[Congressional Record Volume 147, Number 99 (Tuesday, July 17, 2001)]
[Extensions of Remarks]
[Pages E1347-E1348]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




               INDIVIDUAL TAX SIMPLIFICATION ACT OF 2001

                                 ______
                                 

                          HON. RICHARD E. NEAL

                            of massachusetts

                    in the house of representatives

                         Tuesday, July 17, 2001

  Mr. NEAL of Massachusetts. Mr. Speaker, today I am introducing with 
Mr. Matsui the Individual Tax Simplification Act of 2001, and invite 
all my colleagues to join me in sponsoring this legislation.
  It is fitting that this bill on tax simplification is being 
introduced on the first day of joint hearings on tax simplification in 
the Select Revenue Measures and Oversight Subcommittees of the Ways and 
Means Committee. Simplification is on everyone's wish list. While my 
bill may not fulfill everyone's wish, this bill will eliminate 
approximately 200 lines from tax forms, schedules and worksheets. My 
bill generally does this in a revenue neutral manner, and without 
moving money between economic income groups. As we all know, the tax 
code is terribly complex, and has become dramatically more complex for 
average taxpayers during the past six years.
  A skeptic might argue that there is no constituency for 
simplification, but that is changing. A poll by ICR found that 66 
percent said the federal tax system is too complicated. Five years ago 
slightly less than half agreed.
  I believe that with a little compromise, we can enact significant tax 
simplification. That is why I have made sure this bill is essentially 
revenue neutral, so it contains no tax increase. And that is why the 
bill does not try to change the tax burden between economic income 
groups. This is not an attack on the wealthy, nor anyone else. As with 
any change in the tax law, there are some winners and losers--but I 
want to stress that this is incidental to the objective of the bill--
which is simplification that benefits us all.
  The bill has three parts. The first is based on legislation I 
introduced in the last two Congresses regarding nonrefundable personal 
credits. The second part simplifies the taxation of capital gains. The 
third part repeals two hidden marginal tax rates on high income 
individuals, and repeals the individual minimum tax.

   Title I--Simplification Relating to Nonrefundable Personal Credits

  In recent years, much tax relief has been given to taxpayers in the 
form of nonrefundable credits, like the two education credits. These 
credits are not usable against the alternative minimum tax. That means 
that more and more individuals will lose all or part of these credits, 
and will have to fill out the extremely complicated AMT form. Congress 
recognized this problem last year by enacting my proposal to waive this 
until the end of this tax year. It also, this year, permanently took 
the child credit and the adoption credit out of the AMT. Now is the 
time to finish the job.
  The other problem with nonrefundable credits is that the phase out 
provisions vary from credit to credit, causing unnecessary complexity. 
In addition, the same additional dollar of income can result in a 
reduction in more than one nonrefundable credit.
  It is fundamentally wrong to promise the American public tax relief, 
then take all or part of it away in a backhanded manner. This 
fundamentally flawed policy, enacted in 1997, will get worse each and 
every year as more American families find themselves to be AMT 
taxpayers simply because of the impact of inflation, or because of 
their desire to take advantage of the tax relief we have promised them. 
Not only that, this situation will also get worse if additional 
nonrefundable credits are approved by Congress.
  The bill addresses both concerns. First, it permanently waives the 
minimum tax limitations on all nonrefundable credits. Second, the bill 
creates a single phase out range for the adoption credit, the child 
credit, and the education credits, replacing the current three phase 
out ranges.

             Title II--Simplification of Capital Gains Tax

  The second title of this bill is, essentially, Mr. Coyne's capital 
gains proposal from 1999. Under current law, there are 5 different tax 
rates for long term capital gains, and a 54 line tax form that must be 
endured. Moreover, this part of the tax code is already scheduled to 
get worse because additional rates will take affect under current law 
in 2006.
  The solution is clear. Replace this jumble of rates and forms with a 
simple 38 percent exclusion. Not only will this result in tremendous 
simplification (eliminating 36 of the 54 lines), but more than 97 
percent of individuals would be eligible for modest capital gains tax 
reductions.

Title III--Repeal of Certain Hidden Marginal Rate Increases, and of the 
                         Individual Minimum Tax

  The third title of the bill repeals the hidden marginal rate 
increases in current law, and repeals the individual minimum tax. Most 
of my colleagues understand the phrases, PEP and Pease. Under current 
law, itemized deductions are gradually reduced by 3 percent of adjusted 
gross income above approximately $124,000. This is known as the Pease 
provision. In addition, personal exemptions are phased out for incomes 
between approximately $187,000 and $309,000. This is PEP. If we did not 
hide the effect of these provisions of current law, more people would 
know that these provisions result in hidden marginal rate increases. 
These marginal rate increases begin at almost 1 percent for incomes 
above $124,000, and increases for those with incomes above $187,000 by 
about .78 percent for each dependent. The important point here is that 
current law has a hidden marginal rate increase, which gets worse as 
families grow larger. The most recently passed tax bill made some 
progress in this area, but not enough.
  The second part of this title is a complete repeal of the individual 
minimum tax. The minimum tax was intended to make sure that wealthy 
individuals did not overuse certain tax benefits and unfairly reduce 
their tax burden. It no longer accomplishes that goal. Most of the 
significant business related provisions have already been repealed. 
Since the AMT is not adjusted for inflation, more and more middle and 
upper middle income taxpayers are falling into the AMT. This is not 
what was intended, especially when you note that what pushes taxpayers 
into the AMT now, more often than not, are state and local income and 
property taxes, personal exemptions, and the nonrefundable credits. I 
repeat, this is not what Congress was trying to accomplish when the AMT 
was passed.
  My suggestion is to repeal it for individuals, and substitute a 
simple tax on adjusted gross income. The current hidden tax is dropped, 
and is paid for with an explicit tax on the same individuals. They get 
simplification, and we convert a deceptive practice into an open one.

[[Page E1348]]

  In the last Congress, the replacement tax began at 1 percent for 
adjusted gross incomes in excess of $120,000 on a joint return, and 
increased to 2.08 percent for income greater than $150,000, which is 
where the minimum tax exemption begins to phase out. This year I have 
given the Secretary of the Treasury the ability to set the rate so that 
this bill would be revenue neutral over ten years. The initial 
threshold amount and the second threshold amount remain the same--
$120,000 and $150,000 in the cases of a joint return.

                               Conclusion

  Ironically, this simplification proposal must be complex, because it 
mirrors our current law. I want, therefore, to focus on what is 
important.
  This bill provides fairly dramatic simplification of the individual 
tax system.
  It eliminates approximately 200 lines on tax forms, schedules and 
worksheets.
  It is basically revenue neutral, so it can be accomplished during a 
year when there is no non-social security non-medicare budget surplus 
to fund tax cuts.
  It does not attempt to shift money between income groups. The general 
philosophy behind the bill is that those who benefit from tax 
simplification of the current code should offset any revenue loss 
involved.
  It is estimated that more than 50 percent of individuals use tax 
return preparers, and that more than 16 percent use computer software 
to prepare their return. Only about one-third of individuals actually 
fill out their own forms. There is no excuse for that reality, and we 
should do something about it. Given the lack of resources to write 
another major tax bill the priority for which is likely to be business 
tax breaks anyway, the reality that no one wants to pay for 
simplification no matter how much they support the goal, and the need 
to resolve the solvency issues surrounding social security and 
Medicare, I think the opportunity exists this year to solve some of the 
problems that bother all our constituents during this tax filing season 
in the manner that I have suggested. I am introducing this legislation 
to continue the discussion I began in the last Congress, and I hope it 
will be seriously considered by all parties.

                          ____________________