Statement of National Taxpayers Union
Prepared for the Senate Committee on Finance
Submitted July 17, 2017
Executive Vice President
On behalf of National Taxpayers Union (NTU), I thank the Senate Committee on Finance for the opportunity to submit comments regarding the most critical economic issue facing our nation: reforming America’s tax laws.
For nearly five decades, NTU has advocated on behalf of taxpayers in Washington and in state capitals across the country. We were pleased to play a role in the tax reform process in the 1980s that eventually led to the passage of the Tax Reform Act of 1986. We also were proud to be the voice of taxpaying Americans when Congress successfully overhauled the Internal Revenue Service via the IRS Restructuring and Reform Act of 1998. Many of that law’s key provisions were developed by a federal commission on which a representative of NTU served. More recently, we have supported successful efforts to provide tax relief to individuals and small businesses in 2001, 2002, and 2003.
We are extremely encouraged by the Finance Committee’s commitment to reforming the Tax Code. NTU hopes to assist the Committee and other stakeholders in crafting and passing legislation that will create jobs, spur innovation, and grow the United States economy.
Providing Relief to Individuals and Families
Simplification and ease of compliance should be at the center of any credible tax reform proposal. For years, NTU has examined the toll placed on American taxpayers by our excessively complicated and burdensome 74,000 page Tax Code. We strongly believe that one important way to provide relief to struggling families and individuals is make tax compliance easier and less onerous. In NTU Foundation’s annual study, “Tax Complexity 2017: As the Burden Grows, Taxpayers’ Patience Shrinks,” our research showed that individuals and businesses spend 6.98 billion hours each year on tax compliance, which results in an economic loss of $262.6 billion.
As the study explains, even the most basic forms require families to expend a great deal of time and resources:
“The basic form that taxpayers must file to account for their federal income taxes is the 1040, along with its simplified alternatives the 1040A and the 1040EZ. Many middle-class filers use the regular 1040, which requires an average of 15 hours on preparation and submission time, along with out-of-pocket expenses of $280... For these three forms combined and then averaged across the filing population, the activity of keeping records and completing, submitting and complying with the Internal Revenue Code’s (IRC’s) basic series of returns requires 13 hours from each filer. In total, the time spent on the nearly 150 million 1040 forms filed in 2016 consumed 1.9 billion hours of productivity.”
Working families would benefit tremendously from reducing the time and resources that they currently spend on tax compliance. The same can be said for businesses. Indeed, easing the deadweight losses of an overly complex tax system can in itself provide a measure of additional productivity that contributes to economic growth.
Beyond simplification, however, we do urge Congress to reduce tax rates and financial obligations for individuals and families. To assist taxpayers -- particularly those of limited economic means -- NTU recommends cutting individual tax rates and consolidating tax brackets. For instance, collapsing the current 10 and 15 percent brackets under a unified 10 percent rate would be a straightforward and sensible approach to reducing the burden of taxation for all taxpayers.
Additionally, NTU urges the Committee to pursue pro-family tax changes such as increasing the standard deduction and expanding the child tax credit. Lower-income families could also benefit greatly from reforming the well-intentioned, but structurally flawed Earned Income Tax Credit by reducing the improper payment rate, eliminating the marriage penalty, and ensuring benefits are directed to recipients who are trying to work their way out of poverty.
NTU also strongly encourages the Committee to eliminate the federal estate tax and gift taxes. The “death tax” is an unfair provision of the Tax Code that has drained $1.1 trillion worth of capital from the U.S. economy by forcing far too many families to sell off or restructure their businesses. Although Congress has periodically acted to reduce the impact of the death tax, it continues to loom over small businesses and family farms. The only truly efficient long-term solution is to eliminate it entirely.
Likewise, the individual alternative minimum tax (AMT) should be completely repealed. Affecting approximately four million families, “the AMT penalizes middle income taxpayers for having children, getting married, or paying state and local taxes,” as noted by Nina Olson, the National Taxpayer Advocate.
In the course of pursuing these goals, NTU would caution the Committee against adopting tax gimmicks that could deter investment and entrepreneurship. One such proposal would be reclassifying carried interest as income rather than capital gains. This would not be an example of closing a “loophole,” but rather would represent a significant tax increase on innovators.
Spurring Economic Growth via Corporate Tax Reform
Simply put, tax reform must significantly reduce the statutory tax rate confronting American businesses. Virtually everyone with a rudimentary knowledge of the tax system knows that the U.S. corporate rate is the highest in the industrialized world. The negative impacts of this unfortunate policy can hardly be overstated. A 2013 study conducted by Ernst and Young found that our high corporate tax rate has reduced wages for American workers and lowered our standard of living. As the gap grows between our rate and that of other industrialized nations, this problem will be exacerbated.
The corporate rate should be lowered as much as possible. A reduction from 35 to 20 percent, for example, would make American businesses far more competitive and yield significant economic benefits. The Tax Foundation projects such a change would result in a 3.3 percent boost to the economy and 641,000 new jobs.
While cutting the corporate rate is essential, it must be done with proper consideration of the rates paid by other, non-corporate businesses. That is to say, the difference between the corporate rate and that of pass-through entities must be kept to a minimum. Pass-throughs, which pay taxes on the individual schedule, are often smaller, fast-growing enterprises that create jobs and drive economic growth. If Congress can successfully reduce the corporate rate to 15 or 20 percent, it should cap the rate for pass-throughs at a level significantly lower than the top marginal individual rate. This would help preserve rate parity and ensure that all businesses -- regardless of size -- have an opportunity to compete and thrive.
Beyond rates, corporate tax reform should also include a shift to a territorial system of taxation. Our current climate is excessively complex and harmful to domestic companies that engage in business overseas. Some estimates suggest multinational companies are currently holding an estimated $2.4 trillion in offshore accounts due to concerns of double taxation. Over the last 15 years, 13 industrialized nations have shifted from a worldwide to territorial system. NTU urges Congress to follow this same trend.
To incentivize economic growth, Congress should create policies that recognize the importance of capital investment. The best, most effective way to do so is by allowing companies to fully and immediately expense capital expenditures. According to research by the Tax Foundation, allowing for full expensing of investments would lead to a 5.4 percent increase in long-term GDP, create more than 1 million full time jobs, and lift after-tax income by 5.3 percent. To maximize these benefits and reduce complexity, full expensing should be granted in an across-the-board fashion (although some business models directly influenced by government, e.g., heavily regulated utilities, might require special consideration or transition rules). In any case, there should be no clawbacks for certain types of industry-specific expenditures or activities, for instance, advertising expenses and foreign affiliate reinsurance. Congress should reject any such attempts to raise revenues by picking and choosing winners and losers.
The three principles articulated above -- rate reduction, territoriality, and full expensing -- were embodied in an NTU-led letter to Congress signed by two-dozen free-market organizations. Despite any other differences these and other groups in the pro-taxpayer movement may have regarding tax reform, this statement should serve as a lodestar for lawmakers seeking common ground upon which to build the foundation for business tax reform.
Broadening the Tax Base
Tax reform must be done in a fiscally responsible manner. Although well-crafted, pro-growth reforms could provide some revenue feedback, Congress cannot add to the national debt in a reckless fashion. A fiscally irresponsible approach could reduce the economic gains that would otherwise materialize and potentially run afoul of budget reconciliation requirements.
The House Republican tax blueprint, “A Better Way: A Pro-Growth Tax Code for All Americans,” set forth an ambitious approach to expanding the tax base. On the individual side, it proposes elimination of nearly all deductions (save mortgage interest and charitable contributions) to raise approximately $2.3 trillion over ten years. Additionally, it would do away with all individual tax credits (except for the Child Tax Credit, the Earned Income Tax Credit, and the American Opportunity Tax Credit) to bring in $127 billion more to the Treasury. These proposed actions should can only properly be viewed as pro-taxpayer if they serve as offsets for rate reductions and other reforms.
The base-broadeners proposed in the House GOP plan on the corporate side have attracted a great deal of attention and criticism. The blueprint would allow corporate taxes to be adjusted at the border, which would raise $1.1 trillion. Also, the plan would deny the deductibility of interest expenses, which would yield approximately $1.2 trillion in added tax revenue. However, should either of these politically controversial options fail to be included in reform legislation, Congress will need to make other modifications. This could mean reducing the size of the corporate rate cut, abandoning full expensing, or making other concessions that could reduce the benefits of reform.
Should Congress need to bring in additional revenue to comply with reconciliation requirements, NTU urges Congress to explore alternatives that would have a minimal impact on economic output. The 2015 PATH Act, for example, declined to renew a number of so-called “tax extenders” in areas such as wind and solar energy production, and special recovery periods for racehorses and motorsports complexes. Even though those decisions do not offset future rate reductions, a meticulous line-by-line evaluation of other narrowly-crafted tax provisions could not only simplify the tax laws but also reduce distortions and help to balance off rate reductions. Eliminating or consolidating preferential tax treatment towards everything from hiring decisions to purchases or manufacture of certain goods should occur in the context of tax reform.
So should exploration of historical tax policies that might be modified for changing times. To highlight one of many cases, Congress could review the tax exemption currently provided to all credit unions, bearing in mind there are now 281 credit unions that hold over $1 billion in assets or more and increasingly are competing in a head-to-head manner with traditional banks. Congress should examine whether this exemption should be phased down or capped, while at the same time helping to create a more navigable regulatory on-ramp that would make it easier for such entities to charter themselves as banks. This should not occur in isolation; rather, it is but one of hundreds of inquiries across the Tax Code that could be made, some of which may commend adjustments, others not at all. Again, actions such as these must be conducted fairly, without punitive intent or a hidden agenda to grow the size of government.
As Congress engages in this holistic exercise, it is important to be as thorough as possible. After all, income taxes may dominate our system of collecting revenues, but their interaction with payroll and excise taxes ought to be taken into account. So should the concerns of Americans who are sometimes neglected in discussions of tax policy -- citizens living and working in foreign countries as well as those residing in U.S. territories such as Puerto Rico. Taking their circumstances into account at the beginning, rather than near the end, of the legislative process for tax reform will ensure a more cohesive and coherent final product.
Additionally, numerous business tax credits like the domestic production tax credit (Section 199) could be done away with in the context of comprehensive reform. This has the potential to raise more than $700 billion, which could be used to finance pro-growth provisions.
Thank you again for allowing NTU to provide comments and suggestions as you work toward the incredibly challenging, yet essential task of reforming the Tax Code. Obviously, the fact that a comprehensive overhaul of the tax system has not occurred for 30 years stands as testament that this is no easy exercise. Yet, Congress must avoid the temptation to recoil at the task and settle for a few piecemeal changes. The reality is, standing still means falling behind -- compliance burdens will worsen as existing laws have more rulemakings built around them, while corporate inversions will continue and our competitiveness overseas will lag as other nations improve their own laws.
We hope to be a helpful and constructive resource as you develop a comprehensive reform package that provides permanent, pro-growth tax relief to individuals, families, and businesses. Please do not hesitate to call upon our organization at any time during this process.