December 1, 1999
The Honorable William V. Roth, Jr.
Dear Mr. Chairman:
I am writing on behalf of the Section of Taxation of the American Bar Association regarding complexity in the tax law, and more specifically how H.R. 2488, the Taxpayer Refund and Relief Act of 1999 (passed by the Congress earlier this year) affects such complexity. Although the bill was vetoed by the President, we think it likely that some of the provisions, or similar provisions, will be considered in the future. Consequently, we believe our comments may be of benefit to the Congress as it considers future tax legislation.
The Section of Taxation has been concerned for some time with the increasing complexity of our tax laws. In numerous instances in recent years, we have attempted to articulate to the Congress and the Administration the serious adverse consequences that flow from an increasingly complicated system. In our view, complexity is one of the single greatest problems facing our tax system today. Our concerns are shared by other professional organizations including the American Institute of Certified Public Accountants and the Tax Executives Institute. You will be receiving letters from those organizations as well, expressing their concurring views.
In an effort to assist the Congress in simplifying the tax law, all three organizations have formed a joint task force to compile a list of specific simplification recommendations for your consideration. This letter covers some general thoughts on simplification and identifies a few important areas from H.R. 2488 for your consideration. We are working with the AICPA and Tax Executives Institute to supplement these views, early in 2000, with a more comprehensive discussion of simplification initiatives.
In light of continuing concerns about the complexity of the tax law and the likelihood that some of the provisions contained in the 1999 bill will be taken up again, we want to focus on a few provisions in the bill that would have increased complexity and the provisions that would have eased tax complexity. The provisions discussed below are illustrative only; we have not attempted to create an exhaustive list. Our hope is that highlighting both the good and the bad will assist the Congress in its consideration of future tax legislation.
While change in the tax law, in and of itself, tends to be destabilizing, we appreciate your efforts to limit the disruptive effect of the changes. As we reviewed the various provisions, we noted that, when faced with choices between more complicated and less complicated alternatives, Congress frequently chose the latter. For example, reducing the rate of tax applicable to a particular bracket is an easy, effective way in which to reduce taxes. Similarly, it appears that Congress resisted the addition of new, targeted incentives in favor of changes to, and expansion of, existing provisions. We urge the Congress to follow this approach again in any future tax cut legislation.
Alternative Minimum Tax
The Section compliments the Congress for having included an extension of the relief from the AMT interaction with certain credits that was granted individual taxpayers last year. The interaction of the AMT with the credits clearly creates complexity and frustration for the many affected taxpayers.
In addition, we applaud the Congress on its decision (reflected in H.R. 2488) to repeal the individual alternative minimum tax. The individual AMT represents one of the most complex provisions of current law that will, if not changed, only grow geometrically in its deleterious scope and effect. We believe Congress will strike a dramatic blow for simplification if it returns to this issue and succeeds in having the individual AMT eliminated.
We are concerned, however, about the way in which Congress chose to phase in the repeal of the AMT. During the phase-in period, the tax would continue to apply to the same taxpayers to whom it would otherwise apply, but at decreasing percentages. Thus, those taxpayers will face the same complexities (entailing the same need to go through the time and expense of the computations and tax determinations) they would otherwise have faced had the AMT not been repealed at all. In fact, to the extent additional taxpayers will become subject to the AMT during the phase-in period because of inflation or otherwise, its scope will continue to increase despite its eventual repeal.
We suggest that a different approach be taken to phase in repeal in order to mitigate the complexities of the current provision. For example, the exemption amount (currently $45,000 for a married couple filing jointly) could be increased in stages. This would have the benefit of removing taxpayers below the increased exemption amount from the AMT altogether. These increases in the exemption amount could be set to correspond to the revenue losses inherent in the 1999 bill.
We also applaud the Congress for addressing two of the problems associated with the corporate minimum tax by repealing the 90 percent limitations on the use of foreign tax credits and net operating losses. We believe it is time, however, for the Congress to undertake a fundamental re-examination of the corporate minimum tax and the provisions of the Code that drive it, with the goal of eliminating this overly-complicated and burdensome second tax system.
Section 202 of the bill provides for indexation of the basis of certain assets for purposes of determining gain on their sale. This is the only provision described in the Joint Committee on Taxation = s complexity analysis as causing an increase in the complexity of the tax code.
Whether or not singling out capital assets for basis indexation is appropriate as a matter of policy, we believe the additional complexity that would be introduced into the tax code by indexation would be extremely problematic and would outweigh any benefit to be achieved. Proposals to index basis have been made for many years, but it is this very concern with complexity that has caused Congress historically to use a preferential rate as a surrogate for indexation. An additional policy issue is the failure to index debt or interest incurred to purchase capital assets, thus allowing taxpayers to play a tax arbitrage game; but addressing that policy concern would add still more complexity to this area.
These concerns about the complexity of indexation are every bit as valid today as for past attempts, particularly in the case of pass-through entities such as partnerships, RICs and REITs. While we understand the theory underlying basis indexation, we strongly believe that the theoretical should give way to the practical, so that this provision is not enacted.
Marriage Penalty Relief
Recognizing that marriage penalty policy implications are substantially broader than simplification only, we compliment the Congress on the manner in which it designed the provision granting partial marriage penalty relief. In our view, by choosing to increase the size of the standard deduction applicable to married taxpayers as the means for providing relief from the marriage penalty, Congress selected the least complicated alternative available for those individuals who do not itemize deductions. Like the reduction in taxes achieved with a decrease in the tax rate applicable to a particular tax bracket, an increase in the size of a deduction is a simple and elegant way to reduce taxes.
Generation Skipping Transfer Tax
The bill deals positively with a trap for the unwary that exists in the current law generation skipping transfer tax. The provisions included in the bill were proposed by several sections of the ABA and the AICPA. We are pleased that the provisions were included and urge the Congress to resolve these issues as soon as possible.
In the pension area, the bill expands the options available for tax-favored savings. For example, the bill creates a new A Roth 401(k) @ account, and liberalizes income and other limits on existing tax-favored savings vehicles. While we understand the desire of Congress to increase personal saving, we are very concerned about the complexity created by the bewildering array of savings plans with highly complicated and often inconsistent rules and limitations. We believe that individual taxpayers would be better served with a limited range of choices that do not require the assistance of tax or retirement planners to sort through. We urge Congress to resist the temptation to add new, complicated savings vehicles and instead to streamline and simplify the plans already in existence.
The bill also attempts to make many simplifying changes in the pension rules, including certain changes in the A top heavy @ rules. While the Section welcomes efforts to simplify the pension rules, we believe that they do not go nearly far enough. We urge the Congress instead to repeal these rules outright. The rules are no longer necessary as a matter of policy because of other pension plan limitations enacted since the top heavy rules were put in place; thus, outright repeal would be the ultimate B and appropriate B simplification.
Finally, the Section is concerned about the large number of different, and thus inconsistent, effective dates for the various provisions in the bills. Taxpayers must be confused when they see new provisions coming into effect at different times for different taxpayers. We recognize that many of these effective dates are driven by revenue and budget constraints; however, we urge that Congress, wherever possible, provide uniform effective dates in future bills.
Thank you for your consideration. As always, we look forward to working with you, your Committee and its Staff.
Very truly yours,
Paul J. Sax
cc: Bill Archer, Chairman, Committee on Ways and Means Daniel P. Moynihan, Ranking Democratic Member, Committee on FinanceCharles O. Rangel, Ranking Democratic Member, Committee on Ways and Means
For Immediate Release: Contact: Greg Weiner
ABA TAX SECTION JOINS WITH AICPA, TEI
WASHINGTON—The Section of Taxation of the American Bar Association has joined forces with the American Institute of Certified Public Accountants and the Tax Executives Institute in an initiative to simplify the tax code.
In an initial step, the groups have sent letters to the leaders of the Senate Finance and House Ways and Means Committees urging them to make simplifying the tax code a priority when legislators reconsider provisions of the vetoed Taxpayer Refund and Relief Act of 1999. The three organizations plan to offer more comprehensive recommendations on simplifying the tax code early next year.
"These three major professional groups—whose members have occasionally had differing interests—have joined forces out of a shared belief that the complexity of the tax code is one of the most important challenges facing the tax system," said Paul J. Sax, Chair of the ABA Section of Taxation. "The ABA Tax Section hopes to work closely with Congress—and with our colleagues at the AICPA and TEI—to address that challenge, especially as provisions of the 1999 tax bill are reconsidered next year."
The Section of Taxation’s letter, a copy of which is attached, reflects policy of the Section. The policy has not been presented to the American Bar Association’s policy-making House of Delegates, and does not represent policy of the Association.
The Section's letter noted that lawmakers generally favored simpler alternatives over more complex ones in the 1999 bill. It praised Congress in particular for its efforts to repeal the Alternative Minimum Tax and resisting new targeted tax incentives. Congress also chose the least complicated alternative in addressing the so-called marriage penalty by broadening the standard deduction for married taxpayers, thereby providing relief to taxpayers who do not itemize deductions, the letter said.
The letter urged Congress to simplify other provisions it reconsiders, including Section 202, which unnecessarily complicates the process for determining capital gain on the sale of certain assets. The letter also cited the "bewildering array" of tax-favored retirement accounts and inconsistent effective dates for different provisions in the bill.