PERAB Tax Reform Subcommittee Meeting

Mr. Goolsbee: Okay. I'm Austan Goolsbee of the Council of Economic Advisors and
the Chief Economist of the Economic Recovery Advisory Board.
Welcome everyone who is watching to the next of our series of
public meetings with experts about tax reform in preparation
for the P.E.R.A.B.s report on tax reform.
Why don't you guys just introduce yourselves and then
let's just, let's just get started.
Mr. Melancon: I'm Barry Melancon,
President and CEO of the American Institute of CPAs.
Mr. Karl: And I'm Ed Karl, Director of the AICPA
Tax Division in Washington.
Mr. Melancon: Thank you for having us here, it's a real pleasure.
As I said, I'm with the AICPA, and I think it's important just
to give you the frame of reference of what our comments
and remarks and materials are all about.
We have 360,000 members who those in public practice work in
44,000 CPA firms so they touch essentially every taxpayer and
certainly every business in the United States,
and the materials that we've provided and those I that will
give some highlights to today are really the output of our tax
section which has 25,000 people who specialize in tax and who
work through a series of committees with over 200 volunteers.
So there's been a lot of thought into what we have here,
some publications that we've had in the handouts, et cetera,
that will support that, and we think we have a longstanding
record of providing public interest oriented,
unbiased information.
You won't find a lot of my remarks saying specifically this
is what a tax rate ought to be or whatever.
Ours is more from a policy perspective and looking at it
from that standpoint.
So we're pretty, we're pretty proud of the work we've done
with various groups in Congress, the White House over the years,
as well as the IRS.
Today I'm going to cover a suggested framework for
evaluating tax reform proposals, our thoughts on tax
simplification, which we know is a major initiative or focal
point for the subcommittee, our recently updated publication on
tax reform which we think will be a very valuable resource for
you, some ideas on alternative minimum tax,
some ideas on the estate and gift tax system,
and reference a compendium of technical legislative proposals
and some other things that we think can simplify the tax
system like civil tax penalties, et cetera.
Clearly every year discussions take place among policymakers,
politicians, economists, and obviously preparers on how to
reform tax systems.
Some proposed changes would make fundamental changes,
for example, replacing the federal income tax
with a consumption tax.
Other proposals alter the existing system by adding or
expanding tax incentives to encourage savings,
modernizing the international tax rules to better address
today's global economy or making even procedural changes.
Every suggestion to modify taxes,
whether they're major or minor, raises we believe a common
series of questions on how to best analyze and compare the proposals.
As part of its efforts to promote this sound tax policy,
which we really think this is what it's about,
we have published four tax policy concept statements which
discuss various principles of good tax policy.
We've furnished you in electronic format and as well as
in the handouts today all of these tax policy statements,
and I urge you to take a look at them and take them into account
as sort of a starting point, a philosophical point as you will
measure various things that you will debate and ultimately make
various recommendations to.
So as an example, our tax policy statement on number one,
it's entitled, "Guiding Principles to Good Tax Policy:
A Framework for Evaluating Tax Proposals."
And it is in your materials.
And it lays out this framework that we recommend using as a
guideline, there are ten guiding principles that we think you can
look at and evaluate any proposal that you are
considering as you go about making various decisions.
And just to summarize those for you and I won't do this with
each of these in the interest of time,
but we think this is the starting point.
So for instance we focus on equity and fairness as a consideration.
Certainty, tax rules having some certainty to taxpayers is very important.
Convenience of payment, no tax system regardless of its
objectives unless there is a reasonable way of collecting the
taxes really works.
Economy in collection, which ties into that particular point.
Simplicity, we are major advocates of simplicity.
Neutrality, meaning the tax effect on one taxpayer in
similar situations is reasonably the same.
Obviously economic growth and efficiency.
Transparency and visibility.
There are many things in the tax law and I'll reference some of
them that are highly confusing, they're intended to incent
certain things in the tax law but taxpayers cannot really
comprehend them, and as a result they don't have the desired effect.
Minimizing the tax gap.
We think there are some things from a simplicity and an
efficiency standpoint that will help raise the percentage of the
sort of theoretical amount of tax to be collected.
And obviously one of the considerations is appropriate
government revenues.
Let me focus first on simplicity.
We know this is a major focus of the subcommittee,
and we have been a long advocate of simplification and fairness
in the tax law.
I'm often as the person who represents 360,000 CPAs,
I'm often, when I say that people say yeah, right,
CPAs really don't want tax simplification,
and that's simply not true.
Really dating back into the early '80s we've had major
campaigns consistently on tax simplification.
There are some 3.7 million words,
to that effect, in the tax code,
and not counting regulations and everything else,
and we believe it can be much more efficient from that
standpoint and as CPAs we think we can bring a lot to that
particular point.
We particularly see a lot of problems for small business and
sort of the personal side of small business,
the entrepreneur whose small business flows to them in some
form or fashion.
A growing number of taxpayers perceive the tax law to be
unfair, that's what our members tell us,
I think it greatly impedes the continuing efforts of the
service to administer and enforce the law.
The cost of compliance in small businesses is increasing every
day and obviously affecting business decisions from that
standpoint, and we would say the complexity actually interferes
with economic decision making for small businesses and from an
economic stability standpoint we would think that that's not the
best possible result.
The end result is the erosion of a voluntary compliance.
By and large, business people want to obey the law.
But it's only human nature to inadvertently disobey the law if
you don't really understand the law or its context,
and as I mentioned the size of the system,
and in many ways an outdated income tax system.
There are various types of simplification.
We've identified three: There's simplification that reduces
calculation complexity.
There's simplification that reduces the filing burdens.
And there's simplification that reduces the chances of a dispute
between the IRS and the taxpayer.
And quite frankly the first two types of simplification are
sometimes the easiest to identify and fix.
Clearly, the third group revolves around hard choices,
hard policy decisions.
And you know we all know computers help and forms help,
but it's not just about math.
In fact it's far from math.
And this type of problem, you know,
adding certainty to the tax law and reducing the likelihood of
disputes is the most difficult to effect,
but may be the most important.
Clarifying tax law is hard to understand,
but it must be a priority.
With that in mind, I'll reference another document which
is our policy statement number two,
which is the guiding principles to tax simplification.
Which is set forth as I said in there,
and I'm not going to go through all of these,
but there are things like seeking the simplest and most
transparent approach to getting a desired policy objective.
A good example on that is for instance there are some 14 or so
different education type of incentives as a policy
basis in the system.
Well, the fact of the matter is that because they're so complex
people really don't understand them or not many people do,
and as a result they don't get the desired effect of incenting
people in that particular area, so we would be advocates more of
a system that says the public policy issue says we need to do
some things in the tax law to address education,
we ought to have one bucket for that.
If it's not getting that, the desired effect you step it up
from a dollars perspective over time,
but having multiple answers to the same policy do not
necessarily create the types of responses that you want from the
consuming public or the tax paying public.
Another example is minimizing compliance costs.
Another for simplicity, reducing the frequency of
changes in the tax law.
I can tell you there are something greater than 6 million
small businesses in the United States and virtually every one
of them has a CPA relationship.
And finding a way to have less frequent changes is a very key
element to good business decision and investment decision
by those businesses.
The constancy of change, some of it is unavoidable but the
constancy of change creates some issues from that standpoint.
Using consistent concepts and definitions.
Until 2004 we had huge numbers for instance of definitions of
what a child was for tax purposes.
Now there were some steps to try to rationalize that,
but we still have at least three definitions in the tax code of
what a child is which obviously, just on its surface is a form of
complexity from that standpoint.
Obviously simplicity revolves around the ability of the IRS to
administer the system and enforce the laws rationally,
and another area of simplicity to be considered is laws that
apply to just a limited set of taxpayers or for a short period
of time, phase-ins and phase-outs are very complicated
from a planning perspective and I think affect decision making
probably inadvertently.
We are also committed to helping our tax system not only simple
but as fair as possible.
And as mentioned before we believe that we can do a lot of
things from that standpoint.
We've issued a document, we do these periodically and this has
again been provided to you, it's a very long document.
It's called "Tax Reform Alternatives for the 21st Century."
We think that you will find it very useful.
There are things in here that are not really the focal point
of your charge, for instance it looks heavily at alternative tax systems.
And it looks at sort of the issues of transition for those
alternative tax systems which are very complex in and of themselves.
But in chapter 4 of this document it also looks at
improvements to the current system.
And so we would call your attention to that particular report.
We can make as many of those available to you as you'd like.
And it is, like I said, an update of actually a document
that we have produced periodically,
here's a version of it from 2005,
we continually update it for the environment, economic situation,
et cetera, that goes on, and we think it's a useful document.
It's been used by policy decision makers in the past.
We do understand that in making your recommendations ultimately
there are some facts that you have to consider,
and we're very sensitive to that in this publication.
Like dealing with the economic strain of the baby boom generation.
Understanding the impact, the human impact of expiring tax cuts.
As an example in this area, there are certainly advocates of
just allowing the tax cuts to expire.
That may be fine from a revenue generating perspective,
but that assumes that the taxes and the approach that was there
when the tax cuts were implemented is the right policy
decision today.
It may well be that you have to look at it from a different
policy perspective.
And then finally we think controlling the exponential
growth of the alternative minimum tax has to be addressed.
Twenty thousand taxpayers were impacted in 1970 with the AMT.
Without any change, it will be 30 million in 2010.
Most of them not the target of that area.
And I'll comment more on the AMT in a moment.
The, in addition to the debate over the appropriate levels of
federal deficits and national debt and the appropriate levels
there for federal revenue we know is far from settled and is
a key component of recommendations that have to be made.
We understand that.
And all of these things are part of the impetus to consider tax reform.
Current economic conditions as well as future revenue needs
will affect the debate, and while others may present
challenges that's deemed or are deemed to be too great to
overcome or unacceptable, we think they can be overcome.
The report discusses three general approaches to tax reform
that have emerged over time.
Improving the current system through revisions without
changing the fundamental character of the system;
replacing the current system or major parts of it,
such as consumption taxes and the transition issues associated
with it as I referenced; and revising the current system but
also adding other elements like a consumption tax and
things of that nature.
And I'll focus on chapter 4 as I mentioned, which is,
which is the major charge, I guess, of this subcommittee.
So a couple of examples: I mentioned eliminating the
Alternative Minimum Tax.
Consolidating education and retiring savings incentives.
Can still obtain the desired policy effects but make it simpler.
Replacing a very old 20 factor worker classification test into
really identifying who's an employee and who's a subcontractor.
And even simplifying the earned income tax credit.
The fact of the matter is that it's one of the areas of the tax
law that is, has the greatest number of errors.
We fully recognize it has been one of the most successful
programs that the government has brought forth in sort of an
anti-poverty policy perspective, but that doesn't mean that the
income tax credit couldn't be made more effective from that
standpoint, earned income tax credit.
We also focus in this chapter 4 about how to avoid the use of
phase-outs, temporary provisions,
last minute provisions in overriding the tax law,
and how to close the tax gap through a more efficient tax system.
We don't take a position on a best possible solution to reforming.
We do encourage an in-depth debate on the issues undertaken
through an organized and logical process with the goal of
enacting good tax policy reforms in the near future.
We understand that these, that some of these issues
are truly policy issues.
And by looking at how the tax law fits into those policy
decisions and making good decisions we think that's how
you will get to the most efficient tax system.
The unifying goal should be established now,
as the effort before you get to the details,
because that will allow for the most rational decision making.
This should be your first step.
And the ten guiding principles that I referenced earlier really
are the basis for that.
I've mentioned several legislative proposals,
and let me get into a little bit more detail and some specific
recommendations that would address those,
including the alternative minimum tax and the estate and
gift tax system.
We recognize that eliminating individual AMT,
although preferable by many policy members and certainly
many taxpayers, may not be feasible because of the large
revenue loss that is likely to result.
As a result, we have proposed 13 alternative solutions,
each one of which would reduce some of the complexity and the
unfair impact of AMT as currently imposed.
The full text has been provided to you as another handout,
but let me give you a couple highlights.
For instance, we would say that one way to simplify AMT is to
ensure that all taxpayers with adjusted gross income under
$100,000 are exempt from AMT.
It wasn't the intent of AMT at that level of income and it
would simplify tax matters for many unsuspecting individuals by
making that cut at that particular level.
We think an increase in depth of inflation in AMT brackets and
exemptions so that we don't have a unfair ratcheting up over time
and eliminating phase-outs would simplify it.
We would also propose that to allow for AMT purposes a series
of deductions and calculations so that they would be the same
for regular income tax purposes as AMT purposes.
This would simplify and produce fair outcomes from that standpoint.
For instance, standard deductions,
dependency exemptions, miscellaneous itemized
deductions so individuals at those income levels could enjoy
the deductions from employee business expenses,
medical expenses, and even the deduction for state
and local income taxes.
And maybe most importantly and probably unfair to say most
importantly, but we also think that we should exclude the AMT
from the estimated tax penalty.
Many people get AMT taxes, have no idea even what AMT is,
they're caught by that, and not only are they caught by that
tax, but they're inadvertently caught by underpayment of taxes
and it feels to many of those taxpayers as sort of a double
whammy in that particular environment.
It seems a little unfair.
On estate and tax reform; I'm sorry, gift tax reform.
We've also provided a publication on this.
We have been active in this really since this debate has
begun dating back in earnest in 2001 where we issued a study,
these reforms that we proposed back then are still applicable today.
The study focuses on the complexity of the current
system, taxpayer planning and compliance burdens,
ease of administration, and revenue constraints.
The AICPA study remains very relevant today and timely as I
mentioned, and it also focuses on the totality of it,
not just estate but other gift taxes and transfer taxes that
exist in the system.
We've issued a January 2009 letter on the study and we have
provided these suggestions, many more than these but
let me highlight four.
Increasing the exemption and indexing it for inflation.
We know that 2010 because of the existing law is a
particularly difficult year.
We believe that you put in a system,
we put a reasonable whatever the policy decision is on what the
exemption should be, we index it for inflation,
and keep some stability in that transfer system from that standpoint.
We believe that contrary to what will happen in 2010 that we
should have through the estate tax system a full step up in
basis for inherited assets and avoid what will be an incredibly
complex system of carryover basis that
will go into place with 2010.
It's essentially; it would pretty much dwarf a lot of the
complexity that we already have in the system if that
were to remain in place.
We think in the estate tax you should recommend things to
provide broad-based liquidity relief rather than targeted
relief provisions.
It's one thing to have a tax levy,
but we should not be forcing and we know there are some targeted
relief provisions for family farms and other things,
but we should have broader-based liquidity relief so that people
pay the appropriate taxes that the policy warrants,
but at the same time not forcing family assets in some form or
fashion to be disposed of inappropriately.
And also we believe that the portability of whatever
exemptions are in place should accrue to surviving spouses to
simplify estate planning and estate administration
for married couples.
We should not force married couples to go through a series
of legal maneuvers in order to maximize these provisions.
You can do through them through the legal maneuvers,
why don't we just recognize them in the tax law and simplify from
that particular standpoint.
I won't go into these in detail.
We've also provided a compendium of legislative proposals beyond
the ones that I have just covered that we believe can be
addressed that would meet the goal of promoting simplicity and
fairness in the Internal Revenue Code.
We've released this in July of 2009 and we've provided this to
you, I would say these do not rise to the high profile nature,
maybe even the political debate nature, but they are,
that AMT or estate taxes might, but they are very important to
meeting that objective of simplicity and we would commend
to you to take a look at those.
We think that a lot of them can be done efficiently and
effectively, and take a step in the right direction from a
simplicity standpoint.
Likewise, civil tax penalties is another area that comes in to
that particular environment.
We do have concern about civil tax penalties.
We have a sort of a system that civil tax penalties have been
built over time, they're layered, they're very complex,
we acknowledge you need civil tax penalties to incent
compliance with the voluntary compliance system.
However, the way some of these are applied,
the way they interact, in some cases for instance there are
civil tax penalties that even when there's an error the IRS
may levy the penalty and they don't even have the ability to
withdraw the penalty based on the way the law is written.
So overbroad, vaguely defined and disproportionate penalties.
They actually dis-incent the objective of creating high
levels of compliance with a voluntary system.
People at some point throw up their hands;
they just get frustrated from that standpoint.
We think while this would never be something that would be high
profile, this would in fact over time create greater compliance,
minimize the tax gap, and would cause taxpayers to view the tax
system a little bit fairer from that particular standpoint.
Mr. Goolsbee: Do you, I know you guys -- face a hard -
Mr. Melancon: That was my last comment.
Mr. Goolsbee: Oh, that was your last comment.
Mr. Melancon: I was just going to say thank you for the time.
We've provided you a lot -
Mr. Goolsbee: Thank you for these materials.
Mr. Melancon: -- a lot of information.
Mr. Goolsbee: We have said that everybody that presents we are going to
make the materials available.
Mr. Melancon: We're fully aware of that. No problem with that.
Mr. Goolsbee: And we really appreciate all the efforts that you have done
to make us clear those ideas and for clearing out some time on
your schedule to talk with us.
Mr. Karl: That material that's in there was e-mailed yesterday,
so you have it all available.
Mr. Goolsbee: Yes, we got it.
Mr. Melancon: And I think if you see the policy statements and the
detailed recommendations, it obviously, not to unload,
but we're happy to work with you on any of those to clarify.
Mr. Goolsbee: Okay.
Mr. Melancon: And to help you make some decisions that or input that
might be valuable from that standpoint.
Mr. Goolsbee: That's outstanding. Thank you very much.
Mr. Melancon: Thank you, Roger.
Mr. Greenstein: Okay. Thanks for the opportunity to testify and for the important
work of the panel on -- Bob Greenstein from the Center on
Budget and Policy Priorities and...
Mr. Marr: Chuck Marr from the Center as well.
Mr. Greenstein: We have more material in the handout than we
have time to go through, so we're going to go through parts
of it and breeze over other parts of it.
We start with major goals of tax reform.
Most of these need no time: Broaden the base, simplify.
I think the two points we wanted to make here are that while it
seems the tax reform should follow the spirit of 1986,
broaden the base, lower the rates to the degree one can,
we think that the serious long-term fiscal problems the
nation faces means that unlike in '86,
this time the goal should be not only to simplify and broaden the
base, but in the process of doing that to end up with some
net revenue raising to help with long-term deficit reduction.
We obviously think changes are needed on the spending side of
the budget as well.
And needless to say that the revenue raising should be done
in a way that's economically efficient.
The other thing worth noting is just as the federal government
faces serious long-term fiscal pressures,
so do state governments, and so we think care should be taken to
assess the impact of reform options on states,
and make sure reform options do not make state fiscal problems worse.
I'm going to skip over the slides on the long-term fiscal
problem, you all know about that.
Briefly but very briefly note the slide that presents the CBO
data on changes in the income from 1979 through 2006,
it tells the familiar story that due primarily to changes in the
economy that are external to government policy,
there's really been a significant widening in the
quality, and simply our point here is this should be a piece
of context, and that tax reform to the degree possible should
seek to lean against this trend not exacerbate it.
The next slide just makes the same point that I made a minute
ago about state revenue issues.
As I presume you know, most states with an income tax tie
their definition of taxable income to the federal
definition, so changes in the federal tax,
if it broadens the federal base it helps state fiscal
conditions, so one gets another benefit there.
Now, we did want to focus a little more on a few issues.
One of them is tax expenditures.
As you know they're very large.
I was in '94 a Commissioner on the Kerry Danforth Entitlement
and Tax Reform Commission, and I still recall Alan Greenspan's
testimony when he specifically used the word tax entitlements
to refer to these.
Many of them are effectively government subsidy programs that
do not get the same degree of oversight and transparency that
explicit subsidy programs get.
There are a variety of estimates of how much tax expenditures
cost, but regardless of what estimate one uses,
it's a very large number.
In slide number 9, we make the point that we would hope maybe
the panel could think about some options to increase the
transparency of tax expenditures.
We think it would be useful if OMB and CBO in their periodic
budget analyses elevated a little bit how large tax
expenditures are in cost.
One option that the budget experts at the Center have sort
of suggested is that one might actually have some,
want to have some budgetary displays in which tax
expenditures costs are classified as outlays for
presentation purposes.
The larger theme is simply to elevate the degree of attention
that's given to them.
Moving to the next topic, although it's obviously a
related one, one of the major forms of tax expenditures comes
through itemized deductions.
They're designed to create incentives for socially
beneficial behavior, but their value is tied to marginal rates,
and we refer particularly here to the important paper by Lily
Batchelder, Fred Goldberg and Peter Orszag of a few years ago
that found the subsidy structure to be economically inefficient.
The next slide, we just have a couple of pithy quotes from the
Batchelder study, but they really say it as well as one can
that providing a larger incentive to higher income
households as deductions do because of the rate structure is
economically inefficient unless there's specific knowledge that
higher income households are more responsive to the
incentive, or their engaging in a behavior generates larger
social benefits.
In thinking of reform proposals in this area,
the President in this year's budget proposed capping itemized
deductions at 28%.
That proposal does not appear to be gaining traction in Congress,
but what we would suggest as an initial step that might be
politically viable would be to cap them at least at the top
rate, current top rate of 35%, given their economic
inefficiency and the revenue problems we face.
There really is no good rationale for having them go
back up to 39.6%
when the top rate goes back to 39.6.
Mr. Marr: Here your work would be very timely because next year they
have to decide that, so this is, you know, as an incremental,
so if you sort of agree with us and with Peter on the sort of
direction you want to go, this sort of for the Congress is the
first point where they really have to decide and you could
give it a little momentum if you so chose to come out and
recommend that, because the rates are going to go,
are tracked to rise and Congress would have to by end of next
year step in and say no we should keep the value of
deductions at 35.
And that's sort of a first step, you keep things sort of at the
status quo, which would be a step forward, small one.
Mr. Greenstein: And on policy grounds a desirable broader reform we do
not underestimate the degree of political difficulty of it,
is the reform that the Batchelder, Goldberg,
Orszag paper recommended of converting deductions that don't
have positive behavioral incentives,
converting them into uniform refundable credits at a 15%
subsidy rate, which is in essence the direction that the
2005 Bush Tax Reform Panel took with regard to mortgage interest.
There's perhaps no area in which the current deduction and tax
expenditure structure is more inefficient or, to use a word,
in his prior life I heard Peter Orszag use several times,
more upside down than retirement tax incentives.
Where there's $120 billion in foregone revenue to subsidize
retirement saving but the bulk of it goes to the top of the
income scale where the evidence is that we largely induce shifts
from taxable to tax preferred retirement accounts,
rather than generate additional contributions.
I think the figure is that more than 70% of the tax benefits
from preferences for retirement plans go to the top 20% of households.
As a first step, there are some very solid incremental reforms
in President Obama's 2010 budget,
we note them on slide 15, expanding the savers credit and
making it fully refundable, and establishing a system of
automatic workplace pensions, again the broader reform that we
would think is the more desirable,
as an ultimate goal is the sort of thing proposed in this case
in a paper by Bill Gale, Jon Gruber and Peter Orszag where
they proposed establishing automatic accounts and replacing
existing tax deductions and exclusions for retirement
contributions on a revenue neutral basis with the uniform
30% federal match that would be deposited directly into a
savings account.
Moving to the corporate area, won't spend much time here.
We have the slides in simply because one hears too often the
emphasis on the relatively high compared to other western
countries marginal tax rate in the corporate income tax,
but reference isn't always made at the same time to how narrow
the base is for the U.S.
corporate tax, so the next several slides take various
kinds of investment and show how narrow the base is,
and it leads one to slide 20, where we find the seeming
anomaly that despite having a relatively high marginal
corporate tax rate, the U.S.
actually collects less in corporate income taxes as share
of GDP than the majority of countries, OECD countries.
The conclusion obviously this leads to,
hardly an original one with us, is that the corporate area badly
needs reform with a broader base and a lower marginal rate,
and we also think this is one area where one could do a
broader base and a lower marginal rate and try and do it
in a way there is some net revenue increase for deficit
reduction purposes.
Again on slide 21, we note the conclusion that the Bush
Treasury Department reached in a report it brought out in 2007
about the contrast between the high marginal rate and the low
average corporate rate.
Mr. Marr: And just one sort of seemingly small point,
but I think in terms of the process could actually be very
helpful and constructive for the panel to consider recommending
deals with tax extenders.
You're obviously going to propose corporate tax reform
proposals to broaden the base.
Obviously on paper, it's a wonderful idea.
But it's politically very difficult to do because
obviously corporations, lobbyists,
just like human beings generally, are loss averse. Right?
So you always -- hard to take something and you go to give something.
The people you're taking from have a much harder time giving
that up then the people who benefit from.
But you have sort of a built-in process every year where the
corporate tax extenders, R & D tax credit, the Sub Part F,
act of financing deferral for financial institutions,
two very power corporate groups, each year try to get their tax
expenditures renewed.
So they face loss, right.
So they're determined really to get those things extended.
So there's an opportunity there for the panel to recommend,
as a process matter, that those extensions each year be paid for
with corporate loophole closures.
Just that process point, that came from the administration,
which you sort of get soundings of that from the House of Representatives.
If that came from the administration,
you would have several years where you could lock in actually
some good loophole closings, some sort of base broadening
provisions, just because you have sort of political venom
behind very popular provisions.
So we recommend you take a look at that.
Mr. Greenstein: Obviously, consistent with the pay-as-you-go regime and
fiscal responsibility.
The final area we wanted to cover and spend a little time
on, a long-standing area of Center on Public and Policy
Priorities' work and expertise, the tax credits at the low-end
of the income spectrum, which are yearly the Earned Income
Credit and the Child Tax Credit.
As you know, these credits lift millions of families and
children out of poverty.
They also provide important work incentives.
There's a significant research literature suggesting that
particularly among single parents,
the earned income credit has lead to significant increases in
employment and reductions in welfare receipt.
Low-income credits also play another important role.
In the '86 Tax Reform Act, they played a critical role in
helping to ensure that the overall distribution of the
reform was equitable.
In '90 and '93, they were used for similar purposes to offset
the regressive effects of increases in payroll taxes,
in gasoline, alcohol, and tobacco excise taxes.
So they can be important instruments in a number of ways
in a tax reform process.
We recommend the panel think about reforms related to
refundable credits in two contexts;
incremental steps and broader reform.
In the incremental steps, we think there are three key areas.
One which the President has proposed is to make permanent
the Child Tax Credit and Earned Income Tax Credit expansions in
The Recovery Act.
The second is to improve the earned income credit
for childless workers.
And the third is to enact a series of EITC simplification
proposals that the Bush Treasury Department proposed.
They were greeted as good simplifications on the Hill.
They were never a political priority.
They were never acted upon, but they really ought to be.
Taking each of these individually,
the improvements in the earned income and Child Tax Credits in
The Recovery Act enacted in February of this year have a
really large anti-poverty effect,
particularly among children and working poor families.
They also reduce marriage penalties in the earned income credit.
And they improve work incentives.
For example, welfare payments rise with family size,
but wages don't.
The EITC addresses this to a modest degree,
but it only has two tiers; families with one child,
families with two child.
The Recovery Act added a third tier for families with three or
more children with both improves the work incentives and reduces poverty.
We commend the President's proposal to make those
expansions permanent next year.
And we would note that if they expired, nearly 1.5
million people, including 800,000 children who are being
lifted out of poverty by hese expansions,
would fall back below the poverty line.
We would like to talk for a moment about low-income workers
without children.
The earned income credit they get is extremely small.
The President actually in his campaign proposed enlarging that credit.
This is something many analyzed from across the political
spectrum have recommended noting,
that the EITC has significantly improved employment and work
incentives among single female parents,
that we have low participation rates among a number of single
adults, particularly including a number of minority males,
and that a stronger earned income credit for workers
without children could produce really beneficial results here.
The making work pay tax credit that is in the recovery act
effectively serves that function.
We operate on the assumption that it will expire at the end
of 2010 due to its cost.
If it does, we think it would be very important to them to enact
a regular permanent increase in the earned income credit for
childless workers.
We would note that the current income rate
is 7.65% of wages.
Economists, as you know, really regard both the employer and
employee shares as being paid by workers.
We recommend increasing the credit rate to at least 15.3%.
As you know, it's 34% for a family with one child,
40% for families with two children.
We would like to call your attention to slide 27.
What slide 27 shows is that for low-income workers without
children, the federal government is still taxing them
significantly deeper into poverty.
This is not true for families with children.
The changes in the child and earned income credit have
completely resolved that matter.
But for workers without children, the tax burdens,
when you include both payroll and income tax,
continue to be quite substantial at very low wage levels.
And an expanded EITC for childless workers
could help address that.
The final of the incremental proposals we strongly recommend
are that you take a careful look at the EITC simplification
proposals from President Bush's 2005 budget.
Here, Treasury and IRS proposed to simplify the EITC abandoned
spouse rule to make a change in claiming children and to
eliminate the complicated earned income credit.
The last time I looked, the number of pages in the
instruction booklet, the IRS instruction booklet for the
EITC, was greater than the number of pages in the
instruction booklet for the alternative minimum tax.
The EITC is too complicated.
Now, to be fair, most EITC claimants don't have to go
through all of that.
But we have all these extra pages and lines for some
particular provisions in the EITC that affect small numbers
of people but add considerable complexity.
These three Bush Treasury proposals could significantly
reduce the EITC error rate.
Finally, on the broader reform front, as you know,
there are options to consolidate what are now a large number of
tax credits for low-income workers.
The 2005 Bush Tax Panel had some very interesting proposals,
a very interesting proposal, to consolidate those credits into
two credits, a family credit and a work credit.
In a paper two of our colleagues at the center did in 2006,
they have some very good analysis of this
we recommend you look at.
What we particularly recommend you look at is a paper that
Jason Furman, when he was at the Center on Budget, did in 2006.
What Jason did was he looked at the work and family credit
proposals that the Bush Tax Reform Panel put forward.
He noted the fact that they were integrally embedded in some of
the larger reform proposals that panel was making,
which might be a more sweeping than policy makers would want to do.
So he showed how you could take their proposals in this area
and, with some tweaks and modifications make them work on
their own as simplifications, even if you didn't do all the
other broader, more sweeping changes for the tax code as a
whole that the Bush panel did.
And he outlined that in a 2006 paper.
If you don't it, these are on our website.
We can easily get them to you.
And a final point on the EITC is just that there are now 24
states with state earned income credits.
They're an important part of state tax codes.
They generally exist, they're very simple.
Your state earned income credit is say,
10% of your federal credit.
We make the point here simply because if one consolidates
things so the federal earned income credit doesn't quite
remain in its current form, one wants to take a count of trying
to make sure there's still something that's a simple hook
for those states that want to piggyback on.
The final point is just -- sorry Austan had to step out.
Austan has done very important work on return-free filing.
And the last slide, I want to be clear,
is in no way intended to suggest that isn't a very important
reform to look at.
It's simply a caution that under the EITC as it now stands,
particularly with its complicated rules for what
constitutes a qualifying child, rule that are the main source of
error in the EITC, that one wants to be very careful in
moving to a return-free filing regime with regard to people
getting the EITC.
You want to be very careful that it not increase the earned
income credit error rates or lead to a reduction in take-up
rates by people who aren't otherwise required to file a tax return.
I do think -- in Austan's paper, several years ago,
he has several waves.
This would really need to be a wave, I think,
several years down the pike.
And one would want to very carefully make sure one had
addressed those two key issues before bringing EITC people in.
Obviously, to the degree that one had simplified the credit in
the interim, that would facilitate moving in this direction.
Anything you want to add?
Mr. Marr: Yeah. Just quickly back on the potential consolidation of the
family credits, work credits into one,
let's just keep in mind those childless workers that it's
important to keep -- if you have just one credit,
there's a potential that those people could get left out.
That's really a virtue of having a family credit and a worker
credit is a very important population still can get included.
Male Speaker: Great. Thank you very much.
We're on a pretty tight schedule.
We know you are as well.
We greatly appreciate your input.
We will take all this under consideration and look at some
of the other documents as well.
Mr. Marr: Thank you.
Male Speaker: Introduce yourself.
Mr. Bankman: I'm Joe Bankman from Stanford Law School.
Shall I jump in?
Male Speaker: Absolutely.
Mr. Bankman: Okay. And do we have anyone on the phone?
Male Speaker: Keep going.
Mr. Bankman: Okay. Maybe we do, maybe we don't.
Well, I'm going to talk about tax filing.
I've got a presentation, but my purpose is to be
responsive to you all.
So if you have questions, please interrupt me.
Tell me to go faster or go back, whatever you wish.
Filing is outrageously expensive,
even for wage earners.
Our best guess is wage earners spend $30 billion a year filing,
time and money.
That estimate can't, however, cover the hard to monetize cost
of aggravation and anxiety.
I'm going to talk about two ways to limit the cost.
The first is a Performa return, an estimated tax return.
You might have heard about it with Austan Goolsbee,
Simple Return, part of the Obama campaign.
We have that in California.
It's called the ReadyReturn.
So I'm going to talk about is in context of the California
program that's operational.
But I can talk about it more broadly as well.
And, of course, my emphasis will be how it can apply to
the federal government.
Then I'm going to talk about something similar called data retrieval.
So to start with, I want to talk about the ReadyReturn
program a little bit.
And what I've done -- sometimes it's easier when things are
talked about if you can see an example.
So at the end of this slide presentation -- I think it's
slide 19, go to page 19 -- you get some screen captures.
This is an online program.
So what I've done is I've shown you what it looks like if you're
a taxpayer and you want to find your ReadyReturn.
So you go online and you type in your name and your Social Security.
And if you qualify, it will tell you.
You qualify if you have wage income only.
If you've qualified, it will tell you if it's ready.
Whether its ready depends on whether the wage data
has hit the state.
It takes a few days for the state to process it as well.
If it isn't ready, you can leave an e-mail and the state will
tell you when it is ready.
If it is ready -- and here we may be on slide 22 or something
-- you type in your password and up comes your return.
That's slide 23.
It comes up first in a tabular form and then in slide 24 in the
kind of form that you're used to.
It looks like a tax return.
You review it, you make any changes.
Now, you don't have to ever log on and look at it.
If you look at it, you never have to file it.
If it's not right, you can make changes.
You can download it and take it to your preparer to see if they
can do better.
If you're done, you can get your refund direct deposit.
It's two business days, it will be in your bank account.
Most people in this situation are going to have refunds coming.
And then you're done with the process.
I'm now going to talk about the pilot program that evaluated the process.
The question is, how do we know if it's good or not.
In 2004 and '05 -- if you're following me,
I'm now back up to slide 5.
Although, if you lose me, probably nothing hinges from that.
In 2004 and '05, we had a pilot program.
We gave 100,000 tax payers ReadyReturns.
Despite obvious beta flaws in the program which have since
been corrected, an overwhelming majority wanted to use it again,
99% of the online filers.
The average user saved forty bucks in thirty minutes.
What's most significant to me are the taxpayer comments.
And I have some comments in the slide program,
and I think I have some others maybe at the end of this.
You know what they do?
They give you all the comments from the first survey.
And there were three surveys.
And the thing to do is just pick a page in random.
You've really never read comments like this in your life.
You know, I'm looking at one, "wonderful,
wish the Feds could make it this season"; "great program,
makes my life easier."
You know, we're always wondering what tax payers really want.
And here they're telling us one thing they want in their own words.
It's available to about 5% of Californians today,
about 700,000 tax payers.
There was no state-wide publicity really.
So it started off with a very low user rate.
But those who used it stick with it and tell friends.
Participation increased 500%, more than that last year.
It's now about 10%.
It's undoubtedly going to increase significantly in the future.
It cost the state about $100,000 a year to run.
There's cost savings associated with getting this program.
There's fewer errors, people migrate to E-filing.
So on the whole, it's probably a very small
revenue raiser for the state.
As good as it is, I think ReadyReturn is going to occupy a
kind of bottom tier of the solution to the problem of tax filings.
The real monetized cost is at the opposite end.
Not surprising, because most returns are more complicated.
I sometimes like to imagine some tax payer named Leslie.
She's a typical taxpayer who earns a million dollars
a year in wages.
And the IRS publishes statistics on the Leslies of the world.
And you can look at the items of income and deductions Leslies have.
And there are a lot of them.
They can have all sorts of taxable income,
tax exempting income and the like.
But the surprising this is almost everything the typical
Leslie has to put in her tax return is already subject to
third - party reporting.
So if Leslie could download all those 1099s and 1098s and W-2s
and we parenthetically maybe improve basis reporting a little
bit for Schedule D, it turns out Leslie wouldn't have to do much
calculate her taxes.
What we've done is we've substantially reduced record
keeping, which is the single largest component of that $30
billion a year social waste in filing.
We've also made Leslie's life easier and made her
preparer's life easier.
I'm assuming that someone like Leslie is still going to use a preparer.
Almost all of America these days uses preparers.
And what Leslie will do is have her preparer or have E-filing
program download this.
So everything I'm talking about would be platform neutral.
So if you use H & R Block, that's where you'll get the data.
By the way, I should mention that enrolled agents and CPAs
who do the nation's tax preparation are, on the whole,
wildly enthusiastic about getting access to these things
because they don't like their tax payers, their clients,
get furious because they get an audit notice because
they've lost a 1099.
Now, we're not going to have all of Leslie's data,
particularly in the early years.
We can talk in a minute about how much data we can get and
what we would have to do to get it.
But with data retrieval, you're not living Leslie a bottom line,
so you don't need all the data.
You give her what you have.
An there's a national tax journal article which,
God forbid, I don't actually suggest you have to read.
But it talks about how we could integrate a data retrieval
system with the system that changes the way we do amended
returns and extensions.
You know, a lot of Americans amend returns and file
extensions only because they have one little piece
of late arriving data.
And it's really wasteful to take that data,
go to your accountant, and have a file an amended return.
The government could ping the accountant saying we've got the
data, and the taxpayer could have the option, maybe,
of carrying that over until the next year with a slight interest charge.
It would really, again, reduce social welfare cost and aggravation.
Data retrieval doesn't do as much for low-income tax payers
as ReadyReturn, but it does a lot,
because it gives them their data.
To some extent, it's better for those tax payers than it is for
Leslie because they don't have to add data because they're not itemizing.
It does something else for low income-tax payers that I want to emphasize.
It makes filing a one-stop process.
If you see an H & R Block or preparer,
you can go right there and off load the chore instead of going
back home and getting your data.
That's significant because a lot of Americans don't file.
And they're not tax protesters.
Most non-filers have refunds coming.
In California, we have over a million tax payers who have
refunds coming and don't file.
They don't file because they're bewildered by the process.
If we could have the one-stop filing,
it would allow places like an H & R Block to get these people
into the system.
I have a last slide here on data retrieval.
I'm going to call it the last slide on this.
Then I'm going to talk about details,
how you would implement it.
I call it transparency, but, you know,
you might call it tax payers right,
although that's an overused and kind of a loaded phrase.
I mean, the government's collecting all this data on Americans.
The least it can do is tell Americans what data
is collected in their names.
You know, Austan Goolsbee wrote an editorial once.
And he says, why does the IRS ask people for information it
theoretically has.
Well, this is the thing here.
I mean, think of a credit card statement.
Visa doesn't send you a blank piece of paper each month and
say, write down all your transactions and do the math and
if you're wrong, there's interests and penalties.
They start the ball rolling by telling you what's in the
government's computer.
And that's what we should do for the 140 million American tax payers.
I have a slide here on implementation issues.
It's slide 16.
I'm just going to go through those.
But again, I want to be responsive to questions you all
have at the end of this or at any time.
Right now, would data retrieval work or ReadyReturn?
No. The federal government doesn't have the data.
It would need to implement the programs.
The reason it doesn't is we've got regulatory requirements on
transmission of data that are out of date.
So banks and employers e-mail -- or mail,
excuse me -- employee's data at the start of January.
They don't send that identical data into the federal government
until the end of February, the end of March.
Those are the due dates.
Well, if those are the due dates,
then IRS isn't going to have the data in time for most tax payers.
The reason California can implement a ReadyReturn is that
California, like many other states,
requires quarterly submission of wage data.
So by the end of December, they've got -- or first week of
January -- they're going to get almost all the wage data.
And they can have cleaned it up if it needs to be cleaned.
So to implement any of these proposals,
we need one substantive law change.
It's quite a minor one.
It's contemporaneous submission of data.
And I talk about that in the National Tax Journal Article.
And I also talk about some way -- I walk through exactly what
it means for a large employer to send data.
I mean, how burdensome is the process?
Is there anything gained by the six-week wait?
The short answer is nothing is gained by the wait.
And I go through some modifications of the process
that would leave private industry actually better off
rather than worst off.
In any case, the changes would be small.
But that's an important stakeholder.
And I wouldn't want them to oppose a program that could
offer a lot of benefits to their employees because there's a one
time change over in data transmission rules.
Security's another issue.
And it's actually a constellation of issues.
You know, when we started off, we didn't really focus on this.
The reason -- excuse me -- we didn't focus on it is because
right now the tax return data is really insecure because it goes
through the mails.
So you get your W-2 and 1099 through the mail,
we send tax return through the mail that had that same information.
That was a cost benefit calculus thinking the average citizen
would really appreciate getting the paper return,
even though it meant her wage data is now going through the
mail twice instead of once.
Well, since then I've talked to people,
including people at the IRS, people like Dave Williams who
maybe some of you have talked with,
who's head of electronic filing.
I can see that that kind of attitude to security,
however you might think of it from kind of an economistic
standpoint, is not going to fly with the IRS.
And maybe it shouldn't.
They're always going to be paranoid about security leaks
because it's a political firestorm.
So the programs I now envision are online programs
which can be more secure.
And they are programs that would have conservative best
practices of industry.
And those will always change.
And I can talk about what those are,
but the bottom line is we can do it.
It's going to add a little bit of cost to the program.
It's going to slow down acceptance a little bit because
the IRS is going to have to outreach,
mostly to preparers but to some extent do-it-yourselfers about
how to get on the kind of security apparatus in the first place.
How to get your password is the bottom line there.
I mentioned cost.
And let me say a couple words about cost that's not on the
implementation issues, but it's obviously relevant.
The ReadyReturn program is unbelievably cheap, I think,
given what it does.
We're talking about less than a dollar a taxpayer.
A little bit more than a dollar a taxpayer now in gross cost,
going down because it's really infinitely scalable.
I'm prepared to believe that anything you do in Washington is
going to be many times more expensive.
But the fact of it is these programs are basically so cheap
to implement compared to social benefit that the cost could
increase a hundred fold and it would still be a good deal once
the programs get scaled up because the per-taxpayer cost,
when you scale it up for a nation, go down dramatically.
There's another kind of cost involved that I'm going to mention.
And that's cost of lost tax revenue. Right.
It's not exactly a social cost.
The money is there.
It's not wasted building a computer system,
but it's in the wrong hands.
It should be paid to the government.
So the fear here is when people know what the government knows,
they'll quit reporting certain forms of information.
So court reporting moonlighting income for example.
Well, of course the fact is they don't really report it very much now.
It's about a 20% reported trade on moonlighting income.
So one way to interpret that is the only people that are
reporting it at this point are people who are doing it because
they think rightly, it's the right thing to do.
Well, maybe that's not true.
Maybe some of those 20% now won't report it.
We looked at that in California and thought that the numbers
were going to be so small that we weren't going to change the
program, and we did one follow-up.
I say we.
By the way, California did this.
I consulted with them, but this is their program.
And I think it's a great achievement of some kind of
unknown IT people and leadership people in a state tax agency.
There was a follow up study, which suggested the revenue
loss was small.
But if it can't be -- it might be this commision is thinking
the sine qua non of anything is that it raises revenue or that
we're going to address the tax gap, no matter what,
that's our priority.
You could use either of these programs, actually,
to reduce the tax gap, I believe.
And it's not that hard.
Imagine we use the kind of insights of behavioral
economics, cognitive psychology, in terms of what's salient and
how things are framed.
Imagine you go online, you type in your wage data,
a screen pops up and it says, just thought you want to know,
a lot of people, believe it or not,
aren't reporting this moonlighting income,
that's taxable, and if you don't report it, it's tax fraud,
punishable by one to five years in prison.
If you were willing to do that, obviously,
that is a judgment call.
But if you were willing to do it,
I don't think there's any question that the reporting
rate on a lot of these things would go up.
And I bet it would go up significantly.
In fact, per dollar spent on compliance,
this could well be the cheapest investment you have ever made
because it would cost about $20 to add it to your program one time.
A final implementation issue I'll mention is -- I put here,
the IRS can't be stuck with an unfunded mandate.
You know, one way to look at a program like this is the social
pay off can be absolutely enormous.
I know you guys are thinking of other tax reforms.
And there's a lot of great ones out there,
including the presentation you just heard about about a unified
credit for the poor.
Absolutely a great idea, as many others are.
There's not too many that you could say are plausibly going to
reduce social welfare costs by $1 billion, $5 billion, $10 billion.
But there are almost none that actually are going to interface
with $140 million Americans.
And what this program does is it really changes the way those tax
payers are going to view the government a little bit.
And that's unique about this.
One problem we have is that the IRS is a beleaguered agency.
It's got a lot on its plate.
It's got to internalize the benefits.
And it can't really internalize the costs in that way.
And that's why any attempt to move this forward has got to
really reassure the IRS, at the very least,
they don't get stuck with an unfunded mandate and, at best,
they get rewarded for inevitably pushing themselves to add
something else to their plate because the social pay off is so great.
You know, I've designed this to end early so I can take questions.
I don't know if that's permissible. Yes?
Male Speaker: But you didn't touch much on your cost benefit analysis page.
Why don't you do that.
Mr. Bankman: So if you look at what we spend on compliance and,
of course, on filing -- this is just tax filing -- the best
figures come from studies, folks at the IRS starting with Eric
Toder and now going to John Gitten -- if I'm pronouncing his
name correctly -- have done.
That's a hundred billion a year for individuals.
So you start with this hundred billion dollar a year base.
And those are based on various studies done and using different methodology.
A lot of that is for small business.
And what I've done is I've tried to go through those studies and
throw out the small business category,
because we can't do anything for the small business person.
They've got a lot of transactions,
and this program doesn't help them.
But we're still left with about $30 billion.
And when you go to those programs,
you find the monetized costs are mostly in record keeping.
That's the single largest cost people face.
And they're mostly at the top end.
So what does that mean?
That means that, for the ReadyReturn, Simple Return,
you're really not dealing with the top end.
You're dealing with the bottom end.
So you can look at the typical cost that the ReadyReturn users
experience and you can multiply that out or you can look at
Austan Goolsbee's numbers in the simple return and multiply that out.
And that's where you get the $2 billion a year.
Now, everything is just a guess.
And when you think about doing this for the low-income folks,
I really think you have to think we're doing it because this is
driving them nuts as citizens.
Automatied Voice: Please press any key on your phone to
remain in conference.
Mr. Bankman: So that's where I get the $2 billion number.
Now, the $20 billion number is dealing with really the bulk of
compliance costs that Americans are filing.
That's really dealing at the top end where the record keeping
costs increase a lot too.
Now, all these figures are through a glass because I'm
starting with that methodology.
And by the way, the way these studies were done is they either
follow people around or have them keep diaries.
Well, you know, they're kind of accurate and kind of inaccurate.
But what we know is that the numbers are huge.
Again, what I would like to emphasize is that it's not just
about those numbers.
It's about tax payers and knowing that their government is
citizen-friendly.
I don't include -- in these number,
they don't have a lot about the actual cost of running the
program, because the costs are just so cheap.
I mean, in California, if had two million taxpayers,
instead of spending $100,000 a year,
it might cost us $200,000.
Now, we're probably not going to go up to two million because as
you go up the ladder on ReadyReturn,
where you're giving people a bottom-line number, obviously,
the risk and the cost of errors is going to increase.
And so in my view, the ReadyReturn is almost
necessarily limited to low-income people where you can
live with the mistakes you might make,
where the data retrieval is for everybody.
Now, that's a political judgment,
and other people have differing ideas.
And I certainly wouldn't oppose a dramatic expansion of ReadyReturn.
But in my mind, that's the kind of cost benefit we're going to make.
But the cost of getting data back to the taxpayer or to their
preparers in an online sense is virtually costless.
So when I get the gross savings, I don't really subtract very
much from that.
Male Speaker: Okay. Thank you very, very much. We are running over time.
We really greatly appreciate this.
And we will continue to follow this.
As you know, as you point out, Austan has a real interest in it.
So I think this will continue.
So thank you very much; very helpful.
Mr. Bankman: Sure.