A Flatter and Fairer Tax System
Click here to watch the video of Rep. Burgess' Special Order on tax reform
When it was first created, the Tax Code was 400 pages. This year, it is 67,506 pages, nearly a 17,000 percent increase, pretty typical of government math. Because I'm a visual person, I would like to show you what the statistics look like.
Here is a picture from the ``CCH Standard Federal Tax Reporter'' illustrating the exponential increase in the Tax Code. What this demonstrates, Madam Speaker, is way back here in 1913, we had one little 400-page book that was the Federal Tax Code, and then we fast forward to 2007 and 2008 and you see the number of pages now that fill the bookshelf, making the complexity of the code something that the average person, quite honestly just does not understand.
Madam Speaker, remember that one of the fundamental tenets of the American legal system, including the tax system, is that ignorance of the law is no excuse. Therefore, in theory, every single American who is merely trying to comply with the Tax Code and file their taxes by April 15 is supposed to be familiar with all of the 67,000 some odd pages that are contained within the Tax Code which comprise the tax rules.
Now, I don't know if my tax preparer back home knows all of the 67,506 pages and you have to wonder about other people in other congressional districts. What about the small business owner? What about the single mom who is just struggling to get by? How are they ever going to know all of the regulations contained within 67,506 pages of the U.S. Tax Code?
The complexity of the Tax Code is a result of countless deductions and exemptions aimed at steering a social agenda, quite honestly, when it's supposed to be a Tax Code. That's one of the fundamental problems with our tax system, is that we try to enforce social policy through the Tax Code rather than seeing the Tax Code simply as a vehicle for collecting those revenues that the government has to collect in order to run. Special interest groups run rampant through every single page of that 67,000 pages. Anytime Congress wants to punish a special interest group or reward another, Congress adds a new credit or a new law to the mammoth Tax Code. The result is a Federal law fraught with opportunities for avoiding taxes and loopholes to be exploited at the expense of fellow Americans. Everyone is familiar with the problems inherent in our convoluted Tax Code, and criticizing the American Tax Code is as American as apple pie and baseball, and for good reason.
Let me share just a few interesting facts on why we need fundamental tax reform. Each year, Americans spend 6.5 billion hours preparing their tax forms, and businesses spend 800 million hours complying with the Tax Code. The cost of compliance for Federal taxpayers filling out returns and related chores was $265 billion in 2005. The average taxpayer pays over $1,800 per household in compliance costs. In other words, that taxpayer works a little over a week just to pay for the cost of preparing his or her taxes for that year.
A study was done back in 1998 when the forms in 1998 were less complicated than they are 10 years later, and it surveyed 46 tax experts. Each expert came up with 46 different answers when determining tax liability. Forty-six preparers, each given the same set of data, 46 different figures to determine tax liability. The tax calculations themselves ranged some $34,000 to $68,000, almost a doubling of the original estimated amount.
The Tax Foundation prepared the following information that actually I think will be of interest to this body:
In the year 2007, a person spent 79 days working to pay for their Federal taxes and 41 days on State and local taxes for a grand total of 120 days. That's more than health care, more than housing, more than transportation. And, honestly, you can see an immediate return on those categories. It's a little bit more difficult to see the tangible return on Federal tax dollars, albeit those are the moneys that are required to have the Federal Government run. But when you look at the bite that taxes take out of the average income compared with all of the other expenditures, it truly is significant.
We all complain about paying our taxes. The fact is if the system was fair and simple, it would be a lot easier to take. Americans don't mind paying for roads. They pay for a strong defense. They pay for health care for your grandmother. It's the fact that one family makes exactly the same amount as the family next door, but they're forced to pay a higher share of the tax burden. The Declaration of Independence says all men are created equal, and that should apply to the tax burden as well.
Now, let me just show you a breakdown by congressional district. Most Members of Congress should be interested in this chart, also produced by the Tax Foundation. In 2004, the Tax Foundation ranked Federal individual income tax burden by congressional district. My district, the 26th District of Texas, falls here somewhere in the middle, and it is highlighted in yellow so its easy for me to see, but it compares the ranking of Federal income tax burden as a percentage of the adjusted gross income versus the ranking of the average income tax liability per return. In other words, with identical incomes, we have some States with a much higher burden and some States with a much lower burden.
Now that is an average across the population, so clearly there will be some differences, but we see New York represented in both the upper and the lower categories. We see California likewise represented in both the upper and the lower categories. So it's not inconceivable that the discrepancy should not be that large; but, nevertheless, because of the complexity of the Tax Code, that's one of the things we're left with.
435 Members of Congress and here is the data from the top seven compared to the bottom seven. You can definitely see varying tax liabilities throughout the country. Again, my district ranked 139th in regards to the Federal income tax burden as a percentage of gross income, but ranked only 127 as the average income tax liability per return. Again, that's more of the Federal Government's math for you.
And yet another aspect of complying with our Tax Code. Time is precious. We often don't have enough of it for personal things, those mundane things like earning a living, raising your family, spending time with your friends, and then there's the dollars-and-cents side of the equation where, in fact, time is money and valuable resources are misspent navigating tax law instead of spent growing the economy and creating jobs. Taken together, this is a strong prescription for real change in our Tax Code.
We know what works when it comes to changing the Tax Code because we got a glimpse of it when during Ronald Reagan's administration he cut the Tax Code in half in 1986. As a result of that reform, the economy grew, revenues increased and jobs were created. I can't think of a better prescription for our slowing economy today than replicating the reform of the Tax Code on an even greater scale.
So what should we do? The prescription is fairly simple. Flatten the tax, broaden the base and shift the burden away from families and small businesses. Simplify the Tax Code and make it easier for individuals and businesses to file their taxes and pay their fair share. Even the National Taxpayer Advocate, Nina Olsen, stated simplify the Tax Code as one of her recommendations in the 2007 Annual Report to Congress:
``The complexity of the code increases the likelihood that honest taxpayers will make inadvertent mistakes, creates opportunities for taxpayers to avoid paying their fair share of taxes, and makes it difficult for the Internal Revenue Service to administer the tax system. Simplifying the tax law could improve the audit process and allow less taxpayer burden.''
Pretty simple stuff. Pretty straightforward. If the National Taxpayer Advocate thinks it is best for our constituents if we simplify the system, it would make sense that Members of Congress on both sides of the aisle would agree with this sentiment and work toward this goal.
Now, this next data I need to credit to some polling done by American Solutions. They conducted a nationwide poll on six different topics, with one being taxes and jobs. This poll crossed gender, ethnicity, economic and party lines, and they discovered the following opinions in America. Under taxes and jobs, 69 percent think the Federal income tax system is unfair. Seventy percent favor tax incentives for companies who keep their headquarters in the United States of America. What a great concept. Eight-two percent think the option of a single rate system would give taxpayers the convenience of filing their taxes with just a single sheet of paper. Pretty powerful stuff. Eight-two percent want to be able to file on a single sheet of paper.
Madam Speaker, it sounds to me as if America has spoken fairly clearly on this subject, and the evidence is that we do need real change in our tax system. The encouraging news is that we have a practical and effective blueprint for making this real change across-the-board. The blueprint is called the flat tax.
In 1981, Robert Hall and Alvin Rabushka proposed a new and radically simple structure that would transform the Internal Revenue System and our economy by creating a single rate of taxation for all Americans. Today, several States have implemented a single rate tax structure for their State income taxes and from Utah to Massachusetts, citizens are seeing the benefit.
In Colorado, a single rate generated so much income, so much revenue, that lawmakers actually reduced the rate 10 years after its implementation. In the State of Indiana, the economy boomed after a single rate went into effect in 2003, and in that time corporate income tax receipts have risen 250 percent.
In 1981, a simple concept put forth by Robert Hall and Alvin Rabushka, revisited in 1995 by my predecessor in this body, former majority leader Dick Armey, and, most recently, within the last couple of years, a book published by Steven Forbes on the flat tax revolution. All of those authors, all of those authors calling for the same type of reform in our Tax Code, to allow it to be flatter, fairer and simpler.
Now we have got several Members of Congress who are actually working on the problem. Certainly it is something that I remain focused on. Congressman David Dreier from California, the ranking member on the Rules Committee, and Paul Ryan of Wisconsin, the ranking member on the Budget Committee, are all working to establish the single tax rate structure for the United States. Members are working on it in the other body as well. Each of us have our own ideas. The legislation proposed is a little bit different, but it all has at the center of it the concept that you should be able to file your taxes on a single form at a much flatter rate that will be fairer across-the-board, and, in fact, evidence has shown that it will actually increase revenue.
The bill that I introduced actually two Congresses ago, and I have continued to introduce it every year, H.R. 1040, it makes it easy to remember the number, H.R. 1040 allows for a person to opt in to a flat tax. They can't go back and forth from the old IRS code and the flat tax, but if they elect to go into the flat tax, they may do so.
If quite honestly they have constructed their family or business finances such that they have been trying to utilize the code to maximize their effectiveness, no one is going to require them to go into the flat tax. They may stay under the old IRS code. But for a lot of people like myself, regardless of whether I would come up better or worse under the flat tax, just to give up that shoe box full of receipts every year, to give up that quality time spent with my accountant every year, to give up that $1,800 or $2,500 that I spend every year on tax preparation, and I promise you, mine are not that complicated, I would gladly give that up to be able to simply file my taxes on a single page form, or, better yet, populate a field on a computer screen on the Internet, click a mouse, send it in, and be done with it for the year.
Now, we all may not agree on just a single rate. I have mentioned some other individuals that have other bills, and they do have different approaches. We may not all agree on whether it should be a single rate or two rates, as it was back when Ronald Reagan simplified the Tax Code. We may prefer a tax method that does allow for deductions for mortgages or charitable contributions. But regardless, regardless, each of them embodies the fundamental principle that each American should bear the burden of taxation equally and at the lowest rate possible; we think everyone should be able to do their own taxes without the help of a professional and should be confident that people who earn the same income pay the same taxes.
Madam Speaker, just as an aside, I remember back in the year 1993, I was just a regular guy working in a medical practice back home in Texas. It just so happened that that year, the President of the United States and myself had an almost identical income reported. And yet when you calculated what I paid as a percentage of income, it was in excess of 30 percent. When you calculated what the other individual paid, it was around 20 percent. So why the discrepancy? With the same amount of earned income, why should there be such a vast difference in the taxes owed and the taxes paid? That is really what got me to thinking about this subject, many, many years ago.
We all remember when the Tax Code was changed in 1993. It was changed retroactively so that we got both the rich and the dead involved in paying additional taxes. But it really got me focused. Then in 1995 when Congressman Armey published his book on the flat tax, I read it, I became a believer, and have continued to study the issue and have continued to talk about the issue. And this is the time of year to have these types of talks, because I do think it is important, regardless of which party is in power, that we take seriously the will of the American people. Eight-two percent, 82 percent, want to be able to fill out a single page form and be done with their taxes.
Just by way of comparison, according to the Wall Street Journal, citing a blog off the National Taxpayers Union website, there are about 1.2 million or more professional tax preparers during tax season, which equals roughly the population of Hawaii. There are 836,000 doctors in the United States. As a physician, I think that there is something a little askew with this number, that we require half again as many tax preparers in the country as we do physicians. Healers shouldn't be outnumbered by tax preparers. The government math stuff is starting to scare me, and really should start to scare a lot of Americans.
Also, according to the Wall Street Journal, more than half of the individual taxpayers now use a paid preparer for their income tax return. I do myself. Mine is not that complicated, but I don't dare go into the process without a professional guiding me, lest someone at some point say, hey, you made a mistake. I want a professional with me if I had to go in to justify what those numbers read on the form.
We actually anticipate the number of people using a paid preparer to increase this year. In 1960, less than a fifth of taxpayers used preparers. More than half now. Less than a fifth, less than 20 percent, back in 1960. In 2005, one of the most famous tax preparation companies garnered $2.4 billion in revenue from the United States in tax preparation, up from $841 million 10 years before in 1996. Pretty astounding. Pretty astounding figures when you stop and think about it.
Now, I respect and I fully appreciate everything that my tax preparer does for me, what my accountant does for me, what tax preparation companies do, and I think it is a shame that Congress has created a system that is so complicated that more than half of the public feel a need to pay someone, to pay someone else, just to figure out how much they owe for their tax liability. The system doesn't have to be that complicated.
Now, bear with me, if you would, through one last poster, and this really sums it up. A faster, flatter, fairer tax structure, let me show you how it works. It is pretty simple.
Here we go. You put in a little bit of information, like your name; a little bit of identification data, income, personal exemptions, married filing jointly, single head of household; number of dependents. You add up your deductions. Taxable income is line 1 minus line 3. One subtraction equation on the form. And then calculate the amount of tax owed on this particular form, calculate by multiplying line 4 by 0.19. The tax is already withheld. Your tax refund you are owed or the taxes you are to pay. What did that take? According to the clock up there, a little less than 30 seconds. Thirty seconds, and your income taxes are done.
Now, in all honesty, I haven't started my taxes this year. Please don't tell my accountant. But I will spend the better part of a Saturday afternoon, probably this coming Saturday, going to all those places in the house where I have secreted away little receipts and things that I knew I would need when it came time to prepare my taxes. I will gather all of this stuff together and put it in a form that is presentable, take another half day and spend that with my accountant. He will spend several weeks churning it through whatever computer program that he uses. And then right before midnight on April 15th, I will get my tax form to sign, and I will send it in and I will either pay a little in taxes or I will get a little bit of refund.
But look at this. Thirty seconds. Your name, a little bit of identification data, a couple of numbers that are easy to obtain, and taxes are already withheld, your tax liability or your tax refund. No expensive tax attorney bills. No more hours of stressful research trying to figure out whether your military service or your marital status will adversely affect your return. No more headaches trying to determine where the estimated tax payments go. No more Congress taking one special interest group over the other trying to create social good works through the Tax Code. Instead, just a very simple and straightforward system. And remember that number: 82 percent of Americans want something simple like this for their tax preparation.
Now, in my opinion a single tax rate structure would eliminate taxes on capital gains, eliminate taxes on dividends and taxes on savings. You know, we always hear that our savings rate in this country is really pretty low, and that in fact is one of the things that may be behind some of the financial crisis that we find ourself in now.
I will just tell you there was a time when I was in business for myself that I thought the prudent thing to do would be to hold three months, three months, of operating capital in some easily convertible security, like a CD, something that was fairly liquid, earn a little bit of interest along the way, and have that money in case the dire wolf was ever at the door and I needed those funds to continue to operate my business. It seemed like a prudent think to do.
But here is the deal. You earn some interest, but guess what? It is taxed at regular income rates. So it is suddenly eroded by, at that time almost a half, now around a third. And then if you ever get to the point where, okay, I am going to bring that money back into the business and pay it out in salary, well, guess what? If you have held it for over a year in that money market or CD, your business had to report that and pay taxes on it at the end of that first year, and then when you do dispense it as earnings to the owners of the business, guess what? It is taxed again. So it got taxed twice.
So for doing the prudent thing, the prudent thing, holding 3 months of capital in a relatively liquid account so you can get to it if you need it, for doing the prudent thing, you are punished on the interest you earn. So that is not a good deal. You have got to pay taxes on it from your business, and, oh, by the way, if you ever do pay it out to yourself in salary, you get taxed again. So you have been taxed three times on that money that you thought you were doing the right thing. You were putting it away against perhaps a lean month or two. Maybe those Medicare payments didn't come through as fast as I would like, or, God forbid, the SGR cut my payment again for Medicare reimbursement, I would have a little cash to fall back on. But, guess what. If you do that, if you do that, you are actually hurt.
If we were to change the Tax Code, again, with a single rate structure, no capital gains tax, no taxes on dividends, no taxes on savings, which is extremely important, and I personally would eliminate the Clinton tax on Social Security earnings, what would happen? Personal savings would increase.
Would that be a bad thing? Does anyone in this body think personal savings would be a bad thing, particularly given our current economic situation? Businesses might just actually expand and create jobs. Would that be a bad thing given our job creation numbers this past month? We lost a bunch. We didn't create anything.
Without the heavy corporate income tax, which is currently the second highest in the industrialized world, companies would have less incentive to offshore their headquarters and offshore their earnings. If they had less incentive, and those earnings and headquarters stayed in this country, wouldn't that ultimately be a good thing for the state of our economy?
So it really comes down to an all-American principle of freedom, and it comes in a prescription. The decision to move to a single-rate system would be entirely up to the business, not up to the government. This would be an optional program. If someone has constructed their domestic finances or their business finances to maximize their earnings under the current Federal Tax Code, stay in the code, that would be your choice.
But if you are tired of the shoe box, if you want to fill out a single-page return, single-page form, and then have the rest of that time, that half day I am going to spend on Saturday and that other half day I am going to spend on a week, if you would rather have that day to spend with your family, take a personal day off, go fishing, whatever, earn more money, whatever, that's yours. You don't owe it to the government any more.
A flat tax would be less costly. It would save taxpayers $100 billion a year and would reduce cost of compliance by over 90 percent. The resulting increase in personal savings, well, wait a minute, didn't we just pass a big stimulus package? That would have an immediate effect on our American economy by putting that money back in the hands of productive people in this country.
As I said earlier, recent polling by American Solutions shows that over 80 percent of Americans favor an optional, single-page, one-page tax form with one rate. After all, is anybody really going to complain if this one time, this one time Congress does something worthwhile and actually makes something easier? After all, who could complain about making something easier, especially a process that comes with such a high cost?
One of the things we haven't even talked about, and you now hear talked about all the time, is the compliance gap, the 200 to 300 to $350 billion that it's estimated that is owed in taxes but it's not paid in taxes because it's simply too hard to go through all that you have to go through to comply with the IRS code or you are worried about making a mistake and going to jail for misrepresenting yourself on your tax form.
So that compliance gap, the tax gap as it is called, you will hear people talk a bit on both sides of the aisle. They want to utilize, well we are going to go out and do a better job of collecting the taxes, so we will use that $350 billion to offset an increase in the farm program or AMT patch, or, God forbid, we would fix the SGR formula for patients and doctors across the country. But you always hear people talk about that tax gap that they are going to collect that $300 billion and put it to some other good work, but this gets rid of the tax gap. It's gone tomorrow.
You wouldn't have to worry about people not complying with the code because it would be so simple. The cost of not complying would be high. The cost of complying would become much more bearable.
Well, guess what? This is a very political year. Everywhere you go, people are talking about change.
I will tell you what, I haven't heard the word ``change'' so much since I was an intern at the newborn nursery at the Parkland Hospital back in the 1970s. Everyone is talking about change. You turn on the television, people are talking about change.
Let's consider how that change could improve one of the most complicated of institutions, the Internal Revenue Service. More importantly, let's consider how that change could deliver prosperity, deliver time back to America's families and to America's taxpayers.
You know what, when it gets right down to it, that's a stimulus, that's a stimulus that every American could understand and every American could be for. That's a stimulus package that everyone on the floor of this House should consider and vote for.
I have got a bill, H.R. 1040. Ranking Member Dreier has a bill, Ranking Member Paul Ryan has a bill. I think all of those are worth looking at. I would like to see those brought up in the appropriate committee of Ways and Means, the Subcommittee on Taxation. Let's have the debate; let's have the argument. Let's do it out in the open. Let the American people hear our debate, and let them decide who is arguing on their behalf and who is arguing on behalf of the special interests. I think it would become quite clear after just a few minutes of that debate.
Again, here is an opportunity to give time and money back to the American people. That is a stimulus package of which this body, both sides of the aisle, could be justifiably proud.
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