Daily Tax Update - February 2, 2011: Senate Budget Committee Holds Tax Reform Hearing

SENATE BUDGET COMMITTEE HOLDS HEARING ON TAX REFORM:  Today, several private sector and academic witnesses testified on the need for tax reform.  The witnesses who testified were:  C. Eugene Steuerle, Institute Fellow and Richard B. Fisher, Chair, The Urban Institute; Donald B. Marron, Director, Urban-Brookings Tax Policy Center/Visiting Professor, Georgetown Public Policy Institute; Dr. Rosanne Altshuler, Professor, Rutgers University; and Lawrence B. Lindsey, President and Chief Executive Officer, The Lindsey Group.

  • In his opening remarks, Senate Budget Committee Chairman Kent Conrad (D-ND) stressed the need for fundamental tax reform and the adoption of a sustainable long-term fiscal plan to address the country's budget problems.  Chairman Conrad offered support for reform that simplifies the tax code, reduces or eliminates tax expenditures, and lowers individual and corporate tax rates. 
  • Steuerle testified, "First, we must move into an era of fundamental reform—one that no longer centers simply on growth and multiplication of programs.  Large systemic reforms require fundamentally different strategies than those simple tax cuts and benefit expansions that seem only to identify 'winners.'  Whatever one thinks of the final results, the few major domestic reforms of the past three decades—Social Security reform in 1983, tax reform in 1986, welfare reform in 1996, and health reform in 2010—are harbingers of the size and types of trade offs that modern government must increasingly engage.  Second, we must limit how much any political party or any Congress can commit for the future—before that future arises.  In like manner, we should expect that budgets must be roughly balanced over the economic cycle.  The only way to achieve these reforms is through agreement among political parties that they will abide by rules that constrain how much of an unknown future either party can control through foreordained spending increases or tax cuts.  Third, we must account for and report to the public in a more honest way that doesn’t hide the cost of government in tax programs or tax rates in spending programs.   We should also report the tax burden enacted by each Congress as equal to the revenues it collects plus the taxes necessary to cover the deficits it leaves behind.  Finally, we must cut across jurisdictions in ways that allow us more systematically to reform particular areas of the budget where both tax subsidies and direct subsidies are used, such as housing, welfare, and jobs programs."
  • Marron said, "Tax policy experts have long known that high tax rates disproportionately harm the economy.  A rough rule of thumb is that doubling a tax rate increases the resulting economic harm by a factor of four.  The best tax systems thus keep tax rates low and apply them to a broad base.  America’s income tax system violates that principle.  Widespread tax preferences narrow the tax base, distort economic activity, and force rates higher than they need to be.   That has real economic costs.  At the same time, America faces large deficits as far as the eye can see.  Unless Washington demonstrates unprecedented spending restraint in coming years, the pressures of an aging population and rising health care costs will require greater revenues to avoid an unsustainable build-up of debt.  Well-designed tax reform can help address these challenges.  By reducing or eliminating many spending-like tax preferences and using the resulting revenue for a mixture of rate cuts and deficit reduction, policymakers could enhance US economic performance and slow the build-up of debt."
  • Altshuler stated, "(1) The fiscal challenges ahead require that we reform our income tax system or turn to new revenue sources.  Raising significantly more revenue from the current tax system is politically infeasible and would be damaging to economic growth.  (2)  We must broaden the base of our income tax.  While there are many fundamental reforms that could be considered, a reform that broadens the base would not only raise revenue but would simplify the system, increase transparency, make the system less distortive by both allowing for a lower rate and reducing tax-induced biases towards certain activities, and improve the fairness of the system.  Although politically difficult, this type of reform is implementable and follows a wave of similar base-broadening, rate reducing tax reforms that have been enacted in developed countries over the past twenty years, and (3) The current US approach to international corporate taxation needs to be updated to reflect the increased competition our US multinationals face from  foreign-based corporations.  Broadening the base and lowering the rate are essential and straightforward first steps to international tax reform.  We also need to consider updating our system to reflect the international tax rules used by our major trading partners."
  • Lindsey said, "I do not believe that these fundamental problems with our tax structure can be adequately addressed by changes to our current income based tax system.  Rate reductions within the current tax system have proved economically successful because the excess burden associated with current rates are so high that the economy naturally prospers when rates are cut and the benefits to the economy of those cuts have consistently exceeded the foregone revenue.  But further revenue reduction is not possible given our current debt position.  America must move away from an income based system – where what is taxed is an opinion – to a cash based system based on the gross receipts of a business less those items the business has purchased on which it has already paid tax to another business.  Such a tax system should not be an add-on to our current system. Adding yet another layer of complexity on top of what we already have would be among the worst ideas we could come up with. Instead, we need to replace all of our existing income-based tax concepts with a cash-based tax on net receipts."
  • A significant portion of the questions and answers component of the hearing addressed whether a VAT should be considered as part of a strategy to address the country's fiscal challenges.
  • Testimony can be accessed here and charts can be accessed here.
  • For additional information, contact Philip R. West at pwest@steptoe.com.

MISCELLANEOUS GUIDANCE RELEASED TODAY:
Notice 2011-12 provides that, for wages paid after December 31, 2010, the procedure employers use to determine income tax withholding on wages paid for services performed by nonresident alien employees within the United States are different than the procedures used in 2010. The new procedures are explained in Publication 15 (Circular E), Employer’s Tax Guide, for use in 2011 and Notice 1036, Early Release Copies of the 2011 Percentage Method Tables for Income Tax Withholding.

Notice 2011-8 provides adjusted limitations on housing expenses for tax year 2011 for purposes of section 911 of the Code.

TAX BILL INTRODUCED FEBRUARY 1ST:
S.246: A bill to amend the Internal Revenue Code of 1986 to permit the disclosure of certain tax return information for the purpose of missing or exploited children investigations.
Sponsor: Sen Casey, Robert P., Jr. [PA] (introduced 2/1/2011)   Cosponsors (1)  

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
Steptoe & Johnson LLP has one of the largest and most diverse law firm tax practices in the country.  The practice covers the entire spectrum of federal taxation, including representation of businesses before the Congress, Treasury and the national office of the IRS; transactional planning for domestic and multinational corporations; complex audit and controversy work for corporations and other business interests contesting IRS adjustments; litigation before the Tax Court, Court of Federal Claims, district courts, courts of appeals and the Supreme Court.  The firm's tax practice also encompasses all aspects of employee benefits (ERISA), executive compensation, tax-exempt organizations and charitable giving.  Steptoe has an extensive state and local tax practice, representing an array of business clients on complex sales and use tax, corporate income tax and property tax matters, both advising those clients and handling audits, administrative appeals, and litigation for them.  Read more information on Steptoe's tax practice.