Senate Finance Committee Examines Lessons of '86 Tax Reform

Committee is concerned about growing web of codes

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The Senate Committee on Finance held a hearing on Thursday to discuss lessons from the Tax Reform Act of 1986. Sen. Max Baucus, D-Mont., stressed the importance of fairness in the tax code, and asked what lessons could be learned from the 1986 reform.

The 1986 reform "leveled the playing field," Baucus said, adding that wealthy Americans could no longer "escape taxes by buying into a tax shelter." Since then there have been over 15,000 changes to the tax code, though, and now, Baucus says, anyone who knows how to manipulate the code can avoid paying taxes.

"Tax reform is not just about the tax code," Baucus said. "It's about one of the most direct relationships that citizens have with their government. It's important that we try to make that relationship as fair as possible."

"When we consider the complexity of the regular tax system and the creeping effects of the alternative minimum tax (AMT), you have a recipe for disaster," Sen. Chuck Grassley said. If the hold-harmless is not extended for 2010, he said, 26 million tax filers will be affected by the AMT.

Grassley cited a June report from the Congressional Budget Office which found tax revenues have averaged 18.1% for the past 40 years. "An important question that must be answered before tax reform can be attempted is whether reformers are committed to holding taxes at or below the historical level of taxation of 18.1 percent for GDP," he said.

Witnesses included Richard Gephardt, president and CEO of Gephardt Group, a consulting firm focused on improving labor relations and developing policy strategies; William Archer, Jr, senior policy advisor at PricewaterhouseCoopers; John Chapoton, strategic advisor at Brown Advisory; and Randall Weiss, Ph.D, managing director of economic research for The Conference Board.

Gephardt reiterated Baucus's claim that taxes are the principal point of contact between Americans and the government, and added "during tight budget times, the American people want to make certain that their tax dollars are not only fairly spent, but also fairly collected."

Chapoton agreed that Americans must trust that they are being taxed fairly. "Confidence that the tax system is basically fair is essential to the proper operation of the self-assessment tax system we have long considered a key ingredient of our free society," he told the Committee.

Archer argued that the 1986 reform demonstrated tax reform is possible, but difficult. "Achieving tax reform demands presidential leadership working together with the Congress for the good of the American people and businesses," he said.

Periodic review of the tax code is important, Weiss told the Committee, to ensure revenue is raised fairly and efficiently, but he argued for comprehensive reform, as opposed to "piecemeal tax bills" in order to meet those goals.

The reforms that worked in 1986 would work again today he said, namely, rate reduction and the perceived fairness of the tax code, revenue neutrality and de-emphasizing tax distribution by income class.

"Not only would a new tax reform initiative deal with the fairness issue and the economic distortion that result from excessive tax expenditures, but it also could help to resolve the extraordinary degree of uncertainty about what the tax law will be in the very near future," he said.

Video of the hearing can be viewed at the Senate Committee on Finance's website.

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