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





TRANSFORMING THE TAX CODE: AN EXAMINATION OF THE PRESIDENT'S TAX REFORM 
                         PANEL RECOMMENDATIONS

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

                             JOINT HEARING

                               before the

    SUBCOMMITTEE ON RURAL ENTERPRISES, AGRICULTURE & TECHNOLOGY and 
                 SUBCOMMITTEE ON TAX, FINANCE & EXPORTS

                                 of the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                    WASHINGTON, DC, FEBRUARY 1, 2006

                               __________

                           Serial No. 109-38

                               __________

         Printed for the use of the Committee on Small Business


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                                 house


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                      COMMITTEE ON SMALL BUSINESS

                 DONALD A. MANZULLO, Illinois, Chairman

ROSCOE BARTLETT, Maryland, Vice      NYDIA VELAZQUEZ, New York
Chairman                             JUANITA MILLENDER-McDONALD,
SUE KELLY, New York                    California
STEVE CHABOT, Ohio                   TOM UDALL, New Mexico
SAM GRAVES, Missouri                 DANIEL LIPINSKI, Illinois
TODD AKIN, Missouri                  ENI FALEOMAVAEGA, American Samoa
BILL SHUSTER, Pennsylvania           DONNA CHRISTENSEN, Virgin Islands
MARILYN MUSGRAVE, Colorado           DANNY DAVIS, Illinois
JEB BRADLEY, New Hampshire           ED CASE, Hawaii
STEVE KING, Iowa                     MADELEINE BORDALLO, Guam
THADDEUS McCOTTER, Michigan          RAUL GRIJALVA, Arizona
RIC KELLER, Florida                  MICHAEL MICHAUD, Maine
TED POE, Texas                       LINDA SANCHEZ, California
MICHAEL SODREL, Indiana              JOHN BARROW, Georgia
JEFF FORTENBERRY, Nebraska           MELISSA BEAN, Illinois
MICHAEL FITZPATRICK, Pennsylvania    GWEN MOORE, Wisconsin
LYNN WESTMORELAND, Georgia
LOUIE GOHMERT, Texas

                  J. Matthew Szymanski, Chief of Staff

          Phil Eskeland, Deputy Chief of Staff/Policy Director

                  Michael Day, Minority Staff Director

     SUBCOMMITTEE ON RURAL ENTERPRISES, AGRICULTURE AND TECHNOLOGY

SAM GRAVES, Missouri, Chairman       JOHN BARROW, Georgia
STEVE KING, Iowa                     TOM UDALL, New Mexico
ROSCOE BARTLETT, Maryland            MICHAEL MICHAUD, Maine
MICHAEL SODREL, Indiana              ED CASE, Hawaii
JEFF FORTENBERRY, Nebraska           RAUL GRIJALVA, Arizona
MARILYN MUSGRAVE, Colorado

                   Piper Largent, Professional Staff

                SUBCOMMITTEE ON TAX, FINANCE AND EXPORTS

JEB BRADLEY, New Hampshire Chairman  JUANITA MILLENDER-McDONALD, 
SUE KELLY, New York                  California
STEVE CHABOT, Ohio                   DANIEL LIPINSKI, Illinois
THADDEUS McCOTTER, Michigan          ENI F. H. FALEOMAVAEGA, American 
RIC KELLER, Florida                  Samoa
TED POE, Texas                       DANNY DAVIS, Illinois
JEFF FORTENBERRY, Nebraska           ED CASE, Hawaii
MICHAEL FITZPATRICK, Pennsylvania    MICHAEL MICHAUD, Maine
                                     MELISSA BEAN, Illinois

                     Adam Noah, Professional Staff

                                  (ii)


                            C O N T E N T S

                              ----------                              

                               Witnesses

                                                                   Page
Breaux, The Honorable John, (U.S. Senate, retired), Vice 
  Chairman, President's Advisory Panel on Federal Tax Reform.....     6
Castle, The Honorable Mike (DE-At Large), Congressman, U.S. House 
  of Representatives, Main Street Partnership....................     9
Garrett, The Honorable Scott, (NJ-5), Congressman, U.S. House of 
  Representatives, Republican Study Committee....................    11
McCracken, Mr. Todd, President, National Small Business 
  Association....................................................    21
Mitchell, Dr. Daniel, Ph.D., McKenna Senior Fellow in Political 
  Economy, The Heritage Foundation...............................    23
Burton, Mr. David, Americans for Fair Taxation...................    25
Hausman, Mr. Jim, Hausman Metal Works and Roofing, Inc...........    27
Loftis, Mr. Andy, Keller Williams Realty.........................    29
Burman, Dr. Leonard, Ph.D., Senior Fellow, Urban Institute.......    31

                                Appendix

Opening statements:
    Bradley, Hon. Jeb............................................    34
    Graves, Hon. Sam.............................................    36
    Barrow, Hon. John............................................    39
    Millender-McDonald, Hon. Juanita.............................    43
    Kelly, Hon. Sue..............................................    46
Prepared statements:
    Breaux, The Honorable John, (U.S. Senate, retired), Vice 
      Chairman, President's Advisory Panel on Federal Tax Reform.    48
    Castle, The Honorable Mike (DE-At Large), Congressman, U.S. 
      House of Representatives, Main Street Partnership..........    50
    Garrett, The Honorable Scott, (NJ-5), Congressman, U.S. House 
      of Representatives, Republican Study Committee.............    53
    McCracken, Mr. Todd, President, National Small Business 
      Association................................................    56
    Mitchell, Dr. Daniel, Ph.D., McKenna Senior Fellow in 
      Political Economy, The Heritage Foundation.................    61
    Burton, Mr. David, Americans for Fair Taxation...............    67
    Hausman, Mr. Jim, Hausman Metal Works and Roofing, Inc.......    77
    Loftis, Mr. Andy, Keller Williams Realty.....................    80
    Burman, Dr. Leonard, Ph.D., Senior Fellow, Urban Institute...    88
Additional Material:
    Chapter Nine, National Retail Sales Tax......................    95

                                 (iii)



 
TRANSFORMING THE TAX CODE: AN EXAMINATION OF THE PRESIDENT'S TAX REFORM 
                         PANEL RECOMMENDATIONS

                              ----------                              


                      WEDNESDAY, FEBRUARY 1, 2006

                   House of Representatives
                        Committee on Small Business
        Subcommittee on Rural Enterprises, Agriculture and 
    Technology and Subcommittee on Tax, Finance and Exports
                                                     Washington, DC
    The joint Subcommittee met, pursuant to call, at 3:01 p.m., 
in Room 2360 Rayburn House Office Building, Hon. Jeb Bradley 
[Chairman of the Tax, Finance, and Exports Subcommittee] and 
Sam Graves [Chairman of the Subcommittee on Rural Enterprises, 
Agriculture and Technology] presiding.
    Members present: Representatives Kelly, Graves, Bradley, 
Millender-McDonald, Udall, Sodrel, Barrow, Fitzpatrick, and 
Lipinski.
    Mr. Bradley. Good afternoon, ladies and gentlemen. Welcome 
to this committee hearing. It is a pleasure to be here. For 
those of you I haven't had a chance to say happy new year to, 
including our guests, happy new year. I would like to, 
obviously, welcome you all to the Joint Hearing of the Tax, 
Finance & Export Subcommittee and the Rural Enterprises, 
Agriculture & Technology Subcommittee of the House Committee on 
Small Business.
    It is a pleasure to be working with my colleague 
Congressman Graves as we examine the recommendations of the 
President's Advisory Panel on Federal Tax Reform. I would also 
like to thank our distinguished witnesses and certainly thank 
the Minority Chair, Ms. Millender-McDonald for being here this 
afternoon.
    In my view the current tax code is a very difficult code to 
navigate for members of the public that we represent. We need a 
simpler system which is more conducive to our economic goals 
and economic growth. For too long the American people have been 
burdened by the constraints of a complex and unfair tax system, 
one that is riddled with loopholes and shelters. In a time of 
ever-increasing globalization, these impediments to economic 
growth are precluding hardworking Americans from attaining 
their full economic potential.
    Before being elected to Congress I was a small business 
owner myself and know firsthand the significant role that these 
tax difficulties play in our economy and how important it would 
be to simplify them to create prosperity for our economy. We 
have to deal with complexities of the current code and know the 
need for real reform. Small businesses are the lifeblood of my 
state, of our American economy and we have to take away these 
impediments to that kind of economic growth.
    [Chairman Bradley's opening statement may be found in the 
appendix.]
    With that I would recognize Congressman Graves for an 
opening statement.
    Mr. Graves. Thank you, Mr. Chairman. I appreciate it. I 
also, too, want to welcome everybody to this joint hearing. A 
lot of you, I know, traveled a long ways to be here. I 
appreciate your participation very much and for being a part of 
this.
    I also want to thank Jim Housman from Housman Metal Works 
and Roofing for coming all the way to Washington from St. Jo to 
testify as a constituent of mine. I look forward to hearing 
some real life experiences from him and others today and 
appreciate again your participation.
    Throughout my tenure as a Member of Congress I have 
traveled my district visiting with small businesses, 
manufacturers, and others talking about the issues that impact 
their business. It is almost always guaranteed that the tax 
code and reform in the tax code is brought up. According to the 
folks in my district, the current tax code is far too complex, 
time consuming, and cost way too much of their hard-earned 
money to examine it.
    I support simplifying the tax code. The tax code including 
all the opinions and precedents is over 54,000 pages long or 
about 2.8 million words. To complete the form it takes on 
average 11 hours. I think people have much more important 
things to do with their time than spending that 11 hours trying 
to fill out or trying to navigate the complexities of this tax 
code.
    Government shouldn't handcuff small business owners. It 
should work with them. I think simplifying the code helps 
everyone. The tax code is a major drag on the economy. In fact, 
according to some estimates it costs the economy one trillion 
dollars in lost growth each year. This represents hundreds of 
thousands of jobs and opportunities never created because of 
the tax code itself.
     Americans deserve a tax code that is simple, that is fair 
and that promotes economic growth. It is fundamentally unfair 
to have a tax code that has different rules for different 
people. Small businesses create seven out of every 10 jobs in 
America. I want to make sure that we don't put a tax burden on 
them so heavy that there is no incentive to create those jobs.
    The tax code impacts our lives in ways we rarely even 
acknowledge. For example, the tax code tells us when is the 
best time to get married, when is the best time to buy a home, 
to change jobs, to start saving, to have children. It tells us 
when is the best time to get an education and even when it is 
the best time to die.
    According to one small business owner that testified before 
the President's Bipartisan Advisory Panel. The tax code affects 
almost every decision he makes; where to invest, when to 
invest, how much to invest in machinery and equipment used in 
production, and how to finance the investment. The complexity 
of the tax code is what makes it so easy for some folks with 
the means and the motive to cheat the system. Closing those 
loopholes is not enough I believe. Closing the loopholes only 
adds additional complexity to the system and all too often 
provides a new way to cheat.
    I look forward to hearing everybody. I think this is a very 
important subject. I think we need to do something before it 
even gets worse than it already is. Thank you, Mr. Chairman for 
allowing this joint hearing.
    [Chairman Graves' opening statement may be found in the 
appendix.]
    Mr. Bradley. Thank you very much, Congressman Graves. I 
would recognize Ms. Millender-McDonald.
    Ms. Millender-McDonald. Thank you so much, Mr. Chairman, 
and happy new year to you and to all of the members here on the 
panel and to the former member and the current members who are 
here with us. It is important to have all of you here. It is so 
important to have you here on the back of the State of the 
Union when the President spoke about taxes. Not necessarily 
small business taxes but, nevertheless, taxes. We are here 
today to talk about taxes where it really will impact small 
businesses.
    It is so important, Mr. Chairman, and it is great to have 
this dual committee meeting today because we look at taxes with 
reference to rural and urban and those are the two critical 
areas where we need the most relief, rural business as well as 
urban businesses so it is important that we have come together 
today to talk about this.
    It is good to have our old friend with us, Senator John 
Breaux, who serves admirably as the Vice Chair of this 
Committee or Commission that the president has put together, 
this panel along with Senator Connie Mack. Those two 
experienced former members certainly help to advance this issue 
that nobody wants to deal with but then everyone needs to talk 
about.
    It is an interesting time for us and I am especially 
interested in the hearing on how these changes will impact the 
economic development of our nation's 23 million small 
businesses. Many of these firms already face a barrage of 
roadblocks on their path to success and the tax code should not 
be one of them from rising energy prices to a lack of 
affordable health care and the difficulty in assessing capital 
it is clear that America's small businesses deserve a break.
    Unfortunately, inequities and complexities in the tax code 
continue to persist for small businesses. Statistics show that 
in 2002 small businesses shouldered 52.5 percent of the $194 
billion and 5.8 billion hours Americans spent on tax compliance 
activities.
    In addition, the revenue code income tax provisions have 
only continued to balloon between 1995 to 2001. It grew a 
staggering 478 percent from 172,000 words to 995,000 words. No 
one should have to try to grapple with that. The complexity 
problem clearly has serious implications for small business 
owners. This is why this panel has recommended a lot of changes 
that will no doubt help small businesses.
    For an example, the recommendation to allow for more 
immediate expensing of new investment for small businesses is a 
positive step forward and one that will encourage economic 
growth by decreasing the complexity of expensing small business 
owners are encouraged to invest in their businesses while at 
the same time improving their cash flow and simplifying their 
tax reporting.
    I am happy that the panel flatly rejected a consumption of 
tax. I thank you so much for that. I thank you, Mr. Chairman. I 
will put the rest of my statement in the record with unanimous 
consent and thank you so much for convening this hearing.
    Mr. Bradley. Thank you very much. So ordered on your 
statement.
    [Ranking Member Millender-McDonald's opening statement may 
be found in the appendix.]
    Mr. Bradley. I understand that Congresswoman Kelly has an 
opening statement. Please.
    Ms. Kelly. Thank you, Mr. Chairman. Because I represent 
small businesses in New York's Hudson Valley I have a 
considerable concern regarding some of the proposals in the 
Presidential Tax Reform Panel. At the same time, there are some 
promising ideas to at least work with in terms of advancing the 
tax reform agenda as it relates to small business.
    It is important to note that the suggestions in Plan A that 
would repeal the alternative minimum tax are good thinking, I 
believe. The AMT should never be on the backs of middle income 
taxpayers and small business owners. This is money that middle 
income families need for themselves to pay their own bills and 
to use for their own personal needs, most importantly to spend 
in small businesses.
    Under Plan B there is an allowance for the immediate and 
full expensing of all capital investments. Such a deduction 
allows innovators to take more changes, hire more people at an 
early stage, and generally afford more of the cost of doing 
business.
    Plan B also creates a tax system for businesses that are 
cash flow based. This is important, I think, to small 
businesses who need to be able to get a fair shake in terms of 
their real income, what they are actually earning and spending 
and taxing it only once at a lower and flatter rate than we do 
now. This cash flow method eliminates many of the complicated 
tax accounting rules that plague small businesses.
    My greatest concern, however, is the portion of the 
recommendations that will have an inherent negative impact on 
small businesses and that is the proposed elimination of the 
home mortgage interest deduction and the state and local income 
tax deduction. This punishes middle income small business 
owners in New York's Hudson Valley severely. These individuals 
are already overtaxed.
    When middle income citizens are punished, small businesses 
see losses. Elimination of these deductions takes money out of 
the pocket of the homeowner. These homeowners are the 
individuals and the families that are out there spending money 
in our small businesses and this plan would take money away, I 
believe, from valuable patriates of our small businesses.
    I support a simpler tax code but not at the expense of the 
average Hudson Valley resident or small business owner who 
would stand to lose thousands of dollars in tax deductions and 
potential business every year. Small business owners need and 
their customers rely heavily on these deductions for federal 
tax relief every year, not just in the Hudson Valley but across 
America.
    The thought of these crucial deductions sends a chill 
through the livelihood of most of the small businesses of 
America. Small businesses need tax relief, not tax increases. 
This is a tax increase. Now is the time for us to be looking 
for ways to bring more tax relief to America. It is not to be 
developing methods of taking it away. There are good ideas in 
these plans. I hope we can stay with the good ideas and 
jettison those that aren't. Home mortgage interest deduction 
not allowing that is a bad idea. Thank you, Mr. Chairman.
    [Congresswoman Kelly's opening statement may be found in 
the appendix.]
    Mr. Bradley. Thank you.
    Mr. Barrow. Thank you, Chairman Bradley and Chairman Graves 
for holding this joint hearing to look into the findings of the 
President's Tax Reform Panel. I want to thank Senator Breaux, 
Representative Castle and Representative Garrett for taking the 
time to come before our Subcommittees today.
    President Bush appointed the Tax Reform Panel because the 
current tax system is an absolute mess. It hurts business and 
it is a huge drain on our economy. The reason my Subcommittee 
was looking at this, at least in part, is because the current 
tax code hurts small businesses even more than big businesses. 
In 2004 small businesses spent an average of $1,300 per 
employee to comply with federal income taxes which is almost 
twice as much as big business has to spend.
    In addition, the current system makes planning ahead much 
more difficult for small businesses because of Sunsets and 
other temporary fixes it is impossible for a small business 
owner to know how the tax code will affect him in the years 
down the road. The tax code hurts small businesses and that 
means it hurts the growth of our economy.
    The panel's recommendations address many of these issues 
that make life miserable for American taxpayers. Some of the 
recommendations could help the American taxpayers such as 
simplifying our methods of saving. On the other hand, some of 
the recommendations could hurt such as putting a cap on 
mortgage deductions for homeowners. The current mortgage 
deduction system has helped a huge number of working Americans 
become homeowners. A cap on the deduction could put homeowners 
at risk of losing their homes and make new homes unaffordable 
for most Americans.
    Now, the panel took a long hard look at the National Retail 
Sales Tax, an idea that has been floating around Washington for 
many years now. Their findings reinforce the conclusions of 
economists and tax experts throughout the country, the National 
Retail Sales Tax is a bad idea.
    The panel refused to recommend the National Retail Sales 
Tax because they recognize it is just a tax shift and there 
would be a huge tax increase for the vast majority of 
Americans. A national sales tax might be easier for most 
taxpayers to pay but not if it cost more in the long run. 
Paying more in sales tax shouldn't be the price that we have to 
pay to get tax simplification.
    Let me read you a few of the quotes from the Tax Reform 
Panel's report. ``Replacing the current income tax with a 
stand-alone retail sales tax would increase the tax burden on 
the lower 80 percent of American families as ranked by cash 
income by approximately $250 billion per year. Such families 
would pay 34.9 percent of all federal retail sales taxes, more 
than double the 15.8 percent of federal income taxes they pay 
today.''
    ``Although a program could be designed to reduce the burden 
of a retail sales tax on lower income and middle income 
taxpayers by providing cash grants. such cash grants would 
represent a new entitlement program, by far the largest in 
American history and make most American families dependent on 
monthly checks from the Federal Government.''
    ``Two types of Administrations would be required, one to 
collect the tax and another to keep track of personal 
information that would be necessary to determine the size of 
the taxpayer's cash grant.''
    ``Even with favorable assumptions a retail sales tax on a 
broad base with a cash grant program would create incentives 
for significant tax evasion.''
    ``The tax rate would be 49 percent. If a narrower tax base 
were used instead of the extended base, the rate would be even 
higher.''
    In other words, in order to break even it will cost more 
for most of us and the worst of it is that the IRS ain't going 
anywhere. What we will get is two bureaucracies instead of the 
current one. One to collect a huge tax that will be much harder 
to collect than folks realize, and the other to pay off the 
welfare rebate that is supposed to keep the new tax from 
crushing the poor, two messes to replace the current mess.
    The President's Tax Reform Panel gave America a thorough, 
nonpartisan, and fair assessment of the National Retail Sales 
Tax. While the panel clearly laid out the flaws in the 
proposal, I am glad to see some of their other recommendations 
and I again thank the chairman for holding this hearing to 
discuss these options in greater depth.
    Mr. Chairman, I ask unanimous consent to submit Chapter 9 
of the Tax Reform Panel's Report for the record.
    Mr. Bradley. So ordered.
    [Ranking Member Barrow's opening statement and Chapter 9 of 
the Tax Reform Panel's Report may be found in the appendix.]
    Mr. Barrow. Thank you, Mr. Chairman.
    Mr. Bradley. With that, let me recognize our first panel. 
Senator Breaux who is the Vice Chairman of the President's 
Advisory Panel on Federal Tax Reform; Congressman Castle from 
Delaware, and Congressman Garrett from New Jersey's 5th 
Congressional District.
    Mr. Bradley. Gentlemen, welcome, and I think we'll begin 
with you, Senator.

STATEMENT OF THE HONORABLE JOHN BREAUX (U.S. SENATE, RETIRED), 
    PRESIDENT'S ADVISORY PANEL ON FEDERAL TAX RETURN REFORM

    Mr. Breaux. Thank you, Mr. Chairman, Mr. Chairman and 
ranking members and ranking members. I am delighted to have the 
opportunity to be over on the House side to share some thoughts 
and comments. Actually, after serving 32 years in Congress this 
is the first time that I've been back to testify in any 
capacity and I'm delighted to be asked to appear before your 
distinguished Committees.
    Actually, the way things are changing I am just happy to be 
able to walk into the building. I am not sure if I will be able 
to come back a few more months from now so this may be my first 
appearance and maybe my last appearance, but whatever. Thank 
you for having me. I think that everything that all of you have 
said I think is very important. I don't disagree with almost 
all of the conclusions that you have pointed out.
    The Tax Commission, which was bipartisan, had myself and 
Connie Mack as the chair and the co-chair, Congressman Bill 
Frenzel from the House who served on the Ways and Means 
Committee with distinction was one of our other members. Nobody 
else was a political elected official and none of us were 
running again so we were able to do what commissions are 
supposed to do, to look at the tax code which we were charged 
with looking at, and make the best possible recommendations 
without the worry about what are the political implications.
    That's for the administration and that's for you ladies and 
gentlemen to decide whether what we recommended has any 
political legs or is it too difficult to consider. That is the 
beauty about having a commission. You can always say, ``The 
Commission recommended this and we are going to look at it and 
see what we can do with it.''
    I think it is timely. It is much more timely than some of 
the other efforts. We all remember the effort on Social 
Security. The problem with Social Security was that the country 
was not in any kind of agreement that it should be changed. The 
President has put a lot of time, a lot of effort, a lot of 
political capital in traveling around the country talking about 
reforming Social Security.
    The fact was that seniors who I think should be involved in 
looking for positive changes were totally opposed to it. And 
young people who you would think may be looking for new 
alternatives to it were really not engaged and not supportive 
of it. The people who were against it were much more against it 
than the people who were for it. Therefore, when you have a 
split in national dialogue, it is very difficult to get a 
consensus and, as a result, nothing happened.
    On tax reform and tax simplification, I would suggest that 
you cannot go to a rotary club. You cannot go to a town hall 
meeting and ask the question, ``Does anybody here not think 
that the tax code is too complicated? Does anybody think that 
we should not simplify it?'' It is almost an unanimous 
agreement among America's public, young, old, black, white, 
geographic across the country that a tax code is too 
complicated and we should do something for it.
    This is, I think, a political win for both parties. I would 
have hoped that the President would have said, ``I am charging 
the Congress to take the recommendations of my Commission, 
which was unanimous Democrats and Republicans alike, and use it 
as the basis to start the dialogue for simplifying the code.'' 
No one would disagree with that challenge. How we do it, of 
course, obviously there are a lot of challenges.
    The President told us to make sure that what we did was 
reasonably progressive, that it was pro-growth, that we assumed 
that the tax cuts of 2001, '03, and '04 were made permanent, 
that we paid particular attention to the importance of 
charitable contributions and mortgage deductions, and, oh, by 
the way, make it revenue neutral. I would suggest that is an 
incredibly difficult problem to make it revenue neutral if you 
do all of the things that we talked about doing.
    Congresswoman Kelly talked about the mortgage deduction. 
Someone talked about the AMT. Connie Mack's wife, incidentally, 
had the best comment about the AMT. She asked Connie, ``Why do 
you all call it the Alternative Minimum Tax?'' He said, ``What 
are you talking about?'' She said, ``Well, No. 1, it is not an 
alternative. You have to pay it. And it is not the minimum tax 
that you paid, it is the maximum tax. Instead of calling it the 
Alternative Minimum Tax it should be called the Maximum 
Mandatory Tax.''
    Regardless, we recommended, like I think most of you would 
agree, that we do away with it. But how do you do that and pay 
for it? It is $1.6 trillion over 10 years to do away with the 
AMT. If you are going to do away with that and then provide 
incentives in the code like we did, you have to pay for it. 
That is the unpleasant thing. We can all agree that it ought to 
be done away with but who wants to offer the first suggestion 
on how we pay for it?
    That is the difficult thing and we have things in there 
that do that. The state and local tax deduction. I can talk 
about why I think the people who pay more taxes for local 
services should not have people in other states pay for that, 
which we do. We talked about the mortgage deduction. With 
Congresswoman Kelly it is a very big concern.

    The fact is if you look at our studies over 70 percent of 
tax filers we had records for did not benefit one nickel from 
the mortgage deduction that is currently under code. Only 30 
percent did because of the itemization. Most people don't. Most 
people don't get the benefit. What we try to do is structure a 
recommendation that said, yes, we will keep the mortgage 
deduction but we recommended that we replace the current 
deduction with a home credit available to all homeowners 
whether you itemize or not.
    Not just 30 percent of the taxpayers but everybody would 
benefit from it. We would restructure it to say it would be 15 
percent of the mortgage interest that you paid on a principal 
residence. Not a vacation home but on the principal residence 
and it was limited to the average mortgage in respective areas 
up to $411,000 a year.
    Now, if you are wondering how many people would be affected 
by it, between 85 and 90 percent would not lose one nickel of 
deduction under that plan. Those funds along with others were 
used to help pay for the elimination of the AMT which I think 
is a very important thing to do.
    Let me just say, like I think I might have said, $140 
billion a year in complying with the tax code. $140 billion 
every year is spent in complying with the tax code. The earned 
income tax credit for the poorest people, 65 percent of them 
have to hire someone to help them figure it out. These are 
people that don't have enough money to hire a tax account or 
attorney or even H&R Block.
    We ended up making a recommendation that you could do all 
your taxes on two pages, front and back. It is a real 
simplification. I would hope that the Congress would pick this 
up as a starting point. We sent this to the Secretary of the 
Treasurer. They were involved in watching what we did and 
involved with suggestions. I think they thought it was a great 
idea. I don't know where it is at the White House. It must be 
in a closet somewhere or on a shelf somewhere. I didn't hear 
anything about it. This is something the American people would 
support.
    I have up there what we do on small business and I think 
that small businesses are particularly at a disadvantage 
because they cannot obviously afford the tax attorneys like 
Exxon does but yet they have to comply with the same rules and 
regulations. We recommended that most small businesses file 
taxes the same way they pay their bills, with a checkbook. They 
would report income as cash receipts minus their cash business 
expenses.
    Both of our panels made recommendations that allow 
unlimited expensing for most assets that would be purchased by 
businesses with less than a million dollars of income greatly 
simplifying it for small businesses. I think that is a real 
political winner and I think it makes economic sense. Thank you 
all very much for listening.
    [The Honorable John Breaux's testimony may be found in the 
appendix.]
    Mr. Bradley. Thank you.
    Mr. Castle.

     STATEMENT OF THE HONORABLE MIKE CASTLE (DE-AT LARGE), 
           CONGRESSMAN, U.S. HOUSE OF REPRESENTATIVES

    Mr. Castle. Thank you, Chairman Bradley and Chairman Graves 
and members of the Committees. I am delighted to be here with 
you. I could probably save you five minutes or so by saying 
that I agree with virtually everything you said in your opening 
statements and with Senator Breaux. And to further tell you 
that I struggle with tax courses over at Georgetown Law School. 
But being a politician I will take every bit of my five minutes 
and tell you what I think I know about all this and what we 
should do about it.
    First of all, I agree with the plan. I am not going to try 
to go through the plan and discuss the details of it except 
that I agree with it. I particularly agree with something in 
the executive summary which read, ``Tax provisions favoring one 
activity over another or providing targeted tax benefits to a 
limited number of taxpayers create complexity, instability, and 
pose large compliance costs and can lead to an inefficient use 
of resources.
    A rational system would favor a broad tax base providing 
special treatment only where it could be persuasively 
demonstrated that the effect of a deduction, exclusion, or 
credit justifies higher taxes paid by all taxpayers.''
    Obviously lofty goals well stated. I think you all sort of 
basically agree with it in what you stated. However, I believe 
that reform and simplification of the current tax system, 
although it is one of extreme high priority, is not going to be 
easy at all. As Senator Breaux said, we don't know where this 
report is now, which I consider to be a good comprehensive 
report. It seems to be collecting dust someplace. I am 
delighted this Committee has dusted it off a little bit so that 
we can have this discussion.
    I don't see a strong political viability for passing 
reforms. While we all sort of give lip service to it, probably 
do it in our town meetings or whatever, it becomes a heck of a 
lot more difficult when you start to determine what you can 
subtract and add in getting to that revenue neutral 
circumstance that the senator mentioned also.
    We also have many names of Americans who have made 
investments based to some degree on the tax code which is 
perhaps unfortunate but it is the way it is. I am thinking 
primarily of long-term mortgages, other long-term pike loans, 
other things that one can write off depreciation or whatever it 
may be. That adds into the difficulty as well.
    I think we do need truth in accounting. We talk about 
revenue neutral. We need to make sure whatever we do in 
Congress is revenue neutral not anticipating future expenditure 
cuts or tax cuts or increases or whatever it may be, but meets 
the circumstances of whatever we are facing from a fiscal point 
of view at that particular point in time.Any of this can have 
long-term impacts on federal deficits in trading debt for more 
debt because we are trying to fix the tax code would not, in my 
judgment, be the way to go.
    I think there are problems, political problems, in dealing 
with the tax code. Just an excerpt from what I actually wrote 
that is before the Committee is, ``As important as truth in 
accounting is restoring the faith of Americans in the 
Government and our ability to fairly collect the nation's 
revenues, the biggest challenge that I think we have in this 
area is the common abuse of the complex tax code to avoid 
paying federal taxes.
    Loopholes allowing tax avoidance by individuals, and 
particularly corporations [not really small businesses but 
corporations] have proliferated in recent years those same 
lobbyists have created such a growth and demand for earmarks of 
the same type to feast on loopholes and tax bills at incredible 
cost to our revenue system leading to mass complexity in 
business decisions driven by tax consequences rather than 
economic benefit.
    According to the panel findings more than 14,000 changes 
have been made to the code in the past 20 years. It is because 
of these complications that the annual cost of complying with 
today's federal tax system cost taxpayers $1 in compliance cost 
for every $7 in federal income taxes.'' Ms. Millender-McDonald 
referenced that. Senator Breaux indicated that some $140 
billion. It is a lot of money that is put into the compliance 
aspect of it.
    I will admit that I am going to be hiring an accountant 
here shortly to help with my taxes this year so I am part of 
that expenditure that I would like to eliminate. So there are a 
number of problems. The major benefactors of the current tax 
code, in my judgment, in terms of loopholes are the more major 
corporations. The federal corporate tax rate is 35 percent but 
in 2003 corporate taxes were 7.4 percent of overall federal 
receipts which happens to be the lowest level in 20 years which 
indicates what that problem really is.
    I think that any reform to simplify the tax code should 
include a full review of the commonly used methods that are 
here. Some of this is perfectly fine. Tax carryovers for 
businesses and corporations, I don't have a problem with that. 
Some of the exploitation that takes place in offshore tax 
havens, the corporate expatriation or inversions which occur 
out there, simply registering offshore with a post office 
address and shifting tax burdens.
    As a result of that when you are an American corporation 
are a tremendous burden on our system here in the United States 
of America. It is a burden on everyone of us across the United 
States because somebody else is not paying taxes and we are to 
meet the revenue needs which are there. As those kinds of 
loopholes continue to be created and exploited and taken 
advantage of, particularly by the large corporations, it 
creates a tremendous problem for all of us.
    We are losing out on a lot of revenue, I think virtually 
every individual, and I think frankly most corporations, and 
this is important for economic activity. So instead of having 
avoidance of taxation and all the effort and energy that is put 
into that, we could have it put into positive economic 
activity. But if you had a simpler flatter way of dealing with 
taxes and avoid the loopholes which are there, in my judgement 
the economic advantage of transferring that effort from tax 
avoidance to production would be tremendously beneficial to our 
country. It is something we need to get back to as soon as we 
possibly can.
    I think that the Commission did very well when they spoke 
about the updates being able to encourage and reward personal 
investment and savings through simplification. We are getting 
away from savings. That is a great problem for small business 
people. It is a great problem for individuals in the United 
States of America and, unfortunately, is not particularly 
encouraged by what we have today.
    I don't think reforms will be easy to enact but I would 
tell you that if we take the time to really read this report, 
as Ms. Kelly said, we may not agree with everything that is in 
the report, and I certainly probably don't agree with 
everything that is in the report, but the direction of the 
report, most of the content of the report, and the idea of the 
report of making a move in this direction is something that I 
believe that we as a Congress should be taking up as soon as we 
can. I don't see this as being a Republic Democrat issue. It is 
one of those issues which we could actually work together and 
have an achievement which will be beneficial to the American 
people. Thank you.
    [The Honorable Mike Castle's testimony may be found in the 
appendix.]
    Mr. Bradley. Thank you.
    Mr. Garrett.

 STATEMENT OF THE HONORABLE SCOTT GARRETT (NJ-5), CONGRESSMAN, 
                 U.S. HOUSE OF REPRESENTATIVES

    Mr. Garrett. Greetings and good afternoon. Before I begin, 
let me apologize. I was one that was screaming in excitement 
for the President last night so I have a touch of laryngitis so 
bear with me. I will probably keep my remarks briefer than I 
intended. Also, I should say that I also agree with around 80 
percent of the opening comments, maybe even 90 percent. Make 
that 80.
    As the Chairman indicated, I am from the state of New 
Jersey. Why I bring that up again is because, as you may know, 
my home state being where it is and the income level that it 
has, tax policy has a significant impact upon us. Due to the 
progressive nature of the system, New Jersey is one of the 
highest relative tax states in the union and, therefore, we are 
at a significant disadvantage vis-a-vis the other states. We 
are a donor state sending far more tax revenue to Washington 
than we ever get back from the Federal Government.
    But so, too, is the situation for all American taxpayers 
having been overtaxed for too long with our federal income tax 
system, as indicated, overly complex and decidedly unfair. 
American taxpayers are taxed, taxed again, and taxed again and 
again on various levels of government sending the money to 
Trenton or capitals, Washington, all of which could be resolved 
with significant tax reform. That is really why I was so 
inspired by the President and the members of this Committee for 
delving into this issue and willing to take and hopefully make 
some of the hard choices that will need to be made.
    My first impression of the panel suggestion was that it was 
in some ways hampered from the very beginning by some of the 
instructions that they had such as trying to come up with a 
system that was purely a revenue neutral system, and also with 
a more static approach to the impact of the tax changes.If seen 
with the impact of changing economies as the recent evidence 
showing us that tax relief will actually grow the economy, grow 
the tax base and increase revenue, therefore, changes to the 
tax system can do so likewise.
    Next, I was dismayed that there was not a more sweeping 
change proposed, quite honestly, ones that would address some 
of the concerns that have been overly raised by the panel as 
far as the current tax code affecting every single aspect of 
our lives, although I don't think the Committee mentioned as to 
when we have our child, too. When we get married, when we die, 
but also having our children.
    Since my time is limited, let me just pick and choose a 
couple of the aspects in the plan. I am very pleased that both 
plans focus on the AMT. As you probably know, New Jersey has 
the highest percentage of filers who fall victim to the AMT. If 
left unchanged, the AMT will penalize nearly 20 percent of 
taxpayers, nationally some 30 million taxpayers in America in 
total.
    Both recommendations made unanimously by the bipartisan 
panel emphatically call for immediate repeal of the AMT. This 
arcane provision goes to the grave threat to middle America and 
small business. I am happy to indicate to this committee that I 
have legislation, HR 703, that would simply index AMT for 
inflation and allow for state and local tax deductions. I would 
be pleased that the panel would mimic such a proposal in their 
recommendations. Also important are the panel's recommendations 
for permanent marriage relief and improving incentives for 
saving and investing.
    Now, the second proposal is the growth and investment tax 
plan. It is probably more business friendly in specifically how 
they deal with business investment. Tax relief to American 
business is key to economic growth. Businesses need to keep 
more money to grow. More importantly to hire more employees. 
The recommendations show a step in the right direction but, 
again, the sweeping changes that most likely you need were not 
present in the proposal.
    In conclusion, I think we should be inspired by the panel 
that they made some positive suggestions that will certainly 
make improvements to the overall system. As a proponent of a 
healthier economy, increased job growth, and a more efficient 
Federal Government, I want to stress every point that I can not 
to rule out even more significant tax reform.
    I understand that such ideas as FairTax, flat tax and 
likewise have not had a general consensus in this country, but 
I think those are things that this Congress should consider to 
look at. A smaller Federal Government is a more efficient 
Federal Government, one that is able to effectively provide the 
services that the American people need, and a reformed system 
like this will provide that more efficient system.
    I think, as already indicated, we can now use the 
President's panel's recommendation merely as a starting point 
and as a starting point from a bipartisan approach. Finally, 
again, I would just say that although there is not a consensus 
in our America, in the rotary clubs and the like that we go 
back to, as to which of the more sweeping reforms would be the 
better one and the more popular one, I am sure I don't remind 
anyone on this Committee that the role of a member of Congress 
is not necessarily to be popular but it is to lead and take 
charge. I took forward to this Committee taking that role of 
leadership on sweeping reform. I thank you. And I thank you for 
bearing with me.
    [The Honorable Scott Garrett's testimony may be found in 
the appendix.]
    Mr. Bradley. Thank you very much.
    My first question, I think, I would direct to you, Senator 
Breaux.
    Can you talk about, for the panel, why it is the AMT was 
your top priority, what harm it does to the economy? I have 
legislation along with Congressman Garrett similar to yours 
that not only indexes but raises the limits. I have been a 
long-term proponent of this but could you talk about the 
rationale for why this is so important?
    Mr. Breaux. Well, it is outdated. It was originally, as you 
everyone knows, intended to touch very wealthy Americans who 
paid nothing towards running this Government because of the 
various tax deductions and credits that they were entitled to 
legally. The country thought that, well, everybody ought to 
contribute something to running the country and that is where 
the birth of the AMT occurred.
    It was never indexed and now it doesn't just touch wealthy 
individuals but is moving down the food chain and to people 
making $65,000, $70,000 a year. Now, there is a consensus it 
should be eliminated but the last numbers we had it is 
estimated to generate about $1.4 trillion so it is easy to say 
let us eliminate it. The question is if you do it in a revenue 
neutral fashion, where do you get the money to do it?
    Now, if we just raised the rates to cover the AMT, you 
would be looking at about an 11 percent across the board rate 
increase. That would offset the loss of the AMT. It is easy to 
do away with the AMT but it ain't easy to do it if you are 
going to do it and pay for it. I think there is a consensus, 
Democrats and Republicans, that it has outlived whatever 
usefulness it has had. It is a burden. It is not needed and is 
not necessary and should be done away with.
    Mr. Bradley. Senator Breaux and Mr. Castle and Mr. Garrett, 
would you comment on why the panel didn't recommend either a 
national sales tax or a flat income tax and talk about the 
merits of those.
    Mr. Breaux. I mean, very quickly, we look at all of those 
and we had the option of making--the President said make one 
recommendation that simplifies the current code. Keep the 
structure of the current code and we did that. That is 
simplified. Then you can come up with anything else you want. 
We looked at a flat tax, a national sales tax, a value added 
tax, combination consumption and income tax together which most 
developed countries actually have.
    The national sales tax, there is no consensus on that. The 
states don't like it. That is their form of collecting taxes. 
Municipalities collect their revenues through a sales tax and 
they are totally opposed to it. The estimates from IRS tell us 
that if you did a national sales tax, you are looking at about 
33 cents on the dollar. The potential for fraud and abuse with 
that system is very, very high.
    National flat tax, we had folks come in and talk about that 
and make eloquent presentations, 17 percent. How are you going 
to say that it is fair and it is reasonably progressive if you 
have a 17 percent rate on someone making $20,000 a year and a 
17 percent rate on someone making $20 million a year? That is 
not reasonably progressive. Once you start doing things with a 
flat tax to make it reasonably progressive, you get right back 
into complicating it with exemptions, exceptions, and 
deductions. We decided that the value added tax, flat tax was 
not the way to go. We said some favorable things about the 
combination of the two but rejected the retail sales tax and 
the flat tax for those reasons.
    Mr. Castle. Mr. Chairman, I can't respond as to why the 
panel did what it did. Mr. Breaux did a remarkably good job of 
that. But, like you, I come from a state that doesn't like 
taxation a whole lot. We don't have a sales tax either. I find 
that to be about the most annoying tax. I intentionally wait 
until I get back to Delaware to buy anything I am going to buy 
to avoid paying sales taxes in other states.
    Mr. Bradley. You can come to New Hampshire and avoid an 
income tax, too.
    Mr. Castle. That would be even better. I think the flat tax 
is not progressive, I agree. I agree with the reasoning of 
Senator Breaux completely on that. I think the lack of 
progressiveness really is an issue. I really feel there should 
be somewhat of a higher burden as you go up the income scale.
    Having said that, it may be somewhat out of proportion just 
as I think the deductions are crazy all over the place at this 
point. I am delighted they actually didn't make that finding. 
Mr. Garrett may disagree with me here in a moment but I believe 
that gives us a sound basis to get something done and I think 
will bring more of the political middle into actually getting 
something done in Congress. I think it was a good 
recommendation.
    Mr. Garrett. I am not an advocate. You have other members 
who would come clearly more forcefully today but I would just 
say this. It will be hard whatever we do to get through to 
Congress and through the President's task for reform. At the 
end of the day after this year, or the next session where we do 
all that work to try to simplify the system, however that comes 
down, it would be a shame to think that maybe three or four 
years down the road we are simply back in the same boat that we 
are today because the code we are operating under right now, as 
I understand it, when it started some 70 or 80 years ago was a 
very simple, easy tax code without any of those other 
parameters and controls on our lives that we have right now.
    We may try to do some band-aid approaches in the next six 
months or the next year or so to try to fix it. But how long 
will those band-aid approaches remain in effect when we know 
all too well all the lobbying effect will come back just to add 
them all right on again and this Committee will be back to say 
how do we reform the reform from 2006.
    Mr. Bradley. Congresswoman Millender-McDonald.
    Ms. Millender-McDonald. Thank you so much, Mr. Chairman. 
You are absolutely right. If we do a band-aid approach we won't 
get nowhere. But to try to do an approach that has been 
recommended will take a lot of political will. That is very 
true. As I look at and as I have heard your testimony, Senator 
Breaux, you spoke about most small businesses pay their bills 
by checkbook.
    Yet, we talk about health insurance which has been a big 
problem with small businesses. We talk about the alternative 
minimum tax which you are suggesting that we repeal by virtue 
of your own calculation, the trillions of dollars that would be 
lost with that. Plus the President's request for a permanent 
tax cut. Where do we go? What do we do?
    When we speak about state and local deductions, repealing 
of that, as a mayor of a city, coming from the local 
governments, and especially California with Proposition 13, we 
just don't have anywhere else to go. What do you do in this 
type of climate? Given all of those variables that I have just 
given you, I do feel we need something but how in the world do 
we start?
    Mr. Breaux. Well, I would start by using the Commission and 
saying they have looked at it for over a year. They made a 
nonpolitical recommendation. They have a lot of things that 
reduce taxes and everybody can basically or pretty much agree 
with that. We did a lot of things for small business in terms 
of expensing and the way they file their taxes. We did away 
with the AMT. But you had to find a way to pay for it.
    Let me just make a quick comment. I understand people who--
    Ms. Millender-McDonald. That is what I am talking about.
    Mr. Breaux. I will address that. I think for people in high 
tax states, New York and California, started calling us while 
we were still writing that recommendation saying, ``You are 
absolutely crazy.'' Charlie Rangel went everywhere on the 
thing. Here is the logic on it. Say you live in Beverly Hills 
or a bigger city that has very high income constituents in it. 
They pay a lot of local taxes. They may have their trash picked 
up twice a day.
    They may have 24-hour-a-day police security in their 
neighborhood. They may have underground sewage and underground 
powerlines buried so you never see them. They are paying a lot 
of tax for that. Why should someone in New Hampshire be helping 
to pay for that? Why should someone in any other state be 
helping to pay for a high tax community that is enjoying those 
benefits that only they get. Because the whole country is 
seeing that tax deductible, everybody else is paying more for 
the high-tax communities and the high-tax states.
    Ms. Millender-McDonald. But that is not the only high-scale 
area in this country.
    Mr. Breaux. No, it is all over the place.
    Ms. Millender-McDonald. It is one of many, yes.
    Mr. Breaux. My point is why should a Congresswoman or a 
Senator from the state that doesn't have those benefits have 
their constituents be subsidizing the high-tax states for the 
good things that their tax base provides them. If they want to 
pay the tax for all those extras, that is fine, but why should 
someone from Arizona be subsidizing another state's benefits 
that the people in Arizona don't get? By allowing it to be a 
deductible on their Federal income tax, every American is 
helping to subsidize what only a few are getting. It is not 
just California.
    Ms. Millender-McDonald. No.
    Mr. Breaux. New York is the same way. It is a high-tax 
state. They have a lot of benefits but why should the rest of 
the country pay for the benefits that only one state is 
receiving? If they want to pay that tax for those benefits, 
that is fine. If they don't want to, they should elect 
different local officials. The rest of the country shouldn't be 
subsidizing the high-tax benefits that other states get. That 
was the logic behind it. Of course, I am not running again so I 
can say that.
    Ms. Millender-McDonald. That is very true. Certainly flat 
tax proposal will not fly in the state of California. I will 
say that right now. But, you know, you have places like 
Compton, a very urban area, that really pays more taxes than 
Beverly Hills. So when you talk about the tax inequity, you 
really start talking about urban versus suburban versus all 
other things being either equal or unequal. So you get to that 
type of scenario. When you get to that, then you do not have 
the type of proposal that you present to us, not from 
California because you have other urban areas that are paying 
more in taxes than Beverly Hills is paying.
    The other thing is the reform laid out in the report would 
allow for more small businesses to move toward a cash-based 
system by counting and allow them to write off most investments 
immediately. How would these changes reduce complexity and 
encourage investment for small firms? What was the thoughts of 
the panel on that?
    Mr. Breaux. Number one, you are correct in saying what we 
did. We simplified the record keeping for small businesses by 
basing it on cash receipts and expenses. Many small businesses 
are complying with the same rules as Exxon or any of the 
largest companies in America. Many of them are having to keep 
more than one set of books just to keep track of all their 
accounting implications for everything they do.
    This would allow them to have one set of books and it would 
be based on, as we have said, on cash receipts and expenses. I 
think the rule reduces compliance cost for small businesses 
from keeping a second or sometimes even a third set of books 
and allowing them to use the records that they already keep in 
their businesses, basically their checking accounts. The money 
they get and the money they spend and they can figure out their 
taxes on our recommendation in a much more simplified form than 
it was before.
    Ms. Millender-McDonald. Mr. Chairman, I am through for now.
    Mr. Bradley. Mr. Fitzpatrick, do you have a question?
    Mr. Fitzpatrick. Thank you, Mr. Chairman. Under current tax 
law the code makes certain provisions with respect to 
healthcare spending. For example, an employer that provides a 
healthcare plan to his employees and their families, currently 
that healthcare plan, I understand, is considered exempt for 
purposes of income taxes and payroll taxes. Did the tax 
advisory panel deal with the issue of healthcare?
    Mr. Breaux. Oh, yeah. I would argue that the problems with 
healthcare in America is not because we don't spend enough 
money. We as a Government spend more money on healthcare than 
any other country, any developed nation in the world. The 
latest numbers are approximately $1.5 trillion dollars in tax 
expenditures are spent on healthcare every year. That is about 
5,000 and some odd dollars for every person in this country, 
man, woman, and child. About 12 percent of all Federal income 
tax revenues are spent on healthcare. Yet, we still have 
incredible problems with healthcare.
    As you stated, the tax deduction is about $141 billion 
dollars on the deduction that an employer can have when he pays 
for the premiums for his employee and then the non-taxability 
to the employee adds up to $141 billion a year. It also takes 
away the connection between the employee and the cost of 
healthcare. There is a real incentive to buy the best plan and 
even more than they actually need because it is not taxable 
income to them. Their employer is paying for it.
    The panel recommended the following. The panel recommended 
that employee-based health insurance continues to be the 
principal way of getting health insurance for our employees. 
What we suggested was that we have a system that employers 
would be able to continue to deduct the cost of their employee 
compensation, 100 percent of the plan they provide for their 
employee, whether in the form of either cash compensation they 
give to the employee or the health insurance premiums that the 
employer would pay.
    Employees, on the other hand, would be allowed to receive a 
base amount of health insurance from their employer tax free 
but not everything. We will also allow even employees who do 
not have access to employer-provided insurance to also be 
allowed a new tax deduction for their health premiums. Right 
now you get the deduction if you are getting it from your 
employer. If you buy it yourself, you don't. We would allow 
them to be able to deduct the cost of health premiums that they 
pay themselves.
    We have an exclusion, however. The exclusion would be for 
employer-provided health insurance would be limited to $11,500 
for families. In other words, an employee would not have to 
count anything up to $11,500 in contributions from their 
employer is taxable income. But if it is more than that, that 
would be taxable income to the employee. That happens to be 
about the national average. That is what all of you now are 
paying under the Federal Employees Health Benefit Plan. That is 
about the value that you get for a first-class world-class 
health plan. But if it is more than that, you would be paying 
income tax on it.
    Mr. Fitzpatrick. So that $11,500 is that the base amount 
that you referred to in your testimony? If so, is that base 
amount be indexed?
    Mr. Breaux. It is indexed for inflation. Yes, sir.
    Mr. Fitzpatrick. Nothing further. Thank you.
    Mr. Graves. Mr. Barrow.
    Mr. Barrow. Senator Breaux, you talked about some of the 
problems in response to Chairman Bradley's first question about 
some of the reasons for not going with the national sales tax 
or FairTax. I want to, if I can, help you understand some of 
the reasons why a little bit more. Your panel felt the need to 
report on the so-called FairTax and refute some of the claims 
made by proponents.
    One of the things you all went into your panel report 
mentioned that the Treasury Department's own figures contradict 
those offered by proponents of the so-called FairTax. Can you 
help us understand and try to put it in shirtsleeve English for 
us? What is behind the discrepancy between the Treasury 
Department's estimate and their estimates?
    Mr. Breaux. Okay. I mean, we asked that. If you replaced 
the current system with a national sales tax, how much would it 
have to be? So where did we get our figures from? We got our 
figures from the Department of Treasury, Republican Secretary 
of the Treasury, John Snow. They looked at it and if we 
replaced it with a national sales tax, even with favorable 
assumptions a retail sales tax on a broad base would require a 
tax rate of at least 34 percent and likely higher over time if 
the base erodes. That is the number. I think that the 
conclusion by most tax experts is you are looking for real 
trouble.
    Number one, you get the municipalities against it and the 
states against it. All the retail stores don't want to be the 
tax collector for the Federal Government. Plus the high rate 
led to the conclusion that you are looking for trouble. You are 
looking at a lot of tax avoidance if you move in that 
direction.
    Mr. Barrow. How about tax avoidance and evasion? I want to 
focus in on that for just one second more. What do you say to 
those folks who say that the evasion problem will be negligible 
because the cost of everything in the world is going to go down 
to match the increase in this huge add-on tax, the folks who 
say the embedded tax is just going to all of a sudden walk out 
the window?
    What do you say to folks who say it is not going to be 
revenue neutral to have this huge add-on tax added to 
everything we buy but it is actually going to be cost neutral 
to the taxpayer because the cost revenue is going to fall to a 
corresponding extent? What do you all have to say about that?
    Mr. Breaux. I mean, that is simply not the information, the 
evidence, and the testimony that we got from the Treasury 
Department when they looked at it. I thought they did it in as 
nonpartisan a fashion as possibly you can. They looked at other 
states, other countries, other nation states that have gone to 
a National Retail Sales Tax. None of them have that now as 
their own method of raising revenues.
    People have tried it and have done away with it. It has 
been a huge failure. There is no country in the world that 
relies on their revenues for running their governments on a 
National Retail Sales Tax type of plan. Those who have tried it 
have had to get rid of it many for the reasons that I have 
tried to spell out.
    Mr. Barrow. I appreciate you spelling that out and for 
those folks who do think this is not only going to be revenue 
neutral but cost neutral, I have some ocean front property in 
north east Georgia that I would be interested in selling them.
    Mr. Breaux. I have some property in Louisiana I could sell 
you, too.
    Mr. Bradley. Mr. Sodrel.
    Mr. Sodrel. Yes. Thank you. I guess there is no way to know 
where the underlying numbers came from on the 33 or 34 percent 
that a National Retail Sales Tax would have to be in order to 
be revenue neutral. I guess the first thing I would say I never 
taught tax preparation, never taught accounting. In fact, I 
haven't prepared a tax return in a whole lot of years but I 
have paid a lot of taxes and I have spent a lot of work hours 
in business trying to calculate the tax ramifications of 
anything we did before we did it.
    The amount of work hours and management time that is spent 
in the United States trying to predict the impact of a business 
action by the tax code is unknowable. It is incalculable. I 
don't even know what it is. I spent too much time trying to 
calculate what action we were taking was going to affect our 
taxes and too little time trying to figure out how to operate 
the company. You can't know what that number is. It is 
literally unknowable so I am just curious.
    The second question I have is which countries ever went 
with a national sales tax and then got rid of it?
    Mr. Breaux. I could give them to you. In fact, it is in our 
book. You are right on the time spent. What we found out and 
from testimony that Americans spent more than 3.5 billion hours 
doing their taxes. That is the equivalent of hiring almost 2 
million new IRS employees, more than 20 times what they have 
now. We spent about $140 billion on complying with the tax 
code.
    There is huge political opportunity and rightfully so in 
making the argument in a bipartisan fashion that this Congress, 
this session, will begin the process of simplifying the code. 
You will get almost no disagreement back home in town hall 
meetings from the people you speak with when you say, ``I want 
to embark on simplifying the tax code.''
    How you do it obviously begins the political problems. You 
do away with AMT how do you pay for it? Then you get into some 
difficult items. Unlike Social Security there is unanimity of 
agreement that it should be done.
    Mr. Castle. You know, I would just like to comment on that.
    Mr. Sodrel. Please do.
    Mr. Castle. I think it is a tremendous point. I made it in 
my opening, too. The time spent is beyond anything we can 
possibly determine, as you have indicated. It is the focus on 
that instead of economic production. You are running a business 
and you are worried about how am I going to avoid a tax or how 
am I going to pay these taxes or what is the tax exactly. You 
are working with accounts and spending a lot of money.
    It is just incredible. It is true of individuals as well. 
It is not just small businesses. It is not just large 
businesses. It is true of individuals also. I am very sad in a 
way that the panel's report has just not been given more 
credence, has not been given more attention than it has either 
at the White House or in Congress. I hope that this meeting 
this afternoon will perhaps generate the beginning of 
something.
    We are going to have to make tough decisions. I don't think 
you are ever going to get rid of entirely, nor should you, 
charitable deductions and some of the interest rates deductions 
and the healthcare payment deductions and some things like 
that. But there are a lot of things that we all know we could 
get rid of if we had the guts to do it. If we did it, I think 
the public would stand up and say, ``Hurrah. You have done 
actually bright in the Congress of the United States and 
something we really appreciate.''
    But it can't be the band-aid approach which was discussed 
earlier. It has to be a full comprehensive approach. If we do 
that, if we can make this simpler and we can get it down to 
this form, half a page that you could do your taxes on, most 
people are going to say that is great stuff. We ought to do it.
    Mr. Sodrel. Congressman Garrett, did you want to comment?
    Mr. Garrett. Well, maybe just going back to my comment 
before. Where are we going to be today down the road? As much 
as we want to be optimistic, anything less than a pure 
significant change, which I think we need to do, will be long 
lasting. Just think back over the last 12 months or what have 
you that we have been in session and the proposals for other 
changes to our existing tax code, additional deductions, 
credits, what comes out of, with all due respect, Ways and 
Means all the time.
    None of us can get through all that and understand 
everything that they are trying to change in the tax code all 
the time. It is making it more complicated literally as we 
speak. Here we sit saying we are going to come up with a 
proposal that is going to streamline that down to a card or 
what have you. I guess my recidivism or skepticism is whatever 
we do unless it is really broad, one of the other proposals 
that are out on the table, will just be nit-picked away in the 
years ahead in the 110th Congress and 111th Congress and 112th 
Congress.
    Mr. Sodrel. Just for the record, Mr. Chairman, this country 
operated on duties, excises, and imposts from 1787 from the 
time the constitution was written until 1913 when the 
constitution was amended to allow Congress to lay and collect 
taxes on income from whatever derived. This country operated on 
a flat tax from 1787 until 1913 so it can be done, was done, 
has been done. Thank you.
    Mr. Bradley. Thank you. Congressman Fitzpatrick? No 
questions. Are there any follow-up questions quickly of the 
panel? Seeing none, let me thank you for your very compelling 
testimony. It is great to see you again, Senator Breaux, and 
thank you very much Congressman Castle and Congressman Garrett. 
Thank you.
    While the second panel is getting seated, let me start with 
the introductions and then I am going to turn it over to Mr. 
Graves for a while because I have to go to another committee 
meeting.
    The first panelist is Mr. Todd McCracken who is the 
President of the National Small Business Association; Dr. 
Daniel Mitchell who is the McKenna Senior Fellow in Political 
Economy from the Heritage Foundation; Mr. David Burton, 
Americans for Fair Taxation; Mr. Jim Hausman, Hausman Metal 
Works and Roofing, Inc. from Missouri; Mr. Andy Loftis, Keller 
Williams Realty on behalf of the National Association of 
Realtors; and Dr. Leonard Burman, Senior Fellow at the Urban 
Institute. Welcome. With that I am going to turn it over to Mr. 
Graves.
    Mr. Graves. Thank you very much, Mr. Chairman. We will go 
ahead and what we will do is just start out and let you give 
your testimony. We have a series of votes that could be called 
any time during this process unfortunately. What we will have 
to do is recess and then come back. The way the timers work is 
basically you have five minutes. Then there is a one-minute 
warning on the yellow and then it goes to red.
    Don't worry about it too much. If you have something to 
say, please say it. I do worry a little bit about our time 
crunch. I want to try to get everybody in before we have to 
break for votes. We will start out with Mr. McCracken. Thank 
you for being here. I appreciate it. Look forward to hearing 
you.

     STATEMENT OF TODD MCCRACKEN, NATIONAL SMALL BUSINESS 
                          ASSOCIATION

    Mr. McCracken. Thank you, Mr. Chairman. It is good to be 
here today. Again, my name is Todd McCracken and I am the 
president of the National Small Business Association. We 
represent small businesses across the country now for almost 70 
years. We are the oldest national small business advocacy 
association.
    We have been very active in the field of tax policy and we 
were particularly excited when this Commission was appointed 
because our top priority is to fundamentally reform the tax 
system of this country. It has a profound negative impact. A 
lot of what we heard today is true so I won't go into all that 
again.
    My written testimony, which I would ask to be submitted for 
the record, details a number of the key proposals of the Tax 
Reform Commission's recommendations and what we believe their 
impact would be on the small business community. I don't have 
time to go into all of those today but I would be happy to take 
questions on them when I am finished.
    I would like instead to focus on a couple of key areas 
where I think there are some recommendations that the panel 
made that would make a pretty profound difference to the small 
business community in the near term even in lieu of the 
fundamental reform we think is so vitally necessary.This really 
does get at those areas where the tax code has a very profound 
impact on decisions, on the lives of people. That is really 
what we need to begin the business of doing.
    First I would like to address the area of health insurance. 
I mean, we are very pleased that the Commission has recommended 
frankly both that there be a limit on the tax exclusion that 
health insurance receives today from employers. But also that 
all individuals receive equitable treatment in the tax when it 
comes to health insurance.
    In the small business community today, as I am sure you 
know, half of all small companies can't afford to provide 
health insurance to their employees right now. They do not 
receive health insurance. That extends to many of the business 
owners themselves. This very fact that many of these millions 
of people are out looking for individual coverage and finding 
out that, ``Guess what? I have to pay taxes on every nickel of 
that health insurance premium,'' is a profound inequity in our 
tax code. It is also regressive, I might add.
    The panel's recommendations would fundamentally alter that 
and we think that would be a great step forward. I would also 
add, though, we often forget about the payroll tax when we are 
talking about that. We think that it is also important that 
health insurance for people who don't get it through an 
employer also be exempt from payroll taxes. That would be taken 
care of for the self-employed through some legislation that is 
also before the Congress. We would recommend you support that.
    The second thing I would like to address is the area of 
retirement savings and pensions. This is another area where 
there is a profound inequity in the current code between small 
businesses and individuals and those who work for large 
companies. The 401(k) system that we have today has worked 
extremely well for most individuals who work for very large 
companies because of the substantial regulatory burdens that 
are within that system can be spread across large numbers of 
employees and there are still substantial savings for everyone.
    In the very small businesses the cost of setting up and 
running one of these plans is enormous. It simply does not make 
financial sense for the smallest companies to have a 
traditional 401(k) plan. Therefore, they don't. Fewer than 25 
percent of small businesses have a retirement plan for their 
employees. So what is available to those employees to save on 
their own? Well, not much frankly. They are largely left out of 
the retirement saving system that our country has devised.
    Fortunately the Commission has put forth a number of 
recommendations that would really not totally eliminate this 
disparity but make it much smaller. We greatly applaud them for 
that. I think this is an area, again, where the Congress can 
take some action in the relative near term that I think can be 
bipartisan and make a big difference in the lives not only of 
millions of small businesses but also their employees.
    I would like to end, though, on I guess a negative note. 
Our only big disappointment in the recommendations was that 
they did not choose ultimately to tackle big reform, 
fundamental reform. We do believe that a move to a sales tax is 
hands down the best move not only for the small business 
community but the nation overall. We had wished it would get a 
lot more attention and, frankly, a more equitable reporting in 
the final report of the Commission.
    With that said, we think there is a lot to be said for what 
actually is in the report and the adoption of many of these 
proposals would greatly improve the good we have now. Thank you 
very much.
    [Mr. McCracken's testimony may be found in the appendix.]
    Mr. Graves. Thank you, Mr. McCracken.
    Dr. Mitchell

     STATEMENT OF DR. DANIEL MITCHELL, PH.D., THE HERITAGE 
                           FOUNDATION

    Mr. Mitchell. Thank you very much, Mr. Chairman. With your 
permission, I'll submit my statement for the record and then 
touch on a few of the highlights. What I would like to do is 
talk about some of the economic principles that I think the Tax 
Reform Panel did a good job of outlining and addressing. Even 
if perhaps the final recommendations were not as aggressive as 
I would have preferred, I thought they did a very good job in 
focusing on both the need to have low marginal tax rates and 
the need to reduce the level of double taxation of the current 
system.
    A lot of policy makers have a very good understanding of 
the economics of taxation when they are talking about, say, 
tobacco taxes. We have very high tobacco taxes, most state 
governments, a lot of local governments, and those taxes are 
explicitly put in because policy makers say if we put the tax 
higher, we will discourage people from smoking.
    Now whether the Government should be trying to do that, 
that is a separate matter but their economic analysis is 
absolutely correct. The higher the tax rate the more you are 
discouraging something that is being taxed. Even though they 
didn't recommend big sweeping tax rate reductions, they pointed 
out that marginal tax rates on work, saving, investment, 
entrepreneurship and risk taking have negative economic 
affects.
    Then they also, and here is where they were more aggressive 
and I think did a sterling job, they talked about the damage of 
double taxation. By that I am referring to the fact that within 
our current tax system it is possible for a single dollar of 
income to be cycled through the tax code several times.
    Particularly if you are saving and investing between the 
capital gains tax, the corporate income tax, the personal 
income tax, the death tax you actually have very high effective 
marginal tax rates on saving and investment which, as the panel 
pointed out in their analysis, it is rather self-defeating 
since every economic theory, I mean, even the Socialist and the 
Marxists, they would all agree that savings and investment, 
capital formation, that is the key to long-term economic 
growth.
    If we could reduce those levels of double taxation which, 
of course, most of the various fundamental tax reform plans 
that is one of their key features, we will get more saving and 
investment, more capital formation which ultimately, of course, 
translates into more productivity for workers and more 
productive workers are better paid workers.
    So a low marginal tax rate, getting rid of double taxation, 
those are two of the key principles, as well as, of course, we 
want to get the Government out of the sort of back door 
industrial policy through the tax system. It would be great to 
have fewer resources needed for tax compliance. The Tax 
Foundation just issued a recent report that there are $265 
billion of compliance cost for the current tax system. We have 
heard other figures that are a little bit lower.
    Who knows what is really right. A lot of it depends on how 
you value the time that individuals themselves spend on filling 
out their tax returns. There are costs and those costs are very 
substantial. Those are costs completely independent of the 
economic costs, costs that are completely independent of the 
amount of money you are actually sending to Washington.
    If we want to make sure our resources are more effectively 
utilized, if we want to make sure that our economy is as 
competitive as possible and we are worried about competing with 
China and India, not to mention our traditional trading 
partners, we live in a globalized economy where factories can 
be built in different places, jobs can be out-sourced, we don't 
want to have tax policy in effect being some sort of red flag 
or obstacle to job creation and entrepreneurship and economic 
activity inside the U.S.
    Especially given the fact that we are seeing so much tax 
reform, so much tax rate reduction in so many countries around 
the world. We have literally gotten to the point now where 
every single European country, even ones we would consider 
welfare states like France and Sweden, they now have lower 
corporate tax rates than the U.S. Other countries are beginning 
to catch up and try to move tax policy in the right direction 
and I worry that our system might just be so high bound.
    I mean, we have 96 years now of accumulated provisions in 
the tax system and the thought of simplification combined with 
the lower tax rates and the reductions in double taxation that 
we have in the current system I think could yield very, very 
immense benefits. Ultimately, we think that the prism through 
which tax policy should be judged is some form of low single-
rate consumption based tax system. That could be a FairTax as 
some of the other panelists support.
    It could be a flat tax which I think might be more 
reasonable especially since we've seen so many countries like 
the former Soviet bloc, adopt such a system, but as long as we 
are moving in the right direction. Many of the tax cuts that we 
saw in 2001 and 2003 do move in the right direction so 
incremental changes. We don't want to make the perfect the 
enemy of the good.
    There are lots of incremental reforms and that is really 
what we saw in the tax reform advisory panel, a list of 
incremental reforms that would make our tax system better, more 
competitive, incremental reforms that would try to at least 
reduce the interference of the tax code and decision making. We 
want people in our economy to make decisions based on what is 
going to create the most wealth, the most jobs, what is going 
to earn the most income.
    Those are the criteria that should determine our economic 
decisions, not what is going to be the best in terms of 
reducing my tax liability, what is going to make me eligible 
for some new tax provision. That is economic inefficiency. We 
have seen that countries that rely on Government planning you 
have much less economic efficiency, much lower levels of 
productivity. We do it through the tax code where some other 
countries did it through central planning but the ultimate 
result is the same.
    When decisions are based on the tax code or on the basis of 
political considerations instead of economic considerations, 
there will be a loss in economic efficiency. The tax reform 
panel, I think, pointed the direction that we need to go. They 
maybe didn't go as far as I want to but I hardily applaud that 
direction that they did suggest. Thank you.
    [Dr. Mitchell's testimony may be found in the appendix.]
    Mr. Graves. Next we have Mr. David Burton.

     STATEMENT OF DAVID BURTON, AMERICANS FOR FAIR TAXATION

    Mr. Burton. Thank you. I am glad to be here today, Mr. 
Chairman, and members of the Committee. I am a partner in the 
Argus Group and representing Americans for Fair Taxation. I, 
too, would ask that my statement be made part of the record and 
also say that the statement basically walks through a series of 
12 criteria about what constitutes good tax reform and analyzes 
five different plans: the FairTax, which is a national sales 
tax proposal, the flat tax, a business transfer tax, and the 
two main proposals offered by the panel. Then it summarizes it 
in a report card which some people might find of interest.
    But I'm going to summarize that very quickly and talk about 
five things about the FairTax and then a number of things that 
people mentioned in their questions. The FairTax would be 
extraordinarily pro-growth. Demos pro-growth proposal being 
considered by the Congress. It is closely followed by the flat 
tax and the business transfer tax which are virtually the same.
    They are all three consumption taxes. They are all three 
neutral toward savings and investment. They are all three 
dramatically reduce marginal tax rates. They will result in 
higher levels of employment, higher real wage rates, higher 
capital, higher investment, higher savings, higher 
productivity, and greater competitiveness. The FairTax and the 
business transfer tax differ from the flat tax in that they are 
destination principal consumption taxes.
    They for the first time would place American goods and 
foreign goods on an equal footing. Today the income tax 
basically plants a sign on our shores and says, ``You have to 
be an idiot if you make things here because we are going to tax 
you very heavily whether you are selling into the U.S. market 
or the foreign market. We are going to let foreign goods and 
services come into the U.S. free of any tax.''
    Sales taxes or business transfer taxes or value-added 
taxes, for that matter, the value-added tax being employed by 
every one of our major trading partners, are different. They 
tax foreign goods and U.S. goods alike. Therefore, they don't 
put their own industries at a competitive disadvantage. The 
advantage comes from replacing the income tax with the sales 
tax or with a BTT, not from the consumption tax itself. The 
consumption tax is neutral.
    A sales tax would be a radical simplification. Instead of 
the complex morass we've heard about all afternoon so far, 
basically businesses that are selling to consumers have to ask 
the question, ``How much did I sell to consumers this month at 
the end of the month?'' Consumers, people who are not in 
business, never have to file a tax return again in their life. 
It is hard to conceive of a simpler tax system. It is a tax 
system used in 45 states. It is not difficult to comply with. 
As small businesses what takes more time, their income tax or 
their sales tax return? It will always be the income tax 
return.
    The FairTax is fair and it is fair for two reasons. It 
untaxes the poor, includes a rebate equal to the sales tax rate 
times the poverty level so no household in America is going to 
pay sales tax on the basic necessities of life. It also taxes 
similarly situated people the same. It has one uniform rate. 
That has certain advantages in that you cannot play one class 
of taxpayer off against another. You raise the sales tax rate 
and you are going to raise it basically on a broad part of the 
public.
    There has been a lot of talk about evasion. The FairTax 
would reduce evasion. If you look at the literature there are 
two things that constitute the affect of evasion, the benefit 
from cheating and the likelihood of getting caught. The FairTax 
has the lowest possible marginal tax rates, and I'll get into 
that in a second. Also we would radically simplify the tax 
system and, therefore, if you hold enforcement resources 
constant you would increase the audit rate and the changes of 
getting caught would go up.
    It is ridiculous the rates that have been thrown around by 
a number of detractors of the sales tax including the Treasury 
Department. The Treasury Department has not released how they 
came up with their numbers, Congressman. We have asked for them 
and so have at least a number of Senators and Congressmen I 
know of. I wonder why? I would be interesting to see how they 
did their arithmetic.
    The bottom line is consumption is 85 percent of the GDP. 
The revenues we are replacing are about 15 percent of GDP. 
There is no way that replacing revenues that are 15 percent of 
GDP and they have a tax base that is roughly 85 percent of GDP 
get anywhere near the kind of numbers that our detractors are 
talking about. We have a lot of very fancy economists that go 
to a lot of fancy universities that have produced studies that 
show the rate is approximately 23 percent which is what it is 
in the legislation.
    What we hear constantly from detractors is that no country 
has tried this. We also hear constantly from detractors lots of 
countries have tried this and it has never worked. Well, it 
can't be both ways. The bottom line is that a couple countries 
tried it and it worked but because those countries were in the 
European Union they were forced to change to that under EU 
directives.
    A couple of quick points on the panel's report. They talk 
about expensing. Well, the growth and investment plan expenses 
and it is the best of the two proposals. The small business 
expensing provisions in the income tax plan are a real 
retrenchment because businesses that have a million dollars in 
gross receipts are very micro-businesses. Most restaurants, 
most dry cleaners will have more than that and they are only 
able to expense if they have under a million dollars. 
Otherwise, they have to go to depreciation.
    Plan B in their proposal is a consumption tax but it adds 
on a 15 percent tax on dividends, interest, and capital gains 
so it is a consumption tax proposal and in that sense it is 
constructive.
    The last thing I wanted to mention was we once co-authored 
a report for the National Small Business Association that 
details all the ways the current tax system is biased against 
small businesses. I would be glad to go into that. The panel 
does absolutely nothing to rectify a single one of those 
things. The law remains biased against small businesses in a 
host of different ways.
    Lastly, Congressman Barrow mentioned ocean front real 
estate he was selling to sales tax supporters and I would be 
glad to buy it if you would be willing to send me the deeds. 
Thank you very much.
    [Mr. Burton's testimony may be found in the appendix.]
    Mr. Graves. Thank you, Mr. Burton.
    Next we are going to have Mr. Jim Hausman who has a 
business there in St. Joe. Looking forward to hearing from him.

STATEMENT OF JIM HAUSMAN, HAUSMAN METAL WORKS AND ROOFING, INC.

    Mr. Hausman. Thank you for the opportunity to be here 
today. When I was asked to testify before you, my first thought 
was my distaste for speaking in public. However, I do have a 
passion to see our tax system reformed and realizing I would 
never have an opportunity such as this again, I jumped at the 
chance.
    As an owner or part-owner of several small business the 
amount of time and money spent dealing with our present tax 
system is extremely frustrating and time consuming. For this 
discussion I will relate how this issue impacts the largest of 
these companies which is a sheet metal and roofing enterprise 
employing on average 45 to 50 employees with annual billings of 
$6 to 7 million.
    First and foremost, I would like to expound on the estate 
tax which I feel is a major detriment to small business and 
family farms continuing into the second generation. Our firm 
was fortunate. In the late '80s and early '90s we spent six 
years transferring the stock in our company from my father and 
my uncle to their heirs which included my cousins, my brother, 
and me.
    We paid approximately $110,000 to accountants, attorneys, 
and insurance companies to complete the transfer. The money 
spent to accomplish this could have been spent on trucks, new 
equipment, salaries, and perhaps even a bit of profit which is 
not a dirty word. We were fortunate to have transacted this 
transfer in a timely manner as a year later my uncle passed 
away. Our mission was accomplished but how many firms and farms 
are not so lucky?
    Now ten years later we find our firm paying exurbanite fees 
every year for insurance on the four principals in order that 
our company might continue to operate if one of the four were 
to die or become incapacitated. This money could be better 
spent updating our facility. Ours is a small company. We jump 
through the hoops and pay the price to do our transfer legally 
but I truly believe this tax needs a death of its own.
    Corporate taxes are next on my list. If GM or Ford are 
profitable at the end of the year they have to pay corporate 
taxes. If it is paid out of profits, then shareholders are paid 
less in dividends. My question is who pays the tax? The answer, 
the shareholders, not the corporation. The next year if they 
raise their prices on their vehicles to cover the cost of the 
tax, then the consumer pays. If these companies cut labor or 
benefit cost, the employee suffers.
    Our small company is no different. We collect taxes and if 
we are profitable at the end of the year, it comes off the 
bottom line which decreases dividends and/or bonuses to our 
owners and to the employees. In this scenario I pay one-fourth 
of our corporate taxes. Our firm does not buy new trucks or 
equipment unless our accountants are consulted. What a waste of 
time and money. We should be able to make decisions on these 
purchases on their merits, not the tax consequences.
    Then comes year end. Our firm spends hundreds of hours in 
December verifying inventory, balancing accounts, projecting 
billings for the last two weeks of the year and estimating how 
many hours our work force will work the last couple weeks of 
the year, all this to project a bottom line, this just to get 
ready for the accountant to come in. Now we are spending more 
time and money sitting down with the accountants to get close 
to a workable number.
    This year we projected our year-end numbers on December 
20th with no allowance for overtime. We did not anticipate 
overtime work that needed to be done on Saturday, December 24th 
or Monday December 26th which, of course, impacted our 
projections greatly. Therefore, we closed our operation on 
Friday, December 30th so we could hit our projected number. 
Forty-one employees, eight hours each at $29 an hour for one 
day averages $9,512 we didn't put into our economy that one 
day.
    Withholding taxes. Federal, state, FICA, Social Security, 
and FICA Medicare. Okay, I understand this is not the venue for 
state withholding. Let me start by saying I hate withholding 
anything out of our employee's paychecks. Our firm pays sheet 
metal workers approximately $30 per hour and then we withhold 
federal, state, Social Security, dues, 40l(k), and sometimes 
garnishments and child support.
    We should all be responsible for payment of our own bills 
but when it is withheld it is as if they have never paid it. A 
true revolt to unions and the IRS would happen the first week 
that all pay was put on each employer's check. Then each 
employee would be responsible for writing their checks for 
these items just as he does his groceries and his utilities. I 
believe you might receive a few calls here in Washington, D.C.
    Ladies and gentlemen, our tax system is unfair and 
burdensome. I used to feel that a flat tax was the answer but 
as I investigated more deeply, I feel FairTax to be a better 
way to go. A national sales tax on all items paid by everyone 
would be the fairest for all people of all socioeconomic 
status.
    It would do away with all taxes previously described and 
truly stimulate our economy as never before. Please be bold. 
Don't allow tweaking the present system which gives breaks to 
and punishes a few every time it is changed which happens so 
often good accountants can't keep up with the changes. We need 
a drastic change to the system. Thank you very much.
    [Mr. Hausman's testimony may be found in the appendix.]
    Mr. Graves. Thanks, Mr. Hausman.
    Next Mr. Andy Loftis will speak to us. He comes to us from 
Georgia.

        STATEMENT OF ANDY LOFTIS, KELLER WILLIAMS REALTY

    Mr. Loftis. Thank you, Mr. Chair. My name is Andy Loftis. I 
am an owner of a franchise of Keller-Williams Realty based in 
Athens. Currently our company employs about 40 sales agents as 
independent contractors. We engage in both residential and 
commercial sales.
    I offer my testimony today as a constituent of Mr. Barrows 
and also as a member of the National Association of Realtors. 
My oral and written statements, which I ask to be received into 
the record, are presented on behalf of NAR and its 1.2 million 
members.
    Real estate brokers remain decentralized local based 
business. Realtor interest and tax reform would be the same as 
any other small business and those interests include having top 
notch office space with good locations. The President's 
Advisory Panel on Tax Reform has made a series of 
recommendations that would if enacted be disastrous. The 
nation's current 69 percent home ownership rate is the highest 
in our history. We are puzzled that law makers would even 
consider, much less implement, changes that would undermine the 
remarkable achievement that we have accomplished.
    Are there challenges facing the real estate industry? 
Absolutely. Would those challenges go away if Congress were to 
reduce or eliminate long-standing straightforward tax rules 
associated with real estate ownership? No. Reducing or 
eliminating the tax benefits that apply to existing property 
would cause cataclysmic disruption and would be a breach of 
trust for families that have relied on the current law.
    Our written comments list the panel's recommendations that 
would affect real estate and make a number of arguments about 
why those recommendations are flawed. In my brief remarks I 
would like to focus on the role of real estate, particularly 
home ownership as the cornerstone of the savings and retirement 
plan for many, if not most, of my clients in Athens as well as 
around the United States.
    We want you to understand that real estate ownership is 
about the future. It is not about the tax system. The tax rules 
for real estate have been in place for more than 70 years. When 
the tax reform panel talks about them, the discussion sounds 
like real estate tax benefits are something for a chosen few. 
They are not.
    Economists and possibly even the panel forget that the wish 
to own property has been part of the American culture since 
Jamestown and Plymouth Rock. The billions of tax dollars the 
academics focus on are in reality the individual savings of 
families, each saving and hoping for more, reinvesting, and 
eventually retiring and possibly living off the appreciation 
from their real estate.
    When I start with a first-time home buyer in Athens I am 
hoping to see that person and set them on a course that by the 
time they bought homes and raised families they will have 
something tangible that is theirs and theirs alone. I work with 
a system sometimes where we take a first-time home buyer and we 
try to set them down and counsel them and show them that if 
they were to invest in their mortgage and pay and move probably 
three to four times given the rate of appreciation that has 
happened in our area, then they may be in a home free and clear 
possibly a period between 15 and 20 years versus a 30-year 
mortgage that sometimes happens.
    The Internal Revenue Code is remarkably complex but not 
when it comes to home ownership. A homeowner with a mortgage 
receives a form 1098 from the IRS that comes from the lender 
that specifies to the penny how much interest was paid. The 
individual transfers that number to the appropriate line on the 
tax return and that is it. No schedules, no work sheets, no 
special knowledge, no appraisals are needed. Real estate 
ownership does not contribute to the tax system complexity. If 
one were designing the tax system from scratch, that system 
would almost certainly look very different from the one we have 
today but we believe the only viable tax system would continue 
to nurture home ownership.
    Because the current tax rules affecting real estate are not 
complex, we see no apparent justification for revising them. 
Some critics point out that only about a third of taxpayers 
itemize their deduction. These arguments ignore the reality 
that overtime far more than one-third of taxpayers receive the 
benefits of itemizing. Mortgages get paid off, other new 
homeowners enter the market, and families' tax circumstances 
change.
    Arguably, the standard deduction gives non-itemizing 
taxpayers a better answer than utilizing the mortgage interest 
deduction so it is not clear that the non-itemizers have been 
put at a disadvantage. As a general rule, individuals itemize 
only when their total deductions exceed the standard deduction, 
currently $10,000 on a joint return.Taxpayers who use the 
standard deduction thus receive a larger tax reduction than 
they would if they itemized.
    Critics claim that the mortgage interest deduction operates 
as an inducement for people to buy homes. My one million plus 
colleagues can confirm that people do not buy homes because of 
the mortgage interest deduction. They buy homes to satisfy many 
social and family and personal goals. The mortgage interest 
deduction does, however, facilitate home ownership because it 
reduces the carrying cost of that ownership.
    Some economists believe that if less money were invested in 
real estate more money would be invested in productive assets 
such as stocks and equipment. We are aware of no evidence 
showing that owning stocks and bonds can provide the foundation 
for community life, lead to development of quality public 
schools, lower crime rates, or contribute to the tax base of 
the local government.
    At least one of the panelists stated that if families 
bought smaller houses they might buy more stock. We do not 
believe it is the function of the tax system to determine the 
size of a house for any family or its method for saving.
    When former Treasury Secretary James A. Baker testified 
before the President's advisory panel on tax reform in 2005 he 
made this observation about tax reform the mortgage interest 
deduction. If you are going to reform the current income tax 
code, you will not get there if you think you are going to be 
able to eliminate this deduction. We could not agree more.
    Secretary Baker served under President Reagan at Treasury 
during the arduous deliberations over what became after nearly 
two years of debate the tax reform of 1986. His observations 
about tax reform and mortgage interest are based on experience. 
We underscore them for you. Thank you.
    [Mr. Loftis' testimony may be found in the appendix.]
    Mr. Graves. We do have a vote. It is going to take a little 
while to go through the vote. I want to go ahead and hear from 
Mr. Burman, if you would, and then we will recess and come back 
if anybody has any questions at that point. I understand if you 
do have to leave but I want to go ahead and let Mr. Burman get 
started on his testimony.

          STATEMENT OF LEONARD BURMAN, URBAN INSTITUTE

    Mr. Burman. Thank you, Mr. Chairman. I was afraid I was 
going to get bumped. I have a lot of say about the Tax Reform 
Panel's proposals. Actually, I have a lot to say about things 
that have been said this afternoon but I seem to be the one 
skeptic on this panel about National Retail Sales Tax so, given 
time constraints, I think that is what I would like to focus on 
in my oral remarks.
    The President's panel rejected a National Retail Sales Tax 
and, in my view, they did it for a good reason. The National 
Retail Sales Tax called a FairTax by its proponents, is a 
single flat rate tax applied to an extremely comprehensive base 
of final retail sales. To offset the regressivity of a sales 
tax every household will receive cash payments from the 
Government equal to the sales tax owned on a poverty-level 
income.
    Advocates claim that all federal taxes could be replaced by 
a single 23 percent flat-rate sales tax on a tax inclusive 
basis, 30 percent if you measure it the way state sales taxes 
are measured. But this low rate implicity assumes that all 
federal, state, and local government expenditures are in the 
tax base and that nominal government spending doesn't change.In 
other words, the FairTax proponents' math only works if real 
after-tax government purchases are cut by 23 percent across the 
board.
    The state and local government are exempt from the tax and 
Federal Government spending doesn't change. The 23 percent 
national retail sales tax would increase the deficit by $268 
billion in 2005 and almost $600 billion in 2010 compared with 
current law. That math is spelled out in great detail in an 
article by Bill Gale that I cite in my testimony. I am sure 
that is the same kind of logic that was used by the Treasury 
Department. Put differently, the revenue-neutral tax rate would 
be 31 percent and that is under the implausibly optimistic 
assumptions of no avoidance, evasion, or erosion of the tax 
base.
    In addition, the National Retail Sales Tax would undermine 
state tax systems. If there were no federal income tax it would 
be very difficult to maintain a state income tax. States 
benefit from the IRS' information collection and auditing 
procedures which would no longer exist. The compliance burden 
of state income taxes would be very high relative to the 
comparatively small amount of revenue collected by the states. 
Taxpayers would pressure state lawmakers to eliminate their 
income tax. Without a state income tax states would have to 
increase their own sales tax rates significantly so you are 
looking at combined state and federal rates are quite high.
    The advocates assume zero evasion and that is implausible. 
At the rates necessary to finance federal, state, and local 
governments, evasion would be rampant. The evasion would hurt 
compliant taxpayers and require higher tax rates. It would also 
trickle down to the states, which would lose a significant 
portion of their own tax bases. As a result, the required 
combined federal and state tax rates would be exorbitant. As a 
practical matter, government at all levels would have to be 
much smaller.
    Sales tax advocates also assume that almost all forms of 
spending will be included in the retail sales tax base 
including new homes, medical expenses, and financial services. 
Can policy makers really justify tax rates as high as 80 
percent on insulin? Would such a tax on new home sales be 
politically feasible? If it isn't, the tax rates would have to 
be higher still.
    The Tax Reform Panel concluded that the Retail Sales Tax 
Rates would have to be between 49 and 89 percent on a tax-
exclusive basis assuming a moderate amount of evasion. Those 
conclusions are similar to ones that were raised by the Joint 
Committee on Taxation and by Bill Gale as I mentioned earlier. 
On top of those high federal rates, state sales tax rates would 
have to be quite high as well.
    The Panel report also shows that adopting the National 
Retail Sales Tax would shift the tax burden significantly onto 
the middle class. Low-income people would pay lower taxes than 
under current law because of the cash subsidy or the 
``prebate.`` High-income people would pay much less because 
consumption is such a small share of their income. Thus, to 
raise the same amount of revenue, taxes would have to increase 
dramatically on the middle class.
    The proposal would hurt small businesses in my view. The 
Tax Reform Panel sites a well-regarded study of experience in 
Washington State which found the compliance cost for small 
firms were six and a half times as large as those for large 
firms. The rampant evasion would also hurt legitimate 
businesses which would suffer relative to the growing 
underground economy. It would undermine confidence in the 
fairness of the tax system and that would fuel still more 
evasion.
    Enormous transition problems can also be expected as 
explained in my written testimony. To be clear, many of these 
problems are unique to the National Retail Sales Tax. Other 
forms of consumption tax such as a VAT, flat tax or X-tax would 
likely be no more difficult to administer than the current 
income tax and would not undermine compliance with state sales 
taxes. They raise other issues but they could be administered.
    The National Retail Sales Tax is a uniquely flawed and 
unworkable solution. It is no wonder that no developed country 
has ever try this radical experiment. Thank you. I would be 
happy to answer your questions.
    [Mr. Burman's testimony may be found in the appendix.]
    Mr. Graves. I wish we could. I apologize for the votes. 
Unfortunately, I don't get to set the schedule. We always have 
to work around it. I understand, too, that there are a couple 
of people that have some flights to catch so we are going to go 
ahead and end the hearing at this point which is unfortunate 
because I have a whole bunch of questions I would like to ask. 
I have been doing taxation town hall meetings for the last 
month and I have a lot of questions that the constituents 
raised.
    They are good questions. I would just like to know what 
some of the alternatives are like a flat, like a FairTax or a 
consumption tax. Unfortunately, again, because of the late 
hours we are not going to be able to do that. I apologize but I 
do have some things I might send to you. If you could get a 
written response back to me, I would appreciate it. Thank you 
all.
    [Whereupon, at 4:41 p.m. the Joint Subcommittee adjourned.]


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