Wednesday, April 13

From the President's Panel on Tax Reform

Excerpts from the Statement by the President's Advisory Panel on Federal Tax Reform:

* The comments and the testimony of witnesses at our public meetings conveyed the dismal condition of our current tax system.

o Our tax laws have been compared to an overbuilt and dilapidated house with conflicting architectural styles and a crumbling foundation, a sick patient who is about to expire, and a factory that has been littered with so much garbage that it can no longer operate productively.

o Nobel Laureate Milton Friedman described our tax system as a blackboard that has been filled up with so much writing that the slate must be wiped clean.

* We have repeatedly heard that our system is needlessly complex.

o This complexity is costing the U.S. economy about $140 billion per year. To put this number in perspective, it amounts to roughly $1,000 for every family in America.

* One particular problem that cannot be ignored is the rapidly growing reach of the AMT.

o The AMT will affect almost 4 million taxpayers this year and 20 million taxpayers next year. By 2015, some studies project as many as 50 million taxpayers, or about 45 percent of all taxpayers who pay income tax, will be affected.

o The AMT violates three principles of good tax policy: it is not simple, it is not efficient, and it is not fair.

* The problems of complexity are not limited to individual taxpayers.


o Our business tax code is littered with special rates, deductions, and credits creating complexity, volumes of new regulations, opportunities for tax shelters, and unfairness.

o It is hard to believe that our current tax system does not hinder American businesses from selling their products or otherwise competing in the global marketplace.

* Simplifying and reforming the tax code should lighten the burden on taxpayers, eliminating numerous tax headaches, and allowing Americans to spend less time doing their taxes. For American businesses, a better tax code will allow them to devote more resources to developing new products and services, expanding their operations, and hiring more workers.

* Reform of our tax code should alleviate the wasteful use of our economic resources and boost economic growth.

During our examination of the existing system, several themes emerged from the public comments and testimony. These themes will guide our efforts as we consider options for reform:

* We have lost sight of the fact that the fundamental purpose of our tax system is to raise revenues to fund government.

* Tax provisions favoring one activity over another or providing targeted tax benefits to a limited number of taxpayers create complexity and instability, impose large compliance costs and can lead to an inefficient use of resources. A rational system would favor a broad tax base, providing special treatment only where it can be persuasively demonstrated that the effect of a deduction, exclusion, or credit justifies higher taxes paid by all taxpayers.

* The complex and unpredictable influences of the current tax system on how families and businesses arrange their affairs distorts economic decisions, leads to an inefficient allocation of resources and hinders economic growth.

* The complexity of our tax code breeds a perception of unfairness and creates opportunities for manipulation of the rules to reduce tax. The profound lack of transparency means that individuals and businesses cannot easily understand their own tax obligations or be confident that their neighbors or competitors are paying their fair share.

* The tax system is both unstable and unpredictable. Frequent changes in the tax code, which often add to or undo previous policies, as well as the enactment of temporary provisions, result in uncertainty for businesses and households. This volatility is harmful to economic development and creates additional compliance costs.

* The objectives of simplicity, fairness, and economic growth are interrelated and, at times, may be at odds with each other. Policymakers routinely make choices among these competing objectives, and, in the end, simplification is almost always sacrificed. Although these objectives at times are in tension, meaningful reform can deliver a system that is simpler, fairer, and more growth oriented than our existing tax code.

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