Representative Todd Tiahrt - 4th Congressional District of Kansas

| Tax Relief and Simplification |

High Tax Rates and Complex Tax Codes are Killing Jobs in the United States.

Our tax structure does not provide a fair playing field for American industries to compete in the global market. Aside from being too complex, our tax rates place an unfair burden on businesses trying to prosper, and have become barriers to doing business in America.

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Reform of the tax code and tax relief will enable more investment, make businesses more competitive and help bring jobs back to America. Business has already seen dramatic growth due to implementation of the historic tax relief. This tax relief has strengthened the economy and created hundreds of thousands of new jobs. Federal Reserve Chairman Alan Greenspan credits the tax relief for bringing the economy out of the 2000 recession. Consider the following:

As of recently, the IRS produced 649 separate forms, schedules, and instructions with approximately 16,100 lines. IRS publications providing guidance to taxpayers alone totaled about 13,400 pages.
There are 733 separate sections of the federal income tax code--a 612 percent increase over the tax code in 1954.

Compliance and the IRS

Ten years ago, the IRS said it took the average person 9 ½ hours to complete the 1040. Today's average is 13 hours--time enough to complete at least 4 baseball games.

Think You Have Paid Your Taxes for the Year? Think Again!

Throughout the rest of the year, Americans will continue paying more federal taxes every time they fly on an airplane, make a phone call, or fill up their gas tank. These federal excise taxes cost the average American about $500 per year.

Since the federal government taxes corporations, they are forced to factor these costs into the prices of the products and services they sell. Corporate income taxes and the employer share of payroll taxes cost consumers over $1,600 a year in increased prices. Sources for Tax Facts: General Accounting Office, IRS, Office of Management and Budget, Office of Personnel Management, and The Tax Foundation.

Tax relief and simplification have historically led to economic expansion: Even JFK understood the importance of tax relief

In 1963, the foundation of John F. Kennedy's strategy to reduce unemployment was, in his own words: "An across-the board, top-to-bottom cut in both corporate and personal income taxes." Secretary of Commerce, Donald Evans, "Always Bet on America" speech to US Chamber of Commerce, 7/15/04

The Kennedy tax cuts triggered record expansion, and revenues increased by 62 percent over the seven-year period.

Lower taxes on savings and investment were approved in 1962, followed by across-the-board rate reductions in 1964. (The Heritage Foundation).

Reagan's Phenomenal Tax Relief Success

Campaigning on across-the-board tax cuts, Ronald Reagan took office at a time when the economy was in horrible shape. The economy was in the middle of a severe double-dip recession. Inflation was running at double-digit rates, unemployment was rising, and interest rates had climbed to more than 20 percent.

Critics claimed the tax cuts would be inflationary and would do nothing to boost growth, but just the opposite occurred.

Once the tax cuts [took] effect, they initiated the longest peacetime economic expansion up to that point in the nation's history. (The Heritage Foundation)

"Jobs are created when the economy grows; the economy grows when Americans have more money to spend and invest; and the best and fairest way to make sure Americans have that money is not to tax it away in the first place." - President George W. Bush, State of the Union, 2003

Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)

• Rebates of between $300 to $500 mailed to taxpayers due to retroactive nature of rate reduction.

• Taxes for 43 million married couples, on average, will be lowered by $1,730.

• Average tax cut of $1,463 to help pay for education, childcare, and other expenses for 38 million families with children.

• 11 million single mothers with children will be able to keep, on average, $780 more of their income to meet their family's pressing needs.

• Reduction in taxes for 13 million seniors, on average, $924.

• 3.9 million individuals and families will have their income tax liability completely eliminated by the Act.

Jobs and Growth Tax Relief Reconciliation Act of 2003

• Taxpayers with children received an immediate boost from rebate checks of $400 per eligible child.

• Because of lower tax rates and less income tax withholding, workers saw higher take-home pay in their paychecks starting in July 2003.

• Married couples benefit from reduction in the marriage penalty from expansion of the fifteen percent rate bracket and increase in the standard deduction for joint filers.

• Small businesses are benefiting from a four-fold increase in the amount of new investment they can deduct in one year, from $25,000 to $100,000.

Job Creation and Worker Assistance Act of 2002

This important economic stimulus bill included important provisions to help out of work Americans immediately (including extension of unemployment benefits and TANF supplemental grants). More importantly, President Bush and the Republican Congress realized that what unemployed workers really needs is a job. The stimulus bill included an extension of bonus depreciation and the general net operating loss (NOL) carry back--both of which have led to increased capital, economic growth, and increased jobs.

Real effects of tax relief

Despite the collapse of the stock market and commencement of a recession in 2000, the terrorist attacks of 2001, and the ongoing war against terror, the economy has expanded by more than $1 trillion since President Bush took office.

President Bush's economic policies are working. The economy is strong and growing stronger. Factories are busier, families are earning more, homeownership remains at record levels, and people are finding work.

America's standard of living is on the rise. Real after-tax incomes are up by 11 percent since December 2000 - substantially better than the gains following the last recession. Since the President's 2001 and 2003 tax cuts, personal consumption levels have risen significantly.

The national homeownership rate, in the first quarter of 2004, remained at the record high of 68.6 percent set in the previous quarter.

Minority homeownership set a new quarterly record of 50.8 percent in the first quarter of 2004, up 0.2 percentage point from the fourth quarter and up 1.5 percentage points from the first quarter of 2003.

Mortgage rates remain near historic lows, making home buying easier and more affordable.

Productivity grew from 2000 to 2003 at the fastest 3-year rate in more than 50 years. This has bolstered profits and will lead to significantly higher real wages for workers.

Manufacturers have been reporting increased activity and new orders more than at any time in the last 20 years.

From its low in mid 2002, the stock market is up about 40 percent and the NASDAQ is up almost 70 percent.

The 2001 and 2003 tax cuts were the biggest since Ronald Reagan's first term.

Since their passage, the unemployment rate has declined, business investment has increased and GDP has skyrocketed.

The U.S. Treasury Department estimates that without the tax relief, there would be 2 million fewer jobs today.

The GDP growth seen in the 3rd quarter of 2003, the largest since President Reagan, was a result of these tax cuts.

Tax revenues are rising with the superb economic growth.

The stock market has restored more than $2.5 trillion of new shareholder wealth which is boosting capital gains tax revenue as well.
Americans for Tax Reform legislative alert 5/5/04

The double taxation of dividends and capital gains is the lowest than any time since WWII. (The Heritage Foundation)

Tax Cut Success Story: Accelerated/Bonus Depreciation

According to the General Aviation Manufacturers Association (GAMA), bonus depreciation is the primary reason that the aviation industry is beginning to recover.

Since 2001, the aviation industry has lost over 78,000 jobs directly related to the economic slow-down and 9/11.

Every new job in aviation manufacturing creates three additional jobs in the United States. (Bureau of Labor multiplier)

In the first 5 months after enactment of the bonus depreciation provision, sales of general aviation airplanes increased 45 percent. A survey of aircraft purchasers found bonus depreciation to be The deciding factor in 35 percent of recent airplane purchases.

These new sales have pulled the general aviation industry out of a downward spiral and preserved or created just over 20,000 aircraft manufacturing jobs in the United States.

Because bonus depreciation relates only to timing and does not change the total amount that can ultimately be depreciated, its true cost to the federal government is zero. (Joint Committee on Taxation scoring tables for S. 1637 and H.R. 4520)

Congress intended bonus depreciation to remain a powerful incentive for capital purchases through 2004. Because it takes aircraft manufacturers an average of 8 months to fill a customer's order (depending on model), bonus depreciation has ceased to be an incentive for new aircraft purchases.

In Wichita, aviation manufacturers were laying off thousands of workers each month. With accelerated depreciation, however, they received more orders and for the first time in years Cessna announced in May 2004 that it will hire 400 workers!

Competitiveness

"Our tax code internationally was developed in the 1940s and 1950s [and] updated in the 1980s and represented a completely different environment. For us to be competitive domestically, we've got to update the tax code on the international side." Curt Magleby of Ford Motor Company, Manufacturing in America, p. 46

The corporate income tax is imposed on a "worldwide" basis--it applies not only to income earned through a U.S. company's domestic operations, but also through its foreign operations. U.S. companies invest overseas to penetrate foreign markets that cannot be served effectively by U.S. exports.

Because of the increased global nature of the economy, U.S. international tax rules have taken on more importance. (Understanding the Corporate Income Tax, Business Round Table)

U.S. corporate income tax rates are the second highest in the industrialized world, after Japan.

America's corporate tax rate is higher than even socialist welfare states such as France and Sweden.

Competitors such as Germany and Russia are lowering corporate tax burdens. One study estimated that the 40 percent marginal corporate tax rate (including federal and state taxes) has the effect of raising the cost of US labor by $1.43 an hour relative to our major trading partners, making it the single most expensive disadvantage inflicted on U.S. workers. (House Policy Committee "Tax Reform for Freedom, Economic Growth and Jobs" p. 3)

We tax our exports to the rest of the world, but the rest of the world doesn't tax its exports to us. This puts the U.S. at a trade disadvantage of between $120 billion and $150 billion a year. ("Another Whack" Barron's 2/16/04 p. 5)

The marginal U.S. tax burden of the 1960's now has become one of the largest drags on U.S. international competitiveness.

This acts as a drag on competitiveness for three primary reasons: it constrains after-tax cash flow, discourages establishment of foreign manufacturing facilities in the United States, and encourages the migration of U.S. manufacturing facilities to lower-tax jurisdictions.
How Structural Costs Imposed on US Manufacturers Harm Workers and Threaten Competitiveness, by Jeremy A. Leonard, Manufacturers Alliance/MAPI 2003

There is a broad recognition of the advantage conferred on foreign manufacturers by the interrelationship between the current U.S. tax system and international trade rules.

American manufacturers are well aware that most of their competitors are located in countries that rely more heavily on consumption, rather than income, as the basis for taxation.

In practical terms, foreign governments apply taxes solely to income earned on sales in their jurisdiction and will rebate any taxes that apply to exports.

By relying more heavily on income as the basis for taxation, and in taxing U.S. manufacturers on their worldwide income, the U.S. system contains no simple means of ensuring that U.S. exporters receive comparable treatment.

The international trade rules reinforce that disparity because they allow the rebate of indirect taxes (taxes on consumption such as value-added taxes) but prohibit the rebate of any direct taxes on income, on which the U.S. system relies so heavily. U.S. Department of Commerce, Manufacturing in America: A Comprehensive Strategy to Address the Challenges to US Manufacturers, January 2004 p. 46

Returning dividends to the U.S. economy and strengthening employment opportunities are two benefits of improving the competitive position of US multinational firms

As Congress debates how best to reform U.S. international tax rules, some lawmakers have expressed concern that these changes could encourage U.S. multinational companies to ship American jobs overseas.

Economic studies, however, show that these concerns are misplaced. Indeed, the evidence indicates that improving the competitive position of U.S. multinational firms in the global market returns substantial dividends to the U.S. economy.

In 2000, U.S. non-bank multinationals and their majority-owned affiliates generated nearly $2.7 trillion in gross output--equal to 27 percent of the U.S. Gross National Product that year.

These parent firms employed 23 million people in the U.S., about one of every five jobs in the economy. 45 percent of all manufacturing workers are employed by U.S. parent firms while 53 percent of all workers in the "information" industry (publishing, movies, and broadcasting) are employed by U.S. parents.

By contrast, the foreign subsidiaries of U.S. parent companies employed about 8 million workers in 2000. Thus, for every one employee overseas, these parents employed three domestic workers.

While U.S. multinationals made nearly $114 billion in capital expenditures abroad in 2000, they made $406 billion in domestic capital expenditures --a ratio of 3.6 to 1. The Tax Foundation.

Tax provisions that negatively affect businesses

Double Taxation of Foreign-Source Income

In short, manufacturers recognize that the government should not impose penalties on those American companies that are the best U.S. competitors in world markets.

Far from encouraging companies to move offshore, manufactures believe the Internal Revenue Code contains significant penalties on income derived from foreign investment that sometimes lead to the double taxation of foreign-source income.

In a global economy, manufacturers understand that their successes will increasingly depend on their ability either to export (which often requires investment abroad in marketing) or sell to U.S. firms that compete in global markets (which also increasingly depended on the ability to invest, produce, source, and sell abroad). US Department of Commerce, Manufacturing in America: A Comprehensive Strategy to Address the Challenges to US Manufacturers, January 2004 p. 46

Alternative Minimum Tax

Imposes significant extra costs on manufacturers and results in almost no additional revenue for the federal government.

Right now this "Catch-22" system forces an ever-larger number of taxpayers to recalculate their tax burden using the AMT. If this results in a higher tax liability, the taxpayer must pay more tax. This tax is unfair and must be repealed. The Heritage Foundation.

Foreign Tax Credit "Baskets"

The foreign tax credit system as described earlier has an additional layer of complexity to it. One of the key sources of complexity derives from a desire to prevent cross-crediting of foreign taxes paid on active foreign source income with income earned from foreign passive investments.

U.S. taxpayers are permitted to "cross-credit" only within certain separate limitation categories or "baskets." The reason for these separate baskets is a desire to not allow taxes paid on active foreign source income to be cross-credited against income from passive investment (which is generally quite mobile and subject to low rates of tax). There are currently nine baskets. The foreign tax credit limitation must be calculated separately for each basket. This system imposes significant compliance costs on U.S. business.

Rescinding the number of separate baskets would significantly reduce the compliance costs associated with the foreign tax credit. In addition to saving companies roughly $6.1 billion over ten years, it would also reduce overall effective rates by making foreign tax credits more valuable. Tax Foundation.

Death Tax

The death tax is one of the most inefficient features of the current tax system. Its sheer complexity results in high compliance costs. Many small businesses and family farms are destroyed by its penalty, which distorts incentives and hurts families. The Heritage Foundation.

Repatriation

Unlike most other industrial countries, current U.S. tax law provides multinational firms with strong incentives to keep earnings from foreign operations outside the United States, even when efficiency considerations would argue that the funds be used within the United States.

Taken together, the total pool of reinvested foreign earnings eligible for repatriation is estimated at about $500 billion.

In order to estimate the likely effect of the legislation [to allow for repatriation under a reduced tax rate for 12 months], an informal survey of large firms was conducted and indicated a strong incentive to repatriate. Respondents representing slightly over half of the sample indicate that substantially all of their earnings would be repatriated. Only two respondents, accounting for about 8.7 percent of reinvested foreign earnings of the sample, did not plan to repatriate foreign earnings to the United States. JP Morgan, "Introducing the Homeland Investment Act" 5/1/03

Complexity of Tax Code

The U.S. Internal Revenue Code contains numerous tax and tax credit provisions affecting the operation and after-tax profitability of large and small businesses.

Some studies have examined specific programs or polices and others have examined the complexity and administrative detail of the tax code and compliance and both groups have concluded that small firms wind up being unfairly burdened. ("The Impact of Tax Expenditure Policies on Incorporated Small Businesses" by Innovation & Information Consultants for Small Business Administration, April 2004)

Much complexity stems from the legislative process, which involves compromise, pressured last-minute drafting, and tailoring tax provisions to fit the funds available, resulting in phase-ins, sunsets, eligibility restrictions, etc.

Simplification usually loses out to competing political needs as many voices press for complicating adjustments while there is little constituency for simplification.

Example of need for simplification: Calculation of the tax on capital gains requires a separate multi-lined section on Schedule D and several related worksheets. The IRS has also provided a tax calculation worksheet for individuals who have qualifying dividends but who are not otherwise required to file Schedule D. If the various capital gains rates are replaced with a capital gains deduction, Schedule D could be reduced to one page, and column (g) could be eliminated. There would be no alternate tax calculation necessary so the tax charts and rates could be used at applicable. A capital gains exclusion would also simplify the foreign tax credit calculation as well as AMT tax calculations.
H&R Block, Tax Simplification Proposals: 2004

Links of interest

Kansas Small Business Development Center
Small Business Administration Wichita Office
Kansas National Taxpayer Advocate
National Taxpayer Advocate
IRS National Taxpayer Advocate Assistance Centers are your one-stop resource for face-to-face tax help and solutions to tax problems.