[Congressional Record (Bound Edition), Volume 153 (2007), Part 6]
[Senate]
[Pages 8614-8618]
[From the U.S. 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.

[[Page 8615]]

  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 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

[[Page 8616]]

     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 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.

[[Page 8617]]

     TS10AP07.001
     
      

[[Page 8618]]

       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
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                        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
--------------------------------------------------------------------------------------------------------------------------------------------------------
*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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