The Senate Finance Committee held a hearing Tuesday to examine tax administration systems around the world.
The hearing was part of a series that the committee has been holding since last year on the general subject of tax reform.
“Filing taxes is one of the most direct relationships many Americans have with our government and we should do everything possible to minimize the stress and costs involved,” said Senate Finance Committee Chairman Max Baucus, D-Mont. “The U.S. lags far behind other countries in effective tax administration—our tax forms and instructions are too lengthy and confusing, often requiring folks in Montana and across the nation to consult lawyers and accountants just to comply with the law. As we work to improve tax policy, we need to also ensure we’re simplifying the way the Tax Code is administered to make tax filing easier so taxpayers are less frustrated and small businesses can focus on growing their businesses instead of filing their taxes.”
At Tuesday’s hearing, Baucus said that while no single system stands out as an ideal model for the rest of the world, examples of successful techniques from other countries could provide insight into how the U.S. could improve. He considered the practice of providing taxpayers with returns personalized with their own tax data already filled out, which is used in countries like Finland, Denmark, Sweden, Spain and the U.K. With this practice, Baucus noted, many taxpayers just have to review a tax return that the government prepares for them, rather than having to fill out the return from scratch.
The ranking Republican member on the committee, Orrin Hatch, R-Utah, told a story about how even Albert Einstein was reportedly baffled by the U.S. Tax Code. “According to some sources, just at this time of year, several decades ago, when attempting to fill out his U.S. tax return, Albert Einstein threw up his hands in frustration and said, ‘The hardest thing to understand is the United States income tax system,’” he said. Hatch pointed out that the remark was made prior to the enactment of the alternative minimum tax, the personal exemption phase-out, the Pease limitation on itemized deductions, and the Making Work Pay tax credit. “I wonder what that Nobel Prize winner of physics would say now about the tax system’s complexity?” he asked. “My guess is it wouldn’t be fit for polite conversation.”
In the hearing, Baucus and Hatch examined different countries’ tax administration systems and the options for implementing some of their best practices in the U.S. Baucus asked the expert witnesses to what extent the complexity of the Tax Code and frequent changes increase taxpayers’ filing burdens. He also asked the degree to which the information technology infrastructure of the Internal Revenue Service is an impediment to implementing some of the ideas discussed for improving tax administration. Baucus also looked at how other countries detect tax fraud and ensure all taxes owed are paid.
Michael Brostek, director of tax policy and administration at the Government Accountability Office, presented a GAO report on how six other countries handle tax administration. The report found that foreign and U.S. tax administrators use many of the same practices such as information reporting, tax withholding, providing Web-based services, and finding new approaches for tax compliance.
However, there are some differences in other countries that may provide useful insights for policymakers and the IRS. For example, New Zealand integrates evaluations of its tax and discretionary spending programs. In Finland, electronic tax administration is part of a government policy to use electronic services to lower the cost of government and encourage private-sector growth. Overall, according to Finnish officials, electronic services have helped to reduce tax administration staff by over 11 percent from 2003 to 2009 while improving taxpayer service.
Michael Gaffney, a tax partner at PricewaterhouseCoopers, testified about his experiences while working for Merrill Lynch as co-head of global tax from 2000 to 2009. While at Merrill, he was involved with tax administration initiatives undertaken by the United Kingdom, the Organization for Economic Cooperation and Development, and the IRS.
“Many of these programs were very successful, and some were less successful, at least in my experience,” he said in his prepared testimony. “Less successful programs occurred not because of faulty design or goals of the program itself, but rather because of the inability to consider every possible contingency regarding how the specific program would interact with other tax authority initiatives.”
Brian Erard, president of B.E. & Associates in Reston, Va., testified about the Canadian tax system in comparison to the U.S. tax system. He noted that while individual income taxes account for roughly the same share of federal revenue in both countries (about 45 percent), the U.S. relies more heavily on payroll taxes while Canada relies more heavily on consumption and excise taxes. Canada also collects a slightly higher share of its revenue from the corporate income tax, 14 percent, compared to 12 percent in the U.S. The Canada Revenue Agency has increasingly focused on increasing the availability of taxpayer self-help services through the Internet. He believes that Canada’s focus on taxpayer self-service may serve as a model for the U.S.
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