[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]




 
     PRESIDENT'S TAX RELIEF PROPOSALS: INDIVIDUAL INCOME TAX RATES

=======================================================================

                                HEARING

                               before the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                           FEBRUARY 13, 2001

                               __________

                            Serial No. 107-1

                               __________

         Printed for the use of the Committee on Ways and Means





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                      COMMITTEE ON WAYS AND MEANS

 BILL THOMAS, California, Chairman
CHARLES B. RANGEL, New York          PHILIP M. CRANE, Illinois
FORTNEY PETE STARK, California       E. CLAY SHAW, Jr., Florida
ROBERT T. MATSUI, California         NANCY L. JOHNSON, Connecticut
WILLIAM J. COYNE, Pennsylvania       AMO HOUGHTON, New York
SANDER M. LEVIN, Michigan            WALLY HERGER, California
BENJAMIN L. CARDIN, Maryland         JIM McCRERY, Louisiana
JIM McDERMOTT, Washington            DAVE CAMP, Michigan
GERALD D. KLECZKA, Wisconsin         JIM RAMSTAD, Minnesota
JOHN LEWIS, Georgia                  JIM NUSSLE, Iowa
RICHARD E. NEAL, Massachusetts       SAM JOHNSON, Texas
MICHAEL R. McNULTY, New York         JENNIFER DUNN, Washington
WILLIAM J. JEFFERSON, Louisiana      MAC COLLINS, Georgia
JOHN S. TANNER, Tennessee            ROB PORTMAN, Ohio
XAVIER BECERRA, California           PHIL ENGLISH, Pennsylvania
KAREN L. THURMAN, Florida            WES WATKINS, Oklahoma
LLOYD DOGGETT, Texas                 J.D. HAYWORTH, Arizona
EARL POMEROY, North Dakota           JERRY WELLER, Illinois
                                     KENNY C. HULSHOF, Missouri
                                     SCOTT McINNIS, Colorado
                                     RON LEWIS, Kentucky
                                     MARK FOLEY, Florida
                                     KEVIN BRADY, Texas
                                     PAUL RYAN, Wisconsin
   Allison Giles, Chief of Staff
   Janice Mays, Minority Chief 
              Counsel

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.


                            C O N T E N T S

                              ----------                              
                                                                   Page
Advisory of February 6, 2001, announcing the hearing.............     2

                               WITNESSES

U.S. Department of the Treasury, Hon. Paul O'Neill, Secretary....     9

                                 ______

American Enterprise Institute, Kevin A. Hassett..................    60
Center on Budget and Policy Priorities, Robert Greenstein........    49
Feldstein, Martin, Harvard University............................    46

                       SUBMISSIONS FOR THE RECORD

American Bankers Association, statement..........................   103
American Business Council of the Gulf Countries, John Pratt, 
  statement and attachments......................................   104
American Forest & Paper Association, W. Henson Moore, statement..   110
Caplin, Mortimer M., Caplin & Drysdale, statement................   112
Given, John Gary, Sr., and Michele L. Given, Joshua Tree, CA, 
  joint statement and attachment.................................   113
Independent Sector, Peter Goldberg, and Sara E. Melendez, 
  statement and attachments......................................   120
Jaindl Family Farms, Orefield, PA, Frederick J. Jaindl, Sr., 
  statement......................................................   137
National Conference of State Legislatures, Hon. Jim Costa, letter   138
Salazar, Stacey, La Mirada, CA, letter...........................   139


     PRESIDENT'S TAX RELIEF PROPOSALS: INDIVIDUAL INCOME TAX RATES

                              ----------                              


                       TUESDAY, FEBRUARY 13, 2001

                          House of Representatives,
                               Committee on Ways and Means,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:05 a.m., in 
room 1100 Longworth House Office Building, Hon. Bill Thomas 
(Chairman of the Committee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
February 6, 2001
FC-1

                      Thomas Announces Hearing on

                    President's Tax Relief Proposals

    Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways 
and Means, today announced that the Committee will hold a hearing on 
President Bush's tax relief proposals. The hearing will take place on 
Tuesday, February 13, 2001, in the main Committee hearing room, 1100 
Longworth House Office Building, beginning at 10:00 a.m.

    Oral testimony at this hearing will be from invited witnesses only. 
However, any individual or organization not scheduled for an oral 
appearance may submit a written statement for consideration by the 
Committee and for inclusion in the printed record of the hearing.

BACKGROUND:

    On February 8, 2001, President Bush is expected to submit to the 
Congress a package of tax relief proposals, including, among other 
items, reductions in individual income tax rates, an increase in the 
child tax credit, relief from the marriage tax penalty, incentives for 
charitable contributions, and repeal of the death tax. The approximate 
10-year cost of the tax relief is expected to be $1.6 trillion.

    In announcing the hearing, Chairman Thomas stated: ``The surplus 
means it's time for immediate, across-the-board tax relief for all 
taxpayers to boost our economy, create jobs, and give Americans more 
confidence by returning some of their surplus taxes to help them get 
through these uncertain times. We need to cut taxes for working 
Americans.''

FOCUS OF THE HEARING:

    The Committee will receive testimony on the President's tax relief 
proposals and their impact from invited witnesses.

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

    Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5--
inch diskette in WordPerfect or MS Word format, with their name, 
address, and hearing date noted on a label, by the close of business, 
Tuesday, February 27, 2001, to Allison Giles, Staff Director, Committee 
on Ways and Means, U.S. House of Representatives, 1102 Longworth House 
Office Building, Washington, D.C. 20515. If those filing written 
statements wish to have their statements distributed to the press and 
interested public at the hearing, they may deliver 200 additional 
copies for this purpose to the Committee office, room 1102 Longworth 
House Office Building, by close of business the day before the hearing.

FORMATTING REQUIREMENTS:

      Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
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      1. All statements and any accompanying exhibits for printing must 
be submitted on an IBM compatible 3.5-inch diskette in WordPerfect or 
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pages including attachments. Witnesses are advised that the Committee 
will rely on electronic submissions for printing the official hearing 
record.

      2. Copies of whole documents submitted as exhibit material will 
not be accepted for printing. Instead, exhibit material should be 
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      3. A witness appearing at a public hearing, or submitting a 
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      4. A supplemental sheet must accompany each statement listing the 
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      The above restrictions and limitations apply only to material 
being submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press, 
and the public during the course of a public hearing may be submitted 
in other forms.

    Note: All Committee advisories and news releases are available on 
the World Wide Web at ``http://waysandmeans.house.gov''.

    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.

                                


    Chairman Thomas. Everyone find their seats as quickly as 
possible please. Thank you.
    The subject of today's hearing is President Bush's income 
tax relief proposal. This morning we will hear testimony from 
Secretary of Treasury O'Neill. This is Treasury Secretary 
O'Neill's first appearance before the House and we will welcome 
him here. He will be with us, unfortunately, only for about 2 
hours. He has to move on at noon. I do hope the members will be 
expeditious in the questions they ask. I know he will be 
economical in his answers. If there are any elaborations that 
need to be done, I am quite sure we can do it with written 
questions and written answers.
    Then this afternoon we will hear testimony from a panel of 
three economists: Kevin Hassett, Martin Feldstein, and Bob 
Greenstein. I think if anybody knows their backgrounds and will 
listen to the testimony, no one will say that we did not cover 
the spectrum in terms of economic analysis by economists of the 
President's program.
    As we begin the discussion of the President's income tax 
proposals, I would like to remind members that we will have 
ample opportunity to address other problem areas in this 
session. Indeed, today the Congress will have an opportunity on 
the floor to vote on legislation that once again creates a 
Social Security and a Medicare lockbox. It is very similar to 
the legislation that we passed previously and it puts 
approximately $2.9 trillion of the surplus away, preserving it 
for Medicare reform and Social Security reform. These payroll 
taxes as a separate issue will certainly be examined by this 
Committee under its jurisdiction. Medicare and its 
modernization, including prescription drugs, will be the 
subjects of hearings of the House subcommittee under the 
leadership of Chairwoman Nancy Johnson and Ranking Member Pete 
Stark.
    Social Security reform was a major issue in the last 
Presidential campaign. President Bush has said he would be 
presenting proposals on reform as will Members of Congress. 
Obviously the Social Security Subcommittee, under Chairman Clay 
Shaw and Ranking Member Bob Matsui, will provide leadership on 
this issue for the Committee. Areas of concern will be examined 
by this Committee of the President's proposals from time to 
time.
    But today the subject is the Income Tax Code of the United 
States and changes to that Code offered by the President. There 
are many reasons to amend the Code. It is too complex. It is 
unfair. Its current structure collects more money than is 
needed to fund the government. Some are asking that our 
examination of the IRS Code should wait until we have a more 
complete budgetary picture of where we are on the projected 
surplus so that we could examine all the competing demands on 
our resources. And there are some, I have a hunch, who just 
want to stall because they don't want to reduce the income tax 
burden on Americans.
    The economic juggernaut that has propelled us to these 
surpluses is slowing. How much is up for debate. I don't think, 
though, that we should pause, clean our glasses, and adjust our 
green eye shades before we as Congress respond to this economic 
slowdown.
    One of my interests today is to find out if we should act 
sooner rather than later and, if so, in what way. And with 
that, without objection, each member will have an opportunity 
to submit a written statement and have it included in the 
record at this point.
    [The opening statement of Chairman Thomas follows:]

   Opening Statement of the Hon. Bill Thomas, M.C., California, and 
                 Chairman, Committee on Ways and Means

    Good morning. We are pleased to have Treasury Secretary O'Neill and 
some of the nation's top economic experts with us today to testify on 
the President's tax relief plan, and I look forward to hearing their 
views. But before we begin I'd like first to put some things in 
perspective and remind my colleagues of the significant milestones 
we've accomplished for the American people.
    Republicans in Congress are already saving the entire $2.9 trillion 
of the off-budget surplus for Social Security and Medicare. Later 
today, we will again have bipartisan support to create a Social 
Security and Medicare lockbox so that every penny actually goes toward 
those programs for our nation's retirees and seniors. We're keeping our 
commitment to older Americans that have paid into the system their 
entire lives, so they can enjoy a secure and healthy retirement.
    Since 1997, we've paid down more than $363 billion in debt, and for 
the first time in generations, we are on track to eliminate the debt 
entirely. Our priorities have not changed. Even after we have set aside 
$2.9 trillion for Social Security and Medicare and put our fiscal house 
in order, we still have $2.7 trillion more that's coming into the 
Treasury than the government needs. And if that money is left in 
Washington, politicians will surely spend it.
    The health of our nation's economy demands that we act quickly. 
Pick up the local newspaper and you can see the beginnings of sluggish 
economy--tens of thousands of layoffs, production cutbacks, and over-
stocked warehouses. Working Americans continue to feel the tax bite. A 
typical family spends more in taxes than they do on food, clothing and 
shelter combined. Is it any wonder that one in five Americans says 
they're having trouble paying the bills?
    It's time to give hard-working American taxpayers some of their 
money back. Every day, taxpaying families are struggling to make ends 
meet. So the sooner we can give them real tax relief, the sooner they 
can pay the light bills, make their mortgage payments, and cut into 
their credit card debts.

                                


    Chairman Thomas. But I would turn to my friend and 
colleague, the Ranking Member from New York, Mr. Rangel, for 
any comments he may have.
    Mr. Rangel. Thank you. And again, Mr. Chairman, I 
congratulate you on your ascension to the awesome and powerful 
position that you enjoy and I am confident that you will carry 
this great responsibility with a great deal of power-sharing 
and principle-sharing on this Committee, and we look forward to 
working with you.
    Mr. Secretary, I think our Nation is fortunate that someone 
of your stature was willing to give up the private sector to 
come back to help us to work out some of the problems that we 
face. And I enjoy talking with you about the things that you 
hope to accomplish, and I do hope that you will be able to 
bring us together to do what is good for the people. We have a 
tax cut before us that it is generally felt that we have 
accumulated a surplus to which the American people have 
contributed and that we have a responsibility to return a part 
of that to the people. There are differences in terms of the 
size and how we should do it, but this Committee has the 
constitutional responsibility to work that through.
    There is also a problem with the framework that the 
President has sent to us because we hear some people in the 
House say the reason why higher income people receive so much 
of the tax cut is because they are the ones that pay the taxes. 
And the truth of the matter is that in my community, people 
think that taxes are the difference between what their salary 
is and what they come home with. And it is so unfair in my 
opinion not to include payroll taxes as a part of the relief 
which the President talked about in the campaign and which we 
have a responsibility to deal with.
    During the campaign the President's promises were so 
similar to the Democrats that I think we could walk away saying 
that we want to reach the same goals, we want to make certain 
that that Social Security system is not here just for us but 
for the baby boomers that are to come. We want to make certain 
that health care is available to them. The President made a 
great deal about improving the quality of life of our young 
people who put their lives on the line in the military. He 
doesn't want to leave any child behind in terms of education. 
And on that issue I think he has more friends on our side of 
the aisle than the other. He wants to be able to make 
prescription drugs affordable for our people.
    So where could our difference be if we believe in tax cuts, 
we believe in programs? The difference I think, Mr. Secretary, 
is that we do not have a budget, and we can only support a tax 
cut when we know what's going to happen with the rest of the 
budget. And it appears to me, and I may be wrong, and you are a 
businessman, that this tax cut to a large extent is based on 
doing all of these things because we have a reasonable 
possibility that in the next 10 years we will have $5.6 
trillion to deal with, and we are assuming that if we do all 
the things we have to do with this tax cut program, it could 
easily reach $2 trillion. In any event, we will have some 
questions, relying on your expertise to help us to get through 
these things. We welcome you to Capitol Hill and we hope that 
you and your wife will never regret your decision to come up.
    Thank you Mr. Chairman.
    [The opening statement of Mr. Rangel follows:]
    Opening Statement of the Hon. Charles B. Rangel, M.C., New York
    We have a tax cut before us (and) it is generally felt that we have 
accumulated a surplus to which the American people have contributed and 
that we have a responsibility to return a part of it to the people. 
There are differences in terms of the size (of a tax cut) and how we 
should do it, but this Committee has the Constitutional responsibility 
to work that through. There's also a problem with the framework that 
the President has sent to us because we hear some people in the House 
say that the reason why higher income people receive so much of the tax 
cut is because they're the ones that pay the taxes. And the truth of 
the matter is that, in my community, people think that taxes are the 
difference between what their salary is and what they come home with 
and it is so unfair, in my opinion, not to include payroll taxes as a 
part of the relief which the President talked about in the campaign and 
which we have a responsibility to deal with.
    During the campaign, the President's promises were so similar to 
the Democrats' that I think we could walk away saying that we want to 
reach the same goals. We want to make certain that the Social Security 
system is not there just for us, but for the Baby Boomers that are 
going to come. We want to make certain that health care is available to 
them. The President made a great deal of improving the quality of life 
of our young people who put their lives on the line in the military. We 
agree. He doesn't want to leave any child behind in terms of education 
and, on that issue, I think he has more friends on our side of the 
aisle than the other. He wants to be able to make prescription drugs 
affordable for our people. We have tried to do that for years. And so, 
where could a difference be if we believe in tax cuts (and) we believe 
in these programs?
    The difference I think, Mr. Secretary, is that we don't have a 
budget. And we can only support a tax cut when we know what's going to 
happen with the rest of the budget. It appears to me, and I may be 
wrong and you are a business man, that this tax cut, to a large extent, 
is based on reason to believe that in the next 10 years, we will have 
$5.6 trillion to deal with. Nonetheless, we're assuming that if we do 
all the things we have to do with this tax cut program, it could easily 
reach $2 trillion. Before we proceed with such a tax cut, we should 
have a budget in place so that we know what we are doing.

                                

    [The opening statements of Mr. Crane, Mr. McDermott, Mr. 
Ramstad, and Mr. McInnis follow:]
     Opening Statement of the Hon. Philip M. Crane, M.C., Illinois
    Thank you Mr. Chairman.
    Mr. Secretary, I want to welcome you for the first of what I hope 
will be many productive and collegial visits to our Committee. I think 
you have had a splendid start in your tenure as Secretary.
    It will surprise no one, I am sure, when I say I support the 
President's program in its entirety. That said, I want to make just a 
very few points.
    First, I want to recognize our friends from the other side of the 
aisle who have now joined the tax cut movement. After years of 
opposition, the question is no longer whether, but how much. I say that 
not in gloating, but in sincere appreciation.
    Second, I want to point out that we are at this juncture because of 
forecasts of enormous surpluses. These surpluses represent property--
the income and wealth of our citizens--that the federal government is 
taking without cause or need. The great American economist, Walter 
Williams, once captured the matter with the phrase--``Taxation is 
theft.'' It is, to an extent, a necessary theft. But when it produces 
enormous surpluses, it becomes far less a necessity and far more theft. 
And it is irrelevant against whom this theft is committed.
    Third, we hear how these surplus projections are uncertain. Indeed, 
they are. In recent years we have seen the projected surplus rise by a 
half trillion dollars or so every six months. I submit that recent 
experience tells us the uncertainty goes in both directions. The 
surpluses are more likely to turn out to be larger than forecast, not 
smaller.
    Fourth, we can reinforce our confidence in the projected surpluses 
if we reduce spending in some areas. After the last few years of bi-
partisan profligacy, with discretionary spending increasing over 18 
percent in the past three years alone, no one can argue with a straight 
face that spending restraint is not in order. Further, if we hold the 
line on spending, then there is no doubt there will be a second and a 
third tax cut bill in this Congress.
    Finally, I do not know if we can enact this program quickly enough 
to shorten the downturn in the economy. If we had enacted significant 
tax relief last year, we might have avoided the downturn altogether, 
but that is water under the bridge. I do know that sound tax policies 
such as the rate reductions in President Bush's plan will assure us a 
stronger economy in the future. As the recent downturn has indicated, 
and as the decade-long troubles of the once high-flying Japanese 
economy underscore, we must never take prosperity for granted.
    Mr. Secretary, I pledge to you today to work with you to enact the 
President's plan in its entirety with all the dispatch the legislative 
process can muster.

                                


     Opening Statement of the Hon. Jim McDermott, M.C., Washington

    I believe in a tax cut for all Americans, within the context of a 
fiscally responsible budget framework.
    In contrast, the tax cut proposal from President Bush is biased and 
unfair, giving disproportionately less money to working poor families.
    Why should lower-income families who do not owe any federal income 
tax, but who do pay substantial payroll taxes, get no tax cut? Bush 
supporters talk in terms of marginal tax rates and percentages, but not 
dollars. They will tell us that the poor receive a large reduction in 
marginal tax rates in order to help them obtain access to the middle 
class. But they do not tell us that one in three families receive no 
benefits. That is, an estimated 12 million families with children would 
not receive any tax cut. Nor do they tell us that the lowest 20% income 
group earning less than $13,600 will receive an average tax cut of $42 
as compared with the top one percent group who receive an average tax 
benefit of $46,000.
    Why should the child credit be extended to families with incomes 
between $100,000--$200,000 before making the credit refundable? This is 
in effect giving the relatively more affluent taxpayers a raise in the 
child credit from zero to $1,000 while many low income individuals 
receive no benefit. Why shouldn't all Americans benefit from the 
economic growth and prosperity that has resulted in our surpluses?
    Furthermore, President Bush's tax cuts are irresponsible.
    His proposal does not leave enough money to pay off the debt, 
strengthen Medicare and Social Security, and invest in health care, 
education and defense. There will not be enough money for the partial 
privatization of Social Security that Bush has proposed. There will not 
be enough money for prescription drugs or helping the uninsured, (for 
which he committed $130 billion). Nor does the Bush proposal account 
for extending expiring tax provisions and AMT reform.
    Supporters of Bush's plan will argue that tax cuts are needed to 
stimulate the economy. But this tax cut was proposed in 1999. It had 
nothing to do with the economy then. Further, the principle reason 
CBO's budget projections show larger surpluses than previously assumed 
is that CBO now believes the economy generally will be stronger over 
the next 10 years than previously thought. Therefore, the argument that 
a large, permanent, and growing tax cut is needed because of a weaker 
economy does not stand up well.
    I support a responsible tax cut that gives something to all 
families. I support a budget that recognizes economic and fiscal 
realities. The current projections are just that--projections. The 
budget must maintain a reserve for inevitable errors in these 
projections. It must pay down the debt, shore up resources for Medicare 
and Social Security, allow for other initiatives, as well as providing 
for tax cuts.
    There has been much focus on Chairman Greenspan's testimony and the 
peril of reaching zero debt. There is a misconception that government 
spending is a bad idea. If the surpluses do indeed actualize, what 
about the commitment to our seniors--to ensure financial viability for 
the Medicare and Social Security programs? And what about the 44 
million uninsured?
    In fact, in a recent Newsweek poll, 65% said they would rather see 
the surplus used to pay down the federal debt and make entitlement 
programs more solvent than have the surplus used for a tax cut.
    I support tax relief, which includes modifying the estate tax, 
easing the marriage penalty and expanding the earned income tax credit. 
But any tax cut must be designed within the framework of balanced 
priorities.
    Thank you.

                                


       Opening Statement of the Hon. Jim Ramstad, M.C., Minnesota

    Mr. Chairman, thank you for holding this important hearing today to 
examine President Bush's proposals for tax relief.
    What a difference a year makes. At this time last year, we were 
debating whether we should have a tax cut. The question now is not 
whether, but how much and how quickly!
    The time for tax relief is now. The dire state of the economy is no 
longer in doubt. A major tax cut is needed to stimulate the economy and 
keep people working.
    The plan before us is fiscally responsible. CBO estimates project a 
surplus of at least $5.6 trillion over the next 10 years. With this 
surplus, it is unconscionable that Americans are paying the highest 
peacetime level of taxes in history. It is entirely reasonable to 
strengthen the economy by returning to taxpayers one fourth of their 
tax overpayments, and to use the remainder to pay off the debt, shore 
up Medicare and Social Security, and improve education.
    Cutting taxes in this modest way will not threaten our fiscal 
discipline. On the contrary, it is a well-documented paradox that tax 
revenues actually increase after taxes are cut, as more jobs and rising 
incomes send money to the Treasury.
    President Bush's tax cut initiative is also fair. Lower and middle 
income Americans will see the most dramatic percentage drop in their 
taxes under the plan. And although all Americans who pay taxes will 
receive a tax cut under the President's plan, wealthier taxpayers will 
actually pay a larger portion of America's tax burden than they do 
today.
    On a ``micro'' level, this tax relief will raise the standard of 
living for individual families. It will allow working Americans to save 
and spend more of their own money for their family's needs. For a 
typical family of four, this means an extra $1,600. And from a 
``macro'' perspective, this broad tax relief will create jobs and spur 
economic growth. Our families and our national economy need this 
relief.
    Mr. Chairman, thanks again for convening this hearing. I look 
forward to hearing from Secretary O'Neill and our distinguished panel 
of economists. Working together, we can provide tax relief that will 
strengthen families and the economy.

                                


      Opening Statement of the Hon. Scott McInnis, M.C., Colorado

    Mr. Chairman, it is with great optimism that I await today's 
opportunity to discuss legislative proposals to cut taxes for 
Americans. Today we look forward to the opportunity to work to lower 
marginal rates, reduce the marriage penalty, help Americans save for 
their children's education, enable middle class taxpayers to get proper 
credit for their charitable giving, and work toward ending the death 
tax. Since taking a seat on the Ways and Means Committee, I have 
championed the effort, along with some of my colleagues, to bury the 
death tax. I am pleased that this year we have a real opportunity to 
address some of the death tax's punitive operation on constituents in 
the Third District of Colorado and everywhere in the United States.
    The case for killing the death tax is a compelling one, and at its 
basis is a rejection of the notion that the death of a loved one should 
be a taxable event. This concept is so absurd that only the federal 
government could have dreamed it up.
    Let me put my opposition to the death tax in concrete terms. Take 
the case of Brookhart Building Centers in Montrose and Grand Junction, 
Colorado. After 52 years of doing business in western Colorado, 
Brookhart's owners were forced to sell their family owned business to a 
national chain because of the impending threat of having to pay the 
death tax. Rob Watt, who ran the business along with his aging mother 
and father prior to its sale, said at the time ``[i]n order to protect 
our family and our current employees from a liquidation upon the death 
of [my parents], the best thing now would be to sell the company.'' The 
death tax sealed the fate of this family business, and I am firmly 
convinced that there is no sound argument to support the federal 
government imposing such an onerous tax that literally forces the sale 
of these family businesses. Moreover, Brookhart's owners sold it early 
in order to protect their employees, but many small business owners, 
ranchers and farmers don't realize the death tax will hit them, and 
their employees end up suffering because of it.
    Derek Roberts of Livermore, Colorado tells a similar horror story 
about the impact of the death tax on his community. Derek, a fifth 
generation northern Colorado rancher, worries that the death tax will 
doom his family run operation, preventing his sons from becoming the 
sixth generation of Roberts to run the family ranch. The death tax has 
already claimed many of his neighbors in his community, ``[w]e are one 
of only one or two or three ranchers left around here,'' he said in a 
letter to the editor in which he called for the elimination of the 
death tax. ``One of the last to go was a family that had been there as 
long as ours. When the old folks died, the kids borrowed money to pay 
the taxes. Soon they had to start selling cattle to pay the interest. 
When they ran out of cattle, their 18,000 acre ranch was foreclosed and 
is now being developed. The family now lives in a trailer near town, 
and the father works as a highway flagman.''
    Stories like this are far too common in Colorado. And they raise 
the question why tax policy, specifically the death tax, is driving the 
development of ranch and farm land in our country. At a time so many 
people out there are asking policy makers for more open space, why is 
the death tax foreclosing our open space. Local land use planning can 
and should be done without the help of the federal death tax. As Derek 
Roberts makes clear, it is not the ranching family or farmer who 
benefited when his neighbor's ranch was eventually foreclosed. The 
community also lost a source of strength, because often it is these 
families who are foundations of the community's local institutions and 
charities. When the death tax bankrupts a family, the money is sent to 
Washington D.C., and the local community and family suffer as a result.
    So, in closing, Mr. Chairman, I am excited that today Congress and 
the Bush Administration will have the first real opportunity to work on 
a broad tax cut for Americans, and I eagerly look forward to working 
with all who are seriously committed, as I am, to ending the penalty 
the death tax imposes on Colorado's farmers, ranchers, small business 
owners, and everyone else who shares the American Dream.

                                


    Chairman Thomas. Thank you very much. And prior to 
introducing the Secretary, I would be remiss if I did not look 
behind him and see a longtime servant of the people on the 
House Ways and Means Committee, Chris Smith. I am sorry he left 
us, but I am glad that his expertise is now serving the 
administration downtown. And with that, the 72nd Secretary of 
the Treasury, Mr. O'Neill, the time is yours.

STATEMENT OF THE HON. PAUL O'NEILL, SECRETARY, U.S. DEPARTMENT 
                        OF THE TREASURY

    Secretary O'Neill. Mr. Chairman, Mr. Rangel, honorable 
members, it is a great pleasure for me to be here this morning 
in this first of your meetings and my first opportunity as 
Secretary of the Treasury to speak to you about the Nation's 
business and particularly to speak to you about the President's 
proposals for changing our Income Tax Code and giving the 
American people, however you might stylize it, a tax reduction 
or a pay raise which would go to every Federal taxpayer.
    As the Chairman observed, the structure of our tax system 
today is producing very large amounts of excess funds, funds 
greater than we need to pay for agreed public purposes that 
have been legislated by you and your colleagues. And it is also 
true that as we do the conventional process of looking at the 
10-year forecast that, by the CBO reckoning which you will see 
in a couple of weeks, we will substantially validate in the 
administration's own economic forecast, this surplus over the 
next 10 years will approximate $5.6 trillion.
    In order not to end up in a situation in a few years, as 
Chairman Greenspan has observed, in a position where we have 
such large surpluses that we have completely eliminated the 
publicly held debt and go into the business of buying private 
assets as a government holder of private assets, it is 
important that we make structural changes in the way the tax 
system works so that we do not accumulate the huge and ongoing 
surpluses at the Federal level. And importantly, as the 
President has said over the last couple of years, our tax 
structure needs attention to deal with some issues of fairness 
and to deal with the accretion that has occurred in the tax 
rate over the last 10 years as compared to where we were.
    And so we have the President's proposal in front of you. It 
is a proposal not fashioned in the last few weeks or in the 
last few months, but created out of his ideas of what he 
thought would be a fair system for the American people as he 
went around the country and campaigned for office over the last 
2 years. And it would do several very important things:
    First, it would reduce the marginal rates for American 
taxpayers. It would reduce the marginal rates for the lowest-
income Federal taxpayers by 50 percent, not an inconsequential 
change. And at the top end, it is true, the President's 
proposal would reduce the top rate from 39.6 percent to 33 
percent which would still be 2 percentage points higher than 
where we were 9 years ago.
    So there is a shift in the portions of tax incidence in 
what the President has proposed to favor low- and moderate-
income taxpayers. So, for example, for a four-person family 
with an income of $35,000, they would be taken off of the 
Federal income tax rolls. And for a four-person family with an 
income of $50,000 they would have their tax cut in half, from 
$4,000 a year to $2,000 a year. And serially up the line of 
income levels, the President's proposal would provide relief to 
every American taxpayer.
    The President has also proposed that we make a change in 
the Tax Code that is pro-family, effectively doubling the child 
credit from $500 to $1,000.
    And then there are proposals that are certainly familiar to 
you, because in this body in the last couple of years you have 
dealt with the issues of the penalty that is imposed on two-
person families with a so-called marriage penalty and then the 
estate tax or the so-called death tax issues that again you 
dealt with in the last couple of years, and finally making 
permanent the R&D tax credit.
    We believe the time to act is now. In addition to the 
structural reasons to act, as has been noted, our economy has 
slowed down in the last 6 months, I would say beginning in 
August. And Chairman Greenspan has said, and I agree with him, 
we are now bouncing around in a narrow range of economic 
activity of perhaps minus .5 to plus .5 percent or something 
approximating zero real growth. And whether you are Keynesian 
or not, it does seem to me that since we are, I think without 
exception in agreement that we should have tax relief and a pay 
increase for American Federal income tax payers, it seems to me 
the burden of proof is if we are going to do it, why not now? 
Why not immediately?
    Mr. Chairman, I have a prepared statement. With your 
permission, I would insert in the record perhaps at the 
beginning of my remarks and then with these following on a 
brief characterization of what I think about those issues and 
open myself to questions.
    [The prepared statement of Secretary O'Neill follows:]

 Statement of the Hon. Paul O'Neill, Secretary, U.S. Department of the 
                                Treasury

    Good morning Mr. Chairman, Mr. Rangel and members of the Committee. 
It gives me great pleasure to be here this morning, as we move one step 
closer to providing comprehensive income tax relief to American 
taxpayers. On Thursday I presented the President's tax package to House 
and Senate leaders, and I urged then that we get right to work to 
deliver tax relief to working Americans as soon as possible.
    I am pleased that you are starting the hearing process so quickly. 
I hope that your leadership will help ensure early passage of the 
President's proposals. With you I am ready to roll up my sleeves, get 
down to work and leave money in the pockets of every income tax paying 
American.
    Through hard work and ingenuity, Americans have created a booming 
economy that has spread prosperity around the world. Individuals have 
created new technologies that have made our industries more productive 
and have improved the standard of living for millions of Americans.
    Our prosperity has made the unthinkable possible. After decades of 
budget deficits, we now have the opportunity to wall off the Social 
Security surplus so it can't be spent on other government programs. And 
even after we lock away Social Security, we still have more tax dollars 
coming into Washington than Washington needs to pay for agreed upon 
public services.
    This isn't just a budget surplus, it's a tax surplus. We have no 
business continuing to collect more in Federal taxes than the cost of 
the services the government provides. If the phone company overcharged 
one of your constituents, you'd join them in calling for a refund. The 
same principle applies to this tax surplus--it's not the government's 
money, it's the people's money, and we should return it to them as 
quickly as possible.
    The President has proposed tax relief that reinforces the values 
that make America great--opportunity, entrepreneurship, strong families 
and individual success.
    First, the President has proposed reducing income taxes for every 
American who pays income taxes. The current five rate system will be 
simplified to four rates, and the tax rate on the first $6,000 of 
taxable income earned by every American--$12,000 in the case of married 
couples--will fall from 15 to 10 percent.
    High income tax rates block access to the middle class for working 
Americans struggling to get ahead. And high income tax rates punish 
success. We should not allow the threat of higher taxes on the next 
dollars earned to discourage Americans from working harder. Increased 
productivity has been one of the fundamental engines of our economic 
success, and the tax system should not dampen our ability to be more 
productive. We must have a tax code that keeps the American Dream in 
everyone's reach and helps people move up the economic ladder of 
success. We must have a tax code that encourages entrepreneurship and 
rewards hard work.
    The President's tax relief plan also strengthens the ties that bind 
families together.
           It doubles the child tax credit to $1,000 per child. 
        Parents everywhere have one goal above all others: to give 
        their children the best possible opportunity for success and 
        happiness in life. The increased child tax credit will give 
        parents more resources to save for college tuition, pay for 
        braces or hire a tutor.
           This plan also reduces the unfair marriage penalty. 
        We as a society celebrate when two people decide to spend their 
        lives together. Why would our tax code punish them?
           And this plan eliminates the unfair death tax. 
        Government has no business confiscating the legacy parents work 
        their entire lives to build for their children.
    Today we are proposing a tax cut for every income tax payer. Four-
person families earning $35,000 a year will no longer bear any federal 
income tax burden. Four-person families earning $45,000 will see their 
income taxes cut in half. And four-person families earning $75,000 will 
see their tax burden reduced by 22 percent.
    The President's tax relief plan ensures that higher income earners 
pay a larger share of taxes than they do now. In 1998, the top 10 
percent of income earners paid 65 percent of federal income taxes, 
while the bottom half of income earners paid 4.2 percent of the total 
federal income tax burden. After implementing the President's tax 
relief plan, the top 10 percent of income earners will pay 66 percent 
of all federal income taxes.
    This plan provides relief to all income tax payers. There's a 
strange attitude around this town that once the money gets here it 
doesn't belong to the taxpayers anymore--it belongs to some amorphous 
thing called government. That's simply not true. Every person who paid 
income taxes created the tax surplus. And every one of the people who 
paid income taxes deserves to get some of it back.
    Taxpayers in the higher tax brackets will invest their tax relief 
in the economy, creating jobs for all Americans. Economic studies have 
documented that higher income individuals tend to save the bulk of any 
new income they receive. A small businessman receiving tax relief will 
plow that back into the firm, either to increase productivity, which 
results in higher wages, or to hire more workers. A farmer receiving a 
large tax relief check will be able to trade in his tractor and 
purchase the newest technology to improve his crop yield. America's 
economy will grow as these investments go forward.
    This tax relief package is sound fiscal and economic policy. It 
fits easily within our budget framework which walls off the Social 
Security surplus and continues to pay down the public debt in 
increasing amounts each year. I like to refer to it as the Goldilocks 
tax relief plan--not too big, not too small, just right.
    There is no downside to enacting this tax relief package. Today, 
Washington takes more from American taxpayers than it needs to run the 
government. That's not fair. And it isn't useful to pile up resources 
in Washington, where they will be spent to enlarge government. Alan 
Greenspan has pointed out that at the current pace, we'll pay off most 
of the publicly held debt in a few years, and then there will be no 
place to put the surplus. We do not want government taking money from 
the taxpayers and using it to buy up private resources.
    Individual Americans know better how to spend their money. The 
typical family of four will keep $1,600 a year that they would 
otherwise have sent to Washington. That's enough for two monthly 
mortgage payments or for a year of junior college tuition.
    Evidence of an economic slowdown makes this tax relief all the more 
compelling. While the Fed has already acted to stem a downturn, I 
believe in a ``belts and suspenders'' approach. Cutting income tax 
rates can help keep this downturn from taking root. If the economy does 
worsen, I don't want to look back and say ``if only we had acted 
sooner.'' We have a surplus that should be returned to the American 
taxpayers. To the extent that getting it back to them sooner can help 
stave off a worsening of the economic slowdown, we should move forward 
immediately. Taking action soon will boost consumer confidence, which 
in turn will boost consumer demand. And getting money in people's 
pockets quickly will enable Americans struggling with consumer debt to 
pay their credit card bills and get ready for another consumer-led 
expansion.
    I can't accept the idea that it takes nine months to get tax relief 
on its way to the American people. I used to run a 140,000-employee 
company. If I decided to give my employees a raise, I wouldn't wait 
nine months to do it. With our economy slowing, now is the time to 
boost consumer confidence with quick congressional action.
    I look forward to working with Congress to give relief to every 
income tax payer, and to do it quickly. It's time to give working 
Americans a raise.

                                


    Chairman Thomas. Without objection. Let's start by asking 
you that although all of us have good reasons to change the Tax 
Code, especially reducing taxes, some of the President's 
proposals could put money in people's hands as soon as they 
became law. And if we do have a cloudy economic environment and 
we were able to put additional money in our working taxpayers' 
hands, my assumption is if we pick the right ones and we do it 
quickly enough, they will have a little extra money that they 
are going to spend, I daresay perhaps buy a muffler. Does it 
make sense to do this, notwithstanding the fact that Congress 
would tend to prioritize to a certain extent the President's 
proposals?
    We would want, of course, to consult with you as to which 
ones seemed to be most appropriate, and our panel of 
economists. But if it does make sense, what is your reaction or 
the administration's reaction to which ones would make sense, 
or even to the extent of making them retroactive to even the 
beginning of the year?
    Secretary O'Neill. Well, there is no doubt that if you look 
at the distributional effects of the marriage penalty and the 
death tax changes, they don't occur and provide direct and 
immediate benefit to the entire population. On the other hand, 
the marginal tax rate proposals and the child credit would 
provide a broad sweep of benefits to American taxpayers, and if 
we were to do it on a retroactive basis to January 1st, money 
could begin to flow very quickly if the Congress could act on 
these things quickly.
    Chairman Thomas. I understand that the Federal Reserve, and 
as we speak I assume the Chairman, Alan Greenspan, is speaking 
on the other side of the Capitol, has taken some action 
recently, and many people say a monetary policy is much 
preferred. Obviously two half-percent cuts within a month would 
indicate that there is a degree of concern there above the 
ordinary and that if the Congress were to act relatively 
quickly on a portion of a package, do I understand you to say 
that it perhaps could also augment the monetary policy with a 
fiscal policy proposal, that if it doesn't do as much help as 
we would like, it certainly wouldn't do any harm?
    Secretary O'Neill. I've not found anyone who would claim 
that acceleration and putting money into people's hands right 
now would cause any harm. Certainly I agree with you that 
quicker is better, given the softness of the economy we are 
experiencing now. And I honestly do not think any of us know 
what it is going to be 6 months from now. But it does seem to 
me that if it is the will of the Congress that you are going to 
provide tax relief, sooner makes great good sense to go ahead 
and do it so that we have what I characterized as a ``belts and 
suspenders'' approach. If you can have both, why not have both?
    Chairman Thomas. I understand the concern, of course, that 
you would want the budget in place to look at the total revenue 
picture. And I assume the administration will be shortly 
sending the Congress the budget. But if we are talking about a 
portion of the whole, a piece of the program depending upon how 
large that piece is, my assumption is that that could readily 
move, notwithstanding the fact that the other portions of the 
President's plan could be considered along with the Social 
Security changes, the Medicare changes, the other budgetary 
concerns, especially in terms of debt reduction and making sure 
that we live within our means.
    Secretary O'Neill. Absolutely right. In fact, I should have 
noted at the beginning in response to Congressman Rangel's note 
about the budget, it is indeed very important that as you act 
you do it in the context of an understanding of complete fiscal 
policy. And 2 weeks from today you will have a budget. The 
President has asked me, in addition to my other duties, to 
serve on a budget review commission or committee with the Vice 
President and director of OMB, and yesterday we had a meeting 
to look at where we are with the budget. And I don't want to 
tell you exactly what the budget is yet, that is the 
President's business, but I am here to assure you that there is 
plenty of room to do as, Chairman, you suggest: to look at the 
changes retroactively and provide--and we will have plenty of 
room in this budget not only to protect Social Security but to 
implement what the President has proposed by way of tax changes 
and have arguably $1\1/2\ trillion over this 10-year period 
left over for other important public purposes.
    Chairman Thomas. I thank the Secretary. The gentleman from 
New York.
    Mr. Rangel. Thank you.
    Mr. Secretary, were you and the Chairman suggesting that we 
might be able to take the President's package and pass a 
smaller part of that in order to get the money out there as 
fast as possible, sooner rather than later?
    Secretary O'Neill. Let me be as clear as I know how to be 
about this. The President has made clear in every meeting that 
I've been in with him that he believes in the component parts 
of what he has recommended in his tax package, and he believes 
that we need to discipline ourselves not to obligate more than 
$1.6 trillion over this 10-year time period. But he has also 
said, if I remember correctly, I think he said this when we had 
our meeting with you, that he is prepared to work with the 
committees of Congress and with the broader Congress to figure 
out exactly what the pacing is and what the details are, as 
long as we honor the principles and as long as we do not 
obligate more than $1.6 trillion.
    So, yes, in response to your question and to the Chairman's 
earlier question, it is clear that if we are going to, or if we 
want to put money into the hands of Americans quickly, the two 
pieces of the President's proposal that would do that most 
successfully are changes in the marginal rate cut and the child 
credit.
    Mr. Rangel. And I assume the cost, if it was $900 billion 
out of the 1.6 trillion, that would be just considered as a 
part of the overall package.
    Secretary O'Neill. That would be a down payment on the 
total.
    Mr. Rangel. I just would want to ask a parochial question 
before I get to the general questions. Under the President's 
program, he doesn't make adjustments for the alternative 
minimum tax. Many of our high tax, income tax, States under 
existing law are able to deduct their tax liability from their 
Federal liability. The AMT doesn't make those provisions 
possible, so theoretically one could get a tax cut under the 
President's bill but then the AMT would restore--would prevent 
the deduction for local and State taxes. Has any thought been 
given to that?
    Secretary O'Neill. Yes. And honestly this is a very 
complicated subject. And I must tell you some of what I have 
read doesn't measure up to the true complexity that exists in 
the AMT, and I suppose it is because some of the people who 
write for a living having struggled to understand how the 
various aspects of the Tax Code fit together. And I must say on 
their behalf, they are not alone.
    But now to your question about the AMT. First it should be 
understood that the interaction of the AMT and the current Code 
in the President's proposals would not cause anyone to pay net 
more taxes than they pay now. Everyone would still be better 
off. But it is true that the AMT would eat away at some of the 
benefits flowing from the President's tax proposals as compared 
to the absence of an AMT interaction with the rest of the Tax 
Code. But it is also worth noting that 85 percent of the AMT 
effect would be on the families with incomes--with higher-
income families, let me say notionally, with families with 
incomes over $100,000. So this is not a huge substantial 
problem for people with incomes below that level. It does have 
some impact on higher-income families. But let me draw a strong 
line under this point. No one, as a consequence of interaction 
of the AMT and the President's Tax Code proposals, would pay 
more taxes than they do now.
    Mr. Rangel. I want to go as parochial as I can get, and 
that is, would the President and you support the final 
legislative package that would make certain that taxpayers from 
high-income States are able to deduct their income taxes from 
their Federal liability; and if that means adjustments to the 
AMT, then we will just do what we have to do. But at the end of 
the day, we want to know whether or not the President would 
support the deduction.
    Secretary O'Neill. You know, as I have looked at the AMT 
and its interaction with the rest of the Code, I would observe 
this: that the AMT problem has been one that has been 
developing since the AMT was installed into the Tax Code. And I 
guess I am not here to tell you that we are prepared to solve 
every problem that exists with the Tax Code with an early 
action tax bill. There is no doubt that eventually we need to 
work together to figure out how we can strip the AMT out, but 
it is not the only offensive provision, unfortunately, that we 
have in our Tax Code. And again I would say to you, it is 
important to know that no one would pay more taxes after the 
implementation of the President's proposals because of the AMT, 
even if it is left the way it is today. That doesn't mean that 
we shouldn't work together to see if we can soften the impact, 
but I think it is not--if we are going to tackle every aspect 
of income distribution and flaw in the Tax Code, then there is 
no hope that we are going to do this quickly. And the President 
has not proposed that and I certainly would not recommend to 
you that we try to fix all of the problems that exist in the 
9,500 pages of the U.S. Tax Code.
    Mr. Rangel. I am just trying to use this in order to 
educate those people that support the President's program, that 
they may be losing a tax benefit that they have worked hard for 
because of the alternative minimum tax, and the position is 
that we can't help everybody. And so whether you are from New 
York or California, you know, we will get back and deal with it 
later. I just wanted to raise that, because as you pointed out, 
the AMT has a lot of other problems that we will have to work 
with, but that is one that I bring from New York State.
    Chairman Thomas. I thank the gentleman. The gentleman's 
time has expired.
    Mr. Rangel. Well, I didn't know that we had these 
expirations when we had the first witnesses; that is, with the 
previous chair. And you and I have not discussed it.
    Chairman Thomas. I understand that and our goal, as I 
indicated, was that the Secretary has to leave at noon. I had 
admonished members to try to move briskly, but if the gentleman 
has a couple of additional questions, certainly if he feels 
compelled to ask them, go right ahead.
    Mr. Rangel. I appreciate the courtesy and I regret that I 
spent my time on what is basically a New York State issue. But 
I really wanted to ask if you were familiar with the 
uncertainty about some of the projections that the 
Congressional Budget Office has made in the past as relates to 
surpluses.
    Secretary O'Neill. Yes.
    Mr. Rangel. Also I assume that you do not believe that 
Chairman Greenspan suggested a tax cut without taking into 
consideration the uncertainties of the surplus. Having said 
that, if we are projecting the 10-year surplus to be 5.6, do 
you agree that the majority of this expectation, or 70 percent 
of it, would occur after the first 5 years; that we would be 
expecting it in the last 5 years?
    Secretary O'Neill. A large part, yes.
    Mr. Rangel. Seventy percent.
    Secretary O'Neill. I don't know about 70 percent; but yes, 
a large part. And it depends what you do about acceleration.
    Mr. Rangel. Acceleration.
    Secretary O'Neill. And retroactivity.
    Mr. Rangel. Well, Chairman Greenspan does not have the 
political responsibility of taking care of the President's 
campaign promises on education, health care and Social 
Security. And if we do this sooner rather than later, and get 
it out there and get the money in the people's hands to save or 
to spend, as a businessman have you conducted your business 
relying on projections that go up to 10 years and take action 
in the first year in terms of what you expect to get?
    Secretary O'Neill. It is interesting you should ask me. In 
the business that I was in before I came here, when I made a 
billion-dollar decision it was a decision that had to last 50 
years, because you do not get to vote maybe when you build an 
aluminum smelter and aluminum smelters do not come in 3-year 
flavors. And, yes, I am acquainted with the process of making 
long-term decisions. And in a way, it is very much like what 
you all do as Members of Congress. You don't get to vote maybe. 
It is either yes or no. And I think it is true, however, you do 
get to reconsider. It is not quite like building an aluminum 
smelter or building a plant that is going to last 40 or 50 
years. And I think you demonstrate that all the time, that if 
things go awry and you do not like how things are going, you 
change the policy or you change the law.
    I think that is a prospect that is always out there in 
front of you. But with a Tax Code and you are well aware of 
this, you know it better than I do, people make decisions in 
anticipation or in good faith on the basis of what you all do, 
so that if you say you are going to enact a phased-in program 
for a death taxes or the marriage penalty, people will rely on 
that. And so if you decide to change your mind in 2006 or 
something, some people will be quite offended that you decided 
to pull the rug out from under them if you chose to do that.
    Mr. Rangel. So you are suggesting that if the CBO and those 
people relying on do make a dramatic mistake, as they have in 
the past, that either we fulfill our obligation and support the 
programs or we increase taxes to support the programs or we go 
into the Social Security Trust Fund to support the programs.
    Secretary O'Neill. I don't think so. I don't know; at least 
in my lifetime, I don't think there has been a time when the 
Congress of the United States had the possibility of, on the 
one hand, protecting all the Social Security funds and enacting 
a $1.6 trillion tax relief bill for the American people and 
having the 25 percent safety valve.
    Now, when I say safety valve, I am saying we are going to 
have to practice fiscal discipline if we are going to protect 
the safety valve that exists in the forecast. But it is very 
unusual, I think unprecedented, to have the amount of free 
resources coming at you better in these forecasts to protect us 
against having to have a tax structure change, almost no matter 
what happens in our economy. It is very difficult to believe--I 
guess I am a congenital optimist--I think frankly the CBO 
estimates, if we continue to do the right things in the private 
sector as we have over the last 10 years, the CBO estimates of 
surpluses are too low.
    Mr. Rangel. Thank you, Mr. Chairman.
    Chairman Thomas. Thank you very much. Does the gentleman 
from Illinois, Mr. Crane, wish to inquire?
    Mr. Crane. Thank you, Mr. Chairman. We welcome you, Mr. 
Secretary, and look forward to working with you.
    President Bush is absolutely correct to call for the 
elimination of the death tax. It can't be justified on revenue 
grounds, on economic grounds, or on equity grounds. My only 
concern is that it is phased out slowly. Even so, we often hear 
about how few estates actually pay tax, as though a wrong 
committed against a few is acceptable. This is even more absurd 
when you realize that the tax is actually paid by those 
receiving the distributions. After all, neither the deal nor 
illegal fiction called an estate can bear a tax. Do you have 
any idea how many people receive distributions from estates 
that pay tax in a given year or how many such people there 
would be over the next 10 years?
    Secretary O'Neill. I am not sure I can give you an absolute 
number. The number that sticks in my mind is something like 
between 1 and 2 percent of all deaths end up in paying estate 
taxes, but I can give you an absolute number for the record.
    [The following was subsequently received:]

    About 2 percent of all estates are subject to tax each 
year. We do not routinely track the number of heirs associated 
with each estate tax return. Our most recent data on heirs, 
from returns filed in 1988 and 1989, indicate that on average, 
there are about 3.7 noncharitable beneficiaries per return 
(this includes both taxable and nontaxable returns). There were 
49,870 taxable estates among returns filed in 1999, and we 
estimate that roughly 185,000 heirs would be associated with 
these taxable returns.
    Death is a one-time event so the measuring of a single year 
or even a ten-year figure does not give an accurate 
representation of the total number of people granted relief by 
this provision. Nor does the direct tax relief measure the full 
value of this proposal because families spend a great deal of 
time and money trying to protect themselves from this 
confiscatory tax.

    Mr. Crane. Those are the ones that actually pay the tax.
    Secretary O'Neill. That's right.
    Mr. Crane. Not those that divide it up in an estate before 
they depart?
    Secretary O'Neill. Precisely.
    Mr. Crane. Second, we often hear about reducing the public 
debt reduces interest rates, and yet when I look at the 
forecasts of the CBO and the Clinton administration, I see no 
reduction in long-term interest rates. If debt reduction has 
this effect, surely it should be reflected in the forecasts. So 
I ask you, do you believe that buying down the public debt 
reduces interest rates and, if so, how much? And can we expect 
to see that reflected in the administration's forecasts and 
projections?
    Secretary O'Neill. Certainly in classical economic terms 
with only those variables under consideration, one would say if 
you buy it down, the rates are going to go down. Because if you 
assume all of the things are equal and it suggests--and the 
savings pool is larger and the interest rates would go down, it 
is not the only variable. It is not quite that simple, in fact. 
But it does raise a broader question which I know you all have 
been struggling with on and off for the past 25 years: the 
issue of static forecasting as compared to dynamic forecasting. 
It seems fairly clear to me that we need to stop having a food 
fight about this issue and work together, both between our 
forecasting institutions, the congressional ones and the ones 
in the private sector and the ones downtown, and create for the 
Congress' consideration the best of what professional economic 
minds can produce in terms of what is the range of respectable 
zone of possibility between static forecast and dynamic 
forecast. I know there are those who think it is only one or 
the other. I don't buy that, and I don't think economics is a 
sufficiently precise science that you can just say I know 
exactly what is going to happen 10 years from now. Most people 
would not say that. There are some I suppose.
    But in any event, I do think that we should work with a 
more realistic set of numbers, and one of things that I hope to 
do in the time that I am at Treasury is to bring these warring 
factions together and stop the nonsensical arguments and 
provide a better information base for those of you in Congress, 
who then do not get to vote maybe. You get to vote yes or no. 
And I think the profession can do a better job for you than we 
have done.
    Mr. Crane. Finally, Mr. Secretary, I strongly believe this 
tax relief will permit the economy to grow faster. There is no 
real debate about that, only about the magnitude. I understand 
the administration does not intend to include these growth 
effects in its estimates of the cost of the tax relief, and I 
understand why, because you want to debate the merits of the 
plan, not the numbers. Even so, can you give us a specific idea 
of how much additional economic growth we might anticipate once 
the President's plan is enacted?
    Secretary O'Neill. I suppose I could give you something for 
the record. But as I said to you earlier, as I look at both the 
CBO estimates going forward and our own estimates, the private 
sector estimates for the next 10 years, I think we are still 
heavy influenced by the period from, say, 1945 until 1980 when 
we demonstrated, except for a period in the 1960s, a real 
growth rate well under 3 percent. And it is hard for the 
profession to square itself away with what we have experienced 
in the last 15 years or so because the rates of growth and the 
low levels of inflation and the high levels of employment are 
outside of the envelope of what the economics profession would 
have told you was possible even as recently as 10 years ago.
    So I think aside from the question of what these changes do 
for the economy, the range of uncertainty on the upside is 
substantially understated, because I believe--and this is now 
from my private sector experience--that if you look at the 
great companies in our country or even the world, they are 
great because they have adopted leading edge practices and 
technologies. And when you look at how many companies there are 
yet to move to that level of proficiency, I would argue it is 
80 or 90 percent of the companies in the world still haven't 
begun the acceleration phase in economic growth. And so I am a 
great optimist that we can do 4 percent real growth with no 
inflation and very high levels, unprecedented levels of 
employment in our economy, and I think we will see that.
    Mr. Crane. Thank you Mr. Secretary.
    Chairman Thomas. Does the gentleman from Florida, Mr. Shaw, 
wish to inquire?
    Mr. Shaw. Yes I would, Mr. Chairman. And, Mr. Secretary, I 
would like to join my colleagues in welcoming you before this 
Committee. It is indeed a pleasure to have someone of your 
background and quality heading up the Treasury.
    You and I have spoken briefly about the Social Security 
problem that is out there and facing us. On listening to some 
of the Sunday shows, I was noting that some of the political 
guests on those shows were, as Mr. Rangel was, beginning to 
talk about the FICA tax which, of course, is 12.4 percent of 
wages including the employers' and the employees' halves. And I 
can understand where that can be burdensome to low-income 
people.
    But more than that, I am concerned about the fact that I 
want to be sure that particularly for the low-income people, 
that the Social Security Trust Fund will be there, funds will 
be there for them. As you and I have discussed, the Social 
Security surplus will go away in approximately 14 to 15 years 
and we will not have a surplus. Therefore, I am particularly 
concerned that we safeguard those funds and that we put them 
aside so that we will be sufficiently covered as well as we can 
so that we don't make the problem worse. Now, if we were to 
reduce the FICA taxes, I would assume--and I am pretty sure of 
this--that that surplus will dry up a lot earlier. Could you 
elaborate on that?
    Secretary O'Neill. You are exactly right. In fact, we talk 
about Social Security surplus, and it is true that we are going 
to have a cash flow surplus between now and the year 2015. But 
if you look at the actuarial projections, we have got a very 
large shortfall in the amount of money that we need to pay for 
Social Security obligations in the years after 2015. And so it 
seems to me very unwise to think about using Social Security 
Trust Fund monies in some other way or to reduce the Social 
Security tax rates, because at their current level, with the 
current benefit structure, we are not accumulating enough 
money. We are not going to have enough money without a big 
increase in rates or a change in the benefit structure to serve 
as what we said to the American people will be theirs.
    But there is an additional issue of principle here, it 
seems to me, which again I have not seen in most of the things 
I have seen written, which has been an anchor point for Social 
Security since it was enacted, which says the American people 
that are attached to the work force will have an obligation to 
contribute to the Social Security Trust Fund. And when they 
come out on the other end of their work force attachment, they 
can count on a stream of benefits.
    And while it is true that the way we have done this is an 
intergenerational transfer, I think if you go out and talk to 
most Americans, most of the ones I know, the ones who worked 
with me in ALCOA, they believe it is fundamentally an important 
principle that everyone pay for some of their retirement.
    And so to argue the contrary, it seems to me, is to attack 
the fundamental principle that the Americans believe in about 
how the Social Security system works.
    Now, in the other ways you all and we as an American people 
have recognized that for some people the Social Security tax is 
a substantial reduction from their weekly or monthly income, 
and that is why you have enacted the earned income tax credit, 
that is why we have Medicaid, that is why we have SSI, that is 
why we have a housing subsidy, that is why we have a plethora 
of things addressed to helping low-income populations.
    As I said before, I don't think it is our purpose here, I 
would not recommend to you that we try to deal with all the 
social problems that exist in our society and try to encompass 
the welfare system in what we are doing with these tax 
proposals. This is about giving back to the American people who 
sent the money in at least some part of what they sent in, with 
a proportional shift from those who sent in the most to those 
at the low- and middle-income levels to help those low- and 
middle-income people to have more resources for the needs that 
they have in their daily lives.
    Mr. Shaw. And for low-income people, the payoff as to the 
benefits of Social Security is very progressive in that the 
low-income people get a better deal out of Social Security than 
the higher-income people.
    Secretary O'Neill. Precisely.
    Mr. Shaw. I would certainly hope that we would not go in 
and fiddle with the FICA tax, because that would certainly make 
our efforts, which hopefully will be in a bipartisan way, to 
save Social Security and preserve the existing benefits and 
make it much more difficult if we reduce the amount of money we 
have to work with, and it would certainly put in jeopardy the 
Social Security Trust Fund. Thank you, Mr. Chairman.
    Chairman Thomas. I thank the gentleman. Does the gentleman 
from California, Mr. Stark, wish to inquire?
    Mr. Stark. Thank you, Mr. Chairman. Mr. O'Neill, in 
reviewing a most fascinating career, I am very pleased to see--
I went back into an old Harvard case study that was written 
about you back in 1992 or 1991, and it lays out what an expert 
you became in Medicare and Medicaid and the old Hill-Burton Act 
when you started out in government. It also has some 
interesting insight into your philosophy.
    One quote that I liked most, you said--and I am quoting--
``The longer I was in government, the harder it was for me not 
to be able to say what I thought about everything. I hated when 
reporters would ask me something where I really had a very 
strong opinion but I didn't feel free to say what I thought 
because it was inconsistent with the President's policy. In the 
private sector nobody really gives a damn so you can have an 
opinion on just about anything you want to.''
    Secretary O'Neill. I said that. That is true.
    Mr. Stark. I hope you have your private sector hat on here 
this morning.
    Secretary O'Neill. The only thing they can do to me now is 
send me back to retirement.
    Mr. Stark. Also you have indicated this morning that you 
are enthusiastic about the long-range growth, but also in 
researching a little bit about former colleagues at ALCOA I 
found that at ALCOA you would not allow into your planning, 
overall economic forecasts that went longer than 6 quarters 
because you didn't trust them. And further, that if your 
projections at ALCOA were wrong, you laid off people. We can't 
do that.
    And I guess my question is: Would you, if we are wrong--in 
private projecting if you don't want to go one whole Congress 
with overall economic growth projections, who would be the 
people we would lay off; I suppose, the Medicare beneficiaries 
and the Social Security beneficiaries, because we can't fire 
civil service workers and you have trouble firing us in between 
election time. So I hope that you will look at these growth 
projections with the same skepticism in government that you did 
in the private sector.
    But I want to skip to one more issue. Jane Bryant Quinn, of 
course, suggests on the issue of surplus belonging to everybody 
is--I liked her quote in today's Newsweek. It says, ``Does the 
national debt belong to the man in the Moon? Why don't we 
prescribe the $34,000 of national debt to each household and 
let people pay that off out of their tax break?'' But I think 
she is just having fun with you.
    On Sunday, Secretary Powell was interviewed by Wolf 
Blitzer, and in referring to the problems that we are having in 
the Mideast and Arabic countries, Secretary Powell went on in 
great length about how these countries had a duty to protect 
their children, to educate them, to pay for their health care, 
much more important than wasting money on weapons. And I 
thought, boy, does that fit here at home.
    And I just wanted to bring up these numbers and see whether 
you don't think, as a person who has an expertise in 
overhauling the social welfare system, starting back several 
decades ago, to take care of the 45 million uninsured in this 
country would cost about $750 billion over 10 years, to provide 
drug benefits for Americans could would cost about 325 billion 
over 10 years, and to put 20 percent of the surplus to save 
Medicare--if that is the right figure and it just happens to 
fit my numbers--it would take how many billion over the 10 
years or, strangely enough, $1.6 trillion?
    I guess I am going to suggest to you that I would like your 
opinion as to whether or not seeing that everybody had a drug 
benefit and had health insurance and that Medicare was solvent 
wouldn't create as many jobs, wouldn't be as helpful to 
workers, make them more productive, save some money for 
companies in having to provide for retirees? I am sure we could 
not take the whole thing, but I would like to measure it, as I 
say, based on your expertise in having to provide health care 
for a lot of workers, having done it in government, because 
there is nothing in the President's budget now that provides 
any help in terms of dollars for health care. Couldn't we use 
some of this tax cut economically now, and wouldn't it have 
just as good an effect as giving it back to spend more on 
health care workers and provide the money that we need to cover 
for the uninsured?
    Secretary O'Neill. Okay.
    Chairman Thomas. The gentleman's time has expired.
    Secretary O'Neill. Do I have 3 hours? Let me do this really 
quickly. First I said earlier in my previous incarnation, I 
didn't get to have the luxury of waiting to be able to see 10 
years in the future. I had to make decisions that had 50-year 
tails on them. So I think I dealt with that issue.
    You know, do I have respect for the difficulty of 
forecasting? You bet.
    And then I just want to say very quickly--you commented 
about if I was wrong, I could lay people off. When I went to 
ALCOA there were 48,000 employees and today there are 143,000. 
I am not saying that I never had to make decisions about 
closing plants that did not end up costing people their jobs, 
but they were all dealt with in the most respectful way; and by 
that I mean giving them money so they went away. But because of 
what we were able to do, we basically tripled the size of our 
population in 13 years. And I believe as a generalization, good 
leadership produces amazing results and it is not ever bad for 
people.
    Now, you are really taking me outside my portfolio by 
asking me about these health issues. And we honestly do not 
have enough time to do it here, but I will just say to you 
briefly, and maybe you will invite me over sometime to talk 
about these things, I honestly don't believe there is anything 
that can be done in this Congress or any other Congress that is 
going to do what we need to do about health and medical care in 
this country. And I have spent a lot of time working on this 
issue, including creating a coalition of all the interest 
groups in southwestern Pennsylvania on a quest to do what I 
believe is possible, which is to reduce the cost of health and 
medical care in our country by 50 percent, which means $650 
billion a year. But it is not going to come from here. It is 
going to come from people understanding how to reorganize the 
provision of health and medical care, and then we will have 
done something really important.
    And to the question of what we should do about the insured, 
again this is outside my portfolio, but I believe as a basic 
part of being an American, we should say to every American for, 
say, families with more than $35,000 or $40,000 a year, you 
have an obligation to your fellow citizens to put away enough 
money in an insurance plan for health and medical care for your 
family, and for families with incomes below that level, the 
rest of us should pay for it.
    Chairman Thomas. I thank the Secretary. I would remind our 
colleagues that although we are all very conversant with the 
Tax Code, we have a number of friends vicariously with us 
through television, and if we know what the AMT is, they may 
not know what it means--the alternative minimum tax. So as we 
conduct our dialog with the Secretary, if possible we will try 
to make sure that our friends who are following us understand 
exactly the jargon that we are dealing with. It probably makes 
for a much more useful viewing experience.
    And with that, the gentlewoman from Connecticut, Mrs. 
Johnson, do you wish to inquire?
    Mrs. Johnson OF CONNECTICUT. Thank you very much. I too 
want to welcome you here, the Honorable Mr. O'Neill, as 
Secretary of the Treasury, and I would particularly welcome you 
because I have been a long ally of manufacturing over my many 
years here in Congress, and particularly of the small 
manufacturers on whom big companies like yours depended for 
quality production.
    And it is a special pleasure to welcome a Secretary of the 
Treasury that comes out of the manufacturing sector, with all 
due respect to those secretaries we have had from Wall Street. 
I really want to say it is a special pleasure to have you here, 
and I think already in some of the examples that you have 
cited, you have made clear that that concrete experience and 
production will be of value to us as we think through the 
impact of tax policy in people's lives.
    As you said in your testimony, if you were going to give 
your employees a raise, you wouldn't wait 9 months to do it. 
And it is important that we remember that for many people, a 
tax cut will function like a raise.
    But what my question goes to is what is on the front cover 
of the recent Newsweek. It says, ``laid Off. How safe is your 
job?'' And if you look at the statistics in January, the number 
of layoffs shot up to 142,000, the highest in 8 years for 1 
month. DaimlerChrysler is looking at 26,000 people laid off in 
this coming year. General Electric, 60,000. I think working 
families are terribly worried about the future of their jobs.
    And because I think job security is absolutely as important 
as a raise, and because so many small businesses and we all 
know that small businesses are really for the most part the 
engine of hiring in America, so many small businesses pay taxes 
at the personal level, I would like to ask you to talk a little 
bit about first of all what percentage of small businesses do 
pay taxes at the personal level and what impact do you think 
this tax cut will have on the security of small business jobs 
and creation of small business jobs.
    Secretary O'Neill. Well, your points are certainly right. 
And whatever tax relief we can get to small businesses, 
unincorporated people who are basically paying those high 
marginal tax rates at 39.6 percent, every bit of it will help 
them and it will enable them to keep the jobs they currently 
have and hopefully to expand. If you look at where wealth 
creation occurs in the United States, a very, very substantial 
part of it, the media reports about the big people 
notwithstanding, occurs in very small firms and local 
communities all over the United States. And so, as you 
indicate, it is really important that we not confuse where the 
help is going in these high marginal rate cuts. It is going 
substantially to sole proprietorships and small unincorporated 
companies that have been subjected to these very high tax 
rates.
    Mrs. Johnson OF CONNECTICUT. Thank you, Mr. Chairman. In 
deference to the number of people to ask questions I will yield 
back the balance of my time.
    Chairman Thomas. Thank the gentlewoman. Gentleman from New 
York, Mr. Houghton.
    Mr. Houghton. I will pass.
    Chairman Thomas. Gentlemen from California, Mr. Matsui, 
wish to inquire.
    Mr. Matsui. Thank you.
    Thank you very much, Mr. Secretary, for being here. I just 
want to make an observation. I don't want your response to it 
necessarily. But you talked about dynamic scoring as opposed to 
constant scoring or static scoring. I would just urge caution. 
I don't know whether it was deliberate in terms of raising that 
issue or whether it was just in response to Mr. Crane's 
question. But I remember back in 1981 when we used the word 
``rosy'' or phrase ``rosy scenario,'' which was another way of 
talking about dynamic scoring, and we ended up with $4 trillion 
worth of debt over the next 18 years. So I would caution you.
    Second, I would be cautious because not only would the 
right use it in terms of tax cuts but the left could use it in 
terms of spending programs. Put more money into education, 
thereby a microeconomic change could have a macroeconomic 
impact of creating more GDP if you put more money into 
education. So I would just urge caution in this administration. 
I know Mr. Lindsey and others in your administration do support 
that approach or at least talked about that approach. But I 
urge particularly the Treasury Department to be cautious.
    What I want to do is just very quickly read a couple 
observations. David Walker, the Controller General, on February 
6th of this year said that no one should design--I am quoting 
him--``No one should design tax or spending policy pegged on 
precise numbers in any 10-year forecast.'' Then he also says on 
page 1, ``It is important to remember, however, that while 
projections on the next 10 years look better, the long-term 
outlook looks worse.'' And basically you are talking about 
demographic changes, which you responded to in reference to Mr. 
Shaw's question.
    Also, if you take a look at the CBO's January 2001 report, 
which I believe you referred to, they--in chapter 5, and they 
talk about the uncertainty of budget projections--essentially 
say that there is a 50 percent probability that some of their 
numbers may be off as much as 2.8 percent of GDP in years 5 and 
beyond in each year. And they can't even make any kind of 
accuracy predictions with respect to 10-year forecasts because 
they just don't have any.
    That leads them to conclude, and I quote them, on page 95 
in chapter 5, if these averages were applied to CBO's current 
baseline, the estimated surplus could be off in one direction 
or another on average in the year 2001 by $52 billion, by the 
year 2002 by $120 billion and by the year 2006 a staggering--
and this is my word--a staggering $412 billion.
    Would you comment on that? Do you dispute CBO and Mr. 
Walker or do you think they are accurate or do you think there 
is a probability--or that you have probabilities that might 
differ from theirs?
    Secretary O'Neill. Well, I think if you look at the CBO 
numbers, they have told you what they believe the central----
    Chairman Thomas. If the chairman would intervene, CBO is 
the Congressional Budget Office.
    Mr. Matsui. I hope that didn't take my time but go ahead.
    Secretary O'Neill. We are all guilty of jargon. I think 
what you have in the CBO estimates and for sure what you are 
going to get from the administration is what I would call the 
central tendency estimate. And in the statistical sense, it is 
the sum of all the probabilities and it is the midpoint of all 
of the possibilities. And in every distribution of estimates or 
distribution of samples you want to take, you get 
distributions. And they can look like a variety of things. They 
can look like these two alternative curves. And at the end of 
the day professional economists get paid for saying we think 
this is what the central tendency of the distributions is. And 
I think you will not be able to find someone who will say the 
number for the 10 years, the next 10 years, is $5.6 trillion, 
and I am absolutely sure and I guarantee it to you. But it is 
to the point that I made to you earlier.
    Mr. Matsui. If I may, go ahead.
    Secretary O'Neill. I don't think you are going to get to 
vote ``maybe.''
    Mr. Matsui. Okay. Let me raise something that is more than 
maybe. We are going to pay down the debt with the moneys 
fungible, but with the Social Security surplus. Now, by the 
year--I think Mr. Crane said this, and I agree, that within the 
next 13 to 15 years, starting 2013 or maybe 2015, all of a 
sudden that surplus is going to be tapped into. But if we pay 
down the debt with that surplus, that means that somehow by the 
year 2013, 2015, we are going to have a cash flow problem 
because we pay down the debt with it. What do you think we are 
going to do with that? The debt payment is really temporary. It 
is not a permanent debt payment in terms of the publicly held 
debt.
    Secretary O'Neill. I think you might think about two 
things. If you think about the debt capacity of an institution, 
and let's take a company in your district, and you go look at 
their balance sheet, you see they have, let's say, 10 percent 
debt in their capital structure out of a total capital 
structure where the other 90 percent is equity, and if it is a 
well run firm they are producing rates of return that pays for 
the cost of capital, then an intelligent business person would 
say they could borrow another 30 percent and they would still 
be a substantial company.
    In fact, some people at the Harvard Business School would 
say you have got too much equity in your capital structure and 
you ought to have more debt. Now, I know the Federal government 
is not in business, but if you think about where we have been, 
we demonstrated we can run a first rate economy with something 
on the order of $5 trillion worth of national debt. We are 
headed in the direction to eliminate the national debt, so that 
when we get to a point where we have got to have money for 
Social Security we have debt capacity.
    But, I would say something else to you: I believe and the 
President believes that as soon as you all are finished with 
this tax proposal, we will be back to you with recommendations 
to fix Social Security.
    I would say one other thing to you. In 1973, this is now 27 
years ago, I went with George Shultz, who was then the 
Secretary of the Treasury and appeared before the Senate 
Appropriations Committee, and George Schultz said to them, we 
have got to do something about Social Security because we are 
going to fall into the biggest intergenerational war that we 
have never imagined before. We must fix Social Security. And 
here we are 27 or 28 years later, we have used up most of the 
available time. The President has said we are going to fix this 
problem. And we are going to be here with a proposal to fix 
Social Security so that we all can rest easy and not be guilty 
of ignoring the consequences of our inaction for those who 
follow us.
    Mr. Matsui. My time is up, Mr. Secretary, but I wish you 
would come up with Social Security before you come up with the 
tax bill, because I think the tax bill is going to jeopardize 
Social Security in a significant way.
    Secretary O'Neill. I will be back.
    Chairman Thomas. Thank the gentleman. The gentleman from 
California, Mr. Herger, wish to inquire?
    Mr. Herger. Thank you very much, Mr. Chairman. Thank you, 
Mr. Secretary, for your refreshing comments. The President's 
package has been criticized by some for not being good for 
small businesses, but don't many small business owners now pay 
at the top rate of 39.6 percent? And wouldn't they be able to 
hire more workers, buy that new tractor, that piece of 
equipment or machinery or invest in their small businesses due 
to the reducing of this rate? And wouldn't the cost across the 
board rate reductions give consumers more money to spend, 
allowing these businesses to directly benefit from the 
increased consumer spending?
    Secretary O'Neill. My staff has been helpful to give me 
some facts so that I can respond directly to your question. 
Nearly 24 million flow-through businesses in 1998, over 75 
percent, or approximately 18 million, would expect to receive a 
benefit from the tax cut through their owners.
    In 2006, the first year the administration's tax cut 
package is fully effective, over 20 million tax returns, or 75 
percent, of the 26.2 million returns with income from flow-
through would receive a tax deduction. So indeed there are 
major consequences here for sole proprietorships and small 
businesses that would help them to maintain their current 
levels of employment and expand.
    Mr. Herger. I thank you. I understand there is even some 
600,000 Hispanic small businessmen just in the State I 
represent of California that would be affected by this.
    Secretary O'Neill. Absolutely.
    Mr. Herger. Another question. There has also been much that 
has been made of the potential amounts of tax relief that may 
be provided under the tax plan. And to put that into context, 
what are the facts about the amounts of taxes already being 
paid by various groups of income taxes?
    Secretary O'Neill. Well, at the moment the highest income 
group is paying 65 or 66 percent of the total Federal income 
tax, and under the President's proposal, it would be 66 or 67 
percent, and the President's proposal would have the effect of 
lopping off millions of people paying the Federal tax and very 
substantial reductions for those with incomes up to $100,000. 
So there are major distributional consequences of what the 
President has proposed. And, in fact, higher income people 
would continue to pay the majority of Federal income taxes.
    Mr. Herger. You know, I have some information in front of 
me here that is put out by the Tax Foundation that indicates 
that currently as far as who is paying Federal income taxes, 
the top 1 percent is paying 34.8 percent, the top 35 percent, 
53.8 percent, the top 10 percent, 65 or some two-thirds are 
being paid by the top 10 percent, and the bottom 50 percent of 
those paying Federal income tax are paying 4.2 percent.
    Secretary O'Neill. Right.
    Mr. Herger. This has gone up fairly dramatically in the 
last few years.
    Secretary O'Neill. Exactly right.
    Mr. Herger. Thank you. I yield back the remainder of my 
time.
    Chairman Thomas. Does the gentleman from Louisiana wish to 
inquire, Mr. McCrery?
    Mr. McCrery. Yes, thank you, Mr. Chairman. Mr. Secretary, 
we often hear this debate framed in terms of either pay down 
debt or have a tax cut. I hope to illustrate that it is not an 
either/or choice, that we can do both.
    If we go by the CBO baseline, which does not include a tax 
cut, and we go to the year 2006, only 5 years out, not 10 or 30 
or 60, 5 years out, we would have our publicly held debt as a 
percent of our national income down to 9.4 percent. That is the 
lowest since 1917, since World War I. If, though, we assume, 
and I think rightly so, that we are going to use some of that 
surplus for a tax cut and probably some of it for increased 
spending in several areas, and we use only the Social Security 
surplus and the Medicare surplus to buy down the publicly held 
debt, debt as a percent of GNP would be 15.1 percent in 2006. 
And guess what? That is the lowest percent of our national 
income held by the public in debt since 1917.
    If we only use the Social Security surplus to buy down 
publicly held debt in 2006, that debt as a percent of our 
National income will be 16.6 percent, again the lowest since 
1917. My goodness, since 1917 we have been through the end of 
World War I, the Great Depression, World War II, the boom time 
of the fifties, the sixties. And during all of that time, our 
publicly held debt in this country as a percent of our National 
income was higher than it will be in 2006 if we use only the 
Social Security surplus to buy down that debt and we spend or 
give in a tax cut every one other penny of income to this 
government.
    In fact, Mr. Secretary, if we don't buy down any more of 
the publicly held debt, if we spend or give in a tax cut every 
penny of on-budget and off-budget surplus between now and 2006, 
the publicly held debt will represent 25.7 percent of our 
National income, and that will be the lowest since 1975. And if 
you take out 1974 and 1975, it will be the lowest since 1931. 
So we are doing pretty well, is my point, on getting the debt 
down.
    In the last Clinton administration budget, it stated, 
quote, The amount of unified budget surplus available to repay 
debt held by the public is estimated to be greater than the 
amount of debt that is available to be redeemed in 2006 and 
subsequent years, the differences assumed to be held as, quote, 
excess balances and to earn interest at a Treasury rate. These 
excess balances would start at $289 billion in 2006 and exceed 
$2.9 trillion by 2011.
    Two economists writing in the Wall Street Journal recently 
estimate that if we take those excess balances and invest them 
in equities, which is about all we could do with them, that by 
the year 2020 the United States government would hold 
approximately one-fifth of all domestic equities.
    Now, Mr. Secretary, in your view, is that wise for our 
Federal government to hold that large a share of private 
equities in this country?
    Secretary O'Neill. That is a very easy no. I would say one 
other thing. Alan Greenspan and I have been talking about these 
numbers and looking at them together. And I think we both 
believe that thinking about the zero debt held by the public is 
not very realistic for two reasons. One, we think savings bonds 
are not capable of early purchase, that there are people out 
there who are going to hold on to savings bonds. For countries 
who use the U.S. as a reference point, we believe you can't 
afford to buy back some of the debt that they hold because they 
are willing to hold it even if the coupon is zero or even if 
the coupon is negative, so that there is what we would call a 
fractional amount of debt held by the public that may be one 
trillion or one and a half trillion that we wouldn't buy back 
if we wanted to. So the problem is even sharper than what you 
suggest.
    Mr. McCrery. Well, thank you, Mr. Secretary.
    Mr. Chairman, I would suggest that this Committee and the 
Budget Committee and others in this Congress ought to 
concentrate not on debt, paying down the debt, but growing the 
economy, creating jobs, and that is best way for us to solve 
the long-term problems of this country after you come back to 
us with your Social Security and your Medicare solutions. And I 
am also interested in that great health care solution I heard 
you talk about.
    Secretary O'Neill. Thank you.
    Chairman Thomas. Thank the gentleman. The gentleman from 
Pennsylvania, Mr. Coyne, wish to inquire?
    Mr. Coyne. Thank you, Mr. Chairman. Welcome, Mr. Secretary, 
and thank you for your testimony. And I also want to thank you 
for the outstanding public service that you provided to the 
people of Pittsburgh and western Pennsylvania during your time 
serving with Alcoa.
    Secretary O'Neill. Thank you.
    Mr. Coyne. You indicated earlier that 50 percent, there 
would be a 50 percent decrease in the amount of taxes that 
would be paid by low income tax brackets. Could you elaborate a 
little bit more about that, about how that is going to work?
    Secretary O'Neill. If you look at the consequence of the 
President's tax proposals for a four-person family with income 
of $50,000 a year, they are now paying about $4,000 in Federal 
income tax, and the President's proposal would cut their tax by 
50 percent to $2,000 a year.
    Mr. Coyne. Now, how high in the tax brackets would that go?
    Secretary O'Neill. At $75,000 a four-person family would 
have their tax cut by 25 percent. And it moves up. At the 
highest rates that tax rate reduction would be from 39.6 to 33 
percent after it was fully phased in.
    Mr. Coyne. As you know, President Reagan had indicated and 
spoke many times about the earned income tax credit and called 
it the best antipoverty program that he had ever come across. 
Why can't we spend more of the surplus to bolster up and 
increase the level to which people would be able to earn and 
still qualify for the earned income tax credit?
    Secretary O'Neill. I remember being in this, in a way it is 
amusing, I remember being here where we couldn't say negative 
income tax out loud. Now we have $32 billion earned income tax 
credit. It is interesting how the labels change the 
possibilities. I think it is a perfectly legitimate question to 
say should we reconsider what we are doing for low income 
families. But I don't think it is an issue that is pertinent to 
the question of whether we should give taxpayers money back 
they sent in that is in excess of what is required to run the 
government.
    And so, I do think if you all decide you want to do 
something else about Medicaid for low income families or 
housing subsidies or food stamps or food assistance and all the 
SSI, all the other devices, it is a perfectly legitimate 
question. But I don't see it directly related to the issue that 
the President has put on the table that we should fix the 
structure of the tax system for people who pay Federal income 
taxes.
    Mr. Coyne. Well, does that indicate that you are not really 
high on the mechanism of the earned income tax credit?
    Secretary O'Neill. No, I didn't say that. I certainly 
didn't mean to imply that. I think it is just ironic that what 
we couldn't say out loud 30 years ago because it was 
politically out of bounds is now a $32 billion program.
    Mr. Coyne. Thank you.
    Chairman Thomas. The gentleman from Michigan, Mr. Levin, 
wish to inquire?
    Mr. Levin. Thank you very much and welcome, Mr. Secretary. 
In your testimony you say there is a strange attitude around 
this town that once the money gets here it doesn't belong to 
the taxpayers anymore; it belongs to some amorphous thing 
called government. And let me just suggest respectfully that is 
the attitude of any of us. And I think we need to debate these 
issues in a less rhetorical way. I really think that is a straw 
man, if I might say so.
    You say that we can't vote maybe. But for us the question 
is whether we can vote prudently. So let me ask you a few 
questions that relate together. The budget surplus is predicted 
to be $5.7 trillion, as I understand it. You need to subtract 
from that the Social Security and I think the Medicare surplus. 
So when you do that, that subtracts $3.1 trillion. Is that 
correct?
    Secretary O'Neill. If you give me an exam I would have said 
$2.9, but fine. If you have, $3.1 that is all right with me. 
Two-hundred billion.
    Mr. Levin. So that leaves under that calculation $2.6. The 
President's proposal is for $1.6 trillion over 10 years. And I 
think you have to add to that the addition of Federal borrowing 
costs. So you end up using for the tax cut and the related 
borrowing costs $2 trillion of the $2.6.
    Now, let me just ask you since we want to vote, at least 
some of us, prudently, how do you justify that?
    Secretary O'Neill. Well, I think two things, Congressman 
Levin. First of all, the President didn't say $2 trillion, he 
said $1.6. But the thing I find really curious and I have been 
reading this in the newspaper, this business about while the 
interest costs are going to be higher, I didn't know anybody 
was in favor of dynamic scoring.
    Mr. Levin. I am not sure that is dynamic.
    Secretary O'Neill. Well, it suggests that we are going to 
look at feedback effects. If we are going to look at feedback 
effects, should we look at what the consequences are for the 
economy operating at a higher level than it otherwise would 
because we have more savings and investment in the economy?
    Mr. Levin. So you don't think there are likely to be any 
borrowing costs as a result?
    Secretary O'Neill. I didn't say that. But the other way to 
attack the question is to say, as I guess I would say on behalf 
of the President, the number is $1.6 trillion. That is how much 
money we think is a prudent amount of money to give back to the 
taxpayers. And if it is necessary, as you are suggesting, that 
we should reduce that $1.6 trillion by $400 billion because of 
the dynamics, the one-way dynamics of adding back interest 
costs, then it reduces the amount of money you have got to deal 
with because the President said $1.6, he didn't say $1.6 and 
whatever else you want to do.
    Mr. Levin. All right. So you acknowledge there are likely 
to be some borrowing costs. So whether it is $2 trillion of 
$2.6 or $1.8 trillion of $2.6, non-Social Security, non-
Medicare, 75 percent or more of the non-Social Security non-
Medicare surplus goes for this tax cut.
    Let me just ask you, then, you know in 1981, we were told 
pass the tax cut--I wasn't here at the time, the Congress was 
told--and the budget deficit will be eliminated in 3 or 4 
years. Tell me, and I know you are a congenital optimist, but I 
don't think we can pass bills based on congenital optimism. 
Tell me why you are so sure this won't be a repeat of the 1981 
experience?
    Secretary O'Neill. Well, I think a couple of reasons. You 
know, I was outside the government when all of that transpired, 
and it was actually clear to me that what was going to happen 
was in the cards. And maybe you weren't here but other Members 
were here. This was the year of the famous flying asterisk, 
when we had $42 billion worth of unidentified budget reductions 
that no one ever put together. And as a consequence of enacting 
the tax side without dealing with the spending side, we put 
ourselves in a ditch that was horrendous. I would stipulate it 
was not a good thing to do.
    Today we find ourselves in a position, and I am not sure I 
followed all of your numbers, but my view of where we are is to 
say that if we lock box Social Security, that the President 
said we should do, effectively use it to pay down the public 
debt and you all want to do Medicare too, that is fine. We 
still have got after implementation of the President's proposal 
$1.5 trillion available, or more than 25 percent of the total 
projected surplus available as a cushion against the prospect 
of running ourselves back into a deficit ditch.
    And again I would submit to you we have never had a time 
like this where we had so much free margin. Now, I would also 
say to you my assumption presumes that the Congress and the 
administration are going to discipline themselves when it comes 
to spending money. What I just said to you won't come true if 
people insist on piling on with additional targeted tax cuts 
and additional spending programs. Then we can't do all these 
things. But going into it with one and a half trillion dollars 
of unobligated money over the next 10 years seems to me to be 
the best safety life preserver we have ever had available to us 
as a society.
    Mr. Levin. My time is up. I think we better go back over 
the numbers, because it is hard for me to see where the one and 
a half trillion comes from.
    I close with this, in the years that I came in 1982 and 
thereafter, the Congress appropriated less money than the 
Reagan administration requested.
    Chairman Thomas. The gentleman from Michigan, Mr. Camp wish 
to inquire?
    Mr. Camp. Thank you, Mr. Chairman.
    And thank you, Mr. Secretary for being here, particularly 
for your background and experience, especially in the job 
creating private sector and manufacturing. You had said in your 
written testimony that evidence of an economic slowdown makes 
this tax relief all the more compelling. Could you outline for 
us some of the economic indicators or economic factors that you 
see that show this economy is slowing?
    Secretary O'Neill. Well, if you look--let me use an 
industry to make the point. If you look at the automobile 
industry and you look at how it was running, what its final 
demand-sales numbers looked like through last summer and I 
guess through the middle of last summer, they were running at 
an 18-plus million final sales rate of light trucks and cars, 
which was a very, very good rate for our industry and it is 
good for our people and employment and everything else that we 
care about.
    When we got to November and December, the rate was running 
15 or 15 and a half million units. And the consequence of that 
change, major shift down from 18 million to 15 million was 
obvious and it is apparent what that meant in dealer show 
rooms, not so obvious and apparent what it means out there in 
the supply chain. What it means in the supply chain are the 
numbers that were suggested by one of the Members about layoffs 
that are now being reported.
    When final demand slows down like it did at the end of the 
fourth quarter, it is a depression for people out there in the 
supply chain. And what we are seeing right now is a push back 
down into the economy of the consequences of final demand for 
things as important as automobiles pushing their way into the 
economy. And in this economy that we have now, the supply chain 
is so carefully and closely integrated so that ``just in time'' 
is not a slogan, it is the way business is really conducted. So 
that if final demand slows down and you are an employer and you 
don't have any orders, you don't get to spend a lot of time 
softening the blow. You have got to deal with it right now or 
you are going to jeopardize your own financial capacity.
    So we are in the abrupt phase of what I hope is only an 
inventory correction. But there should be no doubt that we have 
slowed down very appreciably from where we were. And if you go 
talk to the execs like I have from across the breadth of our 
country, what you find is some people in the supply chain--and 
now this is, let me say, the high tech supply chain of 
providing telecommunications solutions to major producing 
companies--the order rates for them have slowed down a lot. 
Because when the automobile companies don't have orders, they 
start pulling back on investment and reinvestment and 
modernization and all those other things. So it starts 
filtering out into the rest of the economy. And that is what we 
are seeing now.
    The importance of acting quickly, which Chairman Greenspan 
has done, is that we don't get the negative snowball effect and 
it pushes down into the economy. An interesting insight from a 
conversation with a major supermarket owner last week in New 
York, he told me that as they look at past contractions in the 
economy, they can tell when we are into a serious phase because 
people start going to the grocery store three times a week 
instead of once a week and they buy staples instead of impulse 
items. He said up to now he hasn't seen what you might 
characterize as an individual inventory correction as Americans 
get concerned about the sustainability of their income levels. 
I think that is a positive sign that it hasn't backed up into 
the individual level at the supermarket.
    But there is no doubt that we are in a contraction, a 
slowdown period, and it is important not only for ourselves but 
the rest of the world that we return to rates that are in the 2 
to 3 percent range as quickly as we can.
    Mr. Camp. Would a slowdown be the only reason we should 
pass the President's tax plan?
    Secretary O'Neill. Absolutely not. As I said earlier, the 
President's tax plan was crafted in the context of what should 
a tax system look like for the American people, and it was 
crafted independent of the question of cyclical economics. The 
cycle that we are in now just suggests that we should act on it 
more quickly than perhaps we would have if we had been still 
today at a 3.5 or 4 percent rate of growth. Then it would be 
hard for me to say to you it is worth thinking about 
retroactivity or acceleration. But given the slowdown, it does 
seem to me there is a reason to do retroactivity and maybe some 
acceleration and to do it quick enough so that it gives heart 
to consumers out there. One of the things you need to look at 
as an economic matter is what is the level of consumer 
confidence, because how people feel about their job security 
and their future prospects has a lot to do with whether or not 
you have a consumer led demand level that is consistent with 3 
or 4 percent real growth.
    So if you can all give them more confidence than they 
currently have about flow of funds that are disposable for them 
to pay off their credit card debt and buy new goods could 
really be helpful to having this be a shallow dip and back to 
higher growth rates.
    Mr. Camp. Thank you, Mr. Secretary.
    Chairman Thomas. The gentleman from Minnesota, Mr. Ramstad, 
wish to inquire?
    Mr. Ramstad. Yes, Mr. Chairman. Thank you. Thank you, Mr. 
Secretary. It is refreshing indeed the President has been able 
to attract the best and the brightest to his cabinet. You 
certainly personify that description. We all look forward to 
working with you.
    Would you say in following up on my friend from Michigan's 
line of questioning that were you to prioritize the elements of 
the tax package, that marginal--in terms of simulating the 
economy, that marginal rate reductions are the most important?
    Secretary O'Neill. Yes, without question.
    Mr. Ramstad. And then I want to follow up on my other 
friend from Michigan, Mr. Levin's line of questioning. Isn't it 
true that in the 80's, and we are hearing much from the critics 
about the experience of the 80's, isn't it true that tax 
revenues more than doubled under President Reagan's tax cuts 
but at the same time Federal spending tripled? And even this 
Norwegian can understand that if you double revenues but triple 
spending you are going to have deficits.
    Secretary O'Neill. Absolutely.
    Mr. Ramstad. Isn't that the lesson we should learn in terms 
of holding the line on spending while we produce these tax cuts 
for the American people?
    Secretary O'Neill. That is certainly what I believe.
    Mr. Ramstad. And also in that line of questioning, critics 
have said this tax cut is too large. But again, in looking at 
it relative to the size of the economy, to the Gross Domestic 
Product, isn't it true that President Bush's tax relief package 
is smaller than both President Kennedy's and President 
Reagan's?
    Secretary O'Neill. Yes. I think it is true that it is one-
third the size of what President Reagan recommended and one-
half the size of what President Kennedy recommended and 
implemented.
    Mr. Ramstad. Is it accurate to say that President Bush's, 
in total, the tax relief package is about 1.5 percent of GDP?
    Secretary O'Neill. Exactly.
    Mr. Ramstad. Finally, I want to ask about the--there has 
been much talk in some quarters about a so-called trigger that 
would stop the tax relief if the budget surplus does not 
materialize. Wouldn't this result in uncertainty and make 
business planning, individual financial planning virtually 
impossible?
    Secretary O'Neill. I have seen the comments about the 
trigger. In fact, Alan Greenspan and I have talked about it 
quite a bit. I can't imagine that any of you really would like 
to have a trigger that in the event that say in '06 that we had 
a downturn, that you would have a trigger that would raise 
taxes on the American people when the economy was in 
difficulty. But I tell you there is a concept of a trigger that 
I frankly like quite a bit and it goes like this: After we have 
done what the President proposed, and I hope you all will see a 
way clear to do that, and let's assume that maybe I am correct 
about my optimism about the tax system throwing off even more 
excess revenues, going forward, I would love a trigger that 
said in the future when we have substantial revenues left over 
after we paid for agreed public purposes that 60 or 75 percent 
of it would be automatically sent back to the American people 
the day after we close the books. It seems to me that would 
really be a wonderful trigger and the people would like it a 
lot, because when their economy did well they would be a clear 
and present beneficiary and they wouldn't have to wait for us 
to contemplate it. We just send it back.
    Mr. Ramstad. Well, that is my kind of trigger as well, Mr. 
Secretary. Thank you very much, Mr. Chairman. I yield back the 
balance of my time.
    Chairman Thomas. I thank the gentleman. The gentleman from 
Maryland, Mr. Cardin, wish to inquire?
    Mr. Cardin. Thank you, Mr. Chairman, I do.
    Mr. Secretary, we welcome you on both sides of the aisle. 
We very much appreciate your willingness to serve. I would like 
to just check one of the math figures that you use. You have 
said twice that after the President's tax proposal we have $1.5 
trillion available as a cushion. I think that includes the 
Medicare money. As the Chairman has indicated, we intend to 
pass on a bipartisan basis a lock box which will take the 
Social Security and Medicare money off the table from being 
spent because the same problems we have in Social Security we 
are going to have in Medicare. Am I correct then that the 
cushion if we take Medicare off the table is $1.1 trillion, not 
$1.5 trillion?
    Secretary O'Neill. I would stipulate that, yes.
    Mr. Cardin. I just wanted to make sure we had the right 
numbers.
    Secondly, if I understand your position, the 
administration's position, you believe there is $1.6 trillion 
available over 10 years for the tax number. If we change the 
tax bill, if we make it retroactive, if we deal with 
alternative minimum tax, if we make provisions for the interest 
costs, if we deal with some of the business tax issues that we 
have been lobbying for including extenders, that all has to be 
fit into the $1.6 trillion, is that the administration's 
position?
    Secretary O'Neill. Conceptually I would say yes to you, but 
I would say this as well: The President has really been strong 
and I have done the best that I could in talking to the many 
people you might imagine who come around to tell me they want 
to be on this train, get away from the table. This is a time 
for tax relief for individuals and not for the host of other 
things that are important. It is not that I would say these 
other things are not important and worthy of consideration. 
Certainly the work that you did last year considering IRAs, and 
you can listen to people make a compelling case for a capital 
gains taxes and health insurance. We could make a list of 40 
things that are worthy of consideration. The President has said 
these are the things to deal with now. It is not that we should 
never deal with some of these other things, but not now.
    Mr. Cardin. I understand that. I have been with the 
President and he has said on numerous occasions it is his 
responsibility to suggest and to lobby Congress but it is 
Congress' responsibility to act. And if Congress decides that 
it wants to change this bill, it is your position and the 
administration's position that we need to stay within the $1.6, 
that we can't----
    Secretary O'Neill. Absolutely.
    Mr. Cardin. If you could just help me with one other point 
if you might, and that is we all are starting to talk that our 
economy might be slowing down. Yet when I look at the revenue 
projections, we are projecting surpluses based upon a stronger 
economy. Last year, 1 year ago, we had based projections on an 
overall growth rate of about--real growth rate around 2 
percent. We have changed that to now a 3 percent growth rate. 
If we were to go back to the 2 percent, we would have about 
$2\1/2\ trillion less in surplus. 1 percent difference is about 
$2\1/2\ trillion over the 10-year period.
    So I guess my question to you is that if we are concerned 
that we would have a slowdown in the economy, why are we making 
our projections based upon basically a 50 percent growth rate 
above where we were last year from a 2 percent to a 3 percent?
    Secretary O'Neill. The outside estimates, these are not 
either administration or CBO estimates, the best estimates I 
know for next year is a growth rate between 3 and 3.4 percent. 
Now, you may say economists don't know anything, we shouldn't 
look at any of their numbers, we ought to just make them up 
ourselves. But if you use as a reference point what the 
economics profession thinks, and this is an international 
thing, it is not as though American economists have something 
wrong with them, if you go look at the whole world of 
professional economists, they would tell you they believe next 
year's real growth rate is going to be over 3 percent because 
this year is going to be under 3 percent and that we are going 
through a mild correction. It is not a systemic problem, and 
therefore we are going to be above what most economists would 
say is trend line real growth rate in 2002 and then tapering 
back to something like 3 or 3.1 in the out years.
    Mr. Cardin. Well, I appreciate that, and we all hope that 
those projections hold true. I just find it somewhat difficult 
to understand why we believe we have a softening in the economy 
that needs a stimulus but on the other hand we use long-term 
projections that are more rosy than we did 1 year ago.
    I yield back the balance of my time.
    Chairman Thomas. Thank the gentleman. The gentleman from 
Texas, Mr. Johnson, wish to inquire?
    Mr. Johnson OF TEXAS. Thank you, Mr. Chairman. You know, I 
think everybody is talking about us not having a big surplus, 
but in fact, the CBO's forecast in their recent years have been 
consistently underestimated. Is that not your opinion also?
    Secretary O'Neill. It is true. It is a matter of fact.
    Mr. Johnson OF TEXAS. True fact of history. So we can 
expect the numbers that some of the outside economists are 
forecasting to be true and our surpluses will be there. As 
concerns a trigger mechanism which you spoke to a few minutes 
ago, I like your idea, by the way, perhaps we ought to have a 
trigger mechanism on big government spending bills, too, to 
keep it down. But wouldn't such a trigger mechanism as has been 
proposed, that you don't like, I know, be an invitation to 
those who oppose tax relief to increase government spending?
    Secretary O'Neill. I think so, yes.
    Mr. Johnson OF TEXAS. I am glad you agree with me. Let me 
ask you another question. We spoke to the death tax relief, and 
I know that we are worried about a declining economy at this 
point, and somehow we need to stimulate it. Could you talk to 
the idea of a stimulation by providing fairly quick repeal of 
the death tax? I am told that it might produce as much as $35 
billion into the economy.
    Secretary O'Neill. I think that is right. But as I said 
earlier, if you look at a tradeoff between the distributional 
effects of what the President has proposed for marginal rate 
cuts and even for the child credit and compare it to the 
distributional effects of repeal of the death taxes, there is 
no question that you get a much better diffusion of tax relief 
through these other devices. But saying that doesn't deal with 
a fundamental conceptual point that says once people have paid 
taxes on their income they shouldn't be subjected to taxes 
again when they die. It is a fundamental point of what we as 
Americans think about how our tax system should work.
    Mr. Johnson OF TEXAS. So if we pass your trigger then we 
can come back with complete death tax relief, is that true?
    [Witness nodded.]
    How about marriage penalty? Would you tell me why we are 
doing partial marriage penalty relief and not full? Is there a 
limitation on the dollars available?
    Secretary O'Neill. Yes. We have--the President--I should be 
careful and not say ``we'' because he designed this idea in the 
past couple of years. But I think it is the right thing to do. 
It provides marriage penalty relief for what I would consider 
to be the most egregious cases, and it doesn't go as far as 
some proposals would go. But in looking at the trade between 
marginal rate cuts and the child credit and the estate tax, 
where the President has come out and where I recommend that we 
come out is with what he has proposed, which I know doesn't go 
as far as you all decided last year you wanted to go.
    Mr. Johnson OF TEXAS. I appreciate those comments. I hope 
you will agree with me we need to get this money out of town so 
we won't here in the Congress spend it.
    Thank you, Mr. Chairman. Yield back the balance of my time.
    Chairman Thomas. The gentlewoman from Washington wish to 
inquire?
    Ms. Dunn. Thank you very much, Mr. Chairman. Welcome, Mr. 
Secretary. I think you are doing a great job in your first 
opportunity to come before us, and the clarity of your thoughts 
is very helpful to us.
    I appreciate on the issue of death tax repeal the strong 
position of the administration. It has been in the President's 
tax plan for some time now, and I am delighted to see the 
intent of including that in our tax package, and not just 
relief but repeal.
    There is a group of folks who claim that the death tax 
repeal would affect only 2 percent of people who are filing 
taxes each year. I think that they forget about the folks who 
have to comply with the death tax. They forget about sometimes 
hundreds of thousands of dollars that one individual has to 
pay, for example, to provide for himself liquidity through life 
insurance policies or for estate planning.
    And I have some concerns along that line because we see 
groups of people opposing the repeal of the death tax who 
represent that sort of required investment out of a very bad 
law. The debate has come around to the fairness issue, and I 
think that is very important, what you just mentioned to 
Congressman Johnson about having paid taxes once on the dollar 
you shouldn't have to continue to have to do that. As in the 
case of death tax the third or fourth time sometimes a dollar 
is taxed once again.
    There is a group of folks out there who have raised some 
question on the altruistic thread that people in the United 
States have always exhibited as far back as the 1800's when de 
Tocqueville talked about our threat of altruism. These are the-
fund raisers for charitable organizations. They don't always 
agree. The National Committee on Planned Giving, an 
organization of 111 charitable groups and 11,000 gift planning 
professionals, takes the following position: It is clear that 
charitable gift planners have not reached consensus on this 
question. While some predict disaster, others are convinced 
that the elimination of the estate tax could actually improve 
the quality of charitable gifts by eliminating false pretenses 
in charitable giving. And it is my sense that as we saw no 
decline in the number of dollars in the political system when 
we took deductibility away from those, nobody complains that 
there are too few dollars in politics today, I think that that 
threat of altruism runs very deep. I would like to hear your 
thoughts on the effect on charitable giving of the repeal of 
the death tax.
    Secretary O'Neill. I must say I quite agree with you. I 
think an interesting thing has happened in our country in the 
last 20 or 30 years. More and more people have entered the 
charitable giving process. And you know having served as a 
trustee for the fund that has very large amounts of money and 
looking at what individuals are doing in terms of giving away 
their income and wealth, it really is quite amazing how deep 
that charitable instinct runs.
    And I honestly don't think that the nonprofit institutions 
should be concerned, as some of them seem to be, that suddenly 
that instinct will get turned off if we eliminate the estate 
tax. I guess I am not one who believes that all people are Adam 
Smith's economic human beings and that they only do things 
because of what you all write into a Tax Code. I just don't 
believe it. You know, too personal maybe, but whether you don't 
do the estate tax has nothing to do with what I do with 
charitable giving. I know we shouldn't be personal about that.
    But in addition to that, the President has said we should 
allow people who don't file a long return to claim deductions 
or credits for their charitable giving, and I think that cuts 
the other way. So the prospect is going forward if we do all of 
these things, especially if we keep up the high rates of real 
growth that we have experienced. I think the well spring of 
good intentions and well-meaning by the American people will be 
a flood of additional money to work on the social things that 
we all care about.
    Ms. Dunn. I agree with you, Mr. Secretary. I thank you for 
your answer. It seems to me when people have more dollars in 
their pockets, as they will with the repeal of the death tax 
and these other important issues that the President has 
sponsored, that we will see more giving, not less giving to 
charitable givers.
    Thank you. I yield back my time.
    Chairman Thomas. I thank the gentlewoman. Gentleman from 
Washington, Mr. McDermott, wish to inquire?
    Mr. McDermott. Thank you, Mr. Chairman. Welcome, Mr. 
Secretary. Since I don't know all those people behind you I 
want to ask a request first before I ask a question. And that 
is Congressman Crane, Congressman Rangel 5 years worked on the 
Africa and CBI trade bill. The customs agency is implementing 
it in a way that guts the effect on both the Caribbean and 
Africa. I would ask you to look at that. I know that you are 
new in the job, and I don't know which of your people I should 
call. If they want to get in touch with me, that would be fine.
    The second thing is I have a couple yes and no questions.
    Secretary O'Neill. May I say one thing about that? You 
know, I don't know the details of this but I was told that the 
way these regulations are being formed cuts against the intent 
of fostering and helping with free and fair trade. I guarantee 
you we will fix that problem if it is truly characterized in 
what I have heard.
    Mr. McDermott. Good to hear you are on top of the problem. 
You have got it straight.
    As I listen to this other testimony, I think you said that 
there is no plan to use either Social Security surplus or 
Medicare surplus or government pension surplus in this tax cut.
    Secretary O'Neill. Absolutely right.
    Mr. McDermott. If that is true that $5.6 goes down to $2.3 
trillion, and that is based on $2.4 out of Medicare and $390 
out of Medicare--Social Security is $2.4, Medicare $390, and 
$419 in government pensions.
    Secretary O'Neill. But the government piece never enters 
this equation. It is covered in the--no, it is not. I don't 
think that is right. It is not part of the surplus.
    Mr. McDermott. These are CBO figures.
    Secretary O'Neill. That is not part of our surplus 
calculation.
    Mr. McDermott. I want the chairman to know that it is in 
the CBO figures that we got. That is what I am quoting there.
    Do I also understand you have no intention to fix the AMT?
    Secretary O'Neill. No, I didn't say that. I said----
    Mr. McDermott. What figure are you using as an AMT?
    Secretary O'Neill. What I said is if we don't do anything 
to the AMT, no one will pay more taxes. In fact everyone will 
be benefitted compared to where they are now----
    Mr. McDermott. I heard your answer.
    Secretary O'Neill. With the implementation of the 
President's program. And I further said that 85 percent of the 
AMT effect would happen to people with incomes over $100,000 a 
year. I know some of you are worried that the President's 
proposal is going to give too much money to higher income 
people. So you shouldn't be too alarmed that they are going to 
pay more as a consequence of the AMT than what you otherwise 
would expect. So there is a population, that is a fairly small 
population with incomes below $100,000, that we are prepared to 
work with you all to figure out. If you want to fix a problem 
that has been there for 30 years now, we will work with you to 
fix it, if that is what you want to do.
    Mr. McDermott. One other part of this budget that is pretty 
clearly not being acknowledged is that there is no reflection 
of the increase in population. The CBO says that that is going 
to cost $418 billion. Do you accept a figure in that area?
    Secretary O'Neill. No. I have no idea what that has to do 
with anything.
    Mr. McDermott. OK. Well, I think you ought to check when 
you come up here. Because they say that you have to subtract 
$418 billion simply for the increase in population in the 
various programs. But let me move on to one other thing. That 
is Joint Tax Committee. The Joint Committee on Taxation says 
that the tax cut is $1.5 trillion, $1.6. So we agree on that. 
The President is now talking about advancing that number, is 
that correct, taking in this year?
    Secretary O'Neill. He is talking about what he considers to 
be the desirability of making it retroactive to January 1st, 
2001, yes.
    Mr. McDermott. That adds $400 billion to the tax cut?
    Secretary O'Neill. No, it doesn't.
    Mr. McDermott. That is not what the Joint Committee on 
Taxation says.
    Secretary O'Neill. That is because they didn't listen to 
the President. The President says the number is $1.6 trillion. 
And if we advance and do retroactivity, then it seems it is a 
logical tautology that you are going to have to change 
something else in the back end of the program if you are going 
to front end part of the program. But the President has been 
really clear. I have heard him say it over and over again the 
number is $1.6 trillion. I have heard him say over and over 
again the number is $1.6 trillion.
    Mr. McDermott. That is all. No business tax----
    Secretary O'Neill. $1.6 trillion. This is what the 
President thinks is right for the American people.
    I must tell you I hope I don't sound disrespectful. I know 
the President is not disrespectful. He understands, as I do 
very well, it is up to you to decide what the American people 
will get. I want to be really clear that I am trying to 
communicate the firmness of the President's intention that we 
not spend more than $1.6 trillion of this $5.6 trillion for 
these changes in the way the tax structure works and to the 
degree that we working together decide that we should have some 
aspect of retroactivity and/or some aspect of acceleration that 
we are going to have to work together to figure out how we stay 
within $1.6 trillion.
    Mr. McDermott. Will the President veto if we go above $1.6 
trillion?
    Secretary O'Neill. I think more likely than that he will 
throw me out. So I think my job is in your hands. If I can't 
convince you that we should stay at $1.6 trillion, then I have 
failed, and you need a different Secretary of Treasury to help 
you work the numbers. But I think it is likely that we can work 
together to achieve the numbers the President will sign.
    Mr. McDermott. If you do retroactivity, where do you want 
to make the cuts to stay under the $1.6?
    Secretary O'Neill. I don't have any recommendation except 
the one the President has proposed to you, which is $1.6; and 
the program has developed features in it which we have sent to 
you and it is a place to begin. We would say it is a place to 
end. And if you join the President in thinking that it could 
make some sense to provide retroactivity, then we need to work 
together and come to a common agreement about how we do this. 
If you let me be king for the day, I could do this; but I 
presume you are not going to really let me do that so we are 
going to have to work together to see how we accommodate the 
interests.
    Mr. McDermott. So the retroactivity was not part of the 
proposal that the President sent up here the other day?
    Secretary O'Neill. The retroactivity is not assumed, that 
we are going to add $400 billion, absolutely not. In fact, I 
don't even--I can't imagine where you got $400 billion. Because 
fully phased in the President's--the value of the marginal rate 
cuts for a 10-year period is $750 billion. I can't imagine 
where you got $400 billion in the first year. There is no way.
    Mr. McDermott. We are going to have, obviously--not in the 
first year. That is over 10 years. And we will have a long 
discussion I think with the Joint Committee on Tax because they 
are the ones that gave me these figures. That is not something 
I dreamed up. I think it is good for us to talk about it.
    I thank you, Mr. Chairman.
    Chairman Thomas. I thank the gentleman.
    I am pleased to note that if in fact we decide to do 
something there is room for the Ways and Means Committee. We 
have a future and we can deal with trying to fit the numbers 
into the President's suggested total amount.
    The Chair would like to announce that the next panel of the 
economists, since several of them are over on the Senate side, 
will resume at 1 p.m. I promised the Secretary I would try to 
get him out at noon. We came fairly close for government work. 
But the Committee will begin the questioning following the 
Chair and Ranking Member with the gentleman from Georgia, Mr. 
Collins, and the gentleman from Wisconsin, Mr. Kleczka, so that 
we could give, hopefully, everyone an opportunity to ask a 
question today.
    With that, the Committee stands in recess.
    [Recess.]
    [Statement submitted by Mr. Herger, and Secretary O'Neill's 
response, are as follows:]

        Statement from Mr. Herger to Treasury Secretary O'Neill

    Mr. Secretary, on September 29, 2000, then candidate George W. Bush 
announced a Comprehensive National Energy Policy plan, and published 
the specifics on his Internet site. On page 19, the plan contained a 
proposal to ``Support Tax Credits for Electricity Produced from 
Alternative and Renewable Resources,'' which included ``an open loop 
biomass credit.''
    Please know that the President's open-loop biomass credit is 
essentially identical to that which I have been advocating, along with 
a number of my colleagues in the Ways and Means Committee, for several 
Congresses. Because such a credit is vital to the survival of biomass 
plants in my District and around the nation that provide valuable 
national benefits in terms of renewable energy and waste disposal, I 
was pleased my proposal was included in the Bush Energy plan.
    Now, as you and your staff move forward to draft the President's 
tax proposals into a FY 2002 Budget submission, I would very much 
appreciate it if you would work with me to ensure that this open-loop 
biomass tax credit is included.''

                                


          Treasury Secretary O'Neill's Response to Mr. Herger

    Yes, the administration's Budget will include a proposal to expand 
the credit for electricity produced from alternative and renewable 
sources to include open loop biomass. We look forward to working with 
you and the Members of the tax-writing committees in fashioning the 
details of this proposal as the legislation proceeds.

                                


    [Questions submitted by Democratic Members, and Secretary 
O'Neill's response, are as follows:]

    1. In your Senate confirmation testimony, you stated that you 
supported the aggressive pursuit of the purveyors of corporate tax 
shelters. Do you agree with your predecessor, Larry Summers, that 
abusive tax shelters are ``the most serious compliance issue 
threatening the American tax system today?''
    The United States income tax system largely has been based upon a 
long and enviable tradition of self-assessment. A perception that some 
taxpayers can and do engage in questionable transactions poses a threat 
to the integrity of our tax system and must be taken seriously. I 
understand that over the last several years the Congress and the 
administration have examined the effect of corporate tax shelters on 
the tax system and have addressed certain specific transactions.
    Over the next several months, I envision that Treasury and the IRS 
will continue to address abusive schemes as we become aware of them. 
After a careful review of the comments submitted by taxpayers, we will 
work toward finalizing regulations issued last year under sections 6111 
(dealing with confidential corporate tax shelters), 6112 (dealing with 
list maintenance by promoters), and 6011 (relating to corporate 
disclosures) as well as the modifications to Circular 230 (dealing with 
opinion writing and standards of practice before the IRS.)
    When we believe that legislation is the appropriate remedy to deal 
with a problem, we will come to the Congress with suggestions. And we 
welcome the opportunity to work with the tax-writing committees to 
address that concern them.
    2. Do you also agree with your former Secretary Summers that 
transactions without economic substance and with no discernable non-tax 
business purpose should be subject to a higher penalty for avoiding 
tax?
    It is well-established law that tax benefits claimed from 
transactions without economic substance and with no discernable non-tax 
business purpose are not allowable. Current law also provides that 
taxpayers and promoters that engage in such schemes may be subject to 
penalties. Some have questioned whether these current-law penalties are 
sufficient in order to deter inappropriate behavior. We welcome the 
opportunity to work with the tax-writing committees to examine the 
effectiveness of these present-law sanctions. However, any response to 
perceived abuses has to be appropriately measured so as not to affect 
legitimate business transactions.
    3. Do you agree that a full repeal of the estate and gift tax may 
create certain opportunities for tax avoidance, with losses to the 
Federal treasury yet to be assessed? With repeal of the estate and gift 
tax, would not it be possible to:
    (a) Allow one person to give appreciated stock to an elderly family 
member, and receive a higher basis, tax free for that same property 
when it is willed back after death to the original owner;
    (b) Allow a person to give appreciated stock to a tax-indifferent 
party, who could sell the stock tax free, and return the proceeds to 
the original person;
    (c) Allow a person to give appreciated stock to lower-income 
relatives who could sell the stock at a lower capital gains rate and 
return the proceeds to the original owner.
    Does the administration support allowing such transactions as 
outlined above? If not, what legislative language do you recommend to 
prevent such tax avoidance?
    It is true that repeal of the estate and gift taxes may provide an 
incentive for some taxpayers to modify their behavior and transactions 
and investments in order to minimize their income tax liabilities. The 
Administration's Budget proposal on death tax repeal and H.R. 8 as 
passed by the House of Representatives this year contain provisions 
that seek to address this potential revenue loss. For instance, both 
legislative proposals generally provide that an heir will take the 
decedent's tax basis in the property inherited at death. This preserves 
any built-in gain in the property. A limited step-up to fair market 
value is allowed so that estates not currently subject to estate tax 
will not be disadvantaged under the income tax upon death tax repeal. 
In addition, other provisions in the legislative proposals address 
specific potential income-shifting and tax avoidance transactions. 
Finally, H.R. 8 directs the Treasury Department to further study this 
issue and report to Congress whether any other provisions may be 
needed. As full repeal of the estate and gift taxes is phased in under 
both our Budget proposal and under H.R. 8, we should have sufficient 
time to further examine this issue and address any additional concerns.
    4. Do you disagree with the finding of the Joint Committee on 
Taxation that the numbers of taxpayers paying add-on tax due to the AMT 
will almost double and that the President's plan uses the AMT to take 
back nearly $200 billion of his reductions in the regular income tax 
over 10 years? If you disagree, what are the Treasury Department 
estimates and explain in detail how and why they vary?
    The Treasury Department estimates that the administration's tax cut 
proposals would (1) increase tax receipts from the AMT by $262 billion 
over the 2002-2011 period, and (2) increase the number of taxpayers in 
2011 who have additional tax liability because of the AMT from 20.4 
million to 34.7 million.
    Even people who will go into the AMT after enactment of the tax 
package will have a lower tax rate than they otherwise would have 
experienced under the current system.
    5. Please advise the Committee as to why the President's proposal 
to address the marriage penalty does not address this penalty within 
the earned income tax credit (EITC)?
    Restoring the two-earner deduction would reduce marriage penalties 
among many couples who currently experience marriage penalties due to 
the EITC.
    First, the two-earner deduction would reduce marriage penalties for 
some couples who currently receive the EITC but whose income falls in 
the EITC phase-out range. These couples are eligible for the EITC under 
current law, but they receive a smaller credit filing jointly than they 
would if they could file as unmarried. Thus, they incur a marriage 
penalty due to the EITC. The two-earner deduction reduces their 
marriage penalties because one of the definitions of income used to 
reduce the EITC in the phase-out range is modified adjusted gross 
income (AGI). By reducing adjusted gross income, the two-earner 
deduction would increase the EITC for many couples.
    Second, the two-earner deduction would also reduce marriage 
penalties for couples whose income exceeds the current law EITC income 
thresholds (up to $32,121 for taxpayers with two or more qualifying 
children). These couples are ineligible for the EITC because their 
combined income is too high, but they would be eligible for some credit 
if they filed as unmarried. Over half of EITC-related marriage 
penalties are attributable to couples with incomes between $30,000 and 
$60,000. The two-earner deduction would reduce total marriage penalties 
due to the individual income tax (including the EITC) by about 20 
percent among couples in this income range.
    6. Do you agree that during the next 5 years, the substitute 
proposal on estate tax relief offered by Mr. Rangel last year would 
provide more relief to family farms and businesses than they would 
receive during the same period from the President's proposal?
    The President's proposal would provide relief to 1.8 million farms 
and 17.5 million businesses. I am pleased Mr. Rangel believes estate 
tax relief is important. Whether a particular family would pay lower 
taxes under the amendment proposed by Mr. Rangel on June 7, 2000 or 
under the President's proposal depends upon the particular 
circumstances of the decedent and the heirs. Some estates consisting 
primarily of qualifying family-owned business interests would be 
subject to less tax between 2002 and 2006 if the qualifying family-
owned business interest (QFOBI) deduction were immediately increased to 
shelter $2 million (rather than $1.3 million). However, the amendment 
offered by Mr. Rangel also converted the QFOBI deduction to an 
exclusion amount, reducing its value for some estates. The factors that 
determine who would be better off under the proposal include the size 
of the estate, the portion of the estate (if any) that qualifies for 
the QFOBI deduction, and the marital status of the decedent.
    Some larger estates would obtain a greater benefit from the rate 
reductions in the administration's plan than they would from an 
increase in the QFOBI deduction. In addition, under current law and 
both of the proposals, a married decedent can pass an unlimited amount 
of property to a surviving spouse free of tax. Under current law and 
Mr. Rangel's amendment, the estate of the second spouse would be 
subject to tax (to the extent that her estate exceeds the amounts 
exempted by the unified credit and QFOBI provision). But under the 
Administration's plan, the estate of the second spouse would not be 
subject to any estate tax, if the spouse died in 2009 or thereafter. 
Therefore some married couples would be better off under the 
President's plan than they would under Mr. Rangel's amendment, 
regardless of the size or composition of the estate.
    The QFOBI deduction does not free farm and business owners from the 
estate tax entirely. The QFOBI provision was designed to apply to a 
narrow class of estates. In order to qualify for the deduction, the 
business interest must pass to a Member of the family or long-term 
employee. The heir must then remain active in the business over a 10 
year period after the date of death, or the benefit of the estate tax 
deduction is recaptured. During the 10-year period, the business is 
subject to a special lien for potential additional estate taxes, which 
can limit the business' ability to raise capital. For this and other 
reasons, the administration prefers to eliminate the estate tax 
entirely, rather than to create or increase exemptions that apply only 
to certain kinds of property.
    7. You have testified that eliminating the estate tax will have no 
significant adverse effect on charities, even though the estate tax 
charity deduction can be worth up to 55 cents on the dollar for 
charity. On the other hand, the administration argues that extending 
the individual income tax charity deduction to users of the standard 
deduction will significantly benefit charities even though most 
taxpayers will at most get 15 cents of tax reduction on a dollar for 
charity. How do you reconcile these views? Does not your testimony 
undermine the rationale for the administration's proposed non-itemizer 
charitable tax deduction?
    It is my personal belief that a substantial portion of charitable 
giving is not tax motivated, and thus would not be diminished by repeal 
of the estate tax. This does not mean that charitable giving would be 
entirely unaffected if the estate tax were repealed. Economic research 
suggests that repealing the estate tax, while making no other changes 
to the tax system, would result in some decrease in charitable giving. 
However, the Administration's proposal also would replace the step-up 
in basis at death with carryover basis. Therefore some individuals who 
inherit appreciated property will be encouraged to make charitable 
gifts to reduce their capital gains taxes. In addition, the 
administration has proposed to allow non-itemizers to deduct charitable 
contributions on their income tax returns, to permit charitable 
contributions from individual retirement accounts by persons over age 
59 and to raise the cap on corporate deductions for charitable 
contributions. These proposals would tend to increase charitable 
contributions. Thus taken as a whole, the administration's tax plan is 
not expected to have a detrimental impact on charitable giving. 
Furthermore, to the extent that the Administration's plan contributes 
to real economic growth, it will increase the funds available for 
charitable giving.
    8. You have indicated that what you contend is the $1.6 trillion 
cost of the President's recommended tax cut represents the absolute 
ceiling which the administration will approve without your resignation. 
However, the cost of the one bill already approved by the House already 
exceeds the cost of the same component in the President's tax cut by 
about $100 billion and many other tax cuts are being advanced by 
Republican leaders, such as additional tax relief for this year, 
capital gains cuts and pension changes like those offered by Reps. 
Portman and Cardin. The marriage penalty related legislation advocated 
last year by Republican Congressional Leaders cuts taxes much more than 
the marriage penalty provision in the Bush plan. Please identify 
specifically your priorities for trimming the President's 
recommendation to accommodate the change already made and any changes 
that are likely to occur during the legislative process.
    The Administration expects to work with Congress to fashion tax 
relief proposals that follow President Bush's proposals, in order that 
we may return the excess tax collections to the American taxpayers as 
expeditiously as possible.
    9. Please describe those changes in taxation of businesses that the 
Administration considers most appropriate following approval of any 
legislation concerning individual taxation.
    There are several tax proposals in President's FY 2002 Budget that 
directly relate to the taxation of businesses. For example, the 
Administration proposes to make the research and experimentation tax 
credit permanent and to extend other provisions that are scheduled to 
expire in 2001. Other tax proposals that are targeted toward businesses 
would raise the cap on corporate charitable contributions; exclude from 
income the value of certain employer-provided computers, software and 
peripheral equipment; establish FFARRM Savings Accounts; extend 
permanently the expensing of brownfield remediation costs; extend and 
modify the tax credit for electricity produced from certain sources; 
and modify the treatment of nuclear decommissioning funds. The 
President's plan also calls for extension of provisions in the Tax Code 
that are set to expire this year. This is a priority. They include the 
work opportunity tax credit, the welfare-to-work tax credit, the 
exclusion for work provided educational assistance, alternative minimum 
tax relief for individuals, active financing, percentage depletion for 
oil and gas wells and qualified zone academy bonds.
    Moreover, many of the provisions targeted toward individuals will 
have a significant effect on business activity and investment. A 
substantial portion of small businesses are structured as sole 
proprietorships, partnerships, and S corporations, and are subject to 
tax at the individual tax rates. The President's proposed reduction in 
individual tax rates would increase the cash flow of these businesses 
and provide them with incentives to re-invest profits and expand.
    After enactment of the President's plan we will look forward to 
additional tax simplification and reforms that affect businesses and 
individuals. We look forward to working with Congress on these 
proposals.
    10. The President's budget submission shows planned use of the 
projected unified budget surplus of $5.644 trillion on the following: 
$1.620 trillion for tax cuts, $153 billion for ``Helping Hand'' and 
Medicare proposals, and another $20 billion in other changes. This 
surplus, according to your budget, also will be reduced by $417 billion 
in additional debt service, totaling a $2.210 trillion reduction in the 
surplus over a 10-year period. How much of this $417 billion in 
increased debt service is caused by the three previous items--the tax 
cuts, Medicare and ``Helping Hand'' expenses, and the other proposed 
changes? Is it true that $373 billion of the $417 billion in extra debt 
service is due to the tax cuts? If so, is it not true then that the 
total cost of the tax cut package is really the sum of those two 
figures, or $1.993 trillion?
    The Administration's April budget notes that the revenue cost of 
the President's tax proposal is $1.612 billion over the 10-year budget 
window. It also lists the $420 billion interest cost associated with 
all of the President's tax and spending initiatives--it does not 
provide a breakdown of the debt service for each individual initiative. 
It has been standard practice for a number of years to report the cost 
of a tax proposal by detailing its revenue costs alone.
    11. Do you agree that it is appropriate, as reflected in the tables 
of the President's budget submission, to show the interest expenses 
associated with paying off the debt more slowly? Do you agree that it 
is appropriate, as is done in the President's budget submission, to 
measure budget proposals relative to a baseline projection of existing 
law? Is it correct that the estimate of a $5.6 trillion surplus over a 
decade is based upon no changes in existing law?
    The President's budget pays off the maximum amount of debt that it 
is possible during the budget window. Thus, there is no tradeoff 
between his initiatives and the important goal of paying off the debt.
    Baselines (which are constructed upon the assumption of a 
continuation of existing law) can provide a useful starting point for 
fiscal planning, although they have certain weaknesses. For example, 
the present baseline assumes permanent extension of one-time funding 
needs (like the Decennial census) and assumes that the Federal 
government is able to earn interest on excess cash balances even when 
these balances would likely overwhelm the legally permissible 
investment instruments available to house them.

                                


    Chairman Thomas. The Committee will reconvene.
    In the morning session we heard from the Secretary of the 
Treasury and had what I thought was a useful and lively 
interchange between Members of the Committee, at least as far 
as we were able to get in the time frame, and the Secretary 
over the President's tax plan, in particular, specific areas of 
the tax plan. This afternoon it is my pleasure to present to 
you a panel of economists who we hope provide a broad enough 
spectrum that we will be able to cover anyone at least on this 
Committee's concerns about ramifications and manifestations of 
mixing and matching on the President's income tax revision 
proposal.
    In alphabetical order--and since I had to live with that 
all my life, I am always thinking about doing it in reverse 
alphabetical order, but that is OK--Dr. Feldstein, who is a 
well-known commenter on the economy from Harvard University, 
and we are very pleased that you are able to be with us. Robert 
Greenstein, the Executive Director of the Center on Budget and 
Policy Priorities, and we thank you for joining us. And Dr. 
Kevin Hassett, who is a resident scholar at the American 
Enterprise Institute.
    Prior to calling on the panel, I believe the gentleman from 
Georgia wants to make a comment. I know he is pressed for time 
because of the Budget Committee assignment.
    Mr. Collins. Thank you, Mr. Chairman. As part of my 
assignment to the Ways and Means Committee, I am on the Budget 
Committee, and we are having a hearing that began at 1 o'clock, 
but I would ask unanimous consent to enter into the record some 
of the comments based on the testimony of Secretary O'Neill 
this morning.
    Chairman Thomas. Thank you. And if the gentleman from New 
York had any opening comments they certainly would be placed in 
the record as well.
    [The information follows:]

            Statement of the Hon. Mac Collins, M.C., Georgia

    Today's change in the economy is a cashflow problem. This slowdown 
reflects a shift in spending among wage earners which in turn affects 
the cashflow of businesses--our Nation's job creators.
    To provide evidence to this argument, I recently contacted the 
Columbus, Georgia Chamber of Commerce, located in the Third District of 
Georgia. At my request, Toya Winder contacted several small businesses 
in the area to determine the state of local economic changes and 
conditions.
    Small business after small business told her they were feeling a 
cash flow squeeze because Americans are caught in the vice of tight 
credit, high debt and increasing energy costs.
    For example, a janitorial firm reported last year's business was so 
good, it gave its workers two raises. Since the first of the year, 
however, costs are up, but business is slow and payments are delayed 
because clients are having cashflow problems.
    A local construction firm said business was down, but again costs 
were up. Fuel is more expensive, and so are building materials which 
are affected by higher transportation costs. In addition, competition 
for the remaining jobs is fiercer, so margins are tighter. The firm has 
had to lay off workers.
    High fuel prices and tighter credit is also hitting the sales of 
new Class 8 trucks. That coupled with a drop in value for used trucks, 
transportation firms are finding their margins squeezed tighter and 
tighter.
    A family-owned drugstore reported that costs are up and sales are 
down, because many customers are not buying their drugs. The drop is 
attributable to individuals having to choose between purchasing 
medications and meeting the monthly demand on their budget caused by 
increased heating costs.
    A service station reports that sales seem higher because gasoline 
has become much more expensive. But people are not filling up their 
tanks as much and overall, profits are down.
    A few businesses, however, are reporting brisker business. An 
accounting firm reports an increasing number of customers are getting 
their taxes filed early in hopes of faster refunds. Wage earners are 
trying to offset their cashflow problems.
    A car repair shop reports business is booming as families keep 
their old cars longer. That is good news for mechanics, but bad news 
for car dealers and workers on auto assembly lines where a significant 
drop in domestic production is causing plant closures.
    Even more telling are the last two categories of companies that are 
seeing business expanding. A repossession business reports it cannot 
keep up with demand. This is a sign that families cannot keep up with 
payments on cars, furniture and appliances, reinforcing the fact that 
there is a cashflow problem.
    Finally, a collection agency reports business is great as more and 
more bad debts crop up.
    All of these examples provide a clear indication that Americans are 
being squeezed and face a personal cash flow crunch. Congress must 
address this problem now.
    An across the board income tax rate reduction, an increase in the 
child tax credit, providing relief from the complicated alternative 
minimum tax (AMT), and eliminating the punitive nature of the death tax 
will provide necessary relief for individuals, families and ultimately 
businesses.
    With regard to the budget process, there has been a great deal of 
discussion about whether the tax proposals should be based on a 10 year 
forecast plan. Critics argue a long term plan is unnecessary.
    However, as a government, we require private businesses to project 
five, ten, fifteen and even more than thirty years in the future for 
accounting purposes. Tax depreciation rules require this type of long 
term forecasting when accounting for capital investments. Often the 
depreciation periods required by the internal revenue code extend 
longer than a business can obtain financing for a particular capital 
investment.
    Even individuals and families are required to plan on a ten, 
fifteen, twenty or thirty year basis when purchasing a home.
    Like individuals, families and businesses, Congress must abide by 
the same long term planning principles. The authority of the Federal 
government, whether over Social Security retirement, Medicare or tax 
policy, affects the ability of every individual, every family and every 
business to meet their long term financial needs. Long term budget 
planning is necessary. Doing so will ensure that Congress both complies 
with the same standards required of the private sector, and is 
disciplined when it comes to accounting for the taxpayers' dollars.

                                


    Chairman Thomas. The Chair doesn't feel the need for 
opening comments since this is a continuing panel, and I would 
much rather hear from the panel. So without any additional 
comments, I will tell the gentlemen your written testimony will 
be made a part of the record, and you can address us in the 
time you have in any way you see fit, and we will start in 
alphabetical order with Dr. Feldstein.

 STATEMENT OF MARTIN FELDSTEIN, PH.D., PROFESSOR OF ECONOMICS, 
          HARVARD UNIVERSITY, CAMBRIDGE, MASSACHUSETTS

    Dr. Feldstein. Thank you very much.
    Chairman Thomas. Is your microphone on? Let me warn you, 
you have to get very close.
    Dr. Feldstein. That seems to do it. Thank you very much for 
giving me the opportunity to testify. I have testified before 
members of this Committee for about 20 years, and I have always 
stressed the importance of a sound fiscal policy. Until 
recently I stressed the importance of eliminating budget 
deficits, but today, fortunately, we are meeting in a very 
different fiscal environment in which it is going to be 
possible to have a substantial incentive-increasing tax cut and 
to combine that with strengthening Social Security and with 
shrinking outstanding national debt.
    In my brief time I want to talk about five points. First 
the large current and projected budget surpluses give you all 
an unprecedented opportunity to strengthen and improve the 
American economy by substantially reducing marginal tax rates. 
Our budget surplus last year was 2.4 percent of GDP, and the 
Congressional Budget Office projects a baseline budget surplus 
of $5.6 trillion over the next 10 years, about 4 percent of 
projected GDP, unprecedented large numbers. It is useful to 
contrast this favorable situation with the large budget 
deficits that prevailed when President Kennedy and President 
Reagan initiated tax cuts.
    Even after setting aside the projected Social Security 
surpluses, the projected 10-year on budget surplus is more than 
$3 trillion, or about twice the officially estimated cost of 
President Bush's tax plan. In other words, a $1.6 trillion tax 
cut is compatible with protecting Social Security, increasing 
outlays for Medicare and defense, and still having additional 
money left for further debt reduction.
    My second point is that the true cost of reducing the tax 
rates is substantially smaller than the costs projected in the 
official estimate. Studies of past tax rate reductions show 
that taxpayers respond to lower marginal tax rates in various 
ways that increase their taxable income. They work more and 
harder and take more of their compensation in taxable form and 
less in fringe benefits.
    At the National Bureau of Economic Research, we have used a 
large publicly available sample of anonymous tax returns 
provided by the Treasury to estimate how the actual revenue 
loss would compare to the official estimates that ignore most 
of these behavioral responses. Our analysis shows that when the 
proposed Bush tax cuts are fully phased in, the net revenue 
loss would be only about 65 percent, only about two-thirds, of 
the officially estimated costs.
    Now, for a year like 2010, the Joint Committee on Taxation 
staff estimated a $233 billion cost of the tax plan. Our 
estimate implies that would be only about $150 billion. If you 
apply that same ratio to each year, the $1.6 trillion would be 
cut to only 1 trillion. Now, I think that because of the timing 
of the tax cut and lags in taxpayer responses, a safer and 
conservative estimate of the total 10-year revenue cost would 
be about $1.2 trillion, so substantially less than the 
officially estimated $1.6 trillion, which doesn't take any of 
these economic behavior responses into account.
    Third, the distorting effect that I have been talking about 
of high marginal tax rates on individual behavior, on the way 
people work and the form of their compensation, causes 
substantial waste. If high marginal rates induce someone to 
work less or to work less productively, both he and the Nation 
lose. If marginal tax rates also induce someone to take his or 
her compensation in the form of fringe benefits or more 
expensive perks rather than in taxable cash, they lose even 
more. Economists call such weight the deadweight loss of a tax. 
And the proposed reduction in marginal tax rates will not just 
allow individuals to keep more of their income, they will 
reduce these distortions, and that will produce an enormous 
gain in national well-being.
    Using those same tax return data that I mentioned a moment 
ago, we have calculated that the marginal tax rate reductions 
in the Bush plan would cut that waste by about 40 percent of 
the officially estimated revenue cost; that is, by about $600 
billion over the next 10 years. That raises Americans' real 
incomes by $600 billion that would otherwise be lost to waste. 
That $600 billion makes taxpayers better off by as much as an 
additional $600 billion in cash. The gain from reducing 
distortions is a permanent gain and one that would continue as 
long as marginal rates are kept down.
    My fourth point is that the distribution of President 
Bush's tax cut is essentially proportional to existing taxes. 
Those who pay more in taxes will get bigger tax cuts. But the 
proportional reduction is about the same in every group. If 
anything, the lower income groups get bigger proportional 
reductions in their income tax and will pay an even smaller 
proportion of the overall income tax burden than they do now.
    It is useful to compare the marginal tax rate reductions 
also at the high-income level proposed by the Bush plan with 
those enacted by President Kennedy. The two highest-income 
groups in the Bush plan would see their rates reduced from 39 
and 36 percent to 33 percent, reductions of 17 percent and 9 
percent respectively. In comparison the two top marginal rates 
were reduced under President Kennedy by more than 20 percent.
    Now, in thinking about the distribution, I think you do 
have to think about the off-budget items as well, about the 
payroll tax, and I hope that Congress will pass the tax 
legislation quickly and then turn to Social Security reform. As 
many of you know, I have long been an advocate of a mixed 
Social Security system that would supplement the existing pay-
as-you-go Social Security benefits with annuities paid from 
individual investment-based accounts. One of the major 
advantages of doing that would be to avoid the future payroll 
tax increases that, according to the Social Security actuaries 
would otherwise require raising the payroll tax from 12 percent 
to more than 18 percent. If that long-run saving of 6 percent 
of earnings up to the maximum taxable earnings for Social 
Security is seen as part of the overall fiscal reforms of this 
Congress, the combined effect is to reduce the relative tax 
burden on low- and middle-income families even more.
    Finally, the large tax cut coming at this time will help to 
assure a stronger short-term recovery from the current economic 
slowdown. Although I don't believe that temporary increases and 
decreases in tax rates are useful for reducing business cycle 
fluctuations, and I think the economic evidence on that is 
quite strong, it is certainly convenient now to have a tax cut 
that is going to be made for other reasons. The increase in 
after-tax incomes and the expectations that such increases will 
continue in the future will boost confidence as well as 
spending power. Increasing the short-term effect by starting 
those cuts at the beginning of the current year would reinforce 
this favorable effect.
    Thank you.
    [The prepared statement of Mr. Feldstein follows:]
 Statement of Martin Feldstein, Ph.D., Professor of Economics, Harvard 
                  University, Cambridge, Massachusetts
    Thank you, Mr. Chairman. I am pleased to appear before this 
Committee again and to talk about President Bush's tax cut proposal. I 
have five points to make in this brief statement.
    First, the large current and projected budget surpluses give 
Congress an unprecedented opportunity to strengthen and improve the 
American economy by substantially reducing marginal tax rates. Our 
budget surplus last year was 2.4 percent of GDP and the Congressional 
Budget Office projects a baseline budget surplus of $5.6 trillion over 
the next 10 years, about 4 percent of projected GDP. It is useful to 
contrast this favorable budget situation with the large budget deficits 
(both actual and standardized) when the Kennedy and Reagan tax cuts 
were enacted. Even after setting aside the projected Social Security 
surpluses, the projected 10-year on-budget surplus is more than $3 
trillion or about twice the officially estimated cost of the Bush tax 
plan. In other words, a $1.6 trillion tax cut is compatible with 
protecting Social Security, increasing the outlays for Medicare and 
defense, and still having additional money left for further debt 
reduction.
    Second, the true cost of reducing the tax rates is likely to be 
substantially smaller than the costs projected in the official 
estimates. Studies of past tax rate reductions show that taxpayers 
respond to lower marginal tax rates in ways that increase their taxable 
income. They work more and harder and take more of their compensation 
in taxable form and less in fringe benefits. At the National Bureau of 
Economic Research we have used a large publicly available sample of 
anonymous tax returns to estimate how the actual revenue loss would 
compare to the official estimates that ignore this behavioral response. 
Our analysis shows that when the proposed Bush tax cuts are fully 
phased in the net revenue loss would be only about 65 percent of the 
officially estimated costs.
    That implies, for example, that the revenue loss in 2010 that the 
Joint Committee on Taxation estimated as $233 billion would actually be 
only about $150 billion. If we apply that ratio to each year's revenue 
loss, the total revenue loss would be cut from $1.6 trillion to only 
about $1 trillion. Because of the timing of the tax cut and the 
taxpayer's lags in responding to it, I think a safer estimate of the 
total 10-year revenue loss would be about $1.2 trillion, still less 
than half of the non-Social Security surplus.
    Third, the distorting effect of high marginal tax rates on 
individual behavior--on the way people work and the form of their 
compensation--causes substantial waste. If high marginal rates induce 
someone to work less or to work less productively, both he and the 
motion lose. If high marginal rates also induce someone to take his or 
her compensation in the form of fringe benefits or more expensive perks 
rather than in taxable cash, they lose even more. Economists call such 
waste the deadweight loss of a tax. The proposed reduction in marginal 
tax rates will not just allow individuals to keep more of their income. 
It will also produce an enormous net gain in national well-being. Using 
the same tax return data that I mentioned a moment ago, we have 
calculated that the marginal tax rate reductions in the Bush plan would 
cut that waste by about 40 percent of the officially estimated revenue 
cost, that is, by about $600 billion dollars over the next ten years. 
That raises American's real incomes by $600 billion that would 
otherwise be lost to waste. While the President's proposed tax cut 
would save taxpayers about $1.2 trillion over 10 years it would 
increase their real incomes by $1.8 trillion.
    The gain from reducing distortions is a permanent gain that will 
continue in the future if marginal tax rates are kept down. This gain 
is separate from and additional to any increase in the rate of economic 
growth that results from the improved incentives to save and invest and 
take risks with that capital.
    Fourth, the distribution of President Bush's tax cut is essentially 
proportional to existing taxes. Those who now pay more in taxes will 
get bigger tax cuts. But the proportional reduction is about the same 
in every income group. If anything, the lower income groups get bigger 
proportional reductions and will pay an even smaller proportion of the 
overall tax burden than they do now.
    It is useful to compare the marginal tax rate reductions at high 
income levels proposed by President Bush with the tax rate cuts enacted 
by President Kennedy. The two highest income groups in the Bush plan 
would see their marginal tax rates reduced from 39.6% and 36% to 33%, 
reductions of 17% and 9% respectively. In comparison, the two top 
marginal rates were reduced under President Kennedy by more than 20%.
    I hope that Congress will pass the tax legislation quickly and then 
turn to Social Security reform. As members of this committee know, I 
have long been an advocate of a mixed Social Security system that would 
supplement the existing pay-as-you-go Social Security benefits with 
annuities paid from individual investment-based accounts. One of the 
major advantages of doing so would be to avoid the future payroll tax 
increases that, according to the Social Security actuaries, would 
otherwise require raising the current 12.4% OASDI employer-employees 
tax to more than 18%. If that long-run saving of 6% of earnings up to 
the maximum taxable earnings for Social Security (now $80,400) is seen 
as part of the current fiscal reforms, the combined effect is to reduce 
the relative tax burden on low and middle income families even more.
    Fifth, the large tax cut coming at this time will help to assure a 
stronger short-term recovery from the current economic slowdown. 
Although I do not believe that temporary increases and decreases in tax 
rates are useful for reducing business cycle fluctuations, it is 
certainly convenient now to have a tax cut that is going to be made for 
other reasons. The increase in after-tax incomes and the expectations 
that such increases will continue in the future will boost confidence 
as well as spending power. Increasing the short-term effect by starting 
the tax cuts at the beginning of the year would reinforce this 
favorable effect.
    Thank you.

    Chairman Thomas. Thank you very much, Doctor. Mr. 
Greenstein.

 STATEMENT OF ROBERT GREENSTEIN, EXECUTIVE DIRECTOR, CENTER ON 
                  BUDGET AND POLICY PRIORITIES

    Mr. Greenstein. Thank you, Mr. Chairman. I would like to 
talk about two issues: the cost of the tax cut in relation to 
the available surplus and how various types of Americans would 
be affected by it.
    Now, at first glance it looks quite affordable, a $3.1 
trillion surplus outside Social Security versus a $1.6 trillion 
tax cut. The problem is the available surplus is actually 
significantly smaller than 3.1, and the tax cut would actually 
consume significantly more than 1.6 of it. Let me explain.
    The 1.6 trillion figure is based on a Joint Tax Committee 
estimate done last May based on the economic and revenue 
forecasts of last May. That is two CBO forecasts ago. The 
current forecast is for a bigger economy with more revenue, and 
when you apply this tax cut to it, it would raise the cost of 
the tax cut, the Joint Tax Committee would estimate, by roughly 
$150 billion. In addition to that, when we ask not what is the 
cost of the tax cut, but how much of the surplus would it 
consume, we must include, as we must for any spending increase, 
as well the extra interest payments on the national debt, and 
those are 350 to 400 billion for this proposal. So when you add 
these items in, we are now at 2.1 trillion. That is before we 
get to any additional costs for accelerating the proposed tax 
cuts, and in particular it doesn't include the costs of dealing 
with the AMT problem.
    As I understand the Joint Tax Committee estimate, the Joint 
Tax Committee actually said the Bush tax cut would cost about 
200 to 300 billion more than this 1.6, but the AMT would cancel 
it out because if nothing is done about the AMT, it invades the 
middle class big time. I have every confidence this Congress 
will not allow the AMT to invade the middle class big time, but 
that adds another 200 to $300 billion to the cost, and if you 
do it just a couple years at a time in an extender-like manner, 
that doesn't change the fact that over the course of the decade 
another 200 to 300 billion out of the tax cut--out of the 
surplus would have to go to cover the tax cut's cost. So we are 
talking about more than 2 trillion.
    Let's talk about how much there really is in the surplus. 
It is 3.1 trillion outside of Social Security. Today I believe 
you will vote on a lockbox that covers the Medicare Hospital 
Insurance Trust Fund as well, and that reduces the available 
surplus to 2.7. But 2.7 isn't the appropriate figure for you 
all to use because the 2.7--what CBO does in estimating the 
surplus is CBO has to assume current law is followed in every 
place.
    CBO assumes that all roughly 20 extenders will all die, 
that you will not extend them. But of course you will extend 
them, as you should. CBO assumes the AMT will go from 1.3 
million families under it today to 15 million in 10 years. You 
won't allow that to happen. You should not. The CBO forecast 
assumes that $10 billion a year on average that go to farmers 
under 1 year at a time rather than permanent legislation will 
end. It won't end. Neither party will allow that.
    So when one does an assessment of the surplus outside 
Social Security and Medicare where you simply adjust for those 
items where maintaining current policy, continuing the 
extenders, keeping the AMT at the current level, continuing the 
payments to farmers at the current level and so forth, when you 
do that, that takes another 700 billion out, and that means 
there is about 2 trillion left. And I would urge that neither 
party should look at committing all 2 trillion. This is only a 
projection; 70 percent of it is in the second 5 years. We do 
not know for sure if it will materialize. We shouldn't commit 
100 percent of what is projected to be available over 10 years 
outside of Social Security and Medicare now.
    Now, the other area I wanted to cover was I will also add, 
although I won't take time to talk about it now, that there has 
been discussion of trigger mechanisms. I think they would be 
likely to be ineffective at dealing with this problem if the 
surpluses don't materialize.
    The other issue is who would actually receive the tax cuts. 
Now, I would differ with Dr. Feldstein. I don't think this is a 
proportional tax cut, but it is important to understand the 
difference. When he says it is proportional, he is looking at 
the percentage of income tax that various income groups pay now 
and the percentage of the income tax cut in this bill they 
would get. I would argue that while it is a useful standard, 
that it is not the most appropriate standard. Americans pay 
other taxes as well: payroll taxes, estates taxes, gasoline 
taxes. The more appropriate question is what percentage of the 
total Federal tax burden that various groups pay, and what 
percentage of the total tax cut here would they get.
    This is not just an income tax bill. Certainly it includes 
elimination of the estate and gift taxes, for example. When you 
look at those figures, you find the Treasury figures are that 
the top 1 percent of the population pays 20 percent of total 
Federal taxes and would get at least 36 percent of the total 
tax cuts in this package. When you look at the middle class, 
while many of them would certainly get significant tax cuts, it 
turns out that because many families either don't earn enough 
to owe 1,600 in income tax today, or do not have two children, 
that 85 percent of all households would get less than the 
$1,600 tax cut we hear mentioned. And of particular concern are 
the millions of families that have substantial tax burdens 
through the payroll tax primarily, but don't pay income tax, 
and who would be entirely left out.
    The President mentioned a couple of Saturdays ago a 
waitress making $25,000 a year. It turns out that if she has 
just $170 a month in child care costs, she gets no tax cut from 
the plan, although her payroll tax, after adjusting for the 
EITC, is still $2,300 a year. Overall, 12 million families with 
24 million children, a third of all children, would not receive 
anything from the tax cut; 55 percent of African American 
children and 56 percent of Hispanic children would not either.
    There were ways of providing relief to those low-income 
working families who are taxpayers. You can improve the earned 
income credit. One could extend the child credit to families 
that pay payroll but not income taxes, as a recent Brookings 
Institution paper recommends.
    And I was particularly surprised to find that the plan even 
leaves out something that was a bipartisan item for the last 18 
months, and that is that if you do marriage penalty relief, you 
should reduce marriage penalties on low-income working families 
along with middle- and upper-income working families. Low-
income families have some of the biggest marriage penalties 
because of the way the EITC works. The bills you twice sent to 
President Clinton that he vetoed had marriage penalty relief 
for lower income working families in it, but the Bush plan 
leaves even that out.
    So I think the bottom line that I would--I also would note 
that when you look at all taxes, including estate and payroll, 
not just income tax, it turns out that the biggest percentage 
reduction in total Federal taxes is at the top and the smallest 
at the bottom.
    So my conclusion is that this proposal runs the risk of 
absorbing the entire non-Social Security, non-Medicare surplus 
that is available when you take into account costs for things 
like the extenders and fixing the AMT, leaving little margin 
for error if the surpluses don't materialize fully, and 
squeezing out other priorities that I think should be a higher 
magnitude than this big a tax cut for the people at the top.
    I do think you should do a tax cut, but Congress can 
provide relief that still provides substantial middle-income 
reduction, does more for lower income working families, 
families the President says he cares about, and does it at a 
substantially lower cost and is, therefore, more fiscally 
prudent than the proposal the administration has set up.
    Thank you.
    [The prepared statement of Mr. Greenstein follows:]

 Statement of Robert Greenstein, Executive Director, Center on Budget 
                         and Policy Priorities

    I appreciate the invitation to testify today. I am Robert 
Greenstein, executive director of the Center on Budget and Policy 
Priorities. The Center is a nonprofit policy institute here in 
Washington that specializes both in fiscal policy and in programs and 
policies affecting low- and moderate-income families. The Center does 
not hold (and never has received) a grant or a contract from any 
federal agency.
    My testimony today focuses primarily on two aspects of the Bush 
Administration's tax proposal: the proposal's cost in relation to the 
available surplus, and how various types of Americans would be affected 
by the tax cut.
The Plan's Cost in Relation to the Available Surplus
    At first glance, the proposal may appear to be readily affordable. 
If the non-Social Security surplus totals $3.1 trillion over the next 
10 years and the tax cut costs $1.6 trillion, the tax cut would consume 
a little over half of the projected non-Social Security surplus. The 
problem is that neither of these numbers provides an accurate 
reflection of the fiscal situation: the proposed tax cut would consume 
substantially more than $1.6 trillion of projected surpluses, while the 
available surplus is considerably smaller than $3.1 trillion.

                    How Much Would the Tax Cut Cost?

    Let's look first at the widely cited $1.6 trillion figure. In fact, 
there is no cost estimate that shows the tax plan to cost $1.6 
trillion. The $1.6 trillion figure has been derived as follows.
     Last May, the Joint Tax Committee estimated the cost of 
the plan at $1.3 trillion over the 10 years from 2001 through 2011.
     This estimate showed no cost in 2001, because the plan 
wouldn't be in effect yet. Hence, the $1.3 trillion estimate was a 
nine-year estimate.
     The new budget period is 2002 through 2011. Adding the 
plan's cost in 2011, based on the assumption that the cost in 2011 is 
similar to the cost for the 2010 that the Joint Tax Committee reported 
last May, brings the cost to $1.6 trillion.
    But there is no Joint Tax Committee estimate that the plan costs 
$1.6 trillion. If an estimate were done today of the amount of the 
projected surpluses that the proposal would consume, the estimate would 
necessarily be considerably higher--most likely about $2.1 trillion. 
This is the case for two reasons.
     The May 2000 Joint Tax Committee estimate was based on the 
economic and revenue assumptions in use at that time. The new CBO 
budget projections assume a larger economy that produces more revenues. 
When the same tax cuts are applied to a larger economy that produces 
more tax revenue, they result in a larger dollar tax cut. The change in 
the economic forecast is expected to add approximately $150 billion to 
the plan's estimated cost.
     The $1.6 trillion figure does not include the increased 
interest payments on the debt that would result from using projected 
surplus funds for the tax cut rather than for paying down debt. These 
interest costs must be included when determining how much of the 
projected surplus the tax plan would consume. The tax plan would result 
in $350 billion to $400 billion in added interest payments on the debt.
     This brings to $2.1 trillion the figure the Joint Tax 
Committee and CBO would likely estimate to be the amount of the 
projected surpluses that the plan would consume, if no changes are made 
in the plan.
    Yet even this $2.1 trillion figure is low. It does not include 
several additional costs.
     The President has said he supports accelerating his 
proposed tax cuts and making some aspects of the tax cuts retroactive 
to January 1 of this year. The White House has not specified which 
aspects of the plan it wishes to see accelerated.
    The proposed rate reductions would not take full effect until 2006 
under the plan as it now stands. Making the rate cuts fully effective 
now would add $400 billion to the plan's cost over the 2002-2011 
period, including the added interest payments on the debt.
    Alternatively, making the doubling of the child credit and the 
establishment of a new 10 percent bracket fully effective now would add 
about $300 billion in cost.
     The $2.1 trillion cost is artificially low for a second 
reason--it is based on the assumption that Congress will fail to 
address key problems in the Alternative Minimum Tax. As this Committee 
knows, the AMT affected 1.3 million filers in 2000 but will hit more 
than 15 million filers by 2010 if it is not modified, including large 
numbers of middle-income families that are not engaged in heavy tax 
sheltering. The Joint Tax Committee has estimated that if no action is 
taken and the Bush plan is enacted as it now stands, it will cause an 
additional 12 million filers to become subject to the AMT by 2010, 
bringing the number of filers hit by the AMT to an astonishing 27 
million. Clearly, this should not occur, and virtually all observers 
are confident Congress will not let this happen. At his confirmation 
hearing, Treasury Secretary Paul O'Neill took note of the need to 
address these problems in the AMT.
    This matter directly affects the Bush plan. The Joint Tax Committee 
estimate of the cost of the Bush plan is artificially low because the 
Joint Committee had to assume the AMT would not be fixed (since there 
is no provision in the Bush plan to do so) and that the AMT 
consequently would cancel out several hundred billion dollars of tax 
cuts the plan otherwise would provide. Fixing the AMT problem so that 
the AMT continues to affect roughly the same number of taxpayers as it 
does today will increase the cost of the Bush plan by another $200 
billion to $300 billion. If Congress chooses to address the AMT problem 
a couple of years at a time (in the manner of the ``extenders''), that 
would not alter the fact that over the course of the decade, this full 
$200 billion to $300 billion cost still will have to be absorbed.
    This means the Bush plan would consume approximately $2.4 trillion 
in projected surpluses if none of the tax cuts are accelerated (the 
$2.1 trillion figure cited earlier plus the additional cost the tax 
plan has once the AMT is fixed) and more than that if the tax cuts are 
accelerated. Furthermore, these costs do not include:
     The cost of extending the expiring tax credits, which 
Congress will surely do;
     The cost of various tax reductions that Congress passed 
last year, such as pension tax legislation and larger marriage-penalty 
relief than President Bush is proposing;
     The cost of various health-insurance related tax 
preferences that the Bush Administration is proposing separate and 
apart from its big tax proposal; or
     Any corporate or capital gains tax cuts.

                         The Available Surplus

    Under the new CBO forecast, the projected surplus outside Social 
Security is $3.1 trillion over 10 years. However, as analyses issued 
over the past year by the Brookings Institution, the Concord Coalition, 
and our Center have noted, there is an important difference between 
CBO's estimate of the size of the non-Social Security surplus and the 
amount that actually is available for tax cuts and program initiatives.
    In making its surplus estimates, CBO follows certain rules that 
require it to assume implementation of various tax increases and 
program reductions that would occur if current law is followed but that 
would be highly unpopular and that virtually all observers believe will 
not take place. For example, about 20 popular tax credits and other tax 
preferences, generally known as the ``extenders,'' are typically 
renewed for only a few years at a time and are scheduled to expire in 
the next year or two. There appears to be little question that Congress 
will extend most or all of them. The CBO projections assume, however, 
that all of these tax credits will expire. Similarly, the CBO surplus 
projections assume the law governing the AMT will not be changed and 
millions of middle-class taxpayers will become subject to the AMT over 
the coming decade. The increased taxes those taxpayers are assumed to 
pay are part of CBO's surplus calculation. It is very unlikely, 
however, that Congress will sit idly by and let the AMT encroach 
heavily upon the middle class.
    Similar issues arise on the spending side. The rules CBO uses lead 
it to assume that federal payments to farmers will be slashed deeply. 
In recent years, Congress has provided an average of about $10 billion 
a year in payments to farmers that are made a year at a time rather 
than provided under a provision of permanent law. Since these payments 
are not governed by an ongoing statute, the CBO surplus estimates 
assume these payments will terminate after 2001. Of course, that won't 
occur.
    Questions arise with regard to discretionary spending as well. The 
CBO forecast assumes that funding for discretionary programs--including 
the defense budget--will simply remain over the coming decade at the 
2001 level, adjusted only for inflation. For that to occur, 
discretionary spending would have to fall in purchasing power per U.S. 
resident (since the population is rising) despite almost-certain 
increase in areas such as defense, education, and health research. 
Since 1987, non-defense discretionary spending has remained constant as 
a share of GDP--which means it has risen by more than the inflation 
rate--and in the last three years, as surpluses have emerged and 
defense spending has started back up, total discretionary spending has 
stayed even with GDP. Observers such as Bob Reischauer and Rudy Penner, 
both distinguished former CBO directors, have warned there is little 
chance that discretionary spending over the coming decade will remain 
at current levels, adjusted only for inflation.
    If one simply assumes that current policy (as distinguished from 
current law) is maintained in the area I've just discussed--that is, 
that the ``extenders'' are continued, the AMT is fixed so it remains at 
about current levels in terms of the proportion of taxpayers it 
affects, payments to farmers remain at current levels and discretionary 
spending remains at today's level in purchasing power per U.S. resident 
(which means discretionary spending would have to shrink as a share of 
GDP)--then $700 billion of CBO's projected surplus outside Social 
Security evaporates. To be prudent, policymakers should take this $700 
billion off the table when estimating how much they have available for 
the cuts and program initiatives, since this $700 billion is unlikely 
to materialize. If policymakers assume these funds are available, they 
risk using the same projected surplus dollars twice. Removing this $700 
billion reduces the available non-Social Security surplus to $2.4 
trillion.
    The portion of the projected surplus that would be in the Medicare 
Hospital Insurance trust fund also needs to be removed from the 
calculation. Both parties have appropriately said these funds should be 
set to the side and not used for tax cuts or other program expansions. 
Some $400 billion of the $3.1 trillion non-Social Security surplus 
occurs in the Medicaid HI trust fund. Removing these funds yields an 
estimate that $2.0 trillion over 10 years is available if the projected 
surpluses fully materialize.

  Does this Mean the 107th Congress Should Pass Tax Cuts and Spending 
                       Increases of $2 Trillion?

    Two trillion dollars still is a very large amount. But it would be 
unwise for Congress and the Administration to pass legislature this 
year that commits all of this amount. These figures are only 
projections. These large surpluses are not assured.
    Any number of events--such as slower-than-forecast economic growth 
or faster-than-expected growth in health care costs--could cause the 
projections to be too high. As CBO has pointed out, its track record 
shows that its budget projections are subject to considerable error, 
even in the short term. Since 1981, the CBO forecasts for the fifth 
year out has been off by an average of 3.1 percent of GDP. This means 
that if CBO's projection for 2006 is off by the average amount that its 
forecasts for the fifth year have been off in the past, its projection 
of the surplus in 2006 will be off by $400 billion. A $400-billion 
overestimate would mean we were again running on-budget deficits.
    Furthermore, more than 70 percent of CBO's projected surplus 
outside Social Security and Medicare would come in the second five 
years of the 10-year period. Projections made that far in advance are 
especially uncertain and prone to error. This means that if the full 
amount of the surplus projected outside Social Security and Medicare is 
consumed by actions the 107th Congress takes but the projections later 
prove to have been optimistic, sizable deficits outside Social Security 
and Medicare could return.
    Another reason that it would be unwise to consume all of the $2.0 
trillion in available projected surpluses is that even if the surplus 
forecast proves correct, acting now to commit all of the available 
surpluses for the next 10 years will leave no funds for subsequent 
Congresses to use to address needs that cannot be foreseen today but 
inevitably will arise. It is inconceivable that no such needs will 
emerge over the course of the decade. Such needs could be military, 
international, or domestic. While we cannot know today what these needs 
will be, we had better plan on some new problems emerging that will 
have to be addressed.
    A final reason that consuming all of the projected $2.0 trillion 
would be imprudent relates to Social Security and Medicare. If 
legislation to restore long-term Social Security solvency is to be 
enacted, a transfer of non-Social Security general revenues from the 
Treasury to the Social Security Trust Fund (or to private, individual 
retirement accounts) almost certainly will be required. Without such a 
transfer, the magnitude of the reductions in retirement benefits that 
will be required--regardless of whether a solvency plan includes 
individual accounts--will almost surely make any plan impossible to 
pass. As a result, policymakers ought to set aside, or reserve, a 
portion of the projected non-Social Security surplus funds for this 
purpose. To be prudent, a minimum of $500 billion over 10 years should 
be reserved for this purpose. (If 70 percent of the solvency gap is 
closed by other means, including benefit reductions, and only 30 
percent of the gap needs to be closed through additional revenues, $500 
billion will be needed from the non-Social Security, non-Medicare 
surpluses.)

             The Bottom Line on the Tax Cut's Affordability

    The projected surplus outside Social Security and Medicare is $2.7 
trillion over 10 years, of which $700 billion is likely to be noted 
simply to maintain current policies that command broad support. That 
leaves $2.0 trillion, some of which should be set aside to deal with 
the all-too-real possibility that the surpluses may not fully 
materialize and some of which is likely to be needed for Social 
Security and Medicare solvency legislation. This suggests that 
substantially less than $2 trillion should be committed now. Moreover, 
a portion of that amount will be needed for priorities in health care 
and other areas. Yet the Bush tax cut would consume well over $2 
trillion of projected surpluses, or more than 100 percent of what is 
realistically available. The tax cut is substantially too large.

                         What About a Trigger?

    Before turning to the question of who would benefit from the tax 
cuts, I would like to comment briefly on the idea of accompanying the 
tax cuts with a trigger that would stop the next phase of the tax cuts 
from taking effect if surpluses or the debt failed to reach some 
specified level. Such an approach may have initial appeal. Closer 
examination suggests, however, it has a significant risk of being 
ineffective.
    In the 1980s, Congress passed the Gramm-Rudman-Hollings law, which 
established year-by-year deficit targets and required unpopular actions 
to occur (specifically, across-the-board program reductions) if the 
deficit target otherwise would be missed. The law proved largely to be 
a failure. When the deficit target would be missed by a significant 
amount, Congress and the Administration resorted to budget gimmicks and 
creative accounting to make it appear on paper as though the target had 
been reached, thereby avoiding the unpopular action that otherwise 
would have been triggered. When that was not sufficient, Congress 
simply raised the deficit targets. The odds are substantial the same 
pattern would emerge here.
    Moreover, most provisions of the Bush tax cut would phase in fully 
by the fifth year, 2006. Seventy percent of the surplus that CBO 
projects outside Social Security, however, would come in the second 
five years, from 2007 through 2011, and it is the projections for these 
years that are the most uncertain and subject to larger error. A 
``trigger'' would have little effect in undoing the fiscal damage if 
the budgetary picture in those years was considerably less bright than 
currently forecast; most of the tax-cut provisions would already be in 
full effect.
    The much more prudent approach would be to enact a smaller tax cut 
now, place a portion of projected surpluses in a reserve available for 
neither tax cuts nor spending increases, and wait to see to what extent 
the projected surpluses materialize. Big tax cuts that will not take 
effect for several years do not respond to the current economic 
slowdown, so the danger here is entirely on one side--from overdoing it 
now and fostering fiscal problems down the road. If the type of 
surpluses that currently are forecast for future years do materialize, 
Congress can easily enlarge tax cuts and program initiatives at that 
time. Politically, it is far easier to come back and expand tax cuts 
than to reverse enacted tax cuts or enforce a trigger that may never be 
allowed to be pulled.
Who Would Receive the Tax Cuts?
    In presenting its tax-cut plan, the White House has placed emphasis 
on the plan's effects in helping lower-income working families, such as 
waitresses making $22,000 or $25,000 a year, as well as the beneficial 
effects that provisions such as the proposed doubling of the child 
credit would have on such families. Analysis shows, however, that the 
plan would not do very much for these families and would concentrate an 
unusually large share of its tax-cut benefits on those on the upper 
rings of the income ladder.

                    Effects on Lower-income Families

    The plan would provide no assistance to working-poor and near-poor 
families. The plan only affects families with incomes above about 150 
percent of the poverty line. (The exact level at which the plan begins 
to help families with children varies from about 130 percent to 180 
percent of the poverty line, depending on the number of children, the 
family's filing status, whether the family has child care costs, and 
other matters.)
    The plan bypasses working families with incomes below these levels 
because it only affects families that owe income tax before the Earned 
Income Tax Credit is applied. This does not mean that the plan provides 
a tax cut for everyone who pay taxes. Millions of families owe no 
income tax but pay substantial amounts of payroll tax, as well as other 
federal taxes such as taxes on gasoline.
    Thus, a single mother with two children who works full time and 
earns $22,000 pays no income tax but owes $1,234 in payroll tax (net of 
the EITC). She would receive no tax reduction under the plan. A 
waitress with two children who earns $25,000--an example the White 
House frequently cites--would receive no tax reduction if she incurs 
$170 a month in child care costs, not an unusual amount for such a 
single working parent. The waitress pays $2,325 in payroll tax net of 
the EITC.
    Overall, 12 million families with 24 million children--one of every 
three children in the United States--would receive no tax reduction. 
Some 80 percent of these families have workers. Some 55 percent of 
African-American children and 56 percent of Hispanic children live in 
families that would receive nothing from the proposed tax cut.
    There are a variety of ways to provide relief to low-income working 
families. These include improving the Earned Income Tax Credit and 
extending the child credit to such families by making it partially 
refundable, as a recent Brookings paper by Isabel Sawhill and Adam 
Thomas recommends.
    Some other low-income working families would receive small tax 
reductions. A family of four that earns $26,000 would have its income 
tax liability eliminated. That family, however, pays only $20 in income 
tax now. The family's principal tax burden comes from the payroll tax: 
it pays $2,689 in payroll taxes net of the EITC. Although some 
proponents of the Administration's tax proposal would describe such a 
family as receiving a 100 percent tax cut because its income tax 
liability has been eliminated, the family's overall federal tax burden 
would be reduced by less than three-quarters of one percent.

                           Marginal Tax Rates

    Some supporters of the Administration's proposal have noted that 
while such a family might get a modest tax cut in dollar terms, the 
family's ``marginal tax rate'' would be reduced by 15 percentage 
points. Presidential economics advisor Lawrence Lindsey has observed 
that many families in the $25,000 to $30,000 range face higher marginal 
tax rates than the wealthiest Americans do. If, however, the 
Administration's goal is to reduce marginal tax rates on the low-income 
working families that face the highest rates in the nation--surely a 
worthy goal--the plan falls short. Conservative and liberal analysts 
alike have long recognized that the working families that face the 
highest marginal tax rates are those with incomes between about $13,000 
and about $20,000. For each additional dollar these families earn, they 
lose up to 21 cents in the Earned Income Tax Credit, 15.3 cents in 
payroll taxes (including the employer's share), 24 cents to 36 cents in 
food stamp benefits, and additional amounts if they receive housing 
assistance or a child care subsidy on a sliding fee scale or are 
subject to state income taxes. No other Americans in any income bracket 
have as large a share of each additional dollar they earn ``taxed 
away.''
    Ways to reduce marginal tax rates for such families are available, 
well known, and not especially expensive. One can raise the income 
level at which the Earned Income Tax Credit begins to phase down as 
earnings rise and/or reduce the rate at which the EITC phases down. 
Bipartisan Senate legislation that Senators Rockefeller, Jeffords, and 
Breaux and legislation introduced last year follows such a course, as 
does legislation that Rep. Cardin introduced in the House. The proposal 
that Sawhill and Thomas outline in their new Brookings paper to make 
the child credit partially refundable for low-income working families 
also would lower marginal rates substantially for such families. The 
Administration's plan contains no such features.
    Furthermore, the Bush plan departs from a bipartisan consensus that 
formed in Congress over the past two years to reduce marriage tax 
penalties for low-wage working families, along with middle- and upper-
income families. Some of the most serious marriage penalties in the tax 
code are those that can face low-income working individuals as a result 
of the way the phase-out of the EITC is designed. Tax bills that 
Congress passed and President Clinton vetoed in both 1999 and 2000 
contained EITC reforms to provide marriage penalty relief for low-
income working families. Democratic alternative bills included such 
provisions as well; this issue had become truly bipartisan. The Bush 
plan contains no such marriage penalty relief, limiting its relief to 
families at higher income levels.
    The often-cited $1,600 tax reduction for a middle-class family of 
four also has been subject to some misunderstanding. A large number of 
individuals and families do not have children or have one child and a 
substantial share of the families with two or more children owe less 
than $1,600 in income taxes and hence would receive less than $1,600 in 
tax reductions. A significant majority of households would receive less 
than $1,600 under the proposal.
    I also would note that the $1,600 tax reduction for a family of 
four with a $50,000 income is not scheduled to occur until 2006 under 
the plan as now structured. For such a family, the tax reduction is 
$1,600 in 2006 dollars, or $1,400 in today's dollars. The purchasing 
power of this tax reduction would fall below $1,400 in today's dollars 
in years after 2006 because the child credit is not indexed.

                Tax Reductions for Higher Income Filers

    The average tax reductions for very-high income individuals and 
families would be quite large. It has been argued that such taxpayers 
would get a large share of the tax cut because they pay a 
correspondingly large share of the taxes and that low-income 
individuals and families would receive the largest percentage tax 
reductions. Neither of these statements turns out to be correct.
     The best data available on who pays what share of all 
federal taxes--including income, payroll, estate, excise, and other 
taxes--come from a major study conducted by Treasury career staff and 
released in September 1999. The study shows that the top one percent of 
families pays 20 percent of all federal taxes.\1\
---------------------------------------------------------------------------
    \1\ Following Treasury usage, ``families'' includes single people 
as well as family units. All families are included whether or not any 
member of the family files an income tax return. The ITEP model uses a 
similar definition.
---------------------------------------------------------------------------
     The top one percent of families would receive at least 36 
percent of the tax cuts under the Administration proposal when the plan 
is fully in effect. The top one percent also would have the federal 
taxes it pays reduced by a greater percentage than middle- or low-
income households, while low-income households would receive the 
smallest percentage tax cut of any group. These figures are discussed 
in the next section of this testimony.

                                The Data

    The data presented here on how the benefits of the Bush tax cut 
would be distributed come from two sources: an analysis by Citizens for 
Tax Justice, using the Institute for Taxation and Economic Policy 
(ITEP) model, and the aforementioned Treasury study on how the burdens 
of various taxes are apportioned among various income categories.
    The ITEP model that CTJ uses is a well-respected model developed in 
substantial part by former staff members of the Joint Tax Committee. 
CTJ tax distribution analyses, using the ITEP model, have been 
validated over the years by the fact that they generally have yielded 
results very similar to those the Treasury Department has produced.
    The CTJ analysis of the effect of the Bush plan (when the plan's 
provisions are fully in effect) finds the bottom 40 percent of families 
would receive four percent of the tax cuts, with the average tax cut 
for this group being $115. The bottom 60 percent of families would 
receive 13 percent of the tax cuts. The 20 percent of families exactly 
in the middle of the income spectrum would receive eight percent of the 
tax cuts and receive an average tax reduction of $453.
    By contrast, the top one percent of families would receive 43 
percent of the tax cuts, and their average cut would amount to $46,000. 
The top one percent would receive more in tax cuts than the bottom 80 
percent of the population.
    Some supporters of the Administration's proposal have cited 
alternative figures from the Joint Tax Committee that are said to show 
the proportion of the tax cut that would go to the top one percent of 
families would be significantly smaller. Those figures, however, really 
do not actually show that to be the case. The JCT figures in question 
include neither the effects of repealing the estate tax, which accounts 
for about one-quarter of all tax reductions in the plan when the plan 
is fully in effect, nor the effects of any provisions in the plan that 
do not take effect until after 2005. The part of the tax-rate 
reductions that would not take effect until 2006 is disproportionately 
beneficial to those in the top brackets. As a result, these JCT figures 
are not especially useful. The figures Citizens for Tax Justice has 
produced do not suffer from these omissions.
    There has been some debate in the past about the best methodology 
to use to determine what percentage of the estate tax is paid by people 
in different income categories and thus what percentage of the benefits 
from estate tax repeal would accrue to each income group. Under the 
ITEP model that CTJ uses, 91 percent of the estate tax is estimated to 
be paid by the top one percent of families. Virtually all of the tax is 
estimated to be paid by the top five percent of filers. Such results 
should not be surprising. IRS data show that the estate tax is levied 
only in the case of two percent of all deaths and that in 1997 half of 
all estate taxes were paid by the 2,400 largest taxable estates--the 
estates of the wealthiest one of every 1,000 people who died.\2\
---------------------------------------------------------------------------
    \2\ See Iris Lav and Joel Friedman ``Estate Tax Repeal: A Costly 
Windfall for the Wealthiest Americans,'' Center on Budget and Policy 
Priorities, February 6, 2001.
---------------------------------------------------------------------------
    To help resolve issues related to how to measure the incidence of 
the estate tax, the Treasury study issued in September 1999 includes a 
major analysis of the distribution of the estate tax by income 
category.\3\ Since publication of this study, Treasury has used its 
results in the distributional analyses it has undertaken.
---------------------------------------------------------------------------
    \3\ ``U.S. Treasury Distributional Analysis Methodology,'' 
Department of the Treasury, OTA Paper 85, September 1999.
---------------------------------------------------------------------------
    The Treasury findings on who pays the estate tax are broadly 
similar, although not identical, to the estimates in the ITEP model, 
which was constructed before the Treasury study became available. The 
Treasury study estimates that the top one percent of families pay 64 
percent of the estate tax (and thus would get 64 percent of the tax-cut 
benefits that would result from estate tax repeal), rather than paying 
91 percent of the tax as the ITEP model estimates. The Treasury and 
ITEP figures on the proportion of the estate tax paid by the top five 
percent of families, however, are quite similar; the Treasury study 
estimates the top five percent of families pay 91 percent of the estate 
tax, as compared to 100 percent of the tax under the ITEP model. Under 
both sets of estimates, the top 20 percent of families pay virtually 
all of the estate tax, and the tax does not affect the other 80 percent 
of the population.
    Accordingly, another way to estimate the effect of the Bush tax cut 
on different income groups is to take the CTJ estimate but to modify it 
by substituting the Treasury estimates on the incidence of the estate 
for the estimates in the ITEP model. Under this approach, the top one 
percent of the population is estimated to receive 36 percent of the tax 
cuts under the Bush plan, rather than the 43 percent the CTJ analysis 
estimates, and to receive an average tax cut of $39,000 rather than 
$46,000. The top 20 percent of families still is found to receive 71 
percent of the tax cut, the same percentage as under the CTJ analysis. 
Similarly, the bottom 40 percent of families still is found to receive 
four percent of the tax cut.
    Under either approach, the tax cut is found to be tilted heavily 
toward those with very high incomes and to provide only a modest 
percentage of its tax-cut benefits to the types of families the White 
House last week presented as major beneficiaries. Under both 
approaches, the share of the tax cuts that would go to the top one 
percent would be roughly double the share of the federal taxes this 
group pays, and the top one percent would receive more in tax cuts than 
the bottom 80 percent of the population combined.

        Who Would Receive the Largest Percentage Tax Reductions?

    White House officials have argued that lower-income families would 
receive the largest percentage tax reductions. These statements rest on 
data on the percentage reduction in families' income tax burdens. The 
most relevant data, however, are those on the percentage reduction in 
families' overall federal tax burdens. Since low- and moderate-income 
families pay more in other federal taxes--principally the payroll tax--
than in income taxes and often have very small income tax liabilities, 
it is possible to eliminate those income tax liabilities without 
providing a family a substantial tax cut or reducing the family's total 
federal taxes by a very large percentage.
    When the percentage reduction the Bush tax cut would make in total 
federal tax burdens is examined, a different picture emerges. Under the 
Bush plan, the top one percent would receive a much larger percentage 
reduction in the federal taxes they pay then would any other income 
group. The percentage tax reduction for low-income families would be 
only about half that which the top one percentage of families would 
receive. (See Table 1.)

                     Table 1.--Percentage Reduction in Federal Taxes Under the Bush Tax Plan
----------------------------------------------------------------------------------------------------------------
                                                                                          ITEP Model, but using
                         Income group                             ITEP Model (Citizens     the estimates on who
                                                                    for Tax Justice)             pays tax
----------------------------------------------------------------------------------------------------------------
Bottom 20%....................................................                    -5.5%                    -5.5%
Second 20%....................................................                    -6.5%                    -6.5%
Middle 20%....................................................                    -7.3%                    -7.3%
Fourth 20%....................................................                    -7.2%                    -7.3%
Next 15%......................................................                    -6.1%                    -6.7%
Next 4%.......................................................                    -4.2%                    -6.4%
Top 1%........................................................                   -13.6%                   -11.6%
----------------------------------------------------------------------------------------------------------------

              The Child Credit and the 10 Percent Bracket

    The figures that show the small percentage of the tax cut that 
would go to middle-or low-income families may seem surprising given the 
inclusion in the proposal of the provisions to double the child credit 
and to create a new 10 percent bracket. These have been presented as 
proposals designed in substantial part to benefit lower-income working 
families and help them enter the middle class. In fact, only a modest 
share of the tax-cut benefits from these two proposals would go to low-
or moderate-income families; much larger shares would go to high-income 
families. And as noted, approximately one-third of children would not 
benefit from either proposal.
    Consider the proposal to raise the child credit from $500 per child 
to $1,000. This proposal would cut taxes for families with two children 
that have incomes up to $300,000. Those who would benefit most are 
filers with incomes in the $110,000 to $250,000 range; they would 
receive the largest tax cuts under this proposal because the Bush plan 
not only would double the child credit but also would raise the income 
level at which the child credit starts to phase down from $110,000 to 
$200,000 and slow the rate at which it phases out so that families with 
two children and incomes up to $300,000 would benefit from it. 
Currently, filers with incomes above $130,000 are ineligible for the 
credit. For many of these relatively affluent families, the child 
credit would rise from zero to $1,000 per child. For millions of 
children in low- and moderate-income working families, by contrast, the 
child credit would remain at zero or at its current level of $500 per 
child or would rise to less than $1,000 per child (because their 
families would have insufficient income tax liability against which to 
apply the increase in the child credit). Faced with a choice between 
extending the credit to children in low-income working families that 
pay payroll taxes but no income tax and extending it to children in 
families in the $130,000 to $300,000 range, the Administration chose 
the latter course.\4\
---------------------------------------------------------------------------
    \4\ For families with more than two children, the income range 
would extend even higher than $300,000.
---------------------------------------------------------------------------
    As a consequence, when the increase in the child credit is full in 
effect:
     Some 82 percent of the benefits from the child credit 
proposal would accrue to the 40 percent of families with children with 
the highest incomes. Only three percent of the benefits from this 
proposal would accrue to the bottom 40 percent of such families.\5\
---------------------------------------------------------------------------
    \5\ Institute for Taxation and Economic Policy, special data run 
for the Children's Defense Fund.
---------------------------------------------------------------------------
     The top 20 percent of families would receive 46 percent of 
the tax-cut benefits from this proposal, a larger share than any fifth 
of the population would receive.

                             The Estate Tax

    The feature of the proposal that has the largest effect in making 
the plan so disproportionately beneficial to those at the top of the 
economic scale is the proposed repeal of the estate tax. This tax is 
levied on the estates of only the most affluent two percent of 
individuals who die. Moreover, in 1997, the 2,400 largest estates--the 
estates of the wealthiest one of every 1,000 people who died--bore half 
of the estate tax. Had there been no tax, the estates of these very 
wealthy individuals would have received an average tax reduction of 
$3.5 million each.
    Families farms and small businesses do not figure heavily hear. Of 
the approximately 2.3 million people who died in 1998, only 47,500--or 
about two percent--left estates that were taxable. Of those estates, 
there were just 1,418--or three percent of the taxable estates--in 
which a family business or family farm constituted the majority of the 
estate. This means that a family business or family farm constitutes 
the majority of the estate for only six of every 10,000 people who die. 
Furthermore, a Treasury analysis has found that such estates paid less 
than one percent of all estate taxes. Relief can be provided to such 
estates, and other reforms made in the estate tax, for a fraction of 
the cost of repealing it.
    In addition, it is beginning to be recognized that repeal of the 
estate and gift taxes would open enormous loopholes in other parts of 
the tax code that could substantially increase the cost of estate tax 
repeal beyond the levels the JCT has estimated. The matter is explored 
in a recent issue of the journal Tax Notes by estate tax attorney 
Jonathan Blattmachr and Hofstra law professor Mitchell Gans. Similarly, 
a recent New York times article by David Cay Johnston reports that 
estate tax attorneys interviewed for the article generally concurred 
that repeal of the estate and gift tax would spawn major new tax-
avoidance strategies.
    For example, without the gift tax, a wealthy investor could 
transfer stock that has appreciated in value by $100 million to an 
elderly relative, who agreed simply to hold the stock. The elderly 
relative then would return the stock to the donor when he died, through 
a provision in his will. the investor would thereby escape capital 
gains tax entirely on the $100 million profit. This is just one of a 
number of gaping loopholes that repeal of the estate and gift tax 
threatens to open in the tax code.
Conclusion
    The Bush tax proposal would likely absorb the entire projected non-
Social Security surplus that is likely to be available, leaving little 
margin for error if the surpluses do not materialize fully and 
squeezing out other priorities that should rank higher than giving tax 
cuts of this magnitude to those who are at the pinnacle of the income 
scale, have done the best in recent years, and are least in need of a 
very large tax cut. Congress can provide relief that still provides 
significant tax reduction to middle-income families and is more 
favorable to the lower-income working families the President says he 
cares about at a far lower cost than the rather extravagant and 
lopsided Bush proposal.

                                


    Chairman Thomas. Thank you very much, Mr. Greenstein. Dr. 
Hassett.

    STATEMENT OF KEVIN A. HASSETT, PH.D., RESIDENT SCHOLAR, 
                 AMERICAN ENTERPRISE INSTITUTE

    Dr. Hassett. Thank you very much, Mr. Chairman, Minority 
Leader Rangel.
    Mr. Chairman, we are in a period of enormous surpluses, and 
you may have noticed that those surplus estimates have been 
going up over time. There is a good reason for that. There is 
academic research that suggests that the revisions tend to be 
positively correlated with one another. That is kind of a 
technical thing to say, but practically what it means is that 
the odds are next year when we are sitting here, hopefully, and 
talking again about another tax cut, then we will have an 
upward revision of the surplus if everything goes as it usually 
does. Indeed, the effect of adding the last year, 2012, and 
taking away the first year, that in itself will probably add 
about $700 billion to the surplus.
    And so while this plus is somewhat uncertain, there are 
risks. The risks, I believe, are very, very prudently balanced 
in the CBO forecast.
    We should also, as we start to think about what we are 
going to do with these surpluses, keep in mind that it is not 
free money. It is not a surplus that happened just because the 
economy was booming. Indeed, millions of Americans have 
experienced in recent years and will experience in the forecast 
horizon something that economists have dubbed real bracket 
creep. Because of our progressive tax system, individuals are 
pushed into higher tax brackets as the economy grows. Since our 
tax brackets are only indexed to factor out inflation as the 
economy grows, everybody gets pushed to the right. These 
individuals are hit with automatic, if stealthy, tax increases.
    Recently the boundary between the 15 and 28 percent 
brackets has begun to sweep through the center of the income 
distribution, hitting lots and lots of people. By an estimate 
that I performed recently, about 10 percent of taxpayers will 
move above the 15 percent bracket by 2010. So people are 
getting automatic tax hikes in this forecast, and if we provide 
tax relief, in some sense we are offsetting the tax hikes that 
are already entrained.
    Now, I believe, Mr. Chairman, that the current situation is 
one where we should consider moving the President's plan 
forward into the current year. While it is impossible to know 
with certainty whether a recession is near, one thing is 
extremely clear: Fiscal policy which is racking up surpluses is 
tighter now than it has ever been this close to a recession. 
Bad medicine can make a sick patient worse. There is a 
significant risk that tight fiscal policy will be in the 
influence margin. It pushes the economy into recession or makes 
the recession a lot worse.
    Indeed the last time we approached a slowdown with 
restrictive fiscal policy, the economy responded to high 
surpluses and a general weakening economy by posting the 
steepest decline in real GDP in post war history, dropping a 
whopping 10.3 percent in the first quarter of 1958. That is how 
far back you have to go to see something like the current 
situation. Now, currently--back then the surplus was forecast 
to be about 1 percent of GDP, and currently we are looking at 
something two to three times that size.
    Now, there is no question that fiscal policy can help lower 
the risks of a repeat of that experience. While the theoretical 
response of the economy to a tax cut depends on monetary policy 
as well, macroeconomists who have analyzed the history of U.S. 
tax policy have generally found that the stimulus associated 
with a tax cut is from one to two times the size of the cut. 
Accordingly, if the President's plan were accelerated 
aggressively into this year, we could expect GDP to be higher, 
all else equal, by perhaps as much as 1 percentage point, with 
the effect taking five to seven quarters. Such a stimulus could 
significantly change the odds of recession.
    That there is general agreement surrounding the positive 
effects of such a stimulus may be puzzling to those who have 
heard that economists generally agree that fiscal policy has 
had little effect on past recessions. Economists Christina and 
David Romer recently wrote an exhaustive study of the history 
of fiscal and monetary policy which clears up the mystery. They 
found that fiscal measures generally have failed to push the 
economy out of recession because they have typically been too 
small to have much of an effect. Indeed, large fiscal stimulus 
packages have generally not been passed near cyclical drops. 
Instead, they have historically emerged only because of slow 
recoveries, as was the case, for example, with the 1964 tax 
cut.
    If the President's plan were passed today, it would be 
neither too slow nor too meek. Indeed, the economic data 
indicate that the economy posted positive growth at the end of 
last year. If a recession is under way, it is starting right 
about now.
    Our current situation is unusual for another reason, Mr. 
Chairman. While the short-run forecasts show a significant 
surplus, long-run forecasts indicate that there is a large 
deficit, mostly because of the Social Security payments due 
when the baby boomers retire. Until recently almost every 
observer supported using a significant portion of even the on-
budget surplus to retire government debt in anticipation of the 
coming deficits. However, surplus deficits have soared so much 
recently, by $2 trillion in the last year alone, that we must 
reexamine the effects of such a policy.
    One of the main objections that I would raise toward 
allowing the surpluses to buildup, Mr. Chairman, is that they 
could build up to an enormous hoard in a relatively short time. 
Roughly half of the outstanding national debt is debt that we 
won't be able to buy back, and so relatively quickly the 
government is going to be in a position where it is going to 
have to invest these surpluses in private assets. Projecting 
forward, I have calculated recently that perhaps as much as $20 
trillion of private assets will be held by the government if 
current policies remain unchanged by 2020. To put that in 
perspective, the current market value of all equities in the 
U.S. is about $17 trillion.
    No, the best preparation for our long-run deficit is to put 
our tax house in order and use the Tax Code to stimulate 
savings and capital formation. On this basis the Bush plan has 
much to recommend it as well. There is, for example, a wealth 
of evidence that lower marginal tax rates stimulate 
entrepreneurship and economic activity. While I am unaware of a 
specific effort to provide estimates of these effects for the 
Bush plan specifically, I have taken two recent papers and 
amended them as best I can on the back of an envelope and 
calculated that aggregate output 10 years from now should be 
between 2 and 4 percentage points higher if we pass the Bush 
plan. If that happens, then we will have $700 billion extra to 
play with and use to address our important national problems at 
that time.
    Thank you.
    [The prepared statement of Mr. Hassett follows:]

   Statement of Kevin A. Hassett, Ph.D., Resident Scholar, American 
                          Enterprise Institute

    Chairman Thomas, minority leader Rangel, distinguished 
representatives and colleagues, it is a great privilege to be afforded 
the opportunity to speak with you today about the President's tax 
proposals. As an economist, I have been studying the effects of taxes 
on the economy for over a decade, first as a professor at Columbia 
University, then as a senior economist at the Federal Reserve, and now 
as a resident scholar at the American Enterprise Institute. I strongly 
support the plan proposed by President Bush, and appreciate the 
opportunity to share my reasoning with you.
Large Surpluses Make Tax Cuts Affordable
    Currently, the CBO forecasts that the total surplus over the next 
ten years will be about $5.6 trillion, with $3.1 trillion of that ``on-
budget.'' \1\ The President's relatively cautious plan is to dedicate a 
bit more than half of this surplus to tax relief. While there are 
significant risks to this forecast, the odds are that it will be 
revised upward in subsequent revisions. I expect this to happen for two 
reasons. First, academic research has shown that revisions tend to be 
positively correlated over time.\2\ If there is an upward revision to 
today's CBO forecast, there is more likely to be another upward 
revision the next time as well. Second, we are currently in a period 
where compounding is making surpluses bigger and bigger over time, with 
the total surplus now estimated to be $889 billion in 2011 alone. Next 
year at this time the CBO's 10-year forecast will include 2012 and 
remove 2002, which should, all else equal, add approximately another 
$700 billion to the 10-year surplus estimate. Putting the two effects 
together, if the President's plan is passed as is, the odds are that 
next year the CBO on-budget forecast will still be in the neighborhood 
of $2 trillion. Relative to GDP, even that surplus would be remarkable 
by historical standards. Some observers have noted that there is also a 
downside risk associated with the possibility of recession. However, 
the two effects I just mentioned would likely dwarf any other 
developments. The CBO recently estimated, for example, that a recession 
would lower the current 10-year forecast by only $140 billion.\3\
---------------------------------------------------------------------------
    \1\ Congressional Budget Office, 2001, ``The Budget and Economic 
Outlook: Fiscal Years 2002-2011.''
    \2\ Auerbach, A. February 1995, ``Tax Projections And The Budget: 
Lessons From the 1980s,'' NBER, Working Paper #5009.
    \3\ Congressional Budget Office, 2001, ``The Uncertainty of Budget 
Projections,'' in ``The Budget and Economic Outlook: Fiscal Years: 
2002-2011,'' chapter 5.
---------------------------------------------------------------------------
    As we consider options for the use of these surpluses, it is 
important that we remain aware that the surpluses are partly the result 
of marginal tax rate increases. Here I refer to what economists have 
dubbed ``real bracket creep.'' Because of our progressive tax system, 
individuals are pushed into higher tax brackets when their incomes 
grow. When the economy expands, the incomes of Americans increase. 
Since our tax brackets are only indexed to factor out inflation, not 
real growth, a large number of taxpayers are pushed into higher tax 
brackets over time. These individuals are hit with automatic--if 
stealthy--marginal tax rate hikes. Recently, the boundary between the 
15 and 28 percent brackets has begun to sweep through the center of the 
income distribution, and accordingly, this effect is becoming quite 
large. For example, extrapolating recent trends, more than 10 percent 
of taxpayers will move above the 15 percent bracket by 2010 with the 
majority of these individuals experiencing a 13 percentage point 
marginal tax rate hike.\4\ While the complexity of this issue makes 
precise statements concerning the revenue effects of real bracket creep 
difficult, make no mistake, a good portion of the surplus is 
attributable to these automatic tax hikes.
---------------------------------------------------------------------------
    \4\ For details of the calculations see: Hassett, K., October/
November 2000, ``A Tax Phantom is Stalking You,'' The American 
Enterprise.
---------------------------------------------------------------------------
    These high surpluses occur at a time where we face significant 
short and long-run challenges.
The Tax Cut and a Slowing Economy
    There are many signs that the economy is slowing. The widely 
followed National Association of Purchasing Managers survey index, for 
example, is in a range that in the past has always signaled negative 
economic growth for the economy as a whole. If a few quarters of 
negative growth are strung together, then we will be in recession and 
many will experience painful disruptions to their lives. If the 
recession is typical, for example, roughly 3 million Americans will 
lose their jobs.
    While it is impossible to know with certainty whether a recession 
is near, one thing is extremely clear. Fiscal policy, which is racking 
up large surpluses, is tighter now than it has ever been this close to 
a recession. Bad medicine can make a sick patient worse. There is a 
significant risk that tight fiscal policy will be the influence, at the 
margin, that pushes the economy into recession, or a key factor making 
a recession worse. Indeed, the last time we approached a slowdown with 
restrictive fiscal policy the economy responded to high surpluses and a 
general weakening in consumer demand by posting the steepest decline in 
real GDP in post-war U.S. history, dropping a whopping 10.3 percent 
(annual rate) in the first quarter of 1958. At the time, the surplus 
was about 1 percent of GDP. Currently, it is forecast to be more than 
twice that high.
    There is no question that fiscal policy can help lower the risks of 
a repeat of that experience. While the theoretical responses of the 
economy to a tax cut depends on monetary policy as well, 
macroeconomists who have anlayzed the history of U.S. tax policy have 
generally found that the stimulus associated with a tax cut is from one 
to two times the size of the cut.\5\ Accordingly, if the President's 
plan were accelerated into this year, we could expect GDP to be higher, 
all else equal, by about 1 percentage point, with the effect taking 
from 5 to 7 quarters from the passage of the bill to run its course.\6\ 
Such a stimulus could significantly change the odds of recession.
---------------------------------------------------------------------------
    \5\ See, for example, Blanchard, O., and Perotti, R., July 1999, 
``An Empirical Characterization of the Dynamic Effects of Changes in 
Government Spending and Tax On Output,'' NBER, Working Paper #7629; and 
Romer, C., and Romer, D., June 1994, ``What Ends Recession?'' NBER 
Working Paper #4765.
    \6\ The timing is taken from Blanchard and Perotti. Since the 
President's plan is a permanent tax cut, the multiplier should likely 
be larger than historical estimates based on an empirical analysis of 
the many temporary cuts in post-war U.S. history.
---------------------------------------------------------------------------
    That there is general agreement surrounding the positive effects of 
such a stimulus may be puzzling to those who have heard that economists 
generally agree that fiscal policy has had little effect in past 
recessions. Economists Christina and David Romer recently wrote an 
exhaustive study of the history of fiscal and monetary policy which 
clears up the mystery.\7\ They found that fiscal measures generally 
have failed to push the economy out of recession because they have 
typically been too small to have much of an effect. Indeed, large 
fiscal stimulus packages have generally not been passed near cyclical 
troughs. Instead, they have historically emerged only because of slow 
recoveries, as was the case, for example, with the 1964 tax cut.
---------------------------------------------------------------------------
    \7\ Romer, C., and Romer, D., June 1994, ``What Ends Recession?'' 
NBER Working Paper #4765.
---------------------------------------------------------------------------
    If the President's plan were passed today, it would be neither too 
slow nor too meek. Indeed, the economic data indicate that the economy 
posted positive growth in the fourth quarter of 2000. If a recession is 
underway, it began in early 2001, and there is ample time to do 
something about it. If the tax cut plan is delayed or rejected, we run 
a significant risk of repeating past mistakes.
    I should note that the view that a stimulus could now be effective 
is not an endorsement of Keynesian tax policy. Back in the 1960s, many 
Keynesians believed that economic fluctuations could be offset by tax 
policy. If consumers tend to consume too little in a downturn, then 
government could, it was thought, fix that with tax policy. A big tax 
cut, timed correctly, would boost spending and help push the economy 
out of the doldrums. The Keynesian theory applied on the upside as 
well. Tax increases in good times were recommended to stop a booming 
economy from overheating.
    It was Nobel-laureate economist Milton Friedman who first pointed 
out the key problem with such policy regime: It only works if citizens 
are extremely shortsighted. Consider: If a temporary tax cut gives you 
$1,000 today, but you know that you will have to pay it back next 
year--with interest--how much will you change your behavior? If you're 
like most people, not very much.
    This does not mean all government policies are ineffective. On the 
contrary, if firms and individuals are rational and forward looking, 
high taxes can have enormous negative effects on the long-run health of 
the economy. But if you just jigger taxes up and down from year to 
year, hoping to manipulate the economy, you will fail. Taxes can set 
the level of activity around which the economy fluctuates, but they 
have very little effect on the fluctuations themselves.
    The President's tax cut is not Keynesian for one simple reason. He 
does not plan to raise tax rates as soon as the economy starts to boom 
again because the current surplus is large enough to accommodate his 
tax cut. Under the Bush plan, a taxpayer would pay lower taxes this 
year and again in the future. If experience is any guide, such 
permanent tax cuts are likely to have large positive effects. His plan 
takes us to a new and higher level.
Long Run Challenges
    Our current situation is unusual for another reason. While the 
short run forecasts show a significant surplus, long run forecasts 
indicate that there is a large deficit, mostly because of the Social 
Security payments due when the baby boomers retire. Until recently, 
almost every observer supported using a significant portion of even the 
on-budget surplus to retire government debt in anticipation of the 
coming deficits. However, surplus estimates have soared so much 
recently--by $2 trillion in the last year alone--that we must reexamine 
the effects of such a policy.
    According to the Treasury Department, total government debt held by 
the public is a bit more than $3 trillion. With no change in tax 
policy, projected surpluses would pay down the entire debt by around 
2008. Government could not choose to just hold the cash, as that would 
decrease the monetary base and cause a potentially destructive 
deflation. It will have to decide what to buy with that money. As much 
as half of existing government debt may be almost impossible to retire, 
since savings bonds, for example, often aren't redeemed until maturity, 
and because many holders of long-term treasury bills will be unwilling 
to sell them back to the government. Adjust for these factors and we 
may well be building a sizable hoard of assets in just a few years.
    How big could the hoard get? Investing that much public money would 
likely mean the government purchase of stocks, because only equity 
markets are large enough to absorb such inflows and still remain 
liquid. Assuming the Treasury begins to invest surpluses in the stock 
market as soon as it has retired all the debt that it can, and that 
these investments earn a 10% annual return, our government could be on 
a stock-market portfolio worth about $20 trillion in twenty years. To 
put that in perspective, the current market value of all equities in 
the U.S. is about $17 trillion, according to the Federal Reserve. 
Projecting forward, the U.S. government could own about one-fifth of 
all domestic equities.
    Federal Reserve Chairman Alan Greenspan and others have cautioned 
against such a large scale intrusion by the government into the private 
economy and I concur. While it is possible to contrive conditions under 
which such investments could be neutral, the potential for disruptive 
influences to emerge is significant. The experience with U.S. state 
governments has not been reassuring. As Sebastian Mallaby wrote 
recently in the Washington Post, ``the California Public Employees' 
Retirement System has no tobacco stocks in its $171 billion portfolio, 
and several states bend over to invest in local companies.'' \8\ As 
soon as the government picks and chooses which things to invest in, it 
will change prices and the allocation of resources. Think, for example, 
of the increase in price that occurs when a firm is placed in the S&P 
500 index. Making the government list would be much, much better. This 
argues against allowing the surpluses to build up in anticipation of 
the Social Security shortfalls.
---------------------------------------------------------------------------
    \8\ Mallaby, S., February 5, 2001, ``Greenspan on Going Private,'' 
The Washington Post.
---------------------------------------------------------------------------
    The best preparation for our long run deficit is to put our tax 
house in order and use the tax code to stimulate savings and capital 
formation. On this, the Bush plan has much to recommend it as well. 
There is, for example, a wealth of evidence that lower marginal tax 
rates stimulate entrepreneurship and economic activity.\9\ While I am 
unaware of a specific effort to provide an accounting of the dynamic 
benefits of the Bush plan specifically, two recent works identifying 
the likely benefits of tax reforms in general imply, by my 
calculations, that aggregate output will be between 2 and 4 percentage 
points higher ten years from now if the President's plan becomes law. 
While there is a substantial uncertainty surrounding so complex a 
calculation, if this estimate turns out to be correct, then the output 
of the United States may be as much as $700 billion higher in 2011 if 
the President's proposal is enacted than it would be otherwise. That 
extra national income will certainly help our country face the economic 
challenges of the next decade.
---------------------------------------------------------------------------
    \9\ See the review in Judd, K., forthcoming, ``The Impact of Tax 
Reform in Modern Dynamic Economies, ``Transition Costs of Fundamental 
Tax Reform, Hassett, K. and Hubbard, R.G., eds. See also, Altig, D., 
Auerbach, A., Kotlikoff, L., Smetters, K., and Walliser, J., 
forthcoming ``Simulating Fundamental Tax Reform in the United States.'' 
American Economic Review.
---------------------------------------------------------------------------

                                


    Chairman Thomas. Thank you very much.
    Dr. Feldstein, I think I heard a portion of your testimony 
dealing with the fact that the true cost of the tax cut would 
be the 1.6 that you would initially spend, but because of the 
value of spending it, you get something back, so it would only 
be 1.2. Isn't that a dynamic scoring approach?
    Dr. Feldstein. It is what has been called a dynamic scoring 
approach, but it is a very narrow construct. It is not about 
what happens to growth in general. It focuses just on two 
things: how much people earn and the form in which they take 
their compensation. And the historic record on what has 
happened after previous tax changes quite conservatively 
suggests that that is the kind of increase in taxable income, 
and therefore reduction in the tax costs that would come about, 
about one-quarter of the official estimate.
    Chairman Thomas. And I just wanted to lay that on the table 
before any of my other friends did, because I think we reached 
agreement in the earlier hearing that we were either going to 
be static on both sides of the legend, or we were going to be 
dynamic on both sides of the legend.
    We heard Members earlier discussing the reduction of the 
money available in quite a dynamic way, but were unwilling to 
attribute any dynamism to the plus side. So I appreciate that, 
and I probably believe you, but I think we are going to check 
at least for the current time our dynamic guns at the door, and 
we will deal with the Congressional Budget Office and the 
others on the staff.
    Dr. Feldstein. At least when people go to bed at night, 
they should feel comfortable that they have that little hidden 
reserve there, or not so little hidden reserve, because they 
have not used all the artillery that is available.
    Chairman Thomas. Mr. Greenstein, I understand the way you 
responded to Dr. Feldstein's analysis of the proportionality of 
the income tax provision was that it was not the most 
appropriate way to look at Americans and Federal taxes. And you 
went into payroll, estate, gasoline and other taxes. Setting 
that aside, I would like to go back to the income tax aspect 
because that is what we are looking at today.
    None of us would dispute the fact--in fact, I think the 
President will tell that you that one of the reasons he got 
elected, he believes, is because he faced the question 
foursquarely on Social Security in terms of needing to do 
something about payroll taxes. In fact, if you looked at a 
distribution chart on payroll taxes alone, you might see some 
interesting anomalies between high-income earners and low-
income earners and return on investment being contributed to 
the Social Security fund.
    But my question would be in terms of your analysis, setting 
aside the payroll taxes, the estate taxes, the gasoline taxes, 
the inheritance tax, because today we are just looking at the 
President's income tax proposal, if you were to look at it in 
terms of a distributional chart of Americans on income taxes, 
would you tend to agree with Dr. Feldstein or still disagree 
with him?
    Mr. Greenstein. Let me make two comments, Mr. Chairman. 
First, if this were only an income tax bill, I would agree that 
that would be the appropriate standard. If you were to 
announce--or the President, I should say, were to announce that 
he was removing the estate and gift tax provision from the 
bill, and that it were purely a bill to make changes in income 
taxes, then I think that the way Dr. Feldstein has proposed to 
look at it would be correct, but we are not only discussing 
income.
    Chairman Thomas. No, no, that is fair enough, although 
there may be some discussion that we may want to look at, 
marginal rates or other items, prior to the rest of the 
President's package. And my understanding is if we were to do 
that, look at marginal rates, for example, or maybe the child 
credit, that the proportionality that Dr. Feldstein talked 
about would indeed be there, at least in terms of that portion.
    Mr. Greenstein. If you look at the income tax alone from 
some incomplete tables, and I will explain in a minute why they 
are incomplete, the Joint Tax Committee did last year, it would 
suggest--and you could have two different ways of phrasing it, 
and they would both be right--it would suggest that the Bush 
plan would make the income tax slightly less progressive. You 
could say that the slightly was so slight that you were going 
to call it proportional.
    The problem with that Joint Committee chart was that it 
only went through 2005, and as you know, the rate cuts, the 
child credit changes and so forth phase in through 2006, and it 
looks like--although I have not done a thorough analysis of 
this, it looks like the last year of the phase-in is big and 
maybe a little more geared toward the top, so we would really 
need figures through 2006.
    But the point I want to come back to, Mr. Chairman, is that 
when fully in effect, 24 percent of this plan is the 
elimination of an estate tax. And if it is legitimate to talk 
about estate and gift tax as part of this plan, I don't 
understand why it also isn't legitimate to talk about easing 
some of the burdens on families that have significant tax 
burdens and do not pay income tax.
    And I would say that I certainly favor the need--I--you 
know, I don't have the same views as to Dr. Feldstein as to the 
specifics, but I certainly agree we have a need to address 
Social Security reform, but given the shortfall in that system, 
it is hard to imagine that at least for decades to come that we 
are going to be taking a smaller percentage out of the paycheck 
than we do now. Maybe it all still goes to the trust fund, 
maybe some of it goes to individual accounts and some to the 
trust fund, but at least the same amount is still going to come 
out of each one of those paychecks. And if we are talking about 
1.6, as I have mentioned, I think it is more than $1.6 
trillion, it does seem to me the distribution is a bit skewed 
here.
    One last point is Dr. Feldstein mentioned we have a cushion 
on the rate side because of his dynamic effect.
    Chairman Thomas. Our willingness to lay the dynamic numbers 
on the table gives some folks comfort at at night.
    Mr. Greenstein. I think you need to take your comfort away, 
unfortunately, because there is now growing evidence that 
complete repeal of estates and gift tax, this is amply covered 
in tax notes, would likely create major new tax avoidance 
strategies in other taxes like capital gains that are not 
included in the Joint Committee tax estimates.
    I hope, whatever one favors doing on the estate tax, that 
this Committee will be concerned about the ability, for 
example, of an investor who makes maybe $100 million in the 
stock market to transfer the assets to an elderly relatively 
who is nearing death; no gift tax is levied. The elderly 
relative in the will bequeaths it back to the original 
investor, and the entire estate tax on the $100 million in 
profit is eliminated. This is a growing concern to attorneys 
that we could be creating major tax avoidance here, and that 
could easily eat up Mr. Feldstein's cushion.
    Chairman Thomas. I can tell you, sir, that those kind of 
points are not only going to be presented before this Committee 
and require to factor those changes in the estate tax, but it 
is my understanding that there is a debate currently going on 
in the Bush administration among appointees of the President 
about this approach. So that will be amply examined.
    Just let me say, though, that when you said the extenders 
are coming up, and that we should go ahead and pass the 
extenders, I assume that you are in support of the chicken 
manure tax credit----
    Mr. Greenstein. Excuse me.
    Chairman Thomas. That is going to be up for extension. The 
chicken manure tax credit, that is one of those items that we 
should extend if we simply mindlessly extend the various 
credits--the gentleman from Maryland will have equal time in a 
minute for the Eastern Shore. You do not even have to respond.
    The point I am making is you just automatically assigned a 
dollar amount and moved on and said that those extenders should 
be renewed. Frankly, I think this Committee is going to examine 
some of those extenders, and that we are not going to blindly 
renew those. And that is the case in other items that are 
simply added to the total, and you come to a conclusion. I am 
only glad that you survived last fall when we did not have the 
updated CBO numbers, and this Congress, as a price to conclude 
the last session of Congress, paid more than $600 billion in 
payments over the next 10 years to get out of town. If you had 
extrapolated some of those numbers under the older CBO 
projections, it is a wonder we are alive today.
    Mr. Greenstein. Could I make a comment?
    Chairman Thomas. Sure.
    Mr. Greenstein. A couple of points. First, the 600 
billion----
    Chairman Thomas. Very briefly, because my time is up and I 
want to move to Dr. Hassett, Mr. Rangel is going to feed you a 
lot of good stuff.
    Mr. Greenstein. First off, the point I am trying to make is 
that when policymakers of both parties look at how much money 
is available, they need to be prudent and not assume money is 
available that will be used for other things, because it could 
be used twice. Surely I hope the Committee examines the 
extenders and does not mindlessly extend every one. However, 
past history is a couple drop out, a couple others get added. 
The past history is the total cost of extenders as a group 
doesn't tend to go down, and, therefore, if one is doing 
prudent budget planning, one wants to set aside an amount for 
roughly the current cost, even if you hopefully get rid of some 
that are not of value.
    We did issue reports every few weeks last fall on precisely 
those points on spending that was going on. I would note that 
the $600 million figure which you cited includes the extra 
interest payments on the debt that accompanied that additional 
spending. You should include those.
    I am trying to make a larger point. I would hope that 
Members, both sides, and on both taxes and spending, we need to 
start including the interest costs that go with either spending 
increases or tax cuts because they do consume part of the 
surplus, and my point is when you do that, that brings the tax 
cut to 2 trillion.
    Chairman Thomas. It was worthwhile today if we were 
reminded once again that one of the problems in the past has 
been that we always get carried away in terms of both cutting 
taxes and spending. And our job is to be prudent and to toe the 
line on both sides, and I appreciate that.
    Very briefly, Dr. Hassett, you indicated that given the 
current climate, that it might be useful to do something in the 
short run; that, in fact, if we looked at the last quarter 
numbers, we may very well have bottomed out to zero now, but, 
of course, there will be a delay in collecting those numbers. 
If you look at the President's plan, could you give us some 
feel--or anyone else on the panel, could you give us some feel 
out of the President's tax package what might be the likely 
candidates to be moved early? My assumption is that based upon 
Mr. Greenstein's statements, the estate taxes couldn't make the 
cut in terms of looking at moving them relatively quickly to be 
a mild fiscal stimulus and to create a more proportional and 
fair Tax Code. What would be your nominees, for example?
    Dr. Hassett. Thank you for the question. I think that it is 
very important to think about stimulus if we are going to pull 
stuff forward into the current year. The bottom line of 
stimulus is that if you put the dollar in the pocket of a 
middle-income person, you will get more stimulus than if you 
put a dollar in the pocket of a very, very wealthy person in 
the short run because they will consume it. And so I think that 
a natural candidate to pull forward would be the President's 10 
percent tax bracket. I think if we pulled that forward and 
maybe even phased it in quicker than in the President's plan, 
then we can get a significant stimulus in the short run.
    Chairman Thomas. Any additional comments before I----
    Dr. Feldstein. I would just emphasize that you get stimulus 
in this tax package even before people get extra money in their 
pocket. If this bill were passed in the next few months, 
individuals anticipating the fact that their tax burden is 
going to be permanently lowered or lowered for many years will 
feel more confident about spending in the near term. So I think 
it is very important that whatever you do in terms of trying to 
get some extra cash in there up front, that you are seeing it 
in the context of reducing rates going forward so that people 
at all brackets see that they have this more favorable tax 
climate for the future.
    Chairman Thomas. Well, you mentioned in the next few 
months. Without looking for any date that might be symbolic, 
around April 15 is a kind of a deadline for doing this.
    Dr. Feldstein. That would be very nice.
    Chairman Thomas. Thank you. The gentleman from New York.
    Mr. Rangel. Thank you.
    Mr. Greenstein, you were trying to respond to the Chair in 
pulling out the payroll tax when we are just dealing with 
income tax. And I thought Governor Bush was eloquent on the 
campaign trail when he was trying to talk about relieving the 
fiscal burden of the low- and moderate-income workers. And we 
are supposed to be responding to our constituents and not to 
accountants, and to the average worker taxes is what the 
difference is of what his salary is and what he takes home. I 
don't know of too many people who talk about what their city's 
taxes, their State taxes, their FICA taxes. They just say, I am 
taxed too much.
    And so it would seem to me that notwithstanding the fact 
that we call it income tax, that equity would indicate that 
what we are trying to do is to relieve the burden of taxation 
on the working person. So it would seem to me that you can't do 
it without at least discussing how you can make it easier on 
this very negative tax that the worker has; whether we talk 
about income taxes or not; whether we are talking about child 
credits or not. So I hope that you stay with us in trying to 
design some way that we can include this group of people that 
was excluded from the tax proposal in front of us.
    But, Dr. Feldstein, in the 1993 tax increase that President 
Clinton had, did you have any observation to make as to what 
impact that would have on the economy at that time?
    Dr. Feldstein. I----
    Mr. Rangel. And this is not a hidden question because I 
don't recall if you did or not. I am just basing it on your 
past history and your testimony today.
    Dr. Feldstein. No. What I said then was in effect the same 
thing that I have said about this legislation, that is that it 
would affect people's behavior; that the higher marginal tax 
rates would cause some high-income individuals to change their 
form of compensation, to change the amount that they worked, 
and that that would have a negative consequence on overall tax 
revenue. I did not say that it would destroy the economy or 
push the economy into recession or anything of that sort.
    Mr. Rangel. Your background and reputation goes far beyond 
saying that if you cut people's taxes or raise people's taxes, 
that they are going to respond accordingly. Normally you are 
projecting some type of behavior that we politicians can be 
guided by, but I am convinced----
    Dr. Feldstein. Right, I did, and the numbers were similar 
to the kind of things that I am saying here.
    Mr. Rangel. Let me ask you this, were you right in whatever 
you suggested would happen; did it happen?
    Dr. Feldstein. The truth is we don't know. What we know is 
that a lot of things happened in the economy; that the economy, 
primarily because of technology, has grown much more rapidly 
throughout the income distribution. But we don't really know 
because we have not yet gotten the microdata to look at what 
happened to those top tax rates.
    Mr. Rangel. You know, I thank God every day for giving me 
the opportunity to study law, but the more I listen to you, 
Doctor, I wish I had gone into studying economics and being a 
consultant in this area because it really doesn't make any 
difference whether we know or do not know.
    Tell me--and, Dr. Hassett, Chairman Greenspan has said that 
these projections, we have to be very careful about them 
because they are uncertain. And I wish we could structure a tax 
that would be just as uncertain as the forecast; that it gets 
lower as we find more surpluses, it increases as we find 
setbacks. But we cannot do that. As the Secretary of the 
Treasury said, we can't vote maybe; we can't vote we do not 
know. But as much as we want dynamic scoring and rosy scenarios 
and trust and hope for our country and our people, and the 
President suggests that the 5.6 may be just the tip of the 
iceberg in terms of what the real explosion of surpluses will 
be, and we hope he is right, can we expect that any of you 
experts might be able to give us some guidance if, God forbid, 
they are wrong, CBO, and given the 5.6 also added, we did not 
request it, a scenario where they made a mistake; and then if 
the same type of error was in their recent projection, that 
instead of this sharp increase in the surplus, we would have a 
deficit? They did not say that would happen, and they said in 
all likelihood it would not happen. They said it could happen. 
Could you tell us what we could do, Dr. Feldstein, if that did 
happen, since it is possible that it would happen?
    Dr. Feldstein. I suppose what you would do to be fiscally 
responsible, if it wasn't a short-term deviation, and certainly 
you would not want to respond to a cyclical downturn in revenue 
by raising taxes or cutting spending, but if the long-term 
projection turned out to be wrong, then you would want to cut 
spending, raise taxes or some combination of the two to bring 
the budget back in line. And that is something--if you look 
back over your years in Congress, that has happened from time 
to time. There have been years when you have cut taxes and 
years when you have raised taxes, and years when you felt you 
could spend more and years when you felt you had to be tough on 
spending.
    Mr. Rangel. We can only raise taxes every other year. You 
know that.
    Dr. Feldstein. I wouldn't want you to raise taxes every 
year.
    Mr. Rangel. We could never raise taxes in an election year. 
Even an economist would know that, right?
    Dr. Feldstein. Right.
    Mr. Rangel. But the alternative would be cutting spending.
    Dr. Feldstein. Hard to do in an election year also. But it 
is the longer term getting off track that would be a cause for 
a problem. If you found yourself with projections of several 
years of deficits that wasn't just cyclical, then you would 
have to do the responsible thing, both on the spending and on 
the tax side. You would have to look at the decisions you made 
in the past.
    Mr. Rangel. Or we could go into the Social Security money.
    Dr. Feldstein. You cannot go into the Social Security 
money. You cannot literally go into Social Security money. It 
is blocked in there as a trust-funded amount.
    Mr. Rangel. Who blocked it in?
    Dr. Feldstein. You did.
    Mr. Rangel. Who can unblock it?
    Dr. Feldstein. You wouldn't do that.
    Mr. Rangel. Okay. That is why you are an economist. Mr. 
Greenstein.
    Mr. Greenstein. If you look at the new CBO report, CBO says 
that on average its estimate of the surplus or the deficit for 
the fifth year out has been off by an average of 3.1 percent by 
GDP, which means that if its 2006 forecast is off by the 
average amount that it has been wrong in the past for the fifth 
year, that that estimate is either $400 billion too low or $400 
billion too high. If it is 400 billion too high, we are in real 
trouble.
    It seems to me that it is much harder for Congress to cut 
spending or raise taxes then to cut taxes or increase spending, 
and, therefore, the prudent thing to do is not to take the 
entire surplus outside Social Security and Medicare and commit 
it all in law this year through a combination of tax cuts and 
program increases, but to set some portion of it to the side 
kind of as a rainy day fund. If the surpluses materialize, you 
will have an easy time coming back and enlarging tax cuts or 
doing a bigger drug benefit or whatever it is. But once you 
have passed the tax cuts and the spending, if things go south, 
it isn't so easy to pass the legislation to put it back in 
order. And since 70 percent of this projected surplus does not 
come until the second 5 years, I don't understand why the more 
prudent course is not to put some of it to the side now, and as 
it materializes, if it does, you can always come back and do 
more. You would still have room in doing that for a very 
healthy tax cut this year.
    Dr. Feldstein. You would be giving up something. You would 
be giving up the favorable incentive effects of lower marginal 
tax rates. If you say we are not going to come down with this 
roughly across-the-board reduction in marginal tax rates and 
the incentives that it brings, then you are going to be passing 
up--if you wait, as Mr. Greenstein suggests, if you wait, then 
you are going to delay the favorable effects on the economy of 
those lower marginal tax cuts.
    Mr. Greenstein. On the other hand, if you proceed, you will 
have less national saving and more consumption; and you will 
forego the favorable effects on the economy of more saving. And 
it isn't clear--economists disagree in the economic----
    Mr. Rangel. It is possible that Mr. Stockman, who was the 
manager--the director at OMB, indicated that one of the ways to 
reduce programs is just not to have the money there to fund 
them.
    Thank you, Mr. Chairman.
    Chairman Thomas. Thank you very much. Gentleman from Ohio, 
Mr. Portman, wish to inquire?
    Mr. Portman. Thank you, Mr. Chairman. On behalf of the 
second tier we would like to thank you all on the top for 
giving us some time. We do appreciate it.
    Thank you, Dr. Feldstein, Mr. Greenstein and Dr. Hassett, 
for being here and for your testimony. I think it has been a 
very balanced panel. I think it is complementary to the 
testimony we heard this morning from Secretary O'Neill.
    I have a number of questions, but if I could just start by 
talking about CBO for a second. Dr. Hassett, I am interested in 
your testimony in that regard. Mr. Rangel seems to be saying, 
and Mr. Greenstein seems to be agreeing that we have these 
projections of surplus, but we just can't trust the 
projections. But even though now we are out of deficits, even 
though now we have these tremendous surpluses projected, even 
though they are based on 2, 3 percent growth, we just cannot 
have room for tax cuts.
    Your testimony talks a little bit about the CBO estimates. 
Can you tell us what CBO said about a recession in the next 10 
years, how it would change the estimate?
    Dr. Hassett. Certainly, Mr. Portman. Better turn my mike 
on.
    The CBO has calculated that a recession would knock about 
$140 billion out of the 10-year number. That $140 billion is 
significantly smaller than the upward revision to the forecast 
that I expect at this time next year, both because the forecast 
provisions tend to be positively correlated over time and 
because we are adding this year at the end where the surplus is 
going to be much larger. So even if we do have a recession this 
year, I would expect that, all else equal, we would see an 
upward revision next year.
    I think the CBO forecast is a very, very cautious forecast; 
and it is their best, most prudent guess of what number you 
should base policy on. There are certainly uncertainties. They 
never hit the number exactly. But I think the notion that 
uncertainty means that the number is going to come in lower is 
a false one.
    Mr. Portman. Exactly. That has been certainly the 
implication this morning earlier with testimony by the 
Secretary of the Treasury. There were a lot of questions asked 
of him about the forecast and how can you trust these 
forecasts. The implication was these forecasts are too rosy. In 
fact, what has happened in the last few years? In your 
experience, what has happened in the last few years with regard 
to these CBO estimates? Have they been low or have they been 
high?
    Dr. Hassett. They have tended to be too low. We have been--
upward revisions on budget surplus is about $2 trillion higher 
than it was----
    Mr. Portman. Two trillion dollars higher than the last 
year. As these projections have gone up as there has been more 
surplus, what has happened to those surplus dollars in the last 
couple of years?
    Dr. Hassett. We have seen more surpluses.
    Mr. Portman. And we see more spending.
    Dr. Hassett. But the surpluses are not fantasy. I mean, 
even the 2001 surplus estimate is almost $300 billion, the 2002 
is above $300 billion. So their surplus, a unified budget 
surplus now and on-budget surplus as well, that could be 
targeted towards tax cuts.
    Mr. Portman. I think that that is an important point to 
make. We are not talking about some theoretical surplus. It 
actually happened in the last 2 fiscal years, and we have 
actually seen a great increase in spending. In the last 6 
months alone, we have probably spent enough to provide for 
significant tax relief along the lines of allowing more IRA 
contributions or 401(k) contributions or maybe even something 
with regard to the marriage penalty. But we have eaten it up 
because we have increasingly spent above and beyond the caps 
that we set for ourselves.
    You know, interestingly, this morning the Secretary of the 
Treasury talked a lot about the fact we can't vote maybe, we 
have to vote yes or no based on the best information we have. 
The best information we have is that here we are not in 
deficits as we were in 1993, and in fact we have tremendous 
surpluses. In 1993, the tax rate was raised. Where was it prior 
to President Clinton raising the tax rates at a time that we 
were at deficits?
    Dr. Hassett. I believe it was at 33.
    Dr. Feldstein. Thirty-one.
    Mr. Portman. It was 31 percent. So, actually, interestingly 
before 1993, when President Clinton raised taxes in order to 
get the deficit down, the annual deficit, he raised taxes 
higher than we are talking about now. In other words, lowering 
it. The rates were 31 percent. They are now up to 39.6 percent. 
The Bush proposal takes it down to 33 percent, still 2 points 
higher.
    You are shaking your head, but it is true. It is still 2 
points higher. And yet there are no annual deficits now, are 
there? Are there any deficits this year in the Federal budget?
    So one would think even logically if we can go back to '93 
and say, okay, let's take Mr. Rangel's argument and say that 
had an effect on the economy to get the economy straightened 
out, although I would argue that the Republican majority coming 
in and a balanced budget had a lot more to do to with it, but 
now we are back to where we were. So why wouldn't we take the 
rate down to 31 percent?
    Mr. Greenstein. May I make a comment?
    Mr. Portman. Maybe that is a rhetorical question. Let me 
ask a more specific question.
    I would also say, with regard to your comments, Mr. 
Greenstein, on the size of the tax bill, it is very plain that 
President Bush wants a $1.6 trillion tax bill over 10 years, 
wants to make sure he takes care of certain priorities, 
including being sure there is tax relief for everybody, 
primarily focused on middle-income, lower income Americans, but 
he also has said very clearly that Congress shall legislate.
    So I have looked through your testimony. You talked about 
the extenders, you talked about the phase-ins and so on. Those 
are not in the bill. And if they were to be part of the bill 
there would have to be other adjustments. Secretary O'Neill has 
made it very clear this morning that if there is going to be 
retroactivity it would have to come out of the bill somewhere. 
So there would be other adjustments probably in the later 
years.
    So I would just say it is an interesting argument that, 
gee, the President's tax bill is not what he says it is, but it 
is what he says it is in the sense that he says this is what he 
is going to stick with.
    Mr. Greenstein. Mr. Portman, can I respond, please?
    Mr. Portman. Yes, absolutely.
    By the way, I thought you would be more complimentary of 
the tax bill since it doesn't have the 401(k) or the IRA 
contributions in it to allow people to save more for their own 
retirement, which I know you also have major problems with.
    Mr. Greenstein. I knew you couldn't resist that.
    Mr. Portman. Well, you haven't been able to resist it 
either. But I think this is a very fair bill. I would be happy 
to hear your comments.
    Chairman Thomas. Mr. Greenstein, you may go ahead and 
comment on his expended time--answering.
    Mr. Greenstein. I will be very quick.
    The key point I was trying to make is the $1.6 trillion 
figure does not include the interest payments on the debt. I 
didn't--I am not clear if Mr. O'Neill is saying that it should 
be $1.6 trillion inclusive of the interest payments on the debt 
that goes with that. I would think that would be a very 
important statement. It was not what I understood the 
administration's position to be.
    The other part of this is that my fear, Mr. Portman, is 
that in thinking about how much money is available that the 
Committee will do the extenders for another 2 years, that it 
will be the AMT problem for 1 or 2 years, and the Bush tax cut 
creates--it makes the AMT fix cost 2 to 300 billion more over 
the next 10 years. If you don't do it this year and you do it 
in five segments every 2 years over the next 10 years, the cost 
is still the same. I would consider that an unfunded liability 
of the Bush tax bill, and we need to consider that as part of 
the cost even if you don't happen to pass it all in this 
session or in that bill.
    Mr. Portman. If we would have a conversation about that 
later I would love to address those points, but my time is up. 
Thank you, Mr. Chairman.
    Chairman Thomas. Thank the gentleman. The gentleman from 
Pennsylvania, Mr. English, wish to inquire?
    Mr. English. Thank you, Mr. Chairman.
    This has been a most interesting discussion, and I very 
much appreciate the testimony of all three of the expert 
witnesses. I guess what I find missing from some of the 
discussion of distributional effects is how, if this is a 
policy aimed at growing the economy, if this is a policy which 
successfully could grow the economy faster, create more wealth, 
create more jobs, that the beneficiaries of that growth are 
likely to be people at the middle income and at the lower end.
    What this distributional discussion doesn't seem to take 
into account is that people at the bottom of the economic 
ladder have an enormous stake in a successful pro-growth policy 
that this might make a significant contribution to. But I 
realize as we discuss these tax policies we need to tackle the 
distributionals, whether they are a central issue or a marginal 
issue.
    To that point, Dr. Feldstein, with regard to the 
distributional effects, you have described this as a 
proportional tax cut. In my research, I found that in 1998 the 
top 1 percent of earners paid 35 percent of the total personal 
income tax; the top 5 percent paid 54 percent; and the top 
quarter paid 83 percent, according to the IRS.
    In your view, would this data change in an adverse way 
under the Bush tax plan or would, for that matter, the burden 
be shifted upward specifically under the President's plan? 
Wouldn't high-income Americans potentially shoulder more of the 
tax burden in the income tax system?
    Dr. Feldstein. Yes, they would. Bob Greenstein raised the 
point about what happens when it is fully phased in, and we 
have done some calculations using these tax return data for a 
fully phased-in set of tax rates of the sort that President 
Bush has proposed. I will give you just two numbers.
    For people with incomes between $20,000 and $50,000, the 
share of the tax that they would pay would fall from 11.6 
percent to 10.7 percent; and for individuals in the top bracket 
that we looked at, people with more than $400,000 of income, 
they would see their share rise from 27.2 percent, to 28.8 
percent. So the first group gets about a one-tenth cut in their 
share of overall taxes, while the top group sees their tax 
share rise.
    Mr. English. That is extraordinary, and I think that is 
something that has to be central to any discussion of the 
distributionals that we have.
    I know my time is limited. Dr. Hassett, your testimony 
indicated on page 4 that the permanence of the President's 
marginal tax rate cuts would stimulate the economy because 
taxpayers would know what to expect in the future. We are 
putting incentives in the Code that are presumably going to 
affect behavior. Would conditioning income tax cuts on some 
sort of budget trigger or passing only temporary tax cuts have 
potentially the opposite effect?
    Dr. Hassett. Thank you for the question, Mr. English. 
Indeed, you are exactly right. There has been a wealth of 
evidence in the academic literature that has studied the 
effects of uncertainty both on the behavior of firms and on the 
behavior of individuals, and it is generally found that when 
people don't know what to expect they tend to hold off things. 
They tend to not buy, for example, a car because you don't know 
if your taxes are really going to be low enough so that you can 
afford the payment next year. So if we introduce explicitly a 
higher level of uncertainty then we will certainly subtract 
from the positive effects from the Bush plan.
    Mr. English. Dr. Hassett, is it your professional opinion 
that the longer we wait to reduce marginal income tax rates the 
longer it will take to stimulate the economy? And how important 
is it to move quickly to reduce the marginal rates?
    Dr. Hassett. I believe, Mr. English, that right now we are 
at a period where there is a significant risk that we will 
enter a recession, but it is not a sure thing. And I think that 
the current period is unusual because we are running such a 
high surplus at such a time.
    You know, economists for years have measured the tightness 
of fiscal policy by the full employment surplus which is pretty 
much our estimate of the surplus right now. If you use that 
measure then we are running about the tightest fiscal policy 
near the start of a potential recession that we have ever run, 
and I think that that is a very risky position to be in.
    Mr. English. Thank you.
    My time has expired. I want to thank the panel again for 
the excellence of their testimony. I think it is important that 
everyone understand that we are looking for an economic policy 
that will encourage growth and keep us out of a recession and, 
in doing so, presumably also long term boost our revenues 
beyond what we are currently projecting.
    I will yield back the balance of my time.
    Chairman Thomas. Thank the gentleman. The gentleman from 
Wisconsin wish to inquire? Mr. Kleczka.
    Mr. Kleczka. Thank you, Mr. Chairman.
    Mr. Chairman and Members, I think most if not all Members 
of Congress support a tax cut at this point in time, especially 
meshed against the size of the surplus. So I think to start the 
debate at that point is not adequate. I think the debate that 
we want to engage in on this Committee and in other Committees 
of Congress is the size and the distribution of that tax cut.
    Let me start out by restating, Dr. Feldstein, a point you 
made that you indicated that the tax cut was proportional. The 
figures that I have, and this is in conjunction with the CBO 
and the Center on Budget and Policy, they indicate that when 
fully phased in the Bush tax cut for the top 1 percent--or of 
the Bush tax cut the top 1 percent gets 36 percent of that tax 
cut. However, based on their income tax burden in 1999, only 
the income tax, it shows that that population group, that 
income group paid only 29 percent of the taxes. So to state 
that the tax cut is proportional flies in the face of these 
figures, which I assume is accurate; and I wonder if you want 
to respond to that.
    Again, the share for the top 1 percent of the Bush tax cut 
is 36 percent, compared to them putting 29 percent into the 
pot.
    Dr. Feldstein. Those are not consistent with the numbers 
that I quoted to you. Tell me again the source of the numbers?
    Mr. Kleczka. The income tax burden comes from CBO, and the 
share of the tax cut comes from the Center on Budget and 
Policy. What percentage----
    Dr. Feldstein. I don't know how they estimate those 
numbers, so I can't comment.
    Mr. Greenstein. I would be happy to explain the numbers, 
how we got them.
    Mr. Kleczka. Oh, they are yours. That is better yet. What 
numbers are you using? Twenty-nine? Twenty-nine?
    Dr. Feldstein. The numbers that I quoted to you were not in 
terms of the top 1 percent. They were phased in number--I will 
give you the number for the top. For people with incomes over 
$400,000 on a fully phased in basis it went from roughly 27 
percent to 29 percent of----
    Mr. Kleczka. After the income tax cut and the inheritance 
tax repeal?
    Dr. Feldstein. No. No. No. No. It is just the income tax. I 
don't have any attempt to attribute the estate and gift tax 
to----
    Mr. Kleczka. If you are going to make----
    Dr. Feldstein. That may be why these numbers----
    Mr. Greenstein. If you make the difference.
    Dr. Feldstein. Let's be clear, then, on the income tax it 
is proportional or slightly less.
    Mr. Kleczka. We are looking at a $1.6 trillion tax cut. I 
think if you are going to make an argument that is proportional 
you have to use the whole tax cut and not bits and pieces of 
the tax cut to make your argument. Clearly, since the death 
tax, the inheritance tax goes to the top 1 percent or 2 percent 
of the filers in this country, you clearly have to attribute 
that 80 plus billion dollars to them in some form or fashion.
    Mr. Greenstein, do you want to expound on that somewhat?
    Mr. Greenstein. There have at various points been 
discussions of how to attribute the incidents of the estate 
tax. The best study on this now available is a relatively 
recent study which was conducted by the highly respected career 
staff at the Treasury Department. It was published in 
September, 1999, as part of a major Treasury study on the 
distribution of taxes. That study found that the top 1 percent 
pays about 64 percent of the estate tax. The top 5 percent pays 
about 91 percent of the estate tax.
    What we did in coming up with the figure that the top 1 
percent would get 36 percent of this tax cut is very 
straightforward. We simply--for the estate tax part, we simply 
used the Treasury incident. Since this proposal entirely 
repeals the estate tax, that means you simply use the Treasury 
on who currently pays the estate tax.
    The figure, by the way, in the same Treasury report, the 
Treasury reported that the top 1 percent pays 20 percent of all 
Federal taxes. The figure is higher than that for the 
percentage of the Federal income tax they pay. But if you are 
comparing apples and apples, you are saying, what percentage of 
all Federal taxes does the top 1 percent pay? Answer, 20 
percent. What is the percentage of this tax cut the top 1 
percent would get? Answer, about 36 percent.
    Chairman Thomas. If the gentleman would yield briefly, it 
won't come out of your time.
    You described a procedure that in fact could occur if we 
remove the estate tax in which someone would bequeath to an 
elderly and rotate--none of that is taken into consideration 
here. Your comments earlier about the way in which you gain the 
estate tax, do you recall that?
    Mr. Greenstein. I am sorry. I didn't understand the 
question.
    Chairman Thomas. The statement that you made earlier about 
how you could gain the estate tax if it was repealed?
    Mr. Greenstein. That is not reflected in these figures.
    Chairman Thomas. That is not reflected.
    Mr. Greenstein. Correct.
    Chairman Thomas. Thank you.
    Mr. Kleczka. Finally Mr. Greenstein, the exercise you went 
through in your testimony was to try to indicate the true cost 
of the tax cut versus the true surplus that we are dealing 
with--I think that is what you tried to do. If I followed you 
correctly, you indicated that the true tax cut that we will be 
addressing here is about $2.5 trillion versus an available 
surplus of about $2 trillion. Is that somewhat accurate?
    Mr. Greenstein. Yes. Now if, as the Secretary said this 
morning, things like accelerating the tax cut are accommodated 
within the initial cost, then it wouldn't be as much as 2.5, 
but it would still be more than 2.0 when you take into account 
the interest----
    Mr. Kleczka. That might not be the job of this Committee to 
do the entire exercise, but it will be the job of the Budget 
Committee. Because clearly when we look at the tax cut which we 
will plug into the budget resolution we are going to have to 
make a provision there for the additional interest, the debt 
service cost. So at that point we are going to come up with a 
figure. And even using Dr. Feldstein's--what did you call it--
the actual tax cut being 1.2 versus 1.6, dynamic tax cut, even 
using that figure and the other dynamic numbers, we are still 
very close to using the entire surplus on the tax cut.
    I guess that is the caution that I have to my other 
colleagues and that I will be sharing with my constituents is 
that when you add up all these other things, like the 
alternative minimum tax, the thing we found out yesterday in 
the Budget Committee hearing for the Democrats was, and I think 
my figures are pretty close, currently the alternative minimum 
tax affects about 11 million tax filers. If we do nothing, if 
we do nothing, another 17 million filers are affected.
    So by just not even calculating a change in the alternative 
minimum tax, which we all know is going to have to occur, we 
are talking about 28 million tax filers who will wake up 1 day 
and find out, hey, I am in this situation; and clearly Congress 
years and years ago didn't have the-did not intend that that be 
an effect of the AMT.
    Mr. Feldstein, then I am done.
    Mr. Feldstein. Just one quick point on that. I agree that 
the complexity of the alternative minimum tax should not be 
placed on the vast number of taxpayers. But that doesn't mean 
that in getting rid of that complexity you have to lose the 
revenue. That is, you have to sit down and rethink what you 
want to do about deductions and the rules of the Tax Code.
    Mr. Kleczka. OK. But one of the changes will be to shift 
the focus of the ATM away from the middle tax and higher middle 
tax income owners. That is going to be a loss of revenue.
    So thank you, Mr. Chairman. We will talk about this another 
day.
    Chairman Thomas. I thank the gentleman. We certainly will. 
Does the gentleman from Missouri, Mr. Hulshof, wish to inquire?
    Mr. Hulshof. I do, Mr. Chairman; and I will accept your 
kind reminder this morning that there may be a larger audience 
than just those assembled here. I hope not to bog down in 
taxspeak.
    If I could summarize each of your testimony it would be, 
Dr. Feldstein, you see this as an unprecedented opportunity for 
us; Mr. Greenstein, your summary would be that President Bush's 
plan is not fiscally prudent; and, Dr. Hassett, yours would be 
stimulus, stimulus, stimulus.
    I would also applaud the fact that you pointed out, Dr. 
Hassett, that the Congressional Budget Office, which is our 
official scorekeeper, has always undershot the mark--at least 
in recent memory since 1995, that they have undershot the mark.
    Mr. Greenstein, you have made some assumptions based on 
past history this morning. I don't know if you gentlemen were 
here during Secretary O'Neill's testimony. But there was some 
discussion about 1981. And I will confess to you and to the 
world that, as I was ending my first year of law school in 
1981, I was much more focused in surviving Dr. Cochrane's 
constitutional law class rather than what was happening in 
Congress. But as I understand what happened in 1981 with the 
Reagan tax cut was that it grew to huge proportions. There was 
a lot of piling on, and there was a strong penchant for 
spending that overwhelmed this tax cut that President Reagan 
had put forth.
    I don't know that. You all can argue that. What I do know 
is recent history. And recent history from 1997 through '98, 
'99 and the year 2000, having served on this Committee, is that 
this Committee and the full House have passed tax relief 
measures each one of those years.
    In '97, the tax cut was signed into law by then President 
Clinton; '98, stymied by the Senate, the other body; 1999, the 
$792 billion tax cut--which, by the way, Mr. Chairman, was the 
first time that the House got away from a 5-year projected 
window and we started talking about these 10-year projections--
and then again in the year 2000 with targeted tax relief, each 
of those latter--the tax cuts that the House passed ended up 
being vetoed by then President Clinton.
    I want to focus on 1997. In 1997, as this Committee was 
talking about cutting capital gains tax rates, as we talked 
about creating a $500-per-child tax credit, as we talked about 
raising the exemption on the death tax to shield family 
businesses and particularly family farms from the death tax, do 
you recall in 1997 we had deficits? We were borrowing--Congress 
was borrowing from Social Security. The scenario back then was 
not even near the rosy projections we are getting now from the 
official scorekeeper.
    Mr. Greenstein, I mean no disrespect. If you are throwing 
red flags up when we have a $3 trillion projected surplus 
outside Social Security with this tax cut, you must have been 
violently objectionable do the tax cuts we were talking about 
in 1997. Let me ask, do you believe that the '97 tax cuts that 
we passed, that the President signed when we had deficits, did 
they contribute to the economic expansion, did they contribute 
to the economic slowdown that we see, or something in between. 
Mr. Greenstein?
    Mr. Greenstein. Mr. Hulshof, in 1997 you actually passed an 
overall budget package of which the tax cut was just one part. 
There was restraint on discretionary spending. There were 
changes in Medicare provider payments. The overall package was 
thought at the time to be a net deficit reducer. In the end, it 
probably wasn't a net deficit reducer because we then gave back 
some of the Medicare savings; and the discretionary caps were 
unrealistic from the day they were written and never were going 
to be really complied with.
    We now have surpluses, I think, neither despite nor because 
of the '97 tax cut in large measure but because we had a 
continuation of something we have had throughout much of the 
past decade, which is this tremendous economic growth, higher 
productivity rates than we are forecasting, so forth.
    Mr. Hulshof, what I would say is if you go back to the 
eighties the CBO forecasts were consistently off year by year 
on the other side. They consistently underestimated deficits. 
The deficits kept being bigger than CBO forecasted. The fact of 
the matter is, these are educated guesses and we have had years 
in which they were--they significantly underestimated deficits. 
We have had years in which they significantly underestimated 
surpluses. And we don't know that we won't have a period again 
where the forecasts are too rosy.
    All that I am suggesting is that you not shoot 100 percent 
of the whole wad this year and put some of what is only a 
projection to the side. I am not saying spend it. I am saying 
put it to the side, and then if it really materializes you can 
use more of it.
    Mr. Hulshof. I appreciate that, your lengthy answer.
    I see my time has expired. If the chairman would indulge me 
just for a second.
    Your points are well taken. The point is, however, that we 
are not consuming the entire projected surplus.
    And, quickly, the criticisms of the past and especially 
those on the other side of the aisle, often these tax cuts 
passed this Committee on a party line vote, which was 
unfortunate. We heard on the floor that our tax cuts were going 
to overheat the economy. We heard those arguments as recently 
as not many months ago. I think it will be interesting now to 
those that object to the tax cuts when they get to the floor to 
see how they reconcile present positions with positions of the 
past.
    The criticisms in the past have been that targeted these 
tax reliefs. President Bush's plan is very across the board. If 
you pay income taxes, you get income tax relief.
    Finally, I think it addresses in a positive way 
simplification of the Code. An Old Farmers Almanac saying says 
that if Patrick Henry thought that taxation without 
representation was bad, he ought to see it with representation.
    I think the fact that we are going from five brackets 
consolidating into four I think strikes a blow for 
simplification. I think a $1,600 return in the pockets of an 
average family of four is something that should be supported.
    I appreciate, Mr. Chairman, you allowing me a few extra 
seconds. I yield back.
    Chairman Thomas. We will pause for a moment. We will turn 
to the gentleman from New York, Mr. McNulty. Do you wish to 
inquire?
    Mr. McNulty. Thank you, Mr. Chairman.
    Mr. Chairman, I am concerned. We had 30 years of deficit 
spending in this country, and we saw the national debt go from 
less than $1 trillion in 1980 to $5.7 trillion today. And we 
have heard a lot of different numbers from the time the 
President first made this proposal. We have heard a lot of 
different numbers today. We have had three economists here, 
very well respected, and three different points of view. But I 
am trying to get a handle on what we should do as Congress with 
regard to this tax cut proposal.
    I just want to try to simplify the numbers that we are 
looking at. Now, we have this projection of a $5.6 trillion 
surplus over the next 10 years; and I must tell you I am a 
little bit nervous about 1-year projections, let alone 10-year 
projections. But let's use that as the figure and assume that 
is going to come true.
    Now this afternoon on the floor of the House of 
Representatives we are going to have a vote. It is going to be 
an almost unanimous vote on this lockbox legislation which, 
roughly translated, says we are going to stop stealing the 
Social Security and Medicare money. We are not going to do that 
anymore. And both parties are making that pledge today. We are 
going to put our votes on the line in that regard.
    Let's assume that we do that. Now, other folks think when 
we are doing these calculations--one of my colleagues this 
morning said we ought to add to that figure the money that has 
to be projected in government pensions and so on, and there is 
a debate over that. Let's not use that. Let's use Secretary 
O'Neill's number. That is the one he used. That gets us down to 
2.7.
    Then we get to the tax cut, which at face value is 1.6. I 
must say that Dr. Feldstein is the first person that I have 
heard say it is going to actually cost less than that. Because 
about everybody else says it is going to cost more, if we do 
retroactivity and the interest and all that other, everything 
else that we might add on to it in business or anything.
    But let's go with the Chairman on that one. Let's go with 
the President and the Chairman--1.6. We use static figures. 
Now, under the best of all scenarios, to my way of thinking we 
get down to what is left would be $1.1 trillion over 10 years 
to do everything that we want to do.
    Now, let me also point out, as a nonpartisan critic of some 
of the people in Washington, D.C., that a lot of people around 
this town, both Democratic and Republican, are going around 
saying that we are going to eliminate the national debt in the 
next 10 years. We are not going to eliminate the national debt 
in the next 10 years. If we devoted that entire bottom amount 
there, 1.1 trillion, to the national debt, we would reduce it, 
we would only take care of less than one-fifth of the national 
debt, leaving nothing for new spending, nothing for what the 
President proposed today with regard to military pay, nothing 
for SDI, nothing for education, nothing for prescription drugs, 
nothing for other health care programs, nothing.
    Now we all know that in the real world of Washington, D.C., 
we are going to spend some money over the next 10 years. So you 
can subtract that from the 1.1, and the rest would go to 
deficit reduction.
    All of which is to say that I am concerned. I don't want to 
go back to the days of deficit spending.
    Now I am 53 years old, and I'm going to get through the 
rest of life okay. But I am getting a little bit more 
philosophical as I get older. I have got four children. I have 
got three grandchildren. I am going to have four before the 
week is out. And when I think about them and their future, and 
the prospect of going back to deficit spending, frankly it 
scares the hell out of me.
    My question is, and I would like each of you to answer it 
briefly, if you could, is this: Wouldn't it be more prudent to 
have a tax cut but to have a smaller tax cut so that we guard 
against the prospect of going back to deficit spending?
    Dr. Feldstein. Let me first comment on your comment about 
the size of the tax cut. The $1.2 trillion--the $1.2 trillion 
number that I cited does not include interest. So you can't 
compare it with the numbers that include interest. And I think 
that, as the Chairman pointed out, it does take into account 
behaviorial responses and I think quite modest ones.
    The size of the national debt that you quoted is the entire 
size including debt held by the Federal Reserve and debt held 
in other government accounts, particularly Social Security. So 
if you look at the publicly held national debt, the debt held 
outside the government, it is $3.4 trillion. The combined 
lockboxes of Social Security and Medicare that you had on your 
card is $2.9 trillion. So over the 10 years that would remove 
from the publicly held debt, from the debt held outside the 
government $2.9 trillion of the $3.4 trillion. So the size of 
the debt held by Americans and foreigners in other than 
government accounts would be down to $500 billion. Now that may 
not happen because of Social Security individual accounts and 
all of that. But if we set that aside and just look at the 
numbers that you gave us, it would indeed eliminate most of the 
national debt.
    Mr. McNulty. Mr. Greenstein.
    Mr. Greenstein. My answer to your question is, yes, I share 
your concern.
    Mr. McNulty. Dr. Hassett.
    Dr. Hassett. The gross debt number that you cite isn't the 
number that concerns me and I believe Chairman Greenspan as 
well. Because if we pay off all of the debt then we won't have 
Treasury certificates, Treasury bonds and so on to trade in 
private markets, and it will be much more difficult to manage 
financial affairs in that type of a world.
    Moreover, the government will be faced with a challenge of 
deciding what to do with the money. Because once we have bought 
back all the debt that we can buy then we are going to have to 
go out and buy something else, and the odds are it is going to 
be a private asset, and figuring out how we do that without 
disrupting economic activity significantly is a significant 
challenge.
    Mr. McNulty. Paying off the national debt is the kind of a 
problem I would like to have.
    Chairman Thomas. Is the gentleman through?
    Mr. McNulty. Yes. Thank you, Mr. Chairman.
    Chairman Thomas. I thank the gentleman. Gentleman from 
Kentucky, Mr. Lewis, wish to inquire?
    Mr. Lewis OF KENTUCKY. Yes. Thank you, Mr. Chairman.
    Dr. Hassett, would you expand on the problems with reaching 
the point when the surpluses grow over and beyond our concern 
with paying off the national debt or the public debt? What are 
some of the specific problems that we would face?
    I know, of course, as you said, the investing in private 
assets and of course the other problem that I think could 
certainly step forward in Congress would be more spending. But 
what would be the problems with amassing enormous amounts of 
surplus dollars and what would the government do with those 
dollars?
    Dr. Hassett. Thank you for the question, Mr. Lewis.
    First, we have to understand that the government does 
already place money now and then in private hands. The 
government, for example, deposits your tax checks in a bank; 
and then the bank is required to securitize those deposits 
until they sort of end up coming to Washington and getting 
spent. So the government already with little amounts of money 
is sending money out into the private sector.
    The issue here is that, if no policy changes, going forward 
in about 20 years the government might well own 20 to 25 
percent of the entire stock market; and if the government owns 
that much of the market then there is a significant chance that 
it could do things that would disrupt economic decisions. For 
example, if a firm is drawn into the S&P 500 right now, then we 
see that their price goes up a lot. Well, imagine what might 
happen if a firm makes the government's preferred investment 
list. So I think that is why Chairman Greenspan cautioned 
against allowing surpluses to rack up, because it is going to 
be an intrusion of government into private life, and I share 
his concerns.
    Mr. Lewis OF KENTUCKY. Without significant tax cuts, when 
would those surpluses start to grow above and beyond our 
payment on the debt?
    Dr. Hassett. Mr. Lewis, we don't know for sure, because we 
don't know exactly how much of the privately held debt we will 
be able to buy back. I have seen some estimates that suggest 
perhaps $2 trillion of it is debt that we could retire, perhaps 
$1.5 trillion.
    The problem is that, for example, savings bonds are sitting 
in safety deposit box, and maybe people forget that they own 
them. So how are you going to get at that?
    Moreover, more people might have a very aggressive love 
affair with their long-term treasuries and be unwilling to sell 
them back to you except at a very high price, a price so high 
it wouldn't really be prudent for us to pay it. So perhaps as 
soon as $1.5 trillion in accumulated surpluses from now we will 
have to decide what we are going to do with the money. I am 
sure that you are going to be holding a hearing about that. 
That could be in 4 or 5 years.
    Mr. Lewis OF KENTUCKY. I want to follow up on Mr. Hulshof's 
question a little while ago that Mr. Greenstein answered. What 
is your take on the 1997 Balanced Budget Act, that the specific 
tax relief that was in that--how much about that had to do, do 
you think, with creating surpluses or balancing the budget and 
then creating surpluses?
    Dr. Hassett. I think it is just too difficult to know. 
There have been so many changes outside of the tax sphere that 
have been so important. Productivity growth is absolutely 
flying. That certainly didn't come about exactly because of tax 
policy.
    The thing I like to keep in mind when I am looking at the 
boom of the 90's and attributing credit is one of the biggest 
things the government did it didn't step in and mess it up. If 
we had started regulating the Internet back then and so on, 
then we might have well messed up the boom. The tax cuts 
certainly helped, but how much I don't think we can tell for 
sure.
    Mr. Lewis OF KENTUCKY. Thank you.
    Mr. McCrery. [Presiding.] Mr. Jefferson, my good colleague 
from Louisiana, would you like to inquire?
    Mr. Jefferson. Thank you, Mr. Chairman. I recognize the 
distinct accent you have, so I looked over to see if Mr. Thomas 
had adopted it. Thank you, Mr. Chairman.
    To the Members of this panel, I share some of the concerns 
that have been expressed by members on our side; and I want to 
raise a few of those with you. There have been many bases on 
which this tax cut has been purportedly justified. The most 
recent one is it will be stimulative of the economy, and there 
are some concern about the doldrums to which the economy will 
be subject in the next--in this year in the short term and that 
this could help--the tax cut could help.
    The trouble I have with it is this: If it is true that a 
tax cut will stimulate the economy and that therefore the 
Congress needs to approve one, wouldn't it follow from that 
that if we are to have a stimulation now that--two things, 
first, we ought to do a tax cut that has as much weight as we 
can on the front end of it and that has the effect of 
stimulating the economy now, as opposed to one where we project 
the big bang in the tax cut to take place after the fifth year 
when it will be largely irrelevant to simulating the economy. 
Second of all, if we believe that the stimulation will come 
from increased spending, ought we not then do as much as we can 
on the lower end and the lower to middle ends where people are 
more likely to spend money if we get money, rather than on the 
high end where people aren't likely to spend money at all but 
to save and invest it?
    So it is confusing to me the way this is set up. Because 
the objectives that are purported to be the ones to be realized 
if a tax cut takes place now in the magnitude of which we are 
talking doesn't seem to make any sense, first, as I said, 
because the large part of it, if it is to be stimulus, takes 
place in the sixth year when only 29 percent of the projections 
take place in the 5 years and 71 percent takes place in the 
last 5 years. Therefore, we are not going to have much going on 
this year so why don't we front-load it and then wait and see 
if these surpluses take place and then go forward with some 
more of it.
    On the other hand, which I really don't understand, if we 
do believe that spending is going to be the thing that 
stimulates it, how in the world do we do that if we don't 
address the issues of folks who work every day and don't pay 
income taxes but who pay a lot of payroll taxes and who are 
more likely to spend more on the economy than folks who are at 
the top of the income ladder? Could you please comment on that 
for me, please? Anybody or everybody.
    Dr. Feldstein. Well, I would stress that we ought to do--
you ought to do income tax reform in terms of the fundamental 
structure of the tax and not because of its short-run 
stimulative effect, that you are looking at a long-run change 
in tax rates that have favorable incentives.
    Now, having said that----
    Mr. Jefferson. When you say long run, when will the 
favorable incentives show up?
    Dr. Feldstein. It will show up immediately. But they are 
not spending incentives. I am distinguishing the incentives 
about how people work, how they choose to work, how they choose 
to save, how they choose to take their compensation, things 
that will reduce waste in the economy and contribute to 
economic growth.
    But I think it is a fortunate by-product of passing a tax 
at this time that it will help to reduce the risk of the 
economy slipping into recession. So I wouldn't advocate a tax 
cut at this time for that purpose. If you weren't going to have 
a tax cut for other reasons, if we didn't have these large 
budget surpluses, I wouldn't come to this Committee and say 
let's have an old fashioned Keynesian tax cut, pass it today, 
turn it off a year from now and hope that that helped the 
situation. But I would say, given that there is general 
agreement that there is to be a significant tax cut designed to 
provide better incentives for the economy, then we are lucky 
that it is coming at a time where we can take advantage of that 
for general stimulus.
    Mr. Jefferson. Are you talking just about tax reform, is 
that it?
    Dr. Feldstein. I am talking about tax reform and I am 
saying that----
    Mr. Jefferson. Well, that's a different debate than I heard 
the other day when I was at the White House. The President 
talked about putting money in people's pockets so they could 
spend it and pay bills
    Dr. Feldstein. Well, you asked me, not the President; and 
what I say is----
    Mr. Jefferson. Well, you are here supporting his package. 
So I just want to know if you are in line.
    Dr. Feldstein. I am supporting the package, and I am saying 
that that package was designed to be a long-run improvement in 
the tax structure. And it also has the effect that it will make 
people say my income, my spendable income, over the next 10 
years is going to be higher, and one of the things I can do 
knowing that is take on some more spending today. And so even 
before the cash flow improves, some households are going to 
spend more money because they know that Congress--once Congress 
has done it, they know that Congress has increased their future 
take-home pay.
    I think there is a case that says as long as we are going 
to do this, moving some of it up closer to the front end in 
order to get extra bang in spending today would be a good 
thing.
    Mr. Greenstein. I would give a very different answer. I 
think the supposed benefits, both from an antirecessionary 
standpoint and from a long-term growth standpoint, have been 
substantially overdone. From the standpoint of the recessionary 
issue, the fact of the matter is the Senate is probably not 
going to be able to take up this legislation until after there 
has been an approved congressional budget resolution that can 
use the reconciliation process. That means that by the time any 
checks actually go out, it is probably going to be sometime 
this summer.
    William McDonough, the President of the New York Federal 
Reserve, has said their forecasts indicate the economy probably 
will be recovering by that point.
    Now, it is certainly possible that the economy doesn't 
recover by that point and we go into a prolonged problem, but 
if we do, that raises some questions about the surplus 
forecasts we are then using for the next 10 years.
    In terms of the long-term growth, while the economic 
evidence would suggest that lowering rates would have some 
effect, we shouldn't overstate it. It is a modest effect. It is 
small. It cumulates over time, but it is not huge, and the 
tradeoff is that if instead of doing a tax cut of that 
magnitude we saved more of it, then we would have a larger pool 
of national savings. A substantial part of this tax cut will go 
right into consumption, not into saving, and economists 
generally view increased saving as promoting long-term growth.
    So the tax cut has both a plus and a minus in terms of 
long-term growth from that standpoint, and the net effect isn't 
clear. I think the economic benefits are being substantially 
overstated.
    Mr. Jefferson. Let me ask, would you agree that if there is 
to be some benefit from increased consumption or increased 
spending, that it is more likely to take place among groups who 
are at the lower to middle lower income levels than folks who 
are at the very top of things?
    Mr. Greenstein. Well, the tax cut as a whole is oriented 
far more toward the top. I do think--I would agree with 
something Mr. Hassett said earlier, that if you are going to 
accelerate parts of the tax cut for an antirecessionary effect 
then I still think you are unlikely to be able to accelerate 
them soon enough to have much impact, but were you able to do 
that it would make a lot more sense to accelerate parts that 
are oriented more toward moderate and middle income workers 
like the 15 to 10 percent bracket than parts that are primarily 
oriented toward people at higher income levels.
    Dr. Hassett. I think that you have raised an absolutely 
crucial point, and I am surprised that you said that you were 
confused by all this because I think you went right to the key 
question.
    I would just disagree with Mr. Greenstein that the stimulus 
effects are exaggerated. There is a very, very big literature, 
some of it cited in my testimony which I have handed in, that 
explores the stimulative effects of fiscal policy, of surpluses 
and tax cuts and so on, and finds significant short run and 
long run effects.
    I think that having the very, very tight fiscal stance that 
we do right now is a pretty risky position to be in and it 
argues for pulling things forward, especially at the low end of 
the Bush plan.
    Chairman Thomas. [Presiding.] Thank you.
    Mr. Jefferson. I am out of time, Mr. Chairman?
    Chairman Thomas. Yeah.
    Mr. Jefferson. Yes, sir. I wanted to ask--well, I am out of 
time but the folks in my State, if I might say this little 
teeny-weeny bit, in my State 35 percent of the people in my 
State cannot benefit from the plan because they don't pay 
income taxes. It is not because they don't work. They pay 
payroll taxes. In my State where folks are basically working on 
farms and working in hotels and motels and working in a 
restaurant, they are out making $14,000, $15,000 a year. They 
are not ever going to pay income tax. Therefore, they could 
never benefit from this, and I admit we ought to pay some 
attention, it seems to me, to those folks who are working every 
day and paying payroll taxes as a way to help this whole issue 
of consumption and spending if it is to be stimulating or any 
other thing we can do. That's the part I wanted to have you 
hear about but I didn't kind of get from you.
    Mr. Greenstein. I would agree with you on that.
    Chairman Thomas. The gentleman's time has expired, and as 
we have indicated, this is on income taxes. We are obviously 
going to be looking at payroll taxes, and we will be looking at 
some solutions in part to deal with that issue as we move 
forward.
    This Committee has an enormous agenda in front of it and it 
would be nice to put everything on the table the very first day 
we have the Secretary of the Treasury in front of us, but we 
have got to apply some order to what we are doing.
    The President has looked at income taxes first. He has a 
Social Security plan, a Medicare plan, and we will be looking 
at those.
    Does the gentlewoman from Florida wish to inquire, Mrs. 
Thurman?
    Mrs. Thurman. I do, Mr. Chairman, and thank you.
    I want to make one comment very quickly because I think 
that this really is a core issue for all of us, and that is 
what Mr. Greenstein actually responded to Mr. Hulshof and the 
idea of what happened in 1997.
    I think all of us recognize that there needs to be a budget 
reconciliation so that we can see how every piece fits and not 
just go off on this, well, we could do this today, we can do 
this tomorrow, we can go over here, there, and then all of a 
sudden at the end of the day we are looking at either more 
spending, more tax breaks and we are really looking at some 
issues that could be a big concern for this Congress and what 
happens in our future.
    So, first of all, you are shaking your heads so you all 
agree that we should do a budget reconciliation first. Is that 
what I am seeing?
    Mr. Greenstein. You should definitely do a budget 
resolution. The tax cut is part of the larger question of 
national priorities. You have got to look at how much money do 
you have, how much for the uninsured, how much for the drug 
benefit, how much for the tax cut. If you go forward with one 
before you deal with the others, you may not have enough money 
and you could go over the top and bring back deficits.
    Dr. Feldstein. The key thing is not to let this drag on 
forever. So, yes, do it quickly and do it within a context in 
which you have got all the pieces laid out.
    Dr. Hassett. And I would just add that it is important to 
make sure that everything fits, and exactly how you progress 
legislatively is not something that an economist should advise 
you on, I think.
    Mrs. Thurman. OK, in keeping with the spirit of the 
chairman earlier this morning when he said, well, we should 
stop talking about CBO, AMT, OMB, which actually we haven't 
heard today.
    One of the things that I keep hearing over throughout this 
is there is going to be about a $1,600 average tax cut. Now, in 
the spirit of Mr. Jefferson's comments and the amount of people 
in his State that actually will pay no income tax, I think if 
we listen to what is being said, the other part of this is that 
only if you have a tax liability will you be a participant in 
this stimulus program. Correct?
    Dr. Feldstein. It is an income tax cut, so if you don't pay 
income taxes you don't get a tax cut.
    Mrs. Thurman. OK.
    Mr. Greenstein. But 85 percent of all households would get 
less than $1,600. That includes both people who owe less than 
$1,600 in income tax but it also includes a lot of people who 
owe more than $1,600 in income tax but don't have two children, 
and a lot of those would get less than $1,600.
    So we need to be--when it is carefully said, it is the 
family of four at $50,000 that does get $1,600. But it is not 
correct----
    Mrs. Thurman. Say that again. Say that again.
    Mr. Greenstein. A family of four at $50,000 does get 
$1,600, but some people have been acting as though the average 
filer gets $1,600. That isn't correct. Eighty-five percent of 
the units would get less than $1,600.
    Mrs. Thurman. And I--go ahead, Dr. Hassett.
    Dr. Hassett. I will be very quickly. I don't want to eat 
your time up, but I would add that the ``don't participate'' 
phrase that you use I think could be conceived as an 
oversimplification because, for example, if we have a recession 
then the 3 million or so people that will lose their jobs, 
because that's what happens typically in a recession, will not 
be at the top of the income distribution and may well come 
disproportionately from folks who don't pay taxes right now, 
any income tax.
    Mrs. Thurman. But I believe even in your testimony, though, 
you talked about the fact that--which I found very slow if you 
are talking about trying to move in to be even a part of this 
tax--that about 10 percent over the next 10 years would 
actually move into the next bracket, 10 percent of the entire 
population. So there is not a lot of people moving up very 
quickly that actually would get a benefit from this.
    One of the concerns I have, and this was even from the 
testimony this morning, and I will--in talking about the child 
tax credit, this is the impression, if I were a parent sitting 
home today listening to this dialog that we are having, I would 
be like Dr. Feldstein, going, oh, yes, I have a new behavior in 
spending because all of a sudden I am going to get $1,000 for 
each child, and it doesn't matter whether I make $22,000 or 
whether I make $100,000. That is my point.
    Please let's not--I don't want to have to go home and face 
angry people in our districts that feel like they are getting 
something today and tomorrow it is not there. And I am very 
concerned that we are setting all of ourselves up for a real 
problem when we get home, and I think I would like you all to 
talk about that.
    Then I want to also ask, how do you stimulate an economy 
with an estate tax that hits 48,000 people with about 60, 
whatever that amount is, over a period of a year's time, when 
you are actually bringing those monies to one group of people? 
I don't know how that stimulates, because those people aren't 
going to spend that money.
    Mr. Greenstein. Could I quickly note on the child credit, I 
think this ties together, Congresswoman, a number of your 
points, and Congressman Jefferson's as well. Today the child 
credit goes to families, let's say married families between 
like the low twenties and $130,000 a year. There are millions 
of families that pay payroll tax and not income tax that don't 
get the child credit, and there are families with kids above 
$130,000 that don't get the child credit. And the question is, 
if you are going to extend it to an additional group of 
families who should come first?
    I respectfully disagree with the administration's choice. 
The administration is extending the child credit to families 
between $130,000 and $300,000 a year. It is giving the largest 
increases in the credit to families between $110,000 and 
$250,000 and it is leaving out the family of $20,000. I would 
rather extend the child credit to that family first. It can be 
done by making the child credit refundable against payroll 
taxes or something of that sort, and those people also will 
spend it.
    So, I mean, that is kind of an example of, you know, we 
could improve the distribution and still do a child credit 
expansion. Lord knows, the people with $250,000 and $300,000 
are going to get a lot from other elements of this tax cut. 
They don't need the child credit expansion. The families at 
$15,000 and $20,000 do need the child credit expansion.
    Dr. Hassett. Mrs. Thurman, I believe that you may have been 
referring to something else, the fact that the Bush plan is 
phased in and that we are saying that they are going to have a 
thousand dollar child credit but it is only going to be $600 in 
the first year and then it goes up $100, but I would say that 
you are correct that if we look at the end points and then tell 
people that is what your tax cut is, you are going to have your 
rate go from 15 to 10 and so on, and that we don't let them 
know about the phase-ins in the Bush plan, then that could be a 
political problem. But I think that it argues, and the stimulus 
arguments also move in this direction, for pulling things 
forward and starting sooner.
    Mrs. Thurman. OK. Thank you.
    Chairman Thomas. Thank you. The gentlewoman's time has 
expired.
    The Chair is constrained at this point to point out that it 
is possible to have Mr. Jefferson's constituents or anyone 
else's at that level be subject to an income tax rebate. If we 
pulled down the income tax rate level to where it was 
historically, all of those people would now be paying income 
taxes. One of the reasons they aren't is because we raised that 
level. No one wants to lower it. But let's be mindful of the 
fact that we have recently raised it and therefore they are 
only subject to the payroll taxes, which we will be adjusting.
    The Chair is also constrained to say I find it remarkable 
that any comments are now being made about the phasing in of 
the President's tax program when less than 6 months ago I was 
hearing from my friends on the other side of the aisle about 
the President's prescription drug proposal, which didn't phase 
in until 8 years, and that every comment that was made was made 
on the entire package as though it was available on day one.
    I am pleased to say that if we can create some balance of 
understanding that any program cannot be made completely 
enacted on any given moment, but at least at some point we 
ought to remember what we did in less than 6 months ago in 
terms of discussions and not hold other people responsible for 
the very same things that we did.
    Does the gentleman from Texas, Mr. Brady, wish to inquire?
    Mr. Brady. Thank you, Mr. Chairman. I am please that you 
took my comments and stated them much more succinctly than I 
would have.
    Following Mr. Hulshof's comments, let me make two brief 
points and ask for your comments from the panel. The first 
point is that the American people are smarter than many in 
Washington give them credit for. First, they know the best way 
to pay down the debt, our public debt, is to keep our economy 
strong, and that is what this tax relief plan does.
    They know also that Washington shouldn't be picking winners 
and losers when it comes to tax relief. They understand income 
tax relief should be shared by those who contributed to the 
income tax surplus. And contrary to Senator Daschle's comments, 
and I respect him greatly, but most families I know don't worry 
about and are not concerned about someone else who can buy a 
new Lexus. They worry about paying the note on their own Ford, 
on their own truck, or on their own van. While $1,600 doesn't 
seem like a lot up here, it is real money to a lot of real 
families and we ought to keep that in mind.
    The American people also know that this bill isn't just 
about numbers; it is about fairness. They know it is unfair to 
tax people more simply because they are married. They know it 
is unfair to tax someone's nest egg, and we are finding more 
and more minority and women-owned businesses, people who are 
building wealth for the first time in their family who are now 
faced with the challenge of trying to pass that wealth and all 
their hard work down to their children and grandchildren who 
are now caught up in that, and that they have found that the 
death tax, which has ruined lives for four generations, is 
patently unfair.
    Finally, American families know that it is not right to pay 
more than $5,000 over the next decade to Washington, money that 
Washington doesn't truly need to run its business. And while we 
all have different roles of what our American government should 
do, at the very least the American government should be fair 
and that is what this bill is greatly about, making our Tax 
Code more fair.
    The second point addresses the myth that cutting taxes is 
the easiest vote to cast. It is just the opposite. The fact is, 
having served on a city council and the State legislature and 
now in Congress, the easiest vote to cast is to spend more 
money.
    Now, government behavior is such that if you can't spend 
more money you borrow money so you can spend more. If you spend 
every dime and borrow it, you then find budget gimmicks to 
allow you to spend more and then only, and only if you can't do 
any of the above, will you then try to live within your means 
and once in a great while you will deny yourself extra money in 
order that you are not able to spend more.
    Make no mistake, that is one of the reasons there are 
hundreds of votes cast to raise spending around here and very 
few to ever deny yourself the money to spend more.
    So I think a big part of the Bush plan is to pay down the 
debt by strengthening the economy; restore a measure of 
fairness; and in the future to provide some responsibility to 
Washington to deny us in the future additional spending; force 
us to prioritize and to do more with the dollars that we have.
    And I would open it to the panel for comment. Doctor.
    Dr. Feldstein. I thought that was very eloquent. I don't 
think there is anything I would want to add that I haven't 
already said in my opening remarks or in answer to other 
comments.
    Mr. Brady. Mr. Greenstein.
    Mr. Greenstein. I would respectfully disagree, Congressman. 
In my view, what the Tax Code--what the tax cut is not is fair. 
When Senator Daschle did that little skit last week, I think 
what he was talking about was some of the waitress-type 
families that have been talked about a lot don't get $1,600; 
they get nothing or they get $100 or $150.
    There has been talk about families getting 100 percent of 
their income tax eliminated. A family of four who makes $26,000 
pays about $2,700 in payroll taxes and $20 in income taxes and 
gets a $20 tax cut, but that is less than 1 percent of its 
total tax bill.
    When you look at the tax cut as a whole, about 4 percent of 
it goes to the bottom 40 percent of the population. About 13 
percent of it goes to the bottom 60 percent of the population.
    Mr. Brady. Mr. Greenstein, I appreciate the focus on 
numbers but if you look at real people that family of four that 
saves $1,600, that is real money for them these days; and for 
the 3 million Americans who could lose their job in a recession 
that is real income to those folks. And while it is good to 
stand here and debate the numbers, and statistically we can 
prove you can hang an elephant from a cliff by a thread, but 
the fact of the matter is for a lot of working Americans with 
this economy that we are facing and the high cost of living 
this tax relief is very real to a person to them.
    Mr. Greenstein. And I am for giving those families tax 
cuts, but the typical filer doesn't have--isn't a married 
family with two kids, and the typical filer exactly in the 
middle of the income scale would get an average tax cut of 
about $450. The typical person in the top 1 percent would get 
$25,000 just from the income tax. If you average in the estate 
tax, it is $39,000. I think it is too tilted and too expensive.
    We could do as much for people in the middle. We could do 
more for the working families that pay payroll but not income 
tax at a lower cost if we didn't have so much at the top.
    Mr. Brady. So you don't believe income tax relief should go 
to those who pay income taxes?
    Mr. Greenstein. As I stated earlier, one of my concerns 
here is that the top 1 percent pays 20 percent of total Federal 
taxes and would get 36 percent of the tax cut.
    Mr. Brady. I don't mean to press you, but do you believe 
income tax relief should go to those who pay income tax?
    Mr. Greenstein. Income tax relief obviously can only go to 
those who pay income tax, but in providing that income tax 
relief one can make some of these tax credits refundable for 
families that also pay the payroll tax and provide that relief 
through the income Tax Code. And I think one can reform without 
eliminating the estate tax and make the tax cut substantially 
smaller as a result.
    Mr. Brady. I will take that as a yes. Dr. Hassett.
    Dr. Hassett. Mr. Brady, I applaud your remarks and would 
like to add that there are two reasons why economists generally 
don't stop at the level of analysis that Mr. Greenstein is 
presenting.
    The first is that it is not allowing for any economic 
impact, as you said, the 3 million people that you referred to. 
And the second, more importantly, is that if you bunch Social 
Security into the tax side when you are doing an incidents 
analysis like this, then basically you are assuming that the 
Social Security money that folks are putting in is not going to 
come back to them at some point. Most of us believe that the 
objective of the system is to give people back money when they 
retire. And so if you put a dollar into your Social Security 
fund now, then you will get something higher than that 
hopefully in the future.
    So thinking of that conceptually as a tax that should be 
bunched together with the taxes that we pay that pay for our 
defense and something, I think it is a stretch.
    Mr. Brady. Thank you, Doctor.
    Thank you, Mr. Chairman.
    Chairman Thomas. I thank the gentleman. Does the gentleman 
from Texas, Mr. Doggett, wish to inquire?
    Mr. Doggett. Thank you so much, Mr. Chairman. Dr. Feldstein 
and Dr. Hassett, at this late hour, in order to ask both of you 
several questions, I will respectfully ask you to give me one 
of three answers: I agree; I disagree; or I need to explain, 
and then if time permits I will ask you for your fuller 
explanation.
    The first thing I would like to inquire about is whether 
you agree with Treasury Secretary O'Neill's testimony this 
morning that if any part of the President's tax cut proposal is 
made retroactive that we must either reduce or eliminate some 
other portion of the President's tax cut proposal so as to hold 
the overall costs to what he calls the ``Goldilocks,'' just 
right level of $1.6 trillion. Dr. Feldstein?
    Dr. Feldstein. I think we could have a larger tax cut than 
that.
    Mr. Doggett. Excuse me, but do you agree or disagree or do 
you want to explain some more?
    Dr. Feldstein. I want to explain some more.
    Mr. Doggett. OK. Dr. Hassett?
    Dr. Hassett. Yeah, I would need to explain a little bit, 
too. I am sorry.
    Mr. Doggett. All right.
    Chairman Thomas. Doesn't Greenstein get to play?
    [Laughter.]
    Mr. Doggett. If you will give me another 5 minutes, I would 
love to have that opportunity.
    Chairman Thomas. You will get the same time everybody else 
does.
    Mr. Doggett. Do you agree with Treasury Secretary O'Neill's 
indication that while the President's tax cut may offer little 
help in stimulating the economy, ``it won't hurt,'' and that 
the likely economic effects should be compared with the many 
American men who each morning add a pair of suspenders to their 
belt to be safe in case their belt fails and their pants fall 
off? Do you agree with that?
    Dr. Feldstein. I would need more time to answer that.
    Mr. Doggett. Dr. Hassett?
    Dr. Hassett. I guess you have cornered us with I need to 
explain.
    Mr. Doggett. All right. Well, let me give you an easier 
one. Do you agree with Treasury Secretary O'Neill's testimony 
this morning that the huge deficits of the Reagan era, ``put 
ourselves in a ditch that was horrendous''? Dr. Feldstein?
    Dr. Feldstein. Yes.
    Mr. Doggett. You do agree with that?
    Dr. Feldstein. Yes, at the time.
    Mr. Doggett. Dr. Hassett.
    Dr. Hassett. Well, I would just probably have to explain 
every one of them.
    Mr. Doggett. You would have to explain that one?
    Dr. Hassett. Yes.
    Mr. Doggett. All right. Let me ask you next, do you agree 
with Treasury Secretary O'Neill that the record of fiscal 
discipline and economic stability of the previous 
administration was, in Secretary O'Neill's words, wonderful? 
Dr. Feldstein?
    Dr. Feldstein. No.
    Mr. Doggett. You don't agree with him?
    Dr. Hassett, do you agree with Secretary O'Neill?
    Dr. Hassett. Yes.
    Mr. Doggett. Thank you. Let me ask you then whether you 
agree with Dr. Greenspan, that, ``it is important that any 
long-term tax plan include provisions that would limit surplus-
reducing actions if specified targets for the budget surplus 
and Federal debt were not satisfied''? Do you agree with Dr. 
Greenspan on that?
    Dr. Feldstein. If that means a formal rule, no, I do not 
agree.
    Mr. Doggett. Dr. Hassett?
    Dr. Hassett. I disagree as well.
    Mr. Doggett. One of the principal architects of the 
wonderful economic record of the previous administration was 
former Treasury Secretary Bob Rubin, who has condemned 
President Bush's proposed tax cut as threatening our economy 
and who wrote in the New York Times yesterday, or Sunday, I 
believe, that there is broad agreement amongst virtually all 
mainstream economists that a tax cut this year is unlikely to 
provide meaningful economic stimulus and that if a tax cut is 
desired for short-term stimulative purposes the vast 
preponderance of one proposed by the President is largely 
irrelevant. Do you agree with Secretary Rubin on those points, 
Dr. Feldstein?
    Dr. Feldstein. No.
    Mr. Doggett. Do you, Dr. Hassett?
    Dr. Hassett. I will explain quickly. If the President pulls 
it forward--if we pull the President's plan forward, then I 
disagree. But the President's plan as proposed doesn't have 
something happening now, and so therefore the statement is 
true.
    Mr. Doggett. Since my red light is not on, Dr. Feldstein, 
let me go back to my first question and ask you if you would 
like to explain your disagreement, if there is some, with 
Secretary O'Neill on limiting this overall tax package to $1.6 
trillion, the ``Goldilocks'' Locks level.
    Dr. Feldstein. From a political point of view, I can see 
the reason to put down a number and say that is it, neither 
more nor less. From an economic point of view, and that is the 
context in which you asked me, from an economic point of view, 
since I think that the actual cost of that is substantially 
less than $1.6 trillion, I think that one could have a more--
one could go beyond the President's specific proposal.
    Mr. Doggett. Do you feel that without jeopardizing our 
obligations under Social Security and Medicare and to provide 
educational opportunities for our children and our other needs 
here, that we can afford a $3 trillion tax cut?
    Dr. Feldstein. I do not.
    Mr. Doggett. Over 10 years?
    Dr. Feldstein. No, I do not think we can have a $3 trillion 
tax cut.
    Dr. Hassett. No.
    Mr. Doggett. What do you think the limit is?
    Dr. Hassett. I can't answer that question.
    Mr. Doggett. What do you think it is, Dr. Feldstein?
    Dr. Feldstein. I don't have a number but I think that in 
terms of the static way that these numbers are estimated, we 
could have substantially more than $1.6 trillion within the 
budget window that is available, but I don't want to put a 
number on it.
    Mr. Doggett. You can't tell us how high we can go?
    Dr. Feldstein. It depends on what you get for it. It 
depends on the form of the tax cut because that affects the 
behavioral response and therefore the net cost.
    Mr. Doggett. Thank you very much. Thank you, Mr. Chairman.
    Chairman Thomas. I thank the gentleman. Does the gentleman 
from Wisconsin, Mr. Ryan, wish to inquire?
    Mr. Ryan. Thank you. Mr. Chairman, I guess I will just 
borrow on the Goldie Locks analogy and just say that I like my 
porridge pretty hot.
    I am one of those who believe that this current tax 
proposal is relatively modest.
    I noticed some of my colleagues here discussing this tax 
proposal have been surprised at some of the estimates. I 
notice, Dr. Feldstein, I think you said--you estimate it to be 
about $1.2 trillion. The WEFA model, which is a Wharton model 
that Heritage uses, says it is $939 billion. I think the 
Institute for Policy Innovation, former treasury analysts, I 
think their model says it is about $1.1 trillion.
    So the point is we are using static analysis. We agreed to 
that, but realistic, reality-based scoring shows that there is 
positive economic behavior that is induced from this tax cut 
and that it actually probably won't end up costing what we are 
measuring that. So I think that is just an important 
perspective.
    I also think it is important to take a look at this tax cut 
in the whole scheme of things. The Federal government is going 
to take, give or take a little bit, about $30 trillion in 
revenues over the next 10 years. We are talking about returning 
6 cents on the dollar back to taxpayers, $1.6 trillion out of 
$30 trillion.
    It is important to put this in perspective. Ronald Reagan 
came in in 1981 in the beginning of a recession, pushed an 
economic stimulus plan, a tax rate cut which actually grew 
revenues. It is only the problem that expenditure growth 
exceeded that of revenue growth at that time, and I think that 
is an important point to make for the record. But the point is, 
this tax cut is less than half the size of the Reagan tax cut 
of that year, relatively speaking. It is smaller than the 
Kennedy tax cut relatively speaking, when you take a look at 
the size of the economy versus what we are doing now.
    What I would like to ask is, in my part of the world that I 
represent, southern Wisconsin, we have lost over 5,000 jobs 
just in the last year. You know, just between Motorola and 
Chrysler, we have lost about 2,500 jobs just in southern 
Wisconsin. People, I believe, in the Midwest are at the front 
end of this downturn. Our household demand for energy is up 17 
percent. We have had a pretty tough winter this year. Our price 
of natural gas to heat our homes is up over 300 percent.
    I was just speaking to a small business man yesterday, in 
Elkhorn, Wisconsin, who does heat treating of metal parts. To 
fund--the money he takes to fuel his furnaces has been running 
about $20,000 to $15,000 a month. His energy bill just went 
from $20,000 a month to $65,000 a month on a very small 
business, with just a handful of employees. He is a subchapter 
S corporation, as are most of the employers in the area I 
represent.
    This income tax rate cut is almost like expensing. It is 
helping them pay for the cost of these high energy prices. This 
income tax cut helps people by giving them more money in their 
paychecks now.
    So what I would like to ask you, taking a look at the 
economic feedback, taking a look at the benefit we see to the 
economy, by bringing people's withholdings down, by helping 
small businesses keep more of the money they produce to 
reinvest in their businesses or just absorb some of these 
energy cost spikes that we in our area see, what do you think 
will occur in the beginning of this?
    The other question I have is, you know, I have a concern 
which may be viewed as critical of this tax package, that 
slowing the phase-in of rate cuts can actually be somewhat 
harmful, can build a hesitancy in the marketplace. You can have 
sort of a staggering effect. I believe hopefully this will 
become retroactive to January 1. It would be preferable to 
speed in the rate cuts faster, and I think that we could do 
that within the confines of static analysis.
    Do you have a concern that the phase-in of these rate cuts 
might induce some kind of adverse economic behavior, number 
one? Number two, are the rate cuts going to produce economic 
growth? Do you believe that the rate cuts will help stimulate 
the economy? Will the rate cuts help induce a buttressing of 
consumer demand and confidence?
    Dr. Feldstein. Yes, I think they will. I testified to that 
in my opening statement. I think that the sooner people begin 
to sense that this is for real, the more they will believe the 
outyear cuts, and it is the outyear cuts that are the big part 
of this, and it is that which are going to make people who are 
not cash constrained in every payment they make, is going to 
make them say I can afford to buy that new car or I can afford 
to buy that consumer durable, and that that will contribute to 
spending in the current year.
    Mr. Ryan. And the phasing in, do you think that the phasing 
in----
    Dr. Feldstein. So I think that if you phase it in more 
rapidly, if you phase it in more rapidly, you can get that 
stimulative effect; not just from the people who get some cash 
in their pockets sooner but from everybody who says aha, this 
is a real tax cut. They have passed it. It is going to start 
now. I can be more confident about it than if it were something 
that was over the horizon.
    Dr. Hassett. I think, Mr. Ryan, that what matters in the 
long run is how much money are folks going to be taking home in 
their paycheck. And so if they see a rate reduction coming in 
the future then they might well respond to that now.
    But you raise a genuine concern. I have heard some talk 
that there was quite a bit of action at the end of last year, 
that in December people took their vacations in December and 
moved the income into January because they felt there was a 
good chance they would get a tax cut this year, and I would 
expect that as we march down with rates that we will see some 
of that action again.
    Mr. Ryan. Dr. Greenstein.
    Mr. Greenstein. If I could just comment on it. As I have 
said before, I think the economic benefits are being 
overstated. The economy has slowed right now. I don't see how, 
particularly given the pace of the Senate, the checks are going 
to go out much before next summer. The CBO forecast you are 
operating on shows that by 2002 we have a full scale recovery 
from the recession.
    I think we do have a problem right now, and our best 
mechanism right now is interest rates. I hope the Federal 
Reserve lowers them further. I think that is going to have a 
much bigger effect than anything you do on taxes because I 
don't think--it is not that tax policy can't have a stimulative 
effect. It is very unlikely even this year to occur in time to 
make much difference.
    Dr. Hassett. I would just like to add, Mr. Ryan, that the 
economists who studied this were quite surprised to find that 
fiscal policy in recessions was reasonably effective. It is 
just that folks tried a first punch that was too light and that 
generally we didn't get big measures until well into the 
recession. So the reason that in the past fiscal policy hasn't 
pushed us out of recession is that we delayed.
    So I think that Mr. Greenstein agrees, and he is saying it 
is not likely that we would pass it soon but I would argue this 
is why we should.
    Mr. Ryan. That is precisely my point. That is why I like my 
porridge hot. I think we ought to have this income tax cut 
fast, deeper, retroactive to January 1st, to make sure we get a 
good punch into the economy, juice the economy to make sure 
that we can avoid a hard landing.
    The concern I have around here is that everybody is talking 
about let's wait and see, let's see if they materialize. Well, 
$1.5 trillion have already materialized in the surplus since 
then-Governor Bush proposed this tax cut in the first place. 
The economy has soured. The growth of the projections of the 
surpluses are higher. So we have waited and we do see, and it 
is my concern that if we keep waiting and seeing we won't give 
the economy the boost it needs right now.
    The other thing is whether people are going to buy Lexuses; 
it is my hope that they buy Tahoes and Yukons and Dodge 
Intrepids and Cherokees because 7,000 jobs in southern 
Wisconsin are tied exactly to those models.
    So if this tax----
    Chairman Thomas. And with that?
    Mr. Ryan. And with that, I yield back the balance of my 
time.
    Chairman Thomas. I thank the gentleman.
    Does the gentleman from North Dakota, Mr. Pomeroy, wish to 
inquire?
    Mr. Pomeroy. Mr. Chairman, I do wish to inquire. This is 
the first time I have had a chance to inquire as a Member of 
your Committee, and although I am the last to present no one 
has been happier to be here than me.
    Chairman Thomas. I tell the gentlemen you are on the train, 
and that is what counts.
    Mr. Pomeroy. Okay. Thank you.
    I hope the gentleman from Wisconsin, my friend from 
Wisconsin, also has some muffler manufacturers in his district, 
because that is where really the dollars that we are talking 
about for more Americans would fall under this.
    Let us deal with the stimulative question for a second. I 
thought that Dr. Hassett made a very interesting point earlier 
in your testimony when you indicated if you put a dollar in the 
pocket of the broad middle class you are going to get more of a 
stimulative effect than adjusting the rates at the very top 
end.
    Dr. Hassett. In the short run.
    Mr. Pomeroy. In the near term. So to the extent we talk 
about it as stimulus to ward off this recession, give us a soft 
landing, we ought to really contemplate whether or not we are 
doing enough at the marginal rates at the low end.
    Much has been talked about about the 15 to 10 percent rate 
cut. I don't think nearly as much thought has been given to 
actually the ranges of income that fall within that reduced 
rate. Only the first $6,000 of an individual taxpayer's income 
would come from the 15 to the 10; for a married couple, only 
the first $12,000.
    Now, that range for the couple that will get a $12,000 
income tax reduction, they are going to be paying income tax at 
the 15 percent rate all the way up to roughly $47,000. Maybe it 
would make sense, given what you say about getting more to the 
broad middle so they can stimulate the economy, we ought to 
expand the ranges of that lower end marginal rate cut if we are 
going to deal with this package. That might be some tweaking 
that this Committee would be well advised for purposes of 
stimulus effect. Your response, Doctor?
    Dr. Hassett. The Committee certainly has the ability to 
move into that range. I would argue that within--even within 
the parameters supplied by the President, that there is a 
golden opportunity to take the bottom bracket move, 15 to 10, 
which phases in over some time and starts in 2002, and just 
lump it in as quickly as possible. It seems to me that as a 
handicapper at least that that would be something that one 
ought to be able to acquire a lot of support for.
    Now, it doesn't mean you don't move the marginal rates as 
well, but if you want stimulus then that is the area to target.
    Mr. Pomeroy. More at the lower end, more stimulative 
effect?
    Dr. Hassett. Because folks consume more of the dollars that 
you give them and that is where you get it, at the bottom, in 
the short term.
    Mr. Pomeroy. Exactly right. I think that is a very 
important point.
    Mr. Greenstein. Of course, lowering the--establishment of 
the new 10 percent bracket affects everybody all the way up 
through the top of the income scale. So if your only test were 
short-term stimulus and you were even thinking that maybe you 
would do a temporary piece now and then have other permanent 
changes in the Tax Code, 15 to 10 percent would not be the one 
that would have the most stimulative effect.
    The larger stimulative effect would come from, for the same 
amount of money as that let's say, something where you had some 
kind of--what many Governors, both Republican and Democrat, 
have done with State budget surpluses, you have a flat dollar 
amount for all married families, half of that for single 
filers, in between for heads of households, you put it out as 
like a surplus dividend and you provide it to families also 
that owe significant payroll tax that don't pay income tax. It 
wouldn't have to be a permanent change in the Code, but that 
would actually, for the same amount of money, have more 
stimulative effect; would put a larger proportion of the 
dollars in the low and middle income ranges.
    Mr. Pomeroy. I am going to be short on time. I would love 
to have you comment on this because you and I have----
    Dr. Feldstein. I would say don't design the tax reform for 
stimulative purposes. Design the tax reform for long-term 
purposes. You might change the timing of the phase-in and the 
form of the phase-in with stimulus in mind, but basically go 
for a structure of tax rates that gives you the incentive 
effects that you want long term.
    Mr. Pomeroy. And is that because it is your belief that the 
stimulative effect is somewhat nominal of a tax cut, in the 
near time?
    Dr. Feldstein. The stimulative effect, I think, is a 
favorable by-product of making these long-term changes, and a 
lot of the effect is not just in the cash flow. We keep coming 
back to saying, well, if the lower income family gets a little 
more to spend that will help.
    The middle, the upper middle income family, that for all 
the reasons we have talked about is going to get the bulk of 
whatever tax cut there is because they pay the bulk of the 
taxes, if you tell them now that they are going to start 
getting that and that they are going to get that for the 
indefinite future, that is going to affect their spending plans 
even now.
    Mr. Pomeroy. I find that quite implausible, Doctor, that I 
am a--that my wife and I will say, by golly, as we read the 
paper, Congress has acted, this is going to phase in in 2007 
and, honey, I think we can go ahead and make that car payment 
now. I think that that just really stretches credibility beyond 
the point of belief.
    I have one final point. I know my time is about at an end. 
The notion that we are going to take these surpluses and pay 
off the debt and then we are going to buy a big chunk of the 
private economy and this just isn't right, I mean I honestly 
think that at this--that that concern is less than timely. It 
reminds me of me beginning a diet, an overdue diet, and 
worrying--laying awake at night worrying about the effects of 
emaciation and malnutrition. You know, it is a long way before 
we get $3.4 trillion worth of debt retired, and Dr. Walker, 
David Walker, the head of GAO, testified last week in the 
Senate--
    Chairman Thomas. General Accounting Office.
    Mr. Pomeroy. Thank you, General Accounting Office--
testified that without any tax cut, in light of the fact that 
our entitlement programs, Social Security and Medicare slip 
into deficit positions after the next decade, into the teens, 
that we are going to be in deficit in a unified budget position 
by 2019 without any tax cut. So I don't see how in the world we 
get 20 percent of the--that we have a surplus problem when we 
have got this looming entitlement deficit.
    Dr. Hassett. Can I respond quickly, Mr. Pomeroy?
    Mr. Pomeroy. Yes.
    Dr. Hassett. I would say quickly that the second part of 
your question argues in some sense against the first part 
because the reason why we need to acknowledge the acquisition 
by the government of private assets, if we don't change policy 
today, is that one of the arguments against the tax cut that we 
see is that, no, we should buildup assets in preparation for 
the deficits that will come, whence Social Security.
    Mr. Pomeroy. Actually, at this stage, Doctor, we are 
talking about paying off debt as opposed to building up assets.
    Dr. Hassett. The point is that the debt under the baseline 
will be paid off relatively quickly and so therefore if you 
want to hoard assets in order to pay off our Social Security 
liabilities then you have to simultaneously, unless we address 
Social Security reform, say that it is okay to have the 
government own a large share of the private economy.
    Chairman Thomas. The gentleman's time, unfortunately if he 
thought he was going to be the last person and he could then 
stretch it a little bit, the gentleman needs to know that the 
gentlewoman from Washington, who hasn't asked this panel a 
question, would very much like to inquire.
    Mr. Pomeroy. Thank you, Mr. Chairman, for that very helpful 
orientation admonition, and I will cease at this time. Thank 
you very much.
    Ms. Dunn. Thank you very much, Mr. Chairman.
    It is a pleasure, gentlemen, to be listening to all of you. 
You have different points of view but I think your contrast 
makes things clearer to us.
    I think it is important to keep in mind two important 
points of the Bush tax plan. One is that it takes 6 million 
people off the tax rolls. That is very important. He has aimed 
some of his provisions at the lower income folks, and he has a 
sensitivity there, and I think that is very important to allow 
people to move out of poverty into what they hope will 
eventually be the middle income groups.
    Also, I want to just point out that a single woman on her 
own, with two children, will not pay income taxes under this 
plan until she earns $31,000 a year. That is a very important 
point because there are a lot of single women out there with 
little kids and they need to know how they will benefit from 
this tax plan.
    I want to speak specifically and get your opinion on the 
death tax. In 1997, we tried to write a provision, tried with 
the best of intentions, that would allow folks with incomes, I 
think it is $1.3 million, to apply, folks who owned family-held 
businesses, to apply for an exemption. What we learned very 
quickly was that it is almost impossible to reflect the 
complicated, real life relationships in legislative policy. So 
you had very few people applying for that exemption. Maybe 
between 1 and 3 percent of family-held businesses could even 
qualify and of those folks the IRS questioned two-thirds of 
them. So where we have tried before, we have generally failed 
in providing for relief from the death tax.
    I have got to think--and Dr. Hassett and Dr. Feldstein, 
thank you very much, I know Dr. Greenstein's opinion but Drs. 
Feldstein and Hassett, I would like to know your thoughts on 
the kind of economic infusion the death tax could create in our 
economy.
    I will simply tell you that as we drop a death tax bill 
this week with over 200 people on board, we provide for that 
exemption of $1.3 million a person immediately without having 
to qualify for it. I think that is a stimulating injection, 
that growth policy. And we also provide for a 5 percent rate 
reduction over 10 years.
    In my conversations and the conversations I have had with 
my colleague John Tanner, who supports this bill and is my 
cosponsor, we have spoken to women business groups who say that 
the cost of compliance alone is killing to them, and other 
people who have to pay death taxes, they are buying life 
insurance policies to buy liquidity for themselves at the end 
of their life, especially if it ends unexpectedly, and they are 
paying for estate planning.
    They believe, under a National Association of Women 
Business Owners' survey last year, that it cost them about 
$1,000 a month for small, women-owned businesses to comply with 
the death tax. Those are dollars that should be going in to 
cover health insurance, or for whatever those folks want to 
purchase with their own dollars.
    The Black Chamber of Commerce that is on board believes it 
takes three generations to build a business, provides a legacy 
for them, the death tax is their enemy. The same thing with the 
Indian Business Associations, the Hispanic Chamber of Commerce. 
Conservation groups support death tax repeal because they see 
farmers having to sell property that has been in that family 
maybe for generations, families that don't feel like they are 
wealthy people; they live like normal people do but they are 
land rich. These are the developments that are created on the 
outskirts of farm areas, and conservationists don't like that 
so we have got lots of them on board.
    I want to say that I think this death tax affects a lot 
more people, Dr. Greenstein, than you mentioned with the 2 
percent of the top end of the economy because you never do 
count in those compliance costs that somebody has to pay during 
their lifetime.
    I would like to hear from Drs. Hassett and Feldstein their 
thoughts on death tax and why it is--the repeal of it and why 
it is part of the Bush tax plan.
    Dr. Hassett. Thank you, Ms. Dunn.
    The death tax is really the third tax that people have to 
pay on their money. They pay tax when they earn it at work, 
they pay tax as it grows on their capital income, and then when 
they die they pay another tax as well. If you add together all 
the taxes, it is a very high number, depending again where your 
marginal rate is and so on, and economists generally believe 
that really high tax rates discourage activity.
    In this case, one would say that many people perhaps don't 
even start businesses because they look at the whole 
constellation of taxes that they are going to have to pay if 
they succeed and decide that it is not worth the effort.
    But the death tax has been around for a long time and the 
variation in it isn't such that we can look at it and pinpoint 
what response we will get if we remove it. Certainly, the 
hardships that it imposes are significant but the stimulative 
effects of its repeal are not something that I can quantify.
    Dr. Feldstein. I think Kevin Hassett has given a very good 
answer to the question. Unlike the income tax, where we have a 
lot of experience of rates coming down and rates going up and 
we can actually see what impact that has had. We can't do that 
in the same way with the estate tax. But I think the various 
things that you said sound right to me.
    It is clear this is a tax that collects very little revenue 
relative to our total revenue system and yet is responsible for 
an enormous amount of legal activity on the part of potential 
taxpayers and tax planners trying to figure out how to pay 
little or no estate tax.
    I would say one other thing, and that is about the revenue 
effect of this. We are back to my old friend static versus 
dynamic. One of the things that the estate tax does is it 
encourages people to set up foundations, to make charitable 
contributions. Some of those are to fine and worthy 
institutions and some of those are to perhaps less fine and 
worthy institutions, but the main thing is that once they make 
that gift, the income that is generated from those assets is 
outside the tax system.
    Once you set up a foundation and you put $100,000 or a 
million dollars in that foundation, the income that comes every 
year from that is tax free. So the Treasury loses, the 
government loses all the taxes on the interest and dividends 
and capital gains that would otherwise be subject to tax.
    When an individual passes that money to another person, 
then it stays in the tax system. But once it goes into a 
foundation, although it may do fine work, it costs the Treasury 
money in perpetuity. I think that is something that you ought 
to think about when you think about whether this costs 
anything.
    We don't have very good estimates of that but it isn't hard 
to imagine that the up-front revenue loss, because of the 
eliminating of the estate tax, is balanced by the present value 
of all of the future interest and dividend tax payments that 
would otherwise be there and that under current rules are 
induced to shift money away; because, people say, it is a 55 
percent marginal tax rate at the top, I would rather give that 
money to some institution or another or create a private 
foundation and get friends to run it, and heaven knows what 
good or bad it actually does but at least I am not sending that 
money to Washington. And not only are they not sending that 
money to Washington, they are not sending the taxes on the 
interest and dividends in perpetuity.
    Chairman Thomas. The gentlewoman's time has expired.
    Ms. Dunn. Thank you very much, Mr. Chairman.
    Chairman Thomas. The gentleman from Louisiana wishes to 
inquire?
    Mr. McCrery. Thank you, Mr. Chairman. Just a couple of 
comments.
    Number one, Dr. Hassett, thank you for your column in the 
Wall Street Journal recently that very clearly explained why we 
ought not focus entirely on reducing the publicly-held debt. It 
is an excellent explanation.
    And, Dr. Feldstein, let me thank you for your comments 
today on the same subject, which I hope will serve--both of 
your comments will serve to put the focus of this Committee on 
something other than paying down debt.
    Paying down debt is good. We are paying down debt, and if 
we don't pay down any more debt, just leave it where it is and 
let the economy grow, it will soon, very soon, be reduced to a 
level below what we have seen in decades in terms of a percent 
of our income. So we are doing a good job on paying down the 
debt, and I am glad you both pointed out that that is not what 
we ought to focus on entirely as we go through these maneuvers 
in Congress.
    Number two, it has been said by our former chairman that 
Americans are paying more in taxes now than they have ever 
paid, and some would roll their eyes. Well, the fact is that 
last year, and I have the historical table right in front of me 
from the CBO, last year----
    Chairman Thomas. The Congressional Budget Office.
    Mr. McCrery. Yes. Last year, Americans paid 20.6 percent of 
our GDP to the Federal government in the form of taxes, 20.6 
percent. This table only goes back to 1962 so I can't really 
speak with authority before 1962, but there is no year on this 
table that comes even fairly close to 20.6 of GDP in revenues. 
So you have to go back before 1962, and I predict that if you 
did do that you would have to go back to World War II or some 
wartime when we were collecting more than 20.6 percent of our 
GDP in taxes.
    So indeed we are taxed more than we have ever been in 
peacetime. We need a tax cut. We don't need to just feed the 
Federal Government and create more programs to spend all that 
money. We need to make sure we give that money back to the 
American people who earned it and let them do what they do 
best, create jobs and grow our economy.
    Thank you, Mr. Chairman.
    Chairman Thomas. And with that, I want to thank all three 
of you for the endurance test. You passed marvelously. The 
Committee thanks you, and without any additional comments, the 
Committee stands adjourned.
    [Whereupon, at 3:40 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]

             Statement of the American Bankers Association

    The American Bankers Association (ABA) is pleased to have an 
opportunity to submit this statement for the record on certain of the 
revenue provisions of the Administration's fiscal year 2002 budget.
    The American Bankers Association brings together all categories of 
banking institutions to best represent the interests of the rapidly 
changing industry. Its membership--which includes community, regional 
and money center banks and holding companies, as well as savings 
associations, trust companies and savings banks--makes ABA the largest 
banking trade association in the country.
    The ABA supports the Administration's fiscal year 2002 tax cut plan 
and believes it would provide much needed broad-based economic 
stimulus. Specifically, we are pleased that the plan would reduce 
marginal income tax rates, reform the estate tax and provide a 
permanent extension of the research and experimentation tax credit.
Individual Income Tax Rates
    Recent economic reports suggest a pronounced weakening in economic 
performance. By contrast, the Congressional Budget Office's most recent 
forecast projected a 10-year surplus of $5.6 trillion, of which $2.5 
trillion is the Social Security surplus and $3.1 trillion is the non-
Social Security surplus that could be available to fund a tax cut. 
These figures represent a dramatic increase in the size of the overall 
surplus.
    In this connection, the ABA believes tax cuts are in order to 
confront the evident pronounced weakening in recent economic 
performance and agrees with Federal Reserve System Chairman Alan 
Greenspan that such tax cuts should be enacted sooner rather than later 
to help smooth the transition to longer term fiscal balance. Indeed, in 
testimony before the Senate Budget Committee, Chairman Greenspan said 
that ``over the longer run, most economists believe that [tax policy] 
should be directed at setting rates at the levels required to meet 
spending commitments, while doing so in a manner that minimizes 
distortions, increases efficiency, and enhances incentives for saving, 
investment, and work.''
    Enactment of a broad-based tax cut would put in place a needed 
safety measure should the current economic weakness spread beyond 
current expectations. We urge you to expeditiously enact this 
legislation.
Estate Tax Reform
    The ABA supports reform of the estate tax system; however, the ABA 
would like to bring to your attention the real-world impact of 
including a return to the repeal of the estate tax, as some have 
proposed. As property values have risen, more families have become 
subject to the estate tax. In many instances, family-owned businesses 
and farms must liquidate to pay the tax.
    The current system provides that the first $675,000 of the net 
estate and gift value is exempt (this exemption rises to $1,000,000 by 
2006). The total estate of a decedent includes the value of all 
property, real and personal, tangible and intangible, in which the 
decedent owned an interest on the date of death.
    Although ABA supports reform of the estate tax, we caution against 
the elimination of the step-up in basis at death and a return to 
carryover basis. The burden that would be put on heirs of determining 
the basis of assets acquired decades before should not be 
underestimated.
    In 1976, Congress enacted carryover basis, in which the basis of 
property received from a decedent was ``carried over'' from the 
decedent to the heirs. This rule gave heirs a basis in inherited 
property equal to the decedent's basis on the date of death.
    Congress repealed carryover basis in 1980 because it had proven to 
be an unworkable and expensive burden on heirs. Few individuals 
maintained accurate records of the purchase price of all items included 
in an estate. In fact, in many instances executors could not determine 
so much as an accurate date of acquisition. For example, in one 
instance an estate involved a decedent who had been an oil 
``wildcatter'' and owned some 25 or 30 parcels of land in two states: 
the ownership being for surface rights only on certain parcels, and 
both surface and mineral rights on other parcels. The land was acquired 
through ``swaps'' with family members, land patents and like-kind 
exchanges in consideration for consulting expertise, etc. To date it 
has taken two attorneys six months just to sort out title. The 
determination of the decedent's cost basis (or even acquisition dates) 
has not been possible.
    The estate tax has always been complex. Repealing it would go a 
long way toward simplifying the tax code. However, we are concerned 
that a return to carryover basis would be an administrative nightmare, 
leading the nation further away from a simplification of the tax code. 
These costs--both in legal and executor fees and in the many personal 
hours looking for records--will be borne by the many Americans who 
would otherwise receive the stepped-up basis.
Research and Experimentation Tax Credit
    ABA supports the permanent extension of the tax credit for research 
and experimentation. The banking industry is actively involved in the 
research and development of new intellectual products and services in 
order to compete in an increasingly sophisticated and global 
marketplace. The proposal would extend sorely needed tax relief in this 
area and facilitate tax and business planning with respect to its use.
Other Issues
    The ABA urges Congress to pass the Administration's tax package. We 
understand that Congress may address other tax matters, either as a 
part of this package or later in this Session. Should such opportunity 
arise, we would request that you consider legislation that would:
     Expand IRAs, pensions and tax incentives for savings
     Create Farm, Fish, and Ranch Risk Management Accounts 
(``FFARRM'' accounts)
     Exempt state issued agricultural ``aggie'' bonds from the 
private activity bond volume cap
     Improve tax laws and remove competitive barriers for 
Subchapter S banking
     Enact a permanent ``active finance'' exception to Subpart 
F
     Reform the Alternative Minimum Tax.
Conclusion
    The ABA appreciates having this opportunity to present our views on 
the revenue provisions contained in the President's fiscal year 2002 
budget proposal. We look forward to working with you in the future on 
these most important matters.

                                


  Statement of John Pratt, Chairman, American Business Council of the 
                             Gulf Countries

    GENERATING U.S. EXPORTS AND U.S. JOBS THROUGH INCOME TAX RELIEF

             Expanding the Foreign Earned Income Exclusion

    Thank you, Chairman Thomas, for the opportunity to present 
testimony in support of your hearing on the President's tax relief 
proposals. My name is John Pratt, and I serve as Chairman of the 
American Business Council of the Gulf Countries, a Gulf-based affiliate 
of the U.S. Chamber of Commerce representing the more than 700 U.S. 
companies with operations in the region. Widely regarded as the voice 
of American business in the Arabian Gulf, the ABCGC is a non-profit, 
non-partisan organization consisting of the nine American Chambers of 
Commerce in the region. For more than a decade, the ABCGC has worked 
closely with the U.S. Government to enhance America's business 
competitiveness overseas.
    Mr. Chairman, in the ongoing battle for international market share, 
the Section 911 foreign earned income exclusion has proved to be one of 
the most important weapons in America's trade arsenal. By helping to 
maintain the presence of U.S. citizens ``on the ground'' around the 
world, Section 911 has had a direct impact on the competitiveness of 
American workers and U.S. companies operating in foreign markets. In 
the ABCGC's experience, Americans abroad are the best salesmen and 
saleswomen for U.S. goods and services overseas. Put another way:

              Americans Abroad = U.S. Exports = U.S. Jobs

    As part of the Taxpayer Relief Act of 1997, and thanks largely to 
the efforts of your predecessor, Chairman Bill Archer, Congress 
increased Section 911 by $2,000 per year, leveling off at $80,000 next 
year. Moreover, beginning in calendar year 2008, the $80,000 exclusion 
will also be adjusted for inflation for 2008 and subsequent years.
    American workers and U.S. companies around the world appreciated 
this step by Congress, which helped to shore up temporarily the 
backsliding that the foreign earned income exclusion had experienced 
for more than a decade. But beginning next year, when the exclusion 
tops out at $80,000, the backsliding will return with a vengeance.
    According to a study conducted by PricewaterhouseCoopers LLP in 
1999, the exclusion amount in real dollars is 45 percent below its 
level in 1983 ($80,000 in nominal dollars and $134,197 in 1999 
dollars), following passage of the Economic Recovery Tax Act of 1981. 
The real value of the exclusion will continue falling until 2007, when 
it will stabilize at approximately $65,150 in 1999 dollars. Looked at 
from a ``purchasing power'' perspective, the value of the exclusion 
will have plummeted in real dollars from $134,197 (1983) to $65,150 
(2007), a substantial loss of nearly $70,000 in 1999 dollars. (A copy 
of the 1999 report by PricewaterhouseCoopers LLP--The Effect of 
Inflation on the Foreign Earned Income Exclusion Amount--is attached to 
this testimony as Appendix A.)
    The ABCGC believes that if the U.S. Government wants to put 
American workers and U.S. companies on an equal footing with their 
competitors in the global marketplace, Congress should remove 
limitations on the Section 911 exclusion. The United States is the only 
major industrial country in the world that taxes on the basis of 
citizenship rather than residence, which puts our companies and our 
workers at a competitive disadvantage in foreign markets.
    But because the Bush Administration and Congress have many tax 
relief priorities and are committed to limiting the President's package 
to $1.6 trillion, the ABCGC proposes an interim measure intended to 
restore value to the exclusion that has been eroded over the years as a 
result of inflation.
    This interim measure consists of two parts. First, the Section 911 
exclusion would be raised to $100,000. This is substantially less than 
what the exclusion would be worth today ($135,000+ in real dollars) if 
it had been indexed, as it was intended to be, since the early 1980s. 
Second, the exclusion would be indexed to compensate for the effects of 
inflation. Such indexation would be entirely consistent with the 
inflation adjustments made in many other dollar amounts in the 
individual income tax system--the standard deduction, personal 
exemption, tax bracket amounts, earned income credit, phase-out of 
itemized deductions and personal exemptions, and so on.
    Enactment of this two-part measure represents a relatively small 
investment that will position the United States to compete globally in 
the twenty-first century and yield billions of dollars worth of 
dividends to the U.S. economy in the years ahead.
          * * * * * * *
    When it comes to taxing its citizens on foreign earned income, the 
United States is out of step with the rest of the world. As a result, 
American workers are significantly more expensive to hire than 
comparably qualified foreign nationals. The $78,000 foreign earned 
income exclusion helps to offset some of the imbalance created by this 
policy, but U.S. companies and Americans abroad remain vulnerable. U.S. 
citizens overseas must include as taxable ``income'' many non-salary, 
quality-of-life items for which their employers provide reimbursement: 
schooling for children, cost-of-living allowances, home leave, 
emergency travel, and other necessary and often expensive aspects of 
living overseas.
    Taxable reimbursements like these often double an overseas 
American's taxable income. He or she therefore has a much higher tax 
liability than does a worker with the same salary employed in the 
United States. If his or her employer agrees to offset these increased 
taxes, the cost to the company of hiring this American worker goes 
still higher. As a result, the trend worldwide is to replace American 
workers with less expensive (inclusive of taxes) third country 
nationals, especially Canadians and Europeans.
    Current U.S. tax policy makes it very difficult for U.S. companies 
to bid competitively on international contracts if they plan to utilize 
American employees to staff overseas projects. The Section 911 
exclusion offers an important step toward placing U.S. companies on a 
level playing field with non-U.S. companies competing for these global 
contracts. Section 911:
     Makes U.S. citizens working overseas more competitive with 
foreign nationals who pay no tax on their overseas earned income;
     Makes American companies more competitive in their bids on 
overseas projects;
     Helps to put Americans ``into the field'' overseas, where 
they promote U.S. goods and services, repatriate much of their earnings 
to the USA, pave the way for future growth of U.S. export 
opportunities, and create hundreds of thousands of jobs in the United 
States.
    Two independent studies commissioned by the non-profit Section 911 
Coalition in 1995 reinforced the long-held view that the foreign earned 
income exclusion is especially important to the ``little guy'' trying 
to do business or provide educational services overseas.
    The first study, a survey conducted by international economists at 
the Johns Hopkins University, suggests that the overseas American 
workforce of small and medium-sized companies depends heavily on the 
Section 911 exclusion. (A summary of this study is attached as Appendix 
B.)
    The second study, conducted by Price Waterhouse LLP, found that 
without Section 911, U.S. exports would decline by nearly two percent. 
That translated into a loss of some 143,000 U.S.-based jobs. These 
figures do not include service-related jobs or indirect employment, 
which would likely double the number of jobs lost. (A summary of this 
study is attached as Appendix C.)
    The Price Waterhouse study also found that: (1) The benefits of 
Section 911 are more important for lower-paid Americans abroad than for 
those who receive higher pay; (2) By 1995, the benefit of the exclusion 
had dropped by 43 percent in little more than a decade and that the 
downward spiral is expected to continue; (3) An unlimited exclusion 
would be ``consistent with the international tax policy standards of 
competitiveness, preservation of the U.S. tax base, and 
harmonization.''
    Moreover, the ABCGC's ``real world'' experience has shown that:
     Small and medium-sized companies, when trying to gain a 
foothold overseas, are more likely than large companies (many with an 
established overseas presence already) to draw on U.S.-based personnel 
to penetrate foreign markets.
     Small and medium-sized companies, because they lack the 
world-class name recognition that might provide them with open access 
to foreign customers, traditionally rely very heavily on Americans 
overseas to specify and purchase their products.
     Small and medium-sized companies are, by necessity, much 
more sensitive to individual cost elements and the financial bottom 
line. Without the $78,000 Section 911 exclusion to help make overseas 
Americans more competitive with foreign nationals, relatively few of 
these small and medium-sized companies would be able to hire Americans 
to fill overseas slots.
    In our experience, Mr. Chairman, having Americans overseas is not 
just helpful, it is essential. In effect, taxation of foreign earned 
income amounts to a shortsighted, indirect tax on U.S. exports and 
American culture. This is a debilitating and entirely self-inflicted 
wound--a policy which discriminates against America's companies, U.S. 
workers, and American educational institutions abroad.
    For U.S. companies to continue expanding their market share 
worldwide, they must think and act globally. To stay competitive 
internationally, American managers need the kind of ``hands on'' 
experience that can only be gained by living and working abroad. In 
recent years, for example, two of the traditional Big Three automobile 
companies promoted their CEOs directly from European positions to 
corporate headquarters. This clearly demonstrates recognition by these 
companies of the role that international experience plays in their 
economic futures.
    Nevertheless, it is often very difficult to persuade key employees 
to adjust their career paths and family situations by leaving corporate 
headquarters and the United States. And from the companies' 
perspective, despite the many advantages of hiring American peak 
performers to head overseas offices, current tax policies tend to make 
this option prohibitively expensive.
    The loss of U.S. market share and the cutback in American jobs 
overseas represent a setback for American competitiveness. However, 
this tells only part of the story. The other part, of more immediate 
concern here at home, is the impact felt in communities all across the 
United States as jobs created or sustained by exports would disappear.
    All Americans abroad, whatever their background, are helping to 
fuel the economy in the United States. By securing employment overseas, 
they free up jobs for other Americans back home, thereby reducing 
unemployment. They also support the American economy by repatriating 
much of their overseas earnings back to the United States. Most 
important of all, perhaps, Americans working overseas serve as the 
front-line marketing and sales force for U.S. exports.
    Unless all Americans support competitiveness through exports, our 
nation's trade deficit will surely continue. Exports are widely 
considered the engine of growth for the U.S. economy. But when the 
engine of growth is stalled out by constrictive U.S. tax laws that are 
no longer appropriate, Americans everywhere pay the price.
          * * * * * * *
    Mr. Chairman, jobs that were traditionally held by Americans are 
going to our country's trade competitors. The situation will only get 
worse unless Congress and the new Bush Administration take steps soon 
to make American workers and U.S. companies more competitive in 
overseas markets, The Section 911 foreign earned income exclusion is 
one of the most effective trade weapons that the United States has at 
its disposal, and President Bush's tax relief package is offering a 
unique opportunity to staunch the flow of U.S. jobs to America's 
competitors. In the weeks ahead, we urge you to move aggressively to 
expand Section 911 to $100,000 and to index it for inflation . . . 
before it's too late.
    Thank you for the opportunity to provide testimony. I look forward 
to answering any questions that the Committee may have.

APPENDIX A
PRICEWATERHOUSECOOPERS L.L.P.

 The Effect of Inflation on the Foreign Earned Income Exclusion Amount

Introduction
    This report updates information on the effect of inflation on the 
real value of the foreign earned income exclusion amount, which was 
originally included in an October 1995 report (entitled Economic 
Analysis of the Foreign Earned Income Exclusion) prepared by Price 
Waterhouse LLP for The Section 911 Coalition.
    Under the provisions of Section 911 of the Internal Revenue Code, a 
U.S. citizen or resident alien whose tax home is outside the United 
States, and who meets a foreign residence or foreign presence test, may 
exclude from gross income in 1999 up to $74,000 per year of foreign 
earned income plus a housing cost amount. Historically, the principal 
rationale for the exclusion has been to make the tax treatment of 
Americans working abroad more competitive with that of foreign 
nationals and, thereby, to promote exports of U.S. goods and services.
History of the Foreign Earned Income Exclusion
    The foreign earned income exclusion originally was enacted in 1926 
to help promote U.S. exports. From 1926 to 1952, the exclusion was 
unlimited, corresponding to the present day practice of other major 
industrial countries. From 1953 to 1977, the exclusion was limited to 
$20,000 per year; however, for Americans working abroad for more than 
three years, the exclusion was increased to $35,000 from 1962 to 1964 
and subsequently reduced to $25,000 from 1965 to 1977.
    In 1978, the Foreign Earned Income Act replaced the Section 911 
exclusion with Section 913, a series of deductions for certain excess 
costs of living abroad.
    The Economic Recovery Tax Act of 1981 restored Section 911 and 
increased the exclusion to $75,000 in 1982 with scheduled increases to 
$95,000 in 1986. The legislative history indicates that Congress was 
concerned that the rules enacted in 1978 made it more expensive to hire 
Americans abroad compared to foreign nationals, reduced U.S. exports, 
rendered the United States less competitive abroad, and due to the 
complexity, the new rules required many Americans employed abroad to 
use professional tax preparers.
    Among a number of other deficit reduction measures, the Deficit 
Reduction Act of 1984 delayed the scheduled increases in the foreign 
earned income exclusion, freezing the benefit at $80,000 through 1987. 
The Tax Reform Act of 1986 reduced the exclusion to $70,000 beginning 
in 1987. The exclusion remained at this level through 1997.
Present Law
    The Taxpayer Relief Act of 1997 increased the $70,000 exclusion to 
$80,000 in increments of $2,000 beginning in 1998. The following table 
shows the exclusion amounts specified by the Act.

           Table 1.--Present Law Section 911 Exclusion Amounts
------------------------------------------------------------------------
          Calendar year                       Exclusion amount
------------------------------------------------------------------------
1998.............................  $72,000
1999.............................  $74,000
2000.............................  $76,000
2001.............................  $78,000
2002-2007........................  $80,000
2008 and thereafter..............  $80,000 adjusted for inflation
------------------------------------------------------------------------

    As noted in the table, beginning in 2008 the $80,000 exclusion for 
foreign earned income will be adjusted for inflation. Thus, for any 
calendar year after 2007, the exclusion amount will be equal to $80,000 
times the cost-of-living adjustment for that calendar year. The cost-
of-living adjustment will be calculated using the methodology that 
adjusts the income brackets in the tax rate schedules (Section 1(f)(3) 
of the Internal Revenue Code). The Consumer Price Index for all urban 
consumers (CPI-U) that is published by the Department of Labor will be 
used to determine the adjustment. Specifically, the cost-of-living 
adjustment for a calendar year will equal the CPI-U for the preceding 
calendar year divided by the CPI-U for calendar year 2006 (the base 
year). The Internal Revenue Code further specifies that, in making this 
calculation, the CPI-U for a calendar year is to be calculated as the 
average of the CPI-U as of the close of the 12-month period ending on 
August 31 of such calendar year. Finally, the Taxpayer Relief Act of 
1997 stipulates that if the adjusted exclusion amount is not a multiple 
of $100, then it is to be rounded to the next lowest multiple of $100.
    For this report, we have estimated the inflation-adjusted exclusion 
amounts for 2008 and 2009 to be $82,000 and $84,200, respectively. 
These estimates assume that the CPI-U will increase by 2.6 percent 
annually beginning in calendar year 2000. This assumption is based on 
the Congressional Budget Office's (CBO) most recent published economic 
projections (The Economic and Budget Outlook: Fiscal Years 2000-2009, 
January 1999, Table 1.4).
Effect of Inflation
    Figure 1 shows the exclusion amount in both nominal and real (1999) 
dollars. The nominal dollar line shows the exclusion amounts specified 
by legislation. The effect of the Taxpayer Relief Act of 1997 is shown 
starting in 1998 when the exclusion amount begins to increase in $2,000 
increments from the $70,000 amount established by the Tax Reform Act of 
1986. In 2002, the exclusion amount reaches $80,000 and remains at that 
level until 2008 when the exclusion amount begins to be adjusted for 
inflation.
    As illustrated in Figure 1, the real value of the exclusion has 
dropped substantially. In real 1999 dollars, the 1999 exclusion amount 
of $74,000 is 45 percent below its level in 1983 ($134,197 in 1999 
dollars) when the nominal dollar amount of the exclusion ($80,000) 
reached its highest level after the 1981 Act.
    Figure 1 also shows that the real value of the exemption is 
projected to continue to fall after 1999, even though the Taxpayer 
Relief Act of 1997 eventually will raise the exclusion amount to 
$80,000.
    The provision to adjust the exclusion amount for inflation will 
stabilize the real value of the exclusion amount beginning in 2008. 
Based on the CBO's projection that consumer prices will be 2.5 percent 
higher in 1999 than they were in 1998 and that annual price increases 
will amount to 2.6 percent thereafter, the value of the exclusion 
amount will stabilize at approximately $65,150 in 1999 dollars--an 
amount that is 12 percent below the current exclusion amount in real 
terms and 51 percent below the 1983 peak as measured in 1999 dollars. 
[GRAPHIC] [TIFF OMITTED] T4198A.001

Conclusion
    Since the Section 911 exclusion amount has not been automatically 
indexed for inflation in the way that the Internal Revenue Code adjusts 
the income tax tables and other dollar amounts, the real value of the 
exclusion has dropped substantially. If the $80,000 exclusion that was 
in effect in 1983 had been continually adjusted for inflation, the 
exclusion would be approximately $134,000 in 1999. Based on current CBO 
projections of inflation, the exclusion amount in the year 2000 would 
be nearly $138,000.

APPENDIX B

                   SECTION 911 SURVEY RESULTS ARE IN

Survey Finds Exclusion is Especially Important to Small & Medium-Sized 
                               Companies

    The Section 911 Coalition has announced the findings of its 
``American Competitiveness Survey.'' With nearly 150 companies and 
associations responding to the survey, it represents the largest and 
most broad-based Section 911 survey ever conducted.
    The six-page survey examined the importance of the foreign earned 
income exclusion (under Section 911 of the U.S. Tax Code) and its 
impact on America's global competitiveness. A report prepared by 
economists at the Johns Hopkins University School of Advanced 
International Studies, Drs. Charles Pearson and James Riedel, found 
that:
     The Section 911 exclusion is especially important to small 
and medium-sized firms (including International and American schools 
abroad), which are at least ten times more dependent on Section 911 
than are the large firms that were surveyed. Eighty-two percent of 
small and medium-sized firms said that a loss of the exclusion would 
result in a moderate (6 to 25 percent) or major (above 25 percent) 
change in their ability to compete abroad.
     Nearly two-thirds (65 percent) of respondents felt that 
their ability to secure projects and compete abroad would be improved 
if the exclusion ($70,000 in 1995) were raised to $100,000--a long-
standing position of Americans resident overseas.
     Americans abroad showed a strong tendency to source goods 
and services produced in the United States. Seventy-seven percent of 
respondents said that nationality has an effect on sourcing decisions. 
Among small and medium-sized firms, the number is even higher: 89 
percent said their American expatriate employees prefer to Buy 
American.
     Compensation costs are significant in determining whether 
or not to hire U.S. nationals overseas, and the Section 911 exclusion 
is important in holding down compensation costs. Eighty percent of 
respondents said elimination of Section 911 would have a moderate or 
major negative effect on compensation costs, with 66 percent saying 
elimination of the exclusion would have an important negative impact on 
future hiring practices.
    The survey results strongly suggest that the Section 911 exclusion 
plays a key role in America's competitiveness and the creation of U.S. 
jobs through exports. For further information, please contact the 
Section 911 Coalition.

APPENDIX C

                HIGHLIGHTS OF THE PRICE WATERHOUSE STUDY

      ``Economic Analysis of the Foreign Earned Income Exclusion''

    Price Waterhouse LLP, in a study prepared in 1995 for the Section 
911 Coalition, found that:
     The U.S. is the only major industrial country that does 
not completely exempt from taxation the foreign earned income of its 
citizens working abroad.
     Because the Section 911 exclusion is not adjusted for 
inflation, its real value has dropped by 43 percent since 1982. If the 
exclusion had been adjusted for inflation since it was set at $70,000 
in 1987, the exclusion would rise to over $111,000 in the year 2000. If 
the exclusion is not indexed for inflation soon, its value will 
continue to decline.
     Without the Section 911 exclusion, compensation levels for 
Americans abroad would need to increase by an average of 7.19 percent 
to preserve after-tax income. Section 911 was shown to provide benefits 
in both low tax and high tax nations. Moreover, the exclusion 
represents a larger share of the compensation of low income than of 
high income Americans working abroad.
     A 7.19 percent increase in required compensation would 
result in a 2.83 percent decrease in Americans working abroad. Without 
Section 911, U.S. exports would decline by 1.89 percent or $8.7 
billion. This translates into a loss of approximately 143,000 U.S.-
based jobs. [N.B.--These figures do not include service-related jobs or 
indirect employment, which would likely double the number of jobs 
lost.]
     From a tax policy standpoint, the 911 exclusion meets the 
traditional standards for evaluating income tax provisions: Fairness--
Absent Section 911, Americans working abroad would pay much higher 
taxes than U.S.-based workers with the same base pay. Economic 
efficiency--Absent 911, U.S. tax law would discourage U.S. companies 
from hiring Americans in overseas positions, causing foreign nationals 
to be hired even where Americans would, but for taxes, be preferred. 
Simplicity--The current structure of Section 911 was specifically 
enacted by Congress in 1981 in reaction to the unmanageable complexity 
of the rules enacted in 1978.
     Section 911 also adheres to three additional tax policy 
standards often used to evaluate provisions that affect international 
income: Competitiveness--The competitiveness standard, that U.S. 
capital and labor employed in foreign markets bear the same tax burden 
as foreign capital and labor in those markets, would be achieved if the 
U.S. excluded all foreign earned income (without the current cap). 
Protecting the U.S. tax base--Section 911 applies only to income that 
is earned abroad for activities that are performed abroad by 
individuals who are not residents of the USA. Harmonization--True 
harmonization with other nations would require an unlimited exclusion, 
as was in effect in the USA from 1926 to 1952.

                                


 Statement of W. Henson Moore, President and Chief Executive Officer, 
                  American Forest & Paper Association

    Mr. Chairman and Members of the Ways and Means Committee, I am very 
pleased to have the opportunity to address this Committee concerning 
the issue of the President's Tax Relief Proposals.
    The American Forest and Paper Association (AF&PA) is the national 
trade association representing producers of paper, pulp, paperboard and 
wood products, as well as growers and harvesters of this nation's 
forest resources. AF&PA fully supports the tax relief plan outlined by 
President Bush.
    The members of AF&PA encompass the full spectrum of U.S. 
businesses. AF&PA members range from large integrated corporate 
operations to small private tree farms long held within a family. All 
our members are dedicated to business practices that foster responsible 
environmental stewardship at home and abroad. Our members, both large 
and small, welcome the stimulant effect of the income tax rate 
reductions in the President's plan as well as repeal of the estate tax 
that often forces families and small businesses to consider sale of all 
or a portion of the business to pay this unfair tax. For our 
landowners, the economics of the death tax can weigh heavily in a 
family's decision about whether to sell off lands to developers (to pay 
off the estate tax) or to continue the business and find the funds to 
pay the estate tax from another source. Repeal of the death tax is the 
top priority of our family landowners.
    As CEO of AF&PA, I am troubled by the fiscal difficulties facing 
the U.S. manufacturing sector, however, particularly companies in the 
integrated forest and paper manufacturing business that are members of 
AF&PA. I see evidence on a daily basis of how the U.S. tax code 
negatively impacts the forest products and paper manufacturing industry 
as we compete in a global economy. The need for expeditious business 
tax relief could not be clearer. Blistering competition from outside 
the U.S. has forced our companies to carefully evaluate investments. 
Our competition pay less in taxes than we do and thus, they have an 
advantage.
    We know from studies completed by PricewaterhouseCoopers (PwC) that 
the provisions of the current tax code are a major obstacle to a level 
playing field between the U.S. forest products and paper manufacturing 
industry and our competitors around the world. Our taxes are higher 
than those of competing nations. Moreover, competing nations are 
reforming their tax laws to enable them to lure U.S. businesses to 
relocate to their shores. When added to trade barriers to exports of 
our products, the U.S. worldwide system of taxation functions as a 
major obstacle in global competition. We need a corporate income tax 
rate reduction added to the President's bill just as he has proposed 
for individual taxpayers.
    The daily drumbeat of negative economic news coming from the 
business sector raises concerns in the business community about the 
lack of tax relief for the business sector. There can be little doubt 
that the daily list of layoffs and downtime announced by major U.S. 
companies has a devastating impact on consumer confidence. In the U.S. 
paper and paperboard mills, there has been a significant decline in 
employment: over the past three years, 28,000 jobs have been lost 
representing 13% of the workforce. In the period from 1998 to 2000, 39 
mills were closed: four additional mill closings have already been 
announced this year. An across-the-board tax rate cut, including a cut 
of corporate income tax rates is a simple, straightforward way to boost 
nationwide confidence and growth and improve our competitiveness.
    We regard ourselves as stewards of the vast forest resources that 
have actually been growing over time. Our nation's 500 million acres of 
timberland contain over 36% more wood fiber today than they did fifty 
years ago despite continuously growing demand. Unfortunately, in recent 
years, a greater proportion of our national wood and paper needs have 
been supplied not from our own industry, but from imports. This is the 
reason we have worked to support tax changes that remove disincentives 
to the ownership and sound management of U.S. forests. To compete with 
companies in competing nations studied in the PwC Study, we need tax 
changes such as those in HR 1083 and S 1303, both of which were 
introduced during the 106th Congress.
    The U.S. tax system raises greater disincentives to corporate 
investment in manufacturing and corporate forestry activities than that 
of any major competitor country. The PricewaterhouseCoopers Study shows 
that the effective corporate tax rate for the forest and paper 
manufacturing industry is the second highest among these competing 
countries. Corporate capital gains are taxed at higher effective rates 
in the U.S. than in most competitor countries. And even within the 
U.S., the identical asset--timber--is taxed at widely disparate rates, 
creating disincentives for holding timber in corporate form.
    The forest products industry supplies more than $230 billion to the 
nation's gross domestic product; we rank sixth among domestic 
manufacturing sectors. We employ 1.5 million people and rank among the 
top ten manufacturing employers in 46 states. The forest products 
industry represents more than seven percent of U.S. manufacturing 
output, and provides a basic renewable resource that supports a unique 
and vital forest-based economy.
    Our industry has an enviable environmental record. Members of AF&PA 
subscribe to the Sustainable Forestry Initiative, a program that 
assures the practice of sustainable forestry through the perpetual 
growing and harvesting of trees while protecting wildlife, plants, soil 
and water quality. However, unless we can improve the investment 
climate for forestry in our own country, our forests will be deforested 
and developed and production will shift to other countries, many of 
which have less environmentally sensible practices than we do in the 
U.S. Improvements in our tax system will be beneficial not only to U.S. 
workers, companies and our economy--they will support U.S. 
environmental goals as well.
    The general economic downturn is causing sector hardship, 
constriction and loss of jobs. That status is reason enough to state 
that the benefits of tax relief should be extended to the corporate 
manufacturing sector. There is an additional, perhaps more compelling, 
reason to extend the across-the-board tax relief plan to reduce the 
corporate tax rate. If the rationale for the tax relief plan is to 
return money to taxpayers, then fairness argues that the portion of the 
surplus allocable to corporate tax payments should be returned to that 
sector too. And since time is of the essence for a short-term stimulant 
impact on the economy, an across-the-board rate cut to all taxpayers, 
both individual and corporate, is a simple and direct way to infuse 
money into the economy, to increase jobs and to promote growth.
    We applaud the President's efforts to rationalize our tax system, 
to make it fairer for all taxpayers and to provide much needed tax 
relief. We look forward to working with the Congress and the 
Administration to promote the tax plan and to build a stronger America.

                                


           Statement of Mortimer M. Caplin, Caplin & Drysdale

    My name is Mortimer Caplin, a member of the Washington law firm of 
Caplin & Drysdale. I served as U.S. Commissioner of Internal Revenue 
from 1961 through 1964, during the Kennedy and Johnson years, and have 
specialized in the study and practice of tax law for some 50 years--as 
a professor at the University of Virginia School of Law, and as a 
lawyer representing a wide variety of business and individual 
taxpayers.
    With a $5.6 trillion budget surplus projected for the coming 
decade, and with the President and both parties poised to enact sizable 
tax cuts, we are at a rare political moment--one that enables us to 
undertake a major overhaul of our tax structure, as well as to greatly 
simplify tax returns, reduce rates, and make tax laws fairer.
    ``Simplification'' and ``fairness'' need to be at the heart of any 
new proposal for broad tax legislation. By combining such a focused 
perspective in conjunction with a broad-based/low graduated rate tax 
system, Congress will give American taxpayers unprecedented relief and, 
at the same time, will help revitalize public faith in how we run our 
government.
    Our tax laws today are riddled with an array of targeted tax 
preferences and so-called incentives--grievously complicating tax 
compliance, eroding our tax base and thus necessitating increased tax 
rates to meet revenue demands. The federal tax code is replete with 
special deductions and credits, exemptions and exclusions, deferrals 
and other preferred treatment for particular industries, groups or 
interests. Such provisions constitute a strong brew often leading to 
distortion of normal decision-making and encouragement of tax-
motivated, non-economic behavior. Tax avoidance and abuse are 
inevitable byproducts.
    That these common techniques--typically justified on a variety of 
high-sounding grounds--are simply tax reductions for one anointed body 
or other, was candidly revealed by Treasury Secretary Paul H. O'Neill 
at his recent Senate Finance Committee confirmation hearings. In 
response to suggestions that business tax incentives might be good for 
our economy, Secretary O'Neill answered:
    ``As a businessman I never made an investment decision based on the 
tax code. If you give money away I will take it, but good business 
people don't do things because of inducements.''
    Indeed, both as a former IRS Commissioner and as a practicing 
lawyer, I have found most businessmen's attitude on tax incentives 
entirely in line with that of Mr. O'Neill. How true is the observation 
that our tax laws reflect ``a continuing struggle among contending 
interests for the privilege of paying the least.''
    Beyond this, we continue to see excessive manipulation of the tax 
laws to promote discrete social or economic objectives. The result: 
further fueling of taxpayer frustration from added complexities, tax 
base erosion, and resulting tax increases. All too often, Congress 
finds this ``backdoor financing'' route significantly more convenient, 
albeit more revenue costly, than the better-monitored process of direct 
appropriations.
    Many taxpayers feel left out, discriminated against and abused. 
Their respect for the tax system is repeatedly undermined; they are 
less willing to comply. And when weakening occurs in voluntary 
compliance--which is at the very heart of our tax collection process--
our nation pays a high price.
    With major tax reductions before us, a unique opportunity presents 
itself to sweepingly simplify tax reporting, ease tax administration 
and restore taxpayer confidence in the entire system. Enacting the 
following changes would put these goals well within our reach:
    1. Focus on tax return simplification, eliminating as many 
complexities as possible within reasonable revenue costs.
    2. Restore a straightforward rate structure, minimizing the hidden 
rate increases imposed by ``floors,'' ``bubbles,'' ``phase outs,'' 
``clawbacks,'' and the like.
    3. Eliminate the bulk of special preferences, broadening the tax 
base significantly.
    4. Tax capital gains in the same manner as ordinary income.
    5. Repeal the alternative minimum tax (``AMT'') for individuals as 
well as corporation, offsetting the enlargement of the tax base.
    6. Lower all graduated rates across the board.
    We as a people would be better served by a broad-based/low 
graduated rate tax system, with only the most limited of tax favors. 
Such a regime---aimed at treating all forms of income alike, and 
providing equal tax treatment for persons with equivalent dollar 
incomes--would clearly be simpler, fairer and more equitable for our 
citizenry at large.
    With the new administration primed for major tax changes, Congress 
should boldly move forward on the path first carved out by President 
Reagan's Tax Reform Act of 1986. In addition, steps must be taken to 
correct some of the undue restraints imposed on the IRS by the IRS 
Restructuring and Reform Act of 1998.
    Widespread publicity is currently being given to (1) blatant 
examples of outright flouting of the tax laws, and (2) the disturbing 
and critical drop in the number of tax returns IRS examined in fiscal 
2000--less than one-half of one percent of returns filed, and about 50 
percent less than the percentage examined in 1999. Compliance and 
confidence in the tax system obviously suffers seriously by this 
weakening of enforcement.
    Taxpayers want assurance that their neighbors down the street are 
paying their proper share of taxes; and it is, indeed, shortsighted to 
pass new tax laws without providing the IRS the manpower and resources 
to carry them out in a fair and reasonable fashion. Congress will 
certainly make sure that this proper balance is maintained in any new 
legislation enacted.*
    *This testimony is based in part on my article, ``Now is the Time 
to Reform the Tax Code,'' which appeared in The Wall Street Journal, 
February 7, 2001.

                                


                              Joshua Tree, California 92252
                                                  February 19, 2001
Allison Giles, Staff Director
Committee on Ways and Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington, DC 20515
    Re: Response to Request for Written Statement Concerning President 
Bush's Tax Relief Proposal Dated February 6, 2001

    Dear Ms. Giles: The following information is offered in response to 
the Committee's request and we would like to have this information 
included in the record. We do not profess to represent anyone but 
ourselves, although we probably speak for a great number in voicing our 
concerns.
    We do not protest the taxation of income, in fact we agree with its 
original purpose. We do however, question the intent of Congress in 
their application of the Income Tax to ``personal living and family 
expenses''. The reason we question their intent is evident by the 
statement of Judge Hull in his synopsis of the first income tax levied 
under the 16th Amendment. The synopsis is found in Volume 50, Part 6, 
of the Congressional Record dated October 16, 1913 and begins on page 
5679. There are two major concerns addressed by this synopsis to which 
the Committee should be enlightened.
    First: ``The statutory exemption of $3,000 is allowed for personal 
living and family expenses; however, this and other gross income for 
which special deductions are allowed by the law must be embraced in the 
return of gross income * * *''
    It seems to us that this would be the proper place to begin any tax 
reduction; for the simple reason that it treats every taxpayer the 
same, regardless of the amount of ``income'' involved. The Court 
recognized this principle in 1895 through Justice Harlan's and Justice 
Brown's dissenting opinions in the Pollock Cases 158 U.S. 601 @ 676 and 
694:
    ``The basis upon which such exemptions rest is that the general 
welfare requires that in taxing incomes, such exemptions should be made 
as will fairly cover the annual expenses of the average family, and 
thus prevent the members of the such families becoming a charge upon 
the public. The statute allows corporations, when making returns of 
their net profits or income, to deduct actual operating and business 
expenses. Upon like grounds, as I suppose, Congress exempted incomes 
under $4,000.''
    ``The exemption of $4,000 is designed, undoubtedly, to cover the 
actual living expenses of a large majority of families, and the fact 
that it is not applied to corporations is explained by the fact that 
corporations have no corresponding expenses. The expenses of earning 
their profits are, of course, deducted in the same manner, as the 
corresponding expenses of a private individual are deductible from the 
earnings of his business. * * *''
    Attorney General Olney, in the 1895 Pollock Cases, also recognized 
this principle in his statements before the Court, 157 U.S. 427 (pg. 
778):
    ``In the present case there is no lack of uniformity as between 
corporations and individuals. The exemption of $4,000 a year in the 
case of individuals or families, as will be shown, is intended as a 
compensation for the necessarily excessive burden of consumption taxes 
upon small and moderate incomes.
    There is no such situation in the case of a business corporation. 
Every cent which it expends is allowed it. It is taxed only on its net 
profits, deducting the wages account; which corresponds to the living 
expenses of the individual.''
    Second: ``The Treasury regulations soon to be prepared will make it 
clear to every taxpayer the requirements of the law and its application 
to income derived from the various kinds of business. To any person who 
keeps familiar with his business affairs during the year to the extent 
that at its end he known with reasonable accuracy the amount of his 
aggregate annual profits, the matter of executing his tax return would 
be both simple and convenient.''
    What type of a ``business'' is the labor for hire employee in, and 
what ``profit'' do they acquire from their annual wages? It is evident 
from the above quotes, and the historical information contained in the 
Statistical Abstract of the United States, that the average labor for 
hire employee was not subject to the Federal ``Income Tax'' until after 
1940 (actually the ``Individual Income Tax Bill of 1944'' [H.R. 4646]). 
This is especially interesting when you realize that labor for hire 
employees were earning more than the ``single personal exemption of 
$1,000'' allowed as early as 1917. What changed the levy of the 
``income tax'' on net income (business) to include the gross receipts 
(employee wages) of labor?
    Perhaps it is time to look into the ``Public Salary Tax Act of 
1939'' and the ``party politics'' which endorsed it. The reason we 
suggest this, to us, is simple. The Congress that passed this 
legislation intended for it to be challenged. Many of the comments made 
by the minority Republican Members indicate the possibility that 
certain provisions of the Act were indeed unconstitutional. Congressman 
Plumley of Vermont made this statement in reference to the Act:
    ``So radical a change in our constitutional system as is 
contemplated and proposed by this act can and should only be made after 
and by the submission and adoption of a constitutional amendment, which 
will so extend the power of the Federal Government as to impose such a 
tax.'' (Congressional Record of February 9, 1939 page 1308)
    His statement follows that of Congressman Buck recorded on page 
1305. In addressing the issue of constitutionality Mr. Buck says:
    ``The value of an affirmative decision by Congress on the question 
of Federal taxation of officers of States and their subdivisions lies 
in the fact that the tax would be supported by the presumption of 
constitutionality attaching to a law passed by Congress and passed by 
its deliberate judgement after debate.'' 
    In this same light Senator Brown, on page 3765, in quotes as 
saying:
    ``The Senator from Vermont for himself may certainly make that 
reservation; but there is no question, under the accepted practice here 
and in the courts, that the fact that we pass the bill will lend to it 
the presumption of constitutionality.''
    Just an observation: The Democratic majority was 2:1, with 
Roosevelt as President.
    The reason for our concern is a statement made by Congressman 
Disney on page 1313 where he says:
    ``The bill provided for a direct tax upon the State employee * * * 
''
    Direct taxes levied upon employees are commonly referred to as 
``poll taxes'', or ``capitation'' taxes requiring apportionment. At 
least they were in the opinion of the Judges in office prior to 1937. 
(``Taxing the Exercise of Natural Rights'' by John MacArthur Maguire, 
Harvard Legal Essays 1934 pp. 273-322 [cited by Justice Cardozo in 
Steward Mach. Co. v. Davis 301 U.S. 548 @ 581]).
    Final point: The Sixteenth Amendment provides for the taxation of 
incomes, from whatever source derived, without apportionment. It is 
clear from that Amendment that taxation of the source was not included 
or permitted without apportionment. So what is the meaning of the word 
source?
    That may sound like a silly question, but think about it. 
Immediately after the ratification of the Amendment the Court took up 
the question of what the term ``income'' meant. No one considered that 
a silly question, although the answer was universally known. They, 
however, defined it in light of the 16 Amendment as; ``the gain derived 
from capital, from labor or from both combined''. How many ``sources'' 
did they list, only two. Why? Because, ``income'' belongs to the person 
owning the capital or providing the labor and has nothing to do with 
``who'' paid for it. This all changed in 1939 with the ``Public Salary 
Tax Act'' and the Court's decision in the Graves v. New York Case [306 
U.S. 466].
    The above case deals with the question of sovereign immunity in the 
taxation of governmental entities. The question presented to the court 
was:
    ``We are asked to decide whether the imposition by the State of New 
York of an income tax on the salary of an employee of the Home Owners' 
Loan Corporation places an unconstitutional burden upon the federal 
government.''
    The answer the court gave is found on page 480, it reads:
    ``The present tax is a nondiscriminatory tax on income applied to 
salaries at a specific rate. It is not in form or substance a tax upon 
the Home Owners' Loan Corporation or its property or income, nor is it 
paid by the corporation or the government from their funds. It is 
measured by income which becomes the property of the taxpayer when 
received as compensation for his services; and the tax laid upon the 
privilege of receiving it is paid from his private funds and not from 
the funds of the government, either directly or indirectly. The theory, 
which once won a qualified approval, that a tax on income is legally or 
economically a tax on its source, is no longer tenable.''
    What about the employee's labor, isn't that the real ``source'' of 
the employee's income (salary or wage), and if that happens to be his 
only income, is that not a tax upon the ``source'' unless compensated 
for by the allowance of the personal exemption?
    What is meant by ``nondiscriminatory''? The tax levied upon 
corporations is levied only upon their ``net-profits''. The tax levied 
upon business, professions and the dealings in real and personal 
property is levied only upon net income, the gain derived from such 
things. The employee, however, is required to pay the ``income'' tax on 
the basis of their annual gross receipts. Yet, all three are classified 
as ``persons'', subject to the tax law?
    In a recent case the Supreme Court took up the question of an 
``occupation'' tax levied by Jefferson County, Alabama. The court 
recognized the fact that the County did not have the authority to levy 
an ``income tax'', but did have the authority to levy a ``license or 
privilege'' tax. They then upheld the tax based upon the ``Public 
Salary Tax Act''. (No. 98-10. Argued March 29, 1999--Decided June 21, 
1999, Jefferson County, Alabama v. Acker, Senior Judge)
    In 1903 the Federal District Court of Arkansas ruled upon a 13th 
and 14th Amendment issue [125 F 322]. In making that decision the court 
refers to the ``unalienable'' rights of ``Life, Liberty and the Pursuit 
of Happiness''. In doing so, Judge Trieber seems to reduce those rights 
to their most basic form. He starts out with a question:
    ``Can there be any doubt that the right to purchase, lease, and 
cultivate lands, or to perform honest labor for wages with which to 
support himself and family, is among these rights thus declared to be 
``inherent and inalienable''?
    And ends with the statement:
    ``That the rights to lease lands and to accept employment as a 
laborer for hire are fundamental rights, inherent in every free 
citizen, is indisputable;''
    Is it possible to have the inalienable right to labor for others 
and yet the receipt of wages earned by that labor be taxable as a 
``privilege''?
    We do not object to a reasonable income tax, so long as the basis 
of that tax allows for a reasonable standard of living. It is well 
known that the higher one's income is, the less impact the ``income 
tax'' has upon living expenses. The question then is what ``standard'' 
of living is reasonable? Isn't the attainment of a basic standard of 
living the driving force behind labor, and are not the wages earned by 
hired labor in direct relation to the cost of providing that basic 
standard of living? Raising the ``Personal Exemption'' is fair to all, 
it treats everyone the same whether rich or poor. Why should you take 
the basic necessities away from the poor and not take the luxuries away 
from the wealthy, yet that is what our current system does. The current 
``personal'' exemption is less than $3,000 a year, hardly enough to buy 
groceries let alone pay rent and utilities.
    Raising the ``Personal Exemption'' is also the fastest way of 
putting money back into the economy, it simply lowers the amount 
withheld from wages and reduces the quarterly tax payments. Other than 
that, there are no other changes required in the Tax Law. The money 
thus injected into the lower brackets ultimately will end up in the 
higher brackets through increased consumer spending. A side benefit 
will be the decrease in the number of tax returns filed, thereby 
reducing the cost of processing those returns.
            Respectfully submitted,
                                   John Gary Given Sr.
                                   Michele L. Given.

                                                  Bibliography
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
16th Amendment 1909-1913 S.J.R. 25/
 39/ 40:
    Congressional Record-Senate....  April 28, 1909.......................  p. 1568-1570
                                     June 16, 1909........................  p. 3344
                                     June 17, 1909........................  p. 3377
                                     June 28, 1909........................  p. 3900
                                     June 30, 1909........................  p. 3968-3979
                                     July 1909............................  p. 4067
                                     July 5, 1909.........................  p. 4105-4121
                                     Feb. 10 1910.........................  p. 1694-1699
                                     Feb. 23, 1910........................  p. 2245-2247
                                     March 01,1910........................  p. 2539-2540
                                     Aug. 28, 1913........................  p. 3836-3859
    Congressional Record-House.....  July 12, 1909........................  p. 4389-4440
                                     April 26, 1913.......................  p. 503-518
                                     May 6, 1913..........................  p. 1236-1264
                                     Oct. 16, 1913........................  p. 5679-5680
    Congressional Record Vol. 50,    .....................................  p. 89-90
     Part 7 Appendix.
Revenue Act of 1924: Congressional
 Record-House.
                                     Feb. 16, 1924........................  p. 2612-2614
                                     Feb. 18, 1924........................  p. 2681-2682
                                     May 24, 1924.........................  p. 9416-9419
Revenue Bill of 1926, H.R. 1:
 Congressional Record-House.
                                     Dec. 08, 1925........................  p. 519-525
                                     Dec. 09, 1925........................  p. 539-567
                                     Dec. 10, 1925........................  p. 642-678
                                     Dec. 11, 1925........................  p. 692-724
                                     Dec. 12, 1925........................  p. 731-757
                                     Dec. 14, 1925........................  p. 771-798
                                     Dec. 15, 1925........................  p. 879-898
                                     Dec. 16, 1925........................  p. 937-969
                                     Dec. 17, 1925........................  p. 1005-1037
                                     Dec. 18, 1925........................  p. 1108-1165
                                     Jan. 07, 1926........................  p. 1673-1675
                                     Jan. 16, 1926........................  p. 2230-2231
Social Security Act 1935, H.R.
 7260:
    Congressional Record-Senate....  June 8, 1934.........................  p. 10769-71
                                     April 22, 1935.......................  p. 6100-6101
                                     May 28, 1935.........................  p. 8334-
                                     June 14, 1935........................  p. 9267-9273
                                     June 14, 1935........................  p. 9283-9297
                                     June 15, 1935........................  p. 9351-9353
                                     June 17, 1935........................  p. 9418-9442
                                     June 18, 1935........................  p. 9510-9543
                                     June 19, 1935........................  p. 9624-9650
                                     July 17, 1935........................  p. 11276-81
                                     July 17, 1935........................  p. 11307-10
    Congressional Record-House.....  Mar. 18, 1935........................  p. 3874-3875
                                     April 11, 1935.......................  p. 5454-5462
                                     April 18, 1935.......................  p. 5948-5995
                                     April 19, 1935.......................  p. 6037-6093
                                     June 19, 1935........................  p. 9733-9736
                                     July 17, 1935........................  p. 11320-43
Statutes at Large, 74th Congress     Aug. 14, 1935........................  p. 622-648
 Chap. 531.
Internal Revenue Code of 1939, H.R.
 2762:
    Statutes at Large, 76th          Feb. 10, 1939........................  Part 1
     Congress Vol. 53.
    House Misc. Reports, 76th        Jan. 20, 1939........................  Report #6
     Congress 1-185.
 Public Salary Tax Act of 1939 H.R.
 3790:
    Congressional Record-House.....  Feb. 09, 1939........................  p. 1299-1332
                                     April 10, 1939.......................  p. 4025-4026
    Congressional Record-Senate....  April 3, 1939........................  p. 3701-3705
                                     April 1, 1939........................  p. 3764-3773
                                     April 6, 1939........................  p. 3910-3911
    Senate Misc. Reports 76th        Feb. 24, 1939........................  Report #112
     Congress 2-5.
    House Misc. Reports 76th         Feb. 07, 1939........................  Report #26
     Congress.
Congressional Record-Appendix.
 Extension of Remarks Vol. 84:
    ``New Deal and the Republican    .....................................  p. 1335-1337
     Program''.
    ``The Unemployment Program''...  .....................................  p. 1384-1387
    ``H.R. 4931-Attack on the        .....................................  p. 1491-1501
     Central Problem of Modern Am.
    ``The New Deal Administration''  .....................................  p. 1555
    ``Recovery Obstacles''.........  .....................................  p. 1566
    ``Relief-Recovery-Re-            .....................................  p.1592-1593
     employment''.
    ``Constitution of the United     .....................................  p. 1634-1624
     States-The Charter of Liberty.
    ``Failure of the New Deal''....  .....................................  p. 1666
    ``Federal Tax Changes''........  .....................................  p. 1671-1672
    ``Necessary Additional Money     .....................................  p. 1806-1808
     Supply''.
    ``Collapse of the New Deal''...  .....................................  p. 1826-1827
    ``Three Percent Interest on      .....................................  p. 1896-1897
     Federal Land Bank Loans''.
    ``Labor and Taxes''............  .....................................  p. 1928-1930
    ``Paying the Government Debt     .....................................  p. 2012-13
     With a Fountain Pen''.
    ``Taxes Now Consume 30% of the   .....................................  p. 3237-3238
     National Income.
    ``The Constitution and the Will  .....................................  p. 3265-3267
     of the People''.
    ``Who pays the Taxes''.........  .....................................  p. 3336
    ``Self-liquidating Loans''.....  .....................................  p. 3340-3341
    ``The American Tax Burden''....  .....................................  p. 3352-3355
    ``New Problems of Government''.  .....................................  p. 3397-3399
    ``Lending Programs for Self-     .....................................  p. 3588
     liquidating Programs''.
    `Federal Spending''............  .....................................  p 3684-3685
    ``The Constitution-Written and   .....................................  p. 3689-3690
     Unwritten''.
    ``Construction and Financing of  .....................................  p. 3721-3724
     Self-liquidating Loans''.
    ``A Sixty-two Billion Dollar     .....................................  p. 3884-3885
     Debt''.
    ``The Federal Governments        .....................................  p. 3915-3917
     Encroachment Upon the States''.
    ``Important Shifts in            .....................................  p 3950-3956
     Constitutional Doctrines''.
    ``An Appeal for our Federal      .....................................  p. 4000-4002
     Employees''.
    ``The Best Defense of American   .....................................  p. 3502-3504
     Democracy is to Broaden''
     Vol.86.
    ``Taxation During the            .....................................  p. 3782-3785
     Twenties''.
    ``Taxpayers on the War Path''..  .....................................  p. 5415-5416
The Revenue Bill of 1940, H.R.
 10039:
    Congressional Record-House.....  June 11, 1940........................  p. 7959-8021
    Congressional Record-Senate....  June 17, 1940........................  p. 8374-8375
    76th Congress House Reports....  June 10, 1940R.......................  Report #2491
The Revenue Bill of 1942, H.R.
 7378:
    Congressional Record-House.....  July 16, 1942........................  p. 6252-6317
                                     July 17, 1942........................  p. 6318-6350
                                     Oct. 20, 1942........................  p. 8441-8481
                                     November 1, 1942.....................  p. 8997-8999
    Congressional Record-Senate....  Oct. 06, 1942........................  p. 7792-7852
                                     Oct. 07, 1942........................  p. 7879-7912
                                     Oct. 08, 1942........................  p. 7918-7942
                                     Oct. 09, 1942........................  p. 7980-8018
                                     Oct. 10, 1942........................  p. 8058-8063
    Congressional Record-Appendix..  July 18, 1942........................  p. A2827-28
                                     Oct. 20, 1942........................  p. A3793-99
Revenue Act of 1943, H.R. 3687:      Jan. 12, 1944........................  p. 85-120
 Congressional Record-Senate.
Individual Income Tax Bill of 1944,
 H.R. 4646:
    Congressional Record-House.....  May 3, 1944..........................  p. 3968-3983
                                     May 4, 1944..........................  p. 4010-4033
                                     May 22, 1944.........................  p. 4829-4831
    Congressional Record-Senate....  May 19, 1944.........................  p. 4702-4730
                                     May 20, 1944.........................  p. 4783-4787
  C.R.S. Report for Congress #92-
   303A (1992) ``Frequently Asked
   Questions'' ``Taxing The
   Exercise of Natural Rights''
   J.M. Maguire Harvard Legal
   Essays (1934).
Colliers Encyclopedia (1969) Vol.
 7&8 Constitution--Declaration of
 Independence C.J.S. Volumes 47 and
 47A Income Taxes.
Statistical Abstract of the United
 States, Volume 38 (1918) to Volume
 118 (1998).
Court Cases:
    The Slaughter-House Cases......  83 U.S. 36 (wall) (1872).............  Pursuit of Happiness
    Heyden Fielt v. Daney..........  93 U.S. 634 (1876)...................  Interpretation of words
    Blake v McClung................  172 U.S. 239 (1898)..................  Bankruptcy
    Newton V Archison..............  31 Kan 151 (1883)....................  License tax
    Holy Trinity V. U.S............  148 US 457 (1891)....................  Labor for hire
    Albeyer V. State...............  165 US 578 (1896)....................  Pursuit of happiness
    Burch V. Savannah..............  42 GA 597 (1870).....................  Taxes on occupations
    Rome V. McWilliams.............  52 GA 251 (1874).....................  Taxes on occupations
    State V. Gillespie.............  168 NW 58 (1918).....................  License tax
    Hughes V. C.I.R................  38 F 2d 755 (1930)...................  Tax on ``business occupation''
    Washburn V. C.I.R..............  51 F 2d 949 (1931)...................  Tax on ``business occupation''
    Dupont V. Deputy...............  308 US 499 (1939)....................  Tax on ``business occupation''
    Hill V. Comm...................  181 F 2d 906 (1950)..................  Tax on teacher
    Coughlin V. C.I.R..............  203 F 2d 307 (1953)..................  Tax on lawyer
    Folker V. C.I.R................  230 F 2d 906 (1956)..................  Tax on officer of Corp.
    Trent V. C.I.R.................  291 F2d 669 (1961)...................  Trade or business
    Whipple V. C.I.R...............  373 US 193 (1963)....................  Trade or business
    Sullivan V. C.I.R..............  368 F2d 1007 (1966)..................  Trade or business
    Tyne V. C.I.R..................  385 F2d 40 (1967)....................  Trade or business
    Fausner V. C.I.R...............  472 F 2d 561 (1973)..................  Trade or business
    Butchers Union V. Crescant City  111 US 746 (1883)....................  Pursuit of Happiness
    U.S. V. Morris.................  125 F 322 (1903).....................  Pursuit of Happiness
    Coppage V. Kansas..............  236 US 1 (1914)......................  Pursuit of Happiness
    Meyer V. Nebraska..............  262 US 390 (1922)....................  Pursuit of Happiness
    Redfield V. Fisher.............  292 Pac 813 (1930)...................  Property--income taxes
    Whitcomb V. Emerson............  115P 2d 892 (1940)...................  Right to work
    Jack Cole Co. V MacFarland.....  337 SW 2d 454 (1960).................  Privilege
    Society for Savings V. Coite...  73 US 594 (1867).....................  Excise tax
    Railroad Cases 116 US 138-116
     Us 142-118 US 394--118 US 417
     (1885-1886).
    Home Ins. Co. v. State of N.Y..  134 U.S. 594 (1890)..................  Classification and uniformity
    Magoun V. Illinois Trust.......  170 US 283 (1898)....................  Excise tax
    Pollock V. Farmers.............  157 US 429 (1895)....................  Income tax
    Pollock V. Farmers.............  158 US 601 (1895)....................  Rehearing
    Nicol V. Ames..................  173 US 509 (1898)....................  Excise Privilege
    Knowlton V. Moore..............  178 US 41 (1899).....................  Uniformity Excise
    Patton V. Brady................  184 US 608 (1901)....................  Excise License
    Thomas V. U.S..................  192 US 363 (1904)....................  Excise taxes privilege
    Flint V. Stone Tracy...........  220 US 107 (1910)....................  Privilege of doing business
    Billings v. U. S...............  232 U.S. 261 (1914)..................  ``Use''
    Stratton's Independence........  231 US 399 (1913)....................  Income defined
    Brushaber V. U.P...............  240 US 1 (1915)......................  Income tax--confusion
    Stanton V. Baltic..............  240 US 103 (1915)....................  Mining is business
    Doyle V. Mitchell Bros.........  247 US 179 (1917)....................  Income defined
    Peck V. Lowe...................  247 US 165 (1917)....................  Net income
    Evans V. Gore..................  253 US 259 (1919)....................  Judges not taxable
    Eisner V. Macomber.............  252 US 189 (1919)....................  Income defined
    LaBelle V. U.S.................  256 US 377 (1920)....................  Uniformity
    U.S. V. Philadelphia...........  262 F 188 (1920).....................  Income--excise
    Merchants Loan V. Smietanka....  255 US 509 (1920)....................  Income defined
    Greiner v Lewellyn.............  258 U.S. 384 (1922)..................  Estate Tax
    Meyer v Nebraska...............  262 U.S. 390 (1923)..................  Privileges and immunities
    Blodgelt V. Holden.............  11 F 2d 180 (1926)...................  Subjective--objective--use
    United States v. Katz..........  271 U.S. 354 (1926)..................  Meaning of words
    Karnuth v United States........  279 U.S. 231 (1929)..................  ``Immigrant''
    Old Colony Trust v C.I.R.......  279 U.S. 716 (1929)..................  Employee
    Bromley v McCaughn.............  280 U.S. 124 (1929)..................  Gift tax
    Welch V. Helvering.............  290 US 111 (1933)....................  Ordinary--necessary expense
    State of Ohio v. Helvering.....  292 U.S. 360 (1934)..................  Meaning of ``person''
    U.S. V. Safety Car.............  297 US 88 (1935).....................  Income
    Beeland V. Davis...............  88 F 2d 447 (1937)...................  Social Security Act
    Chas. Steward Mach. Co. V.       89 F 207 (1937)......................  Social Security Act
     Davis.
    Davis V. Boston & M.R..........  89 F 2d 368 (1937)...................  Social Security Act
    Steward Mach Co. V. Davis......  301 US 570 (1937)....................  Social Security Act
    Helvering V. Davis.............  301 US 619 (1937)....................  Social Security Act
    New York v Graves..............  300 U.S. 308 (1937)..................  State taxing power
    Helvering v Geerhardt..........  304 U.S. 405 (1938)..................  Federal Taxing power
    Graves v New York..............  306 U.S. 466 (1939)..................  State taxing power
    O'Malley v Woodrough...........  307 U.S. 277 (1939)..................  Taxing the Judge
    State T.C. of Utah v. Van cott.  306 U.S. 511 (1939)..................  Taxing gov't employees
    Helvering V. Griffiths.........  318 US 371 (1943)....................  Rehearing Eisner Case
    Keasbey Mattison V. Rothensies.  133 F 2d 894 (1943)..................  Foreign income tax
    Helvering V. Edison Bros.......  133 F2d 575 (1943)...................  Income
    C.I.R. V. Wilcox...............  327 US 404 (1945)....................  Benefits
    U.S. v Silk....................  331 U.S. 704 (1947)..................  Social Security
    U.S. V. Gilbert................  345 US 361 (1952)....................  Judgment creditor
    Gen. Am. Inv. V. C.I.R.........  211 F 2d 522 (1954)..................  Accession to wealth
    C.I.R. V. Glenshaw Glass.......  211 F 2d 928 (1954)..................  Income
    C.I.R. V. Glenshaw Glass.......  348 US 426 (1954)....................  Accessions to wealth
    United States v. Shirley.......  359 U.S. 255 (1959)..................  Meaning of words
    Flemming v. Nester.............  363 U.S. 603 (1960)..................  Old Age Benefits
    James v United States..........  366 U.S. 213 (1961)..................  Gross income
    Arnold V. U.S..................  289 FS 206 (1968)....................  Living expenses
    Conner V. U.S..................  303 FS 1187 (1969)...................  Must be gain
    Primuth V. C.I.R...............  54 TC 374 (1970).....................  Employee
    Kowalski V. C.I.R..............  65 TC 44 (1975)......................  Employee
    Cupp V. C.I.R..................  65 TC 68 (1975)......................  Tax filing
    Central Illinois v United        435 U.S. 21 (1978)...................  Withholding
     States.
    Broughton V. U.S...............  632 F 2d 707 (1980)..................  Wages
    Rowan Cos v United States......  452 U.S. 247 (1981)..................  FICA/FUTA
    U.S. V. Stillhammer............  706 F 2d 1072 (1983).................  Failure to file
    Romer V. C.I.R.................  716 F 2d 693 (1983)..................  Personal injury awards
    Parker V. C.I.R................  724 F 2d 469 (1984)..................  Presumption of correctness
    U.S. V. Koliboski..............  732 F 2d 1328 (1984).................  Willful failure
    Ficalora V. C.I.R..............  751 F 2d 85 (1984)...................  Income not defined
    Harris V. U.S..................  758 F 2d 456 (1985)..................  Wages not income
    Hyslep V. U.S..................  765 F 2d 1083 (1985).................  Frivolous suit
    Charczuk V. C.I.R..............  771 F 2d 471 (1985)..................  Income not defined
    Connor V. C.I.R................  770 F 2d 17 (1985)...................  Tax protest
    Lukhard v Reed.................  481 U.S. 368 (1987)..................  Lost wages
    Wilcox V. C.I.R................  848 F 2d 1007 (1988).................  Tax protest
    U.S. V. Man....................  884 F 2d 532 (1989)..................  Tax protest
    Davis v Michigan...............  489 U.S. 803 (1989)..................  All that comes in
    U.S. V. Connor.................  898 F 2d 942 (1990)..................  Tax protest
    Lonsdale V. U.S................  919 F 2d 1440 (1990).................  Tax protest
    Maisano V. U.S.................  908 F 2d 40B (1990)..................  Tax protest
    U.S. V. Melton.................  94-5535 U.P. (1996)..................  Tax protest
    Caniff V. C.I.R................  94-2937 U.P. (1996)..................  Tax protest
    Webb v. U. S. of A.............  94-1854 P. (1994)....................  Statute of Limitations
    Bachner v. C.I.R...............  95-7121 P. (1997)....................  Statute of Limitations
    The Bubble Room v. U.S.........  97-5030 P. (1997)....................  FICA
    Coleman V. C.I.R...............  791 F 2d 68 (1985)...................  ....................................
    Abney V. Campbell..............  206 F 2d 836 (1953)..................  Social Security
    Amon V. U.S....................  514 FS 1293 (1981)...................  Social Security
    Trust Co. V. Lederer...........  229 F 800............................  ....................................
    Hofferbert V. Anerson..........  197 F 2d 504 (1947)..................  Gross income
    Oliver V. Halstead.............  86 SE 2d 858.........................  Profit not wages
Misc. Documents:
    37 F D-377.....................  Internal Revenue Key 211-236.........
    Webster New Collegiate
     Dictionary 1973.
    Words and Phrases..............  Excise, Property-Labor, Wages........
    Bouviers Law Dictionary........  Labor--Property Business.............
    Blacks Law Dictionary..........  Business--Labor--Property............
    Consolidated U.S. Income Tax     Kixmiller--Baar......................
     Laws 1909-1921.
    U.S. Stat. at Large............  53rd Congress Sess. 1 Chap. 349 (1893-
                                      95).
    U.S. Stat. at Large............  63rd Congress Sess. 1 Chap. 1 (1913).
    U.S. Stat. at Large............  76th Congress Sess. 1 Vol. 53 Part 1.
    U.S. Stat. at Large............  83rd Congress Sess. 2 Vol 68A........
    Federal Tax Regulations........  Part 39 Subpart B (1954).............  ....................................
    I.R.C..........................  Vol. 1 1996 U.S. Code Cong...........
    Edwards v. Cuba R. Co..........  268 U.S. 628 (1925) income...........
    Lucas v. Earl..................  281 U.S. 111 (1930) personal tax.....
    McDonald v. C.I.R..............  323 U.S. 57 (1944) business..........
    C.I.R. v. Culbertson...........  337 U.S. 733 (1949) partnership......
    Commissioner v. Sullivan.......  356 U.S. 27 (1958) net-income........
    Commissioner v. Tellier........  383 U.S. 687 (1966) net-income.......
    Jefferson County v. Acker......  98-10 Decided June 21, 1999
                                      ``occupation tax''.
----------------------------------------------------------------------------------------------------------------

                                


  Statement of Peter Goldberg and Sara E. Melendez, Independent Sector

    Independent Sector is a coalition of more than 700 national 
organizations and corporations representing the vast diversity of the 
nonprofit sector and the field of philanthropy. Its members include 
many of the nation's most prominent nonprofit organizations, leading 
foundations, and Fortune 500 corporations with strong commitments to 
community involvement. The network represents millions of volunteers, 
donors, and people served in communities around the world. Independent 
Sector members work globally and locally in human services, education, 
religion, the arts, research, youth development, health care, advocacy, 
democracy, and many other areas. No other organization represents such 
a broad range of charitable organizations and activities.
    Independent Sector strongly commends President Bush for proposing 
enactment of a charitable contribution deduction for the more than 80 
million Americans who use the standard deduction in computing their 
income tax liability. Under the President's proposal, non-itemizers 
would be able to deduct their charitable contributions up to a ceiling 
equal to the amount of the standard deduction.\1\ In non-technical 
terms, the President's proposal would make charitable contributions tax 
deductible for all Americans--not just for the 30% of taxpayers 
(generally higher income) who itemize their deductions. Congressman 
Phil Crane will shortly introduce legislation to enact the President's 
proposed non-itemizer deduction.
---------------------------------------------------------------------------
    \1\ The standard deduction is currently $4,500 for single returns 
and $7,600 for joint returns.
---------------------------------------------------------------------------
    Independent Sector strongly urges Congress to enact the President's 
proposal, as embodied in Congressman Crane's legislation, as part of 
this year's first piece of tax legislation. We attach a list of more 
than 500 charitable organizations--including many of the largest 
national charities--which have individually joined in support of this 
position (Attachment A).
    America depends on a strong charitable sector, and America's 
charities depend on a strong base of charitable giving. Independent 
Sector believes that the following principles state a powerful case for 
the importance of a strong charitable sector and a strong tradition of 
charitable giving as cornerstones of our free society.
     A strong and healthy independent sector is vital to our 
democracy, our quality of life and our free society. The independent 
(voluntary, charitable, nonprofit) sector nurtures and sustains two 
fundamental prerequisites for a free society: an engaged and public-
spirited citizenry and a rich network of autonomous communities working 
to advance the public good. Through our participation in and support of 
the organizations of the independent sector, we give life to some of 
our most cherished values: freedom of speech, association, and 
religion; pluralism; the responsibilities of citizenship; the dignity 
and worth of each and every individual; justice; and, building 
community.
     Within our three-sector society, a strong independent 
sector, a healthy business sector and an effective governmental sector 
all play critical roles. The independent sector sustains a broad range 
of vital public-benefit activities. Many of these activities are 
undertaken in partnership with government and business, and the 
independent sector also plays a role in holding business and government 
accountable. Through the independent sector, Americans both help to 
shape government policy and support private initiatives for the public 
good that complement the essential work of government. Our three-sector 
society works best when each sector understands, respects, and supports 
the vital functions of the other sectors.
     The independent sector depends on a strong base of 
charitable giving. Donated resources allow the organizations of the 
independent sector to sustain public-benefit activities. Without a 
strong base of charitable support, the independent sector could not 
perform these vital roles. While earned income and government support 
are also important revenue sources to nonprofit organizations, donated 
resources often form the core support of the organizations and allow 
them the independence so vital to performing their role in society. 
Thus, society has a fundamental interest in encouraging charitable 
support.
     Tax policy should strongly encourage giving by all 
Americans. The tax code is the most powerful tool available to the 
federal government for sending the message that we as Americans highly 
value and strongly support charitable giving. But today that message 
goes out only to the 30% of taxpayers who itemize their deductions. The 
tens of millions of hard-working low- and middle-income Americans who 
claim the standard deduction do not receive any recognition or 
encouragement through the tax code for their charitable giving. 
Intended or not, the message they receive from current law is that 
their charitable giving is not worth encouraging.
    At a time when the need for stronger civic engagement could not be 
clearer, this is a message we simply cannot afford to keep sending. On 
the contrary, we need to democratize the charitable contribution 
deduction by making it available to all Americans. We need to send a 
clear and unequivocal message that charitable giving is an important 
responsibility of citizenship--for all Americans. Enacting the 
charitable deduction for non-itemizers is the only real way for the 
federal government to send this message.
     The non-itemizer deduction would strongly encourage more 
gifts and new givers. Beyond its powerful symbolic importance, the non-
itemizer deduction would provide a strong stimulus for increased giving 
and new givers. In this regard, we attach a report prepared by the 
National Economic Consulting Division of PricewaterhouseCoopers 
summarizing the results of an econometric analysis of the effect of the 
non-itemizer deduction on charitable giving (see Attachment B).
    PricewaterhouseCoopers concludes that had the non-itemizer 
deduction, as proposed by President Bush, been in effect in 2000, total 
charitable giving would have increased by $14.6 billion--an increase of 
11.2%.
    Perhaps even more important, PricewaterhouseCoopers concludes that 
the non-itemizer deduction would have stimulated charitable gifts by 11 
million Americans who would have otherwise given nothing. The long-term 
importance of encouraging these millions of Americans to begin to 
develop the habit of giving surely dwarfs the immediate increase in 
charitable giving, as important as that increase would be.
    Two other perspectives strongly confirm the importance of the non-
itemizer deduction in encouraging increased giving. First, in 1981, 
Congress enacted the non-itemizer deduction on a 5-year trial basis 
from 1982 through 1986. The deduction was phased in gradually, and was 
fully in effect only in 1986. Significantly, between 1985, when non-
itemizers were allowed to deduct only 50% of their contributions, and 
1986 when non-itemizer gifts were fully deductible, total giving by 
non-itemizers increased by 40% according to IRS data. Second, 
Independent Sector research, summarized in Attachment C, indicate that 
in every income category, individuals who itemize their deductions 
contribute significantly more to charity than do non-itemizers with the 
same income.
     The non-itemizer deduction would provide important tax 
relief to low- and middle-income Americans. In recent months, broad 
consensus has emerged on the importance of enacting a significant, 
broad-based tax cut. Major tax relief for America's hard working low- 
and middle-income families must surely be a part of any such 
legislation. The non-itemizer deduction is an extremely attractive 
means of providing part of this needed tax relief since the deduction 
would achieve three important social goals rather than only one--it 
would reduce taxes, target those tax cuts to low- and middle-income 
taxpayers, and encourage increased charitable giving.
     The non-itemizer deduction would provide much-needed 
funding to thousands of community-based and religious organizations 
that are addressing America's most urgent social concerns. 
Significantly over half of all contributions by non-itemizers go to 
religious and human service organizations. Enacting the non-itemizer 
deduction would, as noted above, substantially increase these 
contributions. Thus, the non-itemizer deduction would directly advance 
a policy objective championed by President Bush and embraced by leaders 
across the political spectrum--increasing the resources available to 
the thousands of community-based organizations, religious and secular, 
which are on the front lines of efforts to help our neediest citizens. 
To be more concrete, if the non-itemizer deduction is enacted, 
community-based organizations will be able to provide dramatically more 
child care, mentoring, job training, drug rehabilitation, elder care, 
and a host of other vital social services. No other measure could do 
more to strengthen America's vital infrastructure of community-based 
service organizations.
    The non-itemizer deduction would be simple for taxpayers and easy 
for the IRS to administer. It is hard to imagine a tax provision easier 
to explain. The message to non-itemizers would be simple and clear: 
before you could not deduct your contributions--now you can. The 
deduction would require only a single additional line on the Form 1040. 
The IRS has already developed--in the course of administering the 
existing charitable deduction for itemizers--clear, user-friendly 
instructions explaining what types of contributions are and are not 
deductible.
    Moreover, rules are already in place that require charities to 
provide written receipts for contributions of $250 or more and to 
advise donors when they must reduce their charitable deduction because 
they have received a return benefit from the charity. These and other 
existing safeguards have effectively ensured the integrity of the 
existing charitable contribution deduction for itemizers, who, because 
of their larger average level of giving, account for 80% of all 
charitable contributions. These existing safeguards will likewise 
ensure the integrity of the non-itemizer deduction.
    In closing, we reiterate the key principles that undergird 
Independent Sector's support for the non-itemizer deduction: America's 
health as a free, democratic society depends on a strong charitable 
sector, and America's charities depend on a strong base of charitable 
giving. The non-itemizer deduction would powerfully encourage that 
charitable giving by all Americans. We applaud President Bush and 
Congressman Crane for their leadership on this issue, commend the many 
other members of Congress who have supported this proposal, and call on 
Congress to enact it now.
                              Attachment A
                                                   January 31, 2001
    Dear President George W. Bush: We, the undersigned organizations, 
representing a cross-section of the entire charitable sector, write in 
support of your Administration's proposal to allow all taxpayers, 
including non-itemizers, to deduct their charitable contributions, 
whether they itemize their deductions or not. This proposal would allow 
non-itemizers to deduct all their charitable contributions up to a 
ceiling equivalent to the standard deduction.
    The non-itemizer charitable deduction reflects the generosity and 
sacrifice made every day by tens of millions of Americans. The proposal 
would allow the 85 million Americans who do not itemize their tax 
returns (more than two out of every three taxpayers) to deduct their 
charitable contributions.
    A forthcoming PricewaterhouseCoopers study for Independent Sector 
reveals that this proposal could increase charitable giving by as much 
as $14 billion per year. In addition, the proposal would encourage over 
11 million taxpayers to become new givers.
    The non-itemizer charitable deduction does triple duty: It provides 
tax relief for non-itemizers, who are largely low-and middle-income 
taxpayers; it improves tax fairness by recognizing the generosity of 
all taxpayers; and, by creating an incentive for additional giving, it 
encourages individuals and families to give more to support the work of 
their favorite charities.
    A similar proposal received broad bipartisan support in the 106th 
Congress.
    President Bush, several times you voiced your support of the 
nonprofit community as partners to government throughout your campaign 
and most recently in your inaugural address. The place to start is with 
the charitable non-itemizer deduction.
    We strongly support your Administration's proposal and urge its 
speedy passage.
            Sincerely,
                                           Sara E. Melendez
                                                    President & CEO
    Attachment A
Over 500 National and Local Organizations, Collectively Representing 
        Thousands of Organizations Nationwide, Have Joined Independent 
        Sector in Support of this Letter
February 28, 2001
Alaska
Alaskan AIDS Assistance Association, Anchorage
Victory Ministries, Inc., Palmer
Alabama
Family Guidance Center of Alabama, Montgomery
Gateway, Birmingham
Nonprofit Resource Center of Alabama, Birmingham
Presbyterian Home for Children, Talladega
Arkansas
Arkansas Community Foundation, Little Rock
Family Service Agency, North Little Rock
United Way of Pulaski County, Little Rock
Arizona
Family Service Agency of Phoenix, Phoenix
Jewish Family and Children's Service, Phoenix
Make a Wish Foundation of America, Phoenix
California
Adult and Child Guidance Center/Family Service Mid-Peninsula, San Jose
ANGELCARE, San Diego
Bolthouse Foundation, Bakersfield
Canine Companions for Independence, Santa Rosa
Children Affected by AIDS Foundation, Los Angeles
Chrysalis, Los Angeles
Dominican University of California, San Rafael
East Bay Habitat for Humanity, Oakland
Family Service Agency of Santa Barbara, Santa Barbara
Freedom from Hunger, Davis
Harry Singer Foundation, Carmel
James Irvine Foundation, San Francisco
Joshua Venture, San Francisco
Los Angeles Women's Foundation, Los Angeles
McKesson HBOC Foundation, San Francisco
Monterey Bay Aquarium, Monterey
Mountain Community Resources, Ben Lomond
National Association of Latino Elected Officials Educational Fund, Los 
        Angeles
Nonprofits Insurance Alliance of California, Santa Cruz
Olive Crest, Santa Ana
Pacific Lodge Youth Services, Woodland Hills
Public Interest Clearinghouse, San Francisco
Sacramento Opera Association, Sacramento
Sacramento Tree Foundation, Sacramento
Sacramento Zoo, Sacramento
San Francisco Food Bank, San Francisco
San Gorgonio Memorial Hospital Foundation, Banning
Senior Community Centers, San Diego
Streetlights Production Assistant Program, Hollywood
Verdugo Mental Health Center, Glendale
William and Flora Hewlett Foundation, Menlo Park
World Emergency Relief, Carlsbad
Colorado
Boys and Girls Club of the Pikes Peak Region, Colorado Springs
Christian Camping International/USA, Colorado Springs
Colorado Association of Non-Profits, Denver
El Pomar Foundation, Colorado Springs
El Pueblo Boys and Girls Ranch, Pueblo
Fort Collins Area United Way, Fort Collins
General Service Foundation, Aspen
Independent Higher Education of Colorado, Denver
Namaqua Center, Loveland
National Associations in Colorado Springs, Colorado Springs
Native American Rights Fund, Boulder
Third Way Center, Denver
Turning Point Center for Youth and Family Development, Fort Collins
Connecticut
Children's Home of Cromwell, Cromwell
Connecticut Association of Nonprofits, Hartford
Connecticut Council of Family Service Agencies, Nethersfield
Connecticut Council of Philanthropy, Hartford
EFT Corporation, Hamden
Empowering Resources, Bridgeport
Family Centers, Greenwich
Family Counseling of Greater New Haven, Inc., New Haven
Family Services of Central Connecticut, Inc., New Britain
Family Services Woodfield, Bridgeport
Village for Families and Children, Inc., Hartford
District of Columbia
ACCESS: Networking in the Public Interest
Agudath Israel of America
Alliance for Nonprofit Management
Alliance to End Childhood Lead Poisoning
American Association of Museums
American Arts Alliance
American Council for International Education
American Council on Education
American Diabetes Association
American Humane Association
American Red Cross
American Society of Association Executives
America's Public Television Stations
Association of American Art Museum Directors
Association of American Universities
Association of Governing Boards of Universities and Colleges
Association of Performing Arts Presenters
Black Patriots Foundations
CARE
Center for Policy Alternatives
Center for Resource Economics/Island Press
Child Welfare League of America
Community Family Life Services
Council for Advancement and Support of Education (CASE)
Council on Foundations
Ethics Resource Center
Forum of Regional Associations of Grantmakers
Foundation for Independent Higher Education
Girl Scouts of the USA
Global Fund for Children
Habitat for Humanity International
HalfthePlanet Foundation
Islamic InstituteKaBOOM!
Lutheran Services in America
March of Dimes Birth Defects Foundation
National Asian Pacific American Legal Consortium
National Association of Independent Schools
National Center for Institutionally Related Foundations
National Conference for Community and Justice
National Council of Jewish Women
National Council of Nonprofit Associations
National Crime Prevention Council
National Grange
National Multiple Sclerosis Society
National Peace Corps Association
OMB Watch
PACT
Pan American Development Foundation
Partners of the Americas
Points of Light Foundation
Population Services International
Presbyterian Church USA
Reading is Fundamental, Inc.
SOS Children's Villages USA
United Cerebral Palsy Associations, Inc.
United States Catholic Conference
Washington Center for Internships
Washington Council of Agencies
The World Institute for Development and Peace
Youth Service America
Delaware
Delaware Association of Nonprofit Agencies, Wilmington
Florida
Anne Norton Sculpture Gardens, Inc., West Palm Beach
Avatar, Casselberry
Charity Works, Inc., Clearwater
Florida Association of Nonprofit Organizations, Miami Lakes
Hillsborough CARES, Tampa
Junior League of Greater Orlando, Orlando
Learn to Read, Inc., Jacksonville
Nassau County Volunteer, Yule
Nicaraguan Development Center, Miami
Nonprofit Management Solutions, Inc., Hollywood
United Way of Florida, Tallahassee
Webb Center, Inc., Jacksonville
Georgia
American Cancer Society, Atlanta
Action Ministries, Inc., Atlanta
AEC Trust, Atlanta
AIDS Survival Project, Atlanta
Atlanta Neighborhood Development Partnership, Atlanta
Boys and Girls Clubs of America, Atlanta
CDC Foundation, Atlanta
Community Foundation for Greater Atlanta, Inc., Atlanta
Emory University, Atlanta
Furniture Bank of Metro Atlanta, Atlanta
Jewish Family and Career Services, Atlanta
Light of Hope Ministries Global International, Albany
Rockdale County Emergency Relief Fund, Inc., Conyers
Union Mission, Inc., Savannah
West Broad Street YMCA, Inc., Savannah
Hawaii
TILT Dance Company, Makawao
Iowa
Community Corrections Improvement Association, Cedar Rapids
Idaho
Children's Village, Inc., Coeur d'Alene
Idaho Youth Ranch, Boise
Illinois
American Library Association, Chicago
America's Second Harvest, Chicago
Ashlumn Community Project, Chicago
Bethany for Children and Families, Moline
CenterPoint Institute, New Lenox
Chaddock, Quincy
Child Care Association of Illinois, Springfield
Children's Home Association, Peoria
Counseling and Family Services, Peoria
Easter Seals, Chicago
Educational Assistance, Ltd., Wheaton
Executive Service Corps of Chicago, Chicago
Field Foundation of Illinois, Chicago
Handkind Company, Chicago
Illinois Association of Rehabilitation Facilities, Springfield
Illinois Fatherhood Initiative, Chicago
Institute for Voluntary Organizations, Downers Grove
Jewish United Fund/Jewish Federation of Metro Chicago, Chicago
Kemmerer Village, Assumption
Lutheran Advocacy Network of Illinois, Des Plaines
Lutheran Social Services of Illinois, Des Plaines
North Park University, Chicago
Northwestern University, Evanston
Oak Park River Forest Community Foundation, Oak Park
OMNI Youth Services, Buffalo Grove
Prevent Blindness America, Schaumburg
Salem Children's Home, Flanagan
Silver Cross Hospital and Medical Centers, Joliet
Sunny Ridge Family Center, Inc., Wheaton
United Way of Illinois, Chicago
World Education Services, Chicago
YMCA of the USA, Chicago
Indiana
Ball Brothers Foundation, Muncie
Christian Church Foundation, Inc., Indianapolis
Covenant Community Church, Indianapolis
Ecumenical Stewardship Center, Indianapolis
Family and Children's Center, Inc., Mishawaka
Family and Children's Center, South Bend
Family Service Association of Howard County, Inc., Kokomo
Family Services Association of Wabash Valley, Inc.
Family Services of Delaware County, Indiana, Inc., Muncie
Family Services of Elkhart County, Inc., Elkhart
Indiana University Center for Philanthropy, Indianapolis
Indiana University School of Nursing, Indianapolis
Meningitis Foundation of America, Indianapolis
National Committee on Planned Giving, Indianapolis
Wesleyan Church Cooperation, Indianapolis
YMCA of Greater Indianapolis, Indianapolis
Kansas
Associated Youth Services, Kansas City
Catholic Charities, Kansas City
St. Lukes Shawnee Health Mission, Shawnee Mission
Youth Volunteer Corps of America, Shawnee Mission
Kentucky
Children's Alliance, Frankfort
Family and Children's Counseling Centers, Louisville
Family Counseling Service, Lexington,
United Way of Kentucky, Louisville
Louisiana
Family and Youth Counseling Agency, Lake Charles
Family Service of Greater New Orleans, New Orleans
University of Louisiana Department of Communication, Lafayette
Massachusetts
Donovan Sloan, Inc., Salem
Family Service, Inc., Lawrence
Family Services of Greater Boston, Jamaica Plain
Girls Incorporated of the Berkshires, Pittsfield
Grants Management Associates, Boston
Massachusetts Audubon Society, Lincoln
Tabor Services, Inc., Arlington
United Way of Merrimack County, Ward Hill
Women's Action for New Directions, Arlington
Youth on Board, Somerville
Maryland
American Institute of Philanthropy, Bethesda
American Zoo and Aquarium Association, Silver Spring
Board of Child Care, Baltimore
Epilepsy Foundation, Landover
Goodwill Industries International, Inc., Bethesda
Maple Shade Youth and Family Services, Inc., Mardola
Maryland Association of Nonprofit Organizations, Baltimore
International Youth Foundation, Baltimore
Izaak Walton League of America, Gaithersburg
TG77 Enterprises, Silver Spring
Maine
Cedars Nursing Care Center, Portland
Institute for Global Ethics, Camden
Maine Association of Nonprofits, Portland
Michigan
American Auto Immune and Related Diseases Association, East Detroit
Action Institute for the Study of Religion and Liberty, Grand Rapids
Boys and Girls Republic, Farmington Hills
Catholic Social Services of Wayne County, Detroit
Christian Reformed Church, Grand Rapids
Dispute Resolution Center of Western Michigan, Grand Rapids
Family Service Area of Genesee County, Flint
Greenville Area Community Foundation, Greenville
High/Scope Educational Research Foundation, Ypsilanti
Hudson-Webber Foundation, Detroit
Lakeside Treatment and Learning Center, Kalamazoo
Lutheran Child and Family Services of Michigan, Bay City
Lutheran Social Services of Michigan, Lansing
Michigan Federation of Private Children's and Family Agencies, Lansing
Michigan Nonprofit Association, East Lansing
The Nokomis Foundation, Grand Rapids
Nonprofit Enterprise at Work, Ann Arbor
Starr Commonwealth, Albion
Teen Ranch, Inc., Marlette
Whaley Children's Center, Flint
Minnesota
Dakota Area Transportation and Resources for Seniors, St. Paul
Family and Children's Services of Minneapolis, Minneapolis
Family Means, Stillwater
Jewish Family and Children's Service, Minnetonka
Maya Foundation, Rochester
Minnesota Council of Nonprofits, St. Paul
Otto Bremer Foundation, St. Paul
Second Harvest St. Paul Food Bank, St. Paul
Sheriff's Youth Programs of Minnesota, Inver Grove Heights
West Central Initiative, Fergus Falls
Missouri
Beyond Housing, St Louis
Butterfield Youth Services, Marshall
Cardinal Ritter Institute, St Louis
Child Advocacy Center, Inc., Springfield
Ewing Marion Kaufmann Foundation, Kansas City
Harvesters, Kansas City
KRCU Southeast Public Radio, Gape Girardeau
Mid-America Arts Alliance, Kansas City
Shepard's Centers of America, Kansas City
YWCA of St. Joseph, St. Joseph
Mississippi
Mississippi Center for Nonprofits, Jackson
Natchez Childrens Home, Natchez
Montana
Four Times Foundation, Red Lodge
Montana Parks Association, Billings
Yellowstone Boys and Girls Ranch, Billings
Nebraska
Catholic Charities of the Archdiocese of Omaha, Omaha
Christian Urban Education Service, Omaha
Family Services of Lincoln, Lincoln
Girls and Boys Town, Boys Town
Woods Charitable Fund, Inc., Lincoln
North Carolina
Baptist Children's Homes of North Carolina, Thomasville
Barium Springs Home for Children, Barium Springs
Charlotte Museum of History, Charlotte
Community Housing Development Corporation, Mooresville
Family Guidance Center, Hickory
Family Services of the Piedmont, Inc., High Point
Nazareth Children's Home, Rockwell
North Carolina Center for Nonprofits, Raleigh
North Carolina Victims Assistance Network, Raleigh
Presbyterian Hospital Foundation, Charlotte
Samaritan's Purse, Boone
Sipes Orchard Home, Conover
YMCA Blueridge Assembly Inc., Black Mountain
North Dakota
The Village Family Service Center, Fargo
New Hampshire
Camp Berea, Bristol
New Hampshire Charitable Foundation, Concord
New Jersey
Association of Jewish Family and Children's Agencies, East Brunswick
Center for Arts and Cultural Policy Studies, Princeton
Center for Family Services, Inc., Camden
Center for Non-Profit Corporations New Jersey, North Brunswick
Children's Aid and Family Services Inc., Paramus
Family Service Association of South Jersey, Absecon
First Occupational Center of New Jersey, Orange
Lucent Technologies Foundation, Murray Hill
Medical Education for South African Blacks, New Brunswick
Partnership in Philanthropy, Chatham
Prudential Foundation, Newark
Recording for the Blind and Dyslexic, Princeton
New Mexico
Americans for Indian Opportunity, Bernalillo
Assurance Home, Inc., Roswell
Rocky Mountain Youth Corps, Taos
United Way of Central New Mexico, Albuquerque
Nevada
Family Counseling Service of Northern Nevada, Reno
Girl Scouts of Frontier Council, Las Vegas
New York
Albert Kunstadter Family Foundation, New York
Alliance for Children and Families, Buffalo
American Foundation for AIDS Research, New York
American Foundation for the Blind, New York
American Lung Association of New York State, Inc., Albany
American Symphony Orchestra League, New York
Angel Guardian Children and Family Services, Brooklyn
Association of Advanced Rabbinical and Talmudic Studies, New York
Association of Junior Leagues International, New York
Compeer, Inc., Rochester
Council of Family and Child Caring Agencies, New York
CUNY Center for the Study of Philanthropy, New York
DOROT, Inc., New York
Environmental Defense, New York
Family and Children's Association, Minneola
Family and Children's Services of Niagara, Inc., Niagara Falls
Family Services of Rochester, Rochester
Girls Incorporated, New York
Heveron and Heveron, Rochester
International Center for the Disabled, New York
Jewish Board of Family and Children's Services, New York
Jewish Community Centers Association, New York
Jewish Community Relations Council of New York, New York
Julia Dyckman Andrus Memorial, Yonkers
Kosciuszko Foundation, New York
LaSalle School Albany, Albany
Libraries for the Future, New York
Literacy Volunteers of America, Inc., Syracuse
National Catholic Development Conference, Hempstead
National Center for Learning Disabilities, New York
National Council of Churches, New York
National Council of Women of the U.S., New York
National Hospital Foundation, New York
National Medical Fellowships, New York
Natural Resources Defense Council, New York
New York Regional Association of Grantmakers, New York
Nonprofit Coordination Contactors of New York, New York
Northeast Parent and Child Society, Inc., Schenectady
NYSARC, Inc., Schoharie
ORBIS International, New York
Park Foundation, Ithaca
Peter F. Drucker Foundation for Nonprofit Management, New York
Planned Parenthood Federation of America, New York
Rural and Migrant Ministry of Oswego County, Inc., Richland
Rural Opportunities, Inc., Rochester
Russell Sage Foundation, New York
Samuel H. Kress Foundation, New York
St. Mary's Foundation for Children, Bayside
Synergos Institute, New York
Theater Communications Group, New York
United Health Services, Binghamton
United Jewish Appeal Federation of Jewish Philanthropies, New York
United Jewish Communities, New York
United Way of Broome County, Inc., Binghamton
YWCA of the USA, New York
Ohio
Cancer Family Care, Cincinnati
Catholic Charities and Human Services Cleveland, Cleveland
Center for Families and Children Cleveland, Cleveland
Cincinnati Institute of Fine Arts, Cincinnati
Community Solutions Association, Warren
Crittenton Family Services, Columbus
Easter Seals Southwest Ohio, Cincinnati
Family Service Agency Youngstown, Youngstown
Family Service of Northwest Ohio, Toledo
Family Services Association of Dayton, Dayton
Family Services of Summit County, Akron
George Gund Foundation, Cleveland
Holy Family Institute, Canfield
Kent State University Foundation, Kent
Mandel Center for Nonprofit Organizations, Cleveland
Mohawk Area Development Corporation, Cincinnati
Ohio Academy of Family Physicians, Columbus
Ohio Association of Nonprofit Organizations, Columbus
Ohio United Way, Columbus
Recovery Resources, Cleveland
Youngstown State University Foundation, Youngstown
Oklahoma
Family and Children's Services, Inc., Tulsa
Oklahoma Public Employees Association, Oklahoma City
Sunbeam Family Services, Inc., Oklahoma City
World Neighbors, Oklahoma City
Oregon
Forest Service Employees for Environmental Ethics, Eugene
Interfaith Volunteer Caregivers of Central Oregon, Bend
Metropolitan Family Service, Portland
Oregon Advocacy Center, Portland
Oregon Independent Colleges Association, Portland
PhilanthropyNow, Portland
St. Mary's Home, Beaverton
Pennsylvania
American Friends Service Committee, Philadelphia
Biblical Theological Seminary, Hartsfield
Big Brothers/Big Sisters of America, Philadelphia
Brighter Horizons Behavioral Health, Edinboro
Children's Aid Society of Mercer County, Mercer
Children's Home of Reading, Reading
Community Foundations for Pennsylvania, Harrisburg
Delaware Valley Grantmakers, Philadelphia
Esperanza Health Clinic, Philadelphia
Evangelical Council for Financial Accountability, Winchester
Family and Community Service of Delaware County, Media
Family Service of Chester County, West Chester
Family Services Association of Bucks County, Langhorne
Family Services Lancaster, Lancaster
Family Services of Lackawanna County, Scranton
Family Services of Northwestern Pennsylvania, Erie
Family Services of Western Pennsylvania, Pittsburgh
Foundation of the Pennsylvania Medical Society, Harrisburg
Grace Brethren Retreat Center Camp Conquest, Denver
Institute for the Study of Civic Values, Philadelphia
Pennsylvania Association of Nonprofit Organizations, Harrisburg
Pennsylvania Council of Youth and Family Services, Harrisburg
Pennsylvania Federation of Museums, Harrisburg
Sarah Reed Children's Center, Erie
Wayne Memorial Health Foundation, Honesdale
Woman's Way, Philadelphia
YWCA of Lancaster, Lancaster
Rhode Island
Jewish Family Service, Providence
University of Rhode Island, Providence
South Carolina
Carolina Counseling, Spartanburg
Compass of Carolina, Greenville
International Primate Protection League, Summerville
South Carolina Association of Nonprofit Organizations, Columbia
Tara Hall Home for Boys, Georgetown
Tennessee
Alliance for Children and Families, Knoxville
Baptist Memorial Health Care Foundation, Memphis
Child and Family Tennessee, Knoxville
Exchange Club Family Center, Memphis
Family and Children's Service, Nashville
Family and Children's Services of Chattanooga, Inc., Chattanooga
Holston United Methodist Home for Children, Greeneville
Lloyd C. Elam Mental Health Center, Nashville
Lyndhurst Foundation, Chattanooga
Park Center, Nashville
Prevent Child Abuse Tennessee, Madison
United Methodist Higher Education Foundation, Nashville
Texas
Alliance of Nonprofits, Irving
American Heart Association, Dallas
Boys and Girls Harbor, Inc., Houston
Boys and Girls Country of Houston, Inc., Hockley
Catholic Diocese of Fort Worth, Fort Worth
Center for AIDS: Hope and Remembrance Project, Houston
Dini Partners, Houston
Family Counseling Service Corpus Christi, Corpus Christi
Family Service Association of San Antonio, San Antonio
Family Services of Southeast Texas, Beaumont
Family Support Services, Amarillo
Florence Crittenden Agency, Inc., Knoxville
Fort Bend County Women's Center, Rosenberg
Galveston College Foundation, Galveston
Girl Scouts of Lone Star Council, Austin
Girl Scouts of the Permian Basin, Odessa
Hogg Foundation for Mental Health, Austin
Lutheran Social Services of the South, Inc., Austin
Providence Foundation, Inc., Waco
Sid W. Richardson Foundation, Fort Worth
Texas Alliance for Human Needs, Austin
Texas Association of Museums, Austin
Texas Development Institute, Austin
Texas Methodist Foundation, Austin
Texas Network of Youth Services, Austin
United Way of the Texas Gulf Coast, Houston
Victim Assistance Center, Inc., Houston
Utah
Granite Education Foundation, Salt Lake City
Simmons Family Foundation, Salt Lake City
Utah Valley State College, Orem
Vermont
Vermont Natural Resources Council, Montpelier
Virginia
America's Promise, Alexandria
Association for Volunteer Administration, Richmond
Association of Farmworker Opportunity Programs, Arlington
Association of Fundraising Professionals, Alexandria
Catholic Charities USA, Alexandria
Christian Service Charities, Springfield
Close Up Foundation, Alexandria
Conservation Fund, Arlington
Gifts In Kind International, Alexandria
Human Service Charities of America, Springfield
International Service Agency, Alexandria
Leukemia and Lymphoma Society, Alexandria
Medical Research Agencies of America, Springfield
National Association of Children's Hospitals, Alexandria
National Association of Schools of Art and Design, Reston
National Association of Schools of Dance, Reston
National Association of Schools of Music, Reston
National Association of Schools of Theater, Reston
National Military Family Association, Inc., Alexandria
Northern Virginia Family Service, Falls Church
Operation Smile, Norfolk
Research America, Alexandria
Salvation Army of America, Alexandria
Share America, Springfield
United Way of America, Alexandria
Volunteers of America, Alexandria
Washington
Children's Services of Sno-Valley, Snoqualmie
Deaconess Children's Services, Everett
Evergreen State Society, Seattle
Family Resource Center Redmond, Redmond
Friends of Youth, Redmond
Gateways for Youth and Family, Tacoma
Giraffe Project, Langley
Morning Star Boys Ranch, Spokane
Mothers Against Violence in America, Seattle
Northwest Regional Facilitators, Spokane
Pacific Northwest Ballet, Seattle
Seattle Children's Home, Seattle
Seattle Lighthouse for the Blind, Seattle
Waitt Family Foundation Technology Resource Center, Seattle
West Virginia
Family Service of Upper Ohio Valley, Wheeling
Wisconsin
Donors Forum of Wisconsin, Milwaukee
Family Service Association of Beloit, Beloit
Family Services of Madison, Madison
Family Services of Racine, Racine
IMPACT Alcohol and Other Drug Abuse Services, Inc., Milwaukee
Madison Avenue Center, Madison
Milwaukee Public Museum, Milwaukee
Nonprofit Center of Milwaukee, Milwaukee
Norris Adolescent Center, Mukwonago
Rehabilitation for Wisconsin, Inc., Madison
Ripon College, Ripon
School Sisters of St. Francis, Inc., Milwaukee

                                


                              Attachment B

                      PRICEWATERHOUSECOOPERS L.L.P

         INCENTIVES FOR NONITEMIZERS TO GIVE MORE: AN ANALYSIS

                             A. Background

Purpose
    This report is prepared for the Independent Sector by the National 
Economic Consulting practice of PricewaterhouseCoopers LLP.
    The report concerns a proposal for allowing individuals who do not 
itemize deductions (``nonitemizers'') in computing federal income tax 
to deduct 100 percent of their charitable contributions, up to the 
amount of the standard deduction applicable to the taxpayer's filing 
status. The proposal is referred to as the ''Bush proposal'' because it 
was included by then-Governor G.W. Bush in A Tax Cut with a Purpose, 
published in December 1999.
    The objectives of the report are to--
     Estimate the amount of additional charitable giving that 
the Bush proposal would stimulate, nationwide and in each State, and
     Estimate the amount of additional giving nationwide 
according to the income of the donor.
Economic rationale and methodology
    Rationale.--The proposal would encourage philanthropy by reducing 
the after-tax price of giving to a donor. Under present law, the after-
tax price for a nonitemizer is $100 per $100 contributed because he or 
she is not allowed to deduct charitable contributions in computing 
taxable income. In contrast, the after-tax price for an individual in 
the 28-percent tax bracket who itemizes deductions is $72 per $100 
donated because the donation generates a $28 tax reduction. The 
economic rationale for the Bush proposal is to confer the same tax 
reduction on nonitemizers as itemizers now enjoy.
    Research that has been conducted in universities, think tanks, and 
the federal government preponderantly supports the economic proposition 
that people tend to give more when the price of giving is lower for 
them. There is, however, a variance of results in this research about 
how strongly price affects the amounts given.
    Methodology.--We use PricewaterhouseCoopers' computerized model of 
charitable giving by individuals for the analysis in this report. The 
model was developed for a prior project for the Council on Foundations 
and INDEPENDENT SECTOR and is described in detail in the associated 
report, Impact of Tax Restructuring on Tax-Exempt Organizations.
    The model is based on data from the 1994 Public Use Tax File that 
is issued by the Internal Revenue Service. This file contains 
information on over 96,000 actual tax returns. We impute information on 
giving by nonitemizers. This information did not appear on 1994 tax 
returns because it was not necessary for income tax purposes then. 
Rather, the imputation is based on characteristics of nonitemizers as 
disclosed on tax returns in 1986, the last year that they could fully 
deduct charitable contributions under prior law.
    The model uses a two-step regression procedure to determine 
charitable giving. The first step determines an individual's 
probability of making any charitable contribution at all. The second 
step estimates an individual's level of giving, after he or she has 
been determined to be a giver. The two-step statistical procedure makes 
the model unique in the sophistication of its approach to the analysis 
of charitable contributions.
    We apportion additional amounts given among the 50 States by 
equally weighting two factors--the percentage of nonitemizers 
nationwide who reside in a jurisdiction and the percentage of 
charitable contributions deducted nationwide that is currently 
originating in the jurisdiction. This information is available from IRS 
tabulations. We then apply the apportionment factors to an estimate of 
increased nationwide giving over 2000-04. We derive this 5-year total 
by growing our nationwide estimate for 2000 over 2001-2004 at the same 
growth rates as the Congressional Budget Office projected for the Gross 
Domestic Product in its July 2000 economic forecast.
    The computations were done in 2000, as if the Bush proposal were 
fully effective then. Obviously the computations are one year ``off'' 
in their fineness if the question is about implementing the proposal 
today. However, the essential character of the results in this report 
is certainly applicable to the current discussion of incentives for 
nonitemizers to give more.

                               B. Results

Overview
    The results are organized in the following four tables.
    Table 1 shows estimates of the amounts given, number of givers, and 
number of itemizers under current law and the Bush proposal.
    Table 2 shows estimates of the amounts given under current law and 
the proposal, according to the income level of the donor. It also has 
estimates of the number of givers under current law and the Bush 
proposal at various levels of income.
    Table 3 shows estimates of percentage increases in amounts given 
under the proposal for individuals at various income levels. It also 
has estimates of the percentage increase in the number of givers at 
various income levels under the Bush proposal.
    Table 4 shows estimates of additional giving in each State under 
the Bush proposal, for the 5-year period 2000-04.
Bush proposal
    The Bush proposal would stimulate additional giving of $14.6 
billion in 2000, an increase of 11.19 percent. The largest responses in 
percentage terms--about 25 percent in some income brackets--would occur 
among individuals whose incomes are under $70,000 (Table 3). In the 
$20,000-$30,000 income bracket, where the percentage response is 
greatest, the average contribution over all (giving and nongiving) tax-
filing units would increase from approximately $611 to $767.
    Increased contributions would come from three segments of the 
population:
     New givers. The proposal would encourage 11.7 million tax-
filing units to become new givers, an increase of 16.6 percent in the 
number of givers. The greatest percentage increase in new givers would 
come in the lower income brackets (Table 3). Indeed, about three-
quarters of the new givers would have incomes under $40,000. One might 
expect this outcome because the proposal is structured to benefit 
nonitemizers and most individuals with incomes under $40,000 (about 88 
percent) do not itemize deductions under present law. By contrast, only 
14 percent of tax-filing units with incomes above $70,000 do not 
itemize at present.
     Current givers who don't itemize. Some additional giving 
would come from individuals who are giving at present and are not 
itemizing deductions under present law. Unfortunately, we cannot 
estimate their number with this analysis.
     Switchers. There would be about 3.9 million ``switchers'' 
under the proposal. A switcher itemizes deductions under present law 
but would not itemize under the proposal. The profile of a switcher is 
a taxpayer whose itemized deductions consist mainly of charitable 
contributions. A switcher would be able to deduct more under the 
proposal by combining the standard deduction with an above-the-line 
charitable deduction than by using the itemized deductions of present 
law.
    The technical property of the Bush proposal that generates large 
estimated increases in charitable contributions and particularly draws 
out new givers is its ``first-dollar'' coverage. That is, an individual 
would receive a tax benefit by giving just one more dollar, whatever 
the amount of his or her current giving. This feature differs from some 
other proposals that would allow no deduction for a threshold amount of 
giving--sometimes put at $500 to $2,000. With a $2,000 threshold there 
is no tax incentive to give anything more or anything at all unless one 
intends to give more than $2,000, and then the total benefit on $2,001 
of giving is just 15 cents for an individual in the 15-percent tax 
bracket. Lower thresholds provide greater incentives to give and give 
more, and no threshold provides the greatest incentive of all.
State perspective
    Under the Bush proposal the greatest increases in charitable 
contributions and about half of the national increase would arise in 
California, New York, Texas, Florida, Illinois, Pennsylvania, New 
Jersey, Ohio, and Michigan (Table 4). These are States that account for 
relatively large percentages of deducted charitable contributions and 
nonitemizing individuals under present law, the two factors used to 
apportion the nationwide change to the States.
    Consistent with our analysis of increased giving nationwide, an 
additional factor that ideally would be used to apportion changes to 
the States is the residence of switchers. However, this information is 
neither available in nor readily inferred from IRS data that are 
ordinarily offered to the public. Thus, while the estimates shown in 
Table 4 should be useful indicators, further research into identifying 
the residence of prospective switchers would be desirable to see 
whether it would materially change the apportioned amounts.

                        Table 1.--Amount given, number of givers and number of itemizers
                                                     [2000]
----------------------------------------------------------------------------------------------------------------
                                                                                                   Number of
                                                          Amount given ($    Number of givers      itemizers
                                                             billions)          (millions)         (millions)
----------------------------------------------------------------------------------------------------------------
Present law............................................             130.3               70.7               39.5
Bush proposal..........................................             144.9               82.4              35.6
----------------------------------------------------------------------------------------------------------------
Source: PricewaterhouseCoopers LLP Individual Tax Model simulations.


                               Table 2.--Amount given and number of givers, by AGI
                                                     [2000]
----------------------------------------------------------------------------------------------------------------
                                                                  Amount of giving          Number of givers
                                                                     ($millions)               (thousands)
                          AGI class                          ---------------------------------------------------
                                                                               Bush                      Bush
                                                              Present law    proposal   Present law    proposal
----------------------------------------------------------------------------------------------------------------
Less than 0.................................................          199          199          171          171
0-5,000.....................................................          726          907        1,435        1,955
5,000-10,000................................................        2,546        2,950        3,548        4,708
10,000-15,000...............................................        3,981        4,818        4,825        6,334
15,000-20,000...............................................        4,935        6,181        5,451        7,144
20,000-30,000...............................................       11,515       14,455       10,514       12,994
30,000-40,000...............................................       10,456       12,872        8,598       10,239
40,000-50,000...............................................        9,878       11,706        7,283        8,263
50,000-60,000...............................................       10,026       11,271        6,618        7,214
60,000-70,000...............................................       10,284       11,595        5,539        5,940
70,000-80,000...............................................        7,490        8,213        4,058        4,342
80,000-90,000...............................................        7,158        7,560        3,048        3,166
90,000-100,000..............................................        5,024        5,315        2,218        2,304
100,000-200,000.............................................       20,205       20,743        5,733        5,912
200,000-500,000.............................................       10,333       10,480        1,326        1,373
500,000-1,000,000...........................................        4,234        4,275          203          215
1,000,000 or More...........................................       11,319       11,347           96          101
                                                             ---------------------------------------------------
      Total.................................................      130,310      144,887       70,664      82,375
----------------------------------------------------------------------------------------------------------------
 ``AGI'' is adjusted gross income for federal income tax purposes.

 Source: PricewaterhouseCoopers LLP Individual Tax Model simulations.


  Table 3.--Percent change in amount given and number of givers, by AGI
                                 [2000]
------------------------------------------------------------------------
                                       Percent change    Percent change
                                       in amount given      in givers
              AGI class              -----------------------------------
                                        Bush proposal     Bush proposal
------------------------------------------------------------------------
Less than 0.........................             0.00%             0.00%
0-5,000.............................            24.93%            36.18%
5,000-10,000........................            15.87%            32.71%
10,000-15,000.......................            21.02%            31.26%
15,000-20,000.......................            25.25%            31.07%
20,000-30,000.......................            25.53%            23.59%
30,000-40,000.......................            23.11%            19.09%
40,000-50,000.......................            18.51%            13.45%
50,000-60,000.......................            12.42%             9.01%
60,000-70,000.......................            12.75%             7.25%
70,000-80,000.......................             9.65%             6.99%
80,000-90,000.......................             5.62%             3.87%
90,000-100,000......................             5.79%             3.85%
100,000-200,000.....................             2.66%             3.12%
200,000-500,000.....................             1.42%             3.54%
500,000-1,000,000...................             0.97%             6.01%
1,000,000 or More...................             0.25%             5.97%
                                     -----------------------------------
      Total.........................            11.19%            16.57%
------------------------------------------------------------------------
 ``AGI'' is adjusted gross income for federal income tax purposes.

 Source: PricewaterhouseCoopers LLP Individual Tax Model simulations.


               Table 4.--Additional amount given, by state
                [2000-2004 total, in millions of dollars]
------------------------------------------------------------------------
                        State                            Bush proposal
------------------------------------------------------------------------
United States........................................          80,637
Alabama..............................................           1,266.66
Alaska...............................................             186.01
Arizona..............................................           1,250.75
Arkansas.............................................             712.94
California...........................................           9,451.96
Colorado.............................................           1,245.31
Connecticut..........................................           1,110.12
Delaware.............................................             238.02
Florida..............................................           4,640.57
Georgia..............................................           2,429.75
Hawaii...............................................             312.03
Idaho................................................             335.73
Illinois.............................................           3,600.85
Indiana..............................................           1,667.72
Iowa.................................................             780.06
Kansas...............................................             766.95
Kentucky.............................................             983.21
Louisiana............................................           1,093.47
Maine................................................             306.62
Maryland.............................................           1,731.75
Massachusetts........................................           1,889.79
Michigan.............................................           2,836.97
Minnesota............................................           1,480.95
Mississippi..........................................             727.02
Missouri.............................................           1,525.91
Montana..............................................             223.09
Nebraska.............................................             522.35
Nevada...............................................             565.26
New Hampshire........................................             330.54
New Jersey...........................................           2,554.79
New Mexico...........................................             425.94
New York.............................................           6,103.47
North Carolina.......................................           2,329.17
North Dakota.........................................             166.62
Ohio.................................................           3,114.36
Oklahoma.............................................             928.20
Oregon...............................................             912.02
Pennsylvania.........................................           3,393.20
Rhode Island.........................................             259.09
South Carolina.......................................           1,153.50
South Dakota.........................................             206.55
Tennessee............................................           1,654.39
Texas................................................           5,591.82
Utah.................................................             866.95
Vermont..............................................             157.13
Virginia.............................................           2,081.97
Washington...........................................           1,695.14
West Virginia........................................             394.95
Wisconsin............................................           1,480.60
Wyoming..............................................             172.59 
------------------------------------------------------------------------
 Source: PricewaterhouseCoopers LLP Individual Tax Model simulations.

 The total for the United States includes the District of Columbia ($242
  million) and other jurisdictions ($540 million) not shown separately.

 The national total is apportioned to a State according to the
  percentages of nationwide nonitemizers in the State and nationwide
  charitable contributions deducted by residents of the State.

                              Attachment C

                           INDEPENDENT SECTOR

   A Charitable Tax Deduction for Nonitemizers Should Be Enacted by 
                               Congress 

    Since Congress permitted the charitable tax deduction for 
nonitemizers to sunset in 1986, seven of ten taxpayers, the 
nonitemizers, can no longer deduct their charitable contributions and 
the resulting loss in charitable giving has been substantial. This 
becomes obvious when a comparison is made of the amount contributed by 
itemizers and nonitemizers who are in the same income groups.

----------------------------------------------------------------------------------------------------------------
                                                      Amount          Amount        % of income     % of income
                  Income group                    contributed by  contributed by  contributed by  contributed by
                                                     itemizers     nonitemizers      itemizers     nonitemizers
----------------------------------------------------------------------------------------------------------------
$1 < $5,000.....................................            $308             $29            10.6            1.1%
$5,000 < $10,000................................            $738            $138             9.3            1.8%
$10,000 < $15,000...............................            $941            $216             7.4            1.7%
$15,000 < $20,000...............................          $1,186            $285             6.8            1.7%
$20,000 < $25,000...............................          $1,150            $330             5.1            1.5%
$25,000 < $30,000...............................          $1,333            $364             4.8            1.3%
$30,000 < $40,000...............................          $1,349            $465             3.9            1.3%
$40,000 < $50,000...............................          $1,425            $654             3.2            1.5%
$50,000 < $75,000...............................          $1,740            $965             2.8            1.6%
$75,000 < $100,000..............................          $2,357          $1,333             2.7            1.6%
$100,000 < $200,000.............................          $3,466          $1,254             2.6            1.0%
$200,000 < $500,000.............................          $7,694          $2,934             2.7            1.0%
$500,000 < $1 million...........................         $19,651          $6,876             2.9            1.0%
$1 million or more..............................        $140,972         $21,015             4.7            1.0%
----------------------------------------------------------------------------------------------------------------

    The average annual amount contributed per tax return for itemizers 
is $2,708; the average for nonitemizers is $328.
    Eighty-seven million tax filers are nonitemizers. It is clear that 
if all nonitemizers raised their contributions to the amount given by 
itemizers, giving would increase greatly. In fact, charitable 
contributions by nonitemizers increased by 40% or $4 billion from 1985 
to 1986, according to Internal Revenue
    Service data. Nonitemizers were permitted to deduct only 50% of 
their charitable contributions and they gave $9.5 billion that year. In 
1986, they could deduct a full 100% and, according to the IRS, they 
gave $13.4 billion--an increase of 40%. The message from that 
experience is apparent. Charitable tax deductions do stimulate 
substantially increased giving from middle income Americans.
    Nonitemizers are low to middle income American households (70 
million have incomes under $30,000 a year) who support services such as 
the Red Cross and the American Cancer Society. They give to churches 
and synagogues, environmental organizations, schools, colleges, 
hospitals, food programs for the homeless, and the Boy Scouts and Girl 
Scouts. They give to advocacy organizations, health research, the arts, 
international development, and myriad activities in the public interest 
that enrich our society and protect its people. Congress should enact a 
legislation that will permit these moderate income Americans to take a 
deduction for their contributions to charity.

    Source: Data prepared for The New Nonprofit Almanac and Desk 
Reference (Jossey-Bass, 2001) using data from the IRS Statistics of 
Income Bulletin, Spring 2000.

                                


   Statement of Frederick J. Jaindl, Sr., Owner, Jaindl Family Farms
    Mr. Chairman and Members of the Committee, I am Frederick J. Jaindl 
and I am the Owner of Jaindl Family Farms in Orefield, Pennsylvania.
    In 1947, after serving time in the armed forces, I started a turkey 
farm with $600. Over the years, working long days, seven days a week, 
every day of the year, I was able to build our farm in to the largest 
singly owned turkey farm in the United States.
    Like many American farmers, everything my wife and I earned was 
reinvested into the farm, except for monies for taxes and necessities. 
We worked hard at constantly improving the farm, investing in 
equipment, land and people. Today we employ over 100 hard working men 
and women. During the past 50 years we have purchased more that 13,000 
acres of land to grow grain to feed our turkeys.
    My wife and I have eight children and fourteen grandchildren. All 
their life we instilled the values of hard work and the importance of 
family. Today I am blessed to have all my children working beside me on 
the farm.
    My concerns regard what I will be able to leave to my children. The 
current estate taxes will severely limit my ability to pass down the 
family farm. Everything my wife and children and I have worked for is 
in our land. With the current estate tax laws my children may lose 
everything we have worked a lifetime to build and be forced to 
liquidate our family farm. Our family legacy may become just another 
one of the 70% of the family farms that was killed by the death tax.
    American farmers are faced with a daily lifetime of battles 
including droughts, floods, maintaining healthy flocks and herds, etc. 
and our reward for our years of hard work and dedication is knowing 
that our largest battle will have to be faced by our children in their 
battle to try to hold onto the family farm. We worked hard all our 
lives and always paid our taxes and when we die the government will tax 
our children on money they have already taxed us on.
    This is an issue that all Americans should be deeply concerned 
about. The death of the American Family Farms doesn't just affect the 
farmers and their families it affects our entire nation. We farmers 
feed the nation, so the next time you take a bite out of apple, pour 
milk into a child's cup or when contemplating what you'd would like for 
breakfast, think about where the nation will be once all the family 
farms have been killed by the death tax.
    I strongly urge the Committee on Ways and Means to support the 
elimination of the federal estate tax.

                                


          National Conference of State Legislatures
                                       Washington, DC 20001
                                                   February 8, 2001
The Honorable William M. Thomas, Chair
House Committee on Ways and and Means
United States House of Representatives
Washington, DC 20515
    Re: Federal Tax Relief
    Dear Chairman Thomas:
    National Conference of State Legislatures is mindful of the role 
that tax relief can play in providing taxpayers increased flexibility 
to make economic choices. NCSL recognizes these fiscal dynamics 
particularly because many state legislatures have enacted a variety of 
tax relief measures over the past six years while maintaining balanced 
budgets. NCSL believes that any tax relief legislation must ensure that 
the federal budget remains balanced. It also should require that 
mandatory and entitlement spending for state-federal partnerships be 
solidified to avoid cost shifts to states. Federal tax relief must also 
be coupled with assurances for meeting current and future Medicare and 
Social Security obligations as well as debt reduction throughout the 
duration of any tax relief package.
    The nation's state legislators believe that federal tax reform 
should encourage work, savings, equity and simplicity. There are many 
tax-related issues NCSL urges you to include in tax relief legislation, 
each of which would provide taxpayers additional assistance beyond 
general income tax changes. The following tax initiatives have broad 
bipartisan support. Each was included in various tax-related 
legislation during the last Congress. The National Conference of State 
Legislatures urges your support for the following in the 107th 
Congress:
    (1) Comprehensive Retirement Security and Pension Reform: NCSL 
urges your support for comprehensive pension reform and modernization 
legislation designed to increase savings, enhance pension portability 
and simplification. Such legislation should facilitate the purchase of 
service credit by public employees and allow catch-up contributions to 
be made by older workers. It should also modernize rules related to 
governmental deferred compensation plans, repeal compensation-based 
limits that unfairly curtail retirement savings and restore benefit and 
contribution limits that are generally lower than they were eighteen 
years ago. Each of these provisions, included in H.R. 1102 during the 
106th Congress, enjoyed broad bipartisan support, passing the House 
twice with 401 votes and approved unanimously by the Senate Finance 
Committee. We understand that Representatives Rob Portman and Ben 
Cardin will introduce a similar bill within the next few days.
    (2) School Construction and Modernization: NCSL has long supported 
a broad approach to federal school construction assistance with the 
caveat that its form should reinforce state constitutional primacy over 
education and finance policy issues. That approach was included 
collectively in H.R. 4094, H.R. 1648 and H.R. 2614 in the 106th 
Congress. NCSL has consistently supported the lifting of arbitrage 
restrictions on school bonds and the expansion of the definition of 
private activity bonds to include school facilities. Current arbitrage 
rules essentially tax interest income on these bonds at a rate of 100 
percent and thereby limit the states' abilities to leverage 
infrastructure funds for school construction and modernization. No one 
proposal can address the $120 billion need for school repairs and 
renovations identified by the Government Accounting Office. Therefore, 
NCSL believes the creation of a school construction state revolving 
fund and a federal grant program would help address identified school 
construction needs. We are pleased that you have included a private 
activity provision in your tax relief proposals. We urge you to 
consider adding our additional suggestions to your overall tax relief 
package.
    (3) Strengthening Investment in High-Speed Rail Development: NCSL 
believes that providing states with incentives for investment in high-
speed rail corridors would bolster an underdeveloped transportation 
alternative. These incentives would also assist states that have 
invested in rail but do not yet have designated high-speed rail 
corridors. Additionally, development of this transportation alternative 
will ease burdens that persist with the nation's roadways and airways. 
The High Speed Rail Investment Act of 2001, recently introduced by 
Senators Joe Biden and Kay Bailey Hutchison, contains the bonding 
authority NCSL believes is necessary to make high-speed rail a 
financially viable transportation alternative for states. I am hopeful 
that it will enjoy your support and inclusion in any tax relief 
legislation.
    (4) Earned Income Tax Credit: NCSL supports the federal EITC as a 
means of reducing poverty among working poor families and ensuring that 
the benefits of work surpass the benefits of public assistance. Because 
an expanded EITC supplements the wages of low-income working families 
without decreasing work incentives, NCSL supports federal efforts to 
increase the value of the credit and adjust it for family size. 
Similarly, NCSL supports removing the marriage penalty associated with 
the credit.
    (5) Sales Tax Deductibility: H.R. 322, the Tax Deduction Fairness 
Act recently introduced by Representative Brian Baird and Bob Clement, 
would partially restore the deductibility of state sales taxes. It 
would give taxpayers the option of deducting states sales or income 
taxes when itemizing federal tax deductions. NCSL has long supported 
the restoration of sales tax deductibility on the grounds that the 
inability to deduct these taxes unfairly burdens taxpayers in states 
where no income tax is applied (Florida, Nevada, South Dakota, 
Tennessee, Texas, Washington and Wyoming).
    We look forward to working with you as the federal budget and 
reconciliation process moves forward. If we can provide additional 
information, please have your staff contact Gerri Madrid (202-624-8670) 
or Michael Bird (202-624-8686).
            Sincerely,
                                  Senator Jim Costa
                                          California Senate
                                                    President, NCSL

                                


                                La Mirada, California 90638
                                                  February 21, 2001
Allison Giles
Staff Director, Committee on Ways and Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington, DC 20515
    Ref: President Bush's tax relief proposal.
    Dear Madam,
    I would like to submit this written statement for consideration by 
the Committee and for the inclusion in the printed record of the 
hearing. It is my understanding that President's Bush's tax relief 
proposal includes, among other things, reductions in individual income 
tax rates.
    First, I must applaud the President for keeping his campaign 
promise in regards to the tax issue. The President indeed understands 
how necessary his tax relief plan is to the nation. The President's 
proposal, however, does have a flaw. It requires government to work 
harder and to conjure new remedies for the ``Social Security problem,'' 
which his existed for many years. In addition, I believe that 
potentially depriving government of additional monies creates fear for 
many government officials since they will be required to become more 
efficient and cost conscious. This fear is what may potentially stop 
the proposal from becoming law.
    Second, opponents argue that the President's tax relief proposal 
isn't fair because the poor will not benefit. Doesn't the poor benefit 
by paying fewer taxes in the first place? Must we reward individuals 
that pay no taxes or who are in the 15 percent tax bracket? 
Furthermore, aren't these the same individuals that qualify for the 
earned income credit? The President's plan is to enact an across-the-
board tax relief so that all Americans who pay taxes get something 
back. Isn't that fair?
    Third, our economy has slowed down dramatically over the past year 
and continues. The last estimate I read indicates that consumer 
spending is about 68 percent of the gross domestic product. In other 
words, we depend on consumer spending to help make the economy grow. If 
all of this spending slows or drops, our economy is going to be in 
serious trouble. We need to cut taxes to create growth. Economists may 
argue that lowering interests rates will alleviate the economy from the 
slowdown. I tend to disagree. Thus far, our economy hasn't witnessed 
any positive signs despite the recent reductions in the federal funds 
rate.
    Finally, to those who believe that we cannot afford the tax relief. 
Please be aware that just recently, tax surplus estimates jumped $1 
trillion to $5.6 trillion over the next ten years. Also, the House 
voted to lock away much of that tax surplus to strengthen Social 
Security and Medicare. In other words, estimates indicate that there is 
plenty of tax surplus left over to give Americans tax relief, pay off 
our national debt, and increase resources for other priorities.
    We need to support our new President. We need to make a real 
difference in the lives of taxpaying Americans. Let's stop making 
excuses. Let's stop punishing the taxpayers.
    Thank you for your time.
    Respectfully,
                                              Stacy Salazar
                                                           Taxpayer