Tax Executives Institute, Inc. - Joint Committee on Taxation; liaison meeting agenda; January 25, 1990.

Tax Executives Institute, Inc. -- Joint Committee on Taxation

Liaison Meeting

Agenda

January 25, 1990

1. INTRODUCTORY COMMENTS

   1. Overview: Does a Constituency Exist for

      That the tax system has become increasingly complex in the last decade is hardly open to dispute. Even apart from teh complex nature of specific statutory schemes (such as those fragmenting the foreign tax credit into countless baskets and the alternative minimum tax scheme), the magnitude and rapidity of change have been staggering. By one count, there have been more than 139 public laws enacted since 1976 that, one way or the other, have changed the Internal Revenue Code--including the Omnibus Budget Reconciliation Act of 1989. 1990 will no doubt bring Law No. 140.

      TEI recognizes that tax rules relating to corporations will never be "simple) and that tax reform's promise of simplicity was directed not so much at the business comumunity but at individual taxpayers. A year ago at our liaison meeting, we stated:

      [T]he tax system is very much like the weather in at least one respect: easy to complain about, more difficult to remedy. We are also well aware of the budget and political exigencies that lead to the development of particular provisions, and acknowledge the charge that "no one complains about complexity that benefits him." We submit, however, that not all rainmakers--those with proposals to address the complexity conundrum and to confront it systematically--are charlatans. We further submit the proper response to a Chicken Little defense ("the sky is falling, the sky is falling") is not its ornithological opposite -- putting one's head in the sand.

      We are pleased that a growing consensus exists that tax simplification must be assigned a higher priority by Congress, the Department of the Treasury and Internal Revenue Service, and the tax community as a whole. Thus, we believe that a "constituency for simplification" is emerging. In this regard, the 1989 Act not only simplified the alternative minimum tax provisions of the Code and repealed the mind-numbingly complex anti-discrimination rules of section 89, but also reformed and simplified the Code's penalty provisions.

      On a going-forward basis, Congressman Rostenkowski has scheduled hearings on "the impact, effectiveness and fairness of the Tax Reform Act of 1986" for early February. (1) (*1) In addition, Assistant Treasury Secretary Gideon, IRS Commissioner Goldberg, and Joint Committee Chief of Staff Pearlman have all voice support for efforts to earmark discrete portions of the Internal Revenue Code (for example, the international provisions) for simplification. These efforts may not produce instantaneous results, but they do mark a salutary start.

      (1) (*1) Numbered notes are printed at the end of the agenda (page 38).

      TEI appreciates that simplification of the tax laws must be an incremental process and that other goals--be they policy or revenue driven -- sometimes take precedence over the goal of simplicity. We do not believe, however, that a "take it or leave it" approach to simplification efforts is appropriate. The solution is continuing dialogue and a willingness to compromise. We recognize, moreover, that the compromises will not be all one way: sometimes simplicity is going to cost money, and sometimes it is going to raise money. That TEI, other professional groups, and other taxpayer representatives decline to support a full slate of revenue-raising proposals--to engage in a "robbing Peter to pay Paul" exercise without any assurance that Paul will ever see a cent of the money -- does not mean that our support for simplification is insincere or hollow.

      TEI strongly encourages Congress and committee staffs to redouble their simplification efforts, and we pledge our cooperation and support.

   2. Identifying and Adhearing to Governing Principles

      A major contributor to the complexity of the tax law is the willy-nilly manner in which changes have been made in recent years. In a very real sense, there seems to be no overriding principles that mold and shape tax policy. To restore order to the tax system (which by itself would bring some certainty), tax policymakers should identify and adhere to, with some degree of constancy, clear principles, rather than championing targeted provisions to address some real, perceived, or perhaps chimerical abuse.

      For example, if sound U.S. tax and economic policy supports minimizing double taxation on income earned abroad and deferring U.S. tax on unrepatriated earnings (and we submit it does), then proponents of proposals to dilute the foreign tax credit or chip away at the concept of deferral should be required to openly defend the proposed deviation from those principles. The incremental nature of such proposals should not relieve their defenders of the obligation to justify their proposals on policy grounds. Otherwise, taxpayers will find themselves at the bottom of the proverbial "slippery slope."

      Similarly, if a national consensus emerges concerning the tax law's proper role in encouraging capital formation and savings (for example, through a preferential capital gain rate or an enhanced Individual Retirement Account) or the integration of the corporate and individual income tax system, future legislative amendments should not be considered until those proposals are reconciled with the governing principles. Such an approach would, by itself, contribute to the simplification of the tax system.

   3. The Proper Target of Enhanced Compliance Measures

      Congressman Pickle, as Chairman of the House Ways and Means Oversight Subcommittee, recently announced the results of the Subcommittee's study of the effects of a budget shortfall at the Internal Revenue Service. The Subcommittee's press release states that the IRS's "financial crisis" has affected the quality of the IRS's taxpayer assistance program, the implementation timetable for a computer system modernization program (and new programs such as a delinquent returns initiative), and the IRS's ability to hire and retain qualified personnel.

      Receiving more attention in the press, however, were two items that could well become the basis for future remedial legislation or stepped-up compliance efforts by the IRS:

      * The Subcommittee reported that "[a]lmost $60 billion in taxes owed to the government remains uncollected because the IRS does not have the necessary resources to pursue delinquent taxpayers. In many instances, billions of dollars have been lost forever because the statute of limitations for IRS action has expired."

      * The Subcommittee reported that "[f]or the first time in history, less than 1 percent of all income tax returns will be audited posing a serious threat to the country's voluntary tax system. Approximately 83 percent of the tax owed in income from legitimate economic activities is voluntarily reported and paid. However, the 'tax gap'--an estimate of the difference between the amount of taxes voluntarily paid in a taxable year and the amount of taxes that would have been paid if all taxpayers had filed complete and accurate returns -- is approaching $100 billion a year and continues to grow. Despite growing noncompliance, the IRS continues to experience budgetary problems and, as a result, critical compliance initiatives have been cancelled or delayed."

      TEI does not underestimate the seriousness of the IRS's accounts receivable inventory or the "tax gap." We submit, however, that attention to these issues must be properly focused. Thus, the class (or classes) of taxpayers that are targeted for action must be specific. In this regard, we note that the IRS's audit coverage of large corporations is not 1 percent, but nearly 100 percent as a result of the Coordinated Examination Program (a program which TEI supports). At a time when most large corporations are subject to continual audit, we suggest the IRS's "critical compliance initiatives" coud more properly be directed to those taxpayers who, unlike CEP taxpayers, are not subject to substantial internal or external controls. (With respect to proposals to implement a document matching program for corporate taxpayers, see Item IV.B.)

      As to be size and nature of the "tax gap," caution must also be exercised not to misconstrue the the available statistical analyses. For example, in connection with the Institute's April 1989 liaison meeting with the Joint Commmittee staff, we noted the flaws in the IRS's 1988 report on the tax gap -- "Gross Tax Gap Trends According to New IRS Estimates, Income Years 1973-1992," Statistics of Income Bulletin, Vol. 8, No. 1, at 23-28 (Summer 1988). Cocluding that the net effect of the IRS's report was to cast corporations as tax scofflaws, we made the following specific observations:

      * The "gross" voluntary compliance rate among corporations in 1988 was 82.4 percent. Thus, the study confirms that the vast majority of corporate taxpayers comply with the tax laws.

      * The size of the tax gap is based on audit adjustments proposed by IRS examiners -- even though a large number of such adjustments are reversed by the IRS itself as cases work their way through the administrative process. (2)

      * The estimated increase in the tax gap (tax dollars not voluntarily paid) is attributable in large measure to the growth of income tax liabilities through real expansion of the economy and through inflation, not to growing noncompliance.

      * The estimated increase in the tax gap assumes that there will be no change in compliance rates. Thus, an incease in income tax liabilities will, by virtue of simple arithmetic, lead to an increase in the tax gap.

      * Perhaps most fundamentally, the IRS has insufficient data to identify the various components of the corporate tax gap.

      As Congress considers proposals to augment the IRS's compliance arsenal, we recommend that care be taken to identify the proper target of new compliance proposals.

   4. Conclusion

      In the succeeding sections of this agenda, TEI discusses several areas...