Submitted in Response to Request for Comments
By
Pete Sepp, Vice President for Policy and Communications
Dear Chairman Volcker, Staff Director Goolsbee, and Distinguished Members of the Board:
On behalf of the 362,000-member National Taxpayers (NTU), I am pleased and honored to submit comments regarding options to increase the transparency, simplicity, and fairness of America's current tax laws.
As you know, few other citizen groups in Washington can match NTU's 40-year history of participation in the vital debate over restructuring our nation's tax system. Our leaders and members worked with Treasury officials during the 1980s in exploring some of the first flat-rate income tax proposals and later served as a collective voice for average Americans during Congressional debate over the Tax Reform Act of 1986. NTU was the leading advocate for overhauling the agency administering the tax system, culminating in the IRS Restructuring and Reform Act of 1998 – a law whose basic tenets were the product of a federal commission on which NTU's then-Executive Vice President served. In more recent years, NTU has actively championed reductions and simplification in many federal taxes, including the 2001, 2002, and 2003 personal income and small business tax relief laws.
We understand that the President's Economic Recovery Advisory Board's (PERAB's) mission "is NOT to recommend a new tax system." While we respect this limitation, we wish to state for the record that NTU's membership fully supports scrapping the current Tax Code in favor of a flat-rate income tax or a national retail sales tax (embodied in legislation in the House of Representatives designated H.R. 1040 and H.R. 25, respectively). In the absence of these reforms, NTU supports making the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001, as well as the Jobs, Growth, and Tax Relief Reconciliation Act of 2003, part of permanent law.
Despite our preferences, we do appreciate PERAB's commitment to "consider ideas on tax simplification, better enforcement of tax law, and reforming corporate taxes."
Accordingly, we believe that PERAB members might find useful some of NTU's research into the area of Tax Code complexity. This phenomenon can be quantified thanks to "A Taxing Trend," a study NTU has conducted since 1999 that focuses on how changes in the law affect the typical tax filer. As our research determined:
The increase in the tax law's complexity alone has added well over 1 billion hours in annual paperwork burdens during the last 10 years. The current paperwork burden generated by the Treasury Department, most of which consists of tax forms, now totals 7.75 billion hours, according to data derived at RegInfo.gov. That is the equivalent of 3.7 million employees working 40-hour weeks year-round without any vacation. That is more workers than are employed at the five biggest employers among Fortune 500 companies -- more than all the workers at Wal-Mart Stores, United Parcel Service, McDonald's, International Business Machines, and Citigroup combined.
- Individual taxpayers alone will spend an estimated 3.8 billion hours complying with the income tax laws this year, up from 3.6 billion hours last year.
- Tax form paperwork burdens alone account for just over 80 percent of the total paperwork burden hours of the entire federal government.
- Taxpayers today must wade through 161 pages of instructions for the 1040 "long" form, over quadruple the number in 1975 and over triple the number in 1985, the year before taxes were "simplified."
- Today's short 1040 form, at 48 lines, has double the number of lines on the 1945 version of the standard 1040 tax return. The short form's instructions total 84 pages, equal to those for the long form from 1995.
Clearly the act of filing taxes has become a separate and distinct burden from the act of paying taxes. These two problems require a multi-faceted approach to tax policy reform – one which we believe should pursue the following course:
- Reduce tax rates and burdens so as to allow citizens to keep more of the money they've earned;
- Simplify the tax system to make administrability of the law transparent and less difficult for those who must comply with it;
- Minimize economic distortion by replacing punitive taxes on individuals or businesses that have been singled out for political convenience, with a tax structure that treats everyone the same.
- Protect taxpayer rights with procedural safeguards against the tendency of tax law administrators to abuse citizens, as well as the tendency of elected officials to tinker constantly with the tax system.
With these principles in mind, we present the following recommendations.
1) Streamline and Simplify Taxes on Savings and Investments. In 1992, the National Taxpayers Union Foundation and National Chamber Foundation commissioned a legal memorandum entitled The Legal Authority of the Department of the Treasury to Promulgate a Regulation Providing for Indexation of Capital Gains.
The document concluded that the real "cost" of assets such as stocks or bonds should be inflation-adjusted in calculating the sale profit to ensure that inflation-caused gains are not taxed. Though the Treasury Department and Congress traditionally have defined "cost" as the asset's original price and a "gain" on the asset's sale as the difference between the original price and the selling price, these definitions are not established law.
According to the memo's co-author, former Justice Department Counsel Charles Cooper, "[T]he Treasury has administrative discretion to reinterpret 'cost' to take account of the economic reality that a 'gain' attributable solely to inflation adds nothing to the taxpayer's real wealth or purchasing power."
What was a good idea 17 years ago remains so today. While NTU is generally skeptical about the Executive Branch exercising tax policy, in the case of indexation, an Executive Order would be an appropriate response to expanding the economy without necessarily increasing net complexity in the tax system. One reason given for requiring "holding periods" in order to qualify for the lowest possible capital gains tax rate is to discourage what some might call "excessive" investment trading. Some individuals, however, can feel compelled to pursue "short trades" because they know that the gain from a sale must far exceed inflation to be lucrative. Indexing could ease this pressure, and perhaps obviate the need for holding period rules. Repealing such rules could help to offset any additional complexity that would result from asset cost calculations an individual would need to attribute to inflation.
In addition to recommending an end to inflationary double-taxation of savings and investments, the Board should also call for consolidating the several types of current-law Individual Retirement Accounts (IRAs) into a single account called a Retirement Savings Account (RSAs). After-tax annual contributions of $7,500 per person or more could be allowed with no restrictions on income. Earnings in these accounts would grow tax-free and distributions after age 58 would also be tax-free. Required Minimum Distributions, which can have a terrible tax impact on seniors and depress the accumulation of savings for heirs, should be abolished. Creation of RSAs would be another healthy step toward the removal of the bias against savings that is currently embedded in our Tax Code, and would complement any effort to reform the Social Security system.
Finally, reporting and tax rules for mutual fund distributions should be simplified. Prior to the popularization of Roth IRAs and other tax-advantaged saving vehicles, millions of Americans purchased taxable mutual funds for their retirements. These funds remain a nightmare in recordkeeping, where taxpayers must keep tens or hundreds of pages of cost-basis calculations for reinvested returns. At the same time, annual capital gain distributions, even if reinvested, must be reported as taxable income, while just a few dollars of unrecaptured gain attributable to Section 1250 of the Internal Revenue Code can trigger new paperwork filing requirements that add more compliance burdens on small investors. Provisions such as these should be reexamined, perhaps instituting in their place exemptions for reporting de minimis amounts.
2) End or Dramatically Reform the Alternative Minimum Tax (AMT). PERAB Members will no doubt receive a great deal of feedback about the need to abolish the AMT and for good reason. By 2010, more than 30 million taxpayers will have to compute and pay the AMT; a series of temporary "patches" defers, but by no means resolves, the problem. Currently more than 80 percent of returns with AMT issues are filed with the help of a paid preparer, demonstrating that most citizens find the tax incomprehensible.
Aside from the fact that the AMT will soon hit millions of unintended targets, the moral unfairness of this tax demands the attention of policymakers. The AMT is designed not to stamp out illegal tax evasion, but rather legal tax avoidance. Why should anyone be penalized with a second set of laws merely because, in Washington's political judgment, an individual has benefited "too much" from existing laws? Imagine if a Police Officer pulled over a driver traveling within the 55-mile-per-hour speed limit, and said, "I don't like your choice of your car, so for you the limit is 50. Pay up." This is precisely the absurd situation that AMT payers face today.
The best solution for the AMT is simply to get rid of it altogether, a remedy repeatedly recommended by the IRS National Taxpayer Advocate. But if Congress can't or won't do so, then it should at least adjust the tax's application to avoid a complexity nightmare for taxpayers and the IRS. Furthermore, the incomprehensible rules surrounding AMT "clawbacks" must be clarified. To give just one example, under the American Recovery and Reinvestment Act of 2009, five credits for new hybrid vehicles, lean-burn vehicles, fuel-cell vehicles, alternative fuel vehicles, and conversions for plug-in vehicles can reduce AMT liabilities for individual taxpayers. However, personal credits for alternative fuel vehicle refueling property cannot be claimed against AMT. What is the rationale for such a policy? We can find none.
3) Reduce Discriminatory Non-income Taxes. Some of the worst federal tax burdens have nothing to do with 1040 forms. Rather, they are embedded in the prices of goods and services.
For example, federal tax policy toward air travel has been wreaking havoc on the economic vitality of the commercial aviation sector. A plethora of excise taxes, passenger facility charges, inspection fees, security fees, and other mandatory charges can push the tax load on an airline ticket to roughly 25 percent (even higher for bargain-priced international tickets). Although the income tax reductions of 2001 and 2003 have provided much-needed relief to Americans, they have also brought to light a startling and intolerable fact: middle-class travelers are now likelier to pay a higher marginal tax rate on airline tickets than they do on their 1040 tax returns.
As an illustration of this seemingly arbitrary policy, the Secretary of Agriculture recently announced his intention to impose a 10 percent increase in the Animal and Plant Health Inspection Service (APHIS) fee on international arrivals. Yet, between January 2005 and today, the APHIS fee has risen by 61 percent. If the latest proposed jump takes place, by the beginning of 2010 APHIS fees will have risen by the equivalent of 77 percent – a mind-numbing figure that far exceeds any rational fiscal measurement such as inflation, international travel growth, or new technological costs. Indeed, during the current recession, international air travel demand has been decreasing. Raising the price of such travel certainly won't reverse this trend.
Earlier this year, Congress and the White House approved another tax hike on the middle class, through raising the federal excise tax on cigarettes. Tobacco taxes are highly regressive and disproportionately harm working-class Americans. According to Congress's own Joint Committee on Taxation, more than 2/3 of all federal tobacco taxes come from those earning less than $40,000 per year.
Ironically, even the supposed justification for this increase -- to finance an expansion of the State Children's Health Insurance Program – is ultimately self-defeating. If Congress is interested in sustainable spending, peddling a higher tobacco tax doesn't make sense. The federal government would become increasingly reliant on excise taxes extracted from the very product whose use among citizens it supposedly hopes to extinguish. If the consumption of cigarettes falls enough over the long term, revenue intake levels could also fall – an outcome made all the likelier by numerous state tobacco tax hikes. Unless Congress is willing to cut future spending, it will need to raise taxes elsewhere. This leads many taxpayers to wonder what politically out-of-favor activity will be targeted next.
They may not have to wonder long, given unwise proposals to tax soft drinks and other beverages deemed to have "too much" sugar in them as a means of financing health care reform. The federal government already puts wildly variable levels of taxation on alcoholic beverages. Distilled spirits, for example, carry a far heavier tax burden, on an ounce-per-ounce of alcohol basis, than beer and wine. We are not suggesting that beer and wine should be taxed more heavily; rather, all such beverages should be taxed at a lower and logically consistent rate. Both alcoholic beverages and those containing sweeteners can be part of a balanced, healthy lifestyle. The federal government should not be attempting to dictate consumers' individual purchases through taxation.
One of the more egregious instances of unfair federal tax policy lurks outside the current health care reform debate. Rather, it concerns a segment of our economy long recognized (at least in the private sector) for its importance to productivity and convenience: telecommunications. Layer upon layer of taxation is levied upon telecommunications services, including a portion of the 3 percent telephone excise tax and "Universal Service Fund" surcharges. Worse, state and local governments have slapped wireless customers with combined tax and fee loads exceeding an average of 15 percent, while tax administrators are eyeing Voice over Internet Protocol (VoIP) technologies for new revenue sources.
Yet, the federal government bears at least some responsibility for those burdens as well. A few years ago the Federal Communications Commission missed an administrative ruling opportunity to affirmatively close off VoIP to cash-hungry states and localities, while Congress continues to enact only short-lived moratoriums on state and local taxes for Internet access. Pending badly-needed reductions in the telecom tax burden, one step that Congress and the Administration could take would be to enact legislation imposing a ban on new or discriminatory state and local taxes on wireless phone service. A bipartisan bill proposing such a moratorium (H.R. 1521) has been introduced in the 111th Congress by Rep. Zoe Lofgren (D-CA), along with 159 cosponsors.
4) Overhaul Extraterritorial and Interstate Business Tax Rules. The United States has one of the highest corporate income taxes of any developed country. When combined with state taxes, American corporations face an average burden of nearly 40 percent. By comparison, the median tax rate levied by developed countries is just 30 percent. Even countries like France, Sweden, and the Netherlands, which are hardly renowned for free-market environs, levy lower corporate tax rates than the U.S. Reductions in America's punitive tax levels should be the proper focus of corporate tax policy revisions.
Furthermore, the United States now ranks an embarrassing 65th worldwide (out of 181 countries surveyed) for time spent complying with corporate tax filings, according to a 2009 study jointly published by the accounting firm PricewaterhouseCoopers and the World Bank. The study examined tax compliance burdens faced by a hypothetical flower pot manufacturer and retailer with 60 employees. It estimates that such a company in the U.S. would spend 187 hours filing taxes. By comparison, companies in Hong Kong, the United Kingdom, or France would spend just 80, 105, and 132 hours, respectively.
Equally painful is the federal government's tax treatment of business income earned abroad. The United States is among the small minority of nations that heavily tax business income earned outside national borders. This policy of "worldwide taxation" is inconsistent with fundamental tax reform and exacts a heavy compliance toll on U.S.-based corporations. Territorial taxation -- the common-sense notion of taxing only income earned inside national borders -- would enable U.S. companies in foreign markets to compete on a level playing field.
We commend the Administration's recent decision to shelve plans that would substantially alter "earnings deferral" rules to the detriment of American businesses. We would urge the Administration to now go further in revisiting worldwide income classification policies.
Other fairness and competitiveness problems manifest themselves in the form of the Streamlined Sales and Use Tax Agreement (SSUTA), a multi-state cartel that could effectively force companies offering goods and services over the Internet to remit sales taxes to more than 7,000 different jurisdictions across the U.S. States need Congress's blessing for SSUTA because of previous court rulings that governments cannot force firms within their jurisdictions to collect taxes on sales made to out-of-state customers. The federal government should prevent this scheme from weighing on businesses and consumers, especially in an economy with a slumping retail sector.
The integration of the Internet and telecommunication technologies has allowed businesses to expand across state lines, to the point where such activities are commonplace. However, these developments have created confusion about when states are allowed to collect income taxes from out-of-state companies conducting certain activities within their respective jurisdictions. As a proactive step, elected officials should enact a law clarifying the definition of "economic nexus" and establishing specific standards that define when firms should be obliged to pay business activity taxes. This plan, the Business Activity Tax Simplification Act (H.R. 1083), has been introduced in the 111th Congress by Rep. Rick Boucher (D-VA) and 20 cosponsors.
5) Establish Institutional Reforms to Promote Simplicity and Taxpayer Rights. As mentioned previously, an NTU representative served on the National Commission on Restructuring the IRS, many of whose recommendations became law in 1998. However, during deliberations over the 1998 IRS Restructuring and Reform Act, Congress rejected several reform proposals that the Board ought to resurrect today.
A Quadrennial Tax Simplification Commission, staffed by volunteers in the private tax preparation community, could provide real-world feedback and recommendations to Congress and the Executive Branch for making the system less complex. The Quadrennial Simplification Commission process would be especially helpful in clearing away the horrendous thicket of tax law provisions affecting corporations. Congress has taken several preliminary steps in clarifying rules on worldwide income, but much more work remains to be done in adopting streamlined, low-tax policies across all sectors of business that will be vital to America's international competitiveness in the years to come.
Furthermore, a Citizen Review Board for the IRS, constructed along the lines of similar entities overseeing large metropolitan police departments, could allow for more structured public input to help the tax agency improve its procedures. Unlike the current Taxpayer Advocacy Panels, which are helpful in their own right, a Citizen Review Board would allow exploration of individual tax-law enforcement incidents and their overall impact on the IRS.
6) What Not to Do. Aside from these recommendations for positive change, we would urge PERAB Members to avoid several negative proposals that have no doubt been proffered.
Some have suggested that tax administration could be greatly simplified by allowing the IRS to compute liabilities and send "returns" to millions of taxpayers for their signatures. This truly appalling idea, in the state-level stage with California's Franchise Tax Board, would turn tax reform on its head. Taxpayers would be discouraged from maximizing the savings that the laws may allow them under individual circumstances; and to the convenience of politicians, taxpayers would be disconnected from yet another process that reminds them of the high price they pay for government.
Others would impose unfair tax burdens on the most important sectors of our economy for political expediency. A case in point is the patently unfair suggestion that the Section 199 deduction for domestic manufacturers and producers should be denied to oil and gas companies. Public officials should recognize that when they begin punishing some firms while rewarding others through tax policies, principles such as rule of law and a level playing field for all Americans become meaningless. In turn, the entire tax system itself is jeopardized.
To conclude, our nation's economy, civil society, and political environment would all flourish under fundamental tax reform. Entrepreneurial energies could be unleashed to usher in an era of prosperity the likes of which our nation has never seen. The freedoms that Americans enjoy could be much more secure. Finally, the unbalanced lawmaking and electoral processes that too often serve special interests would be replaced with a new dynamic that works in the national interest.
Mr. Chairman, we hope that you and your colleagues will call upon National Taxpayers Union for any additional perspectives or analyses you may require in your deliberations. We are also ready and willing to testify before PERAB at any time. Once again, I am grateful for the opportunity to present our views.
Sincerely,
Pete Sepp
Vice President for Policy and Communications
Note: Owing to Board guidelines for brevity, these comments only constitute an outline of National Taxpayers Union's tax reform stance