U.S. GOVERNMENT PUBLISHING OFFICE

31–548—PDF WASHINGTON : 2018

S. HRG. 115–331 

INDIVIDUAL TAX REFORM 

HEARING 

BEFORE THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED FIFTEENTH CONGRESS 

FIRST SESSION 

SEPTEMBER 14, 2017 

( 

Printed for the use of the Committee on Finance 

COMMITTEE ON FINANCE 

ORRIN G. HATCH, Utah, Chairman 

CHUCK GRASSLEY, Iowa 

MIKE CRAPO, Idaho 

PAT ROBERTS, Kansas 

MICHAEL B. ENZI, Wyoming 

JOHN CORNYN, Texas 

JOHN THUNE, South Dakota 

RICHARD BURR, North Carolina 

JOHNNY ISAKSON, Georgia 

ROB PORTMAN, Ohio 

PATRICK J. TOOMEY, Pennsylvania 

DEAN HELLER, Nevada 

TIM SCOTT, South Carolina 

BILL CASSIDY, Louisiana 

RON WYDEN, Oregon 

DEBBIE STABENOW, Michigan 

MARIA CANTWELL, Washington 

BILL NELSON, Florida 

ROBERT MENENDEZ, New Jersey 

THOMAS R. CARPER, Delaware 

BENJAMIN L. CARDIN, Maryland 

SHERROD BROWN, Ohio 

MICHAEL F. BENNET, Colorado 

ROBERT P. CASEY, JR., Pennsylvania 

MARK R. WARNER, Virginia 

CLAIRE MCCASKILL, Missouri 

A. JAY KHOSLA, Staff Director 

JOSHUA SHEINKMAN, Democratic Staff Director 

(II) 

(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Hatch, Hon. Orrin G., a U.S. Senator from Utah, chairman, Committee on 

Finance .................................................................................................................. 1 

Wyden, Hon. Ron, a U.S. Senator from Oregon .................................................... 4 

WITNESSES 

Brill, Alex M., resident fellow, American Enterprise Institute, Washington, 

DC .......................................................................................................................... 8 

Harrison, Iona C., senior vice president, Pioneer Realty, Upper Marlboro, 

MD ......................................................................................................................... 9 

Batchelder, Lily L., professor of law and public policy, New York University 

School of Law, New York, NY ............................................................................. 11 

Ponnuru, Ramesh, visiting fellow, American Enterprise Institute, Washington, DC ............................................................................................................. 12 

ALPHABETICAL LISTING AND APPENDIX MATERIAL 

Batchelder, Lily L.: 

Testimony .......................................................................................................... 11 

Prepared statement .......................................................................................... 45 

Responses to questions from committee members ......................................... 66 

Brill, Alex M.: 

Testimony .......................................................................................................... 8 

Prepared statement .......................................................................................... 71 

Responses to questions from committee members ......................................... 78 

Cantwell, Hon. Maria: 

‘‘Economists See Little Magic in Tax Cuts to Promote Growth,’’ by Patricia Cohen and Nelson D. Schwartz, The New York Times, May 23, 

2017 ................................................................................................................ 80 

Harrison, Iona C.: 

Testimony .......................................................................................................... 9 

Prepared statement .......................................................................................... 82 

Responses to questions from committee members ......................................... 97 

Hatch, Hon. Orrin G.: 

Opening statement ........................................................................................... 1 

Prepared statement .......................................................................................... 101 

Ponnuru, Ramesh: 

Testimony .......................................................................................................... 12 

Prepared statement .......................................................................................... 103 

Responses to questions from committee members ......................................... 106 

Wyden, Hon. Ron: 

Opening statement ........................................................................................... 4 

Prepared statement .......................................................................................... 108 

COMMUNICATIONS

Adoption Tax Credit Working Group (ATCWG) .................................................... 111 

American Retirement Association (ARA) ............................................................... 116 

California Association of Realtors (CAR) ............................................................... 120 

Charitable Giving Coalition (CGC) ........................................................................ 121 

Coalition to Preserve Cash Accounting .................................................................. 123 

The Jewish Federations of North America (JFNA) .............................................. 126 

Kirk, William S. ....................................................................................................... 130 

Page

IV 

League of American Orchestras ............................................................................. 130 

National Association of Enrolled Agents (NAEA) ................................................. 133 

National Volunteer Fire Council (NVFC) .............................................................. 138 

Precious Metals Association of North America ..................................................... 141 

(1) 

INDIVIDUAL TAX REFORM 

THURSDAY, SEPTEMBER 14, 2017 

U.S. SENATE, COMMITTEE ON FINANCE, Washington, DC. 

The hearing was convened, pursuant to notice, at 10:04 a.m., in 

room SD–215, Dirksen Senate Office Building, Hon. Orrin G. Hatch 

(chairman of the committee) presiding. 

Present: Senators Grassley, Cornyn, Thune, Isakson, Portman, 

Toomey, Heller, Cassidy, Wyden, Stabenow, Cantwell, Nelson, Carper, Cardin, Brown, Bennet, Casey, and McCaskill. 

Also present: Republican Staff: Tony Coughlan, Senior Tax Counsel; Chris Hannah, Tax Counsel; Alex Monie, Professional Staff 

Member; Martin Pippins, Detailee; Preston Rutledge, Senior Tax 

and Benefits Counsel; and Jeff Wrase, Chief Economist. Democratic 

Staff: Joshua Sheinkman, Staff Director; Michael Evans, General 

Counsel; Tiffany Smith, Chief Tax Counsel; and Adam Carasso, 

Senior Tax and Economic Advisor. 

OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. 

SENATOR FROM UTAH, CHAIRMAN, COMMITTEE ON FINANCE 

The CHAIRMAN. The committee will come to order. I want to welcome everyone here to this morning’s hearing, where we will discuss a major piece of the tax reform puzzle. 

Today will be talking about ideas, proposals, and considerations 

for reforming the individual tax system. While we have had countless hearings on tax reform in recent years, today’s hearing is the 

first in what I hope will be a series of hearings leading up to an 

intensive effort of this committee to draft and report comprehensive 

tax reform legislation. 

We have talked about these issues a great deal. In fact, since I 

became the lead Republican on this committee in 2011, we have 

had more than 60 hearings where tax reform was the main focus 

of the discussion. 

I think we are capable and ready to get to work on producing a 

bill. And I look forward to working with my colleagues on this next, 

all-important stage of the process. 

I would like to make a couple of points about that process for a 

moment, because there seems to be some confusion as to what the 

Finance Committee’s role will be in tax reform. I have heard a lot 

of talk about a secret tax reform bill or a comprehensive plan being 

written behind closed doors. 

Most of you have probably also heard about tax reform details 

that are set to be released later this month. True enough, leaders 

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of both the House and the Senate, including myself, as well as officials from the executive branch have been discussing various proposals. 

But as we stated in our joint statement before the recess, and as 

I have stated on numerous occasions, the tax writing committees 

will be tasked with writing the bill. This group—some have deemed 

us ‘‘The Big Six’’—will not dictate the direction we take in this 

committee. 

Any forthcoming documents may be viewed as guidance or potential signposts for drafting legislation. But at the end of the day, my 

goal is to produce a bill that we can get through this committee. 

That takes at least 14 votes, and hopefully we will get more. 

Anyone with any experience with the Senate Finance Committee 

knows that we are not anyone’s rubber stamp. If a bill—particularly on something as consequential as tax reform—is going to pass 

in this committee, the members of the committee will have to be 

involved in putting it together. 

Therefore, I intend to work closely with my colleagues and let 

them express their preferences and concerns so that when we are 

ready to mark up a tax reform bill, the mark will reflect the consensus views of this committee. That work, in many respects, has 

already begun, and we are well on our way. 

I will note that I have not limited these commitments to my Republican colleagues on the committee, which brings me to my second point. From the outset, I have made clear that my preference 

is to move tax reform through this committee with bipartisan support. I have no desire at all to exclude any of my Democratic colleagues from this discussion, and I am not determined to report 

anything by a party-line vote. 

I will note that the President and his team have publicly said the 

same thing this week. If any of my Democratic colleagues are willing to come to the negotiating table in good faith and without any 

unreasonable preconditions—and I believe they are—I welcome 

their advice and input. 

So far, my colleagues have insisted that the majority agree to a 

series of process demands before any substantive bipartisan talks 

can take place. Effectively, they want to ensure that we make it 

easier for them to block the bill entirely before they will talk about 

what they want to put in the bill. 

Now that seems kind of counterintuitive to me. And in my view, 

it is unreasonable. Furthermore, I do not recall either side ever offering such a concession when they were in the majority. We 

should not let the process concerns keep us from talking about the 

substance of a tax reform bill. And my hope is that my colleagues 

on the other side will put these demands aside and let us begin 

searching for common ground on these important issues. 

Those threshold matters aside, let me talk about today’s hearing. 

One argument that rears its ugly head in every tax reform debate 

is the claim that proponents of reform want to cut taxes for the 

uber-rich and give additional tax breaks to greedy corporations. 

We have heard that argument repeated in the current debate, 

and while these claims are about as predictable as the sunrise, 

they are simply not true. While I cannot see into the hearts of 

every member of the Congress, I truly do not know of a single ReVerDate Sep 11 2014 17:51 Sep 21, 2018 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 R:\DOCS\31548.000 TIM
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publican who, when thinking about tax reform, asks themselves 

what they can do to help rich people. That has never been our 

focus, and it is not our focus now. 

In fact, an argument can be made that the other side has helped 

the rich more than we have. Instead, we are focused squarely on 

helping the middle class, and recent proposals to reform the individual tax system reflect that. 

For nearly a decade now, middle-class families and individuals 

have had to deal with a sluggish economy, substandard wage 

growth, and a growing detachment from labor markets. Tax reform, 

if it is done right, can help address those problems and provide 

much-needed relief and opportunity for millions of middle-class 

families. 

That, once again, is our goal in tax reform. It is, in fact, the driving force behind our efforts. 

Let us talk about a few specific proposals. Under our tax code, 

individual taxpayers or married couples can opt to either take the 

standard deduction or itemized deductions to lower their tax burden. Currently, about two-thirds of all U.S. taxpayers opt to take 

the standard deduction. These are often low- to middle-income taxpayers. 

One item that has been central to a number of tax frameworks 

is a significant expansion of the standard deduction, which would 

reduce the tax burden for tens of millions of middle-class families 

and eliminate Federal income tax liability for many low- to middleincome Americans. 

I will note that this is not only a Republican idea. In fact, a few 

years back our ranking member introduced legislation that would 

have nearly tripled the standard deduction. And I commend him 

for it. This is the very definition of middle-class tax relief, and it 

goes beyond direct tax and fiscal benefits. 

With a significantly expanded standard deduction, the tax code 

would immediately become much simpler for the vast majority of 

middle-class taxpayers. And that is no small matter. 

Currently, American taxpayers, both individuals and businesses, 

spend about 6 billion hours—that is with a ‘‘b’’—and nearly a quarter of a trillion dollars a year complying with tax filing requirements. This, of course, is not surprising given that our tax code has 

grown exponentially into a 3-million-word behemoth that is basically indecipherable for the average American. 

That one change, expanding the standard deduction, would let 

millions of middle-class taxpayers avoid having to navigate the 

treacherous landscape of credits and deductions. Combined with 

other ideas, including a significant reduction in the number of credits and deductions in the tax code and a radically simplified rate 

structure, this approach will save middle-class families both time 

and money. 

I expect there to be some disagreements about what credits and 

deductions to keep and which to repeal in the name of tax simplicity, efficiency, and of course, fairness. I expect we will air some 

of those differences of opinion here today. 

There are other tax reform proposals under discussion that will 

help the middle class. For example, an increase and enhancement 

of the Child Tax Credit would benefit middle- and lower-income 

4 

* For more information, see also, ‘‘The Taxation of Individuals and Families,’’ Joint Committee 

on Taxation staff report, September 12, 2017 (JCX–41–17), https://www.jct.gov/publications.html?func=startdown&id=5020. 

families almost exclusively. And by reducing barriers and disincentives for savings and investment, we can expand long-term wealth 

and improve the quality of life for those in the middle class. 

Now these are some of the central ideas being discussed to reform the individual tax system. And in virtually every case, the primary beneficiaries of these proposals would be middle-class taxpayers. 

I know that there are Democrats who support these types of reforms. As I mentioned earlier, I hope we can recognize this common 

ground and find ways to collaborate in the broader tax reform effort. 

I will also note that the middle class has a significant stake in 

our efforts to reform the business tax system, but that is a matter 

for another hearing. 

Once again, this committee has a lot of work to do. There is not 

going to be a top-down directive that makes the hard decisions for 

us. I know we are up to that task, and most of us are game to participate in the process to help us reach a successful conclusion. 

Now, before I turn to my distinguished counterpart, Senator 

Wyden, I want to say that I hope we can have a productive discussion of options to reform taxes for individuals and not a debate on 

so-called ‘‘plans’’ based on outside analysts’ conjectures and assumptions. It is all too common for ideological think tanks or partisan analysts to take short statements outlining broad principles 

on tax reform and then fill in the gaps with their own subjective 

assumptions about details just to parade out a list of horribles that 

they then use to tarnish the entire reform effort. 

Let us discuss real ideas and proposals, keeping in mind that the 

Finance Committee will not be bound by any previous tax reform 

proposals or framework when we start putting our bill together. 

With that, I am going to turn to my friend and colleague, Senator 

Wyden, for his opening statement, and then we will go from there.* 

[The prepared statement of Chairman Hatch appears in the appendix.] 

OPENING STATEMENT OF HON. RON WYDEN, 

A U.S. SENATOR FROM OREGON 

Senator WYDEN. Mr. Chairman, thank you very much, and let 

me state again how much I value our partnership. We showed that 

again this week with the beginning of the effort to deal with children’s health. 

Obviously, we have a long way to go in the committee process, 

but I want it understood that I very much value this partnership. 

And I think I can speak for all of the Senate Finance Democrats— 

we share the view that the tax system in this country does not 

work for millions of Americans, particularly working-class people 

who drive this economy. Seventy percent of the economy is their 

consumer spending. So we very much feel that the tax code in this 

country is broken. 

5 

Now just yesterday, the President declared to the Nation that his 

tax plan would not give any breaks to the wealthy. That was yesterday. 

But the fact is, today the President’s one-page tax outline has a 

new lunar crater-sized loophole for the wealthy that would allow 

them to abuse what is called a tax pass-through. The tax passthrough concept is supposed to be about helping the small business 

folks. 

But the Trump plan turns it into a scheme for letting the 

wealthy dodge paying their fair share. In effect, they get to take 

ordinary income and convert it into long-term capital gains income—paying 15 percent. So they get a big break and they avoid 

paying their Social Security and payroll taxes. 

So in spite of what the President said yesterday about not wanting to have tax breaks for the wealthy, you can look today at the 

one-page tax outline and you can see a huge new break there for 

the very wealthy. And that is, colleagues, on top of the administration’s commitment to abolish the estate tax, which touches only one 

out of every 500 wealthy estates. That too is an outlandish giveaway to people at the top. 

Now with respect to this whole notion about ‘‘The Big Six’’—and 

I appreciate the chairman’s comments—it was only a few weeks 

ago where pictures were being sent by the group around the country to say, ‘‘We are writing this tax bill.’’ This did not come from 

me or from a Democrat. These pictures were sent around the country from ‘‘The Big Six,’’ saying that they were writing this bill behind closed doors. 

So what we Finance Democrats have said—and overwhelmingly 

our Democratic colleagues—is that there are key principles that we 

feel strongly about. We feel strongly about having the regular order 

so that members on both sides can offer their ideas and their 

amendments and not have a partisan reconciliation process. 

We feel strongly about fiscal responsibility. We want a deficitneutral plan. We want it to be as progressive as current law, which 

means you are not doling out new breaks for the 1 percent. 

And I share the chairman’s view with respect to talking about 

real ideas, and I would just like to note as we do that, what President Reagan did in 1986 is, he said there would be equal treatment 

with respect to income earned by a wage earner and income earned 

by somebody who is in financial services. So if anything, what Ronald Reagan stood for went beyond, colleagues, the principles that 

we Democrats have staked out. 

So if you listen to the talking points, you hear a lot about how 

the Trump plan would put a big focus on the burden of complexity 

the tax code heaps on so many middle-class families. But if you 

look at the architecture, again, of what the President has laid out, 

it does not reduce complexity or focus on the middle class. It endows future generations of the mega-wealthy. 

Now, I am just going to conclude my remarks by saying there is 

a blueprint for bipartisan comprehensive tax reform that works, 

and it is picking up on some of the ideas of the late President 

Reagan. And it is certainly not what is being pursued by the President as of right now. 

6 

Republican Reagan-style tax reform fights complexity by fighting 

unfairness. As I mentioned, 31 years ago President Reagan signed 

a bill that equalized the tax treatment of wages and wealth. What 

that means is that a worker who punches a clock going in and out 

every shift is not getting a raw deal compared to a trust fund baby. 

Reagan-style tax reform is about cleaning out tax deadwood, the 

provisions that do a whole lot more to please special interests, and 

what amounts to all of the lapdogs they have who are trying to 

come up with new ways to carve out special breaks for people at 

the top. 

Those are propositions that I believe ought to get a lot of bipartisan interest again today. And the reason I say that is, the tax 

code, colleagues, in America is a tale of two systems. 

There is one set of strict rules for a cop and a nurse who are 

married and they are raising kids. Their taxes come out of every 

single paycheck; no special dodges, no special schemes for the cop 

or the nurse to exploit. 

Then there is a whole other set of rules for the most fortunate. 

It says they can decide how much to pay and when to pay it. And 

as I said, as of today, in spite of the President’s comments yesterday that he did not want to help the rich, that tax outline creates 

another lunar crater-sized loophole for the wealthy to exploit. 

That is the brand of unfairness that President Reagan said he 

was going to go after. So, tax reform in 2017 ought to be an opportunity to put money back into the paychecks of the cop and the 

nurse and working families who are saving for retirement, to pay 

for college, and affordable housing. 

And that is why I think it is constructive that the chairman is 

open to ideas for how we pursue it. The basic proposition that 

President Trump has on offer goes after middle-class tax benefits 

like the State and local deduction and incentives for retirement 

savings and home ownership. And it gores working families to finance these special breaks, these special breaks that as of today 

are still on the Trump tax outline for the most fortunate and the 

biggest corporations. 

When it comes to this whole issue of the State and local deductions, this is fake tax reform. This is not just a play at taking away 

from the blue States. There are middle-class families all across 

America. They are in deep blue areas that went for Clinton and 

scarlet red areas that went for President Trump, and they will be 

taxed twice on the same income if State and local deductions are 

eliminated. The dreaded double taxation—if you are opposed to it 

when it involves corporate income, you cannot line up behind a 

plan to double tax middle-class families twice as hard on their 

hard-earned pay. That is what this issue is about. 

When it comes to simplification, it is easy to hold up a proposal 

to double the standard deduction as evidence you want to make a 

filing easier. I appreciated the chairman’s kind words that quite 

some time ago with several Republican colleagues—most recently 

a member of the President’s Cabinet, Dan Coats, who sat right 

there where Senator Cassidy is sitting—I advocated tripling the 

standard deduction. You triple the standard deduction for a worker 

in Michigan or any of our States, and the first thing that happens 

is immediately those folks will adjust their withholding. We will 

7 

put hundreds and hundreds of dollars of real tax relief into the 

pockets of working-class families right away. 

The President’s plan gives those folks no crumbs, using the most 

partisan approach, which is known as reconciliation. 

I am looking forward to hearing from our witnesses. Mr. Chairman, again, I want to express my gratitude for our friendship. We 

have worked together on a lot of things. I guess it is called being 

in a legislative foxhole or something like that. 

You really worked hard to reach out to me. We Democrats have 

laid out core principles that I have described today that frankly do 

not even go as far as what the late President Reagan did when he 

worked on tax reform in 1986. So I look forward to pursuing this 

conversation with you in the days ahead and hearing from our colleagues. 

The CHAIRMAN. Well, thank you, Senator. 

[The prepared statement of Senator Wyden appears in the appendix.] 

The CHAIRMAN. I would like to welcome each of our four witnesses to our hearing today. Before we begin, I want to thank each 

of you for your work and your willingness to testify and answer 

questions. Your work on this important issue is very important to 

us. We all look forward to hearing each of your perspectives on tax 

reform. 

First, we are going to hear from Mr. Alex Brill, a resident fellow 

at the American Enterprise Institute, AEI. Before joining AEI, Mr. 

Brill served as the Policy Director and Chief Economist for the 

House Ways and Means Committee. Previously, he served on the 

staff of the White House Council of Economic Advisors. He has 

served on the staff of the President’s Fiscal Commission, also 

known as Simpson-Bowles, and the Republican Platform Committee. Mr. Brill has an M.A. in mathematical finance from Boston 

University, and a B.A. in economics from Tufts University. 

Next we will hear from Ms. Iona Harrison, the current chair of 

the Taxation Committee of the National Association of Realtors. 

Ms. Harrison was born in San Juan, PR and currently resides in 

Maryland. Ms. Harrison has been a licensed realtor since 1976 and 

previously served as the president of the Maryland Association of 

Realtors. She attended Georgetown University and received a B.S. 

in history from the University of Maryland. 

Our third witness will be Ms. Lily Batchelder, a professor of law 

and public policy at the NYU School of Law and an affiliated professor at the NYU Wagner School of Public Service. From 2010 to 

2015, she was on leave serving as the Deputy Director of the White 

House National Economic Council and Deputy Assistant to the 

President, and as majority chief tax counsel for the U.S. Senate 

Committee on Finance. 

Before joining NYU in 2005, Ms. Batchelder was an associate for 

Skadden, Arps, Slate, Meagher, and Flom, prior to which she also 

worked as the director of community affairs for a New York State 

Senator and also as a client advocate for a small social services organization. Ms. Batchelder received an AB in political science from 

Stanford University, an MPP in microeconomics and human services from the Harvard Kennedy School, and a J.D. from Yale Law 

School. 

8 

Finally, we will hear from Ramesh Ponnuru, a senior editor at 

National Review, where he has covered national politics and policy 

for more than 20 years. He is also a columnist for Bloomberg View, 

which syndicates his articles in newspapers across the Nation. 

He is a visiting fellow at the American Enterprise Institute, and 

he serves as a contributing editor to National Affairs. In 2015, Mr. 

Ponnuru was included in the Politico 50. He grew up in Kansas 

City, KS and graduated from Princeton University. 

I want to thank you all for coming today. Mr. Brill, we will begin 

with you, if you will please get us started by providing us with 

your opening remarks. 

STATEMENT OF ALEX M. BRILL, RESIDENT FELLOW, 

AMERICAN ENTERPRISE INSTITUTE, WASHINGTON, DC 

Mr. BRILL. Chairman Hatch, Ranking Member Wyden, and other 

members of the committee, thank you for the opportunity to testify 

this morning. My name is Alex Brill. I am a resident fellow with 

the American Enterprise Institute. 

I commend the committee for holding this important and timely 

hearing because of the opportunity for fundamental and comprehensive tax reform. It is before this committee for the first time 

in many decades. 

While the tax code has frequently and sometimes significantly 

changed over the last 30 years, not since 1986 has it been truly reformed in a manner that sought to broaden the base and lower 

statutory tax rates. The last 30 years have seen tax complexity increase dramatically with the introduction of more and more tax expenditures. In many regards, the tax code today imposes unnecessary and undue burdens on families and individuals. 

Reversing this trend of the last 3 decades and pursuing individual income tax reform means a broader base and lower statutory tax rates. Such a reform will yield a more neutral and a more 

efficient tax code, one that will facilitate a more productive allocation of resources, and if pursued in conjunction with business tax 

reform and without impeding savings, this can contribute to a progrowth economic environment. 

My written testimony, which I have submitted for the record, 

makes five points which I would like to briefly summarize. First, 

as I just noted, the current individual income tax system is complex. It is burdensome. It is riddled with deductions, exclusions, 

and credits. Appropriately broadening the tax base can mean 

meaningfully simplifying the tax code, especially for many in the 

middle class. 

Second, and often under-unappreciated, is the fact that the current individual income tax system often treats taxpayers with similar amounts of similar income very differently. Appropriately 

broadening the tax base can be an effective means for correcting 

this disparity known as ‘‘horizontal inequity’’ in the tax code. 

For example, nearly 20 percent of taxpayers, one in five who report about $36,000 in adjusted gross income, pay a higher average 

tax rate than 60 percent of taxpayers who earn $50,000. 

Third, in addition to contributing to complexity and horizontal 

inequity, itemized deductions are generally regressive tax policies. 

The deduction for State and local taxes is an excellent example of 

9 

this. It is a policy that, while regressive at the Federal level, ironically incentivizes States to pursue more progressive, but more inefficient tax policies. I estimate that this tax provision forgoes $1.4 

trillion over the budget window in revenue, providing subsidies to 

certain taxpayers in certain States. 

Fourth, broadening the tax base, particularly with regard to limiting itemized deductions, is an opportunity to move towards a 

more neutral tax code, one that interferes less in the allocation of 

resources—decisions that are often best left to the free market. 

My final point is on tax policy and transition, the transitionary 

path from the tax code we have today to a fairer, simpler, hopefully 

more pro-growth tax system. That process is itself a complex challenge, one that will require lawmakers to strike a careful balance. 

Inadequate or insufficient transition relief will cause some taxpayers to face steep and unanticipated tax burdens; but conversely, 

overly extended and generous transition relief may limit the potential economic gains from tax reform. 

In conclusion, lawmakers have the opportunity to simplify the 

tax code, improve the horizontal equity of the system, and reduce 

economic distortions. Tax reform that wisely broadens the tax base 

can achieve these goals. To pursue the additional core objective of 

a tax reform that promotes economic growth, lawmakers should 

look to reduce if possible—and certainly not increase—the current 

tax penalty on savings. 

Thank you, and I would be happy to answer your questions. 

The CHAIRMAN. Well, thank you. 

[The prepared statement of Mr. Brill appears in the appendix.] 

The CHAIRMAN. Ms. Harrison, we will turn to you now. 

STATEMENT OF IONA C. HARRISON, SENIOR VICE PRESIDENT, 

PIONEER REALTY, UPPER MARLBORO, MD 

Ms. HARRISON. Chairman Hatch, Ranking Member Wyden, and 

members of the committee, thank you for this opportunity to testify 

on behalf of the more than 1.2 million professionals who belong to 

the National Association of Realtors. 

As with most Americans, Realtors agree that a major result of 

tax reform should be simplification. But simplification does not necessarily equal elimination. From its inception, our tax system has 

featured easy to comply with housing incentives utilized by tens of 

millions of Americans. 

For decades, these have helped facilitate home ownership, build 

wealth, and provide stability to families and communities. NAR believes that tax reform that eliminates or weakens the current-law 

tax incentives for purchasing or owning a home would be shortsighted and counterproductive to a strong economy and healthy 

communities. My written testimony outlines the reasons why in detail, but I would like to focus on three major points. 

First, the deduction for State and local taxes is vital to a sound 

tax system. This deduction is so basic that its origins go back to 

the Income Tax Act of 1861, and Federal income tax statutes since 

then have included it. State and local taxes paid to benefit the general public are similar to the Federal income tax in that they both 

fund central government services. 

10 

Allowing a Federal deduction for them is essential to avoiding 

double taxation on the same income. Paying involuntary levies 

such as taxes is tantamount to the money having never been 

earned in the first place. So where is the justification for taxing it? 

Some suggest the deduction be repealed because it subsidizes 

State and local governments, leading them to increase spending. 

Interestingly, few if any, suggest that the far more generous credit 

for taxes paid to a foreign government subsidizes spending by those 

nations or encourages profligacy by them. 

Second, the mortgage interest deduction, MID, is a key incentive 

to purchasing a first home and building home ownership in our society. Critics often pan the MID as benefitting primarily the rich. 

In reality, the deduction is utilized by households of all incomes. 

Fifty-three percent of those claiming the MID in 2015 earned less 

than $100,000, and 85 percent had a GI of less than $200,000. 

It is important to recognize that the value of the current tax benefits of owning a home, including both the MID and the property 

tax deduction, are embedded in the price of a home. If those benefits are removed, the value of homes drops. 

Some suggest lowering the MID cap from $1 million to $500,000. 

Realtors oppose this idea. A $500,000 cap would be unfair to those 

living in high-cost areas, many of whom are by no means rich and 

have fairly modest homes. 

Also, inflation could make the pinch of a lower cap much more 

universal in just a few years. Remember the alternative minimum 

tax and what happened when it was not indexed? NAR calculations 

show that by 2043, the value of more than half the homes in a majority of States will likely be greater than $500,000. 

Third, and most importantly, a tax reform plan like the House 

Blueprint, which doubles the standard deduction while eliminating 

most itemized deductions, would bring minimal simplification at a 

very high price for many homeowners and especially those with 

larger families. The combination of the larger standard deduction 

and the repeal of the State and local tax deduction would wipe out 

the incentive value of the tax benefits of owning a home for all but 

the most affluent. 

Essentially, owning and renting a home would be equivalent for 

tax purposes for 95 percent of filers. This would drop the value of 

homes, wrenching the economy. 

Also, many homeowners would pay more tax under such a plan, 

while most renters would get tax cuts. Part of the reason is that 

the Blueprint repeals dependency exemptions to help fund the increased standard deduction. 

The increased child credit helps offset part of this loss, but not 

for larger families or with children older than 16. The effect could 

be particularly acute in States like Utah where families are larger, 

home ownership is higher, and itemized deductions are greater 

than average. 

Tax reform that penalizes American homeowners and middleclass families in the name of simplification or lower corporate rates 

is not worthy of the name. Smart tax reform must first do no harm. 

Thank you. 

The CHAIRMAN. Thank you. 

11 

[The prepared statement of Ms. Harrison appears in the appendix.] 

The CHAIRMAN. Ms. Batchelder? 

STATEMENT OF LILY L. BATCHELDER, PROFESSOR OF LAW 

AND PUBLIC POLICY, NEW YORK UNIVERSITY SCHOOL OF 

LAW, NEW YORK, NY 

Ms. BATCHELDER. Good morning, Mr. Chairman, Ranking Member Wyden, and members of the committee. My name is Lilly 

Batchelder, and I am a professor at NYU School of Law. Thank you 

for the opportunity to testify before you today on the important 

topic of individual tax reform. It is an honor to be back with the 

committee. 

My testimony makes five main points. First, the current tax reform effort is occurring at a time when low- and middle-income 

families are facing deep financial challenges. Economic disparities 

are vast and have been widening for decades. 

The U.S. actually has one of the lowest levels of economic mobility relative to our competitors. Our debt as a share of GDP is projected to grow to unprecedented levels in coming decades, largely 

because of the retirement of the baby boomers and increasing life 

expectancy. This growth in debt will be a drag on economic growth. 

For all these reasons, tax reform should increase revenues and 

should increase progressivity. Doing so would boost economic 

growth and make the tax code fairer at the same time. At a bare 

minimum, tax reform should maintain the current level of revenues 

and progressivity. And these both should be measured consistently 

and without resort to budget gimmicks like a current policy baseline. 

Second, individual tax reform should focus on leveling the playing field for the next generation and supporting work. Doing so 

would blunt economic inequality, broaden opportunity, and increase 

productivity by ensuring that jobs are awarded more often based 

on effort and talent and less based on connections and the luck of 

one’s birth. 

Some worthwhile proposals that would advance these goals are 

expanding the EITC, especially for workers without dependents; increasing refundability of the Child Tax Credit, particularly for 

young children in the poorest families; and restructuring child care 

benefits to provide the largest benefits to those spending the largest share of their income on child care. 

These proposals could make significant headway in offsetting the 

much lower earnings growth that working-class families have experienced over the past few decades compared to those who are more 

fortunate. They should be paid for by raising taxes on the wealthy, 

including by strengthening and not repealing the estate tax. 

Third, individual tax reform should focus on reducing transactional complexity, which essentially involves eliminating opportunities for savvy taxpayers to game the system. This would accomplish the trifecta of tax reform: making the tax code fairer, more 

efficient, and simpler. 

To further this goal, I urge the committee to consider proposals 

like rationalizing the NIIT and SECA taxes so all labor and capital 

income is subject to the Medicare tax on high incomes in some 

12 

form, repealing stepped-up basis, narrowing the gap between the 

tax rates on ordinary income and capital gains, and taxing carried 

interest as ordinary income. 

Fourth, individual tax reform should seek to make tax incentives 

more efficient and fair, generally by restructuring them into refundable credits and leveraging the empirical findings of behavioral 

economics. Doing so could generate more social benefits at a lower 

cost. And one particularly promising area for reform is tax incentives for retirement savings. 

Finally, the very first principle of tax reform should be to do no 

harm. Unfortunately, the tax plans offered so far by the President 

and the House Republican Blueprint do just that: they lose massive 

amounts of revenue. The corresponding increase in the debt would 

depress economic growth substantially over time. 

They are both sharply regressive, providing vast tax cuts to the 

wealthy and a pittance for everyone else. They create a giant new 

loophole for the wealthy in the form of a special rate cap on passthrough business income, which tax experts on the left and right 

agree is a terrible idea. 

And to the extent that they include any proposals intended to 

benefit low- and middle-income households, they do so in a relatively ineffective way. Sooner or later, these plans’ massive tax 

cuts for the wealthy will have to be paid for, and low- and middleincome families are likely to be left footing the bill. 

I, therefore, urge the committee to consider a fundamentally different approach. 

Thank you for the opportunity to testify, and I look forward to 

your questions. 

The CHAIRMAN. Thank you. 

[The prepared statement of Ms. Batchelder appears in the appendix.] 

The CHAIRMAN. Mr. Ponnuru? 

STATEMENT OF RAMESH PONNURU, VISITING FELLOW, 

AMERICAN ENTERPRISE INSTITUTE, WASHINGTON, DC 

Mr. PONNURU. Chairman Hatch, Ranking Member Wyden, and 

distinguished members of the committee, thank you for convening 

this hearing and inviting me to testify. My name is Ramesh Ponnuru. I am a visiting fellow at the American Enterprise Institute, 

a senior editor at National Review, and a columnist for Bloomberg 

View, although my testimony reflects my views alone and not those 

of any organization with which I am affiliated. It is an honor to be 

testifying today. 

While tax policy has been politically contentious, I am here to 

discuss a unifying issue. Over the last 20 years, a broad political 

consensus has supported tax relief for parents of dependent children. The major reforms of the tax code undertaken over this period have consistently, without exception, included such tax relief. 

People from different parts of the political spectrum have had 

varying reasons for supporting the child credit, including an appreciation of the costs of raising children and the belief that raising 

children is in no merely metaphorical sense an investment in the 

Nation’s future. The fact that the child credit lifts nearly 3 million 

people out of poverty each year has also brought it support. 

13 

What is not always appreciated is how the child credit advances 

a major goal of tax reform, creating a tax code that raises the desired amount of revenue while minimizing the distortions that government policy can create. A familiar example of a distortion is an 

unjustified tax break. Tax reformers seek to curtail such tax breaks 

because they unfairly enrich some groups to the detriment of others, and they inappropriately encourage some activities over others. 

The child credit advances this goal by reducing a distortion 

caused by government policy: the large, though implicit, tax on parenting that the structure of some of our largest Federal programs 

has inadvertently created. It is, of course, true that all taxpayers, 

whether or not they have children, contribute to Social Security 

and Medicare, but the financing of those programs relies in a special way on parents. They contribute to the programs, both through 

the Federal taxes that they pay and through the financial sacrifices 

that they make to raise children, including in many cases forgone 

income. 

Because the Federal Government does not recognize the extent 

of their parental contributions, parents shoulder a larger share of 

the burden of government than they should. In the world before 

these programs, many of the financial sacrifices parents made 

redounded to their direct benefit in old age as their children took 

care of them. 

Now much of that age-old financial return on parents’ investment in children goes to senior citizens as a group, whether or not 

they themselves raise children. That is a shift that we as a society 

have made for very weighty and extremely widely supported reasons, but the shift has had the inadvertent effect of transferring resources from parents of the childless and from larger families to 

smaller ones. We can call this transfer the ‘‘parent tax.’’ 

Some government policies offset this parent tax, notably, the tax 

exemption for dependents and the existing tax credit for children. 

But the level of the tax remains quite high even after these policies. One conservative estimate suggests that the child credit would 

need to more than quadruple to eliminate the parent’s tax completely. 

A credit that large is unrealistic, but the calculations suggest 

that tax reform should—whatever its other parameters—include an 

expansion of the child credit so as to reduce the share of the overall 

tax burden paid by parents. It suggests as well that the expansion 

should take two forms. The maximum value of the credit should be 

raised from $1,000 per child to some significantly larger number, 

and the credit should be applied against payroll taxes as well as 

income taxes. 

Finally, it suggests that if the dependent exemption declines as 

part of tax reform, the expansion of the child credit should be large 

enough to more than make up for that decline. A Child Tax Credit 

expansion compares favorably to other proposals for middle-class 

tax relief, such as an increased standard deduction. 

The larger child credit would reduce the parent tax distortion, 

while the standard deduction would not. In addition, a larger share 

of the benefits of a child credit expansion would accrue to relatively 

low-income households. An expanded Child Tax Credit for children 

14 

should be part of a larger tax reform that Congress enacts so as 

to ensure that tax reform is both pro-growth and pro-family. 

Thank you for the opportunity to testify, and I look forward to 

your questions. 

The CHAIRMAN. Well, thank you so much. 

[The prepared statement of Mr. Ponnuru appears in the appendix.] 

The CHAIRMAN. We will now open this up for some questions. 

Ms. Batchelder, a significant part of your written testimony is 

spent on suggestions on how to make the tax code more progressive; that is, in how to make the rich pay more tax and the poor 

pay less tax. 

So my question is this: would repealing the Federal itemized deduction for State and local income taxes be a shift in a progressive 

direction? And after Ms. Batchelder, if Mr. Brill would briefly 

weigh in on this too, I would appreciate it. 

Ms. BATCHELDER. I think it really depends on how that revenue 

is used. So in the current proposals by the President and the House 

Republican Blueprint, the revenue from repealing the State and 

local tax deduction is used for highly regressive tax cuts. So on net, 

it would make the tax code less progressive. 

And if you repealed the State and local tax deduction in isolation 

and used that revenue, for example, to expand the Earned Income 

Tax Credit or the Child Tax Credit, that would be a progressive 

change. But it really depends on what you are using that revenue 

for. 

The CHAIRMAN. Mr. Brill? 

Mr. BRILL. Senator, I would say that the repeal of the State and 

local deduction is a progressive change in isolation by itself. It is 

true that in the context of fundamental reform, we would have to 

look at all the fundamental pieces and where all the changes are 

made, but that piece by itself would be a step in making the tax 

code more progressive. 

The CHAIRMAN. Okay. 

Well, let me ask this of Ms. Harrison. In your written testimony, 

you write extensively about how the State and local tax deduction 

for real property taxes is mostly a benefit for the middle-class. And 

we have statistics from the Joint Committee on Taxation demonstrating that the vast majority of the benefit of the State and 

local tax deduction for State and local income taxes goes to persons 

with an income exceeding $200,000 per year. 

So it appears that there is a real difference between who benefits 

from the deduction for real property taxes, and who benefits from 

the deduction for State and local income taxes. Am I right on that? 

And also, am I correct in stating that your testimony is much more 

focused on preserving the deduction for real property taxes than it 

is on preserving the deduction for State and local income taxes? 

Ms. HARRISON. While not being a tax expert—and I want to get 

that caveat out right from the inception—my information in the 

written testimony was based primarily on our PricewaterhouseCoopers study. As with the mortgage interest deduction, I would 

say that my figures are that 75 percent of the value of real property tax deductions in 2012, for instance, went to taxpayers with 

cash incomes of less than $200,000, and that the typical real estate 

15 

tax deduction beneficiary has an adjusted gross income of slightly 

less than $81,000, which I think, again, is squarely in the middle 

class. 

So one of the other reasons that we want to maintain this as a 

source of home ownership is that for many homeowners this is a 

mandatory, obvious tax that they pay throughout their life. When 

their mortgage is paid off, they are no longer getting the benefit 

of the mortgage interest deduction, if they took it, but they will 

continue to be able to utilize the deduction they pay for State and 

local taxes throughout their ownership of that property, if they so 

choose. 

Once again, we want to refer one back to the idea that because 

of the standard deduction, many people who are homeowners get 

the benefit of that standard deduction as part of that taxing that 

takes place at that level. The idea, I assume, of a standard deduction is to allow people to keep a portion of their earned income discretionary because they have already paid it in taxes. 

The CHAIRMAN. Okay. 

Mr. Ponnuru, you suggest a much higher Child Tax Credit. And 

as you acknowledge, this will cost a lot in the 10-year window, and 

so in the 10 years, this would be difficult to pay for. 

But I suppose one of your points is that it will largely pay for 

itself in the long run; that is, today’s children will be tomorrow’s 

Social Security taxpayers. Am I right about that? 

Mr. PONNURU. Thank you for your question, Mr Chairman. I 

think that I do not propose that the budget should account for such 

long-term effects in financing an expansion of the child credit. I 

propose that an expansion of the child credit be financed in the 

way that other forms of tax relief are, with the familiar list of payfors that I am sure that all of you are extremely familiar with. 

I would just point out that whatever proportion of a tax cut is 

paid for with tax increases or spending cuts elsewhere, we should 

be consistent, and a child credit should not be treated any differently than other forms of tax relief. 

The CHAIRMAN. Senator Wyden? 

Senator WYDEN. Thank you very much, Mr. Chairman. 

Welcome to all of you. And, Ms. Batchelder, it is very good to see 

you. It was not very long ago when we enjoyed having you on this 

side of the dais and I was sitting down there somewhere beyond 

where Michael Bennett is now. So we are glad to have you. 

As I indicated, times are different—2017 is different from 1986 

when Democrats and Ronald Reagan got together. But the principles of tax fairness are there for the ages. 

And I would like you—if you would, for my opening question— 

to contrast what the President said yesterday, where he said there 

are not going to be any tax breaks for the very wealthy, the people 

at the top, with what is on offer as of this morning from President 

Trump. 

Ms. BATCHELDER. Thank you for the question. It is a pleasure to 

be back with the committee and fun to be on the other side of the 

dais. 

I tend to believe people based on their actions and not on their 

words. And so, I think when you look at the President’s statement 

yesterday where he is saying that he will not cut taxes for the 

16 

wealthy, it is hard to square, to say the least, with the plans that 

he has put out. 

He has put out different iterations of his plan. They have all 

been estimated by nonpartisan organizations, and I cannot think of 

a single credible analysis of any of his plans that finds that they 

do not cut taxes substantially for the wealthy and are regressive 

overall. 

So, if you look at his plan overall, it includes huge tax cuts for 

the wealthy. The top 1 percent gets about half the value of the tax 

cuts in his plan. I tend to think of the best way of looking at the 

distribution of tax changes as a percentage change in after-tax income, and the top 1 percent gets a boost in their after-tax income 

of 12 to 13 percent, versus 0 to 2 percent for the vast majority, 80 

percent of low- and middle-income families. 

In addition, his plan raises taxes, actually, on millions of families. 

Senator WYDEN. On working families. 

Ms. BATCHELDER. Working families, yes. 

So an astonishing 45 percent of families with children are estimated to face a tax increase immediately in 2018 under his plan, 

and 70 percent of single parents. And he has known this. This has 

been in the press since last year. I find it very surprising that he 

has not chosen to fix the plan and address these tax increases in 

the midst of a plan that overall is reducing revenues by trillions 

of dollars. 

The last thing I would say is, sooner or later that trillion-dollar 

revenue loss—that is $3.5 trillion according to the most recent estimates—is going to have to be paid for. Right now it appears that 

he is proposing to deficit-finance it. His budget plans would potentially reduce entitlements and other spending in ways that would 

hurt low- and middle-income families. 

But even if those spending cuts were not passed now, it is very 

likely in the future that low- and middle-income families would be 

left holding the bag in the form of either tax increases or spending 

cuts to—— 

Senator WYDEN. It is a very important point you make, that 

these errors that they have said they have made have not been corrected. That has been the case with the outrageous pass-through 

provision, which is a huge gift to the super-wealthy. And it is correct with respect to the working families who get hurt, which they 

said they did not want to see happen in tax reform, but the fact 

is they have said for months that they would correct it. It has not 

been done as of today. Words matter. Yes, deeds matter even more. 

Mr. Ponnuru, just a question for you on this question of the 

Child Tax Credit. As you know, the committee made this permanent. We feel strongly about it. We would like to do everything we 

can to help working families. 

I was pleased about a part of your answer to the chairman, 

where you basically rejected dynamic scoring. The chairman got 

into this question of, how are you going to pay for it? Then you 

said, hey, look, you have to pay your bills in the real world. We are 

not going to have some dynamic scoring. So I am pleased about 

that, and to have a conservative make that point is especially welcome. 

17 

The second point is—and I have read your articles and know that 

you think down the road about these issues. You said, okay, we will 

pay for the expansion—which I would certainly like to see—and for 

helping working families. We will do it by changes in Medicare and 

Social Security. 

And what we have tried to do around here is to update the Medicare guarantee, and particularly, look at chronic illness and the 

like. It is going to take a lot of money to do what you are talking 

about with respect to the Child Tax Credit. 

How would you go about finding the revenue? I mean, we would 

like to start closing some of these outrageous tax loopholes at the 

top. I did not see that in your statement, but we welcome your 

thoughts on it. 

Mr. PONNURU. Thank you for providing me the opportunity to 

clarify. I support dynamic scoring, but I—— 

Senator WYDEN. You did not use it with respect to your answer 

to the chairman. 

Mr. PONNURU. I support the idea of dynamic scoring. I do think 

that, in particular, when you are talking about the Child Tax Credit expansion, the possible revenue payoffs are so far in the future 

that it becomes even more subject to uncertainty than the usual exercise in dynamic scoring. 

I have my own preferences as to how tax reform should be financed. My main point in this testimony has been to discuss the 

idea that part of the tax structure should be a positive change for 

parents regardless of what other choices the Congress makes. 

My own views on how to finance these tax reforms, though, 

would include some long-term restructuring of entitlement programs, as I mention in my written testimony. I do also think that 

certain revenue pay-fors, such as a scaling back or elimination of 

the State and local deduction, scaling back of the mortgage interest 

deduction, would make sense. 

And then finally, I also believe that expanding the width of the 

top tax brackets so that high-earning individuals pay the top rate 

on a larger percentage of their income also makes sense as a revenue raiser in a balanced package. 

Senator WYDEN. I am over my time, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

Senator Isakson? 

Senator ISAKSON. Thank you, Mr. Chairman. I want to assure 

Senator Cornyn and the other members to my left that I am not 

using my back situation as an advantage in my seniority, but I was 

here first. [Laughter.] 

Thanks for letting me move over. 

Mr. Brill, in the last tax act of 1986, I was in business. One of 

the most serious negative effects—and I was all for the 1986 tax 

act, by the way—but one of the most significant negative effects of 

it was the clawback on passive loss. And when the Congress did 

away with passive loss against earned income retroactively, it actually put a number of people out of business and created the real 

estate investment trust, because everybody had to go to the stock 

market to raise capital to get their balance sheet in order. 

Your testimony, if I am not mistaken, addresses that and—not 

specifically that case, but a case of not clawing back. Do you agree 

18 

or disagree that we should avoid any clawback on existing tax 

treatment that was made on investment prior to the time the tax 

law was changed? 

Mr. BRILL. Thank you, Senator. I think that the transition 

issues, as I mentioned in my opening statement, are very important and can be very tricky. And in particular, the question that 

you are relating to of retroactive changes that raise taxes on decisions that have previously been made under a prior set of policies 

is one that can damage the confidence in the tax code. 

If investors, small business owners, see a risk that tax changes 

can be made retroactively, that is only going to be a drag on their 

willingness to be entrepreneurial and to make new investments. 

The proper transition relief is, sort of, a provision-by-provision 

question. 

But as a general matter, we want to make these changes on a 

prospective basis as we make new tax policy. 

Senator ISAKSON. And that was my point. I read that in your testimony, and prospective is the way to look at these things. 

We have a tendency as politicians to label things either progressive or liberal, or wealthier or conservative, or whatever. And 

sometimes we act on a label and we do not act on common sense. 

But it is only common sense to tell the American people that if we 

are going to tax you on investments you made in 2008, we are not 

going to change that in 2012 and come back and make it a different 

tax rate. 

Once somebody has made an investment decision based on a tax 

code that applies to their investment of that time, that ought to 

stick, period. I think the same would be true for the internal buildup of dividends and generating life insurance, many other types of 

things that are longitudal investments like that. It is very important that we not do it. 

The second thing—one of the things I have worked hardest on in 

this committee is incentives for Americans to save for their future. 

I think the best thing we can do to protect our republic in the long 

term is see to it that Americans can take care of themselves as 

much as the government can take care of them, or more so if possible. 

Do you consider a deferral of tax liability, for example on an IRA 

investment or something like that, a benefit to the rich or do you 

think it a common-sense incentive for the tax code? 

Mr. BRILL. Thank you, Senator. 

Obviously, the tax code has a series of provisions related to savings, and the Joint Committee and the Treasury Department will 

identify these policies as tax expenditures. However in a technical 

sense they may be, these are policies that promote savings, which 

is critical for the long-term viability and economic growth of our 

country. 

And income tax is by its very nature going to discourage future 

savings by its design. And these policies that promote individual 

savings—401(k) plans, IRAs, as well as policies that just promote 

savings generally—are all things that can lead to long-term positive economic growth. 

Senator ISAKSON. And eventually, in the long-term investments 

that are tax-deferred, like an IRA investment that someone might 

19 

make, eventually the revenue is going to be paid by the taxpayer 

when they withdraw the money. Is that not correct? 

Mr. BRILL. That is absolutely correct. 

Senator ISAKSON. Which also applies, I think, Ms. Harrison, to 

1031 exchanges. Is that not correct? 

It is not a matter of not collecting the tax, it is a matter of the 

timing of the collection of the taxes. Is that right? 

Ms. HARRISON. Absolutely. And 1031 exchanges, again, are utilized throughout my profession, not just by practitioners who do 

massive commercial deals. They can be very small single-property 

transactions which allow folks to sell a rental property and use 

that tax deferral advantageously. 

Deferral does not mean you are never going to pay it. It just 

means, I do not have to pay it right at this minute. 

Senator ISAKSON. And with Ms. Cantwell here, present on the 

committee, Senator Cantwell, I want to make another point about 

labeling. She has worked steadfastly on low- and moderate-income 

housing tax credits, and you have in your testimony a reference to 

tax credits. 

There are those who might consider tax credits as a benefit to 

the wealthy who are buying the tax credits to defer a tax or put 

it off down the line, but in fact, it is the best way we can raise 

money for housing for people at the low- and moderate-income level 

that will be needed after Harvey and Irma and other storms that 

we are going through right now. 

So let us not be too quick, Republicans or Democrats, to label 

something as anti-progressive or as a tax break for the rich. When 

we look at the whole consequence and the collection of that tax, 

sometimes we are mislabeling things for the wrong reason. 

Would you agree with that? And just say, ‘‘yes.’’ 

Ms. HARRISON. I absolutely do. Labels tend to be very dangerous. 

They lead us not to examine the actual facts underlying the statements we have made. 

Senator ISAKSON. Thank you, Mr. Chairman. 

Ms. HARRISON. Thank you. 

The CHAIRMAN. We will now turn to Senator Cardin. 

Senator CARDIN. Thank you, Mr. Chairman. I very much appreciate this hearing, and I appreciate the comments that both you 

and Senator Wyden made. 

One of the reasons we talk about principles is that we want to 

make sure that when we do certain changes in the tax code, it does 

not have unintended consequences that are contrary to the purpose 

of what we are trying to do in tax reform. 

So, Mr. Chairman, when you mention that middle-class families 

need help, I agree with you. And I think most of us agree, and we 

want to make sure at the end of the day that, when everything is 

said and done, we are not asking middle-income taxpayers to shoulder a greater burden of the cost of this country than they already 

are. In other words, we want to make sure the progressivity is 

maintained and that hopefully it is made more progressive as a result of our action. 

When we look at other principles—and one I just really wanted 

to underscore is, many of you have been in the health-care debate, 

20 

asking our States to do more. We talk about partnerships with our 

States. Well, let us respect federalism. 

There is a reason why there is a State and local tax deduction 

beyond just the impact it has on who pays taxes. It is respect for 

the fact that it is the same taxpayers who pay State and local taxes 

who pay Federal taxes. 

And there is something to be said about double taxation. The 

chairman was very active in trying to deal with corporate integration to deal with double taxation. Let us not create double taxation 

on those who are paying State and local taxes. 

I just point out there are principles that become very important 

in our debate. And, Ms. Harrison, I am glad you are here, because 

home ownership is one of our principal objectives. And we should 

recognize that we want to make sure at the end of the day that 

we do not hamper the ability of individuals to own their homes. It 

has many positive aspects to it. 

But what I want to ask a question on deals with fiscal responsibility, and it follows up a little on Senator Isakson’s point. I think 

we all should agree that one of our principles is that we want to 

make sure that tax reform does not add to the debt, that it is at 

least fiscally neutral. And as I pointed out earlier, I hope that the 

Joint Tax Committee will be our arbiter as it relates to that. 

But there are timing issues as to when you collect taxes, and 

Senator Isakson raised that issue. Senator Portman and I have 

worked a long time to try to improve retirement security in this 

country, because we recognize it is important. People are living 

longer. We believe in the three legs of the stool: Social Security, retirement, and personal savings. We need all three. 

And if we do proposals that deal with timing in order to get revenues short-term, it could have an adverse impact on retirement security, but it certainly is not fiscally responsible. So, it is an issue 

that may have merits, but to use it for revenue, it has no merit. 

So I wanted to ask, Ms. Batchelder, if you could just go over a 

little bit on the retirement security front as we look at tax reform, 

the impact it would have if we use timing issues for rate reductions, the impact it has on overall fiscal responsibility, and also 

what impact it could have on retirement security. 

Ms. BATCHELDER. Thank you for the question. 

I think this is a really important issue that needs to be discussed 

a great deal more. So the proposal that some people have advanced 

is to require people to make all or part of their contributions to 

their retirement plans on a Roth basis, which means that they are 

after-tax instead of pretax. And generally, right now people can 

choose between the two, whether to contribute on a traditional or 

Roth basis. And if their tax rates are constant over time—which is 

a big ‘‘if’’—then those are actually identical economically. And it is 

hard for people to predict whether their tax rate is going to go up 

or go down. 

So as a general matter, if a lot of people shifted to saving on a 

Roth basis, that should not have a large impact either way on revenues. 

The problem is that it would have a very big timing impact. So 

it would mean that all of a sudden people who are taking deductions now when they make contributions to 401(k)s would not be 

21 

taking those deductions and instead they would never be paying 

tax on the withdrawals. 

And so you would end up raising a lot of revenue within the 

budget window and losing a tremendous amount of revenue outside 

of the budget window, which is why I think it is really critical that, 

whenever any tax reform bill or proposal is advanced, the committee obtain estimates from the Joint Committee on Taxation, 

both on the revenue impact within the budget window but also outside, because you can have very different effects in those two periods. 

And as I mentioned in my testimony, I believe tax reform should 

raise revenue, but at a bare minimum be revenue-neutral. And it 

is really important that that is examined both within the budget 

window and on a long-term basis. As Mr. Brill’s testimony referenced, those long-term budget impacts are really important. 

Senator CARDIN. Thank you for that. Mr. Chairman, I just want 

to note that in regards to State and local, I had asked Secretary 

Mnuchin a long time ago for information as a follow-up to one of 

these hearings, and he has not responded. I would hope you would 

help me get that information from the Secretary. 

The CHAIRMAN. I will be happy to try. 

Senator Cassidy, you are next. 

Senator CASSIDY. Thank you, Mr. Chairman. 

Mr. Brill, Mr. Ponnuru references increasing the Child Tax Credit. Your testimony, though, contrasts two families, same income, 

but with different aged children. Implicitly, you are criticizing the 

Child Tax Credit deduction. So just elaborate on that. Again, I always like to take you all’s testimony and see how it plays with 

each other. So go ahead. 

Mr. BRILL. Thank you, Senator, for your question. 

I would note in my testimony, as you described, and in some previous writings and articles that I have authored, that there is a 

wide disparity in tax liabilities currently, based on family size. 

That is by design in the tax code today, both as a result of the personal exemption and as a result of the Child Tax Credit, first at 

$500 in 1997 and then $1,000 starting in 2003. 

This is part of this horizontal inequity that I described in my testimony. Ramesh makes an argument defending that disparity. I am 

simply pointing out that—in many regards—this question of fairness in the tax code relates not only to differences in tax liabilities 

about people who make more or less, but even within the same 

group—— 

Senator CASSIDY. But on the other hand, he is justifying that difference between those in the same group, saying that if you look 

at life-cycle expense of raising a child, that net, it comes out—now 

it is a bigger picture, if you will, if I may speak for him. He makes 

the problem bigger, and you make the problem more focused. 

Again, do you, kind of, not accept the validity of his approach? 

Mr. BRILL. I would not personally promote a larger Child Tax 

Credit in the context of fundamental tax reform, but I am very respectful of the arguments that he is making with respect to its impact on taxpayers and entitlement reform. 

Senator CASSIDY. Secondly—again, I do not mean to pick on you. 

I just liked your testimony, so it triggered ideas. Ms. Batchelder 

22 

cites a reference by you—I think it is reference number four—that 

you, with Joe Antos, put out something stating that our national 

taxes should be an increased amount of our GDP. 

Now implicitly there, you are kind of rejecting the concept of dynamic scoring. Thoughts on that? 

Mr. BRILL. Sure. Well first, with respect to dynamic scoring, certainly no, Senator. I do think that some tax policy changes can lead 

to dynamic effects and dynamic responses—not every tax policy 

change for sure—and that we should recognize that. That is one of 

the core reasons we are pursuing tax reform, I think: to promote 

economic growth. And to the extent that we are successful, we 

should capture those responses in our analyses. Sometimes those 

responses are overstated by some analysts, but I think they are 

real and that we should be able to rely on that information. 

Second, with respect to the footnote, I did co-author a paper 4 or 

5 years ago that was focused around a fiscal reform, around finding 

fiscal balance, bringing the debt-to-GDP ratio down in the long run. 

In that reform, there were a whole host of changes including a net 

increase in revenues over the long run. 

Senator CASSIDY. Except that you just spoke about bringing 

down debt-to-GDP, and so therefore—just to, kind of, complete it, 

you would increase your tax revenue for the State going forward 

relative to GDP in the short-term, I gather, in order to decrease 

debt in the long-term. Is that, again, a fair statement? 

Mr. BRILL. I cannot recall all the specifics. I believe that the revenue increases were phased in over time. This is a factor, that 

there are fundamental demographic shifts underway over the next 

few decades that will put increasing fiscal pressures on the government. We can reform those programs to save money, but we can 

also look at other ways to find balance—— 

Senator CASSIDY. So to put a point on that, and because I have 

been thinking about how we have a demographic bulge of the baby 

boomers going onto Medicare and Social Security, straining those 

programs. Medicare is going bankrupt in 17 years, and people are 

talking about Medicare for all. 

So I gather then, from what you say, that in the short term you 

think that we may need—I am just quoting you; tell me if I am 

wrong. We need to increase the tax-to-GDP total amount in order 

to fully fund our Social Security and Medicare programs to take 

care of the bulge of the baby boomers? 

Mr. BRILL. I am not actually advocating for a tax increase in the 

payroll tax to prefund future Social Security expenditures. I do 

think that given the increased demands on the system through the 

demographic changes, it is reasonable to think that, while those reforms to Medicare and Social Security are needed very much so, we 

cannot address those challenges only by changes in revenue. But 

I do think that if we can find efficient ways to raise revenue, that 

in the long run if there is more revenue into the system, if that 

revenue is collected in an efficient manner, that is a reasonable 

part of a comprehensive fiscal reform solution. 

Senator CASSIDY. There are two components of that. If you grow 

the economy, people will pay more into the system only because 

they are making more money. The same percent results in more 

absolute dollars. 

23 

The second—your suggestion—is that you might sluice off dollars 

from another source that would feed into it over and above that 

which is coming from the payroll taxes. 

Mr. BRILL. That is correct. I would be willing to consider both of 

those in the context of a comprehensive fiscal reform. It is different 

from the context of a fundamental tax reform before the committee 

today, but if we are thinking more broadly about the long-term fiscal challenges—this country faces many—we should be thinking 

about all our options. 

Senator CASSIDY. I am over time. I yield back. Thank you. 

The CHAIRMAN. Senator Brown? 

Senator BROWN. Thank you, Mr. Chairman. 

This spring, the guru of failed trickle-down economics, Martin 

Feldstein, let the cat out of the bag in a Wall Street Journal oped on April 26th, the day after Gary Cohn and Secretary Mnuchin 

released the one-page Trump tax plan. Professor Feldstein laid out 

in detail how Washington elites plan to pay for so-called tax reform 

with massive cuts to Medicare and by raising the retirement age 

for Social Security to 70. 

The latest proposal now that they floated would take away freedom the American people have to choose a retirement savings plan 

that works best for them and force everyone into a Roth account, 

slapping taxes on retirement savings of working middle-class families. You have got to be kidding. I mean, the three best ideas to 

pay for massive tax cuts for Wall Street are to cut Medicare, raise 

the eligibility age to 70 for Social Security, and then steal from the 

retirement accounts of working middle-class Americans. 

Tell the barber in Dayton, OH that he has to work until he is 

70. Tell the construction worker in Warren, OH that she has to 

work until she is 70. Tell the waitress at a Columbus diner that 

she has to work until she is 70. 

If the President and congressional Republicans want to work together with us, as Chairman Hatch promises us, to build a tax code 

that puts more money in the pockets of working Americans, that 

understands you grow the economy not by trickle-down, top-down 

tax cuts, but you grow the economy by investing in the middle 

class, we are there. Senator Wyden and I and all of us want to 

work—we want to reward employers that keep jobs in the United 

States. We are there to work together. 

But if Senator McConnell decides to follow the same template he 

did on health care, where he brought in a handful of five or six— 

turns out to be all Senators who look like me, different party, but 

look like me—join with a few drug company, insurance company 

lobbyists, and then write the bill behind closed doors, he is going 

to have a hell of a fight on his hands, and we know that. 

We know that this committee wants to work bipartisanly, the 

way we did on CHIP, the way we did last year, Senator Portman 

and I and others, on the Earned Income Tax Credit. But if they do 

not even show us a bill, as they did on health care, replace and repeal, or repeal and replace, or whatever they said—they do not 

want to show us a bill—if they are just going to try to jam us on 

a party-line vote for reconciliation, count us out. 

I mean, I want to see a tax bill that focuses on the middle class 

to build the economy out that way. It is really pretty simple. 

24 

So my question, Professor Batchelder, is, what would be the impact of converting—their idea of raising the eligibility age of Social 

Security, cutting Medicare—what would be the impact of that, coupled with converting our current retirement savings vehicles from 

a tax-deferred model to a Roth model, on middle-class families trying to save for retirement? Talk through the impact of that, if you 

would. 

Ms. BATCHELDER. Thank you for the question, Senator. 

Well first, Medicare and Social Security—and I would add in 

Medicaid—are all programs that low- and middle-income families 

rely on tremendously in retirement and also, in the case of Medicaid, before retirement. So cutting those would put further strain 

on families who have spent their whole working lives counting on 

these benefits and have seen their incomes largely stagnate, especially compared to the most wealthy. 

The Rothification idea, as we discussed a bit earlier—first of all, 

I am deeply concerned by the potential use of that proposal as a 

timing gimmick where it would raise, you know, potentially a trillion dollars within the budget window and lose more than that outside the budget window. And if one did not account for both those 

affects, one could use that trillion dollars within the budget window 

to pay for tax cuts for the wealthy and then end up losing even 

more outside of it, which would place even further pressure on programs like Social Security and Medicare in the long term. 

The other point I did not have a chance to make is the Rothification idea would be really a dramatic change in retirement savings policy. Different families have different incentives whether 

they should select to save on a Roth basis or on a traditional basis. 

And for some it is advantageous to save on a Roth basis; for others 

it is not. And there are also very different rules about preretirement withdrawals. There are different effective contribution limits. 

So it is a real sea change in retirement savings policy that I think 

should only be done after very careful analysis of the impact on retirement savings on different families at different segments of the 

distribution, and not just because it happens to serve this budget 

gimmick. 

Senator BROWN. Thank you. There is one more point I want to 

make about something slightly different, Mr. Chairman. One thing 

we did last year was put together—as we expanded EITC and CTC 

on a permanent basis, we put together a robust package of program 

integrity measures to make sure that we are doing everything possible to reduce the error rate for the tax credits on EITC, such an 

important anti-poverty measure, such an important incentive for 

work. 

Now the House budget—and we were proud of that, that there 

is not really a lot of fraud in the EITC. There are a lot of mistakes 

in the EITC, where people were paid more or less because of errors 

in filling the forms out. That is the important point to understand. 

Now the House budget has proposed that not one working family 

receive its Earned Income Tax Credit until the IRS has conducted 

a mini-audit of their finances. 

What is that all about, Mr. Chairman? We need to go to work 

and make sure that our reforms on EITC stay in place and not the, 

sort of, mean-spirited attack on families making $20,000 and 

25 

$30,000 and $40,000 and $50,000 who depend on that $3,000 or 

$4,000 or $5,000 or Earned Income Tax Credit for the incentive, for 

the reward for their working hard and playing by the rules. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Senator Heller? 

Senator HELLER. Mr. Chairman, thank you, and thank you to the 

ranking member. Thanks for holding this hearing. 

I cannot imagine that there is a more important place to be 

today than to have this discussion in this hearing. So thank you 

so much, and I want to thank the witnesses also for taking time, 

for being here, the first hearing on tax reform. 

I know everybody has the same goals; that is, to expand the 

economy, simplify the tax code, and to give the middle class some 

tax relief. So if you will indulge me for just a minute, I want to 

share my perspective from the State of Nevada, and that is that 

our middle class has suffered under an outdated and unfair tax 

code that discourages job creation and makes it harder for Nevadans, and frankly people all across America, to get ahead. 

Just the other night, Mr. Chairman, I had a telephone town hall 

meeting, and I heard from a teacher in Las Vegas who spoke of 

stagnant wages. I also heard recently from a young Nevadan who 

started his own business while going to school full-time, and this 

21-year-old brought up the enormous amount of money he is paying 

in taxes as well as how complicated it is to navigate our current 

system. 

So Nevadans have been waiting for a fair, simpler tax code for 

way too long. According to a recent poll conducted by my office, 

more than half of Nevadans said it is important that Congress pass 

tax reform legislation by the end of this year. 

And now we have a prime opportunity to do that and to provide 

relief to the American people who have been waiting for a fair and 

a simpler tax code. To me, relief means letting the middle class 

keep more of their hard-earned paychecks, making our tax code 

easier to understand—in essence, less paperwork, more money in 

their back pockets. It also means quality jobs, higher wages, and 

growth in our communities. 

So the current economic situation is not acceptable. I look forward to working with all of my colleagues on both sides to address 

this issue. 

Mr. Brill, if I could start with you. The average median household income in Nevada is about $55,000 according to the Census 

Bureau data. And, under various tax relief proposals, we have now 

seen a reduction. We have not only seen a reduction in the number 

of tax brackets from seven to three, but also a significant reduction 

in the income tax rates. 

If we were to be successful here with this committee on tax relief 

and get it through Congress, how much money can the average 

hardworking Nevada family expect to keep? 

Mr. BRILL. Thank you, Senator. 

Perhaps that is the hardest question I have been asked so far. 

Senator HELLER. I think it is the question. 

Mr. BRILL. I appreciate the importance of understanding the tangible consequences of tax reform. 

26 

What I would note—there are three things that I think matter 

to median households. 

One is the amount of tax that they are going to have to pay, just 

quite simply as you are suggesting, what their tax bill is. The larger that tax bill is, the less resources there are for other activities. 

In addition, what their marginal tax rate is. And I know that a 

lot of people are not necessarily always aware explicitly of their effective marginal tax rates, numbers that economists like to discuss, 

but there is clear evidence that people are responsive to changes 

in these marginal rates. And higher rates are going to discourage 

work and discourage entrepreneurship and discourage investment. 

And then finally, it is not only the taxes that are paid, but it is 

the cost associated with complying with those taxes. Many people 

who are earning $55,000 a year enjoy a relatively simple tax code 

today. They claim the standard deduction, but many do not and are 

faced with additional tax burdens, compliance burdens. 

And in particular as it relates to the anecdote that you mentioned earlier, folks who are trying to start small businesses face 

additional compliance burdens much more so than ordinary wage 

earners, and that can be a hindrance in efforts to get those businesses going. 

Senator HELLER. Mr. Brill, thank you. 

Ms. Harrison, real quick. I am assuming—I am sorry I missed 

your testimony. I am assuming you are here representing the Realtors industry, and I want you to know that I appreciate all that 

your industry does, and I do consider it an economic indicator of 

how well an economy is doing. In no State was that more obvious 

than the State of Nevada during the recent recession. 

And I missed your testimony. Will you tell me what your biggest 

concern is in this bill moving forward? 

Ms. HARRISON. Well, I think I concluded with first, do no harm. 

When you are adjusting the moving pieces that this discussion is 

inevitably going to involve, we want to make sure that, just as you 

stated, the economic engine of home ownership and the transfer of 

real property in this country remains unfettered and is still allowed 

to continue in the way that it has, because, again, I am looking 

here at real estate household equity getting back to building 

wealth, $13.7 trillion. For many, many Americans, wealth building 

begins with the equity in their home. 

They do not own stocks. They do not even think about that, but 

they do want to own a home. And to the extent that we have a stable economy, a growing economy, the equity in that home will grow 

with them as well and be available to them as they downsize their 

housing needs and their requirements change. 

We want to make sure that that is preserved. 

Senator HELLER. What is more important to you, growing an 

economy or your interest deduction? 

Ms. HARRISON. I do not think that one exclusively is in the way 

of the other. I think done well, you can have both, because we 

know that, as I said, the transfer of real property is an economic 

driver. 

When you have a depressed real estate market, you have a depressed country in terms of its economic—— 

27 

Senator HELLER. And I said that in my opening comments. Yes, 

I agree with that. 

Ms. HARRISON. Yes. 

Senator HELLER. Mr. Chairman, thank you. 

The CHAIRMAN. Thank you. 

Senator Carper? 

Senator CARPER. Thanks, Mr. Chairman. Thanks to you and our 

ranking member for holding this hearing. And I would just reiterate how important it is, I think, for us to return to regular order, 

to hold hearings, bipartisan hearings like this, where folks, stakeholders can come in from around the country and share with us 

their views. It is just incredibly important, and not only that we 

do it here, we do it again and again with other stakeholders at the 

table, and then we talk amongst ourselves as much as we did yesterday afternoon. So I applaud that, encourage that. 

Lily, nice to have you back. It is great to see you, to welcome our 

other guests too. 

My colleagues have heard me say this before, but I look at every 

proposal for tax reform through four questions. Is it fair? Does it 

foster economic growth? Does it simplify the tax code or make it 

more complex? How does it affect the deficit? Those are the four 

screens, if you will, through which I look. 

Let me just ask each of you, ‘‘yes’’ or ‘‘no,’’ do you think those are 

four good questions to ask? We will just start with you, Mr. Brill, 

just ‘‘yes’’ or ‘‘no’’? 

Mr. BRILL. Yes, I do. 

Senator CARPER. Thank you. 

Ms. Harrison? 

Ms. HARRISON. Absolutely essential questions. 

Senator CARPER. Ms. Batchelder? 

Ms. BATCHELDER. Yes. 

Senator CARPER. And Mr. Ponnuru? 

Mr. PONNURU. Yes and yes. 

Senator CARPER. Yes. Thank you so much. 

In one of my other hearings—I have three committee hearings 

going on this morning. I want to be in all of them, but we have 

not figured out how to clone me yet. So I will bounce back and 

forth from one to the other. 

But one of the hearings we are having is a follow-on to a GAO 

report. The idea in the Homeland Security Committee hearing that 

is going on right now is, how do we stop wasting money in a particular area? So that is the focus. 

I remember having a hearing on the budget deficit years ago 

when I was a Congressman, and we talked about the need for revenues in order to, you know, we needed some extra revenues, we 

needed to do a better job on controlling spending. And one woman 

raised her hand at the back of the room, and she said, ‘‘I do not 

mind paying more taxes if it will erase the deficit. I just do not 

want you to waste my money.’’ I just do not want you to waste my 

money—I have never forgotten that. So we are focusing on that in 

the Homeland Security Committee this morning. 

One of the other things GAO does every other year is, they give 

us a high-risk list, high-risk ways of wasting money. And one of the 

things they have been dwelling on of late deals with the funding 

28 

for the IRS. We have cut funding for the IRS by about 20 percent 

in the last 5, 6, 7 years. 

And the current budget proposal from this administration calls 

for reducing the IRS budget by another 2 percent. Meanwhile, what 

we do in the Congress is, we change the tax code. We usually do 

it late in the calendar year. We do it in ways that make the tax 

code more complex, not less complex. We cut revenues to the IRS 

for people and for technology to provide customer service, and then 

we say, ‘‘Well why don’t you fix this? Why do you guys not do a 

better job?’’ It is crazy. 

For every dollar that we spend on funding the IRS, we are told 

we get back $4 to $10—for every dollar that we fund. Should we 

continue to cut, as has been proposed, continue to cut funding for 

the IRS in the next year? And we will start again with just ‘‘yes’’ 

or ‘‘no.’’ Mr. Brill? 

Mr. BRILL. I am sorry, but I am really not an expert on the budget side of the administration of the tax code. 

Senator CARPER. Okay. Thank you. 

Ms. Harrison? 

Ms. HARRISON. I am certainly no expert, not in any way, shape, 

or form, but I would absolutely say wasting taxpayers’ dollars is 

something no one looks forward to or wants or expects. 

Senator CARPER. Ms. Batchelder? 

Ms. BATCHELDER. I think we should be substantially increasing 

the IRS budget. As you said, if for $1 that is spent on the IRS 

budget for enforcement, the IRS collects—the last statistic I saw 

was $18 from people who are underpaying their legally owed taxes. 

Our tax gap right now is about $400 billion. 

So a very easy way to collect more revenue from people who legally owe it and are evading it is to slightly increase the IRS budget. 

Senator CARPER. Thank you. 

Same question, Mr. Ponnuru. I am just looking for a simple ‘‘yes’’ 

or ‘‘no?’’ Should we continue to cut the budget for the IRS? We cut 

it by 20 percent. Should we continue to cut it, knowing that for 

every dollar we cut, we lose four or five bucks? 

Mr. PONNURU. I am going to associate myself with Alex Brill’s 

‘‘no comment.’’ 

Senator CARPER. Okay. All right. That is an interesting response. 

One of the things we try to do in a hearing like this is look for 

some consensus. It is a diverse panel—complex subjects, difficult 

subjects. 

Give me one idea where you think you all agree on something, 

Mr. Brill. 

Mr. BRILL. I think that—I certainly would associate my comments with Ms. Batchelder’s comments about Rothification, both as 

it relates to timing and the potential significant impacts it has on 

retirement savings. 

Senator CARPER. I succeeded Senator Roth in the Senate and on 

this committee, and he would be pleased to know his name is being 

used in this manner, I think, today. 

Mr. BRILL. He would. 

29 

Senator CARPER. Please, Ms. Harrison, something where you 

think you all agree, and to the extent that you could agree on some 

things, it really helps us. Where do you agree on one issue? 

Ms. HARRISON. We agree that tax code should be fair. 

Senator CARPER. All right. Thanks. 

Ms. Batchelder? 

Ms. BATCHELDER. Well I would, of course, associate myself with 

Mr. Brill on Rothification, but I also agree with Mr. Ponnuru that 

we should be seriously considering expanding the Child Tax Credit, 

particularly for the lowest-income families. There is strong evidence about the impact on future child earnings, health, education, 

especially when there are young children, and especially when they 

are from particularly low-income families. 

Senator CARPER. Thank you. 

Mr. Ponnuru? 

Mr. PONNURU. I agree with the comments about Rothification, 

and I also think, as Ms. Batchelder pointed out in her testimony, 

that eliminating the dependent exemption and increasing the 

standard deduction would be a bad tradeoff for a lot of middle-class 

families. 

Senator CARPER. All right. Thanks. 

Thank you all, and we will look forward to following up with 

some of you later on. Thanks. 

Thanks, Mr. Chairman. 

The CHAIRMAN. Senator McCaskill? 

Senator MCCASKILL. Thank you, Mr. Chairman. I think one of 

the things that we all talk about is the complexity. And I am worried that the way this train is moving, we are going to get off on 

the track of rates and remove ourselves from the difficult job on 

complexity. 

This is going to be a priority, as far as I am concerned, in terms 

of how we write this bill. A tax rate can be based on whether it 

is regular wage income, ordinary dividends, qualified dividends, 

long-term capital gains, short-term capital gains. 

A deduction credit for higher education is different depending on 

whether it applies to continuing education, higher education, a 

family member’s education, or several other subcategories. 

We cannot even manage to define the word ‘‘child’’ consistently 

across the code. To me, we have two issues here. One is a disagreement over rates, both corporate and business organization around 

those rates, and a conversation about individual rates, and I do not 

hear enough heat around the complexity part. 

Do you believe that clearing up some of the complexity could be 

as important to economic growth and prosperity in this country as 

some of the other things that are consuming all the oxygen in the 

room? 

We will start with the guys who do not want to comment on how 

dumb it is that the IRS—there is nothing like being in debt and 

cutting your receivables department. Go ahead. 

Mr. BRILL. I do agree that the complexity of the tax code is a cost 

separate and apart from the revenues that are imposed on taxpayers. 

The number of itemizers in the system today, those taxpayers, 

40-plus million taxpayers who itemize their returns, face additional 

30 

burdens as a result of that. Now, they may get tax breaks as a result of that, but the compliance costs with itemizing are significant. 

In addition, over 40 million taxpayers claim a credit, which is additional paperwork as well. 

Again, they are receiving tax reductions as a result of the policies, but they are also burdened with costs. This disparity creates 

similar taxpayers with different tax burdens, sometimes very similar taxpayers with different burdens. 

If your child is 17 or 16, your tax liabilities will be different. If 

you rent or if you own a home, of course, your tax liabilities will 

be different. So this creates some degree of complexity and uncertainties that are significant, and I think that it is reasonable and 

appropriate to address those complexities in the process of pursuing tax reform. 

Senator MCCASKILL. If we do not do it now, I do not think it will 

get done. I think we will still have 70,000 pages. 

I want to challenge a little bit our Realtor. I certainly understand 

that the mortgage interest deduction is a behavior-modifying provision as it relates to people when they buy their first home. No 

question. I did the math. This is what I am paying for the apartment, this is what it will cost me in a mortgage where I get to deduct the interest; therefore, I was ready to buy my first home. I do 

not remember doing that analysis when I bought a still very modest second home. 

Do you have any studies that show that the buying of homes, the 

second or third or fourth home that the family buys, that somehow 

they are considering going back to an apartment if they do not get 

a mortgage interest deduction? 

I mean, the idea behind the mortgage interest deduction was to 

modify behavior and encourage home ownership. 

Are there any studies that show that you would lose people to 

rental properties if this deduction was removed for people who 

were moving on to bigger and bigger homes in their lives? 

Ms. HARRISON. The short answer is, I do not think so. But again, 

the deduction for mortgage interest, this has been embedded in the 

tax code since 1913, I think. So it is not something that we just 

kind of put in place to encourage first-time homebuyers, but it certainly is in place to encourage home ownership itself. 

As regards recurring transactions, we real estate professionals 

and Realtors, certainly that is how we make money, and it is also 

the story of our lives, if you will, because we begin with the first 

home, perhaps a condo, as a single person and maybe we get a 

partner. 

So as our circumstances change, our housing needs change, and 

that often is the trigger for the purchase or the sale of the first 

home, the purchase of the second home. 

So it is a life story that is going on here. What we have here with 

the mortgage interest deduction is that statement by the Federal 

Government that we believe in home ownership and the benefits 

that go beyond simply that tax benefit, but the benefit that that 

gives to society when we are indeed a Nation of homeowners rather 

than a Nation of renters. 

Senator MCCASKILL. I understand the point you are making, but 

if we look at what we do with the tax code, the tax code provisions 

31 

ostensibly are in place to encourage certain behavior and/or economic growth. 

I just think it is important as we try to analyze the tax code and 

figure out a way to bring down some rates and make it fairer that 

we look at every single one to see if it is accomplishing what it is 

supposed to be accomplishing; if it is not, we should reconsider it. 

That is why I wanted to see if there were any studies that 

showed it did modify behavior for future home purchases beyond 

the first home. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. 

Senator Casey? 

Senator CASEY. Mr. Chairman, thanks very much. We appreciate 

you and the ranking member having this hearing and a number of 

hearings on the broad issue of tax reform. So I commend you for 

that. 

I know there is a substantial disagreement about the insistence 

on our side to have three basic guiding principles. I do not understand the opposition to those, but I just want to state them again 

for the record. Number one, regular order—that should be easy. I 

think both sides agree on that one. So far we are batting 300. 

The second one, of course, is making sure that we do not increase 

the deficit by way of tax reform. I think we can agree on that, I 

hope. 

The third one seems to be the most difficult, and I have a very 

strong view of this. You, Mr. Chairman, I am sure, disagree. But 

why is it that we cannot agree that the top 1 percent should not 

benefit from this process? The top 1 percent of the last generation 

has had a bonanza. They have been doing pretty well. 

Anyway, I just wanted to restate those, because I know we have 

to be honest about the differences even as we commend the work 

of the chairman trying to keep people together in terms of hearings. 

The CHAIRMAN. I do not think there are any differences with regard to the top 1 percent. 

Senator CASEY. I hope not, and I appreciate it. 

The CHAIRMAN. Certainly not that I know of. 

Senator CASEY. I want to focus on something that we do not talk 

about enough, frankly, and I think tax reform gives us another 

chance to not only talk about it, but to actually do something about 

it. 

On both ends of the aid scale among young people, whether it is 

young children on one end or college students on the other, we 

have all seen the horrors of higher education costs going up. Senator Toomey and I represent a State where we have a great system 

of higher education and great institutions whose tuition has gone 

way up with regards to public 4-year colleges. 

But here is the reality on the other end of the scale. As much 

as we are concerned about higher education costs, in fact, in 33 

States and the District of Columbia, here is what we are facing: infant care costs exceed the average cost of in-State college tuition 

at public 4-year institutions. I will say it again: infant care costs. 

Senator Murray and I and a number of Democrats have a bill to 

focus on that. And you all know the numbers. I was not here for 

32 

Ms. Batchelder’s testimony, but you know the costs. Sometimes 

families can be paying as much as a fifth of their income on child 

care. So we wanted to focus on that in our legislation. 

Here is the question for Ms. Batchelder. Can you discuss what 

the President’s past proposals on child care have looked like and 

why a credit for child care costs is preferable to a deduction? If you 

can, walk through that again. 

Ms. BATCHELDER. Thank you for the question. 

The President last fall came out with some proposals regarding 

child care, and I do applaud him for focusing on the issue. The 

problem once again was that his proposals did not actually address 

the challenge. 

They provided larger benefits to higher-income families and very 

small benefits to lower-income families, even though lower-income 

families tend to spend a much larger share of their budget on child 

care costs. And as you just explained, particularly for infants and 

young children, those costs can be astronomical. 

So his plan was both not targeted on the people who need help 

the most, it was also very complex, going to Senator McCaskill’s 

point. 

Right now we have two tax benefits for child care, which is already less than ideal, and it would expand that to five. There is 

evidence that once you give people lots of different tax benefits that 

they have to choose between, they often do not choose the best one 

for themselves. So that complexity hurts the taxpayer. 

I think a much better approach—and I really applaud you for 

working on this issue—is to have a refundable tax credit for child 

care that is targeted on people whose costs impose the biggest 

budgetary strain for them. That would require that the tax credit 

be refundable. 

Right now about 35 percent of households are in the zero bracket, meaning that their income is less than the standard deduction 

and personal exemptions. So that means they do not owe Federal 

income tax, even though they pay vast amounts of Federal payroll 

tax and other State and local taxes. So if you give them anything 

other than a refundable credit, it is worthless to them. The refundable credit is very important. 

The one other thing I would mention which is not strictly individual tax reform is, it would be very helpful to fully fund the direct spending programs for child care. Right now only 15 percent 

of people eligible are able to actually claims those subsidies. And 

particularly for lower-income families, the direct spending program 

may be more efficient even than a tax credit, because they are paid 

out as your child care bills are due rather than at the very end of 

the year. 

Senator CASEY. Great. Thanks very much. Thanks, Mr. Chairman. 

The CHAIRMAN. Thank you. 

Senator Stabenow? 

Senator STABENOW. Thank you, Mr. Chairman and Ranking 

Member, for a very important hearing. And thank you to all of you 

for being here. 

Ms. Harrison, I just want to indicate I am with you on the mortgage interest deduction. So we certainly want to see, in my judgVerDate Sep 11 2014 17:51 Sep 21, 2018 Jkt 000000 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 R:\DOCS\31548.000 TIM
33 

ment—I am certainly supportive of making sure we have that for 

middle-class families. 

I also want to underscore what Senator Casey said in terms of 

where we start. When I look at this through the lens of Michigan, 

which, of course, I do, Michigan families, working families, small 

businesses and so on, I start from a very basic premise of saying 

we do not want to explode the deficit on whatever we do, we want 

it to be bipartisan, and we do not want the benefits going to the 

top 1 percent in our country who have received a majority of benefits of recovery and of other past proposals. 

I am hopeful that we are going to reject clearly the House Blueprint, which would give over 99 percent of the benefits to the 

wealthiest Americans. And by the way, in looking at how Michigan 

ranks, Mr. Chairman, we are at the bottom, totally at the bottom 

on that one. So as far as I am concerned, throw that one out. 

President Trump’s plan at this point gives the top 1 percent a 

tax cut, each person, of over $270,000 a year. So that does not work 

for me, for Michigan middle-class families either, and it would increase the deficit by $3.5 trillion. 

So I am hopeful what we are going to do is work together on a 

bipartisan basis to actually focus this on middle-class families, on 

small businesses where, frankly, the majority of jobs are being created, and that we are going to learn from what happened in the 

past, what did not work and what did work, and that we will build 

on what has grown the economy and jobs in the past. 

I wanted to ask, Ms. Batchelder, when we look at tax reform, 

what lessons can we take from other efforts, early 2000s with the 

Bush tax cuts and before that with President Bill Clinton and 

those efforts as well? When we look at differences in approaches, 

what can we learn in terms of making sure that the benefits of tax 

reform go to working families and small businesses? 

Ms. BATCHELDER. Thank you for the question, Senator. 

I guess one thing that I would say one could learn, if you go back 

especially to the 1986 act, is the importance of working on a bipartisan basis. Tax reform is more likely to endure if it is passed on 

a bipartisan basis and done in a very transparent way. 

Back when I was working for the committee, I spent a lot of time 

working on tax reform. We put out lots of option papers. We put 

out discussion drafts. Tax reform is really complicated and there 

can be lots of pitfalls if you do not put out legislative language well 

in advance and let the public comment on it, point out problems 

with it, point out unintentional loopholes. 

So I think the first thing would be to have a bipartisan and 

transparent process. 

The second would be to look very carefully at the revenue and 

distributional effects. Thankfully, with the advent of computing 

and all sorts of things, we have a much better sense of that than 

we did back in 1986. The Joint Committee on Taxation does excellent work on estimating the effects of tax bills, but I think it is 

really important, before any votes are taken, to know the budget 

consequences, both within and outside the budget window, and to 

know the distributional consequences within and possibly outside 

the budget window. 

34 

Really, the way you can tell whether the middle class is benefitting is when you look at those tables that they do that say what 

is their percentage change in after-tax income. 

Senator STABENOW. I agree with that. Also, I agree with the 

openness and transparency and bipartisanship of the 1986 reforms. 

One of the successes was that it helped to ensure that the 

wealthiest were paying their fair share and gave a tax break to 

middle-class folks and folks working hard to get into the middle 

class. 

I am hopeful that that will be the path and that we will focus 

on those things and not trickle-down economics that just has not 

worked, has not put money in the pockets of the majority of people 

in Michigan, that is for sure. 

One other quick thing, and that is tax reform as it relates to closing loopholes. I am concerned about not creating new ones that individuals can abuse. 

I know my time is about out. So I will just ask, Ms. Batchelder, 

how can we help ensure that we are closing loopholes rather than 

seeing new ones? 

Ms. BATCHELDER. The most important thing I would flag in the 

brief time I have is the proposal to create a rate cap on passthrough business income, which would be a giant new loophole in 

the tax code and would really go in the opposite direction of what 

I would hope happens in tax reform. 

The estimates are that it would cost a huge amount, about $2 

trillion, and 30 percent to 50 percent of that would be people avoiding taxes, because it would create huge incentives for people to 

characterize their labor income as pass-through business income. 

And really it would be the sophisticated taxpayers who can access 

fancy tax advice that would figure out how to do that. 

Furthermore, it would not benefit at all anybody who was in the 

25-percent bracket or below or the 15-percent bracket and below 

under the President’s plan and the House Republican Blueprint, in 

that 95 percent of taxpayers are in the 25-percent bracket or below. 

So it would not benefit small businesses. It would really benefit 

the wealthy who are able to game the system. 

Senator STABENOW. Thank you, Mr. Chairman. 

The CHAIRMAN. Senator Toomey? 

Senator TOOMEY. Thanks, Mr. Chairman. 

I just want to touch on an area that I think we have established 

there is universal agreement on and then make a point where I 

think, evidently, there is a lot of disagreement. 

I think we have all agreed that we would like for tax reform to 

provide tax relief for working-class and middle-income families, and 

I certainly agree with that. 

I do not agree that we have to systematically exclude the people 

who are very productive, successful, and pay a disproportionate 

amount of the taxes in this country. 

I will just give a couple of statistics that it is politically incorrect 

to mention, but I will mention them anyway. The fact is, the top 

10 percent of income earners earn 47 percent of the income in 

America and pay 71 percent of all the taxes. The top 1 percent 

make about 20 percent of the income and pay 40 percent of all the 

income taxes that are paid. 

35 

In my view, we ought to have a very pro-growth tax code that 

is going to encourage an economic expansion, and if, along the way, 

a relatively wealthy person manages to benefit from that, I, for 

one, am not going to lose any sleep at all. 

We have an extremely progressive tax code, and it is going to remain a very progressive tax code. I hope we focus on creating more 

wealth for everybody rather than who must we insist on not being 

able to benefit from this. 

I want to ask Mr. Brill a question about itemized deductions. If 

I understand your testimony, you have made a point that itemized 

deductions generally, and the State and local tax deductions in particular, have some perhaps unintended features. 

They tend to be regressive in the sense that they disproportionately benefit higher-income people; is that true? 

Mr. BRILL. Correct, yes. 

Senator TOOMEY. Would it be fair to characterize your view on 

these deductions as an indirect way in which States with higher 

State and local taxes are subsidized by States with lower State and 

local taxes indirectly through the Federal tax code. Is that true? 

Mr. BRILL. That is true. It is certainly a subsidy to the States 

that utilize those provisions. 

Senator TOOMEY. And the effect of this, of course, all else being 

equal, is it keeps Federal marginal rates higher than they would 

otherwise be if we had a different treatment, a lesser treatment on 

State and local tax deductibility. We would be able, if we chose to, 

to use that to lower marginal rates. 

Mr. BRILL. Statutory rates could certainly be reduced if the base 

was broadened. 

Senator TOOMEY. Let us talk a little bit about the different ways 

that we could go about lowering the tax burden. I was interested 

in Mr. Ponnuru’s testimony, and he makes a persuasive case on a 

number of grounds for a Child Tax Credit, and I am sympathetic 

to many of his arguments. 

To his credit, I think, he did not argue that a consequence of increasing the Child Tax Credit is an immediate expansion or acceleration of economic growth. However, if you lower marginal rates, 

you change incentives. You increase the incentives to work, to save, 

to invest. 

Is it your view that lowering marginal rates does have a nearly 

immediate positive effect on changing incentives and, therefore, encouraging economic growth? 

Mr. BRILL. I have a somewhat nuanced view, Senator. Lowering 

effective tax rates, yes, will increase the incentives to work and can 

increase the incentives to save and invest, for sure. 

It becomes a little bit trickier, just to be honest, when you are 

simultaneously broadening the base and lowering the statutory 

rates, how that affects these true effective marginal tax rates. 

My colleague, Alan Viard, and I wrote about this a few years ago, 

that base broadening can sometimes neutralize some of the positive 

effects of lower rates. That is not to say that we should not do that. 

We can get efficiency gains that are very important and powerful. 

Senator TOOMEY. Would it be fair to say that some base broadening could have a tendency to diminish economic growth, while 

36 

other base broadening would actually encourage it by eliminating 

distortions? 

Mr. BRILL. Correct. 

Senator TOOMEY. In the absence of base broadening—just putting 

that aside for a moment, since that can have either effect—lowering marginal rates by itself does tend to accelerate economic 

growth by enhancing the incentive to produce more goods and services. 

Mr. BRILL. Correct. 

Senator TOOMEY. So as we weigh the various alternatives available to us, one of the ways that we can be very confident we would 

be encouraging a pickup in economic activity and, by the way, all 

the related benefits, right—a higher standard of living, higher 

wages working their way through the economy—we can be very 

confident that lowering marginal rates has that effect. 

Mr. BRILL. In isolation, lowering marginal rates will encourage 

work, entrepreneurship, savings, and investments, for sure. 

Senator TOOMEY. Thank you. Thank you very much, Mr. Chairman. 

The CHAIRMAN. Senator Cantwell? 

Senator CANTWELL. Thank you, Mr. Chairman. Thank you and 

the ranking member for holding this important hearing. 

So many of your comments and, obviously, the comments of 

many colleagues—there are lots of interesting things floating 

around here today. 

There is one thing I wanted to make sure that I was clear on in 

the President’s proposal about getting rid of State and local tax deductions. We have fought for nearly 10 years and finally got restored our ability to deduct our sales tax from our Federal obligation, because we do not have an income tax. 

So I hope the Senators from Florida and Nevada and Texas will 

join me in saying that this idea of trying to get rid of our State 

flexibility is dead, dead on arrival. I hope those Senators from Florida and Nevada and Texas will help us say that—obviously, our 

colleagues from other States too, but I am talking about people who 

are members of this committee. That would be so helpful. 

Now, the ranking member and I come from a part of the country 

that has probably two of the most unique tax codes in the country, 

very different ways of raising revenue, and yet our economies have 

grown faster than the national average, I think every year since 

World War II. 

So the notion that Oregon and Washington have very different 

tax codes than the rest of the Nation, we are more efficient in a 

lot of ways, and we deliver better growth is something that people 

should look at. 

So the notion that somebody wants to knock out, that the President’s proposal is primarily trying to get $1 trillion out of getting 

rid of local deductions, I just think is wrongheaded, and I hope our 

colleagues will join me in saying so. 

Secondly, we sent a letter to Democrats from this committee and 

others about how we wanted to focus on better wages for the middle class. I guess, Ms. Batchelder, I have question for you on that. 

I do want to point out and enter into the record, Mr. Chairman, 

this article from The New York Times by Patricia Cohen and NelVerDate Sep 11 2014 17:51 Sep 21, 2018 Jkt 000000 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 R:\DOCS\31548.000 TIM
37 

son Schwartz that basically economists see very little magic in tax 

cuts to promote growth. 

[The article appears in the appendix on p. 80.] 

Senator CANTWELL. Their point is, do not deficit-finance tax cuts 

because you are not going to see the growth from that, which is 

also the second point of our letter, which is, let us not have issues 

of deficit just to give corporate rate cuts. 

Now, from the State of Washington, I guarantee you I care about 

corporate competitiveness from the perspective of an Amazon, a 

Microsoft, a Boeing, an agricultural economy where 90 percent of 

our products are shipped overseas. I guarantee you I care about 

that competitiveness. But I care in a transformative economy 

where more change is happening, more dislocation is happening, 

more skills need to be upgraded constantly. I care about what we 

are going to do to raise the wages of the middle class and grow the 

economy from the middle out. 

Ms. Batchelder, I do not know if you can tell me, but one of the 

things we are very interested in is making sure, because corporations are investing one-half of what they did 20 years ago in worker training, if you think that incentives to help us retrain and 

reskill workers should be a priority? 

Second, so many people have fallen off of the housing affordability wrung. So the consequence is they have fewer—we have a 

burgeoning level of unaffordability in America. So if we want these 

people to be reskilled and retrained, we have to have a house over 

their head. 

So how much do we need to focus, if we want to grow the economy from the middle out, on the kind of investment structures that 

we need to put in for middle-class wages to increase? 

Ms. BATCHELDER. Thank you for that question. I think one of the 

most important things that one can do to boost middle-class wages 

and for lower-income families, as well, is expand the Earned Income Tax Credit and the Child Tax Credit. 

Those are both programs that have demonstrated effects not just 

immediately on the incomes of such families, but also on their kids 

for generations to come. There are strong outcomes in terms of education, health, long-term earning. 

There have been proposals to significantly expand the Earned Income Tax Credit also for childless adults, as they are so called, people who do not have dependents, who often have relatively low 

labor force participation rates. And by expanding that credit, you 

could encourage people to enter the labor force or be able to work 

more. 

This is actually a group—it is the only group that is currently 

taxed into poverty. And you could also more ambitiously consider 

expanding the EITC for families with children as well, and that 

would be a way to offset the fact that the take-home pay of middleclass families and lower-income families has been growing much, 

much slower than the top 1 percent. 

Senator CANTWELL. What about job training and housing? 

Ms. BATCHELDER. Job training, I think, could be worth considering as part of education benefits as a whole. In general, I tend 

to think that delivering tax benefits directly to the people you want 

38 

to benefit, i.e., the middle-class family, more of that will accrue to 

them than if you do it indirectly. 

But I think that that is—education, including job training and 

including certificate programs, is something that one could look at 

as part of reforming education tax benefits. 

Senator CANTWELL. What about the unaffordability issue that we 

are facing in America? 

Ms. BATCHELDER. On housing? 

Senator CANTWELL. Yes. About increasing the Low-Income Housing Tax Credit—— 

Ms. BATCHELDER. Absolutely, I think that is worth considering. 

Senator CANTWELL. Thank you. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. 

Senator Bennet? 

Senator BENNET. Thank you, Mr. Chairman. I am very grateful 

for your holding this hearing and the manner in which it has been 

held. 

Mr. Ponnuru, thank you for your work. The United States is unusual among advanced economies in that we have millions of children living in poverty in our country, some in families that make 

only $2 a day in cash. 

I wonder, in that context, what your view might be of phasing 

the Child Tax Credit at a faster rate and from the first dollar rather than where we do it today. 

Mr. PONNURU. I support that idea. As I note in my testimony, 

the existing Child Tax Credit already lifts around 3 million people 

out of poverty, and an expanded Child Tax Credit would have even 

more of such an effect, particularly if the Child Tax Credit were 

made refundable against payroll taxes as well as income taxes, and 

I would say both employer-side and employee-side payroll taxes. 

Such estimates as have been made of similar proposals suggest 

that it would be a significant increase in after-tax income for the 

bottom quintile of income earners and, for that matter, for the 

second-lowest quintile. 

Senator BENNET. Let me ask you what your thoughts would be 

about a universal Child Tax Credit of some sort that might provide 

a monthly benefit to families in our country. 

Part of the problem here we are trying to figure out is how you 

deal with the fact that what you want people to be able to do is 

work—everybody wants people to work—but when people are living 

in poverty, it makes it that much harder. 

Things like the cost of housing, as Ms. Batchelder mentioned, the 

cost of transportation, the cost of child care, the cost of health care, 

all of these things, when you have a diminished income, are making it harder and harder for people to get into the position we want 

them to be, which is contributing to the economy. 

I take it—and then I will stop—that the reason why you support 

some of these ideas is that they are an efficient way to distribute 

these benefits rather than building more bureaucracies that might 

not get the eighth of the people that you are trying to get it to. 

Your thoughts on that. 

Mr. PONNURU. I am sorry. Were you asking me about a universal 

basic income or a universal child allowance? 

Senator BENNET. A child allowance. 

39 

Mr. PONNURU. Great. Thanks. I think that the expanded Child 

Tax Credit is maybe a slightly more moderate version of the same 

idea, but it does have the advantages that you are talking about. 

So many of the concerns that Senators have raised during this 

hearing, from the affordability of housing to the affordability of 

child care, the affordability of higher education, these are things 

that families could use an expanded Child Tax Credit to help finance, among many other reasons they could use that money. 

They could use that money to finance paid leave from employment when a child is very young. But families have very different 

needs, and I think it is a good idea to create this flexibility where 

it is up to them to make the decisions as to how to allocate that 

additional money. 

Senator BENNET. Is there anybody else who would like to comment on this? 

Ms. BATCHELDER. Yes. If I could just chime in on the Child Tax 

Credit. I do think it is very important to consider increasing the 

refundability rates. Currently, one has to earn $3,000 in order to 

get any Child Tax Credit, and then you sort of get $0.15 on the dollar above that. 

Senator BENNET. Right. 

Ms. BATCHELDER. The result is that about 11 million children are 

excluded who live in households with working parents, and millions 

more whose parents in the current year are not working. 

So I applaud your proposal to expand that refundability and reduce that threshold. There have been discussions of making the 

Child Tax Credit refundable against payroll tax, and one concern 

I have is that that would not actually benefit low-income families 

much at all, because payroll tax is 15.3 percent and the current 

rate is 15 percent. So you would just be giving a 0.3-percent bump. 

I think it is important to really increase that rate at which lowincome families can earn the Child Tax Credit beyond making it 

refundable against payroll taxes. 

Mr. BRILL. I would just note one unintended consequence in 

making changes to this policy. If the Child Tax Credit is limited, 

it phases out as an income exceeds a certain threshold, I think 

$110,000 for married couples. 

If the Child Tax Credit were to get larger, that phase-out, which 

is an implicit tax, would affect more and more taxpayers. It would 

be another matter that the committee would need to wrestle with. 

Senator BENNET. Thank you. I appreciate the testimony, Mr. 

Chairman. I am sure other people’s States are like mine. Even in 

our State, where we see an economy that is really second-to-none 

in the country, middle-class families and families living in poverty 

are struggling with the costs of higher education, as you pointed 

out, the costs of early childhood education—which in our State actually costs more, on average, than higher ed—housing, and health 

care. 

Those four things are conspiring to make it impossible for people 

to save or feel like they are putting their family in a better position 

for the future. That is why I hope we can get to bipartisan tax reform. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. 

40 

Senator Portman? 

Senator PORTMAN. Thank you, Mr. Chairman. I want to thank 

you and Senator Wyden for holding the hearing and for some great 

testimony today from our former colleagues. 

Alex was on the Ways and Means Committee with me, Lily here 

on this committee, and we need your expertise. So thank you. 

I guess following on to what Senator Bennet said, I think that 

is what is so exciting about tax reform, and I think it goes to, in 

my view, more the economic growth and the wage improvement 

that is going to come from good tax reform, and it is across the 

board. 

If you look at Kevin Hassett’s work—he is now the new Chairman of the Council of Economic Advisers as of a couple of days 

ago—and other studies that have been done, including by AEI, corporate rates, if they are lowered and we have a more competitive 

international system, will result primarily in wage growth, wage 

and benefits. 

CBO has a famous study on this from a while ago showing it is 

70 percent. Others have different numbers. But the point is, that 

is about wages. 

On the individual side, I think the same is true. If you do, in 

fact, broaden the base, get rid of some of the complexity of the code, 

and lower rates, I think it will have the same benefit. 

So to the extent we are concerned about what Senator Bennet 

said, which I agree on, which is kind of the middle-class squeeze, 

higher expenses on everything, especially health care for most 

middle-class families, and then flat wages, which is generally true 

over the last couple of decades, this is, I think, the single best 

thing to do. 

In 2006, there was a study done by the Joint Committee that 

found that a proposal that would expand the tax base while lowering individual rates across the board by about 25 percent would 

increase GDP up to 3.5 percent in the long run. That increase in 

the second half of the budget window is about a $2,500 to $5,000 

increase in income for a family of four. That is on the individual 

side. 

So I think both on the individual side and the business side, we 

have a great opportunity here. 

I would just ask, Alex, because you talked about this some in 

your testimony, in recent tax reform efforts, base broadening and 

rate reduction have been coupled with, in general, this doubling of 

the standard deduction. We talked a lot about that today. 

You talked about who benefits from itemizing and who does not. 

But do you see any benefit in reducing the number of taxpayers 

who have to itemize, just from a compliance point of view, as well? 

Mr. BRILL. I do, Senator. Thank you for your question. There are 

a number of benefits from reducing the number of itemizers, including, in particular, the compliance costs associated with itemizing, as well as this horizontal equity issue that I described in my 

testimony, that taxpayers earning similar incomes should ideally, 

I think, pay roughly similar amounts of taxes. 

Senator PORTMAN. Two hundred and seventy three dollars is the 

estimate that we have for people who itemize, who have to have 

41 

someone else prepare their tax return. So that is saving some 

money right there just in compliance costs. 

On Rothification, we talked about that earlier—Senator Cardin 

talked about it, Senator Isakson; Lily, you answered it; Alex, you 

answered it. 

I think what we are missing, though, in terms of the back-andforth here is the effect on behavior. I understand the timing issue. 

That has always frustrated me, and Ben Cardin and I have struggled with this over the years. How do you help to expand 401(k)s 

and IRAs and not pay the penalty for it? Ultimately, that tax is 

paid—it is deferred—but not within the 10-year window. 

But with regard to Rothification, I just wanted to ask you—and 

certainly you can tell I am concerned—do you think that would create a disincentive to save? Because part of the issue that I look at 

is, you do have the choice now of Rothification and that is good, I 

am glad we have that choice, which means that you do not get the 

tax benefit up front. You do not get a deduction, and you take a 

risk what the tax rate will be later when you have to pay it, whereas with the traditional IRA or 401(k), you get a tax deduction. 

I talked with some businesses this week that said the take-up on 

the Roth is very low. We are talking less than 5 percent of people 

taking it up. 

So if we go to Rothification in order to make our numbers look 

better, what is going to be the incentive to save? We have a serious 

issue in our country right now of people not saving enough. As the 

baby boomers begin to retire and are living longer, would we not 

want to encourage savings, and are you concerned about Rothification in that context? 

Mr. BRILL. I am. As Lily described earlier in her testimony, there 

are circumstances where, in theory, it is a wash. There are circumstances where it is not a wash, depending on what your current tax rate is versus your future tax rate. 

So you can write down—an accountant can write down why these 

are either two neutral or equivalent policies, but what matters is 

the real-world evidence. As you suggested, the take-up rates for 

Roths are significantly lower, and I think there is a fair amount 

of uncertainty about how a change—instead of the choice that we 

have today, if that policy was mandated, in some sense, as your 

savings operative vehicle—how that might affect investment. 

I, frankly, do not know what the effect is, and I think that policymakers should be cautious. 

Senator PORTMAN. I think there are some studies being done 

right now. 

Lily, do you have a comment on that? 

Ms. BATCHELDER. I think as a matter of theory, one could argue 

it either way. It is possible it could increase savings. There are also 

strong arguments, and I think you are raising one, that it could decrease savings. 

But I think this gets to the broader point that, if one were to 

have such a dramatic change in retirement savings policy, you 

would want to have a group like the Joint Committee on Taxation 

estimate what the effects would be on take-up and savings. 

42 

I think it also goes to the broader point that the single biggest 

thing that influences people’s likelihood to save is whether they 

have access to an easy way to save through their employer. 

Personally, I would prioritize something like an auto-IRA over 

this as a way to give people access to an easy way to save at work. 

Senator PORTMAN. Thank you all. Thank you, Ramesh and Ms. 

Harrington, for your testimony as well. 

The CHAIRMAN. Thank you, Senator. 

Let me just end this. I would like to ask a question of Professor 

Batchelder. You express concerns about the potential repeal of the, 

quote, ‘‘head of household’’ filing status as part of tax reform. 

I think you have raised some valid points. That said, I have some 

concerns that the current ‘‘head of household’’ status may be causing significant taxpayer confusion and is potentially prone to abuse. 

An audit conducted by the IRS’s National Research Program for 

the 2009 to 2012 tax years indicates that 45 percent of the individual tax returns claiming the ‘‘head of household’’ status erroneously claimed such status. That is, 45 percent of returns filing 

as ‘‘head of household’’ were not entitled to the tax benefit it affords. 

Now, that is an alarmingly high error rate. Do you have any suggestions on how this error could be addressed, and would it be possible to make up for a lack of ‘‘head of household’’ status in other 

ways, such as through an increased Child Tax Credit, for instance? 

Ms. BATCHELDER. I am not familiar with that study. I find it 

very surprising. So I would like to look at it and would be happy 

to comment for the record on it. I think it is hard to replicate the 

benefits of the ‘‘head of household’’ filing status in general, because 

it is specifically for people who are unmarried and who may be divorced, may have never married, and have dependents. 

So if you just increase, for example, the Child Tax Credit, you 

would not be getting at the issue that sometimes there are greater 

costs and difficulties associated with raising a child on one’s own 

rather than with one’s partner. 

But again, I am not familiar with that study. So I would like to 

look at it before commenting. 

The CHAIRMAN. Thank you. Senator? 

Senator WYDEN. Thank you very much, Mr. Chairman. 

I just want to give a quick summation of where I think we are 

and what’s coming in the days ahead. First, Mr. Chairman, I think 

you know how strongly I feel about working closely with you. We 

have done that consistently and done it most recently on CHIP. So 

I look forward to working with you. 

Second, we have had a lot of constructive discussion here today; 

obviously, some differences of opinion, but constructive discussion. 

And I surely hope that they are listening to this discussion up at 

the White House, because right now one of the critical challenges 

is, up at the White House, there has been a big gap between words 

and deeds. 

Just yesterday the President said, ‘‘Look, I am not going to give 

big tax breaks to the wealthy.’’ But as I have pointed out today, 

Ms. Batchelder has pointed out today, the outline as of today creates a new enormous loophole for the fortunate few with respect to 

43 

the pass-through issue, a real abuse of the pass-through issue, 

which is supposed to benefit small businesses. 

We have gone through today, also, how as of now working families would be hurt. They have been saying they would correct that 

for months and months. I have asked them about it, Mr. Mnuchin 

at these hearings—still not corrected. Big gap between words and 

deeds. 

Now, Democrats have laid out principles that I think are very 

important. We have called for fiscal responsibility and a process 

that is fair to all members, where they can offer their ideas. It 

would be progressive, and we would not be sending more relief to 

the 1 percent. 

I want to, again, say this does not go as far as what the late 

President Reagan did when he treated income from wages and 

wealth the same in 1986. 

Now obviously, times change, and 1986 and 2017 are very different kinds of times. But traditional principles of fairness and bipartisanship really do not change. Those are principles for the 

ages. And this matter of being bipartisan is especially important, 

and I think a couple of you may have touched on it—I think we 

had Ms. Batchelder, several of you. So it spans the ideological spectrum. 

The reason you are bipartisan is really twofold. You need both 

sides to stand together in terms of fighting off special interests and 

making sure that both sides are committed to getting rid of some 

of the junk that has gotten into the tax code. An awful lot has, in 

almost 32 years. 

In fact, in 1986, they were working on a tax climate that was 

really 32 years before that. So it is almost like 32 years is a magical number with respect to tax reform. 

If it is not bipartisan, you will not have the certainty and predictability that the country needs, because people will just say, 

‘‘Hey, it was partisan. We will go back and just change it when we 

take power.’’ 

So, Mr. Chairman, I surely share that view. 

I have written what are really the only two comprehensive, bipartisan tax reform bills since that original one, most recently with 

a member of the President’s cabinet. Nothing would be more satisfying and enjoyable, enjoyable professionally, Mr. Chairman, than 

to work with you and all of our colleagues, as we have said, toward 

building an updated tax system that works for the days ahead 

rather than being a relic of yesteryear. 

We have laid out principles that we think help to do that in a 

bipartisan way. Thank you for this hearing, and we will look forward to working with you in the days ahead. 

The CHAIRMAN. Thank you, Senator. 

Let me just say this. Ms. Batchelder, you had proposed that the 

tax code be made more progressive than it currently is. The question that naturally arises for me is, at what point would it be too 

progressive? 

Once that point is crossed, what harms might come from that? 

If we could just tax Bill Gates and all the rest of us have nothing, 

then why not? 

Do you care to take a crack at that? 

44 

Ms. BATCHELDER. Well, I certainly think there is a point where 

the tax code could either be too progressive or too targeted on just 

one or a handful of individuals, but I think that we are very far 

from that point. 

We have very vastly rising inequality in this country, and the tax 

code could do a lot more to help mitigate that. So I do not think 

anything that is on the potential drawing room table right now is 

at risk of making the tax code too progressive. 

I am sure if you proposed replacing the entire income tax system 

with only taxing Bill Gates, I would think that was both unfair and 

inefficient. 

The CHAIRMAN. Mr. Brill, I would like you to weigh in on that 

question, too, if you would. 

Mr. BRILL. Thank you, Senator. My personal view is, I think it 

is appropriate and good that the tax system today is progressive. 

However, I would caution against an approach that says that every 

change to the tax code should itself be progressive. 

There are certain inefficiencies that rise as the progressivity of 

the tax code increases. In particular, there is evidence looking at 

entrepreneurship and that a progressive rate structure where success is taxed at a higher rate than the failures that are often associated with entrepreneurship, that that convexity of the tax rate 

structure can discourage entrepreneurship and economic growth. 

In other words, I think it is appropriate and good that the system is progressive, but we have to be careful at the limit. 

The CHAIRMAN. Thank you. 

Mr. Ponnuru, we will let you sum up here. 

Mr. PONNURU. I do think that there are concerns about excessive 

progressivity, partly because it can sometimes lead to a more volatile tax base. I think that that is something that, for example, the 

State and local deduction tends to reward on the part of the States, 

that encourages them to have more progressive systems of taxation 

that are more volatile. 

The CHAIRMAN. Thank you. I want to thank all four of you for 

being here today. It has been an interesting hearing. I think all of 

our people had a fairly reasonable chance to ask the questions that 

are really bothering them. 

Now, we just barely scratched the surface, I know, but to the extent that you have contributed, as you have, it has been a wonderful thing for us. So I appreciate all of you. 

With that, we will recess until further notice. 

[Whereupon, at 12:30 p.m., the hearing was concluded.] 

(45) 

1 I am grateful to Seth Hanlon, Chye-Ching Huang, David Kamin, and Greg Leiserson for 

helpful comments, and Cameron Williamson for excellent research assistance. All errors are my 

own. 

A P P E N D I X 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

PREPARED STATEMENT OF LILY L. BATCHELDER,1 PROFESSOR OF LAW AND PUBLIC

POLICY, NEW YORK UNIVERSITY SCHOOL OF LAW

Good morning, Mr. Chairman, Ranking Member Wyden, and members of the committee. My name is Lily Batchelder, and I am a professor at NYU School of Law. 

Thank you for the opportunity to testify before you today on individual tax reform. 

It is a pleasure and honor to be back with the committee. 

There are three traditional goals of tax reform: greater equity, efficiency, and simplicity. Sometimes these goals are in tension; at other points, they can be furthered 

at the same time. In my view, individual tax reform should focus on areas where 

we are farthest from these goals, and where we can advance more than one simultaneously. My testimony makes five main points: 

• The current tax reform effort is occurring at a time when low- and middleincome families are facing deep financial challenges. Economic disparities in the 

United States are vast and have been widening for decades. The United States 

also has one of the lowest levels of economic mobility among our competitors. 

Our debt as a share of GDP is projected to grow to unprecedented levels in coming decades, largely because of the retirement of the Baby Boom generation and 

increasing life expectancy. This growth in national debt will be a drag on economic growth. For all these reasons, tax reform should increase revenues and 

enhance progressivity. Doing so would boost economic growth and make the tax 

code fairer at the same time. At a bare minimum, tax reform should maintain 

the current level of revenues and progressivity, which should be measured consistently and without resort to budget gimmicks like a ‘‘current policy’’ baseline. 

• Individual tax reform should focus on leveling the playing field for the next generation and supporting work. Doing so would blunt economic inequality, broaden economic opportunity, and increase efficiency and productivity by ensuring 

that jobs are awarded more often based on effort and talent, and less often 

based on connections and the luck of one’s birth. Some worthwhile proposals 

that would advance these goals are expanding the EITC, especially for workers 

without dependents; increasing refundability of the child tax credit, especially 

for young children in the poorest families; and restructuring child care benefits 

so they provide the largest benefits to families for whom child care costs impose 

the greatest budgetary strain. These proposals could make significant headway 

in offsetting the much lower earnings growth experienced by low- and 

moderate-income families over the past few decades relative to those who are 

more affluent. They should be paid for by raising taxes on the most fortunate, 

including by strengthening, not repealing, wealth transfer taxes. 

• Individual tax reform should also focus on reducing transactional complexity, 

which arises from taxpayers reorganizing their affairs to minimize taxes. Reducing transactional complexity essentially involves eliminating opportunities for 

savvy taxpayers to game the tax system and accomplishes the trifecta of tax reform: it makes the tax code fairer, more efficient, and simpler. To further this 

goal, Congress should consider proposals like rationalizing the NIIT and SECA 

taxes so all labor and capital income are subject to the Medicare tax on high 

46 

incomes in some form, repealing stepped-up basis, narrowing the gap between 

the tax rates on ordinary income and capital gains, and taxing carried interest 

as ordinary income. 

• Individual tax reform should further seek to make tax incentives more efficient 

and fair, generally by restructuring them into refundable tax credits and leveraging empirical insights from behavioral economics. Doing so could generate 

more social benefits at a lower cost. One particularly fruitful area for reform 

is tax incentives for retirement savings. By reducing tax benefits for the 

wealthy, increasing them for low- and middle-income workers, and ensuring 

that all workers have access to an easy way to save at their workplace through 

automatic IRAs, Congress could increase retirement security for millions of 

Americans while raising revenue at the same time. 

• Unfortunately the tax plans offered to date by President Trump and the House 

GOP leadership move precisely in the opposite direction. Both lose massive 

amounts of revenue. The corresponding increase in debt would depress economic 

growth over time. They are also sharply regressive, providing vast tax cuts to 

the wealthy and a pittance to everyone else. They create a giant new loophole 

for the wealthy in the form of a special rate cap on pass-through business income, which tax experts on the left and right agree is a terrible idea. To the 

extent that they include proposals intended to support low- and middle-income 

households, they do so in relatively ineffective ways. Moreover, sooner or later, 

these plans’ massive tax cuts for the wealthy will have to be paid for, and lowand middle-income families are likely to be left footing the bill. I urge you to 

consider a fundamentally different approach. 

I. INDIVIDUAL TAX REFORM SHOULD ENHANCE PROGRESSIVITY

AND INCREASE REVENUES

A. The Context of Tax Reform 

The current tax reform effort is occurring at time when low- and middle-income 

families are facing deep financial challenges. Economic disparities in the United 

States are vast and have been widening for decades. As illustrated in Figure 1, the 

top 1% earns more than 17% of all market income. 

Tax cuts and especially changes to direct spending programs have played an important role in boosting the incomes for low- and middle-income households over the 

past several decades. But the after-tax, after-transfer income of the top 1% has still 

grown about four times faster than it has for low- and middle-income households, 

as shown in Figure 2. The situation is even worse for working-class households, defined as those in which no one has a bachelor’s degree. Real median after-tax, afterVerDate Sep 11 2014 17:51 Sep 21, 2018 Jkt 000000 PO 00000 Frm 00050 Fmt 6601 Sfmt 6621 R:\DOCS\31548.000 TIM

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2 Chuck Marr, Brandon DeBot, and Emily Horton, ‘‘How Tax Reform Can Raise Working-Class 

Incomes,’’ Center on Budget and Policy Priorities (September 13, 2017). 3Miles Corak, ‘‘Income Inequality, Equality of Opportunity, and Intergenerational Mobility,’’ 

27 Journal of Economic Perspectives 3, 79 (2013). 4 National Research Council and National Academy of Public Administration, Choosing the 

Nation’s Fiscal Future (2010); ‘‘Setting and Meeting an Appropriate Target for Fiscal Sustainability: Hearing Before the Senate Committee on the Budget,’’ 111th Congress (February 11, 

2010) (statement of Rudolph G. Penner, Institute Fellow, Urban Institute). 5 Bipartisan Policy Center, ‘‘A Bipartisan Approach to America’s Fiscal Future’’ (2015), http:// 

www.pgpf.org/sites/default/files/05122015_solutionsinitiative3_bpc.pdf. 6 Joseph Antos, Andrew Biggs, Alex Brill, and Alan Viard, ‘‘A Balanced Plan for Fiscal Stability and Economic Growth,’’ American Enterprise Institute (2015), http://www.pgpf.org/sites/ 

default/files/05122015_solutionsinitiative3_aei.pdf. 7For further discussion of these issues, see Paul N. Van de Water, ‘‘Federal Spending and 

Revenues Will Need to Grow in Coming Years, Not Shrink,’’ Center on Budget and Policy Priorities (September 6, 2017). 

transfer income for a working-class household of three has only grown 3% since 

1997.2

These disparities might be justified if they purely reflected people’s efforts and 

choices. But the United States actually has one of the lowest levels of intergenerational economic mobility among our competitors. In the United States, a father on 

average passes on roughly half of his economic advantage or disadvantage to his 

son. Among our competitors, the comparable figure is less than one-third, and for 

several it is one-fifth.3 This implies that, to an especially large extent in the United 

States, economic disparities reflect the luck of one’s birth, not hard work. 

Compounding these challenges, our national debt as a share of GDP is projected 

to grow to unprecedented levels in the coming decades, as shown in Figure 3. This 

is largely due to the retirement of the Baby Boom generation and increasing life expectancy—not policy choices. These demographic trends increase Medicare, Medicaid, and Social Security costs, contribute to health-care costs rising more rapidly 

than inflation, and reduce the proportion of the population that contributes to the 

trust funds for these programs. 

The solution will need to involve more revenues. As groups ranging from the National Academy of Sciences 4 to the Bipartisan Policy Center 5 to the American Enterprise Institute 6 have concluded, revenues will need to rise as a share of GDP and 

increase relative to current law. The later we act to stabilize our long-term fiscal 

outlook, the larger the costs will be, and the more likely it is that we will partially 

renege on fundamental commitments to low- and middle-income workers in their retirement through cuts to Social Security, Medicare, or Medicaid law.7


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8 Congressional Budget Office, ‘‘The Economic Outlook and Fiscal Policy Choices,’’ Hearing before the Senate Committee on the Budget, 111th Congress 8 (2010) (statement of Douglas W. 

Elmendorf, Director, Congressional Budget Office); Joint Committee on Taxation, ‘‘Macroeconomic Analysis of Various Proposals to Provide $500 Billion in Tax Relief’’ (March 1, 2005), 

http://www.jct.gov/x-4-05.pdf. 9For discussions of the macroeconomic benefits of progressive taxes as automatic stabilizers, see Lily L. Batchelder, Fred T. Goldberg, Jr., and Peter R. Orszag, ‘‘Efficiency and Tax Incentives: The Case for Refundable Tax Credits,’’ 59 Stan. L. Rev. 23 (2006); Yair Listokin, ‘‘Stabilizing the Economy Through the Income Tax Code,’’ Tax Notes (June 29, 2009); Douglas W. Elmendorf and Jason Furman, ‘‘If, When, How: A Primer on Fiscal Stimulus’’ (The Hamilton 

Project, January 2008). 10 Congressional Budget Office, ‘‘Detailed Revenue Projections’’ (June 2017), https://www.cbo. 

gov/about/products/budget-economic-data#7. 

For all these reasons, I believe tax reform should enhance progressivity and increase revenues. Doing so would make the tax code fairer and boost economic 

growth at the same time. JCT and CBO have estimated that deficit-financed individual income tax cuts, including those disproportionately benefiting the wealthy, 

reduce growth by driving up private borrowing costs in the long-term.8 This implies 

that progressive, revenue-enhancing reforms would increase economic growth. In addition, such reforms would strengthen the tax code’s ability to automatically stabilize the economy in recessions, potentially shortening downturns and mitigating 

their negative long-term effects on the economy.9

At a bare minimum, individual tax reform should do no harm: it should at least 

maintain the level of revenues and progressivity under current law. Revenue and 

distributional neutrality were the shared, bipartisan premises of the last major tax 

reform in 1986, and they are all the more critical basic standards today for the reasons laid out above. 

B. The Importance of Accurately Measuring Revenues and Progressivity 

In determining whether tax reform maintains or increases revenues, it is critical 

that revenues are measured consistently and without resorting to budget gimmicks. 

This means first and foremost that revenues should be measured relative to current 

law, not so-called ‘‘current policy.’’ 

At the end of 2015, Congress deliberately allowed many of the ‘‘tax extender’’ provisions to expire while making others permanent. The largest provision set to expire—bonus depreciation—was expressly intended as a temporary, stimulative policy when originally enacted. 

Some have suggested adopting a current policy baseline for tax reform. Such a 

baseline would assume that all of these tax cuts currently set to expire—and potentially a host or provisions that have already expired—are actually permanent law, 

even though making them permanent would cost as much as $450 billion over the 

next decade, as illustrated in Figure 4.10 As a result, a bill that cuts taxes by $450 

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11For further discussion, see David Kamin and Rebecca Kysar, ‘‘All About That Base(line)’’ 

(September 1, 2017) (working paper). 

line for budget scoring purposes would be set a terrible precedent and would fundamentally undermine our system of budget enforcement. 

The problem with a current policy baseline is not strictly with treating temporary 

changes as permanent, but with doing so inconsistently.11 To be sure, when some 

expiring spending programs are extended, their extension is treated as having no 

budgetary effect. But this is done consistently. Such a program is only treated as 

permanent in the baseline, and therefore having no budgetary effect when extended, 

if it was treated as permanent for budget scoring purposes when first enacted. 

In contrast, Congress has traditionally applied a ‘‘current law baseline’’ when determining the budgetary effects of tax changes. When the tax extenders in place 

today were first enacted (or were extended), they were not treated as permanent tax 

cuts for budget scoring purposes. As a result, it would be fundamentally inconsistent 

to assume that making them permanent now has no budgetary cost. In fact, there 

is now some talk of both using a current policy baseline, which assumes that existing temporary provisions are permanent, and then scoring new temporary tax cuts 

as temporary all in the same bill—the ultimate fiscal shell game. By this logic, Congress could repeal all Federal taxes for 2018 only and estimate the cost at the 

roughly $3.6 trillion the Federal Government is expected to raise in 2018, using the 

current law baseline it has traditionally used for tax legislation. Then, in 2018, Congress could permanently repeal all Federal taxes and, if the Budget Committee 

chair declared that Congress was shifting to a current policy baseline for tax purposes, the permanent elimination of all Federal taxes would be treated as having 

no budgetary effects whatsoever. 

In determining the revenue effects of tax reform legislation, it is also critical for 

Congress to avoid timing gimmicks. To be sure, there are reasonable policy changes 

that have bigger or smaller budgetary effects within the budget window than they 

do outside it. But such changes should be enacted because they are substantive policy improvements, not as pretext to hide the cost of tax cuts. Congress should therefore be careful to consider the revenue effects both inside and outside the budget 

window. 

In this respect, the Byrd rule serves as an important backstop. It provides that 

any tax legislation enacted through the reconciliation process (thereby avoiding a filibuster) cannot increase deficits in any year outside the budget window. But it is 


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12See, e.g., Alan Cohen, ‘‘The Potential Impact of PAYGO Rules on Tax Legislation,’’ Center 

for American Progress (August 28, 2017), https://www.americanprogress.org/issues/economy/ 

reports/2017/08/28/437873/potential-impact-paygo-rules-tax-legislation/. 13See, e.g., Scott Greenberg, ‘‘Distributional Effects Should Be Measured in Percentages, Not 

Dollars,’’ Tax Foundation (November 5, 2015), https://taxfoundation.org/distributional-effectsshould-be-measured-percentages-not-dollars/. For a detailed explanation of why this is the best 

measure of tax progressivity, see David Kamin, ‘‘What is a Progressive Tax Change?: Unmasking 

Hidden Values in Distributional Debates,’’ 83 NYU L. Rev. 241 (2008). 14 Richard Rubin, ‘‘Who Ultimately Pays for Corporate Taxes? The Answer May Color the Republican Overhaul,’’ Wall Street Journal (August 8, 2017). 15 Chye-Ching Huang and Brandon DeBot, ‘‘ ‘Current Policy’ Baseline Would Hide $439 Billion in Tax Cuts Worth at Least $40,000 a Year for the Top 0.1 Percent,’’ Center on Budget and 

Policy Priorities (August 16, 2017). 16Squawk Box (CNBC television broadcast, November 30, 2016), http://www.cnbc.com/2016/ 

11/30/cnbc-transcript-steven-mnuchin-and-wilbur-ross-speak-with-cnbcs-squawk-box-today.html. 

See also Tucker Carlson Tonight (Fox News television broadcast, April 26, 2017), http:// 

www.foxnews.com/politics/2017/04/26/mnuchin-trumps-tax-plan-is-middle-income-tax-cut.ht 

ml. 

also important that any tax bill increases, or at a bare minimum maintains, the current law level of revenues within the budget window. The Byrd rule does not cover 

deficit increases within the budget window, but the Senate’s ‘‘pay-go’’ rule does, and 

that rule should not be discarded to allow for deficit-increasing tax cuts.12

In addition, tax reform legislation should respect the underlying intent of the 

Byrd rule (and the reconciliation process itself), which was to reduce deficits, not 

increase them. This is yet another argument for continuing to use a current law 

baseline for tax purposes. It also means that if any bill includes provisions that 

raise more revenue within the budget window than outside it (such as the mandatory ‘‘Rothification’’ of all future contributions to retirement plans), the Senate 

should be absolutely sure to secure estimates of the revenue effects of the bill outside the budget window before voting. Such out-year estimates are necessary to ensure that any such bill complies with both the letter and spirit of the Byrd rule. 

Turning to progressivity, there is broad agreement among tax experts that 

changes in progressivity should be measured by looking at the percent change in 

after-tax income for different income groups.13 The progressivity measure should 

also incorporate all Federal taxes, including the corporate income tax and wealth 

transfer taxes, and should distribute those taxes in line with the methodology adopted by the nonpartisan career staff at JCT, CBO and the Treasury Department. In 

this regard, recent suggestions that corporate income tax cuts should be distributed 

in a dramatically different manner from the consensus approach of these nonpartisan professionals are deeply disturbing.14

One alternative measure of progressivity that is particularly misleading is the 

percent change in tax liabilities. This measure makes regressive tax cuts look like 

progressive cuts. For example, it implies that if a minimum wage worker sees her 

income tax liability fall from $100 to $49, she is receiving a larger tax cut than a 

millionaire whose tax liability is cut from $200,000 to $100,000. Conversely, it is 

also misleading to look only at dollar changes in tax liability because this measure 

can make a progressive tax cut look like a regressive one. For example, it implies 

that if a family earning $25,000 receives a $1,000 tax cut and a family earning $1 

million receives a $1,001 tax cut, this is a regressive tax change. 

Continuing to use a current law baseline is also critical for measuring whether 

tax legislation maintains or increases progressivity. The tax cuts that have recently 

expired or are slated to expire disproportionately benefit the wealthy. They are 

mostly corporate tax cuts, and on average, they provide three times as large a tax 

cut for the top 1% as they do for the bottom four quintiles, when the tax cut is 

measured as a share of after-tax income.15 Thus, assuming that these expired and 

expiring provisions are already permanent would involve assuming that the tax code 

is currently less progressive than it actually is. 

If Congress increases or, at a bare minimum, maintains the current level of revenues and progressivity as defined here, any tax reform legislation will abide by the 

so-called Mnuchin principle, which I fully support. Treasury Secretary Steve 

Mnuchin has stated several times that ‘‘there will be no absolute tax cut for the 

upper class . . . any tax cuts we have for the upper class will be offset by less deductions that pay for it.’’16 In light of mounting inequality and deficits, tax reform 

should not provide a net tax cut to the wealthy. Instead, it should increase taxes 

51 

17 ‘‘A Better Way: Tax Reform Task Force Report’’ 25–26 (June 24, 2016), http://abetterway. 

speaker.gov/_assets/pdf/ABetterWay-Tax-PolicyPaper.pdf. 18TPC Staff, ‘‘The Implications of What We Know and Don’t Know About President Trump’s 

Tax Plan,’’ Tax Policy Center (July 12, 2017). 19 Jim Nunns et al., ‘‘An Analysis of Donald Trump’s Revised Tax Plan,’’ Tax Policy Center 

(October 18, 2016). 20 Blair Guild, ‘‘Trump Lashes out During Combative Speech at Campaign-Style Rally in 

Phoenix,’’ CBS News (August 22, 2017), https://www.cbsnews.com/news/trump-holds-makeamerica-great-again-rally-in-phoenix/. 21 Benjamin R. Page, ‘‘Dynamic Analysis of the House GOP Tax Plan: An Update’’ (June 30, 

2017). 22 Id. (estimating that the House GOP Blueprint would reduce GDP by 1% to 2.6% by 2036); 

TPC Staff, ‘‘The Implications of What We Know and Don’t Know about President Trump’s Tax 

Plan,’’ Tax Policy Center (July 12, 2017). 23See Congressional Budget Office, ‘‘The Economic Outlook and Fiscal Policy Choices,’’ Hearing before the Senate Committee on the Budget, 111th Congress 8 (2010) (statement of Douglas 

W. Elmendorf, Director, Congressional Budget Office); Joint Committee on Taxation, ‘‘Macroeconomic Analysis of Various Proposals to Provide $500 Billion in Tax Relief’’ (March 1, 2005). 24Tax Policy Center, ‘‘T17–0192: Distributional Effects of Proposals Related to the Trump Administration’s 2017 Tax Plan; Tax Cut and Possible Revenue Raising Provisions, by Expanded 

Cash Income Percentile, 2018,’’ Tax Policy Center (July 12, 2017), http://www. 

taxpolicycenter.org/model-estimates/proposals-related-trump-administrations-2017-tax-plan-july2017/t17-0192; Burman et al., ‘‘An Analysis of the House GOP Tax Plan,’’ Columbia Journal 

of Tax Law (2017). 25William Gale et al., ‘‘Cutting Taxes and Making Future Americans Pay for It: How Trump’s 

Tax Cuts Could Hurt Many Households,’’ Tax Policy Center (August 15, 2017). 

on the wealthy and use some of the revenues raised for deficit reduction and some 

to boost the take-home pay of those who are less fortunate. 

C. Proposals to Date by the President and House Republicans Go in the Wrong 

Direction 

Unfortunately the proposals offered to date by President Trump and the House 

Republican Blueprint 17 move exactly in the wrong direction on revenues and progressivity. Both lose vast amounts of revenue. The Tax Policy Center has estimated 

that the President’s most recent plan would lose at least $3.5 trillion over 10 

years,18 and that earlier, more detailed versions of his plan would lose $6.2 trillion.19 Just last month, the President said that he plans to enact the ‘‘biggest tax 

cut in the history of our country.’’ 20 The House GOP Blueprint would lose $3.1 trillion over 10 years.21

Because of these massive revenue losses and the corresponding increase in deficits, the Tax Policy Center estimates that both plans would depress economic 

growth over time.22 While JCT and CBO have not released estimates of either plan, 

their prior estimates imply that they would also find that both plans would reduce 

long-term economic growth.23

In addition, both plans are sharply regressive. Directly contradicting the Mnuchin 

principle, on average they provide massive tax cuts to the wealthiest Americans, including those who inherit vast sums of money, while providing a relative pittance 

to everyone else, as shown in Figure 5. The top 1% receives an average tax cut of 

12–13% of their income under both plans, while the bottom four quintiles only receive average tax cuts of 0–2% of their after-tax income. Overall, the top 1% receives 

about half of the value of the tax cuts under the most recent Trump plan, and about 

three-quarters of the tax cuts under the House GOP Blueprint.24

Sooner or later, these massive tax cuts for the wealthy will have to be paid for, 

and low- and middle-income families are likely going to be left paying the tab. As 

illustrated in Figure 6, if the President’s plan were eventually paid for by tax increases or spending cuts that were proportionate to income, 82% of households 

would be worse off—but not the most affluent.25 And this outcome is probably less 

regressive than it would be if the tax cuts were paid for, either now or in the future, 

with the types of budget cuts called for in President Trump’s and the House Budget 

Committee’s budgets. 

52 

26Tax Policy Center, ‘‘T17–0192: Distributional Effects of Proposals Related to the Trump Administration’s 2017 Tax Plan; Tax Cut and Possible Revenue Raising Provisions, by Expanded 

Cash Income Percentile, 2018,’’ Tax Policy Center (July 12, 2017). This is largely due to his proposals to repeal personal exemptions and head of household filing status, and also because of 

the ways in which he proposes to consolidate the tax brackets. Using a slightly different methodology and focusing on his 2016 tax plan, I previously estimated that 21–28% of families with 

children and 51–61% of single parents would face a tax increase under the President’s plan. Lily 

L. Batchelder, ‘‘Families Facing Tax Increases Under Trump’s Tax Plan,’’ Tax Policy Center (October 28, 2016). 

Another possibility is that low- and middle income families will actually see their 

taxes immediately go up as part of tax reform, paying for tax cuts for the wealthy 

right away. Indeed, the Tax Policy Center estimates that an astonishing 45% of 

families with children—and 70% of single parents—would see their taxes go up in 

2018 under the President’s most recent tax plan, as summarized in Figure 7.26 This 

is all the more stunning when one considers that his plan reduces revenues by 

about $3.5 trillion, and that he has had numerous opportunities to address these 

tax increases as his tax plan has evolved but has not even bothered. 


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27See, e.g., Donald Trump, ‘‘The Inaugural Address,’’ The White House, January 20, 2017, 

https://www.whitehouse.gov/inaugural-address (‘‘Every decision on . . . taxes . . . will be made 

to benefit American workers and American families.’’); Luca Gattoni-Celli, ‘‘Mnuchin Reaffirms 

Support for Revenue-Neutral Tax Reform,’’ Tax Notes (June 14, 2017); Naomi Jagoda, ‘‘Brady 

Makes the Case for Revenue-Neutral Tax Reform,’’ The Hill (January 25, 2017). 28See, e.g., Office of the Press Secretary, Remarks by President Trump on Tax Reform (September 6, 2017), https://www.whitehouse.gov/the-press-office/2017/09/06/remarks-presidenttrump-tax-reform (‘‘[W]e will provide tax relief to middle-income families through a combination 

of benefits, such as raising their standard deduction . . .’’). 29Tax Policy Center, ‘‘T16–0085: Number of Tax Units by Tax Bracket and Filing Status,’’ Tax 

Policy Center (July 6, 2016), http://www.taxpolicycenter.org/model-estimates/baseline-distribution-tax-units-tax-bracket-july-2016/t16-0085-number-tax-units-tax. 

The President and House GOP leadership have said that they intend for their tax 

plans to focus their benefits on middle-class families and, at times, that their tax 

plans will be revenue-neutral.27 I very much hope this is the case. But it is deeply 

concerning that thus far they have proposed very specific and massive tax cuts for 

the wealthy, while being quite non-specific about how they would pay for these tax 

cuts or meaningfully invest in the middle class. 

D. Better Approaches 

In contrast to the plans offered to date by President Trump and the House GOP 

Blueprint, I urge the committee to consider raising more revenue through individual 

tax reform by increasing effective tax rates on the wealthy, including by adopting 

the revenue raising proposals discussed below. 

Any tax cuts that are part of individual tax reform should be focused on low- and 

middle income households, and should therefore generally be structured as refundable tax credits. Cutting tax rates or increasing deductions and exemptions tends 

to disproportionately benefit the wealthy. This is because the value of a deduction 

or exemption is the amount deducted times the taxpayer’s marginal tax rate, which 

tends to rise with income. This is also true of proposals to raise the income thresholds for the tax brackets—the value is the amount of the increase in the threshold 

times the taxpayer’s marginal tax rate. Only a refundable tax credit de-links tax 

benefits from a household’s marginal tax rate. 

As an example of the problem with deductions and raising the thresholds for tax 

brackets, consider the proposal to substantially increase the standard deduction by 

President Trump and the House GOP leadership. Both have promoted this proposal 

as a core element of their plan for low- and moderate-income households.28 But it 

is much less valuable for such households than a refundable credit of equivalent 

cost. Increasing the standard deduction is worth nothing to the 35% of households 

who already fall in the zero bracket (i.e., their income is less than the standard deduction and personal exemptions).29 Among non-itemizers with income above the 

zero bracket, it is worth more to those in higher brackets, who tend to be higher 

income. To be sure, increasing the standard deduction also provides no benefit to 

households whose itemized deductions exceed the new, larger standard deduction, 

and these families tend to be wealthier. But the point remains that increasing the 

standard deduction is a poorly designed way to support low- and middle-income 


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30 Corak, supra note 3; Raj Chetty, et al., ‘‘Is the United States Still a Land of Opportunity? 

Recent Trends in Intergenerational Mobility’’ 11 (National Bureau of Economic Research, Working Paper No. 19844, 2014). 31This discussion of wealth transfer taxes draws on Lily L. Batchelder, ‘‘What Should Society 

Expect From Heirs? The Case for a Comprehensive Inheritance Tax,’’ 63 Tax Law Review 1 

(2009); Lily L. Batchelder, ‘‘The ‘Silver Spoon’ Tax: How to Strengthen Wealth Transfer Taxation,’’ in Delivering Equitable Growth: Strategies for the Next Administration (Washington Center for Equitable Growth, 2016); and Lily L. Batchelder, ‘‘Fixing the Estate Tax,’’ 43 Democracy 

(Winter, 2017). 32Samuel Bowles, Herbert Gintis, and Melissa Osborne Groves, Introduction to Unequal 

Chances: Family Background and Economic Success 18–19 (2005) (finding that financial inheritances account for 30% of the parent-child income correlation, while parent and child IQ, schooling, and personality combined account for only 18%); Adrian Adermon, Mikael Lindahl, and 

Daniel Waldenstrom, ‘‘Intergenerational Wealth Mobility and the Role of Inheritance: Evidence 

From Multiple Generations’’ (July 26, 2016) (working paper) (finding that bequests and gifts account for at least 50% of the parent-child wealth correlation, while earnings and education account for only 25%). 33See, e.g., N. Gregory Mankiw, Remarks at the National Bureau of Economic Research Tax 

Policy and the Economy Meeting from Council of Economic Advisers (November 4, 2003) (‘‘As 

a first approximation, it would make more sense to distribute the burden of the tax to the estate’s beneficiaries rather than to the decedent’’). For an explanation of why this is the case, 

households, and provides little or no benefit to those who are financially struggling 

the most. 

II. INDIVIDUAL TAX REFORM SHOULD SEEK TO LEVEL THE

PLAYING FIELD AND SUPPORT WORK

In addition to increasing revenues and progressivity, individual tax reform should 

focus on leveling the playing field for future generations and supporting work. Doing 

so would blunt economic inequality, broaden economic opportunity, and increase 

productivity by ensuring that jobs are awarded more often based on effort and talent, and less often based connections and the luck of one’s birth. Reforms advancing 

these goals would make the tax code fairer and more efficient simultaneously. They 

could also be structured in ways that are relatively simple. 

A. The First Goal: Do No Harm 

The first goal in this area should be to do no harm. Unfortunately, once again 

the proposals offered by President Trump and the House GOP Blueprint to date 

move in precisely the wrong direction. As discussed, their plans are sharply regressive. This means that they not only will exacerbate growing economic disparities, 

but also will probably reduce intergenerational economic mobility over time. Lower 

levels of income inequality are generally correlated with higher levels of intergenerational economic mobility.30 Put differently, if tax reform raises taxes on the 

wealthy and uses part of the revenues raised to boost the living standards of lowand middle-income families, this doesn’t just benefit such families now. It also 

means that their children are likely to do better because their economic success will 

be less heavily impacted by the economic status of their parents. 

In addition to substantially reducing tax progressivity, both plans counterproductively repeal wealth transfer taxes, including the estate tax, when such taxes are 

actually one of the most important features of the tax system for making the economic playing field somewhat more level.31 As discussed, the United States has one 

of the highest levels of opportunity inequality among our competitors. The enormous 

inequality of financial inheritances worsens this inequality of life chances dramatically. Indeed, 30% of the correlation between parent and child incomes—and more 

than 50% of the correlation between the wealth of parents and their children—is 

attributable to financial inheritances.32 This is far more than the impact of IQ, personality, and schooling combined. In short, when researchers have tried to boil down 

inequality of opportunity to one factor, it is about financial inheritances. 

If financial inheritances drive economic opportunity this much, one would think 

the tax code would try to soften their effects. Instead, on average, we actually tax 

inheritances at only about one-quarter of the rate at which we tax income from 

work and savings, as summarized in Figure 8. If a wealthy individual bequeaths 

assets with $100 million unrealized gains, neither that individual nor his heirs ever 

have to pay income or payroll tax on that $100 million gain due to stepped-up basis. 

In addition, the recipients of such large inheritances never have to pay income or 

payroll tax on the total amount they inherit, whether attributable to unrealized 

gains or not. The only taxes that such lucky heirs may bear are wealth transfer 

taxes, which experts on the both sides of the aisle agree are largely borne by the 

heirs of large estates, not the decedent.33

55 

see Lily L. Batchelder and Surachai Khitatrakun, ‘‘Dead or Alive: An Investigation of the Incidence of Estate Taxes and Inheritance Taxes’’ (2008) (working paper). 34 Joint Committee on Taxation, ‘‘History, Present Law, and Analysis of the Federal Wealth 

Transfer Tax System’’ (March 16, 2015), https://www.jct.gov/publications.html?func= 

startdown&id=4744. 35This assumes that a couple makes annual gifts equal to the annual exclusion for 50 years, 

the annual exclusion is constant (although it is actually inflation-adjusted), and the interest rate 

is 5%. 36David Cay Johnston, ‘‘Talk of Lost Farms Reflects Muddle of Estate Tax Debate,’’ The New 

York Times (April 8, 2001). 37Sahil Kapur, ‘‘GOP Plan to Kill Estate Tax Sets Up Charitable Giving Conflict,’’ Bloomberg 

(August 25, 2017). This is consistent with estimates that permanent estate tax repeal would reduce charitable bequests (which represent 8% of all charitable giving) by 22–37%. Jon M. Bakija 

and William G. Gale, ‘‘Effects of Estate Tax Reform on Charitable Giving,’’ Tax Policy Center 

(July 2003). 38 Joint Committee on Taxation, ‘‘Description of an Amendment in the Nature of a Substitute 

to the Provisions of H.R. 1105, The Death Tax Repeal Act of 2015’’ (March 24, 2015), https:// 

www.jct.gov/publications.html?func=startdown&id=4761. 39Lily L. Batchelder, Elaine Maag, Chye-Ching Huang, and Emily Horton, ‘‘Who Benefits 

From President Trump’s Child Care Proposals,’’ Tax Policy Center Research Report (February 

28, 2017) (estimating that the average tax cut for families with income under $40,000 would 

be less than $20, about 3% of all benefits, while about 70% of the benefits would go to families 

with income over $100,000, and about 25% to families with income over $200,000). 

Wealth transfer taxes are not only essential to leveling the playing field, but they 

are also the most progressive component of the Federal tax system. Currently they 

only apply to the top 0.2% of estates 34 because the exemption is extremely high: 

$11 million per couple in 2017, and probably more than $16 million if a couple takes 

full advantage of the annual gift exclusion,35 not to mention other planning opportunities. Contrary to the talking points of estate tax opponents, neither the American 

Farm Bureau nor The New York Times have been able to identify a single case of 

a farm actually being sold to pay the estate tax, even when the exemption was onesixteenth of the current level and the rate was 55%.36 The estate tax also has strong 

positive effects on charitable giving. When the estate tax was repealed for 1 year 

in 2010, charitable bequests fell by 37%.37 Moreover, repeal would cost $270 billion 

over 10 years, further jeopardizing our long-term fiscal outlook.38

By dramatically cutting taxes for the most affluent and repealing wealth transfer 

taxes, the plans advanced by President Trump and the House GOP Blueprint therefore fail to level the playing field at the top, instead magnifying the advantages of 

the most fortunate. At the same time, to the extent that these plans include proposals intended support low- and middle-income households, they do so in relatively 

ineffective ways. 

For example, President Trump’s proposals in 2016 to expand tax benefits for child 

care disproportionately benefit higher-income families.39 They increase tax complexity by increasing the number of child-care-related tax benefits from two to five. 


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40 Id. 41See, e.g., Congressional Budget Office, ‘‘Effective Marginal Tax Rates for Low- and 

Moderate-Income Workers in 2016’’ (November 2015) (finding that some households earning 

100–149% of the poverty line face implicit marginal tax rates of more than 65% when accounting for taxes and some transfers, but not other transfers and work-related costs). 42 Ramesh Ponnuru, ‘‘GOP’s Pro-Family Tax Reform Might Have a Catch,’’ Bloomberg View 

(August 28, 2017). 43 Executive Office of the President and U.S. Treasury Department, ‘‘The President’s Plan to 

Help Middle-Class and Working Families Get Ahead’’ 2 (April 2015). 44 Id., citing Bruce D. Meyer and Dan T. Rosenbaum, ‘‘Welfare, the Earned Income Tax Credit, 

and the Labor Supply of Single Mothers,’’ 116 Quarterly Journal of Economics 1063 (2014). 45 Chuck Marr, Chye-Ching Huang, Arloc Sherman, and Brandon DeBot, ‘‘EITC and Child Tax 

Credit Promote Work, Reduce Poverty, and Support Children’s Development, Research Finds,’’ 

Center on Budget and Policy Priorities (October 1, 2015). 46 Each year, about 7.5 million working-age adults in the group are taxed into or deeper into 

poverty. Chuck Marr, Chye-Ching Huang, Cecile Murray, and Arloc Sherman, ‘‘Strengthening 

the EITC for Childless Workers Would Promote Work and Reduce Poverty,’’ Center on Budget 

and Policy Priorities (April 11, 2016). 47S. 1012, 114th Congress (2015); H.R. 902, 114th Congress (2015). Senators Baldwin and 

Booker have proposed a similar expansion of the EITC for childless workers in S. 3231, 114th 

Congress (2016). 48 NBC News, ‘‘Meet the Press’’ transcript, February 1, 2015. http://www.nbcnews.com/meetthe-press/meet-press-transcript-february-1-2015-n302111. 

And they provide benefits to higher-income working families with a stay-at-home 

parent, while arbitrarily excluding similar families who are lower-income.40

As discussed, the President’s and House GOP’s proposals to increase the standard 

deduction benefits higher-income non-itemizers more than lower-income nonitemizers, and doesn’t benefit the lowest-income workers at all. This is despite the 

fact that low-income workers face some of the highest implicit marginal tax rates, 

meaning that after taxes, transfers, and work-related costs like child care, it may 

not pay for them to work at all.41

Others have proposed eliminating personal exemptions and/or the head of household filing status in order to pay for a larger child tax credit. But as explained by 

my fellow witness Ramesh Ponnuru, this may well hurt many low- and middleincome families, rather than helping them.42 This is especially true if the refundability of the child tax credit were not increased substantially so that more families could claim the full credit. 

Finally, recent proposals to double the child tax credit and make it fully refundable against payroll taxes would provide much smaller benefits to lower-income families than higher-income families because they would leave the rate at which low 

earnings count toward earning the credit virtually unchanged. 

B. Reforms Worth Considering 

Instead of pursuing the counterproductive or relatively ineffective proposals described above, Congress should instead consider reforms that would meaningfully 

level the playing field and support work. While there are a host of possibilities, I 

would like to highlight four options that are especially promising. 

The first is expanding the Earned Income Tax Credit (EITC), especially for workers without dependents (sometimes called childless workers). The EITC and child 

tax credit (CTC) are some of our most effective policies for reducing poverty and increasing employment. In 2013, they kept 8.8 million people out of poverty, including 

4.7 million children.43 The EITC results in about 1 in 10 parents entering the labor 

force who otherwise would not do so.44 In addition, mounting evidence suggests that 

the EITC and CTC improve health outcomes, school performance, educational attainment, and long-term earnings, including for the next generation.45

Tax reform should build on the success of these programs. To start, it should address the fact that, as illustrated in Figure 9, childless workers are the only group 

that is currently taxed into poverty.46

Senator Brown and Representative Neal have proposed increasing the maximum 

EITC for childless workers to $1,400, phasing it in and out more rapidly, and making it available to younger workers.47 A similar proposal was advanced by former 

President Obama and endorsed by Speaker Ryan, though it was not included in the 

House GOP Blueprint.48 This proposal would subsidize the wages of groups with low 

or declining labor force participation rates, including men without a college education, young adults not enrolled in school, workers with disabilities, and older 

57 

49 Executive Office of the President and U.S. Treasury Department, ‘‘The President’s Proposal 

to Expand the Earned Income Tax Credit’’ (March, 2014). 50 Chuck Marr, Brandon DeBot, and Emily Horton, ‘‘How Tax Reform Can Raise WorkingClass Incomes,’’ Center on Budget and Policy Priorities (September 13, 2017). 51 Chuck Marr, Chye-Ching Huang, Cecile Murray, and Arloc Sherman, ‘‘Strengthening the 

EITC for Childless Workers Would Promote Work and Reduce Poverty,’’ Center on Budget and 

Policy Priorities (April 11, 2016). 52 Casey Tolan, ‘‘Progressive Democrats’ Counter-Argument to Trump Tax Plan: a $1.4 Trillion 

Tax Credit for the Working Class,’’ Mercury News (September 12, 2017). 53 Chuck Marr, Brandon DeBot, and Emily Horton, ‘‘How Tax Reform Can Raise WorkingClass Incomes,’’ Center on Budget and Policy Priorities (September 13, 2017). A working-class 

household is defined here as one in which no one has a bachelor’s degree. See also Neil Irwin, 

‘‘What Would it Take to Replace the Pay Working-Class Americans Have Lost?’’, The New York 

Times (December 9, 2016). 54Tolan, supra note 52. 

workers.49 As a result, it could meaningfully boost labor force participation. It would 

lift 600,000 workers out of poverty and lessen the severity of poverty for another 

8.7 million.50 Moreover, the Brown-Neal proposal would essentially ensure that the 

Federal tax code no longer taxes childless workers into poverty.51

A much more ambitious approach would be to expand the EITC for workers with 

children as well. For example, Senator Brown and Representative Khanna are proposing a major expansion to the EITC that would roughly double the maximum 

credit for all groups.52 Such an expansion would make significant headway toward 

offsetting the much lower earnings growth that working-class households have experienced over the past few decades relative to comparable families with a bachelor’s 

degrees.53 While this proposal would cost over $1 trillion,54 it could be more than 

paid for by tax increases on the wealthy discussed here and elsewhere. And its cost 

pales in comparison to the tax cuts for the wealthy contained in President Trump’s 

plan and the House GOP Blueprint. 

A second proposal worth considering is strengthening the child tax credit (CTC), 

especially for low-income families with young children. Currently, the CTC excludes 

almost 11 million children with working parents because their earnings are too 


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55 Elaine Maag and Julia B. Isaacs, ‘‘Analysis of a Young Child Tax Credit,’’ Urban Institute 

(September 2017). 56See S. 2264, 114th Congress (2015); S. 3231, 114th Congress (2016). For further discussion 

of these proposals and similar ones, see Chuck Marr, Chloe Cho, and Arloc Sherman, ‘‘A Top 

Priority to Address Poverty: Strengthening the Child Tax Credit for Very Poor Young Children’’ 

(August 10, 2016); Maag and Isaacs, supra. 57See, e.g., Gordon B. Dahl and Lance Lochner, ‘‘The Impact of Family Income on Child 

Achievement: Evidence from the Earned Income Tax Credit,’’ 102 American Economic Review 

5, 1927–56 (May 2012): Kerris Cooper and Kitty Stewart, ‘‘Does Money Affect Children’s Outcomes? A Systematic Review,’’ Joseph Rowntree Foundation (October 22, 2013), https://www. 

jrf.org.uk/report/does-money-affect-children%E2%80%99s-outcomes. 58 H.R. 4693, 114th Congress (2016). 59For further discussion of this idea, see Lily L. Batchelder, Elaine Maag, Chye-Ching Huang, 

and Emily Horton, ‘‘Who Benefits From President Trump’s Child Care Proposals,’’ Tax Policy 

Center Research Report (February 28, 2017); Katie Hamm and Carmel Martin, ‘‘A New Vision 

for Child Care in the United States,’’ Center for American Progress (September 2015), https:// 

cdn.americanprogress.org/wp-content/uploads/2015/08/31111043/Hamm-Childcare-report.pdf; 

James P. Ziliak, ‘‘Supporting Low-Income Workers Through Refundable Child-Care Credits,’’ 

Hamilton Project: Improving Safety Net and Work Support (2014), http://www.hamilton 

project.org/assets/legacy/files/downloads_and_links/child_care_credit_ziliak.pdf; Elaine Maag, 

‘‘Simplifying Child Care Tax Benefits,’’ Tax Policy Center (2013), http://www. 

taxpolicycenter.org/taxvox/simplifying-child-care-tax-benefits. 60Ziliak, supra. 61Drew DeSilver, ‘‘Rising Cost of Child Care May Help Explain Recent Increase in Stay-AtHome Moms,’’ FactTank Blog (April 18, 2014), http://www.pewresearch.org/fact-tank/2014/04/ 

08/rising-cost-of-child-care-may-help-explain-increase-in-stay-at-home-moms/. 62 Council of Economic Advisers, ‘‘The Economics of Early Childhood Investments’’ (2014), 

https://obamawhitehouse.archives.gov/sites/default/files/docs/the_economics_of_early_child 

hood_investments.pdf (reviewing the literature and concluding that a 10% reduction in child care 

costs increases maternal employment by 0.5% to 4%). 63 Currently, the Federal Government provides States funding for child care assistance programs through the Child Care and Development Fund and the Temporary Assistance for Needy 

Families block grant. 64Matthews and Walker, 2016. 65Office of Management and Budget, Budget of the U.S. Government: Fiscal Year 2017 (2016), 

https://www.gpo.gov/fdsys/pkg/BUDGET-2017-BUD/pdf/BUDGET-2017-BUD.pdf; Ajay 

Chaudry, Taryn Morrissey, Christina Weil, and Hirokazu Yoshikawa, ‘‘Cradle to Kindergarten: 

A New Plan to Combat Inequality’’ (2017). 

low.55 One way to build on the benefits of the CTC for future generations is to elimi- nate the threshold that currently excludes the first $3,000 of earnings from being 

counted towards earning the credit and to increase the rate at which the credit can 

be earned, especially for families with young children, similar to proposals by Senators Baldwin, Bennet, Brown, and Booker.56 These reforms would target benefits 

on young children in the poorest households. Children under age 6 are much more 

likely to live in poverty than other children or adults. Moreover, the evidence that 

the CTC and similar programs boost children’s health, educational, and lifetime 

earning outcomes is especially strong for the poorest children.57 For them, more income makes a much bigger difference. 

An even more ambitious approach would be to make the CTC fully refundable so 

that the poorest children could fully benefit even if their parents’ have no income, 

similar to a proposal by Representative DeLauro.58

A third reform worth considering is replacing the current law child and dependent 

care tax benefits with a single refundable tax credit that is larger for families for 

whom such expenses represent the largest budgetary strain.59 Child and dependent 

care costs are a significant financial burden on working families, especially those 

with low and moderate incomes. On average, the median single mother with children under 5 spends 15% of her earnings on child care, and the median analogous 

married couple spends 6%.60 Child care costs have grown dramatically over time, 

rising 70% in inflation-adjusted terms from 1985 to 2001.61 Reducing child care 

costs increases labor force participation by ensuring that caretakers who prefer to 

engage in market work actually benefit financially from doing so.62

One drawback of this proposal is that it would not provide financial support to 

such families when they need it most: when their child care bills are due. Therefore, 

while not strictly a tax proposal, an even better reform would be to fully fund child 

care assistance programs, which provide direct subsidies for child care for low-wage 

working families.63 Currently only 15% of families eligible for these subsidies actually receive them because of under-funding; the remaining 85% of families are put 

on waiting lists.64 Fully funding this program could be combined with a tax credit 

for families above the eligibility threshold, as proposed by former President Obama 

and other researchers.65

59 

66Lily L. Batchelder, ‘‘The ‘Silver Spoon’ Tax: How to Strengthen Wealth Transfer Taxation,’’ 

in Delivering Equitable Growth: Strategies for the Next Administration (Washington Center for 

Equitable Growth, 2016). 67David Bradford, ‘‘Untangling the Income Tax,’’ 266–67 (1986). 68Susan Jones, ‘‘IRS: 90% of Taxpayers Seek Help in Preparing Their Returns,’’ cnsnews.com (April 9, 2014), https://www.cnsnews.com/news/article/susan-jones/irs-90-taxpayers-seek-helppreparing-their-returns. 

Finally, these proposals could be paid for by raising taxes on the most fortunate, 

including by strengthening, not repealing, wealth transfer taxes. There are at least 

three ways to strengthen the taxation of financial inheritances that are worth considering. The first is to raise the wealth transfer tax rate above 40%. A second, more 

fundamental reform would be to replace our current wealth transfer taxes with a 

direct tax on the recipients of large inheritances. Effectively, the exemption from 

wealth transfer taxes would then be based on how much an individual inherited, 

not how much a donor bequeathed. If individuals who inherit more than $2.1 million 

over their lifetime had to pay income tax plus a 15% surcharge (roughly equivalent 

to the payroll tax rate) on their inheritances above this threshold, this proposal 

would raise roughly $200 billion more over 10 years than our current wealth transfer taxes.66 Lastly, either of these reforms could be coupled with repealing steppedup basis, which is discussed in more detail in the next section. 

III. SIMPLIFYING THE TAX CODE BY REDUCING OPPORTUNITIES FOR GAMING

The third traditional goal of tax reform is simplification. Simplification should certainly be part of individual tax reform, but the policies that meaningfully simplify 

the tax system are often misunderstood. 

David Bradford, the intellectual father of the 1986 Tax Reform Act, distinguished 

three types of tax complexity: compliance complexity, rule complexity, and transactional complexity.67 Compliance complexity includes things like is how long it 

takes to prepare one’s tax return and how many records taxpayers have to keep. 

Rule complexity is how difficult it is to understand what the law is, and can be the 

result of the tax code being unclear, or unclear administrative guidance and case 

law. Transactional complexity arises from taxpayers organizing their affairs to minimize their tax liability. 

Often transactional complexity is actually the most costly type of tax complexity. 

But many proposals to simplify the tax code focus on compliance complexity in ways 

that provide little or no practical benefits for taxpayers. For example, tax plans (including the President’s and the House GOP Blueprint) often promise to reduce the 

number of tax brackets or the number of taxpayers who itemize deductions, heralding these changes as major simplifications. But virtually no taxpayer would notice if there were fewer tax brackets because 90% prepare their returns with computer software or the help of a third party (who generally uses such software).68 The 

10% who still complete their tax returns by hand are instructed by Form 1040 to 

look up their taxable income on a tax table in order to apply the tax rates, so they 

are not supposed to do the arithmetic to apply the tax brackets in the first place. 

Similarly, taxpayers who do not itemize still need to keep records of their State and 

local taxes, charitable contributions, mortgage interest payments, medical expenses, 

and the like in order to determine whether they are better off itemizing or claiming 

the standard deduction. The only way to eliminate these record keeping burdens is 

to eliminate itemized deductions altogether, which these tax plans do not propose. 

Instead, simplification efforts in individual tax reform should focus on reducing 

transactional complexity, which essentially arises from opportunities for savvy taxpayers to game the tax system. Some tax provisions are meant to change behavior, 

like the charitable deduction. But other tax provisions sometimes create large, unintended opportunities to reduce or avoid taxes by structuring a transaction or activity 

in one way, rather than in another, economically identical form. These are what the 

press frequently refers to as ‘‘loopholes.’’ 

Reducing such transactional complexity accomplishes the trifecta of tax reform: it 

makes the tax code fairer, more efficient, and simpler at the same time. It is fairer 

because generally only taxpayers who can afford high-priced tax advice learn about 

opportunities to structure their affairs in ways that are economically identical but 

reduce their taxes. It is more efficient and simpler because taxpayers spend less 

time trying to figure out how to arrange their affairs to reduce their tax liability, 

and change their behavior less in response to the tax system. 

60 

69This discussion draws on Lily Batchelder, ‘‘Trump’s Giant Loophole,’’ The New York Times 

(May 30, 2017). 70 Urban-Brookings Tax Policy Center Microsimulation Model, ‘‘T17–0164—Distributional Effect of a 15-Percent Top Rate on a Broad Definition of Pass-Through Income, Baseline: Current 

Law With AMT Repealed and 12/25/33 Rate Structure, by Expanded Cash Income Percentile, 

2018’’ (May 15, 2017), http://www.taxpolicycenter.org/model-estimates/options-taxing-passthrough-income-prefential-rates-may-2017/t17-0164-distributional. 71 Urban-Brookings Tax Policy Center Microsimulation Model, ‘‘T17–0080—Sources of FlowThrough Business Income by Expanded Cash Income Percentile; Current Law, 2017’’ (March 20, 

2017), http://www.taxpolicycenter.org/model-estimates/distribution-business-income-march2017/t17-0080-sources-flow-through-business. 72The White House and the U.S. Treasury Department, ‘‘The President’s Framework for Business Tax Reform: An Update’’ (April 2016), https://www.treasury.gov/resource-center/tax-policy/Documents/The-Presidents-Framework-for-Business-Tax-Reform-An-Update-04-04-2016.pdf. 

A. The First Goal (Again): Do No Harm 

Unfortunately several current proposals would dramatically increase transactional 

complexity. The most alarming is the proposal to apply a new, special cap on the 

tax rate for pass-through business income.69 Pass-through business income has always been taxed on individual income tax returns at the same rates as other income. But President Trump has proposed cutting the top rate on pass-through income (and only pass-through income) from 39.6% to 15%, while cutting the top rate 

on all other ordinary income to 35%. The House GOP Blueprint cuts the top rate 

on pass-through income to 25%, while cutting the top rate on other ordinary income 

to 33%. 

Proponents of this rate cap argue that it would benefit small businesses and rectify the over-taxation of pass-through businesses compared to C corporations. But 

nothing could be further from the truth. The Tax Policy Center estimates that a full 

77% of the benefits of the President’s proposal would go to the top 1%,70 who currently earn more than half of all pass-through income.71 As illustrated in Figure 10, 

the average tax cut for the top 1% would amount to 5% of their after-tax income, 

while the average tax cut for the bottom four quintiles would be zero. 

Moreover, the effective marginal tax rate on pass-through businesses is currently 

about 5 percentage points lower than that on C corporations after accounting for 

investor-level taxes. This is part of the reason why the share of all business income 

earned by pass-throughs has risen precipitously, from less than one-quarter in 1980 

to 60% today.72

A pass-through rate cap would dramatically increase the incentive to characterize 

income, including compensation for services, as pass-through business income. This 

is already a significant problem under the current tax code because certain types 

of pass-through business income are not subject to either payroll or self-employment 

tax. But it would become much worse. For example, under the President’s plan, if 

a wealthy executive sets up an LLC to receive his $10 million salary, he could save 

$2 million in taxes. Few middle-class workers have the resources to set up such veVerDate Sep 11 2014 17:51 Sep 21, 2018 Jkt 000000 PO 00000 Frm 00064 Fmt 6601 Sfmt 6621 R:\DOCS\31548.000 TIM

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73Tax Policy Center, ‘‘T16–0085—Number of Tax Units by Tax Bracket and Filing Status,’’ 

Tax Policy Center (July 6, 2016), http://www.taxpolicycenter.org/model-estimates/baseline-distribution-tax-units-tax-bracket-july-2016/t16-0085-number-tax-units-tax (estimating that 79% of 

taxpayers are in the 15% bracket or below, and 95% are in the 25% bracket or below). 74 Urban-Brookings Tax Policy Center Microsimulation Model, ‘‘T17–0162—Revenue Effect of 

Options for Taxing Pass-Through Income at Preferential Rates, Baseline: Current Law with Individual AMT Repealed and 12/25/33 Percent Individual Income Tax Rate Structure, 2018–27,’’ 

Tax Policy Center (May 15, 2017), http://www.taxpolicycenter.org/model-estimates/options-taxing-pass-through-income-prefential-rates-may-2017/t17-0162-revenue-effect; Robert Schroeder, 

‘‘Trump Proposal to Lower Pass-through Tax Rate Could Cost $2 Trillion, Goldman Finds,’’ 

MarketWatch (May 3, 2017), http://www.marketwatch.com/story/trump-proposal-to-lower-passthrough-tax-rate-could-cost-2-trillion-goldman-finds-2017-05-03. 75Kyle Pomerleau, Scott Drenkard, and John Buhl, ‘‘What Trump Can Learn from Kansas’ 

Tax Troubles,’’ Politico (May 4, 2017), http://www.politico.com/magazine/story/2017/05/04/ 

what-trump-can-learn-from-kansas-tax-troubles-215103. 76Department of the Treasury, ‘‘General Explanations of the Administration’s Fiscal Year 

2017 Revenue Proposals,’’ 169 (February 2016). 77 Id. 78Office of Management and Budget, ‘‘Meeting Our Greatest Challenges: Opportunity for All’’ 

(2016), https://obamawhitehouse.archives.gov/sites/default/files/omb/budget/fy2017/assets/ 

opportunity.pdf. 79See, e.g., Len Burman, ‘‘President Obama Targets The ‘Angel of Death’ Capital Gains Tax 

Loophole,’’ Forbes (January 18, 2015). 

hicles—and the vast majority would not benefit if they did because they are already 

in the 15% rate bracket or below.73 Indeed, the Tax Policy Center and Goldman 

Sachs estimate that the tax avoidance response would be staggering, accounting for 

30–50% of the sizeable cost of the proposal.74

For these reasons, tax experts on the left and right agree that it is a terrible idea. 

For example, experts at the Tax Foundation, which traditionally supports business 

tax cuts, argue that ‘‘the pass-through carve-out primarily incentivizes tax avoidance, not job creation.’’ 75

B. Reforms Worth Considering 

Instead of dramatically increasing transactional complexity, Congress should consider several proposals that would substantially reduce it. The first is reforming the 

self-employment tax (SECA) and net investment income tax (NIIT) to ensure that 

all labor and capital income are subject to the Medicare tax on high incomes in some 

form. 

Currently the NIIT and SECA apply a 3.8% to income above $200,000 for single 

filers and $250,000 for married filers in some cases but not others. They do apply 

the tax to all employees, owners of sole proprietorships, and ‘‘passive’’ owners of 

businesses. However, they only apply it in part to ‘‘active’’ owners of S corporations, 

and often do not apply it at all to ‘‘active’’ owners of LLCs and limited partners.76

Many high earners (including Newt Gingrich and John Edwards historically) avoid 

this 3.8% Medicare tax—and sometimes Social Security tax as well—by claiming 

that their labor income is instead pass-through business income that falls into one 

of these tax-exempt or tax-preferred buckets. 

The different treatment of some pass-through business income from other economically identical types of such income is a classic example of transactional complexity. It creates traps for the unwary, enabling savvy taxpayers to avoid the tax 

by changing the legal form of their ownership or the payments they receive. Less 

savvy taxpayers, all wage earners, and all sole proprietors are left footing the bill. 

Former President Obama’s final budget proposed rationalizing these taxes so that 

all income above these thresholds was subject to the 3.8% tax either through the 

NIIT or SECA.77 It also proposed treating eliminating differences in how professional services income is taxed depending on whether it is paid by an S corporation 

or partnership. Together, these proposals would raise $272 billion over 10 years. In 

addition, all NIIT revenue would be redirected from the General Fund to the Medicare trust fund, extending its solvency by more than 15 years.78

A second reform worth serious consideration is repealing stepped-up basis. Sometimes called the single biggest loophole in the individual income tax,79 stepped-up 

basis refers to the fact that capital gains on assets held until death are never 

taxed—instead the tax on such gains is forgiven forever. Stepped-up basis creates 

a large incentive for investors to hold on to underperforming assets purely for tax 

reasons (the so-called lock-in effect), resulting in resources being misallocated 

throughout the economy. It also creates traps for the unwary who do not realize how 

62 

80Department of the Treasury, ‘‘General Explanations of the Administration’s Fiscal Year 

2017 Revenue Proposals,’’ 156, (February 2016). The proposal would also exempt all gains on 

the sale of tangible personal property, and would effectively establish a $500,000 per-couple exemption for gains on residences. 81 Id. 82 James Poterba and Scott Weisbenner, ‘‘The Distributional Burden of Taxing Estates and 

Unrealized Capital Gains at Death,’’ in Rethinking Estate and Gift Taxation, 439–40 (William 

G. Gale et al. eds., 2001). Untaxed accrued gains compose 36 percent of the value of all bequests, 

but 56 percent of bequests over $10 million. 83 Executive Office of the President and U.S. Treasury Department, ‘‘The President’s Plan to 

Help Middle-Class and Working Families Get Ahead,’’ 35 (April 2015). 84Senator Baldwin and Representative Levin have introduced bills to address this issue. See 

S. 1020, 115th Congress (2017); H.R. 2889, 114th Congress (2015). 85Tax Policy Center, ‘‘Table T17–0137’’ (April 18, 2017), http://www.taxpolicycenter.org/ 

model-estimates/individual-income-tax-expenditures-april-2017/t17-0137-tax-benefit-preferential. 86 Id. 

much tax they can save by holding on to their assets even if they are underperforming. 

Former President Obama proposed repealing stepped-up basis subject to several 

exclusions, including an exemption for the first $100,000 in accrued gains ($200,000 

per couple).80 Together with raising the capital gains rate to 28 percent (an idea 

discussed next), this proposal would raise $210 billion over 10 years and significantly more over time as it fully phased in.81 The proposal would also be extraordinarily progressive because inheritances are distributed so unequally and accrued 

gains are even more concentrated among the rich.82 It would further help ensure 

that those who inherit large sums are taxed at a rate closer to those who earn their 

income from working. A full 99% of the revenue raised would come from the top 

1%, and 80% would come from the top 0.1%.83

A third, related reform is narrowing the gap between the tax rates on ordinary 

income and capital gains. This gap creates a large incentive for taxpayers to try to 

recharacterize ordinary income as capital gain, with carried interest a prime example. In addition to treating carried interest as ordinary income to the extent that 

it represents compensation for services,84 Congress should consider raising the capital gains rates to reduce this incentive in the first place. 

Capital gains are highly concentrated among the wealthy. As a result, the preferential rates for capital gains and dividends very disproportionately benefit them. 

As illustrated in Figure 11, these preferential rates provide the top 1% with a tax 

cut that is 29 times larger than that for the middle quintile, even when measured 

as a share of after-tax income.85 Indeed the top 0.1% of taxpayers, earning over $3 

million per year, receive more than 55% of the benefits.86 Raising these preferential 

rates could help curb rising economic inequality, making the tax code fairer. But it 

would also reduce transaction complexity by reducing one of the biggest incentives 

for tax planning in the income tax. 


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63 

87Lily L. Batchelder, Fred T. Goldberg, Jr., and Peter R. Orszag, ‘‘Efficiency and Tax Incentives: The Case for Refundable Tax Credits,’’ 59 Stanford Law Review 23 (2006). 88Keith Miller et al., ‘‘The Reality of the Retirement Savings Crisis,’’ Center for American 

Progress (January 26, 2015) (figure is for households age 55 to 64, and excludes Social Security). 89 ‘‘Retirement Savings 2.0: Updating Savings Policy for the Modern Economy,’’ hearing before 

the Sentate Committee on Finance, 113th Congress 9–10 (2014) (statement of Scott Betts, senior 

vice president of national benefits services, LLC). 

IV. INDIVIDUAL TAX REFORM SHOULD MAKE TAX INCENTIVES FAIRER

AND MORE EFFICIENT

A final area on which individual tax reform should focus is reforming tax incentives to make them more efficient and fair. As just discussed, some tax provisions 

create opportunities for gaming that Congress did not intend. But many other tax 

provisions, which I will call tax incentives, are explicitly intended to change behavior, for example by encouraging people to attend college or purchase health insurance. In such cases, it is not a problem if people respond to the tax incentive; in 

fact, that is the whole purpose. But many such tax incentives are poorly designed 

to achieve their own goals. Restructuring them to get more bang-for-the-buck could 

simultaneously improve social outcomes and raise revenue, which could be used to 

reduce our mounting debt, address rising inequality, and broaden opportunity. One 

could spend a whole hearing on each individual tax incentive, so I will instead highlight a few general principles and case studies here. 

First, the most efficient type of tax incentive is generally a refundable tax credit. 

As Fred Goldberg, Peter Orszag, and I have explained, deductions can be efficient 

if they are designed to measure income or ability to pay.87 Deductions for business 

expenses are one such example. But where, as with tax incentives, the goal is to 

promote socially valued activities or investments, the most efficient default structure is a uniform incentive—unless there is evidence that certain households are 

more responsive to the incentive or generate larger social benefits from engaging in 

the activity. Such uniform benefits can only be accomplished through a refundable 

tax credit. 

Even when there is evidence that responsiveness or social benefits vary by household income or other characteristics, the most efficient incentive is almost certainly 

still some type of refundable credit. It is extremely unlikely that there is a sharp 

break in social benefits or responsiveness to a tax incentive exactly at the point of 

no income tax liability or the rate bracket thresholds. But these types of discontinuities are inherent in all other types of tax incentives. For example, preferential rates 

and non-refundable credits do not benefit taxpayers in the zero bracket, while the 

value of above-the-line deductions and exclusions intrinsically rises with the taxpayer’s marginal tax rate. 

Congress should therefore consider restructuring all tax expenditures that are intended to change behavior into refundable tax credits, designing them based on evidence of how to get the most bang for the buck. In all likelihood, this will also make 

the tax code more progressive. Even if, for example, higher-income households are 

more responsive to a tax incentive, it is unlikely that the optimal tax incentive will 

be as regressive as many of the deductions, exclusions, and preferential rates that 

we have today. Restructuring tax incentives into refundable tax credits will, however, be a major undertaking. Currently, only about 12% of tax expenditures are 

structured as refundable credits, as illustrated in Figure 12. 

Second, wherever possible, Congress should leverage the insights of behavioral economics when redesigning tax incentives. Doing so can also generate more social 

benefits at a lower cost. 

To provide one example, tax incentives for retirement savings are a particularly 

fruitful area for reform. Though we currently spend more than $80 billion per year 

on retirement savings incentives, the median household nearing retirement has only 

$14,500 in retirement savings.88 About one-third of workers do not have access to 

an employer-sponsored retirement plan, even though middle-class workers are 15 

times more likely to save for retirement if they are covered by an employer plan.89

64 

90 Alicia Munnell et al., ‘‘NRRI Update Shows Half Still Falling Short’’ (Center for Retirement 

Research Brief No. 14–20, December 2014). 91 Congressional Budget Office, ‘‘The Distribution of Major Tax Expenditures in the Individual 

Income Tax System,’’ table 2 (May, 2013). 92 Brigitte C. Madrian and Dennis F. Shea, ‘‘The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior,’’ 116 Quarterly Journal of Economics 1149 (2001). While many 

of these workers would eventually join the plan if enrollment were voluntary, accelerating participation through auto-enrollment substantially boosts the overall retirement savings of most 

workers. 93 In 2014, 57% of 401(k) plans auto-enrolled their workers compared to less than 10% in 

2000. Plan Sponsor Council of America, 58th Annual Survey (2016). 

Low- and middle-income families are generally the least prepared for retirement,90 but the lion’s share of tax incentives for retirement savings go to the 

wealthy. Households in the top income quintile receive two-third of the benefit of 

retirement savings incentives and those in the top 5% receive more than one-third 

of the benefits.91 In contrast, the bottom two quintiles only receive 7% of the benefits. 

In addition, there is extensive empirical evidence that retirement savings choices 

are heavily influenced by how easy it is to save principally as a result of defaults. 

For example, new hires are about 50 percentage points more likely to participate 

in their employer’s retirement plan if they are automatically enrolled.92 There have 

been several positive reforms in response to this research. For example, the Pension 

Protection Act of 2006 and Treasury Department guidance issued before and after 

it contributed to a large rise in automatic enrollment.93 But the default retirement 

savings rate is still zero for roughly 62% of workers, as illustrated in Figure 13. 


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65 

94See, e.g., William G. Gale et al., ‘‘Improving Opportunities and Incentives for Saving by 

Middle- and Low-Income Households’’ (The Hamilton Project, Discussion Paper 2006–02, 2006), 

https://www.brookings.edu/wp-content/uploads/2016/06/200604hamilton_2.pdf; Christian E. 

Weller and Sam Ungar, ‘‘The Universal Savings Credit’’ (Center for American Progress, July 

2012), https://cdn.americanprogress.org/wp-content/uploads/2013/07/UniversalSavingsCreditreport.pdf. 95 Emmanuel Saez, ‘‘Details Matter: The Impact of Presentation and Information on the Takeup of Financial Incentives for Retirement Saving,’’ 1 American Economic Journal: Economic Policy 204 (2009). 

96Senator Whitehouse and Representative Neal have introduced Federal automatic IRA legislation, S. 245, 114th Congress (2015); H.R. 2499, 115th Congress (2017). For more details on 

auto-IRA proposals, see, e.g., Mark Iwry and David C. John, ‘‘Pursuing Universal Retirement 

Security Through Automatic IRAs,’’ The Retirement Security Project (2009), http:// 

www.brookings.edu/research/papers/2009/07/automatic-ira-iwry; Department of the Treasury, 

‘‘General Explanations of the Administration’s Fiscal Year 2016 Revenue Proposals,’’ 134, (February 2015). 97 Executive Office of the President and U.S. Treasury Department, ‘‘The President’s Plan to 

Help Middle-Class and Working Families Get Ahead,’’ 5 (April 2015). 

As part of individual tax reform, Congress should therefore consider a number of 

ways to improve retirement savings incentives. These include restructuring the tax 

incentives so that a larger share of the benefits go to low- and middle-income workers,94 directly depositing the incentive into the taxpayer’s account,95 requiring employers offering retirement plans to automatically enroll their workers, and enacting 

automatic IRAs at a Federal level so that every worker has access to an easy way 

to save for retirement.96 Such reforms could substantially boost retirement security 

while saving revenue. Automatic IRAs alone would give 30 million more workers access to a workplace savings opportunity.97

To provide another example, many would argue that the purpose of the tax exemption for State and local bonds is to support investments by State and local governments, effectively devolving Federal revenue to them. But about 20% of the value 

of the exemption goes to high-bracket investors in the form of above-market aftertax interest rates, rather than to State and local governments in the form of lower 


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98 Congressional Budget Office and Joint Committee on Taxation, ‘‘Subsidizing Infrastructure 

Investment With Tax-Preferred Bonds,’’ 34 (October 2009). CBO and JCT estimate that State 

and local governments are able to pay interest at a rate that is 21% below that of comparable 

taxable bonds because of the exemption. This implies that investors in tax brackets above 21% 

benefit from the exemption by an amount equal to their marginal tax rate minus 21% multiplied 

by the amount of tax-exempt interest they receive. Id. at 31–33. 1 Jim Nunns and Jeffrey Rohaly, ‘‘Preliminary Revenue Estimates and Distributional Analysis 

of the Tax Provisions in the Bipartisan Tax Fairness and Simplification Act of 2010,’’ Tax Policy 

Center, 2010, http://www.taxpolicycenter.org/sites/default/files/alfresco/publication-pdfs/ 

412098-Preliminary-Revenue-Estimates-and-Distributional-Analysis-of-the-Tax-Provisions-in-theBipartisan-Tax-Fairness-and-Simplification-Act-of--.PDF. 

interest costs.98 If Congress replaced the exemption with a refundable tax credit, as 

was the case with Build America Bonds, we could deliver the same amount of aid 

to State and local governments at a much lower budgetary cost. 

QUESTIONS SUBMITTED FOR THE RECORD TO LILY L. BATCHELDER

QUESTIONS SUBMITTED BY HON. ORRIN G. HATCH

INCREASING THE STANDARD DEDUCTION

Question. Ms. Batchelder, in your written testimony, you are critical of Republican 

proposals to nearly double the standard deduction. 

But for the sake of fairness and transparency, can you please acknowledge that 

the ranking member has repeatedly proposed nearly tripling the standard deduction? 

Answer. Yes, the ranking member has proposed nearly tripling the standard deduction. However, he did so in the context of tax plans that were roughly revenueneutral and somewhat more progressive compared to current policy at the time, unlike the plans put forth by President Trump or the TCJA as enacted.1 Moreover, 

my criticism of increasing the standard deduction was in the context of arguing that 

tax reform should increase taxes on the wealthy and use some of the revenues 

raised for deficit reduction and some to boost the take-home pay of those who are 

less fortunate. To the extent that increasing the standard deduction was coupled 

with other reforms that together achieve these overall objectives, I would be less 

concerned. 

ASSUMPTIONS ASSOCIATED WITH THE PRESIDENT’S AND THE HOUSE’S TAX PLANS

Question. Ms. Batchelder, your testimony provides a detailed, and negative, assessment of tax ‘‘plans’’ offered by President Trump and the House GOP leadership. 

Given the level of generality of what has been put forward for each of those so-called 

plans, it is impossible to provide the level of details about the implications of the 

plans unless, as you have done, you fill in details with your own assumptions. 

My question is, are the negative implications that you have often discussed of the 

so-called plans put forward by the President and the House GOP actually an analysis of detailed specified plans, or are they implications of assumptions that you 

made that aren’t specified in any detailed plan? 

That is, are they results from a detailed plan, or the results of your individual 

interpretation of what a plan is going to look like once details are finished? 

Answer. Any analysis of tax reform proposals prior to enactment (and even, to 

some degree, after enactment) requires assumptions about how details will be filled 

in. Unless we are going to avoid discussing the potential impact of tax reform plans 

altogether, some assumptions are necessary. 

In my view, tax experts both inside and outside government should try to educate 

the public about the potential impact of tax reform proposals, and, when they do 

so, they should make reasonable assumptions about how the details will be filled 

in and clearly state those assumptions. The portions of my written testimony that 

are critical of the President’s and House GOP’s proposals rely upon estimates by 

independent, nonpartisan organizations that I think easily meet these standards. 

PROGRESSIVITY V. EFFICIENCY

Question. Ms. Batchelder, in the hearing you stated: 

67 

Well, I certainly think there is a point where the tax code can be too progressive 

or too targeted on just one, or a handful of individuals. But I think we are very 

far from that point. We have very vastly rising inequality in this country and 

the tax code could do a lot more to help mitigate that. So I don’t think that 

anything that is on the potential drawing room table right now is at risk of 

making the tax code too progressive. But I’m sure that if you purposed replacing 

the entire income tax system with only taxing Bill Gates, I would think that 

is both unfair and inefficient. 

That’s a reasonable enough statement, but could you flesh that out more please? 

At what point would the tax code be too progressive? Would the code be too progressive if it taxed only the wealthiest 1 percent? 

Were the individual income tax rates at the time of the Truman Presidency too 

progressive? 

At what point would you think a tax was so progressive that it constituted a 

takings, within the meaning of the Fifth Amendment to the Constitution? 

Are the goals of efficiency and progressivity in tension with each other? If Congress could significantly increase GDP, but that would make the code slightly less 

progressive, would you say that is an unacceptable bargain? Should we be willing 

to take a hit to growth, if it significantly increased progressivity? 

Do you think it an important check on the voting public’s appetite for larger government expenditures that all of the voting public somewhat directly pays for some 

of those expenditures? 

I realize that these are not easy questions, but since you have emphasized the 

important issue of progressivity in the tax code, it seems fair to ask them of you. 

Answer. At the beginning of the Truman Presidency, the top individual statutory 

income tax rate was 94%. I do think that is too high. However, what really matters 

are average tax rates and effective marginal tax rates, not the statutory tax rate. 

For example, if the top statutory tax rate were 94% but every taxpayer automatically could deduct 75% of their income, the top effective marginal tax rate would 

only be 23.5% and the top average tax rate is even lower (assuming a progressive 

rate schedule). I am not an expert on the tax code during the Truman Presidency 

so I do not know what the top average tax rate and top effective marginal tax rate 

were at the time. 

I am also not a constitutional law expert so I cannot advise on the point at which 

a tax is so progressive that it constitutes a taking under the Fifth Amendment. To 

my knowledge, the Federal income tax under the Truman Presidency was not successfully challenged as a taking, so that seems to indicate that tax rates could be 

substantially higher than they are now without violating the Takings Clause. 

The goals of efficiency and progressivity are sometimes in tension with each other 

and sometimes are not. It depends in part on whether the policy in question is addressing what economists would call a market failure, such as negative externalities 

or market power. 

In my view, GDP is a relatively poor measure of how well-off Americans are, and 

policymakers should adopt more refined objectives for fiscal policy than simply 

maximizing GDP. Personally, I would be more interested in measures that place relatively more weight on $1 in additional income earned by the middle class and those 

who are less fortunate than $1 in additional income for a billionaire. In certain circumstances, I would view policies that slightly reduce GDP but make the Code substantially more progressive as worth serious consideration. For example, if a tax 

proposal would reduce GDP by $0.1 billion but that was the product of a $1 billion 

increase in the collective income of middle-class workers and a $1.1 billion decrease 

in the income of the single wealthiest American, I would consider that a reasonable 

approach. 

I am not sure I follow your question about whether it is an important check on 

the voting public’s appetite for larger government expenditures that all of the voting 

public somewhat directly pays for some of those expenditures. However, I do not 

think it is necessary or important for every American to pay some tax in order for 

them to exercise their right to vote responsibly. Many voters—rich, poor, and middle 

class—vote against their economic self-interest when they think a different approach is better for the country. We all contribute to and benefit from our government in myriad ways. But even if one did think it was important for all voters to 

pay some tax, I would note that all income groups on average pay positive federal 

68 

2See, e.g., Congressional Budget Office, ‘‘The Distribution of Household Income and Federal 

Taxes, 2013,’’ June, 2016, https://www.cbo.gov/publication/51361. 3See e.g., Jeffrey Grogger, ‘‘The Effects of Time Limits, the EITC, and Other Policy Changes 

on Welfare Use, Work, and Income Among Female-Headed Families,’’ Review of Economics and 

Statistics, 2003; and Jeffrey Liebman and Nadda Eissa, ‘‘Labor Supply Responses to the Earned 

Income Tax Credit,’’ Quarterly Journal of Economics, 1996. 4 Raj Chetty, John N. Friedman, and Emmanuel Saez, ‘‘Using Differences in Knowledge 

Across Neighborhoods to Uncover the Impacts of the EITC on Earnings,’’ American Economic 

Review, 2013, http://www.nber.org/papers/w18232.pdf. 

taxes in a given year,2 a relatively small share of households (many of whom are 

elderly or disabled) do not pay positive federal taxes in any given year, and that 

share becomes even smaller if one looks over multiple years and/or includes state 

and local taxes. 

CAPITAL GAINS VERSUS ORDINARY INCOME

Question. Ms. Batchelder, you mention how the gap between the capital gains tax 

rate and the higher ordinary income tax rate creates a large incentive for taxpayers 

to try to re-characterize ordinary income as capital gains. She proposes addressing 

this problem by ‘‘raising the capital gains rates to reduce this incentive.’’ 

But, to be clear, one equally effective way to address this problem is to reduce 

the ordinary income tax rates, right? 

Answer. Yes, reducing ordinary income tax rates while holding constant capital 

gains rates would reduce the incentive for taxpayers to re-characterize ordinary income as capital gains. I have other concerns with this approach; namely, that it 

would worsen budget deficits and make the tax code less progressive. 

HIGH IMPLICIT MARGINAL TAX RATES

Question. Ms. Batchelder, you wrote something I really appreciated. You wrote: 

‘‘Low-income workers face some of the highest implicit marginal tax rates.’’ 

I think you’re right, and it’s a serious problem. But later in your testimony, you 

talk positively about a proposal from a member of this Committee to increase the 

Earned Income Tax Credit and you note that the proposal would phase the EITC 

out more rapidly. 

But wouldn’t a more rapid phase-out of the EITC increase the highest implicit 

marginal tax rate of those low income workers in the phase-out range? 

Answer. Any increase in the EITC that holds constant the current phase-in and 

phase-out income thresholds will result in lower implicit marginal tax rates in the 

phase-in range and higher implicit marginal tax rates in the phase-out range, compared to current law. An extensive body of research finds that EITC expansions on 

net increase labor force participation despite these somewhat offsetting incentives.3

These effects appear to be due in part to many individuals making decisions about 

working more at the ‘‘extensive margin’’ rather than the ‘‘intensive margin.’’ In 

other words, many individuals look more at what their after-tax return is to working overall, rather than their after-tax return to an additional hour of work. Because 

any EITC expansion necessarily increases the after-tax return to working overall, 

it will increase incentives to engage in market work at the extensive margin. To the 

extent that individuals do make incentives about working at the intensive margin, 

they appear to respond more to the EITC’s phase-in incentives than its phase-out 

incentives. For example, a recent study found that responsiveness to the EITC’s 

phase-in incentives is two to six times stronger than responsiveness to its phaseout incentives.4

The research to date therefore strongly suggests that EITC expansion proposals 

like those discussed in my written testimony will increase labor force participation 

overall, even though they result in higher implicit marginal tax rates over some income ranges. 

QUESTION SUBMITTED BY HON. MIKE CRAPO

Question. Ms. Batchelder, I would like to explore what I see as a potentially 

under-reported challenge we may face in developing comprehensive tax reform. This 

came to mind after reviewing a recent hearing this committee held regarding the 

nationwide shortage of affordable housing. The hearing discussed important matters 

69 

like the Low-Income Housing Tax Credit or LIHTC. I am a longtime supporter of 

LIHTC, as are a number of my colleagues, and the hearing explored bipartisan proposals to expand the credit. What hasn’t received much attention, though, is how 

LIHTC actually works. It is not a tax credit, as some may think, that goes to the 

seniors and low-income families that live in these affordable-housing units. Is it not 

correct that the actual tax credits flow to banks and typically wealthy investors, allowing them to offset about $9 billion of their annual income that would otherwise 

be taxable? 

In exchange, these banks and investors put their own capital toward these affordable housing units, which, without these investments, would not be able to be 

rented out at rates low enough to be affordable for low income families. 

This brings me to some of the public lines in the sand being drawn by some, including some of my colleagues, stating that tax reform must not in any way reduce 

taxes for those above certain income thresholds. If that is the standard, would it 

not be accurate to say that this would mean that proposals such as the CantwellHatch bill to expand the Low-Income Housing Tax Credit, would be considered off 

the table for tax reform, because, regardless of what other important economic and 

policy benefits the credit provides to low income renters, it most certainly also provides a significant reduction in taxes for banks and upper income investors? 

Wouldn’t a similar standard also apply to a theoretical proposal to make permanent the New Markets Tax Credit, which is otherwise set to expire in a couple 

years? While New Markets has strong bipartisan support, and certainly provides important economic and public policy benefits to rural and low income communities, 

is it not also the case that the actual tax credits are typically claimed by banks and 

upper-income investors, which would mean an extension of the New Markets Tax 

Credit would also violate standards we have heard about, like the Mnuchin Rule, 

or the ‘‘Not One Penny’’ standard? 

And really, aren’t there many other broadly supported tax provisions that provide 

important public policy and economic benefits, which might also be candidates for 

attention in tax reform, that would have to be taken off the table if we are subject 

to strict standards on who can and cannot receive any benefits through the tax code 

from tax reform, like municipal bonds or conservation easements or many other provisions? 

Based on these facts, would you agree that it would not be appropriate or productive to set up a standard for evaluating tax reform that cherry picks data to try to 

support one’s position? For example, it would not be appropriate, in the context of 

a full comprehensive reform package, to evaluate some provisions solely by how they 

change particular tax rates for particular taxpayers, or how they change after-tax 

income for particular taxpayers, but then do not fully account for the broader secondary economic effects and effects on meeting important public policy goals (which 

are not always easily quantifiable). Conversely, it would then also not be appropriate to cherry pick and evaluate other provisions in that same comprehensive bill 

only by their broader economic and public policy effects, but not take into account 

how those policies effect tax rates or after tax income, correct? 

In order to best serve the American people and get the best tax policy for everyone, would it not be best to set evaluation standards that are comprehensive, and 

take into account not only the changes in rates and tax effects on taxpayers, but 

also a full evaluation of the broader secondary effects on the economy and on meeting public policy goals? 

Answer. In light of mounting inequality and deficits, I agree with statements that 

tax reform should not provide a net tax cut to the wealthy. However, your question 

raises several important issues about what this means. 

First, by ‘‘net’’ I mean that we should look at whether tax reform proposals provide a tax cut to the wealthy after accounting for all of the provisions in any bill. 

Any major tax reform will entail many moving pieces. I do not find it objectionable 

if some provisions cut taxes for the wealthy so long as they are more than counterbalanced by other provisions that ask them to contribute more. 

Second, a fundamental tenet of economic analysis of taxes is that the person who 

nominally remits a tax (or nominally claims a tax benefit) is not necessarily the person who bears the burden or ‘‘incidence’’ of the tax (or reaps the benefit of a tax 

expenditure). For example, there is broad consensus that the employer share of the 

payroll tax is borne by employees even though it is nominally paid by the employer. 

This is relevant to your question about the LIHTC. I am not sure how JCT distribVerDate Sep 11 2014 17:51 Sep 21, 2018 Jkt 000000 PO 00000 Frm 00073 Fmt 6601 Sfmt 6621 R:\DOCS\31548.000 TIM
70 

utes the benefit, but it would make sense to me if they partially distributed it to 

tenants in LIHTC developments and partially to the developers and investors. Regardless, when considering whether a tax reform plan cuts taxes for the wealthy on 

net, I believe we should look at the economic incidence of the plan, not at how it 

changes who nominally remits taxes or claims tax expenditures. 

This raises a third question: what authority should policymakers rely upon when 

considering the economic incidence of a tax reform proposal? My answer is, where 

at all possible, the Joint Committee on Taxation. They are the official nonpartisan 

estimators for Congress and have an exceptional staff and track record. While many 

have quibbles with certain aspects of their estimates, myself included, they are the 

independent referee and should be respected as such. Moreover, JCT meets the 

standards I outlined above: they do distribute taxes and tax expenditures (like 

LIHTC and the NMTC) according to who they believe bears the economic incidence, 

not to the person who nominally remits the tax or claims the tax expenditure. 

JCT of course has incredible demands upon its time and a small staff. It is therefore not able to provide as many estimates of the revenue, distributional and other 

impacts of tax proposals as members of Congress and the public might like. When 

their estimates are not yet available, I think it is reasonable to rely upon estimates 

by independent, nonpartisan organizations like the Tax Policy Center that attempt 

to replicate the JCT’s methodological approach, adopt reasonable assumptions where 

policy details are unspecified, and are transparent about what assumptions they 

adopt. 

QUESTIONS SUBMITTED BY HON. BILL NELSON

Question. In your opinion, did the 1986 Tax Reform Act solve the problems it was 

intended to fix? If so, please provide some examples of how. If not, why? 

Answer. One could write a book in response to this question (and some have!). 

To answer briefly, though the 1986 Tax Reform Act certainly was not perfect, I do 

think it made substantial headway in addressing some problems it was intended to 

fix. 

One example is the passive loss rules. Individual tax shelters were a huge problem prior to the 1986 Act. They typically involved relatively well-off taxpayers purchasing overpriced assets financed with seller-issued non-recourse debt in order to 

defer paying tax on their labor income and convert it into capital income eligible 

for preferential rates. The passive loss rules dramatically reduced the incentives for 

individuals to engage in such tax shelters and, as a result, they largely disappeared. 

Question. If you can, please provide some suggestions on how the President could 

achieve some of his stated objectives for tax reform, including (1) reducing complexity in the tax code and hours spent on tax-related paperwork, (2) making the 

tax code fairer, (3) raising wages, (4) sustaining 3 percent economic growth or higher, and (5) imposing a ‘‘price to pay’’ for companies that offshore jobs. 

Answer. As discussed in my written testimony, some proposals that I think would 

achieve several of these objectives at once include: 

• Expanding the Earned Income Tax Credit (EITC) for all workers, but especially 

for those without dependents. 

• Increasing refundability of the child tax credit (CTC), especially for families 

with young children. 

• Replacing the current law child and dependent care tax benefits with a single 

refundable tax credit that is larger for families for whom such expenses represent the largest budgetary strain. 

• Strengthening wealth transfer taxes. 

Question. How would you suggest Congress address the problem of wealthy taxpayers using secret, private letter rulings from the IRS to gain tax advantages not 

explicitly intended by Congress? 

Answer. As far as I know, private letter rulings have been publicly available since 

the D.C. Circuit ruled in 1974 that they had to be disclosed (in redacted form) under 

71 

5Tax Analysts and Advocates vs. IRS, 362 F. Supp. 1289 (D.C.D.Ct. 1973), modified 505 F.2d 

350 494 (D.C. Cir.1974). 1See, for example, Kevin A. Hassett and R. Glenn Hubbard, ‘‘Tax Policy and Business Investment,’’ in Handbook of Public Economics, Volume 3, ed. Alan J. Auerbach and Martin Feldstein 

(Amsterdam: North Holland Publishing Co., 2002), 1,293–1,343. 2See, for example, Alan D. Viard, ‘‘Capital Income Taxation: Reframing the Debate,’’ AEI Economic Perspectives, July 2013, available at www.aei.org/wp-content/uploads/2013/07/-capitalincome-taxation-reframing-the-debate_172019152543.pdf. 3See, for example, Emmanuel Saez, Joel Slemrod, and Seth H. Giertz, ‘‘The Elasticity of Taxable Income With Respect to Marginal Tax Rates: A Critical Review,’’ Journal of Economic Lit- erature 50, no. 1 (2012): 3–50, available at http://darp.lse.ac.uk/papersdb/Saez_etal_(JEL12). 

pdf; and Sarah Burns and James Ziliak, ‘‘Identifying the Elasticity of Taxable Income,’’ The Economic Journal 127, no. 600 (March 2017): 297–329. 

FOIA.5 But if you are referring to a different kind of agreement between the IRS 

and taxpayers, I am happy to respond. 

Question. How would you suggest Congress address the skyrocketing cost of rental 

housing? Please provide some ideas to consider. 

Answer. Generally, I think the best way to increase housing affordability is to 

boost the take-home pay of workers, rather than provide subsidies that are limited 

to housing and therefore place a thumb on the scale in favor of some kinds of consumption over others. The proposals I outlined in my written testimony—such as 

expanding the EITC and increasing refundability of the CTC—would indirectly 

make rental housing more affordable for those who are struggling the most. 

Some other ideas Congress should consider are fully funding housing choice 

vouchers (section 8) and expanding LIHTC. 

PREPARED STATEMENT OF ALEX M. BRILL, RESIDENT FELLOW, 

AMERICAN ENTERPRISE INSTITUTE

Chairman Hatch, Ranking Member Wyden, and other members of the committee, 

thank you for the opportunity to testify this morning. My name is Alex Brill, and 

I am a resident fellow at the American Enterprise Institute, a public policy think 

tank here in Washington, DC. I commend the committee for holding this important 

and timely hearing. The views and opinions I offer today are mine alone and do not 

represent those of my employer or necessarily those of my colleagues at AEI. 

The opportunity for fundamental and comprehensive tax reform is before this 

committee for the first time in many decades. As every member of this committee 

well knows, the tax code has frequently and sometimes significantly changed over 

the last 30 years, but not since 1986 has it been truly reformed in a manner that 

sought to broaden the base—that is, eliminate special deductions, credits, and exclusions—while lowering statutory tax rates. As Senators Hatch, Wyden, Roberts, and 

Grassley know firsthand, that legislative process was arduous and sometimes controversial, but the 1986 Tax Reform Act did result in a simpler income tax code with 

a broader tax base and significantly lower statutory tax rates. 

The last 30 years have seen tax complexity increase dramatically with the introduction of more and more tax expenditures. In many regards, the tax code today 

imposes undue and unnecessary burdens on taxpayers. Complexity and compliance 

costs are significant. High effective marginal tax rates impede investment,1 discourage savings,2 and encourage taxpayers to reduce their reported taxable income.3

Moreover, the myriad of tax expenditures in the tax code today yields wide disparities in tax burdens among taxpayers with similar amounts of income. 

Reversing the trend of the last three decades and pursuing an individual income 

tax reform that relies on a broader and fairer tax base will facilitate a move toward 

lower statutory rates and a more efficient and simpler tax code. A more neutral tax 

code will facilitate a more productive allocation of resources and can contribute to 

a pro-growth economic environment. 

In my testimony today, I would like to discuss 5 points: 

1. The current individual income tax system is complex, burdensome, and riddled 

with deductions, exclusions, and credits. Broadening the tax base can be a 

meaningful tax simplification. 

2. The current individual income tax system treats taxpayers with similar 

amounts of income very differently. Broadening the tax base is an effective 

72 

4See Figure 2.1.2 from the National Taxpayer Advocate’s 2016 Annual Report to Congress, 

available at www.taxpayeradvocate.irs.gov/reports/2016-annual-report-to-congress/full-report. 

Total estimated preparation time for all forms is 6 billion hours annually. Because this hearing 

focuses on individual income tax, compliance costs related to business tax (corporate, partnership, and S corportions), estate and gift tax, excise tax, and taxation of foreign persons’ U.S. 

source income are excluded. 5 According to the National Taxpayer Advocate’s 2016 Annual Report to Congress, the average cost of tax prep software is about $50. With 40 percent of the approximately 150 million individual returns completed using software (or 60 million tax returns), the estimated cost is $3 billion. 6 Joint Committee on Taxation (JCT), ‘‘Estimates of Federal Tax Expenditures for Fiscal Years 

2016–2020,’’ JCX–3–17, January 30, 2017. 

means for correcting this disparity and reducing horizontal inequity in the tax 

code. 

3. In addition to contributing to complexity and horizontal inequity, itemized deductions are generally regressive tax policies. The deduction for State and local 

taxes is an excellent example of this and is a policy that, ironically, incentivizes 

States to pursue more progressive (but inefficient) tax policies. 

4. Broadening the tax base, particularly with regard to limiting itemized deductions, is an opportunity to move toward a more neutral tax code and a more 

level playing field economically. 

5. The transitionary path from the tax code we have today to a fairer, simpler, 

and more pro-growth tax system is itself a complex challenge that will require 

lawmakers to strike a careful balance. Inadequate or insufficient transition relief may cause some taxpayers to face steep, unanticipated tax burdens judged 

unfair by policymakers. Conversely, overly extended transition relief (for example, repeal of an ineffective tax credit beginning 10 years hence) may severely 

limit the potential economic gains from tax reform. 

1. COMPLEXITY IN THE TAX CODE ABOUNDS

Members of this committee know well the complexity of the current tax code. The 

IRS Taxpayer Advocate estimates that nearly 2 billion hours are spent preparing 

Form 1040 every year. Various Form 1098s, 1099s, and 5498s, which relate to reporting mortgage interest expense, dividends and interest income, and distribution 

of pensions, among other activities, total over 700 million additional hours annually. 

Collectively, this 2.7 billion hours is equivalent to over 1.3 million full-time workers.4 Taxpayers employ a variety of strategies to comply with tax-filing obligations. 

Based on data from IRS Compliance Data Warehouse, about 40 percent of individual 

taxpayers use software to help them prepare their returns. These services can offer 

valuable convenience and save time but may cost taxpayers $3 billion annually.5

This complexity is not related to the statutory rate (or number of rates) at which 

the government taxes incomes but rather is primarily related to the elements of the 

tax code that alter taxpayer’s tax liabilities, whether by permitting a deduction, an 

exclusion, or a credit. The Joint Committee on Taxation (JCT) identifies more than 

250 such tax expenditures in the Internal Revenue Code,6 though there is no definitive methodology for constructing this list and many of these provisions do not relate directly to individuals. Moreover, surtaxes such as the Alternative Minimum 

Tax are another clear source of complexity. 

One indicator of the complexity of the tax code can be observed by analyzing the 

number of taxpayers who itemize their deductions as opposed to claiming the standard deduction. According to recently released statistics from the IRS Statistics of Income (SOI), 150.6 million individual income tax returns were filed in tax year 2015, 

the most recent year for which these statistics are available. Of these, 44.5 million 

returns claimed a total of $1.2 trillion in itemized deductions. Mortgage interest deductions were claimed by 32.7 million taxpayers and totaled $279 billion. Charitable 

deductions were claimed on 36.6 million returns and totaled $201 billion. State and 

local income tax deductions (including the general sales tax deduction) were claimed 

on 42.6 million returns and totaled $338 billion. 

More than one-fourth of all itemized deductions are claimed by fewer than 3 percent of taxpayers—those with adjusted gross incomes (AGIs) greater than $250,000. 

However, because these higher-income taxpayers face higher marginal tax rates, the 

tax savings they receive from these deductions is far greater than half of the total 

tax savings associated with these policies. Table 1 summarizes the distribution of 

itemized deductions as reported by the IRS for tax year 2015, while Figure 1 illusVerDate Sep 11 2014 17:51 Sep 21, 2018 Jkt 000000 PO 00000 Frm 00076 Fmt 6601 Sfmt 6621 R:\DOCS\31548.000 TIM
73 

7The Tax-Calculator is part of the Open Source Policy Center’s (OSPC) TaxBrain modeling 

suite. More information about TaxBrain and the OSPC generally can be found at www.ospc.org. 

The entire suite of models, including source code, is publicly available. 

trates this distribution visually using data and modeling made available by the 

Open Source Policy Center (OSPC) Tax-Calculator.7 In brief, one-fifth of taxpayers 

earning near the median income are burdened with the complexity of itemized deductions. Over three-fourths of taxpayers with AGIs between $100,000 and $200,000 

are itemizers, and nearly all taxpayers with AGIs greater than $200,000 itemize 

their deductions. 

Table 1. Itemized Deductions by Adjusted Gross Income in Tax Year 2015 

Total Under 

$15,000 

$15,000 to 

$29,999 

$30,000 to 

$49,999 

$50,000 to 

$99,999 

$100,000 to 

$199,999 

$200,000 or 

more 

Number of 

returns 150,565,918 35,584,745 30,103,270 26,564,740 32,892,457 18,634,133 6,786,573 

Itemized 

deductions 44,477,185 1,323,310 2,785,803 5,485,481 14,438,234 14,101,283 6,343,076 

Share itemizing 29.5% 3.7% 9.3% 20.6% 43.9% 75.7% 93.5% 

Source: IRS SOI Bulletin. 

Source: Open Source Policy Center (OSPC). 

Figure 2 narrows in on those taxpayers with AGIs between $20,000 and $200,000 

and looks across this income spectrum in a more granular manner, making evident 

a clear and dramatic trend: as incomes rise, so does the tax code’s complexity. 

Other factors in addition to itemized deductions also contribute to the complexity 

of the tax code for individuals. In tax year 2015, 49.4 million taxpayers claimed one 

or more tax credits, including 22.6 million who claimed the child tax credit, 9.7 million who claimed an education tax credit, 2.7 million who claimed a residential energy credit, and 28.4 million who claimed the earned income tax credit (EITC). 


91417.014
74 

8 JCT, ‘‘The Taxation of Individuals and Families,’’ JCX–41–17, September 12, 2017. 

These credits and deductions reduce tax liabilities for targeted populations and 

can incentivize or reward particular behaviors or offer tax relief for taxpayers in certain circumstances. The merits and efficiency of various credits and deductions can 

be debated, but they generally add to the complexity of the tax code. Further complicating the tax code and leading to higher effective marginal tax rates is the phase 

out of various credits. For example, the JCT reports that 3.5 million households are 

subject to the phase out of the child tax credit. As a result, these taxpayers face 

marginal tax rates 5 percentage points higher.8

2. THE INDIVIDUAL INCOME TAX BREEDS HORIZONTAL INEQUITY

In addition to adding to the complexity of the tax code, a second consequence of 

the myriad of tax expenditures available to individual taxpayers is an increase in 

horizontal inequity—that is, similarly situated taxpayers paying dissimilar amounts 

of Federal income tax. In the most general terms, similar taxpayers may be considered two taxpayers with similar amounts of income. An alternative approach would 

be to consider both income and household size, recognizing the established principle 

in the U.S. tax code that, all else equal, larger households should pay less tax. 

Consider, for example, two neighbors. Neighbor A owns her home, and Neighbor 

B rents. Neighbor A donates a significant amount of her income to charity. Neighbor 

B donates a significant amount of his time to a local charity. Neighbor A lives in 

Bristol, VA, and Neighbor B lives down the street in Bristol, TN. Even if these two 

taxpayers had identical incomes of $100,000, their Federal tax liabilities would differ considerably. Neighbor B would likely claim the standard deduction, but Neighbor A would likely deduct her mortgage interest costs, her charitable giving, and 

the income taxes she paid to the Commonwealth of Virginia. Moreover, if Neighbor 

A has a 17 year child, and Neighbor B has an 18 year old child, their income tax 

liabilities would be even more disparate. 

To better understand this variance in tax liability among taxpayers with similar 

incomes, Figure 3 illustrates the disparity in tax liabilities among taxpayers within 

the same AGI percentile. For example, at the 70th AGI percentile, the median taxpayer within that group faces an average tax rate of 8 percent, while a quarter of 

those taxpayers pay 4 percent of their AGI or less and another quarter pay 13 percent or more. Figure 4 repeats this analysis but only for taxpayers with a constant 


91417.015
75 

household size, single filers with no children. The disparity within percentiles is 

much less but still present. 

A final perspective on the variance in tax liabilities is illustrated in Table 2, 

which breaks down the range of tax bills for all taxpayers, single taxpayers with 

no children, and married taxpayers with two children, with AGIs at both the 50th 

percentile and the 75th percentile. For example, roughly 40 percent of all median 


91417.016 91417.017
76 

9 Congressional Budget Office (CBO), ‘‘Limit the Deduction for State and Local Taxes,’’ Options for Reducing the Deficit: 2017 to 2026, December 8, 2016, available at www.cbo.gov/budget-options/2016/52253. 

taxpayers have zero or negative tax liabilities, while 15.1 percent owe $2,500 or 

more in Federal income tax. 

Table 2. Variance in Tax Liability by Household Size 

Median AGI 75 Percentile of AGI 

Tax Liability All Tax Units Single, 

No Children 

Married, 

2 Children All Tax Units Single, No Children 

Married, 

2 Children 

<$0 37.6% 3.1% 100.0% 1.8% 0.0% 6.4% 

$0 2.5 1.5 0.0 0.6 0.7 0.7 

$1–$1,500 19.9 12.5 0.0 4.2 0.9 15.1 

$1,501–$2,500 24.9 51.7 0.0 6.3 0.8 20.3 

$2,501–$5,000 14.8 30.7 0.0 17.9 3.3 54.6 

$5,001+ 0.3 0.5 0.0 69.2 94.3 2.9 

Source: OSPC. 

The disparities in Federal tax liabilities for similarly situated taxpayers contributes, in my view, to a lack of confidence in the system by many taxpayers. After 

all, while the overall Federal income tax is progressive, nearly 20 percent of taxpayers who report $36,000 in AGI pay a higher average tax rate than 60 percent 

of taxpayers who earn $50,000. In short, many taxpayers are correct in their suspicion that higher-income earners are paying a lower tax rate, but importantly this 

is true across the entire income spectrum. 

3. ITEMIZED DEDUCTIONS ARE DISTORTIONARY AND REGRESSIVE: 

THE STATE AND LOCAL TAX DEDUCTION EXAMPLE

Among the many provisions of the individual income tax code that narrow the tax 

base, itemized deductions are, as a group, the largest. As mentioned above, according to the IRS SOI, itemized deductions totaled $1.2 trillion in tax year 2015. Within this category, the largest itemized deduction was for State and local taxes 

(SALT). In 2015, $338 billion in SALT deductions were claimed. (Mortgage interest 

deductions totaled $279 billion and charitable giving deductions $201 billion.) 

The revenue loss (calculated as the deduction amount multiplied by the weighted 

average marginal tax rate for taxpayers claiming the deduction) from reducing the 

tax base by $338 billion in a single year is quite large. According to my estimation, 

full repeal of the SALT deduction would raise $1.4 trillion over a decade. Of this, 

89 percent—$1.26 trillion—would come from taxpayers with AGIs above $100,000. 

In other words, the policy itself is highly regressive. It is available only to the minority of taxpayers who itemize their taxes (generally higher-income taxpayers) and 

is more valuable to taxpayers in higher tax brackets (though for truly high-income 

earners and taxpayers on the AMT, the benefits are limited). 

What is the purpose or rationale for a Federal tax deduction for State and local 

taxes? As the Congressional Budget Office (CBO) explains: 

The deduction for State and local taxes is effectively a Federal subsidy to State 

and local governments; that means the Federal Government essentially pays a 

share of people’s State and local taxes. Therefore, the deduction indirectly finances spending by those governments when Federal revenues could be used to 

fund the activities of the Federal Government.9

Moreover, this Federal subsidy reduces the ‘‘tax price’’ for deductible State and 

local taxes for those taxpayers who itemize. For example, a $1 State income tax increase paid by a taxpayer in the 33 percent marginal tax bracket would reduce her 

Federal tax liability by $0.33, yielding a net additional cost to the taxpayer of $0.67. 

This reduced tax price can encourage States to rely on deductible taxes more and 

to impose more of those taxes on high-income taxpayers. In short, the SALT is, in 

77 

10Kirk J. Stark, ‘‘The Federal Role in State Tax Reform,’’ Virginia Tax Review 30 (2010): 407. 11David Coyne, ‘‘Unmasking Local Fiscal Responses to Federal Tax Deductibility,’’ National 

Tax Journal 70, no. 2 (2017): 223–256. 12 CBO, ‘‘Limit the Deduction for State and Local Taxes.’’ 13 Alex M. Brill and Alan D. Viard, ‘‘The Benefits and Limitations of Income Tax Reform,’’ AEI 

Tax Policy Outlook, September 2011, available at www.aei.org/wp-content/uploads/2011/10/ 

TPO-Sept-2011.pdf. 

isolation, a regressive tax policy at the Federal level and one that encourages a progressive income tax at the State and local level. As Kirk Stark observed in Virginia 

Tax Review, ‘‘All else equal, State and local governments will have an incentive to 

design their tax systems to take maximum advantage of the SALT subsidy, which 

suggests a strong price effect in favor of a more progressive tax system. Empirical 

studies have shown that the Federal deduction for State and local taxes exerts a 

substantial influence on subnational progressivity.’’ 10 In fact, the most recent evidence of this empirical response, David Coyne finds that local governments are very 

sensitive to changes in the tax price with respect to their willingness to rely on deductible taxes.11 He estimates that a 1 percent increase in the tax price will lead 

to a 3.5 percent reduction in the use of deductible taxes. 

CBO continues: 

An argument in favor of capping the deduction is that the Federal Government 

should not provide a tax deduction that subsidizes the spending of State and 

local governments because revenues from State and local taxes are largely paid 

in return for services provided to the public. When used to pay for public services, such taxes are analogous to spending on other types of consumption that 

are nondeductible. . . . Additionally, the unlimited deductibility of taxes could 

deter States and localities from financing some services with nondeductible fees, 

which could be more efficient.12

Overall, the combination of high marginal tax rates on income earned by taxpayers claiming the largest share of itemized deductions yields a set of regressive 

and costly tax expenditures. The list is led by a policy that unfairly distorts State 

tax policy. 

4. A BROADER TAX BASE CAN PROMOTE GREATER TAX NEUTRALITY

If lawmakers pursue a tax reform agenda with a commitment to broaden the tax 

base, the benefits can be categorized in two types: First, there are the direct benefits 

discussed above: the potential for a less complex tax code with lower compliance 

costs, a fairer tax system with less inequality among similarly situated taxpayers, 

and a less distortionary system that is also less regressive. (Such a result is not, 

however, to be assumed for all base-broadening policies, of course. For example, 

eliminating an exclusion of income, while perhaps desirable, could increase complexity or compliance.) 

Second, there is an important indirect benefit: leveling the playing field and promoting economic efficiency by reducing tax-induced distortions in the allocation of 

resources. As my colleague Alan Viard and I wrote in an AEI Tax Policy Outlook 

in 2011: 

The economy is generally most efficient when the free market determines the 

allocation of resources between goods, based on production costs and consumer 

preferences. When different goods are taxed at different rates, efficiency is impeded because the allocation of resources is based partly on tax considerations, 

rather than costs and preferences. For example, if apples, but not oranges, are 

tax-deductible, the economy produces too many apples and too few oranges. 

Switching to a [single] tax on both goods corrects this misallocation, increasing 

the production of oranges and reducing the production of apples and yielding 

a set of goods consumers find more attractive. . . . Base broadening is likely 

to be most useful when it addresses the major distortions of the current tax system.13

However, some base broadening should certainly be avoided. The income tax, by 

its very nature, discourages savings and investment by taxing future consumption 

more heavily than current consumption. The current tax code includes a host of policies intended to mitigate or eliminate this distortion. While lower tax rates on dividends and capital gains, tax preferences for defined contribution plans, and other 

similar policies may appear on lists of tax expenditures, they in fact promote economic efficiency and should be preserved in even expanded. 

78 

14 Alex Brill, ‘‘Investing in Tax Reform Today Will Yield a Strong Economy Tomorrow,’’ The 

Hill, April 11, 2017, available at www.aei.org/publication/investing-in-tax-reform-today-willyield-a-strong-economy-tomorrow. 

5. TAX REFORM AND TRANSITION POLICY: FINDING THE BALANCE

The final point I would like to address relates to the transition policies necessary 

to consider in a fundamental tax reform effort that transforms the tax code from 

the one we have today to one consisting of a broader base (that is, with fewer expenditures) and lower statutory rates. In many respects, the transition rules—the 

tax policies that will feature prominently in the tax code in the intervening years— 

may be as important as the final tax policies. As lawmakers ponder the most appropriate strategies for crafting these rules, I would like to offer three observations. 

First, if pursuing fundamental and broad-based reform, providing little or no transition relief risks imposing large and unanticipated tax hikes on unsuspecting taxpayers. Beyond the political challenges this may pose, it could yield painful adverse 

short-term economic effects. Second, the corollary is true, too. Overly generous and 

slow transition policies that delay needed reforms many years into the future will 

also delay the potential economic gains associated with tax reform. 

And finally, when considering the budgetary impact associated with tax reform, 

the costs associated with transition policy—for example, that the ‘‘payfors’’ may 

phase in more slowly than a rate cut—are far less important than the budgetary 

impact of tax reform beyond the budget window. As I discussed in a recent article, 

lawmakers in pursuit of revenue-neutral tax reform should focus on the likely revenue impact of tax reform beyond the 10-year budget window rather than the impact within the budget window.14

In conclusion, the opportunity for fundamental reform of the individual income 

tax system is an opportunity to simplify the tax code, improve the equity of the system, and reduce distortions. Tax reform that wisely broadens the tax base can 

achieve these goals. To pursue the additional core objective of a tax reform that promotes economic growth, tax reform should also be careful not to increase the tax 

penalty on savings and should instead pursue opportunities to reduce the current 

savings penalty. 

QUESTIONS SUBMITTED FOR THE RECORD TO ALEX M. BRILL

QUESTIONS SUBMITTED BY HON. ORRIN G. HATCH

CAPITAL GAINS VERSUS ORDINARY INCOME

Question. Mr. Brill, Ms. Batchelder mentions how the gap between the capital 

gains tax rate and the higher ordinary income tax rate creates a large incentive for 

taxpayers to try to re-characterize ordinary income as capital gains. She proposes 

addressing this problem by ‘‘raising the capital gains rates to reduce this incentive.’’ 

But, to be clear, one equally effective way to address this problem is to reduce 

the ordinary income tax rates, right? 

Answer. The differential in tax rates between wage income and capital income can 

encourage taxpayers to try to recharacterize their income to take advantage of the 

lower tax rate. The degree to which this behavior is incentivized is determined by 

the spread between tax rates. That spread can be reduced by either lowering the 

higher rate or raising the lower rate or a combination of the two. But it is important 

to recognize that raising the rate on capital income can discourage savings and investment, which are essential to encouraging investment and for promoting gains 

in productivity. 

HIGH IMPLICIT MARGINAL TAX RATES

Question. Mr. Brill, Ms. Batchelder wrote something I really appreciated: ‘‘Lowincome workers face some of the highest implicit marginal tax rates.’’ 

I think she’s right, and it’s a serious problem. But later in her testimony, she 

talked positively about a proposal from a member of this committee to increase the 

Earned Income Tax Credit and she notes that the proposal would phase the EITC 

out more rapidly. 

79 

But wouldn’t a more rapid phase-out of the EITC increase the highest implicit 

marginal tax rate of those low-income workers in the phase-out range? 

Answer. The EITC is an effective tax policy for encouraging work and reducing 

poverty, especially among taxpayers with children. Providing a tax incentive for lowincome individuals to work, as the EITC does, without providing a subsidy to all 

taxpayers necessitates that the credit be phased out as incomes rise. There is, however, an unavoidable tradeoff in design if the policy were to be expanded. If enlarged, the credit must be phased out at a faster pace over the same range (thus 

creating a higher effective marginal tax rate) or it must be phased out over a broader range of income (thus extending the existing marginal tax rate bump to more 

middle-income taxpayers). 

SALT DEDUCTION: REGRESSIVE OR PROGRESSIVE?

Question. Mr. Brill, you write on how the State And Local Tax (SALT) deduction 

is highly regressive, but that it encourages progressive State/local taxes. So, please 

explain more. Perhaps those two effects net out? If one thinks the tax laws needs 

to be more progressive, perhaps it’s a good thing that the Federal SALT deduction 

encourages progressive State and local taxes? What do you think? A good thing or 

a bad thing? 

Answer. The progressivity of State income tax systems is encouraged by the Federal deduction for State and local taxes. To some extent, the States are responding 

to the incentive to capture the Federal subsidy the deduction offers. By providing 

a subsidy generally only to high-income taxpayers—those who itemize—the code rewards States who rely on these taxpayers for their revenues. The degree of progressivity is a policy design by each State, and Federal tax policy should not attempt 

to steer that design choice. States should not be encouraged (or discouraged) from 

pursuing a progressive State tax system by the Internal Revenue Code. 

TRANSITION POLICY

Question. Mr. Brill, I agreed with Ms. Harrison’s point that: ‘‘If one were designing a tax system for the first time, one would likely devise something that is different from what we have already.’’ 

She then went on to state that some provisions in the tax code have been around 

for over a century, and thus many asset prices have the expectation of those tax 

provisions continuing. 

So, Mr. Brill, please connect Ms. Harrison’s good points with your thoughts on 

transition policy. Namely, it’s certainly true we don’t want, through tax law 

changes, to create tremendous upheaval, even if the new law will be more efficient 

in the long run. Your thoughts? 

Answer. I would encourage the committee not to keep any existing policy in the 

tax code simply because it has been there for a long time. One objective of tax reform should be to establish a neutral tax code that minimizes interference with the 

market, absent clear evidence of a market failure. While asset values can certainly 

be affected by tax policy changes, I believe the idea that the U.S. residential housing 

market is inflated by the mortgage interest deduction is likely exaggerated. While 

my research on the topic is incomplete at this time, I would simply note that given 

the average price of homes in the U.S., current interest rates, and the effects of the 

standard deduction and personal exemption, a large number of homebuyers do not 

claim the mortgage interest deduction. 

QUESTIONS SUBMITTED BY HON. BILL NELSON

Question. In your opinion, did the 1986 Tax Reform Act solve the problems it was 

intended to fix? If so, please provide some examples of how. If not, why? 

Answer. The Tax Reform Act of 1986 was a major legislative accomplishment. The 

tax base was broadened and statutory tax rates were reduced significantly. It was 

also a political accomplishment, as Democrats worked cooperatively with President 

Reagan to achieve these reforms. As Martin Feldstein has documented, TRA86 demonstrated that lower marginal tax rates yield increases in the amount of reported 

taxable income. As the 2006 Economic Report of the President notes, TRA86 also 

greatly narrowed the disparity in tax rates across asset classes, thereby reducing 

distortions in the types of investments made domestically. 

80 

Question. What metric or considerations should Congress use to determine appropriate trade-offs in tax reform? 

Answer. I would encourage lawmakers to pursue a tax reform agenda with two 

main priorities: first, a simplification of the individual income tax system that reduces itemized deductions and moves more taxpayers to the standard deduction. 

This creates both a simpler system and a fairer tax code. Second, to the extent possible, I would encourage Congress to reduce the tax burden on savings and new investment, particularly in the corporate sector. A narrowing of the disparity in tax 

liabilities among similarly situated taxpayers and an increase in the domestic capital stock arising from a reduction in the tax on new investment will yield a tax 

code that is both fairer and more pro-growth. 

A challenge to this task will be balancing the long-run budget consequence of tax 

reform with these goals. While deficit financing the transition cost of tax reform 

may be reasonable, the long-run fiscal outlook must be carefully evaluated. 

Question. How would you suggest Congress address the skyrocketing cost of rental 

housing? Please provide some specific ideas to consider. 

Answer. The cost of rental housing is often measured relative to the cost of purchasing a home, a metric referred to as the price-to-rent ratio. Nationally, that ratio 

is near its historical average, but trends vary across markets. To the extent that 

limited housing supply is pushing up rents, local policy reforms to permit more construction would be most appropriate. I would not support any tax policy geared to 

relieving the cost burden on renters. 

SUBMITTED BY HON. MARIA CANTWELL, A U.S. SENATOR FROM WASHINGTON

From The New York Times 

ECONOMISTS SEE LITTLE MAGIC IN TAX CUTS TO PROMOTE GROWTH

By Patricia Cohen and Nelson D. Schwartz 

May 23, 2017 

If one assumption has undergirded Republican economic policy for decades—and is 

the foundation of the Trump administration’s first budget proposal—it is that tax 

cuts will unleash fantastic growth. 

The basic idea is that shrinking the government’s share increases what people take 

home, encouraging workers to work more and investors to invest more. But while 

taxes can create incentives that can promote growth, liberal and conservative economists alike said there was no evidence that the White House budget announced on 

Tuesday would do so. 

‘‘The assumed effects on growth are just huge and unwarranted,’’ said William G. 

Gale, a co-director of the nonpartisan Urban-Brookings Tax Policy Center and a 

former economic adviser to the first President George Bush. 

The Trump administration promises to cut taxes, keep revenues steady and crank 

out average annual economic growth of 3 percent, but neither the budget nor the 

tax reforms previously outlined in sketchy form provide enough detail to figure out 

if that will happen. 

While the United States cruised along with 3 percent growth—and higher—in the 

late 1990s and mid-2000s, growth has not reached anywhere near that level since 

well before the recession. The best showing in the past decade was in 2015, when 

the annual rate of expansion hit 2.6 percent. 

In 2016, the economy expanded at an annual rate of 1.6 percent, the weakest performance in 5 years. Even as economies in Europe and Asia show signs of life after 

years of stagnation or outright recession, expectations for faster growth soon in the 

United States have ebbed. Both the Federal Reserve and the Congressional Budget 

Office have projected a pace of less than 2 percent in the long run. 

Since mid-March, yields on the benchmark 10-year Treasury bond have fallen from 

2.62 percent to 2.28 percent on Tuesday, a sign that traders are discounting the 

likelihood of a sudden pickup in growth. 

81 

How Trump’s Budget Would Affect Every Part of Government 

Government spending would be cut substantially. See how every budget item would be changed. 

Budget Item 10-year budget 10-year change 10-year percent 

change 

Health $5.11 trillion ¥$2.02 trillion ¥28.3% 

Health care services $4.78 trillion ¥$1.91 trillion ¥28.5% 

Grants to States for Medicaid $4.7 trillion ¥$627 billion ¥11.8% 

Refundable premium assistance tax 

credit and cost sharing reduction $559.6 billion ¥$5.3 billion ¥0.9% 

Federal employees’ and retired employees’ health benefits $220.4 billion ¥$2.6 billion ¥1.2% 

Children’s Health Insurance Programs (CHIP) 77.2 billion +$13.9 billion +21.9% 

DOD Medicare-eligible retiree 

health care fund $143.8 billion ¥$3.8 billion ¥2.6% 

Health Resources and Services Administration $66.2 billion +$474 million +0.7% 

Reinsurance and risk adjustment 

program payments $71.7 billion – – 

Centers for Disease Control and 

Prevention $49 billion ¥$18 billion ¥26.9% 

Indian Health Service $47.5 billion ¥$5.8 billion ¥10.9% 

An analysis of Mr. Trump’s tax plan by the bipartisan, nonprofit Committee for a 

Responsible Federal Budget estimated that the Federal debt would rise by $5.5 trillion over the first decade. Even if lower taxes encouraged people to save and invest 

more, the huge government deficits created by the budget would crowd out private 

investors and offset some of those direct effects, several economists said. 

Alan D. Viard, a tax expert at the American Enterprise Institute, a conservative research organization in Washington, said he and other researchers had repeatedly 

found that ‘‘deficit-financed tax cuts were usually harmful to growth.’’ 

Cutting the tax on investment income, for example, delivers the most bang for the 

buck, Mr. Viard said, but unless the lost revenue is made up through increases in 

other taxes or spending cuts, the deficit will balloon and economic growth will suffer. 

Previous Presidents have not had a lot of success using tax cuts to spur growth. 

‘‘The historical record is pretty clear that large tax cuts don’t pay for themselves 

through economic growth,’’ said Michael J. Graetz, a professor of tax law at Columbia University. 

The 1981 tax cut that President Ronald Reagan pushed through did provide a short 

jolt to the economy, Mr. Graetz said, but he pointed out that the administration was 

compelled to raise taxes in 1982 and 1984 to keep the deficit under control. 

Tax cuts championed by President George W. Bush in 2001 and 2003 performed 

even worse. While the cuts temporarily stimulated spending by putting more money 

in people’s pockets, they did not have much impact in enhancing the economy’s ability to produce goods and services. 

Both President Trump and the House Republicans’ proposals reserve the biggest tax 

cuts for the wealthiest. Slashing rates at the top is probably the least effective way 

of spurring spending, however, because high-income households have the luxury of 

socking away a financial windfall, said Nariman Behravesh, chief economist at the 

research firm IHS Markit. The Trump plan, he said, ‘‘could well end up hurting a 

lot of poor people without boosting growth.’’ 

‘‘If you tilt the tax cuts toward lower-income households, they will spend more of 

it,’’ Mr. Behravesh said. ‘‘There is virtually no debate among economists about that.’’ 

And the deep cuts in the budget to programs that benefit primarily those at the bottom of the economic ladder will, if anything, reduce their spending. 

The left-leaning Economic Policy Institute estimated that the budget cuts would decrease growth by more than 1 percent by 2020. 

Many economists on the left and the right agree that the current code as it applies 

to businesses is misguided: It puts the United States at a competitive disadvantage 

82 

and encourages corporations to keep income abroad. But fixing that problem isn’t 

merely a matter of slashing rates. 

‘‘With the economy back to near full employment, conventional tax cuts or stimulus 

spending won’t have that much of an effect,’’ said Douglas Holtz-Eakin, a conservative economist who served in the George W. Bush administration and advised John 

McCain’s 2008 presidential campaign. ‘‘What is needed are policies that genuinely 

augment the supply side of the economy.’’ 

What might that look like? Instead of simply cutting rates, Mr. Holtz-Eakin would 

opt for incentives for business to invest in new equipment or software, infrastructure investments that speed transportation and ease other frictional costs, and retraining that improves workers’ skills and increases the proportion of prime-age 

Americans who are employed. 

Mr. Viard of the American Enterprise Institute added tax relief for child-care expenses to the list of reforms that could bolster growth. 

There are lots of reasons to tinker with the tax code, many experts say, but the notion that there is a simple cause-and-effect relationship between cuts and growth 

is faulty. ‘‘Tax policy is clearly not some overwhelmingly powerful tool that affects 

growth,’’ Mr. Viard said. There are simply too many other things—like technology, 

worker productivity and aging—that can either muffle or overwhelm their impact. 

In the months after Mr. Trump’s unexpected victory in November, many business 

leaders and investors thought that the Washington logjam might finally break and 

that corporate tax reform, more infrastructure spending and other growth-friendly 

policies would be passed by Congress and signed into law. 

But with Washington and the White House now distracted by the investigation into 

possible ties between former Trump aides and Russia, momentum for major tax cuts 

or a big infrastructure bill has stalled. 

On Friday, the government will announce revised figures for growth in the first 

quarter of 2017, but not much improvement from the initial 0.7 percent estimate 

last month is expected. 

PREPARED STATEMENT OF IONA C. HARRISON, SENIOR VICE PRESIDENT, 

PIONEER REALTY

INTRODUCTION

Chairman Hatch, Ranking Member Wyden, and members of the Finance Committee, my name is Iona Harrison. I am a real estate professional working in Upper 

Marlboro, MD, and have been in the business my entire adult life. Currently, I serve 

as the chair of the Federal Taxation Committee of the National Association of Realtors (NAR), and I have served the real estate industry at the local, State, and national levels for many years in a variety of capacities. 

I am here today to testify on behalf of the more than 1.2 million members of the 

National Association of Realtors. NAR’s members are real estate professionals engaged in activities including real estate sales and brokerage, property management, 

residential and commercial leasing, and appraisal. The business approach of Realtors is a highly personal, hands-on, face-to-face model, focused on helping fulfill a 

family’s fundamental need for shelter. NAR has long prided itself as a voice for not 

only its members, but for America’s 76 million homeowners, as well as the millions 

more Americans who aspire to own their home one day. 

Thank you for the opportunity to present NAR’s views on how tax reform could 

affect individual taxpayers and residential real estate. Purchasing a home is one of 

the most significant events that most Americans undertake in their lives, and this 

activity interacts with our tax system in a fundamental way. Since its inception, the 

Internal Revenue Code has offered important incentives for purchasing and owning 

a home. As it pursues tax reform, Congress must have a full understanding of the 

impact that changing these provisions could have on American taxpayers, as well 

as on residential real estate markets and the economy as a whole. 

NAR Principles for Tax Reform 

NAR’s recommendations are centered on three guiding tax policy principles: 

• Our income tax system, despite its many flaws, has supported a home ownership system that is unequaled in the world. Tax reform must build on the posiVerDate Sep 11 2014 17:51 Sep 21, 2018 Jkt 000000 PO 00000 Frm 00086 Fmt 6601 Sfmt 6621 R:\DOCS\31548.000 TIM
83 

1 National Association of Realtors estimates. 

2 U.S. Census Bureau, January 2017. 

tive aspects of our current system so that it continues to encourage and support 

home ownership. 

• While some aspects of our current tax system are mind-numbingly complex, the 

housing and real estate tax rules create no undue or significant complexity burdens for the great majority of individuals. A quest for simplicity must not be 

allowed to override common sense. 

• Income-producing real estate is vital for strong economic growth and job creation, and great care must be taken in tax reform to ensure that current provisions that encourage those results not be weakened or repealed. Further, we 

agree that the tax system should be improved to better incentivize the construction of low-income housing (such as through an enhanced Low-Income Housing 

Tax Credit), encourage more investment in income-producing real estate by the 

middle class, and to help families save for retirement security. 

If one were designing a tax system for the first time, one would likely devise 

something that is different from what we have today. But we’re not starting from 

scratch, particularly in the context of housing. Some provisions in the tax code, such 

as the deductions for mortgage interest and State and local taxes paid, have been 

part of the Federal tax code since our current income tax was instituted more than 

a century ago. Thus, the values of such tax benefits are both directly and indirectly 

embedded in the price of a home. While economists disagree about the best estimates of the value of those embedded tax benefits, they all generally agree that the 

value of a particular home includes tax benefits. 

Real estate is the most widely held category of assets that American families own, 

and for many Americans, the largest portion of their family’s net worth, despite the 

price declines of the Great Recession. Therefore, while NAR agrees that reform and 

revision to different portions of the individual tax code are warranted, and that the 

law should be simplified, we remain committed to preserving the current law’s incentives for home ownership and real estate investment. 

NAR believes that individual tax rates should be as low as possible while still providing for a balanced fiscal policy. NAR further believes that there should be a 

meaningful differential between the rates paid on ordinary income and capital gains 

on investments. However, NAR does not endorse a particular rate, nor does it believe that long established provisions in the code should be changed or eliminated 

solely to lower marginal tax rates. When Congress last undertook major tax reform 

in 1986, it eliminated or significantly changed a large swath of tax provisions, including major real estate provisions, in order to lower rates, only to increase those 

rates just 5 years later in 1991. Most of the eliminated tax provisions never returned and in the case of real estate, a major recession followed. Congress must be 

mindful that eliminating widely used and simple tax provisions can have harsh and 

dangerous unintended consequences, particularly if the sole purpose of eliminating 

non-abusive provisions is to obtain a particular marginal tax rate. NAR also notes 

that it is estimated that American homeowners already pay well over 80 percent 

of all Federal income taxes.1 Congress should avoid further raising taxes on home- owners. 

Many concepts of tax reform are based on the idea of lowering tax rates and 

broadening the tax base. This paradigm often leads to the conclusion that tax reform needs to ‘‘close abusive or unwarranted loopholes.’’ However, very few ‘‘loopholes’’ have been identified. NAR firmly believes that the tax provisions that support 

home ownership are not loopholes. As 64 percent of American households are owneroccupied,2 we believe that home ownership is not a ‘‘special interest,’’ but is rather 

a ‘‘common interest.’’ 

NAR believes that tax reform must first do no harm to real estate. 

Home Ownership and Tax Simplification 

NAR supports the goals of simplification and structural improvements for the tax 

system. Nonetheless, we are unwavering in our support for the mortgage interest 

and property tax deductions and believe that other favorable housing provisions 

should be retained. These rules are among the most easily understood and widely 

supported in the entire tax system, so compliance is easily achieved. 

The mortgage interest and property tax deductions sometimes come under fire because, in any particular year, only about one-third of taxpayers itemize their deducVerDate Sep 11 2014 17:51 Sep 21, 2018 Jkt 000000 PO 00000 Frm 00087 Fmt 6601 Sfmt 6621 R:\DOCS\31548.000 TIM
84 

tions. This criticism overlooks two essential points. First, even though the percentage of taxpayers who itemize has remained relatively constant over the past 25 

years, the individuals who comprise the universe of itemizers changes from year to 

year. Younger taxpayers purchase their first home, older mortgages get paid off, a 

family’s charitable contributions fluctuate, State and local tax burdens vary from 

State to State, and in some years, families face deductions for large medical expenses or casualty losses. In short, circumstances change. 

Second, the standard deduction serves as a very generous proxy for itemizing. It 

provides, in relative terms, a greater tax benefit for the taxpayers who use it than 

itemizing would give them. For example, today’s standard deduction on a joint return is $12,700. Suppose that if a family’s total of mortgage interest expense, State 

and local taxes, charitable contributions and medical expenses were $8,700, they 

would receive the equivalent of a ‘‘free’’ extra exemption or deduction of $4,000 

($12,700¥$8,700). The standard deduction thus generally has the effect of sheltering some income from taxation. This is because taxpayers itemize only when allowable deductions exceed the standard deduction (please see The Enigma of the 

Standard Deduction, below). 

NAR supports the current standard deduction. For most taxpayers, it is a substantial and significant simplification device that also, by sheltering some income 

from tax, adds progressivity to the system. Those who itemize receive no such benefit. As with standard deduction taxpayers, itemizers are found in all tax brackets. 

If they are in higher tax brackets, they do receive more tax benefit per dollar spent 

than itemizers in lower brackets. What critics often overlook, however, is that higher bracket taxpayers also pay more tax on each dollar of income than those in lower 

tax brackets. 

Some recent tax reform plans feature a much higher standard deduction than is 

offered under the current system. Proponents of this change justify it by touting the 

additional simplification that could result from far fewer taxpayers itemizing. However, this simplification would come at a high price. Doubling or tripling the standard deduction, as some reformers suggest, destroys the incentive value of itemized 

deductions for most, as the great majority of taxpayers would receive the same tax 

benefit whether or not they engaged in the behavior the deduction is designed to 

encourage, whether it is to purchase a home or to donate to a charitable cause. Past 

increases in the standard deduction were justified on the grounds that the underlying itemized deductions had grown in value compared with an unindexed standard 

deduction. But under the current law, the standard deduction is adjusted each year 

for inflation, leaving little or no policy reason to increase it. 

Moreover, one prominent recent tax reform plan purports to almost double the 

standard deduction, but in reality, a large portion of the increase is accomplished 

by shifting the current-law personal and dependency exemptions to the increased 

standard deduction. As a result, this change could greatly mitigate promised tax reductions for many present itemizers, and also lessen or eliminate the incentive effect of those itemized deductions. This is especially true for larger families. 

For example, a family with four children with itemized deductions totaling 

$23,700 would have a total amount of combined deduction and exemptions under 

the current law of $48,000. This is from the itemized deductions plus six personal 

and dependency exemptions worth $4,050 each. However, under the proposed tax 

reform plan that the House Ways and Means Committee is reportedly considering, 

the total deduction and exemptions would be halved to just the $24,000 ‘‘higher’’ 

standard deduction. It is true that the Ways and Means plan includes a higher child 

tax credit, but this would not even come close to making up for the loss of the exemptions. Moreover, if one or more of the children were age 17 or older, there would 

be no offsetting increase in the child credit. Thus, larger families could pay a very 

high price indeed for the marginal amount of simplification that may be gained from 

the higher standard deduction under tax reform. 

For these reasons, NAR opposes tax reform plans that significantly increase the 

standard deduction. 

HOME OWNERSHIP AND AMERICAN CULTURE

Policymakers should not dismiss or underestimate Americans’ passion for home 

ownership, notwithstanding the most recent economic crisis. Calling home ownership the ‘‘American Dream’’ is not a mere slogan, but rather a bedrock value. Owning a piece of property has been central to American values since Plymouth and 

Jamestown. Homes are the foundation of our culture, the place where families eat, 

85 

3 ‘‘2015 Homeownership Opportunities and Market Experience (HOME) Survey,’’ conducted by 

the National Association of Realtors. 4 ‘‘Housing’s Contribution to Gross Domestic Product (GDP),’’ National Association of Home 

Builders, https://www.nahb.org/. 

learn and play together, and the basis for community life. The cottage with a picket 

fence is an iconic and irreplaceable part of our heritage. 

The Nation’s commitment to home ownership as a foundation of our society is not 

misplaced. Now, more than ever, home ownership does and should remain in the 

forefront of our cultural value system. 

The fundamental assumptions about the social benefits of housing and home ownership remain essentially unchanged. NAR polling and focus group research confirm 

that the public continues to share those assumptions, including those who currently 

do not own their own home. An overwhelming majority (94 percent) of renters aged 

34 and younger aspire to own a home. And among renters of all ages, 83 percent 

have a desire to own. Seventy-seven percent of them believe that home ownership 

is part of the American Dream.3 Remarkably, even after the problems stemming 

from the 2003–2007 housing run-up, this faith in home ownership persists. 

Research has consistently shown the importance of the housing sector to the economy and the long-term social and financial benefits to individual homeowners and 

communities. The economic benefits of the housing market and home ownership are 

immense and well documented. 

The housing sector directly accounted for approximately 16 percent of total economic activity in 2016. Net of mortgage liabilities, real estate household equity totaled $13.7 trillion in the first quarter of 2017.4

In addition to tangible financial benefits, home ownership brings substantial social benefits for families, neighborhoods, and the Nation as a whole. These benefits 

include increased education achievement and civic participation, better physical and 

mental health, and lower crime rates. These economic and societal benefits do not 

change and will not change, despite the ups and downs and challenges of the housing market. 

Our tax system does not ‘‘cause’’ home ownership. People buy homes to satisfy 

many social, family, and personal goals. Rather, the tax system facilitates ownership. The tax system supports home ownership by making it more affordable. While 

it is true that only about one-third of taxpayers itemize deductions in any particular 

year, it is also true that, over the home ownership cycle, a much higher percentage 

of taxpayers receive the direct benefit of the mortgage interest deduction. Over time, 

mortgages get paid off, other new homeowners enter the market and family tax circumstances change. Individuals who utilize the mortgage interest deduction (MID) 

in the years right after a home purchase are, over time, likely to switch to the 

standard deduction. 

When academics talk about the MID and refer to it as an expenditure, they are 

speaking in the language of macroeconomics. In reality, the billions of tax dollars 

they see as an expenditure are the individual savings of millions of families. Every 

time homeowners make a mortgage payment, they are generally creating non-cash 

wealth for their families. Many seasoned Realtors describe their satisfaction in helping a family secure its first house and then a larger home(s) for raising families. 

The most satisfying of a long-term series of transactions is helping a couple buy its 

last house without a mortgage. Those couples are able to make this ‘‘last’’ purchase 

because ownership over a long term of years has resulted in savings sufficient to 

meet their needs. 

The Federal policy choice to support home ownership has been in the Internal 

Revenue Code since its inception. We see no valid reason to reverse or undermine 

that basic decision. Indeed, we believe that the only viable tax system for America 

is one that would continue to nurture home ownership. 

RESIDENTIAL REAL ESTATE TAX PROVISIONS

There are a number of provisions in the Internal Revenue Code that affect residential real estate in one form or another. These range from relatively minor temporary tax incentives to major provisions utilized by millions of taxpayers. While 

NAR generally supports tax provisions that encourage sustainable home ownership 

and that incentivize investment and improvement of real estate, we will focus here 

on the most prominent and widely used provisions for individual homeowners. 

86 

5 ‘‘SOI Tax Stats—Individual Income Tax Returns,’’ Publication 1304 (Complete Report), updated 8/31/2016, https://www.irs.gov/. 

The Real Property Tax Deduction 

The income tax system of the United States has provided a deduction for State 

and local taxes, including property taxes, since its inception in 1913. To do otherwise would violate two fundamental and widely accepted principles of good tax policy—the avoidance of double taxation and the need to recognize the taxpayer’s ability to pay. 

Taxes paid at the State and local levels to benefit the general public are in nature 

and purpose similar to the Federal income tax in that they both fund essential government services. Therefore, allowing a deduction for these State and local taxes for 

Federal income tax purposes is essential to avoiding double taxation on the same 

income (or a tax on a tax). Our Federal tax law follows this same principle in connection with the payment of taxes to other nations. In the case of foreign taxes, 

however, the law goes even further and provides taxpayers with a choice of claiming 

a deduction for foreign taxes paid, or taking a credit, which is a dollar-for-dollar reduction in tax owed. 

Some recent tax reform proposals would repeal the deduction for State and local 

taxes paid, ostensibly because the Federal deduction has been viewed by some as 

subsidizing State and local government activities, and even perhaps encouraging 

them to increase spending. Interestingly, very few, if any, critics suggest that the 

even more generous credit for taxes paid to a foreign government subsidizes spending by those nations, or encourages profligacy by them. 

While State and local taxes vary greatly, two aspects of them that do not change 

are that they are ubiquitous throughout the Nation, in one form or another, and 

they are largely involuntary. Some would argue that we can exercise some degree 

of choice over how much we pay in State and local taxes by deciding where we live 

and what we buy. Others would point out that the degree to which this is possible 

is greatly limited by family circumstances and ties. However, avoiding these levies 

altogether is not a practical option. Obviously, paying taxes to State and local governments leaves taxpayers without the income used to pay the taxes. The extraction 

of State and local taxes is tantamount to the money never being earned by the taxpayer in the first place. Our tax system has always recognized this fact by providing 

a deduction for the payment of these taxes. 

Eliminating the deduction for State and local taxes would fly in the face of these 

fundamental tax policy principles that have been ingrained in our income tax law 

from its beginnings. 

For homeowners, real property taxes represent an unending obligation, at least 

as long as they own their homes. The other major deduction for most homeowners, 

the mortgage interest deduction, does not continue after the mortgage is paid off, 

and it usually diminishes as the mortgage is being paid. Property taxes, on the 

other hand, often increase over the years, as assessments on property increase and 

as local governments increase their levy rates. For these reasons, the deduction for 

real estate property taxes is often the one most-claimed by homeowners. In fact, significantly more taxpayers claim the real property tax deduction than claim the deduction for mortgage interest (in 2015, 44.1 million wrote off real property taxes 

while 32.7 million deducted mortgage interest).5

As with the mortgage interest deduction, critics sometimes claim that the deduction for property taxes is misguided because it gives the lion’s share of its benefit 

to the wealthy and little to the rest of us. However, this is just not the case. 

Much of this criticism is centered on the fact that taxpayers must itemize in order 

to take the deduction. As discussed below (please see The Enigma of the Standard 

Deduction), taxpayers who claim the standard deduction also benefit from the property tax deduction. 

Further, because real property taxes are assessed based on property values, one 

would expect the deduction to be much more utilized at higher incomes. Moreover, 

most local governments grant real property tax relief to lower-income taxpayers. 

Surprisingly, however, 70 percent of the value of real property tax deductions in 

2014 went to taxpayers with incomes of less than $200,000, and 53 percent of those 

87 

6 ‘‘SOI Tax Stats—Individual Statistical Tables by Size of Adjusted Gross Income,’’ Table 2.1, 

Tax Year 2014, https://www.irs.gov/. 

claiming the itemized deduction for real estate taxes that year earned less than 

$100,000.6

In addition, the tax law already includes a provision designed to limit the tax benefit of the real property tax deduction to the ‘‘wealthy.’’ Specifically, the deduction 

is disallowed for purposes of the alternative minimum tax. 

Percentage of Tax Units That Use the SALT Deduction and the Average Deduction by State 

State Percent With SALT Deductions 

Average SALT 

Deduction State Percent With SALT Deductions 

Average SALT 

Deduction 

MD 45% $5,604 NE 28% $2,992 

CT 41% $7,774 ME 28% $2,997 

NJ 41% $7,045 VT 27% $3,246 

DC 39% $6,056 SC 27% $2,224 

VA 37% $3,998 MI 26% $2,434 

MA 37% $5,421 OH 26% $2,650 

OR 36% $4,211 MO 26% $2,436 

UT 35% $2,753 KY 26% $2,438 

MN 35% $4,273 AL 26% $1,457 

NY 34% $7,182 KS 26% $2,338 

CA 34% $5,807 NV 24% $1,422 

RI 33% $3,985 OK 24% $1,878 

GA 33% $2,830 IN 23% $1,916 

CO 33% $2,796 MS 23% $1,418 

IL 32% $4,164 LA 23% $1,519 

DE 32% $2,787 NM 23% $1,557 

WI 32% $3,551 AR 23% $1,993 

NH 31% $3,003 TX 22% $1,694 

WA 30% $2,125 FL 22% $1,548 

IA 29% $2,812 WY 22% $1,244 

HI 29% $2,624 AK 21% $1,023 

NC 29% $2,629 TN 20% $1,043 

PA 29% $3,083 ND 18% $1,211 

AZ 28% $1,977 SD 17% $982 

MT 28% $2,483 WV 17% $1,535 

ID 28% $2,312 

Source: The Impact of Eliminating the State and Local Tax Deduction, (based on 2014 IRS data), Government Finance 

Officers Association. 

The Mortgage Interest Deduction 

The deduction for mortgage interest paid has been part of the Federal income tax 

code since its inception in 1913. Despite more than a century of additions, modifications, deletions, and overhauls of the tax code, Congress has left the mortgage interest deduction in place. Current law allows a homeowner to deduct the interest on 

up to $1 million in total acquisition debt for a principal residence and a second, nonrental, home. Homeowners are also allowed to deduct the interest on up to $100,000 

in home equity debt. 

Prior to 1986 there was no limit on the amount of home mortgage interest that 

could be deducted. The Tax Reform Act of 1986 imposed the first limitation on the 

MID, allowing it for allocable debt used to purchase, construct or improve a designated primary residence and one additional residence (second home). 

The Omnibus Budget Reconciliation Act of 1987 further limited the deduction to 

interest allocable to up to $1 million in acquisition debt. This limit is not adjusted 

for inflation. Factoring in the impact of inflation, the value of the cap has eroded 

by half since 1987; in 2014 dollars, the original cap would be equal to over $2 million today had it been indexed. 

Who Benefits From the Mortgage Interest Deduction? 

The mortgage interest deduction (MID) is often criticized on two fronts—that it 

benefits only those relatively few taxpayers who are eligible to itemize their deductions, and that it favors wealthier taxpayers at the expense of those with more modVerDate Sep 11 2014 17:51 Sep 21, 2018 Jkt 000000 PO 00000 Frm 00091 Fmt 6601 Sfmt 6621 R:\DOCS\31548.000 TIM
88 

7 Individual Income Tax Returns, Preliminary Data, Tax Year 2015, Internal Revenue Service, 

Statistics of Income Bulletin, Spring 2017, https://www.irs.gov/. 8 Ibid. 

est incomes. Since taxpayers who itemize are often those with higher incomes, these 

criticisms are related. 

In 2015, the most recent tax year for which IRS data are available, 32.7 million 

tax filers claimed a deduction for mortgage interest.7 While tax filers claiming the 

MID account for less than a quarter of the total number of tax returns filed, returns 

claiming the MID represent closer to half of owner-occupied households and roughly 

two-thirds of homeowners whose homes are mortgaged. 

Furthermore, the percentage of homeowners claiming the benefits of the MID at 

some stage of the home ownership cycle is much higher. Over the course of an owner’s tenure in a home, an individual may itemize in the early years of home ownership, when the interest expense is high relative to the principal paid, but then not 

itemize in later years. Mortgages get paid off, other non-MID deductions rise and 

fall, individuals down-size, divorces occur, a spouse dies or needs to simplify living 

arrangements. These and other life events may convert itemizers into standard deduction taxpayers. Thus, in any given year, we will not see the full contingent of 

homeowners who use the MID at some stage over the time they own their homes. 

As to the charge that the deduction predominately favors the wealthy, statistics 

show that this is simply not the case. Rather, the MID is valuable and utilized by 

households across the income spectrum. Fifty-three percent of those claiming the 

MID in 2015 earned less than $100,000 and 85 percent had Adjusted Gross Incomes 

of less than $200,000. Further, 76 percent of the value of the MID in that year went 

to those earning under $250,000 per year.8

Facts on the Mortgage Interest Deduction in the U.S. 

Share of 

homeowners with 

mortgage 

Number of 

taxpayers claimed 

the MID 

Average amount 

subtracted from 

taxable income 

Average taxpayer 

savings in taxes 

Total tax savings 

from the MID 

United States 63.8% 32,111,500 $8,700 $2,170 $69,768,843,000 

Mortgage Interest Deduction for Each State 

State 

Share of 

homeowner with 

mortgage 

Number of 

taxpayers claimed 

the MID 

Average amount 

subtracted from 

taxable income 

Average taxpayer 

savings in taxes 

Total tax savings 

from the MID 

Alabama 57.4% 390,500 $7,300 $1,820 $712,165,000 

Alaska 66.1% 66,700 $9,600 $2,400 $160,041,750 

Arizona 64.4% 625,300 $8,950 $2,230 $1,395,437,250 

Arkansas 55.6% 199,000 $6,550 $1,640 $326,849,750 

California 71.9% 4,207,200 $12,400 $3,100 $13,040,866,250 

Colorado 72.8% 683,200 $9,550 $2,390 $1,634,558,750 

Connecticut 69.9% 536,200 $8,750 $2,190 $1,174,603,000 

Delaware 69.4% 115,700 $8,900 $2,220 $257,068,250 

District of Columbia 76.0% 77,900 $12,350 $3,090 $240,670,750 

Florida 58.1% 1,465,400 $9,100 $2,280 $3,335,480,000 

Georgia 66.9% 1,066,400 $7,700 $1,930 $2,056,481,750 

Hawaii 66.3% 140,300 $12,800 $3,200 $448,732,750 

Idaho 65.8% 154,100 $7,600 $1,910 $293,572,250 

Illinois 65.0% 1,488,600 $7,700 $1,930 $2,868,501,000 

Indiana 66.7% 557,900 $6,400 $1,610 $895,719,000 

Iowa 60.7% 302,400 $5,900 $1,470 $445,098,500 

Kansas 60.3% 250,800 $6,600 $1,660 $415,260,500 

Kentucky 59.4% 381,100 $6,250 $1,560 $595,903,500 

Louisiana 53.2% 315,300 $7,500 $1,880 $592,514,250 

Maine 62.3% 137,000 $6,950 $1,740 $237,742,000 

Maryland 73.5% 951,300 $10,000 $2,490 $2,372,916,500 

Massachusetts 69.5% 934,900 $9,200 $2,300 $2,153,170,500 

Michigan 61.6% 958,600 $6,700 $1,670 $1,600,460,500 

Minnesota 66.8% 735,600 $7,850 $1,960 $1,444,535,000 

Mississippi 51.2% 189,200 $6,500 $1,620 $306,364,250 

Missouri 62.7% 547,700 $6,800 $1,700 $933,184,000 

89 

Mortgage Interest Deduction for Each State—Continued 

State 

Share of 

homeowner with 

mortgage 

Number of 

taxpayers claimed 

the MID 

Average amount 

subtracted from 

taxable income 

Average taxpayer 

savings in taxes 

Total tax savings 

from the MID 

Montana 55.1% 100,100 $7,600 $1,900 $189,737,000 

Nebraska 61.1% 179,000 $6,050 $1,520 $271,533,250 

Nevada 68.4% 240,900 $9,500 $2,380 $572,154,500 

New Hampshire 67.0% 173,800 $8,300 $2,070 $360,497,000 

New Jersey 68.4% 1,252,700 $9,150 $2,290 $2,864,940,250 

New Mexico 56.3% 157,500 $8,150 $2,040 $321,520,500 

New York 62.4% 1,961,500 $8,800 $2,200 $4,322,713,500 

North Carolina 64.4% 991,000 $7,650 $1,910 $1,897,594,750 

North Dakota 51.9% 43,800 $7,650 $1,910 $83,533,250 

Ohio 64.0% 1,137,400 $6,150 $1,540 $1,749,842,250 

Oklahoma 56.0% 275,200 $6,650 $1,670 $458,660,250 

Oregon 66.1% 497,400 $8,450 $2,120 $1,052,620,500 

Pennsylvania 60.6% 1,354,200 $7,300 $1,820 $2,465,775,250 

Rhode Island 69.9% 135,900 $7,700 $1,930 $261,863,750 

South Carolina 58.6% 444,600 $7,500 $1,870 $830,953,000 

South Dakota 54.7% 49,400 $7,350 $1,840 $90,823,000 

Tennessee 59.9% 443,600 $8,050 $2,010 $890,610,000 

Texas 58.3% 1,975,500 $7,800 $1,950 $3,851,842,000 

Utah 71.0% 342,900 $8,300 $2,070 $711,404,250 

Vermont 62.9% 68,100 $7,100 $1,770 $120,821,250 

Virginia 69.9% 1,127,300 $10,250 $2,570 $2,894,670,250 

Washington 69.0% 826,200 $10,350 $2,580 $2,134,631,500 

West Virginia 46.3% 100,600 $6,800 $1,710 $171,573,750 

Wisconsin 65.1% 678,600 $6,300 $1,580 $1,069,723,750 

Wyoming 58.1% 46,300 $9,000 $2,250 $104,392,500 

Sources: 2014 Internal Revenue Service, 2014 American Community Survey. 

NAR Calculations 

THE ENIGMA OF THE STANDARD DEDUCTION

While it is true that a taxpayer must itemize in order to claim the mortgage interest deduction, it is not true that those who do not itemize get no value from the 

MID. To appreciate this conundrum, one must look at the history of our modern tax 

system. In 1913, Congress and the President enacted the income tax. The original 

tax law provided for both a deduction for interest paid and for State and local taxes 

paid (including for property taxes). These two deductions, plus the deduction for 

charitable contributions, which was added to the tax law in 1917, together comprise 

the majority of itemized deductions that are claimed each year. 

For many years, the tax law provided that taxpayers who paid interest, State and 

local taxes, and/or made charitable contributions, could take a deduction for them. 

A few other deductions, such as for casualty and theft losses or for medical expenses, were also allowed. However, to qualify for these deductions, taxpayers actually had to incur these expenses and keep track of them. 

This changed in 1944, when Congress decided to simplify the tax law by enacting 

the standard deduction. Legislative history (both original and subsequent) shows 

that the standard deduction was based on a composite basket of typical deductions 

that taxpayers claimed, including the MID, taxes paid, charitable contributions 

made, and so forth. The simplification came about by Congress deeming that all individuals were to receive a certain amount of generic deductions, represented by the 

standard deduction. Taxpayers claiming the standard deduction did not need to 

prove that any amounts were actually paid in order to take the standard deduction. 

Congress simply designated that all taxpayers could claim the standard deduction 

whether they made the deductible expenditures or not. 

In enacting the standard deduction, Congress did not modify the deductions themselves. Rather, taxpayers who paid deductible expenditures exceeding the standard 

deduction were allowed to claim the actual amounts as what was (from then on) 

called itemized deductions. Taxpayers with deductions totaling an amount below the 

standard deduction threshold could simply claim the standard amount and not 

worry about even keeping track of what was actually paid. This was a huge step 

toward simplifying the lives of millions of American taxpayers. 

What is often not recognized today is that the standard deduction represents a 

tax giveaway for virtually all taxpayers who claim it. This is because if a taxpayer 

90 

9 ‘‘Summary of H.R. 13270, the Tax Reform Act of 1969,’’ Joint Committee on Internal Revenue Taxation and the Committee on Finance, August 18, 1969. 

has deductions in excess of the standard deduction, he or she may claim the higher 

amount. But those who have actual deductions less than the standard are given the 

benefit of the standard deduction amount whether or not they actually incurred the 

expenses. Thus, the giveaway equals a range of as much as the standard deduction 

for taxpayers who have absolutely no deductions, on the high end, to as little as $1 

for taxpayers whose actual deductions come just $1 short of the standard deduction 

amount, on the low end. 

For example, assume a married couple’s actual amounts for State and local tax, mortgage interest, and charitable contributions for 2017 total $12,000. With the 

standard deduction for a couple currently at $12,700, this family would be receiving 

an extra tax deduction for $700 in expenditures they never made. If they were in 

the 28 percent bracket, this would amount to a $196 tax ‘‘freebie’’ ($700 excess × 28%). Suppose another couple had just $2,000 of State and local taxes, but no mortgage interest and no charitable contributions. This family would also get to claim 

the standard deduction of $12,700, for a subsidy of $10,700 ($12,700¥$2,000), which 

would be worth $2,996, assuming they were also in the 28 percent tax bracket 

($10,700 × 28%). 

The point is that whether a taxpayer is being subsidized a little bit (as with the 

first couple), or a lot (as with the second couple), or not at all (as with the case of 

a couple who has enough deductions to itemize), each couple is benefitting from the 

mortgage interest and property tax deductions. Just because the standard deduction 

does not specifically indicate which portion of it is attributable to the MID or property tax (or any other deductions), does not mean that these deductions for home 

ownership are not part of the benefit being given. 

When Congress first established the standard deduction in 1944, more than 82 

percent of taxpayers were able to utilize this simplification tool, meaning that just 

18 percent itemized. According to the Joint Committee on Taxation (JCT), by 1969 

this proportion of non-itemizers had dropped to 58 percent. In explaining the reason 

for Congress increasing the standard deduction in the Tax Reform Act of 1969, JCT 

stated that since 1944, ‘‘higher medical costs, higher interest rates, higher State and 

local taxes, increased home ownership, and more expensive homes have made it advantageous for more and more taxpayers to shift over to itemized deductions.’’ 9

Thus, it is clear that even though no specific portion of the standard deduction 

is tied to the MID and property tax deduction, Congress crafted the standard deduction to be a proxy for allowable deductions (i.e., itemized deductions), including the 

MID and State and local tax deductions, and when the underlying amount of these 

deductions increase, Congress has believed that it is appropriate for the standard 

deduction to also increase. It is also clear that Congress intended that most taxpayers would claim the standard deduction (82 percent in 1944) and when this proportion was eroded by inflation and other factors, Congress increased the standard 

deduction to keep it closer to its original percentage. 

Arguments that the mortgage interest and real property tax deductions benefit 

only those who itemize simply do not hold water. 

TAX REFORM PROPOSALS TO LIMIT THE TAX BENEFITS OF HOME OWNERSHIP

In recent years, a variety of tax reform ideas have been proposed that would limit 

the ability of certain taxpayers to claim the mortgage interest and/or the property 

tax deductions, or in other ways reduce the incentive effect of these provisions. Each 

of these proposals would limit the value of the deductions and have a negative impact on the value of housing. In many cases, the largest impact would be felt by 

middle-class families, not necessarily by the individuals or families categorized by 

the media as ‘‘the rich.’’ The following is an examination of each of these proposals. 

Capping Itemized Deductions 

Two proposals have repeatedly been floated to cap the value of all itemized deductions. The first is a proposal that was included in several of President Obama’s 

budgets to cap itemized deductions for upper-income taxpayers at 28 percent. As 

itemized deductions follow taxpayers’ top marginal rate, this would have the effect 

of lessening the value of all itemized deductions for individuals in the 33 percent, 

35 percent and 39.6 percent brackets. It is important to note that many of these 

taxpayers have already had the value of their deductions limited by the reinstatement of the complex and burdensome ‘‘Pease’’ limitation that applies to individuals 

91 

10 ‘‘On the Distributional Effects of Base-Broadening Income Tax Reform,’’ Urban-Brookings 

Tax Policy Center, August 1, 2012. 

with adjusted gross income above $250,000 for singles and $300,000 for couples (adjusted for inflation) as part of the American Taxpayer Relief Act of 2012. 

The 28-percent cap focuses on the tax filer’s income, rather than the total dollar 

amount of itemized deductions. This proposal adds, rather than removes, complexity 

from the tax code and would be difficult to plan for. An individual, particularly one 

who owns a business or who is self-employed, may be in different tax brackets from 

year to year. These individuals have a particularly difficult time estimating their 

incomes and tax liability, especially in today’s uncertain economic and legislative climate. They do not need added burdens of complexity or unanticipated tax increases. 

A reduction in the mortgage interest and State and local tax deductions would further complicate their family finances. 

Some will say that putting a limitation on the deductions of upper-income taxpayers would cause no harm for those in lower brackets. However, when reduced 

tax benefits reduce the value of a home, the value of all homes decreases. A collapse 

or reduction in home values at the top end of the market causes downward pressure 

on all other homes. That is, when the value of my neighbor’s house declines, then 

the value of my house declines, as well. 

The second proposal to cap itemized deductions comes in the form of a hard dollar 

cap on all itemized deductions. Most prominently proposed by Republican nominee 

Mitt Romney during the 2012 Presidential election, a dollar cap would disallow deductions above a certain dollar figure regardless of income. 

As the cap is not based on income, but rather the amount of deductions claimed, 

this proposal would potentially raise taxes on Americans of all income levels regardless of where the dollar amount of the cap was set. For example, if the cap on total 

deductions were set at $25,000, households with cash incomes as low as $30,000 

could be impacted, according to the Tax Policy Center (TPC). TPC further estimated 

that 35 percent of households with cash incomes between $100,000 and $200,000 

would see a tax increase averaging almost $2,500 if itemized deductions were 

capped at $25,000.10

Not only does a dollar cap affect taxpayers of all income levels, it penalizes those 

who live in areas with higher housing costs or higher State and local taxes. Taxpayers living in these areas have somewhat ‘‘fixed’’ deduction costs when it comes 

to their mortgage and tax levels. Their property tax levels are directly tied to the 

value of their property and the local tax rate. While, in theory, they can pay down 

their mortgage amount and reduce their interest paid if they have the financial ability to do so, neither the mortgage nor the tax amount paid are discretionary, as is 

a charitable donation. Therefore, while it is widely viewed that charities would take 

the biggest hit from a dollar cap on total itemized deductions, one could argue the 

biggest losers would be younger families living in high cost housing markets who 

have both larger mortgage interest payments and high State and local tax bills. 

Their tax increase would be the most pronounced and painful, despite the idea that 

a dollar deduction cap is designed to simply make ‘‘the rich’’ pay their fair share. 

If a dollar cap were implemented on itemized deductions, no matter the dollar 

amount, more and more taxpayers would be subject to it if Congress failed to index 

that amount for inflation. This would create the same kind of tax nightmare that 

came about as a result of the Alternative Minimum Tax, as more and more middleclass taxpayers became subject to the cap as home values and taxes paid rose, simply because of inflation. After spending years struggling to exempt most middleclass taxpayers from the AMT, it would seem odd Congress might consider falling 

into a similar quagmire again. Further, a dollar cap would add one more layer of 

complexity to the tax code and would be a rather blunt instrument to raise revenue. 

Converting the Mortgage Interest Deduction to a Tax Credit 

Many economists have traditionally favored tax credits over tax deductions because tax credits provide more benefit to those in lower tax brackets. This reflects 

the reality that, in a progressive tax system like ours, an individual in the 15 percent bracket receives only 15 cents of tax reduction for each dollar of interest deducted, while an individual in the 35 percent bracket receives a benefit of 35 cents 

on the dollar. The mathematics of this assertion is correct, but asymmetrical—the 

tax benefit analysis of a deduction ignores the balance between tax rates and individual income taxation. An individual in the 15 percent bracket pays only 15 cents 

of tax on a dollar of income, while an individual in the 35 percent bracket pays tax 

92 

11 ‘‘2017 NAR Investment and Vacation Home Buyers Survey,’’ https://www.nar.realtor. 

of 35 cents on the dollar. Thus, tax rates balance, rather than distort, the value of 

deductions. 

In 2005, President Bush’s tax reform advisory council proposed converting the deduction to a 15-percent non-refundable tax credit. The Simpson-Bowles Commission 

subsequently proposed a 12 percent non-refundable tax credit along with its proposals to eliminate the deduction for second homes and capping the total deduction 

at $500,000. Others have proposed credits of different amounts and with different 

limitations on the total amount of mortgage debt that could be claimed or on the 

number of homes. In order to more carefully weigh the pros and cons of converting 

the deduction to a credit, NAR commissioned outside research in 2005 to study the 

effects of such a conversion. 

While the conclusions are now somewhat dated, they present a striking contrast 

with the 12-percent or even 15-percent credit proposals. In 2005, NAR asked its consultants to design a revenue-neutral tax credit based on data then currently available. (Revenue neutrality was intended as a design under which the total amount 

of the tax expenditure associated with mortgage interest was neither increased nor 

decreased.) That analysis showed that in 2005, a revenue-neutral rate for a credit 

would have been 22 percent—markedly more beneficial to taxpayers than a 12 percent or 15 percent credit. 

The amount of the credit percentage would greatly affect the number of winners 

and losers in any conversion. However, different studies have consistently shown 

that the tax increases for the losers would be far greater than the tax savings experienced by the winners. Also, the loss of the tax benefit would almost certainly result in the drop of value of all homes, as discussed above in the analysis regarding 

the proposal to cap itemized deductions. Furthermore, a conversion to a credit would 

upend over 100 years of established tax law. The effects this drastic of a change 

would have on consumers and the real estate markets is unknowable. In this case 

we think Congress would be well advised to adopt the mantra of ‘‘do no harm.’’ 

Eliminating the Deduction for Second Homes 

Several proposals for tax reform, including Simpson-Bowles, have included a proposal to eliminate the deduction for second homes. Critics of the second home deduction argue that it primarily benefits rich owners of expensive vacation homes in resort areas like Aspen or Cape Cod. In reality, those taxpayers are seldom the beneficiaries of the deduction, as such homes are often purchased with cash. 

When a Second Home is not a ‘‘Second Home’’ 

One often overlooked reason for the code allowing a deduction for mortgage interest paid on a second home in a tax year is the most fundamental part of residential 

real estate: buying and selling. If a family has a mortgage on their primary residence, and then purchases another home with another mortgage before they can sell 

the first residence, such as in connection with a move for a job change, they will 

have owned two homes in that year. Removing the deduction for second homes 

would only allow the family to deduct the interest for one of those residences and 

essentially introduce a tax on moving. Families move for many different reasons: 

more space for a growing family, downsizing once the kids are gone, economic challenges, or a new job. 

Second Homes Are Both Geographically Concentrated and Diverse 

While the image conjured up by critics of a second home is a multi-million-dollar 

property in a tony resort area, most of those homes are bought with cash. In reality, 

second homes nationally have a lower median sales price than principal residences. 

Over the past decade, the median price of a second home has always trailed the median price of a principal residence. 

NAR data show that in 2016 the median income of a second homeowner was 

$89,900.11 While that income level is above the national median, it is certainly not 

the definition of ‘‘rich’’ that many consider when debating tax changes to ‘‘soak the 

wealthy.’’ 

Finally, NAR has compiled data identifying all U.S. counties in which more than 

10 percent of the housing stock is second homes. Currently, about 900 of the Nation’s 3,068 counties (roughly 30 percent) fall into this group. In some counties with 

very small populations, second homes can represent about 40 percent of the housing 

stock. In Meagher County, Montana, for example, the population is only 1,891 peoVerDate Sep 11 2014 17:51 Sep 21, 2018 Jkt 000000 PO 00000 Frm 00096 Fmt 6601 Sfmt 6621 R:\DOCS\31548.000 TIM
93 

12 ‘‘Individual Income Tax Returns, Preliminary Data, Tax Year 2015,’’ Internal Revenue Service, Statistics of Income Bulletin, Spring 2017, https://www.irs.gov/. 13 Ibid. 

ple, but second homes represent 42 percent of the housing stock. That area is doubtlessly dependent on the jobs and property taxes generated by those second homes. 

Thus, about 30 percent of U.S. counties have a stake in retention of the mortgage 

interest deduction for second homes. Those properties generate valuable jobs and 

property and sales taxes for the communities. To eliminate the MID for second 

homes would have at least as dramatic an impact on those communities as it would 

the taxpayer/owners themselves. Congress needs to carefully consider the economic 

impact on these communities, often located in rural areas with little other economic 

resources vs. the amount of revenue that could be raised from eliminating the deduction for second homes. The decline in home values and economic activity in those 

areas where the economy is driven by second homeowners could very well eclipse 

the small amount of revenue that could be gained by increasing taxes on these 

homeowners. 

Reducing the Amount of Qualified Mortgage Debt 

Another proposal to ‘‘raise revenue’’ is to lower the cap on the amount of acquisition debt eligible for the mortgage interest deduction from $1 million to $500,000. 

As previously discussed, the $1 million limitation was put in place in 1987 and is 

not indexed for inflation. Consequently, the value of the MID has eroded by more 

than half in 30 years. 

Critics of the MID argue that lowering the limitation to $500,000 would affect a 

relatively small number of wealthy taxpayers. In fact, research conducted on behalf 

of NAR shows that individuals in every adjusted gross income (AGI) class, even as 

low as $10,000, have mortgage debt in excess of $500,000. Those in the lower income ranges likely include those who are self-employed with minimal income after 

expenses, those who are business owners with significant losses or retired individuals with other tax-exempt income. No matter what the income category, however, 

reducing the cap would make their economic positions worse, particularly where 

there have been losses. 

Further findings from research conducted for NAR shows almost half of taxpayers 

with mortgages over $500,000 have AGI below $200,000. 

Among those who itemize and claim MID, the AGI classes below $100,000 comprise 53 percent of all tax returns.12 Moreover, the AGI classes below $200,000 represent almost 90 percent of all itemized returns.13 Thus, the overwhelming majority 

of tax returns with MID are certainly NOT in so-called ‘‘Warren Buffett’’ territory. 

A $500,000 cap has wildly divergent geographic implications. The burden of the 

cap would be disproportionately borne by taxpayers in high costs areas, even though 

they might not be categorized as ‘‘rich’’ and even though they may have fairly modest homes. Those living in high cost areas pay a disproportionately larger amount 

of their after-tax income toward housing than do taxpayers in other parts of the 

country. Eliminating part of the MID for them would exacerbate that disparity and 

in fact make home ownership even less affordable for many families. Some have proposed addressing this geographic issue by tying the limits of the MID to area housing prices in a way similar to formulas used to calculate loan limits for the Federal 

Housing Administration (FHA). NAR would resist any effort to make the cap on the 

MID contingent on the taxpayer’s place of residence. Such a change would impose 

significant complexity on what is currently a very simple provision. 

There is another factor Congress should take into consideration if contemplating 

a lower limit on the amount of home mortgage debt eligible for the interest deduction. This is the fact that unless such a cap is indexed for inflation, it may soon 

become a de facto limitation on the deduction for taxpayers Congress did not intend 

to hit. Again, the experience with the Alternative Minimum Tax should be instructive. Based on internal NAR calculations, by 2043 the value of more than half the 

homes in a majority of the 50 States will be greater than $500,000. And those projections show that 49 States will have at least 30 percent of their homes with a 

value exceeding this amount. Thus, in a relatively short time, the majority of American homes could be affected by a limit now intended to strike only the ‘‘wealthy.’’ 

94 

14 Available on NAR’s website: http://narfocus.com/billdatabase/clientfiles/172/21/2888.pdf. 15 Ibid. 16 Ibid. 

Increasing the Standard Deduction and Repealing Most Itemized Deductions 

More recently, Republicans in the House of Representatives have put forward a 

tax reform plan called ‘‘A Better Way,’’ which is informally known simply as ‘‘The 

Blueprint.’’ 

While we laud the goals of this tax reform plan, and marvel at its boldness, we 

have great concern with the way one aspect of the Blueprint could affect residential 

real estate. This concern is that the interaction of two features of the plan, which 

are designed to simplify the tax system, would have the unintended consequence of 

nullifying the long-standing tax incentives of owning a home for the great majority 

of Americans who now are, or who aspire to become, homeowners. 

Specifically, the Blueprint calls for the standard deduction to be almost doubled 

from its current levels. The plan also includes the repeal of the deduction for State 

and local taxes paid, as well as the elimination of most other itemized deductions. 

Either of these monumental changes alone would marginalize the value of the 

current-law tax incentives for owning a home. Unfortunately, the combination of 

these two revisions would cripple the incentive effect of the Federal tax law for all 

but the most affluent of taxpayers. 

We anticipate two potentially devastating problems in the aftermath of these 

modifications. First, the impact on the first-time homebuyer could be enormous, despite them likely facing lower prices. For many, the current-law tax incentives make 

the crucial difference in being able to afford to enter the ranks of homeowners. At 

a time when the rate of first-time home-buying is well below the average of the past 

few decades, this could be particularly debilitating for the housing industry and the 

entire economy. 

Furthermore, a tax reform approach like this would discriminate against current 

and aspiring homeowners in favor of renters. Research conducted for NAR on a 

Blueprint-like tax reform plan shows that home-owning families with incomes between $50,000 and $200,000 would face average tax hikes of $815 in the year after 

enactment while non-homeowners in the same income range would enjoy average 

annual tax cuts of $516.14

Also, these estimates show that under a Blueprint-like plan, nearly 46 million 

households would see their taxes go up. But 70 percent of them would be homeowners. Among the 25 million middle-income households ($50,000 to $200,000) with 

a tax increase, 85 percent would be homeowners. 

Homeowners already pay 83 percent of all Federal income taxes, and this share 

would go even higher under similar reform proposals. Homeowners should not have 

to pay a higher share of taxes because of tax reform. 

Second, the decimation of the mortgage interest and real property tax deductions 

would very likely cause a significant plunge in the value of all houses. At a time 

when the housing sector has not fully recovered from the thrashing it took during 

the Great Recession, this drop, even if temporary, could be calamitous. Millions of 

homeowners could again wake up to learn that the value of their largest financial 

asset has dived below the amount of debt that is owed on it. 

Estimates provided for NAR show that values could fall in the short run by more 

than 10 percent if a Blueprint-like tax reform plan were enacted.15 The drop could 

be even larger in high-cost areas. It may take years for home values to rebound 

from such a significant decrease. 

The combination of these two problems could have further ramifications that 

could produce a vicious spiral. Should home values drop due to the decrease in value 

of home ownership incentives, revenues to State and local governments would surely 

follow suit because of lower assessed property values. Further, public pressure on 

these same governments to lower tax rates because these tax payments would no 

longer be deductible could greatly exacerbate the situation. The overall result could 

be a disastrous downturn in the quality of many neighborhoods and communities, 

and especially our most vulnerable ones. 

In sum, it is estimated that a Blueprint-like tax reform approach could reduce the 

amount of Federal tax expenditures for home ownership by 82 percent over 10 

years, from $1.3 trillion to just $232 billion.16 This is certainly not the expected reVerDate Sep 11 2014 17:51 Sep 21, 2018 Jkt 000000 PO 00000 Frm 00098 Fmt 6601 Sfmt 6621 R:\DOCS\31548.000 TIM
95 

sult from a tax reform plan that purports to preserve the mortgage interest deduction. 

Even if the hoped-for economic growth from the Blueprint materializes, it will 

take years for the full effects of these changes to permeate through the economy and 

for the effects to offset the deleterious short- to mid-range effects mentioned above. 

And many homeowners, particularly those who are middle-aged or older and are 

planning to use the equity in their home for retirement or to pay for the education 

of their children, simply will not have time to wait for the recovery. 

ADDITIONAL RESIDENTIAL REAL ESTATE PROVISIONS

In addition to the deductions for mortgage interest and property taxes paid, there 

are two other tax provisions that have a large impact on a family’s ability to sell 

their home. One of these provisions is permanent and should be preserved while the 

other is temporary and should be made permanent. 

Capital Gains Exclusion for Sale of a Principal Residence 

Prior to 1997, the tax rules that governed the sale of a principal residence were 

complex and largely ignored (section 1034 of the Internal Revenue Code). The general rule was that there was no recognition of gain, so long as the seller purchased 

a home of the same or greater value within a specified time. This was a particular 

disadvantage to individuals who relocated from a high cost area to a lower cost area. 

The deferred gain from the sale reduced the basis of the new home. Other elaborate 

rules required taxpayers to track the adjusted basis of the homes they owned so 

that, in the event that they did not purchase a replacement home (or purchased a 

replacement home of lesser value), the gain on that sale became taxable, as measured from the adjusted basis. Few taxpayers had adequate understanding of the law 

or sufficient records to enable them to comply with these rules. 

In 1997, the Clinton administration, without input from NAR or others in the 

housing industry, proposed a complete overhaul and simplification of these rules. 

Rather than require elaborate basis computations on multiple residences over a 

term of many years, the new rule simply permitted the seller to exclude up to 

$250,000 ($500,000 on a joint return) of the gain on the sale. Any excess above these 

amounts would be currently taxable at the capital gains rate for the year of sale. 

The reinvestment rules were eliminated, so taxpayers gained mobility and flexibility. The exclusion gives them the ability to downsize, buy more than one property, 

purchase a non-real estate asset or do anything they choose with the proceeds of 

the sale. The exclusion is restricted to the sale of only a principal residence, and 

certain qualifications must be satisfied in order to receive the benefit of the exclusion. As with the MID, the $250,000 and $500,000 amounts are not indexed for inflation. 

No data is publicly available that allows either NAR or its consultants to evaluate 

the impact of possible changes to these rules. No public IRS records present information about Forms 1099 that are filed for home sale transactions, and only limited 

information on capital gains data are published to show the amount of taxable gain 

reported on homes sales in certain years. In addition, there is no way to ascertain 

the value of unrecognized gain that has accumulated in homes that are not currently on the market. Finally, long-term holders are far more likely to have larger 

appreciation amounts and so should not be penalized for that long tenure. 

We note that this provision is among the most taxpayer-friendly sections in the 

entire code. When enacted, it was a substantial simplification from prior law. Further, it allows a great deal of flexibility in the financial planning for families. Notably, the gain on the sale of a principal residence is a significant factor in the retirement savings plan of many older Americans. They anticipate downsizing and then 

using the remaining proceeds to supplement any retirement income they have. Prior 

law penalized individuals over age 55 by limiting an exclusion to just once in a lifetime and with a relatively small amount. Today’s rules reflect far more accurately 

the home ownership patterns over a lifetime. The exclusion functions as a sort of 

‘‘Housing Roth IRA’’ in that the gains made over long periods (in many cases with 

improvements made from after-tax dollars) are free of tax at the time of sale. At 

a time when policymakers are contemplating changes to entitlement programs and 

Americans are struggling to save more for retirement, Congress should continue to 

recognize the important role the principal residence exclusion plays in supplementing retirement savings. NAR urges Congress to retain the exclusion at current 

levels or secure its importance for future generations of homeowners by indexing it 

for inflation. 

96 

17 ‘‘Like-Kind Exchanges: Real Estate Market Perspective 2015,’’ National Association of Realtors, https://www.nar.realtor. 18 ‘‘The Economic Impact of Repealing or Limiting Section 1031 Like-Kind Exchanges in Real 

Estate,’’ David C. Ling and Milena Petrova, March 2015, revised June 22, 2015. 

Cancellation of Mortgage Indebtedness for Principal Residence 

Under general tax principles, when a lender cancels a portion or all of a debt, including mortgage debt, the borrower is required to recognize the forgiven amount 

as income and pay tax on it at ordinary income rates. An exception is provided for 

some mortgage debt that was forgiven between January 1, 2007 and December 31, 

2016. When this relief was initially considered in 2007, the Ways and Means Committee reported it as a permanent provision. The final version, however, was temporary and in place only through December 31, 2009. That date was extended 

through December 2012 as part of the flurry of legislation enacted at the height of 

the 2008 financial crisis. The American Taxpayer Relief Act of 2012 subsequently 

extended the expiration date to December 31, 2013, and The Tax Increase Prevention Act of 2014 extended the expiration date to December 31, 2014. The Preventing 

Americans From Tax Hikes (PATH) Act of December 2015 extended the provision 

through the end of 2016. However, the provision has not been extended this year. 

While the volume of short sales and foreclosures has receded from record highs, 

there are still a significant number of families struggling to keep up with their 

mortgage payments and banks are still working to conduct loan modifications as a 

result. Moreover, the vicious hurricanes that have wreaked such damage on so 

many U.S. counties this month and last have greatly exacerbated the problem. 

NAR believes the tax code should not discourage homeowners from trying to take 

proactive steps to avoid foreclosure by taxing them on phantom income, especially 

when the Federal Government has devoted considerable resources to help modify 

mortgages and lessen the impacts of foreclosure. 

We urge the Finance Committee to make mortgage cancellation relief a permanent provision. 

SECTION 1031 LIKE-KIND EXCHANGES

Finally, NAR strongly believes that the like-kind exchange provision in current 

law is vital to a well-functioning real estate sector and a strong economy and must 

be preserved in tax reform. The like-kind exchange is a basic tool that helps to prevent a ‘‘lockup’’ of the real estate market. Allowing capital to flow more freely 

among investments facilitates commerce and supports economic growth and job creation. Real estate owners use the provision to efficiently allocate capital to its most 

productive uses. Additionally, like-kind exchange rules have allowed significant 

acreage of environmentally sensitive land to be preserved. 

Section 1031 is used by all sizes and types of real estate owners, including individuals, partnerships, LLCs, and corporations. The committee might be surprised to 

learn that a large number of like-kind exchange transactions involve single-family 

housing. To illustrate, a recent survey of our members indicated that 63 percent of 

Realtors have participated in a 1031 like-kind exchange over the past 4 years.17

A 2015 study 18 found that in contrast to the common view that replacement properties in a like-kind exchange are frequently disposed of in a subsequent exchange 

to potentially avoid capital gain indefinitely, 88 percent of properties acquired in 

such an exchange were disposed of through a taxable sale. Moreover, the study 

found that the estimated amount of taxes paid when an exchange is followed by a 

taxable sale are on average 19 percent higher than taxes paid when an ordinary 

sale is followed by an ordinary sale. 

If one of the goals of tax reform is to boost economic growth and job creation, any 

repeal or limitation of the current-law like-kind exchange provision is a step in the 

wrong direction. 

CONCLUSION

NAR thanks the Committee on Finance for inviting our input into this important 

hearing. Improving our tax system is an important and worthy goal, and we commend you for taking on this gargantuan and often thankless task. 

The residential real estate market is a significant driver of the American economy. When housing does well, America does well. Our Nation has been led out of 

97 

four of the last six recessions by a recovery in the housing market and housing 

gains over the past several years are an important part of the sustained recovery. 

Despite the price declines, foreclosures, and economic hardship that haunted the 

housing market during the Great Recession, Americans remain committed to the 

ideals and vision of home ownership. They continue to hold the vast majority of 

their personal wealth in their homes. They continue to believe that ownership of 

real property is a vital part of the American Dream that was envisioned from the 

very beginning by our Founders. This is why even high numbers of those who now 

rent their home consistently support tax incentives for home ownership and aspire 

to own themselves someday. Congress should not turn its back on these same ideals 

as it seeks to reform our tax system. 

QUESTIONS SUBMITTED FOR THE RECORD TO IONA C. HARRISON

QUESTIONS SUBMITTED BY HON. ORRIN G. HATCH

STATUS QUO?

Question. Ms. Harrison, reading over your testimony, I was struck by the numerous defenses of the status quo. Does the National Association of Realtors support 

tax reform? If so, do you have any specific suggestions on what could be reformed 

about our Nation’s tax laws? 

If the tax laws are exactly the way they should be, that would be helpful to know. 

Answer. The National Association of Realtors does believe that our current tax 

system contains many flaws and is badly in need of thoughtful and careful reform. 

The Internal Revenue Code is too complex and includes many provisions that can 

work at cross-purposes with each other. And even some provisions that have greatly 

simplified the tax lives of millions of taxpayers and assist millions more in saving 

for retirement, such as the exclusion of gain on the sale of a principal residence, 

need to be improved by indexing their limits to inflation. Otherwise, they will continue to grow less beneficial every year. If it does nothing else, a good tax reform 

act should protect the benefits it provides from the ravages of inflation. 

Also, our economy could doubtless benefit from lowering tax rates in a fiscally responsible way. Economic growth is important, and our tax laws should promote and 

not hinder growth and job creation. This is a principal reason NAR is sensitive to 

careless tax reform that can damage, rather than propel, economic growth. The Tax 

Reform Act of 1986 included some harsh and, in our view, unwarranted provisions 

that sent the commercial real estate sector reeling for more than a decade and 

caused untold economic harm to many in the Nation. Our position on tax reform 

is very clear—responsible reform is important but a paramount goal is that it 

should first, do no harm. 

PERCENT OF ITEMIZERS

Question. Ms. Harrison, in your written testimony you state Congress set the 

standard deduction in 1944, and again in 1969, so that 82% of taxpayers claimed 

the standard deduction, and only 18% of taxpayers itemized. 

According to your testimony, currently approximately 33% of taxpayers itemize, 

and 67% of taxpayers claim the standard deduction. 

Given the precedent of targeting 82%, should Congress again target having only 

18% of taxpayers itemize their deductions? What do you believe the ideal percentage 

of taxpayers claiming the standard deduction to be? 

Answer. The standard deduction has been an important tool in simplifying the tax 

lives of millions of people. However, it must be recognized that the goal of simplification must be balanced with the incentive effect of the present-law itemized deductions as well as the economic effect of making sudden and large changes to longstanding tax policy. Also, there are tax equity implications to large changes in the 

standard deduction. 

In terms of simplification, greatly increasing the standard deduction would significantly decrease the number of itemizing tax filers. The authors of the House Republican tax reform Blueprint estimate that only about 5 percent of filers would still 

be itemizing after the increase outlined in that plan. However, this does not mean 

that 95 percent of filers could simply forget about the complexities and timeconsuming problems of dealing with Schedule A of Form 1040. Tens of millions of 

98 

information returns would still need to be prepared, sent to, and dealt with by taxpayers with a mortgage or those who made charitable contributions, and these filers 

would still need to consider whether to itemize, even if most of them did not. 

More importantly, the huge increase in the standard deduction would sap the incentive value of the mortgage interest deduction for the vast majority who now 

claim it, as it would no longer make a difference on their tax return whether they 

owned a home or were renting one. Along with this (and also due to the proposed 

repeal of the property tax deduction), home values would most likely drop significantly, causing untold harm to homeowners everywhere, and especially to first-time 

buyers, who very often have small amounts of equity in their home. This would almost certainly have serious and negative macroeconomic effects. 

Also, as I indicated in my written testimony, the standard deduction represents 

a tax giveaway to everyone who claims it, and the higher the amount of the standard deduction, the greater the giveaway. While this effect is a not a regressive one, 

it is important that policymakers are aware of its effect. Deductions such as that 

for mortgage interest offer a strong incentive to take the specific action of taking 

out a mortgage by purchasing a home. Giveaways through a higher standard deduction dis-incentivize taxpayers by rewarding all whether the desired action is taken 

or not. 

As to an ideal percentage of taxpayers claiming the standard deduction, I will 

simply note that a major stated reason that Congress has increased the standard 

deduction in the past has been because inflation eroded the standard deduction. 

Since the standard deduction has been indexed for inflation, this has become much 

less, if any, of a problem. Thus, a major driver of standard deduction increases in 

the past is no longer present. 

Finally, I will note that if Congress wanted to install into the tax code many of 

the benefits of a higher standard deduction without the disadvantages of diluting 

the incentive value of itemized deductions, it could do so by once again creating a 

true zero bracket amount in the tax law. 

FLUCTUATION OF TAXPAYERS IN THE WEALTHY CATEGORY

Question. Ms. Harrison, your testimony includes the following observation: ‘‘Even 

though the percentage of taxpayers who itemize has remained relatively constant 

over the past 25 years, the individuals who comprise the universe of itemizers 

changes from year to year.’’ And you also observe that: ‘‘In short, circumstances 

change.’’ 

I think that those are accurate observations. A person who takes one or more 

itemized deductions today is in a different situation tomorrow or years from now 

and years earlier. It is also true, when we look at things like capital gains or someone’s place in the income distribution, that the person who receives a capital gain 

today or resides in a certain income category today may not be in the same position 

yesterday or tomorrow. That is, circumstances change, which I think is important 

to consider, and something that analysts often don’t consider as much as they 

should. 

Stated another way, it is important to keep in mind that some people who look 

like they are part of the so-called ‘‘rich’’ today may only be so temporarily, and not 

in a perpetual state of ‘‘richness.’’ 

I wonder if you agree. 

Answer. Yes, I do agree. One of the most important benefits of the mortgage interest deduction is that it is there to assist those first-time home buyers who are facing 

the early years of mortgage payments when interest makes up a much higher proportion of the monthly payment. As the mortgage is amortized, families often become more financially stable, and the extra assistance of the mortgage interest deduction is not as needed. This is why many millions of homeowners do not claim 

the MID in any particular year. They have either paid off, or significantly paid 

down, their mortgages. The number of homeowners who, at some point over their 

ownership of the home, have utilized the deduction is a much more accurate measure of the importance of the deduction in encouraging home ownership. 

TRANSITION POLICY

Question. Ms. Harrison, I agreed with your point that: ‘‘If one were designing a 

tax system for the first time, one would likely devise something that is different 

from what we have already.’’ 

99 

You then went on to state that some provisions in the tax code have been around 

for over a century, and thus many asset prices have the expectation of those tax 

provisions continuing. 

So, what are your thoughts on transition policy. Namely, it’s certainly true we 

don’t want, through tax law changes, to create tremendous upheaval, even if the 

new law will be more efficient in the long run. Your thoughts? 

Answer. As mentioned above, Realtors believe that tax reform is important and 

needed, but should first, do no harm. This may sound like little more than a slogan, 

but your question brings to light the reality of the harm that careless tax reform 

can do to those who reasonably relied on the tax law when making decisions. 

When homeowners (or any taxpayers) enter into a major transaction, such as purchasing a home, they rely on the current law staying in place over the life of that 

transaction. Having the tax law subsequently change in an adverse way can greatly 

affect the ongoing investment in a very negative and unfair manner. 

Please let me mention just three examples in the home ownership arena that 

could have serious or severe consequences on those who, in good faith, purchased 

a home in reliance of the current tax law continuing to provide the benefits available at the time of the transaction. 

First, consider the first-time home purchaser who, like the majority of those entering the ranks of home ownership, has only a minimal amount for the down payment, say less that 10 percent. If the tax law is suddenly changed to where the expected tax benefits are no longer available, the value of the investment (the home) 

will drop, and the taxpayer’s relatively small amount of equity in the home could 

completely disappear, leaving the mortgage under water, meaning the home is no 

longer worth as much as is owned on the loan. We have only to look at the experiences of many homeowners during and following periods of economic downturn to 

find examples of the disruption and pain that can be inflicted. 

Second, take the case of a family with college-bound children. Many parents of 

college students turn to the equity in their homes to help cover the high costs of 

higher education for their children. Negative changes in the tax rules that provide 

tax benefits of owning a home could adversely affect the ability of these families to 

provide for that higher education. 

Finally, please consider the case of the tens of millions of the Baby Boom generation who purchased a home some time ago and have been building equity in that 

home. As these homeowners approach retirement age, they are planning and relying 

on the equity of that home to be there to assist in financing those retirement years. 

For many, their home will be their largest retirement asset. Changes in the tax law 

that reduce that equity can have serious consequences to retirement plans when 

there is little time to recover from the reduction in savings. 

In short, major adverse changes in tax policy that occur after important transactions have been entered into, can and will adversely affect families who have responsibly relied on those tax benefits being there for the duration of their investment. Taking them away is unfair and will cause harm. 

QUESTIONS SUBMITTED BY HON. ROBERT MENENDEZ

Question. Ms. Harrison, in your testimony you argue that the value of the mortgage interest and property tax deductions is already baked in to the price of a home, 

and that if these deductions were repealed or reduced, the price of homes would diminish. 

Could you point to any empirical evidence that guides your views? 

Answer. Economists have long acknowledged that the mortgage interest and property tax deductions are included in the value of homes. Most recently, the National 

Association of Realtors commissioned a study of the estimated impact of a 

Blueprint-type tax reform plan from a prominent national firm. The study estimates 

that home prices in the short run would fall by 10.2 percent as a result of this kind 

of tax reform. The effects would likely be higher in higher cost areas. Please see 

the study at http://narfocus.com/billdatabase/clientfiles/172/21/2888.pdf. 

Question. Ms. Harrison, you have a wealth of experience in the real estate business and have seen the real world implications of tax policy. 

100 

Can you tell us how your experience has influenced your views on the mortgage 

interest deduction? Has the MID and property tax deductions really made a difference for the clients you have worked with? 

Do you really think diminishing these deductions would harm the rate of home 

ownership? 

Answer. For many Americans, the purchase of a home is the single most expensive purchase they will ever make. The decision to purchase a home is influenced 

by a variety of factors, which differ from family to family and is rarely just based 

on financial factors. Nevertheless, the ability to purchase is a financial decision. For 

many of the customers and clients with whom I have worked, the deductibility of 

SALT and the MID have made the difference that allowed them to purchase a home. 

For this reason, I believe that home ownership rates would drop in my market area, 

Prince George’s County, MD, if these deductions were diminished or eliminated. 

Question. Ms. Harrison, critics of the MID and SALT argue that doubling the 

standard deduction will eliminate any additional burden caused by repealing these 

itemized deductions. 

What is wrong with this line of thinking? Wouldn’t everyone still be able to claim 

as much of a deduction as they can now? 

Answer. There are at least two problems resulting from the actual repeal of the 

SALT deduction and the almost de-facto repeal of the MID under the kind of tax 

reform being discussed. The first, as I mentioned above in my answer to the chairman in his question about the percentage of itemizers, is that these changes would 

greatly diminish the incentive value of these two deductions for homeowners. This 

will make it much harder for many first-time homebuyers to make the move from 

renting to owning and also sap the equity of tens of millions of homeowners. 

The second problem is that the increase in the standard deduction is not a true 

increase, but a substitution of the personal and dependency exemptions, which 

would be repealed under the tax reform plans we have seen promoted this year. 

This means that the purported increase in the standard deduction is not a true increase in the exemption amount. For some taxpayers, particularly single ones, there 

would still be an increase in the amount of income that is exempted from tax. And 

many or most of these would indeed receive a tax cut from tax reform. For other 

filers, and particularly those with children, the amount of income exempted from 

tax as a result of the increase in the standard deduction combined with the repeal 

of the exemptions would go down, not up. Some of these filers would get relief from 

this effect by the higher tax credit for children that is promised as part of the reform plan. However, among those taxpayers with larger families, and especially 

those with children over the age of 16 or with incomes too high to qualify for the 

child tax credit, there will be many millions who pay more taxes because the 

amount of the repealed exemptions is higher than the increase in the standard deduction. 

Question. Ms. Harrison, beyond the economics, what about the impact home ownership has on society? 

Why should the tax system encourage home ownership? 

In your experience as a Realtor, does our society benefit through greater home 

ownership? If so, does this benefit justify the value of tax incentives for home ownership? 

Answer. Home ownership remains a goal for most American families, and with 

good reason. It creates communities that are stable and vibrant and is one of the 

chief sources of wealth building for middle-class families. The provisions in the tax 

code that have favored home ownership are an acknowledgement of the high value 

our society places on home ownership and the communities it creates. 

QUESTIONS SUBMITTED BY HON. BILL NELSON

Question. What metrics or considerations should Congress use to determine appropriate trade-offs in tax reform? 

Answer. Tax reform can mean many different things to different people. For example, a tax reform plan that has as its goals to provide a tax cut for the middleclass should actually deliver those results. Likewise, a tax reform that promises increased prosperity through higher economic growth should not result in many bilVerDate Sep 11 2014 17:51 Sep 21, 2018 Jkt 000000 PO 00000 Frm 00104 Fmt 6601 Sfmt 6621 R:\DOCS\31548.000 TIM
101 

lions of lost equity in the first years after its passage. One of the main messages 

NAR has tried to communicate with Congress about tax reform is that it is important to accomplish thoughtful tax reform, but first, it should do no harm. 

Question. How would you suggest Congress address the skyrocketing cost of rental 

housing? Please provide some specific ideas to consider. 

Answer. Realtors have long supported the current-law Low-Income Housing Tax 

Credit, which has been remarkably effective in incentivizing the construction and 

rehabilitation of low-income housing units since its inception in the 1986 Tax Reform Act. The National Association of Realtors is part of the ‘‘A Call To Invest in 

Our Neighborhoods (ACTION) Campaign,’’ a national coalition representing over 

2,000 national, State, and local organizations and businesses advocating to preserve, 

strengthen and expand the Low-Income Housing Tax Credit (Housing Credit). 

The Coalition is urging Congress in tax reform to ensure that the value of the 

Low-Income Housing Tax Credit is not diminished through the reduction in the corporate income tax rate and that the Credit is improved in various other ways. More 

information about specific recommendations can be found here: http:// 

rentalhousingaction.org. 

PREPARED STATEMENT OF HON. ORRIN G. HATCH, 

A U.S. SENATOR FROM UTAH

WASHINGTON—Senate Finance Committee Chairman Orrin Hatch (R–Utah) today 

delivered the following opening statement at a hearing on ways to streamline the 

individual tax system to make it work better for American individuals and families. 

Welcome everyone to this morning’s hearing, where we will discuss a major piece 

of the tax reform puzzle. Today we’ll be talking about ideas, proposals, and considerations for reforming the individual tax system. 

While we have had countless hearings on tax reform in recent years, today’s hearing is the first in what I hope will be a series of hearings leading up to an intensive 

effort on this committee to draft and report comprehensive tax reform legislation. 

We’ve talked about these issues a great deal. In fact, since I became the lead Republican on this committee in 2011, we’ve had more than 60 hearings where tax 

reform was a main focus of the discussion. I think we’re capable and ready to get 

to work on producing a bill, and I look forward to working with my colleagues on 

this next, all-important stage of the process. 

I’d like to make a couple points about that process for a moment, because there 

seems to be some confusion as to what the Finance Committee’s role will be in tax 

reform. 

I’ve heard a lot of talk about a secret tax reform bill or a comprehensive plan 

being written behind closed doors. Most of you have probably also heard about tax 

reform details that are set to be released later this month. 

True enough, leaders in the House and Senate, including myself, as well as officials from the executive branch have been discussing various proposals. But, as we 

stated in our joint statement before the recess—and as I have stated on numerous 

occasions—the tax-writing committees will be tasked with writing the bill. The 

group—some have deemed us ‘‘The Big Six’’—will not dictate the direction we take 

in this committee. 

Any forthcoming documents may be viewed as guidance or potential signposts for 

drafting legislation. But, at the end of the day, my goal is to produce a bill that 

can get through this committee. That takes at least 14 votes, and hopefully we’ll 

get more. Anyone with any experience with the Senate Finance Committee knows 

that we are not anyone’s rubber stamp. If a bill—particularly on something as consequential as tax reform—is going to pass in this committee, the members of the 

committee will have to be involved in putting it together. 

Therefore, I intend to work closely with my colleagues and let them express their 

preferences and concerns so that, when we are ready to mark up a tax reform bill, 

the mark will reflect the consensus views of the committee. That work, in many respects, has already begun. 

I’ll note that I have not limited these commitments to my Republican colleagues 

on the committee, which brings me to my second point. 

102 

From the outset, I have made clear that my preference is to move tax reform 

through this committee with bipartisan support. I have no desire to exclude my 

Democratic colleagues from this discussion, and I’m not determined to report anything by a party-line vote. 

I’ll note that the President and his team have publicly said the same thing this 

week. 

If any of my Democratic colleagues are willing to come to the negotiating table 

in good faith and without any unreasonable preconditions, I welcome their advice 

and input. 

So far, my colleagues have insisted that the majority agree to a series of process 

demands before any substantive bipartisan talks can take place. Effectively, they 

want to ensure that we make it easier for them to block the bill entirely before 

they’ll talk about what they want to put in the bill. 

That seems counterintuitive to me. And, in my view, it is unreasonable. Furthermore, I don’t recall the other side ever offering such a concession when they were 

in the majority. 

We should not let process concerns keep us from talking about the substance of 

a tax reform bill. My hope is that my colleagues on the other side will put these 

demands aside and let us begin searching for common ground on these important 

issues. 

Those threshold matters aside, let me talk about today’s hearing. 

One argument that rears its ugly head in every tax reform debate is the claim 

that proponents of reform want to cut to taxes for the uber-rich and give additional 

tax breaks to greedy corporations. 

We’ve heard that argument repeated in the current debate. While these claims 

are about as predictable as the sunrise, they are simply not true. 

While I can’t see into the hearts of every member of Congress, I truly don’t know 

of a single Republican who, when thinking about tax reform, asks themselves what 

they can do to help rich people. That has never been our focus, and it is not our 

focus now. 

Instead, we are focused squarely on helping the middle class, and recent proposals 

to reform the individual tax system reflect that. 

For nearly a decade now, middle-class families and individuals have had to deal 

with a sluggish economy, sub-standard wage growth, and a growing detachment 

from labor markets. 

Tax reform, if it’s done right, can help address these problems and provide muchneeded relief and opportunity for millions of middle-class families. That, once again, 

is our goal in tax reform—it is, in fact, a driving force behind our efforts. 

Let’s talk about a few specific proposals. 

Under our tax code, individual taxpayers or married couples can opt to either take 

the standard deduction or itemize deductions to lower their tax burden. Currently, 

about two-thirds of all U.S. taxpayers opt to take the standard deduction. These are 

often low-to-middle income taxpayers. 

One idea that has been central to a number of tax frameworks is a significant 

expansion of the standard deduction, which would reduce the tax burden for tens 

of millions of middle-class families and eliminate Federal income tax liability for 

many low- to middle-income Americans. 

I’ll note that this is not only a Republican idea. In fact, a few years back, our 

ranking member introduced legislation that would have nearly tripled the standard 

deduction. 

This is the very definition of middle-class tax relief, and it goes beyond direct tax 

and fiscal benefits. 

With a significantly expanded standard deduction, the tax code would immediately become much simpler for the vast majority of middle class taxpayers. And 

that is no small matter. 

Currently, American taxpayers—both individuals and businesses—spend about 6 

billion hours and nearly a quarter of a trillion dollars a year complying with tax 

filing requirements. This, of course, is not surprising given that our tax code has 

103 

grown exponentially into a three-million-word behemoth that is basically indecipherable for the average American. 

That one change—expanding the standard deduction—would let millions of 

middle-class taxpayers avoid having to navigate the treacherous landscape of credits 

and deductions. Combined with other ideas, including a significant reduction in the 

number credits and deductions in the tax code and a radically simplified rate structure, this approach will save middle-class families both time and money. 

I expect there to be some disagreements about what credits and deductions to 

keep and which to repeal in the name of tax simplicity, efficiency, and fairness. I 

expect we’ll air some of those differences of opinion here today. 

There are other tax reform proposals under discussion that will help the middle 

class. 

For example, an increase and enhancement of the Child Tax Credit would benefit 

middle- and lower-income families almost exclusively. 

And, by reducing barriers and disincentives for savings and investment, we can 

expand long-term wealth and improve the quality of life for those in the middle 

class. 

These are some of the central ideas being discussed to reform the individual tax 

system. And, in virtually every case, the primary beneficiaries of these proposals 

would be middle-class taxpayers. 

I know that there are Democrats who support these types of reforms. As I mentioned earlier, I hope we can recognize this common ground and find ways to collaborate in the broader tax reform effort. 

I’ll also note that the middle class has a significant stake in our efforts to reform 

the business tax system. But, that is a matter for another hearing. 

Once again, this committee has a lot of work to do. There is not going to be a 

top-down directive that makes the hard decisions for us. I know we’re up to the task 

and that most of us are game to participate in the process to help us reach a successful conclusion. 

Before I turn to Senator Wyden, I want to say that I hope we can have a productive discussion of options to reform taxes for individuals, and not a debate on socalled ‘‘plans’’ based on outside analysts’ conjectures and assumptions. It is all too 

common for ideological think tanks and partisan analysts to take short statements 

outlining broad principles on tax reform and then fill in the gaps with their own 

subjective assumptions about details just to parade out a list of horribles that they 

then use to tarnish the entire reform effort. 

Let us discuss real ideas and proposals, keeping in mind that the Finance Committee will not be bound by any previous tax reform proposal or framework when 

we start putting out bill together. 

PREPARED STATEMENT OF RAMESH PONNURU, VISITING FELLOW, 

AMERICAN ENTERPRISE INSTITUTE

Chairman Hatch, Ranking Member Wyden, and distinguished members of the Finance Committee, thank you for convening this hearing on ‘‘Individual Tax Reform.’’ 

I am a visiting fellow at the American Enterprise Institute, a senior editor at National Review, and a columnist for Bloomberg View. This testimony reflects my own 

views and not those of any organization with which I am affiliated. It is an honor 

to be testifying before you. 

While tax policy has been a politically contentious issue, over the last 20 years 

a broad political consensus has supported tax relief for parents of dependent children. The major reforms of the tax code undertaken over this period have consistently included such tax relief. The Taxpayer Relief Act of 1997 instituted a tax credit of $500 per eligible child. The Economic Growth and Tax Relief Reconciliation Act 

of 2001 raised the amount of the tax credit to $1,000. The Jobs and Growth Tax 

Relief Reconciliation Act of 2003 accelerated the phase-in of that expansion. And the 

American Tax Relief Act of 2012 made that expansion permanent. 

People on different parts of the political spectrum have had varying reasons for 

supporting the child credit, including an appreciation of the costs of raising children 

and the belief that raising children is, in no merely metaphorical sense, an investVerDate Sep 11 2014 17:51 Sep 21, 2018 Jkt 000000 PO 00000 Frm 00107 Fmt 6601 Sfmt 6621 R:\DOCS\31548.000 TIM
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1 ‘‘Policy Basics: The Child Tax Credit,’’ Center for Budget and Policy Priorities, October 21, 

2016. 2Large transfers of this kind can also be expected, all else equal, to reduce by some amount 

the number of children that people raise. For evidence that this effect has occurred in developed 

countries, see Michele Boldrin, Mariacristina De Nardi, and Larry E. Jones, ‘‘Fertility and Social 

Security,’’ NBER Working Paper no. 11146, February 2005; and Isaac Ehrlich and Jinyoung 

Kim, ‘‘Social Security, Demographic Trends, and Economic Growth: Theory and Evidence from 

the International Experience,’’ NBER Working Paper no. 11121, February 2005. 3 Ramesh Ponnuru, ‘‘The Empty Playground and the Welfare State,’’ National Review, May 

28, 2012. 

ment in the Nation’s future. The fact that the child credit lifts nearly 3 million people out of poverty each year has also brought it support.1

Yet the child credit has had critics, who believe that it represents a form of governmental favoritism or even ‘‘social engineering,’’ and that changes to the tax code 

should consist of measures more directly related to increasing economic growth. 

In this testimony I will lay out a case for expanding the child credit—specifically, 

for increasing the maximum level of the credit and for applying it to reduce payrolltax as well as income-tax liability—as a crucial component of tax reform. 

REDUCING THE ‘‘PARENT TAX’’ 

The main goal of tax reform is generally taken to be to move closer to a tax code 

that raises the desired amount of revenue while minimizing the distortions that government policy can create. One example of a distortion caused by government policy 

is an unjustified tax break for a particular kind of investment. This departure from 

neutrality between different types of economic activity has two negative effects. It 

unfairly transfers resources from one group of people to another, and it reduces the 

efficiency with which markets direct capital to its most productive uses. In that way 

the tax break reduces national welfare and eliminating the break would increase it. 

Another example of a distortion: in theory, high tax rates on income can so discourage work that reducing them raises the same amount of revenue while allowing for 

a larger economy. 

One rationale for an expanded tax credit for children is that it reduces a distortion caused by government policy: the large, though implicit, tax on parenting that 

the structure of our entitlement programs has inadvertently created. Social Security 

and Medicare, our principal government programs to take care of senior citizens, 

rely for their financing, in large part, on parents. All taxpayers, whether or not they 

have children, contribute to the program. Parents, however, contribute to the program both through the Federal taxes they pay and through the financial sacrifices 

they make to raise children (including, in many cases, forgone income). The Federal 

Government does not recognize the extent of this contribution, which has the effect 

of causing parents to shoulder a larger share of the burden of government than they 

should. 

Consider two couples with similar earnings histories, one with two children and 

one with none. The first couple contributes more to the future of the entitlement 

programs but gets no more benefits from those programs as a result. In the world 

before the entitlement State, many of the financial sacrifices the first couple made 

in raising children would redound to their direct benefit in old age, as their children 

took care of them. Entitlements socialize much of the financial return from childrearing for the betterment of senior citizens as a group, regardless of whether or 

how many children those senior citizens have. 

Society has made this choice for weighty and very widely supported reasons. But 

if it does not recognize parental investment in children as a contribution to the entitlement programs, it is, whether it consciously aims to do so or not, transferring resources from parents to the childless and from larger families to smaller ones. We 

can call this transfer the ‘‘parent tax.’’ 2

Two mistaken objections to this analysis may suggest themselves. The first is that 

it is a kind of single-entry bookkeeping, since most of those children will grow to 

be senior citizens one day and then benefit from Social Security and Medicare themselves. In the past, I have suggested a thought experiment to illustrate why that’s 

a mistaken view.3 Imagine a society with old-age programs similar to ours in which 

for generations each woman has had two children. Imagine next that for one generation each woman has three children, and then the pattern of two children re-asserts 

itself. That increase in the number of children would work an improvement in the 

finances of the programs that would never be undone. For one generation, the same 

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4The thought is developed in Hans-Werner Sinn, ‘‘The Value of Children in a Pay-As-YouGo Pension System: A Proposal for a Partial Transition to a Funded System,’’ National Bureau 

of Economic Research Working Paper 6229, October 1997. 5 Robert Stein, ‘‘Taxes and the Family,’’ National Affairs, Winter 2010. I have updated his estimate using the Consumer Price Index. 6 Charles Blahous and Jason J. Fichtner, ‘‘Limiting Social Security’s Drag on Economic 

Growth: Removing Disincentives to Personal Savings and Labor Force Participation,’’ Mercatus 

Research, 2012. 7Shrinking the entitlement programs would also reduce the parent penalty, although that 

proposal would of course involve important trade-offs beyond the scope of this testimony. The 

programs would have to be very drastically reduced, however, to eliminate the parent tax entirely. See Hans-Werner Sinn, ‘‘The Pay-As-You-Go Pension System as a Fertility Insurance and 

Enforcement Device,’’ National Bureau of Economic Research Working Paper 6610, June 1998. 8The Tax Foundation estimates that a doubling of the standard deduction would reduce rev- enue by $1.3 trillion over 10 years while raising incomes in the second-lowest-earning quintile 

of taxpayers by 0.15 and 1.4 percent; doubling the child credit would on the other hand reduce 

revenue by $640 billion over 10 years while raising income in the lowest quintile by 0.5 percent 

and the second-lowest quintile by 2.1 percent. ‘‘Options for Reforming America’s Tax Code,’’ Tax 

Foundation, 2016. 

tax rate would yield a higher level of benefits. Afterward that society could revert 

to the previous benefit level, but it would never have to go below that level. (Alternatively, that society could react to its baby boom by keeping benefits flat and for 

one generation reducing tax rates.) 4

The second mistaken objection is that this analysis omits the many government 

benefits that accrue to families with children. Childless adults pay for schools 

through their taxes, after all. The difference is that all of these childless adults benefited themselves from an education financed by someone else. A system of general 

taxation to pay for schooling does not create free riders in the way Social Security 

and Medicare do, and does not represent a transfer from smaller families to larger 

ones. 

Other government policies, however, represent genuine but very partial offsets to 

the parent tax: notably the tax exemption for dependents and the existing tax credit 

for children. The problem is the scale: these policies reduce the parent tax but leave 

it still quite high. One conservative estimate suggests that the child credit would 

need to increase to roughly $4,800 per child to eliminate it completely.5

While a large child credit is not the only way to reduce the parent tax, it has significant advantages over other methods. An alternative that has been proposed is 

to reduce payroll taxes based on the number of children a taxpayer is raising.6 Benefit levels in retirement could also be set to vary based on the number of children 

a senior citizen had raised. A larger child credit would, however, be administratively 

simpler than either policy, since it would only change an existing provision of the 

tax code. Compared to a higher-benefits policy, it would also direct resources to 

households at the time they are most likely to be needed: that is, when they are 

raising children.7

A larger deduction for the cost of commercial day care, meanwhile, would reduce 

the parent tax for some families but exclude the many families who make different 

arrangements for their children. 

An increased standard deduction has also been proposed as a way to deliver tax 

relief to middle-class Americans. Whether or not this increase would be desirable 

on other grounds, it would not reduce the parent tax. It appears that more of the 

benefits of a child-credit expansion would also accrue to relatively low-income households.8

APPLYING THE CHILD CREDIT AGAINST PAYROLL TAXES

The logic of this case for a large child credit does not just militate in favor of raising its maximum value from $1,000 per child to some bigger number. It also militates in favor of applying it against payroll taxes as well as income taxes: in favor, 

that is, of making it partially ‘‘refundable.’’ 

The parent tax arises, again, because parents are contributing to Social Security 

and Medicare both through their taxes—including especially their payroll taxes— 

and through the financial sacrifices they make to raise children. If we wish to reduce their contributions to put it on par with those of non-parents, we need to take 

account of the payroll taxes as well as the income taxes. Consider once more our 

two couples, one with children and one without, and assume both of them are payVerDate Sep 11 2014 17:51 Sep 21, 2018 Jkt 000000 PO 00000 Frm 00109 Fmt 6601 Sfmt 6621 R:\DOCS\31548.000 TIM
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9See, for example, Jonathan Gruber, ‘‘The Incidence of Payroll Taxation: Evidence from 

Chile,’’ National Bureau of Economic Research Working Paper 5053, March 1995. 10See Andrew Biggs, ‘‘A New Vision for Social Security,’’ National Affairs, Summer 2017, for 

an example of a proposal that seeks these goals. 11 Eliminating the dependent exemption and raising the child credit by $600 per child, for example, may be a good idea for reasons unrelated to the parent tax. But it would do nothing 

to provide tax relief for the many parents in the 15-percent tax bracket—since the lost value 

of the exemption would cancel out the expansion of the credit—and would therefore not reduce 

the parent tax they pay. 

ing the same amount of payroll taxes but do not make enough money to have income-tax liability. The former couple should have a lower payroll-tax liability. 

Not only that: The credit should in principle be applied not just against 

‘‘employee-side’’ payroll taxes but against ‘‘employer-side’’ payroll taxes as well. It 

is widely recognized among economists that the taxes an employer pays toward Social Security and Medicare for employees represent forgone wages.9 Their true economic incidence, that is, falls almost entirely on the worker. They, too, are thus part 

of the contribution that the taxpaying employee makes to these programs. 

Some observers have expressed concern about taking people off the income tax 

rolls. The child credit has already kept some families from having a positive incometax liability and an expanded child credit would have that effect for even more families—and, as we have seen, reduce their payroll-tax liability too. These observers 

worry that voters who do not pay taxes will have an unhealthful relationship to government, seeing its benefits as free. The empirical grounding for this fear is weak, 

however, and in any case a household’s removal from the tax rolls will be temporary: Adults will lose the credit when their children grow up. And if any large 

group of citizens can be expected to look to the future, it should be parents. 

PAYING FOR AN ENLARGED CHILD CREDIT

As with any form of tax relief, a larger child credit would require the government 

either to tolerate larger deficits, to reduce spending, or to raise other taxes. It is 

possible to agree on the case for a larger child credit while disagreeing on many of 

these questions of fiscal and tax policy. My own top preference would be to reform 

Social Security and Medicare in ways that would reduce the Federal Government’s 

long-term spending compared to their projected levels while also maintaining and 

perhaps even augmenting our current commitments to the neediest.10 My second 

preference would be to scale back or eliminate tax breaks such as the deductions 

for mortgage interest and State and local taxes, especially for the highest earners. 

A third solution would be to lower the thresholds at which people move into the 

highest tax brackets, so that the top marginal tax rates in a reformed tax code apply 

to a larger number of people. 

My main point in this testimony, however, is to argue that reducing the parent 

tax ought to be a priority for tax reform. If tax reform aims to keep revenues flat, 

then it should expand the child credit somewhat and make revenue-raising tax policy changes to compensate. But the increase in the credit cannot be wholly paid for 

by eliminating the dependent exemption, since that would leave the parent tax unaffected.11 If tax reform instead aims for lower revenues than currently projected, 

then a larger child credit should account for some of that reduction. An expanded 

tax credit for children should be part of any larger tax reform that Congress enacts, 

so that the reform is both pro-growth and pro-family. 

QUESTIONS SUBMITTED FOR THE RECORD TO RAMESH PONNURU

QUESTION SUBMITTED BY HON. ORRIN G. HATCH

FUNDING THE CHILD TAX CREDIT

Question. Mr. Ponnuru, you suggest a much higher Child Tax Credit. As you acknowledge, this will cost a lot in the 10-year-window. And so, in the 10 years, this 

would be difficult to pay for. 

But, I suppose one of your points is that it will significantly pay for itself in the 

long run? That is, today’s children will be tomorrow’s Social Security taxpayers? If, 

rather than using a 10-year budget window, Congress used a budget window with 

an infinite horizon, do you have thoughts on how your proposal might score? 

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Answer. The rationale for an expanded child credit is rooted in fairness: the current system overtaxes parents relative to non-parents, and large families relative to 

small ones. An enlarged tax credit might also change behavior in some cases, however, by making a larger family more affordable. To the extent the policy enables 

larger families, it will, over a long enough time horizon, partially recoup its costs. 

QUESTIONS SUBMITTED BY HON. BILL NELSON

Question. In your opinion, did the 1986 Tax Reform Act solve the problems it was 

intended to fix? If so, please provide some examples of how. If not, why? 

Answer. The Tax Reform Act of 1986 had both positive and negative features. On 

the positive side of the ledger, I would place the reduction of marginal tax rates for 

individuals; the expansion of the Earned Income Tax Credit and personal exemption; the elimination of real estate tax shelters; and the simplification of the tax 

code. On the negative side, I would place the lengthening of depreciation schedules, 

the restrictions on IRAs, and the increase in capital gains tax rates. Overall I would 

say the reform was better at simplifying the code, albeit temporarily, than at promoting economic growth. 

Question. President Trump has said he wants to lower the top business tax to 15 

percent. Do you believe this can be done without significantly adding to the deficit? 

If so, please provide a potential scenario for deficit-neutral tax reform in detail (with 

budget estimates). 

Answer. I do not believe the corporate tax rate can be brought to 15 percent without reducing revenues significantly. Unless spending were cut or other taxes raised, 

the deficit would therefore rise significantly. 

Question. What metrics or considerations should Congress use to determine appropriate trade-offs in tax reform? 

Answer. I believe the tax code should be designed so as to raise whatever level 

of revenue Congress deems appropriate in the least damaging manner possible. 

Among the types of harm Congress should strive to avoid are reductions in the incentives to work, save, and invest; favoritism toward some kinds of economic activity over others; tax bills that are too high, especially on low earners; and tax burdens on parents that are unfairly high. 

As you suggest, there are unavoidable trade-offs: raising revenues inevitably reduces incentives to work, save, and invest. For a given level of revenue, leveling the 

playing field for families (through an expanded child credit) means accepting slightly worse incentives to work, save, and invest (through lower marginal tax rates). 

There is no formula for making these trade-offs. I believe tax reform should make 

improvements on multiple fronts rather than focusing on only one of them singlemindedly. 

Tax reform should, that is, reduce the tax code’s favoritism toward some economic 

activities over others; improve incentives to work, save, and invest; and offer tax relief to families; all while raising needed revenues. 

Question. Do you believe Congress should consider cutting entitlement and safety 

net programs—like Social Security, Medicare, TANF, and food stamps—to pay for 

tax reform? If so, why? If not, why not? 

Answer. I favor reforms that restrain the growth of Social Security and Medicare. 

It might be worth considering using some of the budgetary savings to provide additional tax relief. But most reforms would have to be phased in slowly so as to enable 

people to adjust their retirement plans in advance. Such reforms would accumulate 

savings too slowly to finance immediate tax relief. 

Question. In a recent speech, the President stated: ‘‘Our tax plan represents a 

sharp reversal from the failed policy of the past. America’s high tax rates punish 

companies for doing business in America and encourages them to move to other 

countries. . . . There has to be a price to pay when that happens; when they let 

our people go and that happens, and they think they can sell the product right back 

into the USA. There is going to be a big price to pay, and there has been, and that’s 

why you’re seeing a big change.’’ Please provide some suggestions on how the President’s tax reform plan could provide a ‘‘price to pay’’ for companies that offshore 

jobs. 

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Answer. When a company moves production for the American market outside the 

United States, it pays various costs, including the cost of transporting those goods 

and a reduced ability to reap the benefits of productive American labor. I do not 

believe that government policy should seek to increase those costs. Rather we should 

make sure that our policies do not impose unnecessary costs on producing goods in 

America. Lower and fairer taxes on business activity in the United States would 

make it more attractive to produce here. The ‘‘framework’’ endorsed by President 

Trump takes many positive steps in this direction. 

Question. In your opinion, does a lower tax rate or tax exemption for the foreign 

earnings of companies that offshore U.S. jobs amount to a ‘‘price to pay?’’ 

Answer. No. 

Question. One of the President’s stated objectives for tax reform is to make the 

tax code fairer. How would you suggest he achieve this objective? 

Answer. The most important way he could achieve this objective would be to put 

real money behind the ‘‘significant’’ expansion of the tax credit for children that he 

has already endorsed, and to make sure that some of that money relieves families 

with low and moderate incomes from their payroll tax liabilities. 

PREPARED STATEMENT OF HON. RON WYDEN, 

A U.S. SENATOR FROM OREGON

It’d be great if what I’m hearing about the goals for individual tax reform actually 

lined up with the details of the plans that are reportedly in the works, but that just 

isn’t the case. Not even close. 

The President declared to the Nation that his tax plan would not give any breaks 

to the wealthy. But the fact is, his one-page tax outline has a new, lunar cratersized loophole for the wealthy allowing them to abuse pass-through status. Passthrough status is supposed to be about helping small businesses, but the Trump 

plan turns it into a scheme for the wealthy to dodge paying their fair share. That’s 

on top of abolishing the estate tax, which only touches one out of every 500 wealthy 

estates today. It’s another outlandish giveaway to people at the top. 

This morning the Finance Committee is going to spend a few hours spinning its 

wheels while the actual framework of the Republican tax plan is being written behind closed doors. That’s not to say the issues that’ll be discussed today are unimportant; nobody has invested more sweat equity in tax reform than I have. 

But the proposal the committee ought to be evaluating this morning is coming together in secret, written by special interests and it’s skipping right past any serious 

debate or amendment in this room. 

And in the meantime, if all you did was listen to the talking points, it’d be easy 

to think the Republican plan would put a big focus on the burden of complexity the 

tax code heaps onto so many middle-class families. But the actual architecture of 

the plan in the works doesn’t reduce complexity or focus on the middle class—the 

Republican plan endows future generations of the mega-wealthy. 

There is a blueprint for bipartisan, comprehensive tax reform that works. It’s 

Reagan-style tax reform, and it’s not what Republicans are working on today. 

Reagan-style tax reform fights complexity by fighting unfairness. Thirty-one years 

ago, the reform bill President Reagan fought for and signed into law equalized the 

tax treatment of wages and wealth. That meant that the worker who punched a 

clock going in and out of every shift wasn’t getting a raw deal compared to the 

fatcats and trust fund babies. 

Reagan-style tax reform is also about clearing out the deadwood—the provisions 

that do a whole lot more to please special interests and lobbyists than they do to 

create jobs or help families climb the economic ladder. 

Those are propositions that I believe ought to get a lot of bipartisan interest again 

in 2017. That’s because the tax code on the books today amounts to a tale of two 

systems. There’s a strict set of rules for the cop and the nurse who are married and 

raising kids. Their taxes come right out of their paychecks—no special tax dodges 

or schemes for them to exploit. Then there’s another set of rules for the most fortunate. It says they can decide how much to pay and when to pay it. 

109 

That’s the brand of unfairness that Reagan-style reform would go after. Tax reform in 2017 should be an opportunity to put money back into those cops’ and 

nurses’ paychecks, and to help those families save for retirement, pay for college and 

afford housing. 

But the basic proposition that Republicans have on offer goes after middle-class 

tax benefits like the State and local deduction and incentives for home ownership 

and retirement savings. And it gores the middle class to finance unprecedented tax 

handouts for the biggest corporations and the most fortunate. 

When it comes to State and local tax deductions, this is fake tax reform. And it’s 

not just a play at taking from blue States. There are middle-class families across 

the country—taxpayers in deep blue areas that went for Clinton and scarlet red 

areas that went for Trump—that’ll be taxed twice on the same income if State and 

local deduction is eliminated. The dreaded double taxation—if you’re opposed to it 

when it involves corporate income, you can’t line up behind a plan to double tax 

middle-class families twice on their hard-earned pay. 

When it comes to simplification, it’s easy to hold up a proposal to double the 

standard deduction as evidence that you want to make filing easier for a lot of people. But in the recent past I’ve called for tripling the standard deduction. So the 

Republican plan for the standard deduction would be a whole lot less generous in 

that regard. 

The basic framework of this plan looks like what you’d put together if you think 

there are a lot of five-car garages that really need expanding on the middle class’s 

dime. And unfortunately, the administration and Republicans in Congress are committed to the partisan approach. Leader McConnell has said he wants another crack 

at reconciliation to jam this tax plan through the Senate, and he doesn’t want input 

from Democrats. 

So this morning, the committee is going to hear a lot about the complexity of our 

tax code, the burden on families, and the need to spark economic growth. I am all 

ears when it comes to ideas centered on those issues—built on giving everybody a 

chance to get ahead the way Reagan-style tax reform did. But the Republican plan 

I see coming together right now doubles down on the rotten unfairness in our tax 

code. And that would make it a failure for the middle class and people working to 

get there. 

During today’s hearing, I hope the committee is able to take a close look at the 

real causes of unfairness and complexity, and why going after middle-class tax 

breaks to fund a tax cut for the wealthy is the wrong approach to reform. 

Thank you, Chairman Hatch. 

(111) 

1The AFCARS Report: Preliminary FY 2015 Estimates as of June 2016, U.S. Department of 

Health and Human Services: Administration for Children and Families, Adoption and Foster 

Care Analysis and Reporting System, retrieved July 13, 2017, from: https://www.acf.hhs.gov/ 

sites/default/files/cb/afcarsreport23.pdf. 2 ‘‘The Importance of the Adoption Tax Credit,’’ The Adoption Tax Credit Working Group, 

2015, retrieved February 18, 2016, from https://adoptiontaxcreditdotorg.files.wordpress.com/ 

2015/10/atcfactsheet.pdf. 

COMMUNICATIONS

ADOPTION TAX CREDIT WORKING GROUP (ATCWG) 

July 17, 2017 

The Honorable Orrin Hatch 

Chairman 

Committee on Finance 

U.S. Senate 

The Honorable Ron Wyden 

Ranking Member 

Committee on Finance 

U.S. Senate 

Dear Chairman Hatch, Ranking Member Wyden, and Members of the Senate Finance Committee: 

On behalf of the Adoption Tax Credit Working Group (ATCWG), we would like to 

inform the Committee on Finance of our efforts and offer ourselves as a resource. 

The ATCWG is a national collaboration of 150 organizations united by our support 

and advocacy for the adoption tax credit, which plays an important role in encouraging the adoption of children who need families. The organizations that make up 

the ATCWG represent children and families from every sector of adoption, including 

U.S. foster care, domestic private, and international adoptions. With our broad representation and involvement in adoption policy and practice issues, we have a 

unique perspective on the role that the tax credit plays for Americans who adopt. 

The ATCWG understands that there is bipartisan interest in simplifying the tax 

code and we are grateful for your outreach for stakeholder input. As the U.S. Senate 

Committee on Finance (‘‘Committee’’) considers the best means of achieving this 

goal, we urge you to take into account the strong public policy rationale for the 

adoption tax credit, the broader and longer term cost savings adoption ensures, and 

the bipartisan history of and support for the credit since its inception. 

First enacted in 1996 as a part of the Small Business and Job Protection Act of 1996 

(Pub. L. 104–188), the adoption tax credit advances the important goal of enabling 

domestic and intercountry adoptions, especially for children with special needs who 

otherwise might linger in costly foster care without the benefits and security of permanent, loving families. Over 53,000 children were adopted from foster care 

in fiscal year 2015 alone.1 By offsetting some of the costs of adoption or of caring 

for a child with special needs, the tax credit makes adoption a more viable option 

for many children and families. Over 60 percent of adopted children are adopted by lower- and middle-income taxpayers, and almost half of children 

adopted from foster care live in families with household incomes at or 

below 200 percent of the federal poverty level.2 Congress has always worked 

across the aisle to prioritize the continuation of the adoption tax credit, and we hope 

that the Committee will continue to recognize the value of the credit. 

112 

3 R.P. Barth, C.K. Lee, J. Wildfire, and S. Guo, ‘‘A Comparison of the Governmental Costs of 

Long-Term Foster Core and Adoption,’’ Social Service Review (March 2006), retrieved April 11, 

2013, from: http://www.flgov.com/wp-content/uploads/childadvocacy/foster%20care%20and% 

20adoption%20study.pdf. 4The AFCARS Report: Preliminary FY 2015 Estimates as of June 2016, U.S. Department of 

Health and Human Services: Administration for Children and Families, Adoption and Foster 

Care Analysis and Reporting System, retrieved July 13, 2017, from: https://www.acf.hhs.gov/ 

sites/default/files/cb/afcarsreport23.pdf. 5Zill, Nicholas (2011), ‘‘Adoption From Foster Care: Aiding Children While Saving Public 

Money.’’ Brookings Institute Center on Children and Families, retrieved from http:// 

www.brookings.edu/∼/media/research/files/reports/2011/5/adoption-foster-care-zill/05_adop 

tion_foster_care_zill.pdf. 6 Jim Casey Youth Opportunities Initiative (n.d.), retrieved February 3, 2015, from http:// 

www.jimcaseyyouth.org/. 7 Jim Casey Youth Opportunities Initiative (n.d.), retrieved February 3, 2015, from http:// 

www.jimcaseyyouth.org/. 8Fixsen, A. (2011), ‘‘Children in Foster Care Societal and Financial Costs: A Family for Every 

Child,’’ retrieved from http://www.afamilyforeverychild.org/Adoption/AFFECreportonchildrenin 

fostercare.pdf. 

We applaud the Committee’s goal to provide much-needed tax relief to middle-class 

individuals and families through reforms to the individual tax system. We hope that 

it will not be forgotten that the adoption tax credit is an existing policy that does 

just this. It not only provides support directly to lower- and moderate-income families, phasing out for those with higher incomes, but it does so in a way that creates 

government savings. A study reported by the federal Children’s Bureau showed that 

the government saves between $65,000 and $127,000 for each child who is 

adopted rather than placed in long-term foster care.3 These savings accrue 

from reductions in the need for direct child welfare services (foster care and court 

oversight) and from the long-term societal benefits of adoption (increased graduation 

rates, reduced homelessness, and reduced incarceration, for example). Annually, 

over 22,000 youth exit foster care without ever finding a permanent family to help 

them in the transition to adulthood.4 An extensive study by Nicholas Zill found that 

81 percent of males in long-term foster care had been arrested compared with 17 

percent of all young males nationally. Incarceration of former foster youth is estimated to cost society $5.1 billion annually.5

Children and youth deserve a permanent family, and while adoption certainly supports these children, it also benefits society broadly.6 Adoption places children on 

a path to becoming more productive citizens, and research tells us that poor outcomes are common for youth who exit foster care without stable families. In addition 

to higher incarceration rates, youth who ‘‘aged-out’’ of the foster care system face 

many other difficult odds. For example, only 58 percent of foster youth graduated 

high school by age 19, only 50 percent were employed by age 24, and 71 percent 

of young women were pregnant by age 21.7 Studies comparing children who remain 

in foster care to children who are adopted have shown that: adopted children are 

54 percent less likely to be delinquent or arrested, 19 percent less likely to 

become teen parents, and 76 percent more likely to be employed.8

As a collective group of diverse organizations, representing thousands of adoptive 

families across the country and hundreds of thousands of waiting children, one of 

the goals of the ATCWG is to preserve the adoption tax credit as a part of the individual tax code. As laid out above, the adoption tax credit supports families who desire to adopt and children who deserve a permanent family. However, we would be 

remiss if we did not bring to your attention the fairness that a refundable tax credit 

creates for American families. 

Some families will never be able to adopt without the benefit of the adoption tax 

credit. Others will adopt but will not benefit at all, which means they may face challenges meeting their children’s needs, particularly children adopted from foster care 

with special needs. 

Over time, Congress has made a series of improvements to the adoption tax credit— 

the vast majority of which were aimed at addressing the fact that many families 

who adopted from foster care were not able to claim the credit. Data from 2010 and 

2011, when the credit was refundable, shows that for the first time in the credit’s 

history, families who adopted children with special needs from foster care were able 

to benefit like other adoptive families. While we understand the complex budget and 

tax issues at hand, failure to maintain this progress will undoubtedly result in more 

children remaining in foster care rather than moving into permanent families. 

There are currently more than 111,000 children in foster care waiting to be 

113 

9The AFCARS Report: Preliminary FY 2015 Estimates as of June 2016, U.S. Department of 

Health and Human Services: Administration for Children and Families, Adoption and Foster 

Care Analysis and Reporting System, retrieved July 13, 2017, from: https://www.acf.hhs.gov/ 

sites/default/files/cb/afcarsreport23.pdf. 

adopted,9 and this number has increased each of the last three years. The 

societal and financial cost of eliminating the adoption tax credit at this time would 

be especially harmful to waiting children, the families that might adopt them, and 

the national budget. Alternatively, maintaining or improving the credit, by returning it to refundability, would serve a critical population and eliminate costs related 

to maintaining youth in less desirable, impermanent foster care as well as costs related to the negative outcomes youth face who age out of foster care without permanency. 

As the Committee develops recommendations to overhaul the Internal Revenue 

Code, we hope that you will consider the ATCWG Executive Committee as a resource for information related to the adoption tax credit. Collectively, we have many 

decades of adoption experience and a comprehensive understanding of how the adoption tax credit benefits children and is used by families, and we would be pleased 

to provide any additional information to you and your staff. Thank you for your consideration. 

Sincerely, 

Adoption Tax Credit Working Group Executive Committee: 

American Academy of Adoption Attorneys 

Adopt America Network 

Christian Alliance for Orphans 

Congressional Coalition on Adoption Institute (Secretariat) 

Dave Thomas Foundation for Adoption 

Donaldson Adoption Institute 

National Council for Adoption 

North American Council on Adoptable Children 

RESOLVE: The National Infertility Association 

Show Hope 

Voice for Adoption 

Adoption Tax Credit Working Group: 

Villa Hope Birmingham AL 

Alabama Foster and Adoptive Parent Association Cullman AL 

Lifeline Children’s Services, Inc. Birmingham AL 

Dillon Southwest Scottsdale AZ 

Partners for Adoption Walnut Creek CA 

AASK—Adopt A Special Kid Martinez CA 

About a Child Redwood City CA 

Adoption Law Group Pasadena CA 

Angels’ Haven Outreach Pleasant Hill CA 

Bal Jagat—Children’s World Inc. Long Beach CA 

Independent Adoption Center Pleasant Hill CA 

Pact, An Adoption Alliance Oakland CA 

Across the World Adoptions Pleasant Hill CA 

Sierra Forever Families Sacramento CA 

Family Connections Christian Adoptions Modesto CA 

Bay Area Adoption Services Mountain View CA 

AdoptFund, Inc. Los Angeles CA 

Alpine Adoption, Inc. Lakewood CO 

Adoption Today Windsor CO 

Project 1.27 Littleton CO 

Fostering Families Today Windsor CO 

The Adoption Exchange Aurora CO 

Fund Your Adoption CO 

114 

Adoption Tax Credit Working Group:—Continued 

CT Association of Foster and Adoptive Parents Rocky Hill CT 

Lutheran Services in America Washington DC 

Families for Private Adoption Washington DC 

Family Equality Council Washington DC 

Child Welfare League of America (CWLA) Washington DC 

Family and Youth Initiative Washington DC 

Florida State Foster/Adoptive Parent Association Minneapolis FL 

Broward Foster and Adoptive Parent Association Plantation FL 

Beacon House Adoption Services, Inc. Pensacola FL 

Jewish Adoption and Foster Care Options (JAFCO) Sunrise FL 

Pinellas County Foster and Adoptive Parent Association Largo FL 

The Adoption Consultancy Brandon FL 

The Sylvia Thomas Center for Adoptive and Foster 

Families 

Brandon FL 

Georgia Council of Adoption Lawyers Atlanta GA 

Georgia Association of Licensed Adoption Agencies Atlanta GA 

Illien Adoptions International, Inc. Atlanta GA 

Georgia Center for Opportunity Norcross GA 

Iowa Foster and Adoptive Parents Association Pleasant Hill IA 

Idaho Foster and Adoptive Parents Association Post Falls ID 

Family Resource Center Chicago IL 

Sunny Ridge Family Center Bolingbrook IL 

The Adoption Lantern Wilmette IL 

Adoption Learning Partners Evanston IL 

The Cradle Evanston IL 

Lifesong for Orphans Gridley IL 

Adoption ARK, Inc. Buffalo Grove IL 

ACT (Adoption in Child Time) Indianapolis IN 

Families Thru International Adoption Evansville IN 

MLJ Adoptions Indianapolis IN 

Christian Family Services of the Midwest, Inc. Portland KS 

Youthville KS 

Resources4adoption.com Eudora KS 

Adoption Beyond, Inc. Overland Park KS 

American Adoptions KS 

All Blessings International, Inc. Owensboro KY 

Catholic Charities of the Diocese of Baton Rouge Baton Rouge LA 

RainbowKids.com Adoption Advocacy Harvey LA 

A Red Thread Adoption Services, Inc. Norwood MA 

Wide Horizons for Children Waltham MA 

Ascentria MD 

Adoptions Together Silver Spring MD 

Global Adoption Services, Inc. Bel Air MD 

Adoptive and Foster Families of Maine Saco ME 

Bethany Christian Services Grand Rapids MI 

Michigan Association for Foster, Adoptive, and Kinship Parents MI 

Adoption Associates, Inc. Jenison MI 

Americans for International Aid and Adoption Troy MI 

Family Enrichment Center Battle Creek MI 

European Children Adoption Services Plymouth MN 

Children’s Home Society and Family Services St. Paul MN 

My Adoption Advisor, LLC Minnetonka MN 

National Foster Parent Association MN 

Minnesota Foster Care Association Burnsville MN 

Evolve Minneapolis MN 

Children’s Hope International St. Louis MO 

Lutheran Family and Children’s Services of Missouri Independent city MO 

115 

Adoption Tax Credit Working Group:—Continued 

New Beginnings International Children’s and Family 

Services 

Tupelo MS 

Christian Adoption Services, Inc. Matthews NC 

Carolina Adoption Services, Inc. Greensboro NC 

Children at Heart Adoption Services, Inc. Wilmington NC 

Hopscotch Adoptions, Inc. High Point NC 

Creating a Family Brevard NC 

Nebraska Foster and Adoptive Parent Association Lincoln NE 

New Hope for Children Newmarket NH 

Golden Cradle Adoption Services Cherry Hill NJ 

Adoption STAR Amherst NY 

Adoptive Families magazine New York NY 

Ashcraft, Franklin, Young, and Peters, LLP Rochester NY 

Forever Families Through Adoption, Inc. Rye Brook NY 

Helpusadopt.org New York NY 

USAdopt, LLC New York NY 

Adoptive Parents Committee Inc. New York NY 

Michael S. Goldstein, Esq., LCSW Rye Brook NY 

Family Focus Adoption Services Little Neck NY 

NYSCCC Brooklyn NY 

Spence-Chapin New York NY 

Baker Victory Services Lackawanna NY 

Law Office of Barbara Thornell Ginn Cincinnati OH 

Spirit of Faith Adoptions Sylvania OH 

Caring for Kids Cuyahoga Falls OH 

Tuscarawas County Job and Family Services New Philadelphia OH 

National Down Syndrome Adoption Network Cincinnati OH 

European Adoption Consultants, Inc. Strongsville OH 

National Center for Adoption Law and Policy Columbus OH 

Dillon International, Inc. Tulsa OK 

Foster Family-based Treatment Association Norman OK 

Journeys of the Heart Adoption Services Hillsboro OR 

All God’s Children International Portland OR 

Holt International Children’s Services OR 

Oregon Post Adoption Resource Center Portland OR 

SPOON Foundation Portland OR 

The Sparrow Fund Phoenixville PA 

Madision Adoption Associates Perkasie PA 

Together as Adoptive Parents, Inc. Harleysville PA 

La Vida International Malvern PA 

Three Rivers Adoption Council Pittsburgh PA 

A Chosen Child Adoption Services Summerville SC 

Miriam’s Promise Nashville TN 

Fund Your Adoption Gallatin TN 

ONE Church, One Child—OCOC Texas TX 

Buckner International Dallas TX 

Gladney Center for Adoption Fort Worth TX 

Texas Foster Family Association Pflugerville TX 

Generations Adoptions Waco TX 

Upbring Austin TX 

Forever Bound Adoption Morgan UT 

Youth Villages, Inc. Arlington VA 

The Barker Foundation Falls Church VA 

Friends in Adoption Middletown Springs VT 

Amara Seattle WA 

Agape Adoptions Sumner WA 

Children’s House International Ferndale WA 

WACAP (World Association for Children and Parents) Seattle WA 

Foster Parents Association of Washington State Bremerton WA 

116 

1 In any given year, the number of contributors will outnumber the retirees making distributions, further exaggerating this distribution of tax benefits. 2 Internal Revenue Service, Statistics of Income Table 1.4, Sources of Income by Adjusted 

Gross Income and W–2 Tabulations. 

Adoption Tax Credit Working Group:—Continued 

Faith International Adoptions Tacoma WA 

Families Like Ours, Inc. Seattle WA 

Lutheran Social Services of Wisconsin and Upper 

Michigan, Inc. 

Milwaukee WI 

AMERICAN RETIREMENT ASSOCIATION (ARA) 

The American Retirement Association (‘‘ARA’’) thanks Chairman Hatch, Ranking 

Member Wyden, and the other members of the Senate Finance Committee for holding a hearing on individual tax reform and for the opportunity to submit this statement for the record. 

The ARA is an organization of more than 20,000 members nationwide who provide 

consulting and administrative services to retirement plans that cover millions of 

American workers and retirees. ARA members are a diverse group of retirement 

plan professionals of all disciplines, including: financial advisers, consultants, administrators, actuaries, accountants, and attorneys. The ARA is the coordinating entity for its four underlying affiliate organizations, the American Society of Pension 

Professionals and Actuaries (‘‘ASPPA’’), the National Association of Plan Advisors 

(‘‘NAPA’’), the National Tax-deferred Savings Association (‘‘NTSA’’) and the ASPPA 

College of Pension Actuaries (‘‘ACOPA’’). ARA members are diverse but united in 

a common dedication to America’s private retirement system. 

We wish to submit this statement for the record because we want to highlight our 

concern about the testimony of one witness—Lily Batchelder—who called for restructuring the tax incentives for retirement savings into a refundable tax credit. 

She also claimed that ‘‘the lion’s share of tax incentives for retirement savings go 

to the wealthy.’’ Unfortunately, the assertion that the tax incentives for retirement 

are upside down is a common myth that we would like to dispel. Thanks to the balance imposed by the current law contribution limits and stringent nondiscrimination 

rules, these tax incentives are right side up—even before properly considering other 

components of this incentive. 

How is the tax benefit distributed? 

The distribution of the tax benefit for saving in a defined contribution retirement 

plan is typically analyzed by applying the marginal tax rate to current contributions. 

This analysis reflects the progressive nature of the U.S. income tax system, because 

the value of the tax benefit of the deferral increases as the marginal tax rate increases.1

Focusing on contributions within the context of this progressive income tax structure, would lead one to expect the tax benefit for retirement savings would favor 

only higher income individuals. Yet, there are important characteristics of retirement savings that are omitted from this simplistic analysis. 

First, current contributions to employer plans are subject to non-discrimination 

rules and compensation limits. These rules limit not only the deferral rates permitted by higher income participants, but also limits the amount of compensation 

that may be considered for purposes of determining contributions. Together, these 

rules place limitations on the disparities in the contribution levels. 

Second, retirement incentives encourage savings while the individual is working to 

provide income during retirement. The focus on contributions ignores the benefits 

to retirees. In retirement, lower income individuals tend to continue to receive tax 

benefits, as their retirement savings is typically subject to tax at a lower rate compared to their working years (see chart one).2

Third, the analysis ignores that much, if not all, of the apparent tax savings to a 

small business owner accrues to employees in the form of employer contributions. 

Employer contributions represent a critical contribution to lower-wage participants. 

In many cases, complying with safe harbor rules means that the only savings many 

lower-wage participants receive are these employer contributions. 

117 

3William G. Gale, A Proposal to Restructure Retirement Savings Incentives in a Weak Economy With Long-Term Deficits, September 2011. 

Finally, analyzing the benefit for contributions in a given year provides only a snapshot of the benefits, and fails to recognize the disparity in tax rates applied to distributions and tax treatment of other retirement benefits. For example, small business owners’ distributions will face a higher marginal income tax rate than for those 

with a history of lower contributions. In addition, the small business owner will be 

required to include more Social Security benefits in income. As a result, failure to 

consider future tax treatment tends to overstate these relative benefits offered by 

the current system. 

The standard methodology for measuring the benefit of the tax incentive (multiplying marginal rate by income deferred) shows tax incentives for employersponsored retirement savings favor higher income individuals. The analysis simply 

captures the inequality of income, rather than uneven tax benefits. However, because of the unique nature of this tax incentive, this methodology actually understates the benefits of the current retirement incentives. A more comprehensive analysis of the distribution of the tax incentives would show the current tax incentives 

for retirement savings are distributing benefits to low- and moderate-income workers. 

Replacing the Retirement Exclusion With a Credit 

Lily Batchelder’s testimony also stated that ‘‘the tax incentives for retirement savings are a particularly fruitful area for reform’’ without getting into further specifics 

about how to achieve her goal. However, we believe that she is referencing a recurring proposal that would convert the current year retirement plan contribution exclusion from income into a uniform tax credit. 

How a proposal such as this affects retirement plan sponsors and participants depends, of course, on what the level of credit is, and whether or not it is deposited 

to a retirement savings account or directly offsets income tax liability. A past proposal 3 from William Gale of the Tax Policy Center offers both a 30 percent, which 

the paper says would be revenue neutral, and an 18 percent credit. This proposal 

purports to create additional savings by providing more incentive for taxpayers 

below the 23 percent and 15 percent marginal tax brackets to save. 

Data shows the primary problem to be addressed in improving retirement security 

is increasing access to workplace savings, not a lack of incentive for take-up by moderate income participants with access. More than 70 percent of workers earning 

$30,000 to $50,000 participate in a workplace retirement plan at work, but fewer 


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118 

4 Employee Benefit Research Institute (2010) estimate using 2008 Panel of SIPP (Covered by 

an Employer Plan) and EBRI estimate (Not Covered by an Employer Plan—IRA only). 5 Internal Revenue Service, Statistics of Income, IRA Studies, 2014. 

6 Employee Benefit Research Institute estimate of the 2013 Survey of Consumer Finance. 

than 5 percent will save through an IRA on their own (see chart two).4 These plans 

primarily benefit the middle class: 68 percent of active participants in 401(k) plans 

have an adjusted gross income (AGI) of less than $100,000 per year. Thirty-five percent of participants have an AGI of less than $50,000 (see chart three).5 Americans 

earning between $25,000 and $75,000 save seven times more in retirement savings—largely through participation in workplace retirement plans—than any other 

type of savings.6

This proposal has several basic flaws. The proposal itself indicates that the current 

tax incentive for many decision makers would be reduced under the proposal. In 

fact, for the business owner, the reduction in the incentive would be more than illustrated in the proposal because contributions made on behalf of employees would become subject to FICA. In other words, the ‘‘problem’’ being addressed by this proposal is not the problem, and the ‘‘solution’’ will only make the situation worse. 

If the credit is an offset from income tax liability, the size of the credit for a small 

business owner would determine if setting up or maintaining the plan is still worthwhile. If the credit were deposited to a retirement account, in many cases the resulting drain on cash would necessarily result in lower contributions for the small business owner and employees, or termination of the plan. For larger employers, the size 

of the credit will in no way offset additional FICA liability. They would have to take 

on the additional cost, or decrease contributions. 


91417.019
119 

The paper notes that a 30 percent credit is equivalent to a 23 percent deduction. 

Similarly, an 18 percent credit would be equivalent to a 15 percent deduction. The 

equivalency is based on the theory that only the after-tax amount of income will receive the credit. For example, if an employee defers $1,000 under the current incentive system and is in the 15 percent bracket, under current rules, $150 of income 

tax liability is deferred. Under the proposal, the after-tax deferral would be $850. 

Eighteen percent of $850 is $150, so this credit is equivalent to the exclusion for 

income tax purposes. This analysis makes sense in the case of IRA contributions or 

elective deferrals, where FICA is already paid on the contribution amounts. It does 

not hold up, however, for employer contributions, where there is currently no FICA 

liability for either employees or employers. 

Consider an employee in the 15 percent bracket contributing $1,000 as an elective 

deferral and receiving a $1,000 employer contribution. If the level of employer contribution does not change, the employee will not only offset the $1,000 elective deferral by the $150 income tax liability on the elective deferral, but also by the $150 

income tax liability for the employer contribution and the $76 in FICA contributions 

the employee owes on this employer contribution amount. Instead of $2,000 in total 

contributions, there will be $1,624 ($2000¥$150¥$150¥$76). An 18 percent credit applied to $1,624 is only $292. So the employee has lost over $80 in this change 

to an ‘‘equivalent’’ 18 percent credit. For this situation, the equivalent credit would 

be about 23 percent. Note, however, that the higher the level of the employer contribution relative to the elective deferral, the higher the credit must be for the individual to break even. If there were a $2,000 employer contribution, an 18 percent 

credit would result in a reduction of over $171, after FICA is considered, and the 

equivalent credit would be over 25 percent. 

Considering the FICA implications, this proposal has the effect of penalizing both 

business owners (through increased FICA taxes) and employees when the plan provides for matching or profit-sharing contributions, with the penalty increasing as 

the employer contribution increases. Regardless of the size of the credit, this is an 

incentive for all employers, not just small business owners, to reduce company contributions. 

Conclusion 

The current retirement savings tax incentives work well to promote good savings 

behavior for tens of millions of working Americans. If anything, these incentives— 

for both employers and employees—should be enhanced. At a minimum, any modiVerDate Sep 11 2014 17:51 Sep 21, 2018 Jkt 000000 PO 00000 Frm 00123 Fmt 6601 Sfmt 6621 R:\DOCS\31548.000 TIM

91417.020
120 

fications to the current incentives should be evaluated based on whether or not the 

changes will encourage more businesses to sponsor retirement plans for their employees. Restructuring the tax incentives for retirement savings into a uniform tax 

credit would fail this evaluation and should be rejected. 

CALIFORNIA ASSOCIATION OF REALTORS (CAR) 

Executive Offices 

525 South Virgil Avenue 

Los Angeles, CA 90020 

Tel (213) 739–8200 

Fax (213) 480–7724 

https://www.car.org/ 

September 20, 2017 

The Honorable Orrin Hatch and The Honorable Ron Wyden 

U.S. Senate 

Committee on Finance 

215 Dirksen Senate Office Building 

Washington, DC 20510 

Re: ‘‘Individual Tax Reform’’ Hearing; Testimony of the California Association of Realtors 

Dear Chairman Hatch and Ranking Member Wyden, 

On behalf of the more than 190,000 members of the California Association of Realtors (CAR), I am submitting the following statement for the committee’s hearing entitled ‘‘Individual Tax Reform,’’ that will examine ways to improve the U.S. tax system for America’s families and individuals. I would like to thank you for taking the 

time to hold this important hearing on tax reform, an issue that will impact all 

Americans. As CAR and its members look at the issue of tax reform, two important 

issues stand out; (1) Congress must maintain an incentive for renters to become 

homeowners, and (2) Congress must not raise taxes on homeowners. 

Unlike other pieces of legislation that may impact a specific industry or a select 

socio-economic class, tax reform will impact EVERY industry and ALL Americans. 

For this reason, Congress must avoid rushing tax reform through backroom deals. 

An issue of this magnitude needs to move through the full congressional process. 

This includes transparency through committee hearings, amendments, markups, full 

floor debates, and votes. The American taxpayers deserve nothing less. 

CONGRESS SHOULD INCENTIVIZE HOME OWNERSHIP 

For over 100 years Congress has incentivized home ownership with the tax code; 

currently through the mortgage interest deduction. Any effort at reforming the tax 

code should maintain and prioritize this incentive. Unfortunately, many of the proposals for tax reform include the doubling of the standard deduction, would for practical purposes eliminate the incentive effect of the mortgage interest deduction. 

Under the proposals, it is estimated only 5-percent of taxpayers will itemize their 

deductions, therefore the vast majority of people will no longer receive any tax incentive to purchase a home. So, while Congress may state the proposals are keeping 

the mortgage interest deduction, the incentive effect of the deduction for Americans 

to become homeowners and thereby stakeholders in their community would disappear. 

Severely reducing the incentive to home ownership will lower home ownership rates 

in the U.S. This will financially hurt households and shrink the middle class. If 

Congress maintains or increases the incentive for home ownership, Congress will be 

taking the necessary steps to financially strengthen America’s households and grow 

the middle class. According to the Federal Reserve, over the last 28 years the median net worth of households that own homes has averaged $193,000. This is in 

comparison to $5,300 for households that rent over the same time. This is because 

home ownership allows individuals and families to build wealth through principal 

reduction, equity appreciation, stable monthly payments, and create generational 

wealth. It also allows seniors who pay off their mortgage or have a stable mortgage 

payment to live securely and with stability in their residences and community without fear of being displaced due to rent increases. 

121 

CONGRESS SHOULD NOT INCREASE TAXES ON HOMEOWNERS 

Congress needs to protect taxpayers from double-taxation and maintain the deduction for state and local taxes including property taxes. Not allowing the average 

homeowner in California to deduct their property, state and local taxes would effectively be raising their taxes more than $2,400 a year! The Federal Government 

would tax families on money paid to the state and local governments they never 

used. Effectively this is akin to double taxation of the homeowners and taxpayers 

of states with state and local taxes. 

Additionally, eliminating the ability to deduct state and local taxes would further 

punish Californian families who already pay more to the Federal Government than 

they receive. According to the 2014 IRS data book California paid $369 billion dollars to the Federal Government, of which according to the Pew Charitable Trusts, 

only $356 billion was sent back to Californians. Eliminating the ability to deduct 

property, state and local taxes will further increase this discrepancy and harm California homeowners. 

PROTECT CAPITAL GAINS EXCLUSION FOR PRIMARY RESIDENCES 

Congress must keep and improve the capital gains exemption for the sale of a primary residence. Under current law, the first $250,000 in capital gains for singletax filers or $500,000 in capital gains for joint-tax filers on the sale of their primary 

residence is not taxed. This has allowed for millions of households to build equity 

in their homes and supplement their social security when they retire. However, protecting this vital tax provision is not enough, and Congress should take additional 

steps to help these homeowners even more. 

Congress should eliminate the ‘‘single tax filer’’ and have only the higher exemption 

of $500,000 apply to all primary residences regardless of the marital status of the 

owner. By having the higher amount for all primary residences, Congress will ensure widowers and divorced individuals are not punished. Additionally, this tax provision should be indexed for inflation. For 20 years the benefit of this tax provision 

has eroded because the amount has sat stagnant. If the exclusion is indexed for inflation, Congress should use 1997 (the year the law was enacted) as the base year. 

DON’T PAY FOR LOWER CORPORATE RATES ON THE 

BACK OF HOMEOWNERS 

As independent contractors, almost every Realtor is their own small business, so 

CAR understands the importance and benefit of a lower corporate tax rate. However, Congress cannot and must not pay for lower corporate tax rates by effectively 

increasing the taxes of homeowners by eliminating or reducing their deductions. 

Any reduction to the corporate tax rate must be offset by corporations. 

CAR looks forward to working with the Senate as it works to reform the tax code. 

We would be happy to discuss any of these issues further with you and your staff; 

you may contact Matt Roberts, Federal Government Affairs Manager at 213–739– 

8284 or matthewr@car.org. Thank you for taking into consideration our comments. 

Sincerely, 

Geoff McIntosh 

2017 President, California Association of Realtors 

CHARITABLE GIVING COALITION (CGC) 

U.S. Senate 

Committee on Finance 

Dirksen Senate Office Bldg. 

Washington, DC 20510–6200 

Chairman Hatch, Ranking Member Wyden, and Members of the Senate Committee 

on Finance: 

The Charitable Giving Coalition (CGC) welcomes the opportunity to submit comments to the official record for the recent Committee Hearing on Individual Tax Reform. 

As noted in the hearing announcement, Mr. Chairman, your goal was to ‘‘examine 

ways to streamline the individual tax system to make it work better for American 

individuals and families.’’ With this focus on individuals and families, the CGC 

122 

* According to a study commissioned by Independent Sector and conducted by Indiana University Lilly Family School of Philanthropy, ‘‘Tax Policy and Charitable Giving, Results,’’ May 2017, 

Indiana University Lilly Family School of Philanthropy Study commissioned by Independent 

Sector, https://www.independentsector.org/wp-content/uploads/2017/05/tax-policy-charitablegivinq-finalmay2017-1.pdf. 

wants to make certain that you and your colleagues consider the direct connection 

between changes to the individual tax code and the well-being of America’s charities. 

The CGC heeded your call in July to submit comments on Tax Reform, which we 

incorporate here by reference. In this submission, we aim to update those comments. 

The CGC is submitting our remarks to you today with an added sense of urgency. 

In yesterday’s release of the Unified Framework for Fixing Our Broken Tax Code, 

we note that the outline, albeit brief, does not address the consequence of the significant re-configuration of the individual income tax code to charitable giving, the 

organizations it supports and the people served. While the White House draws a 

connection between a strong civil society and vibrant charitable giving, and leaders 

in Congress have expressed interest in unlocking more donor dollars for charities 

across the country, the Framework seems to fall short for America’s charities. 

For that reason, we implore you to consider the impact of new tax policy on vulnerable communities as you convert this Framework to detailed legislation. Based on 

the Framework’s general outline, the Charitable Giving Coalition (CGC) believes the 

plan would generate dramatic, negative consequences for charities and the constituents they serve because the charitable deduction will be available to only 5% of all 

taxpayers—causing a significant drop in contributions. The other 95% of taxpayers 

will be taxed on their gifts to charity. 

Tax reform that strengthens American communities, spurs economic growth and 

supports America’s hard-working families, especially those in middle- and lowerincome brackets, must incentivize charitable giving. The Framework acknowledges 

that certain ‘‘tax benefits help accomplish important goals that strengthen civil society, as opposed to dependence on government: home ownership and charitable giving.’’ 

However, under the Framework, the scope and value of the current charitable deduction would vastly diminish. If the standard deduction nearly doubles, the percentage of taxpayers who itemize will drop from approximately 33.3% to only 5%, 

effectively meaning only 5% of all taxpayers can take the charitable deduction. In 

real terms, 30 million taxpayers who itemized in 2016 will no longer have the giving 

incentive and will be taxed on their gifts. The result would be a staggering loss of 

up to $13 billion in contributions annually,* undermining America’s charitable organizations and our country’s extraordinary tradition of philanthropy. 

Americans are, undeniably, generous. This has been strikingly evident in the wake 

of the unprecedented natural disasters that we’ve experienced in recent weeks. The 

public response reinforces the American tradition of giving. Consider just one example: The ‘‘Hand in Hand Benefit for Hurricane Relief’’ telethon on Tuesday, September 12th, raised over $44 million in one evening. ‘‘Hand in Hand’’ is one of thousands of fundraising efforts, small and large, collecting donations and distributing 

them to a broad cross-section of relief providers in the areas ravaged by recent hurricanes. From individual gifts and small giving circles to the ‘‘One America Appeal’’ 

being led by all five former living Presidents of the United States, the best of our 

American ethos to collectively support our communities is—as always—in action. 

Congress must assure that we retain charitable giving, and unlock more, as it navigates the complexities of tax reform. 

As you know from our comments submitted in July and subsequent outreach to 

Committee Members, the CGC has proposed a fair and efficient resolution that will 

continue to encourage Americans to redirect their dollars to charities: a universal 

charitable deduction available to all taxpayers. This will assure that contributions 

to charities are not taxed by the federal government and that taxpayers who currently take the deduction for their gifts will continue to be incentivized. Furthermore, because the deduction will be available to all taxpayers, it could foster a culture of giving much earlier, providing an incentive to young taxpayers who are beginning to make their charitable investments in the communities and causes they 

care about. 

123 

With the latest U.S. Census figures showing that middle-class households are only 

now seeing their income reach 1999 levels—and with economists concerned that recent gains may not continue—a universal charitable deduction is easy for taxpayers 

to use and will provide tax relief for families across America who give to charity 

but don’t itemize their taxes. 

More than a dozen United States Senators, including members of the Senate Finance Committee, recognized that tax reform must not diminish charitable giving 

when they sponsored The CHARITY Act of 2017 (S. 1343.) That bill expressly states 

that: (1) encouraging charitable giving should be a goal of tax reform; and (2) Congress should ensure that the value and scope of the deduction for charitable contributions is not diminished during a comprehensive reform of the tax code 

As the Committee advances it efforts to enact tax legislation that is good and fair 

for all Americans, the CGC will continue to advance the universal deduction as a 

solution to the expected loss in giving from the current tax Framework. Our collective, unifying goal should be to ensure that America’s communities thrive and her 

charities remain strong, diverse and effective. 

Thank you for this opportunity to submit comments to the hearing record. We look 

forward to our continued efforts to educate the Committee and advance our legislative proposal for a universal charitable deduction. 

COALITION TO PRESERVE CASH ACCOUNTING

September 27, 2017 

The Honorable Orrin Hatch The Honorable Ron Wyden 

Chairman Ranking Member 

U.S. Senate U.S. Senate 

Committee on Finance Committee on Finance 

219 Dirksen Senate Office Building 219 Dirksen Senate Office Building 

Washington, DC 20510–6200 Washington, DC 20510–6200 

Dear Chairman Hatch and Ranking Member Wyden: 

On behalf of the Coalition to Preserve Cash Accounting (‘‘the Coalition’’), we are 

writing to explain why it is important to continue to allow farmers, ranchers, and 

service provider pass-through businesses to continue to use the cash method of accounting as part of any tax reform plan. We appreciate the opportunity to provide 

these comments in connection with the Senate Committee on Finance’s September 

14, 2017 hearing on ‘‘Individual Tax Reform.’’ The Coalition applauds your efforts 

to improve the nation’s tax code to make it simpler, fairer, and more efficient in 

order to strengthen the U.S. economy, make American businesses more competitive, 

and create jobs. 

The Coalition is comprised of dozens of individual businesses and trade associations representing thousands of farmers, ranchers, and service provider passthrough entities across the United States that vary in line of business, size, and description, but have in common that our members rely on the use of cash accounting 

to simply and accurately report income and expenses for tax purposes. Pass-through 

entities account for more than 90 percent of all business entities in the United 

States. A substantial number of these businesses are service providers, farmers, and 

ranchers that currently qualify to use cash accounting. They include a variety of 

businesses throughout America—farms, trucking, construction, engineers, architects, accountants, lawyers, dentists, doctors, and other essential service providers— 

on which communities rely for jobs, health, infrastructure, and improved quality of 

life. These are not just a few big businesses and a few well-to-do owners. According 

to IRS data, there are over 2.5 million partnerships using the cash method of accounting, in addition to hundreds of thousands of Subchapter S corporations eligible 

to use the cash method. 

About the Cash Method of Accounting 

Under current law, there are two primary methods of accounting for tax purposes—cash and accrual. Under cash basis accounting, taxes are paid on cash actually collected and bills actually paid. Under accrual basis accounting, taxes are owed 

when the right to receive payment is fixed, even if that payment will not be received 

for several months or even several years; expenses are deductible even if they have 

not yet been paid. 

124 

The tax code permits farmers, ranchers, and service pass-through entities (with 

individual owners paying tax at the individual level) of all sizes—including partnerships, Subchapter S corporations, and personal service corporations—to use the cash 

method of accounting. Cash accounting is the foundation upon which we have built 

our businesses, allowing us to simply and accurately report our income and expenses, and to manage our cash flows, for decades. It is a simple and basic method 

of accounting—we pay taxes on the cash coming in the door, and we deduct expenses when the cash goes out the door. No gimmicks, no spin, no game playing. 

Cash accounting is the very essence of the fairness and simplicity that is on everyone’s wish list for tax reform. 

Some recent tax reform proposals would require many of our businesses to switch 

to the accrual method of accounting, not for any policy reason or to combat abuse, 

but rather for the sole purpose of raising revenues for tax reform. Forcing such a 

switch would be an effective tax increase on the thousands upon thousands of individual owners who generate local jobs and are integral to the vitality of local economies throughout our nation. It would also increase our recordkeeping and compliance costs due to the greater complexity of the accrual method. Because many of 

our businesses would have to borrow money to bridge the cash flow gap created by 

having to pay taxes on money we have not yet collected, we may incur an additional 

cost with interest expense, a cost that would be exacerbated if interest expense is 

no longer deductible, as proposed under the House Republicans’ Better Way blueprint (‘‘the blueprint’’). Some businesses may not be able to borrow the necessary 

funds to bridge the gap, requiring them to terminate operations with a concomitant 

loss of jobs and a harmful ripple effect on the surrounding economy. 

Tax Reform Proposals and Cash Accounting 

The blueprint moves toward a cash flow, destination-based consumption tax. The 

cash flow nature of the proposal suggests that the cash method of accounting would 

be integral and entirely consistent with the blueprint since it taxes ‘‘cash-in’’ and 

allows deductions for ‘‘cash out,’’ including full expensing of capital expenditures. 

While we understand that they are different proposals, the ABC Act (H.R. 4377), 

a cash flow plan introduced by Rep. Devin Nunes (R–CA) in the 114th Congress, 

required all businesses to use the cash method. However, the blueprint does not provide details regarding the use of the cash method, including whether all businesses 

would be required to use it, whether businesses currently allowed to use the cash 

method would continue to be allowed to do so, whether a hybrid method of cash and 

accrual accounting would apply, or some other standard would be imposed. 

President Trump’s tax reform plan is not a cash flow plan and takes a more traditional income tax-based approach, yet the principles articulated in the administration’s plan are entirely consistent with the continued availability of the cash method 

of accounting. Growing the economy, simplification, and tax relief are exemplified 

by the cash method of accounting. Requiring businesses that have operated using 

the cash method since their inception to suddenly pay tax on money they have not 

yet collected, and may never collect, is an effective tax increase, and will have a contraction effect on the economy as funds are diverted from investment in the business 

to pay taxes on money they have not received or as businesses close because of insufficient cash flow and inability to borrow. It is important to note that cash accounting is not a ‘‘tax break for special interests;’’ it is a simple, well-established 

and long-authorized way of reporting income and expenses used by hundreds of 

thousands of family-owned farms, ranches, businesses, and Main Street service providers that are the backbone of any community. 

Several recent tax reform proposals, including Senator John Thune’s (R–SD) S. 

1144, the Investment in New Ventures and Economic Success Today Act of 2017, 

would expand the use of cash accounting to allow all businesses under a certain income threshold, including those businesses with inventories, to use cash accounting. 

Such proposals aim to simplify and reduce recordkeeping burdens and costs for 

small businesses, while still accurately reporting income and expenses. A few of 

these proposals (not S. 1144) would pay for this expansion by forcing all other businesses currently using cash accounting to switch to accrual accounting. We do not 

oppose expanding the allowable use of cash accounting, but it is unfair and inconsistent with the goals of tax reform to pay for good policy with bad policy that has 

no other justification than raising revenues. When cash accounting makes sense for 

a particular type of business, the size of the business should make no difference. 

Further, there have been no allegations that the businesses currently using cash accounting are abusing the method, inaccurately reporting income and expenses, or 

otherwise taking positions inconsistent with good tax policy. 

125 

Tax reform discussions seem to be trending toward faster cost recovery than 

under current law. For example, the blueprint allows for full expensing of capital 

investment, Senator Thune’s bill makes bonus depreciation permanent, and comments from administration officials suggest that President Trump and his team prefer faster write-offs of capital assets. Such policies benefit capital intensive businesses. However, service businesses by their very nature are not capital intensive, 

so it would be unfair to allow faster cost recovery for some businesses while imposing an effective tax increase and substantial new administrative burdens on passthrough service providers who will not benefit from more generous expensing or depreciation rules by taking away the use of cash accounting. 

OTHER IMPLICATIONS OF LIMITING CASH ACCOUNTING

In addition to the policy implications, there are many practical reasons why the 

cash method of accounting is the best method to accurately report income and expenses for farmers, ranchers, and pass-through service providers: 

The accrual method would severely impair cash flow. Businesses could be forced 

into debt to finance their taxes, including accelerated estimated tax payments, 

on money we may never receive. Many cash businesses operate on small profit 

margins, so accelerating the recognition of income could be the difference between being liquid and illiquid, and succeeding or failing (with the resulting 

loss of jobs). 

Loss of cash accounting will make it harder for farmers to stay in business. For 

farmers and ranchers, cash accounting is crucial due to the number and enormity of up-front costs and the uncertainty of crop yields and market prices. A 

heavy rainfall, early freeze, or sustained drought can devastate an agricultural 

community. Farmers and ranchers need the predictability, flexibility and simplicity of cash accounting to match income with expenses in order to handle 

their tax burden that otherwise could fluctuate greatly from one year to the 

next. Cash accounting requires no amended returns to even out the fluctuations 

in annual revenues that are inherent in farming and ranching. 

Immutable factors outside the control of businesses make it difficult to determine 

income. Many cash businesses have contracts with the government, which is 

known for long delays in making payments that already stretch their working 

capital. Billings to insurance companies and government agencies for medical 

services may be subject to being disputed, discounted, or denied. Service recipients, many of whom are private individuals, may decide to pay only in part or 

not at all, or force the provider into protracted collection. Structured settlements and alternative fee arrangements can result in substantial delays in collections, sometimes over several years; therefore, taxes owed in the year a matter is resolved could potentially exceed the cash actually collected. 

Recordkeeping burdens, including cost, staff time, and complexity, would escalate under accrual accounting. Cash accounting is simple—cash in/cash out. Accrual accounting is much more complex, requiring sophisticated analyses of 

when the right to collect income or to pay expenses is fixed and determinable, 

as well as the amounts involved. In order to comply with the more complex 

rules, businesses currently handling their own books and records may feel they 

have no other choice than to hire outside help or incur the additional cost of 

buying sophisticated software. 

Accrual accounting could have a social cost. Farmers, ranchers, and service providers routinely donate their products and services to underserved and underprivileged individuals and families. An effective tax increase and increased administrative costs resulting from the use of accrual accounting could impede the 

ability of these businesses to provide such benefits to those in need in their local 

communities. 

Conclusions 

The ability of a business to use cash accounting should not be precluded based 

on the size of the business or the amount of its gross receipts. Whether large or 

small, a business can have small profit margins, rely on slow-paying government 

contracts, generate business through deferred fee structures or be wiped out 

through the vagaries of the weather. Cash diverted toward interest expense, taxes, 

and higher recordkeeping costs is capital unavailable for use in the actual business, 

including paying wages, buying capital assets, or investing in growth. 

126 

1 Although not a signatory to this letter, the American Bar Association (ABA) is working closely with the Coalition and has expressed similar concerns regarding proposals to limit the ability 

of personal service businesses to use cash accounting. The ABA’s most recent letter to the Senate Committee on Finance sent in April 2017 is available at http://bit.ly/2xvv6YB. 

Proposals to limit the use of cash accounting are counterproductive to the already 

agreed upon principles of tax reform, which focus on strengthening our economy, 

fostering job growth, enhancing U.S. competitiveness, and promoting fairness and 

simplicity in the tax code. Accrual accounting does not make the system simpler, 

but more complex. Increasing the debt load of American businesses runs contrary 

to the goal of moving toward equity financing instead of debt financing and will 

raise the cost of capital, creating a drag on economic growth and job creation. Putting U.S. businesses in a weaker position will further disadvantage them in comparison to foreign competitors. It is simply unfair to ask the individual owners of 

pass-through businesses to shoulder the financial burden for tax reform by forcing 

them to pay taxes on income they have not yet collected where such changes are 

likely to leave them in a substantially worse position than when they started. 

As discussions on tax reform continue, the undersigned respectfully request that 

you take our concerns into consideration and not limit our ability to use cash accounting. We would be happy to discuss our concerns in further detail. Please feel 

free to contact Mary Baker (mary.baker@klgates.com) or any of the signatories for 

additional information. 

Thank you for your consideration of this important matter. 

Sincerely,1

Americans for Tax Reform 

American Council of Engineering Companies 

American Farm Bureau Federation 

American Institute of Certified Public Accountants 

American Medical Association 

American Society of Interior Designers 

The American Institute of Architects 

The National Creditors Bar Association 

Akin, Gump, Strauss, Hauer, and Feld LLP 

Baker Donelson 

Debevoise and Plimpton LLP 

Dorsey and Whitney LLP 

Foley and Lardner LLP 

Jackson Walker LLP 

K&L Gates LLP 

Kilpatrick, Townsend, and Stockton LLP 

Lewis, Roca, Rothgerber, Christie LLP 

Littler Mendelson P.C. 

Miles and Stockbridge P.C. 

Mitchell, Silberberg, and Knupp LLP 

Morrison and Foerster LLP 

Nelson, Mullins, Riley, and Scarborough LLP 

Ogletree, Deakins, Nash, Smoak, and Stewart, P.C. 

Perkins Coie LLP 

Quarles and Brady LLP 

Rubin and Rudman LLP 

Squire Patton Boggs (U.S.) LLP 

Steptoe and Johnson LLP 

White and Case LLP 

THE JEWISH FEDERATIONS OF NORTH AMERICA (JFNA) 

1720 I Street, NW, #800 

Washington, DC 20006–3736 

Phone 202–785–5900 

Fax 202–785–4937 

https://www.jewishfederations.org/washington 

September 14, 2017 

Chairman Orrin Hatch and Ranking Member Ron Wyden 

Senate Finance Committee 

219 Dirksen Senate Office Building 

127 

The Jewish Federations of North America (‘‘JFNA’’) is the national organization that 

represents 148 Jewish Federations, their affiliated Jewish community foundations, 

and more than 300 independent network communities. In their individual communities, the Jewish Federation and network volunteers (collectively the ‘‘Federation 

system’’) is the umbrella fundraising organization as well as the central planning 

and coordinating body for an extensive network of Jewish health, education, and social service agencies. Thus, the Federation system raises and allocates funds for almost 1,000 affiliated agencies that provide needed social, medical and educational 

services to almost one million individuals throughout the country, including Jews 

and non-Jews alike. 

We applaud the Senate Finance Committee for holding a hearing on September 14, 

2017 on Individual Tax Reform as part of the committee’s continued work to enact 

comprehensive tax reform and submit the following statement to the hearing record. 

Background: Each Jewish Federation conducts a yearly fundraising endeavor (‘‘the 

annual campaign’’) and collectively the Federation System raises almost $950 million each year from over 400,000 donors. In addition, the planned giving and endowment departments of Federations and their affiliated Jewish community foundations 

raise almost $2 billion each year through a variety of planned giving vehicles including charitable gift annuities, charitable trusts, donor advised funds, and supporting 

organizations, among others. Grants from such planned gifts also flow to support 

annual mission-related charitable activities. The combination of a large annual campaign and sophisticated planned giving operations serve to make the Federation system one of the largest philanthropic networks in North America. As such, we are 

vitally concerned regarding the impact that fundamental tax reform could have on 

charitable giving incentives and giving vehicles. 

The Federation system is especially proud of the important role that certain endowed vehicles such as donor-advised funds and supporting organizations play in 

maintaining active grant-making programs in support of our mission as well as 

building long-term endowment assets that assure the continued existence of the our 

philanthropic and social service organizations. According to our most recent financial survey, Jewish Federations and affiliated Jewish community foundations have 

combined endowment assets of approximately $20 billion and make annual grants 

that exceed $2 billion from such funds to other public charities, with significant 

charitable distributions flowing to support both Jewish and non-Jewish causes, domestically and internationally. 

During the past month, as various parts of the United States, including territories 

in the Caribbean have been devastated by an unprecedented number of natural disasters, we are also reminded of the important role that private philanthropy plays 

in provided needed assistance to impacted families as well as working to rebuild 

community infrastructure. We are proud of the fact that collectively the federation 

system has raised over $15 million to aid communities in Texas, Florida, and the 

Islands with additional funds expected to be collected over the next weeks and 

months. We would urge the committee to consider passing a package of tax incentives to further encourage such giving, including a suspension of the current adjusted gross income limitation on annual deductible charitable contributions. 

Our Charitable Mission and the Tax Code: Perhaps the primary mission of the 

Federation system is to inspire its donors as members of the Jewish community to 

fulfill our religious duty to be charitable (‘‘tzedakah’’) and to meet our collective responsibility to build community and improve the entire world (‘‘tikkun olam’’). Although it is true that the importance of these principles transcend the Internal Revenue Code of 1986 (hereinafter ‘‘the Tax Code’’) or particular statutory incentives 

such as the charitable contribution deduction, we have come to recognize that such 

provisions permit many of our donors to extend their levels of generosity. It is these 

charitable contributions that truly are the lifeblood of the Federation system allowing it to meet our operational mandates, achieving a variety of philanthropic goals. 

Fundamental Tax Reform and the Importance of Giving Incentives: We applaud the Senate Finance Committee and the Administration for tackling the complexity surrounding fundamental tax reform and we support efforts to make the tax 

code simpler, more efficient, and more competitive in today’s global economy. We are 

also appreciative of the virtually unanimous support that charitable giving incentives continue to receive from policy-makers. 

The federal income tax has included tax incentives to promote charitable donations 

for over 100 years. Although it has undergone numerous revisions and amendments, 

often tightened by adding regulatory rules and requirements for certain types of doVerDate Sep 11 2014 17:51 Sep 21, 2018 Jkt 000000 PO 00000 Frm 00131 Fmt 6601 Sfmt 6621 R:\DOCS\31548.000 TIM
128 

nations or restrictions to the operations of certain giving vehicles, and sometimes 

broadened by raising the contribution limits or expanding the types of permissible 

charitable donees, the concept of a deduction for contributions to charitable organizations remains fundamental to the social contract that binds individuals, charities, 

and the government to support the most vulnerable among us. 

Similar to other large national charities, the Federation system has a sophisticated 

fund-raising operation as well as highly-organized procedures for allocating funds to 

a broad range of social service programs and general charitable needs throughout 

their communities and overseas. As such, we see both sides of the charitable deduction equation: how donors react to tax provisions, as well as the role that philanthropic dollars play to support programs assisting the most vulnerable. Our perspective on the income tax code and charitable giving incentives is grounded in over 100 

years of such real-world experience. 

Although the donor base to our annual campaign is large, we also recognize that 

the vast amount collected comes from a relatively small number of gifts. As a result, 

a so-called ‘‘90–10’’ rule operates so that the overwhelming percentage of dollars 

raised flow from a small, but tax-sophisticated donor group, who regularly make 

large gifts, either through the annual campaign contribution or more importantly, 

through the use of planned giving vehicles, as discussed below. This tax sophistication permits such individuals and their planned giving advisers to structure gifts 

so that the maximum amount of funds flows to Jewish Federations and, in turn to 

beneficiary agencies, today, rather than later. This perspective convinces us that 

each of the several ‘‘proposals’’ to reform the charitable contribution deduction, such 

as a limitation in the value of the deduction, an overall cap on itemized deductions, 

or even a ‘‘floor’’ on deductible contributions, as contained in the 2014 Tax Reform 

draft proposed by former House Ways and Means Committee Chairman Dave Camp 

(R–MI) (‘‘Camp Draft’’) will lead to a significant decrease in giving to the JFNA System. As government funding for social service and medical programs continues to 

decrease, any such diminution in support of charitable contributions will further 

hamstring the operations of Jewish Federations and their affiliated agencies in their 

mission to help the most vulnerable among us. 

We are also concerned that the interaction of several provisions under discussion 

in a variety of ‘‘fundamental tax reform’’ plans could combine to have a detrimental 

impact on charitable giving. A substantial increase in the standard deduction, combined with the elimination or limitation on a number of other ‘‘itemized deductions’’ 

will have the effect of greatly reducing the number of taxpayers who will claim 

itemized deductions, effectively removing the charitable contribution tax incentive 

for such taxpayers. It is beyond dispute that a dramatic decrease in the number of 

taxpayers who claim the charitable contribution deduction, combined with a decrease in individual income tax rates will have a profound negative impact on dollars given to charity. Indeed, a recent study conducted by the Indiana University 

School of Philanthropy confirms that the contemplated changes discussed above 

would result in a decrease in annual giving of over $13 billion. As such, we understand that many organizations within the charitable sector are endorsing a proposal 

to expand and enhance charitable giving incentives by providing a ‘‘universal deduction’’ to taxpayers who do not itemize. Proponents argue that a universal (or ‘‘abovethe-line’’) deduction would increase giving, in terms of both dollars and donors, increase fairness by incentivizing all taxpayer’s contributions, and provide modest tax 

relief to middle- and lower-income taxpayers. In addition, the dollars flowing to 

America’s charities would increase. This result is bolstered by the results of the Indiana University study that indicates that the inclusion of an above-the-line deduction in the Tax Code would result in a full recoupment of potentially lost contributions plus an additional $5 billion each year. We recognize that some tax policy experts have raised concerns that an above-the-line deduction could cause compliance 

and enforcement issues. We would look forward to working with you and the Finance Committee on a proposal that would have the effect of increasing charitable 

giving incentives as well as address the tax policy issues noted above. 

Importance of Other Charitable Vehicles: Over the past several decades, the 

Federation system has fostered growth in charitable giving through donor advised 

funds and supporting organizations (known as ‘‘participatory funds’’). Participatory 

funds, whose existence stems from the charitable contribution deduction, offer an economical and efficient means for those with sufficient assets and charitable intent 

to benefit the community through an ongoing relationship with public charities such 

as Federations or affiliated Jewish community foundations. Such funds are an indispensable tool in encouraging intergenerational involvement in charitable activities 

through family philanthropy. In addition to providing financial resources for critical 

129 

human services in the local Jewish and general communities, and supporting charitable causes across the globe, participatory funds also advance the values and goals 

of the Federation system through nurturing relationships between philanthropists 

and Federation volunteer and professional leadership, as well as helping to build 

endowment assets. 

In recent years, participatory funds also provide a reliable pool of dollars to support 

the annual campaigns of Jewish Federations, which is the primary financial resource for ongoing operating budgets. Grants from these funds now comprise up to 

20 percent of the annual campaign. Additional grants to Federations are common 

in the case of extraordinary needs or supplemental campaign for natural and manmade disasters, as well as during economic downturns such as the one experienced 

just a few years ago. 

Permitting, indeed encouraging, participatory funds to exist for extended periods of 

time provide Federations and related Jewish community foundations the ability to 

grow the assets of these publicly supported charities. Healthy endowments at Federations and related Jewish community foundations help to assure the continued existence of these organizations for generations to come. This is why any proposal that 

would effectively require donor advised fund contributions to be distributed within 

a limited period of years, such as one that was contained in the 2014 Camp Draft, 

would undermine the broader charitable purpose of such funds and could be devastating to participatory funds in general and Jewish Federations in particular. Our 

donors, especially those who support our work by establishing participatory funds 

with us, ensure that we continue to fulfill our charitable mission through grants to 

worthwhile charitable endeavors. Rather than adhering to an arbitrary numerical 

formula, our philanthropic spending policy is truly donor-driven and recognizes community needs both today and into the future. 

As the Committee continues to consider tax reform proposals, we urge that 

participatory funds be allowed to flourish and be left with a minimum of regulatory 

burdens. JFNA agrees with the bottom-line conclusion of the Treasury Department’s 

Report on Supporting Organizations and Donor Advised Funds issued in December 

2011, that ‘‘the Pension Protection Act of 2006 appears to have provided a legal 

structure to address abusive practices and accommodate innovations in the sector 

without creating undue additional burdens or new opportunities for abuse.’’ The 

Treasury Report further notes that ‘‘it is appropriate that the contribution deduction 

rules applicable to donors to supporting organizations and donor advised fund sponsoring organizations are the same as those applicable to donors to other public charities.’’ 

Conclusion: The Federation system applauds the Senate Finance Committee for 

undertaking such a deliberative process and analyzing the many issues that need 

to be considered in contemplating fundamental tax reform. As it pertains to the 

charitable contribution deduction and charitable giving, however, we remind the 

Committee that any proposal that could result in a decrease in charitable giving will 

have significant negative consequences for America’s charities, including the Federation system, and most importantly, the vulnerable populations that we serve. The 

charitable contribution deduction remains the only provision in the income tax law 

where an individual must ‘‘give away’’ income or assets in order to receive a deduction. As has been true since the enactment of the income tax law, this selfless act 

deserves to be promoted and encouraged by the tax code. 

We are proud that Federations and affiliated Jewish community foundations employ 

the highest ethical standards of self-regulation in the governance and operation of 

our fundraising and planned giving practices and regularly share our expertise with 

policy makers and charities outside of the Jewish community on a variety of charitable giving issues. We continue to work closely with officials at the Treasury Department and the Internal Revenue Service as they work to promulgate guidance 

on some of the provisions added to the tax code by the Pension Protection Act of 

2006 (‘‘PPA’’) regarding donor advised funds and supporting organizations. 

The Federation system remains committed to ensuring that federal tax policies, especially the charitable deduction, continue to incentivize the flow of funds from individuals to public charities. We realize that the Committee will face difficult decisions over the next several months. We urge you, however, to continue to support 

policies that will strengthen our national heritage of broad-based philanthropy. 

We would be more than happy to amplify our comments or answer any questions. 

Please feel free to contact either william.daroff@jewishfederations.org (202–736– 

130 

5868) or Steven Woolf, JFNA senior tax policy counsel at steven.woolf@jewish 

federations.org or (202–736–5863). 

LETTER SUBMITTED BY WILLIAM S. KIRK

September 21, 2017 

Senate Committee on Finance: Attention Orrin Hatch, Chairman 

Dear Senator Hatch; 

Since tax reform is on the agenda, I am writing to ask you to consider how Social 

Security and Medicare are intertwined with tax reform and benefits. 

(1) Social taxation thresholds have not been changed since 1984. They are cur- rently $32,000 for a married couple. They were never indexed for inflation; 

and in today’s dollars this threshold should be around $75,000. I ask that you 

consider bring these frozen figures into the 21st century to catch up to other 

government programs adjusted for inflation. 

(2) Medicare monthly premiums have risen from $104.90 in 2015 to $121.80 in 2016 (16.1%) to $134 in 2017 (10.0%). How can this be justified when Social 

Security benefit increases in 2015 were 1.7%; 2016 were 0%; 2017 were 0.3%. 

These minuscule Social Security increases are eaten up by Medicare premium 

increases resulting in frozen Social Security benefits for several years. In my 

case it will take 5 years of Social Security benefit increases just to cover the 

$134 before I see a dime increase in benefits. This math does not make sense. 

You can only approve a 0.3% increase for Social Security and on the other 

hand say double digit Medicare increases are justified. How do you rationalize 

these two different points of view? 

I look forward to your reply and hope that you will pass legislation that will correct these two situations and bring them in line with realistic benefits that coincide 

with today’s cost of living for recipients of these programs. 

Best Regards, 

William S. Kirk 

LEAGUE OF AMERICAN ORCHESTRAS

33 West 60th Street, 5th floor 

New York, NY 10023 

Phone: (212) 262–5161 

Email: advocacy@americanorchestras.org 

Thank you for the opportunity to provide comments for the record related to the 

Senate Finance Committee’s hearing on individual tax reform, held on September 

14, 2017. We are also grateful for this important opportunity to provide an initial 

response to the September 27th release of the Unified Framework for Fixing the 

Broken Tax Code, which Chairman Hatch has described as ‘‘a critical roadmap for 

the tax-writing committees.’’ 

The League of American Orchestras leads and supports America’s orchestras and 

the vitality of the music they perform. Founded in 1942 and chartered by Congress 

in 1962, the League links a national network of thousands of instrumentalists, conductors, managers, board members, volunteers, and business partners. Its diverse 

membership of approximately 800 nonprofit orchestras across North America ranges 

from world-renowned symphonies to community groups, from summer festivals to 

student and youth ensembles. Orchestras unite people through creativity and artistry, fuel local economies and civic vitality, and educate young people and adults— 

all with the support of private contributions, volunteers, and community partners. 

As the Congress prepares to take next steps in detailing a tax reform plan, we provide comments here that reiterate key points communicated to the Finance Committee by the League of American Orchestras in response to Chairman Hatch’s June 

16, 2017 request for stakeholder feedback on tax reform. The League of American 

Orchestras continues to urge the Committee to support the vital work of nonprofit 

organizations by preserving and strengthening tax incentives for charitable giving 

and supporting policies that strengthen the nonprofit sector. Private contributions 

are a critical source of support that enables orchestras to broaden public access to 

the arts, nurture cultural diversity, and spur the creation of new artistic works, all 

131 

while supporting countless jobs in communities nationwide. We urge the Committee 

to take the following into consideration in shaping tax reform proposals: 

Ensure that comprehensive tax reform results in increased giving by more 

donors. While leadership on House and Senate Committees has expressed support 

for preserving the charitable deduction and enacting policies that incentivize even 

more giving, the proposal in the Unified Framework for Fixing the Broken Tax Code 

to increase the standard deduction would reduce the number of itemizers that make 

use of the charitable deduction to just 5% of taxpayers, resulting in a loss of up to 

$13 billion in contributions annually. Efforts to simplify the tax process could ensure increased charitable giving by enacting a charitable deduction available to all 

taxpayers, whether or not they itemize. The League of American Orchestras endorses the statement submitted to the Committee by the Charitable Giving Coalition, which explains in detail how a universal charitable deduction would increase 

charitable giving by $4.8 billion per year, while cultivating new generations of philanthropists and encouraging a tradition of giving among all taxpayers. 

While the initial impulse to give comes from the heart, studies have repeatedly 

shown that charitable giving incentives have a significant impact on how much and 

when donors contribute. Should charitable giving incentives be scaled back, the public would suffer. Orchestras, like other nonprofit organizations, rely on contributions 

from donors from across the economic spectrum. If individual donations were to decline, the capacity of nonprofit performing arts organizations to provide educational 

programs and widely accessible artistic events, and to boost the civic health of communities and the artistic vitality of our country, would be diminished at a time 

when the services of all nonprofits are most in demand. The tax incentive for charitable contributions uniquely encourages private, individual investment in the public 

good. 

Charitable giving is an essential form of support. Declines in giving would 

result in the loss of vital local nonprofit programs. Orchestras, as tax-exempt 

organizations, are partners in the nation’s nonprofit charitable sector working to improve the quality of life in communities nationwide. Orchestral activity is supported 

by an important combination of public volunteerism, private philanthropy, and civic 

support that is made possible by tax exempt status and incentives for charitable 

contributions. Ticket sales and admission fees alone do not come close to subsidizing 

the artistic presentations, educational offerings, and community-based programming 

of nonprofit arts organizations. In fact, orchestras participating in the League’s Orchestra Statistical Report in 2014 indicated that total private contributions represent 39.7% of the revenue that makes the work of U.S. orchestras possible. 

Reducing incentives for charitable giving would harm communities. Nonprofit jobs account for 1 in 10 members of the U.S. workforce. American orchestras 

employ thousands of professional musicians, administrators, educators, and stage 

personnel in cities and towns across the country. These workers are key contributors 

to their local creative economy through their day-to-day work, boosting their community’s reputation for excellence and competitive edge. They are also planting the 

seeds for future economic growth through the educational, artistic, and civic programs they present to young people, nurturing the next generation of workers who 

will be prepared to contribute to the global economy—which is increasingly reliant 

on creativity and the communication of ideas. The jobs and work product of many 

artists and administrators working in the nation’s nonprofit performing arts community would be imperiled by declines in charitable giving. 

Maintain and strengthen the IRA Charitable Rollover Provision. Congress 

wisely recognized the importance of giving incentives by reinstating and making 

permanent the IRA Charitable Rollover provision in December of 2015 through the 

Protecting Americans from Tax Hikes (PATH) Act, after years of expiration and 

temporary reinstatement. The IRA Rollover provision can be strengthened by lowering the age requirement to 591⁄2 and removing the $100,000 cap on qualifying donations. 

We urge the Committee to consider carefully the impact of changes to Unrelated Business Income Tax (UBIT) requirements. Along with others in the 

nonprofit community, orchestras viewed with great concern the treatment of sponsorship payments in Section 5008 of H.R. 1 in the 113th Congress. Under the House 

bill, if a sponsorship payment exceeds $25,000 for a single event, any use or acknowledgement of the sponsor’s name or logo may only appear with, and in substantially the same manner as, the names of a significant portion of the other donors 

to the event. Contributions acknowledged in a different manner would be treated 

as advertising income by the tax-exempt organization and subject to UBIT. 

132 

Current law already provides that UBIT is incurred any time the sponsor’s product 

is advertised. Sponsorship recipients may not provide qualitative information about 

the product, urge its purchase, or provide any information on how or where to purchase it. The mere acknowledgement of the size of a sponsorship is no different from 

acknowledging the size of charitable gifts from individuals, which is standard practice for charities of every kind. Subjecting the sponsorship to tax would simply divert money from its intended philanthropic use and leave nonprofit cultural organizations with fewer resources to serve their communities. 

Enact the Artist-Museum Partnership Act, S. 1174, which would allow artists, writers, and composers to take an income tax deduction for the fair 

market value of their work when donating it to charitable collecting institutions. For many years, artists, writers, and composers could take a fair market 

value deduction for their works donated to a museum, library, or archive. Currently, 

creators may take a deduction only for the cost of materials, such as paper and ink 

and, as a result, the number of works donated by artists has dramatically declined. 

Musicians, scholars, and the public rely on original manuscripts and supporting material to reveal the artistic underpinnings of existing compositions and inspire the 

creative works of emerging artists. When collected by orchestra archives, music 

schools, music libraries, or other cultural institutions, original musical works and 

related materials can be preserved and made available to the public. By allowing 

artists to take a fair-market value deduction for self-created works given to a nonprofit institution, their works are accessible to the public. 

Orchestras are important contributors to American civic life, and nonprofit 

status and charitable giving to orchestras substantially improves the 

health, education, and artistic vitality of communities nationwide. The 

United States relies upon the nonprofit community to provide many public services 

in fields ranging from public health and education to arts and culture. The various 

types of charitable organizations that comprise the nonprofit sector do not exist or 

operate in silos. They are tightly connected through critical local partnerships that 

leverage shared resources and strengthen services to the public. The programs and 

music of America’s orchestras are embraced, supported, and accessed by the public 

in communities large and small throughout our country. Here are facts about the 

contributions orchestras make to the public good: 

• More than 28,000 performances are given annually by orchestras, many of them 

specifically dedicated to education or community engagement, for a wide range 

of young and adult audiences. With the support of private contributions, many 

of these concerts are made available free of charge, or at reduced prices that 

provide access to families and attendees from across the economic spectrum. 

• Orchestras partner with other community-based nonprofits every day to serve 

specific community needs. In a national survey, our members identified more 

than 40 types of programmatic activities that engage community partners, including health and wellness programs, engagement of military families, senior 

programs, and an extensive array of music education partnerships with schools 

and in afterschool settings. 

• Orchestral activity is embedded in the civic life of towns and cities across our 

country. With nearly 1,600 symphony, chamber, collegiate, and youth orchestras 

across the country, America is brimming with extraordinary musicians, live concerts, and orchestras as unique as the communities they serve. Thousands of 

young people embrace the opportunity to perform side-by-side with their peers, 

and adult professional and community orchestras of all sizes present extraordinary music for their communities. 

• Through the power of music, orchestras unite individuals in the unique shared 

event of a large ensemble performance, and are often a focal point when a community seeks to commemorate an important civic moment. Orchestras are a 

source of strength and pride, as well as a vehicle for community unification and 

reflection. 

• Orchestras contribute to our nation’s artistic vitality, supporting the creative 

endeavors of thousands of today’s classical musicians, composers, and conductors, while strengthening, documenting, and contributing to our nation’s diverse 

cultural identity. 

America’s orchestras promote access to the arts, are important participants in education for children and adults, and support jobs and economic growth—all in partnership with other community-based organizations. On behalf of the full range of 

American orchestras, we urge the Committee to preserve and grow tax incentives 

133 

1 ‘‘Characteristics of Alternative Minimum Tax (AMT) Payers, 2016–2018 and 2027,’’ Tax Policy Center, http://www.taxpolicycenter.org/model-estimates/baseline-alternative-minimum-taxamt-tables-april-2017/t17-0149-characteristics. 

for charitable giving and enact policies that strengthen the impact of the nonprofit 

sector. 

NATIONAL ASSOCIATION OF ENROLLED AGENTS (NAEA) 

1730 Rhode Island Avenue, NW, Suite 400 

Washington, DC 20036–3953 

Toll free 855–880–6232 

Telephone 202–822–6232 

Facsimile 202–822–6270 

info@naea.org 

https://www.naea.org/ 

Tax Reform Proposals 

Individual Tax Simplification 

Alternative Minimum Tax 

Internal Revenue Code: Sections 55, 56, 57, 58, 59. 

The Problem: Congress created the Alternative Minimum Tax (AMT) to ensure 

that wealthy individuals taking advantage of tax shelters pay a minimum 

amount of taxes. In reality, due to tax law changes over the years, the AMT 

often affects taxpayers who were not the target of the original proposal: middleclass taxpayers making as little as $75,000.1 Additionally, taxpayers from high 

tax states and with large families are most vulnerable to the AMT. While not 

common, it is even possible to find examples of taxpayers in the $50,000— 

$60,000 income range affected by AMT. 

Recommendation: The AMT should be repealed or substantially modified to 

apply only to high income taxpayers paying little or no taxes. 

Analysis: The AMT is a parallel tax system, requiring taxpayers to, in effect, 

do their taxes twice. In conjunction with the elimination of many tax avoidance 

provisions of the Internal Revenue Code, the AMT can be eliminated or substantially modified to target only high income taxpayers. 

Personal Exemption Phase-out (PEP) and Limitation of Itemized Deductions (Pease) 

Internal Revenue Code: Sections 151 and 68. 

The Problem: While the Personal Exemption Phase-out (PEP) and Pease are 

presented as phase-outs for exemptions and itemized deductions, in reality they 

are hidden additional tax rates. Additionally, these phaseouts unfairly tax large 

families and people from high tax states. 

Recommendation: Congress should repeal PEP and Pease and replace with an 

applicable tax rate on high-income taxpayers. 

Analysis: Removing phaseouts that act as hidden marginal rates will bring better transparency and efficiency to the Internal Revenue Code. Additionally, repealing PEP and Pease will remove the large family penalty and will provide 

tax relief to people living in high tax states. 

Child Tax Credit 

Internal Revenue Code: Section 24. 

The Problem: A taxpayer may claim a tax credit for each qualifying child under 

the age of 17. In most families, teenagers do not graduate from high school until 

age 18 or even 19. These years can be expensive as the child prepares to enter 

college or the workforce. 

Recommendation: The age limit for each child should be increased from under 

the age of 17 to under the age of 19. 

Analysis: Increasing the child age limit will help families transition children 

from high school to work or college. 

Unearned Income of a Child, ‘‘Kiddie Tax’’ 

Internal Revenue Code: Section 1(g). 

134 

2 Council of Economic Advisers, ‘‘The War on Poverty 50 Years Later: A Progress Report,’’ January 2014. Table 2 on page 27 highlights that the EITC and its sibling, the Child Tax Credit, 

lift more Americans out of poverty than any other program except Social Security. 

The Problem: The additional tax revenue to the Treasury does not outweigh the 

extreme complexity added to a family’s tax compliance. 

Recommendation: Congress should substantially increase the current threshold 

for unearned income subject to the Kiddie Tax from $2,100 to $6,000 (subject 

to annual indexing) while lowering the maximum age subject to the tax to 14. 

Analysis: The intent of current law is to discourage transfers of wealth, purely 

for tax avoidance purposes. Changing the current threshold to $6,000 would better reflect the original threshold adjusted for inflation. 

Mileage Rates 

Internal Revenue Code: Sections 162, 213, 217, and 170(i). 

The Problem: The IRS determines annually the allowable mileage rate as an ordinary and necessary business expense, which is currently 53.5 cents per mile. 

The IRS also sets a standard rate for the medical and moving deduction, which 

is currently 17 cents. Since 1984, the mileage rate for the charitable deduction 

is set by statute at 14 cents per mile. 

Recommendation: The standard mileage rate deduction should be consistent for 

all uses. 

Analysis: The proposal would treat similarly situated taxpayers equally. When 

charitable or medical transportation is necessary, reasonable rates should be allowed and adjusted annually. 

Education 

Internal Revenue Code: Sections 25A, 221, 222, 529, and 530. 

The Problem: The Internal Revenue code includes such a myriad of complex tax 

incentives for education that it is often too expensive and time-consuming for 

many taxpayers to simply sort them all out. As a result, many families without 

sophisticated advice and tax preparation from competent and highly trained 

practitioners simply forego using these incentives. 

Recommendation: Congress should consider consolidating the various education 

benefits into three provisions: 

1. An enhanced super 529 savings vehicle (including tuition prepayment 

plans), with elective payroll deductions; 

2. A college tax credit with a single earnings phase out that would consolidate American Opportunity Credit/Hope Credit, Lifetime Learning Credit, and tuition and fees expenses; and 

3. An expanded deduction for student loan interest. 

Any savings from this consolidation of tax expenditures should be dedicated to 

making all three of these provisions available to as wide of an income group 

as possible. 

Analysis: The proposal would simplify the tax code, reduce taxpayer burden, 

and would more fairly treat taxpayers of similar economic situations. 

Earned Income Tax Credit (EITC) 

Internal Revenue Code: Section 32. 

The Problem: The EITC has increased work, reduced poverty, and lowered welfare receipts.2 At the same time, it is one of the most complex parts of the Internal Revenue Code. Overpayments often result from the complexities of families’ 

lives. The Department of Treasury estimates that 70 percent of improper EITC 

payments stem from issues related to the EITC’s residency and relationship requirements; filing status issues; and issues relating to who can claim a child 

in non-traditional family arrangements. 

Recommendation: Congress should simplify the EITC by making the definition 

of ‘‘qualifying child’’ for EITC consistent with current law governing a dependent child under Internal Revenue Code Section 152(c). The minimum age should 

be reduced to 18 for non-dependent taxpayers and the maximum age (currently 

under age 65) for EITC eligibility should be eliminated. Additionally, Congress 

135 

should create a commission made up of Circular 230 practitioners and lowincome advocacy groups to make recommendations on simplifying the residency 

rules to decrease the incidences of mispayments and to better reflect complex 

family arrangements. 

Analysis: The proposal would simplify an extremely complicated section of the 

Internal Revenue Code, which should lessen the need for practitioners and the 

IRS to be involved in sorting out complex family relationships and thus lowering the incident of mispayments due to unintentional noncompliance. Expanding the eligible age range would create parity for similarly situated taxpayers. 

International 

Internal Revenue Code and U.S. Code: 31 U.S.C. § 5321(a)(5), sections 6038, 

6038B 6038D, 6039F, 6046, 6046A, 6048(b). 

The Problem: The reporting rules for American citizens living abroad are extremely complex and the penalties for noncompliance far outweigh the offense 

in most instances. Congress needs to reform these rules to make both the reporting and the inadvertent noncompliance less draconian. 

Recommendation: The Internal Revenue Code should provide relief from the 

penalties in the following situations: 

• The taxpayer has not filed a FinCEN 114 or IRS forms 926, 5472, 8938, 8865, 

8858, 5471, 3520, or 3520A, but has reported all income from all sources. 

• The taxpayer has not filed a FinCEN 114 or IRS forms 926, 5472, 8938, 8865, 

8858, 5471, 3520 or 3520A, but there is zero balance due related to the various foreign entities. 

• If the taxpayer should have filed a FinCEN 114 or IRS forms 926, 5472, 8938, 

8865, 8858, 5471, 3520 or 3520A and there is a de minimis balance due as 

a result of the missing income, the penalty should be the greater of 20 percent 

of the tax due or $100. 

Analysis: The proposal will mitigate the penalties associated with inadvertent 

noncompliance with the requirements of the Foreign Account Tax Compliance 

Act. 

Self-Employed Health Insurance 

Internal Revenue Code: Section 162. 

The Problem: Self-Employed Health Insurance premiums are deductible as an 

adjustment to income in determining AGI, and not a business expense, absent 

a complex (and often expensive) employer-provided medical expense reimbursement plan. 

Recommendation: Self-employed individuals should be able to deduct health insurance costs in determining net earnings subject to self-employment tax (OldAge, Survivors, and Disability Insurance tax (OASDI) and Hospital Insurance 

(HI) tax). 

Analysis: Self-employed individuals (who file Schedule C or F) cannot deduct 

their own health-insurance premiums as an ordinary and necessary business 

expense even though premiums paid for employees’ health coverage are deductible. 

Pension Simplification 

Retirement and Deferred Compensation Plans 

Internal Revenue Code: Sections 401(k), 403(b), 408(p), and 457. 

The Problem: The proliferation of retirement plans that provide for taxpayer 

elective deferrals contain different rules and requirements. This has become a 

barrier for small businesses to provide retirement benefits to their employees 

as the small businesses compete with larger companies for the best employees 

of small businesses. 

Recommendation: The Internal Revenue Code sections governing employee contribution plans elective deferrals should be simplified into a uniform simplified 

employee contributory deferral plan. 

Analysis: The proposal would simplify the tax code and would more fairly treat 

taxpayers of similar economic situations. 

136 

Determination of Basis 

Internal Revenue Code: Sections 401, 403(b), 408, 408A, 457. 

The Problem: Depending on the type of retirement plan, there are separate 

rules for determining the basis of pension distributions. 

Recommendation: Tax reform should include a uniform rule regarding the determination of basis in distributions from retirement plans. 

Analysis: The proposal would simplify the tax code and would more fairly treat 

taxpayers of similar economic situations. 

Early Withdrawal Penalties 

Internal Revenue Code: Section 72(t). 

The Problem: The rules governing the 10-percent penalty for early withdrawals, 

such as for college costs and first-time homebuyers, from qualified retirement 

plans are applied differently for IRAs and pension plans. Additionally, some 

plan types have larger penalties for early withdrawals. These rule differences 

can lead to confusion and penalties could be avoided if the exceptions to the 10 

percent penalty are consistent for all qualified plans covered under § 72(t). 

Recommendation: The penalty rules for early withdrawals should be standardized for distributions from all types of deferred accounts-qualified retirement 

plans. 

Analysis: The proposal would simplify the tax code and will fairly treat taxpayers of similar economic situations. 

1099/K–1 Reform 

Brokerage Firm Filing Deadline 

Internal Revenue Code: Section 6045. 

The Problem: Even with the date change made by section 403 of the Energy Improvement and Extension Act of 2008, brokerage firms are resending updated 

forms 1099 throughout the tax filing season and occasionally, even later. These 

actions often necessitate changes and amendments or result in taxpayer requests for extensions of time to file, based on uncertainty of forms they have 

received. 

Recommendation: The February 15th deadline for filing all forms 1099 from investment brokerages should be changed back to January 31st. Brokerage firms 

should be required to report the most accurate income and basis known as of 

January 31st. If insignificant corrections and adjustments are reported by 

brokerages subsequent to the January 31st deadline, there should be a de 

minimis safe harbor amount, under which the taxpayer is not required to file 

an amended or superseding return. 

Analysis: The proposal would reduce burden and costs to taxpayers and reduce 

the government’s burden of processing amended returns with insignificant 

changes. 

Uniform 1099–B 

Internal Revenue Code: Section 6045. 

The Problem: Lack of standardization of the 1099–B in the brokerage industry 

causes confusion and misapplication of the information provided. 

Recommendation: The IRS should provide a required uniform 1099–B for the 

brokerage industry. 

Analysis: The proposal would lead to more accurate and complete information 

on the taxpayer’s return. It would reduce taxpayer burden by reducing the number of IRS CP–2000 Notices mailed to taxpayers. 

K–1 Simplification 

Internal Revenue Code: Section 6031. 

The Problem: Many unsophisticated taxpayers unwittingly invest in units of 

partnerships in real estate, oil and gas, timber, and such commodities and futures that generate unique deductions and credits that must be reported but 

rarely if ever affect the tax liability. These deductions and credits also add nothing to IRS’s matching abilities. 

137 

Recommendation: IRS should be directed to review and simplify K–1 reporting 

for partnerships in real estate, oil and gas, timber, and commodities and futures 

for limited partners with a capital account of less than $50,000. 

Analysis: The proposal would reduce complexity and taxpayer burden. 

Indexing 

Internal Revenue Code: All sections of the Internal Revenue Code. 

The Problem: Many parts of the Internal Revenue Code are not indexed for inflation, eroding the value of numerous provisions over time. 

Recommendation: The Internal Revenue Code should be amended as necessary 

to provide uniform indexing requirements. 

Analysis: More uniform indexing of the Internal Revenue Code would ensure 

that taxpayers of similar economic situations would be treated fairly and provide stability. 

Withholding 

Internal Revenue Code: Section 3402. 

The Problem: Employers withhold a percentage of employees’ income from their 

paychecks, simplifying the remittance of taxes to the Treasury. Self-employed 

taxpayers must submit payment through estimated taxes. 

Recommendation: The Internal Revenue Code should provide for optional withholding and reporting for independent contractors, partners and non-employee 

S-corporation shareholders. This could be done through a simple check-the-box 

election on the W–9 Form. 

Analysis: The proposal would reduce taxpayer burden, would assist taxpayers 

in compliance with the ‘‘pay as you go’’ requirement, would reduce the number 

of end-of-year balance due amounts, and would more fairly treat taxpayers of 

similar economic situations. 

IRS Future State, Practitioner Accounts 

Internal Revenue Code: Section 6061(b). 

The Problem: The IRS has developed online accounts for individuals that when 

fully functional, will allow taxpayers to see their transcripts, communicate 

through secure portals for webmail, and submit payments in full or by an installment agreement. Accounts for tax professionals are being developed at a 

much slower pace. Additionally, all powers of attorney and disclosure authorizations are still being submitted through the IRS Centralized Authorization File 

(CAF) using inked signatures while requiring manual input from IRS employees. It is NAEA’s concern that the delay in modernizing online accounts for tax 

practitioners will discourage taxpayers from exercising all their rights for representation. 

Recommendation: Congress should require the following: 

1. The IRS should debut online accounts for tax practitioners at the same 

time as individual accounts. 

2. Individual online accounts should display a Publication 1 equivalent when 

taxpayers utilize payment options in their accounts. 

3. The IRS shall provide an electronic option for taxpayer authorizations of 

Circular 230 practitioners. 

4. The IRS shall provide guidance on the use of electronic signatures for 

Forms 2848 and 8821 for Circular 230 practitioners. 

Analysis: The proposal would ensure equal treatment for taxpayers being represented by tax practitioners and would ensure that taxpayers can fully exercise 

their rights under the Internal Revenue Code. 

Minimum Standards for Unenrolled Tax Preparers 

U.S. Code: Title 31, section 330. 

The Problem: Unscrupulous unenrolled preparers are harming the integrity of 

the tax administration system through incompetency and fraud. The General 

Accountability Office, the Treasury Inspector General for Tax Administration 

and the Taxpayer Advocate have all commented on the need to provide minimum standards for tax preparation. Unfortunately, in Loving v. Commissioner 

138 

and subsequent cases, the courts ruled that the Internal Revenue Service does 

not have authority to regulate tax return preparers under title 31. The case 

overturned the regulatory framework for registered tax return preparers and severely limited the agency’s ability to regulate all individuals—even lawyers, certified public accountants and enrolled agents—in the preparation of tax returns. 

Recommendation: Congress should override Loving and all subsequent cases relying on its holdings and provide specific authority for the IRS to require all 

non-credentialed paid tax preparers to meet minimum standards. Such standards should include passing a one time competency exam administered under 

the auspices of the Department of Treasury, requiring tax compliance background checks, setting continuing education requirements, and requiring compliance with strict ethical standards. 

Analysis: Requiring minimum standards for all paid tax return preparers will 

increase compliance and the overall professionalism of the tax preparation industry. Establishing IRS’s authority will help protect taxpayers, the tax administration system, and the U.S. Treasury. 

NATIONAL VOLUNTEER FIRE COUNCIL (NVFC) 

7852 Walker Drive, Suite 375 

Greenbelt, MD 20770 

(202) 887–5700 

888–ASK–NVFC (275–6832) 

202–887–5291 fax 

nvfcinfo@nvfc.org 

https://www.nvfc.org/ 

September 13, 2017 

Submitted by: Kevin D. Quinn, Chair 

On behalf of the National Volunteer Fire Council (NVFC), a registered 501(c)3 organization representing the interests of the more than 1 million volunteer firefighters 

and EMS providers in the United States, thank you for the opportunity to provide 

information regarding the impact that federal income taxation has on recruitment 

and retention incentives that many communities provide to their volunteer emergency responders as a reward for their service. 

Eighty-five percent of all fire departments in the United States are staffed by alland mostly-volunteer personnel. Those departments protect 35.1 percent of the nation’s population. The NVFC estimates that the services donated by volunteer firefighters save taxpayers more than $30 billion annually. Thousands of communities 

across the nation, particularly in rural and suburban areas, would struggle to provide emergency services without their volunteers. 

Between 1983 and 2015, the number of volunteer firefighters in the United States 

declined from 884,600 to 814,850, an 8 percent reduction. Perhaps more alarmingly, 

since 1987, the number of firefighters under the age of 40 serving communities of 

2,500 or fewer residents dropped from 282,821 to 192,161 while the number of over50 firefighters serving these same communities rose from 71,153 to 124,601. Whereas three decades ago the percentage of young firefighters used to be highest in 

small-town America, today nearly a third of all firefighters serving our smallest 

communities are over the age of 50. 

The reason for this shift is largely due to demographics, what is happening in rural 

America, and the jobs market. People are less likely today to have the same job in 

the same community for their entire lives. This is especially true in rural America, 

because so many jobs have moved to more densely populated areas, or they’ve disappeared completely due to automation or offshoring. Additionally, there are more 

households today in which all adults present work outside of the home. 

As a consequence of these changes, people are more likely to have to move at some 

point in their lives—and possibly several times—for employment. Additionally, 

young people from rural areas are more likely to have to move or commute in order 

to find work. This is very destabilizing for volunteer emergency services staffing, 

which historically was modeled on generational recruitment—children following 

their parents into the fire department. 

With young people today more mobile than in the past, emergency services agencies 

are increasingly implementing formal recruitment and retention (R&R) programs in 

order to ensure adequate volunteer staffing. This is necessary to keep up with rising 

139 

turnover, as people relocate out of communities, as well as to attract personnel who 

may not have ever considered volunteering as an emergency responder, or even be 

aware that the local fire/EMS agency is staffed by volunteers. 

As part of a formal R&R program, many departments have begun to provide modest 

incentives to their volunteers as a reward for their service. The NVFC estimates 

that more than half of all volunteer emergency responders receive some type of incentive, including per-call payments, annual or monthly stipends, or non-monetary 

benefits such as clothing or goods and services. Volunteer incentives are typically 

modest—the NVFC estimates that for volunteers receiving incentives the average 

annual benefit is worth approximately $350—and most volunteers view benefits as 

a form of reimbursement for responding to emergencies in personal vehicles, replacing clothing to wear under protective gear and at training, along with other minor 

expenses. 

Taxation of volunteer benefits can be confusing, in part because the very definition 

of ‘‘volunteer’’ isn’t clear. The U.S. Department of Labor has ruled that personnel 

compensated at a rate of less than 20 percent of what a full-time paid employee performing the same functions would be compensated in the same jurisdiction should 

be considered ‘‘volunteers’’ rather than ‘‘employees.’’ The Internal Revenue Service 

(IRS), however, does not recognize this distinction and has made it clear that even 

minor benefits provided to volunteers should be taxed as income. 

The notion that volunteer benefits ought to be subject to federal income and payroll 

taxes has generally been slow to take hold in the volunteer emergency services community. Even today, the NVFC continues to hear from volunteer fire departments 

that are unaware that the benefits they provide are technically subject to taxation 

for a number of reasons, including: 

– Interpreting the Labor Department’s ruling to mean that because someone is 

considered a ‘‘volunteer’’ rather than an ‘‘employee’’ that benefits provided to 

that individual are not subject to income taxation. 

– Viewing volunteer benefits as reimbursement and hence not subject to income 

taxation. 

– Believing that if benefit amounts are small enough that there is no requirement 

that they be treated as taxable income or reported as such. 

– Not viewing themselves as employers or the benefits they provide as income. 

– Never having been audited or even contacted by the IRS and informed otherwise. 

The federal tax code should be modified to allow local fire and EMS agencies to provide modest incentives to their volunteer personnel without incurring tax liability. 

Considering that the value of services rendered by volunteer emergency responders—on average, more than $37,000 per year per volunteer based on NFPA estimates—are worth far more than the benefits they receive, the notion that the federal government is owed tax on those benefits is counterintuitive. 

In an attempt to simplify the application of federal tax law on volunteer benefits, 

legislation exempting property tax abatements and up to $360 per year of other 

types of benefits to volunteer firefighters and EMS personnel was enacted in 2007. 

In 2008, Congress passed legislation clarifying that exempted benefits are not subject to payroll taxes or withholding. Both of these provisions, commonly referred to 

as the Volunteer Responder Incentive Protection Act (VRIPA), expired at the end 

of 2010. 

VRIPA increased the incentive value of volunteer benefits while easing administrative burdens associated with reporting and calculating withholding on volunteer 

benefits. Since VRIPA expired, volunteer fire departments in Florida and Virginia 

have been audited and fined by the IRS for improper reporting of benefits. This has 

had a chilling effect on departments providing benefits, which has in turn hampered 

R&R efforts at the local level. 

S. 1238, the version of VRIPA introduced in this Congress by Senators Susan Collins and Ben Cardin, would make VRIPA permanent and increase the exempt 

amount from $360 per year ($30 per month of active service) to $600 per year ($50 

per month of active service). A cost estimate developed by the Joint Committee on 

Taxation for identical legislation in the House of Representative (H.R. 1550) estimated that the cost to the federal government of enacting VRIPA would be $465 

million total over the next 10 years (see enclosed cost estimate). 

Volunteering has been part of American life since before our nation was founded. 

The volunteer spirit remains strong, but as society changes barriers to volunteering 

140 

as an emergency responder have emerged that are making it increasingly difficult 

to recruit and retain personnel. On behalf of the NVFC, I urge the committee to 

include the language from S. 1238 in any legislation impacting the portion of the 

U.S. Code dealing with individual income tax. Enactment of VRIPA would give 

agencies that provide modest benefits a reprieve from having to report these payments as in come. It would also ensure that volunteers don’t have to pay tax on 

what amounts to reimbursement for expenses incurred on behalf of the department. 

Thank you for the opportunity to provide input to the committee on this important 

matter. If you have any questions, please do not hesitate to contact me directly, or 

you can follow up with Dave Finger, NVFC Chief of Legislative and Regulatory Affairs, at (240) 297–3566 or dfinger@nvfc.org. 

Sincerely, 

Kevin D. Quinn 

Chair 

Enclosure 

Congress of the United States JOINT COMMITTEE ON TAXATION

502 Ford House Office Building 

Washington, DC 20515–6453 

(202) 225–3621 

http://www.jct.gov/ 

Honorable David G. Reichert 

U.S. House of Representatives 

1127 Longworth 

Washington, DC 20515 

Honorable John B. Larson 

U.S. House of Representatives 

1501 Longworth 

Washington, DC 20515 

Dear Mr. Reichert and Mr. Larson: 

This is a response to your request dated April 12, 2017, for an estimate of H.R. 

1550, the ‘‘Volunteer Responder Incentive Protection Act of 2017,’’ which reinstates, 

increases, and makes permanent the exclusion for benefits provided to volunteer 

firefighters and emergency medical responders. 

Present law requires all payments, stipends, property tax reductions, and other 

fee or tax reductions for volunteer firefighters and emergency medical responders 

to be treated as taxable income. H.R. 1550 will allow qualified payments, tax reductions, or fee reductions up to $50 per month of service to be excluded from taxable 

income. Qualified payments are any payment, reimbursement or otherwise, provided 

by a State or political division thereof, on account of performance of services as a 

member of a qualified volunteer emergency response organization. 

H.R. 1550 is effective for taxable years beginning after December 31, 2017. We estimate that the bill would have the following effects on Federal fiscal year budget receipts: 

Fiscal Years 

(Millions of Dollars) 

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2018–22 2018–27 

¥31 ¥43 ¥46 ¥47 ¥48 ¥49 ¥49 ¥50 ¥50 ¥51 ¥215 ¥465 

NOTE: Details do not add to totals due to rounding. 

141 

I hope this information is helpful to you. If we can be of further assistance in this 

matter, please let me know. 

Sincerely, 

Thomas A. Barthold 

PRECIOUS METALS ASSOCIATION OF NORTH AMERICA

Written Testimony of Scott Smith, President 

Chairman Hatch and Members of the Committee, 

My name is Scott Smith, and I am the CEO of Pyromet, which is a privately owned 

precious metals manufacturer and refiner of silver, gold, and platinum group metals. Since 1969, Pyromet is a reputable name in precious metals and precious metals 

management. I also serve as President of the of the Precious Metals Association of 

North America (PMANA), and I am submitting this written testimony on behalf of 

our members. Our association’s members are made up of refiners, manufacturers, 

traders, and distributors of products that are essentially comprised of precious metals such as gold, silver, platinum, and palladium. All of our members have a vested 

interest in tax reform—in particular, changes to the capital gains rate for investments in precious metal coins and bars. 

Background 

Right now, it is impossible to turn on the television without seeing an advertisement 

for investing in precious metals bullion coins and bars. These are great opportunities for people to include tangible assets into their portfolios. Since 1982, gains made 

on precious metals bullion have been taxed at the ordinary income rate due to language defining such bullion as a collectible. Congress has made numerous attempts 

to mitigate the effects of this capital gains treatment on precious metals. The Tax 

Reform Act of 1986 granted the American Eagle family of coins an exemption from 

the ‘‘collectible’’ definition and allowed them to be included as equity investments 

in Individual Retirement Accounts. Over a decade later, the Taxpayer Relief Act of 

1997 created purity and custody standards that, if met, would exempt bullion coins 

and bars from the definition while also allowing them in IRAs. Furthermore, precious metals investment grade bullion products are purposely designed and produced in a way that excludes any assumption that they are rare or unique collectibles. Instead, investment grade bullion products are mass produced to be offered 

as investments strictly for their precious metal content. 

Regulatory Inconsistencies 

Since 1986, Congress and the U.S. Treasury have recognized the value of investing 

in precious metal bullion, thus making some exemptions from the ‘‘collectible’’ definition. However, the ‘‘collectible’’ definition remains for non-IRA investments in precious metals, and these investments are taxed at the ordinary income rate for collectibles with a maximum rate of 28%—a rate 40% greater than the capital gains 

rate for equity investments. To better understand this inconsistency, I want to briefly explain the different types of coins and the distinctions between them. 

Coins—Function Versus Form 

Coins belong to one of three basic categories that consider the coin’s function and 

form. All coins are round in form. However, there is a critical difference in the concept of form and that of function. For example, while all airplanes have wings and 

tails and are designed to fly, different types of airplanes fulfill different functions. 

One wouldn’t employ a Boeing 747 airliner to perform a fighter mission. Similarly, 

there are different categories of coins that have different roles, and each type is distinguished from the others by its function or purpose. 

There are three basic categories of coins in the world today; each one serves a specific role. 

1. Monetary Coins—These coins are part of a country’s circulating currency that 

its citizens routinely use as money. Coins in circulation today contain no precious 

metal. The value of these coins (commonly referred to as their ‘‘legal tender’’ or 

‘‘face’’ value) is set in law by government decree. In the United Sates, of course, 

these would include pennies, nickels, dimes, quarters, half-dollars, and now, the new 

‘‘Sacagawea’’ dollar coin. They are used as a medium of exchange by which the general public effects everyday transactions, such as when they pay for candy bars, 

newspapers, parking meters, bridge tolls, etc. The purpose of these coins is to cirVerDate Sep 11 2014 17:51 Sep 21, 2018 Jkt 000000 PO 00000 Frm 00145 Fmt 6601 Sfmt 6621 R:\DOCS\31548.000 TIM
142 

culate in the general economy. They are not hoarded for their uniqueness or rarity, 

or because they have any premium value over their legal tender amount. 

2. Rare Coins—These coins are commonly referred to as ‘‘numismatic’’ coins, that 

is, they are held by, valued and traded among hobbyists and coin collectors on the 

basis of their rarity and the quality of their physical condition. Typically, numismatic coins are old (sometimes ancient), and they may, or may not contain a precious metal. The market value of numismatic coins usually far exceeds either their 

face value or their precious metal content (if any). Their market values are determined by supply and demand factors that exist in the rare coin market for particular coins based largely on subjective judgments made about their scarcity and 

condition. Such coins may be held for enjoyment (e.g., as in a hobby), or for investment purposes, or both, just as an antique rug or a rare painting may be purchased 

simply for the enjoyment of its owner, or specifically for its price appreciation potential. Thus, profits through capital gains may be realized when rare coins are sold, 

but because they are unique, their value determinations can vary and can be quite 

subjective. 

3. Bullion Coins—Bullion coins are fungible, highly refined precious metals products, round in shape, and produced to exacting specifications in large numbers by 

numerous countries throughout the world specifically as precious metal investment 

vehicles. They are widely traded, highly liquid and their market values are globally 

publicized. Although they typically are ascribed legal tender status by the governments that mint them, bullion coins trade in the marketplace at or near the market 

price of the commodity they contain, which typically has no relationship whatsoever 

to the coin’s legal tender, or ‘‘face’’ value. For example, earlier this year, a one-ounce 

American Eagle gold bullion coin having a U.S. legal tender value of $50, traded in 

the market place at $1,277.35, while gold itself was trading at a ‘‘spot price’’ of 

$1,239.85 per ounce. Thus, the price of the gold Eagle was at a $37.50 premium 

(3%) to the prevailing gold bullion price. 

It is important to note that the premium charged for a bullion coin over and above 

the current ‘‘spot price’’ of the corresponding commodity it contains merely reflects 

the cost of insurance, transportation, handling, and storage, as well as the manufacturer’s and dealer’s profit, associated with the processing and sale of the coin. This 

premium is not a value ascribed to the coin as the result of any rarity or uniqueness 

considerations. In fact, bullion coins are purposely manufactured in sufficient quantities by their governments to ensure they are not ‘‘rare’’ or ‘‘scarce,’’ but are as common as the many types of bullion bars available also produced by commercial refiners specifically for investment purposes. Therefore, bullion coins should be recognized and treated in the tax code as any other investment. 

Recognizing precious metals coins and bars as investment products, The Wall Street 

Journal publishes each business day in its investment section, the market prices of 

gold, silver, platinum and palladium bullion as well as the prices the most widely 

traded bullion coins. Additional substantiation of the investment status of bullion 

coins and bars is evident in the fact that 21 states have removed their sales tax 

on bullion coins and bars. 

Policy Proposal 

Unlike rare coins—which include those most pursued by hobbyists and collectors— 

bullion coins are precious metal investment vehicles that are traded at the value 

of the commodity they contain. Since they are not rare, but rather mass produced 

specifically for investing, their status as a ‘‘collectible’’ for non-IRA investments is 

misaligned with their function and form. That is why I am requesting on behalf of 

the PMANA that Congress amend the Internal Revenue Code to treat gold, silver, 

platinum, and palladium in either bullion or coin form, in the same manner as 

stocks, bonds, and mutual funds for purposes of the capital gains rate for individuals. 

Thank you, and I look forward to working with the Committee to ensure a reformed 

tax code that is fair to investors and promotes more investments in precious metal 

bullion coins and bars. If you have any questions, I am happy to meet with you and/ 

or your staff to discuss this issue in greater detail. Thank you for the time and I 

hope the Committee will look closely at this issue and the impacts it has on American investors. 

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