With nine out of 10 families either hiring tax preparers or purchasing tax software in order to file their taxes, it is clear that the Tax Code is too complex, too time-consuming and too costly for our families and businesses. So says Dave Camp, R-Mich., the new chairman of the House Ways and Means Committee.
The committee held the first in a series of hearings on fundamental tax reform Thursday, examining the costs imposed on families, employers and the economy at large by the current structure of the federal income tax.
Camp noted that this year is the 25th anniversary of the enactment of the bipartisan Tax Reform Act of 1986, legislation that broadened the tax base by closing loopholes and curtailing tax expenditures, while dramatically reducing marginal tax rates on both individuals and businesses.
Since then, Camp said, “Members of Congress — from both sides of the aisle — have loaded the Tax Code with a dizzying array of credits, deductions, exclusions and exemptions.”
Despite the 25 years since the last meaningful tax reform was passed, both the Bush and Obama administrations presented plans to reform the system. The Bush proposal, formulated by the President’s Advisory Panel on Federal Tax Reform, recommended two plans, a “Simplified Income Tax Plan” and a “Growth and Investment Tax Plan.
Under Obama, the President’s Economic Recovery Advisory Board delivered its own report on tax reform last year, containing a set of options for simplification and compliance. The PERAB proposal noted that the complexity of the Tax Code is partly the result of the fact that new provisions have been added one at a time to achieve a particular policy goal, but with inadequate attention to how they interact with existing provisions.
Small business owner Warren Hudak testified before the committee on the burdensome complexity of the federal Tax Code and the effect of changes to individual tax rates on small businesses. His firm, like 75 percent of small businesses, is a pass-through entity, according to National Federation of Independent Business tax counsel Bill Rys.
“It is important to remember, as part of any debate on tax reform, that most small businesses pay tax on their business income at the individual, and not the corporate, tax rate,” he said. “Individual tax rates, and the impact they have on the vast majority of small businesses, should be part of any debate about tax reform.”
National Taxpayer Advocate Nina Olson voiced her concern that the debate over revenue levels could overshadow and derail meaningful tax reform. She suggested that Congress consider addressing the issues of structural tax reform and revenue levels separately, with reform enacted on a revenue-neutral basis. Congress could then decide on appropriate revenue levels and adjust the tax rates as it deems appropriate, she indicated.
“Based on all the comments we receive every year, the Taxpayer Advocate Service and our experience in handling nearly 300,000 taxpayer cases a year, lowering rates in exchange for broadening the tax base seems like an excellent bargain,” she said. “I am confident that in the end, public support for a simpler code will be strong and deep.”
“The AICPA has long been a proponent of fundamental tax reform,” said Peter Kravitz, director of congressional and political affairs for the AICPA. “We believe the Tax Code is overly complex and needs to be simplified. We’re pleased to see that the first hearing of the Ways and Means Committee in this Congress was on fundamental tax reform.”
Both Chairman Camp and Ranking Member Sander Levin stressed the need for bipartisan effort. “We welcome the opportunity to discuss reforming our tax system,” said Levin. “As was true in 1986, any tax reform will have to be bipartisan and bicameral and will require leadership from the administration.”
“I don’t think this can be, nor should it be, a partisan exercise,” said Camp. “And it cannot happen just because one chamber passes a bill. It will require the active participation of all members of this committee. It will require us to work with the administration. And yes, we will even have to talk to the Senate.”
Although talk about tax reform has surfaced in cycles over the past decade, it looks as though this time there may be enough interest among the various stakeholders to see some real results.
“The tax community has been waiting for a long period of time for movement on tax reform,” said Robert Kerr, senior director of government relations at the National Association of Enrolled Agents. “It’s been 25 years, and you would have to look far and wide to find someone who doesn’t believe that now is the time for tax reform.”
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