Daily Tax Update - March 1, 2012: Senate Budget Committee Hearing On Tax Reform

SENATE BUDGET COMMITTEE HEARING ON TAX REFORM:  Today, the Senate Budget Committee held a hearing on how the tax code could be reformed to encourage growth, reduce the deficit, and promote fairness.  Two of the witnesses supported including new revenue in tax reform efforts.

  • Dr. Burman testified, "The tax code desperately needs reform. It is unfair, inefficient, mind-bogglingly complex, and doesn’t come close to raising enough revenue to pay for the government.  I’m tempted to say that it couldn’t be worse, but sadly that is not true.  Some proposals masquerading as reform would increase the deficit, thereby undermining our economy, and are also deeply unfair.  Thus, it is not only imperative that we reform the tax system, but that any reform meet the objectives you set out in the hearing title: encourage growth, reduce the deficit, and promote fairness.  I’d add one more goal—simplify the tax system so that ordinary Americans can understand it."  Burman continued, "Most economists’ favorite new revenue source would be a carbon tax. By putting a price on carbon emissions, the tax would provide consumers and businesses an incentive to economize on the burning of fossil fuels and boost carbon saving innovations.  This is a far better approach than providing subsidies to particular technologies.  The government isn’t smart enough to know which technologies should be subsidized.  The advantage of the carbon tax is that private profit maximizing enterprises could decide for themselves which technologies can best replace fossil fuels.  The disadvantage of a carbon tax is that it seems even less politically viable than a VAT.  If substantial base broadening and new revenue sources are ruled out, the only remaining option to raise revenues is to raise marginal tax rates.  This would not be my first choice, but it would certainly be better than allowing the debt to continue to grow unchecked.  Top tax rates are very low by historical standards.  Although higher than they were in the immediate aftermath of the Tax Reform Act of 1986, top tax rates are now (and were during the Clinton Administration) lower than at any time between 1932 and 1986.  While it is possible that the economic costs of taxation have grown over time—for example, because the technology of tax avoidance has improved—it is unlikely that returning tax rates to their levels in 2000 would be very harmful."
  • Dr. Rogers testified, "I have recently heard the three tax reform goals the Committee outlined for this hearing—economic growth, deficit reduction, and fairness—referred to as a 'fiscal trilemma,' with the implication that achieving all three goals simultaneously might be difficult.  But as I’ve described today, I believe that base-broadening, revenue-raising, tax-expenditure-reducing tax reform can easily be consistent with all three goals."  Rogers added, "Politically arbitrary labels such as the choice of budget baselines matter a lot, because politicians need these simple metrics to demonstrate their success as policymakers.  Republicans will always want to be known as the tax cutters, while Democrats will always push for more progressive taxation.  Setting a goal of sticking to the current-law revenue baseline, which is achieved by base broadening rather than higher rates, is a way of honoring the seemingly inconsistent tax policy goals of both parties.  It seems reasonable that policymakers should start from a current-law standard, because making changes relative to current law is their legislative responsibility, after all, even if the policy-extended baseline is a more accurate reflection of 'business as usual.'  Economically, however, it doesn't matter if we view such tax policy as raising revenue relative to a current-policy baseline or as keeping revenue constant relative to a current-law baseline.  All that matters is that the policy raises enough revenue to keep deficits at an economically sustainable level — where the economy's growth has a chance to keep up with the growth of the debt — while minimizing the distortionary effects of taxation."  Rogers added, "No matter how one might choose to interpret it — as a policy change consistent with Republican goals of reducing tax rates and government's interference with market decisions (the subsidies given out through the tax code), or as one consistent with Democratic goals of reducing the deficit by progressively raising revenue as a share of our economy — this type of bipartisan tax reform will be crucial to achieving fiscal sustainability.  For now this seems the most promising area for significant progress on deficit reduction to happen relatively quickly, while we continue to work on economically smart ways to control spending in the rest of the federal budget."
  • Dr. Mitchell stated, "The internal revenue code is needlessly punitive and complex. Some of its major flaws are:
    1. High tax rates – Marginal tax rates on additional increments of productive activity are too high, discouraging people from productive behavior.
    2. Biased treatment of income that is saved and invested – Because of the capital gains tax, the corporate income tax, the double tax on dividends, and the death tax, there is pervasive double taxation on capital, causing very high effective marginal tax rates.
    3. Distorting loopholes – Many provisions of the internal revenue code are explicitly designed to encourage economically irrational choices.
    4. Worldwide application – The United States have the world’s most onerous tax system for international activity.
    5. Corruption – While in most cases technically legal, the common practice of swapping favorable tax policies for political support is corrosive.
    6. Complexity – Nearly 100 years of tax changes have produced 72,000 pages of law and accompanying regulation."

TAX BILLS INTRODUCED FEBRUARY 29TH:

1. [112nd] H.R.4108 : To amend the Internal Revenue Code of 1986 to increase and extend the credit for qualifying advanced energy projects, and for other purposes.
Sponsor: Rep Berkley, Shelley [NV-1] (introduced 2/29/2012)      Cosponsors (None)
Committees: House Ways and Means; House Natural Resources; House Budget
Latest Major Action: 2/29/2012 Referred to House committee. Status: Referred to the Committee on Ways and Means, and in addition to the Committees on Natural Resources, and the Budget, for a period to be subsequently determined by the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned.

2. [112nd] H.R.4111 : To amend the Internal Revenue Code of 1986 to exclude from gross income certain State foster care program payments made to the biological parents of disabled children.
Sponsor: Rep Green, Gene [TX-29] (introduced 2/29/2012)      Cosponsors (None)
Committees: House Ways and Means
Latest Major Action: 2/29/2012 Referred to House committee. Status: Referred to the House Committee on Ways and Means.

3. [112nd] S.2143 : A bill to amend the Internal Revenue Code of 1986 to clarify that paper which is commonly recycled does not constitute a qualified energy resource under the section 45 credit for renewable electricity production.
Sponsor: Sen Stabenow, Debbie [MI] (introduced 2/29/2012)      Cosponsors (None)
Committees: Senate Finance
Latest Major Action: 2/29/2012 Referred to Senate committee. Status: Read twice and referred to the Committee on Finance.

4. [112nd] S.2144 : A bill to amend the Internal Revenue Code of 1986 to exclude from gross income of individual taxpayers discharges of indebtedness attributable to certain foreign residential mortgage obligations.
Sponsor: Sen Stabenow, Debbie [MI] (introduced 2/29/2012)      Cosponsors (None)
Committees: Senate Finance
Latest Major Action: 2/29/2012 Referred to Senate committee. Status: Read twice and referred to the Committee on Finance.

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE:
As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

STEPTOE & JOHNSON LLP - TAX PRACTICE
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