President Clinton's proposals for public investment and deficit reduction.

On March 17, 1993, Tax Executives Institute filed the following statement withthe House Committee on Ways and Means concerning the Clinton Administration's proposals for public investment and deficit reduction. The Institute's oral testimony was presented by TEI Executive Micheal J. Murphy.

Background

Tax Executives Institute is the principal organization of corporate tax professionals in North America. Our approximately 4,800 members represent more than 2,400 of the leading corporations in the United States and Canada. TEI represents a cross-section of the business community, and is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike. TEI is firmly committed to maintaining a tax system that works -- one that is consistent with sound tax policy, one that taxpayers can comply with, and one in which the IRS can effectively perform its audit function.

Mr. Chairman, TEI applauds the Committee's decision to hold these hearings in order to obtain preliminary comments on the President's tax proposals. TEI is also pleased with the emerging consensus in both the Administration and the Congress to forge a strong and coherent economic package to reduce the deficit, to cut unnecessary government spending, to create jobs, and to otherwise stimulate the economy. The question, of course, is how best to achieve these laudable goals.

A principal challenge in analyzing the President's proposals -- especially for tax executives whose mission is to divine how they may affect their companies -- is that the specifics of the proposals are in many respects "moving targets." Legislative language has not yet been released, and indeed, some provisions remain undefined or seem to change on a day-to-day basis. The lack of specificity is unfortunate because operational problems with tax proposals frequently are not discovered until the statutory language can be parsed and appraised by those who will have to live with it. In other words, since the details of many of the President's proposals have not yet been released, our comments will of necessity be somewhat tentative. Please be assured that we shall supplement our comments as the legislative process moves forward.

General Comments on the President's Proposals

As a broad-based organization, TEI frequently finds itself unable to take positions on major policy issues that come before the Committee. Our diversity thus limits our ability to opine on certain major policy initiatives. For example, the Institute has historically declined to take a position on proposed changes in the tax rate and to balance such proposals with possible changes in the tax base. Similarly, because of its disparate effect on various segments of our membership, TEI has to date chosen not to take a formal position on the proposal to reinstate the investment tax credit.

We do wish to note, however, that the President's proposals ask a fundamental question about the state of the "compact" that was reached between the government and taxpayers seven years ago when the Tax Reform Act of 1986 became law. At that time, the tax base was broadened and several tax incentives were eliminated in exchange for a lowering of the rates and a generally simpler tax system (especially for individuals). One of the promised consequences was stability -- something that is absolutely essential to business. To plan, one has to know what the rules are and what they will be. Of course, there was a price that the business community had to pay for the promised stability: although the 1986 Act was revenue neutral overall, it exacted $120 billion in additional taxes over five years from the corporate community and imposed compliance burdens out of all proportion to the tax policies supposedly served by the underlying statutory provisions.

Regrettably, the stability that was promised to taxpayers was extraordinarily short-lived. First, in 1988, again in 1989, and most recently in 1990, Congress and the Administration chipped away at the bargain that was struck in 1986. Tax rates were not directly increased in those earlier bills, but business taxpayers were saddled with a large number of complicated tax increases, which required the expenditure of both time and money to understand and implement. Now, the President proposes to increase both corporate and individual tax rates, to reinstate incentives such as the investment tax credit, and to enact a number of provisions that would further complicate the law, require the expenditure of large amounts of money on nonproductive activity, impair America's ability to compete effectively abroad, and arguably spur a resurgence of tax shelters and other uneconomic activities.

TEI does not deny the right -- even obligation -- of the Administration and Congress to fine-tune the Internal Revenue Code and to adapt to changing conditions. We do believe, however, that more than lip service must be paid to the goals of stability and simplification. In proposing to make certain provisions permanent -- including the targeted jobs credit, the research tax credit, and the exclusion for employer-provided educational assistance -- we believe the Administration has moved in the right direction. Specifically, it has sought to remedy the on-again, off-again nature of these provisions and to inject some modicum of certainty into the tax system.

In stark contrast, other provisions of the President's plan would violate all notions of stability, simplicity, and good tax policy. First, we believe the President's proposals to disallow or curtail deductions for legitimate business expenses deviate from what should be a fundamental precept of the tax system: that people are taxed not on gross receipts but on income. Stated differently, the Sixteenth Amendment authorizes a net income tax system in which deductions are generally allowed for the expenses of generating income. The President's proposals would stray from that concept, for example, by disallowing a deduction for lobbying expenses and arbitrarily capping the deduction on executive compensation. TEI questions whether these changes would significantly change how business is conducted: businesses will continue to communicate their views on proposed legislation when it is in their or their shareholders' best interests and will -- if the market demands it -- pay their executives in excess of $1 million. A cynic might say, if behavior will not change, is this not a good way to raise revenue? Leaving aside the question of principle, what that argument ignores is that we operate in a global economy. Whenever the cost of doing business in the United States increases (because a deduction is denied or an additional compliance cost is imposed), the competitive position of the country as a whole cannot be helped.

Second, the international proposals in the President's package would add unnecessary complexity to the Internal Revenue Code and thereby diminish the ability of U.S. business to effectively compete abroad. Consider, for example, the proposal to tax in advance of repatriation to the United States certain accumulations of foreign earnings deemed to be "excessive." The proposal states that a change is needed to prevent the "excessive accumulation" of foreign earnings. There are, however, already two overlapping sets of anti-deferral rules -- one that was enacted in 1962 called Subpart F and the second, relating to "passive foreign investment companies" (PFICs), which was enacted in 1986 to do the very thing the President's proposal is intended to do: end the deferral of tax on passive assets. In other words, in terms of tax policy, the proposal is redundant. In terms of tax administration, it is tremendously complicated. Rather than end the redundancy and streamline the law, the President's proposal would add another layer of rules and another layer of costs and, we submit, garner very little revenue for the government.

Finally, one of the proposals seeks to transfer responsibility for -- and the expense of -- ensuring compliance with certain tax laws from the IRS to already complaint taxpayers. We refer to the proposal to require the filing of information returns -- Forms 1099 -- on all payments for services in excess of $600, including payments to corporations. (Currently, Forms 1099 need not be filed in respect of payments to corporations, in part because the filing of such returns would flood the IRS with information that it could not use.) This proposed "mandate" to file information returns on payments to corporate service providers, however, is not something that can be accomplished cost free.

Indeed, given the Joint Committee on Taxation's revenue estimate for the proposal -- $326 million (as opposed to the Administration's $6.35 billion estimate) -- TEI believes there is a good chance that the cost to the payer community would exceed the revenues flowing to the Treasury. More than one company has already estimated its costs would exceed $1 million to implement the proposed changes and nearly that much to maintain the new system on an ongoing basis. Equally important, there continues to be no convincing evidence that the IRS would be able to process the millions of additional pieces of paper that would be generated under the proposal. In this regard, it is interesting to note that one aspect of the proposal -- an IRS initiative to assist payers in verifying the taxpayer identification number of payees -- has been abandoned, apparently because the IRS cannot implement the program on schedule. There is no similar sympathy demonstrated, however, for the payers that would have to modify their computer systems, institute manual processes, and otherwise gear up for the information reporting program.

In the ensuing sections of this statement, TEI sets...