House Ways And Means Committee Holds Tax Reform Hearing

by Mike Godfrey, Tax-News.com, Washington

10 June 2005

The House Committee on Ways and Means on Wednesday held its first major hearing on fundamental tax reform for a decade, focusing on issues of fairness, simplicity, and the impact on growth of the US Tax Code.

The panel, which heard testimony from several academics and tax experts, sought to gather ideas on making compliance with and understanding of the tax code simpler for American workers and businesses, in addition to ironing out economic distortions and artificial incentives imposed by the tax code.

According to Committee chairman, Bill Thomas, a long time advocate of tax reform, more than 14,000 changes have been made to the tax code since the last major reform effort in 1986.

"The tax code imposes economic distortions that cost the US economy as much as 50 cents for every additional dollar raised, and causes taxpayers to waste 3.2 billion hours and as much as $100 billion complying with an increasingly complex system," Thomas noted in a statement.

“In anticipation of recommendations from the Treasury Secretary on tax reform, this hearing will be the first of several to inform Congress on the need for and benefits of reforming the current tax code," the statement added.

The hearing revealed a broad consensus among academics and lawmakers in favor of tax reform, although opinions differed on how far reform should go.

“America needs a tax system that is fair, protects the poor, treats all Americans the same and is easy to understand,” stated Committee member Congressman John Linder (R-GA).

“This new system must be voluntary, not coercive or intrusive. It must be transparent, eliminating hidden taxes and ensuring that all Americans know what the government costs," he added.

However, fellow Republican, Rep. Nancy L. Johnson of Connecticut, who is a possible candidate to replace Thomas as chairman after he reaches his term limit next year, defended the various tax credits, exemptions and incentives that some argue are the very aspects of the tax system that make it so complex.

"You've got to have better information for me to convince me that tax credits aren't powerful or important in structuring a society," she stated.

The hearing also explored the issue of using the tax system to help reduce the United States' record $696 billion trade deficit through "border adjustments". These would impose value added taxes on imports and rebates on exports, a system commonly employed in other countries.

However, Alan Auerbach of the University of California at Berkeley told the Committee that tax reform "cannot reduce the trade deficit, at least not through the tax treatment of exports and imports." Auerbach warned that border adjustments would simply strengthen the dollar, "putting importers and exporters in the same competitive positions no matter which approach is adopted".

Glenn Hubbard, former chairman of President Bush's Council of Economic Advisers, and currently dean of the Columbia University Graduate School of Business agreed that border adjustments would be unlikely to significantly alter the trade gap.

"I don't think you should expect a border-adjusted tax, per se, to [close] huge deficits," observed Hubbard.

The Presidential Advisory Panel on Federal Tax Reform is due to report to the Treasury Secretary before July 31, 2005.

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