[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]



 
                     HOW THE TAX CODE'S BURDENS ON
                  INDIVIDUALS AND FAMILIES DEMONSTRATE
                 THE NEED FOR COMPREHENSIVE TAX REFORM

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

                                HEARING

                               before the

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

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 13, 2011

                               __________

                           Serial No. 112-09

                               __________

         Printed for the use of the Committee on Ways and Means



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                      COMMITTEE ON WAYS AND MEANS

                     DAVE CAMP, Michigan, Chairman

WALLY HERGER, California             SANDER M. LEVIN, Michigan
SAM JOHNSON, Texas                   CHARLES B. RANGEL, New York
KEVIN BRADY, Texas                   FORTNEY PETE STARK, California
PAUL RYAN, Wisconsin                 JIM MCDERMOTT, Washington
DEVIN NUNES, California              JOHN LEWIS, Georgia
PATRICK J. TIBERI, Ohio              RICHARD E. NEAL, Massachusetts
GEOFF DAVIS, Kentucky                XAVIER BECERRA, California
DAVID G. REICHERT, Washington        LLOYD DOGGETT, Texas
CHARLES W. BOUSTANY, JR., Louisiana  MIKE THOMPSON, California
DEAN HELLER, Nevada                  JOHN B. LARSON, Connecticut
PETER J. ROSKAM, Illinois            EARL BLUMENAUER, Oregon
JIM GERLACH, Pennsylvania            RON KIND, Wisconsin
TOM PRICE, Georgia                   BILL PASCRELL, JR., New Jersey
VERN BUCHANAN, Florida               SHELLEY BERKLEY, Nevada
ADRIAN SMITH, Nebraska               JOSEPH CROWLEY, New York
AARON SCHOCK, Illinois
LYNN JENKINS, Kansas
ERIK PAULSEN, Minnesota
KENNY MARCHANT, Texas
RICK BERG, North Dakota
DIANE BLACK, Tennessee

                       Jon Traub, Staff Director

                  Janice Mays, Minority Staff Director


                            C O N T E N T S

                               __________
                                                                   Page

Advisory of April 13, 2011, announcing the hearing...............     2

                               WITNESSES

Alan Viard, Resident Scholar, American Enterprise Institute......     6
Annette Nellen, CPA, Director, Masters of Science in Taxation 
  Program, San Jose State University.............................    18
Mark E. Johannessen, CFP, Managing Director, Harris--SBSB........    32
Neil H. Buchanan, Associate Professor of Law, The George 
  Washington University..........................................    43

                        QUESTIONS FOR THE RECORD

The Honorable Mr. Pascrell.......................................    84
Response: Mr. Buchanan...........................................    85

                       SUBMISSIONS FOR THE RECORD

Jay Wiedwald.....................................................    88
Grande Harvest Wines.............................................    90
Marc Nelson Oil Products.........................................    93
Sukup Manufacturing..............................................    96
U.S. Chamber of Commerce.........................................    99


                     How the Tax Code's Burdens on
                  Individuals and Families Demonstrate
                 the Need for Comprehensive Tax Reform

                              ----------                              


                       WEDNESDAY, APRIL 13, 2011

                     U.S. House of Representatives,
                               Committee on Ways and Means,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:02 a.m., in 
Room 1100, Longworth House Office Building, the Honorable Dave 
Camp [chairman of the committee] presiding.
    [The advisory of the hearing follows:]

HEARING ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

                   Camp Announces Hearing on How the

                 Tax Code's Burdens on Individuals and

       Families Demonstrate the Need for Comprehensive Tax Reform

April 06, 2011

    Congressman Dave Camp (R-MI), Chairman of the Committee on Ways and 
Means, today announced that the Committee will hold a hearing on the 
special burdens that the Tax Code imposes on individual taxpayers and 
families and on the need for comprehensive tax reform to address these 
problems. The hearing will take place on Wednesday, April 13, 2011, in 
Room 1100 of the Longworth House Office Building, beginning at 10:00 
A.M.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. However, 
any individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing. A list of invited 
witnesses will follow.
      

BACKGROUND:

      
    As mid-April approaches each year, individuals and households 
across the country face the daunting task of fulfilling the one civic 
duty that touches more Americans than any other--filing accurate and 
timely Federal income tax returns. While many criticize the individual 
income tax system primarily for imposing too large a financial burden 
on taxpayers in terms of dollars owed to the government, individual 
taxpayers struggle just as much with the Tax Code's mounting complexity 
and uncertainty. According to recent testimony from the National 
Taxpayer Advocate, the complexity of the current tax system is the 
single most serious problem facing taxpayers today, leading nearly 90 
percent of Americans either to pay a professional to prepare their tax 
returns or to purchase tax preparation software to help them file their 
own returns. Indeed, over the past 25 years, the Tax Code has 
increasingly come to feature hidden marginal tax rates and has seen a 
remarkable proliferation of redundant and confusing tax subsidies that, 
in many cases, may not be fully achieving their intended objectives. 
Moreover, in recent years temporary tax rates and other temporary 
provisions have made it increasingly challenging for families to plan 
their personal finances.
      
    In announcing this hearing, Chairman Camp said, ``As the deadline 
for filing individual tax returns approaches, the time for simplifying 
and stabilizing the Tax Code for individuals and families is also upon 
us. With so many Americans struggling to meet their tax compliance 
responsibilities, Congress and the President need to work together to 
achieve a tax system that is fair, simple, and efficient. While some 
seem to prefer a `business-only' approach to tax reform, we owe it to 
the hard-working taxpayers we represent to ensure that they are not 
left out of this discussion. This hearing will help the Committee 
better understand the many problems that plague our tax system as it 
affects individuals and families across the country.''
      

FOCUS OF THE HEARING:

      
    The hearing will examine some of the difficulties that individuals 
and families face in navigating the current Tax Code, including both 
compliance burdens and challenges faced in making long-term financial 
decisions when confronted with confusing, overlapping, and frequently 
temporary tax preferences.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
written comments for the hearing record must follow the appropriate 
link on the hearing page of the Committee website and complete the 
informational forms. From the Committee homepage, http://
waysandmeans.house.gov, select ``Hearings.'' Select the hearing for 
which you would like to submit, and click on the link entitled, ``Click 
here to provide a submission for the record.'' Once you have followed 
the online instructions, submit all requested information. ATTACH your 
submission as a Word document, in compliance with the formatting 
requirements listed below, by the close of business on Wednesday, April 
27, 2011. Finally, please note that due to the change in House mail 
policy, the U.S. Capitol Police will refuse sealed-package deliveries 
to all House Office Buildings. For questions, or if you encounter 
technical problems, please call (202) 225-3625 or (202) 225-2610.
      

FORMATTING REQUIREMENTS:

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

                                 

    Chairman CAMP. The committee will come to order for a 
hearing on how the Tax Code's burdens on individuals 
demonstrate the need for comprehensive tax reform.
    We meet today to continue our dialogue about what I hope 
will result in a bipartisan path forward to reform our federal 
income tax system. While there has been a lot of valuable 
discussion about the impediments the Tax Code creates for 
America's job creators, and we will certainly continue that 
discussion over the time ahead, today's hearing will focus on 
the burdens imposed by the current federal income tax system on 
individual taxpayers and families.
    Today's hearing is especially timely since each one of us 
likely knows a family that is racing to file their taxes before 
this year's April 18th deadline. And because of the thousands 
of amendments to the Tax Code enacted over the past quarter 
century, this race to the finish has become increasingly 
challenging over the years.
    And since the Tax Reform Act of 1986, the last 
comprehensive tax reform enacted by the Congress, the code has 
become a maze of increasingly complex credits, deductions, 
exclusions and exemptions.
    The challenges created by the Tax Code for job creators and 
families are rooted in a similar place. The Tax Code is too 
complex, too costly, and takes too much time to comply with. 
Whether it is the compliance with administrative burdens, or 
the impact of temporary and expiring tax provisions, today's 
Tax Code is hampering the ability of individuals and families 
to plan their finances with reasonable certainty.
    With nearly 4,500 changes in the last decade, 579 of them 
in 2010 alone, the code is too complex. Adding to that 
complexity is the fact that each Tax Code provision is a little 
bit like a cell. Each one has its own distinct features, 
characteristics, and life span. For example, over 200 federal 
tax provisions are scheduled to expire between 2010 and 2020. 
Whereas, in 1998, there were only 50 expiring provisions.
    And while 20 years ago, it was mostly businesses affected 
by the temporary nature of tax provisions, now families and 
individual taxpayers are held captive to the calendar. For 
example, tax rates on ordinary income and on investments, the 
amount of the child tax credit, the deductions for state sales 
taxes and college tuition, just to name a few, are all 
temporary in nature.
    Given the complexity created by the ever-changing Tax Code, 
it is easy to understand why compliance with it has become too 
costly for American families. According to the National 
Taxpayer Advocate, in 2008 alone taxpayers spent $163 billion 
complying with the individual and corporate income tax rules--
that's billion, with a ``b.'' These costs impede the ability of 
individuals and families to put together their household 
budgets.
    And since provisions may change from one tax filing season 
to the next, it is no wonder that almost 9 out of 10 families 
either hire tax preparers or purchase software in order to 
calculate their taxes. This is a sad reminder that we now have 
a code that can only be managed if you happen to be someone who 
can hire an expert to deal with its challenges.
    And not only is the Tax Code too complex and too costly, it 
takes too much time to comply with. Navigating through the 
tangled web of the Tax Code has resulted in taxpayers spending 
over six billion hours annually to comply with the code. Ask 
any family, and I am sure they will have a long list of better 
ways they could be spending their time.
    Although it will require a lot of hard work on our part to 
achieve consensus on a solution, I think it is safe to say that 
we all agree that the current Tax Code is broken. We can do 
better. The members of the Joint Committee on Taxation had a 
very positive conversation with two key architects of the Tax 
Reform Act of 1986 during last week's JCT roundtable 
discussion: Secretary James Baker and Congressman Dick 
Gephardt. Their message was clear. It will take the leadership 
of this Congress and the White House to get this done.
    The American people deserve a Tax Code that is responsible 
and responsive to their needs. We can do our part by working 
together to make sure that this one is fairer and simpler for 
all families. And I look forward to hearing from our witnesses 
today.
    And with that, I yield to Mr. Levin for his opening 
statement.
    Mr. LEVIN. Thank you very much, Mr. Chairman. The 
announcement for this hearing stated that, ``Congress and the 
President need to work together to achieve a tax system that is 
fair, simple, and efficient. While some seem to prefer a 
business-only approach to tax reform, we owe it to the hard-
working taxpayers we represent to ensure that they are not left 
out of this discussion.'' I very much agree with that.
    The kind of tax reform proposed in the Republican budget 
would reduce taxes for the very highest earners, and increase 
the burden on working families. These reductions for the 
highest earners come on top of the nearly $700 billion in 
additional tax cuts the Republican budget assumes for taxpayers 
with income above $250,000, almost 80 percent of which go to 
people making more than $1 million.
    As we consider complexity in the individual tax system, we 
must be sensitive to the reasons provisions were enacted in the 
first place. Our goal should be to strengthen provisions that 
help working families send their kids to college, save for 
retirement, or simply make ends meet.
    The Republican budget indicates that the individual and 
corporate rates will be reduced from 35 to 25 percent, but 
leaves it up to this committee, the Ways and Means Committee, 
to fill in the details. To do so in a deficit-neutral manner, 
some estimate that we would have to eliminate more than $2.9 
trillion worth of tax expenditures over the next decade.
    The Child Credit, Earned Income Tax Credit, American 
Opportunity Tax Credit, and retirement savings accounts are 
primarily middle and lower income provisions. The need for 
simplification cannot be used as a rationale for irrational 
inequity, or for undoing progress that helped foster the growth 
of the middle class in this country.
    So I look forward, Mr. Chairman and colleagues, to 
continuing this conversation, and hearing today's testimony, 
and I join in thanking all the witnesses for participating. I 
yield back.
    Chairman CAMP. All right. Thank you very much. We have four 
witnesses today: Alan Viard, resident scholar of the American 
Enterprise Institute in Washington, D.C.; Annette Nellen, CPA, 
director, masters of science in taxation program at San Jose 
State University in California; Mark Johannessen, a CFP 
managing director, Harris--SBSB, McLean, Virginia; and Neil 
Buchanan, associate professor of law, the George Washington 
University, Washington, D.C. Thank you all for being here.
    Under our rules, you each have five minutes. We have your 
written testimony. You each have five minutes to summarize your 
statement, whereupon, after the panel completes all of their 
testimony, we will go to Member questions.
    So, Mr. Viard, you may begin. You have five minutes.

    STATEMENT OF ALAN D. VIARD, RESIDENT SCHOLAR, AMERICAN 
             ENTERPRISE INSTITUTE, WASHINGTON, D.C.

    Mr. VIARD. Chairman Camp, Ranking Member Levin, Members of 
the Committee, it is an honor to be here today to testify about 
the Tax Code's burdens on families and individuals. Let me note 
that the views I express today are my own, and do not represent 
the views of the American Enterprise Institute, or any other 
person or organization.
    In keeping with the theme of this hearing, I will focus on 
the complexity affecting individual taxpayers with non-business 
income. Of course, as the members of this committee are aware, 
there is also a significant degree of complexity affecting tax 
returns that contain business income, and that includes not 
only the corporate income tax returns that C corporations file, 
but also the individual income tax returns filed by owners of 
pass-through firms.
    But I will not discuss those today. Nor is there time to 
discuss all of the provisions that add to the complexity of the 
code. Mr. Chairman, you mentioned the billions of hours that 
taxpayers spend on their returns. I will have to focus today on 
three specific areas: the needless complexity of the incentives 
for saving, education, and families in their current design; 
the proliferation of income-based phase-outs in the code; and 
the alternative minimum tax.
    And, as I will emphasize throughout my testimony, these 
problems can be addressed separately from such contentious 
issues as the appropriate level of revenue, the appropriate 
degree of progressivity in the Tax Code, or even the 
appropriate breadth or narrowness of the Tax Code.
    I believe that these issues should be addressed as part of 
comprehensive tax reform, if such reform is adopted, but should 
also be addressed separately, if comprehensive reform does not 
occur. And I think it's an opportunity for members of both 
parties to work together to eliminate this needless complexity.
    The first area that I want to examine is the complexity of 
the current tax incentives for saving, education, and children. 
As Ranking Member Levin mentioned, these provisions play 
important purposes in the Internal Revenue Code. But their 
current design today suffers from needless complexity that 
actually undermines their efficacy.
    These problems have been documented by such sources as the 
Joint Tax Committee, the National Taxpayer Advocate, and the 
2005 President's Advisory Panel on Federal Tax Reform. So I do 
not detail them here in my oral remarks. And even in my written 
testimony, I rely primarily upon the findings of those previous 
studies.
    Just to state the matter briefly, the current tax system 
provides more than 20 tax-preferred savings accounts and plans, 
multiple tax preferences designed to encourage education, and a 
wide array of incentives for families and children, including 
both a credit and a deduction for the children in typical 
households. The National Taxpayer Advocate, the President's 
Advisory Panel, and the Joint Tax Committee have all proposed 
ways to consolidate these incentives, while still allowing them 
to fulfill their essential purpose, and also promote greater 
uniformity of rules across the handful of incentives that might 
remain.
    Let me next turn briefly to income-based phase-outs. There 
are more than a dozen provisions in the Tax Code that phase-out 
or phase-down tax credits or exclusions or deductions, as 
income rises. These are measures that promote progressivity in 
the code. And, like other measures that promote progressivity, 
they increase the effective marginal tax rate that taxpayers 
face. But compared to changes to the explicit rate schedule, 
income-based phase-outs are generally an inferior way to 
promote progressivity. They make it more difficult for 
taxpayers to know the true marginal rate that they face, and 
they require taxpayers to complete an array of worksheets to 
apply the income-based phase-out that applies to each 
provision.
    Moreover, there is no rhyme or reason as to how the income-
based phase-outs work across different provisions. Some of them 
are indexed to inflation, some are not, and they treat family 
status in different ways, and so on.
    So, in general, transparency and simplicity can be advanced 
by eliminating most of the income-based phase-outs, while 
making appropriate adjustments to the rate schedule to achieve 
any desired degree of progressivity.
    The final problem I want to address is the alternative 
minimum tax, a parallel tax system that disallows some, but not 
all, of the tax preferences that can be claimed under the 
regular income tax. More than four million tax payers are 
currently subject to the AMT. If the annual patch that Congress 
passes to address the AMT were to expire, more than 30 million 
taxpayers would become subject to this parallel tax system.
    The AMT represents an attempt to curtain the use of certain 
tax preferences, but it does so in a capricious and needlessly 
complex manner. Whatever preferences are desired in the tax 
system can be provided in the regular tax system. Whichever 
ones need to be curtailed can be curtailed within the regular 
tax system without having to put taxpayers through a second tax 
system with a completely separate set of rules.
    In summary, Mr. Chairman, I believe that these are areas 
that can be addressed on a bipartisan basis, because they do 
not raise some of the contentious ideological and philosophical 
issues raised by such things as the level of revenue or the 
level of progressivity that the tax system has. Certainly this 
complexity is a problem that the American people face, but it's 
also an opportunity for members of both parties to work 
together to give the American people a better tax system.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Viard follows:]

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    Chairman CAMP. Thank you. Thank you very much.
    Ms. Nellen, you have five minutes.

STATEMENT OF ANNETTE NELLEN, CPA, DIRECTOR, MASTERS OF SCIENCE 
   IN TAXATION PROGRAM, SAN JOSE STATE UNIVERSITY, SAN JOSE, 
                           CALIFORNIA

    Ms. NELLEN. Good morning, Chairman Camp, Ranking Member 
Levin, and Members of the Committee. My name is Annette Nellen. 
I am a tax professor at San Jose State University. I am a 
member of the American Institute of Certified Public 
Accountants, and the chair of its individual income taxation 
technical resource panel. Prior to joining San Jose State, I 
worked at Ernst and Young and the IRS. My testimony today is 
based on my 20 years of experience working on tax reform and 
simplification.
    Thank you for the opportunity to appear today and provide 
testimony on the serious complexity problems that burden 
individuals and families and weaken our tax system.
    Our current tax law is often incomprehensible. Its 
complexity imposes burdens on individuals, in terms of time and 
out-of-pocket costs, and increases the tax gap. A tax system 
should follow the principle of simplicity. That is, the tax law 
should be simple, so that taxpayers can understand the rules 
and comply with them correctly and in a cost-efficient manner.
    As noted in our written testimony, there are several 
commonly-encountered areas of the tax law that frustrate 
individuals, generate filing mistakes, and lead to missed 
opportunities to take full advantage of incentives. I will 
briefly address a few of these complexities, as well as some 
possible solutions to illustrate that much complexity can be 
avoided.
    First, there are 14 tax rules that offer some incentive for 
higher education. While all the rules have a common purpose, 
the definitions, eligibility, and income phase-outs vary. 
Further, use of one benefit likely precludes use of another, 
making it difficult to know which is the best incentive to use. 
This confusion leads some individuals to forgo the tax benefit 
all together, and some to claim credits beyond what they are 
entitled to. The AICPA recommends, at a minimum, consolidating 
the education provisions, and providing uniform definitions.
    Another area in need of simplification is the kiddie tax, 
which was enacted in 1986 to prevent parents from shifting tax 
liabilities on investment assets to their children, in order to 
lower their rates. These rules can apply to children under the 
age of 18, or full-time students up to age 23. Challenges with 
the kiddie tax include obtaining the required information and 
interaction with AMT and capital gains. The AICPA recommends 
using a separate rate structure for children subject to the 
kiddie tax.
    Another point of confusion stems from use of due dates that 
are not what an individual would expect. For example, an 
individual with a foreign financial account who needs to file a 
special form known as FBAR, must file it by June 30th, an odd 
due date in the tax system. We recommend October 15th, the 
extended due date for Form 1040.
    Another significant area of complexity affecting a growing 
number of individuals each year is the AMT. The AICPA 
recommends that the AMT be repealed. A second tax system is 
unnecessary. It is burdensome in terms of record-keeping, 
calculations, and the confusion it causes individuals when, for 
example, they think their state taxes are deductible, only to 
find that they are not, because they are an AMT.
    In addition, phase-outs complicate tax calculations and 
planning. For example, the $1,000 child credit starts to phase 
out or reduce once a married couple's income reaches $110,000. 
However, income levels and measures of income for the phase-
outs vary among incentives, leading to confusion. We understand 
phase-outs exists to prevent higher-income individuals from 
reaping full benefit of any favorable tax rules. In effect, 
though, phase-outs disguise an individual's true marginal tax 
rate and make it difficult to know if a tax incentive is truly 
available to you.
    The earned income tax credit is another area of complexity. 
Any reform effort should take into account the difficulties of 
administering this significant program, and reduce its 
complexity.
    Lastly, much frustration is due to the numerous temporary 
provisions in our tax law. Many temporary provisions are 
routinely allowed to expire for a period of time, then are 
temporarily reinstated. This leads to confusion, frustration, 
and often, less than ideal use of an individual's financial 
resources.
    For example, when the AMT patch is not in place at the 
start of a year, many individuals must include AMT in their 
quarterly estimated tax payments. Or, when the exclusion for 
employer-provided education expires, employers might stop 
offering the benefit, or employees may opt out, due to the tax 
consequences, as they cannot rely on the provisions being 
retroactively reinstated.
    The AICPA looks forward to assisting you in reducing the 
many compliance and planning burdens that the tax system 
imposes on individuals and families. Thank you for this 
opportunity to testify. I look forward to your questions.
    [The prepared statement of Ms. Nellen follows:]

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    Chairman CAMP. Thank you very much.
    Mr. Johannessen, you have five minutes.

   STATEMENT OF MARK E. JOHANNESSEN, CFP, MANAGING DIRECTOR, 
                 HARRIS SBSB, MCLEAN, VIRGINIA

    Mr. JOHANNESSEN. Chairman Camp, Ranking Member Levin, and 
esteemed members of the House Ways and Means Committee, thank 
you for inviting me here today to speak to you on behalf of the 
Financial Planning Association. My name is Mark Johannessen. I 
am a certified financial planner at Harris SBSB, a firm in 
McLean, Virginia. In addition to being a planner, myself, I 
served on the Financial Planning Association's board of 
directors for six years, and served as elected president in 
2008.
    Much of the difficulty in understanding our tax system 
arises from the ever-changing provisions of the code. In 1986, 
the goal of tax reform was to make the code more fair and 
simple. Since that time, there have been tens of thousands of 
changes and additions, each with its own set of rules, 
requirements, and phase-outs. Congress as also added provisions 
that are designed to encourage certain behaviors. Many of these 
changes have the support of financial planners, such as tax 
preferred savings vehicles for medical, education, and 
retirement needs. Nonetheless, all tax incentives should be 
regularly reviewed by this committee to ensure they effectively 
meet Congress's policy goals.
    Even with my additional education, training, and 
experience, I know that only professionals completely dedicated 
to understanding the principles of the Tax Code are able to 
complete a tax return for all but the most simple of filings. 
If the interplay of various provisions confuses trained 
financial professionals, imagine the plight on the average 
citizen. Today, the most basic tax provisions are in a constant 
state of flux. The inability to predict, even in the medium 
term, the future rates in income, capital gains, and dividends, 
makes financial planning more challenging and expensive for 
consumers. All too often I have observed consumers holding off 
on making important plans while they wait for Congress to act.
    I have some specific examples in the time I have remaining. 
It is well referenced so far, the complexity that AMT, the 
alternative minimum tax, brings to the average taxpayer, with 
30 million folks ultimately possibly being affected if no patch 
is enacted ear year. So I will limit my time to discussing the 
financial planning issues.
    Under current law, the top rates on dividends will nearly 
triple, from 15 to 43.4 percent in January 2013. The long-term 
capital gains rate will also increase from 15 to 20 percent. 
This is already affecting investment decisions, as individuals 
shift their choices to maximize their after-tax profits. In 
some cases, we are seeing investors choosing stocks that will 
produce more capital gain, or perhaps tax-free investments like 
municipal bonds. And the impact on the capital markets of a 
permanent Tax Code should not be overlooked.
    Starting in 2010, a greater number of taxpayers were 
allowed to convert their traditional individual retirement 
accounts, their 401(k)'s and 403(b)'s, to an after-tax Roth 
account. For most investors, the question that determines 
whether to undertake this conversion is whether one will be 
higher or lower income taxes in their retirement. Many people 
can estimate their likely income bracket, but they must also 
make a best guess about what the tax rate will be--will be in 
their retirement.
    And then, finally, in 2010, individuals faced another 
decision of whether to elect to pay the entire tax on their 
conversion in 2010, or split it over--through 2011 and 2012 
returns. Because rates were scheduled to increase, many decided 
to take the tax hit in 2010. And this caused general confusion, 
as we approached the end of the year.
    Charitable contributions have become one of the provisions 
of the tax extenders exclusions, where exclusions from income 
up to $100,000 can be distributed or transferred directly to a 
charity. And if we can look at 2010 alone, when the extension 
didn't occur until December 17th, I believe many, folks had 
already made their minimum required distributions at that time, 
and so it somewhat muted the actual impact for charities and 
for our clients to take advantage of a tax advantage.
    Estate planning is another area well addressed, I am sure, 
by this committee.
    So, in closing, in its effort to appeal to constituent 
concerns, Congress has killed the code with its kindness, 
loading it up with thousands of special breaks and exemptions. 
While the goal to encourage certain behaviors is laudable, the 
sheer magnitude of these special breaks and exemptions has made 
the income tax system unmanageably complex. I would urge this 
committee to work together to pass tax reform. Thank you.
    [The prepared statement of Mr. Johannessen follows:]

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    Chairman CAMP. Thank you.
    Mr. Buchanan, you have five minutes.

 STATEMENT OF NEIL H. BUCHANAN, JD, PH.D., ASSOCIATE PROFESSOR 
   OF LAW, THE GEORGE WASHINGTON UNIVERSITY, WASHINGTON, D.C.

    Mr. BUCHANAN. Chairman Camp and Ranking Member Levin and 
Members of the Committee, I am an economist and a professor of 
tax law at the George Washington University. Thank you for 
giving me the opportunity to address the committee today.
    At the risk of stating the obvious, there are many areas of 
the Internal Revenue Code that could benefit from 
rationalization and simplification. In areas in which multiple 
provisions have accumulated over time, such as retirement 
savings and education incentives, the same incentives and 
benefits surely could be provided in a simpler fashion.
    That being said, I hope through my testimony to warn the 
committee of some red herrings, issues that need not be 
addressed as you work to simplify the lives of Americans who 
honestly try to comply with the tax laws. Clearing away some 
tempting distractions will, I hope, provide more clarity and 
time for the committee to focus on genuine tax simplification.
    First, the committee should be wary of reducing tax 
complexity without reducing what we might call overall 
complexity. A simple way to reduce the complexity of the Tax 
Code, after all, would simply be to stop running certain 
benefits through the Tax Code, and instead, run them through 
some other agency of the government. The mortgage interest 
deduction, which is about housing, could be turned into a 
benefit run by the Department of Housing and Urban Development. 
The Earned Income Tax Credit, which is a benefit to workers, 
could be run by the Department of Labor. Doing either of those 
things, however, would do nothing to make the lives of American 
taxpayers less complicated. If anything, compliance burdens 
would become even more onerous, as our citizens would now have 
to deal not just with the IRS, but with newly created 
administrative arms of other cabinet departments, or mini 
IRS's, which would also add to federal spending, by the way.
    The IRS has the advantage of being a single agency with 
which citizens interact, and it is the logical agency to 
provide incentives and benefits, the eligibility for which are 
conditioned on income levels. In addition, decades of 
experience have shown that the IRS and its employees possess 
the expertise, dedication, and experience, notwithstanding 
years and years of chronic underfunding, to handle the 
administration of important benefits that we administer 
currently through the Tax Code.
    Second, reducing the number of tax brackets is not an 
important aspect of simplifying taxes, and it has the 
undesirable effect of making the Tax Code less progressive. 
Some analysts have asserted that the existence of multiple 
brackets is confusing, making it more difficult for taxpayers 
to figure out how much taxes they owe each year. In fact, all 
of the work and uncertainty involved in tax compliance is 
related to what happens before tax rates even become relevant. 
That is, once a taxpayer has determined his or her taxable 
income, it takes merely a few seconds--and I repeat, seconds--
to look at the relevant table to determine the tax owed. We 
could have 10 or 20 tax rates without increasing the compliance 
burden. The taxpayer's uncertainty is in figuring out what to 
include, exclude, deduct, credit, and so on, not in dealing 
with different tax rates.
    Third, as a related matter, the existence of so-called 
phase-outs is not inherently complicated, either. Again, the 
difficult part of the process is in figuring out whether a 
person is eligible for a particular provision. The arithmetic 
involved in the phase-outs is a relatively simple after-
thought, and the IRS is perfectly capable of providing simple 
tables to assist the taxpayer in determining how a phase-out 
alters the final tax computation.
    I should add the qualification that phase-outs can pile up, 
with a different phase-out for each of several different tax 
provisions, which does complicate compliance somewhat. I offer 
an example of how to deal with this problem in my prepared 
testimony.
    In addition, it is important to remember that phase-outs 
serve two important purposes. First, they are a way to means-
test benefits, benefits that, after all, cost the Federal 
Government money. Second, phase-outs avoid abrupt all-or-
nothing changes to tax benefits, with a taxpayer suddenly 
losing all of a benefit after hitting an income limit or some 
other arbitrary threshold.
    My message today, Mr. Chairman, therefore, amounts to 
taking three items off the list of possible approaches to tax 
simplification.
    First, taking policies out of the Tax Code and out of the 
IRS's jurisdiction can make citizens' lives more complicated, 
rather than less so, as it would simply relocate the complexity 
that our citizens face, rather than actually reducing 
complexity.
    Second, the number of tax rates is a non-issue, as far as 
complexity and compliance burdens are concerned.
    And third, the existence of phase-outs is nearly a non-
issue, and the complexity of phase-outs can be all but 
eliminated by harmonizing phase-outs across all provisions that 
Congress chooses to means-test.
    The committee's work is daunting, involving important work 
in eliminating and combining duplicative and sometimes 
ineffective tax benefits. That work will be difficult enough 
without becoming distracted by false promises of reduced 
complexity.
    I hope that my testimony will prove useful in directing the 
committee away from those distractions. Thank you.
    [The prepared statement of Mr. Buchanan follows:]

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    Chairman CAMP. All right. Thank you. Thank you all very 
much.
    The President's Economic Recovery Advisory Board issued a 
report in August of 2010, also known as the Volcker Report. And 
in that they also underscore how complex our Tax Code is, and 
even say that the cost of compliance is about 1 percent of GDP 
annually and that those costs are actually more than 12 times 
the IRS budget, really about $.10 on every dollar of income tax 
that is collected.
    I am interested in one particular area right now. Mr. 
Viard, in your testimony you note there are over 20 tax 
preferred savings accounts and plans in the code. And the 
Volcker Report also talks about those, as well. And I just 
wanted to talk with you a little bit more about them.
    From a tax administration standpoint, what is the impact of 
having so many different savings accounts and plans, in terms 
of IRS oversight and taxpayers' ability to really assess those 
and use those plans?
    Mr. VIARD. Well, thank you, Mr. Chairman. I think that the 
proliferation of accounts creates complexity at several 
different levels. The IRS has to promulgate regulations 
governing each of these accounts, and the rules are different, 
with respect to the income limits and the contribution limits, 
as to how much can be put into the account, and also the rules 
for withdrawal, what types of withdrawals incur penalties, and 
such not.
    But I think the biggest grounds for concern arises at the 
individual taxpayer level. It is very difficult for taxpayers 
to choose between these accounts. And one of the interesting 
findings that I mention in my written testimony which comes 
from the National Taxpayer Advocate's 2004 report, is that 30 
percent of taxpayers who were eligible for a 401(k) and chose 
not to participate in it cited the complexity as one of the 
reasons for not participating.
    So, I think one of the real grounds for concern is that the 
social purposes that are intended to be achieved by these 
provisions is undermined if the provisions are too complicated 
for taxpayers to take advantage of them. And, as you mentioned, 
Mr. Chairman, this problem has been documented, you know, 
numerous times by the Volker panel, the National Taxpayer 
Advocate, the Joint Tax Committee, the President's Advisory 
Panel. So it is a long-standing problem. And I think we know 
the general approach that can be taken to simplify these 
accounts, in terms of consolidating them, and making the rules 
more uniform.
    Chairman CAMP. Mr. Viard and Professor Nellen, you both, in 
your testimony, point out that we have multiple tax breaks for 
higher education, and that there are inconsistent rules and 
criteria for these tax breaks, and that they cause complexity. 
Does the current design of these incentives, the complexity of 
them, and the fact that many of them expire frequently reduce 
their effectiveness? And I guess I would like to hear from both 
of you your thoughts on that.
    Ms. NELLEN. Yes, I would say it is the confusion that the 
taxpayers would have as to what is available to them. The IRS 
instructions actually explaining these 14 provisions is an 86-
page publication which is just daunting.
    They also--these incentives try to do a few different 
things. Some of them are actually designed to encourage you to 
save for higher education. And others are going to be used when 
you are currently incurring costs of higher education. They 
could be consolidated into do you want to have just one credit, 
or should it be a deduction. Some of the provisions can be used 
together, some of them cannot.
    And I know there has been studies by the GAO and TIGTA that 
there are people that are overlooking these provisions, I think 
probably just being overwhelmed by them. If a person is not 
getting assistance from a paid preparer knowledgeable in these, 
they are probably going to be overlooked. Your comment earlier 
about a good number of individuals also use software, the 
software actually might not be pointing out, ``Gee, maybe you 
should be saving for education,'' or, ``Maybe you have, you 
know, a choice here and you should be planning next year to try 
and use this particular incentive.'' So, I think being left to 
an 86-page publication is just overwhelming.
    In addition, many of these individuals would also be 
dealing with trying to get other forms of financial aid through 
what might be offered at the university, through state or 
Federal Governments. So it's just adding to the overall 
complexity, because a Tax Code is one place they can get some 
educational support. But there are other places, as well.
    Chairman CAMP. All right, thank you.
    Ms. NELLEN. Thank you.
    Chairman CAMP. Mr. Viard.
    Mr. VIARD. I would really echo those comments, and 
particularly underscore the point about the limited role of 
preparers and software. You know, once the year is complete, 
and I have taken advantage of whatever provisions I may have 
availed myself of, of course a preparer or a software can help 
me compute my tax liability correctly, and to file the return 
properly. But it is much more challenging for the taxpayer to 
know what to do during the year, which options are available, 
which ones can be used without sacrificing the opportunity to 
use others, and which one will actually be most effective for 
the taxpayer's particular situation.
    Even if a preparer or software does offer advice on this, 
the advice may be--may change from year to year, depending upon 
changes in the taxpayer's circumstances, and of course, the 
legislative changes that you have mentioned, Mr. Chairman. So, 
I think the simple proliferation of these has surely undermined 
their effectiveness in achieving Congress's goal of promoting 
education.
    Chairman CAMP. All right. Thank you. Mr. Levin may inquire.
    Mr. LEVIN. Well, thank you very much for your testimony.
    You know, Ms. Nellen, I think your reference to education 
is a good example. Clearly, we need simplification. But it 
cannot be at a cost of meeting needed purposes. There is a 
reason for a credit so people will save, and for a grant for 
those people who cannot afford it. And sometimes they are 
confused, and maybe that is one of the reasons why H.R. 1 
reduced Pell Grants by $6.5 billion. We can have credits to 
stimulate savings. I don't think that means we eliminate grants 
for people whose kids need help to go to college. I think we 
need to emphasize simplification, and remember what its purpose 
is.
    I think also--let me just ask you. Do you know the 
percentage of taxpayers who use either 1040EZ or 1040A? Do you 
have any idea?
    Ms. NELLEN. Actually, I just looked at that last night. 
It's about 60 percent, I think, use 1040. I think it's 28 
percent use 1040A and 12 percent use the 1040EZ from data 
based--from the IRS--on 2009.
    Mr. LEVIN. Yes, our data shows that about 41 percent use 
the EZ or A, while 59 percent use 1040. Do you know the 
percentage of those who file the 1040 and use the standard 
deduction?
    Ms. NELLEN. Yes, actually, approximately two-thirds of 
individuals claim the standard deduction, rather than itemize.
    Mr. LEVIN. So, it is clear. The vast majority of taxpayers 
use one of the more simplified forms, or they use 1040 and use 
the standard deduction, right?
    Ms. NELLEN. Right.
    Mr. LEVIN. All right. I think we are all agreed about the 
AMT and the need to simplify it.
    Let me just say a word about the phase-outs quickly, 
because I looked at your chart, Mr. Viard, and welcome your 
testimony. It was perhaps more modulated than some people 
expected. But it is interesting to look at this. The majority 
of the phase-outs passed in the later 1990s when the now-
majority was in control. It may well be that phase-outs are 
often used for budget purposes, to make sure that the cost is 
kept down, no?
    Mr. VIARD. Well, I think you are right, Mr. Ranking Member, 
that that is one of the motivations that underlie the use of 
income-based phase-outs. But, of course, it is always possible 
to avoid the use of the phase-out and then to make an 
adjustment to the rate schedule instead, to keep both revenue 
and distribution roughly unchanged.
    I mean, I think the relevant issue in each instance is: Do 
we have a reason, on policy grounds, why particular income 
groups should be denied the incentive for this particular type 
of behavior? If there is no reason to deny the incentive to a 
particular income group, then I think a phase-out is 
unwarranted.
    And if there is a concern, then, that a particular group, 
be it a high-income group or any other, is receiving a larger 
tax reduction than would otherwise seem appropriate, then, of 
course, an adjustment to the rate schedule can address that in 
a manner that is more transparent and that still allows this 
group to benefit from the incentive for the behavior that 
Congress has decided to encourage.
    Mr. LEVIN. Mr. Johannessen, you end up by saying Congress 
has killed the code with kindness. Let me just say we have a 
problem with simplification, with complexity.
    I just think we need to be careful in our rhetoric. A 
couple of weeks ago someone said in testimony, ``Government is 
a disease.'' And you do not say quite the same thing. I am not 
sure we have killed the code with kindness. That would seem to 
mean that the kindness was somewhat irrelevant. I do not think 
you mean that.
    A lot of the provisions in our Tax Code--take the mortgage 
interest deduction for example. Without it, the state of 
Michigan where, that Mr. Camp and I come from, and I think 
where most of us come from, would not have the middle class 
that it does today. Employer-based health insurance would never 
have been created on a broad basis in this country without the 
exclusion. My time is up.
    Mr. CAMP. Time has expired. Mr. Herger is recognized.
    Mr. HERGER. Thank you, Mr. Chairman. I would like to thank 
our witnesses for your testimony.
    When so many middle class families have to hire 
professional help just to figure out what they owe in taxes, it 
is clear that something is wrong. And I hope this committee can 
work in a bipartisan way to clear away some of this unnecessary 
complexity.
    Mr. Viard, I would like to explore the issue you raised 
about the phase-out of tax deductions and credits leading to 
high marginal rates. According to the Tax Foundation, when you 
add up the income tax, the payroll tax, the phase-out of the 
earned income tax credit, a family of five making $48,000 a 
year faces an effective marginal tax rate of 42 percent. In 
other words, $.42 of each additional dollar they earn goes to 
paying federal taxes. It is my understanding that once the new 
health insurance exchange subsidies take effect, some low to 
middle income families could face a total marginal rate of well 
over 50 percent. And that is without taking into account state 
and local taxes, or non-tax benefits like food stamps that are 
tied to income.
    Mr. Viard, what is the economic impact of these high 
marginal rates?
    Mr. VIARD. Well, thank you, Congressman. You have 
pinpointed an important problem that arises, or can arise from 
the use of income-based phase-outs. Because the marginal tax 
rates are not being explicitly and openly adopted in the 
Internal Revenue Code, it becomes possible, I think, for them 
to be set at levels that are higher than would ever be agreed 
to if they were presented explicitly on the table. If we were 
to say, ``Do you want a 42 percent marginal tax rate,'' I think 
that members of this committee and Members of Congress would 
think long and hard as to the advantages and disadvantages of 
that. But with the use of income-based phase-outs, these 
marginal tax rates are often difficult to detect, and they vary 
across different households, depending upon their circumstances 
and which tax breaks they are claiming.
    In general, marginal tax rates have the potential to 
discourage the earning of income--that is to say to discourage 
work, to discourage saving, to discourage doing things in 
taxable form, instead of in tax-exempt form.
    One thing that we do not understand well is how important 
the phase-outs are in affecting behavior. Precisely because 
they are complicated, some people have suggested that people 
may not be aware of them, and that, therefore, their behavioral 
impact may be smaller than from explicit marginal tax rates. I 
am wary of that argument. Although I agree that most taxpayers 
do not understand precisely the rate they face, which is a 
problem of transparency, the proliferation of these income-
based phase-outs, I think, contributes to the attitude that any 
attempt to earn additional income may trigger undesired tax 
consequences. So it creates an area of uncertainty that I think 
has its own set of disincentive effects.
    Mr. HERGER. Would that same reasoning also apply to the 
phase-outs you have described at the higher end of the income 
tax scale?
    Mr. VIARD. Yes. I think that at every income level, you 
would anticipate some disincentive effects, and the amount of 
those effects depends upon which choices are available to the 
taxpayers in question. At high income levels, there may 
actually be greater scope for disincentive effects, because 
those taxpayers may have a variety of techniques available to 
them whereby they can reduce their taxable income. And the 
phase-outs may prompt them to take steps to take advantage of 
those strategies and lower their taxable income.
    Mr. HERGER. Thank you. That is very discouraging. It is 
very discouraging to those who would like to work their way up 
the income level to better themselves.
    So, what I would like to ask both you and Professor Nellen 
is this. Would it be possible for us to reform the Tax Code in 
a way that achieves two goals at once: simplifying the tax 
system and making it easier to understand, while also 
eliminating these hidden marginal tax rates that have such a 
negative impact on the incentive to work?
    Ms. NELLEN. I think some simplification certainly is 
possible. For example, on these phase-outs, there are a few 
areas of complexity. One is that most of them start at a 
different dollar amount. But also, what that dollar amount is 
is not always defined the same way. Some of them are based on 
what your adjusted gross income, or AGI, is. Some are based on 
what is your modified adjusted gross income.
    The definition of modified adjusted gross income can 
actually vary from incentive to incentive as to what that 
calculation is, just making it more difficult, for example, for 
a practitioner to explain to a client, ``This is how this is 
going to affect you.'' Instead they will just say, ``I need to 
go double-check what the calculation is and run the numbers.'' 
So, some simplification could occur, just by standardizing the 
deduction as to how do you define what your income level would 
be. And it probably should just be maybe adjusted gross income, 
a dollar amount that is clearly right on the tax return, to 
then base the phase-outs.
    Some of the incentives, perhaps----
    Chairman CAMP. I am sorry, his time has expired.
    Mr. HERGER. And thank you. It sounds very, very complicated 
to me. Thank you.
    Chairman CAMP. Mr. McDermott is recognized.
    Mr. LEVIN. Jim.
    Mr. MCDERMOTT. Okay. Thank you, Mr. Chairman. I noticed 
from the sparsity of the audience that the tax lawyers must be 
sitting in their office watching this, rather than being forced 
to come up here and look at this.
    And I--as I look at the complexity of the Tax Code, it 
seems to me that those folks who have money have plenty of 
people figuring it out for them. They don't have any trouble 
figuring it out. And I am sure that they--most of the 
complexity in the code is derived around the issue of how to 
get me out from under some of it. So, I do not worry about the 
people at the top of the Tax Code very much, because I figure 
they will be taken care of quite well.
    So, my question to you is which of the tax provisions 
affect the middle class and below would you try and 
uncomplexify?
    [No response.]
    Mr. MCDERMOTT. First, if you had one. I mean I assume this 
hearing is on the level, and it is really about making it 
better for the middle class in the country, rather than for the 
people in the top one percent or one-tenth of one percent.
    So, for the middle class, which one would you try and 
decomplexify?
    Mr. VIARD. Well, Congressman, I think that the area that 
seems the most promising, in terms of simplification, is to 
address the savings and the education and the family 
incentives. As Ranking Member Levin mentioned, these provisions 
are significant to the middle class. And I think it is the 
middle class households that are affected by the complexity 
that I and the other witnesses have described.
    So I think that would be a promising area to begin, in 
order to provide simplicity for middle class taxpayers.
    Mr. MCDERMOTT. And give me your solution. I mean we are 
gathering ideas here. This is a hearing. So I would like to 
hear your ideas about how you would decomplexify it.
    Mr. VIARD. Well, to take the savings accounts, for example, 
the basic approach that I think holds the most promise is one 
that has been outlined in various forms by a number of people 
before me, and that involves simply consolidating the 20 
different types of accounts.
    We fundamentally want to encourage saving through employer-
based plans. We want to encourage saving by individuals for 
retirement. And we want to encourage saving by individuals for 
a range of other purposes, such as health and education. Those 
three purposes can probably be achieved by offering three 
different types of tax preferred savings accounts----
    Mr. MCDERMOTT. You mean replace?
    Mr. VIARD [continuing]. Instead of 20.
    Mr. MCDERMOTT. Replace three with three new ones?
    Mr. VIARD. No, I'm sorry, replace the 20-some accounts that 
currently----
    Mr. MCDERMOTT. Ah, with three.
    Mr. VIARD [continuing]. Serve those 3 purposes with 3 
accounts. And then try to make the rules as uniform as possible 
across them. The President's Advisory Panel on Federal Tax 
Reform outlined a reform along these lines. And options have 
been discussed by other groups, as well, that are very similar.
    Mr. MCDERMOTT. Why--explain to me why this committee--I 
mean nobody sits on this committee to think of how you can make 
the plans more complex. So, why did 20 plans get developed? 
Explain to me that process.
    Mr. VIARD. I am not certain about the answer to that, 
Congressman. The accounts have arisen over the years. I think 
there has been a tendency at each point to address some 
specific problem in isolation from the accounts that already 
existed. I think the same process has occurred, for example, on 
the education incentives.
    What I think this hearing offers is the opportunity to sit 
back and say, ``Regardless of how we got here, let us take a 
look at these 20 different accounts, and see if they actually 
serve 20 different objectives.'' And I think the answer is 
pretty clear that they do not. And we now have a range of 
organizations of diverse ideological backgrounds, and those 
that are not ideological, saying there are opportunities to 
simplify these, to step back and say, ``Yes, let us not be 
shackled by the history of how these have developed,'' but 
instead, try to find ones that will most effectively and simply 
achieve the purposes that Congress has set forth.
    Mr. MCDERMOTT. Mr. Buchanan, do you have any comments? Dr. 
Buchanan?
    Mr. BUCHANAN. Yes. Thank you, Mr. McDermott. I agree with 
most of what Mr. Viard just said. I do think that the Congress 
has enacted a lot of responses to individual concerns. If we 
think that people are not saving enough for health emergencies, 
for example we create health savings accounts, and similar 
benefits.
    I do think that it makes sense to stop and shovel out the 
stables every now and then, because there is a lot of 
accumulated mess. It is appropriate to go back and combine 
various benefits into thematic groups, or take the different 
groups and combine them into one type of tax credit. If we 
believe that saving needs to be increased for retirement, then 
we should have one and only one retirement savings incentive.
    Chairman CAMP. All right. Thank you. Mr. Johnson is 
recognized.
    Mr. JOHNSON. Thank you, Mr. Chairman. I think the word is 
``simplify.'' I understand that word better than I do that 
other one they are using over there. Don't you all?
    Ms. Nellen, I appreciate your comments regarding the 
standard mileage rates. You rightly said in your testimony, 
``The IRS can increase these rates as it did last in 2008, when 
gas prices surged to $4.'' I paid $4 yesterday, so it is there. 
As you may know, last month I called on the IRS to increase the 
mileage rates due to higher travel costs brought on by surging 
gas prices.
    This headline by CNN Money has it right: ``Gas prices in 
the firing range of an all-time high.''
    So, for the sake of those who use these rates, particularly 
our nations' small businesses, I would hope that the IRS does 
the right thing and provides relief from the near-record gas 
prices by increasing the mileage deduction. And I hope you 
would agree with me on that one.
    But let me ask you a question. Since about 90 percent of 
the budget cost of earned income tax credit is in the form of 
outlays, rather than credits for actual tax liability, it 
appears the provision effectively is a credit against payroll 
tax, rather than income tax. Would you agree that a simpler way 
to deliver this tax benefit would be to reduce payroll tax 
liability in the first instance, rather than requiring 
taxpayers to engage in this circular flow of tax credits within 
the government?
    Ms. NELLEN. Thank you, Congressman. On the earned income 
tax credit, you are correct, that that is really refunding all 
or some portion, or maybe even beyond what the Social Security 
is.
    Actually, I had provided a paper on that topic to Joint 
Committee when they did the simplification study back in 2001. 
I and others had suggested that perhaps, if they could just not 
have to give the money in the first place, because they are 
giving it through their payroll withholding, but to stop that 
payroll withholding, so they would actually also have it on a 
weekly regular basis, that could simplify what the earned 
income tax credit is intended to do, and that would cause a few 
complexities for employers.
    But I think that could be worked out. And there is probably 
some other improvements to the earned income tax credit that 
could simplify that. But if you could, just stop, you know, 
taking their money, only to give it back to them at the end of 
the year. That, hopefully, could simplify the process.
    Mr. JOHNSON. Yes. There is a whole bunch of things like 
that, isn't there? I mean----
    Ms. NELLEN. Well, earned income tax credit is a good 
example of that, because it is, in essence, refunding the 
Social Security----
    Mr. JOHNSON. We need her to help us simplify the Tax Code. 
What do you think? Thank you for your comments. Mr. Chairman, I 
yield back.
    Ms. NELLEN. Thank you.
    Chairman CAMP. All right. Thank you. Mr. Neal is 
recognized.
    Mr. NEAL. Thank you, Mr. Chairman. Professor Nellen, I 
understand that you are testifying today on behalf of AICPA. 
And I have to say that your statement in support of repeal of 
alternative minimum tax is music to my ears. I have staked a 
career here on that issue.
    I first filed a bill years ago that would, at that time, 
have repealed AMT when it only cost a few billion dollars. Now 
it has overtaken the regular income tax collections. Some of us 
have argued that the decision in 2001 not to deal with AMT 
saved the overall cost of the Bush tax cuts, and that the 
drafters did so knowingly. In fact, in 2001 a Treasury 
Department economist warned, ``Indexation of AMT parameters, 
however, would not completely eliminate the sizeable increase 
in the percentage of AMT taxpayers through 2010 because of the 
post-2001 growth in Tax Reform Act provisions.''
    Even with indexation, the percentage--indexation. Even with 
the percentage of taxpayers subject to AMT would increase by 
more than 200 percent between 2000 and 2010. So, while the lack 
of indexation has always been a contributor to the AMT problem, 
massive cuts in the regular tax were a major contributor, as 
well.
    You have suggested that all new tax bills require the 
impact of AMT to be revealed [sic]. Can you explain how this 
provision would work, and why AICPA believes it is important?
    Ms. NELLEN. Thank you, Congressman. When there are new 
provisions added--the child credit would be an example of that 
that was added, I think, roughly 10 years ago. And when you are 
going to give individuals what then was a $500 credit--now it 
is a $1,000 credit, temporarily up to $1,000--that would then 
generate the question, ``Well, now your regular tax has gone 
down even lower. Is that going to make you more likely to pay 
AMT?''
    If that is the case, then I think it needs to be evaluated. 
Do you want to put in the child credit in the first place? 
Because that is actually then causing the AMT to do what it 
should do. If your tax goes below a perceived minimum, you are 
going to owe the AMT.
    Mr. NEAL. Okay. The growth in Tax Reform Act at that time 
neither fostered significant growth or tax reform, largely 
because there was no scrutiny of what the provision in the long 
term meant. And today, AMT, as I have already indicated, now is 
the Tax Code, in so many ways.
    Mr. Viard, you were nodding your head, so I am going to 
give you a crack at this, as well.
    Mr. VIARD. Well, Congressman, first let me applaud you for 
your work in trying to repeal the AMT, which I think is the 
ultimate solution to this problem. But I do agree with this 
proposal to have the AMT impact of new provisions looked at. 
And I think it is particularly important, because it almost 
helps emphasize why the AMT is a flawed provision to begin 
with.
    If a new tax break is being offered, and a decision is 
being made not to allow it under the AMT, whether it be to 
reduce the revenue loss or whatever other purpose might be 
served, I think that it is appropriate for members of this body 
and for members of the public to ask themselves, ``Why is the 
provision not being allowed under the AMT?''
    If it is intended to serve an important public objective, 
then should it not be available to all taxpayers, not just 
those who are subject to one of two parallel tax systems?
    And if it does not serve a valid purpose, if it is abusive 
in some sense, if it is a loophole that we want to curtail, 
then why is the provision being adopted in the first place?
    So I think that this suggestion offers a good way to focus 
that question, and hopefully lead to the answer that we really 
want this provision to either be available under both systems 
or none. And then, following that logic, I think, would lead 
one to conclude that the ultimate solution is to simply repeal 
the AMT, as you have proposed.
    Mr. NEAL. Mr. Johannessen, you are also nodding in the 
affirmative.
    Mr. JOHANNESSEN. I am nodding to the affirmative because I 
reflected back on the somewhat lack of transparency that the 
AMT code has allowed public policy makers to hide behind. While 
speaking and saying, ``We are lowering taxes on one front,'' it 
is actually increasing on the other.
    So, yes, I am agreeing with exactly what they are 
suggesting here.
    Mr. NEAL. Do any of you know what the cost of the 2001 bill 
would have been, if covered through 2010 with AMT?
    Mr. VIARD. I believe that there would be roughly a $600 
billion or greater cost for the AMT relief. It may be larger 
than that. It is certainly a significant item.
    Mr. NEAL. Yes. Thank you very much. And, Mr. Buchanan, 
lastly, our Republican friends have expressed a willingness to 
use the vote on the debt ceiling as leverage to advance some 
policy goals. In your opinion, as an economist, would the 
economic benefit of moving a 25 percent top rate for 
individuals be worth flirting with default on the debt?
    Chairman CAMP. And time has expired, so just answer 
quickly, please.
    Mr. BUCHANAN. Nothing would be worth threatening the 
creditworthiness of the United States.
    Mr. NEAL. All right, thank you.
    Chairman CAMP. Mr. Nunes is recognized.
    Mr. NUNES. Thank you, Mr. Chairman. I actually want to pick 
up where Mr. Neal left off. And maybe we will start with you, 
Mr. Viard.
    In terms of the top rate--this can go to all of you 
throughout the five-minute period that I have if we were to 
simplify most of the code--so, in other words, as you said, go 
from 20 different types of savings accounts down to 3, and take 
a lot of the inequities out of the code as much as we possibly 
can--and I don't know what this Congress can do, and I do not 
know what the Senate would agree to, and I do not know what the 
President would sign, so this is basically hypothetical, but if 
you could simplify the code, what should the top marginal rate 
be, and how would you structure the code, if you could?
    Mr. VIARD. Well, Congressman, I think it is actually 
important to draw a distinction between simplification and 
base-broadening. The type of simplification that we are 
discussing here today I think would not necessarily lead to 
significant reductions, or necessarily to any reduction in the 
statutory rates.
    For example, if you did simplify the 20 tax preferred 
savings accounts into 3, that does not necessarily mean that 
they would be less generous.
    Mr. NUNES. Right.
    Mr. VIARD. That would be a decision that Congress would 
have to make, and particularly the members of this committee. 
So you could decide to have 3 accounts instead of 20, to make 
it easier for middle class and other households to use them. 
But if they have the same revenue loss, then you actually do 
not achieve rate reduction.
    Rate reduction, instead, requires a much more significant 
fundamental set of policy choices associated with base-
broadening, things that probably, you know, go far beyond what 
we have been discussing in our testimony.
    Someone would have to make decisions, for example, does one 
curtail the tax preference for home mortgage interest? Do you 
curtail the preference for employer-provided health insurance? 
Do you curtail or eliminate the state and local tax deduction?
    Mr. NUNES. What do you think, Mr. Viard? I mean you have 
worked on these tax issues a long time. I have worked with you 
on a couple different tax issues over the years. What road do 
you think the Congress should go down? Do you think we should 
broaden the base and really simplify the code?
    Mr. VIARD. I do believe that the base should be broadened, 
Mr. Congressman, although I think that even a base--even an 
income tax with a broader base is inferior to consumption 
taxation.
    But personally, I do see areas for broadening the base, in 
terms of eliminating the state and local tax deduction, 
restructuring the preferences for employer-provided health 
insurance and home ownership in ways that are more effective in 
providing basic health insurance, and allowing people to become 
home owners, rather than encouraging the spread of expensive 
homes and expensive health insurance policies. And I think if 
you adopt those type of measures, you can lower rates, 
certainly by several percentage points.
    Again, though, I do want to stress those reflect 
fundamental policy debates that clearly are unrelated, at least 
at first glance, to the simplification that we are discussing 
here today.
    Mr. NUNES. Ms. Nellen.
    Ms. NELLEN. Yes, I do agree with that. You know, generally 
though, a broader base and lower rates does also help the tax 
law meet additional principles of good tax policy. Things would 
be more transparent. If you are removing certain provisions, 
that makes it more clear, you know--well, the tax law won't 
affect your decision-making as much as--it should not be 
affecting your decision-making. Make it more neutral.
    So I think there should be consideration, as happened in 
the 1986 act, of lowering the rates and broadening the base. 
That is one way to get simplification. But as Mr. Viard says, 
there are ways to get simplification. So far as what the ideal 
marginal tax rate should be is certainly an important policy 
debate and should be considered. Distributional effects, as 
well, among the different income categories.
    Mr. NUNES. Thank you. Mr. Johannessen.
    Mr. JOHANNESSEN. I can tell you that last year was the 
first year in my 20 years of working with clients actually say 
what I have often heard in economic theory, which says as we 
approach a higher and higher tax bracket at the top, that 
people will be disincentivized for additional units of work.
    And so, probably four or five different clients came to me 
last year and said, ``How can I, next year, reduce my income, 
either by working less or by not creating, something that 
otherwise I might be creating?''
    And so, I don't know what the idea rate is. I do know that, 
as we approach 39.6 this year, it began to get people's 
interest pretty significantly.
    Mr. NUNES. Thank you. Mr. Buchanan.
    Mr. BUCHANAN. When we discuss base broadening and rate 
reduction, that is usually done in the context of wanting to be 
revenue neutral. And I am a bit confused by that discussion in 
the context of the broader context here. Because, as I 
understand it, part of the concern overall--especially later 
this afternoon, apparently--is going to be about reducing long-
run deficits. And so I am not sure whether or not the----
    Mr. NUNES. So you would prefer the code to stay complex, 
rates to stay where they are at, and not broaden the base?
    Chairman CAMP. All right.
    Mr. BUCHANAN. No, absolutely not. What I would prefer is 
that we broaden the base, and think about how that would affect 
revenues, and therefore, the long-run deficit picture.
    Chairman CAMP. All right, thank you.
    Mr. NUNES. I yield back. Thank you, Mr. Chairman.
    Chairman CAMP. Mr. Becerra is recognized.
    Mr. BECERRA. Thank you, Mr. Chairman. Thank you for your 
testimony.
    Let me see if I could ask you all to help me do something. 
Mr. Viard, give me a number between one to three. Just give me 
a number between one to three.
    Mr. VIARD. Two.
    Mr. BECERRA. Two? Ms. Nellen, give me a number between 1 
and--is it Nellen? Ms. Nellen, a number between 1 and 800.
    Ms. NELLEN. Seven hundred.
    Mr. BECERRA. Seven hundred. Now, Mr. Johannessen, a 
number--just give me a top or bottom.
    Mr. JOHANNESSEN. Top.
    Mr. BECERRA. Top? Okay. Let us see. Here is a Tax Code. 
Number 2, 700, and top. So top is here, we are looking at 
Section 1361 of the Tax Code, ``Effect of Election on 
Corporation.'' I suspect this particular section dealing with 
corporations won't affect most individual tax filers. And I 
suspect we could go through this routine about 1,000 times and 
most of this random selection of a provision in the Tax Code 
would not affect most tax filers.
    In fact, if you take a look at the forms that are available 
to tax filers, the 1040EZ, the 1040A, and the 1040 itself, most 
tax filers can file using the simple tax form, the 1040EZ, or 
the 1040A. The 1040EZ, if I am looking at it properly--and I 
have it right here--it has 13 items to be filled out. That is 
it, 13 items.
    Now, the 1040, of course, is the one used by folks who have 
higher incomes. That has a lot of additions, a lot of 
supplemental filings with it. But the 1040EZ, which the IRS, in 
its instructions to tax filers, says to them, ``You can use 
this 1040EZ form if your taxable income is below 100,000''--
and, by the way, 87 percent of the 143 million-plus American 
tax filers earned less than $100,000--is ``your filing status 
is single, or if you are married and file jointly, if you are 
under the age of 65 and not blind''--that is a pretty easy one 
to determine--``you are not claiming any dependents, and your 
interest income is $1,500 or less,'' with today's interest 
rates, you are probably having to earn pretty good interest to 
collect $1,500 in interest, some probably $50,000 in a savings 
account of some sort, or some kind of something that gains you 
an income, an interest income.
    So, probably not a lot of folks who are at $100,000 or 
below, 87 percent of filers, who really have to go beyond the 
1040EZ with 13 questions, or perhaps the 1040A. The reality is 
that the more than 2,300 pages in the Tax Code aren't for 
people who earn $100,000 or less. It is for those who make more 
who need to use the 1040, because they have lots of different 
ways to reduce their tax burden, to the point where Warren 
Buffett has said that he likely pays a lower income tax rate 
than do the assistance and secretaries that work for Warren 
Buffett.
    And, as the Bloomberg Business Week article of April 7th 
said, the top 400 income tax returns--so the 400 wealthiest 
Americans, by income--while their rates, their statutory rates, 
might be in the 30 percent, their effective rate, what they 
ultimately paid after they used all of these tax shelters and 
so forth, was just under 17 percent. That is higher than a lot 
of those middle income families that would file the EZ, 1040EZ, 
form. In fact, those 400 percent richest Americans pay at a 
lower rate than the next set of wealthy Americans, who pay 
probably about 23 percent. So the richer you get, the lower 
your taxes.
    And the poor average worker, who makes--who gets a paycheck 
every week or every month, doesn't have to worry about trying 
to sneak through some of the Tax Code, because his or her money 
is automatically taken out of the paycheck.
    And so, as we talk about complexity, I think we have to 
remember something. The complexity is created not by the 
average American making $100,000 or less, it is created by all 
those folks who make much more money who want to keep as much 
of their money with them as they can. And the reason you have 
2,300 pages is not so that you can help the average stiff who 
works every day 9:00 to 5:00, it is to help the guy who doesn't 
use the 1040EZ who is trying to shelter as much as he can.
    And so, I hope that as you keep coming to testify before 
us, you will help us make sure we navigate this so we do not 
hurt the middle class as some try to protect the wealthiest 
Americans, who are doing very well on their own.
    Chairman CAMP. All right.
    Mr. BECERRA. Thanks very much.
    Chairman CAMP. Thank you. Mr. Tiberi is recognized.
    Mr. TIBERI. Thank you, Mr. Chairman. Mr. Viard? I kind of 
want to say ``Oh,'' based upon your bio and your days at Ohio 
State. But you were there after I graduated.
    You may have seen yesterday an Ernst & Young report come 
out. Are you familiar with that at all? It was a report 
regarding our Tax Code.
    Mr. VIARD. I don't think I saw that report, Mr.----
    Mr. TIBERI. All right. Well, it had to do with the 
corporate Tax Code and pass-through entities. About a month ago 
we had a hearing here with respect to pass-through entities. 
And today, the President is going to tell us something. He has 
talked before about doing corporate tax reform. And some in the 
Administration have talked about doing only corporate tax 
reform.
    In your view, looking at our Tax Code today, if we did only 
corporate tax reform, and did not deal more comprehensively 
across the board, would that create inequities, in your 
opinion, more inequities than we have today?
    Mr. VIARD. I think that would depend on how that reform was 
done. I certainly think that dealing only with the corporate 
income tax, you know, would be only a partial solution to the 
problems that affect our tax system today. There are clearly 
reforms that are needed for individual taxpayers of the type we 
have been discussing here, as well as some that we have not 
been discussing. As I said at the beginning of my testimony, I 
was not going to discuss the problems faced by individual 
owners of pass-through firms. But, in fact, those regimes are 
needlessly complex.
    I think it was interesting that the tax provision that 
Congressman Becerra chose at random was a provision pertaining 
to S corporations. And it is clear that we have some very 
complicated regimes governing pass-through entities. We have a 
partnership regime, we have an S corporation regime, each of 
which is complex in itself, and each of which differs from the 
others.
    And I think that it is absolutely right, as Congressman 
Becerra pointed out, that the individuals directly affected by 
this are high-income individuals, in many cases. And so, I do 
not know that we need to feel compassion that they are 
struggling with this complexity.
    But what I think all of us need to worry about is whether, 
as, you know, citizens and as members of an economy, whether 
the efforts of those individuals should be devoted to dealing 
with intricate tax provisions, or instead, should be devoted to 
business purposes, to the hiring of new workers, to the 
creation of new products that are demanded by consumers.
    Mr. TIBERI. That is where I was----
    Mr. VIARD. And I hope that simplification----
    Mr. TIBERI. And that is where I was heading, actually, 
because the report that came out yesterday showed that a 
majority of business job creators and business owners were 
pass-through entities, including S corps, and that if we raise 
the top rates on them, at the same time we were reducing 
corporate rates, we would actually impact a number of job 
creators in a negative way. And not only the complexity issue 
that has been talked about today, but also raising the rate, 
would have an impact on our economy.
    And so, Mr. Johannessen--did I say that right? For someone 
who gets his name mispronounced every day, I am sensitive to 
the way you pronounce your name. You said something in response 
to Representative Nunes I would like you to say again, with 
respect to something you have heard this year from some of your 
clients with respect to the Tax Code. Can you repeat that 
again?
    Mr. JOHANNESSEN. I believe what I said was that for the 
first time in my 20 or so years, that folks actually were 
asking what they could do to minimize their earnings potential 
because they wanted to try and avoid being pushed into the 39.6 
percent tax bracket.
    Mr. TIBERI. That is the biggest headline that should come 
out of this hearing today. My mom and dad came to America, as I 
have said before, for a better life. And in America, it was 
endless potential. And when you have people, job creators, 
entrepreneurs, people who are trying to better themselves, take 
the Tax Code and go to one of their advisors and say, ``How can 
I work less so I don't get penalized by my government,'' that 
is an incredible statement.
    Representing the AICPA, Ms. Nellen, have you or any of your 
members heard that, or do you see a problem within our Tax Code 
that creates this thought process?
    Ms. NELLEN. Congressman, I have not personally heard that. 
I have heard stories of that. I do think, in looking at the 
rates, I think it is--going to hear more of that, because there 
are some additional rates coming into effect, Medicare tax 
coming into play at 3.8 percent on certain investment income. I 
think some might question, ``Well, what exactly is my marginal 
rate?'' And I think, just seeing additional taxes does perhaps 
also raise the question Mr. Johannessen is hearing from his 
clients.
    Chairman CAMP. All right. Thank you.
    Mr. TIBERI. Thank you. I yield back.
    Chairman CAMP. Mr. Pascrell is recognized.
    Mr. PASCRELL. Thank you. Mr. Buchanan, good morning.
    Mr. BUCHANAN. Good morning.
    Mr. PASCRELL. There is nothing more notoriously and 
pointlessly complex than doing your taxes twice. And you know 
my friend Mr. Neal has referred to the, you know--in my own 
district, tens of thousands of people, we--New Jersey ranks 
number one in AMT filings. There is a reason for that. And my 
own district, which is a moderate income to low income, it 
ranks within the 50th in the entire nation in AMT's filed.
    So, there have been numerous attempts, numerous attempts, 
to index the AMT, to patch it. There have been numerous 
attempts to repeal it. It is almost biblical. The common theme 
was that all of these policies were going to be paid for. So, 
the President's 2012 budget paid for the AMT patch for three 
years by eliminating tax breaks for specific oil companies and 
millionaires--very specific, rather than what we usually do on 
both sides of the aisle, eliminating loopholes, which can mean 
anything under the sun.
    So, the Republican budget, Mr. Ryan's budget, bootstraps 
the $1.5 trillion AMT repeal to the extension of the 
millionaire tax breaks. I find that to be most interesting. At 
a total cost of $4.2 trillion, according to the Tax Policy 
Center. That budget also looks to lower the top rate to 25 
percent.
    Mr. Buchanan, an AMT repeal was included in the 4.2 
trillion tax break in the Ryan budget. Very specific. How much 
more would it cost to lower the top individual rate and top 
corporate rate to 25 percent? You have any idea?
    Mr. BUCHANAN. It would be in the trillions.
    Mr. PASCRELL. Well, the answer is $2.9 trillion over 10 
years, in addition to the 4.2 trillion already in the Ryan 
budget. That is quite a bit of money, isn't it, Mr. Buchanan?
    Mr. BUCHANAN. Yes, sir.
    Mr. PASCRELL. For a budget that is supposed to get us to 
the Promised Land.
    Mr. BUCHANAN. Yes, sir.
    Mr. PASCRELL. It is not getting us to the Promised Land.
    What are the options of paying for this rate reduction? 
What tax credits or deductions will have to be eliminated? All 
of them.
    The President's debt commission has a top rate of 25 
percent. But it eliminated all tax expenditures, did it not?
    Mr. BUCHANAN. Yes.
    Mr. PASCRELL. Okay. If we eliminated many of the complex 
tax preferences, such as the earned income tax credit, a 
favorite of President Reagan, or child tax credit, or the 
mortgage interest deduction, while extending the Bush tax cuts 
for top earners to pay for a rate reduction, wouldn't lower and 
middle income individuals have a higher tax liability in the 
end, Mr. Buchanan?
    Mr. BUCHANAN. Yes, sir.
    Mr. PASCRELL. Or else where would the money come from, Mr. 
Buchanan?
    Mr. BUCHANAN. I could not tell you. As far as I can tell 
from these plans, it boils down to saying, that one way to 
simplify is to raise the net tax burden on those making less 
than 200,000 a year.
    Mr. PASCRELL. Of course it has to come from some place.
    Mr. BUCHANAN. Yes.
    Mr. PASCRELL. Or else we will do what we did for eight 
years, not pay for anything.
    Mr. BUCHANAN. As I understand it, and my earlier response 
to Mr. Nunes was based on this when we are talking about 
eliminating these various preferences, we are broadening the 
base. But, as you describe, this is in a context where we are 
broadening the base in order to make up money that is being 
lost in terms of the rate reduction and the elimination of the 
AMT.
    Mr. PASCRELL. Thank you so much, Mr. Buchanan.
    Chairman CAMP. All right.
    Mr. PASCRELL. And I yield back, Mr. Chairman.
    Chairman CAMP. Thank you. Mr. Davis is recognized.
    Mr. DAVIS. Thank you, Mr. Chairman. I would like to follow 
up on Mr. Herger's question for Dr. Viard and Ms. Nellen about 
how phase-outs might actually discourage work and earnings. I 
serve as the chairman of the Human Resources Subcommittee. We 
are looking at some of the arcane and complex interlocking 
relationships between the silos of the various programs that 
create some real challenges, I think, for the folks who want to 
get out of poverty, or want to get off of assistance and build 
themselves a future.
    And we know the Tax Code has many provisions for low-income 
families. As Ms. Nellen's testimony indicates, however, there 
is no consistent structure to ensure that the tax provisions 
work together more harmoniously or holistically. You know, 
meanwhile, parents who qualify for those tax benefits may, in 
addition, receive food stamps, welfare, Medicaid, and other 
benefits that also vary, based on income.
    Given all that, it has got to be bewildering for parents to 
try to figure out if working and earning more will actually 
make them better off. With all these program interactions, it 
seems that some families with very moderate incomes can 
actually face an effective tax rate of more than 100 percent, 
meaning that they are made worse off if they work and earn 
more, which is counterintuitive to what the goal is, to begin 
with.
    My question is this. Have any of you reviewed how phase-
outs for tax and non-tax benefits discourage work, since 
earning more may cause someone to lose both tax benefits and 
other benefits as well? And should we be looking at this more 
holistically, so low-income and modest-income parents can 
actually end up better off from working and earning more?
    Ms. NELLEN. Congressman, that is a good question. I think 
it is important to think about when the taxpayer would also 
even be aware that they have actually lost the deduction. A lot 
of times that might not happen until they are filing their 
return. As they are proceeding through the year, they might be 
thinking, ``Oh, there is a particular incentive, I am going to 
qualify for that,'' and might not find out--you know, for 
example, even getting a year-end bonus might be enough to kick 
them out of that, and they didn't know that earlier on in the 
year. So that is one problem with the phase-outs. It is not 
something you always plan for.
    Now, some individuals, high income, know that they are 
beyond all the phase-out levels, they don't even think about 
getting those. But I think people that--in the levels where you 
are intending to get those benefits, it is just the uncertainty 
because of that phase-out.
    And sometimes they do not know that unless it has happened 
once. Then they are more likely to pay attention to it, and 
either, you know, just count on, ``I am not going to get that 
particular incentive''--I am not sure it will--it is probably 
too complicated to say, ``I am not going to earn more money,'' 
because they might lose one incentive, but not another one, 
because the phase-out levels are all different.
    Mr. DAVIS. Mr. Viard, you would like to comment?
    Mr. VIARD. Yes, Congressman. I think you are right about 
needing to take a holistic approach to this. And it is very 
complicated, because just as we have a proliferation of phase-
outs on the tax side, we also have a proliferation on the 
spending side.
    There are numerous different anti-poverty programs. You 
mentioned some of them: the food stamps, public housing, 
temporary assistance to needy families, and so on. And any 
given household could, at least in principle, be eligible for a 
number of them. And some of the same complexity problems and 
marginal rate problems arise there, as well.
    I think that if we did try to consolidate, you know, along 
both sides of the system, that we at least could make more 
informed and transparent choices about the marginal tax rates.
    The one note of caution I do want to put into the 
discussion, though, is this. It is difficult to avoid high 
marginal tax rates in these low-income programs, because you 
really face a difficult trade-off. If you choose to have low 
marginal tax rates, you either need to reduce the benefits that 
are paid to the households with the very lowest incomes, or you 
need to have the benefits continue into higher income ranges at 
a greater cost.
    And so, one of the forces that has driven policy-making 
towards these high marginal tax rates is the desire, on the one 
hand, to provide adequate benefits to those at the very bottom, 
but on the other hand, to have those benefits phase out before 
the programs become too costly. So it is a very difficult 
trade-off----
    Mr. DAVIS. Wouldn't it, then, make more sense to step to a 
third-way choice on that question, and actually look at the 
process itself? One thing I have noticed dealing with 
integrated systems that have very little information error, is 
there is no system in the whole of government to be able to 
roll up, for example, a recipient of benefits to see what they 
get across the board.
    And so, I suspect you could get away from that. I mean, 
just from a CPA's perspective, would it be helpful if we had 
statutory language that would allow data to be matched and 
shared across agencies and programs? Because we don't now, and 
I think that is one of the reasons we have 10 percent improper 
payments with our entitlement programs at the moment.
    Ms. NELLEN. Well, certainly so far as transparency, having 
the data would be more useful to help answer these particular 
questions. And it is just in different locations, when does it 
come together into one format? But transparency would say, 
``Let's bring all that together, and analyze what is actually 
there, and where people are getting their particular 
benefits.''
    Mr. DAVIS. It's going to be one of the questions we are 
going to have in the coming months as we talk about entitlement 
reforms. Thank you, Mr. Chairman.
    Ms. NELLEN. Thank you.
    Chairman CAMP. Thank you. Mr. Stark is recognized.
    Mr. STARK. Thank you, Mr. Chairman. I have to make this 
comment, with due regard for the expertise of the other 
witnesses. But I have some notes here from my staff--I won't 
tell you which one--that says that Mr. Viard is the one heavy 
hitter from the GOP witness list. Congratulations. That is a 
high compliment from the Democratic side.
    Mr. VIARD. Well, thank you, Mr. Congressman, but I do not 
claim any expertise greater than my fellow witnesses here.
    Mr. STARK. Okay. I guess that what we want to hear from all 
of you is how we could simplify, as Mr. McDermott has 
suggested, the code for the majority of the taxpayers, which I 
guess is in the 90 percent, who use the simplified forms. There 
is discussions of not taking money out of their paycheck every 
month. But I guess I would ask the witnesses.
    Wasn't that initiated because so many people ended up at 
the end of the year not setting any money aside, then they had 
a tax liability, and then they were in the soup? I mean they 
just didn't have the money to pay their tax? Was that not the 
basis of the payroll withholding? Go ahead.
    Ms. NELLEN. Congressman, the reference actually was to the 
earned income tax credit, not to regular tax payments. Those 
should be done through withholding, to ensure that they are 
done.
    But so far as an earned income tax credit, if what happens 
is that the person from paycheck to paycheck----
    Mr. STARK. Right.
    Ms. NELLEN [continuing]. Is paying FICA tax, only to get 
that returned at the end of the year through a somewhat 
complicated process, is there a way they could not have that 
FICA tax withheld in the first place.
    Mr. STARK. Well, I want to thank the panel for their 
contributions. And as I say, it is going to be a difficult 
question for this committee, to figure out how we can simplify 
the tax return without, say, doing away with the interest--home 
owner's interest deduction, things like that, which politically 
would be a fire storm that none of the politicians could 
weather. Thank you for your contributions today.
    Mr. Neal, would you have further questions? I would be glad 
to yield the balance of my time.
    Mr. NEAL. I am okay. Thank you.
    Mr. STARK. Thank you. I yield back, Mr. Chairman.
    Chairman CAMP. Thank you. Mr. Buchanan is recognized.
    Mr. BUCHANAN OF FLORIDA. Yes. Thank you, Mr. Chairman, for 
holding this important hearing today. And I want to thank all 
our witnesses up front.
    There is a lot of discussion on C corps and having the 
highest rates in the world. I guess Japan lowered its rates, so 
that leaves us the highest rate, and I have heard the President 
and many members on this committee talk about lowering 
corporate rates so we can be more competitive here and abroad.
    But can you lower corporate rates--I pose this to all the 
witnesses--without not dealing with all these pass-through 
entities? I am someone who has been in business for 30 years. 
But in the 1980s everybody had a sub-S, and then everybody 
moved to--at least a lot of the entities that I had were LLC's, 
which are all pass-through entities.
    Do you see any scenario, based on your expertise, where 
they would lower corporate rates, but not at the same time 
lower rates for pass-through entities? Because a lot of those 
folks are the job providers.
    And, Mr. Buchanan, I will start with you, first.
    Mr. BUCHANAN. Compliments on your name, Mr. Buchanan.
    Mr. BUCHANAN OF FLORIDA. Thank you.
    Mr. BUCHANAN. Yes. I do agree that there is a lot of 
slippage between the different types of business entities. And, 
therefore, changing the C corp rules is going to create 
incentives for people either to move into or out of being a C 
corp, and instead, becoming a pass-through entity.
    The permeability isn't perfect, of course, because at this 
point there are people who argue that C corps have no reason to 
exist under the existing incentives for pass-through entities, 
and yet C corps do continue to exist. But I certainly agree 
with you, Mr. Buchanan, that the business tax reform would need 
to be thought of as an integrated whole.
    Mr. BUCHANAN OF FLORIDA. Yes, and if you just take that one 
step further, when you are looking at trying to raise rates on 
the rich, basically a lot of those are job providers. So, if 
you are looking to lower rates on C corp, and then you have to 
deal with pass-through entities, that goes right down to the 
individuals. So that is the point.
    Mr. Johannessen.
    Mr. JOHANNESSEN. You know, I would rather cede my time to 
my colleagues here on the panel.
    Mr. BUCHANAN OF FLORIDA. Okay.
    Mr. JOHANNESSEN. They probably have more expertise in that 
area.
    Mr. BUCHANAN OF FLORIDA. Yes. Ms. Nellen.
    Ms. NELLEN. One thing. The rates, actually, as to which is 
higher, the individuals or the corporations, has changed over 
time. And people do react to that. Prior to the 1986 act, the 
rate on individuals was higher than corporations. That switched 
after the 1986 act, which actually then brought about an 
increase in the number of pass-through entities, particularly S 
corporations and partnerships. And I would guess flipping that 
again would cause, again, some change in behavior.
    So, we have a record of showing that when one side or the 
other----
    Mr. BUCHANAN OF FLORIDA. But how could you, in a 
competitive world like we all live in, have two people 
competing in the same industry--a C corp, in theory, could do a 
lot less in revenues and a pass-through entity could do a lot 
more. And if the C corp was paying a lot less in taxes than the 
S corp or the LLC, how does that work in our competitive 
environment, in terms of doing business? To follow your logic--
--
    Ms. NELLEN. Well, I think some pass-through entities 
perhaps would move to the corporate forum. But you also have, 
with C corps, that they are still subject to double taxation, 
which is another issue that really needs to be addressed, along 
with the consideration of lowering the rates.
    Mr. BUCHANAN OF FLORIDA. Mr. Viard, did you want to comment 
on that?
    Mr. VIARD. Yes.
    Mr. BUCHANAN OF FLORIDA. Just the idea of lowering C corp 
rates here and abroad----
    Mr. VIARD. Well, I think----
    Mr. Buchanan of Florida.--and dealing with everything 
else--my opinion is you have got to deal with them all. But go 
ahead.
    Mr. VIARD. Well, I think, Congressman, yes, this question 
highlights, again, some of the complexities that have crept 
into the Internal Revenue Code in ways that maybe were not 
intended. I think that, in general, C corporations are taxed 
more heavily than pass-through entities, because there are two 
levels of tax. Yet there are circumstances in which C 
corporations can actually be used as, you know, tax avoidance 
devices, particularly if earnings are not being distributed and 
gains are not being realized.
    So, what this ultimately tell us is that we do want--
ideally, at least--a holistic solution, something that will try 
to unify the treatment of different business enterprises, and 
allow the choice of business form to be made without reference 
to tax considerations. So the different firms, as you say, in 
the same industry or in different industries can actually 
compete on a level playing field, be subject to a single level 
of tax that is really uniform across different types of 
entities.
    Mr. BUCHANAN OF FLORIDA. And one other quick question, as I 
have got a few minutes, or a minute left, or whatever it is, 
the IRS says the average person takes 21 hours to fill out 
their return. In fact, I was reading something where the USA 
editorial page had commented that, for the new iPad, they get 
one page of instruction and the 1040 form has 172 pages of 
instruction.
    What would be one or two things that, in terms of tax 
simplification, would you suggest or do? And we will start on 
the other end. Mr. Viard?
    Mr. VIARD. Well, again, I think the thing that most cries 
out is really trying to consolidate these different incentives 
for savings and education and children, which really, you know, 
do not have a rhyme or reason to them at this point. Crept up 
over the years, and you have multiple accounts and incentives 
that are serving only one or two purposes. And----
    Mr. BUCHANAN OF FLORIDA. Ms. Nellen, what would you----
    Chairman CAMP. I am sorry, the time has expired. Mr. 
Paulsen is recognized.
    Mr. PAULSEN. Thank you, Mr. Chairman. I also want to thank 
all of you for being here today as a part of this hearing. I 
find it very interesting.
    I will start with Mr. Johannessen, if I could. As a part of 
the work you do, you obviously advise clients, and we have so 
many provisions that are set to expire in 2012, which we have 
heard about, many of those you referenced: dividends, capital 
gains, and these issues that do affect decisions that go into 
the future. And a lot of these are in flux right now.
    How do you advise your clients just knowing that there is 
the frequency of the changes that are out there, and the 
provisions that expire? How do you go about actually advising 
your clients short-term, long-term?
    Mr. JOHANNESSEN. Right. Planners, by our nature, are used 
to changes in people's plans. We live in that world of 
uncertainty. But from a longer-term perspective, the way that 
we are building our plans today, which--you know, many times we 
are looking at folks' retirement, or their estate--is by taking 
the code as we know it exists today, the top tax brackets, and 
kind of planning out into the future, as legislated. And we 
have a software that helps us, do that in that environment.
    In the short term, it requires a lot of looking at numbers, 
reviewing numbers, trying to make best guess of the direction 
of where the congress and, the economy is going. And so, it 
requires a lot of time and energy. Last year, in particular, 
with Roth, and as we were heading towards a new tax bracket, 
whether we would have folks convert or not, you know, that was 
a significant back-and-forth dialogue.
    Mr. PAULSEN. So it seems like it is pretty clear that, 
given the sense that you have all talked about, that individual 
taxpayers are frustrated with the complexity in the forms they 
fill out, whether it is the phase-out provisions or anything 
else, as a profession you are also navigating the waters and 
having complex calculations and staff, and everyone trying to 
advise your client. So it is part of that whole complex 
situation, right, as a part of----
    Mr. JOHANNESSEN. Yes. You know, I think what most intrigued 
me about this testimony today is the idea of a more permanent 
structure than the one that has been in flux. When you look at 
the wave of folks moving towards retirement, just the Baby 
Boomers alone, and to have some sense of how to plan. Someone 
mentioned earlier the 21 hours to prepare the average tax 
return. That is more time than most people do on their 
financial planning. But then again, most spend time on their 
family vacation than they do on their financial planning.
    And so, to be able to have a more permanent structure, 
where people can peg towards what their retirement lifestyle 
needs to be with taxes built in, is hugely important, with the 
sheer number of people working towards retirement, this will be 
an issue for, not only seniors today, but the Baby Boomers as 
they move through the pipeline.
    Mr. PAULSEN. And, Ms. Nellen, maybe you have a different 
relationship with your clients. But do they face similar 
issues? I mean demographics are a fact, and we cannot change 
demographics. Can you comment on that?
    Ms. NELLEN. Yes, Congressman. I think part of it with 
practitioners is just being able to explain to their clients as 
to what the rules are today, what they might be tomorrow, or 
in--you know, two years out, three years out, and the 
uncertainty of being able to plan in that context. It does make 
it quite difficult, having to caveat answers about, ``Should I 
invest this way or that way? When should I sell my business, 
this year? Next year?'' A lot of caveats have to be put in 
place, and I think the client--and I'm not sure what that 
means.
    But I agree. Permanency would certainly help. Less choice, 
where they do not have to choose between, you know, 14 
different provisions, but it was very clear if I do this I will 
get this particular education incentive, or get this retirement 
saving, whatever it might be. Added certainty, I think less 
choice or options would be helpful.
    Mr. PAULSEN. Okay. And Professor Nellen, I know you 
recently wrote an article for the AICPA that I think was 
called, ``Rethinking the Income Tax Calculation.'' There is a 
lot of talk about tax expenditures right now in the context of 
overall tax reform, and broadening the base, and eliminating a 
lot of these tax expenditures.
    But, you know, and you discuss this as a part of what you 
wrote, there is a complicated interaction of the rules that 
affect income tax calculations, and there is the question of 
what ultimately is a tax expenditure. Can you just explain that 
interaction a little bit, as this conversation, I think, is 
going to occur, obviously, and this committee is a part of tax 
reform. Do you have any suggestions on how we can move forward, 
keeping in mind some of the issues?
    Ms. NELLEN. Well, we hear a lot about this $1.1 trillion of 
tax expenditures out there. I am not sure everybody knows 
exactly what a tax expenditure is. Generally that does not 
include the standard deduction or personal exemption. Those are 
viewed as part of a standard income tax system.
    So far as I think other misconceptions out there, I think 
there is a lot of thought that corporations get most of those 
incentives, where actually, the bulk of those dollars is 
actually for individuals.
    Also, when we hear $1.1 trillion of tax expenditures, that 
is actually income tax. Some of those would actually generate, 
I guess, additional payroll tax, too. If, for example, certain 
employer-provided exclusions were to be considered all or 
partly taxed, it would also general some payroll tax.
    But I think, to talk about tax expenditures, it would be 
helpful if there was a broader understanding of what those are, 
so the public would understand what that is getting at, who 
uses those tax expenditures, and how do they affect what the 
tax rate is.
    Mr. PAULSEN. All right, thank you.
    Chairman CAMP. Thank you. Mr. Marchant is recognized.
    Mr. MARCHANT. Thank you, Mr. Chairman. I represent a 
largely suburban district, very professional, upper middle 
class. And I would tell you the largest reason why these 
professionals have to seek assistance with their tax return is 
the alternative minimum tax. The largest deduction most of my 
constituents have are their property taxes and their house 
payment. So, I don't think we can have any meaningful 
discussion about simplifying the Tax Code without having a 
discussion about the AMT, especially in my district.
    Mr. Viard--is that how you say it? Is there a way to 
calculate the amount of money that is gained by virtue of the 
alternative minimum tax? Is there a baseline where you can say 
if there were no alternative minimum tax, here is the amount of 
money that was collected, but because we are collecting the 
alternative minimum tax on top of it, it represents what 
percentage of the total tax collected?
    Mr. VIARD. It is certainly possible to compute that number, 
Congressman. And, in fact, the Urban-Brookings Tax Policy 
Center, which is probably the most authoritative source of data 
about the AMT and about many other tax topics, has computed 
that.
    I do not have that number with me, offhand. But one 
interesting fact is that we have reached a point where it is 
actually cheaper to repeal the regular income tax than to 
repeal the AMT. Now, the bulk of the revenue that is being 
collected each year would be raised under either of these tax 
systems. And only a modest portion is the increment that arises 
from having two of the systems, as opposed to one. But 
nevertheless, at this point, in that particular sense of the 
term, you know, the AMT has become the ``bigger tax system.''
    Mr. MARCHANT. Is there a largest deduction across the 
nation for AMT payers, the single largest deduction that they 
lose?
    Mr. VIARD. They lose the state and local tax deduction in 
its entirety. So it is the property taxes, as you mentioned, 
and also either the income or the sales tax, which itemizers 
have a choice to deduct. They also lose their personal 
exemptions.
    And that is kind of an interesting fact, because Professor 
Nellen mentioned there is--you know, we do not normally think 
of the personal exemption as being a tax expenditure. We think 
of it as being part of the normal tax system. And yet it is not 
part of the alternative minimum tax. The AMT treats the per-
person exemption, the $3,700 for the taxpayer and the spouse 
and the dependents, as if it were a tax preference, and 
eliminates that under the AMT.
    Mr. MARCHANT. Is that the most common thing that they lose?
    Mr. VIARD. Those two are the biggest single items.
    Mr. MARCHANT. Mr. Johannessen, I found your testimony to be 
especially good, because when you go to your specific examples 
of dealing with the AMT, I think that is what hits most of the 
families in my district. They think they are planning all year 
long on what tax they may owe. And then most times they have 
paid--in my district--most times they have paid in too much.
    And so, they are getting big checks back, but they are 
curtailing their spending during the year. The government is 
keeping more of the money than they actually need, but 
taxpayers are curtailing their spending out out of precaution. 
And it is my contention that if that money was available in the 
economy to be spent, that we would have an acceleration of the 
economy. Thank you, Mr. Chairman.
    Chairman CAMP. Thank you. Mr. Rangel is recognized.
    Mr. RANGEL. Thank you, Mr. Chairman, and welcome all of 
you. Thank you for sharing your views with us today.
    During the President Reagan and President the-first-Bush 
administration there was a dramatic reduction in taxes. Some 
people believe that it--that reduction in revenue was 
responsible substantially for the increase in our deficit. 
Others have taken the position that any reduction in taxes pays 
for itself and, in fact, creates jobs and increases revenue.
    How many of you believe that the reduction in taxes that 
had been enacted was responsible in part for the tremendous 
deficit that we are suffering now?
    So, the two in the middle, your belief that tax cuts pay 
for themselves and grow the economy, and create jobs?
    Mr. JOHANNESSEN. No, sir. Actually----
    Mr. RANGEL. Now, let me--ladies first. Ms. Nellen.
    [Laughter.]
    Ms. NELLEN. Thank you, Congressman.
    Mr. RANGEL. Besides, she is smiling, so I don't think she 
will believe your answer.
    Ms. NELLEN. I am not sure what the answer is. I think there 
are many factors that come into play that would affect that. I 
will leave that to the economists, to know if it actually----
    Mr. RANGEL. Why didn't you put up your hand?
    Ms. NELLEN [continuing]. Is increasing----
    Mr. RANGEL. Let me reframe the question just for you. There 
is reason to believe that dramatically reducing taxes not only 
pays for itself, but increases revenue. If you are confused, 
argue the point of how it is going to create revenue, since you 
are a tax expert, and you do not do like we do, hope for the 
best, or put a spin on something. It is just hard for people to 
believe from the math that you can dramatically reduce taxes 
and then tell the IRS, ``You are in for a boom year.''
    Ms. NELLEN. Right.
    Mr. RANGEL. Right what?
    Ms. NELLEN. You reduce the rates, reduce everything, that 
would be hard to believe that would increase revenues. 
Actually----
    Mr. RANGEL. Let me just----
    Ms. NELLEN [continuing]. It gets measured here as a tax 
cut----
    Mr. RANGEL. I guess I am going to have to rely on you to 
defend this theory, Mr. Johannessen.
    Mr. JOHANNESSEN. You----
    Mr. RANGEL. The other three--I mean the other two----
    Mr. JOHANNESSEN. Right.
    Mr. RANGEL. You are.
    Mr. JOHANNESSEN. The reason I didn't raise my hand is 
because it seemed like during some of those times that you 
referenced in your time line there we also raised expenses 
while cutting taxes. And any financial planner would suggest to 
you that a client is more likely to have a successful outcome 
when the revenue coming in is greater than the expenses going 
out of any family budget.
    And so, there have been times in your time line where we 
were bringing in less revenue, bringing the base down, and 
raising our----
    Mr. RANGEL. How many times have you been accused of having 
a two-handed argument? Of course if you reduce spending it 
reduces the deficit. But I am only dealing with what has been 
said categorically. Reduction of rates brings in a increase of 
revenue. You say, ``Heck no, not unless you reduce spending.''
    In other words, it takes both, I would assume, because we 
are going to be presented with a budget that reduces revenue 
and reduces spending.
    Mr. JOHANNESSEN. I----
    Mr. RANGEL. And I think that shatters the myth that it pays 
for itself. It does not pay for itself, unless you do something 
else, reduction and spending.
    Mr. JOHANNESSEN. Correct. One of--it would make me not 
popular necessarily with my clients is that I would actually 
advocate for modest increase in tax rates, tax revenue.
    Mr. RANGEL. You would do that as an American that is 
concerned about your country. To hell with the client. If you 
just know that you don't want a disaster--who disagrees with 
Mr. Johannessen that--what? No, Mr. Buchanan is with us. Thank 
you, Chairman. No, I don't need the help.
    Mr. VIARD. Congressman, can I ask a question?
    Mr. RANGEL. Yes.
    Mr. VIARD. You are absolutely right, Congressman, that tax 
cuts----
    Mr. RANGEL. Let me----
    Mr. VIARD [continuing]. Normally do not pay for 
themselves----
    Mr. RANGEL. He threw me off. I just want to ask the 
question. During the time for our country, Republican and 
Democrat--so you suggest that to reduce the deficit we should 
reduce the spending and increase the revenue with a tax 
increase. Is there anyone that disagrees with that?
    [No response.]
    Mr. RANGEL. Okay. Now, I am so sorry, Mr. Viard. Your 
thoughts were?
    Mr. VIARD. Well, I--you are absolutely right, Congressman, 
that the typical tax cut does not pay for itself. I do think it 
is important to realize that if there is a marginal rate 
reduction in the tax cut, that you normally do get an increase 
in economic activity, and that there is some revenue feedback 
from that.
    But the revenue feedback is not large enough to offset the 
direct revenue loss. And, therefore, you do have a net 
reduction in revenue from the tax rate cut, even though it is 
not as large of a revenue loss as it would be if there had been 
no behavioral response.
    Chairman CAMP. All right, thank you.
    Mr. RANGEL. What is it----
    Chairman CAMP. Time has expired. Mr. Berg is recognized.
    Mr. BERG. Well, thank you, Mr. Chairman. I would like to 
actually weigh in on that debate. In North Dakota we have 
reduced the income tax. We did that last year. We reduced the 
corporate income tax. We reduced the tobacco tax. And all of 
those have brought in more revenue.
    So, you know, again, I think the focus of this debate here 
today is how do we simplify our taxes, and how do we move to 
that place where it is easier for people to pay their taxes and 
simplify.
    I enjoyed Mr. Buchanan's statement that every now and then 
you have got to clean out the barn, as I would call it in North 
Dakota. And for people that have done that, there is a lot of 
build-up there. And that is, quite frankly, what we did two 
years ago in North Dakota.
    We had two tax forms, one that you could take a lot of 
deductions on--we had about two percent of the filers on 
there--and then we had a streamlined one that basically said, 
``No deductions; here is what your gross income is, here is 
what your state tax is.'' We lowered the overall rate and did 
away with the long form, if you call it. And again, I think 
that is what we are talking about nationally here, too: How do 
we again go back to cleaning out the barn, get to, if you will, 
a short simple form, knowing that, as time progresses, 
different policy changes come in for deductions and different 
things. So, you know, I really like that.
    The other thing that is such a challenge is just the 
uncertainty. The uncertainty out there, it is impossible for 
small business to have confidence in our economy, so they are 
sitting on their hands. They are not hiring. Everyone out there 
is worried about this deficit spending, knowing it is going to 
impact the taxes that they pay and that it is going to be a 
barrier to that growth.
    And so, I guess I would just kind of simplify this. Mr. 
Johannessen, how difficult is it when all these rules are 
changing as you are advising your clients?
    Mr. JOHANNESSEN. You know, we do that all the time, so for 
us it is not difficult. For the average citizen, though, I 
think it is very complex. Studies would tell you that probably 
two percent of the population actually use a certified 
financial planner.
    But we work in it all the time. And it is a matter of 
trying to scenario-plan and look down the road. The issues that 
our clients face certainly are not life and death. They are 
trying to help our clients make smart financial decisions. And 
so, it is complex. There is a number of different areas that 
each year you have to look through.
    One of the concerns, that I have kind of on the larger 
picture is the potential impact on these variable rates on the 
capital markets. Whether it is in last fall's fall-off of 
returns in municipal bonds, as some portion of the public left 
municipal bonds as a result of the changing Tax Code, and how 
folks can game the system with regards to capital gains, and 
what investments they are either getting into or getting out 
of, right at the time that there is an inflection point with 
capital gains rates or ordinary income rates. I think that 
needs to be a part of the discussion, a couple of the things 
that we are thinking about every day.
    Mr. BERG. Well, that is an excellent point. Sometimes we 
forget about the impact of deficit spending on what the long-
term markets are going to do, and what impact it will have, 
even apart from Tax Code. So thank you. I yield back.
    Chairman CAMP. Mr. Roskam is recognized.
    Mr. ROSKAM. Thank you. Mr. Buchanan, in your testimony you 
made an argument that said that the phase-outs do not increase 
complexity. Can you walk us through your thinking on that? It 
is in conflict to what other experts say. It seems intuitively 
difficult to track. What is it, in your experience, that 
animates the hope that, literally, phase-outs do not exacerbate 
the problem with complexity?
    Mr. BUCHANAN. My argument was that Mr. Viard's list of 
phase-outs is a concern, because that are 20 different phase-
outs with 20 different starting points and ending points and 
phase-out rates. That is complicated.
    The concept of having a means-tested phase-out is not 
inherently complicated, because 99 percent of the actual, in 
terms of doing tax planning and figuring out which benefits or 
tax provisions apply comes before you would ever even think of 
a phase-out, or think of the tax rate that may or may not be 
phased out.
    Mr. ROSKAM. Okay. I am sure you said it well and clearly, 
and everybody here got it except for me.
    Mr. BUCHANAN. Okay.
    Mr. ROSKAM. So the first part of your reply was that 
something was complicated, as it relates to phase-outs, and 
then you transitioned into ``but it is not.'' Where was the 
nexus?
    Mr. BUCHANAN. The nexus is if you have 20 different phase-
outs with 20 different sets of rules for each of those phase-
outs, that is complicated. We could have one phase-out that 
says, ``Here is a range of tax provisions that are phased 
out,'' but it begins at the same income level for all of them, 
and it ends at the same income level for all of them. Let us 
say that the ending point of the phase-out was $250,000 a year, 
if I made more than $250,000 a year, would that I am not going 
to be eligible for any of those provisions, so----
    Mr. ROSKAM. I understand. So they all phase-out. That is 
your argument?
    Mr. BUCHANAN. Yes.
    Mr. ROSKAM. Okay. Wouldn't it be better if there weren't 
any phase-out, though?
    Mr. BUCHANAN. No, I do not agree with that. I think that 
the importance of----
    Mr. ROSKAM. Well, it is less complex. What you are 
accepting is a level of complexity, and you are making the 
argument that it is better to endure the complexity, because of 
some other greater good. You are not arguing that it is less 
complex, though.
    Mr. BUCHANAN. Actually, what I am saying is that the phase-
out complexity is so minuscule as to not be an important part 
of the simplicity debate.
    Mr. ROSKAM. Okay. Thank you. Can I just ask the other three 
panelists to take a step back and look at a bigger picture?
    And I think it is interesting. There is nobody on the 
panel, there is nobody on this side of the microphones that is 
arguing for the status quo, right? There is no constituency 
that says, ``Wow, is our Tax Code fabulous.'' Nobody is saying 
that.
    Take a step back, the other three, and give us some top 
lines on fundamental goals, or jurisdictions around the world 
that have attributes that you think are worth admiring and 
replicating and trying to draw from. That is commonly called a 
softball.
    [Laughter.]
    Ms. NELLEN. Congressman, that is a good question. I think 
it is worth taking a look at.
    One comparison point would just be how many provisions are 
in the particular income tax, as far as deductions, credits, 
exclusions. Do they all need to be there? I would venture to 
say that our system probably has far more than most would.
    Also, we have a situation where, as we noted in testimony, 
so far as education incentives, there is 14 different ones 
there. So when one is added, often we are not removing another 
one, we are just saying, ``Here is one more way you might be 
able to qualify for something.''
    I think it might be that--I don't know if other countries 
do this, but I would guess they might think, ``Well, if we are 
going to add one, maybe we should be thinking that that is 
replacing another one.''
    But I would say certainly be looking at just what is 
feasible, so far as understanding and explaining to 
individuals.
    Also, just one comment. So far as complexity, we should 
think of it not only in compliance, but also in tax planning is 
there complexity there. And certainly phase-outs do cause 
complexity in both those categories.
    Mr. JOHANNESSEN. Congressman, this is more my opinion than 
the position of the Financial Planning Association, but as I 
think about the underground economy that exists in our country, 
and recognizing that a consumptive--or consumption tax is 
somewhat regressive and maybe not popular, I do believe that 
some level of consumption tax, in order to gain access to those 
monies that are kind of living in that underground economy that 
certainly are not even a part of any of these discussions that 
we are having today and being filed on a tax return, is perhaps 
a way to--or would be an important part or element of the 
discussions.
    Chairman CAMP. All right. Thank you. Time has expired. Ms. 
Black is recognized.
    Mrs. BLACK. Thank you, Mr. Chairman. And my question goes 
to the fact that there have been some members on this committee 
that have asserted that the Tax Code is not complicated for 
those that they say are just average working middle class 
Americans. And one colleague even pulled the code out to try to 
show his point that the Tax Code is really there for those who 
have a larger income or maybe even a business where they are 
making a larger income.
    And I wanted to go to you, Ms. Nellen, because I noted in 
your testimony you did talk about the complexity, and how 
difficult it might be for just an average working American. And 
I want to make that point, as I was sitting here thinking about 
one of the average working Americans in my district. That may 
be a family of five with three kids, combined salary of $75,000 
a year. We have child care tax credits, we may have one of them 
that is getting ready to go to school, so we want to know about 
the education credit. We might also be saving a little bit, and 
we have to make sure that we are applying that properly to 
whatever our tax liabilities are. Perhaps a savings plan for 
retirement might be a part of that.
    I am going to give one case that just happened to me--and 
this is a real-life situation. I was in my district, in a rural 
part of my district, and I went to a restaurant, a very small 
restaurant, and just going around, shaking hands, saying hello 
to folks, saying, ``How are things going? Can you tell me 
what's happening in your life? How is it?''
    And one young gentleman who was, I would say, maybe his 
early thirties, says, ``You know, I just got a promotion in my 
job,'' and I said, ``That's great.'' And he goes, ``Well, you 
know, it would be great, except that now I am in another tax 
bracket. I am working harder, and I am bringing home very 
little more than what I was bringing home before.''
    And so, Ms. Nellen, can you help me? Is, what I am saying 
to you, actuality, where people who are just average, everyday 
working people are having difficulty in understanding how to 
make out their forms and what their tax liabilities are?
    Ms. NELLEN. Yes. Congresswoman Black, I agree. I think the 
complexity is well beyond those who are high-income and can 
afford people to help explain it. That doesn't mean it should 
be tolerated, just because they can afford to take care of it, 
but a lot of the complexity is in the provisions which--many of 
which are designed for low-income. For example, there is a 
saver's credit which is designed for low-income individuals. It 
is fairly complicated to get through, so far as what you need 
to do to obtain it.
    The earned income tax credit certainly is only designed for 
low-income wage earners. So far as the provisions regarding 
education, retirement plans, other saving vehicle that could be 
there, different ways that they might--you know, whether it is 
funding medical insurance, whatever it might be, I think does 
raise a significant amount of complexity that is hitting people 
who are making certainly under, you know, $80,000.
    And I think another part of the complexity is that, again, 
if they are going to use software, or they are going to someone 
who is just going to prepare their return without asking, 
``Well, gee, you know, are you saving for college,'' those 
questions are not always getting asked if they are just having 
their return done for, you know, some low, low fee. They would 
really need more than that, or they wade through, you know, 
pages and pages of IRS documents.
    So, I appreciate your raising that. The complexity is, I 
think, very heavy for middle and low-income tax----
    Mrs. BLACK. Thank you. And I know my time is brief here, 
and I want to just jump up to the next category of someone I 
actually was visiting with this past week before I got on the 
plane to come here. He owns a business, and it is not a huge 
business, but he does make an income of $250,000 a year, he 
told me. He said, ``But, Diane, you know what? If there are 
benefits out there in that code that really could help me, I 
can't find them. And I am paying my fair share, and I am paying 
what I think, you know, as hard as I am working, is a big 
share.''
    And so, there is also a complexity, from what I am hearing 
from my small business owners who make that income of about 
$250,000, saying, ``There may be tax breaks in all of these 
books that are here, but frankly, I don't know, and the people 
I am paying are not really able to find me these significant 
breaks, where what we are hearing in the media is that I am 
somebody who is really getting these big, huge breaks, and I am 
not paying anything.''
    And then the last thing that I do want to ask each of you, 
define for me--I keep hearing this over and over again--
``wealthy,'' that the wealthy should pay more. Can you give me 
a definition of what you would consider wealthy?
    And, Mr. Buchanan, I would like to start with you.
    Mr. BUCHANAN. Obviously, there is no clean-cut cut-off to 
define the word ``wealth.'' A person can be relatively wealthy 
or relatively not wealthy. But, frankly, I think that when you 
reach the point that you----
    Chairman CAMP. If you could just quickly answer. Is there a 
dollar figure?
    Mrs. BLACK. Yes, what is ``wealthy?'' Give me a number.
    Chairman CAMP. Because time has expired, and we want to get 
through the four answers, and then we will move on.
    Mrs. BLACK. Please.
    Mr. BUCHANAN. I think the $250,000 a year cut-off is 
sensible.
    Mrs. BLACK. Is wealthy. Okay.
    Chairman CAMP. All right.
    Mrs. BLACK. Mr. Johannessen.
    Mr. JOHANNESSEN. I think a similar number, $250,000, is 
probably reasonable.
    Mrs. BLACK. Okay.
    Ms. NELLEN. It sounds fine.
    Mr. VIARD. And I don't think there is any single answer. I 
think, obviously, somebody who makes $250,000 is wealthier than 
somebody who makes $100,000, who is wealthier than somebody who 
makes $50,000.
    Mrs. BLACK. But when we talk about the millionaires who are 
getting the breaks, we, I think, confuse wealthy with those 
that we see on television, like the GE's. So, thank you.
    Chairman CAMP. None of you characterized how that income 
was earned, which I thought was interesting. So, Mr. Schock, it 
is your time.
    Mr. SCHOCK. Yes, I was just going to say, first of all, 
thank you all for being here. Most of the good questions I was 
going to ask have been asked, I think, three times already.
    But since Ms. Black asked such a great question, and I was 
actually quite taken aback by your answers, I guess my question 
is this. Assuming you all recognize that the lion's share of 
small businesses file as either sub-chapter S or limited 
partnerships, and pay that as personal income tax, isn't it 
dangerous to assume that somebody who makes ``more than 
$250,000'' is ``rich,'' and that hiking a tax on filers of over 
$250,000 would put an undue burden on precisely those small 
businesses who have created 7 out of the 10 jobs in the last 2 
years?
    Mr. JOHANNESSEN. I would generally agree with that, but 
there are opportunities within small business to help defer 
some of those--the tax liability if the business owner decides 
to take the stance and help his or her employees set up a 
savings program for their retirement.
    So, though I generally agree with you that it could be a 
risk, there are also ways for them--and I would love to have 
the opportunity to talk to Ms. Black about her constituents who 
have that question. But there are opportunities for them to 
ultimately reduce the income for that business owner.
    Mr. SCHOCK. You mean if they give it to their employees?
    Mr. JOHANNESSEN. To themselves and to their employees.
    Mr. SCHOCK. Well, let me ask a different question. Is 
anybody up here advocating increasing the corporate tax, the 
current rate for corporations?
    Ms. NELLEN. No.
    Mr. SCHOCK. No one. Okay. So, I guess I am a little 
dumbfounded that we would actually suggest increasing the tax 
on filers of over $250,000 if the lion's share of those filers 
are actually small business owners.
    And if we don't think it is a smart thing to increase the 
tax on corporations, why is it a good thing to increase the 
tax, or a justifiable increase in tax, on the largest share of 
small business owners in America? Why is it okay for GE and for 
IBM not to pay a higher tax, but it is not okay for the local 
grocery store or the car dealer?
    Mr. VIARD. Well, Congressman, I definitely share your 
concern about how an increase in the--at these high income 
levels would affect the owners of pass-through firms. Of 
course, some of those pass-through firms are small, some of 
them are large. But all of them are certainly part of the 
investment that takes place in the economy that sustains 
employment opportunities and wages.
    I do think that should be separated from the question of 
whether someone who makes $250,000 is rich. I think someone who 
makes that income level is rich, and that is true, whether they 
own a pass-through business or not. But the fact that they are 
rich does not necessarily mean that we should increase the 
marginal tax rate that applies to them. You know, at a minimum, 
we need to be aware of the impediment that that creates, in 
terms of incentives to invest in pass-through firms.
    Mr. SCHOCK. Anyone else?
    Mr. BUCHANAN. Mr. Schock, I think it is important to 
remember two things about this.
    First of all, $250,000 a year for the owner of a small 
business is not their revenue, it is their income. So we are 
not talking about somebody who takes in $250,000 and then has 
to pay it out to employees' salaries, and that kind of thing. 
We are saying, net of all their business expenses, what is 
their income? At the end of the year, after you add up what you 
have made from the firm, it is $250,000.
    Second of all, if you raise the rate----
    Mr. SCHOCK. But let me just understand you. That is the 
money they then use to reinvest in their business.
    Mr. BUCHANAN. Right. But what----
    Mr. SCHOCK. And the corporations that I did not hear you 
saying you were advocating higher taxes on--I am assuming we 
don't want to raise taxes on them because to take money away 
from a corporation's pot of money with which they reinvest. So 
why is it okay to take more money away from a small business 
owner, but not a big business owner?
    Mr. BUCHANAN. Well, in part, because C corporations have 
the two-part tax that we talked about before. So you are not 
actually comparing the same things.
    Mr. SCHOCK. They are not both the same pot of money that is 
used to reinvest in the entity?
    Mr. BUCHANAN. No, the point is that, for a C corporation, 
they pay the corporate income tax, and then they can----
    Mr. SCHOCK. No, I understand. I understand. Okay.
    Mr. BUCHANAN. Okay.
    Mr. SCHOCK. Finally--I am almost out of time--I am 
interested in the lowest wage earners in America. Mr. Viard, 
maybe perhaps you could address this.
    I have got a lot of poor folks in my home town. And when I 
talk to them a lot about the incentives to go out and work, get 
a higher-paying job, some families who are trying to get two 
jobs, for example, the way I understand it now is there are 
some disincentives for folks in the lower end of the income 
scale when they hit a certain threshold. Could you maybe speak 
to that----
    Chairman CAMP. Just a quick answer and then we will move 
on, because time has expired.
    Mr. VIARD. Yes, there are very high marginal tax rates 
applicable to some of these households, because they lose a 
number of tax-related benefits and also, in some cases, 
benefits from spending programs.
    Chairman CAMP. All right. Thank you. Ms. Jenkins is 
recognized.
    Ms. JENKINS. Thank you, Mr. Chair. Thank you for having 
this hearing. And thank you, each, for your contribution today.
    Much of the focus in the headlines and inside Washington 
has been focused on tax reform to make our corporations more 
competitive, internationally. However, we should also focus on 
helping American families prosper. Could each of you just 
briefly discuss first of all, how the Tax Code impacts or 
distorts the daily decisions that families make, and, secondly, 
how simplifying the individual Tax Code could help individuals 
and families be more successful and help them make rational 
choices and remove some of the economic distortions which 
hamstrings their financial security?
    We will start with the heavy hitter.
    Mr. VIARD. Okay. The--I mean I think there is a number of 
impacts that the tax system has on people. There is the almost 
unavoidable work disincentive, of course.
    But the provisions that we have been discussing today I 
think have more far-reaching and adverse effects, because it 
means that when households are engaging in decisions like 
trying to prepare for--to send their kids to college, or in 
trying to save for retirement, that they are just forced to 
deal with an additional layer of complexity that does not need 
to be there, that they really have to think about the Tax Code, 
front and center, if they want to make, you know, the best 
decisions that they can for themselves concerning how to go 
about, you know, what ought to be much simpler activities.
    Ms. JENKINS. Thank you. Ms. Nellen?
    Ms. NELLEN. Thank you, Congresswoman. The--I think clarity 
would actually help. For example, if there is a desire in the 
tax law to encourage people to save for their retirement, 
perhaps there should be, you know, one particular way of doing 
that, so it is very clear, ``Oh, if I put this $1,000 into this 
account, I am going to have it just earn interest tax free, or 
perhaps I am going to get a deduction for some portion of 
that.''
    I think today they are looking at, ``I would like to save 
for retirement. I am not sure if I am going to have positive or 
negative tax implications of doing it particular ways.'' So I 
think just the added clarity would be a big benefit to, 
actually, all taxpayers.
    Ms. JENKINS. Okay.
    Mr. JOHANNESSEN. Congresswoman, I would like to see a day 
some day when that more than two or three percent of the public 
actually think about this stuff on a daily basis. I would like 
to get there. And this being financial literacy month, would 
love to help educate folks and create incentives for them to 
actually think about this and do their planning.
    But, unfortunately that is not the way it is today. Folks 
think about this stuff on or about April 15th, and then quickly 
forget about it after they have either stroked the check or are 
now in some kind of payment mode.
    So, I would hope that we can get to a point where we do 
that, but it is--we are not there yet.
    Mr. BUCHANAN. In addition to what Ms. Nellen mentioned, in 
terms of planning for retirement, planning for health care 
spending, planning for a college education, I think that 
perhaps one of the greatest effects on what we would call 
everyday Americans is this sense that they do not really know 
what is going on.
    An earlier comment indicated that people thought, ``There 
are provisions out there that I could be benefitting from, but 
darn it, I cannot find them.'' And I think one of the costs of 
complexity is a sort of ``morale cost,'' an important burden on 
the citizens of this country. Essentially, the more pages that 
are there in the Code, and the less time I have to read them, 
the more I have a sense that I am somehow getting left behind.
    Ms. JENKINS. Okay. Thank you all. I yield back.
    Chairman CAMP. Thank you. Dr. Price is recognized.
    Mr. PRICE. Thank you, Mr. Chairman. I appreciate you 
sticking around. I want to thank the panel.
    And I want to try to touch on one item that has been talked 
about, which is this notion that if you decrease tax rates, you 
do not increase revenue. The three cases that are cited most 
frequently are President Kennedy's tax reductions, President 
Reagan's tax reductions, and President Bush 43's tax 
reductions.
    Do any of you disagree that the reductions were followed by 
an increase in revenue to the Federal Government for each of 
those three Administrations?
    Mr. VIARD. Well, I don't believe, Congressman, that they 
caused revenues----
    Mr. PRICE. That is not the question, because it is a very 
complex situation.
    The question is, the tax reductions occurred. Did the 
Federal Government see an increase in revenue? Anybody disagree 
with that?
    [No response.]
    Mr. PRICE. Great.
    Mr. VIARD. If I can clarify, Congressman, you mean the 
revenue was higher----
    Mr. PRICE. Higher after the tax reductions than before.
    Mr. VIARD [continuing]. Some subsequent--in nominal terms, 
I think----
    Mr. PRICE. Yes.
    Mr. VIARD [continuing]. That certainly was true, sure.
    Mr. PRICE. Okay. And then we can argue about--or we can 
discuss--why, indeed, that occurred. But there was an increase 
in revenue to the Federal Government following tax reductions 
by each of those Administrations: Kennedy, and Reagan, and 
Bush.
    We are talking about the burden of the taxes. I have not 
heard anybody talk about the progressive nature of our tax 
system. The top 1 percent pay about 40 percent of the taxes--of 
income earners, the top 10 percent about 70 percent, the top 50 
percent about 97 percent of the taxes. Is--do any of you 
believe that that progressive nature is harmful in any way to 
our economic system, or to our society?
    Mr. VIARD. There is always a trade-off, Congressman, 
between the degree of progressivity and the impact on 
incentives. As the tax system becomes more progressive, it 
features higher marginal rates for those who are at the high 
end of the spectrum. And that does create disincentives for 
work. Under an income tax system, as opposed to a consumption 
tax system, it also creates disincentives for saving and 
investment, which is a very critical distortion.
    And as you have said, Congressman, the individual income 
tax today is quite progressive. I should note that the numbers 
you give are the for the individual income tax----
    Mr. PRICE. Yes.
    Mr. VIARD [continuing]. Not for the tax system, as a whole.
    Mr. PRICE. Right.
    Mr. VIARD. And the overall tax system is somewhat less 
progressive than the individual income tax in isolation.
    But I think that there are a lot of misconceptions. People 
think that the high-income groups are not paying taxes. And 
obviously, we can debate. Should they pay more? Should they pay 
less? But we need to face the reality that they are paying 
substantial taxes now, they are facing significant marginal tax 
rates. There are disincentive effects.
    And we also need to realize, I think, that as we try to 
close our fiscal gap, that increasing taxes only for the top 
two or three percent will not close that gap.
    Mr. PRICE. Yes.
    Mr. VIARD. Obviously, if we are willing to accept the 
disincentive effects, that could be part of the response that 
we adopt.
    Mr. PRICE. Thank you.
    Mr. VIARD. But certainly not the whole thing.
    Mr. PRICE. Does anybody on the panel disagree with the 
statement that Mr. Viard made, and that is that if you increase 
the tax rates there is a disincentive to saving, and a 
disincentive to investment?
    Mr. BUCHANAN. I don't disagree categorically, but I think 
that the evidence on the degree of response is ambiguous, at 
best. And the best evidence indicates that the responses are 
quite small.
    Mr. PRICE. I think that is debatable. We have been talking 
a lot about the burden regarding the income tax system for 
individuals and for families.
    I am of the belief that our tax system currently punishes 
all the things that we say that we want. We want hard work, we 
want success, we want entrepreneurship, we want risk-taking, we 
want savings. All of those things that we say that we want, 
yes, we punish them with our current tax system.
    Wouldn't it be simpler and a less burden to society if we 
did away with the income tax system, and went to a consumption 
tax system? Wouldn't that be much simpler and a lesser burden--
understanding that you take into account those at the lower end 
of the economic spectrum with the prebate and the like?
    Mr. VIARD. Well, Congressman, I believe that consumption 
taxation is superior to income taxation. I would like to see 
the income tax system, both individual and corporate, 
completely replaced by a progressive consumption tax. It would 
eliminate the disincentives for saving and investment. The work 
disincentive, of course, would still exist, but the 
disincentives for saving and investment would be eliminated. 
And a significant degree of the complexity of the current tax 
system could also be removed.
    It would not be, you know, a panacea to create a completely 
simple system, but there are a number of complexities relating 
to income measurement and to depreciation and such not that 
would simply be swept away in their entirety by using 
consumption as the tax base.
    Mr. PRICE. Anybody else want to weigh in on the consumption 
tax? Ms. Nellen?
    Ms. NELLEN. I think a former question regarding what do 
other countries do, I think countries tend to have both an 
income tax and a consumption tax, in the form of a VAT.
    The focus of this hearing being on simplification, I do 
want to just point out that any tax could be complicated. And I 
think on a consumption tax, when you talk about, ``Well, gee, 
we are going to exempt this, this, and this,'' then you get to 
defining those exemptions, you have got a fairly complex 
provision.
    Or, if you want to say, ``We want to encourage people to 
buy this, so we are going to have a lower rate on that 
particular item,'' so any tax could be complicated. I 
wouldn't----
    Mr. PRICE. My time is running--but I do want to say for the 
record that an income tax and a consumption tax is the worst of 
both worlds, which I strongly oppose. Thank you.
    Chairman CAMP. All right, thank you. Time has expired.
    I want to thank all four witnesses for your testimony and 
for your willingness to answer questions today, and helping 
inform the committee. This hearing is now adjourned.
    [Whereupon, at 12:21 p.m., the committee was adjourned.]

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