[Congressional Record Volume 141, Number 122 (Wednesday, July 26, 1995)]
[Extensions of Remarks]
[Page E1516]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


                               TAX REFORM

                                 ______


                          HON. LEE H. HAMILTON

                               of indiana

                    in the house of representatives

                        Wednesday, July 26, 1995
  Mr. HAMILTON. Mr. Speaker, I would like to insert my Washington 
Report for Wednesday, July 26, 1995, into the Congressional Record.
                               Tax Reform

       I find Hoosiers increasingly interested in the idea of tax 
     reform--scrapping the federal income tax and replacing it 
     with something much simpler and fairer. Tax reform is getting 
     more attention in Congress than it has in a decade, and 
     several plans are under consideration. Reforming the tax 
     system will take some time, but is an effort worth 
     undertaking.


                           support for reform

       Tax reform is getting serious attention for several 
     reasons. First, federal income taxes consistently rank as the 
     most unpopular of all taxes. Second, many Americans spend an 
     enormous amount of time complying with the tax code and 
     filling out forms, at a cost of up to $200 billion each year. 
     That time and money could be used much more productively in 
     other ways. Third, many Americans feel the tax code is rigged 
     for those who can hire experts to find loopholes. Fourth, the 
     current system encourages debt and consumption, and 
     discourages saving and investment. That undermines our 
     ability to boost productivity and raise standards of living. 
     Fifth, some people believe the tax code should be used simply 
     to raise revenue rather than try to influence behavior 
     through a variety of deductions and exemptions. Finally, many 
     see tax reform as another way of downsizing government and 
     making it less intrusive.


                         concerns about reform

       Yet others express words of caution. They say, first of 
     all, that the U.S. has one of the lowest overall tax burdens 
     of the major industrialized countries--only Australia's is 
     slightly lower--and that we should not blindly scrap our 
     system. Second, they point out that 70% of taxpayers use the 
     relatively simple 1040EZ form. Third, tax reform could hurt 
     various sectors in the economy and regions of the country. 
     Changes in the home mortgage deduction, for example, would 
     have a big impact on housing. Fourth, they say people have an 
     exaggerated sense of their income tax burden--most Americans 
     pay less in income taxes than they do in Social Security 
     taxes--so new rates that sound good may actually be no 
     improvement. Fifth, tax reform could be like last session's 
     healthcare reform--people support it in general but get very 
     worried once they learn the details. Finally, reforming the 
     tax
      system will be very time consuming and complicated exercise, 
     and will open up the tax code to intense lobbying 
     pressures for special favors.
       My view is that we now have a unique opportunity for 
     meaningful tax reform and should pursue it. At the same time 
     we need to make sure that in our rush to change, we do not 
     replace an unpopular system with one that turns out to be 
     worse. We need to look at the implications of each of the 
     major plans carefully.


                             main versions

       Several tax reform plans have been proposed in Congress. 
     All address the public's frustration with the current system, 
     but each has a very different impact on taxpayers and various 
     sectors of the economy.
       Flat Tax: One plan calls for a single individual and 
     corporate tax rate of 17%, while eliminating virtually all 
     deductions, including those for home mortgage payments and 
     charitable contributions. This plan has the right goal of 
     trying to simplify the system, but has several drawbacks. It 
     tilts its tax relief heavily toward the wealthy. For example, 
     someone getting $100,000 in income from stock dividends would 
     pay no income tax at all. Also eliminating the home mortgage 
     deduction could cut the value of most Americans' biggest 
     asset--their home--by 15-20%. It would also increase the 
     deficit. Adjusting it so it brings in as much as the current 
     system would mean a flat tax rate of more like 23%.
       National Sales Tax: Another plan would scrap the personal 
     and corporate income tax system and replace it with a 17% 
     national sales tax. This plan rightly tries to curb 
     consumption and encourage saving and investment. But a pure 
     sales tax risks a return to inflation and is regressive, 
     hurting lower income people, older Americans, and large 
     families who need to consume a large portion of their income 
     on basic necessities like food and medical services. Trying 
     to remedy this by exempting, say, the first $15,000 of 
     spending could require a burdensome enforcement mechanism. 
     Moreover, the national sales tax would have to be closer to 
     25% to bring in as much revenue as the current system. That 
     could lead to considerable consumer resistance and
      widespread cheating. Retailers and industries that depend on 
     people making large purchases, like the auto industry, 
     would be hard hit by a national sales tax.
       Consumer-Income Tax: This plan would basically tax spending 
     rather than income. A family would tally up all their savings 
     and investments--including bank deposits, stock purchases, 
     home mortgage payments, and educational expenses--and 
     subtract this from their income; they would then pay taxes on 
     the difference--their consumed income. This approach has a 
     good emphasis on saving and investment and it is designed to 
     be progressive--requiring the wealthy to pay more. But it 
     does not achieve much simplification, and indeed could mean 
     more complex tax calculations for many Americans. It also has 
     the drawback of trying to set up a new, untried tax system. 
     Big losers would be sectors whose products or services are 
     not considered ``investments''.
       Modified Flat Tax: A recently announced modified flat tax 
     plan would eliminate almost all current deductions and 
     exemptions, except the home mortgage deduction, in order to 
     reduce overall tax rates. Three-fourths of all taxpayers 
     would pay a flat income tax of 10%, with higher rates for 
     upper income taxpayers--but their rates would still be lower 
     than under the current system. This approach has several 
     advantages: it has the important goal of allowing most 
     taxpayers to pay a flat tax of 10%, it is progressive, and it 
     doesn't add to the deficit. It falls short in not doing 
     enough to encourage greater saving and investment and in 
     eliminating some worthwhile deductions. Yet despite such 
     drawbacks, my sense is that some sort of modified flat tax 
     will be the most likely outcome of the tax reform effort.


                               Conclusion

       The tax reform debate has begun in earnest in Congress and 
     in the country, and that is an important step. Yet the issue 
     will not be decided during this session of Congress, instead 
     carrying over to next year's presidential campaign and the 
     next session of Congress. That means we should push for 
     reform but also think carefully about exactly how we want to 
     do it. We need to overhaul the tax system, but we also need 
     to do it right.
     

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