Executive Calendar

EXECUTIVE CALENDAR

BREAK IN TRANSCRIPT

Mr. GRASSLEY. Mr. President, today, I would like to take a few minutes to speak about the tax gap. Before I get started, I first want to thank my colleagues, the chairman and ranking member of the Budget Committee, for their interest in the tax gap. As chairman of the Finance Committee, I too have a great interest in this topic. It is my intention to close the tax gap, and I look forward to working with Senator GREGG and Senator CONRAD to achieve this important goal.

The tax gap, as we all know, is the difference between the amount of tax owed by taxpayers from legal activities and the amount voluntarily paid on time. Today, specifically, I want to clarify the facts and the fiction regarding the possible solutions to this $350 billion problem.

Under my chairmanship, the Finance Committee has held at least eight hearings to address the tax gap:

No. 1, Oversight of the Internal Revenue Service, ``Taxpayer Beware: Schemes, Scams, and Cons,'' April 5, 2001; No. 2, Tax Code Complexity: New Hope for Fresh Solutions, April 26, 2001; No. 3, Taxpayer Alert: Choosing a Paid Preparer and the Pitfalls of Charitable Car Donation, April 1, 2003; No. 4, Tax Shelters: Who's Buying, Who's Selling, and What's the Government Doing About It?, October 21, 2003; No. 5, Bridging the Tax Gap, July 21, 2004; No. 6, Charities and Charitable Giving: Proposals for Reform, April 5, 2005; No. 7, The $350 Billion Question: How to Solve the Tax Gap, April 14, 2005; and No. 8, Social Security: Achieving Sustainable Solvency, May 25, 2005.

During these hearings, we learned a lot about the tax gap, including several good ideas for closing it. We heard from the Joint Committee on Taxation. We heard from the Treasury Department, including IRS and TIGTA. We heard from the Comptroller General and GAO. We heard from the Justice Department. We heard from the Taxpayer Advocate. We heard from CBO. We heard from the States. We heard from the private sector, both nonprofit and for-profit. And, of course, we heard from the American taxpayer.

From the testimony of all these hearings, and the expertise of all these witnesses, we identified several truths about the tax gap:

No. 1, the tax gap is a huge problem for the tax system; No. 2, it is easy to discuss in the abstract; No. 3, there is no easy solution to the problem; No. 4, there is no one silver bullet; the tax gap can only be solved through many small steps; No. 5, enforcement is important, but any real solution to this problem will require legislative changes, the most important being Tax Code simplification; No. 6, closing the tax gap should not place an undue burden on honest taxpayers; and No. 7, taking concrete steps to close the tax gap will require a lot of political will and bipartisan cooperation.

In the spirit of bipartisan cooperation, I look forward to working with Senator CONRAD and others to solve the tax gap problem. Before we can reach a bipartisan solution, however, we first need to get on the same page regarding the facts and fiction of this issue.

A common misperception by some of my friends on the other side of the aisle is that the only thing we need to do to close the tax gap is give the IRS more money for enforcement. This myth asserts that if the IRS gets more funding for enforcement, both the $350 billion tax gap and the budget deficit will magically disappear. This myth is even being used as an offset for new spending.

The Finance Committee's tax gap hearings have emphasized the importance of IRS enforcement. In fact, this budget will provide the IRS additional resources to get the job done. However, our best estimates suggest that enforcement alone could account for only 10 percent of the tax gap, not 100 percent as purported by Senator Conrad. But even this possible 10 percent is misleading, because it doesn't accurately reflect the reality of expanded enforcement. To achieve these kinds of returns from enforcement alone would, I fear, require us to backtrack to a time when there was serious concern about the IRS overreaching and stepping on the rights of taxpayers. We must always keep a balance between taxpayer rights and enforcement.

So yes, while I support additional enforcement, we need to keep our feet on the ground and our rhetoric in check as to how much can be achieved through enforcement and the level of enforcement that can be supported.

We must also remember that it is vital that enforcement resources be targeted properly. We need to be smart in our use of enforcement. Too often the IRS has ``no-change'' audits. That is, they have spent a lot of time going through the shoebox of receipts belonging to some person and found out there were no problems. This is a waste of IRS resources and takes up the time of honest taxpayers. I been pleased to work with Senator BAUCUS to encourage the IRS to do the research and review that will allow them to focus their attention on the bad actors and get more bang for the buck on audits and enforcement.

Let me note, too, from my work on the Commission on Restructuring the IRS that the Commission found that taxpayer service and clarity of law are vital in encouraging compliance. So many folks want to abide by their obligations as a citizen, but they can't because the law is too confusing, and they can't get the right answer. Service and simplification must be part of any effort to deal with the tax gap. I will return to simplification later in my comments.

So if enforcement can't solve the $350 billion problem, what are our other options? Well, a little over a year ago, the Joint Committee on Taxation, at the Finance Committee's request, issued a report.

This is the report right here. It is titled ``Options to Improve Tax Compliance and Reform Tax Expenditures,'' otherwise known as the ``White Book.''

This report provided about $190 billion over 5 years with some very controversial items. Let me give you some examples:

Repeal the mortgage interest deduction for home equity loans. Subject State and local workers to the Medicare tax. Apply the payroll tax to most fringe benefits. Allow the offshore activities of U.S. companies to be exempt from U.S. tax.

These are clearly controversial proposals, and I am sure there are not many in the Senate who would line up to endorse them today.

Some other ideas came out of the Finance Committee's examination of the payroll tax gap last spring. The Joint Committee on Taxation and the Treasury Department testified on the leakage in the payroll tax system. To fix this leak, we heard some of the following ideas:

Modify the determination of amounts subject to employment tax for partners and S Corporation shareholders.

Provide consistent FICA treatment of salary reduction amounts. Remove the employment tax cap.

Again, many of these and other comprehensive payroll tax proposals, all which would have improved Social Security solvency, were too controversial to stand on their own.

With the lack of bipartisan cooperation on Social Security, we did not have an environment to consider these important, but controversial proposals. Perhaps, if there had been bipartisan cooperation on addressing the Social Security problem, we could have made headway on the payroll tax gap.

In addition, no discussion of methods to close the tax gap can be complete without identifying the single most important one, which is Tax Code simplification. Our tax code is just too complex. Complex laws lead to inadvertent errors as well as opportunities for intentional noncompliance. Complexity in the Tax Code also contributes heavily to taxpayer confusion and real or perceived unfairness in the tax system. And studies have shown that if taxpayers feel they are being treated unfairly by the tax system, they are less likely to be compliant. Any real effort to close the tax gap cannot be taken seriously unless Tax Code simplification is part of the proposal.

Finally, I also want to alert my colleagues to the fact that we have measures in the tax relief reconciliation bill that aim at some aspects of the tax gap. In particular, some of these are dealing with problems we are seeing in tax-exempt entities--charitable donations and abuses of tax-exempt organizations. We have reforms of two types of charitable entities--donor advised funds and supporting organizations. Too often, people have been making donations to these organizations but retaining control and seeing an inappropriate benefit going to themselves and their family, rather than to the community and those in need.

Let my colleagues understand, the issues of donor advised funds and supporting organizations are not minor as it relates to the tax gap. The IRS recently released its ``dirty dozen'' tax scams for 2006, and throughout the thousands of pages of Tax Code and regulations, abuse of donor advised funds and supporting organizations was targeted as one of the top dozen problems.

Two years ago, the Commissioner of the IRS, in a letter to me, highlighted the abuse of donor advised funds and supporting organizations as the No. 1 problem IRS was seeing in tax-exempt entities.

I think the public would view the Finance Committee as neglecting its work if it didn't seek to shut down such abuses. The Finance Committee didn't turn a blind eye; we worked on addressing these problems and drafting reforms. These reforms of donor advised funds and supporting organizations have been drafted on a bipartisan basis and with significant comment and input from the charity sector, particularly the Nonprofit Panel. I am pleased that these measures are now in tax reconciliation and conference. I think it is important that we take steps in addressing these problems here and now.

But my point is that here is something--problems of donor advised funds and supporting organizations--labeled as one of the most dirty abuses in the entire Code, and yet I still have a few colleagues who come to me with this complaint, this change, this concern about what we are doing to stop the abuses. If the road is so full of potholes on dealing with these areas of clear abuse and relatively small dollars, I think we need to recognize the real problems ahead in dealing with the big issues in the tax gap. Unfortunately, all too often I find that the tax gap is an issue in which everyone shouts for solving in the abstract, while many of those same voices are stilled when it comes to the particulars.

In closing, I want to re-emphasize the importance of this debate. Today, I have just scratched the surface on this topic. I praise the Treasury and IRS for taking some initial steps. I applaud the chairman and ranking member of the Budget Committee for their interest in closing the tax gap, and I welcome input from other Senators as well. I will eagerly entertain any specific ideas to close the tax gap as long as they go beyond ``more money for IRS enforcement,'' and as long as they do not place an undue burden on honest taxpayers. The solution to this problem needs to be bipartisan, and it needs to be legislative. Let's sit down at the table, separate the facts from the fiction, and work together to solve this tax gap problem.

But, the bottom line for the discussion today is that the minority's point that closing the tax gap can be done just through enforcement just doesn't have merit. And, the $35 billion--and that is stretching it--that may be gotten through enforcement doesn't come close to paying for the over $100 billion in new spending that the Democrat leadership is pushing.

Mr. President, virtually all Democratic Members have had a common theme in their purported offsets for their amendments to this resolution--they would close tax loopholes to pay for whatever popular spending program is proposed. Closing corporate tax loopholes is the common refrain to pay for spending. Several Members have referred to the raisers in Senator CONRAD's substitute amendment to the tax relief reconciliation bill--and they keep trying to spend that same money over and over again.

Of the raisers in Senator CONRAD's substitute amendment, $30 billion of those are included in the Senate tax relief reconciliation bill that is now in conference between the House and Senate. Many of the proponents of these amendments that have been offered on the other side of the aisle, using tax loophole closers, were among the small minority of Members who opposed the tax relief reconciliation bill that contained offsets.

This brings me then to the amendments that have been proposed. The sponsors say they have offset the costs of the amendments by closing tax loopholes. Senator CONRAD's amendment contains the known universe of revenue raisers supported by those on the other side. If we assume that the raisers in Senator CONRAD's amendment would have raised approximately $89 billion over 10 years that is still a far cry from the cumulative demands of the amendments that have already been offered from the other side. The amendments that have been offered that propose to use those tax loophole closers as offsets total $319 in new spending. That total is as of 3:30 p.m. this afternoon. We don't have a tally for all of the additional amendments that have been proposed since then. That new spending, by the way occurs over the budget period--5 years. That means we will have to find $319 more in revenue raisers just to cover those new spending items.

Now, if you use a loophole closer that is already called for in the tax relief package that is in conference, we will also need to find another $30 billion in raisers to cover the tax reconciliation bill unless my colleagues on the other side of the aisle have decided that they are no longer interested in the tuition deduction and the low income savers credit and the work opportunity tax credit and the deduction for teacher expenses and small business expensing and, oh yes, AMT relief for nearly 20 million Americans. The Finance Committee staff hopes to use the full $30 billion that is already in conference in the Senate tax relief reconciliation bill for those important tax relief provisions.

So, if we leave the $30 billion in raisers that are in tax reconciliation out of it, we will have $59 billion in net new revenue raisers available that are supported by those on the other side. Keep in mind, I'm giving the other side a break here because I'm using 10 year numbers for the offsets. The 5 year numbers are probably less than half of the net $59 billion they could claim they are raising. If you subtract the $59 billion from the $319 billion in new spending proposed, it means the other side's amendments were short by $260 billion. That's $260 billion, Mr. President.

Now, that $260 billion needs to come from some place. It wipes out all the tax relief in the package. That means no extension of the child tax credit, marginal rate relief, marriage penalty relief, retirement security relief, or education tax relief when those provisions expire in 2011.

It also means no extension of the Alternative Minimum Tax relief ``patch'' and other extenders like the research and development tax credit.

You can't have it both ways, Mr. President.

Either the other side, if they had prevailed, would have added $260 billion in deficit spending or they would've gutted the tax relief they claim to support.

Budgets are about choices. In this case, the choices are clear. If the Democratic leadership were in control of the Senate, we would have no tax relief left in this budget or we would have added $269 billion in deficit spending. That deficit spending would be $269 billion higher than the deficits in the budget that the other side criticizes. Neither choice would be the right choice for the American people.

I yield the floor.

http://thomas.loc.gov/