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Public Statements

Tax Reform

Floor Speech

Location: Washington, DC

Mr. WYDEN. Mr. President, in Shakespeare's ``Julius Caesar,'' a soothsayer warned Caesar to ``beware the Ides of March.'' For most Americans, however, the Ides of March passes without incident. It is the Ides of April--April 15, tax day--that so many Americans dread. The last few days must have been a big bonanza for the headache medicine industry. Taxes are due tonight at midnight.

Millions of Americans spent their weekend struggling to use tax software that crashed, flailing about to locate receipts, and wading through hundreds of pages of tax instructions. Instead of enjoying the outdoors or spending time with family and friends, too many Americans spent this past weekend hunched over their kitchen tables or in front of their computers surrounded by a maze of receipts, canceled checks, forms, and other paperwork as they undertook the annual water torture ritual of preparing tax returns.

This is the tax instruction booklet for our personal taxes, our 1040 form. It goes on and on, well over 200 pages. The first 104 pages of instructions are the basic form 1040. The further 110 pages of instructions are for the most common schedules to the 1040. There has got to be a better way.

Some day I hope Democrats and Republicans can come to the floor of this body, ask unanimous consent that this goes into the trash, and instead we substitute a much simpler way for our people to do their taxes. The reality is the Tax Code is too complex, too costly, and simply takes too much time to comply with. It is a code that is hopelessly out of date, mind-numbingly complex, increasingly unfair, and extraordinarily inefficient.

As a result, one of our most consequential economic policies, our tax law, does far more to stifle economic growth than to encourage it. Our country needs a comprehensive overhaul of our system of raising revenue and a modern Tax Code that is simpler, fairer, and simply more efficient. In sum, what is needed is a progrowth economic tax policy. If history is any guide, particularly when former President Reagan and a big group of Democrats got together, it can bolster American families and increase revenue without raising rates.

I have been something of a broken record on this issue for some time. But on a day such as this, particularly given what our people went through over the past weekend, I think it is time we spend a few minutes to talk about how important it is to bring some common sense to American tax law. What is particularly striking is that I think the Congress understands what needs to be done. This is a question of political will now. There have been all kinds of blue-ribbon reports from the Bush administration, the Obama administration. I think what needs to be done is widely understood.

The pipes in the Tax Code are clogged with provisions that encourage rent-seeking behavior, lead to the misallocation of capital, and warp the American economy. What needs to be done is go in there and drain the swamp and clean out the Tax Code. It contains almost 4 million words. In the last decade alone, more than 130 laws have been enacted that yielded almost 4,500 changes to the Tax Code. That amounts to more than one change to the Tax Code each and every day, year in and year out.

It has become so complicated that almost 90 percent of taxpayers either hire a tax preparer or use tax preparation software to complete returns. The IRS reports that the average estimated time burden for all taxpayers filing a Form 1040, a 1040A, a 1040EZ, is 13 hours, with an average cost of $210. With respect to these forms, nonbusiness taxpayers face an average burden of about 8 hours, a full day's work, while business taxpayers face an average burden of about 23 hours, nearly 3 days of work.

In 2011, the Small Business Administration found that among businesses with 20 or fewer employees, tax compliance cost $1,584 per employee. In addition to the escalating cost of compliance with this code, cost, both time and money, the complexity of the code, in my view, has obscured the typical person's ability to understand it and has undercut voluntary compliance, which is, of course, the bedrock principle of our tax law.

With the ongoing debate about how to reduce the budget deficit, the Tax Code's complexity serves also to perpetuate what is known as the tax gap; that is, the difference between what taxpayers pay and what is owed under the law. The most recent Internal Revenue Service estimate for the tax gap is $385 billion. Based on statistical trends, the likely gap for this year is going to exceed $420 billion. This is an underpayment of approximately 14 percent.

My gut tells me--I serve on both the Finance Committee and the Joint Committee on Taxation--that some of this gap certainly is due to conscious tax evasion, but I also believe a significant portion of it is attributable to inadvertent mistakes in filing, many of which stem from the complexity of the code. Well-coordinated, thoughtful, comprehensive reform is going to reduce the need for many complex provisions that limit the ability of taxpayers to benefit from certain deductions, credits, exemptions, and exclusions. Comprehensive tax reform must eliminate the multiple provisions that require taxpayers to calculate their liability multiple times, such as the alternative minimum tax. Talk about bureaucratic water torture. All this weekend across the country we had middle-class folks essentially doing their taxes twice as a result of the minimum tax.

The personal exemption phaseout, PEP, and the phaseout of itemized deductions, Pease, isn't much easier.

I would show this poster which demonstrates 11 tax forms. These are forms, colleagues, the typical filer must fill out every year or, if they can afford it, pay someone to fill them out. Is it really necessary to run this full-time, hand-cramping program for our citizens to have to wade through all of this?

We also have another alternative, a one-page 1040 form which I have worked on with colleagues for years. It is only about 29 lines long. Some industrious reporters took this particular tax form and found a typical citizen--this was worked on by Democrats and Republicans--may fill out their taxes with this form in under an hour.

To illustrate how complicated the code has become, let me refer briefly to capital gains. The income tax currently imposes at least nine different effective tax rates on capital gains, depending on the taxpayer's regular rate, how long an asset was owned, the type of asset, and whether the taxpayer owes the alternative minimum tax. For this the IRS provides three different worksheets, one with 37 lines, to help taxpayers calculate their tax on capital gains.

Comprehensive reform should make things easier for taxpayers by allowing a percentage exclusion for long-term gains and reapplying regular tax rates to the rest. This simple change, to have an exclusion for a measure of capital gains which have been earned and then a progressive rate structure from this point on, would sharply reduce the complexity of returns while maintaining fairness and opportunities for all our people to invest.

Further complicating matters, a number of commonly used terms in the Tax Code: qualifying child, modified adjusted gross income, and more, have multiple definitions depending on the provision. Certainly, Democrats and Republicans should agree uniform definitions for the most commonly used terms are something which shouldn't be a bipartisan issue. More than 40 definitions of small business exist in the Tax Code alone.

There are certainly policy reasons to provide tax benefits to families with children. The definition of a child differs widely across the Tax Code.

Children under 19 count in defining the earned-income tax credit benefits. Those under 17 qualify for the child credit, and only those under 13 are eligible for the child and dependent care credit. Maybe these differences result from deliberate congressional actions about who ought to receive tax benefits, but I think they needlessly complicate tax filing and certainly lead to inadvertent errors which the Internal Revenue Service then attempts to figure out how to correct.

Other factors used to define qualifying children further complicate the situation, including the child's physical residence, custody arrangements, and who pays the child's living expenses. Establishing a single definition to determine whether taxpayers may claim tax benefits for children would simplify both tax filing and IRS processing of returns.

The list only goes on and on, such as the earned-income tax credit, something vital to low-income families, and a whole host of different workshops. The educational credits are, again, another example where families with students in college qualifying for multiple tax benefits to defray educational expenses often may claim only one of them. For example, a family may be able to claim either the Hope credit or the Lifetime Learning Credit, but not both for the same student.

If the family has more than one student it may claim one credit for one student and the other for a second student. Determining which alternative is best requires multiple calculations and may conflict with the use of other tax benefits for education such as Coverdale savings accounts and 529 savings plans. Comprehensive tax reform would, at the very minimum, coordinate these educational benefits to make it easier for families to determine eligibility.

How complicated have things become? A few years ago Treasury's Inspector General for Tax Administration sent staff to pose as taxpayers at 12 commercial preparer chains and 16 small independent preparers. Of the 28 tax returns the professionals prepared, 17 had mistakes. All of the business returns were wrong. Let me repeat that. All of the business returns were wrong when professionals had prepared them.

In 2006 the same sort of drill was undertaken. Again, the Government Accountability Office found professional preparers made mistakes. They mishandled those bread-and-butter kinds of issues, such as the earned-income tax credit and the childcare credit. They even got it wrong whether the taxpayer should even itemize his or her deductions.

The question is, If the pros can't figure out how to file taxes, isn't it clear, isn't it obvious to all of us the Tax Code needs to be purged and the special interest breaks cleaned out so rates can be held down for all? And we can agree on a simple tax philosophy. I can sum up mine in a sentence.

I believe we need a tax system which gives everybody in America the opportunity to get ahead. If you are successful, we want you to be successful. You will pay your fair share, but nothing in the Tax Code will make it impossible for you to be successful in the days ahead. If you don't have much, we will have a Tax Code which is simple and understandable. When you work hard and play by the rules, you will have an opportunity to get ahead as well.

Comprehensive tax reform will make it easier to file. It is going to lay out an opportunity for the Senate Democrats, Republicans, and Independents to come together.

I close simply by saying once again, we saw in the past few days how broken and dysfunctional our tax system in America has become. Can you imagine what people thought when their software was crashing in the last couple of days? They are trying to find their receipts, flailing through filing cabinets trying to find those documents which attest to their taxable events for the past year. They can't know with certainty, based upon some of those analyses by the Government Accountability Office, whether they have done it right or even professionals have done it correctly.

Until this Senate comes together on a bipartisan basis to work for a simpler, more coherent tax system--one which promotes growth and eases the burden on American families and American businesses--there will be no relief from the Ides of April. This, in my view, is a tragedy worthy of Shakespeare.

I yield the floor.

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