The Senate Finance Committee convened a hearing Tuesday aimed at making the Tax Code fairer and simpler, while making U.S. businesses more competitive.

The committee reviewed the changes made to the Tax Code since the landmark Tax Reform Act of 1986 and the extent these changes have kept up with transformations in the U.S. and global economy. 

“The 15,000 changes made to the Tax Code since the 1986 reform effort have stretched the code in different directions, often eroding fairness and simplicity,” said Senate Finance Committee Chairman Max Baucus, D-Mont.  “As we work to simplify the tax code and make it more fair and competitive, changes need to reflect our increasingly global economy and ensure our tax system supports widespread economic growth.  Vast technological innovations have transformed our economy and we should look to these innovations as opportunities to spur job creation and economic growth.”

Baucus stressed the need for changes to make the Tax Code fairer, help businesses to create more U.S. jobs and reduce the potential for exploitation of the tax laws by special interests. Baucus said that Congress needs to ensure the improvements made to the code in tax reform are long-lasting.  He also asked the witnesses about ways to measure the effectiveness of tax incentives.

Baucus also noted the need for tax reform to reduce the estimated $300 billion tax gap—the difference between the amount of taxes owed and taxes paid.  Baucus said tax reform must include ways to improve compliance without exerting excessive burdens on individuals and businesses.

The Finance Committee began its review of the code last September with a review of the lessons of the 1986 Tax Reform Act and considered historical trends in income and revenue last December.

“We will methodically examine every feature of the tax system,” said Sen. Orrin Hatch, R-Utah, the ranking Republican member on the committee. “I expect that we will conduct that examination with President Reagan’s three criteria as our guide posts. We will be looking at the fairness of the system.  We will be looking at the efficiency of the system, with a particular emphasis on the anti-growth features of the systems. We will be looking at the complexity of the current system. After that examination, I’m optimistic that we will be in a position to re-build the system in a way that meets President Reagan’s three criteria.”

Hatch pointed out that in 1986, Congress’s tax reform efforts achieved the bipartisan goal of lower rates and a broader tax base.  “At that time, the tax system raised revenue roughly in line with the historical average of roughly 18 percent of the economy,” he noted. “That is what the Congressional Budget Office tells us would be raised if we define revenue neutrality by reference to current policy. It seems to me to be a good bench mark to use.  I have a chart. The chart shows that, despite many movements up or down in the marginal rate structure, the American taxpayer tends to yield that much revenue.”

Mark A. Weinberger, former Assistant Secretary of Tax Policy at the Treasury Department, and now the global vice chair of tax at Ernst & Young, testified before the committee about the evolving business and global landscape and increasing global competitive pressures. “Throughout the evolution of our tax system, the way the world does business has been changing at an extraordinary pace,” he said. “New industries have been created. New markets have opened. The flow of capital has shifted. New economic powers have arisen. These developments are transforming the landscape for business in the United States and around the world. Businesses have completely changed their business models to adapt. If they didn’t change, they wouldn’t be successful. The same is true for the U.S. economy. We have to adapt our Tax Code to the changing world, if we want the U.S. economy to continue to excel.”

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