The House Ways and Means Committee held a hearing Wednesday on how the Tax Code’s burdens on individuals demonstrate the need for comprehensive tax reform.
Committee Chairman Dave Camp, R-Mich., noted that the Tax Code is “too complex, too costly, and takes too much time to comply with.”
“Navigating through the tangled web of the Tax Code has resulted in taxpayers spending over 6 billion hours annually to comply with the code,” Camp said in his opening statement. “Ask any family, and I am sure they will have a long list of better ways they could be spending their time.”
Sander Levin, D-Mich., the ranking Democratic member of the committee, criticized the Republican tax plans in the budget resolution introduced last week by House Budget Committee Chairman Paul Ryan, R-Wis. “The kind of tax reform proposed in the Republican budget would reduce taxes for the very highest earners, and increase the burden on working families,” said Levin. “These reductions for the highest earners come on top of the nearly $700 billion in additional tax cuts the Republican budget assumes for taxpayers with income above $250,000, almost 80 percent of which go to people making more than $1 million.”
Annette Nellen, chair of the AICPA Individual Income Taxation Technical Resource Panel and a profesor at San Jose State University, testified that individual taxpayers and their families need simple tax laws so they can understand the rules and follow them correctly in a cost-efficient manner. She noted that it takes 86 pages for an IRS publication to explain all the tax education provisions that encourage families to save for and spend on education.
“Few, if any, taxpayers are both aware of all the education tax incentives and fewer still can perform the analysis to determine which incentive is most advantageous,” Nellen said. “The requirements, eligibility rules, definitions, and income phase-outs vary from incentive to incentive.”
Erroneous application of the Hope Credit, among other complexities, contributes to the estimated $345 billion tax gap, Nellen noted. The Earned Income Tax Credit is perennially challenging to taxpayers as well as the IRS, she added.
Allen Viard, a resident scholar at the American Enterprise Institute, told the committee in his prepared testimony about the needless complexity of tax incentives for saving, education and children. “The primary problem is the proliferation of tax incentives that serve largely similar purposes, but are governed by different and complicated rules,” he said. “Taxpayers must sort through these incentives, keeping in mind that selection of one incentive may preclude the use of others.” Income-based phase-outs are another source of complexity, he added.
Neil H. Buchanan, associate professor of law at George Washington University, acknowledged that
there were many areas of the Tax Code that could benefit from rationalization and simplification, such as those governing retirement savings and education incentives. But he warned the committee against the temptation of “false simplification.”
“Assuming that the goal of simplifying the Tax Code is truly to simplify the lives of citizens, and that the exercise is not merely a cover for the elimination of the housing, education, retirement savings and other incentives that past Congresses have enacted to benefit the American people, the committee should be wary of reducing ‘tax complexity’ without reducing what we might call ‘overall complexity,’” he said. “A simple way to reduce the complexity of the Tax Code, after all, would simply be to stop running certain benefits through the Tax Code and, instead, run them through some other agency of the government. The mortgage interest deduction, for example, could be turned into a benefit program run by HUD. The Earned Income Tax Credit, which is a benefit to workers, could be run by the Department of Labor. The medical expense deduction could go through HHS.”
Mark Johannessen, a Certified Financial Planner and a managing director at the Reston, Va., financial advisory firm Harris SBSB, noted that the Tax Code is so complex that only professionals who are completely dedicated to understanding its principals are able to complete a tax return for all but the simplest of filings. “If the interplay of various tax provisions confuses trained professionals who specifically focus on understanding complex financial issues, imagine the plight of the average citizen who has only a basic knowledge of our Tax Code,” he said.
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