Miscellaneous revenue-raising measures.

• Position: Before the House Subcommittee on Select Revenue Measures

On September 22, 1993, Tax Executives Institute submitted the following statement to the Subcommittee on Select Revenue Measures of the House Committee on Ways and Means. The statement, which was signed by TEI President Ralph Weiland, was prepared in connection with three days of hearings the Subcommittee held on 60 miscellaneous revenue-raising proposals.

On behalf of Tax Executives Institute, I am pleased to provide the following comments on several miscellaneous revenue-raising measures that were or will be the subject of hearings by the Subcommittee on Select Revenue Measures on September 8, 21, and 23, 1993. The Institute requests that the comments be associated with the hearing record.

Overview

Don't tax you, don't tax me -- Tax that fella behind the tree.

This aphorism, which has been attributed to former Senator Russell Long, aptly describes the plethora of proposals under consideration by the Select Revenue Measures Subcommittee: an exercise in searching out "that fella behind the tree."To paraphrase Pogo, however, we have found that fella and he is us. Tax Executives Institute concedes that the proposals before the Subcommittee would raise revenue, but respectfully submits that, almost without exception, they do not merit serious consideration. Taken as a whole, they are gargantuan in scope, bereft of detail, generally devoid of any compelling tax-policy basis, blind to the administrative costs they would impose, and driven by nothing so much as the money they would raise and the oxen they would gore.(1)

At any time, the menagerie of proposals before the Subcommittee would be daunting, but at the present uncertain time their advent is especially disconcerting. In the midst of a still-stalled economic recovery, weeks after the enactment of the Omnibus Budget Reconciliation Act of 1993, and days before the President unveils his comprehensive health care proposals, the hodge-podge of proposals stands as an edifice to what is wrong with tax policy in the 1990s. The proposals reflect precious little appreciation for the interplay of tax policy with economic policy and international competitiveness and scant, if any, recognition of the administrative and compliance costs associated with endless tinkering with tax law provisions.

In a word, the proposals before the Subcommittee epitomize "hyperlexis"--excessive complexity in the law--which has been mirthfully defined as "a pathological condition caused by an overactive law-making gland."(2) The proposals, however, are not themselves mirthful: they represent the antithesis of simplification and have a destabilizing effect, not only on the tax system but on international markets and the economy as a whole.

Consider, for example, the proposal to reinstate the withholding tax on interest received by foreigners on certain portfolio investments. Such a proposal ignores that U.S. businesses operate in a global market. Its effect would not be to "punish" foreign lenders but to increase the net cost of borrowing-costs that would be borne by U.S. borrowers (including the government).(3) As the Subcommittee is well aware, the proposal significantly disrupted the international financial markets and recently necessitated a formal disavowal from the Treasury Department. TEI is pleased that the Administration moved quickly to quell the instability in the international markets and that it reiterated its opposition to the proposal during its September 21 testimony before the Subcommittee.(4)

Several other proposals deserve note because they reflect either disregard for proposals Congress has already enacted, misunderstanding of the burdens they would impose on taxpayers, or the type of gimmickry and sleight-of-hand that undermines public confidence in the tax system:

* The proposal to impose a 30-percent excise tax on expenditures of tax-exempt organizations for lobbying (including amounts paid as salaries and an allocable portion of support costs) comes on the heels of OBRA's opprobrious disallowance of deductions for lobbying expenditures (which has a raft of special rules governing expenditures by tax-exempt membership associations). TEI is pleased that the Administration opposed the proposal during its September 21 appearance before the Subcommittee.

* The proposal to increase estimated tax payments under the safe harbor method to 115 percent of last year's liability for individuals with adjusted gross income over $150,000 effectively requires taxpayers to overpay their income taxes in order to avoid any penalty attributable to their inability to estimate their tax liability with certainty. What's more, the proposal comes even before OBRA's change to the estimated tax rules (increasing the applicable percentage rate to 110) has gone into effect and, hence, before Congress could possibly determine whether a further increase is necessary. The Clinton Administration is to be commended for opposing the proposal.

* The proposal to require written substantiation of any meal or entertainment expense claimed as a business deduction or, alternatively, to require written substantiation of any meal or entertainment expense in excess of $10 seems untethered to reality, in that it would impose a requirement to secure receipts from, among other places, fast-food restaurants and vending machines. Moreover, the proposal disregards the OBRA conferees' rejection of a Senate proposal to reduce the substantiation threshold to $20.(5) We are pleased that the Administration shares our opposition to this proposal.

The deja vu quality of many of the proposals--the seeming disregard for the fact that Congress considered and either enacted or rejected similar proposals as recently as two months ago--is disturbing, for it feeds the instability that already marks the tax law. In the aftermath of the Tax Reform Act of 1986, there was much talk of the need for a moratorium on new tax legislation in order to give both taxpayers and the Internal Revenue Service a chance to implement and become accustomed to the massive changes the 1986 Act wrought. Although prospects for a full-scale moratorium were no doubt always illusory, there would clearly be ongoing benefits in adopting a "cooling off period" rule with respect to particular proposals. We applaud the Administration for making this same plea for stability during the Subcommittee's September 21 hearing, and urge the Subcommittee to reject the oft-resurrected proposals with dispatch.

Even more alarming than the "Friday the Thirteenth," Jasonesque character of many of the proposals, however, is their aggregate distension of the Sixteenth Amendment's imposition of a net income tax. People are supposed to be taxed on income not on gross receipts, but certain of the proposals do not concede that. Hence, several of the proposals--those in respect of environmental clean-up expenditures and damages, advertising expenses, and interest on tax underpayments-violate the precept that deductions are generally allowed for the expenses of producing that income.

The proposals also ignore the fact that the United States does not function in a vacuum: it is part of an increasingly interdependent global community. One of the more overreaching proposals would myopically penalize multinational corporations for operating in that global economy by replacing the foreign tax credit with a deduction. Such a proposal would result in double taxation, violate numerous bilateral treaties, and place U.S. companies at a severe competitive disadvantage. Other proposals would undermine the competitive position of the U.S. economy for capital investment and job creation by increasing the cost of doing business in the United States. Whenever a legitimate business expense deduction is denied or an additional compliance cost is imposed, the competitive position of the country as a whole is clearly diminished. That the Clinton Administration generally shares this view is laudable.

As the foregoing discussion makes clear, Tax Executives Institute has significant misgivings about many of the proposals...