WASHINGTON DC – House Democratic Whip Steny Hoyer (MD) addressed the pressing need for federal tax reform, laid out principles for simplification and fairness, and critiqued Republican tax policy in a speech at a Tax Policy Center Forum (a joint venture of the Brookings Institution and the Urban Institute) earlier today.
Congressman Hoyer was joined by Michael J. Graetz, Justus S. Hotchkiss Professor of Law at Yale Law School and former Deputy Assistant Secretary of the Treasury for Tax Policy, and and C. Eugene Steuerle, a Senior Fellow at the Urban Institute and Co-Director of the Tax Policy Center. Peter R. Orszag of the Brookings Institution and Co-Director of the Tax Policy Center moderated.
Attached is Congressman Hoyer's speech as prepared for delivery:
"There is little debate today: The Internal Revenue Code is a Kafkaesque maze of complexity that confounds millions of Americans every single year.
Our tax system is an embarrassment that treats many taxpayers unfairly. And at the very same time, it creates an opportunity – and some would argue an incentive – for those who would exploit its complexity to avoid compliance.
Who’s responsible for this? We all are. Democrats and Republicans, and every American who believes that the tax preferences that he or she utilizes are worthwhile.
Taken individually, of course, nearly all of the tax preferences that clutter the code can be rationalized. Collectively, however, they are a jumble of confusion that lead to unfairness.
And I believe this has a corrosive effect on our democracy.
As President Kennedy said more than four decades ago: “For voluntary self-assessment to be both meaningful and productive of revenues, the citizens must not only have confidence in the fairness of the tax laws, but also in [the] uniform and vigorous enforcement of these laws.”
You do not need a primer on the tax code’s complexity. But a few facts will help frame this discussion.
Today, the IRS now prints more than 1,000 publications, forms and instruction booklets. And while the tax code was a mere 500 pages in 1913, financial publisher CCH says its Standard Federal Tax Reporter – which is guidance for tax preparers – has grown to more than 60,000 pages today.
Four common forms – Form 1040 and Schedules A, B and D – take an estimated 28 hours, 30 minutes to prepare, according to the IRS. When the agency started tracking this information in 1988, the average paperwork burden was 17 hours, 7 minutes.
Even the simplest form in the IRS inventory – the 1040EZ – now requires 3 hours, 43 minutes to prepare, up from 1 hour, 31 minutes in 1988.
The costs of complexity are staggering – more than $100 billion a year in accounting fees and the value of taxpayers’ time to complete their returns, according to Joel Slemrod of the University of Michigan.
This is roughly equivalent to what our nation spends to operate the Departments of Education ($57.4 billion), Homeland Security ($32 billion), and State ($9.3 billion).
Not surprisingly, more Americans than ever rely on tax professionals, 56 percent, compared to 48 percent in 1990.
But even tax professionals cannot guarantee accuracy. The General Accounting Office, for example, recently found that 2 million taxpayers who used a preparer took the standard deduction when they would have been better off itemizing.
And, according to the IRS, tax preparers are responsible for nearly 70 percent of errors and over-claims on returns claiming the earned income tax credit.
Federal policymakers cannot blithely ignore this crisis of complexity because it carries enormous implications.
As Paul O’Neill, the former Secretary of the Treasury, pointed out two years ago: “One of the unseen consequences of our tax code’s complexity is the sense it leaves with taxpayers that the system is unfair and that others pay less tax because of special advantages.”
The fact is, our tax system must be made more simple, more fair, and more efficient. To appreciate the need for a call to action, consider the scope of non-compliance. It ought to trouble every law-abiding American citizen, and it is one of the biggest challenges to tax fairness that we face today.
The IRS estimated earlier this year that there is a $311 billion annual “tax gap” due to under-reporting, under-payment and non-filing.
In March, Nancy Killifer, the chairwoman of the IRS Oversight Board, told the House Ways and Means Subcommittee on Oversight: “Enforcement activities are still at an unacceptable level simply because the IRS does not have the resources needed to accomplish its mission. It continues to be out-gunned and out-manned.”
That same month, Deputy Treasury Secretary Samuel Bodman informed the Senate Finance Committee that the IRS intended to walk away from more than 2 million delinquent tax accounts last year that total nearly $16.5 billion.
What message does non-compliance and lack of enforcement send to individual and business taxpayers?
For too many, the answer is clear: that they should roll the dice and cheat on their taxes.
In fact, an IRS survey in 2003 found that 17 percent of taxpayers – nearly one in five – believe that it is acceptable to cheat, up from 11 percent just four years earlier.
And for cheaters, the chances of being caught are negligible.
In 2003, individuals were audited at a rate of 6.5 per 1,000 returns, and 75 percent of those were computer-generated, non-personal audits.
Compare that to the audit rate of 12.8 percent in 1997 or even 9.9 percent in 1998, the year Congress was considering – and passing – IRS reform legislation.
Audits for businesses, on the other hand, were down from 3 per 1,000 returns in 1999 to 2 in 1,000 in 2003.
Let me add that none of us can ignore the effects of the IRS reform act. I was one of only four Members who voted against the legislation that passed the House in 1998. That bill contained many good provisions, it was improved in conference, and I voted for it on final passage.
However, as I remarked then, many of the proponents of that legislation demonized the IRS to such a point that it not only demoralized the agency’s professional staff, but sent an unmistakable and potentially debilitating message to the American people. That message was that paying one’s taxes was not, as President Kennedy said, “the annual price of citizenship,” but an unfair burden imposed by an unfair government agency.
The aggressive marketing of tax shelters by accounting, legal and financial services firms is nothing less than a response to that message.
Now, it’s true, there is plenty of blame to go around for creating such a complicated tax code. But leaders in the Republican Party – who have repeatedly proclaimed their commitment to tax reform and simplification – must be measured by their actions, rather than their rhetoric.
Two months after President Bush took office, he told the American people in a Saturday morning radio address: “Americans want our tax code to be reasonable and simple and fair. These are goals that unite our country, and these are goals that have shaped my plan.”
And Tom DeLay, the House Majority Leader, stated in April 2001 that, “We’re pushing forward with our campaign to reform the tax code. We’re making it fairer, flatter, simpler and less burdensome to the American people.”
The facts, however, simply demonstrate otherwise. Since 2001, Republicans have made 227 changes to the tax code and added more than 10,000 pages to it.
The 2003 changes in taxes on dividends and capital gains, in particular, have been a nightmare for taxpayers.
The IRS estimates that it takes 7 hours, 58 minutes – essentially, one whole work day – just to complete Schedule D for reporting the sale of any capital assets such as stocks or mutual funds or dividends received.
Schedule C for self-employed workers and sideline businesses takes an estimated 10.5 hours to complete.
And then, there is the ultimate orgy in self-indulgence and complication – the FSC/ETI bill. The legislation that passed the House in June would make an additional 109 changes in the tax code.
When it comes to the issue of real tax reform, the Republican Party’s record is one of abject failure.
Next week, as many of you know, the Republican leadership has announced that it will be “tax reform and simplification week” in the House. There may even be a few proposals offered that Democrats support.
But let’s be honest: After spending 40 months complicating the code – and in my view making it manifestly less fair – House Republicans cannot spend two days talking about simplification and still honestly claim that they are “tax reformers.”
Today, I believe there is an increasing momentum among taxpayers for real reform, and Democrats have an opportunity to lead on this issue when we regain the House Majority in November.
Let me outline a few of the proposals that should be part of this effort.
First, it’s imperative that Congress address the Middle-Class Time-Bomb – the Alternative Minimum Tax.
More than anything else, I believe that the prospect of 30 million taxpayers being subject to the arbitrariness and unfairness of this alternative tax system by the end of the decade will be the impetus for fundamental tax reform.
Today, taxpayers must calculate their AMT liability by first deciphering a separate instruction booklet, and then filling out a 65-line form – only to find that they may not, in fact, owe the AMT at all.
The AMT simply is not serving its original purpose. And the Republican tax bills in 2001 and 2003 have only exacerbated its effect on middle-income taxpayers.
Second, we need to take a hard look at moving toward a “return-free” income tax system.
Such a system would allow the vast majority of American taxpayers to opt-in to the return-free system by using a slightly revised W-4 form. The IRS could calculate expected tax liability and adjust the withholding to reflect the appropriate tax rate.
Third, it’s illogical for the tax code to contain five tax breaks for families with children, with each of the five defining a qualifying child differently.
As a result of these definitions, two families with the same income but with children of different ages can owe very different amounts of federal income taxes. Any real tax reform should include the adoption of a uniform definition to reduce taxpayer error that results from these differing definitions.
Fourth, we need to simplify tax rules for small businesses, which along with the self-employed bear the greatest tax compliance burden – nearly 60 hours per return. In 2000 and 2001 alone, according to the GAO, small businesses overpaid their taxes by $18 billion because of tax return errors.
Fifth, we need to get serious about stopping individuals and corporations from gaming the system. As David Cay Johnston said here at the Urban Institute earlier this year, “We have radically reduced our effort to go after serious tax cheating in America.”
We need to make sure that the IRS can do its job. That is only fair to those who comply with their obligations.
Sixth, we need international tax reform. John Kerry’s proposal is an important contribution in that it focuses on eliminating tax breaks that encourage American companies to move jobs overseas because of our current tax laws.
And seventh, we need real, substantive Congressional hearings that focus on these issues. I don’t think there’s anyone in Washington who really believes that the Republican Congress is exercising true Congressional oversight today.
With that said, though, Presidential leadership on the issue of tax reform is essential. Ronald Reagan demonstrated that in 1986. Today, however, the Bush Administration has been unwilling to expend one nickel of political capital on this issue. On FSC/ETI, it essentially stood on the sidelines and watched.
It has been 18 years since Congress last passed real tax reform. The tax reform act of 1986 was not perfect, but a certain step in the right direction.
Personally, I have always been a believer in the idea that if you reduce tax preferences, you can – and should – reduce rates.
The American people are acutely aware of the unnecessary complexity and dire need for real tax reform in America today. To ignore that need for reform is not only irresponsible, it is a danger to our democracy.
The time for tax reform is right. We should not tinker around the edges of the tax code, but go to the heart of the problem. The American people need and deserve a tax system that is simpler, fairer and more efficient.
I look forward to hearing your comments, suggestions and ideas this morning. Thank you."