Good morning. We meet today to continue our dialogue about what I hope will result in a bipartisan path forward to reform our federal income tax system. In recent weeks, much of the discussion about tax reform has centered on the corporate side, especially after Japan lowered its corporate rate on April 1, leaving America with the dubious distinction of having the highest corporate tax rate in the industrialized world.
It is simply unacceptable that American employers face such an undue burden at a time when we desperately need them to get the economy growing and get almost 13 million unemployed Americans back to work. But, as Tax Filing Day reminds us, only comprehensive tax reform ensures that we address the needs of American families and all job creators, regardless of how they are structured.
As such, we must consider the individual side of the tax code if we are to transform today’s broken code from one that impedes, to one that improves, prospects for job creation. Last year, the IRS processed 142 million tax returns. They also received 10.5 million extension forms, at least in part due to the complex, costly and time consuming nature of our tax code.
With nearly 4,500 changes in the last decade – 579 of them in 2010 alone – the code is too complex. And this complexity has led to ever-increasing costs of complying with the federal tax code. According to the National Taxpayer Advocate, in 2008, taxpayers spent $163 billion complying with the individual and corporate income tax rules.
American families are not only spending more money complying with the tax code, but they are also spending more time. Navigating through the tangled web of tax rules has resulted in taxpayers spending over 6 billion hours annually to comply with the code.
Whether it is the compliance and administrative burdens, the impact of temporary and expiring tax provisions, or the effect of convoluted rules on financial planning decisions, today’s tax code is not just hampering employers, but it is hampering the ability of individuals and families to plan their finances with reasonable certainty.
Turning to the topic of today’s hearing –tax incentives for retirement saving – it quickly becomes clear why we are taking the time to lay the foundation for comprehensive tax reform by gathering input from the experts.
As many Americans work to meet the tax filing deadline, today’s testimony reinforces the wide popularity of these savings vehicles. The overwhelming majority of American workers with access to a workplace retirement plan are participating in that plan. According to the Bureau of Labor Statistics, 78 percent of full time workers have access to a workplace retirement plan, and 84 percent of those workers participate in the plan (meaning 66 percent of all full-time workers participate).
The plans benefit taxpayers of all income levels and from all walks of life. In 2010, over 70 percent of workers earning $30,000 to $50,000 participated in an employer-sponsored retirement plan, if such a plan was available to them, according to data from the Employee Benefit Research Institute. Similarly, IRS data indicates that 38 percent of those participating in defined contribution plans make less than $50,000 a year, while almost three-quarters make less than $100,000 annually.
The proliferation of tax-favored retirement accounts has occurred as specific needs have led Congress to create new types of plans with different rules. Some, however, have questioned whether the large number of plans with different rules and eligibility criteria leads to confusion, reducing the effectiveness of the incentives in increasing retirement savings.
In addition, many commentators have offered ideas for increasing participation in retirement plans and better targeting the incentives. These ideas range from simplification and consolidation of existing plans and accounts, to changing the default rules governing whether an employee participates, to additional incentives such as the Saver’s Credit.
As the Committee continues its work toward comprehensive tax reform, it is important to keep in mind that these savings vehicles affect average people who depend on these resources for their retirement. We must ensure that we do not inadvertently take steps that result in unintended consequences that could threaten the retirement security of ordinary families.
As this Committee considers tax reform, I believe there are three important principles to keep in mind when evaluating tax-favored retirement vehicles: (1) simplification; (2) increased participation, particularly by low- and middle-income taxpayers; and (3) whether the tax benefits are effective and properly targeted.
Regarding the first of these principles, in August 2010, the President’s Economic Recovery Advisory Board (also known as the Volcker Commission) presented options for simplifying savings and retirement incentives in their report on Tax Reform Options. These options are worthy of consideration and discussion. We also have an expert panel of witnesses before us today that will evaluate how existing tax rules measure up to these three criteria.
I’d like to emphasize that today’s hearing isn’t about drawing conclusions, but it is about making sure that as Congress approaches comprehensive tax reform that we do so well-armed with information. Washington has spent too much time in previous years acting first and asking later. That has proven to be the wrong approach. America’s families and job creators deserve better than a “trial and error” approach to crafting policy. This is our opportunity to gather input and get the facts. I look forward to the discussion.