Daily Tax Update - January 20, 2011: Tax Reform Focus of Ways & Means Hearing

THE DAILY TAX UPDATE WILL BE PUBLISHED ON A PERIODIC BASIS UNTIL THE SENATE RETURNS ON JANUARY 25TH.

TAX REFORM FOCUS OF WAYS AND MEANS HEARING:   Today’s House Ways and Means Committee hearing on fundamental tax reform examined "the economic and administrative burdens imposed by the current structure of the Federal income tax...the complexity borne by American families, the cost of a corporate tax system that is increasingly out-of-step with the rest of the world, and the broader cost to the US economy of a tax system that fails to maximize job creation and impedes economic growth."  Witnesses included: Nina Olson, the National Taxpayer Advocate; Robert McDonald, the Chief Executive of Procter & Gamble – (representing the Business Roundtable); Warren Hudak, owner of a Pennsylvania firm focusing on small business accounting; Kevin Hassett of the American Enterprise Institute; and Martin Sullivan, a contributing editor to Tax Analysts.  All of the witnesses cited the complexity of our tax code and the need for its simplification.

  • In his opening remarks today, Committee Chairman Dave Camp said, "Clearly, the tax code is too complex, too costly, and takes too much time to comply with.  All this adds more burdens on families and employers – making it more difficult to create jobs in this country.  I am under no illusion that the task before us will be easy.  To really reform the tax code in a way that lowers the tax rate, broadens the base, and promotes the competitiveness of American companies, we will need to make some tough choices."  Camp added, "I don’t think this can be, nor should it be, a partisan exercise.  And it cannot happen just because one Chamber passes a bill.  It will require the active participation of all Members of this Committee.  It will require us to work with the Administration.  And yes, we will even have to talk to the Senate.  More importantly, we will talk to the American people – individuals, families, employers (large and small) – who are actually impacted by the laws we pass here in Washington."
  • Olson said, "Let me begin by saying bluntly that, in my view, the tax code today is a mess.  Since the last major reform 25 years ago, the tax code has become an ever-expanding patchwork of discrete provisions, often with little logical connection, and it has become unreasonably difficult for taxpayers to understand."  Olson also said that the tax code "imposes excessive compliance burdens on individuals and businesses…[and] is rife with complexity and special tax breaks."   Olson said that the "complexity of the tax code is also burdensome for the IRS."  Olson suggested utilizing a "zero-based budgeting" approach "to assist Congress in deciding which tax breaks and IRS-administered social programs to retain and which to eliminate."
  • McDonald (CEO of Procter & Gamble & representing the Business Roundtable) said that the "US corporate tax system stands out as an outlier relative to the tax systems of our trading partners, imposing a high rate on corporate income tax and maintaining other structural features that result in American companies being less globally competitive, reducing investment in the United States, and resulting in fewer jobs for American workers and a more slowly growing economy."   McDonald concluded, "We now need to make sure the United States has a tax system that is in keeping with the more globally competitive environment we face today…But if we are handicapped by an uncompetitive corporate tax system, we will slow the growth of the US economy to the benefit of our competitors."
  • Hudak said, "The complexities of the current tax code are especially onerous on small businesses…Small businesses face particular challenges when complying with the tax code and they are unique to the structure and function of a smaller businesses.  Small businesses are not miniature versions of larger corporations." 
  • Hassett said, "We can do much to speed up the recovery of the economic recovery process, indeed the literature on fundamental tax reform suggests that a well-designed reform could deliver about a percent a year of extra growth over the next decade, offsetting the handicap that is the residual of the financial crisis."  Hassett added, "A sound reform should not only fix our rates, but also should reform the definition of the tax base as well."  Hassett concluded, "Given the significant headwinds that the economy faces, the indefensible state of the current tax code, the horrifyingly high US corporate tax rate both statutory and effective, and the consensus that the economic impact of a fundamental tax reform would be positive, opposition to tax reform this year would be difficult to comprehend."
  • Sullivan testified, "The complexity of the law costs businesses billions of dollars.  Families endure endless hours of anxiety and paperwork.  The perception of unfairness – whether due to outright cheating by investors hiding funds on Caribbean islands or to special interests who can lobby their way to lower taxes – is an insult to the majority of taxpayers bearing their fair share.  And on top of all of this our tax code is dead weight on the shoulders of the American economy.  Its long lists of subsidies and handouts defies any notion of a free market.  The tax code’s interference with the free-market impedes the efficient allocation of capital, hampers productivity growth, and reduces international competitiveness."
  • Testimony can be accessed here.
  • For additional information, contact Philip R. West at pwest@steptoe.com or Mark J. Silverman at msilverman@steptoe.com.

IRS TO BEGIN PROCESSING TAX RETURNS ON FEBRUARY 14TH:  Today, the IRS said that it plans to start processing tax returns delayed by last month’s tax law changes on February 14th.  The IRS stated, "Beginning Feb. 14, the IRS will start processing both paper and e-filed returns claiming itemized deductions on Schedule A, the higher education tuition and fees deduction on Form 8917 and the educator expenses deduction.  Based on filings last year, about nine million tax returns claimed any of these deductions on returns received by the IRS before Feb. 14.  People using e-file for these delayed forms can get a head start because many major software providers have announced they will accept these impacted returns immediately.  The software providers will hold onto the returns and then electronically submit them after the IRS systems open on Feb. 14 for the delayed forms.  Taxpayers using commercial software can check with their providers for specific instructions. Those who use a paid tax preparer should check with their preparer, who also may be holding returns until the updates are complete."   The IRS said that it "needed the extra time to update its systems to accommodate the tax law changes without disrupting other operations tied to the filing season.  The delay followed the Dec. 17 enactment of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which extended a number of expiring provisions including the state and local sales tax deduction, higher education tuition and fees deduction and educator expenses deduction."

MISCELLANEOUS GUIDANCE RELEASED TODAY:
Revenue Procedure 2011-19, Qualified Zone Academy Bond Allocations for 2011, which provides for the allocation of the national limitation for qualified zone academy bonds among the States, the District of Columbia, and the possessions of the United States. 

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.

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