U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

2012

HOW THE TAX CODE’S BURDENS ON 

INDIVIDUALS AND FAMILIES DEMONSTRATE 

THE NEED FOR COMPREHENSIVE TAX REFORM 

HEARING 

BEFORE THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

APRIL 13, 2011

Serial No. 112–09 

Printed for the use of the Committee on Ways and Means 

( 


anorris on DSK5R6SHH1PROD with HEARING
ii 

COMMITTEE ON WAYS AND MEANS 

DAVE CAMP, Michigan, Chairman 

WALLY HERGER, California 

SAM JOHNSON, Texas 

KEVIN BRADY, Texas 

PAUL RYAN, Wisconsin 

DEVIN NUNES, California 

PATRICK J. TIBERI, Ohio 

GEOFF DAVIS, Kentucky 

DAVID G. REICHERT, Washington 

CHARLES W. BOUSTANY, JR., Louisiana 

DEAN HELLER, Nevada 

PETER J. ROSKAM, Illinois 

JIM GERLACH, Pennsylvania 

TOM PRICE, Georgia 

VERN BUCHANAN, Florida 

ADRIAN SMITH, Nebraska 

AARON SCHOCK, Illinois 

LYNN JENKINS, Kansas 

ERIK PAULSEN, Minnesota 

KENNY MARCHANT, Texas 

RICK BERG, North Dakota 

DIANE BLACK, Tennessee 

SANDER M. LEVIN, Michigan 

CHARLES B. RANGEL, New York 

FORTNEY PETE STARK, California 

JIM MCDERMOTT, Washington 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

EARL BLUMENAUER, Oregon 

RON KIND, Wisconsin 

BILL PASCRELL, JR., New Jersey 

SHELLEY BERKLEY, Nevada 

JOSEPH CROWLEY, New York 

JON TRAUB, Staff Director 

JANICE MAYS, Minority Staff Director 


anorris on DSK5R6SHH1PROD with HEARING
iii 

C O N T E N T S 

Page 

Advisory of April 13, 2011, announcing the hearing ............................................ 2 

WITNESSES 

Alan Viard, Resident Scholar, American Enterprise Institute ............................ 6 

Annette Nellen, CPA, Director, Masters of Science in Taxation Program, 

San Jose State University ................................................................................... 18 

Mark E. Johannessen, CFP, Managing Director, Harris—SBSB ........................ 32 

Neil H. Buchanan, Associate Professor of Law, The George Washington University ................................................................................................................... 43 

QUESTIONS FOR THE RECORD 

The Honorable Mr. Pascrell .................................................................................... 84 

Response: Mr. Buchanan ......................................................................................... 85 

SUBMISSIONS FOR THE RECORD 

Jay Wiedwald ........................................................................................................... 88 

Grande Harvest Wines ............................................................................................ 90 

Marc Nelson Oil Products ....................................................................................... 93 

Sukup Manufacturing ............................................................................................. 96 

U.S. Chamber of Commerce .................................................................................... 99 


anorris on DSK5R6SHH1PROD with HEARING

anorris on DSK5R6SHH1PROD with HEARING
(1) 

How the Tax Code’s Burdens on 

Individuals and Families Demonstrate 

the Need for Comprehensive Tax Reform 

WEDNESDAY, APRIL 13, 2011 

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON WAYS AND MEANS, Washington, DC. 

The committee met, pursuant to notice, at 10:02 a.m., in Room 

1100, Longworth House Office Building, the Honorable Dave Camp 

[chairman of the committee] presiding. 

[The advisory of the hearing follows:] 


anorris on DSK5R6SHH1PROD with HEARING
2 

HEARING ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

Camp Announces Hearing on How the 

Tax Code’s Burdens on Individuals and 

Families Demonstrate the Need for 

Comprehensive Tax Reform 

April 06, 2011 

Congressman Dave Camp (R–MI), Chairman of the Committee on Ways and 

Means, today announced that the Committee will hold a hearing on the special burdens that the Tax Code imposes on individual taxpayers and families and on the 

need for comprehensive tax reform to address these problems. The hearing will 

take place on Wednesday, April 13, 2011, in Room 1100 of the Longworth 

House Office Building, beginning at 10:00 A.M. 

In view of the limited time available to hear witnesses, oral testimony at this 

hearing will be from invited witnesses only. However, any individual or organization 

not scheduled for an oral appearance may submit a written statement for consideration by the Committee and for inclusion in the printed record of the hearing. A 

list of invited witnesses will follow. 

BACKGROUND: 

As mid-April approaches each year, individuals and households across the country 

face the daunting task of fulfilling the one civic duty that touches more Americans 

than any other—filing accurate and timely Federal income tax returns. While many 

criticize the individual income tax system primarily for imposing too large a financial burden on taxpayers in terms of dollars owed to the government, individual taxpayers struggle just as much with the Tax Code’s mounting complexity and uncertainty. According to recent testimony from the National Taxpayer Advocate, the 

complexity of the current tax system is the single most serious problem facing taxpayers today, leading nearly 90 percent of Americans either to pay a professional 

to prepare their tax returns or to purchase tax preparation software to help them 

file their own returns. Indeed, over the past 25 years, the Tax Code has increasingly 

come to feature hidden marginal tax rates and has seen a remarkable proliferation 

of redundant and confusing tax subsidies that, in many cases, may not be fully 

achieving their intended objectives. Moreover, in recent years temporary tax rates 

and other temporary provisions have made it increasingly challenging for families 

to plan their personal finances. 

In announcing this hearing, Chairman Camp said, ‘‘As the deadline for filing 

individual tax returns approaches, the time for simplifying and stabilizing 

the Tax Code for individuals and families is also upon us. With so many 

Americans struggling to meet their tax compliance responsibilities, Congress and the President need to work together to achieve a tax system that 

is fair, simple, and efficient. While some seem to prefer a ‘business-only’ approach to tax reform, we owe it to the hard-working taxpayers we represent to ensure that they are not left out of this discussion. This hearing 

will help the Committee better understand the many problems that plague 

our tax system as it affects individuals and families across the country.’’ 

FOCUS OF THE HEARING: 

The hearing will examine some of the difficulties that individuals and families 

face in navigating the current Tax Code, including both compliance burdens and 

challenges faced in making long-term financial decisions when confronted with confusing, overlapping, and frequently temporary tax preferences. 


anorris on DSK5R6SHH1PROD with HEARING
3 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please Note: Any person(s) and/or organization(s) wishing to submit written comments for the hearing record must follow the appropriate link on the hearing page 

of the Committee website and complete the informational forms. From the Committee homepage, http://waysandmeans.house.gov, select ‘‘Hearings.’’ Select the hearing for which you would like to submit, and click on the link entitled, ‘‘Click here 

to provide a submission for the record.’’ Once you have followed the online instructions, submit all requested information. ATTACH your submission as a Word document, in compliance with the formatting requirements listed below, by the close 

of business on Wednesday, April 27, 2011. Finally, please note that due to the 

change in House mail policy, the U.S. Capitol Police will refuse sealed-package deliveries to all House Office Buildings. For questions, or if you encounter technical 

problems, please call (202) 225–3625 or (202) 225–2610. 

FORMATTING REQUIREMENTS: 

The Committee relies on electronic submissions for printing the official hearing 

record. As always, submissions will be included in the record according to the discretion of the Committee. The Committee will not alter the content of your submission, 

but we reserve the right to format it according to our guidelines. Any submission 

provided to the Committee by a witness, any supplementary materials submitted for 

the printed record, and any written comments in response to a request for written 

comments must conform to the guidelines listed below. Any submission or supplementary item not in compliance with these guidelines will not be printed, but will 

be maintained in the Committee files for review and use by the Committee. 

1. All submissions and supplementary materials must be provided in Word format and MUST 

NOT exceed a total of 10 pages, including attachments. Witnesses and submitters are advised 

that the Committee relies on electronic submissions for printing the official hearing record. 

2. Copies of whole documents submitted as exhibit material will not be accepted for printing. 

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material 

not meeting these specifications will be maintained in the Committee files for review and use 

by the Committee. 

3. All submissions must include a list of all clients, persons and/or organizations on whose 

behalf the witness appears. A supplemental sheet must accompany each submission listing the 

name, company, address, telephone, and fax numbers of each witness. 

The Committee seeks to make its facilities accessible to persons with disabilities. 

If you are in need of special accommodations, please call 202–225–1721 or 202–226– 

3411 TTD/TTY in advance of the event (four business days notice is requested). 

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above. 

Note: All Committee advisories and news releases are available on the World 

Wide Web at http://www.waysandmeans.house.gov

f 

/. 

Chairman CAMP. The committee will come to order for a hearing 

on how the Tax Code’s burdens on individuals demonstrate the 

need for comprehensive tax reform. 

We meet today to continue our dialogue about what I hope will 

result in a bipartisan path forward to reform our federal income 

tax system. While there has been a lot of valuable discussion about 

the impediments the Tax Code creates for America’s job creators, 

and we will certainly continue that discussion over the time ahead, 

today’s hearing will focus on the burdens imposed by the current 

federal income tax system on individual taxpayers and families. 

Today’s hearing is especially timely since each one of us likely 

knows a family that is racing to file their taxes before this year’s 


anorris on DSK5R6SHH1PROD with HEARING
4 

April 18th deadline. And because of the thousands of amendments 

to the Tax Code enacted over the past quarter century, this race 

to the finish has become increasingly challenging over the years. 

And since the Tax Reform Act of 1986, the last comprehensive 

tax reform enacted by the Congress, the code has become a maze 

of increasingly complex credits, deductions, exclusions and exemptions. 

The challenges created by the Tax Code for job creators and families are rooted in a similar place. The Tax Code is too complex, too 

costly, and takes too much time to comply with. Whether it is the 

compliance with administrative burdens, or the impact of temporary and expiring tax provisions, today’s Tax Code is hampering 

the ability of individuals and families to plan their finances with 

reasonable certainty. 

With nearly 4,500 changes in the last decade, 579 of them in 

2010 alone, the code is too complex. Adding to that complexity is 

the fact that each Tax Code provision is a little bit like a cell. Each 

one has its own distinct features, characteristics, and life span. For 

example, over 200 federal tax provisions are scheduled to expire between 2010 and 2020. Whereas, in 1998, there were only 50 expiring provisions. 

And while 20 years ago, it was mostly businesses affected by the 

temporary nature of tax provisions, now families and individual 

taxpayers are held captive to the calendar. For example, tax rates 

on ordinary income and on investments, the amount of the child 

tax credit, the deductions for state sales taxes and college tuition, 

just to name a few, are all temporary in nature. 

Given the complexity created by the ever-changing Tax Code, it 

is easy to understand why compliance with it has become too costly 

for American families. According to the National Taxpayer Advocate, in 2008 alone taxpayers spent $163 billion complying with the 

individual and corporate income tax rules—that’s billion, with a 

‘‘b.’’ These costs impede the ability of individuals and families to 

put together their household budgets. 

And since provisions may change from one tax filing season to 

the next, it is no wonder that almost 9 out of 10 families either 

hire tax preparers or purchase software in order to calculate their 

taxes. This is a sad reminder that we now have a code that can 

only be managed if you happen to be someone who can hire an expert to deal with its challenges. 

And not only is the Tax Code too complex and too costly, it takes 

too much time to comply with. Navigating through the tangled web 

of the Tax Code has resulted in taxpayers spending over six billion 

hours annually to comply with the code. Ask any family, and I am 

sure they will have a long list of better ways they could be spending their time. 

Although it will require a lot of hard work on our part to achieve 

consensus on a solution, I think it is safe to say that we all agree 

that the current Tax Code is broken. We can do better. The members of the Joint Committee on Taxation had a very positive conversation with two key architects of the Tax Reform Act of 1986 

during last week’s JCT roundtable discussion: Secretary James 

Baker and Congressman Dick Gephardt. Their message was clear. 


anorris on DSK5R6SHH1PROD with HEARING
5 

It will take the leadership of this Congress and the White House 

to get this done. 

The American people deserve a Tax Code that is responsible and 

responsive to their needs. We can do our part by working together 

to make sure that this one is fairer and simpler for all families. 

And I look forward to hearing from our witnesses today. 

And with that, I yield to Mr. Levin for his opening statement. 

Mr. LEVIN. Thank you very much, Mr. Chairman. The announcement for this hearing stated that, ‘‘Congress and the President need to work together to achieve a tax system that is fair, 

simple, and efficient. While some seem to prefer a business-only approach to tax reform, we owe it to the hard-working taxpayers we 

represent to ensure that they are not left out of this discussion.’’ 

I very much agree with that. 

The kind of tax reform proposed in the Republican budget would 

reduce taxes for the very highest earners, and increase the burden 

on working families. These reductions for the highest earners come 

on top of the nearly $700 billion in additional tax cuts the Republican budget assumes for taxpayers with income above $250,000, 

almost 80 percent of which go to people making more than $1 million. 

As we consider complexity in the individual tax system, we must 

be sensitive to the reasons provisions were enacted in the first 

place. Our goal should be to strengthen provisions that help working families send their kids to college, save for retirement, or simply make ends meet. 

The Republican budget indicates that the individual and corporate rates will be reduced from 35 to 25 percent, but leaves it 

up to this committee, the Ways and Means Committee, to fill in the 

details. To do so in a deficit-neutral manner, some estimate that 

we would have to eliminate more than $2.9 trillion worth of tax expenditures over the next decade. 

The Child Credit, Earned Income Tax Credit, American Opportunity Tax Credit, and retirement savings accounts are primarily 

middle and lower income provisions. The need for simplification 

cannot be used as a rationale for irrational inequity, or for undoing 

progress that helped foster the growth of the middle class in this 

country. 

So I look forward, Mr. Chairman and colleagues, to continuing 

this conversation, and hearing today’s testimony, and I join in 

thanking all the witnesses for participating. I yield back. 

Chairman CAMP. All right. Thank you very much. We have four 

witnesses today: Alan Viard, resident scholar of the American Enterprise Institute in Washington, D.C.; Annette Nellen, CPA, director, masters of science in taxation program at San Jose State University in California; Mark Johannessen, a CFP managing director, 

Harris—SBSB, McLean, Virginia; and Neil Buchanan, associate 

professor of law, the George Washington University, Washington, 

D.C. Thank you all for being here. 

Under our rules, you each have five minutes. We have your written testimony. You each have five minutes to summarize your 

statement, whereupon, after the panel completes all of their testimony, we will go to Member questions. 

So, Mr. Viard, you may begin. You have five minutes. 


anorris on DSK5R6SHH1PROD with HEARING
6 

STATEMENT OF ALAN D. VIARD, RESIDENT SCHOLAR, 

AMERICAN ENTERPRISE INSTITUTE, WASHINGTON, D.C. 

Mr. VIARD. Chairman Camp, Ranking Member Levin, Members 

of the Committee, it is an honor to be here today to testify about 

the Tax Code’s burdens on families and individuals. Let me note 

that the views I express today are my own, and do not represent 

the views of the American Enterprise Institute, or any other person 

or organization. 

In keeping with the theme of this hearing, I will focus on the 

complexity affecting individual taxpayers with non-business income. Of course, as the members of this committee are aware, 

there is also a significant degree of complexity affecting tax returns 

that contain business income, and that includes not only the corporate income tax returns that C corporations file, but also the individual income tax returns filed by owners of pass-through firms. 

But I will not discuss those today. Nor is there time to discuss 

all of the provisions that add to the complexity of the code. Mr. 

Chairman, you mentioned the billions of hours that taxpayers 

spend on their returns. I will have to focus today on three specific 

areas: the needless complexity of the incentives for saving, education, and families in their current design; the proliferation of income-based phase-outs in the code; and the alternative minimum 

tax. 

And, as I will emphasize throughout my testimony, these problems can be addressed separately from such contentious issues as 

the appropriate level of revenue, the appropriate degree of progressivity in the Tax Code, or even the appropriate breadth or narrowness of the Tax Code. 

I believe that these issues should be addressed as part of comprehensive tax reform, if such reform is adopted, but should also 

be addressed separately, if comprehensive reform does not occur. 

And I think it’s an opportunity for members of both parties to work 

together to eliminate this needless complexity. 

The first area that I want to examine is the complexity of the 

current tax incentives for saving, education, and children. As Ranking Member Levin mentioned, these provisions play important purposes in the Internal Revenue Code. But their current design today 

suffers from needless complexity that actually undermines their efficacy. 

These problems have been documented by such sources as the 

Joint Tax Committee, the National Taxpayer Advocate, and the 

2005 President’s Advisory Panel on Federal Tax Reform. So I do 

not detail them here in my oral remarks. And even in my written 

testimony, I rely primarily upon the findings of those previous 

studies. 

Just to state the matter briefly, the current tax system provides 

more than 20 tax-preferred savings accounts and plans, multiple 

tax preferences designed to encourage education, and a wide array 

of incentives for families and children, including both a credit and 

a deduction for the children in typical households. The National 

Taxpayer Advocate, the President’s Advisory Panel, and the Joint 

Tax Committee have all proposed ways to consolidate these incentives, while still allowing them to fulfill their essential purpose, 


anorris on DSK5R6SHH1PROD with HEARING
7 

and also promote greater uniformity of rules across the handful of 

incentives that might remain. 

Let me next turn briefly to income-based phase-outs. There are 

more than a dozen provisions in the Tax Code that phase-out or 

phase-down tax credits or exclusions or deductions, as income rises. 

These are measures that promote progressivity in the code. And, 

like other measures that promote progressivity, they increase the 

effective marginal tax rate that taxpayers face. But compared to 

changes to the explicit rate schedule, income-based phase-outs are 

generally an inferior way to promote progressivity. They make it 

more difficult for taxpayers to know the true marginal rate that 

they face, and they require taxpayers to complete an array of worksheets to apply the income-based phase-out that applies to each 

provision. 

Moreover, there is no rhyme or reason as to how the incomebased phase-outs work across different provisions. Some of them 

are indexed to inflation, some are not, and they treat family status 

in different ways, and so on. 

So, in general, transparency and simplicity can be advanced by 

eliminating most of the income-based phase-outs, while making appropriate adjustments to the rate schedule to achieve any desired 

degree of progressivity. 

The final problem I want to address is the alternative minimum 

tax, a parallel tax system that disallows some, but not all, of the 

tax preferences that can be claimed under the regular income tax. 

More than four million tax payers are currently subject to the 

AMT. If the annual patch that Congress passes to address the 

AMT were to expire, more than 30 million taxpayers would become 

subject to this parallel tax system. 

The AMT represents an attempt to curtain the use of certain tax 

preferences, but it does so in a capricious and needlessly complex 

manner. Whatever preferences are desired in the tax system can be 

provided in the regular tax system. Whichever ones need to be curtailed can be curtailed within the regular tax system without having to put taxpayers through a second tax system with a completely 

separate set of rules. 

In summary, Mr. Chairman, I believe that these are areas that 

can be addressed on a bipartisan basis, because they do not raise 

some of the contentious ideological and philosophical issues raised 

by such things as the level of revenue or the level of progressivity 

that the tax system has. Certainly this complexity is a problem 

that the American people face, but it’s also an opportunity for 

members of both parties to work together to give the American people a better tax system. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Viard follows:] 


anorris on DSK5R6SHH1PROD with HEARING
8 


anorris on DSK5R6SHH1PROD with HEARING72509A.001
9 


anorris on DSK5R6SHH1PROD with HEARING72509A.002
10 


anorris on DSK5R6SHH1PROD with HEARING72509A.003
11 


anorris on DSK5R6SHH1PROD with HEARING72509A.004
12 


anorris on DSK5R6SHH1PROD with HEARING72509A.005
13 


anorris on DSK5R6SHH1PROD with HEARING72509A.006
14 


anorris on DSK5R6SHH1PROD with HEARING72509A.007
15 


anorris on DSK5R6SHH1PROD with HEARING72509A.008
16 


anorris on DSK5R6SHH1PROD with HEARING72509A.009
17 

f 

Chairman CAMP. Thank you. Thank you very much. 

Ms. Nellen, you have five minutes. 


anorris on DSK5R6SHH1PROD with HEARING72509A.010
18 

STATEMENT OF ANNETTE NELLEN, CPA, DIRECTOR, MASTERS 

OF SCIENCE IN TAXATION PROGRAM, SAN JOSE STATE UNIVERSITY, SAN JOSE, CALIFORNIA 

Ms. NELLEN. Good morning, Chairman Camp, Ranking Member 

Levin, and Members of the Committee. My name is Annette 

Nellen. I am a tax professor at San Jose State University. I am a 

member of the American Institute of Certified Public Accountants, 

and the chair of its individual income taxation technical resource 

panel. Prior to joining San Jose State, I worked at Ernst and 

Young and the IRS. My testimony today is based on my 20 years 

of experience working on tax reform and simplification. 

Thank you for the opportunity to appear today and provide testimony on the serious complexity problems that burden individuals 

and families and weaken our tax system. 

Our current tax law is often incomprehensible. Its complexity imposes burdens on individuals, in terms of time and out-of-pocket 

costs, and increases the tax gap. A tax system should follow the 

principle of simplicity. That is, the tax law should be simple, so 

that taxpayers can understand the rules and comply with them correctly and in a cost-efficient manner. 

As noted in our written testimony, there are several commonlyencountered areas of the tax law that frustrate individuals, generate filing mistakes, and lead to missed opportunities to take full 

advantage of incentives. I will briefly address a few of these complexities, as well as some possible solutions to illustrate that much 

complexity can be avoided. 

First, there are 14 tax rules that offer some incentive for higher 

education. While all the rules have a common purpose, the definitions, eligibility, and income phase-outs vary. Further, use of one 

benefit likely precludes use of another, making it difficult to know 

which is the best incentive to use. This confusion leads some individuals to forgo the tax benefit all together, and some to claim 

credits beyond what they are entitled to. The AICPA recommends, 

at a minimum, consolidating the education provisions, and providing uniform definitions. 

Another area in need of simplification is the kiddie tax, which 

was enacted in 1986 to prevent parents from shifting tax liabilities 

on investment assets to their children, in order to lower their rates. 

These rules can apply to children under the age of 18, or full-time 

students up to age 23. Challenges with the kiddie tax include obtaining the required information and interaction with AMT and 

capital gains. The AICPA recommends using a separate rate structure for children subject to the kiddie tax. 

Another point of confusion stems from use of due dates that are 

not what an individual would expect. For example, an individual 

with a foreign financial account who needs to file a special form 

known as FBAR, must file it by June 30th, an odd due date in the 

tax system. We recommend October 15th, the extended due date for 

Form 1040. 

Another significant area of complexity affecting a growing number of individuals each year is the AMT. The AICPA recommends 

that the AMT be repealed. A second tax system is unnecessary. It 

is burdensome in terms of record-keeping, calculations, and the 

confusion it causes individuals when, for example, they think their 


anorris on DSK5R6SHH1PROD with HEARING
19 

state taxes are deductible, only to find that they are not, because 

they are an AMT. 

In addition, phase-outs complicate tax calculations and planning. 

For example, the $1,000 child credit starts to phase out or reduce 

once a married couple’s income reaches $110,000. However, income 

levels and measures of income for the phase-outs vary among incentives, leading to confusion. We understand phase-outs exists to 

prevent higher-income individuals from reaping full benefit of any 

favorable tax rules. In effect, though, phase-outs disguise an individual’s true marginal tax rate and make it difficult to know if a 

tax incentive is truly available to you. 

The earned income tax credit is another area of complexity. Any 

reform effort should take into account the difficulties of administering this significant program, and reduce its complexity. 

Lastly, much frustration is due to the numerous temporary provisions in our tax law. Many temporary provisions are routinely allowed to expire for a period of time, then are temporarily reinstated. This leads to confusion, frustration, and often, less than 

ideal use of an individual’s financial resources. 

For example, when the AMT patch is not in place at the start 

of a year, many individuals must include AMT in their quarterly 

estimated tax payments. Or, when the exclusion for employer-provided education expires, employers might stop offering the benefit, 

or employees may opt out, due to the tax consequences, as they 

cannot rely on the provisions being retroactively reinstated. 

The AICPA looks forward to assisting you in reducing the many 

compliance and planning burdens that the tax system imposes on 

individuals and families. Thank you for this opportunity to testify. 

I look forward to your questions. 

[The prepared statement of Ms. Nellen follows:] 


anorris on DSK5R6SHH1PROD with HEARING
20 


anorris on DSK5R6SHH1PROD with HEARING72509A.011
21 


anorris on DSK5R6SHH1PROD with HEARING72509A.012
22 


anorris on DSK5R6SHH1PROD with HEARING72509A.013
23 


anorris on DSK5R6SHH1PROD with HEARING72509A.014
24 


anorris on DSK5R6SHH1PROD with HEARING72509A.015
25 


anorris on DSK5R6SHH1PROD with HEARING72509A.016
26 


anorris on DSK5R6SHH1PROD with HEARING72509A.017
27 


anorris on DSK5R6SHH1PROD with HEARING72509A.018
28 


anorris on DSK5R6SHH1PROD with HEARING72509A.019
29 


anorris on DSK5R6SHH1PROD with HEARING72509A.020
30 


anorris on DSK5R6SHH1PROD with HEARING72509A.021
31 


anorris on DSK5R6SHH1PROD with HEARING72509A.022
32 

f 

Chairman CAMP. Thank you very much. 

Mr. Johannessen, you have five minutes. 

STATEMENT OF MARK E. JOHANNESSEN, CFP, MANAGING 

DIRECTOR, HARRIS SBSB, MCLEAN, VIRGINIA 

Mr. JOHANNESSEN. Chairman Camp, Ranking Member Levin, 

and esteemed members of the House Ways and Means Committee, 

thank you for inviting me here today to speak to you on behalf of 

the Financial Planning Association. My name is Mark 

Johannessen. I am a certified financial planner at Harris SBSB, a 

firm in McLean, Virginia. In addition to being a planner, myself, 

I served on the Financial Planning Association’s board of directors 

for six years, and served as elected president in 2008. 

Much of the difficulty in understanding our tax system arises 

from the ever-changing provisions of the code. In 1986, the goal of 

tax reform was to make the code more fair and simple. Since that 

time, there have been tens of thousands of changes and additions, 

each with its own set of rules, requirements, and phase-outs. Congress as also added provisions that are designed to encourage certain behaviors. Many of these changes have the support of financial 

planners, such as tax preferred savings vehicles for medical, education, and retirement needs. Nonetheless, all tax incentives should 

be regularly reviewed by this committee to ensure they effectively 

meet Congress’s policy goals. 

Even with my additional education, training, and experience, I 

know that only professionals completely dedicated to understanding the principles of the Tax Code are able to complete a tax 

return for all but the most simple of filings. If the interplay of various provisions confuses trained financial professionals, imagine 

the plight on the average citizen. Today, the most basic tax provisions are in a constant state of flux. The inability to predict, even 

in the medium term, the future rates in income, capital gains, and 

dividends, makes financial planning more challenging and expensive for consumers. All too often I have observed consumers holding 

off on making important plans while they wait for Congress to act. 

I have some specific examples in the time I have remaining. It 

is well referenced so far, the complexity that AMT, the alternative 

minimum tax, brings to the average taxpayer, with 30 million folks 

ultimately possibly being affected if no patch is enacted ear year. 

So I will limit my time to discussing the financial planning issues. 


anorris on DSK5R6SHH1PROD with HEARING72509A.023
33 

Under current law, the top rates on dividends will nearly triple, 

from 15 to 43.4 percent in January 2013. The long-term capital 

gains rate will also increase from 15 to 20 percent. This is already 

affecting investment decisions, as individuals shift their choices to 

maximize their after-tax profits. In some cases, we are seeing investors choosing stocks that will produce more capital gain, or perhaps tax-free investments like municipal bonds. And the impact on 

the capital markets of a permanent Tax Code should not be overlooked. 

Starting in 2010, a greater number of taxpayers were allowed to 

convert their traditional individual retirement accounts, their 

401(k)’s and 403(b)’s, to an after-tax Roth account. For most investors, the question that determines whether to undertake this conversion is whether one will be higher or lower income taxes in their 

retirement. Many people can estimate their likely income bracket, 

but they must also make a best guess about what the tax rate will 

be—will be in their retirement. 

And then, finally, in 2010, individuals faced another decision of 

whether to elect to pay the entire tax on their conversion in 2010, 

or split it over—through 2011 and 2012 returns. Because rates 

were scheduled to increase, many decided to take the tax hit in 

2010. And this caused general confusion, as we approached the end 

of the year. 

Charitable contributions have become one of the provisions of the 

tax extenders exclusions, where exclusions from income up to 

$100,000 can be distributed or transferred directly to a charity. 

And if we can look at 2010 alone, when the extension didn’t occur 

until December 17th, I believe many, folks had already made their 

minimum required distributions at that time, and so it somewhat 

muted the actual impact for charities and for our clients to take advantage of a tax advantage. 

Estate planning is another area well addressed, I am sure, by 

this committee. 

So, in closing, in its effort to appeal to constituent concerns, Congress has killed the code with its kindness, loading it up with thousands of special breaks and exemptions. While the goal to encourage certain behaviors is laudable, the sheer magnitude of these 

special breaks and exemptions has made the income tax system 

unmanageably complex. I would urge this committee to work together to pass tax reform. Thank you. 

[The prepared statement of Mr. Johannessen follows:] 


anorris on DSK5R6SHH1PROD with HEARING
34 


anorris on DSK5R6SHH1PROD with HEARING72509A.024
35 


anorris on DSK5R6SHH1PROD with HEARING72509A.025
36 


anorris on DSK5R6SHH1PROD with HEARING72509A.026
37 


anorris on DSK5R6SHH1PROD with HEARING72509A.027
38 


anorris on DSK5R6SHH1PROD with HEARING72509A.028
39 


anorris on DSK5R6SHH1PROD with HEARING72509A.029
40 


anorris on DSK5R6SHH1PROD with HEARING72509A.030
41 


anorris on DSK5R6SHH1PROD with HEARING72509A.031
42 

f 

Chairman CAMP. Thank you. 

Mr. Buchanan, you have five minutes. 


anorris on DSK5R6SHH1PROD with HEARING72509A.032
43 

STATEMENT OF NEIL H. BUCHANAN, JD, PH.D., ASSOCIATE 

PROFESSOR OF LAW, THE GEORGE WASHINGTON UNIVERSITY, WASHINGTON, D.C. 

Mr. BUCHANAN. Chairman Camp and Ranking Member Levin 

and Members of the Committee, I am an economist and a professor 

of tax law at the George Washington University. Thank you for giving me the opportunity to address the committee today. 

At the risk of stating the obvious, there are many areas of the 

Internal Revenue Code that could benefit from rationalization and 

simplification. In areas in which multiple provisions have accumulated over time, such as retirement savings and education incentives, the same incentives and benefits surely could be provided in 

a simpler fashion. 

That being said, I hope through my testimony to warn the committee of some red herrings, issues that need not be addressed as 

you work to simplify the lives of Americans who honestly try to 

comply with the tax laws. Clearing away some tempting distractions will, I hope, provide more clarity and time for the committee 

to focus on genuine tax simplification. 

First, the committee should be wary of reducing tax complexity 

without reducing what we might call overall complexity. A simple 

way to reduce the complexity of the Tax Code, after all, would simply be to stop running certain benefits through the Tax Code, and 

instead, run them through some other agency of the government. 

The mortgage interest deduction, which is about housing, could be 

turned into a benefit run by the Department of Housing and Urban 

Development. The Earned Income Tax Credit, which is a benefit to 

workers, could be run by the Department of Labor. Doing either of 

those things, however, would do nothing to make the lives of American taxpayers less complicated. If anything, compliance burdens 

would become even more onerous, as our citizens would now have 

to deal not just with the IRS, but with newly created administrative arms of other cabinet departments, or mini IRS’s, which would 

also add to federal spending, by the way. 

The IRS has the advantage of being a single agency with which 

citizens interact, and it is the logical agency to provide incentives 

and benefits, the eligibility for which are conditioned on income 

levels. In addition, decades of experience have shown that the IRS 

and its employees possess the expertise, dedication, and experience, 

notwithstanding years and years of chronic underfunding, to handle the administration of important benefits that we administer 

currently through the Tax Code. 

Second, reducing the number of tax brackets is not an important 

aspect of simplifying taxes, and it has the undesirable effect of 

making the Tax Code less progressive. Some analysts have asserted that the existence of multiple brackets is confusing, making 

it more difficult for taxpayers to figure out how much taxes they 

owe each year. In fact, all of the work and uncertainty involved in 

tax compliance is related to what happens before tax rates even become relevant. That is, once a taxpayer has determined his or her 

taxable income, it takes merely a few seconds—and I repeat, seconds—to look at the relevant table to determine the tax owed. We 

could have 10 or 20 tax rates without increasing the compliance 

burden. The taxpayer’s uncertainty is in figuring out what to inVerDate Nov 24 2008 03:42 Jan 28, 2012 Jkt 072509 PO 00000 Frm 00047 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\72509.XXX GPO1 PsN: 72509

anorris on DSK5R6SHH1PROD with HEARING
44 

clude, exclude, deduct, credit, and so on, not in dealing with different tax rates. 

Third, as a related matter, the existence of so-called phase-outs 

is not inherently complicated, either. Again, the difficult part of the 

process is in figuring out whether a person is eligible for a particular provision. The arithmetic involved in the phase-outs is a relatively simple after-thought, and the IRS is perfectly capable of 

providing simple tables to assist the taxpayer in determining how 

a phase-out alters the final tax computation. 

I should add the qualification that phase-outs can pile up, with 

a different phase-out for each of several different tax provisions, 

which does complicate compliance somewhat. I offer an example of 

how to deal with this problem in my prepared testimony. 

In addition, it is important to remember that phase-outs serve 

two important purposes. First, they are a way to means-test benefits, benefits that, after all, cost the Federal Government money. 

Second, phase-outs avoid abrupt all-or-nothing changes to tax benefits, with a taxpayer suddenly losing all of a benefit after hitting 

an income limit or some other arbitrary threshold. 

My message today, Mr. Chairman, therefore, amounts to taking 

three items off the list of possible approaches to tax simplification. 

First, taking policies out of the Tax Code and out of the IRS’s jurisdiction can make citizens’ lives more complicated, rather than 

less so, as it would simply relocate the complexity that our citizens 

face, rather than actually reducing complexity. 

Second, the number of tax rates is a non-issue, as far as complexity and compliance burdens are concerned. 

And third, the existence of phase-outs is nearly a non-issue, and 

the complexity of phase-outs can be all but eliminated by harmonizing phase-outs across all provisions that Congress chooses to 

means-test. 

The committee’s work is daunting, involving important work in 

eliminating and combining duplicative and sometimes ineffective 

tax benefits. That work will be difficult enough without becoming 

distracted by false promises of reduced complexity. 

I hope that my testimony will prove useful in directing the committee away from those distractions. Thank you. 

[The prepared statement of Mr. Buchanan follows:] 


anorris on DSK5R6SHH1PROD with HEARING
45 


anorris on DSK5R6SHH1PROD with HEARING72509A.033
46 


anorris on DSK5R6SHH1PROD with HEARING72509A.034
47 


anorris on DSK5R6SHH1PROD with HEARING72509A.035
48 

f 

Chairman CAMP. All right. Thank you. Thank you all very 

much. 

The President’s Economic Recovery Advisory Board issued a report in August of 2010, also known as the Volcker Report. And in 

that they also underscore how complex our Tax Code is, and even 


anorris on DSK5R6SHH1PROD with HEARING72509A.036
49 

say that the cost of compliance is about 1 percent of GDP annually 

and that those costs are actually more than 12 times the IRS budget, really about $.10 on every dollar of income tax that is collected. 

I am interested in one particular area right now. Mr. Viard, in 

your testimony you note there are over 20 tax preferred savings accounts and plans in the code. And the Volcker Report also talks 

about those, as well. And I just wanted to talk with you a little bit 

more about them. 

From a tax administration standpoint, what is the impact of having so many different savings accounts and plans, in terms of IRS 

oversight and taxpayers’ ability to really assess those and use those 

plans? 

Mr. VIARD. Well, thank you, Mr. Chairman. I think that the 

proliferation of accounts creates complexity at several different levels. The IRS has to promulgate regulations governing each of these 

accounts, and the rules are different, with respect to the income 

limits and the contribution limits, as to how much can be put into 

the account, and also the rules for withdrawal, what types of withdrawals incur penalties, and such not. 

But I think the biggest grounds for concern arises at the individual taxpayer level. It is very difficult for taxpayers to choose between these accounts. And one of the interesting findings that I 

mention in my written testimony which comes from the National 

Taxpayer Advocate’s 2004 report, is that 30 percent of taxpayers 

who were eligible for a 401(k) and chose not to participate in it 

cited the complexity as one of the reasons for not participating. 

So, I think one of the real grounds for concern is that the social 

purposes that are intended to be achieved by these provisions is 

undermined if the provisions are too complicated for taxpayers to 

take advantage of them. And, as you mentioned, Mr. Chairman, 

this problem has been documented, you know, numerous times by 

the Volker panel, the National Taxpayer Advocate, the Joint Tax 

Committee, the President’s Advisory Panel. So it is a long-standing 

problem. And I think we know the general approach that can be 

taken to simplify these accounts, in terms of consolidating them, 

and making the rules more uniform. 

Chairman CAMP. Mr. Viard and Professor Nellen, you both, in 

your testimony, point out that we have multiple tax breaks for 

higher education, and that there are inconsistent rules and criteria 

for these tax breaks, and that they cause complexity. Does the current design of these incentives, the complexity of them, and the fact 

that many of them expire frequently reduce their effectiveness? 

And I guess I would like to hear from both of you your thoughts 

on that. 

Ms. NELLEN. Yes, I would say it is the confusion that the taxpayers would have as to what is available to them. The IRS instructions actually explaining these 14 provisions is an 86-page 

publication which is just daunting. 

They also—these incentives try to do a few different things. 

Some of them are actually designed to encourage you to save for 

higher education. And others are going to be used when you are 

currently incurring costs of higher education. They could be consolidated into do you want to have just one credit, or should it be a 


anorris on DSK5R6SHH1PROD with HEARING
50 

deduction. Some of the provisions can be used together, some of 

them cannot. 

And I know there has been studies by the GAO and TIGTA that 

there are people that are overlooking these provisions, I think probably just being overwhelmed by them. If a person is not getting assistance from a paid preparer knowledgeable in these, they are 

probably going to be overlooked. Your comment earlier about a 

good number of individuals also use software, the software actually 

might not be pointing out, ‘‘Gee, maybe you should be saving for 

education,’’ or, ‘‘Maybe you have, you know, a choice here and you 

should be planning next year to try and use this particular incentive.’’ So, I think being left to an 86-page publication is just overwhelming. 

In addition, many of these individuals would also be dealing with 

trying to get other forms of financial aid through what might be 

offered at the university, through state or Federal Governments. So 

it’s just adding to the overall complexity, because a Tax Code is one 

place they can get some educational support. But there are other 

places, as well. 

Chairman CAMP. All right, thank you. 

Ms. NELLEN. Thank you. 

Chairman CAMP. Mr. Viard. 

Mr. VIARD. I would really echo those comments, and particularly underscore the point about the limited role of preparers and 

software. You know, once the year is complete, and I have taken 

advantage of whatever provisions I may have availed myself of, of 

course a preparer or a software can help me compute my tax liability correctly, and to file the return properly. But it is much more 

challenging for the taxpayer to know what to do during the year, 

which options are available, which ones can be used without sacrificing the opportunity to use others, and which one will actually be 

most effective for the taxpayer’s particular situation. 

Even if a preparer or software does offer advice on this, the advice may be—may change from year to year, depending upon 

changes in the taxpayer’s circumstances, and of course, the legislative changes that you have mentioned, Mr. Chairman. So, I think 

the simple proliferation of these has surely undermined their effectiveness in achieving Congress’s goal of promoting education. 

Chairman CAMP. All right. Thank you. Mr. Levin may inquire. 

Mr. LEVIN. Well, thank you very much for your testimony. 

You know, Ms. Nellen, I think your reference to education is a 

good example. Clearly, we need simplification. But it cannot be at 

a cost of meeting needed purposes. There is a reason for a credit 

so people will save, and for a grant for those people who cannot afford it. And sometimes they are confused, and maybe that is one 

of the reasons why H.R. 1 reduced Pell Grants by $6.5 billion. We 

can have credits to stimulate savings. I don’t think that means we 

eliminate grants for people whose kids need help to go to college. 

I think we need to emphasize simplification, and remember what 

its purpose is. 

I think also—let me just ask you. Do you know the percentage 

of taxpayers who use either 1040EZ or 1040A? Do you have any 

idea? 


anorris on DSK5R6SHH1PROD with HEARING
51 

Ms. NELLEN. Actually, I just looked at that last night. It’s about 

60 percent, I think, use 1040. I think it’s 28 percent use 1040A and 

12 percent use the 1040EZ from data based—from the IRS—on 

2009. 

Mr. LEVIN. Yes, our data shows that about 41 percent use the 

EZ or A, while 59 percent use 1040. Do you know the percentage 

of those who file the 1040 and use the standard deduction? 

Ms. NELLEN. Yes, actually, approximately two-thirds of individuals claim the standard deduction, rather than itemize. 

Mr. LEVIN. So, it is clear. The vast majority of taxpayers use 

one of the more simplified forms, or they use 1040 and use the 

standard deduction, right? 

Ms. NELLEN. Right. 

Mr. LEVIN. All right. I think we are all agreed about the AMT 

and the need to simplify it. 

Let me just say a word about the phase-outs quickly, because I 

looked at your chart, Mr. Viard, and welcome your testimony. It 

was perhaps more modulated than some people expected. But it is 

interesting to look at this. The majority of the phase-outs passed 

in the later 1990s when the now-majority was in control. It may 

well be that phase-outs are often used for budget purposes, to make 

sure that the cost is kept down, no? 

Mr. VIARD. Well, I think you are right, Mr. Ranking Member, 

that that is one of the motivations that underlie the use of incomebased phase-outs. But, of course, it is always possible to avoid the 

use of the phase-out and then to make an adjustment to the rate 

schedule instead, to keep both revenue and distribution roughly 

unchanged. 

I mean, I think the relevant issue in each instance is: Do we 

have a reason, on policy grounds, why particular income groups 

should be denied the incentive for this particular type of behavior? 

If there is no reason to deny the incentive to a particular income 

group, then I think a phase-out is unwarranted. 

And if there is a concern, then, that a particular group, be it a 

high-income group or any other, is receiving a larger tax reduction 

than would otherwise seem appropriate, then, of course, an adjustment to the rate schedule can address that in a manner that is 

more transparent and that still allows this group to benefit from 

the incentive for the behavior that Congress has decided to encourage. 

Mr. LEVIN. Mr. Johannessen, you end up by saying Congress 

has killed the code with kindness. Let me just say we have a problem with simplification, with complexity. 

I just think we need to be careful in our rhetoric. A couple of 

weeks ago someone said in testimony, ‘‘Government is a disease.’’ 

And you do not say quite the same thing. I am not sure we have 

killed the code with kindness. That would seem to mean that the 

kindness was somewhat irrelevant. I do not think you mean that. 

A lot of the provisions in our Tax Code—take the mortgage interest deduction for example. Without it, the state of Michigan where, 

that Mr. Camp and I come from, and I think where most of us 

come from, would not have the middle class that it does today. Employer-based health insurance would never have been created on a 

broad basis in this country without the exclusion. My time is up. 


anorris on DSK5R6SHH1PROD with HEARING
52 

Mr. CAMP. Time has expired. Mr. Herger is recognized. 

Mr. HERGER. Thank you, Mr. Chairman. I would like to thank 

our witnesses for your testimony. 

When so many middle class families have to hire professional 

help just to figure out what they owe in taxes, it is clear that something is wrong. And I hope this committee can work in a bipartisan 

way to clear away some of this unnecessary complexity. 

Mr. Viard, I would like to explore the issue you raised about the 

phase-out of tax deductions and credits leading to high marginal 

rates. According to the Tax Foundation, when you add up the income tax, the payroll tax, the phase-out of the earned income tax 

credit, a family of five making $48,000 a year faces an effective 

marginal tax rate of 42 percent. In other words, $.42 of each additional dollar they earn goes to paying federal taxes. It is my understanding that once the new health insurance exchange subsidies 

take effect, some low to middle income families could face a total 

marginal rate of well over 50 percent. And that is without taking 

into account state and local taxes, or non-tax benefits like food 

stamps that are tied to income. 

Mr. Viard, what is the economic impact of these high marginal 

rates? 

Mr. VIARD. Well, thank you, Congressman. You have pinpointed 

an important problem that arises, or can arise from the use of income-based phase-outs. Because the marginal tax rates are not 

being explicitly and openly adopted in the Internal Revenue Code, 

it becomes possible, I think, for them to be set at levels that are 

higher than would ever be agreed to if they were presented explicitly on the table. If we were to say, ‘‘Do you want a 42 percent marginal tax rate,’’ I think that members of this committee and Members of Congress would think long and hard as to the advantages 

and disadvantages of that. But with the use of income-based phaseouts, these marginal tax rates are often difficult to detect, and they 

vary across different households, depending upon their circumstances and which tax breaks they are claiming. 

In general, marginal tax rates have the potential to discourage 

the earning of income—that is to say to discourage work, to discourage saving, to discourage doing things in taxable form, instead 

of in tax-exempt form. 

One thing that we do not understand well is how important the 

phase-outs are in affecting behavior. Precisely because they are 

complicated, some people have suggested that people may not be 

aware of them, and that, therefore, their behavioral impact may be 

smaller than from explicit marginal tax rates. I am wary of that 

argument. Although I agree that most taxpayers do not understand 

precisely the rate they face, which is a problem of transparency, 

the proliferation of these income-based phase-outs, I think, contributes to the attitude that any attempt to earn additional income 

may trigger undesired tax consequences. So it creates an area of 

uncertainty that I think has its own set of disincentive effects. 

Mr. HERGER. Would that same reasoning also apply to the 

phase-outs you have described at the higher end of the income tax 

scale? 

Mr. VIARD. Yes. I think that at every income level, you would 

anticipate some disincentive effects, and the amount of those efVerDate Nov 24 2008 03:42 Jan 28, 2012 Jkt 072509 PO 00000 Frm 00056 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\72509.XXX GPO1 PsN: 72509

anorris on DSK5R6SHH1PROD with HEARING
53 

fects depends upon which choices are available to the taxpayers in 

question. At high income levels, there may actually be greater 

scope for disincentive effects, because those taxpayers may have a 

variety of techniques available to them whereby they can reduce 

their taxable income. And the phase-outs may prompt them to take 

steps to take advantage of those strategies and lower their taxable 

income. 

Mr. HERGER. Thank you. That is very discouraging. It is very 

discouraging to those who would like to work their way up the income level to better themselves. 

So, what I would like to ask both you and Professor Nellen is 

this. Would it be possible for us to reform the Tax Code in a way 

that achieves two goals at once: simplifying the tax system and 

making it easier to understand, while also eliminating these hidden 

marginal tax rates that have such a negative impact on the incentive to work? 

Ms. NELLEN. I think some simplification certainly is possible. 

For example, on these phase-outs, there are a few areas of complexity. One is that most of them start at a different dollar amount. 

But also, what that dollar amount is is not always defined the 

same way. Some of them are based on what your adjusted gross income, or AGI, is. Some are based on what is your modified adjusted 

gross income. 

The definition of modified adjusted gross income can actually 

vary from incentive to incentive as to what that calculation is, just 

making it more difficult, for example, for a practitioner to explain 

to a client, ‘‘This is how this is going to affect you.’’ Instead they 

will just say, ‘‘I need to go double-check what the calculation is and 

run the numbers.’’ So, some simplification could occur, just by 

standardizing the deduction as to how do you define what your income level would be. And it probably should just be maybe adjusted 

gross income, a dollar amount that is clearly right on the tax return, to then base the phase-outs. 

Some of the incentives, perhaps—— 

Chairman CAMP. I am sorry, his time has expired. 

Mr. HERGER. And thank you. It sounds very, very complicated 

to me. Thank you. 

Chairman CAMP. Mr. McDermott is recognized. 

Mr. LEVIN. Jim. 

Mr. MCDERMOTT. Okay. Thank you, Mr. Chairman. I noticed 

from the sparsity of the audience that the tax lawyers must be sitting in their office watching this, rather than being forced to come 

up here and look at this. 

And I—as I look at the complexity of the Tax Code, it seems to 

me that those folks who have money have plenty of people figuring 

it out for them. They don’t have any trouble figuring it out. And 

I am sure that they—most of the complexity in the code is derived 

around the issue of how to get me out from under some of it. So, 

I do not worry about the people at the top of the Tax Code very 

much, because I figure they will be taken care of quite well. 

So, my question to you is which of the tax provisions affect the 

middle class and below would you try and uncomplexify? 

[No response.] 


anorris on DSK5R6SHH1PROD with HEARING
54 

Mr. MCDERMOTT. First, if you had one. I mean I assume this 

hearing is on the level, and it is really about making it better for 

the middle class in the country, rather than for the people in the 

top one percent or one-tenth of one percent. 

So, for the middle class, which one would you try and 

decomplexify? 

Mr. VIARD. Well, Congressman, I think that the area that seems 

the most promising, in terms of simplification, is to address the 

savings and the education and the family incentives. As Ranking 

Member Levin mentioned, these provisions are significant to the 

middle class. And I think it is the middle class households that are 

affected by the complexity that I and the other witnesses have described. 

So I think that would be a promising area to begin, in order to 

provide simplicity for middle class taxpayers. 

Mr. MCDERMOTT. And give me your solution. I mean we are 

gathering ideas here. This is a hearing. So I would like to hear 

your ideas about how you would decomplexify it. 

Mr. VIARD. Well, to take the savings accounts, for example, the 

basic approach that I think holds the most promise is one that has 

been outlined in various forms by a number of people before me, 

and that involves simply consolidating the 20 different types of accounts. 

We fundamentally want to encourage saving through employerbased plans. We want to encourage saving by individuals for retirement. And we want to encourage saving by individuals for a range 

of other purposes, such as health and education. Those three purposes can probably be achieved by offering three different types of 

tax preferred savings accounts—— 

Mr. MCDERMOTT. You mean replace? 

Mr. VIARD [continuing]. Instead of 20. 

Mr. MCDERMOTT. Replace three with three new ones? 

Mr. VIARD. No, I’m sorry, replace the 20-some accounts that currently—— 

Mr. MCDERMOTT. Ah, with three. 

Mr. VIARD [continuing]. Serve those 3 purposes with 3 accounts. 

And then try to make the rules as uniform as possible across them. 

The President’s Advisory Panel on Federal Tax Reform outlined a 

reform along these lines. And options have been discussed by other 

groups, as well, that are very similar. 

Mr. MCDERMOTT. Why—explain to me why this committee—I 

mean nobody sits on this committee to think of how you can make 

the plans more complex. So, why did 20 plans get developed? Explain to me that process. 

Mr. VIARD. I am not certain about the answer to that, Congressman. The accounts have arisen over the years. I think there has 

been a tendency at each point to address some specific problem in 

isolation from the accounts that already existed. I think the same 

process has occurred, for example, on the education incentives. 

What I think this hearing offers is the opportunity to sit back 

and say, ‘‘Regardless of how we got here, let us take a look at these 

20 different accounts, and see if they actually serve 20 different objectives.’’ And I think the answer is pretty clear that they do not. 

And we now have a range of organizations of diverse ideological 


anorris on DSK5R6SHH1PROD with HEARING
55 

backgrounds, and those that are not ideological, saying there are 

opportunities to simplify these, to step back and say, ‘‘Yes, let us 

not be shackled by the history of how these have developed,’’ but 

instead, try to find ones that will most effectively and simply 

achieve the purposes that Congress has set forth. 

Mr. MCDERMOTT. Mr. Buchanan, do you have any comments? 

Dr. Buchanan? 

Mr. BUCHANAN. Yes. Thank you, Mr. McDermott. I agree with 

most of what Mr. Viard just said. I do think that the Congress has 

enacted a lot of responses to individual concerns. If we think that 

people are not saving enough for health emergencies, for example 

we create health savings accounts, and similar benefits. 

I do think that it makes sense to stop and shovel out the stables 

every now and then, because there is a lot of accumulated mess. 

It is appropriate to go back and combine various benefits into thematic groups, or take the different groups and combine them into 

one type of tax credit. If we believe that saving needs to be increased for retirement, then we should have one and only one retirement savings incentive. 

Chairman CAMP. All right. Thank you. Mr. Johnson is recognized. 

Mr. JOHNSON. Thank you, Mr. Chairman. I think the word is 

‘‘simplify.’’ I understand that word better than I do that other one 

they are using over there. Don’t you all? 

Ms. Nellen, I appreciate your comments regarding the standard 

mileage rates. You rightly said in your testimony, ‘‘The IRS can increase these rates as it did last in 2008, when gas prices surged 

to $4.’’ I paid $4 yesterday, so it is there. As you may know, last 

month I called on the IRS to increase the mileage rates due to 

higher travel costs brought on by surging gas prices. 

This headline by CNN Money has it right: ‘‘Gas prices in the firing range of an all-time high.’’ 

So, for the sake of those who use these rates, particularly our nations’ small businesses, I would hope that the IRS does the right 

thing and provides relief from the near-record gas prices by increasing the mileage deduction. And I hope you would agree with 

me on that one. 

But let me ask you a question. Since about 90 percent of the 

budget cost of earned income tax credit is in the form of outlays, 

rather than credits for actual tax liability, it appears the provision 

effectively is a credit against payroll tax, rather than income tax. 

Would you agree that a simpler way to deliver this tax benefit 

would be to reduce payroll tax liability in the first instance, rather 

than requiring taxpayers to engage in this circular flow of tax credits within the government? 

Ms. NELLEN. Thank you, Congressman. On the earned income 

tax credit, you are correct, that that is really refunding all or some 

portion, or maybe even beyond what the Social Security is. 

Actually, I had provided a paper on that topic to Joint Committee 

when they did the simplification study back in 2001. I and others 

had suggested that perhaps, if they could just not have to give the 

money in the first place, because they are giving it through their 

payroll withholding, but to stop that payroll withholding, so they 

would actually also have it on a weekly regular basis, that could 


anorris on DSK5R6SHH1PROD with HEARING
56 

simplify what the earned income tax credit is intended to do, and 

that would cause a few complexities for employers. 

But I think that could be worked out. And there is probably some 

other improvements to the earned income tax credit that could simplify that. But if you could, just stop, you know, taking their 

money, only to give it back to them at the end of the year. That, 

hopefully, could simplify the process. 

Mr. JOHNSON. Yes. There is a whole bunch of things like that, 

isn’t there? I mean—— 

Ms. NELLEN. Well, earned income tax credit is a good example 

of that, because it is, in essence, refunding the Social Security—— 

Mr. JOHNSON. We need her to help us simplify the Tax Code. 

What do you think? Thank you for your comments. Mr. Chairman, 

I yield back. 

Ms. NELLEN. Thank you. 

Chairman CAMP. All right. Thank you. Mr. Neal is recognized. 

Mr. NEAL. Thank you, Mr. Chairman. Professor Nellen, I understand that you are testifying today on behalf of AICPA. And I have 

to say that your statement in support of repeal of alternative minimum tax is music to my ears. I have staked a career here on that 

issue. 

I first filed a bill years ago that would, at that time, have repealed AMT when it only cost a few billion dollars. Now it has 

overtaken the regular income tax collections. Some of us have argued that the decision in 2001 not to deal with AMT saved the 

overall cost of the Bush tax cuts, and that the drafters did so knowingly. In fact, in 2001 a Treasury Department economist warned, 

‘‘Indexation of AMT parameters, however, would not completely 

eliminate the sizeable increase in the percentage of AMT taxpayers 

through 2010 because of the post-2001 growth in Tax Reform Act 

provisions.’’ 

Even with indexation, the percentage—indexation. Even with the 

percentage of taxpayers subject to AMT would increase by more 

than 200 percent between 2000 and 2010. So, while the lack of indexation has always been a contributor to the AMT problem, massive cuts in the regular tax were a major contributor, as well. 

You have suggested that all new tax bills require the impact of 

AMT to be revealed [sic]. Can you explain how this provision would 

work, and why AICPA believes it is important? 

Ms. NELLEN. Thank you, Congressman. When there are new 

provisions added—the child credit would be an example of that 

that was added, I think, roughly 10 years ago. And when you are 

going to give individuals what then was a $500 credit—now it is 

a $1,000 credit, temporarily up to $1,000—that would then generate the question, ‘‘Well, now your regular tax has gone down even 

lower. Is that going to make you more likely to pay AMT?’’ 

If that is the case, then I think it needs to be evaluated. Do you 

want to put in the child credit in the first place? Because that is 

actually then causing the AMT to do what it should do. If your tax 

goes below a perceived minimum, you are going to owe the AMT. 

Mr. NEAL. Okay. The growth in Tax Reform Act at that time 

neither fostered significant growth or tax reform, largely because 

there was no scrutiny of what the provision in the long term 


anorris on DSK5R6SHH1PROD with HEARING
57 

meant. And today, AMT, as I have already indicated, now is the 

Tax Code, in so many ways. 

Mr. Viard, you were nodding your head, so I am going to give you 

a crack at this, as well. 

Mr. VIARD. Well, Congressman, first let me applaud you for 

your work in trying to repeal the AMT, which I think is the ultimate solution to this problem. But I do agree with this proposal to 

have the AMT impact of new provisions looked at. And I think it 

is particularly important, because it almost helps emphasize why 

the AMT is a flawed provision to begin with. 

If a new tax break is being offered, and a decision is being made 

not to allow it under the AMT, whether it be to reduce the revenue 

loss or whatever other purpose might be served, I think that it is 

appropriate for members of this body and for members of the public 

to ask themselves, ‘‘Why is the provision not being allowed under 

the AMT?’’ 

If it is intended to serve an important public objective, then 

should it not be available to all taxpayers, not just those who are 

subject to one of two parallel tax systems? 

And if it does not serve a valid purpose, if it is abusive in some 

sense, if it is a loophole that we want to curtail, then why is the 

provision being adopted in the first place? 

So I think that this suggestion offers a good way to focus that 

question, and hopefully lead to the answer that we really want this 

provision to either be available under both systems or none. And 

then, following that logic, I think, would lead one to conclude that 

the ultimate solution is to simply repeal the AMT, as you have proposed. 

Mr. NEAL. Mr. Johannessen, you are also nodding in the affirmative. 

Mr. JOHANNESSEN. I am nodding to the affirmative because I 

reflected back on the somewhat lack of transparency that the AMT 

code has allowed public policy makers to hide behind. While speaking and saying, ‘‘We are lowering taxes on one front,’’ it is actually 

increasing on the other. 

So, yes, I am agreeing with exactly what they are suggesting 

here. 

Mr. NEAL. Do any of you know what the cost of the 2001 bill 

would have been, if covered through 2010 with AMT? 

Mr. VIARD. I believe that there would be roughly a $600 billion 

or greater cost for the AMT relief. It may be larger than that. It 

is certainly a significant item. 

Mr. NEAL. Yes. Thank you very much. And, Mr. Buchanan, lastly, our Republican friends have expressed a willingness to use the 

vote on the debt ceiling as leverage to advance some policy goals. 

In your opinion, as an economist, would the economic benefit of 

moving a 25 percent top rate for individuals be worth flirting with 

default on the debt? 

Chairman CAMP. And time has expired, so just answer quickly, 

please. 

Mr. BUCHANAN. Nothing would be worth threatening the creditworthiness of the United States. 

Mr. NEAL. All right, thank you. 

Chairman CAMP. Mr. Nunes is recognized. 


anorris on DSK5R6SHH1PROD with HEARING
58 

Mr. NUNES. Thank you, Mr. Chairman. I actually want to pick 

up where Mr. Neal left off. And maybe we will start with you, Mr. 

Viard. 

In terms of the top rate—this can go to all of you throughout the 

five-minute period that I have if we were to simplify most of the 

code—so, in other words, as you said, go from 20 different types of 

savings accounts down to 3, and take a lot of the inequities out of 

the code as much as we possibly can—and I don’t know what this 

Congress can do, and I do not know what the Senate would agree 

to, and I do not know what the President would sign, so this is basically hypothetical, but if you could simplify the code, what should 

the top marginal rate be, and how would you structure the code, 

if you could? 

Mr. VIARD. Well, Congressman, I think it is actually important 

to draw a distinction between simplification and base-broadening. 

The type of simplification that we are discussing here today I think 

would not necessarily lead to significant reductions, or necessarily 

to any reduction in the statutory rates. 

For example, if you did simplify the 20 tax preferred savings accounts into 3, that does not necessarily mean that they would be 

less generous. 

Mr. NUNES. Right. 

Mr. VIARD. That would be a decision that Congress would have 

to make, and particularly the members of this committee. So you 

could decide to have 3 accounts instead of 20, to make it easier for 

middle class and other households to use them. But if they have 

the same revenue loss, then you actually do not achieve rate reduction. 

Rate reduction, instead, requires a much more significant fundamental set of policy choices associated with base-broadening, things 

that probably, you know, go far beyond what we have been discussing in our testimony. 

Someone would have to make decisions, for example, does one 

curtail the tax preference for home mortgage interest? Do you curtail the preference for employer-provided health insurance? Do you 

curtail or eliminate the state and local tax deduction? 

Mr. NUNES. What do you think, Mr. Viard? I mean you have 

worked on these tax issues a long time. I have worked with you 

on a couple different tax issues over the years. What road do you 

think the Congress should go down? Do you think we should broaden the base and really simplify the code? 

Mr. VIARD. I do believe that the base should be broadened, Mr. 

Congressman, although I think that even a base—even an income 

tax with a broader base is inferior to consumption taxation. 

But personally, I do see areas for broadening the base, in terms 

of eliminating the state and local tax deduction, restructuring the 

preferences for employer-provided health insurance and home ownership in ways that are more effective in providing basic health insurance, and allowing people to become home owners, rather than 

encouraging the spread of expensive homes and expensive health 

insurance policies. And I think if you adopt those type of measures, 

you can lower rates, certainly by several percentage points. 


anorris on DSK5R6SHH1PROD with HEARING
59 

Again, though, I do want to stress those reflect fundamental policy debates that clearly are unrelated, at least at first glance, to 

the simplification that we are discussing here today. 

Mr. NUNES. Ms. Nellen. 

Ms. NELLEN. Yes, I do agree with that. You know, generally 

though, a broader base and lower rates does also help the tax law 

meet additional principles of good tax policy. Things would be more 

transparent. If you are removing certain provisions, that makes it 

more clear, you know—well, the tax law won’t affect your decisionmaking as much as—it should not be affecting your decision-making. Make it more neutral. 

So I think there should be consideration, as happened in the 

1986 act, of lowering the rates and broadening the base. That is 

one way to get simplification. But as Mr. Viard says, there are 

ways to get simplification. So far as what the ideal marginal tax 

rate should be is certainly an important policy debate and should 

be considered. Distributional effects, as well, among the different 

income categories. 

Mr. NUNES. Thank you. Mr. Johannessen. 

Mr. JOHANNESSEN. I can tell you that last year was the first 

year in my 20 years of working with clients actually say what I 

have often heard in economic theory, which says as we approach 

a higher and higher tax bracket at the top, that people will be 

disincentivized for additional units of work. 

And so, probably four or five different clients came to me last 

year and said, ‘‘How can I, next year, reduce my income, either by 

working less or by not creating, something that otherwise I might 

be creating?’’ 

And so, I don’t know what the idea rate is. I do know that, as 

we approach 39.6 this year, it began to get people’s interest pretty 

significantly. 

Mr. NUNES. Thank you. Mr. Buchanan. 

Mr. BUCHANAN. When we discuss base broadening and rate reduction, that is usually done in the context of wanting to be revenue neutral. And I am a bit confused by that discussion in the 

context of the broader context here. Because, as I understand it, 

part of the concern overall—especially later this afternoon, apparently—is going to be about reducing long-run deficits. And so I am 

not sure whether or not the—— 

Mr. NUNES. So you would prefer the code to stay complex, rates 

to stay where they are at, and not broaden the base? 

Chairman CAMP. All right. 

Mr. BUCHANAN. No, absolutely not. What I would prefer is that 

we broaden the base, and think about how that would affect revenues, and therefore, the long-run deficit picture. 

Chairman CAMP. All right, thank you. 

Mr. NUNES. I yield back. Thank you, Mr. Chairman. 

Chairman CAMP. Mr. Becerra is recognized. 

Mr. BECERRA. Thank you, Mr. Chairman. Thank you for your 

testimony. 

Let me see if I could ask you all to help me do something. Mr. 

Viard, give me a number between one to three. Just give me a 

number between one to three. 

Mr. VIARD. Two. 


anorris on DSK5R6SHH1PROD with HEARING
60 

Mr. BECERRA. Two? Ms. Nellen, give me a number between 1 

and—is it Nellen? Ms. Nellen, a number between 1 and 800. 

Ms. NELLEN. Seven hundred. 

Mr. BECERRA. Seven hundred. Now, Mr. Johannessen, a number—just give me a top or bottom. 

Mr. JOHANNESSEN. Top. 

Mr. BECERRA. Top? Okay. Let us see. Here is a Tax Code. 

Number 2, 700, and top. So top is here, we are looking at Section 

1361 of the Tax Code, ‘‘Effect of Election on Corporation.’’ I suspect 

this particular section dealing with corporations won’t affect most 

individual tax filers. And I suspect we could go through this routine about 1,000 times and most of this random selection of a provision in the Tax Code would not affect most tax filers. 

In fact, if you take a look at the forms that are available to tax 

filers, the 1040EZ, the 1040A, and the 1040 itself, most tax filers 

can file using the simple tax form, the 1040EZ, or the 1040A. The 

1040EZ, if I am looking at it properly—and I have it right here— 

it has 13 items to be filled out. That is it, 13 items. 

Now, the 1040, of course, is the one used by folks who have higher incomes. That has a lot of additions, a lot of supplemental filings 

with it. But the 1040EZ, which the IRS, in its instructions to tax 

filers, says to them, ‘‘You can use this 1040EZ form if your taxable 

income is below 100,000’’—and, by the way, 87 percent of the 143 

million-plus American tax filers earned less than $100,000—is 

‘‘your filing status is single, or if you are married and file jointly, 

if you are under the age of 65 and not blind’’—that is a pretty easy 

one to determine—‘‘you are not claiming any dependents, and your 

interest income is $1,500 or less,’’ with today’s interest rates, you 

are probably having to earn pretty good interest to collect $1,500 

in interest, some probably $50,000 in a savings account of some 

sort, or some kind of something that gains you an income, an interest income. 

So, probably not a lot of folks who are at $100,000 or below, 87 

percent of filers, who really have to go beyond the 1040EZ with 13 

questions, or perhaps the 1040A. The reality is that the more than 

2,300 pages in the Tax Code aren’t for people who earn $100,000 

or less. It is for those who make more who need to use the 1040, 

because they have lots of different ways to reduce their tax burden, 

to the point where Warren Buffett has said that he likely pays a 

lower income tax rate than do the assistance and secretaries that 

work for Warren Buffett. 

And, as the Bloomberg Business Week article of April 7th said, 

the top 400 income tax returns—so the 400 wealthiest Americans, 

by income—while their rates, their statutory rates, might be in the 

30 percent, their effective rate, what they ultimately paid after 

they used all of these tax shelters and so forth, was just under 17 

percent. That is higher than a lot of those middle income families 

that would file the EZ, 1040EZ, form. In fact, those 400 percent 

richest Americans pay at a lower rate than the next set of wealthy 

Americans, who pay probably about 23 percent. So the richer you 

get, the lower your taxes. 

And the poor average worker, who makes—who gets a paycheck 

every week or every month, doesn’t have to worry about trying to 


anorris on DSK5R6SHH1PROD with HEARING
61 

sneak through some of the Tax Code, because his or her money is 

automatically taken out of the paycheck. 

And so, as we talk about complexity, I think we have to remember something. The complexity is created not by the average American making $100,000 or less, it is created by all those folks who 

make much more money who want to keep as much of their money 

with them as they can. And the reason you have 2,300 pages is not 

so that you can help the average stiff who works every day 9:00 

to 5:00, it is to help the guy who doesn’t use the 1040EZ who is 

trying to shelter as much as he can. 

And so, I hope that as you keep coming to testify before us, you 

will help us make sure we navigate this so we do not hurt the middle class as some try to protect the wealthiest Americans, who are 

doing very well on their own. 

Chairman CAMP. All right. 

Mr. BECERRA. Thanks very much. 

Chairman CAMP. Thank you. Mr. Tiberi is recognized. 

Mr. TIBERI. Thank you, Mr. Chairman. Mr. Viard? I kind of 

want to say ‘‘Oh,’’ based upon your bio and your days at Ohio 

State. But you were there after I graduated. 

You may have seen yesterday an Ernst & Young report come out. 

Are you familiar with that at all? It was a report regarding our Tax 

Code. 

Mr. VIARD. I don’t think I saw that report, Mr.—— 

Mr. TIBERI. All right. Well, it had to do with the corporate Tax 

Code and pass-through entities. About a month ago we had a hearing here with respect to pass-through entities. And today, the 

President is going to tell us something. He has talked before about 

doing corporate tax reform. And some in the Administration have 

talked about doing only corporate tax reform. 

In your view, looking at our Tax Code today, if we did only corporate tax reform, and did not deal more comprehensively across 

the board, would that create inequities, in your opinion, more inequities than we have today? 

Mr. VIARD. I think that would depend on how that reform was 

done. I certainly think that dealing only with the corporate income 

tax, you know, would be only a partial solution to the problems 

that affect our tax system today. There are clearly reforms that are 

needed for individual taxpayers of the type we have been discussing here, as well as some that we have not been discussing. As 

I said at the beginning of my testimony, I was not going to discuss 

the problems faced by individual owners of pass-through firms. 

But, in fact, those regimes are needlessly complex. 

I think it was interesting that the tax provision that Congressman Becerra chose at random was a provision pertaining to S corporations. And it is clear that we have some very complicated regimes governing pass-through entities. We have a partnership regime, we have an S corporation regime, each of which is complex 

in itself, and each of which differs from the others. 

And I think that it is absolutely right, as Congressman Becerra 

pointed out, that the individuals directly affected by this are highincome individuals, in many cases. And so, I do not know that we 

need to feel compassion that they are struggling with this complexity. 


anorris on DSK5R6SHH1PROD with HEARING
62 

But what I think all of us need to worry about is whether, as, 

you know, citizens and as members of an economy, whether the efforts of those individuals should be devoted to dealing with intricate tax provisions, or instead, should be devoted to business purposes, to the hiring of new workers, to the creation of new products 

that are demanded by consumers. 

Mr. TIBERI. That is where I was—— 

Mr. VIARD. And I hope that simplification—— 

Mr. TIBERI. And that is where I was heading, actually, because 

the report that came out yesterday showed that a majority of business job creators and business owners were pass-through entities, 

including S corps, and that if we raise the top rates on them, at 

the same time we were reducing corporate rates, we would actually 

impact a number of job creators in a negative way. And not only 

the complexity issue that has been talked about today, but also 

raising the rate, would have an impact on our economy. 

And so, Mr. Johannessen—did I say that right? For someone who 

gets his name mispronounced every day, I am sensitive to the way 

you pronounce your name. You said something in response to Representative Nunes I would like you to say again, with respect to 

something you have heard this year from some of your clients with 

respect to the Tax Code. Can you repeat that again? 

Mr. JOHANNESSEN. I believe what I said was that for the first 

time in my 20 or so years, that folks actually were asking what 

they could do to minimize their earnings potential because they 

wanted to try and avoid being pushed into the 39.6 percent tax 

bracket. 

Mr. TIBERI. That is the biggest headline that should come out 

of this hearing today. My mom and dad came to America, as I have 

said before, for a better life. And in America, it was endless potential. And when you have people, job creators, entrepreneurs, people 

who are trying to better themselves, take the Tax Code and go to 

one of their advisors and say, ‘‘How can I work less so I don’t get 

penalized by my government,’’ that is an incredible statement. 

Representing the AICPA, Ms. Nellen, have you or any of your 

members heard that, or do you see a problem within our Tax Code 

that creates this thought process? 

Ms. NELLEN. Congressman, I have not personally heard that. I 

have heard stories of that. I do think, in looking at the rates, I 

think it is—going to hear more of that, because there are some additional rates coming into effect, Medicare tax coming into play at 

3.8 percent on certain investment income. I think some might question, ‘‘Well, what exactly is my marginal rate?’’ And I think, just 

seeing additional taxes does perhaps also raise the question Mr. 

Johannessen is hearing from his clients. 

Chairman CAMP. All right. Thank you. 

Mr. TIBERI. Thank you. I yield back. 

Chairman CAMP. Mr. Pascrell is recognized. 

Mr. PASCRELL. Thank you. Mr. Buchanan, good morning. 

Mr. BUCHANAN. Good morning. 

Mr. PASCRELL. There is nothing more notoriously and pointlessly complex than doing your taxes twice. And you know my 

friend Mr. Neal has referred to the, you know—in my own district, 

tens of thousands of people, we—New Jersey ranks number one in 


anorris on DSK5R6SHH1PROD with HEARING
63 

AMT filings. There is a reason for that. And my own district, which 

is a moderate income to low income, it ranks within the 50th in 

the entire nation in AMT’s filed. 

So, there have been numerous attempts, numerous attempts, to 

index the AMT, to patch it. There have been numerous attempts 

to repeal it. It is almost biblical. The common theme was that all 

of these policies were going to be paid for. So, the President’s 2012 

budget paid for the AMT patch for three years by eliminating tax 

breaks for specific oil companies and millionaires—very specific, 

rather than what we usually do on both sides of the aisle, eliminating loopholes, which can mean anything under the sun. 

So, the Republican budget, Mr. Ryan’s budget, bootstraps the $1.5 trillion AMT repeal to the extension of the millionaire tax 

breaks. I find that to be most interesting. At a total cost of $4.2 

trillion, according to the Tax Policy Center. That budget also looks 

to lower the top rate to 25 percent. 

Mr. Buchanan, an AMT repeal was included in the 4.2 trillion 

tax break in the Ryan budget. Very specific. How much more would 

it cost to lower the top individual rate and top corporate rate to 25 

percent? You have any idea? 

Mr. BUCHANAN. It would be in the trillions. 

Mr. PASCRELL. Well, the answer is $2.9 trillion over 10 years, 

in addition to the 4.2 trillion already in the Ryan budget. That is 

quite a bit of money, isn’t it, Mr. Buchanan? 

Mr. BUCHANAN. Yes, sir. 

Mr. PASCRELL. For a budget that is supposed to get us to the 

Promised Land. 

Mr. BUCHANAN. Yes, sir. 

Mr. PASCRELL. It is not getting us to the Promised Land. 

What are the options of paying for this rate reduction? What tax 

credits or deductions will have to be eliminated? All of them. 

The President’s debt commission has a top rate of 25 percent. 

But it eliminated all tax expenditures, did it not? 

Mr. BUCHANAN. Yes. 

Mr. PASCRELL. Okay. If we eliminated many of the complex tax 

preferences, such as the earned income tax credit, a favorite of 

President Reagan, or child tax credit, or the mortgage interest deduction, while extending the Bush tax cuts for top earners to pay 

for a rate reduction, wouldn’t lower and middle income individuals 

have a higher tax liability in the end, Mr. Buchanan? 

Mr. BUCHANAN. Yes, sir. 

Mr. PASCRELL. Or else where would the money come from, Mr. 

Buchanan? 

Mr. BUCHANAN. I could not tell you. As far as I can tell from 

these plans, it boils down to saying, that one way to simplify is to 

raise the net tax burden on those making less than 200,000 a year. 

Mr. PASCRELL. Of course it has to come from some place. 

Mr. BUCHANAN. Yes. 

Mr. PASCRELL. Or else we will do what we did for eight years, 

not pay for anything. 

Mr. BUCHANAN. As I understand it, and my earlier response to 

Mr. Nunes was based on this when we are talking about eliminating these various preferences, we are broadening the base. But, 

as you describe, this is in a context where we are broadening the 


anorris on DSK5R6SHH1PROD with HEARING
64 

base in order to make up money that is being lost in terms of the 

rate reduction and the elimination of the AMT. 

Mr. PASCRELL. Thank you so much, Mr. Buchanan. 

Chairman CAMP. All right. 

Mr. PASCRELL. And I yield back, Mr. Chairman. 

Chairman CAMP. Thank you. Mr. Davis is recognized. 

Mr. DAVIS. Thank you, Mr. Chairman. I would like to follow up 

on Mr. Herger’s question for Dr. Viard and Ms. Nellen about how 

phase-outs might actually discourage work and earnings. I serve as 

the chairman of the Human Resources Subcommittee. We are looking at some of the arcane and complex interlocking relationships 

between the silos of the various programs that create some real 

challenges, I think, for the folks who want to get out of poverty, 

or want to get off of assistance and build themselves a future. 

And we know the Tax Code has many provisions for low-income 

families. As Ms. Nellen’s testimony indicates, however, there is no 

consistent structure to ensure that the tax provisions work together 

more harmoniously or holistically. You know, meanwhile, parents 

who qualify for those tax benefits may, in addition, receive food 

stamps, welfare, Medicaid, and other benefits that also vary, based 

on income. 

Given all that, it has got to be bewildering for parents to try to 

figure out if working and earning more will actually make them 

better off. With all these program interactions, it seems that some 

families with very moderate incomes can actually face an effective 

tax rate of more than 100 percent, meaning that they are made 

worse off if they work and earn more, which is counterintuitive to 

what the goal is, to begin with. 

My question is this. Have any of you reviewed how phase-outs 

for tax and non-tax benefits discourage work, since earning more 

may cause someone to lose both tax benefits and other benefits as 

well? And should we be looking at this more holistically, so low-income and modest-income parents can actually end up better off 

from working and earning more? 

Ms. NELLEN. Congressman, that is a good question. I think it 

is important to think about when the taxpayer would also even be 

aware that they have actually lost the deduction. A lot of times 

that might not happen until they are filing their return. As they 

are proceeding through the year, they might be thinking, ‘‘Oh, 

there is a particular incentive, I am going to qualify for that,’’ and 

might not find out—you know, for example, even getting a year-end 

bonus might be enough to kick them out of that, and they didn’t 

know that earlier on in the year. So that is one problem with the 

phase-outs. It is not something you always plan for. 

Now, some individuals, high income, know that they are beyond 

all the phase-out levels, they don’t even think about getting those. 

But I think people that—in the levels where you are intending to 

get those benefits, it is just the uncertainty because of that phaseout. 

And sometimes they do not know that unless it has happened 

once. Then they are more likely to pay attention to it, and either, 

you know, just count on, ‘‘I am not going to get that particular incentive’’—I am not sure it will—it is probably too complicated to 

say, ‘‘I am not going to earn more money,’’ because they might lose 


anorris on DSK5R6SHH1PROD with HEARING
65 

one incentive, but not another one, because the phase-out levels are 

all different. 

Mr. DAVIS. Mr. Viard, you would like to comment? 

Mr. VIARD. Yes, Congressman. I think you are right about needing to take a holistic approach to this. And it is very complicated, 

because just as we have a proliferation of phase-outs on the tax 

side, we also have a proliferation on the spending side. 

There are numerous different anti-poverty programs. You mentioned some of them: the food stamps, public housing, temporary 

assistance to needy families, and so on. And any given household 

could, at least in principle, be eligible for a number of them. And 

some of the same complexity problems and marginal rate problems 

arise there, as well. 

I think that if we did try to consolidate, you know, along both 

sides of the system, that we at least could make more informed and 

transparent choices about the marginal tax rates. 

The one note of caution I do want to put into the discussion, 

though, is this. It is difficult to avoid high marginal tax rates in 

these low-income programs, because you really face a difficult 

trade-off. If you choose to have low marginal tax rates, you either 

need to reduce the benefits that are paid to the households with 

the very lowest incomes, or you need to have the benefits continue 

into higher income ranges at a greater cost. 

And so, one of the forces that has driven policy-making towards 

these high marginal tax rates is the desire, on the one hand, to 

provide adequate benefits to those at the very bottom, but on the 

other hand, to have those benefits phase out before the programs 

become too costly. So it is a very difficult trade-off—— 

Mr. DAVIS. Wouldn’t it, then, make more sense to step to a 

third-way choice on that question, and actually look at the process 

itself? One thing I have noticed dealing with integrated systems 

that have very little information error, is there is no system in the 

whole of government to be able to roll up, for example, a recipient 

of benefits to see what they get across the board. 

And so, I suspect you could get away from that. I mean, just from 

a CPA’s perspective, would it be helpful if we had statutory language that would allow data to be matched and shared across 

agencies and programs? Because we don’t now, and I think that is 

one of the reasons we have 10 percent improper payments with our 

entitlement programs at the moment. 

Ms. NELLEN. Well, certainly so far as transparency, having the 

data would be more useful to help answer these particular questions. And it is just in different locations, when does it come together into one format? But transparency would say, ‘‘Let’s bring 

all that together, and analyze what is actually there, and where 

people are getting their particular benefits.’’ 

Mr. DAVIS. It’s going to be one of the questions we are going to 

have in the coming months as we talk about entitlement reforms. 

Thank you, Mr. Chairman. 

Ms. NELLEN. Thank you. 

Chairman CAMP. Thank you. Mr. Stark is recognized. 

Mr. STARK. Thank you, Mr. Chairman. I have to make this comment, with due regard for the expertise of the other witnesses. But 

I have some notes here from my staff—I won’t tell you which one— 


anorris on DSK5R6SHH1PROD with HEARING
66 

that says that Mr. Viard is the one heavy hitter from the GOP witness list. Congratulations. That is a high compliment from the 

Democratic side. 

Mr. VIARD. Well, thank you, Mr. Congressman, but I do not 

claim any expertise greater than my fellow witnesses here. 

Mr. STARK. Okay. I guess that what we want to hear from all 

of you is how we could simplify, as Mr. McDermott has suggested, 

the code for the majority of the taxpayers, which I guess is in the 

90 percent, who use the simplified forms. There is discussions of 

not taking money out of their paycheck every month. But I guess 

I would ask the witnesses. 

Wasn’t that initiated because so many people ended up at the 

end of the year not setting any money aside, then they had a tax 

liability, and then they were in the soup? I mean they just didn’t 

have the money to pay their tax? Was that not the basis of the payroll withholding? Go ahead. 

Ms. NELLEN. Congressman, the reference actually was to the 

earned income tax credit, not to regular tax payments. Those 

should be done through withholding, to ensure that they are done. 

But so far as an earned income tax credit, if what happens is 

that the person from paycheck to paycheck—— 

Mr. STARK. Right. 

Ms. NELLEN [continuing]. Is paying FICA tax, only to get that 

returned at the end of the year through a somewhat complicated 

process, is there a way they could not have that FICA tax withheld 

in the first place. 

Mr. STARK. Well, I want to thank the panel for their contributions. And as I say, it is going to be a difficult question for this 

committee, to figure out how we can simplify the tax return without, say, doing away with the interest—home owner’s interest deduction, things like that, which politically would be a fire storm 

that none of the politicians could weather. Thank you for your contributions today. 

Mr. Neal, would you have further questions? I would be glad to 

yield the balance of my time. 

Mr. NEAL. I am okay. Thank you. 

Mr. STARK. Thank you. I yield back, Mr. Chairman. 

Chairman CAMP. Thank you. Mr. Buchanan is recognized. 

Mr. BUCHANAN OF FLORIDA. Yes. Thank you, Mr. Chairman, 

for holding this important hearing today. And I want to thank all 

our witnesses up front. 

There is a lot of discussion on C corps and having the highest 

rates in the world. I guess Japan lowered its rates, so that leaves 

us the highest rate, and I have heard the President and many 

members on this committee talk about lowering corporate rates so 

we can be more competitive here and abroad. 

But can you lower corporate rates—I pose this to all the witnesses—without not dealing with all these pass-through entities? I 

am someone who has been in business for 30 years. But in the 

1980s everybody had a sub-S, and then everybody moved to—at 

least a lot of the entities that I had were LLC’s, which are all passthrough entities. 

Do you see any scenario, based on your expertise, where they 

would lower corporate rates, but not at the same time lower rates 


anorris on DSK5R6SHH1PROD with HEARING
67 

for pass-through entities? Because a lot of those folks are the job 

providers. 

And, Mr. Buchanan, I will start with you, first. 

Mr. BUCHANAN. Compliments on your name, Mr. Buchanan. 

Mr. BUCHANAN OF FLORIDA. Thank you. 

Mr. BUCHANAN. Yes. I do agree that there is a lot of slippage 

between the different types of business entities. And, therefore, 

changing the C corp rules is going to create incentives for people 

either to move into or out of being a C corp, and instead, becoming 

a pass-through entity. 

The permeability isn’t perfect, of course, because at this point 

there are people who argue that C corps have no reason to exist 

under the existing incentives for pass-through entities, and yet C 

corps do continue to exist. But I certainly agree with you, Mr. Buchanan, that the business tax reform would need to be thought of 

as an integrated whole. 

Mr. BUCHANAN OF FLORIDA. Yes, and if you just take that 

one step further, when you are looking at trying to raise rates on 

the rich, basically a lot of those are job providers. So, if you are 

looking to lower rates on C corp, and then you have to deal with 

pass-through entities, that goes right down to the individuals. So 

that is the point. 

Mr. Johannessen. 

Mr. JOHANNESSEN. You know, I would rather cede my time to 

my colleagues here on the panel. 

Mr. BUCHANAN OF FLORIDA. Okay. 

Mr. JOHANNESSEN. They probably have more expertise in that 

area. 

Mr. BUCHANAN OF FLORIDA. Yes. Ms. Nellen. 

Ms. NELLEN. One thing. The rates, actually, as to which is 

higher, the individuals or the corporations, has changed over time. 

And people do react to that. Prior to the 1986 act, the rate on individuals was higher than corporations. That switched after the 1986 

act, which actually then brought about an increase in the number 

of pass-through entities, particularly S corporations and partnerships. And I would guess flipping that again would cause, again, 

some change in behavior. 

So, we have a record of showing that when one side or the 

other—— 

Mr. BUCHANAN OF FLORIDA. But how could you, in a competitive world like we all live in, have two people competing in the 

same industry—a C corp, in theory, could do a lot less in revenues 

and a pass-through entity could do a lot more. And if the C corp 

was paying a lot less in taxes than the S corp or the LLC, how does 

that work in our competitive environment, in terms of doing business? To follow your logic—— 

Ms. NELLEN. Well, I think some pass-through entities perhaps 

would move to the corporate forum. But you also have, with C 

corps, that they are still subject to double taxation, which is another issue that really needs to be addressed, along with the consideration of lowering the rates. 

Mr. BUCHANAN OF FLORIDA. Mr. Viard, did you want to comment on that? 

Mr. VIARD. Yes. 


anorris on DSK5R6SHH1PROD with HEARING
68 

Mr. BUCHANAN OF FLORIDA. Just the idea of lowering C corp 

rates here and abroad—— 

Mr. VIARD. Well, I think—— 

Mr. Buchanan of Florida.—and dealing with everything else—my 

opinion is you have got to deal with them all. But go ahead. 

Mr. VIARD. Well, I think, Congressman, yes, this question highlights, again, some of the complexities that have crept into the Internal Revenue Code in ways that maybe were not intended. I 

think that, in general, C corporations are taxed more heavily than 

pass-through entities, because there are two levels of tax. Yet there 

are circumstances in which C corporations can actually be used as, 

you know, tax avoidance devices, particularly if earnings are not 

being distributed and gains are not being realized. 

So, what this ultimately tell us is that we do want—ideally, at 

least—a holistic solution, something that will try to unify the treatment of different business enterprises, and allow the choice of business form to be made without reference to tax considerations. So 

the different firms, as you say, in the same industry or in different 

industries can actually compete on a level playing field, be subject 

to a single level of tax that is really uniform across different types 

of entities. 

Mr. BUCHANAN OF FLORIDA. And one other quick question, 

as I have got a few minutes, or a minute left, or whatever it is, 

the IRS says the average person takes 21 hours to fill out their return. In fact, I was reading something where the USA editorial 

page had commented that, for the new iPad, they get one page of 

instruction and the 1040 form has 172 pages of instruction. 

What would be one or two things that, in terms of tax simplification, would you suggest or do? And we will start on the other end. 

Mr. Viard? 

Mr. VIARD. Well, again, I think the thing that most cries out is 

really trying to consolidate these different incentives for savings 

and education and children, which really, you know, do not have 

a rhyme or reason to them at this point. Crept up over the years, 

and you have multiple accounts and incentives that are serving 

only one or two purposes. And—— 

Mr. BUCHANAN OF FLORIDA. Ms. Nellen, what would you—— 

Chairman CAMP. I am sorry, the time has expired. Mr. Paulsen 

is recognized. 

Mr. PAULSEN. Thank you, Mr. Chairman. I also want to thank 

all of you for being here today as a part of this hearing. I find it 

very interesting. 

I will start with Mr. Johannessen, if I could. As a part of the 

work you do, you obviously advise clients, and we have so many 

provisions that are set to expire in 2012, which we have heard 

about, many of those you referenced: dividends, capital gains, and 

these issues that do affect decisions that go into the future. And 

a lot of these are in flux right now. 

How do you advise your clients just knowing that there is the 

frequency of the changes that are out there, and the provisions that 

expire? How do you go about actually advising your clients shortterm, long-term? 

Mr. JOHANNESSEN. Right. Planners, by our nature, are used 

to changes in people’s plans. We live in that world of uncertainty. 


anorris on DSK5R6SHH1PROD with HEARING
69 

But from a longer-term perspective, the way that we are building 

our plans today, which—you know, many times we are looking at 

folks’ retirement, or their estate—is by taking the code as we know 

it exists today, the top tax brackets, and kind of planning out into 

the future, as legislated. And we have a software that helps us, do 

that in that environment. 

In the short term, it requires a lot of looking at numbers, reviewing numbers, trying to make best guess of the direction of where 

the congress and, the economy is going. And so, it requires a lot 

of time and energy. Last year, in particular, with Roth, and as we 

were heading towards a new tax bracket, whether we would have 

folks convert or not, you know, that was a significant back-andforth dialogue. 

Mr. PAULSEN. So it seems like it is pretty clear that, given the 

sense that you have all talked about, that individual taxpayers are 

frustrated with the complexity in the forms they fill out, whether 

it is the phase-out provisions or anything else, as a profession you 

are also navigating the waters and having complex calculations 

and staff, and everyone trying to advise your client. So it is part 

of that whole complex situation, right, as a part of—— 

Mr. JOHANNESSEN. Yes. You know, I think what most intrigued me about this testimony today is the idea of a more permanent structure than the one that has been in flux. When you look 

at the wave of folks moving towards retirement, just the Baby 

Boomers alone, and to have some sense of how to plan. Someone 

mentioned earlier the 21 hours to prepare the average tax return. 

That is more time than most people do on their financial planning. 

But then again, most spend time on their family vacation than they 

do on their financial planning. 

And so, to be able to have a more permanent structure, where 

people can peg towards what their retirement lifestyle needs to be 

with taxes built in, is hugely important, with the sheer number of 

people working towards retirement, this will be an issue for, not 

only seniors today, but the Baby Boomers as they move through 

the pipeline. 

Mr. PAULSEN. And, Ms. Nellen, maybe you have a different relationship with your clients. But do they face similar issues? I 

mean demographics are a fact, and we cannot change demographics. Can you comment on that? 

Ms. NELLEN. Yes, Congressman. I think part of it with practitioners is just being able to explain to their clients as to what the 

rules are today, what they might be tomorrow, or in—you know, 

two years out, three years out, and the uncertainty of being able 

to plan in that context. It does make it quite difficult, having to caveat answers about, ‘‘Should I invest this way or that way? When 

should I sell my business, this year? Next year?’’ A lot of caveats 

have to be put in place, and I think the client—and I’m not sure 

what that means. 

But I agree. Permanency would certainly help. Less choice, 

where they do not have to choose between, you know, 14 different 

provisions, but it was very clear if I do this I will get this particular education incentive, or get this retirement saving, whatever 

it might be. Added certainty, I think less choice or options would 

be helpful. 


anorris on DSK5R6SHH1PROD with HEARING
70 

Mr. PAULSEN. Okay. And Professor Nellen, I know you recently 

wrote an article for the AICPA that I think was called, ‘‘Rethinking 

the Income Tax Calculation.’’ There is a lot of talk about tax expenditures right now in the context of overall tax reform, and 

broadening the base, and eliminating a lot of these tax expenditures. 

But, you know, and you discuss this as a part of what you wrote, 

there is a complicated interaction of the rules that affect income 

tax calculations, and there is the question of what ultimately is a 

tax expenditure. Can you just explain that interaction a little bit, 

as this conversation, I think, is going to occur, obviously, and this 

committee is a part of tax reform. Do you have any suggestions on 

how we can move forward, keeping in mind some of the issues? Ms. NELLEN. Well, we hear a lot about this $1.1 trillion of tax 

expenditures out there. I am not sure everybody knows exactly 

what a tax expenditure is. Generally that does not include the 

standard deduction or personal exemption. Those are viewed as 

part of a standard income tax system. 

So far as I think other misconceptions out there, I think there 

is a lot of thought that corporations get most of those incentives, 

where actually, the bulk of those dollars is actually for individuals. Also, when we hear $1.1 trillion of tax expenditures, that is actually income tax. Some of those would actually generate, I guess, additional payroll tax, too. If, for example, certain employer-provided 

exclusions were to be considered all or partly taxed, it would also 

general some payroll tax. 

But I think, to talk about tax expenditures, it would be helpful 

if there was a broader understanding of what those are, so the public would understand what that is getting at, who uses those tax 

expenditures, and how do they affect what the tax rate is. 

Mr. PAULSEN. All right, thank you. 

Chairman CAMP. Thank you. Mr. Marchant is recognized. 

Mr. MARCHANT. Thank you, Mr. Chairman. I represent a largely suburban district, very professional, upper middle class. And I 

would tell you the largest reason why these professionals have to 

seek assistance with their tax return is the alternative minimum 

tax. The largest deduction most of my constituents have are their 

property taxes and their house payment. So, I don’t think we can 

have any meaningful discussion about simplifying the Tax Code 

without having a discussion about the AMT, especially in my district. 

Mr. Viard—is that how you say it? Is there a way to calculate 

the amount of money that is gained by virtue of the alternative 

minimum tax? Is there a baseline where you can say if there were 

no alternative minimum tax, here is the amount of money that was 

collected, but because we are collecting the alternative minimum 

tax on top of it, it represents what percentage of the total tax collected? 

Mr. VIARD. It is certainly possible to compute that number, Congressman. And, in fact, the Urban-Brookings Tax Policy Center, 

which is probably the most authoritative source of data about the 

AMT and about many other tax topics, has computed that. 

I do not have that number with me, offhand. But one interesting 

fact is that we have reached a point where it is actually cheaper 


anorris on DSK5R6SHH1PROD with HEARING
71 

to repeal the regular income tax than to repeal the AMT. Now, the 

bulk of the revenue that is being collected each year would be 

raised under either of these tax systems. And only a modest portion is the increment that arises from having two of the systems, 

as opposed to one. But nevertheless, at this point, in that particular sense of the term, you know, the AMT has become the ‘‘bigger tax system.’’ 

Mr. MARCHANT. Is there a largest deduction across the nation 

for AMT payers, the single largest deduction that they lose? 

Mr. VIARD. They lose the state and local tax deduction in its entirety. So it is the property taxes, as you mentioned, and also either 

the income or the sales tax, which itemizers have a choice to deduct. They also lose their personal exemptions. 

And that is kind of an interesting fact, because Professor Nellen 

mentioned there is—you know, we do not normally think of the 

personal exemption as being a tax expenditure. We think of it as 

being part of the normal tax system. And yet it is not part of the 

alternative minimum tax. The AMT treats the per-person exemption, the $3,700 for the taxpayer and the spouse and the dependents, as if it were a tax preference, and eliminates that under the 

AMT. 

Mr. MARCHANT. Is that the most common thing that they lose? 

Mr. VIARD. Those two are the biggest single items. 

Mr. MARCHANT. Mr. Johannessen, I found your testimony to be 

especially good, because when you go to your specific examples of 

dealing with the AMT, I think that is what hits most of the families in my district. They think they are planning all year long on 

what tax they may owe. And then most times they have paid—in 

my district—most times they have paid in too much. 

And so, they are getting big checks back, but they are curtailing 

their spending during the year. The government is keeping more 

of the money than they actually need, but taxpayers are curtailing 

their spending out out of precaution. And it is my contention that 

if that money was available in the economy to be spent, that we 

would have an acceleration of the economy. Thank you, Mr. Chairman. 

Chairman CAMP. Thank you. Mr. Rangel is recognized. 

Mr. RANGEL. Thank you, Mr. Chairman, and welcome all of 

you. Thank you for sharing your views with us today. 

During the President Reagan and President the-first-Bush administration there was a dramatic reduction in taxes. Some people 

believe that it—that reduction in revenue was responsible substantially for the increase in our deficit. Others have taken the position 

that any reduction in taxes pays for itself and, in fact, creates jobs 

and increases revenue. 

How many of you believe that the reduction in taxes that had 

been enacted was responsible in part for the tremendous deficit 

that we are suffering now? 

So, the two in the middle, your belief that tax cuts pay for themselves and grow the economy, and create jobs? 

Mr. JOHANNESSEN. No, sir. Actually—— 

Mr. RANGEL. Now, let me—ladies first. Ms. Nellen. 

[Laughter.] 

Ms. NELLEN. Thank you, Congressman. 


anorris on DSK5R6SHH1PROD with HEARING
72 

Mr. RANGEL. Besides, she is smiling, so I don’t think she will 

believe your answer. 

Ms. NELLEN. I am not sure what the answer is. I think there 

are many factors that come into play that would affect that. I will 

leave that to the economists, to know if it actually—— 

Mr. RANGEL. Why didn’t you put up your hand? 

Ms. NELLEN [continuing]. Is increasing—— 

Mr. RANGEL. Let me reframe the question just for you. There 

is reason to believe that dramatically reducing taxes not only pays 

for itself, but increases revenue. If you are confused, argue the 

point of how it is going to create revenue, since you are a tax expert, and you do not do like we do, hope for the best, or put a spin 

on something. It is just hard for people to believe from the math 

that you can dramatically reduce taxes and then tell the IRS, ‘‘You 

are in for a boom year.’’ 

Ms. NELLEN. Right. 

Mr. RANGEL. Right what? 

Ms. NELLEN. You reduce the rates, reduce everything, that 

would be hard to believe that would increase revenues. Actually—— 

Mr. RANGEL. Let me just—— 

Ms. NELLEN [continuing]. It gets measured here as a tax 

cut—— 

Mr. RANGEL. I guess I am going to have to rely on you to defend this theory, Mr. Johannessen. 

Mr. JOHANNESSEN. You—— 

Mr. RANGEL. The other three—I mean the other two—— 

Mr. JOHANNESSEN. Right. 

Mr. RANGEL. You are. 

Mr. JOHANNESSEN. The reason I didn’t raise my hand is because it seemed like during some of those times that you referenced 

in your time line there we also raised expenses while cutting taxes. 

And any financial planner would suggest to you that a client is 

more likely to have a successful outcome when the revenue coming 

in is greater than the expenses going out of any family budget. 

And so, there have been times in your time line where we were 

bringing in less revenue, bringing the base down, and raising 

our—— 

Mr. RANGEL. How many times have you been accused of having 

a two-handed argument? Of course if you reduce spending it reduces the deficit. But I am only dealing with what has been said 

categorically. Reduction of rates brings in a increase of revenue. 

You say, ‘‘Heck no, not unless you reduce spending.’’ 

In other words, it takes both, I would assume, because we are 

going to be presented with a budget that reduces revenue and reduces spending. 

Mr. JOHANNESSEN. I—— 

Mr. RANGEL. And I think that shatters the myth that it pays 

for itself. It does not pay for itself, unless you do something else, 

reduction and spending. 

Mr. JOHANNESSEN. Correct. One of—it would make me not 

popular necessarily with my clients is that I would actually advocate for modest increase in tax rates, tax revenue. 


anorris on DSK5R6SHH1PROD with HEARING
73 

Mr. RANGEL. You would do that as an American that is concerned about your country. To hell with the client. If you just know 

that you don’t want a disaster—who disagrees with Mr. 

Johannessen that—what? No, Mr. Buchanan is with us. Thank 

you, Chairman. No, I don’t need the help. 

Mr. VIARD. Congressman, can I ask a question? 

Mr. RANGEL. Yes. 

Mr. VIARD. You are absolutely right, Congressman, that tax 

cuts—— 

Mr. RANGEL. Let me—— 

Mr. VIARD [continuing]. Normally do not pay for themselves—— 

Mr. RANGEL. He threw me off. I just want to ask the question. 

During the time for our country, Republican and Democrat—so you 

suggest that to reduce the deficit we should reduce the spending 

and increase the revenue with a tax increase. Is there anyone that 

disagrees with that? 

[No response.] 

Mr. RANGEL. Okay. Now, I am so sorry, Mr. Viard. Your 

thoughts were? 

Mr. VIARD. Well, I—you are absolutely right, Congressman, that 

the typical tax cut does not pay for itself. I do think it is important 

to realize that if there is a marginal rate reduction in the tax cut, 

that you normally do get an increase in economic activity, and that 

there is some revenue feedback from that. 

But the revenue feedback is not large enough to offset the direct 

revenue loss. And, therefore, you do have a net reduction in revenue from the tax rate cut, even though it is not as large of a revenue loss as it would be if there had been no behavioral response. 

Chairman CAMP. All right, thank you. 

Mr. RANGEL. What is it—— 

Chairman CAMP. Time has expired. Mr. Berg is recognized. 

Mr. BERG. Well, thank you, Mr. Chairman. I would like to actually weigh in on that debate. In North Dakota we have reduced the 

income tax. We did that last year. We reduced the corporate income tax. We reduced the tobacco tax. And all of those have 

brought in more revenue. 

So, you know, again, I think the focus of this debate here today 

is how do we simplify our taxes, and how do we move to that place 

where it is easier for people to pay their taxes and simplify. 

I enjoyed Mr. Buchanan’s statement that every now and then 

you have got to clean out the barn, as I would call it in North Dakota. And for people that have done that, there is a lot of buildup there. And that is, quite frankly, what we did two years ago in 

North Dakota. 

We had two tax forms, one that you could take a lot of deductions on—we had about two percent of the filers on there—and 

then we had a streamlined one that basically said, ‘‘No deductions; 

here is what your gross income is, here is what your state tax is.’’ 

We lowered the overall rate and did away with the long form, if 

you call it. And again, I think that is what we are talking about 

nationally here, too: How do we again go back to cleaning out the 

barn, get to, if you will, a short simple form, knowing that, as time 

progresses, different policy changes come in for deductions and different things. So, you know, I really like that. 


anorris on DSK5R6SHH1PROD with HEARING
74 

The other thing that is such a challenge is just the uncertainty. 

The uncertainty out there, it is impossible for small business to 

have confidence in our economy, so they are sitting on their hands. 

They are not hiring. Everyone out there is worried about this deficit spending, knowing it is going to impact the taxes that they pay 

and that it is going to be a barrier to that growth. 

And so, I guess I would just kind of simplify this. Mr. 

Johannessen, how difficult is it when all these rules are changing 

as you are advising your clients? 

Mr. JOHANNESSEN. You know, we do that all the time, so for 

us it is not difficult. For the average citizen, though, I think it is 

very complex. Studies would tell you that probably two percent of 

the population actually use a certified financial planner. 

But we work in it all the time. And it is a matter of trying to 

scenario-plan and look down the road. The issues that our clients 

face certainly are not life and death. They are trying to help our 

clients make smart financial decisions. And so, it is complex. There 

is a number of different areas that each year you have to look 

through. 

One of the concerns, that I have kind of on the larger picture is 

the potential impact on these variable rates on the capital markets. 

Whether it is in last fall’s fall-off of returns in municipal bonds, as 

some portion of the public left municipal bonds as a result of the 

changing Tax Code, and how folks can game the system with regards to capital gains, and what investments they are either getting into or getting out of, right at the time that there is an inflection point with capital gains rates or ordinary income rates. I think 

that needs to be a part of the discussion, a couple of the things that 

we are thinking about every day. 

Mr. BERG. Well, that is an excellent point. Sometimes we forget 

about the impact of deficit spending on what the long-term markets 

are going to do, and what impact it will have, even apart from Tax 

Code. So thank you. I yield back. 

Chairman CAMP. Mr. Roskam is recognized. 

Mr. ROSKAM. Thank you. Mr. Buchanan, in your testimony you 

made an argument that said that the phase-outs do not increase 

complexity. Can you walk us through your thinking on that? It is 

in conflict to what other experts say. It seems intuitively difficult 

to track. What is it, in your experience, that animates the hope 

that, literally, phase-outs do not exacerbate the problem with complexity? 

Mr. BUCHANAN. My argument was that Mr. Viard’s list of 

phase-outs is a concern, because that are 20 different phase-outs 

with 20 different starting points and ending points and phase-out 

rates. That is complicated. 

The concept of having a means-tested phase-out is not inherently 

complicated, because 99 percent of the actual, in terms of doing tax 

planning and figuring out which benefits or tax provisions apply 

comes before you would ever even think of a phase-out, or think of 

the tax rate that may or may not be phased out. 

Mr. ROSKAM. Okay. I am sure you said it well and clearly, and 

everybody here got it except for me. 

Mr. BUCHANAN. Okay. 


anorris on DSK5R6SHH1PROD with HEARING
75 

Mr. ROSKAM. So the first part of your reply was that something 

was complicated, as it relates to phase-outs, and then you 

transitioned into ‘‘but it is not.’’ Where was the nexus? 

Mr. BUCHANAN. The nexus is if you have 20 different phaseouts with 20 different sets of rules for each of those phase-outs, 

that is complicated. We could have one phase-out that says, ‘‘Here 

is a range of tax provisions that are phased out,’’ but it begins at 

the same income level for all of them, and it ends at the same income level for all of them. Let us say that the ending point of the 

phase-out was $250,000 a year, if I made more than $250,000 a 

year, would that I am not going to be eligible for any of those provisions, so—— 

Mr. ROSKAM. I understand. So they all phase-out. That is your 

argument? 

Mr. BUCHANAN. Yes. 

Mr. ROSKAM. Okay. Wouldn’t it be better if there weren’t any 

phase-out, though? 

Mr. BUCHANAN. No, I do not agree with that. I think that the 

importance of—— 

Mr. ROSKAM. Well, it is less complex. What you are accepting 

is a level of complexity, and you are making the argument that it 

is better to endure the complexity, because of some other greater 

good. You are not arguing that it is less complex, though. 

Mr. BUCHANAN. Actually, what I am saying is that the phaseout complexity is so minuscule as to not be an important part of 

the simplicity debate. 

Mr. ROSKAM. Okay. Thank you. Can I just ask the other three 

panelists to take a step back and look at a bigger picture? 

And I think it is interesting. There is nobody on the panel, there 

is nobody on this side of the microphones that is arguing for the 

status quo, right? There is no constituency that says, ‘‘Wow, is our 

Tax Code fabulous.’’ Nobody is saying that. 

Take a step back, the other three, and give us some top lines on 

fundamental goals, or jurisdictions around the world that have attributes that you think are worth admiring and replicating and trying to draw from. That is commonly called a softball. 

[Laughter.] 

Ms. NELLEN. Congressman, that is a good question. I think it 

is worth taking a look at. 

One comparison point would just be how many provisions are in 

the particular income tax, as far as deductions, credits, exclusions. 

Do they all need to be there? I would venture to say that our system probably has far more than most would. 

Also, we have a situation where, as we noted in testimony, so far 

as education incentives, there is 14 different ones there. So when 

one is added, often we are not removing another one, we are just 

saying, ‘‘Here is one more way you might be able to qualify for 

something.’’ 

I think it might be that—I don’t know if other countries do this, 

but I would guess they might think, ‘‘Well, if we are going to add 

one, maybe we should be thinking that that is replacing another 

one.’’ 

But I would say certainly be looking at just what is feasible, so 

far as understanding and explaining to individuals. 


anorris on DSK5R6SHH1PROD with HEARING
76 

Also, just one comment. So far as complexity, we should think of 

it not only in compliance, but also in tax planning is there complexity there. And certainly phase-outs do cause complexity in both 

those categories. 

Mr. JOHANNESSEN. Congressman, this is more my opinion 

than the position of the Financial Planning Association, but as I 

think about the underground economy that exists in our country, 

and recognizing that a consumptive—or consumption tax is somewhat regressive and maybe not popular, I do believe that some 

level of consumption tax, in order to gain access to those monies 

that are kind of living in that underground economy that certainly 

are not even a part of any of these discussions that we are having 

today and being filed on a tax return, is perhaps a way to—or 

would be an important part or element of the discussions. 

Chairman CAMP. All right. Thank you. Time has expired. Ms. 

Black is recognized. 

Mrs. BLACK. Thank you, Mr. Chairman. And my question goes 

to the fact that there have been some members on this committee 

that have asserted that the Tax Code is not complicated for those 

that they say are just average working middle class Americans. 

And one colleague even pulled the code out to try to show his point 

that the Tax Code is really there for those who have a larger income or maybe even a business where they are making a larger income. 

And I wanted to go to you, Ms. Nellen, because I noted in your 

testimony you did talk about the complexity, and how difficult it 

might be for just an average working American. And I want to 

make that point, as I was sitting here thinking about one of the 

average working Americans in my district. That may be a family 

of five with three kids, combined salary of $75,000 a year. We have 

child care tax credits, we may have one of them that is getting 

ready to go to school, so we want to know about the education credit. We might also be saving a little bit, and we have to make sure 

that we are applying that properly to whatever our tax liabilities 

are. Perhaps a savings plan for retirement might be a part of that. 

I am going to give one case that just happened to me—and this 

is a real-life situation. I was in my district, in a rural part of my 

district, and I went to a restaurant, a very small restaurant, and 

just going around, shaking hands, saying hello to folks, saying, 

‘‘How are things going? Can you tell me what’s happening in your 

life? How is it?’’ 

And one young gentleman who was, I would say, maybe his early 

thirties, says, ‘‘You know, I just got a promotion in my job,’’ and 

I said, ‘‘That’s great.’’ And he goes, ‘‘Well, you know, it would be 

great, except that now I am in another tax bracket. I am working 

harder, and I am bringing home very little more than what I was 

bringing home before.’’ 

And so, Ms. Nellen, can you help me? Is, what I am saying to 

you, actuality, where people who are just average, everyday working people are having difficulty in understanding how to make out 

their forms and what their tax liabilities are? 

Ms. NELLEN. Yes. Congresswoman Black, I agree. I think the 

complexity is well beyond those who are high-income and can afford people to help explain it. That doesn’t mean it should be tolerVerDate Nov 24 2008 03:42 Jan 28, 2012 Jkt 072509 PO 00000 Frm 00080 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\72509.XXX GPO1 PsN: 72509

anorris on DSK5R6SHH1PROD with HEARING
77 

ated, just because they can afford to take care of it, but a lot of 

the complexity is in the provisions which—many of which are designed for low-income. For example, there is a saver’s credit which 

is designed for low-income individuals. It is fairly complicated to 

get through, so far as what you need to do to obtain it. 

The earned income tax credit certainly is only designed for lowincome wage earners. So far as the provisions regarding education, 

retirement plans, other saving vehicle that could be there, different 

ways that they might—you know, whether it is funding medical insurance, whatever it might be, I think does raise a significant 

amount of complexity that is hitting people who are making certainly under, you know, $80,000. 

And I think another part of the complexity is that, again, if they 

are going to use software, or they are going to someone who is just 

going to prepare their return without asking, ‘‘Well, gee, you know, 

are you saving for college,’’ those questions are not always getting 

asked if they are just having their return done for, you know, some 

low, low fee. They would really need more than that, or they wade 

through, you know, pages and pages of IRS documents. 

So, I appreciate your raising that. The complexity is, I think, 

very heavy for middle and low-income tax—— 

Mrs. BLACK. Thank you. And I know my time is brief here, and 

I want to just jump up to the next category of someone I actually 

was visiting with this past week before I got on the plane to come 

here. He owns a business, and it is not a huge business, but he 

does make an income of $250,000 a year, he told me. He said, ‘‘But, 

Diane, you know what? If there are benefits out there in that code 

that really could help me, I can’t find them. And I am paying my 

fair share, and I am paying what I think, you know, as hard as 

I am working, is a big share.’’ 

And so, there is also a complexity, from what I am hearing from 

my small business owners who make that income of about 

$250,000, saying, ‘‘There may be tax breaks in all of these books 

that are here, but frankly, I don’t know, and the people I am paying are not really able to find me these significant breaks, where 

what we are hearing in the media is that I am somebody who is 

really getting these big, huge breaks, and I am not paying anything.’’ 

And then the last thing that I do want to ask each of you, define 

for me—I keep hearing this over and over again—‘‘wealthy,’’ that 

the wealthy should pay more. Can you give me a definition of what 

you would consider wealthy? 

And, Mr. Buchanan, I would like to start with you. 

Mr. BUCHANAN. Obviously, there is no clean-cut cut-off to define the word ‘‘wealth.’’ A person can be relatively wealthy or relatively not wealthy. But, frankly, I think that when you reach the 

point that you—— 

Chairman CAMP. If you could just quickly answer. Is there a 

dollar figure? 

Mrs. BLACK. Yes, what is ‘‘wealthy?’’ Give me a number. 

Chairman CAMP. Because time has expired, and we want to get 

through the four answers, and then we will move on. 

Mrs. BLACK. Please. 

Mr. BUCHANAN. I think the $250,000 a year cut-off is sensible. 


anorris on DSK5R6SHH1PROD with HEARING
78 

Mrs. BLACK. Is wealthy. Okay. 

Chairman CAMP. All right. 

Mrs. BLACK. Mr. Johannessen. 

Mr. JOHANNESSEN. I think a similar number, $250,000, is 

probably reasonable. 

Mrs. BLACK. Okay. 

Ms. NELLEN. It sounds fine. 

Mr. VIARD. And I don’t think there is any single answer. I think, obviously, somebody who makes $250,000 is wealthier than 

somebody who makes $100,000, who is wealthier than somebody 

who makes $50,000. 

Mrs. BLACK. But when we talk about the millionaires who are 

getting the breaks, we, I think, confuse wealthy with those that we 

see on television, like the GE’s. So, thank you. 

Chairman CAMP. None of you characterized how that income 

was earned, which I thought was interesting. So, Mr. Schock, it is 

your time. 

Mr. SCHOCK. Yes, I was just going to say, first of all, thank you 

all for being here. Most of the good questions I was going to ask 

have been asked, I think, three times already. 

But since Ms. Black asked such a great question, and I was actually quite taken aback by your answers, I guess my question is 

this. Assuming you all recognize that the lion’s share of small businesses file as either sub-chapter S or limited partnerships, and pay 

that as personal income tax, isn’t it dangerous to assume that 

somebody who makes ‘‘more than $250,000’’ is ‘‘rich,’’ and that hiking a tax on filers of over $250,000 would put an undue burden on 

precisely those small businesses who have created 7 out of the 10 

jobs in the last 2 years? 

Mr. JOHANNESSEN. I would generally agree with that, but 

there are opportunities within small business to help defer some of 

those—the tax liability if the business owner decides to take the 

stance and help his or her employees set up a savings program for 

their retirement. 

So, though I generally agree with you that it could be a risk, 

there are also ways for them—and I would love to have the opportunity to talk to Ms. Black about her constituents who have that 

question. But there are opportunities for them to ultimately reduce 

the income for that business owner. 

Mr. SCHOCK. You mean if they give it to their employees? 

Mr. JOHANNESSEN. To themselves and to their employees. 

Mr. SCHOCK. Well, let me ask a different question. Is anybody 

up here advocating increasing the corporate tax, the current rate 

for corporations? 

Ms. NELLEN. No. 

Mr. SCHOCK. No one. Okay. So, I guess I am a little dumbfounded that we would actually suggest increasing the tax on filers 

of over $250,000 if the lion’s share of those filers are actually small 

business owners. 

And if we don’t think it is a smart thing to increase the tax on 

corporations, why is it a good thing to increase the tax, or a justifiable increase in tax, on the largest share of small business owners 

in America? Why is it okay for GE and for IBM not to pay a higher 

tax, but it is not okay for the local grocery store or the car dealer? 


anorris on DSK5R6SHH1PROD with HEARING
79 

Mr. VIARD. Well, Congressman, I definitely share your concern 

about how an increase in the—at these high income levels would 

affect the owners of pass-through firms. Of course, some of those 

pass-through firms are small, some of them are large. But all of 

them are certainly part of the investment that takes place in the 

economy that sustains employment opportunities and wages. 

I do think that should be separated from the question of whether someone who makes $250,000 is rich. I think someone who makes 

that income level is rich, and that is true, whether they own a 

pass-through business or not. But the fact that they are rich does 

not necessarily mean that we should increase the marginal tax rate 

that applies to them. You know, at a minimum, we need to be 

aware of the impediment that that creates, in terms of incentives 

to invest in pass-through firms. 

Mr. SCHOCK. Anyone else? 

Mr. BUCHANAN. Mr. Schock, I think it is important to remember two things about this. First of all, $250,000 a year for the owner of a small business is 

not their revenue, it is their income. So we are not talking about 

somebody who takes in $250,000 and then has to pay it out to employees’ salaries, and that kind of thing. We are saying, net of all 

their business expenses, what is their income? At the end of the 

year, after you add up what you have made from the firm, it is 

$250,000. 

Second of all, if you raise the rate—— 

Mr. SCHOCK. But let me just understand you. That is the 

money they then use to reinvest in their business. 

Mr. BUCHANAN. Right. But what—— 

Mr. SCHOCK. And the corporations that I did not hear you saying you were advocating higher taxes on—I am assuming we don’t 

want to raise taxes on them because to take money away from a 

corporation’s pot of money with which they reinvest. So why is it 

okay to take more money away from a small business owner, but 

not a big business owner? 

Mr. BUCHANAN. Well, in part, because C corporations have the 

two-part tax that we talked about before. So you are not actually 

comparing the same things. 

Mr. SCHOCK. They are not both the same pot of money that is 

used to reinvest in the entity? 

Mr. BUCHANAN. No, the point is that, for a C corporation, they 

pay the corporate income tax, and then they can—— 

Mr. SCHOCK. No, I understand. I understand. Okay. 

Mr. BUCHANAN. Okay. 

Mr. SCHOCK. Finally—I am almost out of time—I am interested 

in the lowest wage earners in America. Mr. Viard, maybe perhaps 

you could address this. 

I have got a lot of poor folks in my home town. And when I talk 

to them a lot about the incentives to go out and work, get a higherpaying job, some families who are trying to get two jobs, for example, the way I understand it now is there are some disincentives 

for folks in the lower end of the income scale when they hit a certain threshold. Could you maybe speak to that—— 

Chairman CAMP. Just a quick answer and then we will move on, 

because time has expired. 


anorris on DSK5R6SHH1PROD with HEARING
80 

Mr. VIARD. Yes, there are very high marginal tax rates applicable to some of these households, because they lose a number of taxrelated benefits and also, in some cases, benefits from spending 

programs. 

Chairman CAMP. All right. Thank you. Ms. Jenkins is recognized. 

Ms. JENKINS. Thank you, Mr. Chair. Thank you for having this 

hearing. And thank you, each, for your contribution today. 

Much of the focus in the headlines and inside Washington has 

been focused on tax reform to make our corporations more competitive, internationally. However, we should also focus on helping 

American families prosper. Could each of you just briefly discuss 

first of all, how the Tax Code impacts or distorts the daily decisions 

that families make, and, secondly, how simplifying the individual 

Tax Code could help individuals and families be more successful 

and help them make rational choices and remove some of the economic distortions which hamstrings their financial security? 

We will start with the heavy hitter. 

Mr. VIARD. Okay. The—I mean I think there is a number of impacts that the tax system has on people. There is the almost unavoidable work disincentive, of course. 

But the provisions that we have been discussing today I think 

have more far-reaching and adverse effects, because it means that 

when households are engaging in decisions like trying to prepare 

for—to send their kids to college, or in trying to save for retirement, that they are just forced to deal with an additional layer of 

complexity that does not need to be there, that they really have to 

think about the Tax Code, front and center, if they want to make, 

you know, the best decisions that they can for themselves concerning how to go about, you know, what ought to be much simpler 

activities. 

Ms. JENKINS. Thank you. Ms. Nellen? 

Ms. NELLEN. Thank you, Congresswoman. The—I think clarity 

would actually help. For example, if there is a desire in the tax law 

to encourage people to save for their retirement, perhaps there 

should be, you know, one particular way of doing that, so it is very 

clear, ‘‘Oh, if I put this $1,000 into this account, I am going to have 

it just earn interest tax free, or perhaps I am going to get a deduction for some portion of that.’’ 

I think today they are looking at, ‘‘I would like to save for retirement. I am not sure if I am going to have positive or negative tax 

implications of doing it particular ways.’’ So I think just the added 

clarity would be a big benefit to, actually, all taxpayers. 

Ms. JENKINS. Okay. 

Mr. JOHANNESSEN. Congresswoman, I would like to see a day 

some day when that more than two or three percent of the public 

actually think about this stuff on a daily basis. I would like to get 

there. And this being financial literacy month, would love to help 

educate folks and create incentives for them to actually think about 

this and do their planning. 

But, unfortunately that is not the way it is today. Folks think 

about this stuff on or about April 15th, and then quickly forget 

about it after they have either stroked the check or are now in 

some kind of payment mode. 


anorris on DSK5R6SHH1PROD with HEARING
81 

So, I would hope that we can get to a point where we do that, 

but it is—we are not there yet. 

Mr. BUCHANAN. In addition to what Ms. Nellen mentioned, in 

terms of planning for retirement, planning for health care spending, planning for a college education, I think that perhaps one of 

the greatest effects on what we would call everyday Americans is 

this sense that they do not really know what is going on. 

An earlier comment indicated that people thought, ‘‘There are 

provisions out there that I could be benefitting from, but darn it, 

I cannot find them.’’ And I think one of the costs of complexity is 

a sort of ‘‘morale cost,’’ an important burden on the citizens of this 

country. Essentially, the more pages that are there in the Code, 

and the less time I have to read them, the more I have a sense that 

I am somehow getting left behind. 

Ms. JENKINS. Okay. Thank you all. I yield back. 

Chairman CAMP. Thank you. Dr. Price is recognized. 

Mr. PRICE. Thank you, Mr. Chairman. I appreciate you sticking 

around. I want to thank the panel. 

And I want to try to touch on one item that has been talked 

about, which is this notion that if you decrease tax rates, you do 

not increase revenue. The three cases that are cited most frequently are President Kennedy’s tax reductions, President Reagan’s 

tax reductions, and President Bush 43’s tax reductions. 

Do any of you disagree that the reductions were followed by an 

increase in revenue to the Federal Government for each of those 

three Administrations? 

Mr. VIARD. Well, I don’t believe, Congressman, that they caused 

revenues—— 

Mr. PRICE. That is not the question, because it is a very complex situation. 

The question is, the tax reductions occurred. Did the Federal 

Government see an increase in revenue? Anybody disagree with 

that? 

[No response.] 

Mr. PRICE. Great. 

Mr. VIARD. If I can clarify, Congressman, you mean the revenue 

was higher—— 

Mr. PRICE. Higher after the tax reductions than before. 

Mr. VIARD [continuing]. Some subsequent—in nominal terms, I 

think—— 

Mr. PRICE. Yes. 

Mr. VIARD [continuing]. That certainly was true, sure. 

Mr. PRICE. Okay. And then we can argue about—or we can discuss—why, indeed, that occurred. But there was an increase in revenue to the Federal Government following tax reductions by each 

of those Administrations: Kennedy, and Reagan, and Bush. 

We are talking about the burden of the taxes. I have not heard 

anybody talk about the progressive nature of our tax system. The 

top 1 percent pay about 40 percent of the taxes—of income earners, 

the top 10 percent about 70 percent, the top 50 percent about 97 

percent of the taxes. Is—do any of you believe that that progressive 

nature is harmful in any way to our economic system, or to our society? 


anorris on DSK5R6SHH1PROD with HEARING
82 

Mr. VIARD. There is always a trade-off, Congressman, between 

the degree of progressivity and the impact on incentives. As the tax 

system becomes more progressive, it features higher marginal rates 

for those who are at the high end of the spectrum. And that does 

create disincentives for work. Under an income tax system, as opposed to a consumption tax system, it also creates disincentives for 

saving and investment, which is a very critical distortion. 

And as you have said, Congressman, the individual income tax 

today is quite progressive. I should note that the numbers you give 

are the for the individual income tax—— 

Mr. PRICE. Yes. 

Mr. VIARD [continuing]. Not for the tax system, as a whole. 

Mr. PRICE. Right. 

Mr. VIARD. And the overall tax system is somewhat less progressive than the individual income tax in isolation. 

But I think that there are a lot of misconceptions. People think 

that the high-income groups are not paying taxes. And obviously, 

we can debate. Should they pay more? Should they pay less? But 

we need to face the reality that they are paying substantial taxes 

now, they are facing significant marginal tax rates. There are disincentive effects. 

And we also need to realize, I think, that as we try to close our 

fiscal gap, that increasing taxes only for the top two or three percent will not close that gap. 

Mr. PRICE. Yes. 

Mr. VIARD. Obviously, if we are willing to accept the disincentive effects, that could be part of the response that we adopt. 

Mr. PRICE. Thank you. 

Mr. VIARD. But certainly not the whole thing. 

Mr. PRICE. Does anybody on the panel disagree with the statement that Mr. Viard made, and that is that if you increase the tax 

rates there is a disincentive to saving, and a disincentive to investment? 

Mr. BUCHANAN. I don’t disagree categorically, but I think that 

the evidence on the degree of response is ambiguous, at best. And 

the best evidence indicates that the responses are quite small. 

Mr. PRICE. I think that is debatable. We have been talking a lot 

about the burden regarding the income tax system for individuals 

and for families. 

I am of the belief that our tax system currently punishes all the 

things that we say that we want. We want hard work, we want 

success, we want entrepreneurship, we want risk-taking, we want 

savings. All of those things that we say that we want, yes, we punish them with our current tax system. 

Wouldn’t it be simpler and a less burden to society if we did 

away with the income tax system, and went to a consumption tax 

system? Wouldn’t that be much simpler and a lesser burden—understanding that you take into account those at the lower end of 

the economic spectrum with the prebate and the like? 

Mr. VIARD. Well, Congressman, I believe that consumption taxation is superior to income taxation. I would like to see the income 

tax system, both individual and corporate, completely replaced by 

a progressive consumption tax. It would eliminate the disincentives 

for saving and investment. The work disincentive, of course, would 


anorris on DSK5R6SHH1PROD with HEARING
83 

still exist, but the disincentives for saving and investment would 

be eliminated. And a significant degree of the complexity of the 

current tax system could also be removed. 

It would not be, you know, a panacea to create a completely simple system, but there are a number of complexities relating to income measurement and to depreciation and such not that would 

simply be swept away in their entirety by using consumption as 

the tax base. 

Mr. PRICE. Anybody else want to weigh in on the consumption 

tax? Ms. Nellen? 

Ms. NELLEN. I think a former question regarding what do other 

countries do, I think countries tend to have both an income tax and 

a consumption tax, in the form of a VAT. 

The focus of this hearing being on simplification, I do want to 

just point out that any tax could be complicated. And I think on 

a consumption tax, when you talk about, ‘‘Well, gee, we are going 

to exempt this, this, and this,’’ then you get to defining those exemptions, you have got a fairly complex provision. 

Or, if you want to say, ‘‘We want to encourage people to buy this, 

so we are going to have a lower rate on that particular item,’’ so 

any tax could be complicated. I wouldn’t—— 

Mr. PRICE. My time is running—but I do want to say for the 

record that an income tax and a consumption tax is the worst of 

both worlds, which I strongly oppose. Thank you. 

Chairman CAMP. All right, thank you. Time has expired. 

I want to thank all four witnesses for your testimony and for 

your willingness to answer questions today, and helping inform the 

committee. This hearing is now adjourned. 

[Whereupon, at 12:21 p.m., the committee was adjourned.] 


anorris on DSK5R6SHH1PROD with HEARING
84 

QUESTIONS FOR THE RECORD 

f 


anorris on DSK5R6SHH1PROD with HEARING72509A.037
85 


anorris on DSK5R6SHH1PROD with HEARING72509A.038
86 


anorris on DSK5R6SHH1PROD with HEARING72509A.039
87 

f 


anorris on DSK5R6SHH1PROD with HEARING72509A.040
88 

SUBMISSIONS FOR THE RECORD 


anorris on DSK5R6SHH1PROD with HEARING72509A.041
89 

f 


anorris on DSK5R6SHH1PROD with HEARING72509A.042
90 


anorris on DSK5R6SHH1PROD with HEARING72509A.043
91 


anorris on DSK5R6SHH1PROD with HEARING72509A.044
92 

f 


anorris on DSK5R6SHH1PROD with HEARING72509A.045
93 


anorris on DSK5R6SHH1PROD with HEARING72509A.046
94 


anorris on DSK5R6SHH1PROD with HEARING72509A.047
95 

f 


anorris on DSK5R6SHH1PROD with HEARING72509A.048
96 


anorris on DSK5R6SHH1PROD with HEARING72509A.049
97 


anorris on DSK5R6SHH1PROD with HEARING72509A.050
98 


anorris on DSK5R6SHH1PROD with HEARING72509A.051
99 

f 


anorris on DSK5R6SHH1PROD with HEARING72509A.052 72509A.053
100 


anorris on DSK5R6SHH1PROD with HEARING72509A.054
101 


anorris on DSK5R6SHH1PROD with HEARING72509A.055
102 

Æ 


anorris on DSK5R6SHH1PROD with HEARING72509A.056