS for this flawed law and not saving for my own family's 
future. The AMT law has cost me so much more than the $100,000+. It has 
broken me mentally. Please imagine having to go, hat in hand, to family 
members to borrow such large sums of money for taxes that should never 
have been levied. This has affected them as well and my relationships 
with those who lent me the money. It has been horrible. It seems 
terribly unfair.
    I would like to see the AMT laws changed. I would like Congress to 
consider those of us who have paid the IRS for this flawed law and 
figure out a way to allow us to recoup the money we have paid in to 
date. I have an $80,000 plus credit with the IRS, but the AMT law says 
I can't really use it. It will take me over 30 years to recoup it. With 
the time value of money, it will be worth little. Meanwhile, I have a 
huge debts to pay to those who lent me money for taxes I never should 
have incurred.
    I want to regain my confidence in our leaders and our government. I 
know this Committee most likely did not have a hand in creating the 
law, but I'm fairly certain you have the power and authority to make 
things right. I'm looking forward to hearing how you will help those of 
us who pay our taxes, follow the tax laws (even when flawed and unfair) 
and only want to be treated fairly. Please provide us with the vehicles 
to recoup the money we have paid into this flawed system.
    Thank you for your consideration and time.
                                                          Jeff Eden

                                 
                                         Evans, West Virginia 25241
                                                       June 6, 2005
    As a Certified Public Accountant, I support the plan to abolish the 
I.R.S. and the income tax and replace it with a national sales tax. 
Elimination of the Federal Income Tax on individuals and businesses and 
the replacement thereof with a National Sales Tax is the only genuine 
route to a fair and just tax system. The taxation of revenue generation 
has served only to burden the taxpayers with costs of compliance and of 
implementation of tax reduction strategies. Income taxation has allowed 
politicians to obfuscate the actual costs of government to the 
citizens. It has enabled the hidden social engineering agenda of 
political elites. It has allowed the politicians to clandestinely 
redistribute income according to their own peculiar notions of 
fairness. It has deprived the individual taxpayer and the taxpayer's 
family of the unfettered use and enjoyment of earned income. It has 
stultified formation of capital and associated economic activity. 
Income taxation has necessitated and facilitated the intrusion of 
agents of the government far too deeply into the private lives of 
citizens and businesses. Taken in sum, after social security and 
welfare, income taxation is the most obstructive and destructive force 
applied to the citizens of this federal republic in its history.
    There is no fix. We have long understood that the act of applying a 
tax guarantees the reduction of the object of the tax. Any activity 
which by its nature reduces income cannot provide sufficient good to 
overcome that reduction. It is inherent in the taxation of income that 
it must perpetuate, if not continually, exacerbate the malignant side 
effects discussed above. We have ample evidence of the futility of 
applying remedies to ameliorate the negative impact of the income tax 
in the very complexity, density, and sheer bulk of our opaque income 
tax statutes and regulations. Taken together with bizarre and tortuous 
judicial interpretations, the result is a Byzantine pile which beggars 
compliance. Tax avoidance, not to say evasion, is therefore weighted in 
favor of the high income individual and business who can afford to hire 
tax wonks like me to find a way to nullify the manifest intent of a 
piece of tax code and reduce its impact on a client's income. Not only 
should this malignant tumor on the economic and political body of the 
country be excised, the Sixteenth Amendment to the Constitution should 
be repealed, lest the temptation to try income taxation again prove too 
much for the politicians of some future time.
    The Internal Revenue Service is a gargantuan pestilence which has 
ostensibly no other function than to coerce compliance with an opaque 
and cancerous code. The Service apprehends diametrically opposed 
interpretations simultaneously of the same bit of code in order to 
maximize tax due. It is infamous for overreaching its own authority to 
collect monies from taxpayers on the most dubious of issues. It 
arrogates the power to refuse compliance with the findings and 
interpretations of the Tax Court. The Service is the only enforcement 
arm of government exempt from the constitutional constraint of 
presumption of innocence. It cannot depend on its own computer system 
nor, indeed, its personnel to maintain confidentiality of tax records. 
It has been and will continue to be a weapon for incumbent politicians 
to punish the opposition. It is used as a cudgel by the left to 
restrict conservative political speech in  501 exempt environments, 
while allowing liberals to pollute churches, unions, and NGO's, ad 
libidum. In the mind of the public, the IRS rates right along side of 
the Spanish Inquisition as a model of fairness and compassion. For all 
intents and purposes of the citizenry, the IRS is the American answer 
to the Nazi Gestapo and Russian Secret Police. It has no place in a 
republican federal system and should be disbanded. One could reemploy 
its minions as Border Patrol and ICE agents to much better effect for 
the benefit of the citizens of our country.
    Please do not be dissuaded from the abolition of these political 
and economic malignancies. The blandishments of the Income Tax 
apologists are invitations to perpetuate a governmental disaster. On 
the other hand, the National Sales Tax (Fair Tax) affords the 
opportunity to raise taxes on individuals by attaching to their 
purchases of goods and services.
    Sales tax is a genuinely voluntary tax (or as voluntary as a tax 
gets) because the taxpayer has the option of foregoing the purchase to 
avoid the tax. Since it is virtually impossible to exist in our culture 
without purchasing some durable goods, consumable goods, and services, 
the generation of tax is reasonably guaranteed. It has ever been the 
nature of the human being to acquire in proportion to his means, the 
tax is self graduating. Chevrolet buyers will be less taxed than will 
Cadillac buyers. Whatever the congruence of utility of the vehicles, 
the perceived value is reflected in the difference in the price of the 
vehicles. Wealthy purchasers may be able to control their acquisitive 
instincts sufficiently to content themselves with the Chevy, but most 
will purchase the highest perceived value which they can afford.

Thus, the Fair Tax, in effect, is self assessment and is, amazingly, 
completely without veiled government device.
    The mechanism for efficient collection of the revenue and the 
assurance of compliance is in place nearly universally across the 
country. The Fair Tax should be collected by the vendors of goods and 
services and administrated by the several state tax departments. The 
states should provide expert remittance, compliance, and audit services 
conjointly with their own sales taxation effort. Remittance by the 
states to the U.S. Treasury should be monthly and should be directly 
audited by federal authorities.
    To satisfy the liberal faction, exemption from the impact of the 
Fair Tax could be easily effected by issuance of an exemption card to 
be used not unlike the ubiquitous credit, debit, or smart card at the 
point of sale. Utilizing a smart card could allow the government to 
establish a continuum of exemption amounts by means testing the 
individual taxpayer or by exemption of a given class or classes of 
purchases for individual citizens. No tax returns need be filled out by 
huge numbers of individual taxpayers, but rather Fair Tax collections 
would be reported and remitted by the relatively few vendors. 
Compliance, while a concern in rare circumstances, becomes an almost 
automatic proposition with the Fair Tax as the same process that 
records sales, records tax collections. The only downside, if you wish 
to view it as such, is that the citizenry will become acutely aware of 
the actual cost of government and would thereby be enabled in deciding 
if it is a good investment.
    Please take the Fair Tax forward to enactment. The abolition of the 
cancerous income tax and the institution of the Fair Tax must be the 
most important and most lasting benefits that you can provide to the 
country.
            Respectfully submitted,
                                                Noel H. Eyster, CPA

                                 

                                       New Orleans, Louisiana 70125
                                                       June 4, 2005
Committee on Ways & Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington D.C. 20515

Dear Chairman and Committee Members:

    Having been a businessperson as well as a taxpayer, I believe that 
the Fair Tax proposal (HR 25 /S25) provides the most even-handed and 
effective means of providing the necessary funds for government 
expenditures. I have formed this belief after examining the competitive 
proposals as well as the current taxation system.
    I have reached the following conclusions that I hope Committee 
members will consider carefully:

The Fair Tax proposal provides the necessary revenue.
    The Fair Tax proposal is based on consumer consumption. The 
quantity of consumer consumption is calculable and currently well 
understood. Therefore, the amount of tax that may be raised is 
predictable. By setting an appropriate tax rate, the Government can be 
assured of raising the needed funds. Other proposals (including the 
current taxation system) do not permit the same level of predictability 
nor the assurance of a ``revenue neutral'' implementation.

The Fair Tax proposal is transparent to citizens.
    The Fair Tax proposal, for the first time in American history, will 
give the taxpayers a clear understanding of what they are paying to 
support the Government. All other proposals now being considered have 
some form of hidden taxation or unnecessarily complex exceptions, 
exclusions, and loopholes.

The Fair Tax Proposal can be implemented almost immediately.
    Retailers are already capable of collecting taxes on sales. The 
implementation of a federal consumption tax is trivial compared to the 
current income tax collection mechanisms. And only the Fair Tax 
proposal does this without additional taxpayer identification or 
classification at the retail level.

The Fair Tax Proposal is fair to all economic classes.
    Only the Fair Tax proposal rebates the taxes on basic living 
expenses evenhandedly. Stratified tax rates, complicated tax formulae 
for special classes, and welfare payments through ``unearned negative 
taxation'' will be a thing of the past. Everyone, including the poorest 
Americans, will receive and spend, without tax penalty, 100% of their 
income whether from government support programs, sales revenue, or 
wages.

Taxpayer confidence will be enhanced by the Fair Tax Proposal
    Currently, most taxpayers despise paying into a taxation system 
that they believe is slanted toward special interests. Due to the 
Congress' using the taxation system to foster certain political, 
economic, and cultural programs, this opinion is not entirely wrong. 
The Fair Tax proposal will strongly demonstrate that the collection of 
necessary taxes is based on the fairest basis--the ability to pay.

The Fair Tax Proposal offers a dramatic boost to the American economy
    Only the Fair Tax proposal offers straightforward taxation based on 
consumption with no tax on producers or the poor. The results are a 
dramatic decrease in producer prices, an increase in foreign sales, and 
lowering of interest rates due to the increase in domestic savings. 
With these benefits, every person in America is a winner.

The Fair Tax proposal injects $250 billion into the economy.
    The savings in tax compliance costs is estimated to be $250 billion 
each year if the Fair Tax proposal is implemented. That money will be 
spent instead on productive business activities and not squandered on 
tax avoidance efforts as it is now.

The Fair Tax proposal will create jobs for Americans.
    The current convoluted tax system encourages business to export 
jobs to countries where tax rates and systems are less onerous. The 
Fair Tax proposal will permit companies to employ Americans to produce 
products at competitive prices for sale both domestically and overseas. 
The result will be more income from foreign markets and more spending 
by gainfully employed Americans.

The Fair Tax proposal will help charities and persons on fixed incomes.
    The Fair Tax proposal will allow every American to receive 100% of 
their income and decide for themselves how it should be spent. This 
means that the retired on fixed incomes will receive an immediate 
benefit. Wage earners can decide to save more or donate a larger 
portion to charity.

The Fair Tax proposal will effectively tax all Americans.
    Currently, income tax is only collected from those with paychecks, 
investment income, or sales revenue. Additional ``hidden taxes'' target 
specific products, commodities, and producer segments. The Fair Tax 
proposal will, for the first time, collect taxes from every American 
regardless of how the income was derived and remove ``hidden taxes''.
            Thank you,
                                                   Michael Fermanis

                                 

                                    San Francisco, California 94118
                                                      June 20, 2005
Dear Chairman Thomas and Committee Members:

    Like so many others, my former employer issued me Incentive Stock 
Options several years ago. I am no financial whiz, so I sought advice 
from a highly-respected accounting firm in San Francisco on how to best 
deal with the potential tax consequences. I paid several thousand 
dollars for the advice, which I followed, and now, I find myself in the 
following predicament.
    On calculating my year 2000 income tax, the combined state and 
federal taxes came to $80,000 due to the Alternative Minimum Tax. In a 
good faith effort, I sold the stock in January of 2001 for $26,000.
    That's right, the taxes I owed were equal to 311% of my actual 
gain. I'm glad to pay any percentage of tax, even up to 100% of my 
gain, but a tax in excess of 300% is difficult to comprehend.
    I gave the state of California and the IRS my entire stock gain, 
and all of my additional savings, but I still ``owed'' in excess of 
$45,000 on a $26,000 gain!! And the IRS adds penalties and interest 
every day . . . my liability has incurred over $10,000 in interest and 
penalties so far!!
    I can't use my phantom gain to pay off my debt--the government only 
accepts real income and I never actually had real money from the stock. 
I had to look to other income (my salary), on which I first paid normal 
income tax to pay the tax on my ``phantom gain.''
    Unfortunately, I've since been laid off. I've given the state and 
the IRS all of my savings. Nevertheless, I'm told that although I have 
tens of thousands of dollars in AMT and Capital Gains credits, I have 
to pay my ``debt'' now. I can collect my credit at a rate of roughly 
$2000/year over the next 30+ years. And, although I must pay 
significant interest on my ``debt,'' the IRS will pay me no interest 
(or penalties) for the credits which I'm owed.
    The AMT was designed to prevent the wealthy from avoiding paying 
taxes. I'm not wealthy, nor am I trying to avoid paying taxes. I am an 
honest hard-working taxpayer. I tried to understand this portion of the 
tax code that even Taxpayer Advocate Nina Olsen sees as extremely 
confusing and problematic. I went to highly respected accountants. I'm 
still trapped.
    I've contacted the IRS on multiple occasions to discuss this issue. 
Each time the individuals with whom I've spoken tell me that they agree 
with me that the law is unjust, but my only recourse is through 
legislative action.
    Please address this situation! The tax law should not be so 
confusing that--even with the planning advice of accountants--a 
taxpayer owes 311% of actual gain.
    Clearly this is not what the law intended.
    Thank you for your consideration,
                                                      Mike Fleisher

                                 

Statement of Jolynne Flores, American Society of Pension Professionals 
                   and Acutaries, Arlington, Virginia

    The American Society of Pension Professionals & Actuaries (ASPPA) 
appreciates the opportunity to submit our comments to the House 
Committee on Ways and Means on tax reform and the detrimental affect 
certain reform options could have on the employer-sponsored retirement 
plan system. A 50-page report--``Savings Under Tax Reform: What Is The 
Cost to Retirement Savings?''--discussing ASPPA's concerns in depth can 
be found at www.asppa.org.
    ASPPA is a national organization of almost 5,500 retirement plan 
professionals who provide consulting and administrative services for 
qualified retirement plans covering millions of American workers. ASPPA 
members are retirement professionals of all disciplines, including 
consultants, administrators, actuaries, accountants, and attorneys. Our 
large and broad-based membership gives it unusual insight into current 
practical problems with ERISA and qualified retirement plans, with a 
particular focus on the issues faced by small to medium-sized 
employers. ASPPA's membership is diverse, but united by a common 
dedication to the private retirement plan system.
    We understand this hearing is in anticipation of tax reform 
recommendations to be made by Treasury Secretary John Snow to Congress. 
The President's Advisory Panel on Federal Tax Reform (Advisory Panel) 
has been tasked with recommending ways to improve and simplify the tax 
code to the Treasury Secretary by July 31, 2005. These recommendations 
are to focus on ways to benefit all Americans by making the tax code 
fairer, simpler and more pro-growth.
    ASPPA applauds the Committee's leadership in working to fashion 
such a fairer, simpler, and more pro-growth tax system. Like you, ASPPA 
believes our tax system can and should be improved. But this belief is 
balanced by wariness that the enthusiasm for broad reform may 
jeopardize some tax provisions that have played an important role in 
America's economy. ASPPA looks forward to working with Congress and the 
Administration on strengthening America's economy through the tax 
system, while at the same time recognizing that any reform to the 
federal tax system must continue the current policy of providing tax 
incentives for long-term savings through the employer-sponsored 
retirement plan system.
Tax Reform Could Undermine Long-term Retirement Savings
    On May 27, 2005, the ASPPA Pension Education Research Foundation 
(PERF) released a Report titled ``Savings Under Tax Reform: What Is The 
Cost to Retirement Savings?'' that examines several possible tax 
reforms and their impact on retirement savings.\1\ We are attaching the 
Executive Summary of the Report at the end of these comments. We ask 
that the Report and its summary be included in this hearing's 
Congressional Record.
---------------------------------------------------------------------------
    \1\ The Report and its Executive Summary can be found at 
www.asppa.org.
---------------------------------------------------------------------------
    The Report looks specifically at several suggested tax reform 
options, including a consumption-style tax or the reduction or 
elimination of the tax on capital gains and dividend payments, as a 
strategy to boost national saving. Many tax reform advocates favor 
proposals such as these. The Report concludes that while this goal 
might be achieved, it would be at a high cost--the loss of retirement 
savings plans for millions of Americans with modest means who already 
have difficulty putting aside adequate funds to support their senior 
years. Frankly, this is too high a price to pay, particularly when 
there are other mechanisms that could increase savings without 
jeopardizing the nation's retirement system.
    Any tax reform plan that reduces or eliminates the incentives for 
long-term savings would erode both sponsorship and participation in 
employer-sponsored retirement savings plans, threatening employees' 
future financial security and leading to greater wealth disparities. 
Today's workers could face a much bleaker retirement. Indeed, radical 
reform that would eliminate the current tax incentives for long-term 
savings could virtually destroy the existing system.
    The need to preserve successful sections of the tax code is 
reflected in President Bush's charge to the Advisory Panel where he 
stressed the need to retain incentives that promote home purchases and 
charitable giving. ASPPA believes a compelling case can be made to 
afford equal protections to provisions that encourage retirement 
savings. As the Social Security debate has shown, Americans are 
appropriately worried about economic security in retirement.

Employer-Sponsored Retirement Plan System
    America is not a nation of savers. Even today about a third of 
workers are not saving for retirement and many who are saving have 
retirement accounts that are inadequate to fund a comfortable 
retirement. Further, demographic shifts illustrate a growing retiree 
problem: approximately 85 million Americans will be 65 or older in 2050 
compared to 36 million in 2000.
    The existing provisions of our nation's income tax system that 
incentivize long-term retirement savings have encouraged a significant 
number of Americans of modest means to save for their retirement 
security. These current long-term savings incentives in the tax code 
have been extremely successful and deserve to be retained. The current 
employment-based retirement plan system is the backbone of an 
``ownership'' society, which has made middle-income Americans 
significant investors in the stock market.\2\ However, more needs to be 
done.
---------------------------------------------------------------------------
    \2\ As of July 2003, an estimated 36.4 million U.S. households, or 
almost half of all U.S. households owning mutual funds, held mutual 
funds in employer-sponsored retirement plans. Investment Company 
Institute, U.S. Household Ownership of Mutual Funds in 2003, Vol. 12, 
No. 4 (October 2003).
---------------------------------------------------------------------------
    The Report states that households covered by an employer-sponsored 
retirement plan are more than twice as likely to achieve retirement 
income adequacy. As a result, one goal of tax reform should be 
expanding coverage under the employer-sponsored retirement plan system.
    Much of today's savings is spurred by plans offered by employers, 
which often offer a synergistic combination of advantages. In many 
cases, because of employer matching contributions, a dollar contributed 
by a worker grows immediately, before interest and other earnings are 
added. This means $1 contributed by a worker today may result in an 
immediate deposit--before any interest is earned--of $1.50 or more.
    Putting money in an employer-sponsored plan is also much easier 
than saving independently. Low--to moderate-income workers are 11 times 
more likely to save when covered by a workplace retirement plan, in 
part due to the convenience of payroll deductions, the culture of 
savings fostered in the workplace, and the incentive of the matching 
contributions provided by the employer.\3\ The workplace retirement 
plan has been shown to be the only effective means to get these workers 
to save.
---------------------------------------------------------------------------
    \3\ According to the Employee Benefits Research Institute (EBRI), 
77.9 percent of workers making from $30,000 to $50,000 and covered by 
an employer sponsored 401(k)-type plan actually saved in the plan, 
while only 7.1 percent of workers at the same level of income, but not 
covered by a 401(k)-type plan, saved in an individual retirement 
account.
---------------------------------------------------------------------------
    This is not a blanket defense of the status quo. The federal tax 
system is imperfect. Its retirement savings provisions could be changed 
for the better. But history strongly recommends continuation of 
priorities embedded in the existing system:

      The opportunity for individual retirement savings tied to 
employment should remain. Research shows that many Americans would not 
save at all if not offered employer-sponsored retirement plans.
      The system should maintain nondiscrimination rules to 
assure maximum coverage of all workers.
      The system should favor long-term savings, thereby 
discouraging savers from withdrawing funds prior to retirement.
      The system should acknowledge the priority of retirement 
savings plans by assuring that their incentives are more attractive 
than other savings incentives.

    Small employers hesitate to offer retirement plans for several 
reasons, including administrative complexity and cost, and the 
unpredictability of their financial condition. These hurdles are offset 
partly by the knowledge that the small business owner cannot maximize 
personal retirement savings without providing a plan for workers as 
well. Any changes that allow small business owners to meet their 
retirement savings goals on an individual basis, such as through a 
reduction or elimination of the tax on capital gains and dividends, 
would inevitably threaten the future of the plans they provide their 
workers.
    High-income earners are more likely to have retirement savings than 
those who earn less. The largest group of workers without access to an 
employer-sponsored retirement plan is comprised of those employed by 
small firms for a modest wage. The good news is that coverage for this 
segment of workers has been steadily rising. Tax reform ought not to 
reverse this positive trend.
    Many proponents of tax reform share the goal of increasing savings. 
No one opposes that priority. But there is a need to focus on who is 
saving and how they are saving. The question is not solely how to get 
society to save more, but how to encourage low--to moderate income 
workers, who are often not saving, to save for retirement.
Tax Reform Must Accommodate Retirement Policy
    From a retirement perspective, the most important and daunting goal 
involves convincing the low--to moderate-income workers to increase 
their retirement savings. The political and policy challenge lies in 
ensuring that any plan retains these critically important retirement 
savings incentives.
    Some tax reforms under consideration would provide greater tax 
advantages to individuals investing in stocks, mutual funds and other 
capital investments through a reduced tax on capital gains and 
dividends. This would undoubtedly create a significant disadvantage to 
investing through the employer-sponsored retirement plan system because 
individual savings in capital investments generally is not ``locked-
up'' until retirement. If retirement savings no longer enjoy a special 
tax advantage, low--to moderate-income workers would save less for 
retirement. Instead, if they save at all, it will likely be in a short-
term savings plan to which they will have ready access, making it more 
likely than not that these savings will be spent, in whole or in part, 
well before retirement.

Summary
    Prudent retirement policy suggests that the most efficient and 
effective tax retirement policy system must continue to provide long-
term tax incentives to employers to establish and maintain retirement 
plans. As the tax reform debate accelerates, it is vital that Congress 
acknowledge, protect and extend the positive impact that tax policy has 
had on the individual retirement security of millions of Americans 
through long-term savings incentives.

Attachment
Savings Under Tax Reform:
What Is The Cost To Retirement Savings?
Executive Summary
    More than any other issue, a reform of the federal tax system 
represents a significant threat to the tax incentives available for 
long-term savings provided through the employer-sponsored retirement 
plan system. Any reform to the federal tax system that would diminish 
these incentives would jeopardize the individual economic security 
currently achieved through the employer-based retirement plan system.
    The President has established a tax reform commission that is 
exploring various ways to simplify the current tax system. Its findings 
are due to the Treasury Department by July 31, 2005. Among the 
proposals under consideration are major reforms such as consumption-
style taxes or targeted approaches, such as those that eliminate the 
tax on capital gains and dividend income.
    This research paper focuses on the crucial need for continued long-
term savings incentives through the employer-sponsored retirement plan 
system. It illustrates the potentially devastating effect certain 
potential tax reform solutions could have on savings into qualified 
retirement plans. It concludes that any reform to the federal tax 
system must continue the current policy of providing tax incentives for 
long-term savings through the employer-sponsored retirement plan 
system.

Highlights
The Need for Long-Term Savings
      On their own accord, American workers do not save 
adequately for their retirement and other long-term financial needs. 
While 63 percent of Americans are saving to some extent for retirement, 
more than one-third of the working population is not.
      Demographic shifts illustrate a growing retiree 
population. Approximately 85 million Americans will be 65 or older in 
2050 compared to 36 million in 2000.
      The growing retiree population also reflects increased 
longevity, with the number of people aged 85 or older expected to 
increase five-fold in 2050 over the 2000 population.
      Our current tax system provides the strongest incentive 
for taxpayers to accumulate assets for long-term savings through the 
employer-sponsored retirement plan system by providing for an exclusion 
from income for contributions made to a qualified retirement plan or 
IRA.
      Any reform to the tax system that does not provide 
incentives for long-term savings would inherently favor short-term 
savings choices, which provide current access to such savings.
      The policy implications of reduced long-term savings by 
working Americans could be substantial, particularly given the 
projected shortfalls in Social Security and the need for current and 
future retirees to supplement their Social Security benefits with 
personal savings.
      The current employment-based retirement plan system is 
the backbone of an ``ownership'' society, which has made middle-income 
Americans owners of the stock market.

Employer-Sponsored Retirement Plans
      Employer-sponsored retirement plans are heavily dependent 
on federal tax incentives and are clearly the most effective method for 
encouraging savings by low--to moderate-income workers.
      According to the Employee Benefits Research Institute 
(EBRI), 77.9 percent of workers making from $30,000 to $50,000 and 
covered by an employer sponsored 401(k)-type plan actually saved in the 
plan, while only 7.1 percent of workers at the same level of income, 
but not covered by a 401(k)-type plan, saved in an individual 
retirement account. In other words, low--to moderate-income workers are 
11 times more likely to save when covered by a workplace retirement 
plan.
      This striking disparity is due to the convenience of 
payroll deductions, the culture of savings fostered in the workplace, 
and the incentive of the matching contributions provided by the 
employer.
      The likelihood of retiring with adequate savings depends 
upon whether an individual participated in an employer-sponsored plan. 
Overall, 55 percent of households covered by employer-sponsored 
retirement plans will have adequate savings compared to 24 percent of 
those without.
      Suggested approaches to tax reform, including 
consumption-style taxes and/or the elimination of tax on capital gains 
and dividend income, would tend to encourage savings outside of 
qualified plans since access to such savings is not restricted.
      Employers--particularly small employers--would be able to 
accomplish their savings objectives outside of a qualified retirement 
plan and would be unlikely to incur the cost and potential liability 
associated with establishing or maintaining a qualified plan.
      As a result, low- to moderate-income workers, now not 
covered by a workplace plan, will save less for retirement, impairing 
their future economic security.

Tax Reform Must Accommodate Retirement Policy
      While some level of reform is needed given the complexity 
of the tax code, tax reform proposals must strive for a higher savings 
rates for all American workers across all income classes, not just to 
increase savings in the aggregate.
      Providing favorable tax treatment for individual savings 
outside of the employer-sponsored retirement plan system will erode 
both sponsorship and participation in qualified retirement savings 
plans, threatening financial security and leading to greater wealth 
disparities.
      A switch to a consumption tax system, which would only 
tax amounts consumed and not saved, could result in an alarming 
reduction in individuals' retirement savings as employers would choose 
not to establish or maintain qualified plans.
      Reductions in capital gains and dividend tax rates would 
provide greater tax advantages to individuals investing in stocks, 
mutual funds and other capital investments, which would create a 
significant disadvantage to investing through the employer-sponsored 
retirement plan system.
      Prudent retirement policy suggests that the most 
efficient and effective tax retirement policy system must continue to 
provide long-term tax incentives to employers to establish and maintain 
retirement plans for their workers.
      It would be unacceptable to risk the retirement security 
of working Americans by creating a tax system that fails to recognize 
the need to encourage long-term retirement savings over short-term 
individual savings vehicles (e.g., mutual funds held outside of a 
plan).

                                 

            Statement of Kevin R Frank, Cary, North Carolina

    I am in a very bad situation because of the tax liabilities that 
were generated in year 2000. Because of the economic down turn of the 
telecommunication industry, I was laid off from Cisco in March of 2000. 
This situation forced me to execute the NQ stock options I had 
accumulated over the 5+ years I had worked at Cisco, or lose them 
forever.
    I did not know that the single act of executing NQ stock options 
becomes a taxable event in the eyes of the IRS. I did not sell stock; I 
did not receive any cash; I did not realize any gain whatsoever in the 
transaction--not a single dime!
    Because of the complexity of the tax forms, I paid a CPA $900 to 
prepare my taxes and tell me I owed $1.7 million in taxes for the year 
2000 even though I make less than $100,000 a year! How can this be? The 
CPA office that prepared my taxes commented to me:
    ``This is the most unfair and unfortunate tax return our office has 
ever prepared. Many officers have verified the accuracy of your return 
and we believe it to be correct.''
    I was a habitual saver and lived a very meager lifestyle. At the 
time I executed the NQ stock options, I lived in a 1,400 sqft house 
with my wife a dog and a cat. I drove a 1979 F100 pickup, no air, 
manual steering, 3 speed on the column, 160,000 miles--worth about 
$600. My wife drove a 1987 Olds Cutlass with 224,000 miles. I did not 
live the life of our executives--I was just an engineer trying to save 
for a brighter future.
    The Cisco stock that I bought declined more than 80%. I sold 
everything and took out multiple loans to pay the IRS. Because of my 
prior savings, my meager lifestyle, and the kindness of my bank; the 
IRS received the money April of 2001. My bank has given me two interest 
only loans. Today I live in a 60 X 14 trailer by myself. My wife and I 
divorced in 2004. I still drive the same Ford pickup (over 200,000 
miles now). 70% of my salary goes to maintaining these loans, which I 
have been paying for over 4 years now.
    This unfortunate situation has taken my financial future from me. I 
am addressing this letter to you so that you may know how this stealth 
tax is destroying the lives of so many common people, like me. It is 
just plain wrong to tax people on all of their assets when they have 
realized no financial gain whatsoever.

                                 

                                            Chicago, Illinois 60647
                                                      June 17, 2005
Dear Chairman Thomas and Committee Members:

    In 2000, I exercised stock options with the company I work for, 
PurchasePro.com. As the stock market continued to fall, I was forced to 
sell my stock well below the price I paid for them to pay my 2000 AMT 
bill. I paid my 2000 AMT taxes in the amount of $286,000 after getting 
nothing back from the sale of my stock. I was married in December of 
2000 and our family has been set back a great deal financially. I had 
to sell many of my assets and borrow a large amount against my house. 
We are way too young to have financial problems for the rest of our 
lives. The way current tax code is written it will take 43 years before 
I get all of my money back without interest! I am now stuck holding 
onto thousand of shares of a company that is out of business with NO 
HOPE of recouping my money.
            Sincerely,
                                                      Scott Frisoni

                                 

                                    Thousand Oaks, California 91320
                                                      June 17, 2005
    Dear Chairman Thomas and Committee Members: My name is Brian Fuchs 
and I am writing on behalf of my wife Leslie, and our twin children. We 
appreciate the opportunity to discuss the hardships we are suffering 
due to an outdated and complicated portion of the tax code called 
Alternative Minimum Tax.
    In April of 2000 I took a job as an engineer with a small startup 
telecommunications company in Calabasas, California called Ixia. The 
company gave Incentive Stock Options (ISOs) to the employees to help 
stay competitive with the offerings of larger corporations and to give 
the employees a true sense of ownership and interest in the 
profitability of the company.
    Being what I consider to be tax-savvy, I knew a little about AMT 
and realized that attempting to exercise my ISOs and then hold them for 
one year exposed my family to a huge potential `invisible tax' 
liability--one that taxed me based on potential gains--not on actual 
money I had in my hands. The threat of AMT scared me from the 
possibility of investing in my company and reaching out for the chalice 
known as ``long term Capital Gains''. Instead, I simply `flipped' some 
of my ISO shares, and instead was exposed to what amounted to 48% gains 
tax on my shares (38% Federal and 10% State).
    More recently, I was granted ESPP shares in my company. ESPP shares 
differ from ISO shares in that the company sets aside post-tax dollars 
from your paycheck to purchase shares at a discount. These shares are 
owned; they do not need to be exercised so as to expose oneself to AMT. 
Again, being tax-savvy, I held these shares for the period of 1 year so 
they would qualify for Long Term Gains (15% Federal rather than 38%). 
After all, these shares couldn't possibly expose me to AMT liability, 
right?
    Imagine my surprise when I found out that due to AMT, my Long Term 
Capital Gains were almost completely wiped out! You see, although my 
gains were in fact taxed at the lower 15% rate under AMT, these gains 
exposed more of my regular earnings to the AMT. To be specific, I wound 
up paying 7% for AMT on top of my 15% Capital Gains.
    Let's recap.
    One decision I could have made with my ESPP shares was to flip the 
shares and expose myself to the aforementioned 48% tax (Federal + 
State).
    Instead, I chose to hold my shares and go for the Long Term Capital 
Gains rate of 25% (Federal + State)--A savings of 23%. Thanks to the 
archaic AMT, my actual tax bill amounted to an additional 7%.
    Gentlemen and Ladies, my wife and I are not rich. We are the 
definition of ``Middle Class''. We have a budget that we find difficult 
to stick to. We are a two-income family, and must hire full-time help 
to watch our children. I would much prefer our children to have a full-
time parent, but the ultra-high cost of housing in California prevents 
that. Finding Ixia was the proverbial needle in the haystack. It has 
provided a wonderful addition to our income, but AMT has completely 
penalized us at every opportunity from realizing the gains that our Tax 
System had intended.
    Instead, this system called AMT--that was invented to punish fewer 
than 20 persons--has never been adjusted for inflation. It now affects 
millions, with tens of millions of taxpayers in its sights. Even if it 
were not for my company stock, our family would still be exposed to 
AMT. You see, having children and owning a home in California these 
days almost guarantees you will pay AMT. The last time I checked, 
having children and owning a home was called ``The American Dream''. 
AMT makes it ``The American Tax Liability''.
    The notion of paying taxes on POTENTIAL earnings rather than actual 
earnings is completely immoral. It is akin to being taxed at a higher 
rate simply because your neighbor is rich.
    Being penalized because you live in a state with a high tax rate is 
immoral.
    Being penalized because you have a huge mortgage is immoral.
    Being penalized because you have children is immoral.
    The longer Congress does nothing about AMT, the larger the problem 
will grow. I urge you all to wake up, and do the right thing.
    Eliminate the AMT.
            Thank you,
                                                        Brian Fuchs

                                 

                            Government Finance Officers Association
                                             Washington, D.C. 20004
                                                      June 22, 2005
The Honorable William Thomas
Chairman
Committee on Ways and Means
U.S. House of Representatives
Washington, DC 20515

Dear Chairman Thomas

    On behalf of the over 16,000 members of the Government Finance 
Officers Association, we appreciate the opportunity to comment on the 
tax reform measures that the Committee is considering, in conjunction 
with forthcoming report from the President's Advisory Panel on Federal 
Tax Reform. Our membership includes cities, counties, states, and other 
governmental entities that are very interested in the tax reform 
discussion and its impact on state and local governments.
    In April, state and local governments had the opportunity to appear 
before the Advisory Panel regarding the relationship between the 
federal tax system and state and local governments. Timothy Firestine, 
CFO of Montgomery County, Maryland, appeared before the Panel and 
discussed the impact that any changes to the current federal tax system 
would have at the state and local levels, and how major tax reform 
could dramatically reduce state and local tax revenues and services.
    A chief concern raised by GFOA and other local and state government 
organizations, are possible changes to existing state and local income, 
sales, and property tax deductions. Deductibility of these taxes 
preserves the ability for state and local governments to raise revenues 
and to provide services; promotes equity in the federal taxing system, 
discourages the migration of businesses and individuals for tax 
purposes; avoids excessive cumulative federal/state/local income tax 
rates; and preserves the autonomy of state and local governments. We 
urge you to consider the ramifications that would impact nearly every 
community across the U.S. if limits to these deductions were made.
    Another area of great interest to local and state governments is 
preserving the tax-exempt status of municipal bonds. We cannot 
emphasize enough the importance of the tax-exempt bond market and the 
need to keep its integrity intact as major tax reform is discussed. 
Tax-exempt bonds are the mechanism used to provide for essential 
infrastructure at the local and state levels. Nearly all schools, 
transportation infrastructure, water and wastewater facilities, jails, 
airports, and municipal utility facilities exist today because of tax-
exempt bond financing. Altering the federal income tax or imposing new 
limitations on issuers or purchasers of tax-exempt bonds would cause a 
significant increase in bond interest costs. At a time when direct aid 
from the Federal Government is decreasing, it is imperative for local 
and state governments to be able to provide these essential 
infrastructure and services to their citizens at the lowest possible 
cost. Without the ability to access the low cost, tax-exempt bond 
market, communities across the United States would suffer, and greater 
demands would be placed on the Federal Government to provide additional 
direct funding to local and state governments.
    In addition, included with this letter are proposals that would 
promote economic growth and job creation through simplification 
measures in the tax-exempt bond market. We believe that to foster long-
term growth in the United States economy, federal, state and local 
governments must act in concert rather than at odds with each other. 
These proposals would help increase flexibility and reduce costs for 
state and local governments--and taxpayers--and expand the positive 
characteristics of the tax-exempt bond market for the future.
    Thank you for your consideration of these matters.
            Sincerely,
                                                      Susan Gaffney
                                   Director, Federal Liaison Center
                                 ______
                                 
    I. SIMPLIFY ARBITRAGE INVESTMENT RESTRICTIONS

A. Provide a Streamlined 3-Year Spending Exception to the Arbitrage 
        Rebate Requirement in Lieu of the Present 2-Year Construction 
        Spending Exception
    Present law. Generally, interest earnings on investments of tax-
exempt bond proceeds in excess of the bond yield must be rebated to the 
Federal Government. The main exception to arbitrage rebate is a complex 
2-year spending exception that applies only to governmental bonds and 
qualified 501(c)(3) bonds issued to finance certain construction 
projects.
    Reason for Change. The present 2-year rebate spending exception is 
unduly complex due to unrealistic spending periods, complex 
bifurcations, difficult computations, and unclear multipart 
definitions. Thus, the permitted prompt spending period should be 
extended from two to three years. The recommended streamlined 3-year 
rebate spending exception should apply as broadly as possible, 
recognizing that limited arbitrage potential exists for short-term 
investments in most long-term tax-exempt bond issues. This exception 
should also be broadened to include both governmental and private 
activity bonds and both acquisition and new construction of capital 
projects. A rarely-used election to pay a penalty in lieu of rebate 
should be removed. A de minimis rule for minor amounts of unspent bond 
proceeds should be added. This 3-year rebate spending exception would 
provide meaningful administrative relief from complex arbitrage 
calculations and related burdens to a broad number of tax-exempt bond 
issuers. This exception could be limited to fixed rate tax-exempt bonds 
in recognition of some possible arbitrage potential with short-term 
floating rate bonds.
B. Increase the Small Issuer Exception to the Arbitrage Rebate 
        Requirement from $5 Million to $25 Million and Remove the 
        General Taxing Power Condition
    Present Law. A small issuer exception to arbitrage rebate applies 
to governmental units with general taxing powers that reasonably expect 
to issue not more than $5 million in tax-exempt bonds (excluding 
private activity bonds and most current refunding bonds) in a calendar 
year.
    Reason for Change. The size of this small issuer exception to 
rebate should be increased from $5 million to $25 million in 
recognition of the dramatic increases in capital costs since the 
enactment of this exception in 1986 and the disproportionately-broad 
relief from this change. The increased size of this exception will 
substantially reduce the administrative burden imposed on a large 
number of small issuers while affecting a disproportionately smaller 
amount of tax-exempt bond dollar volume. In 2003, tax-exempt issuers of 
$10 million or less of bank purchase qualified bonds represented about 
32% of the total number of like bond issues but only about 4% of tax-
exempt bond dollar volume. Further, the general taxing power constraint 
unfairly narrows the use of this exception for many common tax-exempt 
bond programs. This exception should be broadened to cover other State 
or local governmental entities eligible to issue tax-exempt bonds which 
lack general taxing powers.
C. Add an Exception to the Arbitrage Rebate Requirement for Equity-
        Funded Reserve Funds
    Present law. Although present law limits the amount of tax-exempt 
bond proceeds that may be used to fund a debt service reserve fund to 
10% of the bond proceeds, the arbitrage rebate requirement nonetheless 
continues to apply to debt service reserve funds for most bond issues. 
The rebate requirement will continue to apply to these reserve funds 
throughout the term of the bonds even if all other bond proceeds are 
spent promptly under a rebate spending exception.
    Reason for Change. Most tax-exempt bond proceeds typically are 
spent within the first several years. During the remainder of the term 
of the bonds, the ongoing costs and administrative tracking burdens of 
the arbitrage rebate requirement result mainly from debt service 
reserve funds. These reserve funds remain unspent (except to pay debt 
service on the bonds in the event of unforeseen financial 
difficulties). To relieve these administrative burdens, an exception to 
the arbitrage rebate requirement should be created for debt service 
reserve funds that are funded from sources besides tax-exempt bonds. 
This change would provide an incentive to issuers to reduce the size of 
tax-exempt borrowings.

II. SMALL ISSUER BANK BOND PURCHASE EXCEPTION
Increase the Small Issuer Bank Purchase Exception from $10 Million to 
        $25 Million and Conform it to the Parallel Small Issuer 
        Exception to the Arbitrage Rebate Requirement
Present law. Banks generally cannot deduct interest on loans used to 
        carry tax-exempt bonds. A small issuer bank purchase exception 
        allows banks to deduct these carrying costs for purchases of 
        tax-exempt bonds issued by certain small issuers which issue 
        not more than $10 million in tax-exempt bonds (excluding 
        private activity bonds and most current refunding bonds) in a 
        calendar year.
    Reason for Change. This small issuer bank purchase exception aims 
to preserve the ability of small issuers, with limited access to the 
capital markets, to place bonds with local banks. The size of this 
exception should be increased from $5 million to $25 million in 
recognition of the dramatic increases in capital costs since the 
enactment of this exception in 1986 and the disproportionately-broad 
relief from this change. The slightly different eligibility 
requirements for this exception and the small issuer exception to 
arbitrage rebate (a trap for these unsophisticated issuers) should be 
conformed with a single, simplified definition of a ``small issuer.'' 
Moreover, increasing this exception would provide access to bank 
purchasers for a disproportionately large number of issuers while 
affecting a comparatively small amount of bond dollar volume. Despite 
the increase in state bond banks and pooled loan programs, many states 
have no such programs. Many small issuers still rely heavily on local 
banks as their main financing source. Also, for bond-financed loan 
programs, an issuer should be permitted to elect to treat each conduit 
borrower as the issuer of a separate issue under this exception.

III. SIMPLIFY RULES FOR GOVERNMENTAL TAX-EXEMPT BONDS
    A. Repeal 5% Unrelated or Disproportionate Private Business Limit 
on Governmental Bonds
    Present law. If private business use is unrelated or is 
disproportionate to the governmental use of tax-exempt bond proceeds, 
then a more restrictive 5% private business use restriction applies to 
tax-exempt governmental bonds instead of the general 10% private 
business restriction on such bonds.
    Reason for Change. The unrelated or disproportionate use test is 
cumbersome, vague, arbitrary, and especially complex in multiple-
project financings. Out of an abundance of caution, some issuers 
automatically reduce their otherwise-permitted level of private 
business involvement from 10% to 5% to avoid the interpretative 
difficulties of this requirement. The general 10% private business use 
limit effectively controls excess private business use of governmental 
tax-exempt bond issues.
    B. Repeal Volume Cap Requirement for Governmental Bond Issues with 
a Nonqualified Private Business Amount in Excess of $15 Million
    Present law. Tax-exempt governmental bond issues are subject to 
volume cap for private business use or private payments that exceed $15 
million, even if it is within the general permitted 10% threshold.
    Reasons for Change. This special volume cap requirement has no 
sound tax policy justification in traditional governmental tax-exempt 
bond issues. The general 10% private business limits adequately address 
the level of private business involvement in traditional governmental 
tax-exempt bond issues.
C. Modify Private Loan Financing Limit on Governmental Bonds
    Present law. If more than the lesser of 5% or $5 million of the 
proceeds of a tax-exempt bond issue are used to finance a loan to a 
private person, the bonds generally are treated as private activity 
bonds (even if there is no private business use).
    Reason for Change. The private loan test should be modified to be a 
straight 10% limitation that corresponds to the general private 
business limitation. The Federal tax distinction between a ``use'' and 
a ``loan'' of bond proceeds is complex. The main intent of the private 
loan test was to limit the use of proceeds to finance non-business 
loans (e.g., consumer loans), such as single-family housing and student 
loans. The existing provision inappropriately could be interpreted to 
impose an additional, lower private business restriction on loans made 
to private businesses.

IV. ALTERNATIVE MINIMUM TAX
Repeal the Alternative Minimum Tax Preference on Private Activity Bonds
    Present law. Interest on qualified tax-exempt private activity 
bonds is excluded from Federal gross income but is included in a 
bondholder's tax base for purposes of the Federal alternative minimum 
tax.
    Reason for Change. The repeal of the alternative minimum tax 
preference on tax-exempt qualified private activity bonds will simplify 
the tax-exempt interest exclusion, enhance market demand for these 
bonds, and increase market efficiency. Private activity bonds that are 
subject to the alternative minimum tax carry a punitive higher interest 
rate. This higher interest cost adds to Federal tax expenditures 
without a corresponding increase in Federal tax revenues because 
investors subject to the alternative minimum tax generally do not 
purchase these bonds. The increased demand for tax-exempt private 
activity bonds from this proposed change should have the effect of 
lowering the interest rates on private activity bonds by an estimated 
10 to 25 basis points and a positive Federal revenue impact.

V. ADVANCE REFUNDING
Permit One More Advance Refunding of Governmental Bonds and Qualified 
        501(c)(3) Bonds
    Present Law. In general, issuers of tax-exempt governmental bonds 
(i.e., excluding most private activity bonds) and qualified 501(c)(3) 
bonds are provided one ``advance refunding'' for new money tax-exempt 
bond issues issued after December 31, 1985. Here, an ``advance 
refunding'' means an issuance of refunding bonds used to refund or 
refinance other bonds (``refunded bonds'') where the refunding bonds 
are issued more than 90 days before the redemption of the refunded 
bonds.
    Reason for Change. Presently, because State and local governments 
and Section 501(c)(3) exempt organizations generally have only one 
opportunity to advance refund their debt, they are put in the 
inflexible position of having essentially to guess when would be the 
optimum time to do that advance refunding to achieve the lowest net 
borrowing costs. These entities should be allowed one additional 
advance refunding to give them more flexibility to lower their 
borrowing costs, to restructure their debt service payments, and to 
incorporate more flexible and modern financing techniques. Debt service 
represents one of the most significant items of operating expense for 
these entities, and they need more flexibility to enable them to 
finance the nation's public infrastructure at the lowest possible cost.

                                 

                                           Madison, Wisconsin 53703
                                                      June 22, 2005
Dear Chairman Thomas and Committee Members:

    I am writing to ask for your support and would appreciate your 
taking a moment to read this. I feel compelled to increase your 
awareness about an issue which is causing devastation amongst many 
taxpayers; the inequitable taxation of individuals via the Alternative 
Minimum Tax (AMT). This has become a particularly critical issue for 
our family.
    I'm currently 43 years old and have worked very hard for 9 years 
for a start-up Internet Service Provider that was successful. In 1999 I 
left the company to move back to Wisconsin to be with family and raise 
my own family. When I left the company I was required to exercise my 
stock options (WorldCom stock).
    Doing so caused us to incur an AMT liability well in excess of 
$1million, which we paid in April 2000. It's now well known that the 
WorldCom stock lost virtually all its value. Our AMT tax payment is now 
a credit that we can never effectively use because the ways in which we 
can draw it down are too restricted. In essence, we've lost almost all 
of our investment money simply to create a tax credit in our IRS 
account. It is fundamentally unfair to have been forced to pay a large 
AMT bill on a phantom gain rather than an actual gain.
    Along with many of my co-workers, friends and family, I now find 
myself in this situation, many others are much worse off. Several of us 
had to declare bankruptcy and others are forced to sell or liquidate 
assets (including college funds, savings, cars, 401k/IRA pension plans, 
homes, etc.) or to refinance homes to help pay the taxes. In our case, 
we're hardworking, honest taxpayers who are incurring financial 
difficulties due to the unintended consequences of the AMT laws.
    To summarize, it's fundamentally unfair that we have provided the 
government a substantial (over 1 million dollars) interest free loan 
that will never be repaid while we're having to defer college and 
retirement savings. Further aggravating the unfair situation, the 
complexities of the AMT law require us, an average middle-class family, 
to pay premium accounting fees to navigate the complexities of our tax 
situation.
    We respectfully ask that you further investigate the disastrous 
consequences of the Alternative Minimum Tax and please support all 
efforts towards reform.

                                                     Shari Galitzer

                                 
                                                Aloha, Oregon 97007
                                                      June 22, 2005
To Honorable Chairman William M. Thomas and House Ways and Means 
Committee--Tax Reform Hearing

Dear Chairman Thomas and Committee Members:

    We are Liles and Naomi Garcia and we are homeowners. Liles was in 
the Air Force for four years, and has worked for three high-technology 
companies for a total of thirty years. Naomi has worked for a high-
technology company, Tektronix, for thirty two years. When Liles was 
working for PMC-Sierra, Inc, the company gave him some stock options 
which often occurs in high technology companies. At the end of 
September, 1999, PMC-Sierra laid off some employees and Liles was 
terminated at this layoff.
    There was no warning of the PMC-Sierra layoff; it was a complete 
surprise. Because of the layoff termination, Liles had to purchase his 
stock options within a short period of time or else lose them. At that 
time the stocks were worth about $965,000.00, and when Liles purchased 
his stock, we unknowingly incurred a $273,000 Alternative Minimum Tax. 
We have been doing our own income taxes for many years, and did not 
know what the AMT was.
    We submitted an Offer-in-Compromise to the IRS in July, 2001. The 
IRS rejected our OIC and an OIC Appeals Officer told us that he would 
only settle for the entire amount. This decision devastated both of us 
because of the large amount that we will be required to pay. We are 
currently making monthly payments to the IRS, but we still owe more 
money than we will ever be able to pay. The IRS can take everything 
that we have through their collection process. To us, this does not 
seem right. Many thanks for any help that your committee can give us.
            Sincerely,
                                             Liles and Naomi Garcia

                                 

                                       Southbury, Connecticut 06488
                                                      June 21, 2005
Dear Chairman Thomas and Committee Members:

    As a 64 year old retired taxpayer the current alternative minimum 
tax is of great concern. Each year more and more Americans fall prey to 
this unfair tax. Approximately five years ago, because of the ISO AMT 
provision, I incurred a huge federal and state tax bill, which I paid. 
The year following my huge tax overpayment my accountant informed me 
that I would have to live another 60 years to recoup my AMT credit. 
This was hard for me to believe! Five years have since passed and I 
have reduced my AMT credit by about 8%. At age 64, I do not believe 
that I will last another 60 years. The Federal Government continues to 
hold my money without paying me one penny of interest. Once I leave 
this earth my AMT tax credit will become property of U.S. Treasury 
coffers. The credit will not be passed on to my heirs. Does this seem 
fair?
    One thing that I do know is that my federal tax credit will follow 
me no matter where I reside in the United States. This is not true on 
the state side. If I move out of Connecticut I lose my ability to 
recoup my state AMT tax credit. This foolish law that was intended to 
prevent wealthy individuals from escaping federal income tax has become 
a burden to the all classes of taxpayers.
    I would appreciate hearing from you on this matter and I please 
urge your leadership in righting this insidious aspect of AMT.
            Sincerely,
                                                 Leonard P. Garille

                                 

                                              Paso Robles, CA 93446
                                                      June 21, 2005
Dear Honorable Panel Members:

    I am writing to let you know about the devastating effects the 
Alternative Minimum Tax (AMT) as applied to incentive stock options 
(ISOs) has had on my wife and I. ISO AMT has devastated our life, 
financial situation and our future. I would

respectfully request that part of your recommendation to the President 
and Secretary Snow be to work with my California Senators and my 
Congressman, the Honorable Bill Thomas, Chairman of the Ways & Means 
Committee to help quickly change this grossly unfair and unintended tax 
application.
    My wife received stock options from her company as part of her 
compensation for all her hard work. Throughout the year in 2000, we 
saved money and used it to exercise the options. We considered the tax 
implications of selling or holding. We were advised and agreed to 
follow the strong tax incentives Congress put in place for ISOs to hold 
on to the stock for long term capital gain and support her company, 
rather than selling immediately and paying approximately $50,000 more 
in short term taxes. We believed strongly and still do in our company, 
and in the market for the long term, looking to accumulate stock and 
other assets for our future and for our eventual retirement.
    In 2001, the market's steep decline reduced the value of our stock 
by over 90%. To make matters worse, we received a tax bill from the IRS 
and the California Franchise Tax Bureau (FTB) for a combined amount of 
close to $150,000. This was over 5 times the amount we realized from 
our stock holdings. We had never heard of the AMT, nor could we have 
ever imagined we would have to pay taxes on stock GAINS WE NEVER 
REALIZED.
    Our situation grew steadily worse, I lost my job, our savings were 
dwindling quickly, and we started getting calls from IRS and FTB 
collection agents demanding that we pay the taxes due. We could barely 
pay our bills much less pay $150,000 in cash to the IRS and the State 
of California. The IRS had suggested an installment agreement, but the 
$3,800 a month they required was far beyond anything we could afford. 
We were also warned that if we accepted the agreement and missed or 
were late on a single payment, the full amount would be due immediately 
and collection actions would be taken, i.e. seizing of assets and 
property.
    The IRS knew we never made the money on the stocks for which we 
were being taxed, but that didn't matter to them. They were aware I had 
been unemployed for 18 months, and they didn't care. They said I had 
the potential to earn, which in their mind is the same as cash.
    Meanwhile, we tried to refinance our home to lower our payments so 
we could have additional money to pay bills, but the IRS had placed a 
lien on our property and we were denied the opportunity to take 
advantage of the lowest interest rates in history. The IRS refused to 
lift the lien, even temporarily, to allow us to refinance.
    We were forced to hire tax attorneys and CPA's to help us with our 
predicament, all to no avail. We submitted an Offer In Compromise. We 
were rejected, the IRS claimed we had the ability to pay, even though I 
had been unemployed for over a year and a half and had been dipping 
into my home equity line of credit just to survive and pay our bills. 
For over three years we lived in constant fear of losing our home, our 
car, our bank accounts, everything. All the while dealing with 
harassing calls from the IRS and the FTB. My wife was afraid we'd be 
sent to prison for not paying the taxes. She had heard so many horror 
stories of what the IRS does to people who don't pay their taxes.
    Having been an independent contractor for many years and using 
credit cards to pay for travel and business expenses, I had established 
a fairly high credit limit. The IRS told me that I had access to credit 
so PAY UP. I was forced into an installment agreement to keep from 
losing our home (the IRS had placed a lien on it). The IRS demanded 
$50,000 in cash and monthly payments of $730 per month to pay of the 
remaining $74,000. I was forced into putting it on my credit card. 
Since the IRS compounds interest daily, we will never be able to pay 
off the balance in our lifetime. Prior to that, we had been forced into 
an installment agreement with the FTB, paying $700 per month. There was 
no way we could pay both monthly payments, equaling over $1,400 per 
month (remember, I had been unemployed for 18 months), so we were 
forced into paying the remaining $18,000 balance due the FTB with my 
credit card to eliminate at least one of the monthly payments.
    I was unable keep up with the credit card payments on an 
outstanding balance of close to $70,000. Now, I am several months 
behind on credit card payments. The credit card companies and 
collection agencies are now making threatening calls daily. I'm now 
getting letters from attorneys on behalf of the credit card companies. 
My credit rating, which was perfect all my life, is now ruined. This 
nightmare just keeps going on and on----
    I'm 51 years old and I should be turning my thoughts toward 
retirement and a comfortable future. My own government has dashed these 
hopes and dreams forever. We are being punished in the worst way 
possible, and our crime? Our crime was working hard and being honest. I 
always felt that these were the values that America embraced. Study 
hard, get a good education, get a good job, work hard, be honest and be 
rewarded. Unless relief comes quickly, I will have been sadly mistaken.
    This law needs to be changed immediately to help the thousands of 
people who are in the same predicament as my wife and I. We hope that 
you will understand that there are some very good people who have been 
caught in the AMT nightmare and are facing financial ruin for the rest 
of their lives. Please show your leadership and do what you can to 
change this law.
            Sincerely,
                                                        Mark Garner

                                 

                                         Germantown, Maryland 20876
                                                      June 17, 2005
Dear Chairman Thomas and Committee Members:

    My name is Mark Gorokhov and I am writing on behalf of my wife 
Nadezhda Gorokhova and our family. We appreciate the opportunity to 
discuss problems we faced due to an outdated and not fair portion of 
the tax code called Alternative Minimum Tax.
    In August of 1998 I took a job as a software engineer at Celera 
Genomics. The offer letter stated that I was granted a stock option 
(ISO). The essence of employee stock options involves employees sharing 
in the future growth and success of a company by receiving financial 
rewards based on future increases in stock price. In 2000 I exercised 
my Incentive Stock Option. In plain English this mean that I bought my 
company stock at discounted rate $8.56 while its market value was in 
$70--$100 range. I did not have any monetary gain when I exercised my 
ISO because I did not sell my stocks. However, the tax law required us 
paying huge AMT tax on this phantom gain. This had dramatic impact on 
our family. The taxable income we reported on form 1040 in 2000 was 
$118,300 and a total tax was $153,458. This was a 130% effective tax 
rate which significantly exceeded entire our family income.
    The deadline to pay this huge sum to IRS was April 15, 2001. By 
that time stock price plunged and we could not pay our tax even we if 
sell all stocks we acquired. We borrowed all available money from my 
wife's and mine retirement investments, from 2nd mortgage and credit 
cards. Also, we emptied all our assets on bank accounts. In year 2005 
we are still paying loans we made to pay tax year 2000.
    The tax we paid for exercised ISO stocks is a prepayment of tax 
with a corresponding Minimum Tax Credit that applies against capital 
gains tax when we sell stocks. Now when the stock price drops we do not 
have an efficient way to recover the leftover excess pre-payment of 
tax. Thus we gave the Federal Government an interest free loan in the 
sum of $125,717.
    In 2001 tax return we recovered $2,433 from our AMT tax carry 
forward. At this pace it would take 51 years to recover the whole sum.
    In 2002 tax rate was lowered, but AMT rate stayed the same. In 2002 
tax return we recovered $820 from our AMT tax carry forward. At this 
pace it would take 149 years to recover the whole sum.
    In 2003 tax rate was lowered again, but AMT rate stayed the same. 
In 2003 and 2004 tax returns we recovered $0 from our AMT tax carry 
forward. At this pace we NEVER recover the whole sum of credit we gave 
to a government.
    We ask your help to change the outdated AMT tax law and help us to 
recover the AMT tax we paid in year 2000.
                                                      Mark Gorokhov

                                 

                                         San Jose, California 95132
                                                      June 17, 2005
To: Honorable Chairman William M. Thomas and House Ways and Means 
Committee--Tax Reform Hearing

Dear Chairman Thomas and Committee Members,

    I have been directly affected by AMT. I have worked for 18 years in 
California. During that time, I accumulated Incentive Stock Options 
from my previous employer, which I exercised at various times. The 
stock market dropped dramatically in 2001. Because of the current AMT 
tax laws, I was taxed based upon the value of his shares at the time I 
exercised them (approx. $60/share), not on what they are worth when I 
sell them. The company I worked for and bought these shares in, Clarent 
Corporation, committed fraud and has since gone bankrupt and is out of 
business. As such, I have been unemployed since October of 2001. The 
stock is now all but completely worthless and I recently sold 12,080 
shares at $0.05/per share and received $573. The stock currently trades 
at $0.045/share, yet I paid approximately $40,000 for the stock, had to 
get a second mortgage to cover a $91,000 AMT tax bill and am now paying 
$19 every day to pay off this loan, in addition to my first mortgage. 
To have had to pay a $91,000 tax on a LOSS of $40,000 is more than 
ridiculous. Further, should I regain employment and claim $3000/year 
off of my taxes, I will never live long enough to use my tax `credit', 
minus of course the interest I will have paid over the life of the 
second loan. I was also subject to trading windows where selling the 
stock was prohibited for six months, only open to trading three weeks 
out of every quarter, and the government encouraged me to hold on to 
the stock for at least one year for long-term capitol gains. Even 
though I have owned my house for 13 years and was paying my 30-year 
mortgage off at a 22-year rate, I now owe over $80,000 more then when I 
first purchased my house in 1991. I am one of literally thousands in 
this country right now who are in a similar or worse position.
    The citizens affected by the AMT are not looking to avoid taxes, 
only to pay their fair share. Please work to retroactively reform the 
tax code regarding the AMT. Changes to this law must be made now in 
order to save the savings, homes and futures of many families. These 
are people working on the cutting edge of technological industries that 
will be our future--their success will be our success. Please help.
            Regards,
                                                  Howard Greenstein

                                 

                                         Arlington, Tennessee 38002
                                                   November 7, 2005
The Honorable Marsha Blackburn
7975 Stage Hills Blvd, Suite 1
Memphis, TN 38133

Dear Honorable Blackburn:

    I want to first thank you for dedicating your time to serve in 
public office. Holding public office in America today is very tough 
with all of the media pressures, and I appreciate all that you do for 
us. I am writing today about the Alternative Minimum Tax (AMT). This 
tax is new to me and I have tried to understand it, but it is far too 
complex for the average college graduate to understand. Luckily, I have 
not been personally affected by this tax, yet. But I am researching it 
because I fear it is only a matter of time before it rears it's ugly 
head and affects my family. As a married woman and the primary wage 
earner in the household, taxes are something I have to consider on a 
very serious matter, and this tax scares me. Mainly because it is 
talked about so much by average wage earners like myself. We are middle 
class, college degreed, business persons that have no clue how to 
calculate the tax and all the research says is it is too complex to 
calculate, just hope you are not hit with it.
    From the research I have done on the tax, it is affecting more and 
more average middle class American's every year it stands unreformed. 
Taxes are eating us alive, literally. I believe with your record as a 
representative and looking at the way in which you have stood on issues 
in the past, this was an issue I should bring to your attention, if you 
are not already aware of it. To quote SmartMoney.com, http://
www.smartmoney.com/tax/filing/index.cfm?story=amt, the people that are 
especially vulnerable today are those that make $75,000 or more annual 
income, that income used to seem like a millionaire's income, not 
anymore. As the price of inflation increases, so does the annual income 
of households, therefore, along with those increases we, also need to 
increase the tax brackets.
    Of all the pervasive impacts of AMT the tax as it applies to stock 
options seems to be the must unfair and punitive, to see exactly what I 
mean please visit WWW.ReformAMT.org
    Please take the time to read about the AMT to make your own 
decision. This tax is affecting more and more American's as each year 
goes by that it is not revisited and reformed. Thank you for taking the 
time to read my letter.
            Sincerely,
                                                   Kayla D. Griffin

                                 
                                        San Diego, California 92102
                                                      June 17, 2005
Dear Chairman Thomas and Committee Members:

    In 1998 I started working for a company called Ask Jeeves as a 
project manager. Although it was a mid-level management position, my 
compensation package included a very generous grant of 75,000 options 
at $0.26 per share. The terms of this grant were standard for the 
industry: After one year of employment I would receive one quarter of 
my shares. From that time forward I would receive monthly blocks of 
shares until I either left the company or ran the course of my four-
year grant and vested all 75,000 shares.
    Prior to Ask Jeeves' IPO, I sought the advice of both my accountant 
and company-internal experts regarding my shares. Both recommended that 
I take part in a special program that allowed employees to pre-purchase 
shares--even shares that had not yet vested, as was the case for me. My 
risk? If I left the company before I vested all of my shares, I would 
lose those shares that I had pre-purchased but had not yet vested. My 
upside? Buying then holding onto my shares for one year afforded me a 
long-term capital gain rather than a short-term capital gain. As the 
stock market was going up at the time, my future looked bright.
    In the spring 1999, I borrowed nearly $20,000 to buy all of my 
shares. On the day that I purchased all of my shares, Ask Jeeves' stock 
was trading on the open market at $42 per share. Little did my 
accountant or I realize, the moment I pre-purchased all of my still 
unvested shares I incurred a huge tax liability. $560,000 to be exact.
    As strange as it seems, I owed taxes on shares that I had not yet 
vested--shares that I had no legal right or ability to buy or sell. But 
that was the law under AMT.
    By September 1999, I vested my first chunk of shares. At that time 
the stock price was still rising, and I would have been able to pay my 
tax liability. Unfortunately I was precluded from selling any of those 
shares because of an SEC-mandated, sixth-month post-IPO lockout. 
Because of this SEC-mandated lockout, I would not be able to trade 
until January 2000. Unfortunately for me, by the time January 2000 
rolled around my accountant--who had no experience with stock options 
or AMT--still did not know that I would owe $560,000 in taxes. 
Additionally, I was still locked out of trading--this time because of 
quarterly earnings statements.
    In 2000, the IRS stalked and threatened me. Under threat I sold all 
of the shares that I could whenevers small windows of trading opened 
(usually just two weeks per quarter, again due to earnings 
announcements). At the end of 2000 Ask Jeeves shares were in the 
doldrums. It was obvious I couldn't vest quickly enough to continue 
making my $10,000 per month payments to the IRS, and my IRS 
representative knew it. He informed my new accountant that they would 
no longer accept payments, and that I needed to pay the nearly $100,000 
remaining immediately.
    Remember, I was salaried at around $75,000 / year at this time. A 
good living to be sure, but I was not wealthy.
    Desperate and in despair, I seriously contemplated suicide. Police 
officers were called to my home after I left a particularly dark 
message on a friend's answering machine. Although I was extremely 
embarrassed, my friend was right to call. I was truly on the edge of 
ending the deep pain of my complete financial failure. I was on anti-
depressants just to maintain a semblance of hope about life. I thought 
that I might get out of the situation by getting a better paying job, 
which I did, but it still didn't afford me any greater negotiating 
power with my assigned IRS representative. The IRS told me that they 
would place a lien on my property--a Honda CRV (I owned nothing else)--
and start proceedings to garnish my wages. My credit would be ruined, 
my shame complete.
    In December 2000, under the advice of my new accountant, I made the 
most humiliating call of my life. It was to my brother and sister-in-
law. I will always owe them the greatest debt for the compassion they 
showed me when I requested a nearly $100,000 loan to cover my remaining 
liability: ``We'll wire it to you tomorrow,'' my sister-in-law said.
    My husband and I are lucky. We are young; we hadn't bought a house 
yet; we have no children; we had family members who could help us. We 
made it through, and are now living happy, healthy, and productive 
lives in San Diego. We are also, by the way, active contributors to the 
U.S. economy and tax coffers, filing a combined household income in 
2003 of nearly $240,000.
    Despite more recent threats from the IRS regarding so-called 
``frivolous'' claims,my husband and I are pursuing legal action. We 
hold no hope of recovering any of the money I paid to the IRS, nor do 
we hold any hope of recovering the

$22,500 in legal fees. We only seek two things: To make a statement to 
the U.S. Government that we will not be bullied, and to prevent others 
from falling prey to the AMT through legislative action to repeal this 
unfair and unethical law.
                                                       Lauren Guzak

                                 

                                           Orland, California 95963
                                                      June 17, 2005
Dear Chairman Thomas and Committee Members:

    The current AMT law and how it is applied to stock options 
specifically has had a devastating impact on my family and our 
financial future.
    In 1998 I was given stock options as part of my compensation 
package at a small start up company for $2.00/share. My company had a 
provision that allowed the employee to purchase the options before they 
were actually vested. I did not have enough cash to purchase my options 
prior to the company going public and was not comfortable taking out a 
loan to purchase the options.
    When my company went public the fair market value of our stock was 
already $24/share. I purchased my first block of shares the day we went 
public and incurred the AMT on the delta between my option price and 
the FMV of the stock on the day I purchased it.
    The stock priced soared over the next several months, split twice 
and reached a maximum value of $198/share. I purchased two more years 
of my options and signed an 83-b form when the stock was trading at 
around $70/share. The purchase triggered the AMT and for tax year 2000 
my AMT income was over $1.5 million dollars. The stock continued to 
rise until late summer 2000, so I felt confident in my decision to 
exercise my options at the $70 FMV.
    Like most high tech stocks, my companies stock started to plummet 
in the fall of 2000, by December of 2000 the stock had dropped below 
the $70 mark. I got a phone call from my accountant late in December 
and they suggested I sell my options before the end of the calendar 
year in order to avoid the huge AMT liability. Unfortunately, I was not 
able to sell because I was in a stock trading black out period which 
lasted through the first week of January 2001.
    Once the black out period lifted, we started to sell the stock in 
order to cover our tax exposure. We were forced to sell many shares 
just a few weeks before we had satisfied the holding periods that would 
have qualified us for the most favorable taxation, but since the stock 
was by then trading below $40/share we decided to try to cut our 
losses. Over the course of the next few months we sold most of our 
vested options for an average amount of $30-$35 a share.
    We did not have enough money to pay our 2000 AMT of $700,000, so we 
hired lawyers to try to work out an offer and compromise with the IRS. 
To add insult to injury, I was laid off from the company prior to 
vesting in large amount of the shares I had purchased in 2000. The 
company repurchased my unvested shares, but of course the tax liability 
was still mine since the repurchase was not in the same calendar year 
of the purchase.
    We have been negotiating with the IRS for more than four years now 
and with interest and penalties now have an unpaid tax bill of over 
$1.2 million dollars.
                                                   Karen Hamerquist

                                 

       Statement of Kathy Hamor, the Savings Coalition of America
    On behalf of its 75 member organizations, the Savings Coalition of 
America (``Coalition'') is pleased to submit these comments to the 
House Committee on Ways and Means concerning the need to simplify the 
federal tax code. The Coalition is extremely encouraged by the 
Committee's initiative towards tax simplification.
    The Savings Coalition of America was established in 1991 to support 
incentives to increase the level of personal savings in the United 
States. It has actively supported the expanded Individual Retirement 
Account (IRA) provisions that increased contributions to spousal IRAs 
from $250 to $2000 in 1996; the increased income limits for IRAs and 
the establishment of the Roth IRA in 1997; and the recent increase in 
contribution limits for IRAs and the creation of catch up contributions 
in the 2001 tax bill.
    The Committee's hearing focuses on fairness, simplicity and impacts 
on groups. While there are many aspects of the current system to be 
addressed, the Savings Coalition of America brings to your attention 
the provisions of the tax code that concern income eligibility for 
making contributions to IRAs and required minimum distributions from 
IRAs. Both are unnecessarily complex, unfair and distort personal 
financial decisions for Americans.
    In 2001, the Congressional Joint Committee on Taxation made 
recommendations for tax simplification in which it recommended the 
elimination of income limits on all IRAs and the elimination of the age 
requirement for minimum required distributions and described the 
complexity surrounding these sections of the tax code. The Coalition 
shares the view that these sections of the tax code are complex and 
confusing and urges the Committee to review them.
Required Minimum Distributions
    Under present law, Americans who reach age 70\1/2\ are required to 
begin taking distributions from their IRAs. This is one of the most 
complex areas of tax law affecting retirees. For this reason, the staff 
of the Joint Committee on Taxation has recommended that the age limit 
for minimum required distributions be eliminated. One unintended 
consequence of the requirement is that individuals may be forced to 
take a distribution at a time when their investment has declined in 
value. Over the past several years, many retirees and workers about to 
retire have seen a drop in the value of their retirement nest eggs. 
Those subject to the requirement may be forced to realize losses on 
part of their investments at a time when they can least afford to do 
so. The minimum required distributions rules merely determine when 
taxes will be imposed on retirement savings, not if. When the IRA owner 
withdraws funds, it will be taxed as ordinary income.
    In addition, tax reform should take into account such things as a 
longer life expectancy for most Americans. For example, as Americans 
live longer, we have learned that the minimum required distribution 
rules have become more burdensome and need to be eliminated or at the 
very least, changed to reflect gains in life expectancy.
Universally Available IRAs
    Currently the tax code has a number of income limits for 
eligibility to contribute to IRAs. In addition to different income 
limits for single and married Americans, there are different income 
eligibilities for the traditional, deductible IRA, the Roth IRA, the 
nondeductible IRA and conversions from the traditional to the Roth IRA. 
Income limits for the Coverdell Education Savings Accounts add further 
confusion. The lesson that we learned in the early 1980s, when IRAs 
were universally available to all Americans, is that more Americans 
saved. The universal eligibility led to mass marketing of these savings 
vehicles, which increased participation. When income limits were 
imposed after the Tax Reform Act of 1986, there was a precipitous drop 
in contributions to IRAs. The 1986 experience teaches us that limiting 
IRA eligibility based on income confuses people and scares them away 
from establishing a pattern of savings that IRAs would otherwise 
promote. One of the most important effects of the IRA cutbacks in the 
Tax Reform Act of 1986 is the fact that IRA contributions for those who 
continued to be eligible for deductible IRAs dropped by more than 40% 
in the first year and have since dropped by over 65%.
    Members of the Savings Coalition believe that eliminating income 
limits and creating a universally available IRA will help more 
Americans save. An IRA that is universally available to all American 
workers would leave no doubt to their understanding of their 
eligibility. Universally available IRAs will be marketed and advertised 
on a massive scale and this advertising will have an ancillary benefit 
of educating people about the need to save. History demonstrates that 
the simpler it is to save, the more Americans are inclined to save.
    Annual income limits are also unfair to taxpayers with fluctuating 
income. For many people, income fluctuates from year to year. A 
universally available IRA ensures that these individuals can make IRA 
contributions in the good years--the years in which they actually have 
the financial resources to make a contribution. This is particularly 
important for the self-employed and for individuals in cyclical 
industries like farming. It simply is not fair to these people to say 
you can have an IRA in the years that you don't have the resources to 
contribute, but if you have a good year then you can't have an IRA. 
Moreover, the uncertainty over whether an individual will be above or 
below the income limit tends to force potential savers to wait most of 
the year before determining whether or not to contribute, thus reducing 
the power of compounding interest. Americans tend to err on the side of 
caution, so an individual worried about possibly bumping up against the 
eligibility limit is more likely to skip saving altogether.
    Another area of confusion with income limits are the restrictions, 
for joint filers, around contributing to an IRA and deducting it is 
limited by participating in an employer plan in addition to income. If 
one spouse is covered by an employer plan and the other is not, as long 
as their income is below $150,000, the non-covered spouse is eligible 
to make a deductible traditional IRA contribution. If they are both 
covered, then the phase out is in place which eventually will be 
between $60,000 and $80,000. For making a Roth IRA contribution, income 
is considered. Over the limits the person simply can't make a 
contribution. Also, if a person is not covered, or both spouses are not 
covered by an employer plan, then there is no income limit to making a 
deductible traditional IRA contribution. This adds a layer of 
complexity and confusion to already complex eligibility requirements 
which can have the result of reducing Americans savings in these 
important savings vehicles.
    In the end, income limits hurt all Americans. Right about the time 
someone starts getting interested in setting up a new IRA, they hear a 
disclaimer that only certain individuals are eligible for IRAs and that 
they should immediately check with an advisor to see if they qualify. 
That just scares people, especially middle income families that most 
need to start the retirement savings habit. They automatically assume 
that they are one of the ones that are excluded. Or they decide not to 
start the pattern of saving in an IRA every year because they will 
assume they won't be eligible next year and that, as a result, it is 
just not worth the trouble. And, in a vicious circle, that taxpayer 
confusion and uncertainty will lead to substantially less advertising 
that will probably not be sufficient to change Americans' savings 
attitudes.
    Members of the Savings Coalition of America feel strongly that tax 
reform should encourage Americans to take more responsibility for their 
retirement. One way in which this can be achieved is to promote values 
that we all share; such as savings and thrift. When it comes to 
savings, our tax code should encourage Americans to save for their 
futures and make it easier to do so. The variety of income limits for 
current tax-favored savings vehicles are cumbersome and confusing and 
we encourage the Committee to recommending substantial simplification 
in this area. Provisions that encourage individually responsible 
behavior such as savings should apply to all Americans. Our current 
tax-favored savings vehicles already limit the amount that can be 
saved. We should not limit eligibility of the people who can save 
through them. That just makes them more confusing and frankly, 
penalizes success.
    The Savings Coalition supports the Committee's goals of simplifying 
the federal tax system and offers its assistance in this effort. We 
look forward to working with you on this important initiative.

                                 

                                Village of Lakewood, Illinois 60014
                                                      June 21, 2005
    By way of introduction my name is Michael Hansen. My wife, two 
daughters and myself live in Lakewood, Illinois.
    In July I will be 54 years old. The son of an auto mechanic I put 
myself through school and have worked hard and played fair my entire 
life. All in all, I was living the American Dream--up until I stepped 
on the IRS landmine in the form of the AMT treatment of ISOs back in 
2000. Now I owe the government more than $750,000, my bank account was 
seized, there is a lien on my house and my wages are garnished.
    As a model taxpayer I always had my taxes professionally prepared--
same tax CPA for 16 years. Prudently, I consulted this firm BEFORE 
exercising my options in 2000. We agreed on an options exercise 
strategy and I followed it. What an incredible shock it was when in 
early 2001 my CPA informed me that I owed far more money in taxes than 
I realized in dollars! At that time (Mar 2001), this same accountant--
and I swear this is true--took me into his private office and told me 
the following `` I'll deny that this conversation ever happened but 
this AMT treatment of ISO options is totally unfair. I'll give you a 
tax return that treats the ISOs based on the money you really made, I 
just can't sign it''. My response to Mr. Joyce was ``you charged me 
$7,200 for tax advice including exercising my options and tax 
preparations and now your best advice is to commit a felony?'' He 
responded that ``if you pay on what you realize you'll never get 
audited.'' I told him that I had no intention of doing anything like 
filing a false return and that furthermore I was no longer a client of 
his firm!
    I immediately started seeking a tax lawyer--that took a 
considerable amount of time. I was stunned when the first several firms 
I contacted had NO IDEA SUCH TREATMENT WAS IN THE TAX CODE! I contacted 
the office of my Congressman, Don Manzullo--they hadn't yet heard of 
the AMT/ISO problem--my neighbor who was our State Representative 
actually scoffed at me claiming that what I was talking about was 
unconstitutional! Even practicing lawyers I knew through my church 
hadn't heard of anything like what I was describing.
    Finally, I did find a tax lawyer who knew of this area of the tax 
code. He had my return once again prepared and filed per the code. At 
that time I owed the IRS $650,000--worse yet, the remaining stock that 
I had was unsellable as it would have generated an even worse tax 
problem (or to put it another way, I was in the 170% tax bracket)!!!
    Then came 9/11/01--my unsellable stock kept decreasing in value. I 
finally was able to sell some to pay off the State of Illinois and, to 
date, $30,000 to my tax lawyer. The real laugh here is that the State 
of Illinois owes me roughly $28,000 per the perversion in the tax law--
money that I'll never see!
    Sure, my tax attorney and I tried the OIC route. The figure that 
the IRS suggested that they might accept is ``only'' equal to 100% of 
my gross wages for FOUR YEARS! That's some ``Effective Tax 
Administration''!
    Now I am strongly considering a bankruptcy. If you can't assure me 
of some REAL legislative relief I'll have to go that route because I 
fear if I wait to file the new bankruptcy legislation will not help my 
struggle to return to a normal life.
    Even though I have paid well over $150,000 towards my 2000 Federal 
Tax bill the interest and penalties increase faster than I could ever 
match--much yet repay in full.
    Please don't think that I'm some sort of millionaire--even when 
money was plentiful I didn't buy a ``McMansion'', Rolex watches or 
jewelry, an Aspen ski chalet, etc, etc. I did however get my eyes 
fixed, supplied food and housing for a single mother with 3 children so 
she could attend school for 3 years (she's now a respiratory 
therapist!) and helped start a new church that I'm proud to say is now 
the spiritual home to more 400 families.
    Of course, there is much more to my story--and the stories of 
thousands of honest Americans who face this monstrosity of the tax code 
with integrity and courage. However, I also ask relief not only for the 
victims of the AMT/ISO trap, but for the many good and decent IRS 
employees who have little choice but to enforce the law as it is 
written--if our positions were reversed, I'd resign, but I haven't 
``walked a mile in their shoes''.
    So Congressmen, stand tall, right this wrong! We love our country, 
always pulled more than our own weight and played fair--now is the time 
for our government to play fair with us!
            Sincerely,
                                                  Michael C. Hansen

                                 

                                        San Diego, California 92129
                                                     March 17, 2005
    In 2000, few people were even aware of the AMT, and even fewer 
understood it, including many tax professionals and even some IRS 
agents. When I exercised Incentive Stock Options in 2000, I followed 
the standard recommendation of holding that stock for one full year to 
achieve the capital gains treatment for which Incentive Stock Options 
had originally been designed. Imagine my surprise when I discovered 
that there was a parallel universe called the AMT, where the rules were 
opposite of common sense and regular IRS rules, and instead of 
benefiting from long term capital gains treatment like an ordinary 
stockholder, I was penalized for NOT selling my stock.
    As a result, my effective tax rate for 2000 was almost 250% and 
left me with state and federal tax obligations well over $300,000. This 
was impossible to pay because it was many times my annual income and 
the stock had dropped to a fraction of its former value. Although I 
have made payments against the debt, it grows too rapidly to ever pay 
off.
    The irony is that the AMT also allows a credit back to me that 
would offset this liability--but there is a cap on the amount of credit 
I can recover each year--it will take over 90 years for me to gain the 
entire credit back, and unlike my AMT liability to the government, I 
receive no interest on the money owed back to me by the government. So 
my debt grows by leaps and bounds and the government holds my money 
interest-free indefinitely.
    I have offered all the equity in my 1500 square foot home, my car, 
my life savings, and my retirement to settle this--everything I have 
managed to put aside over my entire working life to pay arbitrary and 
excessive taxes on profits I did not receive (by the way, the IRS 
refused this offer as insufficient). Actually, after paying over 
$100,000 so far, I have only about $11,000 left out of my savings/
retirement and the IRS has a lien on my house, which also serves to 
ruin my credit. I am 52 years old and have been a compliant taxpayer 
since I earned my first dollar, paying in full and on time, without 
complaint, but I fail to see how bringing an honest middle-class 
taxpayer to financial ruin serves any purpose.
    Legislation is being introduced that would allow me to pay the 
proper percentage of whatever gains were actually realized from the 
stock sale. While I realize the entire AMT needs to be addressed, the 
first logical step would be to support relief for those who have 
suffered the most unfair and egregious effects of this outdated law. 
Please stop the unnecessary financial crippling of some of your most 
hard-working and productive citizens. We can't wait two or three more 
years--we are losing our homes, our retirement, and our entire economic 
futures today!! There is no way a ``fix'' several years from now will 
ever allow us to recover.
    The AMT no longer serves its intended purpose, if it ever did, and 
is increasingly punishing hard-working families. We respectfully ask 
that each of you understand the enormous risk involved in ignoring this 
growing malignancy in our tax system, and take action now.
            Sincerely,
                                                     Angela Hartley

                                 

   Statement of David A. Hartman, Lone Star Foundation, Austin, Texas

Introduction
    The current series of hearings by the House Ways and Means 
Committee on federal tax reform could not come at a more appropriate 
time. The U.S. manufacturing sector is in a state of crisis that 
threatens its very survival, principally due to a federal tax code that 
handcuffs U.S. competition with foreign produced goods.
    I urge you to use these hearings to put the public spotlight on the 
border adjustable (destination based) value added taxes of all U.S. 
foreign competitors which have no counterpart in the federal tax code. 
The result is a 15 to 25 percent price advantage for foreign goods as 
imports to the U.S., and against U.S., exports to foreign markets. 
While consumption based tax reform could assist competitive U.S. 
taxation, it will not suffice without border adjustment.
    This submission is based on The Case for Border Adjusted Federal 
Tax Reform Via the Business Transfer Tax, a paper recently presented to 
the American Enterprise Institute. My presentation plus debate of its 
findings by Dan Mitchell of the Heritage Foundation and David Burton of 
the Argus Group can be viewed at www.aei.org, the AEI website. It 
presents the virtues of a border adjusted subtraction method value 
added tax as the vitally needed competitive response to foreign VATs. 
It further constructs a more efficient and equitable basis for 
consumption based comprehensive tax reform replacing progressive income 
taxation with a 17.5 percent BTT and rebates to prevent regressivity on 
a tax burden neutral basis. It may prove necessary to patiently 
undertake at this time only the first fundamental step, comprised of a 
tax neutral replacement of the corporate income tax and the employers' 
share of social insurance taxes with the BTT. However, when one 
considers its virtues of border adjustable, compatibility with the 
trend to VAT taxation worldwide plus its simplicity, economic 
efficiency and equity compared to progressive income taxation, the BTT 
will be found to be the optimal basis for comprehensive tax reform.
    The Lone Star Foundation and its predecessor, Texans for 
Responsible Government, have been undertaking visionary studies for 
reform of state and federal taxation since 1990. Papers on federal tax 
reform have included Priorities for Taxation of Capital presented to 
the House Ways and Means Committee; design, editing and sponsoring of 
the Institute for Policy Innovation's RoadMap to Tax Reform series; co-
sponsoring with the Heritage Foundation a series of papers on federal 
tax scoring currently being published; and Comprehensive Federal Tax 
Reform by the Business Transfer Tax presented to the President's Panel 
on Tax Reform. Other publications in Tax Notes have included The 
Urgency of Border Adjusted Federal Tax Reform, and The Strategic Steps 
to Tax Reform.

Summary of the Case for the Business Transfer Tax
    The U.S. manufacturing sector is in critical decline due to 
inability to compete with foreign producers and U.S. production 
relocated abroad. The U.S. currently has a trade deficit totaling 6 
percent of GDP, reflecting a deficit with virtually every trade 
competitor and in every class of goods. The U.S. now produces only $2 
worth of every $3 of goods Americans consume.
    The precipitous decline of manufacturing employment's share of U.S. 
employment is a principal cause for declining middle and blue collar 
share of U.S. incomes. Just since 1998 manufacturing employment has 
declined 20 percent, the worst layoff since the Great Depression. 
Despite doubling manufacturing productivity since 1978, the real 
factory wage has declined 11 percent. A similar trend to manufacturing 
appears to be developing in the business services sector due to foreign 
outsourcing, although not yet as severe.
    The U.S. manufacturing crisis began soon after foreign replacement 
of radically reduced tariffs with border adjusted value added taxes 
(VATs) on tradable goods not provided U.S. manufacturers by the federal 
tax code. Starting with France and the EU, all OECD competitors have 
adopted VATs averaging 18 percent abated on their exports to the U.S., 
and 18 percent levied upon imports from the U.S. not matched by abated 
U.S. taxes. The transition from U.S. trade surpluses in goods to huge 
deficits coincides with previous adoption of border adjusted VATs, by 
foreign competitors which in effect replaced tariffs.

The Importance of Replacing the Income Tax with a Business Transfer Tax
    The relentless growth of the U.S. trade deficit has not provided 
evidently beneficial investment of the resulting ``foreign capital 
surplus''. Virtually all foreign investment has been in existing rather 
than new productive assets; instead, the U.S. trade deficit has been 
reflected in excessive consumption at the expense of U.S. saving for 
investment.
    The U.S. trade deficit will not be successfully resolved without 
border adjusted federal tax reform which equalizes competitive terms of 
foreign taxation. This 18 cents on the dollar advantage for foreign 
producers cannot be overcome by innovation and productivity given the 
rapid rate of diffusion abroad (and by U.S. firms which move abroad) or 
by devaluation. Nor will devaluation of the dollar provide more than 
temporary relief at an excessive price. What is required is border 
adjusted and consumption based federal tax reform if the U.S. is to 
restore competitiveness.
    The Business Transfer Tax is the most efficient and competitive 
alternative for federal tax reform. As a tax on the entire Gross 
Domestic Product after expensing of Private Commercial Investment and 
on Imports, but not on Exports, it will restore competitive U.S. terms 
of trade for U.S. manufacturers as well as territorial taxation of 
corporations to restore the U.S. as the preferred location for The 
Importance of Replacing the Income Tax with a Business Transfer Tax 
headquarters. A 17.5 percent BTT will replace all federal income taxes, 
including personal, corporate, employer share of social insurance, and 
the ``death'' taxes; except for personal share of social insurance. 
Rebates will replace exemptions, deductions, and credits in order to 
prevent regressivity. Transition costs can be funded from making 
foreign trade subject to the BTT and from increased growth due to BTT 
tax reform.
    The U.S. needs to confront the reality that since the industrial 
revolution all major powers have been leaders in manufacturing as the 
source of competitive advantage in growth of incomes, wealth, and 
military strength. Preservation and restoration of the manufacturing 
sector is vital to U.S. national interests, and adoption of border 
adjusted, consumption based BTT taxation is the vital condition for 
this remediation. The BTT is the optimal basis for fundamental federal 
tax reform enabling equitable and competitive taxation of consumption, 
growth of investment and income, and restoration of the U.S. economy as 
the leader of free enterprise and freedom.

The Importance of Replacing the Income Tax with a Business Transfer Tax
    As the U.S. begins the Twenty-first Century it finds itself 
increasingly constrained by an uncompetitive and inefficient federal 
tax code. Confiscatory marginal tax rates adopted during the Depression 
and WWII which were successively reduced by the Kennedy and Reagan cuts 
stimulated resurgent economic growth, subsequently restrained by rising 
average income tax rates on capital. The rest of the world has heeded 
the effects of these tax cuts, and has entered an era of corporate 
income tax reductions being replaced by value added taxes and even 
isolated individual income tax reform not matched by the U.S., while 
the border adjusted feature of these value added taxes adopted by all 
U.S. OECD trade competitors have rendered the U.S. uncompetitive with 
world trade at home and abroad.
    U.S. federal tax reform debated over the past decade to little 
avail has been initiated by President Bush's tax cuts, who now seeks 
fundamental reform of the federal tax code. Reform advocates define 
neutrality, transparency, and efficiency as the goals of tax reform by 
consumption based taxation, by an end to double taxation of saving for 
investment, and by lower marginal rates, all worthy objectives.
    But it will be shown in this report that missing from these goals 
is the most pressing current urgency of tax reform, ``border adjusted'' 
(or, destination based) taxation to provide equal competitive terms of 
trade to the advantage of border adjusted value added taxes of all U.S. 
trade competitors in order to restore a competitive U.S. manufacturing 
sector.

Presentation of Findings

The U.S. manufacturing sector is in critical decline due to inability 
        to compete with foreign manufactured goods.
    U.S. manufacturing's share of GDP has fallen over 50 percent since 
the Fifties, and this decline in share has accelerated to less than 13 
percent share of GDP since 1998. The U.S. has a growing trade deficit 
in goods with every principal country and in every category of goods 
except government subsidized aircraft--including agricultural goods. 
The result has been a ``production gap'' in manufactured goods which is 
over 6 percent of GDP; the U.S. now produces only $2 of every $3 of 
manufactured goods which it consumes. The annualized trade deficit in 
goods increased to three quarter of a trillion dollars by 1st quarter 
2005, and the cumulative deficit from 1982 to present has converted the 
U.S. from the world's largest creditor to the world's largest debtor, 
with net foreign ownership of U.S. assets now approaching four trillion 
dollars. The National Association of Manufacturers (NAM) warned last 
year that ``the country may be dropping below critical mass in 
manufacturing.''
    The continuation of the disintegration of the U.S. manufacturing 
sector threatens future progress and prosperity of the U.S. economy and 
loss of the most vital source of U.S. military security. Manufacturing 
has perennially been the leading sector in the technological progress 
which drives productivity across all sectors of the U.S. economy and 
enables superiority of defensive weaponry. The accumulating obligations 
from massive trade deficits is irresponsible public policy for a nation 
all ready facing unfunded multi-trillion dollar welfare obligations for 
``baby boom'' retirees.

The precipitous decline of manufacturing employment's share of U.S. 
        employment is a principal cause for the declining middle and 
        blue collar share of U.S. incomes.
    Employment in manufacturing as a share of U.S. employment has 
fallen over 60 percent over the same period, with a 20 percent decline 
just since 1998, the worst layoff since the Great Depression. The real 
average factory hourly wage, which traditionally had been the vanguard 
of ``blue collar'' compensation, declined 11 percent from 1978 to 2001. 
This decline took place despite a doubling of productivity in 
manufacturing, compared to an increase by one-half in the U.S. business 
sector as a whole. Laid off workers from manufacturing seeking 
reemployment in the highly price--elastic services markets have helped 
depress blue collar wages in general. The often cited increasing share 
of income enjoyed by the top 10 percent of incomes is not due to 
excessive growth of returns to physical and intellectual capital, it is 
because of the stagnation of middle and labor income. The retrogression 
from the 40 hour work-week for one breadwinner to the 80 hour two 
person work-week is now a necessity for the typical American family.

The U.S. manufacturing crisis began soon after foreign replacement of 
        radically reduced tariffs with border adjusted value added 
        taxes on tradable goods not provided U.S. manufacturers under 
        the federal tax code.
    Under U.S. international leadership, average tariffs of OECD 
members declined from 40 percent just after WWII to 4 percent on 
average at present; U.S. tariffs now average only 1.7 percent of 
imports' value. However, starting with France in the mid-Sixties, 
Europe sequentially adopted border adjusted value added taxes now 
averaging 19 percent, and all OECD countries other than the U.S. since 
have adopted VATs or equivalents averaging 18 percent. Consequently, 
U.S. goods carry a full burden of federal, state, and local taxes plus 
an added average of 18 percent VAT in foreign markets, and face foreign 
goods which enjoy 18 percent VAT abatement in U.S. domestic markets. 
The transition of the U.S. manufactured goods trade balance from 
surplus to deficit coincides with the successive conversions of foreign 
competitors to border adjusted taxes, which in effect have replaced 
tariffs.

A similar trend to manufacturing appears to be developing in the 
        business services sector due to foreign outsourcing.
    Growth of the historically positive trade balance in services has 
now flattened out and started to decline as well. Relocation of 
corporate headquarters of multinational corporations to secure lower 
corporate effective tax rates and territorial taxation of international 
income is adding to the loss of U.S. business services abroad. 
Outsourcing is rapidly expanding in both professional and unskilled 
white collar services, with an estimated 14 million jobs possibly at 
risk.
    U.S. services employees who are U.S. residents pay U.S. taxes, 
while those living abroad typically only pay taxes in the county of 
residence that uses their services. But the employees of outsourced 
services produced abroad serving U.S. producers are subject to no U.S. 
taxes.

The relentless growth of the U.S. trade deficit has not resulted in 
        evidently beneficial investment of the consequent ``foreign 
        capital surplus.''
    Lured by bargain imports for consumption, personal saving as a 
percent of GDP has declined to post--WWII lows, as shown by comparable 
decline in personal saving as percent GNP to the increase of the trade 
deficit in goods. However, corporate saving has offset personal saving 
on average such that Gross Private Fixed Investment has remained 
relatively constant at 15 percent of GDP over this period. Reoccurring 
excessive federal deficits have been the additional principal reason 
for declining U.S. saving as a percent of GDP. The so-called ``foreign 
capital surplus'' has primarily funded excessive U.S. consumption and 
acquisition of existing assets; 96 percent of foreign investment in the 
U.S. has purchased existing assets, rather than new investment, while 
private fixed investment has not increased on average. The net growth 
of foreign held prime income assets and obligations funding consumption 
by ``America for Sale'' will result in further unfunded liabilities to 
be claimed as the ``baby boom'' retires.

The U.S. trade deficit will not be successfully resolved without border 
        adjusted federal tax reform which equalize competitive terms of 
        foreign taxation.
    Given the effective VAT advantage of 18 cents on the dollar, the 
U.S. is the most profitable market for foreign producers--and also for 
offshore U.S. producers. No realistic economic analysis shows that 
consumption based federal tax reform without border adjustability would 
come close to remediating an 18 percent price advantage from VATs for 
producers of foreign goods that makes the U.S. their most profitable 
market and renders U.S. goods uncompetitive in their markets.
    U.S. productivity gains and innovation will not level the playing 
field given the rapid diffusion of U.S. technology and management to 
foreign producers. The largest trade deficit measured by exports as a 
proportion of U.S. imports is in telecommunication and EDP goods, for 
which the U.S. is the world technological leader, which bears witness 
to this reality. The recent transfer of manufacturing abroad by U.S. 
companies to secure foreign VAT tax advantages has enabled U.S. 
corporations to join foreign competitors in further seriously 
undermining remaining U.S. competitors.
    The U.S. Department of Commerce and MAPI/NAM agendas for restoring 
competitiveness of U.S. manufacturers if fully achieved would only 
offset 30 percent of the typical foreign manufacturing advantage due to 
border adjusted VAT taxation. In order to level the taxation ``playing 
field'' in international commerce, a 15 percent consumption based and 
border adjusted tax is the minimum requirement, comparable to Canada 
and Mexico border adjusted taxation.
    According to the National Bureau of Economic Research (NBER) 
devaluation of the dollar will not impair competitiveness of foreign 
competitors until devaluation considerably exceeds the OECD average of 
18 percent. Furthermore, devaluation is not a likely remedy as long as 
foreigners continue to have a special appetite for reinvesting trade 
surpluses in prime U.S. assets. Devaluation to close the trade deficit 
will be frustrated by offsetting increase of U.S. costs of first 
commodities, then productive assets, followed by wage increases. Also, 
the Fed will likely be forced to limit the extent of devaluation due to 
unfavorable effects on domestic inflation, plus preserving the role of 
the dollar as a store of value and as a standard for international 
exchange.

The ``Business Transfer Tax'' is the most efficient and effective basis 
        for restoring U.S. competitiveness in manufacturing and 
        business services via border adjusted, consumption based 
        federal tax reform.
    Of the five principal alternatives for fundamental consumption 
based tax reform, the ``Flat Tax'' and the ``consumed income tax'' do 
not differentiate between origin and destination, and are ``direct 
taxes'' that cannot be border adjusted under WTO rules. Both the 
``retail sales tax'' to not differentiate between origin and 
destination, and the European-type ``credit invoice VAT taxes'' are 
``indirect taxes'' and therefore WTO qualified. But as state retail 
sales taxes in the U.S. and credit invoice VATs in Europe and elsewhere 
have demonstrated, they tend to be limited in breadth of assessable tax 
base beyond levy upon goods for political reasons, resulting in higher 
marginal rates and/or lesser revenue yield. The ``business transfer tax 
(BTT)'' as a ``subtraction method VAT'' is an ``indirect tax'' on 
consumed income at the producer level, which should be more easily 
assessable on all commerce and government to enable the broadest base 
and the lowest marginal rate, and WTO qualification for border 
adjustment.

Determination of BTT Base
    As proposed, the BTT Base is Gross Domestic Product, less Gross 
Private Commercial Investment and less the Balance of Trade (if a 
surplus, additive if a deficit). Tax returns simply require the 
following:
All Commercial Entities:
All Revenues
less: Exports of Goods and Services
All Purchases of Goods and Services (Including Equipment and 
        Structures)
Employer Share of Social Insurance Taxes
plus: Purchases of Imports
equals: BTT Base
All Governments and Not-for-Profits:
All Employment Expenses
plus: All Purchases of Imports
equals: BTTBase
Federal Taxes to be Replaced by the BTT
    The BTT as proposed would replace the following, comprising more 
than two-thirds of all federal revenues:
Individual Income Taxes, (less EITC replaced by Rebates)
Corporate Income Taxes (less ``Corporate Welfare'')
Employer Share of Social Insurance Taxes
Estate and Gift Taxes
equals: BTT Revenues
    The Federal Government would deposit an equal match to individual 
payroll taxes for the OASI, DI, and HI Trusts, which would result in 
ending ``the bubble'' which is created by currently capping applicable 
incomes levied as employer direct taxes. The remaining  individual 
portion of social insurance taxes should not be considered direct 
income taxes, but instead considered conceptually as variable insurance 
premiums contributed to secure future retirement benefits.

Addressing Regressivity Concerns
    In order to prevent regressivity, the BTT as proposed would provide 
rebates of the BTT to all taxpayers on the basis of the product of the 
BTT tax rate and the sum of (1) the poverty level for a given family 
size, (2) home mortgage interest, and (3) philanthropic giving. The 
termination of employer paid matching contribution to social insurance 
generally considered to be incident upon employees in a additional 
abatement of regressivity.

Tax Rate
    Based upon FY 2003, the BTT could replace all federal income and 
capital taxes (other than individual FICA and Medicare taxes) with a 
16.4 percent BTT on a ``tax neutral'' basis.
    The inclusion of imports and exclusion of exports for determination 
of BTT taxation will result in ``found money'' while the trade balance 
is in deficit and thereafter when the U.S. ``grows'' an end to this 
deficit. This results in lower tax burden on U.S. taxpayers at ``tax 
revenue neutral BTT receipts''. An alternative BTT level, the ``tax 
burden neutral'' rate at 17.5 percent would be preferable in order to 
make this surplus available to transition funding.

What are the strategic steps required to replace income taxation with 
        border adjusted consumption taxation via the BTT?
    There are three alternative strategic routes to replacement of 
federal income and wealth taxation with the BTT:

    A.  Terminate income taxation by sequential replacement of current 
income and wealth taxes with the BTT.

    Step 1. Replace the corporate income taxes, corporate welfare 
expenditures, employer social insurance taxes, and inheritance and gift 
taxes with a 5.25 percent BTT.
    Step 2. End progressive income taxation with increase of the BTT to 
11 percent to enable flattening the personal income tax to a simple 11 
percent individual income tax rate, subject to current exemptions, 
deductions and credits of the present tax code.
    Step 3. Replace the personal income taxes entirely with a 17.5 
percent tax burden neutral BTT and rebates of BTT on poverty level 
incomes, residential mortgage interest, and charitable giving to 
complete federal tax reform.

    B.  Sequential transition from the current tax code by reducing 
current taxes by one third (or one fifth) and phasing in the BTT by one 
third (or one fifth) increments over three (or five) years.
    C.  Replace the current income taxes with the BTT and rebates in 
one complete step.

    It is unlikely that Congress would ``throw caution to the winds'' 
and reform the tax code in one ``giant step'' as in alternative ``C''. 
Alternative ``A'' would address priorities by addressing corporate and 
manufacturing first, then reform of personal taxation. But alternative 
``B'' is probably the most realistic since by proportional increments 
of adopting reform and phasing out the current code, benefits more 
proportionally match burdens.

Given that foreign border adjusted VAT taxes are the principal cause of 
        the U.S. manufacturing crisis, why hasn't the U.S. adopted the 
        BTT or some other form of border adjusted taxation?
    Conservative and libertarian economists alike appear to have 
visceral objection to value added taxation and to border adjusted 
taxation in general, and also to addressing remediation of the U.S. 
manufacturing crisis in particular. Yet value added taxation as 
proposed by the Business Transfer Tax potentially has the exact same 
base as their popular Flat Tax alternative except for border 
adjustment, and is more transparent and more politically assessable in 
format. What is really at issue is the question as to whether or not 
the U.S. is entitled--much less morally obliged--to provide equal terms 
of trade for the survival of its industries and workers' jobs, in its 
national interests.
    One cause of misconception has been the effective concealing of the 
manufacturing crisis from the public in the form of disinformation as 
to the seriousness of the manufacturing sector's decline, its evident 
consequence of foreign border adjusted VATs, and its implausibility of 
self-correction under the present tax code. This misrepresentation has 
been promoted by the U.S. Commerce Department, and key trade 
organizations representing discount retailers and multinational 
corporations, without challenge from the economic policy community, or 
the media. In effect, they appear to give priority to expansion of 
international trade and current consumerism over long term U.S. 
national interests. A good example of this misrepresentation is shown 
in the trend of U.S. manufacturing, in a recent study by NAM based on 
Commerce Department data for manufacturing share of ``real'' GDP in 
manufacturing, explained as ``physical'' output rather than dollar 
value GDP share. What is ``real'' about physical output as opposed to 
value? Ever since currency replaced barter it is money that has 
measured economic phenomena, and what one can take to the bank or to 
the store. The result is a highly misleading impression of the shocking 
relative decline of the manufacturing sector. An endless stream of bad 
news regarding U.S. manufacturing which has similarly been reported 
from the Commerce Department as good news, augments these 
misconceptions, which is uncritically repeated by the media and policy 
experts.
    Also, VAT taxation, the prime source of U.S. competitiveness 
problems, and the prime candidate for effective tax reform, has been 
disparaged as the source of runaway growth of the European welfare 
states. This misconception fails to recognize that this growth of their 
welfare states should be attributed to their adoption of VATs in 
addition to rather than in replacement of income taxation. Adoption of 
border adjusted taxation has been erroneously labeled as 
``protectionist''--but as proposed, the BTT is strictly neutral in 
terms of international trade for all parties. VATs also have been 
represented as complicated, lacking transparency, inefficient to 
administer and too easily evaded; whereas a subtraction method VAT such 
as the BTT is simpler to assess and enforce than income taxation, and 
can be made comparable in retail transparency to a retail sales tax or 
a credit VAT; and, in addition, the BTT has a larger plausibly 
assessable base.

The most beneficial reform of the federal tax code will not only 
        incorporate border adjustability of the BTT, but should also 
        permanently end income taxation and progressivity.
    Direct taxation of income and wealth taxation have especially 
undesirable arbitrary features with respect to assessment and 
exemption--namely, complexity, discrimination, intrusiveness, and 
economic inefficiency. It invites taxation of the few for the benefit 
of the many until the increasing burden on success causes economic 
stagnation. Small wonder that historically such direct taxation prior 
to ``social democracy'' was considered unfit for freemen, and suitable 
only for slaves.
    Progressive income taxes which incorporate these undesirable 
features at their worst are typically ``justified'' as the price of 
``social equity'', but the evidence shows the contrary. Over the course 
of the four decades 1957-1997 it has been demonstrated that as share of 
individual income taxes paid by the top 10 percent of incomes rose 
(representing taxation of intellectual and financial capital) the after 
tax share of the incomes of the other 90 percent declined. Simply 
stated, progressive taxation appears to have worsened rather than 
improved income maldistribution. As shown earlier, this was not due to 
excess growth of incomes of the top 10 percent; instead it was due to 
stagnant incomes of the other 90 percent. Similarly, over the same 
period relative rises and declines of taxation on financial capital did 
not appreciably alter the real return to financial capital. The 
effective incidence of changes in taxation of capital was upon labor. 
It has also been shown that at least 70 percent of returns of income 
from capital are distributed to labor, in effect showing that growth of 
labor income depends primarily upon growth of capital.
    Tax reform could best secure economic efficiency and equity not by 
progressivity, but instead by proportional taxation of consumption 
which mitigates regressivity by exempting necessities. Arbitrary 
determination of ``equitable levels'' of profits and taxable income 
determined by progressive income should have no place in tax reform, 
but rather, should be left to the impartial arbitration of free 
markets.
    Consumption taxation in combination with income taxation, such a 
BTT combined with an upper income personal income tax would be a modest 
improvement over the present code for as long as such a political 
compromise would last. But a consumption based tax, such as the BTT, 
adjusted by limited rebates to prevent regressivity is the optimal 
compromise for economic efficiency and equity. Given the opportunity to 
demonstrate the results of such reform, repeal of the Sixteenth 
Amendment would be the best guarantee of taxation in the best interests 
of all Americans.
    The Reader's Digest polled a wide range of classifications of 
Americans inquiring what was the maximum rate of taxation on income any 
citizen should have to pay regardless of amount of income. The median 
answer was 25 percent for all groups but one, which proposed 29 
percent. The BTT at 17.5 percent would be considered their ``best 
buy'', particularly if compared to the current tax code with marginal 
rates that are double the 25 percent standard.

Conclusion
    The U.S. needs to confront the reality that since the industrial 
revolution all major powers have been leaders in manufacturing as the 
source of competitive advantage in growth of incomes, wealth, and 
military strength. Preservation and restoration of the manufacturing 
sector is vital to U.S. national interests, and adoption of border 
adjusted, consumption based BTT taxation is the vital condition for 
this remediation. The BTT is the optimal basis for fundamental federal 
tax reform enabling equitable and competitive taxation of consumption, 
growth of investment and income, and restoration of the U.S. economy as 
the leader of free enterprise and freedom.
    The BTT will achieve these goals by direct remediation of the 
serious problems facing the U.S. economy. The manufacturing crisis and 
the soaring U.S. trade deficit will be resolved by the BTT's border 
adjusted exemption of exports and imposition on imports to equalize 
terms of foreign trade. As a consumption based tax code it will close 
the deficit in saving for investment. Border adjustment of business 
services will curb outsourcing before it creates additional deficits. 
And it will restore the U.S. as the preferred location for corporate 
headquarters by the best possible resolution of making corporate 
taxation territorial--the termination of the corporate income tax. The 
end results of adopting the BTT will be not only reversing labor's 
share of income, but by increased growth of all incomes. By ending 
complex, inefficient, and inequitable income and capital taxation, the 
BTT will provide a simple broad based tax that offers the lowest 
possible rate for a proportional consumption tax with adequate rebates 
to prevent regressivity.
    President George W. Bush and the Congress could leave no better 
legacy than the vigorous economic future proposed by BTT federal tax 
reform.

                                 
                                        Cupertino, California 95015
                                                      June 29, 2005
    Dear Chairman Thomas and Committee Members: My name is Joseph Cena 
and I am writing on behalf of my family, Dawn and Justin. We appreciate 
the opportunity to discuss the hardships we have suffered due to the 
challenges that have been set forth by the Alternative Minimum Tax 
Laws. We hope that our situation can assist with putting into place 
changes that will allow for more reasonable tax policy as opposed to 
such restrictions that have been causing financial turmoil & ruin for 
so many Americans.
    I am attaching the original letter that we submitted June 04 to the 
Ways & Means Oversight ``Tax Simplification Hearing'' although the 
language is a tad bitter, I felt it needed to be included as we truly 
feel that this has come to harm so many taxpayers. It was a plea for 
help because our situation, while unique, is so similar to many other 
Americans and we felt helpless. My only hope is that you will read it 
with compassion and be open-minded as there are thousands of stories 
that are more heart wrenching than ours.
    Please help us implement a new tax law that does not create a 
phantom tax on unrealized gain. No one should have to pay tax for 
something that is not tangible, but rather looks good on paper. We beg 
of you and your committee members to take a look at how this would 
affect you if you were faced with the same situation. Only then will 
change be possible.
            Respectfully,
                                        Joseph Cena & Dawn Hasegawa
                                 ______
                                 
    I write to thank you for taking on the difficult task of 
simplifying our tax code. I respectfully enlist your support and ask 
you to please act for the sake of thousands of families who are being 
financially decimated (mine included), for the sake of the general U.S. 
economy that is being adversely affected, to help hard working 
taxpayers regain faith in the IRS and to repeal one of the most 
egregious applications of Tax Policy ever enacted: the dreaded and 
stealthy Alternative Minimum Tax (AMT).
    This woefully outdated policy forced me and my family into a 2000% 
tax bracket in 2000 and required us to provide an interest free loan to 
Treasury that will take us 433 years to receive back!!
A little bit about us:
    My family has lived and worked in California for 26 years. Our home 
is a 56-year-old, 1,245-sq-ft., 3-bedroom ranch home in Cupertino 
California. We have a 9-year-old son, Justin. My wife, Dawn, is a 
unionized Registered Nurse of 23 years who is currently working in the 
Stanford University Hospital Emergency Room. Both of us are approaching 
our fifties, and our living parents require our financial support, 
which we are unable to provide in our current situation. As you will 
easily understand, our experience with the AMT has been very stressful 
on our family and we have come close to divorce over this!
    I started my career in the electronic manufacturing sector working 
on programs for the Department of Defense, the first MRI unit, and 
other dynamic technological areas of industry. I proceeded to Stanford 
University where I consulted on exciting projects such as the Hubble 
Telescope, Sun-Net, the Rel-Gyro project (Testing Einstein's Theories), 
and helped the founders of Cisco Systems. From there it was back into 
High-Tech in 1994-2001 at Synopsys, and Network Appliance. Both firms 
offered stock options, and were on growth paths of 50-100% growth year 
over year. I typically worked 10-14 hours per day, 5-6 days a week.
    While I was a Customer Service Manager at Network Appliance, I was 
diagnosed with a life threatening disability and in December 2000, I 
started chemotherapy treatment. In spring 2001, while undergoing chemo, 
our accountant informed us that we were subject to a parallel tax 
called AMT and we were responsible for $2.1 million in tax to the IRS 
and California even though we didn't sell or have a gain.
    I was shocked to learn that the tax imposed had absolutely no 
correlation to actual gains; and that it would actually be an 
overpayment of $1.4 million!!! How is it possible that a law that was 
enacted in 1969, to catch 155 wealthy people who didn't pay taxes, is 
now forcing tens of thousands of hard working citizens and 
entrepreneurs to legally pre-pay a tax and making it nearly impossible 
for them to recoup the overpayment in their, or their children's 
lifetime? To add insult to injury, the taxpayers who overpaid their 
taxes to the government do not earn interest on their own money even 
though Congress has established such safeguards for con-

sumers requiring banks, escrow companies, landlords and others to 
provide interest income even on funds held in trust for even just a 
short--term.
    Many are being driven into bankruptcy over phantom gains. I am 
certain that Congress did not intend to drive people to bankruptcy when 
it created the AMT in 1969. Under the regular tax system if a taxpayer 
overpays, he or she receives a refund in a lump sum, not so under AMT.

Impact on Us and the U.S. economy by not having our tax credit 
        returned:
    Other than perhaps homeland security, there is no more important 
issue affecting my family than the AMT. Thankfully, my illness is now 
in remission. My wife and I had wanted to have more children, but we 
discovered we are medically unable. We then thought to adopt but we are 
financially unable to do so. I was laid-off during my disability in 
2001 and have been out of work for three years. My unemployment ran out 
long ago and we need the money. For example, my wife's 1991 Nissan 
truck has 132,000 miles and needs replacing. It would help us 
tremendously even if all we received was the interest on our credit.
    I've have drawn up few business plans for ``start-ups,'' one a 
consumer wireless application, real estate venture and others. If I had 
my credit back I would put it to use to launch these businesses and 
help contribute to our economy-putting putting people back to work--
people who would be paying income tax!!
    Thank you for your time and consideration, I hope that with your 
leadership and help Congress can quickly enact a fair and principled 
reform to the ISO-AMT provisions and help us grow the economy.
                                              D. Hasegawa & J. Cena

                                 

                                        La Canada, California 91011
                                                      June 18, 2005
To Honorable Chairman William M. Thomas and House Ways and Means 
Committee--Tax Reform Hearing

Dear Chairman Thomas and Committee Members,

    I'm writing to beg you to change the tax code so that stories such 
as mine never happen again.
    When eToys was started in 1997, its founders quickly realized that 
it would be difficult to know their market if everyone that worked for 
them was a childless, young male. So it wasn't surprising that they 
hired me as their 5th employee, a mid-thirties suburban mother with 
experience in marketing and website design. I initially worked part-
time, as I wanted to spend time with my young children. When the 
company was low on cash, they offered to give me part of my 
compensation in stock options. I didn't know anything about stock 
options, but accepted, knowing that whatever happened, I was there 
primarily because I really enjoyed my job.
    The company went public in May, 1999, but because of a lockout 
period and a blackout period, we weren't able to sell any of our stock 
until February, 2000. In the meantime, I exercised as many shares as I 
could, sometimes when the stock was trading as high as $68. I had also 
become a full-time employee, because the company decided it didn't want 
part-timers anymore.
    Unfortunately, by February, 2000 I needed to sell my stock just to 
pay my tax bill. Even though my income for 1999 had been $85,500, I had 
to pay an Alternative Minimum Tax of $424,100 because I was taxed as if 
I'd had income as high as the price the stock was selling for each day 
I exercised my options.
    Thankfully, the company's stock hadn't been de-listed yet, so I was 
able to sell my shares to pay my tax bill. I've been trying to get AMT 
overpayment back from the IRS, so far to no avail.
    I implore you to do what you can to reform our nation's tax code so 
that this doesn't happen to anyone else, and so that I can recover the 
overpayments that have become a lifetime interest free loan to the 
government. I know that ReformAMT and the Coalition for Tax Fairness 
are working hard to support targeted ISO AMT legislation to bring 
immediate relief to ISO AMT victims, many of whom will be financially 
irretrievably destroyed if relief is not provided in the next few 
months.
    Taxation without income is wrong. Thankfully, so is taxation 
without representation, and I'm relying upon you to do the right thing.
            Sincerely,
                                               Kathryn C. Hernandez

                                 
                                           New York, New York 10024
                                                      June 21, 2005
Dear Chairman Thomas and Committee Members:

    My name is Tony Kadillak. I was born and raised in Butte, Montana, 
and graduated from Montana State University in Bozeman. After college I 
moved to the Bay Area in California to get my career start, where I 
landed a job with a startup called Ariba, Inc. I worked there nearly 
four years before being laid off in a massive restructuring, a result 
of the economic downturn and the dot-com meltdown.
    I am yet another unsuspecting victim of the Alternative Minimum 
Tax. Due to a stock options exercise, I'm being taxed over $1.2 Million 
on stock that yielded actual capital gains of approximately $125,000. I 
can't possibly afford to pay a tax on money I never received, yet the 
IRS seems unable or unwilling to work out a solution that is in line 
with the actual capital gain I realized.
    Fours years on, I have experienced the following: My Offer in 
Compromise experience took almost a full year of my life, and in the 
end, the IRS rejected my offer. I decided to take my appeal to Tax 
Court in hopes it would provide some relief, but after 2+ years I still 
haven't seen any result. Last year my wife and I moved to New York, and 
decided to sell our condominium in San Francisco. Unbeknownst to us, 
the IRS had placed a lien on the property, and we were forced to 
surrender 100% of the equity in the sale. We were rejected for numerous 
apartment rentals in the New York area because of the federal lien. 
Only after begging a building owner and offering a 4-month security 
deposit were we able to find a place to live. We're expecting our first 
child in September, and I have no idea how we'll ever cover our basic 
costs if the IRS starts garnishing my wages.
    Every day I live with this tax looming over me like a dark cloud. I 
would love to pay my fair share, but I simply can't fathom how I'm 
being taxed on money I never saw. Please act now to correct this 
injustice--tax people when they sell the stock, not on phantom gain 
they ``receive'' upon exercise. Thousands of us deserve the opportunity 
to piece our lives back together.
    Thank you for your consideration.
                                                      Tony Kadillak

                                 

         Statement of J. Michael Keeling, The ESOP Association
    Summary:
    1. The Ways and Means Committee (the Committee) should make 
recommendations that are consistent with President Bush's policy goal 
to encourage and promote an ``Ownership Society''.
    2. If the Ways and Means Committee does not make recommendations 
for major changes in the current tax systems, there are several changes 
in current tax laws to encourage more employee ownership through ESOPs.
    3. In studying the current tax laws encouraging employee ownership 
through ESOPs, the legislative history of ESOP law leads to conclusion 
that ESOP law may be reviewed in context of tax favored employer proved 
benefits, or in the context of tax laws encouraging entrepreneurship, 
productivity, and American competitiveness on both a corporate, and 
individual scale.
                                 ______
                                 
    The ESOP Association's Written Statement for the Record of Ways and 
Means Committee's Hearing On Tax Reform
    ``To give every American a stake in the promise and future--we 
will--build an ownership society. We will widen the ownership of homes 
and businesses, retirement savings, and health insurance--preparing our 
people for the challenges of life in a free society.
    By making every citizen an agenda of his or her own destiny, we 
will give our fellow Americans greater freedom from want and fear and 
make our society more prosperous and just and equal.''
    President George W. Bush, January 20, 2005.

Part I
General and Primary Position
    The ESOP Association, on behalf of the employee ownership 
community, respectfully asks that the Committee on Ways and Means (the 
Committee) make it a goal of any work reforming tax laws that the 
Federal tax system continues to encourage and promote an ownership 
society, where many average income citizens are owners, in addition to 
the goals of a more fair, simple, and efficient Federal tax system.
    The ESOP Association recognizes that current Federal tax law 
encourages and promotes employee ownership through ESOPs, and that in 
the 30 plus years these laws have existed, employee ownership through 
ESOPs has in the overwhelming majority of instances provided 
significant wealth to employee owners, and has in the overwhelming 
majority of instances made the employee-owned companies high performing 
companies in comparison to their non-employee-owned competitors. 
(Summary of research data attached.)
    The ESOP Association recognizes the Committee has many options to 
reform the Federal tax laws; for example, the Committee may recommend 
to the full House a major overhaul of the current Federal tax system, 
moving the current income tax based system to a so-called ``flat-rate'' 
system with few exceptions to the general rule that all income of 
whatever source and form is subject to tax, or to a consumption tax 
such as a national sales tax or value added tax, or to a hybrid system 
of both.
    The ESOP Association notes to the Committee that no matter what the 
major structure of the Federal tax system may be, consumption or 
income, or both, there are many methods to be sure it contains 
provisions that encourages and promotes ownership by average income 
citizens.
    Based on real world experience, a system that enables average 
income citizens to be ``financed'' into an ownership state is more 
effective in creating significant ownership than voluntary savings 
plans, which are most utilized by citizens with ample income.
    Theories of how to expand ownership through finance were put to 
Congress by Senator Russell B. Long from 1974 through 1986, and 
resulted in the current laws for ESOPs, which do finance average pay 
employees into ownership positions. Since 1996, the House Ways and 
Means Committee has played a bigger role in protecting and expanding 
ownership through ESOPs than has the Senate.
    A final point is that the one time that Congress made a major 
overhaul of the Federal tax system, coming very close to a pure flat 
tax system, was in 1986 under the leadership of President Ronald 
Reagan. He and Senator Long made sure the Tax Reform Act of 1986 not 
only maintained the tax laws favoring employee ownership through ESOPs, 
but enhanced those laws. A similar result is possible with any proposal 
by the Committee if it is agreed that promoting an ownership society is 
an important goal of any Federal tax system.
    In summary, the ESOP community's general position towards the tax 
reform efforts is in alignment with the words spoken by President Bush 
in his Inaugural Address that an ownership society will build a more 
prosperous, more just, and more equal society. Therefore, the ESOP 
community urges the Committee to have as a goal whatever tax system it 
endorses, income or consumption, the recommended Federal tax system 
should encourage and promote an ownership society where ownership is 
widespread, among average income Americans.
    To reach this goal in the context of the system that the Committee 
may endorse, The ESOP Association stands ready to provide input on any 
of the details of any tax system in order to be sure it promotes a true 
ownership society.

Part II
Specific Ideas to Promote Employee Ownership If Committee Does Not 
        Recommend Major Changes in Current Federal Tax System
    Assuming the Committee does not recommend significant, major 
restructuring of the current Federal income tax system, The ESOP 
Association recommends modest, but significant steps to create more 
employee owners through ESOP arrangements, and to permit better 
operation of existing ESOPs. The recommendations are particularly 
pointed to two areas: One, situations where an S corporation is 
partially owned by an ESOP, and two, in the universe of publicly-traded 
companies. Many may be characterized as ``simplification'' proposals of 
certain current ESOP related tax provisions.
    Brief summary history is in order to understand these recommended 
positions. Under current law, Congress has established significant tax 
incentives for small to mid-sized privately owned businesses to 
establish employee ownership through ESOPs, primarily by encouraging 
the current shareholder[s] who are exiting the business to sell shares 
to the ESOP, if the business is a C corporation. For S corporations 
Congress has established a method of taxing the ESOPs share of an S 
corporations' income that encourages the creation of S corporations 
owned 100% by the ESOP. Current law does not necessarily encourage S 
corporations to establish employee ownership through ESOPs where the 
ESOP owns a minority of the S corporation, and even has somewhat of a 
barrier to the continued operation of an ESOP that owns a minority of 
an S corporation. Current law also does not directly encourage 
publicly-traded companies to expand ownership to employees through an 
ESOP.
    In essence, The ESOP Association would want to see an expansion of 
ownership through ESOPs with specific provisions of law that addresses 
the barriers to ESOP creation and operation, in both C and S 
corporations, and both private and public companies.
    Here are some ideas for new law, but certainly not exhaustive, that 
assumes no major change in Federal tax law, as all ideas were developed 
in the context of current law. Many of these legislative ideas were 
included in HR 4796 and S 2298, introduced in the 108th Congress.

     1.  Repeal the punitive 10% penalty tax on S corporations' 
distributions from current earnings, also referred to as dividends, 
paid on ESOP stock that are passed through to ESOP participants in 
cash. (Participants will pay regular income tax on the cash received. 
Based on prior Joint Committee on Taxation revenue estimates of repeal 
of excise taxes, this revision should raise revenue.) Such a change 
would equalize treatment of cash dividends distributed between C 
corporations and S corporations as the treatment for C corporation 
dividends has no penalty tax imposed.
     2.  Permit sellers of stock to the ESOP on an S corporation to 
utilize the ESOP tax benefit referred to as the tax deferred rollover, 
or the 1042 treatment.
     3.  Clarify that dividends paid by C corporations on ESOP stock 
are not a preference item in calculating the corporate alternative 
minimum tax.
     4.  Permit proceeds received from a 1042 transaction to be 
invested in mutual funds consisting of operating U.S. corporation's 
securities.
     5.  Redefine what is a 25% owner for purposes of IRC 1042 to be 
25% or more owner of voting stock, or 25% or more owner of all stock of 
the corporation, not 25% of any class of stock. IRC 1042 imposes 
restrictions on 25% owners' participation in a 1042 ESOP.
     6.  Permit early withdrawals from ESOP for first time home 
purchases, and college tuition under limited circumstances.
     7.  Increase de minimus amount in an ESOP account not subject to 
mandated diversification from $500 per account to $5,000 per account. 
There should be no revenue impact from this change. In 1986, Congress 
passed a law mandating that an ESOP participant be permitted to 
diversity his or her account from employer securities over a five year 
period up to 50% of the account balance if the account was over $500. 
The $500 level has never been altered in the past 20 years, whereas 
nearly all other de minimus amounts cited in ERISA law have increased 
either under a standard inflation adjuster, or by specific law. It is 
not reasonable to require the administrative headaches of diversifying 
accounts under $5,000 as that amount is not enough to ensure a secure 
retirement.
     8.  Allow a corporation selling a division or subsidiary to an 
ESOP company to utilize 1042 to defer the corporate capital gains tax.
     9.  Permit a tax deduction for transfer of stock at less than fair 
market value that equals the difference between the transfer price and 
the fair market value price. Under certain circumstances, transferring 
stock at less than fair market value triggers a favorable gift tax 
deduction. The contemplated provision would provide for an income tax 
deduction.
    10.  Clarify impact of 25%/5% ownership rule for allocations in a 
post-1042 transaction. Current law has a quirk that eliminates an 
exception to the 5% rule for lineal descendants but in the 25% 
ownership rule covers the same lineal descendants nullifying the 5% 
rule exception.
    11.  Permitting holders of ``Section 83'' stock to sell that stock, 
if not-publicly traded, to an ESOP and utilize the ESOP tax deferred 
rollover provision (Code Section 1042) if employees acquired stock at 
fair-market value. This provision arises from both a current law 
provision in 1042 that does not permit stock held by an employee 
because of the exercise of a stock option to utilize 1042, and from a 
series of IRS letter rulings in the late 80's that expanded the limit 
on 1042 utilization to all stock held by an employee because of his/her 
receiving it because of a program of the employer, even if the employee 
bought the stock at fair market value. The current law is not fair as 
employees who obtained stock paying fair market value because of 
employment do not have the same treatment as an owner-founder, or 
outside investor, who can sell stock to the ESOP and defer the cap 
gains tax under Section 1042.
    12.  In the estate and gift tax is maintained, and not totally 
repealed, consider these ideas:

          A.  Restoration of the shifting of the estate tax liability 
        from an estate to the ESOP sponsor if estate transfers stock to 
        the ESOP. This provision would be a restoration of a 1984 pro-
        ESOP law that was repealed in 1989 during a series of cutbacks 
        in ESOP tax incentives. It was Code Section 2210. At no time 
        from 1984 to1989 did the provision lose more than $5 million 
        per year in revenue, and estimates made for a variety of pro-
        ESOP bills containing the provision since 1990 have always been 
        less than $5million.
          B.  Treat non-corporate donations of company stock to ESOP as 
        a charitable contribution for purposes of income, estate, and 
        gift taxes.

Part III
Proper Input from Employee Ownership Community to the Committee
    Given the hybrid nature of employee ownership in all of its various 
forms, it is possible for the Committee to slot a review of how 
employee ownership fits into any tax system in two different general 
areas.
    One, it is clear, particularly for ESOP discussions, that employee 
ownership is tied to the compensation decisions of the employer, either 
current, or deferred. Two, nearly all employee ownership plans arise 
from deferred compensation schemes. Three, nearly all therefore fall 
into the generally accepted category of employer provided benefits. And 
four, within the general area of employer provided benefits, the major 
employee stock compensation schemes are part of the Federal retirement 
income security laws, or ERISA.
    Thus, there is no doubt that any review of how our tax system might 
impact, or should impact the encouragement of broad ownership in our 
society, could be done in the context of how current law, and proposed 
law, might impact employers' actions to compensate employees as part of 
an employer provided benefits package.
    On the other hand, most of the social research, and the 
justification for broad based employee ownership revolves not just 
around employee income security, but also on how ownership increases 
citizen responsibility, citizen entrepreneurship attitudes, self-
esteem, community involvement, and the performance of companies with 
broad based ownership among its employees. These concepts are in sync 
with the views of President Bush, as expressed in his Inaugural Address 
cited above, and certainly are in sync with his expressions of why wide 
spread home ownership is important.
    Thus, any review of employee ownership by the Committee could focus 
on whether the tax system of the United States should encourage 
employee ownership, in order to increase not just personal wealth, but 
also whether to encourage the ownership behavior that leads to high 
performing companies, better and more involved citizens, and employees 
who are more likely to approach their work in an entrepreneurial 
manner.
    Or, of course, the Committee could measure the effectiveness of 
broad based employee ownership in the review of both areas of the tax 
laws--both as employer provided benefits, and as a way to make American 
companies and their employees more productive, entrepreneurial, and 
connected to the community.
    In any manner, The ESOP Association stands ready to dig into both 
the macro and micro evidence of why the Committee should endorse a tax 
system that helps create the Ownership Society called for by President 
Bush.
                                 ______
                                 
    Attachment

    Employee Ownership and Corporate Performance

    1.  In 2004, the Employee Ownership Foundation, conducting its 13th 
Annual Economic Performance Survey, found that a very high percentage 
of companies, 88%, declared that creating employee ownership through an 
ESOP (employee stockownership plan) was ``a good decision that has 
helped the company.'' In addition, the EPS asked companies to indicate 
their performance in 2003, relative to 2002. Approximately 65% of 
respondents indicated a better performance in 2003 than 2002, 12% 
indicated a nearly identical performance, and 23% indicated a worse 
performance. Around 70% indicated that revenue increased while 30% 
indicated revenue did not increase. In terms of profitability, 64% 
indicated that profitability did increase and 36% indicated that 
profitability did not increase in 2003. This survey was conducted in 
the summer of 2004 among corporate members of The ESOP Association.
    2.  The most comprehensive and significant study to date of ESOP 
performance in closely held companies was conducted by Dr. Joseph R. 
Blasi and Dr. Douglas L. Kruse, professors at the School of Management 
and Labor Relations at Rutgers University, and funded in part by the 
Employee Ownership Foundation. The study, which paired 1,100 ESOP 
companies with 1,100 comparable non-ESOP companies and followed the 
businesses for over a decade, reported overwhelmingly positive and 
remarkable results indicating that ESOPs appear to increase sales, 
employment, and sales/employee by about 2.3% to 2.4% over what would 
have been anticipated, absent an ESOP. In addition, Drs. Blasi and 
Kruse examined whether ESOP companies stayed in business longer than 
non-ESOP companies and found that 77.9% of the ESOP companies followed 
as part of the survey survived as compared to 62.3% of the comparable 
non-ESOP companies. According to Drs. Blasi and Kruse, ESOP companies 
are also more likely to continue operating as independent companies 
over the course of several years. Also, it is substantially more 
probable that ESOP companies have other retirement-oriented benefit 
plans than comparable non-ESOP companies, such as defined benefit 
plans, 401(k) plans, and profit sharing plans.
    3.  Research done by the Washington State Department of Community, 
Trade and Economic Development of over 100 Washington not publicly-
traded ESOP companies compared to 500 not publicly-traded non-ESOP 
companies showed that the ESOP companies paid better benefits, had 
twice the retirement income for employees, and paid higher wages than 
their non-ESOP counterparts. Wealth and Income Consequences of Employee 
Ownership: A Comparative Study from Washington State, Kardas, Peter A., 
Scharf, Adria L., Keogh, Jim, November, 1998.
    4.  Research conducted by Professor Hamid Mehran, while he served 
on the faculty of the J.L. Kellogg Graduate School of Management, 
Northwestern University, of nearly 400 publicly traded companies with 
significant ESOPs both before and after the adoption of the ESOP, 
compared to non-ESOP companies in similar lines of businesses, showed 
that the rate of return for the ESOP companies was 2.7% higher, 60% of 
the ESOP companies experienced share price increases upon announcement 
of the ESOP program, and 82% indicated that the ESOP had a positive 
impact on business results.
    5.  In 1995, Douglas Kruse of Rutgers University examined several 
different studies between ESOPs and productivity growth. Kruse found 
through an analysis of all studies that ``positive and significant 
coefficients [are found] much more often than would be expected if 
there were no true relation between ESOPs and productivity.'' Kruse 
concludes that ``the average estimated productivity difference between 
ESOP and non-ESOP firms is 5.3%, while the average estimated pre/post-
adoption difference is 4.4% and the post-adoption growth rate is 0.6% 
higher in ESOP firms. Kruse cites two studies as part of his research: 
Kumbhakar and Dunbar's 1993 study of 123 public firms and Mitchell's 
1990 study of 495 U.S. business units in public firms. Both reports 
found significant positive effects of greater productivity and 
profitability in the first few years after a company adopted an ESOP.
    6.  In 1995, the U.S. Department of Labor released a study entitled 
``The Financial and Non-Financial Returns to Innovative Workplace 
Practices: A Critical Review.'' This study found that companies that 
seek employee participation, give employees company stock, and train 
employees, can positively affect American corporations' bottom lines. 
In addition, the report cited three studies that analyzed ``the market 
reaction to announcements of ESOPs which found significant positive 
returns to firms which implemented ESOPs as part of a broader employee 
benefit or wage concession plan.'' The three studies are: Chang's 1990 
``Employee Stock Ownership Plans and Shareholder Wealth: An Empirical 
Investigation''; Dhillon and Ramirez' 1994 ``Employee Stock Ownership 
and Corporate Control''; and Gordon and Pound's 1990 ``ESOPs and 
Corporate Control.'' citation.

                                 

                                   Westminster, Massachusetts 01473
                                                      June 22, 2005
Dear Chairman Thomas and Committee Members:

    I was contacted yesterday via email by an organization I have been 
associated with for the last several years known as ReformAMT 
(www.reformat.org). I joined this organization sometime after being hit 
with a substantial tax bill in the form of AMT tax in the tax year 
2000. They have informed me of your panel and you're looking for input 
on the following items regarding current tax laws:

      Headaches, unnecessary complexity, and burdens that 
taxpayers--both Individual's and businesses--face because of the 
existing system.

      Aspects of the tax system that are unfair.

      Specific examples of how the tax code distorts important 
business or personal decisions.

      Goals that the Panel should try to achieve as it 
evaluates the existing tax system and recommends options for reform.

    In regards to the following item:

      Headaches, unnecessary complexity, and burdens that 
taxpayers--both individuals and businesses--face because of the 
existing system.

    I have worked most of my adult life at start up high technical 
companies which commonly issued stock options as a form of 
compensation. One grant I received in 1997 was for ISO options, the 
rest were for Non-Qualified options. It is the ISO options that have 
created my headache. With the ISO options the general prevailing 
philosophy on the sales of these options was to exercise them and hold 
them for at least a year so that they would be taxed as long term 
capitol gains. This philosophy appears to have been a recipe for over 
taxation in the form of AMT tax when held in the context of the boom 
period of 1999-2001. While my employer held seminars on the 
implications that stock options had on potential tax burdens, we would 
be advised to consult with our own private tax consultant on our 
specific details. The problem is many tax consultants seemed to be 
inadequately informed on the matter of stock sales, ISO options and AMT 
tax implications. The result of attempting to do the correct thing for 
me to put myself in a tax situation where my ISO options would be 
taxable as long term gains resulted in being taxed on potential income 
that I have never made. Indeed four years later the stock my ISO's were 
granted in have still not approached the values that my AMT tax was 
based upon. I have since sold these shares to pay for my AMT 
obligation, but I am extremely disappointed at the opportunity lost. I 
am not an accountant and to this day still do not know what would have 
been the correct way to handle my ISO options.
    I have continued to seek accounting help in this area several years 
after the fact, I have involved myself in the organization ReformAMT 
and hope that some day a clearer more representative taxation on my ISO 
sales will be implemented and I will have some restitution on my AMT 
taxes paid.
    I am not a millionaire. I do not earn $200,000.00 every year. I had 
several exceptional earnings years based upon stock options in the late 
90's and early 2000. I am not now nor have I ever been close to 
bankruptcy. I have paid all my tax bills. I do believe that due to the 
current tax laws and lack of correct advice I have been overtaxed in 
the form of AMT tax on ISO options for profits I will never earn. I 
also feel that the government has impacted my ability to provide 
greater stability in the form of financial security to both my children 
and my spouse and I as we get older. This seems shameful to me that 
taxation laws could have this kind of impact on a family.
    In regards to the following item:

      Aspects of the tax system that are unfair.

    Any tax law that taxes people on potential future earnings and then 
does not return those taxes if the earnings are not realized is just 
plain unfair.

    In regards to the following item:

      Specific examples of how the tax code distorts important 
business or personal decisions.

    For me my important decisions had to do with funding my children's 
educations and providing for my wife and I in retirement. Due to the 
complexity and lack of correct advice in ISO/AMT matters my ability to 
properly plan for these items have been adversely impacted.

    In regards to the following item:

      Goals that the Panel should try to achieve as it 
evaluates the existing tax system and recommends options for reform.

    My primary goal for this panel is to recover AMT taxes assessed in 
the year 2000 for exercise of ISO stock options. My secondary goal 
would be obviously for others who have been impacted similarly to have 
there AMT recovered as well. My third goal would be a review of the AMT 
tax laws to see if they make since and due whatever it is they were 
originally intended to do. If they do a new less complicated method of 
implementing these needs to be developed. Currently the AMT taxation 
rules are even to complicated for most accountants to properly explain 
to clients.
    While I have not commented on specifics of my AMT impact other than 
the time frames and personal feelings towards the issue, I would be 
more than happy to meet with the panel to discuss any specific detail 
of my AMT experience. I am not comfortable providing more specific 
details in this letter, as I am told it would be public record.
    Feel free to contact me.
            Sincerely,
                                                          Todd Keen

                                 

           Statement of Debra and John Kelly, San Leon, Texas
Dear Chairman Thomas and Committee Members,

    I want to tell you my story to see if you can help by providing 
needed legislative Tax reform. Specifically the AMT, (Alternate Minimum 
Tax).
    In 2002 I retired from a 20 year career in the pharmaceutical 
industry.
    IDEC Pharmaceuticals did very well and I received some ISO's. All 
the hard work and sacrifice was going to pay off and more. I was not in 
management.
    I wanted to be at home with my Husband and children.
    When I retired IDEC stock was trading at $78 a share. My holdings 
were in ISO's (incentive stock options). When I retired, by company 
policy, I had to exercise my ISO's.
    I purchased my ISO's and held my stock.
    Now understand, I did not cash this stock, did not realize wealth 
from this stock.
    In three months, summer of 2002, the ENRON collapse came. Its 
effect on the entire stock market was unbelievable. My share price went 
from $78 to $21. It would have been only troublesome, had I been able 
to wait out the recovery of the IDEC stock.
    But I owed a tax on money I never received. How can this be??
    April 15th of 2003 I was going to have a tax debt higher than the 
stock was worth and my ability to pay.
    AMT tax was going to be due. AMT tax I owed for ISO's that were 
trading at $78 a share were now trading at $21a share. In addition I 
would owe capital gain tax by selling the stock to pay the AMT tax. 
Double taxation!
    I can not begin to tell you my disbelief, sadness, shock! I am an 
honest hard working middle class citizen. How could my government do 
this and legally?? My dreams were destroyed.
    When the stock crept back up to $40 a share I elected to sell my 
stock. I would have enough money to pay my tax debt and pay my bills. I 
had little money left.
    I was getting advice to take an extension to pay the IRS, ride out 
the stock market. But in light of the world events and the volatile 
nature of the market my husband and I elected to sell the stock and cut 
our losses.
    We did not want to risk loosing our home by incurring debt to the 
IRS.
    April 15th, 2003 I paid my tax owed, in Full. I did not take an 
extension with the IRS.
    Then the fall of 2003 the tax law changed.
    Due to the changes in the tax law the IRS owed me money back.
    I received some money back in June 2004.
    Now the IRS owes me $239,000.
    But the IRS doesn't have to pay me right now. I get a tax credit. 
The IRS doesn't have to give me penalties or interest on the amount.
    I receive a benefit of about $11,000 credit back each year. I still 
have to pay money in to the IRS.
    At that rate I'll get my money back in about 30 years.
    If I owed the IRS that kind of money they would come take my home.
    Garnish my wages.
    It is not just.
    It's not right.
    IF I could have stayed in the stock market, sold my IDEC stock on 
an as needed basis and paid regular capital gain on the sell I would be 
in incredible financial shape today.
    What if??
    Now my story isn't as extreme as others I know.
    I don't have any debt to the IRS and have not entered into court 
battles.
    It has not financially devastated me.
    But I have had to make decisions that have grossly affected my 
financial situation.
    I went from $1.2 million in IDEC ISO stock to $40,000 in my 
Brokerage account. My Husband and I spend $4,000 a month in household 
expenses.
    We both are working and saving for retirement.
    I am not an extravagant person.
    At present I have two children in College.
    My mother is entering into assisted living.
    My husband and I work to make the college payments and ends meet.
    My husband is retired Military and my son is starting his second 
tour in Iraq.
    I am an Oncology Nurse at MD Anderson.
    What's done is done.
    But why can't I have what the IRS owes us?
    Not so much to ask.
    We need to make our government live by real world standards.
    We need to make the highly paid CEO's account for mistakes.
    I know we all live in a complex world and simple answers are hard 
to find.
    But enacting legislation that prohibits the IRS from owing money to 
tax payers is an easy fix. You have the power.
    I cannot believe that this is what the government intended with Tax 
Laws.
    We depend on you to protect us.
    Please make the IRS pay me the money they owe us. So we can invest 
that money to rebuild our family's future.
    Note. This is a simplified version. For answers to any tax 
questions contact me and I will put you in contact with my attorney 
Scott Mitchell or AMT TAX Reform organization.

                                 

                                Retail Industry Leaders Association
                                          Arlington, Virginia 22209
                                                      June 21, 2005
Chairman William M. Thomas
House Ways and Means Committee
1102 Longworth House Office Building
Washington, D.C. 20515

Dear Chairman Thomas:

    As President of the Retail Industry Leaders Association (RILA), I 
appreciate the opportunity to submit comments related to the 
committee's hearing on fundamental tax reform of June 8, 2005.
    I commend you for undertaking such a Herculean task as fundamental 
tax reform. I understand you have made significant efforts to educate 
members of the committee on issues related to fundamental tax reform. 
The tutorials provided by the staff of the Joint Committee on Taxation 
have given members of the committee a broad understanding of the terms 
being used by proponents of the various proposals. I appreciate too, 
that you have urged Members of Congress and other interested parties 
not to cling too tightly to labels during consideration of the various 
proposals.
    The Retail Industry Leaders Association (RILA) represents the 
nation's most successful and innovative retailer and supplier 
companies--the leaders of the retail industry. Retail is the second 
largest industry in the U.S., representing $3.8 trillion in annual 
sales and 12 percent of our nation's workforce. RILA member retailers 
and suppliers operate 100,000 stores, manufacturing facilities and 
distribution centers throughout every congressional district in every 
state, as well as internationally.
    We have serious concerns about the effect of a national sales tax 
on retail sales and the economy at large. A 2000 letter from former 
Joint Committee on Taxation Chief of Staff Lindy Paull suggests a 59.5% 
national retail sales tax rate is needed for the tax to be revenue 
neutral over five years. This would have a significant depressing 
effect on retail sales, putting the cost of many basic commodities and 
other items out of reach for millions of Americans.
    Many national sales tax advocates wish to repeal the current income 
tax system to eliminate the possibility of having a sales tax layered 
on top of the current federal income tax. Repeal of the income tax 
would require amending the United States Constitution. Given the 
difficultly and infrequency of a Constitutional amendment, the 
possibility of both a national sales tax existing along with the 
federal income tax seems altogether possible.
    RILA members are also concerned about the effect of a value added 
tax on consumer goods. We are concerned about the lack of transparency 
and the tendency of the tax to be ratcheted up over time without 
knowledge of the consumer. I understand that you are looking very 
closely at the ``subtraction method'' VAT, as used in Japan. While this 
plan does have some characteristics less onerous than the traditional 
European method VAT, concerns about transparency remain. Additionally, 
retailers are concerned about the complexity of the administration of 
the VAT.
    Another proposal that has been floated by proponents of fundamental 
tax reform is a flat tax. A flat tax is similar to a national sales tax 
in that one rate is applied across the board, albeit one levied on 
income rather expenditures. Again, the rate needed to be revenue 
neutral would be unpalatable to most taxpayers, and the axiom ``simpler 
isn't necessarily fairer'' is well-proven by the innate unfairness of a 
such a high income tax rate on lower income Americans.
    In conclusion, RILA respectfully requests that you keep the retail 
sector and the purchasing power of the American consumer in mind as you 
consider various tax proposals. We stand ready to assist you, the 
Committee and your staff with any additional information you may seek 
regarding the retail sector.
    Thank you for your consideration of our views.
            Sincerely,
                                                  Sandra L. Kennedy

                                 

     Statement of David Koenig, American Forest & Paper Association
Summary
    U.S. manufacturing is at the heart of a vibrant economy that has 
produced the highest living standards in the world. But today, 
manufacturing faces serious domestic and international challenges 
which, if not overcome, will lead to reduced economic growth and 
ultimately a decline in living standards for future generations of 
Americans.
    The U.S. forest products industry is no exception to the challenges 
facing U.S. manufacturing industries. Today, the forest products 
industry is facing serious threats to its continued viability. U.S. 
paper mills and wood products mills are permanently closing their 
doors, resulting in a loss of American jobs. At the same time, our 
foreign competitors, facing generally lower taxes, are expanding their 
capacity.
    An April 2005 report by PricewaterhouseCoopers on behalf of the 
American Forest & Paper Association examined the effect of the U.S. 
income tax system--both the individual income tax and the corporate 
income tax--on the competitiveness of corporations in the U.S. paper 
manufacturing and timber producing sectors.
    As described in this submission, the report found that U.S. income 
taxes are the second-least favorable of the major competing nations. 
U.S. tax rules consistently raise disadvantages for U.S. corporate 
investments relative to the tax rules in most of the competing nations. 
The overall effect is that U.S. companies cannot profitably undertake 
certain investments that foreign competitors can undertake because U.S. 
investors would be left with too little after paying tax whereas 
foreign investors would enjoy a sufficient return after paying tax. 
Because U.S. companies compete against foreign companies in capital and 
product markets both at home and abroad, the U.S. tax disadvantage 
ultimately limits the degree to which U.S. companies may successfully 
challenge foreign competitors.
    Significant reform of the U.S. tax system is necessary in order for 
the U.S. tax system to not excessively hinder U.S. competitiveness. 
Options that should be considered for reform include significant rate 
reduction at both the corporate and individual levels and more 
advantageous rules for recovering the costs of business investment. The 
United States should also consider fully exempting from tax the foreign 
income of U.S.-headquartered multinational corporations, as is the 
practice of many of our trading partners with respect to the foreign 
income of multinational corporations headquartered within their 
countries.
    A competitive, reformed tax system holds significant promise for 
the American forest products industry and can provide the best 
opportunity for American workers to attain ever higher living 
standards.
Achieving Tax Competitiveness: Options for Tax Reform
    U.S. manufacturing is at the heart of a vibrant economy that has 
produced the highest living standards in the world. But today, 
manufacturing faces serious domestic and international challenges 
which, if not overcome, will lead to reduced economic growth and 
ultimately a decline in living standards for future generations of 
Americans.
    The U.S. forest products industry is no exception to the challenges 
facing U.S. manufacturing industries. Today, the forest products 
industry is facing serious threats to its continued viability. Since 
1998, 98 paper mills and 142 wood products mills have permanently 
closed their doors, resulting in the loss of nearly 140,000 jobs. At 
the same time, our foreign competitors, facing generally lower taxes, 
are expanding their capacity.
    An April 2005 report by PricewaterhouseCoopers on behalf of the 
American Forest & Paper Association examined the effect of the U.S. 
income tax system--both the individual income tax and the corporate 
income tax--on the competitiveness of corporations in the U.S. paper 
manufacturing and timber producing sectors. The report, Taxes in 
Competing Nations: Their Effects on Investments in Paper Manufacturing 
and Timber Production, and a companion policy paper providing reform 
options, Reducing Tax Disincentives for Corporate Investments in Paper 
Manufacturing and Timber Production, are included in this submission. 
The report compared income taxes in the United States with income taxes 
in seven other competing countries in terms of facilitating or 
inhibiting investments in paper manufacturing and timber production. 
The seven foreign countries selected--Brazil, Canada, China, Finland, 
Germany, Indonesia, and Russia--compete aggressively with U.S. 
companies in paper manufacturing and timber production.
    The report found that U.S. income taxes are the second-least 
favorable of the major competing nations. U.S. tax rules consistently 
raise disadvantages for U.S. corporate investments relative to the tax 
rules in most of the competing nations. The overall effect is that U.S. 
companies cannot profitably undertake certain investments that foreign 
competitors can undertake because U.S. investors would be left with too 
little after paying tax whereas foreign investors would enjoy a 
sufficient return after paying tax. Because U.S. companies compete 
against foreign companies in capital and product markets both at home 
and abroad, the U.S. tax disadvantage ultimately limits the degree to 
which U.S. companies may successfully challenge foreign competitors.
    Significant reform of the U.S. tax system is necessary in order for 
the U.S. tax system to not excessively hinder U.S. competitiveness. 
Options that should be considered for reform include significant tax 
rate reduction for businesses at both the corporate and individual 
levels. Also, restoring a differential in the tax paid by corporations 
on capital gains income relative to ordinary income would help the 
competitive position of U.S. timber companies. While capital gains 
income is insignificant for many manufacturers, most income from the 
sale of timber qualifies as capital gain income.
    More advantageous rules should be implemented for recovering the 
costs of business investment, including expensing for business assets. 
Furthermore, the corporate alternative minimum tax, an additional tax 
burden placed on corporations that mandates even slower depreciation 
allowances, should be repealed.
    The United States should also consider exempting foreign income 
from the active conduct of a trade or business as is the practice of 
many of our trading partners. Further, U.S. companies may be currently 
disadvantaged with respect to their exports (and face heightened import 
competition) by the absence of border tax adjustments for U.S. income 
taxes, while border tax adjustments for value added taxes are made by 
our foreign competitors. A reformed system should be amenable to World 
Trade Organization rules permitting border tax adjustments.
The Competitiveness Rankings
    The specific rankings of the competing nations are displayed in 
Exhibits 1 and 2. The rankings refer to income taxes levied on 
corporate income, first the tax paid by the corporation and second the 
tax paid by shareholders and lenders as a result of their financing the 
investments that generated the corporate income. The rankings are based 
on laws in effect for 2005, except for the United States where it was 
assumed the fully-phased in nine-percent deduction for qualified 
production activities applied.
    In general, the United States and Canada have the least competitive 
income taxes, while Brazil, China, Indonesia, and Russia have the most 
competitive income taxes. Finland and Germany are closer to the least 
competitive pair.
    As explained in more detail in the accompanying report, the 
rankings and conclusions are derived by computing effective tax rates 
in the competing countries. An effective tax rate is the percentage of 
income that is collected in income taxes over the life of a particular 
investment project--namely, the project that just barely generates the 
minimum rate of return required by investors, measured after taxes and 
inflation.
    Other rankings included in the report show that U.S. multinational 
corporations in paper manufacturing operating abroad are similarly 
disadvantaged relative to multinational corporations headquartered in 
the competing nations.
    As noted in the report, the analysis does not fully account for 
several features unique to the U.S. tax system that serve to further 
increase tax burdens on U.S. corporations. These include the corporate 
alternative minimum tax, which provides for slower recovery of the 
costs of business investments, rules requiring the capitalization of 
indirect costs in inventory, and rules which serve to reduce the 
crediting of foreign taxes.
Options for Reform
    A number of options for reform are considered in the accompanying 
policy paper to reduce the U.S. effective tax rate to that of the 
median, or middle-ranked, of the competing nations. These reforms are 
indicative of the extent of change necessary to make the U.S. tax 
system simply moderately competitive with the tax systems of the 
competing nations in paper manufacturing and timber production.
    For corporate paper manufacturing, as shown in Exhibit 3, these 
options include:

      A 40-percent reduction in all top rates (including rates 
on corporate income and individual income from interest, capital gains 
and dividends);
      Expensing for all equipment and structures;
      A 10-percent investment tax credit; and
      Various combinations of partial expensing or accelerated 
depreciation combined with rate reductions.

    The reform options shown in Exhibit 3 would also make U.S. income 
taxes more favorable for U.S. investors who want to build a papermaking 
facility abroad--provided, of course, that the options were also fully 
applicable to foreign investments. In the past, the United States has 
not allowed investment tax credits or accelerated depreciation for 
equipment used outside the United States. The United States should also 
consider fully exempting from tax foreign income from the active 
conduct of a trade or business as is the practice of many of our major 
trading partners.
    Exhibit 4 presents reform optionsto reduce the U.S. tax rate on 
corporate timber production income to that of the median of the 
competing nations. These reform options include:

      A 40-percent reduction in the corporate capital gain rate 
for timber gain;
      A more than 40-percent reduction in all top corporate and 
individual rates;
      Various combinations of rate reductions with expensing of 
reforestation expenditures or investment tax credits.

    We urge the Advisory Panel to study these options and give great 
consideration to their adoption. It is important to understand the need 
for substantial reductions in the tax burdens on corporate income in 
order to provide a tax system that does not excessively hinder the 
ability of U.S. corporations and U.S. workers to compete in the global 
marketplace.
                                 ______
                                 
    Exhibit 1
    ISSUE: Where are the tax hurdles the highest for a corporation that 
would invest in papermaking in its own country?
    DOMESTIC TAXATION OF DOMESTIC CORPORATE PAPER MANUFACTURING
    *Image not available
    CONCLUSION: The U.S. tax system raises very high hurdles compared 
to other countries. The effective tax rate of the United States is the 
Second Highest in the competing group and 17 percentage points higher 
than the median of the other countries.
                                 ______
                                 

                               Exhibit 2

    ISSUE: Where are the tax hurdles the highest for a corporation that 
would invest in forestry and timer in its own country?
    DOMESTIC TAXATION OF DOMESTIC CORPORATE FORESTRY PRODUCTION
    *Image not available
    CONCLUSION: The U.S. tax system raises very high hurdles compared 
to other countries. The effective tax rate of the United States is the 
second highest in the competing group and 16 percentage points higher 
than the median of the other countries.
                                 ______
                                 
Exhibit 3
Corporate Paper Manufacturing
WHAT IT TAKES TO BE COMPETITIVE
Current Status in 2005
U.S. effective tax rate = 51%
Median effective tax rate for competing nations = 34%
U.S. Alternatives for Change
    1. Reduce the top individual and corporate income tax rates to 21 
percent and to 9 percent for individual capital gains/dividends (a 40-
percent reduction in all top rates)

      Makes the U.S. tax system moderately competitive.

    2. Allow expensing in lieu of depreciation for new equipment and 
structures.

      Makes the U.S. tax system moderately competitive.

    3. Adopt a 10-percent investment tax credit for new equipment.

      Makes the U.S. tax system moderately competitive.

    4. Eliminate the individual income tax on capital gains and 
dividends.

      Falls short. Reduces U.S. effective tax rate to 39 
percent.

    5. Composite #1. Allow expensing in lieu of depreciation for new 
equipment (but not structures), and reduce the top individual and 
corporate rate to 30 percent and to 12.5 percent for individual capital 
gains/dividends (approximately a 15-percent reduction in all top 
rates).

      Makes the U.S. tax system moderately competitive.

    6. Composite #2. Allow 50-percent bonus depreciation for new 
equipment, and reduce the top individual and corporate rate to 25 
percent and to 10 percent for individual capital gains/dividends 
(approximately a 30-percent reduction in all top rates).

      Makes the U.S. tax system moderately competitive.

    7. Composite #3. Reduce the depreciation period for new equipment 
from 7 years to 3 years (double declining balance) and for new 
structures from 39 years to 20 years (straight line); also, reduce the 
top individual and corporate rate to 27 percent and to 12 percent for 
individual capital gains/dividends (approximately a 20-percent 
reduction in all top rates).

      Makes the U.S. tax system moderately competitive.
                                 ______
                                 
Exhibit 4
Corporate Timber Production
WHAT IT TAKES TO BE COMPETITIVE
2Current Status in 2005
U.S. effective tax rate = 37%
Median effective tax rate for competing nations = 22%
U.S. Alternatives for Change
    1. Allow 40 percent of long-term capital gain from the sale of 
timber to be excluded from taxable income (reducing the capital gain 
tax rate on corporate timber to 21 percent).

      Makes the U.S. tax system moderately competitive.

    2. Reduce the top individual and corporate rate to 20 percent and 
to 8.5 percent for individual capital gains/dividends (a more than 40-
percent reduction in all top rates).

      Makes the U.S. tax system moderately competitive.

    3. Adopt a 10-percent investment tax credit (ITC) for all 
reforestation expenditures.

      Falls short. Reduces U.S. effective tax rate to 35 
percent.

    4. Allow expensing for all reforestation expenditures in lieu of 
amortization.

      Falls short. Reduces U.S. effective tax rate to 35 
percent.

    5. Composite #1. Allow expensing for all reforestation expenditures 
and reduce the top individual and corporate rate to 25 percent and to 
10 percent for individual capital gains/dividends (approximately a 30-
percent reduction in all top rates).

      Comes very close. Reduces U.S. effective tax rate to 24 
percent.

    6. Composite #2. 10-percent ITC for all reforestation expenditures 
and exclude 30 percent of long-term capital gain on timber sales from 
taxable income (reducing the tax rate on capital gain of corporate 
timber to 24.5 percent).

      Makes the U.S. tax system moderately competitive.

    7. Composite #3. Allow expensing for all reforestation costs and 
exclude 50 percent of long-term capital gain on timber sales from 
taxable income (reducing the tax rate on capital gain of corporate 
timber to 17.5 percent).

      Makes the U.S. tax system moderately competitive.

                                 

            Statement of Vivian Kramp, San Jose, California
    I exercised 4600 shares of ISO stock at $61.0625 per share on 9/14/
2000. If I had sold at that point, the total value of the stock would 
have been $212,827.90. But the stock tanked to $17 a share, for a value 
of $78,200.
    On my 2000 tax return I had to pay $78,864 in Alternative Minimum 
tax, which is more than the stock was worth. My adjusted gross income 
for that year was $79,596. Virtually all of my income for the entire 
year went to pay the AMT. As a divorced woman I am receiving alimony 
that diminishes in amount every year. In 3 more years, that will drop 
to zero.
    I was counting on the stock options to tide me over until I can 
work again. With a special needs child, it is difficult to return to 
work at this point. I can ill afford to pay almost $80K in AMT when the 
stock value dropped so much. The AMT is affecting many middle class 
people like myself, many in more dire straits than I. To pay my 2000 
income tax bill I had to spend all of the profit from the sale of my 
house after the divorce. I have heard stories of people losing their 
homes and savings because of this tax.
    To tax someone on paper profits is grossly unfair. If I had 
actually sold the stock options, then the tax would be fair. The AMT 
was supposed to target wealthy taxpayers, but the unintended 
consequence has been to hit middle and lower income wage earners. We 
are being destroyed by huge, unfair tax burdens. Please reform the AMT 
to eliminate this problem.

                                 

                                        Los Gatos, California 95033
                                                     March 18, 2005
    To Honorable Chairman William M. Thomas and the House Ways and 
Means Committee's Tax Reform Hearing:

    My wife and I have paid an unfair tax. I am an individual engineer 
who took a job with a technology company in 1998. The company offered 
me incentive stock options. I exercised some of the options at a time 
when the stock's value had dramatically increased. Not being a well 
informed investor, I held the stock while its value dropped. I was 
finally forced to sell the stock when the company was acquired.I have 
gained nothing on this stock, but the U.S. and CA government have taxed 
me approximately $50000 because of the Alternative Minimum Tax. I've 
only received a fraction of the money back over the years since I paid 
that tax. This tax has decimated my savings, and that has caused me and 
my wife a lot of frustration. My wife, an immigrant from Russia, says 
that her previous government was worthy of such an unfair practice, and 
she has lost her faith in the fairness of the U.S. government. I think 
the government owes me interest for holding so much of my money for so 
long.
    My coworkers sold their stock when they saw the value was dropping, 
but I believed the hype that the Internet boom would continue and that 
technology stock prices would remain strong. Why should the government 
punish me for my lack of stock market savvy?
            Regards,
                                                        Kirk Krauss

                                 

                                    Mountain View, California 94040
                                                      June 19, 2005
Dear Chairman Thomas and Committee Members:

    Thank you for the opportunity to voice my concerns regarding tax 
reform. The main point of this submission is to call attention to the 
``AMT/ISO problem'' (alternative minimum tax treatment of ``phantom 
gains'' on incentive stock options), and to make a specific request for 
retroactive relief for those affected in the past by this severely 
unfair and inequitable tax burden. While the AMT system in general is 
widely regarded as problematic, and deserves attention and 
consideration of reform, this specific ``AMT/ISO problem'' is an 
especially severe problem for those affected, and therefore requires 
special attention. The reason is, while the typical effect of AMT may 
be to increase one's tax liability by a few percentage points (say, 25% 
of income instead of 20%), the ``AMT/ISO problem'' has, for numerous 
taxpayers, caused a tax liability of 200% or more of their annual 
income, ostensibly as a pre-payment of tax on anticipated future 
capital gains. In theory, the AMT payment is recoverable in future 
years as ``AMT credits'' when the anticipated capital gains, or other 
similar amounts, are realized as actual income; in reality, if that 
income is never realized, the ``excess'' tax paid as AMT may not be 
recoverable as ``AMT credits'' within the lifetime of the taxpayer. The 
question is, is it fair to assess an income tax on income that will 
never be received, effectively imposing a tax rate of 200% or more when 
compared with actual income? I think reasonable persons would agree 
that the answer is ``no.'' What follows is my own story, and a specific 
request for remedy.
    Originally from Cincinnati, Ohio, I graduated in 1985 with a degree 
in engineering from Case Western Reserve University, and then began a 
career in Silicon Valley. I was fortunate to work with many creative 
and talented people. In 1996, I joined Netscape to work as an engineer 
and technical trainer. In 2001, I exercised incentive stock options and 
held the shares, due to my belief in the company. I paid an AMT of over 
$180,000, around twice my annual income, by liquidating a substantial 
portion of my savings. By 2004, I had sold off all of the stock, but my 
actual gains were far lower than the ``phantom gains'' I had paid tax 
on. Now, I find that I have a six-figure AMT credit balance that is 
probably not recoverable in my lifetime. Needless to say, this is very 
disappointing. Whereas I fully accept responsibility for any gains or 
losses in the stock that I held, I am at a loss to understand why many 
years worth of my hard-earned savings must be permanently forfeited to 
pay an outrageously high tax involving ``phantom gains.''
    Therefore, I respectfully request relief from this unusual and 
unfair tax burden, in the form of being allowed to pay capital gains 
tax on my actual gains, while receiving a full refund of any tax on 
``phantom gains.'' The net fiscal impact of providing this relief is 
theoretically zero, because, as I understand, a refund of AMT credits 
takes a liability off of the government's books. I think everyone, 
including the government, should be happy with people paying taxes on 
their actual gains. I certainly would be happy to do so.
    Thank you for your attention to this matter.
                                                       Hans Lachman

                                 

                                       Ben Lomond, California 95005
                                                      June 17, 2005
    I am writing this letter to add my testimony to those given by 
others who are suffering because the affect of the application of the 
complicated AMT provisions to the exercise of incentive stock options 
in a down market was unknown. I have been devastated after losing all 
that I have saved to carry me through retirement and find myself in a 
dire position.
    I am a software engineer and have worked for wages all my life. 
I've been continuously employed since I was twelve years old. I'm from 
a large (5 boys and a girl) poor family. We lived on one income from my 
father, who was a technician. I worked my way through high school and 
college at various jobs to provide me with clothes and transportation 
and to help supplement the family income.
    I was fortunate enough to work for the Department of Energy (DOE), 
where I implemented operating systems on state of the art 
supercomputers. During my 22 years with DOE at various facilities, I 
was exempt me from FICA and when I left DOE to work in aerospace, I was 
quite behind my peers in acquiring Social Security credits. While at 
various positions in Silicon Valley, where I was again working on state 
of the art networking and computer security, I did not receive any real 
retirement benefits. The work was all consuming and most enjoyable and 
the years seemed to fly by.
    When I reached fifty-five, I noticed that I quickly needed to amass 
a nest egg to carry me through my retirement years. The point was 
driven home when my grandmother could no longer take care of herself 
and had no support to help provide comfort until she died. I was her 
only support as the eldest child (my mother and father died at an early 
age). She had nothing but Social Security and that was just not 
sufficient to take care of her. While I had sufficient income to allow 
her the care she required, it made me aware of the state of risk that I 
was in. I had never given the fact that I may not be ABLE to work any 
significant thought and at the age of fifty-five, I did not have many 
years left to save for a time when I may have to stop working.
    I took a position at Exodus Communications as an early employee for 
a reasonable, but not outstanding salary with stock options. I was told 
that if I worked hard and the company prospered, my stock options would 
become valuable. I liked that idea because I have always been an 
overachiever. During my tenure at Exodus, I worked harder than I ever 
have in my life. I worked days at a time and traveled constantly. I 
have never worked under such stress in my life, but I built a security 
managed services business for Exodus that was their most profitable 
service. Eleven group members generated over $15 million in annual 
revenue. We were the highest producers in the corporation and watched 
over a world wide network of security services for Exodus customers.
    The five years at Exodus took a heavy toll on me and my family but 
we all supported each other and took pride in the fact that I was 
helping to build a business that anyone could be proud of. We were 
counting heavily on the value of the stock options to provide us with 
the retirement income necessary. We built a retirement home in Colorado 
and purchased a nice home here in Santa Cruz County that we hoped would 
provide a little estate for our two children after we passed away.
    That was not to be. Shortly after the company went public, a new 
set of management was brought in as part of the process of becoming a 
large corporation. The new management team squandered all the value 
that all the hardworking staff had generated and drove the company into 
bankruptcy in a very short time. I was not sure what had happened, but 
as I learned about Enron, WorldCom, and other corporate criminals, it 
became obvious that I too was a victim of corporate greed. When it 
became obvious that all the stock options I had exercised had become 
worthless, I was most disappointed, but I comforted myself with the 
knowledge that we still had our two houses, an IRA, some savings and I 
still had a good reputation as a leading software development manager.
    However, that also was not to be. In August, after filing two 
extensions, my CPA and financial adviser informed me that I had a $1.7 
million dollar tax bill based on all that worthless Exodus stock. I 
thought, ``That's just not possible, I paid over a half million dollars 
in taxes the year before, how could I owe another 1.7 million based on 
worthless stock?``
    I can assure you that you have never experienced a shock like the 
one I got when I learned that I REALLY owed the State and Federal 
Government all that money--many times over what I had left from my time 
at Exodus or that I could make in my viable working years. Until that 
day, my biggest problem was finding a new job to replace the income I 
had at Exodus. Now that I was 60 and the market was tight, no one 
wanted to hire me even though I was still one of the best in the 
business.
    So here I am at 61 and still telling myself that this just CAN'T 
happen to me. There must be some way this is incorrect. I've attempted 
to work out settlements with the IRS and California Franchise Tax Board 
and they now have all the cash and retirement savings I have 
accumulated during my 50 years of employment and it appears they are 
about to take the rest of my possessions. I never thought I'd end up as 
one of those you see on a street corner with a cardboard sign, but I'm 
not far away from that today. I've been looking for work for nearly a 
year now and living on savings which the IRS has just taken. There are 
tax liens on both houses so I can't sell them to buy food and pay rent. 
There are zero balances in my bank accounts and all the monthly bills 
are coming due.
    I feel really bad for my wife who depended on me to provide us with 
some sort of retirement. The frustrating thing is that with this job 
market, I can't just say ``Oh well, I'll just work until I die.'' I 
can't even find a job with sufficient income to pay medical insurance 
or rent. I just don't know what I'm going to do. It's a mess.
    Thanks for your attention. I do hope that you can make some 
equitable changes to the tax system before we lose our last remaining 
assets.
                                                         Leroy Lacy

                                 

               Statement of Linda L. Lacy, Mogadore, Ohio
Dear Chairman Thomas and Committee Members:

    After struggling with the words that might make my testimonial a 
significant statement in favor of reforming the AMT, I keep returning 
to the reality of the personal toll that the AMT has taken on my son . 
. . and so, I offer a Mother's intimate account:
    After months of back-and-forth ``conversations'' with the IRS that 
finally resulted in their determination that they had zero interest in 
an ``offer in compromise'' and because my son was told by the IRS that 
the only monthly payment plan they were willing to offer him was a one-
month plan for the entire amount ``owed'', I obtained a signature loan, 
maxed-out three credit cards, and most crushing of all . . . cashed-out 
my fifteen-years of retirement savings from my 401k, walked into our 
local IRS office and proceeded to hand the clerk a personal check 
approximating 95% of the ``debt'' my son ``created'' by exercising a 
portion of the stock options given him by a dot.com firm he was working 
for in California in 2000. After watching him struggle to figure out a 
way to support his wife and children and still pay the IRS for a 
phantom gain on those remaining stock options, I decided to utilize MY 
borrowing power and deliver him from the specter that is the IRS. I 
could ill-afford to do this for him, yet I must confess that I did it 
partially for selfish reasons . . . I was tired of the fear that kept 
me awake at night wondering if the ``new, friendlier IRS'' would put a 
lien on his bank account or encumber his employer by laying claim to 
his wages in order to satisfy the most insidious IRS tax regulation 
that exists.
    What a ridiculously complicated system of taxation we live under! 
This young man has been sentenced to years of trying to climb out from 
under oppressive and illegitimate taxation debt. I'm appalled by what 
our own government is allowing to obscure the dreams of so many.
    After considering the power the IRS wields, we determined it was 
better to owe almost anyone but the IRS (in fact, the IRS WEB site 
encourages that it would be more advantageous to take out a bank loan 
than subject oneself to the penalties and interest assessed by the IRS 
. . . very helpful information). As I am nearing retirement and need to 
direct my financial life toward that phase, I found myself in a rather 
precarious position . . . one of choosing to help my son or helping 
myself (what would most parents do?).
    My children were raised with a respect for the United States 
government and all it represents. I led them on several occasions 
through the impressive buildings and beautiful monuments of Washington 
D.C. and extolled the virtues of living in such a privileged country. 
My husband and I managed to provide all three of our children with 
college educations and will gladly and appreciatively spend the rest of 
our lives repaying the loans that provided them with the excellent 
learning experiences they received. But, at least there are solid 
educations in exchange for those loans! My son received two engineering 
degrees in four years and we were certain that the culmination of his 
hard work would be financial reward compensatory to the effort he 
expended. That reward must now take a back-seat to the IRS to satisfy 
this caustic injustice.
    Please give all of us a break . . . reform this tortuous tax and 
designate it RETROACTIVE to the 2000 Tax Year when so very many 
ambitious, spirited, and intelligent young people were caught 
completely off-guard and are now paying dearly for their naivete (some 
in amounts reaching hundreds of thousands of dollars). In addition to 
those already mired in this mess, so many of us in the middle class 
without accountants and lawyers to warn us of impending danger are 
indeed poised to be ensnarled also.
    To close, I must add that those affected by the AMT extend beyond 
those whose social security numbers appear on the IRS debt ledgers. . . 
. Thank you for reading a Mother's testimonial.

                                 

                                                 Hutto, Texas 78634
                                                      June 20, 2005
Dear Chairman Thomas and Committee Members:

    Thank you for looking into what is an extremely egregious 
situation. The AMT as it affected us due to ISO stock options has 
forced us into bankruptcy, and due to the extremely large amount of tax 
it calculates, it may cause us to lose everything we own, including our 
house. At a minimum, it is forcing us into a Chapter 11, preventing us 
from a Chapter 13 or Chapter 7, which means our Bankruptcy costs are 
about $15,000-$16,000 instead of $2000 to $3000. Our effective tax rate 
was over 600% and if nothing is done, it will take us over 70 years to 
utilize our tax credits. This happened at a Bio-Tech company not a 
telecom company, so there are some of us in many facets of U.S. 
industry, not just one.
    How is this fair or right? We went from thinking we were on our way 
to having a decent retirement after struggling for 20 years to living 
the last 5 years under the constant stress of what is going to happen 
to us and how are we going to survive. There hasn't been a single day 
that we haven't had some issue, be it physical, emotional, stress, or 
depression to deal with. So far we have been able too stay married and 
sane, but it has not been easy. Instead of helping our children and 
parents they are having to help us. Is this the American Dream? Since 
finding out about the AMT repercussions, almost everything we do has 
been based on how to deal with it. All we did was exercise my ISO 
options. How can we owe taxes on something that we never realized? How 
can the U.S. government and its tax code be responsible for making 
thousands of people paupers?
    For those of us that are either on the brink of ruin or over the 
edge, it would be a big help to us to be able to resolve this 
equitably. It will not put things right for us because we still will 
not have any retirement or funds and will have to try to rebuild, but 
it will at least help us to get started. If we can either take the 
credits that are due to us more quickly so that we can recover the 
credits that are due to us or if we can treat the exercise and final 
sale/resolution of ISO options/stock as a single year occurrence, we 
can at least have a fair way of dealing with this issue.
    We have been a middle-income family since we were married almost 25 
years ago. We have worked for everything we acquired, and have not been 
extravagant spenders. In fact since our 2 children started their 
activities, Ballet and Dance, Ice Hockey and Figure Skating, most of 
our expendable income has gone for them. I worked at a company, Luminex 
Corp. that I helped to be successful enough to go public, and was 
offered ISO stock options as a reward for my efforts. Due to management 
changes I left the company in July of 2000, and had to exercise my 
options, but was not aware of the tax implications of the AMT. Everyone 
including our stockbroker told us to hold on to the stock to get long 
term gain tax gains as well as I thought the company had a future. What 
we didn't realize is that the IRS wanted us to pay the taxes on the 
gain (AMT) even though we did not sell the stock. This would be like 
paying taxes for the increase (Gain) in value of your land, even though 
you never sold it. All we have left is the house we have been living in 
for the last 12 years, as we no longer have any savings or retirement, 
and both of our vehicles are over 6 years old. Also, since I came from 
the technology sector, I was out of a job in my industry for over 2.5 
years, and worked at whatever jobs I was able to find. I am now working 
in industry again, but this burden of the AMT is having very serious 
consequences that are not only affecting ourselves, but is also 
affecting our children. Instead of being able to pass along some of the 
fruits of our sacrifices and hard work, we are not able to help our 
children start their own lives, and in fact are concerned for ours in 
our later years as our children (17 and 22) are having to help us now.
    We had to exercise my ISO options in August 2000. The IRS says that 
due to the AMT, we owed almost $300,000 from that year even though we 
didn't sell them. Because of what happened with the stock value, if we 
could treat the exercise and the final result as a single transaction, 
or if we didn't have to consider the AMT, the amount would be more 
realistic and manageable. We currently are in bankruptcy and the IRS 
has put a lien on our house for over $400,000, that if we come out of 
Bankruptcy (the trustee is trying to say there is no outstanding 
question about the validity of the AMT so is trying to get the case 
dismissed), they will seize it. We don't understand how we can owe 
taxes on a something we never had. The judge just ruled that the IRS 
claims are such that we cannot file Chapter 13 but have to file 11, 
which increase our costs to recover from $2000-3000 to $15,000-$16000. 
If we are already struggling to recover, how is adding $13,000 on top 
of our debt helping?
    Your consideration in this issue is greatly appreciated. Please 
help to make the AMT law apply as it was supposed to, not against 
normal middle-income citizens.
            Regards,
                                                      John Lapaglia

                                 

                                    Mountain View, California 94043
                                                      June 17, 2005
    Dear Chairman Thomas and Committee Members: My name is William 
Lazar and I am writing on behalf of my wife Vivian and myself. We 
appreciate the opportunity to discuss the hardships we are suffering 
due to an outdated and complicated portion of the tax code called 
Alternative Minimum Tax.
    I moved to Silicon Valley before the dotcom era to work for a small 
software company. Like many such firms, our product was interesting and 
even innovative but our management was better with technology than 
business and nine months later I was out of a job.
    Fortunately I hired on almost immediate with another startup in 
January, 1997, and this company was much more successful. The ISO 
options I earned as part of this work became very valuable when Sun 
Microsystems bought the company in 1998. I worked through an 
unbelievably difficult two and half years at Sun until my options were 
fully vested and decided to take a little time off.
    I asked for a six month personal leave, which was granted, but when 
that time was up the tech market had crashed and there was no job for 
me to return to at Sun; their first major layoff was only three months 
later. Since I was no longer a Sun employee I had to exercise my vested 
options within 90 days or lose them.
    Since I was fortunate enough not to need the money immediately I 
exercised and held. Unfortunately Sun's stock continued it's fall from 
a high of $64.50 to under $2.50. I had to pay $45,000 to the federal 
and California governments all due to AMT calculations. Of course I 
never saw a penny of this, the stock was sold for under $20,000.
    Just as there was no job for me at Sun, there were no jobs in 
general. Since my separation from Sun on 17 Aug. 2001 I've worked 5 
months for one company as a contractor (total income of $34,500 but 
self-employed so a huge tax bill) and now have worked three months for 
another small company at $20 per hour (though as an employee). Only 
through the good fortune that my wife has been able to help with the 
bills--she's a records clerk at a law firm making under$40,000 per 
year--have we been able to avoid serious financial trouble.
    Meanwhile, I have an AMT tax credit of over $150,000 that I can 
hardly imagine ever being able to claim.
    I could have been smarter and sold the stock sooner, I'm not trying 
to evade responsibility for my own decisions. But I cannot understand 
how a tax program that was intended to make sure very wealthy 
individuals didn't hide their good fortune and avoid contributing to 
our community can catch up people like myself, who've never made as 
much as $100,000 in a year. My story is probably one of the mildest 
you're receiving on this subject but I want to add my voice to those 
urging you and other members of Congress to change this illogical law.
                                                      William Lazar

                                 

 Statement of Leo Linbeck, Americans for Fair Taxation, Houston, Texas
Mr. Chairman and Members of the Committee on Ways and Means:
    The Americans for Fair Taxation (Fairtax.org) welcome the chance to 
submit this written testimony for the Committee's first tax reform 
hearing. We understand that this, initial hearing is limited to an 
overview of the principle objectives of reform--fairness, simplicity 
and growth--in anticipation of the recommendations from the President's 
Advisory Panel on Federal Tax Reform (which have been delayed until 
September 31, 2005). Fairtax.org submits this testimony in order to:

      offer its views on the criteria by which tax reform 
should be judged, the importance of defining those criteria and the 
relevance of holding hearings exploring those criteria;
      address two issues discussed by panelists, particularly 
the means of measuring fairness and as to the effect of tax reform on 
border adjustability;
      and, dispel two unfair myths that have been connected 
with the FairTax plan, namely the difficulty of compliance and the 
relevance of the tax-inclusive rate.

    With more than 600,000 supporters, Fairtax.org is the nation's 
largest grass roots citizens' organization dedicated to fundamental tax 
reform. As a nonpartisan organization, we have engaged some of the 
nation's leading scholars and tax policy analysts to explore the 
infirmities of the existing system and the best means of correcting 
them. The product of our effort is the FairTax, which has been 
introduced by Representative John Linder as H.R. 25 and in the Senate 
as S. 25 by Senator Saxby Chambliss. The House bill now has 37 
cosponsors. We have engaged and we continue to engage academic scholars 
to study the effects of the FairTax on economic growth, fairness, 
international trade and specific industries. With the benefit of our 
research and our efforts towards fundamental reform, we respectfully 
offer the following insights within the narrow scope of this hearing.
    Relevant Criteria By Which Tax Reform Should be Measured_The 
Internal Revenue Code and the U.S. tax system in general are nearly 
universally derided. Although many Americans taxpayers share a visceral 
disdain for the tax system, they hold that view for diverse reasons. 
The Tax reform debate by necessity cannot focus on one problem. The 
debate will encompass a wide range of competing problems searching out 
competing solutions.
    In light of the complexity of the issues demanding resolution, a 
consensus must emerge over the common issues tax reform is meant to 
address before the effectiveness of competing plans can be analyzed. 
The salient problems with the current system must be identified before 
we can determine which ideas best address those problems.
    As the Committee takes this first step along its historic task, the 
Chairman is to be commended for noting three major priorities that 
should drive any tax reform we enact: simplicity, fairness and economic 
growth. However, we would ask the Committee expand upon those criteria 
by developing a methodology for measuring which system most 
effectiveness promotes these objectives. As the Committee begins the 
task of fact finding and deliberations, Fairtax.org offers what it 
considers to be the most important classifications of these problems. 
From our own analysis, from our evaluation of testimony and from the 
problems most commonly cited in our surveys and in the hearings, we 
suggest the Committee measure the success of tax reform alternatives 
against the following scorecard:

      How do the plans affect economic growth and real incomes? 
Apart from lowering marginal rates, a system that eliminates the double 
taxation of income (is neutral as to savings and investment) will 
create more growth.
      In a related inquiry, what is the base and therefore the 
required marginal rate to achieve revenue neutrality? Not only is the 
marginal rate directly related to the base, but the marginal rate has a 
direct bearing on economic growth and evasion.
      How do the plans encourage savings and investment? 
Savings are responsive to a return on capital and consumption taxes 
remove the bias against savings.
      How is education treated under the plans? The cost of 
acquiring education is the cost of America's investment in its 
intellectual capital and the route to upward mobility.
      How do the plans ameliorate complexity and compliance 
costs? Not all plans are created equal in eliminating compliance costs 
long-term.
      Does border adjustability really have no effect on 
international competitiveness or do the plans have vast differences in 
the way they affect international competitiveness (the ability of 
domestic producers to compete against foreign produced goods)? Only 
destination-based consumption taxes are border adjustable.
      How fair is the distribution of the burdens and benefits 
and how does it affect upward mobility? Under a consumption tax, this 
question requires a multi-dimensional analysis.
      How reliable is the plan as a source of revenue? Under 
some plans, fluctuations in revenues present a problem.
      How do the plans expose hidden taxes? Plans can be 
distinguished by the ability of taxpayers to see what they truly pay 
for the cost of government.How do the plans respect privacy and other 
civil liberties? The tax laws need not be intrusive.
      What effect will the plans have on charitable giving? 
Plans differ as to the after-tax costs of giving.
      What effect will the plans have on promoting 
homeownership? Plans differ by raising or lowering the costs to the 
taxpayer of purchasing a home.
      How will the plans affect tax evasion and tax avoidance? 
Some tax reform proposals will do nothing to quell the swelling tax 
gap.
      How permanent is the plan (i.e. how resistant is it to 
unraveling)? The Committee should consider the staying power of the 
reforms it recommends.
      How does each the plan affect global tax competition, tax 
rates and reform? Some plans will encourage global tax reform (i.e. 
they are more contagious).
      To what extent do the plans introduce and dispose of 
transition issues? Many plans simply ignore the large transition issues 
they present.

    The FairTax plan best meets the criteria laid out before the 
Committee. We stand ready to offer the Committee more detailed 
testimony at future hearings to more fully address each of these 
issues. We would urge the Committee to review our web site, which 
contains a recent submission to the President's Panel on Tax Reform on 
these very points.
    In identifying the tax reform alternative that is considered 
optimal, the inquiry begins with defining the public policy goals of 
tax reform. A more definitive level of agreement over those goals--if 
not the prioritization of them--is the political question that will 
better enable scholarly and objective analysis to analyze the plan that 
best succeeds in achieving those goals. Congress and the American 
people will be able to judge the effectiveness of proposals against 
these objective criteria without unnecessary political rhetoric. And as 
the Committee addresses the key questions, the true strengths and 
weaknesses of each plan will become evident.
    The Distributional Methodology to Ensure ``Fairness'' Should be 
Measured in Ways that are Not Biased Against Pro-Growth Tax Policy. 
Fairtax.org views favorably recommendations made by Dr. William Beach 
of the Heritage Foundation, who focused much of his oral testimony to 
the Committee on the need to change the method of measuring 
distribution. Dr. Beach argued that as the tax reform debate commences, 
the Committee should avoid the trap of income-tax biases when measuring 
distributional burdens of consumption taxes. Fairtax.org agrees, taking 
Dr. Beach's testimony one step further. The Committee should recognize 
the flaws of current distributional methodologies when seeking to make 
the tax system more pro-growth and progressive.
    The Chairman recognized the importance of fairness as a key 
priority of tax reform and defines it as ``similarly situated taxpayers 
bear[ing] similar tax burdens.'' Whether any tax reform plan is more 
equitably distributed than another will simultaneously be the most 
influential and contentious value judgment of the coming reform debate. 
In the final analysis, the question of distributional equity boils down 
to three inquiries: (1) how much should people of varying wealth, 
income or consumption pay in taxes and on what basis?; (2) how much do 
people of varying wealth, income or consumption pay under today's 
structure or alternative tax structures?; and, (3) does the tax system 
curtail or improve prospects for upward mobility? In the absence of 
specific criteria to define and measure `fairness' these relatively 
straightforward questions may lend themselves to rhetorical flourishes 
rather than economic analysis.
    As the Committee approaches the pivotal issue of ``fairness,'' the 
definition it ascribes to ``fairness'' and the means of measuring and 
presenting distributional data will mean the difference between 
informing the debate or constructing a monolith to stifle pro-growth 
reform. As the conventions for defining, measuring and portraying 
distribution now stand, the answer to the question of whether a 
consumption plan is ``fair'' is effectively pre-ordained by standards 
of distributional equity that frame the question through reference to 
an income tax. In short, the Committee must reevaluate and reconstruct 
the manner in which it chooses to measure and view distribution if the 
American people are to be given relevant information that can enable 
them to make informed decisions about distributional equity.
    The centrality of this point is best understood by examining the 
narrow but conventional view that ``fairness'' equates to progressivity 
of tax burden relative to some measure of annual income. That is the 
view that may be shared, for example, by Dr. Joel Slemrod of your 
hearing panel, and for a reason. Taxes paid over income is the 
preferred quotient of analysis for those who support multiple taxation 
of savings and investment at accelerated rates (as opposed to 
consumption taxes). Since consumption taxes do not tax returns on 
investment multiple times (which under an income tax is considered a 
normal part of the income base), and since lower wage earners in the 
aggregate spend a disproportionate amount of their earning on 
consumption, the more a tax is based on consumption the more it is a 
foregone (and incorrect) conclusion (based on such a methodology) that 
the tax is ``regressive'' or less ``fair.'' Measuring fairness 
according to an annual income methodology will always show an unfair 
bias in favor of punishing savings and investment chiefly because it 
uses taxes paid over income, rather than consumption, as the unit of 
measurement, even though nearly all economists agree a system neutral 
as to savings and investment will result in higher real incomes. The 
biased nature of basing distributional tables on annual income would 
seem apparent.
    In reality, measuring distribution as a quotient of taxes paid over 
income is only one possible method of portraying fairness, and neither 
the most objective nor best method. Income earned in any given period 
is, at best, an incomplete measure of one's ability to pay over a 
lifetime; and in the case of wealthy individuals, a poor measure. 
Proponents of a consumption tax argue instead that the best measurement 
of the equity of a tax system is what one individual consumes for his 
or her own personal well-being over the course of a lifetime, i.e. the 
private as opposed to public uses of capital. Under the FairTax, 
consumption at or below the poverty level is simply not taxed at all, 
in keeping with the principle that the government should not extract 
resources from citizens until they have met their own sustenance. This 
is accomplished by a ``prebate.'' Income which is not consumed is 
either saved or invested or provided to charitable causes (or 
government) to fund the consumption of others. The return on savings 
and investment is either used to fund future consumption or reinvested 
to increase productivity and output. If income and savings are taxed, 
we have simply taxed deferred consumption. Individuals who defer 
consumption do so because they elect not to consume it for themselves 
immediately, but to make the resource available for others. For this 
reason, consumption tax supporters argue that measuring taxes paid over 
consumption is an equally valid distributional measure, and a more 
appropriate measure, of fairness. If one supports a consumption tax for 
pro-growth reasons, even if one supports certain aspects of a 
consumption tax (such as the taxation of income only once), then is it 
not equally valid to display the distribution as taxes paid as a 
function of consumption as opposed to income? Is this is not a decision 
that rightfully falls outside the learned realm of economics?
    Using income as the denominator is a bias built into conventional 
distributional charts that favors the steeply progressive marginal 
rates with double or treble taxation of income, but it is far from the 
only bias. Another major bias exists if we adhere to the conventional 
wisdom of restricting the unit of analysis to annual income. Annual 
income wrongly assumes the taxpayers within an income category will 
remain financially frozen in perpetuity (i.e. their income will not 
change year-by-year and over the course of their lives). By making that 
assumption, we not only defy reality, we are often comparing a 45 year 
old father with the 18 year old daughter in order to argue that tax 
policy should require the father to redistribute more of his income to 
his daughter. If Congress is provided charts depicting distribution 
only on this basis, those charts will wrongly argue that flatter 
marginal rates hurt the poor and benefit the rich, even if they are the 
same people at different stages of life. Basing distribution on 
stagnation within income deciles not only yields a knowingly wrong 
result, but also yields a result knowingly biased against a flattening 
of rates that nearly all economists (and those on your panel) agree 
increases economic growth.
    Rectifying these biases is not only desirable; it is imperative if 
we are to make economically sound analysis of competing proposals based 
on accepted economic principles. Rather than blindly measuring 
distribution on the basis of taxes paid over annual income, Fairtax.org 
contends that the proper approach is to examine distribution in the 
manner that has been recommended for several years by the President's 
Council of Economic Advisors; such as, measuring distribution as taxes 
paid over consumption, lifetime income, or by evaluating distribution 
on a dynamic basis by measuring what people have after taxation. Such 
means of measuring distribution was suggested by Dr. Beach. In 
considering distribution, the Committee should make clear the enormous 
and uncertain effect that conclusions over incidence of corporate and 
other taxes have on distribution. Sometimes these taxes are just 
ignored in distributional tables. The Committee should employ a 
methodology that requires the distribution tables include the 
compliance costs that are regressive under the current tax system and 
which have given rise to the need for reform (as well as assumption 
over differential compliance rates by income or consumption class since 
the $353 billion tax gap itself is not equitably distributed). The 
Committee should be aware that plans which seek to significantly lessen 
compliance costs should have a ``simplicity dividend'' a ``growth 
dividend'' and a ``compliance dividend'' that will also have 
distributional effects.
    The Committee should also recognize distribution models 
underestimate the regressivity of the current system by failing to 
account for uncertain incidences of corporate and personal income 
taxes, payroll taxes, self-employment taxes, and compliance costs that 
are embedded in the price of consumables or the cost of capital. The 
Committee should recognize that an important determinant of `fairness' 
is whether a particular tax scheme affords greater or lesser upward 
mobility. In summary, as the Committee explores the key subject of 
fairness, it should resist viewing the distributional debate solely 
through the reference frame of an income tax. And it should understand 
why such a limited reference frame offers a skewed vantage point that 
flies in the face of the pro-growth policies the Committee recognizes 
as essential to reform.
    The Unsettled Question Concerning Border Adjustability (and 
Territoriality.) The FairTax has many merits arguing for its enactment. 
These include, among others, the fact the FairTax stimulates economic 
growth, untaxes the poor, removes disincentives to work, save and 
invest, encourages home ownership, advances investment in human 
capital, makes the tax system simpler and more visible, lowers 
compliance costs, and honors the privacy and other civil liberties of 
taxpayers. Moreover these positive effects are supported by extensive 
research. But one often understated reason that deserves further 
explanation is that the FairTax is the most border adjusted tax plan 
that could be devised.
    Allow me to explain further. Fairtax.org asserts that the U.S. 
government should not, as a matter of policy, accord a huge advantage 
to foreign companies competing in the U.S. market or impose a huge 
disadvantage on American producers and workers selling their goods and 
services in the U.S. and foreign markets. Regrettably the current tax 
system has this adverse consequence on the economy.
    Today, the U.S. tax system harms the competitiveness of U.S. 
businesses. Heavy income and payroll taxes are imposed on U.S. workers 
and businesses producing goods in the U.S. whether those goods are sold 
in here or abroad. U.S. corporate taxes are the highest in the 
industrialized world; with a top corporate rate about nine percentage 
points higher than the OECD average. Our current tax system imposes no 
corresponding tax burden on foreign goods sold in the U.S. market. 
Moreover, foreign value added taxes, a major component of the total 
revenue raised in most developed countries including every OECD country 
except the U.S., are rebated if foreign goods are exported. U.S. 
manufacturers selling abroad must pay foreign value added taxes at an 
average rate of nearly 18 percent in addition to U.S. income and 
payroll taxes, creating a large and artificial relative price advantage 
for foreign goods, in both the U.S. market and abroad.
    Empirical evidence suggests that the U.S. inability to border 
adjust its taxes is of tremendous practical importance. With each 
passing year, manufacturing is a smaller and smaller part of the 
overall economy. The value of all goods manufactured in the United 
States was roughly 30 percent of the value of all goods and services in 
the economy in 1953, and fell below 15 percent in 2001. The U.S. trade 
deficit is now almost six percent of GDP and trade deficits exist in 
nearly every category of goods with nearly every country. Most 
importantly, there is an unsustainable ``Production Gap.'' The U.S. now 
produces only about \2/3\ of the goods it consumes. The reason is the 
tremendous price advantage we accord foreign producers and foreign 
workers when competing against American products sold in the domestic 
market or bound for overseas sales.
    The largest single factor in the decline in U.S. manufacturing jobs 
is within our power to fix by reforming the tax code.Specifically, we 
need to eliminate those aspects of our tax system that artificially 
place U.S. production at a competitive disadvantage to foreign 
production. The most powerful tool to improve the international 
competitiveness of U.S. business is to move to a destination principle 
tax system (also known as a border adjusted tax system)--a tax system 
that taxes all goods consumed in the U.S. alike, whether the goods are 
produced in the U.S. or abroad.
    The FairTax accomplishes this result. Foreign manufactured goods 
and U.S. manufactured goods will pay the same tax when the goods are 
sold at retail. U.S. businesses selling goods or services in foreign 
markets will not be subject to federal tax. By comparison, not all 
consumption taxes do so. The flat tax does not address this problem. 
The Flat Tax is an origin method value added tax. It taxes the 
consumption of U.S. value added, whether the consumption occurs in the 
U.S. or abroad. Foreign made goods consumed in the U.S. bear no tax 
under the Flat Tax. Thus, under the Flat Tax, American businesses and 
American workers would still be placed at a large tax disadvantage in 
international markets. Other destination based consumption taxes may be 
border adjustable, but they accomplish this result less effectively and 
efficiently because the entire taxes imposed are not border adjusted as 
they would be under the FairTax.
    Fairtax.org recognizes that some of your distinguished panelists at 
this hearing, particularly, Dr. Alan Auerbach, disagree with us on the 
relevancy of border adjustability. For instance, without much 
elaboration he asserted that ''border adjustments will simply 
strengthen the dollar, putting importers and exporters in the same 
competitive positions no matter which approach is adopted.'' By 
contract, Fairtax.org contends that border adjustability matters 
greatly to U.S. competitiveness, and this view is shared by noted 
economists.
    The fallacy of the `border adjustability is irrelevant argument' 
can be seen most clearly with the FairTax. Advocates of the 
``irrelevancy position'' incorrectly argue that if the FairTax were 
implemented, any relative price change will be eliminated by an 
immediate offsetting 23 percent appreciation in the dollar. This theory 
is based on the assumption that appreciation of the dollar will be 
caused by a reduction in U.S. demand for foreign currency to acquire 
(the now more expensive) foreign goods and an increase in foreign 
demand for U.S. currency to acquire (the now less expensive) U.S. 
goods. The greatest flaw in this analysis is that the demand for U.S. 
dollars is not limited to the traded goods market. Nearly $90 trillion 
in U.S. assets owned by households and non-financial businesses are 
denominated in dollars. Financial institutions trade trillions of 
dollars in securities and currency each day based on expectations and 
long and short term assumptions. Furthermore, the non-traded goods and 
services sector is also denominated in dollars and exceed the traded 
goods sector in size. The value of the traded assets alone cannot 
possibly adjust the value of all dollar denominated assets. Consider 
for a moment the treatment of commodities, where prices are established 
through international markets.
    If, however, border adjustability is not relevant and there is no 
increase in the competitiveness of U.S. goods because of a 23 percent 
increase in the price of the dollar (more or less precisely) relative 
to foreign currency, then the FairTax will have succeeded in increasing 
the wealth of the American people by something on the order of $20 
trillion (23 percent of $90 trillion) relative to the rest of the 
world, an instantaneous increase nearly equal to the value of all the 
goods and services produced in the U.S. over two years. If that were to 
happen, it would be reason enough to enact the FairTax. Unfortunately 
for American asset owners, it is impossible for the traded goods sector 
to dominate the currency movements since the dollar asset markets are 
perhaps 100 times as large as the annual traded goods market (net 
basis).\1\ The argument collapses when one understands that currency 
fluctuations are influenced by a great deal more than just taxes on 
traded goods. An additional legitimate inquiry regarding the reliance 
of border adjustability would examine whether the U.S. wants to take 
the risk that it is imposing what amounts to a self-inflicted tariff on 
its domestic producers and workers when it recognizes the difficulty of 
providing direct trade incentives under the WTO?
---------------------------------------------------------------------------
    \1\ See, Flow of Funds Accounts, United States of America, Fourth 
Quarter 2004, Federal Reserve System, for statistical information on 
asset markets.
---------------------------------------------------------------------------
    The Tax-Inclusive Means of Measuring the FairTax is Not 
Disingenuous_Critics of the FairTax wrongfully contend that expressing 
the FairTax rate in tax-inclusive terms is disingenuous. For instance 
the Ways and Means Committee democratic staff state on their website 
that when the rate is quoted as `23 percent' it really means `30 
percent' to the consumer.'' As the Committee proceeds with these 
hearings, it should clarify that the rates of various tax reform 
proposals must be compared on a uniform basis.
    When considering the rate of a single stage consumption tax, or any 
tax for that matter, one must always decide which of two distinct means 
of portraying this rate--the ``tax-inclusive rate'' or ``tax-exclusive 
rate''--best reflects the tax burden. Which one we employ changes 
absolutely nothing in terms of the taxes that are actually raised or 
paid by the taxpayer under the taxing regime examined any more than 
describing a hot day as 40 degrees centigrade or 104 Fahrenheit changes 
the level of discomfort. But the metric used does change the perception 
of those who wish to compare the merits of competing tax proposals. 
When making comparisons between alternative taxing systems, it is 
important to ensure that these comparisons are consistent, fair in 
terms of expectations, and are well explained. Fair comparisons 
eliminate rather than exacerbate confusion over a relatively critical 
point as the means of expressing the tax rate. The FairTax plan 
contends that the rate of the FairTax is properly measured through the 
use of the same scale as is used for all competing federal plans. We 
contend the only correct and accurate means of measurement is to 
compare the tax-inclusive income tax rate to a tax-inclusive sales tax 
rate. Therefore, in order to compare apples to apples the FairTax is, 
unlike most state sales taxes, imposed on a tax-inclusive basis.
    Two examples may help clarify the use of these two rate calculation 
methods. Assume a worker earns $100 and uses the entire amount to pay 
for a CD player at Wal-Mart. Under the income tax, the worker would 
earn $100, pay $20 dollars in income tax, and have $80 left over to buy 
the CD player. We would say this tax rate is 20 percent. In a typical 
sales tax we would say the worker earned $100, paid $80 for the CD 
player and paid $20 in sales tax. We would divide $20 by $80 and say 
the rate is 25 percent. Using this method, we would say the sales tax 
rate is 25 percent and the income tax rate is 20 percent even though 
the tax burden is precisely the same, i.e. $20. The problem of course 
is that representing the FairTax as 25 percent and the income tax as 20 
percent would lead one to think the FairTax imposes more tax or has a 
smaller base, when both conclusions would be wrong. Thus, the FairTax 
uses the same method of stating its rate (the tax-inclusive rate) as 
does the current system it is designed to replace, and while the 
FairTax is agnostic about which method is chosen, it believes the 
methods should be consistent across tax plans.
    The Ways and Means' Democratic staff observes that on a tax-
exclusive basis, the FairTax would be imposed at a 29.9 percent rate. 
Nothing is wrong with that assertion in the abstract. However, on that 
basis, the current tax system would impose marginal tax rates on 
middle-class taxpayers of 76 percent, if you take into account the 
hidden employer payroll tax is borne by workers.\2\ The Flat Tax would 
bear a maximum marginal rate of 47.7 percent. The FairTax is expressed 
on a tax-inclusive basis not because it shows a lower rate expressed 
differently than state sales taxes, but because the price of adherence 
to the way state sales taxes are expressed would be misrepresentation 
at the national level. Therefore, the FairTax quotes the rate as tax-
inclusive, and explains where it has the chance, the difference between 
the two methods.
---------------------------------------------------------------------------
    \2\ The way of looking at the income tax from a tax-exclusive point 
of view is to ask how much a worker must earn to spend $100. Today, a 
taxpayer in the 28% tax bracket (who pays 7.65 percent in payroll 
taxes) must earn $155 to pay for $100 in goods. If the employer's share 
of the payroll tax is considered, this worker must earn $176 to spend 
$100. A 15 percent income tax bracket taxpayer must earn $129 to spend 
$100. This figure would be $143 if the employer's share of payroll 
taxes is taken into account. If we were to apply a tax-exclusive metric 
to the income tax, the income tax with the payroll tax bears a maximum 
marginal rate that is 75.8 percent of the tax-exclusive rate. Even the 
Federal individual income tax alone reflects a maximum marginal tax-
exclusive rate of 43.3 percent, and the FairTax plan bears a maximum 
marginal rate of 29.9 percent.
---------------------------------------------------------------------------
    The Myth that a Single Stage Consumption Tax In Excess of 10 
Percent Won't Work. Dr. Joel Slemrod testified that a national sales 
tax that would replace the entire tax system would suffer from a lack 
of compliance. He repeated an ``urban myth'' of income tax proponents 
that a sales tax in excess of 10 percent will create compliance issues. 
with a rate beyond 10 percent. This statement has been repeated so 
often and with such certainty by income tax proponents, that it must 
have academic substantiation or proof. This is not the case.
    The author of this conjecture was Vito Tanzi, former Director of 
Fiscal Studies at the International Monetary who simply offered this 
opinion in a 1995 Brookings Institution publication.\3\ Taxes are 
unpopular and breed resentment today--as they undoubtedly always have 
and to some degree probably always will. Accordingly, some people will 
evade taxes no matter what the governing tax system, but there is no 
evidence--empirical or analytical--to suggest that the sales tax would 
not be complied with at a national level, extant research and the 
empirical evidence suggests that the tax would increase voluntary 
compliance while reducing compliance costs. For example, much of the 
tax gap today is attributable to mistakes caused by the complexity of 
the law. Mistakes and confusion would be all but eliminated under a 
system that creates no exemptions, and dispenses with the complex 
issues present today. And the FairTax improves all the factors known to 
bear upon noncompliance, including reducing the rate and the number of 
collection points. The more than 60 years of practical experience in 
administering sales taxes at the state level supports the position that 
the FairTax would be administrable at higher compliance rates relative 
to administrative and compliance costs. Whether or not the plans can be 
complied with is also directly related to the costs and intrusions into 
privacy. The relative administrability of the various alternatives, 
including the single stage consumption tax, should be explored in a 
separate hearing devoted to that purpose and not dismissed by 
unsubstantiated opinion.
---------------------------------------------------------------------------
    \3\ Tanzi, Vito, 1995 ``Taxation in an Integrating World.'' 
Washington: Brookings. 1995, pp. 50-51. For the opposite view, see Dan 
R. Mastromarco, ``The `Fair Tax' and Tax Compliance: An Analytical 
Perspective.'' Tax Notes 79 No. 3 (April 20, 1998): 379-87.
---------------------------------------------------------------------------
    The Facts that Influence Pro-Growth Tax Policy. Fairtax.org has 
done extensive research on the economic effects of its plan. Economists 
estimate that the FairTax plan improves wages and the economic well-
being of all Americans. For example, Boston University economist 
Laurence Kotlikoff estimates the shift to consumption taxation raises 
the stock of U.S. capital by at least 29 percent (potentially by as 
much as 49 percent) and U.S. living standards by at least seven percent 
and potentially by as much as 14 percent. Work by Gary Robbins, Ph.D. 
of Fiscal Associates shows that replacing the current tax system with a 
single-rate system that treats capital and labor income equally--such 
as the FairTax--increases the GDP 36.3 percent and private output by 
48.4 percent over the long run. Higher investment levels increase the 
productivity of employees, demand for workers and real wages.
    Even more important than the end result of the FairTax is an 
understanding what critical aspects of the various plans generate such 
positive effects. Certainly, the FairTax provides substantial benefits 
from the non-trivial savings from compliance costs, from greater 
compliance itself, from international competitiveness and from the 
elimination of the deadweight loss of special interest tax provisions. 
However, the Committee should recognize that the majority of the 
economic growth will come from lowering marginal rates (which results 
from broadening the base and flattening the rates) and the elimination 
of the multiple taxation of income (which results in neutrality as to 
savings and investment). Not all plans proposed will achieve these 
objectives to the same degree.
    Conclusion. As the President's Advisory Panel on Federal Tax Reform 
noted: ``History has taught us that although it is relatively easy to 
achieve consensus on the need for reform, it is much more difficult to 
devise a solution that satisfies all competing interests.'' The hard 
work of crafting of that solution will fall upon this Committee. As it 
undertakes this task, Fairtax.org urges the Committee to define the 
goals of reform in the most definitive terms possible and focus the 
debate around the type of reforms that best meets these goals. As it 
proceeds, Fairtax.org urges the Committee to separate the myth and 
rhetoric from the reality and efficiency of each reform plan it 
considers. Proponents of the FairTax eagerly await and welcome the 
opportunity to participate in such a debate.

                                 

            Statement of Hendy Lund, Ben Lomond, California
    Subject: California dreamin? Try California Nightmare thanks to AMT
    Comments: In 2000, I was living a dream. I was working for Redback 
Networks in a job I loved, was married to a great guy, and had just 
bought a house thanks to stock options I'd been granted when I started 
at Redback. With the rest of the options, I'd done an ``exercise and 
hold'', with the intention of avoiding short term capital gains by 
holding the shares for a year, then selling them to pay the taxes on 
the shares I'd sold to buy the house.
    Convoluted? Perhaps . . . but it was based on the ``common wisdom'' 
of the time. After all, ``the shares aren't going to go down anytime 
soon, and this way you'll save a bunch on taxes!'' Then the bubble 
burst. Come April 2001, when it was time to pay taxes, the shares were 
worth 1/50th of what they were in 2000. Still, if I sold those and took 
out a mortgage on the house, I could cover the regular income tax. I 
wouldn't have the luxury of owning a home free and clear, but a 
mortgage is ``normal'', and I still had a house, something that isn't 
easy to make happen in California.
    Imagine my horror when my accountant presented me with a Federal 
tax bill of $1.2 million. Why? That ``exercise and hold``--a 
transaction in which I received no actual money--was treated as income 
for AMT purposes. My accountant explained that it was a ``prepayment'', 
and that it would be applied as a credit when I actually sold the 
shares.
    Excuse me? The government is taking my money before I even have 
it?!? And now that the stock is effectively worthless, they're taking 
money I'll *never* have? Now it's 2005. I've sold that home for \2/3\ 
of what I paid for it. That ``great guy'' and I are divorced--and yes, 
the fights over money and the associated stress contributed. I still 
owe the IRS $1.2 million thanks to compounding interest and penalties. 
The only reason I'm not in collections with the IRS is that I hired a 
tax attorney. My financial future--my retirement, my daughter's 
education--is on hold until someone flinches and figures out what to do 
with my debt.
    I think I'm a good citizen. I pay taxes on the money I earn with 
hardly a grumble, and I'm honest about how much I earn. But I'm screwed 
because AMT considers a ``Monopoly money'' gain to be cold hard cash . 
. . and that's just not right.

                                 

                                          Boca Raton, Florida 33432
                                                      June 17, 2005
Dear Chairman Thomas and Committee Members:

    I was an employee of Qtera, in South Florida, of one of the many 
acquisitions of Nortel Networks during the telecommunications boon of 
1998 to 2000. I received incentive stock options and subsequently have 
paid to the U.S. Treasury department, Alternative Minimum Tax, in 
excess of $230,000.00.
    I was hired as the 17th employee in 1998, three years after 
completing a Bachelors degree in Mechanical Engineering. Working for 
Qtera, in Boca Raton, FL was a fantastic experience. The team that was 
assembled was of the highest quality and some of the most motivated 
individuals I have ever worked with. Our devotion, hard work and 
technical expertise made us an acquisition target of both Cisco Systems 
and Nortel Networks in late 1999, Nortel Networks ultimately acquired 
us; seventy employees had achieved the impossible. Instantly, all our 
Qtera ISO's were converted to Nortel Networks ISO's at approximately 
$60 per share. Our success received a wealth of media coverage, from 
the Wall Street Journal to NPR.
    Soon after the media broke the news of our success, the 
stockbrokers and investment bankers began courting our employees. As 
employees with much work ahead of us, we had little time or energy to 
learn about the Alternative Minimum Tax code. Some of the investment 
firms provided seminars on the Alternative Minimum Tax code but usually 
we were left with more questions than answers. AMT soon became the 
number one discussion topic, on the surface, we found ourselves quite 
versed in the subject, yet few of us really understood the dirty 
details.
    My plan was to exercise and hold the shares as Congress had 
intended then after holding the stock for a year, sell enough shares to 
pay AMT and invest the rest. The first sign of trouble was the gradual 
decline in Lucent's stock price during 2000. We continued working 
incredible hours to meet our company milestones during our one-year 
transitional period.
    By the middle of 2000 many employees had stockbrokers managing 
their investments. Not only brokers, but accountants, estate planners 
and life insurance brokers, everyone was after our potential wealth. I 
retained a local accounting firm to manage my tax liability and a 
nationwide brokerage house to manage my account. The accountants were 
confident they were experienced with Alternative Minimum Tax. Their 
experience turned out to be limited, but since they had fifteen of my 
co-workers on a yearly $4,000 retainer, they had no problem getting 
their hands dirty with the tax code. I reasoned that the Alternative 
Minimum Tax code was so complicated that I should have professional 
support, no mater the cost.
    April 15th 2001. The year had gone so quickly and I exercised 
options twice during the previous year resulting in an Alternative 
Minimum tax on ``Paper Gains'' of $195,000.00. It was strongly 
suggested, by my investment broker, use margin to pay the tax bill. The 
margin loan sounded like a reasonable idea, the investment firm 
provided a low interest loan without liquidating the account, as long 
as the account value is not less than the loan. Little did I know the 
bottom was about to drop out.
    I began to diversify my account, but the majority was still in 
Nortel stock. Meanwhile, while no one was watching, Nortel Stock fell 
below $20 per share. The Nortel management was positive on the 
company's growth and their overall market position, the low price was a 
just small correction in the overall market. (We now know these 
earnings were inflated.)
    By summer of 2001, the margin debt was nerve-racking and I was 
forced to sell Nortel shares and diversify as the share price continued 
to slide. I began to exercise and sell, just to raise cash for the 2001 
Alternative Minimum Tax. Nothing could stop the hemorrhaging stock 
price or margin calls. The tax models the accountant had prepared last 
year were useless. My only concern was having enough cash to pay the 
AMT and pay off the margin debt. By the end of 2001, we got word that 
Nortel would soon be downsizing their operations in Florida. Nortel 
Networks needed to reach the ``break even point'' and the cutbacks 
began. By the third quarter of 2001, the share price was under $10 and 
Nortel was laying off two thirds of their worldwide workforce.
    April 15th 2002. I had paid estimated tax throughout the year, in 
hopes of making the April payment manageable and avoiding penalty fees. 
Each of those quarterly tax payments went on the margin loan. By April 
2002, I reached my personal debt limit and liquidated my account to pay 
off my debt and pay the AMT. The 2001 tax bill was only $37,000.00, a 
few thousand less than my yearly salary! I ended my contract with my 
accountant, sold 90% of my investment account, and prepared myself for 
the possibility that I too would soon lose my job. My fears were 
realized and by the second quarter of 2002, I was unemployed.
    I learned many valuable lessons through this experience and I am 
fortunate that I am not financially ruined like so many of my former 
colleagues. Many will have their wages garnished, or have filed for 
personal bankruptcy, some were fortunate enough to negotiate 
settlements with the IRS. The Alternative Minimum Tax code was 
implemented to prevent wealthiest 2% of Americans from using special 
tax benefits to pay little or no tax. For various reasons the 
Alternative Minimum Tax has reached many hardworking, middle class 
Americans in South Florida, some who don't have very high incomes or 
special tax benefits. I hope those in the United States Congress have 
the compassion and foresight to realize the growing negative effect of 
the Alternative Minimum Tax and bring change to the outdated tax code.

                                                    Timothy Masters

                                 

                                        Fallbrook, California 92028
                                                      June 22, 2005
Dear Chairman Thomas and Committee Members:

    My wife and I are among other Americans who have been hugely 
impacted by the Alternative Minimum Tax (AMT) and its treatment of 
Incentive Stock Options (ISOs).
    In 1998, I joined a Silicon Valley startup. Within 18 months, I 
exercised incentive stock options and we were instantly 
``millionaires'' on paper. Unfortunately, our stock value plummeted in 
2001 with the rest of the NASDAQ. As a result of the AMT, however, we 
were still liable for nearly $300,000 in federal income taxes and 
approximately $75,000 in state taxes based on the value of the stock at 
exercise. Given the dramatic fall in the value of the stock, we were 
unable to pay the liability in full.
    Over the next 2\1/2\ years, we tried to reach a reasonable 
compromise with the IRS on the remaining balance, but our offer in 
compromise (OIC) with the IRS was rejected, as was our appeal of the 
rejection. Most recently, at great family hardship, we did a cash-out 
refinance of our home and liquidated all of our remaining assets to 
come up with $262,000 (which included $187,000 in federal tax and 
$75,000 in penalties and interest) to pay the balance of our year 2000 
taxes.
    My wife and I are now starting over financially due to the AMT. I 
am 47 years old and the first of my two teenage children will enter 
college next year, which my wife and I are committed to fund. Given 
that the AMT has completed depleted all savings, investments, 401ks, 
college funds, etc, we plan to cash flow our children's education over 
the next 7 years and then at age 54, we will begin to re-save for 
retirement.
    Please help us, and quickly. We are hopeful that our Leadership 
will recognize that the AMT and its impact on families like ours is 
unfair and distorted. We are also hopeful that new legislation will 
soon provide relief for families in our situation. For example, the 
ability to apply our AMT credits against normal income and tax events 
would allow us to regain some of our financial security.
            Sincerely,
                                                      Steve Mazingo

                                 

     Statement of Monica McGuire, AMT Coalition for Economic Growth

    On behalf of the AMT Coalition for Economic Growth, a coalition of 
companies and associations representing small, medium and large 
businesses from different industries, we direct your attention to 
problems created today by the corporate alternative minimum tax (AMT). 
While the growing reach of the individual AMT is a major area of focus 
in the tax reform debate, any serious reform effort also must address 
the adverse effects of the corporate AMT.
    Regarding the Ways and Means Committee hearing on Tax Reform June 
8, 2005, we submit these comments to highlight aspects of the corporate 
AMT that are unfair, including the growing problem companies face of 
not being able to recover AMT credits on a timely basis if at all; ways 
in which the corporate AMT distorts business investment decisions; and 
the complexities and administrative burdens needlessly imposed by the 
AMT. In light of these concerns, we urge the Committee to advance the 
goals of repealing the corporate AMT and allowing taxpayers to utilize 
existing AMT credits (i.e. prepaid taxes) on an expedited basis.

Unfair Impact of the Corporate AMT
    One of the most punitive aspects of the AMT system today is the 
inability of many taxpayers to utilize AMT credits \1\ within a 
reasonable period of time. Companies with unused AMT credits 
essentially are making interest-free loans to the Federal Government, 
to be repaid only when the company has sufficient regular income tax 
liability in the future. Many past AMT taxpayers have significant 
amounts of AMT credits that are now older than 10 years. The longer AMT 
credits go unused (i.e., the longer the interest-free loan to the 
government remains outstanding), the less value they have. Congress 
intended for the AMT to serve only as a pre-payment of tax, not as a 
permanent tax increase, which effectively becomes the case the longer 
taxpayers cannot use AMT credits.
---------------------------------------------------------------------------
    \1\ Under present law, every dollar of corporate AMT paid results 
in an AMT credit that may be carried forward to offset regular tax 
liability in future years, but only to the extent regular tax exceeds 
tentative minimum tax.
---------------------------------------------------------------------------
    IRS data show that AMT credit utilization has declined in recent 
years, down from more than $5 billion in 2000 to $2 billion in 2002.\2\ 
While usage has slowed, more than $26 billion of AMT credits remained 
outstanding in 2002.\3\
---------------------------------------------------------------------------
    \2\ IRS Statistics of Income, Table 13--Corporate Income Tax 
Returns: Balance Sheet, Income Statement, and Tax Items for Specified 
Income Years, 1990-2002.
    \3\ In 2002, there were $26.4 billion minimum tax credits carried 
forward to 2003, U.S. Dept. of Treasury.
---------------------------------------------------------------------------
    Many reasons explain why a taxpayer may be unable to recover AMT 
credits on a timely basis. The decline in AMT credit usage over the 
2000-02 period was in part the result of the recession, which left many 
companies with little or no regular tax liability against which to 
apply AMT credits. Indeed, a perverse aspect of the corporate AMT is 
the fact that the economic benefit of AMT credits is denied at 
precisely the time companies are in greatest financial need. For many 
past AMT taxpayers, deductions for mounting health care benefit and 
pension costs, use of net operating loss (NOL) carryforwards, and other 
factors may limit credit utilization significantly for years to come.
    In recognition of these systemic problems, Congress in the past has 
considered legislation to allow faster use of AMT credits. The AMT 
Coalition would be pleased to work with the Committee this year to 
suggest other means by which taxpayers can better utilize AMT credits.
    Interestingly, fewer and fewer corporations are actually incurring 
AMT today.\4\ In 2002, fewer than 7,000 corporations incurred AMT 
liability, down from more than 30,000 that paid AMT in 1990 and more 
than 25,000 that paid it in 1995.\5\ Looked at another way, only about 
0.3 percent of corporations that filed a return in 2002 incurred an AMT 
liability. The amount of AMT collected in 2002 was $2.45 billion 
compared to more than $8 billion in 1990 and more than $4 billion in 
1995. Accordingly, the revenue lost by repealing the corporate AMT, 
standing alone, would be far less today than in years past.
---------------------------------------------------------------------------
    \4\ The decline in the incidence of the corporate AMT, not all of 
which is yet reflected in available statistical information, is 
attributable in large part to recent legislation. The Taxpayer Relief 
Act of 1997, for example, modified the AMT depreciation adjustment to 
reduce the likelihood that investments in plant and equipment would 
cause a business to incur AMT liability. Most recently, the American 
Jobs Creation Act of 2004 repealed the AMT's 90-percent limit on the 
use of foreign tax credits, an inappropriate restriction that had 
resulted in double taxation of income earned in the global marketplace 
by U.S. companies.
    \5\ IRS Statistics of Income, op cit.
---------------------------------------------------------------------------
    Where the corporate AMT does continue to be paid today, its 
imposition can be viewed as wholly unfair. For example, the AMT's 
limitation on the use of net operating losses (NOLs) prevents companies 
from being able to carry back fully a current-year loss to offset taxes 
paid in prior years. This limitation only exacerbates the problems many 
companies face in struggling through business cycle troughs.
    Ironically, ``fairness'' considerations partly drove Congress to 
enact the AMT at the outset. Concerns had arisen that companies were 
``zeroing out'' their tax liability prior to the Tax Reform Act of 1986 
through use of investment tax credits, the ``accelerated cost recovery 
system'' of depreciation, ``safe harbor'' leasing, and other tax-
favorable items that have since been repealed or scaled back. The 
corporate tax landscape looks far different today, as the Joint 
Committee on Taxation staff noted in recommending repeal of the 
corporate AMT:
    The corporate alternative minimum tax does not necessarily produce 
a more accurate measurement of income after the depreciation, inventory 
and accounting provisions of the Tax Reform Act of 1986, and subsequent 
legislation, have become fully effective. Thus, the Joint Committee 
staff believes that the original purpose of the corporate alternative 
minimum tax is no longer served in any meaningful way. . . .\6\
---------------------------------------------------------------------------
    \6\ Joint Committee on Taxation, ``Study of the Overall State of 
the Federal Tax System and Recommendations for Simplification'' (JCS-3-
01), April 2001 at II-16.
---------------------------------------------------------------------------
    The Coalition would challenge anyone to argue how the corporate AMT 
system today advances the objective of fairness, or any other tax 
policy goal for that matter.
Negative Impact on Investment Decisions
    The corporate AMT operates as a significant disincentive for 
companies to make productive investments. For example, the AMT blocks 
the incentive effect of tax credits like the R&D credit. The AMT does 
not allow the R&D credit to offset AMT liability. The AMT also blocks 
utilization of R&D credits for many companies that do not incur AMT 
liability, since tentative minimum tax liability forms a ``floor'' that 
limits the amount of credits a company may claim against regular tax 
liability. Accordingly, for many taxpayers, the AMT thwarts the 
incentive to invest in U.S.-based R&D that Congress has long sought to 
provide. Meanwhile, remaining AMT limitations on depreciation operate 
as another disincentive, at the margins discouraging companies from 
investing in new plant and equipment.
    These investment disincentives kick in just when businesses most 
need to be retooling and investing for future growth. That is, a 
recession increases AMT liabilities, a counter-cyclical impact that is 
not disputed.\7\ For example, AMT liabilities jumped from $1.8 billion 
in 2001 to $2.45 billion in 2002.\8\
---------------------------------------------------------------------------
    \7\ See, e.g., Joint Committee on Taxation, ``Background Materials 
on Alternative Minimum Tax and Capital Cost Recovery Prepared for the 
House Committee on Ways and Means Tax Policy Discussion Series,'' (JCX-
14-02), March 2002 at 7.
    \8\ IRS Statistics of Income, op cit.
---------------------------------------------------------------------------
Compliance, Administrative Burdens
    The corporate AMT imposes extremely onerous--and well documented--
compliance and recordkeeping burdens.\9\ The AMT requires a calculation 
of a second income tax base and computation of a tax on that base. The 
result is that the AMT adds an additional layer of administrative 
burdens and complexity to the regular corporate tax system.
---------------------------------------------------------------------------
    \9\ See, e.g., General Accounting Office, Tax System Burden: Tax 
Compliance Burden Faced by Business Taxpayers (GAO/T-GGD-95-42, Dec. 9, 
1994); Andrew B. Lyon, Cracking the Code: Making Sense of the Corporate 
Alternative Minimum Tax (Washington, D.C.: The Brookings Institution), 
1997.
---------------------------------------------------------------------------
    One study has found that calculating the corporate AMT adds 16.9 
percent to a corporation's tax compliance costs.\10\ Moreover, these 
AMT compliance costs are incurred regardless of whether a corporation 
actually ends up paying any AMT. Companies first must undertake the AMT 
calculation to determine whether they are liable. All but the very 
smallest firms are required to perform the separate calculations. While 
most of the tax paid under the AMT comes from large firms, about 75 
percent of all AMT returns have come from small and medium-sized 
businesses.\11\
---------------------------------------------------------------------------
    \10\ Joel Slemrod and Marsha Blumenthal, ``The Income Tax 
Compliance Cost of Big Business,'' Public Finance Quarterly, 24 
(October 1996), pp. 411-438.
    \11\ General Accounting Office, Experience with the Corporate 
Alternative Minimum Tax (GAO/GGD-95-88, April 1995), p. 35.
---------------------------------------------------------------------------
    The Joint Committee on Taxation staff recommendation that the 
corporate AMT should be repealed was based in part on the premise that 
Congress should ``relieve corporations from computing their tax base 
using two different methods and complying with burdensome recordkeeping 
requirements.'' \12\
---------------------------------------------------------------------------
    \12\ Joint Committee on Taxation, ``Study of the Overall State of 
the Federal Tax System and Recommendations for Simplification'' (JCS-3-
01), April 2001 at II-16.
---------------------------------------------------------------------------
Conclusion
    Consequently, the AMT Coalition urges the House Ways and Means 
Committee to include as part of any tax reform legislation repeal of 
the corporate AMT and allowing taxpayers to utilize existing AMT 
credits on an expedited basis. Of course, the means by which taxpayers 
may recover AMT credits in a post-tax reform world may depend in part 
on what the new system looks like. That said, mechanisms easily could 
be developed in connection with any type of reform framework that would 
preserve, and quickly unlock, the value of these long-accumulated 
prepaid taxes. We look forward to working with the Committee to address 
this important issue.

                                 

 Statement of Arthur and Rita Miller, Reform AMT, Catonsville, Maryland

    Dear Chairman Thomas and Committee Members: My name is Rita Miller 
and I am writing on behalf of my husband, Arthur W. Miller, Jr and 
myself. It is regarding a huge tax debt that we incurred on phantom 
gains that were created by the application of the Alternative Minimum 
Tax (AMT).
    In November 1997, I took a job in Linthicum, Maryland as an 
Administrative Assistant for a start-up Internet security company, 
VeriSign, Inc. We incurred a huge tax debt starting in the year 1999 by 
exercising Incentive Stock Options (ISOs) I received while working for 
VeriSign, Inc. We read everything we could about stocks and taxes and 
everything pointed to exercising and holding the stock for long term 
capital gains. We enlisted the help of a reputable financial advisor. 
The advice from the financial advisor was to exercise and hold the 
stock so as not to incur the higher short-term capital gains rate. But 
unbeknownst to everyone, if you exercise and hold onto stock for the 
long term and carry it over a tax year, a tax called AMT (alternative 
minimum tax) can apply, and it did.
    All other assets, like real estate and stock purchased on the open 
market, are taxed based on the value at the time of the sale, when you 
actually receive a profit, not at the time of the purchase. Why aren't 
we just taxed when, and if, we sell the stock? That then would be a 
legitimate profit made and a legitimate tax due.
    Our total federal taxes due from the years 1999 through 2002 were 
$448,873. We managed to pay $314,784 by selling whatever shares of 
stock we had. This is not even to mention the amount that we owed to 
the state. We negotiated with the IRS and went on a payment plan to pay 
the remaining $134,089, likewise with the State. We never missed a 
payment until both my husband and I lost our jobs within a few months 
of each other in the year 2002. I was unemployed for over a year, my 
husband is still unemployed. I'll be 58 this year and my husband will 
be 60.
    We submitted several OICs and Appeals and the IRS rejected them 
all--stating that we had a house, a car and some retirement money and 
if we sold the house, the car or turned in the retirement, we could pay 
the ``phantom taxes'' we owed. We came to realize that after filing 
subsequent years taxes, that the IRS now ``owes us'' over $125,000 in 
credits. We owe them $124,000. We filed an OIC asking the IRS to accept 
our credit as payment. It was rejected. The last OIC we offered $30,000 
(provided by a family member) and our credit to bring our tax debt to a 
``paid-in-full'' status. Can you imagine our disbelief when we received 
the notice that the IRS is rejecting this offer too? They accused us of 
using ``delay tactics''. The IRS wants us to pay them in full, first.  
Then they want to give us back the $125,000 by allowing us to recover a 
small portion, approximately $3,000, of the credit per year! It is 
highly unlikely that my husband and I will live to recover all the 
credit due us. We would have to live to approximately 99and 97 
respectively to recover the entire amount. While awaiting a court 
hearing, they have put a lien on all our assets.
    A travesty occurred in our lives that added additional hardship. My 
husband, who has been unemployed since August 2002and spent more than a 
year of processing for employment with the Department of Defense, was 
notified that the DoD was withdrawing their offer of employment due to 
the outstanding IRS debt. They said that the tax issue ``brought into 
question his credibility and trustworthiness''. That he didn't meet 
their suitability criteria. At almost 60 years old where is he going to 
find another opportunity like the one with the DoD? We are hardworking, 
trustworthy and honest people. We have never avoided paying taxes and 
have always engaged in honest financial practices. We understand the 
AMT was put into place to make sure that the very wealthy people paid 
their fair share of taxes, but it's not working the way it was 
intended. There has to be some consideration for people like us, those 
of us that were caught in the AMT trap.
    This year we celebrated our 40th wedding anniversary, but for the 
past 5 years we have been living a nightmare. We fear that one day when 
we open our mailbox there's going to be a letter from the IRS stating 
that they are taking our home or making us liquidate our retirement to 
pay them taxes that are unjust and unfair.
    We respectfully seek the understanding of this Committee and plead 
with you to help rectify this wrong.

                                 

                                            Marietta, Georgia 30066
                                                      June 12, 2005
To Whom It May Concern:

    I will keep this brief. I just want it to be known that as a tax-
paying (yes I pay and do not get a ``refund''), law abiding voter that 
I am in full support of H.R. 25. As a working mother of two, as well as 
financially supporting parents, I see how social security and Medicare 
fall down financially in caring for those over the age of sixty-five. 
Even with other savings, it is still not enough to cover the external 
costs of insurance, medicines, general upkeep of a home, etc. The 
current system is perpetuating the current, causing aging parents to 
become a financial burden to their children and taking away their 
children's choice of wanting to work vs. having to work, in order to 
care for a family.
    I believe government spending should be audited and downsized as 
well in order for us to reap the FULL benefits of H.R. 25.
    Please do not take this bill lightly. It is time for change and the 
time is now so that we do not have to continue to force citizens to 
become financial burdens to the Federal Government.
    Thank you for your time and reading this email.

                                               Ashlyn Montague-Hill

                                 

            Statement of Nield Montgomery, Las Vegas, Nevada

Dear Chairman Thomas and Committee Members:

    My name is Nield Montgomery. I very much appreciate the opportunity 
to tell my story of suffering and hardship brought on by the 
application of the out of date and destructive rules for the treatment 
of Incentive Stock Options under the Alternative Minimum Tax (AMT) 
code.
    My difficulties and those of thousands of others were brought about 
by events never contemplated when the AMT was devised, i.e., the 
significant negative tax impact that happens with stock options when a 
company's stock price experiences a dramatic decline. At the risk of 
being too basic, please allow me a brief explanation of stock options. 
A stock option is the right to buy a share of stock at its current 
price (the strike price) at some time in the future. Non-Qualified 
Options (NQOs) and Incentive Stock Options (ISOs) differ in their tax 
treatment. I'll talk first to ISOs. When the option holder exercises 
the right to buy (obviously the current market price exceeds the strike 
price), they create an Alternative Minimum Tax (AMT) taxable event. The 
AMT treats the spread between the option strike price and the stock 
price when the option is exercised as income (otherwise called 
``phantom'' income). That is, even though there's no tangible income, a 
tax consequence occurs non-the-less. Now to be fair, when the AMT 
exceeds the regular tax owed calculation, the taxpayer gets a credit 
against taxes in future years (the credit's application is complex and 
can take years if ever to recover). A subsequent sharp decline in stock 
price does not alter the tax owed even if the stock price goes to zero.
    When the tech bubble burst, huge numbers of share owners were left 
with tax bills resulting from the AMT treatment of ISOs while their 
shares had become nearly or even totally worthless. Remember, the real 
value of the stock has nothing to do with taxes owed. What was supposed 
to be an ``incentive'' and accepted in lieu of cash compensation turned 
into a tax nightmare (an obligation to pay taxes where no income/gain 
was realized). People were forced to mortgage/sell their homes, take 
out loans, or sell what ever they could to pay these absurd tax bills. 
It seems incomprehensible the IRS would enforce such harsh collection 
measures for tax dollars that become a credit in the taxpayers account. 
This AMT tax treatment is complex and unfair and has caused untold 
financial hardship, ruin, and heartbreak. Side note: how does the 
government account for these prepaid taxes?
    The tax treatment for NQOs is even worse. Tax law requires the 
treatment of the NQO as an income event at the time of grant. The 
income results from the difference between the strike price of the 
option and the stock price on the grant date. This is without regard as 
to whether the NQOs are even exercised and, if they were, whether or 
not the shares were sold. Again, in a market such as we've experienced, 
a decline in the price of the stock is just a personal misfortune. The 
tax is owed even if the stock price goes to zero.
    Looking at the larger picture, I'm not sure anyone can assess the 
positive impact the awarding of stock options has had on our economy. I 
know their use has been wide spread and it's my opinion they've been a 
significant factor in holding down wages and inflation. Thousands of 
employees had been willing to accept below market wages in exchange for 
options. The belief was that by working hard and making their company a 
success, they'd have a share of that success. Unfortunately, for many, 
it didn't work out that way. If the negative tax treatment of stock 
options isn't fixed, their use as an incentive and benefit on holding 
down wages will be lost.
    Now for my story. By way of background, I worked 31 years in the 
telephone industry starting at the lowest entry level job and working 
my way to General Manager. In 1993, I left a good paying job to become 
and ``entrepreneur''. Two years later, I founded MGC Communications. 
Having worked my entire career in large impersonal corporations, I 
thought it was important that our employees be owners as well. We 
accomplished that goal by granting stock options to everyone who joined 
the Company. At the most senior level, we were able to hire very 
qualified people at compensation levels below market rates by 
sweetening employment packages with stock options. As a young Company, 
it was essential we conserve our cash. Since salaries and bonuses 
represented such a significant portion of on-going cost, the use of 
ISOs was an effective way to do that. ISOs also incented our employees, 
as owners of the Company, to really apply their talents to building the 
business.
    As the most senior officer/leader of the Company, I was committed 
to and embodied these goals. In lieu of a salary more typical of my 
position (my successor's annual salary was $500,000), mine was $150,000 
with ISOs as additional compensation. In lieu of cash bonuses (my 
successor's annual bonus was $500,000), I took ISOs. Little did I know 
of the tax nightmare lying ahead.
    Unlike many victims of this cruel conspiracy of events, I had 
access good tax planning help. My personal banker was with one of the 
largest public stock firms in New York. When he didn't have answers, he 
had the best talent available to him in the corporate offices. My 
accounting firm was one of the big five national firms. Like my banker, 
when they needed help, they turned to specific experts on their 
corporate staff. Yet with all this knowledge and talent, none of them 
really understood the complex treatment of options within the AMT.
    Here's what happened in my case. When I exercised my options in 
early 2000, the stock priced was $66 per share. Since the options had 
been granted in the early days of the business, the strike price for 
the options was very low. When the spread was calculated and the AMT 
rules were applied, I owed an additional tax of $4,400,000. Within six 
months of exercising my options, the stock had lost 90% of its value 
(the Company eventually declared bankruptcy). While the intended 
holding period for ISOs is one year, I was forced to sell shares sooner 
to raise the money to pay the taxes. To further compound the situation, 
I owed taxes on the shares being sold. In the end, I sold all the 
shares acquired thru options to pay the AMT and still ended up $200,000 
short. I have said many times jokingly, if the IRS would have accepted 
everything I owned in the Company in exchange for the AMT owed, I would 
have been money ahead.
    All I have to show for the experience is a substantial tax bill; a 
tax bill that resulted from a purchase event. I understand and accept 
the tax consequences when there's a purchase and sale which results in 
a net gain. What I reel at is the application of a 28 percent tax on 
the purchase of stock as though some form of gain had been realized. 
This is a virtual sales tax! And, as noted earlier, the tax code is so 
complex it was/is impossible to find anyone sufficiently knowledgeable 
to provide accurate tax planning.
    As I've talk to other people similarly situated, I've realized how 
pervasive this problem is. I also discovered there are three ways in 
which taxpayers deal with this issue. The first group, like me, 
reported the exercise event and faced the tax consequences. The second 
group knew they should report but chose not to. Since there's no 
reporting/tracking mechanism, the IRS doesn't know there's been a 
taxable event. The third group just didn't realize they had to report. 
Of the three groups, I believe those who reported were in the minority. 
One of the fundamentals in our tax code is the uniform application of 
the law. Clearly that did not happen here.
    As for reform, here are some ideas. Change the AMT formulas so this 
kind of injustice doesn't happen in the future. Those of us who have 
credits, at a minimum, make the credit directly applicable to all 
future taxes owed and not just a factor in the AMT calculation as it is 
now. At the extreme, send us a check equal to the credit (that would be 
a real ``rebate''; these are real dollars we've paid in excess of what 
we would have otherwise owed). And if you must hold our money, at least 
pay us interest at the rate the IRS charges us for late payments. 
Finally, if the AMT must continue, please insure it is indexed down 
proportionate to the regular tax rate schedule.
    As for the tax treatment of NQOs, stop treating the event as income 
at the time of grant. Taxes should be owed when income/gain is 
realized. That means determining taxes owed when the stock is sold. I 
would agree a portion could be treated as income and the change in 
subsequent stock price as a long/short term gain/loss.
    If I sound like a tax professional, I'm not. I'm one of the 
thousands of people granted options only to have this tax nightmare. 
I've become knowledgeable by default! I just couldn't believe I'd owe 
taxes for options granted when I hadn't received income or realized a 
gain. In hindsight, I would have been so much better off to have taken 
the pay instead of the options. I know thousands of others feel the 
same way (not a scenario that bodes well for business and our economy). 
At least I'd have the income to pay the related taxes. We need your 
help; fix this injustice!

                                 

             Statement of David W. Moyle, Beaverton, Oregon

Dear Chairman Thomas and Committee Members:

    Thank you for the opportunity to express my views on this important 
matter. I am a hard-working upper middle class citizen who has 
experienced what I believe are unintended consequences of the 
Alternative Minimum Tax. Below are my views:
    The Alternative Minimum Tax is bad government policy on a number of 
fronts:

      It is unfair
      It has stifled economic recovery
      It is difficult to understand and creates taxpayer 
resentment

    My situation is this: I am a mid-level manager at Intel Corporation 
where I've worked for over 20 years. During my first 10 plus years at 
Intel I received incentive stock options. During the late 1990s and 
early 2000, the value of these options soared about the same time they 
were set to expire. Believing in Intel's long-term future, and the 
under the assumption that long-term gains would be taxed more favorably 
than short-term gains, I purchased the shares and held them. As a 
result, I began to trigger the AMT.
    For the year 2000, in particular, I generated more than $400,000 in 
AMT based on paper gains from the purchase of incentive stock options. 
This amount was over four times my base salary. When the price of Intel 
stock fell before my taxes were due, going from a high of $75 to an 
eventual low of under $13 per share, my alternatives were to sell my 
shares to pay my taxes and have very little left, or take out a loan 
and hold onto the shares in the hope that Intel would rise again 
someday. I chose to borrow. The stock has never fully recovered, and to 
this day, I still carry a loan. I now have about $575,000 in AMT 
``credit,'' much of which I will probably not get back. The AMT tax I 
paid was based on phantom profits . . . in other words, money I never 
made.
    Below is why I believe the AMT is unfair, has stifled economic 
recovery, is very difficult to understand, and has created taxpayer 
resentment.
The AMT is Unfair:
    Phantom gains and Enron-style accounting: In calculating the AMT, 
taxpayers must calculate paper gains on stock option shares purchased, 
but not sold, and treat the phantom gain as if it were real income. In 
other words, no profit has yet been made. The regulations practically 
require us to do Enron-style accounting to show phantom profits as if 
they were real, and then pay taxes on them.
    It's not really a credit: As I began to pay AMT taxes and build a 
``credit,'' I naively assumed I would get this back once I finally sold 
the stock. Theoretically, this could happen if the stock reached the 
former lofty heights of the dotcom era and if I were able to wait that 
long. Most of us get only a portion of this ``credit'' back, at a rate 
of only $3000 per year. At this rate, I would have to live to be well 
over 200 years old to recoup the credit.
    Interest free loan to the government: If we under-pay taxes, the 
IRS assesses interest on taxpayer accounts until we pay in full. In the 
case of AMT, I have grossly overpaid my taxes, and rather than 
receiving interest from the government for my pre-payment of taxes, I 
had to take out a loan to pay taxes on money I never made. In essence, 
I have given a $575,000 interest free loan to the government . . . and 
the government will in all likelihood return only a fraction of the 
loan.

The MAT Has Stifled Economic Recovery:
    Discretionary Income Has Gone to Payoff Loans Used to Pay Taxes: 
Because AMT taxes on ISOs were based on phantom profits, many of us did 
not have the cash to pay our huge tax bills when the stock market 
crashed. In my case, I had to take out a $375,000 loan to pay taxes. 
Interest payments on my loan were double my house payments, and my loan 
size grew because my income was insufficient to pay the interest. Prior 
to having the huge tax bill, I was shopping for a mountain cabin to 
enjoy with my kids while they're still living at home. We scrapped this 
plan. We were planning an international vacation. We scrapped this, 
too. We planned to make some upgrades to our home. We scrapped this 
plan as well. Basically, all our discretionary income went to pay 
interest on our loan to pay taxes ON PROFITS WE NEVER MADE.
The AMT is Very Difficult to Understand:
    Confusing and Contrary to Existing Tax Incentives: The AMT requires 
us to calculate our returns two ways. A ``credit'' is not really a 
credit. A paper profit is treated as a real profit. It is very 
difficult to do financial planning because many tax incentives and 
normally wise investment strategies, such has holding investments for 
the long term, actually put us at great risk with AMT. Rather than 
encouraging long-term investment and ownership in our companies, the 
AMT encourages us to ``cash out'' for short-term gains.
    Taxpayer Resentment: Although I can't say I have always enjoyed 
paying my taxes, I had always viewed it as a necessary responsibility 
of citizenship. The AMT, however, has left me very confused and 
frustrated and quite frankly resentful of our tax policy. I feel that 
the government has taken advantage of me. I feel ``robbed.'' The U.S. 
Government as been the beneficiary of my stock options; by contrast, 
I've paid a penalty. After years of growing my equity, I am now in 
worse financial shape than I was 5 years ago because I was taxed on 
profits I never made. To date, little of consequence has been done to 
address this unfair and complex tax. My hope is that your Committee 
will be able to do something. In priority order, I would have you:

      Refund ``credits'' . . . or let us use the credit against 
all taxes owed, not just future AMT taxes. If this is not done, at 
least pay fair market interest on the ``loan'' and speed up the process 
of giving our money back.
      Eliminate the AMT altogether . . . or go back to the 
drawing board and address the reasons it was created in the first 
place.

                                 

                                              Bozeman Granite Works
                                             Bozeman, Montana 59715
                                                       June 7, 2005
Dear Sir or Madam:

    I respectively request that you support the end item retail 
taxation method known as FAIR TAX and elimination of the 16th amendment 
and all income taxes on USA labor.
    I am a small businessman that runs a manufacturing and retail 
business with a storefront on a major retail avenue. My operation 
requires three full time employees and two part time people. As all 
businesses adding value to a product through manufacture, stocking an 
inventory, sales or any number of activities requiring labor I am 
confronted at least weekly with the taxes on the labor we politely call 
``income tax''. I, as all businessmen, am required to add all taxes 
that are paid, to the price of the end product. What I'm trying to 
convey here is that all taxes, and specifically income tax, is just an 
added value tax. The person, company or corporation that digs the raw 
materials adds income tax to the price of the raw materials, the 
person, company or corporation that transports the raw materials pays 
income tax and adds the tax(s) the transported raw materials, and on 
and on and on, until the product is sold at the retail store. The point 
I'm making is, income tax is added to the price of the completed 
product at all levels of production making it simply an added value 
tax. In other words at any time during the manufacturing, distribution 
and sales of product that value is added to a product we tax it in the 
form of income taxes.
    Added value is not that bad? Yes it is. We only tax our domestic 
production and tax it and tax it. The tune of 50,60,70,80% and some 
products that are heavy in labor 120+% of actual value (untaxed costs). 
We are forced to compete with foreign products that are not taxed in 
the country of origin nor here. Import dudies or taxes of 1, 2, or even 
10% on the untaxed costs of foreign production is basically nothing.
    I am lucky. The vast majority of raw materials, semi finished 
products and finished products that I either add value by finishing the 
production or retail directly are made in USA. They fall in the heavy 
labor category, I manufacture granite monuments. Foreign materials and 
semi finished production is on it's way to displace the domestic. The 
commercial market for natural stone 10 year ago was completely USA and 
now is completely foreign, the handwriting is on the wall; I'll be 
forced to purchase foreign production to stay in business within the 
next 5 years. The loss to our economy will be thousands and thousands 
of 20, 30, and 40 dollar/hour jobs. These highly skilled craftsmen will 
be shoveling burgers for the importers and retail owners. These people 
won't be paid enough to pay taxes, they won't have high paying jobs. 
Please understand the rich aren't getting richer and poor aren't 
getting poorer. The middle class is shifting from high paying 
production jobs to low paying service jobs due to foreign markets 
caused by added value taxation on our production.
    Fairtax is the only way out of this. We need to shift the taxation 
to the end item retail. It's there on domestic production anyway. It's 
about time we placed the same tax burden on the foreign retail here in 
the USA. Please understand that we already add the taxes to the 
domestic production and pay whatever that is at the retail end. Please 
understand that prices on domestic production will not change. Food, 
housing, clothes and all other ``necessities'' are still being produced 
domestically and will not change in price. The beauty of end item 
retail taxation will allow domestic production to expand and even take 
some of the current foreign markets and even compete internationally 
with like products. This will create vast quantities of high paying 
production jobs. In other words more money in the hands of more people 
resulting in more consumption and more tax dollars.
    There are three civilized ways to collect taxes. Fees, the USA 
constitution established a fee system. If you wanted to be a citizen 
you paid an equal share of federal taxes (consult the body of the 
constitution). Fees are color blind, sex blind, handicapped blind, 
anyone who wished could pay the tax and have say in the country. Bill 
gates and a hobo would have the same opportunity. Our country operated 
for more than half it's life on the fee principle of taxation and is 
probably the best system. Number 2, value added is the current system. 
The worst of the three. Value added can tax only domestic production. 
Any changes in production such as imports will displace domestic 
production causing low tax basis and loss of tax revenues. Worse yet 
added value through income taxes results in imports taking high paying 
jobs, poverty and no tax basis. The third is consumption tax (retail 
end sales tax) or Fairtax. Basically put, no taxes are added to 
domestic production until they are retailed. Foreign production burdens 
the same tax, underground economies burden the same tax, collection is 
at a small number of locations, consumption is more consistent than 
income. High paying jobs come back to our country. I can see no down 
side.
    Please support the Fairtax.
            Thank You,
                                                    Thomas M. Olson

                                 

                                        Cupertino, California 95014
                                                      June 20, 2005
Dear Chairman Thomas and Committee Members:

    I am writing to ask for your support and would appreciate your 
taking a moment to read this letter.
    My name is Kimhoe Pang. I am a software engineer of Network 
Appliance. I exercised some stock option in year 2000 under the 
Incentive Stock Options (ISO) scheme. I did not sell any of the 
exercised stock to get profits. The ISO exercise created a huge AMT 
tax. I have $367,684.00 tax due in 2000. It amount is more than 3 time 
of my annual salary. This tax payment actually becomes a credit and can 
never be recovered by me. In essence, I can lose all the investment 
money, and also other assets, simply to create a tax credit in my IRS 
account.
    Due to the stock crises in 2000, I did not have enough money to pay 
tax. I filed an Offer in Compromise (OIC) and the OIC was denied after 
two and half years. IRS has started the collection process and has put 
a lien on all my properties. I am the only one who brings income to my 
family. My family (five people) still live in a two bedrooms rented 
apartment. However, the IRS officers told us that they only concern 
about the tax we have not paid. They are regardless about the fairness 
of the tax.
    We are still facing financial crisis. IRS already starts collection 
process. We have to pay the huge tax that is base on the profit we 
never make.
    We need your help to have the IRS to stop the collection 
activities. We respectfully ask that you further investigate the 
disastrous consequences of the Alternative Minimum Tax and please 
support all efforts towards reform.
            Sincerely,
                                                        Kimhoe Pang

                                 

                                         Issaquah, Washington 98027
                                                      June 17, 2005
Dear Chairman Thomas and Committee Members:

    In 1997 I went to work for a new internet company, Exodus 
Communications, who granted sales employees pre IPO stock shares upon 
hiring. After the IPO and some time of employment I hired a financial 
planning firm to advise me on how to best handle these options. I was 
advised to exercise the options as they became available and then hold 
for one year from that date before diversification. I took this advice. 
During this time between 2000 and 2001 (within several months) the 
stock fell from the high $100s per share to landing at less than $10. I 
was laid off in May of 2001 when we finally sold our shares at $.10 
after Exodus's bankruptcy.
    I was laid off just before Exodus declared bankruptcy and found 
myself unemployed for 7 months. Meanwhile, we had to sell our house and 
all other valuables to make it through this period financially. My 
husband had quadruple bypass surgery unexpectedly in 2001 causing 
further financial difficulty and personal stress. We have not recovered 
from the financial challenges that losing my job, stock value and 
medical bills caused our family, not to speak of the outstanding 
balance expected by the IRS for AMT fees.
    Since 2001 we have been attempting to work with the IRS as the 
amount they calculated we owed them based on the AMT value is over 
$600,000. As you can tell from this writing we incurred a huge loss on 
the ``ownership'' of these granted shares. The IRS denied our Offer In 
Compromise and has not proactively worked with us. We have retained 
counsel to help us try to avoid all collection issues with the IRS and 
had to borrow money exceeding $15,000 to gain representation.
    We have no means to pay the IRS and, of course, feel there is no 
real debt to re-pay. This has been going on for nearly 5 years with a 
lien on our credit and ongoing fees to attorneys to keep collection at 
bay. The next step is the IRS waves our fees or we must declare 
personal bankruptcy. This AMT situation seems completely unfair and not 
the proper application for its original intention. We join AMT Reform 
in asking Congress to instruct the IRS to hold off on current 
collection efforts until new legislation can be addressed.
                                            Bob and Susan Pessemier

                                 

                                        Sunnyvale, California 94086
                                                      June 17, 2005
Dear Chairman Thomas and Committee Members:

    Thank you for taking on the very important task of investigating 
the tangled web of our current tax system with the goal of implementing 
a simpler, more equitable system.
    We respectfully ask that the committee examine the current tax 
system's shortcomings with respect to individual taxpayers' ability to 
recover AMT credits. We are a two-income household (both with full-time 
jobs as individual contributors--not managers or company officers) with 
three young children living in California--a high-tax state, as you 
well know.
    As a result of exercising and holding (to qualify for the long-term 
capital gains tax rate) Incentive Stock Option (ISO) shares in 2000, we 
incurred a Federal AMT bill of several times our normal annual income. 
Luckily, in that year we sought and received sound advice on the AMT 
implications of that plan. Between doing same-day-sales in 2000 on 
remaining ISO shares and taking out a loan against a 401(k) retirement 
account, we were able to meet our AMT obligation on April 15, 2001. 
Thus, we have not run afoul of the IRS and have not had to worry about 
losing our home, unlike many others who exercised and held ISOs during 
that time period.
    With the large decline in the stock markets since 2000, the shares 
we still hold are worth a small fraction of their value upon exercise. 
So, at this point the government is holding our entire gain 
(representing many years of hard work) from the ISOs in the form of a 
large AMT credit. Please also note that for tax year 2000 we paid (on 
shares that we purchased then, but have held for five years now) at the 
AMT rate of 28%, while under the current law our long-term capital 
gains rate upon sale would be 15%. The mandatory pre-payment of tax 
under AMT was at almost double the rate that the regular tax system 
requires!
    When we first saw the size of our AMT credit, we thought we would 
be lucky to finish recovering it before we both died of old age. After 
filing our last four tax returns, though, we see that unless something 
changes we will never recover the vast majority of that credit during 
our lifetimes.
    Here is how much we've been able to recover, on a percentage basis, 
for the 2001-2004 tax years. (Note that our tax returns for these years 
have included no other extraordinary events.)

    Tax Year   % of AMT credit recovered

      2001        0.56%
      2002        0.17%
      2003        0.13%
      2004        0.00%
                ------
       Total      0.86%

    Less than one percent of our AMT credit has been recovered in the 
four tax years since the credit was established! And the trend down to 
zero in 2004 does not bode well for future years.
    Under the current tax law we have very little hope of recovering 
this interest-free loan to the government. These funds would go a long 
way toward ensuring that we will be able to afford college educations 
for our three children.
    Please find a way to accelerate individual taxpayers' ability to 
recover AMT credits!
    Thank you very much for your consideration.
            Sincerely,
                                                         S. Pintner
                                                         D. Pintner

                                 

           Statement of Philip Priddy, Baton Rouge, Lousiana

Alternative Minimum Tax effects spreading

Filers must pay extra to the IRS

Friday, April 15, 2005

By Bill Walsh

Washington Bureau
    WASHINGTON--Every April 15, Americans are reminded just how much 
they dislike paying taxes on their income. Philip Priddy is still 
paying off a $220,000 tax bill on money he never made.
    Priddy, a Baton Rouge sales manager for Nortel, was forced to 
liquidate his savings, sell his boat and his wages are still being 
garnisheed by the Internal Revenue Service to pay off his debt. 
Although an extreme example, he is among a fast-growing segment of 
Americans who are feeling the pinch of the Alternative Minimum Tax, or 
AMT.
    The tax originated in the late 1960s to target super-rich people 
who employed clever accountants to shield their income from the long 
arm of the IRS. But because it hasn't kept pace with wage inflation, 
the U.S. Treasury estimates that 3.8 million Americans this year will 
have to pay an AMT on top of their regular income taxes.
    Most are upper-middle-class people making a comfortable living, but 
that will soon change, according to the Congressional Budget Office. By 
2010, the agency said, nearly 30 million Americans--20 percent of all 
taxpayers and 40 percent of married couples--will have to pay the extra 
tax. By then, it will hit two-thirds of taxpayers with adjusted gross 
income between $50,000 and $100,000, the agency projected.
    ``It is growing every year and taking in people who were never 
intended to be hit by the AMT,'' said Rep. Jim McCrery, R-Shreveport, 
who has filed a bill to repeal the AMT. ``It is already too pervasive 
in our tax system.''
    Most taxpayers probably skip right over the line on their 1040F.

                                 
                                             Network Appliance Inc.
                                         Barrington, Illinois 60010
                                                      June 20, 2005
Dear Chairman Thomas and Committee Members,

    I am a sales manager in Illinois and work for a high tech company 
in Sunnyvale, CA., Network Appliance. I have paid my federal and state 
taxes every year since the age of 16 until 2000 & 2001 when AMT took 
over my families' life.
    I obtained both a blessing and a curse when Network Appliance stock 
options became valuable and eligible to exercise. I followed expert 
guidance on tax issues in regards to ISO options and exercised and held 
all vested ISO options in 2000 & early 2001. The market collapsed, the 
AMT tax bill came due and subsequent loan cover calls collapsed any 
value left from the options. These events created a $900,000, and 
growing, tax liability with no shares or share value left to pay the 
tax bills of 2000 and 2001.
    The tax bill was more than my family was worth by a factor of 
three. We are on a payment plan with the IRS but it does not allow us 
to cover monthly bills eight of the 12 months a year.
    It has put a tremendous emotional strain on our family, especially 
my wife. From her perspective we were taxed on something we never had.
    We have paid our taxes every year after and expect to for the rest 
of our lives.
    The AMT ISO tax laws should have been written to treat vested ISO 
options as standard common stock with standard short term or long term 
capital gains to be applied based on vesting periods. If the law had 
been written as such in 2000 and 2001, we would have paid 5X the amount 
in taxes to the IRS and the state of Illinois. Our family would also 
have had several millions to both invest as well as contribute to 
various previously identified charities.
    The U.S. treasury, the state of Illinois, the economy, several 
charities, and my family would all in better shape if the tax laws were 
written in better balance with today's stock option equity employment 
situation.
                                               Michael T. Pritchett
                                             District Sales Manager

                                 

           Statement of Gregory Ralph, San Diego, California
    My name is Gregory Ralph and I am writing on behalf of myself, my 
wife Nikki, and our four pre-school/elementary school age children. We 
appreciate the opportunity to discuss the inequities we have 
encountered due to the application of the Alternative Minimum Tax (AMT) 
on Incentive Stock Options (ISOs).
    In the late 1990s, I was working as an electronic design engineer. 
As a co-founder of JNI Inc., I was granted Incentive Stock Options 
(ISOs). As was Congress's intent, the ISOs encouraged the founders to 
hold their stock and build a thriving and profitable company, which we 
grew from an initial 11 person staff in 1997, through an IPO in late 
1999, to a company employing over 200 people and generating annual 
revenues of over $100M in 2000.
    In my case, and similar to many others, as a result of the AMT 
treatment on the exercise of those ISOs that subsequently declined in 
value from the date of exercise, I ended up being taxed at a federal 
tax rate of over 60%. The reward for creating a successful company 
should never be that the IRS gets more out of it than the entrepreneur 
(in some cases more than 100% of it), as this is a clear disincentive 
to starting and growing a business. I know this result is clearly 
contrary to the intent of Congress in creating the ISOs, and is rather 
due to an unanticipated flaw in the complicated AMT treatment of ISOs 
that decline in value, resulting in huge taxes on phantom paper gains 
that were never realized.
    This tax might also be known as the ``Honest Hardworking 
Entrepreneur Tax'', since it only affects those dedicated hardworking 
employees who hold on to their stock options after exercise (as the 
`Incentive' in `ISO' implies) and who are honest enough to report their 
option exercises to the IRS after market loses leave them owing more 
AMT than their stock may be worth. After paying my unfair share of tax, 
I have since found out that anyone who simply did not report the 
options exercises on their tax forms probably got away with not paying 
the tax, since there is

no employer reporting of ISO option exercises to the IRS. This is 
clearly not fair and needs to be rectified.
    Another clearly unfair and confusing aspect of this complex and 
stealthy part of the tax code is the AMT credit. My understanding was 
that the AMT ISO tax is a prepayment of future taxes owed such that 
when the stock is sold, the credit can be recouped. To my dismay, I 
found out after selling all my stock that this credit was very 
difficult to recoup if the stock price had not appreciated since the 
time of exercise. Unlike a true credit in the common understanding of 
the term, this credit is not immediately refundable to the taxpayer 
upon sale of the stock as one would reasonably assume it should be. The 
result is that in addition to staggering market losses on my company 
stock over a period of only a couple months (during which I was locked 
out of trading by insider trading rules and could not sell to prevent 
the AMT tax prior to the end of the calendar year), the IRS is also 
keeping my huge tax overpayment ``credit'' indefinitely.
    My ``credit'' has essentially become a long term interest free loan 
to the government of around $700,000 that I am not likely to fully 
recover even over the next 50-years or more, even by applying a portion 
of the credit each year to 100% of my annual tax bill. To compound 
matters further, the IRS has arbitrarily decided to further limit the 
amount of credit a taxpayer can use against regular income. The IRS has 
imposed this change in the law by a change in the form 1040 
instructions with no clear legislative authority.
    Legislative action is clearly needed to restore fairness, increase 
compliance, and bring the AMT treatment of ISOs in line with original 
congressional intent of encouraging long-term ownership of company 
stock without unduly and severely punishing those who do. I urge this 
committee to work toward implementing a swift and fair solution to this 
ISO AMT problem. The fix should include prompt return of prior excess 
AMT credits after the sale of the stock that generated the AMT, re-
alignment of the valuation date for AMT to correspond with the one year 
long term gain holding period of ISOs to restore the initial intent of 
ISO AMT while eliminating the AMT ``trap'', and mandatory ISO exercise 
reporting to ensure future compliance.
    We need this committees help today to correct the injustices caused 
by the ISO AMT. I ask not only for my own family which has been harmed 
by the ISO AMT's effects, but also for the many others who have lost 
everything to this man made disaster that has washed away their 
retirement funds, college funds, their homes, even garnished portions 
of their future livelihoods. If this were a result of a natural 
disaster anywhere in the world, this compassionate country would come 
to their aid. The reality is that hard working entrepreneurs right here 
in the USA are being destroyed by this ISO AMT disaster, and the only 
relief they need is the return or abatement of their tax overpayments 
such that they are only taxed on income they actually receive. It is 
not too much to ask. It is the fair and just thing to do. We have faith 
that this committee will act swiftly and appropriately to enact a fair 
and equitable solution. Thank you.

                                 

                       Statement of ReformAMT.org

    To the Honorable Chairman Thomas and the Honorable Members of the 
Ways and Means Committee:

    Thank-you for allowing ReformAMT the opportunity to communicate the 
urgent need for legislation addressing the life-destroying impact of 
the Alternative Minimum Tax (AMT) and its treatment of Incentive Stock 
Options (ISO). The average individual in our organization faces tax 
rates that exceed 300% of their income.
Introduction
    Formed in April 2001, ReformAMT is a national grass roots 
organization whose mission is to educate, correct, and prevent the 
injustices created by the ISO AMT and its inappropriate means of taxing 
Incentive Stock Options, which are intended to be a form of 
compensation. We have members in 48 different states, plus Puerto Rico 
and the District of Columbia.
    Through ReformAMT, we plead with Congress to correct this flawed 
tax code that has resulted in financial devastation for not only our 
members but also thousands of others across the country who are too 
embarrassed or discouraged to publicize their dilemma. Originally 
intended to ``ensure that a very small group of high-income individuals 
who paid no income tax would pay at least some income tax'',\1\ the AMT 
has hit hardest those honest, hard-working employees who traded longer 
work hours, lower salaries, fewer benefits, and job security for stock 
options that might someday provide for their children's education, 
assist in purchasing a home, or help fund their retirement. 
Unfortunately, caught in the AMT trap, these workers were forced to pay 
taxes on money they never received and never will receive. 
Consequently, they are losing or have lost their homes, education 
funds, and retirement funds.
---------------------------------------------------------------------------
    \1\ Robert Carroll, Deputy Assistant Secretary (Tax Analysis), 
submitted a paper to the President's Advisory Panel on Federal Tax 
Reform on March 7, 2005, entitled: ``The Fact Sheet: The Alternative 
Minimum Tax''
---------------------------------------------------------------------------
    These people were committed, dedicated, and loyal to their 
companies. ``Hold for the long term'', ``be a part of the company'', 
and ``don't dump and cash in'' was the advice of brokers, Certified 
Public Accountants, financial advisors, and the companies themselves. 
However, as we all now know, the Incentive Stock Option AMT provisions 
tax when you buy, NOT when you sell, forcing these workers to pre-pay 
taxes on stock gains they never realized. To add insult to injury, 
these taxpayers have honestly complied with this self-reported tax. 
While the IRS machine destroys their lives, they have watched many of 
their fellow coworkers go unharmed by simply omitting the reporting of 
the stock option transaction.
Demographics
    These are the results of a recent survey of our members in April 
2005:

      65% of our members affected by AMT are secretaries, 
engineers, lower level managers and other rank & file employees (as 
opposed to Managers, Executives and Founders).
      Our members owe or owed an average of $322,428 in ISO AMT 
over and above what they would owe under the regular tax code for 
income received (that is 100 times what the average taxpayer hit with 
AMT pays in additional taxes, according to testimony by the GAO at a 
recent Senate Hearing).
      Our members' average tax rate was 355% of their income.
      Our members have an average outstanding AMT credit of 
$213,620 due to their overpayment of taxes. With the current annual 
deduction for AMT credits of $3,000 per year, it will take 71.2 years--
more than a lifetime--to finally recover their overpayment credit. 
Also, this credit does not accrue interest--on the flip side--
individuals who still have outstanding liabilities are expected to pay 
interest and penalties on this tax prepayment.
      Because of the extreme difficulty/impossibility of paying 
huge taxes on money never received, about 3% of ReformAMT members have 
filed bankruptcy, with another 18% admitting they are considering 
bankruptcy.
      For every 2 people who complied with the AMT regulations, 
there were 3 people who did not, taking advantage of the fact that no 
independent reporting exists.
      For every 4 people who complied, there was 1 person who 
expatriated rather than have their lives destroyed by working the rest 
of their lives to pay taxes on income they never received.
      We know of 2 members who committed suicide due to the 
horrendous effects this ISO AMT tax had on their lives.
Flaws of the AMT Treatment on ISOs that Distort Business and Personal 
        Decisions and Create Unfair and Unjust Results for Hardworking 
        Americans.
    Tax Date Flaw--The regular tax code provides significant incentives 
to hold on to the stock and grow the company. However, the AMT imposes 
tax on the purchase date, not the sale date, making the tax rational 
only in a bull market. In a down market, the AMT can result in 
unreasonable and totally disproportionate tax rates, easily exceeding 
an individual's income or even exceeding an individual's entire net 
worth.

      Complexity Flaw--Due to the complexity of the AMT, 
investment counselors and ``tax experts'' are frequently unable or 
unwilling to give proper advice to constituents about the consequences 
of the ISO AMT. Many people were completely bind-sided by the AMT 
despite getting professional advice on how to treat their stock 
options.
      Reporting Flaw--The exercise of incentive stock options 
is not reported to the IRS by the company or by the broker--it is only 
reported by the individual, making it a self-reported tax. Thus, the 
ISO AMT provisions punish those who are honest and reward those who 
fail to accurately report their taxes under the AMT code (either 
through ignorance or intent).
      Credit Flaw
          ISO AMT credit can easily outlive a taxpayer, since 
        it can be applied only to the difference between the AMT and 
        regular income tax. For those who are ready to retire and who 
        have responsibly saved their entire lives to provide for a 
        proper retirement, the ability to recoup the credit can be 
        impossible.
          The credit that is generated does not pass along to 
        your family or estate.
          The government does not pay interest on the credit.
      Tax Rate Flaw--Taxpayers exercise and hold stock options 
in order to pay 15% long-term capital gains tax at sale, but AMT forces 
them to instead pay 26 to 28% tax in advance. Thus, the AMT drastically 
exacerbates the risk of holding for long-term capital gains and 
discourages the economically beneficial practice of holding stock.
      Encouraging the Wrong Behavior Flaw
          The combination of the Tax Rate Flaw and Tax Date 
        Flaw results in encouraging behavior that is at odds with the 
        goals of the company and the country (ie--forcing people to buy 
        and sell short term and relinquish ownership in their own 
        companies).
          The combination of the Reporting Flaw along with the 
        horror stories of IRS enforcement has discouraged compliance 
        and undermines confidence in the government.

Unintended Consequences
    In order to pay their AMT bills, taxpayers have been forced to 
liquidate much or all of their assets, including savings, retirement 
accounts, and children's college funds. Many have lost their homes. 
Some are forced to take out second mortgages and loans in order to 
comply with this pre-payment of tax. Others are forced into bankruptcy 
or expatriation.
    Those who have attempted to resolve their outstanding liabilities 
through the IRS's Offer in Compromise (OIC) program have faced 
rejection after rejection. The offers often take years to resolve and 
result in unrealistic IRS demands, requiring the taxpayers to live at 
or below the poverty line. According to Nina Olsen's (TAS) 2004 report 
to Congress, only one OIC submission under the use of Effect Tax 
Administration (ETA) was accepted that year. The Tax Court recently 
upheld the IRS position on its refusal to consider the Section 7122 
``equity and public policy'' considerations of the offer in compromise 
process for ISO AMT, stating that while it sympathized with the 
taxpayers, the remedy rests solely with Congress.
    The emotional and financial hardship caused by the AMT's treatment 
of ISOs has taken its toll on thousands. Marriages and families have 
suffered under the daily stress of dealing with the IRS; they have 
divorced, decided not to have children or to adopt children; their 
friends and parents watch in horror as their loved ones lose an entire 
life's work because of how the AMT can force them into pre-paying taxes 
on stock for which they never received gains (for individual stories, 
visit www.reformamt.org). Meanwhile, those who did not comply with the 
law are leading their normal lives.
    Aside from the obvious ``un-American'' treatment of imposing taxes 
based on no realized gain, the effects also reach beyond individuals 
and families. The ISO AMT provisions are destroying and stifling the 
productivity, innovation, and companies that contribute greatly to 
America's economic success and growth. It undermines confidence in the 
tax system, encouraging non-compliance. These effects cannot be what 
Congress intended.
Request for Relief
    Now, with the new bankruptcy laws going into effect in a few 
months, ReformAMT respectfully asks the Ways and Means Committee to 
consider an immediate and critical solution that will:

      Put a ``stay'' on IRS enforcement of this excessive tax 
prepayment and abate the liabilities, interest, and penalties based on 
phantom gain; and
      Restore taxpayers ISO AMT prepayment credits as quickly 
as possible.

    The law as related to the AMT treatment of ISOs is fundamentally 
unfair and flawed, and comes at a tremendous cost to taxpayers. Our 
members are struggling with huge tax bills and IRS collections. They 
have pre-paid taxes from stock compensation for which they never 
received economic gain. Some of the companies whose stock was affected 
are now out of business. Our members are on the brink of financial 
ruin, suffering anxiety and depression that is so severe, it is 
destroying their daily lives. Please help us.
    Thank you for your time. We hope that you will take our voices into 
consideration.
            Sincerely and gratefully,
                                                      ReformAMT.org

                                 

                                           Cedar Rapids, Iowa 52403
                                                      June 18, 2005
Dear Chairman Thomas and Committee Members:

    The Alternative Minimum Tax Law currently requires citizens to pay 
huge amounts of taxes on imagined gain that the taxpayer may never 
realize.
    When my husband and I exercised stock options through his employer 
as a portion of our retirement fund in 2000, we did not know about the 
Alternative Minimum Tax. There was a large difference between what we 
paid for the stock and the stock's value at the time of exercising. 
Unfortunately, as complicated as the law is, it does not account for 
the possibility that stock might decline substantially before the 
taxpayer could sell it, so we had to pay over $40,000 in Alternative 
Minimum Tax on stock that has a current value of under $1000.
    We paid half our entire income for one year! We, in effect, prepaid 
taxes on income we never received to generate credits we may never 
receive. This tax on phantom income is unjust and must be reformed.
    Thank you for your help.
                                         Floyd and Robbin Rekemeyer

                                 

                                                       June 8, 2005
Dear Sir, Madam,

    I am an American expatriate living on very modest income and 
concerned by proposals which could result in double-taxation for the 5 
million Americans living abroad, with no true representation in 
Congress on matters of concern to expatriates.
    We are the only nation which subjects its citizens and green card 
holders living abroad to extraterritorial taxation. This is an 
infringement upon the freedom of Americans to choose their place of 
residence, as compared to the freedom enjoyed by the people of every 
other free industrialized nation. It is detrimental to the U.S. economy 
by depriving U.S. products of the American salesmen and buyers employed 
in foreign countries who can best promote and import these products.
            Thank you.
                                                    Rebecca Reynaud

                                 

 Statement of Garth Rieman, National Council of State Housing Agencies
    Mr. Chairman, Representative Rangel, and members of the Committee, 
thank you for the opportunity to submit testimony on the importance of 
preserving the Low Income Housing Tax Credit (Housing Credit) and tax-
exempt private activity housing bond (Housing Bond) programs in any tax 
reform you undertake. The National Council of State Housing Agencies 
(NCSHA) provides this testimony on behalf of the housing finance 
agencies (HFA) of the 50 states, Puerto Rico, the U.S. Virgin Islands, 
and the District of Columbia and the tens of thousands of lower-income 
families these agencies house each year with the help of Housing 
Credits and Bonds. HFAs administer the Housing Credit and issue Housing 
Bonds in every state to finance affordable ownership and rental 
housing.
    NCSHA is deeply grateful to this Committee and the Congress for its 
steadfast support of the Housing Credit and Bonds. Over 85 percent of 
the Congress, including most members of this Committee, cosponsored 
legislation enacted in 2000 to increase Housing Credit and Bond 
authority by nearly 50 percent annually.
    The Housing Credit and Bond programs are by far the most effective 
tools states have to respond to their enormous affordable housing need. 
With these programs, HFAs have provided millions of working families 
affordable ownership and rental housing and improved the quality of 
neighborhoods across the country.
    NCSHA also recommends Congress make the already successful Housing 
Bond and Credit programs work even harder for America with a few 
changes, many at low or no cost to the Federal Government, to make them 
even more flexible and responsive to state housing needs.

The Nation's Affordable Housing Crisis
    America's need for affordable housing is great and growing. More 
than 14 million working families of modest means in this country spend 
at least 50 percent of their income on housing. Hundreds of thousands 
more live in substandard housing or are homeless. Meanwhile, we are 
losing more low-cost housing annually to conversion, disrepair, and 
abandonment than we can replace with existing resources.
    Federal funding for housing programs is insufficient to make 
headway against these problems. Three quarters of those eligible for 
federal housing assistance today do not receive it. Even the scare 
housing resources we have are in jeopardy. The Administration has 
proposed a 12 percent HUD funding cut in FY 2006, the largest reduction 
proposed for any federal agency.

Housing Credits--An Efficient Supplier of Affordable Rental Housing
    Congress created the Housing Credit program as part of the Federal 
Government's last major tax reform effort, the Tax Reform Act of 1986. 
At the time, Congress took a remarkable, bold new approach to dealing 
with the low-income housing shortages that afflict almost all parts of 
our country, recognizing that apartments simply cost too much to build 
to rent at rates affordable to low-income families without some form of 
tax incentive or subsidy. Congress eliminated previous tax incentives 
in favor of a more effective, efficient, and tightly drawn program that 
places development and investment responsibility in the hands of the 
private sector with strong government oversight.
    The Housing Credit program provides a ten-year reduction in tax 
liability for owners of low-income rental housing based exclusively on 
the development cost of the low-income apartments produced. Credit-
financed apartments are dedicated for 30 years or more at restricted 
rents to families with incomes of 60 percent of median area income--on 
average, families earning $34,800 or less.
    The program authorizes each state to allocate Housing Credits in 
proportion to its population. For-profit and nonprofit developers 
compete for Credits in an open, transparent process. Successful 
applicants exchange Credits for equity that investors supply to help 
fund properties' development cost.
    States put each proposed development through three separate, 
rigorous financial evaluations to make sure it receives only enough 
Credit to make it viable as low-income housing for the long-term. Only 
investors in properties that pass all three financial reviews, complete 
their developments, rent them to eligible low-income families, and keep 
them in good condition can claim Housing Credits.
    The price investors are willing to pay for Credits and the return 
they are willing to accept demonstrate the efficiency of the program. 
Over the last ten years, the average price per dollar for Housing 
Credits has increased over 50 percent. In some cases today, investors 
are paying more than a dollar for a dollar's worth of Housing Credits.
    HFAs also finance the acquisition, construction, and rehabilitation 
of rental housing with tax-exempt Housing Bonds. Multifamily Housing 
Bonds provide debt financing for more than 40 percent of apartments 
that receive Housing Credits and other low-cost rental housing.
    The Housing Credit and Bond programs have financed over 2.7 million 
apartments to respond to the severe shortage of decent, safe, and 
affordable housing for low-income families--working families, seniors, 
homeless families and individuals, and people with special needs all 
across the country. The two programs finance 160,000 apartments each 
year and are the only significant producers of affordable rental 
housing.

Creating Homeowners With Tax-Exempt Bonds
    To help make homeownership affordable to tens of thousands of 
working families each year, the Federal Government allows state and 
local governments to use tax-exempt mortgage revenue bonds (MRBs) to 
finance low-interest mortgages for lower-income first-time homebuyers. 
Investors purchase MRBs at low interest rates because the income from 
them is tax-free. The interest savings made possible by the tax-
exemption is passed on to homebuyers by lowering their mortgage 
interest rates.
    MRBs have made first-time homeownership possible for more than 2.5 
million lower-income families--more than 100,000 every year. The 
average MRB homebuyer earns $38,900--less than three-quarters of the 
national median family income.
    Each state's annual issuance of Housing Bonds and other so-called 
private activity bonds, including industrial development, 
redevelopment, and student loan bonds, is capped. Congress in 2000 
increased the private activity bond cap by 50 percent and indexed it to 
inflation. The 2005 limit is $80 times state population, with a minimum 
of $239,180,000.
    Congress limits MRB mortgages to first-time homebuyers who earn no 
more than the greater of area or statewide median income. Larger 
families can earn up to 115 percent of the greater of area or statewide 
median income. Congress limits the price of homes purchased with MRB 
mortgages to 90 percent of the average area purchase price.

Promoting Economic Growth and Job Creation
    The Housing Credit and Bond programs are not just good for housing; 
they are good for the economy. In 2003, the construction and operation 
of Housing Credit properties generated approximately 76,000 jobs, $2.5 
billion in wages and salaries, and $1.3 billion in government revenue. 
The MRB program the same year generated over 64,000 jobs, $2.5 billion 
in wages and salaries, $465 million in consumer spending, and over $1.3 
billion in government revenue, while multifamily bond issuance 
generated nearly 89,000 jobs, $2.9 billion in wages and salaries, and 
$1.5 billion in government revenue.

Impact of Tax Reform Proposals
    Several tax reform proposals put forward by members of Congress 
this year and under consideration by the President's Advisory Panel on 
Federal Tax Reform would eliminate or diminish the impact of the 
Housing Credit and Bond programs. The private market would not make up 
for these losses.
    The Housing Credit and Bond programs help finance affordable 
housing production that would not otherwise occur. Rental development 
and operating costs outstrip lower-income renters' ability to pay in 
most areas. Conventional mortgages are not as affordable as MRB-
financed mortgages.
    Importantly, direct spending programs cannot replicate what the 
Housing Credit and Bond programs achieve through their private-sector 
discipline. Housing Credit and Bond investors risk losing the primary 
economic benefit of their investments (i.e., through Credit recapture 
or the loss of the Bonds' tax-exempt status) if the programs fail to 
achieve their public purposes. This threat provides a performance 
incentive unmatched by direct spending programs that has helped make 
the Housing Credit and Bond programs the most effective and efficient 
federal mechanisms for providing affordable housing.
    Other seemingly benign changes to the existing tax code could have 
significant unintended negative effects on the Housing Credit and Bond 
programs. The Administration's 2003 proposal to eliminate taxation on 
dividends already taxed at the corporate level, for example, threatened 
to reduce annual Housing Credit production by as much as 35 percent. 
This estimate did not even take into account the impact the proposal 
would have had on Housing Bonds, which finance many Housing Credit 
apartments.
    On the other hand, tax reform could greatly enhance these programs 
by eliminating tax code provisions that inhibit their effectiveness. 
For example, proposals to eliminate the Alternative Minimum Tax (AMT), 
or at least exempt Housing Bonds and Credits from it, would lower bond 
and Credit yields, increasing affordability.
    Since 1986, the interest income on new money private activity 
bonds, unlike general obligation and 501(c)(3) bonds, has not been 
exempt from the AMT. As a result, demand for private activity bonds is 
weakening. To the extent potential Housing Bond investors are or fear 
becoming subject to the AMT, they either demand higher yields on the 
Housing Bonds they buy, reducing the dollars available for housing, or 
decline to buy Housing Bonds. Higher bond yields lead to higher 
mortgage rates, decreasing affordability for lower-income homebuyers 
and renters. AMT relief will lower bond yields and improve housing 
affordability.
    Similarly, Housing Credit investors are increasingly subject to the 
AMT. To the extent potential Credit investors are or fear becoming 
subject to the AMT, they will either pay less for the Credits they buy, 
reducing the dollars available for housing, or decline to buy Credits.

An Opportunity to Strengthen the Housing Credit and Bond Programs
    NCSHA also calls on Congress to seize the opportunity tax reform 
presents to strengthen the Housing Credit and Bond programs and make 
them even more responsive to today's affordable housing needs. Despite 
their success, Housing Bonds and Credits could fulfill the objectives 
Congress created them to meet even more effectively and make them even 
more efficient and responsive to state housing needs if it enacted a 
handful of changes, many at low or no cost to the Federal Government.
    Though the Housing Bond and Credit programs are extraordinarily 
effective, over the years NCSHA and others have contemplated 
legislative and regulatory changes that would make them even better. In 
2004, NCSHA undertook a year-long effort to identify what changes, if 
any, would improve the programs' operations and results. An 18-member 
HFA working group conducted a comprehensive review of the programs in 
consultation with all state HFAs and housing industry groups. That 
review produced the following recommendations:

      Exempt Housing Bond and Credit investments from the 
alternative minimum tax (AMT) to attract investors and generate 
increased proceeds to pass on to homebuyers and renters in lower 
housing costs;
      Exempt displaced homemakers, single parents, and families 
whose homes are destroyed or made uninhabitable by presidentially 
declared natural disasters from the single-family Housing Bond--
Mortgage Revenue Bond (MRB)--program's first-time homebuyer 
requirement;
      Provide relief from the MRB Ten-Year Rule so states can 
recycle more MRB mortgage payments into new mortgages for first-time 
homebuyers;
      Allow states to provide greater Housing Credit amounts to 
properties that achieve state-determined goals, such as deeper income 
targeting and location in rural and other difficult-to-develop areas;
      Encourage mixed-income housing by changing the Housing 
Credit rule that requires all scattered-site properties to be 100 
percent occupied by low-income families;
      Rename the Low Income Housing Tax Credit the Affordable 
Housing Tax Credit to encourage community acceptance; and
      Make technical changes to the Housing Bond and Credit 
programs to simplify their administration.

    We would be happy to provide you more information on the rationale 
for and details of these recommendations.
    Thank you for your attention. NCSHA is available to assist you in 
any way.

                                 

                                            Aptos, California 95003
                                                      June 17, 2005
    Dear Chairman Thomas and Committee Members: My name is Marile 
Robinson and I am writing you as a hardworking taxpaying citizen that 
has been devastated by the unintended consequences of the AMT law. I 
appreciate the opportunity to discuss the hardships I have suffered due 
to an outdated and complicated portion of the tax code called 
Alternative Minimum Tax.
    I am a 27 year employee of Intel Corporation and as a Human 
Resources middle manager I was awarded ISO stock options as a 
compensation award for outstanding performance for many years of 
service. I choose not to exercise those options but to save them for my 
retirement, which I became eligible for in 2001.
    In 1999 and 2000 the bulk of those ISO shares needed to either be 
purchased and held or face expiration. I could have just exercised them 
as Intel stock was between $59.00--$92.00/share in that timeframe. But 
I was advised by my tax consultant and Intel Stock benefits to purchase 
them and hold for one year. I purchased thousands of shares and held 
them only to painfully find out, literally on the afternoon of April 
14th 2001 my tax preparer called me and said ``are you setting down'' 
YOU OWE $290,000 to the IRS.
    I was a part time employee with an annual salary of $60,000/year 
less that a year away from retirement.
    In order to meet that tax liability I barrowed from a margin 
account and paid 6% interest while I tried to figure out a way of 
sorting this out. For the next year I wrote letters, appealed to Intel 
Corporate Officers, supported Zoe Loftgren and others in their attempt 
to reform the AMT law, even sought legal advice. Total expenses 
including the initial tax payment totaled $320,000. I then sold my home 
of 19 years and the total proceeds went to paying off this phantom 
gains tax. I lost my nest egg home, all of saving and postponed my 
retirement. It's still painful to even talk about this financial 
devastation.
    Most people have no idea how this could possibly happen. The way I 
explain it is: imagine you paid a dollar for a lottery ticket with a 
possible payout of $1,000,000. Well, your numbers didn't come up--
However, the IRS says you could have won $1,000,000 so that's what we 
are going to tax you on.
    The issue boils down to doing the right thing. I'll never live long 
enough to use my AMT credits. Please restore my faith in this nation, 
and in this committee. Fix it.
            Respectfully,
                                                    Marile Robinson

                                 

                                                 Dayton, Ohio 45440
                                                      June 20, 2005
Dear Chairman Thomas and Committee Members:

    I started working for a California based company in November 1998. 
I live and work from my home in Dayton, Ohio. As part of my 
compensation package, I received incentive stock options (ISOs) in the 
company. In March 2000, I exercised my vested ISOs (2,455 shares) by 
paying $30,000. The market value was $370,000. I planned to hold the 
stock for a year and complete the holding period.
    By March 2001, the stock price had dropped from $159 to $60 per 
share. You can only image the horror as I did my taxes. Our joint 
Federal AGI was $100,000 and we owed an AMT of $121,000! Thanks to 
outdated tax laws, we were in the 121% Tax bracket!
    To pay the tax, I had to sell all the stock by March 2001 (at 
$60.00 a share). This was just enough to cover the AMT taxes and pay 
off the loan I used to exercise the stock. The gain to my family was 
zero!
    In April 2001, I sent the IRS a check for $102,000. This was the 
entire net proceeds from the sale of the ISOs plus my life savings. We 
survived paycheck to paycheck for the remainder of 2001. For my 2001 
tax, I had an $82,000 non-refundable tax credit and I owed the IRS 
$8,000! The reason for this imbalance is that although I carry a 
$215,000 dollar loss on the tax treatment of the ISOs, I am limited to 
claiming a $3,000 dollar loss per year on the AMT side!
    Now for the best part: the $102,000 check I sent the IRS in 2001 is 
treated as income, which places me in the AMT tax bracket. I had to pay 
AMT in 2001 on the money I used to pay the AMT in 2000! This is wrong! 
The government taxed me on income that I didn't receive! The next year, 
I not only don't get a refund, but I can't use the tax credit and I 
have to pay taxes on the money used to create the tax credit.
    Meanwhile, our government has an interest free loan on my money. 
Based on my calculations, I have close to a $90,000 tax credit and 
$140,000 loss that I won't be able to fully recover until 2049.
    I am 44 years old and a father of two (9 and 12 years of age). I 
was planning on using the ISOs to build a college fund for my children. 
But thanks to a complex, antiquated tax law, those dreams have vanished 
and my family sits on the edge of financial ruin.
    Please forgive my sarcasm, but during the past 5 years, AMT has 
dominated our finical life. There is no way out under current tax laws. 
I spoken with dozens of CPA's and countless Certified Finical Planners, 
their only advice has been to seek legislative change.
    I written and called my Congressman (Mike Turner). The last verbal 
response from his aid was to seek a tax attorney. A tax attorney wants 
$60,000 to take the case, sounds like a losing proposition to me.
    I have written and called my Senators (George Voinovich and Mike 
DeWine). They sent me to Tax Payer Advocate Office. The Tax Payer 
Advocates Office could not help. They can not negotiate with the IRS on 
matters of un-fair tax laws.
    My wife and I wrote letters the President and Vice President in 
2001. In August of 2003, my wife received a letter from the department 
of the Treasury stating our case has been transferred to the Accounts 
Management Center. A few weeks later she received a call from the IRS. 
They apologized for the length of time it's taken to respond to her 
letter, however, the IRS can only enforce the laws, they can not change 
them.
    I keep hearing ``tax the rich'', but from my experience, the tax 
laws are designed to prevent you from becoming ``rich''. Please help!
    God Bless America,
                                                   Monte A. Simmons

                                 

                                                      June 22, 2005
    Ask not: ``What can my country do for me?''--Ask: ``What can I do 
for my country?'' This concept expressed in President John F. Kennedy, 
Jr.'s 1961 presidential inaugural address at the height of the Cold War 
was an invitation for young Americans to become unofficial ambassadors 
of the U.S. by joining the Peace Corps and taking our republican and 
democratic ideals to the poor nations of the world. Many Peace Corps 
workers later joined our esteemed Foreign Service and were in part 
responsible for the fall of the Iron Curtain some 30 years later, 
assisting on the ground the great political leaders, notably President 
Ronald Reagan.
    It was also in the 1960's that many American companies ventured 
abroad, eventually leading up to the creation of many of the America-
based multinational corporations we know today. Those companies sent 
U.S. citizens abroad to build these businesses and train foreign 
workers. This is still being done today, for the mutual enrichment of 
America and its trading partners including the peaceful economic 
development of poor countries in the world.
    In other words, pro-active international business and economic 
development has enriched all concerned. This is simply a reflection of 
the American Way already naturally practiced in the United States since 
its inception.
    The U.S. has also had taxation from its founding and even before--
the hated tax on tea led to our independence from Great Britain. Our 
diplomats and Peace Corps workers have not had to worry about double 
taxation because international law allows government personnel to 
remain taxable in their home countries. Likewise, when most non-
American private citizens who go abroad to promote their private sector 
economies: they leave their country's sphere of taxation and become 
taxable where they settle; the foreign country where they settle claims 
tax jurisdiction over them, as, by the way, does the U.S. for 
foreigners arriving on its shores. The home country gives up taxing 
rights levied with respect to residence. Not so, however, for private 
sector U.S. citizens moving abroad. None except the U.S. taxes on the 
basis of citizenship alone.
    Among the beauties of the generally-used system is a much 
simplified compliance system. These non-U.S. expatriates may in fact 
remain taxable as nonresidents in their home countries with respect to 
income sourced there: most countries, including the U.S., tax 
nonresidents via withholding tax on investment income derived from that 
country. Double taxation issues are dealt with via bilateral tax 
treaties.
    U.S. lawmakers have in the past rejected a residence-based tax 
system because of potential abuse, or exaggerated reports of abuse--
    A wealthy American can already live in the U.S. income tax-free, or 
nearly so, by investing in tax-free municipal bonds, land or works of 
art, etc. He can already give up his citizenship and move to tax havens 
to avoid future tax. Expatriation to more clement taxation is thus 
already possible and legal--However, this sort of situation is (very) 
minor in the U.S. tax landscape because most Americans are patriotic 
and are not willing to go that far.
    America has grown not via the wealthy, but via its vast population 
at all levels. For the few who might leave the U.S. for tax purposes, 
many talented foreigners are waiting to immigrate to the U.S. When tax 
rates were reduced from 70 % to 28 %, under President Reagan, 
individual tax collections climbed (!) because investors felt free to 
realize latent capital gains without punitive taxation. The economy 
soared. Recent economic reports suggest a similar effect is taking 
place at this time following the recent U.S. tax cuts.
    The American Way is to believe in its people, to let our own magic 
mixture of free enterprise and basic social welfare thrive in an almost 
undirected economic system. We trust Americans to build our economy.
    Lawmakers, you should unleash those adventurous Americans who are 
willing to work and trade abroad from undue taxation burdens by letting 
them go abroad and promote international business! To do this, stop 
citizenship-based taxation!

                                              Stephanie H. Simonard
                                       Tax Committee Chairman, AARO

                                 

                                                    Ely, Iowa 52227
                                                      June 15, 2005
Dear Chairman Thomas and Committee Members:

    I am writing to you on behalf of my family because we desperately 
need your help. We are suffering under tremendous stress because of a 
flaw in the tax code, and we need your help to save our family. In the 
year 2000 our taxable income was $105,461. That same year we were 
required to pay an Alternative Minimum Tax of $206,191 from Federal and 
$46,792 from the State of Iowa. The additional AMT tax was based on 
stock that we sold for a loss when our company nearly went bankrupt. We 
were taxed $252,893 for a gain that we never made.
    In December of 1992 I joined a small telecommunications start up in 
Iowa called McLeodUSA. The company provided incentive stock options as 
part of its compensation. This is what we were using to plan our 
future. We saved all the options we received to use on building a home, 
providing for our three daughters education, and providing for our 
retirement.
    In 2000 we were ready to start building our home so we spoke to our 
financial and tax advisers to determine the best way to use the stock. 
Based on the current tax laws, they told us to exercise the options and 
hold them for a year so we could benefit from long-term capital gains 
on the income. We followed that advice, and exercised the stock and 
held on to it consistent with these strong tax incentives. As the home 
was nearing completion we had our taxes done by an accountant and 
received this tax bill which was totally disproportionate to any gain 
we received. The stock value had plummeted so we borrowed money from a 
local bank to try to pay the tax. We paid the State tax and $94,484 of 
the Federal in several payments. Our local IRS collections agent 
reviewed our case and told us there was no way we could pay the 
remainder off and instructed us to enter into the IRS's Offer In 
Compromise program. They said the OIC program was put in place to solve 
impossible situations just like ours.
    After waiting for 8 months we were finally assigned to an OIC 
Specialist. The OIC Specialist utilized the formulas and guidance and 
informed us that we were rejected from the OIC program. He told our 
attorney that I have three things going against me; I am not old, I am 
not disabled, and I have been too consistent. I have been too 
consistent because I've been employed and paying income tax since I was 
fourteen years old. I've never filed bankruptcy. I've never defaulted 
on a loan. According to the archaic computations the IRS used our 
family should only have housing and utility costs of $1,067 per month, 
but our actual is over $3,700. Based on their allotment we are supposed 
to be able to pay $2,366 per month to pay even more unfair taxes, and a 
lien has been placed on our home. There is no way we will be able to 
pay this amount because we never received the money on which the tax is 
theoretically based. We have appealed our case to the U.S. Tax Court 
but the Tax Court upheld the IRS position.
    Both the IRS and the Court say it's up to Congress to fix this.
    Please use the powers you possess to right this inconceivable 
injustice. I beg of you to help. I have been nothing but honest to the 
letter of the law in paying taxes my entire life. It seems incredible 
to me that I should be financially destroyed by a tax that is so unjust 
and certainly not fulfilling the purposes that Congress intended.
                                                         Ron Speltz

                                 

                                          Flossmoor, Illinois 60422
                                                      June 18, 2005
Dear Chairman Thomas,

    Thank you for the opportunity to submit this letter to detail the 
hardships my family has faced as a result of the Alternative Minimum 
Tax. My name is Dan Taylor and I am writing on behalf of my wife Vicki 
and my children Trent and Stephanie. I write to you today to beseech 
you to provide a remedy to taxpayers and families who have been 
financially blindsided by the antiquated tax code that is the 
Alternative Minimum Tax, especially as it applies to Incentive Stock 
Options (ISOs).
    In January 1998, I was hired by GeoTel Communications in a sales 
position to sell telecommunications software. As an incentive to work 
for this small company, I was granted ISOs as part of my compensation 
package. These options would vest over time and I would have the 
opportunity to receive additional grants for meeting performance goals, 
which I did. This was the first position that I held in my career where 
I received any form of stock option with my only investment experience 
being through personal IRAs and company sponsored 401Ks, so I would 
consider myself an unsophisticated investor. I did not know one type of 
stock option from another which, would prove to be catastrophic to me 
and my family later.
    In June 1999, GeoTel, with revenues of approximately $40 Million, 
was purchased by Cisco Systems for $2 Billion, or 50 times sales. I 
received a bit more than one share of Cisco stock for every share of 
GeoTel that I was holding an option on, so this made my accruing 
options very valuable. In June 2000, I left Cisco Systems to pursue 
other interests and was required to exercise the options and purchase 
Cisco stock or lose all the options at no value. I used some options 
granted while I was a Cisco employee, Non-qualified (NQs), to purchase 
the ISOs that I originally received from GeoTel. The NQs were taxed as 
I bought and sold them as ordinary income and the proceeds from the 
sale were used to purchase and hold the ISOs. I purchased 28,000 shares 
of Cisco stock for $4/share on a day that it was selling in the open 
market for $62.
    All of these transactions were made with the help of a 
professionally licensed financial consultant. Every effort was made on 
the part of my wife and me to handle this financial blessing properly 
with regard to income taxes. We were advised that we would be taxed 
when we sold the ISO-based shares. The resulting tax would be at the 
long-term capital gains rate if we held the stock for one year. We were 
never advised that we had created a taxable event on the day that I 
purchased the stock with a tax liability of approximately $500,000 
triggered by the AMT as it is applied to the exercise of ISOs.
    Through late 2000 and Spring 2001, the value of the stock 
plummeted. Vicki and I filed our taxes using the accountant recommended 
by our financial consultant for the 2000 tax year. We were not asked 
any questions about our stock transactions other than to provide the 
1099 for the exercise of the NQ based options. We were not asked to 
provide any records for the ISO based options despite the fact that we 
revealed to the accountant that I had exercised the options in June 
2000.
    In May 2001, I learned through a colleague from GeoTel that he had 
paid a tremendous tax bill centered on the exercise of his ISO shares. 
We both agreed that our situations were similar enough that I needed to 
research and confirm that my taxes had been filed properly. Much to my 
horror, I learned that Vicki and I had indeed filed our return 
improperly. Though we had paid over $125,000 in Federal taxes, we owed 
an additional $438,000 on W-2 income of approximately $350,000. The 
additional tax was generated solely by the AMT associated with the ISO 
stock purchase. I had not sold one share of that stock during 2000. The 
value of the stock was now less than $125,000.
    We did not have the money to pay the taxes, but I was confident 
that if we came forward voluntarily that we would be treated fairly and 
equitably by the Internal Revenue Service. There was no audit trail, 
but I wanted my children to see that we should do the right thing even 
when no one is watching. I expected the outcome to be painful, but 
nothing like what we have experienced.
    Everyone that we have come in contact with at the IRS has expressed 
sympathy for our plight, but very quickly made the point that they have 
no latitude in how the collection process is enforced. The guidelines 
are the guidelines. There are no allowances for anything, only formulas 
that are something out of the 1950s. After two and one-half years, we 
were able to reach an agreement on an Offer in Compromise in October, 
2004. My family and I will pay $372,000 over two years or about $14,500 
per month. This will require us to sell our home, use all of our 
savings and tax deferred retirement accounts, and my son will have to 
leave a four year university and attend junior college.
    Is this how the tax laws are supposed to work? Are they to be a 
snare that catches unsuspecting citizens and devastates them 
financially? If financial professionals do not understand how the AMT 
applies to stock options, how can the average citizen be expected to 
understand and comply with this law?
    Thousands of Americans have been caught in this snare, not just my 
family. Only Congress can provide a remedy that will insure that more 
families will not face similar circumstances. I believe and have faith 
that you will enact legislation to abolish the current AMT tax law and 
replace it with more straightforward tax code that the general public 
can understand. I believe and have faith that you will provide a remedy 
and relief to families such as mine with some type of retroactive 
abatement of taxes from ISO triggered tax bills. Why do I believe and 
have faith that you will do this? The U.S. Congress has the authority 
to do so, and it is the right thing to do. Thank you.
                                                      Daniel Taylor

                                 

                                     Redwood City, California 94062
                                                      June 21, 2005
Dear Chairman Thomas and Committee Members,

    My family was severely impacted by the Alternative Minimum Tax 
(AMT) law. In 2000, I purchased my employee ISO stock shares from my 
company. Rather than sell my shares, I held on to them through the high 
tech stock crash of 2001. Those purchased shares dropped in value from 
$1,500,000 to approximately $400,000. Nevertheless, based on AMT rules, 
I owed more than $400,000 in tax. I was sure this was a mistake. How 
can an asset be taxed more than it's worth? I had to sell all my stock, 
and re-mortgage my home to pay the AMT tax. The mental anguish in this 
situation led me to thoughts of suicide and months of therapy. I have a 
huge AMT tax credit that I can never hope to regain, based on current 
tax laws, and the size of the credit shrinks annually.
    I have to believe that Congress, when it drafted the original AMT 
tax laws, did not intend for the consequences above. I am not a rich 
man (I work as an artist now, and make less than $30,000 annually). 
When I tell others about what happened to me, they scarcely believe how 
unfair my situation--and many like me--is. The reason I held my shares 
to begin with, was because I'm an optimist at heart. I still strive for 
that, in the face of this incredible injustice. My hope is that the 
committee will do the right thing, and right this wrong.
            Best,
                                                       Ed Terpening

                                 

                                         Southfield, Michigan 48069
                                                      June 22, 2005
Dear Chairman Thomas and Committee Members:

    AMT has financially devastated me and ended my marriage. Making 
$50,000 I now owe the government $500,000--including $200,000 of 
interest and penalties. The IRS has requested that I liquidate my 401K 
and pay ALL BUT $300 per month of income for the next 11 years, asking 
for an extra 3 years past the statute of limitations for income taxes. 
The stress of this situation has wrecked my marriage and will make 
raising two children nearly impossible. How will $300 of income each 
month pay for daycare let alone a car to get to a job, food to feed my 
children, and a place to live? I don't owe anyone else, nor am I living 
a lavish lifestyle while trying to avoid paying taxes! I am an honest, 
hard working contributor to society. I've been on the board of a non-
profit volunteering time and energy to make life better for others.
    How can it be that this PREPAYMENT on EXPECTED capital gains 
doesn't change if the EXPECTED capital gain is not achieved? The 
purpose of AMT--to make sure the rich pay their taxes--does not hold in 
a situation such as a stock plummeting 140 points in 6 months! An 
unintended consequence of the AMT, I am told, with no leniency 
possible. Aren't we a civilized nation that should be able to apply 
some logic and situational change to `procedure'?
    Please understand that a realistic outcome of not fixing this 
situation is that a hard working American could end up being forced to 
quit her job. Would I have to go on welfare to support my children? How 
can that be? Somehow I just can't believe that this was the intended 
meaning of the `American dream.'
                                                    Christy Thaxton

                                 

                                                       June 8, 2005
Mr. Chairman,

    Thank you for holding this important hearing on tax reform. The 
American people are eager for Congress to reform the overly-
complicated, regressive and inequitable tax code.
    When President Bush established The Advisory Panel on Federal Tax 
Reform earlier this year, he articulated his key principle that any 
solution must be revenue-neutral. Democrats' bedrock principle is that 
tax reform should not lead to tax increases on middle-class families.
    Millions of working families are already paying more than their 
fair share due to the President's tax cuts and widespread tax avoidance 
by the wealthy and corporations. As a result of rampant underreporting 
of income by those who refuse to abide by the law, the Nation faces a 
$311 billion tax gap, leaving middle-class families to pick up the 
slack.
    We can reform the tax code, restore progressivity and strengthen 
our economy without raising taxes on the middle-class. The last major 
tax reform legislation was enacted in 1986, at a time when the code was 
replete with shelters, loopholes, complexity and inequities. We face 
similar circumstances today.
    The tax code now spans more than 60,000 pages, with thousands added 
in the last few years in the name of ``tax reform.'' The IRS prints 
1,000 publications, forms and instruction booklets in an attempt to 
assist taxpayers. This complexity is taking a toll on middle-class 
families in the form of wasted time, effort, money and productivity.
    It takes the average family 7\1/2\ hours longer to complete its tax 
return than it did just ten years ago. Many spend nearly 24 hours 
annually completing their forms, and nearly 60 percent now use 
professional tax preparers at an average cost of $150, a full day's pay 
for millions of individuals.
    These burdens will only increase as more middle-class families are 
ensnared by the Alternative Minimum Tax. By 2010, the AMT is expected 
to hit 33 million taxpayers, up from just 1 million in 1999. Tax reform 
must include a long-term solution to protect middle-class taxpayers 
from the AMT's unintended consequences.
    While the code's complexity-by-design benefits those who can take 
advantage of its loopholes, middle-class families are left holding the 
bag. Americans recognize this inequity and are losing faith in the 
fairness of the tax system. The IRS found in 2003 that 17 percent of 
taxpayers believe it is acceptable to cheat, up from 11 percent just 
four years earlier. This is an ominous sign for a system built on 
voluntary compliance.
    One example of needless complexity is in the higher education area. 
Parents with children in college have to decipher between five 
different education tax incentives and a series of confusing forms and 
definitions. We should consolidate these five tax breaks into one fully 
refundable $3,000 college tax credit available for four years of 
college and two years of graduate school.
    We should also address the overlapping and confusing incentives for 
families with children. To that end, I have proposed a Simplified 
Family Credit collapsing the Earned Income Tax Credit, the Child Credit 
and the Dependent Exemption into one easy-to-use credit for working 
families with children. The Simplified Family Credit reduces 200 pages 
of the code down to a postcard-sized form with 12 questions.
    Another area ripe for change is in tax incentives for 
homeownership. The mortgage interest deduction is currently available 
only to itemizers, effectively denying the benefit to millions of 
middle-class families. To add progressivity to the code and encourage 
greater homeownership, we should extend the mortgage interest deduction 
to non-itemizers.
    We must also simplify and consolidate the ``alphabet soup'' of 
sixteen different tax-advantaged retirement accounts. The multitude of 
accounts is confusing to employers and employees alike, and acts as a 
disincentive to saving for retirement. That is why I support a 
Universal 401(k) that incorporates the best aspects of the various 
plans into one account that is portable from job-to-job.
    In the last four years, the code has become filled with special 
breaks for special interests. It is time to make middle-class families 
the interests we serve. I look forward to working with my colleagues 
and with the Administration to that end.
                                         The Honorable Rahm Emanuel

                                 

                                         Shoreview, Minnesota 55126
                                                      June 20, 2005
Dear Chairman Thomas and Committee Members:

    My name is Phil Thompson, and I am 44 years old. In 1997 I accepted 
a position as a software engineer with a software company located in 
Roseville, Minnesota. In addition to salary, I was given a one-time 
grant of 3,000 incentive stock options (ISOs) when I started. This was 
the first time I had ever received stock options in my life. Between 
1997 and 2000, the company grew rapidly, and the stock split a few 
times, and the increasing stock price ended up making those options 
very valuable. Before the year 2000, I had exercised and sold some of 
the options that had vested, mainly to get a down-payment for my first 
house. But in the year 2000, because more than half of my options had 
vested, I decided to accelerate exercising many of these options.
    I knew very little about the tax ramifications of exercising and 
holding ISOs, so I hired a professional tax advisor who had been 
recommended to me by several co-workers (who were in situations similar 
to mine). My tax advisor recommended an on-going, well-timed exercise-
and-hold strategy, which would allow me to best benefit from the tax 
laws over the next several years. This seemed logical to me. 
Unfortunately, he did not warn me of the risks involved with exercising 
and holding ISOs, should the stock price decline dramatically. And 
because until that point I had only done same-day sales of my options, 
I was not familiar with the different tax treatments.
    During the year 2000, I exercised and held approximately 4500 
options, worth approximately $470,000 on the purchase date. And for 
most of the year 2000, the stock price continued to trade considerably 
higher than my purchase price. My trading window for the year closed in 
mid-December of 2000, and even in early December the stock price was 
still above my purchase price. Of course, the stock price declined 
dramatically thereafter. I didn't realize there was a problem until my 
tax advisor told me in March of 2001 that I owed approximately $165,000 
in combined federal and state tax. I was shocked and amazed, because my 
gross annual salary at that time was only about $85,000. Frankly, I 
didn't think it was possible that a taxpayer could be required to pay 
more in taxes than he/she actually earned.
    After my tax advisor explained that I would not be able to 
discharge the AMT by selling the shares (because the AMT is an 
immediate tax on potential earnings, not on real money), I was forced 
to exercise and sell even more options in order to cover my tax 
liability. I was luckier than most, in that my company's stock price 
decline was less rapid than most tech stocks at that time.
    As of this writing in June, 2005, the federal and state governments 
still hold over $108,000 of my money in so-called ``AMT credits.'' This 
is money that I could use to pay off my house, invest in my future, and 
prepare for retirement.
    After being victimized by the AMT treatment of incentive stock 
options, I have the following observations:

    1.  The alternative minimum tax can be an unfair tax on phantom 
gains that may never be realized. For incentive stock options, because 
the AMT is based on the tax that would be owed on the day of exercise, 
it does not take into account the possibility of a dramatic drop in the 
stock price. It also does not seem to take into account that for 
various reasons (holding periods, blackouts, complexity of the rules, 
etc.) a taxpayer may be unable to sell the shares in response to such a 
dramatic drop.
    2.  The AMT rules are very difficult to understand. Even with the 
assistance of a professional tax advisor, I encountered a situation 
that could have easily bankrupted me. And since the year 2000, I have 
read 2 books on the AMT, and done much internet research on the AMT. I 
still don't feel like I understand the AMT rules very well. Each rule 
seems to have multiple ``except if'' clauses. Thanks to the complexity 
of the AMT rules, I am forced to hire a professional tax advisor every 
year to prepare my tax return. I also find it very difficult to plan 
future financial moves because I am unsure of how they will affect my 
tax liability and the return of my AMT ``credits.''
    3.  Current tax laws allow no solution to easily recovering the AMT 
taxes pre-paid on phantom profits. Even if a citizen like me is able to 
meet the tremendous burden of the AMT, the rules for returning the AMT 
``credits'' are designed to make it a very long and arduous process, in 
some cases requiring many decades. Recovery of ``credit'' is hastened 
only by dramatically increasing your earnings and/or by creating 
capital gains. And both of those solutions are not generally easy to 
do! In my personal opinion, speeding up the return of the AMT 
``credits'' is the most important part of AMT reform.
    4.  AMT ``credits'' (prepaid taxes) are lost forever if the citizen 
dies. If I was to die in an accident tomorrow, the $108,000 of mine 
that the government holds in AMT ``credits'' would be lost to me and my 
heirs forever.

    Although the tax rules claim to provide a benefit for investors who 
exercise stock options and hold onto the stock, I will never again 
exercise and hold any incentive stock options. Because of the AMT, it's 
just too much of a gamble.
    Please fix the AMT and return the credits!
    Thank you for your attention.
                                                      Phil Thompson

                                 

          Statement of Sunnye Tiedemann, Overland Park, Kansas
    Mr. Chairman and Distinguished Committee Members:
    First, thank you for the opportunity to speak to you of my 
concerns. It is a humbling experience for an average taxpayer to appear 
before you, even if it is just via e-mail. Please give me your 
attention while I tell you why you must repeal the current income tax 
system and install the FairTax.
    President Franklin D. Roosevelt might well have been describing the 
present income tax code when he said, in 1944, ``It is not a tax bill 
but a tax relief bill providing relief not for the needy but for the 
greedy.'' That's a perfect description of the situation we have today.
    According to the IRS, $350 BILLION a year is lost to tax evaders. 
The IRS recovers $50 billion of that through intimidation, coercion and 
even illegal measures, leaving $300 BILLION out there in neverland, 
every year. Meanwhile there's a $6 TRILLION illegal drug industry that 
does not pay taxes.
    While all of this money is out there, owed but untouched by the 
IRS, it costs the Federal Government $140 BILLION a year just to run 
the tax system, adding $850 to the tax bill for every man, woman and 
child in the U.S. That's enough money to the Department of Homeland 
Security, the State Department, NASA, HUD, the United States Congress, 
all our Federal courts and all foreign aid.
    The American consumer, in addition, pays a conservatively estimated 
$225 BILLION annually taxes that are embedded in the prices of the 
goods and services we buy. That's because companies and corporations 
simply pass their tax burden along to the customer in their pricing.
    Those are huge numbers so let's bring it down to specifics, if you 
don't mind. Every taxpayer--you, me, every honest person who pays an 
honest tax--pays $2000 a year just to make up for tax evaders. Add that 
to the $850 we pay for compliance costs annually and you have $2850 
each of us pays BEFORE we get to our tax liability (and that's not 
counting the 20% to 30% embedded tax in everything we buy). And on top 
of that, many of us must pay tax preparers hundreds of dollars a year, 
mainly for the assurance that we would have support if the IRS should 
decide to question our tax returns.
    As if the financial burden wasn't bad enough, we have the emotional 
burden of the IRS, as well. The following story is true, and can is a 
verbatim quote from an e-mail received by one of the FairTax volunteers 
in Florida and shared with the rest of us yesterday:
    ``Sorry I didn't answer right away; I was out of town for awhile. 
``Let me tell you a brief story about something that just happened to 
me. This year the IRS sent me a nasty letter, saying that I failed to 
pay a penalty in 1995 for the 1994 tax year, and now I owed that 
penalty with 10 years' worth of interest! Of course, there were all the 
usual threats and admonitions about how they'd seize my property, throw 
me in jail, and that just because I'm a disabled veteran military 
retiree, I =still= have an obligation to pay my taxes. (Duh! I'm 
obviously a low-life tax cheat in their view.)
    ``How did I get the penalty in the first place? Basically, I paid 
my taxes in time in April 1995. In June, some moron at the IRS said I 
paid too much tax and sent me a refund check. I went to the IRS office 
in Virginia where I lived at that time, told them that, No, I =do= owe 
this amount of tax. The helpful IRS agent said, ``Don't send the check 
back. Cash it, and write me a new check for the amount.'' We put the 
money back in, and supposedly everything was fixed. ``Three months 
later--you guessed it--the IRS sends me a refund check. I stormed back 
to the IRS office. They said, No, you DO owe that money. I told them to 
take their check back. They couldn't do that. Cash it and write us 
another one. Fine.
    ``The next month, I get a BILL from the IRS. I paid my taxes too 
late!!! They were due on April 15th, and I didn't pay until September. 
Back to the IRS office I went, fit to be tied. I explained to yet 
another IRS agent that I =DID= pay my taxes, ON TIME and IN FULL. They 
kept sending me refund checks. The error was theirs! THREE trips to the 
IRS office ensued over the next few months. They decided to forgive the 
penalty, but not the interest, so I wrote them a final check, and got a 
senior supervisor to write and sign a statement for me saying my 1994 
taxes were fully paid. ``Fast forward to 2005. The FEDERAL IRS office 
in Philadelphia decided to overturn the decision of the STATE IRS 
office in Virginia. Not only did I owe the penalty, but now the penalty 
had accrued 10 years' worth of interest! I was livid, to say the least.
    ``Armed with a thick folder of documentation, I went to the IRS 
office here in Jacksonville. The IRS agent here wasn't interested in 
looking at my documentation. He peered at his computer screen and 
dismissed me, saying, ``It's your choice, sir. You can get a tax 
attorney ($$$) and fight this, meanwhile accumulating further interest 
and possible penalties, or you can just pay it, stop the clock on the 
interest, and write a letter of complaint about it. You MIGHT get 
something back, but probably not.'' (He said the Federal IRS office has 
a right to overturn the decisions of the State office. It made no sense 
to me, since we were talking about my Federal Income Tax return. How 
can one IRS office overturn another?)
    ``Let me tell you, I was tempted to spend hundreds of dollars and 
drag this into a public battle. After cooling down, I realized the 
gesture would not only be expensive, but would also be futile. I'd end 
up wasting time, money, and aggravation just to prove what everyone 
already knows--that the IRS is a crooked, incompetent, beast which 
threatens and preys on the lives of honest, hard-working, law-abiding 
Americans. I sent them their check. ``I am more determined than ever to 
rid this country of the utterly contemptible system of revenue 
gathering we've been saddled with. I want the IRS out of my life 
forever.''
    His estimate of hundreds of dollars to defend his position is, I'm 
afraid, massively conservative. His story is typical of many, many 
others I encounter when I talk to people about the FairTax. The IRS is 
a travesty in a country dedicated to'' life, liberty and the pursuit of 
happiness.''
    The best solution to this problem is, without a doubt, the FairTax. 
This is true not only because it is the only proposal that calls for 
repeal of the income tax but because it would fund the government 
without adding to or redistributing the tax burden.
    With the FairTax everyone, rich or poor, would keep 100% of his or 
her paycheck or pension check to spend, save or invest as they choose. 
By repealing the income tax, the FairTax removes the 20% to 30% 
embedded taxes in goods, which means that when they pay the FairTax, 
people pay essentially the same they do now.
    The FairTax funds the U.S. government at present levels--saving the 
taxpayer the aforementioned compliance costs and the annual $2000 s/he 
pays to compensate for tax evaders. That's a significant savings for 
everyone, wealthy or poor.
    The FairTax, since it is a consumption tax, retrieves those funds 
from tax evaders, the drug, criminal and porn industries (which numbers 
in the $6 TRILLION plus range), and in addition adds to the tax rolls 
illegal immigrants and 40 million foreign tourists annually. Imagine 
the increase in the tax base.
    With that kind of boost to the economy, imagine what Congress could 
do: fix the national highway system, pay our troops what they really 
deserve and give each family a $100,000 life insurance policy when a 
member deploys to a war theatre, and more.
    The FairTax would free everyone to be as productive as s/he 
chooses. Today families with two paychecks often watch their income 
carefully to avoid earning enough to kick in higher taxes or the AMT. 
In America the sky should be the limit. It's not. In America the tax 
ceiling is the limit. I know that is so because that is my personal 
experience.
    That, by the way, is why the FairTax is better than any other 
consumption tax proposal. Britain, France, Germany and other European 
countries have tried adding consumption taxes to income taxes and 
discovered, to their collective chagrin, that it is a fatal 
combination. Repealing the income tax and ridding us of it entirely is 
the only safe way to go in tax reform.
    Another proposal before you is the flat tax. That's where we began. 
The flat tax, like Topsy, grows. And the flat tax taxes production. Can 
you imagine the advantage the U.S. would have if it were the only 
country in the world that did not tax productivity? The FairTax would 
make that a reality and our international status as a country welcoming 
foreign investment would soar.
    The FairTax is a progressive tax. Everyone is taxed evenly. The 
wealthy pay more because they buy more expensive goods--mansions 
instead of houses, Jaguars and limousines instead of Fords and Toyotas, 
Kate Spade handbags at $260 instead of Coach handbags at $30, Versace, 
Chanel and Vera Wang gowns instead of off the rack. That's fair.
    As for the poor, everyone with a social security card (wealthy, 
middle-class and poor) gets a ``prebate'' (a rebate before they pay) to 
assure that no one pays tax on necessities up to the poverty level. 
Only the FairTax evens the playing field like that for everyone.
    May I respectfully submit that ALL exceptions, exemptions and so-
called ``incentives'' should be removed from any taxation you approve. 
Tax credits are NOT powerful and important--they are cynical. They tell 
the American people that they are too dumb to make decisions for 
themselves concerning their retirement, home buying, etc. In the early 
years of this country citizens made great decisions. They will do it 
again, given the freedom to do so. The FairTax offers no restrictions, 
exemptions, or controls of any kind.
    In addition to repealing the income tax, the FairTax repeals social 
security taxes, personal, estate, gift, employment, capital gains, 
alternative minimum, Social Security, Medicare, self-employment and 
corporate taxes. It is a replacement tax rather than tax reform. And, 
as I said before, it funds the U.S. government.
    Under the current system, investments are taxed. Under FairTax, 
they would not be taxed at all. Investors prosper under the FairTax 
plan, since corporations have lower operating costs and people have 
more money to save and invest.
    Charities and churches will profit immensely with the FairTax. With 
the repeal of the income tax, they will be free to speak as they please 
without feat of losing their ``tax exempt status.'' When the Tax Reform 
Act of 1986 lowered marginal income and transfer tax rates, charitable 
giving rose by $6.4 billion dollars. Also, most charitable 
contributions now come from non-itemizers. My own view on this is that 
if I get a reward for my giving, I am not giving at all, but investing. 
I prefer to give where there is need.
    In conclusion, the FairTax is not a plan that was developed without 
intensive research not only in considering economics but considering 
also the concerns of the taxpayer. It is the only proposal before you 
wherein some of the best economic minds of our age (from Harvard, 
Stanford, Rice, MIT and more) actually considered the practical needs 
of government and the U.S. citizen. In this, alone, the FairTax rises 
far above its competitors.
    The argument that it is so hard to change the Constitution is 
fallacious. Only a few years ago we saw how easy it is to change the 
constitution when Congress decided to raise the voting age to 18. It 
took less than a year. How much more quickly could Congress get rid of 
the income tax when 80% of voters want to be rid of it! There's an old 
Chinese proverb that fits here: ``Those who say it can't be done should 
get out of the way of those who are doing it.''
    In conclusion, I respectfully ask you to send HR 25 to the floor 
for a vote. There is a huge grassroots effort extant that supports the 
FairTax. Americans want 100% of our paychecks to spend, save and 
invest. We are happy to pay a consumption tax that funds the U.S. 
government and broadens the tax base while taxing everyone evenly and 
exempting the poor from taxation.
    We are thrilled that the FairTax will tax the criminal, drug and 
porn elements of our society as well as the illegal immigrant and 
foreign tourists. We look forward to increasing our savings and 
investments and buying with pretax dollars.
    As retirees living on social security benefits and a government 
pension, my husband and I will enjoy, along with others, a 24% increase 
in our income if the FairTax is passed. And we will delight in seeing 
the prosperity and growth it will bring to our nation.
    Ruth Fulton (nickname/penname Sunnye) Tiedemann is a retired a 
writer, teacher and author who has worked in both the real estate 
industry and at law as a paralegal. Her accomplishments are in the 
fields of real estate, law, disabilities and publishing and are not 
relevant to the subject at hand. Her extensive political advocacy has 
been in the field of disabilities. Sunnye's husband, Herb Tiedemann, 
also retired was an initiator of the space photography program with 
NASA during the Gemini and Apollo programs.
    A native Tennessean, Sunnye studied liberal arts and education at 
the University of Tennessee, real estate and appraising at the 
University of Maryland, and law at the University of Oklahoma. She and 
Herb celebrate their 50 th anniversary this year. Sunnye was an at-home 
mom for their four children until the mid-1970s. They have four 
children: daughter Teena and husband Dewey with grandson Ted; son Keene 
and wife Kathy with their six children; son Ted who died of an aneurysm 
in 1979; and son Allen, who is severely retarded with autistic 
tendencies and temporal lobe epilepsy.
    Thank you again for the opportunity to present my thoughts on tax 
reform. I will be most grateful if you will send HR 25 to the floor for 
a vote as soon as possible.

                                 

                                     Tewksbury, Massachusetts 01876
                                                      June 20, 2005
Dear Chairman Thomas and Committee Members:

    In 2000 my husband and I purchased some of my options from Nortel 
Networks. I had been there for over 8 years so the options were fairly 
low priced. Our goal was to start acquiring shares to sell at some 
point to put towards our kids education, we figured if we bought and 
held for a year we would have 20% more to put down, but not having to 
pay the short-term capital gains. Logical, until we learned that next 
April 15th that we owed the government approximately $75,000 for shares 
that we paid approximately $8000 for.
    I left my accountants office is tears. And since my accountant is 
my Dad, he felt pretty bad about it. We didn't have $75,000 available; 
we had to take it out of our home equity loan. I was physically sick 
for a month thinking about it.
    It is now 2005 and we finally did get to recuperate some of our AMT 
tax when we sold some shares in 2003, but it is going to take us 3-4 
years to get it all back. So our kids got whacked in the end with us 
not being able to put as much money into their college savings funds. I 
am lucky that my husband makes over $100,000 a year and it won't take 
us 20 years to get back all the money. I can't imagine all of the 
people out there that don't make a lot of money and just were trying to 
get ahead and their lives were ruined financially.
    Some of the stories of the people who are a member of ReformAMT are 
heart wrenching. People lost their homes, declared bankruptcy--etc. I 
am only thankful that I was not one of those people and was fortunate 
enough to have the financial means to deal with the loss.
    Please contact me if you need any more information.
                                                      Susan Timmons

                                 

                                        Indianapolis, Indiana 46236
                                                       June 7, 2005
House Ways and Means Committee
United States House of Representatives
Washington, D.C.
    The following can be found on the Internet, by doing a search for 
``IRS Abuse.'' On Yahoo it is the third Web Site and is entitled ``IRS 
Abuse Reports prepared for the United States Congress.'' The following 
report I typed in, before things became even worse. Notice the date and 
the number of the report. I just looked today. The number has risen to 
645. ``TT'' are my husband's initials. Our case looks mild here 
compared to many others. Reading them is true life horror or in the 
word understood today, ``terrorism.''
    This is terrorism of the home grown kind. It may not come from 
overseas and is not bred in Madrasa Ciurriculum Schools, but this 
terrorism is just as effective. I copied and pasted it right from the 
Website.
IRS Abuse Report #171
    Our lives have been ruined by the IRS. We have been accused of not 
filing income taxes and being govt. protesters. The IRS wants nearly 
$200,000 and will not tell us why. We did not make even close to what 
they say we owe. They levied our salaries, put liens on our property 
and have demanded we pay them over $800/mo. for the rest of our lives, 
We do not make enough money to do this. I have two choices: suicide or 
fleeing the country. We have three children so leaving is definitely 
difficult. There is no point to working anymore. Why is this happening? 
We have committed no crime, yet the IRS has definitely threatened jail. 
No one believes us and there is no help. If we had committed murder we 
would at least have an attorney. Our Congressman has not even helped as 
he could.
    We are considered guilty. We have not had a day in court. The IRS 
has all our money if we do not pay them all and more of our money. I am 
angry and want to do something.
    House Bill 25 is FairTax Bill. The Bill has many features. I will 
address only one feature in this letter or I must certainly exceed my 
allotment of pages. I wish to address why we need to eliminate the 
I.R.S.
    Nothing is this country has the power of the I.R.S. With our court 
system one is considered innocent, until proven to be guilty. Not so 
with The Internal Revenue Service.
    Our case began because of a vendetta a prior employer and his 
girlfriend had against me. What did I do to incur such wrath? Rather 
than go into the sordid details, let's just say I ``blew the whistle'' 
on them. They were breaking so many laws, and I refused to do as I was 
told. The first time, I only refused to lie to his automobile insurance 
company. You see, he had told me to tell them he was a dead man . . . 
but all became worse. He was a talk show host, took in money by 
advertising . . . I put my foot down at the time I learned he was 
advertising for a candidate for Congress and their deal was to split 
their proceeds. Not legal. There is so much more; however, it would 
only be window dressing to tell you more about Stan and Jessica. You 
are smart enough to get the picture.
    It was in July of 1995 when we received our first notice from the 
IRS. At the time, I was assisting the FBI put Stan's girlfriend back 
into prison for breaking her Federal probation. I asked the FBI 
personnel involved if the letter I had looked to be written by the IRS. 
You see, It would appear in 1995, the IRS might have their own 
envelopes and letterhead. The typewriter was obviously not electric. It 
was the opinion of the FBI the letter was bogus. Besides, in the 
letter, it was stated I had not filed my taxes since 1992. I knew that 
was wrong.
    Then one day I received a call from someone, who stated they were 
calling from the IRS. We did not have caller ID. The caller sort of 
framed his request for money as a bribe. I still ignored the call, 
because I knew I had done everything as the law required . . . until 
the supposed IRS agent come to our house to peep into the windows. Then 
one day, I received a letter from Cincinnati IRS Office. The demand for 
payment was approximately three quarters of a million dollars. Well, 
drop me dead. That deserved a call back to the name and number on the 
paper. I spoke to a very nice gentleman and it was soon agreed I would 
send in all the taxes I was told had never been filed. That was easy to 
do. I had to find them, but that did not take so long. All seemed 
settled, fixed, satisfied, until this nice gentleman called me to relay 
to me, he was no longer handling the case. He could not understand just 
why, but my case was being moved to Indianapolis.
    This is where I lost all perspective. The Indianapolis Office made 
it impossible to live. Neither my husband nor I were really allowed to 
earn a living. Huge liens were put on our junky house. I do mean really 
junky. No plumbing, no air conditioning, the septic was flooding, the 
roof was leaking, the electric was sparking, black mold was growing 
everywhere, as the Radon levels rose higher and higher. One evening my 
son came to me to ask whether I wanted the good news or the bad news 
first. I told him I wanted to hear the good news first. The good news 
was we were the owners of two swimming pools. The bad news was the 
second one was located in the basement. Some pipe broke and water was 
pouring in like crazy. The one outside did not work.
    To help matters, I checked all the books out of the Indianapolis 
Public Library that had anything to do with the IRS. I learned they 
could not take your money ( we had three children to feed and clothe) 
if bankruptcy were filed. Temporarily, they were stopped dead in their 
tracks. I contacted some IRS TAX helpers and they just took all the 
last money we had and did not one thing.
    One day I watched a Montel William's show. A man had been through 
hell. He was flying his plane and it crashed, leaving him paralyzed and 
burned beyond recognition. This man fought and finally was able to have 
his company once again. He was flying in a small plane with his best 
friend, when that plane also crashed, killing his friend, burning the 
man even more, and leaving him a quadriplegic and totally blind. Montel 
had pictures. It might have been Maury Povich, I could be wrong. The 
point was this man had never given up. That show allowed me to think 
long and hard. I had all my body parts, could see very well, could 
walk, and I even looked good. Should I have been a happy person? NO! I 
would have traded places with that man, because my ability to earn a 
living had been taken away. I was living in terror. Nightmares 
containing government agents still haunt me to this day. I am afraid to 
sleep. The will to live has been taken away, EXCEPT for just one tiny 
thing: I discovered the idea of the FairTax. I got involved and have 
been for nearly eight years, I guess.
    Congress was holding hearings on the IRS. Did I watch? You bet I 
did. My congressmen did little. Now we were being audited. We even had 
to prove our children belonged to us, show grocery bills, proving we 
even fed them, they asked for a copy of every check we had written for 
over four years. We had the free checking account, the one you have to 
pay a dollar for copies of your checks. We did not have four thousand 
dollars for checks, much less for anything else. By this time I think I 
lost my mind. My memory is a bit hazy. My husband did not help me with 
any of this. Meeting with someone from Dan Burton's Office, and Lugar's 
office, and some other people come to mind. I know I wrote to Senator 
Moynihan before he passed away. No doubt this great and wonderful man 
is now in heaven. My only connection to New York is my mother was born 
there, yet he was the only one who did help me. He got someone's 
attention. Heck, Lugar, my own Senator, for whom I voted, and ran for 
president on the promise of ridding this country of the IRS. I was 
pretty much kicked out of his office. Not by him. He was not there.
    So now I was certifiably nuts, depressed and without any effort 
really, was able to get on Social Security Disability. No lawyer was 
needed. Something inside of me wants to work. I am not yet dead.I am 
pretty intelligent, too. I tried it, but the IRS keeps coming and 
coming and coming, no matter what I do. The Social Security 
psychiatrist suggested I use my art to develop into a business. I have 
been trying. One evening as I was preparing to go to a ``juried'' art 
show, I was in the bath tub, when my husband called to me. I was naked 
at the time. A few minutes before my bath, I had called the IRS in New 
York State. The lady was not nice. She made some pretty ugly threats, 
enough to make me cry. I did not get a real chance to answer my 
husband, because into my bedroom, without knocking, walked some Marion 
County Sheriffs. How many I do not remember. I just remember trying to 
cover myself. Does this come close to Abu Ghraib? The sheriffs stood 
there and told a story of how someone had called from the IRS to their 
office from New York, gave our address, and said there was a sick woman 
with several guns, ``hold up'' in the bedroom of the home. Sir, Madam, 
whoever is on your Committee, we do not even own a gun. There was not a 
gun in the house. I hate guns and am scared of them, yet I am not 
against some guns and realize, they are necessary evils. I will never 
forget the humiliation of that evening, not long ago.
    Never have I failed to file a tax return. The IRS sends out 
letters: ``We have changed your return.'' How and why they never say. 
Try to call to ask a question, a simple one and one will get several 
different answers. The answers on the tax software is different from 
the IRS and the tax software people tell you, they don't know the 
answer. Call the IRS. I had this problem just this year when trying to 
get an answer to a question I thought was simple. The law was a new law 
and I imagined someone could answer it. You see, my daughter lives in a 
state where they have no income tax. The new law allowed one to use the 
sales tax deduction instead . . . yet there was no table, based upon 
income to use. No one could tell me the answer, so we just let it pass. 
Even the IRS does not know how their system works. Now I live in fear 
of doing taxes.
    Well, I suppose I have written enough. I have much more to say and 
have the documents to support my letter. I had planned to attach them, 
but all will not work as Word files, because some are IRS forms with 
lines in them.
    Please seriously take a look at the FairTax Bill #25. Provision 
need be made for owning a home and for charitable giving, but it will 
be good for the country. All 645 of the people who took the time to 
write of Internal Revenue Service Abuse will be pleased. I know there 
are many more citizens and taxpayers who will be pleased . . . more who 
will sleep better at night. If you on the Committee are able to effect 
change, you will sleep better, also.
    For a moment, please think of what you can do,
    Or even dream you can do. Then begin. PLEASE!
    Have courage, because courage is a mixture of genius, power and 
even a bit of magic.
    Engage yourselves, heat up those neurons,
    and the work will be concluded or resolved in some manner.
            Sincerely,
                                                  Claudia B. Treacy

                                 

         Statement of Christopher Trowell, Palm Coast, Florida
    The FairTax Act (HR 25 / S25): Clean out America's Economic 
Arteries.
    Forty years and 56,000+ pages of trying to repair the present tax 
code and we are definitely far worse off than we were 40 years ago. The 
so-called flat tax is what our grandfathers instituted in 1913 to 
redistribute wealth. From a 2-page tax code we have put ourselves into 
a situation that has produced the present unwieldy unfair system we 
have today.
    The single most often used words to describe a sales tax by its 
critics is that it would be unfair to those least able to afford it. 
However, if they were to look carefully at the FairTax bill (H.R. 25 
and S. 1493 in the Senate) they would see that with the Family 
Consumption Allowance (FCA) monthly rebate it is actually a progressive 
tax that distributes the tax burden among individuals in proportion to 
their ability to pay. I would like to know why you don't put that bit 
if information from its supporters in your commentary of the proposed 
sales tax.
    The second most important fact about the proposed FairTax is the 
fact that under the president's plan to privatize Social Security he 
doesn't tell us that within 30 years the number of retirees will 
increase by 100% while the number of workers supporting them will only 
increase by 15% in that time. Under that scenario the Social Security 
system will only survive by dramatically reducing benefits or 
increasing income taxes on all Americans. Under an income tax, by 
whatever name, Social Security will collapse within thirty years.
    By repealing the entire income tax code--the AMT, withholding, 
personal and corporate income tax, capital gains and the gift and 
estate tax and replacing it with a single rate, revenue neutral 23% 
national sales tax you achieve simplicity, protect seniors and the 
poor, and make the system transparent. But most importantly you solve 
the long-term solvency problem of Social Security.
    How? First it will be collected from 300 million Americans and 40 
million visitors to our shores. According to Professor Dale Jorgenson 
of Harvard University's School of Economics who participated in the 
four years and $20 million of research that went into the FairTax, 
revenues to Social Security and Medicare would double as the size of 
the economy doubles within fifteen years after the installation of the 
FairTax.
    I would further point out that we are actually paying a value added 
tax under the present system because we pay America's corporation's 
share of the income tax, the employer payroll tax along and their 
compliance costs. These taxes are imbedded in everything we buy (a 
hidden tax that actually hurts the poorest among us the most). The 
FairTax only taxes products and services at the retail level and does 
not tax used products such as automobiles. Nor does it tax business-to-
business products or services.
    According to the National Bureau of Economic Research that 
participated in the study of the FairTax GDP would increase almost 
10.5% in the first year after it goes into effect. Real investments 
could increase by as much as 76% and the incentive to work would 
increase by as much as 20%. Further, studies of the FairTax at Boston 
and Rice Universities suggest that replacing the income tax with the 
FairTax will bring long-term interest rates down to bond rates reducing 
interest by as much as 30%. Without the income tax and its associated 
costs imbedded in products going overseas exports would increase by 26% 
initially and remain more than 13% above present levels under the 
income tax. And, imports would carry the same tax burden at retail as 
our domestic product leveling the playing field.
    Think about it, if all of the world's investors could invest in our 
markets with no tax consequences, we would become the world's ``tax 
haven.'' Our $6 trillion off shore corporations would come home 
increasing values in the American market even more. And with the 
FairTax we would eliminate the complicated depreciation schedules, 
AMTs, credit and deduction schedules and their associated compliance 
costs that only confuse investors. In a nation without the income tax 
(flat or otherwise) only three numbers would have meaning in corporate 
America: earnings, expenditures and dividends.
    All wage earners would keep 100% of their income to spend or save 
without penalty. They would receive a monthly prebate for sales taxes 
paid up to the poverty level virtually un-taxing the poorest among us 
and seniors would keep their entire Social Security checks. The cost of 
goods and services would be cut by up to 30% without the corporate 
income tax, employer tax and their compliance costs being imbedded in 
the pricing system.
    And finally, with all of the above factors combined the FairTax 
would make the long-term solvency problem of Social Security possible 
while making privatization of the system viable without hurting seniors 
collecting it now.

                                 

                                           Winnetka, Illinois 60093
                                                      June 17, 2005
Dear Chairman Thomas and Committee Members,

    My name is Ron Vasaturo and I am writing on behalf of the Vasaturo 
family.
    We're writing to ask that you help change the Alternative Minimum 
Tax (AMT) provisions which have caused a great hardship to our family, 
unfairly. We ask that you recommend reform to the Alternative Minimum 
Tax provisions to allow the AMT credit for the Prior Year Minimum Tax 
to be applied up to 100% of the taxpayer's ordinary income tax. We are 
middle income taxpayers in our 50's that have a large AMT credit we 
will take to our grave unless the AMT provisions are revised to allow 
use of the credit towards ordinary income tax.
    In 2001 we had to pay an extremely large alternative minimum tax--
$250,000--for money we never received and never will receive. The 
$250,000 AMT tax was on top of the taxes we paid on our earned income. 
In 2000, I worked for a high technology company that provided me with 
incentive stock options each month, in lieu of any annual salary 
increases. Because my wife and I were in our 50s we decided to exercise 
the stock options each month and set aside the stock for retirement 
purposes. The company encouraged this, emphasizing the benefit of long-
term capital gains if we held onto the stock. We had no idea that the 
difference between the exercise price and the market value of the stock 
at the time of exercise would be considered income for alternative 
minimum tax purposes. We had never experienced stock options before. We 
thought we were to pay any taxes owed when we sold the stock, if we 
realized a gain. Having worked hard our entire lives and saved 
conservatively for a hoped-for retirement, we have always paid our fair 
share of taxes as part of what it means to be citizens of this country. 
So we expected that any real gain from stock options would be 
appropriately taxed. However, in 2001, when we prepared our tax return, 
we learned of our mistake and our whole world turned upside down.
    By 2001 the stock had dropped precipitously in value (the tech 
bubble burst), and, within a few months, my employer went bankrupt and 
I lost my job. We sold the stock for pennies a share, at a very 
substantial capital loss. We paid the huge AMT sum we owed in 2001 by 
liquidating our bank account and retirement mutual funds, funds we held 
sacrosanct and had never touched before. Understandably, we had spent 
many years saving towards achieving a retirement that could provide us 
with at least some dignity in our ability to meet life's future costs 
(medical expenses, etc.). Because of our ages (now 56 and 57), we are 
possibly the flip side of what is too commonly, and easily, thought of 
as the young college graduate who joins the Internet dot-com for fame 
and quick riches. We simply do not have the earning years left to 
recoup what the AMT has taken from us as taxes for money that we never 
received.
    As we understand, the AMT we paid because of incentive stock 
options is supposed to be a pre-paid tax that can be recouped in later 
years. That is not the way the law is working for us. We don't earn 
anywhere near enough income to be able to use our AMT credit. 
(Ironically, President Bush's recent tax cuts exacerbated this 
situation.) In order to be able to use the credit, one has to have a 
very high income--otherwise the ordinary tax does not exceed the AMT, 
and one can't use the credit.
    In 2001 and 2002 when we sought assistance and information from the 
IRS on how incentive stock options, capital losses, and AMT work, we 
only received incorrect and conflicting information. The IRS staff, and 
I spoke to several different people at the Service, did not seem to 
understand how the alternative minimum tax provisions work. When we 
sought assistance from tax accountants, we discovered the tax 
accountants did not understand this complex area of the law.
    This seems very unfair that we have been victimized so harshly by 
the unintended consequences of the Alternative Minimum Tax. We ask that 
the law be revised so that we can fully apply the credit to our 
ordinary income tax. We are seeking your help in recommending that 
taxpayers be allowed to apply the AMT credit for the Prior Year Minimum 
Tax up to 100% of their ordinary income tax.
    Thank you very much for the opportunity to provide you these 
comments and we hope that this Committee hearing will recommend changes 
to the law that will enable us to fully use our AMT credit so that we 
can one day pursue a retirement that we have worked so long and hard 
towards.
                                                       Ron Vasaturo

                                 

        Statement of Alan C Veeck, Jr, Pittsburgh, Pennsylvania
Dear Chairman Thomas and Committee Members:

    I strongly urge you to support legislation that would modify or 
repeal the Alternative Minimum Tax (AMT), especially as it applies to 
incentive stock options (ISOs). Although unintended, the AMT adjustment 
for ISOs has had a significantly detrimental, and in some cases, 
devastating, financial impact on individuals like me who exercised ISOs 
before the stock market downturn of 2000. Due to a severe depression in 
stock prices, many taxpayers who exercised ISOs in that year face AMT 
liabilities that are far larger than the exercised stock was worth in 
2001 and beyond.
    Affected taxpayers face huge tax bills, some in the hundreds of 
thousands and millions of dollars, on income that they will never 
receive. Although taxpayers can use their AMT payments as credits 
against future income, they will likely never recover the AMT credit 
because of the way the current law is written. Moreover, collecting 
credits into the future is hardly a consolation for those facing 
unbelievable cash crunches due to the magnitude of the tax. This result 
is vastly inconsistent with Congressional intent in enacting the AMT. 
Instead of assuring that ``the rich pay their fair share of taxes'', 
the AMT on ISOs is literally leaving middle-class Americans like me in, 
or near, financial ruin.
    Here is my story: in April 2000, I exercised 6,000 options that I 
earned with the company that I helped to build in Pittsburgh--
FreeMarkets, Inc. My exercise price was about $5/share, so I had to 
scrape together $30,000 to exercise these options. My plan was to hold 
the shares for a minimum of year, but more realistically several years 
because I truly believed in the long-term success of my company, and in 
this way I could recognize profits from stock sale as capital gains as 
opposed to income. I always do my own taxes, so when I fired up 
TurboTax and input my financials, I was more than a little shocked to 
find that I owed the IRS $85,000, and state and local taxing 
authorities about $10,000. This amounted to 110% tax on my earnings, 
when I have realized no actual cash gain! In analyzing my available 
solutions, even if I exercised my next set of options and sold the 
entire lot (12,000 shares), I would not be able to meet my tax 
obligation for the 2000 tax year.
    Quite obviously, this is an absurd situation. I have always, and 
will continue to, pay my taxes like every other red-blooded, patriotic 
American. I fully agree with the concept of paying my ``fair share'' on 
realized cash gains. But the AMT is forcing me and my family of five to 
face real financial ruin. My mother and father pulled significant money 
from their retirement savings to loan me money to pay the government so 
that my family did not have to sell its most important possessions. I 
haven't had to borrow money from my parents since I was sixteen!
    Your support for AMT reform is crucial, as this unfair and 
unintended tax is beginning to affect more and more honest, hard-
working taxpayers in the lower and middle income brackets.
    Thank you for your consideration of this very important issue.

                                 

         Statement of Robert E. Wellston, Jr., Acworth, Georgia
Executive Summary--The Fair Tax Plan
      Tax Reform Requirement--Simple without complexity of the 
current plan.
      Previous attempts at reform of Current System have led to 
a more complexity.
      Flat Tax is not the answer, the current system started as 
a flat tax of 1%.
      Value added Tax not the answer already have a 20-25% tax 
built into Cost of Goods. Economic disadvantage in the world markets.
      Fair Tax taxes consumption, not income:
          Simplicity of the Fair Tax Plan--no forms to file, no 
        records to keep. Productive time lost due to current tax 
        requirements will be recaptured.
          Truly a progressive tax--more consumption--higher tax 
        burden.
      Current System Problems:
          Penalizes Savings and Investments.
          Tax Avoidance and Reduction drive much of system.
          Easy to cheat by under-reporting or under table 
        payments.
      Fair Tax drives out compliance costs and market place 
squeezes out built-in tax burden out as corporate income tax are gone.
      Collects taxes from illegal immigrants as consumption is 
taxed.
      Under Fair Tax Plan, tax payer receives:
          100% of Income in every pay check.
          Pre-bate of taxes based on poverty level to all tax 
        payers.
      Fair Tax Plan is an idea whose time has come.
      Critics of the Plan usually show ignorance of the plan 
through wild comments.
      Must repeal the 16th Amendment to make plan work.
      Current System encourages Class warfare--Fair Tax Plan 
eliminates it.
The Fair Tax Plan
    President Bush charged the Tax Reform panel with looking at the 
current tax code and determine if the system can be reformed or whether 
a new system is needed. The President's requirement was that any new 
system be easy to understand, administer and most of all fair. With 
this and other charges in mind, the Tax Reform Panel heard various 
proposals. I would like to comment on the Fair Tax Plan also referred 
to as the National Retail Sales Tax Plan.
    I consider myself to be fairly intelligent, but I shudder every 
time I have to prepare my income tax. With all of the changes that 
occur every year, it is almost impossible to feel confident about your 
tax preparation after you complete all of the forms. The hours spent 
gathering the information and then filling out the forms is the least 
productive time of the year. Any system that eliminates the need for 
the taxpayer to file tax forms is less complicated.
    The Fair Tax Plan is simpler because an individual does not have to 
keep useless records or spend endless hours pouring over the Income Tax 
forms because there are no forms. The tax is collected at the point of 
sale. An individual's need to file is gone.
    Various proposals for reforming the current system were presented. 
Reform of the current system is doomed to failure because it will only 
add to its complexity as previous attempts at reforms have clearly 
demonstrated. Special interest groups will quickly undo any attempt at 
reform. The current system is clearly beyond reform a new system is 
needed.
    The Flat Tax is another proposal made to the panel. It is important 
to remember that our current system started out as a flat tax, a one 
percent tax on income. The one percent flat tax did not last long. It 
took less than one hundred years for a simple one percent flat tax to 
turn into the monster we currently have. Another flat tax would take 
less time to be screwed up, the special interest groups and the 
Congress have learned a lot about putting their hands in the Tax 
Payers' pockets. Somehow the idea that the money belongs to the people 
that earn it gets lost when people are sent to Washington to take care 
of the people's business.
    Some have called for a Value Added Tax. Reputable economists have 
stated that the built in tax burden on all goods and services is 
approximately 20-25%. How much greater tax burden can the American Cost 
of Good Sold support without putting the United States at a greater 
economic disadvantage than it already faces in world markets.
    There was one tax reform proposal presented to the panel that meets 
the President's requirement that reform must simplify the current 
structure. This plan is the Fair Tax Plan (HR 25/S 25). The Fair Tax 
Plan eliminates a number of problems that the current system produces. 
It is eminently fair because it taxes consumption and not income. It is 
truly a progressive tax in that the more an individual or family 
consumes, the more taxes that individual or family pays. ``It is a 
singular advantage of taxes on articles of consumption that they 
contain in their own nature a security against excess. They prescribe 
their own limit, which cannot be exceeded without defeating the end 
purposed--that is, an extension of the revenue.''--Alexander Hamilton, 
Federalist No. 21
    One of the major problems with the current system is that it 
penalizes savings and investment. The truth of this statement is 
demonstrated in the existence of the 401K Plan and its ilk, the IRA 
Plan, the RRA Plan, Corporate Deferred Income Plans, etc. The one thing 
that all of these plans have in common is the near term avoidance of 
tax on savings and investments. Most of the plans seek to defer taxes 
until such time as the earners taxable income is less and therefore 
taxed at a lower rate. Even the sacred deductions for mortgage 
interest, charities, and others are viewed as a way to avoid income 
tax. Those that cry out that the Fair Tax Plan would eliminate these 
deductions ignore the fact that if the taxpayers were not paying taxes 
on income but on expenditures, these deductions and special saving 
plans would not be needed. They also ignore the fact that as tax rates 
have fallen, donations to charity have risen. If an individual or 
family chooses to invest extra income to create personal wealth and 
boost the economy, there is no tax or disincentive to invest.
    If the Fair Tax Plan was enacted the cost of new goods would be 
reduced significantly as the market place squeezes the cost of the tax 
burden out of these goods and services. The overall impact on the tax 
payer would be neutral or slightly positive, assuming that the Fair Tax 
Plan as implemented would have an approximately 23% tax rate. The 
economists have also stated that the impact on the American economy 
would be unbelievable, doubling the size of the economy in 
approximately five years. Concerns about jobs going overseas would not 
disappear, as lower skill jobs continued to move to lower skilled labor 
pools, but the higher skilled job market would boom, as the United 
States became the Land of Business.
    It is easier under the current system to cheat by under-reporting 
income or by being paid under the table for services. The decision not 
to report income is an individual choice. Under the Fair Tax Plan, it 
requires a conspiracy of the buyer and seller to cheat. An audit of the 
seller's inventory will demonstrate if sales are under reported, the 
same type of audit that states with sales tax currently perform.
    In addition to attracting new business to the United States because 
of the business friendly climate, the compliance costs associated with 
the current tax code would be driven out of the Cost of Goods Sold. 
Many tax payers erroneously think that corporation are paying taxes to 
the government, and that more revenue can be generated by raising 
corporate taxes. This is totally untrue. The cost of those taxes are 
embedded in the Cost of Goods Sold and the taxpayer ultimately pays 
those taxes. Eliminating Corporate Income Tax is a good thing.
    There are several added side benefits of the Fair Tax Plan that are 
easily overlooked. Illegal immigrants and legal visitors to our shores 
would have to pay the 23% on retail goods. Currently, the illegal 
aliens do not pay Income Tax, but they receive benefits from our 
government. This free ride would be eliminated. The additional tax 
burden placed on illegal immigrants may discourage many from crossing 
our borders illegally. Our neighbors to the South would have to find 
ways to fix their economic problems besides the billions of dollars 
sent home every year by illegal immigrants to our country. An 
additional side effect of the Fair Tax Plan is helping to secure our 
borders.
    The Fair Tax Plan would also allow for adequate funding of Social 
Security. The so-called payroll tax would be eliminated under the Fair 
tax Plan and Social Security and Medicare would be paid out of the 
general revenue received from the tax. There would be no more hidden 
taxes and Members of Congress and Senators would have to vote openly to 
increase the Fair Tax Rate.
    The pre-bate provision of the Fair Tax Plan specifically addresses 
problems that lower income earners might have with cash flow. It is 
important to remember that the wage earner now has a chunk of his/her 
wages withheld, but under the Fair Tax Plan every income earner would 
receive 100% of his/her wages. The pre-bate provision reimburses all 
taxpayers the amount of taxes they would pay based on the Federal 
poverty guidelines. So basically a low-income wage earner would receive 
100% of their wages plus the pre-bated taxes the government estimates 
they would pay for basic necessities of life prior to expenditure. The 
low wage earners might actually have an opportunity to save some money 
for a home, or an education, or retirement.
    The Fair Tax Plan is an idea whose time has come. Texas and Florida 
function very well without income tax as does Tennessee and Nevada. It 
is time to make the government live within the means of the American 
people. The Fair Tax Plan is about taxation only. It is not political 
in that neither party wins nor loses with its implementation. If it has 
some beneficial side effects like solving the funding problems for 
Social Security, or lowering transfer payments to the poor, or making 
America a less attractive place for illegal immigrants, who are we to 
complain.
    I believe that if the Tax Reform Commission put its collective ears 
to the ground they would hear the ground swell of support for the Fair 
Tax Plan. The people who speak against the Plan usually display their 
ignorance of the plan through the statements that they make. They usual 
wild claims include that the plan is another ``tax the poor, for the 
benefit of the rich'' plan. Remember the Tax is only levied when an 
item is purchased new. So if a low-income earner buys a used car 
without paying the Fair Tax and buys a previously owned home without 
paying the Fair Tax, how does this plan adversely impacts the low-
income earner? It the low-income earner receives his/her whole pay 
check instead of 75% of it, how does this adversely impact the low-
income earner? If the low-income earner receives a transfer payment 
from the government for the taxes they would pay for the basic 
necessities of life, how does this adversely impact the low-income 
earner? The current system with its built-in breaks encourages class 
warfare; the Fair Tax on consumption eliminates class warfare. The so-
called rich, who are in actuality hard working small business owners 
and others who have made positive choices in their lifetime to work up 
to a higher standard of living, consume more--more gasoline, more food, 
more housing, etc., they would pay more taxes. The more you consume, 
the more you pay. If these ``rich'' don't consume all of their income, 
then they are saving and investing, thereby creating job opportunities 
for others.
    One critical element that must be included in any legislation to 
implement the Fair Tax Plan is an amendment to repeal the Sixteenth 
Amendment. Without the repeal of the Sixteenth Amendment, the American 
Tax Payer is open to confiscatory tax rates that will undoubtedly lead 
to a New American Revolution. A lack of meaningful reform could easily 
lead to that same revolution. We are getting close to ``No Taxation 
without Representation!'' echoing throughout our land once again.

                                 

           Statement of Michael Wertheim, Oakland, California
    I am an average middle class employee. In 2000, I worked for an 
internet company called Critical Path. I received incentive stock 
options as part of my compensation. I exercised the stock and have not 
sold it. No one ever advised me to sell the stock before the end of the 
calendar year to avoid certain Alternative Minimum Tax problems. By the 
time my accountant prepared my income tax bill for 2000, the 
Alternative Minimum Tax on my stock was $64,000. This is despite the 
fact that the current value of the stock at the time was only $8,000 
(and is now worth only $2000). The $64,000 tax bill far exceeded my net 
worth.
    I paid the entire $64,000 tax bill on April 15, 2001 and generated 
a $64,000 tax credit, by liquidating savings and borrowing money from 
my family. At this rate, it will take me over 20 years to use up my AMT 
credit because the tax code allows me to apply only $3000 of my AMT 
credit towards my income tax each year. Essentially, I have been forced 
to make a $64,000 20-year loan to the government interest-free.
    Some day my wife and I would like to buy a house and send our 
daughter to college, but both of those plans are on hold until we can 
regain our financial standing. After my parents loaned me money to pay 
my tax bill, the rest of the family is feeling the financial pain, too. 
My parents, who are both in their 60s, no longer feel that they have 
enough money for their retirement. All these changes--to pay tax on 
income I never actually received.
    Please fix the tax code to better reflect reality. Taxes should not 
exceed the value of the actual gain or stock being taxed.
    Please also make it possible for people in my situation to make 
quicker use of AMT credit by changing the $3000 per year limit.

                                 

                                             Gilbert, Arizona 85234
                                                      June 20, 2005
To Honorable Chairman William M. Thomas and House Ways and Means 
Committee--Tax Reform Hearing

Dear Chairman Thomas and Committee Members

    I am writing to ask for your support and would appreciate your 
taking a moment to read this letter. As many others, I feel compelled 
to tell you about an issue which has and is devastating many American 
people. I am speaking, of course, about inequitably taxing individuals 
via the Alternative Minimum Tax (AMT). The AMT has become a 
particularly critical issue for many Americans for the past several tax 
seasons and looks to remain critical for many years to come.
    As a working professional for the past 20 years I was fortunate to 
work for a company that offered ISOs as additional compensation for my 
hard work. After acquiring much of my stock in contemplation of 
retirement, I held it so as not to be penalized for selling it in the 
short term. I then watched helplessly as my dream of retirement 
vanished. My loss was not the result of the drop in stock price but the 
inequitable taxes I faced under the AMT.
    I lost about 75% of my retirement nest egg because of the 
unexpected $460,000 AMT bill and a $200,000 margin loan left over from 
meeting the tax obligation, which accumulated thousands of dollars of 
interest monthly. After several years of anguish and finally selling 
additional stocks to pay the margin loan created by the AMT, the end 
result was a loss of 32,000 of my 36,000 shares of stock, which I had 
accumulated over the past 20 years. Not only did I lose the 18,000 
shares I exercised that particular year, which created the AMT, but I 
also lost 14,000 shares I had accumulated, owned, and had paid taxes on 
already for the previous 20 years. When the dust settled I was left 
with 4,000 shares of stock out of 36,000; I had to use the rest to pay 
taxes on a gain I never realized.
    Some type of reform and return of taxes paid on my imaginary gain 
are all I can hope for along with a hope that some of my remaining 
investments will recover, but I now realize I will never be as 
financially independent as I once was. The damage has been done and I 
will never be able to recover the investments that I liquidated to pay 
this tax.
    Please do not misunderstand me; I have no problem paying my tax 
obligation, but I should have paid it on my actual gain when I realized 
it--not on an imaginary paper gain that never materialized, thereby 
devastating my financial future.
    Because of this outdated law, I, along with many of my co-workers, 
friends, family, and many Americans, now find myself in this dreadful 
situation. Many American families are now on the verge of declaring 
bankruptcy and others are forced to sell assets (including their 
children's college, savings, cars, refinancing or selling of homes, 
401k/IRA pension plans liquidation etc.) to help pay the taxes on 
monetary gains that they never realized.
    Some may argue that this tax payment actually becomes a credit, yet 
in most instances it is a credit that the taxpayer can never recover. 
It is doubtful my investments will ever see the growth seen in the 
1990's and, therefore, I will never be able to realize any significant 
returns from my huge credit. In essence, the taxpayer can lose all 
their investment money, and also other assets, simply to create a tax 
credit in their IRS account.
    This practice of requiring the payment of taxes when stock is 
purchased is misguided and can lead to dangerous economic consequences. 
Forcing people into bankruptcy and draining life long retirement 
savings does not serve the interests of hard working Americans.
    Your support is needed, now, to circumvent the damage being caused 
by the existing law and to help those whose financial future was 
ruined. We respectfully ask that you further investigate the disastrous 
consequences of the Alternative Minimum Tax and please support all 
efforts towards reform and recovery for those who have lost their hope 
of comfortable futures in their senior years.
            Respectfully,
                                                      Jeff Wienrich

                                 

            Statement of Raymond Woodward, Lombard, Illinois
Fair Tax Explanation
    The Fair Tax plan (Senate Bill S25/House Bill HR 25) is a plan to 
eliminate all income and payroll taxes and replace them with a National 
Retail Sales Tax (NRST) of up to 23% (tax-inclusive).\1\ Many people 
will hear this and think, my God, we are going to have to pay a 23% 
sales tax on top of what we already pay? NO WAY I'M SUPPORTING THAT! 
Well this is not exactly true. Here is how it will work:

    \1\ Tax-inclusive--The National Retail Sales Tax rate would 
actually be 30%, tax-exclusive. However, for comparison purposes, a 
tax-inclusive rate of 23% is used. Here is why:

    1.  The 16th amendment will be repealed, and all income and payroll 
taxes will be eliminated. Employees will take home 100% of their pay. 
Income from investments, savings accounts, etc will no longer be taxed. 
Whatever money you earn, you keep. This is equivalent to at least a 8% 
raise for low income workers to a 25% raise to middle income workers.
    2.  All taxes on businesses will be eliminated. These taxes are not 
really paid by the businesses but are passed along to the consumer. 
According to a Harvard University study, approximately 22% of the price 
of consumer goods is due to taxes. Since the sales tax will be 
approximately 23%, it's effectively a wash.
    3.  The REFUND. The government would send out a check (or a bank 
transfer) for the sales tax paid on the basic necessities based on the 
size of your household. For an example, take a family of four. The 
basic cost of living, which is already calculated by the government, is 
approximately $24,100 for a family of four. Assuming a maximum sales 
tax of 23%, that family would pay $5543 in sales tax for the basic cost 
of living. To compensate for this, the government will send out a 
refund of $461.92 every month to every family of four in the country.
Why will this work?

    1.  The Fair Tax will tax people on consumption. The current system 
taxes based on productivity. People who are productive are penalized 
while those who are not productive benefit. This can lead to a decline 
in production. An addition, the current tax code encourages people to 
avoid the system (illegal or under-the-table work) or to get special 
dispensations (exemptions or loopholes). Tax lobbying is a multi-
billion dollar a year business.
    2.  The tax is on the retail level. It doesn't include private 
party sales and other sales of used items. There will be no taxes on 
you neighborhood garage sales, used cars, or even used homes.
    3.  ELIMINATE THE IRS. This benefit is multi-fold. The cost of 
operating the IRS is huge. In addition to the salaries for the 
auditors, return examiners, etc, there are also legal fees associated 
with collecting back taxes, etc. Another benefit is that you won't have 
to report your life history to the IRS just to get your deductions. It 
also eliminates loopholes as a lobbying strategy as well as playing 
politics with taxes and class warfare (e.g. giving tax cuts to rich 
people or saying that your opponent wants to give tax cuts for rich 
people). As for collecting taxes, 46 states already collect sales tax 
at the retail level. The additional taxes could be collected by these 
state systems with little or no increased costs. The remaining duties 
of counting the taxes, etc. could be folded into the GAO or kept in a 
much reduced form.
    4.  There is currently a $1-$1.5 trillion per year underground 
economy. This economy currently pays no taxes. However the people who 
make this money still go out and spend it. The Fair Tax would bring in 
more than $300 billion per year (30% of 1 trillion since this money is 
tax-exclusive) in additional revenue from the underground economy 
alone.
    5.  Up to 18% of our economy is spent on complying with the current 
tax code. By eliminating the tax code, the economy would save $4 
trillion over the next 10 years.
Progressivity
    Many people say that a 23% tax rate is not progressive because 1) 
poor people currently pay no taxes and 2) poor people have to spend a 
much larger percentage of their income on cost of living expenses. 
Those who think that poor people pay no taxes are kidding themselves. 
Businesses pass along taxes in the form of higher prices, and any time 
someone buys an item they are paying taxes. This includes those who can 
afford it the least, the poor. By eliminating these embedded taxes and 
giving a rebate on taxes paid up to the cost, poor people will truly 
pay no taxes under the FairTax plan. This applies to those who qualify 
for the earned income tax credit as well as those on social security 
who pay no taxes. Any family of 4 that makes less than $24,000 not only 
will pay no taxes, the prices they are paying for items will be 22% 
less. A family making $50,000 will only pay taxes on 50% of their 
income. A family making $100,000 will pay taxes on 75% of their income. 
That is progressivity.
So what does this mean for poor and middle class people?
    Take that family of four that makes $24,000 a year. Under the 
current system, they are bringing home approximately $1800 per month 
($2000 per month minus social security, medicare, and FICA which adds 
up to about 10%). Although money may be taken out for income tax, they 
will receive a refund, so that money is not included in the 
calculations. Under the Fair Tax system, they would take home $2000 per 
month. In addition, they will receive a monthly check for $462 a month. 
So their monthly income is now $2462. The price of goods will be about 
the same, so they have more spendable income.
    What about someone making less like that elderly couple on social 
security? People on social security pay no taxes, you say, so how will 
they benefit? While it's true they don't pay any income tax, they do 
pay the embedded 22% taxes in goods and services they purchase. 
Eliminating these will offset the sales tax. In addition, they also get 
the refund, which should basically refund all of the money they spend 
on sales tax. So under the Fair Tax system, they are actually BETTER 
OFF than under the current system.
Summary--How it would affect families of three at different economic
        levels?
    A.  $25,000/year income--Under the current system a family of 4 
making $25,000 per year not only pays no income taxes, but receives a 
small rebate due to the earned income tax credit (EIC). However, they 
spend all of their income on the basic necessities and have about 8% of 
their income taken out in payroll taxes. The FairTax leads to a 22% 
increase in spendable income.


                                 Current System
                                                                                   FairTax

Income                                   $25,000                                   $25,000
Income Taxes                                --$0                                      --$0
Payroll Taxes                           --$1,912                                      --$0
Embedded Taxes                          --$5,471                                      --$0
Sales Tax                                   --$0                                  --$5,750
Rebate                              $1,780 (EIC)                                    $5,727
                             -----------------------------------------------------------------------------------
  Spendable Income                       $19,397                                   $24,977



    B.  50,000/year income--Under the current system a married family 
of four making $50,000 per year pays a small amount in income taxes in 
addition to payroll taxes. The FairTax calculation assumes that they 
spend all of their income rather than saving any, which would reduce 
their sales tax reduction. The FairTax leads to a 21% increase in 
taxable income.



                                 Current System
                                                                                   FairTax

Income                                   $50,000                                   $50,000
Income Taxes                            --$1,350                                      --$0
Payroll Taxes                           --$3,825                                      --$0
Embedded Taxes                          --$9,861                                      --$0
Sales Tax                                   --$0                                 --$11,500
Rebate                                        $0                                    $5,727
                             -----------------------------------------------------------------------------------
  Spendable Income                       $34,964                                   $44,227



    C.  100,000/year income--Under the current system a married family 
of four making $100,000 per year pays a significant amount in income 
taxes in addition to payroll taxes, even factoring in deductions. The 
FairTax calculation assumes that they spend all of their income rather 
than saving any, which would reduce their sales tax reduction. The 
FairTax leads to a 24% increase in spendable income.



                                 Current System
                                                                                   FairTax

Income                                  $100,000                                  $100,000
Income Taxes                           --$10,630                                      --$0
Payroll Taxes                           --$7,030                                      --$0
Embedded Taxes                         --$19,507                                      --$0
Sales Tax                                   --$0                                 --$23,000
Rebate                                        $0                                    $5,727
  Spendable Income                       $62,833                                   $82,727


What does that mean for the economy?
    Because businesses will no longer have to pay an overwhelming tax 
burden, the implications of this plan on the economy are overwhelming. 
The prices of American made goods are going to drop by approximately 
22%, making them more competitive in the overseas markets. Studies 
estimate that exports will increase approximately 26% in the first year 
alone. An increase in the sales of American-made goods will mean an 
increase in jobs. That doesn't count the increase in sales of U.S.-made 
goods here in the U.S. In addition, foreign countries will want to take 
advantage to the tax shelter provided by the U.S. and will bring their 
businesses here. This will further increase the jobs available. The 
U.S. would be the fastest growing economy in the world.
    In addition, the FairTax would encourage saving and investing. 
Saving and investing would further drive economic growth. Our current 
tax code actually discourages investing, at least from domestic 
investors. Foreign investors, who are not subject to our tax code 
system, are able to accept lower rates of return because none of their 
returns are being eaten up by taxes. This gives foreign investors a 
much greater advantage in the U.S. economy, one that might be dangerous 
in these politically unstable times.
Why is the Fair Tax better than alternative plans such as the Flat Tax?
    1.  The Fair Tax plan places the tax burden on those who spend 
money. Since those who have more money tend to spend more money, it 
will tax people who have money more than it will those who don't.
    2.  In addition, both the economy and individual situations tend to 
be cyclical. People tend to spend more when they are in a good 
financial situation than when they are in a bad financial situation. 
The Fair Tax plan would distribute the tax burden more heavily onto 
those in a good financial situation while reducing the burden on those 
in a bad financial situation. The Flat Tax taxes you equally under both 
situations.
    3.  The Fair Tax plan doesn't penalize you for saving money and 
investing. Only for spending.
    4.  It is simpler to tax everything and then give a refund than to 
exempt certain necessities (food, clothing, etc). For example, if you 
exempt food, what about candy bars? Should they be considered food? If 
a wealthy individual goes out and spends $3000 for food for a party, 
should they not pay taxes on that food? The same thing goes for 
clothing. Does that $3,000 Armani suit get an exemption? Where do you 
draw the line? The refund eliminates these loopholes.
    5.  The Fair Tax is better than a Flat Tax for several reasons. 
First of all, the current tax system started out as a Flat Tax. Second, 
the Flat Tax still requires an IRS. Third, the Flat Tax still penalizes 
productivity and is easier to avoid by paying under the table. You 
still have to file an income tax return, so there is still the cost of 
compliance. The Flat Tax still penalizes businesses in this country, 
making it more difficult for them to compete against overseas companies 
and encouraging outsourcing.
    6.  The Fair Tax frees up money for companies to expand, hire more 
people, give better benefits, etc. In fact, with the economic growth 
predicted if the Fair Tax is passed, so many jobs would be created that 
the unemployment rate would shrink to next to nothing.
    7.  The tax revenues from the Fair Tax increase as the economy 
grows.
    8.  Tax increases are less likely to occur. The current tax code 
has many hidden taxes (such as taxes on businesses) which are passed on 
to the consumer but which you don't see. With the Fair Tax, the tax is 
in the open, and politicians are less likely to raise it due to fear of 
public outcry.
Why the Fair Tax is going to be difficult to pass
    1.  The current tax code has major advantages to those in 
Washington.
          a.  There is a multi-billion dollar industry that is designed 
        around lobbying for exemptions and loopholes for different 
        products and industries. This industry is located in Washington 
        DC and has the ears of the politicians.
          b.  Politicians use the current tax system to get elected and 
        maintain their careers (e.g. tax cuts for the rich; two 
        Americas). They tend to put what's best for them ahead of what 
        is best for their constituents.
    2.  Politicians are resistant to change. They don't like to rock 
the boat. Just look at Social Security reform.

    THE FAIR TAX PLAN IS PICKING UP SUPPORT IN WASHINGTON, BUT IT WILL 
TAKE MUCH MORE TO GET IT PASSED. IT WILL REQUIRE A LOT OF PRESSURE FROM 
THE AMERICAN PEOPLE ON THEIR SENATORS AND REPRESENTATIVES IN ORDER TO 
MAKE THEM UNDERSTAND THAT THIS LEGISLATION IS IMPORTANT TO YOU. 
LOBBYISTS ARE ALREADY AT WORK TRYING TO SHUT THE FAIR TAX MOVEMENT 
DOWN, AND THEY HAVE THE EARS OF THE POLITICIANS. IF THE FAIR TAX IS TO 
BECOME REALITY, THE MEMBERS OF CONGRESS MUST BE MADE TO UNDERSTAND THAT 
THEY NEED TO PASS THIS LEGISLATION. WRITE YOUR CONGRESSMEN TODAY!
    If you purchase an item for $100 and of that total $23 goes to the 
government while $77 is retained by the retailer, the tax rate is 23% 
tax inclusive. If you purchase an item which costs $77, a 30% sales tax 
would increase the item by $23, bringing the total to $100. The first 
example is the tax-inclusive rate while the second rate is tax-
exclusive. Because embedded taxes and income taxes are calculated tax-
inclusive, we use the tax inclusive rate for the income tax rate for 
proper comparison.

    Sources:

    Americans for Fair Tax--http://www.fairtax.org/
    Citizens for an Alternative Tax System (CATS)--http://www.cats.org/
index1.php4
    Presentations to the President's Advisory Panel on Federal Tax 
Reform March 16, 2005 (particularly presentations by Brian Westbury and 
Katherine Kennedy) http://www.taxreformpanel.gov/meetings/meeting-
03162005.shtml

                                 

                                           Elmsford, New York 10523
                                                       June 4, 2005
    An extremely important and delicate relationship exists between the 
citizens of this great country and its Federal Government. Putting it 
lightly, this relationship is very much aggravated by our current 
income tax system. Why must we have a tax system that causes so much 
friction? It need not be like this. As Mr. Goldberg so clearly stated, 
``What I find so discouraging is the gulf between what can be done and 
what's being done. It's not as though we are lacking for ways to 
simplify the system . . . there is no end to the good ideas; what's 
lacking is their enactment into law''\1\.
---------------------------------------------------------------------------
    \1\ TAX CODE SIMPLIFICATION--FRED T. GOLDBERG, JR. 15 June 2004, 
Congressional Testimony by Federal Document (c) 2004 FDCH / eMedia, 
Inc. All Rights Reserved.
---------------------------------------------------------------------------
    We have created an environment that punishes hard work, savings, 
capital investment, and the entrepreneurial spirit. A tax system that 
has sliced and diced our country into a myriad of categories, groups, 
industries, races, classes, non-profit/profit, all clamoring and 
pleading with Washington for ``breaks'', causing the very foundation of 
America to twist and bend with those who best promote their cause. The 
end result causing friction, lack of confidence, confusion, 
frustration, anger, in a nutshell, class warfare between all Americans.
    We spend over $200 billion dollars and 6 billion hours in complying 
with over 42,000 pages of code. At the end of it all it is estimated 
that some $300--$500 billion dollars escapes taxation and no tax 
preparer arrives at the same conclusion given a set of circumstances. 
Knowbody knows what the heck is going on!
    The Whole System is Unfair because it doesn't treat everybody 
equally. It has strayed from what should be the original intent of any 
taxing system, the Collection of Taxes. It has been warped into a tool 
for social change, (this is like trying to clean a window with a 
bulldozer), causing the environment which I have described above.
    The following must be recognized:

      The sole guiding principal is Collection with Simplicity 
and Fairness as the characteristics.
      Administered equally to all with one rate and with no 
exclusions. Note that I am a home owner and I donate to many causes
      Any re-distribution of wealth should be in the form of 
specific targeted accountable programs. Of course we need to help those 
who are less fortunate, however, do not do it in the tax system.
      Only consumers pays taxes.
      Don't be too overly concerned with transitioning. Though 
we don't like having to do it, we have become quite resourceful and 
adept at doing it. How? With every modification that occurs with the 
current income tax code and there have been over 14,000 changes since 
1986.

    I am of the belief that we pull the income tax out by its roots so 
it will never grow back. I implore you to support the FairTax, H.R. 25 
& S.25.
    Realize, that we find ourselves in a wonderful moment in time where 
we have a leader in President Bush who recognizes that America has 
problems and is willing to confront those problems. I believe our 
income tax system is one of the largest and most pervasive problems 
that we face today and it isn't worthy of our United States of America.
    Thank you.
            Most Respectfully,
                                                     Adam S. Yomtov

    PS. Pregnancy is complicated. Paying our Federal taxes need not be!
    Statement of The Honorable Fred T. Goldberg, Jr. Commissioner, 
Internal Revenue Service, 1989-1992
    Subcommittee on Oversight/Committee on House Ways and Means June 
15, 2004

                                 

    Statement of Heather and John Youskauskas, Eldersburg, Maryland
    Dear Chairman Thomas and Committee Members: My name is Heather 
Youskauskas and I am writing on behalf of my family, John, William and 
Robin. We appreciate the opportunity to discuss the hardships we have 
suffered due to the challenges that have been set forth by the 
Alternative Minimum Tax Laws. We hope that our situation can assist 
with putting into place changes that will allow for more reasonable tax 
guidelines as opposed to such restrictions that have been causing 
financial turmoil for so many Americans.
    I am attaching the original letter that we wrote when we first 
experienced our AMT issue and although the language is fairly bitter, I 
felt it needed to be included as we truly feel that this has come to 
harm so many taxpayers. It was a plea for help because our situation, 
while unique, is so similar to many other Americans and we felt 
helpless. My only hope is that you will read it with compassion and be 
open-minded as there are thousands of stories that are more heart 
wrenching than ours.
    We have since reconciled our tax debt, but still are waiting on tax 
credits that will come to us in small portions over the next several 
years. Please help us implement a new tax law that does not create a 
phantom tax on unrealized gain. No one should have to pay tax for 
something that is not tangible, but rather looks good on paper. We beg 
of you and your committee members to take a look at how this would 
affect you if you were faced with the same situation. Only then will 
change be possible.
            Respectfully,
                                             Heather L. Youskauskas
                                 ______
                                 
To Whom It May Concern:

    The spirit of Naziism, Socialism, and Communism has found a 
protective incubator in the IRS. In other words, the IRS has become a 
police state, an entity so independent that it rules, as does no other 
area of our government, with utter disregard, indifference and 
hostility toward the populace. It is astounding that those words, 
thoughts, and feelings of contempt would be vocalized by me. The issue 
of injustice concerns a young couple in their early 30's, Heather and 
John, parents of a 10 year old boy and a one-month-old baby girl. They 
are Middle Americans, both hard working. Heather's company went public 
one year ago in July and was the largest IPO to hit Wall Street raising 
capital in excess of $400 million. On the day she was hired with the 
company, she was given Incentive Stock Options (ISO's), which was the 
norm at that time warranting lower salaries and possibly attracting 
more experienced employees. At the time of the gift, the value of the 
stock was $1.15 a share. They were told that the stock could not be 
sold, traded, disposed of in any lucrative way for six months (with 
additional lockup periods each quarter due to her being considered an 
``insider.'') she was forced to sign a Lockup Agreement. Then, during 
this period of no-sale, two things happened. The value of the stock 
went from $114 to $25, and another tax year was entered. Also, even 
though they were prohibited from selling, the IRS valued the stock as 
though it was income, which it was not and subsequently levied the tax 
along with penalties and interest, as they could not afford to pay.
    She was not allowed to cash in this ``gift'', and so received 
nothing from it. However, on paper, the stock was highly valued, as 
were so many of those high-tech companies. Consequently, the IRS, 
seeing dollars on paper, declared that Heather and John owed 
approximately $83,000 in taxes (due to the Alternative Minimum Tax Laws 
or AMT); however, after interest and penalties over a six month period, 
they now owe $96,000 and have been forced to hire a tax attorney to 
assist them in dealing with the IRS. Shocking, as their net worth or 
income nowhere approach this number and have greatly decreased due to 
the downward market trends.
    I do understand tax levied on real income. I do not understand how 
tax can be levied on phantom income from anyone whether white collar, 
blue collar or destitute. Not only have they not received a penny from 
the stock, but real money will be paid to satisfy this levied burden--
monies which have already been taxed once because that is how the IRS 
tax laws are written. In addition, they will literally be loaning the 
IRS money interest free, but will have to take approximately 28 years 
to get it back through tax credits as you may only claim a certain 
amount each year. Thus, shattering any hopes of putting money away for 
their children's education, not to mention possibly being forced to 
file for bankruptcy to alleviate paying other debts in order to pay the 
tax bill. Is this really what the ``Land of the Free'' is all about? 
Please tell me that I have misunderstood and there is some way to 
rescue them??
    The young folks tried explaining their situation to the IRS 
officials. The ``kinder'' IRS folks retaliated by telling them to sell 
their home of two years, their cars, turn over their savings account 
and all their monies in their IRA's. The ``kinder'' IRS was indifferent 
to the fact that the couple never received any distribution from the 
stock. The ``kinder'' IRS was indifferent that the young mother was 
placed on disability because of pregnancy complications and then 
subsequently laid off from the company, whose stock has now plummeted 
to $.70 a share. The ``kinder'' IRS was indifferent to the mother's 
concern over the baby's heart murmur and breathing problems. The 
``kinder'' IRS told her to find a job soon so that she could begin to 
pay these taxes. Obviously the ``kinder''IRS honors money ahead of 
motherhood and family values. The ``kinder'' IRS would not take into 
consideration that it would cost more than $700 per month for child 
care for the baby, and that this amount would not cover any before and 
after school care for the 10 year old son if she went back to work. The 
``kinder'' IRS would not listen to the mother's physical needs, which 
are recovering from the Caesarian section, leaving her a bladder with 
no sensation. The ``kinder'' IRS does not understand kindness. The 
``kinder'' IRS is unable to quantify a situation. The ``kinder'' IRS 
can only see numbers on a paper and is indifferent to the honest 
situation surrounding those numbers. As I said in the beginning, the 
``kinder'' IRS is its own Gestapo State.
    This problem is perceived by U.S. Congress as being inappropriate, 
but measures to correct it in the House were defeated by reasons 
unknown. However, my understanding is that while these measures were 
defeated, Government respectfully asked that the IRS not go after 
victims of this nature. Maybe this is the government's way of taxing 
the rich and protecting the lower and middle-income citizens; however, 
this type of situation has hurt many middle Americans and will continue 
to do so unless something is changed and fast. Taxpayers should not be 
forced to pay tax on income that never materializes in order for the 
IRS to protect their interests up front from any massive overall gain. 
How the Government can standby and watch this happen to so many, I will 
never understand. Especially in a time when things are so tough 
financially.
    In closing, I would like to say that I have always loved the simple 
fact that I am an American. Nothing filled me with more pride that 
being from a country that fought so hard for its freedom and protecting 
its own other than watching my children smile and reach for their 
dreams. Living the ``American Dream'' is all I ever wanted. However, it 
has been a long cold year and I fear that my pride is turning to hate 
and utter contempt for my country for the simple fact that we can run 
to protect so many other countries, forgive foreign debts beyond 
comprehension, and pardon those who honestly do not deserve it, but 
when given the chance to truly help our own, we refuse or reply, ``I'm 
sorry, but that is just the way it is.'' Please tell me that this is 
not the way it is and that we can rest knowing that this will be taken 
care of because it is truly not right? Please tell me that I do not 
have to explain to my children why we could not put away money for 
their education and other things and pray they do not develop mere hate 
and contempt as well, but rejoice and give thanks that we live in a 
land where people are truly merciful??
            Bitterly,
                                         John & Heather Youskauskas
                                 ______
                                 
                                                     March 17, 2005
    In continuation of this letter written in 2002, we have been 
through many trials and tribulations in order to free ourselves of this 
battle with the ``phantom'' AMT and finally have been successful. While 
it took the assistance of a seasoned tax attorney, and of course money, 
nothing can compare to being relieved of this issue. We originally owed 
the IRS in excess of $120,000 after all of the penalties and interest 
had accrued and with the help of our attorney we realized that we 
should not have owed the tax to begin with as our situation was unique 
based on the IRS laws and regulations. We wonder how many others have 
suffered as we have for over 2-3 years trying to bring resolution to 
their cases and been unsuccessful. We still await our tax credits and 
only in increments of $3,000 each year, but we guess that is a small 
price to pay compared to what we were originally told that we owed.
    Please don't misunderstand, we may have solved our issue; however, 
we strongly feel that the way tax laws are currently written that many 
people have suffered and will continue to suffer unjustly until the AMT 
is reformed to bring balance to American taxpayers. No one should be 
forced to pay taxes on phantom money or money that may never be 
realized. This is nothing but a benefit to the IRS in collecting money 
up front when possible losses are at stake. Not to mention, the 
corporations have no liability in these matters when they reward 
employees with stock options and refuse to educate them as well.
    Thank you for the opportunity to share our story. We look forward 
to the ``new'' reformed AMT.

                                  
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