[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
U.S. GOVERNMENT PRINTING OFFICE
74-198 WASHINGTON : 2001
_______________________________________________________________________
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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
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C O N T E N T S
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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
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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
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The Committee seeks to make its facilities accessible to persons
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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\
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\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.
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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.
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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.
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\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.
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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.
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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.
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\8\ Mallaby, S., February 5, 2001, ``Greenspan on Going Private,''
The Washington Post.
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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.
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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
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----------------------------------------------------------------------------------------------------------------
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
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Feb. 16, 1924........................ p. 2612-2614
Feb. 18, 1924........................ p. 2681-2682
May 24, 1924......................... p. 9416-9419
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Dec. 08, 1925........................ p. 519-525
Dec. 09, 1925........................ p. 539-567
Dec. 10, 1925........................ p. 642-678
Dec. 11, 1925........................ p. 692-724
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Dec. 15, 1925........................ p. 879-898
Dec. 16, 1925........................ p. 937-969
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Dec. 18, 1925........................ p. 1108-1165
Jan. 07, 1926........................ p. 1673-1675
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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
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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.
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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
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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