Thank you, Mr. Chairman, for calling this very important hearing. Thank you all our witnesses for being here this morning.
Congress should get serious about resolving the situation lest the structural budget imbalances facing the U.S. economy could permanently reduce the economic growth and labor productivity for years to come. Tax expenditures; exclusions, deductions, and the various tax credits grafted onto the tax code are entitlement programs. If anyone is eligible, he or she can claim the benefit. There are no application processes; there are no periodic or annual reviews of their efficacy by Congress. What I mean is that, tax expenditures are entitlement spending run amok.
Some of these tax expenditures, like those that relate to drilling of oil and gas, have been in present for more than 120 years and have little, if any justification in our economy today. The special tax rule has significant negative impacts on our economy. The rule allows oil companies and other commodities speculators such as General Electric treat a portion of their short- term trading gains as long- term capital profits subject to lower tax rate. In this way, most of these huge companies that make huge profits end up giving little taxes.
Just to mention a few examples: Wall Street executives can avoid millions of dollars in taxes using complex deferred compensation schemes while an average taxpayer puts not more than $5,000 annually into their Roth IRA. Through the special tax rule, large multinational corporations can easily record profits yet still pay no federal income taxes. Oil companies can reap over $10 billion tax windfall from the worst environment disaster in America’s history. To my opinion, it is not right that the oil spill clean- up costs should be treated as necessary and ordinary business expenses.
In whatever case, tax expenditures represent favors for special interests of large and influential organizations at the expense of average taxpayers. It should be clearly known that tax expenditures are not just about increasing revenue and deficit reduction. They are also about eliminating distortions that act as a drag on economic growth and investment.
Tackling tax expenditures should also involve ensuring that the tax code is fair, simple, and equitable. The current America’s tax code is so complex that many businesses and individuals give up on trying figuring out their taxes on their own. Businesses and taxpayers spend an estimated 7.8 billion hours annually complying with the tax code filing requirements. Complying with these tax code filing requirements is also expensive for most businesses and taxpayers. Taxpayers have a burden of paying tax preparers to fill out their returns.
The complexity of the tax code filing requirements of our country is significant and worries many taxpayers. In just less than 30 years since 1987, the instruction booklets that are sent to taxpayers for the form 1040 have increased in length from 14 pages of text to 44. Since then, more than 16,000 changes have been made to the tax code.
In conclusion, I recommend that the comprehensive deficit reduction should include a well- designed fundamental tax reform that abridges the tax code, drops tax rates, promotes job creation, limits or repeals unnecessary tax loopholes and expenditures, and brings our system of business taxation into the 21st century. If these issues are not checked, the tax expenditures and the complexity of the tax code filing requirements will continue and even bring more significant negative impacts on our economy.