[Congressional Record Volume 153, Number 57 (Tuesday, April 10, 2007)]
[Senate]
[Pages S4294-S4298]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
UNITED STATES TAX CODE
Mr. SPECTER. Mr. President, in the remaining time that I have
allocated, I wish to talk about another subject, and that is the United
States Tax Code. I believe that as I speak there are thousands of
Americans, perhaps hundreds of thousands of Americans, now calculating
their income tax for the year 2006.
Today is April the 10th. Tax returns have to be filed during the
course of the next week to comply with the Federal tax laws, and this
is a matter which is very much on the minds of thousands of Americans,
perhaps even some watching the Senate on C-SPAN are in the process of
compiling their tax returns. I will use this occasion to again
introduce legislation for the flat tax.
The flat tax is a new structure of taxation of income in the United
States under a model proposed by Professors Hall and Rabushka, from
Stanford University, which would enable taxpayers to file their returns
on a simple postcard, which I hold in my hand, where the tax return can
be filled out in the course of 15 minutes. It has some 10 lines to fill
out: Wages, personal allowance, number of dependents, mortgage interest
deduction, charitable contributions, total for deductions, total
taxable compensation, tax of 20 percent, tax withheld by employer, and
the tax or refund due.
We have a system in the United States today where the statistics are
astounding. There are some 582 tax forms to be filled out by Americans
who file their tax returns. There are some 6.4 billion hours and $265
billion each year spent in complying with the tax laws. The IRS Code
and regulations fill more than 17,000 pages and have grown from some
744,000 words in 1955 to over 7 million words 50 years later in the
year 2005.
Albert Einstein, genius that he was, is quoted as saying:
The hardest thing in the world to understand is the income
tax.
For a man who developed the theory of relativity, that is quite an
indictment of the American tax system.
This change in the tax laws would be a godsend for the U.S. economy.
Economists estimate that in the course of 7 years, the gross national
product would increase by $2 trillion, attributable solely to the
efficiencies which would come about by relieving this enormous
regulatory burden.
We talk frequently about the burden of regulation in the Federal
Government, but the most onerous regulatory form is the tax form, or
the tax regulations, which are a burden on all Americans. When you take
a look at the cost of compliance, at $265 billion a year, and take a
look at the loopholes of some $390 billion a year, which would be
eliminated by the flat tax, and $120 billion a year in tax fraud, with
the $10 billion a year it costs to run the Internal Revenue Service, it
is obvious what an enormous savings there would be in the economy. Most
importantly, there would be the savings to individual citizens who, on
the average, require about 14 hours to fill out a tax return. Many
citizens now hire specialists because the tax forms have become so
complicated.
Mr. President, I ask unanimous consent that a copy of the flat tax
return, plus the legislation itself, and my full statement on this
subject be printed in the Record at the conclusion of my remarks.
The PRESIDING OFFICER. Without objection, it is so ordered.
(See exhibit 1.)
Mr. SPECTER. Mr. President, there is one additional comment on the
flat tax return. I have incorporated in the statement an analysis of
taxes which would be made by people at various levels of the income
spectrum, and for a married couple with two children, with an annual
income of $40,000, an analysis of the comparison shows a decrease in
taxes of $1,217. For middle-class taxpayers, with comparable taxes, a
slight increase but relatively little compared to the enormous savings
that are involved.
I thank the Chair, and I thank my colleague from Iowa for yielding me
the time, and I yield the floor.
Exhibit 1
Tax Day 2007 Floor Statement
Mr. Specter. Mr. President, this week, American taxpayers
face another Federal income tax deadline. The date of April
15 (or April 16 this year) stabs fear, anxiety, and unease
into the hearts of millions of Americans. Every year during
``tax season,'' millions of Americans spend their evenings
poring over page after page of IRS instructions, going
through their records looking for information and struggling
to find and fill out all the appropriate forms on their
federal tax returns. Americans are intimidated by the sheer
number of different tax forms and their instructions, many of
which they may be unsure whether they need to file. Given the
approximately 582 possible forms, not to mention the
instructions that accompany them, simply trying to determine
which form to file can in itself be a daunting and
overwhelming task. In 2006, studies conducted by the Office
of Management and Budget and the Tax Foundation found that
American taxpayers, including
[[Page S4295]]
businesses, spend more than 6.4 billion hours and $265
billion each year complying with tax laws. That works out to
more than $2,500 per U.S. household. Much of this time is
spent burrowing through IRS laws and regulations which fill
over 17,000 pages and have grown from 744,000 words in 1955
to 7.1 million words in 2005. By contrast, the Pledge of
Allegiance has only 31 words, the Gettysburg Address has 267
words, the Declaration of Independence has about 1,300 words,
and the Bible has only about 1,773,000 words.
The majority of taxpayers face filing tax forms that are
far too complicated and take far too long to complete.
According to the estimated preparation time listed on the
forms by the IRS, the 2006 Form 1040 is estimated to take 13
hours and 15 minutes to complete. Moreover this does not
include the estimated time to complete the accompanying
schedules, such as Schedule A, for itemized deductions, which
carries an estimated preparation time of 5 hours, 37 minutes,
or Schedule D, for reporting capital gains and losses, which
shows an estimated preparation time of 6 hours, 10 minutes.
Moreover, this complexity is getting worse each year. Just
from 2000 to 2004 the estimated time to prepare Form 1040
jumped 34 minutes.
It is no wonder that well over half of all taxpayers, 61
percent according to a recent survey, now hire an outside
professional to prepare their tax returns for them. However,
the fact that only about 35 percent of individuals itemize
their deductions shows that a significant percentage of our
taxpaying population believes that the tax system is too
complex for them to deal with. We all understand that paying
taxes will never be something we enjoy, but neither should it
be cruel and unusual punishment. Further, the pace of change
to the Internal Revenue Code is brisk--Congress made over
9,500 tax code changes in the past fifteen years. And we are
far from being finished. Year after year, we continue to ask
the same question--isn't there a better way?
My flat tax legislation would make filing a tax return a
manageable chore, not a seemingly endless nightmare, for most
taxpayers. My flat tax legislation will fundamentally revise
the present tax code, with its myriad rates, deductions, and
instructions. This legislation would institute a simple, flat
20 percent tax rate for all individuals and businesses. This
proposal is not cast in stone, but is intended to move the
debate forward by focusing attention on three key principles
which are critical to an effective and equitable taxation
system: simplicity, fairness and economic growth.
My flat tax plan would eliminate the kinds of frustrations
I have outlined above for millions of taxpayers. This flat
tax would enable us to scrap the great majority of the IRS
rules, regulations and instructions and delete most of the
7.1 million words in the Internal Revenue Code. Instead of
billions of hours of non-productive time spent in compliance
with, or avoidance of, the tax code, taxpayers would spend
only the small amount of time necessary to fill out a
postcard-sized form. Both business and individual taxpayers
would thus find valuable hours freed up to engage in
productive business activity, or for more time with their
families, instead of poring over tax tables, schedules and
regulations.
My flat tax proposal is dramatic, but so are its
advantages: a taxation system that is simple, fair and
designed to maximize prosperity for all Americans. A summary
of the key advantages are:
Simplicity: A 10-line postcard filing would replace the
myriad forms and attachments currently required, thus saving
Americans the 6.4 billion hours they currently spend every
year in tax compliance.
Cuts government: The flat tax would eliminate the lion's
share of IRS rules, regulations and requirements, which have
grown from 744,000 words in 1955 to 7.1 approximately 94,000
employees, creating opportunities to put their expertise to
use elsewhere in the government or in private industry.
Promotes economic growth: Economists estimate a growth due
to a flat tax of over $2 trillion in national wealth over
seven years, representing an increase of approximately $7,500
in personal wealth for every man, woman and child in America.
This growth would also lead to the creation of 6 million new
jobs.
Increases efficiency: Investment decisions would be made on
the basis of productivity rather than simply for tax
avoidance, thus leading to even greater economic expansion.
Reduces interest rates: Economic forecasts indicate that
interest rates would fall substantially, by as much as two
points, as the flat tax removes many of the current
disincentives to savings.
Lowers compliance costs: Americans would be able to save or
invest the $265 billion they currently spend every year in
tax compliance.
Decreases fraud: As tax loopholes are eliminated and the
tax code is simplified, there will be far less opportunity
for tax avoidance and fraud. Currently, the IRS is estimating
a tax gap of $300 billion a year.
Reduces IRA costs: Simplification of the tax code will
allow us to save significantly on the $10 billion annual
budget currently allocated to the Internal Revenue Service.
The most dramatic way to illustrate the flat tax is to
consider that the income tax form for the flat tax is printed
on a postcard--it will allow all taxpayers to file their
April 15 tax returns on a simple 10-line postcard. This
postcard will take 15 minutes to fill out.
At my town hall meetings across Pennsylvania, the public
support for fundamental tax reform is overwhelming. I would
point out in those speeches that I never leave home without
two key documents: (1) my copy of the Constitution; and (2) a
copy of my 10-line flat tax postcard. I soon realized that I
needed more than just one copy of my flat tax postcard--many
people wanted their own postcard so that they could see what
life in a flat tax world would be like, where tax returns
only take 15 minutes to fill out and individual taxpayers are
no longer burdened with double taxation on their dividends,
interest, capital gains and estates.
This is a win-win situation for America because it lowers
the tax burden on the taxpayers in the lower brackets. For
example in the 2006 tax year, the standard deduction is
$5,150 for a single taxpayer, $7,550 for a head of household
and $10,300 for a married couple filing jointly, while the
personal exemption for individuals and dependents is $3,300.
Thus, under the current tax code, a family of four which does
not itemize deductions would pay taxes on all income over
$23,500--that is personal exemptions of $13,200 and a
standard deduction of $10,300. By contrast, under my flat tax
bill, that same family would receive a personal exemption of
$37,500, and would pay tax on income over that amount.
The tax loopholes enable write-offs of some $390 billion a
year. What is eliminated under the flat tax are the
loopholes, the deductions in this complicated code which can
be deciphered, interpreted, and found really only by the
$500-an-hour lawyers. That money is lost to the taxpayers.
$120 billion would be saved by the elimination of fraud
because of the simplicity of the Tax Code, the taxpayer being
able to find out exactly what they owe.
This bill is modeled after a proposal organized and
written by two very distinguished professors of law from
Stanford University, Professor Hall and Professor Rabushka.
Their model was first introduced in the Congress in the fall
of 1994 by Majority Leader Richard Armey. I introduced the
flat tax bill--the first one in the Senate--on March 2, 1995,
Senate bill 488. On October 27, 1995, I introduced a Sense of
the Senate Resolution calling on my colleagues to expedite
Congressional adoption of a flat tax. The Resolution, which
was introduced as an amendment to pending legislation, was
not adopted. I reintroduced my legislation in the 105th
Congress with slight modifications to reflect inflation-
adjusted increases in the personal allowances and dependent
allowances. I reintroduced the bill on April l5, 1999 income
tax day--in a bill denominated as S. 822. I then introduced
my flat tax legislation as an amendment to S. 1429, the Tax
Reconciliation bill; the amendment was not adopted. During
the 108th Congress, I introduced my flat tax legislation once
again on April 11, 2003. On May 14, 2003, I offered an
amendment to the Tax Reconciliation legislation urging the
Senate to hold hearings and consider legislation providing
for a flat tax; this amendment passed by a vote of 70 to 30
on May 15, 2003. I then testified on this issue at a
subsequent hearing held by the Joint Economic Committee on
November 5, 2003. On April 15, 2005, I reintroduced my flat
tax legislation in a bill denominated as S. 812. Today, I
again put forward this legislation with two minor changes.
The first is that the numbers for personal exemptions and
deductions have been adjusted for inflation. The second is a
newly inserted provision that will allow these numbers to
continue to be adjusted for inflation in the years to come.
This change will prevent these exemptions and deductions from
losing value over time.
Over the years and prior to my legislative efforts on
behalf of flat tax reform, I have devoted considerable time
and attention to analyzing our nation's tax code and the
policies which underlie it. I began the study of the
complexities of the tax code over 40 years ago as a law
student at Yale University. I included some tax law as part
of my practice in my early years as an attorney in
Philadelphia. In the spring of 1962, I published a law review
article in the Villanova Law Review, ``Pension and Profit
Sharing Plans: Coverage and Operation for Closely Held
Corporations and Professional Associations,'' 7 Villanova L.
Rev. 335, which in part focused on the inequity in making
tax-exempt retirement benefits available to some kinds of
businesses but not others. It was apparent then, as it is
now, that the very complexities of the Internal Revenue Code
could be used to give unfair advantage to some. Einstein
himself is quoted as saying ``the hardest thing in the world
to understand is the income tax.''
The Hall-Rabushka model envisioned a flat tax with no
deductions whatsoever. After considerable reflection, I
decided to include in the legislation limited deductions for
home mortgage interest for up to $125,000 in borrowing and
charitable contributions up to $3,125. While these
modifications undercut the pure principle of the flat tax by
continuing the use of tax policy to promote home buying and
charitable contributions, I believe that those two deductions
are so deeply ingrained in the financial planning of American
families that they should be retained as a matter of fairness
and public policy--and also political practicality. With
those two deductions maintained, passage of a modified flat
tax will be difficult, but without them, probably impossible.
In my judgment, an indispensable prerequisite to enactment
of a modified flat tax is revenue neutrality. Professor Hall
advised
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that the revenue neutrality of the Hall-Rabushka proposal,
which uses a 19 percent rate, is based on a well-documented
model founded on reliable governmental statistics. My
legislation raises that rate from 19 percent to 20 percent to
accommodate retaining limited home mortgage interest and
charitable deductions.
This proposal taxes business revenues fully at their
source, so that there is no personal taxation on interest,
dividends, capital gains, gifts or estates. Restructured in
this way, the tax code can become a powerful incentive for
savings and investment--which translates into economic growth
and expansion, more and better jobs, and raising the standard
of living for all Americans.
The key advantages of this flat tax plan are threefold:
First, it will dramatically simplify the payment of taxes.
Second, it will remove much of the IRS regulatory morass now
imposed on individual and corporate taxpayers, and allow
those taxpayers to devote more of their energies to
productive pursuits. Third, since it is a plan which rewards
savings and investment, the flat tax will spur economic
growth in all sectors of the economy as more money flows into
investments and savings accounts.
Professors Hall and Rabushka have projected that within
seven years of enactment, this type of a flat tax would
produce a 6 percent increase in output from increased total
work in the U.S. economy and increased capital formation. The
economic growth would mean a $7,500 increase in the personal
income of all Americans. No one likes to pay taxes. But
Americans will be much more willing to pay their taxes under
a system that they believe is fair, a system that they can
understand, and a system that they recognize promotes rather
than prevents growth. and prosperity. My flat tax legislation
will afford Americans such a tax system.
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A variety of specific cases illustrate the fairness and
simplicity of this flat tax:
Case #1--Married couple with two children, rents home, yearly income
$40,000
Under Current Law:
Income........................................................$40,000
Four personal exemptions.......................................13,200
Standard deduction.............................................10,300
Taxable income.................................................16,500
Tax due under current rates....................................$1,717
__________
Marginal rate...................................................10.4%
Effective tax rate...............................................4.3%
Under Flat Tax:
Personal allowance............................................$25,000
Two dependents.................................................12,500
Taxable income..................................................2,500
Tax due under flat tax...........................................$500
Effective tax rate...............................................1.3%
Decrease of $1,217
Case #2--Single individual, rents home, yearly income $50,000
Under Current Law:
Income........................................................$50,000
One personal exemption..........................................3,300
Standard deduction..............................................5,150
Taxable income.................................................41,550
Tax due under current rates....................................$6,939
__________
Marginal rate...................................................16.7%
Effective rate..................................................13.9%
Under Flat Tax:
Personal allowance............................................$12,500
Taxable income.................................................37,500
Tax due under flat tax.........................................$7,500
Effective rate..................................................15.0%
Increase of $561
Case #3--Married couple with no children, $150,000 mortgage at 9%,
yearly income $75,000
Under Current Law:
Income........................................................$75,000
Two personal exemptions........................................$6,600
Home mortgage deduction........................................13,500
State & local taxes.............................................3,000
Charitable deduction............................................1,500
Taxable income.................................................50,400
Tax due under current rates....................................$6,809
__________
Marginal rate...................................................13.5%
Effective tax rate...............................................9.1%
Under Flat Tax:
Personal allowance...........................................$25 ,000
Home mortgage deduction........................................11,250
Charitable deduction............................................1,500
Taxable income.................................................37,250
Tax due under flat tax.........................................$7,450
__________
Effective tax rate 9.9%
Increase of $641
Case #4--Married couple with three children, $250,000 mortgage at 9%,
yearly income $125,000
Under Current Law:
Income.......................................................$125,000
Five personal exemptions.......................................16,500
Home mortgage deduction........................................22,500
State & local taxes.............................................5,000
Retirement fund deductions......................................6,000
Charitable deductions...........................................2,500
Taxable income.................................................72,500
Tax due under current rates...................................$11,234
__________
Marginal rate...................................................15.5%
Effective tax rate...............................................9.0%
Under Flat Tax:
Personal allowance............................................$25,000
Three dependents...............................................18,750
Home mortgage deduction........................................11,250
Charitable deduction............................................2,500
Taxable income.................................................67,500
Tax due under flat tax........................................$13,500
__________
Effective tax rate..............................................10.8%
Increase of $2,266
ANNUAL TAXES UNDER 20 PERCENT FLAT TAX FOR MARRIED COUPLE WITH TWO CHILDREN FILING JOINTLY
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Personal
Home Deductible Charitable allowance Taxable Effective
Income mortgage* mtg contribution (w/ income tax rate Taxes owed
interest * children) (percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
<37,500.................................................... ........... ........... ............. ........... 0 0 --
37,500..................................................... 75,000 6,750 750 37,500 0 0 --
40,000..................................................... 80,000 7,200 800 37,500 0 O --
50,000..................................................... 100,000 9,000 1,000 37,500 2,500 1 500
60,000..................................................... 120,000 10,800 1,200 37,500 10,500 3.5 2,100
70,000..................................................... 140,000 11,250 1,400 37,500 19,850 5.7 3970
80,000..................................................... 160,000 11,250 1,600 37,500 29,650 7.4 5,930
90,000..................................................... 180,000 11,250 1,800 37,500 39,450 8.8 7,890
100,000.................................................... 200,000 11,250 2,000 37,500 49,250 9.9 9,850
125,000.................................................... 250,000 11,250 2,500 37,500 73,750 11.8 14,750
150,000.................................................... 300,000 11,250 3,000 37,500 98,250 13.1 19,650
200,000.................................................... 400,000 11,250 3,125 37,500 148,125 14.8 29,625
250,000.................................................... 500,000 11,250 3,125 30,000 198,125 15.9 39,625
500,000.................................................... 1,000,000 11,250 3,125 37,500 448,125 17.9 89,625
1,000,000.................................................. 2,000,000 11,250 3,125 37,500 948,125 19.0 189,625
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* Assumes home mortgage of twice annual income at a rate of 9 percent and charitable contributions up to 2 percent of annual income.
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