AMERICA NEEDS A BETTER TAX SYSTEM

As Tax Day approaches and millions of Americans rush to file their tax returns, the President's Advisory Panel on Federal Tax Reform released the attached statement. The Tax Reform Panel was established by President Bush on January 7, 2005 and is charged with recommending reforms to the tax code that will make the U.S. tax system simpler, fairer and more growth oriented.  The Panel's report is to be issued by July 31, 2005 .

Excerpts from the Statement by the President's Advisory Panel on Federal Tax Reform:

•  The comments and the testimony of witnesses at our public meetings conveyed the dismal condition of our current tax system.

•  Our tax laws have been compared to an overbuilt and dilapidated house with conflicting architectural styles and a crumbling foundation, a sick patient who is about to expire, and a factory that has been littered with so much garbage that it can no longer operate productively.

•  Nobel Laureate Milton Friedman described our tax system as a blackboard that has been filled up with so much writing that the slate must be wiped clean.

•  We have repeatedly heard that our system is needlessly complex.

•  This complexity is costing the U.S. economy about $140 billion per year. To put this number in perspective, it amounts to roughly $1,000 for every family in America .

•  One particular problem that cannot be ignored is the rapidly growing reach of the AMT.

•  The AMT will affect almost 4 million taxpayers this year and 20 million taxpayers next year. By 2015, some studies project as many as 50 million taxpayers, or about 45 percent of all taxpayers who pay income tax, will be affected.

•  The AMT violates three principles of good tax policy: it is not simple, it is not efficient, and it is not fair.

•  The problems of complexity are not limited to individual taxpayers.

•  Our business tax code is littered with special rates, deductions, and credits creating complexity, volumes of new regulations, opportunities for tax shelters, and unfairness.

•  It is hard to believe that our current tax system does not hinder American businesses from selling their products or otherwise competing in the global marketplace.

•  Simplifying and reforming the tax code should lighten the burden on taxpayers, eliminating numerous tax headaches, and allowing Americans to spend less time doing their taxes. For American businesses, a better tax code will allow them to devote more resources to developing new products and services, expanding their operations, and hiring more workers.

•  Reform of our tax code should alleviate the wasteful use of our economic resources and boost economic growth.

During our examination of the existing system, several themes emerged from the public comments and testimony. These themes will guide our efforts as we consider options for reform:

•  We have lost sight of the fact that the fundamental purpose of our tax system is to raise revenues to fund government.

•  Tax provisions favoring one activity over another or providing targeted tax benefits to a limited number of taxpayers create complexity and instability, impose large compliance costs and can lead to an inefficient use of resources. A rational system would favor a broad tax base, providing special treatment only where it can be persuasively demonstrated that the effect of a deduction, exclusion, or credit justifies higher taxes paid by all taxpayers.

•  The complex and unpredictable influences of the current tax system on how families and businesses arrange their affairs distorts economic decisions, leads to an inefficient allocation of resources and hinders economic growth.

•  The complexity of our tax code breeds a perception of unfairness and creates opportunities for manipulation of the rules to reduce tax. The profound lack of transparency means that individuals and businesses cannot easily understand their own tax obligations or be confident that their neighbors or competitors are paying their fair share.

•  The tax system is both unstable and unpredictable. Frequent changes in the tax code, which often add to or undo previous policies, as well as the enactment of temporary provisions, result in uncertainty for businesses and households. This volatility is harmful to economic development and creates additional compliance costs.

•  The objectives of simplicity, fairness, and economic growth are interrelated and, at times, may be at odds with each other. Policymakers routinely make choices among these competing objectives, and, in the end, simplification is almost always sacrificed. Although these objectives at times are in tension, meaningful reform can deliver a system that is simpler, fairer, and more growth oriented than our existing tax code.

Panel Members

Connie Mack III (Chairman) , former U.S. Senator. Senator Mack served as Chairman of the Joint Economic Committee and was a member of the Finance and Banking committees. He is a Senior Advisor at King & Spalding LLP.

John Breaux (Vice-Chairman) , former U.S. Senator. Senator Breaux served on the Finance Committee and the sub-committee on Taxation and IRS Oversight. He is Senior Counsel at Patton Boggs LLP.

William E. Frenzel , former Member of the U.S. House of Representatives. Mr. Frenzel served on the Budget Committee and the Ways and Means Committee. Mr. Frenzel is a Guest Scholar at the Brookings Institution.

Elizabeth Garrett , Sydney M. Irmas Professor of Public Interest Law, Legal Ethics and Political Science, University of Southern California . Ms. Garrett served as Legislative Director and Tax and Budget Counsel to former U.S. Senator David L. Boren.

Edward P. Lazear , Senior Fellow, Hoover Institution and Professor of Human Resources, Management and Economics, Stanford University's Graduate School of Business. Mr. Lazear is the founding editor of the Journal of Labor Economics.

Timothy J. Muris , Foundation Professor, George Mason School of Law and Of Counsel, O'Melveny & Myers LLP. Mr. Muris served as Chairman of the Federal Trade Commission from 2001 to 2004.

James M. Poterba , Department of Economics, Massachusetts Institute of Technology. Mr. Poterba serves as Associate Department Head. He has taught at MIT since 1982.

Charles O. Rossotti , Senior Advisor, The Carlyle Group. Mr. Rossotti served from 1997 to 2002 as Commissioner of Internal Revenue. He formerly served as the President, Chief Executive Officer and Chairman of the Board of American Management Systems.

Liz Ann Sonders , Chief Investment Strategist, Charles Schwab. Ms. Sonders joined U.S. Trust, a division of Charles Schwab, in 1999 as a Managing Director and member of its Investment Policy Committees.

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