Tax Executives Institute-U.S. Department of the Treasury liaison meeting: minutes November 19, 1996.

Minutes November 19, 1996

On November 19, 1996, Tax Executives Institute held its annual liaison meeting with the Assistant Secretary of the Treasury for Tax Policy and other senior representatives of the Treasury Department's Office of Tax Policy. The minutes of the meeting are set forth below.

Introduction

On behalf of the U.S. Treasury Department's Office of Tax Policy, Acting Assistant Secretary Donald C. Lubick welcomed the delegation from Tax Executives Institute. On behalf of TEI, TEI President James R. Murray thanked the Treasury representatives for meeting with the Institute. The Treasury's and Institute's delegations to the meetings are set forth in the box on the following page.

(The order of the items listed in TEI's agenda for the meeting was changed to accommodate the schedules of the Treasury Department representatives. For convenience sake, these minutes follow the Institute's written agenda.)

National Commission on Restructuring the Internal Revenue Service

Mr. Murray summarized his November 8, 1996, testimony before the National Commission on Restructuring the Internal Revenue Service. He explained that his testimony focused on the burdens imposed by current laws and the steps that can be taken to reduce those burdens. Specifically, Mr. Murray's testimony made the following points:

* The Desirability of Establishing an Administrability Index. The tax-writing committees should ask the IRS -- as well as the public -- to testify on the compliance burdens posed by all proposed tax legislation. Ideally, this testimony would be designed to ensure that clear, administrable, and cost-sensitive rules are enacted into law.

* Instability in the Tax Law. Congress needs to keep in mind that change itself is a complicating factor. In 1996 alone, six bills were passed that effected major changes in the Internal Revenue Code. The magnitude and rapidity of change only compound the already complicated nature of the law.

* The Search for More Revenue Without Raising Tax Rates. Each "revenue enhancer" or "loophole closer" that the Administration proposes and Congress enacts adds complexity to the tax law. Each time a legitimate deduction is curtailed, a new set of recordkeeping requirements is imposed. And each time the Code deviates from generally accepted accounting principles that business taxpayers employ for financial reporting purposes, there is a layer of complexity added to the tax law.

* The Use of the Tax Code to Promote Social and Economic Policies. Whether the goal of special provisions is to encourage home ownership through the mortgage interest deduction, to provide an incentive for research by means of the R&D credit, to aid low income Americans by the Earned Income Tax Credit (or Work Opportunity Tax Credit), to spur investment in Puerto Rico, or to enhance capital formation through the adoption of special provisions relating to capital gains, each provision -- regardless of its merits -- spawns tremendous compliance and planning burdens.

* The Alternative Minimum Tax. The decision to impose a "backstop" creates a horrifically complex alternative minimum tax scheme.

Assistant Secretary Lubick stated that Treasury is compiling a list of particular measures that need to be addressed in legislation; none of these items may be "earth shaking," he said, but in the aggregate the changes will reduce the tax law's complexity. He added that Congress needs to decide the priority to be assigned to tax simplification proposals. He invited the Institute's suggestions on what items should be addressed, though noted that there would be only a limited amount of revenue available to "pay for" simplification. He added that Treasury is well aware of the problems related to the alternative minimum tax (both the general "dual system" complication and the ensuing "train wreck" attributable to the interaction of the indexed regular tax exemption and brackets and the AMT regime).

Prospects for Fundamental Tax Reform

Mr. Murray referred to recent proposals to restructure the tax laws, for example, by adopting a flat or consumption tax. He asked for the Administration's views on the likelihood of fundamental tax reform. Although the diversity of its membership prevents TEI from taking a position on the various proposals, he said, the Institute believes it has a role to play in determining whether any particular proposal is administrable. Mr. Murray offered the Institute as a resource for sounding out new ideas, particularly in respect of administrative and transitional issues raised by the various proposals. Mr. Lubick thanked the Institute for its offer. He said that the Treasury Department does not view prospects for fundamental reform of the Code as great, but reiterated his earlier statement that some incremental "reforms" may overlap with simplification proposals.

Proposals for Reform of the International Tax Provisions

1. Treasury Conference on Formulary Apportionment. Mr. Rossi referred to the Treasury conference on formulary apportionment, which was scheduled for December 12. He stated that Mr. Cherecwich will attend the conference on behalf of the Institute. Noting that the speakers' list includes many proponents of a formulary approach, Mr. Rossi asked whether the conference will fully explore the problems with an apportionment-based system. For example, current-day formulae tend to focus on tangible property and generally ignore intangibles. In contrast, the arm's-length standard, as reflected in section 482 of the Code, applies to transfers of intangible property.

   The Assistant Secretary emphasized that the purpose of the conference is to give proponents of formulary apportionment a "fair hearing." The Administration's support for the arm's-length standard and correlative opposition to formulary apportionment has not changed. He said the implementation and administration of a formulary apportionment scheme would likely be problematic and might well create more problems than it solves. He repeated that the purpose of the...