<DOC>
[108th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:95798.wais]
WHAT IS THE BUSH ADMINISTRATION'S ECONOMIC GROWTH PLAN COMPONENT FOR
PAPERWORK REDUCTION?
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ENERGY POLICY, NATURAL
RESOURCES AND REGULATORY AFFAIRS
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
__________
APRIL 20, 2004
__________
Serial No. 108-197
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpo.gov/congress/house
http://www.house.gov/reform
______
U.S. GOVERNMENT PRINTING OFFICE
95-798 WASHINGTON : 2004
____________________________________________________________________________
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COMMITTEE ON GOVERNMENT REFORM
TOM DAVIS, Virginia, Chairman
DAN BURTON, Indiana HENRY A. WAXMAN, California
CHRISTOPHER SHAYS, Connecticut TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York
JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida PAUL E. KANJORSKI, Pennsylvania
MARK E. SOUDER, Indiana CAROLYN B. MALONEY, New York
STEVEN C. LaTOURETTE, Ohio ELIJAH E. CUMMINGS, Maryland
DOUG OSE, California DENNIS J. KUCINICH, Ohio
RON LEWIS, Kentucky DANNY K. DAVIS, Illinois
JO ANN DAVIS, Virginia JOHN F. TIERNEY, Massachusetts
TODD RUSSELL PLATTS, Pennsylvania WM. LACY CLAY, Missouri
CHRIS CANNON, Utah DIANE E. WATSON, California
ADAM H. PUTNAM, Florida STEPHEN F. LYNCH, Massachusetts
EDWARD L. SCHROCK, Virginia CHRIS VAN HOLLEN, Maryland
JOHN J. DUNCAN, Jr., Tennessee LINDA T. SANCHEZ, California
NATHAN DEAL, Georgia C.A. ``DUTCH'' RUPPERSBERGER,
CANDICE S. MILLER, Michigan Maryland
TIM MURPHY, Pennsylvania ELEANOR HOLMES NORTON, District of
MICHAEL R. TURNER, Ohio Columbia
JOHN R. CARTER, Texas JIM COOPER, Tennessee
MARSHA BLACKBURN, Tennessee ------ ------
PATRICK J. TIBERI, Ohio ------
KATHERINE HARRIS, Florida BERNARD SANDERS, Vermont
(Independent)
Melissa Wojciak, Staff Director
David Marin, Deputy Staff Director/Communications Director
Rob Borden, Parliamentarian
Teresa Austin, Chief Clerk
Phil Barnett, Minority Chief of Staff/Chief Counsel
Subcommittee on Energy Policy, Natural Resources and Regulatory Affairs
DOUG OSE, California, Chairman
EDWARD L. SCHROCK, Virginia JOHN F. TIERNEY, Massachusetts
CHRISTOPHER SHAYS, Connecticut TOM LANTOS, California
JOHN M. McHUGH, New York PAUL E. KANJORSKI, Pennsylvania
CHRIS CANNON, Utah DENNIS J. KUCINICH, Ohio
NATHAN DEAL, Georgia CHRIS VAN HOLLEN, Maryland
CANDICE S. MILLER, Michigan JIM COOPER, Tennessee
PATRICK J. TIBERI, Ohio
Ex Officio
TOM DAVIS, Virginia HENRY A. WAXMAN, California
Barbara F. Kahlow, Staff Director
Carrie-Lee Early, Professional Staff Member
Lauren Jacobs, Clerk
Krista Boyd, Minority Counsel
C O N T E N T S
----------
Page
Hearing held on April 20, 2004................................... 1
Statement of:
Clifton, Daniel, Federal affairs manager, Americans for Tax
Reform; Paul Hense, president, Paul A. Hense, CPA, P.C.,
Grand Rapids, MI, on behalf of the National Small Business
Association; and Raymond J. Keating, chief economist, Small
Business Survival Committee................................ 107
Graham, John D., Administrator, Office of Information and
Regulatory Affairs, Office of Management and Budget; Mark
W. Everson, Commissioner, Internal Revenue Service and
former Deputy Director for Management, Office of Management
and Budget; and Patricia A. Dalton, Director, Strategic
Issues, General Accounting Office.......................... 21
Letters, statements, etc., submitted for the record by:
Clifton, Daniel, Federal affairs manager, Americans for Tax
Reform, prepared statement of.............................. 110
Dalton, Patricia A., Director, Strategic Issues, General
Accounting Office, prepared statement of................... 64
Everson, Mark W., Commissioner, Internal Revenue Service and
former Deputy Director for Management, Office of Management
and Budget, prepared statement of.......................... 43
Graham, John D., Administrator, Office of Information and
Regulatory Affairs, Office of Management and Budget,
prepared statement of...................................... 23
Hense, Paul, president, Paul A. Hense, CPA, P.C., Grand
Rapids, MI, on behalf of the National Small Business
Association, prepared statement of......................... 118
Keating, Raymond J., chief economist, Small Business Survival
Committee, prepared statement of........................... 128
Ose, Hon. Doug, a Representative in Congress from the State
of California, prepared statement of....................... 4
Waxman, Hon. Henry A., a Representative in Congress from the
State of California, prepared statement of................. 16
WHAT IS THE BUSH ADMINISTRATION'S ECONOMIC GROWTH PLAN COMPONENT FOR
PAPERWORK REDUCTION?
----------
TUESDAY, APRIL 20, 2004
House of Representatives,
Subcommittee on Energy Policy, Natural Resources
and Regulatory Affairs,
Committee on Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 2 p.m., in
room 2154, Rayburn House Office Building, Hon. Doug Ose
(chairman of the subcommittee) presiding.
Present: Representatives Ose, Schrock, Cannon, Tierney, and
Waxman (ex officio).
Staff present: Barbara F. Kahlow, staff director; Carrie-
Lee Early, professional staff member; Lauren Jacobs, clerk;
Phil Barnett, minority staff director; Karen Lightfoot,
minority communications director/senior policy advisor; Anna
Laitin, minority communications & policy assistant; Krista Boyd
and Alexandra Teitz, minority counsels; Earley Green, minority
chief clerk; and Jean Gosa, minority assistant clerk.
Mr. Ose. Good afternoon. Welcome to this afternoon's
hearing in the Subcommittee on Energy Policy, Natural Resources
and Regulatory Affairs.
This is the subcommittee's sixth annual April hearing to
assess progress in paperwork reduction. Last week, Americans
who prepared and filed their tax returns experienced firsthand
the kind of burdensome paperwork that the government imposes.
In February of this year, the fiscal year 2005 budget of the
U.S. Government outlined the President's six-point economic
growth plan. Point No. 4 is, ``streamlining regulations and
reporting requirements.'' The IRS imposes over 80 percent of
all paperwork burden levied on the public. As a consequence,
IRS compliance simplification should be the administration's
paramount paperwork reduction priority.
Today, our subcommittee will examine the Bush
administration's economic growth plan component for paperwork
reduction, especially for IRS paperwork reduction.
The Office of Management and Budget estimates the Federal
paperwork burden on the public at over 8 billion hours. In its
June 1993 final first-year task force report for the Small
Business Paperwork Relief Act, OMB estimated that the price tag
for all paperwork imposed on the public is $320 billion a year.
Let me just repeat that, $320 billion a year.
In 1980, Congress passed the Paperwork Reduction Act and
established an Office of Information and Regulatory Affairs
within OMB. By law, OIRA's principal responsibility is
paperwork reduction. In 1995, Congress passed amendments to the
Paperwork Reduction Act and set governmentwide paperwork
reduction goals of 10 percent or 5 percent per year during
fiscal years 1996 to 2001.
After annual increases in paperwork, instead of decreases,
Congress attached paperwork riders to the fiscal year 1999 and
fiscal year 2001 Treasury-Postal Appropriations Acts. In
addition, the House report for the fiscal year 2003 Treasury-
Postal Appropriations Act included an instruction for OMB to
focus on IRS paperwork.
In 1983, after issuance of President Reagan's 1981
Executive Order 12291, which initiated OMB review of agency
regulatory proposals, OMB signed a memorandum of agreement with
the Treasury Department relating to its regulatory reviews.
Nothing therein or subsequently has limited OMB's statutory
responsibility for review and approval of each IRS paperwork
requirement.
As evidenced by its actions, paperwork reduction is of
great concern to Congress, especially for tax and regulatory
paperwork. Nonetheless, the GAO will report today that
paperwork burden has increased, not decreased, in each of the
last 8 years.
GAO differentiates between substantive program changes in
paperwork, such as a reduction from quarterly to annual
reporting, and adjustments, such as a reestimate of the time it
takes to complete a form. For adjustments, the public
experiences no relief whatsoever.
Last month, at OMB's annual House appropriations
subcommittee hearing, Members of Congress emphasized to OMB
Director Josh Bolten that mere reduction in the rate of growth
of regulatory burden is insufficient. They emphasized that OMB
must instead do more to examine and reduce the base of existing
regulatory and paperwork burden. Under the Paperwork Reduction
Act, OMB is the watchdog for paperwork. However, the evidence
points to OMB's continued failure to focus on paperwork
reduction. OMB has not pushed the IRS or other Federal agencies
to cut existing paperwork.
IRS itself has had a dismal record in accomplishing
paperwork reduction. Last May, IRS promised to identify all
paperwork thresholds within the Commissioner's discretion to
adjust. I look forward to discussing the results of IRS's
analysis.
Today, we will learn if the President's six-point economic
growth plan can be realized by specific paperwork reduction
efforts identified by OMB and the IRS.
I want to welcome our witnesses today. Our first panel
includes the Office of Management and Budget's OIRA
Administrator Dr. John D. Graham; also the IRS Commissioner and
former OMB Deputy Director for Management Mr. Mark W. Everson;
and the Director for Strategic Issues at the General Accounting
Office Ms. Patricia Dalton. We welcome you all on the first
panel.
Our second panel is comprised of Mr. Daniel Clifton,
Federal Affairs Manager for Americans for Tax Reform; Mr. Paul
Hense, the President, Paul A. Hense CPA, on behalf of the
National Small Business Association; and, Mr. Raymond J.
Keating, the Chief Economist for the Small Business Survival
Committee.
Now, I see this hearing has generated substantial interest.
I want to welcome my friend from Massachusetts for the purpose
of an opening statement.
[The prepared statement of Hon. Doug Ose follows:]
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Mr. Tierney. Thank you, Mr. Chairman. Dr. Graham, once
again for you, Mr. Everson, and to Ms. Dalton, thank you for
your testimony today. I apologize in advance for the fact that
I'll be leaving in a brief while because of a conflict, and
normally I would defer to Mr. Waxman as the chairman of the
committee, but he's been kind enough to allow me to go first
here today so I can make the other appointment on time.
Today, the minority staff report prepared for Mr. Waxman
and for me by staff has been released, and it concerns the
government paperwork burdens. It reflects that, using General
Accounting Office reports and Office of Management and Budget
data, the burden of government paperwork on American citizens
has substantially increased under the Bush administration.
Now, this is despite the fact that we had to listen to the
President--and all of his rhetoric during the 2000 campaign and
time and time again since his election--telling us how bad
paperwork is a burden to the small business persons and on
families and what a reduction we could expect during his
administration.
However, when we look at the administration, we see that,
in fiscal year 2000 the annual paperwork burden imposed by the
Federal Government measured at 7.4 billion hours, and that is
how it stood as this administration took office. By the end of
fiscal year 2003, however, that burden had gone up to 8.1
billion hours, an increase of some 10 percent.
If we average that across the 109 million families in the
United States, households, it would be a 6 hour per household
increase annually.
The IRS accounts for more than any other agency, as the
chairman indicated, that being 81 percent of the burden. So,
you can see the increase in 2000, 7.4 billion hours; in 2001,
7.6 billion, an increase of 290 million hours; in 2002, an
increase of 570 million hours, up to 8.2 billion hours of
burden. A significant cause of that increase was the Economic
Growth and Tax Relief Reconciliation Act of 2001. The amount of
paperwork required by the Internal Revenue Service in fiscal
year 2002 to implement that new law and other IRS regulations
increased by 330 million hours.
So, 7.4 when this administration took office, up to 7.6 the
next year, 8.2 the following year, to 8.1 billion in 2003, but
even that figure of 8.1 billion, which is 0.1 down from the
previous year is only as a matter of adjustments and not the
result of direct Federal Government action. Instead, the
General Accounting Office tells us that, even at a slight
decrease, it was caused by other factors, such as agency
reestimates of burdens associated with the collection of
information.
The General Accounting Office concludes that, exclusive of
those adjustments, the burden would be again up in fiscal year
2003 by some 72 million burden hours. Once again, that is
probably attributable to changes in the tax laws in 2003. They
generated an estimated 113.9 million additional hours of
burden.
Now, I make those notes not because I think the IRS can't
do anything about improving the burden of paperwork but because
they also have to be helped by legislation that this Congress
passes and the President proposes and fights to get passed by
this body.
Also, I'll make note, Mr. Everson, that in my district
there are people working at the Andover IRS Service Center
being told that their jobs are in jeopardy because of a
decrease in paperwork, when, in fact, we see quite the opposite
is true. And, I hope we can take an evaluation of those changes
in light of the information we find out of increasing paperwork
burdens.
Also, just because I won't be here to ask questions, I want
to raise for you the issue of, in that Andover IRS Service
Center, they're projected to stop processing paper returns in
2008 and 2009, but we're told also that people working on the
e-filing component may also lose their jobs as being
transferred elsewhere, and I'd like to think that you might at
some time have your people respond to this--to my office and
indicate--and the committee, and indicate whether or not we can
do something about that. Those people involved with the e-
filing of returns, hopefully they will be able to continue
their work at the Andover center, because they are not
connected with the paperwork processing end of that. So, I'd
appreciate it if you could respond to that either in writing or
on the record and we'll take a look at that when I get back.
Mr. Everson. If I could just say something now since you're
about to go. I was in Andover on--if that is OK?
Mr. Ose. It's not.
Mr. Tierney. Sorry about that, but I will try to get that
information. I would love to have a conversation with you about
that, and I appreciate your willingness to respond on that.
My last comment before I close here is that we are
continually told about the burden of taxes in this country, but
I think it's notable when we look at the information that the
burden of taxes taken up by the corporate, the powers that be
in this country, is somewhat reduced from almost 20 percent in
past years now down to as low as--between 7 and 8 percent, and
I would like to think that we have the proper attention to
auditing and given the resources that the IRS needs in order to
pursue those that might be shifting burdens in tax transfer
policies or taking other evasive action to avoid their
responsibilities. We can still look at people in the Earned
Income Tax Credit, and I discussed this with you, Mr. Everson,
at one of the other committee hearings that we had on the joint
committee. We can do both, but the fact that we are putting so
many efforts against those who are taking the EITC advantage on
their taxes is a small return compared to your information that
you gave us of the anticipated return if we give you the
resources to go after the people that are really avoiding their
fair share of the burden in a large way.
So, I appreciate your continued work in that regard. I'd
like to hear more about what you're doing there and understand
always that we have not been reducing this paperwork and I
certainly hope that, as we move forward, our tax laws and other
actions that we take as a Congress and at the White House will
certainly make your job easier in that regard. I yield back.
Mr. Ose. For the gentleman from Massachusetts, the record
will be left open for you to compose those in writing for Mr.
Everson or any of the other witnesses.
Mr. Tierney. Thank you.
Mr. Ose. The gentleman from Virginia.
Mr. Schrock. Thank you, Mr. Chairman, and thank you for
calling this very timely hearing. Last week, many of us had the
unfortunate responsibility of filing our Federal taxes, but
thankfully the financial burden on American taxpayers is lower
because of the aggressive administration and Congress'
administration. Several tax relief measures have lowered taxes
for American families and small business owners, and we have
seen numerous positive impacts that tax relief has made on our
economy. Unfortunately, this relief has not been extended in
the form of meaningful relief from the paperwork burden that
Americans must face in their personal and professional lives in
dealing with their tax paperwork and other regulatory paperwork
requirements. Hours upon hours and millions of dollars are
spent dealing with this burden, taking away valuable time that
could have been spent on more worthwhile activities.
There is a light at the end of the tunnel, though. The
President has made regulatory reform and paperwork relief a
central part of his economic growth plan. Congress and this
committee have shown on numerous occasions that we're ready to
be partners in this effort, and we've passed a number of pieces
of legislation to combat the regulatory burden placed on
American individuals and small business.
This hearing is going to focus on the plans that the
administration has for implementing its relief program. I
welcome the input from all of our folks testifying today, and I
look forward to working with them to continue the efforts of
this committee in addressing the regulatory and paperwork
burden as a means of driving economic growth in America.
Thanks, Mr. Chairman.
Mr. Ose. The gentleman from California.
Mr. Waxman. Thank you very much, Mr. Chairman. This topic
for today's hearing is an important one. The time and effort
that Americans spend on filling out government paperwork, under
the Paperwork Reduction Act, paperwork burdens are supposed to
be getting smaller; but, in fact, just the opposite is
happening. In preparation for this hearing, as Mr. Tierney
indicated, we asked our staffs to examine what the President
has said on this topic and to compare it to what has actually
happened under the Bush administration.
We're releasing a report today. It shows that government
paperwork burdens have increased substantially under the Bush
administration. This report is based in large part on
information that will be presented at this hearing by the
General Accounting Office and the government witnesses.
This report calls into doubt the administration's
commitment to reducing government paperwork. Over and over
again, the President has promised that his administration will
reduce the amount of time that Americans spend filling out
government paperwork, but, what the report shows is that the
President's rhetoric is directly at odds with his actions.
Americans are spending dramatically more time on government
paperwork since President Bush took office.
In the minds of many Members, it's becoming increasingly
difficult to rely on what the President and his administration
say. Over and over, President Bush and his top officials say
one thing, but then they do the opposite. President Bush's
promises on paperwork are another example of saying one thing
and doing the opposite.
As a candidate, Governor Bush criticized Federal paperwork
and promised my administration will do things differently. In
January 2001, President-elect Bush said, ``On the Federal
level, we require about 60 percent of the paperwork, and that's
going to change.'' In May 2003, President Bush said, ``this
administration has launched a task force to find ways to reduce
paperwork for small business owners in America.'' In September
2003, President Bush said, ``We need to continue to work for
regulatory relief on small and large businesses so that instead
of filing needless paperwork you're working to make your work
force more productive.''
And, then, in November 2003, President Bush said, ``We need
to make sure our entrepreneurs are focused on job creation, not
filling out needless paperwork.'' And, then, in February of
this year, President Bush said, ``The Federal Government must
do everything we can to make the paperwork burden less on small
businesses, not more.''
Well, it can't be any more clear. The President has said
the same thing over and over and over again, but the reality is
that according to the administration's own reports, the amount
of time Americans spend on government paperwork has soared
under President Bush.
Last year, Americans spent 700 million more hours filling
out government forms than they did during the last year of the
Clinton administration. For the average household, paperwork
burdens have increased more than 6 hours per year under the
Bush administration.
This is a serious problem in its own right. Paperwork
requirements represent a real cost to businesses and citizens.
If reduction is important to the President's economic growth
plan, well, maybe that's why the economic growth plan is not
producing jobs, because we're spending more money on paperwork,
and the requirements represent a cost that is being passed on.
It's another one of those unfunded mandates. The States are
getting their unfunded mandates. Businesses are forced to do
things. Individuals are being forced to spend money on more and
more paperwork. That's a problem, but I would submit that
there's an even deeper problem here. The most valuable asset a
government can have is the trust of the people. This trust is
eroded when the commitments our President makes--not once but
over and over and over again--are not borne out by his actions.
So, I'm pleased that we're having this hearing to explore
this matter further. I would submit that this report we've
done, which tries to use as few pages as possible with the
writing on both sides, will give a very clear picture, not
based on what we say but on what this administration's own
people and what the GAO has to tell us, of what is really going
on in this area of increased paperwork demands.
Mr. Ose. Does the gentleman wish to submit that for the
record?
Mr. Waxman. Yes, I do.
Mr. Ose. Without objection.
[The prepared statement of Hon. Henry A. Waxman follows:]
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Mr. Ose. OK. There being no other Members--before we
proceed, I do want to introduce the new vice chairman of this
subcommittee. That would be the gentleman from Virginia, Mr.
Schrock. So congratulations, I think.
As is the custom in Government Reform, we swear in all of
our witnesses. It's not that we're singling you out or
anything. We do this to everybody; so, if you'd all please
rise.
[Witnesses sworn.]
Mr. Ose. Let the record show that the witnesses answered in
the affirmative.
All right. Our first witness today is the Administrator of
the Office of Information and Regulatory Affairs at the Office
of Management and Budget, Dr. John Graham. Dr. Graham, you're
always welcome here. It's nice to see you again. You're
recognized for 5 minutes.
STATEMENTS OF JOHN D. GRAHAM, ADMINISTRATOR, OFFICE OF
INFORMATION AND REGULATORY AFFAIRS, OFFICE OF MANAGEMENT AND
BUDGET; MARK W. EVERSON, COMMISSIONER, INTERNAL REVENUE SERVICE
AND FORMER DEPUTY DIRECTOR FOR MANAGEMENT, OFFICE OF MANAGEMENT
AND BUDGET; AND PATRICIA A. DALTON, DIRECTOR, STRATEGIC ISSUES,
GENERAL ACCOUNTING OFFICE
Mr. Graham. Thank you very much, Mr. Chairman, and I'm
delighted to be here this afternoon, particularly since we do
have some good news to report in the area of paperwork and
regulatory burden.
The first point is that the overall magnitude of paperwork
burden imposed by the Federal Government has declined in fiscal
year 2003. This is the first recorded decline in paperwork
burden since 1996. The percentage reduction, about 1.5 percent,
will sound small, but it translates into 100 million fewer
hours of hassle for citizens and small businesses. Indeed, if
you look closely at the report that we have issued today, the
specific actions of the executive agencies--of the
administration--account for 53 million hours in reduction of
paperwork burden.
Now, you have heard other members of the committee suggest
that, in fact, paperwork burden has been increasing. But one
thing that's important to keep in mind is that the actions of
Congress also have a role to play in how much paperwork burden
there is. In fact, this reduction would have been 110 million
hours larger in the last year if Congress had not passed new
laws that generate paperwork burden.
For example, Mr. Chairman, you and I have discussed the
country of origin labeling requirement, which is a concrete
example of Congress forcing the administration into additional
recordkeeping and reporting requirements. We are making
progress, but, of course, we need the help of Congress to
accelerate that progress.
Point two: the frequency of paperwork violations has
plummeted in the Bush administration. A paperwork violation is
when the Federal Government, usually a regulatory agency,
imposes a burden on citizens or businesses without
authorization from Congress or the Office of Management and
Budget. This flip chart on the left gives you the data, the
most recent data we have on the frequency of these unresolved
paperwork violations. You see that since the beginning of the
Bush administration there has been a 90 percent reduction in
the number of paperwork violations, from 200 to less than 20
unlawful impositions of paperwork burden on citizens and small
businesses.
Why has this 90 percent reduction occurred? It has occurred
because, early in the administration, we adopted a zero
tolerance policy on violations, and I might add, Mr. Chairman,
I had some considerable encouragement from you to move in this
direction. Indeed, we appreciated that tailwind in our efforts
to reduce the paperwork reduction.
Point No. 3: This administration has blocked the growth in
costly major regulations. You will notice that the fourth plank
of the President's six-point plan is streamlined regulations
and paperwork requirements, and let me give you a quantitative
feel of the progress this administration has made in the
regulatory area. We have insisted that new regulations be based
upon science and engineering and economics, and the consequence
of this stricter scrutiny is that we are slowing the growth of
major costly regulations.
In the reports we have shared with you from 1987 to the
year 2003, there were $103.6 billion in new costs of major
regulations imposed on the private sector and State and local
governments. This $103 billion are impositions on the private
sector or on State and local governments. It doesn't account
for any of the additional costs that are in the Federal budget
itself.
Now, if you compare that, over that 17-year period, it's an
average increase of $6.1 billion per year. For the first 3
years of the Bush administration, we have slashed that number
by 80 percent, to $1.6 billion per year. The Bush
administration has reduced the growth rate in costly
regulations by 80 percent.
You might ask, Dr. Graham, why are you only talking about
the growth of Federal regulation? Why don't you reduce the
overall amount of regulation? I think you know the answer to
that question. We are going to need the help from the Congress
to actually make a reduction in the overall size of the
regulatory burden. We can't have Congress forcing us to adopt
new regulations at the same time as we seek to reduce
regulatory burden.
We do have a major challenge ahead of us on the sea of
existing regulations. 1,000 of these major rules have been
adopted since 1980. We have a modest housekeeping effort
underway: 100 of them are being examined. With your help, we
will try to do a better job in this area, but the good news is
the trend lines are in the right direction, and the President's
economic plan is making a difference. Thank you very much.
[Note.--The information is available in subcommittee files
and at http://www.whitehouse.gov/omb/infoeg/
2004<INF>--</INF>icb<INF>--</INF>final.pdf.]
[The prepared statement of Mr. Graham follows:]
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Mr. Ose. Thank you, Dr. Graham.
Our next witness joins us, I think, for the first time, the
Commissioner of the Internal Revenue Service--joining us for
his initial foray here--Mr. Mark Everson. Sir, welcome to the
witness table. You're recognized for 5 minutes.
Mr. Everson. Thank you, Mr. Chairman, Mr. Vice Chairman,
for the opportunity to testify on the IRS's efforts to reduce
unnecessary taxpayer burden. Our goal is to impose the least
amount of burden necessary for taxpayers to meet their tax
responsibilities. Our working equation at the IRS is simple:
service plus enforcement equals compliance. Service means
helping taxpayers understand their tax obligations and
facilitating their participation in the system. Excessive
paperwork costs taxpayers time and money and causes uncertainty
and anxiety. It hinders the ability of the taxpayer to comply
with the tax laws and weakens our ability to enforce those
laws.
As to compliance with the Paperwork Reduction Act, I want
to assure this subcommittee that this is a high priority. I
would note, that of the 223 violations of the act which GAO
identified as occurring during fiscal year 2003, none, none
were from the IRS, despite the fact that just over 80 percent
of the total paperwork burden is generated by the Tax Code. I
think that's a laudable record.
As you know, the overall paperwork burden is significant.
According to our estimates, in tax year 2002, the total burden
of individual taxpayers was almost 26 hours per return filed,
for a total of 3.3 billion hours. Similarly, the out of pocket
taxpayer cost was estimated at $157 per return, or about $20
billion.
I would like to point out that these numbers reflect an
initial roll-up of data from a new, more accurate and
comprehensive method of measuring taxpayer burden, which we
have been working with Treasury and OMB to implement. The new
estimate of burden is somewhat higher than that of the old
model, especially for self-employed individuals.
Our Office of Taxpayer Burden Reduction has aggressively
pursued burden reduction initiatives. Since the Office was
launched in 2002, we have reduced burden by over 100 million
hours. Here are some accomplishments. We are expanding the use
of the standard mileage rate for taxpayers with multiple
vehicles used for business purposes, reducing recordkeeping
burden by an estimated 8 to 10 million hours.
Mr. Chairman, you've noted yourself that this reduction in
tax recordkeeping is a step in the right direction. We've
redesigned forms 1040 and 1040A, reducing burden by almost 12
million hours, and most importantly, we've also helped more
taxpayers go online to file returns, pay taxes and to
communicate with us electronically. E-filing requires less
paper, is more accurate and the computer program catches many
mistakes that would have been made on paper. It also makes it
easier for the IRS to solve taxpayer problems. Refunds come
back in half the time.
Mr. Ose. Mr. Everson, hold on. Dr. Graham, is your mic on?
Please proceed.
Mr. Everson. Perhaps the clearest sign that e-filing is
working is that the number of e-filers is rising rapidly. It's
up 15 percent so far this year compared to a year ago, and, for
the first time, corporations and tax-exempt organizations are
now able to file annual tax returns electronically.
By next year, even the largest corporations will be able to
avoid delivering literally box loads of paper documents to our
doorstep. That is true paperwork reduction.
We have more projects in store for next year. These include
annualization of quarterly employment tax returns, extension of
time to file returns to make all extensions uniform and
automatic, and redesigning the quarterly employment tax return
and Schedules K-1. In my view, we also need to look at a
broader effort to simplify form 1040. We have made this
progress despite the growing complexity of the Code. As you
know, the total number of pages in the Tax Code regulations and
IRS rulings has grown from approximately 20,000 pages to 60,000
over the last 3 decades. Frequent changes to the Code and
rising complexity are perhaps the greatest obstacles to
reducing paperwork burden. I am concerned that tax law
complexity may discourage taxpayers and adversely impact
voluntary self-assessment that is at the heart of our tax
system.
Over the long term, simplification of the Tax Code is the
best way to reduce burden.
Thank you for inviting me here today, and I'm happy to take
your questions.
[The prepared statement of Mr. Everson follows:]
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Mr. Ose. Thank you, Mr. Everson.
Our third witness today I believe also is a new appearance
here, that being Ms. Patricia Dalton, who is the Director of
Strategic Issues at the General Accounting Office. Ma'am,
welcome. You're recognized for 5 minutes.
Ms. Dalton. Thank you. Mr. Chairman, members of the
committee, it is truly a pleasure to be here to discuss the
implementation of the Paperwork Reduction Act of 1995. This act
established goals to reduce the governmentwide paperwork burden
approximately 35 percent to about $4.6 billion by September 30,
2001. Instead, burden has steadily climbed, reaching 8.2
million hours in fiscal year 2002. This year the story, while
on the surface may appear encouraging, continues to show an
increase in burden due to Federal actions. The data we obtained
from OIRA indicates that governmentwide paperwork estimates, as
of September 30, 2003, stood at 8.1 billion burden hours.
While it appears that there was a drop of approximately 116
million burden hours from the previous year, were it not for
adjustments to the burden estimate, the Federal Government
actually experienced an increase of about 72 million burden
hours in paperwork burden.
Further, only a few agencies' paperwork estimates changed
substantially during fiscal year 2003. Three departments,
Defense, Labor and Treasury, exhibited substantial decreases.
It is important to understand how the agencies accomplish
these results. OIRA classifies modifications, either increases
or decreases in agencies' burden hour estimates, as either
program changes or adjustments. Adjustments are not the result
of direct Federal Government actions but are rather caused by
factors such as changes in the population responding to an
existing requirement, or agency reestimates of the burden
associated with the collection of information.
In fact, the number of burden hours attributable to program
changes has increased in every fiscal year.
The IRS accounts for about 81 percent of the governmentwide
burden estimate. Because IRS constitutes such a significant
portion of the governmentwide estimate, it clearly has a
significant and even determinative effect on the governmentwide
estimate. Treasury's submission indicates that the decrease in
the department's estimate during fiscal year 2003, about 162
million burden hours out of an estimated 6.6 billion hours, was
largely achieved through adjustments. Decreases of only 70
million burden hours due to agency actions and 190 million
hours due to adjustments were reported, while there was an
increase of 105 million burden hours due to statutory
requirements.
Of the 70 million burden hours due to agency actions, we
identified only 11 agency actions that reduced burden at least
250,000 hours, with all of them over a 500,000-hour reduction.
Five information collections resulted in a reduction of over 64
million burden hours. There were three of these actions that
were specifically directed at the small business community.
I'd now like to turn to another area in governmentwide
paperwork burden. That is the PRA violations. The agencies
indicated in their ICB submissions that 223 violations occurred
during fiscal year 2003. The 223 reported for fiscal year
2003--is slightly less than the number of violations reported
in the previous fiscal year but still reflects significant
progress from the 850 violations reported in fiscal year 1998.
OIRA, under Dr. Graham's leadership, is to be commended for
the steps that they have taken to reduce violations. OIRA and
the agencies have clearly made progress in reducing the overall
number of Paperwork Reduction Act violations in recent years.
However, more clearly needs to be done. Agencies can and should
achieve OIRA's goal of zero violations. OIRA certainly has
taken steps during the past year to address this problem. We
believe these actions resulted in improvements that occurred
during the fiscal year 2003 and will have positive benefits for
years to come.
However, there are still actions that we previously
recommended to improve compliance with the Paperwork Reduction
Act that need to be taken. For example, OIRA could notify the
budget side of OMB that an agency is collecting information in
violation of the act and encourage appropriate resource
management officers to use their influence to bring the agency
into compliance.
OIRA could also encourage the use of best practices in
agencies with good records of compliance, such as the
Department of Labor, the Departments of Transportation and
Treasury.
We also recognize that OIRA cannot eliminate violations by
itself. Federal agencies committing these violations needs to
demonstrate a similar level of resolve. The President's
initiative to reduce regulatory reporting requirements can
serve as a vehicle to achieve zero violations. It also can
serve as a vehicle to get to even further reductions in
paperwork burden itself.
Mr. Chairman, that completes my statement. I'd be pleased
to answer any questions.
[The prepared statement of Ms. Dalton follows:]
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Mr. Ose. Thank you. I want to thank the witnesses for not
only their written but also the oral testimony.
Before we get to questions, I want to make sure that you
understand how I look at this universe here. It seems to me
that there are two groups of regulations we're dealing with.
One is those that existed before the year 2000 and those that
existed since I became chairman or those that have come to the
fore since I became chairman.
Now, within those two universes, as it relates to those
that have come into existence since I became chairman, Dr.
Graham, you've done a remarkable job in terms of looking at the
content of those proposed new regulations, using prompt letters
to keep the agencies focused on what congressional intent is,
and processing the appropriate rules and regulations for it,
and that's reflected in that chart by the decline in the rate
of growth accordingly.
Part and parcel of your consideration in those regulations
that have been considered since the year 2000 has been, you
know, the practical utility of the information being collected,
the periodicity of the reports, and the threshold requirements
for actually submitting the reports.
One of the things that we're concerned about in the context
of this entire universe, not only just the stuff since 2000 but
previous to 2000, is the periodicity of reports, the threshold
requirements, and the public utility of the information being
collected.
The reason I put this out here is that I want you to
frankly consider your answer in terms of how I'm looking at
this thing. I think Congressman Schrock shares much of my
perspective. He's probably got a more eloquent way of saying
it, but that's what I'm trying to get at is not only new versus
old but as it relates to periodicity, threshold reporting, and
the public utility of the information being collected.
Having said that, Dr. Graham, our invitation asked for you
to address four specific subjects. One is the detailed plan
within the President's six-point economic growth plan for
streamlining regulations and reporting requirements.
On pages 7 and 8 of your statement, Dr. Graham, you briefly
discussed this component, and you mention several changes made
by the administration in the regulatory process. For instance,
data quality and peer review. What I'm interested in is what
specific proposed paperwork reduction initiatives have you been
able to identify to meet the President's economic growth plan
component for streamlining the reporting requirements, and then
whether or not you've been able to do a calculation as to the
cumulative number of burden reduction hours associated with
them?
Mr. Graham. Mr. Chairman, the approach we've taken, as you
know, on these existing regulations and paperwork requirements
is a public nomination process where people, businesses or
citizens who are experiencing these burdens, have the
opportunity to nominate specific rules and paperwork
requirements that they feel need to be reformed. We did that in
2001 and in 2002, and we had roughly 300 nominations from
around 1,700 commenters.
It's interesting to notice that the vast majority of those
nominations addressed regulations rather than paperwork
burdens, and the reason we believe that's true at OMB is that
many of the paperwork burdens that we're all concerned about
are rooted in regulation.
While it is possible on occasion to reduce the paperwork
burden without touching the regulation, the more common
scenario is you have to change the regulation in order to
reduce the paperwork burden. Even more frustratingly, you may
have to change the entire law or the underlying statute, and
I'm sure we'll talk about that more in just a moment.
So, what we have found and heard from the regulated
community is keep your eye on the ball as the executive branch
on the regulatory burdens themselves, and a lot of the
paperwork burden reduction will follow. You see in that chart
on your left, for anybody who believes in numeric performance
in terms of results, this administration has dramatically
reduced the growth rate of Federal regulatory costs.
Now, as you say, the existing regulatory burden is a much,
much bigger challenge, and we're humbled by it, quite frankly.
Mr. Ose. Even within the 300 nominees from the 1,700
comments, I'm not trying--and I don't think Congressman Schrock
is trying--to second-guess whether or not this or that
regulation is properly constructed in terms of impact. What we
are trying to find out is whether or not, for instance, the
reporting periods are the proper length of time. I think Mr.
Everson talked about the 941 reports, scheduled in year 2006 to
go to an annual basis rather than a quarterly basis. That's the
kind of thing that I'm focused on, because in effect, what
you're doing as it relates to that report is reducing the
paperwork by a factor of 75 percent.
I'm trying to find out whether or not OMB has identified
any such opportunities.
Mr. Graham. Yes. The classic work of the OIRA desk officer
on a paperwork request from an agency is to examine the issues
you've just described, and they do it with regard to all of the
various agencies that produce and provide information
collection requests to OIRA. In this report, we are actually
giving you the concrete examples of where we have made progress
in reducing that paperwork burden. This year, for the first
time, we introduced a separate chapter on IRS that involves not
only the progress they've made but what their anticipated
objectives are in the future. Where they can, they've actually
quantified the accomplished or the anticipated burden
reduction. I don't have all those numbers right off the top of
my head, but they're right in there in that separate chapter on
IRS.
Mr. Ose. The IRS number is----
Mr. Graham. We have all the agencies, but as you have
persuaded us over the years, since IRS accounts for over 80
percent of the overall burden, it would seem appropriate that
we would have a considerable emphasis on the Tax Code's
associated burdens in this report, and we have done so.
Mr. Ose. And, again, we're not talking about the substance
of the tax law or how it's applied. We're talking about the
thresholds and the periodicity reporting requirements within
the--I mean, we're not talking about----
Mr. Graham. I'm not going to agree to that premise quite so
easily. It's a lot more complicated. What we have found at OMB
is that, when you get into a desk officer's job of reviewing
IRS information collection requests, and we have been more
aggressive in the last year working with my deputy director and
our desk officer working on these problems--we find that the
distinction between paperwork review and tax policy is not easy
to make. Quite frankly, inevitably you get into questions about
how much documentation should a taxpayer have to have in order
to claim this particular deduction or credit or whatever. And,
oftentimes, the recordkeeping requirements, for example, are
motivated or are instigated by these types of provisions. Once
you start to ask questions about that, which we do with our
colleagues from IRS and Treasury, then they come back to us and
inevitably we find ourselves in a discussion of tax policy.
And, when that goes up in the chain at OMB you know the answer
at that point.
Mr. Ose. And, that's proper. I mean, I----
Mr. Graham. So, I think paperwork review and tax policy are
losely intertwined.
Mr. Ose. Let's go back to this desk officer. In terms of
the paperwork reductions that the desk officer has either
suggested or forced upon the agencies, can you give us some
sense of any that have been accomplished?
Mr. Graham. Well, I think in the testimony from IRS, Mr.
Everson can give you the details on it. IRS has made
significant progress, and we would argue that most of that
activity was initiated by IRS. We would not be here today
suggesting that OMB initiated that activity. However, we have
collaborated with IRS in the development of its improved model
to actually measure burden, which allows us to get at the
question of how much progress are we actually making.
Mr. Ose. If the gentleman from Virginia would just bear
with me here, have there been--separate and apart from the IRS,
has the desk officer charged with this responsibility at OMB
been able to identify any other paperwork reductions?
Mr. Graham. You mean separate from IRS?
Mr. Ose. Separate from your accomplishments so far,
collaboratively or otherwise, with the IRS?
Mr. Graham. Right.
Mr. Ose. Has the desk office been able to identify
paperwork reductions that have been able to be implemented?
Mr. Graham. Certainly. And I can give you, if you'd like to
put that into writing, some examples.
Mr. Ose. We'll do that. We would appreciate having some
examples.
The gentleman from Virginia.
Mr. Schrock. Thank you, Mr. Chairman. Thank you all for
being here.
Your comment about Tax Code reform is squarely right on,
and I think there are two Members of Congress, Senator Saxby
Chambliss and Congressman John Linder from Georgia, who are
beating that drum. Over the 2-week break we had, if I heard
them on the radio once, I heard them five or six times. It's a
daunting task, and however we need to get our hands around it,
it's a mystery to me: but, at some point it has to be done.
Commissioner, I want to ask you a few questions about your
new burden model for small businesses, and you said it will
take into account all out-of-pocket expenses. In your testimony
that's what it said. Will this model include in your burden
estimates of the costs of paying someone else to fill out the
tax returns for you or the cost of purchasing software?
Mr. Everson. That number I referred to earlier for the
individuals, 157, and we're developing other pieces of the
model as we go. That does include the paid professional or the
software does. My understanding is that the old model was last
updated back in the 1980's. There was an assumption as to what
a line on a return or on a form cost in terms of burden. That
clearly was an incomplete picture.
As we look at this, I'm struck by how complex a subject
this is and how much work it needs. In terms of an ongoing
review, we're doing that with OIRA, working with SBA, and the
Department of the Treasury. As I understand it, even now the
new model won't capture things from electronic filing, such as
post filing burden. This is a huge change, where if things are
simplified and the returns come in electronically and there are
fewer errors in them, then there are fewer notices generated
back to the taxpayer. That's a reduction of burden, too, that
we don't yet contemplate. So there are lots of ramifications on
all of that that over time need to be factored into our work.
Mr. Schrock. Will this burden model also be able to
calculate how many more people will pay someone else to prepare
their taxes as a result of the added complexity which seems to
mount every year?
Mr. Everson. We track that every year as it is. The
percentage of people that are actually paying someone else to
prepare their return is now over 50 percent. It's 56 percent.
As I indicated in the statement, 15 percent more people are
filing electronically. That actually is good news, because what
happens is it's more reliable, it's faster in terms of getting
the refund done. The returns don't get lost in the mail. That's
all good news, but I think it does reflect the burden, the fact
that people will buy this package, if you will, or go down to
their paid preparers because they're a little bit frustrated by
the complexity of the Code themselves.
Now, I use one of these packages myself for my own return,
and I think it was quite good, because it gives you a series of
yes or no or fill in the blank alternatives, because, if you've
got to go through these forms, my goodness, they are quite
complex. I agree that's not a viable way to go.
Mr. Schrock. You do your own taxes?
Mr. Everson. I've done my own taxes a couple of years. It
was a little more complicated. I used to live overseas and
that's really complicated. I had someone else do it in those
days.
Mr. Schrock. I don't dare. I don't take the chance. Well,
seriously, I just want to make sure they are done right.
As an aside here, my tax guy does it electronically now,
and he's in San Diego and I'm in Virginia Beach, but I still
sign paperwork. What's going to happen when it's all
electronic? How am I going to be able to do that, because I
intend to keep him for as long as I----
Mr. Everson. We're working with the practitioners to speed
and increase the number of electronic options. Right now, we've
just introduced a new set of options whereby a practitioner can
file--for instance, for an employer identification number
online, we've had a number of those applications. This is a
dramatic change. I just happened to have some testimony, if
you'll indulge me for just a second, from the Ways and Means
Committee from the National Association of Enrolled Agents, and
this was just a couple weeks ago. He said that, in January of
this year, the IRS reached a major milestone in the development
of new electronic capabilities that will revolutionize the way
we as tax practitioners will conduct future business with the
IRS. He talks about these various services. Then, he says the
new set of e-services products which will allow tax
practitioners to represent their clients electronically and in
a highly secure environment has left me utterly speechless. I
can assure you that I do not make this statement lightly.
There's a real excitement out there because of these changes.
Mr. Schrock. I know it had nothing to do with the hearing,
but I had to understand that. Mr. Chairman, I know my time has
run out.
Well, can you share with us the calculations and
assumptions that go into the production of your model, and will
it be transparent, or do you plan to keep that away from public
view? And, will taxpayers and small business groups have the
opportunity to comment on your model and make suggestions for
improvements?
Mr. Everson. Yes, sir. We'll do all those things.
Mr. Schrock. Every one of those? OK.
Will your new model be able to calculate the cumulative
burden on a small business of the new paperwork?
Mr. Everson. I missed a word in there, sir. Will it be able
to calculate what?
Mr. Schrock. I probably skipped one. Will your new model be
able to calculate the cumulative burden on a small business of
a new paperwork requirement in comparison to the current
imposed burden so that regulatory decisions can be made about a
new requirement's impact in the context of the currently
imposed burden?
Mr. Everson. I think that's exactly what the intent is,
that, as we roll this out to the other piece of the overall
burden beyond the individuals, we will be able to do that, yes,
sir.
Mr. Ose. I want to expand on that for just a minute. So,
you're saying that the new model allows you to kind of go an
either-or analysis, a comparative basis? You've got people
behind you going like that.
Mr. Everson. Listen to them. Don't listen to me.
Mr. Ose. So you'll be able to game the system from an
analytical standpoint and say, OK, if we're going this way, the
burden is X, and, if we go this way, it's Y?
Mr. Everson. I think that's right, that we'll be able to
check and see what the various ramifications will be, and it
will obviously help us select the projects that we want to work
on.
Mr. Ose. Could you be able to take it piece by piece so you
can kind of take your base model and then put a piece in, take
it out, and put it----
Mr. Everson. That's exactly right. If you only have a model
that deals with lines, that gives you a very incomplete
picture. This is a better model, but I'm not suggesting it is
foolproof. Don't get me wrong here, but it's a lot better than
what we had.
Mr. Ose. I just wanted to expand on that. I thank the
gentleman.
Mr. Schrock. Dr. Graham, the 2002 Small Business Paperwork
Relief Act required each agency to submit its initial agency
enforcement report to Congress by the last day of last year,
and, during our joint hearing on January 28th of this year, we
displayed a chart showing 42 agencies--I don't know if we have
that up or not--that had not yet submitted statutorily required
reports. On behalf of the Office of Management and Budget, you
agreed to followup with the noncompliant agencies. When will
those missing reports be submitted, especially for Justice and
Treasury Departments, both of which levy fines on small
businesses? Can you provide an expected submission date for
each agency for today's hearing record?
Mr. Graham. Yes, sir. We will do so.
Mr. Schrock. Thank you, Mr. Chairman.
Mr. Ose. No doubt you can read this chart on this screen
again?
Mr. Everson. It looks like one of my forms, I would say.
Mr. Ose. Dr. Graham, I want to go back to something and
make sure I understand it. When we were conversing earlier, we
were talking about paperwork reductions as opposed to
regulatory reforms, and I want to make sure I've got it
correct. You asked that we submit that question in writing
regarding specific paperwork reductions that we've been able to
accomplish. As it relates to regulatory reforms, your chart
over here indicates significant success dealing with the manner
in which regulatory issues are being imposed upon the American
public relative to previous administrations. What I'd like to
do is make sure I understand. You talked about 300 nominations
from 1,700 submittals. Now, those 300 nominations were
paperwork only, or they were regulatory--paperwork reduction or
regulatory reform submittals?
Mr. Graham. The public was provided the opportunity to
nominate regulations, guidance documents or paperwork
requirements that they felt were overly burdensome or for some
reason or another needed reform.
We received 316 nominations from 1,700 commenters, and I
note that most of the nominations dealt with regulation and
guidance documents. Relatively few of them dealt with paperwork
burdens.
Mr. Ose. So, then, my earlier question----
Mr. Graham. Which is not to say that paperwork isn't
important.
Mr. Ose. I understand.
Mr. Graham. It's to say, as I was trying to argue, that the
commenters realize that the paperwork burden is inevitably or
often imbedded in the regulation or the guidance document.
Mr. Ose. All right. Our earlier conversation was about
specific proposed paperwork reduction initiatives, to which we
are going to send you a question in writing. My question right
now is specific proposed regulatory reform initiatives that you
have been able to identify within those 316.
Mr. Graham. Right.
Mr. Ose. Could you provide us with a detailed list of that
for the record?
Mr. Graham. Yes, sir. Will do that.
Mr. Ose. All right.
Ms. Dalton, in your testimony there is a comment on page 10
that the paperwork reduction goals and means of achieving those
goals were not articulated within the President's 2005 budget.
Now, have you--or, excuse me, has GAO been able to find
evidence of major new agency initiatives within the agency's
ICB submissions? In other words, are the agencies proposing a
whole bunch of stuff that you are seeing?
Ms. Dalton. Well, we have seen very few initiatives. When
we looked at the 2003 ICB submissions, other than IRS, what we
were able to identify were just 17 agency actions which reduced
paperwork burdens 250,000 hours or more. For the entire
government that's not a lot. We also haven't seen any plans or
strategies that really would implement the President's
initiative related to paperwork burden, which I think is along
the lines of the questioning here.
Mr. Ose. Now, it may be that those initiatives are under
development.
Dr. Graham, are we trying to count something that's not yet
countable? Are we 9 months away from being able to count such
numbers?
Mr. Graham. No. Let me step back and say that you can think
about the strategy of paperwork reduction as the plumber's
approach, which is you get at each information collection
request and you target it and you try to reduce frequency of
reporting, etc. Or you can do what I'll call a systems
approach, where you try to set in motion certain standards or
guidelines that agencies have to follow and then agencies
generate the paperwork reduction. Or, you use a public
participation approach, where you ask the regulating community
predominantly to tell you which of the specific paperwork
requirements or regulations are in need of reform.
Our experience in this administration is that the most
successful strategies for actually accomplishing reduction in
burden due to regulation and paperwork are through the systems
approach and through the public participation approach. We are
not convinced that the plumber's approach at OMB in the final
analysis, will get you very far. I think this is for a
straightforward reason: we don't have the resources at OMB to
be at that level of review on every single paperwork
requirement.
Mr. Ose. Any of those paths is not mutually exclusive?
Mr. Graham. Right. It's a mix, the question of what mix of
those strategies to use.
Mr. Ose. Well, you can understand my confusion then. We
talked earlier about a desk officer looking at these things
coming through the pipeline. I presume that's kind of like the
plumber approach?
Mr. Graham. That's right.
Mr. Ose. OK.
Mr. Graham. And, if that's your primary approach, you are
in trouble.
Mr. Ose. Well, my point in asking whether they are mutually
exclusive is to ascertain whether we vested all of our--we are
laying down all our cards on one or the other path. Now it
looks by this chart as if we have invested quite a bit of our--
or laid our cards down rather significantly on the
comprehensive approach that's paired between the two of the
three that don't fall under the plumber's thing.
Mr. Graham. Systems approach, public participation.
Mr. Ose. Right. But, it would seem to me when you get to
the technical or more mundane issues of what within a specific
agency's form, whether it be Agriculture or Treasury or HHS or
whomever, it seems to me when you have those forms that those
agencies use having to cross a desk officer's desk and they are
proposing a threshold of X, is someone asking the question
whether or not that threshold is appropriate, or are they
rubber-stamping them?
Mr. Graham. That's a good question.
The kinds of things that we train our desk officers to look
at are, No. 1, is this a new paperwork request or has this one
already been reviewed previously? Certainly, new paperwork
requests would get a more intensive review than would renewals
of previously approved paperwork requests.
Mr. Ose. Logically. I understand that.
Mr. Graham. The second thing that we would train a desk
officer to do is ask, on a renewal request, have there been any
significant changes in the nature of the approval request that
might cause us to think we had better take a look at this? And,
that's obviously a significant factor.
And, I think in the third case we are always looking in
some sense at the overall magnitude of the collection. It is a
new collection? It is an existing collection? What is the
magnitude of it? And, as you well know, the big ticket items,
the big dogs in this game are from the IRS.
Mr. Ose. Let's dwell on one that we have talked about in
the past, whether or not we can incorporate into this or that
agency's a line item that says no change from last year with a
check box by it for people who otherwise have to fill out this
or that form? Have the desk officers at OMB found any
opportunity in any agency to suggest to an agency that they
should add a line that says, ``no change from last year,'' with
a box they can check and sign the bottom and send back? Has any
such activity occurred since we last had the opportunity to
discuss this?
Mr. Graham. Well, to be candid with you, the last thing I
recall on this is you training me about the Bureau of
Reclamation in the need of one of its forms to have such a box.
I'm happy to work with my staff to find out whether we have
made any additional progress. But, quite candidly, that's my
memory of the quite sensible suggestion that maybe there should
be a ``no change'' box.
Mr. Ose. Have you spoken with your staff or whomever that
would then implement that kind of a question within the library
of questions a desk officer would ask?
Mr. Graham. Right. We are in the process now, in the
systems approach to paperwork reduction, of developing
basically a guidance document to agency paperwork reducers.
Mr. Ose. Training----
Mr. Graham. Training materials. And, one of the logical
things we should add, in fact, I'm going to go back and read
our draft to see if it's in there--is the question you just
asked: Does this form actually provide an opportunity of no
change from last year? That sounds like a sensible thing that
should be in that guidance.
Mr. Ose. All right. Now, my time has expired. I've got to
go back to Mr. Schrock. The gentleman from Virginia.
Mr. Schrock. Thank you, Mr. Chairman.
I'm really concerned about the IRS burdens on small
businesses. In particular, Commissioner, Drs. Mark Crain and
Thomas Hopkins said in their testimony here, or in a report
they had in August 2001, that was commissioned by the SBA,
found that small businesses spend twice as much on compliance
as large companies. I think it's $1,202 as opposed to $562.
Small businesses face more than 200 IRS forms, including more
than 8,000 lines, boxes, and data requirements.
In the subcommittee's paperwork hearings in April 1999,
2000, 2001, and 2002, former IRS Commissioner Rossotti
acknowledged there is much duplication of IRS's reporting
requirements for small businesses as opposed to big business.
What specific paperwork reduction requirements did IRS pursue
in 2004 to date and will IRS pursue in the rest of 2004 to
actually reduce the paperwork burden on small businesses as
opposed to re-estimating taxpayer burden through a new model
and notice redesigns and electronic filing and others? And,
what is IRS's estimate for the burden reduction hours
associated with those initiatives?
Mr. Everson. That is an important subject for us. Small
business is something where there has historically been--I
would characterize it as probably difficult relationships
between small businesses and the Service. I believe things have
gotten an awful lot better in the last several years largely
through the reorganization of the IRS around customer lines of
business, so that one of our four principal operating units
deals with small businesses and self-employed people. So, we
have now a more focused relationship with small businesses, a
lot more education. I've met with people from the NFIB and
other organizations that are helping us to address these
issues, and we are much more sensitive to those challenges.
We have done a few things that I think you are familiar
with. We mentioned the cars and meal allowances for day care
providers. We have other things under way in terms of
annualization of certain employment filings and redesigns of
form 941 and others. All of these are bits and pieces that will
contribute in the tens of millions of hours of burden
reduction.
I will give you a comprehensive list of those for the
record, but I don't want you to be under any impression that
represents anything other than a starting point as we continue
to go forward.
Mr. Schrock. So we will continue that process?
Mr. Everson. Absolutely. As I indicated in my opening
remarks, our formula is: service plus enforcement equals
compliance. Service has its element of communication,
understanding and simplification where possible. If you can't
understand the Code, and certainly simplification of reporting
requirements helps understand it, then it's very hard to
comply. So it's in our interest to make sure we continue to
work on this.
Mr. Schrock. You work with NFIB closely on this?
Mr. Everson. Yes. We have an outreach organization within
the small business division, and I meet from time to time with
the leadership of these groups because they keep us pretty
closely on point if we have a proposal or something that's
going in the wrong direction, they tend to let us know, and
they let us know from time to time from going to folks such as
yourself.
Mr. Schrock. I think there are a lot of people sitting
behind you who are listening very carefully.
Mr. Graham. Mr. Chairman, could I just add? There was a lot
of modesty in that answer that I would like to just cut through
for a moment. This is the first year since fiscal year 1996
that overall paperwork burden in this country has declined. Why
did it do so? If you look at this report carefully, it is the
initiatives of the Internal Revenue Service that are driving
that number. It hasn't happened very much. Only eight times in
the last 24 years has overall paperwork burden gone down, and
it has gone down because the Treasury Department and IRS have
made some significant progress. Let's just cut through it and
talk about what the specific facts are in this situation.
Mr. Everson. I would never quibble with OMB.
Mr. Graham. Boy, he was different when he was at OMB, I
will tell you that.
Mr. Ose. Will the gentleman yield?
Mr. Schrock. Yes, I yield.
Mr. Ose. Dr. Graham, are the totals due to adjustments in
the estimates or are they true reductions?
Mr. Graham. Good question. GAO has already testified that
some substantial percentage of the overall reduction we
experienced in the last year is simply due to adjustments
without program effects. But, when you isolate the reductions
due to program changes, which are still substantial overall and
in the order of 50 million hours, what's driving those numbers
predominantly is the Treasury Department and, in particular,
the efforts of a rather substantial office within the IRS
that's worried about the issues that this hearing is about.
Mr. Ose. I just want to make it clear. I'm trying to get to
a position where I can brag about what you are doing.
Mr. Graham. That's why I interjected, because this is a
very different story this year than it's been in a very long
time.
Mr. Ose. You are not talking about adjustments to
estimates?
Mr. Graham. There are separate estimates in here for
adjustments and for specific executive branch actions,
administrative actions; and they quantify the reductions due to
those actions. Now, unfortunately--and I have to get one needle
in--the reduction of 53 million was partly compensated,
unfortunately, by a 100 million increase due to new laws passed
by the Congress in that same year. But we should not take away
from the Treasury Department and what they have done with
regard to the 53 million hours.
Mr. Ose. I thank the gentleman.
Mr. Schrock. Ms. Dalton, I want to bring you on board with
this, too, as we talk about the reduction of small business.
How many significant program decreases of 250,000 hours or more
did GAO find that IRS has made since the last hearing for small
businesses? Is that possible to determine?
Ms. Dalton. There were three reductions that we could
identify specifically related to the IRS that had a direct
impact on small business, and I think it amounted to over 40
million burden hours in reduction. There may have been others,
but they weren't specifically directed at small business but
the more general business community.
Mr. Schrock. That's a lot. That's a lot of hours.
Thank you, Mr. Chairman.
Mr. Ose. Mr. Everson, I was--my curiosity was piqued. You
were speaking earlier about employee reporting and employer
reporting and the burden that comes with the 941 and the like.
One of the things in the real estate business that I've learned
to deal with is whether someone is an employee or an
independent contractor. That's a serious question. There is
lots of case law on it, lots of exposure for developer, whether
they are an employee or a contractor kind of thing.
The National Taxpayer Advocate in the fiscal year 2003
annual report to Congress identified nonfiling and
underreporting by self-employed taxpayers as the second most
serious problem encountered by the IRS; and, as a result, the
Advocate proposed a new requirement for what I think the
Advocate described as employers to withhold payments in certain
categories for nonwage workers or independent contractors. I
presume they are referring to Social Security or withheld
income tax and the like.
What I'm trying to find out was whether the Service, your
office, has taken a position on the Advocate's suggestion in
this particular area?
Mr. Everson. If you will indulge me for a minute to put
this in context. The Advocate doesn't develop those numbers. We
have a research organization that works to look at the whole
tax gap; and the whole tax gap that the country confronts is
over, by our estimate, a quarter of a trillion dollars a year.
Now, again, this is a lot like a burden reduction model. It's
based on an old model. It goes back to the 1980's. We are now,
through new auditing, updating that model; and probably that
quarter trillion dollars a year will actually be larger.
The President is aggressively attacking that tax gap, and
we have a 10.7 percent budget increase requested for the IRS to
go after improvement of compliance. Two-thirds of those moneys
are directed at corporations and high-income individuals and to
increasing criminal investigations. So that, to develop this
sense of fairness, where we are devoting the bulk of our effort
is at the higher end, because it is terribly important that
individuals--and 80 percent of Americans feel this way--that
the IRS enforce the law particularly in those sectors.
When you turn to the smaller businesses, it is true, as the
Advocate suggests, that there is a big compliance problem
there. I do not favor the recommendation that's been made. What
I believe we need to do is to rebuild the enforcement resources
of the IRS, which were drawn down after 1996 by over 25
percent. That's to say the number of revenue agents, revenue
officers, and criminal investigators went down rather
dramatically while we were continuing to improve our service
side. If we do that and we do more on the compliance side, we
need to do that first before we would consider anything of the
nature that she's suggested.
Mr. Ose. Well, I want to note for the record that the
numbers that are the Advocate's recommendation are an estimate
by the IRS of the tax gap at $310.6 billion for the year 2001.
Mr. Everson. That's correct.
Mr. Ose. So we're talking about what's estimated to be a
lot of money.
Mr. Everson. It's over a quarter of a trillion dollars.
That $300 is before about $55 billion that we get back in
people who pay over time or through our enforcement efforts.
The floor on this--and it's something that each Member of
Congress needs to be very aware of as they review the
President's budget request, and I ask for your support on that
request--the floor of this problem is over a quarter trillion
dollars a year. And, again, like the conversation we are having
about the burden reduction model, it's based on old models that
don't take into account changes in behavior for these abusive
shelters, the internationalization, some of the things that
have been happening in corporations, all of these abuses that
we are very aggressively attacking. It's a serious problem, and
it needs your help, if I could say so.
Mr. Ose. Well, the reason it caught my attention was that
the Advocate's approach appears to be to require the 99.9
percent of the people who are in compliance with reporting,
whether they use a 1099 or something else, to now have to
undergo withholding and the like in their relationships with
the general contractor, whoever it is they are working with;
and that, to me, is a paperwork increase. So that's what caught
my attention in terms of the Advocate's proposal.
I am pleased to hear you say that the better avenue for
dealing with this is to reallocate resources to focus on those
who are not complying, rather than to burden those who are.
Mr. Everson. That's absolutely, sir, what I am trying to
do. We are improving our models for risk assessment so that we
can devote resources to the proper challenges. We are redoing
our enforcement processes to become more efficient. This gets
into what Congressman Tierney was talking about before. As we
reap the gains of improvement in processes on the service side,
we are redeploying those to enforcement. We are very conscious
of the need to augment our efforts through more money, and we
are doing that where we need to.
Mr. Ose. I've learned to ask my question two or three
different ways. So, are you saying that at present the Service
does not have the intention of leveling on independent
contractors a requirement for withholding?
Mr. Everson. That's correct.
Mr. Ose. My time has expired.
The gentleman from Virginia.
Mr. Schrock. Thank you, Mr. Chairman.
It just dawned on me. Commissioner, you said you have to
use software to do your taxes. You probably understand how to
do it better than anybody. Shouldn't we get to the point where
the IRS is so user friendly and the forms are such that nobody
has to use any software, so John Q. Public out there can do his
taxes without having to use software or anything else? Is that
a fair question?
Mr. Everson. It's a very interesting question. Congress
some years ago established----
Mr. Schrock. Not fair, but interesting.
Mr. Everson. Like anything approaching taxes, it's a
complicated question.
Mr. Schrock. It is.
Mr. Everson. Congress some years ago set an 80 percent
requirement for electronic filing by the year 2007. We are
progressing toward that goal. I do not believe we will achieve
it by 2007, nor do I think that we want to force that to
happen. There are segments of the tax-paying public that are
neither wired nor necessarily participating in large numbers,
such as immigrants coming into our country. If we force people
to go through a certain system, we will not actually be as user
friendly in terms of bringing them into participation in our
system. So, as we get closer to 80 percent, we need to very
carefully assess when we mandate things or don't.
I do believe, on the other hand, that we will want to
mandate soon electronic filing for corporations. We would have
to establish a threshold for businesses before they would be
required to do that. But, certainly the big outfits, they are
all doing everything electronically anyway, and doing things by
paper doesn't make any sense.
Mr. Schrock. But, the software is making it simple. Why
can't the forms for those who can't use or don't want to use
software or don't have the capability of using the software,
why can't the forms be made as simple as the software?
Mr. Everson. We are improving the access to the electronic
filing. We have something you may have heard of, the Free File
Alliance. That's a group of over a dozen corporations, many of
whom have these preparation businesses where they have
developed this software. Now over 60 percent of Americans are
eligible to actually file for free. They can go on IRS.gov and
then get directed to a page which will help them pick out one
of these corporations.
I did this with my son. We went to the Cherrydale library,
and he just got his check back for $112 from the IRS and he
filed for free. He was a bag boy at Safeway last year.
So that's working. And, this year it's over 3 million
people so far have taken advantage of that option. It's up over
20 percent from a year ago.
Mr. Schrock. It's just breaking old habits and learning how
to do that, I guess.
Mr. Everson. That's a piece of it. It's interesting to me--
if you will indulge me 1 more minute. I was a little skeptical
about just how this would continue to grow, the e-filing; the
fact that it's up this year about 15 percent is quite striking.
I think it may have reached a critical mass where more and more
people are saying to neighbors, hey, look, this is the way to
go. It really is a lot easier, and I got the refund in half the
time. So, I have been pleased by the growth of it.
Mr. Schrock. My accountant has changed his whole paperwork
procedures because of the electronic filing; and it was so easy
for Judy and me this year, I couldn't believe it. It took me
about a third of the time, and----
Mr. Everson. That's right.
Mr. Schrock [continuing]. And I know my chances of going to
jail are a lot less by filling out those forms.
Mr. Everson. Well, you make mistakes and the software says
you didn't fill in box 7 or something. And, it's better.
Mr. Schrock. I think that's all, Mr. Chairman.
Mr. Ose. I've got a couple others. Before we leave this
issue of tax preparation, from an electronics standpoint, are
you able to take the K-1s electronically as well as the returns
themselves?
Mr. Everson. I believe we have just started with the K-1s.
I'm not entirely certain on that. But, what we just did was
allow 95 percent of corporations to file electronically dozens
of forms that just a couple weeks ago were all put on line. The
5 percent of the biggest corporations can't yet do that. By the
end of the year, they will be able to do that.
I'm not sure about the K-1s. But the K-1s, what they are
doing there is--believe it or not, this gets back into our
compliance problems. Until a couple years ago, the IRS wasn't
even entering K-1 data into our data bases so we didn't have
any ability to match all of these complicated figures that were
coming from these partnerships and flow-through entities and to
see whether the taxpayer was reporting all the income or not.
Mr. Ose. Your testimony is that you are now able to cross-
reference those?
Mr. Everson. Now, we are starting to do that. We are
entering the data, but I'm not sure whether it's all coming
electronically. That's the difference. We are entering the
data, though; and, I believe it's still manually.
Unidentified Voice. But, it will be scannable so that they
will all be able to be matched.
Mr. Everson. It will be scannable, but right now it is
still a data entry process.
Mr. Ose. All right. I want to dwell on something that we
have had to work our way through here.
In my opening statement, I talked about President Reagan's
1981 Executive Order 12291 which initiated OMB review of agency
regulatory proposals. In effect, what happened was that there
was a memorandum of agreement or understanding or whatever you
want to call it between Treasury and OMB relating to regulatory
reviews. I've got a copy of that agreement. I don't see
anything in there and I'm not aware of anything subsequent to
that that would suggest that OMB's review deals with anything
other than form rather than substance of the statute dealing
with taxes; and--I mean, we are all concerned about using the
Tax Code for inappropriate purposes, but we are also--because
you sit atop the regulatory behemoth, we are also interested in
working with you to reduce the size of that regulatory
requirement.
Does the memorandum of agreement, the memorandum of
understanding, whichever it is, between Treasury and OMB allow
OMB sufficient ability to review Treasury's paperwork without
going to the point of unduly influencing who pays what?
Mr. Everson. I'm very comfortable with the situation as it
exists today, which I believe to be consistent with those
practices and consistent with what's been taking place really
for the last 20 years. As we said some time ago, we are in
compliance with the Paperwork Reduction Act, and that's because
we go through a whole series of procedures even before we bring
things to John's people. We take that effort very seriously.
And, he says in his written testimony--and I agree with this
entirely. He says, although the primary work and responsibility
in this area resides in the IRS, OMB's review of recurrent
submissions from IRS over a 20-year period has had a sentinel
effect and contributed positively toward curbing excess IRS
paperwork.
I agree with that. But when you get back to what John said
before--and I would not call it tax policy. I would call it tax
administration. When you get into the regulatory arena, you
start getting into tax administration issues. I would not want
to disturb where we are right now because we are in election
season right now. You have already seen requests for IG
investigations on some of the analyses that Treasury has done.
God forbid if we went down a road where we would have more--
even more back and forth on some of the independent calls that
our folks are taking. So, I'm OK with where we are right now,
and I think the relationship is just right.
Mr. Ose. Your testimony is that for 20 years the system has
worked fine, that there hasn't been gaming of the system, that
the reviews have been constrained not to policy but to form?
Mr. Everson. I do not believe that they have interfered
with the IRS's ability to impartially and fairly administer the
law. That's correct. But, I'm going to say--what I'll say is a
little bit like your view of 2000. I've been on the job a year,
and I can tell you in the year I've been here for sure that
I've been very comfortable with everything.
Mr. Ose. All right. Dr. Graham, you are comfortable with
the MOU in terms of how it relates to your role at OIRA and
Treasury's reporting requirements?
Mr. Graham. The way I would describe it is OMB has had an
influence on Treasury and paperwork through the system's
approach and through the public participation approach. The
plumber's approach, which we do use quite aggressively on a lot
of other agencies, is not used as aggressively on Treasury for
the reasons that you and I talked about for several years. I'm
comfortable with that approach, and clearly it's going to
require something very significant both within the Congress and
the administration to change that relationship. That's my
reading of the situation.
Mr. Ose. Well, let me dwell on this a little bit. You and I
have talked at length about whether or not OMB or OIRA, more
specifically, has a person dedicated to Treasury paperwork and
the like. Does OMB or OIRA have some such person, a desk
officer, if you will you?
Mr. Graham. Yes. In the last year we have had the IRS desk
officer devoting closer to full time on this activity. And my
deputy, Don Arbuckle, due to your interest and the Congress's
interest, has been devoting more energy in this area.
The conclusion that we drew from that activity was that
when you get into the plumber approach, you very easily get
into what Mark has referred to as this tax administration or
what I refer to as tax policy. And, quite frankly, our desk
officers don't have an ability, if they would disagree with Mr.
Everson's people to elevate that issue and get results because
of the current nature of the relationship between OMB and
Treasury. Until you provide our desk officers an ability to
make an independent judgment and elevate when necessary, you
don't really have the same relationship that you have with the
other agencies.
Mr. Ose. That begs the question. The desk officer is there
for some purpose. What is their job if--I mean, give us an
example?
Mr. Graham. It's a question of the degree. It's a question
of the intensity.
Mr. Ose. Give us an example of what the desk officer could
or could not do?
Mr. Graham. I think that the examples of various terms that
you gave in your own statement about the kinds of changes that
can be made about the level of intensity of review we have on
Treasury and IRS is different than other agencies precisely for
the reason that you have said in that statement: the history of
that relationship and the memorandum of understanding. So I
don't want to represent to you that we are, in fact, doing the
same thing on each one of those IRS proposals.
I think I can live with that arrangement in the current
situation. I'm not suggesting that needs to be changed. But,
you need to understand exactly the realities of what's going on
so you can make your own assessment of that situation.
Mr. Ose. One of the things that I'm trying to get at is
there are certain things that are defined by statute, like
rates. The marginal income tax rate's pretty well defined by
statute. But, there are other things dealing with periodicity
of reports or reporting threshold requirements and the like
which have been defined by regulatory decision, for instance.
Are there any examples you can give to us where the desk
officer at OMB has suggested back to Treasury that either the
periodicity is too long or too short or that the threshold is
too high or too low?
Mr. Graham. That's a good question. If you give it to me in
writing, I will try to get an answer to you.
But, you used regulation in your question----
Mr. Ose. I understand.
Mr. Graham [continuing]. And the IRS interpretive
regulations, which are the vast majority of the regulations
that they issue, are covered by the memorandum of
understandings. I hope you are not going to look for a long
list of answers from me in response to that question. It's not
just the Tax Code that is in a sense interpreted within
Treasury without rigorous OMB review; it is also the
interpretive regulations which implement the statute. We don't
have the level of review on Treasury that we do on other
agencies; and, as you know, it has a very long history and
explanation for why that's the case.
Mr. Ose. But, just as I use the word ``regulation'' in my
comment, you use the word ``interpretive'' in yours.
Mr. Graham. Fine. Delete the word. Delete the word
interpretive. Because most of the rules coming out of the IRS
are--they would describe them in that way on the issues we are
talking about here.
Mr. Ose. I'm not arguing the point about statutorily
defined things. That's not my issue.
Mr. Graham. I know. But the memorandum of understanding
covers regulations as well as what's statutorily driven.
Mr. Ose. Well, the manner in which the regulation is
interpreted evolves; let me give you an example. In 1980, we
didn't have computers to speak of. Now, nobody competes without
them. I mean, things change. It would seem to me that, over
time, that the threshold of reporting as well as the
periodicity within the report would evolve also, and what I'm
trying to find out is whether or not we are, in fact, applying
such a common sense standard to not the substance of the report
but the submittal of the report, and what I'm unclear on is
whether or not the MOU provides you with that opportunity?
Mr. Graham. Well, what my staff tells me on this, who in
the last year have had several meetings with IRS where they
have worked through these issues, is that, compared to other
Federal agencies, IRS, both in itself and at the Secretary's
office in the Treasury, has a much more closer look at those
set of issues, even the reporting issues that you just
described, than most other paperwork-producing Federal
agencies. So, in that sense, the need for an OMB plumber's
approach is less even though IRS accounts for such a huge part
of the overall burden.
Mr. Everson. If I could just add a point or two on this.
Mr. Ose. I was just coming to you.
Mr. Everson. We work very hard before we put a form out to
focus groups and others. Just as John is saying, because of the
direct impact that is so dramatic, it's subject to a lot of
review and there is--to use a word you used earlier, there is a
lot of transparency on all of this. So, I think we are
attentive to it.
As John indicated, over the last year we have done more in
the way of meetings that involve OMB, Treasury and the SBA, to
try and push these things along. I would be concerned if we go
beyond this because--I understand you are trying to limit this
to the periodicity or threshold question, but you very quickly
get into what you need to enforce the law, and that is a
question that must be reserved for the IRS with some
appropriate participation from Treasury.
Once you start to make a judgment that you don't really
need that and someone from OMB is saying that, you run the risk
that an administration could say: We don't really want to
vigorously enforce this portion of a law or this law. And, I am
uncomfortable with departing from really where we are because I
think it is working.
I think, as OMB is indicating, we are making a legitimate
effort here. GAO hasn't detected any violations of the
Paperwork Reduction Act; so, at least mechanically, we are
doing the right things. Do we need to do more here? Yes, sir,
of course we need to do more here; and I will commit to you
that we will continue to work to do more.
Mr. Ose. Well, let me examine then one aspect of this
having to do with the quarterly submittal of 941. At some point
or another you were able to determine that the periodicity four
times a year can be lengthened. In other words, you are going
to an annual report come January 1, 2006. OK. What can't that
be 2005?
Mr. Everson. Why can't it be 2005? The IRS is a large,
complex organization. One thing is for sure, we are neither
speedy nor agile. I've been giving a great deal of push to our
people to improve our processes, but when we do things we have
to absolutely be 100 percent certain that we get it right.
We will look at that date again, but we have some changes
that are being made for 2004 calendar year or tax year with
filing in 2005. But, we have complicated systems, changes we
need to make for processing all these forms. We can't afford to
have a problem were things to go awry.
Right now, for instance, we are midway through our filing
season preparations for next year. We are finishing up. We are
working on all the returns right now, but we are looking at all
the Code changes that we need to make to our computer systems
to be able to file for next year. So, it does take a little bit
of time.
Mr. Ose. So you have made the decision to go ahead and
implement effective January 1, 2006 to go to the annual versus
the quarterly?
Mr. Everson. Um-hmm.
Mr. Ose. Because I've seen some form up here in my papers.
I mean, it's basically already printed out. Is that right?
Well, that's not a form that's been approved by OMB? So OMB has
approved?
Mr. Everson. I'm not sure of the specifics. I'll have to
look at it and get back to you on the specifics of the
mechanics. But we have identified this as an important thing to
do that will help reduce the burden. We are looking at some
other things. And, you have my assurance we're going to move as
quickly as we can, but again we don't want to promise something
we can't deliver.
Mr. Ose. So, if I'm correct then and I need to correct my
statement, the proposed form to convert from quarterly to
annual report on the 941, that has not gone to OMB--this is the
question: Has that gone to OMB for approval?
Mr. Everson. I don't think it has.
Because, again, one of the issues you face here is when we
make a change it doesn't usually only affect us. We have a lot
of other stakeholders, be they the Census Bureau, Social
Security Administration. This is a complicated web. When we
collect data, it's used in lots of places. So, we do have a
more cumbersome process that we need to go through on questions
like this. So, we take the time to do that.
Mr. Ose. The gentleman from Virginia.
Mr. Schrock. Thank you, Mr. Chairman.
Let me go one other avenue here. I want to talk for a
minute what steps the IRS is taking to improve the paperwork
reduction performance.
First, with SES or SES employees, does the IRS now include
paperwork reduction in their annual performance appraisals
under their executive performance agreements, as the chairman
had previously recommended? And, two, did the IRS make
paperwork reduction a GPRA goal and target in its annual
performance plan, as the chairman recommended? And, if not, are
you going to do that and when?
Mr. Everson. We are just now in the process of finishing
our strategic plan under GPRA, which will cover the years 2005
through 2009; and it has three overall goals: improving
service, modernization of the IRS, and enhancing enforcement.
As I indicated before, service for us means helping people
understand their obligation and facilitating their
participation in the system. So, this document will drive all
of our annual operating plans over the next 5 years. And, it
does, yes, include a component of simplification and cleaner
notices. We want to go to our notices and make them be
understandable to individuals. This has an impact on the burden
reduction.
As we come into fiscal year 2005, which will be the first
year under that plan, we will for sure have all of the annual
goals as part of the President's management agenda, to the
funding request we will follow these goals and also then the
objectives for our business units and then the accountability
of our officers to follow that. So, yes, that will be a
component.
Mr. Schrock. Thank you.
Thanks, Mr. Chairman.
Mr. Ose. Mr. Everson, I have been beating this quarterly to
the annual thing.
Mr. Everson. Mr. Chairman, I've already told you more than
I know.
Mr. Ose. I'm through beating it. I think the horse is dead,
but let me kick the cow over here a little bit.
Relative to the issue of thresholds within the information
collected by the IRS, you have--or testimony last year was that
there were a number of initiatives or analyses--there is a
large analysis under way in terms of thresholds that the IRS
may wish to change as it relates to reporting requirements, for
instance, on Schedule B or Schedule C or what have you. You
talked about that a little bit in your written statement in
terms of this not-yet-completed analysis. What I'm trying to
identify is whether or not you have a list of the discretionary
thresholds that you are looking at and what the potential
burden reduction may be from each of them?
Mr. Everson. We have a partial list. I'm aware of Acting
Commissioner Wenzel's testimony about a year ago, shortly
before I came into the job. What we initially did after that
was go through the Code on a pretty deliberate basis to see
what thresholds there were and whether or what could be revised
through our own actions versus what would require statutory
intervention, and I think we concluded over a period of months
that was not an all-encompassing effort.
And, now we've redirected the efforts a little bit, and
we're looking at areas where there aren't thresholds, and maybe
some thresholds could be introduced to alleviate burden from
folks who perhaps wouldn't need to file a particular form. We
listed a few of those threshold initiatives.
In the testimony, we indicate this is going to be an
ongoing effort that will take several years for us to do; and I
think we will work our way through the different areas with a
view of again not only of looking at what's in law, because a
lot of the thresholds, as you know, are actually in law, but
also looking at this whole question of interpretive decisions
that we've taken.
Examples are, as I understand it, looking at 1040 EZ or
1040A. Maybe we'd lift that threshold from--I guess it's
$50,000 now to a higher level. Another example, as we have
indicated, involves who would need to file officially for a
501(c)(3) exemption.
But, we want to be careful here. We have established four
enforcement priorities. One of them is to make sure we don't
have abuses within tax exempt and government entities. So, we
don't want to do something to alleviate burden, to the
charitable area that actually provides an avenue for terrorists
or other people who are being abusive. So, because of that
factor and because of all these linkages to other agencies and
the Census Bureau and the use of our data, we have to be pretty
careful.
Mr. Ose. Presumably these issues might fall into different
groups: one, some that are pretty straightforward, some that
are highly complex, and some that fall somewhere in between?
Mr. Everson. Yes.
Mr. Ose. Do you have any that fall into the fairly
straightforward category and do you have a date by which some
of those within this fairly straightforward category might be
resolved?
Mr. Everson. I want to think about that and talk to our
people as to what would fall into which bucket scenario.
Mr. Ose. Why don't I send you a question in writing?
Mr. Everson. That would be great.
Mr. Ose. OK.
Now, Dr. Graham, you and I have talked about this before,
and I don't remember the answer. We talked about the
initiatives within the respective agencies to improve their
program performance by basically enhancing the information
collection and by reducing burden on small businesses. And, you
have, in response to my requests, asked these agencies to
provide at least one new initiative in this regard. What I'm
trying to inquire about is, why did we restrict it to--I'm kind
of greedy. Why did we say only one? I mean, was it at least one
or was it only one? It's my understanding that it was, I mean,
you kind of threw it down and said, give me one?
Mr. Graham. Well, I think one of the answers is, is that
these burden reduction initiatives, in order to really make a
meaningful difference, extend over 1 year. So, if you actually
start a burden reduction initiative at time period one, you
don't want that thing to be shut down at the end of that year
as they start a new one. If you do a new one every year, over
time you are actually carrying several of those. So I think, as
a practical matter, our staff are engaging--what can we get out
of these agencies but not push them so hard that they are
basically not in a position to be responsive to us? So, it is
that kind of balance.
But, let me try to get you more details on the level of
responsiveness we have had and what we've been able to
accomplish with that, and we will see if we can't push a little
harder. We are open to that suggestion.
Mr. Ose. Well, I'm not quite----
Mr. Graham. Not there yet?
Mr. Ose. So, it's not that I'm questioning that. It's just
I want to make sure I understand. Are you asking agencies for
one new initiative each year?
Mr. Graham. Um-hmm.
Mr. Ose. So like it could be initiative A in 2003, but then
in 2004 it's got to be initiative B?
Mr. Graham. And, we don't want the first one to shut down.
Mr. Ose. That's my question. So they can run concurrently?
They are not mutually exclusive?
Mr. Graham. That's right.
Mr. Ose. All right. So in the 10th year, we will have at
least some of them done, and we may have six or seven pending?
Am I correct in my understanding?
Mr. Graham. That's right.
Mr. Ose. All right.
Ms. Dalton, we didn't mean to ignore you. That was not our
intention. I have to say, your written statement was
comprehensive and very informative.
Ms. Dalton. Thank you, Mr. Chairman.
Mr. Ose. It's interesting to find third-party corroboration
as to whether I'm right or wrong on some things. I have to
compliment you. You were right on button. So I thank you for
coming.
Ms. Dalton. Thank you.
Mr. Ose. Mr. Everson, Dr. Graham, we thank you for your
appearance. We will leave the record open; and, as we'd
indicated, there are a number of written questions we will be
submitting to each of you. We would appreciate a timely
response.
Dr. Graham, I'm not sure we are going to have this fun next
year.
Mr. Graham. I was about to say, we have let you have your
last hearing on good news: Paperwork burden is down, 90 percent
reduction in violations under this President and we have 80
percent reduction in the growth of the Federal regulatory
state, part of the President's economic plan, thanks to
tailwind. Thank you very much.
Mr. Ose. Well, you are doing the heavy lifting. I will be
watching my remaining months, and I presume Mr. Schrock will be
in behind me. So, again, we appreciate your effort.
Mr. Everson, we look forward to working with you in the
days ahead.
We are going to take a 5-minute recess here. If the second
panel could gather, we would appreciate it. Thank you all.
[Recess.]
Mr. Ose. All right. I want to welcome our second panel to
our hearing today.
As you saw in the first panel, it's not a function of
picking on you, but we swear everybody in. So, if everybody
would please rise, raise your right hands.
[Witnesses sworn.]
Mr. Ose. Let the record show the witnesses answered in the
affirmative.
Our second panel today to talk about the Bush
administration's economic growth plan component for paperwork
reduction is Mr. Daniel Clifton, who is the Federal affairs
manager for the Americans for Tax Reform. Welcome, sir.
He is joined by Mr. Paul Hense, who is the president of
Paul A. Hense, CPA, from Grand Rapids, MI. He is testifying
here on behalf of the National Small Business Association.
And, our third witness is the Chief Economist for the Small
Business Survival Committee, Mr. Raymond Keating.
Gentlemen, welcome. We have received your written
statements for the record. As you saw in the earlier panel, we
go for 5 minutes, so you can summarize; and we appreciate your
being here.
Mr. Clifton you are recognized for 5 minutes.
STATEMENTS OF DANIEL CLIFTON, FEDERAL AFFAIRS MANAGER,
AMERICANS FOR TAX REFORM; PAUL HENSE, PRESIDENT, PAUL A. HENSE,
CPA, P.C., GRAND RAPIDS, MI, ON BEHALF OF THE NATIONAL SMALL
BUSINESS ASSOCIATION; AND RAYMOND J. KEATING, CHIEF ECONOMIST,
SMALL BUSINESS SURVIVAL COMMITTEE
Mr. Clifton. Thank you, Mr. Chairman. It's great to be here
today. Some of my testimony has been repeated earlier, so I
will kind of summarize my written remarks.
My name is Daniel Clifton. I'm Federal affairs manager for
Americans for Tax Reform. Our organization is a coalition of
taxpayer and taxpayer groups from across the country that
believe in lower taxes, fewer regulations, and free markets.
The timing of this hearing is very timely, given that last
week was Tax Day. This is the most appropriate time for
taxpayers to see the burden imposed on them by the government,
both from a financial perspective and from a time perspective.
The good news is, from a financial perspective, taxes are
lower this year due to legislation passed by this Congress and
signed into law by President Bush. The average family is saving
over $1,500 because of the tax cuts from 2001 and 2003. Just
from last year's tax cut, a family of four making $40,000 had a
96 percent tax reduction, meaning they are virtually paying no
taxes.
At the same time, the average refund this year will be over
$2,000, and more than 14 million low-income Americans have been
removed from the tax rolls and are now paying no taxes since
2005.
At the same time, this worked to boost the economy. The
average gross domestic product has been over 6 percent since
the tax cut was put in place. The stock market has generated
$2.5 trillion of shareholder wealth.
Dividend issue is up 60 percent, and initial unemployment
claims are down 25 percent, and jobs--700,000 jobs since the
Tax Code has been put in place.
All in all, the tax cut is working. However, when we make
these tax changes, it has made the Tax Code much more complex.
In fact, as this hearing has found, 80 percent of the change in
the entire Federal Government paperwork burden is through the
IRS and the Tax Code. That's about 6.7 billion hours.
So, how do we get to this point? Our tax system was
supposed to be a system where we raise revenue. Instead, it's
become a system of new deductions, special interest provisions,
with limits and qualifiers on existing rules, and that's what's
adding to the paperwork. The results of these actions have been
to move the paperwork burden in the wrong direction even in the
wake of the Paperwork Reduction Act. The fact is, we are now at
a point of near collapse, and the system needs to be fixed.
It is my belief that both the IRS and the Office of
Management and Budget have moved to make changes. However, this
effort has been akin to running up a downward-moving escalator,
trying to run up a downward-moving escalator. As minor changes
are made that they reported on today, more complexity has been
added, leaving a net increase in the burden.
In fact, since the passage of the Paperwork Reduction Act
in 1995, the number of lines on the 1040 form has increased
from 66 to 73, while the 1040 instruction page booklet has
increased from 84 pages to 131 pages. Without question, the
number of rules, limits, terms of conditions, and other
qualifiers are increasing the paperwork burden on taxpayers.
A recent study by the National Taxpayers Union places this
in context, ``If the Treasury Department were to reduce its
burden by the average amount mandated by the 1995 Paperwork
Reduction Act, the burden would have declined to 3.702 billion
hours in 2005. Instead, the Treasury overshot that target by
2.429 hours.'' The result has been a 15 percent increase from
1995 through 2000, instead of the mandated 31 percent reduction
target set by the law.
This also has an economic cost. The Tax Foundation has
reported that the cost of just complying with the Tax Code is
$203 billion. To place that in context, that is larger than the
revenues of America's second largest company, Exxon Mobil.
With the accelerating tax compliance burden, taxpayers are
now spending 35 percent more time filling out their tax forms
than 1995. Even the EZ file is significantly increasing. The
tax complexity, as the IRS Commissioner testified earlier, also
increases noncompliance. The best way to have compliance is to
have a simple form that taxpayers are comfortable filling out.
The growing tax compliance cost also places a negative drag on
the economy by stifling productivity and allocating resources
less efficiently.
Paid preparers are now up 60 percent since 1980 and 25
percent, so the Code has become the full employment act for
creative accountants. This is redirecting the accountants away
from productive activities like auditing Enron and instead
making them try and find the deductions and loopholes that
drive the cost up for all taxpayers.
I can go on all day with statistics about the growing
complexity of the Tax Code, but I would like to use one
example. There could be many, such as the alternative minimum
tax, the business expensing provisions, but I want to talk
about the savings provisions which are used by millions of
Americans for retirement, education, and health care.
The IRS publication explaining retirement accounts is now
104 pages long. In 1982, that publication was just 12 pages. As
a result of congressional action, there are now six different
accounts, all with special and clever acronyms which make
little sense to the mother who is worried about getting her
children to band practice and a soccer game.
To participate, Americans have to know whether their income
qualifies, how much money they can put in. The rules have
become so complex you need a tax preparer to understand whether
you can just participate in the program. This program is
completely frustrating.
But, we have evidence simplifying it, as Ronald Reagan did
in 1981, will increase participation. From 1980 to 1986,
contributions rose after liberalization from $4 billion to $38
billion. When Congress restricted the deductibility of IRA
contributions and added greater complexity, the level of
contributions fell sharply and never recovered to $15 billion
in 1987 and $8.4 billion in 1995. This affected families who
weren't even affected by the regulations, but the complexity
made it more difficult to figure out whether they could be
included in the participation of the program.
Mr. Ose. Mr. Clifton.
Mr. Clifton. Yes.
Mr. Ose. Are you about to wrap up?
Mr. Clifton. Thank you.
Mr. Ose. That's a question.
Mr. Clifton. Just my recommendations are: Reform the Tax
Code. It's the only way to do it. We can't keep making these
quirky changes and then increasing the complexity. Thank you.
Mr. Ose. Thank you.
[The prepared statement of Mr. Clifton follows:]
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Mr. Ose. Our next witness is the president of Paul Hense
CPA from Grand Rapids, MI. That would be Mr. Paul Hense
speaking on behalf of the National Small Business Association.
Sir, welcome.
Mr. Hense. I thank you for having me here. It's an honor
for a small, humble CPA from Grand Rapids, MI, to be here to
explain the role of the CPA in this end.
It's a little bit--everyone knows that a plague is a
horrible thing unless you are an undertaker, and I hear all
this conversation about the complexity of the Tax Code. I'm
going to buy a new fishing boat in a couple months, and I was
going to name it the Hense Fourth, because I'm the fourth of
the Hense boys. I may change it at this time to the name of the
AMT just in honor of what has made my business grow.
I'm a small business advocate, and I make fun of these
things, but the reality of it is that I'm from where the rubber
meets the road. I'm not a lobbyist. I'm not a politician. This
is what I do, and I do it all year around. And, during tax
season, I do it all day round.
It's an interesting business; I actually prepare the forms,
300-some tax returns. I do have a small office. I have three
very good employees who help me get through this stuff.
The problem that I see is, the problem isn't with the
Internal Revenue Service. The problem is with the laws that are
delivered to them to put into some format that works.
It's akin to giving somebody a couple of tin cans and some
barbed wire and say, make me a Mercedes out of this. You know
they can't do it. You give the IRS incomprehensible tax laws
and ask them to put it into a simple format, it ain't going to
happen.
The worst area that this happens is in the area of 401(k)'s
as an example, where, for some reason, some decision was made
in the last 25 years that, if you're in a large business, you
should be able to put lots and lots of money into your pension
plan; but, if you're a small business, by the nature of your
complexity, you're not going to get those same pension
benefits.
Same way with the section 125 plan. The owner of the
business for some bizarre reason, in a small business, can't
have the same benefits that the employees can have. So, I'm
assuming this kind of happened accidentally, but it makes no
sense. The alternative minimum tax--I spent an hour and a half
with the business editor of the Grand Rapids Business Journal
on April 11th trying to explain the alternative minimum tax to
her, and after an hour and a half we gave up, because she did
the best she could, but it's incomprehensible. And, frankly, to
me, that's a profitmaker.
Depreciation, for a client, a small business client, you
have to have maker's depreciation for the tax return. Then you
have to remember if you're going to take the bonus--if you're
not going to take the bonus depreciation, you have to file a
statement saying you're not taking it. Then, you have to have
alternative minimum tax depreciation, and then, for your
financial statements for the bank, you have to have book
depreciation. I love it. But, the problem is, in the long run
it's a bad thing.
The effects are the small business owners often don't have
401(k) plans. They will have a simple plan which is very
limited in what you can put into it. They won't have a section
125 plan, because why would they set up something they can't
contribute to?
The real proof in this to me--people come in here and they
talk about they have numbers. I don't have exact numbers. All I
can tell you is ADP, H&R Block, and Paychecks are growing like
crazy. Their revenues are up by billions of dollars over the
last 3 or 4 years, and they're projected to go up by more
billions of dollars. At the same time, we're losing our
manufacturing base; why shouldn't that money be going for
research and development and to build new factories and buy new
equipment and hire more people? It's coming to me, and I'm not
sure that's the best thing, and people who do what I do.
There's another thing. We'll have somebody come into our
office who wants to start a business, and often they're not--
you know, they're not going to get a lot of sympathy for
somebody driving a Mercedes, making a lot of money, over the
problems with the tax issues. But, how about somebody who wants
to get off welfare and start a business or get out of a menial
nothing job and get into owning a business? And, by the time
they get done talking to me, they decide they don't want to do
it, because by the time they get done with the paperwork
requirements, the tax requirements--and one of the things I
want to tell you, I'm a small business consultant. Don't hire
people. The software for fundamental accounting is about $125.
Add payroll, you add another couple hundred dollars to your
software program, because payroll is a big complication. Once
you've got payroll, then you've got worker's compensation. Then
you've got Federal unemployment or whatever State's
unemployment. You've got this organization, that organization.
So, what do you want to do? You want to subcontract it out, as
had been discussed earlier relative to real estate development.
So, then you can run a file of the IRS doing that.
So, in the proposal I was delighted with the head of--the
IRS's statement on the 1099s, the withholding. How would you
ever figure out how much to withhold, from whom, who is going
to pay it, who is going to get it and how, what form are you
going to fill out, on and on and on? Made my heart just warm up
knowing that they're not going to do that.
The summation is really kind of simple----
Mr. Ose. Mr. Hense, actually I think he said they had no
current plans to do that.
Mr. Hense. Well, yes, but I'm sure it will stay that way. I
mean, what would influence them to change?
This tax system is broken beyond repair. This can't be
fixed. I believe politically--and I'm a CPA, so I'm a CPA
talking about politics, so take it for what it's worth. But, I
don't think this can be fixed, because it's so broken that to
fix it would be impossible. So, I guess it has to be scrapped.
Five years from now, please--I'm 61, and if you'll wait, I
can get Social Security in 5 years and 10 months. If you're
going to fix it, fix it then, not now. But, it can't be fixed,
and so there are discussions about a national sales tax, value-
added taxes, on and on and on. There are pros and cons to
everything. We could sit here and argue forever, as the
argument in the Middle Ages was how many angles can sit on the
point of a pin? Who knows? What is the right tax system?
Smarter people than I will decide that, but this is not the
right tax system.
Mr. Ose. Thank you, Mr. Hense.
[The prepared statement of Mr. Hense follows:]
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Mr. Ose. Our next witness is the chief economist for the
Small Business Survival Committee, Mr. Keating. Welcome to our
subcommittee. You're recognized for 5 minutes.
Mr. Keating. Thank you. I appreciate it. I never thought
I'd have to be concerned about following an accountant, but
apparently I do.
Thank you for the opportunity to speak here today. I serve
as chief economist for the Small Business Survival Committee,
and we're a small business advocacy group with some 70,000
members across the Nation. The idea that small businesses serve
as the backbone of the U.S. economy is not mere rhetoric, it's
economic reality. We've heard various statistics over the
years. More than 99 percent of all employers are small
businesses. They employ more than half of the private sector
work force. They create 60 to 80 percent of the new jobs each
year, generate 51 percent of the private sector output, and
account for 96 percent of all U.S. exporters.
Nonetheless, the entrepreneurial sector of our economy must
overcome many obstacles, costly obstacles inflicted by
government. The costs of taxation generally fall within three
major categories. The first and most obvious is the amount of
resources extracted from the private sector for use by the
government.
Second, taxes impose a significant cost in terms of lost or
redirected economic opportunity and activity. And, third, what
we're here to talk about today are the costs of regulation,
compliance, and collection.
Unfortunately, regulatory costs, including tax compliance,
hit small businesses hardest. That was illustrated by Mark
Crain and Thomas Hopkins in their 2001 report for the Office of
Advocacy. The per-employee cost of Federal regulations
registered almost $7,000 for firms with fewer than 20
employees, compared to $4,700 for all firms. Tax compliance per
employee costs came in at $1,202 for firms with fewer than 20
employees compared to almost double the $665 for all
businesses.
One recent survey by the National Federation of Independent
Business noted that paperwork and recordkeeping cost small
businesses $48.72 per hour, with tax-related costs as the most
expensive at $74.24 cents per hour.
Another estimate, another study, noted that tax compliance
costs for the entire economy came in at a staggering $203
billion in 2003, and that's about 2 percent of U.S. GDP.
Again, the small business owner, the entrepreneur, gets hit
hard. A 2003 analysis of compliance costs on individual tax
returns performed by the IRS--and it was with consultants from
IBM--they found that, while self-employed taxpayers represent
only 25 percent of all individual taxpayers, they experience 60
percent of the time and money burden in terms of compliance.
And, it was also determined that tax return complexity is
markedly higher for self-employed returns.
I spoke to a few business owners last week in preparation
for these hearings, and I asked them about government paperwork
and taxes in particular, and I got a lot of anger and
resignation, frustration, all of those things, but they noted
that the costs were paid one way or another. They either had to
have outside accountants or lawyers--or hire staff internally
to deal with the paperwork the government inflicts. And, the
question here from an economic standpoint is what would those
resources be used for if not lost on paperwork? The same
question goes for making tax compliance somewhat easier with
tax software. I do that myself, but the question is, what would
all those software writers be doing if they didn't have to deal
with the messy Tax Code?
So, what can be done? First, it's got to be acknowledged
that complexity starts with the Code itself. In its 2000 report
to Congress, the National Taxpayer Advocate noted that the top
two problems facing taxpayers were complexity for individuals
and complexity for businesses. That complexity arguably has
increased since then. Consider the 2001 and 2003 tax cuts
passed by Congress. These had enormous positive benefits for
the economy, particularly through reductions in personal
income, capital gains, dividend tax rates, and the eventual
elimination of the death tax. At the same time, though, the
phase-ins and phase-outs of these tax measures have added to
the system's complexity and costs, as well as creating economic
uncertainty.
An obviouis answer is to make these tax cuts permanent, but
over the long haul we need to look at a fairer, simpler, less
costly, and more pro-growth tax system. Also, Congress needs to
zero in on current major sources of complexity.
My colleague mentioned the AMT. I have various statistics
in my written testimony about the cost of the alternative
minimum tax for individuals. We agree with the National
Taxpayer Advocate in recommending the repeal of the individual
AMT, and quite frankly, we'd like to see the corporate AMT go
as well.
Third, we don't want to make things worse. We don't want to
see the current system get worse. One area that was mentioned
earlier where we strongly disagree with the National Taxpayer
Advocate in the latest report to Congress was the
recommendation for Congress to implement a mechanism to
withhold on certain categories of nonwage workers. There are
costs involved for those having to deal with withholding. It
complicates taxes on both ends, and it really doesn't, in my
view--I don't see how it accomplishes much in terms of
conforming to the Tax Code.
In addition, it's important to understand withholding comes
with economic costs. Business owners, perhaps better than
anyone else, understand the true costs of government because
they have to quarterly write out that check to the Federal
Government and to their State governments. So, they understand
the costs of government. I think that's important for voters
and taxpayers to understand that. When you have withholding,
that's lost on a lot of people. They look at what the take-home
pay is and forget what the total pay is in terms of what they
should be receiving.
There are other suggestions that we have. I see my time is
up. We obviously would like to see the Tax Code--the IRS make
it--their instructions easier, clearer, use plain English,
correspondence. Please use plain English. Perhaps we mentioned
in the written testimony, enhance visual aids, you know, give
somebody the opportunity to see something in a different way,
an easier way than perhaps just jam-packed with text and pages
and pages of material.
We also think the Taxpayer Advocate Service needs to better
get the word out in terms of its duties in representing
taxpayer interests and formulation of policies and procedures
and identifying and developing proposals for simplifying the
Tax Code and reducing taxpayer burden.
Thank you for this opportunity. I look forward to any
questions you might have.
Mr. Ose. I thank the gentleman.
[The prepared statement of Mr. Keating follows:]
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Mr. Ose. Mr. Schrock, why don't you proceed first?
Mr. Schrock. I've got a million questions. Daniel Clifton,
you said it best. We've got to reform the Tax Code. If we
reform it, you won't have SS AMT. But how do we do it? How do
we do it?
Saxby Chambliss--you heard me say Saxby Chambliss and John
Linder out there, I think it's the flat tax they're talking
about. Will that work? What's the answer to this? It's
incredibly complicated and gets no better. Every time we pass a
law, it just makes it more and more burdensome on everybody.
What's the answer?
Mr. Clifton. That's a great question, Congressman. We see
the way to do this is to remove the double taxes on savings and
investment, and, in the 1990's, we had a debate about tax
reform, and people thought whether it was going to be the fair
national sales tax, what Congressman Linder is doing now.
Mr. Schrock. Fair tax.
Mr. Clifton. Or Dick Armey's flat tax, and Congressman
Tauzin and Congressman Armey went around the countryside and
had a debate about it. They said they were going to rip up the
IRS and we were going to start all over.
Mr. Schrock. And, it didn't happen.
Mr. Clifton. It didn't happen. This President has moved in
a different path of tax reform, and he said let me do this
piece by piece. And, there's essentially five steps that unite
the fair-taxers and the flat-taxers. One, lowering marginal
rates, we've done that. We've moved the top rate from 39 to 35
in each step, accordingly.
Two, remove double taxation, such as the death tax, which
we have permanently repealed for 1 year. The capital gains and
dividend reductions made the Tax Code much more complex. If we
had eliminated that, then you would have had much more
simplicity, and that's what we really need to do. I mean,
Schedule D takes hours to fill out now, and what is a qualified
dividend now under the new rate versus a nonqualified? It just
gets crazy.
The third is international tax reform, which Chairman
Thomas tried to do in his FSC-ETI repeal legislation that is
moving both through the House and the Senate to come into
compliance with WTO tariffs.
The fourth is moving to full business expensing. Everybody
here spoke about depreciation schedules and the impact that has
on businesses. We've moved in that direction and gone to a 50
percent system, but we really needed to make 100 so that we
have full business expensing. I think politically the only way
to do it is incrementally, but I think that, if we remove all
double tax on savings and investment and follow the path, we
will get to simplicity much easier than trying to do it all at
once.
Mr. Schrock. When will we get there? In your lifetime? I
doubt it.
Mr. Clifton. Every time we take a step forward, we take two
steps back, so it is a real challenge. There are people who
have a vested interest in this Tax Code, and every time we go
to make a change, they come roaring at us, and it's very hard
to do.
Mr. Schrock. Who?
Mr. Clifton. I want to give you one example. I spoke about
savings accounts. The President's budget has a proposal for
lifetime savings accounts and retirement savings accounts. That
is the closest incremental step we can have toward fundamental
tax reform. Congressman Johnson just introduced legislation,
and the people in the retirement business, when--in the
retirement savings business went crazy at this proposal,
thinking that $1 of immediate savings for me, a young guy
saving for a home, is going to supplement $1 of my retirement
security. It's not a fixed pie, and we really got a big hit
back on that, and that legislation is moving nowhere. That
would simplify the Tax Code more than anything we could do on
an incremental step without doing fundamental tax reform.
Mr. Schrock. Mr. Hense.
Mr. Hense. In everything that happens, there are winners
and losers, and the whole tax law is built around making
winners and losers. There's an example. On the flat tax, I was
able to participate in a panel discussion with Alvin Rabushka
and Dick Armey, and they weren't going to tax interest and
dividend income. I understand the philosophical context behind
that. But, sell that idea to a production line worker in Flint,
MI, that the rich East coast people who inherited a fortune are
not going to pay any income tax on what they get, and a guy
working in the line is going to pay taxes on his income. That
ain't going to fly. In each one of these--in the fair tax,
there's winners and losers. In the income tax, there's winners
and losers.
I want to address--I have seen some interesting things. As
an example, this is going to happen. There are good things and
bad things that are going to happen, hopefully more good than
bad. There's a simple way to fix the pension problem. Everybody
gets to put aside 15 percent of their income, up to $30,000 a
year, period. Doesn't make any difference where you work,
doesn't make any difference what you do, doesn't make any
difference whether you're a C corporation, an S corporation.
Whatever you do, you get to put aside that amount of money
every year, tax deductible, and that's it. There's no
regulations. It's just everybody gets to put aside a share of
their income----
Mr. Schrock. Tax deductible or deferred?
Mr. Hense. Or deferred. That's correct, deferred. We're
actually already doing that in a sense with Social Security.
It's a forced savings plan. It doesn't really work out that way
in the end, it doesn't look like, but that's what the plan was.
But, anyway, in the simplification of the income tax,
they're trying to help the people at the bottom, and they've
made the Earned Income Tax Credit--all these child--it's so
complicated that without the software, I couldn't do it. And
that's for somebody making under $20,000 a year with a couple
of kids. Anybody who owns a business who does not use a CPA is
a fool, because it is so complicated with this depreciation,
that depreciation, you can--if you buy a vehicle over 6,000
pounds, you get to take that write-off; if it's under 6,000
pounds, you get this write-off. It's all various pressure
groups getting what they want. I don't really foresee the day
it will really go away. I think it would be a little bit here,
a little bit there, and then--just as this gentleman said, then
we'll turn around in the next couple of years, it will come
back with a whole bunch of--the best example being the tax on
capital gains and dividends, if it was after May 5th or
whatever, if it was before May 5th.
We have a client who sold an apartment building on May 4th.
He wanted to go back and change the paperwork, and I explained
to him you can't do that. So, it's political pressure. This
goes on and on.
Actually, what happens, people like us have to keep up the
battle or we will go backward. If we don't come here and make
our case and continue to come back and make our case--a radio
newsman asked me yesterday morning when I was talking, after we
got done with the interview, he said, you don't really think
you're going to make a difference, do you? I said, I don't
know, but I know I won't if I don't do anything.
Mr. Schrock. If the chairman will indulge me for just a
minute, one of the things that used to gall me, when our son
was born, my wife was a teacher. She didn't teach until Randy
was 4. He went to school, she started teaching, and the
agreement was 50 percent of her pay would go into a Uniform
Gift to Minors Act account for his college education, but the
doggone government kept taking a lot of it. Now, what nonsense
is that? We're trying to provide for our kid's education, doing
what we think is right, and we're being penalized. That's just
one example.
Fortunately--in fact, he was born 28 years ago tomorrow,
so, that's when the markets went up and he made a ton of money;
still has it. But, I mean, why should the government take that
when we're trying to fund his education? That's just one small
example.
Mr. Hense. But, you spent some money getting that done.
Mr. Schrock. We spent a lot of money getting that done.
Mr. Hense. You spend money for attorneys, you spend money
for accountants, which isn't all bad, but a lot of money is
spent----
Mr. Schrock. Wait a minute. Say that again.
Mr. Hense. I said there's a lot of money spent on
accountants. That's not all bad.
Mr. Schrock. But, it was with lawyers.
Mr. Hense. It all depends on whose ox is getting gored,
something like that. Tort reform I'm for. Tax reform I'm
ambivalent about. But, that's exactly the problem. That is
exactly the problem. When you talk about a national sales tax,
I'm to the point in life where, you know, I've kind of bought
everything. I might want to buy a few more things, but the
national sales tax, I could quit mine, because my kids are
grown, I've got my house, I don't know; but the national sales
tax for young people, they're still buying houses, buying cars,
clothes, food, raising kids. So, for all of these, there are
positives and negatives, and what I'm hoping will happen is
that the organizations that we represent, the National Small
Business Association, all of these organizations that we
represent will continue the battle in the hopes that we can
correct some of these things. But, if we give up, it will get a
lot worse real fast.
Mr. Schrock. There needs to be two tax codes, one for those
raising kids, paying mortgages and----
Mr. Hense. You know what, that could almost happen. Look at
what's already happened. You can almost see something like that
happen.
Mr. Schrock. I don't mean to ignore you, Mr. Keating. I
want to hear from you.
Mr. Keating. No, that's OK. I agree with the fact that we
have to, as representatives of our groups, continue this fight.
Obviously on the other side, though, there's got to be
political leadership. I think--call me crazy. I mean, I'll take
whatever tax cut I can get along the way, but I think the tax
simplification debate is a positive political issue that can be
worked to elected officials' advantage.
You mentioned the flat tax and the national sales tax, and
I went back and I had somebody from our staff--I couldn't
remember when I wrote it. It was way back in May 1995. And, I
love these. Remember the Armey-Shelby plan? This was for
individuals, and this was for businesses. I mean, wow, where
has that debate gone? I mean, maybe it's been fumbled on our
end, as well, as groups, but that's something that we have to
keep hammering away and advancing. Obviously along the way we
take what we can get, but I don't think that tax simplification
should just be tossed aside as something that's a dream way
down the road.
Mr. Schrock. So, I think what I hear you all saying is
political pressure on Members of Congress by special interest
groups are preventing this from happening, period?
Mr. Hense. But, we're part of that. But, the understanding
has to be that we're here today saying that--take an example of
100 percent expensing. I can see that from both sides. I can
see where I like it. If I can buy--right now I can go up to
$100,000 of computers and deduct it in 1 year. There are some
negatives of that, one of them being that you then don't have
any deductions for the next 5 years once you expense it all in
the first year. But, I can understand where somebody who was
not in business would say, whoa, wait a minute. So, he can go
out and buy these computers and pay no tax that year, and the
way this happens, then somebody says, well, let's do this.
Let's have something in there so, if he buys $100,000 worth of
computers and he has no tax, we add a tax that taxes part of
what he wrote off. That's where the alternative minimum tax
came from.
So, basically there are some simple things. This is kind of
what you asked for. There are some simple things. Like with the
pension plans, 15 percent for everybody up to $30,000. That's
it. You don't get any--that's the whole pension plan for the
country. On the alternative minimum tax, it has to be done away
with. It's just an insanity.
But, if we can't reform the whole thing, which I think
realistically I'd like to see it happen in 5 years, but it's
not going to happen now, that we will have to nick away at
this, you know, take it away layer by layer. But, we have to
remember there are people who aren't going to like that, who
will argue from the other side.
Mr. Keating. Can I respond to one point there? I think most
people actually would understand--I own a business, I went out
and bought $100,000 worth of equipment and I write that off in
the year that I bought it. I think people would better
understand that concept than, you know, a depreciation table
which is basically designed by politicians. I think people
would better understand something like expensing. Now, there's
an example that we can make that point in terms of the people
that we're representing. Members of Congress hopefully do the
same thing. So, I think, you know, you take one at a time, but
I think these issues are very much answerable from a general
fairness perspective from the public's perspective.
Mr. Schrock. And, I think, if you're starting a new
business and you're brand new and you have $100,000 in
equipment expenses, the first year more than ever you want that
write-off so you can survive to the second and third and fourth
and fifth year.
Mr. Chairman, I've taken up too much time.
Mr. Ose. Mr. Hense, you just said you had, like, 300
clients?
Mr. Hense. About 325, 330. I haven't finished the count
yet.
Mr. Ose. I think your testimony was you prepare about 300
returns?
Mr. Hense. Yes.
Mr. Ose. In those returns, do you have different reporting
requirements that are, in your judgment, pointless?
Mr. Hense. Almost all of it. The whole thing becomes
pointless, because you spend so much time--I've heard several
people comment on the amount of time that accountants spend on
this. It could probably be spent on something more worthwhile.
Maybe you'd have an engineer instead of an accountant. I think
we need more engineers than we need accountants. In order to
try to make this tax law meet these political needs, it has
become so convoluted. And, to give you an example, probably the
form--the worst form is the alternative minimum tax. That's the
worst.
But, let me give you another--I was asked one time what the
form is that accountants charge the most for, which is probably
the most worthless. And, I would say it's probably the office
in a home expense. It takes a lot of figuring to come up with
an office in the home expense. If somebody owns a business, it
has some validity to it. If they're employed and they're taking
it as an unreimbursed employee expense, you've got to get an
awful large office in the home deduction before it has any
meaningful impact.
There's just a lot of--the depreciation schedules, doing
the tax depreciation schedule, then doing the AMT depreciation
schedule, then doing the book depreciation schedule. There's
just so much to it, I'd have a hard time figuring out
individually----
Mr. Ose. Well, let me phrase the question a different way.
On equipment used in a business, we raised the annual deduction
from $25,000 to $100,000 in effect. For many businesses that's
a paperwork reduction. You just said whatever it is you bought
under $100,000, that's the way it is. You don't have to do
depreciation schedule. It's all done.
Mr. Hense. You still have to keep track of it, because when
you sell it you have to recapture it. So, you still have to
keep track of it. And, there's another thing. Everything in
taxes isn't that simple. If you take a--say you make $50,000 a
year. The accountant has to figure out what the optimum use of
that $100,000 deduction is, because you can take too much. And,
then, if the business is looking profitable, you have a
situation where in a graduated tax, you will actually--it can
actually end up costing you money to use the section 179. Then
you get into the issue with the 50 percent bonus depreciation.
Do you take that and carry the loss back to previous years to
get a refund of previous years' taxes, and will you get more
out of doing that than you would out of carrying it forward?
And, so this is what I meant when I said a small business
owner in starting a business, it's really foolhardy not to have
a CPA, because just by the nature of the thing, it is so
complicated, and many of these decisions, once made, are set in
stone.
Mr. Ose. What I'm looking for is some specific example from
your experience, either in terms of raising the threshold or
eliminating a requirement--I'm looking for some specific
example from your experience--and, Mr. Clifton, Mr. Keating,
we'll get to you on your recommendations for this--that we
could use as an example of increasing the threshold and
reducing paperwork burden. In other words, we raise--well, we
go from $25,000 to $50,000 in terms of--we go to $30,000 what
you can contribute to your retirement program. All you have to
do is check a box and that's that.
Mr. Hense. That would be one. That would be wonderful. A
CPA praising the IRS is a little like a minister praising the
devil. You don't hear this very often, but the IRS and the
Congress have changed some things that have had a positive
impact, and I'm having to get used to a new relationship with
the Internal Revenue Service. There has been some significant
improvement there. And, some of the things that have been done,
as an example, is on small business corporations raising the
threshold for the AMT. I sometimes come up with ATM which
really confuses people, but it's AMT. Raising the threshold for
the AMT for small corporations and then having an average that
they work with before the actual hit. We have some clients who
buy very significant amounts of equipment every year. If they
had to pay AMT, it would severely limit their growth. There's
an example of something that has been actually done where the
AMT was removed. I believe it's at $7 million, you don't pay
alternative minimum tax in a corporation.
One of the things--another thing that's being done is
changing the filing requirement to 1 year. You kept hitting on
that for the 941. That will have significant savings for a
business owner. The one thing that concerns me about that is
that they will have to be aware that they owe this money. I
mean, the quarterly filing lets the IRS know if they're
following behind.
Mr. Ose. Also, they're going to end up setting a threshold,
something other than annual----
Mr. Hense. They're going to need to. But, some of this has
been done. I'm trying to think of some other areas. The one big
thing, if they did away with the alternative minimum tax, it
would do away with the multiple depreciation schedules, and it
would also do away with a lot of computations we have to do to
see whether or not the person--even if they don't have to----
Mr. Ose. What the impact is.
Mr. Hense. Yeah. We have to check to see--and then also
clients call me. As an example, a client was buying a house in
Florida for future retirement, and thank God he called me----
Mr. Ose. A low-tax State.
Mr. Hense. Yeah, a wonderful low-tax State, and it has some
real advantages, but a high property tax.
Mr. Ose. I understand.
Mr. Hense. OK. So, this is a high-income individual. People
shouldn't inadvertently stumble into a tax problem, and he very
well could have, had he not called me. He called me about
something else and this came up. And, I said, oh my God, we've
got to do a computation to see what this does to your AMT, and
the property taxes on that home put him into the alternative
minimum tax. It affects mainly upper-income people now, but
it's working its way down to everybody.
Mr. Ose. Mr. Clifton, do you have any suggestions as to
specific examples? Mr. Hense has AMT.
Mr. Clifton. I would say in the meantime as well you need
to index the AMT right away. I mean, that's something that's
doable in the short term. The reason why we're in this mess and
more people are being hit with it is because it wasn't indexed
in the early 1990's.
Mr. Ose. It's my understanding that requires a statutory
fix that cannot be done regulatorily?
Mr. Clifton. Right, that's correct. On top of that, I would
go back again one more time to the savings programs which could
be done by regulatory change, even some by legislation. The
rules that are implemented by the IRS of who can pull in--you
know, when you have to do a minimum distribution, that's not
legislation, that's regulatory powers. And, I can go back in
and do a full review for you and get back to you on what is
done through regulation versus----
Mr. Ose. We'll send you the specific written question.
Mr. Clifton. Great. I would love that.
Mr. Ose. Mr. Keating, anything specific?
Mr. Keating. Well, he stole my thunder. I would agree with
everything that Paul said on the AMT, and I would also agree
with indexing. I think those are key issues. You know, we've
got--in so many different areas the phasing out of tax benefits
at various income levels up--to the extent that they can be
raised, great; but to the extent they can be phased out and
eliminated, so much the better. It not only would help in terms
of reducing tax complexity, but most of those things have to do
with savings and investment incentives, and anytime you can
enhance those, those are obviously benefits for the economy
overall.
Mr. Ose. Mr. Clifton, you mentioned the savings and
dividends. I've often wondered why we tax interest. I don't
quite understand why that is. But, what level, if any, would
you set--what threshold would you set for interest income below
which you don't have to report it?
Mr. Clifton. There was a change made last year----
Mr. Ose. The amount has been rising.
Mr. Clifton. Right. I can't honestly answer that question,
because I haven't looked at it enough. Personally, we'd like to
abolish all forms of double taxation, including dividend
income. I mean, we pushed to pass the President's plan last
year, and, in the end, we got something that made it much more
complex. But, let me tell you why. We are worried about the
paperwork burden. This proposal, when it passed, actually
created more of a paperwork burden. However, I would say to
continue to do it. The results have been extremely successful
from an economic perspective where there's more cash in
shareholders' hands, but also at the same time it improved
corporate governance, as companies are now returning that cash
back to their shareholders rather than hoarding it, which led
to a lot of the corporate scandals.
So, we think, on net, that it was an overall benefit, and
that's one of our recommendations, is going back into the 1998
IRS Restructuring Act and saying let's do a full cost-benefit
analysis of the economic benefits and the regulatory benefits
and weighing that with the costs; because, on that one, while
the regulatory burden went up, the economic benefits were so
much greater. On some of these other changes, that may not be
the case.
Mr. Ose. Mr. Keating, there's----
Mr. Keating. Can I say one thing?
Mr. Ose. Certainly.
Mr. Keating. Just the economics of taxing capital gains,
dividends, and interest I think has to be understood. You know,
you earn a dollar when you're working. What can you do with
that dollar? You can either use it for consumption, or you can
save it, invest it. And, so often when you use it for
consumption, the Federal Government doesn't tax you that much.
When you turn around and invest it, your returns are socked
again with taxes. So, I just want to reiterate the double
taxation that is in effect now. We've benefited tremendously
from bringing the dividend tax rate down; especially, I would
argue, the capital gains tax rate for investment in
entrepreneurship. Those are all great, but I just want to make
sure that we understand that it is still a double-taxation
scenario.
Mr. Hense. And for small business--and I'm glad we took a
few more minutes, because a big one hit me. Sub S corporations,
C corporations, LLCs, a multitude of entities, sole
proprietorships, all taxed different. A C corporation, a small
business might want to be a C corporation so they can get
deductibility of its health care as an expense, and they may
want to be a C corporation to be at the lower tax rate to build
inventory to build the business. But, if they sell the business
while they're a C corporation, or within 10 years of converting
to an S corporation, they have a double--there used to be a
general utilities rule. You only paid taxes once. I believe it
was 1986 they did away with that. It's one thing when somebody
gets a dividend from IBM and IBM pays the taxes on it, and then
the individual pays the taxes on it, but then a manufacturer
gets an offer he can't refuse on his business and he has to pay
taxes on the profit in the business, and then he has to pay the
taxes on the proceeds when it comes out of the business. The
double taxation issue is huge.
You had asked me what single thing, and I was thinking of
individuals. We just got done with 1040 season. For businesses,
for small businesses that are C corporations, there should
never be a double taxation. That's obscene. For S corporations,
the 2 percent rule--I'll give you an example. One of my
employees, a 41-year-old woman, she and I were discussing her
becoming a partner in my business, and one way or another
that's going to happen because she's a wonderful employee.
She's the classic person you want as an owner.
Mr. Ose. So, we have that on the record?
Mr. Hense. You have that on the record.
Mr. Ose. I'm her agent and I'm----
Mr. Hense. You're her agent, and this is going to cost me.
Then we went into what she loses if she gets 2 percent of the
business. She loses her section 125 plan, she becomes limited
on her pension plan. And, she actually said this to me: ``Well,
Paul, why would I want to be a part owner in this business?''
Very pragmatic woman. ``I have kids to raise, I have issues,
and once I'm 2 percent owner of this business, I come under all
the stupid rules that you come under.'' So, it's a disincentive
for this young lady to become an equity owner in my business,
because she loses benefits. Why, I can't imagine.
Mr. Ose. Beyond the tax issues--in particular Mr. Keating,
I'd direct this at you, but beyond the tax issue, we have
reporting requirements for, like, the toxic release inventory
and a variety of other things. Beyond the tax issues, are there
suggestions you'd make in terms of reporting requirements,
paperwork and the like?
Mr. Keating. We surveyed small business owners going back a
few years, and the IRS was No. 1 in terms of the paperwork
burden. EPA, OSHA, Labor were all in there. When I spoke to
some folks last week, some business owners, I was kind of
surprised. I don't know if it was just by chance, but there
were two manufacturers that told me about Commerce Department
surveys they had to fill out on a quarterly basis, you know,
for capacity levels and so on and so on, and it was a nightmare
for them.
Now, I'll go back and find out exactly what--I don't know
particularly what surveys they were talking about in terms of
our conversation, but I would be glad to go back and find out,
because they're pretty darn animated about these surveys.
But, I'll go back and try to get some specific
recommendations, but what I heard was Department of Labor was a
tremendous burden, and, which came as a bit of a surprise, the
Department of Commerce, after the IRS in terms of the folks I
spoke to last week. But, I gladly would track down some more
specifics and get them to the committee.
Mr. Ose. We'll give you a question in writing to which you
can respond.
Mr. Schrock.
Mr. Schrock. I can't imagine what else I would have. I
think our questions pale in comparison to the discussion we've
had. You three have been magnificent, really. It's all
political will on our part to get it done, but there's so many
of us who have so many people on them, special interest groups,
quite frankly, that's what causes a lot of this. And, you know,
we complain that the paperwork reduction hasn't been as fast as
we want, yet we sit up here every year creating more
legislation, creating more paperwork on what they try to knock
down.
Somebody said you take one step forward and two back, and
that's about the truth. We just have to have the political will
to do it. I think I do. I just need 434 others on this side of
the--you know, in the House to do the same thing. And, I think
it's going to be very hard to do.
You know, we talked about the Linder-Chambliss--do you
agree with that? Do you think that's the way to go, the fair
tax? Is Dick Armey's flat tax the way to go?
Mr. Clifton. Americans for Tax Reform supports the flat
tax, the Dick Armey concept. We support what Congressman Linder
and Saxby Chambliss are trying to do. However, there's
something called the 16th amendment that allows the income tax
to be there, and we don't believe that we're going to be able
to repeal the 16th amendment and do this gigantic tax reform
all at once.
With that said, all it takes is somebody like Howard Dean
to become President, and we have an income and a sales tax at
the same time. And, we want to avoid that. Again, there's so
much that we can do together that unite the fair-taxers and the
flat-taxers.
I would also point out that Congressman Burgess is the one
who reintroduced the Armey flat tax. His is a bit of a
variation which has an opt-in/opt-out system with safeguards.
What that means is that people who have already invested in
depreciation schedules can stay under the existing code,
individuals and businesses, and it addresses some of the
concerns that were spoken about today. Or, you can just write
off into a flat tax. There are protections for that. Americans
for Tax Reform fully supports that legislation and----
Mr. Schrock. You were saying it would be a hard sell to
repeal the 16th amendment? I'll bet you if you put that before
the voters of America, you'd get 100 percent support.
Mr. Clifton. You're absolutely right. I absolutely agree
with you.
Mr. Schrock. People are absolutely fed up with it. I have
to have an accountant, because I don't understand that stuff at
all, and it's better than going to jail. I know your business
depends on it, and we'll hold off for another 3 years for you
to retire, but I don't know where we go. I really don't.
Mr. Hense. One of the things, see, with the flat tax, if
you exempt dividend and interest--and it's been a long time
since I looked at the flat tax, but there are some deductions
that aren't allowed. And, in every one of these tax ideas,
there are unintended consequences. As an example, the real
estate business has been mentioned. I do not know what would
happen if we took away the interest and tax deduction, whatever
tax system we did, I don't know what would happen to the real
estate market. I don't think anybody really knows.
Mr. Ose. Those of us who have no debt would prosper.
Mr. Hense. This may be true. In the fair tax--in the
national sales tax, the one thing in that is that it lends
itself to simplicity. It's simply--it is just simple. And, then
I start hearing the variations people want to put on it, and it
starts not being so simple. But, every form of refuge has its
price, and whatever we turn to will have its upside and its
downside to it, and we need to keep this debate going, because
it's critical to the country.
Mr. Schrock. The tax deduction debate on houses is amazing.
My tax guy--we have a rather large house that we've had for a
long time, and our mortgage was--he said, you can't do that
anymore. So, I refinanced the thing and we're going to tear
part of it down and rebuild it. But, I have a huge write-off
now, and, if they did a flat tax, would that go away? And,
that's a real consideration. But, the chairman said that real
estate would boom.
Mr. Ose. No. I said people with no debt would prosper.
Mr. Schrock. Oh, I see.
Mr. Hense. Absolutely. It would take away a lot of the debt
that Americans go into that's probably unhealthy just to get
the tax break.
Mr. Keating. I'll tell you, I live in New York.
Mr. Ose. I'm sorry.
Mr. Keating. I accept your sympathy, believe me, and I live
on Long Island, so I have some of the highest property taxes in
all of the land, and I have a good solid mortgage. I can only
speak for myself. You bring the rate down low enough, I'll take
the lower rate, but that has to be figured out. We can't go at
this and just stab at a rate. We have to bring all those things
into the calculation.
And, on the national sales tax, you know, as an economist,
I think the national sales tax makes the most sense because
you're taxing at the end of the economic process you're taxing
at the end. You're taxing when consumption is happening. But,
we have questions. You know, the biggest one, as Dan mentioned,
is you don't want to have a national sales tax and then have an
income tax come back because the 16th amendment is still
around. There are other questions about, again, where's the
rate set at, does a 20 percent something national sales tax
rate--what does that do in terms of incentives for tax
avoidance, everything else? All those things are big questions
that have to be wrestled with, but I think we should be
wresting with them.
Mr. Schrock. Maybe when Mr. Hense retires in 3 or 4 years,
you can come to Washington and take on that matter with Grover
and a few others. Thank you, Mr. Chairman.
Mr. Ose. I want to thank our witnesses here, the second
panel, for joining us. It's been very elucidating. It kind of
makes me pine for the private sector. We've heard today a vast
horizon, if you will, a vast spectrum of where we're going. Our
first panel talked about the difficulties in reducing paperwork
burden for what I will describe as administrative reasons,
whether it be periodicity, thresholds, utility and the like.
One of the things I find interesting is that, in the
context of our opening statements, all four of us up here all
argued that we aren't doing enough, we aren't doing enough to
reduce the paperwork burden, we aren't doing enough to reduce
regulatory burden. I think our friend--my friends on the other
side in particular registered certain criticisms of the
administration's record. I think that gives us, Congressman
Schrock, the opportunity to reach out to them and facilitate
the passage of a renewal of this particular legislation as the
opportunity presents itself. It's a unique set of circumstances
that finds both parties in agreement about the efficacy of
existing legislation and the need to, frankly, prepare it.
So, in the context that you were able to bring, at least
the four of us together, and force a discussion of that, you
have been successful.
Mr. Hense, I don't know what 5 years and 10 months from now
holds for you, but we'll do our best to make your life, you
know, a disappointment at that point.
Again, I do want to thank you, all three of you for joining
us today. With that--oh, the record is going to be open for 10
days. We may send you some questions to which we'd appreciate
timely responses, as well as the minority may do that, too.
With that, we appreciate your participation.
[Whereupon, at 4:54 p.m., the subcommittee was adjourned.]
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