[Senate Hearing 115-331]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 115-331

                         INDIVIDUAL TAX REFORM

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

                                 HEARING

                               BEFORE THE

                          COMMITTEE ON FINANCE
                          UNITED STATES SENATE

                     ONE HUNDRED FIFTEENTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 14, 2017

                               __________


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                          COMMITTEE ON FINANCE

                     ORRIN G. HATCH, Utah, Chairman

CHUCK GRASSLEY, Iowa                 RON WYDEN, Oregon
MIKE CRAPO, Idaho                    DEBBIE STABENOW, Michigan
PAT ROBERTS, Kansas                  MARIA CANTWELL, Washington
MICHAEL B. ENZI, Wyoming             BILL NELSON, Florida
JOHN CORNYN, Texas                   ROBERT MENENDEZ, New Jersey
JOHN THUNE, South Dakota             THOMAS R. CARPER, Delaware
RICHARD BURR, North Carolina         BENJAMIN L. CARDIN, Maryland
JOHNNY ISAKSON, Georgia              SHERROD BROWN, Ohio
ROB PORTMAN, Ohio                    MICHAEL F. BENNET, Colorado
PATRICK J. TOOMEY, Pennsylvania      ROBERT P. CASEY, Jr., Pennsylvania
DEAN HELLER, Nevada                  MARK R. WARNER, Virginia
TIM SCOTT, South Carolina            CLAIRE McCASKILL, Missouri
BILL CASSIDY, Louisiana

                     A. Jay Khosla, Staff Director

              Joshua Sheinkman, Democratic Staff Director

                                  (ii)
                            
                            
                            
                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page
Hatch, Hon. Orrin G., a U.S. Senator from Utah, chairman, 
  Committee on Finance...........................................     1
Wyden, Hon. Ron, a U.S. Senator from Oregon......................     4

                               WITNESSES

Brill, Alex M., resident fellow, American Enterprise Institute, 
  Washington, DC.................................................     8
Harrison, Iona C., senior vice president, Pioneer Realty, Upper 
  Marlboro, MD...................................................     9
Batchelder, Lily L., professor of law and public policy, New York 
  University School of Law, New York, NY.........................    11
Ponnuru, Ramesh, visiting fellow, American Enterprise Institute, 
  Washington, DC.................................................    12

               ALPHABETICAL LISTING AND APPENDIX MATERIAL

Batchelder, Lily L.:
    Testimony....................................................    11
    Prepared statement...........................................    45
    Responses to questions from committee members................    66
Brill, Alex M.:
    Testimony....................................................     8
    Prepared statement...........................................    71
    Responses to questions from committee members................    78
Cantwell, Hon. Maria:
    ``Economists See Little Magic in Tax Cuts to Promote 
      Growth,'' by Patricia Cohen and Nelson D. Schwartz, The New 
      York Times, May 23, 2017...................................    80
Harrison, Iona C.:
    Testimony....................................................     9
    Prepared statement...........................................    82
    Responses to questions from committee members................    97
Hatch, Hon. Orrin G.:
    Opening statement............................................     1
    Prepared statement...........................................   101
Ponnuru, Ramesh:
    Testimony....................................................    12
    Prepared statement...........................................   103
    Responses to questions from committee members................   106
Wyden, Hon. Ron:
    Opening statement............................................     4
    Prepared statement...........................................   108

                             Communications

Adoption Tax Credit Working Group (ATCWG)........................   111
American Retirement Association (ARA)............................   116
California Association of Realtors (CAR).........................   120
Charitable Giving Coalition (CGC)................................   121
Coalition to Preserve Cash Accounting............................   123
The Jewish Federations of North America (JFNA)...................   126
Kirk, William S..................................................   130
League of American Orchestras....................................   130
National Association of Enrolled Agents (NAEA)...................   133
National Volunteer Fire Council (NVFC)...........................   138
Precious Metals Association of North America.....................   141

 
                         INDIVIDUAL TAX REFORM

                              ----------                              


                      THURSDAY, SEPTEMBER 14, 2017

                                       U.S. Senate,
                                      Committee on Finance,
                                                    Washington, DC.
    The hearing was convened, pursuant to notice, at 10:04 
a.m., in room SD-215, Dirksen Senate Office Building, Hon. 
Orrin G. Hatch (chairman of the committee) presiding.
    Present: Senators Grassley, Cornyn, Thune, Isakson, 
Portman, Toomey, Heller, Cassidy, Wyden, Stabenow, Cantwell, 
Nelson, Carper, Cardin, Brown, Bennet, Casey, and McCaskill.
    Also present: Republican Staff: Tony Coughlan, Senior Tax 
Counsel; Chris Hannah, Tax Counsel; Alex Monie, Professional 
Staff Member; Martin Pippins, Detailee; Preston Rutledge, 
Senior Tax and Benefits Counsel; and Jeff Wrase, Chief 
Economist. Democratic Staff: Joshua Sheinkman, Staff Director; 
Michael Evans, General Counsel; Tiffany Smith, Chief Tax 
Counsel; and Adam Carasso, Senior Tax and Economic Advisor.

 OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM 
              UTAH, CHAIRMAN, COMMITTEE ON FINANCE

    The Chairman. The committee will come to order. I want to 
welcome everyone here to this morning's hearing, where we will 
discuss a major piece of the tax reform puzzle.
    Today will be talking about ideas, proposals, and 
considerations for reforming the individual tax system. While 
we have had countless hearings on tax reform in recent years, 
today's hearing is the first in what I hope will be a series of 
hearings leading up to an intensive effort of this committee to 
draft and report comprehensive tax reform legislation.
    We have talked about these issues a great deal. In fact, 
since I became the lead Republican on this committee in 2011, 
we have had more than 60 hearings where tax reform was the main 
focus of the discussion.
    I think we are capable and ready to get to work on 
producing a bill. And I look forward to working with my 
colleagues on this next, all-important stage of the process.
    I would like to make a couple of points about that process 
for a moment, because there seems to be some confusion as to 
what the Finance Committee's role will be in tax reform. I have 
heard a lot of talk about a secret tax reform bill or a 
comprehensive plan being written behind closed doors.
    Most of you have probably also heard about tax reform 
details that are set to be released later this month. True 
enough, leaders of both the House and the Senate, including 
myself, as well as officials from the executive branch have 
been discussing various proposals.
    But as we stated in our joint statement before the recess, 
and as I have stated on numerous occasions, the tax writing 
committees will be tasked with writing the bill. This group--
some have deemed us ``The Big Six''--will not dictate the 
direction we take in this committee.
    Any forthcoming documents may be viewed as guidance or 
potential signposts for drafting legislation. But at the end of 
the day, my goal is to produce a bill that we can get through 
this committee. That takes at least 14 votes, and hopefully we 
will get more.
    Anyone with any experience with the Senate Finance 
Committee knows that we are not anyone's rubber stamp. If a 
bill--particularly on something as consequential as tax 
reform--is going to pass in this committee, the members of the 
committee will have to be involved in putting it together.
    Therefore, I intend to work closely with my colleagues and 
let them express their preferences and concerns so that when we 
are ready to mark up a tax reform bill, the mark will reflect 
the consensus views of this committee. That work, in many 
respects, has already begun, and we are well on our way.
    I will note that I have not limited these commitments to my 
Republican colleagues on the committee, which brings me to my 
second point. From the outset, I have made clear that my 
preference is to move tax reform through this committee with 
bipartisan support. I have no desire at all to exclude any of 
my Democratic colleagues from this discussion, and I am not 
determined to report anything by a party-line vote.
    I will note that the President and his team have publicly 
said the same thing this week. If any of my Democratic 
colleagues are willing to come to the negotiating table in good 
faith and without any unreasonable preconditions--and I believe 
they are--I welcome their advice and input.
    So far, my colleagues have insisted that the majority agree 
to a series of process demands before any substantive 
bipartisan talks can take place. Effectively, they want to 
ensure that we make it easier for them to block the bill 
entirely before they will talk about what they want to put in 
the bill.
    Now that seems kind of counterintuitive to me. And in my 
view, it is unreasonable. Furthermore, I do not recall either 
side ever offering such a concession when they were in the 
majority. We should not let the process concerns keep us from 
talking about the substance of a tax reform bill. And my hope 
is that my colleagues on the other side will put these demands 
aside and let us begin searching for common ground on these 
important issues.
    Those threshold matters aside, let me talk about today's 
hearing. One argument that rears its ugly head in every tax 
reform debate is the claim that proponents of reform want to 
cut taxes for the uber-rich and give additional tax breaks to 
greedy corporations.
    We have heard that argument repeated in the current debate, 
and while these claims are about as predictable as the sunrise, 
they are simply not true. While I cannot see into the hearts of 
every member of the Congress, I truly do not know of a single 
Republican who, when thinking about tax reform, asks themselves 
what they can do to help rich people. That has never been our 
focus, and it is not our focus now.
    In fact, an argument can be made that the other side has 
helped the rich more than we have. Instead, we are focused 
squarely on helping the middle class, and recent proposals to 
reform the individual tax system reflect that.
    For nearly a decade now, middle-class families and 
individuals have had to deal with a sluggish economy, 
substandard wage growth, and a growing detachment from labor 
markets. Tax reform, if it is done right, can help address 
those problems and provide much-needed relief and opportunity 
for millions of middle-class families.
    That, once again, is our goal in tax reform. It is, in 
fact, the driving force behind our efforts.
    Let us talk about a few specific proposals. Under our tax 
code, individual taxpayers or married couples can opt to either 
take the standard deduction or itemized deductions to lower 
their tax burden. Currently, about two-thirds of all U.S. 
taxpayers opt to take the standard deduction. These are often 
low- to middle-income taxpayers.
    One item that has been central to a number of tax 
frameworks is a significant expansion of the standard 
deduction, which would reduce the tax burden for tens of 
millions of middle-class families and eliminate Federal income 
tax liability for many low- to middle-income Americans.
    I will note that this is not only a Republican idea. In 
fact, a few years back our ranking member introduced 
legislation that would have nearly tripled the standard 
deduction. And I commend him for it. This is the very 
definition of middle-class tax relief, and it goes beyond 
direct tax and fiscal benefits.
    With a significantly expanded standard deduction, the tax 
code would immediately become much simpler for the vast 
majority of middle-class taxpayers. And that is no small 
matter.
    Currently, American taxpayers, both individuals and 
businesses, spend about 6 billion hours--that is with a ``b''--
and nearly a quarter of a trillion dollars a year complying 
with tax filing requirements. This, of course, is not 
surprising given that our tax code has grown exponentially into 
a 3-million-word behemoth that is basically indecipherable for 
the average American.
    That one change, expanding the standard deduction, would 
let millions of middle-class taxpayers avoid having to navigate 
the treacherous landscape of credits and deductions. Combined 
with other ideas, including a significant reduction in the 
number of credits and deductions in the tax code and a 
radically simplified rate structure, this approach will save 
middle-class families both time and money.
    I expect there to be some disagreements about what credits 
and deductions to keep and which to repeal in the name of tax 
simplicity, efficiency, and of course, fairness. I expect we 
will air some of those differences of opinion here today.
    There are other tax reform proposals under discussion that 
will help the middle class. For example, an increase and 
enhancement of the Child Tax Credit would benefit middle- and 
lower-income families almost exclusively. And by reducing 
barriers and disincentives for savings and investment, we can 
expand long-term wealth and improve the quality of life for 
those in the middle class.
    Now these are some of the central ideas being discussed to 
reform the individual tax system. And in virtually every case, 
the primary beneficiaries of these proposals would be middle-
class taxpayers.
    I know that there are Democrats who support these types of 
reforms. As I mentioned earlier, I hope we can recognize this 
common ground and find ways to collaborate in the broader tax 
reform effort.
    I will also note that the middle class has a significant 
stake in our efforts to reform the business tax system, but 
that is a matter for another hearing.
    Once again, this committee has a lot of work to do. There 
is not going to be a top-down directive that makes the hard 
decisions for us. I know we are up to that task, and most of us 
are game to participate in the process to help us reach a 
successful conclusion.
    Now, before I turn to my distinguished counterpart, Senator 
Wyden, I want to say that I hope we can have a productive 
discussion of options to reform taxes for individuals and not a 
debate on so-called ``plans'' based on outside analysts' 
conjectures and assumptions. It is all too common for 
ideological think tanks or partisan analysts to take short 
statements outlining broad principles on tax reform and then 
fill in the gaps with their own subjective assumptions about 
details just to parade out a list of horribles that they then 
use to tarnish the entire reform effort.
    Let us discuss real ideas and proposals, keeping in mind 
that the Finance Committee will not be bound by any previous 
tax reform proposals or framework when we start putting our 
bill together.
    With that, I am going to turn to my friend and colleague, 
Senator Wyden, for his opening statement, and then we will go 
from there.*
---------------------------------------------------------------------------
    * For more information, see also, ``The Taxation of Individuals and 
Families,'' Joint Committee on Taxation staff report, September 12, 
2017 (JCX-41-17), https://www.jct.gov/
publications.html?func=startdown&id=5020.
---------------------------------------------------------------------------
    [The prepared statement of Chairman Hatch appears in the 
appendix.]

             OPENING STATEMENT OF HON. RON WYDEN, 
                   A U.S. SENATOR FROM OREGON

    Senator Wyden. Mr. Chairman, thank you very much, and let 
me state again how much I value our partnership. We showed that 
again this week with the beginning of the effort to deal with 
children's health.
    Obviously, we have a long way to go in the committee 
process, but I want it understood that I very much value this 
partnership. And I think I can speak for all of the Senate 
Finance Democrats--we share the view that the tax system in 
this country does not work for millions of Americans, 
particularly working-class people who drive this economy. 
Seventy percent of the economy is their consumer spending. So 
we very much feel that the tax code in this country is broken.
    Now just yesterday, the President declared to the Nation 
that his tax plan would not give any breaks to the wealthy. 
That was yesterday.
    But the fact is, today the President's one-page tax outline 
has a new lunar crater-sized loophole for the wealthy that 
would allow them to abuse what is called a tax pass-through. 
The tax pass-through concept is supposed to be about helping 
the small business folks.
    But the Trump plan turns it into a scheme for letting the 
wealthy dodge paying their fair share. In effect, they get to 
take ordinary income and convert it into long-term capital 
gains income--paying 15 percent. So they get a big break and 
they avoid paying their Social Security and payroll taxes.
    So in spite of what the President said yesterday about not 
wanting to have tax breaks for the wealthy, you can look today 
at the one-page tax outline and you can see a huge new break 
there for the very wealthy. And that is, colleagues, on top of 
the administration's commitment to abolish the estate tax, 
which touches only one out of every 500 wealthy estates. That 
too is an outlandish giveaway to people at the top.
    Now with respect to this whole notion about ``The Big 
Six''--and I appreciate the chairman's comments--it was only a 
few weeks ago where pictures were being sent by the group 
around the country to say, ``We are writing this tax bill.'' 
This did not come from me or from a Democrat. These pictures 
were sent around the country from ``The Big Six,'' saying that 
they were writing this bill behind closed doors.
    So what we Finance Democrats have said--and overwhelmingly 
our Democratic colleagues--is that there are key principles 
that we feel strongly about. We feel strongly about having the 
regular order so that members on both sides can offer their 
ideas and their amendments and not have a partisan 
reconciliation process.
    We feel strongly about fiscal responsibility. We want a 
deficit-neutral plan. We want it to be as progressive as 
current law, which means you are not doling out new breaks for 
the 1 percent.
    And I share the chairman's view with respect to talking 
about real ideas, and I would just like to note as we do that, 
what President Reagan did in 1986 is, he said there would be 
equal treatment with respect to income earned by a wage earner 
and income earned by somebody who is in financial services. So 
if anything, what Ronald Reagan stood for went beyond, 
colleagues, the principles that we Democrats have staked out.
    So if you listen to the talking points, you hear a lot 
about how the Trump plan would put a big focus on the burden of 
complexity the tax code heaps on so many middle-class families. 
But if you look at the architecture, again, of what the 
President has laid out, it does not reduce complexity or focus 
on the middle class. It endows future generations of the mega-
wealthy.
    Now, I am just going to conclude my remarks by saying there 
is a blueprint for bipartisan comprehensive tax reform that 
works, and it is picking up on some of the ideas of the late 
President Reagan. And it is certainly not what is being pursued 
by the President as of right now.
    Republican Reagan-style tax reform fights complexity by 
fighting unfairness. As I mentioned, 31 years ago President 
Reagan signed a bill that equalized the tax treatment of wages 
and wealth. What that means is that a worker who punches a 
clock going in and out every shift is not getting a raw deal 
compared to a trust fund baby.
    Reagan-style tax reform is about cleaning out tax deadwood, 
the provisions that do a whole lot more to please special 
interests, and what amounts to all of the lapdogs they have who 
are trying to come up with new ways to carve out special breaks 
for people at the top.
    Those are propositions that I believe ought to get a lot of 
bipartisan interest again today. And the reason I say that is, 
the tax code, colleagues, in America is a tale of two systems.
    There is one set of strict rules for a cop and a nurse who 
are married and they are raising kids. Their taxes come out of 
every single paycheck; no special dodges, no special schemes 
for the cop or the nurse to exploit.
    Then there is a whole other set of rules for the most 
fortunate. It says they can decide how much to pay and when to 
pay it. And as I said, as of today, in spite of the President's 
comments yesterday that he did not want to help the rich, that 
tax outline creates another lunar crater-sized loophole for the 
wealthy to exploit.
    That is the brand of unfairness that President Reagan said 
he was going to go after. So, tax reform in 2017 ought to be an 
opportunity to put money back into the paychecks of the cop and 
the nurse and working families who are saving for retirement, 
to pay for college, and affordable housing.
    And that is why I think it is constructive that the 
chairman is open to ideas for how we pursue it. The basic 
proposition that President Trump has on offer goes after 
middle-class tax benefits like the State and local deduction 
and incentives for retirement savings and home ownership. And 
it gores working families to finance these special breaks, 
these special breaks that as of today are still on the Trump 
tax outline for the most fortunate and the biggest 
corporations.
    When it comes to this whole issue of the State and local 
deductions, this is fake tax reform. This is not just a play at 
taking away from the blue States. There are middle-class 
families all across America. They are in deep blue areas that 
went for Clinton and scarlet red areas that went for President 
Trump, and they will be taxed twice on the same income if State 
and local deductions are eliminated. The dreaded double 
taxation--if you are opposed to it when it involves corporate 
income, you cannot line up behind a plan to double tax middle-
class families twice as hard on their hard-earned pay. That is 
what this issue is about.
    When it comes to simplification, it is easy to hold up a 
proposal to double the standard deduction as evidence you want 
to make a filing easier. I appreciated the chairman's kind 
words that quite some time ago with several Republican 
colleagues--most recently a member of the President's Cabinet, 
Dan Coats, who sat right there where Senator Cassidy is 
sitting--I advocated tripling the standard deduction. You 
triple the standard deduction for a worker in Michigan or any 
of our States, and the first thing that happens is immediately 
those folks will adjust their withholding. We will put hundreds 
and hundreds of dollars of real tax relief into the pockets of 
working-class families right away.
    The President's plan gives those folks no crumbs, using the 
most partisan approach, which is known as reconciliation.
    I am looking forward to hearing from our witnesses. Mr. 
Chairman, again, I want to express my gratitude for our 
friendship. We have worked together on a lot of things. I guess 
it is called being in a legislative foxhole or something like 
that.
    You really worked hard to reach out to me. We Democrats 
have laid out core principles that I have described today that 
frankly do not even go as far as what the late President Reagan 
did when he worked on tax reform in 1986. So I look forward to 
pursuing this conversation with you in the days ahead and 
hearing from our colleagues.
    The Chairman. Well, thank you, Senator.
    [The prepared statement of Senator Wyden appears in the 
appendix.]
    The Chairman. I would like to welcome each of our four 
witnesses to our hearing today. Before we begin, I want to 
thank each of you for your work and your willingness to testify 
and answer questions. Your work on this important issue is very 
important to us. We all look forward to hearing each of your 
perspectives on tax reform.
    First, we are going to hear from Mr. Alex Brill, a resident 
fellow at the American Enterprise Institute, AEI. Before 
joining AEI, Mr. Brill served as the Policy Director and Chief 
Economist for the House Ways and Means Committee. Previously, 
he served on the staff of the White House Council of Economic 
Advisors. He has served on the staff of the President's Fiscal 
Commission, also known as Simpson-Bowles, and the Republican 
Platform Committee. Mr. Brill has an M.A. in mathematical 
finance from Boston University, and a B.A. in economics from 
Tufts University.
    Next we will hear from Ms. Iona Harrison, the current chair 
of the Taxation Committee of the National Association of 
Realtors. Ms. Harrison was born in San Juan, PR and currently 
resides in Maryland. Ms. Harrison has been a licensed realtor 
since 1976 and previously served as the president of the 
Maryland Association of Realtors. She attended Georgetown 
University and received a B.S. in history from the University 
of Maryland.
    Our third witness will be Ms. Lily Batchelder, a professor 
of law and public policy at the NYU School of Law and an 
affiliated professor at the NYU Wagner School of Public 
Service. From 2010 to 2015, she was on leave serving as the 
Deputy Director of the White House National Economic Council 
and Deputy Assistant to the President, and as majority chief 
tax counsel for the U.S. Senate Committee on Finance.
    Before joining NYU in 2005, Ms. Batchelder was an associate 
for Skadden, Arps, Slate, Meagher, and Flom, prior to which she 
also worked as the director of community affairs for a New York 
State Senator and also as a client advocate for a small social 
services organization. Ms. Batchelder received an AB in 
political science from Stanford University, an MPP in 
microeconomics and human services from the Harvard Kennedy 
School, and a J.D. from Yale Law School.
    Finally, we will hear from Ramesh Ponnuru, a senior editor 
at National Review, where he has covered national politics and 
policy for more than 20 years. He is also a columnist for 
Bloomberg View, which syndicates his articles in newspapers 
across the Nation.
    He is a visiting fellow at the American Enterprise 
Institute, and he serves as a contributing editor to National 
Affairs. In 2015, Mr. Ponnuru was included in the Politico 50. 
He grew up in Kansas City, KS and graduated from Princeton 
University.
    I want to thank you all for coming today. Mr. Brill, we 
will begin with you, if you will please get us started by 
providing us with your opening remarks.

     STATEMENT OF ALEX M. BRILL, RESIDENT FELLOW, AMERICAN 
              ENTERPRISE INSTITUTE, WASHINGTON, DC

    Mr. Brill. Chairman Hatch, Ranking Member Wyden, and other 
members of the committee, thank you for the opportunity to 
testify this morning. My name is Alex Brill. I am a resident 
fellow with the American Enterprise Institute.
    I commend the committee for holding this important and 
timely hearing because of the opportunity for fundamental and 
comprehensive tax reform. It is before this committee for the 
first time in many decades.
    While the tax code has frequently and sometimes 
significantly changed over the last 30 years, not since 1986 
has it been truly reformed in a manner that sought to broaden 
the base and lower statutory tax rates. The last 30 years have 
seen tax complexity increase dramatically with the introduction 
of more and more tax expenditures. In many regards, the tax 
code today imposes unnecessary and undue burdens on families 
and individuals.
    Reversing this trend of the last 3 decades and pursuing 
individual income tax reform means a broader base and lower 
statutory tax rates. Such a reform will yield a more neutral 
and a more efficient tax code, one that will facilitate a more 
productive allocation of resources, and if pursued in 
conjunction with business tax reform and without impeding 
savings, this can contribute to a pro-growth economic 
environment.
    My written testimony, which I have submitted for the 
record, makes five points which I would like to briefly 
summarize. First, as I just noted, the current individual 
income tax system is complex. It is burdensome. It is riddled 
with deductions, exclusions, and credits. Appropriately 
broadening the tax base can mean meaningfully simplifying the 
tax code, especially for many in the middle class.
    Second, and often under-unappreciated, is the fact that the 
current individual income tax system often treats taxpayers 
with similar amounts of similar income very differently. 
Appropriately broadening the tax base can be an effective means 
for correcting this disparity known as ``horizontal inequity'' 
in the tax code.
    For example, nearly 20 percent of taxpayers, one in five 
who report about $36,000 in adjusted gross income, pay a higher 
average tax rate than 60 percent of taxpayers who earn $50,000.
    Third, in addition to contributing to complexity and 
horizontal inequity, itemized deductions are generally 
regressive tax policies. The deduction for State and local 
taxes is an excellent example of this. It is a policy that, 
while regressive at the Federal level, ironically incentivizes 
States to pursue more progressive, but more inefficient tax 
policies. I estimate that this tax provision forgoes $1.4 
trillion over the budget window in revenue, providing subsidies 
to certain taxpayers in certain States.
    Fourth, broadening the tax base, particularly with regard 
to limiting itemized deductions, is an opportunity to move 
towards a more neutral tax code, one that interferes less in 
the allocation of resources--decisions that are often best left 
to the free market.
    My final point is on tax policy and transition, the 
transitionary path from the tax code we have today to a fairer, 
simpler, hopefully more pro-growth tax system. That process is 
itself a complex challenge, one that will require lawmakers to 
strike a careful balance. Inadequate or insufficient transition 
relief will cause some taxpayers to face steep and 
unanticipated tax burdens; but conversely, overly extended and 
generous transition relief may limit the potential economic 
gains from tax reform.
    In conclusion, lawmakers have the opportunity to simplify 
the tax code, improve the horizontal equity of the system, and 
reduce economic distortions. Tax reform that wisely broadens 
the tax base can achieve these goals. To pursue the additional 
core objective of a tax reform that promotes economic growth, 
lawmakers should look to reduce if possible--and certainly not 
increase--the current tax penalty on savings.
    Thank you, and I would be happy to answer your questions.
    The Chairman. Well, thank you.
    [The prepared statement of Mr. Brill appears in the 
appendix.]
    The Chairman. Ms. Harrison, we will turn to you now.

 STATEMENT OF IONA C. HARRISON, SENIOR VICE PRESIDENT, PIONEER 
                   REALTY, UPPER MARLBORO, MD

    Ms. Harrison. Chairman Hatch, Ranking Member Wyden, and 
members of the committee, thank you for this opportunity to 
testify on behalf of the more than 1.2 million professionals 
who belong to the National Association of Realtors.
    As with most Americans, Realtors agree that a major result 
of tax reform should be simplification. But simplification does 
not necessarily equal elimination. From its inception, our tax 
system has featured easy to comply with housing incentives 
utilized by tens of millions of Americans.
    For decades, these have helped facilitate home ownership, 
build wealth, and provide stability to families and 
communities. NAR believes that tax reform that eliminates or 
weakens the current-law tax incentives for purchasing or owning 
a home would be shortsighted and counterproductive to a strong 
economy and healthy communities. My written testimony outlines 
the reasons why in detail, but I would like to focus on three 
major points.
    First, the deduction for State and local taxes is vital to 
a sound tax system. This deduction is so basic that its origins 
go back to the Income Tax Act of 1861, and Federal income tax 
statutes since then have included it. State and local taxes 
paid to benefit the general public are similar to the Federal 
income tax in that they both fund central government services.
    Allowing a Federal deduction for them is essential to 
avoiding double taxation on the same income. Paying involuntary 
levies such as taxes is tantamount to the money having never 
been earned in the first place. So where is the justification 
for taxing it?
    Some suggest the deduction be repealed because it 
subsidizes State and local governments, leading them to 
increase spending. Interestingly, few if any, suggest that the 
far more generous credit for taxes paid to a foreign government 
subsidizes spending by those nations or encourages profligacy 
by them.
    Second, the mortgage interest deduction, MID, is a key 
incentive to purchasing a first home and building home 
ownership in our society. Critics often pan the MID as 
benefitting primarily the rich. In reality, the deduction is 
utilized by households of all incomes. Fifty-three percent of 
those claiming the MID in 2015 earned less than $100,000, and 
85 percent had a GI of less than $200,000.
    It is important to recognize that the value of the current 
tax benefits of owning a home, including both the MID and the 
property tax deduction, are embedded in the price of a home. If 
those benefits are removed, the value of homes drops.
    Some suggest lowering the MID cap from $1 million to 
$500,000. Realtors oppose this idea. A $500,000 cap would be 
unfair to those living in high-cost areas, many of whom are by 
no means rich and have fairly modest homes.
    Also, inflation could make the pinch of a lower cap much 
more universal in just a few years. Remember the alternative 
minimum tax and what happened when it was not indexed? NAR 
calculations show that by 2043, the value of more than half the 
homes in a majority of States will likely be greater than 
$500,000.
    Third, and most importantly, a tax reform plan like the 
House Blueprint, which doubles the standard deduction while 
eliminating most itemized deductions, would bring minimal 
simplification at a very high price for many homeowners and 
especially those with larger families. The combination of the 
larger standard deduction and the repeal of the State and local 
tax deduction would wipe out the incentive value of the tax 
benefits of owning a home for all but the most affluent.
    Essentially, owning and renting a home would be equivalent 
for tax purposes for 95 percent of filers. This would drop the 
value of homes, wrenching the economy.
    Also, many homeowners would pay more tax under such a plan, 
while most renters would get tax cuts. Part of the reason is 
that the Blueprint repeals dependency exemptions to help fund 
the increased standard deduction.
    The increased child credit helps offset part of this loss, 
but not for larger families or with children older than 16. The 
effect could be particularly acute in States like Utah where 
families are larger, home ownership is higher, and itemized 
deductions are greater than average.
    Tax reform that penalizes American homeowners and middle-
class families in the name of simplification or lower corporate 
rates is not worthy of the name. Smart tax reform must first do 
no harm.
    Thank you.
    The Chairman. Thank you.
    [The prepared statement of Ms. Harrison appears in the 
appendix.]
    The Chairman. Ms. Batchelder?

 STATEMENT OF LILY L. BATCHELDER, PROFESSOR OF LAW AND PUBLIC 
    POLICY, NEW YORK UNIVERSITY SCHOOL OF LAW, NEW YORK, NY

    Ms. Batchelder. Good morning, Mr. Chairman, Ranking Member 
Wyden, and members of the committee. My name is Lilly 
Batchelder, and I am a professor at NYU School of Law. Thank 
you for the opportunity to testify before you today on the 
important topic of individual tax reform. It is an honor to be 
back with the committee.
    My testimony makes five main points. First, the current tax 
reform effort is occurring at a time when low- and middle-
income families are facing deep financial challenges. Economic 
disparities are vast and have been widening for decades.
    The U.S. actually has one of the lowest levels of economic 
mobility relative to our competitors. Our debt as a share of 
GDP is projected to grow to unprecedented levels in coming 
decades, largely because of the retirement of the baby boomers 
and increasing life expectancy. This growth in debt will be a 
drag on economic growth.
    For all these reasons, tax reform should increase revenues 
and should increase progressivity. Doing so would boost 
economic growth and make the tax code fairer at the same time. 
At a bare minimum, tax reform should maintain the current level 
of revenues and progressivity. And these both should be 
measured consistently and without resort to budget gimmicks 
like a current policy baseline.
    Second, individual tax reform should focus on leveling the 
playing field for the next generation and supporting work. 
Doing so would blunt economic inequality, broaden opportunity, 
and increase productivity by ensuring that jobs are awarded 
more often based on effort and talent and less based on 
connections and the luck of one's birth.
    Some worthwhile proposals that would advance these goals 
are expanding the EITC, especially for workers without 
dependents; increasing refundability of the Child Tax Credit, 
particularly for young children in the poorest families; and 
restructuring child care benefits to provide the largest 
benefits to those spending the largest share of their income on 
child care.
    These proposals could make significant headway in 
offsetting the much lower earnings growth that working-class 
families have experienced over the past few decades compared to 
those who are more fortunate. They should be paid for by 
raising taxes on the wealthy, including by strengthening and 
not repealing the estate tax.
    Third, individual tax reform should focus on reducing 
transactional complexity, which essentially involves 
eliminating opportunities for savvy taxpayers to game the 
system. This would accomplish the trifecta of tax reform: 
making the tax code fairer, more efficient, and simpler.
    To further this goal, I urge the committee to consider 
proposals like rationalizing the NIIT and SECA taxes so all 
labor and capital income is subject to the Medicare tax on high 
incomes in some form, repealing stepped-up basis, narrowing the 
gap between the tax rates on ordinary income and capital gains, 
and taxing carried interest as ordinary income.
    Fourth, individual tax reform should seek to make tax 
incentives more efficient and fair, generally by restructuring 
them into refundable credits and leveraging the empirical 
findings of behavioral economics. Doing so could generate more 
social benefits at a lower cost. And one particularly promising 
area for reform is tax incentives for retirement savings.
    Finally, the very first principle of tax reform should be 
to do no harm. Unfortunately, the tax plans offered so far by 
the President and the House Republican Blueprint do just that: 
they lose massive amounts of revenue. The corresponding 
increase in the debt would depress economic growth 
substantially over time.
    They are both sharply regressive, providing vast tax cuts 
to the wealthy and a pittance for everyone else. They create a 
giant new loophole for the wealthy in the form of a special 
rate cap on pass-through business income, which tax experts on 
the left and right agree is a terrible idea.
    And to the extent that they include any proposals intended 
to benefit low- and middle-income households, they do so in a 
relatively ineffective way. Sooner or later, these plans' 
massive tax cuts for the wealthy will have to be paid for, and 
low- and middle-income families are likely to be left footing 
the bill.
    I, therefore, urge the committee to consider a 
fundamentally different approach.
    Thank you for the opportunity to testify, and I look 
forward to your questions.
    The Chairman. Thank you.
    [The prepared statement of Ms. Batchelder appears in the 
appendix.]
    The Chairman. Mr. Ponnuru?

    STATEMENT OF RAMESH PONNURU, VISITING FELLOW, AMERICAN 
              ENTERPRISE INSTITUTE, WASHINGTON, DC

    Mr. Ponnuru. Chairman Hatch, Ranking Member Wyden, and 
distinguished members of the committee, thank you for convening 
this hearing and inviting me to testify. My name is Ramesh 
Ponnuru. I am a visiting fellow at the American Enterprise 
Institute, a senior editor at National Review, and a columnist 
for Bloomberg View, although my testimony reflects my views 
alone and not those of any organization with which I am 
affiliated. It is an honor to be testifying today.
    While tax policy has been politically contentious, I am 
here to discuss a unifying issue. Over the last 20 years, a 
broad political consensus has supported tax relief for parents 
of dependent children. The major reforms of the tax code 
undertaken over this period have consistently, without 
exception, included such tax relief.
    People from different parts of the political spectrum have 
had varying reasons for supporting the child credit, including 
an appreciation of the costs of raising children and the belief 
that raising children is in no merely metaphorical sense an 
investment in the Nation's future. The fact that the child 
credit lifts nearly 3 million people out of poverty each year 
has also brought it support.
    What is not always appreciated is how the child credit 
advances a major goal of tax reform, creating a tax code that 
raises the desired amount of revenue while minimizing the 
distortions that government policy can create. A familiar 
example of a distortion is an unjustified tax break. Tax 
reformers seek to curtail such tax breaks because they unfairly 
enrich some groups to the detriment of others, and they 
inappropriately encourage some activities over others.
    The child credit advances this goal by reducing a 
distortion caused by government policy: the large, though 
implicit, tax on parenting that the structure of some of our 
largest Federal programs has inadvertently created. It is, of 
course, true that all taxpayers, whether or not they have 
children, contribute to Social Security and Medicare, but the 
financing of those programs relies in a special way on parents. 
They contribute to the programs, both through the Federal taxes 
that they pay and through the financial sacrifices that they 
make to raise children, including in many cases forgone income.
    Because the Federal Government does not recognize the 
extent of their parental contributions, parents shoulder a 
larger share of the burden of government than they should. In 
the world before these programs, many of the financial 
sacrifices parents made redounded to their direct benefit in 
old age as their children took care of them.
    Now much of that age-old financial return on parents' 
investment in children goes to senior citizens as a group, 
whether or not they themselves raise children. That is a shift 
that we as a society have made for very weighty and extremely 
widely supported reasons, but the shift has had the inadvertent 
effect of transferring resources from parents of the childless 
and from larger families to smaller ones. We can call this 
transfer the ``parent tax.''
    Some government policies offset this parent tax, notably, 
the tax exemption for dependents and the existing tax credit 
for children. But the level of the tax remains quite high even 
after these policies. One conservative estimate suggests that 
the child credit would need to more than quadruple to eliminate 
the parent's tax completely.
    A credit that large is unrealistic, but the calculations 
suggest that tax reform should--whatever its other parameters--
include an expansion of the child credit so as to reduce the 
share of the overall tax burden paid by parents. It suggests as 
well that the expansion should take two forms. The maximum 
value of the credit should be raised from $1,000 per child to 
some significantly larger number, and the credit should be 
applied against payroll taxes as well as income taxes.
    Finally, it suggests that if the dependent exemption 
declines as part of tax reform, the expansion of the child 
credit should be large enough to more than make up for that 
decline. A Child Tax Credit expansion compares favorably to 
other proposals for middle-class tax relief, such as an 
increased standard deduction.
    The larger child credit would reduce the parent tax 
distortion, while the standard deduction would not. In 
addition, a larger share of the benefits of a child credit 
expansion would accrue to relatively low-income households. An 
expanded Child Tax Credit for children should be part of a 
larger tax reform that Congress enacts so as to ensure that tax 
reform is both pro-growth and pro-family.
    Thank you for the opportunity to testify, and I look 
forward to your questions.
    The Chairman. Well, thank you so much.
    [The prepared statement of Mr. Ponnuru appears in the 
appendix.]
    The Chairman. We will now open this up for some questions.
    Ms. Batchelder, a significant part of your written 
testimony is spent on suggestions on how to make the tax code 
more progressive; that is, in how to make the rich pay more tax 
and the poor pay less tax.
    So my question is this: would repealing the Federal 
itemized deduction for State and local income taxes be a shift 
in a progressive direction? And after Ms. Batchelder, if Mr. 
Brill would briefly weigh in on this too, I would appreciate 
it.
    Ms. Batchelder. I think it really depends on how that 
revenue is used. So in the current proposals by the President 
and the House Republican Blueprint, the revenue from repealing 
the State and local tax deduction is used for highly regressive 
tax cuts. So on net, it would make the tax code less 
progressive.
    And if you repealed the State and local tax deduction in 
isolation and used that revenue, for example, to expand the 
Earned Income Tax Credit or the Child Tax Credit, that would be 
a progressive change. But it really depends on what you are 
using that revenue for.
    The Chairman. Mr. Brill?
    Mr. Brill. Senator, I would say that the repeal of the 
State and local deduction is a progressive change in isolation 
by itself. It is true that in the context of fundamental 
reform, we would have to look at all the fundamental pieces and 
where all the changes are made, but that piece by itself would 
be a step in making the tax code more progressive.
    The Chairman. Okay.
    Well, let me ask this of Ms. Harrison. In your written 
testimony, you write extensively about how the State and local 
tax deduction for real property taxes is mostly a benefit for 
the middle-class. And we have statistics from the Joint 
Committee on Taxation demonstrating that the vast majority of 
the benefit of the State and local tax deduction for State and 
local income taxes goes to persons with an income exceeding 
$200,000 per year.
    So it appears that there is a real difference between who 
benefits from the deduction for real property taxes, and who 
benefits from the deduction for State and local income taxes. 
Am I right on that? And also, am I correct in stating that your 
testimony is much more focused on preserving the deduction for 
real property taxes than it is on preserving the deduction for 
State and local income taxes?
    Ms. Harrison. While not being a tax expert--and I want to 
get that caveat out right from the inception--my information in 
the written testimony was based primarily on our 
PricewaterhouseCoopers study. As with the mortgage interest 
deduction, I would say that my figures are that 75 percent of 
the value of real property tax deductions in 2012, for 
instance, went to taxpayers with cash incomes of less than 
$200,000, and that the typical real estate tax deduction 
beneficiary has an adjusted gross income of slightly less than 
$81,000, which I think, again, is squarely in the middle class.
    So one of the other reasons that we want to maintain this 
as a source of home ownership is that for many homeowners this 
is a mandatory, obvious tax that they pay throughout their 
life. When their mortgage is paid off, they are no longer 
getting the benefit of the mortgage interest deduction, if they 
took it, but they will continue to be able to utilize the 
deduction they pay for State and local taxes throughout their 
ownership of that property, if they so choose.
    Once again, we want to refer one back to the idea that 
because of the standard deduction, many people who are 
homeowners get the benefit of that standard deduction as part 
of that taxing that takes place at that level. The idea, I 
assume, of a standard deduction is to allow people to keep a 
portion of their earned income discretionary because they have 
already paid it in taxes.
    The Chairman. Okay.
    Mr. Ponnuru, you suggest a much higher Child Tax Credit. 
And as you acknowledge, this will cost a lot in the 10-year 
window, and so in the 10 years, this would be difficult to pay 
for.
    But I suppose one of your points is that it will largely 
pay for itself in the long run; that is, today's children will 
be tomorrow's Social Security taxpayers. Am I right about that?
    Mr. Ponnuru. Thank you for your question, Mr Chairman. I 
think that I do not propose that the budget should account for 
such long-term effects in financing an expansion of the child 
credit. I propose that an expansion of the child credit be 
financed in the way that other forms of tax relief are, with 
the familiar list of pay-fors that I am sure that all of you 
are extremely familiar with.
    I would just point out that whatever proportion of a tax 
cut is paid for with tax increases or spending cuts elsewhere, 
we should be consistent, and a child credit should not be 
treated any differently than other forms of tax relief.
    The Chairman. Senator Wyden?
    Senator Wyden. Thank you very much, Mr. Chairman.
    Welcome to all of you. And, Ms. Batchelder, it is very good 
to see you. It was not very long ago when we enjoyed having you 
on this side of the dais and I was sitting down there somewhere 
beyond where Michael Bennett is now. So we are glad to have 
you.
    As I indicated, times are different--2017 is different from 
1986 when Democrats and Ronald Reagan got together. But the 
principles of tax fairness are there for the ages.
    And I would like you--if you would, for my opening 
question--to contrast what the President said yesterday, where 
he said there are not going to be any tax breaks for the very 
wealthy, the people at the top, with what is on offer as of 
this morning from President Trump.
    Ms. Batchelder. Thank you for the question. It is a 
pleasure to be back with the committee and fun to be on the 
other side of the dais.
    I tend to believe people based on their actions and not on 
their words. And so, I think when you look at the President's 
statement yesterday where he is saying that he will not cut 
taxes for the wealthy, it is hard to square, to say the least, 
with the plans that he has put out.
    He has put out different iterations of his plan. They have 
all been estimated by nonpartisan organizations, and I cannot 
think of a single credible analysis of any of his plans that 
finds that they do not cut taxes substantially for the wealthy 
and are regressive overall.
    So, if you look at his plan overall, it includes huge tax 
cuts for the wealthy. The top 1 percent gets about half the 
value of the tax cuts in his plan. I tend to think of the best 
way of looking at the distribution of tax changes as a 
percentage change in after-tax income, and the top 1 percent 
gets a boost in their after-tax income of 12 to 13 percent, 
versus 0 to 2 percent for the vast majority, 80 percent of low- 
and middle-income families.
    In addition, his plan raises taxes, actually, on millions 
of families.
    Senator Wyden. On working families.
    Ms. Batchelder. Working families, yes.
    So an astonishing 45 percent of families with children are 
estimated to face a tax increase immediately in 2018 under his 
plan, and 70 percent of single parents. And he has known this. 
This has been in the press since last year. I find it very 
surprising that he has not chosen to fix the plan and address 
these tax increases in the midst of a plan that overall is 
reducing revenues by trillions of dollars.
    The last thing I would say is, sooner or later that 
trillion-dollar revenue loss--that is $3.5 trillion according 
to the most recent estimates--is going to have to be paid for. 
Right now it appears that he is proposing to deficit-finance 
it. His budget plans would potentially reduce entitlements and 
other spending in ways that would hurt low- and middle-income 
families.
    But even if those spending cuts were not passed now, it is 
very likely in the future that low- and middle-income families 
would be left holding the bag in the form of either tax 
increases or spending cuts to----
    Senator Wyden. It is a very important point you make, that 
these errors that they have said they have made have not been 
corrected. That has been the case with the outrageous pass-
through provision, which is a huge gift to the super-wealthy. 
And it is correct with respect to the working families who get 
hurt, which they said they did not want to see happen in tax 
reform, but the fact is they have said for months that they 
would correct it. It has not been done as of today. Words 
matter. Yes, deeds matter even more.
    Mr. Ponnuru, just a question for you on this question of 
the Child Tax Credit. As you know, the committee made this 
permanent. We feel strongly about it. We would like to do 
everything we can to help working families.
    I was pleased about a part of your answer to the chairman, 
where you basically rejected dynamic scoring. The chairman got 
into this question of, how are you going to pay for it? Then 
you said, hey, look, you have to pay your bills in the real 
world. We are not going to have some dynamic scoring. So I am 
pleased about that, and to have a conservative make that point 
is especially welcome.
    The second point is--and I have read your articles and know 
that you think down the road about these issues. You said, 
okay, we will pay for the expansion--which I would certainly 
like to see--and for helping working families. We will do it by 
changes in Medicare and Social Security.
    And what we have tried to do around here is to update the 
Medicare guarantee, and particularly, look at chronic illness 
and the like. It is going to take a lot of money to do what you 
are talking about with respect to the Child Tax Credit.
    How would you go about finding the revenue? I mean, we 
would like to start closing some of these outrageous tax 
loopholes at the top. I did not see that in your statement, but 
we welcome your thoughts on it.
    Mr. Ponnuru. Thank you for providing me the opportunity to 
clarify. I support dynamic scoring, but I----
    Senator Wyden. You did not use it with respect to your 
answer to the chairman.
    Mr. Ponnuru. I support the idea of dynamic scoring. I do 
think that, in particular, when you are talking about the Child 
Tax Credit expansion, the possible revenue payoffs are so far 
in the future that it becomes even more subject to uncertainty 
than the usual exercise in dynamic scoring.
    I have my own preferences as to how tax reform should be 
financed. My main point in this testimony has been to discuss 
the idea that part of the tax structure should be a positive 
change for parents regardless of what other choices the 
Congress makes.
    My own views on how to finance these tax reforms, though, 
would include some long-term restructuring of entitlement 
programs, as I mention in my written testimony. I do also think 
that certain revenue pay-fors, such as a scaling back or 
elimination of the State and local deduction, scaling back of 
the mortgage interest deduction, would make sense.
    And then finally, I also believe that expanding the width 
of the top tax brackets so that high-earning individuals pay 
the top rate on a larger percentage of their income also makes 
sense as a revenue raiser in a balanced package.
    Senator Wyden. I am over my time, Mr. Chairman.
    The Chairman. Thank you, Senator.
    Senator Isakson?
    Senator Isakson. Thank you, Mr. Chairman. I want to assure 
Senator Cornyn and the other members to my left that I am not 
using my back situation as an advantage in my seniority, but I 
was here first. [Laughter.]
    Thanks for letting me move over.
    Mr. Brill, in the last tax act of 1986, I was in business. 
One of the most serious negative effects--and I was all for the 
1986 tax act, by the way--but one of the most significant 
negative effects of it was the clawback on passive loss. And 
when the Congress did away with passive loss against earned 
income retroactively, it actually put a number of people out of 
business and created the real estate investment trust, because 
everybody had to go to the stock market to raise capital to get 
their balance sheet in order.
    Your testimony, if I am not mistaken, addresses that and--
not specifically that case, but a case of not clawing back. Do 
you agree or disagree that we should avoid any clawback on 
existing tax treatment that was made on investment prior to the 
time the tax law was changed?
    Mr. Brill. Thank you, Senator. I think that the transition 
issues, as I mentioned in my opening statement, are very 
important and can be very tricky. And in particular, the 
question that you are relating to of retroactive changes that 
raise taxes on decisions that have previously been made under a 
prior set of policies is one that can damage the confidence in 
the tax code.
    If investors, small business owners, see a risk that tax 
changes can be made retroactively, that is only going to be a 
drag on their willingness to be entrepreneurial and to make new 
investments. The proper transition relief is, sort of, a 
provision-by-provision question.
    But as a general matter, we want to make these changes on a 
prospective basis as we make new tax policy.
    Senator Isakson. And that was my point. I read that in your 
testimony, and prospective is the way to look at these things.
    We have a tendency as politicians to label things either 
progressive or liberal, or wealthier or conservative, or 
whatever. And sometimes we act on a label and we do not act on 
common sense. But it is only common sense to tell the American 
people that if we are going to tax you on investments you made 
in 2008, we are not going to change that in 2012 and come back 
and make it a different tax rate.
    Once somebody has made an investment decision based on a 
tax code that applies to their investment of that time, that 
ought to stick, period. I think the same would be true for the 
internal buildup of dividends and generating life insurance, 
many other types of things that are longitudal investments like 
that. It is very important that we not do it.
    The second thing--one of the things I have worked hardest 
on in this committee is incentives for Americans to save for 
their future. I think the best thing we can do to protect our 
republic in the long term is see to it that Americans can take 
care of themselves as much as the government can take care of 
them, or more so if possible.
    Do you consider a deferral of tax liability, for example on 
an IRA investment or something like that, a benefit to the rich 
or do you think it a common-sense incentive for the tax code?
    Mr. Brill. Thank you, Senator.
    Obviously, the tax code has a series of provisions related 
to savings, and the Joint Committee and the Treasury Department 
will identify these policies as tax expenditures. However in a 
technical sense they may be, these are policies that promote 
savings, which is critical for the long-term viability and 
economic growth of our country.
    And income tax is by its very nature going to discourage 
future savings by its design. And these policies that promote 
individual savings--401(k) plans, IRAs, as well as policies 
that just promote savings generally--are all things that can 
lead to long-term positive economic growth.
    Senator Isakson. And eventually, in the long-term 
investments that are tax-deferred, like an IRA investment that 
someone might make, eventually the revenue is going to be paid 
by the taxpayer when they withdraw the money. Is that not 
correct?
    Mr. Brill. That is absolutely correct.
    Senator Isakson. Which also applies, I think, Ms. Harrison, 
to 1031 exchanges. Is that not correct?
    It is not a matter of not collecting the tax, it is a 
matter of the timing of the collection of the taxes. Is that 
right?
    Ms. Harrison. Absolutely. And 1031 exchanges, again, are 
utilized throughout my profession, not just by practitioners 
who do massive commercial deals. They can be very small single-
property transactions which allow folks to sell a rental 
property and use that tax deferral advantageously.
    Deferral does not mean you are never going to pay it. It 
just means, I do not have to pay it right at this minute.
    Senator Isakson. And with Ms. Cantwell here, present on the 
committee, Senator Cantwell, I want to make another point about 
labeling. She has worked steadfastly on low- and moderate-
income housing tax credits, and you have in your testimony a 
reference to tax credits.
    There are those who might consider tax credits as a benefit 
to the wealthy who are buying the tax credits to defer a tax or 
put it off down the line, but in fact, it is the best way we 
can raise money for housing for people at the low- and 
moderate-income level that will be needed after Harvey and Irma 
and other storms that we are going through right now.
    So let us not be too quick, Republicans or Democrats, to 
label something as anti-progressive or as a tax break for the 
rich. When we look at the whole consequence and the collection 
of that tax, sometimes we are mislabeling things for the wrong 
reason.
    Would you agree with that? And just say, ``yes.''
    Ms. Harrison. I absolutely do. Labels tend to be very 
dangerous. They lead us not to examine the actual facts 
underlying the statements we have made.
    Senator Isakson. Thank you, Mr. Chairman.
    Ms. Harrison. Thank you.
    The Chairman. We will now turn to Senator Cardin.
    Senator Cardin. Thank you, Mr. Chairman. I very much 
appreciate this hearing, and I appreciate the comments that 
both you and Senator Wyden made.
    One of the reasons we talk about principles is that we want 
to make sure that when we do certain changes in the tax code, 
it does not have unintended consequences that are contrary to 
the purpose of what we are trying to do in tax reform.
    So, Mr. Chairman, when you mention that middle-class 
families need help, I agree with you. And I think most of us 
agree, and we want to make sure at the end of the day that, 
when everything is said and done, we are not asking middle-
income taxpayers to shoulder a greater burden of the cost of 
this country than they already are. In other words, we want to 
make sure the progressivity is maintained and that hopefully it 
is made more progressive as a result of our action.
    When we look at other principles--and one I just really 
wanted to underscore is, many of you have been in the health-
care debate, asking our States to do more. We talk about 
partnerships with our States. Well, let us respect federalism.
    There is a reason why there is a State and local tax 
deduction beyond just the impact it has on who pays taxes. It 
is respect for the fact that it is the same taxpayers who pay 
State and local taxes who pay Federal taxes.
    And there is something to be said about double taxation. 
The chairman was very active in trying to deal with corporate 
integration to deal with double taxation. Let us not create 
double taxation on those who are paying State and local taxes.
    I just point out there are principles that become very 
important in our debate. And, Ms. Harrison, I am glad you are 
here, because home ownership is one of our principal 
objectives. And we should recognize that we want to make sure 
at the end of the day that we do not hamper the ability of 
individuals to own their homes. It has many positive aspects to 
it.
    But what I want to ask a question on deals with fiscal 
responsibility, and it follows up a little on Senator Isakson's 
point. I think we all should agree that one of our principles 
is that we want to make sure that tax reform does not add to 
the debt, that it is at least fiscally neutral. And as I 
pointed out earlier, I hope that the Joint Tax Committee will 
be our arbiter as it relates to that.
    But there are timing issues as to when you collect taxes, 
and Senator Isakson raised that issue. Senator Portman and I 
have worked a long time to try to improve retirement security 
in this country, because we recognize it is important. People 
are living longer. We believe in the three legs of the stool: 
Social Security, retirement, and personal savings. We need all 
three.
    And if we do proposals that deal with timing in order to 
get revenues short-term, it could have an adverse impact on 
retirement security, but it certainly is not fiscally 
responsible. So, it is an issue that may have merits, but to 
use it for revenue, it has no merit.
    So I wanted to ask, Ms. Batchelder, if you could just go 
over a little bit on the retirement security front as we look 
at tax reform, the impact it would have if we use timing issues 
for rate reductions, the impact it has on overall fiscal 
responsibility, and also what impact it could have on 
retirement security.
    Ms. Batchelder. Thank you for the question.
    I think this is a really important issue that needs to be 
discussed a great deal more. So the proposal that some people 
have advanced is to require people to make all or part of their 
contributions to their retirement plans on a Roth basis, which 
means that they are after-tax instead of pretax. And generally, 
right now people can choose between the two, whether to 
contribute on a traditional or Roth basis. And if their tax 
rates are constant over time--which is a big ``if''--then those 
are actually identical economically. And it is hard for people 
to predict whether their tax rate is going to go up or go down.
    So as a general matter, if a lot of people shifted to 
saving on a Roth basis, that should not have a large impact 
either way on revenues.
    The problem is that it would have a very big timing impact. 
So it would mean that all of a sudden people who are taking 
deductions now when they make contributions to 401(k)s would 
not be taking those deductions and instead they would never be 
paying tax on the withdrawals.
    And so you would end up raising a lot of revenue within the 
budget window and losing a tremendous amount of revenue outside 
of the budget window, which is why I think it is really 
critical that, whenever any tax reform bill or proposal is 
advanced, the committee obtain estimates from the Joint 
Committee on Taxation, both on the revenue impact within the 
budget window but also outside, because you can have very 
different effects in those two periods.
    And as I mentioned in my testimony, I believe tax reform 
should raise revenue, but at a bare minimum be revenue-neutral. 
And it is really important that that is examined both within 
the budget window and on a long-term basis. As Mr. Brill's 
testimony referenced, those long-term budget impacts are really 
important.
    Senator Cardin. Thank you for that. Mr. Chairman, I just 
want to note that in regards to State and local, I had asked 
Secretary Mnuchin a long time ago for information as a follow-
up to one of these hearings, and he has not responded. I would 
hope you would help me get that information from the Secretary.
    The Chairman. I will be happy to try.
    Senator Cassidy, you are next.
    Senator Cassidy. Thank you, Mr. Chairman.
    Mr. Brill, Mr. Ponnuru references increasing the Child Tax 
Credit. Your testimony, though, contrasts two families, same 
income, but with different aged children. Implicitly, you are 
criticizing the Child Tax Credit deduction. So just elaborate 
on that. Again, I always like to take you all's testimony and 
see how it plays with each other. So go ahead.
    Mr. Brill. Thank you, Senator, for your question.
    I would note in my testimony, as you described, and in some 
previous writings and articles that I have authored, that there 
is a wide disparity in tax liabilities currently, based on 
family size. That is by design in the tax code today, both as a 
result of the personal exemption and as a result of the Child 
Tax Credit, first at $500 in 1997 and then $1,000 starting in 
2003.
    This is part of this horizontal inequity that I described 
in my testimony. Ramesh makes an argument defending that 
disparity. I am simply pointing out that--in many regards--this 
question of fairness in the tax code relates not only to 
differences in tax liabilities about people who make more or 
less, but even within the same group----
    Senator Cassidy. But on the other hand, he is justifying 
that difference between those in the same group, saying that if 
you look at life-cycle expense of raising a child, that net, it 
comes out--now it is a bigger picture, if you will, if I may 
speak for him. He makes the problem bigger, and you make the 
problem more focused.
    Again, do you, kind of, not accept the validity of his 
approach?
    Mr. Brill. I would not personally promote a larger Child 
Tax Credit in the context of fundamental tax reform, but I am 
very respectful of the arguments that he is making with respect 
to its impact on taxpayers and entitlement reform.
    Senator Cassidy. Secondly--again, I do not mean to pick on 
you. I just liked your testimony, so it triggered ideas. Ms. 
Batchelder cites a reference by you--I think it is reference 
number four--that you, with Joe Antos, put out something 
stating that our national taxes should be an increased amount 
of our GDP.
    Now implicitly there, you are kind of rejecting the concept 
of dynamic scoring. Thoughts on that?
    Mr. Brill. Sure. Well first, with respect to dynamic 
scoring, certainly no, Senator. I do think that some tax policy 
changes can lead to dynamic effects and dynamic responses--not 
every tax policy change for sure--and that we should recognize 
that. That is one of the core reasons we are pursuing tax 
reform, I think: to promote economic growth. And to the extent 
that we are successful, we should capture those responses in 
our analyses. Sometimes those responses are overstated by some 
analysts, but I think they are real and that we should be able 
to rely on that information.
    Second, with respect to the footnote, I did co-author a 
paper 4 or 5 years ago that was focused around a fiscal reform, 
around finding fiscal balance, bringing the debt-to-GDP ratio 
down in the long run. In that reform, there were a whole host 
of changes including a net increase in revenues over the long 
run.
    Senator Cassidy. Except that you just spoke about bringing 
down debt-to-GDP, and so therefore--just to, kind of, complete 
it, you would increase your tax revenue for the State going 
forward relative to GDP in the short-term, I gather, in order 
to decrease debt in the long-term. Is that, again, a fair 
statement?
    Mr. Brill. I cannot recall all the specifics. I believe 
that the revenue increases were phased in over time. This is a 
factor, that there are fundamental demographic shifts underway 
over the next few decades that will put increasing fiscal 
pressures on the government. We can reform those programs to 
save money, but we can also look at other ways to find 
balance----
    Senator Cassidy. So to put a point on that, and because I 
have been thinking about how we have a demographic bulge of the 
baby boomers going onto Medicare and Social Security, straining 
those programs. Medicare is going bankrupt in 17 years, and 
people are talking about Medicare for all.
    So I gather then, from what you say, that in the short term 
you think that we may need--I am just quoting you; tell me if I 
am wrong. We need to increase the tax-to-GDP total amount in 
order to fully fund our Social Security and Medicare programs 
to take care of the bulge of the baby boomers?
    Mr. Brill. I am not actually advocating for a tax increase 
in the payroll tax to prefund future Social Security 
expenditures. I do think that given the increased demands on 
the system through the demographic changes, it is reasonable to 
think that, while those reforms to Medicare and Social Security 
are needed very much so, we cannot address those challenges 
only by changes in revenue. But I do think that if we can find 
efficient ways to raise revenue, that in the long run if there 
is more revenue into the system, if that revenue is collected 
in an efficient manner, that is a reasonable part of a 
comprehensive fiscal reform solution.
    Senator Cassidy. There are two components of that. If you 
grow the economy, people will pay more into the system only 
because they are making more money. The same percent results in 
more absolute dollars.
    The second--your suggestion--is that you might sluice off 
dollars from another source that would feed into it over and 
above that which is coming from the payroll taxes.
    Mr. Brill. That is correct. I would be willing to consider 
both of those in the context of a comprehensive fiscal reform. 
It is different from the context of a fundamental tax reform 
before the committee today, but if we are thinking more broadly 
about the long-term fiscal challenges--this country faces 
many--we should be thinking about all our options.
    Senator Cassidy. I am over time. I yield back. Thank you.
    The Chairman. Senator Brown?
    Senator Brown. Thank you, Mr. Chairman.
    This spring, the guru of failed trickle-down economics, 
Martin Feldstein, let the cat out of the bag in a Wall Street 
Journal op-ed on April 26th, the day after Gary Cohn and 
Secretary Mnuchin released the one-page Trump tax plan. 
Professor Feldstein laid out in detail how Washington elites 
plan to pay for so-called tax reform with massive cuts to 
Medicare and by raising the retirement age for Social Security 
to 70.
    The latest proposal now that they floated would take away 
freedom the American people have to choose a retirement savings 
plan that works best for them and force everyone into a Roth 
account, slapping taxes on retirement savings of working 
middle-class families. You have got to be kidding. I mean, the 
three best ideas to pay for massive tax cuts for Wall Street 
are to cut Medicare, raise the eligibility age to 70 for Social 
Security, and then steal from the retirement accounts of 
working middle-class Americans.
    Tell the barber in Dayton, OH that he has to work until he 
is 70. Tell the construction worker in Warren, OH that she has 
to work until she is 70. Tell the waitress at a Columbus diner 
that she has to work until she is 70.
    If the President and congressional Republicans want to work 
together with us, as Chairman Hatch promises us, to build a tax 
code that puts more money in the pockets of working Americans, 
that understands you grow the economy not by trickle-down, top-
down tax cuts, but you grow the economy by investing in the 
middle class, we are there. Senator Wyden and I and all of us 
want to work--we want to reward employers that keep jobs in the 
United States. We are there to work together.
    But if Senator McConnell decides to follow the same 
template he did on health care, where he brought in a handful 
of five or six--turns out to be all Senators who look like me, 
different party, but look like me--join with a few drug 
company, insurance company lobbyists, and then write the bill 
behind closed doors, he is going to have a hell of a fight on 
his hands, and we know that.
    We know that this committee wants to work bipartisanly, the 
way we did on CHIP, the way we did last year, Senator Portman 
and I and others, on the Earned Income Tax Credit. But if they 
do not even show us a bill, as they did on health care, replace 
and repeal, or repeal and replace, or whatever they said--they 
do not want to show us a bill--if they are just going to try to 
jam us on a party-line vote for reconciliation, count us out.
    I mean, I want to see a tax bill that focuses on the middle 
class to build the economy out that way. It is really pretty 
simple.
    So my question, Professor Batchelder, is, what would be the 
impact of converting--their idea of raising the eligibility age 
of Social Security, cutting Medicare--what would be the impact 
of that, coupled with converting our current retirement savings 
vehicles from a tax-deferred model to a Roth model, on middle-
class families trying to save for retirement? Talk through the 
impact of that, if you would.
    Ms. Batchelder. Thank you for the question, Senator.
    Well first, Medicare and Social Security--and I would add 
in Medicaid--are all programs that low- and middle-income 
families rely on tremendously in retirement and also, in the 
case of Medicaid, before retirement. So cutting those would put 
further strain on families who have spent their whole working 
lives counting on these benefits and have seen their incomes 
largely stagnate, especially compared to the most wealthy.
    The Rothification idea, as we discussed a bit earlier--
first of all, I am deeply concerned by the potential use of 
that proposal as a timing gimmick where it would raise, you 
know, potentially a trillion dollars within the budget window 
and lose more than that outside the budget window. And if one 
did not account for both those affects, one could use that 
trillion dollars within the budget window to pay for tax cuts 
for the wealthy and then end up losing even more outside of it, 
which would place even further pressure on programs like Social 
Security and Medicare in the long term.
    The other point I did not have a chance to make is the 
Rothification idea would be really a dramatic change in 
retirement savings policy. Different families have different 
incentives whether they should select to save on a Roth basis 
or on a traditional basis. And for some it is advantageous to 
save on a Roth basis; for others it is not. And there are also 
very different rules about preretirement withdrawals. There are 
different effective contribution limits. So it is a real sea 
change in retirement savings policy that I think should only be 
done after very careful analysis of the impact on retirement 
savings on different families at different segments of the 
distribution, and not just because it happens to serve this 
budget gimmick.
    Senator Brown. Thank you. There is one more point I want to 
make about something slightly different, Mr. Chairman. One 
thing we did last year was put together--as we expanded EITC 
and CTC on a permanent basis, we put together a robust package 
of program integrity measures to make sure that we are doing 
everything possible to reduce the error rate for the tax 
credits on EITC, such an important anti-poverty measure, such 
an important incentive for work.
    Now the House budget--and we were proud of that, that there 
is not really a lot of fraud in the EITC. There are a lot of 
mistakes in the EITC, where people were paid more or less 
because of errors in filling the forms out. That is the 
important point to understand.
    Now the House budget has proposed that not one working 
family receive its Earned Income Tax Credit until the IRS has 
conducted a mini-audit of their finances.
    What is that all about, Mr. Chairman? We need to go to work 
and make sure that our reforms on EITC stay in place and not 
the, sort of, mean-spirited attack on families making $20,000 
and $30,000 and $40,000 and $50,000 who depend on that $3,000 
or $4,000 or $5,000 or Earned Income Tax Credit for the 
incentive, for the reward for their working hard and playing by 
the rules.
    Thank you, Mr. Chairman.
    The Chairman. Senator Heller?
    Senator Heller. Mr. Chairman, thank you, and thank you to 
the ranking member. Thanks for holding this hearing.
    I cannot imagine that there is a more important place to be 
today than to have this discussion in this hearing. So thank 
you so much, and I want to thank the witnesses also for taking 
time, for being here, the first hearing on tax reform.
    I know everybody has the same goals; that is, to expand the 
economy, simplify the tax code, and to give the middle class 
some tax relief. So if you will indulge me for just a minute, I 
want to share my perspective from the State of Nevada, and that 
is that our middle class has suffered under an outdated and 
unfair tax code that discourages job creation and makes it 
harder for Nevadans, and frankly people all across America, to 
get ahead.
    Just the other night, Mr. Chairman, I had a telephone town 
hall meeting, and I heard from a teacher in Las Vegas who spoke 
of stagnant wages. I also heard recently from a young Nevadan 
who started his own business while going to school full-time, 
and this 21-year-old brought up the enormous amount of money he 
is paying in taxes as well as how complicated it is to navigate 
our current system.
    So Nevadans have been waiting for a fair, simpler tax code 
for way too long. According to a recent poll conducted by my 
office, more than half of Nevadans said it is important that 
Congress pass tax reform legislation by the end of this year.
    And now we have a prime opportunity to do that and to 
provide relief to the American people who have been waiting for 
a fair and a simpler tax code. To me, relief means letting the 
middle class keep more of their hard-earned paychecks, making 
our tax code easier to understand--in essence, less paperwork, 
more money in their back pockets. It also means quality jobs, 
higher wages, and growth in our communities.
    So the current economic situation is not acceptable. I look 
forward to working with all of my colleagues on both sides to 
address this issue.
    Mr. Brill, if I could start with you. The average median 
household income in Nevada is about $55,000 according to the 
Census Bureau data. And, under various tax relief proposals, we 
have now seen a reduction. We have not only seen a reduction in 
the number of tax brackets from seven to three, but also a 
significant reduction in the income tax rates.
    If we were to be successful here with this committee on tax 
relief and get it through Congress, how much money can the 
average hardworking Nevada family expect to keep?
    Mr. Brill. Thank you, Senator.
    Perhaps that is the hardest question I have been asked so 
far.
    Senator Heller. I think it is the question.
    Mr. Brill. I appreciate the importance of understanding the 
tangible consequences of tax reform.
    What I would note--there are three things that I think 
matter to median households.
    One is the amount of tax that they are going to have to 
pay, just quite simply as you are suggesting, what their tax 
bill is. The larger that tax bill is, the less resources there 
are for other activities.
    In addition, what their marginal tax rate is. And I know 
that a lot of people are not necessarily always aware 
explicitly of their effective marginal tax rates, numbers that 
economists like to discuss, but there is clear evidence that 
people are responsive to changes in these marginal rates. And 
higher rates are going to discourage work and discourage 
entrepreneurship and discourage investment.
    And then finally, it is not only the taxes that are paid, 
but it is the cost associated with complying with those taxes. 
Many people who are earning $55,000 a year enjoy a relatively 
simple tax code today. They claim the standard deduction, but 
many do not and are faced with additional tax burdens, 
compliance burdens.
    And in particular as it relates to the anecdote that you 
mentioned earlier, folks who are trying to start small 
businesses face additional compliance burdens much more so than 
ordinary wage earners, and that can be a hindrance in efforts 
to get those businesses going.
    Senator Heller. Mr. Brill, thank you.
    Ms. Harrison, real quick. I am assuming--I am sorry I 
missed your testimony. I am assuming you are here representing 
the Realtors industry, and I want you to know that I appreciate 
all that your industry does, and I do consider it an economic 
indicator of how well an economy is doing. In no State was that 
more obvious than the State of Nevada during the recent 
recession.
    And I missed your testimony. Will you tell me what your 
biggest concern is in this bill moving forward?
    Ms. Harrison. Well, I think I concluded with first, do no 
harm. When you are adjusting the moving pieces that this 
discussion is inevitably going to involve, we want to make sure 
that, just as you stated, the economic engine of home ownership 
and the transfer of real property in this country remains 
unfettered and is still allowed to continue in the way that it 
has, because, again, I am looking here at real estate household 
equity getting back to building wealth, $13.7 trillion. For 
many, many Americans, wealth building begins with the equity in 
their home.
    They do not own stocks. They do not even think about that, 
but they do want to own a home. And to the extent that we have 
a stable economy, a growing economy, the equity in that home 
will grow with them as well and be available to them as they 
downsize their housing needs and their requirements change.
    We want to make sure that that is preserved.
    Senator Heller. What is more important to you, growing an 
economy or your interest deduction?
    Ms. Harrison. I do not think that one exclusively is in the 
way of the other. I think done well, you can have both, because 
we know that, as I said, the transfer of real property is an 
economic driver.
    When you have a depressed real estate market, you have a 
depressed country in terms of its economic----
    Senator Heller. And I said that in my opening comments. 
Yes, I agree with that.
    Ms. Harrison. Yes.
    Senator Heller. Mr. Chairman, thank you.
    The Chairman. Thank you.
    Senator Carper?
    Senator Carper. Thanks, Mr. Chairman. Thanks to you and our 
ranking member for holding this hearing. And I would just 
reiterate how important it is, I think, for us to return to 
regular order, to hold hearings, bipartisan hearings like this, 
where folks, stakeholders can come in from around the country 
and share with us their views. It is just incredibly important, 
and not only that we do it here, we do it again and again with 
other stakeholders at the table, and then we talk amongst 
ourselves as much as we did yesterday afternoon. So I applaud 
that, encourage that.
    Lily, nice to have you back. It is great to see you, to 
welcome our other guests too.
    My colleagues have heard me say this before, but I look at 
every proposal for tax reform through four questions. Is it 
fair? Does it foster economic growth? Does it simplify the tax 
code or make it more complex? How does it affect the deficit? 
Those are the four screens, if you will, through which I look.
    Let me just ask each of you, ``yes'' or ``no,'' do you 
think those are four good questions to ask? We will just start 
with you, Mr. Brill, just ``yes'' or ``no''?
    Mr. Brill. Yes, I do.
    Senator Carper. Thank you.
    Ms. Harrison?
    Ms. Harrison. Absolutely essential questions.
    Senator Carper. Ms. Batchelder?
    Ms. Batchelder. Yes.
    Senator Carper. And Mr. Ponnuru?
    Mr. Ponnuru. Yes and yes.
    Senator Carper. Yes. Thank you so much.
    In one of my other hearings--I have three committee 
hearings going on this morning. I want to be in all of them, 
but we have not figured out how to clone me yet. So I will 
bounce back and forth from one to the other.
    But one of the hearings we are having is a follow-on to a 
GAO report. The idea in the Homeland Security Committee hearing 
that is going on right now is, how do we stop wasting money in 
a particular area? So that is the focus.
    I remember having a hearing on the budget deficit years ago 
when I was a Congressman, and we talked about the need for 
revenues in order to, you know, we needed some extra revenues, 
we needed to do a better job on controlling spending. And one 
woman raised her hand at the back of the room, and she said, 
``I do not mind paying more taxes if it will erase the deficit. 
I just do not want you to waste my money.'' I just do not want 
you to waste my money--I have never forgotten that. So we are 
focusing on that in the Homeland Security Committee this 
morning.
    One of the other things GAO does every other year is, they 
give us a high-risk list, high-risk ways of wasting money. And 
one of the things they have been dwelling on of late deals with 
the funding for the IRS. We have cut funding for the IRS by 
about 20 percent in the last 5, 6, 7 years.
    And the current budget proposal from this administration 
calls for reducing the IRS budget by another 2 percent. 
Meanwhile, what we do in the Congress is, we change the tax 
code. We usually do it late in the calendar year. We do it in 
ways that make the tax code more complex, not less complex. We 
cut revenues to the IRS for people and for technology to 
provide customer service, and then we say, ``Well why don't you 
fix this? Why do you guys not do a better job?'' It is crazy.
    For every dollar that we spend on funding the IRS, we are 
told we get back $4 to $10--for every dollar that we fund. 
Should we continue to cut, as has been proposed, continue to 
cut funding for the IRS in the next year? And we will start 
again with just ``yes'' or ``no.'' Mr. Brill?
    Mr. Brill. I am sorry, but I am really not an expert on the 
budget side of the administration of the tax code.
    Senator Carper. Okay. Thank you.
    Ms. Harrison?
    Ms. Harrison. I am certainly no expert, not in any way, 
shape, or form, but I would absolutely say wasting taxpayers' 
dollars is something no one looks forward to or wants or 
expects.
    Senator Carper. Ms. Batchelder?
    Ms. Batchelder. I think we should be substantially 
increasing the IRS budget. As you said, if for $1 that is spent 
on the IRS budget for enforcement, the IRS collects--the last 
statistic I saw was $18 from people who are underpaying their 
legally owed taxes. Our tax gap right now is about $400 
billion.
    So a very easy way to collect more revenue from people who 
legally owe it and are evading it is to slightly increase the 
IRS budget.
    Senator Carper. Thank you.
    Same question, Mr. Ponnuru. I am just looking for a simple 
``yes'' or ``no?'' Should we continue to cut the budget for the 
IRS? We cut it by 20 percent. Should we continue to cut it, 
knowing that for every dollar we cut, we lose four or five 
bucks?
    Mr. Ponnuru. I am going to associate myself with Alex 
Brill's ``no comment.''
    Senator Carper. Okay. All right. That is an interesting 
response.
    One of the things we try to do in a hearing like this is 
look for some consensus. It is a diverse panel--complex 
subjects, difficult subjects.
    Give me one idea where you think you all agree on 
something, Mr. Brill.
    Mr. Brill. I think that--I certainly would associate my 
comments with Ms. Batchelder's comments about Rothification, 
both as it relates to timing and the potential significant 
impacts it has on retirement savings.
    Senator Carper. I succeeded Senator Roth in the Senate and 
on this committee, and he would be pleased to know his name is 
being used in this manner, I think, today.
    Mr. Brill. He would.
    Senator Carper. Please, Ms. Harrison, something where you 
think you all agree, and to the extent that you could agree on 
some things, it really helps us. Where do you agree on one 
issue?
    Ms. Harrison. We agree that tax code should be fair.
    Senator Carper. All right. Thanks.
    Ms. Batchelder?
    Ms. Batchelder. Well I would, of course, associate myself 
with Mr. Brill on Rothification, but I also agree with Mr. 
Ponnuru that we should be seriously considering expanding the 
Child Tax Credit, particularly for the lowest-income families. 
There is strong evidence about the impact on future child 
earnings, health, education, especially when there are young 
children, and especially when they are from particularly low-
income families.
    Senator Carper. Thank you.
    Mr. Ponnuru?
    Mr. Ponnuru. I agree with the comments about Rothification, 
and I also think, as Ms. Batchelder pointed out in her 
testimony, that eliminating the dependent exemption and 
increasing the standard deduction would be a bad tradeoff for a 
lot of middle-class families.
    Senator Carper. All right. Thanks.
    Thank you all, and we will look forward to following up 
with some of you later on. Thanks.
    Thanks, Mr. Chairman.
    The Chairman. Senator McCaskill?
    Senator McCaskill. Thank you, Mr. Chairman. I think one of 
the things that we all talk about is the complexity. And I am 
worried that the way this train is moving, we are going to get 
off on the track of rates and remove ourselves from the 
difficult job on complexity.
    This is going to be a priority, as far as I am concerned, 
in terms of how we write this bill. A tax rate can be based on 
whether it is regular wage income, ordinary dividends, 
qualified dividends, long-term capital gains, short-term 
capital gains.
    A deduction credit for higher education is different 
depending on whether it applies to continuing education, higher 
education, a family member's education, or several other 
subcategories.
    We cannot even manage to define the word ``child'' 
consistently across the code. To me, we have two issues here. 
One is a disagreement over rates, both corporate and business 
organization around those rates, and a conversation about 
individual rates, and I do not hear enough heat around the 
complexity part.
    Do you believe that clearing up some of the complexity 
could be as important to economic growth and prosperity in this 
country as some of the other things that are consuming all the 
oxygen in the room?
    We will start with the guys who do not want to comment on 
how dumb it is that the IRS--there is nothing like being in 
debt and cutting your receivables department. Go ahead.
    Mr. Brill. I do agree that the complexity of the tax code 
is a cost separate and apart from the revenues that are imposed 
on taxpayers.
    The number of itemizers in the system today, those 
taxpayers, 40-plus million taxpayers who itemize their returns, 
face additional burdens as a result of that. Now, they may get 
tax breaks as a result of that, but the compliance costs with 
itemizing are significant. In addition, over 40 million 
taxpayers claim a credit, which is additional paperwork as 
well.
    Again, they are receiving tax reductions as a result of the 
policies, but they are also burdened with costs. This disparity 
creates similar taxpayers with different tax burdens, sometimes 
very similar taxpayers with different burdens.
    If your child is 17 or 16, your tax liabilities will be 
different. If you rent or if you own a home, of course, your 
tax liabilities will be different. So this creates some degree 
of complexity and uncertainties that are significant, and I 
think that it is reasonable and appropriate to address those 
complexities in the process of pursuing tax reform.
    Senator McCaskill. If we do not do it now, I do not think 
it will get done. I think we will still have 70,000 pages.
    I want to challenge a little bit our Realtor. I certainly 
understand that the mortgage interest deduction is a behavior-
modifying provision as it relates to people when they buy their 
first home. No question. I did the math. This is what I am 
paying for the apartment, this is what it will cost me in a 
mortgage where I get to deduct the interest; therefore, I was 
ready to buy my first home. I do not remember doing that 
analysis when I bought a still very modest second home.
    Do you have any studies that show that the buying of homes, 
the second or third or fourth home that the family buys, that 
somehow they are considering going back to an apartment if they 
do not get a mortgage interest deduction?
    I mean, the idea behind the mortgage interest deduction was 
to modify behavior and encourage home ownership.
    Are there any studies that show that you would lose people 
to rental properties if this deduction was removed for people 
who were moving on to bigger and bigger homes in their lives?
    Ms. Harrison. The short answer is, I do not think so. But 
again, the deduction for mortgage interest, this has been 
embedded in the tax code since 1913, I think. So it is not 
something that we just kind of put in place to encourage first-
time homebuyers, but it certainly is in place to encourage home 
ownership itself.
    As regards recurring transactions, we real estate 
professionals and Realtors, certainly that is how we make 
money, and it is also the story of our lives, if you will, 
because we begin with the first home, perhaps a condo, as a 
single person and maybe we get a partner.
    So as our circumstances change, our housing needs change, 
and that often is the trigger for the purchase or the sale of 
the first home, the purchase of the second home.
    So it is a life story that is going on here. What we have 
here with the mortgage interest deduction is that statement by 
the Federal Government that we believe in home ownership and 
the benefits that go beyond simply that tax benefit, but the 
benefit that that gives to society when we are indeed a Nation 
of homeowners rather than a Nation of renters.
    Senator McCaskill. I understand the point you are making, 
but if we look at what we do with the tax code, the tax code 
provisions ostensibly are in place to encourage certain 
behavior and/or economic growth.
    I just think it is important as we try to analyze the tax 
code and figure out a way to bring down some rates and make it 
fairer that we look at every single one to see if it is 
accomplishing what it is supposed to be accomplishing; if it is 
not, we should reconsider it.
    That is why I wanted to see if there were any studies that 
showed it did modify behavior for future home purchases beyond 
the first home.
    Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Casey?
    Senator Casey. Mr. Chairman, thanks very much. We 
appreciate you and the ranking member having this hearing and a 
number of hearings on the broad issue of tax reform. So I 
commend you for that.
    I know there is a substantial disagreement about the 
insistence on our side to have three basic guiding principles. 
I do not understand the opposition to those, but I just want to 
state them again for the record. Number one, regular order--
that should be easy. I think both sides agree on that one. So 
far we are batting 300.
    The second one, of course, is making sure that we do not 
increase the deficit by way of tax reform. I think we can agree 
on that, I hope.
    The third one seems to be the most difficult, and I have a 
very strong view of this. You, Mr. Chairman, I am sure, 
disagree. But why is it that we cannot agree that the top 1 
percent should not benefit from this process? The top 1 percent 
of the last generation has had a bonanza. They have been doing 
pretty well.
    Anyway, I just wanted to restate those, because I know we 
have to be honest about the differences even as we commend the 
work of the chairman trying to keep people together in terms of 
hearings.
    The Chairman. I do not think there are any differences with 
regard to the top 1 percent.
    Senator Casey. I hope not, and I appreciate it.
    The Chairman. Certainly not that I know of.
    Senator Casey. I want to focus on something that we do not 
talk about enough, frankly, and I think tax reform gives us 
another chance to not only talk about it, but to actually do 
something about it.
    On both ends of the aid scale among young people, whether 
it is young children on one end or college students on the 
other, we have all seen the horrors of higher education costs 
going up. Senator Toomey and I represent a State where we have 
a great system of higher education and great institutions whose 
tuition has gone way up with regards to public 4-year colleges.
    But here is the reality on the other end of the scale. As 
much as we are concerned about higher education costs, in fact, 
in 33 States and the District of Columbia, here is what we are 
facing: infant care costs exceed the average cost of in-State 
college tuition at public 4-year institutions. I will say it 
again: infant care costs.
    Senator Murray and I and a number of Democrats have a bill 
to focus on that. And you all know the numbers. I was not here 
for Ms. Batchelder's testimony, but you know the costs. 
Sometimes families can be paying as much as a fifth of their 
income on child care. So we wanted to focus on that in our 
legislation.
    Here is the question for Ms. Batchelder. Can you discuss 
what the President's past proposals on child care have looked 
like and why a credit for child care costs is preferable to a 
deduction? If you can, walk through that again.
    Ms. Batchelder. Thank you for the question.
    The President last fall came out with some proposals 
regarding child care, and I do applaud him for focusing on the 
issue. The problem once again was that his proposals did not 
actually address the challenge.
    They provided larger benefits to higher-income families and 
very small benefits to lower-income families, even though 
lower-income families tend to spend a much larger share of 
their budget on child care costs. And as you just explained, 
particularly for infants and young children, those costs can be 
astronomical.
    So his plan was both not targeted on the people who need 
help the most, it was also very complex, going to Senator 
McCaskill's point.
    Right now we have two tax benefits for child care, which is 
already less than ideal, and it would expand that to five. 
There is evidence that once you give people lots of different 
tax benefits that they have to choose between, they often do 
not choose the best one for themselves. So that complexity 
hurts the taxpayer.
    I think a much better approach--and I really applaud you 
for working on this issue--is to have a refundable tax credit 
for child care that is targeted on people whose costs impose 
the biggest budgetary strain for them. That would require that 
the tax credit be refundable.
    Right now about 35 percent of households are in the zero 
bracket, meaning that their income is less than the standard 
deduction and personal exemptions. So that means they do not 
owe Federal income tax, even though they pay vast amounts of 
Federal payroll tax and other State and local taxes. So if you 
give them anything other than a refundable credit, it is 
worthless to them. The refundable credit is very important.
    The one other thing I would mention which is not strictly 
individual tax reform is, it would be very helpful to fully 
fund the direct spending programs for child care. Right now 
only 15 percent of people eligible are able to actually claims 
those subsidies. And particularly for lower-income families, 
the direct spending program may be more efficient even than a 
tax credit, because they are paid out as your child care bills 
are due rather than at the very end of the year.
    Senator Casey. Great. Thanks very much. Thanks, Mr. 
Chairman.
    The Chairman. Thank you.
    Senator Stabenow?
    Senator Stabenow. Thank you, Mr. Chairman and Ranking 
Member, for a very important hearing. And thank you to all of 
you for being here.
    Ms. Harrison, I just want to indicate I am with you on the 
mortgage interest deduction. So we certainly want to see, in my 
judgment--I am certainly supportive of making sure we have that 
for middle-class families.
    I also want to underscore what Senator Casey said in terms 
of where we start. When I look at this through the lens of 
Michigan, which, of course, I do, Michigan families, working 
families, small businesses and so on, I start from a very basic 
premise of saying we do not want to explode the deficit on 
whatever we do, we want it to be bipartisan, and we do not want 
the benefits going to the top 1 percent in our country who have 
received a majority of benefits of recovery and of other past 
proposals.
    I am hopeful that we are going to reject clearly the House 
Blueprint, which would give over 99 percent of the benefits to 
the wealthiest Americans. And by the way, in looking at how 
Michigan ranks, Mr. Chairman, we are at the bottom, totally at 
the bottom on that one. So as far as I am concerned, throw that 
one out.
    President Trump's plan at this point gives the top 1 
percent a tax cut, each person, of over $270,000 a year. So 
that does not work for me, for Michigan middle-class families 
either, and it would increase the deficit by $3.5 trillion.
    So I am hopeful what we are going to do is work together on 
a bipartisan basis to actually focus this on middle-class 
families, on small businesses where, frankly, the majority of 
jobs are being created, and that we are going to learn from 
what happened in the past, what did not work and what did work, 
and that we will build on what has grown the economy and jobs 
in the past.
    I wanted to ask, Ms. Batchelder, when we look at tax 
reform, what lessons can we take from other efforts, early 
2000s with the Bush tax cuts and before that with President 
Bill Clinton and those efforts as well? When we look at 
differences in approaches, what can we learn in terms of making 
sure that the benefits of tax reform go to working families and 
small businesses?
    Ms. Batchelder. Thank you for the question, Senator.
    I guess one thing that I would say one could learn, if you 
go back especially to the 1986 act, is the importance of 
working on a bipartisan basis. Tax reform is more likely to 
endure if it is passed on a bipartisan basis and done in a very 
transparent way.
    Back when I was working for the committee, I spent a lot of 
time working on tax reform. We put out lots of option papers. 
We put out discussion drafts. Tax reform is really complicated 
and there can be lots of pitfalls if you do not put out 
legislative language well in advance and let the public comment 
on it, point out problems with it, point out unintentional 
loopholes.
    So I think the first thing would be to have a bipartisan 
and transparent process.
    The second would be to look very carefully at the revenue 
and distributional effects. Thankfully, with the advent of 
computing and all sorts of things, we have a much better sense 
of that than we did back in 1986. The Joint Committee on 
Taxation does excellent work on estimating the effects of tax 
bills, but I think it is really important, before any votes are 
taken, to know the budget consequences, both within and outside 
the budget window, and to know the distributional consequences 
within and possibly outside the budget window.
    Really, the way you can tell whether the middle class is 
benefitting is when you look at those tables that they do that 
say what is their percentage change in after-tax income.
    Senator Stabenow. I agree with that. Also, I agree with the 
openness and transparency and bipartisanship of the 1986 
reforms.
    One of the successes was that it helped to ensure that the 
wealthiest were paying their fair share and gave a tax break to 
middle-class folks and folks working hard to get into the 
middle class.
    I am hopeful that that will be the path and that we will 
focus on those things and not trickle-down economics that just 
has not worked, has not put money in the pockets of the 
majority of people in Michigan, that is for sure.
    One other quick thing, and that is tax reform as it relates 
to closing loopholes. I am concerned about not creating new 
ones that individuals can abuse.
    I know my time is about out. So I will just ask, Ms. 
Batchelder, how can we help ensure that we are closing 
loopholes rather than seeing new ones?
    Ms. Batchelder. The most important thing I would flag in 
the brief time I have is the proposal to create a rate cap on 
pass-through business income, which would be a giant new 
loophole in the tax code and would really go in the opposite 
direction of what I would hope happens in tax reform.
    The estimates are that it would cost a huge amount, about 
$2 trillion, and 30 percent to 50 percent of that would be 
people avoiding taxes, because it would create huge incentives 
for people to characterize their labor income as pass-through 
business income. And really it would be the sophisticated 
taxpayers who can access fancy tax advice that would figure out 
how to do that.
    Furthermore, it would not benefit at all anybody who was in 
the 25-percent bracket or below or the 15-percent bracket and 
below under the President's plan and the House Republican 
Blueprint, in that 95 percent of taxpayers are in the 25-
percent bracket or below.
    So it would not benefit small businesses. It would really 
benefit the wealthy who are able to game the system.
    Senator Stabenow. Thank you, Mr. Chairman.
    The Chairman. Senator Toomey?
    Senator Toomey. Thanks, Mr. Chairman.
    I just want to touch on an area that I think we have 
established there is universal agreement on and then make a 
point where I think, evidently, there is a lot of disagreement.
    I think we have all agreed that we would like for tax 
reform to provide tax relief for working-class and middle-
income families, and I certainly agree with that.
    I do not agree that we have to systematically exclude the 
people who are very productive, successful, and pay a 
disproportionate amount of the taxes in this country.
    I will just give a couple of statistics that it is 
politically incorrect to mention, but I will mention them 
anyway. The fact is, the top 10 percent of income earners earn 
47 percent of the income in America and pay 71 percent of all 
the taxes. The top 1 percent make about 20 percent of the 
income and pay 40 percent of all the income taxes that are 
paid.
    In my view, we ought to have a very pro-growth tax code 
that is going to encourage an economic expansion, and if, along 
the way, a relatively wealthy person manages to benefit from 
that, I, for one, am not going to lose any sleep at all.
    We have an extremely progressive tax code, and it is going 
to remain a very progressive tax code. I hope we focus on 
creating more wealth for everybody rather than who must we 
insist on not being able to benefit from this.
    I want to ask Mr. Brill a question about itemized 
deductions. If I understand your testimony, you have made a 
point that itemized deductions generally, and the State and 
local tax deductions in particular, have some perhaps 
unintended features.
    They tend to be regressive in the sense that they 
disproportionately benefit higher-income people; is that true?
    Mr. Brill. Correct, yes.
    Senator Toomey. Would it be fair to characterize your view 
on these deductions as an indirect way in which States with 
higher State and local taxes are subsidized by States with 
lower State and local taxes indirectly through the Federal tax 
code. Is that true?
    Mr. Brill. That is true. It is certainly a subsidy to the 
States that utilize those provisions.
    Senator Toomey. And the effect of this, of course, all else 
being equal, is it keeps Federal marginal rates higher than 
they would otherwise be if we had a different treatment, a 
lesser treatment on State and local tax deductibility. We would 
be able, if we chose to, to use that to lower marginal rates.
    Mr. Brill. Statutory rates could certainly be reduced if 
the base was broadened.
    Senator Toomey. Let us talk a little bit about the 
different ways that we could go about lowering the tax burden. 
I was interested in Mr. Ponnuru's testimony, and he makes a 
persuasive case on a number of grounds for a Child Tax Credit, 
and I am sympathetic to many of his arguments.
    To his credit, I think, he did not argue that a consequence 
of increasing the Child Tax Credit is an immediate expansion or 
acceleration of economic growth. However, if you lower marginal 
rates, you change incentives. You increase the incentives to 
work, to save, to invest.
    Is it your view that lowering marginal rates does have a 
nearly immediate positive effect on changing incentives and, 
therefore, encouraging economic growth?
    Mr. Brill. I have a somewhat nuanced view, Senator. 
Lowering effective tax rates, yes, will increase the incentives 
to work and can increase the incentives to save and invest, for 
sure.
    It becomes a little bit trickier, just to be honest, when 
you are simultaneously broadening the base and lowering the 
statutory rates, how that affects these true effective marginal 
tax rates.
    My colleague, Alan Viard, and I wrote about this a few 
years ago, that base broadening can sometimes neutralize some 
of the positive effects of lower rates. That is not to say that 
we should not do that. We can get efficiency gains that are 
very important and powerful.
    Senator Toomey. Would it be fair to say that some base 
broadening could have a tendency to diminish economic growth, 
while other base broadening would actually encourage it by 
eliminating distortions?
    Mr. Brill. Correct.
    Senator Toomey. In the absence of base broadening--just 
putting that aside for a moment, since that can have either 
effect--lowering marginal rates by itself does tend to 
accelerate economic growth by enhancing the incentive to 
produce more goods and services.
    Mr. Brill. Correct.
    Senator Toomey. So as we weigh the various alternatives 
available to us, one of the ways that we can be very confident 
we would be encouraging a pickup in economic activity and, by 
the way, all the related benefits, right--a higher standard of 
living, higher wages working their way through the economy--we 
can be very confident that lowering marginal rates has that 
effect.
    Mr. Brill. In isolation, lowering marginal rates will 
encourage work, entrepreneurship, savings, and investments, for 
sure.
    Senator Toomey. Thank you. Thank you very much, Mr. 
Chairman.
    The Chairman. Senator Cantwell?
    Senator Cantwell. Thank you, Mr. Chairman. Thank you and 
the ranking member for holding this important hearing.
    So many of your comments and, obviously, the comments of 
many colleagues--there are lots of interesting things floating 
around here today.
    There is one thing I wanted to make sure that I was clear 
on in the President's proposal about getting rid of State and 
local tax deductions. We have fought for nearly 10 years and 
finally got restored our ability to deduct our sales tax from 
our Federal obligation, because we do not have an income tax.
    So I hope the Senators from Florida and Nevada and Texas 
will join me in saying that this idea of trying to get rid of 
our State flexibility is dead, dead on arrival. I hope those 
Senators from Florida and Nevada and Texas will help us say 
that--obviously, our colleagues from other States too, but I am 
talking about people who are members of this committee. That 
would be so helpful.
    Now, the ranking member and I come from a part of the 
country that has probably two of the most unique tax codes in 
the country, very different ways of raising revenue, and yet 
our economies have grown faster than the national average, I 
think every year since World War II.
    So the notion that Oregon and Washington have very 
different tax codes than the rest of the Nation, we are more 
efficient in a lot of ways, and we deliver better growth is 
something that people should look at.
    So the notion that somebody wants to knock out, that the 
President's proposal is primarily trying to get $1 trillion out 
of getting rid of local deductions, I just think is 
wrongheaded, and I hope our colleagues will join me in saying 
so.
    Secondly, we sent a letter to Democrats from this committee 
and others about how we wanted to focus on better wages for the 
middle class. I guess, Ms. Batchelder, I have question for you 
on that.
    I do want to point out and enter into the record, Mr. 
Chairman, this article from The New York Times by Patricia 
Cohen and Nelson Schwartz that basically economists see very 
little magic in tax cuts to promote growth.
    [The article appears in the appendix on p. 80.]
    Senator Cantwell. Their point is, do not deficit-finance 
tax cuts because you are not going to see the growth from that, 
which is also the second point of our letter, which is, let us 
not have issues of deficit just to give corporate rate cuts.
    Now, from the State of Washington, I guarantee you I care 
about corporate competitiveness from the perspective of an 
Amazon, a Microsoft, a Boeing, an agricultural economy where 90 
percent of our products are shipped overseas. I guarantee you I 
care about that competitiveness. But I care in a transformative 
economy where more change is happening, more dislocation is 
happening, more skills need to be upgraded constantly. I care 
about what we are going to do to raise the wages of the middle 
class and grow the economy from the middle out.
    Ms. Batchelder, I do not know if you can tell me, but one 
of the things we are very interested in is making sure, because 
corporations are investing one-half of what they did 20 years 
ago in worker training, if you think that incentives to help us 
retrain and reskill workers should be a priority?
    Second, so many people have fallen off of the housing 
affordability wrung. So the consequence is they have fewer--we 
have a burgeoning level of unaffordability in America. So if we 
want these people to be reskilled and retrained, we have to 
have a house over their head.
    So how much do we need to focus, if we want to grow the 
economy from the middle out, on the kind of investment 
structures that we need to put in for middle-class wages to 
increase?
    Ms. Batchelder. Thank you for that question. I think one of 
the most important things that one can do to boost middle-class 
wages and for lower-income families, as well, is expand the 
Earned Income Tax Credit and the Child Tax Credit.
    Those are both programs that have demonstrated effects not 
just immediately on the incomes of such families, but also on 
their kids for generations to come. There are strong outcomes 
in terms of education, health, long-term earning.
    There have been proposals to significantly expand the 
Earned Income Tax Credit also for childless adults, as they are 
so called, people who do not have dependents, who often have 
relatively low labor force participation rates. And by 
expanding that credit, you could encourage people to enter the 
labor force or be able to work more.
    This is actually a group--it is the only group that is 
currently taxed into poverty. And you could also more 
ambitiously consider expanding the EITC for families with 
children as well, and that would be a way to offset the fact 
that the take-home pay of middle-class families and lower-
income families has been growing much, much slower than the top 
1 percent.
    Senator Cantwell. What about job training and housing?
    Ms. Batchelder. Job training, I think, could be worth 
considering as part of education benefits as a whole. In 
general, I tend to think that delivering tax benefits directly 
to the people you want to benefit, i.e., the middle-class 
family, more of that will accrue to them than if you do it 
indirectly.
    But I think that that is--education, including job training 
and including certificate programs, is something that one could 
look at as part of reforming education tax benefits.
    Senator Cantwell. What about the unaffordability issue that 
we are facing in America?
    Ms. Batchelder. On housing?
    Senator Cantwell. Yes. About increasing the Low-Income 
Housing Tax Credit----
    Ms. Batchelder. Absolutely, I think that is worth 
considering.
    Senator Cantwell. Thank you. Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Bennet?
    Senator Bennet. Thank you, Mr. Chairman. I am very grateful 
for your holding this hearing and the manner in which it has 
been held.
    Mr. Ponnuru, thank you for your work. The United States is 
unusual among advanced economies in that we have millions of 
children living in poverty in our country, some in families 
that make only $2 a day in cash.
    I wonder, in that context, what your view might be of 
phasing the Child Tax Credit at a faster rate and from the 
first dollar rather than where we do it today.
    Mr. Ponnuru. I support that idea. As I note in my 
testimony, the existing Child Tax Credit already lifts around 3 
million people out of poverty, and an expanded Child Tax Credit 
would have even more of such an effect, particularly if the 
Child Tax Credit were made refundable against payroll taxes as 
well as income taxes, and I would say both employer-side and 
employee-side payroll taxes.
    Such estimates as have been made of similar proposals 
suggest that it would be a significant increase in after-tax 
income for the bottom quintile of income earners and, for that 
matter, for the 
second-lowest quintile.
    Senator Bennet. Let me ask you what your thoughts would be 
about a universal Child Tax Credit of some sort that might 
provide a monthly benefit to families in our country.
    Part of the problem here we are trying to figure out is how 
you deal with the fact that what you want people to be able to 
do is work--everybody wants people to work--but when people are 
living in poverty, it makes it that much harder.
    Things like the cost of housing, as Ms. Batchelder 
mentioned, the cost of transportation, the cost of child care, 
the cost of health care, all of these things, when you have a 
diminished income, are making it harder and harder for people 
to get into the position we want them to be, which is 
contributing to the economy.
    I take it--and then I will stop--that the reason why you 
support some of these ideas is that they are an efficient way 
to distribute these benefits rather than building more 
bureaucracies that might not get the eighth of the people that 
you are trying to get it to. Your thoughts on that.
    Mr. Ponnuru. I am sorry. Were you asking me about a 
universal basic income or a universal child allowance?
    Senator Bennet. A child allowance.
    Mr. Ponnuru. Great. Thanks. I think that the expanded Child 
Tax Credit is maybe a slightly more moderate version of the 
same idea, but it does have the advantages that you are talking 
about.
    So many of the concerns that Senators have raised during 
this hearing, from the affordability of housing to the 
affordability of child care, the affordability of higher 
education, these are things that families could use an expanded 
Child Tax Credit to help finance, among many other reasons they 
could use that money.
    They could use that money to finance paid leave from 
employment when a child is very young. But families have very 
different needs, and I think it is a good idea to create this 
flexibility where it is up to them to make the decisions as to 
how to allocate that additional money.
    Senator Bennet. Is there anybody else who would like to 
comment on this?
    Ms. Batchelder. Yes. If I could just chime in on the Child 
Tax Credit. I do think it is very important to consider 
increasing the refundability rates. Currently, one has to earn 
$3,000 in order to get any Child Tax Credit, and then you sort 
of get $0.15 on the dollar above that.
    Senator Bennet. Right.
    Ms. Batchelder. The result is that about 11 million 
children are excluded who live in households with working 
parents, and millions more whose parents in the current year 
are not working.
    So I applaud your proposal to expand that refundability and 
reduce that threshold. There have been discussions of making 
the Child Tax Credit refundable against payroll tax, and one 
concern I have is that that would not actually benefit low-
income families much at all, because payroll tax is 15.3 
percent and the current rate is 15 percent. So you would just 
be giving a 0.3-percent bump.
    I think it is important to really increase that rate at 
which low-income families can earn the Child Tax Credit beyond 
making it refundable against payroll taxes.
    Mr. Brill. I would just note one unintended consequence in 
making changes to this policy. If the Child Tax Credit is 
limited, it phases out as an income exceeds a certain 
threshold, I think $110,000 for married couples.
    If the Child Tax Credit were to get larger, that phase-out, 
which is an implicit tax, would affect more and more taxpayers. 
It would be another matter that the committee would need to 
wrestle with.
    Senator Bennet. Thank you. I appreciate the testimony, Mr. 
Chairman. I am sure other people's States are like mine. Even 
in our State, where we see an economy that is really second-to-
none in the country, middle-class families and families living 
in poverty are struggling with the costs of higher education, 
as you pointed out, the costs of early childhood education--
which in our State actually costs more, on average, than higher 
ed--housing, and health care.
    Those four things are conspiring to make it impossible for 
people to save or feel like they are putting their family in a 
better position for the future. That is why I hope we can get 
to bipartisan tax reform.
    Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Portman?
    Senator Portman. Thank you, Mr. Chairman. I want to thank 
you and Senator Wyden for holding the hearing and for some 
great testimony today from our former colleagues.
    Alex was on the Ways and Means Committee with me, Lily here 
on this committee, and we need your expertise. So thank you.
    I guess following on to what Senator Bennet said, I think 
that is what is so exciting about tax reform, and I think it 
goes to, in my view, more the economic growth and the wage 
improvement that is going to come from good tax reform, and it 
is across the board.
    If you look at Kevin Hassett's work--he is now the new 
Chairman of the Council of Economic Advisers as of a couple of 
days ago--and other studies that have been done, including by 
AEI, corporate rates, if they are lowered and we have a more 
competitive international system, will result primarily in wage 
growth, wage and benefits.
    CBO has a famous study on this from a while ago showing it 
is 70 percent. Others have different numbers. But the point is, 
that is about wages.
    On the individual side, I think the same is true. If you 
do, in fact, broaden the base, get rid of some of the 
complexity of the code, and lower rates, I think it will have 
the same benefit.
    So to the extent we are concerned about what Senator Bennet 
said, which I agree on, which is kind of the middle-class 
squeeze, higher expenses on everything, especially health care 
for most 
middle-class families, and then flat wages, which is generally 
true over the last couple of decades, this is, I think, the 
single best thing to do.
    In 2006, there was a study done by the Joint Committee that 
found that a proposal that would expand the tax base while 
lowering individual rates across the board by about 25 percent 
would increase GDP up to 3.5 percent in the long run. That 
increase in the second half of the budget window is about a 
$2,500 to $5,000 increase in income for a family of four. That 
is on the individual side.
    So I think both on the individual side and the business 
side, we have a great opportunity here.
    I would just ask, Alex, because you talked about this some 
in your testimony, in recent tax reform efforts, base 
broadening and rate reduction have been coupled with, in 
general, this doubling of the standard deduction. We talked a 
lot about that today.
    You talked about who benefits from itemizing and who does 
not. But do you see any benefit in reducing the number of 
taxpayers who have to itemize, just from a compliance point of 
view, as well?
    Mr. Brill. I do, Senator. Thank you for your question. 
There are a number of benefits from reducing the number of 
itemizers, including, in particular, the compliance costs 
associated with itemizing, as well as this horizontal equity 
issue that I described in my testimony, that taxpayers earning 
similar incomes should ideally, I think, pay roughly similar 
amounts of taxes.
    Senator Portman. Two hundred and seventy three dollars is 
the estimate that we have for people who itemize, who have to 
have someone else prepare their tax return. So that is saving 
some money right there just in compliance costs.
    On Rothification, we talked about that earlier--Senator 
Cardin talked about it, Senator Isakson; Lily, you answered it; 
Alex, you answered it.
    I think what we are missing, though, in terms of the back-
and-forth here is the effect on behavior. I understand the 
timing issue. That has always frustrated me, and Ben Cardin and 
I have struggled with this over the years. How do you help to 
expand 401(k)s and IRAs and not pay the penalty for it? 
Ultimately, that tax is paid--it is deferred--but not within 
the 10-year window.
    But with regard to Rothification, I just wanted to ask 
you--and certainly you can tell I am concerned--do you think 
that would create a disincentive to save? Because part of the 
issue that I look at is, you do have the choice now of 
Rothification and that is good, I am glad we have that choice, 
which means that you do not get the tax benefit up front. You 
do not get a deduction, and you take a risk what the tax rate 
will be later when you have to pay it, whereas with the 
traditional IRA or 401(k), you get a tax deduction.
    I talked with some businesses this week that said the take-
up on the Roth is very low. We are talking less than 5 percent 
of people taking it up.
    So if we go to Rothification in order to make our numbers 
look better, what is going to be the incentive to save? We have 
a serious issue in our country right now of people not saving 
enough. As the baby boomers begin to retire and are living 
longer, would we not want to encourage savings, and are you 
concerned about Rothification in that context?
    Mr. Brill. I am. As Lily described earlier in her 
testimony, there are circumstances where, in theory, it is a 
wash. There are circumstances where it is not a wash, depending 
on what your current tax rate is versus your future tax rate.
    So you can write down--an accountant can write down why 
these are either two neutral or equivalent policies, but what 
matters is the real-world evidence. As you suggested, the take-
up rates for Roths are significantly lower, and I think there 
is a fair amount of uncertainty about how a change--instead of 
the choice that we have today, if that policy was mandated, in 
some sense, as your savings operative vehicle--how that might 
affect investment.
    I, frankly, do not know what the effect is, and I think 
that policymakers should be cautious.
    Senator Portman. I think there are some studies being done 
right now.
    Lily, do you have a comment on that?
    Ms. Batchelder. I think as a matter of theory, one could 
argue it either way. It is possible it could increase savings. 
There are also strong arguments, and I think you are raising 
one, that it could decrease savings.
    But I think this gets to the broader point that, if one 
were to have such a dramatic change in retirement savings 
policy, you would want to have a group like the Joint Committee 
on Taxation estimate what the effects would be on take-up and 
savings.
    I think it also goes to the broader point that the single 
biggest thing that influences people's likelihood to save is 
whether they have access to an easy way to save through their 
employer.
    Personally, I would prioritize something like an auto-IRA 
over this as a way to give people access to an easy way to save 
at work.
    Senator Portman. Thank you all. Thank you, Ramesh and Ms. 
Harrington, for your testimony as well.
    The Chairman. Thank you, Senator.
    Let me just end this. I would like to ask a question of 
Professor Batchelder. You express concerns about the potential 
repeal of the, quote, ``head of household'' filing status as 
part of tax reform.
    I think you have raised some valid points. That said, I 
have some concerns that the current ``head of household'' 
status may be causing significant taxpayer confusion and is 
potentially prone to abuse.
    An audit conducted by the IRS's National Research Program 
for the 2009 to 2012 tax years indicates that 45 percent of the 
individual tax returns claiming the ``head of household'' 
status erroneously claimed such status. That is, 45 percent of 
returns filing as ``head of household'' were not entitled to 
the tax benefit it affords.
    Now, that is an alarmingly high error rate. Do you have any 
suggestions on how this error could be addressed, and would it 
be possible to make up for a lack of ``head of household'' 
status in other ways, such as through an increased Child Tax 
Credit, for instance?
    Ms. Batchelder. I am not familiar with that study. I find 
it very surprising. So I would like to look at it and would be 
happy to comment for the record on it. I think it is hard to 
replicate the benefits of the ``head of household'' filing 
status in general, because it is specifically for people who 
are unmarried and who may be divorced, may have never married, 
and have dependents.
    So if you just increase, for example, the Child Tax Credit, 
you would not be getting at the issue that sometimes there are 
greater costs and difficulties associated with raising a child 
on one's own rather than with one's partner.
    But again, I am not familiar with that study. So I would 
like to look at it before commenting.
    The Chairman. Thank you. Senator?
    Senator Wyden. Thank you very much, Mr. Chairman.
    I just want to give a quick summation of where I think we 
are and what's coming in the days ahead. First, Mr. Chairman, I 
think you know how strongly I feel about working closely with 
you. We have done that consistently and done it most recently 
on CHIP. So I look forward to working with you.
    Second, we have had a lot of constructive discussion here 
today; obviously, some differences of opinion, but constructive 
discussion. And I surely hope that they are listening to this 
discussion up at the White House, because right now one of the 
critical challenges is, up at the White House, there has been a 
big gap between words and deeds.
    Just yesterday the President said, ``Look, I am not going 
to give big tax breaks to the wealthy.'' But as I have pointed 
out today, Ms. Batchelder has pointed out today, the outline as 
of today creates a new enormous loophole for the fortunate few 
with respect to the pass-through issue, a real abuse of the 
pass-through issue, which is supposed to benefit small 
businesses.
    We have gone through today, also, how as of now working 
families would be hurt. They have been saying they would 
correct that for months and months. I have asked them about it, 
Mr. Mnuchin at these hearings--still not corrected. Big gap 
between words and deeds.
    Now, Democrats have laid out principles that I think are 
very important. We have called for fiscal responsibility and a 
process that is fair to all members, where they can offer their 
ideas. It would be progressive, and we would not be sending 
more relief to the 1 percent.
    I want to, again, say this does not go as far as what the 
late President Reagan did when he treated income from wages and 
wealth the same in 1986.
    Now obviously, times change, and 1986 and 2017 are very 
different kinds of times. But traditional principles of 
fairness and bipartisanship really do not change. Those are 
principles for the ages. And this matter of being bipartisan is 
especially important, and I think a couple of you may have 
touched on it--I think we had Ms. Batchelder, several of you. 
So it spans the ideological spectrum.
    The reason you are bipartisan is really twofold. You need 
both sides to stand together in terms of fighting off special 
interests and making sure that both sides are committed to 
getting rid of some of the junk that has gotten into the tax 
code. An awful lot has, in almost 32 years.
    In fact, in 1986, they were working on a tax climate that 
was really 32 years before that. So it is almost like 32 years 
is a magical number with respect to tax reform.
    If it is not bipartisan, you will not have the certainty 
and predictability that the country needs, because people will 
just say, ``Hey, it was partisan. We will go back and just 
change it when we take power.''
    So, Mr. Chairman, I surely share that view.
    I have written what are really the only two comprehensive, 
bipartisan tax reform bills since that original one, most 
recently with a member of the President's cabinet. Nothing 
would be more satisfying and enjoyable, enjoyable 
professionally, Mr. Chairman, than to work with you and all of 
our colleagues, as we have said, toward building an updated tax 
system that works for the days ahead rather than being a relic 
of yesteryear.
    We have laid out principles that we think help to do that 
in a bipartisan way. Thank you for this hearing, and we will 
look forward to working with you in the days ahead.
    The Chairman. Thank you, Senator.
    Let me just say this. Ms. Batchelder, you had proposed that 
the tax code be made more progressive than it currently is. The 
question that naturally arises for me is, at what point would 
it be too progressive?
    Once that point is crossed, what harms might come from 
that? If we could just tax Bill Gates and all the rest of us 
have nothing, then why not?
    Do you care to take a crack at that?
    Ms. Batchelder. Well, I certainly think there is a point 
where the tax code could either be too progressive or too 
targeted on just one or a handful of individuals, but I think 
that we are very far from that point.
    We have very vastly rising inequality in this country, and 
the tax code could do a lot more to help mitigate that. So I do 
not think anything that is on the potential drawing room table 
right now is at risk of making the tax code too progressive.
    I am sure if you proposed replacing the entire income tax 
system with only taxing Bill Gates, I would think that was both 
unfair and inefficient.
    The Chairman. Mr. Brill, I would like you to weigh in on 
that question, too, if you would.
    Mr. Brill. Thank you, Senator. My personal view is, I think 
it is appropriate and good that the tax system today is 
progressive. However, I would caution against an approach that 
says that every change to the tax code should itself be 
progressive.
    There are certain inefficiencies that rise as the 
progressivity of the tax code increases. In particular, there 
is evidence looking at entrepreneurship and that a progressive 
rate structure where success is taxed at a higher rate than the 
failures that are often associated with entrepreneurship, that 
that convexity of the tax rate structure can discourage 
entrepreneurship and economic growth.
    In other words, I think it is appropriate and good that the 
system is progressive, but we have to be careful at the limit.
    The Chairman. Thank you.
    Mr. Ponnuru, we will let you sum up here.
    Mr. Ponnuru. I do think that there are concerns about 
excessive progressivity, partly because it can sometimes lead 
to a more volatile tax base. I think that that is something 
that, for example, the State and local deduction tends to 
reward on the part of the States, that encourages them to have 
more progressive systems of taxation that are more volatile.
    The Chairman. Thank you. I want to thank all four of you 
for being here today. It has been an interesting hearing. I 
think all of our people had a fairly reasonable chance to ask 
the questions that are really bothering them.
    Now, we just barely scratched the surface, I know, but to 
the extent that you have contributed, as you have, it has been 
a wonderful thing for us. So I appreciate all of you.
    With that, we will recess until further notice.
    [Whereupon, at 12:30 p.m., the hearing was concluded.]

                            A P P E N D I X

              Additional Material Submitted for the Record

                              ----------                              


   Prepared Statement of Lily L. Batchelder,\1\ Professor of Law and 
            Public Policy, New York University School of Law
---------------------------------------------------------------------------
    \1\ I am grateful to Seth Hanlon, Chye-Ching Huang, David Kamin, 
and Greg Leiserson for helpful comments, and Cameron Williamson for 
excellent research assistance. All errors are my own.
---------------------------------------------------------------------------
    Good morning, Mr. Chairman, Ranking Member Wyden, and members of 
the committee. My name is Lily Batchelder, and I am a professor at NYU 
School of Law. Thank you for the opportunity to testify before you 
today on individual tax reform. It is a pleasure and honor to be back 
with the committee.

    There are three traditional goals of tax reform: greater equity, 
efficiency, and simplicity. Sometimes these goals are in tension; at 
other points, they can be furthered at the same time. In my view, 
individual tax reform should focus on areas where we are farthest from 
these goals, and where we can advance more than one simultaneously. My 
testimony makes five main points:

      The current tax reform effort is occurring at a time when low- 
and middle-
income families are facing deep financial challenges. Economic 
disparities in the United States are vast and have been widening for 
decades. The United States also has one of the lowest levels of 
economic mobility among our competitors. Our debt as a share of GDP is 
projected to grow to unprecedented levels in coming decades, largely 
because of the retirement of the Baby Boom generation and increasing 
life expectancy. This growth in national debt will be a drag on 
economic growth. For all these reasons, tax reform should increase 
revenues and enhance progressivity. Doing so would boost economic 
growth and make the tax code fairer at the same time. At a bare 
minimum, tax reform should maintain the current level of revenues and 
progressivity, which should be measured consistently and without resort 
to budget gimmicks like a ``current policy'' baseline.

      Individual tax reform should focus on leveling the playing field 
for the next generation and supporting work. Doing so would blunt 
economic inequality, broaden economic opportunity, and increase 
efficiency and productivity by ensuring that jobs are awarded more 
often based on effort and talent, and less often based on connections 
and the luck of one's birth. Some worthwhile proposals that would 
advance these goals are expanding the EITC, especially for workers 
without dependents; increasing refundability of the child tax credit, 
especially for young children in the poorest families; and 
restructuring child care benefits so they provide the largest benefits 
to families for whom child care costs impose the greatest budgetary 
strain. These proposals could make significant headway in offsetting 
the much lower earnings growth experienced by low- and 
moderate-income families over the past few decades relative to those 
who are more affluent. They should be paid for by raising taxes on the 
most fortunate, including by strengthening, not repealing, wealth 
transfer taxes.

      Individual tax reform should also focus on reducing 
transactional complexity, which arises from taxpayers reorganizing 
their affairs to minimize taxes. Reducing transactional complexity 
essentially involves eliminating opportunities for savvy taxpayers to 
game the tax system and accomplishes the trifecta of tax reform: it 
makes the tax code fairer, more efficient, and simpler. To further this 
goal, Congress should consider proposals like rationalizing the NIIT 
and SECA taxes so all labor and capital income are subject to the 
Medicare tax on high incomes in some form, repealing stepped-up basis, 
narrowing the gap between the tax rates on ordinary income and capital 
gains, and taxing carried interest as ordinary income.

      Individual tax reform should further seek to make tax incentives 
more efficient and fair, generally by restructuring them into 
refundable tax credits and leveraging empirical insights from 
behavioral economics. Doing so could generate more social benefits at a 
lower cost. One particularly fruitful area for reform is tax incentives 
for retirement savings. By reducing tax benefits for the wealthy, 
increasing them for low- and middle-income workers, and ensuring that 
all workers have access to an easy way to save at their workplace 
through automatic IRAs, Congress could increase retirement security for 
millions of Americans while raising revenue at the same time.

      Unfortunately the tax plans offered to date by President Trump 
and the House GOP leadership move precisely in the opposite direction. 
Both lose massive amounts of revenue. The corresponding increase in 
debt would depress economic growth over time. They are also sharply 
regressive, providing vast tax cuts to the wealthy and a pittance to 
everyone else. They create a giant new loophole for the wealthy in the 
form of a special rate cap on pass-through business income, which tax 
experts on the left and right agree is a terrible idea. To the extent 
that they include proposals intended to support low- and middle-income 
households, they do so in relatively ineffective ways. Moreover, sooner 
or later, these plans' massive tax cuts for the wealthy will have to be 
paid for, and low- and middle-income families are likely to be left 
footing the bill. I urge you to consider a fundamentally different 
approach.
         i. individual tax reform should enhance progressivity 
                         and increase revenues
A. The Context of Tax Reform
    The current tax reform effort is occurring at time when low- and 
middle-income families are facing deep financial challenges. Economic 
disparities in the United States are vast and have been widening for 
decades. As illustrated in Figure 1, the top 1% earns more than 17% of 
all market income.

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]


    Tax cuts and especially changes to direct spending programs have 
played an important role in boosting the incomes for low- and middle-
income households over the past several decades. But the after-tax, 
after-transfer income of the top 1% has still grown about four times 
faster than it has for low- and middle-income households, as shown in 
Figure 2. The situation is even worse for working-class households, 
defined as those in which no one has a bachelor's degree. Real median 
after-tax, after-transfer income for a working-class household of three 
has only grown 3% since 1997.\2\
---------------------------------------------------------------------------
    \2\ Chuck Marr, Brandon DeBot, and Emily Horton, ``How Tax Reform 
Can Raise Working-Class Incomes,'' Center on Budget and Policy 
Priorities (September 13, 2017).

 [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]


    These disparities might be justified if they purely reflected 
people's efforts and choices. But the United States actually has one of 
the lowest levels of intergenerational economic mobility among our 
competitors. In the United States, a father on average passes on 
roughly half of his economic advantage or disadvantage to his son. 
Among our competitors, the comparable figure is less than one-third, 
and for several it is one-fifth.\3\ This implies that, to an especially 
large extent in the United States, economic disparities reflect the 
luck of one's birth, not hard work.
---------------------------------------------------------------------------
    \3\ Miles Corak, ``Income Inequality, Equality of Opportunity, and 
Intergenerational Mobility,'' 27 Journal of Economic Perspectives 3, 79 
(2013).

    Compounding these challenges, our national debt as a share of GDP 
is projected to grow to unprecedented levels in the coming decades, as 
shown in Figure 3. This is largely due to the retirement of the Baby 
Boom generation and increasing life expectancy--not policy choices. 
These demographic trends increase Medicare, Medicaid, and Social 
Security costs, contribute to health-care costs rising more rapidly 
than inflation, and reduce the proportion of the population that 
---------------------------------------------------------------------------
contributes to the trust funds for these programs.

    The solution will need to involve more revenues. As groups ranging 
from the National Academy of Sciences \4\ to the Bipartisan Policy 
Center \5\ to the American Enterprise Institute \6\ have concluded, 
revenues will need to rise as a share of GDP and increase relative to 
current law. The later we act to stabilize our long-term fiscal 
outlook, the larger the costs will be, and the more likely it is that 
we will partially renege on fundamental commitments to low- and middle-
income workers in their retirement through cuts to Social Security, 
Medicare, or Medicaid law.\7\
---------------------------------------------------------------------------
    \4\ National Research Council and National Academy of Public 
Administration, Choosing the Nation's Fiscal Future (2010); ``Setting 
and Meeting an Appropriate Target for Fiscal Sustainability: Hearing 
Before the Senate Committee on the Budget,'' 111th Congress (February 
11, 2010) (statement of Rudolph G. Penner, Institute Fellow, Urban 
Institute).
    \5\ Bipartisan Policy Center, ``A Bipartisan Approach to America's 
Fiscal Future'' (2015), http://www.pgpf.org/sites/default/files/
05122015_solutionsinitiative3_bpc.pdf.
    \6\ Joseph Antos, Andrew Biggs, Alex Brill, and Alan Viard, ``A 
Balanced Plan for Fiscal Stability and Economic Growth,'' American 
Enterprise Institute (2015), http://www.pgpf.org/sites/default/files/
05122015_solutionsinitiative3_aei.pdf.
    \7\ For further discussion of these issues, see Paul N. Van de 
Water, ``Federal Spending and Revenues Will Need to Grow in Coming 
Years, Not Shrink,'' Center on Budget and Policy Priorities (September 
6, 2017).

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]


    For all these reasons, I believe tax reform should enhance 
progressivity and increase revenues. Doing so would make the tax code 
fairer and boost economic growth at the same time. JCT and CBO have 
estimated that deficit-financed individual income tax cuts, including 
those disproportionately benefiting the wealthy, reduce growth by 
driving up private borrowing costs in the long-term.\8\ This implies 
that progressive, revenue-enhancing reforms would increase economic 
growth. In addition, such reforms would strengthen the tax code's 
ability to automatically stabilize the economy in recessions, 
potentially shortening downturns and mitigating their negative long-
term effects on the economy.\9\
---------------------------------------------------------------------------
    \8\ Congressional Budget Office, ``The Economic Outlook and Fiscal 
Policy Choices,'' Hearing before the Senate Committee on the Budget, 
111th Congress 8 (2010) (statement of Douglas W. Elmendorf, Director, 
Congressional Budget Office); Joint Committee on Taxation, 
``Macroeconomic Analysis of Various Proposals to Provide $500 Billion 
in Tax Relief'' (March 1, 2005), http://www.jct.gov/x-4-05.pdf.
    \9\ For discussions of the macroeconomic benefits of progressive 
taxes as automatic stabilizers, see Lily L. Batchelder, Fred T. 
Goldberg, Jr., and Peter R. Orszag, ``Efficiency and Tax Incentives: 
The Case for Refundable Tax Credits,'' 59 Stan. L. Rev. 23 (2006); Yair 
Listokin, ``Stabilizing the Economy Through the Income Tax Code,'' Tax 
Notes (June 29, 2009); Douglas W. Elmendorf and Jason Furman, ``If, 
When, How: A Primer on Fiscal Stimulus'' (The Hamilton Project, January 
2008).

    At a bare minimum, individual tax reform should do no harm: it 
should at least maintain the level of revenues and progressivity under 
current law. Revenue and distributional neutrality were the shared, 
bipartisan premises of the last major tax reform in 1986, and they are 
all the more critical basic standards today for the reasons laid out 
above.
B. The Importance of Accurately Measuring Revenues and Progressivity
    In determining whether tax reform maintains or increases revenues, 
it is critical that revenues are measured consistently and without 
resorting to budget gimmicks. This means first and foremost that 
revenues should be measured relative to current law, not so-called 
``current policy.''

    At the end of 2015, Congress deliberately allowed many of the ``tax 
extender'' provisions to expire while making others permanent. The 
largest provision set to expire--bonus depreciation--was expressly 
intended as a temporary, stimulative policy when originally enacted.

    Some have suggested adopting a current policy baseline for tax 
reform. Such a baseline would assume that all of these tax cuts 
currently set to expire--and potentially a host or provisions that have 
already expired--are actually permanent law, even though making them 
permanent would cost as much as $450 billion over the next decade, as 
illustrated in Figure 4.\10\ As a result, a bill that cuts taxes by 
$450 billion could be treated as not cutting taxes at all. Adopting a 
current policy baseline for budget scoring purposes would be set a 
terrible precedent and would fundamentally undermine our system of 
budget enforcement.
---------------------------------------------------------------------------
    \10\ Congressional Budget Office, ``Detailed Revenue Projections'' 
(June 2017), https://www.cbo.
gov/about/products/budget-economic-data#7.

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]


    The problem with a current policy baseline is not strictly with 
treating temporary changes as permanent, but with doing so 
inconsistently.\11\ To be sure, when some expiring spending programs 
are extended, their extension is treated as having no budgetary effect. 
But this is done consistently. Such a program is only treated as 
permanent in the baseline, and therefore having no budgetary effect 
when extended, if it was treated as permanent for budget scoring 
purposes when first enacted.
---------------------------------------------------------------------------
    \11\ For further discussion, see David Kamin and Rebecca Kysar, 
``All About That Base(line)'' (September 1, 2017) (working paper).

    In contrast, Congress has traditionally applied a ``current law 
baseline'' when determining the budgetary effects of tax changes. When 
the tax extenders in place today were first enacted (or were extended), 
they were not treated as permanent tax cuts for budget scoring 
purposes. As a result, it would be fundamentally inconsistent to assume 
that making them permanent now has no budgetary cost. In fact, there is 
now some talk of both using a current policy baseline, which assumes 
that existing temporary provisions are permanent, and then scoring new 
temporary tax cuts as temporary all in the same bill--the ultimate 
fiscal shell game. By this logic, Congress could repeal all Federal 
taxes for 2018 only and estimate the cost at the roughly $3.6 trillion 
the Federal Government is expected to raise in 2018, using the current 
law baseline it has traditionally used for tax legislation. Then, in 
2018, Congress could permanently repeal all Federal taxes and, if the 
Budget Committee chair declared that Congress was shifting to a current 
policy baseline for tax purposes, the permanent elimination of all 
Federal taxes would be treated as having no budgetary effects 
---------------------------------------------------------------------------
whatsoever.

    In determining the revenue effects of tax reform legislation, it is 
also critical for Congress to avoid timing gimmicks. To be sure, there 
are reasonable policy changes that have bigger or smaller budgetary 
effects within the budget window than they do outside it. But such 
changes should be enacted because they are substantive policy 
improvements, not as pretext to hide the cost of tax cuts. Congress 
should therefore be careful to consider the revenue effects both inside 
and outside the budget window.

    In this respect, the Byrd rule serves as an important backstop. It 
provides that any tax legislation enacted through the reconciliation 
process (thereby avoiding a filibuster) cannot increase deficits in any 
year outside the budget window. But it is also important that any tax 
bill increases, or at a bare minimum maintains, the current law level 
of revenues within the budget window. The Byrd rule does not cover 
deficit increases within the budget window, but the Senate's ``pay-go'' 
rule does, and that rule should not be discarded to allow for deficit-
increasing tax cuts.\12\
---------------------------------------------------------------------------
    \12\ See, e.g., Alan Cohen, ``The Potential Impact of PAYGO Rules 
on Tax Legislation,'' Center for American Progress (August 28, 2017), 
https://www.americanprogress.org/issues/economy/reports/2017/08/28/
437873/potential-impact-paygo-rules-tax-legislation/.

    In addition, tax reform legislation should respect the underlying 
intent of the Byrd rule (and the reconciliation process itself), which 
was to reduce deficits, not increase them. This is yet another argument 
for continuing to use a current law baseline for tax purposes. It also 
means that if any bill includes provisions that raise more revenue 
within the budget window than outside it (such as the mandatory 
``Rothification'' of all future contributions to retirement plans), the 
Senate should be absolutely sure to secure estimates of the revenue 
effects of the bill outside the budget window before voting. Such out-
year estimates are necessary to ensure that any such bill complies with 
---------------------------------------------------------------------------
both the letter and spirit of the Byrd rule.

    Turning to progressivity, there is broad agreement among tax 
experts that changes in progressivity should be measured by looking at 
the percent change in after-tax income for different income groups.\13\ 
The progressivity measure should also incorporate all Federal taxes, 
including the corporate income tax and wealth transfer taxes, and 
should distribute those taxes in line with the methodology adopted by 
the nonpartisan career staff at JCT, CBO and the Treasury Department. 
In this regard, recent suggestions that corporate income tax cuts 
should be distributed in a dramatically different manner from the 
consensus approach of these nonpartisan professionals are deeply 
disturbing.\14\
---------------------------------------------------------------------------
    \13\ See, e.g., Scott Greenberg, ``Distributional Effects Should Be 
Measured in Percentages, Not Dollars,'' Tax Foundation (November 5, 
2015), https://taxfoundation.org/distributional-effects-should-be-
measured-percentages-not-dollars/. For a detailed explanation of why 
this is the best measure of tax progressivity, see David Kamin, ``What 
is a Progressive Tax Change?: Unmasking Hidden Values in Distributional 
Debates,'' 83 NYU L. Rev. 241 (2008).
    \14\ Richard Rubin, ``Who Ultimately Pays for Corporate Taxes? The 
Answer May Color the Republican Overhaul,'' Wall Street Journal (August 
8, 2017).

    One alternative measure of progressivity that is particularly 
misleading is the percent change in tax liabilities. This measure makes 
regressive tax cuts look like progressive cuts. For example, it implies 
that if a minimum wage worker sees her income tax liability fall from 
$100 to $49, she is receiving a larger tax cut than a millionaire whose 
tax liability is cut from $200,000 to $100,000. Conversely, it is also 
misleading to look only at dollar changes in tax liability because this 
measure can make a progressive tax cut look like a regressive one. For 
example, it implies that if a family earning $25,000 receives a $1,000 
tax cut and a family earning $1 million receives a $1,001 tax cut, this 
---------------------------------------------------------------------------
is a regressive tax change.

    Continuing to use a current law baseline is also critical for 
measuring whether tax legislation maintains or increases progressivity. 
The tax cuts that have recently expired or are slated to expire 
disproportionately benefit the wealthy. They are mostly corporate tax 
cuts, and on average, they provide three times as large a tax cut for 
the top 1% as they do for the bottom four quintiles, when the tax cut 
is measured as a share of after-tax income.\15\ Thus, assuming that 
these expired and expiring provisions are already permanent would 
involve assuming that the tax code is currently less progressive than 
it actually is.
---------------------------------------------------------------------------
    \15\ Chye-Ching Huang and Brandon DeBot, `` `Current Policy' 
Baseline Would Hide $439 Billion in Tax Cuts Worth at Least $40,000 a 
Year for the Top 0.1 Percent,'' Center on Budget and Policy Priorities 
(August 16, 2017).

    If Congress increases or, at a bare minimum, maintains the current 
level of revenues and progressivity as defined here, any tax reform 
legislation will abide by the so-called Mnuchin principle, which I 
fully support. Treasury Secretary Steve Mnuchin has stated several 
times that ``there will be no absolute tax cut for the upper class . . 
. any tax cuts we have for the upper class will be offset by less 
deductions that pay for it.''\16\ In light of mounting inequality and 
deficits, tax reform should not provide a net tax cut to the wealthy. 
Instead, it should increase taxes on the wealthy and use some of the 
revenues raised for deficit reduction and some to boost the take-home 
pay of those who are less fortunate.
---------------------------------------------------------------------------
    \16\ Squawk Box (CNBC television broadcast, November 30, 2016), 
http://www.cnbc.com/2016/11/30/cnbc-transcript-steven-mnuchin-and-
wilbur-ross-speak-with-cnbcs-squawk-box-today.html. See also Tucker 
Carlson Tonight (Fox News television broadcast, April 26, 2017), http:/
/www.foxnews.com/politics/2017/04/26/mnuchin-trumps-tax-plan-is-middle-
income-tax-cut.ht
ml.
---------------------------------------------------------------------------
C. Proposals to Date by the President and House Republicans Go in the 
        Wrong 
        Direction
    Unfortunately the proposals offered to date by President Trump and 
the House Republican Blueprint \17\ move exactly in the wrong direction 
on revenues and progressivity. Both lose vast amounts of revenue. The 
Tax Policy Center has estimated that the President's most recent plan 
would lose at least $3.5 trillion over 10 years,\18\ and that earlier, 
more detailed versions of his plan would lose $6.2 trillion.\19\ Just 
last month, the President said that he plans to enact the ``biggest tax 
cut in the history of our country.'' \20\ The House GOP Blueprint would 
lose $3.1 trillion over 10 years.\21\
---------------------------------------------------------------------------
    \17\ ``A Better Way: Tax Reform Task Force Report'' 25-26 (June 24, 
2016), http://abetterway.
speaker.gov/_assets/pdf/ABetterWay-Tax-PolicyPaper.pdf.
    \18\ TPC Staff, ``The Implications of What We Know and Don't Know 
About President Trump's Tax Plan,'' Tax Policy Center (July 12, 2017).
    \19\ Jim Nunns et al., ``An Analysis of Donald Trump's Revised Tax 
Plan,'' Tax Policy Center (October 18, 2016).
    \20\ Blair Guild, ``Trump Lashes out During Combative Speech at 
Campaign-Style Rally in Phoenix,'' CBS News (August 22, 2017), https://
www.cbsnews.com/news/trump-holds-make-america-great-again-rally-in-
phoenix/.
    \21\ Benjamin R. Page, ``Dynamic Analysis of the House GOP Tax 
Plan: An Update'' (June 30, 2017).

    Because of these massive revenue losses and the corresponding 
increase in deficits, the Tax Policy Center estimates that both plans 
would depress economic growth over time.\22\ While JCT and CBO have not 
released estimates of either plan, their prior estimates imply that 
they would also find that both plans would reduce long-term economic 
growth.\23\
---------------------------------------------------------------------------
    \22\ Id. (estimating that the House GOP Blueprint would reduce GDP 
by 1% to 2.6% by 2036); TPC Staff, ``The Implications of What We Know 
and Don't Know about President Trump's Tax Plan,'' Tax Policy Center 
(July 12, 2017).
    \23\ See Congressional Budget Office, ``The Economic Outlook and 
Fiscal Policy Choices,'' Hearing before the Senate Committee on the 
Budget, 111th Congress 8 (2010) (statement of Douglas W. Elmendorf, 
Director, Congressional Budget Office); Joint Committee on Taxation, 
``Macroeconomic Analysis of Various Proposals to Provide $500 Billion 
in Tax Relief'' (March 1, 2005).

    In addition, both plans are sharply regressive. Directly 
contradicting the Mnuchin principle, on average they provide massive 
tax cuts to the wealthiest Americans, including those who inherit vast 
sums of money, while providing a relative pittance to everyone else, as 
shown in Figure 5. The top 1% receives an average tax cut of 12-13% of 
their income under both plans, while the bottom four quintiles only 
receive average tax cuts of 0-2% of their after-tax income. Overall, 
the top 1% receives about half of the value of the tax cuts under the 
most recent Trump plan, and about three-quarters of the tax cuts under 
the House GOP Blueprint.\24\
---------------------------------------------------------------------------
    \24\ Tax Policy Center, ``T17-0192: Distributional Effects of 
Proposals Related to the Trump Administration's 2017 Tax Plan; Tax Cut 
and Possible Revenue Raising Provisions, by Expanded Cash Income 
Percentile, 2018,'' Tax Policy Center (July 12, 2017), http://www.
taxpolicycenter.org/model-estimates/proposals-related-trump-
administrations-2017-tax-plan-july-2017/t17-0192; Burman et al., ``An 
Analysis of the House GOP Tax Plan,'' Columbia Journal of Tax Law 
(2017).

    Sooner or later, these massive tax cuts for the wealthy will have 
to be paid for, and low- and middle-income families are likely going to 
be left paying the tab. As illustrated in Figure 6, if the President's 
plan were eventually paid for by tax increases or spending cuts that 
were proportionate to income, 82% of households would be worse off--but 
not the most affluent.\25\ And this outcome is probably less regressive 
than it would be if the tax cuts were paid for, either now or in the 
future, with the types of budget cuts called for in President Trump's 
and the House Budget Committee's budgets.
---------------------------------------------------------------------------
    \25\ William Gale et al., ``Cutting Taxes and Making Future 
Americans Pay for It: How Trump's Tax Cuts Could Hurt Many 
Households,'' Tax Policy Center (August 15, 2017).

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]


    Another possibility is that low- and middle income families will 
actually see their taxes immediately go up as part of tax reform, 
paying for tax cuts for the wealthy right away. Indeed, the Tax Policy 
Center estimates that an astonishing 45% of families with children--and 
70% of single parents--would see their taxes go up in 2018 under the 
President's most recent tax plan, as summarized in Figure 7.\26\ This 
is all the more stunning when one considers that his plan reduces 
revenues by about $3.5 trillion, and that he has had numerous 
opportunities to address these tax increases as his tax plan has 
evolved but has not even bothered.
---------------------------------------------------------------------------
    \26\ Tax Policy Center, ``T17-0192: Distributional Effects of 
Proposals Related to the Trump Administration's 2017 Tax Plan; Tax Cut 
and Possible Revenue Raising Provisions, by Expanded Cash Income 
Percentile, 2018,'' Tax Policy Center (July 12, 2017). This is largely 
due to his proposals to repeal personal exemptions and head of 
household filing status, and also because of the ways in which he 
proposes to consolidate the tax brackets. Using a slightly different 
methodology and focusing on his 2016 tax plan, I previously estimated 
that 21-28% of families with children and 51-61% of single parents 
would face a tax increase under the President's plan. Lily L. 
Batchelder, ``Families Facing Tax Increases Under Trump's Tax Plan,'' 
Tax Policy Center (October 28, 2016).

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

    The President and House GOP leadership have said that they intend 
for their tax plans to focus their benefits on middle-class families 
and, at times, that their tax plans will be revenue-neutral.\27\ I very 
much hope this is the case. But it is deeply concerning that thus far 
they have proposed very specific and massive tax cuts for the wealthy, 
while being quite non-specific about how they would pay for these tax 
cuts or meaningfully invest in the middle class.
---------------------------------------------------------------------------
    \27\ See, e.g., Donald Trump, ``The Inaugural Address,'' The White 
House, January 20, 2017, https://www.whitehouse.gov/inaugural-address 
(``Every decision on . . . taxes . . . will be made to benefit American 
workers and American families.''); Luca Gattoni-Celli, ``Mnuchin 
Reaffirms Support for Revenue-Neutral Tax Reform,'' Tax Notes (June 14, 
2017); Naomi Jagoda, ``Brady Makes the Case for Revenue-Neutral Tax 
Reform,'' The Hill (January 25, 2017).
---------------------------------------------------------------------------
D. Better Approaches
    In contrast to the plans offered to date by President Trump and the 
House GOP Blueprint, I urge the committee to consider raising more 
revenue through individual tax reform by increasing effective tax rates 
on the wealthy, including by adopting the revenue raising proposals 
discussed below.

    Any tax cuts that are part of individual tax reform should be 
focused on low- and middle income households, and should therefore 
generally be structured as refundable tax credits. Cutting tax rates or 
increasing deductions and exemptions tends to disproportionately 
benefit the wealthy. This is because the value of a deduction or 
exemption is the amount deducted times the taxpayer's marginal tax 
rate, which tends to rise with income. This is also true of proposals 
to raise the income thresholds for the tax brackets--the value is the 
amount of the increase in the threshold times the taxpayer's marginal 
tax rate. Only a refundable tax credit de-links tax benefits from a 
household's marginal tax rate.

    As an example of the problem with deductions and raising the 
thresholds for tax brackets, consider the proposal to substantially 
increase the standard deduction by President Trump and the House GOP 
leadership. Both have promoted this proposal as a core element of their 
plan for low- and moderate-income households.\28\ But it is much less 
valuable for such households than a refundable credit of equivalent 
cost. Increasing the standard deduction is worth nothing to the 35% of 
households who already fall in the zero bracket (i.e., their income is 
less than the standard deduction and personal exemptions).\29\ Among 
non-itemizers with income above the zero bracket, it is worth more to 
those in higher brackets, who tend to be higher income. To be sure, 
increasing the standard deduction also provides no benefit to 
households whose itemized deductions exceed the new, larger standard 
deduction, and these families tend to be wealthier. But the point 
remains that increasing the standard deduction is a poorly designed way 
to support low- and middle-income households, and provides little or no 
benefit to those who are financially struggling the most.
---------------------------------------------------------------------------
    \28\ See, e.g., Office of the Press Secretary, Remarks by President 
Trump on Tax Reform (September 6, 2017), https://www.whitehouse.gov/
the-press-office/2017/09/06/remarks-president-trump-tax-reform (``[W]e 
will provide tax relief to middle-income families through a combination 
of benefits, such as raising their standard deduction . . .'').
    \29\ Tax Policy Center, ``T16-0085: Number of Tax Units by Tax 
Bracket and Filing Status,'' Tax Policy Center (July 6, 2016), http://
www.taxpolicycenter.org/model-estimates/baseline-distribution-tax-
units-tax-bracket-july-2016/t16-0085-number-tax-units-tax.
---------------------------------------------------------------------------
          ii. individual tax reform should seek to level the 
                     playing field and support work
    In addition to increasing revenues and progressivity, individual 
tax reform should focus on leveling the playing field for future 
generations and supporting work. Doing so would blunt economic 
inequality, broaden economic opportunity, and increase productivity by 
ensuring that jobs are awarded more often based on effort and talent, 
and less often based connections and the luck of one's birth. Reforms 
advancing these goals would make the tax code fairer and more efficient 
simultaneously. They could also be structured in ways that are 
relatively simple.
A. The First Goal: Do No Harm
    The first goal in this area should be to do no harm. Unfortunately, 
once again the proposals offered by President Trump and the House GOP 
Blueprint to date move in precisely the wrong direction. As discussed, 
their plans are sharply regressive. This means that they not only will 
exacerbate growing economic disparities, but also will probably reduce 
intergenerational economic mobility over time. Lower levels of income 
inequality are generally correlated with higher levels of 
intergenerational economic mobility.\30\ Put differently, if tax reform 
raises taxes on the wealthy and uses part of the revenues raised to 
boost the living standards of low- and middle-income families, this 
doesn't just benefit such families now. It also means that their 
children are likely to do better because their economic success will be 
less heavily impacted by the economic status of their parents.
---------------------------------------------------------------------------
    \30\ Corak, supra note 3; Raj Chetty, et al., ``Is the United 
States Still a Land of Opportunity? Recent Trends in Intergenerational 
Mobility'' 11 (National Bureau of Economic Research, Working Paper No. 
19844, 2014).

    In addition to substantially reducing tax progressivity, both plans 
counterproductively repeal wealth transfer taxes, including the estate 
tax, when such taxes are actually one of the most important features of 
the tax system for making the economic playing field somewhat more 
level.\31\ As discussed, the United States has one of the highest 
levels of opportunity inequality among our competitors. The enormous 
inequality of financial inheritances worsens this inequality of life 
chances dramatically. Indeed, 30% of the correlation between parent and 
child incomes--and more than 50% of the correlation between the wealth 
of parents and their children--is attributable to financial 
inheritances.\32\ This is far more than the impact of IQ, personality, 
and schooling combined. In short, when researchers have tried to boil 
down inequality of opportunity to one factor, it is about financial 
inheritances.
---------------------------------------------------------------------------
    \31\ This discussion of wealth transfer taxes draws on Lily L. 
Batchelder, ``What Should Society Expect From Heirs? The Case for a 
Comprehensive Inheritance Tax,'' 63 Tax Law Review 1 (2009); Lily L. 
Batchelder, ``The `Silver Spoon' Tax: How to Strengthen Wealth Transfer 
Taxation,'' in Delivering Equitable Growth: Strategies for the Next 
Administration (Washington Center for Equitable Growth, 2016); and Lily 
L. Batchelder, ``Fixing the Estate Tax,'' 43 Democracy (Winter, 2017).
    \32\ Samuel Bowles, Herbert Gintis, and Melissa Osborne Groves, 
Introduction to Unequal Chances: Family Background and Economic Success 
18-19 (2005) (finding that financial inheritances account for 30% of 
the parent-child income correlation, while parent and child IQ, 
schooling, and personality combined account for only 18%); Adrian 
Adermon, Mikael Lindahl, and Daniel Waldenstrom, ``Intergenerational 
Wealth Mobility and the Role of Inheritance: Evidence From Multiple 
Generations'' (July 26, 2016) (working paper) (finding that bequests 
and gifts account for at least 50% of the parent-child wealth 
correlation, while earnings and education account for only 25%).

    If financial inheritances drive economic opportunity this much, one 
would think the tax code would try to soften their effects. Instead, on 
average, we actually tax inheritances at only about one-quarter of the 
rate at which we tax income from work and savings, as summarized in 
Figure 8. If a wealthy individual bequeaths assets with $100 million 
unrealized gains, neither that individual nor his heirs ever have to 
pay income or payroll tax on that $100 million gain due to stepped-up 
basis. In addition, the recipients of such large inheritances never 
have to pay income or payroll tax on the total amount they inherit, 
whether attributable to unrealized gains or not. The only taxes that 
such lucky heirs may bear are wealth transfer taxes, which experts on 
the both sides of the aisle agree are largely borne by the heirs of 
large estates, not the decedent.\33\
---------------------------------------------------------------------------
    \33\ See, e.g., N. Gregory Mankiw, Remarks at the National Bureau 
of Economic Research Tax Policy and the Economy Meeting from Council of 
Economic Advisers (November 4, 2003) (``As a first approximation, it 
would make more sense to distribute the burden of the tax to the 
estate's beneficiaries rather than to the decedent''). For an 
explanation of why this is the case, see Lily L. Batchelder and 
Surachai Khitatrakun, ``Dead or Alive: An Investigation of the 
Incidence of Estate Taxes and Inheritance Taxes'' (2008) (working 
paper).

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

    Wealth transfer taxes are not only essential to leveling the 
playing field, but they are also the most progressive component of the 
Federal tax system. Currently they only apply to the top 0.2% of 
estates \34\ because the exemption is extremely high: $11 million per 
couple in 2017, and probably more than $16 million if a couple takes 
full advantage of the annual gift exclusion,\35\ not to mention other 
planning opportunities. Contrary to the talking points of estate tax 
opponents, neither the American Farm Bureau nor The New York Times have 
been able to identify a single case of a farm actually being sold to 
pay the estate tax, even when the exemption was one-sixteenth of the 
current level and the rate was 55%.\36\ The estate tax also has strong 
positive effects on charitable giving. When the estate tax was repealed 
for 1 year in 2010, charitable bequests fell by 37%.\37\ Moreover, 
repeal would cost $270 billion over 10 years, further jeopardizing our 
long-term fiscal outlook.\38\
---------------------------------------------------------------------------
    \34\ Joint Committee on Taxation, ``History, Present Law, and 
Analysis of the Federal Wealth Transfer Tax System'' (March 16, 2015), 
https://www.jct.gov/publications.html?func=
startdown&id=4744.
    \35\ This assumes that a couple makes annual gifts equal to the 
annual exclusion for 50 years, the annual exclusion is constant 
(although it is actually inflation-adjusted), and the interest rate is 
5%.
    \36\ David Cay Johnston, ``Talk of Lost Farms Reflects Muddle of 
Estate Tax Debate,'' The New York Times (April 8, 2001).
    \37\ Sahil Kapur, ``GOP Plan to Kill Estate Tax Sets Up Charitable 
Giving Conflict,'' Bloomberg (August 25, 2017). This is consistent with 
estimates that permanent estate tax repeal would reduce charitable 
bequests (which represent 8% of all charitable giving) by 22-37%. Jon 
M. Bakija and William G. Gale, ``Effects of Estate Tax Reform on 
Charitable Giving,'' Tax Policy Center (July 2003).
    \38\ Joint Committee on Taxation, ``Description of an Amendment in 
the Nature of a Substitute to the Provisions of H.R. 1105, The Death 
Tax Repeal Act of 2015'' (March 24, 2015), https://www.jct.gov/
publications.html?func=startdown&id=4761.

    By dramatically cutting taxes for the most affluent and repealing 
wealth transfer taxes, the plans advanced by President Trump and the 
House GOP Blueprint therefore fail to level the playing field at the 
top, instead magnifying the advantages of the most fortunate. At the 
same time, to the extent that these plans include proposals intended 
support low- and middle-income households, they do so in relatively 
---------------------------------------------------------------------------
ineffective ways.

    For example, President Trump's proposals in 2016 to expand tax 
benefits for child care disproportionately benefit higher-income 
families.\39\ They increase tax complexity by increasing the number of 
child-care-related tax benefits from two to five. And they provide 
benefits to higher-income working families with a stay-at-home parent, 
while arbitrarily excluding similar families who are lower-income.\40\
---------------------------------------------------------------------------
    \39\ Lily L. Batchelder, Elaine Maag, Chye-Ching Huang, and Emily 
Horton, ``Who Benefits From President Trump's Child Care Proposals,'' 
Tax Policy Center Research Report (February 28, 2017) (estimating that 
the average tax cut for families with income under $40,000 would be 
less than $20, about 3% of all benefits, while about 70% of the 
benefits would go to families with income over $100,000, and about 25% 
to families with income over $200,000).
    \40\ Id.

    As discussed, the President's and House GOP's proposals to increase 
the standard deduction benefits higher-income non-itemizers more than 
lower-income non-itemizers, and doesn't benefit the lowest-income 
workers at all. This is despite the fact that low-income workers face 
some of the highest implicit marginal tax rates, meaning that after 
taxes, transfers, and work-related costs like child care, it may not 
pay for them to work at all.\41\
---------------------------------------------------------------------------
    \41\ See, e.g., Congressional Budget Office, ``Effective Marginal 
Tax Rates for Low- and 
Moderate-Income Workers in 2016'' (November 2015) (finding that some 
households earning 100-149% of the poverty line face implicit marginal 
tax rates of more than 65% when accounting for taxes and some 
transfers, but not other transfers and work-related costs).

    Others have proposed eliminating personal exemptions and/or the 
head of household filing status in order to pay for a larger child tax 
credit. But as explained by my fellow witness Ramesh Ponnuru, this may 
well hurt many low- and middle-
income families, rather than helping them.\42\ This is especially true 
if the refundability of the child tax credit were not increased 
substantially so that more families could claim the full credit.
---------------------------------------------------------------------------
    \42\ Ramesh Ponnuru, ``GOP's Pro-Family Tax Reform Might Have a 
Catch,'' Bloomberg View (August 28, 2017).

    Finally, recent proposals to double the child tax credit and make 
it fully refundable against payroll taxes would provide much smaller 
benefits to lower-income families than higher-income families because 
they would leave the rate at which low earnings count toward earning 
the credit virtually unchanged.
B. Reforms Worth Considering
    Instead of pursuing the counterproductive or relatively ineffective 
proposals described above, Congress should instead consider reforms 
that would meaningfully level the playing field and support work. While 
there are a host of possibilities, I would like to highlight four 
options that are especially promising.

    The first is expanding the Earned Income Tax Credit (EITC), 
especially for workers without dependents (sometimes called childless 
workers). The EITC and child tax credit (CTC) are some of our most 
effective policies for reducing poverty and increasing employment. In 
2013, they kept 8.8 million people out of poverty, including 4.7 
million children.\43\ The EITC results in about 1 in 10 parents 
entering the labor force who otherwise would not do so.\44\ In 
addition, mounting evidence suggests that the EITC and CTC improve 
health outcomes, school performance, educational attainment, and long-
term earnings, including for the next generation.\45\
---------------------------------------------------------------------------
    \43\ Executive Office of the President and U.S. Treasury 
Department, ``The President's Plan to Help Middle-Class and Working 
Families Get Ahead'' 2 (April 2015).
    \44\ Id., citing Bruce D. Meyer and Dan T. Rosenbaum, ``Welfare, 
the Earned Income Tax Credit, and the Labor Supply of Single Mothers,'' 
116 Quarterly Journal of Economics 1063 (2014).
    \45\ Chuck Marr, Chye-Ching Huang, Arloc Sherman, and Brandon 
DeBot, ``EITC and Child Tax Credit Promote Work, Reduce Poverty, and 
Support Children's Development, Research Finds,'' Center on Budget and 
Policy Priorities (October 1, 2015).

    Tax reform should build on the success of these programs. To start, 
it should address the fact that, as illustrated in Figure 9, childless 
workers are the only group that is currently taxed into poverty.\46\
---------------------------------------------------------------------------
    \46\ Each year, about 7.5 million working-age adults in the group 
are taxed into or deeper into poverty. Chuck Marr, Chye-Ching Huang, 
Cecile Murray, and Arloc Sherman, ``Strengthening the EITC for 
Childless Workers Would Promote Work and Reduce Poverty,'' Center on 
Budget and Policy Priorities (April 11, 2016).

    Senator Brown and Representative Neal have proposed increasing the 
maximum EITC for childless workers to $1,400, phasing it in and out 
more rapidly, and making it available to younger workers.\47\ A similar 
proposal was advanced by former President Obama and endorsed by Speaker 
Ryan, though it was not included in the House GOP Blueprint.\48\ This 
proposal would subsidize the wages of groups with low or declining 
labor force participation rates, including men without a college 
education, young adults not enrolled in school, workers with 
disabilities, and older workers.\49\ As a result, it could meaningfully 
boost labor force participation. It would lift 600,000 workers out of 
poverty and lessen the severity of poverty for another 8.7 million.\50\ 
Moreover, the Brown-Neal proposal would essentially ensure that the 
Federal tax code no longer taxes childless workers into poverty.\51\
---------------------------------------------------------------------------
    \47\ S. 1012, 114th Congress (2015); H.R. 902, 114th Congress 
(2015). Senators Baldwin and Booker have proposed a similar expansion 
of the EITC for childless workers in S. 3231, 114th Congress (2016).
    \48\ NBC News, ``Meet the Press'' transcript, February 1, 2015. 
http://www.nbcnews.com/meet-the-press/meet-press-transcript-february-1-
2015-n302111.
    \49\ Executive Office of the President and U.S. Treasury 
Department, ``The President's Proposal to Expand the Earned Income Tax 
Credit'' (March, 2014).
    \50\ Chuck Marr, Brandon DeBot, and Emily Horton, ``How Tax Reform 
Can Raise Working-Class Incomes,'' Center on Budget and Policy 
Priorities (September 13, 2017).
    \51\ Chuck Marr, Chye-Ching Huang, Cecile Murray, and Arloc 
Sherman, ``Strengthening the EITC for Childless Workers Would Promote 
Work and Reduce Poverty,'' Center on Budget and Policy Priorities 
(April 11, 2016).

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

    A much more ambitious approach would be to expand the EITC for 
workers with children as well. For example, Senator Brown and 
Representative Khanna are proposing a major expansion to the EITC that 
would roughly double the maximum credit for all groups.\52\ Such an 
expansion would make significant headway toward offsetting the much 
lower earnings growth that working-class households have experienced 
over the past few decades relative to comparable families with a 
bachelor's degrees.\53\ While this proposal would cost over $1 
trillion,\54\ it could be more than paid for by tax increases on the 
wealthy discussed here and elsewhere. And its cost pales in comparison 
to the tax cuts for the wealthy contained in President Trump's plan and 
the House GOP Blueprint.
---------------------------------------------------------------------------
    \52\ Casey Tolan, ``Progressive Democrats' Counter-Argument to 
Trump Tax Plan: a $1.4 Trillion Tax Credit for the Working Class,'' 
Mercury News (September 12, 2017).
    \53\ Chuck Marr, Brandon DeBot, and Emily Horton, ``How Tax Reform 
Can Raise Working-Class Incomes,'' Center on Budget and Policy 
Priorities (September 13, 2017). A working-class household is defined 
here as one in which no one has a bachelor's degree. See also Neil 
Irwin, ``What Would it Take to Replace the Pay Working-Class Americans 
Have Lost?'', The New York Times (December 9, 2016).
    \54\ Tolan, supra note 52.

    A second proposal worth considering is strengthening the child tax 
credit (CTC), especially for low-income families with young children. 
Currently, the CTC excludes almost 11 million children with working 
parents because their earnings are too low.\55\ One way to build on the 
benefits of the CTC for future generations is to eliminate the 
threshold that currently excludes the first $3,000 of earnings from 
being counted towards earning the credit and to increase the rate at 
which the credit can be earned, especially for families with young 
children, similar to proposals by Senators Baldwin, Bennet, Brown, and 
Booker.\56\ These reforms would target benefits on young children in 
the poorest households. Children under age 6 are much more likely to 
live in poverty than other children or adults. Moreover, the evidence 
that the CTC and similar programs boost children's health, educational, 
and lifetime earning outcomes is especially strong for the poorest 
children.\57\ For them, more income makes a much bigger difference.
---------------------------------------------------------------------------
    \55\ Elaine Maag and Julia B. Isaacs, ``Analysis of a Young Child 
Tax Credit,'' Urban Institute (September 2017).
    \56\ See S. 2264, 114th Congress (2015); S. 3231, 114th Congress 
(2016). For further discussion of these proposals and similar ones, see 
Chuck Marr, Chloe Cho, and Arloc Sherman, ``A Top Priority to Address 
Poverty: Strengthening the Child Tax Credit for Very Poor Young 
Children'' (August 10, 2016); Maag and Isaacs, supra.
    \57\ See, e.g., Gordon B. Dahl and Lance Lochner, ``The Impact of 
Family Income on Child Achievement: Evidence from the Earned Income Tax 
Credit,'' 102 American Economic Review 5, 1927-56 (May 2012): Kerris 
Cooper and Kitty Stewart, ``Does Money Affect Children's Outcomes? A 
Systematic Review,'' Joseph Rowntree Foundation (October 22, 2013), 
https://www.
jrf.org.uk/report/does-money-affect-children%E2%80%99s-outcomes.

    An even more ambitious approach would be to make the CTC fully 
refundable so that the poorest children could fully benefit even if 
their parents' have no income, similar to a proposal by Representative 
DeLauro.\58\
---------------------------------------------------------------------------
    \58\ H.R. 4693, 114th Congress (2016).

    A third reform worth considering is replacing the current law child 
and dependent care tax benefits with a single refundable tax credit 
that is larger for families for whom such expenses represent the 
largest budgetary strain.\59\ Child and dependent care costs are a 
significant financial burden on working families, especially those with 
low and moderate incomes. On average, the median single mother with 
children under 5 spends 15% of her earnings on child care, and the 
median analogous married couple spends 6%.\60\ Child care costs have 
grown dramatically over time, rising 70% in inflation-adjusted terms 
from 1985 to 2001.\61\ Reducing child care costs increases labor force 
participation by ensuring that caretakers who prefer to engage in 
market work actually benefit financially from doing so.\62\
---------------------------------------------------------------------------
    \59\ For further discussion of this idea, see Lily L. Batchelder, 
Elaine Maag, Chye-Ching Huang, and Emily Horton, ``Who Benefits From 
President Trump's Child Care Proposals,'' Tax Policy Center Research 
Report (February 28, 2017); Katie Hamm and Carmel Martin, ``A New 
Vision for Child Care in the United States,'' Center for American 
Progress (September 2015), https://cdn.americanprogress.org/wp-content/
uploads/2015/08/31111043/Hamm-Childcare-report.pdf; James P. Ziliak, 
``Supporting Low-Income Workers Through Refundable Child-Care 
Credits,'' Hamilton Project: Improving Safety Net and Work Support 
(2014), http://www.hamilton
project.org/assets/legacy/files/downloads_and_links/
child_care_credit_ziliak.pdf; Elaine Maag, ``Simplifying Child Care Tax 
Benefits,'' Tax Policy Center (2013), http://www.
taxpolicycenter.org/taxvox/simplifying-child-care-tax-benefits.
    \60\ Ziliak, supra.
    \61\ Drew DeSilver, ``Rising Cost of Child Care May Help Explain 
Recent Increase in Stay-At-Home Moms,'' FactTank Blog (April 18, 2014), 
http://www.pewresearch.org/fact-tank/2014/04/08/rising-cost-of-child-
care-may-help-explain-increase-in-stay-at-home-moms/.
    \62\ Council of Economic Advisers, ``The Economics of Early 
Childhood Investments'' (2014), https://obamawhitehouse.archives.gov/
sites/default/files/docs/the_economics_of_early_child
hood_investments.pdf (reviewing the literature and concluding that a 
10% reduction in child care costs increases maternal employment by 0.5% 
to 4%).

    One drawback of this proposal is that it would not provide 
financial support to such families when they need it most: when their 
child care bills are due. Therefore, while not strictly a tax proposal, 
an even better reform would be to fully fund child care assistance 
programs, which provide direct subsidies for child care for low-wage 
working families.\63\ Currently only 15% of families eligible for these 
subsidies actually receive them because of under-funding; the remaining 
85% of families are put on waiting lists.\64\ Fully funding this 
program could be combined with a tax credit for families above the 
eligibility threshold, as proposed by former President Obama and other 
researchers.\65\
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    \63\ Currently, the Federal Government provides States funding for 
child care assistance programs through the Child Care and Development 
Fund and the Temporary Assistance for Needy Families block grant.
    \64\ Matthews and Walker, 2016.
    \65\ Office of Management and Budget, Budget of the U.S. 
Government: Fiscal Year 2017 (2016), https://www.gpo.gov/fdsys/pkg/
BUDGET-2017-BUD/pdf/BUDGET-2017-BUD.pdf; Ajay Chaudry, Taryn Morrissey, 
Christina Weil, and Hirokazu Yoshikawa, ``Cradle to Kindergarten: A New 
Plan to Combat Inequality'' (2017).

    Finally, these proposals could be paid for by raising taxes on the 
most fortunate, including by strengthening, not repealing, wealth 
transfer taxes. There are at least three ways to strengthen the 
taxation of financial inheritances that are worth considering. The 
first is to raise the wealth transfer tax rate above 40%. A second, 
more fundamental reform would be to replace our current wealth transfer 
taxes with a direct tax on the recipients of large inheritances. 
Effectively, the exemption from wealth transfer taxes would then be 
based on how much an individual inherited, not how much a donor 
bequeathed. If individuals who inherit more than $2.1 million over 
their lifetime had to pay income tax plus a 15% surcharge (roughly 
equivalent to the payroll tax rate) on their inheritances above this 
threshold, this proposal would raise roughly $200 billion more over 10 
years than our current wealth transfer taxes.\66\ Lastly, either of 
these reforms could be coupled with repealing stepped-up basis, which 
is discussed in more detail in the next section.
---------------------------------------------------------------------------
    \66\ Lily L. Batchelder, ``The `Silver Spoon' Tax: How to 
Strengthen Wealth Transfer Taxation,'' in Delivering Equitable Growth: 
Strategies for the Next Administration (Washington Center for Equitable 
Growth, 2016).
---------------------------------------------------------------------------
   iii. simplifying the tax code by reducing opportunities for gaming
    The third traditional goal of tax reform is simplification. 
Simplification should certainly be part of individual tax reform, but 
the policies that meaningfully simplify the tax system are often 
misunderstood.

    David Bradford, the intellectual father of the 1986 Tax Reform Act, 
distinguished three types of tax complexity: compliance complexity, 
rule complexity, and transactional complexity.\67\ Compliance 
complexity includes things like is how long it takes to prepare one's 
tax return and how many records taxpayers have to keep. Rule complexity 
is how difficult it is to understand what the law is, and can be the 
result of the tax code being unclear, or unclear administrative 
guidance and case law. Transactional complexity arises from taxpayers 
organizing their affairs to minimize their tax liability.
---------------------------------------------------------------------------
    \67\ David Bradford, ``Untangling the Income Tax,'' 266-67 (1986).

    Often transactional complexity is actually the most costly type of 
tax complexity. But many proposals to simplify the tax code focus on 
compliance complexity in ways that provide little or no practical 
benefits for taxpayers. For example, tax plans (including the 
President's and the House GOP Blueprint) often promise to reduce the 
number of tax brackets or the number of taxpayers who itemize 
deductions, heralding these changes as major simplifications. But 
virtually no taxpayer would notice if there were fewer tax brackets 
because 90% prepare their returns with computer software or the help of 
a third party (who generally uses such software).\68\ The 10% who still 
complete their tax returns by hand are instructed by Form 1040 to look 
up their taxable income on a tax table in order to apply the tax rates, 
so they are not supposed to do the arithmetic to apply the tax brackets 
in the first place. Similarly, taxpayers who do not itemize still need 
to keep records of their State and local taxes, charitable 
contributions, mortgage interest payments, medical expenses, and the 
like in order to determine whether they are better off itemizing or 
claiming the standard deduction. The only way to eliminate these record 
keeping burdens is to eliminate itemized deductions altogether, which 
these tax plans do not propose.
---------------------------------------------------------------------------
    \68\ Susan Jones, ``IRS: 90% of Taxpayers Seek Help in Preparing 
Their Returns,'' cnsnews.com (April 9, 2014), https://www.cnsnews.com/
news/article/susan-jones/irs-90-taxpayers-seek-help-preparing-their-
returns.

    Instead, simplification efforts in individual tax reform should 
focus on reducing transactional complexity, which essentially arises 
from opportunities for savvy taxpayers to game the tax system. Some tax 
provisions are meant to change behavior, like the charitable deduction. 
But other tax provisions sometimes create large, unintended 
opportunities to reduce or avoid taxes by structuring a transaction or 
activity in one way, rather than in another, economically identical 
---------------------------------------------------------------------------
form. These are what the press frequently refers to as ``loopholes.''

    Reducing such transactional complexity accomplishes the trifecta of 
tax reform: it makes the tax code fairer, more efficient, and simpler 
at the same time. It is fairer because generally only taxpayers who can 
afford high-priced tax advice learn about opportunities to structure 
their affairs in ways that are economically identical but reduce their 
taxes. It is more efficient and simpler because taxpayers spend less 
time trying to figure out how to arrange their affairs to reduce their 
tax liability, and change their behavior less in response to the tax 
system.
A. The First Goal (Again): Do No Harm
    Unfortunately several current proposals would dramatically increase 
transactional complexity. The most alarming is the proposal to apply a 
new, special cap on the tax rate for pass-through business income.\69\ 
Pass-through business income has always been taxed on individual income 
tax returns at the same rates as other income. But President Trump has 
proposed cutting the top rate on pass-through income (and only pass-
through income) from 39.6% to 15%, while cutting the top rate on all 
other ordinary income to 35%. The House GOP Blueprint cuts the top rate 
on pass-through income to 25%, while cutting the top rate on other 
ordinary income to 33%.
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    \69\ This discussion draws on Lily Batchelder, ``Trump's Giant 
Loophole,'' The New York Times (May 30, 2017).

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

    Proponents of this rate cap argue that it would benefit small 
businesses and rectify the over-taxation of pass-through businesses 
compared to C corporations. But nothing could be further from the 
truth. The Tax Policy Center estimates that a full 77% of the benefits 
of the President's proposal would go to the top 1%,\70\ who currently 
earn more than half of all pass-through income.\71\ As illustrated in 
Figure 10, the average tax cut for the top 1% would amount to 5% of 
their after-tax income, while the average tax cut for the bottom four 
quintiles would be zero.
---------------------------------------------------------------------------
    \70\ Urban-Brookings Tax Policy Center Microsimulation Model, 
``T17-0164--Distributional Effect of a 15-Percent Top Rate on a Broad 
Definition of Pass-Through Income, Baseline: Current Law With AMT 
Repealed and 12/25/33 Rate Structure, by Expanded Cash Income 
Percentile, 2018'' (May 15, 2017), http://www.taxpolicycenter.org/
model-estimates/options-taxing-pass-through-income-prefential-rates-
may-2017/t17-0164-distributional.
    \71\ Urban-Brookings Tax Policy Center Microsimulation Model, 
``T17-0080--Sources of Flow-Through Business Income by Expanded Cash 
Income Percentile; Current Law, 2017'' (March 20, 2017), http://
www.taxpolicycenter.org/model-estimates/distribution-business-income-
march-2017/t17-0080-sources-flow-through-business.

    Moreover, the effective marginal tax rate on pass-through 
businesses is currently about 5 percentage points lower than that on C 
corporations after accounting for 
investor-level taxes. This is part of the reason why the share of all 
business income earned by pass-throughs has risen precipitously, from 
less than one-quarter in 1980 to 60% today.\72\
---------------------------------------------------------------------------
    \72\ The White House and the U.S. Treasury Department, ``The 
President's Framework for Business Tax Reform: An Update'' (April 
2016), https://www.treasury.gov/resource-center/tax-policy/Documents/
The-Presidents-Framework-for-Business-Tax-Reform-An-Update-04-04-
2016.pdf.

    A pass-through rate cap would dramatically increase the incentive 
to characterize income, including compensation for services, as pass-
through business income. This is already a significant problem under 
the current tax code because certain types of pass-through business 
income are not subject to either payroll or self-employment tax. But it 
would become much worse. For example, under the President's plan, if a 
wealthy executive sets up an LLC to receive his $10 million salary, he 
could save $2 million in taxes. Few middle-class workers have the 
resources to set up such vehicles--and the vast majority would not 
benefit if they did because they are already in the 15% rate bracket or 
below.\73\ Indeed, the Tax Policy Center and Goldman Sachs estimate 
that the tax avoidance response would be staggering, accounting for 30-
50% of the sizeable cost of the proposal.\74\
---------------------------------------------------------------------------
    \73\ Tax Policy Center, ``T16-0085--Number of Tax Units by Tax 
Bracket and Filing Status,'' Tax Policy Center (July 6, 2016), http://
www.taxpolicycenter.org/model-estimates/baseline-distribution-tax-
units-tax-bracket-july-2016/t16-0085-number-tax-units-tax (estimating 
that 79% of taxpayers are in the 15% bracket or below, and 95% are in 
the 25% bracket or below).
    \74\ Urban-Brookings Tax Policy Center Microsimulation Model, 
``T17-0162--Revenue Effect of Options for Taxing Pass-Through Income at 
Preferential Rates, Baseline: Current Law with Individual AMT Repealed 
and 12/25/33 Percent Individual Income Tax Rate Structure, 2018-27,'' 
Tax Policy Center (May 15, 2017), http://www.taxpolicycenter.org/model-
estimates/options-taxing-pass-through-income-prefential-rates-may-2017/
t17-0162-revenue-effect; Robert Schroeder, ``Trump Proposal to Lower 
Pass-through Tax Rate Could Cost $2 Trillion, Goldman Finds,'' 
MarketWatch (May 3, 2017), http://www.marketwatch.com/story/trump-
proposal-to-lower-pass-through-tax-rate-could-cost-2-trillion-goldman-
finds-2017-05-03.

    For these reasons, tax experts on the left and right agree that it 
is a terrible idea. For example, experts at the Tax Foundation, which 
traditionally supports business tax cuts, argue that ``the pass-through 
carve-out primarily incentivizes tax avoidance, not job creation.'' 
\75\
---------------------------------------------------------------------------
    \75\ Kyle Pomerleau, Scott Drenkard, and John Buhl, ``What Trump 
Can Learn from Kansas' Tax Troubles,'' Politico (May 4, 2017), http://
www.politico.com/magazine/story/2017/05/04/what-trump-can-learn-from-
kansas-tax-troubles-215103.
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B. Reforms Worth Considering
    Instead of dramatically increasing transactional complexity, 
Congress should consider several proposals that would substantially 
reduce it. The first is reforming the self-employment tax (SECA) and 
net investment income tax (NIIT) to ensure that all labor and capital 
income are subject to the Medicare tax on high incomes in some form.

    Currently the NIIT and SECA apply a 3.8% to income above $200,000 
for single filers and $250,000 for married filers in some cases but not 
others. They do apply the tax to all employees, owners of sole 
proprietorships, and ``passive'' owners of businesses. However, they 
only apply it in part to ``active'' owners of S corporations, and often 
do not apply it at all to ``active'' owners of LLCs and limited 
partners.\76\ Many high earners (including Newt Gingrich and John 
Edwards historically) avoid this 3.8% Medicare tax--and sometimes 
Social Security tax as well--by claiming that their labor income is 
instead pass-through business income that falls into one of these tax-
exempt or tax-preferred buckets.
---------------------------------------------------------------------------
    \76\ Department of the Treasury, ``General Explanations of the 
Administration's Fiscal Year 2017 Revenue Proposals,'' 169 (February 
2016).

    The different treatment of some pass-through business income from 
other economically identical types of such income is a classic example 
of transactional complexity. It creates traps for the unwary, enabling 
savvy taxpayers to avoid the tax by changing the legal form of their 
ownership or the payments they receive. Less savvy taxpayers, all wage 
---------------------------------------------------------------------------
earners, and all sole proprietors are left footing the bill.

    Former President Obama's final budget proposed rationalizing these 
taxes so that all income above these thresholds was subject to the 3.8% 
tax either through the NIIT or SECA.\77\ It also proposed treating 
eliminating differences in how professional services income is taxed 
depending on whether it is paid by an S corporation or partnership. 
Together, these proposals would raise $272 billion over 10 years. In 
addition, all NIIT revenue would be redirected from the General Fund to 
the Medicare trust fund, extending its solvency by more than 15 
years.\78\
---------------------------------------------------------------------------
    \77\ Id.
    \78\ Office of Management and Budget, ``Meeting Our Greatest 
Challenges: Opportunity for All'' (2016), https://
obamawhitehouse.archives.gov/sites/default/files/omb/budget/fy2017/
assets/opportunity.pdf.

    A second reform worth serious consideration is repealing stepped-up 
basis. Sometimes called the single biggest loophole in the individual 
income tax,\79\ stepped-up basis refers to the fact that capital gains 
on assets held until death are never taxed--instead the tax on such 
gains is forgiven forever. Stepped-up basis creates a large incentive 
for investors to hold on to underperforming assets purely for tax 
reasons (the so-called lock-in effect), resulting in resources being 
misallocated throughout the economy. It also creates traps for the 
unwary who do not realize how much tax they can save by holding on to 
their assets even if they are underperforming.
---------------------------------------------------------------------------
    \79\ See, e.g., Len Burman, ``President Obama Targets The `Angel of 
Death' Capital Gains Tax Loophole,'' Forbes (January 18, 2015).

    Former President Obama proposed repealing stepped-up basis subject 
to several exclusions, including an exemption for the first $100,000 in 
accrued gains ($200,000 per couple).\80\ Together with raising the 
capital gains rate to 28 percent (an idea discussed next), this 
proposal would raise $210 billion over 10 years and significantly more 
over time as it fully phased in.\81\ The proposal would also be 
extraordinarily progressive because inheritances are distributed so 
unequally and accrued gains are even more concentrated among the 
rich.\82\ It would further help ensure that those who inherit large 
sums are taxed at a rate closer to those who earn their income from 
working. A full 99% of the revenue raised would come from the top 1%, 
and 80% would come from the top 0.1%.\83\
---------------------------------------------------------------------------
    \80\ Department of the Treasury, ``General Explanations of the 
Administration's Fiscal Year 2017 Revenue Proposals,'' 156, (February 
2016). The proposal would also exempt all gains on the sale of tangible 
personal property, and would effectively establish a $500,000 per-
couple exemption for gains on residences.
    \81\ Id.
    \82\ James Poterba and Scott Weisbenner, ``The Distributional 
Burden of Taxing Estates and Unrealized Capital Gains at Death,'' in 
Rethinking Estate and Gift Taxation, 439-40 (William G. Gale et al. 
eds., 2001). Untaxed accrued gains compose 36 percent of the value of 
all bequests, but 56 percent of bequests over $10 million.
    \83\ Executive Office of the President and U.S. Treasury 
Department, ``The President's Plan to Help Middle-Class and Working 
Families Get Ahead,'' 35 (April 2015).

    A third, related reform is narrowing the gap between the tax rates 
on ordinary income and capital gains. This gap creates a large 
incentive for taxpayers to try to recharacterize ordinary income as 
capital gain, with carried interest a prime example. In addition to 
treating carried interest as ordinary income to the extent that it 
represents compensation for services,\84\ Congress should consider 
raising the capital gains rates to reduce this incentive in the first 
place.
---------------------------------------------------------------------------
    \84\ Senator Baldwin and Representative Levin have introduced bills 
to address this issue. See S. 1020, 115th Congress (2017); H.R. 2889, 
114th Congress (2015).

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

    Capital gains are highly concentrated among the wealthy. As a 
result, the preferential rates for capital gains and dividends very 
disproportionately benefit them. As illustrated in Figure 11, these 
preferential rates provide the top 1% with a tax cut that is 29 times 
larger than that for the middle quintile, even when measured as a share 
of after-tax income.\85\ Indeed the top 0.1% of taxpayers, earning over 
$3 million per year, receive more than 55% of the benefits.\86\ Raising 
these preferential rates could help curb rising economic inequality, 
making the tax code fairer. But it would also reduce transaction 
complexity by reducing one of the biggest incentives for tax planning 
in the income tax.
---------------------------------------------------------------------------
    \85\ Tax Policy Center, ``Table T17-0137'' (April 18, 2017), http:/
/www.taxpolicycenter.org/model-estimates/individual-income-tax-
expenditures-april-2017/t17-0137-tax-benefit-preferential.
    \86\ Id.
---------------------------------------------------------------------------
      iv. individual tax reform should make tax incentives fairer 
                           and more efficient
    A final area on which individual tax reform should focus is 
reforming tax incentives to make them more efficient and fair. As just 
discussed, some tax provisions create opportunities for gaming that 
Congress did not intend. But many other tax provisions, which I will 
call tax incentives, are explicitly intended to change behavior, for 
example by encouraging people to attend college or purchase health 
insurance. In such cases, it is not a problem if people respond to the 
tax incentive; in fact, that is the whole purpose. But many such tax 
incentives are poorly designed to achieve their own goals. 
Restructuring them to get more bang-for-the-buck could simultaneously 
improve social outcomes and raise revenue, which could be used to 
reduce our mounting debt, address rising inequality, and broaden 
opportunity. One could spend a whole hearing on each individual tax 
incentive, so I will instead highlight a few general principles and 
case studies here.

    First, the most efficient type of tax incentive is generally a 
refundable tax credit. As Fred Goldberg, Peter Orszag, and I have 
explained, deductions can be efficient if they are designed to measure 
income or ability to pay.\87\ Deductions for business expenses are one 
such example. But where, as with tax incentives, the goal is to promote 
socially valued activities or investments, the most efficient default 
structure is a uniform incentive--unless there is evidence that certain 
households are more responsive to the incentive or generate larger 
social benefits from engaging in the activity. Such uniform benefits 
can only be accomplished through a refundable tax credit.
---------------------------------------------------------------------------
    \87\ Lily L. Batchelder, Fred T. Goldberg, Jr., and Peter R. 
Orszag, ``Efficiency and Tax Incentives: The Case for Refundable Tax 
Credits,'' 59 Stanford Law Review 23 (2006).

    Even when there is evidence that responsiveness or social benefits 
vary by household income or other characteristics, the most efficient 
incentive is almost certainly still some type of refundable credit. It 
is extremely unlikely that there is a sharp break in social benefits or 
responsiveness to a tax incentive exactly at the point of no income tax 
liability or the rate bracket thresholds. But these types of 
discontinuities are inherent in all other types of tax incentives. For 
example, preferential rates and non-refundable credits do not benefit 
taxpayers in the zero bracket, while the value of above-the-line 
deductions and exclusions intrinsically rises with the taxpayer's 
---------------------------------------------------------------------------
marginal tax rate.

    Congress should therefore consider restructuring all tax 
expenditures that are intended to change behavior into refundable tax 
credits, designing them based on evidence of how to get the most bang 
for the buck. In all likelihood, this will also make the tax code more 
progressive. Even if, for example, higher-income households are more 
responsive to a tax incentive, it is unlikely that the optimal tax 
incentive will be as regressive as many of the deductions, exclusions, 
and preferential rates that we have today. Restructuring tax incentives 
into refundable tax credits will, however, be a major undertaking. 
Currently, only about 12% of tax expenditures are structured as 
refundable credits, as illustrated in Figure 12.

    Second, wherever possible, Congress should leverage the insights of 
behavioral economics when redesigning tax incentives. Doing so can also 
generate more social benefits at a lower cost.

    To provide one example, tax incentives for retirement savings are a 
particularly fruitful area for reform. Though we currently spend more 
than $80 billion per year on retirement savings incentives, the median 
household nearing retirement has only $14,500 in retirement 
savings.\88\ About one-third of workers do not have access to an 
employer-sponsored retirement plan, even though middle-class workers 
are 15 times more likely to save for retirement if they are covered by 
an employer plan.\89\
---------------------------------------------------------------------------
    \88\ Keith Miller et al., ``The Reality of the Retirement Savings 
Crisis,'' Center for American Progress (January 26, 2015) (figure is 
for households age 55 to 64, and excludes Social Security).
    \89\ ``Retirement Savings 2.0: Updating Savings Policy for the 
Modern Economy,'' hearing before the Sentate Committee on Finance, 
113th Congress 9-10 (2014) (statement of Scott Betts, senior vice 
president of national benefits services, LLC).

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

    Low- and middle-income families are generally the least prepared 
for retirement,\90\ but the lion's share of tax incentives for 
retirement savings go to the wealthy. Households in the top income 
quintile receive two-third of the benefit of retirement savings 
incentives and those in the top 5% receive more than one-third of the 
benefits.\91\ In contrast, the bottom two quintiles only receive 7% of 
the benefits.
---------------------------------------------------------------------------
    \90\ Alicia Munnell et al., ``NRRI Update Shows Half Still Falling 
Short'' (Center for Retirement Research Brief No. 14-20, December 
2014).
    \91\ Congressional Budget Office, ``The Distribution of Major Tax 
Expenditures in the Individual Income Tax System,'' table 2 (May, 
2013).

    In addition, there is extensive empirical evidence that retirement 
savings choices are heavily influenced by how easy it is to save 
principally as a result of defaults. For example, new hires are about 
50 percentage points more likely to participate in their employer's 
retirement plan if they are automatically enrolled.\92\ There have been 
several positive reforms in response to this research. For example, the 
Pension Protection Act of 2006 and Treasury Department guidance issued 
before and after it contributed to a large rise in automatic 
enrollment.\93\ But the default retirement savings rate is still zero 
for roughly 62% of workers, as illustrated in Figure 13.
---------------------------------------------------------------------------
    \92\ Brigitte C. Madrian and Dennis F. Shea, ``The Power of 
Suggestion: Inertia in 401(k) Participation and Savings Behavior,'' 116 
Quarterly Journal of Economics 1149 (2001). While many of these workers 
would eventually join the plan if enrollment were voluntary, 
accelerating participation through auto-enrollment substantially boosts 
the overall retirement savings of most workers.
    \93\ In 2014, 57% of 401(k) plans auto-enrolled their workers 
compared to less than 10% in 2000. Plan Sponsor Council of America, 
58th Annual Survey (2016).

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

    As part of individual tax reform, Congress should therefore 
consider a number of ways to improve retirement savings incentives. 
These include restructuring the tax incentives so that a larger share 
of the benefits go to low- and middle-income workers,\94\ directly 
depositing the incentive into the taxpayer's account,\95\ requiring 
employers offering retirement plans to automatically enroll their 
workers, and enacting automatic IRAs at a Federal level so that every 
worker has access to an easy way to save for retirement.\96\ Such 
reforms could substantially boost retirement security while saving 
revenue. Automatic IRAs alone would give 30 million more workers access 
to a workplace savings opportunity.\97\
---------------------------------------------------------------------------
    \94\ See, e.g., William G. Gale et al., ``Improving Opportunities 
and Incentives for Saving by Middle- and Low-Income Households'' (The 
Hamilton Project, Discussion Paper 2006-02, 2006), https://
www.brookings.edu/wp-content/uploads/2016/06/200604hamilton_2.pdf; 
Christian E. Weller and Sam Ungar, ``The Universal Savings Credit'' 
(Center for American Progress, July 2012), https://
cdn.americanprogress.org/wp-content/uploads/2013/07/
UniversalSavingsCredit-report.pdf.
    \95\ Emmanuel Saez, ``Details Matter: The Impact of Presentation 
and Information on the Take-up of Financial Incentives for Retirement 
Saving,'' 1 American Economic Journal: Economic Policy 204 (2009).
    \96\ Senator Whitehouse and Representative Neal have introduced 
Federal automatic IRA legislation, S. 245, 114th Congress (2015); H.R. 
2499, 115th Congress (2017). For more details on auto-IRA proposals, 
see, e.g., Mark Iwry and David C. John, ``Pursuing Universal Retirement 
Security Through Automatic IRAs,'' The Retirement Security Project 
(2009), http://www.brookings.edu/research/papers/2009/07/automatic-ira-
iwry; Department of the Treasury, ``General Explanations of the 
Administration's Fiscal Year 2016 Revenue Proposals,'' 134, (February 
2015).
    \97\ Executive Office of the President and U.S. Treasury 
Department, ``The President's Plan to Help Middle-Class and Working 
Families Get Ahead,'' 5 (April 2015).

    To provide another example, many would argue that the purpose of 
the tax exemption for State and local bonds is to support investments 
by State and local governments, effectively devolving Federal revenue 
to them. But about 20% of the value of the exemption goes to high-
bracket investors in the form of above-market after-tax interest rates, 
rather than to State and local governments in the form of lower 
interest costs.\98\ If Congress replaced the exemption with a 
refundable tax credit, as was the case with Build America Bonds, we 
could deliver the same amount of aid to State and local governments at 
a much lower budgetary cost.
---------------------------------------------------------------------------
    \98\ Congressional Budget Office and Joint Committee on Taxation, 
``Subsidizing Infrastructure Investment With Tax-Preferred Bonds,'' 34 
(October 2009). CBO and JCT estimate that State and local governments 
are able to pay interest at a rate that is 21% below that of comparable 
taxable bonds because of the exemption. This implies that investors in 
tax brackets above 21% benefit from the exemption by an amount equal to 
their marginal tax rate minus 21% multiplied by the amount of tax-
exempt interest they receive. Id. at 31-33.

                                 ______
                                 
        Questions Submitted for the Record to Lily L. Batchelder
               Questions Submitted by Hon. Orrin G. Hatch
                   increasing the standard deduction
    Question. Ms. Batchelder, in your written testimony, you are 
critical of Republican proposals to nearly double the standard 
deduction.

    But for the sake of fairness and transparency, can you please 
acknowledge that the ranking member has repeatedly proposed nearly 
tripling the standard deduction?

    Answer. Yes, the ranking member has proposed nearly tripling the 
standard deduction. However, he did so in the context of tax plans that 
were roughly revenue-neutral and somewhat more progressive compared to 
current policy at the time, unlike the plans put forth by President 
Trump or the TCJA as enacted.\1\ Moreover, my criticism of increasing 
the standard deduction was in the context of arguing that tax reform 
should increase taxes on the wealthy and use some of the revenues 
raised for deficit reduction and some to boost the take-home pay of 
those who are less fortunate. To the extent that increasing the 
standard deduction was coupled with other reforms that together achieve 
these overall objectives, I would be less concerned.
---------------------------------------------------------------------------
    \1\ Jim Nunns and Jeffrey Rohaly, ``Preliminary Revenue Estimates 
and Distributional Analysis of the Tax Provisions in the Bipartisan Tax 
Fairness and Simplification Act of 2010,'' Tax Policy Center, 2010, 
http://www.taxpolicycenter.org/sites/default/files/alfresco/
publication-pdfs/412098-Preliminary-Revenue-Estimates-and-
Distributional-Analysis-of-the-Tax-Provisions-in-the-Bipartisan-Tax-
Fairness-and-Simplification-Act-of--.PDF.
---------------------------------------------------------------------------
 assumptions associated with the president's and the house's tax plans
    Question. Ms. Batchelder, your testimony provides a detailed, and 
negative, assessment of tax ``plans'' offered by President Trump and 
the House GOP leadership. Given the level of generality of what has 
been put forward for each of those so-called plans, it is impossible to 
provide the level of details about the implications of the plans 
unless, as you have done, you fill in details with your own 
assumptions.

    My question is, are the negative implications that you have often 
discussed of the so-called plans put forward by the President and the 
House GOP actually an analysis of detailed specified plans, or are they 
implications of assumptions that you made that aren't specified in any 
detailed plan?

    That is, are they results from a detailed plan, or the results of 
your individual interpretation of what a plan is going to look like 
once details are finished?

    Answer. Any analysis of tax reform proposals prior to enactment 
(and even, to some degree, after enactment) requires assumptions about 
how details will be filled in. Unless we are going to avoid discussing 
the potential impact of tax reform plans altogether, some assumptions 
are necessary.

    In my view, tax experts both inside and outside government should 
try to educate the public about the potential impact of tax reform 
proposals, and, when they do so, they should make reasonable 
assumptions about how the details will be filled in and clearly state 
those assumptions. The portions of my written testimony that are 
critical of the President's and House GOP's proposals rely upon 
estimates by independent, nonpartisan organizations that I think easily 
meet these standards.
                      progressivity v. efficiency
    Question. Ms. Batchelder, in the hearing you stated:

        Well, I certainly think there is a point where the tax code can 
        be too progressive or too targeted on just one, or a handful of 
        individuals. But I think we are very far from that point. We 
        have very vastly rising inequality in this country and the tax 
        code could do a lot more to help mitigate that. So I don't 
        think that anything that is on the potential drawing room table 
        right now is at risk of making the tax code too progressive. 
        But I'm sure that if you purposed replacing the entire income 
        tax system with only taxing Bill Gates, I would think that is 
        both unfair and inefficient.

    That's a reasonable enough statement, but could you flesh that out 
more please?

    At what point would the tax code be too progressive? Would the code 
be too progressive if it taxed only the wealthiest 1 percent?

    Were the individual income tax rates at the time of the Truman 
Presidency too progressive?

    At what point would you think a tax was so progressive that it 
constituted a takings, within the meaning of the Fifth Amendment to the 
Constitution?

    Are the goals of efficiency and progressivity in tension with each 
other? If Congress could significantly increase GDP, but that would 
make the code slightly less progressive, would you say that is an 
unacceptable bargain? Should we be willing to take a hit to growth, if 
it significantly increased progressivity?

    Do you think it an important check on the voting public's appetite 
for larger government expenditures that all of the voting public 
somewhat directly pays for some of those expenditures?

    I realize that these are not easy questions, but since you have 
emphasized the important issue of progressivity in the tax code, it 
seems fair to ask them of you.

    Answer. At the beginning of the Truman Presidency, the top 
individual statutory income tax rate was 94%. I do think that is too 
high. However, what really matters are average tax rates and effective 
marginal tax rates, not the statutory tax rate. For example, if the top 
statutory tax rate were 94% but every taxpayer automatically could 
deduct 75% of their income, the top effective marginal tax rate would 
only be 23.5% and the top average tax rate is even lower (assuming a 
progressive rate schedule). I am not an expert on the tax code during 
the Truman Presidency so I do not know what the top average tax rate 
and top effective marginal tax rate were at the time.

    I am also not a constitutional law expert so I cannot advise on the 
point at which a tax is so progressive that it constitutes a taking 
under the Fifth Amendment. To my knowledge, the Federal income tax 
under the Truman Presidency was not successfully challenged as a 
taking, so that seems to indicate that tax rates could be substantially 
higher than they are now without violating the Takings Clause.

    The goals of efficiency and progressivity are sometimes in tension 
with each other and sometimes are not. It depends in part on whether 
the policy in question is addressing what economists would call a 
market failure, such as negative externalities or market power.

    In my view, GDP is a relatively poor measure of how well-off 
Americans are, and policymakers should adopt more refined objectives 
for fiscal policy than simply maximizing GDP. Personally, I would be 
more interested in measures that place relatively more weight on $1 in 
additional income earned by the middle class and those who are less 
fortunate than $1 in additional income for a billionaire. In certain 
circumstances, I would view policies that slightly reduce GDP but make 
the Code substantially more progressive as worth serious consideration. 
For example, if a tax proposal would reduce GDP by $0.1 billion but 
that was the product of a $1 billion increase in the collective income 
of middle-class workers and a $1.1 billion decrease in the income of 
the single wealthiest American, I would consider that a reasonable 
approach.

    I am not sure I follow your question about whether it is an 
important check on the voting public's appetite for larger government 
expenditures that all of the voting public somewhat directly pays for 
some of those expenditures. However, I do not think it is necessary or 
important for every American to pay some tax in order for them to 
exercise their right to vote responsibly. Many voters--rich, poor, and 
middle class--vote against their economic self-interest when they think 
a different approach is better for the country. We all contribute to 
and benefit from our government in myriad ways. But even if one did 
think it was important for all voters to pay some tax, I would note 
that all income groups on average pay positive federal taxes in a given 
year,\2\ a relatively small share of households (many of whom are 
elderly or disabled) do not pay positive federal taxes in any given 
year, and that share becomes even smaller if one looks over multiple 
years and/or includes state and local taxes.
---------------------------------------------------------------------------
    \2\ See, e.g., Congressional Budget Office, ``The Distribution of 
Household Income and Federal Taxes, 2013,'' June, 2016, https://
www.cbo.gov/publication/51361.

                  capital gains versus ordinary income
    Question. Ms. Batchelder, you mention how the gap between the 
capital gains tax rate and the higher ordinary income tax rate creates 
a large incentive for taxpayers to try to re-characterize ordinary 
income as capital gains. She proposes addressing this problem by 
``raising the capital gains rates to reduce this incentive.''

    But, to be clear, one equally effective way to address this problem 
is to reduce the ordinary income tax rates, right?

    Answer. Yes, reducing ordinary income tax rates while holding 
constant capital gains rates would reduce the incentive for taxpayers 
to re-characterize ordinary income as capital gains. I have other 
concerns with this approach; namely, that it would worsen budget 
deficits and make the tax code less progressive.
                    high implicit marginal tax rates
    Question. Ms. Batchelder, you wrote something I really appreciated. 
You wrote: ``Low-income workers face some of the highest implicit 
marginal tax rates.''

    I think you're right, and it's a serious problem. But later in your 
testimony, you talk positively about a proposal from a member of this 
Committee to increase the Earned Income Tax Credit and you note that 
the proposal would phase the EITC out more rapidly.

    But wouldn't a more rapid phase-out of the EITC increase the 
highest implicit marginal tax rate of those low income workers in the 
phase-out range?

    Answer. Any increase in the EITC that holds constant the current 
phase-in and phase-out income thresholds will result in lower implicit 
marginal tax rates in the phase-in range and higher implicit marginal 
tax rates in the phase-out range, compared to current law. An extensive 
body of research finds that EITC expansions on net increase labor force 
participation despite these somewhat offsetting incentives.\3\ These 
effects appear to be due in part to many individuals making decisions 
about working more at the ``extensive margin'' rather than the 
``intensive margin.'' In other words, many individuals look more at 
what their after-tax return is to working overall, rather than their 
after-tax return to an additional hour of work. Because any EITC 
expansion necessarily increases the after-tax return to working 
overall, it will increase incentives to engage in market work at the 
extensive margin. To the extent that individuals do make incentives 
about working at the intensive margin, they appear to respond more to 
the EITC's phase-in incentives than its phase-out incentives. For 
example, a recent study found that responsiveness to the EITC's phase-
in incentives is two to six times stronger than responsiveness to its 
phase-out incentives.\4\
---------------------------------------------------------------------------
    \3\ See e.g., Jeffrey Grogger, ``The Effects of Time Limits, the 
EITC, and Other Policy Changes on Welfare Use, Work, and Income Among 
Female-Headed Families,'' Review of Economics and Statistics, 2003; and 
Jeffrey Liebman and Nadda Eissa, ``Labor Supply Responses to the Earned 
Income Tax Credit,'' Quarterly Journal of Economics, 1996.
    \4\ Raj Chetty, John N. Friedman, and Emmanuel Saez, ``Using 
Differences in Knowledge Across Neighborhoods to Uncover the Impacts of 
the EITC on Earnings,'' American Economic Review, 2013, http://
www.nber.org/papers/w18232.pdf.

    The research to date therefore strongly suggests that EITC 
expansion proposals like those discussed in my written testimony will 
increase labor force participation overall, even though they result in 
---------------------------------------------------------------------------
higher implicit marginal tax rates over some income ranges.

                                 ______
                                 
                 Question Submitted by Hon. Mike Crapo
    Question. Ms. Batchelder, I would like to explore what I see as a 
potentially under-reported challenge we may face in developing 
comprehensive tax reform. This came to mind after reviewing a recent 
hearing this committee held regarding the nationwide shortage of 
affordable housing. The hearing discussed important matters like the 
Low-Income Housing Tax Credit or LIHTC. I am a longtime supporter of 
LIHTC, as are a number of my colleagues, and the hearing explored 
bipartisan proposals to expand the credit. What hasn't received much 
attention, though, is how LIHTC actually works. It is not a tax credit, 
as some may think, that goes to the seniors and low-income families 
that live in these affordable-housing units. Is it not correct that the 
actual tax credits flow to banks and typically wealthy investors, 
allowing them to offset about $9 billion of their annual income that 
would otherwise be taxable?

    In exchange, these banks and investors put their own capital toward 
these affordable housing units, which, without these investments, would 
not be able to be rented out at rates low enough to be affordable for 
low income families.

    This brings me to some of the public lines in the sand being drawn 
by some, including some of my colleagues, stating that tax reform must 
not in any way reduce taxes for those above certain income thresholds. 
If that is the standard, would it not be accurate to say that this 
would mean that proposals such as the Cantwell-Hatch bill to expand the 
Low-Income Housing Tax Credit, would be considered off the table for 
tax reform, because, regardless of what other important economic and 
policy benefits the credit provides to low income renters, it most 
certainly also provides a significant reduction in taxes for banks and 
upper income investors?

    Wouldn't a similar standard also apply to a theoretical proposal to 
make permanent the New Markets Tax Credit, which is otherwise set to 
expire in a couple years? While New Markets has strong bipartisan 
support, and certainly provides important economic and public policy 
benefits to rural and low income communities, is it not also the case 
that the actual tax credits are typically claimed by banks and upper-
income investors, which would mean an extension of the New Markets Tax 
Credit would also violate standards we have heard about, like the 
Mnuchin Rule, or the ``Not One Penny'' standard?

    And really, aren't there many other broadly supported tax 
provisions that provide important public policy and economic benefits, 
which might also be candidates for attention in tax reform, that would 
have to be taken off the table if we are subject to strict standards on 
who can and cannot receive any benefits through the tax code from tax 
reform, like municipal bonds or conservation easements or many other 
provisions?

    Based on these facts, would you agree that it would not be 
appropriate or productive to set up a standard for evaluating tax 
reform that cherry picks data to try to support one's position? For 
example, it would not be appropriate, in the context of a full 
comprehensive reform package, to evaluate some provisions solely by how 
they change particular tax rates for particular taxpayers, or how they 
change after-tax income for particular taxpayers, but then do not fully 
account for the broader secondary economic effects and effects on 
meeting important public policy goals (which are not always easily 
quantifiable). Conversely, it would then also not be appropriate to 
cherry pick and evaluate other provisions in that same comprehensive 
bill only by their broader economic and public policy effects, but not 
take into account how those policies effect tax rates or after tax 
income, correct?

    In order to best serve the American people and get the best tax 
policy for everyone, would it not be best to set evaluation standards 
that are comprehensive, and take into account not only the changes in 
rates and tax effects on taxpayers, but also a full evaluation of the 
broader secondary effects on the economy and on meeting public policy 
goals?

    Answer. In light of mounting inequality and deficits, I agree with 
statements that tax reform should not provide a net tax cut to the 
wealthy. However, your question raises several important issues about 
what this means.

    First, by ``net'' I mean that we should look at whether tax reform 
proposals provide a tax cut to the wealthy after accounting for all of 
the provisions in any bill. Any major tax reform will entail many 
moving pieces. I do not find it objectionable if some provisions cut 
taxes for the wealthy so long as they are more than counterbalanced by 
other provisions that ask them to contribute more.

    Second, a fundamental tenet of economic analysis of taxes is that 
the person who nominally remits a tax (or nominally claims a tax 
benefit) is not necessarily the person who bears the burden or 
``incidence'' of the tax (or reaps the benefit of a tax expenditure). 
For example, there is broad consensus that the employer share of the 
payroll tax is borne by employees even though it is nominally paid by 
the employer. This is relevant to your question about the LIHTC. I am 
not sure how JCT distributes the benefit, but it would make sense to me 
if they partially distributed it to tenants in LIHTC developments and 
partially to the developers and investors. Regardless, when considering 
whether a tax reform plan cuts taxes for the wealthy on net, I believe 
we should look at the economic incidence of the plan, not at how it 
changes who nominally remits taxes or claims tax expenditures.

    This raises a third question: what authority should policymakers 
rely upon when considering the economic incidence of a tax reform 
proposal? My answer is, where at all possible, the Joint Committee on 
Taxation. They are the official nonpartisan estimators for Congress and 
have an exceptional staff and track record. While many have quibbles 
with certain aspects of their estimates, myself included, they are the 
independent referee and should be respected as such. Moreover, JCT 
meets the standards I outlined above: they do distribute taxes and tax 
expenditures (like LIHTC and the NMTC) according to who they believe 
bears the economic incidence, not to the person who nominally remits 
the tax or claims the tax expenditure.

    JCT of course has incredible demands upon its time and a small 
staff. It is therefore not able to provide as many estimates of the 
revenue, distributional and other impacts of tax proposals as members 
of Congress and the public might like. When their estimates are not yet 
available, I think it is reasonable to rely upon estimates by 
independent, nonpartisan organizations like the Tax Policy Center that 
attempt to replicate the JCT's methodological approach, adopt 
reasonable assumptions where policy details are unspecified, and are 
transparent about what assumptions they adopt.

                                 ______
                                 
                Questions Submitted by Hon. Bill Nelson
    Question. In your opinion, did the 1986 Tax Reform Act solve the 
problems it was intended to fix? If so, please provide some examples of 
how. If not, why?

    Answer. One could write a book in response to this question (and 
some have!). To answer briefly, though the 1986 Tax Reform Act 
certainly was not perfect, I do think it made substantial headway in 
addressing some problems it was intended to fix.

    One example is the passive loss rules. Individual tax shelters were 
a huge problem prior to the 1986 Act. They typically involved 
relatively well-off taxpayers purchasing overpriced assets financed 
with seller-issued non-recourse debt in order to defer paying tax on 
their labor income and convert it into capital income eligible for 
preferential rates. The passive loss rules dramatically reduced the 
incentives for individuals to engage in such tax shelters and, as a 
result, they largely disappeared.

    Question. If you can, please provide some suggestions on how the 
President could achieve some of his stated objectives for tax reform, 
including (1) reducing complexity in the tax code and hours spent on 
tax-related paperwork, (2) making the tax code fairer, (3) raising 
wages, (4) sustaining 3 percent economic growth or higher, and (5) 
imposing a ``price to pay'' for companies that offshore jobs.

    Answer. As discussed in my written testimony, some proposals that I 
think would achieve several of these objectives at once include:

      Expanding the Earned Income Tax Credit (EITC) for all workers, 
but especially for those without dependents.

      Increasing refundability of the child tax credit (CTC), 
especially for families with young children.

      Replacing the current law child and dependent care tax benefits 
with a single refundable tax credit that is larger for families for 
whom such expenses represent the largest budgetary strain.

      Strengthening wealth transfer taxes.

    Question. How would you suggest Congress address the problem of 
wealthy taxpayers using secret, private letter rulings from the IRS to 
gain tax advantages not explicitly intended by Congress?

    Answer. As far as I know, private letter rulings have been publicly 
available since the D.C. Circuit ruled in 1974 that they had to be 
disclosed (in redacted form) under FOIA.\5\ But if you are referring to 
a different kind of agreement between the IRS and taxpayers, I am happy 
to respond.
---------------------------------------------------------------------------
    \5\ Tax Analysts and Advocates vs. IRS, 362 F. Supp. 1289 
(D.C.D.Ct. 1973), modified 505 F.2d 350 494 (D.C. Cir.1974).

    Question. How would you suggest Congress address the skyrocketing 
---------------------------------------------------------------------------
cost of rental housing? Please provide some ideas to consider.

    Answer. Generally, I think the best way to increase housing 
affordability is to boost the take-home pay of workers, rather than 
provide subsidies that are limited to housing and therefore place a 
thumb on the scale in favor of some kinds of consumption over others. 
The proposals I outlined in my written testimony--such as expanding the 
EITC and increasing refundability of the CTC--would indirectly make 
rental housing more affordable for those who are struggling the most.

    Some other ideas Congress should consider are fully funding housing 
choice vouchers (section 8) and expanding LIHTC.

                                 ______
                                 
         Prepared Statement of Alex M. Brill, Resident Fellow, 
                     American Enterprise Institute
    Chairman Hatch, Ranking Member Wyden, and other members of the 
committee, thank you for the opportunity to testify this morning. My 
name is Alex Brill, and I am a resident fellow at the American 
Enterprise Institute, a public policy think tank here in Washington, 
DC. I commend the committee for holding this important and timely 
hearing. The views and opinions I offer today are mine alone and do not 
represent those of my employer or necessarily those of my colleagues at 
AEI.

    The opportunity for fundamental and comprehensive tax reform is 
before this committee for the first time in many decades. As every 
member of this committee well knows, the tax code has frequently and 
sometimes significantly changed over the last 30 years, but not since 
1986 has it been truly reformed in a manner that sought to broaden the 
base--that is, eliminate special deductions, credits, and exclusions--
while lowering statutory tax rates. As Senators Hatch, Wyden, Roberts, 
and Grassley know firsthand, that legislative process was arduous and 
sometimes controversial, but the 1986 Tax Reform Act did result in a 
simpler income tax code with a broader tax base and significantly lower 
statutory tax rates.

    The last 30 years have seen tax complexity increase dramatically 
with the introduction of more and more tax expenditures. In many 
regards, the tax code today imposes undue and unnecessary burdens on 
taxpayers. Complexity and compliance costs are significant. High 
effective marginal tax rates impede investment,\1\ discourage 
savings,\2\ and encourage taxpayers to reduce their reported taxable 
income.\3\ Moreover, the myriad of tax expenditures in the tax code 
today yields wide disparities in tax burdens among taxpayers with 
similar amounts of income.
---------------------------------------------------------------------------
    \1\ See, for example, Kevin A. Hassett and R. Glenn Hubbard, ``Tax 
Policy and Business Investment,'' in Handbook of Public Economics, 
Volume 3, ed. Alan J. Auerbach and Martin Feldstein (Amsterdam: North 
Holland Publishing Co., 2002), 1,293-1,343.
    \2\ See, for example, Alan D. Viard, ``Capital Income Taxation: 
Reframing the Debate,'' AEI Economic Perspectives, July 2013, available 
at www.aei.org/wp-content/uploads/2013/07/-capital-income-taxation-
reframing-the-debate_172019152543.pdf.
    \3\ See, for example, Emmanuel Saez, Joel Slemrod, and Seth H. 
Giertz, ``The Elasticity of Taxable Income With Respect to Marginal Tax 
Rates: A Critical Review,'' Journal of Economic Literature 50, no. 1 
(2012): 3-50, available at http://darp.lse.ac.uk/papersdb/
Saez_etal_(JEL12).
pdf; and Sarah Burns and James Ziliak, ``Identifying the Elasticity of 
Taxable Income,'' The Economic Journal 127, no. 600 (March 2017): 297-
329.

    Reversing the trend of the last three decades and pursuing an 
individual income tax reform that relies on a broader and fairer tax 
base will facilitate a move toward lower statutory rates and a more 
efficient and simpler tax code. A more neutral tax code will facilitate 
a more productive allocation of resources and can contribute to a pro-
---------------------------------------------------------------------------
growth economic environment.

    In my testimony today, I would like to discuss 5 points:

    1.  The current individual income tax system is complex, 
burdensome, and riddled with deductions, exclusions, and credits. 
Broadening the tax base can be a meaningful tax simplification.

    2.  The current individual income tax system treats taxpayers with 
similar amounts of income very differently. Broadening the tax base is 
an effective means for correcting this disparity and reducing 
horizontal inequity in the tax code.

    3.  In addition to contributing to complexity and horizontal 
inequity, itemized deductions are generally regressive tax policies. 
The deduction for State and local taxes is an excellent example of this 
and is a policy that, ironically, incentivizes States to pursue more 
progressive (but inefficient) tax policies.

    4.  Broadening the tax base, particularly with regard to limiting 
itemized deductions, is an opportunity to move toward a more neutral 
tax code and a more level playing field economically.

    5.  The transitionary path from the tax code we have today to a 
fairer, simpler, and more pro-growth tax system is itself a complex 
challenge that will require lawmakers to strike a careful balance. 
Inadequate or insufficient transition relief may cause some taxpayers 
to face steep, unanticipated tax burdens judged unfair by policymakers. 
Conversely, overly extended transition relief (for example, repeal of 
an ineffective tax credit beginning 10 years hence) may severely limit 
the potential economic gains from tax reform.
                 1. complexity in the tax code abounds
    Members of this committee know well the complexity of the current 
tax code. The IRS Taxpayer Advocate estimates that nearly 2 billion 
hours are spent preparing Form 1040 every year. Various Form 1098s, 
1099s, and 5498s, which relate to reporting mortgage interest expense, 
dividends and interest income, and distribution of pensions, among 
other activities, total over 700 million additional hours annually. 
Collectively, this 2.7 billion hours is equivalent to over 1.3 million 
full-time workers.\4\ Taxpayers employ a variety of strategies to 
comply with tax-filing obligations. Based on data from IRS Compliance 
Data Warehouse, about 40 percent of individual taxpayers use software 
to help them prepare their returns. These services can offer valuable 
convenience and save time but may cost taxpayers $3 billion 
annually.\5\
---------------------------------------------------------------------------
    \4\ See Figure 2.1.2 from the National Taxpayer Advocate's 2016 
Annual Report to Congress, available at www.taxpayeradvocate.irs.gov/
reports/2016-annual-report-to-congress/full-report. Total estimated 
preparation time for all forms is 6 billion hours annually. Because 
this hearing focuses on individual income tax, compliance costs related 
to business tax (corporate, partnership, and S corportions), estate and 
gift tax, excise tax, and taxation of foreign persons' U.S. source 
income are excluded.
    \5\ According to the National Taxpayer Advocate's 2016 Annual 
Report to Congress, the average cost of tax prep software is about $50. 
With 40 percent of the approximately 150 million individual returns 
completed using software (or 60 million tax returns), the estimated 
cost is $3 billion.

    This complexity is not related to the statutory rate (or number of 
rates) at which the government taxes incomes but rather is primarily 
related to the elements of the tax code that alter taxpayer's tax 
liabilities, whether by permitting a deduction, an exclusion, or a 
credit. The Joint Committee on Taxation (JCT) identifies more than 250 
such tax expenditures in the Internal Revenue Code,\6\ though there is 
no definitive methodology for constructing this list and many of these 
provisions do not relate directly to individuals. Moreover, surtaxes 
such as the Alternative Minimum Tax are another clear source of 
complexity.
---------------------------------------------------------------------------
    \6\ Joint Committee on Taxation (JCT), ``Estimates of Federal Tax 
Expenditures for Fiscal Years 2016-2020,'' JCX-3-17, January 30, 2017.

    One indicator of the complexity of the tax code can be observed by 
analyzing the number of taxpayers who itemize their deductions as 
opposed to claiming the standard deduction. According to recently 
released statistics from the IRS Statistics of Income (SOI), 150.6 
million individual income tax returns were filed in tax year 2015, the 
most recent year for which these statistics are available. Of these, 
44.5 million returns claimed a total of $1.2 trillion in itemized 
deductions. Mortgage interest deductions were claimed by 32.7 million 
taxpayers and totaled $279 billion. Charitable deductions were claimed 
on 36.6 million returns and totaled $201 billion. State and local 
income tax deductions (including the general sales tax deduction) were 
---------------------------------------------------------------------------
claimed on 42.6 million returns and totaled $338 billion.

    More than one-fourth of all itemized deductions are claimed by 
fewer than 3 percent of taxpayers--those with adjusted gross incomes 
(AGIs) greater than $250,000. However, because these higher-income 
taxpayers face higher marginal tax rates, the tax savings they receive 
from these deductions is far greater than half of the total tax savings 
associated with these policies. Table 1 summarizes the distribution of 
itemized deductions as reported by the IRS for tax year 2015, while 
Figure 1 illustrates this distribution visually using data and modeling 
made available by the Open Source Policy Center (OSPC) Tax-
Calculator.\7\ In brief, one-fifth of taxpayers earning near the median 
income are burdened with the complexity of itemized deductions. Over 
three-fourths of taxpayers with AGIs between $100,000 and $200,000 are 
itemizers, and nearly all taxpayers with AGIs greater than $200,000 
itemize their deductions.
---------------------------------------------------------------------------
    \7\ The Tax-Calculator is part of the Open Source Policy Center's 
(OSPC) TaxBrain modeling suite. More information about TaxBrain and the 
OSPC generally can be found at www.ospc.org. The entire suite of 
models, including source code, is publicly available.


                     Table 1. Itemized Deductions by Adjusted Gross Income in Tax Year 2015
----------------------------------------------------------------------------------------------------------------
                                  Under      $15,000 to    $30,000 to    $50,000 to    $100,000 to   $200,000 or
                    Total        $15,000       $29,999       $49,999       $99,999      $199,999        more
----------------------------------------------------------------------------------------------------------------
Number of       150,565,918    35,584,745    30,103,270    26,564,740    32,892,457    18,634,133     6,786,573
 returns
----------------------------------------------------------------------------------------------------------------
Itemized         44,477,185     1,323,310     2,785,803     5,485,481    14,438,234    14,101,283     6,343,076
 deductions
----------------------------------------------------------------------------------------------------------------
Share                 29.5%          3.7%          9.3%         20.6%         43.9%         75.7%        93.5%
 itemizing
----------------------------------------------------------------------------------------------------------------
Source: IRS SOI Bulletin.


[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

    Source: Open Source Policy Center (OSPC).

    Figure 2 narrows in on those taxpayers with AGIs between $20,000 
and $200,000 and looks across this income spectrum in a more granular 
manner, making evident a clear and dramatic trend: as incomes rise, so 
does the tax code's complexity.

    Other factors in addition to itemized deductions also contribute to 
the complexity of the tax code for individuals. In tax year 2015, 49.4 
million taxpayers claimed one or more tax credits, including 22.6 
million who claimed the child tax credit, 9.7 million who claimed an 
education tax credit, 2.7 million who claimed a residential energy 
credit, and 28.4 million who claimed the earned income tax credit 
(EITC). 

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

    These credits and deductions reduce tax liabilities for targeted 
populations and can incentivize or reward particular behaviors or offer 
tax relief for taxpayers in certain circumstances. The merits and 
efficiency of various credits and deductions can be debated, but they 
generally add to the complexity of the tax code. Further complicating 
the tax code and leading to higher effective marginal tax rates is the 
phase out of various credits. For example, the JCT reports that 3.5 
million households are subject to the phase out of the child tax 
credit. As a result, these taxpayers face marginal tax rates 5 
percentage points higher.\8\
---------------------------------------------------------------------------
    \8\ JCT, ``The Taxation of Individuals and Families,'' JCX-41-17, 
September 12, 2017.
---------------------------------------------------------------------------
        2. the individual income tax breeds horizontal inequity
    In addition to adding to the complexity of the tax code, a second 
consequence of the myriad of tax expenditures available to individual 
taxpayers is an increase in horizontal inequity--that is, similarly 
situated taxpayers paying dissimilar amounts of Federal income tax. In 
the most general terms, similar taxpayers may be considered two 
taxpayers with similar amounts of income. An alternative approach would 
be to consider both income and household size, recognizing the 
established principle in the U.S. tax code that, all else equal, larger 
households should pay less tax.

    Consider, for example, two neighbors. Neighbor A owns her home, and 
Neighbor B rents. Neighbor A donates a significant amount of her income 
to charity. Neighbor B donates a significant amount of his time to a 
local charity. Neighbor A lives in Bristol, VA, and Neighbor B lives 
down the street in Bristol, TN. Even if these two taxpayers had 
identical incomes of $100,000, their Federal tax liabilities would 
differ considerably. Neighbor B would likely claim the standard 
deduction, but Neighbor A would likely deduct her mortgage interest 
costs, her charitable giving, and the income taxes she paid to the 
Commonwealth of Virginia. Moreover, if Neighbor A has a 17 year child, 
and Neighbor B has an 18 year old child, their income tax liabilities 
would be even more disparate.

    To better understand this variance in tax liability among taxpayers 
with similar incomes, Figure 3 illustrates the disparity in tax 
liabilities among taxpayers within the same AGI percentile. For 
example, at the 70th AGI percentile, the median taxpayer within that 
group faces an average tax rate of 8 percent, while a quarter of those 
taxpayers pay 4 percent of their AGI or less and another quarter pay 13 
percent or more. Figure 4 repeats this analysis but only for taxpayers 
with a constant household size, single filers with no children. The 
disparity within percentiles is much less but still present.

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]


    A final perspective on the variance in tax liabilities is 
illustrated in Table 2, which breaks down the range of tax bills for 
all taxpayers, single taxpayers with no children, and married taxpayers 
with two children, with AGIs at both the 50th percentile and the 75th 
percentile. For example, roughly 40 percent of all median taxpayers 
have zero or negative tax liabilities, while 15.1 percent owe $2,500 or 
more in Federal income tax.


                              Table 2. Variance in Tax Liability by Household Size
----------------------------------------------------------------------------------------------------------------
                                             Median AGI                           75 Percentile of AGI
----------------------------------------------------------------------------------------------------------------
                                 All Tax     Single,  No   Married,  2     All Tax     Single,  No   Married,  2
        Tax Liability             Units       Children      Children        Units       Children      Children
----------------------------------------------------------------------------------------------------------------
<$0                                 37.6%          3.1%        100.0%          1.8%          0.0%          6.4%
----------------------------------------------------------------------------------------------------------------
$0                                    2.5           1.5           0.0           0.6           0.7           0.7
----------------------------------------------------------------------------------------------------------------
$1-$1,500                            19.9          12.5           0.0           4.2           0.9          15.1
----------------------------------------------------------------------------------------------------------------
$1,501-$2,500                        24.9          51.7           0.0           6.3           0.8          20.3
----------------------------------------------------------------------------------------------------------------
$2,501-$5,000                        14.8          30.7           0.0          17.9           3.3          54.6
----------------------------------------------------------------------------------------------------------------
$5,001+                               0.3           0.5           0.0          69.2          94.3          2.9
----------------------------------------------------------------------------------------------------------------
Source: OSPC.


    The disparities in Federal tax liabilities for similarly situated 
taxpayers contributes, in my view, to a lack of confidence in the 
system by many taxpayers. After all, while the overall Federal income 
tax is progressive, nearly 20 percent of taxpayers who report $36,000 
in AGI pay a higher average tax rate than 60 percent of taxpayers who 
earn $50,000. In short, many taxpayers are correct in their suspicion 
that higher-income earners are paying a lower tax rate, but importantly 
this is true across the entire income spectrum.
       3. itemized deductions are distortionary and regressive: 
               the state and local tax deduction example
    Among the many provisions of the individual income tax code that 
narrow the tax base, itemized deductions are, as a group, the largest. 
As mentioned above, according to the IRS SOI, itemized deductions 
totaled $1.2 trillion in tax year 2015. Within this category, the 
largest itemized deduction was for State and local taxes (SALT). In 
2015, $338 billion in SALT deductions were claimed. (Mortgage interest 
deductions totaled $279 billion and charitable giving deductions $201 
billion.)

    The revenue loss (calculated as the deduction amount multiplied by 
the weighted average marginal tax rate for taxpayers claiming the 
deduction) from reducing the tax base by $338 billion in a single year 
is quite large. According to my estimation, full repeal of the SALT 
deduction would raise $1.4 trillion over a decade. Of this, 89 
percent--$1.26 trillion--would come from taxpayers with AGIs above 
$100,000. In other words, the policy itself is highly regressive. It is 
available only to the minority of taxpayers who itemize their taxes 
(generally higher-income taxpayers) and is more valuable to taxpayers 
in higher tax brackets (though for truly high-income earners and 
taxpayers on the AMT, the benefits are limited).

    What is the purpose or rationale for a Federal tax deduction for 
State and local taxes? As the Congressional Budget Office (CBO) 
explains:

        The deduction for State and local taxes is effectively a 
        Federal subsidy to State and local governments; that means the 
        Federal Government essentially pays a share of people's State 
        and local taxes. Therefore, the deduction indirectly finances 
        spending by those governments when Federal revenues could be 
        used to fund the activities of the Federal Government.\9\
---------------------------------------------------------------------------
    \9\ Congressional Budget Office (CBO), ``Limit the Deduction for 
State and Local Taxes,'' Options for Reducing the Deficit: 2017 to 
2026, December 8, 2016, available at www.cbo.gov/budget-options/2016/
52253.

    Moreover, this Federal subsidy reduces the ``tax price'' for 
deductible State and local taxes for those taxpayers who itemize. For 
example, a $1 State income tax increase paid by a taxpayer in the 33 
percent marginal tax bracket would reduce her Federal tax liability by 
$0.33, yielding a net additional cost to the taxpayer of $0.67. This 
reduced tax price can encourage States to rely on deductible taxes more 
and to impose more of those taxes on high-income taxpayers. In short, 
the SALT is, in isolation, a regressive tax policy at the Federal level 
and one that encourages a progressive income tax at the State and local 
level. As Kirk Stark observed in Virginia Tax Review, ``All else equal, 
State and local governments will have an incentive to design their tax 
systems to take maximum advantage of the SALT subsidy, which suggests a 
strong price effect in favor of a more progressive tax system. 
Empirical studies have shown that the Federal deduction for State and 
local taxes exerts a substantial influence on subnational 
progressivity.'' \10\ In fact, the most recent evidence of this 
empirical response, David Coyne finds that local governments are very 
sensitive to changes in the tax price with respect to their willingness 
to rely on deductible taxes.\11\ He estimates that a 1 percent increase 
in the tax price will lead to a 3.5 percent reduction in the use of 
deductible taxes.
---------------------------------------------------------------------------
    \10\ Kirk J. Stark, ``The Federal Role in State Tax Reform,'' 
Virginia Tax Review 30 (2010): 407.
    \11\ David Coyne, ``Unmasking Local Fiscal Responses to Federal Tax 
Deductibility,'' National Tax Journal 70, no. 2 (2017): 223-256.

---------------------------------------------------------------------------
    CBO continues:

        An argument in favor of capping the deduction is that the 
        Federal Government should not provide a tax deduction that 
        subsidizes the spending of State and local governments because 
        revenues from State and local taxes are largely paid in return 
        for services provided to the public. When used to pay for 
        public services, such taxes are analogous to spending on other 
        types of consumption that are nondeductible. . . . 
        Additionally, the unlimited deductibility of taxes could deter 
        States and localities from financing some services with 
        nondeductible fees, which could be more efficient.\12\
---------------------------------------------------------------------------
    \12\ CBO, ``Limit the Deduction for State and Local Taxes.''

    Overall, the combination of high marginal tax rates on income 
earned by taxpayers claiming the largest share of itemized deductions 
yields a set of regressive and costly tax expenditures. The list is led 
by a policy that unfairly distorts State tax policy.
        4. a broader tax base can promote greater tax neutrality
    If lawmakers pursue a tax reform agenda with a commitment to 
broaden the tax base, the benefits can be categorized in two types: 
First, there are the direct benefits discussed above: the potential for 
a less complex tax code with lower compliance costs, a fairer tax 
system with less inequality among similarly situated taxpayers, and a 
less distortionary system that is also less regressive. (Such a result 
is not, however, to be assumed for all base-broadening policies, of 
course. For example, eliminating an exclusion of income, while perhaps 
desirable, could increase complexity or compliance.)

    Second, there is an important indirect benefit: leveling the 
playing field and promoting economic efficiency by reducing tax-induced 
distortions in the allocation of resources. As my colleague Alan Viard 
and I wrote in an AEI Tax Policy Outlook in 2011:

        The economy is generally most efficient when the free market 
        determines the allocation of resources between goods, based on 
        production costs and consumer preferences. When different goods 
        are taxed at different rates, efficiency is impeded because the 
        allocation of resources is based partly on tax considerations, 
        rather than costs and preferences. For example, if apples, but 
        not oranges, are tax-deductible, the economy produces too many 
        apples and too few oranges. Switching to a [single] tax on both 
        goods corrects this misallocation, increasing the production of 
        oranges and reducing the production of apples and yielding a 
        set of goods consumers find more attractive. . . . Base 
        broadening is likely to be most useful when it addresses the 
        major distortions of the current tax system.\13\
---------------------------------------------------------------------------
    \13\ Alex M. Brill and Alan D. Viard, ``The Benefits and 
Limitations of Income Tax Reform,'' AEI Tax Policy Outlook, September 
2011, available at www.aei.org/wp-content/uploads/2011/10/TPO-Sept-
2011.pdf.

    However, some base broadening should certainly be avoided. The 
income tax, by its very nature, discourages savings and investment by 
taxing future consumption more heavily than current consumption. The 
current tax code includes a host of policies intended to mitigate or 
eliminate this distortion. While lower tax rates on dividends and 
capital gains, tax preferences for defined contribution plans, and 
other similar policies may appear on lists of tax expenditures, they in 
fact promote economic efficiency and should be preserved in even 
expanded.
        5. tax reform and transition policy: finding the balance
    The final point I would like to address relates to the transition 
policies necessary to consider in a fundamental tax reform effort that 
transforms the tax code from the one we have today to one consisting of 
a broader base (that is, with fewer expenditures) and lower statutory 
rates. In many respects, the transition rules--the tax policies that 
will feature prominently in the tax code in the intervening years--may 
be as important as the final tax policies. As lawmakers ponder the most 
appropriate strategies for crafting these rules, I would like to offer 
three observations.

    First, if pursuing fundamental and broad-based reform, providing 
little or no transition relief risks imposing large and unanticipated 
tax hikes on unsuspecting taxpayers. Beyond the political challenges 
this may pose, it could yield painful adverse short-term economic 
effects. Second, the corollary is true, too. Overly generous and slow 
transition policies that delay needed reforms many years into the 
future will also delay the potential economic gains associated with tax 
reform.

    And finally, when considering the budgetary impact associated with 
tax reform, the costs associated with transition policy--for example, 
that the ``payfors'' may phase in more slowly than a rate cut--are far 
less important than the budgetary impact of tax reform beyond the 
budget window. As I discussed in a recent article, lawmakers in pursuit 
of revenue-neutral tax reform should focus on the likely revenue impact 
of tax reform beyond the 10-year budget window rather than the impact 
within the budget window.\14\
---------------------------------------------------------------------------
    \14\ Alex Brill, ``Investing in Tax Reform Today Will Yield a 
Strong Economy Tomorrow,'' The Hill, April 11, 2017, available at 
www.aei.org/publication/investing-in-tax-reform-today-will-yield-a-
strong-economy-tomorrow.

    In conclusion, the opportunity for fundamental reform of the 
individual income tax system is an opportunity to simplify the tax 
code, improve the equity of the system, and reduce distortions. Tax 
reform that wisely broadens the tax base can achieve these goals. To 
pursue the additional core objective of a tax reform that promotes 
economic growth, tax reform should also be careful not to increase the 
tax penalty on savings and should instead pursue opportunities to 
---------------------------------------------------------------------------
reduce the current savings penalty.

                                 ______
                                 
          Questions Submitted for the Record to Alex M. Brill
               Questions Submitted by Hon. Orrin G. Hatch
                  capital gains versus ordinary income
    Question. Mr. Brill, Ms. Batchelder mentions how the gap between 
the capital gains tax rate and the higher ordinary income tax rate 
creates a large incentive for taxpayers to try to re-characterize 
ordinary income as capital gains. She proposes addressing this problem 
by ``raising the capital gains rates to reduce this incentive.''

    But, to be clear, one equally effective way to address this problem 
is to reduce the ordinary income tax rates, right?

    Answer. The differential in tax rates between wage income and 
capital income can encourage taxpayers to try to recharacterize their 
income to take advantage of the lower tax rate. The degree to which 
this behavior is incentivized is determined by the spread between tax 
rates. That spread can be reduced by either lowering the higher rate or 
raising the lower rate or a combination of the two. But it is important 
to recognize that raising the rate on capital income can discourage 
savings and investment, which are essential to encouraging investment 
and for promoting gains in productivity.
                    high implicit marginal tax rates
    Question. Mr. Brill, Ms. Batchelder wrote something I really 
appreciated: ``Low-income workers face some of the highest implicit 
marginal tax rates.''

    I think she's right, and it's a serious problem. But later in her 
testimony, she talked positively about a proposal from a member of this 
committee to increase the Earned Income Tax Credit and she notes that 
the proposal would phase the EITC out more rapidly.

    But wouldn't a more rapid phase-out of the EITC increase the 
highest implicit marginal tax rate of those low-income workers in the 
phase-out range?

    Answer. The EITC is an effective tax policy for encouraging work 
and reducing poverty, especially among taxpayers with children. 
Providing a tax incentive for low-income individuals to work, as the 
EITC does, without providing a subsidy to all taxpayers necessitates 
that the credit be phased out as incomes rise. There is, however, an 
unavoidable tradeoff in design if the policy were to be expanded. If 
enlarged, the credit must be phased out at a faster pace over the same 
range (thus creating a higher effective marginal tax rate) or it must 
be phased out over a broader range of income (thus extending the 
existing marginal tax rate bump to more middle-income taxpayers).
               salt deduction: regressive or progressive?
    Question. Mr. Brill, you write on how the State And Local Tax 
(SALT) deduction is highly regressive, but that it encourages 
progressive State/local taxes. So, please explain more. Perhaps those 
two effects net out? If one thinks the tax laws needs to be more 
progressive, perhaps it's a good thing that the Federal SALT deduction 
encourages progressive State and local taxes? What do you think? A good 
thing or a bad thing?

    Answer. The progressivity of State income tax systems is encouraged 
by the Federal deduction for State and local taxes. To some extent, the 
States are responding to the incentive to capture the Federal subsidy 
the deduction offers. By providing a subsidy generally only to high-
income taxpayers--those who itemize--the code rewards States who rely 
on these taxpayers for their revenues. The degree of progressivity is a 
policy design by each State, and Federal tax policy should not attempt 
to steer that design choice. States should not be encouraged (or 
discouraged) from pursuing a progressive State tax system by the 
Internal Revenue Code.
                           transition policy
    Question. Mr. Brill, I agreed with Ms. Harrison's point that: ``If 
one were designing a tax system for the first time, one would likely 
devise something that is different from what we have already.''

    She then went on to state that some provisions in the tax code have 
been around for over a century, and thus many asset prices have the 
expectation of those tax provisions continuing.

    So, Mr. Brill, please connect Ms. Harrison's good points with your 
thoughts on transition policy. Namely, it's certainly true we don't 
want, through tax law changes, to create tremendous upheaval, even if 
the new law will be more efficient in the long run. Your thoughts?

    Answer. I would encourage the committee not to keep any existing 
policy in the tax code simply because it has been there for a long 
time. One objective of tax reform should be to establish a neutral tax 
code that minimizes interference with the market, absent clear evidence 
of a market failure. While asset values can certainly be affected by 
tax policy changes, I believe the idea that the U.S. residential 
housing market is inflated by the mortgage interest deduction is likely 
exaggerated. While my research on the topic is incomplete at this time, 
I would simply note that given the average price of homes in the U.S., 
current interest rates, and the effects of the standard deduction and 
personal exemption, a large number of homebuyers do not claim the 
mortgage interest deduction.

                                 ______
                                 
                Questions Submitted by Hon. Bill Nelson
    Question. In your opinion, did the 1986 Tax Reform Act solve the 
problems it was intended to fix? If so, please provide some examples of 
how. If not, why?

    Answer. The Tax Reform Act of 1986 was a major legislative 
accomplishment. The tax base was broadened and statutory tax rates were 
reduced significantly. It was also a political accomplishment, as 
Democrats worked cooperatively with President Reagan to achieve these 
reforms. As Martin Feldstein has documented, TRA86 demonstrated that 
lower marginal tax rates yield increases in the amount of reported 
taxable income. As the 2006 Economic Report of the President notes, 
TRA86 also greatly narrowed the disparity in tax rates across asset 
classes, thereby reducing distortions in the types of investments made 
domestically.

    Question. What metric or considerations should Congress use to 
determine appropriate trade-offs in tax reform?

    Answer. I would encourage lawmakers to pursue a tax reform agenda 
with two main priorities: first, a simplification of the individual 
income tax system that reduces itemized deductions and moves more 
taxpayers to the standard deduction. This creates both a simpler system 
and a fairer tax code. Second, to the extent possible, I would 
encourage Congress to reduce the tax burden on savings and new 
investment, particularly in the corporate sector. A narrowing of the 
disparity in tax liabilities among similarly situated taxpayers and an 
increase in the domestic capital stock arising from a reduction in the 
tax on new investment will yield a tax code that is both fairer and 
more pro-growth.

    A challenge to this task will be balancing the long-run budget 
consequence of tax reform with these goals. While deficit financing the 
transition cost of tax reform may be reasonable, the long-run fiscal 
outlook must be carefully evaluated.

    Question. How would you suggest Congress address the skyrocketing 
cost of rental housing? Please provide some specific ideas to consider.

    Answer. The cost of rental housing is often measured relative to 
the cost of purchasing a home, a metric referred to as the price-to-
rent ratio. Nationally, that ratio is near its historical average, but 
trends vary across markets. To the extent that limited housing supply 
is pushing up rents, local policy reforms to permit more construction 
would be most appropriate. I would not support any tax policy geared to 
relieving the cost burden on renters.

                                 ______
                                 
    Submitted by Hon. Maria Cantwell, a U.S. Senator From Washington

                        From The New York Times

       Economists See Little Magic in Tax Cuts to Promote Growth
                By Patricia Cohen and Nelson D. Schwartz
                              May 23, 2017
If one assumption has undergirded Republican economic policy for 
decades--and is the foundation of the Trump administration's first 
budget proposal--it is that tax cuts will unleash fantastic growth.

The basic idea is that shrinking the government's share increases what 
people take home, encouraging workers to work more and investors to 
invest more. But while taxes can create incentives that can promote 
growth, liberal and conservative economists alike said there was no 
evidence that the White House budget announced on Tuesday would do so.

``The assumed effects on growth are just huge and unwarranted,'' said 
William G. Gale, a co-director of the nonpartisan Urban-Brookings Tax 
Policy Center and a former economic adviser to the first President 
George Bush.

The Trump administration promises to cut taxes, keep revenues steady 
and crank out average annual economic growth of 3 percent, but neither 
the budget nor the tax reforms previously outlined in sketchy form 
provide enough detail to figure out if that will happen.

While the United States cruised along with 3 percent growth--and 
higher--in the late 1990s and mid-2000s, growth has not reached 
anywhere near that level since well before the recession. The best 
showing in the past decade was in 2015, when the annual rate of 
expansion hit 2.6 percent.

In 2016, the economy expanded at an annual rate of 1.6 percent, the 
weakest performance in 5 years. Even as economies in Europe and Asia 
show signs of life after years of stagnation or outright recession, 
expectations for faster growth soon in the United States have ebbed. 
Both the Federal Reserve and the Congressional Budget Office have 
projected a pace of less than 2 percent in the long run.

Since mid-March, yields on the benchmark 10-year Treasury bond have 
fallen from 2.62 percent to 2.28 percent on Tuesday, a sign that 
traders are discounting the likelihood of a sudden pickup in growth.


        How Trump's Budget Would Affect Every Part of Government
  Government spending would be cut substantially. See how every budget
                         item would be changed.
 
                                                         10-year percent
    Budget Item      10-year budget    10-year change        change
 
Health                $5.11 trillion   -$2.02 trillion            -28.3%
------------------------------------------------------------------------
Health care           $4.78 trillion   -$1.91 trillion            -28.5%
 services
    Grants to          $4.7 trillion     -$627 billion            -11.8%
     States for
     Medicaid
    Refundable        $559.6 billion     -$5.3 billion             -0.9%
     premium
     assistance
     tax credit
     and cost
     sharing
     reduction
    Federal           $220.4 billion     -$2.6 billion             -1.2%
     employees'
     and retired
     employees'
     health
     benefits
    Children's          77.2 billion    +$13.9 billion            +21.9%
     Health
     Insurance
     Programs
     (CHIP)
    DOD Medicare-     $143.8 billion     -$3.8 billion             -2.6%
     eligible
     retiree
     health care
     fund
    Health             $66.2 billion     +$474 million             +0.7%
     Resources and
     Services
     Administratio
     n
    Reinsurance        $71.7 billion                 -                 -
     and risk
     adjustment
     program
     payments
    Centers for          $49 billion      -$18 billion            -26.9%
     Disease
     Control and
     Prevention
    Indian Health      $47.5 billion     -$5.8 billion            -10.9%
     Service
 


An analysis of Mr. Trump's tax plan by the bipartisan, nonprofit 
Committee for a Responsible Federal Budget estimated that the Federal 
debt would rise by $5.5 trillion over the first decade. Even if lower 
taxes encouraged people to save and invest more, the huge government 
deficits created by the budget would crowd out private investors and 
offset some of those direct effects, several economists said.

Alan D. Viard, a tax expert at the American Enterprise Institute, a 
conservative research organization in Washington, said he and other 
researchers had repeatedly found that ``deficit-financed tax cuts were 
usually harmful to growth.''

Cutting the tax on investment income, for example, delivers the most 
bang for the buck, Mr. Viard said, but unless the lost revenue is made 
up through increases in other taxes or spending cuts, the deficit will 
balloon and economic growth will suffer.

Previous Presidents have not had a lot of success using tax cuts to 
spur growth. ``The historical record is pretty clear that large tax 
cuts don't pay for themselves through economic growth,'' said Michael 
J. Graetz, a professor of tax law at Columbia University.

The 1981 tax cut that President Ronald Reagan pushed through did 
provide a short jolt to the economy, Mr. Graetz said, but he pointed 
out that the administration was compelled to raise taxes in 1982 and 
1984 to keep the deficit under control.

Tax cuts championed by President George W. Bush in 2001 and 2003 
performed even worse. While the cuts temporarily stimulated spending by 
putting more money in people's pockets, they did not have much impact 
in enhancing the economy's ability to produce goods and services.

Both President Trump and the House Republicans' proposals reserve the 
biggest tax cuts for the wealthiest. Slashing rates at the top is 
probably the least effective way of spurring spending, however, because 
high-income households have the luxury of socking away a financial 
windfall, said Nariman Behravesh, chief economist at the research firm 
IHS Markit. The Trump plan, he said, ``could well end up hurting a lot 
of poor people without boosting growth.''

``If you tilt the tax cuts toward lower-income households, they will 
spend more of it,'' Mr. Behravesh said. ``There is virtually no debate 
among economists about that.''

And the deep cuts in the budget to programs that benefit primarily 
those at the bottom of the economic ladder will, if anything, reduce 
their spending.

The left-leaning Economic Policy Institute estimated that the budget 
cuts would decrease growth by more than 1 percent by 2020.

Many economists on the left and the right agree that the current code 
as it applies to businesses is misguided: It puts the United States at 
a competitive disadvantage and encourages corporations to keep income 
abroad. But fixing that problem isn't merely a matter of slashing 
rates.

``With the economy back to near full employment, conventional tax cuts 
or stimulus spending won't have that much of an effect,'' said Douglas 
Holtz-Eakin, a conservative economist who served in the George W. Bush 
administration and advised John McCain's 2008 presidential campaign. 
``What is needed are policies that genuinely augment the supply side of 
the economy.''

What might that look like? Instead of simply cutting rates, Mr. Holtz-
Eakin would opt for incentives for business to invest in new equipment 
or software, infrastructure investments that speed transportation and 
ease other frictional costs, and retraining that improves workers' 
skills and increases the proportion of prime-age Americans who are 
employed.

Mr. Viard of the American Enterprise Institute added tax relief for 
child-care expenses to the list of reforms that could bolster growth.

There are lots of reasons to tinker with the tax code, many experts 
say, but the notion that there is a simple cause-and-effect 
relationship between cuts and growth is faulty. ``Tax policy is clearly 
not some overwhelmingly powerful tool that affects growth,'' Mr. Viard 
said. There are simply too many other things--like technology, worker 
productivity and aging--that can either muffle or overwhelm their 
impact.

In the months after Mr. Trump's unexpected victory in November, many 
business leaders and investors thought that the Washington logjam might 
finally break and that corporate tax reform, more infrastructure 
spending and other growth-friendly policies would be passed by Congress 
and signed into law.

But with Washington and the White House now distracted by the 
investigation into possible ties between former Trump aides and Russia, 
momentum for major tax cuts or a big infrastructure bill has stalled.

On Friday, the government will announce revised figures for growth in 
the first quarter of 2017, but not much improvement from the initial 
0.7 percent estimate last month is expected.

                                 ______
                                 
    Prepared Statement of Iona C. Harrison, Senior Vice President, 
                             Pioneer Realty
                              introduction
    Chairman Hatch, Ranking Member Wyden, and members of the Finance 
Committee, my name is Iona Harrison. I am a real estate professional 
working in Upper Marlboro, MD, and have been in the business my entire 
adult life. Currently, I serve as the chair of the Federal Taxation 
Committee of the National Association of Realtors (NAR), and I have 
served the real estate industry at the local, State, and national 
levels for many years in a variety of capacities.

    I am here today to testify on behalf of the more than 1.2 million 
members of the National Association of Realtors. NAR's members are real 
estate professionals engaged in activities including real estate sales 
and brokerage, property management, residential and commercial leasing, 
and appraisal. The business approach of Realtors is a highly personal, 
hands-on, face-to-face model, focused on helping fulfill a family's 
fundamental need for shelter. NAR has long prided itself as a voice for 
not only its members, but for America's 76 million homeowners, as well 
as the millions more Americans who aspire to own their home one day.

    Thank you for the opportunity to present NAR's views on how tax 
reform could affect individual taxpayers and residential real estate. 
Purchasing a home is one of the most significant events that most 
Americans undertake in their lives, and this activity interacts with 
our tax system in a fundamental way. Since its inception, the Internal 
Revenue Code has offered important incentives for purchasing and owning 
a home. As it pursues tax reform, Congress must have a full 
understanding of the impact that changing these provisions could have 
on American taxpayers, as well as on residential real estate markets 
and the economy as a whole.
NAR Principles for Tax Reform
    NAR's recommendations are centered on three guiding tax policy 
principles:

      Our income tax system, despite its many flaws, has supported a 
home ownership system that is unequaled in the world. Tax reform must 
build on the positive aspects of our current system so that it 
continues to encourage and support home ownership.

      While some aspects of our current tax system are mind-numbingly 
complex, the housing and real estate tax rules create no undue or 
significant complexity burdens for the great majority of individuals. A 
quest for simplicity must not be allowed to override common sense.

      Income-producing real estate is vital for strong economic growth 
and job creation, and great care must be taken in tax reform to ensure 
that current provisions that encourage those results not be weakened or 
repealed. Further, we agree that the tax system should be improved to 
better incentivize the construction of low-income housing (such as 
through an enhanced Low-Income Housing Tax Credit), encourage more 
investment in income-producing real estate by the middle class, and to 
help families save for retirement security.

    If one were designing a tax system for the first time, one would 
likely devise something that is different from what we have today. But 
we're not starting from scratch, particularly in the context of 
housing. Some provisions in the tax code, such as the deductions for 
mortgage interest and State and local taxes paid, have been part of the 
Federal tax code since our current income tax was instituted more than 
a century ago. Thus, the values of such tax benefits are both directly 
and indirectly embedded in the price of a home. While economists 
disagree about the best estimates of the value of those embedded tax 
benefits, they all generally agree that the value of a particular home 
includes tax benefits.

    Real estate is the most widely held category of assets that 
American families own, and for many Americans, the largest portion of 
their family's net worth, despite the price declines of the Great 
Recession. Therefore, while NAR agrees that reform and revision to 
different portions of the individual tax code are warranted, and that 
the law should be simplified, we remain committed to preserving the 
current law's incentives for home ownership and real estate investment.

    NAR believes that individual tax rates should be as low as possible 
while still providing for a balanced fiscal policy. NAR further 
believes that there should be a meaningful differential between the 
rates paid on ordinary income and capital gains on investments. 
However, NAR does not endorse a particular rate, nor does it believe 
that long established provisions in the code should be changed or 
eliminated solely to lower marginal tax rates. When Congress last 
undertook major tax reform in 1986, it eliminated or significantly 
changed a large swath of tax provisions, including major real estate 
provisions, in order to lower rates, only to increase those rates just 
5 years later in 1991. Most of the eliminated tax provisions never 
returned and in the case of real estate, a major recession followed. 
Congress must be mindful that eliminating widely used and simple tax 
provisions can have harsh and dangerous unintended consequences, 
particularly if the sole purpose of eliminating non-abusive provisions 
is to obtain a particular marginal tax rate. NAR also notes that it is 
estimated that American homeowners already pay well over 80 percent of 
all Federal income taxes.\1\ Congress should avoid further raising 
taxes on homeowners.
---------------------------------------------------------------------------
    \1\ National Association of Realtors estimates.

    Many concepts of tax reform are based on the idea of lowering tax 
rates and broadening the tax base. This paradigm often leads to the 
conclusion that tax reform needs to ``close abusive or unwarranted 
loopholes.'' However, very few ``loopholes'' have been identified. NAR 
firmly believes that the tax provisions that support home ownership are 
not loopholes. As 64 percent of American households are owner-
occupied,\2\ we believe that home ownership is not a ``special 
interest,'' but is rather a ``common interest.''
---------------------------------------------------------------------------
    \2\ U.S. Census Bureau, January 2017.

    NAR believes that tax reform must first do no harm to real estate.
Home Ownership and Tax Simplification
    NAR supports the goals of simplification and structural 
improvements for the tax system. Nonetheless, we are unwavering in our 
support for the mortgage interest and property tax deductions and 
believe that other favorable housing provisions should be retained. 
These rules are among the most easily understood and widely supported 
in the entire tax system, so compliance is easily achieved.

    The mortgage interest and property tax deductions sometimes come 
under fire because, in any particular year, only about one-third of 
taxpayers itemize their deductions. This criticism overlooks two 
essential points. First, even though the percentage of taxpayers who 
itemize has remained relatively constant over the past 25 years, the 
individuals who comprise the universe of itemizers changes from year to 
year. Younger taxpayers purchase their first home, older mortgages get 
paid off, a family's charitable contributions fluctuate, State and 
local tax burdens vary from State to State, and in some years, families 
face deductions for large medical expenses or casualty losses. In 
short, circumstances change.

    Second, the standard deduction serves as a very generous proxy for 
itemizing. It provides, in relative terms, a greater tax benefit for 
the taxpayers who use it than itemizing would give them. For example, 
today's standard deduction on a joint return is $12,700. Suppose that 
if a family's total of mortgage interest expense, State and local 
taxes, charitable contributions and medical expenses were $8,700, they 
would receive the equivalent of a ``free'' extra exemption or deduction 
of $4,000 ($12,700-$8,700). The standard deduction thus generally has 
the effect of sheltering some income from taxation. This is because 
taxpayers itemize only when allowable deductions exceed the standard 
deduction (please see The Enigma of the Standard Deduction, below).

    NAR supports the current standard deduction. For most taxpayers, it 
is a substantial and significant simplification device that also, by 
sheltering some income from tax, adds progressivity to the system. 
Those who itemize receive no such benefit. As with standard deduction 
taxpayers, itemizers are found in all tax brackets. If they are in 
higher tax brackets, they do receive more tax benefit per dollar spent 
than itemizers in lower brackets. What critics often overlook, however, 
is that higher bracket taxpayers also pay more tax on each dollar of 
income than those in lower tax brackets.

    Some recent tax reform plans feature a much higher standard 
deduction than is offered under the current system. Proponents of this 
change justify it by touting the additional simplification that could 
result from far fewer taxpayers itemizing. However, this simplification 
would come at a high price. Doubling or tripling the standard 
deduction, as some reformers suggest, destroys the incentive value of 
itemized deductions for most, as the great majority of taxpayers would 
receive the same tax benefit whether or not they engaged in the 
behavior the deduction is designed to encourage, whether it is to 
purchase a home or to donate to a charitable cause. Past increases in 
the standard deduction were justified on the grounds that the 
underlying itemized deductions had grown in value compared with an 
unindexed standard deduction. But under the current law, the standard 
deduction is adjusted each year for inflation, leaving little or no 
policy reason to increase it.

    Moreover, one prominent recent tax reform plan purports to almost 
double the standard deduction, but in reality, a large portion of the 
increase is accomplished by shifting the current-law personal and 
dependency exemptions to the increased standard deduction. As a result, 
this change could greatly mitigate promised tax reductions for many 
present itemizers, and also lessen or eliminate the incentive effect of 
those itemized deductions. This is especially true for larger families.

    For example, a family with four children with itemized deductions 
totaling $23,700 would have a total amount of combined deduction and 
exemptions under the current law of $48,000. This is from the itemized 
deductions plus six personal and dependency exemptions worth $4,050 
each. However, under the proposed tax reform plan that the House Ways 
and Means Committee is reportedly considering, the total deduction and 
exemptions would be halved to just the $24,000 ``higher'' standard 
deduction. It is true that the Ways and Means plan includes a higher 
child tax credit, but this would not even come close to making up for 
the loss of the exemptions. Moreover, if one or more of the children 
were age 17 or older, there would be no offsetting increase in the 
child credit. Thus, larger families could pay a very high price indeed 
for the marginal amount of simplification that may be gained from the 
higher standard deduction under tax reform.

    For these reasons, NAR opposes tax reform plans that significantly 
increase the standard deduction.
                  home ownership and american culture
    Policymakers should not dismiss or underestimate Americans' passion 
for home ownership, notwithstanding the most recent economic crisis. 
Calling home ownership the ``American Dream'' is not a mere slogan, but 
rather a bedrock value. Owning a piece of property has been central to 
American values since Plymouth and Jamestown. Homes are the foundation 
of our culture, the place where families eat, learn and play together, 
and the basis for community life. The cottage with a picket fence is an 
iconic and irreplaceable part of our heritage.

    The Nation's commitment to home ownership as a foundation of our 
society is not misplaced. Now, more than ever, home ownership does and 
should remain in the forefront of our cultural value system.

    The fundamental assumptions about the social benefits of housing 
and home ownership remain essentially unchanged. NAR polling and focus 
group research confirm that the public continues to share those 
assumptions, including those who currently do not own their own home. 
An overwhelming majority (94 percent) of renters aged 34 and younger 
aspire to own a home. And among renters of all ages, 83 percent have a 
desire to own. Seventy-seven percent of them believe that home 
ownership is part of the American Dream.\3\ Remarkably, even after the 
problems stemming from the 2003-2007 housing run-up, this faith in home 
ownership persists.
---------------------------------------------------------------------------
    \3\ ``2015 Homeownership Opportunities and Market Experience (HOME) 
Survey,'' conducted by the National Association of Realtors.

    Research has consistently shown the importance of the housing 
sector to the economy and the long-term social and financial benefits 
to individual homeowners and communities. The economic benefits of the 
---------------------------------------------------------------------------
housing market and home ownership are immense and well documented.

    The housing sector directly accounted for approximately 16 percent 
of total economic activity in 2016. Net of mortgage liabilities, real 
estate household equity totaled $13.7 trillion in the first quarter of 
2017.\4\
---------------------------------------------------------------------------
    \4\ ``Housing's Contribution to Gross Domestic Product (GDP),'' 
National Association of Home Builders, https://www.nahb.org/.

    In addition to tangible financial benefits, home ownership brings 
substantial social benefits for families, neighborhoods, and the Nation 
as a whole. These benefits include increased education achievement and 
civic participation, better physical and mental health, and lower crime 
rates. These economic and societal benefits do not change and will not 
---------------------------------------------------------------------------
change, despite the ups and downs and challenges of the housing market.

    Our tax system does not ``cause'' home ownership. People buy homes 
to satisfy many social, family, and personal goals. Rather, the tax 
system facilitates ownership. The tax system supports home ownership by 
making it more affordable. While it is true that only about one-third 
of taxpayers itemize deductions in any particular year, it is also true 
that, over the home ownership cycle, a much higher percentage of 
taxpayers receive the direct benefit of the mortgage interest 
deduction. Over time, mortgages get paid off, other new homeowners 
enter the market and family tax circumstances change. Individuals who 
utilize the mortgage interest deduction (MID) in the years right after 
a home purchase are, over time, likely to switch to the standard 
deduction.

    When academics talk about the MID and refer to it as an 
expenditure, they are speaking in the language of macroeconomics. In 
reality, the billions of tax dollars they see as an expenditure are the 
individual savings of millions of families. Every time homeowners make 
a mortgage payment, they are generally creating non-cash wealth for 
their families. Many seasoned Realtors describe their satisfaction in 
helping a family secure its first house and then a larger home(s) for 
raising families. The most satisfying of a long-term series of 
transactions is helping a couple buy its last house without a mortgage. 
Those couples are able to make this ``last'' purchase because ownership 
over a long term of years has resulted in savings sufficient to meet 
their needs.

    The Federal policy choice to support home ownership has been in the 
Internal Revenue Code since its inception. We see no valid reason to 
reverse or undermine that basic decision. Indeed, we believe that the 
only viable tax system for America is one that would continue to 
nurture home ownership.
                 residential real estate tax provisions
    There are a number of provisions in the Internal Revenue Code that 
affect residential real estate in one form or another. These range from 
relatively minor temporary tax incentives to major provisions utilized 
by millions of taxpayers. While NAR generally supports tax provisions 
that encourage sustainable home ownership and that incentivize 
investment and improvement of real estate, we will focus here on the 
most prominent and widely used provisions for individual homeowners.
The Real Property Tax Deduction
    The income tax system of the United States has provided a deduction 
for State and local taxes, including property taxes, since its 
inception in 1913. To do otherwise would violate two fundamental and 
widely accepted principles of good tax policy--the avoidance of double 
taxation and the need to recognize the taxpayer's ability to pay.

    Taxes paid at the State and local levels to benefit the general 
public are in nature and purpose similar to the Federal income tax in 
that they both fund essential government services. Therefore, allowing 
a deduction for these State and local taxes for Federal income tax 
purposes is essential to avoiding double taxation on the same income 
(or a tax on a tax). Our Federal tax law follows this same principle in 
connection with the payment of taxes to other nations. In the case of 
foreign taxes, however, the law goes even further and provides 
taxpayers with a choice of claiming a deduction for foreign taxes paid, 
or taking a credit, which is a dollar-for-dollar reduction in tax owed.

    Some recent tax reform proposals would repeal the deduction for 
State and local taxes paid, ostensibly because the Federal deduction 
has been viewed by some as subsidizing State and local government 
activities, and even perhaps encouraging them to increase spending. 
Interestingly, very few, if any, critics suggest that the even more 
generous credit for taxes paid to a foreign government subsidizes 
spending by those nations, or encourages profligacy by them.

    While State and local taxes vary greatly, two aspects of them that 
do not change are that they are ubiquitous throughout the Nation, in 
one form or another, and they are largely involuntary. Some would argue 
that we can exercise some degree of choice over how much we pay in 
State and local taxes by deciding where we live and what we buy. Others 
would point out that the degree to which this is possible is greatly 
limited by family circumstances and ties. However, avoiding these 
levies altogether is not a practical option. Obviously, paying taxes to 
State and local governments leaves taxpayers without the income used to 
pay the taxes. The extraction of State and local taxes is tantamount to 
the money never being earned by the taxpayer in the first place. Our 
tax system has always recognized this fact by providing a deduction for 
the payment of these taxes.

    Eliminating the deduction for State and local taxes would fly in 
the face of these fundamental tax policy principles that have been 
ingrained in our income tax law from its beginnings.

    For homeowners, real property taxes represent an unending 
obligation, at least as long as they own their homes. The other major 
deduction for most homeowners, the mortgage interest deduction, does 
not continue after the mortgage is paid off, and it usually diminishes 
as the mortgage is being paid. Property taxes, on the other hand, often 
increase over the years, as assessments on property increase and as 
local governments increase their levy rates. For these reasons, the 
deduction for real estate property taxes is often the one most-claimed 
by homeowners. In fact, significantly more taxpayers claim the real 
property tax deduction than claim the deduction for mortgage interest 
(in 2015, 44.1 million wrote off real property taxes while 32.7 million 
deducted mortgage interest).\5\
---------------------------------------------------------------------------
    \5\ ``SOI Tax Stats--Individual Income Tax Returns,'' Publication 
1304 (Complete Report), updated 8/31/2016, https://www.irs.gov/.

    As with the mortgage interest deduction, critics sometimes claim 
that the deduction for property taxes is misguided because it gives the 
lion's share of its benefit to the wealthy and little to the rest of 
---------------------------------------------------------------------------
us. However, this is just not the case.

    Much of this criticism is centered on the fact that taxpayers must 
itemize in order to take the deduction. As discussed below (please see 
The Enigma of the Standard Deduction), taxpayers who claim the standard 
deduction also benefit from the property tax deduction.

    Further, because real property taxes are assessed based on property 
values, one would expect the deduction to be much more utilized at 
higher incomes. Moreover, most local governments grant real property 
tax relief to lower-income taxpayers.

    Surprisingly, however, 70 percent of the value of real property tax 
deductions in 2014 went to taxpayers with incomes of less than 
$200,000, and 53 percent of those claiming the itemized deduction for 
real estate taxes that year earned less than $100,000.\6\
---------------------------------------------------------------------------
    \6\ ``SOI Tax Stats--Individual Statistical Tables by Size of 
Adjusted Gross Income,'' Table 2.1, Tax Year 2014, https://
www.irs.gov/.

    In addition, the tax law already includes a provision designed to 
limit the tax benefit of the real property tax deduction to the 
``wealthy.'' Specifically, the deduction is disallowed for purposes of 
---------------------------------------------------------------------------
the alternative minimum tax.


             Percentage of Tax Units That Use the SALT Deduction and the Average Deduction by State
----------------------------------------------------------------------------------------------------------------
          Percent With SALT       Average SALT                           Percent With SALT       Average SALT
 State        Deductions           Deduction              State              Deductions           Deduction
----------------------------------------------------------------------------------------------------------------
MD                      45%               $5,604                   NE                  28%               $2,992
CT                      41%               $7,774                   ME                  28%               $2,997
NJ                      41%               $7,045                   VT                  27%               $3,246
DC                      39%               $6,056                    SC                 27%               $2,224
VA                      37%               $3,998                   MI                  26%               $2,434
MA                      37%               $5,421                   OH                  26%               $2,650
OR                      36%               $4,211                   MO                  26%               $2,436
UT                      35%               $2,753                   KY                  26%               $2,438
MN                      35%               $4,273                   AL                  26%               $1,457
NY                      34%               $7,182                   KS                  26%               $2,338
CA                      34%               $5,807                   NV                  24%               $1,422
RI                      33%               $3,985                   OK                  24%               $1,878
GA                      33%               $2,830                   IN                  23%               $1,916
CO                      33%               $2,796                   MS                  23%               $1,418
IL                      32%               $4,164                   LA                  23%               $1,519
DE                      32%               $2,787                   NM                  23%               $1,557
WI                      32%               $3,551                   AR                  23%               $1,993
NH                      31%               $3,003                   TX                  22%               $1,694
WA                      30%               $2,125                   FL                  22%               $1,548
IA                      29%               $2,812                   WY                  22%               $1,244
HI                      29%               $2,624                   AK                  21%               $1,023
NC                      29%               $2,629                   TN                  20%               $1,043
PA                      29%               $3,083                   ND                  18%               $1,211
AZ                      28%               $1,977                   SD                  17%                 $982
MT                      28%               $2,483                   WV                  17%               $1,535
ID                      28%               $2,312
----------------------------------------------------------------------------------------------------------------
Source: The Impact of Eliminating the State and Local Tax Deduction, (based on 2014 IRS data), Government
  Finance Officers Association.

The Mortgage Interest Deduction
    The deduction for mortgage interest paid has been part of the 
Federal income tax code since its inception in 1913. Despite more than 
a century of additions, modifications, deletions, and overhauls of the 
tax code, Congress has left the mortgage interest deduction in place. 
Current law allows a homeowner to deduct the interest on up to $1 
million in total acquisition debt for a principal residence and a 
second, non-rental, home. Homeowners are also allowed to deduct the 
interest on up to $100,000 in home equity debt.

    Prior to 1986 there was no limit on the amount of home mortgage 
interest that could be deducted. The Tax Reform Act of 1986 imposed the 
first limitation on the MID, allowing it for allocable debt used to 
purchase, construct or improve a designated primary residence and one 
additional residence (second home).

    The Omnibus Budget Reconciliation Act of 1987 further limited the 
deduction to interest allocable to up to $1 million in acquisition 
debt. This limit is not adjusted for inflation. Factoring in the impact 
of inflation, the value of the cap has eroded by half since 1987; in 
2014 dollars, the original cap would be equal to over $2 million today 
had it been indexed.
Who Benefits From the Mortgage Interest Deduction?
    The mortgage interest deduction (MID) is often criticized on two 
fronts--that it benefits only those relatively few taxpayers who are 
eligible to itemize their deductions, and that it favors wealthier 
taxpayers at the expense of those with more modest incomes. Since 
taxpayers who itemize are often those with higher incomes, these 
criticisms are related.

    In 2015, the most recent tax year for which IRS data are available, 
32.7 million tax filers claimed a deduction for mortgage interest.\7\ 
While tax filers claiming the MID account for less than a quarter of 
the total number of tax returns filed, returns claiming the MID 
represent closer to half of owner-occupied households and roughly two-
thirds of homeowners whose homes are mortgaged.
---------------------------------------------------------------------------
    \7\ Individual Income Tax Returns, Preliminary Data, Tax Year 2015, 
Internal Revenue Service, Statistics of Income Bulletin, Spring 2017, 
https://www.irs.gov/.

    Furthermore, the percentage of homeowners claiming the benefits of 
the MID at some stage of the home ownership cycle is much higher. Over 
the course of an owner's tenure in a home, an individual may itemize in 
the early years of home ownership, when the interest expense is high 
relative to the principal paid, but then not itemize in later years. 
Mortgages get paid off, other non-MID deductions rise and fall, 
individuals down-size, divorces occur, a spouse dies or needs to 
simplify living arrangements. These and other life events may convert 
itemizers into standard deduction taxpayers. Thus, in any given year, 
we will not see the full contingent of homeowners who use the MID at 
---------------------------------------------------------------------------
some stage over the time they own their homes.

    As to the charge that the deduction predominately favors the 
wealthy, statistics show that this is simply not the case. Rather, the 
MID is valuable and utilized by households across the income spectrum. 
Fifty-three percent of those claiming the MID in 2015 earned less than 
$100,000 and 85 percent had Adjusted Gross Incomes of less than 
$200,000. Further, 76 percent of the value of the MID in that year went 
to those earning under $250,000 per year.\8\
---------------------------------------------------------------------------
    \8\ Ibid.


                              Facts on the Mortgage Interest Deduction in the U.S.
 
                            Share of          Number of      Average amount                         Total tax
                         homeowners with      taxpayers      subtracted from  Average taxpayer  savings from the
                            mortgage       claimed the MID   taxable income   savings in taxes         MID
 
United States                      63.8%        32,111,500            $8,700            $2,170   $69,768,843,000
 



                                   Mortgage Interest Deduction for Each State
 
                            Share of          Number of      Average amount                         Total tax
         State           homeowner with       taxpayers      subtracted from  Average taxpayer  savings from the
                            mortgage       claimed the MID   taxable income   savings in taxes         MID
 
Alabama                            57.4%           390,500            $7,300            $1,820      $712,165,000
Alaska                             66.1%            66,700            $9,600            $2,400      $160,041,750
Arizona                            64.4%           625,300            $8,950            $2,230    $1,395,437,250
Arkansas                           55.6%           199,000            $6,550            $1,640      $326,849,750
California                         71.9%         4,207,200           $12,400            $3,100   $13,040,866,250
Colorado                           72.8%           683,200            $9,550            $2,390    $1,634,558,750
Connecticut                        69.9%           536,200            $8,750            $2,190    $1,174,603,000
Delaware                           69.4%           115,700            $8,900            $2,220      $257,068,250
District of Columbia               76.0%            77,900           $12,350            $3,090      $240,670,750
Florida                            58.1%         1,465,400            $9,100            $2,280    $3,335,480,000
Georgia                            66.9%         1,066,400            $7,700            $1,930    $2,056,481,750
Hawaii                             66.3%           140,300           $12,800            $3,200      $448,732,750
Idaho                              65.8%           154,100            $7,600            $1,910      $293,572,250
Illinois                           65.0%         1,488,600            $7,700            $1,930    $2,868,501,000
Indiana                            66.7%           557,900            $6,400            $1,610      $895,719,000
Iowa                               60.7%           302,400            $5,900            $1,470      $445,098,500
Kansas                             60.3%           250,800            $6,600            $1,660      $415,260,500
Kentucky                           59.4%           381,100            $6,250            $1,560      $595,903,500
Louisiana                          53.2%           315,300            $7,500            $1,880      $592,514,250
Maine                              62.3%           137,000            $6,950            $1,740      $237,742,000
Maryland                           73.5%           951,300           $10,000            $2,490    $2,372,916,500
Massachusetts                      69.5%           934,900            $9,200            $2,300    $2,153,170,500
Michigan                           61.6%           958,600            $6,700            $1,670    $1,600,460,500
Minnesota                          66.8%           735,600            $7,850            $1,960    $1,444,535,000
Mississippi                        51.2%           189,200            $6,500            $1,620      $306,364,250
Missouri                           62.7%           547,700            $6,800            $1,700      $933,184,000
Montana                            55.1%           100,100            $7,600            $1,900      $189,737,000
Nebraska                           61.1%           179,000            $6,050            $1,520      $271,533,250
Nevada                             68.4%           240,900            $9,500            $2,380      $572,154,500
New Hampshire                      67.0%           173,800            $8,300            $2,070      $360,497,000
New Jersey                         68.4%         1,252,700            $9,150            $2,290    $2,864,940,250
New Mexico                         56.3%           157,500            $8,150            $2,040      $321,520,500
New York                           62.4%         1,961,500            $8,800            $2,200    $4,322,713,500
North Carolina                     64.4%           991,000            $7,650            $1,910    $1,897,594,750
North Dakota                       51.9%            43,800            $7,650            $1,910       $83,533,250
Ohio                               64.0%         1,137,400            $6,150            $1,540    $1,749,842,250
Oklahoma                           56.0%           275,200            $6,650            $1,670      $458,660,250
Oregon                             66.1%           497,400            $8,450            $2,120    $1,052,620,500
Pennsylvania                       60.6%         1,354,200            $7,300            $1,820    $2,465,775,250
Rhode Island                       69.9%           135,900            $7,700            $1,930      $261,863,750
South Carolina                     58.6%           444,600            $7,500            $1,870      $830,953,000
South Dakota                       54.7%            49,400            $7,350            $1,840       $90,823,000
Tennessee                          59.9%           443,600            $8,050            $2,010      $890,610,000
Texas                              58.3%         1,975,500            $7,800            $1,950    $3,851,842,000
Utah                               71.0%           342,900            $8,300            $2,070      $711,404,250
Vermont                            62.9%            68,100            $7,100            $1,770      $120,821,250
Virginia                           69.9%         1,127,300           $10,250            $2,570    $2,894,670,250
Washington                         69.0%           826,200           $10,350            $2,580    $2,134,631,500
West Virginia                      46.3%           100,600            $6,800            $1,710      $171,573,750
Wisconsin                          65.1%           678,600            $6,300            $1,580    $1,069,723,750
Wyoming                            58.1%            46,300            $9,000            $2,250      $104,392,500
 
Sources: 2014 Internal Revenue Service, 2014 American Community Survey.
NAR Calculations

                  the enigma of the standard deduction
    While it is true that a taxpayer must itemize in order to claim the 
mortgage interest deduction, it is not true that those who do not 
itemize get no value from the MID. To appreciate this conundrum, one 
must look at the history of our modern tax system. In 1913, Congress 
and the President enacted the income tax. The original tax law provided 
for both a deduction for interest paid and for State and local taxes 
paid (including for property taxes). These two deductions, plus the 
deduction for charitable contributions, which was added to the tax law 
in 1917, together comprise the majority of itemized deductions that are 
claimed each year.

    For many years, the tax law provided that taxpayers who paid 
interest, State and local taxes, and/or made charitable contributions, 
could take a deduction for them. A few other deductions, such as for 
casualty and theft losses or for medical expenses, were also allowed. 
However, to qualify for these deductions, taxpayers actually had to 
incur these expenses and keep track of them.

    This changed in 1944, when Congress decided to simplify the tax law 
by enacting the standard deduction. Legislative history (both original 
and subsequent) shows that the standard deduction was based on a 
composite basket of typical deductions that taxpayers claimed, 
including the MID, taxes paid, charitable contributions made, and so 
forth. The simplification came about by Congress deeming that all 
individuals were to receive a certain amount of generic deductions, 
represented by the standard deduction. Taxpayers claiming the standard 
deduction did not need to prove that any amounts were actually paid in 
order to take the standard deduction. Congress simply designated that 
all taxpayers could claim the standard deduction whether they made the 
deductible expenditures or not.

    In enacting the standard deduction, Congress did not modify the 
deductions themselves. Rather, taxpayers who paid deductible 
expenditures exceeding the standard deduction were allowed to claim the 
actual amounts as what was (from then on) called itemized deductions. 
Taxpayers with deductions totaling an amount below the standard 
deduction threshold could simply claim the standard amount and not 
worry about even keeping track of what was actually paid. This was a 
huge step toward simplifying the lives of millions of American 
taxpayers.

    What is often not recognized today is that the standard deduction 
represents a tax giveaway for virtually all taxpayers who claim it. 
This is because if a taxpayer has deductions in excess of the standard 
deduction, he or she may claim the higher amount. But those who have 
actual deductions less than the standard are given the benefit of the 
standard deduction amount whether or not they actually incurred the 
expenses. Thus, the giveaway equals a range of as much as the standard 
deduction for taxpayers who have absolutely no deductions, on the high 
end, to as little as $1 for taxpayers whose actual deductions come just 
$1 short of the standard deduction amount, on the low end.

    For example, assume a married couple's actual amounts for State and 
local tax, mortgage interest, and charitable contributions for 2017 
total $12,000. With the standard deduction for a couple currently at 
$12,700, this family would be receiving an extra tax deduction for $700 
in expenditures they never made. If they were in the 28 percent 
bracket, this would amount to a $196 tax ``freebie'' ($700 excess  
28%). Suppose another couple had just $2,000 of State and local taxes, 
but no mortgage interest and no charitable contributions. This family 
would also get to claim the standard deduction of $12,700, for a 
subsidy of $10,700 ($12,700-$2,000), which would be worth $2,996, 
assuming they were also in the 28 percent tax bracket ($10,700  28%).

    The point is that whether a taxpayer is being subsidized a little 
bit (as with the first couple), or a lot (as with the second couple), 
or not at all (as with the case of a couple who has enough deductions 
to itemize), each couple is benefitting from the mortgage interest and 
property tax deductions. Just because the standard deduction does not 
specifically indicate which portion of it is attributable to the MID or 
property tax (or any other deductions), does not mean that these 
deductions for home ownership are not part of the benefit being given.

    When Congress first established the standard deduction in 1944, 
more than 82 percent of taxpayers were able to utilize this 
simplification tool, meaning that just 18 percent itemized. According 
to the Joint Committee on Taxation (JCT), by 1969 this proportion of 
non-itemizers had dropped to 58 percent. In explaining the reason for 
Congress increasing the standard deduction in the Tax Reform Act of 
1969, JCT stated that since 1944, ``higher medical costs, higher 
interest rates, higher State and local taxes, increased home ownership, 
and more expensive homes have made it advantageous for more and more 
taxpayers to shift over to itemized deductions.'' \9\
---------------------------------------------------------------------------
    \9\ ``Summary of H.R. 13270, the Tax Reform Act of 1969,'' Joint 
Committee on Internal Revenue Taxation and the Committee on Finance, 
August 18, 1969.

    Thus, it is clear that even though no specific portion of the 
standard deduction is tied to the MID and property tax deduction, 
Congress crafted the standard deduction to be a proxy for allowable 
deductions (i.e., itemized deductions), including the MID and State and 
local tax deductions, and when the underlying amount of these 
deductions increase, Congress has believed that it is appropriate for 
the standard deduction to also increase. It is also clear that Congress 
intended that most taxpayers would claim the standard deduction (82 
percent in 1944) and when this proportion was eroded by inflation and 
other factors, Congress increased the standard deduction to keep it 
---------------------------------------------------------------------------
closer to its original percentage.

    Arguments that the mortgage interest and real property tax 
deductions benefit only those who itemize simply do not hold water.
    tax reform proposals to limit the tax benefits of home ownership
    In recent years, a variety of tax reform ideas have been proposed 
that would limit the ability of certain taxpayers to claim the mortgage 
interest and/or the property tax deductions, or in other ways reduce 
the incentive effect of these provisions. Each of these proposals would 
limit the value of the deductions and have a negative impact on the 
value of housing. In many cases, the largest impact would be felt by 
middle-class families, not necessarily by the individuals or families 
categorized by the media as ``the rich.'' The following is an 
examination of each of these proposals.
Capping Itemized Deductions
    Two proposals have repeatedly been floated to cap the value of all 
itemized deductions. The first is a proposal that was included in 
several of President Obama's budgets to cap itemized deductions for 
upper-income taxpayers at 28 percent. As itemized deductions follow 
taxpayers' top marginal rate, this would have the effect of lessening 
the value of all itemized deductions for individuals in the 33 percent, 
35 percent and 39.6 percent brackets. It is important to note that many 
of these taxpayers have already had the value of their deductions 
limited by the reinstatement of the complex and burdensome ``Pease'' 
limitation that applies to individuals with adjusted gross income above 
$250,000 for singles and $300,000 for couples (adjusted for inflation) 
as part of the American Taxpayer Relief Act of 2012.

    The 28-percent cap focuses on the tax filer's income, rather than 
the total dollar amount of itemized deductions. This proposal adds, 
rather than removes, complexity from the tax code and would be 
difficult to plan for. An individual, particularly one who owns a 
business or who is self-employed, may be in different tax brackets from 
year to year. These individuals have a particularly difficult time 
estimating their incomes and tax liability, especially in today's 
uncertain economic and legislative climate. They do not need added 
burdens of complexity or unanticipated tax increases. A reduction in 
the mortgage interest and State and local tax deductions would further 
complicate their family finances.

    Some will say that putting a limitation on the deductions of upper-
income taxpayers would cause no harm for those in lower brackets. 
However, when reduced tax benefits reduce the value of a home, the 
value of all homes decreases. A collapse or reduction in home values at 
the top end of the market causes downward pressure on all other homes. 
That is, when the value of my neighbor's house declines, then the value 
of my house declines, as well.

    The second proposal to cap itemized deductions comes in the form of 
a hard dollar cap on all itemized deductions. Most prominently proposed 
by Republican nominee Mitt Romney during the 2012 Presidential 
election, a dollar cap would disallow deductions above a certain dollar 
figure regardless of income.

    As the cap is not based on income, but rather the amount of 
deductions claimed, this proposal would potentially raise taxes on 
Americans of all income levels regardless of where the dollar amount of 
the cap was set. For example, if the cap on total deductions were set 
at $25,000, households with cash incomes as low as $30,000 could be 
impacted, according to the Tax Policy Center (TPC). TPC further 
estimated that 35 percent of households with cash incomes between 
$100,000 and $200,000 would see a tax increase averaging almost $2,500 
if itemized deductions were capped at $25,000.\10\
---------------------------------------------------------------------------
    \10\ ``On the Distributional Effects of Base-Broadening Income Tax 
Reform,'' Urban-Brookings Tax Policy Center, August 1, 2012.

    Not only does a dollar cap affect taxpayers of all income levels, 
it penalizes those who live in areas with higher housing costs or 
higher State and local taxes. Taxpayers living in these areas have 
somewhat ``fixed'' deduction costs when it comes to their mortgage and 
tax levels. Their property tax levels are directly tied to the value of 
their property and the local tax rate. While, in theory, they can pay 
down their mortgage amount and reduce their interest paid if they have 
the financial ability to do so, neither the mortgage nor the tax amount 
paid are discretionary, as is a charitable donation. Therefore, while 
it is widely viewed that charities would take the biggest hit from a 
dollar cap on total itemized deductions, one could argue the biggest 
losers would be younger families living in high cost housing markets 
who have both larger mortgage interest payments and high State and 
local tax bills. Their tax increase would be the most pronounced and 
painful, despite the idea that a dollar deduction cap is designed to 
---------------------------------------------------------------------------
simply make ``the rich'' pay their fair share.

    If a dollar cap were implemented on itemized deductions, no matter 
the dollar amount, more and more taxpayers would be subject to it if 
Congress failed to index that amount for inflation. This would create 
the same kind of tax nightmare that came about as a result of the 
Alternative Minimum Tax, as more and more middle-class taxpayers became 
subject to the cap as home values and taxes paid rose, simply because 
of inflation. After spending years struggling to exempt most middle-
class taxpayers from the AMT, it would seem odd Congress might consider 
falling into a similar quagmire again. Further, a dollar cap would add 
one more layer of complexity to the tax code and would be a rather 
blunt instrument to raise revenue.
Converting the Mortgage Interest Deduction to a Tax Credit
    Many economists have traditionally favored tax credits over tax 
deductions because tax credits provide more benefit to those in lower 
tax brackets. This reflects the reality that, in a progressive tax 
system like ours, an individual in the 15 percent bracket receives only 
15 cents of tax reduction for each dollar of interest deducted, while 
an individual in the 35 percent bracket receives a benefit of 35 cents 
on the dollar. The mathematics of this assertion is correct, but 
asymmetrical--the tax benefit analysis of a deduction ignores the 
balance between tax rates and individual income taxation. An individual 
in the 15 percent bracket pays only 15 cents of tax on a dollar of 
income, while an individual in the 35 percent bracket pays tax of 35 
cents on the dollar. Thus, tax rates balance, rather than distort, the 
value of deductions.

    In 2005, President Bush's tax reform advisory council proposed 
converting the deduction to a 15-percent non-refundable tax credit. The 
Simpson-Bowles Commission subsequently proposed a 12 percent non-
refundable tax credit along with its proposals to eliminate the 
deduction for second homes and capping the total deduction at $500,000. 
Others have proposed credits of different amounts and with different 
limitations on the total amount of mortgage debt that could be claimed 
or on the number of homes. In order to more carefully weigh the pros 
and cons of converting the deduction to a credit, NAR commissioned 
outside research in 2005 to study the effects of such a conversion.

    While the conclusions are now somewhat dated, they present a 
striking contrast with the 12-percent or even 15-percent credit 
proposals. In 2005, NAR asked its consultants to design a revenue-
neutral tax credit based on data then currently available. (Revenue 
neutrality was intended as a design under which the total amount of the 
tax expenditure associated with mortgage interest was neither increased 
nor decreased.) That analysis showed that in 2005, a revenue-neutral 
rate for a credit would have been 22 percent--markedly more beneficial 
to taxpayers than a 12 percent or 15 percent credit.

    The amount of the credit percentage would greatly affect the number 
of winners and losers in any conversion. However, different studies 
have consistently shown that the tax increases for the losers would be 
far greater than the tax savings experienced by the winners. Also, the 
loss of the tax benefit would almost certainly result in the drop of 
value of all homes, as discussed above in the analysis regarding the 
proposal to cap itemized deductions. Furthermore, a conversion to a 
credit would upend over 100 years of established tax law. The effects 
this drastic of a change would have on consumers and the real estate 
markets is unknowable. In this case we think Congress would be well 
advised to adopt the mantra of ``do no harm.''
Eliminating the Deduction for Second Homes
    Several proposals for tax reform, including Simpson-Bowles, have 
included a proposal to eliminate the deduction for second homes. 
Critics of the second home deduction argue that it primarily benefits 
rich owners of expensive vacation homes in resort areas like Aspen or 
Cape Cod. In reality, those taxpayers are seldom the beneficiaries of 
the deduction, as such homes are often purchased with cash.
When a Second Home is not a ``Second Home''
    One often overlooked reason for the code allowing a deduction for 
mortgage interest paid on a second home in a tax year is the most 
fundamental part of residential real estate: buying and selling. If a 
family has a mortgage on their primary residence, and then purchases 
another home with another mortgage before they can sell the first 
residence, such as in connection with a move for a job change, they 
will have owned two homes in that year. Removing the deduction for 
second homes would only allow the family to deduct the interest for one 
of those residences and essentially introduce a tax on moving. Families 
move for many different reasons: more space for a growing family, 
downsizing once the kids are gone, economic challenges, or a new job.
Second Homes Are Both Geographically Concentrated and Diverse
    While the image conjured up by critics of a second home is a multi-
million-dollar property in a tony resort area, most of those homes are 
bought with cash. In reality, second homes nationally have a lower 
median sales price than principal residences. Over the past decade, the 
median price of a second home has always trailed the median price of a 
principal residence.

    NAR data show that in 2016 the median income of a second homeowner 
was $89,900.\11\ While that income level is above the national median, 
it is certainly not the definition of ``rich'' that many consider when 
debating tax changes to ``soak the wealthy.''
---------------------------------------------------------------------------
    \11\ ``2017 NAR Investment and Vacation Home Buyers Survey,'' 
https://www.nar.realtor.

    Finally, NAR has compiled data identifying all U.S. counties in 
which more than 10 percent of the housing stock is second homes. 
Currently, about 900 of the Nation's 3,068 counties (roughly 30 
percent) fall into this group. In some counties with very small 
populations, second homes can represent about 40 percent of the housing 
stock. In Meagher County, Montana, for example, the population is only 
1,891 people, but second homes represent 42 percent of the housing 
stock. That area is doubtlessly dependent on the jobs and property 
---------------------------------------------------------------------------
taxes generated by those second homes.

    Thus, about 30 percent of U.S. counties have a stake in retention 
of the mortgage interest deduction for second homes. Those properties 
generate valuable jobs and property and sales taxes for the 
communities. To eliminate the MID for second homes would have at least 
as dramatic an impact on those communities as it would the taxpayer/
owners themselves. Congress needs to carefully consider the economic 
impact on these communities, often located in rural areas with little 
other economic resources vs. the amount of revenue that could be raised 
from eliminating the deduction for second homes. The decline in home 
values and economic activity in those areas where the economy is driven 
by second homeowners could very well eclipse the small amount of 
revenue that could be gained by increasing taxes on these homeowners.
Reducing the Amount of Qualified Mortgage Debt
    Another proposal to ``raise revenue'' is to lower the cap on the 
amount of acquisition debt eligible for the mortgage interest deduction 
from $1 million to $500,000. As previously discussed, the $1 million 
limitation was put in place in 1987 and is not indexed for inflation. 
Consequently, the value of the MID has eroded by more than half in 30 
years.

    Critics of the MID argue that lowering the limitation to $500,000 
would affect a relatively small number of wealthy taxpayers. In fact, 
research conducted on behalf of NAR shows that individuals in every 
adjusted gross income (AGI) class, even as low as $10,000, have 
mortgage debt in excess of $500,000. Those in the lower income ranges 
likely include those who are self-employed with minimal income after 
expenses, those who are business owners with significant losses or 
retired individuals with other tax-exempt income. No matter what the 
income category, however, reducing the cap would make their economic 
positions worse, particularly where there have been losses.

    Further findings from research conducted for NAR shows almost half 
of taxpayers with mortgages over $500,000 have AGI below $200,000.

    Among those who itemize and claim MID, the AGI classes below 
$100,000 comprise 53 percent of all tax returns.\12\ Moreover, the AGI 
classes below $200,000 represent almost 90 percent of all itemized 
returns.\13\ Thus, the overwhelming majority of tax returns with MID 
are certainly NOT in so-called ``Warren Buffett'' territory.
---------------------------------------------------------------------------
    \12\ ``Individual Income Tax Returns, Preliminary Data, Tax Year 
2015,'' Internal Revenue Service, Statistics of Income Bulletin, Spring 
2017, https://www.irs.gov/.
    \13\ Ibid.

    A $500,000 cap has wildly divergent geographic implications. The 
burden of the cap would be disproportionately borne by taxpayers in 
high costs areas, even though they might not be categorized as ``rich'' 
and even though they may have fairly modest homes. Those living in high 
cost areas pay a disproportionately larger amount of their after-tax 
income toward housing than do taxpayers in other parts of the country. 
Eliminating part of the MID for them would exacerbate that disparity 
and in fact make home ownership even less affordable for many families. 
Some have proposed addressing this geographic issue by tying the limits 
of the MID to area housing prices in a way similar to formulas used to 
calculate loan limits for the Federal Housing Administration (FHA). NAR 
would resist any effort to make the cap on the MID contingent on the 
taxpayer's place of residence. Such a change would impose significant 
---------------------------------------------------------------------------
complexity on what is currently a very simple provision.

    There is another factor Congress should take into consideration if 
contemplating a lower limit on the amount of home mortgage debt 
eligible for the interest deduction. This is the fact that unless such 
a cap is indexed for inflation, it may soon become a de facto 
limitation on the deduction for taxpayers Congress did not intend to 
hit. Again, the experience with the Alternative Minimum Tax should be 
instructive. Based on internal NAR calculations, by 2043 the value of 
more than half the homes in a majority of the 50 States will be greater 
than $500,000. And those projections show that 49 States will have at 
least 30 percent of their homes with a value exceeding this amount. 
Thus, in a relatively short time, the majority of American homes could 
be affected by a limit now intended to strike only the ``wealthy.''
Increasing the Standard Deduction and Repealing Most Itemized 
        Deductions
    More recently, Republicans in the House of Representatives have put 
forward a tax reform plan called ``A Better Way,'' which is informally 
known simply as ``The Blueprint.''

    While we laud the goals of this tax reform plan, and marvel at its 
boldness, we have great concern with the way one aspect of the 
Blueprint could affect residential real estate. This concern is that 
the interaction of two features of the plan, which are designed to 
simplify the tax system, would have the unintended consequence of 
nullifying the long-standing tax incentives of owning a home for the 
great majority of Americans who now are, or who aspire to become, 
homeowners.

    Specifically, the Blueprint calls for the standard deduction to be 
almost doubled from its current levels. The plan also includes the 
repeal of the deduction for State and local taxes paid, as well as the 
elimination of most other itemized deductions. Either of these 
monumental changes alone would marginalize the value of the 
current-law tax incentives for owning a home. Unfortunately, the 
combination of these two revisions would cripple the incentive effect 
of the Federal tax law for all but the most affluent of taxpayers.

    We anticipate two potentially devastating problems in the aftermath 
of these modifications. First, the impact on the first-time homebuyer 
could be enormous, despite them likely facing lower prices. For many, 
the current-law tax incentives make the crucial difference in being 
able to afford to enter the ranks of homeowners. At a time when the 
rate of first-time home-buying is well below the average of the past 
few decades, this could be particularly debilitating for the housing 
industry and the entire economy.

    Furthermore, a tax reform approach like this would discriminate 
against current and aspiring homeowners in favor of renters. Research 
conducted for NAR on a Blueprint-like tax reform plan shows that home-
owning families with incomes between $50,000 and $200,000 would face 
average tax hikes of $815 in the year after enactment while non-
homeowners in the same income range would enjoy average annual tax cuts 
of $516.\14\
---------------------------------------------------------------------------
    \14\ Available on NAR's website: http://narfocus.com/billdatabase/
clientfiles/172/21/2888.pdf.

    Also, these estimates show that under a Blueprint-like plan, nearly 
46 million households would see their taxes go up. But 70 percent of 
them would be homeowners. Among the 25 million middle-income households 
($50,000 to $200,000) with a tax increase, 85 percent would be 
---------------------------------------------------------------------------
homeowners.

    Homeowners already pay 83 percent of all Federal income taxes, and 
this share would go even higher under similar reform proposals. 
Homeowners should not have to pay a higher share of taxes because of 
tax reform.

    Second, the decimation of the mortgage interest and real property 
tax deductions would very likely cause a significant plunge in the 
value of all houses. At a time when the housing sector has not fully 
recovered from the thrashing it took during the Great Recession, this 
drop, even if temporary, could be calamitous. Millions of homeowners 
could again wake up to learn that the value of their largest financial 
asset has dived below the amount of debt that is owed on it.

    Estimates provided for NAR show that values could fall in the short 
run by more than 10 percent if a Blueprint-like tax reform plan were 
enacted.\15\ The drop could be even larger in high-cost areas. It may 
take years for home values to rebound from such a significant decrease.
---------------------------------------------------------------------------
    \15\ Ibid.

    The combination of these two problems could have further 
ramifications that could produce a vicious spiral. Should home values 
drop due to the decrease in value of home ownership incentives, 
revenues to State and local governments would surely follow suit 
because of lower assessed property values. Further, public pressure on 
these same governments to lower tax rates because these tax payments 
would no longer be deductible could greatly exacerbate the situation. 
The overall result could be a disastrous downturn in the quality of 
many neighborhoods and communities, and especially our most vulnerable 
---------------------------------------------------------------------------
ones.

    In sum, it is estimated that a Blueprint-like tax reform approach 
could reduce the amount of Federal tax expenditures for home ownership 
by 82 percent over 10 years, from $1.3 trillion to just $232 
billion.\16\ This is certainly not the expected result from a tax 
reform plan that purports to preserve the mortgage interest deduction.
---------------------------------------------------------------------------
    \16\ Ibid.

    Even if the hoped-for economic growth from the Blueprint 
materializes, it will take years for the full effects of these changes 
to permeate through the economy and for the effects to offset the 
deleterious short- to mid-range effects mentioned above. And many 
homeowners, particularly those who are middle-aged or older and are 
planning to use the equity in their home for retirement or to pay for 
the education of their children, simply will not have time to wait for 
the recovery.
             additional residential real estate provisions
    In addition to the deductions for mortgage interest and property 
taxes paid, there are two other tax provisions that have a large impact 
on a family's ability to sell their home. One of these provisions is 
permanent and should be preserved while the other is temporary and 
should be made permanent.
Capital Gains Exclusion for Sale of a Principal Residence
    Prior to 1997, the tax rules that governed the sale of a principal 
residence were complex and largely ignored (section 1034 of the 
Internal Revenue Code). The general rule was that there was no 
recognition of gain, so long as the seller purchased a home of the same 
or greater value within a specified time. This was a particular 
disadvantage to individuals who relocated from a high cost area to a 
lower cost area. The deferred gain from the sale reduced the basis of 
the new home. Other elaborate rules required taxpayers to track the 
adjusted basis of the homes they owned so that, in the event that they 
did not purchase a replacement home (or purchased a replacement home of 
lesser value), the gain on that sale became taxable, as measured from 
the adjusted basis. Few taxpayers had adequate understanding of the law 
or sufficient records to enable them to comply with these rules.

    In 1997, the Clinton administration, without input from NAR or 
others in the housing industry, proposed a complete overhaul and 
simplification of these rules. Rather than require elaborate basis 
computations on multiple residences over a term of many years, the new 
rule simply permitted the seller to exclude up to $250,000 ($500,000 on 
a joint return) of the gain on the sale. Any excess above these amounts 
would be currently taxable at the capital gains rate for the year of 
sale. The reinvestment rules were eliminated, so taxpayers gained 
mobility and flexibility. The exclusion gives them the ability to 
downsize, buy more than one property, purchase a non-real estate asset 
or do anything they choose with the proceeds of the sale. The exclusion 
is restricted to the sale of only a principal residence, and certain 
qualifications must be satisfied in order to receive the benefit of the 
exclusion. As with the MID, the $250,000 and $500,000 amounts are not 
indexed for inflation.

    No data is publicly available that allows either NAR or its 
consultants to evaluate the impact of possible changes to these rules. 
No public IRS records present information about Forms 1099 that are 
filed for home sale transactions, and only limited information on 
capital gains data are published to show the amount of taxable gain 
reported on homes sales in certain years. In addition, there is no way 
to ascertain the value of unrecognized gain that has accumulated in 
homes that are not currently on the market. Finally, long-term holders 
are far more likely to have larger appreciation amounts and so should 
not be penalized for that long tenure.

    We note that this provision is among the most taxpayer-friendly 
sections in the entire code. When enacted, it was a substantial 
simplification from prior law. Further, it allows a great deal of 
flexibility in the financial planning for families. Notably, the gain 
on the sale of a principal residence is a significant factor in the 
retirement savings plan of many older Americans. They anticipate 
downsizing and then using the remaining proceeds to supplement any 
retirement income they have. Prior law penalized individuals over age 
55 by limiting an exclusion to just once in a lifetime and with a 
relatively small amount. Today's rules reflect far more accurately the 
home ownership patterns over a lifetime. The exclusion functions as a 
sort of ``Housing Roth IRA'' in that the gains made over long periods 
(in many cases with improvements made from after-tax dollars) are free 
of tax at the time of sale. At a time when policymakers are 
contemplating changes to entitlement programs and Americans are 
struggling to save more for retirement, Congress should continue to 
recognize the important role the principal residence exclusion plays in 
supplementing retirement savings. NAR urges Congress to retain the 
exclusion at current levels or secure its importance for future 
generations of homeowners by indexing it for inflation.
Cancellation of Mortgage Indebtedness for Principal Residence
    Under general tax principles, when a lender cancels a portion or 
all of a debt, including mortgage debt, the borrower is required to 
recognize the forgiven amount as income and pay tax on it at ordinary 
income rates. An exception is provided for some mortgage debt that was 
forgiven between January 1, 2007 and December 31, 2016. When this 
relief was initially considered in 2007, the Ways and Means Committee 
reported it as a permanent provision. The final version, however, was 
temporary and in place only through December 31, 2009. That date was 
extended through December 2012 as part of the flurry of legislation 
enacted at the height of the 2008 financial crisis. The American 
Taxpayer Relief Act of 2012 subsequently extended the expiration date 
to December 31, 2013, and The Tax Increase Prevention Act of 2014 
extended the expiration date to December 31, 2014. The Preventing 
Americans From Tax Hikes (PATH) Act of December 2015 extended the 
provision through the end of 2016. However, the provision has not been 
extended this year.

    While the volume of short sales and foreclosures has receded from 
record highs, there are still a significant number of families 
struggling to keep up with their mortgage payments and banks are still 
working to conduct loan modifications as a result. Moreover, the 
vicious hurricanes that have wreaked such damage on so many U.S. 
counties this month and last have greatly exacerbated the problem.

    NAR believes the tax code should not discourage homeowners from 
trying to take proactive steps to avoid foreclosure by taxing them on 
phantom income, especially when the Federal Government has devoted 
considerable resources to help modify mortgages and lessen the impacts 
of foreclosure.

    We urge the Finance Committee to make mortgage cancellation relief 
a permanent provision.
                    section 1031 like-kind exchanges
    Finally, NAR strongly believes that the like-kind exchange 
provision in current law is vital to a well-functioning real estate 
sector and a strong economy and must be preserved in tax reform. The 
like-kind exchange is a basic tool that helps to prevent a ``lockup'' 
of the real estate market. Allowing capital to flow more freely among 
investments facilitates commerce and supports economic growth and job 
creation. Real estate owners use the provision to efficiently allocate 
capital to its most productive uses. Additionally, like-kind exchange 
rules have allowed significant acreage of environmentally sensitive 
land to be preserved.

    Section 1031 is used by all sizes and types of real estate owners, 
including individuals, partnerships, LLCs, and corporations. The 
committee might be surprised to learn that a large number of like-kind 
exchange transactions involve single-family housing. To illustrate, a 
recent survey of our members indicated that 63 percent of Realtors have 
participated in a 1031 like-kind exchange over the past 4 years.\17\
---------------------------------------------------------------------------
    \17\ ``Like-Kind Exchanges: Real Estate Market Perspective 2015,'' 
National Association of Realtors, https://www.nar.realtor.

    A 2015 study \18\ found that in contrast to the common view that 
replacement properties in a like-kind exchange are frequently disposed 
of in a subsequent exchange to potentially avoid capital gain 
indefinitely, 88 percent of properties acquired in such an exchange 
were disposed of through a taxable sale. Moreover, the study found that 
the estimated amount of taxes paid when an exchange is followed by a 
taxable sale are on average 19 percent higher than taxes paid when an 
ordinary sale is followed by an ordinary sale.
---------------------------------------------------------------------------
    \18\ ``The Economic Impact of Repealing or Limiting Section 1031 
Like-Kind Exchanges in Real Estate,'' David C. Ling and Milena Petrova, 
March 2015, revised June 22, 2015.

    If one of the goals of tax reform is to boost economic growth and 
job creation, any repeal or limitation of the current-law like-kind 
exchange provision is a step in the wrong direction.
                               conclusion
    NAR thanks the Committee on Finance for inviting our input into 
this important hearing. Improving our tax system is an important and 
worthy goal, and we commend you for taking on this gargantuan and often 
thankless task.

    The residential real estate market is a significant driver of the 
American economy. When housing does well, America does well. Our Nation 
has been led out of four of the last six recessions by a recovery in 
the housing market and housing gains over the past several years are an 
important part of the sustained recovery.

    Despite the price declines, foreclosures, and economic hardship 
that haunted the housing market during the Great Recession, Americans 
remain committed to the ideals and vision of home ownership. They 
continue to hold the vast majority of their personal wealth in their 
homes. They continue to believe that ownership of real property is a 
vital part of the American Dream that was envisioned from the very 
beginning by our Founders. This is why even high numbers of those who 
now rent their home consistently support tax incentives for home 
ownership and aspire to own themselves someday. Congress should not 
turn its back on these same ideals as it seeks to reform our tax 
system.

                                 ______
                                 
         Questions Submitted for the Record to Iona C. Harrison
               Questions Submitted by Hon. Orrin G. Hatch
                              status quo?
    Question. Ms. Harrison, reading over your testimony, I was struck 
by the numerous defenses of the status quo. Does the National 
Association of Realtors support tax reform? If so, do you have any 
specific suggestions on what could be reformed about our Nation's tax 
laws?

    If the tax laws are exactly the way they should be, that would be 
helpful to know.

    Answer. The National Association of Realtors does believe that our 
current tax system contains many flaws and is badly in need of 
thoughtful and careful reform. The Internal Revenue Code is too complex 
and includes many provisions that can work at cross-purposes with each 
other. And even some provisions that have greatly simplified the tax 
lives of millions of taxpayers and assist millions more in saving for 
retirement, such as the exclusion of gain on the sale of a principal 
residence, need to be improved by indexing their limits to inflation. 
Otherwise, they will continue to grow less beneficial every year. If it 
does nothing else, a good tax reform act should protect the benefits it 
provides from the ravages of inflation.

    Also, our economy could doubtless benefit from lowering tax rates 
in a fiscally responsible way. Economic growth is important, and our 
tax laws should promote and not hinder growth and job creation. This is 
a principal reason NAR is sensitive to careless tax reform that can 
damage, rather than propel, economic growth. The Tax Reform Act of 1986 
included some harsh and, in our view, unwarranted provisions that sent 
the commercial real estate sector reeling for more than a decade and 
caused untold economic harm to many in the Nation. Our position on tax 
reform is very clear--responsible reform is important but a paramount 
goal is that it should first, do no harm.
                          percent of itemizers
    Question. Ms. Harrison, in your written testimony you state 
Congress set the standard deduction in 1944, and again in 1969, so that 
82% of taxpayers claimed the standard deduction, and only 18% of 
taxpayers itemized.

    According to your testimony, currently approximately 33% of 
taxpayers itemize, and 67% of taxpayers claim the standard deduction.

    Given the precedent of targeting 82%, should Congress again target 
having only 18% of taxpayers itemize their deductions? What do you 
believe the ideal percentage of taxpayers claiming the standard 
deduction to be?

    Answer. The standard deduction has been an important tool in 
simplifying the tax lives of millions of people. However, it must be 
recognized that the goal of simplification must be balanced with the 
incentive effect of the present-law itemized deductions as well as the 
economic effect of making sudden and large changes to long-standing tax 
policy. Also, there are tax equity implications to large changes in the 
standard deduction.

    In terms of simplification, greatly increasing the standard 
deduction would significantly decrease the number of itemizing tax 
filers. The authors of the House Republican tax reform Blueprint 
estimate that only about 5 percent of filers would still be itemizing 
after the increase outlined in that plan. However, this does not mean 
that 95 percent of filers could simply forget about the complexities 
and time-
consuming problems of dealing with Schedule A of Form 1040. Tens of 
millions of information returns would still need to be prepared, sent 
to, and dealt with by taxpayers with a mortgage or those who made 
charitable contributions, and these filers would still need to consider 
whether to itemize, even if most of them did not.

    More importantly, the huge increase in the standard deduction would 
sap the incentive value of the mortgage interest deduction for the vast 
majority who now claim it, as it would no longer make a difference on 
their tax return whether they owned a home or were renting one. Along 
with this (and also due to the proposed repeal of the property tax 
deduction), home values would most likely drop significantly, causing 
untold harm to homeowners everywhere, and especially to first-time 
buyers, who very often have small amounts of equity in their home. This 
would almost certainly have serious and negative macroeconomic effects.

    Also, as I indicated in my written testimony, the standard 
deduction represents a tax giveaway to everyone who claims it, and the 
higher the amount of the standard deduction, the greater the giveaway. 
While this effect is a not a regressive one, it is important that 
policymakers are aware of its effect. Deductions such as that for 
mortgage interest offer a strong incentive to take the specific action 
of taking out a mortgage by purchasing a home. Giveaways through a 
higher standard deduction dis-incentivize taxpayers by rewarding all 
whether the desired action is taken or not.

    As to an ideal percentage of taxpayers claiming the standard 
deduction, I will simply note that a major stated reason that Congress 
has increased the standard deduction in the past has been because 
inflation eroded the standard deduction. Since the standard deduction 
has been indexed for inflation, this has become much less, if any, of a 
problem. Thus, a major driver of standard deduction increases in the 
past is no longer present.

    Finally, I will note that if Congress wanted to install into the 
tax code many of the benefits of a higher standard deduction without 
the disadvantages of diluting the incentive value of itemized 
deductions, it could do so by once again creating a true zero bracket 
amount in the tax law.

            fluctuation of taxpayers in the wealthy category
    Question. Ms. Harrison, your testimony includes the following 
observation: ``Even though the percentage of taxpayers who itemize has 
remained relatively constant over the past 25 years, the individuals 
who comprise the universe of itemizers changes from year to year.'' And 
you also observe that: ``In short, circumstances change.''

    I think that those are accurate observations. A person who takes 
one or more itemized deductions today is in a different situation 
tomorrow or years from now and years earlier. It is also true, when we 
look at things like capital gains or someone's place in the income 
distribution, that the person who receives a capital gain today or 
resides in a certain income category today may not be in the same 
position yesterday or tomorrow. That is, circumstances change, which I 
think is important to consider, and something that analysts often don't 
consider as much as they should.

    Stated another way, it is important to keep in mind that some 
people who look like they are part of the so-called ``rich'' today may 
only be so temporarily, and not in a perpetual state of ``richness.''

    I wonder if you agree.

    Answer. Yes, I do agree. One of the most important benefits of the 
mortgage interest deduction is that it is there to assist those first-
time home buyers who are facing the early years of mortgage payments 
when interest makes up a much higher proportion of the monthly payment. 
As the mortgage is amortized, families often become more financially 
stable, and the extra assistance of the mortgage interest deduction is 
not as needed. This is why many millions of homeowners do not claim the 
MID in any particular year. They have either paid off, or significantly 
paid down, their mortgages. The number of homeowners who, at some point 
over their ownership of the home, have utilized the deduction is a much 
more accurate measure of the importance of the deduction in encouraging 
home ownership.
                           transition policy
    Question. Ms. Harrison, I agreed with your point that: ``If one 
were designing a tax system for the first time, one would likely devise 
something that is different from what we have already.''

    You then went on to state that some provisions in the tax code have 
been around for over a century, and thus many asset prices have the 
expectation of those tax provisions continuing.

    So, what are your thoughts on transition policy. Namely, it's 
certainly true we don't want, through tax law changes, to create 
tremendous upheaval, even if the new law will be more efficient in the 
long run. Your thoughts?

    Answer. As mentioned above, Realtors believe that tax reform is 
important and needed, but should first, do no harm. This may sound like 
little more than a slogan, but your question brings to light the 
reality of the harm that careless tax reform can do to those who 
reasonably relied on the tax law when making decisions.

    When homeowners (or any taxpayers) enter into a major transaction, 
such as purchasing a home, they rely on the current law staying in 
place over the life of that transaction. Having the tax law 
subsequently change in an adverse way can greatly affect the ongoing 
investment in a very negative and unfair manner.

    Please let me mention just three examples in the home ownership 
arena that could have serious or severe consequences on those who, in 
good faith, purchased a home in reliance of the current tax law 
continuing to provide the benefits available at the time of the 
transaction.

    First, consider the first-time home purchaser who, like the 
majority of those entering the ranks of home ownership, has only a 
minimal amount for the down payment, say less that 10 percent. If the 
tax law is suddenly changed to where the expected tax benefits are no 
longer available, the value of the investment (the home) will drop, and 
the taxpayer's relatively small amount of equity in the home could 
completely disappear, leaving the mortgage under water, meaning the 
home is no longer worth as much as is owned on the loan. We have only 
to look at the experiences of many homeowners during and following 
periods of economic downturn to find examples of the disruption and 
pain that can be inflicted.

    Second, take the case of a family with college-bound children. Many 
parents of college students turn to the equity in their homes to help 
cover the high costs of higher education for their children. Negative 
changes in the tax rules that provide tax benefits of owning a home 
could adversely affect the ability of these families to provide for 
that higher education.

    Finally, please consider the case of the tens of millions of the 
Baby Boom generation who purchased a home some time ago and have been 
building equity in that home. As these homeowners approach retirement 
age, they are planning and relying on the equity of that home to be 
there to assist in financing those retirement years. For many, their 
home will be their largest retirement asset. Changes in the tax law 
that reduce that equity can have serious consequences to retirement 
plans when there is little time to recover from the reduction in 
savings.

    In short, major adverse changes in tax policy that occur after 
important transactions have been entered into, can and will adversely 
affect families who have responsibly relied on those tax benefits being 
there for the duration of their investment. Taking them away is unfair 
and will cause harm.

                                 ______
                                 
              Questions Submitted by Hon. Robert Menendez
    Question. Ms. Harrison, in your testimony you argue that the value 
of the mortgage interest and property tax deductions is already baked 
in to the price of a home, and that if these deductions were repealed 
or reduced, the price of homes would diminish.

    Could you point to any empirical evidence that guides your views?

    Answer. Economists have long acknowledged that the mortgage 
interest and property tax deductions are included in the value of 
homes. Most recently, the National Association of Realtors commissioned 
a study of the estimated impact of a 
Blueprint-type tax reform plan from a prominent national firm. The 
study estimates that home prices in the short run would fall by 10.2 
percent as a result of this kind of tax reform. The effects would 
likely be higher in higher cost areas. Please see the study at http://
narfocus.com/billdatabase/clientfiles/172/21/2888.pdf.

    Question. Ms. Harrison, you have a wealth of experience in the real 
estate business and have seen the real world implications of tax 
policy.

    Can you tell us how your experience has influenced your views on 
the mortgage interest deduction? Has the MID and property tax 
deductions really made a difference for the clients you have worked 
with?

    Do you really think diminishing these deductions would harm the 
rate of home ownership?

    Answer. For many Americans, the purchase of a home is the single 
most expensive purchase they will ever make. The decision to purchase a 
home is influenced by a variety of factors, which differ from family to 
family and is rarely just based on financial factors. Nevertheless, the 
ability to purchase is a financial decision. For many of the customers 
and clients with whom I have worked, the deductibility of SALT and the 
MID have made the difference that allowed them to purchase a home. For 
this reason, I believe that home ownership rates would drop in my 
market area, Prince George's County, MD, if these deductions were 
diminished or eliminated.

    Question. Ms. Harrison, critics of the MID and SALT argue that 
doubling the standard deduction will eliminate any additional burden 
caused by repealing these itemized deductions.

    What is wrong with this line of thinking? Wouldn't everyone still 
be able to claim as much of a deduction as they can now?

    Answer. There are at least two problems resulting from the actual 
repeal of the SALT deduction and the almost de-facto repeal of the MID 
under the kind of tax reform being discussed. The first, as I mentioned 
above in my answer to the chairman in his question about the percentage 
of itemizers, is that these changes would greatly diminish the 
incentive value of these two deductions for homeowners. This will make 
it much harder for many first-time homebuyers to make the move from 
renting to owning and also sap the equity of tens of millions of 
homeowners.

    The second problem is that the increase in the standard deduction 
is not a true increase, but a substitution of the personal and 
dependency exemptions, which would be repealed under the tax reform 
plans we have seen promoted this year. This means that the purported 
increase in the standard deduction is not a true increase in the 
exemption amount. For some taxpayers, particularly single ones, there 
would still be an increase in the amount of income that is exempted 
from tax. And many or most of these would indeed receive a tax cut from 
tax reform. For other filers, and particularly those with children, the 
amount of income exempted from tax as a result of the increase in the 
standard deduction combined with the repeal of the exemptions would go 
down, not up. Some of these filers would get relief from this effect by 
the higher tax credit for children that is promised as part of the 
reform plan. However, among those taxpayers with larger families, and 
especially those with children over the age of 16 or with incomes too 
high to qualify for the child tax credit, there will be many millions 
who pay more taxes because the amount of the repealed exemptions is 
higher than the increase in the standard deduction.

    Question. Ms. Harrison, beyond the economics, what about the impact 
home ownership has on society?

    Why should the tax system encourage home ownership?

    In your experience as a Realtor, does our society benefit through 
greater home ownership? If so, does this benefit justify the value of 
tax incentives for home ownership?

    Answer. Home ownership remains a goal for most American families, 
and with good reason. It creates communities that are stable and 
vibrant and is one of the chief sources of wealth building for middle-
class families. The provisions in the tax code that have favored home 
ownership are an acknowledgement of the high value our society places 
on home ownership and the communities it creates.

                                 ______
                                 
                Questions Submitted by Hon. Bill Nelson
    Question. What metrics or considerations should Congress use to 
determine appropriate trade-offs in tax reform?

    Answer. Tax reform can mean many different things to different 
people. For example, a tax reform plan that has as its goals to provide 
a tax cut for the middle-class should actually deliver those results. 
Likewise, a tax reform that promises increased prosperity through 
higher economic growth should not result in many billions of lost 
equity in the first years after its passage. One of the main messages 
NAR has tried to communicate with Congress about tax reform is that it 
is important to accomplish thoughtful tax reform, but first, it should 
do no harm.

    Question. How would you suggest Congress address the skyrocketing 
cost of rental housing? Please provide some specific ideas to consider.

    Answer. Realtors have long supported the current-law Low-Income 
Housing Tax Credit, which has been remarkably effective in 
incentivizing the construction and rehabilitation of low-income housing 
units since its inception in the 1986 Tax Reform Act. The National 
Association of Realtors is part of the ``A Call To Invest in Our 
Neighborhoods (ACTION) Campaign,'' a national coalition representing 
over 2,000 national, State, and local organizations and businesses 
advocating to preserve, strengthen and expand the Low-Income Housing 
Tax Credit (Housing Credit).

    The Coalition is urging Congress in tax reform to ensure that the 
value of the Low-Income Housing Tax Credit is not diminished through 
the reduction in the corporate income tax rate and that the Credit is 
improved in various other ways. More information about specific 
recommendations can be found here: http://rentalhousingaction.org.

                                 ______
                                 
              Prepared Statement of Hon. Orrin G. Hatch, 
                        a U.S. Senator From Utah
WASHINGTON--Senate Finance Committee Chairman Orrin Hatch (R-Utah) 
today delivered the following opening statement at a hearing on ways to 
streamline the individual tax system to make it work better for 
American individuals and families.

    Welcome everyone to this morning's hearing, where we will discuss a 
major piece of the tax reform puzzle. Today we'll be talking about 
ideas, proposals, and considerations for reforming the individual tax 
system.

    While we have had countless hearings on tax reform in recent years, 
today's hearing is the first in what I hope will be a series of 
hearings leading up to an intensive effort on this committee to draft 
and report comprehensive tax reform legislation.

    We've talked about these issues a great deal. In fact, since I 
became the lead Republican on this committee in 2011, we've had more 
than 60 hearings where tax reform was a main focus of the discussion. I 
think we're capable and ready to get to work on producing a bill, and I 
look forward to working with my colleagues on this next, all-important 
stage of the process.

    I'd like to make a couple points about that process for a moment, 
because there seems to be some confusion as to what the Finance 
Committee's role will be in tax reform.

    I've heard a lot of talk about a secret tax reform bill or a 
comprehensive plan being written behind closed doors. Most of you have 
probably also heard about tax reform details that are set to be 
released later this month.

    True enough, leaders in the House and Senate, including myself, as 
well as officials from the executive branch have been discussing 
various proposals. But, as we stated in our joint statement before the 
recess--and as I have stated on numerous occasions--the tax-writing 
committees will be tasked with writing the bill. The group--some have 
deemed us ``The Big Six''--will not dictate the direction we take in 
this committee.

    Any forthcoming documents may be viewed as guidance or potential 
signposts for drafting legislation. But, at the end of the day, my goal 
is to produce a bill that can get through this committee. That takes at 
least 14 votes, and hopefully we'll get more. Anyone with any 
experience with the Senate Finance Committee knows that we are not 
anyone's rubber stamp. If a bill--particularly on something as 
consequential as tax reform--is going to pass in this committee, the 
members of the committee will have to be involved in putting it 
together.

    Therefore, I intend to work closely with my colleagues and let them 
express their preferences and concerns so that, when we are ready to 
mark up a tax reform bill, the mark will reflect the consensus views of 
the committee. That work, in many respects, has already begun.

    I'll note that I have not limited these commitments to my 
Republican colleagues on the committee, which brings me to my second 
point.

    From the outset, I have made clear that my preference is to move 
tax reform through this committee with bipartisan support. I have no 
desire to exclude my Democratic colleagues from this discussion, and 
I'm not determined to report anything by a party-line vote.

    I'll note that the President and his team have publicly said the 
same thing this week.

    If any of my Democratic colleagues are willing to come to the 
negotiating table in good faith and without any unreasonable 
preconditions, I welcome their advice and input.

    So far, my colleagues have insisted that the majority agree to a 
series of process demands before any substantive bipartisan talks can 
take place. Effectively, they want to ensure that we make it easier for 
them to block the bill entirely before they'll talk about what they 
want to put in the bill.

    That seems counterintuitive to me. And, in my view, it is 
unreasonable. Furthermore, I don't recall the other side ever offering 
such a concession when they were in the majority.

    We should not let process concerns keep us from talking about the 
substance of a tax reform bill. My hope is that my colleagues on the 
other side will put these demands aside and let us begin searching for 
common ground on these important issues.

    Those threshold matters aside, let me talk about today's hearing.

    One argument that rears its ugly head in every tax reform debate is 
the claim that proponents of reform want to cut to taxes for the uber-
rich and give additional tax breaks to greedy corporations.

    We've heard that argument repeated in the current debate. While 
these claims are about as predictable as the sunrise, they are simply 
not true.

    While I can't see into the hearts of every member of Congress, I 
truly don't know of a single Republican who, when thinking about tax 
reform, asks themselves what they can do to help rich people. That has 
never been our focus, and it is not our focus now.

    Instead, we are focused squarely on helping the middle class, and 
recent proposals to reform the individual tax system reflect that.

    For nearly a decade now, middle-class families and individuals have 
had to deal with a sluggish economy, sub-standard wage growth, and a 
growing detachment from labor markets.

    Tax reform, if it's done right, can help address these problems and 
provide much-needed relief and opportunity for millions of middle-class 
families. That, once again, is our goal in tax reform--it is, in fact, 
a driving force behind our efforts.

    Let's talk about a few specific proposals.

    Under our tax code, individual taxpayers or married couples can opt 
to either take the standard deduction or itemize deductions to lower 
their tax burden. Currently, about two-thirds of all U.S. taxpayers opt 
to take the standard deduction. These are often low-to-middle income 
taxpayers.

    One idea that has been central to a number of tax frameworks is a 
significant expansion of the standard deduction, which would reduce the 
tax burden for tens of millions of middle-class families and eliminate 
Federal income tax liability for many low- to middle-income Americans.

    I'll note that this is not only a Republican idea. In fact, a few 
years back, our ranking member introduced legislation that would have 
nearly tripled the standard deduction.

    This is the very definition of middle-class tax relief, and it goes 
beyond direct tax and fiscal benefits.

    With a significantly expanded standard deduction, the tax code 
would immediately become much simpler for the vast majority of middle 
class taxpayers. And that is no small matter.

    Currently, American taxpayers--both individuals and businesses--
spend about 6 billion hours and nearly a quarter of a trillion dollars 
a year complying with tax filing requirements. This, of course, is not 
surprising given that our tax code has grown exponentially into a 
three-million-word behemoth that is basically indecipherable for the 
average American.

    That one change--expanding the standard deduction--would let 
millions of 
middle-class taxpayers avoid having to navigate the treacherous 
landscape of credits and deductions. Combined with other ideas, 
including a significant reduction in the number credits and deductions 
in the tax code and a radically simplified rate structure, this 
approach will save middle-class families both time and money.

    I expect there to be some disagreements about what credits and 
deductions to keep and which to repeal in the name of tax simplicity, 
efficiency, and fairness. I expect we'll air some of those differences 
of opinion here today.

    There are other tax reform proposals under discussion that will 
help the middle class.

    For example, an increase and enhancement of the Child Tax Credit 
would benefit middle- and lower-income families almost exclusively.

    And, by reducing barriers and disincentives for savings and 
investment, we can expand long-term wealth and improve the quality of 
life for those in the middle class.

    These are some of the central ideas being discussed to reform the 
individual tax system. And, in virtually every case, the primary 
beneficiaries of these proposals would be middle-class taxpayers.

    I know that there are Democrats who support these types of reforms. 
As I mentioned earlier, I hope we can recognize this common ground and 
find ways to collaborate in the broader tax reform effort.

    I'll also note that the middle class has a significant stake in our 
efforts to reform the business tax system. But, that is a matter for 
another hearing.

    Once again, this committee has a lot of work to do. There is not 
going to be a top-down directive that makes the hard decisions for us. 
I know we're up to the task and that most of us are game to participate 
in the process to help us reach a successful conclusion.

    Before I turn to Senator Wyden, I want to say that I hope we can 
have a productive discussion of options to reform taxes for 
individuals, and not a debate on so-called ``plans'' based on outside 
analysts' conjectures and assumptions. It is all too common for 
ideological think tanks and partisan analysts to take short statements 
outlining broad principles on tax reform and then fill in the gaps with 
their own subjective assumptions about details just to parade out a 
list of horribles that they then use to tarnish the entire reform 
effort.

    Let us discuss real ideas and proposals, keeping in mind that the 
Finance Committee will not be bound by any previous tax reform proposal 
or framework when we start putting out bill together.

                                 ______
                                 
        Prepared Statement of Ramesh Ponnuru, Visiting Fellow, 
                     American Enterprise Institute
    Chairman Hatch, Ranking Member Wyden, and distinguished members of 
the Finance Committee, thank you for convening this hearing on 
``Individual Tax Reform.'' I am a visiting fellow at the American 
Enterprise Institute, a senior editor at National Review, and a 
columnist for Bloomberg View. This testimony reflects my own views and 
not those of any organization with which I am affiliated. It is an 
honor to be testifying before you.

    While tax policy has been a politically contentious issue, over the 
last 20 years a broad political consensus has supported tax relief for 
parents of dependent children. The major reforms of the tax code 
undertaken over this period have consistently included such tax relief. 
The Taxpayer Relief Act of 1997 instituted a tax credit of $500 per 
eligible child. The Economic Growth and Tax Relief Reconciliation Act 
of 2001 raised the amount of the tax credit to $1,000. The Jobs and 
Growth Tax Relief Reconciliation Act of 2003 accelerated the phase-in 
of that expansion. And the American Tax Relief Act of 2012 made that 
expansion permanent.

    People on different parts of the political spectrum have had 
varying reasons for supporting the child credit, including an 
appreciation of the costs of raising children and the belief that 
raising children is, in no merely metaphorical sense, an investment in 
the Nation's future. The fact that the child credit lifts nearly 3 
million people out of poverty each year has also brought it support.\1\
---------------------------------------------------------------------------
    \1\ ``Policy Basics: The Child Tax Credit,'' Center for Budget and 
Policy Priorities, October 21, 2016.

    Yet the child credit has had critics, who believe that it 
represents a form of governmental favoritism or even ``social 
engineering,'' and that changes to the tax code should consist of 
---------------------------------------------------------------------------
measures more directly related to increasing economic growth.

    In this testimony I will lay out a case for expanding the child 
credit--specifically, for increasing the maximum level of the credit 
and for applying it to reduce payroll-tax as well as income-tax 
liability--as a crucial component of tax reform.
                      reducing the ``parent tax''
    The main goal of tax reform is generally taken to be to move closer 
to a tax code that raises the desired amount of revenue while 
minimizing the distortions that government policy can create. One 
example of a distortion caused by government policy is an unjustified 
tax break for a particular kind of investment. This departure from 
neutrality between different types of economic activity has two 
negative effects. It unfairly transfers resources from one group of 
people to another, and it reduces the efficiency with which markets 
direct capital to its most productive uses. In that way the tax break 
reduces national welfare and eliminating the break would increase it. 
Another example of a distortion: in theory, high tax rates on income 
can so discourage work that reducing them raises the same amount of 
revenue while allowing for a larger economy.

    One rationale for an expanded tax credit for children is that it 
reduces a distortion caused by government policy: the large, though 
implicit, tax on parenting that the structure of our entitlement 
programs has inadvertently created. Social Security and Medicare, our 
principal government programs to take care of senior citizens, rely for 
their financing, in large part, on parents. All taxpayers, whether or 
not they have children, contribute to the program. Parents, however, 
contribute to the program both through the Federal taxes they pay and 
through the financial sacrifices they make to raise children 
(including, in many cases, forgone income). The Federal Government does 
not recognize the extent of this contribution, which has the effect of 
causing parents to shoulder a larger share of the burden of government 
than they should.

    Consider two couples with similar earnings histories, one with two 
children and one with none. The first couple contributes more to the 
future of the entitlement programs but gets no more benefits from those 
programs as a result. In the world before the entitlement State, many 
of the financial sacrifices the first couple made in raising children 
would redound to their direct benefit in old age, as their children 
took care of them. Entitlements socialize much of the financial return 
from child-rearing for the betterment of senior citizens as a group, 
regardless of whether or how many children those senior citizens have.

    Society has made this choice for weighty and very widely supported 
reasons. But if it does not recognize parental investment in children 
as a contribution to the entitlement programs, it is, whether it 
consciously aims to do so or not, transferring resources from parents 
to the childless and from larger families to smaller ones. We can call 
this transfer the ``parent tax.'' \2\
---------------------------------------------------------------------------
    \2\ Large transfers of this kind can also be expected, all else 
equal, to reduce by some amount the number of children that people 
raise. For evidence that this effect has occurred in developed 
countries, see Michele Boldrin, Mariacristina De Nardi, and Larry E. 
Jones, ``Fertility and Social Security,'' NBER Working Paper no. 11146, 
February 2005; and Isaac Ehrlich and Jinyoung Kim, ``Social Security, 
Demographic Trends, and Economic Growth: Theory and Evidence from the 
International Experience,'' NBER Working Paper no. 11121, February 
2005.

    Two mistaken objections to this analysis may suggest themselves. 
The first is that it is a kind of single-entry bookkeeping, since most 
of those children will grow to be senior citizens one day and then 
benefit from Social Security and Medicare themselves. In the past, I 
have suggested a thought experiment to illustrate why that's a mistaken 
view.\3\ Imagine a society with old-age programs similar to ours in 
which for generations each woman has had two children. Imagine next 
that for one generation each woman has three children, and then the 
pattern of two children re-asserts itself. That increase in the number 
of children would work an improvement in the finances of the programs 
that would never be undone. For one generation, the same tax rate would 
yield a higher level of benefits. Afterward that society could revert 
to the previous benefit level, but it would never have to go below that 
level. (Alternatively, that society could react to its baby boom by 
keeping benefits flat and for one generation reducing tax rates.) \4\
---------------------------------------------------------------------------
    \3\ Ramesh Ponnuru, ``The Empty Playground and the Welfare State,'' 
National Review, May 28, 2012.
    \4\ The thought is developed in Hans-Werner Sinn, ``The Value of 
Children in a Pay-As-You-Go Pension System: A Proposal for a Partial 
Transition to a Funded System,'' National Bureau of Economic Research 
Working Paper 6229, October 1997.

    The second mistaken objection is that this analysis omits the many 
government benefits that accrue to families with children. Childless 
adults pay for schools through their taxes, after all. The difference 
is that all of these childless adults benefited themselves from an 
education financed by someone else. A system of general taxation to pay 
for schooling does not create free riders in the way Social Security 
and Medicare do, and does not represent a transfer from smaller 
---------------------------------------------------------------------------
families to larger ones.

    Other government policies, however, represent genuine but very 
partial offsets to the parent tax: notably the tax exemption for 
dependents and the existing tax credit for children. The problem is the 
scale: these policies reduce the parent tax but leave it still quite 
high. One conservative estimate suggests that the child credit would 
need to increase to roughly $4,800 per child to eliminate it 
completely.\5\
---------------------------------------------------------------------------
    \5\ Robert Stein, ``Taxes and the Family,'' National Affairs, 
Winter 2010. I have updated his estimate using the Consumer Price 
Index.

    While a large child credit is not the only way to reduce the parent 
tax, it has significant advantages over other methods. An alternative 
that has been proposed is to reduce payroll taxes based on the number 
of children a taxpayer is raising.\6\ Benefit levels in retirement 
could also be set to vary based on the number of children a senior 
citizen had raised. A larger child credit would, however, be 
administratively simpler than either policy, since it would only change 
an existing provision of the tax code. Compared to a higher-benefits 
policy, it would also direct resources to households at the time they 
are most likely to be needed: that is, when they are raising 
children.\7\
---------------------------------------------------------------------------
    \6\ Charles Blahous and Jason J. Fichtner, ``Limiting Social 
Security's Drag on Economic Growth: Removing Disincentives to Personal 
Savings and Labor Force Participation,'' Mercatus Research, 2012.
    \7\ Shrinking the entitlement programs would also reduce the parent 
penalty, although that proposal would of course involve important 
trade-offs beyond the scope of this testimony. The programs would have 
to be very drastically reduced, however, to eliminate the parent tax 
entirely. See Hans-Werner Sinn, ``The Pay-As-You-Go Pension System as a 
Fertility Insurance and Enforcement Device,'' National Bureau of 
Economic Research Working Paper 6610, June 1998.

    A larger deduction for the cost of commercial day care, meanwhile, 
would reduce the parent tax for some families but exclude the many 
---------------------------------------------------------------------------
families who make different arrangements for their children.

    An increased standard deduction has also been proposed as a way to 
deliver tax relief to middle-class Americans. Whether or not this 
increase would be desirable on other grounds, it would not reduce the 
parent tax. It appears that more of the benefits of a child-credit 
expansion would also accrue to relatively low-income households.\8\
---------------------------------------------------------------------------
    \8\ The Tax Foundation estimates that a doubling of the standard 
deduction would reduce revenue by $1.3 trillion over 10 years while 
raising incomes in the second-lowest-earning quintile of taxpayers by 
0.15 and 1.4 percent; doubling the child credit would on the other hand 
reduce revenue by $640 billion over 10 years while raising income in 
the lowest quintile by 0.5 percent and the second-lowest quintile by 
2.1 percent. ``Options for Reforming America's Tax Code,'' Tax 
Foundation, 2016.
---------------------------------------------------------------------------
            applying the child credit against payroll taxes
    The logic of this case for a large child credit does not just 
militate in favor of raising its maximum value from $1,000 per child to 
some bigger number. It also militates in favor of applying it against 
payroll taxes as well as income taxes: in favor, that is, of making it 
partially ``refundable.''

    The parent tax arises, again, because parents are contributing to 
Social Security and Medicare both through their taxes--including 
especially their payroll taxes--and through the financial sacrifices 
they make to raise children. If we wish to reduce their contributions 
to put it on par with those of non-parents, we need to take account of 
the payroll taxes as well as the income taxes. Consider once more our 
two couples, one with children and one without, and assume both of them 
are paying the same amount of payroll taxes but do not make enough 
money to have income-tax liability. The former couple should have a 
lower payroll-tax liability.

    Not only that: The credit should in principle be applied not just 
against 
``employee-side'' payroll taxes but against ``employer-side'' payroll 
taxes as well. It is widely recognized among economists that the taxes 
an employer pays toward Social Security and Medicare for employees 
represent forgone wages.\9\ Their true economic incidence, that is, 
falls almost entirely on the worker. They, too, are thus part of the 
contribution that the taxpaying employee makes to these programs.
---------------------------------------------------------------------------
    \9\ See, for example, Jonathan Gruber, ``The Incidence of Payroll 
Taxation: Evidence from Chile,'' National Bureau of Economic Research 
Working Paper 5053, March 1995.

    Some observers have expressed concern about taking people off the 
income tax rolls. The child credit has already kept some families from 
having a positive income-tax liability and an expanded child credit 
would have that effect for even more families--and, as we have seen, 
reduce their payroll-tax liability too. These observers worry that 
voters who do not pay taxes will have an unhealthful relationship to 
government, seeing its benefits as free. The empirical grounding for 
this fear is weak, however, and in any case a household's removal from 
the tax rolls will be temporary: Adults will lose the credit when their 
children grow up. And if any large group of citizens can be expected to 
look to the future, it should be parents.
                  paying for an enlarged child credit
    As with any form of tax relief, a larger child credit would require 
the government either to tolerate larger deficits, to reduce spending, 
or to raise other taxes. It is possible to agree on the case for a 
larger child credit while disagreeing on many of these questions of 
fiscal and tax policy. My own top preference would be to reform Social 
Security and Medicare in ways that would reduce the Federal 
Government's long-term spending compared to their projected levels 
while also maintaining and perhaps even augmenting our current 
commitments to the neediest.\10\ My second preference would be to scale 
back or eliminate tax breaks such as the deductions for mortgage 
interest and State and local taxes, especially for the highest earners. 
A third solution would be to lower the thresholds at which people move 
into the highest tax brackets, so that the top marginal tax rates in a 
reformed tax code apply to a larger number of people.
---------------------------------------------------------------------------
    \10\ See Andrew Biggs, ``A New Vision for Social Security,'' 
National Affairs, Summer 2017, for an example of a proposal that seeks 
these goals.

    My main point in this testimony, however, is to argue that reducing 
the parent tax ought to be a priority for tax reform. If tax reform 
aims to keep revenues flat, then it should expand the child credit 
somewhat and make revenue-raising tax policy changes to compensate. But 
the increase in the credit cannot be wholly paid for by eliminating the 
dependent exemption, since that would leave the parent tax 
unaffected.\11\ If tax reform instead aims for lower revenues than 
currently projected, then a larger child credit should account for some 
of that reduction. An expanded tax credit for children should be part 
of any larger tax reform that Congress enacts, so that the reform is 
both pro-growth and pro-family.
---------------------------------------------------------------------------
    \11\ Eliminating the dependent exemption and raising the child 
credit by $600 per child, for example, may be a good idea for reasons 
unrelated to the parent tax. But it would do nothing to provide tax 
relief for the many parents in the 15-percent tax bracket--since the 
lost value of the exemption would cancel out the expansion of the 
credit--and would therefore not reduce the parent tax they pay.

                                 ______
                                 
          Questions Submitted for the Record to Ramesh Ponnuru
               Question Submitted by Hon. Orrin G. Hatch
                      funding the child tax credit
    Question. Mr. Ponnuru, you suggest a much higher Child Tax Credit. 
As you acknowledge, this will cost a lot in the 10-year-window. And so, 
in the 10 years, this would be difficult to pay for.

    But, I suppose one of your points is that it will significantly pay 
for itself in the long run? That is, today's children will be 
tomorrow's Social Security taxpayers? If, rather than using a 10-year 
budget window, Congress used a budget window with an infinite horizon, 
do you have thoughts on how your proposal might score?

    Answer. The rationale for an expanded child credit is rooted in 
fairness: the current system overtaxes parents relative to non-parents, 
and large families relative to small ones. An enlarged tax credit might 
also change behavior in some cases, however, by making a larger family 
more affordable. To the extent the policy enables larger families, it 
will, over a long enough time horizon, partially recoup its costs.

                                 ______
                                 
                Questions Submitted by Hon. Bill Nelson
    Question. In your opinion, did the 1986 Tax Reform Act solve the 
problems it was intended to fix? If so, please provide some examples of 
how. If not, why?

    Answer. The Tax Reform Act of 1986 had both positive and negative 
features. On the positive side of the ledger, I would place the 
reduction of marginal tax rates for individuals; the expansion of the 
Earned Income Tax Credit and personal exemption; the elimination of 
real estate tax shelters; and the simplification of the tax code. On 
the negative side, I would place the lengthening of depreciation 
schedules, the restrictions on IRAs, and the increase in capital gains 
tax rates. Overall I would say the reform was better at simplifying the 
code, albeit temporarily, than at promoting economic growth.

    Question. President Trump has said he wants to lower the top 
business tax to 15 percent. Do you believe this can be done without 
significantly adding to the deficit? If so, please provide a potential 
scenario for deficit-neutral tax reform in detail (with budget 
estimates).

    Answer. I do not believe the corporate tax rate can be brought to 
15 percent without reducing revenues significantly. Unless spending 
were cut or other taxes raised, the deficit would therefore rise 
significantly.

    Question. What metrics or considerations should Congress use to 
determine appropriate trade-offs in tax reform?

    Answer. I believe the tax code should be designed so as to raise 
whatever level of revenue Congress deems appropriate in the least 
damaging manner possible. Among the types of harm Congress should 
strive to avoid are reductions in the incentives to work, save, and 
invest; favoritism toward some kinds of economic activity over others; 
tax bills that are too high, especially on low earners; and tax burdens 
on parents that are unfairly high.

    As you suggest, there are unavoidable trade-offs: raising revenues 
inevitably reduces incentives to work, save, and invest. For a given 
level of revenue, leveling the playing field for families (through an 
expanded child credit) means accepting slightly worse incentives to 
work, save, and invest (through lower marginal tax rates). There is no 
formula for making these trade-offs. I believe tax reform should make 
improvements on multiple fronts rather than focusing on only one of 
them single-mindedly.

    Tax reform should, that is, reduce the tax code's favoritism toward 
some economic activities over others; improve incentives to work, save, 
and invest; and offer tax relief to families; all while raising needed 
revenues.

    Question. Do you believe Congress should consider cutting 
entitlement and safety net programs--like Social Security, Medicare, 
TANF, and food stamps--to pay for tax reform? If so, why? If not, why 
not?

    Answer. I favor reforms that restrain the growth of Social Security 
and Medicare. It might be worth considering using some of the budgetary 
savings to provide additional tax relief. But most reforms would have 
to be phased in slowly so as to enable people to adjust their 
retirement plans in advance. Such reforms would accumulate savings too 
slowly to finance immediate tax relief.

    Question. In a recent speech, the President stated: ``Our tax plan 
represents a sharp reversal from the failed policy of the past. 
America's high tax rates punish companies for doing business in America 
and encourages them to move to other countries. . . . There has to be a 
price to pay when that happens; when they let our people go and that 
happens, and they think they can sell the product right back into the 
USA. There is going to be a big price to pay, and there has been, and 
that's why you're seeing a big change.'' Please provide some 
suggestions on how the President's tax reform plan could provide a 
``price to pay'' for companies that offshore jobs.

    Answer. When a company moves production for the American market 
outside the United States, it pays various costs, including the cost of 
transporting those goods and a reduced ability to reap the benefits of 
productive American labor. I do not believe that government policy 
should seek to increase those costs. Rather we should make sure that 
our policies do not impose unnecessary costs on producing goods in 
America. Lower and fairer taxes on business activity in the United 
States would make it more attractive to produce here. The ``framework'' 
endorsed by President Trump takes many positive steps in this 
direction.

    Question. In your opinion, does a lower tax rate or tax exemption 
for the foreign earnings of companies that offshore U.S. jobs amount to 
a ``price to pay?''

    Answer. No.

    Question. One of the President's stated objectives for tax reform 
is to make the tax code fairer. How would you suggest he achieve this 
objective?

    Answer. The most important way he could achieve this objective 
would be to put real money behind the ``significant'' expansion of the 
tax credit for children that he has already endorsed, and to make sure 
that some of that money relieves families with low and moderate incomes 
from their payroll tax liabilities.

                                 ______
                                 
                 Prepared Statement of Hon. Ron Wyden, 
                       a U.S. Senator From Oregon
    It'd be great if what I'm hearing about the goals for individual 
tax reform actually lined up with the details of the plans that are 
reportedly in the works, but that just isn't the case. Not even close.

    The President declared to the Nation that his tax plan would not 
give any breaks to the wealthy. But the fact is, his one-page tax 
outline has a new, lunar crater-
sized loophole for the wealthy allowing them to abuse pass-through 
status. Pass-through status is supposed to be about helping small 
businesses, but the Trump plan turns it into a scheme for the wealthy 
to dodge paying their fair share. That's on top of abolishing the 
estate tax, which only touches one out of every 500 wealthy estates 
today. It's another outlandish giveaway to people at the top.

    This morning the Finance Committee is going to spend a few hours 
spinning its wheels while the actual framework of the Republican tax 
plan is being written behind closed doors. That's not to say the issues 
that'll be discussed today are unimportant; nobody has invested more 
sweat equity in tax reform than I have.

    But the proposal the committee ought to be evaluating this morning 
is coming together in secret, written by special interests and it's 
skipping right past any serious debate or amendment in this room.

    And in the meantime, if all you did was listen to the talking 
points, it'd be easy to think the Republican plan would put a big focus 
on the burden of complexity the tax code heaps onto so many middle-
class families. But the actual architecture of the plan in the works 
doesn't reduce complexity or focus on the middle class--the Republican 
plan endows future generations of the mega-wealthy.

    There is a blueprint for bipartisan, comprehensive tax reform that 
works. It's Reagan-style tax reform, and it's not what Republicans are 
working on today.

    Reagan-style tax reform fights complexity by fighting unfairness. 
Thirty-one years ago, the reform bill President Reagan fought for and 
signed into law equalized the tax treatment of wages and wealth. That 
meant that the worker who punched a clock going in and out of every 
shift wasn't getting a raw deal compared to the fatcats and trust fund 
babies.

    Reagan-style tax reform is also about clearing out the deadwood--
the provisions that do a whole lot more to please special interests and 
lobbyists than they do to create jobs or help families climb the 
economic ladder.

    Those are propositions that I believe ought to get a lot of 
bipartisan interest again in 2017. That's because the tax code on the 
books today amounts to a tale of two systems. There's a strict set of 
rules for the cop and the nurse who are married and raising kids. Their 
taxes come right out of their paychecks--no special tax dodges or 
schemes for them to exploit. Then there's another set of rules for the 
most fortunate. It says they can decide how much to pay and when to pay 
it.

    That's the brand of unfairness that Reagan-style reform would go 
after. Tax reform in 2017 should be an opportunity to put money back 
into those cops' and nurses' paychecks, and to help those families save 
for retirement, pay for college and afford housing.

    But the basic proposition that Republicans have on offer goes after 
middle-class tax benefits like the State and local deduction and 
incentives for home ownership and retirement savings. And it gores the 
middle class to finance unprecedented tax handouts for the biggest 
corporations and the most fortunate.

    When it comes to State and local tax deductions, this is fake tax 
reform. And it's not just a play at taking from blue States. There are 
middle-class families across the country--taxpayers in deep blue areas 
that went for Clinton and scarlet red areas that went for Trump--
that'll be taxed twice on the same income if State and local deduction 
is eliminated. The dreaded double taxation--if you're opposed to it 
when it involves corporate income, you can't line up behind a plan to 
double tax middle-class families twice on their hard-earned pay.

    When it comes to simplification, it's easy to hold up a proposal to 
double the standard deduction as evidence that you want to make filing 
easier for a lot of people. But in the recent past I've called for 
tripling the standard deduction. So the Republican plan for the 
standard deduction would be a whole lot less generous in that regard.

    The basic framework of this plan looks like what you'd put together 
if you think there are a lot of five-car garages that really need 
expanding on the middle class's dime. And unfortunately, the 
administration and Republicans in Congress are committed to the 
partisan approach. Leader McConnell has said he wants another crack at 
reconciliation to jam this tax plan through the Senate, and he doesn't 
want input from Democrats.

    So this morning, the committee is going to hear a lot about the 
complexity of our tax code, the burden on families, and the need to 
spark economic growth. I am all ears when it comes to ideas centered on 
those issues--built on giving everybody a chance to get ahead the way 
Reagan-style tax reform did. But the Republican plan I see coming 
together right now doubles down on the rotten unfairness in our tax 
code. And that would make it a failure for the middle class and people 
working to get there.

    During today's hearing, I hope the committee is able to take a 
close look at the real causes of unfairness and complexity, and why 
going after middle-class tax breaks to fund a tax cut for the wealthy 
is the wrong approach to reform.

    Thank you, Chairman Hatch.

                                 ______
                                 

                             Communications

                              ----------                              


               Adoption Tax Credit Working Group (ATCWG)

                             July 17, 2017

The Honorable Orrin Hatch
Chairman
Committee on Finance
U.S. Senate

The Honorable Ron Wyden
Ranking Member
Committee on Finance
U.S. Senate

Dear Chairman Hatch, Ranking Member Wyden, and Members of the Senate 
Finance Committee:

On behalf of the Adoption Tax Credit Working Group (ATCWG), we would 
like to inform the Committee on Finance of our efforts and offer 
ourselves as a resource. The ATCWG is a national collaboration of 150 
organizations united by our support and advocacy for the adoption tax 
credit, which plays an important role in encouraging the adoption of 
children who need families. The organizations that make up the ATCWG 
represent children and families from every sector of adoption, 
including U.S. foster care, domestic private, and international 
adoptions. With our broad representation and involvement in adoption 
policy and practice issues, we have a unique perspective on the role 
that the tax credit plays for Americans who adopt.

The ATCWG understands that there is bipartisan interest in simplifying 
the tax code and we are grateful for your outreach for stakeholder 
input. As the U.S. Senate Committee on Finance (``Committee'') 
considers the best means of achieving this goal, we urge you to take 
into account the strong public policy rationale for the adoption tax 
credit, the broader and longer term cost savings adoption ensures, and 
the bipartisan history of and support for the credit since its 
inception.

First enacted in 1996 as a part of the Small Business and Job 
Protection Act of 1996 (Pub. L. 104-188), the adoption tax credit 
advances the important goal of enabling domestic and intercountry 
adoptions, especially for children with special needs who otherwise 
might linger in costly foster care without the benefits and security of 
permanent, loving families. Over 53,000 children were adopted from 
foster care in fiscal year 2015 alone.\1\ By offsetting some of the 
costs of adoption or of caring for a child with special needs, the tax 
credit makes adoption a more viable option for many children and 
families. Over 60 percent of adopted children are adopted by lower- and 
middle-income taxpayers, and almost half of children adopted from 
foster care live in families with household incomes at or below 200 
percent of the federal poverty level.\2\ Congress has always worked 
across the aisle to prioritize the continuation of the adoption tax 
credit, and we hope that the Committee will continue to recognize the 
value of the credit.
---------------------------------------------------------------------------
    \1\ The AFCARS Report: Preliminary FY 2015 Estimates as of June 
2016, U.S. Department of Health and Human Services: Administration for 
Children and Families, Adoption and Foster Care Analysis and Reporting 
System, retrieved July 13, 2017, from: https://www.acf.hhs.gov/sites/
default/files/cb/afcarsreport23.pdf.
    \2\ ``The Importance of the Adoption Tax Credit,'' The Adoption Tax 
Credit Working Group, 2015, retrieved February 18, 2016, from https://
adoptiontaxcreditdotorg.files.wordpress.com/2015/10/atcfactsheet.pdf.

We applaud the Committee's goal to provide much-needed tax relief to 
middle-class individuals and families through reforms to the individual 
tax system. We hope that it will not be forgotten that the adoption tax 
credit is an existing policy that does just this. It not only provides 
support directly to lower- and moderate-income families, phasing out 
for those with higher incomes, but it does so in a way that creates 
government savings. A study reported by the federal Children's Bureau 
showed that the government saves between $65,000 and $127,000 for each 
child who is adopted rather than placed in long-term foster care.\3\ 
These savings accrue from reductions in the need for direct child 
welfare services (foster care and court oversight) and from the long-
term societal benefits of adoption (increased graduation rates, reduced 
homelessness, and reduced incarceration, for example). Annually, over 
22,000 youth exit foster care without ever finding a permanent family 
to help them in the transition to adulthood.\4\ An extensive study by 
Nicholas Zill found that 81 percent of males in long-term foster care 
had been arrested compared with 17 percent of all young males 
nationally. Incarceration of former foster youth is estimated to cost 
society $5.1 billion annually.\5\
---------------------------------------------------------------------------
    \3\ R.P. Barth, C.K. Lee, J. Wildfire, and S. Guo, ``A Comparison 
of the Governmental Costs of Long-Term Foster Core and Adoption,'' 
Social Service Review (March 2006), retrieved April 11, 2013, from: 
http://www.flgov.com/wp-content/uploads/childadvocacy/
foster%20care%20and%
20adoption%20study.pdf.
    \4\ The AFCARS Report: Preliminary FY 2015 Estimates as of June 
2016, U.S. Department of Health and Human Services: Administration for 
Children and Families, Adoption and Foster Care Analysis and Reporting 
System, retrieved July 13, 2017, from: https://www.acf.hhs.gov/sites/
default/files/cb/afcarsreport23.pdf.
    \5\ Zill, Nicholas (2011), ``Adoption From Foster Care: Aiding 
Children While Saving Public Money.'' Brookings Institute Center on 
Children and Families, retrieved from http://www.brookings.edu//media/
research/files/reports/2011/5/adoption-foster-care-zill/05_adop
tion_foster_care_zill.pdf.

Children and youth deserve a permanent family, and while adoption 
certainly supports these children, it also benefits society broadly.\6\ 
Adoption places children on a path to becoming more productive 
citizens, and research tells us that poor outcomes are common for youth 
who exit foster care without stable families. In addition to higher 
incarceration rates, youth who ``aged-out'' of the foster care system 
face many other difficult odds. For example, only 58 percent of foster 
youth graduated high school by age 19, only 50 percent were employed by 
age 24, and 71 percent of young women were pregnant by age 21.\7\ 
Studies comparing children who remain in foster care to children who 
are adopted have shown that: adopted children are 54 percent less 
likely to be delinquent or arrested, 19 percent less likely to become 
teen parents, and 76 percent more likely to be employed.\8\
---------------------------------------------------------------------------
    \6\ Jim Casey Youth Opportunities Initiative (n.d.), retrieved 
February 3, 2015, from http://www.jimcaseyyouth.org/.
    \7\ Jim Casey Youth Opportunities Initiative (n.d.), retrieved 
February 3, 2015, from http://www.jimcaseyyouth.org/.
    \8\ Fixsen, A. (2011), ``Children in Foster Care Societal and 
Financial Costs: A Family for Every Child,'' retrieved from http://
www.afamilyforeverychild.org/Adoption/AFFECreportonchildrenin
fostercare.pdf.

As a collective group of diverse organizations, representing thousands 
of adoptive families across the country and hundreds of thousands of 
waiting children, one of the goals of the ATCWG is to preserve the 
adoption tax credit as a part of the individual tax code. As laid out 
above, the adoption tax credit supports families who desire to adopt 
and children who deserve a permanent family. However, we would be 
remiss if we did not bring to your attention the fairness that a 
---------------------------------------------------------------------------
refundable tax credit creates for American families.

Some families will never be able to adopt without the benefit of the 
adoption tax credit. Others will adopt but will not benefit at all, 
which means they may face challenges meeting their children's needs, 
particularly children adopted from foster care with special needs.

Over time, Congress has made a series of improvements to the adoption 
tax credit--the vast majority of which were aimed at addressing the 
fact that many families who adopted from foster care were not able to 
claim the credit. Data from 2010 and 2011, when the credit was 
refundable, shows that for the first time in the credit's history, 
families who adopted children with special needs from foster care were 
able to benefit like other adoptive families. While we understand the 
complex budget and tax issues at hand, failure to maintain this 
progress will undoubtedly result in more children remaining in foster 
care rather than moving into permanent families. There are currently 
more than 111,000 children in foster care waiting to be adopted,\9\ and 
this number has increased each of the last three years. The societal 
and financial cost of eliminating the adoption tax credit at this time 
would be especially harmful to waiting children, the families that 
might adopt them, and the national budget. Alternatively, maintaining 
or improving the credit, by returning it to refundability, would serve 
a critical population and eliminate costs related to maintaining youth 
in less desirable, impermanent foster care as well as costs related to 
the negative outcomes youth face who age out of foster care without 
permanency.
---------------------------------------------------------------------------
    \9\ The AFCARS Report: Preliminary FY 2015 Estimates as of June 
2016, U.S. Department of Health and Human Services: Administration for 
Children and Families, Adoption and Foster Care Analysis and Reporting 
System, retrieved July 13, 2017, from: https://www.acf.hhs.gov/sites/
default/files/cb/afcarsreport23.pdf.

As the Committee develops recommendations to overhaul the Internal 
Revenue Code, we hope that you will consider the ATCWG Executive 
Committee as a resource for information related to the adoption tax 
credit. Collectively, we have many decades of adoption experience and a 
comprehensive understanding of how the adoption tax credit benefits 
children and is used by families, and we would be pleased to provide 
any additional information to you and your staff. Thank you for your 
---------------------------------------------------------------------------
consideration.

Sincerely,

         Adoption Tax Credit Working Group Executive Committee:

                 American Academy of Adoption Attorneys

                         Adopt America Network

                     Christian Alliance for Orphans

      Congressional Coalition on Adoption Institute (Secretariat)

                  Dave Thomas Foundation for Adoption

                      Donaldson Adoption Institute

                     National Council for Adoption

              North American Council on Adoptable Children

             RESOLVE: The National Infertility Association

                               Show Hope

                           Voice for Adoption


                   Adoption Tax Credit Working Group:
 
 
 
Villa Hope                             Birmingham         AL
Alabama Foster and Adoptive Parent     Cullman            AL
 Association
Lifeline Children's Services, Inc.     Birmingham         AL
Dillon Southwest                       Scottsdale         AZ
Partners for Adoption                  Walnut Creek       CA
AASK--Adopt A Special Kid              Martinez           CA
About a Child                          Redwood City       CA
Adoption Law Group                     Pasadena           CA
Angels' Haven Outreach                 Pleasant Hill      CA
Bal Jagat--Children's World Inc.       Long Beach         CA
Independent Adoption Center            Pleasant Hill      CA
Pact, An Adoption Alliance             Oakland            CA
Across the World Adoptions             Pleasant Hill      CA
Sierra Forever Families                Sacramento         CA
Family Connections Christian           Modesto            CA
 Adoptions
Bay Area Adoption Services             Mountain View      CA
AdoptFund, Inc.                        Los Angeles        CA
Alpine Adoption, Inc.                  Lakewood           CO
Adoption Today                         Windsor            CO
Project 1.27                           Littleton          CO
Fostering Families Today               Windsor            CO
The Adoption Exchange                  Aurora             CO
Fund Your Adoption                                        CO
CT Association of Foster and Adoptive  Rocky Hill         CT
 Parents
Lutheran Services in America           Washington         DC
Families for Private Adoption          Washington         DC
Family Equality Council                Washington         DC
Child Welfare League of America        Washington         DC
 (CWLA)
Family and Youth Initiative            Washington         DC
Florida State Foster/Adoptive Parent   Minneapolis        FL
 Association
Broward Foster and Adoptive Parent     Plantation         FL
 Association
Beacon House Adoption Services, Inc.   Pensacola          FL
Jewish Adoption and Foster Care        Sunrise            FL
 Options (JAFCO)
Pinellas County Foster and Adoptive    Largo              FL
 Parent Association
The Adoption Consultancy               Brandon            FL
The Sylvia Thomas Center for Adoptive  Brandon            FL
 and Foster Families
Georgia Council of Adoption Lawyers    Atlanta            GA
Georgia Association of Licensed        Atlanta            GA
 Adoption Agencies
Illien Adoptions International, Inc.   Atlanta            GA
Georgia Center for Opportunity         Norcross           GA
Iowa Foster and Adoptive Parents       Pleasant Hill      IA
 Association
Idaho Foster and Adoptive Parents      Post Falls         ID
 Association
Family Resource Center                 Chicago            IL
Sunny Ridge Family Center              Bolingbrook        IL
The Adoption Lantern                   Wilmette           IL
Adoption Learning Partners             Evanston           IL
The Cradle                             Evanston           IL
Lifesong for Orphans                   Gridley            IL
Adoption ARK, Inc.                     Buffalo Grove      IL
ACT (Adoption in Child Time)           Indianapolis       IN
Families Thru International Adoption   Evansville         IN
MLJ Adoptions                          Indianapolis       IN
Christian Family Services of the       Portland           KS
 Midwest, Inc.
Youthville                                                KS
Resources4adoption.com                 Eudora             KS
Adoption Beyond, Inc.                  Overland Park      KS
American Adoptions                                        KS
All Blessings International, Inc.      Owensboro          KY
Catholic Charities of the Diocese of   Baton Rouge        LA
 Baton Rouge
RainbowKids.com Adoption Advocacy      Harvey             LA
A Red Thread Adoption Services, Inc.   Norwood            MA
Wide Horizons for Children             Waltham            MA
Ascentria                                                 MD
Adoptions Together                     Silver Spring      MD
Global Adoption Services, Inc.         Bel Air            MD
Adoptive and Foster Families of Maine  Saco               ME
Bethany Christian Services             Grand Rapids       MI
Michigan Association for Foster,                          MI
 Adoptive, and Kinship Parents
Adoption Associates, Inc.              Jenison            MI
Americans for International Aid and    Troy               MI
 Adoption
Family Enrichment Center               Battle Creek       MI
European Children Adoption Services    Plymouth           MN
Children's Home Society and Family     St. Paul           MN
 Services
My Adoption Advisor, LLC               Minnetonka         MN
National Foster Parent Association                        MN
Minnesota Foster Care Association      Burnsville         MN
Evolve                                 Minneapolis        MN
Children's Hope International          St. Louis          MO
Lutheran Family and Children's         Independent city   MO
 Services of Missouri
New Beginnings International           Tupelo             MS
 Children's and Family Services
Christian Adoption Services, Inc.      Matthews           NC
Carolina Adoption Services, Inc.       Greensboro         NC
Children at Heart Adoption Services,   Wilmington         NC
 Inc.
Hopscotch Adoptions, Inc.              High Point         NC
Creating a Family                      Brevard            NC
Nebraska Foster and Adoptive Parent    Lincoln            NE
 Association
New Hope for Children                  Newmarket          NH
Golden Cradle Adoption Services        Cherry Hill        NJ
Adoption STAR                          Amherst            NY
Adoptive Families magazine             New York           NY
Ashcraft, Franklin, Young, and         Rochester          NY
 Peters, LLP
Forever Families Through Adoption,     Rye Brook          NY
 Inc.
Helpusadopt.org                        New York           NY
USAdopt, LLC                           New York           NY
Adoptive Parents Committee Inc.        New York           NY
Michael S. Goldstein, Esq., LCSW       Rye Brook          NY
Family Focus Adoption Services         Little Neck        NY
NYSCCC                                 Brooklyn           NY
Spence-Chapin                          New York           NY
Baker Victory Services                 Lackawanna         NY
Law Office of Barbara Thornell Ginn    Cincinnati         OH
Spirit of Faith Adoptions              Sylvania           OH
Caring for Kids                        Cuyahoga Falls     OH
Tuscarawas County Job and Family       New Philadelphia   OH
 Services
National Down Syndrome Adoption        Cincinnati         OH
 Network
European Adoption Consultants, Inc.    Strongsville       OH
National Center for Adoption Law and   Columbus           OH
 Policy
Dillon International, Inc.             Tulsa              OK
Foster Family-based Treatment          Norman             OK
 Association
Journeys of the Heart Adoption         Hillsboro          OR
 Services
All God's Children International       Portland           OR
Holt International Children's                             OR
 Services
Oregon Post Adoption Resource Center   Portland           OR
SPOON Foundation                       Portland           OR
The Sparrow Fund                       Phoenixville       PA
Madision Adoption Associates           Perkasie           PA
Together as Adoptive Parents, Inc.     Harleysville       PA
La Vida International                  Malvern            PA
Three Rivers Adoption Council          Pittsburgh         PA
A Chosen Child Adoption Services       Summerville        SC
Miriam's Promise                       Nashville          TN
Fund Your Adoption                     Gallatin           TN
ONE Church, One Child--OCOC Texas      .................  TX
Buckner International                  Dallas             TX
Gladney Center for Adoption            Fort Worth         TX
Texas Foster Family Association        Pflugerville       TX
Generations Adoptions                  Waco               TX
Upbring                                Austin             TX
Forever Bound Adoption                 Morgan             UT
Youth Villages, Inc.                   Arlington          VA
The Barker Foundation                  Falls Church       VA
Friends in Adoption                    Middletown         VT
                                        Springs
Amara                                  Seattle            WA
Agape Adoptions                        Sumner             WA
Children's House International         Ferndale           WA
WACAP (World Association for Children  Seattle            WA
 and Parents)
Foster Parents Association of          Bremerton          WA
 Washington State
Faith International Adoptions          Tacoma             WA
Families Like Ours, Inc.               Seattle            WA
Lutheran Social Services of Wisconsin  Milwaukee          WI
 and Upper Michigan, Inc.
 


                                 ______
                                 
                 American Retirement Association (ARA)

The American Retirement Association (``ARA'') thanks Chairman Hatch, 
Ranking Member Wyden, and the other members of the Senate Finance 
Committee for holding a hearing on individual tax reform and for the 
opportunity to submit this statement for the record.

The ARA is an organization of more than 20,000 members nationwide who 
provide consulting and administrative services to retirement plans that 
cover millions of American workers and retirees. ARA members are a 
diverse group of retirement plan professionals of all disciplines, 
including: financial advisers, consultants, administrators, actuaries, 
accountants, and attorneys. The ARA is the coordinating entity for its 
four underlying affiliate organizations, the American Society of 
Pension Professionals and Actuaries (``ASPPA''), the National 
Association of Plan Advisors (``NAPA''), the National Tax-deferred 
Savings Association (``NTSA'') and the ASPPA College of Pension 
Actuaries (``ACOPA''). ARA members are diverse but united in a common 
dedication to America's private retirement system.

We wish to submit this statement for the record because we want to 
highlight our concern about the testimony of one witness--Lily 
Batchelder--who called for restructuring the tax incentives for 
retirement savings into a refundable tax credit. She also claimed that 
``the lion's share of tax incentives for retirement savings go to the 
wealthy.'' Unfortunately, the assertion that the tax incentives for 
retirement are upside down is a common myth that we would like to 
dispel. Thanks to the balance imposed by the current law contribution 
limits and stringent nondiscrimination rules, these tax incentives are 
right side up--even before properly considering other components of 
this incentive.
How is the tax benefit distributed?
The distribution of the tax benefit for saving in a defined 
contribution retirement plan is typically analyzed by applying the 
marginal tax rate to current contributions. This analysis reflects the 
progressive nature of the U.S. income tax system, because the value of 
the tax benefit of the deferral increases as the marginal tax rate 
increases.\1\
---------------------------------------------------------------------------
    \1\ In any given year, the number of contributors will outnumber 
the retirees making distributions, further exaggerating this 
distribution of tax benefits.

Focusing on contributions within the context of this progressive income 
tax structure, would lead one to expect the tax benefit for retirement 
savings would favor only higher income individuals. Yet, there are 
important characteristics of retirement savings that are omitted from 
---------------------------------------------------------------------------
this simplistic analysis.

First, current contributions to employer plans are subject to non-
discrimination rules and compensation limits. These rules limit not 
only the deferral rates permitted by higher income participants, but 
also limits the amount of compensation that may be considered for 
purposes of determining contributions. Together, these rules place 
limitations on the disparities in the contribution levels.

Second, retirement incentives encourage savings while the individual is 
working to provide income during retirement. The focus on contributions 
ignores the benefits to retirees. In retirement, lower income 
individuals tend to continue to receive tax benefits, as their 
retirement savings is typically subject to tax at a lower rate compared 
to their working years (see chart one).\2\
---------------------------------------------------------------------------
    \2\ Internal Revenue Service, Statistics of Income Table 1.4, 
Sources of Income by Adjusted Gross Income and W-2 Tabulations.

Third, the analysis ignores that much, if not all, of the apparent tax 
savings to a small business owner accrues to employees in the form of 
employer contributions. Employer contributions represent a critical 
contribution to lower-wage participants. In many cases, complying with 
safe harbor rules means that the only savings many lower-wage 
---------------------------------------------------------------------------
participants receive are these employer contributions.

[GRAPHIC] [TIFF OMITTED] T1417.018


Finally, analyzing the benefit for contributions in a given year 
provides only a snapshot of the benefits, and fails to recognize the 
disparity in tax rates applied to distributions and tax treatment of 
other retirement benefits. For example, small business owners' 
distributions will face a higher marginal income tax rate than for 
those with a history of lower contributions. In addition, the small 
business owner will be required to include more Social Security 
benefits in income. As a result, failure to consider future tax 
treatment tends to overstate these relative benefits offered by the 
current system.

The standard methodology for measuring the benefit of the tax incentive 
(multiplying marginal rate by income deferred) shows tax incentives for 
employer-
sponsored retirement savings favor higher income individuals. The 
analysis simply captures the inequality of income, rather than uneven 
tax benefits. However, because of the unique nature of this tax 
incentive, this methodology actually understates the benefits of the 
current retirement incentives. A more comprehensive analysis of the 
distribution of the tax incentives would show the current tax 
incentives for retirement savings are distributing benefits to low- and 
moderate-income workers.
Replacing the Retirement Exclusion With a Credit
Lily Batchelder's testimony also stated that ``the tax incentives for 
retirement savings are a particularly fruitful area for reform'' 
without getting into further specifics about how to achieve her goal. 
However, we believe that she is referencing a recurring proposal that 
would convert the current year retirement plan contribution exclusion 
from income into a uniform tax credit.

How a proposal such as this affects retirement plan sponsors and 
participants depends, of course, on what the level of credit is, and 
whether or not it is deposited to a retirement savings account or 
directly offsets income tax liability. A past proposal \3\ from William 
Gale of the Tax Policy Center offers both a 30 percent, which the paper 
says would be revenue neutral, and an 18 percent credit. This proposal 
purports to create additional savings by providing more incentive for 
taxpayers below the 23 percent and 15 percent marginal tax brackets to 
save.
---------------------------------------------------------------------------
    \3\ William G. Gale, A Proposal to Restructure Retirement Savings 
Incentives in a Weak Economy With Long-Term Deficits, September 2011.

Data shows the primary problem to be addressed in improving retirement 
security is increasing access to workplace savings, not a lack of 
incentive for take-up by moderate income participants with access. More 
than 70 percent of workers earning $30,000 to $50,000 participate in a 
workplace retirement plan at work, but fewer than 5 percent will save 
through an IRA on their own (see chart two).\4\ These plans primarily 
benefit the middle class: 68 percent of active participants in 401(k) 
plans have an adjusted gross income (AGI) of less than $100,000 per 
year. Thirty-five percent of participants have an AGI of less than 
$50,000 (see chart three).\5\ Americans earning between $25,000 and 
$75,000 save seven times more in retirement savings--largely through 
participation in workplace retirement plans--than any other type of 
savings.\6\
---------------------------------------------------------------------------
    \4\ Employee Benefit Research Institute (2010) estimate using 2008 
Panel of SIPP (Covered by an Employer Plan) and EBRI estimate (Not 
Covered by an Employer Plan--IRA only).
    \5\ Internal Revenue Service, Statistics of Income, IRA Studies, 
2014.
    \6\ Employee Benefit Research Institute estimate of the 2013 Survey 
of Consumer Finance.

[GRAPHIC] [TIFF OMITTED] T1417.019


This proposal has several basic flaws. The proposal itself indicates 
that the current tax incentive for many decision makers would be 
reduced under the proposal. In fact, for the business owner, the 
reduction in the incentive would be more than illustrated in the 
proposal because contributions made on behalf of employees would become 
subject to FICA. In other words, the ``problem'' being addressed by 
this proposal is not the problem, and the ``solution'' will only make 
---------------------------------------------------------------------------
the situation worse.

If the credit is an offset from income tax liability, the size of the 
credit for a small business owner would determine if setting up or 
maintaining the plan is still worthwhile. If the credit were deposited 
to a retirement account, in many cases the resulting drain on cash 
would necessarily result in lower contributions for the small business 
owner and employees, or termination of the plan. For larger employers, 
the size of the credit will in no way offset additional FICA liability. 
They would have to take on the additional cost, or decrease 
contributions.

[GRAPHIC] [TIFF OMITTED] T1417.020


The paper notes that a 30 percent credit is equivalent to a 23 percent 
deduction. Similarly, an 18 percent credit would be equivalent to a 15 
percent deduction. The equivalency is based on the theory that only the 
after-tax amount of income will receive the credit. For example, if an 
employee defers $1,000 under the current incentive system and is in the 
15 percent bracket, under current rules, $150 of income tax liability 
is deferred. Under the proposal, the after-tax deferral would be $850. 
Eighteen percent of $850 is $150, so this credit is equivalent to the 
exclusion for income tax purposes. This analysis makes sense in the 
case of IRA contributions or elective deferrals, where FICA is already 
paid on the contribution amounts. It does not hold up, however, for 
employer contributions, where there is currently no FICA liability for 
either employees or employers.

Consider an employee in the 15 percent bracket contributing $1,000 as 
an elective deferral and receiving a $1,000 employer contribution. If 
the level of employer contribution does not change, the employee will 
not only offset the $1,000 elective deferral by the $150 income tax 
liability on the elective deferral, but also by the $150 income tax 
liability for the employer contribution and the $76 in FICA 
contributions the employee owes on this employer contribution amount. 
Instead of $2,000 in total contributions, there will be $1,624 ($2000 - 
$150 - $150 - $76). An 18 percent credit applied to $1,624 is only 
$292. So the employee has lost over $80 in this change to an 
``equivalent'' 18 percent credit. For this situation, the equivalent 
credit would be about 23 percent. Note, however, that the higher the 
level of the employer contribution relative to the elective deferral, 
the higher the credit must be for the individual to break even. If 
there were a $2,000 employer contribution, an 18 percent credit would 
result in a reduction of over $171, after FICA is considered, and the 
equivalent credit would be over 25 percent.

Considering the FICA implications, this proposal has the effect of 
penalizing both business owners (through increased FICA taxes) and 
employees when the plan provides for matching or profit-sharing 
contributions, with the penalty increasing as the employer contribution 
increases. Regardless of the size of the credit, this is an incentive 
for all employers, not just small business owners, to reduce company 
contributions.
Conclusion
The current retirement savings tax incentives work well to promote good 
savings behavior for tens of millions of working Americans. If 
anything, these incentives--for both employers and employees--should be 
enhanced. At a minimum, any modifications to the current incentives 
should be evaluated based on whether or not the changes will encourage 
more businesses to sponsor retirement plans for their employees. 
Restructuring the tax incentives for retirement savings into a uniform 
tax credit would fail this evaluation and should be rejected.

                                 ______
                                 
                California Association of Realtors (CAR)

                           Executive Offices

                        525 South Virgil Avenue

                         Los Angeles, CA 90020

                           Tel (213) 739-8200

                           Fax (213) 480-7724

                          https://www.car.org/

September 20, 2017

The Honorable Orrin Hatch and The Honorable Ron Wyden
U.S. Senate
Committee on Finance
215 Dirksen Senate Office Building
Washington, DC 20510

Re: ``Individual Tax Reform'' Hearing; Testimony of the California 
Association of Realtors

Dear Chairman Hatch and Ranking Member Wyden,

On behalf of the more than 190,000 members of the California 
Association of Realtors (CAR), I am submitting the following statement 
for the committee's hearing entitled ``Individual Tax Reform,'' that 
will examine ways to improve the U.S. tax system for America's families 
and individuals. I would like to thank you for taking the time to hold 
this important hearing on tax reform, an issue that will impact all 
Americans. As CAR and its members look at the issue of tax reform, two 
important issues stand out; (1) Congress must maintain an incentive for 
renters to become homeowners, and (2) Congress must not raise taxes on 
homeowners.

Unlike other pieces of legislation that may impact a specific industry 
or a select socio-economic class, tax reform will impact EVERY industry 
and ALL Americans. For this reason, Congress must avoid rushing tax 
reform through backroom deals. An issue of this magnitude needs to move 
through the full congressional process. This includes transparency 
through committee hearings, amendments, markups, full floor debates, 
and votes. The American taxpayers deserve nothing less.

               CONGRESS SHOULD INCENTIVIZE HOME OWNERSHIP

For over 100 years Congress has incentivized home ownership with the 
tax code; currently through the mortgage interest deduction. Any effort 
at reforming the tax code should maintain and prioritize this 
incentive. Unfortunately, many of the proposals for tax reform include 
the doubling of the standard deduction, would for practical purposes 
eliminate the incentive effect of the mortgage interest deduction. 
Under the proposals, it is estimated only 5-percent of taxpayers will 
itemize their deductions, therefore the vast majority of people will no 
longer receive any tax incentive to purchase a home. So, while Congress 
may state the proposals are keeping the mortgage interest deduction, 
the incentive effect of the deduction for Americans to become 
homeowners and thereby stakeholders in their community would disappear.

Severely reducing the incentive to home ownership will lower home 
ownership rates in the U.S. This will financially hurt households and 
shrink the middle class. If Congress maintains or increases the 
incentive for home ownership, Congress will be taking the necessary 
steps to financially strengthen America's households and grow the 
middle class. According to the Federal Reserve, over the last 28 years 
the median net worth of households that own homes has averaged 
$193,000. This is in comparison to $5,300 for households that rent over 
the same time. This is because home ownership allows individuals and 
families to build wealth through principal reduction, equity 
appreciation, stable monthly payments, and create generational wealth. 
It also allows seniors who pay off their mortgage or have a stable 
mortgage payment to live securely and with stability in their 
residences and community without fear of being displaced due to rent 
increases.

            CONGRESS SHOULD NOT INCREASE TAXES ON HOMEOWNERS

Congress needs to protect taxpayers from double-taxation and maintain 
the deduction for state and local taxes including property taxes. Not 
allowing the average homeowner in California to deduct their property, 
state and local taxes would effectively be raising their taxes more 
than $2,400 a year! The Federal Government would tax families on money 
paid to the state and local governments they never used. Effectively 
this is akin to double taxation of the homeowners and taxpayers of 
states with state and local taxes.

Additionally, eliminating the ability to deduct state and local taxes 
would further punish Californian families who already pay more to the 
Federal Government than they receive. According to the 2014 IRS data 
book California paid $369 billion dollars to the Federal Government, of 
which according to the Pew Charitable Trusts, only $356 billion was 
sent back to Californians. Eliminating the ability to deduct property, 
state and local taxes will further increase this discrepancy and harm 
California homeowners.

         PROTECT CAPITAL GAINS EXCLUSION FOR PRIMARY RESIDENCES

Congress must keep and improve the capital gains exemption for the sale 
of a primary residence. Under current law, the first $250,000 in 
capital gains for single-tax filers or $500,000 in capital gains for 
joint-tax filers on the sale of their primary residence is not taxed. 
This has allowed for millions of households to build equity in their 
homes and supplement their social security when they retire. However, 
protecting this vital tax provision is not enough, and Congress should 
take additional steps to help these homeowners even more.

Congress should eliminate the ``single tax filer'' and have only the 
higher exemption of $500,000 apply to all primary residences regardless 
of the marital status of the owner. By having the higher amount for all 
primary residences, Congress will ensure widowers and divorced 
individuals are not punished. Additionally, this tax provision should 
be indexed for inflation. For 20 years the benefit of this tax 
provision has eroded because the amount has sat stagnant. If the 
exclusion is indexed for inflation, Congress should use 1997 (the year 
the law was enacted) as the base year.

              DON'T PAY FOR LOWER CORPORATE RATES ON THE 
                           BACK OF HOMEOWNERS

As independent contractors, almost every Realtor is their own small 
business, so CAR understands the importance and benefit of a lower 
corporate tax rate. However, Congress cannot and must not pay for lower 
corporate tax rates by effectively increasing the taxes of homeowners 
by eliminating or reducing their deductions. Any reduction to the 
corporate tax rate must be offset by corporations.

CAR looks forward to working with the Senate as it works to reform the 
tax code. We would be happy to discuss any of these issues further with 
you and your staff; you may contact Matt Roberts, Federal Government 
Affairs Manager at 213-739-8284 or [email protected]. Thank you for 
taking into consideration our comments.

Sincerely,
Geoff McIntosh
2017 President, California Association of Realtors

                                 ______
                                 
                   Charitable Giving Coalition (CGC)

U.S. Senate
Committee on Finance
Dirksen Senate Office Bldg.
Washington, DC 20510-6200

Chairman Hatch, Ranking Member Wyden, and Members of the Senate 
Committee on Finance:

The Charitable Giving Coalition (CGC) welcomes the opportunity to 
submit comments to the official record for the recent Committee Hearing 
on Individual Tax Reform.

As noted in the hearing announcement, Mr. Chairman, your goal was to 
``examine ways to streamline the individual tax system to make it work 
better for American individuals and families.'' With this focus on 
individuals and families, the CGC wants to make certain that you and 
your colleagues consider the direct connection between changes to the 
individual tax code and the well-being of America's charities.

The CGC heeded your call in July to submit comments on Tax Reform, 
which we incorporate here by reference. In this submission, we aim to 
update those comments.

The CGC is submitting our remarks to you today with an added sense of 
urgency. In yesterday's release of the Unified Framework for Fixing Our 
Broken Tax Code, we note that the outline, albeit brief, does not 
address the consequence of the significant re-configuration of the 
individual income tax code to charitable giving, the organizations it 
supports and the people served. While the White House draws a 
connection between a strong civil society and vibrant charitable 
giving, and leaders in Congress have expressed interest in unlocking 
more donor dollars for charities across the country, the Framework 
seems to fall short for America's charities.

For that reason, we implore you to consider the impact of new tax 
policy on vulnerable communities as you convert this Framework to 
detailed legislation. Based on the Framework's general outline, the 
Charitable Giving Coalition (CGC) believes the plan would generate 
dramatic, negative consequences for charities and the constituents they 
serve because the charitable deduction will be available to only 5% of 
all taxpayers--causing a significant drop in contributions. The other 
95% of taxpayers will be taxed on their gifts to charity.

Tax reform that strengthens American communities, spurs economic growth 
and supports America's hard-working families, especially those in 
middle- and lower-
income brackets, must incentivize charitable giving. The Framework 
acknowledges that certain ``tax benefits help accomplish important 
goals that strengthen civil society, as opposed to dependence on 
government: home ownership and charitable giving.''

However, under the Framework, the scope and value of the current 
charitable deduction would vastly diminish. If the standard deduction 
nearly doubles, the percentage of taxpayers who itemize will drop from 
approximately 33.3% to only 5%, effectively meaning only 5% of all 
taxpayers can take the charitable deduction. In real terms, 30 million 
taxpayers who itemized in 2016 will no longer have the giving incentive 
and will be taxed on their gifts. The result would be a staggering loss 
of up to $13 billion in contributions annually,* undermining America's 
charitable organizations and our country's extraordinary tradition of 
philanthropy.
---------------------------------------------------------------------------
    * According to a study commissioned by Independent Sector and 
conducted by Indiana University Lilly Family School of Philanthropy, 
``Tax Policy and Charitable Giving, Results,'' May 2017, Indiana 
University Lilly Family School of Philanthropy Study commissioned by 
Independent Sector, https://www.independentsector.org/wp-content/
uploads/2017/05/tax-policy-charitable-givinq-finalmay2017-1.pdf.

Americans are, undeniably, generous. This has been strikingly evident 
in the wake of the unprecedented natural disasters that we've 
experienced in recent weeks. The public response reinforces the 
American tradition of giving. Consider just one example: The ``Hand in 
Hand Benefit for Hurricane Relief'' telethon on Tuesday, September 
12th, raised over $44 million in one evening. ``Hand in Hand'' is one 
of thousands of fundraising efforts, small and large, collecting 
donations and distributing them to a broad cross-section of relief 
providers in the areas ravaged by recent hurricanes. From individual 
gifts and small giving circles to the ``One America Appeal'' being led 
by all five former living Presidents of the United States, the best of 
our American ethos to collectively support our communities is--as 
---------------------------------------------------------------------------
always--in action.

Congress must assure that we retain charitable giving, and unlock more, 
as it navigates the complexities of tax reform.

As you know from our comments submitted in July and subsequent outreach 
to Committee Members, the CGC has proposed a fair and efficient 
resolution that will continue to encourage Americans to redirect their 
dollars to charities: a universal charitable deduction available to all 
taxpayers. This will assure that contributions to charities are not 
taxed by the federal government and that taxpayers who currently take 
the deduction for their gifts will continue to be incentivized. 
Furthermore, because the deduction will be available to all taxpayers, 
it could foster a culture of giving much earlier, providing an 
incentive to young taxpayers who are beginning to make their charitable 
investments in the communities and causes they care about.

With the latest U.S. Census figures showing that middle-class 
households are only now seeing their income reach 1999 levels--and with 
economists concerned that recent gains may not continue--a universal 
charitable deduction is easy for taxpayers to use and will provide tax 
relief for families across America who give to charity but don't 
itemize their taxes.

More than a dozen United States Senators, including members of the 
Senate Finance Committee, recognized that tax reform must not diminish 
charitable giving when they sponsored The CHARITY Act of 2017 (S. 
1343.) That bill expressly states that: (1) encouraging charitable 
giving should be a goal of tax reform; and (2) Congress should ensure 
that the value and scope of the deduction for charitable contributions 
is not diminished during a comprehensive reform of the tax code

As the Committee advances it efforts to enact tax legislation that is 
good and fair for all Americans, the CGC will continue to advance the 
universal deduction as a solution to the expected loss in giving from 
the current tax Framework. Our collective, unifying goal should be to 
ensure that America's communities thrive and her charities remain 
strong, diverse and effective.

Thank you for this opportunity to submit comments to the hearing 
record. We look forward to our continued efforts to educate the 
Committee and advance our legislative proposal for a universal 
charitable deduction.

                                 ______
                                 
                 Coalition to Preserve Cash Accounting

                           September 27, 2017

The Honorable Orrin Hatch           The Honorable Ron Wyden
Chairman                            Ranking Member
U.S. Senate                         U.S. Senate
Committee on Finance                Committee on Finance
219 Dirksen Senate Office Building  219 Dirksen Senate Office Building
Washington, DC 20510-6200           Washington, DC 20510-6200

Dear Chairman Hatch and Ranking Member Wyden:

    On behalf of the Coalition to Preserve Cash Accounting (``the 
Coalition''), we are writing to explain why it is important to continue 
to allow farmers, ranchers, and service provider pass-through 
businesses to continue to use the cash method of accounting as part of 
any tax reform plan. We appreciate the opportunity to provide these 
comments in connection with the Senate Committee on Finance's September 
14, 2017 hearing on ``Individual Tax Reform.'' The Coalition applauds 
your efforts to improve the nation's tax code to make it simpler, 
fairer, and more efficient in order to strengthen the U.S. economy, 
make American businesses more competitive, and create jobs.

    The Coalition is comprised of dozens of individual businesses and 
trade associations representing thousands of farmers, ranchers, and 
service provider pass-through entities across the United States that 
vary in line of business, size, and description, but have in common 
that our members rely on the use of cash accounting to simply and 
accurately report income and expenses for tax purposes. Pass-through 
entities account for more than 90 percent of all business entities in 
the United States. A substantial number of these businesses are service 
providers, farmers, and ranchers that currently qualify to use cash 
accounting. They include a variety of businesses throughout America--
farms, trucking, construction, engineers, architects, accountants, 
lawyers, dentists, doctors, and other essential service providers--on 
which communities rely for jobs, health, infrastructure, and improved 
quality of life. These are not just a few big businesses and a few 
well-to-do owners. According to IRS data, there are over 2.5 million 
partnerships using the cash method of accounting, in addition to 
hundreds of thousands of Subchapter S corporations eligible to use the 
cash method.
About the Cash Method of Accounting
    Under current law, there are two primary methods of accounting for 
tax purposes--cash and accrual. Under cash basis accounting, taxes are 
paid on cash actually collected and bills actually paid. Under accrual 
basis accounting, taxes are owed when the right to receive payment is 
fixed, even if that payment will not be received for several months or 
even several years; expenses are deductible even if they have not yet 
been paid.

    The tax code permits farmers, ranchers, and service pass-through 
entities (with individual owners paying tax at the individual level) of 
all sizes--including partnerships, Subchapter S corporations, and 
personal service corporations--to use the cash method of accounting. 
Cash accounting is the foundation upon which we have built our 
businesses, allowing us to simply and accurately report our income and 
expenses, and to manage our cash flows, for decades. It is a simple and 
basic method of accounting--we pay taxes on the cash coming in the 
door, and we deduct expenses when the cash goes out the door. No 
gimmicks, no spin, no game playing. Cash accounting is the very essence 
of the fairness and simplicity that is on everyone's wish list for tax 
reform.

    Some recent tax reform proposals would require many of our 
businesses to switch to the accrual method of accounting, not for any 
policy reason or to combat abuse, but rather for the sole purpose of 
raising revenues for tax reform. Forcing such a switch would be an 
effective tax increase on the thousands upon thousands of individual 
owners who generate local jobs and are integral to the vitality of 
local economies throughout our nation. It would also increase our 
recordkeeping and compliance costs due to the greater complexity of the 
accrual method. Because many of our businesses would have to borrow 
money to bridge the cash flow gap created by having to pay taxes on 
money we have not yet collected, we may incur an additional cost with 
interest expense, a cost that would be exacerbated if interest expense 
is no longer deductible, as proposed under the House Republicans' 
Better Way blueprint (``the blueprint''). Some businesses may not be 
able to borrow the necessary funds to bridge the gap, requiring them to 
terminate operations with a concomitant loss of jobs and a harmful 
ripple effect on the surrounding economy.
Tax Reform Proposals and Cash Accounting
    The blueprint moves toward a cash flow, destination-based 
consumption tax. The cash flow nature of the proposal suggests that the 
cash method of accounting would be integral and entirely consistent 
with the blueprint since it taxes ``cash-in'' and allows deductions for 
``cash out,'' including full expensing of capital expenditures. While 
we understand that they are different proposals, the ABC Act (H.R. 
4377), a cash flow plan introduced by Rep. Devin Nunes (R-CA) in the 
114th Congress, required all businesses to use the cash method. 
However, the blueprint does not provide details regarding the use of 
the cash method, including whether all businesses would be required to 
use it, whether businesses currently allowed to use the cash method 
would continue to be allowed to do so, whether a hybrid method of cash 
and accrual accounting would apply, or some other standard would be 
imposed.

    President Trump's tax reform plan is not a cash flow plan and takes 
a more traditional income tax-based approach, yet the principles 
articulated in the administration's plan are entirely consistent with 
the continued availability of the cash method of accounting. Growing 
the economy, simplification, and tax relief are exemplified by the cash 
method of accounting. Requiring businesses that have operated using the 
cash method since their inception to suddenly pay tax on money they 
have not yet collected, and may never collect, is an effective tax 
increase, and will have a contraction effect on the economy as funds 
are diverted from investment in the business to pay taxes on money they 
have not received or as businesses close because of insufficient cash 
flow and inability to borrow. It is important to note that cash 
accounting is not a ``tax break for special interests;'' it is a 
simple, well-established and long-authorized way of reporting income 
and expenses used by hundreds of thousands of family-owned farms, 
ranches, businesses, and Main Street service providers that are the 
backbone of any community.

    Several recent tax reform proposals, including Senator John Thune's 
(R-SD) S. 1144, the Investment in New Ventures and Economic Success 
Today Act of 2017, would expand the use of cash accounting to allow all 
businesses under a certain income threshold, including those businesses 
with inventories, to use cash accounting. Such proposals aim to 
simplify and reduce recordkeeping burdens and costs for small 
businesses, while still accurately reporting income and expenses. A few 
of these proposals (not S. 1144) would pay for this expansion by 
forcing all other businesses currently using cash accounting to switch 
to accrual accounting. We do not oppose expanding the allowable use of 
cash accounting, but it is unfair and inconsistent with the goals of 
tax reform to pay for good policy with bad policy that has no other 
justification than raising revenues. When cash accounting makes sense 
for a particular type of business, the size of the business should make 
no difference. Further, there have been no allegations that the 
businesses currently using cash accounting are abusing the method, 
inaccurately reporting income and expenses, or otherwise taking 
positions inconsistent with good tax policy.

    Tax reform discussions seem to be trending toward faster cost 
recovery than under current law. For example, the blueprint allows for 
full expensing of capital investment, Senator Thune's bill makes bonus 
depreciation permanent, and comments from administration officials 
suggest that President Trump and his team prefer faster write-offs of 
capital assets. Such policies benefit capital intensive businesses. 
However, service businesses by their very nature are not capital 
intensive, so it would be unfair to allow faster cost recovery for some 
businesses while imposing an effective tax increase and substantial new 
administrative burdens on pass-through service providers who will not 
benefit from more generous expensing or depreciation rules by taking 
away the use of cash accounting.

             Other Implications of Limiting Cash Accounting

    In addition to the policy implications, there are many practical 
reasons why the cash method of accounting is the best method to 
accurately report income and expenses for farmers, ranchers, and pass-
through service providers:

        The accrual method would severely impair cash flow. Businesses 
        could be forced into debt to finance their taxes, including 
        accelerated estimated tax payments, on money we may never 
        receive. Many cash businesses operate on small profit margins, 
        so accelerating the recognition of income could be the 
        difference between being liquid and illiquid, and succeeding or 
        failing (with the resulting loss of jobs).

        Loss of cash accounting will make it harder for farmers to stay 
        in business. For farmers and ranchers, cash accounting is 
        crucial due to the number and enormity of up-front costs and 
        the uncertainty of crop yields and market prices. A heavy 
        rainfall, early freeze, or sustained drought can devastate an 
        agricultural community. Farmers and ranchers need the 
        predictability, flexibility and simplicity of cash accounting 
        to match income with expenses in order to handle their tax 
        burden that otherwise could fluctuate greatly from one year to 
        the next. Cash accounting requires no amended returns to even 
        out the fluctuations in annual revenues that are inherent in 
        farming and ranching.

        Immutable factors outside the control of businesses make it 
        difficult to determine income. Many cash businesses have 
        contracts with the government, which is known for long delays 
        in making payments that already stretch their working capital. 
        Billings to insurance companies and government agencies for 
        medical services may be subject to being disputed, discounted, 
        or denied. Service recipients, many of whom are private 
        individuals, may decide to pay only in part or not at all, or 
        force the provider into protracted collection. Structured 
        settlements and alternative fee arrangements can result in 
        substantial delays in collections, sometimes over several 
        years; therefore, taxes owed in the year a matter is resolved 
        could potentially exceed the cash actually collected.

        Recordkeeping burdens, including cost, staff time, and 
        complexity, would escalate under accrual accounting. Cash 
        accounting is simple--cash in/cash out. Accrual accounting is 
        much more complex, requiring sophisticated analyses of when the 
        right to collect income or to pay expenses is fixed and 
        determinable, as well as the amounts involved. In order to 
        comply with the more complex rules, businesses currently 
        handling their own books and records may feel they have no 
        other choice than to hire outside help or incur the additional 
        cost of buying sophisticated software.

        Accrual accounting could have a social cost. Farmers, ranchers, 
        and service providers routinely donate their products and 
        services to underserved and underprivileged individuals and 
        families. An effective tax increase and increased 
        administrative costs resulting from the use of accrual 
        accounting could impede the ability of these businesses to 
        provide such benefits to those in need in their local 
        communities.
Conclusions
    The ability of a business to use cash accounting should not be 
precluded based on the size of the business or the amount of its gross 
receipts. Whether large or small, a business can have small profit 
margins, rely on slow-paying government contracts, generate business 
through deferred fee structures or be wiped out through the vagaries of 
the weather. Cash diverted toward interest expense, taxes, and higher 
recordkeeping costs is capital unavailable for use in the actual 
business, including paying wages, buying capital assets, or investing 
in growth.

    Proposals to limit the use of cash accounting are counterproductive 
to the already agreed upon principles of tax reform, which focus on 
strengthening our economy, fostering job growth, enhancing U.S. 
competitiveness, and promoting fairness and simplicity in the tax code. 
Accrual accounting does not make the system simpler, but more complex. 
Increasing the debt load of American businesses runs contrary to the 
goal of moving toward equity financing instead of debt financing and 
will raise the cost of capital, creating a drag on economic growth and 
job creation. Putting U.S. businesses in a weaker position will further 
disadvantage them in comparison to foreign competitors. It is simply 
unfair to ask the individual owners of pass-through businesses to 
shoulder the financial burden for tax reform by forcing them to pay 
taxes on income they have not yet collected where such changes are 
likely to leave them in a substantially worse position than when they 
started.

    As discussions on tax reform continue, the undersigned respectfully 
request that you take our concerns into consideration and not limit our 
ability to use cash accounting. We would be happy to discuss our 
concerns in further detail. Please feel free to contact Mary Baker 
([email protected]) or any of the signatories for additional 
information.

    Thank you for your consideration of this important matter.

    Sincerely,\1\
---------------------------------------------------------------------------
    \1\ Although not a signatory to this letter, the American Bar 
Association (ABA) is working closely with the Coalition and has 
expressed similar concerns regarding proposals to limit the ability of 
personal service businesses to use cash accounting. The ABA's most 
recent letter to the Senate Committee on Finance sent in April 2017 is 
available at http://bit.ly/2xvv6YB.

Americans for Tax Reform
American Council of Engineering Companies
American Farm Bureau Federation
American Institute of Certified Public Accountants
American Medical Association
American Society of Interior Designers
The American Institute of Architects
The National Creditors Bar Association
Akin, Gump, Strauss, Hauer, and Feld LLP
Baker Donelson
Debevoise and Plimpton LLP
Dorsey and Whitney LLP
Foley and Lardner LLP
Jackson Walker LLP
K&L Gates LLP
Kilpatrick, Townsend, and Stockton LLP
Lewis, Roca, Rothgerber, Christie LLP
Littler Mendelson P.C.
Miles and Stockbridge P.C.
Mitchell, Silberberg, and Knupp LLP
Morrison and Foerster LLP
Nelson, Mullins, Riley, and Scarborough LLP
Ogletree, Deakins, Nash, Smoak, and Stewart, P.C.
Perkins Coie LLP
Quarles and Brady LLP
Rubin and Rudman LLP
Squire Patton Boggs (U.S.) LLP
Steptoe and Johnson LLP
White and Case LLP

                                 ______
                                 
             The Jewish Federations of North America (JFNA)

                        1720 I Street, NW, #800

                       Washington, DC 20006-3736

                           Phone 202-785-5900

                            Fax 202-785-4937

              https://www.jewishfederations.org/washington

September 14, 2017

Chairman Orrin Hatch and Ranking Member Ron Wyden
Senate Finance Committee
219 Dirksen Senate Office Building

The Jewish Federations of North America (``JFNA'') is the national 
organization that represents 148 Jewish Federations, their affiliated 
Jewish community foundations, and more than 300 independent network 
communities. In their individual communities, the Jewish Federation and 
network volunteers (collectively the ``Federation system'') is the 
umbrella fundraising organization as well as the central planning and 
coordinating body for an extensive network of Jewish health, education, 
and social service agencies. Thus, the Federation system raises and 
allocates funds for almost 1,000 affiliated agencies that provide 
needed social, medical and educational services to almost one million 
individuals throughout the country, including Jews and non-Jews alike.

We applaud the Senate Finance Committee for holding a hearing on 
September 14, 2017 on Individual Tax Reform as part of the committee's 
continued work to enact comprehensive tax reform and submit the 
following statement to the hearing record.

Background: Each Jewish Federation conducts a yearly fundraising 
endeavor (``the annual campaign'') and collectively the Federation 
System raises almost $950 million each year from over 400,000 donors. 
In addition, the planned giving and endowment departments of 
Federations and their affiliated Jewish community foundations raise 
almost $2 billion each year through a variety of planned giving 
vehicles including charitable gift annuities, charitable trusts, donor 
advised funds, and supporting organizations, among others. Grants from 
such planned gifts also flow to support annual mission-related 
charitable activities. The combination of a large annual campaign and 
sophisticated planned giving operations serve to make the Federation 
system one of the largest philanthropic networks in North America. As 
such, we are vitally concerned regarding the impact that fundamental 
tax reform could have on charitable giving incentives and giving 
vehicles.

The Federation system is especially proud of the important role that 
certain endowed vehicles such as donor-advised funds and supporting 
organizations play in maintaining active grant-making programs in 
support of our mission as well as building long-term endowment assets 
that assure the continued existence of the our philanthropic and social 
service organizations. According to our most recent financial survey, 
Jewish Federations and affiliated Jewish community foundations have 
combined endowment assets of approximately $20 billion and make annual 
grants that exceed $2 billion from such funds to other public 
charities, with significant charitable distributions flowing to support 
both Jewish and non-Jewish causes, domestically and internationally.

During the past month, as various parts of the United States, including 
territories in the Caribbean have been devastated by an unprecedented 
number of natural disasters, we are also reminded of the important role 
that private philanthropy plays in provided needed assistance to 
impacted families as well as working to rebuild community 
infrastructure. We are proud of the fact that collectively the 
federation system has raised over $15 million to aid communities in 
Texas, Florida, and the Islands with additional funds expected to be 
collected over the next weeks and months. We would urge the committee 
to consider passing a package of tax incentives to further encourage 
such giving, including a suspension of the current adjusted gross 
income limitation on annual deductible charitable contributions.

Our Charitable Mission and the Tax Code: Perhaps the primary mission of 
the Federation system is to inspire its donors as members of the Jewish 
community to fulfill our religious duty to be charitable (``tzedakah'') 
and to meet our collective responsibility to build community and 
improve the entire world (``tikkun olam''). Although it is true that 
the importance of these principles transcend the Internal Revenue Code 
of 1986 (hereinafter ``the Tax Code'') or particular statutory 
incentives such as the charitable contribution deduction, we have come 
to recognize that such provisions permit many of our donors to extend 
their levels of generosity. It is these charitable contributions that 
truly are the lifeblood of the Federation system allowing it to meet 
our operational mandates, achieving a variety of philanthropic goals.

Fundamental Tax Reform and the Importance of Giving Incentives: We 
applaud the Senate Finance Committee and the Administration for 
tackling the complexity surrounding fundamental tax reform and we 
support efforts to make the tax code simpler, more efficient, and more 
competitive in today's global economy. We are also appreciative of the 
virtually unanimous support that charitable giving incentives continue 
to receive from policy-makers.

The federal income tax has included tax incentives to promote 
charitable donations for over 100 years. Although it has undergone 
numerous revisions and amendments, often tightened by adding regulatory 
rules and requirements for certain types of donations or restrictions 
to the operations of certain giving vehicles, and sometimes broadened 
by raising the contribution limits or expanding the types of 
permissible charitable donees, the concept of a deduction for 
contributions to charitable organizations remains fundamental to the 
social contract that binds individuals, charities, and the government 
to support the most vulnerable among us.

Similar to other large national charities, the Federation system has a 
sophisticated fund-raising operation as well as highly-organized 
procedures for allocating funds to a broad range of social service 
programs and general charitable needs throughout their communities and 
overseas. As such, we see both sides of the charitable deduction 
equation: how donors react to tax provisions, as well as the role that 
philanthropic dollars play to support programs assisting the most 
vulnerable. Our perspective on the income tax code and charitable 
giving incentives is grounded in over 100 years of such real-world 
experience.

Although the donor base to our annual campaign is large, we also 
recognize that the vast amount collected comes from a relatively small 
number of gifts. As a result, a so-called ``90-10'' rule operates so 
that the overwhelming percentage of dollars raised flow from a small, 
but tax-sophisticated donor group, who regularly make large gifts, 
either through the annual campaign contribution or more importantly, 
through the use of planned giving vehicles, as discussed below. This 
tax sophistication permits such individuals and their planned giving 
advisers to structure gifts so that the maximum amount of funds flows 
to Jewish Federations and, in turn to beneficiary agencies, today, 
rather than later. This perspective convinces us that each of the 
several ``proposals'' to reform the charitable contribution deduction, 
such as a limitation in the value of the deduction, an overall cap on 
itemized deductions, or even a ``floor'' on deductible contributions, 
as contained in the 2014 Tax Reform draft proposed by former House Ways 
and Means Committee Chairman Dave Camp (R-MI) (``Camp Draft'') will 
lead to a significant decrease in giving to the JFNA System. As 
government funding for social service and medical programs continues to 
decrease, any such diminution in support of charitable contributions 
will further hamstring the operations of Jewish Federations and their 
affiliated agencies in their mission to help the most vulnerable among 
us.

We are also concerned that the interaction of several provisions under 
discussion in a variety of ``fundamental tax reform'' plans could 
combine to have a detrimental impact on charitable giving. A 
substantial increase in the standard deduction, combined with the 
elimination or limitation on a number of other ``itemized deductions'' 
will have the effect of greatly reducing the number of taxpayers who 
will claim itemized deductions, effectively removing the charitable 
contribution tax incentive for such taxpayers. It is beyond dispute 
that a dramatic decrease in the number of taxpayers who claim the 
charitable contribution deduction, combined with a decrease in 
individual income tax rates will have a profound negative impact on 
dollars given to charity. Indeed, a recent study conducted by the 
Indiana University School of Philanthropy confirms that the 
contemplated changes discussed above would result in a decrease in 
annual giving of over $13 billion. As such, we understand that many 
organizations within the charitable sector are endorsing a proposal to 
expand and enhance charitable giving incentives by providing a 
``universal deduction'' to taxpayers who do not itemize. Proponents 
argue that a universal (or ``above-the-line'') deduction would increase 
giving, in terms of both dollars and donors, increase fairness by 
incentivizing all taxpayer's contributions, and provide modest tax 
relief to middle- and lower-income taxpayers. In addition, the dollars 
flowing to America's charities would increase. This result is bolstered 
by the results of the Indiana University study that indicates that the 
inclusion of an above-the-line deduction in the Tax Code would result 
in a full recoupment of potentially lost contributions plus an 
additional $5 billion each year. We recognize that some tax policy 
experts have raised concerns that an above-the-line deduction could 
cause compliance and enforcement issues. We would look forward to 
working with you and the Finance Committee on a proposal that would 
have the effect of increasing charitable giving incentives as well as 
address the tax policy issues noted above.

Importance of Other Charitable Vehicles: Over the past several decades, 
the Federation system has fostered growth in charitable giving through 
donor advised funds and supporting organizations (known as 
``participatory funds''). Participatory funds, whose existence stems 
from the charitable contribution deduction, offer an economical and 
efficient means for those with sufficient assets and charitable intent 
to benefit the community through an ongoing relationship with public 
charities such as Federations or affiliated Jewish community 
foundations. Such funds are an indispensable tool in encouraging 
intergenerational involvement in charitable activities through family 
philanthropy. In addition to providing financial resources for critical 
human services in the local Jewish and general communities, and 
supporting charitable causes across the globe, participatory funds also 
advance the values and goals of the Federation system through nurturing 
relationships between philanthropists and Federation volunteer and 
professional leadership, as well as helping to build endowment assets.

In recent years, participatory funds also provide a reliable pool of 
dollars to support the annual campaigns of Jewish Federations, which is 
the primary financial resource for ongoing operating budgets. Grants 
from these funds now comprise up to 20 percent of the annual campaign. 
Additional grants to Federations are common in the case of 
extraordinary needs or supplemental campaign for natural and manmade 
disasters, as well as during economic downturns such as the one 
experienced just a few years ago.

Permitting, indeed encouraging, participatory funds to exist for 
extended periods of time provide Federations and related Jewish 
community foundations the ability to grow the assets of these publicly 
supported charities. Healthy endowments at Federations and related 
Jewish community foundations help to assure the continued existence of 
these organizations for generations to come. This is why any proposal 
that would effectively require donor advised fund contributions to be 
distributed within a limited period of years, such as one that was 
contained in the 2014 Camp Draft, would undermine the broader 
charitable purpose of such funds and could be devastating to 
participatory funds in general and Jewish Federations in particular. 
Our donors, especially those who support our work by establishing 
participatory funds with us, ensure that we continue to fulfill our 
charitable mission through grants to worthwhile charitable endeavors. 
Rather than adhering to an arbitrary numerical formula, our 
philanthropic spending policy is truly donor-driven and recognizes 
community needs both today and into the future.

As the Committee continues to consider tax reform proposals, we urge 
that participatory funds be allowed to flourish and be left with a 
minimum of regulatory burdens. JFNA agrees with the bottom-line 
conclusion of the Treasury Department's Report on Supporting 
Organizations and Donor Advised Funds issued in December 2011, that 
``the Pension Protection Act of 2006 appears to have provided a legal 
structure to address abusive practices and accommodate innovations in 
the sector without creating undue additional burdens or new 
opportunities for abuse.'' The Treasury Report further notes that ``it 
is appropriate that the contribution deduction rules applicable to 
donors to supporting organizations and donor advised fund sponsoring 
organizations are the same as those applicable to donors to other 
public charities.''

Conclusion: The Federation system applauds the Senate Finance Committee 
for undertaking such a deliberative process and analyzing the many 
issues that need to be considered in contemplating fundamental tax 
reform. As it pertains to the charitable contribution deduction and 
charitable giving, however, we remind the Committee that any proposal 
that could result in a decrease in charitable giving will have 
significant negative consequences for America's charities, including 
the Federation system, and most importantly, the vulnerable populations 
that we serve. The charitable contribution deduction remains the only 
provision in the income tax law where an individual must ``give away'' 
income or assets in order to receive a deduction. As has been true 
since the enactment of the income tax law, this selfless act deserves 
to be promoted and encouraged by the tax code.

We are proud that Federations and affiliated Jewish community 
foundations employ the highest ethical standards of self-regulation in 
the governance and operation of our fundraising and planned giving 
practices and regularly share our expertise with policy makers and 
charities outside of the Jewish community on a variety of charitable 
giving issues. We continue to work closely with officials at the 
Treasury Department and the Internal Revenue Service as they work to 
promulgate guidance on some of the provisions added to the tax code by 
the Pension Protection Act of 2006 (``PPA'') regarding donor advised 
funds and supporting organizations.

The Federation system remains committed to ensuring that federal tax 
policies, especially the charitable deduction, continue to incentivize 
the flow of funds from individuals to public charities. We realize that 
the Committee will face difficult decisions over the next several 
months. We urge you, however, to continue to support policies that will 
strengthen our national heritage of broad-based philanthropy.

We would be more than happy to amplify our comments or answer any 
questions. Please feel free to contact either 
[email protected] (202-736-5868) or Steven Woolf, 
JFNA senior tax policy counsel at steven.woolf@jewish
federations.org or (202-736-5863).

                                 ______
                                 
                  Letter Submitted by William S. Kirk

                           September 21, 2017

Senate Committee on Finance: Attention Orrin Hatch, Chairman

Dear Senator Hatch;

Since tax reform is on the agenda, I am writing to ask you to consider 
how Social Security and Medicare are intertwined with tax reform and 
benefits.

    (1)  Social taxation thresholds have not been changed since 1984. 
They are currently $32,000 for a married couple. They were never 
indexed for inflation; and in today's dollars this threshold should be 
around $75,000. I ask that you consider bring these frozen figures into 
the 21st century to catch up to other government programs adjusted for 
inflation.

    (2)  Medicare monthly premiums have risen from $104.90 in 2015 to 
$121.80 in 2016 (16.1%) to $134 in 2017 (10.0%). How can this be 
justified when Social Security benefit increases in 2015 were 1.7%; 
2016 were 0%; 2017 were 0.3%. These minuscule Social Security increases 
are eaten up by Medicare premium increases resulting in frozen Social 
Security benefits for several years. In my case it will take 5 years of 
Social Security benefit increases just to cover the $134 before I see a 
dime increase in benefits. This math does not make sense. You can only 
approve a 0.3% increase for Social Security and on the other hand say 
double digit Medicare increases are justified. How do you rationalize 
these two different points of view?

    I look forward to your reply and hope that you will pass 
legislation that will correct these two situations and bring them in 
line with realistic benefits that coincide with today's cost of living 
for recipients of these programs.

Best Regards,
William S. Kirk

                                 ______
                                 
                     League of American Orchestras

                     33 West 60th Street, 5th floor

                           New York, NY 10023

                         Phone: (212) 262-5161

                 Email: [email protected]

Thank you for the opportunity to provide comments for the record 
related to the Senate Finance Committee's hearing on individual tax 
reform, held on September 14, 2017. We are also grateful for this 
important opportunity to provide an initial response to the September 
27th release of the Unified Framework for Fixing the Broken Tax Code, 
which Chairman Hatch has described as ``a critical roadmap for the tax-
writing committees.''

The League of American Orchestras leads and supports America's 
orchestras and the vitality of the music they perform. Founded in 1942 
and chartered by Congress in 1962, the League links a national network 
of thousands of instrumentalists, conductors, managers, board members, 
volunteers, and business partners. Its diverse membership of 
approximately 800 nonprofit orchestras across North America ranges from 
world-renowned symphonies to community groups, from summer festivals to 
student and youth ensembles. Orchestras unite people through creativity 
and artistry, fuel local economies and civic vitality, and educate 
young people and adults--all with the support of private contributions, 
volunteers, and community partners.

As the Congress prepares to take next steps in detailing a tax reform 
plan, we provide comments here that reiterate key points communicated 
to the Finance Committee by the League of American Orchestras in 
response to Chairman Hatch's June 16, 2017 request for stakeholder 
feedback on tax reform. The League of American Orchestras continues to 
urge the Committee to support the vital work of nonprofit organizations 
by preserving and strengthening tax incentives for charitable giving 
and supporting policies that strengthen the nonprofit sector. Private 
contributions are a critical source of support that enables orchestras 
to broaden public access to the arts, nurture cultural diversity, and 
spur the creation of new artistic works, all while supporting countless 
jobs in communities nationwide. We urge the Committee to take the 
following into consideration in shaping tax reform proposals:

Ensure that comprehensive tax reform results in increased giving by 
more donors. While leadership on House and Senate Committees has 
expressed support for preserving the charitable deduction and enacting 
policies that incentivize even more giving, the proposal in the Unified 
Framework for Fixing the Broken Tax Code to increase the standard 
deduction would reduce the number of itemizers that make use of the 
charitable deduction to just 5% of taxpayers, resulting in a loss of up 
to $13 billion in contributions annually. Efforts to simplify the tax 
process could ensure increased charitable giving by enacting a 
charitable deduction available to all taxpayers, whether or not they 
itemize. The League of American Orchestras endorses the statement 
submitted to the Committee by the Charitable Giving Coalition, which 
explains in detail how a universal charitable deduction would increase 
charitable giving by $4.8 billion per year, while cultivating new 
generations of philanthropists and encouraging a tradition of giving 
among all taxpayers.

While the initial impulse to give comes from the heart, studies have 
repeatedly shown that charitable giving incentives have a significant 
impact on how much and when donors contribute. Should charitable giving 
incentives be scaled back, the public would suffer. Orchestras, like 
other nonprofit organizations, rely on contributions from donors from 
across the economic spectrum. If individual donations were to decline, 
the capacity of nonprofit performing arts organizations to provide 
educational programs and widely accessible artistic events, and to 
boost the civic health of communities and the artistic vitality of our 
country, would be diminished at a time when the services of all 
nonprofits are most in demand. The tax incentive for charitable 
contributions uniquely encourages private, individual investment in the 
public good.

Charitable giving is an essential form of support. Declines in giving 
would result in the loss of vital local nonprofit programs. Orchestras, 
as tax-exempt organizations, are partners in the nation's nonprofit 
charitable sector working to improve the quality of life in communities 
nationwide. Orchestral activity is supported by an important 
combination of public volunteerism, private philanthropy, and civic 
support that is made possible by tax exempt status and incentives for 
charitable contributions. Ticket sales and admission fees alone do not 
come close to subsidizing the artistic presentations, educational 
offerings, and community-based programming of nonprofit arts 
organizations. In fact, orchestras participating in the League's 
Orchestra Statistical Report in 2014 indicated that total private 
contributions represent 39.7% of the revenue that makes the work of 
U.S. orchestras possible.

Reducing incentives for charitable giving would harm communities. 
Nonprofit jobs account for 1 in 10 members of the U.S. workforce. 
American orchestras employ thousands of professional musicians, 
administrators, educators, and stage personnel in cities and towns 
across the country. These workers are key contributors to their local 
creative economy through their day-to-day work, boosting their 
community's reputation for excellence and competitive edge. They are 
also planting the seeds for future economic growth through the 
educational, artistic, and civic programs they present to young people, 
nurturing the next generation of workers who will be prepared to 
contribute to the global economy--which is increasingly reliant on 
creativity and the communication of ideas. The jobs and work product of 
many artists and administrators working in the nation's nonprofit 
performing arts community would be imperiled by declines in charitable 
giving.

Maintain and strengthen the IRA Charitable Rollover Provision. Congress 
wisely recognized the importance of giving incentives by reinstating 
and making permanent the IRA Charitable Rollover provision in December 
of 2015 through the Protecting Americans from Tax Hikes (PATH) Act, 
after years of expiration and temporary reinstatement. The IRA Rollover 
provision can be strengthened by lowering the age requirement to 59\1/
2\ and removing the $100,000 cap on qualifying donations.

We urge the Committee to consider carefully the impact of changes to 
Unrelated Business Income Tax (UBIT) requirements. Along with others in 
the nonprofit community, orchestras viewed with great concern the 
treatment of sponsorship payments in Section 5008 of H.R. 1 in the 
113th Congress. Under the House bill, if a sponsorship payment exceeds 
$25,000 for a single event, any use or acknowledgement of the sponsor's 
name or logo may only appear with, and in substantially the same manner 
as, the names of a significant portion of the other donors to the 
event. Contributions acknowledged in a different manner would be 
treated as advertising income by the tax-exempt organization and 
subject to UBIT.

Current law already provides that UBIT is incurred any time the 
sponsor's product is advertised. Sponsorship recipients may not provide 
qualitative information about the product, urge its purchase, or 
provide any information on how or where to purchase it. The mere 
acknowledgement of the size of a sponsorship is no different from 
acknowledging the size of charitable gifts from individuals, which is 
standard practice for charities of every kind. Subjecting the 
sponsorship to tax would simply divert money from its intended 
philanthropic use and leave nonprofit cultural organizations with fewer 
resources to serve their communities.

Enact the Artist-Museum Partnership Act, S. 1174, which would allow 
artists, writers, and composers to take an income tax deduction for the 
fair market value of their work when donating it to charitable 
collecting institutions. For many years, artists, writers, and 
composers could take a fair market value deduction for their works 
donated to a museum, library, or archive. Currently, creators may take 
a deduction only for the cost of materials, such as paper and ink and, 
as a result, the number of works donated by artists has dramatically 
declined. Musicians, scholars, and the public rely on original 
manuscripts and supporting material to reveal the artistic 
underpinnings of existing compositions and inspire the creative works 
of emerging artists. When collected by orchestra archives, music 
schools, music libraries, or other cultural institutions, original 
musical works and related materials can be preserved and made available 
to the public. By allowing artists to take a fair-market value 
deduction for self-created works given to a nonprofit institution, 
their works are accessible to the public.

Orchestras are important contributors to American civic life, and 
nonprofit status and charitable giving to orchestras substantially 
improves the health, education, and artistic vitality of communities 
nationwide. The United States relies upon the nonprofit community to 
provide many public services in fields ranging from public health and 
education to arts and culture. The various types of charitable 
organizations that comprise the nonprofit sector do not exist or 
operate in silos. They are tightly connected through critical local 
partnerships that leverage shared resources and strengthen services to 
the public. The programs and music of America's orchestras are 
embraced, supported, and accessed by the public in communities large 
and small throughout our country. Here are facts about the 
contributions orchestras make to the public good:

      More than 28,000 performances are given annually by orchestras, 
many of them specifically dedicated to education or community 
engagement, for a wide range of young and adult audiences. With the 
support of private contributions, many of these concerts are made 
available free of charge, or at reduced prices that provide access to 
families and attendees from across the economic spectrum.

      Orchestras partner with other community-based nonprofits every 
day to serve specific community needs. In a national survey, our 
members identified more than 40 types of programmatic activities that 
engage community partners, including health and wellness programs, 
engagement of military families, senior programs, and an extensive 
array of music education partnerships with schools and in afterschool 
settings.

      Orchestral activity is embedded in the civic life of towns and 
cities across our country. With nearly 1,600 symphony, chamber, 
collegiate, and youth orchestras across the country, America is 
brimming with extraordinary musicians, live concerts, and orchestras as 
unique as the communities they serve. Thousands of young people embrace 
the opportunity to perform side-by-side with their peers, and adult 
professional and community orchestras of all sizes present 
extraordinary music for their communities.

      Through the power of music, orchestras unite individuals in the 
unique shared event of a large ensemble performance, and are often a 
focal point when a community seeks to commemorate an important civic 
moment. Orchestras are a source of strength and pride, as well as a 
vehicle for community unification and reflection.

      Orchestras contribute to our nation's artistic vitality, 
supporting the creative endeavors of thousands of today's classical 
musicians, composers, and conductors, while strengthening, documenting, 
and contributing to our nation's diverse cultural identity.

America's orchestras promote access to the arts, are important 
participants in education for children and adults, and support jobs and 
economic growth--all in partnership with other community-based 
organizations. On behalf of the full range of American orchestras, we 
urge the Committee to preserve and grow tax incentives for charitable 
giving and enact policies that strengthen the impact of the nonprofit 
sector.

                                 ______
                                 
             National Association of Enrolled Agents (NAEA)

                1730 Rhode Island Avenue, NW, Suite 400

                       Washington, DC 20036-3953

                         Toll free 855-880-6232

                         Telephone 202-822-6232

                         Facsimile 202-822-6270

                             [email protected]

                         https://www.naea.org/

                          Tax Reform Proposals

Individual Tax Simplification
Alternative Minimum Tax
        Internal Revenue Code: Sections 55, 56, 57, 58, 59.

        The Problem: Congress created the Alternative Minimum Tax (AMT) 
        to ensure that wealthy individuals taking advantage of tax 
        shelters pay a minimum amount of taxes. In reality, due to tax 
        law changes over the years, the AMT often affects taxpayers who 
        were not the target of the original proposal: middle-class 
        taxpayers making as little as $75,000.\1\ Additionally, 
        taxpayers from high tax states and with large families are most 
        vulnerable to the AMT. While not common, it is even possible to 
        find examples of taxpayers in the $50,000--$60,000 income range 
        affected by AMT.
---------------------------------------------------------------------------
    \1\ ``Characteristics of Alternative Minimum Tax (AMT) Payers, 
2016-2018 and 2027,'' Tax Policy Center, http://
www.taxpolicycenter.org/model-estimates/baseline-alternative-minimum-
tax-amt-tables-april-2017/t17-0149-characteristics.

        Recommendation: The AMT should be repealed or substantially 
        modified to apply only to high income taxpayers paying little 
---------------------------------------------------------------------------
        or no taxes.

        Analysis: The AMT is a parallel tax system, requiring taxpayers 
        to, in effect, do their taxes twice. In conjunction with the 
        elimination of many tax avoidance provisions of the Internal 
        Revenue Code, the AMT can be eliminated or substantially 
        modified to target only high income taxpayers.

Personal Exemption Phase-out (PEP) and Limitation of Itemized 
Deductions (Pease)

        Internal Revenue Code: Sections 151 and 68.

        The Problem: While the Personal Exemption Phase-out (PEP) and 
        Pease are presented as phase-outs for exemptions and itemized 
        deductions, in reality they are hidden additional tax rates. 
        Additionally, these phaseouts unfairly tax large families and 
        people from high tax states.

        Recommendation: Congress should repeal PEP and Pease and 
        replace with an applicable tax rate on high-income taxpayers.

        Analysis: Removing phaseouts that act as hidden marginal rates 
        will bring better transparency and efficiency to the Internal 
        Revenue Code. Additionally, repealing PEP and Pease will remove 
        the large family penalty and will provide tax relief to people 
        living in high tax states.
Child Tax Credit
        Internal Revenue Code: Section 24.

        The Problem: A taxpayer may claim a tax credit for each 
        qualifying child under the age of 17. In most families, 
        teenagers do not graduate from high school until age 18 or even 
        19. These years can be expensive as the child prepares to enter 
        college or the workforce.

        Recommendation: The age limit for each child should be 
        increased from under the age of 17 to under the age of 19.

        Analysis: Increasing the child age limit will help families 
        transition children from high school to work or college.
Unearned Income of a Child, ``Kiddie Tax''
        Internal Revenue Code: Section 1(g).

        The Problem: The additional tax revenue to the Treasury does 
        not outweigh the extreme complexity added to a family's tax 
        compliance.

        Recommendation: Congress should substantially increase the 
        current threshold for unearned income subject to the Kiddie Tax 
        from $2,100 to $6,000 (subject to annual indexing) while 
        lowering the maximum age subject to the tax to 14.

        Analysis: The intent of current law is to discourage transfers 
        of wealth, purely for tax avoidance purposes. Changing the 
        current threshold to $6,000 would better reflect the original 
        threshold adjusted for inflation.
Mileage Rates
        Internal Revenue Code: Sections 162, 213, 217, and 170(i).

        The Problem: The IRS determines annually the allowable mileage 
        rate as an ordinary and necessary business expense, which is 
        currently 53.5 cents per mile. The IRS also sets a standard 
        rate for the medical and moving deduction, which is currently 
        17 cents. Since 1984, the mileage rate for the charitable 
        deduction is set by statute at 14 cents per mile.

        Recommendation: The standard mileage rate deduction should be 
        consistent for all uses.

        Analysis: The proposal would treat similarly situated taxpayers 
        equally. When charitable or medical transportation is 
        necessary, reasonable rates should be allowed and adjusted 
        annually.
Education
        Internal Revenue Code: Sections 25A, 221, 222, 529, and 530.

        The Problem: The Internal Revenue code includes such a myriad 
        of complex tax incentives for education that it is often too 
        expensive and time-consuming for many taxpayers to simply sort 
        them all out. As a result, many families without sophisticated 
        advice and tax preparation from competent and highly trained 
        practitioners simply forego using these incentives.

        Recommendation: Congress should consider consolidating the 
        various education benefits into three provisions:

        1.  An enhanced super 529 savings vehicle (including tuition 
        prepayment plans), with elective payroll deductions;

        2.  A college tax credit with a single earnings phase out that 
        would consolidate American Opportunity Credit/Hope Credit, 
        Lifetime Learning Credit, and tuition and fees expenses; and

        3.  An expanded deduction for student loan interest.

        Any savings from this consolidation of tax expenditures should 
        be dedicated to making all three of these provisions available 
        to as wide of an income group as possible.

        Analysis: The proposal would simplify the tax code, reduce 
        taxpayer burden, and would more fairly treat taxpayers of 
        similar economic situations.
Earned Income Tax Credit (EITC)
        Internal Revenue Code: Section 32.

        The Problem: The EITC has increased work, reduced poverty, and 
        lowered welfare receipts.\2\ At the same time, it is one of the 
        most complex parts of the Internal Revenue Code. Overpayments 
        often result from the complexities of families' lives. The 
        Department of Treasury estimates that 70 percent of improper 
        EITC payments stem from issues related to the EITC's residency 
        and relationship requirements; filing status issues; and issues 
        relating to who can claim a child in non-traditional family 
        arrangements.
---------------------------------------------------------------------------
    \2\ Council of Economic Advisers, ``The War on Poverty 50 Years 
Later: A Progress Report,'' January 2014. Table 2 on page 27 highlights 
that the EITC and its sibling, the Child Tax Credit, lift more 
Americans out of poverty than any other program except Social Security.

        Recommendation: Congress should simplify the EITC by making the 
        definition of ``qualifying child'' for EITC consistent with 
        current law governing a dependent child under Internal Revenue 
        Code Section 152(c). The minimum age should be reduced to 18 
        for non-dependent taxpayers and the maximum age (currently 
        under age 65) for EITC eligibility should be eliminated. 
        Additionally, Congress should create a commission made up of 
        Circular 230 practitioners and low-
        income advocacy groups to make recommendations on simplifying 
        the residency rules to decrease the incidences of mispayments 
---------------------------------------------------------------------------
        and to better reflect complex family arrangements.

        Analysis: The proposal would simplify an extremely complicated 
        section of the Internal Revenue Code, which should lessen the 
        need for practitioners and the IRS to be involved in sorting 
        out complex family relationships and thus lowering the incident 
        of mispayments due to unintentional noncompliance. Expanding 
        the eligible age range would create parity for similarly 
        situated taxpayers.
International
        Internal Revenue Code and U.S. Code: 31 U.S.C. Sec. 5321(a)(5), 
        sections 6038, 6038B 6038D, 6039F, 6046, 6046A, 6048(b).

        The Problem: The reporting rules for American citizens living 
        abroad are extremely complex and the penalties for 
        noncompliance far outweigh the offense in most instances. 
        Congress needs to reform these rules to make both the reporting 
        and the inadvertent noncompliance less draconian.

        Recommendation: The Internal Revenue Code should provide relief 
        from the penalties in the following situations:

          The taxpayer has not filed a FinCEN 114 or IRS forms 926, 
        5472, 8938, 8865, 8858, 5471, 3520, or 3520A, but has reported 
        all income from all sources.

          The taxpayer has not filed a FinCEN 114 or IRS forms 926, 
        5472, 8938, 8865, 8858, 5471, 3520 or 3520A, but there is zero 
        balance due related to the various foreign entities.

          If the taxpayer should have filed a FinCEN 114 or IRS forms 
        926, 5472, 8938, 8865, 8858, 5471, 3520 or 3520A and there is a 
        de minimis balance due as a result of the missing income, the 
        penalty should be the greater of 20 percent of the tax due or 
        $100.

        Analysis: The proposal will mitigate the penalties associated 
        with inadvertent noncompliance with the requirements of the 
        Foreign Account Tax Compliance Act.
Self-Employed Health Insurance
        Internal Revenue Code: Section 162.

        The Problem: Self-Employed Health Insurance premiums are 
        deductible as an adjustment to income in determining AGI, and 
        not a business expense, absent a complex (and often expensive) 
        employer-provided medical expense reimbursement plan.

        Recommendation: Self-employed individuals should be able to 
        deduct health insurance costs in determining net earnings 
        subject to self-employment tax (Old-Age, Survivors, and 
        Disability Insurance tax (OASDI) and Hospital Insurance (HI) 
        tax).

        Analysis: Self-employed individuals (who file Schedule C or F) 
        cannot deduct their own health-insurance premiums as an 
        ordinary and necessary business expense even though premiums 
        paid for employees' health coverage are deductible.
Pension Simplification
Retirement and Deferred Compensation Plans
        Internal Revenue Code: Sections 401(k), 403(b), 408(p), and 
        457.

        The Problem: The proliferation of retirement plans that provide 
        for taxpayer elective deferrals contain different rules and 
        requirements. This has become a barrier for small businesses to 
        provide retirement benefits to their employees as the small 
        businesses compete with larger companies for the best employees 
        of small businesses.

        Recommendation: The Internal Revenue Code sections governing 
        employee contribution plans elective deferrals should be 
        simplified into a uniform simplified employee contributory 
        deferral plan.

        Analysis: The proposal would simplify the tax code and would 
        more fairly treat taxpayers of similar economic situations.
Determination of Basis
        Internal Revenue Code: Sections 401, 403(b), 408, 408A, 457.

        The Problem: Depending on the type of retirement plan, there 
        are separate rules for determining the basis of pension 
        distributions.

        Recommendation: Tax reform should include a uniform rule 
        regarding the determination of basis in distributions from 
        retirement plans.

        Analysis: The proposal would simplify the tax code and would 
        more fairly treat taxpayers of similar economic situations.
Early Withdrawal Penalties
        Internal Revenue Code: Section 72(t).

        The Problem: The rules governing the 10-percent penalty for 
        early withdrawals, such as for college costs and first-time 
        homebuyers, from qualified retirement plans are applied 
        differently for IRAs and pension plans. Additionally, some plan 
        types have larger penalties for early withdrawals. These rule 
        differences can lead to confusion and penalties could be 
        avoided if the exceptions to the 10 percent penalty are 
        consistent for all qualified plans covered under Sec. 72(t).

        Recommendation: The penalty rules for early withdrawals should 
        be standardized for distributions from all types of deferred 
        accounts-qualified retirement plans.

        Analysis: The proposal would simplify the tax code and will 
        fairly treat taxpayers of similar economic situations.
1099/K-1 Reform
Brokerage Firm Filing Deadline
        Internal Revenue Code: Section 6045.

        The Problem: Even with the date change made by section 403 of 
        the Energy Improvement and Extension Act of 2008, brokerage 
        firms are resending updated forms 1099 throughout the tax 
        filing season and occasionally, even later. These actions often 
        necessitate changes and amendments or result in taxpayer 
        requests for extensions of time to file, based on uncertainty 
        of forms they have received.

        Recommendation: The February 15th deadline for filing all forms 
        1099 from investment brokerages should be changed back to 
        January 31st. Brokerage firms should be required to report the 
        most accurate income and basis known as of January 31st. If 
        insignificant corrections and adjustments are reported by 
        brokerages subsequent to the January 31st deadline, there 
        should be a de 
        minimis safe harbor amount, under which the taxpayer is not 
        required to file an amended or superseding return.

        Analysis: The proposal would reduce burden and costs to 
        taxpayers and reduce the government's burden of processing 
        amended returns with insignificant changes.
Uniform 1099-B
        Internal Revenue Code: Section 6045.

        The Problem: Lack of standardization of the 1099-B in the 
        brokerage industry causes confusion and misapplication of the 
        information provided.

        Recommendation: The IRS should provide a required uniform 1099-
        B for the brokerage industry.

        Analysis: The proposal would lead to more accurate and complete 
        information on the taxpayer's return. It would reduce taxpayer 
        burden by reducing the number of IRS CP-2000 Notices mailed to 
        taxpayers.
K-1 Simplification
        Internal Revenue Code: Section 6031.

        The Problem: Many unsophisticated taxpayers unwittingly invest 
        in units of partnerships in real estate, oil and gas, timber, 
        and such commodities and futures that generate unique 
        deductions and credits that must be reported but rarely if ever 
        affect the tax liability. These deductions and credits also add 
        nothing to IRS's matching abilities.

        Recommendation: IRS should be directed to review and simplify 
        K-1 reporting for partnerships in real estate, oil and gas, 
        timber, and commodities and futures for limited partners with a 
        capital account of less than $50,000.

        Analysis: The proposal would reduce complexity and taxpayer 
        burden.
Indexing
        Internal Revenue Code: All sections of the Internal Revenue 
        Code.

        The Problem: Many parts of the Internal Revenue Code are not 
        indexed for inflation, eroding the value of numerous provisions 
        over time.

        Recommendation: The Internal Revenue Code should be amended as 
        necessary to provide uniform indexing requirements.

        Analysis: More uniform indexing of the Internal Revenue Code 
        would ensure that taxpayers of similar economic situations 
        would be treated fairly and provide stability.
Withholding
        Internal Revenue Code: Section 3402.

        The Problem: Employers withhold a percentage of employees' 
        income from their paychecks, simplifying the remittance of 
        taxes to the Treasury. Self-employed taxpayers must submit 
        payment through estimated taxes.

        Recommendation: The Internal Revenue Code should provide for 
        optional withholding and reporting for independent contractors, 
        partners and non-employee S-corporation shareholders. This 
        could be done through a simple check-the-box election on the W-
        9 Form.

        Analysis: The proposal would reduce taxpayer burden, would 
        assist taxpayers in compliance with the ``pay as you go'' 
        requirement, would reduce the number of end-of-year balance due 
        amounts, and would more fairly treat taxpayers of similar 
        economic situations.
IRS Future State, Practitioner Accounts
        Internal Revenue Code: Section 6061(b).

        The Problem: The IRS has developed online accounts for 
        individuals that when fully functional, will allow taxpayers to 
        see their transcripts, communicate through secure portals for 
        webmail, and submit payments in full or by an installment 
        agreement. Accounts for tax professionals are being developed 
        at a much slower pace. Additionally, all powers of attorney and 
        disclosure authorizations are still being submitted through the 
        IRS Centralized Authorization File (CAF) using inked signatures 
        while requiring manual input from IRS employees. It is NAEA's 
        concern that the delay in modernizing online accounts for tax 
        practitioners will discourage taxpayers from exercising all 
        their rights for representation.

        Recommendation: Congress should require the following:

          1.  The IRS should debut online accounts for tax 
        practitioners at the same time as individual accounts.

          2.  Individual online accounts should display a Publication 1 
        equivalent when taxpayers utilize payment options in their 
        accounts.

          3.  The IRS shall provide an electronic option for taxpayer 
        authorizations of Circular 230 practitioners.

          4.  The IRS shall provide guidance on the use of electronic 
        signatures for Forms 2848 and 8821 for Circular 230 
        practitioners.

        Analysis: The proposal would ensure equal treatment for 
        taxpayers being represented by tax practitioners and would 
        ensure that taxpayers can fully exercise their rights under the 
        Internal Revenue Code.
Minimum Standards for Unenrolled Tax Preparers
        U.S. Code: Title 31, section 330.

        The Problem: Unscrupulous unenrolled preparers are harming the 
        integrity of the tax administration system through incompetency 
        and fraud. The General Accountability Office, the Treasury 
        Inspector General for Tax Administration and the Taxpayer 
        Advocate have all commented on the need to provide minimum 
        standards for tax preparation. Unfortunately, in Loving v. 
        Commissioner and subsequent cases, the courts ruled that the 
        Internal Revenue Service does not have authority to regulate 
        tax return preparers under title 31. The case overturned the 
        regulatory framework for registered tax return preparers and 
        severely limited the agency's ability to regulate all 
        individuals--even lawyers, certified public accountants and 
        enrolled agents--in the preparation of tax returns.

        Recommendation: Congress should override Loving and all 
        subsequent cases relying on its holdings and provide specific 
        authority for the IRS to require all non-credentialed paid tax 
        preparers to meet minimum standards. Such standards should 
        include passing a one time competency exam administered under 
        the auspices of the Department of Treasury, requiring tax 
        compliance background checks, setting continuing education 
        requirements, and requiring compliance with strict ethical 
        standards.

        Analysis: Requiring minimum standards for all paid tax return 
        preparers will increase compliance and the overall 
        professionalism of the tax preparation industry. Establishing 
        IRS's authority will help protect taxpayers, the tax 
        administration system, and the U.S. Treasury.

                                 ______
                                 
                 National Volunteer Fire Council (NVFC)

                      7852 Walker Drive, Suite 375

                          Greenbelt, MD 20770

                             (202) 887-5700

                        888-ASK-NVFC (275-6832)

                            202-887-5291 fax

                           [email protected]

                         https://www.nvfc.org/

                           September 13, 2017

                  Submitted by: Kevin D. Quinn, Chair

On behalf of the National Volunteer Fire Council (NVFC), a registered 
501(c)3 organization representing the interests of the more than 1 
million volunteer firefighters and EMS providers in the United States, 
thank you for the opportunity to provide information regarding the 
impact that federal income taxation has on recruitment and retention 
incentives that many communities provide to their volunteer emergency 
responders as a reward for their service.

Eighty-five percent of all fire departments in the United States are 
staffed by all- and mostly-volunteer personnel. Those departments 
protect 35.1 percent of the nation's population. The NVFC estimates 
that the services donated by volunteer firefighters save taxpayers more 
than $30 billion annually. Thousands of communities across the nation, 
particularly in rural and suburban areas, would struggle to provide 
emergency services without their volunteers.

Between 1983 and 2015, the number of volunteer firefighters in the 
United States declined from 884,600 to 814,850, an 8 percent reduction. 
Perhaps more alarmingly, since 1987, the number of firefighters under 
the age of 40 serving communities of 2,500 or fewer residents dropped 
from 282,821 to 192,161 while the number of over-50 firefighters 
serving these same communities rose from 71,153 to 124,601. Whereas 
three decades ago the percentage of young firefighters used to be 
highest in small-town America, today nearly a third of all firefighters 
serving our smallest communities are over the age of 50.

The reason for this shift is largely due to demographics, what is 
happening in rural America, and the jobs market. People are less likely 
today to have the same job in the same community for their entire 
lives. This is especially true in rural America, because so many jobs 
have moved to more densely populated areas, or they've disappeared 
completely due to automation or offshoring. Additionally, there are 
more households today in which all adults present work outside of the 
home.

As a consequence of these changes, people are more likely to have to 
move at some point in their lives--and possibly several times--for 
employment. Additionally, young people from rural areas are more likely 
to have to move or commute in order to find work. This is very 
destabilizing for volunteer emergency services staffing, which 
historically was modeled on generational recruitment--children 
following their parents into the fire department.

With young people today more mobile than in the past, emergency 
services agencies are increasingly implementing formal recruitment and 
retention (R&R) programs in order to ensure adequate volunteer 
staffing. This is necessary to keep up with rising turnover, as people 
relocate out of communities, as well as to attract personnel who may 
not have ever considered volunteering as an emergency responder, or 
even be aware that the local fire/EMS agency is staffed by volunteers.

As part of a formal R&R program, many departments have begun to provide 
modest incentives to their volunteers as a reward for their service. 
The NVFC estimates that more than half of all volunteer emergency 
responders receive some type of incentive, including per-call payments, 
annual or monthly stipends, or non-monetary benefits such as clothing 
or goods and services. Volunteer incentives are typically modest--the 
NVFC estimates that for volunteers receiving incentives the average 
annual benefit is worth approximately $350--and most volunteers view 
benefits as a form of reimbursement for responding to emergencies in 
personal vehicles, replacing clothing to wear under protective gear and 
at training, along with other minor expenses.

Taxation of volunteer benefits can be confusing, in part because the 
very definition of ``volunteer'' isn't clear. The U.S. Department of 
Labor has ruled that personnel compensated at a rate of less than 20 
percent of what a full-time paid employee performing the same functions 
would be compensated in the same jurisdiction should be considered 
``volunteers'' rather than ``employees.'' The Internal Revenue Service 
(IRS), however, does not recognize this distinction and has made it 
clear that even minor benefits provided to volunteers should be taxed 
as income.

The notion that volunteer benefits ought to be subject to federal 
income and payroll taxes has generally been slow to take hold in the 
volunteer emergency services community. Even today, the NVFC continues 
to hear from volunteer fire departments that are unaware that the 
benefits they provide are technically subject to taxation for a number 
of reasons, including:

    -  Interpreting the Labor Department's ruling to mean that because 
someone is considered a ``volunteer'' rather than an ``employee'' that 
benefits provided to that individual are not subject to income 
taxation.
    -  Viewing volunteer benefits as reimbursement and hence not 
subject to income taxation.
    -  Believing that if benefit amounts are small enough that there is 
no requirement that they be treated as taxable income or reported as 
such.
    -  Not viewing themselves as employers or the benefits they provide 
as income.
    -  Never having been audited or even contacted by the IRS and 
informed otherwise.

The federal tax code should be modified to allow local fire and EMS 
agencies to provide modest incentives to their volunteer personnel 
without incurring tax liability. Considering that the value of services 
rendered by volunteer emergency responders--on average, more than 
$37,000 per year per volunteer based on NFPA estimates--are worth far 
more than the benefits they receive, the notion that the federal 
government is owed tax on those benefits is counterintuitive.

In an attempt to simplify the application of federal tax law on 
volunteer benefits, legislation exempting property tax abatements and 
up to $360 per year of other types of benefits to volunteer 
firefighters and EMS personnel was enacted in 2007. In 2008, Congress 
passed legislation clarifying that exempted benefits are not subject to 
payroll taxes or withholding. Both of these provisions, commonly 
referred to as the Volunteer Responder Incentive Protection Act 
(VRIPA), expired at the end of 2010.

VRIPA increased the incentive value of volunteer benefits while easing 
administrative burdens associated with reporting and calculating 
withholding on volunteer benefits. Since VRIPA expired, volunteer fire 
departments in Florida and Virginia have been audited and fined by the 
IRS for improper reporting of benefits. This has had a chilling effect 
on departments providing benefits, which has in turn hampered R&R 
efforts at the local level.

S. 1238, the version of VRIPA introduced in this Congress by Senators 
Susan Collins and Ben Cardin, would make VRIPA permanent and increase 
the exempt amount from $360 per year ($30 per month of active service) 
to $600 per year ($50 per month of active service). A cost estimate 
developed by the Joint Committee on Taxation for identical legislation 
in the House of Representative (H.R. 1550) estimated that the cost to 
the federal government of enacting VRIPA would be $465 million total 
over the next 10 years (see enclosed cost estimate).

Volunteering has been part of American life since before our nation was 
founded. The volunteer spirit remains strong, but as society changes 
barriers to volunteering as an emergency responder have emerged that 
are making it increasingly difficult to recruit and retain personnel. 
On behalf of the NVFC, I urge the committee to include the language 
from S. 1238 in any legislation impacting the portion of the U.S. Code 
dealing with individual income tax. Enactment of VRIPA would give 
agencies that provide modest benefits a reprieve from having to report 
these payments as in come. It would also ensure that volunteers don't 
have to pay tax on what amounts to reimbursement for expenses incurred 
on behalf of the department.

Thank you for the opportunity to provide input to the committee on this 
important matter. If you have any questions, please do not hesitate to 
contact me directly, or you can follow up with Dave Finger, NVFC Chief 
of Legislative and Regulatory Affairs, at (240) 297-3566 or 
[email protected].

Sincerely,

Kevin D. Quinn
Chair

                                 ______
                                 
Enclosure

                     Congress of the United States

                      Joint Committee on Taxation

                     502 Ford House Office Building

                       Washington, DC 20515-6453

                             (202) 225-3621

                          http://www.jct.gov/

Honorable David G. Reichert
U.S. House of Representatives
1127 Longworth
Washington, DC 20515

Honorable John B. Larson
U.S. House of Representatives
1501 Longworth
Washington, DC 20515

Dear Mr. Reichert and Mr. Larson:

    This is a response to your request dated April 12, 2017, for an 
estimate of H.R. 1550, the ``Volunteer Responder Incentive Protection 
Act of 2017,'' which reinstates, increases, and makes permanent the 
exclusion for benefits provided to volunteer firefighters and emergency 
medical responders.

    Present law requires all payments, stipends, property tax 
reductions, and other fee or tax reductions for volunteer firefighters 
and emergency medical responders to be treated as taxable income. H.R. 
1550 will allow qualified payments, tax reductions, or fee reductions 
up to $50 per month of service to be excluded from taxable income. 
Qualified payments are any payment, reimbursement or otherwise, 
provided by a State or political division thereof, on account of 
performance of services as a member of a qualified volunteer emergency 
response organization.

H.R. 1550 is effective for taxable years beginning after December 31, 
2017. We estimate that the bill would have the following effects on 
Federal fiscal year budget receipts:

                                                                      Fiscal Years
                                                                  (Millions of Dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                  2018                      2019      2020      2021      2022      2023      2024      2025      2026      2027     2018-22    2018-27
--------------------------------------------------------------------------------------------------------------------------------------------------------
-31                                           -43       -46       -47       -48       -49       -49       -50       -50       -51       -215       -465
--------------------------------------------------------------------------------------------------------------------------------------------------------
NOTE: Details do not add to totals due to rounding.

    I hope this information is helpful to you. If we can be of further 
assistance in this matter, please let me know.

            Sincerely,

            Thomas A. Barthold

                                 ______
                                 
              Precious Metals Association of North America

              Written Testimony of Scott Smith, President

Chairman Hatch and Members of the Committee,

My name is Scott Smith, and I am the CEO of Pyromet, which is a 
privately owned precious metals manufacturer and refiner of silver, 
gold, and platinum group metals. Since 1969, Pyromet is a reputable 
name in precious metals and precious metals management. I also serve as 
President of the of the Precious Metals Association of North America 
(PMANA), and I am submitting this written testimony on behalf of our 
members. Our association's members are made up of refiners, 
manufacturers, traders, and distributors of products that are 
essentially comprised of precious metals such as gold, silver, 
platinum, and palladium. All of our members have a vested interest in 
tax reform--in particular, changes to the capital gains rate for 
investments in precious metal coins and bars.
Background
Right now, it is impossible to turn on the television without seeing an 
advertisement for investing in precious metals bullion coins and bars. 
These are great opportunities for people to include tangible assets 
into their portfolios. Since 1982, gains made on precious metals 
bullion have been taxed at the ordinary income rate due to language 
defining such bullion as a collectible. Congress has made numerous 
attempts to mitigate the effects of this capital gains treatment on 
precious metals. The Tax Reform Act of 1986 granted the American Eagle 
family of coins an exemption from the ``collectible'' definition and 
allowed them to be included as equity investments in Individual 
Retirement Accounts. Over a decade later, the Taxpayer Relief Act of 
1997 created purity and custody standards that, if met, would exempt 
bullion coins and bars from the definition while also allowing them in 
IRAs. Furthermore, precious metals investment grade bullion products 
are purposely designed and produced in a way that excludes any 
assumption that they are rare or unique collectibles. Instead, 
investment grade bullion products are mass produced to be offered as 
investments strictly for their precious metal content.
Regulatory Inconsistencies
Since 1986, Congress and the U.S. Treasury have recognized the value of 
investing in precious metal bullion, thus making some exemptions from 
the ``collectible'' definition. However, the ``collectible'' definition 
remains for non-IRA investments in precious metals, and these 
investments are taxed at the ordinary income rate for collectibles with 
a maximum rate of 28%--a rate 40% greater than the capital gains rate 
for equity investments. To better understand this inconsistency, I want 
to briefly explain the different types of coins and the distinctions 
between them.
Coins--Function Versus Form
Coins belong to one of three basic categories that consider the coin's 
function and form. All coins are round in form. However, there is a 
critical difference in the concept of form and that of function. For 
example, while all airplanes have wings and tails and are designed to 
fly, different types of airplanes fulfill different functions. One 
wouldn't employ a Boeing 747 airliner to perform a fighter mission. 
Similarly, there are different categories of coins that have different 
roles, and each type is distinguished from the others by its function 
or purpose.

There are three basic categories of coins in the world today; each one 
serves a specific role.

1. Monetary Coins--These coins are part of a country's circulating 
currency that its citizens routinely use as money. Coins in circulation 
today contain no precious metal. The value of these coins (commonly 
referred to as their ``legal tender'' or ``face'' value) is set in law 
by government decree. In the United Sates, of course, these would 
include pennies, nickels, dimes, quarters, half-dollars, and now, the 
new ``Sacagawea'' dollar coin. They are used as a medium of exchange by 
which the general public effects everyday transactions, such as when 
they pay for candy bars, newspapers, parking meters, bridge tolls, etc. 
The purpose of these coins is to circulate in the general economy. They 
are not hoarded for their uniqueness or rarity, or because they have 
any premium value over their legal tender amount.

2. Rare Coins--These coins are commonly referred to as ``numismatic'' 
coins, that is, they are held by, valued and traded among hobbyists and 
coin collectors on the basis of their rarity and the quality of their 
physical condition. Typically, numismatic coins are old (sometimes 
ancient), and they may, or may not contain a precious metal. The market 
value of numismatic coins usually far exceeds either their face value 
or their precious metal content (if any). Their market values are 
determined by supply and demand factors that exist in the rare coin 
market for particular coins based largely on subjective judgments made 
about their scarcity and condition. Such coins may be held for 
enjoyment (e.g., as in a hobby), or for investment purposes, or both, 
just as an antique rug or a rare painting may be purchased simply for 
the enjoyment of its owner, or specifically for its price appreciation 
potential. Thus, profits through capital gains may be realized when 
rare coins are sold, but because they are unique, their value 
determinations can vary and can be quite subjective.

3. Bullion Coins--Bullion coins are fungible, highly refined precious 
metals products, round in shape, and produced to exacting 
specifications in large numbers by numerous countries throughout the 
world specifically as precious metal investment vehicles. They are 
widely traded, highly liquid and their market values are globally 
publicized. Although they typically are ascribed legal tender status by 
the governments that mint them, bullion coins trade in the marketplace 
at or near the market price of the commodity they contain, which 
typically has no relationship whatsoever to the coin's legal tender, or 
``face'' value. For example, earlier this year, a one-ounce American 
Eagle gold bullion coin having a U.S. legal tender value of $50, traded 
in the market place at $1,277.35, while gold itself was trading at a 
``spot price'' of $1,239.85 per ounce. Thus, the price of the gold 
Eagle was at a $37.50 premium (3%) to the prevailing gold bullion 
price.

It is important to note that the premium charged for a bullion coin 
over and above the current ``spot price'' of the corresponding 
commodity it contains merely reflects the cost of insurance, 
transportation, handling, and storage, as well as the manufacturer's 
and dealer's profit, associated with the processing and sale of the 
coin. This premium is not a value ascribed to the coin as the result of 
any rarity or uniqueness considerations. In fact, bullion coins are 
purposely manufactured in sufficient quantities by their governments to 
ensure they are not ``rare'' or ``scarce,'' but are as common as the 
many types of bullion bars available also produced by commercial 
refiners specifically for investment purposes. Therefore, bullion coins 
should be recognized and treated in the tax code as any other 
investment.

Recognizing precious metals coins and bars as investment products, The 
Wall Street Journal publishes each business day in its investment 
section, the market prices of gold, silver, platinum and palladium 
bullion as well as the prices the most widely traded bullion coins. 
Additional substantiation of the investment status of bullion coins and 
bars is evident in the fact that 21 states have removed their sales tax 
on bullion coins and bars.
Policy Proposal
Unlike rare coins--which include those most pursued by hobbyists and 
collectors--bullion coins are precious metal investment vehicles that 
are traded at the value of the commodity they contain. Since they are 
not rare, but rather mass produced specifically for investing, their 
status as a ``collectible'' for non-IRA investments is misaligned with 
their function and form. That is why I am requesting on behalf of the 
PMANA that Congress amend the Internal Revenue Code to treat gold, 
silver, platinum, and palladium in either bullion or coin form, in the 
same manner as stocks, bonds, and mutual funds for purposes of the 
capital gains rate for individuals.

Thank you, and I look forward to working with the Committee to ensure a 
reformed tax code that is fair to investors and promotes more 
investments in precious metal bullion coins and bars. If you have any 
questions, I am happy to meet with you and/or your staff to discuss 
this issue in greater detail. Thank you for the time and I hope the 
Committee will look closely at this issue and the impacts it has on 
American investors.

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