Hatch Lays Out Importance of Tax Reform in Speech Today

At American Action Forum Event, Utah Senator Calls for Tax Overhaul Using President Reagan’s Criteria of Fairness, Growth, Simplicity

WASHINGTON – In a speech today outlining why overhauling America’s burdensome tax code is critical for economic growth and prosperity, U.S. Senator Orrin Hatch (R-Utah), Ranking Member of the Senate Finance Committee, laid out the three key criteria for reform: fairness, growth and simplicity, the same criteria outlined by President Ronald Reagan when the tax code was last reformed in the 1980s. Hatch spoke at an American Action Forum event entitled “Getting Tax Reform Right.”

Tomorrow, the Senate Finance Committee will hold its first in its series of hearings this Congress examining America’s inefficient and burdensome tax code and ways to improve it to spur economic growth and job creation.

Below are key excerpts of Hatch’s speech:

ON DEFICIT REDUCTION THROUGH SPENDING REDUCTIONS – NOT TAX INCREASES:
We must reduce deficits and debt through spending reductions. Separately, we must promote tax reform. If we try to mix the two, we risk walking down the road to a back door tax increase.
Though it is never clearly expressed, our friends on the other side, including President Obama, seem to take the opposite view. They are happy to combine these goals. They wish to balance the budget, but not through spending reductions. Rather, tax reform can provide the tax increases and additional revenue to balance the budget without spending restraint.

ON THE THREE CRITERIA FOR TAX REFORM:
President Reagan did what Presidents are supposed to do. He led. President Reagan took the initiative and the risk. He put tax reform on the table before the 1984 national elections. After winning a mandate for reform, President Reagan listed three criteria for a reformed system. Those criteria were fairness, growth, and simplicity. Those were the criteria then, and they remain the criteria today.

ON “FAIRNESS” IN TAX REFORM:
Fairness, unlike the other two criteria, is very subjective. It is also the most politically charged. Democrats and Republicans tend to look at it differently… According to the Tax Policy Center, not exactly a right wing think tank, forty-seven percent of households pay no income tax at all.
That’s almost half of all households that pay no income tax. Forty seven percent is a big group. They have a stake in the benefits of bigger government. When fewer and fewer people are responsible for paying for more government, where will the interest be in reducing the size of government?

ON “GROWTH” IN TAX REFORM:
Yet economic growth will be the key criterion for future prosperity and ultimately the fiscal health of the nation. And tax signals are powerful factors for determining where taxpayers are likely to engage or disengage their labor and capital.

It’s clear that these tax signals interfere with market forces. They re-direct economic activity from where it would otherwise go. Economists define it as inefficiency. It means our market economy performs at less of a level than it otherwise would. That’s why you’ll hear pretty solid consensus among economists that a more efficient tax system will mean more growth.

ON “SIMPLICITY” IN TAX REFORM:
As for President Reagan’s third criterion — simplicity — it is just as important today. Yet over twenty five years after the last comprehensive tax reform, the one consistent characteristic of our current system is its complexity. The complexity of the tax system grows with every Congress. It grows with the regulations churned out by the Treasury Department. It grows with notices and rulings published by the Internal Revenue System.

ON THE SENATE FINANCE COMMITTEE’S WORK ON TAX REFORM:
You will see the Senate Finance Committee, on a bipartisan basis, start the tax reform process for this new Congress. It will be a workman-like effort. We will methodically examine every feature of the tax system. We will conduct that examination with President Reagan’s three criteria as our guide posts. We will be looking at the fairness of the system. We will be looking at the efficiency of the system, with a particular emphasis on the anti-growth features of the systems. We will be looking at the complexity of the current system. After that examination, I’m optimistic that we will be in a position to re-build the system in a way that meets President Reagan’s three criteria.

Below is Hatch’s full speech as prepared for delivery:

Over the last few weeks, I’ve had the opportunity to discuss our nation’s economic situation on a number of occasions.

It isn’t pretty.

With little exaggeration, we find ourselves in the middle of a fiscal nightmare. And unfortunately, the President’s budget, perpetuates, rather than corrects, this nightmare.
In a series of Senate floor speeches, I have sought to bring some clarity to our dire fiscal situation.

I have arrived at three conclusions that are strongly supported by data from the Congressional Budget Office, or CBO.

First, our nation’s current and projected deficits are unsustainable. One need only look at the gargantuan levels of debt piled up under current policy or the President’s budget.

Second, spending, which is at a historically high level as a percentage of the economy, is responsible for these out-of-control deficits. The President’s budget converts these high spending vices into spending habits.

Third, the level of taxation under current policy provides revenue at or above the historical percentage of the economy. The President’s budget, meanwhile, would set us on a path toward revenues at or near historic peaks.

I have addressed each of these conclusions separately on the Senate floor.

Together, they paint a picture of a nation on the brink. Spending is too high, is driving systematic deficits and debt that are a genuine threat to national security, and is encouraging the left to promote ever higher taxes.

How does this fiscal situation inform the tax reform debate?

The answer is a critical one.

The sentiment among Republicans generally is that fiscal reform and tax reform must be separate endeavors. We must reduce deficits and debt through spending reductions. Separately, we must promote tax reform. If we try to mix the two, we risk walking down the road to a back door tax increase.

Though it is never clearly expressed, our friends on the other side, including President Obama, seem to take the opposite view. They are happy to combine these goals. They wish to balance the budget, but not through spending reductions. Rather, tax reform can provide the tax increases and additional revenue to balance the budget without spending restraint.
The rubber hits the road in this debate on the definition of revenue neutrality.

If tax reform must be revenue neutral against current law, then we are guaranteed a significant tax increase. Starting in the first year after such a revenue neutral tax reform, taxes would rise by 10 percent. That’s not an attractive end game for many on my side of the aisle. It would take too much pressure off resolving fiscal problems at their roots.

And the roots of our fiscal problems are out-of-control levels of spending.

The better definition of revenue neutrality is against current tax policy. Former House Democratic Leader Dick Gephardt could not have been clearer on this point. He testified before the Finance Committee on tax reform last year. He said tax reform is hard enough by itself. Mixing it with the objective of raising taxes will only make it more difficult.

Now, I don’t mean to suggest that there are no fiscal policy benefits to be gained from a reformed system.

There is little disagreement that a reformed system would likely produce more revenue than the current system.

History bears this out. Comparative data from reformed systems versus cumbersome systems, as well as common sense, confirm that a simpler tax code will generate more revenue.
Unfortunately, the degree to which that fiscal benefit is quantifiable in advance, sufficient to score for conventional budget rules, is questionable.

For all of the disagreements and complications, there is a growing consensus that tax reform, done properly, is an imperative to getting America’s fiscal house in order.
What do I mean by done properly?

We can look to the last great leader of comprehensive reform. I’m talking, of course, about our beloved Gipper.

President Reagan did what Presidents are supposed to do. He led. President Reagan took the initiative and the risk. He put tax reform on the table before the 1984 national elections.
After winning a mandate for reform, President Reagan listed three criteria for a reformed system. Those criteria were fairness, growth, and simplicity.

Those were the criteria then, and they remain the criteria today.

I want to take a few moments to talk about each one.

Let’s start with fairness. Fairness, unlike the other two criteria, is very subjective. It is also the most politically charged. Democrats and Republicans tend to look at it differently.

To see the differences among the parties on the issue of fairness, all you need to look at is how the de facto test for fairness — distribution of tax policy changes — is employed. My friends on the other side look at the distribution of the benefits from a tax policy change. That view necessarily ignores the relative burden that taxpayers bear. Since higher income folks shoulder a disproportionately higher share of taxes, a view of benefits only, will define most broad-based tax reductions as a tax cut for the wealthy.

This should surprise no one. Here’s why.   Most on the other side clamor for ever more redistribution of income from higher income to lower income taxpayers through tax policy.
I honestly don’t know if there is a limit to how much income they feel should be distributed from higher income taxpayers to lower income taxpayers.
Maybe there isn’t a limit.

The President has been quite direct on this point. In an insightful interview with the New York Times Magazine the President said the following:

“If you talk to Warren (meaning Mr. Buffet), he’ll tell you his preference is not to meddle in the economy at all — let the market work, however way it’s going to work, and then just tax the heck out of people at the end and just redistribute it, Obama said. That way you’re not impeding efficiency, and you’re achieving equity on the back end.”

On our side, we like to address any tax policy change within the context of the relative share of taxes already paid by income group. This is why you’ll see Republicans ask for analysis of the changes in the distribution of tax burden from a given tax policy proposal.

Distribution tables become something of a fetish for many of the liberal think tanks and many members on the other side. It’s almost as if a distribution analysis is the only thing that matters to them.

Distribution tables can show two sides of the same fairness coin. According to the Tax Policy Center, not exactly a right wing think tank, forty-seven percent of households pay no income tax at all.

That’s almost half of all households that pay no income tax.

Forty seven percent is a big group.

They have a stake in the benefits of bigger government. No direct transparent burden accompanies the benefits enjoyed by the forty-seven percent.

Does this make any sense?

Does it make sense to have millions and millions of Americans desirous for more government spending without the corresponding discipline that comes with the obligation to pay for this spending through income taxes?

When fewer and fewer people are responsible for paying for more government, where will the interest be in reducing the size of government?

Interestingly, President Obama indirectly acknowledged the risks of one-half of the population receiving government services for free. Here’s the follow-up quote from the New York Times article:

“He {meaning Obama} continued by saying that he thought there was some merit in Buffett’s argument. But, he said: I do think that what the argument may miss is the sense of control that we want individuals to have in determining their own career paths, making their own life choices and so forth. And I also think you want to instill that sense of self-reliance and that what you do will help determine outcomes.”

Those last two sentences sound like something you’d hear in the Senate Republican Conference.

Don’t they?

Individuals should determine their own career paths?

Instill a sense of self-reliance?

Good old-fashioned individual responsibility and reward.

Kind of what America is all about. Isn’t it?

So on the first of Reagan’s criteria, fairness, all we know is this — it’s subjective, normative, and very political.

We will need to come to a meeting of minds between Democrats and Republicans on what fairness means.

And that won’t be easy.

We can’t diminish the political importance of the role of the criterion of fairness.

Yet economic growth will be the key criterion for future prosperity and ultimately the fiscal health of the nation. And tax signals are powerful factors for determining where taxpayers are likely to engage or disengage their labor and capital. The non-partisan Joint Committee on Taxation places this cautionary note in estimates of marginal tax hikes.

Here’s what Joint Tax says and I quote:

“We anticipate that taxpayers would respond to the increased marginal rate by utilizing tax-planning and tax avoidance strategies that will decrease the amount of income subject to taxation.”

That’s the simplest example. Raise rates on a certain kind of income and taxpayers will respond. If you want to curtail activity raise the tax rate on it. Conversely, if you want more of an activity, drop the tax rate on it.

Think of the tax code as a traffic grid. Think of various activities as streets. Think of the signals the code sends as traffic lights. Think of the length that the traffic light stays constant as the strength of the signal.

The tax code is like an endless multitude of traffic lights on the many different streets of economic activity. It is everywhere. Those traffic lights affect labor. They affect the flow of capital. They affect entrepreneurial effort and innovation.

A red light penalizes one activity with a higher effective rate of taxation.

A green light rewards another activity with a lower effective rate of taxation. Maybe the light is a murky yellow and the taxpayer needs to figure it out.

As you consider that traffic grid, realize that the American economy is not the only traffic grid. We have a global economic traffic grid.

It’s clear that these tax signals interfere with market forces. They re-direct economic activity from where it would otherwise go. Economists define it as inefficiency. It means our market economy performs at less of a level than it otherwise would. That’s why you’ll hear pretty solid consensus among economists that a more efficient tax system will mean more growth.
As for President Reagan’s third criterion — simplicity — it is just as important today.

Yet over twenty five years after the last comprehensive tax reform, the one consistent characteristic of our current system is its complexity.

This complexity adversely affects wealthy taxpayers, middle-income taxpayers, and low income taxpayers.

Low-income taxpayers enjoy the benefits of panoply of refundable credits. There credits mean these taxpayers get checks worth several thousand dollars each year. To get the check, low-income taxpayers have to navigate a minefield of complex definitions and tests. All this complexity, even after the definition of a dependent was simplified a few years ago. What this means is tax preparers have a captive market of low-income folks.

Middle-income taxpayers, especially dual income families with children, face a gauntlet of phase-outs and cutbacks. As many as 22 million of these families would pay the alternative minimum tax, or AMT, but for the annual AMT patch that we legislate. Ask anyone who has tried to comply with the AMT their opinion of it. You’ll probably hear an expletive or two. If left in place, the AMT will eventually swallow the regular income tax system.

High-income taxpayers also face a lot of complexity. They have the means to employ highly compensated tax professionals.

But think of how inefficient this is.

Is tax compliance and planning really an appropriate use of some of our most talented professionals? A lot of the advice the wealthy receive directs their resources to tax-favored activity.

Is that a good result of tax complexity?

It gets back to the inefficiency problem I discussed earlier.

The complexity of the tax system grows with every Congress. It grows with the regulations churned out by the Treasury Department. It grows with notices and rulings published by the Internal Revenue System.

Former Ways and Means Committee Chairman Archer used to say that the tax system was like a weed. He meant that true reform would require us to tear the income tax system out by its roots. In that way, the system would not grow back.

I guess I’d like to borrow Chairman Archer’s analogy, but use it in a different way. When I think of our tax system, I think of a garden choked with weeds. Our economy is the garden. All of these rules and regulations are the weeds. If we don’t cut them back, eventually these weeds will take over.

We’re long past due the time for a weeding of the tax system.

The good news begins tomorrow.

You will see the Senate Finance Committee, on a bipartisan basis, start the tax reform process for this new Congress. It will be a workman-like effort. We will methodically examine every feature of the tax system. We will conduct that examination with President Reagan’s three criteria as our guide posts. We will be looking at the fairness of the system. We will be looking at the efficiency of the system, with a particular emphasis on the anti-growth features of the systems. We will be looking at the complexity of the current system.

After that examination, I’m optimistic that we will be in a position to re-build the system in a way that meets President Reagan’s three criteria.

And after we reform the code, if done in the right way, our economy will be set for growth, our families and businesses will be in a position to thrive, and we will take a giant step toward getting our fiscal house in order.

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