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Congressional Testimony
April 12, 2000, Wednesday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 2360 words
HEADLINE:
TESTIMONY April 12, 2000 BILL FRENZEL GUEST SCHOLAR BROOKINGS INSTITUTION
HOUSE WAYS AND MEANS TAX OVERHAUL PROPOSALS
BODY:
Bill Frenzel, Guest Scholar Brookings
Institution Statement on H.R. 134, The Simplified USA Tax To the Committee on
Ways and Means U.S. House of Representatives April 12, 2000 Mr. Chairman and
Members of the Committee: It is, as always, a pleasure to return to the scene of
one's former crimes. I appear here today on my own behalf and my testimony does
not represent the opinions or conclusions of The Brookings Institution. I
congratulate the Chairman and the Committee for holding these Tax Reform
hearings. The time is ripe. You are all, as was I, very fortunate to be able to
serve on this distinguished and historic committee. I hope you are less
frustrated than I was about our ability to produce a Tax Code in which our
country can have more confidence. The need for major surgery on the U.S. Tax
Code has been obvious for years. Over the years, complications and
"simplifications" alike have created a system of bewildering, and indefensible,
size and complexity. Nobody intended that it be so cumbersome, but it got that
way for a variety of reasons well known to the committee (we live in a complex
society and economy-, politicians run on platforms of change- its easier to
amend than to delete-, simplicity and fairness are sometimes in conflict).
Whatever the reasons, today many taxpayers cannot comply (without help) with the
Code, and tax collectors have great difficulty enforcing it. But, size and
complexity are problems that are less serious than the perverse incentives that
have worked their ways into the Code. Four that I have found particularly
troublesome are- (1) inadequate incentives for saving-, (2) more incentives to
import than to export-, (3) regressivity and job creation disincentives in our
Social Security taxes; and (4) the endless layering of good, and, at the time,
necessary, adjustments which have led to unacceptable complexity. Each of you
could list many more. The origins of most of these policies go long way back in
history. They undoubtedly made good sense when enacted. Now, the world has
changed, and it will continue to change even more swiftly. Regulators are
already having difficulty keeping up. Relatively small, targeted Tax policy
changes, like the ones this committee has regularly made in the past, are not
able to keep pace with the speed of change. I believe that you must make bold
and massive changes to meet the new challenges. But size and boldness usually
mean a tax package so full of fish hooks that no one will touch it. I, myself,
was, for many years in this Committee, a supporter of the theory of creeping
incrementalism". Later, I have come to believe that Band-Aids, even giant ones
like TRA 1986, are more likely to extend the problems than they are to solve
them. KR. 134, the Simplified USA Tax, appears to me to be a workable solution
to the Tax Reform dilemma. In the interests of full disclosure, I must admit I
was exposed to the general concept nearly 1 0 years ago when I attended, with
about a dozen accountants, tax lawyers and economists, a series of brainstorming
sessions which began with David Bradford's "Consumed Income Tax" and went
through to the original Nunn-Domenici USA Tax. That original Nunn-Domenici
proposal was an important milestone in the development of H.R. 134, but, like
many of its ilk, it was too complicated. The cleverest of us could not have
explained it to our constituents very quickly or concisely. That kind of bill is
an easy victim for interests, which want to retain the old code, or for partisan
squabbling. H.R. 134 can not be called simple, but it is understandable. It is a
suitable vehicle for the Committee's Tax Reform efforts. I can't review the
whole bill, but here are some of the aspects, which appeal to me- 1. H. R. 134
has the international parts right. We should not tax foreign
income; we need to relieve taxes on exported goods and
services; and we need to assess taxes on imports to equalize the burdens on
domestic producers. We have had only the lonely FISC as an export incentive.
It's a weak one compared to the combinations of incentives offered by many of
our foreign competitors, and now, its existence is imperiled. 2. H.R. 134
provides powerful savings incentives. Once the taxes have been paid on income
going into the investment account, there is no additional tax on either inside
build-up or on withdrawals. Congressman English has used the relatively simple
mechanism found in the Roth IRA to solve the major complexity problem of the
original USA Tax. Withdrawals from these after-tax savings accounts can be made
for any purpose. 3. H.R. 134 relieves problems of regressivity and of
disincentives to job formation caused by Social Security taxes. Since I first
came to Washington, the income tax Code has become more progressive as more
people at lower levels of income have been taken out of the code completely.
But, because the Social Security taxes are levied on the first dollar of
earnings, the overall tax burden has become more regressive. And, in times of
less than full employment, those taxes are a real jobs disincentive for
employers. I personally support progressive income tax rates, with a couple of
caveats. The present highest rate is too high. The EITC which I supported
originally has been expanded to a point where it could be better managed and
enforced as an appropriation entitlement rather than a tax entitlement. It
should be noted that tax rates under the Simplified USA Tax could be flattened,
or made even more progressive than present rates. Congressman English has
structured it to make it roughly equal to the current burden tables. That may
not be the place you want to finish, but , to me, it's the right place to start.
Finally, Mr. Chairman, I recommend H.R. 134, the Simplified USA Tax, for the
Committee's consideration because it gives real promise of achieving most of the
things I have always sought in Tax Reform. It may be an exaggeration to call it
simple, because life is not simple. It isn't perfect, because there is no such
thing as a perfect tax bill. And it doesn't tear the system out by the roots as
you have always wanted to do, but it does rough up the system pretty well. Not
only will it do the Tax Reform job, but its is workable and understandable.
Those two virtues may be able to stand as proxies for the simplicity which has
always been so elusive.
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