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TRANSFORMING THE TAX CODE: AN EXAMINATION OF THE PRESIDENT’S TAX REFORM

PANEL RECOMMENDATIONS

JOINT HEARING

BEFORE THE

SUBCOMMITTEE ON RURAL ENTERPRISES, AGRICULTURE & TECHNOLOGY and SUBCOMMITTEE 

ON TAX, FINANCE & EXPORTS

OF THE

COMMITTEE ON SMALL BUSINESS 

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

WASHINGTON, DC, FEBRUARY 1, 2006

Serial No. 109–38

Printed for the use of the Committee on Small Business

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house 

COMMITTEE ON SMALL BUSINESS 

DONALD A. MANZULLO, Illinois, Chairman 

ROSCOE BARTLETT, Maryland, Vice 

Chairman 

SUE KELLY, New York 

STEVE CHABOT, Ohio 

SAM GRAVES, Missouri 

TODD AKIN, Missouri 

BILL SHUSTER, Pennsylvania 

MARILYN MUSGRAVE, Colorado 

JEB BRADLEY, New Hampshire 

STEVE KING, Iowa 

THADDEUS MCCOTTER, Michigan 

RIC KELLER, Florida 

TED POE, Texas 

MICHAEL SODREL, Indiana 

JEFF FORTENBERRY, Nebraska 

MICHAEL FITZPATRICK, Pennsylvania 

LYNN WESTMORELAND, Georgia 

LOUIE GOHMERT, Texas 

NYDIA VELA ́ ZQUEZ, New York 

JUANITA MILLENDER-MCDONALD, 

California 

TOM UDALL, New Mexico 

DANIEL LIPINSKI, Illinois 

ENI FALEOMAVAEGA, American Samoa 

DONNA CHRISTENSEN, Virgin Islands 

DANNY DAVIS, Illinois 

ED CASE, Hawaii 

MADELEINE BORDALLO, Guam 

RAU ́ L GRIJALVA, Arizona 

MICHAEL MICHAUD, Maine 

LINDA SA ́ NCHEZ, California 

JOHN BARROW, Georgia 

MELISSA BEAN, Illinois 

GWEN MOORE, Wisconsin 

J. MATTHEW SZYMANSKI, Chief of Staff 

PHIL ESKELAND, Deputy Chief of Staff/Policy Director 

MICHAEL DAY, Minority Staff Director

SUBCOMMITTEE ON RURAL ENTERPRISES, AGRICULTURE AND 

TECHNOLOGY 

SAM GRAVES, Missouri, Chairman 

STEVE KING, Iowa 

ROSCOE BARTLETT, Maryland 

MICHAEL SODREL, Indiana 

JEFF FORTENBERRY, Nebraska 

MARILYN MUSGRAVE, Colorado 

JOHN BARROW, Georgia 

TOM UDALL, New Mexico 

MICHAEL MICHAUD, Maine 

ED CASE, Hawaii 

RAU ́ L GRIJALVA, Arizona

PIPER LARGENT, Professional Staff 

SUBCOMMITTEE ON TAX, FINANCE AND EXPORTS 

JEB BRADLEY, New Hampshire Chairman 

SUE KELLY, New York 

STEVE CHABOT, Ohio 

THADDEUS MCCOTTER, MICHIGAN

RIC KELLER, Florida 

TED POE, Texas 

JEFF FORTENBERRY, Nebraska 

MICHAEL FITZPATRICK, Pennsylvania 

JUANITA MILLENDER-MCDONALD, 

CALIFORNIA

DANIEL LIPINSKI, Illinois 

ENI F. H. FALEOMAVAEGA, American 

Samoa 

DANNY DAVIS, Illinois 

ED CASE, Hawaii 

MICHAEL MICHAUD, Maine 

MELISSA BEAN, Illinois

ADAM NOAH, Professional Staff

(II) 

C O N T E N T S 

WITNESSES

Page 

Breaux, The Honorable John, (U.S. Senate, retired), Vice Chairman, President’s Advisory Panel on Federal Tax Reform .................................................. 6

Castle, The Honorable Mike (DE-At Large), Congressman, U.S. House of 

Representatives, Main Street Partnership ........................................................ 9

Garrett, The Honorable Scott, (NJ-5), Congressman, U.S. House of Representatives, Republican Study Committee .................................................................. 11

McCracken, Mr. Todd, President, National Small Business Association ............ 21

Mitchell, Dr. Daniel, Ph.D., McKenna Senior Fellow in Political Economy, 

The Heritage Foundation .................................................................................... 23

Burton, Mr. David, Americans for Fair Taxation ................................................. 25

Hausman, Mr. Jim, Hausman Metal Works and Roofing, Inc. ............................ 27

Loftis, Mr. Andy, Keller Williams Realty .............................................................. 29

Burman, Dr. Leonard, Ph.D., Senior Fellow, Urban Institute ............................. 31

APPENDIX

Opening statements: 

Bradley, Hon. Jeb ............................................................................................. 34

Graves, Hon. Sam ............................................................................................. 36

Barrow, Hon. John ........................................................................................... 39

Millender-McDonald, Hon. Juanita ................................................................. 43

Kelly, Hon. Sue ................................................................................................. 46

Prepared statements: 

Breaux, The Honorable John, (U.S. Senate, retired), Vice Chairman, 

President’s Advisory Panel on Federal Tax Reform ................................... 48

Castle, The Honorable Mike (DE-At Large), Congressman, U.S. House 

of Representatives, Main Street Partnership ............................................. 50

Garrett, The Honorable Scott, (NJ-5), Congressman, U.S. House of Representatives, Republican Study Committee ................................................ 53

McCracken, Mr. Todd, President, National Small Business Association ..... 56

Mitchell, Dr. Daniel, Ph.D., McKenna Senior Fellow in Political Economy, 

The Heritage Foundation ............................................................................. 61

Burton, Mr. David, Americans for Fair Taxation .......................................... 67

Hausman, Mr. Jim, Hausman Metal Works and Roofing, Inc. .................... 77

Loftis, Mr. Andy, Keller Williams Realty ....................................................... 80

Burman, Dr. Leonard, Ph.D., Senior Fellow, Urban Institute ..................... 88

Additional Material: 

Chapter Nine, National Retail Sales Tax ....................................................... 95

(III) 

(1)

TRANSFORMING THE TAX CODE: AN EXAMINATION OF THE PRESIDENT’S TAX REFORM PANEL RECOMMENDATIONS 

WEDNESDAY, FEBRUARY 1, 2006

HOUSE OF REPRESENTATIVES

COMMITTEE ON SMALL BUSINESS

SUBCOMMITTEE ON RURAL ENTERPRISES, AGRICULTURE AND

TECHNOLOGY AND SUBCOMMITTEE ON TAX, FINANCE AND

EXPORTS

Washington, DC 

The joint Subcommittee met, pursuant to call, at 3:01 p.m., in 

Room 2360 Rayburn House Office Building, Hon. Jeb Bradley 

[Chairman of the Tax, Finance, and Exports Subcommittee] and 

Sam Graves [Chairman of the Subcommittee on Rural Enterprises, 

Agriculture and Technology] presiding. 

Members present: Representatives Kelly, Graves, Bradley, 

Millender-McDonald, Udall, Sodrel, Barrow, Fitzpatrick, and Lipinski. 

Mr. BRADLEY. Good afternoon, ladies and gentlemen. Welcome to 

this committee hearing. It is a pleasure to be here. For those of you 

I haven’t had a chance to say happy new year to, including our 

guests, happy new year. I would like to, obviously, welcome you all 

to the Joint Hearing of the Tax, Finance & Export Subcommittee 

and the Rural Enterprises, Agriculture & Technology Subcommittee of the House Committee on Small Business. 

It is a pleasure to be working with my colleague Congressman 

Graves as we examine the recommendations of the President’s Advisory Panel on Federal Tax Reform. I would also like to thank our 

distinguished witnesses and certainly thank the Minority Chair, 

Ms. Millender-McDonald for being here this afternoon. 

In my view the current tax code is a very difficult code to navigate for members of the public that we represent. We need a simpler system which is more conducive to our economic goals and economic growth. For too long the American people have been burdened by the constraints of a complex and unfair tax system, one 

that is riddled with loopholes and shelters. In a time of ever-increasing globalization, these impediments to economic growth are 

precluding hardworking Americans from attaining their full economic potential. 

Before being elected to Congress I was a small business owner 

myself and know firsthand the significant role that these tax difficulties play in our economy and how important it would be to 

2

simplify them to create prosperity for our economy. We have to 

deal with complexities of the current code and know the need for 

real reform. Small businesses are the lifeblood of my state, of our 

American economy and we have to take away these impediments 

to that kind of economic growth. 

[Chairman Bradley’s opening statement may be found in the appendix.] 

With that I would recognize Congressman Graves for an opening 

statement. 

Mr. GRAVES. Thank you, Mr. Chairman. I appreciate it. I also, 

too, want to welcome everybody to this joint hearing. A lot of you, 

I know, traveled a long ways to be here. I appreciate your participation very much and for being a part of this. 

I also want to thank Jim Housman from Housman Metal Works 

and Roofing for coming all the way to Washington from St. Jo to 

testify as a constituent of mine. I look forward to hearing some real 

life experiences from him and others today and appreciate again 

your participation. 

Throughout my tenure as a Member of Congress I have traveled 

my district visiting with small businesses, manufacturers, and others talking about the issues that impact their business. It is almost 

always guaranteed that the tax code and reform in the tax code is 

brought up. According to the folks in my district, the current tax 

code is far too complex, time consuming, and cost way too much of 

their hard-earned money to examine it. 

I support simplifying the tax code. The tax code including all the 

opinions and precedents is over 54,000 pages long or about 2.8 million words. To complete the form it takes on average 11 hours. I 

think people have much more important things to do with their 

time than spending that 11 hours trying to fill out or trying to 

navigate the complexities of this tax code. 

Government shouldn’t handcuff small business owners. It should 

work with them. I think simplifying the code helps everyone. The 

tax code is a major drag on the economy. In fact, according to some 

estimates it costs the economy one trillion dollars in lost growth 

each year. This represents hundreds of thousands of jobs and opportunities never created because of the tax code itself. 

Americans deserve a tax code that is simple, that is fair and that 

promotes economic growth. It is fundamentally unfair to have a tax 

code that has different rules for different people. Small businesses 

create seven out of every 10 jobs in America. I want to make sure 

that we don’t put a tax burden on them so heavy that there is no 

incentive to create those jobs. 

The tax code impacts our lives in ways we rarely even acknowledge. For example, the tax code tells us when is the best time to 

get married, when is the best time to buy a home, to change jobs, 

to start saving, to have children. It tells us when is the best time 

to get an education and even when it is the best time to die. 

According to one small business owner that testified before the 

President’s Bipartisan Advisory Panel. The tax code affects almost 

every decision he makes; where to invest, when to invest, how 

much to invest in machinery and equipment used in production, 

and how to finance the investment. The complexity of the tax code 

is what makes it so easy for some folks with the means and the 

3

motive to cheat the system. Closing those loopholes is not enough 

I believe. Closing the loopholes only adds additional complexity to 

the system and all too often provides a new way to cheat. 

I look forward to hearing everybody. I think this is a very important subject. I think we need to do something before it even gets 

worse than it already is. Thank you, Mr. Chairman for allowing 

this joint hearing. 

[Chairman Graves’ opening statement may be found in the appendix.] 

Mr. BRADLEY. Thank you very much, Congressman Graves. I 

would recognize Ms. Millender-McDonald. 

Ms. MILLENDER-MCDONALD. Thank you so much, Mr. Chairman, 

and happy new year to you and to all of the members here on the 

panel and to the former member and the current members who are 

here with us. It is important to have all of you here. It is so important to have you here on the back of the State of the Union when 

the President spoke about taxes. Not necessarily small business 

taxes but, nevertheless, taxes. We are here today to talk about 

taxes where it really will impact small businesses. 

It is so important, Mr. Chairman, and it is great to have this 

dual committee meeting today because we look at taxes with reference to rural and urban and those are the two critical areas 

where we need the most relief, rural business as well as urban 

businesses so it is important that we have come together today to 

talk about this. 

It is good to have our old friend with us, Senator John Breaux, 

who serves admirably as the Vice Chair of this Committee or Commission that the president has put together, this panel along with 

Senator Connie Mack. Those two experienced former members certainly help to advance this issue that nobody wants to deal with 

but then everyone needs to talk about. 

It is an interesting time for us and I am especially interested in 

the hearing on how these changes will impact the economic development of our nation’s 23 million small businesses. Many of these 

firms already face a barrage of roadblocks on their path to success 

and the tax code should not be one of them from rising energy 

prices to a lack of affordable health care and the difficulty in assessing capital it is clear that America’s small businesses deserve 

a break. 

Unfortunately, inequities and complexities in the tax code continue to persist for small businesses. Statistics show that in 2002 

small businesses shouldered 52.5 percent of the $194 billion and 

5.8 billion hours Americans spent on tax compliance activities. 

In addition, the revenue code income tax provisions have only 

continued to balloon between 1995 to 2001. It grew a staggering 

478 percent from 172,000 words to 995,000 words. No one should 

have to try to grapple with that. The complexity problem clearly 

has serious implications for small business owners. This is why 

this panel has recommended a lot of changes that will no doubt 

help small businesses. 

For an example, the recommendation to allow for more immediate expensing of new investment for small businesses is a positive step forward and one that will encourage economic growth by 

decreasing the complexity of expensing small business owners are 

4

encouraged to invest in their businesses while at the same time improving their cash flow and simplifying their tax reporting. 

I am happy that the panel flatly rejected a consumption of tax. 

I thank you so much for that. I thank you, Mr. Chairman. I will 

put the rest of my statement in the record with unanimous consent 

and thank you so much for convening this hearing. 

Mr. BRADLEY. Thank you very much. So ordered on your statement. 

[Ranking Member Millender-McDonald’s opening statement may 

be found in the appendix.] 

Mr. BRADLEY. I understand that Congresswoman Kelly has an 

opening statement. Please. 

Ms. KELLY. Thank you, Mr. Chairman. Because I represent small 

businesses in New York’s Hudson Valley I have a considerable concern regarding some of the proposals in the Presidential Tax Reform Panel. At the same time, there are some promising ideas to 

at least work with in terms of advancing the tax reform agenda as 

it relates to small business. 

It is important to note that the suggestions in Plan A that would 

repeal the alternative minimum tax are good thinking, I believe. 

The AMT should never be on the backs of middle income taxpayers 

and small business owners. This is money that middle income families need for themselves to pay their own bills and to use for their 

own personal needs, most importantly to spend in small businesses. 

Under Plan B there is an allowance for the immediate and full 

expensing of all capital investments. Such a deduction allows 

innovators to take more changes, hire more people at an early 

stage, and generally afford more of the cost of doing business. 

Plan B also creates a tax system for businesses that are cash 

flow based. This is important, I think, to small businesses who 

need to be able to get a fair shake in terms of their real income, 

what they are actually earning and spending and taxing it only 

once at a lower and flatter rate than we do now. This cash flow 

method eliminates many of the complicated tax accounting rules 

that plague small businesses. 

My greatest concern, however, is the portion of the recommendations that will have an inherent negative impact on small businesses and that is the proposed elimination of the home mortgage 

interest deduction and the state and local income tax deduction. 

This punishes middle income small business owners in New York’s 

Hudson Valley severely. These individuals are already overtaxed. 

When middle income citizens are punished, small businesses see 

losses. Elimination of these deductions takes money out of the 

pocket of the homeowner. These homeowners are the individuals 

and the families that are out there spending money in our small 

businesses and this plan would take money away, I believe, from 

valuable patriates of our small businesses. 

I support a simpler tax code but not at the expense of the average Hudson Valley resident or small business owner who would 

stand to lose thousands of dollars in tax deductions and potential 

business every year. Small business owners need and their customers rely heavily on these deductions for federal tax relief every 

year, not just in the Hudson Valley but across America. 

5

The thought of these crucial deductions sends a chill through the 

livelihood of most of the small businesses of America. Small businesses need tax relief, not tax increases. This is a tax increase. 

Now is the time for us to be looking for ways to bring more tax 

relief to America. It is not to be developing methods of taking it 

away. There are good ideas in these plans. I hope we can stay with 

the good ideas and jettison those that aren’t. Home mortgage interest deduction not allowing that is a bad idea. Thank you, Mr. 

Chairman. 

[Congresswoman Kelly’s opening statement may be found in the 

appendix.] 

Mr. BRADLEY. Thank you. 

Mr. BARROW. Thank you, Chairman Bradley and Chairman 

Graves for holding this joint hearing to look into the findings of the 

President’s Tax Reform Panel. I want to thank Senator Breaux, 

Representative Castle and Representative Garrett for taking the 

time to come before our Subcommittees today. 

President Bush appointed the Tax Reform Panel because the current tax system is an absolute mess. It hurts business and it is a 

huge drain on our economy. The reason my Subcommittee was 

looking at this, at least in part, is because the current tax code 

hurts small businesses even more than big businesses. In 2004 

small businesses spent an average of $1,300 per employee to comply with federal income taxes which is almost twice as much as big 

business has to spend. 

In addition, the current system makes planning ahead much 

more difficult for small businesses because of Sunsets and other 

temporary fixes it is impossible for a small business owner to know 

how the tax code will affect him in the years down the road. The 

tax code hurts small businesses and that means it hurts the 

growth of our economy. 

The panel’s recommendations address many of these issues that 

make life miserable for American taxpayers. Some of the recommendations could help the American taxpayers such as simplifying our methods of saving. On the other hand, some of the recommendations could hurt such as putting a cap on mortgage deductions for homeowners. The current mortgage deduction system has 

helped a huge number of working Americans become homeowners. 

A cap on the deduction could put homeowners at risk of losing their 

homes and make new homes unaffordable for most Americans. 

Now, the panel took a long hard look at the National Retail Sales 

Tax, an idea that has been floating around Washington for many 

years now. Their findings reinforce the conclusions of economists 

and tax experts throughout the country, the National Retail Sales 

Tax is a bad idea. 

The panel refused to recommend the National Retail Sales Tax 

because they recognize it is just a tax shift and there would be a 

huge tax increase for the vast majority of Americans. A national 

sales tax might be easier for most taxpayers to pay but not if it 

cost more in the long run. Paying more in sales tax shouldn’t be 

the price that we have to pay to get tax simplification. 

Let me read you a few of the quotes from the Tax Reform Panel’s 

report. ‘‘Replacing the current income tax with a stand-alone retail 

sales tax would increase the tax burden on the lower 80 percent 

6

of American families as ranked by cash income by approximately 

$250 billion per year. Such families would pay 34.9 percent of all 

federal retail sales taxes, more than double the 15.8 percent of federal income taxes they pay today.’’ 

‘‘Although a program could be designed to reduce the burden of 

a retail sales tax on lower income and middle income taxpayers by 

providing cash grants. such cash grants would represent a new entitlement program, by far the largest in American history and 

make most American families dependent on monthly checks from 

the Federal Government.’’ 

‘‘Two types of Administrations would be required, one to collect 

the tax and another to keep track of personal information that 

would be necessary to determine the size of the taxpayer’s cash 

grant.’’ 

‘‘Even with favorable assumptions a retail sales tax on a broad 

base with a cash grant program would create incentives for significant tax evasion.’’ 

‘‘The tax rate would be 49 percent. If a narrower tax base were 

used instead of the extended base, the rate would be even higher.’’ 

In other words, in order to break even it will cost more for most 

of us and the worst of it is that the IRS ain’t going anywhere. What 

we will get is two bureaucracies instead of the current one. One to 

collect a huge tax that will be much harder to collect than folks realize, and the other to pay off the welfare rebate that is supposed 

to keep the new tax from crushing the poor, two messes to replace 

the current mess. 

The President’s Tax Reform Panel gave America a thorough, nonpartisan, and fair assessment of the National Retail Sales Tax. 

While the panel clearly laid out the flaws in the proposal, I am 

glad to see some of their other recommendations and I again thank 

the chairman for holding this hearing to discuss these options in 

greater depth. 

Mr. Chairman, I ask unanimous consent to submit Chapter 9 of 

the Tax Reform Panel’s Report for the record. 

Mr. BRADLEY. So ordered. 

[Ranking Member Barrow’s opening statement and Chapter 9 of 

the Tax Reform Panel’s Report may be found in the appendix.] 

Mr. BARROW. Thank you, Mr. Chairman. 

Mr. BRADLEY. With that, let me recognize our first panel. Senator Breaux who is the Vice Chairman of the President’s Advisory 

Panel on Federal Tax Reform; Congressman Castle from Delaware, 

and Congressman Garrett from New Jersey’s 5th Congressional 

District. 

Mr. BRADLEY. Gentlemen, welcome, and I think we’ll begin with 

you, Senator. 

STATEMENT OF THE HONORABLE JOHN BREAUX (U.S. SENATE, RETIRED), PRESIDENT’S ADVISORY PANEL ON FEDERAL TAX RETURN REFORM 

Mr. BREAUX. Thank you, Mr. Chairman, Mr. Chairman and 

ranking members and ranking members. I am delighted to have 

the opportunity to be over on the House side to share some 

thoughts and comments. Actually, after serving 32 years in Congress this is the first time that I’ve been back to testify in any caVerDate 0ct 09 2002 13:49 Sep 18, 2006 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 G:\HEARINGS\26960.TXT MIKE
7

pacity and I’m delighted to be asked to appear before your distinguished Committees. 

Actually, the way things are changing I am just happy to be able 

to walk into the building. I am not sure if I will be able to come 

back a few more months from now so this may be my first appearance and maybe my last appearance, but whatever. Thank you for 

having me. I think that everything that all of you have said I think 

is very important. I don’t disagree with almost all of the conclusions that you have pointed out. 

The Tax Commission, which was bipartisan, had myself and 

Connie Mack as the chair and the co-chair, Congressman Bill Frenzel from the House who served on the Ways and Means Committee 

with distinction was one of our other members. Nobody else was a 

political elected official and none of us were running again so we 

were able to do what commissions are supposed to do, to look at 

the tax code which we were charged with looking at, and make the 

best possible recommendations without the worry about what are 

the political implications. 

That’s for the administration and that’s for you ladies and gentlemen to decide whether what we recommended has any political 

legs or is it too difficult to consider. That is the beauty about having a commission. You can always say, ‘‘The Commission recommended this and we are going to look at it and see what we can 

do with it.’’ 

I think it is timely. It is much more timely than some of the 

other efforts. We all remember the effort on Social Security. The 

problem with Social Security was that the country was not in any 

kind of agreement that it should be changed. The President has 

put a lot of time, a lot of effort, a lot of political capital in traveling 

around the country talking about reforming Social Security. 

The fact was that seniors who I think should be involved in looking for positive changes were totally opposed to it. And young people who you would think may be looking for new alternatives to it 

were really not engaged and not supportive of it. The people who 

were against it were much more against it than the people who 

were for it. Therefore, when you have a split in national dialogue, 

it is very difficult to get a consensus and, as a result, nothing happened. 

On tax reform and tax simplification, I would suggest that you 

cannot go to a rotary club. You cannot go to a town hall meeting 

and ask the question, ‘‘Does anybody here not think that the tax 

code is too complicated? Does anybody think that we should not 

simplify it?’’ It is almost an unanimous agreement among America’s public, young, old, black, white, geographic across the country 

that a tax code is too complicated and we should do something for 

it. 

This is, I think, a political win for both parties. I would have 

hoped that the President would have said, ‘‘I am charging the Congress to take the recommendations of my Commission, which was 

unanimous Democrats and Republicans alike, and use it as the 

basis to start the dialogue for simplifying the code.’’ No one would 

disagree with that challenge. How we do it, of course, obviously 

there are a lot of challenges. 

8

The President told us to make sure that what we did was reasonably progressive, that it was pro-growth, that we assumed that the 

tax cuts of 2001, ’03, and ’04 were made permanent, that we paid 

particular attention to the importance of charitable contributions 

and mortgage deductions, and, oh, by the way, make it revenue 

neutral. I would suggest that is an incredibly difficult problem to 

make it revenue neutral if you do all of the things that we talked 

about doing. 

Congresswoman Kelly talked about the mortgage deduction. 

Someone talked about the AMT. Connie Mack’s wife, incidentally, 

had the best comment about the AMT. She asked Connie, ‘‘Why do 

you all call it the Alternative Minimum Tax?’’ He said, ‘‘What are 

you talking about?’’ She said, ‘‘Well, No. 1, it is not an alternative. 

You have to pay it. And it is not the minimum tax that you paid, 

it is the maximum tax. Instead of calling it the Alternative Minimum Tax it should be called the Maximum Mandatory Tax.’’ 

Regardless, we recommended, like I think most of you would 

agree, that we do away with it. But how do you do that and pay 

for it? It is $1.6 trillion over 10 years to do away with the AMT. 

If you are going to do away with that and then provide incentives 

in the code like we did, you have to pay for it. That is the unpleasant thing. We can all agree that it ought to be done away with but 

who wants to offer the first suggestion on how we pay for it? 

That is the difficult thing and we have things in there that do 

that. The state and local tax deduction. I can talk about why I 

think the people who pay more taxes for local services should not 

have people in other states pay for that, which we do. We talked 

about the mortgage deduction. With Congresswoman Kelly it is a 

very big concern.

The fact is if you look at our studies over 70 percent of tax filers 

we had records for did not benefit one nickel from the mortgage deduction that is currently under code. Only 30 percent did because 

of the itemization. Most people don’t. Most people don’t get the benefit. What we try to do is structure a recommendation that said, 

yes, we will keep the mortgage deduction but we recommended 

that we replace the current deduction with a home credit available 

to all homeowners whether you itemize or not. 

Not just 30 percent of the taxpayers but everybody would benefit 

from it. We would restructure it to say it would be 15 percent of 

the mortgage interest that you paid on a principal residence. Not 

a vacation home but on the principal residence and it was limited 

to the average mortgage in respective areas up to $411,000 a year. 

Now, if you are wondering how many people would be affected 

by it, between 85 and 90 percent would not lose one nickel of deduction under that plan. Those funds along with others were used 

to help pay for the elimination of the AMT which I think is a very 

important thing to do. 

Let me just say, like I think I might have said, $140 billion a 

year in complying with the tax code. $140 billion every year is 

spent in complying with the tax code. The earned income tax credit 

for the poorest people, 65 percent of them have to hire someone to 

help them figure it out. These are people that don’t have enough 

money to hire a tax account or attorney or even H&R Block. 

9

We ended up making a recommendation that you could do all 

your taxes on two pages, front and back. It is a real simplification. 

I would hope that the Congress would pick this up as a starting 

point. We sent this to the Secretary of the Treasurer. They were 

involved in watching what we did and involved with suggestions. 

I think they thought it was a great idea. I don’t know where it is 

at the White House. It must be in a closet somewhere or on a shelf 

somewhere. I didn’t hear anything about it. This is something the 

American people would support. 

I have up there what we do on small business and I think that 

small businesses are particularly at a disadvantage because they 

cannot obviously afford the tax attorneys like Exxon does but yet 

they have to comply with the same rules and regulations. We recommended that most small businesses file taxes the same way they 

pay their bills, with a checkbook. They would report income as cash 

receipts minus their cash business expenses. 

Both of our panels made recommendations that allow unlimited 

expensing for most assets that would be purchased by businesses 

with less than a million dollars of income greatly simplifying it for 

small businesses. I think that is a real political winner and I think 

it makes economic sense. Thank you all very much for listening. 

[The Honorable John Breaux’s testimony may be found in the appendix.] 

Mr. BRADLEY. Thank you. 

Mr. Castle. 

STATEMENT OF THE HONORABLE MIKE CASTLE (DE-AT 

LARGE), CONGRESSMAN, U.S. HOUSE OF REPRESENTATIVES 

Mr. CASTLE. Thank you, Chairman Bradley and Chairman 

Graves and members of the Committees. I am delighted to be here 

with you. I could probably save you five minutes or so by saying 

that I agree with virtually everything you said in your opening 

statements and with Senator Breaux. And to further tell you that 

I struggle with tax courses over at Georgetown Law School. But 

being a politician I will take every bit of my five minutes and tell 

you what I think I know about all this and what we should do 

about it. 

First of all, I agree with the plan. I am not going to try to go 

through the plan and discuss the details of it except that I agree 

with it. I particularly agree with something in the executive summary which read, ‘‘Tax provisions favoring one activity over another or providing targeted tax benefits to a limited number of taxpayers create complexity, instability, and pose large compliance 

costs and can lead to an inefficient use of resources. 

A rational system would favor a broad tax base providing special 

treatment only where it could be persuasively demonstrated that 

the effect of a deduction, exclusion, or credit justifies higher taxes 

paid by all taxpayers.’’ 

Obviously lofty goals well stated. I think you all sort of basically 

agree with it in what you stated. However, I believe that reform 

and simplification of the current tax system, although it is one of 

extreme high priority, is not going to be easy at all. As Senator 

Breaux said, we don’t know where this report is now, which I consider to be a good comprehensive report. It seems to be collecting 

10

dust someplace. I am delighted this Committee has dusted it off a 

little bit so that we can have this discussion. 

I don’t see a strong political viability for passing reforms. While 

we all sort of give lip service to it, probably do it in our town meetings or whatever, it becomes a heck of a lot more difficult when you 

start to determine what you can subtract and add in getting to that 

revenue neutral circumstance that the senator mentioned also. 

We also have many names of Americans who have made investments based to some degree on the tax code which is perhaps unfortunate but it is the way it is. I am thinking primarily of longterm mortgages, other long-term pike loans, other things that one 

can write off depreciation or whatever it may be. That adds into 

the difficulty as well. 

I think we do need truth in accounting. We talk about revenue 

neutral. We need to make sure whatever we do in Congress is revenue neutral not anticipating future expenditure cuts or tax cuts 

or increases or whatever it may be, but meets the circumstances 

of whatever we are facing from a fiscal point of view at that particular point in time.Any of this can have long-term impacts on federal deficits in trading debt for more debt because we are trying 

to fix the tax code would not, in my judgment, be the way to go. 

I think there are problems, political problems, in dealing with 

the tax code. Just an excerpt from what I actually wrote that is before the Committee is, ‘‘As important as truth in accounting is restoring the faith of Americans in the Government and our ability 

to fairly collect the nation’s revenues, the biggest challenge that I 

think we have in this area is the common abuse of the complex tax 

code to avoid paying federal taxes. 

Loopholes allowing tax avoidance by individuals, and particularly 

corporations [not really small businesses but corporations] have 

proliferated in recent years those same lobbyists have created such 

a growth and demand for earmarks of the same type to feast on 

loopholes and tax bills at incredible cost to our revenue system 

leading to mass complexity in business decisions driven by tax consequences rather than economic benefit. 

According to the panel findings more than 14,000 changes have 

been made to the code in the past 20 years. It is because of these 

complications that the annual cost of complying with today’s federal tax system cost taxpayers $1 in compliance cost for every $7 

in federal income taxes.’’ Ms. Millender-McDonald referenced that. 

Senator Breaux indicated that some $140 billion. It is a lot of 

money that is put into the compliance aspect of it. 

I will admit that I am going to be hiring an accountant here 

shortly to help with my taxes this year so I am part of that expenditure that I would like to eliminate. So there are a number of problems. The major benefactors of the current tax code, in my judgment, in terms of loopholes are the more major corporations. The 

federal corporate tax rate is 35 percent but in 2003 corporate taxes 

were 7.4 percent of overall federal receipts which happens to be the 

lowest level in 20 years which indicates what that problem really 

is. 

I think that any reform to simplify the tax code should include 

a full review of the commonly used methods that are here. Some 

of this is perfectly fine. Tax carryovers for businesses and corporaVerDate 0ct 09 2002 13:49 Sep 18, 2006 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 G:\HEARINGS\26960.TXT MIKE
11

tions, I don’t have a problem with that. Some of the exploitation 

that takes place in offshore tax havens, the corporate expatriation 

or inversions which occur out there, simply registering offshore 

with a post office address and shifting tax burdens. 

As a result of that when you are an American corporation are a 

tremendous burden on our system here in the United States of 

America. It is a burden on everyone of us across the United States 

because somebody else is not paying taxes and we are to meet the 

revenue needs which are there. As those kinds of loopholes continue to be created and exploited and taken advantage of, particularly by the large corporations, it creates a tremendous problem for 

all of us. 

We are losing out on a lot of revenue, I think virtually every individual, and I think frankly most corporations, and this is important 

for economic activity. So instead of having avoidance of taxation 

and all the effort and energy that is put into that, we could have 

it put into positive economic activity. But if you had a simpler flatter way of dealing with taxes and avoid the loopholes which are 

there, in my judgement the economic advantage of transferring 

that effort from tax avoidance to production would be tremendously 

beneficial to our country. It is something we need to get back to 

as soon as we possibly can. 

I think that the Commission did very well when they spoke 

about the updates being able to encourage and reward personal investment and savings through simplification. We are getting away 

from savings. That is a great problem for small business people. It 

is a great problem for individuals in the United States of America 

and, unfortunately, is not particularly encouraged by what we have 

today. 

I don’t think reforms will be easy to enact but I would tell you 

that if we take the time to really read this report, as Ms. Kelly 

said, we may not agree with everything that is in the report, and 

I certainly probably don’t agree with everything that is in the report, but the direction of the report, most of the content of the report, and the idea of the report of making a move in this direction 

is something that I believe that we as a Congress should be taking 

up as soon as we can. I don’t see this as being a Republic Democrat 

issue. It is one of those issues which we could actually work together and have an achievement which will be beneficial to the 

American people. Thank you. 

[The Honorable Mike Castle’s testimony may be found in the appendix.] 

Mr. BRADLEY. Thank you. 

Mr. Garrett. 

STATEMENT OF THE HONORABLE SCOTT GARRETT (NJ-5), 

CONGRESSMAN, U.S. HOUSE OF REPRESENTATIVES 

Mr. GARRETT. Greetings and good afternoon. Before I begin, let 

me apologize. I was one that was screaming in excitement for the 

President last night so I have a touch of laryngitis so bear with me. 

I will probably keep my remarks briefer than I intended. Also, I 

should say that I also agree with around 80 percent of the opening 

comments, maybe even 90 percent. Make that 80. 

12

As the Chairman indicated, I am from the state of New Jersey. 

Why I bring that up again is because, as you may know, my home 

state being where it is and the income level that it has, tax policy 

has a significant impact upon us. Due to the progressive nature of 

the system, New Jersey is one of the highest relative tax states in 

the union and, therefore, we are at a significant disadvantage visa-vis the other states. We are a donor state sending far more tax 

revenue to Washington than we ever get back from the Federal 

Government. 

But so, too, is the situation for all American taxpayers having 

been overtaxed for too long with our federal income tax system, as 

indicated, overly complex and decidedly unfair. American taxpayers 

are taxed, taxed again, and taxed again and again on various levels 

of government sending the money to Trenton or capitals, Washington, all of which could be resolved with significant tax reform. 

That is really why I was so inspired by the President and the members of this Committee for delving into this issue and willing to 

take and hopefully make some of the hard choices that will need 

to be made. 

My first impression of the panel suggestion was that it was in 

some ways hampered from the very beginning by some of the instructions that they had such as trying to come up with a system 

that was purely a revenue neutral system, and also with a more 

static approach to the impact of the tax changes.If seen with the 

impact of changing economies as the recent evidence showing us 

that tax relief will actually grow the economy, grow the tax base 

and increase revenue, therefore, changes to the tax system can do 

so likewise. 

Next, I was dismayed that there was not a more sweeping 

change proposed, quite honestly, ones that would address some of 

the concerns that have been overly raised by the panel as far as 

the current tax code affecting every single aspect of our lives, although I don’t think the Committee mentioned as to when we have 

our child, too. When we get married, when we die, but also having 

our children. 

Since my time is limited, let me just pick and choose a couple 

of the aspects in the plan. I am very pleased that both plans focus 

on the AMT. As you probably know, New Jersey has the highest 

percentage of filers who fall victim to the AMT. If left unchanged, 

the AMT will penalize nearly 20 percent of taxpayers, nationally 

some 30 million taxpayers in America in total. 

Both recommendations made unanimously by the bipartisan 

panel emphatically call for immediate repeal of the AMT. This arcane provision goes to the grave threat to middle America and 

small business. I am happy to indicate to this committee that I 

have legislation, HR 703, that would simply index AMT for inflation and allow for state and local tax deductions. I would be 

pleased that the panel would mimic such a proposal in their recommendations. Also important are the panel’s recommendations for 

permanent marriage relief and improving incentives for saving and 

investing. 

Now, the second proposal is the growth and investment tax plan. 

It is probably more business friendly in specifically how they deal 

with business investment. Tax relief to American business is key 

13

to economic growth. Businesses need to keep more money to grow. 

More importantly to hire more employees. The recommendations 

show a step in the right direction but, again, the sweeping changes 

that most likely you need were not present in the proposal. 

In conclusion, I think we should be inspired by the panel that 

they made some positive suggestions that will certainly make improvements to the overall system. As a proponent of a healthier 

economy, increased job growth, and a more efficient Federal Government, I want to stress every point that I can not to rule out 

even more significant tax reform. 

I understand that such ideas as FairTax, flat tax and likewise 

have not had a general consensus in this country, but I think those 

are things that this Congress should consider to look at. A smaller 

Federal Government is a more efficient Federal Government, one 

that is able to effectively provide the services that the American 

people need, and a reformed system like this will provide that more 

efficient system. 

I think, as already indicated, we can now use the President’s 

panel’s recommendation merely as a starting point and as a starting point from a bipartisan approach. Finally, again, I would just 

say that although there is not a consensus in our America, in the 

rotary clubs and the like that we go back to, as to which of the 

more sweeping reforms would be the better one and the more popular one, I am sure I don’t remind anyone on this Committee that 

the role of a member of Congress is not necessarily to be popular 

but it is to lead and take charge. I took forward to this Committee 

taking that role of leadership on sweeping reform. I thank you. And 

I thank you for bearing with me. 

[The Honorable Scott Garrett’s testimony may be found in the 

appendix.] 

Mr. BRADLEY. Thank you very much. 

My first question, I think, I would direct to you, Senator Breaux. 

Can you talk about, for the panel, why it is the AMT was your 

top priority, what harm it does to the economy? I have legislation 

along with Congressman Garrett similar to yours that not only indexes but raises the limits. I have been a long-term proponent of 

this but could you talk about the rationale for why this is so important? 

Mr. BREAUX. Well, it is outdated. It was originally, as you everyone knows, intended to touch very wealthy Americans who paid 

nothing towards running this Government because of the various 

tax deductions and credits that they were entitled to legally. The 

country thought that, well, everybody ought to contribute something to running the country and that is where the birth of the 

AMT occurred. 

It was never indexed and now it doesn’t just touch wealthy individuals but is moving down the food chain and to people making 

$65,000, $70,000 a year. Now, there is a consensus it should be 

eliminated but the last numbers we had it is estimated to generate 

about $1.4 trillion so it is easy to say let us eliminate it. The question is if you do it in a revenue neutral fashion, where do you get 

the money to do it? 

Now, if we just raised the rates to cover the AMT, you would be 

looking at about an 11 percent across the board rate increase. That 

14

would offset the loss of the AMT. It is easy to do away with the 

AMT but it ain’t easy to do it if you are going to do it and pay for 

it. I think there is a consensus, Democrats and Republicans, that 

it has outlived whatever usefulness it has had. It is a burden. It 

is not needed and is not necessary and should be done away with. 

Mr. BRADLEY. Senator Breaux and Mr. Castle and Mr. Garrett, 

would you comment on why the panel didn’t recommend either a 

national sales tax or a flat income tax and talk about the merits 

of those. 

Mr. BREAUX. I mean, very quickly, we look at all of those and we 

had the option of making—the President said make one recommendation that simplifies the current code. Keep the structure 

of the current code and we did that. That is simplified. Then you 

can come up with anything else you want. We looked at a flat tax, 

a national sales tax, a value added tax, combination consumption 

and income tax together which most developed countries actually 

have. 

The national sales tax, there is no consensus on that. The states 

don’t like it. That is their form of collecting taxes. Municipalities 

collect their revenues through a sales tax and they are totally opposed to it. The estimates from IRS tell us that if you did a national sales tax, you are looking at about 33 cents on the dollar. 

The potential for fraud and abuse with that system is very, very 

high. 

National flat tax, we had folks come in and talk about that and 

make eloquent presentations, 17 percent. How are you going to say 

that it is fair and it is reasonably progressive if you have a 17 percent rate on someone making $20,000 a year and a 17 percent rate 

on someone making $20 million a year? That is not reasonably progressive. Once you start doing things with a flat tax to make it reasonably progressive, you get right back into complicating it with exemptions, exceptions, and deductions. We decided that the value 

added tax, flat tax was not the way to go. We said some favorable 

things about the combination of the two but rejected the retail 

sales tax and the flat tax for those reasons. 

Mr. CASTLE. Mr. Chairman, I can’t respond as to why the panel 

did what it did. Mr. Breaux did a remarkably good job of that. But, 

like you, I come from a state that doesn’t like taxation a whole lot. 

We don’t have a sales tax either. I find that to be about the most 

annoying tax. I intentionally wait until I get back to Delaware to 

buy anything I am going to buy to avoid paying sales taxes in other 

states. 

Mr. BRADLEY. You can come to New Hampshire and avoid an income tax, too. 

Mr. CASTLE. That would be even better. I think the flat tax is 

not progressive, I agree. I agree with the reasoning of Senator 

Breaux completely on that. I think the lack of progressiveness really is an issue. I really feel there should be somewhat of a higher 

burden as you go up the income scale. 

Having said that, it may be somewhat out of proportion just as 

I think the deductions are crazy all over the place at this point. I 

am delighted they actually didn’t make that finding. Mr. Garrett 

may disagree with me here in a moment but I believe that gives 

us a sound basis to get something done and I think will bring more 

15

of the political middle into actually getting something done in Congress. I think it was a good recommendation. 

Mr. GARRETT. I am not an advocate. You have other members 

who would come clearly more forcefully today but I would just say 

this. It will be hard whatever we do to get through to Congress and 

through the President’s task for reform. At the end of the day after 

this year, or the next session where we do all that work to try to 

simplify the system, however that comes down, it would be a 

shame to think that maybe three or four years down the road we 

are simply back in the same boat that we are today because the 

code we are operating under right now, as I understand it, when 

it started some 70 or 80 years ago was a very simple, easy tax code 

without any of those other parameters and controls on our lives 

that we have right now. 

We may try to do some band-aid approaches in the next six 

months or the next year or so to try to fix it. But how long will 

those band-aid approaches remain in effect when we know all too 

well all the lobbying effect will come back just to add them all right 

on again and this Committee will be back to say how do we reform 

the reform from 2006. 

Mr. BRADLEY. Congresswoman Millender-McDonald. 

Ms. MILLENDER-MCDONALD. Thank you so much, Mr. Chairman. 

You are absolutely right. If we do a band-aid approach we won’t 

get nowhere. But to try to do an approach that has been recommended will take a lot of political will. That is very true. As I 

look at and as I have heard your testimony, Senator Breaux, you 

spoke about most small businesses pay their bills by checkbook. 

Yet, we talk about health insurance which has been a big problem with small businesses. We talk about the alternative minimum 

tax which you are suggesting that we repeal by virtue of your own 

calculation, the trillions of dollars that would be lost with that. 

Plus the President’s request for a permanent tax cut. Where do we 

go? What do we do? 

When we speak about state and local deductions, repealing of 

that, as a mayor of a city, coming from the local governments, and 

especially California with Proposition 13, we just don’t have anywhere else to go. What do you do in this type of climate? Given all 

of those variables that I have just given you, I do feel we need 

something but how in the world do we start? 

Mr. BREAUX. Well, I would start by using the Commission and 

saying they have looked at it for over a year. They made a nonpolitical recommendation. They have a lot of things that reduce 

taxes and everybody can basically or pretty much agree with that. 

We did a lot of things for small business in terms of expensing and 

the way they file their taxes. We did away with the AMT. But you 

had to find a way to pay for it. 

Let me just make a quick comment. I understand people who— 

Ms. MILLENDER-MCDONALD. That is what I am talking about. 

Mr. BREAUX. I will address that. I think for people in high tax 

states, New York and California, started calling us while we were 

still writing that recommendation saying, ‘‘You are absolutely 

crazy.’’ Charlie Rangel went everywhere on the thing. Here is the 

logic on it. Say you live in Beverly Hills or a bigger city that has 

16

very high income constituents in it. They pay a lot of local taxes. 

They may have their trash picked up twice a day. 

They may have 24-hour-a-day police security in their neighborhood. They may have underground sewage and underground 

powerlines buried so you never see them. They are paying a lot of 

tax for that. Why should someone in New Hampshire be helping 

to pay for that? Why should someone in any other state be helping 

to pay for a high tax community that is enjoying those benefits that 

only they get. Because the whole country is seeing that tax deductible, everybody else is paying more for the high-tax communities 

and the high-tax states. 

Ms. MILLENDER-MCDONALD. But that is not the only high-scale 

area in this country. 

Mr. BREAUX. No, it is all over the place. 

Ms. MILLENDER-MCDONALD. It is one of many, yes. 

Mr. BREAUX. My point is why should a Congresswoman or a Senator from the state that doesn’t have those benefits have their constituents be subsidizing the high-tax states for the good things that 

their tax base provides them. If they want to pay the tax for all 

those extras, that is fine, but why should someone from Arizona be 

subsidizing another state’s benefits that the people in Arizona don’t 

get? By allowing it to be a deductible on their Federal income tax, 

every American is helping to subsidize what only a few are getting. 

It is not just California. 

Ms. MILLENDER-MCDONALD. No. 

Mr. BREAUX. New York is the same way. It is a high-tax state. 

They have a lot of benefits but why should the rest of the country 

pay for the benefits that only one state is receiving? If they want 

to pay that tax for those benefits, that is fine. If they don’t want 

to, they should elect different local officials. The rest of the country 

shouldn’t be subsidizing the high-tax benefits that other states get. 

That was the logic behind it. Of course, I am not running again so 

I can say that. 

Ms. MILLENDER-MCDONALD. That is very true. Certainly flat tax 

proposal will not fly in the state of California. I will say that right 

now. But, you know, you have places like Compton, a very urban 

area, that really pays more taxes than Beverly Hills. So when you 

talk about the tax inequity, you really start talking about urban 

versus suburban versus all other things being either equal or unequal. So you get to that type of scenario. When you get to that, 

then you do not have the type of proposal that you present to us, 

not from California because you have other urban areas that are 

paying more in taxes than Beverly Hills is paying. 

The other thing is the reform laid out in the report would allow 

for more small businesses to move toward a cash-based system by 

counting and allow them to write off most investments immediately. How would these changes reduce complexity and encourage 

investment for small firms? What was the thoughts of the panel on 

that? 

Mr. BREAUX. Number one, you are correct in saying what we did. 

We simplified the record keeping for small businesses by basing it 

on cash receipts and expenses. Many small businesses are complying with the same rules as Exxon or any of the largest companies in America. Many of them are having to keep more than one 

17

set of books just to keep track of all their accounting implications 

for everything they do. 

This would allow them to have one set of books and it would be 

based on, as we have said, on cash receipts and expenses. I think 

the rule reduces compliance cost for small businesses from keeping 

a second or sometimes even a third set of books and allowing them 

to use the records that they already keep in their businesses, basically their checking accounts. The money they get and the money 

they spend and they can figure out their taxes on our recommendation in a much more simplified form than it was before. 

Ms. MILLENDER-MCDONALD. Mr. Chairman, I am through for 

now. 

Mr. BRADLEY. Mr. Fitzpatrick, do you have a question? 

Mr. FITZPATRICK. Thank you, Mr. Chairman. Under current tax 

law the code makes certain provisions with respect to healthcare 

spending. For example, an employer that provides a healthcare 

plan to his employees and their families, currently that healthcare 

plan, I understand, is considered exempt for purposes of income 

taxes and payroll taxes. Did the tax advisory panel deal with the 

issue of healthcare? 

Mr. BREAUX. Oh, yeah. I would argue that the problems with 

healthcare in America is not because we don’t spend enough 

money. We as a Government spend more money on healthcare than 

any other country, any developed nation in the world. The latest 

numbers are approximately $1.5 trillion dollars in tax expenditures 

are spent on healthcare every year. That is about 5,000 and some 

odd dollars for every person in this country, man, woman, and 

child. About 12 percent of all Federal income tax revenues are 

spent on healthcare. Yet, we still have incredible problems with 

healthcare. 

As you stated, the tax deduction is about $141 billion dollars on 

the deduction that an employer can have when he pays for the premiums for his employee and then the non-taxability to the employee adds up to $141 billion a year. It also takes away the connection between the employee and the cost of healthcare. There is 

a real incentive to buy the best plan and even more than they actually need because it is not taxable income to them. Their employer 

is paying for it. 

The panel recommended the following. The panel recommended 

that employee-based health insurance continues to be the principal 

way of getting health insurance for our employees. What we suggested was that we have a system that employers would be able 

to continue to deduct the cost of their employee compensation, 100 

percent of the plan they provide for their employee, whether in the 

form of either cash compensation they give to the employee or the 

health insurance premiums that the employer would pay. 

Employees, on the other hand, would be allowed to receive a base 

amount of health insurance from their employer tax free but not 

everything. We will also allow even employees who do not have access to employer-provided insurance to also be allowed a new tax 

deduction for their health premiums. Right now you get the deduction if you are getting it from your employer. If you buy it yourself, 

you don’t. We would allow them to be able to deduct the cost of 

health premiums that they pay themselves. 

18

We have an exclusion, however. The exclusion would be for employer-provided health insurance would be limited to $11,500 for 

families. In other words, an employee would not have to count anything up to $11,500 in contributions from their employer is taxable 

income. But if it is more than that, that would be taxable income 

to the employee. That happens to be about the national average. 

That is what all of you now are paying under the Federal Employees Health Benefit Plan. That is about the value that you get for 

a first-class world-class health plan. But if it is more than that, you 

would be paying income tax on it. 

Mr. FITZPATRICK. So that $11,500 is that the base amount that 

you referred to in your testimony? If so, is that base amount be indexed? 

Mr. BREAUX. It is indexed for inflation. Yes, sir. 

Mr. FITZPATRICK. Nothing further. Thank you. 

Mr. GRAVES. Mr. Barrow. 

Mr. BARROW. Senator Breaux, you talked about some of the problems in response to Chairman Bradley’s first question about some 

of the reasons for not going with the national sales tax or FairTax. 

I want to, if I can, help you understand some of the reasons why 

a little bit more. Your panel felt the need to report on the so-called 

FairTax and refute some of the claims made by proponents. 

One of the things you all went into your panel report mentioned 

that the Treasury Department’s own figures contradict those offered by proponents of the so-called FairTax. Can you help us understand and try to put it in shirtsleeve English for us? What is 

behind the discrepancy between the Treasury Department’s estimate and their estimates? 

Mr. BREAUX. Okay. I mean, we asked that. If you replaced the 

current system with a national sales tax, how much would it have 

to be? So where did we get our figures from? We got our figures 

from the Department of Treasury, Republican Secretary of the 

Treasury, John Snow. They looked at it and if we replaced it with 

a national sales tax, even with favorable assumptions a retail sales 

tax on a broad base would require a tax rate of at least 34 percent 

and likely higher over time if the base erodes. That is the number. 

I think that the conclusion by most tax experts is you are looking 

for real trouble. 

Number one, you get the municipalities against it and the states 

against it. All the retail stores don’t want to be the tax collector 

for the Federal Government. Plus the high rate led to the conclusion that you are looking for trouble. You are looking at a lot of 

tax avoidance if you move in that direction. 

Mr. BARROW. How about tax avoidance and evasion? I want to 

focus in on that for just one second more. What do you say to those 

folks who say that the evasion problem will be negligible because 

the cost of everything in the world is going to go down to match 

the increase in this huge add-on tax, the folks who say the embedded tax is just going to all of a sudden walk out the window? 

What do you say to folks who say it is not going to be revenue 

neutral to have this huge add-on tax added to everything we buy 

but it is actually going to be cost neutral to the taxpayer because 

the cost revenue is going to fall to a corresponding extent? What 

do you all have to say about that? 

19

Mr. BREAUX. I mean, that is simply not the information, the evidence, and the testimony that we got from the Treasury Department when they looked at it. I thought they did it in as nonpartisan a fashion as possibly you can. They looked at other states, 

other countries, other nation states that have gone to a National 

Retail Sales Tax. None of them have that now as their own method 

of raising revenues. 

People have tried it and have done away with it. It has been a 

huge failure. There is no country in the world that relies on their 

revenues for running their governments on a National Retail Sales 

Tax type of plan. Those who have tried it have had to get rid of 

it many for the reasons that I have tried to spell out. 

Mr. BARROW. I appreciate you spelling that out and for those 

folks who do think this is not only going to be revenue neutral but 

cost neutral, I have some ocean front property in north east Georgia that I would be interested in selling them. 

Mr. BREAUX. I have some property in Louisiana I could sell you, 

too. 

Mr. BRADLEY. Mr. Sodrel. 

Mr. SODREL. Yes. Thank you. I guess there is no way to know 

where the underlying numbers came from on the 33 or 34 percent 

that a National Retail Sales Tax would have to be in order to be 

revenue neutral. I guess the first thing I would say I never taught 

tax preparation, never taught accounting. In fact, I haven’t prepared a tax return in a whole lot of years but I have paid a lot of 

taxes and I have spent a lot of work hours in business trying to 

calculate the tax ramifications of anything we did before we did it. 

The amount of work hours and management time that is spent 

in the United States trying to predict the impact of a business action by the tax code is unknowable. It is incalculable. I don’t even 

know what it is. I spent too much time trying to calculate what action we were taking was going to affect our taxes and too little time 

trying to figure out how to operate the company. You can’t know 

what that number is. It is literally unknowable so I am just curious. 

The second question I have is which countries ever went with a 

national sales tax and then got rid of it? 

Mr. BREAUX. I could give them to you. In fact, it is in our book. 

You are right on the time spent. What we found out and from testimony that Americans spent more than 3.5 billion hours doing their 

taxes. That is the equivalent of hiring almost 2 million new IRS 

employees, more than 20 times what they have now. We spent 

about $140 billion on complying with the tax code. 

There is huge political opportunity and rightfully so in making 

the argument in a bipartisan fashion that this Congress, this session, will begin the process of simplifying the code. You will get almost no disagreement back home in town hall meetings from the 

people you speak with when you say, ‘‘I want to embark on simplifying the tax code.’’ 

How you do it obviously begins the political problems. You do 

away with AMT how do you pay for it? Then you get into some difficult items. Unlike Social Security there is unanimity of agreement that it should be done. 

Mr. CASTLE. You know, I would just like to comment on that. 

20

Mr. SODREL. Please do. 

Mr. CASTLE. I think it is a tremendous point. I made it in my 

opening, too. The time spent is beyond anything we can possibly 

determine, as you have indicated. It is the focus on that instead of 

economic production. You are running a business and you are worried about how am I going to avoid a tax or how am I going to pay 

these taxes or what is the tax exactly. You are working with accounts and spending a lot of money. 

It is just incredible. It is true of individuals as well. It is not just 

small businesses. It is not just large businesses. It is true of individuals also. I am very sad in a way that the panel’s report has 

just not been given more credence, has not been given more attention than it has either at the White House or in Congress. I hope 

that this meeting this afternoon will perhaps generate the beginning of something. 

We are going to have to make tough decisions. I don’t think you 

are ever going to get rid of entirely, nor should you, charitable deductions and some of the interest rates deductions and the 

healthcare payment deductions and some things like that. But 

there are a lot of things that we all know we could get rid of if we 

had the guts to do it. If we did it, I think the public would stand 

up and say, ‘‘Hurrah. You have done actually bright in the Congress of the United States and something we really appreciate.’’ 

But it can’t be the band-aid approach which was discussed earlier. It has to be a full comprehensive approach. If we do that, if 

we can make this simpler and we can get it down to this form, half 

a page that you could do your taxes on, most people are going to 

say that is great stuff. We ought to do it. 

Mr. SODREL. Congressman Garrett, did you want to comment? 

Mr. GARRETT. Well, maybe just going back to my comment before. Where are we going to be today down the road? As much as 

we want to be optimistic, anything less than a pure significant 

change, which I think we need to do, will be long lasting. Just 

think back over the last 12 months or what have you that we have 

been in session and the proposals for other changes to our existing 

tax code, additional deductions, credits, what comes out of, with all 

due respect, Ways and Means all the time. 

None of us can get through all that and understand everything 

that they are trying to change in the tax code all the time. It is 

making it more complicated literally as we speak. Here we sit saying we are going to come up with a proposal that is going to 

streamline that down to a card or what have you. I guess my recidivism or skepticism is whatever we do unless it is really broad, 

one of the other proposals that are out on the table, will just be 

nit-picked away in the years ahead in the 110th Congress and 

111th Congress and 112th Congress. 

Mr. SODREL. Just for the record, Mr. Chairman, this country operated on duties, excises, and imposts from 1787 from the time the 

constitution was written until 1913 when the constitution was 

amended to allow Congress to lay and collect taxes on income from 

whatever derived. This country operated on a flat tax from 1787 

until 1913 so it can be done, was done, has been done. Thank you. 

Mr. BRADLEY. Thank you. Congressman Fitzpatrick? No questions. Are there any follow-up questions quickly of the panel? SeeVerDate 0ct 09 2002 13:49 Sep 18, 2006 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 G:\HEARINGS\26960.TXT MIKE
21

ing none, let me thank you for your very compelling testimony. It 

is great to see you again, Senator Breaux, and thank you very 

much Congressman Castle and Congressman Garrett. Thank you. 

While the second panel is getting seated, let me start with the 

introductions and then I am going to turn it over to Mr. Graves for 

a while because I have to go to another committee meeting. 

The first panelist is Mr. Todd McCracken who is the President 

of the National Small Business Association; Dr. Daniel Mitchell 

who is the McKenna Senior Fellow in Political Economy from the 

Heritage Foundation; Mr. David Burton, Americans for Fair Taxation; Mr. Jim Hausman, Hausman Metal Works and Roofing, Inc. 

from Missouri; Mr. Andy Loftis, Keller Williams Realty on behalf 

of the National Association of Realtors; and Dr. Leonard Burman, 

Senior Fellow at the Urban Institute. Welcome. With that I am 

going to turn it over to Mr. Graves. 

Mr. GRAVES. Thank you very much, Mr. Chairman. We will go 

ahead and what we will do is just start out and let you give your 

testimony. We have a series of votes that could be called any time 

during this process unfortunately. What we will have to do is recess and then come back. The way the timers work is basically you 

have five minutes. Then there is a one-minute warning on the yellow and then it goes to red. 

Don’t worry about it too much. If you have something to say, 

please say it. I do worry a little bit about our time crunch. I want 

to try to get everybody in before we have to break for votes. We 

will start out with Mr. McCracken. Thank you for being here. I appreciate it. Look forward to hearing you. 

STATEMENT OF TODD MCCRACKEN, NATIONAL SMALL 

BUSINESS ASSOCIATION 

Mr. MCCRACKEN. Thank you, Mr. Chairman. It is good to be here 

today. Again, my name is Todd McCracken and I am the president 

of the National Small Business Association. We represent small 

businesses across the country now for almost 70 years. We are the 

oldest national small business advocacy association. 

We have been very active in the field of tax policy and we were 

particularly excited when this Commission was appointed because 

our top priority is to fundamentally reform the tax system of this 

country. It has a profound negative impact. A lot of what we heard 

today is true so I won’t go into all that again. 

My written testimony, which I would ask to be submitted for the 

record, details a number of the key proposals of the Tax Reform 

Commission’s recommendations and what we believe their impact 

would be on the small business community. I don’t have time to go 

into all of those today but I would be happy to take questions on 

them when I am finished. 

I would like instead to focus on a couple of key areas where I 

think there are some recommendations that the panel made that 

would make a pretty profound difference to the small business community in the near term even in lieu of the fundamental reform we 

think is so vitally necessary.This really does get at those areas 

where the tax code has a very profound impact on decisions, on the 

lives of people. That is really what we need to begin the business 

of doing. 

22

First I would like to address the area of health insurance. I 

mean, we are very pleased that the Commission has recommended 

frankly both that there be a limit on the tax exclusion that health 

insurance receives today from employers. But also that all individuals receive equitable treatment in the tax when it comes to health 

insurance. 

In the small business community today, as I am sure you know, 

half of all small companies can’t afford to provide health insurance 

to their employees right now. They do not receive health insurance. 

That extends to many of the business owners themselves. This very 

fact that many of these millions of people are out looking for individual coverage and finding out that, ‘‘Guess what? I have to pay 

taxes on every nickel of that health insurance premium,’’ is a profound inequity in our tax code. It is also regressive, I might add. 

The panel’s recommendations would fundamentally alter that 

and we think that would be a great step forward. I would also add, 

though, we often forget about the payroll tax when we are talking 

about that. We think that it is also important that health insurance for people who don’t get it through an employer also be exempt from payroll taxes. That would be taken care of for the selfemployed through some legislation that is also before the Congress. 

We would recommend you support that. 

The second thing I would like to address is the area of retirement savings and pensions. This is another area where there is a 

profound inequity in the current code between small businesses 

and individuals and those who work for large companies. The 

401(k) system that we have today has worked extremely well for 

most individuals who work for very large companies because of the 

substantial regulatory burdens that are within that system can be 

spread across large numbers of employees and there are still substantial savings for everyone. 

In the very small businesses the cost of setting up and running 

one of these plans is enormous. It simply does not make financial 

sense for the smallest companies to have a traditional 401(k) plan. 

Therefore, they don’t. Fewer than 25 percent of small businesses 

have a retirement plan for their employees. So what is available to 

those employees to save on their own? Well, not much frankly. 

They are largely left out of the retirement saving system that our 

country has devised. 

Fortunately the Commission has put forth a number of recommendations that would really not totally eliminate this disparity 

but make it much smaller. We greatly applaud them for that. I 

think this is an area, again, where the Congress can take some action in the relative near term that I think can be bipartisan and 

make a big difference in the lives not only of millions of small businesses but also their employees. 

I would like to end, though, on I guess a negative note. Our only 

big disappointment in the recommendations was that they did not 

choose ultimately to tackle big reform, fundamental reform. We do 

believe that a move to a sales tax is hands down the best move not 

only for the small business community but the nation overall. We 

had wished it would get a lot more attention and, frankly, a more 

equitable reporting in the final report of the Commission. 

23

With that said, we think there is a lot to be said for what actually is in the report and the adoption of many of these proposals 

would greatly improve the good we have now. Thank you very 

much. 

[Mr. McCracken’s testimony may be found in the appendix.] 

Mr. GRAVES. Thank you, Mr. McCracken. 

Dr. Mitchell 

STATEMENT OF DR. DANIEL MITCHELL, PH.D., THE HERITAGE 

FOUNDATION 

Mr. MITCHELL. Thank you very much, Mr. Chairman. With your 

permission, I’ll submit my statement for the record and then touch 

on a few of the highlights. What I would like to do is talk about 

some of the economic principles that I think the Tax Reform Panel 

did a good job of outlining and addressing. Even if perhaps the 

final recommendations were not as aggressive as I would have preferred, I thought they did a very good job in focusing on both the 

need to have low marginal tax rates and the need to reduce the 

level of double taxation of the current system. 

A lot of policy makers have a very good understanding of the economics of taxation when they are talking about, say, tobacco taxes. 

We have very high tobacco taxes, most state governments, a lot of 

local governments, and those taxes are explicitly put in because 

policy makers say if we put the tax higher, we will discourage people from smoking. 

Now whether the Government should be trying to do that, that 

is a separate matter but their economic analysis is absolutely correct. The higher the tax rate the more you are discouraging something that is being taxed. Even though they didn’t recommend big 

sweeping tax rate reductions, they pointed out that marginal tax 

rates on work, saving, investment, entrepreneurship and risk taking have negative economic affects. 

Then they also, and here is where they were more aggressive and 

I think did a sterling job, they talked about the damage of double 

taxation. By that I am referring to the fact that within our current 

tax system it is possible for a single dollar of income to be cycled 

through the tax code several times. 

Particularly if you are saving and investing between the capital 

gains tax, the corporate income tax, the personal income tax, the 

death tax you actually have very high effective marginal tax rates 

on saving and investment which, as the panel pointed out in their 

analysis, it is rather self-defeating since every economic theory, I 

mean, even the Socialist and the Marxists, they would all agree 

that savings and investment, capital formation, that is the key to 

long-term economic growth. 

If we could reduce those levels of double taxation which, of 

course, most of the various fundamental tax reform plans that is 

one of their key features, we will get more saving and investment, 

more capital formation which ultimately, of course, translates into 

more productivity for workers and more productive workers are 

better paid workers. 

So a low marginal tax rate, getting rid of double taxation, those 

are two of the key principles, as well as, of course, we want to get 

the Government out of the sort of back door industrial policy 

24

through the tax system. It would be great to have fewer resources 

needed for tax compliance. The Tax Foundation just issued a recent 

report that there are $265 billion of compliance cost for the current 

tax system. We have heard other figures that are a little bit lower. 

Who knows what is really right. A lot of it depends on how you 

value the time that individuals themselves spend on filling out 

their tax returns. There are costs and those costs are very substantial. Those are costs completely independent of the economic costs, 

costs that are completely independent of the amount of money you 

are actually sending to Washington. 

If we want to make sure our resources are more effectively utilized, if we want to make sure that our economy is as competitive 

as possible and we are worried about competing with China and 

India, not to mention our traditional trading partners, we live in 

a globalized economy where factories can be built in different 

places, jobs can be out-sourced, we don’t want to have tax policy 

in effect being some sort of red flag or obstacle to job creation and 

entrepreneurship and economic activity inside the U.S. 

Especially given the fact that we are seeing so much tax reform, 

so much tax rate reduction in so many countries around the world. 

We have literally gotten to the point now where every single European country, even ones we would consider welfare states like 

France and Sweden, they now have lower corporate tax rates than 

the U.S. Other countries are beginning to catch up and try to move 

tax policy in the right direction and I worry that our system might 

just be so high bound. 

I mean, we have 96 years now of accumulated provisions in the 

tax system and the thought of simplification combined with the 

lower tax rates and the reductions in double taxation that we have 

in the current system I think could yield very, very immense benefits. Ultimately, we think that the prism through which tax policy 

should be judged is some form of low single-rate consumption based 

tax system. That could be a FairTax as some of the other panelists 

support. 

It could be a flat tax which I think might be more reasonable especially since we’ve seen so many countries like the former Soviet 

bloc, adopt such a system, but as long as we are moving in the 

right direction. Many of the tax cuts that we saw in 2001 and 2003 

do move in the right direction so incremental changes. We don’t 

want to make the perfect the enemy of the good. 

There are lots of incremental reforms and that is really what we 

saw in the tax reform advisory panel, a list of incremental reforms 

that would make our tax system better, more competitive, incremental reforms that would try to at least reduce the interference 

of the tax code and decision making. We want people in our economy to make decisions based on what is going to create the most 

wealth, the most jobs, what is going to earn the most income. 

Those are the criteria that should determine our economic decisions, not what is going to be the best in terms of reducing my tax 

liability, what is going to make me eligible for some new tax provision. That is economic inefficiency. We have seen that countries 

that rely on Government planning you have much less economic efficiency, much lower levels of productivity. We do it through the 

25

tax code where some other countries did it through central planning but the ultimate result is the same. 

When decisions are based on the tax code or on the basis of political considerations instead of economic considerations, there will be 

a loss in economic efficiency. The tax reform panel, I think, pointed 

the direction that we need to go. They maybe didn’t go as far as 

I want to but I hardily applaud that direction that they did suggest. Thank you. 

[Dr. Mitchell’s testimony may be found in the appendix.] 

Mr. GRAVES. Next we have Mr. David Burton. 

STATEMENT OF DAVID BURTON, AMERICANS FOR FAIR 

TAXATION 

Mr. BURTON. Thank you. I am glad to be here today, Mr. Chairman, and members of the Committee. I am a partner in the Argus 

Group and representing Americans for Fair Taxation. I, too, would 

ask that my statement be made part of the record and also say 

that the statement basically walks through a series of 12 criteria 

about what constitutes good tax reform and analyzes five different 

plans: the FairTax, which is a national sales tax proposal, the flat 

tax, a business transfer tax, and the two main proposals offered by 

the panel. Then it summarizes it in a report card which some people might find of interest. 

But I’m going to summarize that very quickly and talk about five 

things about the FairTax and then a number of things that people 

mentioned in their questions. The FairTax would be extraordinarily 

pro-growth. Demos pro-growth proposal being considered by the 

Congress. It is closely followed by the flat tax and the business 

transfer tax which are virtually the same. 

They are all three consumption taxes. They are all three neutral 

toward savings and investment. They are all three dramatically reduce marginal tax rates. They will result in higher levels of employment, higher real wage rates, higher capital, higher investment, higher savings, higher productivity, and greater competitiveness. The FairTax and the business transfer tax differ from the flat 

tax in that they are destination principal consumption taxes. 

They for the first time would place American goods and foreign 

goods on an equal footing. Today the income tax basically plants 

a sign on our shores and says, ‘‘You have to be an idiot if you make 

things here because we are going to tax you very heavily whether 

you are selling into the U.S. market or the foreign market. We are 

going to let foreign goods and services come into the U.S. free of 

any tax.’’ 

Sales taxes or business transfer taxes or value-added taxes, for 

that matter, the value-added tax being employed by every one of 

our major trading partners, are different. They tax foreign goods 

and U.S. goods alike. Therefore, they don’t put their own industries 

at a competitive disadvantage. The advantage comes from replacing 

the income tax with the sales tax or with a BTT, not from the consumption tax itself. The consumption tax is neutral. 

A sales tax would be a radical simplification. Instead of the complex morass we’ve heard about all afternoon so far, basically businesses that are selling to consumers have to ask the question, 

‘‘How much did I sell to consumers this month at the end of the 

26

month?’’ Consumers, people who are not in business, never have to 

file a tax return again in their life. It is hard to conceive of a simpler tax system. It is a tax system used in 45 states. It is not difficult to comply with. As small businesses what takes more time, 

their income tax or their sales tax return? It will always be the income tax return. 

The FairTax is fair and it is fair for two reasons. It untaxes the 

poor, includes a rebate equal to the sales tax rate times the poverty 

level so no household in America is going to pay sales tax on the 

basic necessities of life. It also taxes similarly situated people the 

same. It has one uniform rate. That has certain advantages in that 

you cannot play one class of taxpayer off against another. You raise 

the sales tax rate and you are going to raise it basically on a broad 

part of the public. 

There has been a lot of talk about evasion. The FairTax would 

reduce evasion. If you look at the literature there are two things 

that constitute the affect of evasion, the benefit from cheating and 

the likelihood of getting caught. The FairTax has the lowest possible marginal tax rates, and I’ll get into that in a second. Also we 

would radically simplify the tax system and, therefore, if you hold 

enforcement resources constant you would increase the audit rate 

and the changes of getting caught would go up. 

It is ridiculous the rates that have been thrown around by a 

number of detractors of the sales tax including the Treasury Department. The Treasury Department has not released how they 

came up with their numbers, Congressman. We have asked for 

them and so have at least a number of Senators and Congressmen 

I know of. I wonder why? I would be interesting to see how they 

did their arithmetic. 

The bottom line is consumption is 85 percent of the GDP. The 

revenues we are replacing are about 15 percent of GDP. There is 

no way that replacing revenues that are 15 percent of GDP and 

they have a tax base that is roughly 85 percent of GDP get anywhere near the kind of numbers that our detractors are talking 

about. We have a lot of very fancy economists that go to a lot of 

fancy universities that have produced studies that show the rate is 

approximately 23 percent which is what it is in the legislation. 

What we hear constantly from detractors is that no country has 

tried this. We also hear constantly from detractors lots of countries 

have tried this and it has never worked. Well, it can’t be both 

ways. The bottom line is that a couple countries tried it and it 

worked but because those countries were in the European Union 

they were forced to change to that under EU directives. 

A couple of quick points on the panel’s report. They talk about 

expensing. Well, the growth and investment plan expenses and it 

is the best of the two proposals. The small business expensing provisions in the income tax plan are a real retrenchment because 

businesses that have a million dollars in gross receipts are very 

micro-businesses. Most restaurants, most dry cleaners will have 

more than that and they are only able to expense if they have 

under a million dollars. Otherwise, they have to go to depreciation. 

Plan B in their proposal is a consumption tax but it adds on a 

15 percent tax on dividends, interest, and capital gains so it is a 

consumption tax proposal and in that sense it is constructive. 

27

The last thing I wanted to mention was we once co-authored a 

report for the National Small Business Association that details all 

the ways the current tax system is biased against small businesses. 

I would be glad to go into that. The panel does absolutely nothing 

to rectify a single one of those things. The law remains biased 

against small businesses in a host of different ways. 

Lastly, Congressman Barrow mentioned ocean front real estate 

he was selling to sales tax supporters and I would be glad to buy 

it if you would be willing to send me the deeds. Thank you very 

much. 

[Mr. Burton’s testimony may be found in the appendix.] 

Mr. GRAVES. Thank you, Mr. Burton. 

Next we are going to have Mr. Jim Hausman who has a business 

there in St. Joe. Looking forward to hearing from him. 

STATEMENT OF JIM HAUSMAN, HAUSMAN METAL WORKS AND 

ROOFING, INC. 

Mr. HAUSMAN. Thank you for the opportunity to be here today. 

When I was asked to testify before you, my first thought was my 

distaste for speaking in public. However, I do have a passion to see 

our tax system reformed and realizing I would never have an opportunity such as this again, I jumped at the chance. 

As an owner or part-owner of several small business the amount 

of time and money spent dealing with our present tax system is extremely frustrating and time consuming. For this discussion I will 

relate how this issue impacts the largest of these companies which 

is a sheet metal and roofing enterprise employing on average 45 to 

50 employees with annual billings of $6 to 7 million. 

First and foremost, I would like to expound on the estate tax 

which I feel is a major detriment to small business and family 

farms continuing into the second generation. Our firm was fortunate. In the late ’80s and early ’90s we spent six years transferring 

the stock in our company from my father and my uncle to their 

heirs which included my cousins, my brother, and me. 

We paid approximately $110,000 to accountants, attorneys, and 

insurance companies to complete the transfer. The money spent to 

accomplish this could have been spent on trucks, new equipment, 

salaries, and perhaps even a bit of profit which is not a dirty word. 

We were fortunate to have transacted this transfer in a timely 

manner as a year later my uncle passed away. Our mission was accomplished but how many firms and farms are not so lucky? 

Now ten years later we find our firm paying exurbanite fees 

every year for insurance on the four principals in order that our 

company might continue to operate if one of the four were to die 

or become incapacitated. This money could be better spent updating our facility. Ours is a small company. We jump through the 

hoops and pay the price to do our transfer legally but I truly believe this tax needs a death of its own. 

Corporate taxes are next on my list. If GM or Ford are profitable 

at the end of the year they have to pay corporate taxes. If it is paid 

out of profits, then shareholders are paid less in dividends. My 

question is who pays the tax? The answer, the shareholders, not 

the corporation. The next year if they raise their prices on their veVerDate 0ct 09 2002 13:49 Sep 18, 2006 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 G:\HEARINGS\26960.TXT MIKE
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hicles to cover the cost of the tax, then the consumer pays. If these 

companies cut labor or benefit cost, the employee suffers. 

Our small company is no different. We collect taxes and if we are 

profitable at the end of the year, it comes off the bottom line which 

decreases dividends and/or bonuses to our owners and to the employees. In this scenario I pay one-fourth of our corporate taxes. 

Our firm does not buy new trucks or equipment unless our accountants are consulted. What a waste of time and money. We 

should be able to make decisions on these purchases on their merits, not the tax consequences. 

Then comes year end. Our firm spends hundreds of hours in December verifying inventory, balancing accounts, projecting billings 

for the last two weeks of the year and estimating how many hours 

our work force will work the last couple weeks of the year, all this 

to project a bottom line, this just to get ready for the accountant 

to come in. Now we are spending more time and money sitting 

down with the accountants to get close to a workable number. 

This year we projected our year-end numbers on December 20th 

with no allowance for overtime. We did not anticipate overtime 

work that needed to be done on Saturday, December 24th or Monday December 26th which, of course, impacted our projections 

greatly. Therefore, we closed our operation on Friday, December 

30th so we could hit our projected number. Forty-one employees, 

eight hours each at $29 an hour for one day averages $9,512 we 

didn’t put into our economy that one day. 

Withholding taxes. Federal, state, FICA, Social Security, and 

FICA Medicare. Okay, I understand this is not the venue for state 

withholding. Let me start by saying I hate withholding anything 

out of our employee’s paychecks. Our firm pays sheet metal workers approximately $30 per hour and then we withhold federal, 

state, Social Security, dues, 40l(k), and sometimes garnishments 

and child support. 

We should all be responsible for payment of our own bills but 

when it is withheld it is as if they have never paid it. A true revolt 

to unions and the IRS would happen the first week that all pay 

was put on each employer’s check. Then each employee would be 

responsible for writing their checks for these items just as he does 

his groceries and his utilities. I believe you might receive a few 

calls here in Washington, D.C. 

Ladies and gentlemen, our tax system is unfair and burdensome. 

I used to feel that a flat tax was the answer but as I investigated 

more deeply, I feel FairTax to be a better way to go. A national 

sales tax on all items paid by everyone would be the fairest for all 

people of all socioeconomic status. 

It would do away with all taxes previously described and truly 

stimulate our economy as never before. Please be bold. Don’t allow 

tweaking the present system which gives breaks to and punishes 

a few every time it is changed which happens so often good accountants can’t keep up with the changes. We need a drastic 

change to the system. Thank you very much. 

[Mr. Hausman’s testimony may be found in the appendix.] 

Mr. GRAVES. Thanks, Mr. Hausman. 

Next Mr. Andy Loftis will speak to us. He comes to us from Georgia. 

29

STATEMENT OF ANDY LOFTIS, KELLER WILLIAMS REALTY 

Mr. LOFTIS. Thank you, Mr. Chair. My name is Andy Loftis. I am 

an owner of a franchise of Keller-Williams Realty based in Athens. 

Currently our company employs about 40 sales agents as independent contractors. We engage in both residential and commercial 

sales. 

I offer my testimony today as a constituent of Mr. Barrows and 

also as a member of the National Association of Realtors. My oral 

and written statements, which I ask to be received into the record, 

are presented on behalf of NAR and its 1.2 million members. 

Real estate brokers remain decentralized local based business. 

Realtor interest and tax reform would be the same as any other 

small business and those interests include having top notch office 

space with good locations. The President’s Advisory Panel on Tax 

Reform has made a series of recommendations that would if enacted be disastrous. The nation’s current 69 percent home ownership rate is the highest in our history. We are puzzled that law 

makers would even consider, much less implement, changes that 

would undermine the remarkable achievement that we have accomplished. 

Are there challenges facing the real estate industry? Absolutely. 

Would those challenges go away if Congress were to reduce or 

eliminate long-standing straightforward tax rules associated with 

real estate ownership? No. Reducing or eliminating the tax benefits 

that apply to existing property would cause cataclysmic disruption 

and would be a breach of trust for families that have relied on the 

current law. 

Our written comments list the panel’s recommendations that 

would affect real estate and make a number of arguments about 

why those recommendations are flawed. In my brief remarks I 

would like to focus on the role of real estate, particularly home 

ownership as the cornerstone of the savings and retirement plan 

for many, if not most, of my clients in Athens as well as around 

the United States. 

We want you to understand that real estate ownership is about 

the future. It is not about the tax system. The tax rules for real 

estate have been in place for more than 70 years. When the tax reform panel talks about them, the discussion sounds like real estate 

tax benefits are something for a chosen few. They are not. 

Economists and possibly even the panel forget that the wish to 

own property has been part of the American culture since Jamestown and Plymouth Rock. The billions of tax dollars the academics 

focus on are in reality the individual savings of families, each saving and hoping for more, reinvesting, and eventually retiring and 

possibly living off the appreciation from their real estate. 

When I start with a first-time home buyer in Athens I am hoping 

to see that person and set them on a course that by the time they 

bought homes and raised families they will have something tangible that is theirs and theirs alone. I work with a system sometimes where we take a first-time home buyer and we try to set 

them down and counsel them and show them that if they were to 

invest in their mortgage and pay and move probably three to four 

times given the rate of appreciation that has happened in our area, 

then they may be in a home free and clear possibly a period beVerDate 0ct 09 2002 13:49 Sep 18, 2006 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 G:\HEARINGS\26960.TXT MIKE
30

tween 15 and 20 years versus a 30-year mortgage that sometimes 

happens. 

The Internal Revenue Code is remarkably complex but not when 

it comes to home ownership. A homeowner with a mortgage receives a form 1098 from the IRS that comes from the lender that 

specifies to the penny how much interest was paid. The individual 

transfers that number to the appropriate line on the tax return and 

that is it. No schedules, no work sheets, no special knowledge, no 

appraisals are needed. Real estate ownership does not contribute to 

the tax system complexity. If one were designing the tax system 

from scratch, that system would almost certainly look very different from the one we have today but we believe the only viable 

tax system would continue to nurture home ownership. 

Because the current tax rules affecting real estate are not complex, we see no apparent justification for revising them. Some critics point out that only about a third of taxpayers itemize their deduction. These arguments ignore the reality that overtime far more 

than one-third of taxpayers receive the benefits of itemizing. Mortgages get paid off, other new homeowners enter the market, and 

families’ tax circumstances change. 

Arguably, the standard deduction gives non-itemizing taxpayers 

a better answer than utilizing the mortgage interest deduction so 

it is not clear that the non-itemizers have been put at a disadvantage. As a general rule, individuals itemize only when their total 

deductions exceed the standard deduction, currently $10,000 on a 

joint return.Taxpayers who use the standard deduction thus receive a larger tax reduction than they would if they itemized. 

Critics claim that the mortgage interest deduction operates as an 

inducement for people to buy homes. My one million plus colleagues can confirm that people do not buy homes because of the 

mortgage interest deduction. They buy homes to satisfy many social and family and personal goals. The mortgage interest deduction does, however, facilitate home ownership because it reduces 

the carrying cost of that ownership. 

Some economists believe that if less money were invested in real 

estate more money would be invested in productive assets such as 

stocks and equipment. We are aware of no evidence showing that 

owning stocks and bonds can provide the foundation for community 

life, lead to development of quality public schools, lower crime 

rates, or contribute to the tax base of the local government. 

At least one of the panelists stated that if families bought smaller houses they might buy more stock. We do not believe it is the 

function of the tax system to determine the size of a house for any 

family or its method for saving. 

When former Treasury Secretary James A. Baker testified before 

the President’s advisory panel on tax reform in 2005 he made this 

observation about tax reform the mortgage interest deduction. If 

you are going to reform the current income tax code, you will not 

get there if you think you are going to be able to eliminate this deduction. We could not agree more. 

Secretary Baker served under President Reagan at Treasury during the arduous deliberations over what became after nearly two 

years of debate the tax reform of 1986. His observations about tax 

31

reform and mortgage interest are based on experience. We underscore them for you. Thank you. 

[Mr. Loftis’ testimony may be found in the appendix.] 

Mr. GRAVES. We do have a vote. It is going to take a little while 

to go through the vote. I want to go ahead and hear from Mr. Burman, if you would, and then we will recess and come back if anybody has any questions at that point. I understand if you do have 

to leave but I want to go ahead and let Mr. Burman get started 

on his testimony. 

STATEMENT OF LEONARD BURMAN, URBAN INSTITUTE 

Mr. BURMAN. Thank you, Mr. Chairman. I was afraid I was 

going to get bumped. I have a lot of say about the Tax Reform Panel’s proposals. Actually, I have a lot to say about things that have 

been said this afternoon but I seem to be the one skeptic on this 

panel about National Retail Sales Tax so, given time constraints, 

I think that is what I would like to focus on in my oral remarks. 

The President’s panel rejected a National Retail Sales Tax and, 

in my view, they did it for a good reason. The National Retail Sales 

Tax called a FairTax by its proponents, is a single flat rate tax applied to an extremely comprehensive base of final retail sales. To 

offset the regressivity of a sales tax every household will receive 

cash payments from the Government equal to the sales tax owned 

on a poverty-level income. 

Advocates claim that all federal taxes could be replaced by a single 23 percent flat-rate sales tax on a tax inclusive basis, 30 percent if you measure it the way state sales taxes are measured. But 

this low rate implicity assumes that all federal, state, and local 

government expenditures are in the tax base and that nominal government spending doesn’t change.In other words, the FairTax proponents’ math only works if real after-tax government purchases 

are cut by 23 percent across the board. 

The state and local government are exempt from the tax and 

Federal Government spending doesn’t change. The 23 percent national retail sales tax would increase the deficit by $268 billion in 

2005 and almost $600 billion in 2010 compared with current law. 

That math is spelled out in great detail in an article by Bill Gale 

that I cite in my testimony. I am sure that is the same kind of logic 

that was used by the Treasury Department. Put differently, the 

revenue-neutral tax rate would be 31 percent and that is under the 

implausibly optimistic assumptions of no avoidance, evasion, or 

erosion of the tax base. 

In addition, the National Retail Sales Tax would undermine 

state tax systems. If there were no federal income tax it would be 

very difficult to maintain a state income tax. States benefit from 

the IRS’ information collection and auditing procedures which 

would no longer exist. The compliance burden of state income taxes 

would be very high relative to the comparatively small amount of 

revenue collected by the states. Taxpayers would pressure state 

lawmakers to eliminate their income tax. Without a state income 

tax states would have to increase their own sales tax rates significantly so you are looking at combined state and federal rates are 

quite high. 

32

The advocates assume zero evasion and that is implausible. At 

the rates necessary to finance federal, state, and local governments, 

evasion would be rampant. The evasion would hurt compliant taxpayers and require higher tax rates. It would also trickle down to 

the states, which would lose a significant portion of their own tax 

bases. As a result, the required combined federal and state tax 

rates would be exorbitant. As a practical matter, government at all 

levels would have to be much smaller. 

Sales tax advocates also assume that almost all forms of spending will be included in the retail sales tax base including new 

homes, medical expenses, and financial services. Can policy makers 

really justify tax rates as high as 80 percent on insulin? Would 

such a tax on new home sales be politically feasible? If it isn’t, the 

tax rates would have to be higher still. 

The Tax Reform Panel concluded that the Retail Sales Tax Rates 

would have to be between 49 and 89 percent on a tax-exclusive 

basis assuming a moderate amount of evasion. Those conclusions 

are similar to ones that were raised by the Joint Committee on 

Taxation and by Bill Gale as I mentioned earlier. On top of those 

high federal rates, state sales tax rates would have to be quite high 

as well. 

The Panel report also shows that adopting the National Retail 

Sales Tax would shift the tax burden significantly onto the middle 

class. Low-income people would pay lower taxes than under current 

law because of the cash subsidy or the ‘‘prebate.‘‘ High-income people would pay much less because consumption is such a small 

share of their income. Thus, to raise the same amount of revenue, 

taxes would have to increase dramatically on the middle class. 

The proposal would hurt small businesses in my view. The Tax 

Reform Panel sites a well-regarded study of experience in Washington State which found the compliance cost for small firms were 

six and a half times as large as those for large firms. The rampant 

evasion would also hurt legitimate businesses which would suffer 

relative to the growing underground economy. It would undermine 

confidence in the fairness of the tax system and that would fuel 

still more evasion. 

Enormous transition problems can also be expected as explained 

in my written testimony. To be clear, many of these problems are 

unique to the National Retail Sales Tax. Other forms of consumption tax such as a VAT, flat tax or X-tax would likely be no more 

difficult to administer than the current income tax and would not 

undermine compliance with state sales taxes. They raise other 

issues but they could be administered. 

The National Retail Sales Tax is a uniquely flawed and unworkable solution. It is no wonder that no developed country has ever 

try this radical experiment. Thank you. I would be happy to answer your questions. 

[Mr. Burman’s testimony may be found in the appendix.] 

Mr. GRAVES. I wish we could. I apologize for the votes. Unfortunately, I don’t get to set the schedule. We always have to work 

around it. I understand, too, that there are a couple of people that 

have some flights to catch so we are going to go ahead and end the 

hearing at this point which is unfortunate because I have a whole 

bunch of questions I would like to ask. I have been doing taxation 

33

town hall meetings for the last month and I have a lot of questions 

that the constituents raised. 

They are good questions. I would just like to know what some of 

the alternatives are like a flat, like a FairTax or a consumption 

tax. Unfortunately, again, because of the late hours we are not 

going to be able to do that. I apologize but I do have some things 

I might send to you. If you could get a written response back to 

me, I would appreciate it. Thank you all. 

[Whereupon, at 4:41 p.m. the Joint Subcommittee adjourned.]

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