Institute Testifies on Tax Code Simplification

Washington, DC, August 6, 2001 - The Institute recently submitted a written statement to the House Committee on Ways and Means Subcommittee on Oversight and the Subcommittee on Select Revenue Measures for their hearing on the need for the simplification of the Internal Revenue Code and review of the Joint Committee on Taxation's (Joint Committee) study of the overall state of the federal tax system. The Institute submitted a prior written statement to the Senate Finance Committee for its hearing on the Joint Committee's study.

The Institute's statement generally supports the Joint Committee's efforts in recommending simplification of various retirement and education savings vehicles. Although the Joint Committee made numerous recommendations regarding retirement and education savings vehicles, the Institute focused its statement on three basic areas:

The Institute's statement notes that for savings incentives to work, the rules need to be simple. Frequent changes in law create uncertainty. Since the passage of the Employee Retirement Income Security Act in 1974, there have been over a dozen major amendments to pension laws and the related tax code sections. Since 1994 alone, Congress has passed five substantial pieces of pension-related tax legislation. While a number of these legislative changes have provided new opportunities for saving and were supported by the Institute, many amendments to pension laws have, unfortunately, added unnecessary complexity and administrative burdens that serve as a disincentive to long-term savings.

The Institute's statement strongly supports the Joint Committee's recommendation to repeal the IRA's complex eligibility rules, which primarily serve to deter lower- and moderate-income individuals from participating in the program. The Institute states that a return to the "universal" IRA will result in increased savings by middle- and lower-income Americans. The Institute emphasizes, however, that the nondeductible IRA, which the Joint Committee report recommended eliminating, should be eliminated only if the other recommended changes are made.

The Institute's statement supports recommendations contained in the Joint Committee's report regarding reducing the complexity associated with retirement plans-especially for workers who struggle to understand the differences between 401(k), 403(b), and 457 plans. Many of the Joint Committee's recommendations were included in the recently enacted tax legislation-the Economic Growth and Tax Relief Reconciliation Act of 2001. The Institute indicated its continued support of Congress's efforts to simplify and conform the rules that apply to different plan types in order to assist workers in understanding their retirement plans.

Finally, the Institute indicated its support for the various simplifications related to education savings vehicles, including eliminating the income-based eligibility phase-out ranges for the HOPE and Lifetime Learning credits, providing a uniform definition of qualifying higher-education expenses, combining the HOPE and Lifetime Learning credits into a single credit and eliminating the restrictions on the use of education tax incentives based on the use of other education tax incentives. In its statement, the Institute notes that by reducing the complexity surrounding these various tax incentives and education savings vehicles, Congress will enable more Americans to take advantage of opportunities to save for their children's education.