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Tax Reform Panel Says Eliminate the AMT

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Senate Finance CommitteeChairman Max Baucus, D-Mont. opened a hearing Tuesday, taking testimony from five former Assistant Secretaries of the Treasury for Tax Policy, and setting a civil political tone for what will undoubtedly be a long debate on tax reform. 

At the hearing, “How Did We Get Here? Changes in the Law and Tax Environment Since the Tax Reform Act of 1986,” Senators and witnesses agreed that tax reform is necessary. Where they differ is how to simplify the tax code and make it fair.

Opening the first Financial Committee hearing of the 112th Congress, Baucus outlined macro changes in the U.S. and around the world since last major reforms in tax laws were passed, in 1986, such as the fall of the Berlin Wall and rise of e-mail.

Regarding the tax code in particular, Baucus noted that there have been some, “15,000 changes to the tax code since 1986.” He asked, “Have these changes left us with a tax code that is more efficient, fair?”

The Senator added that corporate taxes also need reform, as “cross border arrangements by corporations make the tax burden on corporations uneven,” with some corporations paying single-digit taxes and others paying, “20% or even 25%.”

The first witness, Former Assistant Secretary of the Treasury for Tax Policy, 1992, Fred Goldberg Jr., who is also a Former IRS Commissioner, said in his opening remarks: “The tax system today grossly complicated, perceived as unfair from all points,” and reduces the U.S. global competitiveness. The ’86 Act was grounded on the principle of revenue neutrality…[but that is] not the case today, and we have betrayed our children and grandchildren,” by burdening them with debt.

Goldberg said he is concerned with “Growing inequality in wealth among our citizens…Tax reform should,” indirectly, help mitigate this. He asserts that “Taxes have awesome and potentially destructive power,” and added that the current U.S. “tax system is increasingly hostile to capital in its many forms, [including] monetary, human,” and other types of capital. He urged the committee to “think big, pursue far more fundamental reform that in ’86.”

We are “facing the ‘perfect storm’of structural problems, the AMT [Alternative Minimum Tax]…deficits, growing entitlement program, said Former Assistant Secretary of the Treasury for Tax Policy, 2000-2001, Jonathan Talisman, in his statement. “[Former President Bill] Clinton took steps to reduce” the deficit when he was in office, reducing it by “$250 billion,” Talisman said, “with spending and tax cuts over 10 years.” This resulted in a “unified surplus of $70 billion in 1998, and higher surplus in subsequent years.”

“Revenue neutral or corporate tax reform will create winners and losers. Simplification is desirable, [however] some of the complexity of the code is desirable,” Talisman added, given the “complex society,” in America. We are “not starting from scratch,” however, he cautioned, and must “consider practical social and economic effects of eliminating tax expenditures…for example, the research credit.” The tax debate must also, he said, “reflect expanding global environment for business.”

“Fundamental elements of the tax code,”said Former Assistant Secretary of the Treasury for Tax Policy, 2001-2002, Mark Weinberger, include, “rules that evolved largely without sufficient debate.” He added that, “New markets, and faster flow of capital transform the environment for businesses in the U.S. and around the world.”  We must “adapt.”

Weinberger explained that “Tax policy decisions…can no longer be made in a vacuum.” The UK for example, he said, has declared that it is “open for business;” the U.S. must be able to compete. Weinberger also cautioned in his remarks that “revenue neutral does not mean neutral to all taxpayers—every poker game is rev neutral.”

Tax reform will take “political courageand a willingness to challenge the current system [more than we did in] ’86…with a willingness to look beyond next election,” said Former Assistant Secretary of the Treasury for Tax Policy, 2002-2004, Pamela Olson. We need to build a “foundation for economic growth and job creation without saddling our children and grandchildren with debt.” The tax reform of “1986 addressed a number of serious flaws, but has its own flaws.” We need to “raise revenues with the least adverse impact on economy.

Revenue neutrality—I would throw overboard,” said Olson. She also advised that the “exclusion for employer-provided health care should be eliminated,” and said the “regressive and unfair corporate tax system encouraged corporate debt.” Olson urged the committee to “consider the budget holistically, and that spending and taxes are inextricably linked.”

The final witness, Former Assistant Secretary of the Treasury for Tax Policy, 2006-2009, Eric Solomon, noted in his statement that “tax laws need to adapt.” We need to periodically “reevaluate laws, including tax laws, to ensure,” that they are fair and applicable. Noting that the “code grows through accretion, and a patchwork of provisions, they should be reviewed.” Specifically, the “AMT is an example of a provision that needs to be patched or it will not meet original intent.”

Solomon also brought up the issue of broader temporary patches to the code: “temporary provisions create unwelcome uncertainty—looming expirations of ’03 patches created this in 2010, and could again in 2012.” In closing he explained that the “object of the reform should be to reduce the tax gap—[and create] a system that maximizes tax compliance and reduces the burden.  

After their testimony, Baucus noted, “I did not come here to be a maintenance Senator,” imploring the committee to find “ways to collect revenue that are potentially more stable, and adding that the committee’s “goal is to be effective, not waste our time.”

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Senator Orrin Hatch, R-Utah, and the ranking Republican on the committee, asked the witnesses: “Is the only path to fiscal discipline to maintain record levels of federal taxation?”

“We’re in a fiscal hole and the first rule is to stop digging—[we’re] going to have to raise revenue. Obviously [we] have to work on the spending side, and work on entitlements as well,” answered Olson.

Does that mean “raise marginal rates?” asked Hatch  

“Look at marginal rates and get the policy right; look at alternative sources,” said Olson

Goldberg, referring to President Roosevelt, proposed: “low marginal rates, proximity, consumption taxes,” alluding to a value added tax (VAT) on what taxpayers spend instead of what they earn. He recommended “Low marginal rates on income tax on the high end; let everyone else pay tax on what they buy and what they spend.”

Olsen recommended eliminating “double tax on corporate income, eliminating the bias toward debt,” as a way to raise corporate capital.

Sen. Ron Wyden, D-Ore. asked about “job creation, noting that “the ’86 Act, in the two years after the Act passed, created [millions] of non farm jobs.” He asked Goldberg why he favors a value added tax.

Goldberg called it “a consumption tax,” asking “What can you buy for the revenue?” Goldberg added, “That levy can take 100 million Americans off the tax rolls; [it’s] the only way to reduce corporate rates,” and reform the system.

Wyden noted “85 Senators had come out against” a VAT,” saying it would be politically impossible to pass.

“I don’t think we have come to terms what our tax sys is doing to our country and citizens, “said Goldberg.

Olsen wants lawmakers to discuss “how to get rid of AMT without busting the progressive system.”

Sen. Olympia Snowe, R-Me. asked if corporate tax reform can be undertaken “without addressing individual tax rates,” adding that she is concerned about its impact on small businesses and job creation. She noted the “paltry 38,000 jobs created last month.” She also asked how this can go forward “without Presidential leadership.”

Talisman agreed that Presidential leadership “is essential…someone speaking with one voice as to what the goals are.”

This needs to “be bipartisan,” Weinberger concurred, adding, “Reagan came to the floor several times to save the ’86 bill.”

Goldberg added that in 1986, then-President Ronald Reagan was able to “say it in one sentence: Cut the rates, broaden the base; get the government off your back.” Goldberg also advised, echoing others on the panel, that the U.S. eliminate the “double tax on enterprises,” and “the healthcare exclusion,” as well as the “subsidy on leveraged home-ownership.”

All the witnesses mentioned the AMT problem and the need to eliminate or fix it, but acknowledged that it is expensive to do that.

However, Olson asserted, “if AMT survives tax reform you’re going to have to go back and start all over again.”

The panel concurred, said Talisman: “AMT most serious problem for the individual” taxpayer.

It will be interesting to see if this new Congress can keep up a bipartisan discussion that seemed broadly open and productive, after the bitter fights in Congress in 2010. While there is a very long way to go, perhaps this first step will set a more cordial tone in the Capitol as lawmakers debate this crucial issue.