[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
MEMBER PROPOSALS FOR TAX REFORM
=======================================================================
HEARING
before the
SUBCOMMITTEE ON SELECT REVENUE MEASURES
of the
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
JULY 28, 2005
__________
Serial No. 109-45
__________
Printed for the use of the Committee on Ways and Means
U.S. GOVERNMENT PRINTING OFFICE
26-378 WASHINGTON : 2006
_____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800
Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001
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
______
SUBCOMMITTEE ON SELECT REVENUE MEASURES
DAVE CAMP, Michigan, Chairman
JERRY WELLER, Illinois MICHAEL R. MCNULTY, New York
MARK FOLEY, Florida LLOYD DOGGETT, Texas
THOMAS M. REYNOLDS, New York STEPHANIE TUBBS JONES, Ohio
ERIC CANTOR, Virginia MIKE THOMPSON, California
JOHN LINDER, Georgia JOHN B. LARSON, Connecticut
MELISSA A. HART, Pennsylvania
CHRIS CHOCOLA, Indiana
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 July 13, 2005, announcing the hearing................ 2
WITNESSES
Bishop, Hon. Timothy, a Representative in Congress from the State
of New York.................................................... 19
Burgess, Hon. Michael, a Representative in Congress from the
State of Texas................................................. 21
Emanuel, Hon. Rahm, a Representative in Congress from the State
of Illinois.................................................... 15
English, Hon. Phil, a Representative in Congress from the State
of Pennsylvania................................................ 8
Kucinich, Hon. Dennis, a Representative in Congress from the
State of Ohio.................................................. 18
Linder, Hon. John, a Representative in Congress from the State of
Georgia........................................................ 12
Neal, Hon. Richard, a Representative in Congress from the State
of Massachusetts............................................... 5
SUBMISSIONS FOR THE RECORD
Allen, Nelson, Plano, Texas, letter.............................. 36
Anderson, Susan Schroeder, Mountain View, California, statement.. 37
Ashley, Ross, Dallas, Texas, statement........................... 38
Brown, Michael, Manchester, Michigan, letter..................... 39
Cain, Herman, New Voters Alliance, Stockbridge, Georgia, letter.. 40
Carlson, Timothy, Coalition for Tax Fairness, Arlington,
Virginia, letter............................................... 45
Carter, Earl, Huntsville, Texas, statement....................... 46
Cena, Joseph and Dawn Hasegawa, Cupertino, California, letter.... 47
Chou, Jeffrey, Foster City, California, letter................... 49
Cole, John, Durham, North Carolina, letter....................... 50
Cornelius, Barbara, Richardson, Texas, letter.................... 51
Delore, Eric, Alameda, California, letter........................ 51
Doherty Family, Chantilly, Virginia, statement................... 53
Donnie, Rol, Houston, Texas, statement........................... 54
Emery, Charles, Aiken, South Carolina, statement................. 54
Faruque, Mohammad, Chandler, Arizona, letter..................... 55
Frank, Kevin, Cary, North Carolina, letter....................... 56
Frisoli, Scott, Chicago, Illinois, statement..................... 57
Galitzer, Shari, Madison, Wisconsin, letter...................... 57
Ganu, Sunil, Santa Clara, California, statement.................. 57
Garcia, Liles and Naomi, Aloha, Oregon, letter................... 58
Garilee, Leonard, Southbury, Connecticut, letter................. 59
Garner, Mark, Paso Robles, California, letter.................... 59
Ghazouli, Hisham, Redwood City, California, letter............... 60
Gorokhov Family, Germantown, Maryland, statement................. 61
Guthrie, Duane, Allen, Texas, letter............................. 62
Hartley, Angela, San Diego, California, statement................ 62
Hernandez, Kathryn, La Canada Flintridge, California, letter..... 63
Kadillak, Tony, New York, New York, letter....................... 63
Keen, Todd, Westminster, Massachusetts, statement................ 64
Kempster, Beatrice, Lakeland, Florida, letter.................... 65
Kirby, Daniel, Pensacola, Florida, statement..................... 66
Korte, Robert, Scottsdale, Arizona, letter....................... 67
Lachman, Hans, Mountain View, California, letter................. 68
Lacy, Leroy and Janis Purl, Ben Lomond, California, letter....... 69
Lapaglia, John, Hutto, Texas, letter............................. 70
Linbeck, Leo, Americans for Fair Taxation, Houston, Texas,
statement...................................................... 71
Marx, Gerald, San Diego, letter.................................. 76
Masters, Timothy, Boca Raton, Florida, letter.................... 77
May, Steven, Austin, Texas, letter............................... 79
Mazingo, Steve, Fallbrook, California, letter.................... 80
McCaul, The Hon. Michael, a Representative of Congress from the
State of Texas................................................. 81
Miller, Arthur and Rita, Catonsville, Maryland, letter........... 81
Montgomery, Nield, Las Vegas, Nevada, letter..................... 83
Pang, Kimhoe, Cupertino, California, letter...................... 85
Peed, Kimball, Newnan, Georgia, letter........................... 85
Pessemier, Bob and Susan, Issaquah, Washington, letter........... 86
Pintner, Steven and Danna, Sunnyvale, California, letter......... 86
Price, The Hon. Tom, U.S. House of Representatives, State of
Georgia, statement............................................. 87
Pritikin, Joshua, Santa Barbara, California, statement........... 88
Rassmussen, Kristina, National Taxpayers Union, Alexandria,
Virginia, letter............................................... 88
Reform AMT, Foster City, California, statement................... 89
Richards, Robert, Abilene, Texas, statement...................... 91
Rinehardt, William, Allen, Texas, letter......................... 91
Ross, Dr. Terry, Austin, Texas, letter........................... 93
Schrepel, Tom, Excelsior, Minnesota, letter...................... 94
Sheldon, Joe, Huntington Beach, California, statement............ 95
Speltz, Ron, Eli, Iowa, letter................................... 97
Steere, Jonathan, Leonardtown, Maryland, statement............... 97
Strick, Mike, Seattle, Washington, statement..................... 100
Sullivan, Michael, Santa Cruz, California, letter................ 100
Szturma, Shawn, Somerville, Massachusetts, letter................ 101
Tabor, William Donald, Chesapeake, Virginia, letter.............. 101
Tadros, Paul, Kirkland, Quebec, Canada, statement................ 103
Terpening, Ed, Redwood City, California, letter.................. 106
Thayer, Heather, Atascadero, California, letter.................. 107
Thompson, Phillip, Shoreview, Minnesota, letter.................. 107
Timmons, Susan, Tewksbury, Massachusetts, letter................. 109
Toth, Daniel, Batavia, Illinois, letter.......................... 109
Vasatura, Ronald, Winnetka, Illinois, letter..................... 110
Wertheim, Michael, Oakland, California, statement................ 111
MEMBER PROPOSALS FOR TAX REFORM
----------
THURSDAY, JULY 28, 2005
U.S. House of Representatives,
Committee on Ways and Means,
Subcommittee on Select Revenue Measures,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:00 a.m., in
room 1100, Longworth House Office Building, Hon. Dave Camp
(Chairman of the Subcommittee) presiding.
[The advisory announcing the hearing follows:]
ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON SELECT REVENUE MEASURES
CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
July 13, 2005
SRM-4
Camp Announces Hearing on
Member Proposals for Tax Reform
Congressman Dave Camp (R-MI), Chairman, Subcommittee on Select
Revenue Measures of the Committee on Ways and Means, today announced
that the Subcommittee will hold a hearing on various tax reform
proposals by Members of the U.S. House of Representatives. The hearing
will take place on Thursday, July 28, 2005, in the main Committee
hearing room, 1100 Longworth House Office Building, beginning at 10:00
a.m.
Testimony will be received from Members of Congress alone during
the hearing. However, any individual or organization not scheduled for
an oral appearance may submit a written statement for consideration by
the Subcommittee 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
is expected to report to the Secretary of the U.S. Department of the
Treasury by September 30, 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.
On June 8, 2005, the full Committee held the first in a series of
hearings on tax reform. That hearing focused on the broad overview of
the principle economic objectives of tax reform, including fairness,
simplicity, and impacts on growth.
In announcing the hearing, Chairman Camp stated, ``As the Committee
begins to review the formal recommendations of the President's Advisory
Panel on Federal Tax Reform, the Subcommittee will examine how reform
proposals made by Members of Congress may satisfy the President's
objectives of fair, simple, and growth-oriented tax reform.''
FOCUS OF THE HEARING:
The focus of the hearing will be to examine proposals made by
Members of the U.S. House of Representatives that satisfy the
President's objectives of fair, simple, and growth-oriented tax reform.
DETAILS FOR SUBMISSIONS OF REQUESTS TO BE HEARD:
Requests to be heard at the hearing must be made by telephone to
Michael Morrow or Kevin Herms at (202) 225-1721 no later than the close
of business on Friday, July 22, 2005. The telephone request should be
followed by a formal written request faxed to Allison Giles, Chief of
Staff, Committee on Ways and Means, U.S. House of Representatives, 1102
Longworth House Office Building, Washington, D.C. 20515, at (202) 225-
0942. The staff of the Subcommittee will notify by telephone those
scheduled to appear as soon as possible after the filing deadline. Any
questions concerning a scheduled appearance should be directed to the
Subcommittee staff at (202) 226-5911.
Members scheduled to present oral testimony are required to
summarize briefly their written statements in no more than five
minutes. The five-minute rule will be strictly enforced. The full
written statement of each Member will be included in the printed
record, in accordance with House Rules.
In order to assure the most productive use of the limited amount of
time available to question witnesses, all Members scheduled to appear
before the Subcommittee are required to submit 200 copies, along with
an IBM compatible 3.5-inch diskette in WordPerfect or MS Word format,
of their prepared statement for review by Members prior to the hearing.
Testimony should arrive at the Subcommittee office, 1135 Longworth
House Office Building, no later than Tuesday, July 26, 2005.
WRITTEN STATEMENTS IN LIEU OF PERSONAL APPEARANCE:
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 on
Wednesday, August 31, 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. Those filing written
statements who wish to have their statements distributed to the press
and interested public at the hearing can follow the same procedure
listed above for those who are testifying and making an oral
presentation. 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 CAMP. The hearing of the Subcommittee on Select
Revenue Measures will come to order. On January 7, 2005,
President Bush established the President's Advisory Panel on
Federal Tax Reform. The panel has held ten hearings throughout
the country to solicit the opinions of leading experts,
academics, and practitioners on reforming the Tax Code. The
President's goal is for the panel to explore options to reform
the Tax Code, to make it simpler, fairer, and more pro-growth.
The panel is expected to provide recommendations to the
Secretary of the Treasury by September 30, 2005. The bipartisan
panel is chaired by former Senators Connie Mack and John
Breaux, both distinguished former Members of the United States
Senate Committee on Finance. The panel also includes
distinguished former members of the government, academia, and
the business community, including a distinguished former Member
of the House Committee on Ways and Means, Mr. Bill Frenzel.
Similar to the bipartisan nature of the President's panel,
we have a bipartisan panel of Members of the U.S. House of
Representatives testifying before us today. The composition of
our witnesses serves as testimony to the fact that both parties
recognize that the current U.S. tax system is broken and needs
to be fixed for the benefit of working families. In
anticipation of the formal recommendations of the President's
panel in September, the goal of this hearing is to examine how
tax reform proposals made by Members of the U.S. House of
Representatives satisfy the President's objectives of simple,
fair, and growth-oriented tax reform. These topics are among
the most serious issues Members of the Ways and Means Committee
will face. I want to welcome our witnesses' and colleagues'
views as to how we might address them. I now yield to the
Ranking Member, Mr. McNulty, for a statement.
Mr. MCNULTY. Thank you, Mr. Chairman. Today's hearing is a
follow-up to last month's full Committee hearing on the
economic aspects of tax reform legislation. I welcome each
Member of the House appearing before the Subcommittee this
morning. I thank you all for your contributions to the ongoing
debate on tax reform and look forward to the discussion of your
proposals. Bipartisan hearings, such as our hearing today,
provide Members of the Subcommittee with valuable insight into
the merits of various approaches for improving our tax system.
The Congress, in a bipartisan manner, needs to press for tax
simplification as a goal and as a priority. Having said that, I
would caution against establishing a totally new system of
assessing and collecting Federal taxes, which raises serious
questions about fairness and effective tax administration.
Whether a flat tax, a retail sales tax, or a value-added tax
(VAT), I suggest that the Subcommittee and the Committee accept
the offer of the IRS Commissioner to brief the Committee on
problems his European and other international counterparts have
shared with him about the serious noncompliance problems they
face in administering their tax system. In short, Mr. Chairman,
we should fix any problems that may exist in our Tax Code, not
throw it out in its entirety. I thank you, Mr. Chairman, and
yield back the balance of my time.
Chairman CAMP. Thank you very much. Our panel today
includes the Honorable Richard Neal, a Member of the Committee,
and a Member from the State of Massachusetts; the Honorable
Phil English, a Member of the Ways and Means Committee, from
the State of Pennsylvania; the Honorable John Linder, also a
Member of the Committee, from the State of Georgia; the
Honorable Rahm Emanuel, a Member of the full Committee, from
the State of Illinois; the Honorable Dennis Kucinich, a
Representative in Congress from the State of Ohio; the
Honorable Timothy Bishop, a Representative from the State of
New York; and the Honorable Michael Burgess, a Representative
from the State of Texas. As you know, in this Committee, you
will each have 5 minutes, and we will begin with the Honorable
Richard E. Neal. We have your written testimony, and if you
could summarize your testimony for us, we would appreciate it.
We thank all of you for taking the time to come today, in a
very busy week, to share your views on fundamental tax reform.
Mr. Neal?
STATEMENT OF THE HONORABLE RICHARD E. NEAL, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF MASSACHUSETTS
Mr. NEAL. Thank you very much, Mr. Chairman. I just had an
interesting moment. I have been a constant critic of the
Alternative Minimum Tax (AMT), and I have just had three of my
former staffers that are here, as well as my current staff--and
I have been very fortunate. I have had very competent tax
advisers who have worked for me. It also tells the story of my
woe. Three former members of my staff, who are still toiling on
the Hill, have all worked on this issue, and we are no closer
to fixing it than we were when they began. Mr. Camp, Mr.
McNulty, and fellow Ways and Means Members, I want to thank you
for giving me this opportunity to testify before you today on
H.R. 2950, the Individual Tax Simplification Act, which I
introduced last month. As the title implies, my bill is
designed to attack the overwhelming complexity embedded in our
Nation's Tax Code.
Today's Internal Revenue Code contains 1.5 million words,
hundreds of thousands of which have been added in the last 10
years alone. As you might guess, those massive additions to the
Tax Code have not made it easier to fill out a 1040 form.
Americans now spend more time than ever handling their taxes:
3.5 billion hours per year, for an average of about 25 hours
per return. That is more than half of a work week. As a result,
record numbers of Americans--60 percent--are giving up filling
out their own tax forms and are instead paying tax preparers,
at an average cost of between $100 and $150. For many families,
that represents a full day's wages. Other taxpayers receive
assistance from volunteer services or from the IRS, leaving
only a third of taxpayers to file their taxes with no help
whatsoever. It does not have to be this way. For the past four
Congresses, I have authored a bill that would streamline the
Tax Code, and make it more transparent and understandable.
Crucially, the bill is revenue neutral. My legislation would
attack three hefty sources of complexity in the Tax Code.
First, it would enact a paid-for repeal of the AMT. Second, it
would untangle the mess that we have made of nonrefundable
personal credits, by instituting uniform phase-outs of credits
for adoption, children, and education. Third, it would
streamline the jumble of rates and forms that govern long-term
capital gains, and replace it, instead, with a simple 38-
percent exclusion.
Altogether, my bill would wipe out about 200 lines from tax
reforms, schedules, and work sheets, drastically reducing the
amount of time needed to file. The AMT alone is estimated to
add 12 hours to the filing process, and under my bill it would
disappear. As all of you know, the AMT is not problematic only
because of its complexity, but because it is a revenue monster
steadily swallowing up the rest of our Tax Code and shifting an
ever increasing burden onto the backs of middle-income
families. At one time, the AMT was a ``class tax,'' levied on
the wealthiest Americans to ensure that they did not overuse
certain tax breaks to avoid paying any taxes. Now, it is a
``mass tax,'' which CRS projects would reach 41 million
Americans by 2013. By the end of this decade, the majority of
taxpayers with income between $75,000 and $100,000 will be
forced to pay the AMT, as will almost all married couples with
two or more children in that income range. Up to now, Congress
has employed various stop-gap measures to patch the AMT
temporarily, but these will not work forever. The problem will
get worse the longer we allow it to fester, and retaining the
status quo is really not an option. At the same time, repeal of
the AMT is expected to cost between $700 billion and $1.1
trillion over the next 10 years, so repealing the AMT without a
pay-for would be a fiscally reckless policy.
My legislation would counterbalance AMT repeal, by placing
an additional income tax on adjusted gross income exceeding
$120,000 for joint filers and $90,000 for single taxpayers. The
rate of that tax would be doubled for income above $150,000 for
joint filers and $112,000 for single taxpayers. All of these
thresholds would be indexed to inflation, and the bill requires
the Secretary of the Treasury to set a rate that makes the bill
revenue neutral over the first 10 years of its enactment. The
goal of my bill is to simplify the Tax Code, not to provide a
tax increase or cut, nor to redistribute wealth. There is no
responsible way to repeal the AMT and offer a free lunch, and I
cannot underscore that message more clearly. The numbers simply
do not add up. We must tackle the AMT repeal, and that requires
us to make hard choices. My bill attempts to achieve these
objectives, while balancing fiscal responsibility with equity
and fairness. Mr. Chairman, Mr. McNulty, simplifying the Tax
Code is a goal that we all share and we all frequently talk
about, but it certainly is easier to talk about it than to
achieve it. I am glad that we are beginning to dialogue once
again on how we get from here to there. It is going to require
a lot of cooperation, a lot of bipartisanship, and I am eager
to join all of you in pursuing these goals. This is the first
step today. I am glad you are doing this, Mr. Chairman, and I
hope that this will be a process that we can engage in through
the coming year as well. Seldom have I been aligned with an
issue that has drawn more favorable attention to my position
and less action. Thank you for your time.
[The prepared statement of Mr. Neal follows:]
Statement of The Honorable Richard E. Neal, a Representative in
Congress from the State of Massachusetts
Chairman Camp and Ranking Member McNulty, and fellow Ways and Means
Members, I want to thank you for giving me the opportunity to testify
before you today on H.R. 2950, the Individual Tax Simplification Act,
which I introduced last month. As its title implies, my bill is
designed to attack the overwhelming complexity embedded in our nation's
tax code.
Today's Internal Revenue Code contains 1.5 million words, hundreds
of thousands of which have been added in the last ten years alone. As
you might guess, those massive additions to the tax code haven't made
it easier to fill out a 1040 form. Americans now spend more time than
ever before handling their taxes: 3.5 billion hours per year, for an
average of about 25 hours per return. That's more than half of a work
week.
As a result, record numbers of Americans--sixty percent--are giving
up on filling out their own tax forms and are instead hiring paid tax
preparers, at an average cost of between $100 and $150. For many
families, that represents a full day's wages. Other taxpayers receive
assistance from volunteer services or from the IRS, leaving only a
third of taxpayers to file their taxes with no help whatsoever.
But it just doesn't have to be this way. For the past four
Congresses, I have authored a bill that would streamline the tax code
and make it more transparent and understandable. And, crucially, the
bill is revenue neutral. My legislation would attack three hefty
sources of complexity in the tax code.
First, it would enact a paid-for repeal of the
Alternative Minimum Tax.
Second, it would untangle the mess that we've made of
nonrefundable personal credits, by instituting uniform phaseouts of
credits for adoption, children, and education.
Third, it would streamline the jumble of rates and forms
that govern long term capital gains and replace it instead with a
simple 38 percent exclusion.
Altogether, my bill would wipe out 200 lines from tax forms,
schedules, and worksheets, drastically reducing the amount of time
needed to file. The AMT alone is estimated to add 12 hours to the
filing process, and under my bill it would disappear.
As all of you know, the AMT isn't problematic only because of its
complexity but because it is a revenue monster steadily swallowing up
the rest of our tax code and shifting an ever-increasing burden onto
the backs of middle income families. At one time, the AMT was a ``class
tax,'' levied on the wealthiest Americans to ensure that they did not
overuse certain tax breaks to avoid paying any taxes. Now it's a ``mass
tax,'' which CRS projects would reach 41 million Americans by 2013. By
the end of this decade, the majority of taxpayers with income between
$75,000 and $100,000 will be forced to pay the AMT, as will almost all
married couples with two or more children in that income range.
Up to now, Congress has employed various stopgap measures to patch
the AMT temporarily, but these won't work forever. The problem will get
worse the longer we allow it to fester, and retaining the status quo is
not an option. At the same time, total repeal of the AMT is expected to
cost between $700 billion and $1.1 trillion over the next ten years, so
repealing the AMT without a pay-for would be a fiscally reckless
policy.
My bill would counterbalance AMT repeal by placing an additional
income tax on adjusted gross income exceeding $120,000 for joint filers
and $90,000 for single taxpayers. That rate of that tax would be
doubled for income above $150,000 for joint filers and $112,000 for
single taxpayers. All of the thresholds would be indexed to inflation,
and the bill requires the Secretary of the Treasury to set a rate that
makes the bill revenue neutral over the first ten years of its
enactment.
The goal of my bill is to simplify the tax code, not to provide a
tax increase or cut, nor to redistribute wealth. There is no
responsible way to repeal the AMT and offer a free lunch; the numbers
just don't add up. We must tackle AMT repeal, and it will require hard
choices. My bill attempts to achieve these objectives while balancing
fiscal responsibility with equity and fairness.
Mr. Chairman and Mr. McNulty, simplifying the tax code is a goal
that we all share, but it has always been easier to talk about it than
to achieve it. I'm glad that we're beginning the dialogue about how to
get from here to there. It will require a lot of cooperation and a lot
of work, and I am eager to join my colleagues in pursuing these goals.
Today's hearing is an excellent first step, and I thank you for the
opportunity to participate.
Chairman CAMP. Thank you very much, Mr. Neal. The Honorable
Phil English, a distinguished Member of the full Ways and Means
Committee, you have 5 minutes. Welcome.
STATEMENT OF THE HONORABLE PHIL ENGLISH, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF PENNSYLVANIA
Mr. ENGLISH. Thank you, Chairman Camp, Members of the
Committee, for the opportunity to appear before you today. If I
could, I would like to submit my full testimony for the record
and summarize, as is customary in this setting.
Chairman CAMP. Without objection.
Mr. ENGLISH. In my view, the American tax system is too
complicated and riddled with obvious inequities. It punishes
savings and investment, while reducing economic growth and
burdening domestic industry, struggling to remain competitive.
To address these inequities, and because I want to reform the
American tax system in a way that makes sense to the average
citizen, I am advocating the Simplified USA Tax Act (SUSAT),
which I have introduced in previous Congresses and I will be
reintroducing this coming fall. I am currently in the midst of
updating several provisions, which have been impacted
significantly by the many positive tax changes this Committee
and the Congress have made in recent years. The principles
which are the pillars of the Simplified USA Tax will remain
fully intact. Not only do we need a Tax Code that is fair and
sensible, we need one that is stable. As bad as the current Tax
Code is--and I am certainly one of its critics--the last thing
we need to enact is a reform that is so radical and
experimental that we have to redo it all over again a few years
hence.
The new Tax Code I have developed--the Simplified USA Tax,
or SUSAT--is based on sound and familiar doctrines that are
easy to understand. It also meets all of the criteria President
Bush laid out when he created an advisory panel to make
recommendations to fundamentally change the Code. First, SUSAT
significantly simplifies the Tax Code and does so by a factor
by some estimates of about 75 percent. Second, it is
progressive while it preserves the importance of homeownership
and charitable giving. Finally--and in my view, most
importantly--it provides the right incentives for the U.S.
economy to thrive globally. Although the Joint Committee on
Taxation (JCT) has never completed a revenue score of SUSAT, it
was written to be revenue neutral. The USA Tax for individuals
is simplicity itself, a true minimalist approach that achieves
a great deal without a lot of complex rules.
First, the Tax Code must give Americans a fair opportunity
to save part of their earnings. In my tax reform proposal, USA
stands for ``unlimited savings allowance.'' Everyone is allowed
an unlimited Roth IRA in which they can put the portion of each
year's income they save after paying taxes and living expenses.
After 5 years, all money in the account can be withdrawn for
any purposes, and all withdrawals--including accumulated
interest and other earnings or principal--are tax free. The Tax
Code must also give everyone the opportunity to keep what they
save and, if they wish, to pass it along to succeeding
generations. To that end, my tax reform proposal repeals
permanently the Federal estate and gift taxes.
Under the new Tax Code, tax rates must remain low,
especially for wage earners who now pay both an income tax and
a FICA payroll tax on the same wage base. The Simplified USA
Tax starts out with low tax rates--three progressive rates in
the range of 10 to 25 percent. Then the rates are reduced
further by allowing wage earners a full tax credit for the 7.65
percent Social Security and Medicare payroll tax that is
withheld from their paychecks under current law. I do not
propose to repeal the payroll tax, but I do allow a credit for
it. When the credit is taken into account, the rates of tax on
workers' wages are low indeed. This proposal provides tax
relief for all Americans, especially those who own their home,
give to their church, educate their children, and set aside
some savings for a better future. Under my proposal, everyone
gets a deduction for the mortgage interest on their home and
for charitable contributions they make. My proposal also
contained a new and better way of taxing corporations and other
businesses that will allow them to compete and win in global
markets in a way that exports American-made products, not
American jobs.
All businesses, corporate and non-corporate, are taxed
alike at an 8-percent rate on the first $150,000 of profit and
at 12 percent on all amounts above that small business level.
All businesses will be allowed a credit for the payroll tax
they pay under current law. All costs for plant, equipment, and
inventory will be expended into the year of purchase. If they
are to survive and prosper, American manufacturers must make
big-dollar purchases of capital goods, but they need the lower
cost and financing help that first-year expensing provides.
Another key element on the business side is the way income
earned outside of our borders is taxed. What we need to move
toward--and what SUSAT embodies--is a system that does not tax
foreign-source income on a worldwide basis or export sales of
American-made products and services. The absence of some type
of border tax adjustments for exports of American-made goods to
correspond to the export rebates under foreign countries'
value-added tax systems puts our businesses--manufacturers and
eventually service providers--at a serious disadvantage.
Under SUSAT, all export sales income is exempt, as is all
other foreign-source income, and all profits earned abroad can
be brought back for reinvestment in America without penalty. In
conclusion, the Simplified USA Tax is a hybrid of the others we
often hear about. The plan combined the great strengths of
other mainstream tax proposals and, most importantly, it does
not contain their individual weaknesses. For too long the Tax
Code has been a needless drag on the economy. This is
unproductive as a national policy. More importantly, it is
unfair to those Americans whose living standards are lower
because of it. I thank you, Mr. Chairman and Members of the
Subcommittee, for the opportunity to testify.
[The prepared statement of Mr. English follows:]
Statement of The Honorable Phil English, a Representative in Congress
from the State of Pennsylvania
Thank you Chairman Camp, Members of the Committee, for the
opportunity to appear before you today. The American tax system is a
Frankenstein's monster that haunts individual taxpayers while casting a
cold shadow over the productive sectors of the U.S. economy. It is too
complicated, and riddled with obvious inequities. It punishes savings
and investment, while reducing economic growth and burdening domestic
industry struggling to remain competitive.
To address these inequities and because I want to reform the
American tax system in a way that makes sense to average citizens, I am
advocating the Simplified USA Tax Act, which I have introduced in
previous Congresses. I will be reintroducing the proposal this coming
fall; I am currently in the midst of updating several provisions which
have been impacted by the many positive tax changes this Committee and
the Congress have made in recent years. But the principles which are
the pillars of the Simplified USA Tax will remain fully intact. Not
only do we need a tax code that is fair and sensible, we need one that
is stable. As bad as the current tax code is--and I am certainly one of
its critics--the last thing we need is to enact some reform that is so
radical and experimental that we have to redo it all over again a few
years later.
The new tax code I have developed--the Simplified USA Tax Act or
``SUSAT''--is based on sound and familiar doctrines that are easy to
understand. It also meets all of the criteria President Bush laid out
when he created an advisory panel to make recommendations to
fundamentally change the tax code. First, SUSAT significantly
simplifies the tax code--and does so by a factor of 75 percent; second,
it is progressive while it preserves the importance of homeownership
and charitable giving; and finally--and in my view, most importantly--
provides the right incentives for the U.S. economy to thrive globally.
Although the Joint Committee on Taxation had never completed a revenue
score of SUSAT, it was written to be revenue neutral.
Taxing Individuals
The USA Tax for individuals is simplicity itself; a true minimalist
approach that achieves a great deal without a lot of complex rules. In
addition to providing a simple way to calculate taxes, the USA Tax
brings several key reforms to the table.
First, the tax code must give Americans a fair opportunity to save
part of their earnings. Thrift has helped provide Americans the
security and independence that is the foundation of freedom. Savings
buys the tools to make Americans more productive. Productivity raises
our living standards to the highest in the world.
In my tax reform proposal, ``USA'' stands for unlimited savings
allowance. Everyone is allowed an unlimited Roth IRA in which they can
put the portion of each year's income they save after paying taxes and
living expenses. After five years, all money in the account can be
withdrawn for any purpose and all withdrawals--including accumulated
interest and other earnings or principal--are tax free. Nothing could
give the people a better opportunity to save; especially young people.
Because only new income earned after enactment of the Simplified USA
Tax can be put in the USA Roth IRA, young people starting to move into
their higher-earning years are the ones who will benefit the most for
the longest time.
The tax code must also give everyone the opportunity to keep what
they save and, if they wish, to pass it along to succeeding
generations. To that end, my tax reform proposal repeals the federal
estate and gift taxes.
Under the new tax code, tax rates must be low; especially for wage
earners who now pay both an income tax and a FICA payroll tax on the
same amount of wages. The Simplified USA Tax starts out with low tax
rates--three progressive rates in the range of 10 percent to 25
percent. Then, the rates are reduced even further by allowing wage
earners a full tax credit for the 7.65 percent Social Security and
Medicare payroll tax that is withheld from their paychecks under
current law. I do not propose to repeal the payroll tax, but I do allow
a credit for it and when the credit is taken into account, the rates of
tax on workers' wages are very low indeed.
The Simplified USA Tax provides tax relief for all Americans,
especially those who own their home, give to their church, educate
their children and set aside some savings for a better tomorrow. Under
my proposal, everyone gets a deduction for the mortgage interest on
their home and for charitable contributions they make. In addition--and
this is brand new and long overdue in my opinion--the USA plan allows a
deduction for tuition paid for college and post-secondary vocational
education. The annual limit is $4,000 per person and $12,000 for a
family. Generous personal and family exemptions are also allowed under
my proposal.
The Simplified USA Tax is simplicity itself. The tax return will be
short, only a page or two for most of us, but more to the point, the
tax return will be understandable. For the first time in a very long
time, America's tax system will make sense to the citizens who file the
tax returns and pay the taxes. Since inception of the federal income
tax, Americans will have a full and fair opportunity to save whatever
portion of their income they wish and for whatever purpose they wish.
For the first time, working people will be allowed a credit for the
payroll tax they pay, and also for the first time, families will have
generous tax-free allowance for the education of their children.
Taxing Businesses
My proposal also contains a new and better way of taxing
corporations and other businesses that will allow them to compete and
win in global markets in a way that exports American-made products, not
American jobs. I have studied this issue and believe that, if enacted
in America, this approach to business taxation will soon become the
worldwide standard to which other countries aspire.
All businesses--corporate and non-corporate--are taxed alike at an
8 percent rate on the first $150,000 of profit and at 12 percent on all
amounts above that small business level. All businesses will be allowed
a credit for the payroll tax they pay under current law.
All costs for plant, equipment and inventory will be expended into
the year of purchase. This is a major departure from our current, and
frankly archaic, depreciation system, but a crucial element of the
Simplified USA Tax. If they are to survive and prosper, American
manufacturers must make big-dollar purchases of capital goods, but they
need the lower cost and financing help that first-year expensing
provides. If American manufacturers have state-of-the-art machinery and
equipment, they will not only create high-paying jobs, they will be
able to compete effectively with low-cost producers outside of the U.S.
In the year 2002, Congress enacted a 30% expensing allowance
followed by a 50% allowance stopped which reversed a two-year decline
in capital spending that was one of the worst in history. Every
economic principle and every piece of data tells us that first-year
expensing must be a major component of fundamental tax reform because
it directly translates into high-paying manufacturing jobs and
decreases the cost-of-capital.
Another key element of the business side of the Simplified USA Tax
is the way income earned outside of our borders is taxed. What we need
to move towards--and what SUSAT embodies--is a system that does not tax
foreign-source income on a worldwide basis or export sales of American-
made products and services. The absence of some type of border tax
adjustments for exports of American-made goods to correspond to the
export rebates under foreign countries' Value Added Tax systems puts
our businesses--manufacturers and eventually service providers--at a
severe disadvantage. If anyone doubts the disadvantage American
exporters are faced with, they ought to look at our trade deficit of
astronomical proportions.
Under SUSAT, all export sales income is exempt, as is all other
foreign-source income, and all profits earned abroad can be brought
back home for reinvestment in America without penalty. Because of a 12
percent import adjustment, all companies that produce abroad and sell
back into U.S. markets will be required to bear the same tax as
companies that both produce and sell in the U.S.
Conclusion
The Simplified USA Tax is a hybrid of the others we often hear
about. This plan combines the biggest strengths of other mainstream tax
proposals and most importantly, it does not contain their weaknesses.
For too long the tax code has been a needless drag on the economy. This
is unproductive as a national policy and more importantly, is unfair to
those Americans whose living standards are lower because of it. For
years, its complex inanities have been the object of ridicule. It is
also the ultimate source of bureaucratic excess that is inconsistent
with a free society. It is high time that we restore people's faith in
the integrity and competence of their tax system and, in the process,
take a major step toward restoring people's confidence in the good
character of their government.
Thank you Chairman Camp, and Members of the Committee for the
opportunity to testify.
Chairman CAMP. Thank you, Mr. English. Now, the Honorable
John Linder of Georgia, who is also a Member of the Select
Revenue Measures Subcommittee, you have 5 minutes.
STATEMENT OF THE HONORABLE JOHN LINDER, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF GEORGIA
Mr. LINDER. Thank you, Mr. Chairman, and Members of the
Committee. My bill, H.R. 25, the FairTax, would abolish all
taxes on income of any source, and tax only personal
consumption at the retail checkout. It gets rid of the
corporate income tax, the personal income tax, the payroll tax,
which is the largest tax, three-fourths of us pay. It gets rid
of the AMT on a revenue neutral basis, the gift tax, the estate
tax, for the retail sales tax. It is simple, replaces 60,000
pages with 132 pages. It is fair. It untaxes everyone up to the
poverty level spending, totally--as the Tax Commission said, it
is the only proposal that totally untaxes the poor. It is
voluntary. You pay taxes when you choose, as much as you
choose, by how you choose to spend. It is transparent. Instead
of having a 22 percent hidden tax on everything, we pay for
now--that is the Harvard study, 22 percent of the price system
represents the tax component--you will see on your receipt for
that loaf of bread exactly how much you paid the government. It
is border neutral. It treats imports exactly the same as our
domestic competition. Imports coming from China would be taxed
23 cents in a General Agreement on Tariffs and Trade (GATT)-
compliant, World Trade Organization (WTO)-compliant way. It is
industry neutral. We should not be charging the guy down the
street--or putting the guy down the street who sells books at a
disadvantage to amazon.com. That is a huge problem for States
losing collections to Internet catalogue sales. It strengthens
Social Security by going from 158 million payers to 296 million
citizens and 51 million visitors to our shores every time they
buy something.
Mr. Chairman, there are several economic forces that are
driving us toward this. The 22 percent tax component of the
price system makes us less than competitive. We spend $400 to
$500 billion a year complying with this Code. That is like
paying for a dead horse. That produces no jobs, produces no
wealth. We have driven into the underground economy, not
participating in our tax system, between $1.5 and $3 trillion,
and the more complex we get, the easier it is to go
underground, and the more difficult it is to be found. We have
driven in dollar-denominated deposits in offshore financial
centers $10 trillion. Ten trillion dollars not in our markets.
If we are to get rid of the IRS and all taxes on income, all of
those would be fixed. There is simply no way to fix any of them
by nibbling around the edges of the current system. Why do we
want $10 trillion back in our economy, in our markets? If it
were to come, we would eliminate all of the pension problems
every major corporation has because the markets would be driven
up. We have two market managers, whose names you would
recognize, who have looked at this and said, ``I don't know
what the Dow Jones would be at when this becomes effective, but
in 2 years, it will have doubled.''
Now, let me tell you something that this does that no one
ever thinks about. We have never taxed wealth in this country.
We tax wages, and people who are living on their wages have no
latitude to adjust the way they live. People living on wealth
can do it. If you recall, Mrs. Heinz Kerry had to disclose how
much revenue she had in 2003 during the campaign. It was $6.1
million. She paid a 12 percent tax, and likely paid nothing
into Social Security or Medicare because she had no earned
income. Ross Perot put $3.5 billion from the sale of his
company into municipal bonds, paid nothing in taxes and had no
earned income, paid nothing into Social Security. It is likely
that Bill Gates spends $10 million a year personally. He
probably pays nothing into Social Security because he has no
earned income. Under our system, he would pay $800,000 into
Social Security and Medicare, 8 percent of that would go into
Social Security and Medicare.
We need to get off the system of taxing wages, and start
thinking about taxing wealth. We believe that people who earn
more spend more, and people who spend more will contribute more
to the tax system. We will have many contributions to charities
even if it is not deductible. The American people gave $43
billion to charities in 1980, when the value of a charitable
contribution at the margin was 70 percent. In 1988, when the
value was 28 percent, they gave $88 billion. The great fortunes
that have been given away in this country, the Goulds, the
Fricks, the Carnegies and Mellons, were given away before 1913.
People with lots of money give lots of money away. Under our
system, the average income earner is going to have a 50-percent
increase in take-home pay. They will have money in their
pockets, and they will be able to afford to give to charity.
Mr. Chairman, thanks for this opportunity. I stand ready to
take any questions you might have.
[The prepared statement of Mr. Linder follows:]
Statement of The Honorable John Linder, a Representative in Congress
from the State of Georgia
Mr. Chairman, Ranking Democratic Member McNulty, and Members of the
Subcommittee, I appreciate having the opportunity to testify today.
IRS bashing has become a sport in this country. Whenever I mention
the possibility of abolishing the IRS at a town hall meeting, I'm
greeted with thunderous applause. And while I know that we can all
recite the horror stories of overzealous IRS agents or unhelpful and
unknowledgeable IRS staff, I think that it is important that we as
Members of Congress accept our role in making the IRS frightening and
the tax code loathsome.
There are numbers that we can all quote by heart--more than 14,000
changes since 1986, 10 million words of code and regulation, 6.6
billion hours each year to comply, 60% of Americans forced to use
professional tax preparers--and these are not the fault of the IRS
bureaucracy. Rather, responsibility for these numbers--numbers that
would be laughable if not so painful--lies squarely with you and me. I
congratulate the Chairman for holding this hearing as an important step
in accepting responsibility for our errant past and charting a new
course for the future.
I think that there is a real debate in Congress about what taking
responsibility for this tax morass means. There are those who believe
that the responsible thing is to leave in place our current system--a
system literally tried and tested over 90-plus years of frustration,
arbitration, litigation and incarceration--and to limit it to impacting
as few people as possible. This is a very easy and very doable path,
and while the monster that is the income tax code will remain in place,
we could limit it to feeding on as few citizens as possible. Simply
raising the floor of the AMT and eliminating tax returns for most
Americans would address constituent ire. Going one step further and
eliminating all personal income taxes in favor of higher taxes on big
business and capital might be even more popular. Again, these are
relatively easy changes.
Mr. Chairman, the point that I would like to make today is that
``easy'' is not necessarily ``better.'' I would argue that if we take
this historic opportunity to reform our system of taxation and we do
something ``easy'' then we are not accepting the mantle of
responsibility for our past failings and in fact we are simply passing
the buck and failing once again.
I certainly believe that one of our goals should be to make paying
taxes easy, but it is but one of our goals. We must lift the foot of
our tax system off of the neck of our economy and free the American
worker and the American consumer.
To be competitive in international markets, we must have a border-
adjustable tax system. How long has the Ways and Means Committee worked
to provide some measure of relief from this burden for American
companies doing business abroad? DISC . . . FSC . . . ETI . . . the
list of acronyms that have tried and failed to address this issue is
long. For more than 30 years we have tried these band-aid solutions to
a problem that we know is real. The FairTax--for the first time--will
heal this economic wound fully and permanently.
The FairTax is the only Congressional proposal that abolishes
corporate taxes. For too long, the costs and complexities of the tax
code have been levied on business, which simply hides the burden in
higher prices for American consumers. Not only do these hidden taxes
burden American goods as we try to compete in international markets but
they also hide the true cost of government from American consumers here
at home.
The FairTax also removes the highly regressive and hidden payroll
tax from both workers' paychecks and the price of goods. Not only is
the payroll tax doomed to failure as a funding mechanism for Social
Security and Medicare, but it stands as the largest tax that Americans
pay. How can we claim to tackle the burdens and complexities of the
American tax code if we fail to address the largest tax that Americans
pay? The answer is that we cannot, and yet the FairTax is the only
major piece of legislation that takes on this challenge.
Just last week, the President's Advisory Panel on Tax Reform, with
the help of the Treasury Department, concluded that the FairTax is the
only reform proposal that completely untaxes the poor. I want to say
that again: The FairTax is the only reform proposal that completely
untaxes the poor. Today, we use exemptions and deductions, we use cash
payments in the form of the fraud-riddled earned income tax credit, and
we still fail to provide the opportunity society that we've promised to
low-income Americans. For the first time, the FairTax fulfills this
promise. Even more, it ends the punishment of American workers as they
struggle to climb the ladder of success.
The CBO reported in March--as it does every March--about where the
burden of Federal taxation falls. The CBO found, as it has every year
since it began tracking these numbers in 1979, that while the effective
income tax rate on the poor is actually negative the effective payroll
tax on those same Americans is incredibly high. In fact, we have so
manipulated the income tax code in this country that it is only those
Americans with the highest quintile of incomes--those at $175,000 and
higher--who pay more in income taxes than payroll taxes. For the other
four quintiles--80% of all Americans--the payroll tax burden is higher
and larger than the income tax burden. It is simply folly to discuss
tax reform without discussing this burden, and yet the FairTax is the
only major reform proposal that does.
The reports above make it clear that a personal consumption tax of
23% is more favorable to working Americans than the current 10% or 15%
income tax that is filled with credits and exemptions designed by
Washington to make their lives better. The demagogues are always
available to exacerbate the confusion. I expect that we might even hear
some of that today. While the motive of some might be to confuse,
others simply are confused, and who can blame them? The current system
with its cascading taxes hidden at every level of income and
consumption denies Americans that opportunity to understand exactly
what their tax burden is. The FairTax by design ends the deception.
An interesting part of my experience promoting this bill has been
responding to myriad calculations of what the rate of the FairTax would
need to be. All sorts of outlandish numbers have been calculated
including one of nearly 60% by the Joint Tax Committee some number of
years ago. I confess that these erroneous guesstimates used to be very
frustrating to me, but now I simply use them to make my point. You see,
I don't care what the rate has to be for revenue neutrality. The math
is what it is. I value the transparency and the efficiency of removing
all of the hidden taxes and having the complete tax figure available
for all Americans to see. With a near zero percent savings rate in this
country, consumption and income by definition are the same thing . . .
so if a detractor calculates that a revenue neutral FairTax rate would
actually be 60%, by definition the current tax rate on all of America--
when you pull all the hidden taxes together into one place--must also
be 60%. If I spend everything that I earn, and the tax man needs 60
cents out of every dollar that I spend, in the alternative he would
also need 60 cents out of every dollar that I earn. I ask that you take
this point to heart as this Committee continues this process.
Transparency, border-adjustability, simplicity, and progressivity
are all found in the FairTax. With a 600,000 member (and growing)
grassroots organization on the ground in every state in America, the
FairTax has amassed more cosponsors--both this Congress and last--than
any other piece of fundamental tax reform legislation. It has been the
subject of Committee hearings and has been poked and prodded by
economists from the left and the right. I appreciate the opportunity to
testify about the FairTax again today, and I look forward to working
with the Subcommittee to make this bill a reality.
Thank you, Mr. Chairman.
Chairman CAMP. Thank you, Mr. Linder. Now, the Honorable
Rahm Emanuel, a distinguished Member of the full Committee,
from Illinois.
STATEMENT OF THE HONORABLE RAHM EMANUEL, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF ILLINOIS
Mr. EMANUEL. Thank you, Mr. Chairman. I have introduced the
Middle-Class Tax Fairness Act. Now, in my district office, I
run--between January 1st to April--tax clinics, helping folks
fill out the tax forms that we have. We have a tax assistance
program for them, and over 1,000 families have benefited from
it. What the problem is, because of the complexity of the Code,
related specifically to achieve the American dream, we have to
literally help people get, whether it is the earned income tax
credit, the education deduction, the type of dollars that we
have said are important to achieve in their life. So, what I
have tried to do here is take the buying of a home, education
of a child, raising a child, and saving for retirement, the
basic pillars of a middle-class life, and simplify the Code as
it relates to that part of the Code, as it penalizes, I think,
middle-class families accomplishing the American dream. Just in
the last 4 years, we have added 10,000 pages to the Code. One
would think that the complexity is done by design in that
effort. So, let's take it and try to knock these off real
quickly. I know you have questions, and I know we have other
Members here who want to speak.
The college tax credit. In that area we have five different
types of deductions that exist in the Code, and depending on
how you want to look at it, some think it is as high as nine.
We would simplify that and take it down--and, actually, it
takes 85 pages of notes and a booklet on how to fill out the
IRS tax portions as it relates to higher education, going to a
college, or a community school--85 pages to analyze what you
have to do to fill it out just to get one deduction, whether it
is a lifetime learning, the HOPE scholarship, et cetera. So, we
would simplify it with a $3,000 credit for 4 years of college
or 2 years of graduate school, and it cuts the instruction book
in half and simplifies the paperwork.
The home mortgage deduction. Presently, about 31 million
Americans get the home mortgage deduction, those people who
itemize. There are 10 million Americans who pay a mortgage, who
make $50,000 or less, who do not get the deduction. Allow every
American who owns a home to get the mortgage deduction,
regardless of whether you itemize or not. So, simplify the home
mortgage deduction by making it universal.
Taking the raising of a child, we have the earned income
tax credit, we have the per-child deduction, and we have the
dependent care. Make it the simplified family credit. It takes
200 pages of the Code down to 12 questions. The portion of
raising a child and what you would have to do to fill out all
of those different forms, with different definitions of what a
child is, reduce that down to 12 questions and help the
families who are making somewhere between $14,000 a year and
$30,000 a year, not having a dependency and not living on
welfare, chose work, simplify the Code as it relates to raising
a child. Then, lastly, retirement, and although we are dealing
with this issue in the Social Security debate and in the non-
Social Security retirement area. In the last 30 years, the
Congresses have added 16 separate provisions to help people
save for retirement, and yet, America's saving in the same time
has gone from 10 percent down to less than 1 percent. Clearly,
what we are doing as it relates to the Tax Code is not working.
We have given everybody different definitions from IRA to super
IRA to Roth IRAs, and so forth, and it is not adding to
America's saving or people participating. Doing more of the
same and expecting a different result will only waste dollars.
So, it takes all the different forms of saving for your
retirement and makes it a universal pension for all Americans.
What you would do is basically reduce the alphabet soup. Every
taxpaying American would be able to open up a universal pension
at the age of 21. Contribution limits would track those of the
IRA, $4,000 in 2005. For 80 percent of all the small business
employees who don't have either a 401(k), they would be able to
contribute an extra $10,000 annually. There is one other key
advantage to the universal pension. When people switch jobs,
usually because of the complexity of the 401(k), a lot of
people who have saved some money end up cashing out and taking
their money out of their retirement. This automatically
transfers, if you move jobs, your 401(k) into the universal
pension, so you don't lose anything. It eliminates the
paperwork and the chance that they will cash out their
retirement.
Finally, the universal pension would work seamlessly with
an expanded and a refundable saver's credit that we have also
proposed, some of us, in the debate on retirement security.
Individuals earning up to $30,000 and married couples up to
$60,000, would get a flat 50 percent credit for contributions
up to the first $2,000. So, from retirement, buying a home,
raising a child, or sending that child to college, all pillars
that make the American dream possible, we would simplify the
Tax Code and bring economic opportunity to more and more
Americans. Last, I would say as a Democratic principle--and I
know I have 20 seconds here left--the President, when he
outlined his tax reform commission, he said he wanted this to
be revenue neutral. That was his principle. I think for myself,
I can speak for myself. My principle is this should be revenue
neutral for the middle class. Any tax reform should not raise
taxes on the middle class. That is our goal, not what it does
to the government but what it does to the middle class
families. This would help people not only achieve the American
dream, but it would also help us grow the economy. Thank you.
[The prepared statement of Mr. Emanuel follows:]
Statement of The Honorable Rahm Emanuel, a Representative in Congress
from the State of Illinois
Mr. Chairman,
Thank you for the opportunity to testify before the Select Revenue
Measures Subcommittee on my tax reform proposal, the Middle-Class Tax
Fairness Act.
This proposal will help middle-class families realize the American
Dream by making the tax code simpler and fairer in four distinct areas:
buying a home, raising children, sending them to college and saving for
retirement.
In the last four years, 10,000 new pages have been added to the tax
code, most of them adding new tax breaks for special interests. Our tax
system is needlessly complicated and burdensome to the middle class. It
is long past time for fundamental tax reform that restores equity to
the tax code for middle-class families.
When President Bush announced his Advisory Panel on Tax Reform
earlier this year, he said his core principle was that it should be
revenue-neutral.
I believe the core principle of tax reform should be that it does
not increase taxes on the middle class and makes the code simpler and
fairer.
Part of the Middle-Class Tax Fairness Act combines all the higher
education tax credits into one simple and progressive Simplified
College Tax Credit. Nowhere is the need for tax reform more urgent than
in the area of education incentives. As USA Today wrote, ``Want to save
for education? Fantastic, but you had better be on good terms with your
accountant.''
Part of this legislation will make it much easier--and much less
expensive--for middle class parents to send their kids to college. The
Simplified College Tax Credit combines each of the overlapping and
confusing higher education tax credits that exist today into one simple
and progressive credit.
Education tax incentives are designed to help families, yet the
forms and the instructions that accompany them prevent families from
taking full advantage of these incentives. For instance the IRS
instruction booklet for the various current education incentives is 85
pages long. The Simplified College Tax Credit would cut that booklet in
half.
The second piece of my proposal is the Simplified Family Credit.
The Simplified Family Credit will provide meaningful tax relief to
middle-income families, stimulate the economy and simplify the tax
code, while delivering these benefits in a fiscally responsible way.
It does so by condensing the earned income tax credit, child tax
credit, and additional child credit into one expanded credit. In the
process, it shrinks 200 pages of tax code down to 12 easy questions.
The third element of this proposal is a Universal Mortgage
Deduction that is available to every homeowner, not just to those who
can afford to itemize deductions. This provision will enable 10 million
more Americans, most of whom earn $50,000 or less, to deduct the
interest payments on their mortgages.
This simple step will help to level the playing field with the 31
million homeowners who currently take the mortgage interest deduction.
The fourth and final provision would create a Universal Pension for
all Americans. During the past thirty years, Congress has created
sixteen different tax-advantaged retirement savings accounts, each with
its own contribution limits, income requirements and definitions.
At the same time, the savings rate has dropped from ten percent in
1980 to just one percent last year. The vast array of accounts creates
confusion and acts as a deterrent to those who want to save for
retirement but cannot afford to hire an accountant to navigate the sea
of options. The Universal Pension would replace the `alphabet soup' of
retirement savings options with one simple account that is portable
from job-to-job.
Mr. Chairman, the Middle Class Tax Fairness Act will add simplicity
and fairness to the tax code while making it more equitable for
America's families.
Thank you again for the opportunity to testify before this
Subcommittee. I look forward to answering your questions.
Chairman CAMP. All right. Thank you, Mr. Emanuel. The
Honorable Dennis Kucinich from Ohio, you have 5 minutes, and
your written statement will be a part of the record.
STATEMENT OF THE HONORABLE DENNIS J. KUCINICH, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF OHIO
Mr. KUCINICH. I want to thank the Chairman, Mr. Camp, and
the Ranking Member, Mr. McNulty, for the opportunity to
testify. Thank you for holding this hearing. I would like to
bring to your attention a proposal I introduced in the last
Congress, H.R. 3655, the Progressive Tax Act of 2003, which
will have a positive impact on millions of taxpayers. I think
it is fair to say that all Members of Congress believe we need
to strive for a fair, simple, and adequate tax system. We may
disagree on how this has been accomplished, but we have the
same goals. However, I think we can also agree on the need for
transparency. Transparency in the tax system is necessary to
achieve fairness. Transparency permits the taxpayer to
understand how fairness is arrived in the Tax Code. A
simplified Tax Code can provide this transparency, which in
turn provides a sense of trust in the government.
This Committee should enact my proposal to create a $2,000
simplified family credit, a refundable tax credit that
simplifies the Tax Code by consolidating the earned income tax
credit, the child tax credit, additional child credit, and
dependent exemption for children into one streamlined
simplified family credit. This tax credit will simplify the Tax
Code, provide greater transparency, provide extra work
incentives, and provide a stimulus effect. Families should not
have to struggle to understand the eligibility requirements for
each of the various family tax breaks in current law. All
families should follow the same set of rules.
The simplified family credit is structured to provide
progressive tax benefits and a work incentive. The families
with lower income will get more benefit, but they are also
rewarded for work. The credit would be steeply phased in at the
lowest income levels providing the incentive to work and a
substantial benefit. As income rises a slow phaseout would be
necessary to ensure that we maintain a progressive tax system.
The cost of this proposal would fall in the range of $20
billion a year. Given our current deficit problems, I believe
that Congress should only create the simplified family tax
credit if it is paid for. In my legislation, H.R. 3655, there
are several options to pay for this proposal, including rolling
back parts of the tax cuts enacted in the last 5 years. Those
tax cuts only added to the complexity of the Tax Code and
removed any remaining transparency. Again, I want to thank the
Chair for the opportunity to testify and thank the Ranking
Member, for helping to make it possible.
[The prepared statement of Mr. Kucinich follows:]
Statement of The Honorable Dennis J. Kucinich, a Representative in
Congress from the State of Ohio
Thank you Chairman Camp and Ranking Member McNulty for holding this
important hearing. I would like to bring to your attention a proposal I
introduced last Congress, H.R. 3655, the Progressive Tax Act of 2003,
which will have a positive impact on millions of taxpayers.
I think it is fair to say that all Members of Congress believe we
need to strive for a fair, simple, and adequate tax system. We may
disagree on how this has been accomplished, but we have the same goals.
However, I think we can agree on the need for transparency.
Transparency in the tax system is necessary to achieve fairness.
Transparency permits the taxpayer to understand how fairness is arrived
in the tax code. A simplified tax code can provide this transparency,
which in turn provides a sense of trust in the government.
This Committee should enact my proposal to create a $2,000
Simplified Family Credit, a refundable tax credit that simplifies the
tax code by consolidating the Earned Income tax Credit (EITC), Child
Tax Credit, Additional Child Credit, and dependent exemption for
children into one streamlined Simplified Family Credit. This tax credit
will simplify the tax code, provide greater transparency, provide extra
work incentives, and provide a stimulus effect.
Families should not have to struggle to understand the eligibility
requirements for each of the various family tax breaks in current law.
All families should follow the same set of rules.
The Simplified Family Credit is structured to provide progressive
tax benefits and a work incentive. The families with lower income will
get more benefit, but they are also rewarded for work. The credit would
be steeply phased in at the lowest income levels providing the
incentive to work and a substantial benefit. As income rises a slow
phase out would be necessary to ensure we maintain a progressive tax
system.
The cost of this proposal would fall in the range of $20 billion a
year. Given our current deficit problems, I believe that Congress
should only create the Simplified Family Tax Credit if it is paid for.
In my legislation H.R. 3655, there are several options to pay for this
proposal including rolling back parts of the tax cuts enacted in the
last 5 years. Those tax cuts only added to the complexity of the tax
code and removed any remaining transparency.
Chairman CAMP. Thank you, Mr. Kucinich. The Honorable
Timothy Bishop from the State of New York, you have 5 minutes.
Thank you.
STATEMENT OF THE HONORABLE TIMOTHY H. BISHOP, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF NEW YORK
Mr. BISHOP. Thank you, Mr. Chairman, and Ranking Member
McNulty. I have two very specific proposals to reform the Tax
Code that I would like to share with you this morning, and they
are both tailored to what I consider to be the single greatest
environmental imperative in the district I represent, and that
is the preservation of open space. The first of the two
proposals is a piece of legislation I will file today called
the Open Space Preservation Promotion Act. This legislation
would allow Americans who sell development rights to their land
on an installment sale basis to pay the capital gains taxes due
in installments rather than all at once in the first year of
the sale. The New York State Constitution requires that
municipalities pay for land purchases through the use of a
sinking fund. This requirement exists in 15 other States as
well. This process has led willing sellers to believe that they
cannot sell the development rights under an installment
agreement, and it is complicated by a technical problem in the
Tax Code that treats the sale of development rights the same as
if a farmer sold the land to a private buyer.
Consequently, tax attorneys and estate planners advise
their clients not to sell development rights if they do not
have the cash payments on hand to pay the taxes immediately. My
bill simply clarifies the IRS Code that sinking funds should
receive installment sale treatment, and thus it removes the
cash flow disincentive that currently exists for the seller.
This will ensure that farmers who protect their land are not
forced to pay taxes before they actually receive payment of the
principal. The second bill that I will also file today is a
bill that would allow survivors of farmers to defer estate
taxes on the farmland they inherit as long as the land remains
in agricultural use or is otherwise undeveloped. The tax would
only come due at the time when the farmer chooses to develop
the land. As the value of farmland continues to skyrocket on
Long Island and elsewhere, so also does the estate tax. Where
new zoning legislation and preservation efforts have failed, my
bill would help preserve as much as 80,000 acres of farmland in
Suffolk County, New York, alone, which as I say is the area I
represent. Thank you, Mr. Chairman. I look forward to your
questions.
[The prepared statement of Mr. Bishop follows:]
Statement of The Honorable Timothy H. Bishop, a Representative in
Congress from the State of New York
Thank you Mr. Chairman, Ranking Member McNulty, and distinguished
Members of this Subcommittee for this opportunity to discuss two tax
reform bills I am introducing this week to provide tax fairness for all
Americans by rewarding conservation of farmland and open spaces.
My legislation fulfills a dual objective of achieving the kind of
reform necessary to make the tax code more user-friendly for families
while also addressing one of my home state's most critically important
environmental issues--rapidly disappearing open space, a process that
could be slowed considerably if we removed disincentives from the tax
code which discourage conservation.
Urban sprawl will consume 95 million acres of farmland in the next
20 years, according to the Department of Agriculture; 75 million more
acres of cropland, rangeland, pasture and forest are threatened.
Farmland and open space preservation is an important goal for New York
State and many other states actively working to accomplish this
objective.
However, highly appreciated real estate values in my district,
which encompasses the eastern half of Long Island, as well as other
high-cost areas--combined with the complexities of estate tax policy
and estate planning for families who are landowners--are disincentives
for conservation of farmland and open space.
In response to these trends, I will reintroduce two tax bills this
week that I initially introduced in the previous Congress. The first
bill I wish to call to the Subcommittee's attention is titled The Open
Spaces Preservation Promotion Act. As this title implies, my
legislation is intended to protect open space and encourage
environmental preservation.
A growing number of municipalities across the nation have
demonstrated a strong commitment to preserving the natural beauty of
our communities by purchasing the development rights of land from
willing sellers. Some communities are investing tens of millions of
dollars every year for this purpose. My legislation would help achieve
this objective by ensuring that families who sell the development
rights to a municipality can pay the capital gains taxes as they
receive the payments for those development rights.
The Open Space Preservation Promotion Act of 2005 would encourage
land conservation by clarifying a technical problem in the IRS Code.
This problem effectively restricts the purchase of conservation
easements and development rights in New York and fifteen other states
when landowners desire to receive payment for the sale of their
development rights in installment payments over multiple years rather
than receiving a lump sum payment at once.
As Ranking Member McNulty may be aware, the New York State
constitution requires the establishment of a sinking fund for purchases
by municipalities--mandating payment of principal and interest over the
life of the debt instrument. Under current law, it is believed that
farmers and landowners have been reluctant to sell their land or the
development rights of their land to municipalities under an installment
agreement because sufficient uncertainty surrounds the treatment of
sinking funds under the Internal Revenue Code.
As a matter of policy, this installment option is advantageous to
both the seller and the buyer, but landowners wishing to structure
deals this way have been discouraged because of the cloud of uncertain
IRS treatment. Specifically, the concern is that transactions conducted
in the form of a sinking fund would force farmers to pay their capital
gains taxes immediately, rather than upon future receipt of the actual
payment.
My bill would clarify that sinking funds should receive installment
sales treatment, in an effort to ensure that farmers who opt to protect
their land are not forced to pay premature taxes before they actually
receive payment of principal. In other words, the net effect of this
provision is to have the tax obligation of the seller come due
commensurate with the periodic receipt of proceeds from the sale.
Working now to remedy this minor technical problem will help to
facilitate efforts by municipalities to purchase the development rights
of land. Landowners and farmers committed to land conservation will be
prepared to reap the financial benefits of their decision to protect
their land without fear of owing taxes before they are able to pay the
Internal Revenue Service. I hope you agree that this simple fix will go
a long way toward encouraging land preservation and protecting our
nation's natural landscape for future generations to enjoy.
The second bill I would like to discuss is the Estate Tax Deferral
for Working Farms and Land Conservation Act of 2005. My legislation
would modify the current federal estate tax by allowing a deferment to
survivors of farm owners who choose to keep working their inherited
land. The tax would only come due at the time a farmer chose to sell or
develop the land.
As you know, upon the death of a farmer, the farm is considered
part of the estate left to the heirs and subject to estate taxes. The
tax can be very large, even though the deduction for the value of the
gross estate in calculating inheritance taxes was recently increased to
$1.5 million for tax year 2005.
Under my legislation, federal estate taxes on farmland and open
space could be deferred as long as the land remains in open space. Only
land that qualifies for conservation easements under IRS Code Section
170(h) would be eligible for such deferral. The tax would only come due
at the time when the farmer chooses to develop the land.
As long as families keep land as either a working farm or open
space, they would have no tax liability on that portion of the estate.
As the family chooses to sell portions or all of the land for
development, tax liability would then become due. I am confident this
legislation would go a long way to offset the effect of the estate tax
where spiraling real estate values have made it too expensive for many
families to pay the estate tax and not sell to developers.
When I introduced The Open Spaces Preservation Promotion and The
Estate Tax Deferral for Working Farms and Land Conservation Acts during
the last Congress, both measures received bipartisan support and
bipartisan cosponsors in addition to endorsements from my local and
state farm bureaus and environmental advocacy organizations. I welcome
the support of taxpayer advocates, who should find the tax relief
contained in both will go a long way toward helping farmers and their
families keep more of the hard-earned money as well as keeping farmland
in their family for future generations.
Mr. Chairman, thank you again for this opportunity to discuss both
measures. I am confident you will find my legislation provides the kind
of simplification and reform that you are seeking in order to make the
tax code more user-friendly for American families. I applaud your
initiative for calling this hearing, and I look forward to working with
you to achieve meaningful and lasting tax reform.
Chairman CAMP. Thank you very much, Mr. Bishop. Now the
Honorable Michael Bishop from the State of Texas. Thank you.
Did I say ``Bishop''? I meant ``Burgess.'' Thank you, Mr.
Bishop. Mr. Burgess, welcome to the Committee.
STATEMENT OF THE HONORABLE MICHAEL C. BURGESS, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF TEXAS
Mr. BURGESS. Thank you, Chairman Camp and Ranking Member
McNulty. I really appreciate you holding this hearing today. I
appreciate you keeping the issue of fundamental tax reform
before this Congress and before the American people. The
President, on a quiet summer's evening, last summer, in New
York, or I guess it was in September in New York, mentioned one
evening that he wanted tax reform to be a centerpiece of his
second term Administration. I was so encouraged to hear that.
The President laid out the principles that he would like to see
embodied in that fundamental tax reform. He wanted it to be
fair, he wanted it to be simple, and he did not want it to
impede growth--economic growth--in this country.
Well, Mr. Chairman, I would submit to you that H.R. 1040,
which has been introduced in this Congress and I believe has
been referred to this Committee, would do exactly that, and
almost immediately. It would eliminate the marriage penalty. It
would repeal the death tax. It would abolish the punitive
alternative minimum tax. It would eliminate multiple taxation
of investment income and allow for immediate expensing of
business capital equipment--all issues that we have heard today
on this table. This proposal, H.R. 1040, is a flat tax. It is a
flat tax that is a little bit different from the flat taxes
that were introduced in earlier Congresses in that it is
voluntary; that is, it gives the business or the individual the
option to opt into a pro-growth system that will tax income one
time, and if someone likes the life that they have under the
IRS Code, they can stay under the IRS Code. Now, I come from
Texas, and this Congress passed a fairly substantial tax reform
back in 1986. We had a significant recession in Texas in 1988.
A lot of people back home felt that one of the reasons we had
that recession was because changes in the Tax Code hit the real
estate and the energy sector pretty hard. Those are things that
we depend upon back home. So, the question in my mind was
always: Why does the government get to make these decisions?
Why don't we let people make those decisions for themselves?
That is why, when I introduced the flat tax, I thought it was
important that it be a voluntary program.
Now, you may ask yourself, what in the world is a doctor
doing here at sort of the tail end of this long line of
economic experts? I ask myself the same question. The fact is,
back in 1995, Mr. Chairman, I got religion. I bought a book
that was published by former Majority Leader Dick Armey about
the flat tax. I read this book and I said, it is so simple, it
is so beautiful, why won't they do that? Then the good news is
here on the 10-year anniversary of Mr. Armey's book, Mr. Forbes
has a new book out about the flat tax that details many of the
principles that I have outlined in my bill and many of the
principles that I am bringing to you this morning. The flat tax
is voluntary. It is a single rate 19 percent for the first 2
years, falling to 17 percent thereafter. A person or a business
would not have the option to move in and out of the flat tax
once making the election. They would have to stay within the
flat tax. I believe it is reasonable to give people another
option that would reduce complexity. A simple Tax Code would
allow us to close the tax gap, the $300 billion that is out
there that is just not collected because it is not filed. Some
people do not file because, ``It is too hard, I can't do
that.'' So, no one comes and picks them up, and over time they
just stop filling out a tax form. What Dr. Linder refers to as
people--the untaxed, the underground economy, perhaps we would
bring more of these people into the system if it were not so
difficult for them to fill out their forms and pay their taxes.
I would point out to you the $300 billion that is taxed but
not collected, owed but not collected, is essentially what our
deficit is at the end of this fiscal year. This system would be
fundamentally fair. We all talk about progressivity in our
income tax, but how about an income tax that is fair
horizontally as well? Myself and President Clinton earned the
same amount of money when he passed his tax increase back in
1993, and yet I paid a functional tax rate of 33 percent, he
paid at 19 percent. Where is the fairness in that? Why the
difference simply because one person is more clever about
assigning deductions? This tax is simple and that is its
beauty. It gives time back to families. Yes, families need more
money, but families also need more time. Here is an opportunity
for this Congress to step up to the plate and give time back to
families.
On the issue of home mortgage deduction, which has always
been one of the criticisms of the flat tax, remember that home
mortgage deduction means different things in different parts of
the country. In my area of Fort Worth, Texas, a home mortgage
deduction may equal about $1,000 in real dollars over a 3-year
time. However, in Santa Barbara, California, if you bought your
starter castle, a home mortgage deduction may be a pretty big
deal. Why not give the person in Santa Barbara, California, a
chance to stay in the Code and us in Fort Worth, Texas, a
chance to opt into a flat tax? Mr. Chairman, in closing, I
believe it is time to trust the American people. Let's give
them the choice for a voluntary pro-growth system that is built
on the concept of a flat tax, and I will yield back.
[The prepared statement of Mr. Burgess follows:]
Statement of The Honorable Michael C. Burgess, a Representative in
Congress from the State of Texas
First, I want to thank Chairman Camp for holding this important
hearing today. As a long-time supporter of fundamental tax reform, I
believe that this is one of the most important issues that Congress
will face in the next few years. I would also like to thank the
Chairman for the opportunity to testify before you to explain my
voluntary flat tax proposal. I believe that the flat tax meets the
criteria set forth by the President to evaluate tax reform proposals--
it is fair, simple, and pro-growth. I will discuss how the flat tax
meets each of these important criteria, but first I would like to
explain how the Freedom Flat Tax works.
The Freedom Flat Tax Act
In March 2005, I reintroduced H.R. 1040, The Freedom Flat Tax Act,
which would establish a voluntary flat consumption tax. The flat tax
concept is simple--there are two components, the individual wage tax
and the business tax.
Individuals pay a flat rate on their wage and pension income, and
there will be no deductions. H.R. 1040, however, would allow for the
following personal exemptions:
$24,600 for a married couple filing jointly;
$15,700 for a single head of household;
$12,300 for a single person; and,
$5,300 for each dependent.
A family of four, for example, would not be subject to the flat tax
until their combined income reached $35,400, which is 194% above the
2002 federal poverty level of $18,244. Thus, the flat tax system is
slightly progressive because the exemptions ensure that lower wage
earners do not pay any federal tax until they reach a certain
threshold, after which they pay the flat rate of 17%.
It is important to note that the flat tax would:
Eliminate the marriage penalty
Repeal the death tax
Abolish the punitive Alternative Minimum Tax (AMT)
Eliminate multiple taxation of investment income
Allow immediate expensing for business capital equipment
Businesses would pay a flat rate on the total costs of taxed inputs
subtracted from total sales; only employee wages and pensions will be
tax deductible--this ensures that income is only taxed one time. Under
H.R. 1040, both the business and individual tax rates are 19 percent,
but would decline to 17 percent after the initial two years of
participating.
Unlike past flat tax proposals, The Freedom Flat Tax Act allows
taxpayers to choose if and when to opt into a flat tax system. That is
because I do not believe that we should penalize those who have made
investments based on the current tax code. It would be like changing
the rules in the middle of the game. My flat tax plan allows taxpayers
to transition to the flat tax system on their own timetable.
Now that I have outlined the mechanics of my flat tax proposal, I'd
like to discuss the proposal in the context of fairness, simplicity,
and promoting economic growth.
Fairness
First, it is fair both vertically and horizontally. Horizontally
because no matter how much money you make, what kind of business you
are in, or whether or not you are married, you will be taxed at the
same low rate as every other taxpayer.
The flat tax system has vertical fairness because it taxes everyone
at the same rate, while its limited personal exemption ensures that the
tax burden does not fall too heavily on lower wage earners.
The tax code should also have horizontal fairness, and that is best
illustrated by what I call the ``Clinton paradox,'' which I encountered
in 1993. 1993 was the year that Congress increased the tax rate,
retroactive to the first of the year. By some quirk of fate, former
President Clinton and I earned almost an identical amount that year.
But when it came time to pay to the Federal Government, President
Clinton paid just over 20 percent, and I paid over 30 percent. Why
should such a discrepancy exist? What is the benefit for the country
when we are taxed at different rates on exactly the same income?
Currently, simplicity and fairness in taxes are sacrificed for the sake
of pursuing a social agenda.
But a social agenda is not the purpose of the federal income tax
code. That is why the Freedom Flat Tax Act does not allow credits or
deductions, which means that people who earn the same wages pay the
same amount in taxes, thus the flat tax has horizontal fairness.
Simplicity
A major advantage of the flat tax is its simplicity--it is a tax
system so simple that you can understand it without an accountant. By
eliminating tax credits and deductions, abolishing multiple layers of
taxation, and eliminating the complex depreciation schedules for
businesses, the flat tax will simplify the tax code.
All you need under the flat tax is a post-card sized form. The
current tax code, by comparison, requires taxpayers to determine which
of almost 500 different tax forms they must fill out in order to comply
with the tax code.
The flat tax will allow families and businesses to take back the
more than 6 billion hours per year that they currently spend to comply
with the income tax. Some simple arithmetic is all that is needed to
determine your tax liability each year. The flat tax has the ability to
give time back to families because it is easy to understand and easy to
comply with.
Efficiency/Pro-Growth
The flat tax will encourage economic growth by treating all
economic activity equally, taxing income once and only once, and
reducing the cost in time and money for taxpayers and entrepreneurs to
comply with the tax code.
The current tax code penalizes savings and investment by imposing
multiple layers of taxation. This discourages taxpayers from adding to
the capital stockpile for our economic engine. Additionally, the tax
code favors certain economic activities over others, which ultimately
distorts financial decisions and reduces overall economic efficiency.
By eliminating the deductions and exemptions that characterize our
current tax code, the flat tax will allow people to base their
financial decisions on commonsense economics and not the tax code.
A flat tax would be much less costly, saving taxpayers more than
$100 billion per year and reducing tax compliance costs by over 90%,
according to one estimate by The Tax Foundation. This would give
individuals and businesses more money to spend, which will increase
demand for consumer and business goods, which in turn spurs the economy
and increases prosperity. For example, one estimate of the Armey Flat
Tax, by Michael Boskin, a former chairman of the Council of Economic
Advisors, estimated that the flat tax could increase the size of the
economy by up to 10 percent.
Not only does the flat tax create a tax code that is less costly
for the individual taxpayer, but the simplified tax code would reduce
the cost of enforcement. The current system is clearly not efficient--
according to the CATO Institute, collecting the income tax costs the
Federal Government 10-20% of all tax revenue collected.
The flat tax especially benefits small businesses, which today
create the majority of new jobs and account for half of the economy's
private output, by allowing for major simplification and the immediate
expensing of capital equipment.
I would now like to discuss a couple of criteria that have not been
explicitly articulated by President Bush, but I think is important
nonetheless.
Transparency
It is important that the tax system be transparent--otherwise the
government can easily raise rates, as they have done in Europe with the
VAT tax. With a flat tax, you will easily be able to tell how big a
bite the Federal Government takes out of your income each year. After
some simple and brief subtraction, you simply pay 17% of your wages
above your personal exemptions. And because everyone pays the same
rate, it would be obvious to all Americans if it was raised.
Compliance
The current tax code's complexity discourages compliance with the
tax code. Determining the exact amount of tax that is not paid each
year is extremely difficult, but the Internal Revenue Service's most
recent estimate of the tax gap estimates the tax gap (which is the
difference between what taxpayers should pay and what they actually
pay) to be between $257 billion and $298 billion for Tax Year 2001.
Experience in Russia has shown that the adoption of the flat tax and
lowering marginal rates has led to dramatically increased compliance
with the tax code. Official Russian statistics show that tax revenue
rose 28% between 2000 and 2001, following the adoption of the flat tax.
If we could utilize the flat tax to collect even a fraction of the
tax gap, we could reduce the deficit or reduce the rates for everyone.
To conclude, the American people deserve a tax system and a
government that rewards them for their hard work. It is time for
Congress to give that to them and I believe that the flat tax is the
best way to achieve this goal.
Chairman CAMP. Thank you very much. Mr. Burgess, your
proposal would require that taxpayers evaluate two different
tax systems, if I understand your testimony: one, a flat tax,
and then they could opt into the current system. It would
require the IRS to administer two different systems. Can you
talk to me about how we achieve the goal of a simpler tax
system under that proposal?
Mr. BURGESS. Mr. Chairman, I would submit that it just
simply cannot be any more complicated than it already is, and
to introduce a flat tax to the IRS, to have them administer it,
my belief, my opinion, I personally, without even doing the
calculation to see--would I save money or have to pay more
money--I would give up that shoebox of receipts in a heart beat
and go into a flat tax. Again, whether I paid more money or not
would be immaterial to me. The simplicity and the gift of time
would be worth my considering the flat tax. I don't know if
other people feel the same way I do. From my discussions as
just a regular guy back in Texas, I got that impression. Again,
Mr. Armey's book was very popular back in my district, and not
just because he was my Representative at the time. It was an
idea that resonated back home. Unlike Dr. Linder's proposal,
the IRS would continue to be there in my proposal, but my
belief is that as people worked their way down from those high
home mortgage deductions that perhaps they have been encouraged
to take on because of our complex Tax Code, that as people work
their way through those processes, they will abandon the IRS
Code and come to the flat tax. My belief is, at some point in
the future, we would be able to entirely eliminate the Code
because it would no longer be necessary.
Chairman CAMP. Thank you. Thank you very much. Mr. English,
your proposal would focus on the way corporate taxes are paid,
and particularly would exclude export revenues from taxation
and would tax imports at 11 percent, if I understand it
correctly. Tell me how you think that would affect economic
growth in this country, if you could.
Mr. ENGLISH. We have listened to a number of experts
speculate on how this could have an impact. What it does, in
effect, by setting up a border-adjustable system, you are--
which, by the way, is common not only to my proposal, but to a
number of others. What it would do is it would level the
playing field. A product that would be leaving this country and
competing in a third market would be able to compete on an even
footing without the tax cost built into the price with foreign
products. It could enter another country and compete with
product produced in that particular country by here, again,
only paying taxes imposed within that jurisdiction, rather than
the additional burden of taxes from our system. By contrast, an
import coming in, which currently comes in typically border-
adjusted, would currently have no foreign tax imposed; and
apart from State taxes on things like sales, it would be
comparatively tax free. Yet, the cost of our tax system would
be built into the price of competing domestic products. No
matter which market you are in, the effect of border
adjustability is substantial. Now, the issue has been raised by
economists, in fact, would not there be an opportunity through
changes over time in currency pricing--would that not, in
effect, take away the advantage of border adjustability? That,
to me, is a macroeconomic analysis from a microeconomic
problem. Clearly, a border-adjustable system would add economic
growth by making our manufacturers more competitive in all
markets, and by leveling the playing field so that the price of
our tax system does not become an unfair disadvantage for
individual products. This is particularly significant in
manufacturing. We think over time it would also be a
significant issue in the service industry. As a result, Mr.
Chairman, I think you can make a compelling argument that our
approach is the one necessary if we are going to have our
products competitive over time in global markets and allow us
to start to reduce the institutional built-in advantage for
imports.
Chairman CAMP. All right. Thank you very much. Mr. Linder,
your proposal obviously is a retail sales proposal, and
property that is purchased for business purposes or services
would not be subject to tax. If the taxability of an item
depends on the nature of the transaction, would that be a
simpler tax to administer? Because there still will have to be
this evaluation: Was the item purchased for business purposes
or was it purchased for consumption? If you could just talk
about that a little bit, I would like to hear your thoughts on
that.
Mr. LINDER. If a business went to Home Depot and bought
some goods from Home Depot, they would pay the tax at Home
Depot, which sells to both consumers and businesses, and they
would keep their receipts, and they would use the value of
those receipts as a credit against paying the tax in the
future. So, they would not be taxed. We would not ask Home
Depot to make the decision whether or not to raise the tax from
them. Any business-to-business transfers will not be taxed at
all. Now, let me be very clear. Some people are going to cheat.
We are Americans. We cheat. We cheat on our income taxes.
People take their spouses to dinner on the corporate ticket and
write it off. It is going to be much more difficult to cheat
under this system because you are going to have to have two
people conspire to cheat. Currently, just one person lies on a
tax return, sends it in, and he has less than 1-percent chance
of being found. Under our system, you have to have two people
conspire to cheat. My guess is that since about 90 percent of
this tax is going to be collected by about 10 percent of our
companies--right now in California, for example, 92 percent of
the tax is collected from 8 percent of the companies, the big
boxes, the Home Depots, the Loews, the Penneys, the Targets.
They are not going to help cheat. The guy who is going to cheat
is the guy who comes to paint your house, and he is going to
collect the tax from you. He is just not going to remit it.
That is going to be a very, very small part of the economy, and
we think that the collection will be significantly higher--we
think it would be more like approaching sales taxes at State
levels, which collect somewhere in the 90- to 92-percent range
right now.
Chairman CAMP. Thank you very much. Mr. McNulty may
inquire.
Mr. MCNULTY. Thank you, Mr. Chairman. I am sorry Mr. Neal
had to get to another meeting because I did want to discuss a
little bit more the AMT issue and to clarify the difference
between the personal AMT and the corporate AMT, which was a
result of the 1986 Tax Act, after many stories in this country
about corporations making billions of dollars of net profit and
then not paying anything in Federal taxes because of various
tax loopholes, and that was the genesis of the corporate AMT,
which, I am assuming, Mr. Neal is not talking about, but I want
to talk about it for a second, because it has been the policy
of this Administration not only to repeal the corporate AMT,
but to repeal it retroactively, and to give rebate checks to
all of these corporations or every single penny that they paid
in under that tax since 1986. Some examples would be IBM would
get a rebate check of $1.4 billion; Ford Motor Company, $1
billion; ChevronTexaco, $800 million; General Motors, $800
million; General Electric, which has a presence in my district,
and which I have helped many times through the years, would get
a rebate check from us, the rest of the taxpayers of $600
million. Now, at a time when we have record deficits and a
record national debt and are struggling, the last thing we need
to be doing is giving rebate checks to these corporations that
are doing very, very well. So, I think it is important to
underscore the difference between what Mr. Neal is trying to do
with the personal AMT and the corporate AMT.
I would just like to ask Mr. Burgess a little bit about
this flat tax issue because, as you know, this issue has been
around for many, many years and other people, including Mr.
Armey and others, have proposed it. It has always been
fascinating to me because you brought up the issue of
simplicity, and you made the personal comment that you wouldn't
mind paying a little bit more in order to get the simplicity.
Now, I don't know how many--you know, I would like to test that
theory out a little bit and see how many people feel the same
way you do about giving up the shoebox of receipts but we have
to pay more. You know, I am looking at simplicity, too, with
regard to a flat tax. Basically, if you want to talk about
simplicity, there are three groups of people in this country:
there are poor people, there are rich people, and there is the
middle class. I know, in your proposal, you are not proposing
taxing poor people. I have talked to many people about the flat
tax through the years, and I have found very few wealthy people
who are opposed to it. Most are very enthusiastic about it,
which indicates to me that they would pay less under a flat
tax. If your proposal is revenue neutral and poor people are
not going to pay and rich people are going to pay less, who
makes up the difference? The middle class. The basis of your
proposal, at least in your conclusion, was that people for the
sake of simplicity would be willing to pay more--in other
words, more taxes on the middle class. How do you respond to
that?
Mr. BURGESS. Well, as far as the simplicity argument goes,
we passed as part of your Committee's bill, the FSC/ETI bill
last year (P.L. 108-357), we allowed citizens in my State of
Texas to take a deduction for their State sales tax on their
Federal income taxes. That deductibility had gone away back in
the 1980s. It is not a formal survey, but I have asked people
at my town halls. I used to keep all of my receipts for sales
tax because I thought I could do a better job than the IRS at
calculating a table. I don't do that anymore, because quite
honestly, my time is too valuable and I am just not able to do
that, but I have not encountered anyone who is keeping all of
their receipts from all of their purchases, to tally them up at
the end of the year and see if they will be able to increase
their rate of reduction over what is available in the IRS
table.
Mr. MCNULTY. What about the general concept of the simple
math here? If your proposal is revenue neutral, you are not
proposing taxing the poor segment of the society, lower income?
The wealthier people in this country are wildly enthusiastic
about your proposal, which is a clear indication to me that
they are going to pay less, and if your proposal is revenue
neutral, if the poor are not going to pay and the rich are
paying less, and the proposal is revenue neutral, in other
words, you are bringing in the same amount of money, the middle
class has to pay more.
Mr. BURGESS. You know, are you absolutely sure that the
rich are going to pay less? The example was given of someone
who earned a fantastic income and paid a 12 percent rate.
Mr. MCNULTY. I don't have any scientific information on
that because we haven't done it, but I mean, it is a clear
indication to me that if wealthier people in this country are
so strongly supportive of the flat tax concept, it is not
because they are going to pay more. They are not going around
saying, ``Implement this new proposal so that we can pay more
in taxes.'' I think they are saying, ``Implement this new
proposal so that we can pay less in taxes.'' If indeed, they
would pay less in taxes, middle income people have to pay more.
In all fairness, I really haven't heard from anyone who I would
consider extremely wealthy in this country who is enthusiastic
about this proposal. It has been a little bit difficult to push
the concept uphill, but obviously I would welcome support from
any venue.
Chairman CAMP. Thank you. Ms. Hart may inquire.
Ms. HART. Thank you, Mr. Chairman. I am going to ask all of
the panelists to answer this question, and I would like you to
distill your--I guess, support--or your enthusiasm--into one
issue that I am mostly concerned about, because in the
communities I represent, people tell me that our Tax Code is
simply a deterrent to entrepreneurship and a deterrent to
economic growth. So, what I would like each of you to do for me
is, in a couple of sentences tell me why your proposal is going
to encourage entrepreneurship and promote economic growth. What
about your proposal, that is different from our current system,
is going to change that? Go ahead, Congressman English.
Mr. ENGLISH. In a nutshell, what my proposal would do is
level the playing field in international competitiveness, at
the same time dramatically lower the cost of capital and also
increase the national savings rate, which, in turn, it will
provide more seed resources for entrepreneurship. My proposal
is radically pro-growth, radically pro-entrepreneur, and will
make it easier to launch many, many small businesses in the
future.
Ms. HART. Congressman Linder?
Mr. LINDER. It is clear to everyone that the current tax
system punishes savings, thrift, punishes productivity, and
rewards consumption. Under our system, the average income
earner is going to get a 50-percent increase in take-home pay.
He is going to be an investor. The $10 trillion in offshore
financial center and dollar-denominated deposits will be
largely on our shores, creating jobs, increasing the value of
the markets. We have studies that say within the first year
after passage of this, the economic growth rate in the United
States will be 10.5 percent. Increase in exports would be 26
percent, and the increase in capital investment would be 78
percent. We know that from '45 to '95 real take-home wages
increased in exact correspondence to the increase in capital
investment. This is the most solid pro-growth proposal ever
proposed, and that is what was said at the Tax Commission by
all of the economists who said this is the most effective way
to go with the economy, is to tax consumption.
Ms. HART. Mr. Emanuel?
Mr. EMANUEL. Three quick parts. One, number one reason
people drop out of college or don't go to college is they can't
afford it, number one. So, we would give everybody a $3,000
credit so they can go to college or graduate school. Second.
Homeownership represents about one-eighth of the economy's
economic activity. We would provide the mortgage deduction to
everybody who owns a home, so 10 million people who today own a
home, but don't get the mortgage deduction, would be provided
that, and other people who are on the moderate to low-income
end, would be brought into the homeownership arena and begin to
build their nest egg of equity. Third, as all of us have said,
it is that we have a low savings rate here, and given that we
create a universal pension, you would actually not only
increase the amount of people who save, but the dollars that
are saved, which is important for, obviously, capital
formation, and allow, actually, the thing that you are looking
for: economic activity and entrepreneurship.
Ms. HART. Mr. Kucinich?
Mr. KUCINICH. Thank you very much for the question. Under
my proposal, the working poor, in particular, would have more
money to spend on their children, which, of course, would
amount to a lot of economic activity, particularly for small
businesses which are the first point of contact for many of the
working poor.
Ms. HART. Mr. Bishop?
Mr. BISHOP. The economic stability of the district I
represent is linked inextricably to the quality of our
environment. The principle industries of our district are
travel, tourism, the second-home industry, farming and fishing,
and the preservation of open space is absolutely vital to the
quality of the environment, and thus to the stability of the
economy.
Ms. HART. Thank you. Dr. Burgess?
Mr. BURGESS. Well, certainly the improvement of savings and
investment, there is no question about that. Just focus on the
marriage penalty for a moment. Under a flat tax, currently the
system is a spouse whose husband or wife earns in excess of
$50,000, $60,000 a year initially pays tax at the highest
possible rate of every dollar that they earn. Under a flat tax
proposal, everyone goes back to the same flat rate, so there is
no penalty for being married. In my business--my medical
practice--when I first started out, I thought a smart thing to
do would be to keep 3 months of operating capital in an account
in the bank, so I would always have that in case the wolves
were at the door. Imagine my surprise to find out, at the end
of the first year, I got taxed at 38 percent on that money,
that 3 months capital that I had in the bank to prevent the
wolves coming to the door. Suddenly, over a third of it was
gone. The flat tax would eliminate that from happening.
Ms. HART. Thank you for that. That was pretty quick for
Congressmen. I want to go back to Mr. English and his proposal.
You exclude export revenue in the conversations we have just
been having on trade.
Mr. ENGLISH. Yes.
Ms. HART. I am very interested in that. Can you tell me the
genesis of doing that, and why that is such a positive part----
Chairman CAMP. Mr. English, if you could respond quickly
because time has expired.
Mr. ENGLISH. Certainly. Since 1948, it has been allowable,
under GATT rules, for a border adjustable tax system. Most of
our trading competitors have adopted border adjustable tax
systems, which allow them to take the tax off of their products
at the border, and impose an equal and fair tax on imports
coming in. That way, both imports and exports pay the same tax
and pay the same share of the freight.
Ms. HART. Thank you. Thank you, Mr. Chairman, for your
consideration on that one.
Chairman CAMP. Thank you very much. Mr. Thompson may
inquire.
Mr. THOMPSON. Thank you, Mr. Chairman. I have a couple. Mr.
Linder, could you help me understand the difference between the
inclusive and the exclusive tax provisions in your bill?
Mr. LINDER. We are placing an income tax, which is
inclusive of what you earn, so we thought we would have to do
an exclusive tax of what you spend. It is 23 percent out of
every dollar you spend will go to the government, and currently
33 cents of every dollar you earn goes to the government. If
you were treating it exclusively, it would be a 30 percent tax,
a 29.9 percent tax on what you spend. Then to compare that to
the income tax, what you have left to spend after government
gets is, you have a 50 percent tax as an exclusive tax. So, it
is the same 23 cents whether you spend 77 cents times 30
percent gets $1.23 goes to the government, or whether you spend
a dollar and the first 23 cents out of it inclusively.
Mr. THOMPSON. So, it would be 23 percent, not the higher 20
percent?
Mr. LINDER. Inclusive, 23 percent of what you spend----
Mr. THOMPSON. If you bought $100 worth of goods, what would
you pay in tax?
Mr. LINDER. $23 it would be included in the price.
Mr. THOMPSON. Thank you. Mr. English, your bill does away
with the State tax exemption?
Mr. ENGLISH. Yes.
Mr. THOMPSON. Would it do away with all similar State tax
exemptions? I think Mr. Burgess mentioned Texas and their sales
tax exemption. That would do away with that as well?
Mr. ENGLISH. Yes.
Mr. THOMPSON. Thank you. Mr. Burgess, how do you handle
inheritance tax in your bill?
Mr. BURGESS. There would--if a person would like to go
under the flat tax, there would not be an estate tax.
Mr. THOMPSON. So, you wouldn't actually pay, what is it, 17
percent on all of the money that you take in, only on wages,
the earned income?
Mr. ENGLISH. The concept is that money is taxed just one
time, so tax at the point of earning and not at the point of
death.
Mr. THOMPSON. So, it is not on all income or not all
earnings, just what? What gets taxed under your bill?
Mr. ENGLISH. Wages, income from--dividends would either
be--and that would be a decision for this Committee to make--
would be taxed only one time. They could be taxed at the level
of the business where they were generated or at the time they
were distributed to the individual. Investment income would be
taxed one time. Wages would be taxed one time. Capital gains
would be taxed one time.
Mr. THOMPSON. I have never really understood the tax one
time on inheritance, because if you inherit it, you haven't
been taxed on it, somebody else was.
Mr. ENGLISH. The taxes have been paid on the money, that is
correct.
Mr. THOMPSON. Your wage money is also--somebody has paid
taxes on that somewhere down the line as well. Does your bill--
--
Mr. ENGLISH. Most of the income that I leave when I leave
this earth will be income that has been paid to me as wages and
has been taxed.
Mr. THOMPSON. When you leave, you are giving it to someone
else, so they haven't paid anything on their new moneys.
Mr. ENGLISH. They put up with me.
[Laughter.]
Mr. THOMPSON. Yeah, that may be worth something, I don't
know. Your bill also does away with your sales tax exemption
that people enjoy now in Texas?
Mr. ENGLISH. If somebody elected to go into the flat tax--
and I cannot believe a single person in the State of Texas
would say, you know----
Mr. THOMPSON. No, I don't want to debate that. I have no
way of knowing what people in Texas would choose to do----
Mr. ENGLISH. If you elect to go on the flat tax, it is
gone. That is correct.
Mr. THOMPSON. Thank you very much. I yield back, Mr.
Chairman.
Chairman CAMP. Thank you. Mr. Foley may inquire.
Mr. FOLEY. Thank you very much. The first question for Mr.
Linder. I am obviously intrigued by your proposal. I think it
does a lot of things that are unique, and the one thing I most
appreciate is the fact that it really does reward savers. If
you are a consumer--if you are spending--you will pay taxes. If
you are a saver, you have the opportunity to aggregate wealth,
and not avoid necessarily taxation because you are going to
have to lay out moneys the live and to operate, but it really
does create an incentive, if you will, for frugality. Is that a
fair impression?
Mr. LINDER. That is a precise impression, and frankly, if
you are wealthy and you want to--if Bill and Melinda Gates want
to move to a farm and grow their groceries and live off the
rebate, good for them. We will borrow their money and create
jobs with it. This is the single-most compelling reason to do
that. The second one is, whatever we do, we have got to make an
effort to get the tax component out of the price system. It is
the one thing that makes us less then competitive in the world
economy.
Mr. FOLEY. The concept or notion that your proposal will
eliminate the IRS is not accurate, is it? We will still have to
have an oversight or collection----
Mr. LINDER. My proposal anticipates that the States will do
the collecting and administering, and we would pay them 25
basis points for doing so. The retail, or whatever outlet that
collects the money from the individual and remits it to the
State, will get 25 basis points. There will be a department in
the Treasury of a few thousand people that will be responsible
for collecting Internet and catalog sales. I don't believe the
guy down the street who builds a building and hires our kids
and sells books should be put at a 7 percent disadvantage to
Amazon.com. The States in 2003 lost, in collections to Internet
and catalog sales, $23 billion. It is a growing concern for
States, so the Federal agency in the Treasury will be
responsible for collecting Internet and catalog sales and
remitting them to the States and localities.
Mr. FOLEY. So, this is an equalization?
Mr. LINDER. That is correct.
Mr. FOLEY. We no longer have the disparity, if you will,
between the big box retailers and the shippers of, as you
mentioned, Amazon.
Mr. LINDER. It also eliminates the government choosing
winners and losers in respect of goods v. services. I was
speaking downtown to a group of physicians who really liked the
idea, until one lady jumped and said, ``You expect us to tax
our patients?'' I said, ``What makes you think you are so
special? All your neighbors are taxing their source of income
right now. We should tax all goods and all services equally.''
Mr. FOLEY. The point of collection, obviously, you
mentioned a mechanism. Florida has a Department of Revenue, so
that is already in place. They would be your collection
manager?
Mr. LINDER. That is correct. We would contract with them
and oversee their collections and the biggest difficulty for
them will move to collecting on services. They don't have the
template in place like they do goods. Forty-five States
currently collect a sales tax, and they will be contracted with
to do the collecting administering, and we have already had
States who it--say if those other 5 States don't want to do it,
we will do it for them.
Mr. FOLEY. I was hoping Mr. Emanuel would have been
available for one question. Maybe his Democratic colleagues can
help me with this, because I did want to try and hone in on the
terminology used by your side when we have the tax cuts for the
rich. There is a conversation that constantly occurs, and it is
a wonderful sound bite: This is for the middle class. We want
to give tax relief for the middle class. I am trying to
determine what that means, if we have a parameter of income
that we would consider middle class. If either could venture a
guess, because it does sound nice. I talk about it. I say for
the middle class, but that is an ambiguous statement, and I do
not know where we draw the lines of who is in the middle class
today. Somebody living in Chicago--which is why I wanted to
pose the question--may have an $800,000 apartment based on the
market prices, but they are two hard-working public servants
making $80,000, $100,000--depending on locality, pay is
different. Is $200,000 income middle class? Is $400,000? Is
$60,000? Just for the terms of the rules of engagement, I wish
somebody could answer that question, because as long as it is
nebulous, we can all get away with saying, ``I want it for the
middle class.'' If we don't define what those rules are, then
we are talking about atmospherics. Can either Member help me
define what the party's position is, relative to middle class,
the pay structure or the asset base, so at least I know who we
are talking about?
Mr. KUCINICH. Well, it is an important question. I can talk
from my own experience with my own constituency. I live in,
what I consider to be, a middle class neighborhood. Those who
are middle class tend to have jobs. Those jobs tend to be where
they make in a range of $30,000, $35,000 a year to about
$70,000 or $75,000 a year, in my neighborhood. They have homes
that might be anywhere from $65,000 to maybe $200,000. So, that
is what I understand from my own experience, where I live.
Also, the idea about tax cuts for the rich--those concepts
mainly come from the distribution tables, which, in the last
tax cut, seemed to--on the basis of some reports--like from the
New York Times, where the greatest percentage of the benefits
went to people who made over a million dollars. So, they would
be in another class from the people who would be in my
neighborhood, let us say. I guess you have to go on your own
experience. For example, in some neighborhoods, like in
California or perhaps in Florida, people could be considered
middle class and they would be living in homes that might be
worth upward of a million dollars. I mean, that is possible,
actually.
Mr. FOLEY. Well, that is my only concern----
Mr. KUCINICH. You know, there are a number of factors
involved, but I would probably say that one of the first
factors has to involve your actual income in relationship to
what everyone else is in your area, the value of property in
relationship to what everyone else's is in your area. It is
kind of a relative position for people in a region, but
nationally, it is not relative because it really depends on the
kind of disposable income you have, not just property assets.
Chairman CAMP. If we could conclude because your time has
expired. Ms. Tubbs Jones may inquire.
Mrs. TUBBS JONES. Oh, Mr. Foley, call some of your
sociologists to do the research for you and figure out what
middle class is. You know what middle class is for purposes--
the debate that you want to have on it. Even when your party
defines what low-income is, you use $12,000 for a family of
four. That is pure poverty when we start developing. So, you
can get a sociologist to do some research for you and define
middle class. It will be all right. Because I want to be clear
that as we debate this issue out here on the floor, that not
only is the Democratic side reflected, but the Republican and
all of use license--political license--to use or define middle
class the way we want to for purposes of whatever debate we are
in or whatever discussion we are in. If you would like me to
give you some time to respond, I would love it. If not, I am
going to move on to ask Mr. Kucinich a few questions about his
tax in piece.
Mr. FOLEY. Would you give me your definition at least of
the middle class parameters?
Mrs. TUBBS JONES. Halfway between--between the poorest
people of our country and the richest people of our country.
That is middle class, okay? You know what the usual definition
of ``middle'' is, in the middle, between the top and the
bottom. We talk about lower middle-class, middle middle-class,
and upper middle-class, same thing. Okay? I am not a researcher
at all. That is my definition. Mr. Kucinich, how are you, sir?
Mr. KUCINICH. Good morning.
Mrs. TUBBS JONES. How you doing? Do you think that there
are other things that we could use for purposes of defining--
when we talk about simplified family credit--are there other
taxing issues out there that we might include in the family
credit?
Mr. KUCINICH. Well, I think that you have to go back to how
this idea came up. There is a group called the Economic Policy
Institute and a gentleman by the name of Max Sawicky. His idea
is to look at what we can do to make the Tax Code more
progressive, and also what we can do to make the Tax Code have
more transparency, which actually is a way of showing people
that it is progressive. The idea--Congress has come forward and
created a number of vehicles to try to provide benefits for
families. You know, we had the earned income tax credit, we
have the Child Tax Credit, the Additional Tax Credit, and
dependent exemption for children. All of those were attempts to
provide some benefits. What this does is it puts--it basically
consolidates--all of these various programs that Congress has
already worked on, and in doing that, it simplifies the Tax
Code because I think that is something we are always striving
to do--provides greater transparency, provides work incentives,
which is one of the things we need to do for the constituency
that you and I represent, to make sure that people do achieve
incentives for work, and have a stimulus effect on the economy,
which answers the question that Ms. Hart had.
Mrs. TUBBS JONES. Okay. Thank you, Mr. Kucinich. Mr.
Linder, when you talk about your national resales tax being
voluntary, that means that--are you suggesting in your proposal
that someone either chooses to stay under the current code or
they can choose to go under a national resale tax code? Is that
what--I mean----
Mr. LINDER. No. The tax itself would be imposed on
everyone, but if some chose to buy a used house and a used car
and used clothing and live off the rebate, they would pay no
tax whatsoever. Currently people----
Mrs. TUBBS JONES. How would you regulate that? Who would be
responsible for it administering the rebate?
Mr. LINDER. The person who does the buying. We don't tax
anything used. We tax everything new once.
Mrs. TUBBS JONES. No. I am saying, who would be responsible
for determining whether or not the person doing the buying
would get a rebate?
Mr. LINDER. Every household, rich or poor, would get a
rebate at the beginning of every month sufficient to totally
untax them up to poverty level spending. Poverty level spending
for a household of one is $9,600 a year. Poverty level spending
for a household of four is $25,660 a year. Their check----
Mrs. TUBBS JONES. Would come from?
Mr. LINDER. Come from the Social Security Department. It
might be a debit card. It might be a overnight click into an
account.
Mrs. TUBBS JONES. Then Social Security, or the IRS, or
whatever we call this agency, would be responsible for the
administration of this rebate?
Mr. LINDER. You would sign up with your State
administration department with the names and Social Security
numbers of who all lives in that household, and your rebate
would be sent to you based on the number of people in the
household. People today have been spending all----
Mrs. TUBBS JONES. Have you any idea what the administrative
cost would be for the proposal you have got?
Mr. LINDER. A whole lot less than sending out 45 million
Social Security checks.
Mrs. TUBBS JONES. I don't know. I am just asking. I am
curious. Have you--you say it is a whole lot less. How much
less?
Mr. LINDER. We believe--and we have had conversation with
Visa and Mastercard, that they would administer it, and they
would provide debit accounts for your debit card once a month,
and it would be very low.
Mrs. TUBBS JONES. So, you are proposing that rather than
the government administer the program, we give that
responsibility to a private industry to be able to do that for
us?
Mr. LINDER. No. I am proposing that this Committee, if it
ever looks at this seriously and chooses to do it, will make
that decision on how it gets done in the final drafting, but we
have looked at all kinds of different ways. You can make a
hundred million computer clicks in one evening through the
Federal Reserve or through a Social Security Department for
about a penny a click and transfer that money.
Mrs. TUBBS JONES. Thanks for your responses, sir. Thank
you, Mr. Chairman.
Chairman CAMP. Thank you. All Members have had an
opportunity to inquire. Are there any Members who wish to
inquire further?
Mr. MCNULTY. Mr. Chairman, I just want to take this
opportunity to thank all of the panelists for their very
thoughtful proposals and for being here today. Thank you.
Chairman CAMP. I do as well. I want to thank all the
Members, on a very busy week and morning, for taking the time
to come and testify before the Subcommittee this morning.
Without objection, this hearing is adjourned.
[Whereupon, at 11:17 a.m., the hearing was adjourned.]
[Submissions for the record follow:]
Plano, Texas 75074
August 30, 2005
Dear Honorable Chairman Camp and Ranking Member McNulty:
Below please find my submission this spring to President Bush's Tax
Reform Advisory Panel.
I now wish to share my story directly with you in hopes of
garnering your support and leadership of the Honorable Sam Johnson's
H.R. 3385.
I am employed by Network Appliance in the Plano area of Texas. In
2000 I purchased some of my stock options. During that time the stocks
buy value was $50/shr and the peak value was $150/shr then within a few
months the value dropped to a low of $6/shr. Consequently, we were
taxed at $50 per share rate even though by the end of the year--the
stock was only valued at $6 per share. We were told we owed AMT in the
amount of $350,000. This was a prepayment of tax for which we hadn't
received benefit from. Lets remember, we purchased the asset we didn't
sell it and receive capital gains! My wife and I had started building
our retirement home and we had to finish the house using our savings
rather than gains from the stock. I then had to mortgage the house.
The IRS ruled that we would have to sell our house in order to pay
the AMT liability of $350K. I put the house up for sale and three
months later, the IRS attached my wages because the house had not yet
sold. When this did not help the house sell, the IRS attached my base
salary and my bank accounts--forcing me into bankruptcy. I have always
paid my taxes on time and I have never been audited. I am 57 years old
and all my savings were in the house. The house never sold and
eventually was foreclosed on--eliminating any future liability for the
payments, but leaving us with no equity to pay the IRS. We finally got
the IRS to negotiate a settlement (after 18 months in bankruptcy) on
the amount to be paid over a six-year period. I have hundreds of
thousands of carry-forward losses but they cannot be used for previous
years. We settled on paying the IRS $240 over six years which will take
most of my income. Then, I will start to try to build up retirement
when I'm sixty-two years old!! Since I was forced into bankruptcy, I
don't have a credit card to travel and do my job--I can't rent a car. I
use a bankcard for hotels and meals and get rides from other employees
in the cities I visit. I would have paid anything I could afford from
day one--the IRS didn't have to force me into bankruptcy. This Policy &
the IRS has ruined my credit, cost me thousands in legal and accounting
fees (all of which could have gone to paying them). I'm at a loss as to
why someone who has never done anything but pay his taxes on time can
be treated in such a vindictive manner!
The ISO AMT law is beyond unfair! IT'S CRIMINAL and should be
changed immediately!! It has ruined my families retirement and has
forced me into bankruptcy unnecessarily. Your support is respectfully
and urgently requested so that other families and other honest
taxpayers don't get caught in this horrible AMT trap.
Nelson R. Allen
Statement of Susan Schroeder Anderson, Mountain View, California
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 have submitted my story on numerous
times to my Senator, Congressperson as well as the Ways & Means
Committee and the President's Advisory on Federal Tax Reform. I feel
that the AMT, 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.
As a taxpayer and citizen, I urge you to please support H.R. 3385.
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 & AirForce 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 $3,000 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 credit 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 underreporting, 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 & 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 & 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.
Statement of Ross Ashley, Dallas, Texas
I ask for your support of H.R. 3385. This bill is a good first step
towards alleviating the pain and suffering that my family is
experiencing right now and, with no end in sight, for many more years.
I worked as a software engineer for a once high-flying software
company, i2 Technologies. I was not an executive or even a mid level
manager. I was simply a hard-working individual contributor. I made
several significant contributions to our products and later helped our
customers solve special problems. I was granted incentive stock options
every year from 96 through 2003 and our stock price rose along with
others during the tech bubble. In 2000 I exercised options with a
market value at that time of about $450k. The exercise of those options
resulted in a tax liability that I didn't fully understand at the time.
The AMT tax that I incurred was about $150k. By the end of the year,
the value of the stock that I owned by virtue of the options I
exercised was about $75k, or about half the value of the AMT tax I
owed. i2 Technologies was trading in the spring of this year at
approximately $0.50.
Congress passed laws encouraging individuals to buy and hold stock
rather than trading it on a short term basis when they reduced the
capital gains tax rate. When I exercised the stock options I intended
to hold those shares and that's exactly what I did. When more of my
options vested I planned to exercise them and hold them also. I had no
inside knowledge of the impending collapse of the tech industry. As far
as I knew, our products were world class and our solutions were saving
our customers real money.
In early 2001, I thought that we were experiencing a market
correction and that i2 was a great company. Soon the market would see
that i2 saved it's customers money and it would reward the company with
a higher stock price. So I didn't sell the shares in early 2001 even
though the value of those shares was then less than half of the tax
liability. Later that year, I submitted an Offer In Compromise of about
half the value of my IRA, which at the time was about $40k. It was
rejected.
Today I am living with my wife's family, on disability, with
virtually no savings other than a very modest IRA which today is worth
about $10k. My tax liability has increased through penalties and
interest to about $200k. The appeal of my first Offer In Compromise was
rejected in May 2003 since at that time, although confined to a
wheelchair, I was still employed even though I explained that since my
condition, Freidriech's Ataxia, was progressive and incurable, it was
not likely that I would be able to work for more than 9-12 more months.
I finally had to quit work in March of 2004, about 10 months after my
appeal.
The tax liability that I have is ridiculous and unfair. The fact
is, if the AMT threshold of $40k, which was established in the late
1960's, had been adjusted for inflation, the unintended victims of this
shortsighted tax law would still be unaware of what AMT means.
In my case, the tax liability has hung over my head now for more
than 4 years. I have submitted another Offer In Compromise, this one
significantly smaller than the one that was rejected over 2 years ago.
I no longer own a home and my savings has dwindled. The appeals agent
at the IRS that heard my first Offer told me that although she
sympathized with my situation, her hands were tied by the Service and
she could not accept my offer.
If the AMT tax was simply applied in the manner it was intended
when it was established, even during the tech bubble, the average
worker who had been rewarded by her company for excellent work would
not face financial ruin at the hands of the IRS. After all, I didn't
benefit from owning that stock. Why should I owe any tax on it? Why
should I owe so much more than I am worth? Why doesn't the IRS allow
it's appeals agents to make decisions that are good for the treasury
and good for the individual taxpayer?
I have a Collection Due Process hearing scheduled for Sept. 1.
After that meeting, even as I continue to be optimistic, I will
probably consult with my legal representative about filing for
bankruptcy. I owe much more than 10 times my net worth in taxes and my
only income is Social Security Disability and the long term disability
provided by a private insurer. My IRA is being decimated by legal fees
and I am utterly powerless to stop this unfair and unreasonable action
against me and my family.
Manchester, Michigan 48158
August 31, 2005
House Ways and Means Committee
I am an average middle class American working in the high tech
computer industry. I have been employed with the same company for about
7 years. I was granted ISO stock options as part of my compensation
package when I first started. During the Internet boom on the stock
market, my ISO stock options had a 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
approximately $100,000. However, when my accountant calculated out what
I owed due to AMT, the amount equaled $371,000. . . . This is due to
the overvaluation of the stock during the year 2000 and not taking into
account the dramatic fall of the stock. 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
over time. . . .
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 hard-working,
honest taxpayers that this has affected.
My wages are currently being garnished by the IRS and only allowed
to take home $332 per week. With the current gas prices over $3.00 per
gallon, it costs me about $32 a day to drive to work and back home. So
after paying for gas, I am left with about $172 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 appeals with the IRS and those were 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 7 years, ($84,000) they refused and continue to
take my paychecks except the $332 per week they think I can live on. .
. . HELP!!!!!
Michael K. Brown
Submission of Herman Cain, New Voters Alliance, Stockbridge, Georgia
The Federal Tax Code Must be Replaced with a Fairer and Simpler System
I. Introduction
The current income tax system cannot be reformed. It creates
disadvantages for multinational businesses, domestic businesses,
individuals, and our government.
No amount of tinkering with a portion of the tax code is going to
fix it. It is too complicated. It inflates the costs of U.S. goods and
services to other nations. It is too unfair and inefficient. It
discourages people from working harder to achieve upward economic
mobility, which destroys hope and opportunity.
The current tax system needs to be replaced. It can be replaced
with an integrated plan including a progressive national sales tax,
also known as the FairTax (H.R. 25 and S. 25).
Several commissions over the last twenty years, including the one I
served on in 1995 (The National Commission on Economic Growth and Tax
Reform or Kemp Commission), have all concluded that a replacement tax
system should satisfy six principles.
First, it should promote economic growth by reducing marginal tax
rates and eliminating the tax bias against savings and investments.
Second, it should promote fairness by having one tax rate and
eliminating all loopholes, preferences and special deductions, credits,
and exclusions.
Third, it should be simple and understandable. Simplicity would
dramatically reduce compliance costs and allow people to truly
comprehend their actual tax burden.
Fourth, it should be neutral rather than allowing misguided
officials to manipulate and micromanage our economy by favoring some at
the expense of others.
Fifth, it should be visible so it clearly conveys the true cost of
government and so people would not be subjected to hidden changes in
the tax law.
Sixth, it should be stable rather than changing every year or two
so people can better plan their businesses and their lives.
In remarks made in March 2005 before the President's Advisory Panel
on Federal Tax Reform, Federal Reserve Chairman Alan Greenspan stated,
``Many economists believe that a consumption tax would be best from the
perspective of promoting economic growth particularly if one were
designing a tax system from scratch because a consumption tax is likely
to encourage saving and capital formation.''
Consider the compelling advantages of replacing the current income
tax code with the FairTax.
Gross Domestic Product increases, according to several
independent economists, by 10.5 percent in the first year and levels
off in succeeding years at approximately 5 percent annually.
Consumer prices decrease, again according to independent
economists, an average of 12 to 25 percent due to corporate taxes and
compliance costs currently embedded in the costs we pay for goods and
services.
A single-rate national sales tax rate on all new goods
and services at approximately $0.23 from every dollar spent is revenue-
neutral and replaces the current annual tax revenues of nearly $2
trillion.
The annual amount of tax avoidance by an army of 18-
million non-filers, according to IRS estimates, is nearly $300 billion.
This amount does not escape the FairTax.
The annual cost of compliance with the tax code is
estimated at over $250 billion. In addition, businesses and taxpayers
spend nearly seven billion hours each year filling out their IRS forms
and many more calculating the tax implications of business decisions.
The annual amount of tax loss due to illegal activity is
estimated between $500 billion and $1 trillion. Under the FairTax,
those engaged in illegal activities no longer avoid paying their fair
share.
Imported goods are treated the same as domestically
produced goods. This means U.S. businesses are much less likely to
locate their plants overseas and foreign manufacturers are far more
likely to locate their plants in the U.S.A.
All taxpayers have an equal voice, not just people who
can afford tax lobbyists and skilled tax accountants.
The FairTax effectively untaxes the poor, due to its
rebate provision, greatly simplifying the current earned income tax
system, while better encouraging work. What encourages work more than
no federal taxes of any kind being taken from a paycheck?
The FairTax does not punish those who work second jobs to
improve their family's economic situation.
The FairTax untaxes education, by allowing parents to
save and invest for their children's futures.
These advantages of the FairTax plan have been well researched,
analyzed, and documented by some of the most respected business people,
economists, and academicians in the country. Hundreds of thousands of
citizens are now actively supporting a change from an income tax to
this national sales tax on consumption. The FairTax unleashes the full
potential of the U.S. economy, and the potential inside businesses and
individuals to pursue economic freedom.
II. Description of proposal
The FairTax is a non-partisan proposal that abolishes all federal
income taxes including personal, estate, gift, capital gains,
alternative minimum, corporate, Social Security, other payroll, and
self-employment taxes and replaces them all with one simple, visible,
federal retail sales tax.
The FairTax dramatically changes the basis for taxation by
eliminating the root of the problem: Taxing income. The FairTax taxes
us only on what we choose to spend, not on what we earn. It does not
raise any more or less revenue; it is designed to be revenue neutral.
The FairTax is a fair, efficient, and intelligent solution to the
frustration and inequity of our current tax system.
Collection Methods
Retail businesses collect the tax from the consumer, just as state
sales tax systems already do in 45 states; the FairTax is simply an
additional line on the current sales tax reporting form. Retailers
collect the tax and send it to the state taxing authority. All
businesses serving as collection agents receive a fee for collection,
and the states also receive a collection fee. The tax revenues from the
states are then sent to the U.S. Treasury.
Impact on Businesses
Today, too many layers of business, income, payroll, capital gains,
and estate taxation provide numerous disincentives to expand businesses
and hire new workers. According to Harvard University Economics
professor Dr. Dale Jorgensen, embedded costs from various forms of
taxation account for an average of 22 percent. These embedded costs
are, of course, passed on to consumers like any other cost of
production.
To remain competitive, each year businesses are forced to ship
manufacturing plants and jobs overseas. Stifling self-employment taxes
and the paperwork required to comply with them discourage individuals
from exercising the entrepreneurial spirit and pursuing their American
dreams.
The FairTax allows U.S. businesses to sell their exports overseas
for approximately 22 percent less, on average, than they do now, and
with similar profit margins. With the FairTax system in place,
businesses can choose to expand their capital investments, hire more
employees, pay employees higher wages, and lower consumer prices.
Distribution of the Tax Burden
Under the FairTax, the tax burden falls on those who spend, and it
falls greatest on those who spend the most on new goods and services.
The FairTax also contains a rebate feature. All Social Security
cardholders who are legal U.S. residents receive a monthly rebate
equivalent to the FairTax paid on essential goods and services up to
the poverty level. The size of the rebate is determined by the
Department of Health and Human Services' poverty level multiplied by
the tax rate. This calculation includes considerations for food,
clothing, shelter, and medical care.
The rebate feature, which is funded from the sales tax revenues,
effectively untaxes the working poor and those on fixed incomes. In
addition to receiving the monthly FairTax rebate, these taxpayers are
freed from regressive payroll taxes, the federal income tax, and the
compliance burdens associated with each. They no longer pay the
imbedded taxes on goods or services, and they can purchase used goods
tax free.
Because of the rebate feature, those below the poverty line have a
negative effective tax rate and lower middle-income families enjoy
lower effective tax rates than they do today.
Under the FairTax, the tax burden is fairly distributed. It is, in
fact, much more fairly distributed than under the current income tax
code. Wealthy people spend more money than other individuals. The
FairTax taxes them on their purchases and as a result, they pay both a
higher effective rate and more in taxes.
The FairTax is premised on the notion that it is fairer to tax
individuals when they consume for themselves above the essentials of
life, rather than when they invest in their businesses and their
children's futures.
Education is one of the keys (along with savings and hard work) to
an improved standard of living. That certainly was true in my case. I
was the first person in my family to attend and graduate from college.
It took a lot of hard work, and a lot of sacrifice by my parents. The
FairTax is education friendly and is dramatically more supportive of
education than current law. The FairTax embodies the principle that
investments in people (human capital) and investments in things
(physical capital) should be treated comparably. The current tax
system, in stark contrast, treats educational expenditures very
unfavorably.
For nearly every citizen, attainment of a quality education is an
absolute minimum requirement for success in life, whether you measure
success by economic status or virtually any other standard. Yet the tax
system today punishes people who invest in education, virtually
doubling its cost.
Today, to pay $10,000 in college or private school tuition, a
typical middle-class American must earn $15,540 based only on federal
income taxes and the employee payroll tax.\1\ The amount one must earn
to pay the $10,000 is really more like $20,120, once employer and state
income taxes are taken into account.\2\
---------------------------------------------------------------------------
\1\ $15,540 less 7.65 percent in employee Social Security and
Medicare payroll taxes ($1,189) less 28 percent in federal income taxes
($4,351) leaves $10,000.
\2\ Economists generally agree that the employer share of payroll
taxes is borne by the employee in the form of lower wages. This figure
assumes that employees bear the burden of the employer payroll tax and
that they are in a seven percent state and local income tax bracket.
$20,120 less $5,634 in income tax (28 percent), $3,079 in payroll taxes
(15.3 percent) and $1,408 in state and local income taxes (7 percent)
leaves $10,000.
---------------------------------------------------------------------------
The FairTax does not tax education expenditures. Education is paid
for with pre-tax dollars. This is the equivalent of making educational
expenses deductible against both the income tax and payroll taxes
today. Thus, a family needs to earn $10,000 to pay $10,000 in tuition,
making education much more affordable. The FairTax makes education
about half as expensive to American families compared to today.
Exemptions, Deductions, Credits, and Exclusions
Exempting items by category is neither fair nor simple. Numerous
studies have shown that the wealthy spend much more on unprepared food,
clothing, housing, and medical care than do the poor. Exempting these
goods, as many state sales taxes do, actually gives the wealthy a
disproportionate benefit. Also, today these purchases are not exempted
from federal taxation. The purchase of food, clothing, and medical
services is made from after-income tax and after-payroll tax dollars,
while their purchase price hides the cost of corporate taxes and
private sector compliance costs. Tax lobbyists and special interest
groups work hard every day to create and protect tax credits,
loopholes, and deductions that benefit their clients. Those who have
the money will send lobbyists to Washington to obtain special tax
breaks in their own self-interest. This process causes unfair and
inefficient distortions in our tax code and our economy and must be
stopped.
Though the FairTax eliminates all credits, loopholes, and
deductions, homeowners and those who contribute to religious and other
charitable organizations realize a greater financial benefit than they
do under the current system. Currently, 70 percent of taxpayers do not
itemize deductions on their income tax returns. Of the 30 percent who
do itemize deductions, those who take the home mortgage interest
deduction pay their interest with post-Social Security/pre-income tax
dollars. They then pay their principal with post-SS/post-income tax
dollars. The 70 percent who do not itemize receive no tax benefit at
all. Under the FairTax, all homeowners make their entire house payment
with pre-tax dollars. With the FairTax, mortgage interest rates fall by
about 25 percent (about 1.75 points) as bank overhead falls; this is a
huge savings for consumers. For example, on a $150,000, thirty-year
home mortgage at an interest rate of 7.00 percent, the monthly mortgage
payment would be $999.12. On that same mortgage at a 5.25 percent
interest rate, the monthly payment is $830.01. Over 30 years, the 1.75-
percent decrease in interest rates in this instance results in a
$60,879 cost savings to the consumer. First-time buyers also benefit
under the FairTax, which allows them to save for a down payment much
faster. Under the FairTax, home ownership is a possibility for many who
have never had that option under the income tax system. Lower interest
rates, the repeal of the income tax, the repeal of all payroll taxes,
and the rebate mean that people have more money to spend, and have an
increased opportunity to become homeowners. Contributions to religious
and charitable organizations depend on one factor more than any other:
The health of the economy.
For all of the money that pours into churches every Sunday and into
a broad range of charities every day, only the 30 percent of donors who
itemize deductions receive any tax benefit. The other 70 percent donate
their money and receive no tax benefit. The FairTax allows all people
to make charitable contributions from pre-tax dollars. As a result,
those generally less affluent taxpayers who do not itemize see their
cost of charitable giving go down under the FairTax. The wealthy make
decisions on charitable giving based on the cause. Once they have
determined the cause is worthy, their contribution is structured to
maximize the gift and minimize the tax. But the intention to give comes
first; taxes simply determine the structure--rarely the amount--of the
gift.
III. Impact of proposal relative to current system
The FairTax Encourages Economic Growth
The FairTax significantly enhances economic performance by
improving the incentives for work and entrepreneurial activity and by
raising the marginal return on savings and investments.
Entrepreneurs and small business owners get greater access to
capital, the life-blood of a free economy. Investments rise, the
capital stock grows, productivity increases and the output of goods and
services expands. The economy creates more and better paying jobs for
American workers and payrolls increase considerably.
Although the magnitude of the economic growth generated by a
single-rate, neutral tax system causes lively debate among economists,
virtually all agree that the large marginal tax rate reductions with a
national sales tax, combined with neutral taxation of savings and
investments, has a powerful positive effect on the economy.
For example, Dr. Jorgensen conducted a research analysis in 1997
that showed that a national sales tax produces a 10.5-percent increase
in Gross Domestic Product, a 76-percent increase in real investments,
and a 26-percent increase in exports in the first year of a national
sales tax enactment.
Those increases level off at 5 percent, 15 percent, and 13 percent
respectively over the succeeding twenty-five years. Nothing promotes
the competitiveness of U.S. businesses more than growth in our national
economy, more dollars to grow our businesses, and a level playing field
for selling our products and services to other nations.
The FairTax is Simple
The FairTax is a simple, single-rate tax on the retail price of new
goods and services. Individuals who are not in business have absolutely
no compliance burden, nor are they subject to the discretionary
interpretation of the current, convoluted tax code.
Businesses also benefit under the FairTax. There is no more
alternative minimum tax, no more depreciation schedules, no more
complex employee benefit rules, no more complex qualified account and
pension rules, no more complex income sourcing and expense allocation
rules, no more foreign tax credit, no more complex rules governing
corporate acquisitions, divisions and other reorganizations, no more
uniform capitalization requirements, no more complex tax inventory
accounting rules, no more income and payroll tax withholding, and the
list goes on. Retail businesses simply need to keep track of how much
they sold to consumers.
Compliance costs, therefore, fall under the FairTax while
compliance improves. Today, individuals and businesses spend about $250
billion each year and an estimated seven billion hours filling out
forms, hiring tax lawyers, accountants, benefits consultants, and
collecting information needed only for tax purposes. To the extent
these costs are incurred by businesses, they must be recovered and
consequently are embedded in the cost of everything we buy.
In addition, the FairTax is easy to collect. Retail businesses
collect the tax from the consumer, just as state sales tax systems
already do in 45 states; the FairTax is simply an additional line on
the current sales tax reporting form. Retailers simply collect the tax
and send it to the state taxing authority. All businesses serving as
collection agents receive a fee for collection, and the states also
receive a collection fee. The tax revenues from the states are then
sent to the U.S. Treasury.
The FairTax is Neutral
Under the FairTax, all consumption is treated equally. The current
tax code punishes those who save and rewards consumption. Under the
FairTax, the tax system is no longer in the business of picking winners
and losers. The tax code is neutral in the choice between savings and
consumption, neutral between types of savings and investments, and
neutral between types of consumption.
The FairTax is Visible
The FairTax is highly visible, because there is only one tax rate.
Moreover, all citizens are subject to any tax increases, not just a
targeted few. It would be much harder for Congress to adopt the typical
divide-and-conquer, hide-and-disguise tax increase strategy it uses
today. The FairTax explicitly states the contribution to the Federal
Government each and every time a new good or service is purchased--
right at the bottom of the retail sales tax receipt.
The FairTax is Stable
The FairTax is a more stable source of government revenues than the
present system for two reasons.
First, because it is so simple and transparent, it does not invite
tinkering in the way that the current system does with its thousands of
pages of code and regulations. The public would resist attempts to make
it more complex and they would resist any attempts by Congress and
special interests to reward certain groups or certain types of
behaviors.
Second, taxing consumption is a more stable source of revenue than
taxing income. There are fewer fluctuations in the consumption base
than in the income base. A recent study by the American Farm Bureau
Federation showed that for the years 1959 to 1995, a national sales tax
base was less variable than the income tax base. Why? When times are
unusually good, people will usually save a little more. People tend to
smooth out their consumption over their lifetime. They borrow when
young, save in middle age, and spend more than their income in
retirement.
IV. Transition, tradeoffs, and special issues
The FairTax is Revenue Neutral
The 23-percent tax rate, when compared to current income and
payroll tax rates, has been carefully calculated to (1) raise the same
amount of federal funds as are raised by the current system, (2) pay
the universal rebate, and (3) pay the collection fees to retailers and
state governments. Unlike some other proposals, this rate has been
independently confirmed by several different non-partisan institutions
across the country. Detailed calculations are available from
www.FairTax.org.
The FairTax pays for all current government operations, including
Social Security and Medicare. Government revenues are more stable and
predictable under a consumption tax than with the federal income tax,
because consumption is a more constant revenue base than is income.
If you were in a 23-percent income tax bracket, the Federal
Government would take $23 out of your paycheck for every $100 you made.
With the FairTax, if the Federal Government receives $23 out of every
$100 spent in America, the same total revenue is delivered to the
Federal Government. This is revenue neutrality.
So, instead of paycheck-earning Americans paying 15.3 percent of
their payroll in Social Security and Medicare payroll taxes, plus an
average of 18 percent of their paychecks in federal income tax, for a
total of about 33 percent, consumers in America pay only $23 out of
every $100 they chose to spend. The FairTax is progressive, since it is
collected only on spending above the federal poverty level.
V. Summary
Sales taxes as a stable and reliable source of revenues are not
new--most Americans come into contact with sales taxes daily, since 45
states currently use them to collect state revenues. It is easier to
switch from an income tax to the FairTax system than it is to switch
from gallons to liters or from feet to meters! Of course, those who
depend on the structure and complexity of our current system (e.g., tax
lobbyists, tax preparers, and tax shelter promoters) will have to find
more productive economic pursuits (and they will fight the FairTax plan
tooth and nail). However, everyone will have enough advance notice to
adjust to the new system.
Under the FairTax, everyone has to think about taxes in a different
way. Income--what we earn--no longer has to be documented, measured,
and kept track of for tax purposes. The only relevant measure of our
tax liability is the amount we choose to spend on final, discretionary
consumption. Tax-related issues suddenly become a lot simpler and more
straightforward than they used to be. The aggravation and anxiety
associated with ``April 15th'' disappear forever after passage of the
FairTax.
Under the FairTax, job creation booms. Residential real estate
booms. Financial services boom. Exports boom. Retail prospers. Farming
and ranching prosper. Churches and charities prosper. Civil liberties
are enhanced. In short, it is difficult to imagine all the far-
reaching, positive effects of this change from taxation on income to
taxation on consumption.
The future stability of our nation's economic infrastructure, and
the future for our children and grandchildren, will be determined by
the political will and courage in Congress to be aggressive with
solving the big issues such as the tax code mess. The 92-year-old
income tax code thwarts the natural, individual motivation of citizens
to use their God-given talents to pursue happiness and their respective
dreams.
Conversely, the FairTax allows all Americans to own all the returns
on their sweat equity as the fruits of their labor. Ownership lets
people realize their dreams and opportunities and is the key to the
greatest nation on earth remaining the greatest nation. We have a moral
obligation to protect our Founding Fathers' vision and to protect the
unalienable right of ownership for our grandchildren.
It's our unalienable responsibility.
Coalition for Tax Fairness
Arlington, Virginia 22209
August 31, 2005
To Honorable Chairman Dave Camp, Honorable Ranking Member Michael
McNulty, and the Honorable Members of the Select Revenue Measures
Subcommittee:
The Alternative Minimum Tax (``AMT'') has received substantial
negative press because of its many anomalous provisions. In the case of
the AMT imposed on incentive stock option exercises, taxpayers are
being forced into bankruptcy with tax rates of 300% or more of their
income.
The Coalition for Tax Fairness fully endorses and supports H.R.
3385, legislation introduced by Representative Sam Johnson that
provides focused relief for those taxpayers being most seriously harmed
by the AMT's unintended consequences--those trapped by the AMT's
treatment of incentive stock option exercises. H.R. 3385 has already
received significant bi-partisan co-sponsorship. We urge the Select
Revenue Measures Subcommittee to support this fair and important
legislation critical to the financial survival of tens of thousands of
hard-working, honest Americans.
I. H.R. 3385 Addresses a Severe and Unintended Consequence of the Tax
Code
During the 1990s, many employers offered ISOs as compensation to
attract more talented employees than they could otherwise afford.
Congress encouraged this type of employee investment in their companies
and in the economy by creating tax rules that did not tax ISOs upon
their exercise and encourage a quick sale, but instead rewarded
taxpayers by offering the more favorable capital gains tax rates to
those who held their stock for one year.
The AMT, in the context of the economic downturn, eliminated these
benefits without any warning and sent taxpayers into a downward spiral
from which many have yet to recover. The AMT taxed the transaction on
the exercise date as though the taxpayer actually sold the stock
immediately and realized a gain, even though he did not receive any
actual gain and in fact the stock lost most or all of its value prior
to sale. The AMT therefore caused massive tax prepayments on phantom
income.
Those entrepreneurs and company employees subjected to this AMT
have ended up owing massive prepayments of tax for income never
received. These prepayments have become interest-free loans to the
government that, due to further quirks in the law, will never be
repaid. Those taxpayers who do not have the resources to make these
massive interest-free loans to the government are incurring interest
and penalties. Many have lost (or are in the process of losing) their
homes, retirement savings, and college savings--while the prepayments
they are making build up more useless AMT tax ``credits.'' Those who
exercised ISOs, in the years 1999-2003 especially, and did not sell (in
many cases upon the advice of their trusted advisers or due to insider
trading restrictions) continue to suffer greatly at the hands of the
AMT. Adverse market conditions and a conflict between the tax and
securities laws exacerbated the problem.
II. Summary of H.R. 3385 Relief and Revenue Generating Provisions
H.R. 3385 will alleviate current and future suffering through
refunding the prepayments over a five year period, once the credits
have been outstanding for more than four years. This will allow people
a window of hope where they can see an end to the financial ruin
nightmare they have been enduring.
H.R. 3385 alleviates this unfair and unnecessary suffering in a
manner that generates revenue through enhancing future compliance. This
Bill reinforces compliance by providing for corporate ``matching''
reporting to the IRS of employees' ISO exercises, thereby increasing
voluntary compliance and ensuring everyone pays their fair share. This
measure prospectively institutes mandatory reporting of ISO exercises,
without any additional administrative cost, thereby substantially
increasing tax revenues.
III. H.R. 3385 is Good Tax Policy and Good for the Economy
The irony in this situation is that many people are paying
significant interest on loans from private creditors to prepay their
interest-free loan to the government. In some cases, the amounts at
issue exceed hundreds of thousands, even millions, of dollars.
Additionally, the IRS is increasing the burden by imposing interest and
penalties on the taxpayers who haven't been able to pay all of their
AMT because they simply lack the financial resources. Under the
proposal, returning an excessive AMT prepayment is not a tax rebate,
nor is it an unprincipled refund. The AMT credits were in fact intended
to be returned to the taxpayers in a reasonable time, and to the extent
the quirks in the AMT code undermine this repayment intent and extend
the ``repayment period'' out to tens and hundreds of years--H.R. 3385
fixes this mistake.
Without the passage of H.R. 3385, the current application of the
AMT/ISO provision will continue to cause unintended, egregious, and
devastating tax burdens, and hobble the very entrepreneurial drive that
made small business a powerful engine of the U.S. economy. With the
passage of H.R. 3385, citizens can spend their ambition, time, and
effort growing the U.S. economy--rather than fighting unjust tax laws.
We urge the Select Revenue Subcommittee to fully support this fair
and urgent relief for the good of the economy and to give American
taxpayers the fair treatment they deserve.
Timothy J. Carlson
President
Submission of Earl Carter, Huntsville, Texas
Distinguished Members of the House Committee on Ways and Means:
First, allow me to thank you for undertaking this most important
hearing! It is hugely important to the country that you get it right in
reforming our tax code as we will all live with the result for a long
time.
Pursuant to that, the only current tax reform proposal that meets
ALL the criteria set forth by the President in his charge to the
members of his tax reform panel is the proposal set forth in H.R. 25/S.
25, the FairTax plan. Nothing else even comes close in my estimation.
Under the FairTax, the United States will become the most
attractive industrialized country in which to manufacture in the world!
The cost of capital will decline dramatically. American manufacturers
will be more competitive in the global marketplace. American firms will
be much more likely to build plants in the U.S. Foreign firms are
likely to find the U.S. a highly attractive place to build their plants
to serve U.S. and foreign markets, given the stable political
environment, an educated workforce, the large domestic market and the
lack of an income tax. The construction and operation of these new
plants would generate relatively high-paying jobs. Exports would no
longer bear the burden of embedded income and payroll taxes and imports
would bear the same sales tax burden as domestically produced goods.
For the first time, exported and imported goods will have the same tax
treatment. Imported goods will no longer be advantaged over
domestically produced goods.
The overall U.S. economy will grow dramatically under the FairTax.
All known economic projections predict a much healthier economy. Real
wages will increase. People will be able to purchase more and better
homes in a healthy economy. Typical estimates are that the economy will
be 10 to 14 percent larger than it would have been under the income tax
within 10 years, and both production and consumption will grow
substantially. Some studies show the potential gains to be much higher.
Manufacturers will make more money in a prosperous, growing economy.
The Fairtax plan would also go a long way toward solving the
solvency issues currently existing in our Social Security and Medicare
programs as well.
And last but far from being least, the Fairtax would return our
country's taxing method to something much more in keeping with methods
envisioned by our founders as opposed to the current progressive income
tax which was endorsed by Karl Marx and Frederick Engels in their
``Manifesto of the Communist Party.''
The progressive income tax properly needs to be put where its' main
adherents political philosophy has already found itself, on the ash
heap of history, and I beg you to do exactly that by replacing it with
a NRST very similar to that set forth in H.R. 25/S. 25!
Cupertino, California 95014
August 31, 2005
To Honorable Chairman William M. Thomas and House Ways and Means
Committee
Dear Honorable Chairman Camp and Ranking Member McNulty
I have submitted my testimony and shared my story at the following
hearings:
6-15-2004, Ways & Means Hearing on Tax Simplification, Oversight
Subcommittee
3-17-2005, President's Tax Reform Advisory Panel
6-08-2005, Hearing on Tax Reform, Full Committee
I now wish to share my story directly with you in hopes of
garnering your support and leadership of the Honorable Sam Johnson's
H.R. 3385.
Recent updates since my last testimony submission. The IRS is now
requesting that I prepay an additional $400,000, and $600,000 in
penalties and interest. It's not bad enough that I already overpaid my
taxes by $1.4 million, a 2000% tax bracket that will take me 433 years
to have returned to us, but they want to now place me in a 3500% tax
bracket that will take me 800 years to have returned to me. If this
isn't legalized extortion I don't know what you would call it!!! It is
ludicrous to cause such a cash flow/bankruptcy situation on the
American public for the sake of prepaying a tax that isn't really owed
and never returned even after the gain/loss has been determined.
God bless this great country and you our leaders to break the
chains of tyranny we find ourselves captive of.
We respectfully and urgently request your support of H.R. 3385.
----------
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 and 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.
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 consumers 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 133,000 miles and needs replacing. It would help us
tremendously even if all we received was the interest on our credit.
I 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.
Joseph Cena & Dawn Hasegawa
Foster City, California 94404
August 30, 2005
The Honorable Chairman William M. Thomas
The House Ways and Means Committee
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 and its treatment of Incentive Stock Options.
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. And, because of the new bankruptcy laws that will be
going into effect in October, we are seriously considering declaring
bankruptcy within the next month. This issue cannot be more urgent.
H.R. 3385 is the only bill that will save me from financial ruin by
being taxed on money I never received.
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
lifestyles. 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 taxpayers. 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 newborn
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 taxpayers 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. My family and I respectfully ask for your support
of H.R. 3385. We hope that its passage will come before our bankruptcy
completes and our home is lost.
This is the highest priority of my life. Please do not hesitate to
contact me any time for any reason.
Jeffrey Chou
Durham, North Carolina 27705
August 31, 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 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 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.
John Cole
Richardson, Texas 75080
August 31, 2005
Committee on Ways & Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington D.C. 20515
Dear Honorable Chairman Camp and Ranking Member McNulty:
We have submitted our story in the past and are hoping to garner
your support and leadership for the Honorable Sam Johnson's bill 3385
on September 20, 2005 at the Committee for Ways and Means.
My husband, Jerry and I live in Richardson, Texas where Jerry owns
and manages Canyon Creek Art & Frame. In April of 1999, I joined Avanex
Corporation and accepted a lower salary in lieu of an Incentive Stock
Option grant. I was unfamiliar with ISOs but it was explained to me
that someday the company might go public and that the stock could
potentially provide a small gain or contribute nicely to a retirement
fund.
The company went public in February of 2000, and like many
companies in that same year, did surprisingly well. It was scary and
exhilarating all at the same time. The company advised their employees
to talk to a financial advisor regarding long-term capital gains,
short-term capital gains and AMT. We consulted a tax accountant, who
told us we needed to be concerned about the capital gains, but that AMT
was only for the very wealthy and we did not qualify. The tax
accountant explained that we should buy what we could and hold it to
protect against short-term capital gains. Later that year a coworker
mentioned the need to check out the AMT situation and again we inquired
with our tax advisor and again he assured us that we had nothing to
worry about.
We soon discovered that he was incorrect and we were truly
uninformed about AMT. When we finally discovered the problem, it was
too late to sell as the stock-trading window had closed and before the
next open window arrived, the stock had plummeted. Our tax bill came to
$92,000, more then double my starting annual income, and in order to
pay the bill, we were worried we might have to take out a second
mortgage and may lose our business. Fortunately, for our financial
future, during the next open window, we were able to sell all our stock
and pay most of the bill. By depleting our savings, we were able to pay
the remaining balance. Now, with no savings and the hope of a small
retirement fund from our ISO grant gone, we are starting over with
retirement planning.
We are outraged that the government saw fit to apply a tax to
phantom money! We are outraged that we now have NO savings and NO
retirement!
I respectfully and urgently request your support of H.R. 3385.
Barbara Cornelius
Alameda, California 94052
August 31, 2005
Committee on Ways & Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington D.C. 20515
Dear Committee on Ways & Means:
My name is Eric Delore and I am writing on behalf of myself and my
family to ask for your active support and co-sponsorship of H.R. 3385.
I have a huge Alternative Minimum Tax (AMT) tax debt incurred on
``phantom'' gains due to the application of the Alternative Minimum Tax
to incentive stock options (ISOs). I owe $420,000 of AMT on under
$5,000 of actual income derived from the sale of frightfully deflated
Incentive Stock Options (ISOs). 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 $40,000+ 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 more than $140,000 of taxes paid to
date.
Again, I would like to ask for your active support and co-
sponsorship of H.R. 3385. This important legislation was recently
introduced by Reps. Johnson (TX), Neal, McCrery, Jefferson, Ramstad,
Lofgren, Shaw, Honda and Johnson (CT), to provide relief for taxpayers
subjected to unfair and unjust tax treatment due to the AMT treatment
ISOs. In addition to unfairly affecting me, this serious problem has
impacted many employees of small and large companies across America,
often resulting in taxes up to and exceeding 300 percent of these
employees' annual salaries. Workers are being forced to pay tens of
thousands, hundreds of thousands, and even millions of dollars in tax
overpayments on income they will never receive.
Please join the groundswell of support for remedying this serious
injustice through this ISO AMT legislation. This bi-partisan effort is
building support in Congress, the Press, Corporate America, the
Taxpayer Advocate's office. Grassroots organizations like the
ReformAMT, www.reformamt.org, and the Coalition for Tax Fairness,
www.fair-iso.org, are actively supporting this important legislation,
and may be contacting your office to secure your support.
I thank you for your leadership on this effort, as your support is
critical to restoring a fair and just tax system for all Americans--
including hard-working, entrepreneurial Americans. Please do not
hesitate to contact me if you have any questions.
Eric Delore
Statement of the Doherty Family, Chantilly, Virginia
Mr. Chairman and Members of the Committee: My name is Nina Doherty
and I would like to first thank you for the opportunity to speak with
you today.
I am a married working mother of three living in a modest Northern
Virginia suburb with my husband of 17 years. Today, I work full time
for a small software company. I am sharing my story with you in the
hope that it will shed light on how the Alternative Minimum Tax
treatment of Incentive Stock Options can have a devastating impact on
average hard-working people like me.
In 1994, I became the first employee of a small start-up
Telecommunications Company. Part of my compensation included Incentive
Stock Options. Seven years later, I found out to my huge shock that
there could be an egregious impact from exercising Stock Options due to
unintended consequences of the Alternative Minimum Tax.
Back in March 2000, before I learned about the Alternative Minimum
Tax, I exercised some stock options and it appeared that all my hard
work and sacrifice in working for a start-up would pay off. My company
was going public as many did at that time, and it was everyone's
expectation that the stock value would remain stable and perhaps even
grow. Unfortunately, shortly thereafter, the stock market tumbled and
my ``paper'' stock value was reduced to nothing. Despite the dwindling
stock value, I never thought to sell them even after my restrictions
lapsed in September 2000. I continued to hold onto my stock because I
was told by my financial advisor before I ever exercised any options
that due to the way the law was written with regard to capital gains
tax penalties, it was more beneficial for me to hold it for more than
one year.
In April of 2001, while on a Girl Scout trip with one of my
daughters, I got a call from my accountant about the taxes he had just
prepared. He told me that because of the Alternative Minimum Tax, I
owed a lot of money, but he didn't want to tell me how much until I got
back into town. Alarmed, I asked him to tell me right there and then--
and that is how I found out that I owed tax equal to 100% of our annual
family income! I was dumbfounded, and quite frankly, so was my
accountant. Now my family is facing potential financial ruin as a
result of this massive penalty.
Unfortunately, the highly complex nature of the Alternative Minimum
Tax code befuddled both my highly trained financial advisor and my
accountant, a situation affecting family after family across this
country.
And it wasn't just complicated code that led me to hold onto the
stock. The spirit and intent behind the incentive in an Incentive Stock
Option is that employees like me are encouraged by law to hold onto our
stocks for a longer period of time, to help our companies grow by
investing in the future. Certainly, the intent was NEVER to hurt the
very people that contributed to a company's success. Despite this,
countless families are facing financial ruin due to the ISO AMT issue--
mine is not a unique story.
The big problem with paying the AMT is that the tax payment is
simply a prepayment of tax. When this law was written in the sixties,
the volatility of the stock market was not anticipated by Congress and
there was no evidence at that time that prepaying this tax would create
hardship. Unfortunately, many families like mine cannot afford to
prepay this tax. Because there was no actual gain for victims like me,
this tax will generate a useless tax ``credit,'' meaning that our
prepayment of this tax is nothing more than an interest-free loan to
the government. By today's law, we can only recover the tax prepayment
in credits at $3,000 per year, which for our family means 30+ years--
for many people the credit will well exceed their life expectancy.
Recently, the IRS levied our bank accounts, seizing $30,000 that my
husband had in savings from a loan against his 401(k). This money was
needed to do repairs on our ten year old home and replace our failing
minivan. Next we received official notice that there was a Federal lien
filed by the IRS on any and all property that we own. With this and the
past three years of worry about this problem, there has been terrible
strain on my family and my marriage. Every day this issue is like a
dark cloud over our heads and we wonder if we should just declare
bankruptcy.
My family and I respectfully urge those of you on the Committee to
take immediate action on correcting this injustice, through a repeal of
the AMT/ISO provision, or through targeted and principled measures that
will help those of us currently facing this problem, and also prevent
similar results from occurring in the future. For many families like
mine, time has run out: the IRS is enforcing the strict letter of the
law--threatening to take our homes and retirement funds to collect the
money despite the fact that we never had any actual gain.
Please don't allow this injustice to continue. Taxpayers deserve
fair treatment in connection with simpler rules, and we appreciate your
current consideration of a solution that is fair and just.
Again, thank you for your time.
Statement of Rol Donie, Houston, Texas
Job loss in America has become a major problem. Our jobs keep
flowing offshore. American workers are showing up on the dole instead
of showing up for work. One of the biggest reasons for fewer jobs is
the way we collect taxes. The income tax system drives away existing
jobs and limits the creation of new jobs to boot.
A better plan is the FairTax. The FairTax (H.R. 25/S. 25)
implements a National Retail Sales Tax to replace the income tax. The
amount of taxes collected will remain the same. Government will receive
the same amount of funding it receives now. The big difference is that
the FairTax lets us fund government without losing jobs in the process.
The FairTax Plan
Lets businesses spend the billions now spent annually on
tax compliance on job growth instead.
Lets businesses create new jobs based on good business
planning instead of tax planning.
Lets businesses redirect the hundreds of millions now
spent on tax lobbyists into creating productive jobs instead.
Lets businesses spend all the money they now pay as
matching Social Security contributions on expanding their workforce.
Lets businesses compete in the global marketplace on a
more level playing field. Prices for American products will no longer
include all the embedded expense incurred with the income tax. Demand
for cheaper American products will soar. Job growth for Americans will
soar.
Americans that want their job back, Americans looking for their
first job and Americans concerned about the way our jobs are going can
find more information at www.fairtax.org.
Submission of Charles Emery, Aiken, South Carolina
Ladies and Gentlemen of the Panel,
Job loss in America has become a major problem. Our jobs keep
flowing offshore. American workers are showing up on the dole instead
of showing up for work. One of the biggest reasons for fewer jobs is
the way we collect taxes. The income tax system drives away existing
jobs and limits the creation of new jobs to boot.
A better plan is the FairTax. The FairTax (H.R. 25/S. 25)
implements a National Retail Sales Tax to replace the income tax. The
amount of taxes collected will remain the same. Government will receive
the same amount of funding it receives now. The big difference is that
the FairTax lets us fund government without losing jobs in the process.
The FairTax Plan
Lets businesses spend the billions now spent annually on
tax compliance on job growth instead.
Lets businesses create new jobs based on good business
planning instead of tax planning.
Lets businesses redirect the hundreds of millions now
spent on tax lobbyists into creating productive jobs instead.
Lets businesses spend all the money they now pay as
matching Social Security contributions on expanding their workforce.
Lets businesses compete in the global marketplace on a
more level playing field. Prices for American products will no longer
include all the embedded expense incurred with the income tax. Demand
for cheaper American products will soar. Job growth for Americans will
soar.
Americans that want their job back, Americans looking for their
first job and Americans concerned about the way our jobs are going can
find more information at www.fairtax.org.
Please consider the FairTax for the sake of American jobs as well
as a host of other reasons for this change in the way federal taxes are
collected. Thank you for your time and consideration.
Chandler, Arizona 85226
August 31, 2005
Dear Honorable Chairman and Members of the Ways and Means Committee
I wish to bring to your attention the story of ISO and AMT and how
it impacts me and many Americans who have been affected by AMT tax
laws.
ISO stocks were granted as an incentive to employees to reward them
for good performance and long term retention. Favorable tax rate was
one of the key elements of ISO stocks. It was recommended that ISO
stocks be held for at least one year after exercise so that they do not
become ``disqualified disposition.''
While this strategy worked for upward moving markets where stocks
appreciated in value, no one (including the proponents of the ISO/AMT
tax codes) ever fully comprehended the unprecedented financial havoc
this may cause in case of drastically decreasing stock market and
market that is depressed for a long time.
The AMT rules pertaining to ISO stocks do the following.
Calculate paper profit based on exercise price and option
price.
Recognize the paper profit as income in a parallel
calculation under AMT rules.
Adjust income with some other incomes, refund etc.
Levy tax based on AMT income (more than real income),
which includes paper profit.
The difference between regular tax and AMT tax is imposed
as additional AMT tax.
When the ISO stocks are sold later (after the hold
period), part of the advanced AMT tax can be recouped.
Please note that in a rapidly declining and continuously depressed
market, the AMT tax cannot be fully recouped as the exercised stocks
will always be below the exercise price. By selling the exercised
stocks, the individual will further incur regular capital gain, and
accumulate AMT Capital Loss.
This results in paying tax once (AMT tax) for exercising the ISO
and, taxed again due to regular Capital gain by selling the stocks
(albeit at lower than exercise price). Opportunity to recoup the AMT
taxes is very slim in the current environment, and we will not probably
be able to recoup it in our lifetime.
I personally paid (forced to pay) AMT taxes in hundreds of
thousands of dollars, and in the process was burdened with huge loans.
I humbly request the intervention by Congress to relieve us from the
loan burden, and return us the advanced taxes we paid in the form of
AMT taxes. The advanced AMT taxes are rightfully ours, which we can
never get back unless Congress makes sweeping changes in the ISO/AMT
tax rules.
I am a strong believer of paying our fair share of taxes for the
benefit of the society, but it is utterly unfair to pay taxes based on
fictitious profit and not be able to get it back.
I urge you to support the Tax Reform proposal by Honorable Sam
Johnson's H.R. 3385. I respectfully and urgently request your support
of H.R. 3385.
Mohammad Faruque
Cary, North Carolina 27511
August 31, 2005
To House Ways and Means Committee
Dear Honorable Chairman Camp and Ranking Member McNulty:
I have submitted my testimony and shared my story at these
following events:
6/15/2004, Hearing on Tax Simplification, Oversight
Subcommittee
6/23/2004, Hearing on Select Tax Issues, Select Revenue
Measures Subcommittee
6/08/2005, Hearing on Tax Reform, Full Committee
April/May 2005, Senate Finance Committee Chairman
Grassley
Spring/Summer 2005, President's Tax Reform Advisory Panel
I now wish to share my story directly with you. I hope this
Committee will extend the relief H.R. 3385 offers people that executed
Incentive Stock Options (ISO) in years 1999, 2000, and 2001 to people
that executed NonQualified (NQ) stock options in those same years. H.R.
3385 will not help my situation, because H.R. 3385 requires a person to
have ``AMT credit.'' I have no AMT credit, since my stock options were
NQ, but I suffer the same detrimental effects of executing stock
options in year 2000.
I am in a very bad situation because of the tax liabilities that
were generated in year 2000. Because of the economic downturn of the
telecommunication industry, I was laid off from Cisco in March of 2000.
This situation forced me to execute the NonQualified (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! I only executed the option to buy Cisco
stock at a price offered to me when I was hired.
Because of the complexity of the tax laws, 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 sq. ft. 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% in 2000 and
2001. 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 270,000 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 of all their assets when they have
realized no financial gain whatsoever.
Kevin R. Frank
Statement of Scott Frisoli, Chicago, Illinois
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.
Madison, Wisconsin 53703
August 26, 2005
Dear Honorable Chairman Camp and Ranking Member McNulty:
I am writing to ask for your support and would appreciate your
taking a moment to read this. I have submitted my testimony and shared
my story for previous hearings regarding this issue. I now wish to
share my story directly with you in hopes of garnering your support and
leadership of the Honorable Sam Johnson's H.R. 3385.
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 $1
million, 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 (amounting to an interest-free loan to the government) 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 and friends, 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 had
to liquidate our life savings and obtain a loan secured by my in-law's
assets to pay our tax bill, we're now deferring college and retirement
savings as we pay back this loan with its interest--all while we have
$1 million tax credit. We're hard-working, 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 pay off a loan with
interest and 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.
I respectfully and urgently request your support of H.R. 3385.
Shari Galitzer
Statement of Sunil Ganu, Santa Clara, California
My life is changed because of the alternative minimum tax (AMT). I
am suffering from acute panic disorder and stress. If my age is X, I
look like X+10 years, thanks to this AMT. Moreover, people think either
I was either greedy or stupid. I never did anything wrong in my life to
have all this trouble. My credit scores are 758+. I always paid my
credit card balances and loan amounts on time. I followed the advice of
my advisors at Morgan Stanley. They advised me not to sell the stock I
purchased through the exercise of incentive stock options (ISOs)
earlier--but there is no point in blaming anybody now. It's my mistake
and it seems nobody can save me now. I have already paid more than
$150,000 in AMT from the tangible assets I had and owe substantially
more. My AMT credits will exceed $400K, which I will only be able to
claim at a rate of $3,000 per year for the rest of my life or 133
years.
I exercised (bought) 15,000 ISO shares. I couldn't sell most of
them before the company (Exodus Communications) filed for chapter 11,
as I hadn't owned the shares for at least one year. Initially I paid
$110K in AMT by selling some of the stocks at $15.00 per share in 2001,
remember now, I was taxed as if I sold them for $76 a share! I didn't
realize that my company would be bankrupt soon. I still owe $150K plus
penalties. The IRS has kept all my refunds--worth about $45K in the
last 3 years--but penalties keep accruing.
I have tried to negotiate with the IRS but we are rejected on every
offer I made. My first OIC was turned down in 2002. I have appealed to
the IRS again and increased the amount of my OIC. That too was turned
down in April 2003. The IRS evaluation process is faulty. They are
looking for all the money available in my 401(k) plan apart from
whatever assets assessments are done based upon my car, credit cards
statements etc. Though I don't have any bank balances, the IRS already
put a lien on my Condo and basically I will be in a debt trap if I
borrow from my credit card to pay off IRS as the interest rates are so
high. The important point is that the IRS is seeking all this money for
income I never realized. What a nightmare! Meanwhile I got laid off in
August 2003. Luckily I got a job in another company with a lower salary
in 3 months. The trauma I went through during that time is
unimaginable.
Please do what is necessary to reform the draconian provisions of
the law. Morally I don't believe I owe anything to the IRS but then
legally and financially I have a sword hanging over my head.
Aloha, Oregon 97007
August 31, 2005
Dear Honorable Chairman Camp and Ranking Member McNulty:
I have submitted my testimony and shared my story at these
following events:
Ways and Means Committee Hearings:
6-15-2004, Hearing on Tax Simplification, Oversight
Subcommittee
9-23-2004, Hearing on Select Tax Issues, Select Revenue
Measures Subcommittee
6-08-2005, Hearing on Tax Reform, Full Committee
April/May 2005, Senate Finance Committee Chairman
Grassley
Spring/Summer 2005, President's Tax Reform Advisory Panel
We now wish to share our story directly with you in hopes of
garnering your support and leadership of the Honorable Sam Johnson's
H.R. 3385.
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, Inc., 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.
We respectfully and urgently request your support of H.R. 3385.
Liles and Naomi Garcia
Southbury, Connecticut 06488
September 1, 2005
Dear Chairman Camp and Ranking Member McNulty:
I have submitted my testimony and shared my story at the following
events: Spring/Summer 2005, President's Tax Reform Advisory Panel and
the 6/08/2005 Hearing on Tax Reform, Full Committee. As a resident of
the 5th Congressional District, I now wish to share my story directly
with you in hopes of garnering your support and leadership of the
Honorable Sam Johnson's H.R. 3385.
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 respectfully and urgently request your support of H.R. 3385.
Leonard P. Garille
Paso Robles, California 93446
August 30, 2005
Dear Honorable Chairman Camp and Ranking Member McNulty:
I have submitted my testimony and shared my story with the
President's Advisory Panel On Tax Reform on April 29th, 2005.
I now wish to share my story directly with you in hopes of
garnering your support and leadership of the Honorable Sam Johnson's
H.R. 3385.
The following describes the devastating effect the AMT has had and
is still having on my wife and I.
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 off 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 to 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.
I respectfully and urgently request your support of H.R. 3385.
Mark Garner
Redwood City, California 94065
August 25, 2005
Dear Honorable Chairman Camp and Ranking Member McNulty:
I have submitted my testimony and shared my story at these
following events:
6-15-2004, Hearing on Tax Simplification, Oversight
Subcommittee
9-23-2004, Hearing on Select Tax Issues, Select Revenue
Measures Subcommittee
6-08-2005, Hearing on Tax Reform, Full Committee
April/May 2005, Senate Finance Committee Chairman
Grassley
Spring/Summer 2005, President's Tax Reform Advisory Panel
I now wish to share my story directly with you in hopes of
garnering your support and leadership of the Honorable Sam Johnson's
H.R. 3385.
My name is Hisham Ghazouli and I am writing on behalf of my wife
Irma, and our two children. We appreciate the opportunity to discuss
the hardships we are suffering due to an outdated and complicated
portion of the tax code called the Alternative Minimum Tax.
In July 1998, I went to work for a startup in Redwood City, Ca. In
exchange for a lower paying job, I was granted 60,000 shares of
incentive stock options. I worked very hard helping the company develop
its product and grow. In Feb of 2000, the company went public and the
stock quickly climbed to $100. I could not exercise my options at the
time because I was blocked from doing so. Approximately 6 months later,
when the stock was trading around $20, I decided to exercise my options
and hold the stock for 18 months. By the end of the year the stock was
trading at $1.00 a share. I didn't know that exercising the stock
options would trigger AMT, which taxes you on the day of exercise even
though incentive stock options are not supposed to be taxed until sale.
After filling out our tax returns, we realized that we had a $33,000
AMT Federal tax bill and a $6,000 state AMT tax bill. I was forced to
pay taxes on stock options as if they were trading at $20 a share
regardless of the reality that the stock was trading at less than $1 a
share.
We had to liquidate all of our savings to pay for the AMT bill.
That year we paid over $65,000 in Federal taxes on income of $100,000,
which I am sure is an unintended consequence of the tax law. As of tax
year 2003, I have received less than 10% of the AMT money I loaned the
government in 2000. It will take another 5-10 years to fully recover
the amount.
I don't believe that the law was intended to so severely tax hard-
working and honest middle class Americans. Please fix the law so that
we don't have to pay taxes on income we don't receive, and we can
access the ``credits'' in a more timely manner.
I respectfully and urgently request your support of H.R. 3385.
Hisham Ghazouli
Statement of the Gorokhov Family, Germantown, Maryland
Members of the Committee: 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 means that I bought my
company stock at discounted rate $8.56 while its market value was in
$70-$100 range. When I exercised my ISO I did not have any monetary
gain 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 total tax we had to pay significantly exceeded our
entire family taxable income we reported on form 1040 for the year
2000. The effective tax rate was 130%.
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 if we
sell all stocks we acquired. We borrowed all available money from my
wife's and my retirement investments, from 2nd mortgage and credit
cards. Also, we emptied all our assets on bank accounts. In year 2004
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, which is over $100,000.
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 carryforward. At this
pace it would take 149 years to recover the whole sum.
In 2003 and 2004 tax rate was lowered again, but AMT rate stayed
the same. In 2003 and 2004 tax return we recovered $0 from our AMT tax
carryforward. 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.
Allen, Texas 75013
August 31, 2005
Dear Honorable Chairman Camp and Ranking Member McNulty:
I have submitted my testimony and shared my story at these
following events June 2004.
I now wish to share my story directly with you in hopes of
garnering your support and leadership of the Honorable Sam Johnson's
H.R. 3385. I live in his district. This is my previous statement:
I do telecommunications development for Cisco Systems. No one would
likely call me financially rich, but I am a very blessed man with a
wife and 2 adopted daughters.
I have ISOs from Cisco that I could exercise and, according to one
part of the tax code, I should receive preferential tax treatment if I
hold the stock for at least a year. Truth be told, I think the smarter
investment would be to buy the stock and hold it for at least 10 years.
However, with the present ISO AMT laws and with fluctuations in
telecommunication stock prices, I can not make such smart investment
choices (buy Cisco and hold for 10 years) because the stock price may
go down temporarily, and I would owe more in taxes than the stock is
worth. It doesn't make sense that on the one hand the tax law would
encourage my long term investment (which, under normal circumstances
would be a wise strategy for me, my employer and the economy), but on
the other hand the tax law so heavily discourages such long term
investment by mandating taxpayers risk losing more than their
investment to acquire the stock.
Please bring sense to these laws. Thank you.
Duane Guthrie
Statement of Angela Hartley, San Diego, California
Dear Congressmen:
I have submitted my testimony and shared my story at several
Congressional hearings, including written testimony for April 17, 2005
hearing. I will share my story again in support of the Honorable Sam
Johnson's H.R. 3385--it is my last hope for financial survival. Please
support this bill.
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 1,500 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.
La Canada Flintridge, California 91011
August 31, 2005
I am writing to beg you to change the tax code so that stories such
as mine never happen again. You can help do so by approving ISO AMT
Bill H.R. 3385.
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 only worked part-time,
however, 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 this
money 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. Taxation without income is
wrong. Thankfully, so is taxation without representation, and I'm
relying upon my representatives to do the right thing. Please vote
``yes'' on ISO AMT Bill H.R. 3385.
Kathryn C. Hernandez
New York, New York 10024
August 29, 2005
Dear Honorable Chairman Camp and Ranking Member McNulty:
I am writing to respectfully request your support of H.R. 3385,
otherwise known as the AMT Credit Fairness Act of 2005.'' I have
submitted my testimony and shared my story at the following events:
Hearing on Tax Simplification, Oversight Subcommittee (6-
15-2004)
Hearing on Select Tax Issues, Select Revenue Measures
Subcommittee (9-23-2004)
Hearing on Tax Reform, Full Committee (6-08-2005)
Senate Finance Committee Chairman Grassley (April/May
2005)
President's Tax Reform Advisory Panel (Spring/Summer
2005)
I wish to share my story in brief with you in hopes of garnering
your support and leadership of the Honorable Sam Johnson's H.R. 3385:
``I am yet another unsuspecting victim of the Alternative Minimum
Tax. Due to a stock options exercise in 2000, 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.
Four years has passed, and I've gone through a failed Offer in
Compromise and seemingly endless paperwork in Tax Court. My wife and I
are expecting our first child next month, and I have no idea how we'll
ever cover our basic costs if the IRS starts garnishing my wages. I
can't even begin to describe the negative impact this experience has
had on my personal and professional life.
I still hold hope that there is light at the end of the tunnel--I
don't believe the AMT was ever intended to snare taxpayers for capital
gains never received, and that's what this legislation can help
remedy.'' I respectfully and urgently request your support of H.R.
3385.
Tony Kadillak
Statement of Todd Keen, Westminster, Massachusetts
Dear Honorable Chairman Camp and Ranking Member McNulty:
I have submitted my testimony and shared my story at these
following events: Spring/Summer 2005, President's Tax Reform Advisory
Panel.
I now wish to share my story directly with you in hopes of
garnering your support and leadership of the Honorable Sam Johnson's
H.R. 3385.
I was contacted yesterday via email by an organization I have been
associated with for the last several years known as ReformAMT
(www.reformamt.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
capital gains. This philosophy appears to have been a recipe for
overtaxation 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
their AMT recovered as well. My third goal would be a review of the AMT
tax laws to see if they make sense and do 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 too 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.
I respectfully and urgently request your support of H.R. 3385.
Lakeland, Florida 33803
August 25, 2005
Dear Honorable Chairman Camp and Ranking Member McNulty:
I wish to take this opportunity to share my story with you and the
other Members of the Ways and Means Committee, and to request your
support for H.R. 3385.
The Alternative Minimum Tax, required to be paid in advance and in
anticipation of profit, had had a profound effect on our family.
Our son, with a young family, was excited to be given stock options
in Dragon Systems. When he was finally able to exercise these options,
he invested 15,000 hard earned dollars. He was prohibited from selling
these shares for a period of time, and during that time the company was
sold, and the stock became worthless.
In the meantime, the IRS tax form required that he check the box
stating that he'd exercised his options. His tax burden on the
`unearned but anticipated profit' was an identical $15,000. If our son
had not had family to help pay this tax, he would have lost everything
to the IRS for inability to pay.
This was over five years ago, and the IRS still has the $15,000 in
taxes he paid, but will never have a profit in his name to charge
against his account.
I sincerely hope you can find it in your hearts to find a way to
release these funds back to the hard-working, honest individuals who
have been adversely affected by the AMT by supporting H.R. 3385.
Thank you,
Beatrice C. Kempster
Statement of Daniel T. Kirby, Pensacola, Florida
Distinguished Congressmen and Congresswomen;
Thank you for letting me have this opportunity to speak on behalf
of the Fair Tax Act or national sales tax. Congressman Linder has done
an excellent job in creating this idea. It is fair and would work
better then a flat tax.
Simply put, the Fair Tax would replace the way we're currently
taxed, based on our annual income; with a tax based on goods and
services.
Briefly outlined is the FairTax. The FairTax proposal is a
comprehensive plan to replace federal income and payroll taxes,
including personal, gift, estate, capital gains, alternative minimum,
Social Security/Medicare, self-employment, and corporate taxes. The
FairTax proposal integrates such features as a progressive national
retail sales tax, dollar-for-dollar revenue replacement, and a rebate
to ensure that no American pays such federal taxes up to the poverty
level. Included in the FairTax plan is the repeal of the 16th Amendment
to the Constitution. The FairTax allows Americans to keep 100 percent
of their paychecks (minus any state income taxes), ends corporate taxes
and compliance costs hidden in the retail cost of goods and services,
and fully funds the Federal Government while fulfilling the promise of
Social Security and Medicare.
Americans take home their whole paychecks.
Not only do more Americans have jobs, but they also take home 100
percent of their paychecks (except where state income taxes apply). No
federal income taxes or payroll taxes are withheld from paychecks,
pensions, or Social Security checks.
No federal sales tax up to the poverty level means progressively like
today's tax system.
To ensure no American pays tax on necessities, the FairTax plan
provides a prepaid, monthly rebate (prebate) for every registered
household to cover the consumption tax spent on necessities up to the
federal poverty level. This, along with several other features, is how
the FairTax completely untaxes the poor, lowers the tax burden on most,
while making the overall rate progressive. However, the FairTax is
progressive based on lifestyle/spending choices, rather than simply
punishing those taxpayers who are successful. Do you see how much freer
life is with the FairTax instead of the income tax?
No tax on used goods. The amount you pay to fund the government is
totally visible.
With the FairTax you are only taxed once on any good or service,
the sales tax is charged just as state sales taxes are today. If you
choose to buy used goods--used car, used home, used appliances--you do
not pay the FairTax. If, as a business owner or farmer, you buy
something for strictly business purposes (not for personal
consumption), you pay no consumption tax. When you decide what to buy
and how much to spend, you see exactly how much you are contributing to
the government with each purchase.
Retail prices no longer hide corporate taxes or their compliance costs,
which drive up costs for those who can least, afford to pay.
Did you know that hidden income taxes and the cost of complying
with them currently make up 20 percent or more percent of all retail
prices? It's true. According to Dr. Dale Jorgenson of Harvard
University, hidden income taxes are passed on to the consumer in the
form of higher prices--from an average 22 percent on goods to an
average 25 percent on services--for everything you buy. If competition
does not allow prices to rise, corporations lower labor costs, again
hurting those who can least afford to lose their jobs. Finally, if
prices are as high as competition allows and labor costs are as low as
practical, profits/dividends to shareholders are driven down, thereby
hurting retirement savings for moms-and-pops and pension funds invested
in Corporate America. With the FairTax, the sham of corporate taxation
ends, competition drives prices down, more people in America have jobs,
and retirement/pension funds see improved performance.
The income tax exports our jobs, rather than our products. The FairTax
brings jobs home.
Most importantly, the FairTax does not burden U.S. exports as they
are with the current income tax. So the FairTax allows U.S. exports to
sell overseas for prices 22 percent lower, on average, than they do
now, with similar profit margins. Lower prices sharply increase demand
for U.S. exports, thereby increasing job creation in U.S. manufacturing
sectors. At home, imports are subject to the same FairTax rate as
domestically produced goods. Not only does the FairTax put U.S.
products sold here on the same tax footing as foreign imports, but the
dramatic lowering of compliance costs in comparison to other countries'
value-added taxes also gives U.S. products a definitive pricing
advantage which foreign tax systems cannot match.
The FairTax strategy is revenue neutrality: Neither raise nor lower
taxes so consumer costs remain stable.
The FairTax pays for all current government operations, including
Social Security and Medicare. Government revenues are more stable and
predictable than with the federal income tax because consumption is a
more constant revenue base than is income.
If you were in a 23-percent income tax bracket, the Federal
Government would take $23 out of your paycheck for every $100 you made.
With the FairTax, if the Federal Government gets $23 out of every $100
spent in America, the same total revenue is delivered to the Federal
Government. This is revenue neutrality. So, instead of paycheck-earning
Americans paying 7.65 percent of their paychecks in Social Security/
Medicare payroll taxes, plus an average of 18 percent of their
paychecks in federal income tax, for a total of about 25.65 percent,
consumers in America pay only $23 out of every $100. Or about 30
percent at the cash register when they elect to spend on new goods or
services for their own personal consumption. And this tax is collected
only on spending above the federal poverty level, providing important
progressively.
Tax criminals--don't make criminals out of honest taxpayers.
Today, the IRS will admit to 25 percent non-compliance with the
code. FairTax.org will be generous and simply take the position that
this is likely a conservative estimate of the underground economy.
However, this does not take into account the criminal/drug/porn
economy, which equally conservative estimates put at one trillion
dollars of untaxed activity. The FairTax will tax this--criminals love
to flash that cash at retail--while continuing to provide the federal
penalties so effective in bringing such miscreants to justice. The
substantial decrease in points of compliance--from every wage earner,
investor, and retiree, down to only retailers--also allows enforcement
to concentrate on following the money to criminal activity, rather than
making potential criminals out of every taxpayer struggling to decipher
the current code.
Scottsdale, Arizona 85260
August 29, 2005
Ways and Means Committee:
H.R. 3385 comments from AZ 5th district:
This letter is a request for support of H.R. 3385 which provides
fair relief to taxpayers who have been caught in the unfair AMT ISO
trap.
My story. I am a long time resident in Arizona's 5th district. I
was a senior executive at FINOVA--a NYSE listed commercial finance
company based in Scottsdale, Arizona. During FINOVA's heyday I made
lots of money, gladly paid lots of taxes, and contributed to local
charities. In fact, during my last six years with FINOVA I paid over
$2.1 million in Federal Taxes. In March 2001 FINOVA filed for Chapter
11 protection and my employment was simultaneously terminated. The
value of FINOVA's stock plummeted with the bankruptcy filing. During
the two year period before FINOVA's bankruptcy filing and for three
months after my employment termination, I was prevented from selling my
FINOVA stock under SEC insider trading rules. Consequently, I lost most
of my net worth which was heavily concentrated in FINOVA stock, and
lost my lucrative employment at the same time.
My history. During FINOVA's good times, I exercised Incentive Stock
Options (ISO's), borrowed money to exercise the ISO's and pay
Alternative Minimum Tax, I held the related stock since I was precluded
from selling the stock under SEC insider rules, and finally sold 100%
of the stock after my departure at a significant loss.
I followed the IRS rules for ISOs which effectively required me to
prepay taxes in the form of AMT. The IRS rules were undoubtedly
established with the belief that this ``prepayment'' was appropriate
since the taxpayer would incur an eventual gain on the ISOs. A logical
rule that put taxes into the Treasury coffers. But the critical problem
is the very difficult process of recapturing this credit if the ISO
gain never materializes. In my situation, the gain never occurred as I
sold the stock at a loss. So, in summary I prepaid taxes for a gain
that never occurred. And the only way to get those prepaid taxes back
under current IRS rules is to make lots of money (more than $500k per
year)--and in my four years after leaving FINOVA my earnings have
averaged under $100,000 per year.
Fortunately H.R. 3385 has been introduced to right the inequity of
the AMT ISO trap. H.R. 3385 does not try to fix all of the issues with
AMT--it focuses solely on the ISO trap. When I try to be as unbiased as
possible on this issue, I can still can not justify the unfair nature
of AMT credits related to ISO. The only argument I can muster against
H.R. 3385, is that it reduces tax revenue in a time of budget deficits
and record debt. But the continuation of an unfair tax because it is
not comfortable to address the source of repayment is little comfort.
Without this bill, I have no way in the foreseeable future to recoup
$135,000 in taxes I paid for a benefit I never captured.
Please support this bill.
Robert M. Korte
Mountain View, California 94040
August 11, 2005
Dear Chairman Camp, Ranking Member McNulty, and Committee Members:
Thank you for the opportunity to voice my concerns regarding tax
reform. I have previously submitted my testimony to the President's Tax
Reform Panel earlier this year, as well as to the Tax Reform Hearing of
June 2005, and to the Tax Simplification Hearing of June 2004,
regarding the ``AMT/ISO problem'' (alternative minimum tax treatment of
incentive stock options). At this time, I would like to ask for your
support of H.R. 3385, the AMT Credit Fairness Act, introduced by Rep.
Sam Johnson.
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 joined Netscape as an engineer in 1996.
Five years later, I exercised incentive stock options and held the
shares, due to my belief in the company, and paid AMT of over $180,000,
about twice my annual income, on ``phantom gains.'' 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.''
H.R. 3385, while not providing a ``quick fix,'' will accelerate the
return of these tax overpayments by providing refunds in chunks over a
period of years. This will help to ease the burden on people like
myself, as well as other affected taxpayers who were unfortunate enough
to have to sell their homes, declare bankruptcy, and face financial
ruin, all because of a severe and unfair tax on ``phantom gains.'' This
is not about giving a tax break to the rich, it is a means to return
overpayments of tax to ordinary working people who were taxed as if
they had gotten rich from stock options, but in reality did not.
Therefore, I respectfully and urgently request your support of H.R.
3385. Thank you for your attention to this matter.
Sincerely yours,
Hans Lachman
Ben Lomond, California 95005
August 30, 2005
Dear Honorable Chairman Camp and Ranking Member McNulty:
This letter is to add testimony to those given by others who are
suffering from the AMT issues on incentive stock options. In my case it
is devastating and has taken all that I have saved to carry me through
retirement and left me 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 as 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 have been fortunate enough to work at the state of the art in
computer science while at the DOE where I implemented operating systems
on supercomputers. My 22 years with DOE at various facilities exempted
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 at the state of
the art in networking and computer security, there was no 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
should work carefully 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. It was
explained that if I worked hard and the company prospered, my stock
options would become valuable. I liked that idea; 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 the Exodus
clientele.
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 we were
building 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. Ellen Hancock and her staff squandered all the value
that all the hard-working 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 purchased had become
worthless, I was most disappointed, but 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 was not to be. In August,
after filing two extensions, my CPA and financial advisory informed me
that I had a $1.7 million tax bill based on all that worthless Exodus
stock. 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 the CPA informed me 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 with 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'm still the best in
the business.
So here I am at 61 still telling myself that 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 FTB 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 have
just been taken by the IRS. There are tax leans 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 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 some equitable changes
can be made in the tax system before we lose our last remaining assets.
Sincerely,
Leroy Lacy and Janis K. Purl
Hutto, Texas 78634
August 31, 2005
Honorable Chairman William M. Thomas and House Ways and Means Committee
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 $2,000 to $3,000. 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 to 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 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 $2,000-3,000 to $15,000-
$16,000. 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.
John Lapaglia
Statement of Leo E. Linbeck, Americans for Fair Taxation, Houston,
Texas
I serve as the voluntary Chairman of Americans for Fair Taxation
(FairTax.org). FairTax.org is pleased to submit this statement in
support of the FairTax (H.R. 25) introduced by Rep. John Linder. H.R.
25 is superior to all other tax reform legislation being considered by
the Committee.
FairTax.org is the nation's largest, single-issue grassroots
organization dedicated to fundamental tax replacement. FairTax.org is
the collective voice of more than 500,000 Americans of all ages, ethnic
backgrounds, political affiliations and walks of life who share two
views on tax reform:
That Americans can rise above the failed income and
payroll tax regimes to develop a more visible, more globally
competitive, administrable, fairer, understandable and less costly and
intrusive system of collection; and
That when educated about alternatives in an unbiased way,
regardless of ideology and political affiliation, Americans consider
the FairTax to be the best plan for our national and individual
prosperity and freedom.
The FairTax Plan
The FairTax repeals all current taxes imposed by the Internal
Revenue Code on income and wages; including individual, corporate and
alternative minimum income taxes, capital gains taxes, estate and gift
taxes, and Social Security and Medicare taxes. In place of these taxes,
the FairTax imposes a single, 23 percent tax (tax-inclusive) rate on
the final retail sale of goods and services used or consumed in the
U.S. The FairTax plan then amends the U.S. Constitution so that the
income tax will never return.
The FairTax plan taxes all personal consumption at the point of
final consumption. To ensure the FairTax does not cascade, business-to-
business transactions are not taxed. Intermediate goods and services
are properly treated as inputs into goods and services sold at retail.
Unlike the current system which taxes income multiple times and on an
inconsistent basis, the FairTax taxes income only once and then when
consumed. Furthermore, the FairTax does not tax used goods under the
principle they will have already been taxed under the income tax or,
after enactment, the FairTax. The FairTax countenances no exemptions
for goods or services in order to ensure the broadest conceivable base
without special interest exemption or compliance problems.
The FairTax is a Progressive Tax
While permitting no exemptions, the FairTax holds the poor harmless
through a monthly ``prebate'' equal to 23 percent times the DHHS
poverty level for the family unit plus an additional amount in the case
of married couples to avoid a marriage penalty. The prebate ensures
each family unit can consume tax free up to the poverty level. The
amount of tax free consumption for a married couple with two children
in 2005 would be $25,660. Unlike the current system, no poor person
will pay any tax under the FairTax. And the effective tax rate for the
lower middle class since the prebate will protect most of their
spending from tax. Those spending at twice the poverty level will have
an effective tax rate of only 11\1/2\ percent under the FairTax. Thus,
a married couple with two children spending $51,320 would pay only
11\1/2\ percent in sales tax and pay no income tax and no payroll tax.
A family spending four times the poverty level would pay an
effective tax rate of 17\1/4\ percent.
The FairTax Rate is Revenue Neutral
Several independent researchers confirm the FairTax plan is revenue
neutral at 23 percent. As the starting point for this rate calculation,
consider that in fiscal year 2003, the total taxes the FairTax repeals
accounted for about 1.67 trillion. The economy in 2003 produced goods
and services valued at 10.4 trillion. Of this, 7/8's or $8.6 trillion
was consumed. To raise the taxes it repealed in that year, the rate on
this base without any exemptions would be 19.4 percent, derived by
dividing the taxes replaced by the total consumption in the U.S. The
FairTax rate must be increased to 23 percent rate to accommodate the
FairTax's generous ``prebate.'' The actual tax base calculations are,
of course, more complex. Fairtax.org would be pleased to provide the
Committee our detailed base calculations.
The FairTax Imposes the Lowest Possible Marginal Rate of Any Tax
Neutral System
It is a mathematical certainty that broadening the base and
imposing a single rate of tax will reduce average marginal rates.
Because the FairTax plan utilizes a consumption base larger than both
the current income tax base and any other alternative, it imposes the
lowest marginal tax rate of any revenue neutral alternative without
doubly taxing the same income. In 2001 (the latest year data
available), total adjusted gross income was $6.17 trillion. Thus, the
basic building block of the FairTax base--total consumption--is 38
percent larger than the current tax system's starting point--adjusted
gross income. Actual taxable income under the current system was only
$4.22 trillion in 2001, only 49 percent of total consumption.
The FairTax Would Stimulate Economic Growth
Lower marginal tax rates improve the incentive to work, save and
invest. A consumption tax base that no longer taxes savings and
investment multiple times will increase savings and investment. Higher
investment levels will increase the productivity of employees, demand
for workers and real wages.
Economists estimate that the FairTax plan will improve wages and
the economic wellbeing of virtually all Americans (tax lawyers are an
exception). Work by Harvard economist Dale Jorgenson shows a quick 9 to
13 percent increase in the GDP. Similarly, Boston University economist
Laurence Kotlikoff predicts a 7 to 14 percent increase. Work by Fiscal
Associates' Gary Robbins shows that replacing the current tax system
with a flat rate system that taxed capital and labor income equally--
such as the FairTax--would increase the GDP 36.3 percent and increase
private output by 48.4 percent over the long run. Even work by Nathan
Associates, commissioned by the National Retail Federation which is
hostile to the FairTax, shows that the economy would be one to five
percent larger under a sales tax than in the absence of reform.
The FairTax Untaxes Education
Tuition is not taxed by the FairTax plan because the FairTax draws
no distinction between investment in human capital and investment in
plant or equipment. Rather, the FairTax treats education as a personal
investment the primary aim of which is to increase future income.
The FairTax Untaxes and Uncomplicates Saving
Americans today save at low rates because our current income tax
regime punishes saving and investment. Savings are made with what
remains after payroll and income tax, and the return on those
investments is taxed multiple times: the income-producing asset is
taxed, corporate income (including capital gains) is taxed and
dividends are taxed. Although assets in qualified pension accounts
approach being taxed in a manner consistent with a consumption tax, the
thousands of pages of pension regulations impose further costs that
discourage pension plans. FairTax supporters do not see the ability to
save as a privilege to be bestowed by the Internal Revenue Code but
advocate adoption of the simplest pension plan in the world; one in
which everyone can participate--if you don't spend it on yourself after
you've met life's necessities, they don't get to tax it. The FairTax
offers the equivalent of a universal, unlimited IRA with no
restrictions on how much to save or on who can save.
The FairTax Reduces Compliance Costs More Than Any Other Tax System
The current system literally throws away precious economic
resources on wasted compliance costs that add no value to the economy.
We collectively filed 227 million tax returns in FY 2004, and more than
1.4 billion information returns. In 2002, the Tax Foundation estimates
individuals, businesses and non-profits spent an estimated 5.8 billion
hours complying with the federal income tax code at a cost of over $194
billion. This amounts to a 20.4 percent tax compliance surcharge for
every dollar the income tax system collected and nearly two percent of
the GDP.
The FairTax Will Ensure Greater Compliance
The FairTax would be more easily enforced, foster greater
compliance and be less intrusive than current law or competing plans.
Despite its intrusiveness and large compliance costs, the current tax
system is failing. According to the latest IRS data, the annual tax
gap--the difference between the taxes due the IRS and the actual taxes
collected--is between $312 billion and $353 billion. The tax gap would
be reduced for several reasons. First, because marginal tax rates are
the lowest they can be under any sound tax system, cheaters profit far
less from cheating. Second, it will be easier to catch cheaters, since
the number of tax filers will drop by as much as 90% since only
businesses will file tax returns. Thus, enforcement authorities will be
required to monitor far fewer taxpayers and if resources are held
constant audit rates will increase (and audits will be vastly
simplified). Finally, more than 80 percent of the sales tax is
collected by 15 percent of the retailers. Third, simplicity and
visibility add to enforcement. Today the more than 228 million
taxpayers can cheat in the privacy of an office and bury their cheating
in the unnavigable 7,000 code sections with plausible deniability that
the taxpayer even understood the law. The FairTax increases the
likelihood that tax evasion would be uncovered and leaves little room
to hide between honesty and outright fraud. In short, tax collectors
can focus enforcement resources on far fewer taxpayers, with far fewer
opportunities to cheat, diminished incentives to do so, and a far
greater chance of getting caught if they do.
The FairTax Fully Eliminates the Current Self-imposed Tariff Against
American Producers
American manufacturing faces unprecedented foreign competition.
With a negative trade balance in goods with every principal nation and
region, the U.S. trade deficit is approaching $600 billion per year,
more than 5 percent of GDP. Despite this, the U.S. has failed to
address the central problem: the increasing reliance by our trading
partners on border adjusted taxes. 29 of 30 OECD nations (and China)
employ border-adjusted consumption taxes rebated on exports and levied
on imports at an average rate of 17.7 percent ad valorem. Border
adjusted taxes enhance, through WTO legal means, the competitiveness of
exports. Since these nations in turn levy consumption taxes on imports,
U.S. produced goods are effectively double taxed--paying U.S. income
and payroll taxes and foreign value added taxes. Similarly, foreign
goods sold in the U.S. bear neither foreign consumption tax or any
appreciable U.S. tax.
As the purest version of a destination principle consumption tax,
the FairTax completely removes the self-imposed tariff we now impose on
U.S. produced exports. The FairTax does not tax goods or services used
or consumed outside the U.S. Conversely, it taxes imports the same as
U.S. produced goods when they are sold at retail in the U.S. For this
reason, the FairTax can play a central role in revitalizing the
American manufacturing base lost to foreign competition, and return to
America the high-wage manufacturing jobs we have driven overseas. It
will also help to make U.S. agricultural and forestry products more
competitive.
The FairTax Benefits Charities More Than Any Other Plan or the Current
Tax System
The FairTax will enhance resources available to charities (1) by
improving the primary determinant of charitable giving--economic growth
and national income; and, (2) by giving every taxpayer the equivalent
of a supercharged charitable contribution by enabling contributions
free of income, payroll and sales tax.
Some supporters of the income tax argue the steeper the rate of
tax, the more one is inclined to be ``charitable,'' but empirical data
confirm a high correlation between economic growth and the national
giving. Total philanthropy has held steady at around 2% of GDP for more
than two decades even while the top marginal rate has fluctuated
between 28 and 70 percent. Simply put, as people become more
prosperous, they give more to philanthropic causes. And virtually every
economist who opines that deductions are needed for charitable
contributions also makes the case that a consumption tax would improve
economic prosperity.
Equally important, the FairTax lowers the costs of charitable
contributions for all taxpayers in ways unmatchable by the income tax.
The appropriate question with respect to the charitable contribution is
not `how much of a deduction is provided?' but rather `what must a
taxpayer earn in order to make that contribution?' A taxpayer under the
FairTax must earn $100 to contribute $100, but a taxpayer able to
deduct the contribution today, must earn at least $108.28 to contribute
$100 ($118 if both employer and employee share of payroll taxes are
considered paid by the contributor). A non-itemizing taxpayer (three-
quarters of all taxpayers) in a 28 percent bracket must earn $176 to
make a $100 contribution to charity given the combined effect of the
15.3 percent payroll tax.
To match the power of the charitable ``incentive'' under the
FairTax, the income tax would not only have to permit charitable
contribution deductions against payroll taxes, but eliminate the
distinction between itemizers and non-itemizers and the many other
restrictions on the deduction.
The FairTax Benefits Home Ownership More Than Any Other Plan or the
Current Tax System
The FairTax lowers the ``true costs'' of buying a home. The
purchase of new property is taxed as a consumption item under the
FairTax, in a manner not unlike today. We currently require homebuyers
to pay for their new home with what remains after payroll and income
tax today. There is no deduction for the purchase of a home. But unlike
under the current regime, the FairTax imposes a lower marginal rate of
tax and capital gains from the sales of used or new property are not
taxable to the sellers under the FairTax. Moreover, the cost of newly
constructed homes should decline as much as 20 percent as a result of
the elimination of taxes imposed upstream. More importantly still,
purchasers of existing homes (the most common properties bought by
first time homebuyers) pay no FairTax on the home sale.
The mortgage interest deduction (MID)--now permitted for servicing
the interest on mortgage debt--pales in comparison to the full non-
taxation of interest by the buyer or the lender under the FairTax. The
intended result of the MID is the non-income taxation of mortgage
interest (or more precisely, the funds used to pay mortgage interest).
But as in the case of the charitable deduction, the MID cannot be taken
against payroll taxes which represent about 43 percent of income-based
taxes by receipt. Three-quarters of all Americans pay more payroll than
income taxes and they are disproportionately the first time homebuyers.
By repealing income and payroll taxes alike, the FairTax plan ensures
mortgage interest payments are made with totally untaxed earnings. If
the MID were to treat mortgage interest that favorably, it would have
to allow the deduction against payroll taxes. Finally, since lenders
are not taxed on interest they receive the FairTax is estimated to
lower interest rates by about 250 basis points (toward the tax-free
bond rate) which will further reduce the carrying costs of purchasing a
home. The FairTax also benefits home ownership because it enables
homebuyers to save without swimming against the tide of taxation to
amass the down payment.
The FairTax Will Provide a Template for a Uniform System of Taxation
for States
States today are struggling with how to tax Internet and mail order
sales. They miss the larger picture. It is not the sale of goods and
services that presents a problem, but the taxation of income which can
shift around the world as the speed of light. The FairTax offers states
a chance for uniformity in adopting a common tax base that will enable
states to reach out-of-state retailers selling into the state. And
using all measures of variance, consumption is less variable than the
taxable income.
Unlike Other Plans, The FairTax Will Not Morph Into The Income Tax
Not only does the FairTax tax consumption rather than income, it
would eliminate the administrative means to collect an income tax. The
FairTax offers the only alternative that can assure no return of the
income tax because it is the only comprehensive reform that can exist
after repeal of the 16th amendment. The flat tax, the USA tax and other
similar plans keep the entire income tax apparatus in place and can
easily be transformed back into an income tax.
The FairTax Will Bring Honesty to Government by the Most Visible and
Transparent Tax
Today, small changes to the Code shift tens of billions of dollars
to particular groups of taxpayers in ways not as visible as direct
appropriations, but just as effective. With each special exemption,
credit, deferral, deduction or definition that results, the marginal
tax rates are increased on everyone else. When taxes are transparent,
they are generally more difficult to raise.
The FairTax Respects Privacy More Than Any Other System
The FairTax eliminates the need for individuals to file tax
returns. It will make our tax system consistent with our historically
hallowed notions of privacy. The truth is that we could hardly have
devised a more intrusive tax system for prying into our houses, our
papers, our effects, our lifestyles, or our decisions. And we could
have hardly devised a tax that--because of its many temptations to a
large number of filers, its perceived unfairness, and its complexity--
requires such intrusiveness as a prerequisite to its enforceability. By
its own unalterable nature, from the cradle to the grave, the income
tax eventually extracts, collates, and chronicles almost every detail
of our financial and personal lives as a necessary condition of its
enforceability.
The FairTax is Supported by Small Firms
The FairTax is the only plan specifically endorsed by a wide array
of small business groups; including, the National Small Business
United, the Small Business Association of Michigan, the Council on
Smaller Enterprises, the Associated Builders and Contractors and the
American Farm Bureau Federation. These groups, who consist of retailers
as well as manufacturers and service providers, support the FairTax
because it will eliminate tax on productive income, reduce compliance
costs, and create economic growth.
The Flat Tax and the Freedom Flat Tax Act
The Hall-Rabushka-Armey-Forbes flat tax is a modified value added
tax that taxes labor value added at the individual level and capital
value added at the business level. It retains the basic income tax
apparatus with tax returns filed by both businesses and individuals.
Because it expenses capital and treats savings as if they were in a
Roth IRA, the Hall-Rabushka flat tax is a type of consumption tax. The
flat tax taxes U.S. exports and imposes no tax on imports into the U.S.
Princeton economist David Bradford and more recently Robert Hall
(the Hall in Hall-Rabushka) have proposed the X Tax which is the flat
tax with graduated rates on labor income.
The flat tax could be converted back into a serviceable graduated
income tax with the following changes:
1. Depreciate capital rather than expense capital;
2. Deduct inventories when sold rather than when purchased;
3. Make interest both taxable and deductible;
4. Tax dividends, royalties and capital gains; and
5. Make tax rates graduated rather than flat.
The fact that such straightforward modifications can transform the
flat tax into a graduated rate income tax should give its supporters
pause.
Although an improvement over the current system the flat tax is
inferior to the FairTax because:
1. it retains the income tax apparatus and can be easily
transformed into a graduated rate income tax;
2. it requires individuals to continue to file tax returns;
3. it is not nearly as transparent or understandable as the
FairTax (as is evidenced by the fact that most flat tax supporters
don't even understand what it is)
4. it hides a large portion of the total tax burden in the
business tax; and
5. it continues to place American producers at a disadvantage both
in U.S. markets and abroad.
Rep. Michael C. Burgess has introduced the so-called Freedom Flat
Tax (H.R. 1040). This proposal would allow taxpayers to choose between
a flat tax and the current system. The proposal thus would retain all
of the special exclusions, credits, preferences and deductions in the
current system and all of its complexity and compliance costs. It then
adds a new layer of complexity. The proposal cannot be revenue neutral
because it affords taxpayers an option between the current system and
the flat tax. Virtually all taxpayers will do their tax returns both
ways and file whichever way leads to the lowest tax bill.
The Simplified USA Tax Act or ``SUSAT''
Rep. Phil English has proposed the simplified USA Tax. The proposal
would impose both a business transfer tax (a subtraction method value
added tax) and a type of consumed income tax (with graduated rates)
where all individual savings is treated as if they were in a Roth IRA.
The proposal does represent an improvement over the current tax system
in that the tax base is consumption and the marginal tax rates are
somewhat lower than the current system. In addition, the business
transfer tax is border adjusted and would improve the competitiveness
of U.S. producers in international markets.
Nevertheless the proposal retains the current income tax apparatus.
It is quite complex compared to the FairTax and would have much higher
compliance costs. Although an improvement over the current system the
simplified USA Tax is inferior to the FairTax because:
1. it retains the income tax apparatus, including graduated tax
rates;
2. it only modestly reduces marginal income tax rates;
3. it requires individuals to continue to file tax returns;
4. it is not nearly as transparent or understandable as the
FairTax; and
5. it hides a large portion of the total tax burden in the
business tax.
Conclusion
The FairTax is superior to the current tax system and to all of the
alternatives being considered by the Congress. The FairTax represents
the best plan to improve the wellbeing of the American people while
raising the revenue needed to fund the Federal Government. It is more
fair, will better promote economic growth and competitiveness, will
better foster thrift, charitable giving, education and home ownership,
will reduce needless compliance and administrative costs and protect
privacy.
San Diego, California 92122
August 26, 2005
Dear Honorable Chairman Camp and Ranking Member McNulty:
I have submitted testimony and shared my story to the President's
Tax Reform Advisory Panel during the Spring of 2005.
I now wish to share this story directly with you in hopes of
garnering your support and leadership of the Honorable Sam Johnson's
H.R. 3385.
In Year 2000 during my employment at a high technology company, I
exercised unvested incentive stock options that were issued by my
company with an exercise price that was significantly less than the
fair market value on the date of exercise. I wasn't able to sell these
in Year 2000 so I incurred a significant AMT preference item that
resulted in my alternative minimum taxable income being much greater
than my regular taxable income. As a result, I had to pay approximately
$34,000 in AMT to the Federal Government and approximately $5,000 in
AMT to the state of California. These AMT values that I paid are over
and above the regular tax amounts that I paid in Year 2000. The AMT tax
itself that I paid was actually greater than the ordinary tax that I
paid. I submitted an 83(b) election which effectively recognizes the
AMT income in the year that this election was submitted. In order to
pay the tax, I sold all equity holdings that I possessed.
The payment of these taxes put me and my family in a very
challenging financial situation. I refused to take on any credit card
debt in order to maintain our standard of living so we cut our spending
dramatically. In fact, I turned off the heat in our house during the
winter in order to save a few hundred dollars a month although I did
keep a space heater running in our new baby's bedroom during the night.
We did not contribute to our IRA accounts in Year 2001 and I even cut
back my bi-weekly 401K contribution rate to one percent of my salary
from a contribution rate that would result in me contributing the
maximum yearly amount.
The AMT that is paid becomes an AMT credit which can be claimed by
an amount that equals the regular tax minus the alternative minimum
tax. In Year 2004, I will be able to claim approximately $1,500 of this
AMT credit. The yearly rate of reclamation of the AMT credit is
generally low relative to the outstanding AMT credit for people in my
situation. This AMT credit provides federal and state governments with
an interest free loan that is paid for by the taxpayer since the
taxpayer can't collect any interest on this money for himself. In fact,
I understand that the taxpayer actually loses this credit upon his
death.
Understanding the AMT tax system took many hours of my time. The
time was spent reading appropriate tax books, reviewing some message
boards on appropriate websites, and long discussions with my colleagues
at work. The time required to understand this tax has a negative effect
on productivity at my place of work. I can imagine that Joe taxpayer
generally won't even be able to comprehend this tax even though he will
be affected by it sooner or later.
I know well over twenty people who were adversely affected by
staggering amounts of AMT. I know of one individual that needed to sell
his house and move his family in order to pay the tax as he got laid
off as well in Year 2001. Many of these individuals suffered
psychologically as a result of the financial straits that they were
subjected to as a result of the AMT. As a result, work productivity
notably suffered as well.
I would like to add that many of my colleagues at work were
adversely affected by exercising non-qualified stock options where the
exercise price was much less than the fair market value on the date of
exercise. The tax that is based on the difference between these two
values becomes due on the date of exercise. It counts as regular tax
and not alternative minimum tax. Unfortunately, my colleagues were not
able to sell immediately since the shares weren't vested. The
underlying stock price had already fallen dramatically enough when the
exercised shares could be sold. The result is the tax paid in Year 2000
is much greater than the amount for which the shares could be sold.
Reclamation of this loss will take decades for most of these
individuals as only $3,000 of the amount could be reclaimed annually.
This regular tax coupled with their AMT burden has adverse financial
consequences for my colleagues to this very day.
Some Recommendations for Tax Reform:
1. Elimination of the alternative minimum tax and payment of all
outstanding AMT credit to individuals that are due this credit.
2. The loss of the billions of dollars from AMT payments by
individuals needs to be obtained from other sources. This may be
achieved by the following methods:
a. Changing the marginal tax rates to their prior values at
minimum
b. Establish a federal consumption tax. In order to mitigate the
regressive effects of this tax on low income families, provide
additional income tax relief to people in this group.
c. SIMPLIFY! The simplest solution is almost always the best
solution and the correct solution. Any lack of coverage by a simplified
tax code will be more than made up by the billions of dollars that will
be saved by administering a complex tax code, the decrease in worker
productivity that occurs when individuals spend many days trying to
figure out the best tax strategy, the corresponding loss of tax revenue
as companies earn less when the employees are less productive, and
anecdotally, the hundreds of millions of dollars that are unnecessarily
paid to tax preparers that are required to prepare complex tax returns.
I respectfully and urgently request your support of H.R. 3385.
Gerald M. Marx
Boca Raton, Florida 33432
August 31, 2005
Honorable Chairman William M. Thomas and House Ways and Means Committee
Dear Chairman Thomas and Committee Members from the Florida 22nd
Congressional District:
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 matter 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
just a 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 hard-working, middle class
Americans in South Florida 22nd Congressional District, 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
Austin, Texas 78736
August 31, 2005
Honorable Chairman William M. Thomas and House Ways and Means Committee
Washington, DC
Dear Honorable Chairman Camp and Ranking Member McNulty:
I have previously submitted 6/05 to the Ways & Means Tax Reform
Hearing.
I now wish to share my story directly with you in hopes of
garnering your support and leadership of the Honorable Sam Johnson's
H.R. 3385.
Our three children, and I, along with my wife Julie have been
seriously impacted by the Alternative Minimum Tax (AMT) that I had to
pay due to the exercise of stock options. The AMT laws pertaining to
Incentive Stock Options are unfair and I would venture,
unconstitutional. I appreciate the time you and the Committee are
taking to review this matter, and would ask that you consider changing
this seriously flawed and unjust law of the tax code. I also ask that
you consider doing what's right for those already impacted, a large
majority of which, was caused by the ``perfect storm'' when the market
went south in 2000.
I, personally, consider myself one of the lucky ones. . . . I have
the possibility of actually recovering the AMT amount paid in over my
lifetime, if everything works out, and even though it's having a direct
impact now on our lives, it could have been worse. Thank God I only
exercised 346 of the 512 stock options I was originally going to! Even
with this stated, I am personally writing for those who have had their
lives turned upside down. It's devastating to hear some of these
stories! Single mothers who are janitors owing hundreds of thousands of
dollars . . . just because they listened to their tax accountants, the
IRS and a poorly written policy, called AMT. This belittles the 35-
$40,000 (52.55% affective rate) difference the AMT law made on my tax
bill ($29,355 in actual taxes owned + the amount I would have got back,
had it not been for the AMT ``law'').
My story starts back in the middle of 1996. I had a prior job with
a retirement benefit that I received. As I was struggling to make ends
meet while supporting my wife (who's presently disabled) and three
children (two of which were from my wife's prior marriage, and at that
point, had received NO child support. I loved my family then, and do to
this day, so it was just one of life's struggles we have to deal with),
we had to roll over the retirement account to a standard IRA. Around
1999, I found out about the ROTH IRA, and as things were looking better
with my job and our finances, it sounded like a good item to move
towards looking into our future. We realized it would be a struggle to
pay the taxes on it, but were going to deal with that hardship to
invest in our future retirement. So in early 2000, things were looking
like we could finally pull off coming up with the taxes at the end of
that year, so we converted the IRA to a ROTH IRA. In Feb. 2000, when
our companies stock was doing well, I contacted some tax accountants
and made several calls to the IRS regarding exercising my stock options
utilizing the 83-b, so I could lock in the tax benefits. Things were
really looking up and we were highly encouraged to invest in our
company by management, and so I did. All my calls to the IRS didn't
really amount to much as hardly anybody knew about the Form 83-b, but
the basic information they kept telling me is that it's a huge tax
benefit. I'd only have to pay long term capital gains tax on the
options exercised, as long as they weren't sold for a year (even the
options which hadn't vested yet, and wouldn't until even the latter
part of 2001). As the markets kept dipping and our stock started taking
a dive (much later than most in that year), and I started hearing more
mentioned about the AMT tax, I started looking into the AMT
implications. I had at least 20 conversations with the IRS themselves,
along with consulting with two different tax accountants. NONE of them
really knew of this area of the tax code, and ALL called it a ``very
gray area.'' Many times, the IRS would have to escalate up the ladder
to a more knowledgeable expert in that area. I NEVER did get any real
information from ANY of them other than ``it's a gray area.'' If the
IRS couldn't tell me about the ISO-AMT laws, who could???
At the beginning of 2001 I continued to keep placing calls to the
IRS to find out exactly how my options will be taxed and what or how
AMT would apply. I finally got a copy of some tax software after I
couldn't get answers to my questions from either the IRS or the tax
advisors I was working with. Well, I couldn't believe my eyes when I
plug my numbers in. I then made many more calls to the IRS. Finally
AFTER the 2000 tax year was completed, some of these ``gray areas''
start turning into answers. They went something like ``Oh, I just had
to look into a few of these last week and the IRS has started
publishing more/better information on these `gray areas.' '' To my
amazement, now that the tax year is over, the IRS had finally got
specific, but by now, it was too late for me to do anything. It was a
blow that I couldn't ever have expected, nor believed that there was
any constitutional way that I could be liable for this kind of tax. It
meant that we were to pay tax on money we would NEVER receive. It meant
that for a $2 stock option, I was going to have to pay almost $24/share
in taxes . . . yet the value of the stock was only a small fraction of
that. EVEN THOUGH I COULD SELL THE STOCK FOR A PROFIT OVER THE $2 GRANT
PRICE, I STILL HAD TO PAY TAXES IN AN AMOUNT THAT MEANT I LOST MONEY.
How can you pay taxes on stock that you NEVER saw a gain from???
Now, comes the real shocker . . . so this is a pre-paid tax . . .
I'll just be able to get the tax money back I paid when I file my 2001
taxes, and pay off the money I owed the IRS. . . . NO SUCH LUCK! This
law is written to where the only way you could do that is OWE a huge
amount of AMT tax again the next year. I will probably NEVER owe AMT
tax again (so I thought) in my life . . . now that I'm reading more
about it, I find even that may not be true.
So, here I am, I bought exercised the stock, NEVER sold it and now
I have this HUGE debt, with an effective tax rate of 52.55% (it's
realistically higher, as I didn't get back the $$ I should have), and
am expected to live on that. My disabled wife needed a different used
car as hers was becoming undependable with over 130,000 miles on it, I
couldn't afford that, I couldn't afford anything I worked for. The IRS
kept charging me penalties and interest on my AMT bill, and so I
finally had to go into serious debt by borrowing money off of my credit
cards to pay off the IRS to get them off of my back.
Now, I went from thinking I could actually do something nice for my
family and take our first real vacation, to being horrifically in debt!
Something's wrong here. . . . I'd previously in my life worked two jobs
for almost two years (putting in 70-100 hrs a week), to get myself
where I didn't have to worry about serious debt (mostly due to a
robbery), and now because I worked hard and my company attempted to
reward me, I'm in the worst shape of my life! I didn't try to get out
of the taxes I truly owed . . . never have, never will. But, why isn't
our government treating me the same exact way? George Washington would
be turning in his grave if he knew about this. Hard work in this
country is supposed to be rewarded, not a punishment. I worked hard for
everything I have, never getting any handouts, nor expecting them. I
just want my country to treat me fairly in the same manner, as it
should treat ALL in this country that way. Please correct this
injustice . . . if not for me, but for ALL citizens, especially those
such as the hard-working single moms who have been blindsided so hard
by a lack of information and poor tax laws and interpretations of them.
Please repeal AMT retroactively, and replace it with something that is
TRUELY FAIR.
I was about to stop there, but wanted to add one more piece I think
you should know about . . . this isn't just about money here . . . this
law is putting a serious strain on people's health too. I try to avoid
thinking about AMT as much as I can. . . . It gets me literally sick
every time I think of it. This was hard once again to write to try to
have some action taken on this subject. I knew what would probably
happen . . . but I had to write anyway. I've NEVER felt so strongly
about a law so much in my life . . . don't get me wrong, I have strong
moral values, and feel there are many which could be improved upon, but
this law, I feel, is just plain robbery.
I respectfully and urgently request your support of H.R. 3385.
Steven D. May
Fallbrook, California 92028
August 17, 2005
Dear Honorable Chairman Camp and Ranking Member McNulty:
House Ways and Means Committee
Dear Chairman and Members:
I respectfully and urgently request your support of H.R. 3385 as 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 software 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 3\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 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,
specifically H.R. 3385; AMT Credit Fairness Act, will soon provide
relief for families in our situation. 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
The Honorable Michael McCaul, Representative of Congress from the State
of Texas
Mr. Chairman, I would like to thank you for allowing me the
opportunity to submit my thoughts for the record on the Fair Tax Plan.
I would like to commend Mr. Linder for his leadership on this very
important issue.
The income tax has been a permanent part of the American tax system
for ninety-two years. Increased government spending has resulted in
such a steep income tax rate that a significant amount of the average
hard-working American worker's salary never even reaches his or her
pocket. As a conservative, I believe that the American taxpayer is a
better judge of how their own money should be spent, and not the
government.
Mr. Linder's plan would permanently abolish the income tax and
replace it with a national sales tax. His plan would allow workers to
receive one hundred percent of their earnings in their paychecks,
giving them the right to decide how best to use all of it. American's
will pay taxes based on their personal consumption of products, as
opposed to how much the government chooses to take from them based on
what they earn through their hard work. Taxpayers will save thousands
of dollars and hundreds of hours a year by simplifying this process. No
more confusing tax forms, no more costly tax compliance. Additionally,
our government will save millions of dollars in collection costs and
enforcing taxpayer compliance. The fair tax is most, and perhaps only,
efficient way to collect federal taxes.
Many tax proposals will be reviewed in the coming months by your
Committee. I strongly urge the Committee to adopt the fair tax model
for fundamental tax reform. The economic benefits this plan will bring
for the country and cost savings for the government are undeniable. It
is time the government stopped carving up taxpayers hard earned
paychecks and started allowing working Americans to keep their own
money.
Catonsville, Maryland 21228
August 26, 2005
Dear Honorable Chairman Camp and Ranking Member McNulty,
We have submitted our testimony and shared our story at these
following events:
6-15-2004, Hearing on Tax Simplification, Oversight Subcommittee
9-23-2004, Hearing on Select Tax Issues, Select Revenue Measures
Subcommittee
6-08-2005, Hearing on Tax Reform, Full Committee
April/May 2005, Senate Finance Committee Chairman Grassley
Spring/Summer 2005, President's Tax Reform Advisory Panel
We now wish to share our story directly with you in hopes of
garnering your support and leadership of the Honorable Sam Johnson's
H.R. 3385.
My name is Rita Miller and I am writing on behalf of myself and my
husband, Arthur, regarding a huge tax debt that we incurred on phantom
gains that were created by the application of the Alternative Minimum
Tax. We submitted our testimony previously, but we are respectfully
requesting your support of H.R. 3385.
In November 1997, I took a job in Linthicum, MD as an
Administrative Assistant for a start-up Internet security company,
VeriSign, Inc., whose headquarters is in Mt. View, CA. 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 held some
of the stock. We didn't realize ANY profit from the exercised, unsold
stock. We just took the stock from VeriSign and put it into our newly
created stock brokerage account.
We have always been in the lower portion of the middle class income
bracket. We never owned even one share of stock before. We thought the
stock market was for the rich and famous. For that matter we never
really ever had a savings account. We raised three sons while just
making ends met. But now it had looked as though the all-American dream
might be coming true for us. We now had a vehicle to change our
financial position and the ability to really be able to save for
retirement. I am 56 years old and my husband is 58.
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. And we did--
we held the stock. 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.
We were taxed on the value of the stock on that particular day we
exercised them. On some of those days the stock traded as high as $220.
We were taxed as if we sold the stock that day and made a profit. We
didn't sell the stock at $220. We didn't receive, as it would appear,
the huge profit on those shares of stock, but we were being taxed as if
we did. Taxed on ``phantom income.'' As if we had the monetary gains
sitting in a bank account somewhere. That was not the case.
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 was
$448,873. We managed to pay $314,784 by selling whatever shares of
stock we had. During the year 2000 when the stock market started to
plummet, so did the value of our stock. When we sold the stock the
prices ranged from $34 to as low as $9. Keep in mind that the original
amount of $448,873 was the tax due based on the stock trading at an
average $220 per share. As you can see I didn't sell it for $220 but
I'm being taxed as if I did.
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.
We requested an OIC and the IRS rejected it--stating that we had a
house, a car and some retirement money and if we sold the house, the
car and turned in the retirement, we could pay the ``phantom taxes'' we
owed. We came to realize that after filing subsequent years taxes, the
IRS now ``owes'' us $124,297 in credits for actual overpayment of
taxes. We immediately filed another OIC. We offered $8,002 along with
the credit of $124,297 that the IRS admits was an overpayment of taxes
bringing 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? The IRS wants us to pay them first, then they want to give
us back the $124,297 of ``overpayment'' by allowing us to recover a
small portion, approximately $3,000, of the credit per year! My husband
and I will have to reach the age of 99 and 97 respectively to recover
the entire amount of the overpayment.
A travesty just occurred in our lives that added additional
hardship. My husband, who has been unemployed since August 2002 and has
spent more than a year of processing for employment with the Department
of Defense was just notified that the DoD is withdrawing his offer of
employment due to the outstanding IRS debt. They said that the tax
issue brought into question his credibility--but we only owe this tax
because we were honest enough to report our exercise of the stock
options in the first place. At almost 60 years old where is he going to
find another opportunity like the one with the DoD? We are hard-
working, 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.
Whenever you tell anyone the details of our situation they are
appalled. They say that's impossible. It just couldn't be. Well it did
and we have been living a nightmare for over 3 years with daily fear
that one day when we open our mailbox there's going to be a letter
there from the IRS stating that they are taking our home, the one that
we worked all our life for.
We respectfully and urgently seek your support of H.R. 3385.
Rita & Arthur Miller
Las Vegas, Nevada 89149
August 26, 2005
Dear Honorable Chairman Camp and Ranking Member McNulty:
I have submitted my testimony and shared my story on a number of
occasions in the hope something can be done to fix a travesty in the
tax code. I now wish to share my story directly with you in hopes of
garnering your support and leadership of the Honorable Sam Johnson's
H.R. 3385.
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 whatever 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 widespread 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
an ``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 to 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 founding the Company, creating thousands of
jobs and building a good business 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 talked 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 of our tax code is the fair and 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. It is
absolutely absurd that our prepayment of taxes is a free loan to the
government. 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 grave injustice!
I respectfully and urgently request your support of H.R. 3385.
Nield J. Montgomery
Cupertino, California 95014
August 20, 2005
Dear Honorable Chairman Camp and Ranking Member McNulty:
I have submitted my testimony and shared my story at 6-15-2004,
Hearing on Tax Simplification, Oversight Subcommittee.
I now wish to share my story directly with you in hopes of
garnering your support and leadership of the Honorable Sam Johnson's
H.R. 3385.
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. The amount is more than 3
times 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 bedroom rented
apartment. However, the IRS officers told us that they were only
concerned about the tax we have not paid. They are regardless about the
fairness of the tax.
We are still facing financial crisis. IRS already started
collection process. We have to pay the huge tax that is based on the
profit we never made.
I respectfully and urgently request your support of H.R. 3385.
Sincerely,
Kimhoe Pang
Newnan, Georgia 30263
August 6, 2005
Committee on Ways & Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington D.C. 20515
Dear Chairman Thomas and Members:
My wife and I ask the Committee to report favorably on H.R. 25, the
Fair Tax proposal by Rep. John Linder of Georgia.
We support the elimination of the income tax, the IRS, and the
current harmful tax code.
We support a national retail sales tax with a prebate to every
household of a portion of estimated sales tax payments.
Thank you.
Sincerely,
Kimball L. Peed
Issaquah, Washington 98027
August 24, 2005
Honorable Chairman Camp and Ranking Member McNulty
House Ways and Means Committee
Dear Honorable Chairman Camp and Ranking Member McNulty:
I have submitted my testimony and shared my story at the following
events:
6-15-2004, Hearing on Tax Simplification, Oversight
Subcommittee
9-23-2004, Hearing on Select Tax Issues, Select Revenue
Measures Subcommittee
6-08-2005, Hearing on Tax Reform, Full Committee
April/May 2005, Senate Finance Committee Chairman
Grassley
Spring/Summer 2005, President's Tax Reform Advisory Panel
I now wish to share my story directly with you in hopes of
garnering your support and leadership of the Honorable Sam Johnson's
H.R. 3385.
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.
We respectfully and urgently request your support of H.R. 3385.
Bob and Susan Pessemier
Sunnyvale, California 94086
July 25, 2005
Dear Ways and Means Committee Members:
We strongly encourage the Committee's support of Congressman
Johnson's recently introduced bill, H.R. 3385, to correct the existing
inequities associated with individual taxpayers' ability to recover
Alternative Minimum Tax credits. The current law makes it very
difficult, if not impossible, for individual taxpayers to recover AMT
credits, resulting in perpetual interest-free loans to the government.
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. Years ago in lieu of a higher salary, incentive stock options
became part of our compensation.
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.)
------------------------------------------------------------------------
% of AMT credit
Tax Year 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 support Congressman Johnson's H.R. 3385 to accelerate
individual taxpayers' ability to recover AMT credits!
Thank you very much for your consideration.
Sincerely,
Steven and Danna Pintner
Statement of The Honorable Tom Price, a Representative of Congress from
the State of Georgia
Tax System Reform unites the American people unlike any other.
Everyone can agree that reform is much needed and long overdue.
Reducing the onerous burden imposed by an overly complicated tax code
that creates enormous compliance costs for American citizens and
businesses should be a priority for Congress.
The current U.S. tax code numbers over 10,000 pages, 600 forms, and
16,000 lines. If that is not complicated enough, those who call the
Internal Revenue Service get correct answers to their questions only
fifty-three percent of the time.
The purpose of this letter is to urge the Committee on Ways and
Means to support the FairTax proposal which would create a National
Retail Sales Tax. The goals of the FairTax are consistent with
responsible goals for our tax structure--fair, simple, and efficient.
Americans deserve and desire a tax system that encourages savings, a
tax system that is void of loopholes, and a tax system that is no
longer subject to the influence of special interest groups. The FairTax
meets these objectives by eliminating the income tax in its entirety
and replacing it with a consumption tax on spending for new goods and
services.
The FairTax is more equitable than our current tax system because
it is based on what one spends over a lifetime, not what one earns in a
given year. Furthermore, the FairTax has a rebate component so as not
to burden the poor, the elderly, or those on fixed incomes.
The FairTax rebate was created in part to eliminate the tax that
Americans pay on the purchase of necessities. In fact, the FairTax is
the only proposal, including current law, that completely ``untaxes''
the poor by (1) eliminating the payroll tax, a highly regressive tax
that only targets wages, (2) eliminating hidden federal taxes,
corporate taxes, income taxes, and payroll taxes that businesses pass
on to consumers in the form of higher prices, and (3) assuring that no
American pays taxes on spending up to the poverty level. The rebate
feature of the FairTax assures its progressivity and, in fact, makes it
the least regressive viable system.
One reason our current tax structure is more regressive is that it
deters people from saving. Currently, national savings is at the lowest
rate in the history of our country. The FairTax is applied only when
consumers spend, not when they save or invest. Saving and investing
creates economic wealth not only for ourselves, but also for others.
Dale Jorgenson of Harvard University predicts that in the first year
under the FairTax, invested capital will rise by 80 percent over
projected levels under current law. Over the first decade of the
FairTax, the savings rate will level off to 20 percent more than under
the current system. This effect will result in a higher standard of
living for both those who save (invest in others) and those who work
for wages (because the market value of their work will be increased by
investment). The value of capital will increase because their buildup
is not taxed, and the level of real wages will rise because of the rise
in real investment.
Under the FairTax, the United States will become the most
attractive industrialized country in the world in which to base
production facilities because we will be the only nation with a zero
rate of taxation on profits. As a consequence, American overseas
investment can be repatriated and direct foreign investment will flow
to our shores.
Perhaps the most basic benefit of the FairTax system is that it
simply costs far less--about $225 billion (90 percent) less--to collect
the same amount of revenue as the current income tax. Research shows
that Americans spend an estimated $250 billion a year just complying
with the current tax code. That's $888 per year for every man, woman,
and child in America or nearly $2,800 per family--$2,800 that would be
better spent on education, a mortgage payment for a new house, or a
more secure retirement.
The simplicity of the FairTax makes enforcement easier and evasion
harder by allowing us to focus resources on fewer filers and by
lowering the total number of tax filers from 212 million to only 14
million (retailers). By eliminating loopholes, the FairTax also keeps
the tax base broad and marginal tax rates low, dramatically lower than
any other tax proposal or current law. This reduces the potential gain
from evasion and therefore reduces evasion temptation. The elimination
of exceptions also decreases the ability of government to pick winners
and losers through tax code enticements, thereby unfairly gaming the
system. The FairTax would save money by collecting the current level of
revenue in a more efficient way.
Please give your serious consideration to this common sense
solution to the challenge and need of fundamental tax reform--the
FairTax is the answer.
Joshua Pritikin, Santa Barbara, California
I support H.R. 25, the FairTax.org proposal.
The rationale for this bill is already well explained with others,
such as Jonathan Steere of Maryland. With this letter, I merely add my
support.
Thank you.
National Taxpayers Union
Alexandria, Virginia 22314
August 9, 2005
The Honorable E. Clay Shaw, Jr., Chairman
Subcommittee on Trade
Committee on Ways & Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington D.C. 20515
Dear Chairman Shaw:
On behalf of the 350,000 members of the National Taxpayers Union
(NTU), I write to offer our thoughts on a bill currently being
considered for inclusion in a miscellaneous trade package. It is NTU's
strong belief that H.R. 521, the Milk Import Tariff Equity Act, should
not be included in this legislative vehicle.
Earlier this year NTU strongly condemned the introduction of H.R.
521, which would restrict the importation of milk protein concentrates
(MPCs), casein, and caseinate by raising tariffs. As tariffs are
nothing more than taxes on the flow of goods and services across
national boundaries, NTU believes that this bill would both harm
relations with our trading partners and place unnecessary financial
burdens on American consumers who use everyday products containing
MPCs, such as coffee creamer and infant formula.
In addition to substantive policy concerns with H.R. 521, NTU feels
that the bill is simply too contentious for a legislative package that
seeks to make technical corrections to U.S. trade laws. The
Subcommittee listed ``attract[s] controversy'' as one of the criteria
by which to reject bills for inclusion in the trade package, and since
its introduction H.R. 521 has indeed proved to be an extremely
controversial proposal. The already fierce reactions to H.R. 521 from
various groups--the most important of whom are taxpayers and MPC
consumers--would only intensify if the bill were inserted into what is
supposed to be an innocuous legislative package. The provisions of H.R.
521 require further congressional scrutiny and therefore should not
weigh down a technical trade measure.
Because of policy and procedural concerns, NTU respectfully
requests that the Subcommittee refrain from adding H.R. 521 or any of
its components to the proposed miscellaneous trade package.
Sincerely,
Kristina M. Rasmussen
Government Affairs Manager
Statement of ReformAMT.org, Foster City, California
To the Honorable Chairman Camp, Honorable Ranking Member McNulty, and
the Honorable Members of the Select Revenue Measures
Subcommittee:
Thank you for allowing ReformAMT the opportunity to communicate our
support for H.R. 3385, the AMT Credit Fairness Act of 2005. This
important legislation is addressing some aspects 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 support H.R. 3385
which helps to correct some aspects of 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,'' 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.
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
Prepayment Credit 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.
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.
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 blindsided 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).
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
With the new bankruptcy laws going into effect in a few months,
ReformAMT respectfully asks the Select Revenue Measures Subcommittee to
support quick passage of H.R. 3385, a key component that will come just
in time to prevent even more severe harm to honest Americans.
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.
Statement of Robert W. Richards, Abilene, Texas
Mr. Chairman, Ranking Democratic Member McNulty, and Members of the
Subcommittee, I appreciate having the opportunity to submit my comments
regarding reform of the Federal Tax Code.
As you have become aware during your hearings, the current Federal
Tax Code has become a giant burden to individuals and business, not
only in cost but also in trying to comply with thousands of pages of
code and regulations. In 2003, there were 54,846 pages to the Federal
Income Tax Rules, including the tax code, tax regulations, and IRS
rulings. That is many more times the pages in the Holy Bible, War and
Peace, Gone with the Wind, and The Complete Works of William
Shakespeare (unabridged) combined. The goal of the Tax Reform Act of
1986 was tax simplification and tax reform, but the number of pages in
the tax code in 1984 was 26,300. We have more than doubled the tax code
since then! (Source: http://www.cato.org/dailys/04-15-03-3.html).
In my opinion, we do not need to just tinker around with the
current income tax code. We need to scrap it. The Fair Tax Act of 2005
(H.R. 25), sponsored by Rep. John Linder of Ga., replaces the current
individual, corporate, estate and payroll taxes with a national retail
sales tax. I am sure by now you are well aware of this legislation. It
has my full support.
I would hope that Congress would be bold in its reform of the tax
laws. Please do what is right for this country and eliminate the beast
that the current tax laws have become. Please pass the Fair Tax!
Thank you very much.
Robert W. Richards, CPA
Allen, Texas 75002
8/23/05
Dear Ways and Means Committee Members,
My name is William Rinehardt and I am writing on behalf of myself
and my fiancee, regarding a huge AMT tax debt that I incurred on
``phantom'' gains due to the application of the Alternative Minimum Tax
to incentive stock options (ISOs). I owed 124% of my taxable income in
Federal income tax for year 2000. I owed more AMT taxes due to the
exercise of my ISO shares than the market value of the shares when I
sold them. I couldn't pay the AMT at the time. If I would have sold all
my shares, my house, my car, all of my savings, all of my stocks, my
IRA and my 401K, the proceeds from these sales would not be enough to
cover my tax liability. I still owe over $40K in back taxes due to
penalty and interest. The truly depressing part of this sad story is
that the Federal Government owes me over $150K in AMT credits. Of
course I will not see any interest from the government and it'll take
me decades to recover these credits back under the current AMT tax
laws.
I would like to ask for your active support of H.R. 3385. This
important legislation was recently introduced by Reps. Johnson (TX),
Neal, McCrery, Jefferson, Ramstad, Lofgren, Shaw, Honda and Johnson
(CT), to provide relief for taxpayers subjected to unfair and unjust
tax treatment due to the AMT treatment ISOs. In addition to unfairly
affecting me, this serious problem has impacted many employees of small
and large companies across America, often resulting in taxes up to and
exceeding 300 percent of these employees' annual salaries. Workers are
being forced to pay tens of thousands, hundreds of thousands, and even
millions of dollars in tax overpayments on income they will never
receive.
Please join the groundswell of support for remedying this serious
injustice through this ISO AMT legislation. This bi-partisan effort is
building support in Congress, the Press, Corporate America, the
Taxpayer Advocate's office. Grassroots organizations like the ReformAMT
www.reformamt.org and the Coalition for Tax Fairness www.fair-iso.org
are actively supporting this important legislation, and may be
contacting your office to secure your support.
I thank you for your leadership in this effort, as your support is
critical to restoring a fair and just tax system for all Americans--
including hard-working, entrepreneurial Americans.
Here's my personal story:
I moved from Plano, TX to become an employee of Qtera Corp., in
South Florida, 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 $250,000.00.
I was hired as the 31st employee in 1999. Working for Qtera Corp.,
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; around 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. Qtera Corp. moved me to
Denver to work in the Sales office for our largest customer, Qwest.
Soon after the media broke the news of our success, and 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.
The plan laid out by my financial advisors 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, (they recommended the accounting firm) 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 matter the
cost.
April 15th 2001. The year had gone so quickly and I exercised
options during the previous year resulting in an Alternative Minimum
tax on ``Paper Gains'' of over $250,000. This even though I only made
$92,000 a year. It was strongly suggested, by my investment broker to
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, then $16, then soon after $12. The Nortel
management was positive on the company's growth and their overall
market position, the low price was just a small correction in the
overall market. (We now know these earnings were inflated.) At one
point the stock fell to $0.40 per share but is now at a healthy $2.60
per share. I paid the AMT rate of 28% for $60, $70 and $80 per share.
By the 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. 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.
By the summer of 2001, I reached my personal debt limit and
liquidated my account to pay off my debt and pay most of the AMT. I
sold my home that I had purchased in Denver and sold my car. The IRS
had placed a tax lien on my home and took the money that I desperately
needed to live on when I closed the sale. I ended my contract with my
accountant, sold over 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 packed
up my used truck and moved back to where I started, Texas. I was broke,
unemployed and pretty darn disheartened.
I learned many valuable lessons through this experience and I am
fortunate that I am not currently financially ruined like so many of my
former colleagues. Many will have their wages garnished, or have filed
for personal bankruptcy. None that I know of were fortunate enough to
be able 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 hard-working, middle class
Americans in Texas and all over this great country. Most of those folks
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. AMT is not a fair tax. Why are certain
Americans being punished with AMT? Because, we were perceived to be
``rich'' for a six month period of our lives? This is truly ludicrous!
This will inevitably lead to bankruptcy for many Americans guilty of
nothing more than exercising the promise of long-term investment in an
employer they trusted. Not even the most diabolic communistic state
could have come up with a worse tax system! I just can't understand
this AMT tax law. It is so unfair! Income tax should be on INCOME!
In the end I, (along with many other Americans) could very well
have to declare bankruptcy if a tax relief bill isn't passed into law.
I hope that you would be able to help us with this situation, by
trying to abolish the current AMT Tax law, (hopefully retroactively to
1999). I would again like to ask for your active support of H.R. 3385.
Please let me know what I can do to help you and what your thoughts on
this matter are? I'm a law abiding, tax paying, Gulf War vet that
thought I was living the American dream. I responsibly held my stocks.
When the market crashed, I knew that I had to take the losses. What I
didn't know is that I had to pay taxes of ``phantom'' gains. No
American should have to pay taxes on income that was never income!
Thank you and best regards,
William R. Rinehardt
Austin, Texas 78734
August 22, 2005
Committee on Ways and Means
U.S. House of Representatives
Washington, DC
Dear Sirs:
Several years ago, I BOUGHT stock by exercising ``incentive'' stock
options where I worked.
I NEVER SOLD that stock.
I made NO PROFIT on that stock, and I have no hope of ever making
any profit on it.
Despite those facts, current Alternative Minimum Tax law required
me to PAY INCOME TAX AS IF I HAD MADE A PROFIT the day I exercised the
options.
The law allows the U.S. Treasury to collect tax on ``PHANTOM''
PROFITS.
I have, in effect, provided the U.S. Treasury an interest-free loan
by PREPAYING TAX on income that I will NEVER receive.
This is so bizarre and so unfair that it is hard to comprehend. The
U.S. Congress never could have intended to cause such INJUSTICE and
should be anxious to correct it.
H.R. 3385, The AMT Credit Fairness Act, was recently introduced by
Representatives Johnson (TX), Neal, McCrery, Jefferson, Ramstad,
Lofgren, Shaw, Honda and Johnson (CT), to provide relief for taxpayers
subjected to this UNFAIR TAX.
Please work to pass H.R. 3385--AMT Credit Fairness Act.
Thank you for your leadership to ensure a fair and just tax system.
Sincerely,
Dr. Terry Ross
Excelsior, Minnesota 55331
August 25, 2005
To: Members of the House Ways and Means Committee--Hearing on Member
Proposals on Tax Issues/Reform
Dear Committee Members:
I have submitted my testimony and shared my story on Alternative
Minimum Tax (AMT) at a number of events, including the recent
President's Tax Reform Advisory Panel. I am writing this letter to you
directly to provide my personal testimony with regards to Alternative
Minimum Tax (AMT) for individual tax payers and to ask for your support
and leadership in regards to Bill H.R. 3385, introduced by the
Honorable Sam Johnson on July 21, 2005 and co-sponsored by a number of
Ways and Means Committee Members.
Our family paid over $1.7 Million AMT in Tax Year 2000, due to
phantom gains on Incentive Stock Options (ISOs) that were exercised but
not sold. Specifically, the AMT was paid due to paper gains on 70,000
Ariba ISOs that we exercised when at the stock's value was over $110/
share. Due to a Blackout Period, I was unable to trade the stock until
after the end of the tax year. The stock is now worth less than $1/
share, with an economic benefit of about $70,000, as opposed to the
$7,700,000 paper gain we were taxed on. I ask that you focus on those
numbers. We paid a $1,700,000 tax for an economic benefit of $70,000
due to what Senator Joe Lieberman described as a ``Kafkaesque
situation'' and the ``tax equivalent of the perfect storm.'' These
statements were part of Senator Lieberman's Congressional Record
statement made when he introduced Bill #S. 1324, an Alternative Minimum
Tax (AMT) relief bill with respect to Incentive Stock Options (ISOs)
for tax year 2000, on August 8, 2001.
Senator Lieberman is not alone in his search of a fair law to
replace the current AMT law and the problem does not appear to be a
partisan political issue. Many bills were introduced on this subject
prior to 2001 and numerous bills have been introduced since. Several
have been introduced into this session of Congress, including the most
recent Bill H.R. 3385 for which this letter requests your support. My
analysis shows that both Republicans and Democrats support ISO AMT
reform. This support includes many Members of the 109th Congress
Committee on Ways and Means: Reps. Wally Herger, Jim McCrery, Jim
Ramstad, Eric Cantor, E. Clay Shaw Jr., Sam Johnson, Phil English,
Jerry Weller, Ron Lewis, Mark Foley, Kevin Brady, Richard Neal, William
Jefferson, and Lloyd Doggett.
There is no question that AMT is not serving the purpose for which
it was originally intended and that it must be totally revised soon for
many reasons. This hypothesis is supported by most informed civilian
and government agencies aware of the original intent and the current
implementation of the law, including:
The United States General Accounting Office
Congress Joint Committee on Taxation
The Brookings Institution
The National Taxpayers Advocate (a division of the IRS)
The American Bar Association (ABA)
American Institute of Certified Public Accountants
(AICPA)
Tax Executives Institute (TEI)
The National Venture Capital Association
Tax law for AMT on ISOs as currently written is highly confusing
and very unfair. The Instructions for Form 6251 (AMT--Individuals) when
filing my 2000 taxes stated the following:
``The tax laws give special treatment to some types of
income, allow special deductions for some types of expenses,
and allow credits for certain taxpayers. These laws enable some
taxpayers with substantial economic income to significantly
reduce their regular tax. The AMT ensures that these taxpayers
pay at least a minimum of tax on their economic income.''
My family has no special credits, deductions, or exemptions that
significantly reduce our regular tax and we have been caught in a
situation where our AMT tax burden on ISOs has far exceeded any
economic benefit we have or ever will gain from ISOs exercised in tax
year 2000. In short, we are 2000 AMT victims that Senator Lieberman
described as, ``fell into a trap which the tax code created through its
perverse and confusing structure'' in his Congressional Record
statement on August 8, 2001.
I am not a wealthy executive. I am a 46-year-old sales
representative that received the ISOs because I joined a company before
they were well known and opened a territory for them to make them well
known. My wife, Velinda, is a stay-at-home Mom for our 8-year-old
daughter Emma and 4-year-old son Quinn. When we became aware of our AMT
obligation in 2001, we liquidated all of our assets and paid the AMT,
including a substantial penalty that incurred during the period that it
took us to liquidate those assets. We paid tax on paper gains that
exceed my salary for a lifetime. I continue to work and pay taxes.
Interestingly enough, I seem to get hit with AMT every year. It seems a
little odd that the taxes we continue to pay continue to be used to
support people that find themselves the victims of unfortunate
circumstances, yet no such support is there for those of us that got
caught in the AMT trap in 2000.
Please use this testimony as an example of the unfairness of this
law as it is currently written and to promote reform of the AMT for
Individuals tax laws, including relief for those of us that lost all of
our assets in 2001. I believe that doing so is very much on the spirit
of President Bush's tax relief package, which allows Americans to keep
more of their own money. I respectfully request your leadership and
support of H.R. 3385 as a part of your efforts to accomplish this
vision.
Tom Schrepel
Statement of Joe E. Sheldon, Huntington Beach, California
My greatest concern is that the Committee (and Congress and the
President, too, for that matter) will fail to realize that the National
Anthem is NOT: ``Tiptoe Through The Tax Code Tinkering Tango'' as an
acquaintance of mine used to say.
Tinkering with the tax code, no matter how well intentioned, will
no longer plug all the leaks in the boat but would require bailing so
fast that the boat would catch fire from the friction or sink (or
perhaps both).
I truly hope that is realized (and I think, perhaps, it is).
Attempting to retain ANY tax system based upon income taxation will
no longer function as has now been adequately proven after almost 100
years of trying. It's time for a tax system in tune with the 21st
century and international competition. It is time for the FairTax.
As the most thoroughly-researched economic/tax proposal ever
brought before Congress, the FairTax stands head and shoulders above
any form of income taxation (including any flat tax which after all is
what the present system started as) or any form of Value Added
Taxation.
Any income-based taxation--flat or round--has the sort of warts we
have come to know (but not love) such as embedding taxes into the
prices we all pay; allowing for great political mischief with all of
the exemptions, deductions, and other special tax favors, treating
those in similar situations differently (and causing resentment
thereby), and requiring a much-detested enforcement arm--the IRS. It
also encourages--almost mandates--attempts by Congress to control the
populace by altering the Tax Code. Such attempts are bound to fail as
misguided efforts in ``Trying to Teach the Elephant to Tap Dance'' as
the old saying goes and they invariably redound to the detriment of the
citizens and eventually the government itself . . . the current
untenable AMT being a perfect example.
It is neither necessary nor desirable for the government to attempt
to control the lifestyles of its citizens by such means. The citizens
are fully capable of doing so themselves and the necessary tax revenue
can be raised without such nonsense. Laws for behavior should be
separated from tax laws which are, after all, for the purpose of
raising the money to run the government. Mixing the two does neither
effort (nor the citizens) justice--not to mention the country itself.
The FairTax is the only tax plan that I see before Congress that
meets all of the criteria charged by the President. All of the others
fail in important aspects. It is time for a real change and not just
tinkering again. The people want real change which I think should now
be abundantly clear. Do not be forestalled by those who say ``no one
else has done it that way'' and other similar non-arguments. Remember
no other country had even had a Representative Republic before and THAT
has worked out very well. Slavishly copying failed tax plans from other
countries is not a recipe for success.
In addition, the attempts at introducing the FUD Factor (Fear,
Uncertainty, and Doubt) used by those who would prefer some form of the
status quo can surely be seen for what they are--emotion based attempts
to derail a tax system that we so badly need. Claims that the FairTax
requires a huge boost in rate over that in the H.R. 25 bill or that
evasion will be rampant are examples of the FUD Factor run amok;
compliance should actually improve. In fact the FairTax should be
scored in a fashion that recognizes the increased revenues it derives
which cannot be done by any income-based taxation system. The
underground economy in all its many forms of illegal income (illegal
aliens, drug transactions, prostitution, and just money theft in
general) completely escapes any income tax-based system while under
H.R. 25, the cash from those illegal transactions is fully taxed when
spent for taxable items. In the case of illegal aliens alone this
represents many, many billions of tax revenue and should be scored as
such for the FairTax--as should the capture of the other illegal
income.
Additionally, the FairTax will obtain tax revenue from foreign
tourists who, after all, are benefitting by our (formerly) taxpayer-
paid facilities when they visit many places in this country. Also, the
provisions of H.R. 25 allow border-adjustable taxation which would help
our exporters reduce their prices to be more competitive in other
markets . . . and foreign imports would also be taxed when sold as
taxable items at retail instead of being tax-free as at present--
somewhat like a tariff but allowed and acceptable under international
agreements.
Moreover, the FairTax offers another path to the President in his
desire to reform the Social Security/Medicare systems.
Perhaps the four overriding goals of a tax system were best
expressed by Adam Smith in his ``Wealth of Nations'' where he set out
these four canons----
``I. The subjects of every state ought to contribute towards
the support of the government, as nearly as possible, in
proportion to their respective abilities; that is, in
proportion to the revenue which they respectively enjoy under
the protection of the state. . . .
II. The tax which each individual is bound to pay ought to be
certain, and not arbitrary. The time of payment, the manner of
payment, the quantity to be paid, ought all to be clear and
plain to the contributor, and to every other person. . . .
III. Every tax ought to be levied at the time, or in the
manner, in which it is most likely to be convenient for the
contributor to pay it. . . .
IV. Every tax ought to be so contrived as both to take out
and keep out of the pockets of the people as little as possible
over and above what it brings into the public treasury of the
state. . . .''
The present income tax system fails on all four points; the FairTax
(H.R. 25) meets all four admirably and in the spirit intended.
Therefore I urge you . . . NO, I implore you . . . to recognize the
FairTax as the best alternative for a decent, simple, visible, and
modern tax system for this country.
Thank you for your attention and interest.
Ely, Iowa 52227
August 31, 2005
Dear Honorable Chairman Camp and Ranking Member McNulty:
I am writing to you on behalf of my family because we desperately
need your help. We have been improperly assessed by a flaw in the tax
code and we need you to step forward and help save our family. In the
year 2000 our taxable income was $105,461. For that same year we
received an Alternative Minimum Tax of $206,191 from the Federal and
$46,792 from the State of Iowa. A total tax of $252,893 for a gain that
we NEVER made.
In December of 1992 I took a chance on a small telecommunications
start-up in Iowa called McLeodUSA. To compensate the employees the
company used stock options as part of its compensation. This is what we
were using to plan our future. We had saved all the options we received
to use on building a home, our three daughters education, and 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 would be charged long-term capital gains on
the income. We exercised the stock but did NOT sell it. As the home was
nearing completion we had our taxes done by an accountant and received
this unjust tax bill. The stock value had plummeted so we borrowed
money from a local bank to try to pay the tax. We paid the State tax in
full and $94,484 of the Federal in 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 inter 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 has utilized the formulas and guidance
that our government has put into place and has informed us that we have
been 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, our actual is over
$3,700. Based on their allotment we are supposed to be able to pay
$2,366 per month to settle the debt and a lien has been placed on our
home. There is no way we will be able to pay this amount. We have
appealed our case with the U.S. Tax Court but have been rejected by the
Court also. Both the IRS and the Court say it's up to Congress to fix
this. We desperately need Senate Finance to place a ``stay'' on the IRS
collections pending the Sam Johnson ISO AMT remedial legislation that
will correct this horrible wrong. Our story is a legitimate case that
can't be disputed as being horribly wrong. Please use the powers you
possess to right this inconceivable outright injustice. I beg of your
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.
I respectfully and urgently request your support of H.R. 3385.
Ron Speltz
Submission of Jonathan Steere, Leonardtown, Maryland
House Committee on Ways and Means:
I am writing this letter to discuss the alternatives you are
considering in overhauling the U.S. tax code as requested by President
George Bush. In particular, I am in strong support of implementing a
national consumption tax in replacement of the current federal income
and corporate taxes. (Also known as the Fairtax.)
Though the fairtax and flat tax proponents cite the complexity and
cost of complying with the current income tax code as a supporting
argument in favor of their respective tax systems, it is not one of my
reasons for supporting tax change. I fully expect that if the tax
system is simpler, it would promote better compliance by individuals on
their taxes, and therefore would be easier to find tax fraud and
lawbreakers who will cheat the system regardless of how it is formed.
If this were the only benefit, however, I would have no interest in the
tax change whatsoever as I don't mind the current annual 1040 tax forms
and I don't feel huge overhauls are necessary just because some people
break the law.
I believe that there are incredible gains in many other areas to be
achieved by tax reform. I wish to outline them for the Committee now.
Promote Fair Taxation
One of the biggest fights on taxation seems to always be the
struggle between progressive and regressive taxation. As tax rates
increase, the incentive to hide your income at higher tax brackets
increases, and the incentive to improve your wealth through
entrepreneurship decreases. If tax rates become too high, then the
wealthiest and the largest producers of jobs will strive to earn
revenue in other countries in search of lower tax alternatives, or look
for tax breaks here, or defraud the government altogether. If the tax
rates are too low, then those poorest among us complain about the rich
not paying their fair share of taxes, as the government will struggle
to pay for low income benefits.
Unfortunately, taxation is a necessity given the way the government
is currently structured. But even so, the burden needs to be balanced
and compassionate. When special interests are allowed to influence
lawmakers through the tax code, the tax burden becomes more and more
unbalanced, as tax laws are written to cater to the lobbyists. This
would happen at any tax rate and any income tax system. Even if a flat
tax was enacted, it is likely that deductions, tax breaks, and
incentives would start to creep into the tax code in future
administrations, thereby undoing all the great work that this Committee
is trying to enact. Those companies or individuals that qualify for the
tax breaks pay less than those that don't. Usually, it is the middle
class that bears the burden, as the poor pay little or no tax, and the
rich have the resources to utilize the tax shelters set up specifically
for them.
The only way to correct this imbalance is to repeal the income tax
law entirely and revert to a form of taxation that is fair and balanced
for all, and yet has consideration for the poor. I believe the fair tax
fits this qualification.
Pro-Growth
Both the flat tax and fair tax initiatives would promote growth, as
there is equal incentive to strive for more success at any income
level. The flat tax, however, has the chance to be undermined by future
administrations by adjusting the tax rates, re-implementing progressive
tax brackets that punish success, or giving incentives for special
interest groups to re-implement complexity through narrow tax breaks
for special activities. This can be seen in history, as President
Reagan simplified the tax code in 1986 to two tax brackets, along with
closing some loopholes and other changes. Twenty years and three
presidents later, multiple tax brackets have returned and the tax code
is as complicated as ever.
Corporate taxes raise costs for domestic companies while reducing
their competitiveness with foreign companies that have either lower or
no corporate taxes. Since, it raises costs, it will do one of three
things. It might reduce their profitability, which slows investment
income growth. It may cause them to freeze wage increases, lower wages
or lay people off to cut costs, which reduces the tax base and also
slows growth. Finally, it might cause them to raise prices on the goods
they sell, which adds to inflation. It should be easy to see that any
of these three options result in negative consequences for the economy.
Indirectly, it also is a form of double taxation for individuals, since
most companies reject losing profitability in favor of passing on their
costs to either the consumer or their employees. Competition, labor
agreements, or resources may restrict their ability to pass these costs
on. That leaves them with one other possibility, which is the worst of
all for Americans. This would be that the company stop producing
locally and import their goods from countries that have cheaper labor
costs, cheaper resources and/or cheaper tax rates.
This is the one area where the fair tax is superior to all other
forms of taxation. It is the only tax system that levels the playing
field between domestic and foreign operated companies. As I have just
shown, other taxes make domestic goods more expensive, and many foreign
companies do not have this problem. Removing corporate taxes actually
has the long-term result of reducing the costs of goods manufactured or
services provided in the United States. Although this would be replaced
by the fair tax, it does help make American goods more competitive by
taxing goods equally whether they are made here or somewhere else. An
item manufactured in China would be subject to the same tax as one
manufactured in America. But with corporate taxes removed, the Chinese
good would cost 30% more, and the American good's price would be more
balanced by the lowering of hidden taxes even though the 30% sales tax
would apply. Note that this is done without invoking any protectionist
measures that might violate foreign trade agreements and cause
retaliation by the foreign country.
It is clearly a political benefit to correct the corporate
imbalance and make strides towards reducing the incentive for
outsourcing jobs, something that was a big issue in the last
presidential election. It also potentially could help reduce the huge
trade deficits we experience year after year.
Taxes Previously Untaxable Illegal Activities
One of the political benefits from using the fair tax system is
that the taxation rate can be revenue neutral for law-abiding
taxpayers, and still generate significantly more revenue than the
existing tax code. For instance, according to the Office of National
Drug Control Policy, $77 billion is spent on cocaine and $22 billion on
heroin, $2 billion on methamphetamines, $10 billion on marijuana, and
$2-3 billion on other illegal drugs. (Statistics are from the
government web site below.)
http://www.whitehousedrugpolicy.gov/publications/drugfact/
american_users_spend/section1.html
90% of this money stays in the U.S. This money cannot be taxed
directly by any suggested tax system because it will never be reported.
But indirectly, only the fair tax system will generate any revenue at
all. Eventually, this money will be spent on other things. At a 30%
taxation rate, this would generate $30 billion or more when this money
is eventually spent legally on cars, boats and other goods. This in
itself would pay 2.5x what is currently spent on the war on drugs,
which is about $12 billion.
This of course, is one type of criminal activity among thousands.
Indirect revenue would also be achieved from prostitution,
embezzlement, smuggling, or any other unreported revenue. It should be
noted too, that revenue legally earned, though illegally unreported on
tax returns would also generate indirect revenue, such as tips, casual
labor, or other secret transactions not always reported.
Another source of income would be from immigrants who are here
illegally. If the current estimates are correct, then 10-15 million
illegal immigrants are not reporting any revenue to be taxed. While
it's highly likely that most of these would not pay taxes under the
other suggested taxation systems, it provides a disincentive to illegal
immigration in that goods are taxed, and yet only legal residents would
be eligible for the fairtax prebate. Though this will probably not be
sufficient to deter them from living here, it will be another indirect
source of 10's of billions of dollars in taxed sales, that results in
revenue that likely went to Mexico or another country before.
Proof of Success and Warnings
Many years ago, I was a resident of Canada, and was able to view
first hand the results of Canada's implementation of the Goods and
Services Tax (GST). This is a value-added taxation scheme implemented
by the Canadian conservative party. It was a great success
economically, but a failure politically. I believe, however, that it
can be used as an example of how the tax would affect the United
States, and for what policies to avoid.
First, it was a success in that it generated revenue for the
Canadian government far beyond what any of the experts predicted. Its
success has allowed the government to generate a surplus in which it
could reduce its national debt in every year since 1997. It has also
allowed the government to reduce the federal tax rates without
sacrificing revenues or the surplus. This has resulted in Canada having
a lower income tax rate in 2004 than the United States. (The first time
this has happened in at least 50 years) As hidden taxes were removed,
prices definitely did drop almost immediately on many goods, and
although a few things did rise in price because of the tax, it was a
net gain for the consumer. Overall, it was the start of a long boom in
the economy that coincided with the boom in the U.S. It began more
slowly at first, but took off as income tax rates were reduced in
stages. Canada's economy slowed only slightly when the U.S. experienced
the recession, because while Canadian income taxes were dropping along
with interest rates, American citizens had to deal with Clinton's tax
increases and rising interest rates.
Unfortunately, it was a political failure in that it's
implementation was utilized as a political issue by the opposition
party who regained power by promising to repeal the tax. They never did
repeal the tax, however, because of the success of the tax. The reasons
that it wasn't a political success were twofold. First, the lack of
understanding among the general public about it, and the fact that it
was seen as an additional tax, since no changes were made to any of the
other taxes Canadians were subject to, except the hidden manufacturing
taxes.
Clearly, in the Canadian case, the fact that the income tax
remained was the reason for the political backlash of the GST, even
though in the long run the economy benefited. (Also, if it were not for
other problems the party was having at the time, this could have been
mitigated.) The fairtax solution avoids this problem by forcing a
repealing of all income and corporate taxation. Though there might be
transitional difficulties as there always is with such a large change,
the benefits in the long run far exceed any short term pain and
confusion. I ask that you consider carefully the benefits of the
fairtax, as I feel it is the best overall and fairest form of taxation
available to any government looking for tax reform.
Thank you for your consideration of this letter.
Statement from Mike Strick, Seattle, Washington
Dear Honorable Chairman Camp and Ranking Member McNulty,
I understand that there was a House Ways and Means Committee
hearing on Tax Simplification with regard to the Alternative Minimum
Tax on June 15, 2004. I noticed you were looking for stories of
``middle class'' Americans who have been affected by the current
parameters of the AMT. I am one of those people.
I worked for Internap Network Services, an Internet connectivity
company, for almost two years before being laid off in April 2001.
While I was working, I was also in graduate school for psychology to
become a counselor. At one time, Internap's stock traded as high as
$220/share before splitting to $110. Yesterday, Internap closed at
about $1.00/share. I exercised incentive stock options to acquire a
number of shares in July, August, and September of 2000 with the
intention of holding them for the long term. I assumed I would have
enough value in the stock that I could pay off the AMT I owed. I would
have never guessed the stock would drop to $1.00/share and hover there
for the next three years . . . and that I would end up owing almost
$100,000 in AMT--money I just don't have. I find it hard to fathom that
I owe so much because I ended up paying huge taxes on a phantom gain.
My tax alone was more than two years worth of income for me.
I ended up in negotiation with the IRS via an Offer in Compromise
for almost three years. We ended up ``compromising'' so that I would
lose everything I own (retirement savings, investments, emergency
funds, IRA's, etc.), plus about 20% more, all to be paid over the
course of two years. This situation has affected every aspect of my
life and will impact my future for years to come.
In retrospect, I realize I made a mistake by not delving deep
enough into a complicated tax code to understand the possible outcome
of my ISO exercises. I am working to pay off my debt as a counselor
with developmentally disabled folks. But, I feel the AMT laws as
written are not working the way they were intended, and I don't want
others to have to go through the same hardships I am enduring. Change
is needed. I would be happy to give more details or talk about my
situation. I appreciate your time and concern and I respectfully
request your support of H.R. 3385.
Santa Cruz, California 95060
August 31, 2005
Dear Honorable Chairman Camp and Ranking Member McNulty,
I submitted testimony and shared my story at previous events:
April/May 2005, Senate Finance Committee, Chairman
Grassley
Spring/Summer 2005, President's Tax Reform Advisory Panel
I now wish to share my story directly with you in hopes of
garnering your support and leadership of the Honorable Sam Johnson's
H.R. 3385.
When we met with our tax preparer for the 2000 tax year, we were
very surprised to learn that the IRS demanded from our middle class
family AMT tax of more than $230,000 due to paper gains on stock
options that dropped in value during the year, even though we never
received gains in reality.
As a result of the tax bill on the ``paper'' profits that we never
received, we had to take out a second mortgage on our home and deplete
our daughter's college fund to pay the IRS and avoid a threatened lien
on our house.
Today, we no longer have college savings for our daughter, who is
13 years old and a straight-A student who deserves to go to a good
American university. The irony is that all the money she needs to
attend college is sitting with the IRS in the form of a tax credit.
However, no matter how hard we plan, our AMT and our regular tax bills
are nearly identical each year, so we are never able to generate a
sufficient AMT credit to receive a refund that would put the money back
into our hands and allow us to invest it in a 529 or other college
savings fund on her behalf.
Please help ordinary American families like ours recoup AMT credits
and send our children to college.
I respectfully and urgently request your support of H.R. 3385.
Michael Sullivan
Somerville, Massachusetts 02144
August 18, 2005
Dear Honorable Chairman Camp and Ranking Member McNulty:
I have submitted my testimony and shared my story at the Ways and
Means Committee Hearing on Tax Simplification on 6-15-2004. I now wish
to share my story directly with you in hopes of garnering your support
and leadership of the Honorable Sam Johnson's H.R. 3385.
I am writing to enlist your help in fixing the Alternative Minimum
Tax (AMT) law to help me obtain more than $100,000 that I overpaid to
the government while I can still use it to help pay for my children's
education, care for my aging parents and, hopefully, afford retirement
instead of having to take small credits for each of the next 20 years.
For almost 5 years, I have worked for a company, named webMethods,
which has created over 850 new jobs in the last four years of
operation. To reward and retain its employees, webMethods makes
extensive use of incentive stock options (ISO).
As an early employee of the company, I received a number of stock
option grants. Unfortunately, I made the grave mistake of exercising
these options in one year and selling them in another. That action,
coupled with the fact that webMethods was the #1 software initial
public offering (IPO) in history, created an enormous AMT tax bill
($250K+) for my wife and I. The taxes I paid and the value of the stock
exists now only as a $250K AMT credit, which, as I explain below, I can
draw at the rate of only a few thousand dollars a year.
We had to sell most of our long term savings to pay this tax bill.
We consider ourselves fortunate that we did not also have to sell our
home or declare bankruptcy. All of this, just so we could pre-pay tax
at a 28% rate when the actual tax is only 15%. You must also know that
the AMT is affecting an increasing number of middle-income taxpayers,
which is, and should be, of great concern to many lawmakers.
Fundamentally, the AMT treatment of ISOs is wrong and should be
fixed--ideally the AMT should be eliminated. That said, our immediate
problem is the AMT tax crediting process. Each year, we are only
credited the difference between our regular and AMT tax calculations--
for the 2002 tax year our credit was a little over $5,000. At this
rate, it will take us more than 20 years to get our entire overpayment
back from the U.S. Government. This delay represents opportunity cost
for a better retirement, good schools for our children, and money to
care for our aging parents.
Clearly structural changes are needed, but what my wife and I want
immediately addressed is our outstanding AMT tax credit. H.R. 3385 has
provisions that address this issue and I respectfully and urgently
request your support of H.R. 3385.
Very Sincerely,
Shawn W. Szturma
Chesapeake, Virginia 23322
July 27, 2005
Honorable Committee Members:
I am a dentist in private practice in Norfolk, Virginia. I have
practiced in the private sector for thirty-one years. I am also
Treasurer of the Tidewater Libertarian Party and an observer and
student of human behavior and economics. I note that while the free
market has provided us with a wide array of goods and services at
competitive prices in other areas, it has failed to do so in
healthcare. I believe there are a number of factors related to tax
reform that are responsible for the failure of the free market to
operate at it's best in this segment of the economy. With the issue of
tax reform before Congress, we have an opportunity to unleash the power
of the market to deliver healthcare of great quality and at lower
costs, thus making government paid healthcare unnecessary, except for
the indigent.
First, there is a distortion in the market mechanism because those
who consume healthcare do not directly pay for it. Because our tax laws
make it impossible for individual or voluntary organization group
healthcare plans to compete with employer provided plans, the great
majority of healthcare is paid for by employers who have little control
over consumption or delivery of that care. There is no other equivalent
disconnect in market forces anywhere else in the U.S. economy.
Secondly, the marginal cost of using healthcare services is
distorted by the nature of those employer sponsored group insurance
policies. While catastrophic healthcare insurance is necessary for
protecting us from unexpected and overwhelming costs, most employer
sponsored plans include both a catastrophic insurance element and an
element of prepaid routine care to encourage early intervention. This
makes sense from the insurer's and the employer's point of view as
early intervention often reduces the need for later catastrophic care.
But from the consumer's point of view, once deductibles are paid, the
marginal cost for consuming more healthcare services is minimal, and
after `stop loss' limits are reached, non-existent. From the provider's
point of view, there are liability issues to consider when making
decisions, but no doctor has ever been sued for ordering too many
expensive tests. This is equivalent to selling houses in such a way
that the buyer pays full price for the living room, 20% of the cost of
the kitchen, bathrooms, and first bedroom, and nothing at all for
additional rooms, with a third party compelled to pay the remainder of
the costs. There would be no reason for any homeowner to live in
anything less than a mansion. Efforts to control those costs through
managed care schemes have proven only marginally effective and
detrimental to patient care.
Finally, while the rest of the industrialized world funds
government largely through consumption taxes, the U.S. alone relies
entirely on taxation of personal and corporate income for government
and social security funding. Income based taxation costs to businesses
and individuals cascade through the production process, just like any
other cost of doing business, and result in an embedded tax component
hidden in the price of goods and services. This embedded tax component
averages about 20% for goods and 25% for services of all types, but
varies greatly depending on the income levels of those providing the
services. For example, the services of a low wage gardener or domestic
worker would contain relatively little embedded tax component, while
services provided by multiple layers of highly paid professionals would
carry a much higher than average embedded tax component. Healthcare is
provided by general practice and specialty physicians, dentists,
optometrists, and other providers backed by layers of technicians,
caregivers, clerical personnel and equipment specialists all of whom
are paid, and taxed, far above average. The tax component embedded
invisibly in the price of healthcare has not, to my knowledge, been
individually measured, but must be enormous compared to almost any
other service sector, possibly as much as one third of the total cost.
Changing from an income based tax system to a consumption tax, like
the FairTax, (www.fairtax.org) would eliminate the tax advantage of
employer sponsored insurance plans. Certainly, most employers, through
negotiation with their employees, would continue to offer those plans,
but group plans based on professional organizations, health clubs and
religious or social organizations would be competitive. Healthcare
insurers would again be directly accountable to those who purchase and
use their product, reintroducing free market forces to those
transactions. There would, at last, be incentives to patients and
providers to control costs at the level where the choice of how much
and what level of care is appropriate is made.
Although healthcare premiums, and services not covered by
insurance, would be taxed just like any other item of consumption under
the FairTax, because the tax component embedded in healthcare services
being eliminated is far larger than the 23% (inclusive) tax rate, the
walk-away cost of healthcare would decline even before competition
brought the normal efficiencies of the market to bear on how healthcare
is delivered and consumed. Note that this would be less true for a VAT
tax, as cascading of costs for consumables would still occur under that
system while they do not under the single layer retail sales tax used
in the FairTax plan.
Finally, the other economic advantages of the FairTax plan, such as
overall growth in the economy, investment incentives, and repatriation
of manufacturing jobs, would leave us with a population far better able
to directly pay those lowered healthcare costs, with less dependence on
third party payers which distort the market.
No doubt, many healthcare providers will balk at facing the
competition of direct involvement in the marketplace, but why should
the healthcare sector be exempt from the same competition and
innovation that has made us the most free and prosperous people in the
history of mankind? Since removing the embedded taxes, now hidden in my
fees, reduces the cost of my services to my patients but does nothing
to reduce my income, I see little to fear. As a healthcare
professional, I would greatly prefer that my patients be able to afford
my services with less strain on their budgets and more say in the type
and extent of treatment available to them. Market forces would bring
greater efficiencies to the delivery of healthcare, and more restraint
to consumption of those services, further bringing down the cost
without interfering in the choices which should be made by our
patients, in consultation with their doctor, and not by government or a
distant insurance company.
That is how the free market is supposed to work, and will, if we
just get our Byzantine income tax code out of the way. The FairTax will
remove distortions from the marketplace in healthcare and elsewhere in
the economy, grow our economy and individual incomes, bring back the
manufacturing jobs we have lost, and fund our necessary government
services with a fair and transparent system of taxation more consistent
with our national embrace of the free market, and freedom in general,
than any other system under consideration. I ask you to join me in
working for this important change for the better.
Thank you for your time and consideration.
Sincerely,
Wm. Donald Tabor Jr., DDS
Statement of Paul Tadros, Kirland, Quebec, Canada
INTRODUCTION
Invariably, some of the proposals herein may have been presented by
others but, in many aspects, may be different and more controversial
but pragmatic. Of course, they constitute broad concepts.
The proposals being presented aim to (1) avoid complexity and (2)
be equitable. While a certain degree of complexity may be necessary, it
should not be the norm. Currently, complexity in the Code is the norm
rather than the exception.
The key element to drafting and implementing sound pragmatic fiscal
policy is the existence of the political will. Does Congress and the
Administration have the will to curb self-interests groups? Sound tax
policy implies equitable treatment, not equality--not everyone can be
satisfied.
At this point, some background and insight may be warranted. I have
been practicing U.S. international taxation for over 25 years and have
worked in numerous countries. Until two years ago, I was a Partner--
U.S. International Tax Services with a Big 4 Firm.
In 1980, I was part of a small group which was contracted by a
foreign national government to make recommendations on a complete
overhaul of its income tax regime. This national government provided us
with extensive data of its taxpayers over a fifteen (15) year period.
Of course, identities were not disclosed but groupings, as we thought
to be necessary for the analyses and basis for our recommendations,
were provided. In conducting our in-depth analysis, no element nor any
group were ``sacrosanct.'' The ``bottom line'' shock to this government
was that, over the fifteen-year period, its revenues would have been
30% higher if:
1. There was no corporate income tax; and,
2. The basic rate for individuals was 17% with a basic exemption,
at that time, of $10,000.
Of course, the final document was substantive. To the surprise of
that government, the public hearings produced wide acceptance for the
proposals. Unfortunately, it succumbed to the pressures of interest
groups and lacked the political will to tell these groups to ``get
lost.'' Needless to say, the continuation of the status quo resulted,
in the long term, in large fiscal deficits.
PRINCIPLES BEHIND THE SUGGESTED PROPOSALS
1. We must start with the principle that the concepts of capital
export neutrality (``CEN'') and capital import neutrality (``CIN'') are
no longer valid in today's global economic environment. In fact, they
are contradictory. For example, we see this in the portfolio interest
exception in section 871(h). Therefore, where is the ``neutrality''? To
retain these principles in formulating tax policy will cause meaningful
tax reform to remain elusive;
2. Encouraging compliance. A disincentive to avoid taxes is
introduced;
3. Protecting and even increasing revenue flows to the Treasury;
4. Encouraging investment in human resources and plant and
equipment;
5. Increasing productivity and making U.S.-based multinationals
more competitive;
6. Increasing savings thereby putting less pressure on the Social
Security system; and,
7. Keeping inflationary pressures at bay.
INDIVIDUALS
1. The four categories of filing status should be eliminated.
These categories produce bias and complexity. Each taxpayer files
separately and becomes solely responsible for his/her own tax
liabilities;
2. In the areas of employment and investment income, the number of
deductions should be significantly reduced (see points 3 and 4 below).
Normal expenses for business (self-employed) income continue to be
available;
3. Deductions for items such as mortgage interest, property and
state taxes should be eliminated. At the same time, the deferral rules,
etc. related to the sale of a principal residence should be eliminated.
The gain on sale of a principal residence (subject to built-in
safeguards) should not be taxable. Of course, losses are not
deductible;
4. Dividend income from U.S. sources should be exempt. Therefore,
any expenses attributable thereto would not be deductible. Foreign-
source dividends would be taxable at the full proposed rate (of course,
subject to any foreign tax credit);
5. There should not be any distinction between capital gains and
other investment income;
6. The PFIC (personal foreign investment company) rules should be
retained;
7. All taxpayers will have a basic exemption of an amount equal to
the minimum wage. In essence, this protects the most disadvantaged in
our society while creating an equitable situation;
8. In relation to (7) above, a refundable child tax credit of
$3,000 for each child under 18 years of age if and only if the total
annual family income is less than $30,000 (basically, twice the minimum
wage); and,
9. Based on the preceding, the rate of tax applicable to everyone
should be 20%.
Some of the effects from the preceding proposals should be:
1. Given that $0.80 for every $1.00 earned is retained by a
taxpayer, an incentive to earn more is created and a disincentive to
not report is also created. A progressive system, although the
principle is to create ``fairness,'' actually: (1) creates a
disincentive to increase earnings because every additional dollar
earned in ``moving to another higher bracket'' results in lower
returns; and, (2) creates an incentive to ``avoid.''
2. Pressures on salaries and wages should be substantially
reduced. This, in turn, enables U.S.-based companies to be more
competitive while reducing inflationary pressures;
3. By making domestic dividends exempt from taxation, the so-
called ``Wall Street'' biases should be lessened. Companies with a good
history of paying dividends would be rewarded by investors. More
importantly, the investments become more of a long-term nature rather
than ``selling'' because someone on Wall Street placed an earnings
target on a company which was not met. In addition, this should lead to
stronger balance sheets because it is worthwhile to raise funding
through equity rather than debt.
CORPORATIONS
This area would, most likely, constitute the largest overhaul.
However, it's also the area which is prone to self-interest groups.
This must be avoided at all costs.
Some of the areas which should be retained include, in an
international context, sections 367; 163(j); and 482. Nevertheless,
updating the applicable regulations to ensure that they are in line
with today's economic environment becomes crucial.
Since my forte is in the international area, most of the proposals
address this aspect. A good start was made in some of the changes in
the American Jobs Creation Act of 2004 (``AJCA''). For example, the
reduction of the foreign tax credit baskets to two and the
recharacterization of overall foreign loss to domestic loss. However,
one of the negatives was the various effective dates. This type of
action contributes to and promotes built-in complexity which must be
minimized.
With regards to the controlled foreign corporation (``CFC'') rules,
the only aspect which should be retained is that related to ``pure
investment income.'' The following paragraphs address the draconian
aspects of the CFC rules.
The Subpart F provisions constitute one of the most complex set of
rules in the Code. These were introduced in 1962 when the so-called
principles of CEN and CIN were, perhaps, valid. Forty-three years
later, CEN and CIN, as stated earlier, are no longer valid. To maintain
the CFC rules to force ``neutrality'' is not appropriate. Other factors
such as labor, country risk, etc. play major roles in investment
decisions. All of these are not the ``same'' in all countries. In other
words, ``neutrality,'' in this context, is no longer valid. This goes
beyond the basis on which taxation should be imposed, i.e., residence
or source but do illustrate that we should not be holding fast to CEN
and CIN, depending on one's point of view, as the foundation for tax
policy.
When the entity classification rules [commonly referred to as
``check-the-box'' regulations (``CTB'')] were introduced in 1997, it is
common knowledge that various companies took the opportunity to
minimize the excessive draconian provisions of Subpart F. Not
surprisingly, some of these companies found themselves having to deal
with two old Subpart F provisions, i.e., the sales and manufacturing
branch rules. Why these even existed in the first place defies logic.
Companies which are based in the developed countries (primarily, the
OECD members) do not have to contend with such antiquated and stifling
provisions. Not content with outdated and draconian provisions, once
more Treasury tried to curtail the positive aspects of the CTB rules.
End result, more complexity, more litigation, additional costs and
waste of resources.
Let us examine two areas to illustrate the ``folly'' thereof: one
in Subpart F and one dealing with a particular sourcing rule.
Absent the so-called ``same country exception'' and any CTB
opportunities, interest paid between two CFCs is taxed on a current
basis in the hands of the U.S. parent (``USP''). The following is a
typical scenario: USP has two wholly-owned subsidiaries (``A'' and
``B'') in Country A and Country B, respectively. A and B are brother-
sister and are corporations for all U.S. tax purposes. Both A and B
conduct an active trade or business. However, A is extremely profitable
and has excess cash on hand. B needs funding to modernize to become
competitive. If A lends the funds to B, USP has Subpart F income
taxable on a current basis. Therefore, B turns to a third-party bank to
borrow the funds. Is this an economically efficient way to use of the
funds of the group? Does anyone in Congress not see why ``inversions''
took place? For portfolio-type of investments, we already have the PFIC
rules to address this issue. However, that should be the sole
exception. Subjecting sound efficient allocation of resources were
needed to current taxation is pure folly.
What was Congress' answer? Section 7874 of the AJCA. Instead of
repealing the draconian provisions of Subpart F which were the ``root''
of the problem, section 7874 was introduced. What did section 7874 do?
Firstly, it created more complexity and, secondly, it caught
transactions which had absolutely nothing to do with inversions. If
another country applied a similar provision, Congress would be livid.
To illustrate: USP owns A and B. If USP decides to form a holding
company (``C'') in Country C and transfers the shares of A and B to C
in a stock-for-stock exchange, would Congress accept, for example,
Country A's position that C is now a tax resident of Country A?
The other area deals with the sourcing rules in the
telecommunications sector. Many countries around the world have opened
their telecom industry to competition (previously, a monopolistic
situation). The following is a typical scenario and one which was
encountered:
USCo is in the wireless telecommunications business. It wanted to
expand outside the U.S. and saw an economic opportunity to so do. Under
the foreign country's requirements, USCo was required to form a local
company (``LoCo'') to apply for the license and, if granted, to operate
the cellular business in that country. LoCo was granted a license and
signed a significant number of subscribers in that country. All of its
customers are ``locals.'' Its competitor was the previous monopoly
which was not U.S.-owned (``MCo''). MCo does not have a fixed place of
business in the U.S. and, like LoCo, all of its customers are
``locals.'' Where does the ``idiocy'' arise? If LoCo's customer makes a
call from his home to, say, someone in California, to LoCo, for U.S.
tax purposes, the revenue therefrom becomes U.S. source income. At the
same time, MCo and its non-U.S. owner do not have to contend with this
issue. Does one see a theme emanating throughout this discussion?
Stifling the ability of U.S.-owned enterprises to compete. Why? Because
``we believe CEN and CIN are very valid principles on which fiscal
policy should be based.''
As to the corporate area, the following are proposed:
1. Except for income from pure portfolio-type of investments
(which should be addressed in the PFIC provisions), repeal Subpart F in
its entirety;
2. Amend the provisions of section 7874 to ensure that true ``non-
inversions'' are not caught. The ``fix'' in the ``Tax Technical
Corrections Act of 2005'' does not solve this problem. Since the
original provision was retroactive to March 2003, this amendment should
also be retroactive to March 2003;
3. Eliminate all ``preference'' items. This, then negates the need
for AMT and reduces the need for all the associated reporting on large
book-to-tax differences. For example, there would not be a need to
expense stock options. Given that employment income and capital gains
are taxed at the same rate, the adjusted basis to the employee is
simply the price paid for the stock on exercise thereof;
4. Dividends received from CFCs in an active trade or business
should be exempt under strict reinvestment provisions. Included in the
definition of an active trade or business would be intragroup financing
provided the beneficiary of the funding is in an active trade or
business; and,
5. Non-manufacturing income to be taxed at 20% while manufacturing
income (as envisioned in section 199) to be taxed at 15%.
OTHER
Due to recent developments, Congress and the Administration must
act on ``reigning-in'' commodity traders, in particular those in the
oil sector. In the 1990s, there was a concerted effort globally on
putting a ``leash' on the currency traders whose actions had wreaked
unnecessary havoc.
Notwithstanding that there are influences which will dictate the
price of oil, what is now occurring is that these traders are using
every excuse to reap substantial profits at the expense of the global
economies. For example, storms in the Gulf of Mexico always arose and
we never saw spikes in prices. Today, just a ``whiff'' of a pending
storm and these individuals use this as an excuse. If immediate action
is not taken, there would be severe disruptions to economies and a
vicious circle begins: price pressures fuel inflation which requires an
increase in interest rates.
Therefore, it is proposed that a special tax equal to 75% of the
gain realized by a trader should be imposed. This may seem harsh but
harsh measures are necessary to put back some semblance of order.
CONCLUSION
Of course, the preceding are only in broad terms and do not purport
to address all aspects of tax reform. They do, however, attempt to
address those areas which would achieve the objectives as previously
outlined.
To reiterate, it is the belief that the proposals presented herein
should result in:
1. Increasing the competitiveness of U.S. persons;
2. Increased revenue flows to the Treasury;
3. Reduced complexity and providing a foundation for fairness and
equity;
4. Increased compliance by providing a disincentive to avoid
taxes;
5. Protecting and even increasing revenue flows to the Treasury;
6. Increased investment in human resources and plant and
equipment;
7. Increased productivity;
8. Increased savings thereby putting less pressure on the Social
Security system; and,
9. Keeping inflationary pressures at bay.
Redwood City, California 94062
August 30, 2005
Dear Honorable Chairman Camp and Ranking Member McNulty:
I have submitted my testimony and shared my story at the
President's Tax Reform Panel in May 2005, as well as for H.R. 5141. I
now wish to share my story with you in hopes of garnering your support
and leadership of the Honorable Sam Johnson's H.R. 3385.
My story is simple, and yet so unfair and outlandish that few
people outside of government believe it was possible. Quite simply, I
paid $334,000 in AMT taxes for stock I never sold (and therefore never
profited from) and which was worth less than $100,000 at the time. How
is it possible to pay more in tax than an asset (stock) is worth?
Alternative Minimum Tax, or AMT. I now have a huge AMT ``tax credit''
that I can never hope to recover. I understand the logic that was used
to originally justify AMT, but the law as created was clearly flawed.
Thousands, like me, have been forced to sell everything for a tax bill
that is several times the worth of their gains/income, again, phantom
profits.
In my own story, I went through both severe financial and emotional
strain. The sleepless nights, the new anti-depressants (which I never
took before), the new 2nd mortgage was almost overwhelming. I hold on
as an optimist to this day that this injustice will someday be
corrected. I know of others that were not able to hold on, and who have
taken their own lives.
I respectfully and urgently request your support of H.R. 3385.
Ed Terpening
Atascadero, California 93422
August 31, 2005
Dear Honorable Chairman Camp and Ranking Member McNulty:
I wish to share my story with you in hopes of garnering your
support and leadership of the Honorable Sam Johnson's H.R. 3385.
I am a technical support engineer and I work for a tech company
located in San Luis Obispo, California and live nearby in Atascadero
with my husband and two young children (10 months and 3 years).
Although I make a decent salary, I'm not only the primary breadwinner
in our household, but I pretty much support the family right now. My
husband is a part-time student, part-time stay at home dad and part-
time auto mechanic. He is back in school to earn a degree and change
careers not only for his fulfillment, but also so that we may provide a
better life for our children. We drive used cars and don't take fancy
vacations. We are definitely your everyday people.
Several years ago, I was offered stock options through my company.
My husband and I were anxious to exercise these to hopefully have a
long-term investment that might help in the future with college funds
or retirement. We knew there would be tax implications and were aware
of AMT, but felt the investment was the smart thing to do. We purchased
those options through the years 2000 to 2002. When filing our taxes the
following April each of those years, we were shocked at how much of our
calculated taxes for the previous year was from AMT. It may not sound
like much to some people, but thousands of dollars to this family is at
least a month's expenses, maybe two. This is something we can't afford
to be paying when we are struggling to make our mortgage each month.
And now, being faced with more stock options offered at my new company,
I am terrified to purchase them until I sit down and compute to see if
we can afford to do it this time around. I'm sad to say that I predict
we will not be able to take advantage of this opportunity.
I respectfully and urgently request your support of H.R. 3385.
Heather Thayer
Shoreview, Minnesota 55126
August 30, 2005
House Ways and Means Committee
Dear Members of the House Ways & Means Committee:
My name is Phil Thompson, and I have submitted my testimony and
shared my story at these past events:
6-15-2004, Hearing on Tax Simplification, Oversight
Subcommittee
6-08-2005, Hearing on Tax Reform, Full Committee
April/May 2005, Senate Finance Committee Chairman
Grassley
Spring/Summer 2005, President's Tax Reform Advisory Panel
I now wish to share my story directly with you in hopes of
garnering your support and leadership of the Honorable Sam Johnson's
H.R. 3385.
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 downpayment 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 ongoing, 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 4,500
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
treatment of ISOs, it's just too much of a gamble.
I respectfully and urgently request your support of H.R. 3385.
Thank you for your attention.
Phillip Thompson
Tewksbury, Massachusetts 01876
June 20, 2005
To Honorable Chairman William M. Thomas and House Ways and Means
Committee
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 $8,000 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 were just trying to
get ahead and their lives were ruined financially.
Some of the stories of the people who are members 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
Batavia, Illinois 60510
August 26, 2005
Dear Honorable Chairman Camp and Ranking Member McNulty:
I have not previously submitted my testimony to any previous Ways
and Means Committee proceedings.
I now wish to share my story directly with you in hopes of
garnering your support and leadership of the Honorable Sam Johnson's
H.R. 3385.
I am writing for myself and others in a similar position who have
suffered financial hardships as a result of the Alternative Minimum
Tax.
I work for a small technology consulting firm that used incentive
stock options as part of its compensation. Believing in the company and
its future and being hamstrung by rules that dictated when I had to
exercise and when I could sell, I exercised and held good portions of
the stock granted to me as ISOs. However, the antiquated and complex
rules of the AMT, as I understand were created to catch the wealthiest
individuals in the U.S. from sheltering gains from the government, have
now caught unaware many middle and upper middle class Americans who
have worked hard for what they have earned. Since the AMT requires the
gains to be calculated at the time of exercise not at the time of sale,
I owed nearly $250,000 in taxes based on paper profits not on actual
gains. Calculating tax on paper gains is wrong and unfair. While I did
not suffer as badly as others, at the time the $250,000 was twice my
annual income. While I continue to work for the same company today and
I continue to hold its stock, I am very disenfranchised with the tax
policy and urge you to take a stand and retroactively eliminate the
AMT. Demonstrate to the people that you represent, that you believe the
government should not continue to support unfair tax policies and now
tax policies that discourage individuals from taking chances with small
businesses.
Thank you for your time and consideration.
I respectfully and urgently request your support of H.R. 3385.
Daniel Toth
Winnetka, Illinois 60093
August 22, 2005
Dear Honorable Chairman Camp and Ranking Member McNulty:
I have submitted my testimony and shared my family's story at these
events:
6-15-2004 Hearing on Tax Simplification, Oversight
Subcommittee
Spring/Summer 2005, President's Tax Reform Advisory Panel
I now wish to share my story directly with you in hopes of
garnering your support and leadership of the Honorable Sam Johnson's
H.R. 3385, the AMT Credit Fairness Act.
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 50's 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 55 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 Panel 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.
I respectfully and urgently request your support of H.R. 3385.
Very Sincerely,
Ronald Vasaturo
Statement of Mike Wertheim, Oakland, California
I have submitted this story in previous years. I am submitting my
story now to ask you to please support bill H.R. 3385.
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 $500). 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 $3,000 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 60's, no longer feel that they have
enough money for their retirement. All of this happened because the AMT
laws forced me to pay a large tax on income that I never actually
received.
H.R. 3385 will be a great improvement to the tax code. Taxes should
not exceed the value of the actual gain being taxed. It will make it
possible for people in my situation to make quicker use of AMT credit.
I respectfully and urgently request your support for H.R. 3385.