Showing posts with label Senate. Show all posts
Showing posts with label Senate. Show all posts

Wednesday, July 17, 2013

A Blueprint for Tax Reform and Health Reform : Before the Senate Committee on Finance

library A Blueprint for Tax Reform and Health ReformLeonard E. Burman

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

In this testimony Burman outlines a plan for tax reform that would maintain progressivity, raise enough revenues to finance the government, and dovetail with plans to provide universal access to health insurance. It would combine a value-added tax (VAT) dedicated to pay for a new universal health insurance voucher with a vastly simplified and much flatter income tax. With a new financing source for health care, income tax rates could be cut sharply—the top rates could be cut to 25 percent or less. The health care voucher would also offset the inherent regressivity of a VAT. And, under the simplified system, most Americans would not have to file income tax returns.

The text below is an excerpt from the complete document.
Read the full written testimony in PDF format.

Chairman Baucus, Ranking Member Grassley, and members of the committee: Thank you for inviting me to testify on tax reform.

It is a great honor to speak to you on this topic. The last great tax reform effort lured me to Washington away from academia to work for the Treasury Department in 1985. I remember when Chairman Packwood rescued reform from the abyss with his “27-percent solution”—a top rate so low it caught the public’s attention and sustained momentum for what became the Tax Reform Act of 1986. The creativity and bipartisanship of this committee were key elements in the success of the 1986 Act.

In the mid-1980s, the tax system desperately needed fixing. Tax shelters were rampant, with investment decisions often motivated solely by the tax savings they could produce, rather than their underlying economics, which were often dubious. The public had lost confidence in the fairness of the tax system.

If anything, the need for tax reform is even greater now for at least four reasons. First, under current law most of the tax cuts enacted since 2000 are set to expire at the end of 2010 and the code will revert to that of 2000. In theory, this will trigger what tax cut advocates are already calling the largest tax increase in history, but extending the tax cuts seems fiscally reckless. Second, the baby boomers are beginning to retire and the costs of providing their Social Security and medical care will strain available federal revenues. Third, under current law, the reach of the individual alternative minimum tax (AMT), a pointlessly complicated and unfair element of the current code, is scheduled to mushroom, hitting 32 million taxpayers by 2010, up from 4 million in 2007. Were that to happen the middle class would scream in protest, but making up for the hundreds of billions of dollars in revenue that the AMT is projected to produce will be a huge challenge. Finally, there is growing public dissatisfaction with our federal tax system which is complex, riddled with loopholes, and widely perceived to be unfair. It is hard to see how these challenges can be tackled without a major tax reform.

Although tax reform is always a long shot, there are reasons for optimism. Politicians in both parties—and even current presidential candidates—understand that the current situation is unsustainable. A new president who had campaigned on a platform of working in a bipartisan way to advance objectives that matter to both parties may be willing to stake political capital on advancing tax reform. And the fact that both sides acknowledge that this is a “change election” bodes well for the next president’s willingness to take political risks.

(End of excerpt. The entire testimony is available in PDF format.)

The views expressed are those of the author and should not be attributed to the Urban Institute, its trustees, or its funders.


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The Individual Alternative Minimum Tax : Testimony before the U.S. Senate Committee on Finance

library The Individual Alternative Minimum TaxLeonard E. Burman

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

The text below is Burman's oral testimony.
Read the full written testimony in PDF format.
Read Burman's response to follow-up questions from Senators Baucus and Grassley in PDF format.

The AMT threatens to grow from a footnote in the tax code to a major scourge affecting tens of millions of taxpayers every year. The practice in recent years has been to patch the AMT every year or two on a temporary basis so that not too many people are affected. The latest patch expired at the end of 2006. This testimony outlines how the AMT works, whom it affects, why it demands attention, and why financing AMT repeal or reform is important. Burman lays out a number of fiscally responsible options to fix or eliminate the AMT and discusses their effects on the distribution of tax burdens, the number of AMT taxpayers, and marginal tax rates.

Chairman Baucus, Ranking Member Grassley, Members of the Committee: Thank you for inviting me to share my views on the individual alternative minimum tax.

A few years ago, my colleagues and I wrote a paper titled "The AMT: Out of Control." It's really out of control now. If Congress doesn't act, virtually everyone in this room, along with 23 million Americans will owe AMT next April.

A lot of the AMT's victims will be solidly middle class, not the millionaires who were its originally intended target. In my testimony, I show that a family with four kids under age 17, earning $75,000, with no itemized deductions will see their tax double in 2007 because of the AMT. Their tax planning mistake (in AMT world) was having four kids.

Last night, I checked the IRS website to see whether this family would have enough tax withheld to pay the AMT. No. Assuming one parent earns all the income, the IRS advises him or her to claim 11 exemptions on the W-4 form employers use to set withholding, and promises that the family will get a $25 refund at the end of the year. Actually, under current law, that family would be underwithheld by almost $2,000. Talk about a rude shock at tax time.

The smart money says that Congress will patch the AMT for another year or two to make sure that my hypothetical family won't be affected. The latest patch expired at the end of 2006. This stopgap approach leads to endless confusion though. How much estimated tax and withholding should I pay? What is my tax bracket? Would I benefit from the tax credit for hybrid vehicles if I bought one?

Is it safe to ignore the AMT, as the IRS does in its withholding calculator? Is the IRS prescient or just clueless like the rest of us? Why should 23 million Americans have to guess about their tax situation?

Some people say that the AMT isn't such a bad tax system so we should just let it take over. Actually, the AMT is a terrible tax system. The AMT exemption, which you deduct from income to calculate AMT, phases out at a 25-percent rate. This boosts the effective tax rates in the phaseout range by a quarter, so instead of the advertised 26 and 28 percent rates, many AMT taxpayers face effective rates of 32.5 and 35 percent. The highest rates don't apply to the highest-income people, which is why the AMT hits almost everyone with incomes between $200,000 and $500,000, but not so many millionaires.

What's more, unlike the regular income tax, the AMT is not indexed for inflation so people's average tax bills can increase every year, even if their incomes don't grow at all in real terms. And the AMT hammers married couples and especially families with kids. In 2007, married couples will be 15 times as likely as singles to owe AMT.

Some claim that software and paid preparers make AMT complexity no big deal, but there are at least three problems with this argument. First, as the AMT consumes the middle class, it will hit more and more people who do their taxes by hand, or try. Second, even with software, it's complex—as I explain in my written testimony. Third, you might want people to understand how the tax system affects them. With the AMT, the tax system becomes an inscrutable black box.

Some argue that the AMT is a "blue state" tax—only one party's problem. Although it is true that, historically, taxpayers in relatively high-income, high-tax coastal states were more likely to owe AMT than those in the interior, the AMT is going to hit people in all states hard if it isn't fixed. And, even back in 2004, lots of red states had AMT hot spots—zip codes where 10 percent or more of the residents owed the tax.

The AMT hits middle and upper income families with kids—soccer moms. It's in all of your interests to do something about it.

What to do about it?

Some members of this committee have suggested that the solution would be to repeal the AMT and not worry about the $800 billion in revenues that would be forgone. Those members argue that the AMT would tax people who were never its intended target and thus AMT revenues should never have been counted on. The real baseline, they assert, should assume no AMT.

Those members might have—but didn't—raise that argument in 2001 when large projected AMT revenues greased the skids for the ensuing tax cuts. In fact, the AMT masked much of the cost of the tax cuts since people who pay it do not get the full income tax rate reductions. Eliminating the AMT after it has helped finance the largest tax cuts in history amounts to a major bait and switch if the lost revenue isn't offset.

Fortunately, there are many options to reform or repeal the AMT that would not increase the deficit. My favorite option, and probably one shared by everyone on this panel, would be to eliminate the AMT as part of fundamental tax reform. But given political reality, the best alternative may be a simple surtax of 4 percent of adjusted gross income (AGI) over $200,000 for joint returns and $100,000 for others, which would raise enough to offset the revenue lost from repealing the AMT.

The surtax would be simple and progressive. The vast majority of AMT-paying taxpayers would pay lower taxes. Only the richest 1 percent would pay higher taxes on average. And they would lose far less than they gained from the 2001-2006 tax cuts. Moreover, most of the taxpayers who lost a large share of their tax cut due to the AMT would now receive the full benefit.

Some critics have complained that the surtax would raise effective tax rates and discourage work and saving. But since the current AMT has even bigger implicit surtaxes built into it, most affected taxpayers would face lower rates under the alternative.

Many other fiscally responsible options are outlined in my written testimony.

I understand that fixing the AMT isn't easy. If it were, it would have been done a long time ago. I applaud the Committee for taking the first steps toward what I hope will be a permanent solution.

The text above is Burman's oral testimony.
Read the full written testimony in PDF format.
Read Burman's response to follow-up questions from Senators Baucus and Grassley in PDF format.

The views expressed are those of the author and should not be attributed to the Urban Institute, its trustees, or its funders.


View the original article here

Individual Taxpayers and Federal Tax Reform : Testimony before the United States Senate Committee on Finance

library Individual Taxpayers and Federal Tax ReformWilliam G. Gale

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

In the next few years, several factors will push tax issues to the forefront of policy discussions. First, under current law, almost all of the Bush Administration's tax cuts will expire at the end of 2010. A second factor is the rapid growth in the alternative minimum tax (AMT), which will increase the inequity and complexity of the tax system. A third issue is the expected increase in government spending over the next several decades. Despite these pressures on the system, tax changes are not inevitable, and achieving meaningful reform—that is, with substantial design improvements—will require strong political leadership. Gale's testimony focuses on some overarching principles that should guide tax reform efforts.

The text below is an excerpt from the complete document.
Read the full written testimony in PDF format.

Chairman Baucus, Ranking Member Grassley, and other members of the Committee:
Thank you for inviting me to testify at this hearing on individual taxpayers and tax reform. The tax system needs to be simpler, more equitable, more conducive to prosperity, and sustainable. My remarks focus on some overarching principles that should guide reform efforts. There is no clean line between individual taxes and business taxes. In particular, individuals–not businesses–bear the burden of taxes imposed on businesses.
The key item in any tax reform is to broaden the tax base. The goal should be to tax all income once, tax it only once, at the full, income tax rate. Broadening the base taxes different types of activities at the same rate, and thus "levels the playing field," and reduces the extent to which taxes distort economic behavior;allows for lower rates in order to raise a given level of revenue, or allows an increase in the revenue level, if needed; lower overall rates, in turn, further reduce the extent to which taxes distort economic behavior; andmakes taxes simpler.After base broadening, special attention should be given to the form of any surviving tax preferences. Deductions are regressive and are only justified if there is a true reduction in ability to pay, a condition that is rarely met among existing tax preferences. Converting the deductions to flat, refundable credits would in most cases be preferable on revenue, distributional, incentive, and efficiency grounds.It is time to eliminate the AMT, but only if the revenue is replaced and the loopholes that would be created are closed.A revenue system that is not adequate to finance government spending will be unstable and unsustainable.The importance of simplifying the system can not be overstated. Taxpayers are overwhelmed by complexity, real and imagined, in the tax code. Oddly, although the need to simplify the tax system is the one goal everyone accepts in tax discussions, every year the system becomes more complex. If simplification is not the primary goal of reform, tax changes will likely make the tax system more complicated.

(End of excerpt. The entire testimony is available in PDF format.)

The views expressed are those of the author and should not be attributed to the Urban Institute, its trustees, or its funders.


View the original article here

The Future of Individual Tax Rates: Effects of Economic Growth and Distribution : Leonard Burman's Testimony before the Senate Committee on Finance

library The Future of Individual Tax Rates: Effects of Economic Growth and DistributionLeonard E. Burman

The text below is an excerpt from the complete testimony. Read the full written testimony in PDF format.

Leonard Burman's testimony before the Senate Committee on Finance on whether and how to extend the 2001 and 2003 tax cuts.

Chairman Baucus, Ranking Member Grassley, Members of the Committee: Thank you for inviting me to share my views on whether and how to extend the 2001 and 2003 tax cuts. I am speaking for myself alone. My views should not be attributed to any of the organizations with which I am affiliated.

The expiration of the "Bush tax cuts" at the end of 2010 creates a number of decision points for the Congress: Should all or some of the tax cuts be extended? If so, should they be made permanent? If not, how long should they be extended for? And, if only some of the tax cuts are to be extended, which ones?

In short, I believe it would be a serious mistake to make any of the tax cuts permanent now. The income tax is a mess and is badly in need of an overhaul. It doesn't raise close to enough revenue to pay for current governmental expenditures and is needlessly complex, unfair, and inefficient. A system-wide reform along the lines of the Tax Reform Act of 1986, but with the goal of eventually raising enough revenue get the national debt out of the red zone should be a top priority for the Congress. Permanent extension of the tax cuts would make such a reform far more difficult and would signal to markets that our budget problems are only going to get worse.

However, I also think it would be a mistake to allow all of the tax cuts to expire as scheduled in 2011. The economy is in a very precarious state and a major tax increase would slow the economic recovery. With credit still in very short supply, low- and middle-income households are facing serious cash flow constraints. A tax increase would result in less spending, which would ripple through the economy, costing jobs and threatening the nascent recovery.


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The Future of Individual Tax Rates: Effects on Growth and Distribution : Donald Marron's Testimony Before the Senate Committee on Finance

library The Future of Individual Tax Rates: Effects on Growth and DistributionDonald Marron

The text below is an excerpt from the complete testimony. Read the full written testimony in PDF format.

Donald Marron's testimony before the Senate Committee on Finance on the individual tax system.

Chairman Baucus, Ranking Member Grassley, and Members of the Committee: Thank you for inviting me to appear today to discuss our individual income tax system.

As this committee knows well, our nation faces difficult economic and fiscal challenges. In the aftermath of the worst financial crisis since the 1930s, almost 15 million workers are unemployed, about one-tenth of our work force. Almost 7 million of those workers have been unemployed for six months or longer. And millions more lack jobs but don't count in the statistics because they're too discouraged to look for work. Moderate economic growth is expected to lower those figures only gradually over the next few years.

At the same time, budget deficits have rocketed to 60-year highs because of the financial crisis, the weak economy, and subsequent policy responses. As a result, the federal debt has grown from about 40 percent of gross domestic product (GDP) at the end of 2008 to about 60 percent of GDP today, the highest since just after World War II.

Deficits should narrow in coming years as the economy recovers and as policy responses to the recession wind down. Our long-term fiscal outlook remains daunting, however, because of a fundamental imbalance between spending and revenues. Because of an aging population and rising health care costs, spending is expected to grow significantly faster than revenues over the next 25 years, pushing our nation deeper into debt.


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