[Congressional Record Volume 143, Number 54 (Wednesday, April 30, 1997)]
[Extensions of Remarks]
[Page E805]
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, April 30, 1997

  Mr. HAMILTON. Mr. Speaker, I would like to insert my Washington 
report for Wednesday, April 30, 1997, into the Congressional Record:

                               Tax Reform

       There is a great deal of discussion in Washington today on 
     fundamental tax reform. The current tax system is widely 
     perceived as too complicated and rigged for those who can 
     hire experts to find the loopholes. Many believe that 
     fundamental reform could sharply increase economic growth by 
     encouraging more saving and investment, and there is 
     considerable debate over whether the current tax system 
     collects either too much or too little revenue. Many Hoosiers 
     favor scrapping the current system and replacing it with 
     something much simpler and fairer.


                          different approaches

       There are several different approaches to reform.


                            retail sales tax

       One proposal is to replace the income tax with a national 
     retail sales tax. If all consumption were taxed, a national 
     sales tax of about 15% would be needed to generate the same 
     revenue as the current system. But in the 45 states that have 
     retail sales taxes today there are large exemptions for 
     education, medical care, food, and housing. If these were 
     also exempted in a federal sales tax, the tax base would be 
     sharply reduced and the rate would have to exceed 30%. Yet 
     such high rate would be unpopular with consumers and could 
     encourage evasion by retail businesses. Also, the tax would 
     claim a larger share of the incomes of the poor than the 
     rich, since lower-income households spend a large proportion 
     of their income on food and basic necessities.


                            value-added tax

       A second approach is the value-added tax. Instead of being 
     levied on the retail sale, this tax is collected from all 
     businesses on the difference between their sales proceeds and 
     their purchases from other businesses. Because it is 
     collected at many levels, evasion has proven manageable in 
     the more than 50 countries around the world that have value-
     added taxes. A drawback is that it too shifts tax burdens 
     from the rich to the poor. There is also considerable 
     uncertainty about its impact on the U.S. trade balance 
     because such a tax would boost the price of our products.


                                flat tax

       A third approach is a flat tax, which imposes a single 
     income tax rate on businesses and households while 
     eliminating virtually all the deductions in the current 
     system. Businesses would be allowed deductions for wage 
     payments and pension contributions, and exemptions would 
     basically spare low-income families from paying taxes. 
     There are many variations of this proposed tax but one of 
     the more popular would require a flat rate of about 21% to 
     replace the income taxes we now have.


                          consumed-income tax

       A fourth approach is a consumed-income tax which combines a 
     consumption tax on families and a value-added tax on 
     businesses. Families would be able to deduct all of their net 
     savings and investments, thereby receiving an unlimited 
     savings allowance. This tax would be progressive, with lower 
     rates for those with lower income. Such a tax would encourage 
     saving and investment, but it raises major administrative 
     problems. There would powerful incentives to conceal assets, 
     and policing such evasion would be very difficult.


                         simplified income tax

       A final proposal would simplify the current income tax 
     system, building on the 1986 tax reform which eliminated 
     various deductions and exemptions in order to cut tax rates. 
     Versions of this proposal would end individual deductions for 
     state and local taxes and charitable contributions, and would 
     end corporate tax breaks for pension contributions and health 
     insurance. This broadening of the base would allow lower 
     rates, such as a maximum rate of 34%, compared to almost 40% 
     under current law.


                               assessment

       Each of these proposals raises difficult questions about 
     what base to tax, what deductions to permit, and what rates 
     to levy. Major tax reform inevitably redistributes tax 
     burdens among taxpayers and changes the value of taxpayer 
     assets. For example, the elimination of the homeowner 
     deductions for mortgage interest and property taxes could cut 
     the value of housing by 15-20%. Current tax law encourages 
     employers to provide health insurance to their employees by 
     exempting insurance premiums from personal income and payroll 
     taxes. But health insurance under several of these plans 
     would become taxable, and that could boost its cost by as 
     much as 20%. Current tax law also promotes giving through the 
     charitable contributions deduction, and proposals to 
     eliminate it fuel intense concern among charitable 
     organizations.
       The impact of tax reform on income inequity must be 
     carefully watched. In recent years, the gap between upper-
     income and lower-income Americans has widened significantly. 
     Many of these proposals could increase that gap. In addition, 
     current law permits the deduction of state and local income 
     and property taxes. Eliminating these deductions would 
     undercut the notion that people should not have to pay taxes 
     on other taxes they've already paid--a very popular concept. 
     The point simply is that all of these proposals for 
     fundamental tax reform would make major changes on the tax 
     burdens of the poor, the strength of charitable 
     organizations, the popularity of home ownership, the 
     continuation of health insurance coverage, and many other 
     similar concepts that have widespread popular support.
       Underlying all the talk about fundamental tax reform is the 
     impact on economic growth. Although some of the proposals 
     have positive features, I don't think anyone knows exactly 
     how fundamental tax reform would affect the economy's growth 
     rate. Most of the proposals have never been tried before in 
     the form proposed and they would each entail huge changes far 
     and above any previous modification of the tax code.


                               conclusion

       The more I examine fundamental changes in the tax code the 
     less attractive they become. I am increasingly interested in 
     proposals to broaden the base and reduce the deductions, 
     credits, and other sheltering devices in order to reduce 
     overall tax rates, simplify the system, and provide better 
     incentives for work and investment. Incremental reform along 
     these lines would avoid the wrenching upheavals and the 
     windfall redistributions that might accompany more radical 
     change. I am certainly not interested in proposals that would 
     increase our budget deficits.
       (Material for this newsletter taken from ``Setting National 
     Priorities'' by Brookings Institution.)

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