HIGH-INCOME ΤΑΧPAYERS AND RELATED FRIDAY, SEPTEMBER 20, 1985 HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON OVERSIGHT, Washington, DC. The subcommittee met, pursuant to call, at 9:30 a.m., in room 1100, Longworth House Office Building, Hon. J.J. Pickle (chairman of the subcommittee) presiding. [The press release announcing the hearing follows:] [For immediate release, Friday, Sept. 13, 1985] HON. J.J. PICKLE (D., TEX.), CHAIRMAN, SUBCOMMITTEE ON OVERSIGHT, COMMITTEE ON WAYS AND MEANS, U.S. HOUSE OF REPRESENTATIVES, ANNOUNCES A HEARING ON HIGH-INCOME TAXPAYERS AND RELATED PARTNERSHIP TAX ISSUES The Honorable J.J. Pickle (D., Tex.), Chairman of the Subcommittee on Oversight, Committee on Ways and Means, U.S. House of Representatives, today announced a hearing on high-income individuals who pay little or no tax and the use of partnerships to reduce individuals' tax liabilities. The Subcommittee will receive testimony from the Department of the Treasury based on the results of its recent study and analyses of the subject. The Subcommittee hearing will be held on Friday, September 20, 1985, in the Main Committee Hearing Room, 1100 Longworth House Office Building, beginning at 9:30 a.m. In announcing the hearing, Mr. Pickle stated, "The tax laws should ensure that everyone pays their fair share of taxes. The Department of the Treasury's study clearly shows that is not the case for a number of wealthy taxpayers. Deductions taken for losses from investments in certain partnerships seem to be the primary means by which high-income taxpayers drastically reduce or wipe out their tax liability altogether. These loss deductions do not necessarily reflect true economic losses. As we move into comprehensive tax reform, it is imperative that the Committee examine the operation and impact of our present law rules if we are to restore fairness and the public's confidence in our tax system." Among the issues of concern to the Subcommittee are the types of tax shelters used and deductions claimed by high income taxpayers to avoid paying taxes, the growth in recent years of partnerships, the impact of partnership losses on high income taxpayers, and how the various tax code provisions are utilized to generate losses. The Subcommittee anticipates additional hearings on other tax shelter issues later this session. Chairman PICKLE. The Chair will ask the committee to come to order and ask our guests to take their seats. We are going to proceed. We have other members on the way, but in the interest of time, I would like to make an opening statement. Then we will proceed with our first witness. The Subcommittee on Oversight will conduct a hearing today to examine how high-income individuals are able to avoid Federal taxes. The Department of the Treasury will report on results of its study of taxes paid by high-income taxpayers and the recent (1) growth in partnerships. Also, the Treasury will report the results of its review of selected partnership returns by outlining how the various Tax Code provisions can be combined to generate losses and which Tax Code provisions are utilized the most. As we move into tax reform next year, it is important that this subcommittee explore how our tax system currently affects a significant portion of the high-income population and identify those issues which should be carefully considered before adopting a new tax system. During recent trips home, Members of Congress found that one fundamental aspect of the current tax debate stirs the most interest. This issue is the issue of fairness. A recent Democratic Study Group survey in 60 congressional districts reinforces this finding. The current tax system is perceived as unfair because a significant number of high-income taxpayers and corporations can take advantage of investments which afford huge tax benefits to reduce their taxes to almost nothing. As a result, many high rollers pay little or no income tax. Further, what should the public think about advertisements for legal tax shelters offering tax deductions of $10 for each $1 contributed? Unfortunately, many of these well-meaning Tax Code provisions have been used by some wealthy individuals and corporations to eliminate their tax liability. It is not my intention to use this hearing to look for ways to soak the rich because most wealthy people do pay a higher rate of taxes. What we must be concerned about is that some high-income people have found ways to use the Tax Code to avoid paying their fair share. Clearly, Congress has intended to provide some investment incentives in our Tax Code. And these tax provisions have become very important, particularly now in helping American businesses compete with foreign businesses that receive subsidies from their governments. But I don't really think that Congress ever intended to allow a person making more than a million dollars a year to pay no taxes. Finally, let me note that a tax reform bill that will garner both public and congressional support must directly address the issue of fairness. I know this will be a complicated task, but this subcommittee's effort will contribute to this essential goal. We are happy to have with us today Mr. Ronald Pearlman who will describe the results of the Treasury Department's study on high-income nontaxpayers. Mr. Pearlman is the Assistant Secretary for Tax Policy in the Department of the Treasury. Before you proceed, Mr. Pearlman, let me yield to Mr. Dorgan for any statement he might make. Mr. DORGAN. I would like to commend the chairman for calling these hearings. I think they are important hearings. The chairman used the phrase soak the rich, and he and I know full well the rich don't have any particular danger of being soaked these days with the kind of Tax Code we have. Our Tax Code, unfortunately, has become a lot of exclusions and deductions that allow you, if you have enough money, to pay a good deal of money to the best minds around to search for the widest loopholes possible. Those whose income is listed on a W-2 form have no flexibility, of course, and continue to bear the burden of financing our Government. The reason this is becoming very, very important to us is that this is the first generation of Americans, those who have been raised in the last 15 years, who have actually seen demonstrated evidence that the rich can make a great deal of money and pay nothing. The President and former Presidents have, either inadvertently or by their own actions, their income taxes disclosed and have shown a great deal of income for which they paid nothing in taxes. In a public hearing here in Congress on the appointment of a Vice President not so many years ago, the potential appointee, one of the richest men in America, disclosed that in a recent year he had had a great deal of income but paid nothing in taxes. We had a recent President who was so embarrassed by having a substantial income and paying no taxes that he sent a voluntary check to the Treasury Department and said, "I want to make an $8,000 contribution." Another President did pay taxes, but my guess is he just couldn't figure out how not to pay. If he had the wherewithal, he would find somebody who would allow him to avoid his taxes as well. The point is, we have a tax system which is not fair to the working people in the country because a lot of big folks and big corporations are able to make big money and pay nothing. I have said in the past the system has become a feedlot for the rich. I think that is the case. If you are rich enough, you can figure out a way to move your tax liability down to zero, or close to zero. That is fundamentally wrong. As a former tax administrator, Mr. Chairman, I especially feel that we have a responsibility with respect to our revenue system, but the storm clouds are growing over that system and they are dark and ominous. The reason the clouds are dark and ominous is the American people perceive, correctly in many instances in my judgment, that this system reeks with unfairness and that somebody ought to make it fair. I think that demonstrations of the unfairness through testimony today will propel us further toward tax reform and toward cleaning up a system that desperately needs it. Thank you, Mr. Chairman. Chairman PICKLE. Thank you, Mr. Dorgan. Mr. Secretary, I notice you have a lengthy statement which includes many charts and statistics. I am going to ask we put your entire statement, including the charts, in the record, so it will be made part of this hearing, and we will ask now that you proceed to summarize it. But if you follow your testimony, try to indicate just where you are and what reference you make, if you follow it that closely, so we can follow you as best we can. We will not limit you to any 5minute summary. We want you to give us a full analysis of this if you can. Mr. Pearlman. STATEMENT OF RONALD A. PEARLMAN, ASSISTANT SECRETARY, TAX POLICY, DEPARTMENT OF THE TREASURY Mr. PEARLMAN. Thank you, Mr. Chairman. First let me thank you for the opportunity to appear before the subcommittee this morning. We have spent, as you know, a good deal of time the last several months trying to put together some data in response to your two requests for an analysis of both high-income taxpayers and, more specifically, partnerships and partnership losses. What I am going to try to do this morning is summarize that data as best I can for you. We have included in the written materials to which you refer a statement that includes some tables. Just to make sure we are all talking about the same tables, when I refer to tables during my comments, they are the tables that follow page 11, the last page of my written statement. In addition to the statement, we have included two other documents you have received previously. First is the report we transmitted to you, Mr. Chairman, on July 31 on high-income taxpayers. The second item, which you received this week, is a detailed analysis of our partnership study. It goes into more specifics about the methodology of that study. I do not intend to refer to those documents with any specificity this morning. Let me begin by saying that we share, and I want to make it clear, it is the administration that shares the view that I know you and the Ways and Means Committee hold that a major focus of the tax reform debate is the issue of fairness. As the committee proceeds to develop legislation on fundamental tax reform, we think it is quite appropriate to examine the tax burden borne by some highincome taxpayers relative to others. Similarly, it is appropriate, we think, to examine partnership activities since they are frequently seen as vehicles for tax shelters, and I think our data will be helpful to you since partnership losses do comprise a significant portion of losses reflected in high-income taxpayer returns. With any analysis of high-income taxpayers and partnerships, a natural reaction is to focus on the negative aspects, that is on how many high-income taxpayers pay little or no tax, and on the growth of partnerships with losses. These are clearly parts of the picture, but I think it is also important, as you have indicated in your opening statement, and indeed as Mr. Dorgan indicated in his comments, to keep in mind the positive aspects. That is, that most high-income families do pay a fair share of taxes, and most partnerships earn a profit. Unlike corporations, partnerships flow through their income and expenses, and, therefore, they are conducive to tax shelters or taxsheltered investment. The partnership form of organization does serve important business purposes in allowing individuals and other enterprises to conduct business together or to invest together. Partnerships are not the only vehicle in which investors can receive preferential tax treatment. Individuals can conduct business as sole proprietorships, and groups of individuals can associate together in corporate form with the small business corporation, so |