COMMITTEE ON WAYS AND MEANS BILL THOMAS, California, Chairman
PHILIP M. CRANE, Illinois E. CLAY SHAW, Jr., Florida NANCY L. JOHNSON, Connecticut AMO HOUGHTON, New York WALLY HERGER, California JIM MCCRERY, Louisiana DAVE CAMP, Michigan JIM RAMSTAD, Minnesota JIM NUSSLE, Iowa SAM JOHNSON, Texas JENNIFER DUNN, Washington MAC COLLINS, Georgia ROB PORTMAN, Ohio PHIL ENGLISH, Pennsylvania WES WATKINS, Oklahoma J. D. HAYWORTH, Arizona JERRY WELLER, Illinois KENNY C. HULSHOF, Missouri SCOTT MCINNIS, Colorado RON LEWIS, Kentucky MARK FOLEY, Florida KEVIN BRADY, Texas PAUL RYAN, Wisconsin	CHARLES B. RANGEL, New York FORTNEY PETE STARK, California ROBERT T. MATSUI, California WILLIAM J. COYNE, Pennsylvania SANDER M. LEVIN, Michigan BENJAMIN L. CARDIN, Maryland JIM MCDERMOTT, Washington GERALD D. KLECZKA, Wisconsin JOHN LEWIS, Georgia RICHARD E. NEAL, Massachusetts MICHAEL R. MCNULTY, New York WILLIAM J. JEFFERSON, Louisiana JOHN S. TANNER, Tennessee XAVIER BECERRA, California KAREN L. THURMAN, Florida LLOYD DOGGETT, Texas EARL POMEROY, North Dakota
Allison Giles, Chief of Staff Janice Mays, Minority Chief Counsel SUBCOMMITTEE ON OVERSIGHT AMO HOUGHTON, New York, Chairman
ROB PORTMAN, Ohio JERRY WELLER, Illinois KENNY C. HULSHOF, Missouri SCOTT MCINNIS, Colorado MARK FOLEY, Florida SAM JOHNSON, Texas JENNIFER DUNN, Washington	WILLIAM J. COYNE, Pennsylvania MICHAEL R. MCNULTY, New York JOHN LEWIS, Georgia KAREN L. THURMAN, Florida EARL POMEROY, North Dakota

SUBCOMMITTEE ON SELECT REVENUE MEASURES JIM MCCRERY, Louisiana, Chairman
J.D. HAYWORTH, Arizona JERRY WELLER, Illinois RON LEWIS, Kentucky MARK FOLEY, Florida KEVIN BRADY, Texas PAUL RYAN, Wisconsin	MICHAEL R. MCNULTY, New York RICHARD E. NEAL, Massachusetts WILLIAM J. JEFFERSON, Louisiana JOHN S. TANNER, Tennessee
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records of the Committee on Ways and Means are also published in electronic form. The printed hearing record remains the official version. Because electronic submissions are used to prepare both printed and electronic versions of the hearing record, the process of converting between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current  publication process and should diminish as the process is further refined.

Advisory of July 10, 2001, announcing the hearing

Gale, William G., Brookings Institution

Joint Committee on Taxation, Lindy Paull

National Taxpayers Union, David L. Keating

Steuerle, C. Eugene, Urban Institute

Tax Foundation, Scott Moody

American Bankers Association, statement

House of Representatives,
Committee on Ways and Means,
Subcommittee on Oversight,
Subcommittee on Select Revenue Measures,
Washington, DC.

The Subcommittees met, pursuant to notice, at 2:00 p.m., in room 1100 Longworth House Office Building, Hon. Amo Houghton (Chairman of the Subcommittee) presiding.

[The advisory announcing the hearing follows:]

Chairman HOUGHTON. If I can have your attention, I think we will call the meeting to order.  I am going to say a few things, and then I will turn over the mike to Mr. McCrery, who is the co-leader here, and then I will recognize Mr. Coyne and Mr. McNulty.

What I would like to do is begin by noting that this is, as I mentioned earlier, a joint hearing of the Oversight and Select Revenue Measures Subcommittees, and I have the gavel because I outweigh and I out-age my colleague, Mr. McCrery, and I haven't been treated, frankly, with the proper respect over the years.

The Oversight Subcommittee has a long history of activity on tax simplification, and I certainly welcome the participation of the Select Revenue Measures members in the important need to simplify our Tax Code. What I have here in my hand is the number of pages used for our income taxes in 1913. Now, I was not alive in 1913, but that is what it was. 

Now, I was alive in 1937, and the four pages have now grown to eight. However, if you will look down here right in front of me, this is the requirement for the income tax reporting in 2000. The current Tax Code is so complex that I couldn't begin to hold up those forms and the pages of instructions put out by the IRS, but they are right here in front of me.

Our past hearings have given us a range of numbers on the cost and complexity of the Tax Code. The lowest estimates, in the range of $75 billion per year, commonly include only the cost of preparing Federal income tax forms. If you add up all the costs of the Federal tax system including education, record keeping, preparing returns, governmental administration, tax litigation and things like that, the total overall overhead cost of our Federal tax system is probably in the range of $200 billion, and I really think that is a conservative estimate. So think what we could do if we had that available -- that amount of money available for health care or other important activities.

So today's hearing really is going to begin our quest to simplify the Tax Code. I don't know that we can do it, but we are going to have a mighty effort in that regard. We will hear from several witnesses who have studied the complexity of the system and its cost to society, and we will also review the excellent report produced by the Joint Committee on Taxation (JCT) for which we commend Mrs. Paull very much, and her staff.

So future hearings -- so this is not the only one. Future hearings will examine a host of other simplification recommendations. And I understand that the Treasury Department is reviewing the simplification study done by the Joint Committee on Taxation together with simplification proposals advanced by the IRS Restructuring Commission, National Taxpayer Advocate, a number of professional associations. And also, in addition, the Treasury Department will be developing proposals that were not addressed by these other reports.

Now, a future hearing is going to require the Treasury Department to come back at us and give the opportunity to present specific proposals that would simplify the tax system and provide for enhanced economic growth. We look forward to hearing the Treasury Department's recommendations when the analysis is complete.

And I am now pleased to yield to the Chairman of the Subcommittee for Select Revenue Measures, Mr. McCrery.

[The opening statement of Chairman Houghton follows:]

Chairman MCCRERY. Thank you. It is a pleasure to co-host this hearing with the Oversight Subcommittee. The Select Revenue Measures Subcommittee is certainly interested in the findings of the Oversight Committee with respect to tax simplification and potentially moving forward legislation at some point to make the Tax Code more simple.

Chairman Houghton has said pretty much what I would say in my opening remarks, and, in the interest of time, I would submit for the formal record my written opening remarks and yield back to the Chairman.

[The opening statement of Chairman McCrery follows:]

Chairman HOUGHTON. Thanks very much, Mr. McCrery, and also I am honored to be able to do this thing with you. What I would like to do is call my friend here, Mr. Coyne.

Mr. COYNE. Thank you, Mr. Chairman. It is helpful that this hearing be held to discuss the need for tax simplification. I believe that the time for tax simplification is now. We must make the decision to simplify the Tax Code and make tax reform a high priority. The Oversight Subcommittee has held numerous tax simplification hearings. In 1998 we held hearings on the impact of the tax law complexity on individual taxpayers and businesses. At the beginning of each year since then, we have held a tax return filing season hearing which included discussion of tax complexity and the most common taxpayer and tax practitioner errors.

As the Subcommittees proceed this year, I suggest that we consider simplification measures that address both simpler Tax Code rules and improved IRS notices, forms, and instructions. The Joint Committee on Taxation's April 2001 simplification report is an excellent document. This report was mandated by the 1998 IRS Reform Act to provide the Congress with a professional and objective analysis of why the tax laws are complex and how the tax laws can be simplified. The study outlines in quite specific terms what could be done to simplify the Code.

I want to thank Chairman Houghton for keeping tax simplification at the top of the Oversight Subcommittee's agenda. I look forward to developing a tax simplification package and also to working with all members of both Subcommittees on tax simplification throughout the year. Thank you, Mr. Chairman.

[The opening statement of Mr. Coyne follows:]

Chairman HOUGHTON. Thanks very much, Mr. Coyne. Mr. McNulty.

Mr. MCNULTY. Thank you, Mr. Chairman. I ask unanimous consent that all members of the two Subcommittees have 5 legislative days in which to submit statements for the record.

Mr. Chairman, today our two Subcommittees are joined together to discuss one of the most frustrating issues facing taxpayers: the complexity of our tax laws. The witnesses' testimony will provide us with an excellent basis for analyzing the specific tax law provisions that deserve our priority attention for simplification. Tax simplification has strong and widespread bipartisan support. Given this, I would hope that the Committee will decide to take tax simplification seriously and do more than just holding hearings.

We have been talking about tax simplification for years, but little has been done. Instead, the tax laws have, as you have pointed out, Mr. Chairman, become more and more complicated and taxpayers, justifiably, are becoming more frustrated. I believe that we could develop a tax simplification legislative package immediately. As a priority, we should focus on those tax provisions that impose significant unnecessary burdens on the greatest number of individual taxpayers. Simplification could begin with reforms to the earned income tax credit, alternative minimum tax, education credits, capital gains, and other areas affecting average working individuals and their families.

There is no question that the tax laws are complicated and that simplification reforms are needed. The real question is when will the Committee act to simplify the Tax Code. And, much more important than simplification, it is critical that any reforms we enact are fair to average taxpayers. Mr. Chairman, I look forward to working with you and the members of the Committee on this subject. Thank you.

[The opening statement of Mr. McNulty follows:]

Chairman HOUGHTON. Thanks very much, Mr. McNulty.

Unless other people have opening statements, Mrs. Paull, we are delighted to have you here, and please proceed.

STATEMENT OF LINDY PAULL, CHIEF OF STAFF, JOINT COMMITTEE ON TAXATION

Mrs. PAULL. Thank you, Mr. Chairman, and Mr. Chairman, and members of the Subcommittees. Let me start by thanking you for holding this series of hearings. I am especially appreciative of you inviting us to present to you the report that we did earlier this year on the overall state of the Federal tax system and our recommendations on ways to make it a little bit more simple.

Simplification of the Tax Code is really an ongoing process. It requires a lot of diligence, and it requires a lot of focus on the ways that we write our tax laws. And I think this project was really quite an interesting one for our staff to engage in, to step back and take a big broad look at the Tax Code. So we thank you for inviting us to do that as well.

Our report, of course, stems from the work of this Committee leading to the 1998 IRS Restructuring Act. And I also would like to thank everybody who contributed to the work of this study, because it was not only our staff which did a tremendous job on the report but also our colleagues at the U.S. General Accounting Office (GAO), the Congressional Research Service (CRS), and we elicited some outside advisors to help us as well, and it was quite a pleasure to work with all of them.

I have submitted written testimony for the record, and I would just like to provide some highlights of that testimony so that there will be ample time for questions. I also thank you for accommodating my schedule. The Committee has a major markup tomorrow and we are getting ready for that as well; so, thank you for that.

There is no doubt that the tax system is complex, illustrated by Chairman Houghton's very high stack of instructions and forms and publications that the IRS puts out on an annual basis to assist taxpayers in complying with the tax law.

We have over 100 million individual income tax returns that are filed annually on behalf of about 90 percent of the U.S. population, and the individual income tax return itself consists of about 79 lines, 144 pages of instructions, 11 schedules that have another 443 lines, 19 separate work sheets, the possibility of having to file numerous other forms and to have to look and to consult with all kinds of other schedules and instructions. So it is quite a complicated, daunting and intimidating task for taxpayers when they sit down to try to do their annual tax return.

The Tax Code consists of approximately 1.4 million words. Almost 700 sections of the Tax Code are applicable to individual taxpayers, over 1,500 sections are applicable to businesses, and almost 500 sections to tax-exempt organizations, employee plans, et cetera. There are almost 20,000 pages of regulations, encompassing about 8 million words that you have to try to sort through on various topics of the tax area, and there are a lot of missing regulations as well.

Another interesting thing that we would note is that the number of paid tax return preparers has increased over the last decade, from about 48 percent of individual returns to 55 percent, which is almost a 27 percent increase. And the use of computer software for the preparation of income tax returns has increased even more, from about 16 percent in 1990 to 46 percent now. Some of the complexity of the Tax Code is actually hidden in the sense that you go to a tax preparer, you use computer software as opposed to having to try to sort through the returns and do it yourself.

As a part of the study, we undertook a review of all the present-law tax provisions. We didn't focus only on one, but obviously we spent a lot more attention on the individual side and the complexity with respect to small businesses, because we thought that was one of the principal emphasis from the IRS Restructuring Act. And we determined that there was really no single cause of complexity. There are a multitude of causes. There are many, many factors, and you have to be diligent in all aspects of the tax law in order to try to make a change so that the complexity doesn't overcome and overwhelm the system. It is quite close to doing that right now.

In the course our study we were able to identify numerous areas of the tax law that could be simplified. We did not think that our mission was to compare the current Tax Code to a theoretical or a perfect world Tax Code, but to look at the Tax Code and explore, considering the policies that have been enacted, are there simpler ways to go about implementing the policy that the Congress was desirous of achieving through those provisions of the tax law?

So what we were identifying were areas where we thought you could go about achieving the same goal, but do it in a simpler way. In many instances, we found that there are multiple tax provisions that are trying to achieve the same thing. We explored whether they could be combined into one so that you would have one way of achieving that goal.

In some instances we ultimately decided, especially with respect to the structure of the Tax Code, that there were so many policy issues involved in some of these structural issues that we could not make a recommendation. For example, the multiple filing statuses or whether or not you have one pass-through entity regime versus a different tax system for subchapter S corporations, partnerships, and other entities. While we didn't make a recommendation on it, we certainly left you a road map for us to come back and do some further work if after you have reviewed our report you wanted us to look further into it.

In addressing the simplification, we have a few recommendations on how to tackle what seems to be an overwhelming effort to simplify the Tax Code. First, we would echo I think what has already been said, that particular attention ought to be paid to recommendations that have widespread applicability to individuals. For example, a simplification recommendation that we made with respect to the alternative minimum tax, and with respect to uniform definition of a child for various purposes of the Tax Code, ought to be given a very high priority by the Congress because so many people are affected by those provisions.

There is another tier of recommendations that we made that basically involve the notion of uniform definitions that -- although we haven't estimated all our recommendations -- we think that are probably pretty low cost and would give a coherence in the Tax Code and get rid of so-called dead wood, out-of-date provisions. We identified over a hundred of those provisions in the Tax Code. It would be a relatively simple proposition to go about doing that.

The third thing we would urge -- which we would participate in this when you are marking up a tax bill -- is that when you are marking up a tax bill and you are adding new provisions to the Tax Code, some weight ought to be given to the benefit of the policy that you are trying to promote through the Tax Code versus the complexity and additional stacks of paper you are going to be adding to the instructions on the forms.

And, finally, we would ask that you follow up on some of the structural issues that we identified. We identified over 20 area that would be major projects and would involve a significant amount of policy decisions. So it would be up to the Congress to move forward those types of policy changes.

Since my time is up and the report has been out since April, I will not highlight our specific recommendations as I had intended to. I would be happy to answer any questions you may have. Again, I appreciate you inviting me to appear before you today, and I think it is great that you are holding these hearings on tax code simplification.

[The prepared statement of Mrs. Paull follows:]

Chairman HOUGHTON. Thanks very much, Mrs. Paull. I just have a quick question, and I will pass it over to Mr. McCrery and others. It has always amazed me that we don't get at this every year, I mean every year, and for us to start a series of tax simplification proceedings -- and I know other people have gotten out of it and a lot of things have been written about it, but many times I will talk to the Treasury and they will say this is a really a government policy issue; or I will talk to the IRS and they will say, really it is not ours, it is the Treasury Department's.

So we just keep going around in circles. And I think that you can help us not only in prioritizing, which you have, in terms of obsolete provisions and uniform definitions and things like that, but also help us to set us on a course where we can help those people who must help all the citizens out there, because this is really ridiculous. There is just so much wasted time, so much wasted effort, so many things burned up in the process.

So the only thing I plead with you is, as we go along here and have these other hearings, help us think through, prioritize, but also find handles that we can get on with this.

Mr. McCrery.

Mrs. PAULL. Mr. Houghton, if I could just respond very briefly. I think a red flag should come up with the Committee members when the provision is of a very narrow scope and it doesn't have a broad application, because when you load up the Tax Code with these very, very narrow provisions, you start seeing difficulties in applying and understanding the tax law.

Chairman HOUGHTON. And also I think your point about the cost and benefit of some of these things, we very rarely talk about that. It is a side issue; it is not a core issue. Thank you very much.

Mrs. PAULL. You are welcome.

Chairman HOUGHTON. Mr. McCrery.

Chairman MCCRERY. Just one topic I would like for you to touch on, and that is the AMT, alternative minimum tax. If I am not mistaken, in your report you recommend total repeal of alternative minimum tax for individuals and corporations; is that correct?

Mrs. PAULL. That is correct, Mr. McCrery.

Chairman MCCRERY. I have often heard, and I will see if you agree, that the easiest thing we could do to simplify the Tax Code in one fell swoop would be to repeal the alternative minimum tax. Is that one of the -- one of the main things you would recommend for simplification is repeal of the AMT?

Mrs. PAULL. Yes, it is. Our report starts with the repeal of the AMT. While we didn't necessarily order our recommendations, the fact that the report starts with the AMT indicates we thought it was a pressing issue. For those people who might be subjected to the alternative minimum tax or are in fact having to make those calculations, they are having to make a completely double set of calculations to figure their income taxes. It is not bad enough to have to do it once, but they get to do it twice. Many people must run through a check box of questions as to whether or not you should try to make those computations. Many people make them when they are actually not going to pay the tax. Unfortunately, in the future, many people are in fact going to be minimum taxpayers. They would have been under the previous law before the large bill that was just signed into law, and even more will be minimum taxpayers.

The profile of the individuals that we are dealing with here tend to be large families or in a high income tax State, or they may have some other things like incentive stock options that will throw them in in one year. Sometimes you are in, sometimes you are not, but over time we are going to see a lot more people who are consistently in the AMT. It is a very complicated system, and it was not designed for those types of people.

For businesses, some of them have to compute their taxes three ways. It is really kind of mind-boggling, the paperwork that they have to go through to comply with the alternative minimum tax. Again, they may go back and forth from year to year. Many of the reasons why there was an alternative minimum tax no longer are present. The regular tax has been changed, the alternative minimum tax was not, and so it is just picking up aberrational cases, and more than was ever intended.

Chairman MCCRERY. Well, for purposes of today's hearing, it is not so much the actual alternative minimum tax that some taxpayers have to pay -- and you say that number is going to grow -- it is the complexity that it adds to the Code and to the calculation of one's taxes. And in fact, Mrs. Paull, isn't it correct that every taxpayer that itemizes his deductions has to go through the minimum tax calculation?

Mrs. PAULL. Yes they do to make sure that they are not going to be a minimum tax payer. If you knew  something -- if you were a lower-income person and you knew something about the minimum tax, you might be able to do it shorthand, but most people have to go through various calculations to figure out whether or not they are AMT taxpayers.

Chairman MCCRERY. Thank you.

Chairman HOUGHTON. Thanks very much, Mr. McCrery. Mr. Coyne.

Mr. COYNE. Thank you, Mr. Chairman.

Mrs. Paull, based on your analysis of the Tax Code and the study you did and the recommendations you made, who bears more of the responsibility for the complexity of the Code; the tax-writing committees of Congress or the IRS?

Mrs. PAULL. Well, we did not try to identify it in that way. We have a long list of contributing factors.

Mr. COYNE. You have done an exhaustive study of the Code, and I am just asking for your professional opinion. Who bears more of the responsibility?

Mrs. PAULL. I would say that obviously the Congress bears a significant responsibility because they write the tax laws.

Mr. COYNE. Thank you. What policy considerations prevented you from making comprehensive recommendations in the areas of dependency exemption, child credit, earned income tax credit?

Mrs. PAULL. We made some recommendations in that area that we think are long overdue, having to do with the unified definition of a child for the five purposes of the Tax Code. It is possible to go further structurally to make additional simplifications of some of these provisions, but we believe the recommendations we made are significant. This was our first report, the first time we had done a comprehensive report like this, and we were not given very much guidance by the Congress on what kind of recommendations to make. So we made the recommendations that we felt were appropriate, which were not to second-guess policy decisions, but to try to go about implementing the policy of the Congress in a simpler way. You could give us some authority to look at specific areas to make recommendations, and we could give you some options with respect to the policy trade-offs that you could make. But we were really trying to focus on simplifying and implementing in a simpler way existing policy decisions in the Tax Code.

Mr. COYNE. But aren't some of the areas that I cited, like dependency exemption, child credit, earned income tax credit -- aren't these exactly the ones that cause taxpayers most of the trouble?

Mrs. PAULL. One of the big reasons they have a lot of trouble is because they might have a child that qualifies them for one provision, and then they think they are qualified for all the other purposes and they are not. So, again, we made a recommendation for a unified definition of child so that when you qualify for one provision, you qualify for them all. In some instances, our recommendation would expand some of those provisions from present law if you were to move forward with that, but generally it would make it so much simpler for millions of people with children under the age of 19 or 18.

Mr. COYNE. But they do tend to be the areas that cause the most trouble for taxpayers; is that correct?

Mrs. PAULL. That is a significant area, yes.

Mr. COYNE. Thank you.

Chairman HOUGHTON. Mr. McNulty.

Mr. MCNULTY. Thank you, Mr. Chairman. I yield to Mr. Neal.

Mr. NEAL. Thank you Mr. Chairman. Thank you, Mr. McNulty.

First of all, Mrs. Paull, let me thank you for last year for accepting many of my recommendations --

Mrs. PAULL. You are welcome.

Mr. NEAL. In H.R. 1420, and certainly you demonstrated wise judgment in that instance. What do we do to ensure that this tax simplification study really becomes real tax simplification for the American people as opposed to just another study?

Mrs. PAULL. Well, you know, we took our job seriously. We did not view this as a study that would be put on the shelf, that would be collecting dust. Simplification is an ongoing process. Our report is an outgrowth of a major initiated by this Committee on the IRS Restructuring Act, and we took it seriously. Now we hope the Congress will take our report seriously and act on some of the recommendations and develop additional ones.

Mr. NEAL. What is the disincentive for Congress not to take it up?

Mrs. PAULL. The disincentive? Well --

Mr. NEAL. I heard the former Chairman of this Committee for 6 years talking about yanking the Tax Code out by its roots and throwing it to the side. We are no closer to that today than we were the day that he first said it. That was a big thing around here 6 years ago. We were going to tear the Tax Code apart and we are going to have a simplified Tax Code, and we are going to have a flat tax and we are going to have all these other things. President Bush put it on the front page of the New York Times yesterday; so we are all worked up about it again. It has been circulating in this arena for a long time, and we haven't done anything about it.

Mrs. PAULL. Mr. Neal, we didn't approach this, as our report deals with fundamental tax reform. Again, we approached it as is exploring if there is a simpler way to implement the policies of the present tax law, and we felt that was our mission. Obviously, the Committee can consider fundamental tax reform. My experience has been that there isn't a consensus on fundamental tax reform as to which way to go. That is a political issue and a policy issue for the Congress, and it appears to be stymied. Then you still have the Tax Code and there are still many, many well-intended ideas going into the Tax Code. This is an opportunity for you to step back and take a broad look and see if there isn't something you can do to make life simpler for a lot of people.

Mr. NEAL. Did you say well-intended or well-intentioned?

Mrs. PAULL. Both.

Mr. NEAL. Good follow-up. Bear with me for a second. I want to raise a point with you, and you really have tried hard to answer these questions in the past, but give me a few minutes here.

You are certainly familiar with the incentive stock option alternative minimum tax problem. This, as you know, is a poster child for the unintended consequences of the complexity in the Code. On the one hand, we have a regular Tax Code telling people to keep their exercise incentive stock options for a year to get long-term capital gains; then we tax them immediately in AMT. And since thousands of people were unaware of this interaction, now people are paying all or part of their tax bill by cashing out of their pensions, taking second mortgages, and contemplating filing for bankruptcy. Now, let me just read you part of a letter that I received:

"Dear, Mr. Neal, my husband's company, quote, rewarded him with an incentive stock option for his hard work and dedication to the company. Since we exercised incentive stock options when the price was about triple the current value of the stock, we were forced to pay over $150,000 in AMT taxes, which is approximately the current value of the stock if we sold it today. If we sold the stock to pay the taxes, our real tax rate would be close to 100 percent, not the 25 percent the AMT is supposed to be. We are lucky enough to be able to take out a second mortgage on our home; however, several of our friends have not been so lucky. In this instance people conceivably could be losing their homes, vehicles, and child education funds because of the AMT and the timing of the tax at the exercise of International Organization for Standardizations (ISO)."

Is this a result of the kind of complexity in the Tax Code that we should be worried about, Mrs. Paull?

Mrs. PAULL. Yes it is. I think the incentive stock option is not the only issue that people face. I certainly heard some very unfortunate situations dealing with actual capital gains that were realized, reinvested in the stock market, and the market fell and they had to pay their tax on their capital gains for last year. But that is not to say this is an unfortunate circumstance that should be addressed at the appropriate time.

Mr. NEAL. Well, let me ask you this. Have we ever backdated pro-taxpayer changes in the Tax Code because of policy reasons or because of an injustice?

Mrs. PAULL. Well, I think the fundamental policy question for this Committee is the AMT serving the purpose for which it was designed? You are giving an example of someone for whom the AMT was not designed to cause them to pay a hardship tax on them. I don't think the AMT was designed for large families to have to pay the AMT, or people living in high-tax States, or the kinds of profiles of people that you are seeing now having to pay the AMT. This is the crux of the fundamental policy of the question. We certainly considered whether or not the AMT ought to be fixed, so to speak, rather than recommend repeal. But we couldn't see an obvious big fix to it that was appropriate, and so we made a recommendation of repeal both on the individual and on the business side.

Mr. NEAL. What was the cost, do you recall?

Mrs. PAULL. The cost was at the time we made the recommendation, about 200 billion over 10 years on the individual side. I don't know what it was on the business side. But that cost has gone up significantly since the recent tax bill, and I don't have a precise figure for you today. I know you have an estimate request in for it and we are working on it.

Mr. NEAL. Thank you very much. Finally, Mrs. Paull, I pursued this issue with some diligence, as you know --

Mrs. PAULL. Sure.

Mr. NEAL. For a considerable period of time. It seems to me that the AMT issue not only highlights the complexities that we are talking about, but it really is something that we could have done before we took up tax issues. There was room to get this done, and the Chairman has acknowledged that we have to get it done. And just to point out to the members of the two respective Subcommittees that are here today, the longer the problem goes on, not only the more complicated it becomes but the worse it gets. So it is going to be more costly to fix next year than it was this year. You are free to comment on that if you would like that.

Mrs. PAULL. That is true.

Mr. NEAL. Thank you. Thank you, Mr. Chairman.

Chairman HOUGHTON. Thanks very much. Mr. Ryan.

Mr. RYAN. Thanks, Mrs. Paull. This is my first time up here, actually, in this top tier. Nice to be here. I want to ask you one question about your capital gains recommendation and then two questions about policy decisions. I know you were restricted to the parameters of not making recommendations that would change underlying policy; but first could you describe to me your recommendation on your capital gains provision which would be a flat tax rate on a deduction from capital gains net calculation? Is that how you would do it?

Mrs. PAULL. Yes. Our recommendation on capital gains would be to go back to the way it was before the Tax Reform Act of 1986 --

Mr. RYAN. Pre-TRA.

Mrs. PAULL. Which would be to have a flat exclusion or deduction for whatever percentage the Congress chooses -- it had been various percentages over the years before the change in the law. This new notion of putting a cap, or a maximum rate, on capital gains has added tremendous complexity, and now we have even more people who are investing in the stock market. We have over 27 million people who are filing an incredibly complicated Schedule D now. So that is another proposal, honestly, that would have widespread applicability that should be attended to soon.

Mr. RYAN. And depending on where you set the level, I suppose, would you include an indexing component of that? Because if you set the level too low, it is going to be a big revenue raiser. I assume you would probably calculate that. Where would you estimate the revenue neutral to be set at; not the rate but the level?

Mrs. PAULL. We had estimated it in the past in the high 30's percent; but after this new tax bill we have to reestimate it, and we have not done that yet.

Mr. RYAN. In your model right now --

Mrs. PAULL. But indexing, I would just note, is a separate matter. One of the issues with indexing in the past has been the complexity it would add to the Tax Code.

Mr. RYAN. And I think you and I have talked about this once before, but do you believe that the revenue-maximizing rate for capital gains right now is something like 22 percent? Is that what your model projects?

Mrs. PAULL. Because we have had such a substantial tax cut this year, we would have to go back review the rate and get back to you on that. I would be happy to do that. It will have a different effect under lower tax rates.

Mr. RYAN. Right. Right. Going on to -- I think in your testimony in the beginning you talk about being restricted to the parameters of things that would not make policy changes. You talk about changing depreciation, quote, determining whether an expenditure is a capital expenditure that cannot be currently expensed, and modifying the rules relating to the depreciation of capital assets. Obviously, that is a real source of an incredible amount of complexity in the Code.

Could you expound on any ways that could make that simpler, including possible policy changes?

Mrs. PAULL. Well, we would be happy to work with you on that. I think the notion would be to try to determine a broader category of types of assets that could be currently expensed, and perhaps have a smaller number of categories of depreciable lives, so you could lump more equipment together. But when you do that, you are going to have winners and losers. Some averaging would go on, but you certainly could simplify the depreciation regimes, on a revenue-neutral basis or some other basis.

Mr. RYAN. On a revenue-neutral basis, do you believe that neutral cost recovery -- you know, the concept of bringing forward the time value of money with respect to depreciation -- can be done in a revenue-neutral way, which also makes depreciation more or less complex?

Mrs. PAULL. Well, again, I haven't looked at that proposal in years, but it had an indexing component to it. And when you have an indexing component to these kinds of proposals, you are going to end up with a much more complicated system than you start out with without the indexing. When you take into account the time value of money, you end up  accelerating deductions. And so you end up having to overcome the revenue loss from that.

Mr. RYAN. I think the last time your Committee scored that, though, that was -- that was a revenue-neutral provision; correct?

Mrs. PAULL. I am not sure. It has been a long time since I have looked at that estimate.

Mr. RYAN. Has anybody taken a look at that?

Mrs. PAULL. I think the last time we had looked at it was in early 1995, and the cost was significantly higher than the Committee wanted to get into at the time.

Mr. RYAN. Did that have indexing at the time --

Mrs. PAULL. I don't know the number off the top of my head.

Mr. RYAN. One more quick question. I know that this is not in the report either, but have you given thought to studying the multiple levels of taxation that occurs in any given dollar moving through the economy? Have you looked at analyzing the different layers of taxation that occurs moving from individual to business and back and forth through the economy, and calculated the cost of its complexity or tried to nail down exactly how that effect occurs through the Tax Code?

Mrs. PAULL. Mr. Ryan, we have not. We are much more focused on the individual provisions of the Tax Code at this point. We have never done a study like that.

Mr. RYAN. Or not even on the individual side?

Mrs. PAULL. Not that I am aware of.

Mr. RYAN. Okay. I see my time is up. No further questions.

Chairman HOUGHTON. Fine. Thanks very much, Mrs. Paull. Mrs. Thurman.

Mrs. THURMAN. Thank you, Mr. Chairman.

Mrs. Paull, first of all, let me compliment both you and your staff for trying to put this together. I can't even imagine what kind of an undertaking this had to have been to go through all of these issues. And I was particularly moved by page 109 in Volume I where you actually talk about the effects of complexity on perceived fairness of the Federal tax system. But, more importantly, at the end, where it says "cynicism among taxpayers which ultimately can lead to intentional noncompliance" is a pretty interesting statement, when particularly this Committee writes the bills and, in fact, either give or take from the taxpayer, and fairness obviously is a big issue for them. 

So in saying that, let me ask you this. In the last markup that we had in this Committee, there was quite a bit of debate on the charitable givings as to the complexity that might be incurred by the taxpayer for this particular piece of legislation. And I think it was pointed out once or twice that it really was about $3.56 when you got done with it all, for the complexity. I remember when the Committee talked about the simplification and the analysis particularly.

In any of these volumes, is there any recommendation in here at all that, since we have already acknowledged that Congress is the tax-writing body, that we should in fact put the analysis and simplification before, as part of the analysis of the tax bills before us, as versus waiting to the end, when we get it at the end of the report, after we have had the markup and before we go to the floor, in the fact that, quite frankly, what I have seen around here, once we get to the floor, very little action is taken based on what the analysis was given us?

So is there any kind of a recommendation in here that suggests that we should actually use the simplification analysis as a part of the tax-writing process?

Mrs. PAULL. We were trying to make recommendations with respect to the actual structure of the tax law in this report. We obviously are the ones who shepherd the complexity analysis. The way the process is working on tax legislation, there is not adequate time for full consideration to be given to this. The standard that we have been using in order to determine whether or not to prepare a complexity analysis is a standard that you have to have -- and this is what the statute says, too -- widespread applicability. And we are using a standard of at least 10 percent of individual taxpayers or small businesses being affected. The non-itemizer deduction, of course, did meet that standard, but there is an awful lot of provisions that do not meet that standard, but add complexity to the Tax Code.

We don't have the resources to keep on top of every single proposal, to be honest with you. So we are doing the best we can. It is a new role for us since the 1998 act, and I think that it does provide some useful information. It is mostly far along in the process; because, as you said, while I am prepared at the markup to discuss it, you don't get anything in writing until the report is filed. And at that time, we have asked the Treasury Department and the IRS to scramble and give us something for the report so it is available for floor action.

Mrs. THURMAN. Why would --

Mrs. PAULL. And then the legislation moves over into the Senate, and the Senate is, of course, adding many more provisions, and the same thing is going on. So it doesn't lend itself, considering the way the tax laws are written right now, to be part of the mix very easily, because the laws are written in such a time compressed way.

Mrs. THURMAN. But the idea of the law specifically was to in fact make sure that Congress was aware of the complexities as we wrote --

Mrs. PAULL. Right.

Mrs. THURMAN. The laws. I mean, that was the idea.

Mrs. PAULL. Right.

Mrs. THURMAN. I mean, we talked about how the IRS should be involved in this because, quite frankly, that is as much of a problem as anything because when we send it out there into, you know, kind of the IRS divisions, each one of these divisions is interpreting the law a little bit differently; so therefore some of our taxpayers are feeling like they are not getting the fair representation of the Tax Code, and I would still go back to page 109.

I think, and I would say to the Chairman, Mr. Chairman, I hope that as we go through this, that what we do up here should not be done in such a rush that we can't look at this complexity, because then all of the things that we are doing today mean nothing to us in the future. Thank you.

Chairman HOUGHTON. Is that it, Mrs. Thurman? Okay. Good. Let me understand your time. You have got to get out of here pretty soon, don't you? Have you got enough time to continue the questions?

Mrs. PAULL. I can continue taking questions.

Chairman HOUGHTON. Okay, fine. Ms. Dunn.

Ms. DUNN. Thank you, Mr. Chairman. I think this is a fascinating report, and I appreciate our having it so that we can look through it. And I am wondering, Mrs. Paull -- I will wait until you finish.

Mrs. PAULL. Sorry.

Ms. DUNN. You talked about 55 percent of tax returns currently being done by professionals. I am not sure whether that increase that you stated is due to the complexity of the Code or the continuing lack of time in a normal person's life these days. But I wonder, just off the top -- and briefly --  if you think that the numbers of professionals who are preparing tax returns are going to increase until we have a complete reform of the Tax Code.

Mrs. PAULL. Well, there is an increase both in the paid professionals as well as in the use of computer software, where you can go out and buy a computer program to help you with your tax return. We are not sure why, but there is a growing use of both by non-itemizers. I think you can only assume that, even though they have a very simple tax return, they are very intimidated by the instructions and whether or not they can get it right. As a result, more non-itemizers have to use someone else or to buy software because they are not confident they can get it right.

Ms. DUNN. They just don't want to face one more problem in their lives.

Mrs. PAULL. They don't want that letter from the IRS, I think.

Ms. DUNN. And they want to do it right and they want to do it fairly and they want to stay out of trouble.

Let me ask you a question. Something that has concerned me recently in some of the moves that we have done as we work toward making the Tax Code fairer and less of a burden on the backs of normal taxpayers, and that is the increasing gap between corporate capital gains and individual capital gains. It seems to me that at some point we have to figure we are really voting in favor of the individual and against the corporation in how we are collecting these taxes. And I am wondering if it is not going to lead to a reorganization in some businesses in order -- as REITs, Real Estate Investment Trusts, for example, in order to avoid paying the high capital gains that corporations have to pay. What do you think would be the situation? Would we be better off if we had a lower capital gains rate that applied equally to corporations and individuals?

Mrs. PAULL. Well, we are getting into not so much simplification but a policy call that needs to be made by the Committee. The issue with respect to a lower capital gains rate has been focused on individual investors, because they tend to be very sensitive to the rate at which the capital gains are taxed.

Therefore you find a lot of incentive being derived from a lower capital gains rate. With respect to corporations, the economic literature is not very supportive of a lower rate in the sense of providing an incentive because businesses are going to invest for solid business reasons and for the long haul. So the incentive part of it has been always a little bit cloudy, and that is why I think the law has developed the way it is.

On the other hand, there are certain industries, and I think you know I am familiar with an industry that has a presence in the Northwest, that a lower corporate capital gains rate could make a big difference.

Ms. DUNN. That of course is the timber industry. I appreciate your mentioning that.

Let me ask you a question. You mentioned in your testimony a recommendation for simplifying the qualifying rules for children and I am wondering if you could describe how that works, why that is a problem right now, and also perhaps at the same time why is it difficult to account for the income of minor children?

Mrs. PAULL. Let me start with the definition of qualifying children. As we discussed in our report, in order to figure out whether or not a child qualifies you for the earned income credit, the dependent care credit, the dependency exemption, head of household status, and the $500 now increasing to $1,000 child credit, you have to go through a maze. And it is literally a maze, 17 pages of instructions, all kinds of flow charts. We did an outline in our report comparing the different eligibility criteria, and it is 7 pages long and it is an outline. So it is very difficult to try to figure out if your child qualifies you for each of these things or which one you are eligible for.

And as I said, it is extremely confusing. You make it through the maze for one provision and you think you are home free on all of them. So that particular recommendation is, I would hope, at the top of the list of things that Members would be interested in pursuing. With respect to children under the age of 14, right now we have a very complicated system, called the kiddie tax, to try and determine the tax on the unearned income of those children. This provision was well-intentioned but it is extremely complicated to try to figure out how much tax your child under the age of 14 should pay. So we have a recommendation in our report to make it much simpler.

Ms. DUNN. Mr. Chairman, I do hope we can put those at the top of our list. I think it would save a lot of families a lot of time.

Chairman HOUGHTON. Well noted. Thanks very much. Mr. Pomeroy.

Mr. POMEROY. Hello, Mrs. Paull. You know I am new on this Committee and, honestly, it just drives me nuts that it seems like we can't hold two thoughts in our head at the same time. And so when this Committee was considering tax cuts, we talked about all manner of tax cuts but we didn't talk at all about tax cuts relative to simplification and Code complexity. That is like an entirely different thought that we hold at other periods of time.

I would like to show you a chart. We have tried to diagram, and it is complex to do, but we have tried to chart the phase-ins and the phase-outs of the various aspects of the recently enacted Tax Relief Act. And as you can see, some are calling it the hokey-pokey tax cut. You phase a tax cut in, you phase a tax cut out, you phase a tax cut in, you shake it all about. I just would ask you straight up, when the Tax Relief Act is completely implemented, assuming no change, will the Code be more complex than today or less complex?

Mrs. PAULL. It will be more complex. We indicated that in our testimony.

Mr. POMEROY. One feature where you have made, I think, an important recommendation relates to elimination of the alternative minimum tax. Now check that. Before I get to the AMT, I don't really understand the constraints of the Joint Tax Committee. I mean, you answered questions for some hours before this Committee as we considered the tax cut, and during the pendency of the report that came out this April I never heard you discuss simplification. Were you precluded from doing it under the direction of the Committee or how come simplification never came up?

Mrs. PAULL. Mr. Pomeroy, I am here to explain to the Committee the provisions and answer questions. Now there were a lot of questions, if I remember right, about the alternative minimum tax, the implications of that tax, of the lowering of the regular income tax rates, throwing more people on the AMT. It is going to make the system more complicated for a lot of people. Many of the provisions that were before the Committee were not phased in and sunsetted the way the final bill ended up. So that discussion really didn't occur before the Committee because the provision wasn't before the Committee.

But, last week when we were talking about the non-itemize or charitable deduction, I think we had a very good discussion about complexity. I am here to help you out in any way I can.

Mr. POMEROY. I wish this idea that you all advanced in your April report about elimination of the AMT had taken root with the Committee, and we really wrestled with it as we evaluated what to put into the package. I think we could have had a package that in the end wouldn't have looked like that; it wouldn't have required future work.

Mrs. PAULL. Unfortunately, I think you marked up the rates in March, our report came out in April after 18 months of work. We were working as hard as we could in between the Congress' legislative activity. I didn't let our staff have Easter break because of this report.

Mr. POMEROY. But one month later on Memorial Day we enacted a significantly more complicating component to the Tax Code. So it is unfortunate sometime during the month of May we did not quite catch from you what you were recommending and what you were recommending be something quite different than what we were doing. What is your relative belief to be able to achieve simplification in a relative neutral way without touching any of those tax cut phase-ins or finding other spending offsets or dipping into trust funds or using the contingency fund, if there is a contingency fund? Can you get the job done on a revenue neutral basis within the Code or does it have a revenue impact?

Mrs. PAULL. Well, some of these proposals you can probably do on a revenue neutral basis, but of course you are going to make some trade-offs because somebody's tax provision may not be as generous as it is under present law. And in order to achieve a broader simplification --

Mr. POMEROY. Could one conclude that really in order to in a meaningful way advance simplification we will need to revisit some of the aspects of the recently enacted tax legislation?

Mrs. PAULL. I would imagine what seems to be the easy target around here is the high rates.

Mr. POMEROY. Thank you. Thank you, Mrs. Paull. I yield back, Mr. Chairman.

Chairman HOUGHTON. Thank you very much. Mr. Weller.

Mr. WELLER. Thank you, Mr. Chairman. And thank you, both you and Chairman McCrery, for conducting this hearing. I often hear the folks back home in the south suburbs of Chicago, they always complain their taxes are too high but if you listen a little longer they talk about how complicated and how unfair the Tax Code is and of course the need to simplify it. And there is strong interest and support for simplifying the Tax Code, and listening to some of my colleagues and the questions they have, I would note that in the tax cut that we recently passed and the President signed into law we did move toward simplifying some key provisions, particularly in the area of marriage tax penalty, which I always considered to be one of the more glaring results of our complicated Tax Code. We need to do more.

Our friends in the Senate of course wanted to have a smaller tax cut. At the same time there were those who wanted to do more with a smaller tax cut, which forced us to phase in some provisions that we would liked to have started immediately rather than phasing them in over a period of time. You know, when it comes to the complications, and really the marriage tax penalty is an example there of -- when we were first researching the marriage tax penalty we noted that that impacting joint filers was the biggest of them all. But in analyzing the Tax Code there were about 62 other marriage tax penalties. And they, like a lot of other complications in the Code, resulted from the income eligibility and income thresholds and the so-called targeting of the tax, various tax provisions and certain groups that were selected by the President, and the Congress' legislation moved through. I was wondering, Mrs. Paull, just from a historical perspective when did the so-called targeting tax provisions and determining who would qualify, be eligible for certain -- such as the child tax credit or the student loan interest deduction -- when those income thresholds -- was that something that started in the '70s, the '80s, the '90s? When did all that begin?

Mrs. PAULL. The $500 per child credit and the student loan deduction were both enacted in 1997.

Mr. WELLER. Was that a common practice in the Tax Code well before the time that I came onto this Committee to create income thresholds determining who was eligible; is that prior --

Mrs. PAULL. It is becoming a more common thing in the recent decade.

Mr. WELLER. What was the primary reason for that? Was it just for selecting who would qualify or was it for scoring reasons because of limited revenue? What was kind of the primary motivation from your experience?

Mrs. PAULL. Sometimes it would be to provide assistance but only to certain people, and therefore they would put some income limits on it. The other reason would be driven by the budget limitations.

Mr. WELLER. You know, my friend Mr. Ryan touched on one issue which I considered a need to modernize the Tax Code, and that is the whole issue of depreciation. I really believe that technology is driving the need to change how we depreciate assets. It doesn't make sense to carry the office computer on the books for 5 years when businesses on average replace their PCs about every 14 months. It should be expensed. And there is a lot of other taxed assets, wireless and communications medical technology, software, computer components and other assets, that we should expense. From your study, as we look at ways to simplify and modernize the Tax Code, what do you consider to be the chief roadblocks to expensing technology and other assets?

Mrs. PAULL. You have selected a group of equipment or property that you would like to revisit, but there are other groups of property that people would like to revisit. Trying to come up with a uniform way to apply a new set of depreciation rules is the challenge, because while I might have sympathy towards the kinds of property you are talking about, before long we are going to have a whole long other list. That is what has happened over the last few years with respect to depreciation. As a result, the Committee had asked the Treasury Department to prepare a comprehensive study on depreciation -- this is a very technical area -- but only gave the Treasury Department a limited time period to do the study. I believe the Subcommittees are going to be looking at that study.

But I think what the challenge is, not just a couple of pieces of property, but to try to do the whole thing.

Mr. WELLER. Well, just to follow up on that, you know, I think we are all disappointed with that Treasury study. That report really said little other than we should study it some more. I think we are all very disappointed in what they produced. Obviously it is going to require a complicated effort. Could you also just see from an international competitiveness standpoint any thoughts that you have on the whole issue of depreciation as we work to modernize our Tax Code and make it more user friendly, as we look at how we can better compete in the global marketplace, how depreciation can play a role?

Mrs. PAULL. Mr. Weller, we are in the process of taking a look at this area ourselves. As I said, it is a difficult area. We have been soliciting comments. We are doing a study of how other countries treat depreciation and hope to be able to provide the Committee with some useful information on which to move forward on this. But I think again you have got to roll up your sleeves and do it in a comprehensive way.

Mr. WELLER. The information I have seen, particularly the Asians have a much more attractive treatment of assets, particularly in the area of technology, than we do. Would you agree with that?

Mrs. PAULL. I personally have not looked at it, so I would have to get back to you on it. We are, as I said, compiling this information for this Committee at the Chairman's request.

Mr. WELLER. Thank you, Mr. Chairman.

Chairman HOUGHTON. Mr. Brady, do you have a question? Mrs. Paull, thank you so much. We really appreciate your being with us.

Next I would like to call the panel, Mr. David Keating, Senior Counselor, National Taxpayers Union; Mr. Scott Moody, Senior Economist, Tax Foundation; Mr. C. Eugene Steuerle, Senior Fellow of the Urban Institute; and Mr. William Gale, Senior Fellow of the Brookings Institution.

While you are coming toward the desk, I was just reading over the income tax form for 1913. It makes me want to cry.

All right. Now let's go right ahead. Mr. Keating, would you start?

STATEMENT OF DAVID L. KEATING, SENIOR COUNSELOR, NATIONAL TAXPAYERS UNION

Mr. KEATING. Thank you, Mr. Chairman, and members of the Committee, for holding this hearing on tax complexity and for inviting me to testify. It is kind of like old age, tax complexity; it has been creeping up on us for many years and you may not notice 1  year at a time, but when you look back at how things have changed over the decades it is shocking. Sixty-five years ago the 1040 instructions, as you pointed out, were just two pages long and even when the income tax became a mass tax during World War II they were four pages long. Today taxpayers have 117 pages of instructions, triple the number in 1975 and more than double the number in 1985. This was the year before taxes were simplified.

I also note that today's news report that the IRS has apparently sent out a half a million erroneous notices about the size of the tax refund checks. So if the IRS can't get it right I am not sure we can expect the average taxpayer to either.

Now, if you need help with something more complicated than the basic 1040 instructions, I think this stack right here that you had on exhibit is a perfect example. This is a total of about 13,000 pages of other forms and instructions that some taxpayers need to file or consult when preparing their return. Even the IRS itself is complaining about the burden. The new annual report of the Taxpayer Advocate cites complexity for individuals and businesses as the number one and two most serious problems encountered by taxpayers and the root cause of the top 20.

It is no surprise, I think, that paid professionals now prepare most of the tax returns. In fact, the use of paid professionals has soared by 50 percent since 1980, and this is even more remarkable when you consider that the average home didn't have access to a computer in 1980. When you look at the tax returns prepared not only by paid professionals but by incredibly sophisticated tax return software, now 80 percent of the people are preparing returns either with computers or paid preparers.

Despite the use of more powerful computers and faster printers, tax preparation fees are on the rise, even when you adjust for inflation. That is solely due to the rising complexity. One way of tracking this trend is to look at the average fee charged by H&R Block, which fortunately is a publicly traded company and has to report how much it makes. In fact, last month the company again raised its dividend and declared a two for one stock split.

You can almost track the growth of the H&R Block stock to the increasing complexity. The average fee they charge is now up to $112 this year, which is a rise of about 50 percent after accounting for inflation. If you don't account for inflation, the increase tops 140 percent.

Now, it has been pointed out by Lindy Paull earlier, that the recent tax law changes have made things more complicated and I suspect things will get worse before they get better. But here is one interesting thing that I found while researching this area for the Subcommittees. I was looking at the Paperwork Reduction Act of 1995, which set annual goals for reduction of the paperwork. But this law by any measurement has been an abject failure, largely due to the increasing paperwork burdens generated at the IRS. Now in all fairness to the IRS, these burdens aren't the result of IRS bureaucrats mindlessly dreaming up new forms and regulations. Much of the burden increase has been due to the fact that the tax law's flood of complexity is continuing unabated.

Another thing that we examined was the IRS's own measurements of how long it takes to prepare and file tax return. Now, as Bill Gale points out in his statement, these estimates are not perfect. But I do think it gives some indication of the trends. Look at the 1040 form with the fairly common schedules of A, B, and D where taxpayers report itemized deductions, interest, and dividend income as well as capital gains. In 1988, when the IRS started tracking this information, to this year's tax return, the average paperwork burden climbed from 17 hours and 7 minutes to 27 hours and 2 minutes, an increase of 58 percent. Even the short forms are becoming more complicated under these calculations. The so-called EZ form now requires 3 hours and 53 minutes, up from 1 hour and 31 minutes, a jump of 156 percent. I point out that these estimates are certainly incorrect, but they are the best that we have.

For example, the IRS reports that taxpayers only have to spend one minute understanding the earned income credit. Well, this is a provision of the tax law that the IRS reports has an extremely high error rate.

My statement details some of the suggestions as to how Congress can move toward simplification. I note that the '98 IRS Reform and Restructuring Act required Congress to at least consider complexity before passing tax legislation. The report on complexity that accompanied this year's tax legislation was an afterthought and an embarrassment. I think the Joint Committee could have done a much better job.

Clearly tax laws as they are being drafted are being driven by numbers -- revenue loss estimates, revenue gain estimates, how the burden of the tax system is distributed, but there is nothing that requires, for example, complexity neutrality. So until you start getting driven by numbers on how complex things are, I suspect we will not see simplification.

Thank you very much.

[The prepared statement of Mr. Keating follows:]

Chairman HOUGHTON. Thank you. We have a vote. So why don't we go ahead with your statement, Mr. Moody, and then if people want to peel off, fine. If not, we will finish with that, go and have a vote and come back. So go right ahead, please.

STATEMENT OF SCOTT MOODY, SENIOR ECONOMIST, TAX FOUNDATION

Mr. MOODY. Thank you, Mr. Chairman and members of the Committee. My name is Scott Moody. I am the Senior Economist of the Tax Foundation. It is an honor for me to appear before your Committee today on behalf the Tax Foundation to discuss the cost of tax complexity on taxpayers.

The Tax Foundation's goal is to explain as precisely and as clearly as possible the current state of fiscal policy in light of established tax principles so that you, the policy makers, have the information to make informed decisions. Among these principles, a good tax system should be as simple and as stable as possible.

The Tax Foundation has worked on estimating how much it costs both individuals and businesses to read the rules, fill out the forms and do all the other things necessary to comply with the Nation's tax laws in time for the April 15th deadline. Many studies of the Tax Code find that our system, particularly the income Tax Code, is excessively complex. In 2001, individuals and businesses will spend an estimated 4.6 billion hours complying with the Federal income tax with an estimated cost of compliance of over $140 billion. This amounts to imposing a 12-cent administrative burden for every dollar that the income tax system collects.

To put this tax compliance burden into perspective, the 140 billion tax surcharge is greater than the combined revenue of Sears, Walt Disney, Microsoft, Rite Aid, McDonald's, 3Com and Radio Shack. Put another way, 4.6 billion hours per year represents a work force the equivalent of over 2.2 million people. That is more people than would reside in four congressional districts.

The Tax Foundation has also projected future compliance costs out to 2006 as shown in the chart here to my left. Over this time period compliance costs will grow by almost $30 billion from 140 billion in 2001 to 170 billion in 2006.

To illustrate the magnitude of these compliance costs the chart also compares the year-to-year cost with that of the recently enacted tax reduction. In every year between 2001 and 2006 the total tax compliance cost is greater than the tax reduction. So from the taxpayers' perspective the recent tax cut represents only a partial refund of their total yearly tax compliance burden. In fact, the cumulative compliance burden over this time period will come to almost $930 billion while the cumulative tax relief over the same period will only cover a little more than half that cost, or roughly $550 billion.

Because complying with the tax laws represents a fixed cost for many individuals, it seems likely that lower income individuals would bear a greater relative tax burden than higher income individuals. In previous research, the Tax Foundation has found this to be true of corporations. New research by the Tax Foundation finds that the same is also true for individuals. As you can see in the second chart, the compliance costs of individuals is quite regressive. As a percent of adjusted gross income, taxpayers with AGI of less than $20,000 are hit the hardest. They pay a compliance tax surcharge of over 4 percent of their income, because compliance costs are essentially a fixed cost.

The compliance tax surcharge falls as income increases. For taxpayers with $40,000 to $75,000 in income their surcharge consumes a much lower 1 percent. The surcharge drops to two-tenths of a percent for taxpayers with incomes over $200,000.

As in chart 1, chart 2 compares the distribution of the individuals' compliance costs to the distribution of the recent tax reduction. Chart 2 illustrates that a very effective way to provide tax relief for lower income taxpayers is via tax simplification. In fact, nearly half of the tax surcharge savings resulting from tax simplification would go to taxpayers with less than $40,000 in income. For example, Form 1040, which accounts for almost half of the tax compliance burden on individuals, takes nearly 13 hours to complete. Every hour shaved off the 1040 would save taxpayers over $2 billion a year. A mere 3-hour savings would net a 10-year $60 billion windfall for taxpayers at zero cost to the U.S. treasury.

In addition to the tax surcharge itself, the tax complexity due to the size and instability of the Tax Code creates two other economic costs. I don't measure these costs in my testimony, but they are significant enough to keep in mind. One is the overhead cost associated with the economically sterile exercise of tax planning, compliance and litigation. The second cost results from the economic opportunities that are foregone because of taxpayer uncertainty in the Tax Code.

In conclusion, the benefits of reducing the tax complexity burden would dramatically benefit lower income taxpayers, since they bear a disproportionate amount of the burden. Overall, though, taxpayers in all income brackets would benefit from a tax reduction via tax simplification. This could be done under a comprehensive revision of the Tax Code guided by established tax principles such as those supported by the Tax Foundation.

Thank you very much.

[The prepared statement of Mr. Moody follows:]

Chairman HOUGHTON. Thank you very much, Mr. Moody. Mr. Steuerle and Mr. Gale, we just have to suspend for a moment. We will be back as soon as this vote is over. Thank you.

[Recess.]

Chairman HOUGHTON. Okay. Gentlemen, thank you very much for your patience. We would like to continue the hearing. Mr. Steuerle, if you would like to give your testimony, we would appreciate it.

STATEMENT OF C. EUGENE STEUERLE, SENIOR FELLOW, URBAN INSTITUTE

Mr. STEUERLE. Thank you, Mr. Chairman. It is an honor for me to be here today, in part because earlier in my career I worked extensively with this Subcommittee on tax simplification in the late '70s. So the issue is not a new one. But I am always honored to work with the Subcommittee. Its work is always well respected, although often little recognized as well.

Ever the bridesmaid, simplification seems never to get the attention it deserves no matter which political party is in power. It would be a mistake, however, to fault elected officials for pursuing broader agendas. Government does not exist to simplify itself. It is entirely appropriate for policy to be the handmaiden to broader budget and economic policy. Nonetheless, almost everyone would agree that simplicity has been given far too little weight in the legislative process, leading to substantial waste and taxpayer cynicism.

In my oral remarks I will focus only on certain parts of my written testimony: the importance of reforming processes if simplification is to be attained, and how simplification may offer an ideal way to give direction to what otherwise could be a rather chaotic tax process over the coming months and years.

While some complexity in the tax law is inevitable at its heart, excessive complexity is a failure of process. This process failure could be mitigated by the adoption of certain executive branch and congressional procedures that would grant simplicity a higher priority. I give several examples in my testimony: Upgrading the biennial report for the study of the overall state of the Federal tax system and publishing it annually much as the Congressional Budget Office used to publish potential expenditure cuts and tax increases to deal with the deficit problem; improving the requirement under the Government Performance and Results Act of 1993 for Treasury to apply a performance plan to the many programs listed in the tax expenditure budget; encouraging IRS to make much greater effort to analyze the programs under its control and take greater responsibility for reporting on their success or failure; giving simplification greater weight in the legislative process by continually providing some witnesses who focus solely on simplification; requiring IRS to produce mock tax forms before passage of final legislation; and give higher status to the Joint Committee's tax complexity analysis.

Despite the trend towards increased complexity, significant tax simplification has a good chance of being passed some time in the near future. I remain an optimist. The first Secretary of the Treasury, Alexander Hamilton, had it right. "The truth is," he asserted, "in human affairs there is no good, pure and unmixed; every advantage has two sides." So, let me argue, does every disadvantage. The seed that could sprout into major simplification is in one of the worst failures of the recent legislation: the extraordinary growth scheduled in the number of taxpayers subject to the AMT. But follow the scenario out a little bit. As millions of taxpayers get added to the AMT rolls every year, public ire will be aroused over perceived unfair treatment. Americans do not take kindly to the notion that their dependents or forced payments are taxes to State and local governments or tax shelters. Accordingly, something will be done to fix the AMT despite all the difficulty.

At issue, though, is what type of bill will contain it. A large AMT fix by itself would mainly lower taxes for those with incomes still well above the average. Previous Presidents and Congress have shied away from any bill that could cater only to higher income groups. Any politically feasible AMT fix therefore probably also has to do something for taxpayers in other income classes. But AMT reform isn't a natural fit, say, with offering deductions for the middle class. The most logical way to help those less well off at the same time would be through across-the-board simplification.

Moreover, there is another issue at stake: gaining control of the agenda. There are going to be a lot of tax proposals that this Subcommittee and the fuller Committee are going to have to deal with in the near future. Simplification offers some chance of channeling this momentum, limiting the amount of special interest legislation, and keeping the focus on the attainment of a more efficient tax system. If Hamilton could see a national blessing in a national debt, then surely some modern President, Secretary of the Treasury or congressional leader will recognize that rising tax complexity itself presents an opportunity to advance tax simplification legislation before taxpayers rebel.

In sum, process reforms can accord simplicity more weight in the legislative process, in Treasury analysis and in IRS research. And the mandate for AMT relief could catalyze a much broader attack on the complexity of the tax system for all taxpayers, from poor to rich. As a practical matter simplification offers the President and congressional leaders a focus that could channel what could otherwise become a more chaotic tax policy process into an effort producing significant efficiency gains for the American economy. Thank you.

[The prepared statement of Mr. Steuerle follows:]

Chairman HOUGHTON. Thank you very much. Mr. Gale.

STATEMENT OF WILLIAM G. GALE, JOSEPH A. PECHMAN FELLOW, BROOKINGS INSTITUTION

Mr. GALE. Thank you very much, Mr. Chairman. I appreciate the opportunity to be here this afternoon, and I want to emphasize that I think the attention given to tax simplification is a welcome development.

I would like to structure my comments around what I view as the fundamental paradox of tax simplification, and that is, on the one hand, probably the only single thing about tax policy that everyone agrees on is that the tax system is too complicated. On the other hand, every year the tax system gets more complicated rather than less complicated. I think this paradox needs to be kept in mind in all tax simplification discussions, and I think it motivates several questions and answers regarding why taxes are complex and how we might make taxes simpler.

So let's start with the first question. If everyone thinks taxes should be simpler, why are taxes so complicated? Gene has pointed to process reasons. I want to point to policy reasons, and that is taxes are complicated because policy makers run into trade-offs between simplifying taxes and other policy goals.

For example, the simplest tax would be an equal lump sum tax on each person, a single dollar amount per year. We don't have a tax like that and no other country has a tax like that. When England had a tax like that it created riots and it was repealed. Rather, all countries tailor tax burdens to the characteristics of individual taxpayers. Why? Because it is thought to be fairer. Well, it may in fact make taxes more fair, but it also makes them more complicated. It requires tracing consumption or income from the business sector to the individual, it requires reporting and documenting individual characteristics such as marital status, number of dependents, age, the composition of expenditures, the composition of income, et  cetera. But if we want to impose taxes on an individual basis, we are stuck with some additional complexity compared to imposing an equal lump sum tax per person. So in essence policy outcomes balance one goal again the other and simplicity often comes up short in those outcomes.

This leads me to two implications for thinking about tax complexity. The first is that the fundamental question is not how complicated the tax system is. Rather the question is are we getting good value for the complications that are out there. That is, some complications are probably worth the cost and some complications aren't. In that regard you might think of tax complexity as like air pollution. It is an unfortunate, undesirable consequence of other things that we happen to like as a society. Just as we couldn't get rid of all pollution because that would mean we couldn't produce many of the things we would actually like, it is also not realistic to think that we can get rid of all tax complications. Nevertheless, just as we look for the most efficient ways to make the world cleaner, we should also look for the most efficient or fair way to simplify taxes.

The other issue to think about is that the factors that generate complicated tax systems, which are these policy trade-offs and politics and taxpayers' desire to cut their own taxes, are not features of specific tax policies per se. If we went to a flat tax or sales tax or any other system, those features would be part of the landscape and therefore the scope for simplification I think in a realistic sense is limited by these policy trade-offs. I would caution you to be very skeptical of claims that some other tax system which has never existed, never been tried anywhere in the world, would actually turn out to be very simple. Unless you can repeal politics at the same time you repeal the Tax Code, you are likely to end up with a very complicated tax system in one way or another.

My testimony outlines the various ways that the recent tax bill makes taxes more complicated. I won't harp on that here except to mention that the new tax law also made it more difficult to simplify taxes in the coming years precisely because it uses so much of the revenue from the projected budget surpluses for other purposes. So I view the recent Tax Act as not just a missed opportunity to simplify the tax system but a tax law that actually made the system worse and made the prospects for simplifying even more difficult.

As you think about simplifying the tax system I would suggest two principles: One is to make fewer distinctions across economic activities and personal characteristics. This would suggest that taxes be imposed on a broad base at relatively low rates that don't vary by income source or expenditure type or person type. It should be embodied in the rate structure and the tax base, not in the design of specific provisions. The other principle I think, especially in light of the recent Tax Act, is that revenue neutral tax simplification not only can but should now be undertaken, and I would add that simplification that is revenue neutral and distributionally neutral would likely be the most compelling.

In terms of specific reforms, my proposal outlines a variety of them. They are not that different from the JCT proposals. I do want to emphasize the possibility that filing and record keeping could be enhanced by consideration of return free tax systems and/or by significantly raising the standard deduction. The last thing I would like to toss out on a more speculative note is that, for a lot of these simplification ideas, we just don't know if they work or not. If Congress would take, say, one-half of 1 percent of all tax cuts and devote those revenues to tax simplification experiments to find out which proposals work, which proposals don't, how to design a provision to make it simpler, I think that could actually reap very large policy dividends.

Thank you very much.

[The prepared statement of Mr. Gale follows:]

Chairman HOUGHTON. All right. Well, thanks very much, Mr. Gale. Let me start off though, if I could, a minute. And I don't know how the others in the panel feel about this, but you know I think when you get into form and structure and basic concepts, I think we are dealing with something which is very, very difficult. When we are even dealing with policy, that is difficult. What I am thinking about is just the mechanics, just some of the detailed mechanics of simplification and redundancy and things like that. And the reason I say that is that if you know, 1 to 10, if 10 is the overall tax structure and 1 is the individual return, if we can just do a few things, as I like to say, waiting for the bank heist, why can't we knock off a couple of gas stations. And if we can do something simple it would be far better because I have a feeling that if you look back in years past nothing has ever gotten done. There have been so many different tax proposals, so many different suggestions, and we never have gotten off the dime here.

It would seem to me if we could do two things, and I am just talking for myself, if we could look at those specific things which some of you have mentioned in your testimony, so we could do them tomorrow, I mean, I don't mean next week, I mean tomorrow, that are not subject to legislation but as sort of an administrative fix, then also we can begin to make Congress aware of the fact that they are really the culprit, because Congress does these things. And as a Member, I criticized President Clinton for this and it was unfair of me because we do the same thing. I can remember him giving one of his State of the Union speeches, saying we have got to get rid of tax credits, they are a curse on the tax system, and next thing that came up there were 28 different tax credits. We do the same thing ourselves. We never think of the cost-benefit. We never think of this.

So if there could be a beginning of the recognition of our part in this whole puzzle but also get together certain specifics so at the end of this year we can look back and say we did something, it wasn't very much but it was a start. That is what I am looking for. I don't know whether you gentlemen have any comment on that or not?

Mr. STEUERLE. I agree with you, Mr. Chairman. I think often the perfect is the enemy of the good. It seems to me, as you are arguing and as Mr. Gale emphasized this in his testimony, there are a lot of the tax laws that are inevitably going to be complex. It is not just policy, it is also that taxes are based on transactions, that people have to record transactions. When one promises the world simplicity and can't deliver it, then at least politically one is worse off almost than doing nothing; whereas if one promises a modest amount of improvement and delivers on it, I think that becomes quite believable.

I do think the types of simplifications that the Joint Committee put forward are exactly of that latter. I think they are quite doable. I do think also, however, as I emphasized, I think there are two processes that you have to think about. One is the process with respect to legislation that is already passed. Here I think one would emphasize things like the Joint Committee report. Mrs. Thurman emphasized this, I think, in her questions to Lindy Paull: you think about the processes that we undergo when we pass due legislation. Before we pass a bill can't we just put one person at the table whose only job is to report on simplification? It is not that simplification would always win out, but it would be given great weight in the process.

Have the IRS there, force them to produce any tax form they can in time before you pass the bill. I can tell you a lot of enactments would not be made if you actually just saw the tax form. I actually did this once as Deputy Assistant Secretary of the Treasury. It changed some legislation at the last minute. So first is process reform with respect to current legislation.

Second, past legislation is harder. If you act as in the last tax bill, and you can't create any losers, it is very hard to get simplicity because you are always patching on to an existing system. And patches usually add complexity. I give an example in my testimony of what happened with the child credit, the refundable child credit. If there was going to be refundability, everybody, left and right, conservative and liberal, agreed that the simpler way to do it would have been just to phase out the earned income credit more slowly. But for a variety of political reasons that wasn't on the table. So you got into this world of having to do it through the refundable child credit. And then there was a particular set of potential losers who were families with three or more children. We couldn't let them lose, so we had to keep their refundable credit, too. We ended up with this maze.

Chairman HOUGHTON. Well, listen, thank you very much. My time is really up. I would like to ask Mr. Coyne.

Mr. COYNE. Thank you, Mr. Chairman. Mr. Gale, are you familiar with the attempts that were made, in fact included in the recent tax bill, tax legislation, relative to simplifying the earned income tax credit provision?

Mr. GALE. Yes, in terms of simplifying the income definitions and the phase-outs, yes.

Mr. COYNE. What are your thoughts on that and I wonder if could you tell us what more you think needs to be done in the area of the earned income tax simplification?

Mr. GALE. I think that the two bright spots in the tax bill for simplification were first the earned income tax credit (EITC), simplifying and clarifying the income definition in terms of the various parts of the program and, second, the repeal of the personal exemption phase-outs and the limitations on itemized deductions. Those two bright spots of course are swamped by the sunset provisions and the phase-in and phase-out provisions which introduce an enormous amount of complexity or uncertainty in tax planning. I think the EITC itself is not tremendously complex right now. I think there is additional potential to simplify tax issues for low income households by combining the earned income credit, the child credit and the personal exemptions. Particularly if you have the same definition of a qualifying child for all three programs, there is no reason why when someone has stated their income and their number of kids that they shouldn't be able to kick right into all three of those programs at the same time without having to do separate worksheets. In the grand scheme of things that might not be the most important issue, but as the Chairman mentioned, we need to address these issues one at a time, and that is probably a very good place to start.

Mr. COYNE. Did you include that in your written testimony?

Mr. GALE. There is a reference to it, yes.

Mr. COYNE. We could get you to elaborate on that.

Mr. GALE. Certainly.

Mr. COYNE. Thank you.

Chairman HOUGHTON. Mr. McNulty.

Mr. MCNULTY. No questions.

Chairman HOUGHTON. Mr. Brady.

Mr. BRADY. Just briefly, Mr. Chairman. Like you, I have been excited and looking forward to this hearing. Simplification is such a key issue and of course like most things in life, as soon as you get excited about a hearing your schedule gobbles up all your time and you miss the testimony. I don't know if that ever happens to you, but I apologize for not being here.

I think one of the debates we have been having is whether we spend our time working to improve and simplify the Tax Code we have today, attacking the recommendations like our Chairman has spoken about or go after fundamental reform. I am convinced we have to do both, that we have to have two tracks, improve the product we have today in whatever area we can, as soon as possible, maybe using the criteria that the Joint Committee set out today or your own criteria. And I really am convinced that as long as we have an income-based and the income interpreted-based tax system we are going to have these problems. And at some point I think unless we have a sunset date for this Tax Code, that our grandchildren will be sitting here debating ways to simplify the current Tax Code. My experience is unless we set a date to sunset the Tax Code, whether it is 4 or 6 or even 10  years from now, my experience is if we set the deadline for midnight we will start working on it about 11:00. We will likely get done at 2:00, maybe later in the morning. But we do end up finishing that job. And I am convinced without some date certain that we have to really sit down, debate, work through this Tax Code in some time where we have a good thoughtful debate on it, perhaps removed from the immediacy of this election or this election cycle, that without both those tracks working that we will end up with very little in the end run.

Any comments from the panel?

Mr. GALE. Sure, just a couple. I think we would all like to see a simpler tax system. Personally I am concerned about proposals to sunset the Tax Code. I understand that saying we will make a decision by date X is a good model for a business  with a hierarchal framework but I think a Congress is sort of 535 businesses all meeting at the same time, all with different objectives. And it is not obvious to me that if we sunset the Tax Code at a certain date that we would actually get a new Tax Code. There is no procedural guarantee that we could even come up with a new Tax Code. I think the risks inherent in that process are very large.

Mr. BRADY. Let me ask you this. Do you think we will get a Tax Code without a sense of urgency, a timetable in which to move? What would possibly motivate us to do that since there has not been an example of us doing that effectively to date?

Mr. GALE. Well, the best example I could put forward is the Tax Reform Act of 1986. It may be that we never do as much base broadening and rate reduction and simplifying again as we did then. But as Mr. Steuerle mentioned, I don't think we should let the perfect be the enemy of the good. I think that would be an excellent model to build on. And if sunsetting the Code would get us to a new Code and that new Code was guaranteed to be simpler, then sure, I would be in favor of it. But I think what sunsetting the Code does is put every single tax provision in the Code in play and essentially tells lobbyists now is the time to go out there and defend your tax provision. I think it would concentrate efforts to keep the Tax Code complicated rather than enhance efforts to simplify the system.

Mr. KEATING. Well, I think I would disagree here. I agree with you, Congressman. I think that it does make sense to take steps that have been identified now and move forward. The Joint Committee has suggested many useful proposals to simplify the tax laws, and I think more can be done as far as process. The fact that the Joint Committee had these recommendations even as late as April 27, I think was the exact date, a couple of very useful provisions made its way into the tax legislation. I think that is in part because they were already suggested and vetted by the Joint Committee on Taxation.

To the extent we have additional recommendations and we can induce competition between the various bureaucratic agencies, I think that might be useful.

One of the more revealing experiences that I had on the National Commission on Restructuring the Internal Revenue Service, with Mr. Coyne and Mr. Portman, was that whenever we had a hearing or an initiative come up before the Commission, wouldn't you know, the Treasury Department, that day or the day before, announced some new initiative to reform and restructure the IRS. I believe the mere existence of our Commission helped the Treasury and the IRS think harder about how they can do a better job.

The Joint Committee on Taxation for years has been tasked with the job of suggesting simplifications, but until this report came out, I don't remember anything quite so substantive from the Joint Committee.

A quadrennial commission, as I suggested in the testimony and as the National Commission on Restructuring the IRS has suggested, would bring private-sector input of people who would be appointed by the President or the Congress. Such a panel might help the Treasury Department and the Joint Committee stay on its toes and offer additional suggestions for simplification.

These are interim steps.

I do think that a sunseting of the Tax Code could work. I am not saying it would work. Of course, there are no guarantees, but the fact is that if Congress, on a bipartisan basis, approved legislation committing to fundamental overhaul of the Tax Code, that is a very important political statement. It sets into motion the machinery at the Treasury Department and the Joint Tax Committee and elsewhere to produce recommendations for simplification and fundamental overhaul.

It could prove useful, but I think what is most likely to happen if we are to see fundamental reform, it will be led from the White House, whoever is President. We saw that in the mid-1980s, and I think we may see it again sometime soon.

Mr. BRADY. Thank you. Thank you, Mr. Chairman.

Chairman HOUGHTON. Thanks very much. Mrs. Thurman.

Mrs. THURMAN. Thank you, Mr. Chairman.

Mr. Brady, I would tell you that I actually had an experience in the State of Florida where we actually sunsetted the codes, and I can tell you that by the time we came back, because we had about a year to look at it, we ended up with basically the same Tax Code we started with and nothing really took place.

Mr. BRADY. Shame on you.

Mrs. THURMAN. Well, no, it wasn't shame on me because, quite frankly, we tried to make some suggestions that were based on what we thought was sound policy. And in fact, it was all those other people coming back to the legislature saying, oh, no, don't touch us, we are not the culprit, go find somebody else to touch. So, you know, the politics do play in the policy.

Mr. Keating, let me ask you a question because it was alluded to in one of the answers here to one of the questions that I asked. Would you believe, then, that -- and I think the Congress did try to do something correctly on simplification with the analysis. Other than the fact it is at the end instead of the beginning, would you believe that that would be a good place to start?

Mr. KEATING. You mean the analysis --

Mrs. THURMAN. I mean at the beginning, as we go through the changes, as versus at the end in the Committee report.

Mr. KEATING. Yes, I think so. If you look at the tax complexity analysis on this most recently passed tax legislation, I said it was a disappointment and an embarrassment. It was amazing to me that the analysis itself didn't even point out the positive things that were in the bill. There was no mention of the repeal of the phase-out of the personal exemption and itemized deductions. I don't think they talked much about the earned income tax credit simplification. So clearly it was the very last thing. It was put in there only because someone had to write something. I very much doubt it had any impact at all.

Mrs. THURMAN. The other thing --

Mr. KEATING. I think the numbers -- perhaps there is something that could be done with the numbers. The joint tax is required to score --

Chairman HOUGHTON. Mrs. Thurman, did you want to say something?

Mr. KEATING. Year by year, but there is no requirement that they score; and I don't know how you would do it exactly, but we need something that would analyze how complexity would change with this legislation. So much of this is number driven to meet these targets, and if there are no targets for simplification, nothing to meet, it tends to take a back seat.

Mrs. THURMAN. And I would say to you, I think that while we talked about policy and the complexity over the last couple of years, or the last several years, has been driven from Congress -- and I do believe that that is very true -- my outcome is different, though. I think it has been a numbers game. I think when some group has wanted something to be done, we have gone into the Tax Code, we have taken something out of the Tax Code or added something into the Tax Code to meet a number, to pay for a program, to do something different as versus just, you know, changing policy up here, I think. And I think that has caused part of the complexity.

Which goes to the second part of this, then; and that is -- and I think you said this, Mr. Keating, and I think that we got this report on April 27. My guess is that there could have been some conversations before we did the tax bill that was signed just before Memorial Day; that we in fact could have picked up some of those issues and used them in this recent tax bill signed into law that would have helped us with the complexity and, I think, would have straightened out many of the issues out there.

And if anybody would like to comment on that because, quite frankly, the second question to that is in reviewing this -- and one of the questions I didn't get to ask Mrs. Paull was on the money. We are not talking about just walking in and changing some policy and walking away. You could be talking about some serious dollars that would have to be laid on the table to change the complexity of these tax codes.

Anybody want to give me an idea of what you think some of the costs would be? Have you done any of that or -- you know, you don't have to answer. I mean, I kind of know the answer about the end of it; you know, that we should have looked at it in the tax bill in the beginning, but --

Mr. KEATING. Well, I think the fact that it came so late in the process limited the report's usefulness. And Gene talked earlier in his statement about the need to institutionalize these recommendations. When we had these huge budget deficits, each year the Congressional Budget Office was tasked with the job of coming up with examples of spending cuts and tax increases. I think if the Committee and the Finance Committee tasked the Joint Committee with coming up each year with ways to simplify the tax laws -- and hopefully the report is done by December 31 so when the Congress starts its new session, it can use those ideas when the inevitable tax legislation comes up.

Mrs. THURMAN. But I need to say this, because I think some of those spending cuts you are talking about could have been done if we had used the surplus more wisely in paying down the debt. Because part of -- it is not just spending on appropriations bills. It has been spending on the interest that we have had to pay on the deficit which has also caused us a huge problem that we can't cut.

Mr. STEUERLE. Mrs. Thurman, I totally agree with you on the importance of process reform, but I do think there is a certain extent to which Congress sets up rules. A lot of them are implicit; some of them are explicit. Sometimes the rule is "we have got 500 billion over 5 years." It is amazing how the entire process will revolve around that, and if $2 changes are made here then $2 has to come in over there.

Or they will set up a rule like the Senate did.

They had the Byrd rule which led to sunsetting the bill in the 11th year. It is amazing how rules do affect process. Suppose a rule -- I am not saying this is the right rule -- said after we pass legislation, we are going to take a day aside and only hear simplification testimony. I am not saying I would always want to do that, but if that was the rule and you knew you had to go through with it, then would you go through it? If you are not sure you have to go through it, you probably won't. The poor chairperson of the Subcommittee or Committee is trying to get all the votes together and is probably wracking his brain. The Joint Committee is working through the night. Nobody wants something added to their plate unless they know it has to be there.

So I think there are things that have to institutionalize a simplification process. As I mentioned, the Congressional Budget Office's (CBO) report on deficit reduction options, because it was constantly being there and hammered away at people, helped a lot. And I think raising the status of this Joint Committee report, putting a lot more in and getting outside help, would help a lot.

Finally, I think to do all this is going to require some level of additional resources. The Joint Committee and Treasury staffs are overworked, especially at tax bill-writing time; so there is a resource issue that has to be addressed at the same time.

Mrs. THURMAN. And I would say to you that this Chairman has actually met with some of the IRS people and the Commission in trying to figure out how we best can do that. So I give him a lot of credit for that, along with Mr. Coyne.

Chairman HOUGHTON. Thanks very much, Mrs. Thurman. Look, you know, big issue, big problem. And I just hope we don't stub our toe or look out the window on December 31 and think we have done a good job when we haven't.

I think we are really going to get into this, and I appreciate very much your testimony. We will continue it, and any other suggestions, please let us know. The hearing is complete.  

[Whereupon, at 4:36 p.m., the hearing was adjourned.]
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