House Committee Holds Tax Reform Hearing

The House Committee on Ways and Means on Wednesday held a hearing on fundamental tax reform. Focusing on the objectives of tax reform, the hearing also explored issues of fairness, the impact of growth and methods for making compliance easier for individuals and businesses.

“America needs a tax system that is fair, protects the poor, treats all Americans the same and is easy to understand,” Congressman John Linder (R-GA), a member of the Ways and Means Committee said in a statement submitted to the Committee. “This new system must be voluntary, not coercive or intrusive. It must be transparent, eliminating hidden taxes and ensuring that all Americans know what the government costs. Our reform efforts must also be border-neutral so that our exports are free of the burden of the tax code and can become competitive around the world. Fundamental reform must stop picking winners and losers through the tax code and ensure the long-term solvency of Social Security and Medicare.”

One of the concepts discussed during the hearing was that of “border adjustments.” “Border adjustments” are value-added taxes on imports and rebates on exports that are common features of consumption-oriented tax systems. MarketWatch cites the American Enterprise Institute in reporting that the U.S. is the only country in the organization for Economic Cooperation and Development without border-adjusted taxation.

The role of “border adjustments” in narrowing or eliminating the trade deficit, has been the subject of much debate among lawmakers and economists. The U.S. trade deficit is running at a record rate of $696 billion annually in the first three months of 2005. Two economists testifying before the Committee, however, maintained that “border adjustments” alone will not close the trade gap.

MarketWatch reports that Alan Auerbach, economist and tax policy expert from the University of California at Berkley, told the Committee in prepared testimony that border adjustments would simply strengthen the dollar, “putting importers and exporters in the same competitive positions no matter which approach is adopted.”

Under questioning Auerbach conceded that there are “things you can do in tax reform, especially in terms of increasing national savings” that stand a better chance of eliminating the trade imbalance.

MarketWatch reports that economist Glenn Hubbard, dean of the Columbia University Graduate School of Business and former chairman of President Bush’s Council of Economic Advisers, agreed that border adjustments would be unlikely to significantly alter the trade gap saying “I don’t think you should expect a border-adjusted tax, per se, to [close] huge deficits.”

The overhaul of the federal tax system is one of President Bush’s top legislative priorities during his second term. Recommendations for reforming the federal income tax code are expected before the end of July from the advisory panel created by the president earlier this year.

“As the one committee in the House that is charged with understanding and evaluating the product from the president’s panel, it’s useful to begin an analysis of the kinds of criteria that would be useful in making choices based upon some of the panel’s suggestions,” Bill Thomas (R-CA), chairman of the Ways and Means Committee told CNN.

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