Senate Finance on Simplification in Tax Reform
Senate Committee on Finance
“Tax Complexity, Compliance, and Administration:
The Merits of Simplification in Tax Reform”
Tuesday, March 10, 2015
Key Topics & Takeaways
- Inversions:Sen. Orrin Hatch (R-Utah) asked Desai for his views on inversions. Desai responded that there is a “fundamental mismatch in international taxpayers” and that “very sophisticated taxpayers” are engaged in inversions. Desai said “we may see something much more destructive like multinationals splitting so they can be acquired under the new [IRS] regulation.”
- Senate Finance Committee Minority Staff Report – March 2015: Sen. Ron Wyden (D-Ore.) referred to the Senate Finance Minority Staff report released last week, “How Tax Pros Make the Code Less Fair and Efficient: Several New Strategies and Solutions,” and said that it “looks at some of the most offensive parts of the tax code.” He asked how much this tax compliance and complexity effectively diminishes the code. Fogg responded that complexity could be reduced by making the rates the same for both high and low income earners. Bartlett said the big issue is that the tax code “chooses when and if to realize that income.” Desai agreed with Wyden and said it is important to look into these issues of complexity, pointing out that capital gains is the “manifestation of this complexity” and the “lion’s share of it is coming from the realization” principle.
- Role of the Administration: Sen. Dean Heller (R-Nev.) asked why it is so important that the Administration play a role in tax reform. Bartlett said Treasury must “keep an eye on everything” because it is “easy to make mistakes” that could create unintended consequences. Bartlett contended that Congress cannot move without the Administration.
Witness
- Carol Markman, Certified Public Accountant and Tax Director, EP Caine & Associates CPA, LLC, Westbury, NY
- Mihir A. Desai, Mizuho Financial Group Professor of Finance & Professor of Law, Harvard University, Cambridge, MA
- Bruce Bartlett, Former Deputy Assistant Secretary for Economic Policy, 1988 – 1993, United States Department of the Treasury, Great Falls, VA
- T. Keith Fogg, Professor of Law and Director, Villanova University School of Law Federal Tax Clinic, Villanova, PA
Opening Remarks
In his opening statement, Chairman Orrin Hatch (R-Utah) explained that complexity makes it more difficult and more expensive for taxpayers to comply with the law. He acknowledged that simplification is “not without trade-offs” and suggested a “tension between fairness and simplicity.” Hatch stated that tax reform will not be easy, but that this should not deter the Committee’s efforts.
In his opening statement, Ranking Member Ron Wyden (D-Ore.) said the “overly complicated tax code divides tax payers into very different worlds.” He added that the “lucky few” who can afford to hire tax professionals “game the system.” Next, Wyden highlighted that each provision can have its own set of rules and definitions. For example, Wyden explained that “small business is defined nearly 40 different ways in the tax code.”
In her testimony, Carol Markman, Certified Public Accountant and Tax Director at EP Caine & Associates, said allowing taxpayers to take their entire minimum redistribution creates simplicity without a reduction in tax revenue. Next, Markman suggested that an early withdrawal penalty on retirement accounts be made uniform across all plans. She also recommended a separate phase-out for head of household filers.
In his testimony, Dr. Mihir A. Desai, Mizuho Financial Group Professor of Finance and Profess of Law at Harvard University, said the complexity in the tax code arises from the behavior of tax planners. He described this pattern as a “death spiral” of planning, regulation, and complexity. In his view, the alternative minimum tax (AMT) on foreign source income is the latest example of complexity. Desai suggested that the complexity can be “managed like software” and “the code must be mapped.” He said it is important to begin the process of simplifying administrative complexity and pointed to three factors that most contribute to complexity: 1) the consumption tax; 2) reliance on realization events; and 3) reluctance to embrace solutions. Desai concluded that structural reforms are needed to address this complexity in the code.
In his testimony, Bruce Bartlett, Former Deputy Assistant Secretary for Economic Policy at the Department of Treasury, said there are many sources of complexity including the issues facing small businesses when they have to keep track of their expenses. Bartlett described this challenge of determining income as a growing problem. He also acknowledged that the simplicity of the “flat tax” is grossly overestimated. Bartlett said he fears that Washington is “constantly putting off doing what’s doable on a bipartisan basis because of tax reform.”
In his testimony, T. Keith Fogg, Professor of Law and Director at Villanova University School of Law Federal Tax Clinic, said he advocates on behalf of low income taxpayers and how to make the system simpler for them. Fogg said the Earned Income Tax Credit is difficult to navigate. He also suggested that the Internal Revenue Service (IRS) provide “walk-in assistance” because people want the personal touch.
Question and Answer
PEP and Pease
Hatch explained that many people look like they have a higher income, but live in parts of the country with higher costs of living. He asked Markman if it is best to eliminate complex rules and deductions for state and local income taxes. Markman responded that that “PEP and Pease” makes people very angry because they typically lose all of their deductions and people with large numbers of children are burdened. She thinks clients would prefer to see a rate that is clear and transparent rather than a “self-hidden rate.” In this way, she assured that “simplification is worthy of consideration.”
Hatch asked Desai for his views on inversions. Desai responded that there is a “fundamental mismatch in international taxpayers” and that “very sophisticated taxpayers” are engaged in inversions. Desai said “we may see something much more destructive like multinationals splitting so they can be acquired under the new [IRS] regulation.”
Senate Finance Committee Minority Staff Report – March 2015
Wyden referred to the Senate Finance Minority Staff report released last week, “How Tax Pros Make the Code Less Fair and Efficient: Several New Strategies and Solutions,” and said that it “looks at some of the most offensive parts of the tax code.” He asked how much this tax compliance and complexity effectively diminishes the code. Fogg responded that complexity could be reduced by making the rates the same for both high and low income earners. Bartlett said the big issue is that the tax code “chooses when and if to realize that income.” Desai agreed with Wyden and said it is important to look into these issues of complexity, pointing out that capital gains is the “manifestation of this complexity” and the “lion’s share of it is coming from the realization” principle.
Issuance of Tax Returns
Sen. Robert Casey (D-Pa.) said he would like the IRS to focus on sending tax returns to taxpayers as quickly as possible and asked how to address this. Fogg replied that the IRS has created a situation where taxpayers expect their refunds in early February. He suggested that the IRS obtain the data more quickly and upload it.
Obtaining Simplification
Sen. Maria Cantwell (D-Wash.) asked if the U.S. should have a tax code that suits an “innovation economy” and what it would takes to compete globally. Bartlett responded that problems surround the fact that “more and more of the burden on preparing for retirement is on the individual” and “more and more people are independent contractors” with more options for retirement savings and tax sheltering.
Sen. Benjamin L. Cardin (D-Md.) said he would like to focus on simplification. Bartlett responded that many good arguments for simplification exist and suggested a Value Added Tax (VAT). He said he does not subscribe to the school of thought that complexity in the code should remain because it keeps the tax burden down.
Sen. Sherrod Brown (D-Ohio) said the Committee can either wait until the political climate changes or abandon the quest to recreate comprehensive reform and pursue discrete packages of reform. Bartlett replied that in 1986 taxes increased on corporations and that revenue was used as a break on individuals. He explained that today there are not enough tax expenditures to finance a meaningful reduction of rates only on the corporate side. Bartlett said more revenue from individuals is needed to get to a 25 percent rate for corporations, which he said is “impossible politically.” Brown asked how to piecemeal reform. Bartlett said “there is a lot of simplification that can be done in revenue neutral or de minimus form.” Desai suggested addressing pass through entities to generate “a lot of revenue.”
Sen. John Thune (R-S.D.) said “we can’t make the perfect the enemy of the good” and asked what noncontroversial fundamental reforms Congress can accomplish. Bartlett pointed to the “backlog” of topics discussed in this hearing.
Heller asked how to overhaul the tax code. Desai said the best compendium was President Bush’s proposal in 2005.
Agreement
Sen. Thomas R. Carper (D-Del.) asked the panelists where they think there is bipartisan agreement within the Senate Finance Committee. Fogg replied that he thinks common ground can be found on the issue of raising revenue through pass through entities. Bartlett said he thinks the Committee would agree that it is a “bad idea to have so many different incentives.” Desai said he thinks there is broad agreement about unifying the information the IRS sends to the taxpayer. Markman explained that the IRS is responsible for the issues facing low income earners.
Tax Compliance
Carper said that in 2006 there was a tax gap of $385 billion and that he would like to work to reduce to the tax gap. Fogg said it is important to make “tax administration” a principle at the IRS.
Sen. Dean Heller (R-Nev.) asked why it is so important that the Administration play a role in tax reform. Bartlett said Treasury must “keep an eye on everything” because it is “easy to make mistakes” that could create unintended consequences. Bartlett contended that Congress cannot move without the Administration.
AMT
Thune asked how to address the alternative minimum tax (AMT). Markman said a new net investment income tax makes it more complicated.
Phase Outs
Thune asked how much complication phase-outs cause in the code. Markman said phase-outs are a tradeoff and “you have to pick your poison.” Desai suggested “some kind of aggregation.”
For more information on this event, please click here.
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Senate Committee on Finance
“Tax Complexity, Compliance, and Administration:
The Merits of Simplification in Tax Reform”
Tuesday, March 10, 2015
Key Topics & Takeaways
- Inversions:Sen. Orrin Hatch (R-Utah) asked Desai for his views on inversions. Desai responded that there is a “fundamental mismatch in international taxpayers” and that “very sophisticated taxpayers” are engaged in inversions. Desai said “we may see something much more destructive like multinationals splitting so they can be acquired under the new [IRS] regulation.”
- Senate Finance Committee Minority Staff Report – March 2015: Sen. Ron Wyden (D-Ore.) referred to the Senate Finance Minority Staff report released last week, “How Tax Pros Make the Code Less Fair and Efficient: Several New Strategies and Solutions,” and said that it “looks at some of the most offensive parts of the tax code.” He asked how much this tax compliance and complexity effectively diminishes the code. Fogg responded that complexity could be reduced by making the rates the same for both high and low income earners. Bartlett said the big issue is that the tax code “chooses when and if to realize that income.” Desai agreed with Wyden and said it is important to look into these issues of complexity, pointing out that capital gains is the “manifestation of this complexity” and the “lion’s share of it is coming from the realization” principle.
- Role of the Administration: Sen. Dean Heller (R-Nev.) asked why it is so important that the Administration play a role in tax reform. Bartlett said Treasury must “keep an eye on everything” because it is “easy to make mistakes” that could create unintended consequences. Bartlett contended that Congress cannot move without the Administration.
Witness
- Carol Markman, Certified Public Accountant and Tax Director, EP Caine & Associates CPA, LLC, Westbury, NY
- Mihir A. Desai, Mizuho Financial Group Professor of Finance & Professor of Law, Harvard University, Cambridge, MA
- Bruce Bartlett, Former Deputy Assistant Secretary for Economic Policy, 1988 – 1993, United States Department of the Treasury, Great Falls, VA
- T. Keith Fogg, Professor of Law and Director, Villanova University School of Law Federal Tax Clinic, Villanova, PA
Opening Remarks
In his opening statement, Chairman Orrin Hatch (R-Utah) explained that complexity makes it more difficult and more expensive for taxpayers to comply with the law. He acknowledged that simplification is “not without trade-offs” and suggested a “tension between fairness and simplicity.” Hatch stated that tax reform will not be easy, but that this should not deter the Committee’s efforts.
In his opening statement, Ranking Member Ron Wyden (D-Ore.) said the “overly complicated tax code divides tax payers into very different worlds.” He added that the “lucky few” who can afford to hire tax professionals “game the system.” Next, Wyden highlighted that each provision can have its own set of rules and definitions. For example, Wyden explained that “small business is defined nearly 40 different ways in the tax code.”
In her testimony, Carol Markman, Certified Public Accountant and Tax Director at EP Caine & Associates, said allowing taxpayers to take their entire minimum redistribution creates simplicity without a reduction in tax revenue. Next, Markman suggested that an early withdrawal penalty on retirement accounts be made uniform across all plans. She also recommended a separate phase-out for head of household filers.
In his testimony, Dr. Mihir A. Desai, Mizuho Financial Group Professor of Finance and Profess of Law at Harvard University, said the complexity in the tax code arises from the behavior of tax planners. He described this pattern as a “death spiral” of planning, regulation, and complexity. In his view, the alternative minimum tax (AMT) on foreign source income is the latest example of complexity. Desai suggested that the complexity can be “managed like software” and “the code must be mapped.” He said it is important to begin the process of simplifying administrative complexity and pointed to three factors that most contribute to complexity: 1) the consumption tax; 2) reliance on realization events; and 3) reluctance to embrace solutions. Desai concluded that structural reforms are needed to address this complexity in the code.
In his testimony, Bruce Bartlett, Former Deputy Assistant Secretary for Economic Policy at the Department of Treasury, said there are many sources of complexity including the issues facing small businesses when they have to keep track of their expenses. Bartlett described this challenge of determining income as a growing problem. He also acknowledged that the simplicity of the “flat tax” is grossly overestimated. Bartlett said he fears that Washington is “constantly putting off doing what’s doable on a bipartisan basis because of tax reform.”
In his testimony, T. Keith Fogg, Professor of Law and Director at Villanova University School of Law Federal Tax Clinic, said he advocates on behalf of low income taxpayers and how to make the system simpler for them. Fogg said the Earned Income Tax Credit is difficult to navigate. He also suggested that the Internal Revenue Service (IRS) provide “walk-in assistance” because people want the personal touch.
Question and Answer
PEP and Pease
Hatch explained that many people look like they have a higher income, but live in parts of the country with higher costs of living. He asked Markman if it is best to eliminate complex rules and deductions for state and local income taxes. Markman responded that that “PEP and Pease” makes people very angry because they typically lose all of their deductions and people with large numbers of children are burdened. She thinks clients would prefer to see a rate that is clear and transparent rather than a “self-hidden rate.” In this way, she assured that “simplification is worthy of consideration.”
Hatch asked Desai for his views on inversions. Desai responded that there is a “fundamental mismatch in international taxpayers” and that “very sophisticated taxpayers” are engaged in inversions. Desai said “we may see something much more destructive like multinationals splitting so they can be acquired under the new [IRS] regulation.”
Senate Finance Committee Minority Staff Report – March 2015
Wyden referred to the Senate Finance Minority Staff report released last week, “How Tax Pros Make the Code Less Fair and Efficient: Several New Strategies and Solutions,” and said that it “looks at some of the most offensive parts of the tax code.” He asked how much this tax compliance and complexity effectively diminishes the code. Fogg responded that complexity could be reduced by making the rates the same for both high and low income earners. Bartlett said the big issue is that the tax code “chooses when and if to realize that income.” Desai agreed with Wyden and said it is important to look into these issues of complexity, pointing out that capital gains is the “manifestation of this complexity” and the “lion’s share of it is coming from the realization” principle.
Issuance of Tax Returns
Sen. Robert Casey (D-Pa.) said he would like the IRS to focus on sending tax returns to taxpayers as quickly as possible and asked how to address this. Fogg replied that the IRS has created a situation where taxpayers expect their refunds in early February. He suggested that the IRS obtain the data more quickly and upload it.
Obtaining Simplification
Sen. Maria Cantwell (D-Wash.) asked if the U.S. should have a tax code that suits an “innovation economy” and what it would takes to compete globally. Bartlett responded that problems surround the fact that “more and more of the burden on preparing for retirement is on the individual” and “more and more people are independent contractors” with more options for retirement savings and tax sheltering.
Sen. Benjamin L. Cardin (D-Md.) said he would like to focus on simplification. Bartlett responded that many good arguments for simplification exist and suggested a Value Added Tax (VAT). He said he does not subscribe to the school of thought that complexity in the code should remain because it keeps the tax burden down.
Sen. Sherrod Brown (D-Ohio) said the Committee can either wait until the political climate changes or abandon the quest to recreate comprehensive reform and pursue discrete packages of reform. Bartlett replied that in 1986 taxes increased on corporations and that revenue was used as a break on individuals. He explained that today there are not enough tax expenditures to finance a meaningful reduction of rates only on the corporate side. Bartlett said more revenue from individuals is needed to get to a 25 percent rate for corporations, which he said is “impossible politically.” Brown asked how to piecemeal reform. Bartlett said “there is a lot of simplification that can be done in revenue neutral or de minimus form.” Desai suggested addressing pass through entities to generate “a lot of revenue.”
Sen. John Thune (R-S.D.) said “we can’t make the perfect the enemy of the good” and asked what noncontroversial fundamental reforms Congress can accomplish. Bartlett pointed to the “backlog” of topics discussed in this hearing.
Heller asked how to overhaul the tax code. Desai said the best compendium was President Bush’s proposal in 2005.
Agreement
Sen. Thomas R. Carper (D-Del.) asked the panelists where they think there is bipartisan agreement within the Senate Finance Committee. Fogg replied that he thinks common ground can be found on the issue of raising revenue through pass through entities. Bartlett said he thinks the Committee would agree that it is a “bad idea to have so many different incentives.” Desai said he thinks there is broad agreement about unifying the information the IRS sends to the taxpayer. Markman explained that the IRS is responsible for the issues facing low income earners.
Tax Compliance
Carper said that in 2006 there was a tax gap of $385 billion and that he would like to work to reduce to the tax gap. Fogg said it is important to make “tax administration” a principle at the IRS.
Sen. Dean Heller (R-Nev.) asked why it is so important that the Administration play a role in tax reform. Bartlett said Treasury must “keep an eye on everything” because it is “easy to make mistakes” that could create unintended consequences. Bartlett contended that Congress cannot move without the Administration.
AMT
Thune asked how to address the alternative minimum tax (AMT). Markman said a new net investment income tax makes it more complicated.
Phase Outs
Thune asked how much complication phase-outs cause in the code. Markman said phase-outs are a tradeoff and “you have to pick your poison.” Desai suggested “some kind of aggregation.”
For more information on this event, please click here.