Testimony on the impact, effectiveness, and fairness of the Tax Reform Act of 1986 before the Committee on Ways and Means U.S. House of Representatives February 7, 1990.

• Author: Burk, William M.

Testimony on The Impact, Effectiveness, and Fairness of the Tax Reform Act of 1986 before the Committee on Ways and Means U.S. House of Representatives February 7, 1990

On February 7, 1990, TEI President William M. Burk testified before the House Committee on Ways and Means on the impact, effectiveness, and fairness of the Tax Reform Act of 1986. Mr Burk focused on the administrative and compliance burdens spawned by the 1986 Act. Mr. Burk's testimony is reprinted below.

Executive Summary

Introductory Comments. Tax Executives Institute recognizes that corporate taxpayers can be expected to devote a reasonable amount of time to their tax affairs. Today, however, U.S. corporations face a tax system so complicated that tax executives are frequently reduced, not to ensuring total compliance - because that may be literally impossible - but to substantially complying with the tax laws.

Types of Complexity. Commissioner Goldberg has identified three types of complexity with which taxpayers must contend: (a) substantive complexity: how difficult is it to discern what the rules are?; (b) transactional complexity: how difficult is it to work with the provision?; and (c) administrative complexity: how difficult is it to create, collate, analyze, and maintain the necessary records and information in respect of the provision? In addition, there is transitional complexity - which encompasses the problems associated with the instability of the tax laws.

The Causes of Administrative Complexity. Complex rules have been developed that, without regard to their merits on conceptual grounds, are impossible for the IRS to administer and for taxpayers to comply with. The burdens generated by many provisions have been markedly disproportionate to their relative policy and even revenue goals.

Measuring the Results of Complexity. TEI conducted a survey to quantify the administrative burden of the Tax Reform Act of 1986 and to identify the particular provisions that contribute the most to that burden. Twenty companies participated in the survey and virtually all major industries were represented. The survey compared the companies' 1987 compliance burden to that in 1986 and specifically tracked the increase in staff time for preparing the return, internal research, and fees to outside advisers. On the whole, large increases in all three categories were reported. The order of the increase for staff time ranged from 10 to 191 percent; for research time, from 30 to 1,025 percent; and for fees paid to outside advisers, from 0 to 3,750 percent.

The major reasons for the increased workload were accounting changes (e.g., uniform capitalization rules), international provisions (e.g., myriad foreign tax credit limitations), and the alternative minimum tax. TEI members anticipated that the workload for preparing the 1988 return would be even worse.

Recommendations. TEI recommends that the complexity issue be addressed by -

* Seeking IRS testimony on the administrability of

proposed tax law changes.

* Making draft legislative language available in advance

of hearings.

* Developing pre-enactment forms and schedules.

Adopting these recommendations would help to make the legislative process more responsive to "real world" limitations and constraints. A reduction in complexity would contribute to increasing corporate productivity and, consequently, would enhance the ability of U.S. business to compete in foreign markets.

Mr. Chairman and Members of the Committee: I am William M. Burk, Director, Domestic Tax and Audits for CPC International Inc. in Englewood Cliffs, New Jersey. I am here today in my capacity as President of Tax Executives Institute to present the Institute's comments on the effect of the Tax Reform Act of 1986. Specifically, I will focus on the administrative burdens and costs faced by corporate taxpayers in complying with the statute.

1. Background

   Mr. Chairman, Tax Executives Institute (TEI) is the principal association of corporate tax executives in North America. Our 4,300 members represent approximately 2,000 of the largest companies in the United States and Canada, and are responsible for coping with the tax laws - from both a planning and a compliance perspective - on a day-to-day basis.

   TEI represents a cross-section of the business community, and is dedicated to the development and effective implementation of sound tax policy, to promoting uniform and equitable enforcement of tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayer and government alike. As a professional association, TEI is firmly committed to working with the government in developing and maintaining a tax system that works - one that is consistent with solid tax policy, taxpayers can comply with, and the Internal Revenue Service can audit.

2. Introductory Comments

   Mr. Chairman, in 1913 the modern income tax came into being as part of the Underwood Tariff. Representative Cordell Hull of Tennessee - who chaired the Committee's income tax subcommittee (but who is perhaps best remembered for his subsequent service as Secretary of State) - defended the proposal by stating that -

   Every good citizen ... should be willing to devote a

   brief time during some one day in the year, when

   necessary, to the making up of a listing of his income

   for taxes....

   "A brief time during some one day." Mr. Chairman, the world in 1990 is far different from, and far more complex than, it was in 1913. TEI (whose members strive to be good citizens) recognizes that large corporate taxpayers can reasonably be expected to devote more than "a brief time during some one day" to their tax affairs. Today, however, we face a tax system so complicated and, in many respects, perverse that tax executives are frequently reduced to performing corporate tax triage: moving from one compliance challenge to another, using band-aid approaches to stop the worst bleeding, and striving not to ensure total compliance - because regrettably that may literally be impossible - but to substantially comply.

   Of course, if the tax system were as simple today as Congressman Hull envisioned in 1913, Tax Executives Institute - and the ABA Tax Section and the AICPA Federal Tax Division - might well not exist. We would not need to, and the accountants, lawyers, and other business professionals and their staffs, who now devote themselves to trying to understand, to cope, and to comply with the tax laws...