    [House Hearing, 108 Congress]
    [From the U.S. Government Publishing Office]

                     PRESIDENT'S ECONOMIC GROWTH PROPOSALS

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

                                    HEARING

                                   before the

                          COMMITTEE ON WAYS AND MEANS
                         U.S. HOUSE OF REPRESENTATIVES

                          ONE HUNDRED EIGHTH CONGRESS

                                 FIRST SESSION

                                   __________

                          MARCH 4, 5, 6, and 11, 2003

                                   __________

                               Serial No. 108-19

                                   __________

             Printed for the use of the Committee on Ways and Means

                            U.S. GOVERNMENT PRINTING OFFICE

    91-630                            WASHINGTON : 2004
    _____________________________________________________________________
    For sale by the Superintendent of Documents, U.S. Government Printing
    Office Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800
    Fax: (202) 512-2250  Mail: Stop SSOP, Washington, DC  20402-0001

                          COMMITTEE ON WAYS AND MEANS

                       BILL THOMAS, California, Chairman

    PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
    E. CLAY SHAW, JR., Florida           FORTNEY PETE STARK, California
    NANCY L. JOHNSON, Connecticut        ROBERT T. MATSUI, California
    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           LLOYD DOGGETT, Texas
    J.D. HAYWORTH, Arizona               EARL POMEROY, North Dakota
    JERRY WELLER, Illinois                MAX SANDLIN, Texas
    KENNY C. HULSHOF, Missouri           STEPHANIE TUBBS JONES, Ohio
    SCOTT MCINNIS, Colorado
    RON LEWIS, Kentucky
    MARK FOLEY, Florida
    KEVIN BRADY, Texas
    PAUL RYAN, Wisconsin
    ERIC CANTOR, Virginia

                        Allison H. Giles, Chief of Staff
                      Janice Mays, Minority Chief Counsel

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

                                C O N T E N T S

                                   __________
                                                                       Page
    Advisory of February 25, 2003, announcing the hearing............     2

                                   WITNESSES

    U.S. Department of the Treasury, Hon. John W. Snow, Secretary;
      accompanied by Hon. Pamela F. Olson, Assistant Secretary for
      Tax Policy, and Hon. Richard H. Clarida, Assistant Secretary
      for Economic Policy............................................     5

                                     ______

    American Council of Life Insurers, Hon. Frank Keating............   129
    American Enterprise Institute, James K. Glassman.................    54
    American Enterprise Institute, John H. Makin.....................   197
    Blackburn, Hon. Marsha, a Representative in Congress from the
      State of Tennessee.............................................   224
    Bond Market Association, Ronald Stack............................   152
    Brookings Institution, William G. Gale...........................    65
    Business Roundtable, John J. Castellani..........................    61
    Dreier, Hon. David, a Representative in Congress from the State
      of California..................................................   215
    Employee Benefit Research Institute, Dallas L. Salisbury.........   174
    Gale, William G., Brookings Institution..........................    65
    Glassman, James K., American Enterprise Institute, and
      TechCentralStation.com.........................................    54
    Godfrey, Jr., Richard H., National Council of State Housing
      Agencies, and Rhode Island Housing and Mortgage Finance
      Corporation....................................................   185
    Hevesi, Hon. Alan G., New York State Comptroller.................   155
    Keating, Hon. Frank, American Council of Life Insurers...........   129
    Lehman Brothers, Ronald Stack....................................   152
    Makin, John H., American Enterprise Institute....................   197
    Morgan Stanley & Company, John H. Schaefer.......................   133
    National Council of State Housing Agencies, Richard H. Godfrey,
      Jr.............................................................   185
    Ney, Hon. Robert W., a Representative in Congress from the State
      of Ohio........................................................   221
    Rhode Island Housing and Mortgage Finance Corporation, Richard H.
      Godfrey, Jr....................................................   185
    Salisbury, Dallas L., Employee Benefit Research Institute........   174
    Securities Industry Association, John H. Schaefer................   133
    Shackelford, Douglas A., University of North Carolina............   179
    Schaefer, John H., Securities Industry Association, and Morgan
      Stanley & Company..............................................   133
    Stack, Ronald, Bond Market Association, and Lehman Brothers......   152
    TechCentralStation.com, James K. Glassman........................    54
    Upton, Hon. Fred, a Representative in Congress from the State of
      Michigan.......................................................   225

                           SUBMISSIONS FOR THE RECORD

    Advisory Council for Taco Bell Franchisees, joint statement (See
      listing for International Pizza Hut Franchise Holders
      Association)...................................................   273
    Affordable Housing Tax Credit Coalition, statement...............   235
    Alliance for Small Business Investment in Technology, Arlington,
      VA, statement..................................................   238
    American Forest & Paper Association, statement and attachments...   239
    American Gas Association, statement..............................   246
    American Insurance Association, statement........................   250
    Association of Kentucky Fried Chicken Franchisees, Inc., joint
      statement (See listing for International Pizza Hut Franchise
      Holders Association)...........................................   273
    Association of Long John Silvers Franchisees, Inc., joint
      statement (See listing for International Pizza Hut Franchise
      Holders Association)...........................................   273
    ASPA, Arlington, VA, statement...................................   252
    Baroody, Michael E., National Association of Manufacturers,
      statement......................................................   308
    Canavan, Robert, Rebuild America's Schools, letter...............   323
    Edison Electric Institute, statement.............................   255
    Enterprise Foundation, Columbia, MD, F. Barton Harvey III,
      statement......................................................   258
    ESOP Association, J. Michael Keeling, letter.....................   261
    Fashion Institute of Design and Merchandising, Norine Fuller,
      letter.........................................................   265
    Governmental Affairs and Services, Richard P. Trotter, and Tatum
      CFO Partners, LLP, Atlanta, GA, Douglass M. Tatum, joint
      statement and attachments......................................   328
    Hardin, Charles G., RetireSafe.org, Arlington, VA, statement.....   325
    Harvey III, F. Barton, Enterprise Foundation, Columbia, MD,
      statement......................................................   258
    Hoekstra, Hon. Peter, a Representative in Congress from the State
      of Michigan, statement.........................................   267
    Investment Company Institute, statement and attachment...........   269
    International Pizza Hut Franchise Holders Association, Advisory
      Council for Taco Bell Franchisees, Association of Kentucky
      Fried Chicken Franchisees, Inc., National A&W Franchisees
      Association, and Association of Long John Silvers Franchisees,
      Inc., joint statement..........................................   273
    Keeling, J. Michael, ESOP Association, letter....................   261
    Kerrigan, Karen, Small Business Survival Committee, letter.......   327
    Kukura III, John F., Columbus, OH, letter........................   275
    Lawlor, Sr. Brigid, National Advocacy Center of the Sisters of
      Good Shepherd, Silver Spring, MD, letter.......................   297
    Mortgage Bankers Association of America, statement and
      attachments....................................................   276
    National A&W Franchisees Association, joint statement (See
      listing for International Pizza Hut Franchise Holders
      Association)...................................................   273
    National Advocacy Center of the Sisters of Good Shepherd, Silver
      Spring, MD, Sr. Brigid Lawlor, and Alison L. Prevost, letter...   298
    National Association for the Self-Employed, statement............   299
    National Association of Home Builders, statement.................   301
    National Association of Manufacturers, Michael E. Baroody,
      statement......................................................   308
    National Council of La Raza, Raul Yzaguirre, statement...........   309
    National Education Association, statement........................   312
    New Markets Tax Credit Coalition, statement and attachments......   313
    Prevost, Alison L., National Advocacy Center of the Sisters of
      Good Shepherd, Silver Spring, MD, letter.......................   297
    Profit Sharing/401K Council of America, Chicago, IL, statement...   319
    Real Estate Roundtable, statement................................   320
    Rebuild America's Schools, Robert Canavan, letter................   324
    RetireSafe.org, Arlington, VA, Charles G. Hardin, statement......   325
    Small Business Survival Committee, Karen Kerrigan, letter........   327
    Tatum CFO Partners, LLP, Atlanta, GA, Douglass M. Tatum, and
      Governmental Affairs and Services, Richard P. Trotter, joint
      statement and attachments......................................   328
    U.S. Chamber of Commerce, statement..............................   336
    Yzaguirre, Raul, National Council of La Raza, statement..........   309

                     PRESIDENT'S ECONOMIC GROWTH PROPOSALS

                                  ----------

                             TUESDAY, MARCH 4, 2003

                 U.S. House of Representatives,
                           Committee on Ways and Means,
                                                        Washington, DC.
        The Committee met, pursuant to notice, at 2:05 p.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 25, 2003
    FC-5

       Thomas Announces Hearing on President's Economic Growth Proposals

        Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways
    and Means, today announced that the Committee will hold a four-part
    hearing to examine the economic growth proposals included in the
    Administration's fiscal year 2004 budget. The hearing will take place
    on Tuesday, March 4, 2003, at 2:00 p.m.; Wednesday, March 5, 2003, at
    2:00 p.m.; Thursday, March 6, 2003, at 10:00 a.m.; and Tuesday, March
    11, 2003, at 2:00 p.m. All segments of the hearing will take place in
    the main Committee hearing room, 1100 Longworth House Office Building.

        In view of the limited time available to hear witnesses at the
    hearing, oral testimony will be heard 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 or for inclusion in the printed record of the hearing.

    BACKGROUND:

        The Administration's fiscal year 2004 budget includes provisions
    providing individual income tax relief and promoting long-term economic
    growth. The proposal would accelerate provisions that were enacted by
    the Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L.
    107-16), including the expansion of the 10-percent income tax bracket,
    the reduction in the individual marginal income tax rates, marriage
    penalty tax relief, and the increase in the child tax credit from $600
    to $1,000. In addition, the proposal would increase the amount of
    investments that small businesses can expense annually pursuant to
    section 179 of the Internal Revenue Code. Finally, the proposal would
    reform the taxation of dividends. The hearing will examine the economic
    effects of these proposals.

        In announcing the hearing, Chairman Thomas stated: ``The
    President's proposal seeks to put the economy back on track for solid,
    job-producing growth. The hearing will provide the Committee with a
    chance to explore all aspects of the President's proposal.''

    FOCUS OF THE HEARING:

        Witnesses will be asked to discuss the potential economic
    consequences of the Administration's economic growth proposals. As
    tentatively scheduled, the first segment of the hearing will include
    testimony from the Administration and from economists regarding the
    effects of the overall package. The second segment of the hearing will
    focus on individual income tax relief proposals in the package. The
    third segment of the hearing will focus on the proposal to eliminate
    the double taxation of corporate dividends and the proposal to expand
    small business expensing. Finally, the fourth segment of the hearing
    will provide Members of Congress with an opportunity to testify.

    DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

        Please Note: Due to the change in House mail policy, any person or
    organization wishing to submit a written statement for the printed
    record of the hearing should send it electronically to
    hearingclerks.waysandmeans@mail.house.gov, along with a fax copy to
    (202) 225-2610, by the close of business, Tuesday, March 18, 2003.
    Those filing written statements that wish to have their statements
    distributed to the press and interested public at the hearing should
    deliver their 200 copies to the full Committee in room 1102 Longworth
    House Office Building, in an open and searchable package 48 hours
    before the hearing. The U.S. Capitol Police will refuse sealed-packaged
    deliveries to all House Office Buildings.

    FORMATTING REQUIREMENTS:

        Each statement presented for printing to the Committee by a
    witness, any written statement or exhibit submitted for the printed
    record or any written comments in response to a request for written
    comments must conform to the guidelines listed below. Any statement or
    exhibit not in compliance with these guidelines will not be printed,
    but will be maintained in the Committee files for review and use by the
    Committee.

        1. Due to the change in House mail policy, all statements and any
    accompanying exhibits for printing must be submitted electronically to
    hearingclerks.waysandmeans@mail.house.gov, along with a fax copy to
    (202) 225-2610, in Word Perfect or MS Word format and MUST NOT exceed a
    total of 10 pages including attachments. Witnesses are advised that the
    Committee will rely on electronic submissions for printing the official
    hearing record.

        2. Copies of whole documents submitted as exhibit material will not
    be accepted for printing. Instead, exhibit material should be
    referenced and quoted or paraphrased. All exhibit material not meeting
    these specifications will be maintained in the Committee files for
    review and use by the Committee.

        3. Any statements must include a list of all clients, persons, or
    organizations on whose behalf the witness appears. A supplemental sheet
    must accompany each statement listing the name, company, address,
    telephone and fax numbers of each witness.

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

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

        Chairman THOMAS. Good afternoon. Today we will start an
    examination of H.R. 2, the Jobs and Growth Tax Act of 2003.
    This bill is an exact rendering of President Bush's proposal to
    speed up the economy's growth rate while creating jobs and
    secure futures for Americans. This four-part hearing, which is
    somewhat extraordinary in itself, will allow us to fully
    explore the impact and mechanics of the President's proposal so
    the Members of this Committee can make informed decisions. We
    need to understand short-term and long-term impacts, the impact
    on various types of taxpayers and industries and the general
    effect on economic efficiency. The need to grow our economy to
    produce stable, lasting jobs and to remain capable of paying
    the costs of our freedom is urgent and becoming more urgent
    everyday. Today, we will be hearing from members of the
    Administration.
        The second segment of our hearing will include two panels
    tomorrow. The first will focus on individual tax relief
    proposals in the package, and the second panel, which will also
    be the topic of Thursday's hearing, will focus on the proposal
    to eliminate the double taxation of dividends.
        Finally, we will reconvene for the fourth segment next
    Tuesday in which we plan to hear from particular Governors and
    Members of Congress, sharing their ideas with us.
        The economy is in a soft spot. Businesses are concerned
    about both the short term and the future. Sensible and
    permanent tax changes will improve business confidence and tax
    rate cuts will increase workers' paychecks. President Bush has
    offered a proposal to create a single level of taxation on
    business earnings and proposed marginal tax rate cuts, which is
    a key element for promoting economic growth by encouraging
    work, savings, and investment.
        We are pleased to have with us today Treasury Secretary
    John Snow. With him will be Treasury Assistant Secretary for
    Tax Policy, Pam Olson. The Committee welcomes both of you back
    and extends its welcome to Richard Clarida, Assistant Secretary
    for Economic Policy. This is Mr. Clarida's' first appearance, I
    believe, in front of the Committee on Ways and Means. We look
    forward to the explanations provided by the Secretary and/or of
    the appropriate assistant secretary.
        With that, I would recognize the gentleman from New York,
    Mr. Rangel, for any comments he would like to make.
        [The opening statement of Chairman Thomas follows:]
        Opening Statement of the Honorable Bill Thomas, Chairman, and a
            Representative in Congress from the State of California
        Good afternoon. Today we will start an examination of H.R. 2, the
    Jobs and Growth Tax Act of 2003. This bill is an exact rendering of
    President Bush's proposal to speed up the economy's growth rate while
    creating jobs and secure futures for working Americans.
        This four-part hearing will allow us to fully explore the impact
    and mechanics of the President's proposal so that Members of this
    Committee can make informed decisions. We need to understand short-term
    and long-term impacts, the impact on various types of taxpayers and
    industries and the general effect on economic efficiency. The need to
    grow our economy, to produce stable, lasting jobs and to remain capable
    of paying the cost of our freedom is urgent.
        Today, we will be hearing from members of the Administration. The
    second segment of our hearing will include two panels: the first one
    will focus on individual income tax relief proposals in the package;
    and the second panel, which will also be the topic of Thursday's
    hearing, will focus on the proposal to eliminate the double taxation of
    dividends. Finally, the fourth segment of the hearing next Tuesday will
    provide Members of Congress and Governors with an opportunity to share
    their ideas.
        The economy is in a soft spot and businesses are concerned about
    both the short-term and the future. Sensible and permanent tax changes
    will improve business confidence and tax rate cuts will increase
    worker's paychecks. President Bush has offered a proposal to create a
    single level of taxation on business earnings and proposed marginal tax
    rate cuts, which is a key element for promoting economic growth by
    encouraging work, savings and investment.
        We are honored to have Treasury Secretary John Snow and Treasury
    Assistant Secretary for Tax Policy Pam Olson before us today. The
    Committee welcomes you back and looks forward to hearing from you. Also
    joining us today is Richard Clarida [Clare - i - da], Assistant
    Secretary for Economic Policy. This is Mr. Clarida's first appearance
    in front of the Committee on Ways and Means, and we look forward to
    discussing the economic ramifications in H.R. 2's provisions with you,
    as well.
        I now recognize the gentleman from New York, Mr. Rangel, for any
    comments he would like to make at this time.

        Mr. RANGEL. Thank you, Mr. Chairman. Thank you once again,
    Mr. Secretary. Mr. Clarida, welcome, and Ms. Olson. It is very
    important, and I thank the Chairman for inviting you to come
    here, that we try as desperately as possible to see whether or
    not it is possible to move forward on a bipartisan basis. I
    think everyone would agree when you are having dramatic changes
    in policies, especially tax policies, it is very helpful to the
    American people to believe that it is not a partisan effort but
    one that is necessary for our national economic growth. This is
    especially so when our Nation is on the brink of a possible war
    and we find unemployment high, local and State governments
    going to deficit, programs being cut.
        One of the concerns that most all of us have is whether or
    not the sacrifices that are being asked for Americans to make,
    especially those in the military, whether that sacrifice is
    going to be shared.
        It seems almost unbelievable that at a time of possible
    war, we are now talking not about shoring up these programs in
    terms of protection of our young people in the military, but we
    are talking about a dramatic tax cut that, until we get
    distribution tables from the Administration, would allow most
    Americans to believe that only those who are very fortunate
    economically would benefit from these tax cuts.
        So, it seems to me that the fact that the Administration
    cannot give us any estimates of what it is costing now to
    support the deployment of troops around the world, no estimate
    of what it would cost if the President decides to invade Iraq,
    what it would cost to occupy Iraq or any other place that it
    decides is necessary in our national interest, it is very
    difficult for us to be able to digest the suggested tax cut.
        You are here and we are anxious to hear from you and I
    thank the Chairman for giving us this opportunity.
        Chairman THOMAS. Thank you very much. Mr. Secretary, any
    written statements that you may have will be made a part of the
    record and you may address us as you see fit. Let me indicate
    to you that these are very antiquated sound structures around
    here. You need to turn it on, but it is very unidirectional.
    You need to speak directly into it. Our goal is to improve this
    Committee room and we will do so over the year, but for now we
    are laboring in the fifties as far as the sound system is
    concerned.

       STATEMENT OF THE HONORABLE JOHN W. SNOW, SECRETARY, U.S.
    DEPARTMENT OF THE TREASURY; ACCOMPANIED BY THE HONORABLE PAMELA
    F. OLSON, ASSISTANT SECRETARY FOR TAX POLICY; AND THE HONORABLE
      RICHARD H. CLARIDA, ASSISTANT SECRETARY FOR ECONOMIC POLICY

        Mr. SNOW. Thank you. I thank you very much for that good
    counsel on how to use the sound system. I also thank you and
    Ranking Member Rangel and distinguished Members of the
    Committee for the opportunity to appear before you today to
    discuss the President's plan for jobs and growth.
        Let me begin, Mr. Chairman, by thanking you for introducing
    the President's jobs and growth proposal last week. If passed
    as introduced by you, I am confident that the President's plan
    will create a lot of new jobs and will put the American economy
    on a higher growth path, and it will provide for higher
    standards of living and higher productivity for the American
    economy.
        Why is the plan needed? Well, I think we all know something
    is needed to give the economy a boost, something is needed to
    assure that we create those jobs for those who can't find jobs.
    The President has said he wants to make sure that the economy
    grows fast enough to assure that everybody who wants a job can
    find a job, and we are not doing that right now.
        The President's plan deals with both the short-term
    concerns--sustaining the recovery, improving the recovery, and
    bolstering the recovery--and the longer-term concerns with
    putting America on a higher growth path, creating higher
    productivity, deepening the savings pool and capital pool of
    the country.
        I think you all know the plan. I will be brief. In the near
    term, the plan puts money in consumers' pockets and it does so
    right away, and this will stimulate demand. It does so by
    accelerating the tax relief that was approved in the 2001 tax
    legislation, good tax legislation, legislation that was needed
    to make sure we didn't fall into a deep recession. I think the
    tax plan is fair. The tax plan provides broad-based and far-
    reaching relief for small business, for millions of taxpayers,
    and reduces tax burdens at the end of this process while it
    reduces tax rates across the board, produces tax rates at the
    end of the process where those at the highest income levels
    actually pay a larger share of the national revenues than they
    did at the beginning and those in the lower income categories
    pay a smaller share.
        A centerpiece of the plan is the proposal to eliminate the
    double tax on dividends. I think it is axiomatic that you get
    less of everything you are taxed. That is why we put tax on
    things we don't like. That is why we have so-called sin taxes.
    It strikes me as a bit strange we would want to double-tax the
    very lifeblood of the economy, capital and capital formation.
    Can't be any doubt about the fact that double taxation of
    capital means we have less capital. Means we use more debt.
    Means we have higher debt-to-equity ratios than we would
    otherwise. Means the financial structure of companies is more
    fragile than they otherwise would be, and it means that
    companies have less incentives to pay dividends.
        In this day and age, when there are so many questions being
    raised about accounting earnings and reported earnings and
    about GAAP earnings, it seems to me it is a healthy thing to
    encourage companies to pay more dividends, because after all,
    dividends reflect maybe in the best and most transparent way
    possible, the real earning power of the corporations. So both
    from a short-term point of view and a long-term point of view,
    from the point of view of putting people back to work now and
    from the point of view of creating a more prosperous and
    abundant economy for the long term, I commend this proposal to
    you and I look forward to responding to your questions.
        [The prepared statement of Mr. Snow follows:]
    Statement of the Honorable John W. Snow, Secretary, U.S. Department of
                                  the Treasury
        Chairman Thomas, ranking member Rangel, and distinguished members
    of the House Ways and Means Committee, it is my privilege to appear
    before you today to discuss the President's plan for jobs and growth.
    Let me begin my testimony by thanking Chairman Thomas for introducing
    the President's Jobs and Growth proposal. I believe that if passed as
    introduced by the Chairman, the President's plan will create and secure
    jobs, accelerate and sustain our recovery, increase workers' standards
    of living and increase the economic performance of our nation for many
    years to come.
        This plan is needed because too many people who want jobs can't
    find them, and too many people who have jobs are concerned about their
    job security. Let me explain.
        In the near-term, this plan puts money in consumers' pockets right
    away, which will stimulate demand. The 10% tax rate bracket will expand
    immediately; helping low-income earners keep more of their pay. The
    punitive marriage penalty will end once and for all, and the child
    credit will increase by $400 to $1,000 per child this year. The plan
    will accelerate the additional income tax relief approved in 2001, to
    accelerate the benefits to the American people.
        Under the President's proposal this year, a typical family of four
    with two earners making a combined $39,000 will receive a total of
    $1,100 in tax relief, compared to 2002--not just this year, but in
    every year thereafter.
        The tax rate cuts will spur business investment in the near term.
    Much investment and new employment comes from small businesses, most of
    which are S corporations, sole proprietorships, and partnerships. These
    businesses are taxed at individual tax rates, so marginal rate
    reductions help create new jobs and equipment.
        Rate reductions combined with the proposed increase in new
    equipment expensing for small businesses will give our economy a big
    boost, and quickly. According to this Administration's analysis, our
    economy will add about 1.4 million new jobs under this plan by the end
    of next year--that's the best kind of help to a lot of families, who
    really need it.
        As I stated earlier, the President's plan also contains the
    elements for a healthier, higher-performing economy over the longer-
    term. A key element of the plan for both fairness and effectiveness is
    the complete elimination of the double-taxation of dividends. Anything
    you tax more of, you will get less of, including business investment.
    Today, corporate profits are taxed at 35 percent range, and then these
    profits, which represent the return on business capital, are taxed
    again when paid to shareholders, so that total tax on this money can be
    as high as 60%.
        Taxing anything twice is unfair. It is nothing short of double
    jeopardy for those who invest in America, and we pay for it with
    American jobs.
        This is a double tax on investment. When you tax investment, you
    get less of it. That policy is directly opposed to economic growth.
    Investment is basic to the American economy. We need to encourage
    business owners to invest for growth. Why instead would we punish those
    who want to invest in America?
        Again, this double taxation is unfair, counter-productive and
    damaging to our economy. Double taxation makes it doubly difficult for
    companies to hire new workers, for hardworking taxpayers to save for
    their retirement, and for the economy to grow and create jobs. For
    every dollar a business sends to Washington in taxes, it is one less
    dollar it can spend to hire a new employee, develop a new product or
    invest in the future. For every dollar an individual taxpayer sends to
    Washington in the form of a dividend tax, it's one less dollar to
    invest in a business or save for the future.
        Because the President's proposal lowers the cost of capital by
    reducing the double taxation of capital, it encourages investment and a
    higher long-term growth rate. Lower capital taxes mean more capital,
    which means higher productivity, which means faster growth and higher
    wages for everyone.
        Also, ending the double taxation of dividends benefits people who
    will never receive a penny of dividends, because they will live in a
    more prosperous economy.
        This package is good economics. The President's plan makes the
    economy more efficient, which raises productivity, which raises real
    wage rates, which raises the standard of living, which in turn provides
    more choice, opportunity, security and confidence for the American
    people.
        In addition, dividend tax relief will stimulate the economy by
    increasing disposable incomes and by raising stock market share prices,
    inducing a ``wealth effect.'' We are now a nation of shareholders: over
    half of families own stock shares, many of which pay dividends.
        Let me further illustrate the argument. Let's say a family owns 200
    shares of a $50 stock with a 3% yield. That means they receive $300 in
    dividends from those shares each year, but they only keep $200 of that
    because of the dividend tax. Without that tax, they keep another $100,
    which they can spend as they please. That means higher consumer
    spending.
        But there is potentially a much larger benefit from higher equity
    prices and the wealth effect. If our hypothetical company has 200
    million shares outstanding, the effect of eliminating the double
    taxation of dividends is to increase the shareholders' after-tax
    earnings by up to $100 million. That is, $100 million of dividends that
    would have gone to shareholder taxes are now kept by the shareholders.
    These additional earnings are capitalized into the price of the
    company's shares, assuming a certain discount rate and earnings
    multiple, so they might add, say, $1 billion to the market cap of the
    company. This encourages ``wealth effect'' spending by the owners,
    which we saw in great abundance in the last decade, and it lowers the
    cost of capital for the company.
        The President's goal is to do something now that would pay off
    today and long into America's future--not here today, gone tomorrow.
    President Bush's jobs and growth plan will not only help American's
    achieve their economic dreams, creating a more abundant future with
    more good and secure jobs and rising real wages.
        I urge this committee to pass it quickly. Thank you.

        Chairman THOMAS. Thank you very much, Mr. Secretary. I know
    Members are anxious to ask questions and I am going to try to
    hold Members to the time limit as best I am able. My question
    will go to the heart of, I think, some of the concerns that
    many have about the President's proposal, since we have seen
    many of these very specific pieces before. Most of us are
    familiar with child credit, marriage penalty, the acceleration
    of the rates. It is, I think, the dividend proposal that is the
    one that probably needs some examination.
        The way I would ask the question is that you obviously
    selected, out of some options that could be created, a
    particular dividend proposal. Could you briefly give us a feel,
    an understanding, of the choices that you looked at, if there
    was more than one, and why this one probably offers itself as
    one preferred to others? I know we get into some details in
    this and I would be more than willing to allow any of the folks
    at the panel to discuss it. My hope is at the end of this very
    brief discussion--and obviously we will get written support to
    a number of the questions that we ask, because we can't get the
    full answer in the short time that we have--but this one was
    chosen, and other ones were not and why, I guess would be the
    easiest way to ask that question, Mr. Secretary?
        Mr. SNOW. Thank you, Mr. Chairman. I wasn't in the
    Administration when the legislation was--the formative period
    of this legislation--but I was consulted by people in the
    Administration and had some conversations with the President on
    the proposal as well. So I feel that I am vested in the
    proposal. The key alternative to this proposal, I suppose,
    would be, on the one hand, lowering rates to 50 percent on
    dividends or 25 percent on dividends or putting in an
    exclusion. All of those I am told were under review by the
    Administration. The President on that score I think concluded
    that the principle here is awfully important, the principle
    that corporate income should be taxed once, but just once, and
    there is no principle to tax corporate income 1.4 times or 1.7
    times. I think the Administration thought that through, as I
    reconstruct what happened. I think the President finally
    decided the way to do this was, on broad principle, tax
    corporate income once and not more than once, so it was a
    principle decision.
        An alternative to get at the same issue would be to have
    made the deduction available to the corporations. There is some
    merit in that idea. Chairman Greenspan has testified that he
    thinks it is probably better to do it at the corporate level
    than at the shareholder level because the impact would be
    quicker. Corporate executives would respond more immediately to
    the stimulus. On the other hand, as I recall his testimony, and
    he was very supportive of the concept, his testimony was in the
    end you get to the same place, because the marketplace will
    drive corporations if the incentives are there to pay the same
    amount of dividends whether it is excluded at the corporate
    level or at the investor or taxpayer level. Those were the
    basic considerations.
        Of course, another way to get at the whole question would
    be to eliminate the corporate income tax. That might overload
    the boat. Another way to get at it would be to have some major
    reduction or elimination of capital gains taxes. That probably
    overloads the boat, too. One consideration in the deductibility
    at the investor level rather than at the corporate level is
    cost. It costs less to do it this way.
        Maybe Pam or Rich would like to answer it because you were
    in the Administration at the time this was all done.
        Ms. OLSON. The only thing I would add to the Secretary's
    very good description of it is that there is a definite
    difference between the deduction at the corporate level and an
    exclusion at the shareholder level because of the number of
    shareholders that are tax exempt, exempt organizations, and et
    cetera. The President's principle was that he wanted to tax
    income once and only once and he did very much want to deliver
    this benefit to the shareholders of America.
        Chairman THOMAS. Thank you very much. Gentleman from New
    York wish to inquire?
        Mr. RANGEL. Thank you, Mr. Chairman.
        Mr. Secretary, the economy is really in bad shape, local
    and State governments accruing deficits, programs are being
    cut, and it looks like we are moving more and more in a wartime
    economy. We are being shaken down by countries around the world
    in order to assist us in liberating countries in the Middle
    East. The deficit--interest on the debt is playing a more
    important role in our budgets. We can't get from the
    Administration the cost of our troops in Afghanistan and then
    step up in the wartime effort. I just can't believe that the
    Congress cannot get any estimate at all as to the cost of what
    could be a war being declared by our government against the
    government of Iraq. I can't see how we can talk about a
    dramatic cut in taxes when we have no clue of the cost of a
    potential war. It would be different if your proposal was
    conditioned on whether or not we are at war or not.
        Every time we hear war, we hear of sacrifice and I think
    you are suggesting that this tax cut is not a reward for the
    wealthy but a reward for all of America. We have a very tight
    budget that we work with in trying to provide assistance to our
    constituents.
        My question would be, do you have any idea at all what the
    economic costs of the war would be if, in fact, the President
    fulfills his recommendation that the United States liberates
    the people in Iraq? Do you have any ballpark figures to share
    with us that would make your recommendations of this dramatic
    reduction of resources make more sense to Members of Congress?
        Mr. SNOW. Thank you, Mr. Rangel. You put your finger on a
    good issue, an important issue. The President really is trying
    to avoid a war. He says war is the last option here, and he is
    extending himself and his Administration to seek to avoid a
    war. Whether or not the President decides to authorize the use
    of force--and certainly he hopes that isn't required--it is
    vital that our country grow. It is vital that our country
    continue to create jobs for the millions of people who are
    looking for work and can't find work.
        So we can afford a war and we will put it behind us, but we
    do need to make sure we have an economy that is growing and
    creating jobs for people who want work. That is what this plan
    is about, creating jobs for people who want work and growth for
    the economy so everybody can have prospects for a more abundant
    life.
        Mr. RANGEL. You didn't say what this war would cost.
        Mr. SNOW. We have a 10 point--toward $11 trillion economy.
        Mr. RANGEL. How many wars can we afford? Mr. Rumsfeld said
    we can do two or three wars at the same time. Did he discuss
    that with you?
        Mr. SNOW. My mission is with Treasury and not how many wars
    we can conduct at a certain time.
        Mr. RANGEL. You said we could afford it. I heard Mr.
    Rumsfeld say this war may take 5 weeks, 4 months, or 4 years,
    and occupation may be $100 billion a year. They have thrown
    these numbers at us, and you are saying we can afford it and I
    want to feel that comfort. You must have some reason to believe
    that we can afford to stay there how many years.
        Mr. SNOW. The reason I have comfort is the cost of the war
    will be small relative to the gross domestic product (GDP) of
    the United States.
        Mr. RANGEL. How many wars are we talking about? How about
    North Korea?
        Mr. SNOW. We are always trying to avoid a war.
        Mr. RANGEL. We are always trying to avoid it, even though
    you don't get that impression from the television. Assuming
    that we are making every effort to avoid it, it looks like we
    may not be able to do it. So, you already said we can afford
    the sacrifices that we will make in Iraq, and I guess you have
    done a lot of study of that. I am asking whether there are any
    other wars that you figure we can afford to do economically,
    forgetting the lives of men and women involved.
        Mr. SNOW. If you are asking me to foretell the next two,
    three, four, five wars, I am not in that business.
        Mr. RANGEL. You are in the business of foretelling the
    budget and expenses of the government. I just thought that both
    of these were very, very important. Thank you, Mr. Chairman.
        Chairman THOMAS. Thank the gentleman.
        Mr. SNOW. I was going to say that this is a war to--if we
    have a war, the purpose of the engagement will be to eliminate
    enormous threat and risk to the American people. We can't put a
    price tag on that, Congressman.
        Chairman THOMAS. Gentleman's time has expired. Gentleman
    from Illinois wish to inquire?
        Mr. CRANE. Yes, Mr. Chairman. Secretary Snow, I would like
    to join my colleagues in thanking you for being here today. The
    last time you were here you did an extraordinary job of
    answering questions regarding the President's budget just 2
    days after taking the office of Secretary of the Treasury.
    There have been several proposals offered by our colleagues on
    the other side of the aisle that focus on a one-time increase
    in government spending and temporary tax cuts. Do such policies
    have any sustained long-term economic benefit?
        Mr. SNOW. Congressman Crane, no, I do not think they have a
    long-term sustainable impact. One of the teachings, I think, of
    modern economics is if you are going to affect people's
    behavior today, you have to give them the sense that that tax
    reduction will return to them this year, next year, the year
    after, the year after that, rather than be a one-time shot. A
    one-time shot, frankly, isn't worth the money it costs to give
    them.
        Mr. CRANE. In addition to the administrative and tax
    compliance benefits of increasing from $25,000 to $75,000, the
    annual amount of capital investment that small businesses can
    expense or immediately deduct each year, can you explain how
    the section 179 expensing provision will increase capital
    investment and create jobs?
        Mr. SNOW. Yes. Small businesses--and there are some 23
    million or 30 million, I forget the number now--there are an
    awful lot of small businesses, and they are the primary engine
    for job creation in America. The expensing means that those
    small businesses will immediately have a writeoff they don't
    have today. It will mean more money in their pockets. It will
    mean more free cash flow for the business. That heightened free
    cash flow will make the business more valuable. It will mean
    the business has a higher return on invested capital. It is the
    return on invested capital and that business goes up, that
    those small businesses become more profitable and they are more
    inclined to make additional expenditures and to hire additional
    people. So the expensing improves the economic outlook for
    small business, which means that small business will be more
    inclined to invest and hire.
        Mr. CRANE. In addition to increasing the amount that a
    small business can expense, the proposal also increases the
    number of companies eligible for the provision. Can you tell us
    how many additional businesses will be eligible for the section
    179 expensing under the proposal?
        Mr. SNOW. I think that is roughly 23 million, 23 million
    firms who will be eligible for that and they will get the
    advantage of the lower marginal tax rates.
        Mr. CRANE. Thank you. I yield back the balance of my time.
        Chairman THOMAS. Thank the gentleman. Gentleman from
    California, Mr. Stark, wish to inquire?
        Mr. STARK. Thank you, Mr. Chairman. Mr. Secretary, I am
    still puzzled over your assertion that the President is trying
    to avoid war, but we will come back to that as I try and think
    how in God's name he is doing anything to avoid war, but that
    is another issue.
        We do have a crisis in consumer confidence, the lowest
    level in nearly a decade, because Americans are worried about
    low job market, falling stock prices, rising gas prices, the
    threat of terrorism and the President's insane commitment to go
    to war with Iraq at all costs. American families are prepared
    to send their sons and daughters, husbands and wives to war. In
    addition to buying duct tape and plastic, they are preparing
    themselves for what may be the ultimate sacrifice. Yet, this
    Administration continues to crusade for tax cuts for the
    wealthy. In other words, 60 percent of the tax cuts you are
    talking about go to the 10 percent of the people in this
    country with incomes over $100,000. Fifty percent of the people
    in this country are going to get less than $256 in tax cuts.
    You are trying to tell us that is fair. If that is your
    assessment of fair, I suggest you got to go back and reread
    whatever book it is that told you about business ethics and
    fairness.
        What I would like to know from you is, first of all, what
    you intend to do to pay for the war. When you were here a month
    ago, I asked you if anyone in the Administration talked to you
    about the cost of the war and you said no. I presume you have
    been on the job long enough to at least listen in on the
    discussions with Rumsfeld, Cheney, and Wolfowitz and have some
    idea as Secretary of the Treasury what the war is going to
    cost. You are going to have to come back to us with a debt
    limit increase.
        When do you intend to do that and how much will you ask
    for? If you don't know, I think you are building up a good bill
    of impeachment for incompetence in your job. So let us talk
    about what you are in charge of and how you are going to pay
    for this crazy Administration's headlong rush into war and its
    overzealous commitment for cutting taxes for the rich and
    ignoring creating new jobs. I might add, it is the first
    Republican Administration out of the last two that has not
    extended jobless benefits beyond 13 weeks, which would really
    get the economy going if they would be willing to do that. Let
    us talk about the war, its costs, and what you are going to
    tell the American people about the fairness and how to pay for
    it.
        Mr. SNOW. The tax cut plan, Congressman, as I indicated in
    my opening statement reduces the burden on the lower income----
        Mr. STARK. Two hundred fifty-six dollars is for the median.
    That is it. That means half the people of this country get 256
    bucks or less. Those are your figures, I might add.
        Mr. SNOW. What it means, though, if this is passed, as I
    dearly hope it will be, the lower income people who are paying
    taxes will bear a smaller share of the total tax burden, and
    those are the numbers that I think are indisputable.
        Mr. STARK. Hot dog. What about the million people who are
    on unemployment? What are you going to do for them?
        Mr. SNOW. The best thing we can do for them is get the
    economy going.
        Mr. STARK. You know what the President is going to do? He
    is going to put that money into one of these job training
    monkey business things and say go and get training, and these
    are all people who are working. You going to train plumbers to
    be chiropractors or are you going to get them jobs and pay
    their unemployment benefits so they can pay their rent and buy
    clothes for their kids and stimulate the economy as you suggest
    that is what you would like to do?
        Mr. SNOW. I urge you to take a close look for that proposal
    and review the experience, Congressman, in the States where it
    has been applied because it has been a great success.
        Mr. STARK. It hasn't been applied. It is a new pipe dream
    that this Administration has. So what you are saying is you are
    doing nothing. When are you coming back with the debt limit
    increase? When are you coming back with the debt limit
    increase?
        Mr. SNOW. We have written a letter to the Congress
    indicating that the debt ceiling, which is currently $6.4
    trillion, could be breached sometime in April or May and that
    we propose to have a dialogue with the Congress about the need
    to raise the ceiling. That, of course, has nothing to do with
    the war.
        Mr. STARK. Oh, no, because you aren't including the cost of
    the war in your budget.
        Mr. SNOW. Actually, it has nothing to do with the war. It
    is a result of the spending and taxing policies of the United
    States.
        Mr. STARK. Good luck.
        Chairman THOMAS. The gentleman's time has expired and the
    Chair thanks the gentleman for his questions. The gentlewoman
    from Connecticut wish to inquire?
        Mrs. JOHNSON OF CONNECTICUT. Thank you, Mr. Chairman.
    Welcome, Secretary Snow. There is in my mind a lot of good
    reason for considering speeding up the changes to the
    individual side of the Code. This is a time when families
    desperately need every penny they can get. So, I think that
    could put money into the economy in a way that would be very
    strengthening to it. There has been a good deal of concern
    about the interaction between the dividends proposal and
    retirement security, the construction of affordable housing in
    our society, the ability of municipalities to borrow at zero
    interest. I wondered if you would comment on some of those
    reverberations of this proposal that do concern many of us.
        Mr. SNOW. Yes, and I would be happy to. We are in dialogue
    with a number of people who represent those interests. Let us
    start out with the municipals. I don't think the proposal will
    have much effect on the munis at all, modest at best, because
    the investors in the municipals are really a separate and
    different--have different investment objectives than people who
    invest in equities. The municipals gives you some advantages
    that you don't get from equities. Equities have more risk to
    them, don't have an assured payment schedule, and don't have
    the stability. As I have looked at that one--and I tried to
    think about it--I don't think there will be much impact, modest
    at best.
        Turning to the tax credits, again, I think the effect will
    be quite modest. The proposal, after all, is unlikely to lead
    to companies paying out all of their dividends, so they will
    still have an incentive of having some portion of their income
    sheltered from taxation. I am told--I am sure Secretary Clarida
    or Olson could confirm this--that the debt of corporations that
    are represented by tax credits, investment in tax credits, is
    very small, something like 1 percent or less than 1 percent for
    low-income housing, which is one of the areas that you
    mentioned in your comments to me.
        We are also talking to another group involved with variable
    annuities. I think we can find a way to deal with the issue
    there. So I think with respect to the munis and with respect to
    the tax credits, impacts will be fairly modest. I know you are
    concerned about the low-income housing credits. I look forward
    to a discussion with you on that. On the municipals, the
    evidence I think there is really pretty clear, that we are
    talking about different investors with different investment
    profiles and different investment expectations. There will be--
    the diversion of funds will be in all likelihood from corporate
    debt--from bond to bonds into to--and other credit instruments
    of corporations into equities, not from the munis into
    equities.
        Chairman THOMAS. Thank the gentlewoman. The gentleman from
    California, Mr. Matsui, wish to inquire?
        Mr. MATSUI. Yes, I would. Thank you, Mr. Chairman. Mr.
    Secretary, let me throw out a few statistics as a background of
    my observation here. Economic growth in 2000 was 3.8 percent.
    Average for the last 2 years is 1.3 percent. The unified budget
    surplus, year 2000, was 238 billion in surpluses. We are now
    projecting $207 billion worth of deficits in this year and $204
    billion worth of deficits in the next fiscal year that we are
    about to work on.
        Unemployment rate was 4 percent in 2001. It is 5.7 percent
    today. The number of unemployed was 5.7 million in 2001. It is
    8.3 million, a gain of 2.6 million unemployed today.
        The value of the stocks in the equity market was $13
    trillion and now it is about $8 trillion, a drop of about $5
    trillion.
        In terms of your dividend deduction proposal or the
    elimination of taxation on dividends, we had an MIT study
    recently analyze your proposal, and it says at the most, there
    will be a 5-percent increase in the equity markets from this
    proposal. With a drop of 35, 40 percent in the market over the
    last 2\1/2\ years, it seems kind of incredulous that we would
    rely upon a 5 percent increase.
        Second, what is troubling from my perspective is that for
    this Administration that believes in the marketplace, it would
    seem to me you are using the Tax Code to try to temporarily
    jack up the market when we really should be dealing with
    fundamentals and obviously transparency in the market. So it
    just seems that approach doesn't make a lot of sense.
        Second, I think both you and representative--Ms. Olson
    mentioned this--the benefit goes to the shareholder rather than
    the corporation; therefore, it has a very negligible effect in
    terms of changing corporate behavior in the sense of moving
    from debt financing for capital expansion to equity financing.
    In fact, it almost has no impact at all.
        Thirdly, the--undoubtedly will increase the cost for tax-
    exempt bonds and that will have an appreciable impact on local
    and State government at a time when local and State government
    has an $80 billion debt in this coming fiscal year.
        When infrastructure throughout the United States has to be
    really addressed, and I find--I have met with a group of State
    treasurers today and they just can't understand how this
    proposal can even see the light of day.
        Lastly, I tend to disagree with you, but reasonable people
    hopefully can disagree, in view of the fact that in this fiscal
    year only $30 billion will be actually put out in the economy.
    I can't even imagine how this will have a short-term stimulus
    effect on the economy. You are telling us it is about $52
    billion. I can't imagine what a stimulus effect it might have.
        Thirdly, from a larger perspective, I want to follow up on
    what my two colleagues from California and New York have said.
    This total package, about $700 billion, and of course that
    doesn't include making the tax cuts of 2001 permanent, which
    would add about $600 million to it, but in terms of your
    priorities, in view of the fact that we are projecting deficits
    at least for the balance of this decade, would it not make more
    sense to either use the revenues that you are going to lose
    here on this tax cut to pay down the debt?
        Or secondly, perhaps, maybe have a little insurance, just
    in case the war doesn't work out like everyone hopes it works
    out, that maybe it will go a year instead of 5 weeks, maybe
    instead of occupying our troops in Iraq for a year, if it goes
    5 years, doesn't it make sense to have a little hedge and maybe
    we should wait for this tax cut for 2004?
        Lastly, there is a lot of domestic needs out there. The
    President announced a prescription drug bill yesterday that is
    very sketchy and doesn't have a lot of details in it, but
    perhaps some of these loss of revenues that occur because of
    these tax cuts should be used for perhaps beefing up the
    prescription drug bill which we are going to have a very
    difficult time passing once this tax bill goes into effect and
    secondly, once the war goes into effect. I see deficits running
    $500 billion if in fact the war ends in rapid fashion and we
    are there for only a very limited period of time. It seems to
    me that we ought to use this money as a safety net instead of a
    tax cut that I haven't yet seen have an appreciable effect in
    helping the market or the economy.
        Chairman THOMAS. Gentleman's time has expired, but
    obviously the Secretary can respond. Given the length of the
    questions, my assumptions is a number of these may be responded
    to in writing.
        Mr. MATSUI. Whatever he wants to do is fine with me.
        Mr. SNOW. This is an insurance policy. It is an insurance
    policy that we stay on the recovery and that those people who
    are looking for work can find work. That has to be a priority.
        On the debt/equity ratios, I think it is going to be more
    powerful than your numbers suggest. We will give you the
    numbers on that. I don't think it is going to drive down the
    price of municipals, increase their yields very much at all.
        The stimulus actually has a pretty powerful effect of
    450,000 jobs, 500,000 jobs by the fourth quarter of this year.
    I will explain why that happens in the written response. I
    think investing in growth, which is what this package is all
    about, eliminating the biases in the Code to use debt rather
    than equity, and stimulating investment in equity capital will
    have a long-term powerful effect on corporate behaviors that
    will be very beneficial to the way the American economy
    performs, and I will elaborate on all that in my written
    answer.
        Chairman THOMAS. Gentleman's time has expired. Gentleman
    from California, Mr. Herger, wish to inquire?
        Mr. HERGER. Thank you very much, and thank you, Mr.
    Secretary, for being with us. I would like to comment on a
    question that was asked you just earlier by Mr. Crane on the
    Administration's support in your tax package. Knowing that over
    90 percent of all businesses are small businesses, that over
    half of all new jobs are created by the small businesses, I
    want to thank you for your support for increasing from $25,000
    to $75,000 the annual amount of capital investment that can be
    expensed or immediately deducted, as well as increasing that
    threshold from $200,000 to $325,000 of investment for a small
    business. This is legislation that I sponsored last year, again
    this year, that Senator Snowe has in the Senate. Again, I thank
    you for having this in your plan, and as you have mentioned,
    see it very clearly as a major help to creating more jobs.
        My question is that several of our liberal friends have
    commented that the Administration's tax proposals are simply a
    tax cut for the rich. Of course the child tax credit, the
    income tax bracket expansion for a 10 percent income tax
    bracket and the 15 percent tax income tax bracket and expansion
    of standard deductions for married taxpayers clearly benefit
    low-income people. However, there still remain the double
    taxation of dividends, which I strongly favor eliminating,
    still remain. Could you comment on how the elimination of this
    double taxation of dividends will benefit low-income taxpayers
    as well as retired taxpayers and will this proposal have an
    effect on increased wages?
        Mr. SNOW. I thank you very much for that excellent,
    excellent question. Forty percent of the recipients--I should
    say it differently, 40 percent of all stock ownership in
    America--we have become an investing country with half of the
    families in America now owning equity. Forty percent of the
    equities are, in terms of number of people owning equities, are
    people with income of less than $50,000 a year. An awful lot of
    people who receive dividends are people with average incomes,
    modest incomes, moderate. People like my mother, the
    schoolteacher I talked to you about once, who depended on those
    dividends in her retirement. Found it enhanced her ability to
    enjoy life. With this proposal, can't be any doubt about the
    fact that many, many companies who are paying dividends today
    will pay larger dividends because the obstacle to paying
    dividends has been eliminated.
        I can't tell you, Congressman, how many meetings I have
    been in as a chief executive officer (CEO) and a board member
    where the discussion turned to the subject, how do we reward
    shareholders? The first thing that came to mind was let us buy
    in shares because we can borrow the money and take a deduction
    to buying in shares. Of course, there was a lot of buying in of
    shares.
        A second option that always was on the table was well, the
    market rewards us for being bigger. Why don't we do a
    transaction? We can borrow the money for the transaction and
    take a deduction.
        The third option, dividends--should we pay more dividends--
    was always greeted with the response well, you know, if we do
    dividends, that it is so tax inefficient. It is taxed at the
    corporate, it is taxed at the individual level, and this has
    been said in every board room I venture in America; that is not
    a tax-efficient way to reward our shareholders. We have now
    taken that reason away. As we take it away, it is going to lead
    to enormous growth in the payment of dividends, putting a lot
    of money in people's pockets.
        In addition, it is going to lead to a growth of equity
    capital. The growth of equity capital across America will lead
    to more investments. It will lead to a deepening of the capital
    stock. It will lead to business expansions. It will lead to
    higher productivity on the part of the workforce. It will make
    America better off and make America wealthier. If we make
    America wealthier, it helps everybody. A wealthier, more
    prosperous country helps everybody.
        Chairman THOMAS. Thank the gentleman. Gentleman from
    Michigan, Mr. Levin, wish to inquire?
        Mr. LEVIN. I think one of the problems you have is that a
    similar message as you are giving today was presented by some
    of your predecessors. So as they say, we have heard this song
    before. Let me give you one critique of that approach. I read
    it in quotes. In the example of fad economics that occurred in
    1980 when a small group of economists advised Presidential
    candidate Ronald Reagan that an across-the-board cut in income
    tax rates would raise revenue.
        ``When politicians,'' this is a quote, ``rely on the advice
    of charlatans and cranks, they rarely get the desirable results
    they anticipate.''
        You are now a politician and I am not suggesting that you
    have listened only to cranks and charlatans, but you know,
    after the 1980 tax cuts that weren't pinpointed, we went into
    these long trails of deficits, and we now have that after the
    most recent across-the-board cuts that weren't targeted. What
    is different this time? Why is that economist in his analysis
    wrong about this approach?
        Mr. SNOW. Well, I don't know what the reference point for
    that economist's observation is.
        Mr. LEVIN. To the experience in the '80s.
        Mr. SNOW. I won't use this occasion to debate the merits of
    the 1980's tax cut. I will talk about this particular set of
    proposals. Congressman, this is good economics. These proposals
    are fundamentally good economics. Chairman Greenspan himself I
    think testified here just a week or two ago, and, when asked
    about the double taxation of dividends, said that it is good
    economics.
        Mr. LEVIN. Didn't he say, though--let me just interject.
    What did he say about the deficits?
        Mr. SNOW. What he said about the deficits is that in the
    long term deficits matter, but that deficits of the size we are
    talking about will not rile up or disturb financial markets.
        Mr. LEVIN. You know, I think what you are doing is
    dismissing what he said--really, the gist of it. Also, what I
    read was from the first edition of the textbook by the person
    who has been designated as the leader of the Council of
    Economic Advisors, Professor Manchu. There is deep skepticism
    because what you say today was said a few years ago and was
    said 20 years ago. What we have seen from that approach is
    these deep, deep deficits and we better take them seriously.
        I won't quote what you said some years ago, what you said
    about deficits. I think you also have changed your tune, as
    Professor Manchu and others have. I think what you said and
    what he said a few years ago is likely to prove historically
    correct about this one.
        I want to talk about fairness for just a minute. You say in
    your testimony a typical family of four with two wage earners
    making a combined $39,000 will receive a total of $1,100 in tax
    relief. What percentage of the households is represented by
    that typical family of four?
        Mr. SNOW. I think Ms. Olson has the answer to that.
        Mr. LEVIN. What is the percentage? What percentage of the
    households?
        Mr. SNOW. The percentage of households represented by the
    $39,000 with two children--I think--can I get that for you for
    the record?
        Mr. LEVIN. I think it is about 25 to 30 percent.
        Mr. SNOW. That could be.
        Mr. LEVIN. So why do you use a figure that represents a
    small fraction? I will ask you this, too. The average tax cut
    for somebody earning over $200,000 would be $12,496. For over
    50 percent, the tax cut would be $100. Assume you are in that
    category over $200,000, Mr. Secretary; what do I say to my
    constituents, so many of whom are in the half that would
    receive $100, that it is fair for them to get $100 and for you
    to get $12,496 and for someone earning over a million would get
    $90,000? What is the fairness in that?
        Mr. SNOW. Congressman, you are talking from numbers that I
    have not seen before.
        Mr. LEVIN. You have never seen these numbers?
        Mr. SNOW. Not those numbers. I have seen a different set of
    numbers. Assuming I am talking about the numbers that I have
    seen, I think the answer is we all benefit from getting this
    economy going from creating jobs. The best thing we can do for
    people is create work and jobs. That is what this does.
        I know that there is this notion of trickle-down economics
    that some people believe in. That is not what this is all
    about. This is about improving the total output of this
    economy. When we improve the total output of the economy, as
    Chairman Greenspan testified in connection with a question like
    this on the elimination of the double taxation of dividends, he
    said that virtually everyone benefits when we make the economy
    more efficient. That is what this does. It makes the economy
    more efficient.
        Chairman THOMAS. Gentleman's time has expired. Gentleman
    from Louisiana wish to inquire?
        Mr. MCCRERY. Yes, Mr. Chairman, thank you. In quick
    explanation of the reason why one might use the family of four
    as a typical example of the effect of the tax cut, by
    instituting the child tax credit, Congress recognized that the
    people in our society perhaps having the most difficult time
    making ends meet are those with children. We instituted a child
    tax credit to help those people to raise their kids, to give
    them a break in the Tax Code. So that, indeed, is a good
    example for us to use as to the true impact of the parts of
    this tax proposal.
        Mr. Secretary, there has been a lot of talk about whether
    we can afford the tax cut and whether it is wise to do so. I
    think it might be instructive to look at the historical rates
    that income tax revenues have represented as a percent of our
    GDP to find out if we can afford it. Between 1945 and 2002,
    individual income tax revenues represented an average of less
    than 8.1 percent of GDP. Under the President's proposal, as I
    read the tables, individual income tax revenues with the tax
    cut proposed by the President in the years 2006, 2007, 2008
    will be around 8.5 percent of GDP. So in other words, even
    after this tax cut, income--individual income taxes will
    represent a higher percentage of our national income than the
    historical average since World War II.
        So I think the question we ought to be asking is how much
    are we spending and can we make our expenditures fit within
    that over the long haul, with the exception, of course, for
    wars that we must fight, must win, and spend whatever is
    necessary to do that?
        You mentioned, Mr. Secretary, in response to Ms. Johnson's
    question, annuities. I want to highlight that because I do
    think that may be an area of where the Administration in
    putting together its proposal overlooked an effect in the
    marketplace that would be unintended. Your proposal would tell
    individuals who purchase mutual funds that they can enjoy the
    tax-free treatment of dividends paid within those mutual funds.
    You said in your proposal that if that individual has a
    variable annuity, which is kind of like a mutual fund, except
    maybe better, if your object is to have that person save for
    the long term, save for retirement, he can't get that tax-free
    treatment of dividends paid inside that annuity. I know you
    mentioned it to Ms. Johnson. I would like for you to expand on
    that for just a moment so we can get that clear.
        Mr. SNOW. The principle is income taxing once, and we are
    looking at the application of that principle to the variable
    annuity to see whether or not the principle is being properly
    applied. We are in technical discussions. Secretary Olson is
    looking at the matter and we are in discussions with the
    variable annuity industry, and I think we can find an
    accommodation there. It is not really a big issue, it is really
    a technical issue, and I think we can resolve it.
        Mr. MCCRERY. I thank the Secretary for that response. I
    think it does deserve attention, and I am hopeful we can find a
    solution for that.
        Several media reports noted that the bill as introduced by
    the Chairman of the Committee on Ways and Means, H.R. 2, has
    some differences from the Administration's initial offering,
    and one of those changes relates to the treatment of previously
    accrued alternative minimum tax (AMT) credits. Can you explain
    why the President's proposal has been changed, I take it with
    the Treasury's blessing, with respect to accrued AMT credits
    and why that is philosophically consistent with the rest of the
    package?
        Mr. SNOW. It goes back to the issue on the variable
    annuities. We are trying to make sure we are consistent with
    this principle that dividends are paid only from moneys where a
    tax has previously been paid. The AMT is a tax, it has been
    paid, and should be credited. That is the basic answer.
        Mr. MCCRERY. Thank you, Mr. Chairman.
        Mr. SNOW. Very similar to the foreign tax credits.
        Mr. MCCRERY. Yes, sir. In fact very similar. Thank you.
        Chairman THOMAS. Thank the gentleman. The Chair wants to
    make sure that, based upon that discussion, that the Chair's
    representation of the legislation introduced as H.R. 2 is in
    fact an exact rendering of the President's proposal. Is that a
    correct statement?
        Mr. SNOW. Yes, it is, Mr. Chairman.
        Chairman THOMAS. I appreciate that. Does the gentleman from
    Washington wish to inquire? Mr. McDermott?
        Mr. MCDERMOTT. Thank you, Mr. Chairman.
        Welcome, Mr. Snow. I know you must--I hope you have taken a
    long-term lease on your house because I think of Mr. Lindsey
    and Mr. O'Neill and Mr. Hubbard, and I feel like you are out
    here rearranging the chairs on the deck of the Titanic. I read
    the local newspapers, and they tell me we are going to war.
    Now, I am not going to ask the question of the Committee or the
    audience how many think we will be at war in 30 days, but I bet
    you I would have an overwhelming number of people think that,
    which is why the consumer spending has dropped and it is going
    to keep dropping. Mr. Ridge says we are certainly going to war,
    and Mr. Bush talks about he is going to do a war to bring a
    lasting peace, and he points to the statue of Theodore
    Roosevelt. So, you know, he is the guy we are looking back to.
        So I started thinking about that, and I thought, well,
    every time we have had a war we have had a tax increase. Are
    you getting your answer ready, or are you listening to me? I
    was just wondering. We are not sure just exactly how big this
    war, how much it is going to cost, because the guys who said it
    cost a hundred billion they got dropped out the window and so
    we don't know what it is really is.
        In 1796, the Committee on Ways and Means reported to the
    Congress a bill to adopt a death tax to develop a strong naval
    force because of the problems with France. In 1862, Mr. Salmon
    Chase, your predecessor, and President Abraham Lincoln enacted
    the first income tax to raise revenue for the war for the
    Union. Then again in 1898 President McKinley reenacted the War
    Revenue Act to pay for the Spanish American War, and America
    sent its young men to war in Europe. At the suggestion of Mr.
    Roosevelt, Mr. Wilson put on the death tax again. Then World
    War II, we raised all kinds of taxes. We did it in the Korean
    War, we restored the excess profit tax. Every single war, we
    have raised taxes. Now you are sitting out here and saying 300
    years--3,000 years of public finance, we are going to go to
    war, and we can cut taxes and don't worry, folks.
        How in the world can you sit there with a straight face and
    sell that to the American people when the history is as I said
    it? Now, maybe you quibble with my history. If you don't, then
    I would like to hear how you are going to be the first
    Secretary of Treasury in the history of the United States who
    cuts taxes during a war and pays for the war. I don't know
    where you are getting the money from, because nobody is
    spending. You can give $250 to the average truck driver or cab
    driver or schoolteacher and a lot of people. If you think that
    is going to bring up the economy, no, no, they are paying down
    their credit card debts. They are putting a little extra on
    their house payment. They are doing a lot of things to save it.
    They are not going out and buying stuff. That is why we are not
    having a recovery. As long as you have this war, everybody says
    you are not going to have recovery.
        So how are you going to sell this to the American people?
    We are going to cut taxes. I guess it is because you have given
    up on deficits. I guess deficits don't mean anything.
        Mr. SNOW. No. Deficits matter.
        Mr. MCDERMOTT. Oh, they do?
        Mr. SNOW. As I testified before you last time----
        Mr. MCDERMOTT. The first rule is when you are in a hole,
    stop digging.
        Mr. SNOW. Congressman, the hole we are in now is we are not
    creating jobs. The hole we are in right now is we are not
    growing the economy. The hole we are in is we are diminishing
    the prospects and the outlooks for millions of Americans. That
    is a hole we have to get out of. You are a much better student
    of history than I am, but that recounting of all those tax
    increases in the time of war, you know, the President wants to
    avoid a war here. That is----
        Mr. MCDERMOTT. Is there anybody in this room who believes
    we are not going to be at war? Wait a minute. I know he wants
    to avoid a war. Of course you do. Is there anybody in this room
    who believes we are not going to war? Anybody? You see?
        Mr. SNOW. Well, I don't think people want to intrude on
    your questioning here of me.
        Mr. MCDERMOTT. Surely there is somebody here who wants to
    defend the President's not going to war. Surely there must be
    somebody who thinks he is going to keep us out of war.
        Mr. SNOW. I think it is pretty clear the President----
        Mr. COLLINS. Would the gentleman yield?
        Mr. MCDERMOTT. Where?
        Mr. COLLINS. Right here. Collins is the name.
        Mr. MCDERMOTT. Collins. Yes, sir. Do you think we are not
    going to war?
        Mr. COLLINS. There would be a lot less chance we would go
    to war if we didn't have so many naysayers in the group.
    Depending on the President and strategy of building the defense
    and showing the strength of the United States and stop
    undermining with all your rhetoric.
        Mr. MCDERMOTT. Oh, so now it is us.
        Mr. MCCRERY [Presiding.] The gentleman's time has expired
    The Committee will be in order.
        Mr. COLLINS. The answer is up to Saddam Hussein.
        Mr. MCCRERY. The Committee will be in order.
        Mr. Johnson from Texas may inquire.
        Mr. JOHNSON OF TEXAS. Thank you, Mr. Chairman.
        You know, you keep getting asked about the cost of war. I
    hear so many misstatements of fact I can't believe it. It seems
    to me that for 40 years under Democrat control in this Congress
    the debt limit kept going up and money kept being spent. I
    didn't know anyone except in the past Administration that
    believed in double taxation for anybody. I think you are right
    on target when you say the President is thinking about taxing
    money once and once only. That is the theme throughout this
    thing. You guys need to realize that.
        I know it seems like the several proposals offered by the
    Democrats focus on a one-time increase in government spending.
    Do such policies have any sustained long-term economic benefit
    as far as you can see?
        Mr. SNOW. Congressman, no. I think the virtue of this
    proposal is that makes a long-term real improvement in lowering
    marginal tax rates so people can count on having those lower
    marginal tax rates into the future. The evidence indicates that
    one-time spending proposals do almost nothing to improve
    employment or assist the economy in achieving higher levels of
    growth. Almost nothing.
        Mr. JOHNSON OF TEXAS. How can a Democrat plan to spend more
    money not cause us to exceed the debt limit either? Isn't that
    something that would happen if we spent more money?
        Mr. SNOW. I think when you look at these numbers that the
    Chair raised with me earlier, it is pretty obvious that we get
    into trouble on the deficit because of the spending side, and
    the spending side historically has been what leads to
    significant trouble on the deficit side. Revenues tend to stay
    in that 17, 18, 19 percent range. Spending though has much
    greater variation or amplitude. It is, the spending has to be
    watched here very significantly. We really don't have a serious
    deficit problem as long as we watch spending. There are plenty
    of revenues coming in. These revenues are going to be rising,
    as the Chair pointed out in his questions to me. So I am in
    complete agreement with the tenor of your question.
        Mr. JOHNSON OF TEXAS. Thank you. I would like to ask you,
    then, what will be benefit be of accelerating the marginal tax
    rates now? That is a tax reduction.
        Mr. SNOW. That is a very significant tax reduction. Again,
    one of the teachings of economics I think is you get less of
    everything you tax and more of everything you reduce taxes on.
    Marginal tax rates, high marginal tax rates reduce the
    incentives to work and reduce the--therefore, reduce the output
    of the economy. By lowering marginal tax rates on individuals
    will encourage individuals to work harder and will put more
    disposable income in their hands. As they have more disposable
    income in their hands, they will spend it. They will do
    something with it. That will benefit the economy. In particular
    here, the lower marginal tax rates for small business means
    those businesses become more profitable. As businesses become
    more profitable, they invest, they expand, and they grow. This
    is a vehicle for small business to expand and grow and hire.
        Mr. JOHNSON OF TEXAS. Exactly, and create more jobs in the
    process. Well, let me just say I didn't see a cushion, as was
    talked about before, during the Vietnam War, and maybe that is
    to my detriment. I know that I have talked to our military, and
    they are energized, they are ready, and we do have the dollars
    to support them if we have to. I thank you for your comments,
    sir.
        Mr. SNOW. Thank you, Congressman.
        Mr. MCCRERY. Mr. Lewis.
        Mr. LEWIS OF GEORGIA. Thank you very much, Mr. Chairman.
        Welcome, Mr. Secretary. Mr. Secretary, you know better than
    any of us this Administration is halfway home. You are in the
    third year and time is running out. Time is late. I want you to
    tell us, what went wrong? How did you and the Administration
    get on this road? In order to know where you are going, you
    must know where you have been and where you are. This
    Administration came into office with a surplus. The surplus is
    gone. What happened? In the previous Administration, more than
    22 million jobs were created. During the first 2 years of this
    Administration, we have lost more than 8 million jobs. You talk
    about jobs, creating jobs. Why now in the third year of this
    Administration? What happened during the past 2 years?
        Mr. Secretary, the economy is in a ditch, and the ditch is
    getting much deeper. Do you really believe that your proposal
    and the proposal of the Administration would get the economy
    moving? Would you like to respond?
        Mr. SNOW. Yes, Congressman. I can respond enthusiastically
    in the affirmative to that question. Absolutely. There can't be
    any doubt about the fact--and I mean this from the bottom of my
    heart. I mean this with the deepest sincerity. There can't not
    be any doubt about the fact that this proposal will create
    hundreds of thousands of jobs for Americans looking for work;
    that the estimate of the economists in the Administration--Mr.
    Clarida is one of them--is that by the fourth quarter of this
    year, if this is enacted by mid-term, by June or so, that there
    will be 500,000 additional jobs; that by the fourth quarter of
    next year there will be a million and a half additional jobs;
    and by 2005, well over 2 million additional jobs. Growth rates
    of an additional 1 percent in GDP for this year and another 1
    percent for next year. So a total of 2 percent additional GDP.
    That is a tremendous improvement in the outlook for the
    American economy, and I have no doubt that that would be the
    effect of lowering rates as proposed.
        On this issue of the surplus and squandering the surplus as
    the charge goes, you know, this Administration inherited a
    recession. This----
        Mr. LEWIS OF GEORGIA. You had a surplus. You cannot deny
    the fact that there was a surplus. What happened to it?
        Mr. SNOW. Well, it was a surplus on paper. It ought to make
    everybody who does economic forecasts very humble. It was never
    there in reality. It was a number on a piece of paper that was
    wildly exaggerated. That is what it was.
        Mr. LEWIS OF GEORGIA. Mr. Secretary, let us turn to another
    question that some of my colleagues on this side of the aisle
    have raised. As one Member, just one Member of this Committee,
    I must tell you that I am deeply troubled with our rush to war.
    During the past 40 years, I never seen anything--anything--
    nothing that troubled me more than our rush to war. Are we
    prepared to rob our people, our senior citizens' quality health
    care, are we prepared to steal from our children to finance a
    war? Some people are saying that the war will cost $60 billion,
    $95 billion, maybe $100 billion. Can you tell us how much this
    war is going to cost?
        Mr. SNOW. Well, first of all, as I have said earlier, the
    President's objective here is to bring peace to that part of
    the world and end terrorist and----
        Mr. LEWIS OF GEORGIA. Do you bring peace by destroying the
    Nation and destroying people, destroying our own people and
    destroying other people? Do you call that peace?
        Mr. SNOW. Well, Saddam Hussein has the option of complying
    with the U.N. resolution. The President is giving him that
    option. He is urging him to respond to the U.N., to the rule of
    law, and it is his option. It is his option, and he seems to be
    rejecting that option. So the President isn't seeking war. The
    President is seeking an end to a tyrannical regime that
    tortures its own people and accumulates weapons of mass
    destruction. That is going to make the world a more peaceful
    place, not a more warlike place.
        Mr. LEWIS OF GEORGIA. Mr. Secretary, I wish you could tell
    us and tell this poor Member, I don't understand how we are
    going to do all of these things. Health care for our senior
    citizens, prescription medicine, no child will be left behind,
    we are going to finance education, clean up the environment,
    and then fight a war and spend billions of dollars. Where are
    we going to get the resources from?
        Mr. SNOW. We have the most----
        Mr. LEWIS OF GEORGIA. Have a tax cut?
        Mr. SNOW. Well, the tax cut is going to help us get where
    we need to get. The tax cut will help us create the robust
    economy that makes paying for those things possible.
        I think it is important to keep in mind that over the next
    10 years GDP is projected to grow by $142 trillion. The revenue
    impact of this proposal is only 1 percent of the growth in GDP
    over that time. We can afford that. We can only afford it if we
    have the economy growing and performing the way it can grow and
    perform.
        Mr. MCCRERY. The gentleman's time has expired. Ms. Dunn.
        Ms. DUNN. Thank you, Mr. Chairman. I feel like the other
    side has got their theme down. It is just they are attending
    the wrong hearing today. So I would like to get back to the
    economy, if we could do that, Mr. Secretary. Thank you for
    coming to be before us today.
        Mr. Secretary, like most of my colleagues, I agree with the
    underlying economic argument behind the President's tax plan
    regarding the double taxation of dividends. Taxing the same
    income twice, as you have said, is inefficient and unfair. Yet
    the other side says that this is just another handout to the
    wealthy. As you have mentioned, Alan Greenspan's testimony when
    he was here on the Hill recently, he says about the double
    elimination--double taxation of dividends, he says the
    elimination of the double taxation of dividends will be a
    benefit to virtually everyone in the economy over the long run,
    and that is one of the reasons I strongly support it. That is a
    quote from Alan Greenspan.
        I wonder if you could explain to us how the dividend
    proposal is in fact a tax reform that will benefit all citizens
    whether or not they own stock that pays dividends.
        Mr. SNOW. Thank you very much, Congresswoman, for that good
    question, and I must say I was delighted to see the Chairman's
    testimony in which he pointed out the benefits of the
    elimination of double taxation. Eliminating double taxation of
    dividends will benefit the American economy in a number of
    important ways. One, its immediate impact--and I hate to talk
    economics here, but its immediate impact is to increase the
    return on equity capital. As we increase--by taking that tax
    away, the return on equity capital will rise. As the returns on
    equity capital rise, we will find lots of investments of equity
    capital, and we will see money coming out of debt instruments,
    corporate debt instruments into equity instruments. The total
    size of the capital pool of the United States will rise. As the
    total pool of capital in the United States rises, that means
    that every worker will have on average more capital to work
    with. As workers--as the capital per worker rises, productivity
    goes up. As productivity goes up, it raises real wage rates.
    That is what leads to a more abundant life for millions and
    millions of Americans.
        The proposal also will have some beneficial effects on the
    stock market. Earlier there was some comment that it will be
    punier, minuscule. I think it is going to be more than that. I
    think we can see--I have seen estimates that the increases in
    the stock market valuation could be as high as 15, 20 percent.
    That is pretty sizable. When you are talking about a market
    worth $8 or $9 trillion and you increase it 10 or 20 percent,
    you are talking about huge amounts of money that becomes wealth
    in somebody's hands. In this investor society where people are
    checking their 401(k)s and their individual retirement accounts
    (IRAs) and their ROTHs and so on, their pension plans, to see
    the net worth of their retirement accounts go up gives them a
    greater sense of confidence, makes them more willing to spend.
        There is a huge beneficial impact of this proposal on
    corporate behaviors. We live in a day and age when there has
    been a lot of questions raised about behavior in the boardroom
    and what can be trusted and what can be believed and what is
    the real earning power of companies when there have been so
    many questions raised about accounting. One thing we know, you
    can't kid around about cash. As companies pay out more
    dividends, and they certainly will, the confidence in corporate
    America, the confidence in the earning power of these
    enterprises will increase enormously, and that will be helpful
    to our capital markets.
        So I think for any number of reasons here, a variety of
    reasons, ending the double taxation of dividends, putting debt
    and equity on the same level playing field will remove an
    important rigidity in our economic system. It is interesting to
    look at the numbers. The United States today taxes capital at
    the very highest rate except for one country, Japan, of all the
    developed Nations. As I said earlier, we tax things we don't
    want. Why would we want to tax something that is the very life
    blood of our economy, capital?
        Ms. DUNN. Thank you, and I like that educated answer. It is
    a relief to hear from somebody who has been inside those
    boardrooms instead of ivory towers. I think often our comment
    comes from the wrong source.
        Let me ask you a quick question here since I am running out
    of time.
        Mr. MCCRERY. The gentlelady's time has expired. Mr. Cardin.
        Mr. CARDIN. Thank you, Mr. Chairman. Secretary Snow, once
    again, it is a pleasure to have you before our Committee. When
    you have large deficits and you want to propose a policy that
    is likely to add to the deficits, it seems to me you have to
    have an urgent public need for that type of policy to be acted
    upon. Clearly we have a need for homeland security and we need
    to do everything we can on homeland security and we have to
    move forward on that. We have an urgent need with our seniors
    on prescription medicines, and I think on both sides of the
    aisle we acknowledge the fact that we are going to have to do
    something in those two areas; and that the deficit is very
    important for us to deal with, but we need to make sure that we
    have homeland security and prescription medicines.
        As I understand the issue at today's hearings, we are
    talking about the Administration's stimulus proposal, which is
    being proposed to stimulate the economy, and I have listened to
    a lot of the debate here. I want to share with you the thoughts
    that have come to me through respected economists. That is,
    they said if you want to stimulate the economy, if you think
    the Federal Government can help in that direction, the most
    important thing is to get money into the hands of people
    immediately, because that may affect their behavior in spending
    more money. The major proposal you have, and you have been
    talking about it, is the dividend exclusion. I guess my
    question to you is, do you have any statistics as to how much
    of the total tax relief will get into the hands of our
    taxpayers in 2003 under that proposal?
        Mr. SNOW. Congressman, I don't have that readily available.
    I would--I will get that and make that available. As I recall,
    something like half of the total job creation over the next 5
    years is from the dividend proposal. In the short term more of
    the impact is from accelerating the rate reductions and the
    child credits, and so on, from the outyears and bringing them
    in. Now, the dollar value of that in the given period is we
    have it at the calendar year 2003 in at over $100 billion.
        Mr. CARDIN. One hundred billion dollars from the dividend
    exclusion?
        Mr. SNOW. No, no. For the total package, of which the
    dividend exclusion is about $20 billion to $25 billion.
        Mr. CARDIN. Twenty to $25 billion in 2003?
        Mr. SNOW. In 2003.
        Mr. CARDIN. Do you know what the 5-year or 10-year
    projections are on the dividend exclusion?
        Mr. SNOW. The cost to the government?
        Mr. CARDIN. Correct.
        Mr. SNOW. The cost is $390 over 10, and that is without any
    feedback, so----
        Mr. CARDIN. I understand that.
        Mr. SNOW. So over 5--I don't have the 5-year number, but I
    think it is like--$153.
        Mr. CARDIN. Well, let me just do some quick arithmetic here
    and this is what concerns many of us. We are placing a $390
    billion loss of revenue against a projected deficits, which
    will add $390 billion to the projected deficits. I understand
    your argument on economic impact, but we are going to be
    looking at a $390 billion additional hole to dig ourselves out
    of, and only $20 or $25 billion of that, or less than 10
    percent--well, less than 10 percent is effective in the year
    that we are trying to get activity from the consuming public in
    order to stimulate the economy.
        So I would just urge that as we look for ways to stimulate
    the economy we should at least listen to the good advice of the
    economists that say that if you are going to stimulate the
    economy look at something that will affect the bottom line of
    consumers in 2003 and is fiscally responsible over its
    lifetime. That is why temporary relief seems to be the
    preferred course.
        Mr. SNOW. Just a couple comments. The President's proposal,
    while having small--relative to the total size of the package,
    small dollar direct impacts in the early year, in 2003, of
    course will have major economic impacts, because as taxpayers
    realize that the tax reductions, the tax relief, the $1,000,
    $2,000, $3,000, whatever it is they are going to receive, isn't
    just for this year but is for the next year and the year after
    and the year after. It begins to have a powerful impact on
    their current behaviors, I think, Congressman, an impact which
    is much more powerful, most economists would agree, than just
    giving them money in a given period.
        Mr. CARDIN. Mr. Snow, I just point out that we are going to
    be faced though with a budget weighing on us of $390 billion we
    are going to have to make up, which is going to affect the
    other programs I have referred to. Thank you, Mr. Chairman.
        Mr. MCCRERY. Mr. Collins.
        Mr. COLLINS. Thank you, Mr. Chairman.
        Mr. Secretary, it is a pleasure to sit here and listen to
    you, as evident by the fact of your comments and how focused
    you are on this particular package, this growth package, that
    you have created jobs. That is a plus. It is much better than
    listening to some of those who just talk about creating jobs.
    You know the reality and how it is done.
        Would you not agree that the American workforce is involved
    in a global marketplace, not just a domestic?
        Mr. SNOW. Absolutely.
        Mr. COLLINS. Well, you mentioned a minute ago that only
    Japan taxes a certain portion of our economy less than we do;
    we are higher than any other. If we are global marketplace and
    competing with other Nations, as our workforce competes with
    their workforce, does it not make sense to look at their tax
    provisions and try to beat them or meet them?
        Mr. SNOW. I think in many ways the American economy is much
    stronger, more resilient, and the fundamentals are better. In
    this way, this particular way, this integration between
    corporate and individual taxes, I think some of the other
    countries have got it better than we do, frankly.
        Mr. COLLINS. Well, they do, and that is the reason you are
    having the inversion problem that we are having, that is the
    reason you are having companies that are moving offshore,
    taking the jobs with them. That is the reason you are having
    some foreign investors come in and purchase and then move,
    because the competition is less by being located in another
    Nation rather than here. Who loses in a situation like that? Is
    it not our American workforce?
        Mr. SNOW. There is no doubt about the fact that
    corporations make decisions based on the Tax Code.
        Mr. COLLINS. They do.
        Mr. SNOW. They flee high taxes.
        Mr. COLLINS. So you agree then, it is the workforce that
    actually loses out when a company moves offshore to better
    their bottom-line position?
        Mr. SNOW. Without any doubt. I mean, the fact of the matter
    is corporations collect taxes. They don't really pay them. They
    do take actions in response to the tax rates.
        Mr. COLLINS. Well, now you are getting to the bottom line.
    You are getting to the bottom line, and that is exactly right.
    We are talking about, I believe you said, something like 23
    million businesses would be affected by this tax bill either
    through expensing or dividends or some structure?
        Mr. SNOW. That is right.
        Mr. COLLINS. The purpose of this, the idea of it is to
    create jobs through a strong economy. If only 10 percent, one
    out of 10 of these 23 million create a job, how many jobs is
    that? 10 percent, how many jobs is that?
        Mr. SNOW. You made your point. You made your point. It is a
    big number.
        Mr. COLLINS. Yes, sir, it is.
        Mr. SNOW. I told you earlier, the Committee earlier that we
    foresee over 2 million additional jobs in 2005. A good number
    of those will come from small business, I am convinced.
        Mr. COLLINS. Well, the benefit of the focusing on the
    capital, as you said, is that it will change the pattern of
    businesses as far as investing or purchasing. As the President
    said in Cobb County, Georgia a couple of weeks ago, when you
    have this type incentive in place, when small business makes a
    purchase that they can expense out that year, someone has to
    make that product that they are purchasing. Is that not true?
        Mr. SNOW. That is the way the economy works, absolutely.
        Mr. COLLINS. That is how the economy works. That is how you
    create jobs. You don't sit around up here on this dais and talk
    about creating them, you do it by doing it in the marketplace,
    in the economies. You try to compete in the world market, not
    only competing with workers in other countries where products
    are made similar than ours in exporting, but competing with the
    imports from those countries who are sold here domestically. Is
    that not true?
        Mr. SNOW. That is absolutely true.
        Mr. COLLINS. Well, I appreciate the fact that the President
    is focused on a package that is a growth package. It is a
    package that I feel like that is more in relation to building a
    long-term relationship with the workforce in this country
    rather than looking at some kind of so-called stimulus plan
    that would only create a one-night stand for those who are
    depending upon the government to take care of them from the
    womb to the tomb.
        So I appreciate the President for what he is doing and how
    he is focused and how he is actually working toward creating
    jobs and looking after the workforce in this country. Thank
    you, Mr. Secretary.
        Mr. SNOW. Congressman, thank you very much.
        Mr. MCCRERY. Mr. Portman.
        Mr. PORTMAN. Thank you, Mr. Chairman, and, Mr. Secretary,
    we appreciate your being here today to give us some perspective
    on this proposal. I think the package has a remarkable balance
    and I think up and until your testimony today, perhaps the
    Administration has undersold its benefits in the short term.
    What I love about the package is it deals with our two biggest
    issues. One is keeping consumer demand up, and Mr. Stark
    earlier talked about the fact that consumer confidence today we
    find is at a 10-year low. Auto sales are down in Mr. Levin's
    State and my State. That is a big deal. We have a problem right
    now on the consumer front. The consumers have kept us in the
    game, haven't they, for the last couple years, and now consumer
    demand seems to be shaky?
        Mr. SNOW. That is right.
        Mr. PORTMAN. Can you tell us a little bit about how the
    proposal on eliminating the double taxation on dividends will
    help with regard to consumer demand, particularly with what you
    said earlier about boosting stock prices?
        Mr. SNOW. I think there will be a direct byplay between the
    dividend proposal and consumers. First of all, half the
    American families now are investors in the stock market, and
    this will lead to more disposable income in millions and
    millions of families. That is, the elimination of the double
    taxation of dividends will lead to millions and millions of
    families having additional disposable income. It is also going
    to lead corporations to pay a lot more dividends. I think there
    is just no doubt about the fact that once we end this tax
    inefficiency, this high cost for corporations to reward their
    shareholders with dividends--and that is how it is perceived by
    corporations, as a very burdensome way to reward your
    shareholder--we are going to find corporations paying a lot
    more dividends.
        The stock market has to be benefited. Just take a simple
    example. Suppose there is an equity of $50, pays a 3 percent
    dividend, $1.50, the dividend gets taxed at 30 percent. So that
    is only a dollar in the hands of the ultimate shareholder from
    the $1.50 the company wants to pay. Let us assume that the
    company has 200 million shares. 50 cents times 200 million
    shares, there is $100 million of additional after-tax earning
    power that the NBC corporation now has. The marketplace will
    look at that $100 million of additional earning power and say
    that company is worth more. Any organization that can--any
    company that can demonstrate to the marketplace that it is
    earning, producing more after-tax dollars will be a more
    valuable place for investors to invest. They will want to
    invest in that. That will drive the price up. It will drive it
    up by some factor, depending on the discount rate of the
    investors. Equities sell, as you know, Congressman, in the mid
    range, 15 to 20 times earnings, six to eight times free cash
    flow. Well, the math is pretty clear. We are going to create a
    lot of additional wealth in the hands of shareholders. That is
    going to make people feel better.
        One of the reasons I think confidence is down is markets
    are down. In this investor society with markets being down
    investors don't feel as good about their future, don't feel
    good about the present. That makes them more reluctant to
    spend, makes them more reluctant to invest, more reluctant to
    buy that new car, take that vacation, get the refrigerator and
    all the things that really in the aggregate create the economy
    we know as the American economy.
        Mr. PORTMAN. I think that is a very good point, and you
    talked earlier about the wealth effect. Economists don't agree
    on much, but they agree there is a wealth effect. With the
    market going down, the wealth effect has been negative. With it
    going up, you are going to see people getting out there and
    purchasing more cars and more appliances, and that is a
    tremendous benefit to this plan.
        The second weakness we have obviously is on the business
    investment side, and that is something that has been lagging
    over the last few years and continues to lag. Now obviously not
    taxing dividends twice and corporate earnings twice is going to
    help with business investment.
        Can you expand on that a little more and talk about how
    that second component of our economy will be strengthened?
        Mr. SNOW. Yes. We talked earlier about the fact that the
    consumer has been carrying the American economy, and the
    housing market, low interest rates in the housing market. What
    we have lacked is the corporate sector making investments. By
    improving the returns that they will get for making
    investments, we are going to encourage investments. We are
    going to encourage more investments on the part of corporations
    using equity, That has to be positive for the economy.
        Mr. PORTMAN. That is the investment in plant equipment that
    is going to give people jobs; that is the expansion----
        Mr. SNOW. Exactly.
        Mr. PORTMAN. That we need in order to get people back to
    work?
        Mr. SNOW. That is exactly right.
        Mr. PORTMAN. Final question.
        Mr. SNOW. We lower the cost of doing that, we lower the
    cost of business expansion by eliminating the double tax.
        Mr. PORTMAN. There has got to be a pent-up demand on that.
    Just a quick comment on the possibility of war in Iraq and
    terrorism. We need an insurance policy, too. Those who are
    concerned about that must realize that not only do we need to
    increase consumer demand and increase business investment, we
    need an insurance policy. This is an uncertain world. The final
    question I have for you on the dividend side, we have looked a
    lot at the issue of offshore----
        Mr. MCCRERY. The gentleman's time has expired.
        Mr. PORTMAN. Thank you.
        Mr. MCCRERY. Mr. Tanner.
        Mr. TANNER. Thank you, Mr. Chairman. Thank you, Mr.
    Secretary. I have enjoyed your testimony. I agree and I am very
    interested in your proposal with regard to corporate
    governance. I have always thought a tax policy that advantaged
    debt over equity is wrong-headed, and you spoke to that. I
    agree, too, that spending is one of the central items that we
    ought to look at with regard to deficits. I think you would
    agree that spending, domestic discretionary spending as a
    percentage of GDP since 1993, the last 10 years or so, has been
    relatively flat as a percentage of GDP, domestic discretionary
    spending. I hope you can agree with that.
        Mr. SNOW. Yeah. I think it has risen here in the last few
    years fairly markedly. Over the period of the late '90s, 1995
    to 1999 or something, I think that is right.
        Mr. TANNER. Pretty flat. Here is what I would like to ask.
    Presently, we are at $6.4 trillion in national debt. Eight
    months ago the Congress raised the debt ceiling $450 billion.
    You testified that, well, that is about, in my calculation
    about 7 percent of our total national debt over 225 years, $450
    billion. We are going to reach that in the next month or two.
    We are looking at a $300 billion deficit this year or
    thereabouts, 200-plus, in the $300 billion range. We are
    looking at interest payments both accrued to the trust funds
    and checks we wrote of over $320 billion last year. If you put
    that to the pencil on a $1.83 trillion income, we have a 17
    percent interest rate basically on the country. The Blue Dogs,
    which I belong to, call this a debt tax. In other words, the
    more we borrow, the more interest we have to pay. Right now our
    credit cards are carrying a 17 percent rate.
        So my question is, at what point does the central debt
    become unmanageable as it rises from $6.4--another $450 would
    be $6.8 as you go on up. If we hit $450 every 8 months over the
    next few years, one can readily see this central government
    debt becoming almost $10 trillion pretty quick. At what point
    does that become either unmanageable or a severe problem for
    the country, and at what point does this carrying charge, this
    interest rate on present income become something that will not
    allow the government to make the necessary public investments
    so that private enterprise can expand? Thank you very much.
        Mr. SNOW. Congressman Tanner, those are excellent
    questions. Let me try and respond.
        The debt level becomes a problem when it is so large
    relative to the GDP that it begins to crowd out private debt,
    private capital. We are not close to that point in the budget
    that has been proposed in any of the years that are in that 10-
    year outlook. I do agree with you that it is very important to
    always keep that thought foremost in our mind. Are we crowding
    out private capital? Is the debt too large to be sustained?
    What is happening to the interest payments on the debt? Now, of
    course, we are fortunate today that interest payments on the
    debt, even though the debt has gone up, the total interest
    payments have been coming down. It is one of the categories of
    the Federal budget that is in decline.
        Mr. TANNER. About as good as it is going to get, I am
    afraid.
        Mr. SNOW. Well, we are fortunate to have these low interest
    rates. Interest rates will undoubtedly rise some over time as
    we get back closer to full employment over the course of the
    next few years, but I don't see anything that suggests we are
    going to create an unmanageable situation at all. In fact, the
    debt levels--I don't have the numbers directly in front of me,
    but the level of total debt to GDP will begin to recede here
    and will stay within moderate historic--by historic standards,
    moderate levels. The deficits will--which will be around 3
    percent this year and next--will come down to the 1.8, 1.7 in 3
    or 4 years out.
        Mr. TANNER. Could you address the carrying charge, the
    interest rates?
        Mr. SNOW. The carrying charge----
        Mr. TANNER. We are paying about 17 percent of our income on
    interest now. What concerns me, Mr. Secretary, about that----
        Chairman THOMAS [Presiding.] The gentleman's time has
    expired. If you could conclude. You can conclude.
        Mr. TANNER. Could you address that? At what point? Is it
    20, 25? At what point do you see the government being severely
    hampered from making the necessary public investment for
    private enterprise to flourish and expand, which is where jobs
    are created in the private sector, but there has to be all of
    the necessary public investments made?
        Mr. SNOW. I agree, there is a point. I don't think we are
    close to it. I don't think we will see it under any of the
    budget scenarios that have been laid out here. Clearly there is
    a point, and we always want to have a large margin to be within
    that point.
        Chairman THOMAS. The gentleman's time has expired.
        Mr. TANNER. If you could find out, I would like to know.
        Chairman THOMAS. The gentleman's time has expired. The
    gentleman from Illinois, Mr. Weller, wish to inquire?
        Mr. WELLER. Thank you, Mr. Chairman. Mr. Chairman, and Mr.
    Secretary, I join my colleagues here on the Committee in
    welcoming you back before our Committee, and appreciate the
    time you are giving us today and the opportunity to talk about
    the President's economic growth package that he has before us.
        The last few weeks I have had the opportunity to travel
    throughout my district in the south suburbs and part of
    northern Illinois talking with workers and small business
    people and taxpayers alike, and they like much of what is in
    the President's plan. They agree we need to put extra spending
    in the pocketbooks of consumers, they agree we need greater
    incentives for business to invest in the creation of jobs. They
    like the fact that the President's proposal has immediate tax
    relief, which will immediately put extra money in the
    pocketbooks of Illinois taxpayers. I would note from the
    information I have under the President's proposal that the
    average Illinois taxpayer in the south suburbs that I represent
    would see about an extra $1,000--$1,068 in higher take-home
    pay, which would be immediately available because of adjusting
    and the withholding on taxes as a result of the rate
    reductions, and also the fact that we make immediately
    effective the elimination of the marriage tax penalty, which
    will benefit 46 million couples who pay on average $1,700 just
    because they are married. Also, for those who have children, 34
    million families with children would benefit from the immediate
    increase from $600 to $1,000 of the child tax credit. I would
    note under the President's proposal a check would be sent out
    shortly after it became law, again putting money immediately
    into the economy. So they like those ideas.
        I would like to focus on the business investment portion of
    the President's proposal. The economy in my area, of course we
    have a lot of petrochemicals, we have heavy manufacturing, but
    we also have a lot of smaller manufacturers. Those that are
    family-owned are usually the primary employer in many of the
    communities and the suburban communities as well as rural
    communities that I represent. They are owned by the families
    who live right in town. They usually employ a few hundred
    people. So they don't necessarily qualify as a small business,
    but they are small manufacturers. I was wondering, I am a
    strong believer in expensing and of course what the President
    has proposed, increasing small business expensing from $25,000
    to $75,000. I believe it will encourage an increase in
    purchases of delivery vans and pickup trucks and company cars
    and telecommunications equipment and office computers.
        I was wondering, could you just share with us the reasoning
    why it is important to increase that small business expensing
    from $25,000 to $75,000?
        Mr. SNOW. Yes, Congressman. The primary reason is that
    small business creates far more jobs than anybody else. It is
    the engine of job creation, and an awful lot of small
    businesses today are hurting. You mentioned the ones in your
    district. I have been traveling the country and having townhall
    meetings, and virtually everywhere I go small business people
    are expressing concerns about the economy. They are expressing
    concerns about their insurance rates, their health care costs,
    a whole range of things, and they are in a frame of mind that
    has them not optimistic, not confident, and not making
    investments.
        The expensing proposal makes their businesses--produces
    more free cash flow for their businesses. It makes their
    businesses immediately more profitable. Coupled with the
    lowering of the marginal tax rates which would be 11, 12, 15,
    17, 20 percent, depending on what category they are in, it
    means these businesses become instantly much more profitable.
    As businesses get more profitable, there is an incentive to
    invest. You want to grow and expand a more profitable business,
    and these actions will make those businesses more profitable.
    In addition, these actions will make those businesses more
    viable and better credit risks. They will make the businesses
    worth more, so the businesses will be in a better position to
    secure credit. That is one of their concerns today.
        Mr. WELLER. Mr. Secretary, in building on the arguments for
    the small business expensing, which I strongly support, many of
    those small manufacturers in the south suburbs and rural
    communities that I represent, they do not qualify as a small
    business. They employ a few hundred people and they don't meet
    the definition. The question would be, in the thinking of the
    Administration, putting together the economic plan, could you
    explain why the Administration did not go further on
    accelerated appreciation or full expensing for other
    businesses?
        Mr. SNOW. Yeah. I think when the paper was put to the
    pencil, it was felt that we got the most bang for the buck by
    an expensing proposal targeted on the small businesses that are
    eligible for this proposal as opposed to investment tax credits
    or other expensing or accelerated depreciation generally for
    business. That was simply sort of an internal economic
    calculation of the costs versus the benefits and where do you
    get the most bang for the buck.
        Mr. WELLER. Thank you, Mr. Chairman. I see my time has
    expired. Thank you, Mr. Secretary.
        Chairman THOMAS. Brief follow-up by the Chair on that. I
    understand you looking for bang for the buck. Would you say
    that at least in a narrow range, if you decided to go from $25-
    to $75,000 on the expensing or to go from $75,000 to $100,000
    on the expensing, that those dollars are relatively more
    attractive on a linear basis? That is, you go slightly more,
    slightly larger in terms of the definition of the business?
        Obviously, if it leapt to a million dollars, you may get
    some interactive problems. Generally speaking, if we were to
    increase it we would get a little bit better benefit. So you
    are looking at total dollars generated versus where you are
    spending the dollars. On the margin, moving it up dollar for
    dollar seems to be appropriate as a reaction in your opinion,
    Mr. Secretary?
        Mr. SNOW. Well, and I think that fits in with the spending
    amount that has gone to, what, $325? You may have to move that
    up a little as we--but, no, I think there is merit in that,
    that point of view.
        Chairman THOMAS. Incremental moves in those areas would be
    equally meritorious to what the President is suggesting?
        Mr. SNOW. I have not run the numbers on that to know what
    the trade-offs are. I think directionally certainly you would
    get benefits.
        Chairman THOMAS. Thank the gentleman. Does the gentleman
    from Texas, Mr. Brady, wish to inquire?
        Mr. BRADY. Yes. Thank you, Mr. Chairman. Thank you, Mr.
    Secretary, for being here today. Earlier--I have two questions
    and a request. The first question: Earlier today you were asked
    repeatedly what the cost of war would be. It raises the
    question, what is the price of living in terror? It seems to me
    the Nations with the toughest economies are those who live
    under the constant fear of attack, thinking back to 9/11, how
    devastating that is and was. How damaging was that to our
    economy and how devastating would be another attack on America
    to our economy?
        Mr. SNOW. Well, Congressman Brady, you are raising the
    right question here. This is something we have to do. We have
    to remove this threat from the American people. The cost of
    this, of the threat, is far greater than the cost of dealing
    with the threat. That is your point, I think, and I agree with
    you entirely.
        Mr. BRADY. It seems to be. The alternative to the
    President's package can be summed up in this. We will stimulate
    the economy by sending out one time a $300 rebate check, and
    then we will pump up more government spending. It seems to me
    government has been on a very large spending spree over a
    number of recent years, and it hasn't stopped this recession
    from occurring. Why would more government spending help us move
    out of recession when it didn't stop us from getting in there
    in the first place?
        Mr. SNOW. I think the evidence is pretty clear, and
    Chairman Greenspan testified to this, a stimulus package based
    on spending isn't a very effective way to advance the interest
    of jobs, job creation, or growth in the economy. It is an
    ineffective way to do that.
        Mr. BRADY. So a final request. I support the President's
    package. It seems to me the best way to balance the budget,
    start paying down the debt again, and to preserve Social
    Security and Medicare is to get this economy growing. That has
    been your point repeatedly, and I think you are right on
    target.
        In addition to that package, could you take a look at the
    proposal that I have introduced along with 50 Members of
    Congress to restore the sales tax deduction that was taken away
    in 1986?
        What we are seeking to do is provide balance back to the
    Tax Code. What we do today is we provide a deduction for those
    who have a personal income tax in their State, but we don't
    allow taxpayers to States that pay their governments through a
    State sales tax. So in other words, you have two identical
    families paying with the exact same income, the exact same
    deductions, paying differently just because of where they
    happen to live. Our feeling is that this legislation would help
    stimulate the economy because for just an average family of
    four, a schoolteacher, someone who works at the bank with two
    kids, it would pump $300 to $400 into their family's account
    immediately. For those who live in States that have a personal
    income tax for the first time they have an option of choosing
    between the highest deduction, their income tax or their State
    tax.
        Would you take a look at that proposal again just from a
    standpoint of would it help stimulate the economy and would it
    help make our Tax Code a little bit more fair?
        Mr. SNOW. I would be delighted to do that. I think you
    raise a good question.
        Mr. BRADY. Thank you, Mr. Secretary, Mr. Chairman.
        Chairman THOMAS. Does the gentleman from Texas, Mr.
    Doggett, wish to inquire?
        Mr. DOGGETT. Thank you, Mr. Secretary. Thank you, Mr.
    Chairman, and thank you, Mr. Secretary.
        I think you have a really tough job. You are replacing a
    man who apparently was fired because he was too candid. As you
    are well aware of, former Secretary O'Neill has indicated that
    he would reject what you call the centerpiece of this tax plan
    and has said that the resources would be better used to shore
    up Social Security. I certainly don't blame you for evading Mr.
    Rangel's questions, because the last member of this
    Administration who made an estimate, even though it was a low-
    ball estimate, on the cost of the war in Iraq was fired also.
    His estimate was $100 to $200 billion, which was incredibly low
    for the years of occupation that will be involved here.
        You have had to abandon your own prior record of opposing
    economic stimulus measures and your own record of opposing
    deficits, and now you are about to preside over the largest
    deficit in the history of America.
        Instead of paying down the public debt, as we were doing
    when this Administration came into office--it wasn't just on
    paper; we were actually paying down the debt--you proposed to
    raise the debt ceiling. I think you are going to need an
    extension over at the Treasury Department because if this plan
    is going to be put into effect, it will soar above $10 trillion
    when you count in interest figures on this plan.
        You also have a difficult job because never before in my
    memory has another prominent Republican--the Chairman of the
    Federal Reserve Board, Federal Reserve Bank, Mr. Greenspan,
    questioned the impact of one of President Bush's tax proposals
    and you have to explain that away also.
        All of this, Mr. Secretary, occurs when the President is
    telling us here in Congress, and the American people, that he
    cannot keep his word with regard to education. He has come up
    short this year on the No Child Left Behind Act, which was one
    of our few bipartisan initiatives here. At a time when public
    schools in my town and all across America are freezing teacher
    hiring and cutting back education budgets, the President tells
    us we cannot afford any student financial assistance that we
    have already. So thousands of Americans will not get the
    support that they need to go to school.
        I am as concerned as some of my colleagues about the cost
    of blood and money, about the land invasion of Iraq. I am
    concerned about what seems to be this Administration's war on
    reality. My question to you, and I think it is the same answer
    for all three parts of it, isn't it true, first, that every
    penny of this tax break that you are advocating will be paid
    for by borrowing from the American people?
        Second, isn't it true that almost half of the American
    taxpaying households will get $256 or less from the proposal
    you are advocating?
        Third, isn't it true that the firm that the President
    relied upon to predict the job figures you just testified about
    a few minutes ago, Macroeconomic Advisors of St. Louis,
    forecast that the plan that you are advocating could actually
    hurt the economy over the long term with higher interest rates,
    the same concern Mr. Greenspan had about crowding out private
    investment, and that the economy, if the plan were adopted,
    would actually be worse than if there had been no tax breaks
    enacted at all--that is, if you don't offset spending to make
    up for this and the President hasn't offset any spending?
        Then, finally, I would ask you if it is also not true that
    less than 3 percent of the huge amount of money that you are
    proposing to incur in public debt in order to pay for these tax
    breaks, less than 3 percent of it will actually be spent this
    year and that it will have a minuscule stimulative effect this
    year?
        Mr. SNOW. I will start with the latter one, that the
    spending impact in calendar year 2003 will be about $100
    billion, sizeable enough to affect the economy; and after all,
    we are talking about a $10 trillion economy now. So you need to
    have spending of considerable size to affect it. On
    Macroeconomic--and it will produce jobs. I am confident of
    that, as I testified earlier.
        Macroeconomic Advisors, they have a model that is good in
    the short term, but they unfortunately took it out to 2017 and
    the model's probity isn't as high way out then. I think they
    have got assumptions built in there that just conflict with
    reality. It is hard for me to understand how you could get the
    results they got from that model.
        On Chairman Greenspan, I agree with most of what Chairman
    Greenspan said. He said he didn't want to see a stimulus
    package. I agree with that; we need a growth package. Stimulus
    packages, as we talked about earlier with Congressman Brady,
    don't really accomplish much, in my view.
        The deficit, it is going to manageable. The Chairman
    himself, I think, said something to the effect that the fiscal
    problems we have at the moment are modest. The thing he is
    worried about are the fiscal problems out when the baby boomers
    retire, out in 2012 and 2014.
        So basically I think I would be disagreeing with you on
    every one of your major points there.
        Chairman THOMAS. The gentleman's time has expired. Does the
    gentleman from Kentucky, Mr. Lewis, wish to inquire?
        Mr. LEWIS OF KENTUCKY. Thank you, Mr. Chairman. Mr.
    Secretary, there is an old adage, ``Circumstances alter
    cases,'' and I think we find ourselves in a set of
    circumstances that were certainly beyond our control: the
    recession, an attack on our country, an emergency. President
    Bush said early on he was going to work to make sure that we
    cap a balanced budget in our country, but the circumstances
    altered the case.
        Under these circumstances, what is the fastest way, the
    best way, we can start moving back to a balanced budget and
    start paying down the debt again?
        I came here in 1994 with a desire to balance the budget. We
    did that in 1997. We passed a bill that balanced the budget; we
    did start paying down debt. Then unfortunate, sad circumstances
    led our Nation beyond our control. Now we are in this
    condition, how are we going to get out? I think this proposal
    is one good way to accomplish that. What would be your comment?
        Mr. SNOW. My reaction is the same. The best way to get out
    of the situation we are in now is to grow, is to get on a
    higher growth path and get people back to work. As that
    happens, the government's revenues will rise as well.
        We developed those surpluses--the surpluses were the
    product of a buoyant and growing economy, and the American
    economy has now been through an extraordinary set of jolts,
    really extraordinary--the recession, 9/11, the meltdown of the
    stock markets, the corporate governance scandals--and
    confidence isn't what it should be. The recovery is slower than
    it should be. That is understandable.
        Circumstances have changed, and we need a set of economic
    policies that accommodate the current circumstances. I think
    this does that very well.
        Mr. LEWIS OF KENTUCKY. I agree. Thank you.
        Chairman THOMAS. Does the gentleman from Wisconsin, Mr.
    Ryan, wish to inquire?
        Mr. RYAN. I do, Mr. Chairman, thank you. Mr. Secretary, one
    of the benefits of being low on the seniority totem pole is
    that you pretty much hear all the arguments as they come around
    to you. I have heard a few of them that I thought were very,
    very interesting.
        On the distribution table, you hear this and I am going to
    quote something I read out of Time Magazine, quote, ``Although
    Bush touted the fact that the average tax bill would shrink
    $1,083, almost half of all filers will get reductions of less
    than $100 according to the left-leaning Center on Budget and
    Policy Priorities,'' end quote. You heard that quote repeated
    all around here.
        What is interesting about these distributional analyses is
    that they don't actually look at who pays taxes. So, if you are
    going to cut someone's taxes, you have to pay them in the first
    place to get their taxes cut. I know that is fairly logical.
    When you see that this tax plan brings the number of tax filers
    who never pay taxes to almost 40 million filers, that is about
    69 million people, you have to take that into consideration. If
    you are going to get a tax cut, you have to pay taxes in the
    first place. So I think what you are seeing thrown around here
    is really sort of unfair, inaccurate, distortive distributional
    analyses that do not give a fair reading of the President's
    plan.
        Another thing that I wanted to bring to your attention, if
    I could ask for that chart on dividends to be brought up. I
    just handed you a chart; it is the top one. I would like to ask
    you a couple of questions about the dividend proposal.
        As you well know from our own personal experience, a high
    tax rate on dividends actually decreases the after-tax rate of
    return on investment. When you take a look at our economy, by
    definition--and you worked as an economist so I know you know
    that--our economy, our GDP is broken down into three parts:
    consumption, investment and government spending.
        Government spending, as my colleague Mr. Brady said, is at
    an all-time high. That is doing fine. If you want more
    spending, that is doing quite well. Consumption, on other hand,
    also has been doing fairly well; and many economists argue that
    consumption is the reason why our economy grew at 2.5
    percentage points last year.
        What is in decline in this economy is investment.
    Investment has declined eight consecutive quarters. So when you
    look at some of the more egregious taxes on investment, it
    seems to me the most egregious tax on investment, the greatest
    assault on capital in this country is the dividends tax. What
    this chart shows is that now that we work and operate in a
    competitive economy, in a global economy, you can see that the
    U.S. tax on dividends, both paid at the corporate and the
    personal rate, the combined tax on dividends, is the second
    highest in the industrialized world, next to Japan. So, while
    we are trying to compete and face the competitive pressures on
    our manufacturing businesses, our small businesses, from China,
    from Germany, from Japan, from all around, we see that we tax
    dividends higher than any other country in the world except for
    Japan, which is in its second decade of recession.
        [The chart follows:]
        [GRAPHIC] [TIFF OMITTED] T1630A.001

        Mr. RYAN. What I would like to ask you is, on this
    dividends proposal, could you walk me through how it also helps
    other non-dividend-paying taxes, how the step-up in basis
    actually helps all equity values and how it helps people who
    think that if they don't get a dividend, they aren't going to
    be helped by this.
        As for my second question, a lot of critics are saying if
    we cut taxes and if they are not revenue-neutral tax cuts, they
    decrease the national savings rates. I think we are going to
    hear from an economist tomorrow who is actually going to come
    here and say cutting taxes decreases savings.
        Could you address these kinds of allegations, as well--the
    charge that the positive effect of the Administration's tax cut
    proposal could actually reduce or wipe out its positive growth
    effects by decreasing national savings or the deficit and
    interest rate connection?
        So, first, how this helps other equities than just
    dividend-paying stocks and then the national savings criticism.
        Mr. SNOW. One of the interesting features of this proposal
    is how it affects capital generally. I think that is probably
    what your question is getting at.
        Today, the Tax Code tilts in favor of debt. Broadly
    speaking, what we are trying to do here is to eliminate that
    tilt in favor of using debt, which is leading to too high debt-
    to-equity ratios, building in too much precariousness in the
    American business structure and raising corporate governance
    issues because companies don't have the incentive to reveal
    their real earning power through paying dividends.
        Retaining earnings is also a good idea sometimes, and we
    don't want the scale to be tilted against retaining earnings in
    favor of paying dividends at the expense of retained earnings.
    So we have tried to be neutral. The way we have been neutral on
    this is to say that if you don't use your entire amount of
    dividends that you could pay out because there has been a prior
    tax on it, if you don't use that entire amount, the difference,
    what is left over, will go into the stock basis of your
    investors.
        Take an example, $100 million of earnings, tax rate 35
    percent, you end up with $65 million you can pay out under the
    President's proposal in dividends without a tax to the
    recipient. Suppose you want to keep $30 million of that $65
    after you have paid out the $35. That $30 million is added to
    the tax basis, increases the basis of your shareholders.
        Let us assume there are 30 million shares. That means for
    every one of those shares, the basis rises from $30 to $31.
    That $1 now is taken outside of the capital gains tax. So it
    has an effect on capital gains reductions as well as on
    dividends.
        The argument on the savings mystifies me. I don't see how
    that could be good economics. The argument is, if you have got
    a deficit, then you are crowding out private capital. There is
    no crowding out of private capital when you have
    underemployment of all your resources in the economy. Whatever
    merit that might have if you are working in a full-employment
    economy, it has no merit when you are in an economy that is
    performing under its full potential. There simply won't be any
    crowding out. What we want to do is stimulate more private
    capital formation.
        Chairman THOMAS. The gentleman's time has more than
    expired. Does the gentleman from Texas, Mr. Sandlin, wish to
    inquire?
        Mr. SANDLIN. Yes, sir, Mr. Chairman. Thank you, sir. Mr.
    Secretary, thank you. Good to have you here. I will say, as Mr.
    Ryan has indicated, it is more difficult to have anything to
    ask toward the end, but we can only hope that the last will be
    first and the first will be last and go forward.
        I appreciate your position that nothing should be taxed
    twice and agree with that. You did indicate that you felt
    everything should be taxed once, and is that correct.
        Mr. SNOW. I think it is a general proposition--earnings,
    income, real income should be taxed once.
        Mr. SANDLIN. Would that include efforts that are currently
    under way to go after corporations that locate offshore in an
    attempt to avoid corporate tax? Would you support trying to
    recover taxes on those revenues?
        Mr. SNOW. I think the IRS does have a vigorous program
    under way. Looking at those, you are calling those inversions
    and tax shelters? I think if a tax shelter is inappropriate and
    is abusive, it ought to be addressed.
        Mr. SANDLIN. If we eliminate the double tax on dividends,
    about the only money that I am aware of that would be double
    taxed would be wages, which would be subject to income tax and
    payroll tax; is that correct?
        Mr. SNOW. Well, there is a dispute on whether or not the
    payroll tax is a tax or a payment for the purchase of that, but
    you could make the argument either way.
        Mr. SANDLIN. Payroll tax, by definition, is a tax; is it
    not? Is it not a payroll tax?
        Mr. SNOW. When I talk about a payroll tax in the Social
    Security sense or the Medicare sense, I am talking about a tax
    which is really a payment to secure an insurance program.
        Mr. SANDLIN. You are currently proposing a reduction in
    double taxes, as you call them, on dividends, but there is no
    proposed reduction in payroll tax is there?
        Mr. SNOW. No, there is not, and for good reason, I think.
        Mr. SANDLIN. Let me ask you on behalf of my senior
    citizens, seniors that hold stock in their 401(k), if
    withdrawals are made from the 401(k), they will not be given
    the benefits or the protections of the lack of double taxation;
    is that correct?
        Mr. SNOW. This is a 401(k) in which they have got a
    deduction; they put the money in and then it builds up interest
    free and tax free during that interim period, and then they pay
    a tax at the end.
        Mr. SANDLIN. So they will not be afforded that protection,
    though? You said accumulate stock.
        Mr. SNOW. I think they get the equivalency of it, because
    they have a tax deduction when they make the initial
    investment.
        Mr. SANDLIN. I understand the deduction, but when a
    withdrawal is made--I have been asked this by many
    constituents: If you are a current investor and you earn a
    dividend, you would get the protection if you receive that
    money now. If you make a withdrawal from your 401(k) you will
    not be afforded that protection, correct?
        Mr. SNOW. Let me give you an answer in detail for the
    record, because there is a complicated explanation as to why
    that produces an equivalency.
        Mr. SANDLIN. Let me ask you just a few more questions. So
    the higher-income present investors will receive a tax break by
    not having to pay income tax on current dividends, but working
    people who earn wages, they will pay a double tax on wage and
    payroll; and senior citizens who withdraw funding from a
    401(k), they too will pay taxes on that withdrawal; is that
    correct?
        Mr. SNOW. Everybody who gets investors in the equity
    markets will find themselves not paying that double taxation.
        Mr. SANDLIN. Except if that person withdraws money from his
    401(k), he is going to pay tax on it.
        Mr. SNOW. He has already taken a deduction. That is why
    that is complicated. That produces an equivalency.
        Mr. SANDLIN. I am just a country lawyer from Texas, but I
    understand that. I am making the point when he takes the money
    out, he is going to pay income tax on that money.
        Mr. SNOW. He will pay it, but he already has a deduction on
    it, and it produces the same tax effect. Let me give you the
    memorandum and then we can discuss it. That was the same
    question I had when I was first told that.
        Mr. SANDLIN. Until the Administration told you to change.
        Mr. SNOW. This was an internal debate within the Treasury
    Department.
        Mr. SANDLIN. My mother is a retired school teacher just
    like your mother. I was surprised she was able to accumulate a
    portfolio of stock, a modest one. My mother with her modest
    income was--her money is in certificates of deposit earning
    very little, as you might imagine. She will not get any
    protection on her CD return, as opposed to an investor who gets
    that protection; is that correct?
        Mr. SNOW. Yeah. That has been taxed once. That is a single
    tax.
        Mr. SHAW [Presiding.] Mr. Hulshof.
        Mr. HULSHOF. Thanks, Mr. Chairman. Mr. Secretary, welcome.
    Thanks for your patience and I appreciate these series of
    hearings. Perhaps those tuning in might have their eyes glazed
    over a bit, but I think this has been a very useful economic
    discussion; and I think you have made a strong case for ending
    the double taxation on dividends.
        I would like to take it, however, from the classroom and
    maybe bring it back to the real world a bit and follow up on a
    question asked by Mrs. Johnson earlier.
        You indicated that the low-income housing tax credit, that
    there would be a modest effect if this plan were implemented as
    far as the low-income housing tax credit. How does that square
    with last week's release of the Ernst & Young (E&Y) report that
    indicates that will be a 35-percent reduction in the
    availability of affordable housing?
        Mr. SNOW. I have not had a chance to review that in real--
    in detail. It has been reviewed by the staff at Treasury. The
    conclusion there is that the E&Y study greatly overstated the
    impact on that credit and, basically, that E&Y missed a few
    things that were relevant in their study.
        Mr. HULSHOF. I appreciate that, because as you can tell,
    there are certain things in the Tax Code that do enjoy
    bipartisan support. I hope that that is something--Ms. Olson, I
    know you have been often quoted too on that issue, and
    hopefully we can get to some resolution.
        The other thing I would point to, and I absolutely agree
    with you as you make the case that there is a tilt in favor of
    debt over equity, just as I believe the Tax Code for individual
    taxpayers produces a tilt in favor of consumption over savings.
        Having said that, though, I also--and as one of the few
    Members, I think, on this Committee that still does our
    family's taxes without the use of accountants or other tax
    advisors, I want to talk a little bit about complexity.
        It has been reported that computing the amount of
    dividends, or following through the dividends as far as the
    taxability of those dividends, is going to be somewhat complex
    in that companies would have to establish excludable
    distribution accounts in which they would have to record not
    only corporate income that has been taxed, and then companies
    would have to track that income as fully taxed or partially
    taxed or that is untaxed, and then inform shareholders about
    what portion.
        You know, I know on my 1040 and across the country, line 8
    says, What is your interest income, put it here--Uncle Sam
    wants his share--and then under that, dividend income.
        Then you go to Schedule B and that Schedule B depends, of
    course, on the 1099. So complexity, when it comes to where the
    rubber meets the road. Again, we can talk theoretically. Again,
    I am convinced by the economic arguments.
        What assurances can you give on the complexity issue?
        Mr. SNOW. On the complexity issue, the first line of
    defense is the corporations themselves who have a great deal of
    experience. I used to run one of those organizations, and I am
    confident that the corporate treasuries and corporate finance
    departments can readily--and tax departments can readily do at
    the corporate level what they need to do with respect to the
    REBAs and the CREBAs and the excludable dividend amounts (EDAs)
    and all those things that you are making reference to.
        Then the question is, if the corporation can do it
    readily--and I really think they can readily do that--how much
    more complexity is there from the point of view of the
    individual taxpayer who now has this basis that can be adjusted
    and so on? With respect to the dividend itself, there is no
    more complexity; in fact, it is less complex because there is
    one less tax to worry about at the investor level.
        I am assured that the broker-dealer networks and the mutual
    funds can readily accommodate the information and make it
    available for their investors. Just as they keep your basis of
    today, your mutual fund will keep your basis in the stock, your
    broker-dealer will keep your basis in the stock. My
    conversations with people indicate that the mutual fund
    industry, the asset management people, the broker-dealers will
    be able to readily accommodate that. A little work on their
    part, but from the point of view of the investor it will be
    seamless.
        Mr. SHAW. The gentleman's time has expired. Mr. Secretary,
    I would like to join my colleagues and welcome you back to our
    hearing. It is a delight to hear you fend off questions as well
    as answer questions.
        A few minutes ago, the gentleman from Texas, Mr. Doggett
    made this comment and I wrote it down. He said that we should
    use these dollars to shore up Social Security. I am a little
    confused by that comment as to where those dollars would be
    placed. The Social Security trust fund doesn't keep any
    dollars. It either pays them out or converts them into Treasury
    bills and puts them back into the general fund. If the
    gentleman is thinking about setting up individual savings
    accounts for every American worker, then he has got an ear from
    me, because I am looking for people to assist us in that
    because that is exactly what we should do. I will yield.
        Mr. DOGGETT. I was only quoting Secretary O'Neill, the
    Secretary's predecessor, who said he opposed this dividend plan
    because he thought these moneys would be needed to shore up
    Social Security. Perhaps what he had in mind is what many of us
    are concerned about, that if we incur another umpteen trillion
    dollars in public debt, we will have less resources to
    strengthen Social Security, whatever form it might take in the
    future.
        Mr. SHAW. Reclaiming my time, I would say that we are going
    to have enough payroll taxes to take care of our Social
    Security obligations until 2016. Now, beginning at 2016, at
    that point, we are going to be looking for dollars if we don't
    start planning ahead now. Quite frankly, that would be one of
    the greatest stimuluses we could possibly give to the stock
    market is to allow every American worker to actually own stock
    in their own IRA. I would be delighted to look for partners on
    the Democrat side to work with me in that particular area.
        Mr. Secretary, I want to comment, too, on the plan. We talk
    about stimuluses versus growth. I don't think anybody in this
    room would dare to try to make an argument that you can tax
    your way out of a recession. You cannot. You can invest and
    encourage investment, and that is your growth. You can give tax
    relief, which is the stimulus. I think that by accelerating the
    child credit, that is going to be a great stimulus and, I
    think, some of the other things involved in there.
        I think your dividend plan is excellent as far as growth.
    Your plan as far as the small business investment is growth.
    That is the only way you are going to create jobs in this
    country is through capital investment.
        When you look at the greatest economic power in the world,
    the United States, as being the largest taxer in the world of
    capital, second only to Japan, and we know how their economy is
    going, I think you have to really have to have reason to pause
    and wonder which direction we are going.
        We also have spent an extraordinary amount of time, and
    both Democrats and Republicans have been very concerned about
    the corporate inversions to the extent that we are looking at
    ways to penalize corporations for leaving this country, which I
    think is, in some instances, appropriate; but I think also we
    should look at ourselves and see what we can do to encourage
    investment, what we can do to encourage moneys from outside the
    United States to return to the United States and be invested in
    our businesses so we can get jobs. That is tremendously
    important.
        One other thing that I would like to comment on, and we
    keep talking about what this is going to cost. Now, as I
    understand the scoring, none of this takes into account the
    growth or the taxes that are going to come into the U.S.
    Department of the Treasury as a result of job creation, as a
    result of investment, as a result of this stimulus.
        Would you like to comment on that?
        Mr. SNOW. Yes, Mr. Chairman, I would. The way this is
    scored, we have taken all of the costs of the lost revenues and
    that is the $690-some billion, but we have not done any of the
    offsets; and clearly, there will be some sizeable offsets here
    as people get back to work, as the economy grows faster, as
    small business becomes more profitable.
        As the economy performs better, there will be a sizeable
    payback to the revenue stream of the Federal Government. The
    estimates I have seen put that in the 30 to 40 percent range of
    feedback in terms of revenues. So the number you are looking at
    is really a much larger and, unrealistically, a large deficit
    number. The actual deficit will be orders of magnitude smaller
    than that.
        Mr. SHAW. Thank you.
        Mr. SNOW. Could I add one more thought, Mr. Chairman? You
    made a very important point about the inversions and people
    seeking to avoid taxes.
        One reason they seek to avoid taxes is the impact of things
    like the double taxation of dividends. As we lower tax rates,
    the incentives--and that clearly does this--as we take earnings
    and income out of the tax system, corporations have far less
    incentive to engage in the tax shelter activity that so many
    find offensive.
        Mr. SHAW. Ms. Tubbs Jones?
        Ms. TUBBS JONES. Thank you, Mr. Chairman. Mr. Snow, it is
    nice to see you again, sir. Secretary Snow, I want to pick up
    where we left off. We were talking about double dividend
    taxing, as you claim it to be, and its impact on low-income
    housing. When you left the last time, I made some statements to
    you, and you said you really weren't sure about that.
        Have you done any homework since you left, sir, that you
    can discuss with me the impact of the dividend tax credit on
    low-income housing, sir?
        Mr. SNOW. We have.
        Ms. TUBBS JONES. Understand I only have 5 minutes, so if
    you give me a short answer, I would appreciate it.
        Mr. SNOW. I will give you an answer for the record as well,
    but the short answer is, there will be some effect but not
    large.
        Ms. TUBBS JONES. Let me ask you this. You are aware in 1986
    the low-income housing credit was created to generate equity
    for affordable rental housing?
        Mr. SNOW. Yes.
        Ms. TUBBS JONES. In the early days, high net worth
    individuals bought these credits as tax shelters, correct? Then
    the credits were made permanent in 1993, and large public
    companies got interested in them as a way to shelter earnings
    over a 10-year period. In fact, low-income housing credits, as
    well as empowerment zones and some of the community renewable
    provisions enacted in 2000, the newer markets initiatives of
    the Clinton Administration and the qualifying zone academy
    bonds, which are bonds that allow the companies to buy the
    bonds tax free in order for schools to be renovated, will all
    be affected by the dividend tax cut. Is that a correct
    statement?
        Mr. SNOW. I don't think in any major way.
        Ms. TUBBS JONES. Well, you know what? You just said that
    the cost of war will be relatively small as compared to the
    GDP. When you say in a ``major way,'' for a school system like
    Cleveland, where they were able to renovate schools, it could
    be a major way.
        Mr. SNOW. Let me tell you why I don't think it will be a
    major way.
        Ms. TUBBS JONES. Short answer.
        Mr. SNOW. The corporations will still have incentives to
    invest in these.
        Ms. TUBBS JONES. They won't have these incentives.
        Mr. SNOW. They will still have incentives because it is
    unlikely they will use up all of their EDA.
        Ms. TUBBS JONES. You know what? It is wonderful to hear you
    talk about ``It is unlikely'' and ``It is probably,'' but the
    people out in the streets who don't have any jobs and who are
    struggling to make ends to meet don't like these terms,
    ``unlikely'' or otherwise. Let me go on to something.
        Mr. SNOW. I am confident we will create a lot more jobs for
    those people.
        Ms. TUBBS JONES. You did say the cost of war will be
    relatively small as compared to the GDP. In a number, what is
    the cost of war, sir?
        Mr. SNOW. Of course, my first answer is we hope to avoid
    war.
        Ms. TUBBS JONES. I don't want that answer because that is
    not answering my question. I don't mean to be disrespectful,
    but I have sat through 25 people where you have given that
    answer. My question is, what is the cost of war as compared to
    the GDP in numbers, as you use it, sir?
        Mr. SNOW. I don't----
        Ms. TUBBS JONES. You don't know, do you?
        Mr. SNOW. I don't know. I don't know that we are having a
    war.
        Ms. TUBBS JONES. If it is not a war, then tell me what is
    it costing us to have Blackhawk helicopters all over in Iraq?
    How much are the tankers going to cost? We have troop
    transports, LHAs, LSTs. We have military salaries, food,
    clothing, ammunitions. Every day in my congressional district,
    somebody is being deployed. What is that costing?
        So if it is not called war, what is it and how much does it
    cost and where does it fit in the budget, sir?
        Mr. SNOW. Well, as we discussed earlier, whatever the cost
    is, and I don't know.
        Ms. TUBBS JONES. You are the Secretary of the Treasury and
    you don't know what sending--not the war, but the Blackhawk
    helicopters, the tankers, the ships, the military salaries, the
    food, clothing, ammunition, the base maintenance, the carrier
    ships, you don't know what that costs?
        Mr. SNOW. No, I don't, but I am sure somebody in the
    government does.
        Ms. TUBBS JONES. Could you get that answer for me tomorrow?
        Mr. SNOW. I don't know that I know how to get the answer.
        Ms. TUBBS JONES. You are the Secretary of the Treasury and
    you can't get that answer and you don't know where it is? What
    is your job, sir, as Secretary of Treasury?
        Mr. SNOW. Well, I think it is to worry about the
    fundamentals of the American economy and see that people have
    jobs and that we can grow the economy.
        Ms. TUBBS JONES. To understand how much money is in the
    Treasury that you are worrying about, right, and how that money
    is expended; is that correct?
        Mr. SNOW. That money will be in a defense appropriation.
        Ms. TUBBS JONES. No, but, sir, it is not about a defense
    appropriation. This money is being spent today and for the past
    90, 120 days, and that is not an appropriation coming up. That
    is money that is being expended today.
        Mr. SNOW. Congresswoman, money isn't spent that isn't
    appropriated. So it has to be in an appropriation.
        Ms. TUBBS JONES. Sir, you are not making a correct
    statement. Money is spent that isn't appropriated because if it
    were not being spent, if it were not appropriated, we wouldn't
    be having this discussion. If it were appropriated, we wouldn't
    be having this discussion, excuse me, because there was no
    appropriation for a buildup for a war in Iraq.
        Mr. SNOW. Ultimately, the Congress has to approve what the
    executive branch----
        Ms. TUBBS JONES. We haven't approved this and that was a
    whisper in your ear. I want you to answer my question tomorrow.
        Chairman THOMAS [Presiding.] The gentlewoman's time has
    expired. I would tell the gentlewoman that appropriations to
    the Department of Defense oftentimes have a broad basis for
    expenditures, but they first are authorized and then
    appropriated under, oftentimes, broad headings, which are then
    used for specific purposes.
        Ms. TUBBS JONES. Mr. Chairman, I thank you for the
    response, but my question was to the Secretary.
        Chairman THOMAS. I understand. Does the gentleman from
    Florida, Mr. Foley, wish to inquire?
        Mr. FOLEY. Thank you, Mr. Chairman. Thank you, Mr. Snow,
    for attempting to appear here today as Secretary of Defense and
    Treasury.
        Ms. TUBBS JONES. You may think it is funny, but I don't.
        Mr. FOLEY. Thank you. We are delighted you are here. It
    seems some people have amnesia in the building, who have been
    talking about deficits. I got elected in 1994, and it seems 40
    years of Democratic rule brought us to trillions of dollars of
    deficit that nobody seems to remember.
        If the former President of the United States had operated
    and pursued Osama bin Laden, given numerous information about
    his whereabouts and including the fact that the Sudanese
    attempted to hand him over, we may not need to calculate the
    effects of war in this country. We certainly wouldn't have to
    look at the carnage in New York, the Pentagon and Pennsylvania
    had we pursued Osama bin Laden with the same veracity as we did
    Bill Gates and his cheap software.
        Let me suggest to you, did not President Kennedy attempt to
    stimulate the 1960s economy by authoring and providing to the
    Congress a significant tax reduction?
        Mr. SNOW. He did indeed.
        Mr. FOLEY. Wouldn't it be fair to suggest, when we cut
    capital gains tax rates, that we, in fact, stimulated economic
    activity and cash flow to the Treasury?
        Mr. SNOW. I think that is fair to say. As I recall the
    President's comment, when challenged, he said, ``A rising tide
    lifts all boats,'' something--I was a young man, but I thought
    it captured the essence of tax reform.
        Mr. FOLEY. We cut taxes on capital gains in the mid-'90s,
    and we found the same stimulative effect despite a constant
    barrage from then-Secretary Rubin as to the negative impact. It
    was actually a very stimulative impact. Do you not see future
    opportunities, as we reduce tax rates, to incur that same kind
    of revenue enhancement to the Treasury?
        Mr. SNOW. I don't think we will ever balance the budget
    unless we have a strong, growing economy. It is a necessary
    condition, and we won't get there without it.
        Mr. FOLEY. You touched on, a little bit, and I wanted to
    underscore the concerns on low-income housing credits as well
    as wind energy credits.
        There are some impacts to those credits that I would like
    you to look at carefully to find a way, in fact, if we could
    not neutralize the adverse effects while retaining the benefits
    of the dividend plan. I think there is a way we can craft a
    proposal.
        Mr. SNOW. We are making an effort to understand the impact
    and try to quantify it, and once we do, we will be in a
    position to engage in that subject with you.
        Mr. FOLEY. There have been some inquiries from banks and
    others why they would be unfairly treated under the proposal of
    the dividend plan. Isn't it correct that a CD, that the bank
    deducts the cost of that interest to the debtor, if you will,
    from their balance sheet, they take that off of earnings; so it
    is taxed, there is a taxation? So they obviously have a
    beneficial financial transaction in deducting that cost from
    business.
        Mr. SNOW. That's right.
        Mr. FOLEY. Would it be fair to assume--and first let me
    quantify because I grew up under the notion that dividend
    stocks were for widows and orphans because it provided safety
    and security in their retirement; is that fair to assume?
        Mr. SNOW. Yes. The profile of investors in dividend stocks
    is different than the profile of investors in municipals or
    other things.
        Mr. FOLEY. Some have suggested that IRAs, 401(k)s and
    others wouldn't be treated fairly in the dividend plan since
    they pay no taxes within their basket.
        I would tend to disagree by suggesting--once again using
    the quote, ``A rising tide lifts all boats,'' that if you, in
    fact, reduce taxes on those dividends, you increase the
    likelihood of investors' preference for those stocks, thereby
    increasing the value of all the stocks. So if your basket
    contains those stocks, you will see your 401(k)s, IRAs and
    other accounts rise in value; would you not?
        Mr. SNOW. Absolutely. That is what you would expect.
        Mr. FOLEY. So there is a stimulative economic-driven
    incentive for this Committee to carefully consider that.
        Mr. SNOW. As I said earlier, I think one of the beneficial
    aspects of this is that it will enhance equity values whether
    they are in or out of retirement plans or 401(k)s.
        Mr. FOLEY. Obviously as we move forward, the public is
    concerned about the values of their equities. I think we all
    are. I assume you and the President and his chief advisers
    spend a lot of time thinking about the plight of the average
    investor on a daily basis, because it absolutely impacts the
    growth and stability of our marketplace.
        Can you share with us some of those pressing concerns?
        Mr. SNOW. We have become an investor society. We have any
    number of television networks now dedicated entirely to
    reporting the stock news. Even the networks that don't dedicate
    themselves to reporting market activity have a little column
    underneath the main story that is always running the stock
    indices.
        We are an investment society. It is a wonderful thing that
    so many Americans are participants in the marketplace, in the
    equity markets. The loss of equity values has--which has gone
    on now for 3 years has taken the wind out of a lot of peoples'
    sails. It has dampened their confidence. Corporate scandals did
    that as well.
        I think we need to reinstill confidence in equity markets,
    and one way you do that is to give equities a boost. They are
    going to get a boost because the added earning power, the added
    after-tax earning power of corporate America, especially as
    they pay more dividends, will get recapitalized and reflected
    in their market values. That will raise the value of corporate
    equities.
        Of course, taking the retained earnings out of corporate
    capital gains taxes will also mean that the shareholders will
    have more after-tax earnings in that case when they sell the
    equity.
        Chairman THOMAS. The gentleman's time has expired. Does the
    gentleman from North Dakota wish to inquire?
        Mr. POMEROY. Thank you, Mr. Chairman. I would begin by just
    saying that this is a place where bipartisan debate gets hot
    sometimes, but to suggest that the carnage in New York is the
    responsibility of the prior Administration is way out of
    bounds, way out of bounds, and should not have been said by the
    gentleman from Florida.
        Mr. Secretary, having observed the 1990s, we were paying
    down the deficit, we were reducing the deficit. The economy was
    growing and doing well. This decade, so far, we have been
    growing the deficit and the economy has not performed well.
        It is my understanding that the Treasury Department will be
    advancing a proposal to raise the borrowing limit of this
    country within this calendar year; is that correct?
        Mr. SNOW. Yes.
        Mr. POMEROY. I think that is what is causing some of us
    concern about this package. We are trying to get our hands
    around exactly what might be involved in driving the deficits
    even deeper than they are already at a steep rate of increase.
        Does the cost of the package before us count additional
    borrowing costs that we will have to make in light of revenue
    that will not be received by the Treasury? I am told it could
    be as high as an additional $254 billion in added borrowing
    costs.
        Mr. SNOW. The $695 doesn't include either the borrowing
    costs or the feedback to the revenue stream of the Federal
    Government.
        Mr. POMEROY. Will there be other tax cut proposals advanced
    by the Administration?
        Ms. Olson has been broadly quoted relative to a significant
    proposal that would allow the affluent people to save tens of
    thousands of dollars in tax-free accounts. I wonder if this is
    a proposal the Administration will be making.
        Mr. SNOW. This is the centerpiece proposal of the
    Administration.
        Mr. POMEROY. Are there two categories, centerpiece
    proposals and kind of add-ons, or how are we to evaluate this?
    Will there will be additional tax proposals? The President has
    talked, for example, about making the tax cuts permanent. Is
    that going to be another set of tax cut proposals being
    advanced?
        Mr. SNOW. Right now, we are talking about the growth
    package, and that is the centerpiece of the President's
    program.
        Mr. POMEROY. Kind of reminds me of how I eat cake. I take
    the piece out of the pan. I come back and take another piece
    out of the pan. Pretty soon, I have eaten the whole damn pan of
    cake.
        You are coming after one tax cut today. You are going to
    come in after another tax cut later--not the centerpiece of the
    growth package, but to make the tax cuts a permanent package.
    Ms. Olson has been talking about this proposal to not tax the
    savings of the most affluent, tens of thousands of dollars of
    their savings of the most affluent.
        Are all of those matters going to be advanced for our
    consideration?
        Mr. SNOW. I would hope so, because it is all good----
        Mr. POMEROY. Mr. Secretary, I am trying to run an adding
    tab here. Now, we have been talking a lot about the cost of the
    war and maybe there won't be a war. I certainly hope there
    won't be a war. In any event, we have got to acknowledge we
    have expended an awful lot of money not initially anticipated
    in the budget for the Pentagon that we had earlier
    appropriated.
        I believe that the Administration will be advancing a
    supplemental appropriation to cover these costs. Do you have
    any information on that? I am not saying the size, but can we
    expect a supplemental appropriation?
        Mr. SNOW. I think it is entirely conceivable, but I am not
    aware.
        Mr. POMEROY. From what I hear, it certainly is entirely
    conceivable, in fact, to the extent that all of this effort
    being waged up to this point and prepositioning around Iraq was
    not anticipated and was not funded. So, we are going to have a
    very significant bill coming on that one.
        Now, the combined total of all that you are advancing is
    extraordinarily significant. You are talking about a dividend
    proposal, 75 percent of which goes to the wealthiest 1 percent
    of households and, let me see, 50 percent goes to the
    wealthiest 1 percent of households and 75 percent goes to the
    wealthiest 5 percent of households. Clearly, this isn't much of
    an immediate stimulus.
        So for the 2 million people that have lost their jobs over
    the last couple of years, this does not offer either immediate
    relief--and when you talk about growing back to the 2 million
    jobs, you are talking about the year 2005. So now you are
    talking about immediately creating the kind of jobs to get
    these people back to work, the 2 million that have lost their
    jobs. So you are talking about a very extraordinary hit to the
    Treasury, especially when we anticipate what else you are going
    to be bringing and the cost of the war with Iraq and very
    little by way of stimulus effect to create jobs now.
        You can see where our concern is coming from. I will be
    happy to hear the Secretary's response.
        Chairman THOMAS. The gentleman's time has expired.
        Mr. SNOW. You and I have a difference of opinion on the
    impact of the package. We think it will have an immediate and
    direct impact, creating 2 million jobs in the next 2 years.
    While a deficit is unfortunate, to have any deficit at all, it
    is small, it is modest and it is manageable and will not have
    any real effect on interest rates.
        Chairman THOMAS. Does the gentleman from Pennsylvania wish
    to inquire, which would be the final inquiry?
        Mr. ENGLISH. I would consider it a privilege. Mr.
    Secretary, in my 9 years on this Committee, it is refreshing to
    see a Treasury Secretary coming forward with such a break-the-
    mold idea on tax policy as the centerpiece of a plan to rebuild
    the economy and encourage economic growth. I very much want to
    credit the Administration for thinking outside of the box on
    tax policy and looking for ways of giving the economy some
    substantial forward movement.
        If I could, I would like to redirect the questioning to get
    back to what I thought was the point of the hearing, which was
    to focus on the growth potential in the Administration's
    program. I have several questions for which I would actually
    like answers, so I will give you time to answer them.
        First of all, I know the Administration was encouraged in
    the name of economic growth to also look at reducing the
    capital gains tax rate. Rather than exploring why the
    Administration didn't pursue that as an option, I wonder if you
    would comment on how the provision eliminating the double
    taxation of dividends might affect the taxation of capital
    gains and how this potentially could have growth consequences.
        Mr. SNOW. Thank you very much for that opportunity. That is
    a very important, Congressman, feature of this proposal.
        Under the proposal, any income of the corporation that has
    had a prior corporate tax applied to it can be paid out as
    dividends and not taxed at the investor level. In many cases,
    companies will pay out only a portion of the eligible money as
    dividends. Then the question is, what happens to the rest of
    that?
        Under the President's proposal, the portion of that total
    amount that could be paid out as dividends, and prior-taxed and
    won't be taxed to the investor, will go into the stock basis to
    raise the basis of the stock. What that means, of course, then,
    is that the individual investor will have excluded from capital
    gains that amount.
        Just a simple example sort of illustrates it. You have got
    $100 million of earnings. It is all taxed at the 35-percent
    rate. It leaves $65 million to be paid out. Company says, well,
    we will pay out $35 million. That $35 million will not be again
    taxed, but neither will the retained earnings. It has $30
    million that it retains in earnings, assuming they have got 30
    million shares, $1 per share would--for every share, the basis
    would rise by $1, and that $1 would not be subject to capital
    gains tax.
        So we are making a very far-reaching effort here to reduce
    the taxation of capital to make sure that America doesn't, when
    this legislation is enacted, stand at the very top of that
    chart showing what country has the highest tax rates for
    capital.
        Mr. ENGLISH. Many of us in Congress have been concerned
    over the last year, year-and-a-half in the wake of many of the
    corporate governance scandals to encourage the transparency of
    corporate activities and specifically corporate finances. By
    eliminating the double taxation of corporate dividends, how
    does this affect the transparency of corporate operations?
        You have been a CEO. What kind of incentive does this
    create?
        Mr. SNOW. It creates a very strong incentive to pay
    dividends out. There can't be any doubt of the fact that if
    this proposal is adopted, there will be an increase in
    dividends paid by companies who today pay dividends, they will
    go up, and companies who don't pay dividends will decide to pay
    dividends.
        The marketplace will demand it, because what will happen
    here, I am convinced, Congressman, is that the companies who
    are paying dividends will find their market value goes up
    because the after-tax earnings stream from those companies will
    get capitalized. They are now producing more returns to
    investors. Investors will go to those stocks and drive the
    prices up.
        Other companies will say, we want to get in on that. We
    want to reward our shareholders. In this day and age where
    there have been so many questions raised about accounting
    numbers and what is the core earning power of a company, to
    encourage payment of dividends, which is the best and purest
    test of the underlying earning power of a company, is a
    marvelous idea. It will help eliminate a lot of this concern
    that investors have about, what do these numbers really mean. A
    company that starts paying out 20, 30, 35, 40, 45, 50 percent
    of its dividends will be sending the market a clear signal that
    it has got confidence in its underlying earning power.
        Now, you can fudge numbers a little bit, but you can't
    fudge cash.
        Mr. ENGLISH. Thank you Mr. Secretary. Your testimony is
    most eloquent.
        Chairman THOMAS. Mr. Secretary, thank you very much,
    especially on behalf of the Committee for staying the entire
    time.
        You are right, profits are an opinion, cash is a fact.
    Frankly, we need to have a bit more of that as people make
    decisions in this country whether you are an individual or a
    corporation. I believe that is the intended purpose of the
    President's underlying bill.
        The Committee stands in recess.
        [Whereupon, at 4:55 p.m., the hearing was recessed, to
    reconvene on Wednesday, March 5, 2003, at 2:00 p.m.]

                     PRESIDENT'S ECONOMIC GROWTH PROPOSALS

                                  ----------

                            WEDNESDAY, MARCH 5, 2003

                 U.S. House of Representatives,
                           Committee on Ways and Means,
                                                        Washington, DC.
        The Committee met, pursuant to notice, at 2:20 p.m., in
    room 1100 Longworth House Office Building, Hon. Bill Thomas
    (Chairman of the Committee) presiding.
                                    ------

        Chairman THOMAS. If our guests can find seats, please. What
    you might assume was an interruption in the regular order was,
    in fact, the regular order. The Members were over voting.
        Today, we begin a second day of a four-part hearing to
    examine the President's initiative for expanding the economic
    growth our Nation needs to create jobs and providing the
    resources needed to secure the future for working Americans.
        We begin with the panel that would examine the benefits of
    reducing individual income tax rates, including relief from the
    so-called marriage penalty, and accelerating the increase in
    the child tax credit that would be given to parents. We are
    pleased to have as part of this panel Mr. James Glassman, who
    is currently a resident fellow with the American Enterprise
    Institute. I recall a column written in the Washington Post,
    and for a brief period of time, his appearance on one of the
    more enlightened talking-head programs, as I recall, and
    thought you should have stayed on longer. Also, John
    Castellani, president of the Business Roundtable, and William
    Gale, co-director of the Tax Policy Center with the Brookings
    Institution.
        The second panel will discuss the various effects of the
    proposal to eliminate the double taxation of dividends. I would
    hasten to say that since the package is a package, I don't
    expect to be mutually exclusive in the discussion of these
    issues, but we have tried to create some placement of emphasis
    for focus in moving forward. To help us better understand the
    implications of that particular proposal, we have the Honorable
    Frank Keating, who is the CEO of the American Council of Life
    Insurers (perhaps some of us know him more as the former
    Governor of Oklahoma); John Schaefer, President and Chief
    Operating Officer of the Individual Investor Group with Morgan
    Stanley & Co., and Chairman of the Securities Industry
    Association (SIA); Ron Stack, who is Managing Director and Head
    of Finance for Lehman Brothers, and Chairman of the Municipal
    Securities Division for the Bond Market Association; and Alan
    Hevesi, who is the New York State Comptroller.
        The witnesses today will give us a chance, based upon their
    testimony and our questions, to examine from several viewpoints
    the President's proposal. We are pleased to have such
    distinguished panels with us. As the Members ask questions, I
    do hope that we can retain a modicum of civility so that we
    generate slightly more light than heat.
        Before our first panel, I would like to recognize the
    gentleman from New York, Mr. Rangel, for any comments he might
    wish to make.
        [The opening statement of Chairman Thomas follows:]
        Opening Statement of the Honorable Bill Thomas, Chairman, and a
            Representative in Congress from the State of California
        Good afternoon. Today, we begin our second day of a four-part
    hearing to examine the President's initiative for expanding the
    economic growth our Nation needs to create jobs and providing the
    resources needed to secure the future for working Americans.
        We begin with a panel that will examine the benefits of reducing
    individual income tax rates, including relief from the unfair marriage
    penalty, and accelerating the increase in the child tax credit to give
    help to parents. We are pleased to have James Glassman, a Resident
    Fellow with the American Enterprise Institute; John Castellani,
    President of The Business Roundtable; and William Gale, Co-Director of
    the Tax Policy Center with the Brookings Institute.
        Our second panel will discuss the various affects of the proposal
    to eliminate the double taxation of dividends. To help us better
    understand the implications of this proposal, we have the Honorable
    Frank Keating, CEO of the American Council for Life Insurers and former
    Governor of Oklahoma; John Schaefer, President and Chief Operating
    Officer of the Individual Investor Group with Morgan Stanley & Company
    and Chairman of the Securities Industry Association; Ronald Stack,
    Managing Director and Head of Finance for Lehman Brothers, Inc. and
    Chairman of the Municipal Securities Division for the Bond Market
    Association; and Alan Hevesi, New York's State Comptroller. The
    witnesses today will give us a chance to examine several different
    viewpoints, as well as possible alternatives.
        We are fortunate to have such a distinguished panel of experts
    testifying to help us better comprehend the outcomes and effects of the
    President's proposal. I hope Members will take full advantage of the
    opportunity presented before us this afternoon.
        Before we hear from our first panel, I would like to recognize the
    gentleman from New York, Mr. Rangel, for any comments he would like to
    make at this time.

        Mr. RANGEL. Thank you, and I join with you in hoping that
    having professional economists that are not politically
    motivated that they might be able to share some light on the
    impact of the President's proposal to this Committee and how it
    is going to affect local and State governments and existing
    Federal programs.
        This is especially so since the Administration has not seen
    fit to incorporate the cost of the war into its budget
    proposal. Like you, we don't know whether we are going to be at
    war at all or for 4 days, 4 weeks, 4 years. We also really
    don't know what the impact of the deficit is going to be on our
    economy, as well as so many of these proposals being long-term
    rather than short-term stimulus. Knowing how the Roundtable and
    so many other business groups have always been concerned about
    the size of the deficit and the impact on economic growth, it
    would be good to receive this morning a nonpartisan,
    professional review of the budget that is before us.
        I thank you so much for taking time out to respond to our
    invitation.
        Chairman THOMAS. I thank the gentleman. I will tell each of
    you that any written remarks that you may have will be made a
    part of the record. You can address this as you see fit in the
    time that you have. You need to turn the microphones on. They
    are very unidirectional and you need to speak directly into
    them, and I would invite your remarks to try to stay within the
    timeframe so that each Member can have their opportunity to ask
    you questions if they so desire.
        Let's start with Mr. Glassman and move from my left to my
    right, your right to your left.

     STATEMENT OF JAMES K. GLASSMAN, HOST, TECHCENTRALSTATION.COM,
           AND RESIDENT FELLOW, AMERICAN ENTERPRISE INSTITUTE

        Mr. GLASSMAN. Thank you, Mr. Chairman, thank you for
    inviting me today, Mr. Rangel, Members of the Committee. My
    name is James K. Glassman. I am a resident fellow at the
    American Enterprise Institute and host of the website
    TechCentralStation.com. In addition, for more than 20 years, I
    have been writing about personal investing, currently as a
    syndicated columnist for the Washington Post.
        A major focus of my work has been the impact of public
    policy, including tax policy, on small investors. I am in the
    process of establishing a new organization, Shareholders
    United, to represent the interests of small investors.
        Today, speaking only for myself, I will address the effects
    of President Bush's tax proposals, which are highly beneficial.
    In order to understand the impact, it is necessary to look
    first very briefly at the sweeping changes in the investment
    environment in the United States.
        Over the past 20 years, personal investing has undergone a
    revolution, creating what Robert J. Samuelson of the Washington
    Post has called ``one of the great social movements.'' In 1983,
    only 16 million households owned stocks, either as individual
    shares or through mutual funds. By 2002, the figure had climbed
    to 53 million--in other words, roughly half the families in the
    United States.
        There are 84 million shareholders compared with 16 million
    union members and 43 million senior citizens over the age of
    60.
        One reason for the boom is the boom in mutual funds, which
    are also vehicles for the ownership of bonds and debt
    securities. The proportion of households owning mutual funds of
    any sort has risen from 6 percent in 1980 to 50 percent in
    2002.
        Ownership of financial assets has broadened dramatically.
    For example, the fastest-growing demographic sectors for mutual
    funds are: one, families making between $25,000 and $35,000 a
    year; and, two, households headed by persons 25 to 34 years
    old. Particularly, rapid growth has occurred among African
    American and Hispanic families. Investing is no longer the
    exclusive domain of the white, the rich, and the middle-aged.
    Ownership of financial assets has continued to thrive despite
    the recent sharp decline in stock prices. This revolution has
    brought about a profound change. Americans no longer simply
    work for owners of capital assets. They are now owners
    themselves.
        Now, let me turn to taxes. The U.S. Tax Code continues to
    encourage consumption over savings and investment. The
    Economist magazine recently stated in an editorial, ``America
    seriously overtaxes savings and seriously undertaxes
    consumption. This inhibits the accumulation of capital and ....
    makes the economy more fragile.''
        My perspective in this testimony, however, is not
    macroeconomic. It is from the bottom up--from the point of view
    of individual investors.
        With taxes what they are, many of these investors wonder
    why they should save and invest beyond their 401(k) plans, and
    the majority of them do not even have such plans.
        In January, President Bush announced a tax plan to speed up
    the recovery from the 2001 recession, provide an economic
    insurance policy against war and terrorism, and strengthen the
    economy for the long term. The most significant feature is
    ending the double taxation of corporate dividends and not apply
    capital gains taxes to profits attributable to retained
    earnings.
        The dividend proposal addresses an anomaly in the tax law
    that taxes dividend income more than any other kind of income.
    The idea of eliminating one of the layers of taxation of
    dividends is not a new idea. In fact, it was advanced as long
    ago as 1936 by President Franklin D. Roosevelt. Double taxation
    creates serious economic distortions. It encourages companies
    to borrow to excess and to hoard their earnings rather than
    paying them out to shareholders. Thus, the law hurts small
    investors by encouraging inefficiency and depleting the value
    of their holdings.
        In recent years, the effects have been dramatic. For
    example, in 2002, the lowest proportion of large companies on
    record paid dividends. The proportion of earnings that the
    average firm sends to shareholders in the form of dividends has
    fallen from more than half to about one-third over the last two
    decades. Research by economist James Poturba predicts that this
    payout ratio will rise back to the mid-50-percent region if
    double taxation is ended.
        Dividend payments mean less volatility for investors. Even
    in a year in which a stock might fall 20 percent in price, a
    stock is likely to continue paying its dividend, providing
    steady income and a buffer against capital losses. Since 2000,
    for example, dividend-paying stocks have outperformed non-
    dividend payers by more than 40 percentage points.
        Recent research cites ``the poor job that the average
    company does when investing the cash that it would pay out as
    dividends. Therefore, it is better for the company to
    distribute its earnings to shareholders.''
        The President's proposal would encourage more corporations
    to distribute dividends, or at least to disclose in greater
    detail why they choose not to. A dividend is also in most cases
    a more accurate manifestation of a company's financial health
    than the paper profits reported to government authorities. An
    old saying going back to the 19th century holds that ``earnings
    are an opinion, but cash is a fact.'' Ending double taxation
    would, thus, improve corporate governance by making corporate
    performance more transparent.
        Beyond that, the policy, of course, will increase the
    return on small investors' stock investments. The White House
    estimates that 35 million Americans currently receive taxable
    dividends and will benefit from the changes. Half of those are
    senior citizens. Dividend income from taxable investments will
    rise between 40 percent and 80 percent.
        Investors who hold stock in tax-deferred investments or in
    Roth IRAs will also benefit from a rise in the price of the
    shares themselves since taxable investors will bid up the share
    price. How much? Economists differ, but a rise in price is
    undeniable, probably on the order of 8 to 10 percent.
        Chairman THOMAS. Mr. Glassman, 5 minutes occurs very
    quickly when you are having fun. Can you sum up?
        Mr. GLASSMAN. Thank you, sir.
        In addition, by accelerating the tax rate reductions
    enacted in 2001, the proposal will increase the current income
    that small investors receive from all financial assets, both
    stocks and bonds. This step will have the same effect as the
    elimination of double taxation. It will boost after-tax returns
    and increase the value of capital.
        Finally, on the brink of war, and at a time when we now
    have the highest tax rates on corporate income of any Nation
    other than Japan, the United States needs to give investors
    every incentive to commit their dollars to investments that
    will boost growth and increase jobs. The President's plan does
    that powerfully, efficiently, and fairly.
        Thank you.
        [The prepared statement of Mr. Glassman follows:]
       Statement of James K. Glassman, Host, TechCentralStation.com, and
                 Resident Fellow, American Enterprise Institute
        My name is James K. Glassman. I am a resident fellow at the
    American Enterprise Institute and host of the website
    TechCentralStation.com. In addition, for more than 20 years, I have
    been writing about personal investing as a columnist for The Reader's
    Digest, Worth magazine, the International Herald Tribune, New York
    Daily News and many other publications. I am currently a syndicated
    financial columnist for the Washington Post and am the author of two
    books on investing. The more recent, The Secret Code of the Superior
    Investor (Crown), was recently named one of the 10 best financial books
    of 2002 by Barron's.
        A major focus of my work has been the impact of public policy,
    including tax policy, on small investors. With several associates, I am
    in the process of establishing a new organization that I will chair,
    Shareholders United, which will represent the interests of small
    investors.
        Today, speaking only for myself, I will address the effects of
    President Bush's tax-reduction proposals, which I believe are highly
    beneficial. But, in order to assess the full impact of those proposals,
    it is first necessary to examine the sweeping changes that have
    occurred in the investment environment in the United States.
    The Rise of the Shareholder Society
        Over the past 20 years, personal investing has undergone a
    democratic revolution, creating what Robert J. Samuelson of the
    Washington Post called ``one of the great social movements.''
    1 In 1983, only 16 million households owned stocks--either
    as individual shares or through mutual funds. By 2002, the figure had
    climbed to 53 million households. In other words, roughly half the
    families in the United States are owners of American businesses listed
    on the major exchanges.2
    ---------------------------------------------------------------------------
        \1\ Robert J. Samuelson, ``Stocks Without Risks?'' Newsweek, Nov.
    11, 1999.
        \2\ ``Equity Ownership in America,'' 2002, report based on several
    data sources, including the Investment Company Institute and the
    Securities Industry Association. Published by the American Council for
    Capital Formation, Washington, October 2002. See www.accf.org.
    ---------------------------------------------------------------------------
        Of all U.S. stockholders, 89 percent own at least some stocks
    through mutual funds, which are also vehicles for the ownership of
    bonds and other debt securities. The proportion of households owning
    mutual funds of any sort has risen has risen from 6 percent in 1980 to
    50 percent in 2002.3
    ---------------------------------------------------------------------------
        \3\ ``U.S. Household Ownership of Mutual Funds in 2002,''
    Investment Company Institute, Washington, October 2002. See
    www.ici.org.
    ---------------------------------------------------------------------------
        Ownership of financial assets has broadened dramatically. For
    example, the fastest-growing demographic sectors for mutual funds are:
    1) families making between $25,000 and $35,000 a year, where the
    proportion of fund ownership went from 28 percent in 1998 to 36 percent
    in 2002, and 2) households headed by persons aged 25 to 34 years old,
    where fund ownership over the same period rose from 42 pecent to 48
    percent. Currently, 48 percent of households with incomes from $35,000
    to $50,000 own mutual funds, as do 57 percent of households headed by a
    person aged 35 to 44.4
    ---------------------------------------------------------------------------
        \4\ Ibid.
    ---------------------------------------------------------------------------
        Similarly, a recent Federal Reserve report found that the median
    value of mutual funds held by non-whites and Hispanics in 2001 was
    $17,500; the value of stocks, $8,000; bonds, $7,600; and certificates
    of deposit, $9,000.5 The Fed data show that, for the average
    American family, financial assets now comprise 42 percent of total
    assets, compared with 32 percent 10 years ago.6
    ---------------------------------------------------------------------------
        \5\ ``Recent Changes in U.S. Family Finances: Evidence from the
    1998 and 2001 Survey of Consumer Finances,'' Federal Reserve Board, p.
    13. See www.federalreserve.gov.
        \6\ Ibid, p. 9.
    ---------------------------------------------------------------------------
        In other words, investing is no longer the exclusive domain of the
    white, the rich and the middle-aged.
        Ownership of financial assets has continued to thrive despite the
    sharp decline in stock prices over the past three years.7
    For example, the benchmark Standard & Poor's 500-Stock Index lost 9
    percent of its value in 2000 and 12 percent in 2001, but the number of
    households owning mutual funds rose between January 1999 and January
    2002 from 49 million to 53 million.8 Those are the most
    current ownership figures available, but we know that in 2002,
    investors withdrew a net of $27 billion from equity mutual funds--only
    about 1 percent of the total assets of those funds--despite the worst
    year for stocks since 1974. Investors also added a net of $140 billion
    to bond mutual funds.9
    ---------------------------------------------------------------------------
        \7\ 2000-2002 comprised the third-worst three-year period in stock
    market history. The broad market index dropped 40 percent, a figure
    exceeded only by 1930-1932 and 1929-1931.
        \8\ S&P figures from 2002 Yearbook, Ibbotson Associates, Chicago.
    Ownershp data from ``Equity Ownership,'' op. cit.
        \9\ ``Trends in Mutual Fund Investing,'' December 2002, Investment
    Company Institute statistics; press release, Jan. 30, 2003.
    ---------------------------------------------------------------------------
        This revolution has brought a profound change: Americans no longer
    simply work for owners of capital assets; they are now owners
    themselves. ``As capitalism expands,'' wrote my colleague Ben J.
    Wattenberg, ``a lot of `them' become `us.' [Stock ownership] brings us
    all together as stakeholders in common.'' 10 In 1977, the
    year before the 401(k) was created, there were 298 work stoppages that
    idled 1.2 million workers for 21.2 million working days. Twenty years
    later, there were only 29 strikes that idled 339,000 workers for 4.5
    million working days.11 In addition to encouraging
    cooperation, ownership of financial assets ``appears to have ...
    encouraged an orientation towards the future--the investor's own and
    his family's.'' 12
    ---------------------------------------------------------------------------
        \10\ Ben J. Wattenberg, ``Capitalism for the Masses,'' Baltimore
    Sun, Jan. 9, 1997.
        \11\ ``Investor Fact Sheet,'' American Shareholders Association,
    Washington. See www.americanshareholders.com.
        \12\ Richard Nadler, ``The Rise of Worker Capitalism,'' Cato Policy
    Analysis No. 359, Nov. 1, 1999.
    ---------------------------------------------------------------------------
    Tax Policy Encourages Broad Ownership of Financial Assets
        A study by the Joint Economic Committee 13 found that
    the main reasons for the broadening of ownership of financial assets
    were, first, the rise of mutual funds and, second, important changes in
    tax law, such as the advent of Individual Retirement Accounts and
    401(k) accounts and the decline in capital-gains tax rates.
    ---------------------------------------------------------------------------
        \13\ ``The Roots of Broadened Stock Ownership,'' Joint Economic
    Committee, April 2000. See www.house.gov/jec.

          It [the IRA] was the first real incentive for a great number of
    Americans to put money away for the long term. And these were generally
    people who up until then hadn't seen themselves as having any control
    over the long-term.14
    ---------------------------------------------------------------------------
        \14\ Joseph Nocera, A Piece of the Action: How the Middle Class
    Joined the Money Class (New York, 1994), p. 288.

        Still, the Tax Code continues to encourage consumption over savings
    and investment. ``Taking the overall tax haul as given,'' The Economist
    magazine recently stated in an editorial, ``America seriously overtaxes
    savings and seriously undertaxes consumption. This inhibits the
    accumulation of capital and probably depresses long-term growth. It
    also encourages excess indebtedness, which makes the economy more
    fragile.'' 15
    ---------------------------------------------------------------------------
        \15\ ``Who dares wins,'' The Ecomonist, Jan. 11, 2003, p. 10.
    ---------------------------------------------------------------------------
        My perspective in this testimony, however, is not macroeconomic. It
    is from the bottom up--from the point of view of individual small
    investors.
        Many of these investors wonder why they should save and invest
    beyond their 401(k) plans--and the majority of them do not even have
    such plans. Their salaries are first taxed at ordinary income rates;
    then, if they can save anything to invest in financial assets, the
    income (dividends and interest) from those investments are also taxed
    at ordinary rates; if they re-invest what is left of that income after
    taxes, the dividends and interest are taxed once more. If they sell the
    assets at a profit, capital gains taxes apply. And if they manage to
    pass along any of their investments at death, then estate taxes may
    apply. Americans wonder why they shouldn't consume (in which case,
    they're taxed only once, on the initial salary) rather than save and
    invest.
    The Bush Tax Plan
        In January, President Bush announced a tax plan to speed up the
    recovery from the 2001 recession, provide an economic insurance policy
    against war and terror, and strengthen the economy for the long term.
    The two most significant features were ending the double-taxation of
    corporate dividends and making rate reduction from the 2001 tax law
    effective immediately rather than phasing them in (in 2004 and 2006, as
    the law originally provided). Both of these measures will encourage
    savings and investment and broaden the shareholder society--not by
    bestowing special favors but by removing impediments.
    Double Taxation of Dividends
        The dividend proposal addresses an anomaly in the tax law. Suppose
    a company earns $1 in profits that it wants to pass on to its owners,
    that is, its public shareholders. The $1 is first taxed at the
    corporate level at a rate of around 40 percent, including both federal
    and state corporate income taxes. That leaves 60 cents. The 60 cents is
    then sent to shareholders in the form of dividends. The shareholders
    pay, depending on their tax bracket, taxes that are fairly similar--in
    many cases, 40 percent or more. That leaves 36 cents. So, of the
    original $1 in profits, 64 cents go to taxes.
        The idea of eliminating one of the layers of taxation is not a new
    idea. In fact, it was embraced as long ago as 1936 by President
    Franklin D. Roosevelt, whose Treasury Secretary, Henry Morgenthau,
    proposed ending taxes on income at the corporate level for all profits
    that were distributed to shareholders.16 Roosevelt said that
    the measure ``would constitute distinct progress in tax reform.'' It
    ultimately failed, of course. The Bush proposal retains taxes at the
    corporate level but eliminates them at the individual level. The effect
    is the same.
    ---------------------------------------------------------------------------
        \16\ A fascinating discussion of FDR's advocacy of ending double
    taxation of dividends is found in a memorandum to ``Friends of ABC,''
    the American Business Conference, Washington, D.C., by John Endean, who
    himself draws from John M. Blum, From the Morgenthau Diaries, Volume
    One: Years of Crisis, 1928-1938 (Boston, 1959), pp. 305-319.
    ---------------------------------------------------------------------------
        Double taxation creates serious economic distortions. For example,
    it encourages companies to borrow (since profits that are used to pay
    interest on debt are taxed only once, not twice), and it encourages
    them to retain their earnings rather than paying them out to
    shareholders. Since current tax policy promotes such inefficiencies, it
    hurts small investors by depleting the value of their holdings.
        In recent years, the effects have been dramatic--in part because
    the gap between capital gains rates (now up to 20 percent) and ordinary
    income rates (now up to 38.6 percent) has risen. For example, in 2002,
    only 351 companies paid any dividend at all, among the 500 large firms
    that comprise the S&P 500.17 That is the lowest proportion
    on record. More important, the percentage of profits that the average
    firm sends to shareholders in the form of dividends has fallen from 55
    percent to 36 percent over the past two decades.18
    ---------------------------------------------------------------------------
        \17\ ``2002 Review,'' Standard & Poor's, U.S. Indices, p. 4.
        \18\ The average dividend payout ratio (dividends/earnings) for
    stocks covered by the Value Line Investment Survey was 55 percent
    between 1977 and 1986 and 36 percent for 2000, the most recent year for
    statistics. The decline has been consistent and dramatic. ``A Long-Term
    Perspective: Dow Jones Industrial Average 1920-2000,'' Value Line
    Publishing, Inc., New York.
    ---------------------------------------------------------------------------
        Dividend payments mean less volatility for investors. Even in a
    year in which a stock might fall 20 percent in price, a stock is likely
    to continue paying its dividend, providing steady income and a buffer
    against capital losses.
        In addition, academic research, starting with the work of Michael
    Jensen of Harvard in 1986, indicates strongly that ``the more cash that
    companies have now (beyond what is needed for current projects), the
    less efficient they will be in the future.'' 19
    ---------------------------------------------------------------------------
        \19\ Michael C. Jensen, ``The Agency Costs of Free Cash Flow:
    Corporate Finance and Takeovers,'' American Economic Review, Vol. 76,
    No. 2 (May, 1986). The quotation is not from the paper, but from a
    paraphrase by Mark Hulbert, ``In a Twist, High Dividends Are Now a
    Predictor of Growth,'' New York Times, Nov. 17, 2002.
    ---------------------------------------------------------------------------
        In 2002, the stocks of S&P 500 companies that paid dividends fell
    13.3 percent, on average, while the stock non-dividend payers declined
    30.3 percent.20 While this difference is particularly
    extreme, it is clear that companies that keep their cash often use it
    unwisely. A new study by Robert Arnott and Clifford S. Asness has
    found:
    ---------------------------------------------------------------------------
        \20\ ``2002 Review,'' Standard & Poor's, op. cit.

          For the overall stock market between 1871 and 2001, corporate
    profits grew fastest in the 10 years following the calendar years in
    which companies had the highest average dividend payout ratio. In
    contrast, the 10-year real earnings growth rate was the lowest
    following years with the lowest average payout ratio.21
    ---------------------------------------------------------------------------
        \21\ Hulbert, op. cit.

        The authors believe that ``the primary cause'' of this result is
    ``the poor job that the average company does when investing the cash
    that it would pay out as dividends. Therefore, it is better for the
    company to distribute its earnings to shareholders.'' 22
    ---------------------------------------------------------------------------
        \22\ Ibid.
    ---------------------------------------------------------------------------
        Currently, managers have an excuse and an incentive to hoard their
    earnings. In fact, it is surprising that they pay out even one-third of
    their profits to shareholders, considering the tax laws. But eliminate
    double taxation of dividends and the excuse disappears. The proposal
    ``would encourage more corporations to distribute dividends or, at
    least, disclose in greater detail whey they choose not to--a point
    worth the attention of those demanding greater managerial
    accountability in the use of what Louis Brandeis called `other people's
    money.' '' 23
    ---------------------------------------------------------------------------
        \23\ Endean, American Business Conference, op. cit.
    ---------------------------------------------------------------------------
        Consider a company that earns $4 per share in profits after taxes.
    It retains $2 for reinvesting in the business and sends $2 to
    shareholders in the form of dividends. The shareholders can then
    choose: reinvest in the company themselves because they like what
    management is doing, or use the money to invest in another company.
    Without the dividend, the only action the shareholder can take is to
    sell his or her stock altogether.
        A dividend is also, in most cases, a more accurate manifestation of
    a company's financial health than the paper profits reported to
    government authorities. An old saying, going back to at least the
    19th century, holds that ``earnings are opinion, but cash is
    a fact.'' I continually encourage my readers to look at the consistency
    with which a company pays--and raises--its dividend. Such activity
    tells far more about the soundness of the firm than rising earnings,
    which, as we have seen, are easy to manipulate. Dividends can't be
    faked. It's true that companies can borrow to pay dividends, but under
    the president's proposal, such leveraged dividends are taxable to
    investors--a sure sign that something fishy is going on.
        Consider Enron Corp. Between 1997 and 2000, Enron increased its
    reported earnings per share by a total of 69 percent (from 87 cents to
    $1.47), but its dividends per share rose only 9 percent (from 46 cents
    to 50 cents).24 That might have been a tip-off that the
    company was suffering a cash squeeze. But investors ignored the
    evidence, in part because they simply have not taken dividends very
    seriously in recent years, thanks to the tax disincentives. That will
    change if the Bush proposal becomes law.
    ---------------------------------------------------------------------------
        \24\ Data from Value Line's final one-page analysis of Enron, by
    Sigourney B. Romaine, Dec. 21, 2001. Also worth nothing is that Enron's
    cash flow was negative (that is, capital expenditures, not to mention
    dividends, exceeded incoming cash) for each of the years 1997-2000. The
    Value Line Investment Survey, New York.
    ---------------------------------------------------------------------------
        Almost exactly a year ago, I testified in front of the House
    Financial Services Committee in a hearing whose subject was, ``How to
    Protect Investors Against Another Enron.'' I stated at the time:

          Cash dividends are the clearest, most transparent evidence of
    corporate profits. An investor who sees dividends increasing every year
    can, properly, have confidence in a company. ... Ending double taxation
    of dividends would increase payouts and vastly increase investor
    confidence. I realize that this matter goes beyond the committee's
    jurisdiction, but it is probably the single most important legislative
    step that can be taken to protect shareholders.25
    ---------------------------------------------------------------------------
        \25\ James K. Glassman, ``How to Protect Investors Against Another
    Enron,'' testimony before a hearing on H.R. 3763, ``The Corporate and
    Auditing Accountability, Responsibility and Transparency Act of 2002,''
    Financial Services Committee, U.S. House Of Representatives, March 13,
    2002.

        Beyond corporate governance, ending the double taxation of
    dividends will have a powerful and beneficial effect: It will increase
    the return on every small investor's stock investments. The White House
    estimates that 35 million Americans currently receive taxable dividends
    and will benefit from the changes. Half of those Americans are senior
    citizens.26
    ---------------------------------------------------------------------------
        \26\ ``Fact Sheet: The President's Proposal to end the Double Tax
    on Corporate Earnings,'' U.S. Department of the Treasury, press
    release, Jan. 14, 2003. See www.treasury.gov.
    ---------------------------------------------------------------------------
        Consider a person in a 30 percent tax bracket who owns 100 shares
    of stock in a company that currently pays a dividend of $1 per share.
    Assume the dividend payout does not increase. Under current law, the
    investor pockets $70 after taxes; if the Bush proposal passes, the
    investor pockets the full $100. That is an increase of 43 percent. Now
    assume that the company, as a result of the new tax incentive, boosts
    its payout from $1 to $1.25--which is actually a more modest increase
    than would occur if the current payout ratio merely reverted to the
    mean of previous decades. Now, the investor pockets $125 instead of
    $70--an increase of 79 percent.
        But what about investors who hold stock in tax-deferred accounts or
    in Roth IRAs, which are untaxed? Almost certainly, such investors would
    benefit from a rise in the price of the shares themselves since each of
    those shares would now produce more after-tax income for taxable
    investors. Those investors would bid up the share price. How much?
    Economists differ, but a rise in price is undeniable.
        Perhaps more important, eliminating the double taxation of
    dividends would provide an incentive for investors to increase their
    savings outside limited tax-advantaged vehicles like 401(k) plans and
    IRAs, decreasing their dependency on Social Security and encouraging
    them to put money aside for non-retirement expenses, including
    education, home purchases and renovation, travel or starting their own
    businesses.
        At the very least, the proposal turns the attention of investors
    toward dividends, which in recent years have not received the respect
    they deserve. While dividends have declined as a percentage of stock
    prices (yield), they remain a critical factor in achieving high returns
    over time. For example, a study found that $1,000 invested in the S&P
    500 index on June 30, 1982, became $16,597 (without taxes) by Sept. 30,
    2001. But approximately 40 percent of those gains came from reinvesting
    dividends back into the stocks of the index.27
    ---------------------------------------------------------------------------
        \27\ ``Fading Dividends Could Make a Comeback,'' T. Rowe Price
    Report, Baltimore, Fall 2001, p. 6.
    ---------------------------------------------------------------------------
    Acceleration of Rate Reductions
        In 2001, Congress passed and the President signed into law a bill
    that reduced tax rates across the board. In fact, proportional cuts
    were greater at the low end than the high. The bottom rate was cut to
    10 percent from 15 percent (a decline of one-third) while the top rate
    was cut from 39.6 percent to 35 percent (less than one-eighth). In
    addition, the cut to 10 percent happened immediately while other rates
    were scheduled to be reduced slowly, with completion by 2006. In an
    effort to boost the recovery, the President has proposed making all
    remaining cuts effective now, retroactive to Jan. 1, 2003.
        By accelerating the tax-rate reductions, the proposal would
    increase the current income that small investors receive from their
    financial assets, both equities and debt. Some of the increased income
    would be consumed in purchases of goods and services and some would go
    back into investment. But the overall effect would be to increase the
    incentives for future investment by increasing returns at the margin--
    that is, at the point of deciding how to commit a dollar in hand.
        Again, the math is simple. Take an investor in a 39.6 percent tax
    bracket before the 2001 law. The rate is now 38.6 percent, but, if the
    President's proposal is accepted, the investor's rate drops immediately
    to 35 percent. If she had invested a few years ago in a $10,000
    Treasury bond paying 6 percent interest, she will this year, if the law
    does not change, receive $600 before taxes and $368.40 after taxes.
    With the acceleration, she will pocket $390--an increase of 6 percent.
    Another way to say this is that her after-tax return on the investment
    will rise from 3.7 percent to 3.9 percent. That's a significant
    increase in a low interest-rate environment. Similarly, an investor who
    is trying to decide what to do with $10,000 will have more incentive to
    invest than to consume since returns are higher.
        Two objections are frequently raised. The first is that the
    benefits of acceleration go to higher earning Americans.
    Proportionally, the opposite is true. The bottom bracket gets the
    biggest cut; the other brackets get roughly the same cut. In terms of
    actual dollar savings, of course, the higher-earners will, in many
    cases, get more, but the tax plan offers other cuts aimed at middle-
    income Americans including remediation for the ``marriage penalty'' and
    higher child credits. As an example, the Treasury cites ``a married
    couple with two children and income of $60,000.'' Such a family will
    see taxes decline under the President's proposal ``by $900 (from $3,750
    to $2,850) in 2003, a decline of 24 percent.'' 28
    ---------------------------------------------------------------------------
        \28\ ``Examples of Tax Relief in 2003 Under the President's Growth
    Package,'' U.S. Department of the Treasury, op. cit.
    ---------------------------------------------------------------------------
        As for the highest earners getting more dollar savings: The latest
    Internal Revenue Service data show that the top 5 percent of taxpayers
    (with incomes above $121,000) pay 56 percent of all individual income
    taxes--even though they earn only 34 percent of all income. By
    contrast, the 50 percent of taxpayers with the lowest incomes (below
    $26,000) pay just 4 percent of the individual income taxes--with 13
    percent of all income.29 Any across-the-board cut, or even a
    cut skewed toward lower earners, will by necessity produce large
    savings for higher earners.
    ---------------------------------------------------------------------------
        \29\ ``Tax Bites,'' table of Federal Individual Income Taxes by
    Income Class, Tax Foundation, Washington, D.C., www.taxfoundation.org.
    ---------------------------------------------------------------------------
        Higher earners are also more likely to save and invest. But low-
    and middle-income Americans need incentives, too. According to the Fed,
    in 2001, the median family in the 90th to 100th
    percentile of income held $161,000 in unrealized capital gains (that
    is, stock and bond profits), up from $75,000 in 1995. (That 2001 figure
    is probably lower now, with the decline of the stock market, but it is
    still substantial.) By contrast, the median family in the
    40th to 60th percentile held just $9,500 in
    unrealized capital gains, up from $4,300 but still a minuscule
    number.30
    ---------------------------------------------------------------------------
        \30\ ``Recent Changes in U.S. Family Finances,'' op. cit., p. 20.
    ---------------------------------------------------------------------------
        The President's proposals will almost certainly boost the economy,
    adding to the value of the stock holdings of more than 50 million
    American families and spurring more capital investment and job
    creation. But, just as important, they will encourage families to make
    prudent purchases of financial assets--stocks and bonds for the long
    term--to provide them with more comfortable and fruitful lives.
        Using static accounting methodology, the tax cuts represent less
    than one-half of one percent of the Gross Domestic Product that the
    U.S. is expected to generate over the next 10 years. That is a small
    price to pay for stronger growth, more jobs, and sounder retirements.
        Thank you.

        Chairman THOMAS. Thank you very much, Mr. Glassman. Mr.
    Castellani?

    STATEMENT OF JOHN J. CASTELLANI, PRESIDENT, BUSINESS ROUNDTABLE

        Mr. CASTELLANI. Thank you, Mr. Chairman. I am pleased to be
    here this afternoon to testify before the Committee.
        The Business Roundtable, as you know, is an association of
    CEOs of major corporations with a combined workforce of 10
    million employees in the United States and representing $3.7
    trillion in annual revenues. Although we are in the business of
    creating jobs and contributing to economic growth, we have
    serious concerns about our ability to do these things in this
    fragile economic environment.
        The CEOs of the Business Roundtable feel that the U.S.
    economy is not growing to its potential. Late last year, we
    surveyed our members about their business plans for 2003. The
    survey showed that few CEOs expected robust growth this year
    and raised serious concerns for American workers, companies,
    and the overall economy.
        Let me give you three specific examples of the results of
    that survey.
        First, 89 percent of our members said that they expected
    employment in their companies to stay the same or drop in 2003;
        Second, 64 percent are expecting GDP growth rates of less
    than 2 percent for this year;
        Third, 81 percent expect their capital expenditures to be
    flat or decline.
        Consumer demand and consumer confidence has been undermined
    by the overhang of our Nation's war on terrorism, the potential
    for a war with Iraq, and the decline in stock market
    valuations. Our CEOs feel that business investment will only
    return when there is sufficient consumer demand to exhaust the
    existing capacity in the U.S. economy. Only by increasing
    demand will we return to a level that supports investment and,
    more importantly, supports job growth. We feel we need to
    ignite consumer confidence and stimulate consumer spending.
        That is why we are urging the enactment of an economic
    growth package. It must be, in our view, large in size, focus
    on consumer demand, and focus on restoring investor confidence.
    These are the actions we believe will jump-start the economy.
        The President's economic growth and jobs proposal, as it
    has been reflected in the Chairman's introduction of H.R. 2,
    is, in our view, precisely the kind of boost the economy needs.
    If enacted, it will significantly stimulate the economy in the
    short term and boost long-term economic growth.
        According to the results of the study conducted for the
    Business Roundtable by PricewaterhouseCoopers, using the widely
    supported macroeconomic model housed at the University of
    Maryland, H.R. 2, if enacted, would create jobs. The study
    shows it would create an average of 1.8 million jobs in each of
    the next 2 years and then average a creation of 1.2 million
    jobs per year for the next 5 years. It also shows that it would
    boost GDP in the United States by 2.4 percent by the end of
    2004. Working consumers will have more money to spend and more
    confidence to spend it on goods and services.
        By accelerating the 2001 tax rate cuts, the marriage
    penalty reduction, and the child tax credit increase, and by
    eliminating the double taxation of dividends, the proposal will
    not only provide an immediate boost to the U.S. economy, it
    will also add millions of jobs, increase investor confidence,
    and ensure long-term growth. Importantly, the elimination of
    the double taxation of dividends will have the single most
    positive impact on economic growth.
        In addition to creating an average of 500,000 jobs per year
    over the next 5 years from this provision alone, the
    elimination of the double taxation of dividends has three
    important and multiplying effects:
        First, it abolishes the double taxation of dividends, and
    by doing so it will spur consumer spending by increasing the
    after-tax income of stock investors. It will put more money in
    the hands of individuals because shareholders will no longer
    bear the unfair burden of paying taxes twice on the same
    income.
        Second, eliminating the double taxation of dividends will
    change corporate behavior. It will provide an incentive for
    companies to boost their dividend payments to shareholders, and
    by our estimate in this model, it would increase by 4
    percentage points over the 10 years.
        Third, while it is difficult to predict stock market
    reaction, even the most conservative analysts predict
    significant increases in stock prices.
        All three combined will not only benefit the broad spectrum
    of the economy that received dividends, particularly those
    people who depend on it for their retirement, but would benefit
    all of those funds that are invested in equities: 401(k)s,
    IRAs, private and public pension funds. Indeed, all sectors of
    the economy will benefit.
        We urge this Committee and the Congress to move quickly to
    enact an economic growth plan that will give an immediate boost
    to the economy and put people back to work. The President's
    plan, and H.R. 2, is the best means for our companies to create
    jobs, spur business investment, ignite economic growth. It is
    the right prescription for this ailing economy. Thank you.
        [The prepared statement of Mr. Castellani follows:]
        Statement of John J. Castellani, President, Business Roundtable
        My name is John J. Castellani. I am President of The Business
    Roundtable, an association of CEOs of leading corporations with a
    combined workforce of more than 10 million employees in the United
    States and $3.7 trillion in annual revenues. It is my pleasure to
    present the testimony of The Business Roundtable today in support of
    the President's economic growth and job creation package.
    Overview

        The Business Roundtable believes it is critically important for
    Congress to adopt a jobs and economic growth plan that will put more
    cash in the pockets of consumers, stimulate demand, create jobs, and
    get the world's strongest, most resilient economy moving again.
        The economy is not performing up to its potential. Last November,
    The Business Roundtable conducted a survey of its 150 members, which
    cross all sectors of the economy, and we asked them what assumptions
    about employment, capital spending and economic growth they were
    imbedding in their business plans for 2003. In summary, the results
    raised serious concerns for American workers, companies and the overall
    economy.

         60 percent of CEOs expect their company's employment to
    drop in 2003; 28 percent expect it to remain the same, and 11 percent
    expect employment growth.
         57 percent of CEOs expect their U.S. capital expenditures
    in 2003 to be the same as 2002 levels, while 24 percent expect a
    decline. Only 19 percent expect higher capital spending.
         64 percent of the CEOs are expecting GDP growth rates of
    less than 2 percent in their 2003 planning, while 36 percent expect GDP
    growth of more than 2 percent. By comparison, the average annual GDP
    growth over the past decade has been 3.2 percent.
         19 percent of CEOs expect their 2003 sales to be flat
    compared with 2002, while 9 percent expect sales to be lower. Seventy-
    one percent of the CEOs expect higher sales in 2003.

        The BRT survey of CEOs reinforces a series of economic data
    released over the past several months that indicates a mixed economic
    performance and an unstable recovery. Consumer sentiment fell this
    month to a nine-year low. The gross domestic product (GDP) rose by a
    mere 1.4 percent in the fourth quarter of 2002--the smallest gain since
    2001--when it could be growing at 4-5 percent.
        That is why last November, the BRT urged the President and Congress
    to take immediate action on a large economic growth package aimed at
    consumers. Business cannot create demand, so we need to ignite consumer
    confidence and consumer spending. The war on terrorism and fear of war
    with Iraq, and depressed equity valuations all have combined to
    undermine consumer confidence and push demand down. What the U.S.
    economy needs is significant and immediate tax relief for consumers.
    The President's Economic Growth Plan

        The President's economic growth and job creation package provides
    exactly the kind of boost our economy needs. It will do this by
    accelerating the 10 percent bracket expansion and rate reductions, with
    AMT hold-harmless relief; accelerating the marriage penalty reduction
    and child tax credit increase; and eliminating the unfair double
    taxation of dividends.
        The President's plan, if enacted, will significantly stimulate the
    economy in the short-term and boost long-term economic growth.
    According to the results of a study conducted for The Business
    Roundtable by PricewaterhouseCoopers (PwC) using the widely-supported
    Inforum LIFT macroeconomic model housed at the University of Maryland
    (a copy is attached to this testimony), it will create an average of
    1.8 million new jobs in each of the next two years and an average of
    1.2 million new jobs per year for the next five years.
        To put that in perspective, there are approximately 1.5 million
    fewer people employed today than the pre-recession high of 2 years ago,
    and we estimate that enactment of the President's growth package would
    put just as many people back to work in the first year.
        The President's plan would, according to our study, boost the gross
    domestic product in the U.S. economy by 2.4 percent by the end of 2004.
    Working consumers will have more money to spend and more confidence to
    spend it on goods and services.
    Eliminating the Double Taxation of Corporate Dividends

        The dividend component of the President's plan, according to the
    BRT/PwC study, will have the single most positive impact on economic
    growth in both the short term and the long term. The dividend proposal
    contributes half of the plan's resulting job and GDP growth over five
    years. As a result, companies will be more likely to invest in new
    equipment, build new plants and develop new products, which will
    sustain economic growth and create jobs.
        Abolishing the unfair double taxation of dividends will spur
    consumer spending by increasing the after-tax income of stock investors
    in three ways. First, it will put more money in the hands of
    individuals because shareholders from all income levels will pay less
    in taxes. Second, it will cause companies to increase their dividend
    payments to shareholders (by an estimated four percentage points).
    Third, it will put upward pressure on equity valuations.
        Eliminating the double taxation of dividends will change corporate
    behavior. Under present-law, retained earnings are preferred because
    they are taxed at the lower capital gains rate while dividends are
    subject to the higher individual income tax rates. Under the
    President's plan, dividends would be tax-free to shareholders. While
    this same tax treatment would apply to retained earnings, shareholders
    are likely to prefer immediate cash in their pockets in the form of
    dividends.
        Critics of the dividend component of the President's plan have
    suggested that it would only help companies that pay dividends and
    individuals who invest outside tax advantaged retirement accounts.
        But the resulting increase in equity valuations would benefit
    companies and investors as a whole. In addition to boosting consumer
    confidence through greater wealth, increased equity valuation would
    benefit college and university endowments, IRAs, corporate and public
    pensions and all savings. Companies that do not have to fund their
    pensions will have additional operating capital to invest, resulting in
    more profits and increased stock prices.
        The economic benefits are further multiplied when shareholders
    increase their spending on goods and services, which provides new
    income to other households. The increase in income leads to more
    demand, and producers will need to step up their hiring and capital
    spending in order to meet the increased demand. Because of this
    ``multiplier effect,'' an initial $1 increase in cash income--because
    of the reduced level of taxation and increase in the dividend payout
    rate--will result in more than $1 of new income throughout the economy.
    Budget Deficits and Fiscal Responsibility

        The Business Roundtable acknowledges the importance of federal
    budget deficits, but also understands the importance of a healthy
    economy. Short-term budget deficits are understandable when there is
    below-optimal economic growth and a need to stimulate economic growth
    by allowing individuals to keep more of what they earn.
        We believe the President's plan is fiscally responsible. Under the
    plan, deficits would start at 2.8 percent of GDP and decline to 1.4
    percent by 2008, and average 2 percent during 2003-2008. The economy
    can handle deficits of that relative size. Deficits averaged three
    percent of GDP during the 1970s and 1980s.
        The primary cause of the current deficit situation is declining
    revenues due to the 2001 recession and the anemic growth coming out of
    the recession. The key to returning to a balanced budget is to return
    to higher growth rates by stimulating the employment of underutilized
    resources in the economy (i.e., people and plant and equipment).
        According to the BRT study, one-third of the projected 10-year
    static deficit increase resulting from enactment of the President's
    plan would be eliminated as a result of the increased economic growth
    derived from the plan.
        At that level, the return on the government's investment in
    additional GDP would be 340 percent. On the dividend component alone,
    the return on the government's investment would be 630 percent. So we
    prefer to view the President's economic growth package as an investment
    in our economy.
    Conclusion

        We urge Congress to move quickly to enact an economic growth plan
    that will give an immediate boost to the economy and put people back to
    work. The President's plan is the best means for sustaining new job
    creation, business investment, and economic growth, both in the short
    term and in the long term. It is the right prescription for an ailing
    economy.

        Chairman THOMAS. Thank you, Mr. Castellani. Welcome, Mr.
    Gale.

     STATEMENT OF WILLIAM G. GALE, CO-DIRECTOR, TAX POLICY CENTER,
                         BROOKINGS INSTITUTION

        Mr. GALE. Thank you very much, Mr. Chairman, Mr. Rangel,
    and distinguished Members of this Committee. Thank you for
    inviting me to testify this afternoon. It is an honor to appear
    before this Committee.
        My comments will focus on the economic effects of the
    President's job and growth package as well as the broader
    context and the overall budget situation.
        Elsewhere I have described the President's tax proposals as
    an answer in search of a question. I believe the package
    overall is poorly designed and poorly conceived for almost any
    useful purpose.
        First, it is not a good way to stimulate the economy in the
    short run. Economists are fairly united on this, and even the
    Administration admits this on occasion.
        Second, it is not a good way to stimulate economic growth
    in the medium or longer term. A variety of studies show this.
    In particular, I draw your attention to a study by
    Macroeconomic Advisers, which is not a commissioned study. It
    was a study that they did on their own. They found no effect on
    GDP over 5 years. They found an increase in interest rates,
    which ultimately would raise the cost of capital and reduce
    productivity growth.
        It may seem strange that a tax cut on dividends might have
    this effect, but the logic is pretty straightforward. First of
    all, the tax cut would reduce national saving; that is, it
    would reduce government saving by more than it would increase
    private saving. That in turn reduces our future national
    income. Just like a household that saves less has less income
    in the future, a country that saves less has less income in the
    future, too.
        Second, although the proposal would definitely help the
    incorporated sector, it would definitely hurt other sectors of
    the economy, like small business and housing. They would be
    hurt because the way the proposal works would be to make
    corporate equities more attractive relative to all other forms
    of investment than it currently is. So you would expect funds
    to move from the small business sector, the unincorporated
    sector, into the incorporated sector. You would expect them to
    move especially from the housing sector, which is interest
    sensitive, to the incorporated sector. You would expect
    slowdowns in the unincorporated and housing parts of the
    economy.
        The slowdown would occur both because of the shift in
    resources from unincorporated sectors and debt to equity and
    because there would be an increase in interest rates. I don't
    want to get into a debate about whether budget deficits
    increase interest rates. Actually, I would be happy to, but I
    am not going to here. There is another reason that interest
    rates would go up, even if budget deficits have no effect on
    interest rates. That is, as money moves from bonds to equity,
    the value of bonds is going to fall. As the value of bonds
    falls, the interest rate has to rise by definition. So to the
    extent that the proposal is capable of drawing funds into the
    corporate sector, it is going to raise interest rates, and that
    will hurt the other sectors of the economy, even if deficits
    have no effect on interest rates.
        Third, the proposal is not even a good way to fix the
    corporate tax system. It is overly complex. It gives the
    dividend tax break in the wrong place. It gives windfalls to
    existing capital, but directs little of its gains to new
    investment. In short, it does the easy part of corporate tax
    reform. It cuts taxes while completely ignoring the hard part,
    which is the base-broadening, loophole-closing part. This is
    not what the Treasury focused on in 1992. The Treasury in 1992
    focused on revenue neutral, distributionally neutral corporate
    integration. I think everyone is in favor of that. That is not
    what this proposal is.
        Let me turn now to the broader budget package. The broader
    budget package has larger and equally regressive tax cuts, and
    it has reductions in spending programs that benefit low-income
    households, children's health, child care and education. The No
    Child Left Behind Act is funded at a level that is $9 billion
    below the amount authorized for 2004.
        At the same time, the budget makes unrealistic assumptions.
    It completely ignores the AMT. It uses a 5-year budget window,
    but then proposes tax cuts that are twice the size of the cost
    of fixing Social Security but that don't start until after the
    5-year budget window. Even under the Administration's
    assumptions, we have structural deficits as far as the eye can
    see, and those assumptions are much too optimistic.
        So given current circumstances, the job and growth package
    in particular and the budget in general are somewhere between
    disappointing and cynical documents. They would do little to
    address current economic problems. They would make long-term
    economic problems worse. At a time of impending war, they would
    provide windfall gains to the wealthiest citizens but impose
    stringent conditions on those who are least able to make
    sacrifices. I don't think I would describe that as
    compassionate public policy, nor would I describe it as wise or
    effective public policy. Thank you.
        [The prepared statement of Mr. Gale follows:]
    Statement of William G. Gale, Co-Director, Tax Policy Center, Brookings
                                  Institution
        Chairman Thomas, Ranking Member Rangel, and Members of the
    Committee:
        Thank you for inviting me to testify today. It is an honor to
    appear before this committee. President Bush and members of Congress
    have proposed several new tax-based incentives aimed to raise economic
    growth. My testimony is divided into two sections: a summary of the
    conclusions, and supporting analysis.
    Summary of major conclusions
         In considering policies to spur the economy, it is
    important to distinguish short- term and long-term problems. In the
    short-term, the major economic problem is inadequate aggregate demand,
    as evidenced in particular by low rates of utilization of capital among
    businesses. The key to boosting the economy in the short-run is
    boosting demand in order to fully utilize existing capacity. In
    constast, in the long-term, economic growth depends on the extent to
    which productive capacity (including physical capital, human capital,
    and economic institutions) is able to grow. Sustained increases in such
    capacity require increases in national saving.
         Tax cuts have ambiguous effects on economic growth in the
    long run. Tax cuts can affect economic growth in the long run through
    at least two channels. First, a tax cut will affect labor supply, human
    capital accumulation, saving, investment, entrepreneurship and so on.
    Second, the reduction in revenues will raise the federal deficit
    (unless matched by spending reductions) and hence reduce national
    saving. The net effect on growth is the sum of the (generally positive)
    effects created by more favorable economic incentives and the
    (negative) effects created by the increase in the deficit. For the tax
    cut to have a net positive effect on growth, the effects on labor
    supply, saving, etc., not only must be positive, they must be larger
    than the drag created by the increased deficit. Increased deficits
    reduce national saving and future national income regardless of whether
    deficits raise interest rates. One of the best ways to encourage
    economic growth is to keep national saving high, which in turn implies
    that public saving should be high.
         The 2001 tax cut was poorly designed to raise growth.
    According to Treasury data, 64 percent of taxpayers will receive no
    reduction in marginal tax rates. But the tax cut will reduce revenues
    by $1.7 trillion through 2010 and reduce national saving. Estimates of
    how deficits affect interest rates used by President Bush's Council of
    Economic Advisers imply that EGTRRA will raise the cost of capital for
    most investments. Researchers have generally found that the positive
    effects of the 2001 tax cut on labor supply, saving, etc., are likely
    to be offset by, and may well be outweighed by, the negative effects of
    the tax cut in reducing national saving.
         For the same reasons, accelerating the 2001 tax cut and/or
    making it permanent is unlikely to stimulate growth. An acceleration
    could raise the cost of capital on new investment for small businesses
    because it reduces the tax rate against which investment deductions may
    be taken. Likewise, making the 2001 tax cut permanent is neither
    affordable, nor would it do anything to spur growth currently. Given
    that EGTRRA as a whole probably had either a negligible or negative
    impact on growth, making it permanent is not a pro-growth strategy.
         The President's proposal to reduce taxes on dividends and
    capital gains is unlikely to generate much in the way of new growth. By
    reducing the double taxation of dividend income, the plan could reduce
    the cost of new corporate investments financed by new equity issues. It
    would not reduce the cost of investments financed by debt, and would
    likely reduce investment in non-corporate sectors, including housing
    and small businesses. It would also raise interest rates by encouraging
    investors to move from bonds to stocks. By raising deficits, it would
    reduce future national income. A study of all of these effects by
    Macroeconomic Advisers finds that plan would have no effect on average
    GDP between 2003 and 2007, would raise interest rates, and in the long
    run would reduce productivity.
         Increasing the temporary provision for partial expensing
    from its current 30-percent level is unlikely to spur much new
    investment. The primary problem that businesses face currently is
    inadequate demand and economic uncertainty, as evidenced by low
    capacity utilization rates. It is unclear why businesses would want to
    invest more, given that demand is so low they do not even use the
    capital they currently have.
         Small businesses would not generally fare well under the
    proposals under con-sideration. They would be helped directly by the
    proposed increase in expensing limits. But the acceleration of the tax
    cut, the dividend proposal, and the expansion of partial expensing
    would raise the cost of new investments and reduce the funds available
    for new investments by small business.
    Supporting text
    1. Description of proposals

        The President's budget contains four major tax-related proposals
    aimed at increasing economic growth. It would accelerate to January 1,
    2003, some, but not all, of the income tax cut provisions that were
    enacted in 2001 and scheduled to be implemented in the future. It would
    make EGTRRA permanent. It would exclude all corporate dividends from
    taxation under the individual income tax provided that corporate taxes
    have been paid on the earnings generating the dividends. A related
    provision would allow companies to deem dividends without actually
    paying them, thus reducing eventual capital gains and capital gains
    taxes for shareholder. It would increase the small business expensing
    limits to $75,000 from $25,000, and index for inflation. Another
    proposal that has been floated is to increase the 30 percent partial
    expensing for corporate investments (which was enacted in 2002 and
    applies to investments made between September 11, 2001 and September
    2004) to either 40 percent or 50 percent.
    2. Relations between tax cuts, deficits, and economic growth

        National saving is the sum of private saving (which occurs when the
    private sector spends less than its after-tax income) and public saving
    (which occurs when the public sector runs budget surpluses). National
    saving is identically equal to--and is used to finance--the sum of
    domestic investment and net foreign investment. Domestic investment is
    the accumulation by Americans of private assets at home, or of public
    (government) assets. Net foreign investment is the nation's investment
    overseas minus borrowing from abroad (foreign investment in the United
    States). An increase in net foreign investment may take the form of
    increased U.S. investment overseas, increased U.S. lending to
    foreigners, reduced foreign investment in the United States, or reduced
    U.S. borrowing from abroad. The composition of the change in net
    foreign investment is of secondary importance, and we will typically
    refer to an increase in net foreign investment as ``increased borrowing
    from abroad.'' We refer to the sum of domestic and net foreign
    investment as ``national investment.''
        In simplest terms, national saving must by identity equal national
    investment, and an increase in national saving must show up as an
    increase in domestic investment and/or net foreign investment. Either
    way, the accumulation of assets due to increased saving and investment
    means that the capital stock owned by Americans is increased. The
    returns to that additional capital--whether domestic or foreign--raise
    the income of Americans in the future.
        These macroeconomic building blocks highlight two key points: An
    increase in the budget deficit (a decline in public saving) reduces
    national saving unless it is fully offset by an increase in private
    saving, and a reduction in national saving must correspond to a
    reduction in national investment and in future national income, holding
    other things equal.
        Barro (1974) demonstrates that if households are fully rational and
    take the well-being of their descendants into account in formulating
    their consumption and savings patterns, reductions in taxes today would
    be balanced by offsetting increases in private saving today. In
    particular, households would recognize that the reduction in taxes
    today would increase future tax liabilities and thus save the tax cut.
    Numerous tests of household saving behavior, however, conclude that
    households do not follow the dictates of this model (Bernheim 1987).
    The implication is that increased budget deficits are not fully offset
    by increases in private saving, and therefore result in a reduction in
    national saving.
        A decline in national saving must reduce private domestic
    investment, net foreign investment, or some combination thereof. The
    reduction in investment reduces the capital stock owned by Americans,
    and therefore reduces the flow of future capital income. Either the
    domestic capital stock is reduced (if the reduction in national saving
    crowds out private domestic investment) or the nation is forced to
    mortgage its future capital income by borrowing from abroad (if the
    reduction in national saving generates a decline in net foreign
    investment). In either case, future national income is lower than it
    otherwise would have been.
    3. Changing EGTRRA

        A. EGTRRA and Growth--The analysis above considers only the effects
    of reduced budget surpluses or increased budget deficits per se. It
    establishes the crucial observation that, other things equal, smaller
    budget surpluses reduce future national income relative to what it
    would otherwise be, and do so regardless of how they affect interest
    rates. In this section, we point out that a full analysis of policies
    that raise deficits or reduce surpluses needs to take into account (1)
    the direct effects of the policy in question, ignoring any change in
    the deficit, and (2) the change in the deficit.
        The most recent prominent example of this issue is the 2001 tax
    cut. The net effect of the 2001 tax cut on growth is the sum of its
    direct effect on changes in incentives and after-tax income and its
    indirect effect through changes in the budget deficits. The improved
    economic incentives from provisions of the 2001 tax cut, analyzed in
    isolation, tend to raise labor supply, human capital accumulation, and
    private saving. But these changes in incentives are financed by
    reductions in public saving. Thus, to gauge the full effect on growth,
    one needs to factor in the effect of lower public saving on economic
    growth.
        Given the structure of the 2001 tax cut, researchers have generally
    found that the positive effects on future output from the impact of
    reduced marginal tax rates on labor supply, human capital accumulation,
    private saving and investment either substantially offset or even
    outweigh the negative effects of the tax cuts via reduced public and
    national saving (see Auerbach 2002, CBO 2001, Elmendorf and
    Reifschneider 2002, Gale and Potter 2002).
        There are several factors that help show why the effects of EGTRRA
    on growth are likely to be small or even negative. First, Treasury data
    in Kiefer et al (2002) show that 64 percent of tax filers with positive
    tax liability, accounting for 38 percent of all taxable income, would
    receive no reduction in marginal tax rates under EGTRRA. Most of these
    households were either in the 15 percent bracket or on the alternative
    minimum tax. Second, the increase in the deficit could raise interest
    rates and that increase would raise the cost of capital on new
    investments. President Bush's Council of Economic Advisers routinely
    uses an estimate that a $200 billion increase in the deficit raises
    interest rates by 3-5 basis points. If so, the $1.7 trillion cost of
    EGTRRA over the next 10 years would be expected to raise interest rates
    by between 25 and 42 basis points. Gale and Potter (2002) show that if
    EGTRRA causes interest rates to rise by 30 basis points, then the net
    effect of EGTRRA--including reduced marginal income tax rates--is to
    raise the cost of new investments for sole proprietors, for housing,
    and for corporate investments in structures. Only the cost of corporate
    investments in equipment would fall, and by less than 1 percent. Third,
    the reduction in federal surpluses (or increases in deficits) of $1.7
    trillion through 2011 will reduce national saving. The $1.7 trillion
    includes $1.35 trillion in tax cuts plus the additional debt service
    costs.
        B. Accelerating EGTRRA--All of the reasons noted above, combined
    with the fact that accelerating EGTRRA is a temporary tax cut, suggest
    that accelerating the 2001 tax cut would have negligible effects on
    growth. In fact, at least one aspect of accelerating the tax cut could
    reduce investment currently. The cost of capital that sole proprietors,
    partnerships, and S-corporations face on new investment depends in part
    on the present value of the depreciation allowances they are able to
    deduct. Thus, a business would like to deduct depreciation against high
    tax rates, since a $1 dollar deduction is worth more the higher the tax
    rate is. Right now, with tax rates poised to decline over time,
    businesses (other than C Corporations) face the rosy prospect of making
    investments now, taking the deprecation in the next few years at
    relatively high tax rates and then reporting the income in the future
    after 2006 against relatively low rates. Reducing tax rates now would
    reduce the benefit of the depreciation deductions and hence could
    reduce new investment by those businesses.
        C. Making EGTRRA Permanent--Making EGTRRA permanent is unlikely to
    stimulate growth, for the same reasons that EGTRRA is estimated to have
    little impact on growth over the next decade. Still it is worth noting
    that the Congressional Budget Office (2003) has estimated that letting
    EGTRRA sunset would reduce GDP by 0.5 percent. Perhaps surprisingly,
    this estimate is fully consistent with EGTRRA having little or no
    impact on economic growth over the past decade and little or no impact
    in the future.
        To see this, recall that taxes have two sets of effects--one on
    incentives and one on national saving via the deficit. The CBO estimate
    of the effects of letting EGTRRA expire is solely an ``incentive''
    effect. Note that it implies that the cumulative value of the
    incentives in EGTRRA would be to raise GDP by 0.5 percent over the
    decade. That implies an increase in GDP of about $81 billion by 2011
    (CBO 2003, table 1-2). But recall also that the full effects of EGTRRA
    are the incentive effects plus the impact on national saving. To
    calculate the latter effect, note that EGTRRA reduces budget surpluses
    by $1.7 trillion over the decade. Assuming that private saving rises by
    about one-third of this amount (based on Gale and Potter 2002),
    national saving falls by $1.13 trillion. With a 6 percent interest
    rate, the decline in national saving implies a reduction of $68 billion
    in income. That means that EGTRRA will raise GDP by only $13 billion
    (81-68) in 2011. This is less than 0.1 percent of GDP.
    4. The dividend proposal

        A. As corporate tax reform--The dividend tax proposal is intended
    to tax corporate income once and only once. Three points are important
    to emphasize about this proposal. First, most corporate income in the
    United States is not taxed twice. A substantial share of corporate
    income is not taxed at the corporate level, due to shelters, corporate
    tax subsidies and other factors (McIntyre 2003). Recent evidence
    suggests growing use of corporate tax shelters (Desai 2002).
    Furthermore, half or more of dividends are effectively untaxed at the
    individual level because they flow to pension funds, 401(k) plans, and
    non-profits (Gale 2002). Although data limitations make definitive
    judgments difficult, the component of corporate income that is not
    taxed (or is preferentially taxed) appears to be at least as large as
    the component that is subject to double taxation. That is, the non-
    taxation or preferred taxation of corporate income is arguably at least
    as big of a concern as double taxation.
        Second, the Administration's proposal would have no effect on
    firms' incentives to shelter and retain earnings to the extent that
    firms are owned by non-taxable shareholders. To the extent that firms
    are held by taxable shareholders, the Administration proposal would
    reduce incentives to shelter somewhat, but firms would still maximize
    shareholders' after-tax returns by sheltering corporate income from
    taxation and then retaining the earnings--the same strategy that
    maximizes taxable shareholders' after-tax returns under current law.
    Despite the Administration's claims to the contrary, the proposal
    therefore does not eliminate, and may not even reduce to a significant
    degree, the incentives that exist under the current tax system to
    shelter corporate income from taxation and then to retain the earnings.
        Third, the Administration's proposal may result in a variety of new
    tax shelters.
        A partial dividend exclusion is not a solution to these problems
    either. It just reduces both the benefits and costs of the proposal.
    Proponents of the dividend exclusion often note that many European
    countries have partially or fully integrated their corporate and
    personal tax systems. However, it is also the case that several
    European countries have recently moved away from integrated systems
    (Avi-Yonah 2003). In addition, the large share of corporate equities
    are held by shareholders that are not subject to individual dividend
    and capital gains taxes appears to be much higher in the United States
    than in most European countries.
        The bottom line is that the Administration's proposal does the
    ``easy'' part of tax reform: it cuts taxes. It fails, however, to do
    the difficult part of any serious tax reform effort: broadening the tax
    base and eliminating the share of corporate income that is never taxed
    (or taxed at preferential rates). That difference is what distinguishes
    ``tax reform'' from ``tax cuts.'' The approach proposed by the
    Administration would also undermine the political viability of true
    corporate tax reform. Any such reform would have to combine the
    ``carrot'' of addressing the double taxation of dividends with the
    ``stick'' of closing corporate loopholes and preferential tax
    provisions, but the Administration's proposal simply gives the carrot
    away. Burman (2003) and Gale and Orszag (2003) discuss modifications to
    the Administration's proposal that would represent a more balanced
    approach to changing the system of taxing corporate income.
        B. As a Growth Package--In the long run, the key to economic growth
    is to expand the capacity of the nation to produce goods and services.
    That capacity, in turn, depends on national saving. Yet the
    Administration's plan will expand the budget deficit, which will have
    the effect of reducing national saving. Only if the economic benefits
    of the policy changes generating the deficits more than offset the
    losses imposed by reduced national saving would the net effect be
    positive.
        A study by Macroeconomic Advisers (2003) reached the following
    conclusions regarding the growth and jobs package, including the
    dividend plan: The plan would have no effect on average GDP between
    2003 and 2007. Employment would grow by an average of 21,000 per year
    over the next five years. The yield on 10-year Treasury notes would
    rise by 23 basis points by 2004 and by about 50 basis points by 2007.
    In the long-term, productivity would fall and the cost of capital would
    rise, due to the effects of increased deficits on national saving and
    interest rates.
        It is worth emphasizing several reasons why the plan may not
    stimulate much if any growth. First, although the plan will help
    allocate an existing amount of investment more efficiently across
    sectors (though significant corporate tax reforms would do an even
    better job in this regard), by raising the deficit and reducing
    national saving the plan is likely to reduce the total amount of
    capital owned by Americans. Second, the impact on corporate investment
    will be muted to the extent that interest rates rise (due to making
    equities more attractive) and the extent to which investments tend to
    be financed with debt or retained earnings. Third, to the extent the
    proposal would attract funds to the corporate sector, those funds may
    simply generate one-time windfall gains in corporate stock without
    affecting investment. Any increase in stock values would raise
    consumption somewhat and would serve to reduce private saving. Fourth,
    to the extent that funds are channeled to the corporate sector, fewer
    funds may be available to finance investment by unincorporated business
    and S-corporations. To the extent that interest rates rise, investment
    in interest-sensitive sectors like housing may decline.
    5. Increase in partial expensing

        Expanding the partial expensing provision is unlikely to generate
    much in the way of new investment. Although there is an established
    research finding that, on average, cuts in the cost of capital raise
    investment, there is--to my knowledge--no evidence that demonstrates
    that such policies work well in the presence of substantial non-
    utilization of existing capacity. That is, the key question is not
    whether such incentives work well under average conditions, but whether
    they work well under acute conditions--with low investment and low
    capacity utilization.
        Intuition suggests that under current circumstances firms are not
    likely to be very responsive to changes in investment subsidies. For
    example, despite generous subsidies to new investment embodied in the
    2002 stimulus act (including the provision to allow 30 percent partial
    expensing in the first year), and despite low inflation (which reduces
    the cost of investing because it raises the value of nominal
    depreciation allowances in the future) and low interest rates,
    investment has remained constant or fallen over the last few years. If
    an increase from zero to 30 percent partial expensing had such a small
    effect on investment, it is hard to see how increasing it more would
    cause an investment surge.
    6. Effects on small business

        A key concern for policy makers is the impact of the tax cut plans
    on small businesses. The proposals in question would have a variety of
    effects on the small business sector and it is not at all clear that
    the sector would come out ahead (Lee 2003).

         Under the President's growth and jobs more than half (51.6
    percent) of tax returns with small business income would receive a
    direct tax cut of $500 or less in 2003.
         The expansion of small business expensing options will
    undoubtedly reduce the cost of capital for some small businesses and
    encourage them to invest more. Note, however, that this occurs only in
    a limited range of investment and the subsidies are taken back when
    investments reach a higher level.
         Lower marginal tax rates will improve cash flow and reduce
    taxation of income from old projects for some businesses but as noted
    above it will raise the cost of capital for new investments and thus
    may reduce new investments.
         The dividend proposal would divert capital from the small
    business sector and put upward pressure on interest rates, both of
    which would increase the cost of capital for small businesses and may
    reduce new investments by that sector.
         A recent study by Cullen and Gordon (2002) find that EGTRRA
    will reduce the level of entreprenuerial activity by reducing the tax
    benefits of entrepreneurship relative to other economic activity.
    Accelerating the tax cut or making it permanent may therefore be
    unlikely to help the small business sector as a whole. Cullen and
    Gordon (2002) argue that--and present evidence that--incentives to
    engage in entrepreneurial activity fall when individual income tax
    rates fall because small businesses can shelter income more effectively
    than wage earners can. Also, lower tax rates make risky projects
    relatively less attractive because the government bears less of the
    risk. Moreover, when personal tax rates are high, entrepreneurs have
    the advantage of being able to take losses at high personal tax rates,
    but if projects succeed they can incorporate and reduce their tax rate.
    References
    Auerbach, Alan J. 2002. ``The Bush Tax Cut and National Saving.''
                National Tax Journal. September. 55:3. 387-408.
    Avi-Yonah, Reuven S. 2002. ``Back to the 1930s? The Shaky Case for
                Exempting Dividends.'' Tax Notes. December: 1599.
    Barro, Robert J. 1974. ``Are Government Bonds Net Worth?'' Journal of
                Political Economy Vol. 82 No. 6 (Nov/Dec): 1095-1117.
    Bernheim, B. Douglas. 1987. ``Ricardian Equivalence: An Evaluation of
                Theory and Evidence.'' NBER Working Paper 2330. July.
    Blanchard, Olivier and Francesco Giavazzi. 2002. ``Current Account
                Deficits in the Euro Area: The End of the Feldstein-Horioka
                Puzzle? Brookings Papers on Economic Activity. 2: 63-146.
    Burman, Leonard E. 2003. ``Taxing Capital Income Once.'' Urban-
                Brookings Tax Policy Center. January.
    Congressional Budget Office. 1997. ``An Economic Model for Long-Run
                Budget Simulations,'' July.
    Congressional Budget Office. 1998. ``Description of Economic Models.''
                November.
    Congressional Budget Office. 2001. ``The Budget and Economic Outlook.''
                January.
    Congressional Budget Office. 2003. ``The Budget and Economic Outlook.''
                January.
    Desai, Mihir. 2002. ``The Corporate Profit Base, Tax Sheltering
                Activity, and the Changing Nature of Employee
                Compensation.'' NBER Working Paper 8866. April.
    Elmendorf, Douglas W. and David L. Reifschneider. 2002. ``Short-Run
                Effects of Fiscal Policy with Forward-Looking Financial
                Markets.'' Prepared for the National Tax Association's 2002
                Spring Symposium.
    Elmendorf, Douglas W. and Jeffrey B. Liebman. 2000. ``Social Security
                Reform and National Saving in an Era of Budget Surpluses.''
                Brookings Papers on Economic Activity 2000(2): 1-71.
    Elmendorf, Douglas W. and N. Gregory Mankiw. 1998. ``Government Debt.''
                NBER working paper no. 6470. March.
    Elmendorf, Douglas W. and N. Gregory Mankiw. 1999. ``Government Debt.''
                In Handbook of Macroeconomics Volume 1C, edited by John B.
                Taylor and Michael Woodford. Amsterdam: Elsevier Science
                B.V, 1615-1669.
    Feldstein, Martin S. and Charles Horioka. 1980. ``Domestic Savings and
                International Capital Flows.'' Economic Journal June Vol.
                90 No. 358 (June): 314-329.
    Feldstein, Martin S. and Phillipe Bacchetta. 1991. ``National Saving
                and International Investment.'' In National Saving and
                Economic Performance, edited by B. Douglas Bernheim and
                John Shoven. Chicago: The University of Chicago Press, 201-
                220.
    Gale, William G. 2002. ``About Half of Dividend Payments do not Face
                Double Taxation.'' Tax Notes, November 11.
    Gale, William G. and Peter R. Orszag. 2002. ``The Economic Effects of
                Long-Term Fiscal Discipline.'' Brookings Institution.
                December.
    Gale, William G., and Peter R. Orszag. 2003. ``The Administration's
                Proposal to Cut Dividend and Capital Gains Taxes.'' Tax
                Notes. January.
    Gale, William G., and Samara R. Potter. 2002. ``An Economic Evaluation
                of the Economic Growth and Tax Relief and Reconciliation
                Act of 2001.'' National Tax Journal. March. 55:1. 33-186.
    Gordon, Roger H., and Julie Berry Cullen. 2002. ``Taxes and
                Entrepreneurial Activity: Theory and Evidence for the
                U.S.'' NBER Working Paper w9015, June.
    Kiefer, Donald et al. 2002. ``The Economic Growth and Tax Relief
                Reconciliation Act of 2001: Overview and Assessment of
                Effects on Taxpayers.'' National Tax Journal. March. 55:1
                89-118.
    Lee, Andrew. 2003. ``President's Radio Address and Other Administration
                Statements Exaggerate Tax Plan's Impact on Small
                Businesses,'' Center on Budget and Policy Priorities,
                January 18.
    Macroeconomic Advisers. 2003. ``A Preliminary Analysis of the
                President's Jobs and Growth Proposals,'' January 10.
                www.macroadvisers.com.
    McIntyre, Robert. 2003. ``Calculations of the Share of Corporate
                Profits Subject to Tax in 2002.'' Citizens for Tax Justice,
                Washington, DC. January.
    Obstfeld, Maurice and Kenneth Rogoff. 2000. ``The Six Major Puzzles in
                International Economics: Is There a Common Cause?'' NBER
                Macroeconomics Annual 2000, edited by Ben S. Bernanke and
                Kenneth Rogoff. Cambridge: MIT Press. 339-390.
    Poterba, James M. 1998. ``The Rate of Return to Corporate Capital and
                Factor Shares: New Estimates Using Revised National Income
                Accounts and Capital Stock Data.'' Carnegie-Rochester
                Conference Series on Public Policy Vol. 48 (1998): 211-246.

        Much of this testimony is based on collaborative work with Peter
    Orszag. All errors and opinions are my own and should not be taken to
    represent the views of the Brookings Institution or the Tax Policy
    Center.

        Chairman THOMAS. Thank you very much. In attempting to
    artificially divide the President's package primarily in terms
    of the individual rates and the associated tax changes, such as
    the so-called marriage penalty and the child credit, from the
    dividend, I see we were not as successful as we had hoped to be
    because if we tell you to stay at the shallow end of the pool,
    you are going to swim to the deep end, anyway.
        I would like to ask some questions focused on the fact that
    all three of you were able to offer testimony in which, if my
    ear was working, I never heard the term ``stimulus.'' I heard
    ``immediate boost,'' ``jump-start,'' and a few more euphemisms.
        If the question were asked--and I think the President was
    correct in identifying his package overall not as a stimulus
    but, as he calls it, ``a jobs and growth package,'' if you were
    to look for those areas that could carry the old-fashioned
    label ``stimulus,'' would you find any? If it was an area where
    you would expect to find it, is it large enough to justify the
    term ``stimulus''? If it isn't, how big would it need to be?
    Mr. Glassman or Mr. Castellani or Mr. Gale?
        Mr. GLASSMAN. I don't think that this is a stimulus
    package. I think it is a growth package. I am glad that it is
    not a stimulus package because I think ``stimulus'' has
    connotations of kind of artificiality, sort of like a joy
    buzzer or something. I think that it will--stimulus tends to
    have negative effects on the back end. So I am happy this
    isn't.
        There are stimulating elements, certainly. The fact that
    investors will receive more current income as a result of
    dividends, the fact that they will be able to keep more of
    their own earnings as the rate cuts are accelerated, the fact
    that the child credit will directly put dollars in the pockets
    of parents with children--these will all have stimulative
    effects as long as people make the decision to spend that money
    rather than to save it. There will be stimulative effects. I
    just don't think that the major thrust of this--and I am glad
    it isn't--is quick fix, because I don't think that is what we
    need.
        Chairman THOMAS. When you are dealing with a more than $10
    trillion a year economy, if you really want to stimulate, it
    takes more than a trickle charge, and the dollar volumes here I
    think we are looking at probably don't meet that level either.
        Mr. GLASSMAN. No.
        Chairman THOMAS. Is that what you are saying?
        Mr. GLASSMAN. Absolutely, Mr. Chairman. As I say in my
    testimony, I think it is important to note that these are--the
    President's proposals are modest. In other words, they are--if
    you look at them from a static point of view, that is to say,
    if you think they will have no beneficial economic effect at
    all, that people will just take the extra money and flush it
    down the toilet, it represents about a little bit less than
    $700 billion, which is one-half of 1 percent of the total
    output of the economy over that period.
        Chairman THOMAS. Thank you.
        Mr. CASTELLANI. Mr. Chairman, I would take some issue with
    what my friend Jim just said, and that is, one of the things
    that is attractive about all of the elements in combination of
    this package is that it does provide both a short-term boost to
    the economy as well as an incentive for long-term growth.
        In the Business Roundtable view, both are needed. We have
    been concerned that the economy is growing well below its
    potential. We believe it can grow at rates in excess of 4
    percent without any fear of inflation, and it is growing below
    a rate where we can see substantial increases in jobs.
        Our analysis, which we have submitted with our testimony,
    shows that, in fact, all three elements--the rate acceleration,
    the acceleration of the credits, and the elimination of the
    dividend double taxation--contribute both in the short term and
    the long term. We see a substantial impact, if enacted by the
    middle of this year, to the economy in growth by the end of
    next year and see a substantial impact in job creation. So it
    is both in the short term and sustained over the 8 to 10 years
    that we have looked at it that it has benefits, and we believe
    both are necessary.
        Chairman THOMAS. Again, the term ``stimulus'' was not used.
    If you would take the analogy of a battery in the economy, you
    can either trickle charge it or you can jump-start it. I think
    the stimulus tends to be in the jump-start category, and you
    believe there are components that tend to lean toward the jump-
    start analogy rather than the trickle charge.
        Mr. CASTELLANI. We do. More importantly, we believe that is
    necessary.
        Chairman THOMAS. Is it enough, if you believe it is
    necessary? Or would you like more?
        Mr. CASTELLANI. In our deliberations, we felt that a
    package that could be in its first 2 or 3 years about in the
    $200 to $300 billion range would be sufficient to change
    behavior, and that is what this package and what H.R. 2
    achieves.
        Chairman THOMAS. Thank you very much. Mr. Gale?
        Mr. GALE. Thanks. This is not a stimulus, for two reasons.
    One is that the tax cuts being proposed in the budget are
    gigantic. If they were all enacted, they would be about 2.5
    percent of GDP by the end of the decade. Looking forward, that
    would be enough--that amount of money would be enough to solve
    both the Social Security and the Medicare part A financing
    problem over the next 75 years. So there are very large tax
    cuts being talked about. A very tiny fraction of those tax cuts
    that are being presented would take effect in this year and
    next year. So the proportion of the bill that is stimulus is
    minuscule.
        The second reason it is not stimulus is the structure of
    the tax cut itself. The idea that you are going to cut taxes
    permanently to boost the stock market on a one-time basis now
    and then you get some spending boost out of that, if you do the
    numbers, you get a spending boost of about $20 billion,
    assuming the stock market goes up 5 percent. In exchange for
    that, you are enacting a permanent tax cut that costs a lot in
    the out-years. So it is not well designed to generate stimulus.
        If you wanted to stimulate the economy now, you would do
    two things. One is you would get the money in the pockets of
    low- and middle-income households who are more likely to spend
    it. The Administration's proposal specifically doesn't do that.
    The two features of the income tax cuts in EGTRRA that it did
    not accelerate are: one, the refundability of the child credit;
    and, two, marriage penalty relief for low-income households. If
    you were concerned about stimulus or concerned about low-income
    households, you would accelerate those two items.
        The other thing that you can do, which is the single best
    thing to stimulate the economy now, is Federal aid for the
    States. We have been through this discussion many times, but
    the basic point is the States, in order to balance their
    budgets, are cutting spending and raising taxes. Both of those
    things hurt the economy right now, and any Federal aid to the
    States would directly offset that on a one-to-one basis. One-
    to-one is a far better ratio than you would get through any of
    these other stimulus ideas.
        Chairman THOMAS. Thank you. Would you find the child credit
    more attractive if it were refundable?
        Mr. GALE. If it were refundable, the money would be going
    lower in the income distribution than it currently is, and
    econometric evidence suggests that the likelihood of that money
    being spent is much higher than money that goes to people in
    the upper part of the income.
        Chairman THOMAS. So irrespective of whether you support the
    provision or not, making it refundable makes it more attractive
    to you.
        Mr. GALE. It makes it more of a stimulus.
        Chairman THOMAS. Yes. Okay. Thank you very much. Does the
    gentleman from New York wish to inquire?
        Mr. RANGEL. Thank you. Mr. Glassman and Mr. Castellani,
    would your support of the President's package be just as strong
    if you knew hypothetically as a fact that we were going to war
    in Iraq?
        Mr. CASTELLANI. Absolutely. We think that economic
    security----
        Mr. RANGEL. That is good. That is good.
        Mr. CASTELLANI. Plus, national security are tied.
        Mr. RANGEL. Mr. Glassman.
        Mr. GLASSMAN. Yes, sir.
        Mr. RANGEL. Would you say that if it was a short war, we
    went in there, got it done, and got out fast that it could
    actually be a stimulus to our economy?
        Mr. GLASSMAN. I am sorry. The war itself would be a
    stimulus?
        Mr. RANGEL. That is what I asked.
        Mr. GLASSMAN. No, I don't think war is ever a stimulus to
    an economy except in the sense that it changes an environment--
    --
        Mr. RANGEL. Mr. Castellani, do you think it would spur the
    economy at all?
        Mr. CASTELLANI. No.
        Mr. RANGEL. Do you think lower gas prices would have any
    impact on our economy, either one of you or both of you, if
    prices of oil were to drop? Do you think that might stimulate
    the economy at all?
        Mr. GLASSMAN. Yes.
        Mr. CASTELLANI. Yes.
        Mr. RANGEL. Do you think that if we went there, seized the
    oil fields, and managed to control or increase production, that
    would have any impact on the Organization of Petroleum
    Exporting Countries (OPEC) in terms of the price of oil in that
    area?
        Mr. GLASSMAN. I don't know whether it would have an effect
    on OPEC, but it would certainly increase supply a little bit at
    the margin and----
        Mr. RANGEL. No, no. I am asking----
        Mr. GLASSMAN. It would lower prices.
        Mr. RANGEL. You don't think that it would not--if we were
    able to control the production of oil in Iraq, you don't
    believe that would have any impact on the price of oil as it
    relates to OPEC?
        Mr. GLASSMAN. I think it would--technically--I don't know
    about OPEC, but it would certainly have----
        Mr. RANGEL. I am only talking about OPEC. I am not talking
    about anything else. I am talking about----
        Mr. GLASSMAN. The price of oil----
        Mr. RANGEL. The inability of OPEC to control the supply of
    oil if we were in control of the production.
        Mr. GLASSMAN. A little bit.
        Mr. RANGEL. Okay. How about you, Mr. Castellani?
        Mr. CASTELLANI. Well, you know, this is not an area that we
    have examined, but I would say that if the United States were
    controlling the production of oil in Iraq, it would have other
    political implications within the OPEC nations that might
    offset any advantage.
        Mr. RANGEL. Okay. Neither one of you have any idea, nor do
    we, whether we are going to war or not. Among all you people
    involved with business, if there was something that could have
    the cost implied that we would have with this war, the $100
    billion--we now get an estimate from the Administration that
    occupation could be $100 billion a year. Secretary Rumsfeld
    said it may take 4 weeks, 4 months, 4 years. You know, while we
    didn't hear the word ``stimulus,'' we didn't hear the word
    ``war,'' if there is a war. Does that have anything to do with
    whatever we are talking about today if it is a long-term war,
    in your opinion?
        Mr. GLASSMAN. Well, I think it does in the sense that if we
    have a long war, or if we have a war, period, I think it is
    important that----
        Mr. RANGEL. That is good. That is good.
        Mr. GLASSMAN. The economy----
        Mr. RANGEL. No, no, no. I just want to know----
        Mr. GLASSMAN. Remain sound.
        Mr. RANGEL. Whether it is a factor. The only reason I am--
    this man is rough on the time when he is not talking. So I just
    want to prepare for the next question. Do you think that a
    long-term war, Mr. Castellani, could have any impact on the
    budgetary situation that our great Nation finds itself in?
        Mr. CASTELLANI. I think the potential for the war right now
    is having a significant impact on the economy, both the war
    with Iraq, potentially, and the war on terrorism. Obviously war
    has its cost, but that does not mean, in our view, that we
    should forego opportunities to have a vibrant economy, too.
        Mr. RANGEL. I am just saying, wouldn't you want to know
    what the cost of the war is going to be? I understand the
    President said yesterday that if the diplomatic initiatives
    fail in North Korea, we are prepared to go militarily. We are
    in the Philippines. We are in Colombia. We are going to have to
    get more troops and all of these things.
        I am asking you, Mr. Castellani, as a businessman, should
    we consider or factor in the possibilities of the cost of this
    extended war as we look at this present budget before us? Just
    between you and me, the Administration has no figures to give
    us about a potential cost of the war. They haven't the
    slightest clue. They said to do that would be declaring war.
    Since you are not part of the Administration and you are
    nonpartisan, you could give us a professional view of this
    without saying that you are declaring war.
        It is a hypothetical. If we were involved in a long-term
    war and we had to fight more than one war at a time, like the
    President may do in North Korea, and if we have to send more
    troops to the Philippines and to Colombia, and we have an
    expanded search for Osama bin Laden, wherever he is, do you
    think that would be a factor in the budget that is before us
    today?
        Mr. CASTELLANI. Congressman, I have no idea--I have no way
    to calculate nor does the business community have a way to
    calculate the cost of the war or the scenarios under which it
    would be waged.
        Mr. RANGEL. If a big hurricane--if you were in business and
    they told you a big hurricane was coming, you would have no way
    to know whether the hurricane was coming or not. If that is
    what the experts were telling you and you were preparing a
    budget, would you prepare for a hurricane which I am describing
    as a war?
        Mr. CASTELLANI. Well, good risk management in business
    always prepares for as much of the uncertainties as we can
    identify and the costs that we can identify.
        Mr. RANGEL. Well, I am saying that the Administration
    refuses to identify any cost. Thank you, Mr. Chairman.
        Chairman THOMAS. Does the gentleman from Florida wish to
    inquire?
        Mr. SHAW. Briefly. Mr. Glassman, what effect do you see
    that the threat of war has had on the markets at this
    particular point?
        Mr. GLASSMAN. I am sorry, sir. On the stock market?
        Mr. SHAW. How the threat of war, what effect has that had
    on the markets?
        Mr. GLASSMAN. I think it has had a severe effect. The
    geopolitical situation, as Alan Greenspan calls it, has
    increased uncertainty as opposed to measurable risk. Everyone
    who goes in the stock market understands what the historic
    risks of investing are, or they should. There are
    uncertainties, like what we face today with Iraq and terrorism,
    that really scare investors. One of the responses that
    investors have is that they take their chips off the table.
    They basically say, ``I am not playing.'' Not only do investors
    in the stock market say this, but also businesses themselves.
    That is the condition that we are in today.
        When this situation clarifies itself, I think that will
    change. I would also say, in sort of late response to Mr.
    Rangel's question, that one-time expenses, even $100 billion--
    which, by the way, is less than 1 percent of this country's
    GDP--have far less effect on the overall structural economy
    than things that go on and on and on. Just like hurricanes. We
    can absorb that in this economy, and I think we need to look to
    the long term for economic growth and make these changes.
        Mr. SHAW. Thank you. Mr. Gale, I may have misunderstood
    what you said, so correct me if I have. I think I heard you say
    that doing away with the double taxation of dividends would
    have a one-time stimulus effect. Did I understand you correctly
    to say that?
        Mr. GALE. On the stock market I think is what I was
    referring to. That is, if you----
        Mr. SHAW. Yes, now, don't you think that it would have a
    permanent effect of making stocks a more desirable investment?
        Mr. GALE. That is what I meant. There would be a one-time
    ratcheting up in stock prices.
        Mr. SHAW. That would be permanent.
        Mr. GALE. Permanent, yes.
        Mr. SHAW. Mr. Castellani, would you comment on that,
    please?
        Mr. CASTELLANI. Yes. We think it has a number of benefits.
    First, of course, it puts more money in shareholders' hands and
    across the economy. More importantly, it is the gift that keeps
    on giving because it will change corporate behavior. That
    change is most manifested by the fact that it will increase
    payout ratios by corporations, which puts even more money into
    the economy and makes valuations of equities even more
    attractive because they have higher yields.
        Mr. SHAW. By ``the gift that keeps on giving,'' you take
    exception with what Mr. Gale just said.
        Mr. CASTELLANI. Well, he said it would have a one-time
    impact, but it is not a one-time event because over the course
    of time, payout ratios will continue to increase to meet
    shareholder demands, quite frankly, and because the disparity
    between retained earnings and distributed earnings has been
    eliminated.
        Mr. GALE. Could I try to clarify this?
        Mr. SHAW. Please do.
        Mr. GALE. Changing the dividend payout ratio doesn't change
    at all the amount of money that is in the economy. It just
    changes the amount that is in the firm versus the amount that
    the shareholder has in their pocket. Whether it is a good or
    bad thing is different, but changing the dividend payout ratio
    doesn't alter the size of the economy.
        Mr. SHAW. Listen to your own testimony, because your
    message to us is that to put the money in the hands of the
    consumer was the best place to put it.
        Mr. GALE. I think I said that if you wanted to stimulate
    the economy in the short run, you would get a bigger stimulus
    by putting money in consumers' hands than putting it through
    the stock market. That is correct.
        Mr. SHAW. This is a long-term--putting more and more money
    into the hands of the consumers.
        Mr. GALE. That doesn't change anything about the fact that
    you would get a permanent ratcheting up in the stock market.
        Mr. SHAW. Also, I think it is important--I think it is also
    important to realize that by making the stock market a more
    desirable place to invest, that stimulates the investment in
    capital.
        Mr. GALE. Well, there is an issue there because the bigger
    the initial stock market effect, the smaller the ultimate
    investment effect. The bigger the stock market effect, the more
    of the benefit is a windfall gain to existing investors. The
    reason I say it is a windfall gain is because when they bought
    their stock, they bought it knowing that there was double
    taxation, and, therefore, they paid a lower price than they
    otherwise would have.
        So when you remove double taxation on existing stock, you
    give them a windfall gain. That windfall gain doesn't do
    anything to stimulate new investment. The right way to
    integrate the corporate and individual tax is moving forward by
    cutting the tax on new investment. Cutting the tax on old
    investment doesn't do anything for economic growth.
        Mr. SHAW. One follow-up, if I may, Mr. Chairman. That
    ratcheting up in the price of the stock will also develop into
    more revenue into the Federal Government, which will in itself
    reduce the proposed deficit or the revenue shortfall caused by
    the elimination of the double taxation.
        Mr. GALE. I think that is included in JCT's estimates.
        Mr. SHAW. Thank you, Mr. Chairman.
        Chairman THOMAS. The gentleman's time has expired. Does the
    gentleman from California, Mr. Stark, wish to inquire?
        Mr. STARK. Thank you, Mr. Chairman. Mr. Gale, the President
    and the Administration are fond of saying that we are going to
    have 92 million Americans who are going to get 1,083 bucks, on
    average. Yet Brookings, which I am sure you are familiar with,
    and the Urban Institute show that almost half of all the
    taxpayers would see their taxes drop by less than $100.
    Meanwhile, the tax savings for the 1 percent with the highest
    income would be around $24,000.
        Wouldn't using the $100 be a more truthful estimate of the
    typical tax cut that would come out of this new plan?
        Mr. GALE. Definitely. For all filers, the typical tax cut
    is $100. For all taxpayers----
        Mr. STARK. Now let me go on another step, because this is
    where I am having trouble making this all--Mr. Castellani, I
    think it was in your testimony that you think that--while you
    say there are 1.5 million fewer people employed today than
    there were 2 years ago--when, by the way, we tried a tax cut
    and that didn't do any good, did it? The 2001 tax cut didn't
    create any jobs, did it?
        Mr. CASTELLANI. Well, I would say our view is the 2001 tax
    cut did have a significant benefit----
        Mr. STARK. So you think there would have been even more
    people out of work if we hadn't cut those taxes?
        Mr. CASTELLANI. Particularly mitigating the impact of the
    terrorist attacks.
        Mr. STARK. So we cut and cut and cut, and we certainly
    have--why, we could cut ourselves right into a boom time. You
    say that there are 1.5 million fewer employed, and I believe
    you would all agree, I think, that there is somewhere around a
    million people today who lost their unemployment benefits right
    after Christmas, on December 28th. This Administration is the
    only one of the three most recent Republican Administrations
    that has not extended unemployment benefits for either 33 or 36
    weeks.
        Now, they say instead that they are going to go out and
    train people. I don't know what they are going to train them
    for, these unemployed people. First of all, they had to have a
    job to get unemployment, so they were doing something before
    they got laid off or the company went broke or whatever. It is
    a mystery to me what they are going to train them to do. Are
    they going to train plumbers to be chiropractors and--I don't
    know what. These people arguably don't need training. They were
    working. They just don't have a job. You have all talked about
    getting some money into the economy, stimulus.
        So for a measly 4 or 5 billion bucks, we could extend--and,
    by the way, that is in the unemployment trust fund. We could
    extend these unemployment benefits for a million people. That
    means they could pay their rent and buy food and buy shoes for
    their kids and do all the things that they are unable to do
    now, and arguably that money would come right back into the
    consumption stream of this country.
        So it puzzles me why we should train people to do something
    when arguably it isn't the training, it is that there aren't
    any jobs. So why not in the interim, if you wanted to get some
    money to stimulate the economy, you wanted to help some people
    who aren't welfare cheats, they are not terrorists, they are
    just people who, through no fault of their own, are out of
    work. Why wouldn't it, Mr. Gale, be far more efficient with the
    taxpayers' dollars, which wouldn't take much, to extend these
    unemployment benefits to these million people?
        Mr. GALE. If the goal is to stimulate the economy in the
    short run, that is another option that would have a much bigger
    bang for the buck.
        Mr. STARK. How about just being compassionate to people who
    are down on their luck?
        Mr. GALE. I would buy that one, too. In any case, it would
    give you a much bigger stimulus impact per dollar spent,
    studies suggest, than would accelerating the upper-income tax
    rates, for example.
        Mr. STARK. Mr. Castellani, why wouldn't your membership buy
    into this? It isn't going to cost them anything.
        Mr. CASTELLANI. Congressman, the real tragedy of this
    economy are the people who have lost their jobs, and that is
    precisely why we have been looking for and have been
    advocating, a growth package that will help us create jobs.
        Mr. STARK. While you are looking around for that, what is
    wrong with the idea of doing what President Reagan did and the
    previous President Bush did and let these people have some
    decent standard of living and stimulate the economy for another
    33 weeks?
        Mr. CASTELLANI. We think that it is absolutely--and as the
    Congress has done--necessary to extend the unemployment
    benefits for the people who have been laid off. We think it is
    much more important to create jobs so that they can come back
    into the workforce and help stimulate----
        Mr. STARK. I am with you. Would you send the message back?
    It wouldn't cost much, it would be humane, it would keep people
    from sitting on the street with tin cups, and they would be
    there when your factories start up again. We would have those
    people in the neighborhood ready to go back to work. Thank you.
        Chairman THOMAS. The gentleman's time has expired. Does the
    gentleman from Illinois, Mr. Crane, wish to inquire?
        Mr. CRANE. Thank you, Mr. Chairman. To all of you, in
    addition to increasing the amount that a small business can
    expense, the proposal also increases the number of companies
    eligible for the provision. Treasury Secretary Snow told us
    yesterday that an estimated 23 million small businesses will be
    eligible for Section 179 expensing if this proposal is enacted.
        Can you comment on how this will affect the economy in the
    short term? Starting with you, Mr. Glassman.
        Mr. GLASSMAN. Thank you, Congressman. Well, I think this is
    an excellent idea. It will directly encourage small businesses
    to make the kinds of investments that they haven't been making
    right now. They don't have that added incentive to do so, and,
    frankly, I would like to see this same program extended beyond
    small business. We just need more investment in this country.
    That is really our major advantage over other nations, so I
    think it is a very good idea.
        Mr. CRANE. Mr. Castellani?
        Mr. CASTELLANI. Congressman, the Business Roundtable
    members are a lot of things, but small business is not one of
    them. We, of course, and our members would not benefit from
    this, but we do believe it would be helpful, and helpful for
    small business that does generate many of the jobs in this
    country, and we would encourage it and support it.
        Mr. CRANE. Mr. Gale?
        Mr. GALE. This bill is a Faustian bargain for small
    businesses. It is true that they get the increase in expensing,
    but I think it is also worth pointing out that that is only
    about 1 percent of the total tax cut.
        Under the President's bill, more than half of tax returns
    with small business income would get a tax cut of less than
    $500. That is one issue. A second issue is that, as I mentioned
    before, the dividend proposal would divert capital from the
    small business sector, unambiguously, and put upward pressure
    on interest rates, both of which would increase the cost of
    capital for small businesses and could reduce new investments
    in that sector.
        So if I were a small businessman, I would think twice
    before I enthusiastically signed on to this package.
        Mr. CRANE. Even though you were getting relief.
        Mr. GALE. Well, you are getting the direct relief, but
    remember, a lot of businesses are not getting very much relief.
    More than half are getting $500 or less. You are getting
    indirect expense via the fact that there is going to be less
    financing available for the small business sector, and that
    which is available is going to be more expensive. So they would
    have to weigh whether their particular tax cut is big enough to
    outweigh the costs of less available credit and more expensive
    available credit.
        Mr. CRANE. Can I put a general question out to all of you
    again? That is, do businesses pay taxes? Or is that not just a
    cost of doing business, like plant and equipment and labor, and
    you have got to absorb your costs and pass them on to the
    consumer and get a fair return on investment or you are out of
    business?
        Mr. GALE. There is a distinction here between corporations
    and unincorporated businesses. In corporations, it is axiomatic
    among economists that businesses don't pay taxes, people do.
    That is, corporations either pass the tax along to their
    customers, their workers, their suppliers, or if none of the
    others, they pass it on to their shareholders.
        In a small business, the owner is the shareholder, the
    worker, the manager, et cetera. So I think in a very real sense
    it is often the case that the owner of the small business would
    bear the burden of less credit and higher interest rates.
        Mr. CRANE. For him to survive, he has got to pass that tax
    cost on to the consumer of whatever it is he is marketing. It
    is a form of stealth taxation.
        Mr. GALE. If that were the case, then small business should
    have no complaints about taxes on their products.
        Mr. CRANE. Why? Why shouldn't they have a complaint?
        Mr. GALE. If it is just passed on to the consumers, then it
    doesn't make the small business any worse off.
        Mr. CRANE. Yes, but not every one of them can pass it on.
        Mr. GALE. Well, that is my point exactly. If they can't
    pass it on, they are bearing the burden. That is exactly my
    point.
        Mr. CRANE. Absolutely. All right. Thank you.
        Chairman THOMAS. The gentleman's time has expired. Does the
    gentleman from Michigan, Mr. Levin, wish to inquire?
        Mr. LEVIN. Thank you, Mr. Chairman.
        Just one brief comment, Dr. Gale, on your excellent
    testimony. You referred to deficits as far as the eye can see.
    I think that there are now deficits much further than the eye
    can see. This relates, unless you believe deficits don't
    matter, to interest rates, which affect small business.
        Mr. Glassman, we were talking about Iraq and the impact on
    the stock market. As I remember it, the stock market began to
    go not up toward your 36,000 but down, before Iraq became an
    imminent--if it isn't that, a clear issue on the horizon. So
    our economic troubles began before Iraq was the predominant or
    dominant feature.
        Mr. Castellani, let me just go back to you for a moment,
    because your testimony said that that is why last November the
    Roundtable urged the President and Congress--this is on page
    2--to take immediate action on a large economic growth package
    aimed at consumers. So just quickly, in 30 seconds or so, tell
    me what parts of this package are directly aimed at consumers
    and what percentage of it.
        Mr. CASTELLANI. Well, in fact, all of it is aimed at
    consumers. What we were saying in that point is that from our
    perspective, given the choices to stimulate economic growth, we
    didn't incentives to invest in more capacity. We have more than
    sufficient capacity in manufacturing and services across the
    economy to meet demand from American and worldwide consumers.
        What we felt was necessary was to stimulate that
    consumption at a greater level than we are currently seeing and
    what we anticipate.
        Mr. LEVIN. Okay. So, your proposal had some change in the
    payroll tax, right?
        Mr. CASTELLANI. We initially proposed looking at a change
    in the payroll tax and accelerating the tax cuts and
    eliminating the double taxation.
        Mr. LEVIN. The payroll tax proposal would have directly and
    substantially affected consumers, right?
        Mr. CASTELLANI. Yes, it would.
        Mr. LEVIN. That is not in this package, right?
        Mr. CASTELLANI. It is not.
        Mr. LEVIN. Let me just say a few words and ask Mr. Glassman
    about stockholders because your testimony very much emphasizes
    them. I just want to read some figures. I think we need to look
    at the facts here about stockholders. The data I have show that
    for those in the top 10-percentage bracket by income, other
    than retirement funds, 60 percent have stock directly, while
    for the middle 20, it is about 16 percent. Do you have any
    reason to challenge those figures?
        Mr. GLASSMAN. About direct ownership of stocks?
        Mr. LEVIN. Yes. Other than retirement funds, this is the
    direct ownership of stocks, and I will get to mutual funds in a
    minute. Do you have any reason to challenge those figures?
        Mr. GLASSMAN. I actually don't know the figures. I know
    that many Americans own stock through mutual funds and many
    through individual shares, and they do both.
        Mr. LEVIN. It is important as we look at the dividend issue
    to look at who owns stock outside of retirement funds that
    aren't going to benefit from it directly. There is a dramatic
    differential. Your testimony is just replete with the notion
    that America is just filled with people who own stock, the
    assumption is in a degree that they have a real important stake
    in what happens in terms of their decisions.
        Mr. GLASSMAN. I think that is true, absolutely.
        Mr. LEVIN. When you look at the figures, so much of this is
    in retirement funds that they don't have direct control over. I
    don't control my investments in my retirement funds, and in
    most cases, they don't either.
        So if you look at the percentages, the percentiles, for
    example, those in the 25th to 50th bracket who own stock
    outside of retirement funds, less than 10 percent own stocks
    and quite a bit less than 10 percent have investment in mutual
    funds. Those probably overlap a great deal. So there is a huge
    differential between those who own stocks outside of retirement
    funds according to income, a huge differential. When we look at
    the impact of the dividend change, you have to look at those
    facts.
        So, I am going to send these to you, and I would like you
    to challenge them.
        Mr. GLASSMAN. Thank you. Let me just make two quick
    comments. First, when Americans own shares--or actually own
    mutual funds through 401(k) plans, defined contribution plans,
    they are--it depends on how you define ``control,'' but they
    are in control of that money. It is quite different from an
    old-fashioned defined benefit plan. They own those stocks. They
    own those mutual funds. That means something to them, number
    one.
        Number two, as I said in my testimony, even people who own
    stocks in non-taxable accounts will benefit directly from this
    change in the dividend law because the income which the people
    who own the stocks in taxable accounts receive will go up.
    Therefore, shares become more valuable to those people. They
    bid up the price of the shares, and everyone who owns the
    shares, whether they own them in a taxable account or a non-
    taxable account, benefits.
        Mr. LEVIN. That is your assumption and your prediction, and
    I think we need to be a bit skeptical about that.
        Mr. GLASSMAN. I agree, but I think that----
        Mr. LEVIN. About your predictions.
        Mr. GLASSMAN. Mr. Gale would agree with that prediction. As
    he said, you would have a one-time increase in stock prices for
    everybody, not just taxable accounts but also for non-taxable
    accounts. I will look at your----
        Chairman THOMAS. The gentleman's time has expired, but I
    wonder if Mr. Gale agrees with that.
        Mr. GALE. There is an issue basically----
        Chairman THOMAS. I won't limit you to Charlie's ``yes'' or
    ``no.''
        Mr. GALE. Okay. Well, basically the answer is yes, I think
    there will be a general boost in the market. It will be
    different depending on whether firms pay dividends, how much
    they pay. Yes, generally there should be a boost in the market.
        Chairman THOMAS. Does the gentleman from California, Mr.
    Herger, wish to inquire?
        Mr. HERGER. Yes, thank you very much, Mr. Chairman. Mr.
    Glassman, could you tell me just in general, is the American
    public, i.e., small businesses, businesses, the public in
    general, are they being taxed at a low historic rate, about
    normal, high? Do you know offhand?
        Mr. GLASSMAN. American businesses?
        Mr. HERGER. Our public in general, yes, and small business
    and those that are creating jobs.
        Mr. GLASSMAN. Well, I can give you one fact which is based
    on the work of some of my colleagues, including Kevin Hassett
    at the American Enterprise Institute, that corporate taxes,
    when you include the tax on dividends, are now higher in the
    United States than in any industrialized country other than
    Japan. As for the rates for small businesses, if they are
    unincorporated small businesses, they are paying generally at
    the top individual ordinary rate, which is now 38.6 percent,
    which is certainly a good deal higher than it was not too many
    years ago. So, in my opinion, yes, these are high tax rates.
        Mr. HERGER. Could you also tell me, in your opinion--the
    President's plan would raise the tax credit on--child tax
    credit from its current $600 to $1,000. What effect do you feel
    that would have on the low-income taxpayers? Do you feel that
    would help our economy in the short term?
        Mr. GLASSMAN. I think this is a very important question,
    and I am sorry that we neglected, all three of us neglected to
    discuss this, as the Chairman sort of chided us on this. There
    will be really quite dramatic declines in the amount of money
    that middle-income and sort of lower-middle-income Americans
    will be paying in individual income taxes if this passes. One
    example is that a family making $60,000 a year, a married
    couple with two children, which, by the way, is the average for
    a married couple with two children, will see their taxes
    decline from $3,750 to $2,850, a $900 decline, which is a
    decline of 24 percent. A family making $40,000 will essentially
    have their entire tax bill--a similar family with two children
    will have their entire tax bill wiped out.
        I think this is a message--I don't want to criticize the
    White House because I think they have done generally a good job
    in presenting this tax package. This is a message which most
    Americans don't understand. This bill is indeed targeted toward
    low--and middle-income individuals who pay taxes. It is true
    that large numbers of people who now currently don't pay taxes
    or pay very, very little in the way of taxes are not helped
    that much by it. Middle-income, lower-middle-income Americans,
    absolutely.
        Mr. HERGER. So, therefore, the accusation we hear from some
    of our friends on the Democrat side of the aisle that this is
    mainly helping the fat cats just isn't true?
        Mr. GLASSMAN. No. Let's look at this way: The general cut
    across the board that the President has made is actually--
    actually, there is more of a cut at the lower end, where the
    bottom bracket goes from 15 percent to 10 percent, than at the
    top end, where it goes from 39.6 to 35. That is proportionally
    much greater.
        The problem that you have in cutting taxes across the board
    or anything close to proportionally in this society is that the
    top 5 percent of taxpayers pay 56 percent of all individual
    income taxes, and the bottom 50 percent of taxpayers pay 4
    percent. So you would have to skew your tax cuts so much in
    order to get the dollar amounts to be about equal. I think this
    is actually quite a fair tax cut.
        Mr. HERGER. Did I misunderstand what you said? The top 5
    percent pay--how much, what percentage?
        Mr. GLASSMAN. The top 5 percent of earners, that is to say,
    people with incomes over $121,000--these are the latest
    Internal Revenue Service data--pay 56 percent of all individual
    income taxes.
        Mr. HERGER. Over half, 56 percent. The bottom 50 percent of
    earners pay?
        Mr. GLASSMAN. Four percent.
        Mr. HERGER. Four percent.
        Mr. GLASSMAN. I will also point out that those who pay the
    56 percent also have 34 percent of the income. In other words,
    they pay a much larger percent of the total piece of the pie
    that they represent. This is only individual income taxes. I
    don't want to exaggerate this. It does not include payroll
    taxes, which go to Social Security and so forth.
        Mr. HERGER. Right. Mr. Castellani, there have been several
    proposals that have been offered by our Democrat friends that
    focus on a one-time increase in Government spending and
    temporary tax cuts. Do you feel that such policies have any
    sustained, long-term economic benefit?
        Mr. CASTELLANI. No, we do not. We think that the wisdom and
    the benefit of this proposal is that it provides a substantial
    stimulus in the short term in the amount of money that it puts
    into the economy. As importantly, and perhaps more importantly,
    it provides substantial incentive for growth over the long
    term, so you really get the best of both that we are looking
    for to get the economy back on track.
        Mr. HERGER. Thank you very much. Thank you, Mr. Chairman.
        Chairman THOMAS. The gentleman's time has expired. Does the
    gentleman from Maryland wish to inquire?
        Mr. CARDIN. Thank you, Mr. Chairman. Thank you very much. I
    am having a hard time following a lot of the logic of this
    hearing. I just recently had a meeting of the CEOs in
    Baltimore, and we went over what we could do to try to help
    this economy. The message I heard from my CEOs was that the
    Federal Government should have a responsible budget, that it
    should work for a bipartisan budget, one that exercises
    restraint, and that would be the most positive message that we
    could give for growth in this Nation. They reminded me of the
    pay-go rules we used to have in effect here in Congress that
    put restraints on spending, on entitlement spending, and on tax
    expenditures.
        Now we seem to have ignored all that. Anything is free to
    go when it comes to tax cuts. Any tax cut appears to be good,
    even though we know that it is going to add to the amount of
    deficits, and even though Alan Greenspan is saying what I think
    many of us believe, that ultimately large deficits are going to
    lead to higher interest rates, which is not going to be good
    for anyone in job creation in our community.
        If you were a CEO of a company and you had a bad year,
    large deficits, you had to borrow money to give dividends, I
    don't think you would increase your dividends. I really don't
    think you would do that. Yet you are suggesting that here we
    are with larger deficits, a reversal of our economy, we have to
    go out and borrow every dollar that we are going to be paying
    off in extra taxes, and all of a sudden that is going to be
    good.
        Something is lost in the consistency from the business
    leadership in our community, here the representatives in
    Washington. I think in my district they are telling me the
    right message. It is a message from both Democrats and
    Republicans, because both parties have been doing things that
    may be concerned about the deficit. I would expect from our
    business leadership a little bit more conservative policies as
    it relates to the deficit, or maybe just deficits aren't
    important anymore.
        Mr. CASTELLANI. Congressman, if I might respond, the
    Business Roundtable and their CEOs remain absolutely committed
    to the need to balance the budget, particularly when the
    economy is operating at a robust level. That is when we are the
    most concerned about deficits, when the economy is operating at
    a robust level. Just like any company with a strong balance
    sheet can use that strong balance sheet when times are not as
    good to develop new product, to develop new sources of income,
    we believe that now is the time to use the strong balance sheet
    that the United States does have to stimulate the kind of
    growth, coupled with spending discipline, that we will see from
    this package to get jobs, to get income, to get tax revenue,
    and ultimately get back to balanced budgets.
        Mr. CARDIN. Economists will tell you that if you want to
    stimulate the economy, put it into the economy now, trigger it
    all, and have long-term accountability. Yet the dividend
    exclusion does just the reverse. A small percentage affects
    2003. It is a long-term policy. You just said to use your
    balance sheets to stimulate the economy, but you don't change
    your balance sheets into long-term deficits. That is, it seems
    to me, what you are suggesting here.
        I really do look to you for leadership on this issue to try
    to build bridges between the policies here. I must tell you, I
    am disappointed. I think we could come up with any tax proposal
    and you would support it. You lose credibility when you do
    that. I mean, there are legitimate questions as to the
    President's policies, and I would have hoped we would have had
    some at least critical discussions of it today. I am just
    disappointed.
        Mr. CASTELLANI. Congressman, we believe that particularly
    the dividend proposal is the one that provides, for a
    relatively small investment, a tremendous return. If you look
    at our models and our results, we are looking at a proposal
    here that, in total, makes a $687 billion investment--and those
    were the numbers we had at the time that we ran these models--
    and gets back a $1.5 trillion increase in GDP.
        Mr. CARDIN. Could the President come in with----
        Mr. CASTELLANI. That is a heck of a return.
        Mr. CARDIN. Is there any tax cut the President would have
    come in with that you would not have supported?
        Mr. CASTELLANI. We are not asking for nor would we be
    supporting changes to provide incentives for increased
    investment directly on corporations.
        Mr. CARDIN. Does the President have that proposal? I didn't
    see that.
        Mr. CASTELLANI. There have been a number of proposals that
    have said what we need is accelerated depreciation, more bonus
    depreciation. What the members of the Business Roundtable are
    saying is, no, the focus should not be on corporate taxes; the
    focus should be on stimulating consumer confidence, investor
    confidence, and consumer spending.
        Mr. CARDIN. Mr. Chairman, thank you for your attention.
        Chairman THOMAS. I thank the gentleman. Again, he ends
    right on time. Does the gentleman from Louisiana, Mr. McCrery,
    wish to inquire?
        Mr. MCCRERY. Yes, thank you, Mr. Chairman. Thank you all
    for your testimony. Mr. Gale, it is always a pleasure to have
    you with us. You are always well prepared and give us lots of
    information. Are you an economist?
        Mr. GALE. Yes. I have a Ph.D. from Stanford.
        Mr. MCCRERY. Well, I am a lawyer, so I hesitate to make
    economist jokes.
        Mr. GALE. Go ahead.
        [Laughter.]
        Mr. MCCRERY. There are plenty. Is Glenn Hubbard an
    economist as well?
        Mr. GALE. Glenn Hubbard is an economist.
        Mr. MCCRERY. He teaches----
        Mr. GALE. A very good economist.
        Mr. MCCRERY. He teaches at Columbia, right?
        Mr. GALE. Yes.
        Mr. MCCRERY. Isn't he the main architect of the President's
    tax proposal?
        Mr. GALE. I am not privy to the inside workings of the
    Administration, but my understanding is what you just said.
        Mr. MCCRERY. Well, at least you have heard him extol the
    virtues of the President's proposal.
        Mr. GALE. Certainly.
        Mr. MCCRERY. So I think it is fair to say, wouldn't you
    agree, that good economists like you and Mr. Hubbard can
    disagree on the impact of the President's proposals.
        Mr. GALE. Absolutely, and where we agree is that we both
    think corporate integration would be a fine idea. Where we
    disagree is that I think it should be revenue and
    distributionally neutral, and Mr. Hubbard, if he is the one
    that proposed this policy, proposed an integration scheme that
    loses revenue and is regressive.
        Mr. MCCRERY. Okay. Thank you. Mr. Glassman, and, really,
    all three of you, do you think that the dividend proposal in
    the President's plan would increase the value of the stock
    market, all other things being equal?
        Mr. GLASSMAN. Yes.
        Mr. CASTELLANI. Yes.
        Mr. GALE. Yes.
        Mr. MCCRERY. Okay. Isn't that a good thing?
        Mr. GALE. It depends what you are trying to do.
        Mr. MCCRERY. Sometimes it is a bad thing.
        Mr. GALE. If you are trying to stimulate the economy, there
    are less expensive ways to do it in the short run. Remember,
    the bigger stock market boost you get, the smaller is the
    investment boost you are going to get out of it in the long
    term. This goes to a complicated issue in corporate finance
    that Mr. Hubbard has done a lot of work on about the old view
    versus the new view of corporate finance. Basically the bigger
    impact you get from abolishing dividends, the less likely you
    are to get an investment boost from it.
        In the extreme, under the new view, the entire dividend cut
    would show up as a stock market boost on the order of about 10
    percent, and there would be no change in investment. Under the
    old view, you would get about 3 or 4 percent in the stock
    market, and there would be an investment response.
        Mr. MCCRERY. So if we go with the new view and we get a 10-
    percent increase in the value of the stock market----
        Mr. GALE. No new investment.
        Mr. MCCRERY. Well----
        Mr. GALE. If you want the new view, that is the new view.
        Mr. MCCRERY. I hate to bring up Mr. Greenspan, but Mr.
    Greenspan often talks about the wealth effect of the stock
    market. He used to a long time ago, 2 years or 3 years ago.
    Isn't there something to that? I mean, if you increase the
    value of the stock market by 10 percent, aren't those of us who
    are invested in the stock market going to feel better about our
    situations and----
        Mr. GALE. Yes, so----
        Mr. MCCRERY. Go out perhaps and spend more and----
        Mr. GALE. Rough numbers, the stock market is, say, $8
    trillion; 10 percent would be $800 billion. If you assume
    people will spend about 3 percent of that, say--that is the
    wealth effect--that is about $24 billion in added spending. By
    comparison, that is about half as big as the rebate in 2001,
    which was $40 billion. So you are spending hundreds of billions
    of dollars over the next umpteen years in order to get a $24
    billion stimulus now, and that is what I meant when I said
    earlier that this is not an efficient way to stimulate the
    economy in the short run. It is much more a kind Rube Goldberg
    scheme than a direct stimulus.
        Mr. MCCRERY. So when Mr. Greenspan used to talk about this
    wealth effect, he really was just talking about some trivial
    matter, shouldn't have probably even brought it up.
        Mr. GALE. No, no, no. That estimate incorporates the wealth
    effect. That 3 percent is the wealth effect. It is just that
    the magnitude of the wealth effect is not big enough to make
    boosting the stock market the least costly way of stimulating
    the economy. I am a firm believer in the wealth effect.
        Mr. MCCRERY. Mr. Glassman.
        Mr. GLASSMAN. Let me just add that I think that with the
    market as depressed as it is and investors as depressed as they
    are, I think it is not hard to see that a wealth effect of this
    nature could give an extra boost. Americans would like to see
    something going on in the stock market that is positive, and
    this is not simply an artificial change. This is eliminating a
    distortion which just about every economist has pointed to as
    being an inefficiency in the market. We are going to get rid of
    it if you pass this bill. It will have a major effect on the
    wealth of individual Americans, and it will make them feel
    better about investing their money in the stock market, as
    well, by the way, as in bonds because of the accelerated cuts
    in tax rates which will increase the return on bonds. You are
    going to increase the return on stocks and you are going to
    increase the return on bonds. That will certainly mean that
    people will make more investments than they are making today.
        Mr. MCCRERY. Thank you, Mr. Chairman.
        Chairman THOMAS. The gentleman's time has expired. Does the
    gentleman from California, Mr. Becerra, wish to inquire?
        Mr. BECERRA. Thank you, Mr. Chairman.
        Mr. Gale, let me go back to something you said a little
    earlier. I want to be sure I am clear on this. You mentioned
    that the provisions in the President's tax cut plans--and I am
    talking now about more than just his tax cut plan that is about
    $700 billion, but the others that he has as well to make
    permanent some of the tax cuts that were passed in 2001 and so
    forth, all those tax cut plans. I think you mentioned that the
    total effect for small business in most tax cut plans amounts
    to about 1 percent of the entire cost of all of those plans put
    together over the next 10 years?
        Mr. GALE. Right. I believe that was in reference to the
    expensing proposal as a share of the total proposed tax cut.
        Mr. BECERRA. Let me get some definition on that. We are
    talking about an entire cost over the next 10 years of about
    $1.5 trillion, thereabouts, right?
        Mr. GALE. Right.
        Mr. BECERRA. That includes the tax cut plan that the
    President has put forward that he is calling his economic
    growth plan. That includes the plan to make permanent some of
    the tax cuts that were enacted in 2001. It includes some other
    tax cut proposals that will be before us at some point as well.
    Total cost of about $1.5 trillion over 10 years.
        Mr. GALE. Right. It does not include tax plans like fixing
    the AMT, which the budget does not have in it, but which is
    going to be another $600 billion or $1 trillion.
        Mr. BECERRA. Right. So if we wanted to make sure that
    individuals did not find themselves all of a sudden having to
    pay a higher tax because they fell into the AMT, then the
    President would have to include another $600 billion or so on
    top of the $1.5 trillion to take care of those middle-income
    Americans who are going to find that they are going to be
    paying more taxes unless they get that AMT relief?
        Mr. GALE. That is exactly right.
        Mr. BECERRA. For right now, not to put aside middle
    America, but for right now just to discuss the $1.5 trillion
    cost of the President's proposals that we have before us, how
    much does the expensing provision that is beneficial to small
    business cost?
        Mr. GALE. Approximately 1 percent of it. So if I am doing
    my math right, I believe it is $15 billion.
        Mr. BECERRA. Fifteen or $16 billion. Is there anything else
    that is specifically targeted toward small business in that
    $1.5 trillion over the next 10 years in tax cuts?
        Mr. GALE. Well, they often talk about the rate cuts in
    EGTRRA as being targeted toward small business, but this is one
    of the great bait and switch----
        Chairman THOMAS. Mr. Gale, just if I might, to make sure we
    keep the numbers, because we have Joint Tax numbers. The small
    business provision is 28.
        Mr. GALE. So it is 2 percent.
        Chairman THOMAS. Your magnitude is correct. It is just that
    it is 28.
        Mr. GALE. Okay. The rate cuts for EGTRRA are often said to
    benefit small businesses, in fact, in particular the top rate
    cut is often said to benefit small businesses. In fact, 98
    percent of all small businesses are not subject to the top
    rate, and the vast majority of them are either in the 0-, 10-,
    or 15-percent bracket. So, again, as I said, I think it is a
    bait and switch technique, that there is no reason to think
    that there would be particularly disproportionate benefits
    there to small businesses. So I think the answer to your
    question is yes, that is the main provision.
        Mr. BECERRA. Now, you said something else that I would like
    to return to. You mentioned that if we were not enact these tax
    cuts that the President has proposed, we could use the moneys
    that would be otherwise expended to have these tax cuts and
    place them into the Social Security system, and that we would
    correct the imbalance that we see coming upon us on the near
    horizon, the next 30 years or so, so that we would not have any
    problems over the next 75 years making sure that every
    individual who retires and qualifies for Social Security over
    the next 75 years would get exactly what he or she right now
    believes he or she will get?
        Mr. GALE. Right, let me try to clarify that statement. The
    tax cut proposals in the budget and AMT reform would total
    between 2.3 and 2.7 percent of GDP as of the last year of the
    budget horizon. If you assume that they are permanent at that
    stage and they go forward, that is a cost of 2.3 to 2.7 percent
    of GDP over the next 75 years.
        In contrast, the cost of fixing Social Security over the
    next 75 years is 0.7 percent of GDP, so it is about a third or
    less of that total cost of the tax cut. The cost of fixing
    Medicare part A is on the order of 1 percent of GDP. I am not
    quite sure about the number. The sum of those two is less than
    2.3 to 2.7 percent of GDP.
        Mr. BECERRA. So we could take care of the long-term
    imbalance in Social Security, we could take care of Medicare
    and put a prescription drug benefit that would be reasonable
    and something that most seniors could afford into Medicare, and
    we would still have money left over if we were not to enact
    these tax cuts?
        Mr. GALE. Right. The money available for the tax cuts--the
    money that is being proposed to be used on tax cuts would be
    more than sufficient to finance existing obligations under
    Social Security and Medicare the next 75 years. Whether it
    would include a prescription drug benefit would depend in part
    on how big the benefit is.
        Mr. BECERRA. Thank you, Mr. Chairman.
        Chairman THOMAS. I thank the gentleman. Does the gentleman
    from Ohio, Mr. Portman, wish to inquire?
        Mr. PORTMAN. Thank you, Mr. Chairman. To all three of you,
    thank you for your good testimony today. Mr. Gale, I just want
    to follow up on some of your answers to Mr. Becerra regarding
    the impact on small business. Your testimony says that you
    don't believe that small business will fare well under this
    proposal, and you talk about only a 1-percent benefit, after
    the Chairman talked about the $28 billion, you said maybe 2
    percent.
        I would just ask you about a couple things. One is
    expensing. I don't see how expensing cannot help small
    business. I would love to see our expensing go even further in
    terms of the levels of businesses that could apply, but section
    179 expensing, taking it from $25,000 to $75,000, certainly
    doesn't have a negative impact on national savings, certainly
    doesn't have a negative impact on those businesses. They have
    an advantage of certainly being able to go out and immediately
    expense what they buy, which is good for them and the economy,
    but also it is a simplification, a major simplification for
    these small businesses.
        How would that not be a big benefit?
        Mr. GALE. Expensing would be a big benefit and would have
    the effects that you just mentioned. It is the other stuff that
    has effects in the opposite direction. So, the net effect on a
    small business would be the positive effects of expensing minus
    the negative effects of reduced credit availability and higher
    interest rates.
        Mr. PORTMAN. Let's talk about that for a second. I can't
    imagine expensing would lead to higher interest rates. There is
    no reason that it should. With regard to the rates, you
    indicated--I just wrote down what you told Mr. Becerra--that 96
    percent of businesses don't pay income taxes at the top couple
    rates; rather, they pay it at, you said, 0-, 10-, and 15-
    percent rates. Are you talking about Subchapter S businesses
    and the sole proprietors, partnerships?
        Mr. GALE. I am talking about the definition of small
    business as conventionally used in the tax world, the one that
    Treasury uses. It takes a relatively broad view of what
    constitutes a small business.
        Mr. PORTMAN. I just think your figures are a little
    misleading when you say that 96 percent of businesses don't pay
    taxes at the rates that are affected by this. I would say that
    when you look at the benefit at the top rate--in other words,
    even taking the rate down to 35 percent. Let's just talk about
    the top top rate. The majority of that benefit goes to
    individuals who do have business income. They are Subchapter S
    owners. They are sole proprietors. They are general partners.
    They are in these limited liability companies. They are
    obviously the vast majority of small businesses. They don't
    incorporate as C corporations, and for you to say that 96
    percent of the people in those businesses don't benefit from
    it, the point is that the majority of the people who will
    benefit from that do have that business income, and they are
    the innovators, they are the small businesses. They do tend to
    be perhaps a little larger small businesses than the very small
    businesses that would benefit from section 179, which is a nice
    compliment, I think. I just think that is a little misleading
    to say that 96 percent of them aren't in that category. In
    terms of the value of the business and the tax impact to them,
    it is far in excess of the 4 percent that you would indicate. I
    don't know what it is, but Treasury has told us that the
    majority of them benefit, the majority of it would go to people
    who have business income.
        Mr. GALE. There are two issues here. I don't disagree with
    what you said. There are two issues.
        One is the vast share of returns that report small business
    income, the 98 percent I think it is, not 96, are not in the
    top income tax bracket.
        It is also true, as you said, that a significant share of
    the returns in the top income bracket have business income, but
    there is a concern about what that means for small business
    investment because people suspect, myself included, but others
    as well, suspect that a lot of that is purely passive income
    and is not sort of entrepreneurship as we would like to think
    about it.
        Mr. PORTMAN. I think we don't need to suspect, as much as
    we are suspecting, because there is good data on at least the
    significant number you mentioned. It is over half. In terms of
    passive versus active income, the point would be that most
    small businesses are incorporated as individuals; in other
    words Sub S or sole proprietors or general partners. Those
    individuals will get benefit from this. It will help small
    businesses, and I would just hope you can work that into your
    small business calculation when you say they don't fare well
    under this.
        I think it is a significant impact. It certainly is in my
    district where the vast majority of businesses are small
    businesses, they are the ones who are creating all of the new
    jobs. Frankly, our large businesses are still downsizing.
        One other question I have for you, and Mr. Glassman and Mr.
    Castellani should jump in here, too, but you talked about these
    macroeconomic impacts of the President's proposal. I know the
    BRT has its own impacts, the statements they have done. Five
    hundred thousand new jobs a year I think for the next 5 years
    is what the BRT economists show.
        You mentioned the macroeconomic advisers, a study done in
    2003, you said no effect on GDP between 2003 and 2007. I know
    the macroeconomic advisers is not in line with most of the
    other groups out there that have done analyses, but what we get
    from them is not that. In fact, we have information that they
    say that you will see an increase in growth, 0.5 percentage
    points and 1 percentage point--0.5 this year and 1 percent in
    2004, just something you might want to check in terms of the
    facts.
        Mr. GALE. That is accurate, but the net effect over the 5-
    year period is zero. There is a short-term boost in that model,
    but the net effect over the 5-year period is zero because it--
    --
        Mr. PORTMAN. That means it is stimulative. That means it is
    stimulative over the next couple of years. That is great.
        Mr. GALE. Qualitatively, yes.
        Mr. PORTMAN. Thank you, Mr. Gale.
        Mr. GLASSMAN. Could I just add something to Mr. Gale's
    response?
        Mr. PORTMAN. It is up to the Chairman.
        Chairman THOMAS. Briefly.
        Mr. GLASSMAN. Even if Mr. Gale is correct--and I don't
    think he is--that there are so many small businesses, I guess
    that includes like baby sitters or something who don't make
    that much money, all tax rates are being cut under this bill by
    10 percent, minimum. So if you want to call those small
    businesses, and I am sure they are, they are all going to
    benefit from this.
        Mr. GALE. That is just factually wrong.
        Mr. GLASSMAN. Second, many small businesses----
        Mr. GALE. That is factually----
        Mr. GLASSMAN. Many small businesses----
        Mr. GALE. It is factually incorrect.
        Mr. GLASSMAN. Many small businesses will move from an
    unincorporated status and maybe even an unlisted status to a
    new status because their shareholders will begin to get tax-
    free dividends. So I think this will have a huge and important
    effect on small businesses.
        Mr. GALE. It is factually incorrect to say that all rates
    are coming down. The 15-percent rate is not changing, and
    taxpayers that are on the AMT, which is disproportionately a
    large share of small businesses, do not have reductions in
    their marginal tax rates.
        All told, according to Treasury data, 64 percent of
    taxpayers--taxpayers, not filers--64 percent of taxpayers will
    not get a cut in marginal tax rates due to the 2001 tax cut,
    and that is because they are either in the 15-percent bracket,
    which has not changed, or they are on the AMT.
        So the majority of taxpayers out there--that is people with
    positive income tax liability--do not get a reduction in
    marginal tax rates under the entire extra package according to
    Treasury data.
        Chairman THOMAS. The gentleman's time has expired. Does the
    gentleman from North Dakota wish to inquire?
        Mr. POMEROY. Thank you, Mr. Chairman. I want to salute each
    of you for your roles over the years in advancing ideas.
        Mr. Glassman, you have advanced many ideas, some of them I
    have found intriguing, many of them I have disagreed with, but
    you have contributed to the debate in town. Let us just review
    some of those ideas.
        Do you think that the long-term commitment of this country
    to Social Security and Americans' expectation of Social
    Security benefits is pleasantly defined as something that
    should continue?
        Mr. GLASSMAN. Yes, sir, I do, although I do think it is
    imperative that we reform the Social Security system. I think
    people who are currently on Social Security or who anticipate
    getting Social Security within the next few years, that is a
    guarantee that this country needs to meet and will meet.
        Mr. POMEROY. The baby boomers will be perhaps a little more
    away than that. Do you support substantial reform relative to
    baby boomers or should they be entitled to the guaranteed
    annuity as presently----
        Mr. GLASSMAN. Yes, I do, Congressman.
        Mr. POMEROY. You do.
        Mr. GLASSMAN. Yes, as a matter of choice. In other words, I
    think baby boomers can make a decision--and don't forget baby
    boomers go all the way from 1947, that is me, to 1964. So some
    of them are, what, 38 years old now.
        Mr. POMEROY. We have such little time. I will just have to
    cut to the chase. I hear you saying you think it ought to be
    substantially reformed, while maintaining existing guarantees
    to people on or near Social Security.
        Mr. GLASSMAN. Yes.
        Mr. POMEROY. How about Medicare, do you think that going
    forward we should maintain the commitment of Medicare as an
    entitlement to American people, including baby boomers, going
    forward?
        Mr. GLASSMAN. I think that Medicare needs, and this is not
    my field, but I think Medicare needs, again, significant
    reform.
        Mr. POMEROY. You have also opined on tax reform in years
    past. Flat tax, tend to favor it?
        Mr. GLASSMAN. Yes, but I don't----
        Mr. POMEROY. The thing about----
        Mr. GLASSMAN. Let me just add that I think that the rate
    part, sort of the part that attracts all the attention,
    everybody is at the same rate, is probably the least-important
    part. I think we need to tax income only once, we need to
    eliminate deductions and special exclusions. I think that is
    the key.
        Mr. POMEROY. In light of your long analysis of tax reform,
    it is not surprising to see you participating in this date, an
    interesting welcome voice. One of the things that strikes me as
    different about this tax reform debate from others is that it
    is not paid for. We have looked at other types of tax reform.
    Packages had revenue off-sets to deal with the revenue cuts.
    This is just cuts.
        So, we are talking about kind of the beneficial results of
    tax cuts, and yet notably absent from the discussion are the
    economic consequences of soaring deficits. Mr. Gale, perhaps if
    any of the panel has spoken to that, you have a bit. What are
    the effects on the overall economy of soaring deficits?
        Mr. GALE. The key effect is the reduction in national
    saving that occurs, and that occurs if, say, the government
    borrows $100 billion more, if the private sector then turns
    around and saves about $25 billion than it otherwise would
    have, which is what the evidence suggests, the national savings
    has gone down by $75 billion. National savings is the sum of
    public and private saving.
        Mr. POMEROY. Savings rates relates to economic performance.
        Mr. GALE. Right. The amount of national saving the country
    does relates directly to how much capital it owns, which then
    relates to its future income, and so there is a reduction in
    future income. Just to give you a rough calculation, from
    January 2001 to this January, the 10-year budget surplus
    projection fell by $5.6 trillion.
        If you go through the calculation the way I just mentioned
    and apply a conservative interest rate to that capital, you are
    looking at a reduction in income in 2012 of about $1,500 per
    household in this country.
        Mr. POMEROY. I will submit for the record the David Broder
    column appearing in today's Post, where he cites the Committee
    of Economic Development, a blue-ribbon organization of
    corporate chief executive officers and civic leaders. They
    weigh in with great concern about this plan, citing, and I
    quote, ``Deficits of this scale over that many years would
    spell economic peril at any time the business executives say
    because they reduce the pool of national savings, diminish the
    investments and make us more dependent on foreign investors.''
        [The information follows:]
                              The Washington Post
                         The CEO's Dim View of Deficits
    By David S. Broder
    Columnist
    WEDNESDAY, MARCH 5, 2003; Page A21

        From the heart of the business establishment comes a statement
    criticizing and rejecting the Bush tax cuts--a stunning repudiation of
    the president's fundamental economic strategy delivered by the very
    corporate leaders who make the investment decisions on which recovery
    and growth turn.
        Along with the criticism of the Administration plan leveled last
    month by Federal Reserve Board Chairman Alan Greenspan, the report
    being issued today by the Committee for Economic Development, a blue-
    ribbon organization of corporate chief executive officers and civic
    leaders, is a warning that President Bush's policies risk long-term
    damage to Americans' prosperity and the government's fiscal stability.
        While Administration officials defend the deficits in store for
    this year and next as small by historical standards and temporary, the
    Committee says that more realistic calculations show that over the next
    decade we can expect ``annual deficits of $300-$400 billion, increasing
    as far as the eye can see.''
        Those estimates do not take into account the new tax cuts proposed
    by Bush in January and now beginning to make their way through the
    House of Representatives. ``All told, the new budget proposals, if
    enacted, would raise the 10-year deficit by about $2.7 trillion and
    annual deficits 10 years from now by about $500 billion,'' the report
    says. And none of this, by the way, factors in the costs of a possible
    war with Iraq and its aftermath.
        Deficits of this scale, over that many years, would spell economic
    peril at any time, the business executives say, because they reduce the
    pool of national savings, diminish needed investments and make us more
    dependent on foreign creditors.
        But they are particularly dangerous at this moment, because in only
    5 years, starting in 2008, the vanguard of the baby boomers will reach
    early retirement age and the demands on Social Security, Medicare and
    private health and retirement systems will rise dramatically.
        The workforce is likely to grow barely at all in subsequent
    decades, thanks to continuing low birthrates, which means that overall
    economic growth will be limited. Meanwhile, lengthening life expectancy
    and the sheer number of boomers will cause retirement and health care
    costs to explode.
        ``Staying on our present track, spending for Social Security,
    Medicare and Medicaid skyrockets, while revenues fail to keep pace. The
    Federal Government deficit would balloon,'' weakening an already poor
    savings rate, and ``by the 2020s, per-capita income growth would have
    fallen by more than half, and by 2040 the model predicts growth rates
    very nearly zero. ... Perhaps for the first time in this country's
    history, most Americans could no longer expect their children and
    grandchildren to have higher living standards than their own.''
        The hardheaded executives dismiss as unrealistic any hope that the
    United States can simply ``grow its way out of'' the interlinked
    challenges of dangerous deficits and rising demands from its aging
    population.
        Given the scale of the challenge, no single fix--whether on the
    spending or revenue side--will be sufficient. The policy
    recommendations embrace reform of Social Security and Medicare, careful
    scrutiny of Pentagon and homeland defense priorities and provision for
    expanded investment in education, research and infrastructure--the
    building blocks of future growth.
        But the main point of the report is that ``we must begin
    immediately in the 2004 budget to deal with the explosion of the long-
    term deficit.''
        That does not mean raising taxes or cutting spending now, while the
    economy is still struggling. But it does mean the government should not
    adopt ``any short-term stimulus program that is not combined with a
    plan to restore longer term budget balance. We are specifically
    concerned that the Jobs and Growth Package proposed by the
    Administration, which would raise the cumulative 2004-2013 deficit by
    about $920 billion (including interest) and raise the annual deficit 10
    years from now by about $100 billion, does not meet this test.''
        Over the decades ahead, considering the demands of an aging
    population, the threat of terrorism and the growing international
    obligations of the United States, the Committee for Economic
    Development says it is ``extremely unlikely that the long-term budget
    problem can be solved without additional revenues. We therefore urge
    the Administration and Congress to forgo at this time any additional
    tax reductions,'' including any move to make permanent the tax cuts
    passed in the make-believe atmosphere of projected budget surpluses in
    2001.
        It is a sobering message and, considering the source, not one to be
    ignored.

        Mr. POMEROY. As we talk about whether or not the market
    gets a little juice from the dividend proposal, it seems to me
    we are not talking about whether or not we are strengthening
    the long-term fundamental performance of the economy, and that
    will ultimately have more bearing on stock price than an
    incidental effect on dividends; is that correct, Mr. Gale?
        Mr. GALE. That is exactly right. The President said that he
    did not want to pass the burden of his current policies on to
    future generations, but that is exactly what his budget would
    do, and it would do it in massive amounts by increasing the
    amount of public debt.
        Mr. POMEROY. Thank you.
        Chairman THOMAS. The gentleman from Missouri would be
    recognized. Would he yield to the Chair?
        Mr. HULSHOF. I would be happy to be recognized and yield to
    the Chair.
        Chairman THOMAS. Thank the gentleman. I would like to pose
    a question which each of you if you desire to respond to can.
    Is every dollar that you spend in deficit equal to any other
    dollar that you spend in deficit?
        Mr. GLASSMAN. No, and I think that is a very important
    question. Let me actually frame it in a slightly different way,
    Mr. Chairman, if I may. I think if Milton Friedman were here,
    he would do it this way.
        What counts is what the government spends and what it
    spends on. The question of where that money comes from is a
    separate issue. It can only come from two sources. It can
    either come from borrowing or it can come from taxes. Either of
    those two sources pull money out of the private sector, so you
    better be sure you are spending money on a good thing before
    you pull money out of the private sector.
        Really, it does not make that much difference whether the
    money comes out as taxes or as debt because it is coming from
    the same source. In fact, I would argue that today this country
    is paying very little on its debt. Just maybe, given this
    choice, if we think that the government is spending on the
    right things, that in fact this may be a good time--I hate to
    bring up such a remarkable thought--but this may be a good time
    to choose debt over taxes.
        Chairman THOMAS. Any other brief response on the gentleman
    from Missouri's time?
        Mr. GALE. The short answer is, no, they are not all the
    same. The tax cuts, spending cuts have two effects; one is
    their direct effect on the economy, which can differ across
    policies, and the other is the drag on national saving.
        I do want to mention this is not a good time for the
    country to borrow, even though interest rates are low, because
    we have the baby boomers retiring in a few years, and the
    budget deficit going off the table at that point.
        Chairman THOMAS. I would only say, not to extend the
    discussion, that sometimes, in the old cliche, you have to
    spend money to make money, and that what you spend that deficit
    dollar on I think does make a difference, either growth or
    consumption.
        The gentleman from Missouri is appreciated, and the Chair
    will be as generous as the Members allow him.
        Mr. HULSHOF. I appreciate that. Thank you for asking my
    question, Mr. Chairman.
        In fact, just as a comment, I am not sure if either of the
    three of you had a chance to review Secretary Snow's testimony
    from yesterday. He made the same point, Mr. Glassman; that is,
    and I think it was under questions from Mr. Tanner on the debt
    service, that we are actually paying now less on the debt
    service because of interest rates. Mr. Gale, you are cringing a
    bit. Do you disagree with what the Treasury Secretary told us
    yesterday?
        Mr. GALE. Oh, sorry. I wasn't cringing, I was just
    formulating my response. I want to emphasize the budget deficit
    this year, the budget deficit next year is not a big deal. We
    had a stock market come down, we had a recession, we may have a
    war. Short-term budget deficits are not that big a deal. The
    big problem is that 10 years from now the deficits go off the
    map. They increase dramatically as the boomers start retiring,
    and therefore we have sort of a medium-term issue in the next 3
    to 10 years, when we can save for retirement.
        What this Administration's budget does is it takes that 3-
    to 10-year period and it creates deficits as far as we can see.
    That is the new troubling thing. The old troubling thing is the
    long-term forecast, but the new troubling thing in this budget
    is that, even over the next 10 years, even with full
    employment, no war, no AMT fix, we are looking at structural
    deficits of 1.5 percent of GDP, and that is a really bad
    situation to head into the retirement of the baby boomers.
        Mr. HULSHOF. Let me state and echo, Mr. Gale, what Mr.
    McCrery said. I do appreciate your points of view. In fact, I
    think, if memory serves, we assembled a panel that you were on
    right after the September 11th. Wasn't that a closed-door
    session that we had, and you were one of those that we were
    bouncing around some ideas of what we could do in the interim
    after September 11th, a dramatic impact, and certainly we all
    agree I think that it had a dramatic negative impact on the
    national economy.
        Was there anything in EGTRRA that was a good thing, looking
    back, Mr. Gale? The $300 and $600 rebates, the elimination of
    the marriage penalty?
        Mr. GALE. The rebates certainly had some short-term impact.
    They couldn't have been that big because they were only $40
    billion overall, and estimates look like a third or half of
    them were spent so that is up to $20 billion in a $10-trillion
    economy, but that is sort of a shred of silver lining, I guess.
        We don't have time to go into what I think of all of the
    problems that EGTRRA created, but that is certainly one
    positive thing.
        Mr. HULSHOF. As a final comment, Mr. Chairman, and I know
    my time now has--the sands in the hourglass have dwindled out,
    but----
        Chairman THOMAS. I would tell the gentleman he has a
    slightly larger hourglass than most.
        [Laughter.]
        Mr. HULSHOF. I appreciate that. I would say, and there is
    something, and we don't have a chance, Mr. Gale, to talk about
    it, but maybe if you could just give me a sound bite on your
    comment to an earlier question. So are you saying that we
    should return to the Nixon-era days of revenue sharing with the
    States?
        I heard you say that States are now really hurting. I know
    Mr. Keating is coming and the comptroller of the State of New
    York is coming. Is it that we should then open up the coffers
    and then give the States the money? Should my taxpayers in
    Missouri help plug the $35-billion deficit in the State of
    California? What is it that you are proposing as far as helping
    the States.
        Mr. GALE. The States are bringing the economy down in the
    short run by raising taxes and cutting spending, and they may
    well be bringing the economy down in the long run right now
    because the way they are cutting spending is on things like
    education, which cannot have good long-term effects;
    corrections budgets, which scares the daylights out of me;
    health care, which again can't have good long-term effects.
        So I would certainly agree that there is an issue
    concerning what the best way to structure the relationship
    between Federal and State relations are. There is another issue
    about whether the States should really have balanced budget
    rules, and those should all be addressed, but as a positive
    matter, as sort of a statement of fact, if you wanted to
    stimulate the economy right now, funneling the money to the
    States, given their situation and their budget rules, would be
    an effective way to do it.
        Chairman THOMAS. I thought the Chair heard Dr. Gale talk
    about dynamic scoring on tax cuts and spending, in terms of
    effects on the economy. Does the gentleman from Massachusetts
    wish to inquire?
        Mr. NEAL. Thank you very much, Mr. Chairman. Mr. McCrery,
    in his comments earlier, alluded with some humor to the
    uncertainty of projections that economists make. We are dealing
    with some firm data.
        Mr. Castellani, what is it that you object to about the
    policies of Mr. Bentsen, and Mr. Rubin, and Mr. Summers?
        Mr. CASTELLANI. There is nothing that I am objecting to or
    nothing I can think of that we would object to about the
    policies. I think the current situation is different. We have
    an economy that is growing at a very anemic rate, certainly not
    enough to create jobs, certainly not enough to sustain
    investment.
        Irrespective of anyone's view here, my colleagues here on
    this panel or anyone's view of how it should be done, all of
    the issues are exacerbated if the economy continues to limp
    along in the long term.
        Mr. NEAL. Well, would you say that those three Treasury
    Secretaries, and the job that they did, was a pretty good job
    during those years?
        Mr. CASTELLANI. By all means, for those times.
        Mr. NEAL. For those times? So you would argue that those
    policies that they employed worked pretty well.
        Mr. CASTELLANI. I would say that whether or not those
    policies directly affected the economy or not, they were
    certainly benefited by a robust economy and substantial
    revenues.
        Mr. NEAL. Well, the Majority Leader here in the House at
    the time that we took some very tough votes, and let me give
    Bush 1 some credit, too, for having had the courage to do the
    right thing at the right moment, the Majority Leader at the
    time in the House said that we were headed to the worst
    Depression in the history of America. The leader of the Budget
    Committee at the time, a gentleman from Ohio, said that we were
    headed to fiscal armageddon.
        I don't understand the notion that we had to undo
    immediately a couple of years ago all of the things that they
    put in place arguing that, for some reason, if we changed
    dramatically, then there must have been some fault line that
    was discovered along the way.
        Mr. CASTELLANI. Well, Congressman, I can't conceive, and we
    can't conceive, of a circumstance where the economy would be
    benefited, and job creation would be enhanced, and investment
    would be enhanced by raising taxes at this point, which was, in
    fact, done in 1992.
        Mr. NEAL. Mr. Castellani, it plays to the notion that Mr.
    Cardin raised, for those of us on this side, you are going to
    come in and argue for tax cuts no matter what the economy is
    doing. If the evidence is put to you to the contrary, it is not
    going to make a bit of difference. You are going to simply say
    ``cut taxes."
        Mr. CASTELLANI. In this circumstance, we feel that these
    cuts, aimed at consumers, and aimed at investors, are what will
    provide the biggest incentive for the economy to grow to
    overcome the circumstances that are keeping it from growing at
    a robust rate.
        Mr. NEAL. How are we going to pay for the impending war in
    Iraq? Have you given that any thought?
        Mr. CASTELLANI. As I had said earlier, just like a business
    would use its strong balance sheet, we do have a strong balance
    sheet in this country, and whatever the cost is, revenues will
    be enhanced as the economy picks up and grows at a 4-percent
    rate, a 4.5-percent rate, and brings back the kind of robust
    job growth and investment that will bring back the revenues.
        Mr. NEAL. Mr. Glassman, I do enjoy reading your column and
    follow you with a lot of interest.
        Mr. GLASSMAN. Thank you.
        Mr. NEAL. Over the past few weeks, I have received a number
    of letters from groups, largely because of the work that I have
    done over the years, opposing the dividend provision because of
    its detrimental effect on low-income housing, and I would like
    to enter into the record letters from GMAC Commercial Holding
    of Denver, Colorado, Penrose Properties of Philadelphia, the
    Massachusetts Association of Community Development
    Corporations, the NCB Development Corporation of Washington,
    DC, and the National Coalition of State Housing Administrators.
        I have also received a similar letter from the Bond Market
    Association regarding the effect on tax-exempt bonds, and, Mr.
    Chairman, I would like this entered into the record, as well.
        Chairman THOMAS. Without objection.
        [The letters follow:]

        Massachusetts Association of Community Development Corporations
                                            Boston, Massachusetts 02111
                                                      February 11, 2003
    The Honorable Richard Neal U.S. Congressman
    2236 Rayburn House Office Building
    Washington. D.C. 20515-2102

        Dear Congressman Neal:

        On behalf of the Massachusetts Association of Community Development
    Corporations (MACDC) and its 68 members, I am writing to urge you to
    oppose President Bush's $674 billion tax cut, in particular the
    dividend exemption.
        MACDC is very concerned that the President's dividend exemption
    proposal will have an unintended consequence of undermining Federal
    housing policy. According to recent reports from Ernst & Young and
    Forbes Magazine, the President's proposal to eliminate tax on dividends
    may devastate the Low Income Housing Tax Credit. The value of tax
    credit investments to corporations would be greatly diminished, if not
    entirely eliminated, causing corporations to avoid investments in tax
    credits in order to maximize tax-free dividends to their shareholders.
        Tax credit programs have become the major source of affordable
    housing and community development funding in the U.S. For example, the
    Low Income Housing Tax Credit generates $6 billion annually in private
    investment and produces virtually all of America's new affordable
    rental housing. As you may know, CDCs build strong communities in large
    part through affordable housing development, and our members rely
    substantially on the Low Income Housing Tax Credit program. Without
    this program, CDCs will not be able to achieve their 2 year goal of
    creating and preserving 3,000 homes during 2003 and 2004. With
    Massachusetts facing a serious housing crisis, we need every home we
    can build.
        On behalf of the CDC community in Massachusetts, MACDC respectfully
    suggests that the $674 billion could be put to much better use by
    restoring full funding for the Community Development Block Grant
    program, the HOME program, the Economic Development Administration,
    Rural Housing and Economic Development program, Community Development
    Financial Institutions Fund, the SBA micro lending and PRIME programs,
    and the Job Opportunities for Low Income People program.
                Thank you,
                                                       Joseph Kriesberg
                                                      President and CEO

                                  GMAC Commercial Holding Capitol Corp.
                                                 Denver, Colorado 80202
                                                        January 6, 2003
    The Honorable Richard E. Neal
    2133 Rayburn HOB
    Washington, DC 20515-102

    Re: Proposed Dividend Tax Exemption and the Low-Income Housing Tax
    Credit

        Dear Richard,

        I am writing you to express our firm's deep concern over the
    negative impact on multifamily affordable housing from the
    Administration's proposal to exempt shareholders from tax on corporate
    dividends. Specifically, this legislation as proposed would very
    negatively impact the viability of Low-Income Housing Tax Credits
    (``LIHTC'').
        This public-private partnership model has efficiently delivered
    over 1.3 million (approximately 100,000+ annually) affordable
    multifamily homes ... a crucial element in meeting the housing needs of
    the 40 million Americans who spend more than half their income for
    housing or live in substandard housing. LIHTC enjoys overwhelming bi-
    partisan support as the United States' primary multifamily affordable
    housing delivery vehicle. Recent legislation increasing the program was
    cosponsored by 85% of Congress, nearly equally Republican and
    Democratic.
        Your assistance to helping solve this very important issue as
    quickly as possible is most urgently requested. I have attached a one-
    page summary of this issue. I would very much welcome discussing this
    in more detail.
                Sincerely,
                                                         David C. Smith
                                                              President

                                               Penrose Properties, Inc.
                                  Philadelphia, Pennsylvania 19103-7332
                                                      February 10, 2003

    The Honorable Richard E. Neal, D-MA
    United States House of Representatives
    House Committee on Ways and Means
    1102 Longworth House Office Bldg.
    Washington, D.C. 20515-6348

        Dear Mr. Neal:

        We are concerned that the Treasury Department's formulation of
    President Bush's policy initiative to reform the Internal Revenue Code
    by ending the double taxation of corporate dividends will seriously
    jeopardize the production of affordable housing by reducing the value
    of the low income housing tax credit (the ``LIHTC''). We urge you to
    ensure that no harm is done to the LIHTC when you consider legislation
    designed to incorporate the Administration's policy to end the double
    taxation of corporate dividends (the ``dividend proposal'').
        As you may know, at least 40 percent of annual affordable housing
    starts are made possible through the LIHTC. It began under the Reagan
    Administration as a means to provide a more efficient means of meeting
    the Nation's affordable housing needs than direct subsidies. The
    program has proved to be a rousing success. Under the Treasury
    Department's formulation of the dividend proposal, however, the
    efficiency which is the hallmark of this program would be sharply
    reduced. To demonstrate this, we have attached an example illustrating
    how the LIHTC works under current law and how it would be affected
    under the Treasury's formulation of the dividend proposal.
        We are also very concerned that the value' of the new markets tax
    credit, enacted in 2000, and President Bush's new homeownership tax
    credit will drop significantly under the Treasury's formulation of the
    dividend proposal. We urge you to preserve the value of these credits
    as well in any legislation which you consider implementing the dividend
    proposal.
        We look forward to working with you to preserve the LIHTC as a
    critical engine behind the production of affordable housing in our
    Nation. It was initiated by President Reagan, extended and strengthened
    by President George H.W. Bush and permanently extended and increased by
    President Clinton. It is a bipartisan program that works. Let's not
    break it by trying to fix the Internal Revenue Code, particularly at a
    time that our Nation's economy can ill afford it.
                Kind regards,
                                                         Mark H. Dambly
                                                         Vice President

                                                  NCB Development Corp.
                                                   Washington, DC 20006
                                                          March 4, 2003

    The Honorable Richard E, Neal
    2133 Rayburn House Office Building
    United States House of Representatives
    Washington, DC 20515

        Dear Congressman Neal:

        The NCB Development Corp. (NCBDC), as a member of the New Markets
    Tax Credit Coalition (NMTCC), Community Homeownership Credit Coalition
    (CHCC) and a coalition of more than 63 national and local organizations
    that have signed a statement sponsored by the National Council of State
    Housing Agencies (NCSHA) regarding the dividend exemption, is gravely
    concerned about the President's proposal to end double taxation of
    corporate dividends and its potential impact on community reinvestment
    tax credits, including the New Market Tax Credit (NMTC), Low Income
    Housing Tax Credit (LIHTC), Historic Rehabilitation Tax Credit, and the
    Administration's own proposed Homeownership Tax Credit.
        The NMTC, as part of the Community Renewal Tax Relief Act of 2000,
    (signed into law on Thursday, December 21, 2000) is designed to spur
    $15 billion in community economic development investments over a seven-
    year period (2001-2007). NMTC represents the largest new Federal
    investment in lower income community development since the mid-
    eighties.
        NCBDC is a national mission driven non-profit organization who, for
    25 years, has provided innovative financial development services and
    technical assistance to improve the lives of low-income individuals,
    families, and communities. By creatively investing in our
    neighborhoods, advocating elected officials around public policy, and
    collaborating with other national and local community-based
    organizations, NCBDC helps charter schools finance facilities; enables
    community health centers to expand to serve more patients; preserves
    and creates affordable housing; and helps socially responsible
    businesses thrive.
        The Treasury Department's Community Development Financial
    Institutions Fund (CDFI) is expected to announce the initial round of
    the NMTC allocations this week or early March, totaling nearly $2.5
    billion (after the Fund received applications requesting mores than 10
    times the amount or $26 billion). The Administration's proposal will
    slow or stall corporations, the anticipated principal investors in the
    NMTC. They will be forced to choose between reducing corporate tax
    liability and maximizing shareholder benefits or reducing tax liability
    and investing in revitalization projects through the NMTC until the
    dividend exemption proposal is resolved. The number of applications
    received represents distressed communities across the country.
        A recent report released by Ernst & Young, LIP and commissioned by
    the NCSHA suggests that the value of tax credit investments to
    corporations would be greatly diminished or entirely eliminated, as
    corporate investment currently accounts for 98 percent of the equity
    capital generated by the LIHTC. The LIHTC generates more than $6
    billion annually in private investment, and produces a large proportion
    of America's affordable rental housing. The Administration's dividend
    exclusion proposal will drastically reduce or eliminate the LIHTC.
        We applaud the work of the Administration in launching the NMTC
    program, and their inclusion of the community home ownership tax credit
    in the fiscal year 2004 budget. However, NCBDC is concerned that if the
    proposal is passed in its current form, the outcome will be devastating
    to ALL community reinvestment tax credits, and to the low income and
    displaced communities they serve, This private investment has been
    integral to our organization and others like us to support small
    businesses and provide services, homes and opportunities to hard
    working families and the elderly across the country. NCBDC will
    continue to examine the potential impacts of the dividend exclusion
    proposal and will share that information with you, the U.S. Congress,
    and the Administration.
        If you have any questions, please contact me at 202-218-7289 or
    jholdsclaw@ncbdc.org. Thank you for your consideration in this matter.
                Sincerely,
                                                   John M. Holdsclaw IV
                                           Director, Policy Development

                               National Trust for Historic Preservation
                                                   Washington, DC 20036
                                                      February 27, 2003
    The Honorable Richard E. Neal
    U.S. House of Representatives
    2133 Rayburn House Office Building
    Washington, DC 20515-2102

        Dear Congressman Neal:

        On behalf of the National Trust for Historic Preservation I am
    writing to express our concern to Congress that the Administration's
    proposal to eliminate double taxation of corporate dividends would do
    serious harm to the vitality of the Federal Historic Preservation Tax
    Credit (HPTC) program. We also have serious reservations about its
    potentially adverse affect on other tax credits that link historic
    preservation with community revitalization and housing production such
    as the Low-Income Housing Tax Credit and the New Markets Tax Credit.
    The National Trust is a private, non-profit organization dedicated to
    protecting historic buildings and the neighborhoods they anchor. It has
    extensive experience with the use of HPTCs and other credits in
    stimulating the beneficial re-use of historic and older buildings for
    offices, retail space, and places to live. As Congress prepares to
    consider the Administration's proposal, we urge your support for a
    dividend exclusion plan that would have no adverse effect on tax
    credits.
        HPTCs are one of the nation's most successful and cost-effective
    tools for stimulating community revitalization. The program fosters
    private sector rehabilitation of historic buildings and promotes
    economic growth. At the same time it provides a strong alternative to
    government ownership and management of such historic properties. If the
    dividend exclusion were enacted in its present form, the National
    Trust's preliminary analysis indicates that corporations would opt to
    increase the distribution of tax-free dividends (or deemed dividends)
    to shareholders at the expense of investing in tax credits such as the
    HPTC. If this happens, the community development and historic
    preservation sectors would lose one of their most valuable resources
    for bringing new life to downtowns, and low- and moderate-income
    areas--the same, places where, most of America's older buildings are
    located.
        The basic structure of the HPTC was enacted as part of President
    Reagan's Economic Recovery Tax Act 1981. The program currently provides
    for a 20% credit for eligible expenditures related to the
    rehabilitation of properties listed on the National Register of
    Historic Places or located in historic districts. A 10% credit is
    currently allowed for similar expenditures on older, non-historic
    buildings. The passive activity provisions added to the Internal
    Revenue Code in 1986 preclude many individuals from claiming HPTCs. As
    a result, today nearly 80% of all HPTCs are claimed by corporate
    taxpayers. Given this limitation, HPTCs would be placed at a distinct
    disadvantage were the Administration's dividend exclusion proposal to
    add a disincentive for corporate taxpayers to participate in the
    program as well.
        Since their inception, historic preservation tax incentives have
    produced significant benefits for the nation. The National Park
    Service, which administers the program in cooperation with the Internal
    Revenue Service, calculates that:

         the tax incentives have stimulated private investment of
    over $18 billion;
         more than 27,000 historic properties have been
    rehabilitated and saved;
         more than 149,000 housing units have been rehabilitated;
         more than 75,000 new housing units have been created,
    including over 30,000 for low and moderate-income families.

        Despite this economic impact, according to OMB the combined total
    tax expenditure for both the 10% tax credit and the 20% tax credit in
    2002 was only $230 million.
        The effect of any destabilization of the HPTC and other tax credits
    would be felt well beyond the walls of the nation's older and historic
    buildings. Rehabilitation of existing structures has a greater economic
    result than comparable dollars invested in new construction. Research
    indicates that if a community is deciding between spending one million
    dollars in new construction and spending one million dollars in
    rehabilitation, the rehabilitation approach offers the following
    advantages:

         $120,000 more will initially stay in the community;
         as many as nine more construction jobs will be created;
         4.7 more new jobs will be created;
         household incomes in the community will increase by $107
    more than new construction; and
         retail sales in the community will increase $142,000 as a
    result of that one million dollars of rehabilitation expenditure--
    $34,000 more than with one million dollars of new construction.

        Destabilization of the HPTC marketplace would also adversely impact
    the 21 states that have created state historic preservation tax
    credits, many of which are intentionally designed to ``piggyback'' off
    of the HPTC.
        The National Trust recognizes the Administration's support for the
    HPTC and does not believe the dividend exclusion proposal was intended
    to put this valuable program at risk. However, we advise Congress that
    if the proposal is implemented in its current form the outcome could be
    devastating for America's older and historic communities.
        I urge your consideration for a formulation of the dividend
    exclusion proposal that would not penalize corporate taxpayers who
    participate in the HPTC program and adversely affect other credits that
    benefit neighborhoods most in-need. I would welcome the opportunity to
    meet with you to discuss these matters further.
        Warmest regards.
                Sincerely,
                                                            Richard Moe

                             National Council of State Housing Agencies
                                                   Washington, DC 20001
                                                      February 25, 2003
    The Honorable John W. Snow
    Secretary, United States Department of the Treasury
    1500 Pennsylvania Avenue, NW, Suite 3330
    Washington, DC 20220

        Dear Secretary Snow:

        The National Council of State Housing Agencies (NCSHA), on behalf
    of the state Low Income Housing Tax Credit (Housing Credit) allocators,
    is pleased to share with you, ``The Impact of the Dividend Exclusion
    Proposal on the Production of Affordable Housing,'' a February 2003
    report prepared by Ernst & Young LLP at NCSHA's request. This report
    objectively documents the unintended adverse impact the
    Administration's proposed dividend tax exclusion would have on the
    production of affordable rental housing in America.
        Neither NCSHA nor Ernst & Young has a position on the dividend
    proposal itself. NCSHA offers the Administration and the Congress this
    report to help build understanding of the implications of the proposal
    for affordable housing and, specifically, the Housing Credit. We hope
    the report will also be useful to you in assessing the dividend
    proposal's impact on other important housing and community
    revitalization tools, such as the Administration's proposed
    Homeownership Credit, the New Markets Tax Credit, and the Historic
    Preservation Tax Credit.
        Ernst & Young estimates that 35 percent fewer Housing Credit
    apartments--40,000 fewer apartments serving about 100,000 residents--
    would be produced annually if the dividend exclusion proposal were
    enacted as proposed. Its analysis shows that corporate Housing Credit
    investors--which account for 98 percent of Housing Credit equity raised
    annually--would limit the amount of capital they invest in Housing
    Credits or lower the price they are willing to pay for them, reducing
    the amount of Housing Credit equity available to produce affordable
    rental housing.
        NCSHA believes the total impact may be even greater. Ernst & Young
    does not take into account, for example, the impact of higher interest
    rates on tax-exempt housing bonds almost certain to result from
    enactment of the dividend proposal. Forty-two percent of Housing Credit
    apartments developed annually are financed with tax-exempt bonds.
        America cannot afford the loss of a single affordable apartment,
    let alone 40,000 Housing Credit apartments annually. As of 2001, over
    seven million American renter families--one in five--suffer severe
    housing affordability problems. They spend more than half of their
    income on rent or live in substandard housing. Meanwhile, more than
    150,000 apartments are lost to the low-cost rental housing inventory
    each year due to rent increases, abandonment, and deterioration.
        In the face of this enormous need, the Housing Credit is the only
    significant producer of affordable rental housing. The Housing Credit
    is a federal tax incentive Congress has empowered states to use to
    encourage private investment in the construction and rehabilitation of
    privately owned apartments dedicated for 30 years or more at restricted
    rents to families with incomes of 60 percent of area median income or
    less. In creating the Housing Credit in 1986, Congress recognized that
    apartments simply cost too much to build, without some form of
    development tax incentive or subsidy, to rent at rates affordable to
    low-income families.
        The Housing Credit is an enormous success. Since 1986, it has
    financed 1.5 million apartments to respond to the severe and growing
    shortage of decent, safe, and affordable housing for low-income
    Americans--working families, seniors, the homeless, and people with
    special needs all across the country. Each year, the Housing Credit
    finances 115,000 more apartments.
        Often, Housing Credit tenants earn far less than federal income
    limits permit; in 1997, the GAO found the average Housing Credit tenant
    earned 38 percent of area median income. A majority of Housing Credit
    properties are dedicated to low-income use for periods longer than 30
    years, many for 50 years or more.
        The Housing Credit works because it allows states, not the federal
    government, to decide how to respond most effectively to their housing
    needs. It also harnesses the resources and discipline of the private
    sector, attracting $6 billion in private sector capital annually and
    giving the private sector a stake in the success of the housing this
    investment builds.
        The Housing Credit has become more and more efficient over time,
    due in large part to Congress' 1993 decision to make the Housing Credit
    permanent and increased corporate investment. Prices investors pay for
    Housing Credits have risen approximately 50 percent since the program's
    creation in 1986, increasing the amount of equity capital that goes
    directly into affordable housing production.
        The Housing Credit is not only good for housing; it is good for the
    economy. Housing Credit apartments account for up to 40 percent of all
    apartment production annually. Each year, the construction and
    operation of Housing Credit properties generates approximately $8.8
    billion of income for the economy, creates 167,000 jobs, and produces
    $1.35 billion in revenue for cash-strapped local governments.
        The Housing Credit enjoys strong, bipartisan support in the
    Congress. As recently as December 2000, Congress increased annual
    Housing Credit authority by 40 percent. Over 85 percent of the
    Congress, with nearly equal proportions of Republicans and Democrats,
    cosponsored the legislation calling for that increase.
        We offer a simple solution to the problem the dividend proposal
    presents the Housing Credit. Treat Housing Credits as taxes paid, as
    the proposal treats foreign tax credits.
        We look forward to your help in protecting this vital supplier of
    the nation's affordable rental housing. We stand ready to assist you in
    any way we can. If you have questions about the Housing Credit or the
    Ernst & Young report, please do not hesitate to call me.
                Sincerely,
                                                    Barbara J. Thompson
                                                     Executive Director

    Enclosure
    cc. Assistant Secretary Pamela Olson
      Deputy Assistant Secretary Gregory Jenner

        Mr. NEAL. Thank you, Mr. Chairman. Mr. Houghton and I have
    worked hard on this. In fact, we have had legislation pass
    Congress that succeeded, with the help of the Chairman, on that
    whole notion of extending bond opportunities.
        Let me ask you, with some of the projections you are going
    to be making and some of the items that you might be focusing
    on, if these concerns are well-founded, and would you be
    recommending these investments over dividend-paying equities in
    the future?
        Mr. GLASSMAN. You know, real estate has always been tax
    advantaged or at least for decades, and I think that certainly
    real estate interests are not happy about the fact that
    equities, which have been tax disadvantaged, are now going to
    have an even playing field. So certainly that equation changes,
    but would I tell people not to invest in real estate?
    Absolutely, I would not tell people not to invest in real
    estate. I think that is a good part of a diversified portfolio,
    and real estate still enjoys, even after these changes, far
    more advantages than any other kind of investment that people
    can make.
        Mr. NEAL. Quickly, Mr. Chairman? Mr. Gale, would you argue
    that by not addressing the AMT issue that some people are about
    to get a tax increase?
        Mr. GALE. We might get a little metaphysical about what a
    tax increase is versus not getting a tax cut, but it is clear
    that many people starting in 2005 and under current law, will
    face higher taxes under current law than they would if the AMT
    didn't exist. By the end of the decade, it will be 36 million
    households that will face higher taxes because of the AMT.
        Mr. NEAL. Thank you, Mr. Chairman.
        Chairman THOMAS. I would tell the gentleman that you would
    have to analyze that in the face of the so-called hold harmless
    provision on the AMT that is in this package and, in fact, has
    been in every package that we have looked at.
        Mr. GALE. That only goes to 2005.
        Chairman THOMAS. I understand. It is temporary.
        Mr. NEAL. Mr. Chairman, could I have permission to insert
    into the record a statement from a number of leading economists
    opposing the tax cuts?
        Chairman THOMAS. Certainly, without objection. Does the
    gentleman from Pennsylvania, Mr. English, wish to inquire?
        [The information follows:]
                ECONOMISTS' STATEMENT OPPOSING THE BUSH TAX CUTS
        Economic growth, though positive, has not been sufficient to
    generate jobs and prevent unemployment from rising. In fact, there are
    now more than two million fewer private sector jobs than at the start
    of the current recession. Overcapacity, corporate scandals, and
    uncertainty have and will continue to weigh down the economy.
        The tax cut plan proposed by President Bush is not the answer to
    these problems. Regardless of how one views the specifics of the Bush
    plan, there is wide agreement that its purpose is a permanent change in
    the tax structure and not the creation of jobs and growth in the near-
    term. The permanent dividend tax cut, in particular, is not credible as
    a short-term stimulus. As tax reform, the dividend tax cut is
    misdirected in that it targets individuals rather than corporations, is
    overly complex, and could be, but is not, part of a revenue-neutral tax
    reform effort.
        Passing these tax cuts will worsen the long-term budget outlook,
    adding to the nation's projected chronic deficits. This fiscal
    deterioration will reduce the capacity of the government to finance
    Social Security and Medicare benefits as well as investments in
    schools, health, infrastructure, and basic research. Moreover, the
    proposed tax cuts will generate further inequalities in after-tax
    income.
        To be effective, a stimulus plan should rely on immediate but
    temporary spending and tax measures to expand demand, and it should
    also rely on immediate but temporary incentives for investment. Such a
    stimulus plan would spur growth and jobs in the short term without
    exacerbating the long-term budget outlook.

                                                        George Akerlof*
                                      UNIVERSITY OF CALIFORNIA-BERKELEY

                                                        Lawrence Mishel
                                              ECONOMIC POLICY INSTITUTE

                                                   Laura D'Andrea Tyson
                                                 LONDON BUSINESS SCHOOL

                                                      Kenneth J. Arrow*
                                                    STANFORD UNIVERSITY

                                                     Franco Modigliani*
                                  MASSACHUSETTS INSTITUTE OF TECHNOLOGY

                                                           Janet Yellen
                                      UNIVERSITY OF CALIFORNIA-BERKELEY

                                                          Peter Diamond
                                  MASSACHUSETTS INSTITUTE OF TECHNOLOGY

                                                     Paul A. Samuelson*
                                  MASSACHUSETTS INSTITUTE OF TECHNOLOGY

                                                     Douglass C. North*
                                                  WASHINGTON UNIVERSITY

                                                     Lawrence R. Klein*
                                             UNIVERSITY OF PENNSYLVANIA

                                                       Robert M. Solow*
                                  MASSACHUSETTS INSTITUTE OF TECHNOLOGY

                                                     William F. Sharpe*
                                                    STANFORD UNIVERSITY

                                                    Daniel L. McFadden*
                                      UNIVERSITY OF CALIFORNIA-BERKELEY

                                                       Joseph Stiglitz*
                                                    COLUMBIA UNIVERSITY

    *Nobel laureate

    ------------------------------------------------------------------------
     ------------------------------------------------------------------------
    Henry Aaron                                 Robert K. Arnold
    The Brookings Institution                   Center for Continuing Study
                                                 of the California Economy
    ------------------------------------------------------------------------
    Katharine Abraham                           David Arsen
    University of Maryland                      Michigan State University
    ------------------------------------------------------------------------
    Frank Ackerman                              Michael Ash
    Global Development and Environment          University of Massachusetts
     Institute                                   Amherst
    ------------------------------------------------------------------------
    William James Adams                         Alice Audie-Figueroa
    University of Michigan                      International Union, UAW
    ------------------------------------------------------------------------
    Earl W. Adams                               Robert L. Axtell
    Allegheny College                           The Brookings Institution
    ------------------------------------------------------------------------
    Irma Adelman                                M.V. Lee Badgett
    University of California--Berkeley          University of Massachusetts
                                                 Amherst
    ------------------------------------------------------------------------
    Moshe Adler                                 Ron Baiman
    Fiscal Policy Institute                     University of Illinois--
                                                 Chicago
    ------------------------------------------------------------------------
    Behrooz Afraslabi                           Dean Baker
    Allegheny College                           Center for Economic and
                                                 Policy Research
    ------------------------------------------------------------------------
    Randy Albelda                               Drucilla K. Barker
    University of Massachusetts--Boston         Hollins University
    ------------------------------------------------------------------------
    Polly R. Allen                              David Barkin
    University of Connecticut                   Universidad Autonoma
                                                 Metropolitana--Unidad
                                                 Xochimilco
    ------------------------------------------------------------------------
    Gar Alperovitz                              William A. Barnett
    University of Maryland                      University of Kansas and
                                                 Washington University
    ------------------------------------------------------------------------
    Alice H. Amsden                             Timothy J. Bartik
    Massachusetts Institute of Technology       Upjohn Institute
    ------------------------------------------------------------------------
    Robert M. Anderson                          Francis M. Bator
    University of California                    Harvard University, Kennedy
                                                 School of Government
    ------------------------------------------------------------------------
    Ralph Andreano                              Sandy Baum
    University of Wisconsin                     Skidmore College
    ------------------------------------------------------------------------
    Laura M. Argys                              Northeastern University
    University of Colorado--Denver
    ------------------------------------------------------------------------
    William J. Baumol                           Lawrence Blume
    New York University                         Cornell University
    ------------------------------------------------------------------------
    Randolph T. Beard                           Samuel Bowles
    Auburn University                           Santa Fe Institute
    ------------------------------------------------------------------------
    Michael Behr                                James K Boyce
                                                University of Massachusetts
                                                 Amherst
    ------------------------------------------------------------------------
    Michael H. Belzer                           Lawrence W. Boyd
    Wayne State University                      University of Hawaii--West
                                                 Oahu
    ------------------------------------------------------------------------
    Arthur Benavie                              James K. Boyle
    University of North Carolina--Chapel Hill   University of Massachusetts--
                                                 Amherst
    ------------------------------------------------------------------------
    Peter Berg                                  Ralph Bradburd
    Michigan State University                   Williams College
    ------------------------------------------------------------------------
    Alexandra Bernasek                          Gerard Bradley
    Colorado State University                   San Diego New Mexico Labor
                                                 Department
    ------------------------------------------------------------------------
    Michael A. Bernstein                        W. Robert Brazelton
    University of California                    University of Missouri--
                                                 Kansas City
    ------------------------------------------------------------------------
    Jared Bernstein                             Daniel W. Bromley
    Economic Policy Institute                   University of Wisconsin
    ------------------------------------------------------------------------
    Melissa Binder                              Clair Brown
    University of New Mexico                    University of California--
                                                 Berkeley
    ------------------------------------------------------------------------
    Peter Birckmayer                            Ralph C. Bryant
    SUNY--Empire State College                  The Brookings Institution
    ------------------------------------------------------------------------
    L. Josh Bivens                              Robert Buchele
    Economic Policy Institute                   Smith College
    ------------------------------------------------------------------------
    Margaret M. Blair                           Stephen Buckles
    Georgetown University Law Center            Vanderbilt University
    ------------------------------------------------------------------------
    Olivier Blanchard                           Jeremy Bulow
    Massachusetts Institute of Technology       Stanford University
    ------------------------------------------------------------------------
    Gail Blattenberger                          Mary A. Burke
    University of Utah                          Hunter College, City
                                                 University of New York
    ------------------------------------------------------------------------
    Barry Bluestone                             Lawrence Chimerine
    Florida State University & Grinnell         Radnor International
     College                                     Consulting, Inc.
    ------------------------------------------------------------------------
    Stephen V. Burks                            Menzie D. Chinn
    University of Minnesota                     University of California--
                                                 Santa Cruz
    ------------------------------------------------------------------------
    Larry Buron                                 Carl F. Christ
    Abt Associates                              Johns Hopkins University
    ------------------------------------------------------------------------
    Gary Burtless                               Paul P. Christensen
    The Brookings Institution                   Hofstra University
    ------------------------------------------------------------------------
    Dallas Burtraw                              Jens Christiansen
    Resources for the Future                    Mount Holyoke College
    ------------------------------------------------------------------------
    Jim Campen                                  Michael P. Claudon
    University of Massachusetts--Boston         Middlebury College
    ------------------------------------------------------------------------
    E. Ray Canterbery                           Gary E. Clayton
    Florida State University                    Northern Kentucky University
    ------------------------------------------------------------------------
    Paul Cantor                                 Alan Clayton-Matthews
    Norwalk Community College                   University of Massachusetts--
                                                 Boston
    ------------------------------------------------------------------------
    Christopher D. Carroll                      Richard D. Coe
    Johns Hopkins University                    New College of Florida
    ------------------------------------------------------------------------
    Jeffrey P. Carpenter                        Richard D. Coe
    Middlebury College                          New College of Florida
    ------------------------------------------------------------------------
    Susan B. Carter                             Robert M. Coen
    University of California--Riverside         Northwestern University
    ------------------------------------------------------------------------
    Carl E. Case                                Stephen S. Cohen
    Wellesley College                           University of California--
                                                 Berkeley
    ------------------------------------------------------------------------
    Timothy N Cason                             Steven Cohn
    Purdue University                           Knox College
    ------------------------------------------------------------------------
    Fikret Ceyhun                               David C. Cole
    AEA & URPE                                  Harvard University
    ------------------------------------------------------------------------
    Jimmy Chan                                  William S. Comanor
    Johns Hopkins University                    University of California--
                                                 Santa Barbara & Los Angeles
    ------------------------------------------------------------------------
    Howard Chernick                             Gregory DeFreitas
                                                Hofstra University
    ------------------------------------------------------------------------
    John R. Conlon                              I.M. Destler
    University of Mississippi                   University of Maryland
    ------------------------------------------------------------------------
    Rachel Connelly                             James G. Devine
    Bowdoin College                             Loyola Marymount University
    ------------------------------------------------------------------------
    John Connor                                 William T. Dickens
    Villanova University                        The Brookings Institution
    ------------------------------------------------------------------------
    Patrick Conway                              Randall Dodd
    University of North Carolina--Chapel Hill   Financial Policy Forum
    ------------------------------------------------------------------------
    Paul N. Courant                             Peter B. Doeringer
    University of Michigan                      Boston University
    ------------------------------------------------------------------------
    David B. Crary                              J. Malcolm Dowling
    Eastern Michigan University                 Singapore Management
                                                 University
    ------------------------------------------------------------------------
    Carolyn Craven                              Robert Drago
    Middlebury College                          Pennsylvania State
                                                 University
    ------------------------------------------------------------------------
    Vincent P. Crawford                         Laura Dresser
    University of California--San Diego         University of Wisconsin--
                                                 Madison
    ------------------------------------------------------------------------
    James R. Crotty                             James S. Duesenberry
    University of Massachusetts                 Harvard University
    ------------------------------------------------------------------------
    Al Culver                                   Lloyd J. Dumas
    California State University--Chico          University of Texas--Dallas
    ------------------------------------------------------------------------
    David Danning                               Steven Durlauf
    Massachusetts Teachers Association          University of Wisconsin
    ------------------------------------------------------------------------
    Sheldon Danziger                            M. Dutta
    University of Michigan                      Rutgers University--New
                                                 Brunswick
    ------------------------------------------------------------------------
    Jane D'Arista                               Ronald G. Ehrenberg
    Financial Markets Center                    Cornell University
    ------------------------------------------------------------------------
    Paul Davidson                               Barry Eichengreen
    Journal of Post Keynsian Economics          University of California--
                                                 Berkeley
    ------------------------------------------------------------------------
    Sidney Davidson                             Albert Fishlow
    University of Chicago                       Columbia University
    ------------------------------------------------------------------------
    Catherine S. Elliott                        Diane Flaherty
    New College of Florida                      University of Massachusetts--
                                                 Amherst
    ------------------------------------------------------------------------
    David T. Ellwood                            Kenneth Flamm
    Harvard University, Kennedy School of       LBJ School of Public
     Government                                  Affairs, University of
                                                 Texas at Austin
    ------------------------------------------------------------------------
    Richard W. England                          Robert J. Flanagan
    University of New Hampshire                 Stanford University
    ------------------------------------------------------------------------
    Ernie Englander                             Daniel Flores-Guri
    George Washington University                Skidmore College
    ------------------------------------------------------------------------
    Gerald Epstein                              Nancy Folbre
    University of Massachusetts--Amherst        University of Massachusetts--
                                                 Amherst
    ------------------------------------------------------------------------
    Linda Ewing                                 Christina M. Fong
    International Union, UAW                    Carnegie Mellon University
    ------------------------------------------------------------------------
    Jeff Faux                                   Harold A. Forman
    Economic Policy Institute                   UFCW
    ------------------------------------------------------------------------
    Massoud Fazeli                              Richard G. Frank
    Hofstra University                          Harvard University
    ------------------------------------------------------------------------
    Steven Fazzari                              Robert H. Frank
    Washington University                       Cornell University
    ------------------------------------------------------------------------
    Sasan Fayazmanesh                           Jeffrey Frankel
    California State University--Fresno         Harvard University
    ------------------------------------------------------------------------
    Rashi Fein                                  Donald G. Freeman
    Harvard University                          Sam Houston State University
    ------------------------------------------------------------------------
    William D. Ferguson                         Joseph Froomkin
    Grinnell College
    ------------------------------------------------------------------------
    Rudy Fichtenbaum                            Richard Fryman
    Wright State University                     University of West Georgia
    ------------------------------------------------------------------------
    Ronald C. Fisher                            Victor R. Fuchs
    Michigan State University                   Stanford University
    ------------------------------------------------------------------------
    Franklin M. Fisher                          James K. Galbraith
    Massachusetts Institute of Technology       University of Texas, LBJ
                                                 School of Public Affairs
                                                 Austin
    ------------------------------------------------------------------------
    Stephen Golub                               Eban Goodstein
    Swarthmore College                          Lewis & Clark College
    ------------------------------------------------------------------------
    William G. Gale                             Neva R. Goodwin
    The Brookings Institution                   Tufts University
    ------------------------------------------------------------------------
    Kevin Gallagher                             Robert J. Gordon
    Global Development and Environment          Northwestern University
     Institute, Tufts University
    ------------------------------------------------------------------------
    David E. Gallo                              Fred Gottheil
    California State University--Chico          University of Illinois--
                                                 Urbana
    ------------------------------------------------------------------------
    Irv Garfinkel                               Peter Gottschalk
    Columbia University                         Boston College
    ------------------------------------------------------------------------
    Wei Ge                                      Ulla Grapard
    Bucknell University                         Colgate University
    ------------------------------------------------------------------------
    Teresa Ghilarducci                          Jerry R. Green
    University of Notre Dame                    Harvard University
    ------------------------------------------------------------------------
    John Gilderbloom                            Daphne Greenwood
    University of Louisville                    Center for Colorado Policy
                                                 Studies
    ------------------------------------------------------------------------
    Amy K. Glasmeier                            Douglas F. Greer
    Pennsylvania State University               San Jose State University
    ------------------------------------------------------------------------
    Devra L. Golbe                              Gregory Grossman
    Hunter College, City University of New      University of California--
     York                                        Berkeley
    ------------------------------------------------------------------------
    Arthur S. Goldberger                        Terry L. Gustafson
    University of Wisconsin                     California State University--
                                                 Chico
    ------------------------------------------------------------------------
    Marshall I. Goldman                         Deborah Haas-Wilson
    Wellesley College                           Smith College
    ------------------------------------------------------------------------
    Steven M. Goldman                           Steven C. Hackett
    University of California--Berkeley          Humboldt State University
    ------------------------------------------------------------------------
    Don Goldstein                               Bronwyn H. Hall
    Allegheny College                           University of California--
                                                 Berkeley
    ------------------------------------------------------------------------
    Jonathan H. Hamilton                        Marjorie Honig
    University of Florida                       Hunter College, City
                                                 University of New York
    ------------------------------------------------------------------------
    Joseph E. Harrington, Jr.                   Barbara Hopkins
    Johns Hopkins University                    Wright State University
    ------------------------------------------------------------------------
    Douglas Harris                              Ann Horowitz
    Florida State University                    University of Florida
    ------------------------------------------------------------------------
    Jonathan M. Harris                          Scott Houser
    Tufts University                             California State
                                                 University--Fresno
    ------------------------------------------------------------------------
    Donald Hausch                               Charles Howe
    University of Wisconsin--Madison            University of Colorado
    ------------------------------------------------------------------------
    Robert Haveman                              David Hummels
    University of Wisconsin--Madison            Purdue University
    ------------------------------------------------------------------------
    Sue Headlee                                 Richard Hurd
    American University                         Cornell University
    ------------------------------------------------------------------------
    Carol E. Heim                               Steven Husted
    University of Massachusetts--Amherst        University of Pittsburgh
    ------------------------------------------------------------------------
    James Heintz                                Michael Hutchison
    University of Massachusetts                 University of California--
                                                 Santa Cruz
    ------------------------------------------------------------------------
    Paul A. Heise                               Alan G. Isaac
    Lebanon Valley College                      American University
    ------------------------------------------------------------------------
    William F. Hellmuth                         Jonathan Isham
    Virginia Commonwealth University            Middlebury College
    ------------------------------------------------------------------------
    Joni Hersch                                 Joyce Jacobsen
    Harvard Law School                          Wesleyan University
    ------------------------------------------------------------------------
    Donald D. Hester                            Sanford M. Jacoby
    University of Wisconsin                     University of California--
                                                 Los Angeles
    ------------------------------------------------------------------------
    Marianne T. Hill                            Kenneth P. Jameson
    Mississippi Center for Policy Research      University of Utah
    ------------------------------------------------------------------------
    Albert O. Hirschman                         Pascale Joassa
    Institute for Advanced Study                University of Massachusetts
    ------------------------------------------------------------------------
    Lawrence D. Jones                           Dan Kovenock
    University of British Columbia              Purdue University
    ------------------------------------------------------------------------
    George Jouganatos                           Robert J. Kozlowski
    California State University                 Macalester College
    ------------------------------------------------------------------------
    Alfred E. Kahn                              Nicholas N. Kozlov
    Cornell University, NERA                    Hofstra University
    ------------------------------------------------------------------------
    Linda Kamas                                 Mordechai Kreinin
    Santa Clara University                      Michigan State University
    ------------------------------------------------------------------------
    J.K. Kapler                                 David Kristjanson-Gural
    University of Massachusetts--Boston         Bucknell University
    ------------------------------------------------------------------------
    Roger T. Kaufman                            Mordecai Kurz
    Smith College                               Stanford University
    ------------------------------------------------------------------------
    David E. Kaun                               Helen F. Ladd
    University of California--Santa Cruz        Duke University
    ------------------------------------------------------------------------
    Carl Kaysen                                 David L. Landes
    Massachussets Institute of Technology       City College of San
                                                 Francisco
    ------------------------------------------------------------------------
    Zorina Khan                                 Kevin Lang
    Bowdoin College                             Boston University
    ------------------------------------------------------------------------
    Marlene Kim                                 Catherine Langlois
    University of Massachusetts--Boston         Georgetown University
    ------------------------------------------------------------------------
    Lori G. Kletzer                             Mehrene Larudee
    University of California--Santa Cruz        University of Kansas
    ------------------------------------------------------------------------
    Tim Koechlin                                Gary Latanich
    Vassar College                              Arkansas State University
    ------------------------------------------------------------------------
    Andrew I. Kohen                             Robert Z. Lawrence
    James Madison University                    Harvard University
    ------------------------------------------------------------------------
    Douglas Koritz                              I. Paul Leigh
    Buffalo State College                       University of California--
                                                 Davis
    ------------------------------------------------------------------------
    Charles Leven                               Arthur MacEwan
    Washington University                       University of Massachusetts--
                                                 Boston
    ------------------------------------------------------------------------
    Margaret C. Levenstein                      Jeffrey Mackie-Mason
    University of Michigan                      University of Michigan
    ------------------------------------------------------------------------
    David I. Levine                             Mark H. Maier
    University of California--Berkeley          Glendale Community College
    ------------------------------------------------------------------------
    Herbert S. Levine                           Thomas N. Maloney
    University of Pennsylvania                  University of Utah
    ------------------------------------------------------------------------
    Mark Levinson                               Vaishali Mamgain
    UNITE                                       University of Southern Maine
    ------------------------------------------------------------------------
    Stephen Levy                                Jay R. Mandle
    Center for Continuing Study of the          Colgate University
     California Economy
    ------------------------------------------------------------------------
    James D. Likens                             Andrea Maneschi
    Pomona College                              Vanderbilt University
    ------------------------------------------------------------------------
    George C. Lodge                             Michael Manove
    Harvard Business School                     Boston University
    ------------------------------------------------------------------------
    George Loewenstein                          Donald Mar
    Carnegie Mellon University                  San Francisco State
                                                 University
    ------------------------------------------------------------------------
    Michael Lovell                              Ann R. Markuson
    Wesleyan University                         University of Minnesota
    ------------------------------------------------------------------------
    Darryl Lowrystyle                           Peter Hans Matthews
    Roanoke College                             Middlebury College
    ------------------------------------------------------------------------
    Lisa M. Lynch                               Elaine McCrate
    Tufts University                            University of Vermont
    ------------------------------------------------------------------------
    Robert G. Lynch                             M. Kevin McGee
    Washington College                          University of Wisconsin--
                                                 Oshkosh
    ------------------------------------------------------------------------
    Catherine Lynde                             Andrew McLennan
    University of Massachusetts--Boston         University of Minnesota
    ------------------------------------------------------------------------
    Louis J. Maccini                            Walter W. McMahon
    Johns Hopkins University                    University of Illinois at
                                                 Urbana Champaign
    ------------------------------------------------------------------------
    Charles W. McMillion                        Edward Montgomery
    MBG Information Services                    University of Maryland
    ------------------------------------------------------------------------
    Robert N. Mefford                           Mark Montgomery
    UAW of San Francisco                        Grinnell College
    ------------------------------------------------------------------------
    Gerald M. Meier                             Robert E. Moore
    Stanford University                         Georgia State University
    ------------------------------------------------------------------------
    Martin Melkonian                            James C. Moore
    Hofstra University                          Purdue University
    ------------------------------------------------------------------------
    Seymour Melman                              Suleman A. Moosa
    Columbia University                         California State University--
                                                 Chico
    ------------------------------------------------------------------------
    Mieke Meurs                                 James P. Morgan
    American University                         University of Michigan
    ------------------------------------------------------------------------
    Peter B. Meyer                              Lawrence Morse
    The E.P. Systems Group, Inc.                North Carolina Agricultural
                                                 & Technical State
                                                 University
    ------------------------------------------------------------------------
    Bruce D. Meyer                              Saeed Mortazavi
    Northwestern University                     Humboldt State University
    ------------------------------------------------------------------------
    Thomas R. Michl                             Fred Moseley
    Colgate University                          Mount Holyoke College
    ------------------------------------------------------------------------
    Edward Miguel                               Joanna Moss
    University of California--Berkeley          San Francisco State
                                                 University
    ------------------------------------------------------------------------
    William Milberg                             Tracy Mott
    New School University                       University of Denver
    ------------------------------------------------------------------------
    John A. Miller                              Richard J. Murnane
    Wheaton College                             Harvard Graduate School of
                                                 Education
    ------------------------------------------------------------------------
    Amata Miller                                Richard A. Musgrave
    College of St. Catherine                    Harvard University
    ------------------------------------------------------------------------
    Ted R. Miller                               Peggy B. Musgrave
    Pacific Institute for Research &            University of California--
     Evaluation                                  Santa Cruz
    ------------------------------------------------------------------------
    Jerry Miner                                 Mount Holyoke College
    Syracuse University
    ------------------------------------------------------------------------
    G. Alan Myers                               Michael Perelman
    Santa Fe Workshops                          California State University--
                                                 Chico
    ------------------------------------------------------------------------
    Glenn Nelson                                Jeffrey M. Perloff
                                                University of California--
                                                 Berkeley
    ------------------------------------------------------------------------
    Janet S. Netz                               Brian J. Peterson
    University of Michigan                      Manchester College
    ------------------------------------------------------------------------
    Pamela Nickless                             Karen A. Pfeifer
    University of North Carolina--Asheville     Smith College
    ------------------------------------------------------------------------
    Roger G. Noll                               Michael J. Piore
    Stanford University                         Massachusetts Institute of
                                                 Technology
    ------------------------------------------------------------------------
    Paulette Olson                              Robert Pollin
    Wright State University                     University of Massachusetts--
                                                 Amherst
    ------------------------------------------------------------------------
    Paul Ong                                    Marshall Pomer
    University of California--Los Angeles       Macroeconomic Policy
                                                 Institute
    ------------------------------------------------------------------------
    Van Dom Ooms                                Adam Posen
    Committee for Economic Development          Institute for International
                                                 Economics
    ------------------------------------------------------------------------
    Peter R. Orszag                             John M. Quigley
    The Brookings Institution                   University of California--
                                                 Berkeley
    ------------------------------------------------------------------------
    Spencer J. Pack                             Gustav Ranis
    Connecticut College                         Yale University
    ------------------------------------------------------------------------
    Thomas I. Palley                            Daniel I. Rees
    Open Society Institute                      University of Colorado--
                                                 Denver
    ------------------------------------------------------------------------
    Sangin Park                                 Michael Reich
    SUNY Stony Brook                            University of California--
                                                 Berkeley
    ------------------------------------------------------------------------
    James Parrott                               Cordelia Reimers
    Fiscal Policy Institute                     Hunter College, City
                                                 University of New York
    ------------------------------------------------------------------------
    Manuel Pastor                               James D. Reschovsky
    University of California--Santa Cruz        Center for Studying Health
                                                 System Change
    ------------------------------------------------------------------------
    Eva Paus
    ------------------------------------------------------------------------
    Alice M. Rivlin                             Jeffrey D. Sachs
    The Brookings Institution & New School      Columbia University
     University
    ------------------------------------------------------------------------
    Bruce B. Roberts                            Steven C. Salop
    University of Southern Maine                Georgetown University Law
                                                 Center
    ------------------------------------------------------------------------
    James M. Rock                               Gregory M. Saltzman
    University of Utah                          Albion College and
                                                 University of Michigan
    ------------------------------------------------------------------------
    Dani Rodrik                                 Isabel V. Sawhill
    Harvard University, Kennedy School of       The Brookings Institution
     Government
    ------------------------------------------------------------------------
    Carol Ann Rogers                            Max B. Sawicky
    Georgetown University                       Economic Policy Institute
    ------------------------------------------------------------------------
    David Romer                                 Peter V. Schaeffer
    University of California--Berkeley          West Virginia University
    ------------------------------------------------------------------------
    Christina Romer                             William C. Schaniel
    University of California--Berkeley          State University of West
                                                 Georgia
    ------------------------------------------------------------------------
    Frank Roosevelt                             A. Allan Schmid
    Sarah Lawrence College                      Michigan State University
    ------------------------------------------------------------------------
    Howard Rosen                                Stephen J. Schmidt
                                                Union College (Schenectady)
    ------------------------------------------------------------------------
    Joshua L. Rosenbloom                        Geoffrey E. Schneider
    University of Kansas                        Bucknell University
    ------------------------------------------------------------------------
    Roy J. Rotheim                              Bruce R. Scott
    Skidmore College                            Harvard Business School
    ------------------------------------------------------------------------
    Daniel Rubinfeld                            Allen J. Scott
    University of California--Berkeley          University of California--
                                                 Los Angeles
    ------------------------------------------------------------------------
    Janis A. Russell                            Robert Scott
    University of Massachusetts--Amherst        Economic Policy Institute
    ------------------------------------------------------------------------
    Thomas F. Rutherford                        James G. Scoville
    University of Colorado                      University of Minnesota
    ------------------------------------------------------------------------
    Vernon W. Ruttan                            Stephanie Seguino
    University of Minnesota                     University of Vermont
    ------------------------------------------------------------------------
    Laurence Seidman                            Stephen J. Silvia
    University of Delaware                      American University
    ------------------------------------------------------------------------
    Bonu Sengupta                               Carl Simkonis
    Grinnell College                            Northern Kentucky University
    ------------------------------------------------------------------------
    Esther-Mirjam Sent                          Betty Frances Slade
    University of Notre Dame & Netherlands      Harvard Institute for
     Institute for Advanced Study in the         International Development
     Humanities and Social Sciences
    ------------------------------------------------------------------------
    Purvi Sevak                                 Timothy M. Smeeding
    Hunter College--City University of New      Maxwell School, Syracuse
     York                                        University
    ------------------------------------------------------------------------
    Jean Shackelford                            Stephen C. Smith
    Bucknell University                         George Washington University
    ------------------------------------------------------------------------
    Harry G. Shaffer                            Joel Sobel
    University of Kansas                        University of California
    ------------------------------------------------------------------------
    Sumitra Shah                                Martin C. Spechler
    St. John's University                       Indiana University
    ------------------------------------------------------------------------
    M. M. Shahjahan                             William Spriggs
    PHI Service Co.                             National Urban League
                                                 Institute for Opportunity
                                                 And Equality
    ------------------------------------------------------------------------
    Matthew D. Shapiro                          Mary Huff Stevenson
    University of Michigan                      University of Massachusetts--
                                                 Boston
    ------------------------------------------------------------------------
    Carl Shapiro                                John R. Stifler
    University of California--Berkeley          University of Massachusetts--
                                                 Amherst
    ------------------------------------------------------------------------
    William G. Shepherd                         Michael Storper
    University of Massachusetts                 University of California--
                                                 Los Angeles
    ------------------------------------------------------------------------
    Steven Shuklian                             Stephen H. Strand
    Marshall University                         Carleton College
    ------------------------------------------------------------------------
    Laurence Shute                              Frederick R. Strobel
    California State Polytechnic University--   New College of Florida
     Pomona
    ------------------------------------------------------------------------
    Hilary Sigman                               Myra H. Strober
    Rutgers University                          Stanford University
    ------------------------------------------------------------------------
    OECD                                        Ashok Vora
                                                Baruch College, City
                                                 University of New York
    ------------------------------------------------------------------------
    Peter Temin                                 Norman J. Waitzman
    Massachusetts Institute of Technology       University of Utah
    ------------------------------------------------------------------------
    David Terkla                                Suzanne Wallace
    University of Massachusetts--Boston         Central College
    ------------------------------------------------------------------------
    Kenneth H. Thomas                           Michael Wallerstein
    The Wharton School, University of           Northwestern University
     Pennsylvania
    ------------------------------------------------------------------------
    Frank Thompson                              Bernard Wasow
    University of Michigan                      The Century Foundation
    ------------------------------------------------------------------------
    Ross Thomson                                Teresa Meyer Waters
    University of Vermont                       University of Tennessee
    ------------------------------------------------------------------------
    L.C. Thurow                                 David N. Weil
    Massachusetts Institute of Technology       Brown University
    ------------------------------------------------------------------------
    Tom Tietenberg                              Sidney Weintraub
    Colby College                               Center for Strategic and
                                                 International
    ------------------------------------------------------------------------
    Christopher Tilly                           Burton A. Weisbrod
    University of Massachusetts--Lowell         Northwestern University
    ------------------------------------------------------------------------
    Mayo C. Toruno                              Charles L. Weise
    California State University, San            Gettysburg College
     Bernardino
    ------------------------------------------------------------------------
    James Tybout                                Thomas E. Weisskopf
    Penn State University                       University of Michigan
    ------------------------------------------------------------------------
    Christopher Udry                            Christian E. Weller
    Yale University                             Economic Policy Institute
    ------------------------------------------------------------------------
    David Vail                                  Fred M. Westfield
    Bowdoin College                             Vanderbilt University
    ------------------------------------------------------------------------
    Donald Vial                                 Melvin I. White
    California Foundation on the Environment    Brooklyn College--City
     and the Economy                             University of New York
    ------------------------------------------------------------------------
    George M. Von Furstenberg                   ............................
    Indiana University
    ------------------------------------------------------------------------
    Nancy E. White
    Bucknell University
    ------------------------------------------------------------------------
    Shelley I. White-Means
    University of Memphis
    ------------------------------------------------------------------------
    Charles K. Wilber
    University of Notre Dame
    ------------------------------------------------------------------------
    ------------------------------------------------------------------------
    Arthur R. Williams
    Health Care Policy & Research, Mayo Clinic
    ------------------------------------------------------------------------
    Gordon C. Winston
    Williams College
    ------------------------------------------------------------------------
    Martin H. Wolfson
    University of Notre Dame
    ------------------------------------------------------------------------
    Brian D. Wright
    University of California--Berkeley
    ------------------------------------------------------------------------
    Gary Yohe
    Wesleyan University
    ------------------------------------------------------------------------
    Linda Young
    Southern Oregon University
    ------------------------------------------------------------------------
    Carol Zabin
    University of California Berkeley Center
     for Labor Research and Education
    ------------------------------------------------------------------------
    Henry W. Zaretsky
    Henry W. Zaretsky & Assoc., Inc.
    ------------------------------------------------------------------------
    Lyuba Zarsky
    Global Development and Environment
     Institute
    ------------------------------------------------------------------------
    Andrew Zimbalist
    Smith College
    ------------------------------------------------------------------------
    John Zysman
    Berkeley Roundtable on the International
     Economy
    ------------------------------------------------------------------

        Mr. ENGLISH. I do, indeed, Mr. Chairman. Thank you, Mr.
    Gale. I would like to perhaps move this from the metaphysical
    to something a little more concrete, but to build on a line of
    questioning just pursued by my colleague from Massachusetts
    with Mr. Glassman.
        As I understand it, not paying corporate taxes, by your
    definition sheltering income, one way to reduce tax liability
    is to utilize provisions in the tax code, such as the low-
    income housing tax credit or the wind energy tax credit. Is it
    your testimony today that the President's dividend proposal
    will not ``reduce to a significant degree'' the use of tax
    shelters such as low-income housing tax credits and wind energy
    tax credits?
        Mr. GALE. There are two issues with the use of sheltering,
    and it depends on whether the shareholder is taxable or tax
    exempt. I have written a paper that showed that half of
    dividends accrue to shareholders that would not be affected by
    the change in the dividend tax treatment.
        Mr. ENGLISH. On page 6 of your testimony, you said that
    ``The Administration's proposal would have no effect on firms'
    incentives to shelter and retain earnings. The proposal,
    therefore, does not eliminate, and may not even reduce to a
    significant degree, the incentives that exist under the current
    tax system to shelter corporate income from taxation and then
    to retain the earnings.''
        Am I reading that correctly?
        Mr. GALE. You left out one part, which is, ``The
    Administration's proposal would have no effect on firms'
    incentives to shelter and retain earnings to the extent that
    firms are owned by nontaxable shareholders.''
        Mr. ENGLISH. I see.
        Mr. GALE. So, for them, there is no net effect. To the
    extent that firms are held by taxable shareholders, the
    Administration's proposal would reduce incentives to shelter
    somewhat, but it is also true that firms could still maximize
    the after-tax return by sheltering the corporate income from
    taxation and then retaining the earnings.
        Mr. ENGLISH. That is very nuanced testimony, and I think
    that is a good counterpoint to some of the panic we have heard
    from some of the opponents of this provision on that point.
        Mr. Gale, in listening to your testimony earlier, I believe
    you said that the most efficient thing we could do would be to
    take Federal dollars and provide them back to the States as a
    stimulus.
        Is it your view that State and local governments inherently
    spend resources more efficiently than the Federal Government?
        Mr. GALE. I think that when I used ``efficiently'' there, I
    meant it in the terms of the cost to the Federal Treasury
    relative to the boost to the economy. So the issue isn't the
    efficiency of the State government versus the Federal
    Government, it is that a dollar that flowed from Federal to
    State coffers would be a direct-stimulus effect, would have a
    direct-stimulus effect.
        Mr. ENGLISH. What if local governments and State
    governments took the Federal dollars and raised taxes anyway?
        Mr. GALE. No, no. What the Federal money would do would be
    to allow them not to raise taxes in a situation where they
    otherwise needed to raise taxes, the idea being----
        Mr. ENGLISH. That is true. As someone who actually has had
    a career in State government, and who was a finance officer in
    local government, that is not the way State and local
    governments all too often behave, unfortunately, and that may
    be a political component that your model is not addressing.
        Mr. Glassman, you raised a very important point about how
    the President's proposal on dividends will improve the
    transparency of corporate finance. Could you elaborate on why
    you think this could be a significant corporate governance
    reform in addition to tax policy.
        Mr. GLASSMAN. In fact, I think it is the most important
    corporate governance reform. A year ago I testified in front of
    the Financial Services Committee, and I said if you really want
    to do something about corporate governance, and I realize this
    is not what the Financial Services Committee is supposed to do,
    but eliminate the double taxation of dividends, and the reason
    is this:
        That corporations today have very little incentive to pay
    dividends to their shareholders, so they have cut back on
    dividends, they have cut back on the percentage of profits that
    they pay. Dividends have become, in many cases, practically
    meaningless, so that an individual investor cannot look at a
    dividend and say, ``Oh, here is a company that is consistently
    increasing its dividend. That is the kind of company I want to
    invest in.''
        There are too many mixed messages being sent because of the
    interference of the tax law. If you eliminate double taxation,
    investors can come to rely on that dividend figure. A lot of
    academic research has shown that companies are very reluctant
    to cut their dividend, and when you see a dividend payout, that
    is a more reliable figure in many cases, I would say in most
    cases, than the paper profits that a company is declaring to
    the Securities and Exchange Commission, which, as we know, can
    easily be manipulated.
        You can't manipulate cash or you might be able to do it one
    or 2 years, but you can't do it over the long term, and it is
    very transparent. It is very clear. So I think it would add
    tremendously to the average investor's perception of what is
    happening.
        Mr. ENGLISH. My time has expired, but I want to thank all
    three of you gentlemen for excellent testimony today, which I
    think substantially enhances our understanding of the subject
    matter. Thank you, Mr. Chairman.
        Chairman THOMAS. Thank the gentleman. Does the gentleman
    from Kentucky, Mr. Lewis, wish to inquire?
        Mr. LEWIS OF KENTUCKY. Yes, thank you, Mr. Chairman. Mr.
    Glassman, you stated a little while ago that 5 percent pay 56
    percent of the taxes and 50 percent pay 4 percent; is that
    correct?
        Mr. GLASSMAN. Yes, sir.
        Mr. LEWIS OF KENTUCKY. We have had this debate for several
    years now. This has been a class warfare debate.
        With 56 percent of the taxes being paid by 5 percent, it
    seems to me it makes all the sense in the world to try to
    encourage and to stimulate long-term growth in the sector of
    the economy that pays the most taxes, where jobs are created,
    where that those that need help within our society, those that,
    because of no fault of their own cannot help themselves, that a
    huge proportion of the taxes being paid by the upper 5 percent
    go to help those that can least help themselves; is that
    correct?
        Mr. GLASSMAN. Yes, I agree with that, Congressman. I do
    think it is important that society pay attention to and not
    overburden and help the less fortunate, the lower earners. I
    think we are doing a good of that, and maybe we could do a
    better job, but in general, absolutely, that by taxing higher
    earners, people get hurt in the lower levels, get hurt in the
    sense that they don't have jobs.
        Mr. LEWIS OF KENTUCKY. Absolutely. If we can't get the
    economy moving in the right direction, again, and I think you
    would agree with me that the reason we are in the huge deficits
    that we are seeing, even though it is 2 percent of the gross
    national product, is because of a slow-down in our economy.
        Mr. GLASSMAN. Absolutely. There is no doubt about that.
    Revenues have slowed down dramatically as a result of what has
    happened in the stock market and the decline in growth.
        Mr. LEWIS OF KENTUCKY. So if we can create jobs, and I want
    to use my son and daughter-in-law as an example, they are
    factory workers. They have an average income of probably, I
    don't know, $50- to $60,000 for both of them, combined. They
    work for an automobile parts manufacturer. Now, how much are
    they paying in income taxes every year, on average?
        Mr. GLASSMAN. Probably, actually----
        Mr. LEWIS OF KENTUCKY. They have a daughter. They have
    one----
        Mr. GLASSMAN. Actually, I used an example that is quite
    similar. If they are making $60,000, I believe they are paying
    about $3,000 in income taxes or $3,500 in income taxes a year.
        Mr. LEWIS OF KENTUCKY. Okay.
        Mr. GLASSMAN. I think that is about right.
        Mr. LEWIS OF KENTUCKY. They are very interested in keeping
    their jobs, and if the automobile industry is not selling
    automobiles, if there is a slowdown there, then they very well
    could end up in the unemployment line. I could tell you they
    certainly would prefer a weekly wage to an unemployment check.
        Mr. GLASSMAN. I think that is the problem. If I could just
    comment, one of the things that Mr. Gale said about States, he
    said that States are bringing the economy down by raising taxes
    and cutting spending. I think there are very few economists who
    would disagree with the notion that when you are in tough
    times, the last thing you want to do is raise taxes and, in
    fact, one of the first things you want to do is to cut taxes.
    So, absolutely.
        Mr. LEWIS OF KENTUCKY. Well, isn't it true that the average
    family, with the Federal tax burden, the local, State tax
    burden, they are paying about 50 percent of their income--40
    percent--in local, State and Federal taxes, and then when you
    add in the regulatory burden of government, then you are
    getting into a significant amount of their income. Is that
    true?
        Mr. GLASSMAN. Yes, sir.
        Mr. LEWIS OF KENTUCKY. So I think we need some tax relief,
    don't you?
        Mr. GLASSMAN. Yes, sir.
        Mr. LEWIS OF KENTUCKY. Thank you.
        Chairman THOMAS. Thank the gentleman. Does the gentleman
    from Tennessee, Mr. Tanner, wish to inquire?
        Mr. TANNER. Thank you very much, Mr. Chairman. I, too,
    would like to thank the panel. I think it has been a very
    interesting discussion, one that I have enjoyed and I think
    benefited from, as I hope the other Members have.
        I want to ask a question about deficits, and debt, and
    carrying charges, I call them, for lack of a better term.
    According to the latest figures, last year we either accrued or
    paid interest of about $330-some-odd-billion on an income of
    $1.8 trillion. That works out to be 17 or 18 percent of our
    income was paid or accrued to trust funds as interest on the
    national debt.
        Is there a point or what, in your opinion, what is the
    point at which this interest rate that the country is paying
    every year on the national debt, no matter what it is, in terms
    of debt, at what point does that restrict or impede the
    government's ability to make the necessary investments in
    public infrastructure so that private enterprise can flourish,
    and expand, and grow, and create jobs? Is it 20, 25, 30
    percent? Mr. Glassman, in your opinion, at what point does this
    interest rate on present income that we are paying become too
    burdensome to carry?
        Mr. GLASSMAN. Congressman, I really don't know what the
    answer to that is. I think that where we are now----
        Mr. TANNER. Is it closer to 50 or 30?
        Mr. GLASSMAN. It may be 50. It is a complicated issue in
    the sense that this interest, most of it, is being paid to
    Americans themselves who will then take the money and do other
    things with it, maybe invest in stocks, maybe invest further in
    bonds.
        The real question I think is, as long as we have debt
    levels at the level that we have today, which is about maybe
    one-third of GDP for the public, for the debt owed to the
    public, which I don't think is onerous, the real question is
    what are we using that debt for, which is to say are we
    spending the money on the right things?
        I think at these levels we are not in kind of a dangerous
    economic circumstance.
        Mr. TANNER. I think you know about a trillion-and-a-half of
    this debt that we actually pay, write checks on, is held by
    foreigners.
        Mr. GLASSMAN. Some of it is held by foreigners, correct.
        Mr. TANNER. Yes, about a third. Would you care to comment
    about this interest that we are paying out of present income
    with regard to our ability to invest in those things?
        Mr. CASTELLANI. I am going to pass. I do not know the
    answer to that.
        Mr. GALE. I can't give you a specific number either, but I
    do want to emphasize that our debt-to-GDP ratio, if you just
    look at the debt held by the public, is an extraordinarily
    misleading figure because it omits all of the liabilities due
    in Social Security and Medicare. It astounds me that people who
    analyze firms very carefully and look for all of the footnotes
    in the documents and try to get the exact right measure of the
    financial picture of the firm, at the same time completely
    ignore the 800-pound gorilla of implicit debt when it comes to
    looking at the Federal Government.
        The Federal Government is in debt up to its ears, but not
    all of that debt has a U.S. bond written on it or a Treasury
    bill. A lot of it is implicit in the form of the promises we
    have made to Social Security and Medicare, and to argue that
    our current debt position is trivial or manageable ignores all
    of that.
        Mr. TANNER. What we would call contingent liabilities are
    not contingent, really, but future.
        I did some figuring here, and by my figures there are 129
    million individual taxpayers in the country. If you divide that
    into the interest paid last year, on average--and that seems to
    be what everybody is talking about--every individual taxpayer
    last year, when they filed their income tax return, paid $2,556
    as their share of the interest on the national debt for last
    year. I call that a debt tax, not a death tax, but a debt tax.
        If one believes in the figures that we see, and the
    projections that are being paid about deficits as far as the
    eye can see, it seems to me that this number is going to have
    to go up because interest on the debt is the one tax increase
    that I know of that cannot be repealed. Now, you are talking
    about real dollars. You can talk about percentage of GDP on
    everything else, but when you start talking about money that
    people pay, it seems to me the debt is quite real.
        Did any of you have a comment on that?
        Mr. GLASSMAN. I think, again, Congressman, you have to look
    at what that money is being paid for. We have a big government.
    We have got $2-trillion budgets, and that money is being paid
    as interest on what a lot of people consider to be investments
    that this country has made in defense, in welfare, in education
    and all of the kinds of things that--goods and services that
    Governments buy.
        The real question is, is it worth it? I think that is a
    question that you need to ask, as Members of Congress, over and
    over and over again. Quite frankly, I don't think those
    questions have been asked much in the past.
        There are only two ways to pay for it, as I said--either
    debt or taxes--and both methods pull money out of the private
    sector, have the same effect.
        Mr. TANNER. I couldn't agree with you more, and I think
    some of the proposals, for example, the debt being advantaged
    in the Code over equity is not a good situation in the Tax
    Code, and I like that.
        You made a startling statement when you said we are
    spending very little on the debt, Mr. Glassman. If we are
    spending 17 cents out of every dollar that comes here in
    interest this year, it seems to me that one could make the
    argument we have got a 17-percent mortgage on this country. I
    think if you equate that to a business, that is quite high,
    regardless of what it is being spent on, because this interest
    is being basically spent not on investment in public
    infrastructure that allows private enterprise to grow and
    expand, in my view. Thank you.
        Chairman THOMAS. I thank the gentleman. The gentleman's
    time has expired. Does the gentleman from Texas, Mr. Brady,
    wish to inquire?
        Mr. BRADY. Yes, thank you, Mr. Chairman. Thank you for
    being here today to all of the panelists.
        Debt is important, but common sense tells you that if you
    don't have a job, you are not paying much into the Federal
    Treasury to pay down that debt. If businesses are going under
    and not creating jobs or don't have a profit, you are not doing
    much else to generate revenue and pay down this debt.
        So common sense, I think, is pretty clear. The best way we
    can balance the budget, pay down the debt and have the revenue
    to preserve Social Security, Medicare, and our other issues is
    to get the economy going, and I think that is what the
    testimony today is focused on.
        There is also, some intangibles to this tax relief. On the
    dividend proposal--and this is what I wanted to ask you first,
    Mr. Castellani, and the other panelists if you would like--is
    that our Tax Code changes people's behaviors, and they do
    things differently because the Code, and it is the same way for
    business.
        You have many, many business members of all shapes and
    sizes and different types of products, and as you look at the
    dividend proposal, in addition to helping seniors who are the
    biggest holder of these dividends, in addition to the
    transparency, in what way do you think the dividend proposal
    changes behaviors for business that would help a family try to
    restore their stock portfolio, help them rebuild their
    retirement nest egg for the future? What behaviors occur that
    would help me or my family or my neighbor's family help benefit
    in this process?
        Mr. CASTELLANI. Well, there are three significant changes
    in behavior that I think would come as a result of this
    proposal if it were enacted.
        First and foremost, because it does eliminate the penalty
    that is now imposed on paying dividends, you will increase
    dividend payout rates. So if you own a share, if you don't buy
    another share, if it is in your savings plan, if it is in your
    possession, you will get more dividend income as a result of
    this being enacted because it does eliminate that disincentive
    to pay out dividends.
        Second, it will affect the cost of capital for a
    corporation. It should lower the cost of capital, and that
    lowering of the cost of capital is significant. By lowering
    cost of capital, by increasing economic activity, we believe
    that this will also increase economic activity by the
    corporation, so it will stimulate investment, it will stimulate
    certainly the creation of jobs. It, in of itself, is the
    largest single impact of all of the provisions in H.R. 2 and
    what the President has proposed in job creation.
        Second, if you have that job, and you have those savings,
    it also helps substantially in the competitiveness of U.S.
    corporations compared to our foreign competitors. So that job
    that you have, the savings and the income that you will be able
    to generate from that, will be better enhanced because we will
    be able to be competitive, even more so than we are now.
        We have among the highest tax rates for dividend income in
    the world, and that is a disadvantage for U.S. corporations. So
    I think there would be a significant advantage in all three
    areas.
        Mr. BRADY. Does this, again, to any of the panelists, for
    those of us who are looking to invest not in companies that are
    pumping their stock, carrying huge debt, instead of choosing a
    long, steady, stable growth that my family is looking for, does
    this reinforce and encourage companies to take the short-term,
    get-rich approach or the long-term, stable, create jobs, be
    there 10 years from now approach?
        Mr. CASTELLANI. It definitely emphasizes long-term stable
    growth and the production of dividends as cash, which Jim had
    said earlier that there are a lot of things you can do, and
    there are a lot of complexities with financial statements
    because these are complex organizations, but there are only two
    ways to generate cash, and one of them is counterfeiting and
    that won't happen.
        The generation of cash will provide, we believe, for stable
    prices, for equities, increased prices for equities, and higher
    total shareholder return, as well as positive benefits for
    corporate governance.
        Mr. BRADY. Great.
        Mr. GALE. I actually disagree with a few of the things that
    were just said.
        One is I think the emphasis on short-term performance is
    not driven by the firm, it is driven by the investors, and as
    long as investors have that desire, either firms will respond
    to it or investors will respond in certain ways that make firms
    respond to it.
        Mr. BRADY. I don't mean to interrupt, but don't you really
    have a choice? As an investor, I can go for a technology
    company or someone who is moving their stock price up or a more
    stable company that prefers to pay me back some revenue each
    year. Is that right?
        Mr. GALE. That is right, and what will happen is that there
    will be tax-exempt shareholders and taxable shareholders, and
    there will be a lot of activity once a corporate return is
    filed. Tax-exempt shareholders selling their stocks to taxable
    shareholders who then take the money out and sell at a capital
    loss would be one example of a shelter that would be created.
        There is a whole little cottage industry going on in the
    tax world about new ways to shelter money under this proposal,
    and I can refer you to a couple of articles on that.
        Mr. BRADY. Thank you, Mr. Chairman.
        Chairman THOMAS. The gentleman's time has expired. Does the
    gentleman from Illinois, Mr. Weller, wish to inquire?
        Mr. WELLER. Thank you, Mr. Chairman. For the gentlemen on
    the panel, thank you for your patience and participation this
    afternoon in what has been I believe a good panel.
        Of course, I think the goal for all of us in the room is to
    give Americans who currently are not working the opportunity to
    go back to work. That is the bottom line and what I know the
    President wants to achieve, and I think we and the Congress
    want to achieve as well to get this economy moving again.
        I represent the South suburbs in the Chicago area, a lot of
    manufacturing, a lot of petro chemicals, a lot of agriculture-,
    and transportation- and manufacturing-type enterprises there.
    As I talk with workers, as I talk with small business and
    entrepreneurs and taxpayers, whether blue collar or white
    collar, they like a lot of what the President has proposed.
        They like the fact that there is an immediate benefit from
    making the rate reductions effective this year, rather than 10
    years from now. Small business likes that, in particular.
        They like the fact that 46-million married couples, who
    suffer the marriage tax penalty, will see full relief this year
    rather than at the end of the decade. Those with children like
    the fact that we are doubling the child tax credit from $600 to
    $1,000 and the fact that a check will be sent out shortly after
    this becomes a law.
        They also like the fact that because the rate reductions
    will be effective immediately, the withholding will be adjusted
    within a paycheck or two. They will see higher take-home pay.
    So, for the average taxpayer in Illinois, an extra $1,000 in
    higher take-home pay is going to mean a lot in helping them
    meet the needs of their families. So they like those ideas.
        The one proposal I would like to focus on is the
    President's plan where he talks about small business
    investment, the expensing portion of the President's plan.
    Economists have told me that for about every dollar in revenue
    impact to the Federal Treasury, there is about $9 in economic
    impact that comes from expensing.
        We did some accelerated depreciation, a 30-percent
    accelerated depreciation in the stimulus package that went into
    law a year ago. The technology sector, manufacturers in my area
    told me that has had a positive impact. The technology sector
    says that 30-percent accelerated depreciation has brought them
    back to essentially where they were in the first quarter of
    2001. They have seen a little bit of a recovery as a result of
    that, and John Deere and others have credited accelerated
    depreciation with an impact.
        The President proposes targeting the expensing changes
    solely to small business, and that is good. The $25,000 to
    $75,000 I think encourages small business to buy a new pickup
    truck or a delivery vehicle or a new computer,
    telecommunications equipment. There are workers somewhere that
    produce that. That is going to create jobs.
        One of the concerns that I hear, and that is, in my area, a
    lot of suburban and rural communities that I represent are
    small manufacturers. They tend to be family held, they have
    been there for several generations, they employ 2- to 300
    people. They don't qualify as small businesses, but at the same
    time they like the idea of doing more in the area of expensing.
        Mr. Glassman, I was wondering do you have some ideas, and
    perhaps, if we wanted to help the smaller manufacturers, how we
    would expand upon the President's proposal to include more
    businesses being able to participate in the expensing the
    President has offered?
        Mr. GLASSMAN. Well, I think it should be expended.
        I would like to see, in an ideal world, all businesses able
    to expense all legitimate investment. That would have a
    tremendously positive effect on investment. I think most
    economists, and I am not an economist, but most economists
    would agree with that. It may be very difficult to do
    politically.
        So I guess my answer to your question is that the more that
    you can do to extend expensing of investment the better. Even
    at this particular time, when a lot of people feel that what we
    need is help on the consumer side, give the consumers more
    money, let them spend, I think that for the long term it really
    is the investment side, if we can think of it as two sides,
    that is important here and that we can remedy actually fairly
    easily by extending the expensing of investments.
        Mr. WELLER. One of the things I have been told by some of
    the employers in my district is they have delayed replacing
    their equipment. The economy is a little soft, so they have
    delayed replacing their company car, and the pickup truck,
    delivery vehicles, telecommunications, machine tools, the
    office computer.
        Mr. GLASSMAN. Right.
        Mr. WELLER. Do you believe that if we expanded the
    expensing, that would stimulate them or encourage them to
    replace that equipment now?
        Mr. GLASSMAN. Businesses don't make decisions solely
    because of the tax benefits, nor do we want them to. So there
    certainly are times when, and this may be one of those times,
    with an impending war, that businesses are saying, ``I don't
    care what the tax benefits are, I am not going to buy five new
    trucks or make an investment in the plant.''
        I think we have to look beyond the immediate problems and
    toward the future, and I do believe that it is better for the
    economy to have businesses making innovative investments than
    not. We don't want to just think about today.
        Mr. WELLER. Thank you, Mr. Chairman. I see my time has
    expired.
        Chairman THOMAS. The gentleman's time has expired. Would
    the gentlewoman from Ohio, Ms. Tubbs Jones, wish to be the last
    inquirer on this panel?
        Ms. TUBBS JONES. Of course, Mr. Chairman. You know I
    couldn't miss this opportunity. Thank you very much. Let me say
    hello, Mr. Glassman. I think we met when I was on Financial
    Services.
        Mr. GLASSMAN. We had. You interrogated me very vigorously.
        Ms. TUBBS JONES. Get ready. No. Let me, first of all, say I
    am just amazed, in sitting through the few hearings that I have
    had as a Member of the Committee on Ways and Means,
    particularly yesterday and last week the testimony of Secretary
    Snow and the testimony of Mr. Glassman and Mr. Castellani, that
    all of these things you say are not impacted by the fact that
    we are, according to Mr. Snow, not in a war, the President
    doesn't want to get in a war, but we have expensed millions or
    billions or trillions of dollars to be ready to go to war, and
    we are sitting on the verge about to jump off.
        Let me go on to ask you a question. Did you, in fact, say,
    Mr. Glassman, that what counts is not what the government
    spends, but what it spends it on?
        Mr. GLASSMAN. Yes.
        Ms. TUBBS JONES. I would agree that most of the American
    public right now sitting out there, particularly those seniors
    who are questioning who is going to pay for a prescription drug
    benefit would say that it is true, it doesn't matter what the
    government spends it on, what the government spends, but what
    it spends it on, that they think that we ought to be spending
    some of this money that we have on a prescription drug benefit,
    where they don't have to go into a health maintenance
    organization in order to receive a prescription drug benefit
    and that they have paid their dues--you know, like my folks who
    are 81, 82, 83 years old have paid their dues--and we ought to
    really be spending money on a prescription drug benefit. I
    guess that is a question for another day.
        Let me ask you this. You did say one of you, Mr. Glassman,
    Mr. Castellani, that the Tax Code does change behavior, and the
    fact is that the Tax Code changes people's behavior. One of you
    said that; is that correct?
        Mr. GLASSMAN. He said it, but I agree with it.
        Ms. TUBBS JONES. You both agree with it.
        Mr. GLASSMAN. I think Bill even agrees with it.
        Ms. TUBBS JONES. We can tell that this is--I will leave
    that alone. In fact, the fact that the Tax Code provided a
    privilege or an incentive, that caused many people to invest in
    low-income housing over the past 10 years; is that a fact, Mr.
    Castellani and Mr. Glassman?
        Mr. GLASSMAN. I am really not an expert in that area, but,
    clearly, there is a tax benefit, and so it would encourage
    that.
        Ms. TUBBS JONES. You know I kind of figured that neither of
    you were experts in that area, and this is not to be offensive,
    but in neither of your statements did you talk about the impact
    that the dividend tax cut would have on low-income housing or
    the impact that it would have on qualified educational bonds.
    Those are dollars that are used as a tax shelter to build
    schools across the country, nor did you talk about in there
    anything about new markets initiatives or empowerment zones or
    enterprise zones--all of those programs which will be impacted
    by a dividend tax cut.
        So since you all don't know much about that, I guess I will
    move on to some thing else.
        Let me ask you, Mr. Gale, I am interested in your statement
    with regard to partial expensing and your position that it is
    unlikely to have a significant impact on small businesses doing
    greater business. Can you expand on that a little bit for me,
    sir?
        Mr. GALE. Sure. Right now I think that there is a
    tremendous amount of uncertainty in the economy, a lot of it
    related to the situation in Iraq, a lot of it related to sort
    of just general economic uncertainty. I think that what Mr.
    Glassman said a couple minutes earlier is right, which is that
    right now, if you give them a bigger tax incentive, it is not
    going to do anything. That is not the reason they are not
    investing.
        Ms. TUBBS JONES. Would you like to tell me, very briefly,
    seeing how we only have a couple minutes, in addition to the
    war in Iraq and the uncertainty and the anxiety, what is the
    reason people aren't investing?
        Mr. GALE. That covers it. They are not investing because
    there is too much uncertainty I think right now surrounding
    things like war and oil prices.
        Ms. TUBBS JONES. Assume, in the best of worlds, that--
    strike that. Go on and answer your question. I apologize.
        Mr. GALE. So there are two other reasons why I don't think
    it would do much right now. One is because we have low capacity
    utilization rate, we would be asking firms to buy new equipment
    when they are not even using the equipment that they currently
    have. I believe this is what my colleague here was talking
    about earlier as well.
        The third reason is that, remember, we have already got
    generous investment subsidies in place. We have got 30-percent
    partial expensing. We are seeing the effects of that right now.
    If you don't see anything because of that, I don't either, but
    we have more generous incentives than usual in place right now.
    So I think it will be----
        Ms. TUBBS JONES. So just to that point, the United States
    is not such a terrible place to do business, is it?
        Mr. GALE. No. Actually, the United States is a wonderful
    place to do business, and all of the discussion about how our
    tax rates are much higher than European countries is based on
    particular examples. If you look at the economy as a whole, our
    corporate tax burden is one of the lowest in the Organization
    of Economic Cooperation and Development (OECD), and the reason
    why is we have so much corporate income that is either not
    taxed at all or is only taxed once.
        It is true that if you have corporate income that is taxed
    twice and the shareholder is the highest income bracket, there
    is high effective tax rate on it, but that applies to only a
    very small portion of total corporate income. So, yes, the
    United States is a good place to do business.
        Ms. TUBBS JONES. Thanks, Mr. Chairman.
        Chairman THOMAS. Thank you, and I want to thank the panel.
        As a parting question, since all of you are very familiar
    with the Hill and the legislative process, if the primary
    concern is over the war with Iraq, whether we have a war or
    not, do you think that decision will be finalized prior to the
    tax legislation going to the President's desk?
        Mr. GLASSMAN. I don't know. In some ways, I hope not, but I
    guess it will.
        Chairman THOMAS. Well, if that is the uncertainty, and
    people aren't dealing with it by the time this is ready for
    signature, the Chair's assumption, based upon the pace of
    legislative progress, is that won't be an impediment one way or
    the other.
        Mr. GLASSMAN. Could I add something, Mr. Chairman? I mean,
    this distinguished Committee is, its work, and you know this
    better than I, is supposed to be for the long term, and I think
    that certainly that should be your focus, whatever is happening
    in the next few weeks.
        Mr. CASTELLANI. Mr. Chairman, I would just also add that
    national security and economic security are inexorably tied
    together, and both have to be pursued, and both are important
    and vital. We need both, and so I hope that the Committee can
    move expeditiously because we think the impact of this program
    is needed and is needed quickly in this year.
        Chairman THOMAS. Mr. Gale, a final word?
        Mr. GALE. Sure. I think that this is not the right solution
    in the short run, and it is not the right solution for the long
    run, and that is independent of what happens in Iraq.
        Chairman THOMAS. The gentleman from New York wishes to----
        Mr. RANGEL. I just want to ask, Mr. Castellani, if you were
    in my place, would you be interested at all in the projected
    cost of a war or would that just fold into our search for
    economic growth, and that is one of things--I mean, would this,
    if you had to review the budget, the tax cuts, the incentives,
    and the locking into place long-term economic growth, would it
    concern you at all if you were in place?
        Mr. CASTELLANI. I think it is important that we understand,
    to the extent that we can every cost, just like your example
    before about the cost of a hurricane. Companies do that
    regularly to try to mitigate risk, but there are just some
    risks that you can't quantify when you would like to. I think
    it should be pursued, but I am not surprised that it can't be
    quantified.
        Mr. RANGEL. Would the company be concerned about a
    hurricane that occurs--you know war is a hurricane every day.
        Mr. CASTELLANI. I recognize how difficult it is to quantify
    it.
        Mr. RANGEL. I wish you hadn't used the hurricane as an
    example because I really think it is much more serious than
    that.
        Chairman THOMAS. The Chair wants to thank the panel once
    again. We did take an extended period of time, but we are
    pleased we focused on the tax rates, the child credit and the
    marriage penalty.
        The next panel that will focus on dividends consists of
    the, as I said earlier, Honorable Frank Keating, American
    Council of Life Insurers, and I am sure we will get into the
    State and local Government question by virtue of his being the
    former Governor of Oklahoma; Mr. John Schaefer, representing
    Morgan Stanley and the SIA; Mr. Ronald Stack, Municipal
    Securities Division; and the Honorable Alan Hevesi, current New
    York State Comptroller, which means we are going to talk about
    conditions today.
        I want to thank all of you for waiting. Some Members will
    come back. The Chair just wants to underscore the fact that the
    quality is here, if not the quantity, with the gentleman from
    New York and other Members.
        When you settle in--the Chair will indicate that any
    written statement that you may have will be made a part of the
    record, and you can address us, and I do hope we can attempt to
    confine the remarks to the time available to you, and we will
    just start with the former Governor and move across the panel.

     STATEMENT OF THE HONORABLE FRANK KEATING, PRESIDENT AND CHIEF
     EXECUTIVE OFFICER, AMERICAN COUNCIL OF LIFE INSURERS (FORMER
                         GOVERNOR OF OKLAHOMA)

        Mr. KEATING. Thank you, Mr. Chairman and Members of the
    Committee, for the opportunity to participate in these
    important hearings.
        As head of the American Council of Life Insurers, I
    represent 383 life insurance companies whose products help
    families manage risks that could be financially devastating.
    Our products help families accumulate savings for retirement,
    as well as manage savings during retirement, to provide a
    guaranteed income for life. They protect families from the
    financial devastation caused by an untimely death, disability
    and chronic long-term-care need.
        The industry's $3.3 trillion in assets makes it the fourth
    largest institutional investor in the United States and the
    second largest among investors specifically geared toward long-
    term investment.
        The Administration's goal, which we support, is to
    eliminate double taxation of dividends on stocks held
    individually or through mutual funds. To be consistent and fair
    to Americans saving for retirement, however, dividends credited
    to stock investments underlying an after-tax variable annuity
    contract should be accorded the same level of tax. An annuity
    transfers the responsibility and risk of money management from
    consumers to the insurance company. It encourages long-term
    savings for retirement and provides an income that can never be
    outlived, thus, ensuring real retirement security. In a recent
    survey, Mr. Chairman, 71 percent of voters supported Government
    tax incentives for retirees to obtain that guaranteed lifetime
    stream of income. Certainly, guaranteed annuity income streams
    should not be penalized through a double tax when other types
    of income bear only one level of tax.
        The life insurance industry strongly supports tax proposals
    that seek to simplify the Code, lower rates, promote growth and
    the anti-competitive features of the corporate income tax and
    increase savings. We believe that a critical consideration
    should be the effect of any tax change on the ability of
    individuals to secure a sound financial future. This is
    especially critical now, as millions of baby boomers approach
    retirement age.
        We urge the Congress to evaluate carefully the effect of
    any potential weakening of incentives for individuals to save
    specifically for their own retirement. As noted, America's
    personal savings rate has declined over the past decade from 5
    percent annually to less than 1 percent. Americans are
    increasingly having longer retirement periods. Men and women
    who are 65 have an additional life expectancy of 16 and 19
    years, respectively. Sixty-one percent of Americans are
    concerned about their retirement savings lasting as long as
    they live. When faced with near-term realities such as housing,
    education and day care, it is hard to save for long-term goals
    such as retirement that may be decades away.
        By repealing some disincentives within the current tax
    system, such as the double taxation of corporate earnings, the
    tax system will encourage more savings. This is part of the
    equation. An equally crucial component of retirement security
    is the protection and management of savings, particularly as
    lifespans increase. Without sufficient private resources set
    aside specifically for retirement, death, longevity, disability
    and long-term care needs, many more people will become
    dependent on the government, particularly in their old age.
    Without providing incentives for people to take personal
    responsibility for these purposes, efforts to control the
    growth of government will fail because the government will have
    to increase taxes to support those who have not provided for
    themselves. One unintended, but very real, consequence could be
    the weakening of the Nation's private insurance system.
        In short, we urge you to support a successful part of the
    economy that invests long term and provides products for
    Americans' long-term financial security. The life insurance
    industry is an essential source of capital, with $257 billion
    invested in the U.S. economy in this past year alone. The life
    industry is good for America, and any fundamental tax changes
    should seek to strengthen this vital sector of the economy.
        I understand that Treasury Secretary Snow acknowledged and
    committed to work on our concerns regarding variable annuities
    in yesterday's hearings before the Committee. We appreciate
    that, and we also look forward to working with you, and the
    Secretary, in this regard.
        Thank you, Mr. Chairman.
        [The prepared statement of Mr. Keating follows:]
    Statement of the Honorable Frank Keating, President and Chief Executive
        Officer, American Council of Life Insurers (former Governor of
                                   Oklahoma)
        Thank you, Mr. Chairman, for giving me the opportunity to
    participate in these important hearings. As head of the American
    Council of Life Insurers, I represent 383 life insurance companies. The
    products provided by the life insurance industry help families
    accumulate savings for retirement, as well as manage savings during
    retirement to provide a guaranteed income for life. They protect
    families from financial devastation caused by an untimely death,
    disability, and chronic long-term illness. The industry's $3.3 trillion
    in assets makes it the fourth largest institutional investor in the
    U.S., and the second largest among investors specifically geared toward
    long-term investment.
        We fully support the President's efforts to open serious debate in
    this Committee about the need to promote new economic growth and
    provide an innovative approach to addressing the double taxation of
    corporate income in the current U.S. tax system.
        We appreciate that such a fundamental change to the tax system is a
    very complex undertaking. We also appreciate that any comprehensive
    reform may ultimately require some balancing of competing
    considerations. The Administration's goal is to eliminate double
    taxation of dividends on stocks held individually or through mutual
    funds. We support this goal. To fully eliminate the double tax,
    dividends credited to stock investments underlying an after-tax
    variable annuity contract (and other after-tax products) should be
    accorded the same one level of tax.
        The annuity is a unique product that encourages long-term saving
    for retirement and provides an income that can never be outlived, thus
    providing real retirement security. Well accepted conventional wisdom
    encourages individuals to invest in equities for long-term savings; the
    combination of equity investment with the guarantees that are part and
    parcel of annuities should be encouraged. We believe that this can be
    accomplished by including dividends credited to variable insurance
    products as part of the economic growth tax package. If you cannot
    predict how long you will live in retirement, it's hard to determine
    how much to save and how much you should withdraw annually from your
    savings so as not to outlive them. An annuity transfers the
    responsibility and risk of money management from consumers to the
    insurance company and guarantees a steady stream of income that cannot
    be outlived by the policyholder and his or her spouse. In a recent
    survey, 71 percent of voters supported government tax incentives for
    retirees to obtain a guaranteed stream of income. Certainly, annuity
    payments should not be penalized with a double tax when other types of
    income bear only one level of tax.
        The Administration's tax proposals seek to accomplish many goals,
    including simplifying the Code, lowering tax rates, promoting growth,
    ending the anti-competitive features of the corporate income tax, and
    increasing savings. These are all laudable goals that the life
    insurance industry strongly supports. For life insurers and
    policyholders, a critical consideration is the effect of any tax
    changes on the ability of individuals to secure a sound financial
    future. This is especially critical now because of the significant
    demographic changes that will happen over the next 40 years as the baby
    boomers reach retirement age. We believe this should also be of
    considerable concern to Congress as it examines the possibilities for
    change.
        Given the looming demographic changes in the United States, it is
    essential that private savings for retirement and private resources for
    protecting against the financial burdens of death, longevity,
    disability and long-term illness be strengthened. When faced with near-
    term realities--housing, education, and day care--many working
    Americans find it hard to save for long-term goals, such as retirement
    that may be decades away. That is why Congress has always given special
    tax incentives to products that promote long-term savings.
        And long term is growing longer as Americans are increasingly
    experiencing longer and longer retirement periods. Today, men and women
    who are 65 have an additional life expectancy of 16 and 19 years,
    respectively. Sixty-one percent of Americans are concerned about making
    their retirement savings last as long as they live. A combination of a
    decrease in defined benefit plans and longer life spans will increase
    the importance of individual annuities as a source of income. Only an
    annuity can guarantee that an individual will receive income payments
    for as long as he or she lives.
        Congress will encourage more savings by repealing some savings
    disincentives within the current system, such as the double taxation of
    corporate earnings. This is part of the equation. We must also ensure
    that annuities which provide a means for Americans to manage and
    protect their savings in retirement are not devastated under the
    Administration's tax proposal. Moreover, without sufficient private
    resources set-aside specifically for retirement, death, disability and
    long-term care needs, we will see a significant increase in the number
    of individuals and families that will become dependent on the
    government, particularly in their old age. Without sufficient savings
    for these purposes, efforts to control the growth of government
    spending will fail because the government will have to increase taxes
    to support those who have not provided for themselves.
        We believe strongly that it is an important and legitimate role of
    government to use the tax system to encourage Americans to prepare for
    their own futures. Providing strong encouragement for individuals and
    families to take responsibility for their retirement and financial
    burdens of death, longevity, disability and long-term care will go a
    long way toward preventing uncontrolled growth of government
    expenditures, while ensuring more comfortable, more secure, and more
    independent families.
        That is why we have long supported accelerating and making
    permanent, that the Portman-Cardin comprehensive retirement security
    reforms. We must also look beyond incentives to accumulate retirement
    savings and find ways to help Americans manage and protect their
    savings. We appreciate Administration and Congressional support for
    legislation that would create an above-the-line deduction for long-term
    care insurance premiums. The tax code should encourage Americans to
    prepare for their retirement and protect their savings from being wiped
    out by the potentially catastrophic costs of their long-term care
    needs. Americans also face the serious risk in retirement that they
    will outlive their assets. Guaranteed lifetime income payments from an
    annuity are the most effective way for an individual to ensure that his
    or her retirement savings will last a lifetime. As a result, we also
    believe that Congress should enact the Lifetime Annuity Payout
    legislation that will lower the high tax rates on lifetime income
    payments from individual annuities, and should remove barriers to
    lifetime income payments from pension plans.
        Finally, as part of the Administration's economic growth proposal,
    all corporate dividends that fall within the definition of excludable
    dividend accounts will be tax-free, whether received by an individual
    or another corporation. This same treatment should apply to dividends
    received by insurance companies. The insurance company dividend
    treatment should not, be changed in a way that would further adversely
    affect the life insurance industry, and represent an explicit tax
    increase on insurance companies.
        In short, we look forward to working with Congress and the
    Administration on behalf of an industry that invests long-term and
    offers products that provide for Americans' long-term financial
    security. We appreciate the work of Treasury Secretary Snow and
    Congress to make sure that dividends for annuities are treated the same
    as dividends for stock and mutual funds. The life insurance industry is
    an essential source of capital with $257 billion invested in the U.S.
    economy in the past year alone. The life insurance industry is good for
    America. Any significant tax changes should seek to strengthen, this
    vital sector of the economy.

        Chairman THOMAS. Thank you very much. Mr. Schaefer?

     STATEMENT OF JOHN H. SCHAEFER, PRESIDENT AND CHIEF OPERATING
     OFFICER, INDIVIDUAL INVESTOR GROUP, MORGAN STANLEY & COMPANY,
       NEW YORK, NEW YORK, AND CHAIRMAN OF THE BOARD, SECURITIES
                          INDUSTRY ASSOCIATION

        Mr. SCHAEFER. Mr. Chairman, Members of the Committee, my
    name is John Schaefer. I am President and Chief Operating
    Officer of Morgan Stanley's Individual Investor Group.
        I am here today testifying as chairman of the board of the
    SIA, which I Chair this year. The SIA believes the
    Administration's proposal to eliminate the double taxation of
    dividends will enhance the long-term growth potential of the
    U.S. economy. It will promote job creation and higher wage
    growth, strengthen corporate governance and put the United
    States on a more equal footing with our major trading partners.
        Current U.S. tax policy skews economic decisions by taxing
    corporate income more heavily than other forms of income. Taxes
    are imposed twice; first, when the income is earned and,
    second, when it is distributed as dividends. The total
    effective tax on corporate income from investments financed
    with equities can be as high as 60 percent, far in excess of
    tax rates imposed on other income.
        The President's proposal would improve the efficiencies of
    the capital markets, by reducing the artificial bias in the
    current law to, on one hand, issue debt and also to retain
    earnings. Importantly, eliminating the double tax on equity-
    financed investments would bring U.S. tax policy more in line
    with our major trading partners. The United States has the
    second-highest dividend tax among the 30 OECD Nations. Twenty-
    seven of the thirty OECD countries have adopted one or more
    ways of alleviating the double tax.
        All G7 countries, with the exception of the United States,
    provide protection against the double taxation of dividends. So
    whether competing at home or abroad, the double tax makes it
    more difficult for a U.S. company to compete successfully
    against foreign competitors.
        The end of the double taxation of dividends would help move
    our tax system to one that taxes income only once. This, in
    turn, will promote savings and investment, will promote
    increased capital formation, job creation and economic
    expansion. We believe the increased economic activity would
    generate additional tax revenues that could offset a
    significant percentage of the tax revenues foregone by this
    aspect of the proposal.
        The immediate impact of eliminating the tax on dividends
    would be an annual tax savings of approximately $30 billion, or
    three-tenths of 1 percent of the GDP. This savings would be
    distributed broadly and shared by more than the 50 percent of
    U.S. households that own stock.
        Increased after-tax dividends would make equities more
    attractive to investors. A higher after-tax value of dividends
    would also increase the value of stocks. It has been estimated
    that the value of the equity market would increase by 5 to as
    much as 20 percent. This increase in equity value would provide
    further economic stimulus through the wealth effect. We all
    know that people tend to spend more as their net worth
    increases. It is also clear that a rising stock market is a
    leading indicator of future economic growth.
        Almost half of all savings from the dividend exclusion
    would go to taxpayers 65 years of age and older, thereby giving
    retirees additional cash to supplement their Social Security
    earnings and other retirement savings. The average annual tax
    savings for the 9.8 million seniors who receive dividends would
    be $936 per year.
        Perhaps the greatest long-term benefit from the elimination
    of the double taxation of dividends would be the incentives for
    companies to return to principles of sound financial
    management. With half of American families invested in the
    market, nothing is more important to the securities industry
    than restoring the public's trust in the strongest capital
    market in the world.
        From the standpoint of both shareholders and the health of
    our economy, companies should be encouraged to concentrate on
    cash earnings. Encouraging companies to pay dividends would
    give investors a clear signal of the true financial strength
    and credibility of a company's earnings reports. That is
    because dividends offer proof of real profits.
        Since dividends serve as a stronger foundation for longer
    term value, companies that pay them will have fewer motives to
    artificially inflate profits just to cause temporary increases
    in their stock price. Perhaps most importantly, dividend-paying
    companies experience half the market-price volatility and half
    the rate of share turnover of nondividend-paying companies.
        Mr. Chairman, SIA commends you again for holding this
    important hearing. We believe the President's proposal to
    exclude dividends from the individual income tax will help
    investors at a critical time. It will boost stock prices,
    increase capital investment, strengthen corporate governance,
    provide retirees with additional cash and increase U.S.
    competitiveness abroad.
        Thank you.
        [The prepared statement of Mr. Schaefer follows:]
     Statement of John H. Schaefer, President and Chief Operating Officer,
      Individual Investor Group, Morgan Stanley & Company, New York, New
        York, and Chairman of the Board, Securities Industry Association
        Mr. Chairman and members of the Committee, my name is John H.
    Schaefer, and I am President and Chief Operating Officer of Morgan
    Stanley & Co's Individual Investor Group. I am testifying today as
    Chairman of the Securities Industry Association (``SIA'') *. I thank
    the Chairman and the Committee for the opportunity to present SIA's
    views on the potential economic consequences of the Administration's
    proposal to eliminate the double taxation of corporate dividends.
    ---------------------------------------------------------------------------
        * SIA brings together the shared interests of more than 600
    securities firms to accomplish common goals. SIA member firms
    (including investment banks, broker--dealers, and mutual fund
    companies) are active in all U.S. and foreign markets and in all phases
    of corporate and public finance. Collectively they employ more than
    495,000 individuals, representing 97 percent of total employment in
    securities brokers and dealers. The U.S. securities industry manages
    the accounts of nearly 93-million investors directly and indirectly
    through corporate, thrift, and pension plans. In 2001, the industry
    generated $280 billion in U.S. revenue and $383 billion in global
    revenues.
    ---------------------------------------------------------------------------
        SIA strongly supports the proposal to eliminate the double taxation
    of corporate earnings. The elimination of the double tax on dividend
    income would enhance the long-term growth potential of the U.S.
    economy, promote job creation and higher wage growth, strengthen
    corporate governance, and put the United States on a more equal footing
    with our major trading partners.
        Current tax policy encourages corporations to rely too heavily on
    debt rather than equity financing, because interest is deductible but
    dividends are not. The bias favoring debt over equity financing, for
    example, led many companies to take on high levels of debt that left
    them vulnerable to the economic downturn. The President's proposal
    would improve the performance of our economy by relieving numerous
    distortions caused by the current corporate tax regime, including the
    income tax code's general bias against savings and investment.
    CURRENT TAX POLICY CREATES NUMEROUS DISTORTIONS
        Corporate income from a newly equity-financed project is subject to
    two layers of federal income tax. First, when the corporation earns a
    profit it pays tax at rates as high as 35 percent. A second level of
    tax is imposed if the corporation pays dividends to its shareholders
    out of its after-tax income, at individual tax rates that range as high
    as 38.6 percent. The total effective tax on corporate income from
    investments financed with new share issues can be as high as 60
    percent, far in excess of tax rates imposed on other types of income.
    Even if the corporation retains earnings, the maximum combined
    effective tax rate approaches 50 percent on the appreciation in stock
    value (arising from corporate earnings that are retained and reinvested
    in the firm).
        Under current law, interest payments are deductible to the
    corporation. This policy encourages corporations to retain earnings
    rather than distribute them, and to issue debt rather than stock. In
    addition, the double taxation of dividends encourages artificial
    shifting by businesses and investors into entities that will not be
    taxable as corporations under the Internal Revenue Code. Such
    distortions raise the cost of capital for investment financed with new
    share issues. The President's proposal would improve the efficiency of
    the capital markets by reducing artificial biases in current law to
    retain earnings and to issue debt.
    U.S. POLICY LAGS OUR MAJOR TRADING PARTNERS
        Importantly, eliminating the double tax on equity-financed
    investments would bring United States tax policy more in line with our
    major trading partners. With the exception of the United States, all G-
    7 countries provide protection against the double tax on dividends. In
    addition, the United States has the second highest dividend tax rate
    among the 30 OECD nations. Twenty-seven of the 30 OECD countries have
    adopted one or more ways of alleviating the double tax. Whether
    competing at home or abroad, the double tax makes it more difficult for
    a U.S. company to compete successfully against a foreign competitor.
    ELIMINATING DOUBLE TAXATION WOULD BENEFIT U.S. ECONOMY
        The end of the double taxation of dividends would help move our tax
    system to one that taxes income only once. This, in turn, promotes
    savings and investment, increased capital formation, job creation, and
    economic expansion. The increased economic activity would generate
    additional tax revenues that could offset a significant percentage of
    the tax revenues foregone by the proposal.
        The immediate impact of eliminating the tax on dividends would be
    an annual tax savings of approximately $30 billion, or 3 percent of
    GDP. This savings would be distributed broadly and shared by the more
    than 50 percent of U.S. households that own stock. Moreover, in the
    case of the tax cut on dividends, there are additional factors that
    would help boost the economy in the long run. Because the after-tax
    value of dividends would increase, investment in stocks would become
    more attractive. It has been estimated that the value of the equity
    market would increase by as much as 5-10 percent. This increase in
    equity values would provide further economic stimulus through the
    wealth effect (people spend more as their net worth increases). It is
    no accident that a rising stock market is a leading indicator of
    economic growth.
        The initial approximately $30 billion in tax savings is actually a
    very conservative estimate because it assumes no change in the current
    dividend policies of U.S. companies. But it is likely that more
    companies would issue dividends. Now that a tax cut on dividends has
    been proposed, companies that have previously retained large amounts of
    cash have said they may distribute some of that cash to shareholders.
        As useful as a tax cut on dividends would be in reviving the
    current sluggish economy, the main benefits would be long term. The
    double taxation of corporate earnings reduces companies' return on
    capital and therefore increases the cost of capital. Lowering the cost
    of capital by eliminating taxes on dividends would encourage companies
    to invest more in plants, equipment and other capital stock, enhancing
    long-term growth and leading to more jobs and higher wages.
    DIVIDENDS BENEFIT TAXPAYERS ACROSS THE INCOME SPECTRUM
        According to the most recent IRS data, 34.1 million tax returns (or
    26.4 percent of total tax returns, representing 71 million people)
    reported some dividend income in 2000. Of all taxpayers that claimed
    some dividend income in 2000, nearly half (45.8 percent) earned less
    than $50,000 in adjusted gross income (including dividends). This
    proposal would also benefit more than 13.1 million small-business
    owners or self-employed taxpayers.
        Importantly, almost half of all savings from the dividend exclusion
    would go to taxpayers 65 and older, thereby giving retirees an
    additional reliable, long-term source of income to supplement their
    social security earnings and other retirement savings. The average
    annual tax savings for the 9.8 million seniors receiving dividends
    would be $936.
    IMPROVING CORPORATE GOVERNANCE WILL BOOST INVESTOR CONFIDENCE
        Perhaps the greatest long-term benefit from the elimination of the
    double taxation of dividends would be the incentives for companies to
    return to the principles of sound financial management. With half of
    American families invested in the market, nothing is more important to
    the securities industry than restoring the public's trust in the
    strongest capital markets in the world. While we cannot blame the
    bubble of the late 1990s and its painful aftermath on the tax system,
    the current system did little to reign in the excesses and in some
    cases contributed to them. From the standpoint of both shareholders and
    the health of our economy, companies should be encouraged to
    concentrate on real earnings.
        In that vein, encouraging companies to pay dividends would limit
    excesses because dividends offer proof of real profits. The payment of
    dividends by a company may give investors a strong signal of the
    company's underlying financial health and profitability. Indeed, a firm
    cannot pay dividends for any length of time unless the company has the
    earnings to support such payments. In an environment where reported
    earnings are viewed with some skepticism, cash dividends will bolster
    the credibility of earnings reports. Moreover, the payment of dividends
    would better align the interests of shareholders and managers by
    allowing shareholders to participate in decisions regarding corporate
    investment. Finally, because dividends serve as a stronger foundation
    for long-term value, companies that pay them will have fewer motives to
    artificially inflate profits just to cause temporary increases in stock
    prices.
    CONCLUSION
        Mr. Chairman, SIA commends you again for holding a hearing to
    review the potential economic consequences of a tax system in which
    corporate earnings are taxed only once. We believe the President's
    proposals will help restore investor confidence by increasing jobs,
    expanding the economy, and providing economic security to Americans.
    The proposal to exclude dividends from the individual income tax will
    help investors, boost stock prices, increase capital investment,
    strengthen corporate governance, provide retirees an additional
    reliable, long-term source of income, and put the United States on a
    more equal footing with our major trading partners. Thank you for
    allowing me to share the securities industry's views on this vitally
    important subject.
                                     ______

                             DEFENDING THE DIVIDEND
                             by Frank A. Fernandez
        Excerpt from Research Reports, Vol. IV, No. 1 (January 31, 2003)
      President Bush has proposed ending the double taxation of corporate
        earnings. To support that worthy goal, this article presents an
      assessment of the absolute and relative costs and benefits of this
    significant change in our tax structure. We consider to what degree the
    specific proposal encourages efficient capital formation, the growth of
     productivity as well as contributing to long run fiscal stability and
     moving the tax system towards fundamental reform, such as elimination
      of distortions and biases. On balance, the benefits of the proposal
                              outweigh the costs.
    SUMMARY
        President Bush has proposed ending the double taxation of corporate
    earnings by eliminating the personal income tax on dividends. To
    support that worthy goal, an assessment of the absolute and relative
    costs and benefits of this significant change in our tax structure is
    presented below. We consider how the specific proposal encourages
    efficient capital formation, the growth of productivity as well as
    contributing to long run fiscal stability and moving the tax system
    towards fundamental reform, such as elimination of distortions and
    biases. On balance, the benefits of the proposal outweigh the costs in
    terms of reduced tax revenues and less stimulus of consumption.
        The benefits of this change, although gradual, are sustained,
    providing long-term support for economic growth by encouraging savings
    and investment, reducing the cost of equity financing, improving
    corporate profitability (a greater proportion of which would likely
    flow to shareholders) and boosting share prices. More efficient use of
    resources, enhanced productivity and higher incomes are some of the
    expected indirect benefits. By removing the bias that encourages
    companies to become more highly leveraged and hence more prone to
    failure, the proposal would also help contain record bankruptcy rates
    and reduce the sustained, near-record volatility in asset prices seen
    in recent years.
        Eliminating the double taxation of dividends would also contribute
    to efforts to improve corporate governance. Achieving this goal would
    help restore public trust and confidence, a necessity if sustained
    economic growth is to ensue. The proposed tax change is expected to
    lead to: more accurate financial statements; less use of relatively
    opaque, noncorporate business structures (S-corps, L.P.s, sole
    proprietors and non-profits, which current tax rules favor over
    corporate forms); reduced opportunities and incentives for corporate
    managers to ``game the system'' (engage in transactions solely to
    reduce tax liabilities) or to mismanage; and, better alignment of
    management objectives with shareholder interests. It will encourage
    managers to focus more on the continuous, profitable operation of a
    firm, and less on activities that produce often transient stock price
    appreciation, and to undertake only the most productive investments
    rather than purchases that do not necessarily increase shareholder
    value.
    Direct Benefits
        Everyone will benefit to varying degrees, either directly or
    indirectly, from the elimination of tax biases that distort corporate
    and investor decisions, and from the increase in incentives to save and
    invest. The proposal would benefit the economy (boosting incomes and
    job growth), the capital markets, and most of all, individual
    taxpayers, particularly those who invest, to whom the direct benefits
    flow.
        Individuals, rather than corporations, are the direct
    beneficiaries, and the proposal would reward those who save and invest.
    Half of all American households (more than 84 million individual
    investors) own stock directly or through stock mutual funds, and are
    likely to benefit from the tax cut and the support to equity prices
    provided by this more neutral tax policy. Stock ownership, and the
    percentage of those receiving dividends, is expected to rise as this
    bias against dividend income is removed.
        More than 34 million American households (26.4% of the 129.3
    million households that filed returns in 2000) that invest in the stock
    market and receive taxable dividend income will benefit directly, and
    more than half these dividends go to America's seniors. 15.6 million or
    45.7% of these households receiving dividends have adjusted gross
    income of $50,000 or less. Although this lower income group receives
    only 16.8% of the value of dividends distributed, this is slightly
    higher than the percentage of taxes that group pays, and the majority
    of people in that group are seniors.
    [GRAPHIC] [TIFF OMITTED] T1630B.001

        Overall, the benefits of this tax proposal are largely neutral, in
    that they are distributed across income groups proportionate to the
    share of taxes they pay. Dividend recipients tend to be older,
    relatively wealthier Americans (similar to overall stock ownership
    patterns), many of them retirees, and many of those dependent on fixed
    income in part derived from dividends. This is similar to the
    distribution of tax payments relative to age and income as seen above.
    [GRAPHIC] [TIFF OMITTED] T1630C.001

    The Current Tax Treatment
        Under current law, corporate earnings are subject to two levels of
    tax: one at the corporate level and one at the shareholder level.
    Income earned by a corporation is taxed, generally at the rate of 35
    percent. If the corporation distributes its after-tax earnings to
    shareholders in the form of dividends, this dividend income is
    generally taxed again at the shareholder level at rates as high as 38.6
    percent.1 The combined or effective tax rate on dividends
    can be as high as 60.1 percent. Alternatively, shareholders pay tax
    when they realize an appreciation in stock value that arises from
    retained corporate earnings, rather than earnings paid out as
    dividends, and reinvested in the corporation at a maximum tax rate of
    20 percent.2 The effective tax rate on income received this
    way is about 40.9 percent, taking into account the preferential tax
    rate on capital gains realizations and the benefits of tax
    deferral.3 The President's proposal would equalize the
    effective tax rates confronted by investors receiving four principal
    types of income: dividends, retained earnings, debt and pass-through
    income.
    ---------------------------------------------------------------------------
        \1\ There is no specific ``dividend tax'' applied to receipt of
    dividend income, unlike the separate calculation applied to capital
    gains. Dividends, along with income from pensions, interest, alimony,
    salaries and wages are added together and deductions are netted in the
    calculation of adjusted gross income on individual tax returns. The
    rate of 38.6 percent is the maximum statutory rate on individual
    income.
        \2\ The statutory tax rate on long-term capital gains held for more
    than five years is 18 percent, but taxes are deferred until the asset
    is sold, thereby lowering the effective rate on tax on capital gains.
    Taxpayers who hold assets until death receive a step-up of basis, and
    further reduce the effective rate.
        \3\ Council of Economic Advisers, ``Eliminating the Double Tax on
    Corporate Income'', January 7, 2003, p. 3.
    ---------------------------------------------------------------------------
        Presidents since John Kennedy have proposed ending the double
    taxation of dividends, and no fewer than five separate legislative
    proposals were before Congress to accomplish this task when President
    Bush presented his plan. Virtually all economists would agree (a
    profession hardly known for unanimity of opinion) that ending the
    double taxation of dividends is long overdue, providing fundamental
    reform by removing some of the worst distortions and biases introduced
    by our tax system.
    Biases and Distortions
        The current tax treatment of dividends introduces a number of
    biases and distortions. One of the principal concerns is that it can
    distort corporate financing decisions, which prove to be less efficient
    for the firm and for the economy in the long run. Corporations raise
    capital through three principal methods: debt, equity and retained
    earnings. Current law introduces a tax bias against equity financing
    and in favor of use of retained earnings and debt financing, both of
    which are taxed more lightly. Debt receives the most favorable tax
    treatment. Interest payments are a deductible expense for corporations
    and hence reduce the amount of corporate profits subject to tax, while
    dividends are paid out of after-tax funds. Interest payments are taxed
    once, at most, at the individual level, and more lightly than
    dividends.
        Retained earnings are also taxed twice, but not as heavily as
    dividends. Retaining earnings for investment purposes tends to push a
    firm's share prices higher. That additional price appreciation raises
    shareholders' capital gains taxes by a commensurate amount when the
    shareholder decides to sell their shares. However, capital gains tax
    rates are lower than ordinary income tax rates and investors determine
    when they sell their shares, potentially deferring these taxes almost
    indefinitely. As a result, retained earnings generate lower taxes at
    the individual level than dividend payments, which are subject to tax
    in the year in which the payment was made at individual tax rates.
        These biases distort corporate decisions. The bias in favor of debt
    financing encourages companies to become more highly leveraged. Greater
    leverage leaves companies more prone to failure when their revenues
    fall and/or market interest rates rise. A corporation that relies more
    heavily on equity financing has more flexibility to meet fluctuations
    in the business cycle, reducing or raising dividends to reflect changes
    in net income. A heavily indebted company has much less adjustment
    capability in the face of market forces it cannot influence. Logically,
    one would expect higher bankruptcy rates and greater volatility in
    asset prices as a result. Those expectations have been met in a
    sustained manner.
    [GRAPHIC] [TIFF OMITTED] T1630D.001

    [GRAPHIC] [TIFF OMITTED] T1630E.001

        From the standpoint of the corporation trying to provide the
    greatest economic benefits to its shareholders, the current tax system
    favors retaining earnings and using them to buy back stock rather than
    distribute them in the form of dividends. To the investor, the buyback
    raises stock prices (or prevents them from falling) and thereby
    generates a capital gains tax liability only if the investor chooses to
    sell. To tax-sensitive investors, the lower tax rate on capital gains
    makes it a preferable way to receive income. A surge in buybacks in the
    past decade has been coincident with dramatic growth of option-based
    compensation programs, and, increasingly, retained earnings have been
    used to fund the repurchase of shares granted through the exercise of
    these options. This surge has mirrored the decline in the dividend
    yield. During the 1990s, this form of variable compensation accounted
    for a greater and greater share of total compensation.4
    ---------------------------------------------------------------------------
        \4\ ``In 1999, over 34% of publicly traded companies engaged in
    share repurchases, up from 28% in 1992. More striking is the fact that
    by 1999, almost 20% of earnings were paid out by share repurchases,
    nearly triple that of 1992.'' Statement by Pam Olson, Assistant
    Secretary for Tax Policy, Department of the Treasury, January 23, 2003.
    Both percentages continued to rise before peaking in 2001.
    ---------------------------------------------------------------------------
        Although the evidence is far from clear regarding the impact of the
    second distortion, some would argue that the tax bias against equity
    financing and in favor of retained earnings may also distort the value
    of marginal investment decisions, encouraging investment in less
    productive projects or ones that do not add to shareholder value or add
    relatively little. Limiting the amount of funds over which managers
    have discretion may be one way to impose discipline in corporate
    investment decisions. Shareholders looking for the best return have far
    more options than corporate management and will, on average, prove more
    efficient in reinvesting surpluses. The more efficient ``resource
    allocation'' would likely lead to greater productivity and wealth in
    the economy.
        These tax biases have discouraged the use of equity as a financing
    mechanism (except as a method to fund compensation) and discouraged the
    use of dividends as a method of providing benefits to shareholders.
    Companies which pay dividends have declined both as a share of the
    total number of listed firms and as a share of the total market
    capitalization. As dividends became less and less important in
    investors' expectations of the total return on investments, an equity
    holder looks chiefly, if not solely, to price appreciation. This may
    have encouraged corporate management to focus more than in the past on
    these and other activities that sustain stock price appreciation and
    relatively less on ensuring the continuous, profitable operation of the
    firm required to sustain a long-term dividend stream.
    [GRAPHIC] [TIFF OMITTED] T1630F.001

        Investors too may have fallen prey to focusing disproportionately
    on short-term, often transitory, price appreciation, in part due to
    this tax bias. Removing the tax bias against dividends might encourage
    individual investors to pursue sounder, more fundamental investment
    strategies to their long run financial benefit. According to a study by
    T. Rowe Price, dividends accounted for 50.8 percent of the total return
    of the Standard & Poor's 500 Index from 1980-2002. Dividends can offset
    a lack of price appreciation (or outright price declines) and always
    enhance total return.
        Dividend paying companies tend to outperform those that do not pay
    dividends. In a study by Fama and French,5 which evaluated
    companies over the period 1963 to 1998, companies that paid dividends
    offered a higher return on assets (7.8 percent versus 5.4 percent) and
    a higher return on equity (12.8 percent versus 6.2 percent) than did
    companies that did not pay a dividend.6 In a study by
    Standard & Poor's covering the three bear market years, 2000-2002,
    dividend payers in the Standard & Poor's 500 Index roughly broke even,
    while non-dividend paying firms fell significantly.7 The
    prices of dividend paying stocks also tend to be less volatile, further
    enhancing their relative returns on a risk-adjusted basis. Discouraging
    dividends does little, if anything, to enhance investor returns and may
    well drive them lower than they would be otherwise.
    ---------------------------------------------------------------------------
        \5\ E.F. Fama, and K.R. French, ``Taxes, Financing Decisions and
    Firm Value,'' Journal of Finance 53, 1998, pp. 819-843.
        \6\ A recent paper by K. Fuller and M. Goldstein found that over
    the period 1970-2000, dividend paying stocks outperformed those that
    did not, by on average 1.4 percent per month versus 0.9 percent per
    month. L. Kirschner and R. Bernstein of Merrill Lynch found that from
    the NASDAQ's inception in 1971 through September 2001, the tech-laden
    index under performed the S&P Utilities index (11.2% p.a. versus
    12.0%).
        \7\ Standard & Poor's The Outlook, ``Dividends End 2002 on a Strong
    Note'', January 2, 2003. In just 2002, dividend payers in the S&P 500
    averaged a decline of 18.4%, compared with a 30.3% average plunge for
    stocks in the index that did not pay dividends.
    ---------------------------------------------------------------------------
        The current tax biases may also distort the choice of the
    organizational form of firms. The higher tax on corporations (C-
    corporations) relative to other businesses (such as S-corporations,
    partnerships, sole proprietorships and non-profit organizations) may
    distort the allocation of capital and entail an inefficient use of
    resources and reduce productivity and income.8 According to
    the U.S. Treasury, ``from 1980 to 1999, net income of C corporations
    fell from 78% to 57% of all business income with net income of flow
    throughs rising by a corresponding amount. Similarly, the gross
    receipts of C corporations fell from 87% to 72% of all business
    receipts with the gross receipts of flow throughs rising by a
    corresponding amount.'' 9 The choice of organizational form
    may also have a direct bearing on the level of transparency and the
    degree of disclosure of financial information to investors.
    ---------------------------------------------------------------------------
        \8\ This observation provided impetus to past proposals, to reduce
    this and other economic distortions, including the Report of the U.S.
    Treasury Department, Integration of the Individual and Corporate Tax
    Systems, January 1992.
        \9\ Op.cit. 4.
    ---------------------------------------------------------------------------
        The bias against dividends may also have contributed to the wave of
    recent corporate governance failures, and some portion of these multi-
    billion dollar failures should be assigned to the costs of this
    distortion. Dividend payments constrain the discretionary behavior of
    managers. Reducing the amount of cash at the discretion of management
    may reduce opportunities for corporate governance failures and lead
    management to undertake only the most productive investments and those
    that increase shareholder value. In addition, the tax biases may
    encourage managers to engage in transactions and activities solely for
    the purpose of reducing tax liabilities, incentives that would be
    reduced under a more neutral tax system.
        Often referred to as ``discipline of the dividend'', payment of
    dividends forces managers to put less focus on short-term share price
    movements and more attention to sustainable profitability. A firm
    cannot pay dividends for any length of time unless it has a continuing
    stream of earnings to support such payments. Dividend payments also
    provide a ``signaling function'', providing management with a channel
    to inform investors about expectations of the firm's future cash flows
    and profitability.
    The President's Proposal
        On January 7, 2003, President Bush formally unveiled a $674 billion
    job creation and economic growth package that would, among other
    provisions, exclude dividends paid by corporations to individuals out
    of previously taxed corporate income from the individual's taxable
    income. The provision would be effective for dividends paid on or after
    January 1, 2003, with respect to corporate earnings after 2001, and
    accounts for the bulk, some $364 billion over the next decade, of the
    tax cut package.
        To ensure that corporate income is taxed once but only once, an
    excludable dividend account (EDA) 10 would be created. This
    EDA would be the mechanism to determine the amount of income that has
    been fully taxed at the corporate level and, thus the amount of
    distributions to shareholders that would not be taxable. If a
    corporation made distributions in excess of the amount of earnings and
    profits that has already been fully taxed at the corporate level the
    excess distributions would be a taxable dividend to shareholders (or
    constitute a capital gain or a return of shareholders' investment).
    According to a Treasury release, the EDA will be computed using a
    relatively simple formula 11 and provided annually by
    corporations to shareholders.12
    ---------------------------------------------------------------------------
        \10\ A similar mechanism exists under current law. Distributions
    are treated as dividends only to the extent the corporation have
    earnings and profits.
        \11\ Annual additions to EDA = (U.S. taxes + foreign tax credits
    used to offset U.S. tax liability)/.35 minus U.S. taxes + foreign tax
    credits used to offset U.S. tax liability + excludable dividend income.
    A corporation's U.S. taxes would include the total tax amount reflected
    on its U.S. federal income tax return filed during the calendar year.
    The first calculation is due September 15, 2003, using 2002 numbers.
        \12\ A corporation, mutual fund or stockbroker would be required to
    provide shareholders with the information they need in an end-of-year
    tax statement sent every January. The statement would indicate: how
    much of the dividend is tax free; how much of the dividend, if any, is
    taxable; and how much shareholders can add to what they paid for the
    stock to determine their tax when they sell their stock. This amount is
    the adjustment to shareholders' basis.
    ---------------------------------------------------------------------------
        In order to avoid a bias against retained earnings, (to effectively
    treat dividends and retained earnings alike) the proposal would allow
    corporations to make an adjustment that would flow through to their
    shareholders. The proposal would permit corporations that reinvest
    their taxed earnings to elect, either through a direct dividend
    reinvestment plan or through a ``deemed dividend
    distribution'',13 to increase shareholders' stock basis
    14 to reflect the taxed income that the corporation was
    retaining. The change in basis would reduce the amount of capital gains
    tax liability when shareholders realize those gains through a sale of
    stock. The proposal would permit a mutual fund or a real estate
    investment trust that receives excludable dividends to pass those
    excludable dividends through tax-free to shareholders.
    ---------------------------------------------------------------------------
        \13\ A company would be required to treat undistributed or retained
    earnings as giving rise to a ``deemed paid EDA''--the amount would be
    treated as distributed and recontributed to the corporation, with an
    adjustment to increase the shareholders stock basis, without additional
    tax at the shareholder level.
        \14\ Basis in the case of equity is the original cost of purchase
    of the shares plus transaction costs and adjustments for splits and if
    this proposal is approved, for deemed dividends. Adjustments to
    shareholders basis are to be made annually on December 31st by the
    amount retained per share. Corporations would report to shareholders
    the amount of Excludable Dividends and basis adjustments annually on
    IRS Form 1099.
    ---------------------------------------------------------------------------
        This element of the proposal, which will lower capital gains taxes,
    balances the views of both sides in a long-running dividend tax
    debate.15 The traditional view of dividend taxation holds
    that lowering dividend taxes would make it easier for companies to
    raise capital that they could then pour into new plants and equipment.
    The opposing view holds that it would also make shareholders more
    demanding. ``With lower dividend taxes, investors would expect
    executives to pay out more of their earnings in the form of dividends
    rather than pour them into new projects.'' 16 To incorporate
    both views, the ``deemed dividend'' was added to the President's
    proposal, which will allow a company to pursue investments funded by
    retained earnings and still pass along tax benefits to the investor
    through an adjustment of basis similar to those received in a dividend
    distribution. This will reduce shareholders' incentives to demand
    dividends from companies and make them more tolerant of reinvestment by
    companies by restoring some of the incentives to focus on capital
    gains. It will however limit some of the benefits already mention from
    elimination of the dividend tax that would prevail in the absence of
    this provision. The balancing of these two effects will likely be
    determined company by company and vary significantly across industries
    and sectors. Overall, the net investment impact is positive and
    significant, but likely will be less than most proponents expect.
    ---------------------------------------------------------------------------
        \15\ See J. Hilsenrath, ``Dividend Plan Straddles Academic
    Debate'', The New York Times, The Outlook, Economy, January 2003. See
    also K. Hassett, and A. Auerbach, ``On the Marginal Source of
    Investment Funds'', Journal of Public Economics, December 2002, p. 205-
    232.
        \16\ Ibid.
    ---------------------------------------------------------------------------
    Assessing Economic Effects
        Any realistic evaluation of the impact of this proposal must assess
    how individuals and businesses respond to it, the timing of its
    implementation and the likely evolution of macroeconomic variables.
    Thus far, estimates of the costs of this proposal are incomplete, while
    quantification of its benefits has been more the subject of partisan
    debate than the object of balanced appraisal. Both appear to be
    overstated. Overall, it would appear that the conclusion reached by the
    Treasury a decade ago still holds true: the long run benefits derived
    from eliminating biases and distortions is roughly comparable to the
    costs generated by lost tax revenues and resultant higher fiscal
    deficits. If one includes the long-term benefits of higher growth in
    incomes and jobs, the balance tips well in favor of the proposal.
        Official projections of the impact of this proposal, those provided
    by the Administration and Congress, employ static analysis, and hence
    do not include any increase in economic growth likely to arise due to
    this tax change. This amount would be substantial and appears, in the
    long term, to outweigh the costs of the proposal. That Treasury study
    17 from a decade ago suggested that even in the absence of
    increased investment eliminating double taxation would eventually raise
    economic welfare in the United States by about 0.5 percent of
    consumption, equal to about $36 billion each year (in 2003 dollars).
    Put differently, the reduced distortion of business decisions would be
    equivalent to receiving additional income of $36 billion every year
    forever. In addition, higher investment due to the lower tax on capital
    income would promote higher wages in the long run. The proposal would
    also enhance near-term economic growth.18
    ---------------------------------------------------------------------------
        \17\ Report of the U.S. Treasury Department, Integration of the
    Individual and Corporate Tax Systems, January 1992.
        \18\ Op.cit. 3, p. 1-2.
    ---------------------------------------------------------------------------
        The President's Council of Economic Advisers (CEA) expects the
    dividend proposal, combined with the President's other proposals, to
    jointly add 0.4 percent to real GDP growth in 2003 and 1.1 percent in
    2004. Over the next five years, GDP growth would be 0.2 percent higher
    on average. They estimate that the increase in the federal deficit if
    no impact of faster growth were factored in would total $146 billion
    for fiscal years 2003 and 2004, and $359 billion cumulatively for the
    period, 2003 to 2007. Including the impact of faster growth reduces
    those amounts to $119 billion and $166 billion, respectively, over the
    next two and five years. Roughly half these amounts are attributable to
    the dividend proposal, although a separate breakout has not yet been
    provided. This analysis assumes the proposal has no direct impact on
    equity markets and that no change in the stance of monetary policy
    occurs over the forecast period. It also makes relatively conservative
    assumptions concerning the impact of faster growth on Federal budget
    receipts (a $1 rise in real GDP generates 20 cents of Federal revenue)
    given the specific set of tax proposals considered.

                    The President's Proposals and the Economy
    ------------------------------------------------------------------------
     Impact of President's Proposals       2003         2004      2003-2007
    ------------------------------------------------------------------------
    Faster Real GDP Growth                     1.0          0.8        0.2 *
    (Q4 to Q4, percentage points)
    (Year avg to Year avg, percentage          0.4          1.1        0.2 *
     points)
    ------------------------------------------------------------------------
    Additional Employment Growth           510,000      891,000    140,000 *
    (Q4 to Q4)
    (Year avg to Year avg)                 192,000      900,000    170,000 *
    ------------------------------------------------------------------------
    Lower Unemployment Rate                   -0.3         -0.8       -0.5 *
    (Q4 level, percentage points)
    (Annual average, percentage               -0.1         -0.6       -0.5 *
     points)
    ------------------------------------------------------------------------
    Change in Fiscal Balance;                  -33         -113       -359 +
    No Impact of Faster Growth
    ($ billions, fiscal year)
    ------------------------------------------------------------------------
    Change in Fiscal Balance;                  -31          -82       -166 +
    Including Impact of Faster Growth
     \1\
    ($ billions, fiscal year)
    ------------------------------------------------------------------------
    * Average, 2003-2007
    + Total, 2003-2007
    \1\ Excludes change in debt service

        Most private sector analysts expect the proposals' impact over this
    period to be somewhat lower,19 and more in line with the
    Federal Reserve's economic model, which ``suggests that the add-on to
    GDP growth from a tax cut of this size would be just 0.4% and 0.7% in
    the first two years after enactment, respectively.'' 20
    Benefits from the dividend proposal are expected to be negligible in
    the near term. While the proposal might become effective as early as 3Q
    2003 and be applied retroactively, it is unlikely to alter consumer or
    investor behavior markedly before taxpayers begin to file in 2004, and
    the full benefits of the dividend tax break unlikely to be seen until
    the end of the second year.
    ---------------------------------------------------------------------------
        \19\ See for example, UBS Warburg, Global Economic Strategy
    Research, U.S. Economic Perspectives: ``Time for a Tax Cut'', January
    10, 2003, which concluded ``the lift for the economy looks likely to be
    smaller than the tax cut, which will total about 0.9% of GDP over the
    next 16 months.
        \20\ Ibid, p. 6.
    ---------------------------------------------------------------------------
                        Saving Rates by Income Quintile

    Saving rates by income quintile estimated by Federal Reserve
     age group                                            30-59 (CES)     70-79 (CES)   average (CES)    30-59 (PSID)
    quintile 1                                                 -0.23           -0.49           -0.36               0
    quintile 2                                                  0.15           -0.34           -0.09            0.02
    quintile 3                                                  0.27           -0.14            0.07            0.05
    quintile 4                                                  0.35            0.05             0.2            0.05
    quintile 5                                                  0.46            0.32            0.39            0.11
    Implied weighted average saving and spending rates from Bush tax proposal
     Saving rate                                                 0.42            0.24            0.33            0.09
    Spending rate                                               0.58            0.76            0.67            0.91
    Domestic spending rate                                      0.52            0.68             0.6            0.81
    ----------------------------------------------------------------------------------------------------------------
    Note: Spending rate equals 1 minus the saving rate. The domestic spending rate is the share of total spending
      that is allocated to domestically produced goods and services, which we estimate at about 89% of total
      spending.
    Source: Citizens for Tax Justice, Federal Reserve Board, and UBS Warburg LLC estimates.

        Part of the reason for the lower estimates is that fiscal
    ``stimulus will be stunted by leakage to savings.'' The boost to growth
    will be constrained as households save a portion of the increased
    after-tax income. Average savings rates have risen recently from record
    lows to about 4.3 percent, ``but the `leakage' from savings in the
    current tax cut could be larger than usual because the well-to-do will
    benefit disproportionately from the proposed tax cut'' and they save
    more than low-income households. For example, the top income quintile,
    on average, can be expected to save as much as 39 percent out of after-
    tax income, while the next highest income quintile would likely save 20
    percent.21 Savings rates for the bottom two income quintiles
    are negative. Although savings rates rise with income among elderly
    households too, savings rates are lower at every income level than in
    younger households. Using these savings rates and the distribution of
    dividend receipts across income brackets provided by individual income
    tax return data for 2000, the latest year for which detailed data are
    readily available, one can estimated the share of the proposal which
    will be spent and what proportion will likely be saved.
    ---------------------------------------------------------------------------
        \21\ Federal Reserve Consumer Expenditure Survey, 2000 http://
    www.federalreserve.gov/pubs/oss/oss2/scfindex.html
    ---------------------------------------------------------------------------
        These estimates indicate that the near term stimulus to growth
    would be small, in line with the Administration's estimates of a
    reduction in tax revenues between now and April 2004 of only $20
    billion. Even those benefits may be overestimated and are unlikely to
    arrive until after investors turn their attention to tax matters at the
    start of 2004. Rather than provide a burst of short-term stimulus to
    consumption, which would likely prove transitory, it seeks to boost
    long-term growth by providing incentives to savings and investment. In
    that respect, it should succeed, in that the benefits flow to those
    most likely to save and invest the proceeds. Assuming half the benefits
    of the proposal go to the top two income quintiles, fully one-third of
    this amount would likely be saved, and the remainder spent.
        The estimates of the costs of the proposal may also prove to be
    high for other reasons. The estimates are based in part on tax data on
    dividends for 2000, and substantial changes in income impacted by this
    proposal have occurred since then that suggested the estimates should
    be lowered. Some portion of the dividend income received by individuals
    reported in the tax data includes interest payments from money market
    mutual funds and bond funds, in addition to stock dividend income
    received outside of retirement plans and other tax-deferred vehicles,
    for which adjustments were made. However, since that time portfolios
    have changed. For example, during 2002, there was a net inflow into
    taxable bond funds of $124 billion, while the first annual net outflow
    of long term funds from stock mutual funds since 1988 occurred: some
    $27 billion. Individual investors also reduced their holdings of
    individual stocks. As a result, the portion of income derived from
    these interest payments and reported as dividends for calculation of
    AGI will be higher when tax returns are filed this spring and the
    adjustments made by those providing estimates should be commensurately
    raised.
        In 2000, corporations paid an estimated $201 billion in dividends
    out of after-tax incomes.22 More than half of these
    dividends were paid to tax-exempt entities--such as pension funds,
    IRAs, and non-profit foundations--or to individuals that owed no income
    tax. As a result, only about 46 percent of the dividends paid by
    corporations to individuals (or $93 billion in dividends) were subject
    to individual income tax in 2000.23 These figures include
    those interest payments mentioned above. Since then, actual dividend
    payments fell 3.3 percent in 2001 before rising 2.1 percent last year.
    Equity ownership rose in 2001 in terms of the number of households and
    individuals holding equities, but fell as a portion of overall
    financial assets, as flows moved from equity to debt and as equity
    prices continued their three year decline.
    ---------------------------------------------------------------------------
        \22\ The Urban Institute-Brookings institution Tax Policy Center.
        \23\ William G. Gale, ``About Half of Dividend Payments Do Not Face
    Double Taxation'', Tax Notes, November 11, 2002.
    ---------------------------------------------------------------------------
        In addition, it would appear that investors in recent years have
    allocated an increased portion of their equity holdings to tax deferred
    accounts such as 401(k) plans, IRA's and Keoghs and a corresponding
    portion of corporate bond holdings to their taxable
    portfolio,24 and these trends appear to have continued in
    the past three years. As a result, the percentage of total dividends
    paid by corporations to individuals' taxable accounts has fallen
    significantly, to about 40 percent, from the 46 percent estimated for
    2000. This investor behavior appears to be the opposite of what
    conventional wisdom would predict, but has rational explanations, and
    is largely induced by distortions introduced by the current tax policy.
    Stocks are expected to have most of their payout in the form of capital
    gains, which are taxed relatively lightly, while bonds pay interest,
    which is more highly taxed. Investors would be expected to choose to
    put the riskier asset, stocks, in the taxable portfolio and bonds in
    the tax-deferred account. Just the opposite has occurred in practice.
    One study notes that ``if taxes on dividends were eliminated, there
    would be greater incentive to hold stocks outside a tax-sheltered
    portfolio. So we would expect to see investor portfolios shift more in
    the direction the theory predicts: taxable bonds in tax-deferred
    accounts, and stocks in taxable accounts to the advantage of lightly
    taxed capital gains and untaxed dividends.'' 25 The impact
    of changes in securities ownership, both actual changes in the last two
    years and prospective changes if the proposal is approved, need to be
    added to the analysis.
    ---------------------------------------------------------------------------
        \24\ James M. Poterba, The Rise of the ``Equity Culture:'' U.S.
    Stockownership Patterns, 1989-1998, Massachusetts Institute of
    Technology, January 2001, http://econ-www.mit.edu/faculty/poterba/
    files/aea2001.pdf
        \25\ H. Varian, ``What would be the long-run impact of tax-free
    dividends on the market?'' The New York Times, Economic Scene, January
    16, 2003, p. C2.

                                   U.S. Household Ownership of Equities, 1999 and 2002
    ----------------------------------------------------------------------------------------------------------------
                                             Percent of All         Number of Households        Number of Indiv.
                                               Households                (millions)           Investors (millions)
                                       -----------------------------------------------------------------------------
                                            1999         2002         1999         2002         1999         2002
    ----------------------------------------------------------------------------------------------------------------
    Any type of equity (net)1, 2               48.2         49.5         49.2         52.7         78.7         84.3
    ----------------------------------------------------------------------------------------------------------------
    Any equity inside employer-                31.8         34.0         32.5         36.2         52.0         57.9
     sponsored retirement plans
    ----------------------------------------------------------------------------------------------------------------
    Any equity outside employer-               35.5         33.7         36.3         35.9         61.6         57.4
     sponsored retirement plans
    ----------------------------------------------------------------------------------------------------------------
    Individual stock (net)1                    26.1         23.9         26.7         25.4         40.0         38.1
    ----------------------------------------------------------------------------------------------------------------
    Individual stock inside employer-          10.5          8.3         10.7          8.8         14.0         12.3
     sponsored retirement plans
    ----------------------------------------------------------------------------------------------------------------
    Employer stock inside employer-             6.0          5.6          6.1          6.0          8.0          7.8
     sponsored retirement plans3
    ----------------------------------------------------------------------------------------------------------------
    Non-employer stock inside employer-         8.0          3.5          8.2          3.7         11.4          5.2
     sponsored retirement plans4
    ----------------------------------------------------------------------------------------------------------------
    Individual stock outside employer-         21.4         19.7         21.9         21.0         32.8         31.5
     sponsored retirement plans3
    ----------------------------------------------------------------------------------------------------------------
    Stock mutual funds (net)1                  40.9         44.2         41.8         47.0         66.8         70.5
    ----------------------------------------------------------------------------------------------------------------
    Stock mutual funds inside employer-        27.9         31.2         28.5         33.2         39.9         46.5
     sponsored retirement plans
    ----------------------------------------------------------------------------------------------------------------
    Stock mutual funds outside                 27.2         27.0         27.8         28.7         44.4         43.1
     employer-sponsored retirement
     plans
    ----------------------------------------------------------------------------------------------------------------
    \1\ Multiple responses included.
    \2\ The average number of individuals owning equities per household owning equities was 1.6 in 1999 and 2002.
    \3\ Excludes employer stock options.
    \4\ The decline in the number of households and individual investors owning non-employer stock inside employer-
      sponsored retirement plans reflects a change in questionnaire design. In the 2002 survey, respondents owning
      non-employer stock inside retirement plans had to indicate that their plans provided a brokerage account
      window. The 1999 survey did not include a question about brokerage account windows.
    Note: The U.S. had approximately 106.4 million households in 2001, the most recent estimate available [U.S.
      Bureau of the Census, Current Population Reports, p. 60-213 (September 2001)].
    Source: Equity Ownership in America 2002, Investment Company Institute and the Securities Industry Association,
      www.sia.com/publications/pdf/equity--owners02.pdf

        The most tangible economic benefits of the proposal arise from the
    increased incentives to savings and investment. These additional
    savings are invested and spur additional capital formation, boosting
    business fixed investment spending and generating additional output and
    jobs. This, combined with the likely effects of the additional
    consumption spending and the additional investment income, provides for
    substantially lower cost estimates of the proposal, and ones roughly in
    line with the dynamic estimates provided by the CEA. These benefits
    generate additional tax revenues sufficient to offset slightly more
    than half the tax revenues foregone by the proposal.
        Other dynamic effects of the proposal, such as the impact on
    capital markets (including a boost, albeit small, to equity prices) and
    the long run encouragement of higher rates of savings and investment
    need to be considered. Estimates of the increase in stockholder wealth
    generated by the proposal, which range from $600 billion to $1.7
    trillion, also appear to be overstated, but still large. These latter
    effects arrive with substantial lags and are difficult to forecast, but
    are likely to grow over the long term. This suggests that while the
    stimulative effects of the proposal are muted in the near term, they
    will likely expand significantly over time, as investor and consumer
    behavior changes in response to this fundamental reform.
        In conclusion, the President's proposal is worthy of support. Its
    value rests in the very reasons for which it is most heavily
    criticized: that it does not provide a short-term stimulus to
    consumption, nor achieve any redistribution of tax burdens across
    income groups. Instead it provides a long-term boost to saving and
    investment, a boost that provides lasting support for growth in jobs
    and income. This is particularly important now since the recent
    recession, unlike most in history, was not led by a decline in
    consumption. Instead, consumption has been sustained, growing in excess
    of income with the deficit filled by record levels of debt in both the
    household and corporate sector. This deficit in the corporate sector
    which reached 6 percent of GDP at its peak in 2000 has since fallen to
    a more manageable 2 percent last year, while consumers have thus far
    failed to retrench, encouraged to continue to borrow and spend by
    recent fiscal and monetary policy.
        Prospects for emerging from the economy's current ``soft patch''
    26 might well be dependent on a revival of sharply reduced
    and still moribund business fixed investment before consumers
    inevitably retrench, as they may well be doing in early 2003. The need
    for longer-term stimulus is even more pressing if America goes to war
    in the months ahead. Such action could well plunge the U.S. economy
    into renewed recession late this year, and fiscal stimulus delayed
    until early 2004 might well prove very timely.
    ---------------------------------------------------------------------------
        \26\ A euphemism for the decline in real GDP growth in Q4 2002 to
    less than 1 percent and perhaps still lower in the current quarter, in
    large part due to weak corporate earnings, geopolitical uncertainties
    and a loss to public trust and confidence arising from corporate
    governance failures, and other elements of the hangover from one of the
    worst speculative manias in our history, all factors unlikely to be
    affected by a short-term stimulus to consumption.
    ---------------------------------------------------------------------------
        More importantly for our long term economic health and fiscal
    stability is the direct support for savings provided by the proposal.
    This represents fundamental reform rather than countercyclical
    tinkering. Americans do not save enough--not nearly enough and it is
    not even close. We do not save enough for retirement, which is the
    principal goal of equity investors, cited by 89 percent of those
    surveyed,27 nor enough to meet other primary objectives such
    as college education. The President's proposal addresses this problem
    directly and will change savings and investment behavior, slowly over
    time, but permanently for the better. Americans are too myopic and
    consumption-oriented to the point of their long-term detriment. If the
    fiscal cost of altering that (in terms of reduced tax revenues and less
    stimulus to current spending in the near term) is viewed as too great,
    it should be an invitation to more, not less, fundamental tax reform to
    remedy that problem, rather than rejecting a proposal which removes
    some of the most egregious distortions and biases of our tax system and
    addresses some of America's most pressing needs. From a broader
    macroeconomic perspective the long run benefits of the proposal
    outweigh these costs.
    ---------------------------------------------------------------------------
        \27\ Equity Ownership in America, 2002, Investment Company
    Institute and the Securities Industry Association, www.sia.com/
    publications/pdf/equity--owners02.pdf.

    Frank A. Fernandez
    Senior Vice President, Chief Economist
    and Director, Research

        Chairman THOMAS. Thank you, Mr. Chairman. Mr. Stack?

       STATEMENT OF RONALD STACK, MANAGING DIRECTOR AND HEAD OF
      FINANCE, LEHMAN BROTHERS, NEW YORK, NEW YORK, AND CHAIRMAN,
         MUNICIPAL SECURITIES DIVISION, BOND MARKET ASSOCIATION

        Mr. STACK. Thank you. Thank you, Chairman Thomas, and good
    afternoon.
        I am pleased to be here today on behalf of the Bond Market
    Association to discuss the President's jobs and growth package.
    My area of expertise is the municipal bond market. I am
    Chairman of the Association's Municipal Securities Division,
    and I have worked in the area of State and local finance for 18
    years as an investment banker and eight in the Governor's
    office of New York State.
        First, the Association fully supports the President's
    proposal to eliminate the double taxation of corporate earnings
    by exempting certain dividends from the income tax and allowing
    basis adjustments in cases where companies do not distribute
    dividends.
        The proposal is bold and constructive and we believe will
    lead to lower capital costs for corporations, more capital
    investment and more jobs and economic growth. Virtually
    everyone agrees that there is absolutely no policy
    justification for the multiple taxation of corporate earnings
    in the current tax code.
        Now, what will be the impact of a new class of tax-
    advantaged instruments on the tax-exempt municipal market?
    Intuitively, the creation of a new class of assets with a tax
    preference would decrease the demand for municipals and thus
    increase borrowing costs. In fact, many municipal bond market
    participants legitimately and forcefully have argued that the
    dividend proposal will cause disruption in the market and that
    tax-exempt stock dividends will attract mainstream municipal
    bond investors away from bonds and into stocks.
        While this may indeed occur on the longer maturities, we
    believe this effect will not be widespread and will not result
    in a wholesale reallocation of assets. Why? Simply put,
    investors buy equities in fixed-income securities for very
    different reasons. Investors buy bonds primarily for capital
    preservation, while they buy stocks for capital appreciation,
    which are significantly five times more volatile;
        Second, bonds offer higher rates of return than the
    dividend yields on most stocks;
        Third, bonds offer more security and certainty of
    predetermined interest payments than stocks.
        However, when we focus on corporate demand for municipal
    bonds, we find the proposal to exempt dividends from taxation
    does have a significant market effect. Corporations currently
    hold just under 25 percent of all outstanding municipals. Most
    of that is held by property and casualty insurers in commercial
    banks. Any change in tax law that would eliminate this group of
    buyers would significantly affect municipal bonds and increase
    borrowing costs for States and localities.
        Under the President's proposal, corporations could
    distribute dividends or basis step-up only to the extent of the
    tax income. Municipal bond interest is exempt from income tax,
    it cannot be included in the EDA that determines the amount of
    a company's tax-free dividends.
        In essence, municipal bond interest earned by a corporation
    would become taxable and pass through to shareholders. The
    result would be a significantly lower rate of return at the
    shareholder level for municipal bond interest than for
    comparable taxable interest. Consequently, many corporations,
    if not most, would shift out of municipals, and the loss of
    demand would drive up borrowing costs for State and local
    governments.
        Fortunately, there is a simple solution to this issue,
    which is consistent with the President's principle. The
    proposal should be amended so that corporations can include
    municipal bond interest into calculations of EDA. Since
    municipal bond investors already pay an implicit tax on their
    investment and form a reduced pretax yield, the President's
    principle would remain intact.
        Of course, the benefit of this tax is realized by the State
    or local bond issuer, not the Federal Government, in the form
    of lower borrowing costs. Moreover, this change would maintain
    the policy decision that the Congress made 90 years ago with
    the adoption of the very first Internal Revenue Code that
    municipal bond interest should be exempt from Federal taxation.
        It also, interestingly, is consistent with the Treasury
    Department's December 1992 report on corporate tax integration,
    which adopted an approach very similar to the President's
    current approach, but which did include municipal bond interest
    in distributable tax-exempt dividends.
        In sum, we believe the worthy goal of eliminating the
    multiple taxation of corporate earnings can be achieved without
    significant disruption to the bond market and municipals or
    major increases in borrowing costs. We urge the Committee to
    adopt our modification to the President's dividend proposal
    when you formally consider this legislation.
        Thank you, again, for this opportunity to testify.
        [The prepared statement of Mr. Stack follows:]
       Statement of Ronald Stack, Managing Director and Head of Finance,
    Lehman Brothers, New York, New York, and Chairman, Municipal Securities
                       Division, Bond Market Association
        Thank you, Chairman Thomas, for the opportunity to testify today on
    the president's economic growth proposals. My name is Ronald Stack and
    I am a managing director and the head of Public Finance for Lehman
    Brothers. I am here on behalf of The Bond Market Association, which
    represents securities firms and banks that underwrite, distribute and
    trade debt securities domestically and internationally. I am Chairman
    of the Association's Municipal Securities Division and a member of its
    Board of Directors. Association member firms account for in excess of
    95 percent of all primary issuance and secondary market activity in the
    U.S. debt capital markets, including the underwriting and trading of
    state and local government securities.
        The Association supports the president's jobs and growth plan and
    has long supported eliminating the double taxation of corporate
    profits. There is no policy justification for taxing corporate earnings
    more than once. The multiple taxation of corporate earnings is
    distortive and excessive. The corporate tax code should not create an
    environment that inappropriately influences corporate financing
    decisions as the current circumstances of double taxation does.
        The federal tax-exemption of the interest earned by investors on
    most municipal securities is one of the most important sources of
    federal assistance to states and localities. Every year, state and
    local governments save tens of billions of dollars in interest expense
    due to the tax-exemption. This savings makes it possible to finance
    schools, roads, airports, environmental infrastructure, low-income
    housing and a variety of other capital projects cheaply and
    efficiently. States and localities currently face significant fiscal
    constraints brought about by a weak economy, a poorly performing stock
    market and increasing pressures on spending. Today more than ever,
    state and local governments need the important assistance provided by
    tax-exempt financing.
        The president's jobs and growth package is a constructive plan that
    will lead to greater capital investment and a stronger economy. Some
    observers, however, have questioned whether the provision to exempt
    dividend payments from ordinary income taxes could--by making dividend-
    paying equities a stronger competitor of municipal bonds--lure
    investors away from the municipal market and drive up financing costs
    at the state and local level. It is too soon to be certain exactly what
    effect exempting dividends from the income tax will have on the
    municipal market, especially since we do not yet know the details of
    the plan that will emerge from congressional debate. However, making
    dividend payments on equities tax-exempt is not likely to create a
    substitute for fixed-income products generally, including municipal
    bonds, which offer a variety of features--capital preservation,
    priority security, lower volatility and predefined coupon payments,
    among others--that will continue to make them attractive.
        One aspect of the dividend proposal, however, could inhibit
    corporate participation in the municipal bond market and consequently
    drive up borrowing costs for state and local governments. Fortunately,
    this aspect of the proposal can be addressed in a manner consistent
    with the spirit of the president's proposal and current tax law--by
    permitting corporations to include tax-exempt income in their tax-free
    dividend distribution.
    The Effect of Exempting Dividends from Taxation
        The proposed tax exemption for dividends applies only to income on
    which corporations pay taxes. As interest on tax-exempt bonds is not
    taxable, it cannot become part of a corporation's excludable dividend
    amount (EDA), or the total amount of tax-free dividends and basis step-
    up which the corporation's shareholders are eligible to earn. As a
    result, the overall after-tax return on municipal bonds held by
    corporations would be reduced, and many corporations would reduce or
    eliminate their holdings of municipal securities.
        Consider the situation from the investor's point of view. Assume a
    corporation has some cash to invest, and its choices are a tax-exempt
    municipal bond yielding 5 percent and a comparable taxable bond
    yielding 6.85 percent.1 If the corporation buys the taxable
    bond and pays the corporate-level income tax of 35 percent, the
    effective return to shareholders is 4.45 percent (6.85 reduced by 35
    percent). Dividends and capital gains distributed to shareholders
    attributable to the bond interest would not be taxable at the
    individual level. If the corporation buys the municipal security and
    the average marginal tax rate for their shareholders is 30 percent, the
    return to shareholders would be only 3.5 percent (5 percent reduced by
    30 percent). Even though the corporation would not pay an explicit tax
    on its municipal bond interest, dividends and capital gains earned by
    shareholders and attributable to the municipal interest would be
    taxable at the individual level. In such an environment, many
    corporations would forgo the lower-yielding municipal bonds in favor of
    taxable investments.
    ---------------------------------------------------------------------------
        \1\ This difference in yield reflects the average observed yield
    ratio between Moody's Aa-rated municipal and corporate bonds over the
    period 1991-2002.
    ---------------------------------------------------------------------------
        Corporations currently hold just under 25 percent of outstanding
    municipal bonds. This figure, however, understates corporations'
    influence in the market. Corporations, especially property and casualty
    insurance companies (P&Cs) which account for approximately half of all
    corporate holdings of municipal bonds, play an important role as
    ``crossover'' buyers of municipal securities. By entering the market
    when rates of return rise to threshold levels, P&Cs help ensure that
    state and local borrowing rates remain stable and reasonable.
        The Administration's proposal would have a particularly acute
    effect on P&Cs, because they are already effectively taxed on their
    municipal bond income. Under current law, P&Cs are permitted deductions
    for contributions to loss reserves. Under the ``proration'' provision,
    this deduction is reduced by an amount equal to 15 percent of the
    amount of municipal bond interest earned. This results in an effective
    tax on municipal bond interest of 5.25 percent.
        While the Administration appropriately formulated the EDA to ensure
    that all corporate income is taxed once and only once, Congress has
    already decided that municipal bond interest should not be taxed at
    all. Excluding municipal interest from the EDA would have the effect of
    taxing this income when it is passed through to investors. Already,
    municipal bond investors can be thought to pay an implicit tax on their
    interest earned by accepting a lower pre-tax yield on their investment.
    (Of course, the benefit of this ``tax'' is realized by the state or
    local bond issuer--not the Federal Government--in the form of a lower
    borrowing cost.) Since this interest has already been taxed once, it
    should not be taxed again when distributed to shareholders. Moreover,
    the tax code already contains limitations on the deduction of interest
    expenses for corporations that earn tax-exempt interest. These
    limitations constrain corporate participation in the municipal market.
    Past Treasury Department Support for TBMA Position
        In 1992, the Treasury Department studied the prospect of
    integrating the corporate and individual income taxes. In its report
    issued in December 1992, the Treasury Department endorsed a plan for
    corporate tax integration similar to the current Administration's
    dividend proposal. The recommendation included a proposal which would
    have permitted corporations to pass through municipal bond interest to
    shareholders on a tax-exempt basis.
    Policy Recommendations
        Qualified municipal bond interest has been exempt from federal
    income taxation since the inception of the Internal Revenue Code.
    Municipal interest should not lose its tax-exempt status simply because
    it is earned by a corporation and redistributed to shareholders. We
    would, therefore, urge that the Administration's proposal be amended so
    that municipal bond interest earned by corporations be included in the
    determination of EDA. If it is not, corporate demand for state and
    local debt could be severely weakened, and state and local borrowing
    costs would likely increase significantly.
        With the imposition of the income tax in 1913, Congress made clear
    its intention that tax-exempt municipal bond interest should not be
    subject to tax. As noted above, including tax-exempt interest in the
    EDA would assure it remains untaxed, maintaining one of the most
    important sources of federal assistance for state and local
    governments. On behalf of The Bond Market Association once again, I
    would like to thank you for the opportunity to express our support for
    the president's proposal and our suggestions for modifying the details
    of the dividend tax exemption.

        Chairman THOMAS. Thank you, Mr. Stack. The Honorable Alan
    Hevesi?

       STATEMENT OF THE HONORABLE ALAN G. HEVESI, NEW YORK STATE
                    COMPTROLLER, NEW YORK, NEW YORK

        Mr. HEVESI. Thank you very much, Chairman Thomas,
    Congressman Rangel, Members of the Committee. My name is Alan
    Hevesi. I am New York State comptroller and have been for 8
    weeks and prior to that served for 8 years as New York City
    comptroller.
        I have a very particular interest----
        [Request that Mr. Hevesi turn on his microphone.]
        Thank you very much. I will not repeat all of that vital
    information.
        Chairman THOMAS. The 8 weeks part I found interesting,
    though.
        Mr. HEVESI. Which part?
        Chairman THOMAS. You have been in office 8 weeks.
        Mr. HEVESI. In this current office, yes, sir.
        Chairman THOMAS. Okay. Excuse me. I do think that, in all
    fairness, the gentleman from New York should give you a
    complete and full introduction.
        Mr. RANGEL. We have the pleasure of having with us a long-
    time State legislator, but also one that has served our great
    New York City as a comptroller there, and so when the
    opportunity came to bring this talent and expertise to the
    State level, he was overwhelmingly selected by the people in
    the great State of New York.
        I thank you for your wisdom in having him share his talents
    with us.
        Chairman THOMAS. With the witness in front of us, we have
    both local and State expertise. Mr. Hevesi?
        Mr. HEVESI. Thank you very much. Are there any questions?
    Let me just suggest that we do have a particular interest in
    restoring the strength of the stock market and the financial
    services industry. It is our home-based industry. Twenty-one
    percent of the wages earned in New York City come from this
    industry and about 15 percent of the State of New York and the
    health of that industry is crucial to us.
        The discussion for the last almost 3 hours has been
    fascinating for myself, and I hope for everybody else, partly
    because of its dynamic, and the dynamic included assertions by
    those of us who are testifying about the benefits or lack of
    benefit of this tax proposal within a very narrow frame of
    reference. So the argument is very strong that double taxation
    is inappropriate.
        I am going to give you a narrow frame of reference, too,
    because that is the prepared text I have, only in part, and
    then I want to make some larger observations because I think
    this debate should not spin on the narrower issues, as potent
    as they may be, but on the larger questions of what the Federal
    Government is intending to do and what the consequences are.
        So, from the narrow point of view, let me just refer to my
    prepared text, that President Bush's tax-cut proposals will
    hurt New York State, will hurt New York City, other local
    Governments and other States. The reason is that New York
    State, New York City, the City of Yonkers and 41 States out of
    the 50 have, in their own tax codes, a coupling provision,
    which means if nothing changes, and the change would be very
    difficult, the passage of this legislation would result in
    immediate increases in the deficits of those States.
        State tax revenues in New York, resulting from the dividend
    proposal and from the municipal bond effect that Ron Stack just
    outlined for you, if not changed, will cost the State of New
    York $526 million in revenues in the year 2003, $2.3 billion
    over the next 4 years and $9 billion over the next 10 years.
        New York City, independently, will lose or will increase
    its deficits or lose revenues in the amount of $155 million
    this first year, $781 million in the next 4 years, and $3.3
    billion in 10 years.
        When you add Yonkers, the combined revenue loss is $700
    million the first year, $3 billion over 4 years, and more than
    $12 billion over 10 years. If no changes are made in the
    decoupling, that is absolute. That will be the impact. Forty-
    one States will suffer revenue losses through this legislation
    of $4.5 billion in this first year alone.
        I won't go into detail as to how we did our calculations.
    They were based on the reality that this proposal now assumes
    that 56 percent of dividends are not taxed and 44 percent are
    paid by companies that do not pay corporate taxes, so there are
    all kinds of technical issues here. The context is, adding to
    the deficits of these 41 States, at a time when most of them
    are suffering grievously because of the economy, I think is
    something that has to be part of the risk in the calculation
    that you make.
        New York State, for example, has a deficit for the current
    fiscal year of $2.2 billion. The fiscal year ends in not quite
    three weeks and has another $9.3-billion deficit for the fiscal
    year beginning on April the 1st. Although those numbers are
    going up substantially, they do not take into consideration,
    for example, a seven times multiplier in pension costs for the
    State and localities. That has not yet been configured into the
    budgets.
        Every--not every--but almost every locality is raising
    taxes now, and so the additional hit from these losses is going
    to be quite substantial. The prepared text details that. It
    also talks about other proposals made by the President that
    have a neutral effect, the increase in the child tax credit,
    the expansion of the 10-percent income tax. They don't have an
    effect, but the dividend program and the effect on the
    municipal bond market will directly, and immediately, if there
    are no changes, dramatically impact on the budgets of States
    and their ability to provide services.
        The larger picture, however--and that is my frame of
    reference. The larger picture is that there are some very
    important consequences that have to be taken into consideration
    and some of which have been discussed today and some minimized.
        First of all, the scenarios that have been portrayed by the
    supporters of the elimination of a tax on dividends, which we
    have just heard, involve very positive benefits, that there
    will be a dramatic increase and interest in the markets. Those
    calculations, however, have to take into consideration a
    variety of other variables.
        The loss of confidence in the markets is not just a
    function of the fact that dividends are taxed. By the way, the
    dividends were taxed during the boom that some in this room
    called the ``Clinton boom'' for six years, in which the stock
    market exploded, and there were huge amounts of money invested
    and huge amounts of money earned and then huge amounts of money
    lost, and the tax wasn't a major variable.
        There are other factors: the tech stock collapse, the loss
    of confidence as a result of corporate corruption, Enron,
    Cendant, WorldCom, Adelphia, Global Crossing, Tyco have
    affected the attitude of a lot of individual investors and even
    institutional investors, and I think that has to be part of the
    calculation as to what the positive impact will be if you
    eliminate the tax on dividends. Local taxes, I have mentioned.
        The one other piece that I want to, and maybe this is just
    therapeutic for me, but for almost two hours I have been
    hearing how deficits don't matter, that the debt doesn't
    matter, that a dollar of tax savings is the same as a dollar of
    borrowing. It is not. When you borrow a dollar and pay it off
    in 20-year bonds, it costs you $3 to pay that off over time.
    There are interest impacts.
        The huge deficits that are in prospect now are potentially
    very devastating to the economy. How do we know that? We did
    this already. In 1980, the national debt was $900 billion. In
    1992, the national debt was $4.3 trillion; $3.4 trillion was
    borrowed in 12 years, bipartisan, by the Congress, by the
    President. That was an average of $280 billion in debt each
    year, deficits each year.
        The New York Times this morning had a front-page story that
    said when you start talking about the tax cuts and the war, you
    are going to be approaching $400 billion for this year, and
    maybe it is true that if that was for a year or two or three in
    a crisis, you certainly do get yourself out of a financial
    crisis, but I think everybody has a sense that this is going to
    go on for a long time.
        It was remarkable for me, when I was a youngster in
    politics, watching the debates in the Congress, when Democrats
    were in the majority, how conservative Republicans would rail
    at the deficit, that this was bad for the long term and that
    balanced budgets should be the goal, as close as we could get
    to them, and it is remarkable that there are some changes in
    this.
        I think the deficits will result in huge barriers to
    economic growth. You will be sucking enormous amounts of money
    out of the capital markets that will not be available for
    private business to borrow, and to invest, and to do research
    and development because the Federal Government will be, by law,
    borrowing that money and that the interest rates will be
    dramatically high and that the message to business that the
    Government does not care about these deficits and didn't care
    when there were surpluses. Is that clicking my notice to stop?
    Thank you very much. I didn't know that, as I haven't done this
    before.
        Thank you very much, Mr. Chairman.
        Chairman THOMAS. The Chair generously, out of his warm
    feeling for the gentleman from New York, allowed you, because
    you were on a roll, I didn't want to stop the roll. I was
    looking for a break in the roll, and we found one.
        Mr. HEVESI. I am very grateful. I thought the clicking was
    applause, but I misinterpreted it.
        [The prepared statement of Mr. Hevesi follows:]
    Statement of the Honorable Alan Hevesi, New York State Comptroller, New
                                 York, New York
        I would like to thank Chairman Thomas, Ranking Member Rangel and
    the other members of the Ways and Means Committee for allowing me to
    testify to you today on the impact of the President's tax proposals.
        President Bush's tax cut proposals will hurt New York State, New
    York City, and other local government budgets. According to an analysis
    done by my Office, the proposal will:

         Reduce State tax revenues and increase State borrowing
    costs by $526 million in 2003, $2.3 billion over the next four years
    and $9 billion over the next 10 years.
         Reduce New York City tax revenues and increase City
    borrowing costs by $155 million in 2003, $781 million over the next
    four years and $3.3 billion over the next 10 years.
         In addition, the City of Yonkers will lose $230,000 in
    2003, $1 million over the next four years and $2.9 million over the
    next 10 years.
         The combined impact is a revenue loss of almost $700
    million in the first year, more than $3 billion over four years, and
    more than $12 billion over 10 years.

        This comes at a time when New York State and its local governments
    already face huge budget gaps. New York State is currently trying to
    close an estimated gap of at least $2.4 billion for the year ending
    March 31 and another $9.3 billion for the following fiscal year. My
    Office estimates that New York City could face a gap of more than $3.6
    billion for the fiscal year starting July 1, 2003.
        This proposal not only adds to the current crisis, it also saddles
    us with a problem that grows rapidly year after year. Over the next 10
    years, the cost would be more than $12 billion. This is a conservative
    estimate. Using the President's estimate that the dividend tax cut will
    generate $364 billion nationally, the New York cost will be almost $16
    billion over 10 years.
        New York is not alone in being injured by the President's proposal.
    Forty-one of the 50 states will lose an estimated $4.5 billion in tax
    revenues in the first year alone, according to the Center for Budget
    and Policy Priorities. This comes at a time when States are facing
    budget gaps totaling between $60 billion and $85 billion for next year.
        We had hoped that the Federal Government would come to the aid of
    the states, and especially New York, which has been hurt by the
    combined impact of a national economic recession and the 9/11 terrorist
    attacks. Instead, the President's plan would add to the already serious
    state and local fiscal crisis.
        It is imperative that no state or city is injured by the
    President's proposal. If tax cuts are agreed to at the federal level,
    they should not automatically damage State finances. Even if States
    enact legislation to de-couple from the federal changes, it is unclear
    whether sufficient reporting of dividend income will exist in order to
    enable States to effectively continue to tax it.
        The main components of the President's tax proposal and the effect
    on New York State and New York City budgets follows:
    New York State and New York City would lose revenues from the proposed
            dividend tax exemption.
        The plan calls for eliminating dividend income paid by corporations
    from the federal personal income tax, when dividends are paid out of
    previously taxed corporate income. This does not mean all dividends
    would be exempt from tax. Dividends paid from Money Market Funds and
    Mutual Funds would be exempt to the extent that they arise from
    previously taxed corporate income.
        The State and New York City base their income taxes on the federal
    definition of income, so any reduction in federal income leads to a
    reduction in state and local income tax revenues. This year, New York
    State will collect about $925 million in taxes on dividend income from
    its residents.
        The President's original plan was projected to eliminate taxes on
    about 56 percent of dividends. The tax exemption would not have applied
    to the 44 percent of dividends paid by companies that do not pay
    corporate taxes and by mutual funds. The proposal has recently been
    modified to extend the tax exemption to some corporations even if they
    do not pay taxes. Thus the following analysis may actually understate
    the full impact of the proposal.
        But assuming 56 percent of dividends are not taxed, that will
    result in a State tax revenue reduction of about $520 million in the
    first year. New York City will lose about $125 million and Yonkers
    about $230,000. As dividend payouts increase over time, so would the
    amount of lost revenue. State revenues lost from not taxing dividends
    will grow to a total of $2.15 billion through 2006 and at least $6.4
    billion over 10 years. New York City revenues lost will total $525
    million over four years and $1.55 billion over 10 years.
    New York State and New York City would lose revenues from the proposed
            reduction in capital gains taxation.
        The President's proposal allows companies that pay taxes but do not
    pay dividends to give stockholders a credit that would reduce the
    stockholders' capital gains, thus reducing the taxes they pay on those
    gains. For example, say a share is bought for $100 and the company has
    $6.50 a share in fully taxed profits. The company will notify the
    shareholder of this. Then suppose the share is sold for $110--a $10
    profit. The capital gains tax will apply only to $3.50 of the gains,
    excluding the value of the company's taxed profits from the original
    purchase.
        This will not have a significant impact in the first year because
    stockholders must hold a stock for a while for capital gains to
    accumulate. However, over time it will substantially reduce tax
    revenues from capital gains for New York State and New York City.
        In 1999, the most recent year for which actual data is available,
    State residents reported $48.3 billion in capital gains on which the
    State collected an estimated $3.3 billion in taxes. Revenues lost from
    the reduced capital gains will cost the State $200 million over four
    years and $1.8 billion over 10 years. New York City would lose capital
    gains tax revenues of $50 million over four years and $450 million over
    10 years.
    Proposed Tax Free Dividends and new Savings Accounts will drive higher
            borrowing costs for States and localities.
        The President's plan will substantially increase the supply of tax-
    exempt investments without any increase in demand. In fact, to the
    extent that taxes are lower, demand for tax-exempt investments may
    decline. The State and its related debt issuers will therefore have to
    increase interest on notes and bonds to compete to attract investors.
        If the interest rate the State and City pay increased by only 50
    basis points, or one half of one percentage point, that will cost the
    State $31 million this year, $201 million over four years and $839
    million over 10 years. New York City's borrowing costs will increase by
    $35 million this year, $266 million over four years and $1.3 billion
    over 10 years.
        On top of this, the new savings accounts would further expand the
    supply of tax-exempt options and compete with other tax-free investment
    vehicles such as State and local government bonds, likely necessitating
    additional interest rate increases. Government relies on tax-exempt
    bonds to support roads and bridges, school building and other important
    capital projects.
    New tax-free savings accounts cause revenue gains in the short-term and
            revenue losses in the longer-term from new savings accounts.
        The President's plan would create a new kind of savings plan
    whereby individuals pay taxes on their account contributions, but the
    earnings on those contributions would be tax-free when withdrawn.
    Currently, contributions and earnings for most IRAs, 401Ks and other
    long-term savings plans are generally tax deferred until they are
    withdrawn, at which time both contributions and earnings are taxable.
    The new proposal essentially provides for earnings that are never
    taxed.
        This proposal would likely increase state and local income tax
    revenue in the short-term as individual investors convert or avoid
    traditional retirement and long-term savings plans such as IRAs, 401Ks
    and college savings programs to newly established savings and
    retirement accounts where they would pay taxes on their contributions
    when they are made rather than when the contributions are withdrawn
    many years later.
        Preliminary OSC staff estimates indicate that the State and New
    York City could realize approximately $30 million in the first year,
    $360 million over the next four years, and $42 million over the course
    of 10 years. These figures represent the net impact of revenue
    increases in the first few years and reductions in receipts in the
    later years.
        However, the longer-term impact of this proposal is a significant
    loss in income tax receipts. For example, the revenue loss grows over
    time, by the tenth year, annual losses would reach an estimated $100
    million. Unlike the current savings accounts that tax earnings when
    withdrawals are made, these new savings accounts would exempt earnings
    from taxation altogether. Over the longer run this provision would have
    more dramatic effect on revenues as investment earnings increase, are
    withdrawn, and the cumulative effect of a total tax exemption is felt.
    Early implementation of many of the income tax provisions passed in
            2001 would reduce federal taxes without negatively affecting
            New York State or New York City revenues.
        Implementation of rate reductions in the federal personal income
    tax, a reduction in the marriage penalty, an increase from $600 to
    $1,000 in the child tax credit, and an expansion of the 10 percent
    income tax bracket would be accelerated by one year. In addition, small
    businesses would be able to expense up to $75,000 in equipment
    purchases (up from the current level of $25,000), which would be
    indexed for inflation.
        Most of these changes do not flow through to the State or local
    income tax bases. While the small business equipment provision would
    pass through to New York State, its effect on revenues would be
    minimal. The federal income tax changes are estimated to reduce New
    York taxpayers federal tax bill by an estimated $8.9 billion next year,
    including $2.2 billion in tax cuts related to dividend tax changes.
        Note: The analysis does not account for any possible increased
    economic activity that may be stimulated by the tax cuts--the focus is
    solely on the certain direct budgetary impact on the State and local
    budgets.
    Impact of the President's Tax Proposals on NYS and NYC Budgets

    ------------------------------------------------------------------------
                                          1 Year      4 Years      10 Years
    ------------------------------------------------------------------------
    NYS
    ------------------------------------------------------------------------
    Dividends                               $(520)     $(2,150)     $(6,400)
    ------------------------------------------------------------------------
    Capital Gains                               $-       $(200)     $(1,800)
    ------------------------------------------------------------------------
    Debt Service                             $(31)       $(201)       $(839)
    ------------------------------------------------------------------------
    Savings plans *                            $25         $300          $35
    ------------------------------------------------------------------------
      NYS Total                             $(526)     $(2,251)     $(9,004)
    ========================================================================
    NYC
    ------------------------------------------------------------------------
    Dividends                               $(125)       $(525)     $(1,550)
    ------------------------------------------------------------------------
    Capital Gains                               $-        $(50)       $(450)
    ------------------------------------------------------------------------
    Debt Service                             $(35)       $(266)     $(1,293)
    ------------------------------------------------------------------------
    Savings plans *                             $5          $60           $7
    ------------------------------------------------------------------------
      NYC Total                             $(155)       $(781)     $(3,286)
    ========================================================================
       NYS and NYC                           $(681)     $(3,032)    $(12,290)
    ------------------------------------------------------------------------
    * The 10-year total for the savings plan represents 2004-2013; whereas
      the 10-year total for the other components represent 2003-2012. The
      differing presentation is necessary due to the manner that the Federal
      Government reported its estimates.

        Chairman THOMAS. Well, the Chair would just observe that
    the so-called Clinton boom, 6 of the 8 years the
    constitutionally empowered legislative body to generate revenue
    bills. It was under the control of the Republican Party, and I
    think you can deal with deficits both sides, taxing and
    spending, and I think significant impact was the spending
    restraint, so I think it was a shared benefit.
        Mr. Stack, you have a quote, unquote, ``solution'' to
    remove you from the cross-hairs of the dividend proposal. Do
    you have a dollar amount or a cost figure associated with that
    change?
        Mr. STACK. That is not our expertise. We have not cost it
    out, but our experts would be glad to get back to you with an
    estimate if that is what you----
        Chairman THOMAS. That would be helpful, but our own
    estimates will do the same as well. Governor Keating, I did not
    hear or see in your testimony a specific solution to your
    concern, but I understand the relative devaluing of the
    annuities. Do you have a specific solution or a structured
    solution to your problem?
        Mr. KEATING. Yes, we do, Mr. Chairman, and that would be,
    as I indicated, to treat a mutual fund outside of an annuity
    and a mutual fund inside an annuity exactly the same. If the
    mutual fund outside is tax free, then the mutual fund inside a
    variable would be subject to a step up in basis. We anticipate
    it would be something in the neighborhood of $3 billion over 7
    years. Of course these are murky figures any time you are
    dealing with projections of revenue loss.
        Chairman THOMAS. Mr. Schaefer, you used phrases such as
    ``alleviate the double taxation'' or ``protection against the
    double taxation'' in terms of what has occurred in other
    countries. The President's proposal is to tax dividends only
    once, to create a single or one level in integrated tax. Do you
    know of any country that has created a single level tax on
    dividends? I know you indicated that it has been alleviated and
    there has been protection against them, but is there any
    country that has actually done what the President is proposing?
        Mr. SCHAEFER. My able support allows me to say that Greece
    as a country does, but we can get back to you for the record
    with the various solutions. People have come up with a number
    of different alternatives.
        Chairman THOMAS. There is no question that there are
    alternatives to alleviate or reduce the problem of double
    taxation. The question is: have they removed entirely the
    double taxation to go to a single level?
        Mr. SCHAEFER. Yes, one country has.
        Chairman THOMAS. One country. Of course, currently, it is
    absolutely correct, in comparison to most other countries, I
    think Japan is the only one on a corporate tax structure that
    creates the burden that we have placed on ours, and I do not
    know too many people who want to emulate the Japanese structure
    at the current time. The question of moving to--and there may
    be some question about Greece, and I will have our staff check
    that as well.
        Gentleman from New York wish to inquire?
        Mr. RANGEL. Comptroller Hevesi, when you were the city
    comptroller you had to make certain that the city had a
    balanced budget; is that correct?
        Mr. HEVESI. Yes, sir.
        Mr. RANGEL. Of course as the State Comptroller, the States
    have to balance their budget. While you cited New York, the
    same problems that Mr. Stack has shared with us as relates to
    municipal bonds, governors throughout the country will have the
    same mandate to balance the budget. In addition to this, if you
    look at the President's overall legislative package, does your
    office review the unfunded mandates that our city and State
    would have as relates to lack of child care for the welfare
    bill, the matching funds from Medicaid and----
        Mr. HEVESI. We have the capacity to do that. We have
    focused immediately in my short term as State Comptroller on
    the impact of the State budget on the local revenues, the city
    of New York and the unfunded mandates on the localities, but
    the next stop, as your budget process evolves, we will be doing
    those calculations as well. There are certainly a number of
    unfunded mandates from the Federal Government that impact on
    the States' budgets.
        Mr. RANGEL. Have you been able to take a look at, with all
    of the concern that the President and the Congress have shown
    as a result of being hit at the World Trade Center, whether or
    not the funding that is coming into our city and State is
    coming from mandates that have already been passed, rather than
    having new money to resolve some of these problems?
        Mr. HEVESI. Well, my understanding is that of the $21
    billion that was promised for relief, about a third of it has
    been forthcoming. I don't know that all or most of it is coming
    from existing programs. My impression was that that was new
    money of Federal Emergency Management Agency money that had
    been set aside for particular recovery programs. It is slow in
    coming, and the cash impact, by the way, of 9-11, which is a
    variable we didn't mention and we should have mentioned, it has
    affected the entire national economy, just lost infrastructure,
    lost revenue, lost business income was $105 billion. So, it has
    had an enormous effect for us locally, of course, and had a
    spill over effect on our economy, on travel, on airlines, on
    entertainment, on tourism, and so any way we can accelerate the
    Federal assistance that has been pledged is enormously
    important for us.
        Mr. RANGEL. Well, what is the--have you shared this? I mean
    do you meet with other comptrollers, other governors involved
    with this? Have they had the same opportunity to analyze the
    impact of removing taxes----
        Mr. HEVESI. There are associations of comptrollers. There
    are governors' conferences. As I say, in 8 weeks we are now
    dealing with--our fiscal year is April the 1st, so we are
    focused on that. I have a little tiff, as you know, with the
    MTA. We are dealing with a tremendous local issue where the
    presumptions by local governments of their pension
    contributions are about one-seventh of what the reality will
    be, and they are now faced with 7 times multiples in their
    pension contributions, and they all have to deal with that.
        So we have not yet focused on the impact of the Federal
    budget or the proposed Federal budget on us, but we will be in
    communication and lobbying for whatever adjustments we hope
    will be forthcoming, you know, as a team, and that is
    comptroller's association and the Conference of State
    Legislators as well as the Governors Conference.
        Mr. RANGEL. Governor Keating, what he is talking about,
    does that make any sense to you as a former governor, about the
    ability to get the State bonds out, the taxes and bonds out?
        Mr. KEATING. Well, Congressman, I left office 6 weeks ago,
    so I am almost the neophyte the comptroller is. Obviously, as a
    result of the factors that he stated in his opening statement,
    State government budgets in the main are in stress. Any tax
    changes here have an impact on what the States can spend and
    how much they can collect. For example, any State that seeks to
    reduce its State income tax or eliminate it, will, as a
    consequence, increase the Federal tax burden of its citizens,
    if you are linked State to State. By the same token, what is
    proposed here will have an impact on State revenues, but in my
    case, and I think in the case of a lot of States in a similar
    position, we need more taxpayers. We need more taxpayers
    earning more money, and we need more taxpayers paying more
    taxes.
        Mr. RANGEL. That is long term, but----
        Mr. KEATING. The whole process here is long term.
        Mr. RANGEL. Would your income tax piggyback on the Federal
    system like we do in New York?
        Mr. KEATING. Yes.
        Mr. RANGEL. So, if there is a dramatic reduction in taxes,
    then the States, unless they increase taxes, would suffer a
    loss of revenue, wouldn't they?
        Mr. KEATING. Well, I don't know if this is the case in New
    York, but one of the problems we had, and one of the big
    problems in California is no capital gains taxes. Because of
    the collapse in the stock market, because of much of the
    challenged equity markets, there has been a crash in capital
    gains revenue. So if you remove the double taxation of
    dividends, if you encourage equity ownership, equity purchases,
    as a result of that--and this is certainly the opinion of a
    number of people--you will see dramatic upswings in the value
    of equities, and hopefully more capital gains revenues going to
    States.
        Mr. RANGEL. How can the governors fold this into balancing
    their budget? Is this dynamic scoring?
        Mr. KEATING. I am saying that in our case, in my State's
    case, a significant part of the loss of tax revenue year to
    year is the absence of any capital gains being paid or the very
    dramatic reduction in capital gains paid, which will have an
    impact.
        Mr. RANGEL. This tax package would not provide the revenue
    to balance the budget. How would you handle that, Comptroller?
    Would you be able to talk about the long-term gains that we
    have to have in the future to balance the current budget?
        Mr. HEVESI. You mean the economic activity that would be
    driven by this----
        Mr. RANGEL. How do you fold that into a balanced budget?
        Mr. HEVESI. Long term there is a potential, but to suggest
    that that is an absolute based solely on the formulation that
    there is a reduced tax and therefore people will be more active
    in the markets is not sufficient. You have to take into
    consideration a variety of other motivations for people being
    involved in the markets. There are many people, including
    institutional investors and big ticket institutions, wealthy
    people, who are in the markets regardless of the tax on
    dividends. There are other people who got into the markets who
    were casual before, not even involved, who got in during boom
    times, and the boom times are a function of a variety of larger
    economic factors and variables. So there are a lot of people
    who dropped out, as I mentioned, because they are just sour for
    the time being because of the corporate governance issues.
        So could there be a beneficial effect long term and
    increase their activity? Yes. Will that match the absolute and
    immediate losses? There is no way to calculate that. We know
    the numbers of the losses for our State. I think every State
    could make that calculation. They are sort of absolutes. Over
    what period of time is that compensated for? I can't tell.
        Mr. RANGEL. Thank you.
        Chairman THOMAS. Thank you. I tell Mr. Schaefer, my sources
    tell me that Greece does not adjust for retained earnings, so
    that it would not be a single-level retained integrated tax. It
    comes close, but I do not think there is a country that has
    that.
        The gentleman from Louisiana, the Chairman of the Select
    Revenue Subcommittee wish to inquire?
        Mr. MCCRERY. Yes. Thank you, Mr. Chairman.
        Mr. Hevesi, welcome, and believe me, you have my sympathy,
    as do the governors and elected officials in most of our States
    which are having problems, fiscal problems because of the
    recession, so I know you have a tough job. I also know that
    some of the long-term hope of the President's proposals does
    you no good in terms of balancing your budget, perhaps under a
    constitutional mandate, this year, or even next year.
        To say that your revenues will be reduced because they are
    tied to the Federal income tax regime, really I think under
    values the State Government. I mean that is a State Government
    decision, is it not, to tie your income tax returns to the
    Federal returns?
        Mr. HEVESI. Yes, it is a decision, but it is also based,
    not only the simplicity of that kind of policy, but also the
    difficulty if the tax is eliminated on the Federal tax form for
    getting the information that would drive the State taxes.
        Mr. MCCRERY. I understand the reasons for it, but it is a
    State decision, and not all States do that.
        Mr. HEVESI. That is true, yes, sir.
        Mr. MCCRERY. So I mean if you just did not like Federal tax
    policy any more, and you wanted to vary from your current
    practice, you could do that with an act of the legislature,
    couldn't you?
        Mr. HEVESI. That is correct.
        Mr. MCCRERY. It is curious to me, setting aside your
    immediate problem which many, many States have, and you are
    going to have whether this proposal passes or not, setting
    aside your immediate problem of balancing your budget, it is
    curious to me that New York, of all places, would send an
    elected representative here to oppose the dividend proposal,
    when the businesses that make up such an important and vibrant
    part of New York City, the economy in New York City and
    certainly New York State are all coming to us saying, ``Please,
    pass the dividend proposal. It would be good for us and we
    would create jobs, more jobs in New York City and other
    places.'' Doesn't that strike you as being at least curious?
        Mr. HEVESI. No, not at all, obviously, because I am here,
    and taking this point of view, because again I am trying to tie
    this particular specific policy, which is one of many that are
    being proposed, to the larger picture. If the presumptions that
    I operate under about the larger picture are true, we are not
    going to be creating jobs in New York. We are going to be
    following the pattern of the 1980s. What was that pattern? Huge
    borrowing that was a function of dramatic tax cuts under
    President Reagan that produced dramatic cash flow in the early
    part of the 1980s, but not a commensurate reduction in Federal
    spending, in fact, dramatic increases in Federal spending,
    including analogously, military spending, ending up in 1986 and
    1987 with an awful recession that cost our State 600,000 jobs.
        Mr. MCCRERY. So are you disagreeing with the businesses
    that make up the stock market in New York City? Are you saying
    they don't know what is good for them or is there something
    else?
        Mr. HEVESI. No, no, no. That would be unfair and that would
    suggest that we have a hostile relationship.
        Mr. MCCRERY. No, no. I am just trying to get it straight.
        Mr. HEVESI. No. In the narrow frame of reference, if you
    have got a particular business and you believe in focusing on
    your business, that this could potentially enhance your
    business, and philosophically you believe that double taxation
    is wrong, I understand the recommendation. If however,
    implementing that policy and the rest of the tax reduction
    program does not have the positive results that have been
    ascribed to it, but in the long term create a debt problem that
    is analogous to the 1980s debt problem, and ends up with us
    eating up so much of our resources in paying off prior debt--I
    mean one of the prior speakers says, ``Well, you spend that
    money on good things.'' No. You are spending money to pay off
    debt for stuff that has been spent in the past at dramatic
    interest rates. If that triggers the kind of recession we had
    in 1987 through 1992-93, it crippled us in New York. It
    crippled other locations. If that scenario is what happens,
    then maybe this is not the time to do the dividend tax cut.
    That is the point I am making.
        So we are disagreeing. I mean all of this is about
    predicting scenarios, what is going to happen if you take a
    particular action? I have always been fearful of the impact
    that huge government debt has on the economy and how it slows
    down the economy.
        Mr. MCCRERY. Let me just point out quickly that the
    deficits projected, even with the President's tax cut, amount
    to 3 percent of GDP, that the deficits we were running in the
    1980s that you keep referring to, were 6 percent and above of
    GDP, huge difference.
        Mr. HEVESI. Well, I don't know what those predictions are
    because the point has been made consistently that the deficits
    have not yet calculated in the cost of the war in Iraq, what
    happens after the war, the rehabilitation program, and those
    expenditures, plus the prescription drug program that is part
    of the President's, all of that has not yet been calculated in.
        If, for example, the New York Times is correct, that we are
    approaching $400 billion annually compared to $280 billion back
    in the 1980s, we will be in the multiple trillion dollar added
    debt, then the fact that you approach it as a percentage of
    GDP, and Mr. Tanner approached it as $2,500 per taxpayer, and
    rising, so there are different ways to characterize this using
    those numbers.
        Chairman THOMAS. The gentleman's time has expired. The
    gentleman from New York, Mr. McNulty, wish to inquire?
        Mr. MCNULTY. Thank you, Mr. Chairman. I too would like to
    question Comptroller Hevesi. Mr. Chairman, as Charlie Rangel
    pointed out, Alan has a long and distinguished career in public
    service in New York. We served together in the State
    Legislature, and as a matter of fact he was a member of the
    State Legislature for over 20 years before becoming Comptroller
    of the City of New York, and of course now he is the State
    Comptroller.
        Alan, I just wanted to build upon what you were talking
    about with regard to the larger issues because I do think we
    need to look at the big picture, and you correctly pointed out
    that eliminating deficits, getting to balanced budgets,
    reducing the national debt were primarily seen as Republican
    issues for many years. As a matter of fact, when I first came
    down here, and I have consistently talked about those issues
    for 15 years, I got in trouble with my own party back home
    because I talked about those issues so much, and if anything,
    my concern about those issues is deepened even further today
    because of the situation that we are in, and also because of
    the fact that in addition to having the four children I had
    when I came to Washington, I have five grandchildren now, and I
    think we are dangerously close to a policy where we are going
    to drown our children and grandchildren in red ink.
        So, 2 years ago when the President came out with this
    proposal for a $1.35 trillion tax cut based upon the fact that
    we would have surpluses as far as the eye could see, and a $5.6
    trillion surplus over 10 years, I got very nervous, and of
    course, today, the President acknowledges that surplus is not
    going to be there and we are facing deficits as far as the eye
    can see.
        I do not want to go back in history and talk about the
    past. A great Governor of New York used to say, ``Let's look at
    the record.'' So let's look at where we are today. We are back
    into deficit situations. We had $159 billion budget deficit
    last year. The President himself is projecting a deficit of
    over $300 billion this year, $300 billion the following year,
    deficits as far as the eye can see. We have a $6.2 trillion
    national debt on which we paid $332 billion in interest alone
    last year on that debt.
        My question to you, Alan, is given the facts, given where
    we are right now, what is your opinion of a proposal to take
    $695 billion more out of the revenue stream in the form of new
    tax cuts?
        Mr. HEVESI. Well, I think I am clear that that makes me
    extremely nervous. Just Mr. McCrery making reference to I come
    out of New York and how can I take this position in relation to
    our own home business? One of my jobs, you should know, is I am
    the sole trustee of the second largest pension fund in America,
    the $100 billion New York State Common Retirement System. So we
    have a particular interest in the growth of this market.
        My fear is that this dividend tax cut, as part of a package
    of tax cuts at this time, is not going to have the stimulant
    effect of the growth effect that people predict, that in fact,
    based on our recent history, while there will be a short-term
    maybe positive effect because of the cash flow, when we pay
    back this huge debt, it will suck the lifeblood out of the
    revenues of the Government. I don't want to overstate this, but
    every dollar that is spent on debt service, interest on the
    debt, is money that is not spent for international affairs, the
    war, or for aid to education, or for helping out localities or
    for tax cuts. That money has to be paid. As it grows, somebody
    is going to be coming back here and saying, ``We are going to
    have to find revenues and raise taxes again because the numbers
    are so enormous.''
        Mr. MCNULTY. I thank the Comptroller, and I thank the
    Chairman, and I yield back the balance of my time.
        Chairman THOMAS. Thank the gentleman. Gentleman from
    Kentucky, Mr. Lewis, wish to inquire?
        Mr. LEWIS OF KENTUCKY. Yes, thank you, Mr. Chairman. Mr.
    Schaefer, how many senior citizens will be helped by this
    elimination of the double taxation on dividends?
        Mr. SCHAEFER. By our estimates, about 9.8 million people
    age 65 years or older own dividend paying stocks and will
    receive a dividend break.
        Mr. LEWIS OF KENTUCKY. Mr. Hevesi, you said a little while
    ago that there was going to be a loss to New York State, New
    York City, if the elimination of the double taxation on
    dividends occurs. You know, it always kind of amuses me here in
    DC and in State government, local government, government folks
    always talk about a loss for their government, a loss to the
    government. What about the loss of money to those 9 million
    senior citizens that are losing money? You know, it is where
    the money comes from that counts, and the money comes from the
    taxpayer. You talk about these deficits, well----
        Mr. HEVESI. Can I respond to that, just that point?
        Mr. LEWIS OF KENTUCKY. Let me just finish here. In the
    1980s when Ronald Reagan cut taxes, we came out of some very
    tough years. I remember the Carter years, double digit
    inflation, double digit interest rates, bad, bad economy. When
    Ronald Reagan cut taxes, the revenues to the Federal Treasury
    doubled. They increased. What happened was the spending here in
    Congress, the spending. I want to ask you, how much of a
    surplus did New York State have in recent years? Did they have
    a surplus?
        Mr. HEVESI. New York State has not had a surplus.
        Mr. LEWIS OF KENTUCKY. Has not had a surplus?
        Mr. HEVESI. They always have balanced budgets, but New York
    State is guilty of closing those deficits by borrowing, same
    problem.
        Mr. LEWIS OF KENTUCKY. I just want to use my State as an
    example. Just as a matter of like 3 or 4 years ago, we had a
    $325 million surplus and----
        Mr. HEVESI. I am sorry. In the late 1990s and into 2000 the
    State had surpluses.
        Mr. LEWIS OF KENTUCKY. Sure. What happened to that surplus?
        Mr. HEVESI. They were spent.
        Mr. LEWIS OF KENTUCKY. Spent, absolutely spent.
        Mr. HEVESI. We agree.
        Mr. LEWIS OF KENTUCKY. So I think the problem here that it
    is not that we are not having a problem with taxes, we are
    having a problem with spending. I want to ask you, what would
    be your way to get us out of deficits and out of this slowdown
    in the economy? Would it be to increase taxes?
        Mr. HEVESI. Well, no. I wouldn't cut the taxes that are now
    in this proposal.
        Mr. LEWIS OF KENTUCKY. So you would do nothing?
        Mr. HEVESI. Let me respond. The theory that the tax cuts
    will drive the economy may have some validity if, as you
    suggest--and I agree with you--that the spending reductions
    were commensurate. If you lost revenue but you reduced your
    spending, then the stimulant effect is very positive. If you
    reduce your tax revenues and maintain your spending or increase
    it and fill that vacuum with debt, for a couple of years you
    will have a nice cash flow.
        Mr. LEWIS OF KENTUCKY. How much----
        Mr. HEVESI. You are going to have to pay that debt back and
    that is going to eat into----
        Mr. LEWIS OF KENTUCKY. How much is New York State cutting
    their spending?
        Mr. HEVESI. Well, I am not the Governor or the legislature.
    They are flattening their spending for this year because of the
    crisis. The Governor has proposed $1.2 billion reductions in
    school aid, about $1.2 billion in health care, Medicaid costs.
    By the way, our Governor, who is opposed to any tax increases,
    has about $1.4 billion in tax and fee increases.
        Mr. MCNULTY. I appreciate him for that.
        Mr. HEVESI. No, no. Increases, you don't appreciate him for
    that.
        Mr. MCNULTY. Oh, increases.
        Mr. HEVESI. Increases.
        Mr. MCNULTY. Increases in taxes.
        Mr. HEVESI. Yes. He calls them fees. There is a sales tax
    increase. It is $1.4 billion in his proposed budget. Even the
    comment about the 9 million seniors who are going to benefit,
    that is not the question itself. The issue is number one, how
    much are each of them going to benefit? What is the tax
    savings? I don't know that number and----
        Mr. SCHAEFER. It is $936, call it a thousand.
        Mr. HEVESI. It is $936?
        Mr. SCHAEFER. On average.
        Mr. HEVESI. On average, good. I am not an attorney, so I
    asked the question even though I didn't know the answer. That
    is an offset if the same senior finds, because of the general
    economy and because of their local taxes go up, their property
    taxes go up, their sales tax go up, their State income tax goes
    up, or they lose their senior center, or they lose the rent
    exemption that they had before.
        Mr. LEWIS OF KENTUCKY. So you are saying government can
    spend individuals' and families' money and income better than
    they can? That is what you are saying.
        Mr. HEVESI. No, no. I think that American--I have heard
    this many times, and I don't want to get into partisan
    exchange. I think the public asks its government to provide
    things. I think when the President sends 250,000 troops to
    Iraq, he didn't ask each American, ``Is this money well
    spent?'' He said, ``This is going to be spent because this is
    what I believe in,'' and that is going to be very--does
    President Bush think that he knows better how to spend money in
    Iraq and in Afghanistan better than the American voter? I mean
    they----
        Mr. LEWIS OF KENTUCKY. According to the polls of the
    American people----
        Chairman THOMAS. The gentleman's time has expired, and the
    nonpartisan comment was registered. Does the gentlewoman from
    Ohio wish to engage the Comptroller in a nonpartisan
    discussion?
        Ms. TUBBS JONES. At some point, Mr. Chairman, but I am
    going to start somewhere else and come back to the nonpartisan
    engagement. I want to start with Mr. Keating. Mr. Keating, good
    afternoon, and good afternoon to all of the panel and thank you
    for hanging around so long.
        A lot of people don't realize that the insurance industry
    plays an important role in the area of retirement planning and
    security. One of the purposes of this series of hearings is to
    figure out some of the unintended consequences of the
    President's economic proposals and the legislation introduced
    to enact it.
        With that in mind, can you tell me how the dividend
    proposal as it stands now will have an adverse effect on
    retirement security? Mr. Keating, understand I only have 5
    minutes. My question was a little long, so your answer can be a
    little less long.
        Mr. KEATING. I will be very brief.
        Ms. TUBBS JONES. Okay.
        Mr. KEATING. As one who recently purchased a variable
    annuity, not because I was going into this industry, but
    because I am at the age where I need to think about some kind
    of defined benefit, if you will, from the private sector to
    take care of me and my spouse. That annuity is filled with
    mutual funds, or will be filled with mutual funds.
        If the President's proposal is enacted, our industry fully
    supports that because we think you will have more savings, more
    investment, more income, more job growth as a result.
        Ms. TUBBS JONES. That part I didn't want to hear. Go ahead,
    I am kidding.
        Chairman THOMAS. Tell the gentlewoman to relax. We don't
    have to really worry about the clock. There is no one else
    here.
        Ms. TUBBS JONES. Just me and you?
        Chairman THOMAS. It is just me and you, and the gentleman
    from New York.
        Mr. KEATING. If that proposal is enacted without adjustment
    to the life insurance piece, what you have is a situation where
    mutual funds outside of an annuity are tax free and mutual
    funds like I purchased in the annuity, are fully taxable. So
    guess what? I would sell the annuity, perhaps at a loss. What
    will that do? Well, there are 72 million annuities in effect in
    the United States. Many of those are in qualified plans. Many
    of those are nonqualified plans. People, as they get older,
    invest in an annuity, want that defined benefit, that assurance
    of an income stream to take care of them as a companion to
    Social Security. That entire industry, according to Bear
    Stearns, would be in flames, would be wrecked, if there were
    not the opportunity to treat the mutual funds in the annuity
    with the same tax free status as the mutual funds outside of
    the annuity. That is why we think consistent treatment should
    be applied, as a social policy, considering the older baby
    boomers of my age group have on the average only $47,000 of
    cash assets. You throw in your retirement plans, you throw in
    your house, maybe $120,000 or $130,000. You need a lot more
    money to take care of people in their old age in addition to
    Social Security, and we provide that opportunity.
        Ms. TUBBS JONES. Thank you, Mr. Keating.
        Mr. Schaefer, my question for you is do you believe that if
    you did a survey of the senior citizens that you are worked
    about having to forego $936, if they had an opportunity to
    receive a prescription drug benefit without paying any money
    out of their pocket, any more than $25 per month, that they
    would forego that $936 and be interested in a prescription drug
    benefit?
        Mr. SCHAEFER. That would be a speculation on my part to
    answer that, not knowing what the per capita cost of the plan
    you are talking about, so----
        Ms. TUBBS JONES. Mr. Schaefer, all of the stuff you wrote
    in here is speculation, and you know it. In fact, all we have
    been doing all day is speculating because we have no idea what
    is going to happen with this economy. We have been sitting here
    talking about give money back to the business, cut the tax, do
    all of these different things----
        Mr. SCHAEFER. I think----
        Ms. TUBBS JONES. Let me finish. Do all of these different
    things, and we are going to have a better economy in which
    people are going to spend their money and go out and consume,
    et cetera. Now, that is all speculation, sir. So now that you
    have speculated for a while, let me speculate, and if you
    cannot answer my question, tell me so.
        Mr. SCHAEFER. I think there is a broad range of issues that
    seniors would be concerned about, including prescription drugs.
    There is no doubt about it.
        Ms. TUBBS JONES. They would in fact forego $936 a year if
    they could have all of those benefits.
        Mr. SCHAEFER. I am not sure you can come to that
    conclusion. Some may. Some may not, but we should basically let
    them make the decision and give them back their tax money.
        Ms. TUBBS JONES. Well, that is your position.
        Mr. SCHAEFER. They can decide what to do with it.
        Ms. TUBBS JONES. Anyway, how many of the----
        Mr. SCHAEFER. I think what we are trying to talk about is
    creating jobs.
        Ms. TUBBS JONES. Mr. Schaefer, my question. Mr. Schaefer,
    my question, and if you don't want to deal with my question,
    tell me and I will ask somebody else a question, okay?
        Mr. SCHAEFER. Listening.
        Ms. TUBBS JONES. You talk about 9.8 million seniors. How
    many seniors are there in this country, sir?
        Mr. SCHAEFER. I don't have the number. That are age 65 and
    older, what percentage that would be?
        Ms. TUBBS JONES. It would be nice to figure that into that
    discussion because it would make your argument a little more
    legitimate if you could say how many 9.8 million represented.
        Mr. SCHAEFER. Okay. We will get that to you for the record.
        Ms. TUBBS JONES. You will get that answer for me, will you?
        Mr. SCHAEFER. Yes, we will.
        [The information follows:]

                                        Securities Industry Association
                                              Washington, DC 20005-2225
                                                         March 27, 2003
    The Honorable Stephanie Tubbs Jones
    United States House of Representatives
    1009 Longworth House Office Building
    Washington, DC 20515

        Dear Congresswoman Tubbs Jones:

        I am pleased to respond to the question that you posed to me when I
    testified before the Committee on Ways and Means on behalf of the
    Securities Industry Association on March 5, 2003, in strong support of
    the proposal to eliminate the double taxation of corporate earnings by
    providing an exclusion from the income tax for investors receiving
    dividends paid out of fully taxed corporate earnings.
        You asked me for the number of people in the United States that are
    age 65 and older, in order to put in context my statement that 9.8
    million seniors receive dividends. According to the United States
    Census Bureau, in the year 2000 just over 35 million individuals
    residing in the United States were age 65 or older (35,062,000)
    (midyear population). The U.S. Census Bureau projects that there were
    35.3 million individuals in this group as of July 2002, and projects
    there will be 35.6 million as of July 2003. (See U.S. Census Bureau
    Annual Projections of the Resident Population by Age, Sex, Race, and
    Hispanic Origin: Middle Series, 1999 to 2100.) Using the July 2003
    projection, roughly 27.5 percent of those age 65 and older receive
    dividends.
                Sincerely,
                                                       John H. Schaefer
                                                  Chairman of the Board

        Ms. TUBBS JONES. Thank you. Let me go to Mr. Hevsi. Let me
    say to you, sir, I am so proud that you would come here as a
    public official from the State of New York, even though New
    York has a huge capital market and insurance industry, because
    it speaks to the fact that those of us who are elected
    officials, even in the face of all those people who we hope
    will support us, that there are some times that it is necessary
    for you to step up on issues that are more important to your
    constituency than to a particular industry. My time looks to be
    up, but if you want to respond, I am sure the Chairman, since
    it is only me and him and the man from New York still here,
    that you might get a chance to say something.
        Mr. HEVESI. Other than indicating my gratitude, I have no
    interest in responding.
        Ms. TUBBS JONES. Okay. Thanks, Mr. Chairman.
        Chairman THOMAS. Thank you. Just a couple of points for
    those of you who are suggesting changes that may cost revenue,
    I have always found that you shouldn't leave to other people
    the work that affects you, so if you can get to me as quickly
    as you can, especially Mr. Stack and Governor Keating.
        Mr. STACK. Mr. Chairman, we will. We do strongly believe
    that it is less than the increase in borrowing costs for State
    and localities.
        Chairman THOMAS. Thank you. I just want to assure any
    witness that ever appears before this panel, as long as I am
    Chairman, the questions may be the Members'. The answers belong
    to the witnesses.
        I want to remind you that today's segment is a portion of
    an ongoing hearing, and the hearing is in recess if there be no
    further business before the Committee. We will reconvene on
    Tuesday for the third segment of our four-segment hearing. No,
    we will convene on Thursday, tomorrow, at 10:00 a.m. for the
    third of the four-segment hearing.
        [Whereupon, at 5:48 p.m., the Committee was recessed, to
    reconvene at 10:00 a.m., Thursday, March 6, 2003.]

                     PRESIDENT'S ECONOMIC GROWTH PROPOSALS

                                  ----------

                            THURSDAY, MARCH 6, 2003

                 U.S. 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.
                                    ------

        Chairman THOMAS. Good morning. Today marks the third day of
    a four-part hearing to examine the President's initiative to
    promote economic growth while creating jobs for every worker
    who wants one.
        We will begin today by again focusing on the proposal to
    eliminate the double taxation on stock dividends, which seems
    to be a major theme regardless of what the panel was supposed
    to talk about over the last several days. We are going to hear
    reaction from experts also on low-income housing and pensions
    and retirement savings, the other side of the coin from the
    stock dividends proposal.
        Joining us as soon as his plane lands, I believe, is John
    Makin, a Resident Scholar and Director of Fiscal Policy Studies
    at the American Enterprise Institute; Dallas Salisbury,
    President and CEO of the Employee Benefit Research Institute;
    Douglas Shackelford, Meade H. Willis Distinguished Professor of
    Taxation at the University of North Carolina; and Richard
    Godfrey, Executive Director of the Rhode Island Housing and
    Mortgage Finance Corporation and Vice President of the National
    Council of State Housing Agencies.
        Thank you for being with us this morning.
        As with the previous two hearings, the experts will bring
    to us several perspectives and hopefully possible alternatives
    so that we can examine all of these issues with the pros, the
    cons and the alternatives in front of us.
        As usual before we start, I would like to recognize the
    gentleman from New York, Mr. Rangel, for any comments he may
    wish to make.
        [The opening statement of Chairman Thomas follows:]
        Opening Statement of The Honorable Bill Thomas, Chairman, and a
            Representative in Congress from the State of California
        Good morning. Today marks the third day of a four-part hearing to
    examine the President's initiative to promote economic growth while
    creating jobs for every worker who wants one.
        We will begin today by again focusing on the proposal to eliminate
    the double taxation on stock dividends. We are also going to hear
    reaction from experts on low-income housing, and pensions and
    retirement savings. Joining us today are John Makin, a Resident Scholar
    and Director of Fiscal Policy Studies at the American Enterprise
    Institute; Dallas Salisbury, President and CEO of the Employee Benefit
    Research Institute; Douglas Shackelford, the Meade H. Willis
    Distinguished Professor of Taxation at the University of North
    Carolina; and Richard Godfrey, Executive Director of the Rhode Island
    Housing and Mortgage Finance Corporation and Vice President of the
    National Council of State Housing Agencies. Welcome, we are pleased to
    have you with us this morning.
        As with the previous two hearings, these experts bring to the
    Committee several perspectives and possible alternatives to the issues
    for us to consider.
        Before we get started, I would like to first recognize the
    gentleman from New York, Mr. Rangel, for any comments he would like to
    make.

        Mr. RANGEL. Thank you, Mr. Chairman. I am anxious to hear
    from the witnesses. I join with you in thanking them for
    attending, and I yield back the balance of my time.
        Chairman THOMAS. Thank you. All of your written statements
    will be made part of the record. You can address us in the time
    that you have as you see fit. The microphones have an on-off
    switch. They are very unidirectional. If you will speak
    directly into them, we will have a better chance to hear you.
    Mr. Salisbury.

    STATEMENT OF DALLAS L. SALISBURY, PRESIDENT AND CHIEF EXECUTIVE
              OFFICER, EMPLOYEE BENEFIT RESEARCH INSTITUTE

        Mr. SALISBURY. Mr. Chairman, Mr. Rangel and Members of the
    Committee, thank you very much. Thank you for inviting me
    today.
        I have been asked to specifically focus on the impact of
    the dividend payment proposals on pensions and particularly
    defined contribution retirement plans. We believe the major
    impact of the family of dividend exclusion proposals on those
    plans would fall into three areas: The employers may terminate
    existing arrangements, employers that may have started a new
    plan had the proposals not been adopted, and employees that
    would be offered qualified plan coverage but choose to forego
    it in order to have nonplan investments in order to take
    advantage of the new dividend tax treatment.
        There will obviously be some plan sponsors, particularly
    among small businesses, that are so close to the margin as to
    whether they should offer a qualified plan that when the after-
    tax financial outcome of the next best alternative based on
    these legal changes is presented to them it would be sufficient
    to tip the scales towards termination of a plan. Of course, the
    real concern is exactly how many of these plans are there and
    is the loss of benefits for their employees significant. There
    is no database that we are aware of that can provide this
    estimate, but this is one of the questions that needs to be
    answered before final analysis of such proposals can be
    provided.
        It is unlikely that the vast majority of plan participants
    will see their plans terminated as a result of this proposal,
    since it is those with less than 10 and less than 25 employees
    that would most likely do that, and that segment of the labor
    force accounts for only approximately 16 percent of all
    employees.
        Congress should not limit itself merely to existing plans.
    It is quite likely that there may be employers who would have
    started a new plan had the proposals not been adopted. However,
    we believe this would have a relatively short window effect as
    a result of the extra 2001 provisions that provided for 401(k)
    plans to allow participants to choose to allocate all or a
    portion of their contributions to after-tax Roth contributions
    beginning in 2006. These provisions would allow an individual
    to fully escape taxation of interest income, dividend income
    and all capital gains income.
        In addition to either causing the termination of existing
    plans or the suppression of new plans, the dividend exclusion
    proposals could also have impact on employees in their decision
    making. The list of decision variables in making individual
    choices is obviously specific to each individual, but some of
    the more important determinants are likely to be, first, after-
    tax versus before-tax contributions; second, the individual's
    expectations for tax rates over time; thirdly, the need to
    access money for emergencies or the perception of that need;
    and, fourth, whether or not the employer offers matching
    contributions.
        Regardless of the impact on total savings, some workers are
    likely to lose the valuable ancillary benefits they derive from
    participates in an employer-sponsored plan.
        In the post-Enron environment, legislation that your
    Committee and others have considered post-Enron, one cannot
    understate the importance of those particular considerations.
        The dividend exclusion proposal is also likely to have an
    impact on IRAs, both regular and Roth.
        In conclusion, Mr. Chairman, having done our own
    preliminary analysis and having read those produced by others,
    we are unable to make a point estimate as to the extent to
    which the dividend exclusion proposals would harm qualified
    retirement plans, as there are many alternative parameters.
        Our latest Issue Brief notes 18 percent retirement plan
    participation among employers with less than 10 employees in
    2001 for those workers who are prime age. This figure has
    increased by 50 percent since 1991. There have also been
    dramatic increases in participation rates for the 10-to-24 and
    25-to-99 employee firms, in sharp contrast to larger firms,
    where essentially participation has been flat. Are these groups
    big enough, enough people, to justify not doing something for
    all taxpayers that would be an automatic benefit for stock
    investors? That is the tough decision that you face.
        However, if one were concerned with the potential
    termination problem, they could in fact mitigate it by
    accelerating the implementation date of the Roth 401(k)
    provisions to 2004 to coincide with the time when plan sponsors
    would first begin to consider the investment strategies and
    products likely to be created as alternatives to existing
    qualified plans. Small employers wanting sheltered income and
    increased appreciation and also wanting total tax exemption
    would be able to use the Roth 401(k) as opposed to plan
    termination and separate investment.
        Mr. Chairman and Members of the Committee, thank you for
    your invitation again to testify.
        [The prepared statement of Mr. Salisbury follows:]
        Statement of Dallas L. Salisbury, President and Chief Executive
                  Officer, Employee Benefit Research Institute
    Introduction
         Thank you, Mr. Chairman, for allowing me this opportunity
    to share observations on how the president's plan to end double
    taxation of many dividend payments would impact America's pension
    system.
         A brief comment on terminology: I am including the proposed
    dividend exclusion, deemed dividend treatment and the recent expansion
    to include annuities in my comments. I will refer to it generically as
    the ``dividend exclusion proposal'' below.
    Analysis
         I believe the major impact of the dividend exclusion
    proposal on qualified defined contribution plans will focus on the
    following three areas:

           Employers that may terminate existing arrangements
           Employers that may have started a new plan had the
    proposal not been adopted
           Employees that would be offered qualified plan coverage
    but choose to forgo it for non-plan investments

         There will obviously be some plan sponsors (particularly
    among small businesses) that are so close to the margin as to whether
    they should offer a qualified plan that when the after-tax financial
    outcome of the next best alternative (i.e., have the owner forgo any
    contributions and declare a bonus for himself of an equivalent amount)
    improves via dividend exclusion it would be sufficient to tip the
    scales towards termination of the plan. I do not mean to imply that
    personal enrichment is the only reason that qualified retirement plans
    are offered by small employers. However, the mathematics of the cost/
    benefit tradeoff for a large number of small plans may be sufficiently
    modified to result in a significant number of terminations. Of course
    the real concern is exactly how many of these plans are there and is
    the loss of benefits for their employees significant? There is no
    database that I am aware of that can provide this estimate but this is
    one of the questions that needs to be answered before final analysis of
    this proposal can be provided.
         It is unlikely that the vast majority of plan participants
    will see their plans terminated as a result of this proposal. However,
    one should not minimize the potential problems that may be faced by a
    plan sponsor since non-highly compensated employees may choose
    (logically or otherwise) to opt out of a 401(k) plan in favor of non-
    qualified investments which may make ADP testing more difficult.
    Although it is also possible that the dividend proposal will make ADP
    testing easier as the highly compensated employees are more likely to
    contribute to the match level and then invest outside than the average
    employee stop investing and invest on the outside.
         Congress should not limit its concern merely to existing
    plans however as it is quite likely that there may be employers that
    would have started a new plan had the proposal not been adopted.
    However, I believe this would have a relatively short window as a
    result of the EGTRRA 2001 provisions that provided for 401(k) plans to
    allow participants to choose to allocate all or a portion of their
    contributions to after-tax ``Roth contributions'' beginning in 2006 and
    escape taxation on either principal or investment income when benefits
    are received. It would appear that many plan sponsors may find the Roth
    401(k) to be a better option than forgoing a qualified plan and taking
    advantage of the dividend exclusion. I believe many potential sponsors
    would not choose to make contributions on an after tax basis just to
    get a dividend exclusion when they can get a full tax exemption under a
    Roth 401(k) plan.
         While the employer is under no requirement to allow
    participants to make after tax Roth contributions, it is likely that
    both Roth and traditional 401(k) provisions would be provided by most
    sponsors (especially among small employers) in an attempt to optimize
    benefit delivery for all of the employees. This results from the fact
    that some employees anticipate their marginal tax rate will increase
    between now and eventual time of payment (in which case a Roth
    contribution is preferable) while others anticipate it will decrease
    and therefore prefer a traditional 401(k) contribution.
         In addition to either causing the termination of existing
    plans or the suppression of new plans, the dividend exclusion proposal
    could also impact employees that would still be offered qualified plan
    coverage but choose to forgo it for non-plan investments. The list of
    decision variables in making this choice is obviously specific to each
    individual but some of the more important determinants are likely to
    be:

          1.after tax vs. before tax contributions (both from a financial
    and psychological perspective)
          2.the individuals expectations for tax rates over time
          3.the need to access money for emergencies
          4.whether or not the employer offers a match

         Regardless of the impact on total savings, some workers are
    likely to lose the valuable ancillary benefits they derive from
    participating in an employer-sponsored retirement plan. Some workers
    will end up investing in ``individual'' individual accounts as opposed
    to group (or employer-sponsored) individual accounts either due to the
    considerations mentioned above or because the employer has chosen not
    to sponsor a plan in the new environment. These individuals may lose
    the benefit of having a fiduciary screen for ``appropriate''
    investments and continually monitor the funds. Moreover, employer-
    sponsored educational programs would likely not be provided, at least
    to the same extent, if the employee were to save outside of the
    qualified market. This could also result in higher investment and
    service fees, which would serve to lower overall retirement wealth.
         The dividend exclusion proposal is also likely to have an
    impact on IRAs--both regular and Roth versions. The rationale for the
    likely decrease in future contributions to these vehicles is that
    investors in IRAs who won't see the tax benefits for years might shift
    more money into taxable accounts. The latter would have the benefit
    both of tax free dividends as well as capital gains taxed at only a 20
    percent rate. However, this is unlikely to impact a large percentage of
    individuals as only 5.3 percent of workers contributed to a deductible
    IRA in 1998.
    Conclusion
         Mr. Chairman, having done our own preliminary analysis and
    having read those produced by others, we are unable to make an estimate
    as to the extent to which the dividend exclusion proposals would harm
    qualified retirement plans as there are too many unknown parameters.
         EBRI's latest Issue Brief notes 18% retirement plan
    participation among employers with less than 10 employees in 2001. This
    figure has increased by 50 percent since 1991. There have also been
    dramatic increases in participation rates for the 10-24 and the 25-99
    employee firms and is in contrast with their larger firm counterparts
    that displayed only minor increases. Are these groups big enough
    (enough people) to justify not doing something for all taxpayers that
    would be an automatic benefit for stock investors--not something that
    requires action?
         However, if one were concerned with the potential
    termination problem they could mitigate it by accelerating the
    implementation date of Roth 401(k) plans to 2004 to coincide with the
    time when plan sponsors would first begin to consider the investment
    strategies and products likely to be created as a result of the
    dividend exclusion proposal as a viable alternative to qualified plans.
    Small employers want sheltered income and increased appreciation and
    also want total tax exemption. In which case the Roth 401(k) would be a
    more attractive alternative to the small plan sponsor.
                                     ______

        Thank you, Mr. Chairman, for allowing me this opportunity to share
    observations on how the president's plan to end double taxation of many
    dividend payments would impact America's pension system.
        It is bold as a move in policy. This is particularly true when it
    is combined with the savings proposals for LSA, RSA, and the Roth
    401(k) acceleration to 2004. These last provisions essentially allow
    low- and moderate-income individuals to save with a 0% tax rate on
    interest, dividends, and capital gains. These are the groups most
    likely to own mutual funds versus individual securities, and the most
    likely to have money in regular savings accounts versus other vehicles
    due to their low savings rates. Total exclusion would not likely move
    them toward the purchase of dividend-paying stocks, but rather would
    create indifference.
        It is likely to have only a limited impact in any direction on most
    current retirement and savings plan participants. Once the Roth 401(k)
    is in place in 2006, under current law, this becomes even more the
    case. A future exclusion from any taxes on any income or capital gains
    will clearly trump a stand-alone dividend exclusion. Some small
    employers could decide to not have a plan and simply move their money
    into a portfolio of high-dividend stocks. However, the Roth 401(k)
    would provide a better means of exclusion for these individuals, since
    they could also exclude interest and capital gains income. Since the
    theory of ending a plan due to this provision means a willingness to
    save after tax-dollars, the Roth 401(k) can be seen as a reasonable
    alternative for first dollars. The small employer might then also
    contribute to an LSA for family members. Roth 401(k)s, LSAs, and RSAs
    would also be more attractive options to small employers than simply
    moving their money into high-dividend stock portfolios.
        It is unlikely that a dividend tax exclusion would lead to
    significant asset shifting for most individuals. Most defined
    contribution plan participants have small account balances, as most
    Americans have little in savings. The Administration's proposal should
    not have an effect on lower-compensated workers, as these workers are
    unlikely to have saved enough at any one time to make a stock purchase
    worthwhile, and the tax deduction is going to far outweigh any savings
    in dividends over their lifetimes and at withdrawal time.
        Even with a dividend tax exclusion, higher-compensated workers
    would still want an employer-sponsored retirement plan, particularly if
    there is a match. These workers can always diversify into bonds in the
    retirement accounts and stocks in nontax-favored settings. Furthermore,
    if the retirement plan fees are subsidized by the employer, this may
    mitigate the benefits of not having dividends taxed, since dividends
    are running around 2 to 3 percent of value.
        It is unlikely the Administration's proposal will cause a large
    number of people to change the way they invest. It appears more to be
    just a tax ``break'' for stock owners, and for many it will be quite
    small. At this point it is uncertain whether this would really have an
    effect on mutual fund providers. If, at some point in the future,
    corporations decided to significantly increase their dividend payouts,
    this analysis would change. But that is unlikely (certainly in the
    current economic environment), and stock appreciation will always be
    important.
        The savings proposals will discourage targeted retirement savings,
    however. For employees not participating in a 401(k) plan offering an
    employer match, the LSA would often be the first place to put the first
    $7,500 per family member due to the lack of restrictions on when a
    participant can take a distribution as well as the lack of early
    withdrawal penalties. Since this amount is more than most Americans
    save in a year in any form,1 it could absorb all savings for
    most.
    ---------------------------------------------------------------------------
        \1\ In the calendar year 1999 data from the EBRI/ICI Participant-
    Directed Retirement Plan Data Collection Project, the average before-
    tax 401(k) participant contribution as a percentage of salary was 6.8
    percent. The average total participant contribution as a percentage of
    salary was 6.9 percent. Based on an average annual participant salary
    of $44,187, this produces an average annual before-tax contribution of
    $3,004, or $3,048 if after-tax contributions are included. See Sarah
    Holden and Jack VanDerhei, ``Contribution Behavior of 401(k) Plan
    Participants.'' ICI Perspective, Vol. 7, no. 4; and EBRI Issue Brief
    no. 238 (Investment Company Institute and Employee Benefit Research
    Institute, October 2001).
    ---------------------------------------------------------------------------
        It is a next step in a long-term policy progression toward
    incentives for savings other than for retirement. Until the mid 1990s
    the incentives were offered for retirement savings only. These
    incentives were often reinforced through early withdrawal penalties
    and, in the case of certain 401(k) monies, in-service withdrawals were
    permitted in only limited situations. The Taxpayer Relief Act of 1997
    created a new tax-favored savings vehicle called a Roth IRA that
    introduced the concept of ``no deduction,'' ``no tax on withdrawal'' to
    retirement planning.2 Then came 529 plans for college
    savings, Individual Development Accounts, etc. Now, the proposed
    Lifetime Savings Account would allow for withdrawal for any purpose
    without tax or penalty at any time.
    ---------------------------------------------------------------------------
        \2\ Technically, after-tax contributions and recovery of the cost
    basis tax-free were quite common before 401(k) plans. However, Roth
    IRAs also allow for tax-free withdrawal of investment income.
    ---------------------------------------------------------------------------
        It is likely that there will be two groups that would forego the
    LSA for at least a portion of their annual savings. First, those who
    have a retirement plan at work with a matching contribution and are
    willing to have limited access to the money are likely to choose to
    participate in the 401(k) plan instead. Second, those motivated by the
    ability to make before-tax contributions to have an immediate tax
    reduction would likely prefer the 401(k) plan also. This latter group
    is likely to be high-income individuals who believe they will be in a
    higher tax bracket when they withdraw the money or intend to leave the
    account to their non-taxable estate.
        The savings proposal could cause some small employers to terminate
    retirement plans and others not to start them. This is especially
    likely to happen with small plans, since the employer could put away
    $15,000 for him/herself with similar amounts for a spouse and each
    child without having to deal with administrative details of qualified
    plans or the employer contributions necessary to make a safe-harbor 3%
    contribution, a safe harbor matching contribution, or to induce
    sufficient contributions from the NHCEs to pass the nondiscrimination
    tests. Moreover, at least initially, the $15,000 is greater than the
    $12,000 under Sec. 402(g), which would still apply to ERSAs.
        Certain elements of the savings proposal would work toward
    increasing total savings. First, the LSA and the RSA would apply to all
    persons with identical provisions so that advertising them would be
    easy and clear and much confusion would be eliminated. The universal
    eligibility and relatively simple design of the attendant financial
    instruments should increase both the supply and demand for these
    options. Second, the increased flexibility with respect to withdrawal
    access should also appeal to those with limited resources who prefer to
    have ready access to liquid assets in the case of financial
    emergencies.3 Third, taxpayers who believe their personal
    long-term tax rates will increase would find the after-tax nature of
    the LSA and RSA desirable and might choose to increase their annual
    savings as a result.4
    ---------------------------------------------------------------------------
        \3\ Holden and VanDerhei show that a participant in a plan offering
    loans was expected to contribute 0.6 percentage point more of his or
    her salary to the 401(k) plan than a participant with no borrowing
    privileges. Sarah Holden and Jack VanDerhei, ``Contribution Behavior of
    401(k) Plan Participants.''
        \4\ There are many reasons why an individual taxpayer may believe
    their tax bracket would increase later in life even if the tax rates
    remain static. However, growing budget deficits (and the promises for
    Medicare and Medicaid already in law for the elderly), which are
    growing rapidly, may provide additional incentive for individuals to
    choose the after-tax contributions.
    ---------------------------------------------------------------------------
        However, there are also reasons to hypothesize that the savings
    proposal may not increase total savings. First, most taxpayers already
    have both the regular IRA and the Roth IRA available but few have
    chosen to contribute to either.5 Given that Roth IRAs need
    to satisfy a five-year holding requirement that does not apply to LSAs,
    there may be more of a demand for the latter, but it might simply
    capture short-term savings. Second, if the proposal were adopted, it
    would likely lead to termination of existing defined contribution
    plans, especially among the small employers. Since employee
    contributions are mostly driven by matching employer
    contributions,6 this would not only deprive a significant
    number of employees from receiving employer contributions, but it would
    likely cause them to discontinue their own contributions as well.
    ---------------------------------------------------------------------------
        \5\ Only 5.3 percent of workers contributed to a deductible IRA in
    1998. Craig Copeland, ``IRA Assets and Characteristics of IRA Owners,''
    EBRI Notes, no. 12, (December 2002).
        \6\ Jack VanDerhei and Craig Copeland. ``A behavioral model for
    predicting employee contributions to 401(k) plans.'' North American
    Actuarial Journal (First Quarter, 2001).
    ---------------------------------------------------------------------------
        Regardless of the impact on total savings, some workers are likely
    to lose the valuable ancillary benefits they derive from participating
    in an employer-sponsored retirement plan. Some workers will end up
    investing in ``individual'' individual accounts as opposed to group (or
    employer-sponsored) individual accounts either due to the
    considerations mentioned above or because the employer has chosen not
    to sponsor a plan in the new environment. These individuals may lose
    the benefit of having a fiduciary screen for ``appropriate''
    investments and continually monitor the funds. Moreover, employer-
    sponsored educational programs would likely not be provided, at least
    to the same extent, if the employee were to save outside of the
    qualified market. This could also result in higher investment and
    service fees, which would serve to lower overall retirement wealth.
                                     ______

        EBRI is a private, nonprofit, nonpartisan public policy research
    organization based in Washington, DC. Founded in 1978, its mission is
    to contribute to, to encourage, and to enhance the development of sound
    employee benefit programs and sound public policy through objective
    research and education. EBRI does not lobby and does not take positions
    on legislative proposals.

        Chairman THOMAS. Thank you very much, Mr. Salisbury. Mr.
    Shackelford.

         STATEMENT OF DOUGLAS A. SHACKELFORD, MEADE H. WILLIS
       DISTINGUISHED PROFESSOR OF TAXATION, UNIVERSITY OF NORTH
                 CAROLINA, CHAPEL HILL, NORTH CAROLINA

        Mr. SHACKELFORD. Mr. Speaker and distinguished Members of
    this Committee, I support fundamental reform of the taxation of
    financial capital, including the elimination of double
    taxation, not because it will provide a significant immediate
    stimulus to the economy, which I doubt it will, but for its
    long-term efficiency gains.
        However, the President's proposal for eliminating double
    taxation is unduly complex. To illustrate, let me ask you, how
    are you going to answer a constituent who asks, will not 2003
    dividends be taxed?
        I think you will have to say something like this: It
    depends. You see, 2003 dividends are not taxed to the extent
    the company had taxable income less taxes in 2001. So if 2003
    dividends exceed 2001 after-tax taxable income, then you are
    subject to tax on the excess amount.
        If the company's dividends are less than 2001 after-tax
    taxable income, then your 2001 dividends are exempt and you may
    receive tax-free dividends in the future unless the company
    opts to increase your tax basis, which it may do at any time
    during the year, in which case your capital gains will be less
    when you sell the stock, assuming, of course, you maintain
    records of these increases in tax basis over the years. These
    provisions, however, only apply if you hold the stock for at
    least 46 days. Otherwise, you face the usual full dividend and
    capital gains taxation.
        That is the simple answer.
        Things will get more complicated after 2003, because we
    have to track after-tax taxable income and dividends on a
    cumulative basis. So in 2004 dividends might be fully exempt,
    even though 2004 dividends exceed 2002 after-tax taxable
    income. However, this will result in shareholders having to
    decrease the tax basis they increased in 2003.
        Under no condition would I recommend that you mention what
    happens if there is an IRS audit or there are carry-overs, the
    AMT, the foreign tax credit.
        Now, why is the President's bill so complicated? The
    complexity arises from the lofty goal of attempting to link
    corporate and shareholder taxes. Unfortunately, it is
    impractical.
        I would like to advance an alternative that will eliminate
    double taxation and vastly simplify the Tax Code. Retain full
    taxation of dividend income, just as we fully tax interest
    income, but permit corporations to deduct dividends, again,
    just as we permit them to deduct interest. In other words,
    simply make debt and equity identical from a tax perspective.
        Now, I believe this would have at least five advantages:
    First, it will eliminate double taxation. Second, it will
    reduce complexity in the tax law, not increase it as under the
    President's proposal. Third, it will eliminate inefficiencies
    that arise from these debt-equity differences, such as exotic
    securities from Wall Street. Fourth, it will substantially
    reduce the inefficiencies in the choice of organizational
    form--that is, choosing between operating through a C
    corporation, where there is both investor and entity taxation,
    versus an S corporation or partnership, where there is only
    investor taxation. Fifth, I believe it will improve corporate
    accountability and governance, because large institutional
    investors who would receive no direct benefit under the
    President's plan will be able to pressure managers to
    distribute free cash flow.
        So what are the problems with deductibility?
        One, it doesn't look good. Companies, not shareholders,
    reduce their taxes. Now, ignoring the problems with that claim,
    and there are plenty, I accept that some may characterize
    deductibility as corporate welfare.
        The other problem is the revenue estimates might claim it
    is too expensive, and I believe that costs are an important
    consideration in this proposal. However, it is very difficult
    for revenue estimates to fully capture the efficiency gains of
    simplification.
        Nevertheless, if you are troubled by those concerns, then I
    recommend another option that will still eliminate double
    taxation, still simplify the code and still improve efficiency.
    Let us have no dividend deduction, let us have no dividend
    taxation, let us have no interest deduction, and let us have no
    interest taxation. This will shift tax payments from the
    investors to the company and should score better with the
    revenue estimators.
        In summary, I applaud the President and you for tackling a
    very important problem; and let me emphasize the importance of
    the issue. Even tweaking the taxation of dividends--and the
    President's bill does far more than just tweak--carries major
    implications for a host of issues throughout the Tax Code.
    Unfortunately, the President's plan is impractical. However,
    there is a straightforward way to eliminate double taxation;
    and I urge you to do it.
        I look forward to your questions.
        [The prepared statement of Mr. Shackelford follows:]
      Statement of Douglas A. Shackelford, Meade H. Willis Distinguished
    Professor of Taxation, University of North Carolina, Chapel Hill, North
                                    Carolina
    Introduction and Summary

        Mr. Chairman and distinguished members of the committee, I
    appreciate the invitation to comment on the provisions in the
    President's Economic Growth Proposal designed to eliminate the double
    taxation of corporate earnings.
        The President has proposed reducing shareholder taxes by providing
    an exclusion for dividend income and a deemed dividend basis adjustment
    for capital gains. The proposal restricts these dividend and capital
    gains tax reductions to companies that pay Federal taxes. Linking
    shareholder and corporate taxes has intuitive appeal because it
    attempts to ensure at least one level of taxation. However, practically
    it will be extremely difficult to implement. In short, although I
    support the President's goal of no more than one level of tax on equity
    capital, the current proposal is unduly complex.
        The purpose of reforming equity capital taxation should be to
    eliminate any distinctions between equity and debt capital. Currently
    dividend payments are not deductible to firms while dividend income is
    taxed to the recipients. This treatment contrasts with that of debt
    capital where interest expense is deductible and interest income is
    taxed. The reason equity capital is considered ``double taxed'' is this
    debt/equity distinction, i.e., the failure to permit companies to
    deduct dividends. I recommend eliminating any distinctions between debt
    and equity by taxing equity capital in the same manner as debt capital.
    That is, permit companies to deduct dividends and retain full dividend
    taxation.
        The remainder of this written statement discusses why double
    taxation exists, details the complexity of the President's proposal,
    proposes a dividend deductibility alternative and identifies its
    possible weaknesses, conjectures about the stock market effects of the
    President's proposal, and mentions the importance of a global analysis.
    Why Double Taxation Exists

        Double taxation exists because debt and equity capital are taxed
    differently. The fundamental problem is that returns from equity are
    taxed twice, first at the corporate and then at the individual level,
    either as dividends or capital gains taxes. Conversely, debt capital is
    only taxed at the lender's level because borrowers are permitted a
    deduction for interest. This treatment implies that payments on one
    form of financial capital (debt) are a cost of doing business while
    payments on another (virtually identical) form of financial capital
    (equity) are not a cost of doing business. This legal, but not
    economic, distinction between debt and equity has led to considerable
    mischief in the tax law.
        Differential taxation of capital sources has been examined for
    decades. Seminal work by Modigliani and Miller (1963) concludes that,
    in a world with corporate taxes, the solution to firms' maximization
    problem is to issue all debt, since interest payments are deductible,
    but payments on equity financing are not. In a major 1992 study, the
    Treasury Department concluded:

        ``the current tax system often perversely penalizes the corporate
    form of organization, ... distorts corporate financial decisions in
    particular by encouraging debt, ... prejudices corporate decisions
    about whether to retain earnings or pay dividends and encourages
    corporations to distribute earnings in a matter to avoid the double-
    level tax.''

        By affording different treatment to different sources of capital,
    taxation becomes a factor in the choice of organizational form.
    Currently, C corporations are the only businesses that face two levels
    of tax, one at the entity level and another at the investor level. Sole
    proprietorships, partnerships, S corporations, and limited liability
    companies only face taxation at the investor level. Thus, many
    taxpayers operate their businesses under these forms to escape an
    additional layer of tax. Consistent with these tax incentives, Plesko
    (2003) documents a dramatic increase in the use of S corporations after
    the enactment of the Tax Reform Act of 1986. In short, many firms
    sacrifice the benefits of organizing as a C corporation (easy ownership
    division, unlimited life span, access to the public equity markets,
    among others) to eliminate their exposure to an additional level of
    tax.
        Unfortunately, the President's proposal fails to treat equity and
    debt capital the same. It proposes retaining interest expense
    deductibility, interest income taxation, and non-deductibility of
    dividend payments, while (under certain conditions) providing an
    exemption for dividend income. To really reform financial capital
    taxation, using the President's approach, would require linking
    corporate profits to the taxation of interest income, a proposal that
    no one has advanced. In other words, if linking shareholder taxes to
    corporate taxes is appropriate, the law should also link bondholder
    taxes to corporate taxes. To address the debt/equity asymmetry
    underlying double taxation, a proposal that provided tax-exempt
    dividends if companies pay taxes should also recommend exempting
    interest income if leveraged firms pay corporate taxes.
    Complexity in the President's Proposal

        The complexity in the President's proposal arises from linking
    shareholder taxes to corporate taxes. The intention is to ensure that
    corporate profits are taxed at least once, either at the corporate
    level or at the shareholder level.1 While a lofty goal,
    linking corporate taxes and shareholder taxes introduces enormous
    complexity as numerous commentators have noted, including Paul Krugman,
    who termed the proposal, ``The Tax Complication Act of 2003.''
    ---------------------------------------------------------------------------
        \1\ Under current and proposed law, this goal is not possible as
    long as some shareholders (e.g., pensions, charities, or foreign
    investors) are tax-exempt. In those cases corporate profits escape all
    taxes if companies avoid taxes and pay dividends that would be fully
    taxable, except that the shareholders are not subject to tax.
    ---------------------------------------------------------------------------
        To illustrate a bit of the complexity, consider the fact that the
    proposal will not tax 2003 dividends to the extent the company had
    after-tax profits in 2001. If 2003 dividends exceed 2001 after-tax
    corporate profits, then the excess is subject to tax. If 2003 dividends
    are less than 2001 after-tax profits, then 2003 dividends are exempt.
    Future dividends also may be tax-free or may be used to increase
    shareholders' tax bases at the discretion of the company. If the firm
    chooses to increase basis, which it may do at any time during the year,
    future capital gains will be lower, assuming, of course, shareholders
    maintain records of these increases in tax basis. These provisions,
    however, only apply, if the stock is held for at least 46 days.
    Otherwise, the current law with full dividend and capital gain taxation
    applies.
        Those rules are just the basics. Complexity increases after 2003
    because computations will be made on a cumulative basis. 2004 dividends
    might be fully exempt even though they exceed 2002 after-tax profits,
    if the firm had an excess of 2001 after-tax profits over 2003
    dividends. However, this would result in a reduction in shareholders'
    tax bases. Other considerations include IRS audit adjustments to prior
    years, loss carryovers, and alternative minimum tax. As Bear Stearns
    (2003) stated in January ``The proposal is a tax planning nightmare.''
    Unfortunately, the complexity problem cannot simply be addressed with
    minor tweaks to the President's proposal because it arises from the
    attempt to link shareholder taxes to corporate taxes. Solving the
    complexity problem requires uncoupling the shareholder taxes from the
    corporate taxes.
    An Alternative Approach--Dividend Deductibility

        An alternative exists that could eliminate double taxation and not
    only avoid this complexity, but significantly simplify the tax code.
    Recall that the double taxation arises because debt and equity are
    taxed differently. The government could enact legislation to tax equity
    capital in the same manner that it taxes debt capital, permitting a
    deduction for dividend payments and fully taxing dividend income.
        This is not an original idea. In 1984 the Treasury Department (so-
    called Treasury I) recommended that 50 percent of dividends be
    deducted. More recently, others (including columnists George Will,
    Allan Sloan, and Martin Mayer, and Senator Jon Corzine) have
    recommended dividend deductibility.
        The rationale is as follows: Firms require financial capital to
    operate. Investors provide the capital because they believe the firm
    will earn a return that justifies its risk. Accountants attempt to
    dichotomize financial capital into debt and equity. However,
    sophisticated financial engineering often makes this dichotomization
    seem arbitrary. As evidence of the difficulty in discerning the
    difference between debt and equity, the IRS has yet to issue final
    regulations defining debt and equity for tax purposes, although
    instructed to do so by Congress in 1969. In short, it is difficult, at
    best, to discern whether financial capital is debt or equity. However,
    despite the lack of economic distinction between debt and equity, the
    tax law treats them differently. Since there is no economic
    justification for taxing debt and equity differently, I urge the
    committee to eliminate the current distinction and thereby eliminate
    double taxation.
        Besides eliminating double taxation, identical treatment of both
    debt and equity will result in other benefits. It will eliminate tax-
    motivated deadweight costs that arise from the development of exotic
    securities that have equity features but receive debt taxation (high-
    yield bonds) or have debt features but receive equity taxation (e.g.,
    trust preferred stock). Another positive by-product will be the removal
    of tax considerations from the choice of organizational form. Since C
    corporations are the only business form that is taxed both at the
    entity and investor level, taxing debt and equity the same would
    largely eliminate the unjustifiable differences between C corporations
    and other organizational forms (e.g., sole proprietorships,
    partnerships, and other corporations, such as S and limited liability).
    Equal treatment would therefore remove tax considerations from
    organizational form choices.
        A major non-tax by-product from this change will be improved
    corporate accountability and governance because large institutional
    investors (who receive no direct benefit from the President's plan
    because they already enjoy dividend exclusion) will benefit from
    deductibility. Consequently, they could apply pressure on corporate
    management (that millions of tiny individual investors cannot) and
    force them to distribute free cash flow, rather than retain and
    squander it. Unfortunately, with basis adjustment as an option to
    dividends, I anticipate the President's proposal applying little
    pressure on companies to distribute their cash.
    Problems with Dividend Deductibility

        One possible problem with deductibility is the appearance of unfair
    corporate welfare since deductibility reduces corporate taxes, but not
    shareholder taxes. However, this argument is flawed because the cost of
    equity will reflect returns to the shareholder after considering both
    corporate and shareholder taxes. So, while there may be an appearance
    problem, in reality, the return to shareholders is the same, whether
    they receive after-tax profits as tax-free dividends or face personal
    taxes on before-tax dividend payments.
        Moreover, permitting C corporations to deduct dividends simply
    places them on similar footing with all other organization forms, such
    as partnerships and S corporations, which only tax business profits at
    the investor level. Since publicly-traded businesses are taxed under C
    corporate rules and most privately-held businesses use another
    organizational form (e.g., S corporation or partnerships) or eliminate
    corporate taxes through year-end bonuses or interest payments, the
    distinctive taxation for C corporations can be viewed as an added tax
    on accessing the public capital markets. Obviously, there is no
    justification for taxing companies that access the public capital
    markets differently from companies that access the debt capital
    markets.
        A second objection could be that dividend deductibility is too
    expensive. This may be true and might argue against any legislative
    change, including the President's proposal. However, it is important to
    recognize that this charge could also be levied at the current
    treatment of debt capital where we permit interest expense to be
    deducted, regardless of whether the interest income is subject to U.S.
    tax. Assuming we correctly deduct and tax interest, we should treat
    equity capital similarly. One option to reduce the cost of
    deductibility would be to permit only a percentage of interest and
    dividend payments to be deducted (as suggested under Treasury I) but to
    require all interest income and dividend income to be fully taxed.
    Another option to save money would be to achieve debt-equity equality
    by providing no deduction for dividend payments, no deduction for
    interest payments, no tax on dividend income and no tax on interest
    income.
        However, before you allow revenue estimates to prevent you from
    appropriately reforming financial capital taxation, count the costs of
    complexity. One cost is the bewildered constituent, who grows cynical
    because he cannot understand why his taxes are so complex. The other
    (perhaps greater) cost is the untold deadweight costs on Wall Street
    and other streets as companies and investors undo (and sometimes
    exploit) legal distinctions that are inconsistent with economic
    reality. If you make dividends tax-exempt and continue to deduct and
    tax interest, as proposed under the President's plan, you beg bankers,
    lawyers, accountants and others to devise perfectly legal securities
    and structures that result in unforeseen consequences, including far
    greater revenue loss than currently anticipated.
    Stock Market Reaction

        Lurking in the background of the President's proposed changes to
    dividend and capital gains taxation is a hope that it will increase
    stock valuations. It is very difficult to predict stock price responses
    to tax legislation, although, at first blush, more favorable taxation
    of equity capital should increase the attractiveness of equity capital.
        However, current tax policy has encouraged tax clienteles among
    shareholders that will need to be reshuffled to fully avail
    shareholders of the tax savings in the President's proposal. Recent
    research suggests that the marginal shareholder in dividend-paying
    companies faces low marginal tax rates [see Blouin (2003), Engle,
    Erickson and Maydew (1999), Frank (2002), Graham (1999), Kemsley and
    Nissim (2002), among others]. If so, these shareholders (e.g.,
    institutions, such as pensions) will benefit little from the new
    legislation.
        Conversely, the marginal investor in non-dividend paying firms (or
    low dividend-paying firms) appears to face high marginal tax rates and
    anticipate capital gains taxes on their returns to equity [see Lang and
    Shackelford (2000)]. These shareholders could benefit from tax-free
    dividends, but they must sell their current holdings in growth
    companies, pay the capital gains tax, and then reinvest in mature,
    dividend-paying firms. Their movement to tax-favored, dividend-paying
    firms might bid the stock price too high for the current, low-marginal
    tax rate shareholders of those companies. If so, the low-marginal tax
    rate investors would likely shift to the non-dividend paying firms,
    ignoring risk preferences, institutional restrictions (such as some
    pensions' inability to buy non-dividend paying firms), or transaction
    costs. Whether this reshuffling of the country's equity will occur and
    the pace at which it occurs is unclear; however, it will not be
    costless.
    How Does this Affect Global Capital Markets?

        It is beyond the scope of this statement to provide a complete
    analysis of the global capital market implications for the President's
    proposal or for dividend deductibility. However, I would urge the
    committee to think carefully about the implications of any changes on
    both foreign investors in U.S. companies and U.S. investors in foreign
    companies as well as the implications for U.S. and foreign competition
    in the market for corporate control.
    Conclusion

        In closing, I support the elimination of double taxation of
    corporate earnings. I urge the committee to address this fundamental
    problem by recognizing the inefficiencies created when debt and equity
    are taxed differently. Unfortunately, the President's proposal leaves
    debt and equity taxed differently and introduces enormous complexity. I
    recommend an alternative approach--either permit a dividend deduction
    in the same way that interest is deductible or remove all deductions
    and taxation of interest and dividends. In summary, if we are going to
    eliminate double taxation, which is definitely a worthy goal, let's do
    it right. Do not settle for an elimination of double taxation that
    still leaves debt and equity taxed differently.
    References
    Blouin, Jennifer. 2003. Shareholder Taxes and Stock Prices. University
                of North Carolina Working Paper.
    Engle, Ellen, Merle Erickson and Edward Maydew. 1999. Debt-Equity
                Hybrid Securities. Journal of Accounting Research 37: 249-
                274.
    Frank, Mary Margaret. 2002. The Impact of Taxes on Corporate Defined
                Benefit Plan Asset Allocation. Journal of Accounting
                Research 40: 1163-190.
    Graham, John. 1999. Do Personal Taxes Affect Corporate Financing
                Decisions? Journal of Public Economics 73: 147-185.
    Kemsley, Deen and Doron Nissim. 2002. Valuation of the Debt Tax Shield.
                Journal of Finance 57: 2045-2073.
    Lang, Mark and Douglas Shackelford. 2000. Capitalization of Capital
                Gains Taxes: Evidence from Stock Price Reactions to the
                1997 Rate Reduction. Journal of Public Economics 76: 69-85.
    Modigliani, Franco. and Merton Miller. 1963. Corporate Income Taxes and
                the Cost of Capital: A Correction. American Economic Review
                53: 433-443.
    Plesko, George. 2003. The Role of Taxes in Organizational Choice: S
                Conversions After the Tax Reform Act of 1986. MIT working
                paper.
    U.S. Treasury. 1992. Taxing Business Income Once: Washington, D.C.:
                U.S. Government Printing Office.

        Chairman THOMAS. Thank you very much, Mr. Shackelford. Mr.
    Godfrey.

    STATEMENT OF RICHARD H. GODFREY, JR., EXECUTIVE DIRECTOR, RHODE
     ISLAND HOUSING AND MORTGAGE FINANCE CORPORATION, PROVIDENCE,
      RHODE ISLAND, AND VICE PRESIDENT, NATIONAL COUNCIL OF STATE
                            HOUSING AGENCIES

        Mr. GODFREY. Thank you, Mr. Chairman, Representative Rangel
    and Members of the Committee. Thank you for the opportunity to
    testify today.
        I am Richard Godfrey, Executive Director of Rhode Island
    Housing. I am also Vice President of the National Council of
    State Housing Agencies.
        I come before you with great respect and only after deep
    consideration of the issues involved. I know that you are
    evaluating a tax plan that is intended to provide deeply needed
    economic stimulus to this country.
        When the President first announced his plan to eliminate
    taxes on corporate dividends, my immediate reaction, along with
    the reaction of many in the housing industry, was concern,
    concern because so many of our programs are tax-driven. Instead
    of relying on appropriations, new, affordable apartment
    production, along with assistance for first-time home buyers,
    relies on tax incentives, tax incentives purchased by
    corporations that decide to invest in affordable housing solely
    because of financial incentives in the Tax Code.
        However, we chose not to respond based on intuition.
    Instead, we are responding factually, basing our comments on
    the best educated estimate of the actual programmatic impact.
    We hired the best independent experts we could find, Ernst &
    Young, and charged them with determining the impact that the
    dividend tax exclusion will have on affordable rental housing
    production.
        The news they brought back was devastating. Production
    would be cut 35 percent; 40,000 units of workforce and
    supportive housing would be lost every year.
        The Housing Credit Program has been enormously successful.
    It has gained in efficiency and service to lower income working
    families virtually every year. Organizations such as NCSHA and
    Rhode Island Housing have worked hard to accomplish this in an
    environment in which workforce and supportive housing are
    becoming ever harder to come by.
        Between 1986 and 2000, inflation severely eroded the value
    of the Housing Credit. Two years ago you, Members of Congress,
    affirmed the importance of the Housing Credit by restoring the
    value lost to inflation and indexing it for future inflation.
    The currently proposed plan would negate your work, setting us
    back to the time prior to that inflation adjustment, instantly
    cutting apartment production by 35 percent annually.
        Ernst & Young, through their well-substantiated econometric
    models, verified and enumerated our fears. The cuts would wound
    deepest where safe, affordable housing is hardest to produce:
    housing in urban areas, housing for the lowest-income families,
    housing in isolated rural areas.
        In Rhode Island, as in many of our sister States, the
    Housing Credit program means far more than just affordable
    housing for working families. It means fewer families are
    homeless. It means children have a consistent and safe place in
    which to sleep, study, and go to school each day. It means
    parents have a secure place in which they can prepare for work.
    It means that homes are safe from lead paint and other life-
    threatening hazards.
        Housing Credits build lives and communities, as well as
    just putting a roof over people's heads. There are
    neighborhoods and provinces where crime is down and property
    values are up because of Housing Credit investments. We used
    Housing Credits to renovate a critical mass of abandoned and
    derelict properties. This motivated other landowners to fix
    their properties as well. Once this beachhead is established,
    homeowners return, bringing true vigor and caring to places
    where previously everyone wanted to escape.
        I invite you all to Rhode Island. I will take you to
    neighborhoods where, just a few years ago, there were blocks in
    which only one or two buildings were occupied. In those same
    blocks today, kids are playing, drug dealers are gone, and new
    homeowners and landlords join together for community planning
    and planting.
        Many of you have been tireless supporters of the Housing
    Credit over the years. To my neighbor, Representative Johnson,
    particularly, we thank you for your endless support for the
    Housing Credit. Please do not send us back to the time before
    we got the inflation adjustment. In Rhode Island, rental
    housing prices are up 50 percent in just the past 4 years.
    Homelessness, driven by large increases among working families,
    has reached unprecedented levels. Homeless families now
    outnumber homeless individuals. Overcrowding has also increased
    34 percent in the last decade. These phenomena are happening
    across the country, fueled solely by the lack of affordable
    rental housing.
        How can America's economy grow without housing for its
    workers? How can our economy grow without a strong housing
    sector? You know that housing construction is one of the few
    bright spots in the economy last year. Our studies show that
    the Housing Credit now accounts for 40 percent of America's
    apartment construction. In Rhode Island, we know that every new
    unit we produce translates into one job in the construction
    industry. Ernst & Young estimates that, nationally, apartment
    construction will be reduced by 40,000 units. That means 40,000
    jobs lost along with 40,000 homes each and every year.
        Thank you very, very much.
        [The prepared statement of Mr. Godfrey follows:]
    Statement of Richard H. Godfrey, Jr., Executive Director, Rhode Island
    Housing and Mortgage Finance Corporation, Providence, Rhode Island, and
           Vice President, National Council of State Housing Agencies
        Mr. Chairman, Representative Rangel, and members of the Committee,
    thank you for the opportunity to testify on the impact of the
    Administration's dividend exclusion proposal on the Low Income Housing
    Tax Credit (Housing Credit) and the affordable rental housing
    production it makes possible.
        I am Richard Godfrey, executive director of the Rhode Island
    Housing and Mortgage Finance Corporation. I am testifying on behalf of
    the National Council of State Housing Agencies (NCSHA). I serve as
    NCSHA's vice president.
        NCSHA is a national nonprofit, bipartisan organization. It
    represents the housing finance agencies (HFAs) of the 50 states, the
    District of Columbia, Puerto Rico, and the U.S. Virgin Islands.
        NCSHA's member agencies administer the Housing Credit in every
    state. We also issue tax-exempt private activity housing bonds (Bonds)
    to finance Housing Credit apartments, other affordable rental housing,
    and first-time homes for low-income families.
        NCSHA is deeply grateful to this Committee and the Congress for its
    steadfast support of the Housing Credit and Bonds. Over 85 percent of
    the Congress, including most members of this Committee, cosponsored
    legislation enacted just over two years ago to increase Housing Credit
    and Bond authority by nearly 50 percent annually. An even greater
    percentage cosponsored legislation making both programs permanent in
    1993.
        Eighty-two percent of the last Congress, including 34 members of
    this Committee, cosponsored Representatives Amo Houghton (R-NY) and
    Richard Neal's (D-MA) Housing Bond and Credit Modernization and
    Fairness Act, H.R. 951. We urge you to include this bill, re-introduced
    by Representatives Houghton and Neal this year as H.R. 284, in the tax
    bill you are preparing to write.
        H.R. 284's enactment would extend the reach of the Housing Credit
    and Bonds by repealing the Mortgage Revenue Bond (MRB) Ten-Year Rule,
    updating MRB purchase price limits, and making Housing Credit income
    eligibility rules more flexible. The Ten-Year Rule alone is costing
    states over $3 billion annually in MRB mortgage money that would
    otherwise be available to help working families buy their first home.
    California forfeits over $1 million a day to the Ten-Year Rule.
    The Unintended Adverse Impact of the Dividend Exclusion on the Housing
                                     Credit
        NCSHA does not oppose the Administration's Growth and Jobs Plan or
    the dividend exclusion proposal it contains. We have no position on
    either. NCSHA also does not believe the Administration intends any harm
    to the Housing Credit or affordable rental housing production.
        We are deeply concerned, however, that Housing Credit apartment
    production would be severely curtailed if Congress enacts the dividend
    exclusion as the Administration has proposed it. Ernst & Young's (E&Y)
    just-released study, The Impact of the Dividend Exclusion Proposal on
    the Production of Affordable Housing, substantiates our concern.
        NCSHA commissioned the E&Y study to back up with sound, objective
    analysis our belief that Housing Credit apartment production would be
    eliminated or severely reduced as a result of the enactment of the
    dividend proposal. We have shared the report with the Committee and ask
    that it be made part of today's hearing record.
        E&Y estimates that 40,000 fewer Housing Credit apartments would be
    produced annually if the dividend exclusion were enacted as currently
    structured. That means 35 percent of annual Housing Credit apartment
    production would be lost. And, about 80,000 low-income residents would
    not be served.
        NCSHA fears the total impact may be much greater. E&Y does not take
    into account, for example, the impact of the higher interest rates on
    tax-exempt housing bonds that almost certainly will result from
    enactment of the dividend proposal. Forty-two percent of Housing Credit
    apartments developed annually are financed with tax-exempt bonds.
        E&Y finds that corporate Housing Credit investors--who account for
    98 percent of Housing Credit equity raised annually--would either limit
    the amount of capital they invest in Housing Credits or lower the price
    they are willing to pay for them, reducing the amount of Housing Credit
    equity available to produce affordable rental housing.
        Simply stated, Housing Credits would be worth less to corporate
    investors. With enactment of the dividend exclusion, the more taxes a
    corporation pays, the more income shareholders could receive tax-free
    from the corporation. Since Housing Credits reduce corporate taxes,
    they would also reduce the corporate profits available to shareholders
    tax-free. Corporations seeking to maximize shareholder benefits would
    find Housing Credits less attractive.
        The bottom line--corporations may still invest in the Housing
    Credit, but they would probably invest substantially less for each
    dollar of Housing Credits than they do today. This price adjustment
    would be necessary to compensate shareholders for reducing their tax
    benefits.
        With less Housing Credit equity available, developments would face
    significant financing gaps. More ``soft financing,'' typically provided
    as very low-cost or deferred loans from public sources, would be needed
    to fill the gap, essentially replacing the lost Housing Credit equity.
    Otherwise, developments would be financially infeasible.
        Unfortunately, soft financing has become increasingly scarce due to
    federal, state, and local budget constraints. Without substantially
    increased government funds--unlikely in today's budget environment--
    existing public funds would be called upon to provide more subsidy to
    fewer properties. The rest simply would not move forward.
        Properties located in distressed low-income communities and high-
    rent markets are at the greatest risk. These developments qualify for
    more Housing Credits than other properties because Congress recognized
    they are especially difficult and costly to develop, but meet an
    essential need. These properties typically rely on Housing Credit
    equity to fund a larger share of their development costs. A
    proportional cut in equity investments would hurt these properties the
    most.
                               What's the Answer

        Solutions to the threat the dividend proposal poses the Housing
    Credit are at hand. One remedy is to treat Housing Credits as taxes
    paid, much like the proposal treats the foreign credit. Other
    approaches may work as long as they do not negatively affect the value
    of the Housing Credit. We stand ready to assist the Committee in
    evaluating alternative approaches.
        We implore the Committee to act quickly, however. Some corporate
    investors are already deferring Housing Credit investments pending
    congressional action. According to E&Y, this has destabilized the
    Housing Credit equity market and is likely to reduce affordable housing
    production in the short-term.
                                What's at Stake

        America cannot afford the loss of a single affordable apartment,
    let alone 40,000 Housing Credit apartments annually. As of 2001, over
    seven million American renter families--one in five--suffer severe
    housing affordability problems. They spend more than half of their
    income on rent or live in substandard housing. Meanwhile, more than
    150,000 affordable apartments are lost each year due to rent increases,
    abandonment, and deterioration.
        In the face of this staggering need, the Housing Credit is the only
    significant producer of affordable rental housing. Since 1986, it has
    financed 1.5 million apartments for low-income Americans--working
    families, seniors, the homeless, and people with special needs all
    across the country. Each year, the Housing Credit finances 115,000 more
    affordable apartments.
        Virtually all Housing Credit apartments are dedicated for 30 years
    or more at restricted rents to families with incomes of 60 percent of
    area median income (AMI) or less. Often, Housing Credit residents earn
    far less than federal income limits permit. In 1997, the GAO found the
    average Housing Credit resident earned 38 percent of AMI. A majority of
    Housing Credit properties are committed to low-income use for periods
    longer than 30 years, many for 50 years or more.
        In my home state of Rhode Island, the Housing Credit has produced
    over 5,600 affordable apartments and accounts for an additional 325
    apartments each year. With rents of about $500 a month, these
    apartments are homes to our store clerks, nurses' aides, and truck
    drivers.
        Rhode Island's working families need the affordable apartments the
    Housing Credit provides now more than ever. Between 1998 and 2002, the
    average rent for a two-bedroom apartment in Rhode Island increased 40
    percent. Income growth has not begun to keep pace.
        The Housing Credit in Rhode Island, however, does so much more than
    provide affordable rental housing. From the renovation of former mill
    housing in Westerly, bordering Representative Nancy Johnson's (R-CT)
    home state of Connecticut, to the conversion of a former factory in
    Cumberland, bordering Representative Neal's home state of
    Massachusetts, the Housing Credit revitalizes neighborhoods. I know
    from my HFA colleagues that the Housing Credit is helping to rebuild
    communities like these all across the country.
                          Congress Had the Right Idea

        Congress understood when it created the Housing Credit that
    affordable apartments would not be produced without it or some form of
    tax incentive or subsidy. Apartments simply cost too much to build to
    rent at rates affordable to low-income households.
        At the time, Congress took a remarkable, bold new approach to
    dealing with the low-income housing shortages that afflict almost all
    parts of our country. Rather than create another Washington-knows-best,
    one-size-fits-all program, you empowered the states to determine how to
    respond best to their housing needs. Rather than build another top-
    heavy Washington program bureaucracy, you entrusted the states to
    administer it, with rational IRS regulation and oversight. Rather than
    rely on the uncertainty of federal appropriations, you harnessed the
    resources of the private sector to capitalize it.
        Today, the Housing Credit produces high quality, privately owned
    affordable rental housing in the parts of the country where it is most
    needed. This housing is built with $6 billion in private sector capital
    annually through highly effective public-private partnerships.
        The Housing Credit has become more and more efficient over time,
    due in large part to both Congress's 1993 decision to make the Housing
    Credit permanent and increased corporate investment. Prices investors
    pay for Housing Credits have risen approximately 50 percent since the
    program's creation in 1986, increasing the amount of private sector
    equity capital that goes directly into affordable housing production.
        The Housing Credit is not just good for housing; it is good for the
    economy. Housing Credit apartments account for up to 40 percent of all
    apartment production annually. Each year, the construction and
    operation of Housing Credit properties generates approximately $8.8
    billion of income for the economy, creates 167,000 jobs, and produces
    $1.35 billion in revenue for cash-strapped local governments. In just
    my small state of Rhode Island, 100 jobs would disappear, $3.4 million
    in wages would be lost, and $1.8 million in federal, state, and local
    taxes would go uncollected, if 35 percent of our annual Housing Credit
    production were lost.
        Mr. Chairman, Congress had the right idea when it created the
    Housing Credit. It is the most successful federal affordable housing
    program ever. Protect it now from the unintended negative consequences
    of the dividend exclusion proposal.
        Thank you for your attention. NCSHA is available to assist you in
    any way.
                                     ______

                                     [GRAPHIC] [TIFF OMITTED] T1630G.001

                                     [GRAPHIC] [TIFF OMITTED] T1630H.001

                                     [GRAPHIC] [TIFF OMITTED] T1630I.001

        Chairman THOMAS. Thank you, Mr. Godfrey. That was not a
    tape you brought with the sounds of construction in the
    background. That is the sound of safety, because they are
    remodeling some offices for the homeland security office; and
    it was just a very appropriate backdrop while you were talking
    about housing construction.
        Mr. Salisbury, thank you for your testimony. Obviously,
    when you change the relationship between stocks or preferred
    stocks with dividends and annuities, people who thought
    tomorrow was going to look like today are trying to reassess
    it.
        In the testimony from the Secretary of the Treasury, there
    was indication that talks were being carried out, and there was
    a possibility for a technical amendment that might adjust the
    concern that I think all of us share, that what is now a
    working, viable employee-employer relationship in being able to
    think about annuities and pensions in one particular way that
    benefits employees more so than in the past.
        Can you give me a flavor of the kind of discussion you
    would hope would be carried out in terms of the, quote,
    unquote, technicalities? Do you see an ability to narrowly and
    specifically resolve this differences between the two, short of
    some of the more fundamental approaches that Mr. Shackelford
    outlined?
        Mr. SALISBURY. It would essentially, Mr. Chairman, be the
    same type of adjustment that the Secretary mentioned vis-a-vis
    annuities, that essentially within any defined contribution
    account, whether it be an IRA or a 401(k), a money purchase
    plan, you name it, that essentially you would keep track of the
    amount of money that was attributable to dividend and these
    other features and that would not be treated as taxable income
    at the time that the money comes out.
        I will then quickly add, and I think this is true for
    annuities as well as qualified plans, keeping track of that
    would add a level of complexity to plan Administration that--
    well, I wouldn't want to have to deal with personally.
        Chairman THOMAS. Well, my question was going to be, that is
    easy to say, how easy is it to do, and you answered it, and
    then obviously complications related with that. Thank you.
        Mr. Shackelford, I think you outlined some alternatives,
    obviously, put them both on or take them both off; and I think
    you also correctly focused on I believe one of the reasons
    people perhaps don't look at the corporate side solution. One,
    it deals with the assumption that you are reducing tax on
    corporations, which is kind of a symbol. The other one, of
    course, is the revenue estimate is considerably higher. Either
    one would be I think appropriate alternatives to produce
    results similar to the way they want.
        Then you said there were other tweaks, and you didn't go
    into the specifics of the tweaking. What did you mean by that?
        Mr. SHACKELFORD. I was really referring that if you do
    anything and change the status of dividends, the ripple effect
    goes throughout the Code. I would have given an example----
        Chairman THOMAS. I assume that is good or bad?
        Mr. SHACKELFORD. Good or bad, that is exactly right.
        I will give you an example. Currently, we--if a company has
    excess compensation for, say, its chief executive officer,
    there are rules that would reclassify that excess compensation
    as a dividend. So, in some sense, that is a safeguard against
    maybe a closely-held company paying out an excessive amount of
    wages to its owner, the backstop being the dividend.
        If you alter the dividend taxation, you alter backstops
    such as that. Now, those backstops, if you will, have come
    about because we have had a classical system with the dividend
    tax penalty for decades. You alter any part of that dividend
    tax penalty--and I would argue that there are some very
    positive efficiencies to doing that, but it will ripple
    throughout the Code. That was what I meant by tweaking.
        Chairman THOMAS. Well, the discussion has been among some
    panelists and among Members that some of the positive aspects
    of the reduction of dividend is obviously a drive toward single
    tax structure, which would move the United States immediately
    from one of the most taxed in the area to no other country
    status as a single or integrated tax structure, but that the
    positives of corporate behavior and other changes, some have
    argued that if you stop anywhere between today and completely
    eliminating the double taxation, you wouldn't get any of the
    benefits.
        It sounds to me like when you say even if you tweak there
    are ripple effects, are you saying that if you found some
    position between today's current double taxation and the
    removal of a complete side of that double taxation, that some
    halfway house would also produce more or less halfway benefits
    of some sort?
        Mr. SHACKELFORD. Yeah, I think that is entirely possible. I
    would caution against complexity provisions such as the
    President's bill has. I believe that, in an attempt to do good,
    you can cause a great deal of problems by adding the complexity
    that we see in the current proposal.
        Chairman THOMAS. So perhaps in looking at if someone was
    interested in alternatives in terms of bang for the buck, the
    degree of taxation is equal to, less than, greater than the
    added complexity. Or is the usual tradeoff in terms of you
    would like to get the tax down, but if you add complexity it
    may not be worth it; if you can simplify, you don't have to go
    so far down on the tax; the usual kinds of tradeoffs?
        Mr. SHACKELFORD. The usual types of tradeoffs, yes.
        Chairman THOMAS. Mr. Godfrey, I understand your concern
    about the President's proposal; and, obviously, Mr. Shackelford
    has looked at some alternatives. Have your folks looked at
    alternatives, short of simply saying, don't do what the
    President has asked for, so that you could get some of the
    positive aspects of removing the double taxation but not the
    downsides that you are concerned about?
        Mr. GODFREY. Yes, sir. We have looked at several
    alternatives. We believe the most straightforward one is to
    treat Housing Credits in the same manner as taxes paid, so that
    the same benefits would be passed through to the shareholders.
    This is how the foreign tax credit is treated, and we believe
    that treating the Housing Credit in the same way is the best
    way to alleviate the effect.
        Chairman THOMAS. My only reaction is the reasoned articles
    about an old tree growing near the road and they need to expand
    the road, and one of the suggestions is why don't you just pave
    both sides of the tree. You have still got the tree, but you
    can get around it.
        From your perspective, I think that does solve the problem,
    but I think the complexity and the difficulties and the others
    associated with the people who are going to form outside
    Charlie Rangel's door to have another lane added to the highway
    going around the tree, because all they need to do is to be
    treated in an equal manner.
        Perhaps a more fundamental examination of the proposal
    could address your problem as well, rather than the straight
    suggestion that you offered.
        I want to thank all of you for your testimony. All of us
    are concerned in simplifying the Code. Most of us I think--
    well, I would say all of us are concerned in reasonable and
    appropriate reduction of taxes, but, given the President's
    proposal, which I think is bold and innovative, the reason for
    the extraordinary number of hearings is to make sure that as we
    move forward, we have as great an understanding of what happens
    behind the various tax provisions as the tax provisions
    themselves, and I want to thank you for your testimony.
        Does the gentleman from New York wish to inquire?
        Mr. RANGEL. Thank you, Mr. Chairman; and let me thank the
    panelists.
        Mr. Godfrey, I personally believe that the solution to this
    problem would be a commitment by the Federal Government to
    provide affordable housing as well as health care to all of its
    citizens. Clearly, when we have to go to the Tax Code to
    provide incentives, it means that the government has failed to
    see it as their responsibility.
        Having said that, since it is the only thing we have had to
    provide affordable housing, it would seem to me that the
    government has an obligation to show what they would do to at
    least allow people to make investments that would help us to
    provide the housing that is necessary for our Nation.
        When we find this Earth-shaking proposal by the President,
    it would seem to me that this could put a chill in operations,
    not knowing what the future would hold in terms of tax benefits
    if this becomes law. We don't know where this proposal is going
    to go, but do you have any recommendations as to what the
    Congress can do to give some assurances that, if indeed this
    becomes law, that we are aware of the problem and that we will
    be searching for some type of solution to this problem so that
    we can remove the damper on investments into low-income
    housing?
        Mr. GODFREY. I agree with you a hundred percent. It would
    be more straightforward to solve the housing issue, you know,
    in a more straightforward way than through the Tax Code, but
    that is the chosen vehicle, and it is a way in which the
    private sector is engaged, and it really is the only way.
        Affordable housing is a noneconomic activity. If we are
    going to bring the private sector in, then the Tax Code is the
    way to do it. It has been done that way--well, I have been
    working this for 3 decades, and it has been done that way.
        We also know that uncertainty is the enemy of these kinds
    of investments. When year after year we had to come back for
    extensions of the Housing Credit program before it was made
    permanent, the price that was received was much less because
    corporations faced that uncertainty. Once it was made
    permanent, the efficiency of the program soared upward.
    Unfortunately, we are seeing right now, because of the
    introduction of this proposal, that uncertainty has returned.
    Prices are already softening and, unfortunately----
        Mr. RANGEL. If the gentleman would yield, I would notice
    that we have changed physically the Chair of the Committee,
    which gives me the opportunity--you think it would help if the
    Ranking Member and the Chairman of this Committee agree that we
    are going to resolve this problem some kind of way, that might
    give some assurances to investors in the low-income housing
    area?
        Mr. GODFREY. Absolutely, sir.
        Mr. RANGEL. Well, I think we can get assurances from the
    Chair that we intend to rectify that. This was an unintended
    thing that we have in the President's proposal, but we as the
    taxwriting Committee would make certain that we hold investors
    harmless in this area. What do you say, Mr. Chairman?
        Mr. SHAW [Presiding.] I say, don't go there.
        Mr. RANGEL. Well, I do hope that Mrs. Johnson will be able
    to persuade you that is the right thing to do.
        We do recognize the serious nature of the problem. As you
    pointed out, we have handled this in a bipartisan way over the
    years with the overwhelming majority of the Members, and I
    cannot see where stubbornness is going to prevail over common
    sense and reason.
        I want to thank you for bringing this eloquently to the
    attention of this Committee.
        Mr. GODFREY. Thank you, Mr. Rangel.
        Mr. SHAW. Mr. McCrery.
        Mr. MCCRERY. Thank you, Mr. Chairman.
        First of all, I would like to address the comparison to the
    foreign tax credit. That is really not a good analogy. The
    foreign tax credit, as you may know, is designed to prevent a
    corporation from paying taxes in two different countries on the
    same income, whereas the low-income Housing Credit is a true
    tax credit. It gives you a credit for some worthwhile
    expenditure or investment that we deem through the Tax Code. So
    it is not really a good comparison, and I don't think you
    should use that.
        Many of us on this Committee have been supporters of a low-
    income Housing Credit. As you pointed out, it has become a
    permanent fixture in the Tax Code. It has given some security
    to those corporations who want to make that decision to get
    that benefit. They know it is going to be there, and that has
    helped increase the low-income housing--the use of the low-
    income Housing Credit, and I support that.
        However, we also do a lot of other things through the Tax
    Code and through appropriations to encourage people to provide
    low-income housing, whether it is the HOPE program, the HOME
    program, programs to encourage home ownership for low-income
    people. We do a lot to try to help folks get homes, either
    through renting or purchasing; and I would hope that this
    Committee would look at the benefit--the overall benefits of
    the President's proposal, whether we do it exactly as he has
    suggested or as Mr. Shackelford has suggested or others for
    alternatives and look at the benefits to the entire country,
    even to the low-income housing opportunities in this country,
    rather than focusing on one tax credit that may or may not be
    substantially harmed.
        Mr. Godfrey, I am told that there are elements of the low-
    income housing industry that disagree with the study that your
    association commissioned. For example, the National Association
    of Home Builders does not agree with the estimates provided by
    Ernst & Young. Are you aware of that disagreement within the
    industry; and, if so, do you have any explanation for those
    disagreements?
        Mr. GODFREY. Yes. First of all, I apologize if you thought
    I was comparing the Housing Credit to the foreign credit--I
    wasn't. I am just saying you could treat the Housing Credit as
    you have treated the foreign credit. They obviously are very
    different, so I am sorry.
        Yes, and certainly we understand--we have heard--we have
    not seen any reports at this point in time, but certainly the
    Home Builders and some of the other industry associations
    disagree with Ernest & Young, but their primary business is not
    affordable housing. They have many other interests which they
    push, and the affordable housing issue is just a very small
    part of their business. This is our only business, and it is a
    business--this doesn't serve the Housing Credit. It serves low-
    income people. In fact, we put a lot of soft money into these
    programs, and that is the issue that Ernst & Young specifically
    addresses, the lower price that investors will pay for these
    credits will require an increase in soft money.
        We ran that test in Rhode Island and applied it to the
    developments which we did over the past 3 years. We found the
    impact would have been 32 percent fewer units, which is really
    very close and statistically identical to the Ernst & Young
    report.
        So we have studied that proposal very carefully. I know
    Ernst & Young went at it absolutely independently. Their tax
    partners vetted it thoroughly. I have Mr. Fred Copeman here,
    who is a tax partner at Ernst & Young, who participated in this
    report.
        Many of us in the housing field thought the impact would in
    fact be greater. We knew they excluded certain items that would
    make the scenarios much worse. So, having vetted it ourselves--
    I know it went through a number of vettings within Ernst &
    Young and testing it in Rhode Island. I feel the number is
    pretty good.
        Mr. MCCRERY. Thank you. Mr. Shackelford--well, my time is
    up.
        Mr. SHAW. We have now been joined with Mr. John Makin, who
    is Resident Scholar, Fiscal Policy Studies, American Enterprise
    Institute. I understand your plane was late, so we appreciate
    the extra effort to get here.
        If you would like, just for a couple moments, to summarize
    your statement into the record, then we will continue the
    questioning.
        Mr. MAKIN. Thank you.
        Mr. SHAW. Turn your microphone on, please, sir.

      STATEMENT OF JOHN H. MAKIN, RESIDENT SCHOLAR AND DIRECTOR,
          FISCAL POLICY STUDIES, AMERICAN ENTERPRISE INSTITUTE

        Mr. MAKIN. Thank you very much Mr Chairman and Members of
    the Committee. My apologies to the Committee and the other
    witnesses for being late. I left on the 7:30 shuttle, but Delta
    had other plans.
        I would like to offer a few comments in support of the
    President's proposal to eliminate the double taxation of
    dividends.
        I do think it is sound policy; and I recognize that, like
    all steps toward a better balanced tax system, it will be
    resisted by those who have adapted to the distortions in the
    current Tax Code. Some will claim it is not stimulative, an
    incorrect assertion; while others will claim that fewer are
    affected by tax provisions on dividends. Still others will
    claim that it will raise the deficit and raise interest rates
    and thereby be counterproductive. I would like to address these
    issues.
        First, what about problems with current policy? The current
    double taxation of dividends has produced three types of
    behavior that penalize growth. It encourages over-reliance on
    debt finance. That requires firms to meet rigid debt service
    payments, whereas equity finance enables firms to pay a
    flexible stream of dividends and makes it easier to deal with
    the business cycle.
        Second, double taxation of dividends encourages management
    to retain cash inside the corporation rather than pay it out.
    We have seen that companies have a tendency to over-retain
    cash. I am surprised that so few commentators on the dividend
    taxation proposal have noted the connection between corporate
    scandals and the high level of cash retention in what were the
    fastest-growing companies during the stock market boom. High
    levels of cash retention inside the company led to a temptation
    not only to invest too much in a given area but to make loans
    to corporate insiders on overly generous terms. The rationale
    for such insider largesse is usually the idea that if the head
    of the corporation were forced to sell stocks, it would depress
    stock prices.
        Some in Congress have criticized the President's proposal
    to end the double taxation of dividends because they say that
    few of their constituents receive dividends. Here, again, the
    adaptation to current distortions in the Tax Code are
    important. Double taxation has indeed reduced dividend payouts,
    and fewer people are receiving dividends. The ratio of
    dividends as a percentage of earnings has fallen from about 60
    percent in 1995 to about 40 percent in 2001. An end to the
    double taxation of dividends would mean more dividend payouts,
    thereby increasing the constituency for the better tax
    treatment of corporations.
        Higher after-tax returns for investors receiving dividends
    would increase the price they would pay for stocks of companies
    paying dividends. In those companies, the cost of capital would
    fall, they would invest more, add to the capital of stock,
    increase the productivity of workers and pay higher wages to
    the workers. The overall stock of capital would increase, while
    the composition of the capital stock would be improved by
    virtue of the removal of the distortion that creates too much
    capital of companies that rely heavily on debt.
        Any measure that reduces taxation results in the short run,
    at least, in a lower level of government revenue. By
    undertaking tax reform measures such as the elimination of the
    double taxation of dividends, the Federal Government is, in
    effect, utilizing its borrowing power to invest in a better
    functioning economy by reducing distortions and burdens created
    by the tax system. Based on static revenue measures,
    elimination of the double taxation of dividends calls for the
    Federal Government to borrow about $300 billion over 10 years
    in order to finance a measure that reduces distortions,
    increases stock prices and results in a higher capital stock
    and higher real wages.
        As such, the net cost of the measure will be considerably
    less than the initial estimate of revenue lost. Indeed, over a
    long-time horizon, investment in measures to reduce distortions
    in the tax system ought to be self-financing.
        In conclusion, elimination of the double taxation of
    dividends constitutes low-hanging fruit in the tax reform area.
    It would be an excellent start down the road to full
    elimination of the tax on corporate income and a movement
    toward an integrated tax system where corporate income is
    imputed to owners--households--and taxed once at that level at
    the same rate that all income is taxed. That would be real tax
    reform. It is time to return to this important agenda begun in
    1986 with the support of many Members--in both parties--of this
    distinguished Committee. Thank you.
        [The prepared statement of Mr. Makin follows:]
       Statement of John H. Makin, Resident Scholar and Director, Fiscal
                 Policy Studies, American Enterprise Institute
        Mr. Chairman and Members of the Ways and Means Committee, Thank you
    for the opportunity to testify on the President's proposal to eliminate
    the double taxation of corporate dividends.
        The proposal is sound tax policy. Let me say what the proposal will
    and will not do. Like all steps toward a better-balanced tax system, it
    will be resisted by those who have adapted to the distortions in the
    current tax code. Some will claim that it is not stimulative (an
    incorrect assertion) while others will claim that few are affected by
    tax provisions on dividends. Still others will claim that it will raise
    the deficit and raise interest rates and thereby be counterproductive.
    I would like to address all of these issues and suggest the positive
    reasons why eliminating the double taxation of dividends is an
    excellent investment for the Federal Government to undertake.
    Problems with Current Policy
        The current double taxation of dividends has produced three types
    of behavior that penalize growth. First, double taxation encourages
    overreliance on debt finance by corporations. Debt finance requires
    firms to meet rigid debt service payments, whereas equity finance
    enables firms to pay a flexible stream of dividends, thereby making it
    easier to deal with unstable cash flows during business cycles.
        Second, the double taxation of dividends encourages management to
    retain cash inside the corporation rather than pay it out. New
    technology companies that experience a surge in cash flow may not be,
    as we have seen, the best judges of the need to further expand
    capacity. Elimination of the double taxation of dividends puts pressure
    on management to pay out cash to investors and allows those investors
    to decide if they want to reinvest in that firm or invest elsewhere
    where prospective growth may be more promising.
        On this second point I am surprised that so few commentators on the
    dividend taxation proposal have noted the connection between corporate
    scandals and the high level of cash retention in what were the fastest
    growing companies during the stock market boom. High levels of cash
    retained inside the company lead to the temptation not only to invest
    too much in a given area, but to make loans to corporate insiders on
    overly generous terms. The rationale for such insider largesse is
    usually the idea that if the head of the corporation were forced to
    sell stock, it would depress the stock price and thereby impede the
    growth of the company. That line of thinking has led to disastrous
    consequences for some of the fastest growing companies of the late
    1990s.
        Some in Congress have criticized the President's proposal to end
    the double taxation of dividends because they say that few of their
    constituents receive dividends. This is like observing on a sunny day
    that few people are using umbrellas. Double taxation has indeed reduced
    dividend payouts and so fewer people are receiving dividends. The ratio
    of dividends as a percentage of earnings has fallen from about 60
    percent in 1995 to about 40 percent in 2001. An end to the double
    taxation of dividends would mean more dividend payouts, thereby
    increasing the constituency for better tax treatment of corporations.
    How Would Eliminating the Double Taxation of Dividends Increase Growth?
        Higher after-tax returns for investors receiving dividends would
    increase the price they would pay for stocks of companies paying
    dividends. For those companies, the cost of capital would fall, they
    would invest more, add to the capital of stock, increase the
    productivity of their workers, and pay their workers higher wages. The
    overall stock of capital would increase while the composition of the
    capital stock would be improved by virtue of the removal of the
    distortion that generates too much capital of companies that rely
    heavily on debt.
        Once again, the experience of the last several years is testimony
    to the advisability of reducing overreliance on debt while
    simultaneously encouraging companies to pay out earnings to investors.
    The increased pressure to pay out earnings results in a higher hurdle
    rate for investment with retained cash and thereby helps to avoid the
    excessive buildup of capacity in industries that may be experiencing a
    period of rapid growth the benefits of which ought promptly to be
    shared with owners of the companies' stock rather than husbanded inside
    the company.
        The desirability of eliminating the double taxation of dividends is
    hardly a novel concept. It is advocated in nearly every textbook on
    public finance and practiced, at least partially, in most major
    industrial countries. Indeed, the maximum effective tax rates on
    dividends are higher in the United States than in any of the G7
    countries.
    Larger Budget Deficits?
        Any measure that reduces taxation results in the short run, at
    least, in a lower level of government revenue. By undertaking tax
    reform measures such as the elimination of the double taxation of
    dividends, the Federal Government is, in effect, utilizing its
    borrowing power to invest in a better functioning economy by reducing
    distortions and burdens created by the tax system. Based on static
    revenue measures, elimination of the double taxation on dividends calls
    for the Federal Government to borrow about $300 billion over ten years
    in order to finance a measure that reduces distortions, increases stock
    prices, and results in a higher capital stock and higher real wages. As
    such, the net cost of the measure will be considerably less than the
    initial estimate of revenue lost. Indeed, over a long time horizon,
    investment in measures to reduce distortions in the tax system ought to
    be self-financing.
        That said, there is no denying an additional supply of government
    securities, say over the first five years of the program, which are
    estimated to be $132 billion. The addition of $132 billion over five
    years to a pool of debt including government, corporate, municipal, and
    mortgage debt in the United States totaling about $18 trillion
    currently is hardly likely to produce an impact on interest rates.
    Indeed, in the current environment of excess capacity in some
    industries, one might hope that tax measures could be found that would
    result in higher interest rates, not through crowding out but, rather,
    by generating higher real returns on capital. Such higher real returns
    would require higher real interest rates on other investments such as
    U.S. government bonds to compete with the enhanced attractiveness of
    investments in new industries.
    Conclusion
        Elimination of the double taxation of dividends constitutes low-
    hanging fruit in the tax reform area. It would be an excellent start
    down the road to full elimination of the tax on corporate income and a
    movement toward an integrated tax system where corporate income is
    imputed to its ultimate owners--households--and taxed once at that
    level at the same rate that all income is taxed. That would be real tax
    reform. It is time we return to that important agenda, begun in 1986
    with the support of many members--in both parties--of this
    distinguished committee.

        Mr. SHAW. Thank you, Mr. Makin. Mr. English.
        Mr. ENGLISH. Thank you, Mr. Chairman. I would like to pose
    to all of the panelists the following question: The dividend
    component of this package is the key driver of long-term
    economic growth; and, as it has been mentioned, it levels the
    playing field in the Tax Code so as to lessen the bias against
    savings, reduce incentives to take on more debt and excessively
    retain earnings. Due to the current bias in the Tax Code,
    companies in some cases mass much larger piles of money than
    they need to. For any or all of you, can you explain the
    economic impact of this problem and can you elaborate on how
    the growth plan before us encourages savings, therefore
    increases the wealth of all Americans?
        Mr. MAKIN. I could take a shot at that. I think that is an
    important issue.
        You know, corporate managements have not been, I would say,
    overly supportive of this proposal in some cases, and I think
    one of the reasons is that they are tempted to retain too much
    cash inside the corporation. I will give you an example.
        Porsche makes wonderful sports cars. It is a closely
    managed company that has a tremendous amount of cash on hand.
    Now what they decided to do with the cash was build a sport
    utility vehicle (SUV), at a time when SUVs are probably not
    going to be in great demand. Maybe this will turn out. Maybe it
    won't. My point is that if you force corporations to pay out
    cash, then they have to confront the choice that investors
    might make for use of the cash. An investor might want to
    decide whether to expand capacity of a given company or invest
    the money elsewhere. That is how you improve resource
    allocation, by giving companies an incentive to pay out
    dividends, instead of saying, oh, we don't want to pay out the
    dividend; it would be bad for the stock price. We will retain
    it, and you will get it back in capital gains. That story came
    to a very sad end in March of 2000 when the stock market
    started to drop.
        Mr. ENGLISH. Any other comments? Mr. Shackelford?
        Mr. SHACKELFORD. I concur with much of what you were
    saying.
        I would say that, because companies will have the option to
    adjust the tax bases in shareholders' stock, it is not
    necessarily clear to me that there will be a surge in
    dividends. In other words, companies can retain the money, and
    they can say to their shareholders, your capital gains tax bill
    will be less. So I am not sure that we would see that many more
    companies paying that much more in taxes, and that is--I mean,
    I am sorry, that much more in dividends, and that is the
    trigger device that needs to be done here.
        Furthermore, because the dividends are only tax exempt if
    the companies--you know, it goes through this complex
    calculation, but the company is paying taxes itself. Many
    companies, because of the recession and also companies because
    of large stock option deductions, aren't paying that much taxes
    themselves. So I am not sure if the jump-start is in the
    proposal the President has.
        Mr. ENGLISH. Let me tackle a different question, one that I
    posed to the Treasury Secretary the other day.
        By stepping up the basis when a corporation does retain its
    earnings, the proposal effectively cuts the capital gains tax
    rate. The result is an equalization in the treatments of the
    two ways corporations return their investment to shareholders,
    and from the Treasury Secretary's response this is obviously
    something that was in the front of their mind in designing this
    provision. My question is, how significantly does this impact
    the cost of capital in the short and the long term? Mr. Makin.
        Mr. MAKIN. Well, I think it is important to distinguish
    between the ultimate position once you change the law governing
    dividend distributions and the initial position. Clearly, the
    impact on capital gains is important, but as time goes by and
    more companies elect to pay dividends, as I think they will
    given that--the attractiveness and the possibility of reducing
    the cost of capital. The issue on capital gains that the
    Treasury is concerned about will become less pronounced.
    Ultimately, it won't be as important, because capital gains
    won't be as important a part of the picture affecting the tax
    burden on companies. We will get a lower cost of capital
    without double taxation of dividends. The problems associated
    with the treatment of capital gains that will be complicated in
    the transition will gradually atrophy.
        Mr. ENGLISH. Thank you very much for your testimony.
        Mr. SHAW. Mr. Levin.
        Mr. LEVIN. Thank you very much, and a hearty welcome.
        This panel has been I think, perhaps more than the previous
    ones, marked by shades of gray instead of making these issues
    black and white, and I think it is helpful to understand the
    problems as well as the--whatever are the alleged
    potentialities. I think, Mr. Salisbury, your testimony should
    be read by everybody and the issues raised I think understood
    by everybody.
        Let me just ask Professor Shackelford, you come up with an
    equal treatment provision or proposal. There is opposition to
    it because of its cost. Mr. Thomas, the Chairman, spelled out a
    couple of the problems. I think there is also opposition beyond
    that, isn't there? This idea has been floated for some time,
    your idea in terms of allowing a deduction within the
    corporation, right? There has been resistance from good parts
    of the corporate community, I think. So talk about that, if you
    would.
        Mr. SHACKELFORD. I hesitate to speak for the entire
    business community, but let me say that I think that one of the
    problems which I think has been alluded to here before is that
    corporate management does not want to have pressure put upon
    them to distribute out their cash reserves. So if there was the
    full deductibility of dividends, shareholders would be in a
    very strong position to say to management, you have extra cash;
    give us that money. If we think your future investments are
    good, we will be glad to give you the money back. You could
    have a dividend reinvestment type policy.
        I could certainly understand if you were to see a company--
    particularly if you have some goals you would like to achieve
    over some long period of time, you would like to keep a cushion
    of cash with you.
        So, as the other witness mentioned, I don't think the
    business community would be--large corporations, I don't think
    many of those companies would be strongly behind having
    dividend deductibility, simply because it would take away the
    shield that they currently have with double taxation.
        Mr. LEVIN. From a sound economic point of view, though, how
    sound is that objection? I mean, I understand whatever you want
    to call it, the self-interest--maybe that is too strong a
    term--but in terms of sound economic policy, since your
    approach, whatever the cost in a sense is simpler, how
    legitimate from an economics point of view is that complaint?
    It doesn't force the granting of dividends, right?
        Mr. SHACKELFORD. That is exactly right.
        Mr. LEVIN. So tell me--forget for a moment the interplay
    and all that. From an economics point of view--you are a
    professor of economics.
        Mr. SHACKELFORD. Well, I am actually professor of
    accounting.
        Mr. LEVIN. Accounting. That is part of economics.
        Mr. SHACKELFORD. I do know economists.
        Mr. LEVIN. I had as much trouble with accounting as I did
    with economics.
        Mr. SHACKELFORD. I believe we would be best off if money is
    in its best and highest use. So if we have two companies that
    are identical, one has very bright prospects, they have
    excellent plans, people want to be involved with that company,
    I don't think they are going to drain the cash out of that
    company. They will say, my money is better with that company
    than in my pocket. However, if we have another company that has
    cash but they don't have a tremendous amount of prospects, we
    are better off to take the cash out of that company, give it to
    the shareholders, let the shareholders redistribute that money
    to other places in the economy where it can be better used.
        So I would think that this provision would be of great
    interest to those who want to see capital flowing to start-ups,
    to entrepreneurs, to companies that have great prospects but
    right now have difficulties accessing the capital markets
    because some of the capital is tied up. The tax system is
    partly responsible for this. Capital is tied up in companies
    where there is a cost to getting the money out.
        Mr. LEVIN. Mr. Godfrey, that doesn't solve your problem,
    though, does it?
        Mr. GODFREY. No, it does not.
        Mr. LEVIN. So how do we solve, I think, the very legitimate
    issue you raised with this simpler idea? I am not saying bad or
    good, but it is simpler, I think.
        Mr. GODFREY. The goal--and I have heard this many times--is
    to change corporate behavior. To the extent you change
    corporate behavior with the Tax Code, it has a lot of ripple
    effects, and the Housing Credit is going to suffer. I know
    that--I have been talking to investors over the years, and
    their sole reason for investing in these is the tax benefits
    and the financial issues. So to the extent that you take those
    away, they are going to leave the market.
        Mr. LEVIN. Thank you.
        Mr. SHAW. The time of the gentleman is expired. I would
    point out to the gentleman, as a former certified public
    accountant myself, we deal with facts, not theory, as the
    economists do.
        Mr. LEVIN. Well, I think Professor Shackelford was saying
    what the facts are----
        Mr. SHAW. Mr. Weller.
        Mr. LEVIN. As an accounting expert.
        Mr. WELLER. Thank you, Mr. Chairman; and I also want to
    thank the gentlemen on the panel today for participating in
    today's hearing, obviously a very important issue for us.
        I think we all agree we need to get this economy moving
    again. The district that I represent in the south suburbs, we
    have employment as high as 9 percent in LaSalle County, so it
    is of great concern to the folks I represent.
        They appreciate the leadership the President is showing on
    his economic growth package. They like the fact that he is
    making the rate reductions effective immediately. They like the
    fact he is eliminating the marriage tax penalty immediately,
    rather than phasing it in. They like the fact that he is
    doubling the child tax credit immediately; the fact that they
    will see immediate relief and have extra spending money, in
    fact, higher tax-home pay as a result of the President's
    proposal, an extra $1,068 per Illinois taxpayer in higher take
    home pay. They like that, because they recognize when consumers
    will have extra spending money that money will be spent in the
    local economy. So there is broad support for that.
        The area that I represent of course has a large number of
    small manufacturers. Usually family-held businesses are the big
    employer in town. Usually, it is the side of town where they
    have maybe, you know, two, three hundred employees that have
    been there for several generations. They are competing with our
    foreign competitors today.
        I guess, you know, they look at the President's proposal,
    and obviously they see the benefit to their employees, the
    workers, but they are wondering about the impact of the
    dividend proposal as it will affect them directly. They are not
    publicly traded. They are family held. They are family
    businesses. I was wondering, Mr. Makin, could you comment on
    that? How would we explain how the President's dividend
    proposal would benefit those small manufacturers?
        Mr. MAKIN. I do think there is an important way, and other
    panelists have alluded to it. That is, if you encourage
    investors to ask themselves would I rather--allocate funds
    elsewhere even though a company has done very well, and the
    earnings have gone up.
        If the tax system makes it necessary or more necessary for
    companies to face a demand for higher dividend payments when
    their incomes rise, then investors are going to be more free to
    reallocate the returns from investing in a large company. So
    induce companies to pay out higher dividends by making those
    dividends tax free to investors.
        Mr. WELLER. How does that directly benefit?
        Mr. MAKIN. Investors then have more investable funds and
    they may wish to invest in smaller companies.
        Mr. WELLER. In case a company is going to sell out, is what
    you are saying, not the family-held business?
        Mr. MAKIN. If it is a family-owned business and it is not
    accessing capital markets to finance an expansion and its
    activity, then this isn't going to have a direct effect. If,
    however, it was looking for startup money, it would have an
    effect.
        Mr. WELLER. Thank you, Mr. Makin. When I talk and listen to
    the managers and those that operate the small manufacturers,
    which really are the backbone of the economy in the area that I
    represent, they suggest we need to do more in the area of
    accelerated depreciation. They like the idea of expensing
    because they feel it encourages great investment, new company
    cars and delivery vehicles, telecommunications equipment,
    replace the office computer. They see that as creating jobs and
    driving investment, particularly in smaller, lower companies.
        Mr. Shackelford, I see you are a tax expert at the
    university level and I am just wondering, you have looked at
    the President's proposal when it comes to the expensing
    provision, which is targeted to small businesses, the 179. Do
    you have any thoughts about that? Could you see changes we can
    make in that proposal to benefit more small manufacturers and
    support them as well?
        Mr. SHACKELFORD. I would expect they would like that. I
    mean that is a movement toward a consumption tax to have
    immediate expensing of capital equipment et cetera. I think
    that the dividend proposal probably won't have much effect on
    those companies because they are likely to be structured as an
    S corporation. So they are not in the double taxation C
    corporate world. I think you would be correct in assessing that
    something like additional expensing would be something they
    would be more interested in.
        Mr. WELLER. I realize my time is running out. Do you have
    some suggestions as to how we can expand the President's
    proposal on expensing to benefit the smaller manufacturers,
    particularly those family-held businesses?
        No? Okay. Mr. Makin, any thoughts?
        Mr. MAKIN. As I understand it, and I may be wrong that the
    President's proposal already does expand expensing provisions.
    I have seen him criticized for it. There is a front-page
    article in the USA Today that a business could buy a SUV and
    not pay tax on it.
        Mr. WELLER. It is targeted of course, those who qualify
    under the Tax Code, the definition of small business. Many of
    these small manufacturers do not qualify.
        Mr. SHAW. The time of the gentleman has expired. Mr. Ryan.
        Mr. RYAN. Thank you, Mr. Chairman. I want to ask you, Mr.
    Shackelford, a couple of questions about the complexity issue.
    You described the legislation that I introduced which was total
    deductibility at the corporate level, and in my bill I bring
    the dividends tax rate down to the capital gains tax rate, so
    there is no difference in the tax rates. There are two issues
    that seem to be at play here that I think we are all digging
    into. One is a competitiveness issue. If you take a look at the
    chart over here, it is tough to read. It is the dividends one.
    If you combine the dividends tax rate, the corporate and the
    personal tax rate, we tax dividends higher than any other
    industrialized Nation in the world save for Japan. So our
    competitiveness on a global basis is extremely important here,
    and we are very uncompetitive.
        The second point is, and I think a number of you mentioned
    and, Mr. Makin, you did as well, the ultimate goal in tax
    reform ought to be to tax income once at its source and never
    again, correct? Would most of you agree that is a good,
    achievable goal to get toward simplicity and toward economic
    efficiencies--the complexity? The bill that I introduced that
    you described is very simple, very easy, no calculations are
    really needed, no basis adjustment. Looking at the
    Administration's proposal, the cost from a revenue law
    standpoint on an aesthetic basis is about a third as much. So
    you mentioned that as well. One thing that the Administration
    proposal gets you is you don't double tax on capital gains as
    well because of the basis adjustment. So the approach that I
    have been taking does stop double taxation on dividends, but
    doesn't stop double taxation on capital gains. The
    Administration's proposal, which costs a third less than my
    bill, does effectively stop double taxation not only on
    dividends but on capital gains as well. So, you do get more
    bang for your buck.
        What I want to ask is how complex do you think it is to
    calculate the EDA, the excludable dividend amount? Do you
    believe that the Tax Code today does not have an accurate
    measuring stick to track a dollar as it moves through the
    economy through corporations to ensure that that dollar is
    never again taxed again? Is not the EDA necessary to put this
    new computation into the Code so we can track that dollar
    through the economy to assure that it is never taxed again?
        Mr. SHACKELFORD. Well, I think if you go to a plan like
    what the President has you have to have something like EDA, and
    certainly it is calculable. A company will issue a 1099. It
    will have on there total dividends paid, basis adjustment,
    total dividends, they are taxable, et cetera. I think that the
    more difficult issue is trying to tax plan in such a world.
    So--trying to tax plan in that world. I own a stock and I get a
    dividend in March, I won't know if that dividend is fully
    taxable or not or how it will play out. I sell my stock. It is
    very difficult to plan under that situation.
        Mr. RYAN. If you allow the firms to calculate when they pay
    out their dividends and how to structure their REBA, their
    retained earnings basis adjustment, then don't you get out of
    that problem because it goes into their cumulative retained
    earnings basis adjustment? So if the firm gets to elect when
    they distribute, when they notify, that problem is kind of
    solved, isn't it?
        Mr. SHACKELFORD. We adjust basis this year because we had
    more income than we had paid out taxes. A year from now we
    decided no, we will pay out dividends and adjust the basis back
    down.
        Mr. RYAN. That comes out of the cumulative, not the annual.
        Mr. SHACKELFORD. These are the kind of cross-year issues
    that gets things very, very complicated, and I think there is a
    real cost complication because I think the American people
    don't understand why things are complicated and begin to lose
    trust in the system.
        Mr. RYAN. You think this complication outweighs the
    economic benefits that are achieved by not taxing that income
    ever again.
        Mr. SHACKELFORD. I am afraid so.
        Mr. RYAN. Mr. Makin, what is your take on that? You are
    sort of singing off the same song sheet.
        Mr. MAKIN. I am an economist and not an accountant and I
    think I will defer to an accountant on this. I would say there
    is no provision in the Tax Code that the well paid industry
    that advises us to deal with it could not manage. So certainly
    they have plenty of challenges and I am sure they could rise to
    this one.
        Mr. RYAN. It seems to me the EDA is fairly easy to compute.
    It is on the Schedule J. Mr. Godfrey's points, which are well
    taken, aside, I think the calculation is fairly easy. Have you,
    Mr. Salisbury and Mr. Godfrey, looked at the complexity issues?
    I understand that you think, Mr. Godfrey, if you just add your
    low income housing tax credit back into the EDA, problem
    solved, correct?
        Mr. GODFREY. Some of it is, yes.
        Mr. RYAN. Mr. Salisbury, what is your opinion?
        Mr. SALISBURY. I think the problem, and to use the words
    you were using, of elimination of double taxation of dividends
    is that one of the problems related to close to 35 percent of
    all publicly traded equities is they are currently owned by
    pension plans, and all of those dividends will still be subject
    to double taxation. The bigger problem with that is that far
    more individuals own securities, if you will, through qualified
    plans at low and moderate income levels than through the
    general stock market. So essentially what we are doing through
    these proposals, without figuring out how to deal with
    qualified retirement plans, is we are basically saying for low
    and moderate income individuals they will still pay double
    taxes on dividends. In fact they will pay it at maximum
    marginal tax rates that they have and that they face, while
    those lucky enough to have real assets in the economy and are
    not dependent on qualified plans will not pay those taxes.
        Mr. RYAN. Notwithstanding the value in all equities that
    occur because of the proposal. I see my time has expired.
        Mr. SHAW. The time of the gentleman has expired. Mr.
    Cardin.
        Mr. CARDIN. Thank you, Mr. Chairman. Let me join with my
    colleagues to say how much I thought this panel was very
    helpful in our deliberations and has really raised some issues
    that we need to take up.
        Mr. Salisbury, I want to continue the discussion you had
    with Mr. Ryan. I would encourage my colleagues to read this
    testimony, because an interesting observation or interesting
    facts have taken place over the last 10 years, and as you point
    out there has been a significant increase in a number of
    retirement plans, qualified plans that are being offered by
    smaller companies. That is good news, and I think that this
    Committee should take some pride in the legislations that we
    have supported and enacted as having an impact in creating more
    opportunities for employees at small firms to participate in
    employer-sponsored pension plans.
        I am glad Mr. Portman is here because his leadership has
    been instrumental in that regard. Both of us believe and I
    think this Committee believes that it is important particularly
    for younger workers and lower wage workers to have some
    additional incentive other than just the Tax Code in order to
    participate in the pension plan, and that is why these
    employer-sponsored plans are so important and that is why small
    companies, particularly which haven't been major players in
    qualified plans, the increase here is very, very encouraging.
        Mr. Salisbury, you made another observation. You indicated
    that in a few years if the dividend exclusion were enacted, it
    is your observations that it would become more attractive to go
    to the Roth IRA rather than to an employer-sponsored plan. I
    have serious concerns, because if that happens, whether lower
    wage workers and younger workers will indeed participate in
    retirement savings if there isn't an incentive offered up under
    an employer-sponsored plan. I would appreciate your comments on
    that because we spend a lot of effort to try to reverse the
    trend of the eighties where we saw a reduction in the number of
    pension plans with small companies. Now that we have it on the
    rise I think it would be tragic if the unintended consequences
    of this dividend exclusion was to reduce the number of
    employer-sponsored plans by small companies.
        Mr. SALISBURY. I would add a statistic to go with what you
    are saying. In 2001, which is the most recent year for which
    IRS data is available, 2.7 percent of taxpayers made a
    contribution to an Individual Retirement Account. When an
    employer sponsors a program and encourages participation at the
    lowest income level, 75 percent of low income individuals and
    moderate income individuals take advantage of the payroll
    deduction opportunity most particularly and at higher rates if
    there is a matching contribution, which most of the existing
    plans will offer.
        I would add the additional note is there is a Roth 401(k)
    feature that is in the law, but it is not to be effective until
    2006. Were that accelerated, that would mitigate the need for
    the small employer to terminate the plan.
        Mr. CARDIN. I very much appreciate that and I think, Mr.
    Chairman, this is something this Committee really needs to take
    a look at as we try to encourage more participation in
    retirement accounts.
        Let me make one other observation with the panel on a
    different subject and that is, Mr. Makin, you mentioned there
    are distortions in the Tax Code. There are many distortions in
    the Tax Code. There are many inequities in the Tax Code. The
    double taxation of dividends is an inequity. We understand
    that. We have an AMT problem in the Tax Code that needs to be
    addressed. Many of us think that our Tax Code favors
    consumption over savings and that companies involved in exports
    are not treated fairly in our Tax Code. I guess my point is we
    are talking about a stimulus package here.
        We do have, I think, some economists that are on the panel,
    but I have been told that the primary test for stimulus is how
    much money gets into the hands of the taxpayers, the consumers
    in 2003 that they can spend. The problem I find with the
    President's proposal is very little gets into the hands of the
    consumers in 2003, yet the cost of the proposal is rather--it
    is ongoing and will add to deficits. I guess that is one of our
    concerns. As we are looking for inequities to correct, it would
    be better, it would seem to me, if there was more bang for the
    buck in 2003. Any comments?
        Mr. MAKIN. May I comment on that?
        Mr. CARDIN. Sure. I have 30 seconds left. Don't take all 30
    though.
        Mr. MAKIN. Many Members of this Committee realize that
    there are many distortions in the Tax Code and I remember in
    1985 and 1986 joining many of these Members of the Committee at
    study retreats to try to examine those distortions. Improving
    resource reallocation rises from changes in the Tax Code that
    remove distortions and improves the ability of the economy to
    grow. It is a supply side move. The quick stimulus you are
    calling for is demand side. I think you ought to do both.
        Mr. CARDIN. My time has expired, so let me just comment,
    that is fine if we are looking at changes in the Tax Code
    generally. This is supposed to be a stimulus. This hearing is
    based on the President's stimulus package. Maybe we should be
    talking about the inequities in the corporate tax world as an
    issue that this Committee should take up, but I would argue it
    should be done in context with the budget and in context to the
    dollars that are available for tax cuts.
        Mr. SHAW. The time of the gentleman has expired. I am going
    to allow one more Member to question the witnesses, and then we
    are going to have to recess for the vote that is on the floor.
    Mr. Houghton.
        Mr. SHAW. Ms. Tubbs Jones?
        Ms. TUBBS JONES. Thank you. We have been having this
    hearing for the past 3 or 4 days and I would like someone to
    talk to me about the dividend tax cuts. Let me start over. In
    the past 3 or 4 days we have been having these hearings on the
    dividend tax cut and the tax proposals, et cetera, and I have
    been anxiously awaiting someone who is going to talk to me
    about the impact it would have on low income housing credits.
        I come to this Committee from the Committee on Financial
    Services. I come from the Subcommittee on Housing. I come from
    the City of Cleveland, where low income housing tax credits
    have brought our city back from names like ``mistake on the
    lake'' to a great place where we have had more housing starts
    and more housing being built in the City of Cleveland in the
    last 10 years than since the Korean War. I speak specifically
    about one particular place called Arbor Village, where we have
    rental housing for low income families where they can have low
    income housing with up to four bedrooms, and it is unheard of
    previously to have this opportunity.
        So I am happy to have an opportunity to talk specifically
    about this issue, and let me say to Mr. Shackelford, Mr.
    Salisbury and Mr. Makin, I haven't heard you talk about housing
    credits. I am not going to ask you any questions. It is not
    that I don't like you or anything like that, but I want to give
    all of my time to Mr. Godfrey because I think the issue is so
    very, very important. It goes not only to what happens with
    regard to housing, but it goes to what happens to neighborhoods
    and building wealth in communities and building better
    communities and stronger families and having better schools.
    Mr. Godfrey, take up from there. It is your show.
        Mr. GODFREY. I think you heard me say exactly the same
    things, and certainly Cleveland is an excellent example of
    using the tool and using community development corporations and
    revitalizing and turning cities around. I have seen it in my
    neighborhoods, and not only direct developments that are
    impacted, but surrounding properties and communities--when you
    bring investment in, it encourages the other landlords and the
    other homeowners who have been there to bring investment in.
    All of the property values go up and it becomes a desirable
    place to live.
        Ms. TUBBS JONES. The other thing of interest to me is that
    I am a lawyer by training and been practicing law in a
    courtroom and I understand the importance of long-term tax
    policy. The other reality is that long-term tax policy often
    can have a short-term deterrent impact on the ability of
    communities and people to build lives, and also they are in a
    pattern of what they are used to, not into a pattern of what
    could be in the future. Specifically, if we look at this low
    income housing tax credit that was created back in 1986 and
    then became permanent in 1993, that is when everybody kind of
    jumped on the band wagon because they understood the permanency
    of the tax credit to allow them to have some benefit over time.
        Is that a fair statement, Mr. Godfrey?
        Mr. GODFREY. That is an excellent statement. We have seen
    the efficiency and the productivity of the Housing Credit grow.
    I would certainly think if Congress is making a tax credit
    available, it would want to make sure we are getting the best
    bang for the buck and the bang that is increased every year.
    Unfortunately, under this proposal Housing Credits would cost
    the same amount, but would produce 40,000 fewer units.
        Ms. TUBBS JONES. Mr. Chairman, I couldn't say it any better
    than that. I am yielding you back 2 minutes and leaving out of
    here. We got a new business Chairman. I yield back the balance
    of my time, Mrs. Johnson. Thank you very much. Mr. panelists,
    all of you, thank you so much for coming this morning.
        Mrs. JOHNSON OF CONNECTICUT [Presiding.] I recognize Mr.
    Tanner.
        Mr. TANNER. Thank you all for being here this morning.
    Should it be--I am going to try and change gears a little bit
    here and ask a macro question. Should it be a cause for concern
    in this country that 8 months ago we increased the national
    debt ceiling by $450 billion, which represented at that time
    about 8 percent of the debt of the country up to that time? We
    are going to breach that limit, according to the Secretary of
    the Treasury, sometime next month. Contrast that with the fact
    that we are now on a yearly basis on a $1.8 trillion revenue
    stream last year paying or accruing over $330 billion in
    interest, which translates to a 17 or 18 percent interest rate
    on our present income with regard to what has to be paid.
    Should that be a concern as we go forward talking about
    possible revenue loss as predicted by the Congressional Budget
    Office for the next foreseeable future, for the next 10 years?
    Should that be a concern we ought to address in this Committee?
        Mr. MAKIN. I am supposed to be a macro economist, so let me
    take a shot at it. I think it depends. If the rise in the
    deficit was due to a surge in spending, perhaps on wasteful
    projects as we saw in Japan over the past decade, it would be a
    concern. If it is due to slower economic growth and tax cuts
    that are designed to revive growth, I don't think it should be
    a concern.
        Many people suggest that the prospect of higher deficits
    would raise interest rates. This is what I often call the Rubin
    fallacy. I see absolutely no evidence that interest rates are
    rising and in fact as we talk about larger deficits interest
    rates are falling because the economy does need the stimulus
    that the tax cuts offer.
        Mr. TANNER. At what point, in your opinion, is there a
    point at which the carrying charges of the national debt,
    presently 17 or 18 percent, is there a point at which that will
    impede the ability of the government to make the necessary
    public infrastructure investments, whether it be in human
    capital in the form of education or in just bricks and mortar
    in terms of highways and airports and so on? Is there a point
    at which the public infrastructure investment ability is
    impeded because of interest payments being made on past debt
    that we aren't able to use that money for such things so that
    private enterprise can expand and grow?
        Mr. MAKIN. Of course there is a point, but I think we are a
    long way from it.
        Mr. TANNER. What would be your opinion?
        Mr. MAKIN. Well, in Wednesday's Wall Street Journal, Martin
    Feldstein, who is no stranger to these issues, has suggested
    that if we undertook the tax cuts proposed by the President and
    under some conservative assumptions, we might see the ratio of
    national debt to GDP reach 35 percent, which is well within the
    safety zone. In the 1980s, the debt to GDP ratio got over 50
    percent. In the 1980s we saw high growth. So we have been a
    long way away from a setting in which the Federal Government is
    borrowing at a level that would substantially crowd out private
    capital.
        Mr. TANNER. Do any of the gentlemen have a comment?
        Mr. SALISBURY. I would comment that the Committee should be
    very concerned about that issue, most particularly given the
    long-term liabilities related to Social Security, Medicare, the
    current funding problems on Medicaid, considering all of those
    factors.
        Mr. TANNER. I am just a country lawyer, but I know that we
    can't borrow ourselves rich without breaking our children. Then
    what I hear from some of these economists is let us just
    continue to borrow, it doesn't matter what deficits are. I have
    never known any country that was broke and unable to provide
    the infrastructure for private enterprise to expand and
    flourish. If you think you can, go somewhere where there is no
    government and see how many people are rich. Very few.
        I am sorry. Go ahead.
        Mrs. JOHNSON OF CONNECTICUT. We only have 5 minutes before
    the vote and they don't hold it open any more, so I am not
    going to be asking questions. I did want to ask one question
    because the low income housing tax credit, while my colleague
    from New York suggested that it was because we have failed to
    invest in the cities, it is more that direct investment by the
    government has failed to produce the desired outcome. With the
    low income housing tax credit, you have a partnership that
    encourages both better quality building and far better
    management, and that is why a lot of us are concerned about it.
    In my own district, almost all of the affordable units have
    been possible in recent years due to low income housing tax
    credits. I share Mr. Salisbury's concern about the impact on
    qualified plans, particularly if we fix annuities and don't fix
    qualified plans. In either case, both annuities and qualified
    plans are very important instruments of promoting retirement
    security, which is frankly a very important goal for me as a
    policy maker. So I just wonder--this was an excellent panel. I
    think we all learned a lot from it.
        Mr. Shackelford and Mr. Salisbury and Mr. Godfrey, who
    wants to comment? Very briefly, if we went to one of Mr.
    Shackelford's alternatives, how does that affect the low income
    housing tax credit? How would that affect the qualified plans?
    Would its effect be any different than the proposal before us?
        Mr. GODFREY. The effect would be the same.
        Mr. SALISBURY. For practical purposes, vis-a-vis retirement
    plans and annuities, the effect would be the same.
        Mrs. JOHNSON OF CONNECTICUT. Thank you very much. We
    appreciate you being here and appreciate the thoughtfulness of
    your testimony, and I think it is testimony that Members will
    think carefully about. The Committee stands in recess.
        [Whereupon, at 11:25 a.m., the Committee was recessed, to
    reconvene on Tuesday, March 11, at 2:00 p.m.]

                     PRESIDENT'S ECONOMIC GROWTH PROPOSALS

                                  ----------

                            TUESDAY, MARCH 11, 2003

                 U.S. House of Representatives,
                           Committee on Ways and Means,
                                                        Washington, DC.
        The Committee met, pursuant to notice, at 2:00 p.m., in
    room 1100 Longworth House Office Building, Hon. Bill Thomas
    (Chairman of the Committee) presiding.
                                    ------

        Chairman THOMAS. If our guests could find seats, please.
        Today we begin the final segment of our four-part hearing
    to examine President Bush's plan to create jobs for American
    workers while growing and stabilizing the economy. Today's
    format will be different than the previous three segments of
    the hearing. We will hear from our congressional colleagues,
    who will be providing reactions as well as outlining possible
    alternatives or additions to reinvigorating the economy and
    creating jobs. This process is important because as Members
    begin to examine the President's plan, we want as broad an
    understanding of the reaction as possible, because as each
    Member reacts to the President's plan, who is not on this
    Committee, they are bringing information back from the people
    they represent in their districts across the United States.
        We are pleased to have with us today the Chairman of the
    Rules Committee, the gentleman from California, David Dreier;
    the gentleman from Ohio, the Chairman of the Committee on House
    Administration, Bob Ney; and a newer Member of the collegiate
    workforce, Representative Marsha Blackburn of Tennessee.
        Welcome. Thank you for your willingness to testify.
        Seeing no Ranking Member, the Chair will indicate that if
    you have any written statement, it will be made a part of the
    record and you may address us in the time you have in any way
    you see fit.
        These microphones are out of a previous era; you have to
    turn them on and speak directly into them. They are very
    unidirectional.
        With that, I would recognize the Chairman of the Committee
    on Rules, the Honorable David Dreier.
        [The opening statement of Chairman Thomas and Mr. English
    follows:]
        Opening Statement of the Honorable Bill Thomas, Chairman, and a
            Representative in Congress from the State of California
        Good afternoon. Today we begin the final segment of our four-part
    hearing to examine President Bush's plan to create jobs for American
    workers while growing and stabilizing the economy.
        Today's format is different than that of the past three segments.
    We will hear from our Congressional colleagues, who will be providing
    feedback, as well as outlining possible alternatives to reinvigorate
    the economy and create jobs.
        This set-up is a very important step in the process of helping
    Members of this Committee dissect the effects and outcomes of the
    provisions outlined as by the President. Notably, these Members carry
    with them feedback from the people in their districts across the United
    States.
        We are pleased to have with us today Rules Committee Chairman David
    Dreier of California; Representative Fred Upton of Michigan; House
    Administration Chairman Bob Ney of Ohio; and Representative Marsha
    Blackburn of Tennessee. Welcome--we look forward to your testimony.
        Before we get started, I would like to first recognize the
    gentleman from New York, Mr. Rangel, for any comments he would like to
    make.

    Opening Statement of the Honorable Philip S. English, a Representative
                   in Congress from the State of Pennsylvania
        Taken together, the President's tax proposals are an ideal
    prescription for economic growth and job creation. Lower tax rates will
    allow everyone to consume more and to invest more.
        Similarly, removing the double tax on dividends will, through
    market capitalization, produce a wealth effect that will enhance both
    consumption and investment--the two engines of economic growth.
        In my own view however, there are ways to improve the tax package
    the President has put before us. In particular, I would like to discuss
    some provisions to enhance its stimulative effects.
    Homeland Investment Act

        I have introduced The Homeland Investment Act (H.R. 767), along
    with the Chairman of the Rules Committee, Mr. Dreier, and my Ways and
    Means Colleague, Mr. Brady. The bill encourages companies to bring
    income earned abroad back to the U.S.--having a dramatic stimulative
    effect on the U.S. economy.
        U.S. companies currently pay U.S. tax on foreign subsidiary
    earnings when they bring those dollars back to the U.S. At that time,
    the company pays the tax to the extent income taxes paid abroad are
    less than the full 35-percent U.S. tax rate. While many other countries
    fully exclude foreign dividends from domestic taxation, U.S. companies
    are left with only 65-percent of foreign earnings when they invest the
    foreign earning in the U.S. Alternatively, the U.S. companies can
    invest 100-percent abroad, and they do.
        This is solely the result of the current U.S. tax rule. It is the
    equivalent of a U.S. investment tax credit for investing outside the
    United States--up to 35 percent. If a company came to us and asked us
    to enact current law, Congress would not agree. We should also not
    agree to continue the existing incentive to invest elsewhere.
        The Homeland Investment Act provides a sensible and fiscally
    responsible alternative. In lieu of the deterring 35-percent rate, the
    Homeland Investment Act would effectively impose, for a limited period,
    a 5.25-percent toll tax on dividends from foreign subsidiaries. The
    5.25-percent rate would only apply to excess of normal distributions.
    Companies must reinvest the funds in the U.S. to take advantage of the
    lowered rate.
        To ensure that the money coming in is indeed taxed at the 5.25-
    percent rate, U.S. shareholders would surrender the right to claim
    foreign tax credits for 85% of foreign income taxes associated with
    dividends subject to the 5.25-percent tax. Moreover, U.S. shareholders
    would be required to exclude 85-percent of income subject to the 5.25-
    percent tax from the calculation of the foreign tax credit limitation.
        The Joint Committee on Taxation estimated that this elective rule
    would increase tax revenues by $4.1 billion in the first year and
    reduce revenues by $3.9 billion over 10 years--a small cost relative to
    the economic benefits that would be derived from $135 billion in new
    corporate investment at home.
        The projected $135 billion of new investment in America would have
    a far-reaching impact on the U.S. economy. This is just the stimulus
    the economy needs. Reinvestment of such money would provide additional
    funding in the United States for:

         Plant, equipment, and R&D;
         Pension plans depleted by decline in the stock market;
         Debt repayment, strengthening corporate balance sheets;
         Dividends to shareholders, which could productively be
    redeployed; and
         Raising equity market valuations by increasing funds for
    share repurchases.

        This proposal brings investment back to the U.S., when we need it,
    immediately. U.S. industrial production hit its peak in mid-2000, and
    now two and one half years later it is five percent under where it was.
    The economy is not performing up to its potential because a significant
    number of people and machines are not at work.
        The number of people employed in the U.S. has fallen since its peak
    in 2001. We are 2.7 million jobs under where we were two years ago.
        The $135 billion that Homeland Investment Act would bring into the
    U.S. is needed. The U.S. Department of Labor estimates that every $1
    billion in direct foreign investment into the United States supports
    20,000 workers at a salary of $50,000.
        We can bring $135 billion into the U.S. economy this year at the
    reduced tax rate or continue to encourage those earnings remain
    overseas where they will never be taxed and where they are not invested
    in our economy.
        I hope that many of my colleagues will join in the effort to
    include this cost-effective proposal in the final stimulus package.
    Expensing

        Second, I urge that we perfect the economic growth formula by
    adding 100-percent first-year expensing for all machinery and equipment
    placed in service within the next three years. A few weeks ago, I
    introduced H.R. 683 to accomplish just that.
        The manufacturing sector has lost 2 million jobs since July, 2000;
    the trade deficit is nearly $38 billion; and capital expenditures
    remain in negative territory for the sixth quarter in a
    row.1 Unless the current trend is reversed, manufacturing
    will almost disappear from America in the not too distant future and
    with it will go many of our high-paying, high-skill jobs. If they are
    to survive, American manufacturers must make big-dollar purchases of
    capital goods, but they need the lower cost and financing help that
    first-year expensing provides.
    ---------------------------------------------------------------------------
        \1\ Patricia Panchak, ``Manufacturing's Public Policy Challenge,''
    Industry Week, March, 2002.
    ---------------------------------------------------------------------------
        The excess manufacturing capacity that some people talk about is an
    excess of ``yesterday's'' outmoded plant and equipment that needs to be
    replaced as soon as possible. We have an under capacity in the latest
    state-of-the-art machinery that can compete with low-cost producers
    outside the U.S. An incentive in this area will undoubtedly spur
    investment in this sector and stimulate the manufacturing sector.
        The revenue cost of first-year expensing for another three years is
    about $185 billion in the first year and rapidly declining thereafter.
    Over a ten-year period, the static revenue cost is $44 billion.
        All elements of the President's tax package produce a large bang-
    for-the-buck in that they produce more GDP than they cost in tax
    revenues. According to the Fiscal Associates' econometric model, the
    President's rate reduction produces $2.50 of GDP for each $1 of revenue
    cost. Excluding dividends from double taxation produces $2.70 of GDP
    for each $1 revenue cost. Under this same econometric model, first-year
    expensing produces $9.00 of GDP for every $1 of revenue
    cost.2
    ---------------------------------------------------------------------------
        \2\ ``What's The Most Potent Way To Stimulate The Economy,'' IPI
    Issue Brief, October 10, 2001: Institute for Policy Innovation.
    ---------------------------------------------------------------------------
        Expansion of expensing produces significant results, has bipartisan
    appeal and will create jobs and growth.
    Broadband

        Third, I have introduced The Broadband Internet Access Act (H.R.
    768) along with my colleague on the committee, Mr. Matsui. This bill
    provides tax incentives to businesses which deploy high-speed broadband
    internet access to underserved areas of the country.
        The basic infrastructure that connects millions of Americans to the
    internet is quickly becoming outdated and cannot support the high-speed
    data transmissions available through broadband. A lack of investment in
    less affluent areas of the United States has lead to a burgeoning
    ``digital divide'' between rural and suburban America.
        The Broadband Internet Access Act provides a 10% tax credit to
    companies providing current-generation broadband technology (1 mbps
    download and 128 kbps upload) to rural and low-income areas. The bill
    also provides a 20% tax credit to companies deploying next-generation
    broadband technology (22 mbps download and 5 mbps upload) to rural and
    low-income areas and residential areas throughout the country. Any
    company deploying broadband technology, whether via satellite, fiber
    optics, coaxial cable or copper wire, can qualify for the tax credits.
    The bill's tax incentives terminate five years from enactment.
        The Joint Committee on Taxation estimates the cost of the
    legislation at $2.2 billion over 10 years. Moreover, the Brookings
    Institution estimates that the expansion of broadband technology across
    the country could generate nearly $500 billion worth of growth in the
    U.S. economy annually.
        The Broadband Internet Access Act has attracted a broad array of
    support. A bipartisan coalition of 227 Members of the House of
    Representatives and 65 Senators cosponsored the bill in the 107th
    Congress. More than 100 different telecommunications, telemedicine,
    agriculture, civil rights and public interest organizations have
    endorsed the legislation.
    Repeal the Tax on Unemployment Compensation

        Finally, I have introduced legislation to place a two-year
    moratorium on the tax on Unemployment Insurance (UI) benefits (H.R.
    798). As Americans struggle to recover from the recent economic
    downturn, it is more important than ever to repeal this unfair and
    inefficient tax.
        The tax on UI benefits, enacted in 1986, penalizes individuals and
    families during the hardest of times. The Department of Labor estimates
    that 10 million people received unemployment benefits in 2002. While
    productivity is increasing in some markets, jobs are still being lost
    across the board--the recovery from unemployment is even worse than
    expected.
        Come April, the unemployed will realize a tax liability as a result
    of having received those benefits. This legislation will protect such
    working individuals and families from facing this tax penalty during
    unemployment. The current tax treatment of unemployment compensation
    puts these payments on par with wages and other ordinary income with
    regard to income taxation. However, the UI tax is not a tax on income,
    it is a tax on benefits--benefits received during one of the most
    difficult times in a person's life.
        It is unfair that no withholding is done during the dispensing of
    compensation, so individuals are hit with a tax penalty a year later,
    without any consideration of their financial stability. The tax on
    unemployment benefits strains taxpayers during their most vulnerable
    times.
        There is broad bipartisan support for temporarily repealing this
    tax. Please join me in helping the victims of lay-offs get back on
    their feet.
        I thank you for the opportunity to submit testimony. I commend the
    president for putting forward a strong proposal embedded in sound tax-
    policy. In addition, I urge your support for the aforementioned issues.

     STATEMENT OF THE HONORABLE DAVID DREIER, A REPRESENTATIVE IN
                 CONGRESS FROM THE STATE OF CALIFORNIA

        Mr. DREIER. Well, thank you very much, Mr. Chairman. It is
    nice to be on this side the table from you for the first time
    in a heck of a long time. Let me say, it is nice to be here
    with Mr. Crane and Mr. Camp, Mr. Hayworth, and Mr. Ryan. I am
    glad to see my friend, Mr. Levin, has arrived, making this a
    bipartisan effort. I want to say that I am very supportive of
    the President's plan, Mr. Chairman. Mr. Weller, nice to see
    you.
        I hope very much that we will be able to maintain the
    package that the President has offered, intact. I think it is a
    very bold and dynamic growth package; and I have argued that
    there are some things that we can utilize, as you and I have
    discussed in the past, Mr. Chairman, that can make this plan
    even better. One of the things that I have testified before
    this Committee and talked all around about for a long period of
    time is the issue of capital gains.
        We all know that every single time we have cut the capital
    gains tax in the past, we have seen a dramatic increase in the
    flow of revenues to the Federal Treasury. One of the best
    examples that we have used was the 1981 bill, where we brought
    about this reduction, and we saw a 500-percent increase in the
    flow of revenues to the Federal Treasury up until 1986. When we
    passed the 1986 Tax Reform Act and increased the capital gains
    tax again, and then we see a diminution of that the flow in
    revenues to the Treasury.
        We know that getting to where I believe we should be, a
    zero capital gains tax, is probably not going to happen. Now
    maybe if we had a vote at this moment in the Committee, we
    might be able to be successful with it, but I still think it
    might face some other challenges.
        So I began--as I looked at the President's great package, I
    said, Well, how can we make it even better and deal with this
    capital gain issue in a creative way? So some friends of mine
    and I sat down and started talking about this, and what I have
    introduced with--a number of Members of your Committee, Mr.
    Chairman, have cosponsored. You know, I have discussed it in
    the past, and it is a prospective cut in the capital gains tax.
        Now, there are many people who argue if you cut the capital
    gain tax on all appreciated assets today, we would see a drop
    in the market because there would be this huge sell-off. This
    proposal, H.R. 44, in no way, in no way would create that kind
    of problem.
        What I do is, I call for a cut in the top rate from 20
    percent to 10 percent, 35 to 20 for corporations; and there is
    a 1-year holding period, so regardless of how you score the
    thing, the Federal Treasury ain't going to see a loss of
    revenues in that first year. There is a 2-year window during
    which time this purchase of a new investment needs to be made.
    The idea behind it, of course, is to get people into investing,
    create an incentive for them to get back into markets.
    Obviously we know, based on the track record that we have, that
    this would create an increase in the flow of revenues.
        A 10-year scoring that was--just came out today by the
    Heritage Foundation showed there would be a $69.1-billion
    increase in the flow of revenues, $180 billion in new
    investment and 1 million jobs created in dealing with this sort
    of creative way to address capital gains. So I hope very much
    that this can be utilized as a way to build on the President's
    great proposal.
        Another issue that I have been working on with a Member of
    your Committee, Mr. English, has to do with the issue of the
    foreign dividends deduction. One of the problems that we have
    is that there is a disincentive based on the Code right now
    that says to companies that have investments, operations, and
    income overseas that the tax right now is 35 percent on the
    dividends that are brought back--the earnings that are brought
    back here to the United States.
        I think we need to encourage the opportunity to bring those
    earnings back and get them invested here in the United States.
    So, Mr. English and I have a bill, the Homeland Investment Act
    it is called, and I hope very much that that could be utilized
    here. I think that it, too, would create a wonderful
    opportunity for us to see strong and dynamic economic growth.
        So I just want to say, Mr. Chairman, that I think that you
    have got a wonderful package before you. I have such confidence
    under your leadership in the work product that will end up
    coming before the Rules Committee, that we will anxiously look
    forward to; and I would just like to say that I hope very much
    that we will be able to include those items in this package.
        I hope you understand, I have a meeting that I am
    representing--where I am representing you, Mr. Chairman,
    because I know that you can't be there; and so I have got to go
    back and represent the Thomas interest, which is always my top
    priority at every meeting I attend. So, I am not going to break
    with that today, and so I appreciate your understanding the
    extricacies of our schedules.
        So thanks very much for having me.
        [The prepared statement of Mr. Dreier follows:]
     Statement of the Honorable David Dreier, a Representative in Congress
                          from the State of California
        Mr. Chairman, thank you for the opportunity to appear before the
    Committee today to discuss the President's economic growth proposal, as
    well as others, including my own, which I believe will provide an
    important stimulative complement to the President's plan and help grow
    our economy stronger faster, providing new jobs and opportunities for
    American workers, businesses, and investors. While I wholeheartedly
    support the President's plan, I also believe that inclusion of
    components that offer an incentive to increase capital spending in the
    near term, such as a prospective capital gains tax cut, overseas
    earnings repatriation, and accelerated depreciation are critical to
    providing a much needed, immediate, boost to those parts of the economy
    that are in the most need of help--investment and job creation.
        Although recent indicators demonstrate that the U.S. economy is
    undergoing a slow recovery from the downturn of 2000, there are signs
    of weakness that continue to hamper growth. While productivity numbers
    have jumped at the fastest pace in years, the latest unemployment
    figures reinforce that much of our growth has been based on the use of
    existing resources, not new jobs and investment. Today, consumer
    spending, the backbone of the current recovery, shows signs of
    slippage. Individual investors, faced with the loss of $8 trillion in
    stock market wealth, continue to be wary, as further illustrated by the
    recent drop in worker participation in 401(k)s and other long-term
    investment and personal savings accounts. Simply put, our economy is
    growing, but not fast enough.
        With this in mind, the President has introduced a plan that serves
    to provide both immediate and long term growth to our economy. To do
    this, the President's plan puts money back in the hands of consumers by
    accelerating tax relief, giving small businesses the room they need to
    grow, and providing incentives for capital investments.
        Under the President's plan, 92 million taxpayers would receive an
    average tax cut this year of $1,083. It would come through an
    acceleration of the rate reductions passed in 2001, speeding up the
    marriage penalty relief in the same bill, and increasing the child tax
    credit from $600 to $1000. In my home state of California, that is 11
    million taxpayers who will benefit, including 4 million married couples
    who will receive marriage penalty relief and 3 million families who
    will benefit from an increase in the child tax credit. These reductions
    were targeted at middle class taxpayers when they were approved last
    Congress, and they will provide immediate relief if they are
    implemented even sooner.
        Mr. Chairman, as you know, America's small businesses create the
    majority of new jobs and account for fully half the total output of our
    economy. The President's plan would raise the equipment expense
    limitation for these firms to $75,000 from $25,000, providing much
    needed tax relief that will allow these companies to remain the driving
    force of our great economy. Lower taxes will help foster greater
    American entrepreneurship, allowing more investment for growth
    opportunities and creating more good jobs for American workers.
        Importantly, the President's plan would also eliminate the unfair
    double taxation of dividends. Everyone who invests in the stock market
    and receives dividend income--especially seniors who often rely on
    those checks for a steady source of retirement income--will benefit
    from elimination of the double taxation on dividends. It is estimated
    that enacting this important component of the President's plan would
    return about $20 billion this year into the economy.
        All together, the President's proposal provides a critical step
    towards growing our economy faster, helping to maintain our long term
    prosperity. I believe that it is important that the Congress move
    immediately to pass his plan.
        However, while I fully support the President's proposal, I believe
    that we can do even more to boost the economy and create jobs for more
    Americans.
        Although business productivity has improved over the past year,
    increased worker efficiency is not nearly enough to sustain strong
    economic growth. In order to get more Americans back on the job, we
    need to implement incentives that will make our economy grow at a much
    faster rate, thereby increasing the demand for new goods and services--
    and the workers who produce them.
        Right now businesses are responding to economic uncertainty by
    placing a freeze on hiring and wringing as much productivity out of
    their businesses as possible. While our economy has experienced
    moderate growth, most of that can be accounted for through gains in
    productivity as a result of layoffs and better utilization of existing
    resources.
        The key to strong and sustained economic growth is to encourage
    businesses to increase capital investment that will lead to expansion
    and job creation. Companies that undertake bold new business
    initiatives require a larger workforce, thus providing more Americans
    with opportunities to attain stable employment and provide for their
    families. For example, during the unprecedented economic expansion of
    the mid to late 90's, much of our economic growth was attributed to
    entrepreneurial activities. According to the National Venture Capital
    Association (NVCA), between 1995 and 2001, venture capitalists financed
    an average of 1,700 brand new companies per year. In 2002, only 706
    companies received their initial round of venture financing. NVCA
    estimates that today, more than $85 billion in venture capital is
    sitting on the sidelines waiting for investment opportunities. We need
    to get that capital into the economy, where it will help turn
    innovative ideas into reality, create new jobs for American workers,
    and produce new goods and services for consumers here at home and
    around the world.
        One of the most effective ways to boost business expansion, create
    jobs, and bring individual investors back into the markets--to grow the
    economy--is to immediately target capital investment. Legislation I
    have introduced, H.R. 44, the ``Investment Tax Incentive Act of 2003''
    would do just that. H.R. 44 creates a two-year window of opportunity in
    which assets purchased during that time will lock-in a reduced capital
    gains tax rate when they are sold. The capital gains tax rate for
    investments purchased during the two-year window would fall from 20
    percent to 10 percent for individuals and 35 percent to 20 percent for
    businesses. Investments must be held for one year to qualify for the
    lower rates. Purchases which qualify under Section 1202 (Qualified
    Small Business Stock) would have an effective rate that falls to 7%.
        Importantly, I believe this forward-looking proposal will
    reinvigorate business investment while also bolstering the investment
    holdings of the 50% of Americans--the Investor Class--who own some type
    of financial asset to help pay for their children's education, buy a
    first time home, or plan for their retirement. These investors
    understand that they have a direct stake in America's continuing
    prosperity. Their stocks, mutual funds, and 401(k)s fund the ideas,
    technologies, and businesses that drive the economy. By providing an
    incentive to get them back into the market, we can create and expand
    the businesses that put workers back on the job.
        Lowering the future capital gains tax rate for new investments will
    increase the value and price of assets. This will give markets a boost
    and raise portfolio values. The two-year time frame creates a further
    incentive to buy now, providing near-term stimulus. Finally, lower
    capital costs for business will allow companies to purchase the plants,
    machinery, and other equipment needed to expand and create new jobs.
        This targeted proposal also includes a special benefit for the
    entrepreneurial small firms that are an ``engine of growth'' among
    American businesses. In my home state of California, many of the
    corporate cornerstones of the Information Age started in the garages of
    pioneers like Steve Jobs and David Packard. They relied then on access
    to capital to turn great technology ideas into great high tech
    businesses, and early venture funding is just as critical today.
        Some critics of a broad capital gains tax reduction have made the
    claim that cutting this tax rate would encourage investors to sell
    assets to take advantage of the tax cut. They claim this would actually
    drive down markets, the last thing investors want to see. That argument
    fails to take into account the fact that lowering the capital gains
    ``tax on investment'' would increase the demand side of the investment
    equation. But, this proposal takes that whole argument off the table.
    The forward-looking nature of this investment window is a strong
    incentive to buy. Rather than downward pressure on the market, we would
    see momentum for a rising market and increased wealth--direct relief
    for individual investors who have weathered an $8 trillion drop in the
    stock market.
        Mr. Chairman, my proposal would not only provide the much needed
    stimulus our economy needs to grow faster and create new jobs, it will
    also be good for the federal treasury. According to a preliminary score
    by the Joint Committee on Taxation, the Investment Tax Incentive Act
    would increase budget receipts by $100 million in the first year and
    $600 million in the second year. In addition, a preliminary score by
    The Heritage Foundation estimates that my proposal would increase
    budget receipts by $66.7 billion in 2004 and $28.9 billion in 2005.
    Over a 10-year period, The Heritage Foundation analysis estimates that
    there would be a $69.1 billion increase in federal capital gains
    receipts. Like the last time we cut the capital gains tax rate in 1997,
    a faster growing economy and increased investor activity will quickly
    put to rest any arguments that such a move would cut revenue.
        Several other proposals have been introduced that also demonstrate
    the ability to increase capital investment and strengthen the economy.
    Specifically, H.R. 767, the ``Homeland Investment Act'', introduced by
    Congressman English, of which I am an original co-sponsor. Under the
    current IRS code, U.S. companies are required to pay tax on foreign
    subsidiary earnings when these earnings are brought back to the U.S.,
    to the extent of any shortfall in the tax paid abroad and the 35% U.S.
    tax rate. Thus, U.S. companies realize only 65% of their hard earned
    income from overseas investments, thus deterring them from bringing
    these funds home. The proposal would effectively impose, for a one-year
    period, a 5.25% toll tax on dividends in excess of normal distributions
    from foreign subsidiaries, thereby encouraging U.S. companies to bring
    back their earnings from international holdings for investment here at
    home.
        I applaud the President's plan which provides much needed tax
    relief for all Americans and boosts the economy. I also believe that
    the addition of my capital gains tax cut proposal to the President's
    plan will enhance short-term stimulative effects and help foster faster
    economic growth, financial prosperity for America's Investor Class, and
    new jobs for American workers.
        I look forward to continue working with the President and you, Mr.
    Chairman, to craft an effective economic growth package. Thank you.
                                     ______

                                                      February 12, 2003
    The Honorable David Dreier
    United States House of Representatives
    237 Cannon House Office Building
    Washington, DC 20515

    RE: The Investment Tax Incentive Act of 2003

        Dear Representative Dreier:

        On behalf of the National Venture Capital Association (NVCA), I
    commend you for your introduction of H.R. 44, ``The Investment Tax
    Incentive Act of 2003.'' I write to offer our support for this
    important legislation. It will help bolster desperately needed
    financing for our country's small, entrepreneurial companies, which
    create the majority of new jobs in this country.
        I have participated in numerous formal and informal roundtable
    discussions with industry representatives, academics and policy makers
    regarding challenges faced by U.S. entrepreneurs and the role the
    Federal Government can play in contributing to their success. These
    discussions generated an indisputable consensus that access to adequate
    capital is an enabling element to a successful entrepreneurial venture.
    And simply stated, if the capital gains rate is lowered the amount of
    investment increases.
        There has been a dramatic slowdown in new investments by venture
    capitalists, since 2001. Between 1995 and 2001 venture capitalists
    financed an average of 1,700 brand new companies per year. But last
    year only 706 companies received their initial round of venture
    financing. Furthermore, NVCA estimates that nearly $85 billion of
    venture capital is sitting on the sidelines looking for investments.
    This targeted bill is effectively crafted to avoid the usual criticisms
    of a capital gains cut. By making it prospective there is no incentive
    to cash out of current investments; in fact, just the opposite, it
    brings new money into play.
        NVCA represents more than 460 professional venture capital firms
    located throughout the United States. Most of the companies in which we
    invest are in the high tech arenas of the Internet, telecommunications,
    medical devices, and biotechnology. These sectors are now the bedrock
    of our economy and are literally changing the ways we work and live. It
    should be a national priority that we encourage these companies to
    expand and prosper.
        I commend your leadership on this issue and I look forward to
    working with you to pass this important legislation.
                Sincerely,
                                                         Mark G. Heesen
                                                              President
                                     ______

                                                          March 5, 2003
    The Honorable David Dreier
    United States House of Representatives
    Washington, DC 20515

        Dear Mr. Chairman

        The Financial Services Roundtable thanks you for your introduction
    of H.R. 44, the ``Investment Tax Incentive Act of 2003.'' The
    Roundtable represents 100 of the largest integrated financial services
    companies providing banking, insurance, and investment products and
    services to the American consumer. Roundtable member companies provide
    fuel for America's economic engine accounting directly for $18.3
    trillion in managed assets, $678 billion in revenue, and 2.1 million
    jobs.
        H.R. 44 will boost business expansion, create jobs, and bring
    individual investors back into the markets by immediately targeting
    capital investment. The bill creates a two-year window in which assets
    purchased will be subject to a reduced capital gains tax rate when they
    are sold. Capital gains rates for investments purchased during the two-
    year window would fall from 20 percent to 10 percent for individuals
    and from 35 percent to 20 percent for corporations.
        H.R. 44 will generate revenue and revitalize our economy by
    encouraging capital investment with the lower capital gains on new
    asset purchases. Thank you again for your leadership on H.R. 44, the
    ``Investment Tax Incentive Act of 2003.''
        If I can be of any assistance on this or any other matter, please
    contact myself or Scott Talbott at 202-289-4322.
                Best regards,
                                                         Steve Bartlett
                                                              President
                                     ______

                                                       February 4, 2003
    The Honorable David Dreier
    237 Cannon House Office Building
    Washington, DC 20515

        Dear Chairman Dreier:

        I am writing to express Americans for Tax Reform's support for the
    Investment Tax Incentive Act of 2003.
        As you know, the most effective way to restart economic growth is
    to reduce taxes on capital. The reduction of capital gains, as proposed
    by the Tax Incentive Act will boost business expansion, create jobs,
    and bring individual investors back into the market. As such, the
    legislation if enacted, will have a significant impact restarting
    economic growth in America.
        Moreover, the importance of financial markets cannot be
    understated. With nearly 52 percent of Americans invested in the
    market, the economy has become more dependent on the stock market. Your
    legislation will help boost investor confidence and regain some of the
    $7 trillion of value lost in the markets since March 2000.
        On behalf of Americans for Tax Reform, I wholeheartedly endorse the
    proposal. This initiative is the right course for limiting the tax
    burden on American families.
        Thank you for sponsoring this important legislation.
                Sincerely,
                                                     Grover G. Norquist
                                                              President

        Chairman THOMAS. Thank you very much. I appreciate your
    focus on capital gains. It is an important component.
        We have asked the Joint Tax Committee to examine the
    proposal that you have introduced with Congressman English. We
    believe their revenue flow estimates are not correct, and we
    are going to continue a dialogue with them to get a little
    better idea of what they believe it raises and it costs over a
    10-year period. So we appreciate very much the work that you
    have put in, especially in the capital gains area.
        Say hello to the people for whom you are doing my work.
        Mr. DREIER. Absolutely, I will.
        Chairman THOMAS. The gentleman of the Committee on House
    Administration whom we will all be visiting with briefly in the
    capacity of that Committee's reviewing the authorizing
    Committees' budgets.
        The Chair listens intently to the gentleman from Ohio as he
    presents his concerns about the tax bill

     STATEMENT OF THE HONORABLE ROBERT W. NEY, A REPRESENTATIVE IN
                    CONGRESS FROM THE STATE OF OHIO

        Mr. NEY. Thank you, Mr. Chairman, Members of the Committee.
    Also wanting to fall in line with my colleague, Mr. Dreier, we
    will be very--I guess you would say ``working for the
    Chairman,'' and if the last Chairman of the Committee couldn't
    get these microphones upgraded, I commit to you I will try.
    That is a joke.
        So I just--thank you, Mr. Chairman, for the opportunity to
    be here today to discuss with you the low-income housing tax
    credit and the role it plays in helping to create affordable
    housing for lower-income households.
        This country is facing a growing affordable housing crisis
    for low- and moderate-income families. Despite the fact that
    more and more people are sharing in the American dream of home
    ownership, many working families are finding it difficult to
    find affordable rental housing. The high cost of construction
    and the shortage of land have forced many builders to focus on
    only the high-end market. That is why we have to look for ways
    to improve these barriers that make it more costly or difficult
    to meet the demands of the low- and moderate-income housing
    market.
        As the new Chairman of the Financial Services Subcommittee
    on Housing and Community Opportunity, I am also committed to
    see that we preserve the affordable housing that currently
    exists and to work to create more affordable housing across the
    United States. One of the major engines for subsidizing the
    production of assisted rental housing to make it affordable to
    low-income households is the low-income housing tax credit.
        On January 7, of course, President Bush unveiled his job
    creation and economic growth package designed to provide
    important changes to many current tax provisions. I want to
    make it clear that I support the President's stimulus package.
    I applaud the efforts of the Chairman of the Committee in doing
    something about the economy of the United States. I am sure the
    plan will stimulate economic growth and will create new jobs
    while reducing unfair burdens on American investors. Our
    country is still trying to recover from last year's recession
    and this plan will help spur that recovery.
        More specifically, I strongly support eliminating the
    double taxation on dividends, as well as making the phasing of
    income tax relief for all Americans immediate. The double
    taxation of dividends unfairly punishes investors and
    discourages people from putting capital into our markets that
    could be used to fund new economic growth, exactly the opposite
    of what our economy needs right now.
        However, I did want to bring to the Committee's attention
    an issue that could have a unintended impact on various tax
    credit programs designed to promote affordable housing. As I
    mentioned, in the President's plan as introduced is a proposal
    to eliminate the double taxation of corporate dividends.
    Beginning in 2003, dividends paid by corporations to their
    shareholders would be tax free when paid from earnings
    previously taxed at the corporate level. In short, corporations
    that pay higher income taxes will be able to distribute more
    tax-free dividend income than corporations that have reduced
    their tax burden.
        While there are many significant benefits to this change,
    it is important I think that we understand all the implications
    for a change in the Tax Code. Over the years, various tax
    credits have been enacted specifically to encourage community
    reinvestment such as the low-income housing tax credit, the new
    markets tax credit, and the historic preservation tax credit,
    to name a few. Perhaps the largest of those programs is the
    low-income housing tax credit. I just want to take a moment to
    highlight the importance of this program.
        Since it was created in 1986, the low-income housing tax
    credit program has produced over 1.6 million units of
    affordable housing. Two years ago Congress expanded this
    program so it is now producing over 115,000 units annually. In
    my home State of Ohio, we are seeing 3,500 units of affordable
    housing produced every year because of tax credits. I believe
    the tax credit program is one of the best ways to involve the
    private sector in affordable housing.
        Congress has developed a fiscally responsible way to
    provide corporations an incentive to put money into affordable
    housing. This is the way the government should do business.
        Concerns have been raised that the President's dividend tax
    proposal could have an adverse effect on these affordable
    housing tools. It is estimated that corporate investment
    accounts for more than 98 percent of the equity capital
    generated by the housing credit makes this affordable rental
    housing possible. The theory is simply that under the economic
    stimulus plan, corporations would forgo housing credit
    investments in favor of maximizing the distribution of tax-free
    dividends to shareholders.
        Again, while I support the President's efforts to stimulate
    the economy and eliminate the double taxation on dividends, the
    effect on the low-income housing tax credit and other tax
    credit programs is an issue, I believe, that deserves our
    deliberate attention as we move forward with the President's
    economic stimulus package.
        So that is simply, Mr. Chairman, what I am pointing out
    today. I do appreciate the Chair's work on this issue and the
    President's plan.
        Chairman THOMAS. Thank you very much. Is the Chair correct
    in assuming that the Chairman is able to stay following the
    other Members testimony for questions?
        Mr. NEY. Yes, sir.
        [The prepared statement of Mr. Ney follows:]
    Statement of the Honorable Robert W. Ney, a Representative in Congress
                             from the State of Ohio
        Thank you for the opportunity to be here today to discuss with you
    the Low Income Housing Tax Credit (LIHTC) and the role it plays in
    helping to create affordable housing for lower income households.
        This country is facing a growing affordable housing crisis for low
    and moderate-income families. Despite the fact that more and more
    people are sharing in the American dream of home-ownership, many
    working families are finding it difficult to find affordable rental
    housing.
        The high cost of construction and the shortage of land have forced
    many builders to focus on only the high-end market. That is why we must
    look for ways to remove those barriers that make it more costly or
    difficult to meet the demands of the low and moderate income housing
    market.
        As the new Chairman of the Financial Services Subcommittee on
    Housing and Community Opportunity, I am committed to seeing that we
    preserve the affordable housing that currently exists and to working to
    create more affordable housing across the country.
        One of the major engines for subsidizing the production of assisted
    rental housing affordable to lower income households is the Low Income
    Housing Tax Credit (LIHTC).
        On January 7, President Bush unveiled his job creation and economic
    growth package designed to provide important changes to many current
    tax provisions. I want to make it clear that I support the President's
    stimulus package. The plan will stimulate economic growth that will
    create new jobs while reducing unfair burdens on American investors.
    Our country is still trying to recover from last year's recession, and
    this plan will help spur that recovery. More specifically, I strongly
    support eliminating the double taxation of dividends, as well as making
    the phase in of income tax relief for all Americans immediate. The
    double taxation of dividends unfairly punishes investors and
    discourages people from putting capital in our markets that could be
    used to fund new economic growth, exactly the opposite of what our
    economy needs right now.
        However, I want to bring to your attention an issue that could have
    an unintended impact on various tax credit programs designed to promote
    affordable housing. As I mentioned, in the President's plan, as
    introduced by Chairman Thomas, is a proposal to eliminate the double
    taxation of corporate dividends. Beginning in 2003, dividends paid by
    corporations to their shareholders would be tax-free when paid from
    earnings previously taxed at the corporate level. In short,
    corporations that pay higher income taxes will be able to distribute
    more tax-free dividend income than corporations that have reduced their
    tax burden. While there are many significant benefits to this change,
    it is important that we understand all the implications for such a
    change in the tax code.
        Over the years, various tax credits have been enacted specifically
    to encourage community reinvestment, such as the Low Income Housing Tax
    Credit (LIHTC), the New Markets Tax Credit and the Historic
    Preservation Tax Credit to name a few.
        Perhaps the largest of those programs is the Low Income Housing Tax
    Credit. I want to take a moment to highlight the importance of this
    program. Since it was created in 1986, the Low Income Housing Tax
    Credit program has produced over 1.6 million units of affordable
    housing. Two years ago Congress expanded this program so that it is now
    producing over 115,000 units annually. In my home state of Ohio we are
    seeing 3,500 units of affordable housing produced every year because of
    tax credits.
        I believe that the tax credit program is one of the best ways to
    involve the private sector in affordable housing. Congress has
    developed a fiscally responsible way to provide corporations an
    incentive to put money into affordable housing. This is the way
    government should do business.
        Concerns have been raised that the President's dividend tax
    proposal could have an adverse effect on these important affordable
    housing tools. It is estimated that corporate investment accounts for
    more than 98 percent of the equity capital generated by the housing
    credit that makes this affordable rental housing possible. The fear is
    that under the economic stimulus plan corporations would forgo housing
    credit investment in favor of maximizing the distribution of tax-free
    dividends to shareholders.
        While I support the President's efforts to stimulate the economy
    and eliminate the double taxation on dividends, the effect on the Low
    Income Housing Tax Credit and other tax credit programs is an issue
    that deserves our deliberate attention as we move toward passage of the
    President's economic stimulus package.
        It is important that we make sure we understand the consequences of
    the President's proposal and that we make the necessary changes prior
    to passage to alleviate any negative effects the dividend tax exemption
    proposal might have on our ability to provide affordable housing for
    low and moderate families across the country.
        Thank you again for the opportunity to be here today and I stand
    ready to work with you in the weeks ahead to pass an economic stimulus
    package that will not only jump start our economy but will also
    maintain the important tools necessary to promote the goal of providing
    sufficient affordable housing.

        Chairman THOMAS. Thank you very much. The Chair would then
    recognize the Honorable Marsha Blackburn from Tennessee for any
    statement she may wish to make.

     STATEMENT OF THE HONORABLE MARSHA BLACKBURN, A REPRESENTATIVE
                IN CONGRESS FROM THE STATE OF TENNESSEE

        Mrs. BLACKBURN. Thank you, Mr. Chairman and welcome back
    from Tennessee. We are glad you had the opportunity to visit
    our fair State. Thank you for calling this hearing to allow
    Members the opportunity to testify on items that should be
    included in this Committees' economic growth package.
        I support the President's economic growth package because
    it will provide many immediate and long-term economic benefits
    with much-needed provisions for small business owners today. I
    want to testify about a separate item that deserves inclusion
    in the final plan.
        Current U.S. tax law allows individuals living in
    jurisdictions with State and local income taxes to deduct the
    amount they pay in such levies from the amount of income
    subject to Federal taxation. The Income Tax Code, however, does
    not allow individuals who live in States or localities with
    sales taxes to choose to deduct those tax payments from their
    Federal income tax base.
        This situation is inequitable. Residents of States whose
    leaders have shown the fiscal restraint to avoid adopting a
    State income tax should not be punished; this is simply an
    issue of tax fairness.
        To remedy this situation, I have joined with more than 65
    of my colleagues to support legislation put forward by
    Representative Brady that would reinstate that deduction. H.R.
    720 gives taxpayers the option to either deduct the State and
    local income taxes or State and local sales taxes. Those living
    in States that have an income tax would still be able to make
    that income tax deduction as they do today.
        By providing this option to take one of the two deductions,
    the impact on the Treasury would be minimized and residents in
    States like mine would be provided with an equitable remedy. If
    Tennesseans could deduct their sales tax, it would mean an
    addition of 1 billion into the economy for the people of
    Tennessee.
        This is a bipartisan bill that has been cosponsored by
    eight Members of your Committee, Mr. Chairman. It is my hope
    that the inclusion of this item in the final economic stimulus
    package could bring bipartisan support in this Committee and on
    the floor of the House.
        Mr. Chairman, thank you for the opportunity to testify
    before your Committee.
        [The prepared statement of Mrs. Blackburn follows:]
       Statement of the Honorable Marsha Blackburn, a Representative in
                      Congress from the State of Tennessee
        Thank you Mr. Chairman for calling this hearing to allow members
    the opportunity to testify on items that should be included in this
    committee's economic growth package.
        I support the President's economic stimulus package because it will
    provide many immediate and long term economic benefits, with much
    needed provisions for small business owners. Today, I want to testify
    about a separate item that deserves inclusion in the final plan.
        Current U.S. tax law allows individuals living in jurisdictions
    with state and local income taxes to deduct the amount they paid in
    such levies from the amount of income subject to federal taxation. The
    Income Tax Code, however, does not allow individuals who live in states
    or localities with sales taxes to choose to deduct these tax payments
    from their federal income tax base.
        This situation is inequitable. Residents of states whose leaders
    have shown the fiscal restraint to avoid adopting an income tax should
    not be punished. This is simply an issue of tax fairness.
        To remedy this situation, I have joined with more than 65 of my
    colleagues to support legislation put forward by Representative Brady
    that would reinstate that deduction.
        H.R. 720 gives taxpayers the option to either deduct state and
    local income taxes or state and local sales taxes. Those living in
    states that have an income tax would still be able to take an income
    tax deduction as they do today. By providing this option to take one of
    the two deductions, the impact on the Treasury will be minimized, and
    residents of states, like mine, would be provided with an equitable
    remedy.
        According to our state Comptroller, if Tennesseans could deduct
    their sales tax it would mean one billion dollars for the people of our
    state.
        This is a bipartisan bill that has been cosponsored by seven
    members of your committee, Mr. Chairman. It is my hope that the
    inclusion of this item in the final economic stimulus package could
    bring bipartisan support in this committee and on the floor of the
    House.
        Mr. Chairman, thank you for the opportunity to testify before this
    committee.

        Chairman THOMAS. Thank you. Now we turn to the gentleman
    from Michigan, Mr. Upton. Thank you for joining us; we are
    interested in hearing what you have to say. Any written
    testimony will be made a part of the record.

      STATEMENT OF THE HONORABLE FRED UPTON, A REPRESENTATIVE IN
                  CONGRESS FROM THE STATE OF MICHIGAN

        Mr. UPTON. Thank you, Mr. Chairman and I will do exactly
    that and summarize my statement briefly.
        Mr. Chairman, back this March of 2002, President Bush
    signed the Job Creation Worker Assistance Act into law, and
    that included legislation that allowed businesses to utilize
    the first-year 30 percent accelerated depreciation. The tech
    industry was often viewed, particularly from 1994 to the year
    2000, as the engine of the economy. It has now become an anchor
    because things have been really tough. With this legislation
    that Mr. Weller and I introduced, H.R. 771, of which we have
    some 82 cosponsors thus far, we allow businesses to depreciate
    100 percent of their equipment purchases over the next 18
    months.
        Now, why is this important? Well, if you read today's front
    page of the Wall Street Journal, a story written by William
    Buckley, he writes this:
        ``The chief information officer of the telephone giant
    Verizon Communications was reviewing this year's technology
    budget with his top lieutenants in late January. He didn't
    think that their savings projections were ambitious enough.
    They told him $20 million would be lopped off large computer
    purchases. `Not enough,' he says; `we saved $100 million last
    year.'
        ``One of his top aides protested that Verizon did such a
    phenomenal job of vendor squeezing in '02 that there is not
    much more to squeeze. `Squeeze harder,' he admonished; `see how
    much you can push things.'
        ``Well, that attitude is bad news for IBM, Hewlett Packard,
    Sun Microsystems and other big technology sellers.
    Unfortunately for them, it is a widespread attitude not
    expected to change soon.''
        Mr. Chairman, H.R. 771 will change that. I mean, from
    today's bad news in the Wall Street Journal, when you look at
    the statistics and the graphs in terms of investment in high-
    tech equipment, you can see that every year it was coming down
    until the Weller-Upton legislation was enacted into law last
    year and it began to come back up.
        We want this--these bars to continue to go up, and we know
    that this bipartisan legislation will help in a major way. I
    would like to say on behalf of Mr. Weller, but certainly for
    me, that we would like to see this bill included as part of the
    package that this Committee will vote on in the next couple of
    weeks and get to the House floor.
        I yield back the balance of my time.
        [The prepared statement of Mr. Upton follows:]
      Statement of the Honorable Fred Upton, a Representative in Congress
                           from the State of Michigan
        Mr. Chairman--
        Thank you for the opportunity to testify on HR 771, the Full
    Expensing for Economic Growth Act of 2003. I appreciate the opportunity
    to testify before the Ways and Means Committee. I am very pleased to
    have worked closely on this bill with my good friend from Illinois,
    Congressman Weller.
        There is no question that our economy is in a rut. Congress must
    take the necessary steps to jumpstart the economy back into a period of
    significant growth. We can do more to stimulate the economy, and
    accelerated depreciation is part of the prescription that will get our
    economy moving again.
        Last year, Congressman Weller and I introduced similar legislation,
    H.R. 2981 to establish a 2-year recovery period for depreciation of
    computers and other technological equipment, a 24-month useful life for
    depreciation of computer software, and a 7-year useful life for the
    depreciation of certain auction-acquired telecommunications licenses.
    This legislation had 57 cosponsors, including 6 Members of this
    Committee.
        Why the emphasis on accelerated depreciation? Well, the numbers do
    not lie. On March 9, 2002, President Bush signed the Job Creation and
    Worker Assistance Act into law. This important legislation allowed
    businesses to utilize a first-year 30 percent accelerated depreciation
    allowance. As this chart shows, the four quarters preceding the new law
    experienced consistent decline in the investment of high-tech
    equipment. Upon the president signing the bill, investment quickly
    improved and we have seen 4 consecutive quarters of increased
    investment in high-tech equipment. And I am confident that the trend
    will continue.
        But why is this important? The answer is simple. From 1994 to 2000,
    the information technology (IT) industry served as the uncontested
    ``engine'' of economic expansion in the U.S. Although it comprises 8
    percent of the U.S. economy as a whole, the IT sector accounted for
    nearly 30 percent of real growth in the Gross Domestic Product (GDP)
    over that period, a greater contribution than any other sector of the
    economy, including retail trade, services and transportation.
        IT investment drove this boom, with real private investment in
    information processing equipment and software growing at an average
    annual rate of 32 percent from 1994 through 2000. Investment in
    computers and peripheral equipment grew at an astounding 131 percent
    average annual rate.
        During the 1990s, U.S. businesses poured more than $2 trillion into
    computers, software and other technological products. As you know, most
    computers and other technological equipment currently have a 5-year
    depreciation life. The current 5-year lifetime for depreciation of
    computers/high tech equipment is clearly outdated. A 5-year
    depreciation schedule for business computers and equipment is no longer
    realistic in today's economy.
        As Chairman of the House Energy and Commerce Subcommittee on
    Telecommunications and the Internet, I am very concerned with the
    economic heath of the high-tech sector, and there is no question of
    that our bill will help spur growth.
        The new law allows businesses to accelerate the depreciation of
    equipment they purchase between September 11, 2001 and December 31,
    2004. They get to accelerate 30% more in the first year. Before this
    law, a $1000 computer would be depreciated equally over 5 years. $200
    each year. With this change, businesses get $200 in the first year,
    plus a 30% bonus. So, they depreciate $500 in the first year and the
    remaining $500 over the next four years ($125 each year for four
    years).
        Congressman Weller and I believe this is the right way to stimulate
    the economy. To this end, on February 13, 2003, we introduced
    legislation to ``speed up'' accelerated depreciation even further (HR
    771, introduced 2/13/03 with 82 cosponsors).
        With our new legislation, businesses could depreciate 100% of their
    equipment purchases over the next 18 months. All of the assets covered
    under the Job Creation and Worker Assistance Act would apply.
    Generally, all assets with depreciation lives of 20 years or under
    would apply.
        This is 100% expensing. We believe this would provide an immediate
    boost to the economy by encouraging businesses to purchase equipment
    this year and next year. This will create jobs and help Americans keep
    their jobs. According to research done by the Institute for Policy
    Innovation, ``100 percent first year `expensing' can be expected to
    produce $9 of additional economic output for every dollar it costs in
    lost revenue.''
        The economic growth plan introduced by President Bush in January
    2003, does not change the accelerated depreciation provisions at all.
    His proposal does increase small business expensing for new investment
    by allowing small businesses to immediately deduct $75,000 (currently
    $25,000) beginning in 2003.
        Mr. Chairman, I would ask that as the Committee considers ways to
    grow the economy over the next 18 months, it consider my proposal to
    allow for 100% expensing of equipment until September 2004. This is a
    common sense solution to that will quickly infuse cash into the
    economy.
        Thank you for your consideration of my testimony. I would be happy
    to answer any questions.
                                     ______

                                     [GRAPHIC] [TIFF OMITTED] T1630J.001

        Chairman THOMAS. Thank the gentleman. I am asking staff to
    see--do we know if there is a score that Joint Tax has produced
    on 771? Mr. Weller?
        Mr. WELLER. Mr. Chairman, we have submitted a request, but
    we have not been given a formal score yet.
        Chairman THOMAS. You don't have that yet.
        Given the magnitude and the boldness which the Chair
    indicates might be necessary in terms of a stimulus package,
    especially compared with the President's component, we would be
    most interested in what the score is.
        For example, the gentlewoman from Tennessee's proposal, we
    believe, is somewhere in the vicinity of $30 billion over 10
    years on creating an either/or between income and sales tax at
    the State and local level. I have a hunch your legislation, Mr.
    Upton, carries a fairly significant price tag, because I
    believe it is fairly significant legislation, and we just need
    to get those numbers before we can begin to come down on one
    side or the other.
        Mr. UPTON. Well, if you could help us get those numbers--I
    know we sent a letter.
        Chairman THOMAS. We are going to do just that. Mr. Ney, you
    should find some form of comfort that yours is not a voice in
    the wilderness about the credit aspect of the President's plan.
    We have had testimony in virtually every session that we have
    had.
        Also, it isn't just the low-income; there are energy
    credits, which have been noted, that would be affected. The
    difficulty is getting a feel for exactly to what extent would
    they be affected; and we are doing the best that we can right
    now to get an understanding of, if there is in fact a
    decimating effect, whether it makes it difficult, whether or
    not it is absorbing these bumps in business as usual.
        You have a feeling it is somewhere along a continuum, and
    these are as significant as the protestors or as insignificant
    as the advocates. Just where on that continuum, I think, is
    something that we need to know, and then begin to take that
    into consideration as we examine the President's structure.
        I appreciate your registering your concern on that issue as
    well.
        Mr. NEY. Thank you, Mr. Chairman. I think that approach is
    very fair and balanced.
        Chairman THOMAS. Does the gentleman from Illinois wish to
    inquire?
        Mr. CRANE. Not so much to inquire, but to congratulate the
    witnesses here for their introduction of good legislation and
    to let them know that I think I am a cosponsor, aren't I, of
    yours, Fred?
        Mr. UPTON. Yes, sir. It is actually Mr. Weller's bill; it
    is Weller-Upton. I think you are.
        Mr. CRANE. I think David Dreier's, I am a cosponsor of too.
        I don't know that I am a cosponsor of Marsha's. I agree
    with her totally on what she is trying to do. The question I
    have--and unfortunately Marsha has left us--is how do you
    calculate sales taxes? How do you keep track of the sales
    taxes?
        Chairman THOMAS. You could obviously keep records, but as I
    recall--and I stand willing to be corrected, but in the old
    days, you had charts in the tax booklets which gave you amounts
    which you could utilize, reasonable amounts for various States,
    based upon the tax that you paid, to determine roughly the
    amount that you could deduct. It was not a totally accurate
    procedure.
        Mr. CAMP. It was like a standard deduction?
        Chairman THOMAS. Yes. It changed from State to State based
    upon the levies made. As I recall, it may have been only the
    State level and not the State and local. So, you could do an
    approximation, or you could save all your receipts which would
    be gargantuan in this day and age.
        Mr. CRANE. No, I have always believed that taxes should be
    raised in the simplest but most painful possible way so
    everyone is painfully aware of what he is paying in taxes.
    Sales taxes, to me, have always been stealth taxes, a way of
    hiding the tax revenue that is being gained by government every
    time you go out and make a purchase; and the average person
    isn't even aware of it when he is buying products.
        This is a concern to me as to how you would adequately
    offset that, give that same kind of tax relief to individuals
    or the States.
        At any rate, I commend all that you are doing, and I
    support all of your efforts and yield back the balance of my
    time.
        Chairman THOMAS. I thank the gentleman. Does any other
    Member wish to inquire of the Members? The gentleman from
    Michigan.
        Mr. CAMP. Thank you, Mr. Chairman. Fred, does your bill
    apply to any equipment or just high-tech equipment? You had
    given the high-tech----
        Mr. UPTON. It is all equipment.
        Mr. CAMP. All business equipment?
        Mr. UPTON. You know--and actually I would like to see it
    expanded. I spoke to the American Dental Association this
    morning at their nationwide conference, and for many of them
    they have leased equipment, and again they--the way that the
    tax law is structured for them, I think it is over a 30-year,
    34-year span, so--but this is all equipment. Obviously, it
    would impact the high-tech side in a major way, as the Wall
    Street Journal pointed out this morning.
        Mr. CAMP. To the extent that you get your score from Joint
    Tax, I notice in your testimony you talk about some research
    done by the Institute for Policy Innovation, that 100 percent
    first-year expensing can be expected to produce $9 of
    additional economic output for every $1 it costs in lost
    revenue. So, to the extent that you can get that message out, I
    think this would be helpful to your----
        Mr. UPTON. That is what we would like to do.
        Mr. CAMP. To your bill.
        Chairman THOMAS. The gentleman from Illinois.
        Mr. WELLER. Thank you, Mr. Chairman. It is good to see my
    friend and classmate, Chairman Ney. I am going to direct my
    question to my colleague, Mr. Upton.
        First, Fred, let me just say thank you for the opportunity
    to work with you on the legislation you have brought before our
    Committee to discuss.
        You know, I think Mr. Camp really hit the nail on the head
    by pointing out the economic impact of 100-percent expensing in
    the first year. A $9 economic impact for every $1 of cost to
    the Treasury is a tremendous impact if we are looking for
    essentially a jump start or a kick start to get this economy
    moving again you know. Of course, Fred, you and have I
    districts that are somewhat similar. You are in southwestern
    Michigan and I am in the south suburbs of Chicago, but a lot of
    our employers are smaller manufacturers. Usually they are
    family held and they have been there several generations and
    they employ 200 to 300 people on the side of town. They are the
    sole employer for many of our communities.
        Mr. UPTON. Even employers that employ as few as 50 people--
    I was at a small business in Kalamazoo 2 weeks ago. They have
    gone from 55 employees to 25. This is a company that makes
    boxes that package beer and cereal and everything else. This
    provision, if we are able to get it enacted, would probably
    bring back many of the people they have had to lay off.
        Mr. WELLER. Well, if the gentleman would yield, one thing I
    hear from the employers in my district is that, you know, many
    of them have delayed replacing equipment--whether a delivery
    vehicle or telecommunications equipment, the office computer,
    machine tool--and they believe that full expensing would give
    them the incentive to replace that equipment. Of course, there
    is a worker somewhere in Michigan or Illinois or elsewhere in
    this country that makes it.
        I know Mr. Camp asked the question, what assets would be
    affected by this. The same identical assets that are currently
    benefiting from the 30 percent expensing provision that was in
    the stimulus package a year and half ago, including inside
    build-out, tenant improvements, and real estate.
        What are your--you know, your business leaders and workers
    saying back home regarding what kind of impact they believe
    expensing could have?
        Mr. UPTON. They have come to me. We have put out some
    notice that I am pursuing this, and we have had a number of
    businesses call our offices and say, this will help, this will
    bring back the unemployed workers, the folks that we have
    reluctantly had to let go. I would hope that they stay in the
    area.
        If you can get this thing through, this is going to be an
    immediate jump start, just like this table showed, where, when
    the President's signed stimulus package into law, and we
    immediately began to see an investment in high tech. Whether it
    be the large companies, like Hewlett Packard or Cisco or
    Nortel, companies like that in terms of things that they
    actually produce.
        As the Journal said this morning, every company is looking
    at this downturn and when is it going to end. This as a piece
    of the stimulus package will provide immediate growth and bring
    unemployed folks back into working again.
        Mr. WELLER. If the gentleman would yield, you know, one
    area where I have seen--where there is a great interest in
    greater investment, as well, is in the whole issue of security.
        Now we tend to forget the vast majority of institutions,
    buildings, offices, factories, manufacturing facilities are in
    private hands; and every manufacturer--or, excuse me, every
    manager--in America, after September 11, was thinking, what do
    I need to do to make my business more secure for my workers, my
    family, my customers, those whom I serve with our business?
    Many of these companies are now investing in improved security.
    Of course, by allowing them to expense or fully deduct 100
    percent, that encouraged them to make the investment to
    essentially--you know, for private homeland security.
        It also helped them absorb the cost; do you agree?
        Mr. UPTON. That is a very good point. I do agree.
        Mr. WELLER. Well, thank you, Mr. Chairman. Fred, thanks for
    testifying.
        Mr. UPTON. Thank you for your leadership. I just want to
    say that before the week is out I would like to think that we
    will get a lot more cosponsors on a bipartisan basis on this
    bill as well.
        Chairman THOMAS. Does the gentlewoman from Ohio, Ms. Tubbs
    Jones, wish to inquire?
        Ms. TUBBS JONES. Thank you, Mr. Chairman. I am going to
    take just a couple of minutes.
        I want to applaud my colleague from Ohio, the Chair of the
    Housing and Community Empowerment Subcommittee of Financial
    Services. I used to serve on that Committee prior to coming to
    this Committee. You have said very clearly what I have been
    saying to just about every witness that has come in talking
    about dividend tax cuts, whether they knew anything about low-
    income, affordable housing or not. My purpose in doing that was
    to bring the issue to a higher level.
        Mr. Ney, I just want to thank you for raising your
    concerns, because as the Chair of the Housing Subcommittee, the
    fact that you would raise these concerns, it will be given
    quite a bit of attention.
        I just want to say also, this week--in fact, seated in the
    audience today--is a young woman from the Ohio Historic
    Preservation Committee, raising many of the issues; and I am
    sure that you will probably be visited today or tomorrow by
    those groups as well.
        I just want to thank you for your leadership. It is always
    good to have a Buckeye that is doing a good job on housing.
        Mr. NEY. Thank you, Mr. Chairman. Want to thank the
    gentlelady. We had a good year in Tempe, Arizona, too.
        Mr. UPTON. Just wait till Ann Arbor this year.
        Chairman THOMAS. I thank the gentlewoman. Any additional
    questions? The gentlewoman from Connecticut.
        Mrs. JOHNSON OF CONNECTICUT. Thank you. I wanted to clarify
    from my colleague Mr. Upton what I believe is so, that your
    bill and my colleague Mr. Weller's bill allows expensing of all
    equipment.
        Mr. UPTON. It does. You are right.
        Mrs. JOHNSON OF CONNECTICUT. I am a cosponsor of that
    legislation, and I want to be sure that the record notes that
    by allowing immediate expensing for 18 months, which is
    something we can afford, we have a chance to help small
    manufacturing through a very, very difficult period created in
    very large part by government actions.
        The steel decision is falling heavily on steel users. We
    are on the verge of losing a very critical component of our
    industrial base as a result of a public policy that imposed on
    them not only a 30 percent price increase, but unpredictable
    supplies and poor-quality supplies. So it has had a very heavy
    cost impact, sometimes as much as 50 percent on small
    manufacturers in New England at least; and this bill will help
    them to some extent get over that hump.
        We also have allowed ourselves to manage a trade agreement
    with a formerly nonmarket economy with very little attention to
    the surge issues that we managed quite well in the 1980s and
    which, in the end, because we managed them, we enabled our
    machine tool industry to recapitalize itself, improve its
    technology, improve its productivity without being put out of
    business by the Japanese and the Taiwanese, who were able to
    produce machine tools with very different rules and access to
    capital.
        So it is very important that we--that we pass this as part
    of any stimulus bill, because we really have to help the small
    manufacturers on whom ultimately our defense security does
    rest.
        So I thank you for broadening your bill; and I thanked Mr.
    Weller before for his leadership on this issue. I think this is
    an extremely important issue, very relevant to the strength of
    our economy now and in the next few years. I look forward to
    working with you to get this as part of the stimulus package.
        Mr. UPTON. I would just like to say, I know you know my
    district very well, as your mother used to live, when she was
    alive, in my district.
        The steel decision, at the risk of offending my good
    friend, Mr. English, really hurt my district in a major way. We
    have so many small tool and die manufacturers and others that
    rely--the furniture industry, the appliance industry, the auto
    industry. That tariff decision was a death knell to many, many
    workers and this is a way that we can begin to reverse that
    trend with that awful decision.
        Chairman THOMAS. The Chairman notes that the gentleman from
    Michigan's comments have prompted another inquirer, and so the
    Chair, assuming there was one final one, now realizing there
    are three, would question the three who are interested if any
    of you have comments or questions to direct to the Chairman of
    House Administration, Mr. Ney, because his time is very
    constrained.
        I believe the other two would be asking broader questions.
        Does the gentleman from Wisconsin, Mr. Ryan, wish to----
        Mr. RYAN. Yes, I do. Chairman Ney, I want to ask you a
    couple of questions, or actually bring something to your
    attention. Are you familiar with the new mortgage banker study
    about the low-income housing tax credit that came out?
        Mr. NEY. Yes.
        Mr. RYAN. Yes. It came out yesterday. I just wanted to make
    a couple of points.
        Number one for the Committee, I think it is interesting to
    note that the econometrics firm that the MBA, the Mortgage
    Bankers, used to study the effects of the President's economic
    plan was Macroeconomic Advisors of St. Louis. This is the same
    macroeconomic forecasting firm that Bill Gale, the Brookings
    Institution economist, cited in his efforts to try to pan or
    trash the Administration's proposal.
        What their econometrics model shows us is that the Bush
    plan will--within 18 months, by the end of 2004, create a
    million new jobs, will add 1.4 percent economic growth to GDP;
    that is from Macroeconomic Advisors that critics of the Bush
    plan have been using.
        Chairman Ney, specifically, they actually analyze the
    effect this policy would have on the low-income housing tax
    credit, and they are not so sure that it would have an adverse
    effect. I just want to read something and then just bring it to
    your attention.
        On the question of whether this has an adverse effect on
    the low-income housing tax credit they basically say, since
    dividend returns to shareholders are not negatively affected
    under any reasonable assumptions of dividend payout ratios,
    there appears to be no need to change the fundamental
    calculation of the excludable dividend amount, a policy
    advocated by the low-income housing tax credit associations.
    They said that because it appears that any potential negative
    effects would be due solely to the change in the capital gains
    basis and potential additional capital gains taxes, any remedy
    should be aimed at that issue. So the problem would be largely
    ameliorated by allowing the capital gains tax basis to be
    increased either by the amount of the low-income housing tax
    credit or by the amount of the low-income housing investment
    tax credit investments expensed by the investor, or lowering
    capital gains tax rates.
        Do you know whether the low-income housing tax credit
    associations have looked at trying to find a fix on the capital
    gains basis side rather than trying to get the tax credit added
    back to the EDA?
        Mr. NEY. Mr. Chairman, I believe they are looking at all
    options that protect, in fact, the ability for this program to
    continue.
        I would note, I talked today to the mortgage bankers and
    just pointed out for them to take a second look, because this
    is so serious.
        If I could, Mr. Chairman, I wanted to say something about
    the study. The premise of the study is, because the economic
    growth sparked by the President's proposal would increase
    corporate earnings, corporations that would have operated at a
    loss without the economic stimulation package will not sell
    their credits.
        Now, the MBA study does not document its findings and is
    limited to a 2-year analysis, which is a very short period of
    time considering that the low-income housing tax credit program
    is a long-term program.
        Second, the MBA study also doesn't quantify the price
    elasticity of the credit, even though it indicates the value of
    the credit will go down, if not for any other reason than
    effectively eliminating the double taxation of corporate
    earnings, increasing the cost basis of the stock.
        Also, I want to point out, the MBA makes the argument,
    without the stimulus plan, without it, including the dividend
    exclusion component, the economy and the corporate earnings
    will go into such a tailspin that the demand for credits might
    be less than with the stimulus action. I don't think there is
    any reasonable expectation that would happen.
        Lastly, if I could, the low-income housing tax credit
    program operates on slim margins with multiple layers of
    assistance. Even a small change in the value of the credit and
    reducing amount of equity capital raised within the credit
    program, which both the ENY and the MBA studies acknowledge
    would mean that the population location served by the program
    would probably change.
        I wish I could answer the question better for the
    gentleman, but----
        Mr. RYAN. I had a feeling you had an answer ready.
        Mr. NEY. Right off the top of my head. I learned that from
    Mr. Thomas in House Administration over 6 years. I think that
    this needs to be really looked at is, I guess, the point of my
    answer.
        Mr. RYAN. I just wanted to say, I am glad we are bringing
    this discussion to a really high level. The capital gains basis
    adjustment for the low-income housing tax credit is a new idea
    that I hadn't seen until I read this study. So I think that is
    something that is interesting to look at while we try and make
    sure that no damage is done to existing structures. So I
    appreciate that.
        I also think it is important to note that macroeconomic
    forecasters at the Brookings Institution cite--to say it is a
    reason for opposing the Bush plan--tell us that we are going to
    get a million new jobs in the next year and half.
        So, with that, I thank the Chairman.
        Chairman THOMAS. I thank the gentleman. Does the gentleman
    from Pennsylvania still feel sufficiently motivated to inquire?
        Mr. ENGLISH. I actually was hoping to allow this to go
    forward, but since a couple of policies have been mentioned
    that I am very directly interested in and my name has been
    invoked, I feel the need to make a couple of points.
        First of all, I want to congratulate Mr. Upton for getting
    involved in the cause of promoting expensing. I have been
    involved in this cause since 1996. I have introduced
    fundamental tax reform legislation to promote expensing. I
    agree with him that this is a fundamental reform that is
    necessary for us to maintain our manufacturing base on shore.
        I have introduced my own bill to promote full expensing. I
    think my efforts complement his and Mr. Weller's, and I wish
    them well. I would encourage them to take a look at a couple of
    issues that are not addressed in their bill that are addressed
    in mine, for example, full retroactivity for 2003, which I
    think is essential if you are going to move an expensing bill
    forward.
        Also, a better treatment of leasing products, I think is
    absolutely critical if you are actually going to move the
    language forward.
        I think the principle that you have laid out here is a
    sound one, and I think it is absolutely critical for the cause
    of maintaining the level of capital investment necessary to
    keep good-paying jobs on shore. The only way our workers can
    compete with the Pacific Rim is if our employers are making the
    level of capital investment necessary in manufacturing
    facilities to be able to have--to continue to have the most
    productive workers on the planet here in the United States.
        A couple of other points: I would simply commend the
    gentleman on the issue of tool and die and trade, on which I
    have spent a great deal of time. I would encourage him to look
    at the study done by the International Trade Commission, which
    frankly debunks the notion that steel prices are the primary
    problem for tool and die.
        There are a variety of problems of which the brief spike in
    steel prices certainly was a contributing factor. Their real
    problems have to do with long-term moving of their customer
    base off shore and some other fundamentally difficult trade
    problems for which I don't think there is an easy remedy.
        So I would welcome his participation. I don't think that
    really it serves much of a purpose to attribute all of the
    problems of small manufacturers to the President's steel policy
    which, after all, only covers 28 percent of the steel products
    being produced. We have seen a decline recently in steel
    prices, and also we have seen that steel prices are now higher
    in other jurisdictions than in ours.
        I think that our steel consumers can thrive by using
    domestic steel and foreign steel where it is appropriate, but I
    don't think they need access to dump prices in order to be
    competitive, particularly given the way the international
    market is looking. You and I can disagree on that, but that is
    probably a topic for a different panel; and I salute you for
    the excellent work that you and Mr. Weller have done in looking
    at some of the tax issues that I think are central to
    maintaining our industrial base.
        I thank the gentleman.
        Mr. UPTON. I appreciate the gentleman's kind words and
    constructive comments, for sure. I also might add to that,
    maybe a Buy America provision with regard to expensing might be
    appropriate. I also want to thank the gentleman for his
    leadership on the tax credits for deploying broadband,
    something that we both care deeply about in urban and rural
    areas.
        Chairman THOMAS. The Chair wants to thank all Members. Are
    there any additional inquiries or questions?
        The Chair especially applauds those Members who have taken
    the time to examine additional ways in which we might assist
    the economy in this difficult time. I thank the gentleman from
    Michigan for his legislation and thank all Members. If there
    are no further inquiries, the hearing is adjourned.
        [Whereupon, at 2:50 p.m., the hearing was adjourned.]
        [Submissions for the record follow:]

            Statement of the Affordable Housing Tax Credit Coalition
        Mr. Chairman and Members of the Committee, this statement is
    submitted by the Affordable Housing Tax Credit Coalition
    (``Coalition'') in connection with the Committee's hearings on the
    Administration's proposals on economic growth included in the Fiscal
    Year 2004 budget. The Coalition is a trade organization based in
    Washington, DC, comprised of most of the major private sector
    participants in the Low-Income Housing Tax Credit (``Housing Credit'')
    program. Its members represent syndicators, investors, for-profit and
    not-for-profit developers, lenders, managers and public agencies
    (including those which allocate Low-Income Housing Tax Credits).
    Coalition members are responsible for raising the vast majority of the
    Six Billion Dollars raised annually for investment in affordable rental
    housing properties. We appreciate this opportunity to share our views
    with the Committee.
    Introduction

        The Coalition wishes to stress that it takes no position on the
    overall dividend exclusion proposal. Indeed, some of the Coalition's
    members have expressed support for the Administration's proposal. Our
    concern is strictly with the impact of this proposal on the ability of
    the Housing Credit to produce the affordable housing that Congress
    intended in enacting this program.
        If enacted in its present form, the Administration's proposal to
    eliminate double taxation of corporate dividends could have a severely
    adverse impact on the Housing Credit program, the only significant
    producer of affordable rental housing for America's low-income
    families. Without the rental housing that the Housing Credit provides,
    America's housing crisis will worsen significantly and the major
    economic stimulus the Housing Credit provides will be lost. Although we
    do not believe the Administration intends to undermine the Housing
    Credit or the low-income housing opportunities it provides, this
    proposal puts the Housing Credit's future in serious jeopardy.
    Background of the Housing Credit

        Originally signed into law as part of the Tax Reform Act of 1986,
    the Housing Credit is responsible for the production of virtually all
    affordable rental housing in the United States--over 115,000 dwelling
    units annually and 1.5 million units since enactment. The Congress
    understood from the beginning that private capital would be attracted
    to affordable housing only in exchange for tax credits since cash
    returns would be virtually non-existent as a result of rental
    restrictions. The program is a model of well-thought-out good
    government, involving effective public-private partnerships and sound
    administration by the States, which together assure the housing is
    developed and maintained according to strict program rules. Its
    longevity is testimony to the fact that the program has operated as
    intended. The program enjoys widespread and bipartisan congressional
    support--in 2000, legislation to increase the amount of Housing Credits
    was co-sponsored by 85% of the Congress, with almost equal numbers of
    Republicans and Democrats.
    How the Housing Credit Works

        The program provides tax incentives, in the form of credits against
    federal income tax, in exchange for investment in newly constructed or
    substantially rehabilitated affordable rental housing. For periods of
    30 years or more, this housing serves low-income people, who pay
    restricted rents and who earn a maximum of 60% of area median income
    (although average incomes in these properties are far lower). Credits
    are allocated to the States based upon population. The States
    determine, within broad federal guidelines, their own housing
    priorities and then choose the properties which are to be awarded
    Housing Credits. Developers, many of which are non-profit
    organizations, compete for Housing Credits; in most States demand for
    Housing Credits far exceeds the supply, even with the recent increase
    authorized in 2000. Developments which are awarded Housing Credits are
    located in urban, suburban and rural areas. Although a majority of the
    properties serve families, a substantial number serve elderly, disabled
    and special needs populations.
        Once the Housing Credits are awarded, investors provide equity
    capital to finance a substantial portion of the costs of constructing
    or rehabilitating the housing. This equity capital reduces the need for
    mortgage financing and decreases debt service payments, thereby
    lowering operating cost and allowing owners to rent to low-income
    persons who pay regulated rents well below market rates.
        Approximately 98 percent of this equity capital is raised from
    corporations, including banks, financial institutions, insurance
    companies, and Government Sponsored Enterprises such as Fannie Mae and
    Freddie Mac. Investors have contributed Forty Billion Dollars since
    1986. Due to passive loss and alternative minimum tax limits,
    individual investors supply very little capital and cannot compensate
    for any reduction in corporate investment. Even if the passive loss and
    alternative minimum tax rules were to be substantially modified,
    raising capital from individual investors is far less efficient because
    individuals cannot be expected to make commitments at the levels which
    corporations invest, which are typically in the tens of millions of
    dollars.
        It is important to note that the prices which corporations are
    willing to pay for Housing Credits have risen dramatically over the
    past ten years, which translates into more equity available to build
    affordable housing. Prices began to rise after the Congress made the
    Housing Credit program a permanent part of the Internal Revenue Code in
    1993 because investors became confident that the program would be
    around for the long term. Indeed, prices have risen by approximately 50
    percent in the past ten years, meaning that the program's efficiency
    has increased tremendously over that time.
        Housing Credits are earned over a 10-year period, although they are
    subject to recapture for 15 years if various program rules are
    violated. Accordingly, corporations are highly motivated to make sure
    that the Housing Credits are received and not lost to recapture. Many
    corporations engage firms with special expertise in this area, often
    referred to as Housing Credit syndicators, to help them in structuring
    and monitoring the properties. This very intense oversight and the
    effective administration conducted by States are the principal reasons
    that the program has operated in accordance with government
    requirements--and even exceeded expectations--throughout its history.
    Impact of the Dividend Exclusion Proposal on the Housing Credit

        Dividends paid by corporations to individual shareholders would be
    excluded from taxable income when paid out of previously taxed
    corporate income. Dividends paid by corporations in excess of
    previously taxed income would be included in taxable income. The
    proposal is intended to provide the exclusion only if the corporation
    has paid tax on its earnings to avoid double taxation on the earnings.
    However, to the extent that a corporation reduces its corporate tax
    burden by the receipt of Housing Credits (as well as most other tax
    credits), it lowers the amount of tax-free dividends it can distribute
    to its shareholders (or ``deemed dividends'' that shareholders can use
    to increase their stock basis for capital gains purposes). An exception
    is provided under the proposal for foreign tax credits. We understand
    that an exception will also be provided for alternative minimum tax
    credits.
        The Committee has been presented with the Ernst & Young LLP report
    entitled, ``The Impact of the Dividend Exclusion Proposal on the
    Production of Affordable Housing'' (the ``E&Y Report''). The E&Y Report
    was commissioned by the National Council of State Housing Agencies. The
    E&Y Report makes a compelling case that if the proposal is enacted,
    there will be reduction of approximately 40,000 dwelling units each
    year--or 35 percent of Housing Credit production. This will adversely
    affect more 80,000 people annually. Extrapolated over the next ten
    years, this proposal could mean that over 800,000 people will be
    deprived of the decent, safe and affordable housing that the Housing
    Credit provides.
        It is important to recognize, as does the E&Y Report, that each
    corporation will be affected differently by the dividend exclusion
    proposal and that corporate decision making with respect to Housing
    Credit investments may vary widely from company to company. In our
    view, the most dramatic impact may be to drive down the price that
    corporations are willing to pay for Housing Credits. As demonstrated by
    the E&Y Report, on average, a corporation which today pays
    approximately 92 cents for each dollar of Housing Credit will find that
    the loss of shareholder tax benefits can be greater than the net
    benefits at the corporate level (See, Exhibit I-1 and page 5 of the E&Y
    Report). The result is that investment in Housing Credits may be
    unattractive at current prices.
        To the extent that some corporations will be willing to pay less
    for Housing Credits, it will inevitably affect what all corporations
    are willing to pay because is axiomatic that prices are determined by
    the marginal buyer. If prices paid for Housing Credits drop, it will
    mean that there will be less equity capital available for the
    production of affordable housing.
        As shown in the E&Y Report, affordable housing properties are
    financed principally from three sources--first mortgage financing,
    whose debt service must be paid from property revenues; ``soft''
    financing, typically obtained from state and local governmental
    sources, where repayment terms are deferred and payable only from
    available cash flow; and from equity capital. The amount of first
    mortgage financing is tied to the rental revenues of the property and
    since rents are strictly limited under the Housing Credit program, that
    financing is not able to be increased if other sources are decreased.
    The amount of equity capital is tied principally to the amount of
    Housing Credits generated by a particular project (which, in turn, is
    tied to the costs incurred) and to the amount an investor is willing to
    pay for a given amount of Housing Credits. Theoretically, the reduction
    in equity capital could be made up by an increase in soft financing,
    but that is highly unlikely in light of budget constraints faced by all
    levels of government. Even if the costs of the housing could be
    reduced, which may or may not be possible, the amount of equity capital
    would be further reduced because the amount of Housing Credits
    generated is a function, in part, of the costs to produce the housing.
        The result is if there is less equity, then there will be a
    financing gap which will make a substantial number of affordable
    housing developments financially infeasible. In other words, the
    sources available will be less than the costs of building the housing.
    In Ernst and Young's estimation, this means that 40,000 fewer units can
    be produced.
        The mere introduction of this proposal has caused some corporations
    to suspend making Housing Credit investments. Accordingly, it is
    critical that the Administra- tion and the Congress act expeditiously
    to protect the Housing Credit program so that investments are not
    frozen and production of affordable housing is not crippled.
    The Housing Credit Provides Economic Stimulus

        More and more working families need affordable housing. Today, 40
    million Americans--one in seven--either spend more than one-half their
    income on housing or live in substandard conditions. This problem has
    increased by an alarming 60% between 1997 and 2001. The
    Congressionally-appointed, bipartisan Millennial Housing Commission
    stated last year that the evidence is ``mounting that stable,
    affordable rental housing plays an important role in helping families
    find and hold jobs.''
        The dividend exclusion proposal is part of a larger package
    introduced by the Administration in the hopes of reviving our weak
    economy. However, it would be tragic and ironic if this economic
    stimulus proposal undermined the Housing Credit pro- gram, which itself
    serves as a powerful economic stimulus. Based on figures extrapolated
    from a study conducted by the National Association of Home Builders,
    each year the construction and ongoing operation of Housing Credit
    properties generates approximately $8.8 billion of income for the
    economy, creates 167,000 jobs, and pro- duces $1.35 billion of revenue
    for cash strapped local governments.
        In short, harming the Housing Credit harms the economy.
    Proposed Solution

        To prevent a short-term cessation or a decrease in investment in
    Housing Credit properties, the Administration and the Congressional
    leadership should immediately issue statements that the Housing Credit
    program will be protected in the dividend exclusion proposal. The
    solution should be to allow income, the tax on which has been offset by
    the Housing Credit, to be included in a corporation's excluded dividend
    account, thereby allowing corporations to distribute such dividends
    tax-free to shareholders or to allow the same basis adjustments as
    would be otherwise permitted under the proposal. This solution would
    simply allow the continued success of the Housing Credit program and
    the ongoing production of critically needed affordable rental housing
    for low-income persons.
        We understand that concern has been raised that if relief is
    provided for the Housing Credit, then advocates for other credits and
    tax preferences will seek similar treatment. While we are not opposed
    to treating other credits in a like manner, our principal concern
    involves the Housing Credit. The Congress has historically singled out
    the production of affordable housing for special treatment. In 1986,
    despite the dramatic changes which affected most taxpayers, the
    Congress and Administration recognized the need to continue to provide
    incentives for affordable housing and it created the Housing Credit
    program in response. In 1993, the Congress made the Housing Credit
    permanent, singling it out among a number of other credit programs. As
    noted earlier, the Administration has determined already to treat
    foreign tax credits and alternative minimum tax credits in a manner
    similar to our proposal. The point is that logical distinctions can and
    should be made and we urge the Committee to do so in the case of this
    very valuable and successful program.

    Statement of the Alliance for Small Business Investment in Technology,
                              Arlington, Virginia
        The Alliance for Small Business Investment in Technology (ASBIT)--a
    coalition of small business trade associations and computer industry
    corporations--is a strong supporter of the provision to increase
    expensing to $75,000 in the President's economic growth package. ASBIT
    very much supports the Small Business Expensing Improvement Act of 2003
    and the many other elements of the package that will pave the way for
    economic growth.
        Currently small businesses may expense up to $25,000 in capital
    expenditures each year, which is well below the annual technology
    investments of many small businesses, especially for a small capital
    intensive manufacturing company such as a commercial printer. Computer
    equipment makes up about 33% of the total amount of capital equipment
    expensed under section 179. The technological advances over the last
    two decades have greatly enhanced the productivity of small businesses.
    In fact, a recent Department of Labor report stated that American
    productivity has nearly doubled since 1995--from 1.4% to 2.6%
    annually--largely as a result of advancements in technology.
    Furthermore, many economists agree that higher worker productivity
    contributes to sustained economic growth; leads to lower unemployment
    and can grow government tax revenues. Some estimates show that a one-
    half-point increase in worker productivity could add close to $1
    trillion to the US tax coffers. Therefore, the need for increased
    expensing is certainly greater than it has ever been considering the
    current state of our economy.
        Provisions increasing expensing limits passed the House and the
    Senate last year with bipartisan support. The President's proposal to
    increase current expensing limits to $75,000 with a $325,000 phase out,
    embodied in H.R. 179, introduced by Representatives Herger, Weller,
    Johnson of Connecticut, Crane, Lewis of Kentucky, Foley, and Manzullo,
    and S. 158, introduced by Senators Snowe and Bond, will help businesses
    and the economy even more. We are very grateful to the President for
    proposing and to these legislators for introducing legislation to
    implement the change.
        While there are some signs of a possible weak economic recovery,
    the need to increase small business expensing allowances would further
    strengthen the economy by giving small businesses the opportunity to
    grow. Small businesses are increasingly dependent on current IT tools
    to stay competitive and we need these tools now in order to create jobs
    and assure recovery from the recession.
        This legislation will help the nation's nearly 20 million small
    businesses and especially the nearly 100,000 small technology and small
    manufacturing companies that have been especially hard-hit in the
    recent economic downturn. We urge the Ways and Means Committee to
    support for this beneficial update in U.S. tax law.
    About ASBIT
        The Alliance for Small Business Investment in Technology (ASBIT) is
    a bipartisan coalition of small business and information technology
    trade associations and companies that supports federal tax law changes
    to promote small business investment in technology products and
    services. ASBIT believes that such changes will improve small business
    productivity and strengthen the U.S. economy and the IT sector.

        Members of ASBIT include:
                                 AeA (American Electronics Association)
                                             Business Software Alliance
                                             Career College Association
                                                           Circuit City
                                                  Computers for Schools
                    CompTIA (Computing Technology Industry Association)
                                                  Corning, Incorporated
                                                                Gateway
                          Information Technology Association of America
                                Information Technology Industry Council
                                                      Intel Corporation
                             National Association for the Self-Employed
                          National Association of Women Business Owners
                                         National Small Business United
                                        National Society of Accountants
                               National Tooling & Machining Association
                                         Printing Industries of America
                                                            Radio Shack
                                      Small Business Council of America
                                      Small Business Survival Committee

              Statement of the American Forest & Paper Association
                               Executive Summary
         AF&PA Strongly Supports The President's Proposal To Eliminate
      The Double Taxation Of Corporate Income because it will improve the
                                  competitive
       position of U.S. industry and result in job creation and economic
                                    growth.
    U.S. Tax System Less Competitive

        In 1998, PricewaterhouseCoopers undertook a study for AF&PA to
    determine how income taxes in the U.S. compare with income taxes in six
    other countries in terms of facilitating or inhibiting investments in
    paper manufacturing and forestry. The study was updated in 2001 and
    again in 2003. Companies in the other countries, Brazil, Canada,
    Finland, Germany, Indonesia and Japan, compete aggressively with U.S.
    companies in all aspects of the forest products industry.
        The result was that U.S. income taxes are the most unfavorable of
    all the competing nations, or very close to it, for corporate income
    from papermaking and forestry. Moreover, because of recently enacted
    tax law changes by some competing countries, the U.S. will be even less
    tax competitive by 2005. In short, U.S. tax rules consistently raise
    disadvantages for U.S. corporate investments relative to the tax rules
    in most of the industry's competing nations. The overall effect is that
    U.S. companies cannot undertake certain investments that foreign
    competitors can undertake profitably because U.S. investors would be
    left with too little after paying tax. Because U.S. companies compete
    against foreign companies in capital and product markets both at home
    and abroad, the U.S. tax disadvantage ultimately limits the degree to
    which U.S. companies may successfully challenge foreign competitors.
        The reason that the U.S. tax system imposes such high effective tax
    rates compared to the competing nations is that the U.S. has high tax
    rates on every major piece of an investment--corporate-level earnings
    and individual-level earnings of interest, dividends and capital gains.
    In particular, the U.S. has the highest tax rate on the dividend income
    of individuals, net of any dividend credit. The range is zero (Brazil
    and Finland) to 43.8 percent (U.S.). See Attached Exhibits.
        The effective tax rate on U.S. corporate forestry operations is the
    highest of all nations studied--53 percent. This rate is 22 percentage
    points higher than the average of the other competing countries. See
    Exhibit 2. For paper manufacturing, the comparable effective tax rate
    is 61 percent--13 percentage points higher than the average of our
    international competitors. See Exhibit 1. As previously cited, one of
    the major reasons for this disparity is the fact that the U.S. has the
    highest effective tax rate on dividend income among forest products
    industry trading partners. Enactment of the President's proposal to
    eliminate the double taxation of corporate income would go a long ways
    towards helping the competitive position of the U.S. forest products
    industry.
    Effect Of The Dividend Proposal

        Specifically, enactment of the Administration's proposal to
    eliminate the double taxation of corporate income would reduce the U.S.
    effective tax rate on paper manufacturing from 61 percent to 44
    percent. This would place the U.S. in the middle of the competing
    nations in terms of tax competitiveness. If the Administration's
    proposed reduction of individual income tax rates were also enacted,
    the effective tax rate on U.S. paper manufacturing investments would
    decline further, to 40 percent. See Exhibit 1.
        Likewise, the effective tax rate on corporate forestry would
    decline from 53 percent to 34 percent, moving the U.S. into the middle
    of the group of competing nations with respect to these investments.
    The U.S. effective tax rate would decline to 29 percent if the proposed
    individual income tax rate reduction is adopted. See Exhibit 2.
    Reforestation Tax Act

        The aforementioned PricewaterhouseCoopers study also showed that
    the U.S. provides worse tax treatment than all our competitors do for
    reforestation costs and for the sale of timber. Congress can go a long
    way toward improving this situation by enacting ``The Reforestation Tax
    Act'' (RTA), which will soon be reintroduced this Congress by Rep.
    Jennifer Dunn and Rep. Max Sandlin, members of this Committee. Last
    Congress, the RTA (H.R. 1581) had 111 bipartisan cosponsors, including
    21 current members of this Committee, whom we hope will be original
    cosponsors of the reintroduced RTA.
        The RTA does two things to remove disincentives for private
    investment in our forests and promote reforestation efforts: (1)
    reduces the tax paid on timber sold by individuals and corporations;
    (2) improves the tax treatment of reforestation expenses.
        It is enthusiastically endorsed by all elements of the forest
    products industry--individual landowners, large and medium sized forest
    and paper companies and our labor unions. In addition, the RTA has the
    support of environmental groups such as the Conservation Fund, since
    the bill directly encourages replanting resulting in not only reduced
    sprawl but also an improved environment due to trees storing carbon
    dioxide that would otherwise be released into the atmosphere.
    Conclusion

        Enactment of the President's dividend proposal and the
    Reforestation Tax Act will make U.S. forest products companies
    competitive with our primary international competitor countries. The
    net effect of these policy changes will ensure that U.S. companies
    continue to be the dominate player in the world market for paper and
    wood products. Absent these changes in the tax law, this industry will
    decline in importance to the U.S. economy and to the many communities
    that rely on the industry for employment opportunities and tax revenue.
                                     ______

        The American Forest & Paper Association appreciates the opportunity
    to provide data that underscore the importance of the President's
    proposal to eliminate the double taxation of corporate income to the
    competitiveness of U.S. industry and job creation. We strongly support
    enactment of the President's proposal and look forward to working with
    the Committee on Ways and Means to ensure that U.S. manufacturers have
    a tax code that enables them to compete in a world economy. The
    elimination of double taxation of corporate income is one of the most
    important steps the committee can take to accomplish this shared goal.
        AF&PA is the national trade association representing more than 240
    member companies and related associations that engage in or represent
    the manufacturers of pulp, paper, paperboard and wood products, as well
    as the growers and harvesters of this nation's forest resources.
    America's forest and paper industry ranges from state-of-the-art paper
    mills to small, family-owned sawmills and some 9 million individual
    woodlot owners.
        The U.S. forest products industry is vital to the nation's economy,
    providing approximately 7 percent of the U.S. manufacturing output,
    while ranking among the top ten manufacturing employers in 42 states.
    More than 1.5 million people are employed by the forest products
    industry with an estimated annual payroll of $64 billion. Sales of the
    paper and forest products industry top $250 billion annually in the
    U.S. and export markets, making us the world's largest producer of
    forest products. We are also a natural resource based industry
    responsible for planting, growing and harvesting trees, a basic
    renewable resource.
        Despite these impressive numbers, all is not well with the forest
    products industry. We face serious international competitive threats.
    New capacity growth is taking place in other countries, where forestry,
    labor and environmental practices are not always as responsible as
    those in the U.S. Failure to successfully address the competitive
    challenges facing our industry means that public demand for our
    products will increasingly be met by other nations who do not adhere to
    our high standards. Without our influence as a major international
    market presence, the ability of the U.S. to advance responsible
    forestry standards and forest product manufacturing practices globally
    would be compromised. The decline of the domestic industry is causing
    serious economic harm for many communities across the country where the
    industry is a way of life. This is reflected in the fact that since
    1997, 88 U.S. paper mills have closed. In the last two years alone, 40
    mills have permanently shut their doors, idling 104 machines and about
    6 million tons of productive capacity. As a result, the industry has
    lost more than 43,500 jobs, or 19 percent of our workforce, in the last
    5 years.
        Recognizing the danger posed by our industry's loss of
    competitiveness, in 1998 AF&PA undertook an extensive research project
    to identify the causes of this trend and determine what could be done
    to maintain the domestic industry's viability. The results of this
    research made it clear that the major factors causing erosion of our
    competitive position are:

         Reduced Access to Fiber
         Environmental Regulation
         International Trade Barriers
         U.S. Tax System

        It is the last factor where this Committee has jurisdiction and can
    make a meaningful difference in the competitiveness of U.S. industry.
    U.S. Tax System Less Competitive
        In 1998, PricewaterhouseCoopers undertook a study for AF&PA to
    determine how income taxes in the U.S. compare with income taxes in six
    other countries in terms of facilitating or inhibiting investments in
    paper manufacturing and forestry. The study was updated in 2001 and
    again in 2003. Companies in the other countries, Brazil, Canada,
    Finland, Germany, Indonesia and Japan, compete aggressively with U.S.
    companies in all aspects of the forest products industry. To the best
    of our knowledge, no other industry has undertaken such a comprehensive
    study to see exactly how U.S. tax law compares to that of our
    competitors.
        The result was that U.S. income taxes are the most unfavorable of
    all the competing nations, or very close to it, for corporate income
    from papermaking and forestry. Moreover, because of recently enacted
    tax law changes by some competing countries, the U.S. will be even less
    tax competitive by 2005. In short, U.S. tax rules consistently raise
    disadvantages for U.S. corporate investments relative to the tax rules
    in most of the industry's competing nations. The overall effect is that
    U.S. companies cannot undertake certain investments that foreign
    competitors can undertake profitably because U.S. investors would be
    left with too little after paying tax. Because U.S. companies compete
    against foreign companies in capital and product markets both at home
    and abroad, the U.S. tax disadvantage ultimately limits the degree to
    which U.S. companies may successfully challenge foreign competitors.
    The Rankings
        The rankings of competing nations from least taxed to most taxed
    are subsequently displayed in the attached charts. See Exhibits 1 & 2.
    The rankings refer to income taxes levied on corporate income, first
    the tax paid by the corporation and second the tax paid by shareholders
    and lenders as a result of their financing the investments that
    generated the corporate income.
        In general, the U.S. and Canada have the least competitive income
    taxes, while Indonesia, Brazil, Finland and Japan have the most
    competitive income tax systems. Germany is now closer to the less
    competitive pair, but by 2005 will be among the more competitive group.
    Why the U.S. Tax System Is Not Competitive
        The reason that the U.S. tax system imposes such high effective tax
    rates compared to the competing nations is that the U.S. has high tax
    rates on every major piece of an investment--corporate-level earnings
    and individual-level earnings of interest, dividends and capital gains.
    In particular:

         The U.S. has the highest tax rate on the dividend income of
    individuals, net of any dividend credit. The range is zero (Brazil and
    Finland) to 43.8 percent (U.S.).
         The U.S. has the second highest tax rate on corporate
    income. The range is 29 percent (Finland) to 43.7 percent (Japan). The
    U.S. is at 39.2 percent.
         The U.S. has the highest tax rate on the capital gain
    income of individuals. The range is zero (Germany) to 24.2 percent
    (U.S.).
         The U.S. has the third highest tax rate on the interest
    income of individuals. The range is 15 percent (Indonesia) to 51.2
    percent (Germany). The U.S. is at 43.8 percent.
    Integration of Income Taxes
        If a country that has both a corporate income tax and an individual
    income tax does not integrate the two taxes, then income generated by
    corporate investments will be exposed to two income taxes while income
    generated by noncorporate businesses bears just one level of income
    tax. In an unintegrated system, such as in the U.S., corporate
    shareholders first pay the corporate income tax and then pay individual
    income tax on (i) dividends that the corporation pays out or (ii)
    capital gain on increased stock values due to the earnings that the
    company retains.
        Countries use different methods to mitigate or eliminate double
    taxation of corporate income. A shareholder might be allowed to deduct
    dividends received for the reason that that income has already been
    taxed once under the corporate income tax. Under a more elaborate and
    theoretically precise approach (called the imputation credit), a
    shareholder may be given a credit to reduce individual income tax by
    the amount of corporate income tax imputed to his shares and then be
    taxed on the corresponding amount of the corporation's earnings under
    the individual income tax.
        The U.S. does not integrate its corporate and individual income
    taxes. Most countries in the competing group provide a significant
    degree of integration to relieve the double taxation of corporate
    income.
    President's proposal to Eliminate the Double Taxation of Corporate
            Income
        The President's proposal would integrate corporate and individual
    income taxes so that corporate income would be taxed once and only
    once. Under the proposal, corporations would be permitted to distribute
    nontaxable dividends to their shareholders to the extent that those
    dividends are paid out of income previously taxed at the corporate
    level. The effective tax rate on U.S. corporate forestry operations is
    the highest of all nations studied--53 percent. This rate is 22
    percentage points higher than the average of the other competing
    countries. See Exhibit 2. For paper manufacturing, the comparable
    effective tax rate is 61 percent--13 percentage points higher than the
    average of our international competitors. See Exhibit 1. As previously
    cited, one of the major reasons for this disparity is the fact that the
    U.S. has the highest effective tax rate on dividend income among forest
    products industry trading partners. Enactment of the President's
    proposal to eliminate the double taxation of corporate income would go
    a long ways towards helping the competitive position of the U.S. forest
    products industry.
        Specifically, enactment of the Administration's proposal to
    eliminate the double taxation of corporate income would reduce the U.S.
    effective tax rate on paper manufacturing from 61 percent to 44
    percent. This would place the U.S. in the middle of the competing
    nations in terms of tax competitiveness. If the Administration's
    proposed reduction of individual income tax rates were also enacted,
    the effective tax rate on U.S. paper manufacturing investments would
    decline further, to 40 percent. See Exhibit 1.
        Likewise, the effective tax rate on corporate forestry would
    decline from 53 percent to 34 percent, moving the U.S. into the middle
    of the group of competing nations with respect to these investments.
    The U.S. effective tax rate would decline to 29 percent if the proposed
    individual income tax rate reduction is adopted. See Exhibit 2.
        According to a study prepared for the Business Roundtable, the
    Administration's economic growth plan will increase the number of U.S.
    jobs beyond the current forecast by an average of 1.8 million per year
    for the next two years and an average of 1.2 million per year for the
    next five years. The dividend component will have the single most
    positive effect on growth, alone accounting for an average of 500,000
    jobs per year for the next five years. This is critical for the forest
    products industry given the previously referenced mill closures and job
    losses the industry has suffered in the previous five years.
        The double tax on corporate income increases the cost of capital
    for corporations. According to the President's Council of Economic
    Advisors, enactment of the President's economic growth plan would
    reduce the cost of capital by more than 10 percent. This reduction will
    encourage higher levels of corporate investment and capital
    accumulation, resulting in greater productivity increases and,
    therefore, higher wages for workers. Productivity improvements are
    essential to job and wage growth in manufacturing sectors such as
    forest products. I urge the Committee to support the President's bold
    initiative to eliminate the double taxation of corporate income.
    Reforestation Tax Act
        Another reason the U.S. tax code is not competitive with competing
    nations is the tax treatment of forestry operations. No other
    competitor country imposes such a large percentage of tax on corporate
    forestry operations. In addition to industry competitiveness, there are
    environmental reasons and reasons relating to urban sprawl why the U.S.
    should provide better tax treatment for forestry operations.
        The 2001 Southern Forest Resource Assessment (SFRA) study by the
    U.S. Forest Service examined the status, trends and potential future of
    southern forests. It concluded tax policy is an important component in
    keeping land in forest cover. Urban growth presents a substantial
    threat to the condition, health and long-term sustainability of these
    forests. Between 1982 and 1997, developed land in the South increased
    by 45 percent, representing 12 million acres of forest lost forever to
    development. The SFRA report concluded that another 12 million acres
    could be sold and developed by 2020. Specifically, there are two
    critical ways the tax code can play a role in keeping land in working
    forests that AF&PA urges the Committee to consider. They include
    changing how reforestation costs are treated under the tax code and the
    tax treatment of the gain from the sale of timber.
        AF&PA agrees with the SFRA conclusion that changes to the tax code
    are needed to ensure that landowners hold on to their forest land
    rather than be forced to sell to developers, thus worsening urban
    sprawl. Another reason for providing tax incentives for owners of
    timber is competitiveness. The aforementioned PricewaterhouseCoopers
    study also showed that the U.S. provides worse tax treatment than all
    our competitors do for reforestation costs and for the sale of timber.
        We do not believe this situation was intended by Congress. Rather
    it is more likely the result of years of tax policy changes without an
    analysis of the accumulated effect on either urban sprawl or
    international competitiveness. Unfortunately, current law discourages
    job creation in the U.S., promotes imports and undercuts the high
    environmental standards that the U.S. practices. Congress can go a long
    way toward improving this situation by enacting ``The Reforestation Tax
    Act'' (RTA), which will soon be reintroduced this Congress by Rep.
    Jennifer Dunn and Rep. Max Sandlin, members of this Committee. Last
    Congress, the RTA (H.R. 1581) had 111 bipartisan cosponsors, including
    21 current members of this Committee, whom we hope will be original
    cosponsors of the reintroduced RTA.
        The RTA recognizes the unique nature of timber and the overwhelming
    risks associated with an investment in this essential natural asset and
    attempts to place the industry in a more equal position with its
    international competitors. Trees can take anywhere from 25 to 75 years
    to grow to maturity. Fire, disease, weather, events that are
    unpredictable and uninsurable, can wipe out acres of trees at any time
    during the long, risky growing period. Good management practices can
    help mitigate some of nature's vagaries, but are costly over the entire
    growing period. The RTA does two things to remove disincentives for
    private investment in our forests and promote reforestation efforts:
    (1) reduces the tax paid on timber sold by individuals and
    corporations; (2) improves the tax treatment of reforestation expenses.
        Specifically, the RTA provides a sliding scale reduction in the
    amount of taxable gain based on the number of years the asset is held--
    3 percent per year, up to a maximum reduction of 50 percent. While this
    provision does not fully compensate for the negative tax impact of
    inflation, it does provide a significant incentive for landowners not
    only to re-plant their land after a timber harvest, but to keep their
    land in forest cover for generations to come.
        Under current law, the first $10,000 of reforestation expenses are
    eligible for a 10 percent tax credit and can be amortized over 7 years.
    Reforestation expenses are the initial expenses required to establish a
    new stand of trees, including expenses for site preparation, the cost
    of seedlings and the labor costs required to plant the seedlings.
    Because amounts over $10,000 may not be amortized and do not qualify
    for the credit, most reforestation expenses are not recoverable until
    the timber is harvested, many years after being incurred. The revised
    RTA removes the $10,000 cap and allows all reforestation expenses to be
    expensed in the year incurred. This change in the law will provide a
    strong incentive for increased reforestation by eliminating the
    arbitrary cap on such expenses and allowing them to be immediately
    expensed.
        The RTA is enthusiastically endorsed by all elements of the forest
    products industry--individual landowners, large and medium sized forest
    and paper companies and our labor unions. In addition, the RTA has the
    support of environmental groups such as the Conservation Fund, since
    the bill directly encourages replanting resulting in not only reduced
    sprawl but also an improved environment due to trees storing carbon
    dioxide that would otherwise be released into the atmosphere. Last
    year, the RTA was one of a number of bills subject to a hearing on
    Environmental/Conservation Tax Measures before Chairman Jim McCrery's
    Select Revenue Measures Subcommittee. When asked to comment on the
    bill, the entire panel of witnesses, representing industry,
    environmental and conservation groups all expressed support for the
    bill.
        A variation of the RTA was included in the 1999 Omnibus Tax Bill
    that passed Congress but, for unrelated reasons, was vetoed by
    President Clinton. Likewise, it was included in the Minimum Wage and
    Small Business Tax Relief Bill passed by the House in 2000.
        AF&PA strongly urges the Committee to include the RTA in tax
    legislation you enact this year. The RTA has the benefit of being
    bipartisan, helps our industry's competitive position, helps U.S.
    companies and the jobs they provide and promotes sustainable forestry
    in an environmental friendly way.
    Conclusion
        Enactment of the President's dividend proposal and the
    Reforestation Tax Act will make U.S. forest products companies
    competitive with our primary international competitor countries. The
    net effect of these policy changes will ensure that U.S. companies
    continue to be the dominate player in the world market for paper and
    wood products. Absent these changes in the tax law, this industry will
    decline in importance to the U.S. economy and to the many communities
    that rely on the industry for employment opportunities and tax revenue.
                                     ______

                             PricewaterhouseCoopers
                                   Exhibit 1
    ISSUE: Where are the tax hurdles the highest for a corporation that
            would invest in papermaking it its own country?
            [GRAPHIC] [TIFF OMITTED] T1630K.001

    CONCLUSION: The U.S. tax system raises very high hurdles compared to
            other countries. The effective tax rate of the United States is
            the second highest in the competing group and 13 percentage
            points higher than the average for other countries.
                                     ______

                             PricewaterhouseCoopers
                                   Exhibit 2
    ISSUE:Where are the tax hurdles the highest for a corporation that
            would invest in forestry and timber in its own country?
            [GRAPHIC] [TIFF OMITTED] T1630L.001

    CONCLUSION: The U.S. tax system raises very high hurdles compared to
            other countries. The effective tax rate of the United States is
            the second highest in the competing group and 22 percentage
            points higher than the average for other countries.

                   Statement of the American Gas Association
    Executive Summary
         The American Gas Association represents the nation's local
    natural gas utilities. Natural gas companies are traditional utilities
    with relatively stable income streams.
         Natural gas utilities pay out nearly two-thirds of their
    net income to their five million shareholders.
         Natural gas utility shareholders are both older and less
    affluent than shareholders at large. Eliminating the double taxation of
    corporate dividends will be of enormous benefit to them.
         Repealing the double tax upon dividends will greatly assist
    natural gas utilities in raising the $100 billion in capital that they
    will need in the next two decades to fund the infrastructure that the
    growing natural gas market will demand.
         Sound national policy should encourage this growth, because
    natural gas is an abundant domestic energy resource, it is an
    economical fuel, and it is the most environmentally benign of the
    fossil fuels.
    Introduction
        The American Gas Association (``AGA'') is grateful for the
    opportunity to share its views with the House Committee on Ways and
    Means with respect to the issue of eliminating the double taxation of
    dividends. AGA is composed of 190 natural gas distribution companies
    that deliver natural gas throughout the United States. Local gas
    utilities deliver gas to more than 64 million customers nationwide, and
    AGA members deliver approximately 83 percent of this gas.
        Energy utilities that deliver natural gas have approximately 5
    million shareholders. Their market capitalization is nearly $300
    billion. They contribute about $15 billion in dividends to the economy
    annually.
        AGA member companies are, and always have been, traditional ``brick
    and mortar'' enterprises. They acquire natural gas supply on behalf of
    most of their customers, who are principally residential and commercial
    consumers. They deliver this gas through more than one million miles of
    underground pipe. While many AGA members provide other (usually
    related) services to their customers, the traditional gas acquisition
    and delivery function is at the core of their business. State public
    service commissions typically regulate the rates and terms and
    conditions of service of AGA members under traditional cost-of-service
    regulation.
        AGA members are utilities in the well-known, traditional sense of
    the word. From a financial perspective, AGA members enjoy a relatively
    steady pattern of net income. As a result, almost all AGA member
    companies pay regular dividends to their shareholders. Natural gas
    distribution utilities pay out nearly two-thirds of their net income in
    dividends, almost twice the average for U.S. public companies. Indeed,
    many AGA member companies have paid quarterly dividends without
    interruption for decades (in some cases, even longer). As a whole
    natural gas utilities have a dividend yield of approximately five
    percent annually.
        The shareholder profile of AGA member companies is, as will be
    discussed below, unique. Quite importantly, the shareholder base of
    natural gas utility companies is very heavily tilted toward those who
    purchase shares and hold them, principally for the steady and
    significant dividend flow that they produce.
        AGA enthusiastically supports the proposal to eliminate the double
    taxation of corporate profits (first on corporate income and then again
    upon shareholder income) by excluding dividend income from a
    shareholder's taxable income. Doing so will provide enormous benefit to
    the shareholders of AGA member companies, will enhance their disposable
    income, and, will provide an economic impetus for the economy. It also
    will enhance the ability of AGA member companies to raise capital in
    order to build the $100 billion of new infrastructure that the market
    will demand in the two decades ahead. In the discussion that follows,
    we will explain why AGA member companies endorse this proposal with
    such enthusiasm and why adopting the proposal would serve the national
    interest.
        There are many sound reasons to eliminate the double taxation of
    dividends. Two reasons are most pertinent to natural gas utilities.
    First, elimination of the double taxation of dividends will be strongly
    beneficial to the unique shareholder base of natural gas utilities.
    Second, elimination of the double taxation of dividends will markedly
    improve the ability of natural gas utilities to raise the $100 billion
    in capital that they will require in the next two decades to provide
    the clean burning, economical natural gas that America's consumers will
    demand.
    Natural Gas Utility Shareholders Will Be Particularly Benefited By
            Elimination Of The Double Taxation of Dividends
        Utility stocks have historically attracted investors that seek the
    stable income and regular dividend stream that regulated utilities
    produce. These investors tend to be older (perhaps retired) and less
    affluent than shareholders as a group. They also tend to rely upon the
    regular income stream that utility stocks produce. Utility stocks
    appeal to those investors that do not have the risk tolerance that is
    necessary for investments in more speculative or volatile stock issues,
    where returns are often in the form of capital gains at some uncertain,
    future date. In times past, the prototypical utility shareholder was
    the retired investor with significant holdings in one or more telephone
    or electric companies. (That picture may have changed somewhat when the
    telephone business became the telecommunications industry and when some
    electric utilities became merchant generators and traders. As those
    industries now return to basics, they may again attract their
    historical shareholder group.)
        This traditional picture of a utility investor, however, continues
    to exist today for natural gas utilities. Individual investors hold
    more than half of the outstanding shares of gas distribution
    companies.i Now, as in the past, gas utility investors are
    individuals who are older and less affluent than investors at large.
    Nearly 70 percent of utility stockholders are 65 years of age or older,
    compared to 22 percent for all stockholders. This fact is amply
    demonstrated by the following graphic:
    ---------------------------------------------------------------------------
        \i\ Survey of American Gas Association members, 2002
        [GRAPHIC] [TIFF OMITTED] T1630M.001

        Moreover, almost 60 percent of utility shareholders have annual
    household incomes less than $50,000, compared to 25 percent for all
    stockholders as a group:ii
    ---------------------------------------------------------------------------
        \ii\ Edward Jones, Utility Investor Survey 2000 and the Federal
    Reserve Board, Survey of Consumer Finances 1998.
    ---------------------------------------------------------------------------

        [GRAPHIC] [TIFF OMITTED] T1630N.001

        The present proposal for tax reform would, therefore, be of direct
    and significant assistance to natural gas utility shareholders. First,
    removing the double taxation of corporate dividends would be of
    measurable benefit to the many natural gas utility shareholders who
    depend on dividends for their retirement income. Removing the double
    tax would increase the disposable income of these retirees. Second,
    doing so would be of great benefit to those at large who are not in the
    upper income brackets. It would directly reduce their tax burden and
    would increase their disposable incomes. Moreover, there is a greater
    likelihood that lower-income and middle-income shareholders will spend
    their cash dividends rather than save them, thus promoting further
    near-term growth in the economy.
    Natural Gas Utilities Rely Upon The Distribution Of Dividends As An
            Important Means Of Attracting Investment Capital
        According to an Edward Jones survey,iii investors choose
    utility stocks first for income and dividends and then for the security
    and stability of the underlying stock. In order to provide these
    distributions, gas utilities use most of their corporate net income to
    fund dividends--on average, gas distribution utilities distribute 62
    percent of their net income to investors as dividends,iv
    compared to 33 percent for the S&P 500 index.v
    ---------------------------------------------------------------------------
        \iii\ Edward Jones, Utility Investor Survey 2000
        \iv\ Data from Research Insight/PC Plus Data November 2002 and CA
    Turner Utility Reports December & January Issues 2002
        \v\ Wall Street Journal, Will Stock Dividends Get Back Their
    Respect? December 10, 2002
    ---------------------------------------------------------------------------
        Given the important role of dividends in attracting capital to the
    utility sector, elimination of the double taxation of dividends would
    provide a unique benefit to natural gas utilities. The result would be
    a significant boost in the dividend cash stream to investors. This
    would provide an additional, and important, incentive for investors to
    invest in natural gas utilities, thus encouraging long-term capital
    formation by not penalizing investment in companies, such as gas
    utilities, that pay a large portion of their net income in dividends.
    Unfortunately, current law penalizes dividends as a means of attracting
    capital. Doing so is unsound economic and tax policy.
        This tax reform would encourage companies to pay dividends rather
    than spending their funds on stock buy-back programs or investing in
    the securities of other companies. Such actions can be viewed as
    unproductive from an economic perspective. As the following discussion
    will demonstrate, elimination of the double taxation of dividends will
    provide an important and appropriate incentive that is in the national
    interest.
        Consumers today are turning to natural gas because it is a domestic
    energy source, because it is a good fuel value, and because it is the
    most environmentally friendly fossil fuel. The U.S. Department of
    Energy expects natural gas consumption to grow about 50 percent in the
    next 20 years.[vi] To meet this demand, natural gas
    utilities will need to spend $100 billion by 2020 to build new
    distribution pipeline infrastructure.vii (This does not
    include normal investment in replacement, maintenance, and safety of
    distribution facilities). Moreover, security-related investments have
    become more critical since 9/11. Natural gas utilities are working with
    the Federal Government to ensure the continued safe and reliable
    delivery of natural gas, even in today's uncertain environment. In any
    event, all commentators agree that the natural gas market is to grow by
    approximately 50 percent in the next twenty years. Enormous new
    investment will be necessary to meet this demand growth.
    ---------------------------------------------------------------------------
        \vi\ U.S. Department of Energy, Energy Information Administration,
    Annual Energy Outlook 2003. Numerous other analysts are fundamentally
    in agreement with these projections.
        \vii\ American Gas Foundation, Fueling the Future, 2000
    ---------------------------------------------------------------------------
        It is in the national interest that the market demand for natural
    gas be met. Natural gas is a domestic fuel. Production of natural gas
    stimulates the economy, avoids deleterious balance-of-payments issues,
    and promotes the security of the nation. It is best for the nation that
    we rely upon domestic energy sources because the investment in
    production (and jobs) occurs in the United States, the payment for the
    production does not go to a foreign source, and no foreign power may,
    at will, interdict the delivery of the commodity. Moreover, natural gas
    is relatively benign from an environmental perspective. America's
    natural gas utilities have an outstanding record for providing an
    economic fuel source safely, reliably and securely. AGA believes that
    national policy should, where possible, assist in facilitating this
    growth in the market. Elimination of the double taxation of dividends
    will clearly do so. It will reinforce the attractiveness to
    shareholders of utilities as an investment. It will, therefore, assist
    natural gas utilities in raising the $100 billion in capital that will
    be required to meet the projected demand for natural gas.
    Elimination of The Double Taxation of Dividends Will Stimulate Economic
            Growth
        Eliminating the double taxation of dividends would increase the
    disposable income of stockholders, thereby stimulating consumer
    spending and the economy as a whole. This multiplier effect would be
    more significant with regard to natural gas utilities than with other
    companies, as utilities distribute more than 60 percent of their net
    income as dividends and their shareholders tend to be older and less
    affluent.
    The Double Taxation Of Dividends Is Inequitable To Corporation and
            Taxpayers
        Under existing tax law, corporations distribute dividends employing
    funds that have already been subjected to the corporate income tax--
    most often at the 35 percent rate. The dividend is then taxed again to
    the individual taxpayer recipient at his or her marginal tax rate,
    which can be as high as 38.6 percent. The top marginal rate for
    individuals is nearly twicethe rate paid on capital gains, which is the
    other component of shareholder return. Existing law unfairly penalizes
    the payment of dividends by taxing them twice, at a cumulative tax
    burden that usually exceeds 50 percent. This is inequitable to both the
    corporation and to its individual shareholders. Moreover, it unfairly
    taxes dividends when compared to other returns. Capital gains carry no
    tax at the corporate level, and they are taxed at less than half the
    effective rate of dividends at the shareholder level. And returns on
    debt instruments--interest on corporate debt--are free of tax at the
    corporate level.
    Elimination Of the Double Taxation Of Dividends Would Promote Efficient
            Entity Selection And The Efficient Allocation Of Capital
        Current law promotes inefficiency in capital markets in at least
    two ways. As noted above, dividends are treated unfairly when compared
    to capital gains and returns on debt. Moreover, they are treated
    unfairly when compared to returns from other forms of business
    entities. Under current law, returns on capital invested in general
    partnerships, limited partnerships, joint ventures, and limited
    liability companies are only taxed once. Indeed, an extremely large
    number of such entities exist solely for the relatively favored tax
    treatment that they enjoy. Repealing the double taxation of corporate
    dividends would, therefore, promote efficiency in the selection of
    business entity. The needs of the markets--capital and consumer--would
    dictate the form of entity rather than the tax code.
        Moreover, double taxation of dividends artificially skews corporate
    investment decisions toward debt. Interest payments to bondholders and
    note holders are deductible at the corporate level, while dividends are
    taxed twice. Returns on debt and on equity should receive comparable
    tax treatment so that the market can determine whether debt or equity
    is the appropriate investment instrument in any particular
    circumstance.
    Elimination Of the Double Taxation Of Dividends Will Encourage Sound
            Corporate Management
        Under the corporate laws of most states, dividends may only be paid
    from earnings or capital surplus. In practical terms, dividends almost
    always are paid from current earnings. An entity that pays dividends,
    therefore, must have both earnings and cash in order to do so.
        Over the last two years, the nation has witnessed an array of
    stunning corporate failures, including a wide array of improper
    accounting legerdemain, outright fraud and illegality, and abuses by
    corporate managers and directors. Eliminating the double taxation of
    dividends will rectify the current disfavored treatment of dividends.
    It also will likely lead to an increased demand by shareholders for the
    payment of dividends. This will translate into an economic incentive
    for managers to operate their businesses in such a fashion that they
    can pay dividends. In correlative fashion, corporate managements will
    be required to focus on succeeding the old fashioned way--by generating
    corporate earnings. Given the events of the last several years, this is
    sound policy that Congress should seek to encourage.
        Repealing the double taxation of corporate dividends would
    represent a major change in U.S. tax policy. It would have a material
    and significant affect on the financial planning strategies of U.S.
    companies as well as a major impact upon future entity-formation
    decisions. For these and other reasons it would be prudent, as is the
    case with many major shifts in tax policy, that appropriate transition
    rules be incorporated in the legislation implementing the change.

                Statement of the American Insurance Association
        The American Insurance Association (AIA) appreciates having this
    opportunity to submit testimony on the President's dividend exclusion
    proposal (``Proposal''). AIA supports eliminating the double taxation
    of corporate earnings. We applaud the President's bold initiative to
    eliminate tax code biases that influence decisions about corporate and
    shareholder investment. We are concerned, however, that the treatment
    of tax-exempt bonds issued by state and local governments (``municipal
    bonds'') would drive-up borrowing costs for state and local
    governments, inhibit property and casualty (P&C) insurer participation
    in the municipal bond market and reduce the values of current P&C
    insurer investment portfolios. In AIA's view, these adverse effects can
    be avoided--by treating the implicit tax paid on a municipal bond
    investment as a tax paid for purposes of the excludable dividend amount
    (EDA) and the retained earnings basis adjustment (REBA)--in a manner
    that is consistent with the President's goals, Treasury's prior
    analysis of this issue, and current tax law principles.
        AIA's over 400 P&C insurance company members together wrote some
    $98 billion in P&C insurance premiums, or almost 30% of the P&C
    insurance market, in 2001. As of 2000, the P&C insurance industry held
    over $180 billion in municipal bonds. These holdings comprised over 10%
    of total outstanding such bonds, roughly 20% of total P&C insurance
    industry assets, and 50% of municipal bond holdings in the corporate
    sector in that year. Because municipal bonds offer needed security,
    liquidity and attractive after-tax yields, many AIA members invest
    significant amounts of their portfolios in these bonds in order to back
    obligations to pay insured losses to policyholders (e.g., in the event
    of a natural disaster or other catastrophic event). P&C insurers, among
    the largest institutional investors in intermediate and longer-term
    maturity municipal bonds, help to maintain stable and reasonable
    borrowing costs for state and local governments.
        The Administration proposes to eliminate the adverse effects of the
    double taxation of corporate earnings by making distributions of
    previously-taxed corporate earnings nontaxable to shareholders. After
    studying integration of the corporate and individual income tax systems
    for a full year, Treasury concluded in 1992 that such nontaxable
    treatment should apply to dividends paid out of earnings from
    investments in municipal bonds.\1\ For unexplained reasons, however,
    Treasury now proposes to abandon this conclusion.
    ---------------------------------------------------------------------------
        \1\ A Recommendation for Integration of the Individual and
    Corporate Tax Systems at 2, 4-6 (Department of the Treasury, December
    1992).
    ---------------------------------------------------------------------------
        The Proposal would include in a corporate investor's EDA its after-
    tax yield on a taxable bond, but would exclude from EDA the yield on a
    municipal bond. The EDA is the account out of which a corporation may
    make distributions to its shareholders without additional shareholder-
    level tax. Excluding the yield on a municipal bond, which is implicitly
    taxed to the investor, would penalize corporate investment in such
    bonds.
        The holder of a municipal bond gives up yield in lieu of paying
    federal income tax. The spread between taxable and municipal bond
    yields represents the implicit tax incurred by the municipal bond
    holder.\2\ The economic result is the same as if the holder had
    purchased a higher-yielding, taxable corporate bond, with the Federal
    Government then remitting the difference in yields to state and local
    governments. Unless the implicit tax is taken into account in
    calculating EDA, P&C insurers either will shift their investments to
    taxable bonds or demand a higher return on municipal bonds, thereby
    decreasing demand for municipal bonds and increasing the cost of
    borrowing for state and local governments. Simply put, the Federal
    Government would collect more tax from the P&C insurer at the expense
    of state and local governments.
    ---------------------------------------------------------------------------
        \2\ ``Holders of tax-exempt investments accept a lower rate of
    return in exchange for the exemption from income tax obligations on the
    investment received. The difference between the taxable and tax-exempt
    rates may be viewed as an implicit tax which is `paid' to State and
    local government issuers.'' Methodology and Issues in Measuring Changes
    in the Distribution of Tax Burdens (Joint Committee on Taxation, June
    14, 1993).
    ---------------------------------------------------------------------------
        Leaving municipal bonds taxed (implicitly) at the corporate level
    and (explicitly) at the shareholder level would perpetuate distortions
    that arise from the multiple taxation of corporate earnings. It also
    would have the perverse effect of treating the implicit tax paid by an
    investor to U.S. state and local governments less favorably, in terms
    of EDA, than the tax paid by the same investor to foreign countries.
    Thus, the Proposal is intended to ``integrate the corporate and
    individual income taxes so that corporate earnings generally will be
    taxed once and only once.'' \3\ Consistent with this intent, the
    Proposal provides that corporate income subject to tax paid to a
    foreign sovereign and sheltered from U.S. income tax by the foreign tax
    credit, should not be taxed again when it is distributed to the
    corporation's shareholders.\4\ Under the Proposal, however, corporate
    municipal income, which is subject to implicit tax paid to a U.S. sub-
    national sovereign, would be taxed again when it is distributed to the
    corporation's shareholders.
    ---------------------------------------------------------------------------
        \3\ General Explanation of the Administration's Fiscal Year 2004
    Revenue Proposals at 12 (February 2003).
        \4\ The Proposal provides for the ``flow-through'' to shareholders
    of the foreign tax credit.
    ---------------------------------------------------------------------------
        Treating the implicit tax paid to state and local governments when
    a corporate investor purchases a municipal bond less favorably, for
    purposes of calculating the EDA, than the tax paid by that same
    investor to a foreign country (which is included in the EDA), would
    have the following adverse effects:

         Investments in Municipal Bonds. The exclusion of municipal
    bond interest from EDA would make corporate municipal bond investment
    less attractive (relative to current law and also relative to a taxable
    bond). Loss of corporate demand would increase municipal bond yields,
    increase borrowing costs to state and local governments at a time when
    they can least afford it, and immediately depress the value of current
    corporate municipal bond holdings, impairing the liquidity of any P&C
    insurers needing to sell such bonds to pay losses.
         Investment in P&C insurers. Shareholders can be expected to
    prefer investment in corporations that can make excludable dividends
    out of EDA. The exclusion from EDA of earnings from municipal bonds
    would deter investment in corporate purchasers of such bonds, leaving
    P&C insurers that invest heavily in municipal bonds at a distinct
    disadvantage in attracting investor interest in the marketplace.\5\
    ---------------------------------------------------------------------------
        \5\ ``While it is difficult to say exactly to what extent dividend
    taxes are reflected in share prices, research generally finds evidence
    consistent with the view that at least a portion of the shareholder
    level taxes on dividends are capitalized into share prices. That is,
    elimination of the dividend tax increases the after-tax value of
    dividends and, thus, the price investors are willing to pay for
    corporate equities.'' Eliminating the Double Tax on Corporate Income at
    4 (Council of Economic Advisers, January 7, 2003).
    ---------------------------------------------------------------------------
         Equity. The exclusion from EDA of earnings from municipal
    bonds would cause a P&C insurer's purchase of a municipal bond to
    create tax liability at the shareholder level. No shareholder-level tax
    would apply if the same bond is purchased by a shareholder (or if a
    taxable bond is purchased by a P&C insurer).
         Purpose of Proposal. The key purpose of the dividend
    exclusion proposal is to mitigate economic distortions arising from the
    double taxation of corporate earnings. By leaving municipal bonds taxed
    (implicitly) at the corporate level and (explicitly) at the shareholder
    level, the Proposal would perpetuate these distortions.

        AIA has been asked whether transitional relief for holders of
    municipal bonds (i.e., ``grandfathering'' of bonds issued as of a fixed
    date) would resolve the problems. Congress provided transitional relief
    for municipal bonds held by P&C insurers when the ``proration'' rules
    were adopted as part of the Tax Reform Act of 1986.\6\ Similar
    transitional rules were provided in the 1986 Act for municipal bonds
    held by banks. While such relief would avoid frustrating the
    reasonable, past investment expectations of corporate investors in
    municipal bonds, however, it would do nothing to address the market
    disincentives or increased costs of borrowing for state and local
    governments that arise under the Proposal.
    ---------------------------------------------------------------------------
        \6\ Under the proration rules in section 832(b)(5)(B) of the
    Internal Revenue Code of 1986, P&C insurers today are taxed on
    municipal bond interest at an effective tax rate of 5.25%.
    ---------------------------------------------------------------------------
        To eliminate the adverse impacts of the Proposal on P&C insurers
    and the municipal bond market, AIA respectfully urges you to amend the
    Proposal to allow for the addition to EDA of interest on municipal
    bonds (as an approximation of the implicit tax that is paid on such
    bonds).\7\
    ---------------------------------------------------------------------------
        \7\ This would apply to the portion of a P&C insurer's municipal
    bond interest earnings (85%) that is not subject to proration.

    ---------------------------------------------------------------------------

                     Statement of ASPA, Arlington, Virginia
    Introduction

        Thank you for this opportunity to submit ASPA's views on the impact
    of Treasury's proposal to eliminate the double taxation of corporate
    earnings contained in H.R. 2, the Jobs and Growth Act of 2003. ASPA is
    a national organization of over 5,000 retirement plan professionals who
    assist hundreds of thousands of small businesses throughout the country
    in establishing and maintaining qualified retirement plans for their
    workers.
        We would like to begin by thanking the members of the Ways and
    Means Committee for their efforts over the last decade to improve the
    retirement security of our nation's workers. In particular, we greatly
    appreciate the efforts of Chairman Thomas, and Representatives Portman,
    Cardin, Pomeroy, and others for their emphasis on expanding the
    retirement plan coverage rates of our nation's small business workers,
    which have lagged behind the coverage rates of workers at larger firms.
        The critical role of employer-sponsored plans in promoting savings
    by American workers cannot be understated. According to the Employee
    Benefit Research Institute, middle-income workers are more than 10
    times as likely to save if they are covered by a workplace retirement
    plan than on their own. Further, workplace retirement plans have made
    middle income Americans owners in the stock market. According to the
    Investment Company Institute, almost half of the over 50 million
    American households that own stock first purchased stock through a
    workplace retirement plan. Noting that 79 percent of equity owners
    participate in employer-sponsored plans, the president of the
    Securities Industry Association recently emphasized, in a 2002 press
    release, ``the important role that employer-sponsored retirement plans
    play in introducing Americans to investing.''
        The Administration began 2003 by unveiling an almost $700 billion
    stimulus package intended to jump-start the economy. The centerpiece of
    this package is a proposal that would generally exclude from
    shareholders' taxable income corporate dividends that have already been
    taxed. Specifically, under the Administration's proposal, all dividends
    that are paid out of corporate earnings that have already been fully
    taxed at the corporate level would be excludable from the income of the
    shareholder who receives them. Alternatively, the proposal provides
    that if the company retains already fully taxed earnings, the
    shareholder will be entitled to a basis adjustment to reflect the
    already fully taxed retained earnings. However, the proposal
    specifically does not apply to stock held in tax-favored retirement
    vehicles such as qualified retirement plans and IRAs.
        In a general sense, the tax effect of the Administration's proposal
    is similar to the operation of a Roth IRA. Amounts are invested on an
    after-tax basis and earnings (already taxed at the corporate level) are
    tax-free. However, unlike a Roth IRA, there are no limits on the
    amounts that can be invested nor are there any restrictions or
    penalties on early distributions. Consequently, questions have been
    raised about the potential impact of the Administration's proposal on
    retirement savings, particularly savings by workers of our nations'
    small businesses. While the Administration's proposal may arguably
    address reasonably sound tax policy concerns about making sure that
    corporate income is taxed only once, it potentially could have an
    unintended, adverse impact on small business retirement plan coverage.
    Impact on Retirement Savings Generally

        Since the proposal was announced, the Administration has been
    arguing that the dividend exclusion proposal does not disfavor
    retirement savings. The basis for their argument is that a deductible
    IRA and a Roth IRA are economically neutral, assuming the same tax
    rates at the time of contribution and distribution. For example, assume
    a $1,000 contribution to a deductible IRA and a 5 percent rate of
    return. If it were withdrawn one year later, assuming a 40 percent tax
    rate and ignoring early withdrawal penalties, the taxpayer would net
    $630. If, instead, the same taxpayer contributed to a Roth IRA, the
    contribution would be $600. Assuming everything else is the same, after
    the first year, the taxpayer would again net $630. Given this economic
    neutrality, the Administration argues that because their proposal has a
    similar tax effect as the Roth IRA, it is at most equally neutral as
    compared with a deductible tax-favored retirement savings vehicle. In
    the Administration's view, tax-favored retirement savings vehicles
    remain more attractive because they inherently have more investment
    flexibility.
        Contrasting views have been expressed suggesting that if the
    Administration's proposal were enacted the investment community would
    most certainly develop competitive products to take advantage of the
    new law. Further, unlike retirement savings vehicles, the investments
    made under the President's proposal would be advantaged since they
    would not be subject to limits or restrictions, or penalties upon early
    distribution. Regardless of which of these views seems more persuasive,
    though, one thing is clear--the relative value of tax-favored
    retirement savings vehicles would be somewhat lessened if the
    Administration's proposal were enacted.
    Effect on Small Business Retirement Plan Coverage

        For many small business owners, the decision to establish a
    qualified retirement plan is particularly sensitive to the value of the
    tax incentives provided through qualified plan rules. There is no
    question that the law provides qualified plans with valuable tax
    incentives--contributions to the plan are tax-deductible and earnings
    are tax-deferred until distributed. However, qualified plans are also
    subject to stringent nondiscrimination and top-heavy rules that require
    small business owners to make contributions on behalf of their
    employees in order to make contributions on behalf of themselves. Given
    the valuable tax incentives accorded qualified plans, Congress
    determined it appropriate to impose these nondiscrimination
    requirements in order to provide rank-and-file workers with a fair
    share of retirement benefits.
        Due to these nondiscrimination rules, for every dollar a small
    business owner wants to contribute to a qualified plan on his or her
    own behalf, he or she will generally have to spend a minimum of 30 to
    40 cents on behalf of employees. This expenditure represents a
    combination of the implementation and administrative costs associated
    with a qualified plan, and the cost of covering the business' workers--
    a prerequisite to the owner's participation in the plan as required by
    the qualified plan nondiscrimination rules.
        Given this added cost, the relative value of the tax incentives
    provided under the qualified plan rules is a critical element to the
    small business owner's decision to establish a retirement plan.
    Consequently, if a small business owner were able to save an equivalent
    amount outside of a qualified pension plan in a tax-favored alternative
    without such added cost, such an alternative would significantly reduce
    the incentive of the small business owner to incur the responsibilities
    of contributing to a retirement plan for the small business' workers.
    An unlimited, uncapped exclusion from taxable income of qualifying
    dividends (and undistributed after-tax earnings) is just such an
    attractive alternative. Such a non-plan alternative is made even more
    attractive when you consider that there are no restrictions on
    distributions and early-withdrawal penalties as there are with a plan.
    Further, by not establishing a workplace retirement plan the small
    business owner could avoid exposure to potential fiduciary liability
    that he or she would otherwise be subject to with such a plan.
        If the Administration's proposal were enacted in its current form,
    it would not be difficult for the small business owner to generate tax-
    free investment returns that would be more financially advantageous
    than investing in a qualified retirement plan. For example, if the
    Administration's proposal had been effective over the last 15 years,
    based on our analysis, a simple investment in an S&P 500 index fund
    would generate on average approximately a 5 percent tax-free annual
    yield. For many small business owners, during this period they would
    have been significantly better off investing under the Administration's
    proposal than through a qualified retirement plan. In effect, from the
    perspective of the small business owner, the Administration's proposal
    turns the tax-advantaged qualified retirement plan into a tax-
    disadvantaged plan.
        For example, consider a small business with one owner and 5
    employees. The owner would like to save the maximum each year to a
    defined contribution plan--currently $40,000. In order to do that, the
    qualified plan nondiscrimination rules would require the owner to make
    roughly $13,000 in contributions on behalf of employees, a cost of 32.5
    percent. If the small business owner had invested her annual $40,000
    contribution over the last 15 years in an S&P 500 index fund, the owner
    would have accumulated after-tax savings of $504,482, assuming a 40
    percent tax rate.
        Assume instead that the Administration's proposal had been in place
    over the last 15 years. If the small business owner took the combined
    $53,000--the $40,000 for herself and the $13,000 for the employees--and
    gave herself an annual bonus and invested the after-tax amount
    (approximately $32,000 assuming a 40 percent tax rate) over the same
    15-year period in an S&P 500 index fund, the owner would have
    accumulated after-tax savings of $641,884, over $137,000 more than with
    the qualified retirement plan, due to the power of the tax free
    dividends and appreciation under the Administration's proposal. In the
    real world, a decision to save 21 percent less for retirement is not
    one many small business owners will make.
        The Administration's decision to extend the dividend exclusion
    proposal to variable annuities makes it even more likely that a small
    business owner will forego adopting a plan in favor of saving on his or
    her own. In the above example, the small business owner could take her
    after-tax bonus and invest it annually in a variable annuity. A
    variable annuity operates just like a 401(k) plan by offering multiple
    investment choices and allowing investments to be diversified without
    current tax consequence. Further, like a 401(k) plan, a variable
    annuity is only taxed when distributed. However, unlike a 401(k) plan,
    it is not subject to any limits or nondiscrimination rules. Now, under
    the Administration's proposal, a substantial portion of the earnings
    under the variable annuity will be tax free. Thus, by extending the
    proposal to variable annuities, the Administration not only makes it
    more financially advantageous for the small business owner to save
    without a plan, but it also provides the small business owner with the
    same ability to diversify investments as if the owner had a plan.
        In light of this, a significant number of small business owners
    will likely choose the non-plan option consistent with the
    Administration's proposal and avoid the necessity of making
    contributions on behalf of their small business employees. They may
    offer their employees a 401(k) plan, but such a plan would be funded
    solely with contributions made by the small business employees with no
    contributions, like matching contributions, made by the owners, likely
    reducing the participation rates of many small business workers.
        Critics of this view suggest that there are other reasons besides
    tax incentives for a small business owner to establish a plan, such as
    the need to compete for employees, which will lead to small business
    retirement plan coverage. However, ASPA members who work closely with
    America's small businesses every day know that the incremental decision
    to establish a workplace retirement plan by the owner of a small
    business, which has been operating quite well without a plan, has
    little to do with competition for employees. Surveys conducted by
    Employee Benefit Research Institute show that employees of small
    businesses without a plan would generally prefer wages instead of
    retirement plan coverage. Thus, the tax incentive carrot to the small
    business owner is needed in order to bring the small business workers
    into the savings game.
    Tax and Social Policy Concerns

        ASPA recognizes the tax policy arguments underlying the proposition
    that income should be taxed only once. However, ASPA also joins the
    Administration and the Congress in its firm support for the social
    policy underlying incentives to encourage businesses--and particularly
    small businesses--to establish and fund qualified retirement savings
    plans for the workers employed by our nation's small businesses.
    Ironically, thanks to the tremendous efforts of the Ways and Means
    Committee significant progress has been made. According to the
    Congressional Research Service, since 1996 coverage of full-time small
    business employees at firms with less than 25 employees has increased
    from 25 to over 33 percent. This translates to millions of small
    business workers who now are covered by a plan.
        Unfortunately, unless the Administration's proposal is modified to
    include workplace retirement plans, just as was done for variable
    annuities, the tax policy that supports tax-free qualifying dividends
    will likely undercut the good social tax policy that incents small
    business owners to provide retirement coverage for their workers.
    Failure to modify the proposal that would exclude qualifying dividends
    from taxable income (or increase basis to reflect after-tax retained
    earnings) could make the employees of our country's small businesses
    potential losers.
        It is a heavy price to pay for theoretically sound tax policy.

                   Statement of the Edison Electric Institute
        The Edison Electric Institute (EEI) is pleased to provide comments
    for the record on the Committee on House Ways and Means' hearing on
    March 6, 2003. EEI is the association of U.S. shareholder-owned
    electric companies, international affiliates, and industry associates
    worldwide. Our U.S. members serve over 90 percent of all customers
    served by the shareholder-owned segment of the industry. They generate
    approximately three-quarters of all the electricity generated by
    electric companies in the U.S. and service about 70 percent of all
    ultimate customers in the nation.
        EEI would like to thank the Chairman and this Committee for holding
    this important hearing on the Administration's proposal to eliminate
    the double taxation of corporate dividends. This statement is intended
    to demonstrate the reasons for our strong commitment to this important
    tax law change.
        We believe the double taxation of corporate dividends is
    fundamentally unfair and is bad tax policy. This statement outlines the
    reasons why EEI believes Congress should act quickly to eliminate the
    double taxation of corporate dividends. It also addresses several
    transition and implementation issues within the Administration's
    proposal that are of concern to us. We recommend that these issues be
    addressed and changes made in order to make the proposal more
    equitable.

    THERE ARE MANY BENEFITS TO BE GAINED FROM ELIMINATING THE DOUBLE
    TAXATION OF CORPORATE DIVIDENDS.

    Eliminating the Double Taxation of Corporate Dividends Would Increase
    the Spending Power of the Millions of Americans Who Own Shares in
    Public Companies, Including Electric Utility Companies.

        Today, 84 million Americans--or over 50 percent of American
    households--own shares in public companies. Eliminating the double
    taxation of corporate dividends would offer these investors more
    incentives to diversify their stock portfolios, which is widely
    recognized as the healthiest long-term investment strategy.
        Eliminating the double taxation of corporate dividends would be
    particularly beneficial to the nearly 4 million individual shareholders
    who own shares in our nation's electric companies. These companies have
    a long history of paying dividends, and the industry maintains the
    highest payout ratio of dividends when compared to other major sectors.
        In 2001,\1\ shareholder-owned electric companies paid $12.7 billion
    in common-stock dividends. Based upon the industry's consolidated
    financial statements, this group paid out an average of 58 percent of
    their earnings in dividends. For the twelve months ending September 30,
    2002, total dividends paid escalated to $13.7 billion.
    ---------------------------------------------------------------------------
        \1\ 2001 is the last year for which data are currently available.
    ---------------------------------------------------------------------------
        Based on their dividend-paying record and their stock appreciation,
    electric utility companies traditionally have been viewed as a stable
    and secure investment with a reasonable rate of return.
        According to a Salmon Smith Barney report entitled ``Eliminating
    the Double Dip,'' under a most likely scenario, eliminating the double
    taxation of corporate dividends is worth approximately $2 per share for
    each $1 of dividend paid. This equates to an additional 10 percent
    appreciation potential for the typical electric company stock.

    Eliminating the Double Taxation of Corporate Dividends Would be
    Particularly Important for Older Americans--Many of Whom Own Shares in
    Electric Utility Companies.

        According to the American Association of Retired Persons (AARP),
    seniors received nearly half of the $147 billion in taxable dividend
    income in 2000. Seniors depend heavily on dividend checks to supplement
    their retirement income and to help them pay for their day-to-day
    living expenses.
        Electric utility company stocks have always been an attractive
    option for older Americans, who value these stocks for their dividends,
    security, and reliable performance. Based on demographic data gathered
    by EEI for our 2001 Financial Review, U.S. electric company common
    shareholders are likely to be:

         Over 65 years of age (70 percent)
         A resident of the United States
         A person that holds their stock for more than nine years
         Split 50/50 by gender

        Dividends make up a larger percentage of seniors' income than
    capital gains, wages, and other non-Social Security income. Eliminating
    the double taxation of corporate dividends would provide an average tax
    savings of $936 for the 9.8 million seniors receiving dividends.

    Eliminating the Double Taxation of Corporate Dividends Would Benefit
    Out Nation's Economy by Giving Investors More Available Income to
    Either Spend in the Economy or to Reinvest in the Market.

        Eliminating the double taxation of corporate dividends would
    benefit the U.S. economy and taxpayers across the income spectrum, both
    of which will boost investor confidence.
        Under current law, the double taxation of dividends: 1) encourages
    an over reliance on debt rather than equity financing; 2) encourages
    management to retain cash inside the company; and 3) discourages
    dividend payouts. These actions penalize growth, and serious economic
    distortions occur when companies essentially are encouraged to borrow
    and retain earnings rather than paying them out to shareholders.
        Americans have been losing faith in the economy and stock market.
    However, millions of Americans depend on the market and their
    investments for their savings and retirement plans. The paying of
    dividends requires companies to have cash in order to make the payouts.
    Consumers trust a dividend check. Eliminating the double taxation of
    dividends will encourage more investors to return to the stock market,
    thereby creating a positive environment for higher rates of investment
    that will boost long-term growth and productivity.

    Eliminating the Double Taxation of Corporate Dividends Would Benefit
    Out Nation's Electricity Infrastructure and It's Customers by Drawing
    Investors Back to the Power Sector.

        The electric utility industry is now facing some of the most
    significant financial challenges ever. In fact:

         Between December 2000 and December 2002, shareholder-owned
    electric utility companies lost $78.3 billion in market capitalization,
    a 23.9 percent drop over two years.\2\ The EEI Index, a measure of the
    overall stock performance of electric utilities, was down by 14.7
    percent in 2002.
    ---------------------------------------------------------------------------
        \2\ This is based upon the stock performance of 65 shareholder-
    owned electric companies. If one expands the coverage to include
    unregulated utilities, the drop in market cap is even steeper.
    ---------------------------------------------------------------------------
         Throughout 2002, credit rating changes in the power sector
    also were overwhelmingly negative. According to Standard & Poor's
    (S&P), the ratio of downgrades-to-upgrades rose 12:1 as of December
    2002, up from a 3:1 ratio in 1999, 2000, and 2001. Downgrades
    outnumbered upgrades 81 to 29 in 2001 and 182 to 15 in 2002. The
    percentage of companies on ``negative watch'' rose to 25 percent in
    2002.

        Today, electric utilities are taking aggressive steps to rebuild
    their balance sheets and promote greater transparency in electric power
    markets in order to restore investor confidence. They are selling non-
    core assets, downsizing, issuing new equity, canceling acquisitions,
    reducing significant levels of capital expenditures, realigning trading
    around their own generation assets and customer obligations, and
    accelerating debt repayment. EEI is leading an aggressive action plan
    for the electric industry that embraces vastly greater transparency in
    financial disclosure and corporate governance implementation.
        For the electric power industry--one of the most capital-intensive
    industries in the world--the erosion of investor confidence has had a
    devastating impact on companies' access to capital on reasonable terms.
    The higher cost of capital makes it more difficult to fund badly needed
    infrastructure projects to maintain reliable electric service and to
    meet growing demand.
        Eliminating the double taxation of corporate dividends would
    benefit electric companies by:

         Encouraging electric utilities--like other public
    companies--to pay increased attention to their dividend programs as a
    way to enhance their ability to attract capital through equity rather
    than debt. Equity is considered financially superior and less risky
    than debt. If equity financing were more attractive, companies would be
    able to strengthen their balance sheets with leaner debt/equity ratios.
         Helping them address their critical infrastructure needs.
    If more individual investors are brought back to the sector, electric
    companies would have better opportunities to enhance infrastructure
    systems--electric transmission and distribution lines, natural gas
    pipelines, and power plants--needed to maintain system reliability and
    to meet the growing demand for electricity.
         Restoring investor confidence and increasing the overall
    flow of cash into electric utilities and ultimately to their
    shareholders. The cost of equity capital will be reduced as the
    investor's rate of return is enhanced.

        The proposed elimination of double taxation has already drawn
    attention to electric utility stocks. In fact, integrated electric
    utility stocks were up an average of 7.0 percent for the first month
    following the announcement of the dividend proposal.
    TRANSITION/IMPLEMENTATION ISSUES NEED TO BE ADDRESSED TO MAKE THE
            PROPOSAL MORE EQUITABLE.

    I. Changes Made to the Dividend Proposal Prior to Introduction of H.R.
            2
         Corporate Alternative Minimum Tax (AMT)
        We want to commend the Chairman of the Committee on Ways and Means
    for recognizing that pre-2001 AMT credits should not reduce the
    excludable dividend account (EDA) balance. Such credits constitute a
    pre-payment of tax and fall within the Administration's objective of
    ``taxes fully paid.''
         EDA Carryovers
        Again, we want to commend the Chairman for recognizing the strong
    pro growth effects of permitting EDA carryforwards. While we agree that
    granting the Department of Treasury the ability to regulate in this
    area (as set forth in H.R. 2) is a step in the right direction, we
    would argue a statutory solution is preferable. EDA carryforwards will
    significantly promote economic growth and should be approved as a
    legislative amendment during Committee markup.
    II. ``Smoothing'' Mechanism Needed for Disparate Income Years
        As introduced, H.R. 2 assumes a 2003 date of enactment for the
    dividend proposal, with a two-year ``look-back'' to 2001 for
    establishing the baseline year. Our concern with this proposal is
    simple--2001 was an uncharacteristically poor economic year for our
    industry. The economic recession and September 11, as well as electric
    utility industry restructuring at the state level, combined to create
    an industry-wide reduction in revenues. This resulted in an abnormally
    low amount of taxes paid for 2001. (Traditionally, our industry pays
    one of the highest effective tax rates of any industry.)
        The dividend proposal relies on a ``taxes paid'' calculation for
    determining the amount of dollars available in the EDA. The requirement
    to use 2001 as the baseline year dramatically alters the EDA
    calculation for most of our members and results in a serious detriment
    to our shareholders. The rationale for putting forth the dividend
    proposal is to stimulate the economy. The arbitrary assignment of 2001
    as the baseline year results in a dramatically reduced stimulative
    effect for our industry.
        Since 2001 was a poor economic year for many industries, a
    generally applicable transition rule for establishing the EDA baseline
    should be included during Ways and Means Committee markup.
    Specifically, a transition rule should allow a taxpayer to elect to
    calculate EDA based on either the federal taxes paid for the applicable
    year or through the use of a ``smoothing'' mechanism to account for
    disparate income years.
    III. Transition Relief for Investments Already Made
        Congress has traditionally used the Internal Revenue Code (IRC) to
    encourage economic behavior. By providing tax incentives for activities
    such as renewable energy (IRC Sec. 45) and non-conventional fuels (IRC
    Sec. 29), our industry has been encouraged to pursue these public
    policy objectives. To date, the shareholder-owned electric power
    industry has invested large sums of money to promote these
    congressionally authorized objectives.
        It seems incongruous that Congress is now considering diminishing
    the value of these incentives by reducing the EDA in the dividend
    proposal. This seems particularly unfair since companies have already
    made investments based on these tax incentives. We believe this action
    will set a bad precedent and will make it more difficult for Congress
    to encourage economic behavior in the future.
        For investments already made, we believe that transition relief in
    the form of ``grandfathering'' should be included during Committee
    markup for investments already committed. Credits (whether based on
    investment or production), which are attributable to investments
    already made, should not be an offset in calculating EDA.
    CONCLUSION

        Eliminating the double taxation of corporate dividends is extremely
    important to the millions of Americans who own stock in U.S. companies,
    to our nation's seniors, to the U.S. economy, and to America's
    shareholder-owned electric utility companies and their shareholders.

    The times has come to stop the unfair double taxation of corporate
    dividends. EEI strongly urges Congress to act now.

     Statement of F. Barton Harvey, III, Enterprise Foundation, Columbia,
                                    Maryland
                           Introduction and Overview
        The Enterprise Foundation appreciates the opportunity to comment
    for the printed record of the Committee's hearing on the president's
    economic growth proposals. Enterprise is a national nonprofit
    organization that supports community- and faith-based organizations and
    their neighborhood revitalization initiatives. In our 20 years we have
    invested more than $4 billion, which has helped finance more than
    144,000 homes for low-income families and strengthen hundreds of
    community-based organizations nationwide. We are currently investing
    more than half-a-billion dollars annually into grassroots groups and
    distressed communities all across the country.
        In our public policy advocacy, Enterprise works on a bipartisan
    basis to advance policies that will help low-income people and places
    join the economic mainstream. We are proud to be a leading participant
    in the Administration's campaign to increase minority homeownership. We
    were honored that President Bush mentioned our contributions in both
    his major public speeches on that important initiative. We are strong
    supporters of the Administration's proposed Homeownership Tax Credit,
    enactment of which would help boost minority homeownership
    significantly.
        Enterprise does not oppose or endorse the Administration's jobs and
    growth tax plan, including the proposal to end the double taxation of
    corporate dividends. We and many other housing and community
    development stakeholders that work with the Administration are
    concerned, however, that the dividend proposal in its current form
    would seriously harm critical community revitalization tax incentives,
    especially the Low Income Housing Tax Credit (LIHTC). We believe the
    proposal would also adversely affect the New Markets Tax Credit and the
    Administration's own proposed Homeownership Tax Credit.
        The Committee could address these concerns without undermining the
    primary policy objectives of the Administration's proposal. For
    example, the Committee could amend the proposal to treat investments in
    these tax credits as income on which a corporation paid taxes. The
    Administration's proposal treats the Foreign Tax Credit in this manner.
    Other approaches could work as well or better.
        We look forward to working with the members of the Committee to
    protect critical community revitalization tax credits from the adverse
    effects the Administration's dividend proposal in its current form
    would have on them.
      The Low Income Housing Tax Credit is an Efficient, Effective Program
        The Low Income Housing Tax Credit (LIHTC) is one of the most
    important and successful federal initiatives ever created to provide
    affordable housing for low-income renters. Congress expanded the Credit
    by 40 percent in 2000, with the support of 85 percent of all members,
    including a majority of current members of the Committee.
        The LIHTC generates $6 billion in housing investment to produce
    more than 115,000 affordable apartments for working families, seniors,
    homeless individuals and people with special needs every
    year.1 The Credit annually accounts for most new affordable
    apartment production and drives up to 40 percent of all multifamily
    apartment development.2 The average Credit-financed
    apartment tenant earns less than 40 percent of their area's median
    income.3
    ---------------------------------------------------------------------------
        \1\ National Council of State Housing Agencies, 2003.
        \2\ Ernst & Young, ``Understanding the Dynamics: A Comprehensive
    Look at Affordable Housing Tax Credit Properties,'' 2002
        \3\ General Accounting Office, ``Tax Credits: Opportunities to
    Improve Oversight of the Low-Income Housing Program,'' 2002.
    ---------------------------------------------------------------------------
        In the course of providing desperately needed affordable housing,
    the Credit creates jobs and boosts local economies. Each year, the
    construction and operation of Credit properties generates approximately
    $8.8 billion of income for the economy, creates 167,000 jobs and
    produces $1.35 billion in revenue for cash-strapped local
    governments.4 The Credit also helps stabilize struggling
    communities, often spurring additional housing and commercial
    investment. The Credit has shown the private sector--especially large,
    sophisticated institutions--that low-income communities can be viable
    places to do business and that community-based organizations serving
    the neediest neighborhoods can be good business partners. More
    corporate and financial institutions are more active in more low-income
    communities in part as a result of the Credit.
    ---------------------------------------------------------------------------
        \4\ National Council of State Housing Agencies, 2003.
    ---------------------------------------------------------------------------
        Not only does the private sector provide the capital that fuels the
    Credit, but also business discipline and oversight that helps account
    for the extraordinary performance of Credit-financed properties.
    According to Ernst & Young, the annual foreclosure rate for Credit
    properties is more than 40 times lower than the rate for all apartment
    developments and more than 100 times lower than the rate for commercial
    real estate.5
    ---------------------------------------------------------------------------
        \5\ Ernst & Young, Ibid.
    ---------------------------------------------------------------------------
        The LIHTC does not operate like a typical government program. Each
    state receives an annual allocation of Credits based on its population
    ($1.75 per capita in 2002). States award Credits to developers,
    including community-based organizations under a competitive process in
    accordance with annual plans for meeting state housing needs.
    Developers typically do not have sufficient tax liability to use the
    Credits so they sell them to corporations and use the cash they receive
    to finance affordable housing for low-income people. LIHTC-financed
    apartments must remain affordable to low-income people for at least 30
    years.
        Two other critical community revitalization tax incentives bear
    mention. The New Markets Tax Credit (NMTC) was enacted as part of the
    Community Renewal Tax Relief Act of 2000, which had overwhelming
    bipartisan support in Congress. The Credit will support $15 billion of
    investment in economic development and community facilities in low-
    income neighborhoods over the next several years. The NMTC will help
    finance neighborhood retail centers, small businesses, charter schools
    and child care centers in distressed areas nationwide.
        The Treasury Department's Community Development Financial
    Institutions Fund administers the program. Fund-certified financing
    entities with community development missions and community
    accountability apply to the Fund annually for credits. These entities
    will sell the credits for cash to corporate institutions and use the
    proceeds to support their community revitalization projects. The Fund
    is expected to award the first round of credits, to support $2.5
    billion in investment, this month.
        The Homeownership Tax Credit (HOTC) is one of the Administration's
    signature housing proposals. The president first proposed the credit in
    his 2000 campaign and has included it in his annual budget requests
    since taking office. Bipartisan House and Senate bills to enact the
    HOTC have been introduced in the House (H.R. 839, sponsored by
    Representatives Portman, Cardin and others) and Senate (S. 198,
    sponsored by Senators Smith, Santorum and Stabenow). The Homeownership
    Tax Credit has the strong support of most of the housing industry.
    Enterprise strongly supports the HOTC.
        The HOTC is modeled on the highly successful LIHTC. Instead of
    financing rental apartments, it would encourage the development of for-
    sale housing affordable to low-income families in distressed
    communities. States would allocate credits under a competitive process
    to developers, which would sell them for cash to corporations and use
    the funds to finance for-sale homes. The Credit would generate $2
    billion in financing in its first year. It would produce an estimated
    50,000 affordable for-sale homes for low-income people annually.
     The Administration's Dividend Proposal Would Severely Weaken the LIHTC
        The Administration's dividend proposal would allow shareholders in
    a corporation to receive either tax-free dividends or, when they sold
    their stock, a capital gains tax cut. But the proposal would penalize
    shareholders in corporations that invested in LIHTCs. In most cases,
    shareholders would pay higher taxes if the corporation had invested in
    LIHTCs.
        Corporations purchase 98 percent of all LIHTCs. Tax Code rules
    effectively prevent individuals from investing. Corporations do not
    invest in LIHTCs for the sole purpose of avoiding taxes, but also to
    finance housing for working families that otherwise would not get
    built. And corporations cannot simply claim LIHTCs. They have to pay
    for them and they only get their Credits if the apartments the Credits
    finance remain in good condition for low-income people for at least 30
    years.
        If the Administration's plan were enacted, corporations that invest
    in LIHTCs would have strong incentives not to do so. Many corporations
    would limit the amount of capital they invest in LIHTCs or lower the
    price they are willing to pay for them. Lower corporate demand for
    Credits would drive down their purchasing power and reduce their
    effectiveness. Less affordable housing for low-income people would be
    built.
        According to Ernst & Young, the Administration's proposal would
    reduce the number of affordable apartments the LIHTC can produce by
    40,000--35 percent--annually, a $1.1 billion cut to housing investment
    that would affect 80,000 low-income people a year.6
    Developments serving the lowest income people and communities would be
    disproportionately affected by this cut, according to Ernst & Young.
    ---------------------------------------------------------------------------
        \6\ Ernst & Young, ``The Impact of the Dividend Exclusion Proposal
    on the Production of Affordable Housing,'' 2003.
    ---------------------------------------------------------------------------
        The impact could be even more damaging than Ernst & Young projects.
    The report does not take into account the impact of higher interest
    rates on tax-exempt Housing Bonds the proposal would cause, but notes
    that it would definitely be adverse and in addition to the effects
    noted above. Forty-two percent of LIHTC apartments developed in 2001
    were financed with tax-exempt bonds.
        The report also does not account for the short- and long-term
    erosion of investor confidence in the program the proposal almost
    certainly will trigger, which will further cut its purchasing power
    over time. According to Ernst & Young, some corporations have already
    deferred making new commitments to invest in LIHTCs as a result of the
    uncertainty the Administration's proposal has caused. ``This has
    destabilized the Housing Credit equity market and is likely to reduce
    affordable housing production in the short term,'' according to Ernst &
    Young.7
    ---------------------------------------------------------------------------
        \7\ Ibid., p. 2.
    ---------------------------------------------------------------------------
        We know from experience that uncertainty about the LIHTC's future
    cripples its purchasing power. In its early years, the LIHTC, like many
    tax credits, was subject to periodic ``sunsets.'' Relatively few
    corporations were willing to commit the time, energy and staff to a
    program that seemed so precarious. Investors that were in the market
    then benefited from the general lack of confidence in the program by
    purchasing Credits for relatively low prices and realizing high returns
    on their investments. That was bad for the Federal Government because
    it meant the program was not reaching maximum efficiency. And it was
    bad for housing, because the Credit was not generating nearly as much
    housing capital as it otherwise could--and does today.
        Now is not the time to cut back on affordable housing development.
    In 2001, over seven million American renter families--one in five--
    suffered severe housing affordability problems, spending more than half
    of their income on rent or living in run down conditions. Meanwhile,
    the supply of affordable apartments for low-income people drops by
    150,000 apartments annually due to rent increases, abandonment and
    deterioration.8
    ---------------------------------------------------------------------------
        \8\ National Council of State Housing Agencies, 2003.
    ---------------------------------------------------------------------------
        Ernst & Young's analysis is a conservative econometric projection
    that accounts for the variety of dividend payout policies and
    shareholder bases among LIHTC investors and a range of shareholder
    capital gains tax rates. Ernst and Young projects that the
    Administration's dividend proposal would have adverse effects on the
    New Markets Tax Credit, Historic Tax Credit and the Administration's
    proposed Homeownership Tax Credit as well.
     The Committee Can Protect the LIHTC Without Undermining the Dividend
                                      Plan
        We urge the Committee to protect the Low Income Housing Tax Credit,
    as well as the New Markets Tax Credit and proposed Homeownership Tax
    Credit, in the legislation to enact the president's economic growth
    plan. We believe the Committee could do this without significantly
    undermining the Administration's tax-exempt dividend proposal.
        For example, the Committee could amend the proposal to treat
    investments in these tax credits as income on which a corporation paid
    taxes. The Administration's proposal treats the Foreign Tax Credit in
    this manner. Other approaches could work as well or better. For
    example, we understand that the Treasury Department in 1992 under
    President George H.W. Bush developed a proposal--after more than a year
    of study--to tax corporate income only once that would have protected
    important tax incentives, including the LIHTC. We understand that the
    Committee is reviewing this proposal.
        Once again, Enterprise does not oppose or endorse the
    Administration's tax-exempt dividend proposal. We are simply seeking a
    small change to it that would ensure carefully considered bipartisan
    tax incentives can continue to meet the critical needs Congress created
    them to address with maximum efficiency and effectiveness.
        Thank you for this opportunity to file this statement.
        This comment is filed on behalf of The Enterprise Foundation and
    its affiliated organizations only.

                                                       ESOP Association
                                                   Washington, DC 20036
                                                         March 18, 2003
    The Honorable William Thomas
    United States House of Representatives
    2208 Rayburn Office Building
    Washington, DC 20515

    The Honorable Charles Rangel
    United States House of Representatives
    2354 Rayburn Office Building
    Washington, DC 20510

        Dear Chair Thomas, Ranking Member Rangel and the members of the
    House Committee on Ways and Means:

        On behalf of The ESOP Association and its nearly 2400 members
    representing all 50 states, I thank you for the opportunity to have our
    statement on President Bush's tax proposals for the year 2003 placed in
    the House Committee on Ways and Means' Hearing on the President's
    Economic Growth Proposals, pertaining to H.R. 2, ``Job and Growth Tax
    Act of 2003.''
    Introduction:

        The ESOP Association is a 501(c)(6) advocacy and educational entity
    that has interacted with your Committee since the Association's
    beginnings in 1978 on various issues pertaining to this nation's
    policies related to stock ownership by employees in the companies where
    they work. These policies are dominated by the ownership and retirement
    savings structure known as employee stock ownership plan, or ESOP.
        Today's statement is limited to commentary on the Administration's
    tax proposal to eliminate the double taxation on the taxable earnings
    of corporations in America that are structured in a form called ``C''
    corporations.
    Background:

        Since 1984, as amended in 1986, as amended in 2001, your Committee
    has endorsed a corporate level tax deduction for certain dividends paid
    by a corporation on qualified employer securities held by an ESOP. This
    corporate level deduction is provided for in Internal Revenue Code
    Section 404(k). For ease of reading, the Association's statement shall
    refer to this provision of law as the ``ESOP dividend deduction,'' or
    ``ESOP deductible dividends.''
        The original ESOP dividend deduction was provided for in the 1984
    tax law, known as ``DEFRA.'' DEFRA provided that if dividends paid on
    ESOP stock were passed-through to the employees in cash, the corporate
    sponsor of the ESOP could take a tax deduction equal in value to the
    dividends paid to the employees. The employees, under the law, reported
    the dividends as current income, and paid an income tax appropriate to
    the income tax rate applicable to each employee.
        In 1986, the ESOP dividend deduction law was expanded by the Tax
    Reform Act of 1986 to provide that in addition to taking a deduction
    for dividends paid on ESOP stock passed-through to employees in cash,
    the corporation could take a tax deduction if the dividends were used
    to pay the debt incurred to acquire the stock for the ESOP, provided
    that the employees received stock in their ESOP accounts equal in value
    to the dividends used to service the ESOP debt.
        In 2001, under EGTRRA, the ESOP dividend deduction law was expanded
    to provide that in addition to taking a deduction for dividends paid on
    ESOP stock passed-through to employees in cash, and for dividends paid
    on ESOP stock used to service ESOP debt, the corporation could take the
    ESOP dividend deduction if an employee voluntarily directed that his or
    her dividends on the ESOP stock in his or her account was not received
    in cash, but reinvested back to the ESOP for more company stock.
    Specific Effects on ESOPs:

        In sum, a corporate level tax deduction is allowed for a
    corporation paying dividends on ESOP stock under three conditions:

        1.Employees receive the dividends in cash
        2.Employees receive the dividends in cash, or voluntarily direct
    that the dividends be reinvested in the ESOP for more company stock
        3.The dividends are used to service the debt incurred by the ESOP
    sponsor in acquiring the ESOP stock if employees have company stock
    allocated to their accounts in amounts equal to the dividends.

        Note, many details of qualifying for the ESOP dividend deduction
    are left out of this general description, as there are countless rules
    and regulations, and complicated statutory language that must be
    adhered to before the ESOP dividend deduction is permitted. For this
    testimony, only an overview is provided.
        So, how does the Administration's proposal impact this valuable
    ESOP tax incentive, the ESOP dividend deduction?
        In reviewing new proposed Code Sections 116, 281,282, and a special
    rule for ESOPs, proposed Code subsection 286(f), and after discussions
    with representatives of the Treasury Department, we believe that H.R. 2
    provides the following:

        1.If the dividends on ESOP stock are passed-through in cash to
    employees, and the ESOP sponsor takes a corporate level deduction, the
    employees pay a regular income tax on the dividends they receive.
        2.If the dividends on ESOP stock are voluntarily reinvested back to
    the ESOP for more company stock and the ESOP sponsor takes a corporate
    level deduction, an employee reinvesting his or her dividend will pay
    income tax upon distribution from the ESOP to the employee under the
    various and complex rules governing when an ESOP makes distributions.
        3.If the dividends on ESOP stock are used to pay ESOP debt, and the
    ESOP sponsor takes a corporate level tax deduction, an employee
    receives stock equal in value to dividends in his or her ESOP account
    in the form of company stock, and pays tax on the value of that stock
    upon distribution from the ESOP.

        The ESOP Association does not seek any change to H.R. 2 if we are
    correct in the manner we believe that it will operate. We also
    understand that these circumstances, if accurately interpreted, the
    corporation paying dividends should not pay all from its excludable
    dividends account, that unlike holders of that corporation's stock
    directly, the ESOP stock will not have a step up in basis.
        We do not quarrel with this result, if our interpretation of the
    proposal is correct.
        There is one, seemingly minor interpretation of the
    Administration's proposal that we feel is unfair, as it seems to
    violate the core principle of the Administration's proposal that
    corporate earnings be subject to just one tax. As we interpret the
    proposal, if a C corporation sponsor of an ESOP pays dividends on ESOP
    stock, but does not take the ESOP dividend deduction, and passes-
    through the dividends to the employees, both the corporation and the
    employees will pay tax on the value of those dividends. This result is
    totally inconsistent with the view that only one tax is paid on
    dividends on C corporation stock, as in this situation, two levels of
    tax are paid.
        The ESOP Association respectfully requests that the Committee
    consider ``fixing'' the proposal so that when the C corporation
    foregoes the corporate level tax deduction, the recipient of the
    dividends who are ESOP participants receive the dividends without
    paying any tax as the corporation has paid tax, and clearly the
    dividends are from the excludable dividend account.
    Ensuring ESOP Dividends are Taxed Only Once

        In that regard, ensuring ESOP dividends are taxed once and only
    once, The ESOP Association also requests to bring to the Ways and Means
    Committee's attention other unfair results in current law that if not
    remedied if Congress adopts the Administration's proposal will result
    in dividends on ESOP stock paying more than one level of federal tax in
    certain instances.
        To reiterate, if Congress agrees with the Administration's proposal
    that only one tax should be paid on corporate earnings, then Congress
    should ``fix'' current law to ensure that only one tax is paid on
    earnings on stock that is ESOP stock.
        There are two situations to review:

         ESOP Deductible Dividends and the Alternative Minimum Tax

          First, under current regulations, the IRS has held that dividends
    deducted pursuant to the ESOP dividend deduction law are a preference
    item under the corporate AMT. The IRS' position, supported by the
    Treasury Department, is not clear-cut or without controversy, because
    neither the 1986 tax law that created the current AMT law, nor the 1989
    law that made relevant changes in that law, in order to make it more
    understandable, explicitly provided that ESOP dividends are a
    preference item under AMT. Instead, the 1989 law altered an AMT
    preference that was to tax the differential between what a corporation
    reported to the SEC as its income and what it reported to the IRS as
    its income, known as the BIRP preference, to a preference that was to
    consist of a concept known as the ``adjusted current earnings''
    preference, or ACE.
          Congress, in substituting the ACE preference for the BIRP
    preference, did not spell out what the elements of ACE were, and left
    it up to the IRS to fill in the blanks.
          The IRS filled in the blanks with regulations issued in 1990,
    that said in no uncertain terms that ESOP deductible dividends were to
    be part of any ACE calculation, which, in turn was subject to the AMT,
    assuming the corporation met the thresholds for being subject to AMT.
          The ESOP community was duly despondent with the IRS' decision,
    having protested the proposed regulations with formal comments. The
    despondency grew as the ESOP community witnessed three ESOP companies
    challenge the IRS in Federal court, going to the appeals level, and
    losing.
          While a strong case, but obviously not a winning court case, can
    be made that Congress never intended ESOP deductible dividends to be
    part of an AMT preference item, an even stronger case can be made that
    if ESOP deductible dividends are to be taxed at the individual level,
    as explained above and at the corporate level as part of an AMT
    preference, then ESOP sponsors are, paying a federal tax twice!
          So, we would respectfully ask that if the Administration's
    proposal to tax corporate earnings only once is endorsed by the
    Committee, the Committee make sure that dividends on ESOP stock are not
    taxed twice due to a debatable interpretation of a 1989 law dealing
    with how ACE is calculated. The statutory fix is simple: by excluding
    ESOP deductible dividends from the calculation of ACE as an AMT
    preference.

         Tax S Corp Distributions from Current Earnings Once

          Turning to the second concern: in the S corporation area, the
    ESOP community notes what it considers an anomaly in the law that would
    have never had occurred had the community been more on its toes in 1997
    when Congress agreed to new law permitting S corporations to sponsor
    ESOPs.
          As all Committee members know, S corporations only pay one level
    of tax. In other words, under most circumstances, earnings on S
    corporation stock already matches the Administration's goal that
    corporate earnings only be taxed once. In the S area, the one tax is
    imposed at the shareholder level.
          When passing the 1997 ESOP S laws, Congress noted that permitting
    an S corporation to take an ESOP dividend deduction was not necessary,
    as the corporation owed no tax. So, in 1997, the Congress made clear
    that the provision of law that permits C corporations to take a
    deduction for ESOP dividends was not applicable to S corporations
    sponsoring ESOPs.
          But in doing so, the ESOP community believes Congress unwittingly
    put in place the imposition of a 10% penalty tax on S corporation
    distributions from current earnings when passed-through to employees
    participating in the ESOP. (An S corporation distribution from current
    earnings is, in essence, a dividend.)
          It would seem to be patently unfair that employees with stake
    holds in S corporations through an ESOP would be subject to a penalty
    tax that no other shareholders pay.
          And, again, should the Administration's principle that corporate
    earnings are taxed once become law, it would be ironic if S corporation
    employees were taxed 1.1 times. (In reality the employees are taxed
    almost ``double'', as most ESOP employees are in the 10% or 15% tax
    bracket, and the 10% penalty is a doubling of the federal tax, or a
    near doubling for taxpayers in those categories. For example, for each
    dollar of S corporation distribution from current earnings an ESOP
    employee might receive, he or she probably pays 15 cents in regular tax
    plus the 10 cents in penalty.)
          Of course, the penalty tax on the S corporation's current
    earnings if passed-through to employees, has resulted in distributions
    not being passed-through, and the one tax on the earnings being often
    deferred until there is an ESOP distribution upon the employee's death,
    disability, retirement, or termination. So, now the distribution from S
    corporation's current earnings is maintained in the ESOP.
          The argument to repeal the 10% penalty tax on the S corporation
    distributions from current earnings passed-through to employees is self
    evident, if measured, against the Administration's principle that
    corporate earnings are to be taxed once and only once.
          The ESOP Association recognizes that a counter argument might be
    made that the ESOP is a retirement savings plan, and no earnings from
    the plan should be allowed to ``leak'' out of the plan, making the 10%
    penalty tax appropriate. In other words, permitting the S corporation
    distributions from current earnings to pass-through the ESOP is
    supposedly ``bad'' retirement savings policy.
          Of course under this view of ESOPs, the current ESOP dividend
    deduction for C corporations should be repealed, as some critics of
    employee ownership argue.

        But Congress has not repealed the ESOP dividend deduction for C
    corporations, and in fact endorsed this tax incentive for employee
    ownership in both 2001 by expanding its reach, and in 2002 by summarily
    rejecting suggestions that the 2001 expansion be repealed. Congress
    also rejected repeal of the ESOP dividend deduction provision in 1989.
        By its actions, Congress has reaffirmed, as Federal Court after
    Court has recognized, that the laws establishing ESOPs, and the
    incentives for ESOPs are to promote an ownership policy, as well as a
    retirement savings policy.
        Since 1975, when ESOPs were first recognized, the ESOP community
    has recognized this dual purpose, and has not run from the fact that
    those feeling that retirement savings policy is more important than a
    national ownership policy will dislike, criticize, and even try to have
    altered those ESOP laws that promote ESOPs as ownership plans. In fact,
    when President Reagan recommended in 1985 that ESOPs be removed from
    the ERISA laws of the nation, The ESOP Association did not oppose this
    initiative, and it was Congress that rejected the proposal and kept the
    ESOP as an ownership plan in ERISA.
        The point is that if Congress, and the Committee in particular,
    still desire that ESOPs continue to be a major part of this nation's
    commitment to broad based ownership, it will eliminate the barrier to S
    corporation employee owners through ESOPs having one aspect of being
    owners, which is receiving in cash the earnings from their stock, on
    which they will pay tax as the cash is current earnings in their
    pockets.
    Conclusion

        The ESOP Association has only one minor suggestion with regard to
    the Administration's proposal to tax corporate earning only once, as it
    impacts the near-20 year-old ESOP tax incentive known as ESOP dividend
    deduction. The Association suggests that if the Administration's
    proposal is adopted, then if a corporation does not take the ESOP
    dividend deduction and pays dividends to ESOP participants, the
    participants receive the dividends tax-free, as the corporation paid
    the tax.
        Most importantly, however, The ESOP Association urges the Committee
    to clarify the ESOP deductible dividends, so that they are not subject
    to the corporate AMT, and that distributions to ESOP participants from
    S corporations' current earnings not be subject to a 10% penalty tax.
    These recommendations are necessary to conform current law to the
    Administration's proposal that corporate earnings be taxed only once.
        Again, we thank the Committee for permitting our views to be part
    of the Committee's record of its hearings on the ``President's Economic
    Growth Proposals.''
                Sincerely,
                                                J. Michael Keeling, CAE
                                                              President

                          Fashion Institute of Design and Merchandising
                                                   Washington, DC 20007
                                                         March 13, 2003
    The Honorable Bill Thomas
    Chairman
    Committee on Ways and Means
    1100 Longworth House Office Building
    Washington, D.C. 20515

        Dear Chairman Thomas,

        I thank you for the opportunity to submit our testimony for
    consideration as the Committee on Ways and Means takes up legislative
    business to bolster the economy, encourage job creation, and assist
    America's workforce and families.
        History has shown that in tough economic times individuals tend to
    return to school. This, along with the U.S. Department of Education's
    recent projections of college enrollments expanding to 16.3 million by
    the year 2006, place great demands on institutions for plant, property
    and equipment. Increasing enrollments are certainly a positive for
    institutions, however, there is significant pressure for institutions
    to control tuition increases. To underscore this effort to govern
    tuition increases Representative Howard P. ``Buck'' McKeon (R-CA)
    announced on March 5, 2003 that he will unveil the College
    Affordability Act, mandating that colleges control tuition charges or
    face the threat of termination of Title IV eligibility. Nonetheless, as
    reported in the Chronicle of Higher Education August 26, 2002 edition,
    ``colleges will be pressed to spend funds to build or refurbish
    dormitories, laboratories and student centers to deal with the influx
    of new students.''
        In order to assist institutions of higher education in meeting the
    growing student population demand we would propose amending the Job
    Creation and Worker Assistance Act of 2002 (Section 168(k)) to allow a
    30% additional first-year depreciation for buildings and improvements
    for tax-paying colleges.
        We believe the following objectives would be served with such an
    amendment.

         Due to the uncertainty caused by September 11, 2001, and
    the resultant dip in the economy, this is a time when most businesses,
    colleges included, are scaling down their growth plans through
    investments in long-lived assets. The additional 30% depreciation would
    allow colleges to continue to reinvest in the innovative and leading
    technologies that keeps our workforce at the forefront of the world.
         This plan would tie in additional tax savings to
    reinvestments in technology assets, and would ensure reinvestment in
    the economy.
         After September 11, 2001 additional reporting requirements
    were mandated by the INS for tracking foreign students attending U.S.
    institutions after January 2003. These new administrative reporting
    requirements add to college costs, therefore some additional tax relief
    would benefit institutions in their efforts to control tuition
    increases.
         By limiting the amendment to higher education institutions
    to those that are degree-granting and regionally accredited the
    proposal stays cost-effective.
         There is a very real fear of expansion right now among
    schools, and this bill would go a long way to eliminating it.
         There is a proven trend that when the economy slows down,
    more people return to school as they lose jobs or struggle to support
    themselves. Postsecondary educational institutions were overtaxed prior
    to September 11, 2001 with an inability to accommodate all of the
    incoming students. Those who do choose to attend higher education, or
    return to school, should be supported by the government because they
    are reinvesting in their own futures as well as that of the nation.

        We would respectfully suggest amending the Job Creation and Worker
    Assistance Act of 2002 as follows:

    If an institution of higher education that is regionally accredited and
    provides a 2-year or 4-year program of instruction for which the
    institution awards an associate or baccalaureate degree has invested in
    the purchase of a building and building/leasehold improvements or has
    done so through a related corporation and that institution has
    substantial equity in these school-occupied facilities, then that
    institution will be eligible to take a 30% additional first-year
    depreciation deduction for buildings or improvements if acquired or
    contracted for after September 11, 2001 and before September 11, 2004.
    The income tax savings related to this 30% reduction must be reinvested
    into technology assets by the institutions utilizing this deduction.

        Our cost analysis for such a proposal is as follows:
        New tax revenues would be generated by creating new technology
    sector sales. As part of the bill, all dollars saved would translate to
    additional sales in tech markets, increasing that sector's taxable
    income. The amendment would stimulate the economy over the short and
    long term by providing much needed facilities for students, providing
    them with more current access to latest innovations in technology,
    create an influx of sales in the troubled technology sector, and create
    more tax revenue for the Federal Government by the middle of the third
    year after investment.

     ------------------------------------------------------------------------
                    Assumptions
    ------------------------------------------------------------------------
    Facilities purchased or constructed before
      9/11/2004...............................
    ------------------------------------------------------------------------
    Effective tax rate                          34%
    ------------------------------------------------------------------------
    Number of institutions                      228
    ------------------------------------------------------------------------
    Percentage that might utilize               50%
    ------------------------------------------------------------------------
    Assumed cost per facility                   10,000,000
    ------------------------------------------------------------------------
    Total investment in facilities              1,140,000,000
    ------------------------------------------------------------------------
    Current law annual depreciation             28,860,759
    ------------------------------------------------------------------------
    30% Bonus (tax savings reinvested in tech   342,000,000
     assets)
    ------------------------------------------------------------------------
    Technology assets purchased                 116,280,000
    ------------------------------------------------------------------------
    Revised annual depreciation                 25,916,962
    ------------------------------------------------------------------------
    Current law depreciation tech assets Y-1    23,256,000
    ------------------------------------------------------------------------
    Current law depreciation tech assets Y-2    37,209,600
    ------------------------------------------------------------------------
    Current law depreciation tech assets Y-3    22,325,760
    ------------------------------------------------------------------------
    Current law depreciation tech assets Y-4    13,395,456
    ------------------------------------------------------------------------
    Current law depreciation tech assets Y-5    8,037,274
    ------------------------------------------------------------------------
    Current law depreciation tech assets Y-6    12,055,910   116,280,000
    ------------------------------------------------------------------------
    30% Bonus (tech assets)                     34,884,000
    ------------------------------------------------------------------------
    Revised depreciation tech assets Y-1        16,279,200
    ------------------------------------------------------------------------
    Revised depreciation tech assets Y-2        26,046,720
    ------------------------------------------------------------------------
    Revised depreciation tech assets Y-3        15,628,032
    ------------------------------------------------------------------------
    Revised depreciation tech assets Y-4        9,376,819
    ------------------------------------------------------------------------
    Revised depreciation tech assets Y-5        5,626,092
    ------------------------------------------------------------------------
    Revised depreciation tech assets Y-6        8,439,137   116,280,000
    ------------------------------------------------------------------------

     ----------------------------------------------------------------------------------------------------------------
                                                                  Increase
                        Taxes collected                       (reduction)  in   Technology sector     Total effect
                                                                   taxes
    ----------------------------------------------------------------------------------------------------------------
    Year 1 differential                                          (124,767,557)        116,280,000        (8,487,557)
    ----------------------------------------------------------------------------------------------------------------
    Year 2                                                           4,796,270                             4,796,270
    ----------------------------------------------------------------------------------------------------------------
    Year 3                                                           3,278,119                             3,278,119
    ----------------------------------------------------------------------------------------------------------------
    Year 4                                                           2,367,228                             2,367,228
    ----------------------------------------------------------------------------------------------------------------
    Year 5                                                           1,820,693                             1,820,693
    ----------------------------------------------------------------------------------------------------------------
    Year 6                                                           2,230,594                            32,528,962
                                                                 (110,274,653)
    ----------------------------------------------------------------------------------------------------------------
    Years 7-39.5                                                     1,000,891                            38,534,309
      differential
    ----------------------------------------------------------------------------------------------------------------

        We appreciate this opportunity to submit our testimony before the
    Committee on Ways and Means. Should you need additional information
    please feel free to contact us.
                Sincerely,
                                                          Norine Fuller
                       Executive Director of Student Financial Services

    Statement of the Honorable Peter Hoekstra, a Representative in Congress
                           from the State of Michigan
        The President has proposed an ambitious economic stimulus package,
    several components of which I believe will spur economic recovery,
    including making those tax cuts signed into law in 2001 permanent and
    creating incentives for business to invest.
        The struggling economy and uncertainty in the tax code has business
    unsure of the future. One way Congress can eliminate that uncertainty
    is to make permanent those tax cuts.
        The Economic Growth and Tax Relief Reconciliation Act of 2001
    provided tax relief in nearly every tax bracket. It repealed the death
    tax, provided marriage tax relief, expanded the Earned Income Credit,
    raised IRA contribution limits and simplified the tax code, making it
    easier for families to save and invest for the future.
        By not making those cuts permanent, an already complex tax code
    will become even more difficult for individuals and businesses to
    navigate. People and businesses need certainty to plan. Taxpayers
    should not be held to the whims of Congress.
        Another aspect of the President's proposal, providing for a larger
    expensing allowance, is necessary to create jobs and strengthen the
    manufacturing sector.
        The President's plan calls for the elimination of the double
    taxation on dividends. This provision might provide long-term growth in
    the economy, but I feel it is necessary to provide our business sector,
    particularly manufacturing, with more immediate relief.
        American manufacturing is innovative, productive and efficient. It
    is estimated that the manufacturing sector contributes more than 60
    percent of U.S. investment in research and development.
        However, over the past two years, more than 10,000 office furniture
    workers in West Michigan lost their jobs. Today, manufacturers in
    Michigan's Second Congressional District wonder whether America will
    retain a viable manufacturing sector.
        Nationwide more than 2 million manufacturing jobs, paying an
    average annual wage of $46,000, have been lost in the last two and half
    years.
        Providing for additional expensing for small business is a step in
    the right direction, but while the President proposes to increase the
    annual deduction and raise the annual allowance for small businesses,
    the committee needs to consider reaching even farther.
        I support increasing the three-year, 30 percent expensing allowance
    in the Job Creation and Worker Assistance Act of 2002 to 100 percent
    for all American businesses. This is why I co-sponsored H.R. 771, the
    Full Expensing for Economic Growth Act of 2003.
        This legislation allows businesses to depreciate 100 percent of
    their equipment purchases over the next 18 months. Every dollar devoted
    to an enhanced expensing allowance will go into new capital investment
    in the United States, which will result in increased productivity and
    higher wages.
        Increasing the expensing allowance acts as super-accelerated
    depreciation by ``front-loading'' the deduction allowed. Thus, the
    long-term federal budget impact is minimal because it does not increase
    the total depreciation deduction. Also, it would increase total sales
    of capital equipment and thereby generate additional tax revenues.
        In the face of a weak economy, businesses need a very compelling
    reason to move forward with, rather than defer, capital purchases.
    Increasing the expensing allowance would create this positive effect.
        I also believe we need to closely examine the possibility of
    reinstating an investment tax credit of 10 percent for all new
    equipment purchases.
        Reducing the tax burden on American businesses with an investment
    tax credit of 10 percent would spur greater spending on equipment,
    increase capital investment and would seriously boost the manufacturing
    sector of our economy.
        As we discuss different aspects of the proposed jobs and growth
    plan, the current proposal to eliminate the double taxation on
    dividends deserves the closest scrutiny.
        While many other provisions provide an immediate or short-term
    boost to spending and investment, there is contradictory evidence
    regarding the effect of the dividend provision.
        Congressional Research Service had this to say about the dividend
    proposal:

          ``Using dividend tax reductions to stimulate the economy is
    unlikely to be very effective because, unlike direct government
    spending or tax cuts for lower and moderate income individuals, it is
    not as likely to directly increase spending, which is the most
    effective way to stimulate the economy.''

        The dividend proposal accounts for nearly half the estimated
    revenue loss associated with the President's growth package over the
    next 10 years. Estimates suggest that dividend exclusions for
    individual taxpayers would cost some $25 billion per year.
        I agree with Federal Reserve Chairman Alan Greenspan's measured
    support for this proposal contingent on whether its implementation
    increases or decreases revenue. Further, I consider this proposal an
    investment in the long-term health of our economy.
        But just as every household budget must first pay for the needs of
    today and then put leftover funds into long-term investments, Congress
    must also. In a time of budget deficits and uncertain foreign policy
    costs, revenue loss needs to be balanced with prudent fiscal policy.

                 Statement of the Investment Company Institute
        The Investment Company Institute (the ``Institute'') 1
    is pleased to submit for the Committee's consideration this statement
    strongly supporting the President's proposal to promote economic growth
    and encourage savings by eliminating the double taxation of corporate
    earnings. The dividend exclusion incorporated in H.R. 2 achieves this
    objective through provisions that are designed to maximize economic
    efficiencies and minimize administrative burden. This legislation
    represents an important step in enhancing the ability of Americans to
    meet their own needs for long-term financial security.
    ---------------------------------------------------------------------------
        \1\ The Investment Company Institute is the national association of
    the American investment company industry. Its membership includes 8,929
    open-end investment companies (``mutual funds''), 553 closed-end
    investment companies and 6 sponsors of unit investment trusts. Its
    mutual fund members have assets of about $6.322 trillion, accounting
    for approximately 95% of total industry assets, and 90.2 million
    individual shareholders.
    ---------------------------------------------------------------------------
        The Institute has discussed the dividend exclusion proposal with
    Treasury Department representatives on numerous occasions and with
    Committee staff. We appreciate greatly their receptivity to our
    suggestions for modest, conforming changes that will make the proposal
    even more administrable for investors generally and, more particularly,
    for the millions of mutual fund shareholders investing for the future
    in equities through taxable accounts.
    I. The Need to Encourage Savings
        Encouraging Americans to save for their long-term financial
    security is of vital importance to our nation's future. As Dr. Rudolph
    G. Penner stated at the beginning of his paper, ``Reducing the Tax
    Burden on Saving,'' that was published by the Institute in 1994, a
    nation's savings provide the foundation for its economic growth.
    Nations that do not save will in the long run see their potential for
    increased income and wealth suffer. For that reason, the current
    savings rates in the United States, low by historical and international
    standards, raise concerns that the United States will grow more slowly
    than it should and that the standard of living of its citizens will be
    lower than it need be. The cause of the falling savings rate has been
    the subject of much debate. Although the cause is not clear, the trend
    may be reversed by reducing the tax burden on saving.2
    ---------------------------------------------------------------------------
        \2\ ``Reducing the Tax Burden on Saving,'' p. 1, Investment Company
    Institute, December 1994, located on the Institute's Mutual Fund
    Connection website at www.ici.org/newsroom/pub/1rpt_penner.pdf
    ---------------------------------------------------------------------------
    II. The Mutual Fund Industry's Role in American Saving
        Mutual funds play an important financial management role for over
    90 million Americans. Overwhelmingly, these investors are middle-income
    Americans who invest in mutual funds for the diversification,
    professional management and varying investment objectives that funds
    provide. Americans may invest in funds through taxable accounts,
    retirement accounts, or qualified tuition programs (more commonly known
    as Section 529 Plans). As these funds have grown, they've played a
    leading role in democratizing our financial markets. American investors
    now represent a broad cross-section of society and a powerful engine
    for economic recovery.
        At the end of 2003, U.S. mutual funds had total assets of $6.391
    trillion. Of this amount, approximately 42 percent (or $2.667 trillion)
    was invested in equity funds, approximately 18 percent (or $1.125
    trillion) was invested in bond funds, approximately 5 percent (or
    $0.327 trillion) was invested in hybrid funds,3 and the
    remaining 35 percent (or $2.272 trillion) was invested in money market
    funds.4
    ---------------------------------------------------------------------------
        \3\ A hybrid fund is one that invests in a combination of stocks,
    bonds and other securities.
        \4\ Mutual Fund Industry Developments in 2002, Perspectives, Vol.
    9, No. 1, Investment Company Institute (February 2003), located on the
    Institute's Mutual Fund Connection website at www.ici.org/newsroom/pub/
    per09-01.pdf
    ---------------------------------------------------------------------------
        Mutual funds function as an important investment medium for
    employer-sponsored retirement programs (e.g., section 401(k) plans) as
    well as for individual savings vehicles (e.g., individual retirement
    accounts (``IRAs'')). As of December 31, 2001, mutual funds held
    approximately $2.3 trillion in retirement assets, including $1.2
    trillion in IRAs and $1.1 trillion in employer-sponsored defined
    contribution plans.5 These figures represented about 49
    percent of all IRA assets and 44 percent of all 401(k) plan assets.
    ---------------------------------------------------------------------------
        \5\ Mutual Funds and the Retirement Market in 2001, Fundamentals,
    Vol. 11, No. 2, Investment Company Institute (June 2002) located on the
    Institute's Mutual Fund Connection website at www.ici.org/newsroom/pub/
    fm-v11n2.pdf.
    ---------------------------------------------------------------------------
        While many are aware that more than half of all U.S. households
    invest in mutual funds, the impact that growing mutual funds have had
    on the economy is less fully appreciated. A few years ago, The
    Economist said that mutual funds had emerged as ``the biggest source of
    capital for American companies ... giving small and medium-sized
    businesses unprecedented access to capital markets and thereby
    financing nearly all of America's employment growth.'' 6
    ---------------------------------------------------------------------------
        \6\ ``The Seismic Shift in American Finance: Mutual Funds,'' The
    Economist, October 21, 1995.
    ---------------------------------------------------------------------------
        In short, mutual funds are both an essential vehicle for enabling
    middle-income Americans to reach their long-term savings goals,
    including retirement, and an important source of capital and growth for
    the American economy.
    III. Application of the Dividend Exclusion to RICs and Their
            Shareholders
    A. General Rules

        Under the President's proposal, a corporation's fully-taxed
    earnings may be distributed tax-free to the corporation's shareholders
    either as a tax-free cash distribution (an ``excludable dividend'' or
    ``ED'') or by adjusting upward the cost basis of each shareholder's
    shares (a ``retained earnings basis adjustment'' or ``REBA''). Once a
    corporation distributes its earnings as an ED or a REBA, no further
    income tax will ever be imposed on those earnings.
        A corporation also can make a tax-free distribution to its
    shareholders, under the President's proposal, out of its ``cumulative
    retained earnings basis adjustment amount'' or ``CREBAA'' and reducing
    the amount of its cumulative REBAs by the amount distributed. A
    cumulative retained earnings basis adjustment (``CREBA'') distribution
    is treated in the hands of an investor exactly the same as a return of
    capital; each provides tax-free cash to the investor (to the extent of
    the shareholder's basis) and requires a downward adjustment in share
    basis equal to the cash distributed.
    B. regulated investment company (``RIC'') Rules

        The dividend exclusion tax benefits provided to direct investors in
    equity securities also are provided under the President's proposal to
    the shareholders of a fund organized as a regulated investment company
    (``RIC'') under Subchapter M of the Code, hereinafter referred to as a
    ``fund.'' A fund that receives EDs, REBAs and CREBAs on its portfolio
    stocks could pay/allocate them periodically to its shareholders on a
    flow-through basis. Funds may be expected under the President's
    proposal to pay EDs and allocate REBAs frequently, as fund shareholders
    would benefit from an ED or REBA only to the extent that it had been
    paid or allocated by the fund to its shareholders.
        Many millions of mutual fund shareholders would not need to
    individually make the basis adjustments required by the REBA and CREBA
    regimes, as they already are entitled to receive average cost basis
    statements provided to them voluntarily by their funds. Once the funds
    have modified their cost basis programs for REBAs and CREBAs, the funds
    themselves would make the necessary adjustments to the cost basis of
    their shareholders' shares. Those shareholders who either do not
    receive, or choose not to use, average cost basis statements provided
    to them by their funds would need to make these adjustments themselves
    (such as with the use of a computer program designed for this purpose)
    or rely on their tax return preparers or financial advisors to assist
    them.
    C. Retirement Accounts

        The President's proposal does not apply to retirement accounts. As
    noted in the Treasury Department's General Explanations of the
    Administration's Fiscal Year 2004 Revenue Proposals, ``[b]ecause all
    investment income is effectively free from tax in Retirement Plans,
    investments in these plans will remain tax advantaged relative to
    investments outside of these plans.'' 7
    ---------------------------------------------------------------------------
        \7\ ``General Explanations of the Administration's Fiscal Year 2004
    Revenue Proposals,'' p. 21, U.S. Department of the Treasury (February
    2003).
    ---------------------------------------------------------------------------
    IV. The Dividend Exclusion's Impact on Savings
        The mutual fund industry's role in Americans' efforts to achieve
    financial security provides the Institute with a unique perspective
    with respect to the dividend exclusion and its impact on various
    savings opportunities.
        The proposal would have a strong, positive impact on taxable
    investing in equities. Eliminating the investor-level tax on corporate
    dividends would substantially increase after-tax returns on equities
    which, in turn, should raise stock prices and promote long-term
    savings.
        The impact of the proposal on municipal bonds most likely would be
    modest. Although the proposal would raise the risk-adjusted after-tax
    return on equities relative to bonds, equities and municipal bonds are
    not generally viewed as ready substitutes for each other. Taxable bonds
    are a far better comparable for municipal bonds, and the relative
    after-tax yield on the taxable bond versus the municipal bond yield is
    often the determining factor in deciding whether to invest in municipal
    bonds.
        Finally, although the proposal does not apply to equities held in a
    retirement account, any investor eligible to make pre-tax contributions
    to a retirement account or after-tax contributions to a Roth IRA would
    still receive more favorable treatment by investing in the retirement
    account than by investing in the same assets through a taxable account.
    This result would occur unless 100 percent of the return on a stock was
    in the form of a tax-free distribution of an ED, a REBA or a
    CREBA.8 Moreover, retirement accounts investing in equities
    would receive the same benefit that taxable accounts would receive from
    the rise in stock prices generated by the proposal. Thus, investors
    would continue to have an incentive to hold equities through their
    retirement accounts and would benefit from the proposal's positive
    impact on the stock market.
    ---------------------------------------------------------------------------
        \8\ As noted above, retirement accounts effectively provide a zero
    rate of tax on return. In contrast, a taxable account would only
    provide tax-free treatment on the portion of the investment return
    attributable to EDs, REBAs or CREBAs.
    ---------------------------------------------------------------------------
    V. Mutual Fund Capital Gains
        The Institute supports legislation that would permit the deferral
    of the payment of tax on a capital gain realized by a fund until the
    fund shareholder receives the gain in cash, such as by redeeming fund
    shares. This proposal would remedy the anomalous result, misunderstood
    by many fund shareholders, that capital gains realized by the fund are
    taxed currently to the fund's long-term mutual fund shareholders--who
    continue to hold, rather than sell, their shares.
        If this type of legislation were enacted, the fund shareholder's
    own actions would determine when taxes are paid. This would benefit the
    millions of fund shareholders investing in taxable accounts. These
    investors are mainly middle-income investors who are providing capital
    necessary for continued economic growth.
        By reducing current tax bills and allowing earnings to grow tax-
    deferred, this legislation would boost long-term savings. Moreover, the
    proposal would not result in these gains being excluded from tax.
    Instead, the gains would merely be deferred, albeit, in some cases,
    outside the relevant budget-scoring period. The proposal's boost to
    long-term savings would have little, if any, long-term cost and would
    provide benefits to the economy in both the short run and the long run.
    VI. Institute Support for Other Savings Initiatives
        Finally, the Institute has long supported efforts to enhance
    financial security by advocating efforts to encourage retirement
    savings through employer-sponsored plans and IRAs, to simplify the
    rules applicable to retirement savings vehicles, to enable individuals
    to better understand and manage their retirement assets, to encourage
    college savings, and to reduce the tax burden on other long-term
    investing through mutual funds.
        The President's budget includes several important savings
    incentives, in addition to the proposal to eliminate the double
    taxation of corporate earnings. One bold initiative is the proposed
    creation of Retirement Savings Accounts, Lifetime Savings Accounts and
    Employer Retirement Savings Accounts. These three new retirement and
    savings vehicles would both enhance the ability of Americans to save
    for their future and simplify the current rules governing retirement
    plans. The Institute strongly supports savings and simplification
    initiatives that would bring long-term savings and investment
    opportunities within the reach of every working American.
        The President's budget detailed other important retirement savings
    initiatives that the Institute endorses, including proposals to
    accelerate the savings enhancements, and make permanent the pension law
    enhancements, that were enacted two years ago as part of the Economic
    Growth and Tax Relief Reconciliation Act of 2001 (``EGTRRA'').
        The Institute supports accelerating the phase-ins of the increases,
    enacted as part of EGTRRA, in the contribution limits to IRAs and
    employer-sponsored retirement plans and in the opportunity for
    individuals age 50 and over to make ``catch-up'' contributions to their
    pension plans and IRAs. Accelerating the phase-ins will increase saving
    and boost economic growth.
        The Institute also supports making permanent as soon as possible
    the EGTRRA enhancements to our pension laws--which likewise encourage
    economic growth. For individuals to plan appropriately for their
    retirement years, they must be able to rely on predictable rules--rules
    that apply now and throughout one's career and retirement.9
    The future termination of these provisions could affect the long-term
    savings strategies of working individuals, undermining the purpose of
    these reforms and jeopardizing saving and long-term growth.
    ---------------------------------------------------------------------------
        \9\ Americans will be better positioned to build an adequate
    retirement plan if they know now whether, for example, they will be
    able to contribute $2,000 or $5,000 to an IRA in 2011 and whether they
    will be able to make catch-up contributions.
    ---------------------------------------------------------------------------
        Because education helps increase productivity, saving for higher
    education promotes economic growth in both the near-term and the long-
    term. The Institute supports prompt enactment of legislation making
    permanent the tax-free treatment of qualified withdrawals from Section
    529 plans because of the disproportionate impact that this uncertainty
    is having today. EGTRRA provides no up-front benefit to taxpayers, but
    instead provides that future qualified withdrawals will be tax-free.
    Consequently, EGTRRA's sunset provision creates immediate uncertainty
    for families who are trying to save now to meet college expenses that
    will arise after 2010. Legislation making permanent the tax-free
    treatment of qualified withdrawals from these plans will promote growth
    and encourage long-term savings. For this reason, it should be a
    priority.
    VII. Recommendation
        The Institute strongly supports common-sense initiatives that will
    promote savings. Thus, we urge enactment of the H.R. 2 provisions that
    would eliminate the double taxation of corporate earnings. We support
    capital gains tax relief for mutual fund shareholders. Finally, we also
    support savings incentives for retirement and college education.
                                     ______

                                 SUMMARY POINTS
                 STATEMENT OF THE INVESTMENT COMPANY INSTITUTE
                  ON THE PRESIDENT'S economic growth proposals

                    included in the FISCAL YEAR 2004 BUDGET
                  SUBMITTED TO THE COMMITTEE ON WAYS AND MEANS
                         U.S. HOUSE OF REPRESENTATIVES
    I. The Need to Encourage Savings

        Encouraging Americans to save for their long-term financial
    security is of vital importance to our nation's future.
    II. The Mutual Fund Industry's Role in American Saving

        Mutual funds play an important financial management role for over
    90 million, overwhelmingly middle-income, Americans who invest in
    mutual funds through taxable accounts, retirement accounts and
    qualified tuition programs (Section 529 Plans).
    III. Application of the Dividend Exclusion to Mutual Fund Shareholders

        The proposal's tax benefits would be provided to direct investors
    and mutual fund shareholders. Funds may be expected to distribute these
    benefits frequently to their shareholders. Those millions of mutual
    fund shareholders who receive average cost statements from their funds
    would have all calculations performed for them.
    IV. The Dividend Exclusion's Impact on Savings

        The Institute strongly supports this proposal because it most
    likely would have a strong, positive impact on taxable investing in
    equities and a modest impact on municipal bonds. Although the proposal
    would not apply to equities held in a retirement account, investors
    would continue to have an incentive to hold equities through their
    retirement accounts and would benefit from the proposal's positive
    impact on the stock market.
    V. Mutual Fund Capital Gains

        Finally, the Institute supports legislation that would permit the
    deferral of the payment of tax on a capital gain realized by a fund
    until the fund shareholder receives the gain in cash, such as by
    redeeming fund shares.
    VI. Institute Support for Other Savings Initiatives

        The Institute has long supported efforts to enhance financial
    security by advocating efforts to encourage retirement savings through
    employer-sponsored plans and IRAs, to simplify the rules applicable to
    retirement savings vehicles, to enable individuals to better understand
    and manage their retirement assets, and to encourage college savings.

      Statement of International Pizza Hut Franchise Holders Association
        (IPHFHA), Advisory Council for Taco Bell Franchisees (FRANMAC),
       Association of Kentucky Fried Chicken Franchisees, Inc. (AKFCF),
     National A&W Franchisees Association (NAWFA), and Association of Long
                      John Silvers Franchisees, Inc. (LJS)
        Mr. Chairman and members of the Ways and Means Committee, thank you
    for the opportunity to submit testimony on the critically important
    issue of economic growth, specifically the impact depreciation relief
    contained in proposals such as H.R. 571 could have in creating jobs and
    speeding up our nation's economic recovery.
        We are speaking on behalf of franchisees from the following
    restaurant concepts: Taco Bell, Pizza Hut, KFC, Long John Silvers and
    A&W. Restaurant franchisees are generally small business people who own
    and operate restaurants in their local communities under franchise
    agreements which give them access to the franchisor's trade name and
    business system. Franchisees are responsible for acquiring restaurant
    property, constructing the actual facility, employing its workers, and
    overseeing the day-to-day operations of the restaurant.
    Background
        Under current tax law, owners of most commercial buildings, quick-
    serve restaurants included, must depreciate their building's original
    cost, plus any subsequent renovation or improvements, over a 39-year
    cost recovery period. In the past, Congress has sped up this schedule
    for certain types of businesses whose facilities incur an unusually
    high degree of wear and tear such as gas stations and, more recently,
    convenience stores.
        It is unrealistic to believe that a restaurant building has a
    useful life of 39 years. Restaurants, especially quick-serve
    restaurants, see a very high-volume of business every day and are open
    seven days a week, many up to 24 hours per day. Restaurants constantly
    have to renovate and update in order to comply with state and local
    building, health, and safety codes not to mention meeting the ever-
    changing tastes of discerning consumers.
        In fact, National Restaurant Association studies show that most
    restaurants remodel and update their buildings every six to eight
    years, nowhere near the 39-year depreciation timeframe provided in
    current law. Our restaurant buildings simply do not last that long
    without major renovations. When a restaurant does renovate, those costs
    must then be depreciated on yet another 39-year cost recovery period,
    which often times makes remodeling an unattractive proposition.
        Also, many franchise agreements contain ``scrap and rebuild''
    provisions obligating franchisees to build a new facility from the
    ground up once their original restaurants reach a certain age. This
    means franchisees often have to build a new restaurant well before
    their costs incurred from the original restaurant have been recovered.
        Even if restaurant franchisees did not have major renovations to do
    and were not subject to ``scrap and rebuild'' provisions, many
    franchise agreements do not provide automatic rights of renewal past
    the expiration at 20 years. One of the basic accounting principles
    requires matching revenues with expenses. When a 20-year franchise
    contract is carried out in a building with a 39-year depreciation
    period, it becomes very clear that the depreciation expense applicable
    to the building is not in step with the income generated over the life
    of the franchise agreement.
    Legislation
        Taco Bell FRANMAC strongly supports legislation to remedy this
    disparate tax treatment such as H.R. 571 introduced by Congressman Mark
    Foley. H.R. 571 shortens the current 39-year depreciation schedule to a
    much more reasonable 15-year period which would allow restaurants to
    recover the costs of buildings and improvements over a shorter period
    of time. H.R. 571 would apply to restaurant buildings placed in service
    after the date of the enactment and to all improvements made after that
    same date.
    Economic Impact
        In addition to rectifying the disparity between the normal use-life
    of a restaurant facility and the tax code's current depreciation
    period, this legislation will also serve as a major impetus for
    improving the economy given the number of typically small businesses
    that are put to work when building or renovating a particular
    restaurant facility. For instance, local bankers and real estate
    brokers benefit from financing the costs associated with building and
    remodeling, local architects gain from the design and planning aspects,
    and roofers, plumbers, electricians and carpenters all benefit from the
    resulting construction project itself. Add in local landscapers,
    signage companies, and pavement contractors and you can easily see how
    depreciation relief could directly and immediately stimulate our local
    and national economic recovery.
        H.R. 571's economic impact will be felt across the country, in both
    small towns and large cities, since franchise restaurants are located
    in every Congressional district in the country. In fact, the average
    Congressional district is home to between 25 and 75 restaurants from
    the above five franchise concepts alone.
        The International Franchise Association (``IFA'') recently asked
    some of its similarly situated members in an informal survey what
    depreciation reform would mean to their business:

         Burger King reports not one original restaurant structure
    was still standing after 39 years. The typical Burger King restaurant
    facility undergoes building improvements every seven to ten years. In
    addition, Burger King's 20-year franchise agreement requires
    franchisees to ``scrape and rebuild'' restaurants before renewal.
         A Dunkin' Donuts multi-unit franchisee reports that while
    his franchise agreement is for 20 years, he is obligated to remodel
    every ten years. However, the shops require remodeling about every
    seven years.
         International Dairy Queen estimates that its small
    percentage of company-owned stores would be able to increase the
    allowed depreciation taken over the first five years by $15,000 for
    remodeling and $67,800 for new construction. This is the savings for
    one restaurant and represents the accumulated increased depreciation
    deduction over the entire five-year period.
         We calculate the tax savings to be in the $6,000 per year/
    store range on a typical Taco Bell or KFC franchise building.
    Leveling the playing field
        H.R. 571 will also level the playing field with certain convenience
    store operators that have recently become direct competitors with
    quick-serve restaurant franchisees in many cases. In 1996, Congress
    provided a 15-year depreciation schedule for gas stations and
    convenience stores. Since then their food service options have expanded
    to include deli's, burgers, pizza, tacos and chicken. From 1997 to 1999
    foodservice sales generated by these competing products in gas stations
    and convenience stores grew 64%. In fact, food prepared on site has
    taken over dispensed beverages as the largest segment of convenience
    stores' foodservice sales. Our restaurant franchisees operate in a very
    competitive environment and request that the Committee modernize the
    tax code to reflect these real world conditions.
    Conclusion
        Franchising accounts for over $1 trillion in U.S. retail sales and
    more than eight million jobs. The restaurant industry is the nation's
    largest private employer with over 11.2 million workers.
        Shortening the current 39-year depreciation schedule to 15 years
    would stimulate both short- and long-term economic growth and create
    jobs in not only the restaurant industry, but in the trades and
    businesses that will indirectly benefit from the construction and
    renovation of restaurant buildings as well.
        We hope the Ways and Means Committee will include H.R. 571's
    depreciation relief in the economic stimulus package currently before
    Congress. Thank you again for the opportunity to present this
    testimony.

                                                    1204 Wyandotte Road
                                                   Columbus, Ohio 43212
                                                       February 3, 2003
    The Honorable Robert Portman
    United States House of Representatives
    238 Cannon House Office Building
    Washington, D.C. 20515

        Dear Representative Portman:

        I wanted to write you to show my support for the Administration and
    President Bush's efforts to reform the Internal Revenue Code in efforts
    to stimulate the national economy. Unfortunately I am concerned,
    however, that the Treasury Department's formulation for ending the
    double taxation of corporate dividends will have the unintended
    consequence of diminishing the flow of private capital into affordable
    housing financed with the Low Income Housing Tax Credit (LIHTC). I urge
    you to ensure that no harm is done to the LIHTC when you consider
    legislation designed to incorporate the Administration's policy to end
    the double taxation of corporate dividends (the ``dividend proposal'').
        I have personally been involved in affordable housing for over 13
    years. The LIHTC generates equity for such investments in affordable
    housing. The current proposal to reform the Internal Revenue Code could
    greatly hamper efforts to create and preserve affordable housing in
    Ohio for Ohioans.
        As you may know, LIHTC is involved in virtually all of this
    Nation's affordable rental units and at least 40 percent of all
    multifamily housing starts are made possible through the LIHTC. Since
    1986, LIHTC has generated private equity investments in more than 1.5
    million units of new or rehabilitated safe, decent housing for low- and
    moderate-income seniors and families.
        According to some estimates, every $1 invested in housing credits
    will ``taint'' $1.86 of earnings by subjecting them to double taxation
    of dividends. So, corporations who currently provide 98% of LIHTC
    equity nationwide will be forced to make the choice between reducing
    corporate taxes and supporting the creation of affordable housing OR
    passing the maximum amount of tax-free dividends on to shareholders.
        LIHTC was initiated by President Reagan, extended and strengthened
    by President George H.W. Bush and permanently extended and increased by
    President Clinton. It is a bipartisan program that works very well.
    LIHTC began as a means to provide an efficient alternative to direct
    subsidies for meeting the Nation's affordable housing needs. The
    program has proved very successful. Under the Treasury Department's
    formulation of the dividend proposal, however, the hallmark success and
    efficiency of this program will be greatly diminished.
        I am also concerned that the Treasury's formulation of the dividend
    proposal will significantly reduce the value of the New Markets Tax
    Credit, enacted in 2000, and President Bush's new Homeownership Tax
    Credit. I urge you to preserve the value of these credits, as well as
    the LIHTC, in any legislation in which you consider the implementation
    of the dividend proposal.
        I look forward to working with you to preserve the LIHTC as an
    essential tool in preserving and producing affordable housing in our
    State and Nation. Let us not disassemble a valuable tool in providing
    for families in Ohio and throughout the country at a time when our
    Nation's people and economy can ill afford it. If you have any
    questions please feel free to contact me at 614-353-5353.
                Sincerely,
                                                     John F. Kukura III

            Statement of the Mortgage Bankers Association of America
     Estimated Impact of the Major Components of the Bush Administration's
                Growth and Jobs Plan on Housing and the Economy
    Executive Summary
        The halting and weak nature of the current economic recovery and
    the related lack of job creation have led to the proposal that fiscal
    policy be used to encourage greater economic growth. February payroll
    employment declined by over 300,000 jobs affecting all sectors of the
    economy. Fourth quarter Gross Domestic Product (GDP) increased a paltry
    1.4 percent at an annual rate. House price increases are slowing,
    increasing the likelihood that the strong support provided by the
    housing sector will moderate somewhat toward a more historically normal
    role, but raising the risk of slowing consumer spending. While some
    signs of strengthening can be observed, the Federal Reserve Board has
    noted that there is still greater risk of weak economic growth than of
    resurgent inflation.
        The Bush Administration has proposed a defined package of policies
    for the purpose of increasing economic growth and accelerating job
    creation. In light of the challenges faced by the economy and the
    importance of job and income growth to both the residential and
    commercial real estate finance industries, it is prudent for the
    Mortgage Bankers Association of America (MBA) to evaluate the impact of
    the proposal on the economy and real estate.
        The two main elements of the Administration's proposal are the
    acceleration and making permanent of the previously enacted marginal
    tax rate cuts and the elimination of the double taxation of corporate
    dividends. The MBA incorporated the combined package into a simulation
    of economic activity for purposes of evaluating the capacity of the
    proposal to increase job formation and income growth in the next two
    years, a period of time over which the full effects should play out.
        Simulation results produced by MBA, and based on conservative
    assumptions, show that the effects predicted by the Administration's
    economic advisors are supported, with any differences within the
    tolerances of such models. Our estimates anticipate an annualized
    increase of 0.9 percent in GDP growth by year-end 2004 and the addition
    of 1.0 million jobs in that same time frame. The proposal will have a
    minimal impact on mortgage interest rates and will generate an
    additional 130,000 housing starts over the simulation time frame.
        As a result of the estimated positive effects on the economy and
    the related benefits for the commercial and residential real estate
    sectors, MBA is strongly recommending the adoption and implementation
    of the proposal as soon as possible.
    Current Economic Environment
        The recovery of the U.S. economy from the recession that began in
    2001 has been modest and uneven and has failed to produce a desirable
    level of job growth. As a result, the Bush Administration has proposed
    an economic growth package intended to increase both employment and GDP
    growth.
        Growth of Gross Domestic Product (GDP) began decelerating in the
    second half of 2000 and became negative at the outset of 2001.
    [GRAPHIC] [TIFF OMITTED] T1630O.001

        After three consecutive quarters during which the annualized rate
    of GDP growth was negative, national income growth turned up but at an
    erratic pace. The preliminary GDP estimates for the fourth quarter of
    2002 stand at 1.4 percent, well below the economy's long-run capacity
    for growth and well under the pace normal for this far beyond what
    appears to have been the end of a recession and the beginning of an
    expansion.
        Monetary policy has been accommodative since the onset of the
    recession. The Federal Reserve has lowered the Federal Funds Rate
    Target both rapidly and to a very low level.
    [GRAPHIC] [TIFF OMITTED] T1630P.001

        The most recent cut in the Fed Funds target, November 2002, to 1.25
    percent was accompanied by commentary indicating that the observed
    softening of activity in the manufacturing sector indicated that the
    risks to the recovery of the economy remained significant and growth-
    oriented rather than inflationary. The Federal Reserve Board has been
    very clear that it will retain an accommodative policy stance until
    such time as it sees a solid footing established under the recovery;
    something that it does not yet see.
        Unemployment, which began to rise in late 2000, has remained
    stubbornly high, most recently reported in February 2003 at 5.8
    percent.
    [GRAPHIC] [TIFF OMITTED] T1630Q.001

        The February report indicated private nonfarm payroll job losses of
    321,000.
                               Employment Growth
         (Monthly Change in Private Nonfarm Employment, Number of Jobs)
    [GRAPHIC] [TIFF OMITTED] T1630R.001

        These losses were not concentrated but rather were reflected in all
    broad categories of employment with retail trade and services suffering
    the largest losses. Manufacturing continued to register job losses.
    Additionally, the rate of initial unemployment claims have remained
    relatively high and the Help Wanted Index gives no indication of a
    trend shift toward improved employment conditions.
    [GRAPHIC] [TIFF OMITTED] T1630S.001

        One of the few sectors of the economy that has been adding jobs has
    been the residential housing real estate finance sector. Mortgage
    bankers and brokers have added over 120,000 jobs since January of 2001
    during which time the U.S. economy has suffered a net loss of 2,531,000
    private nonfarm jobs. Record low interest rates have provided an
    impetus that has allowed the housing sector to stand as one of the most
    important supports for the overall economy, softening the recession and
    serving as an engine to support the modest recovery to this point.
        Home sales have set records each of the last two years at 6.19
    million new and existing homes sold in 2001 and 6.58 million in 2002.
    [GRAPHIC] [TIFF OMITTED] T1630T.001

                                    ------

    [GRAPHIC] [TIFF OMITTED] T1630U.001

        Real residential fixed investment has remained strong throughout
    the current recessionary period, in contrast to the 1990-91 recession,
    providing valuable support to economic activity through sustained
    employment and materials demand in the residential construction sector
    as well.
    [GRAPHIC] [TIFF OMITTED] T1630V.001

        Unfortunately, the economic downturn and its effects on business
    fixed investment and employment have devastated the real nonresidential
    or commercial structures sector.
    [GRAPHIC] [TIFF OMITTED] T1630W.001

        This sector will not return to health until such time as economic
    growth resumes at a higher level and employment picks up.
        Concurrent with home sales increases, residential mortgage
    originations registered $2.03 trillion in 2001 and $2.46 trillion in
    2002, both record levels. A significant part of the origination dollar
    amount was the removal of equity built up by increases in home values.
    The Federal Reserve estimates that roughly $200 billion of equity was
    extracted through ``cash-out'' refinancing in 2002, slightly higher
    than that of 2001. Of this cash, a substantial portion was applied to
    the reduction of other forms of debt but the remainder, perhaps as much
    as $75 billion each year was used for consumption of various kinds by
    households. Once again the housing sector provided support for the
    economy at a level well above that of the 1990-91 recession.
    [GRAPHIC] [TIFF OMITTED] T1630X.001

                      Source: U.S. Department of Commerce
        The role of residential housing as a support for the economy
    through both the cash-out refinancing supporting consumer spending and
    through the consumption boost generated by the sale and financing of
    new and existing homes is expected to wane slightly in 2003.
    Refinancings, in particular, will recede from the historic levels of
    the last few years as the number of households for which there is an
    economic benefit declines. The housing sector will still be a strong
    leg for the economy but more in its traditional role of providing
    between 12 and 20 percent of GDP depending on how it is measured.
    However, as interest rates rise modestly and refinancing activity
    declines and provides somewhat less support for consumer spending and
    the economy, there will need to be an increase in income growth and
    employment to offset it.
        The MBA's forecast for economic growth, employment and housing
    activity without the implementation of any sort of growth plan is for
    continued growth below capacity and little recovery in jobs until late
    2004. Without a growth plan, we expect GDP growth in the neighborhood
    of 2.8 percent from fourth quarter to fourth quarter 2003 and 3.4
    percent the following year. Furthermore, unemployment is expected to
    rise to a level of 6.1 percent and remain there through most of 2004.
    The housing sector is expected to begin a slow decline of modest
    proportions.
        The Bush Administration has introduced a plan intended to boost
    employment and economic growth to provide the offset to the slowing
    housing sector. This will potentially be important to the housing
    industry as the three most important factors for a growing housing
    industry in the longer term are jobs growth, income growth, and
    demographic factors. Since the Bush Administration's plan is intended
    to increase both jobs and economic growth, it is incumbent on the
    Mortgage Bankers Association of America (MBA) to assess the plan's
    expected impact on the residential and commercial real estate and real
    estate finance industries. What follows is a description of the
    Administration's proposal's major elements and their estimated impacts
    on the economy and real estate finance.
    MBA Analysis of the Bush Administration's Growth and Jobs Plan
        The MBA has undertaken an analysis of the economic effect of the
    Bush Administration's proposed economic growth package. The MBA has
    determined that if the package were passed by the middle of 2003, 1.0
    million new jobs would be created by the end of 2004, or within 18
    months of the passage of the plan. The MBA estimates that if the plan
    were passed in its entirety, Gross Domestic Product (GDP) would
    increase by an additional 0.5 percent during 2003 and by an additional
    0.9 percent during 2004. As a result of this analysis, the MBA strongly
    recommends passage of the plan.
    Key Points of the Bush Administration's Plan

        The Bush Administration's plan has two key components, the
    acceleration to January 1, 2003 of the tax cuts passed in 2001 that are
    now being phased-in over several years, and an elimination of the
    double taxation of dividends. The proposed accelerated tax cuts
    include:

         The expansion of the 10 percent tax bracket.
         The reduction in the 27%, 30%, 35% and 38.6% income tax
    rates to 25%, 28%, 33% and 35% respectively.
         The reduction in the marriage penalty.
         An increase in the child tax credit from $600 to $1,000. In
    addition, the 2003 increase would be paid to qualifying taxpayers with
    advance payment checks in July 2003.

        In addition to the elimination of the double taxation of dividends,
    the Administration proposes increasing from $25,000 to $75,000 the
    amount of investment that small businesses can expense immediately and
    increasing the Alternative Minimum Tax exemption by $8,000 for married
    taxpayers ($4,000 for single taxpayers) between 2003 and 2005.
    Assumptions in Estimating the Effect of the Plan

        Estimates of the effects of tax changes on economic growth are
    always challenging, particularly when we are looking at reversing the
    effects that the double taxation of dividends has created over many
    years. For example, the MBA estimates that the removal of the double
    taxation of dividends would add roughly $30 billion annually to after-
    tax incomes. Since there is little historical precedent on how much of
    this will result in additional spending, the MBA made the very
    conservative assumption that the amount of new spending would be small,
    and that the principal stimulative effect of the proposal would come
    from the resulting increase in equity prices. There appears to be
    little argument that some increase in stock prices would occur; the
    question is how large it would be. Estimates of private economists put
    the probable increase in the 5 to10 percent range. The MBA is assuming
    an increase of 7.5 percent in its model.
        The experience of the late 1990s clearly indicates that increased
    wealth in the form of higher equity prices does encourage consumers to
    spend more and save less, as would be expected. Higher equity prices
    also reduce the cost of equity capital to businesses, potentially
    increasing business spending for capital equipment. There is thus good
    reason to expect positive benefits to economic growth from eliminating
    taxes on dividends. Indeed, since the weak and erratic nature of the
    economic recovery that began a year ago probably traces in good measure
    to the legacy of the bear market in equities, an upturn in stock prices
    should clearly help strengthen the economy.
        The acceleration of the tax cuts should have a major, direct impact
    on consumer spending. Tax cuts that are permanent have a much larger
    impact on consumer spending than those that are temporary, such as
    rebates. Estimates from previous tax cuts are that individuals spend
    only about one-fifth of any funds received via temporary tax cuts or
    rebates. On the other hand, spending out of permanent tax cuts, such as
    those proposed in the Administration's plan, runs closer to two-thirds
    of the increase in disposable income.
        One additional but minor point is whether the acceleration of
    previously scheduled tax cuts might have a slightly different impact on
    personal consumption than newly scheduled tax reductions. The issue
    with the accelerated tax cuts in the Administration's proposal is
    whether or not individuals have already increased their spending in
    anticipation of future tax cuts already enacted into law. While it is
    theoretically possible that consumers have already begun to spend part
    of expected future tax cuts, the MBA believes this is highly unlikely
    and that most consumers have not made the careful calculations that
    would be necessary to estimate how future tax changes would affect
    their after-tax income. Even if they had done so, they would probably
    still be uncertain as to whether future tax cuts would actually be
    realized, given the desires of some in Congress to cancel some or all
    of scheduled future tax cuts. In the estimates of the economic effects
    of the stimulus package discussed below, the accelerated tax cuts
    announced in the Administration's proposal are treated the same as if
    they were newly enacted tax reductions.
        To estimate the impact on economic growth, simulations were done
    with the econometric model that the MBA uses for creating its economic
    forecasts, a model created by Macroeconomic Advisers of St. Louis. The
    MBA used the following assumptions:

         The new tax proposals are assumed to be passed in their
    proposed form by mid-year 2003 and go into effect during the third
    quarter.
         Stock prices are assumed to increase 7\1/2\ percent in
    response to the elimination of taxes on dividends.
         The tax cuts result in a $70 billion increase in income to
    taxpayers.
    MBA Simulation Results
    Impact on GDP and Employment

        The results provide general confirmation of the Administration's
    estimates of the near term impact on economic growth. Regarding GDP
    growth and employment, the simulations suggest the following.
        The simulations suggest that 0.5 percent would be added to GDP
    growth in the last two quarters of 2003, measured year-over-year, and
    0.9 percent added to year-over-year growth in 2004.
    [GRAPHIC] [TIFF OMITTED] T1630Y.001

        By the fourth quarter of 2004, the number of payroll jobs would be
    boosted by 1.0 million.
    [GRAPHIC] [TIFF OMITTED] T1630Z.001

        The MBA's current forecast for annualized growth in the latter half
    of this year is in the 3 to 3\1/4\ percent range. The simulations
    suggest that annualized growth during the third and fourth quarters
    might be boosted by as much as a full percentage point, raising the
    growth rate during that period to 4 to 4\1/4\ percent.
    Impact on Interest Rates

        The MBA's estimate of the impact of the Administration's growth
    package suggests a bit less growth coming from the stimulus package
    than what the Administration estimates--though the difference is quite
    small. One possible reason for the difference could be differences in
    the allowances made for the impact of the stimulus package on interest
    rates.
        Several factors would likely increase interest rates with any
    stimulus package. First, the demand for funds is likely to increase
    with any economic recovery, putting upward pressure on rates. Second,
    if equity prices are boosted, a substantial part of the money flowing
    into equities might come from investments in fixed income securities,
    pushing up their yields. Both of these effects would be offset somewhat
    if the result of elimination of the double taxation of dividends is to
    make equity funding less expensive and reduce somewhat the corporate
    demand for debt funding.
        How large an effect on interest rates would occur depends
    importantly on how the Federal Reserve reacts to the impact of the
    stimulus package on the economy. Given the currently very low rate of
    inflation, it is MBA's judgement that the Fed would not rush to raise
    interest rates at the first sign of improved economic growth. From the
    middle of this year onward, however, the economy could well be growing
    at a pace that reduces unemployment significantly. The real federal
    funds rate is now below zero (meaning that the rate is below the rate
    of inflation), implying a posture of monetary policy that cannot be
    sustained indefinitely. Solid economic growth would give the Fed the
    opportunity to move gradually back toward a neutral posture. The
    simulations allow for this, but suggest that the increase in interest
    rates would be quite moderate, in the neighborhood of 20 basis points
    above what they otherwise would have been on the 30-year fixed rate
    mortgage rate by year-end 2004.
    [GRAPHIC] [TIFF OMITTED] T1630AA.001

    Impact on Housing Starts

        The effect of the Administration's proposal on housing starts is to
    increase them. The increase in employment (which is significant but not
    so large as to put upward pressure on the price level) and disposable
    income overrides the minor increase in interest rates. The result is
    that housing starts are increased by 30,000 units in 2003 and by
    100,000 units in 2004 through implementation of the full plan.
    [GRAPHIC] [TIFF OMITTED] T1630BB.001

        Were the dividends exclusion component of the plan not enacted, the
    impact on 2003 starts would be a smaller increase of 25,000 units and
    starts in 2004 would be 60,000 higher rather than 100,000 with the full
    plan.
    Conclusion
        The halting and weak nature of the current economic recovery and
    the related lack of job creation have led to the proposal that fiscal
    policy be used to encourage greater economic growth. The Bush
    Administration has proposed a defined package of policies for the
    purpose of increasing economic growth and accelerating job creation.
    The two main elements of the Administration's plan are the acceleration
    and making permanent of the previously enacted marginal tax rate cuts
    and the elimination of the double taxation of corporate dividends.
        The MBA incorporated the combined package into a simulation of
    economic activity for purposes of evaluating the capacity of the
    proposal to increase job formation and income growth in the next two
    years, a period of time over which the full effects should play out.
    Simulation results produced by MBA, and based on conservative
    assumptions, show that the effects predicted by the Bush
    Administration's economic advisors are supported, with any differences
    within the tolerances of such models. Our estimates anticipate an
    annualized increase of 0.9 percent in GDP growth by year-end 2004 and
    the addition of 1.0 million additional jobs in that same time frame.
    The plan will have a minimal impact on mortgage interest rates and will
    generate an additional 130,000 housing starts over the simulation time
    frame.
        As a result of the estimated positive effects on the economy and
    the related benefits for the commercial and residential real estate
    sectors, MBA is strongly recommending the adoption and implementation
    of the plan as soon as possible.
                                     ______

    Appendix 1
         Other Benefits of the Bush Administration's Proposal for the
                Elimination of the Double Taxation on Dividends
        In addition to the direct economic benefits of the Administration's
    growth plan discussed in the report, the MBA sees a number of other
    advantages to improved corporate governance and operations that will
    ultimately inure to the benefit of the economy by increasing investor
    confidence and increasing capital market efficiencies.

        1.Greater corporate transparency. By removing the tax disincentive
    not to pay dividends, corporations will be under greater pressure to
    justify their levels of retained earnings. The justification for
    retaining funds in a corporation is that the firm has better growth and
    investment prospects than the individual investor, particularly on an
    after-tax basis. Once the double taxation of dividends is removed,
    firms will have to be more open about their investment prospects that
    justify not paying out dividends.
        2.Dividends will be a greater reality check on earnings. Some of
    the largest corporate collapses in the last two years came as a result
    of inflated earnings and cash needs supported by increasing levels of
    debt. Putting a greater emphasis on cash payouts in the form of
    dividends will serve as a reality check on reported earnings.
        3.Lower leverage levels will tend to make corporate balance sheets
    less fragile. Removing the double taxation of dividends should make
    equity financing relatively cheaper to debt financing than is currently
    the case. By encouraging corporations to have less debt financing,
    aggregate corporate balance sheets would become less fragile.
        4.Reduce the need to sell stocks for current income. The double
    taxation of dividends has discouraged firms from paying dividends to
    shareholders. While individuals in need of regular cash income from
    their stocks have generally concentrated their purchases on higher
    dividend-paying stocks, others are placed in the position of having to
    sell their stocks and buy replacements in order to capture the same
    income in the form of capital gains but at a lower tax rate. The
    Administration's proposal to reduce the volume of stock sales that
    occur solely to generate regular income at capital gains rates.
                                     ______

    Appendix 2
      Analysis of the Impact of the Bush Administration's Economic Growth
                     Plan on Low Income Housing Tax Credits
        The MBA fully supports the Bush Administration's economic proposal.
    Some concerns have been raised, however, about the potential impact of
    the plan on one of the important and successful methods of promoting
    the development of rental apartments for lower income individuals, the
    Low Income Housing Tax Credit (LIHTC) program. The reason for the
    concern is inherent in the mathematics of the calculation of the
    Excludable Dividend Amount, or the amount of dividends that can be paid
    tax free to shareholders. The excludable amount is based on the amount
    of taxes paid by the corporation in the following fashion:

        Excludable Dividend Amount = (Federal Tax Paid .35) - Federal Tax
    Paid

        This can be restated as:

        Excludable Dividend Amount = 1.85  Federal Tax Paid

        The result is a situation where the amount of tax-free dividends
    that a corporation can pay is reduced by $1.85 for every dollar
    reduction in federal tax paid. The issue for LIHTCs then is whether the
    benefits of LIHTC investing at the corporate level are sufficient to
    offset any potential negative effects at the shareholder level, given
    that savings at the corporate level come at the corporate tax rate
    whereas the potential additional tax exposure is at generally lower
    individual income and capital gains rates. The MBA's analysis is that,
    under a range of reasonable assumptions regarding tax rates and
    dividend payout rates, marginal returns to shareholders from corporate
    investments in LIHTCs remain positive under the Administration's plan.
    While the marginal shareholder returns from LIHTCs are somewhat lower
    under the Bush Administration's plan than current law, the differences
    are driven entirely by assumptions regarding the tax effects of
    relative changes in capital gains tax basis. Since neither corporate
    yields nor the amount of tax-free dividends that can be paid are
    affected by LIHTC investments, under reasonable dividend payout
    assumptions, it is difficult to predict the degree of any negative
    pricing impacts. Based on all of the various and sometimes offsetting
    factors at work, it appears unlikely, that any negative price changes
    resulting directly from the Administration's plan would be significant.
    Indeed, it can be argued that a failure to pass the Administration's
    growth plan would negatively impact LIHTC prices. A danger to LIHTC
    pricing is a continued softness in current corporate earnings, combined
    with a negative outlook for the future. This could result in a reduced
    appetite for new LIHTC investments and increased secondary market sales
    of existing credits, both of which would depress LIHTC prices.
        In its analysis of the impact of the Administration's economic
    growth proposal on the LIHTC program, the MBA attempted to answer three
    questions. First, will LIHTCs remain viable investments, that is, will
    the tax costs to shareholders outweigh the benefits at the corporate
    level? Second, will prices be affected and to what degree? Third, if
    any adverse effects of the tax plan are large enough that they need to
    be mitigated, what form should changes to the plan take?
    Will LIHTCs remain viable under the Bush Administration's jobs and
            growth plan?

        The LIHTC program provides benefits at the corporate and
    shareholder level. While the exact returns will differ based on a broad
    continuum of corporate and individual income and capital gains tax
    rates, attached Exhibit 1 shows the marginal benefit of a LIHTC priced
    to yield 8 percent in the form of tax credits under current law. The
    assumptions in the model assume that the effective corporate tax rate
    is 28 percent, the dividend payout rate is 48 percent of after-tax
    earnings, the marginal individual income tax rate on dividends is 35
    percent, and the individual capital gains tax rate is 10 percent. These
    average tax and dividend payout rate assumptions are reasonable
    averages of average rates and were used in a recent study on this issue
    by Ernst & Young. In this particular example, the marginal benefit at
    the corporate level is $367 and the benefit passed through to
    shareholders is $287. It is important to note that this benefit is
    highly dependent on effective tax rates. For example, were it assumed
    that the effective corporate tax rate is 35 percent, the benefit would
    jump by 19 percent to $437, of which $341 would be passed on to
    shareholders. It is reasonable to assume that corporations with higher
    effective tax rates would be willing to pay more for LIHTCs than those
    in lower tax brackets. Therefore, any assumptions regarding the pricing
    impact of the Administration's tax proposal must take into
    consideration the effective tax rates of the purchasers of LIHTCs, not
    the average of all corporations.
        Exhibit 2 uses an identical set of tax rate and dividend
    assumptions to show the marginal benefit of investing in LIHTCs under
    the Administration's growth package. What is important is that the
    benefit remains positive overall to shareholders, and, assuming a
    constant dividend payout ratio, the LIHTC investment increases the
    amount of tax-free dividends they receive. In addition, the marginal
    return to shareholders increases by 65 percent if it assumed that
    companies investing in LIHTCs are those with effective federal tax
    rates of 35 percent. While the size of the marginal benefit is lower
    under the Administration's proposal, that reduction is entirely in the
    change in capital gains basis where the applicable rate assumptions are
    the most open to question.
        The purpose of Exhibit 3 is to put the LIHTC issue into some sort
    of context with the total impact on shareholder returns. While the
    relative magnitude of the change in returns is based on the relative
    size of the LIHTC investment, here it is assumed, as in the previous
    exhibits, that LIHTC investments are 1 percent of a corporation's pre-
    tax net income. The overall benefits to shareholders from the
    Administration's package dwarf the marginal shareholder effects from
    LIHTC investments, increasing returns by 24 percent both with and
    without LIHTCs.
    What will be the impact on LIHTC prices?

        Absent a detailed analysis of the price elasticities of the demand
    and supply in the LIHTC market, it is impossible to develop a firm
    analysis of the impact a change in the relative value of LIHTCs under
    the Administration's plan would have on LIHTC pricing. It would be
    clearly incorrect simply to establish some baseline hurdle rate and
    estimate how much LIHTC prices would have to adjust to meet that
    particular hurdle rate for a set of investors with a particular set of
    tax and dividend expectations. Given the various reasons for investing
    in LIHTCs, including CRA considerations, it may be sufficient for some
    investors to know only that returns do not turn negative for them to
    continue their investments.
        There are a number of factors that influence LIHTC pricing. First,
    given the long duration of the LIHTC investment commitment (10 years),
    prices are driven by changes in discount rates, which in turn are
    driven by changes in underlying interest rates and changes in relative
    risk. The extent to which interest rates have fallen over the last 18
    months has helped support LIHTC prices.
        Second, it is not clear the extent to which any corporation can
    base an investment decision on the tax situation of a particular class
    of investors. For example, corporations have long paid dividends
    despite the fact that, for some investors, dividends are taxed at a
    higher rate than capital gains. If after-tax returns to shareholders in
    the examples used to discuss the potential impact of the
    Administration's plan on LIHTCs are really a primary motivator, one
    would have to question why any corporations ever pay any dividends. It
    should be noted that for shares held in pension funds or 401k accounts
    where the applicable dividend and capital gains rates are zero, there
    is no reduction in the marginal shareholder return from LIHTCs.
        Third, LIHTC prices are fundamentally driven by supply and demand.
    In a report for the Millennial Housing Commission, Recapitalization
    Advisors, Inc. gave a history of LIHTC prices since the inception of
    the program, and demonstrated how prices improved as the program
    matured:

     ------------------------------------------------------------------------
                                                            Average prices
                            Years                            (per dollar)
    ------------------------------------------------------------------------
    1987-1989                                                           .45
    ------------------------------------------------------------------------
    1989-1993                                                           .52
    ------------------------------------------------------------------------
    1993-1997                                                           .65
    ------------------------------------------------------------------------
    1998-2000                                                           .74
    ------------------------------------------------------------------------
    2001-                                                               .77
    ------------------------------------------------------------------------

        In addition to noting the steady increase in LIHTC prices,
    Recapitalization Advisors notes that at one point in early 2001, LIHTC
    prices dropped by 10 percent in as little as three months as a result
    of an apparent 40 percent increase in the supply of LIHTCs hitting the
    market at one time. Other negative impacts on prices mentioned in the
    Recapitalization Advisors report include whether the strongest
    properties have already been financed and the potential overhang of the
    now sizable secondary market for trading these tax credits.
        The point is that LIHTC prices can be volatile absent changes in
    tax laws, and that any and all effects on supply and demand resulting
    from the passage of the Administration's growth plan must be taken into
    consideration. It can be argued, for example, that if the economy did
    not improve, the profits and therefore the tax credit appetites of
    traditional LIHTC investors would go down. Not only would these firms
    drop out of the primary market for LIHTCs, they would likely seek to
    sell their existing credits in the secondary market, further depressing
    prices. Thus depressed corporate earnings from a sluggish economy could
    pose the greater risk to LIHTC pricing, particularly since LIHTC
    shareholder returns remain positive under the proposal and firms will
    thus not have an incentive to dump their credits on the secondary
    market.
    If any adverse effects on the LIHTC program need to be mitigated, what
            form should changes in the Bush Administration's growth
            proposal take?
        If it becomes clear that the Administration's growth proposal will
    have significant negative effects on LIHTC prices due to the relative
    change in shareholder returns, what form should any change take? Since
    dividend returns to shareholders are not negatively affected under any
    reasonable assumptions of dividend payout ratios, there appears to be
    no need to change the fundamental calculation of Excludable Dividend
    Account. Instead, because it appears that any potential negative
    effects would be due solely to the change in capital gains basis and
    potential additional capital gains taxes, any remedy should be aimed at
    that issue. The problem would be largely ameliorated by allowing the
    capital gains tax basis to be increased either by the amount of the
    LIHTC tax credit or the amount of the LIHTC investment expensed by the
    investor, or lowering capital gains tax rates.
    Conclusion

        While it appears that the relative benefits of LIHTC investments
    may decline for some investors under the Administration's proposal, it
    is unclear what the effect on LIHTC prices might be. Given that the
    effect of the proposal on shareholder returns is limited to the changes
    in capital gains basis, the proposal may have limited effect. Indeed,
    not enacting the plan may have a greater effect on LIHTC pricing if the
    demand for LIHTC investments declines with lower corporate profits.
        In any event, any potential impact on LIHTCs is not a reason to
    oppose the growth plan but, if necessary, to seek changes to limit any
    negative effects. It appears that adjusting the capital gains basis to
    reflect LIHTC investments would be sufficient to offset the capital
    gains impacts on relative shareholder returns.

                                                        EXHIBIT 1
    ----------------------------------------------------------------------------------------------------------------
                                            LIHTC Benefits Under Current Law
    -----------------------------------------------------------------------------------------------------------------
                                                               Without LIHTC        With LIHTC      Marginal Benefit
                                                                 investment         investment          of LIHTC
    ----------------------------------------------------------------------------------------------------------------
    At Corporate Level:
    ----------------------------------------------------------------------------------------------------------------
    Net Income                                                         100,000            100,000                  0
    ----------------------------------------------------------------------------------------------------------------
    LIHTC cost                                                               0              1,000              1,000
    ----------------------------------------------------------------------------------------------------------------
    Taxable Income                                                     100,000             99,000            (1,000)
    ----------------------------------------------------------------------------------------------------------------
    Corp Inc. Tax before LIHTC                                          28,000             27,720              (280)
    ----------------------------------------------------------------------------------------------------------------
    LIHTC Credit                                                             0              1,087              1,087
    ----------------------------------------------------------------------------------------------------------------
    Corp. Inc. Tax After LIHTC                                          28,000             26,633            (1,367)
    ----------------------------------------------------------------------------------------------------------------
    Net after tax earnings                                              72,000             72,367                367
    ----------------------------------------------------------------------------------------------------------------
    At Shareholder Level:
    ----------------------------------------------------------------------------------------------------------------
    memo: Excludable Dividend Amount                                         0                  0                  0
    ----------------------------------------------------------------------------------------------------------------
    Dividends received:                                                 34,200             34,374                174
    ----------------------------------------------------------------------------------------------------------------
    Shareholder taxable dividends                                       34,200             34,374                174
    ----------------------------------------------------------------------------------------------------------------
    Shareholder dividend tax                                            11,970             12,031                 61
    ----------------------------------------------------------------------------------------------------------------
    Shareholder after-tax dividends                                     22,230             22,343                113
    ----------------------------------------------------------------------------------------------------------------
    Capital gains change from retained earnings                         37,800             37,993                193
    ----------------------------------------------------------------------------------------------------------------
    Retained earnings benefit adjustment                                     0                  0                  0
    ----------------------------------------------------------------------------------------------------------------
    Taxable capital gains                                               37,800             37,993                193
    ----------------------------------------------------------------------------------------------------------------
    Future capital gains tax                                             3,780              3,799                 19
    ----------------------------------------------------------------------------------------------------------------
    Shareholder after-tax capital gains                                 34,020             34,193                173
    ----------------------------------------------------------------------------------------------------------------
    After-tax return to shareholders                                    56,250             56,537                287
    ----------------------------------------------------------------------------------------------------------------
    Assumptions:
    ----------------------------------------------------------------------------------------------------------------
    Corporate Marginal Tax Rate:                                           35%
    ----------------------------------------------------------------------------------------------------------------
    Corporate Effective Tax rate:                                          28%
    ----------------------------------------------------------------------------------------------------------------
    LIHTC Annual Yield                                                      8%
    ----------------------------------------------------------------------------------------------------------------
    Dividend payout ratio                                                  48%
    ----------------------------------------------------------------------------------------------------------------
    Individual income tax rate                                             35%
    ----------------------------------------------------------------------------------------------------------------
    Individual capital gains tax rate:                                     10%
    ----------------------------------------------------------------------------------------------------------------

                                                        EXHIBIT 2
    ----------------------------------------------------------------------------------------------------------------
                                            LIHTC Benefits Under Proposed Law
    -----------------------------------------------------------------------------------------------------------------
                                                               Without LIHTC        With LIHTC      Marginal Benefit
                                                                 investment         investment          of LIHTC
    ----------------------------------------------------------------------------------------------------------------
    At Corporate Level:
    ----------------------------------------------------------------------------------------------------------------
    Net Income                                                         100,000            100,000                  0
    ----------------------------------------------------------------------------------------------------------------
    LIHTC cost                                                               0              1,000              1,000
    ----------------------------------------------------------------------------------------------------------------
    Taxable Income                                                     100,000             99,000            (1,000)
    ----------------------------------------------------------------------------------------------------------------
    Corp Inc. Tax before LIHTC                                          28,000             27,720              (280)
    ----------------------------------------------------------------------------------------------------------------
    LIHTC Credit                                                             0              1,087              1,087
    ----------------------------------------------------------------------------------------------------------------
    Corp. Inc. Tax After LIHTC                                          28,000             26,633            (1,367)
    ----------------------------------------------------------------------------------------------------------------
    Net after tax earnings                                              72,000             72,367                367
    ----------------------------------------------------------------------------------------------------------------
    At Shareholder Level:
    ----------------------------------------------------------------------------------------------------------------
    memo: Excludable Dividend Amount                                    52,000             49,461            (2,539)
    ----------------------------------------------------------------------------------------------------------------
    Dividends received:                                                 34,200             34,374                174
    ----------------------------------------------------------------------------------------------------------------
    Shareholder taxable dividends                                            0                  0                  0
    ----------------------------------------------------------------------------------------------------------------
    Shareholder dividend tax                                                 0                  0                  0
    ----------------------------------------------------------------------------------------------------------------
    Shareholder after-tax dividends                                     34,200             34,374                174
    ----------------------------------------------------------------------------------------------------------------
    Capital gains change from retained earnings                         37,800             37,993                193
    ----------------------------------------------------------------------------------------------------------------
    Retained earnings benefit adjustment                                17,800             15,087            (2,713)
    ----------------------------------------------------------------------------------------------------------------
    Taxable capital gains                                               20,000             22,906              2,906
    ----------------------------------------------------------------------------------------------------------------
    Future capital gains tax                                             2,000              2,291                291
    ----------------------------------------------------------------------------------------------------------------
    Shareholder after-tax capital gains                                 35,800             35,702               (98)
    ----------------------------------------------------------------------------------------------------------------
    After-tax return to shareholders                                    70,000             70,076                 76
    ----------------------------------------------------------------------------------------------------------------
    Assumptions:
    ----------------------------------------------------------------------------------------------------------------
    Corporate Marginal Tax Rate:                                           35%
    ----------------------------------------------------------------------------------------------------------------
    Corporate Effective Tax rate:                                          28%
    ----------------------------------------------------------------------------------------------------------------
    LIHTC Annual Yield                                                      8%
    ----------------------------------------------------------------------------------------------------------------
    Dividend payout ratio                                                  48%
    ----------------------------------------------------------------------------------------------------------------
    Individual income tax rate                                             35%
    ----------------------------------------------------------------------------------------------------------------
    Individual capital gains tax rate:                                     10%
    ----------------------------------------------------------------------------------------------------------------

                                                        EXHIBIT 3
    ----------------------------------------------------------------------------------------------------------------
                                          Comparative Gains under Proposed Law
    -----------------------------------------------------------------------------------------------------------------
                                                       Without
                                          Without       LIHTC,                 With LIHTC,  With LIHTC,
                                           LIHTC,      Proposed      Gains     Current Law    Proposed      Gains
                                        Current Law      Law                                    Law
    ----------------------------------------------------------------------------------------------------------------
    At Corporate Level:
    ----------------------------------------------------------------------------------------------------------------
    Net Income                              100,000      100,000            0      100,000      100,000            0
    ----------------------------------------------------------------------------------------------------------------
    LIHTC cost                                    0            0            0        1,000        1,000            0
    ----------------------------------------------------------------------------------------------------------------
    Taxable Income                          100,000      100,000            0       99,000       99,000            0
    ----------------------------------------------------------------------------------------------------------------
    Corp Inc. Tax before LIHTC               28,000       28,000            0       27,720       27,720            0
    ----------------------------------------------------------------------------------------------------------------
    LIHTC Credit                                  0            0            0        1,087        1,087            0
    ----------------------------------------------------------------------------------------------------------------
    Corp. Inc. Tax After LIHTC               28,000       28,000            0       26,633       26,633            0
    ----------------------------------------------------------------------------------------------------------------
    Net after tax earnings                   72,000       72,000            0       72,367       72,367            0
    ----------------------------------------------------------------------------------------------------------------
    At Shareholder Level:
    ----------------------------------------------------------------------------------------------------------------
    memo: Excludable Dividend Amount              0       52,000       52,000            0       49,461       49,461
    ----------------------------------------------------------------------------------------------------------------
    Dividends received:                      34,200       34,200            0       34,374       34,374            0
    ----------------------------------------------------------------------------------------------------------------
    Shareholder taxable dividends            34,200            0     (34,200)       34,374            0     (34,374)
    ----------------------------------------------------------------------------------------------------------------
    Shareholder dividend tax                 11,970            0     (11,970)       12,031            0     (12,031)
    ----------------------------------------------------------------------------------------------------------------
    Shareholder after-tax dividends          22,230       34,200       11,970       22,343       34,374       12,031
    ----------------------------------------------------------------------------------------------------------------
    Capital gains change from retained       37,800       37,800            0       37,993       37,993            0
     earnings
    ----------------------------------------------------------------------------------------------------------------
    Retained earnings benefit                     0       17,800       17,800            0       15,087       15,087
     adjustment
    ----------------------------------------------------------------------------------------------------------------
    Taxable capital gains                    37,800       20,000     (17,800)       37,993       22,906     (15,087)
    ----------------------------------------------------------------------------------------------------------------
    Future capital gains tax                  3,780        2,000      (1,780)        3,799        2,291      (1,509)
    ----------------------------------------------------------------------------------------------------------------
    Shareholder after-tax capital            34,020       35,800        1,780       34,193       35,702        1,509
     gains
    ----------------------------------------------------------------------------------------------------------------
    After-tax return to shareholders         56,250       70,000       13,750       56,537       70,076       13,540
    ----------------------------------------------------------------------------------------------------------------
      Percentage increase:                                                24%                                    24%
    ----------------------------------------------------------------------------------------------------------------
    Assumptions:
    ----------------------------------------------------------------------------------------------------------------
    Corporate Marginal Tax Rate:                35%
    ----------------------------------------------------------------------------------------------------------------
    Corporate Effective Tax rate:               28%
    ----------------------------------------------------------------------------------------------------------------
    LIHTC Annual Yield                           8%
    ----------------------------------------------------------------------------------------------------------------
    Dividend payout ratio                       48%
    ----------------------------------------------------------------------------------------------------------------
    Individual income tax rate                  35%
    ----------------------------------------------------------------------------------------------------------------
    Individual capital gains tax rate:          10%
    ----------------------------------------------------------------------------------------------------------------

               National Advocacy Center of the Sisters of Good Shepherd
                                     Silver Spring, Maryland 20904-3300
                                                      February 27, 2003
    The Honorable Bill Thomas
    Chairman, Committee on Ways and Means
    United States House of Representatives
    1102 Longworth House Office Building
    Washington, DC 20515

    The Honorable Charles Rangel
    Ranking Member, Committee on Ways and Means
    United States House of Representatives
    1102 Longworth House Office Building
    Washington, DC 20515

    Re: President Bush's ``Economic Growth'' Proposals

        Dear Chairman Thomas and Ranking Member Rangel,

        The National Advocacy Center of the Sisters of the Good Shepherd,
    representing sisters and programs in 22 states and the District of
    Columbia, appreciates this opportunity to share our views regarding the
    President's ``economic growth'' proposals. Our concerns reflect the
    commitments of the Sisters of the Good Shepherd and Good Shepherd
    programs to addressing the needs of low-income and vulnerable families
    and children and to structural change that promotes social justice.
        The National Advocacy Center of the Sisters of the Good Shepherd
    opposes the ``economic growth'' proposals put forward by President
    Bush. These proposals would not only fail to stimulate the economy, but
    are also fundamentally unfair as the majority of the benefits will go
    to the wealthiest Americans and not to those most in need of assistance
    during this economic downturn. Moreover, the President's proposals
    would drain additional funds from state budgets even as they face
    record deficits and would undermine long-term fiscal responsibility,
    crippling our efforts to make crucial investments in our economy and
    our people.
        Sisters of the Good Shepherd and Good Shepherd programs work
    directly with low-income and vulnerable families on a daily basis.
    These families are the hardest hit in times of recession and their
    current situation is made even worse by the cuts states are making in
    child care, health care, education, and other services due to budget
    shortfalls. Directing assistance to these families is not only the just
    thing to do, but would also be an immediate way to inject money into
    the economy and increase demand for goods and services because these
    families are most likely to spend whatever assistance they receive.
    Yet, the President's proposals offer little help to these families.
        According to the Urban Institute-Brookings Institution Tax Policy
    Center, nearly 11 million families with children, those making $20,000
    or less per year--or one-fourth of all families with children--would
    receive no benefits from the tax cuts proposed by the President. The
    average tax cut for the bottom 80% of taxpayers would be just $239. In
    contrast, those with incomes over $1 million would receive an average
    tax cut of $88,900, little of which would be directed back into the
    economy in the short term to provide the needed stimulus. At the same
    time, the proposal to eliminate taxation on dividend income would drain
    another $4 billion or more from state budgets forcing further cuts in
    social programs that are essential to the economic stability of many
    working families. In addition, the loss of revenue and long-term costs
    of the President's proposals will increase the federal deficit and
    jeopardize funding for critical priorities in the short and long term.
    Already cuts have been proposed for low-income housing, job training,
    after school programs, and other services to vulnerable families.
        Catholic Social Teaching states that economic decisions must be at
    the service of all people, especially the poor. In this light, a good
    economic stimulus plan should minimize the economic hardship that many,
    especially low-income workers, are experiencing by targeting unmet
    needs, providing assistance to prevent programs cuts at the state
    level, and promoting fiscal responsibility to ensure that adequate
    resources are available for human needs programs. President Bush's
    ``economic growth'' proposals fail to meet any of these criteria;
    therefore, the National Advocacy Center opposes them and urges the
    House Committee on Ways and Means to reject them and develop an
    alternative based on the criteria outlined above.
        Thank you again for this opportunity to share our concerns.
                Sincerely,
                                             Sr. Brigid Lawlor, RGS, JD
                                                   National Coordinator

                                                      Alison L. Prevost
                                                               Lobbyist

          Statement of the National Association for the Self-Employed
        As proposals for stimulating the nation's sagging economy are
    debated, the  National Association for the Self-Employed (NASE) and our
    250,000 members businesses, representing over 600,000 employers and
    employees and self-employed individuals, would like to clearly convey
    that significant reforms to revitalize our nation's micro-businesses,
    the lifeblood of America's economy, must be included in an economic
    stimulus plan in order to jump start our ailing economy.
        The historic economic contribution of micro-businesses cannot be
    overstated in this dialogue. Today, this segment represents more than
    18 million self-employed individuals and owners of micro-business firms
    that--in the past few decades in particular--have leveraged size,
    flexibility and entrepreneurship to ignite what has arguably been the
    most remarkable era of innovation and growth in our nation's history.
    In fact, firms with fewer than 10 employees created well over a third
    of all new jobs to the economy between 1998 and 1999, and the last U.S.
    Census reported that these firms employ more than 12.3 million workers
    with a total annual payroll of more than $309.7 billion.
        Beyond these tangible contributions, it's also important to note
    that in a period marked by corporate scandals and uncertainty, ``Main
    Street'' businesses remain a bright example of solid American virtues
    and values. According to a recent poll by USA TODAY, CNN and Gallup,
    Americans rate people who own small businesses as the second most
    trustworthy group in the nation, right behind teachers.
        The NASE is pleased to see income tax rate reductions and an
    increase in business equipment expensing in the forefront of many of
    the stimulus proposals. However, we firmly believe that these plans do
    no go far enough in addressing some of the key issues that create a
    drag on growth for the self-employed and micro-businesses. In working
    with many of the nation's self-employed, I see several key issues and
    measures that are critical to getting micro-businesses back in position
    to help revive the economy. The NASE proposes a Micro-Business Stimulus
    Plan, which includes:

         An Increase in Business Expensing
         Clarification of Independent Contractor Status
         Payroll Tax Relief
         Home-Based Business Deduction Simplification
         Self-Employment Tax Deduction on Health Insurance Premiums
         Health Care Tax Credits
    Increase in Business Equipment Expensing

        The NASE proposes an increase of the deductible for business
    equipment expenses. Section 179 of the Internal Revenue Code should be
    amended to increase the amount of equipment purchases that small
    businesses may expense each year from the current $25,000 to $40,000.
    This change will eliminate the burdensome record keeping involved in
    depreciating such equipment and free up capital for small businesses to
    grow and create jobs. Also increases the phase-out limitation for
    equipment expensing from the current $200,000 to $400,000, thereby
    expanding the type of equipment that can qualify for expensing
    treatment. This limitation along with the annual expensing amount
    should be indexed for inflation in any proposed legislation.
        Section 179 should also be amended to permit expensing in the year
    that the property is purchased or the year that the property is placed
    in service, whichever is earlier. This will eliminate the difficulty
    that many small firms have encountered when investing in new equipment
    in one tax year (e.g., 2001) that cannot be placed in service until the
    following year (e.g., 2002).
    Independent Contractor Status Clarification

        The IRS' lack of clarity in defining ``independent contractor''
    versus ``employee'' for tax purposes has presented major difficulties
    for micro-business owners, costing owners more than $750 million in IRS
    fines and back-taxes over the past 10 years. The NASE proposes that
    legislation for a micro-business stimulus package include all the
    provisions of the Independent Contractor Determination Act of 2001 (S.
    837, H.R. 1783) previously introduced in the 107th Congress.
        Key provisions would create new worker-classification rules and
    would prohibit the IRS from reclassifying independent contractors as
    employees if employers have a reasonable basis for its treatment of
    workers as independent contractors.
    One-time Payroll Tax Cut

        Currently, the payroll tax is 12.4% for Social Security and 2.9%
    for Medicare, for a total of 15.3%, divided equally between employee
    and employer. Four of five taxpayers now pay more in payroll taxes than
    income taxes. Some taxpayers do not necessarily realize it because
    their employers pay half of the payroll tax. However, the self-employed
    are required to pay both the employer and employee share of payroll
    taxes, leaving them with a continuously increasing tax burden. The
    Congressional Budget Office has estimated that the 10% of taxpayers
    making $100,000 or more this year will pay 64% of all income taxes and
    31% of payroll taxes. By contrast, the 62% of households earning
    $50,000 or less will pay just 7% of income taxes but 30% of payroll
    taxes.
        A payroll tax cut would give the economy a powerful shot in the arm
    because the benefits are spread so widely. The NASE proposes a refund
    to employees and employers in micro-businesses with 10 or less
    employees, also including the self-employed, on the payroll taxes they
    paid in 2001 on the first $10,000 of each employee's or self-employed
    individual's earnings.
    Home Office Tax Deduction Simplification

        With the rise in home-based businesses, tax deductions for home
    offices are an important benefit for self-employed individuals and
    micro-businesses. The NASE proposes a new $2,500 tax deduction for
    home-based small-business operators, which will greatly simplify their
    tax filing process. This amount represents the average amount taken by
    home office tax filers each year. Additionally, legislation should
    repeal tax code provisions that require homeowners to ``recapture''
    their depreciation when they sell their homes. These current tax
    provisions prevent home based business owners from taking full
    advantage of capital gains tax exclusions, which exempt $250,000
    ($500,000 for married couples) on the gain of the sale of a primary
    residence.
    Self-Employment Tax Relief on Health Insurance Premiums

        Current tax codes related to health insurance premiums deliver
    another whammy that is unique to the self-employed. Under present tax
    laws, corporations are able to deduct health insurance premiums as a
    business expense and to forego FICA (Social Security and Medicare)
    taxes. In contrast, the self-employed are not allowed to deduct
    premiums as a business expense and thus, are required to pay an
    additional 15.3 percent self-employment tax on these expenses. These
    additional costs are a chief reason why the working self-employed and
    their families comprise 62 percent of the 43 million Americans who are
    without health insurance.
        Scheduled to phase in this year is 100% deductibility of health
    insurance premiums for the self-employed. However, this does not solve
    the tax inequity. One hundred percent (100%) deductibility of health
    insurance premiums for the self-employed relates to income tax and not
    self-employment tax. The self-employed are required to pay two types of
    taxes on their returns: income tax and self-employment tax.
        The current inequity in the Internal Revenue Code as it relates to
    the self-employed and their health insurance premiums must be
    corrected. To achieve tax equity between all forms of business
    entities, the self-employed must receive exclusion of health insurance
    premiums from self-employment tax regardless of the entity form under
    which they choose to operate. The NASE proposes the following options
    to achieve equity:

        1.Internal Revenue Code Sec. 162(l)(4) Code Sec. 1402(a) currently
    excludes the self-employed health insurance deduction from net earnings
    from self-employment. If these code sections were eliminated then
    health insurance premiums would be a deduction for purposes of
    computing the self-employment tax while leaving the self-employed
    deduction for insurance premiums as an above the line deduction on Form
    1040. Alternatively, a line item deduction for the same amount as the
    self-employed insurance deduction on page 1 of 1040 could be added to
    Schedule SE.
        2.Health insurance premiums of the self-employed could be
    deductible on Schedule C or E as an ordinary and necessary business
    expense rather than the deduction above the line on Form 1040.
        3.The group health insurance benefit provisions of the Internal
    Revenue Code could be expanded to include individuals who have ``earned
    income'' and/or the provisions of IRC Section 105 (medical
    reimbursement plans) could be expanded to include self-employed owners.
    This change would have the effect of making the insurance premiums
    deductible at the entity level (Schedule C, Form 1065 or Form 1120S)
    thus eliminating the need for the self-employed insurance deduction on
    page 1 of 1040 or on Schedule SE.
    Health Care Tax Credits

        With eight out of ten uninsured Americans in working families, our
    nation stands in desperate need of strategies to address the needs of
    the working uninsured. One place to start is in the micro-business and
    self-employed communities. Almost 100% of large firms offer health
    insurance. But for small employers, that number is cut in half and the
    self-employed continue to find it a daunting task to gain access to
    affordable health coverage.
        The NASE proposes that micro-businesses (C corporations) with ten
    or less employees receive a 50% tax credit, up to $2000 per individual
    policy, and $5000 per family, for purchasing health coverage for
    themselves and their employees. Sole-proprietors (Schedule C filers)
    and partners in partnerships with earned income and 2% owners in S
    Corporations (Schedule E filers) should receive a pre-payable, fully
    refundable tax credit towards the purchase of health insurance. The
    credit would be $1,000 for individuals, $2,000 for married couples and
    $500 per dependent up to $3,000 per family, plus 50 percent of any
    additional premiums to assist those with higher costs.
    Conclusion

        Again, the NASE would like to restate our support for specific
    proposals in the Administration's economic growth plan. However, we
    feel more needs to be done to result in true growth of our waning
    economy. We also strongly feel that economic growth can only be spurred
    if the issue of access to affordable health coverage is addressed. Any
    infusion of funds received by growth provisions will go directly into
    alleviating micro-business owner's current health care burden rather
    than being reinvested in their business for the purposes of expansion
    and growth.
        The NASE believes that micro-businesses and the self-employed have
    been pillars of innovation, integrity and reliability, fueling much of
    what is great about America. Finding solutions that provide a more
    equitable shake for these enterprises not only is in the best interest
    of this important segment of the small business population; it's in the
    best interests of our nation and its economy, as well.

             Statement of the National Association of Home Builders
        Thank you Mr. Chairman for the opportunity to present testimony to
    the Committee on Ways and Means on behalf of the National Association
    of Home Builders (NAHB). NAHB represents more than 205,000 members
    involved in home building, remodeling, multifamily construction,
    property management, subcontracting and light commercial construction.
    NAHB is affiliated with more than 800 state and local home builder
    associations around the country. Our builder members will construct
    approximately 80 percent of the more than 1.6 million new housing units
    projected for construction in 2003.
        The home building industry has been one of the strongest
    contributors to the national economy in recent years. We have had
    record years of production that have led to the highest homeownership
    rate in U.S. history--67 percent. It is in America's interest to assure
    that the home building industry maintains its leadership role in the
    economy, not only because housing and related industries account for 14
    percent of the gross national product (GDP), but most importantly
    because of the benefits of home ownership to our country.
        The subject of these hearings, the ``Economic Growth Package'' in
    the Administration's FY 2004 budget, is a complicated proposal that
    affects a variety of issues of interest to the home building industry
    that warrant careful consideration and review by the committee. In
    addition to stimulating increased consumption and capital investment,
    these issues include interest rates, rates of return on tax exempt
    bonds, possible effects on targeted tax credits such as the Low Income
    Housing Tax Credit, the proposed Homeownership Tax Credit, New Markets
    Tax Credit, and Historic Preservation Tax Credit.
        First, I want to say that NAHB supports President Bush and the
    Congress in their efforts to achieve an economic stimulus package that
    will provide near term stimulus to consumer spending and capital
    investment, including more housing consumption and production. NAHB
    supports changes in the Bush Administration's tax proposal or any
    Congressional tax proposal that will avoid unintended consequences that
    would be harmful to the housing industry such as increasing interest
    rates or the rate of return on tax exempt bonds, or negatively
    impacting housing affordability by lessening the value of targeted tax
    credits such as the LIHTC, the President's proposed HOTC, the New
    Markets Tax Credit and the Historic Preservation Tax Credit.
        NAHB specifically supports the primary short term stimulus elements
    of the ``Economic Growth Package'' that would accelerate the
    implementation of changes in the tax law scheduled to take place in the
    future and increase capital formation incentives for small businesses.
    The accelerated changes in the tax code are tax rate reductions, an
    expansion of the 10 percent rate bracket, providing marriage penalty
    relief, and increasing the child tax credit. The small business capital
    formation proposal would increase the amount small businesses can
    annually expense from $25,000 to $75,000. We do, however, have concerns
    with some aspects of the Economic Growth Package. We are concerned
    about the possible consequential effects of eliminating the double
    taxation of corporate earnings, as well as, the failure of the package
    to include a housing component.
        The primary focus of my testimony today is focused on the impact of
    the Administration's proposal to eliminate the double taxation of
    corporate earnings on the LIHTC program. This is a complicated issue
    that requires some background information before it can be understood.
    Background

        Under present law, ``C'' corporations, generally large corporations
    with many shareholders, pay federal income tax on their earnings. After
    the tax is paid the corporations either pay dividends to shareholders
    from the earnings or retain the earnings in the corporation. When a
    shareholder receives a dividend payment from a corporation, the
    shareholder reports the dividend as taxable income on his or her
    personal tax return. If the corporation retains earnings, the
    shareholder does not receive a direct benefit for the retained
    earnings. However, the retained earnings may produce an indirect
    benefit of increasing the value of the corporation's stock because the
    corporation has more capital.
        The distribution of a dividend from taxed corporate earnings to a
    shareholder who then pays tax on the dividend is a double taxation of
    the corporate earnings. This double taxation of corporate earnings
    affects how businesses conduct their financial affairs and can create
    economic distortions. Many businesses avoid organizing as ``C''
    corporations. They operate as pass through entities, i.e., businesses
    that pass through their items of income and expenses to the owners who
    report the items on their individual tax returns. When businesses
    operate as pass through entities there is only one level of tax and the
    double taxation of corporate earnings is totally avoided. Pass through
    entities are generally Sub Chapter S corporations and different types
    of partnerships.
        Corporations that cannot do business as a pass through entity can
    minimize the impact of the double tax on earnings in a number of ways.
    Corporations may avoid raising capital though stock offerings and
    instead raise capital with debt. Interest payments on the debt are
    fully deductible, and as a result, less costly than paying dividends.
    Corporations also can buy back stock. To shareholders that sell their
    stock, the gain is a capital gain that is usually taxed at the capital
    gains rate of 20 percent, rather than higher personal income tax rates.
    The shareholders that do not sell their stock also receive a benefit
    from corporate repurchases of outstanding shares. As the number of
    corporate shares in the market declines, the price of the remaining
    outstanding shares tends to increase. Corporations also may retain more
    earnings than they would otherwise to avoid having shareholders pay
    additional tax on the earnings. By retaining the earnings, the value of
    the stock may increase due to the additional capital that the
    corporation keeps, especially if the corporation profitably uses the
    retained earnings.
        Another way corporations can reduce the impact of the double
    taxation of corporate earnings is to reduce their tax liability.
    Corporations today can increase their earnings by buying Low Income
    Housing Tax Credits (LIHTCs) that can offset a dollar of tax liability
    with a dollar of tax credit. Corporations pay less for the credit than
    the amount of tax credit the corporation uses to offset its tax
    liability, producing a return on the transaction for the corporation.
    The increased earnings can be paid directly to shareholders as a
    dividend or retained in the corporation, indirectly benefiting the
    shareholders by increasing the corporation's capital. Today
    corporations make up approximately 98 percent of the market for LIHTCs.
    The large share of the market that corporations have is in part due to
    restrictions in the alternative minimum tax and on passive loss
    deductions applicable only to individuals. The LIHTC is considered a
    tax preference that is subject to AMT, which affects more and more
    taxpayers because the thresholds are not indexed. The passive loss
    rules limit the use of the LIHTC in offsetting the tax owed by
    individuals from non real estate investments.
    The President's Proposal

        The President's proposal to eliminate the double taxation of
    corporate earnings is accomplished in two ways. First, shareholders are
    entitled to exclude any dividend received from the taxable income they
    report on their personal tax returns that is attributable to taxed
    corporate earnings. The exclusion eliminates one of the two layers of
    tax that is currently imposed on corporate earnings. Second,
    shareholders are entitled to increase the cost basis of their stock by
    the amount of any retained corporate earnings that were subject to tax.
    The increase in the cost basis of the shareholder's stock reduces the
    amount of capital gains tax the taxpayer must pay if the stock is sold
    for more than its cost. This provision helps equalize the tax treatment
    of dividends and retained earnings in the proposal.
        The president's proposal is expected to increase the amount of
    dividends paid because it will reduce the tax cost for the shareholders
    receiving the dividend. Since shareholders vote for the management of a
    corporation, corporate officers are expected to be compelled to
    increase dividend payments. The proposal also is expected to reduce the
    amount of capital raised with debt and increase the capital raised from
    stock issues because interest payments and dividend payments will be
    treated essentially the same. More businesses are expected to operate
    as C corporations than pass through entities because the adverse
    consequences of the double taxation of corporate earnings will be
    eliminated.
        The relative beneficial changes to corporate earnings caused by the
    dividend proposal to other forms of investments will likely lead to a
    reduced rate of return on stocks because the amount received is not
    taxed. As a result, alternative forms of investment will likely
    experience a required increase in their rates of return in order to
    remain competitive. These other forms of investment include taxable and
    tax exempt bonds, interest earning accounts, and real estate, including
    home ownership.
        The macro economic effect of the proposal will likely result in
    more employment and a higher level of economic output, at least in the
    short run. Corporate stock values should increase. In the long run,
    interest rates may increase because of additional federal borrowing due
    to an increased federal deficit. An increase of approximately 75 basis
    points in long term interest rates is predicted by Macroeconomic
    Advisors (MA), LLC, one of the premier economic analysis firms in he
    country.
    Tax Effects Of The Dividend Proposal On The LIHTC

        Unfortunately, the dividends exclusion proposal reduces the value
    of tax credits like the Low Income Housing Tax Credit (LIHTC). The
    value of tax credits is reduced compared to today's value of the tax
    credits because corporate earnings that are exempted from tax by the
    credit are taxable to the shareholder and will not increase the cost
    basis of the shareholder's stock when the corporation retains the
    earnings. Today, the use of the tax credit by the corporation has no
    effect on the tax treatment of dividends paid to the shareholder or the
    cost basis of the shareholder's stock, i.e., there is no tax cost to
    the shareholder for the use of the credit by the corporation. The
    reduced value of the credit due to the change in the tax treatment of
    corporate earnings is expected to lower the price corporations will pay
    for the LIHTC.
        The computation that reduces the value of the LIHTC relative to the
    current treatment is performed as follows. In order to determine the
    amount of the corporation's dividend that is either exempt from tax at
    the shareholder level or used to increase the cost basis of
    shareholders' stock, the corporation must perform a calculation to
    determine it's excludable dividend amount (EDA). The shareholder's
    excludable portion of any dividend received is the amount of the
    dividend payment that bears the same ratio to the dividend payment as
    the amount of the corporation's EDA to all dividends paid by the
    corporation. If EDA exceeds the dividends paid during the year, the
    cost basis of the shareholders' stock is increased by the amount of EDA
    the corporation did not pay out as dividends.
        The computation of EDA that affects the value of tax credits is:

    EDA = Federal Income Tax - tax credits except for the Foreign Tax and
    AMT credits

                    Highest Corporate Income Tax Rate (35 Percent)

        In the formula above, the amount of a corporation's EDA is reduced
    when tax credits like the LIHTC are subtracted from the corporation's
    Federal income tax. When the amount of federal income tax is reduced, a
    smaller EDA amount is computed after the federal income tax is divided
    by the 35 percent corporate tax rate. As EDA becomes smaller, the
    portion of the shareholder's dividend that is excluded from the
    shareholder's income is also smaller. The ratio or the shareholder's
    excluded dividend to the overall dividend paid to the shareholder is
    the same as the ratio of EDA to all corporate dividends. In addition,
    when the amount of EDA is made smaller by subtracting credits from the
    corporation's federal income tax, the amount by which EDA exceeds
    dividends paid also becomes smaller. As a result, there is less EDA
    excess over dividends paid to increase the cost basis of the
    shareholder's stock.
        The impact of the Administration's dividend proposal on the price
    that will be paid for tax credits such as the LIHTC depends on the mix
    of dividends paid and taxed earnings retained in the future. The value
    of the LIHTC is more adversely affected if more dividends are paid
    relative to earnings retained (i.e., the more tax benefit forgone, the
    lower the value of the credit). Since the proposal is designed to
    eliminate a bias against paying dividends, it is likely that dividend
    payments will increase relative to the current level of dividend
    payments.
        The value of a dividend exclusion to the shareholder is based on
    the shareholder's current income tax rate that can be as much as 38.6
    percent under present law or 35 percent if the stimulus package is
    enacted into law. The value of the dividend benefits the shareholder in
    the year the dividend is paid. If the LIHTC is used to increase
    earnings to be distributed as dividends in the future, the credit will
    have to generate enough extra earnings so that the shareholder can pay
    the personal income tax on dividend while still getting as much of the
    dividend as the shareholder would have received tax free without the
    use of the credit.
        Shareholders receive less of a benefit when the basis of the
    shareholder's stock is increased as a result of the corporation
    retaining taxed earnings. The shareholder does not realize the value of
    the increase in the stock's cost basis until the stock is sold. At the
    time of sale, the shareholder will probably be subjected to the 20
    percent capital gains rate on the difference between the stock's cost
    basis and its sales price. The capital gains tax that is not paid on
    stock sales because of the increased cost basis of the stock is less
    than the ordinary income tax that is not paid when tax free dividends
    are distributed. In addition, the smaller tax benefit of the stock cost
    basis adjustment must be discounted to its present value because it
    will not occur until some point in the future.
    Operation Of The LIHTC Program

        The LITHC program produces 115,000 units of affordable housing each
    year. Credits are allocated by state agencies and claimed by investors
    over a 10 year period. The affordable housing property must stay in
    compliance with the requirements of the LIHTC program for 15 years for
    investors to avoid a recapture of the tax benefits of the credit they
    claim over the 10 year period.
        Affordable housing built with the LIHTC has different layers of
    support and operates on narrow margins. States try to serve the lowest
    income tenants possible and locate affordable properties in areas where
    development frequently is difficult, such as rural and inner city
    areas. A developer who sells the LIHTC to investors uses the proceeds
    from the sale as equity in LIHTC properties. The amount of equity
    generated with the credit reduces the debt financing the property must
    carry. As a result, rents lower than market rates can be charged to
    eligible tenants, i.e. tenants at or below 60 percent of area median
    income, because less debt is carried on LIHTC properties than on market
    rate properties.
        There are other factors that affect the purchase of LIHTCs and
    influence the analysis of the impact of the dividends proposal on the
    credit. Some purchasers of the LIHTC are in the business of investing
    in real estate and can be expected to continue to invest in the credit
    as part of their business. Although these businesses will remain a part
    of the market for purchasing credits, they will buy the credit at
    market prices if prices decline. If companies that are not in the real
    estate business reduce their purchases of LIHTCs, the price of the
    credit may go down despite the continued interest of businesses in real
    estate. Some businesses purchase credits because they are subject to
    legal requirements that credit purchases satisfy, such as the Community
    Reinvestment Act (CRA). The credit is purchased today to meet these
    requirements. While the credit will continue to satisfy the obligation
    of these firms under CRA, other forms of investments can be made to
    satisfy CRA requirements. As a result, the alternative investments may
    become more attractive when the value of purchasing the credit is
    reduced by the dividend proposal, reducing the CRA-driven demand.
    Effect Of The Dividends Proposal On The LIHTC Program

        Even a modest change in the value of the credit and the resulting
    reduction in the amount of equity the credit can generate will have
    adverse consequences on the LIHTC program. When the credit is worth
    less, corporations will pay less for the same amount of credits than
    they pay today and less capital will be available to invest in
    affordable housing properties.
    Dividend Proposal

        Two studies have been published to date that analyze an impact of
    the Administration's dividend proposal on the LIHTC program. The first
    study released was prepared by Ernst & Young (E&Y) for the National
    Council of State Housing Agencies (NCHSA) that predicted there would be
    a reduction of 40,000 LIHTC units per year, which is a 35 percent
    reduction from the current level of 115,000 units that will affect
    80,000 people. The Mortgage Bankers Association (MBA) published the
    second study. The negative effects of the dividend proposal on the
    LIHTC program was driven by a 21 percent decrease in the prices for the
    credit due to the tax change in corporate earnings. The MBA study
    predicted the dividend proposal would actually benefit the production
    of LIHTC units and have virtually no negative effects at all.
        There are many assumptions that must be made to perform an analysis
    like the E&Y and MBA studies. We believe the static assumptions in the
    E&Y study result in too much emphasis being placed on the effects the
    proposal would have on the production of units. The changes induced by
    the full tax proposal will provide an incentive for some firms to
    become Chapter C corporations that are now Chapter S, which will
    provide new demand for the LIHTC. Some corporations that have average
    tax rates below 35 percent will benefit from the EDA calculation that
    uses an average tax rate of 35 percent. Such corporations will
    effectively be able to pass more of the benefit of the credit to the
    shareholder without tax. The combined effect of more demand for the
    LIHTC from new sources is uncertain but in the direction of tempering
    the price impact. It is not clear to us how the MBA study was actually
    performed. We are continuing to review it now.
        It is our best estimate at this point that the 21 percent estimate
    of the price reduction in the E&Y study is overstated and that the
    emphasis on units produced in the analytical formula fails to reflect
    the full range of the impact of the dividend proposal. NAHB estimates
    that a more realistic decline in the value of the credit is 10 to 15
    percent. We also believe that there will be significant revisions in
    state priorities for the LIHTC program if the dividend proposal is
    enacted into law. Higher income tenants will be sought and fewer
    properties will be built, particularly in hard to develop areas.
        LIHTC properties are financed in three layers--equity, soft gap
    funding and first mortgage debt. While the exact impact of dividend
    proposal on the amount of equity available for LIHTC properties is
    still open to question, it seems certain that a significant erosion
    will occur, requiring offsetting increases in the other funding slices.
    Most observers agree that current federal and state sources of soft
    financing/grants are already fully tapped. That leaves first mortgage
    debt financing as the only available offset and unfortunately, as
    discussed below, this avenue has severe limitations on expansion.
        These limitations, simply stated, revolve around the difficulty in
    increasing rental income from LIHTC properties. Loans for LIHTC
    properties are underwritten on the basis of the capacity of the ongoing
    net operating income of the property (the margin of rental and other
    income over operating expenses and reserve payments) to cover mortgage
    payments. Lenders establish minimum debt coverage or debt service
    ratios (DCRs) that determine how much mortgage debt a property can
    support. Fannie Mae, for example, enforces a debt service ratio of 1.15
    percent, requiring properties to generate operating income
    significantly in excess of expenses. Other financing programs require
    DCRs in the 1.10 to 1.20 percent range.
        Such limitations on debt coverage greatly limit the capacity of
    LIHTC properties to take on additional debt needed to significantly
    offset the expected reduction in equity funding. Rents on eligible
    LIHTC units by law cannot increase above 30 percent of 60 percent of
    area median income. This is the constraint producing the program's
    unusually low loan-to-value ratios. Therefore, the impact of the
    dividend proposal provision on the number of units produced and the
    characteristics of households and areas served will be well beyond
    incidental and ultimately determined by the capacity and willingness of
    state allocating agencies to fund properties at higher rent levels.
        Adjustments are possible. State allocating agencies strive to serve
    households at the lowest income levels possible. The states could
    redirect the program to those earning closer to the maximum statutory
    limit of 60 percent of area median income. States also likely will
    attempt to allocate more credits to properties than they do today in an
    effort to reduce debt requirements. Reducing service and increasing
    rent loads for low-income families is not likely to be a welcomed
    option and will be limited by the facts that any increase in incomes
    served would come from levels that are, in most cases, not that far
    below the statutory maximums and market rents in many areas would not
    permit significant or any rent increases. This would be particularly
    true in rural and economically distressed urban areas.
        These factors lead NAHB to conclude that the dividend proposal
    component of the President's proposal would have a significant adverse
    impact on the supply of rental housing available for low-income
    families. This effect would take the form of a sizable reduction in the
    number of units produced each year, as well as a shift in the
    composition of the units produced away from those serving families at
    lower income levels and located in rural, urban and other difficult to
    develop areas.
    Solutions:

        There are two approaches that can be used to avoid a negative
    impact of the Administration's dividend proposal on the LIHTC. The
    first approach would be to exempt the LIHTC from the adverse effects of
    the elimination of the double taxation of corporate earnings. This can
    be done within the structure of the Administration's proposal by
    treating earnings corresponding to the LIHTC as taxed earnings. Other
    methods not affecting the LIHTC by a dividend proposal would involve
    structural changes of the proposal such as exempting all or part of
    dividends received by shareholders as exempt from tax or by shifting
    the tax benefit of eliminating the double taxation. The tax benefit
    could be shifted to a corporation with a corporate deduction for
    dividends paid.
        The other approach to protecting the LIHTC from the adverse
    consequences of the Administration's dividend proposal would be to make
    up for any adverse impact on the credit from the dividend proposal by
    expanding the availability and the market for the credit. This proposal
    requires adjustments to the program and other parts of the tax code
    that limit the market for the credit.
    1. Exemtping The LIHTC From The Effects Of The Dividend Proposal.
    a. Treat Earnings Excluded from Income by the LIHTC as Taxed.
        This option would treat corporate earnings that are not subject to
    tax because of the LIHTC in the same fashion as earnings subject to
    foreign taxation and exempted from federal taxation by the Foreign Tax
    Credit (FTC) or earnings that were previously subject to the AMT and
    credited for past payments of that tax. The proposal exempts the LIHTC
    from the impact of the dividend proposal because the earnings that are
    exempted from tax by the LIHTC are treated as taxed earnings that can
    be paid out as tax free dividends or used to adjust the cost basis of a
    shareholder's stock. The solution fits into the format of the dividend
    proposal in the Economic Growth Plan without changing the basic
    structure of the proposal.
        As discussed above, EDA is computed with the following formula:

    EDA = Federal Income Tax - tax credits except for the Foreign Tax and
    AMT credits

                    Highest Corporate Income Tax Rate (35 Percent)

        If the LIHTC were added to the FTC and AMT credit in the formula,
    the adverse consequences of the dividend proposal on the LIHTC would be
    avoided.
    b. Equivalent Solutions To Treating LIHTC Excluded Earnings As Taxed.
        There are other approaches that could accomplish similar results as
    the FTC treatment of the LIHTC. For example, providing corporations
    with a dividends-paid deduction for dividends paid to shareholders from
    taxable earnings and a capital basis adjustment for shareholders' stock
    when taxed earnings are retained by the corporation, or, provide
    shareholders with an exclusion (with or without a limit) for dividends
    received would effectively protect the LIHTC from the adverse
    consequences of a dividend exclusion. In fact, the Treasury Department
    made such a proposal in 1992 in ``A Recommendation for Integration of
    The Individual and Corporate Tax Systems.'' The Treasury Department's
    1992 proposal would exempt all dividends received by a shareholder from
    ordinary income taxes. A capital gain tax would apply to dividends that
    represent a return on capital rather than ordinary income earned by the
    corporation.
    2. Expanding LIHTC Limits And Market
        Today's LIHTC market among individuals is limited by limits on
    passive loss deductions and the imposition of the alternative minimum
    tax. Eliminating these restrictions could substantially expand the
    LIHTC market. However, removing these restrictions would not fully
    compensate for reducing the corporate market for LIHTCs due to the
    Administration's dividend proposal. Individuals cannot be expected to
    pay as much for the credits as the current group of corporations that
    make up the market. The corporations are in a better position to assess
    the risk of purchasing credits and require a lower rate of return than
    investors who cannot perform the same level of risk assessment. As a
    result, if the program is to be maintained at current levels by
    expanding the market for the credits among individuals, the amount of
    credits that can be sold to raise equity, as well as the amount of
    credits that can be dedicated individual properties, would need to be
    increased to make up for inefficiencies in the individual market. A
    more detailed discussion of these changes follows.
    a. Increase the amount of LIHTC individual investors can take annually
            against ordinary (non-passive) income.
        The current very low deduction limitation--$25,000--on the amount
    of LIHTC individual investors can take each year to offset individual
    ordinary income tax liability should be raised or eliminated. The
    current limit has all but eradicated the market for the LIHTC among
    individuals, which reduces demand for LIHTCs and, consequently, the
    amount available each year for the apartment investment the LIHTC can
    generate from any particular amount of LIHTCs.
    b. Allow the use of the LIHTC to reduce Alternative Minimum Tax (AMT)
            liabilities.
        Individuals use the LIHTC to reduce their regular tax liability.
    However, the LIHTC cannot be used to offset the Alternative Minimum Tax
    (``AMT''), which applies to increasing numbers of individuals. To the
    extent that potential LIHTC investors are subject to the AMT, they
    either pay less for the LIHTCs they buy, reducing the dollars available
    from the LIHTC for housing, or may refuse to buy LIHTCs at all.
    Providing an exemption from the individual AMT would increase the
    marketability of the credits and help alleviate any reduced value due
    to the elimination of the double taxation of corporate earnings.
    c. Remove LIHTC Limits per Project & Increase the volume cap on LIHTCs
        Currently, the volume cap on LIHTCs is $1.75 per capita per state
    indexed for inflation and with a ``small state minimum'' of $2 million.
    LIHTCs per project are limited to four percent and nine percent of
    total development costs, depending on the type of transaction.
        This proposal fills the financing gap due to the Administration's
    dividend proposal by eliminating the four and nine percent credit
    limits per project, allowing states to put as much credit as is needed
    (subject to the required feasibility analysis by the allocating agency)
    into an individual project. The increase in credits per project is
    necessary because less capital will be raised by the LIHTC from the
    individual market than the current corporate market. An increase in the
    state per capita allocation and minimum state allocation must also be
    made to keep the program at current operating levels to make up for the
    additional credits each project will require. Without more credits per
    state, some projects would be fully funded while others would not be
    funded and a net loss in affordable units would result. If more credits
    per state under the per capita and minimum state allocation are
    allowed, then the current level of production could be maintained, even
    with a lower credit price due to the inefficiencies of the individual
    market.
        I urge you to consider the unintended adverse consequences of the
    Economic Growth Package on the LIHTC and devise solutions that will
    keep the program operating at the same levels as it does today. NAHB
    looks forward to working the Ways and Means Committee and Treasury
    Department to fully protect the LIHTC.
        Thank you for the opportunity to present this statement for the
    record.

     Statement of Michael E. Baroody, National Association of Manufacturers
    I. Introduction
        The National Association of Manufacturers (NAM) appreciates the
    opportunity to comment on the economic growth provisions in the
    Administration's FY 2004 budget proposal. The NAM is the nation's
    largest industrial trade association, representing 14,000 members
    (including 10,000 small and mid-sized companies) and 350 member
    associations serving manufacturers and employees in every industrial
    sector and all 50 states. Headquartered in Washington, D.C., the NAM
    has 10 additional offices across the country.
        Economic growth is key to our nation's future, and manufacturing is
    key to economic growth. The NAM's mission is to enhance the
    competitiveness of manufacturers and improve American living standards
    by shaping a legislative and regulatory environment conducive to U.S
    economic growth, and to increase understanding among policy-makers, the
    media and the general public about the importance of manufacturing to
    America's economic strength.
        At no time in history has NAM's mission been more important than
    now. Manufacturing is at a crossroads--it was the first sector to
    experience the recession and it remains at the center of our country's
    anemic economic recovery. Corporate profits are down, industrial
    production is lackluster and business investment is off. The recession
    has caused the loss of two million manufacturing jobs and many smaller
    manufacturing companies.
        In the current economic climate, it is critical for policy-makers
    to focus on economic growth, which is essential to overcoming many of
    the problems facing manufacturing and other sectors of the economy.
        The NAM strongly supports President Bush's economic growth plan
    because it offers a creative mix of incentives that will increase
    consumer spending, encourage aggressive investment in the stock market
    and spur new capital investment by business. American consumers have
    played a major role in the vibrant economic growth experienced by our
    country in recent years. The President's proposal to accelerate the
    individual tax-rate cuts scheduled for 2004 and 2006 will help shore up
    consumer confidence and spending. Because many small businesses pay
    taxes at the individual rate, they will benefit from the individual
    rate cuts.
        Small businesses also will benefit from the proposal to triple the
    allowance for expensing capital investments from $25,000 to $75,000 and
    expand the availability of the incentive. This will make it easier for
    small manufacturers to increase investment and create jobs. In
    addition, the proposal to eliminate double taxation of dividends will
    boost business and consumer confidence, reduce the cost of investment
    capital and encourage business to invest more in new plants and
    equipment.
    II. Individual Tax-Rate Cuts
        American consumers have been key to the economic growth of recent
    years and individual tax relief is a critical piece of any economic
    growth package. Under the tax-relief tax package enacted in 2001,
    additional tax-rate cuts are scheduled for 2004 and 2006. The
    President's proposal will accelerate these tax cuts to Jan. 1, 2003,
    providing tax relief for everyone who pays income taxes and leaving
    more money in workers' paychecks to spend, save and invest. Many
    families will receive additional tax relief under proposals to end the
    ``tax penalty'' paid by married couples and increase the child tax
    credit.
        At the same time, more than 23 million small businesses--including
    more than 5,000 NAM members--that pay taxes at the individual rates
    will receive a tax cut. Small businesses are responsible for more than
    70 percent of the new jobs created in the United States, new jobs that
    account for half the output of the economy. This tax savings will
    provide business owners with money to expand their companies and create
    new jobs. In a recent survey, the NAM's small manufacturers identified
    a cut in individual tax rates as the tax incentive that would have the
    most positive impact on their companies' ability to grow.
    III. Small Business Investment Incentive
        Continued sluggish capital investment continues to be one of the
    biggest impediments to a strong U.S. economic recovery. The President's
    proposal to allow small businesses to write off $75,000 of equipment
    purchases (up from $25,000 in current law) will provide an additional
    growth incentive for small businesses.
        Expanded investment incentives, like the expensing provision, will
    reduce the after-tax cost of capital investments for many small
    businesses and help spur capital investment and job creation. In fact,
    in the survey cited above, NAM's small manufacturers ranked expanded
    expensing just below rate cuts as a tax incentive that would have the
    most positive impact on their companies' ability to grow.
    IV. Tax-Free Dividends
        Under current law, corporate earnings paid out as dividends to
    shareholders are taxed twice: once at the corporate level and once at
    the shareholder level. This tax treatment causes a bias against
    corporate earnings and penalizes equity financing.
        The President's proposal to eliminate the tax on dividends received
    by shareholders will increase the real rate of return of all dividend-
    paying stocks. Higher yields will boost stock values, leading to
    increased investor confidence in the stock market. Similarly, higher
    stock prices will reduce the cost of equity financing for corporations.
    This will encourage firms to rely more on equity financing, leading to
    higher investment spending and a larger capital stock.
        Eliminating the double tax also will make the United States more
    competitive--most of our major trading partners provide some tax relief
    for corporate dividends. Right now, the United States has the second
    highest dividend tax rate in the Organization for Economic Cooperation
    and Development (OECD).
        The dividends-exclusion proposal is particularly important to
    manufacturers. In 2002, just under 300 of NAM's large, publicly traded
    member companies paid out more than $100 billion in dividends to
    shareholders. Tax-free dividends will encourage more shareholders to
    invest in the equity market and encourage more companies to pay
    dividends. At the same time, investors will put less pressure on
    companies to increase share prices in the short term, a development
    that will have a positive impact on corporate governance.
    V. Conclusion
        In a recent survey of all NAM members, more than 90 percent of
    respondents indicated that, to achieve a faster recovery in 2003, it
    was important to enact an economic growth package including tax relief
    for consumers, investors and businesses. A carefully crafted tax
    package, like the growth package proposed by President Bush, will
    provide the boost needed to push the economy into high gear and ensure
    durable growth in the future.
        The NAM also believes there are a number of other pro-growth tax
    provisions that would benefit the American economy. To encourage
    capital investment, productivity and job creation, there should be
    further acceleration of depreciation. The tax relief enacted in 2001,
    including estate-tax repeal, should be made permanent. The ongoing
    impasse with the European Union in the World Trade Organization over
    taxation of extraterritorial income (the FSC/ETI case) must also be
    addressed, and reforms in the international tax arena should be enacted
    to enable U.S. companies to effectively compete in the global
    marketplace. We also need a permanent R&D tax credit that benefits the
    largest number of companies and pension reforms to encourage greater
    participation in the private retirement system. Finally, to ensure that
    these tax law changes benefit all manufacturers, action is needed to
    address the problem of the corporate alternative minimum tax (AMT), the
    ``anti-manufacturing tax.''
        In sum, restored economic growth is essential to achieving our
    critical national objectives, particularly successful prosecution of
    the war on terrorism, increasing productivity, saving and creating jobs
    and the eventual return to budget surpluses. A strong and growing
    economy is especially important for manufacturers, as they started to
    feel the recession six months before the rest of the economy. We
    believe strongly that tax relief is key to restoring durable economic
    growth and generating federal budget surpluses. The NAM welcomes the
    opportunity to work with the committee to advance the President's
    economic growth package as well as ``follow-on'' pro-growth tax
    policies.

            Statement of Raul Yzaguirre, National Council of La Raza
    Introduction
        My name is Raul Yzaguirre, and I am President of the National
    Council of La Raza (NCLR). NCLR is a private, nonprofit, nonpartisan
    organization established in 1968 to reduce poverty and discrimination
    and improve life opportunities for the nation's Hispanics. NCLR is the
    largest national Hispanic constituency-based organization, serving all
    Hispanic nationality groups in all regions of the country through a
    network of more than 300 affiliate community-based groups.
        NCLR established its Economic Mobility Initiative several years ago
    in an effort to address the economic issues faced by Latino working
    families. The foundation of this project is to explore the financial
    and economic security of the nation's Latino families, and to develop
    and propose clear public policy measures to improve the ability of
    Latino families to move more successfully into the ranks of the
    American middle class. With this charge, NCLR has committed itself to
    focusing on many issues relating to asset accumulation and wealth-
    building, such as personal savings and investment, retirement security,
    pension coverage, and homeownership--policy areas shaped and influenced
    by federal tax policy.
        Because of the increasingly influential role of Latino workers and
    consumers in the U.S. economy as well as the economies of cities and
    states, Hispanic families have a significant stake in the debate over
    the Administration's economic growth plan. Latinos maintain over $580
    billion in consumer buying power, account for almost half of the growth
    in the labor market over the last five years, and make up one in five
    new U.S. homeowners. The right economic plan must include measures that
    generate real business activity, create more jobs, avoid serious budget
    deficits, and directly benefit hardworking American families. Most
    importantly, in our view any economic plan enacted must reach Latino
    families to the same degree as other American families, especially the
    millions working hard to succeed and save for the future. Therefore, I
    appreciate the opportunity to provide remarks on H.R. 2, the Jobs and
    Growth Tax Act of 2003.
    Budget and Tax Policy
        From a Latino perspective, the debate over how to restore growth in
    the U.S. economy has everything to do with status and outlook of the
    federal budget. For Hispanic families, getting our proverbial ``house
    in order'' is a major priority.
        In the last two years the nation has gone from budget surpluses and
    widespread prosperity to huge budget deficits. A $200 billion-plus
    deficit is projected for this year alone, and it is expected to soar to
    $1.8 trillion in the next ten years.
        Over half of states are now facing budget shortfalls forcing many
    to propose cuts in social programs. Deficits were estimated to be
    deepest in the three states where nearly three in five Latinos live:
    California, Texas, and New York.
        This comes at a time when workers are most in need of assistance in
    providing for the housing, nutritional, and health needs of their
    children. The budget situation also comes at a time when we need
    greater, not smaller, investments in federal and state programs that
    guarantee equal opportunity and ensure that those who work hard and
    support their families through their own efforts are able to do so.
        The existing demands on the budget are serious, not to mention new
    costs for homeland security and as of yet unknown sums to support war
    efforts abroad, and the Administration's estimated $726 billion
    economic plan is just too expensive. There are more modest and
    affordable ways to restore growth in the U.S. economy, and a better
    approach than the initial Administration package would ensure that all
    hardworking American families directly benefit from any economic plan.
    Tax Cut on Stock Dividends
        Despite their contributions to the economy, many Latino families do
    not own stock or participate in any employer-sponsored pension plans,
    including those that rely on dividend income. In fact, while people
    with income below $50,000 account for over 40% of those receiving
    dividends, they receive only 18.5% of all dividend income. With the
    average Latino household earning a median income of $33,565, many would
    likely receive little or no benefit from the $396 billion tax cut
    measure on corporate dividends--the centerpiece of the Administration's
    proposal. Moreover, experts confirm that this measure would have no
    simulative impact to the economy in the short term, and while some
    economic growth over the long term is plausible it could be offset by
    losses in investments in corporations that do not provide dividends.
        Implementing a tax cut on stock dividends may also have the
    unintended consequence of hurting useful tax credit programs for Latino
    families, such as the low-income housing tax credit (LITC), which has
    financed more than 1.5 million homes for low-income families. Latinos
    have a strong desire to become homebuyers and own a piece of the
    American Dream. LITC is an important tool for families wishing to own a
    home and build wealth and therefore, efforts to undermine it, however
    unintentional, will adversely affect the financial security of many
    low-income families.
        In our view, the upside of this measure is dubious at best, while
    the downside is clear; it has very little direct positive impact on
    most low- and moderate-income families including most Hispanic
    families, it will worsen the nation's budget outlook, and will threaten
    our nation's commitment to long-term domestic priorities. Congress
    should drop this measure entirely from its economic plan.
    Acceleration of Tax Cuts on Idividual Income
        Carefully targeted tax benefits can stimulate consumer spending and
    economic activity while providing important financial relief to
    families. For example, low-income families, including over one-third of
    Hispanic households, have benefited greatly from the Earned Income Tax
    Credit (EITC) and the partially refundable child tax credit (CTC). The
    combined average EITC and CTC refund for Latino families was estimated
    at $2,359 in 2000 and will potentially increase to nearly $3,600 by the
    end of the decade. When even a modest portion of this refund is
    channeled into savings, it potentially results in measurable increases
    in wealth and financial security for Hispanic families. In 1998 the
    median Hispanic family maintained 4% of the wealth of the median White
    non-Hispanic family.
        Given the potential benefits for low-income workers, NCLR supports
    certain provisions in H.R. 2. First, we support the expansion of the
    10% income bracket, which will lower the tax liability of low-income
    workers and put more money in the pockets of those who need it the most
    to support their families. Second, NCLR has in the past formally
    supported the elimination of the marriage penalty tax and therefore, we
    currently support accelerating its repeal ahead of schedule. Finally,
    NCLR supports increasing the child tax credit from $600 to $1,000 per
    child this year. Tax credits, preferably those that are refundable, are
    a more effective way of reaching Hispanic working poor families who are
    deeply impacted by taxes and need assistance to offset the tax burden
    on their families.
        In addition to more tax credits geared toward families, tax rebates
    to low-income workers with no tax liability are promising features of
    any economic growth plan. Last year during debate over an economic
    stimulus proposal, the Administration, along with members of Congress
    from both parties, supported a tax rebate to workers who did not
    receive a rebate in 2001. A stimulative effect on the economy would
    most likely result from rebates to low-income workers because these
    workers are likely to spend a high proportion of any new income they
    receive. For this reason, NCLR believes income tax rebates of up to
    $300 per person and $600 per working couple, regardless of tax
    liability, should be included in the economic growth package.
        NCLR will remain supportive of tax measures that benefit low- and
    moderate-income families. However, most of the benefits conferred in
    the 2001 tax cut legislation missed the bulk of Latino families,
    especially those in the lowest tax brackets. The tax cuts were
    egregiously tilted to benefit the wealthiest Americans, and Hispanic
    families received very few direct benefits. Furthermore, because many
    Hispanic working poor families are disproportionately burdened by
    payroll and sales taxes and do not owe federal income tax, the 2001 tax
    cuts had no impact on those most in need of relief.
    Incentives for Small Business
        NCLR agrees that under certain economic circumstances, such as when
    consumer spending is strong, encouraging businesses to increase
    investment spending or hire more workers can stimulate economic growth.
    H.R. 2 would increase the amount small businesses would be allowed to
    expense for the cost of new investments--from the current $25,000 to
    $75,000. But given that businesses primarily base production,
    investment, and hiring decisions on expected consumer demand rather
    than tax incentives, it remains unclear how effective this provision
    would be in the short term. The loss of tax revenue associated with
    this measure, on the other hand, could have a clear and harmful impact
    on the budget deficit.
    Conclusion
        NCLR, on behalf of the nation's 40 million Hispanics, wants to
    support an economic growth plan that is modest in size and yet
    sufficient to help workers find new jobs, enhance the ability of
    families to meet rent and mortgage payments, help workers save, and
    generate enough spending to stimulate the economy. This means that the
    economic growth package should provide as much direct benefit and
    relief to Latino families as to other hardworking American families and
    should not put the government at great financial risk in the long run.
    Recent figures from the Congressional Budget Office, which estimate a
    $1.8 trillion deficit in ten years, should create considerable alarm as
    should the warnings from Federal Reserve Chairman Alan Greenspan that
    the proposed growth plan may, in fact, have dire consequences for the
    economy. In addition, economic growth plans must also consider the
    fiscal conditions in the states. H.R. 2 may have an indirect negative
    impact on state budgets. Budget deficits are already estimated to be
    severe in key states where Latinos reside. Because many states tax
    income and investments based on rules under the federal tax system, the
    tax cuts included in the proposal may significantly reduce state and
    local revenues, exacerbating the fiscal situation. Therefore, state
    funding for key programs may be threatened by additional tax cuts.
    While this falls outside the scope of H.R. 2, I wish to echo the
    concerns of several state governors who have called for much-needed
    federal assistance to meet not only critical needs in education and
    health care but to pay for infrastructure and homeland security
    expenses.
        Yet, in spite of these serious reservations about H.R. 2, it
    appears that some in the Administration and Congress would rather force
    Americans to accept their plan as is rather than work with lawmakers to
    develop a more affordable, less risky, more equitable growth package.
    The initial plan costs too much, disproportionately benefits Americans
    in the highest income brackets, and would lead to record-high budget
    deficits at a time when there are serious economic demands on the
    nation, not the least of which is an impending war in Iraq. By working
    with the President, Congress can develop and enact a more balanced and
    effective plan. But lawmakers will need to fight hard on behalf of all
    American families if they are to win the support of Latinos.

                Statement of the National Education Association
        Members of the Committee:
        The National Education Association, representing 2.7 million
    educators across the country, is pleased to submit the following
    testimony on the need for the Federal Government to provide fiscal
    relief to states. We request that this statement be made a part of the
    printed hearing record.
    A Crisis in the States
        States are facing their worst fiscal crisis since World War II. The
    budget shortfalls are huge: As a share of states' overall budgets, they
    average between 13 percent and 18 percent. Though states have taken
    painful steps to end deficits, the collective shortfall for FY 2004 is
    estimated at $80 billion and growing. States also are reporting that FY
    2003 budget gaps have grown nearly 50 percent just since November.
        Cuts in programs to make up these deficits are taking a toll on
    everyone as states release prisoners, cutback on safety by reducing
    highway patrols, eliminate some Medicaid programs and force colleges
    and universities to increase tuition.
    The Impact on Education
        NEA members know that a strong America needs strong public schools.
    And, they know that funding is the key. The major difference between
    superb public schools and struggling public schools is clear--money.
    Adequate, equitable funding is the foundation on which excellent public
    schools are built.
        Yet, today our public schools face a funding crisis, exacerbated by
    the severe state budget shortfalls. In FY 2002, 17 states reported
    cutting funding for K-12 education; in FY 2003, 14 states cut education
    funds. More cuts are expected in state legislatures for FY 2004 as
    legislators grapple with looming shortfalls. Cuts in K-12 education
    have delayed much needed renovation and construction, eliminated after-
    school programs and, in some places, reduced the number of school
    weeks. Students across the country are sitting in larger classes,
    paying to participate in school sports, and losing access to classes in
    music, art and foreign language.
        In the higher education arena, nineteen states have cut spending,
    forcing cancellation of classes and tuition hikes of around 10 percent.
        Snapshots from around the country highlight the devastating impact
    of these cuts:

         Oklahoma has laid off 2,800 school employees.
         Des Moines, IA plans to cut 110 teachers--4 percent of its
    total workforce.
         Syracuse, NY was forced to eliminate 15 teaching assistant
    positions--most of whom were working with special education students.
         The School Board in Santee, CA may cut 25 of its 287
    teaching positions.
         Elgin, IL is eyeing a 33 percent reduction in its teaching
    staff.
         Charleston, SC is cutting twenty five percent of school
    nursing positions.
    The Need for Federal Action--A One-Time Unrestricted Grant to States
        Failure to provide states and communities immediate fiscal relief
    will jeopardize gains made by students and public schools the last
    several years and will delay any economic recovery.
        Therefore, NEA urges Congress to include in any economic stimulus
    package a one-time $50 billion grant in unrestricted aid to states to
    help address current state fiscal crises. We also urge Congress to
    provide the funds as a directed appropriation, which would not count
    against the Budget's discretionary spending caps.
        Providing an unrestricted grant will send money where it will have
    the biggest immediate economic impact: into communities for funding
    critical needs in education, health care, and infrastructure, and into
    the hands of the unemployed. The National Governors Association,
    National Conference of State Legislatures, National League of Cities,
    U.S. Conference of Mayors, and the National Association of Counties
    have also called on Congress to provide such assistance.
        The Budget Resolution reported by the House Budget Committee
    assumes $726 billion for an economic recovery tax cut package. A $50
    billion grant to states would comprise only 7 percent of this total--a
    small percentage that would make a big difference.
    The Danger of the Dividend Exclusion
        In contrast to the immediate help $50 billion in unrestricted aid
    would offer, proposals to exempt dividends from taxable income will
    cause states to lose revenue, thereby exacerbating the current crisis.
    Most state income tax systems are tied to the federal system. It is
    estimated that exempting dividends from taxable income would cost
    states as much as $5 billion per year for each of the next ten years.
    In addition, states and schools will be forced to pay higher interest
    rates on municipal bonds, including school construction bonds, in order
    to have tax-free bonds remain a competitive investment option in
    relation to what would be tax-free stock dividends.
        The proposed dividend exemption will also jeopardize the Qualified
    Zone Academy Bond (QZAB) program. This program, which the president has
    recommended for a two-year extension, provides tax credits in lieu of
    interest to financial institutions that purchase zero interest school
    construction bonds. These tax credits will reduce the amount of
    excludable dividends available to a corporation. Therefore, the
    dividend exclusion will make the QZAB tax credit, along with other tax
    credits such as the low-income housing credit, much less attractive to
    corporations and will likely curtail the use of and the viability of
    this important program.
    Conclusion
        State budget shortfalls are jeopardizing public schools and the
    students they serve. Rather than focusing on proposals that would
    exacerbate this crisis, the Federal Government should focus on helping
    states and local governments protect critical education, health, and
    other services, by providing $50 billion in unrestricted aid.
        We thank you for the opportunity to submit these comments.

               Statement of the New Markets Tax Credit Coalition
    Introduction
        Chairman Thomas, Ranking Member Rangel and honorable members of the
    Ways and Means Committee, I appreciate the opportunity to submit
    testimony on the President's economic growth proposal on behalf of the
    New Markets Tax Credit Coalition.
        The New Markets Tax Credit Coalition is a network of more than 80
    community development organizations, intermediaries and investors
    committed to seeing the New Markets Tax Credit succeed in generating
    private investments in economic and business opportunities in our
    nation's most distressed communities.
    Background on the New Markets Tax Credit and the Coalition
        The New Markets Tax Credit (NMTC) was enacted in 2000 as part of
    the Community Renewal Tax Relief Act and is designed to increase the
    flow of private capital into low-income communities.
        The NMTC provides a credit against federal income taxes paid by
    individuals or corporations that make qualified equity investments in
    designated Community Development Entities (CDEs). The NMTC offers
    investors a tax credit worth 39% of an investment over seven years--a
    5% credit in years 1 through 3 and a 6% credit in years 4 through 7.
    CDEs, which include faith and community based organizations, will use
    capital raised with the NMTC to make community development investments
    in targeted low-income communities. Between now and 2007, the NMTC will
    spur at least $15 billion in private investments to promote development
    in poor communities.
        Like the Low-Income Housing Tax Credit (LIHTC), which draws 98% of
    its investors from the corporate sector, we expect corporations will be
    the principal source of investments in New Markets Tax Credits.
    Corporations are attracted to the Credit to offset their tax liability
    and at the same time make a significant contribution to community
    development. Due to passive investment regulations, which limit the
    amount of tax credits an individual can claim, we expect there will be
    minimal interest in the NMTC among individual investors.
        Unlike the LIHTC that has a market of seasoned investors and an
    inventory of housing units that can be traced to LIHTC investments, the
    NMTC is a new tax credit. The first allocation of Credits will be
    awarded in the next two weeks and therefore no investors have yet taken
    advantage of the NMTC.
        There is a great demand for the NMTC as exhibited by the 345
    applications submitted for the first round of allocations worth $2.5
    billion in investment volume. The applications that were submitted to
    the Treasury Department in August of 2002 requested Credits for $26
    billion in targeted investments--more than 10 times what was available.
    The Administration's Proposed Economic Growth Package:
        The NMTC Coalition has two comments on the President's proposed
    economic growth package. First, the Coalition is concerned that the
    dividend tax exemption proposal as currently conceived would negatively
    impact the market for New Markets Tax Credits and we ask that the
    proposal be amended to accommodate this concern. Secondly, we encourage
    the committee to include an additional allocation of NMTCs in the final
    economic growth package in order to ensure that low-income communities,
    which are often impacted first and most severely by a downturn in the
    economy, receive immediate assistance.

        1.Concerns with the Administration's Dividend Tax Exemption
    Proposal and its Impact on the NMTC

        The New Markets Tax Credit Coalition and its advisors have
    concluded that the President's proposal to end the double taxation of
    corporate dividends will have an immediate, significantly detrimental
    and potentially crippling impact on the recently enacted New Markets
    Tax Credit Program.
        The Administration's plan proposes to exclude certain dividends
    from individual taxation. Any dividend paid to a shareholder out of
    previously taxed corporate income would be excluded from the
    shareholder's taxable income. In order to determine whether a dividend
    was paid out of previously taxed income, corporations would be required
    to establish and maintain Excludable Dividend Accounts (EDAs). The
    amount of income in an EDA would be calculated based on actual taxes
    paid on corporate earnings.
        As most companies do not distribute all their earnings, the
    Administration's proposal would allow for an increase in the basis of a
    shareholder's investment in a company by the amount of the EDA not
    distributed. It can be ``deemed'' distributed and thus increase the
    shareholder's basis in their investment. Assuming the value of the
    company increases by the amount of the earnings retained, a ``deemed''
    dividend allows the shareholder to sell their investment without paying
    tax on the value increase attributable to retained earnings.
        While under this proposal the NMTC would continue to benefit the
    corporate bottom line, such benefits would be offset by the reduction
    of tax-free dividends or a reduced stock basis, which would adversely
    impact the corporation's stock price. We firmly believe that pressure
    from shareholders alone would force corporations to defer investing in
    tax credits and instead distribute tax-free dividends to shareholders.
        If passed in its current form, the President's dividend tax
    exclusion proposal would freeze the market for NMTCs and similar
    targeted tax credits. I have attached to my testimony a letter signed
    by 50 community development organizations and investors that are
    concerned about the President's proposal and how it will impact the
    NMTC market.
        In order to preserve the NMTC and its stated mission of increasing
    private investment in poor communities, the Coalition recommends that
    the Administration's proposal be amended to provide that, similar to
    the treatment of foreign tax credits, any NMTCs taken should be
    included as a component of ``taxes paid'' for purposes of the EDA
    calculation. In effect, whether a corporation pays its taxes through
    direct cash payments or tax credits, its income has been subject to
    tax.

        2.Meet the Tremendous Demand for NMTCs and Include an Additional
    $2.5 Billion in NMTC Allocations in the Economic Stimulus Package

        As previously mentioned, the first round of applications for NMTCs
    closed in August 2002 and award announcements are expected within the
    month. While only $2.5 billion in Credits were available, the Treasury
    Department's Community Development Financial Institutions (CDFI) Fund
    received applications requesting close to $26 billion.
        This demand demonstrates both the need for capital in poor
    communities as well as the interest among private sector investors in
    the NMTC.
        Due to the overwhelming demand for Credits, the CDFI Fund has
    qualified NMTC applications on hand with the potential to generate
    increased investment in poor communities if an additional allocation of
    Credits were made available. These applications include business and
    economic development deals and investment commitments that could have
    an immediate impact on low-income communities.
        Therefore, we recommend the Committee include an additional $2.5
    billion in NMTC in the final economic stimulus legislation. This
    additional volume would enable the CDFI Fund to award Credits to some
    of these qualified CDE applicants thereby spurring new private sector
    investments and generating new economic activity in targeted
    communities. We estimate the cost of this additional NMTC volume would
    be $42 million over five years and $700 million over ten.
        I appreciate this opportunity to submit testimony on behalf of the
    NMTC Coalition and would be happy to answer any questions that you
    might have on the New Markets Tax Credit or the issues raised in my
    testimony.
        Thank you.
                                     ______

                                  Attachment 1
            The New Markets Tax Credit Coalition's Statement On the
                Administration's Dividend Tax-Exemption Proposal
        The New Markets Tax Credit Coalition is concerned that the
    Administration's proposal to end double taxation of corporate dividends
    will have an adverse impact on the implementation of the New Market Tax
    Credit.
        The NMTC was enacted in the Community Renewal Tax-Relief Act of
    2000 and is designed to increase the flow of private capital to low-
    income communities. Between now and 2007, some $15 billion in private
    investments in economically distressed communities will be eligible to
    receive Credits.
        Next month, the Treasury Department is expected to allocate the
    initial round of Credits, totaling at least $2.5 billion. At minimum,
    the Administration's proposal will muddy corporate decision-making on
    Credits. Marketing for this new product may be slowed or stalled until
    the dividend exemption proposal is resolved.
        We expect corporations to be the principal investors using the
    NMTC. The dividend tax exemption may act as a disincentive to these
    corporate investors who would be forced to choose between reducing
    corporate tax liability and maximizing shareholder benefits and
    reducing federal tax liability and investing revitalization projects
    through the New Markets Credit.
        An indication of the need for the Credit is the great demand for
    the first round of Credits. While only $2.5 billion in Credits were
    available the Treasury Department's Community Development Financial
    Institutions (CDFI) Fund received applications requesting close to $26
    billion--more than ten time the amount available. These applications
    represented distressed communities across the country.
        We applaud the work of the Administration in launching the NMTC and
    we do not believe the dividend exclusion proposal was intended to put
    the NMTC at risk. However, we are concerned that if the proposal is
    implemented in its current form the outcome will be devastating to the
    Credit.
        The NMTC Coalition will continue to examine the potential impacts
    of the dividend exclusion proposal and will share that information with
    the Congress and the Administration.

                Organization                         City, State
     Access Capital Group, LLC            Shreveport, LA
    Alaska Village Initiatives           Anchorage, AK
    Bethel New Life, Inc.                Chicago, IL
    Boston Community Capital             Boston, MA
    Boston Community Loan Fund           Boston, MA
    Business Carolina, Inc               Columbia, SC
    CAP services                         Stevens Point, WI
    CBO Financial, Inc                   Clarksville, MD
    Chicanos Por La Causa                Phoenix, AZ
    Coalition for a Better Acre          Lowell, MA
    Coalition of Community Development   Arlington, VA
     Financial Institutions
    Coastal Enterprises, Inc.            Wiscasset, ME
    Community Development Venture        New York, NY
     Capital Alliance
    Community Reinvestment Fund          Minneapolis, MN
    Community Resource Group, Inc.       Fayetteville, AR
    Connections for Community Ownership  Chicago, IL
    Covenant Community Capital           Houston, TX
     Corporation
    Enterprise Corporation of the Delta  Jackson, MS
    Federal Home Loan of Atlanta         Atlanta, GA
    Federation of Appalachian Housing    Berea, KY
     Enterprises, Inc.
    Holm Law Firm, PLLC                  Memphis, TN
    Housing Partnership Network          Boston, MA
    Impact Services Corporation/ Impact  Philadelphia, PA
     Loan Fund, Inc.
    Impact Seven, Inc.                   Almena, WI
    Investment Builders                  El Paso, TX
    Kentucky Highlands Investment        London, KY
     Corporation
    Legacy Bancorp                       Milwaukee, WI
    Lenders for Community Development    San Jose, CA
    Leviticus 25:23 Alternative Fund,    Yonkers, NY
     Inc.
    Local Initiatives Support            New York, NY
     Corporation
    Los Angeles LDC, Inc.                Los Angeles, CA
    Low Income Investment Fund           Oakland, CA
    MACED                                Berea, KY
    Meridian Investments                 Quincy, MA
    N.M. Marketing & Communications      Baltimore, MD
    National Bankers Association         Washington, DC
    National Community Capital           Philadelphia, PA
     Association
    National Community Investment Fund   Chicago, IL
    National Economic Opportunity Fund   Montchanin, DE
    NCB Development Corporation          Washington, DC
    New Community Corporation            Newark, NY
    Northeast Ventures Corporation       Duluth, MN
    Northern Community Investment        St. Johnsbury, VT
     Corporation
    Northern Economic Initiatives        Marquette, MI
     Corporation
    Reznick Fedder & Silverman           Baltimore, MD
    Rural Community Assistant            West Sacramento, CA
     Corporation
    Rural Opportunities, Inc.            Rochester, NY
    Self-Help                            Durham, NC
    Shorebank Advisory Services          Chicago/DC
    Sustainable Growth Fund              Columbus, OH
    TELACU                               Los Angeles, CA
    The Enterprise Foundation            Washington, DC
    The National Development Council     New York, NY
    The National Trust for Historic      Philadelphia, PA
     Preservation
                                      ______

                                  Attachment 2
                        NEW MARKETS TAX CREDIT COALITION
                               STEERING COMMITTEE

    Frank Altman
    Community Reinvestment Fund
    801 Nicollet Mall, Suite 1800 W
    Minneapolis, MN 55402
    612-338-3050
    612-338-3236 (fax)
    frank@crfusa.com
     Nancy Andrews
    Low Income Investment Fund
    1330 Broadway, Suite 600
    Oakland, CA 94612
    510-893-3811
    510-893-3964 (fax)
    nandrews@lihf.org
     Michael Banner
    Los Angeles LDC, Inc.
    1055 West 7th St., Ste. 2840
    Los Angeles, CA 90017
    MBanner8@aol.com
    213-362-9113
    213-362-9119 (fax)
     David Beck
    Self Help
    301 West Main Street
    Durham, NC 27701
    919-956-4400
    919-956-4600 (fax)
    davidb@self-help.org
     Bill Bynum
    Enterprise Corporation of the Delta
    308 East Pearl Street, 4th Floor
    Jackson, MS 39201
    601-944-1100
    601-944-0808 (fax)
    wbynum@ecd.org
     Art Campbell
    Federal Home Loan Bank of Atlanta
    P.O. Box 105565
    Atlanta, GA 30348-5565
    404-888-8000
    404-888-8558 (fax)
    acampbell@fhlbatl.com
     Annie Donovan
    National Cooperative Bank
    1725 Eye Street, NW, Suite 600
    Washington, DC 20005
    202-336-7700
    202-336-7804 (fax)
    adonovan@ncb.com
     Bill French
    Rural Community Assistance Corp.
    3120 Freeboard Drive, Suite 201
    West Sacramento, CA 95691
    916-447-2854 Ext. 102
    916-447-2878 (fax)
    wfrench@rcac.org
     Mary Nelson
    Bethel New Life
    4950 W. Thomas
    Chicago, IL 60651
    773-473-7870
    773-473-7871 (fax)
    mnelson@aol.com
     Ron Phillips
    Coastal Enterprises, Inc.
    P.O. Box 268, 36 Water Street
    Wiscasset, ME 04578
    207-882-7552
    207-882-7308 (fax)
    RLP@CEIMaine.org
     Mark Pinsky
    National Community Capital Association
    Public Ledger Building
    620 Chestnut Street, Suite 572
    Philadelphia, PA 19106-3413
    215-923-4754
    215-923-4755 (fax)
    markp@communitycapital.org
     Lisa Richter
    National Community Investment Fund
    205 Washington #409
    Santa Monica, CA 90403
    310-458-5542
    773-753-5880 (fax)
    lrichter@ncif.org
     Buzz Roberts
    Local Initiatives Support Corporation
    1825 K Street, NW Suite 1100
    Washington, DC 20006
    202-785-2908
    202-835-8931 (fax)
    broberts@liscnet.org
    Ellen Seidman
    Shorebank Advisory Services
    1730 Rhode Island Ave. NW
    Washington, DC 20036
    202-822-9100
    202-822-9176 (fax)
    esseidman@aol.com
     Kerwin Tesdell
    Community Development Venture Capital Alliance
    330 7th Avenue, 19th Floor
    New York, NY 10001
    212-594-6747
    212-594-6717 (fax)
    ktesdell@cdvca.org
     Stockton Williams
    The Enterprise Foundation
    415 2nd Street, NE, 2nd Floor
    Washington, DC 20002
    202-543-4599, Ext. 15
    202-543-8130 (fax)
    swilliams2@enterprisefoundation.org

      Statement of the Profit Sharing/401(k) Council of America, Chicago,
                                    Illinois
        The Profit Sharing/401(k) Council of America (PSCA) applauds the
    Administration's efforts to stimulate the economy and encourage long-
    term growth. Individual savers, including the 75 million participants
    in employer provided defined contribution retirement plan systems, are
    keenly interested in restoring vigor and growth to our economy.
    Unfortunately, we believe that the proposals to eliminate the double
    taxation of dividends and for retained earning basis adjustment will
    negatively impact the employment based retirement system and result in
    an overall reduction in retirement savings, particularly among low and
    moderately paid workers. Any legislation must contain provisions that
    preserve the appeal of employer provided retirement plans.
        The Administration's proposal will result in markedly lower taxes,
    perhaps to zero in some arrangements, on many equity investments that
    are not held in a tax-qualified employer based plan such as 401(k) or
    profit sharing plans--while not changing the tax treatment of qualified
    plans. This will significantly erode the tax incentives that encourage
    employers to accept the fiduciary obligations and expenses that are
    associated with offering a retirement plan. Presently, the tax code
    links the availability of preferential treatment on savings for
    business owners and highly paid workers with the retirement savings of
    lower paid employees. This linkage requires that employers incentivize
    lower paid workers to save for retirement by using expensive
    nonelective or matching contributions as well as conducting aggressive
    educational and marketing campaigns.
        Under the Administration's proposal, many employers, particularly
    small business owners, will decide not to provide a retirement plan for
    their employees. This will result in lower retirement savings as some
    moderate and lower income employees will make smaller, or no,
    retirement investment contributions despite the attractiveness afforded
    equity investing under the proposal. Additionally, some participants in
    employer plans will redirect some of their retirement savings to non-
    qualified investments that contain no contribution limits and no
    holding requirements other than the capital gains holding period. This
    will result in lower average account balances and higher plan costs. To
    the extent that some employers continue to offer 401(k) plans, it may
    be more difficult for these plans to pass the nondiscrimination tests.
        Any legislation should include provisions that maintain the
    incentives that encourage the growth of employer-provided retirement
    plans that are responsible for our nation's broad investor class.
        The Profit Sharing/401(k) Council of America (PSCA) is a national
    non-profit association of diverse employers that provide profit sharing
    and 401(k) plans for their employees. For over 50 years, PSCA has
    promoted the use of profit sharing, 401(k) and related savings and
    incentive programs; identified and shared best practices with its
    members; and analyzed and reported plan related trends to business,
    government, and the media. PSCA was instrumental in the passage of
    Section 401(k) in 1978 and of HR 1836 in 2001.

                    Statement of the Real Estate Roundtable
    Introduction
        Mr. Chairman, the Real Estate Roundtable appreciates the
    opportunity to submit the following comments regarding the President's
    Job Creation and Economic Growth Package.
        The Real Estate Roundtable is the vehicle through which the leaders
    of the real estate industry come together to identify, analyze and
    advocate policy positions on capital, finance, environmental,
    investment and tax issues. Roundtable members are the Chairmen,
    Presidents or Chief Executive Officers of the nation's 100 leading
    commercial, retail and multifamily real estate companies and the
    managing directors of major financial institutions.
        The Roundtable also includes the elected leaders of Washington's
    major real estate trade organizations. Collectively, Roundtable members
    hold portfolios containing over 3.5 billion square feet of developed
    property valued at more than $350 billion. The industry represents over
    one million people involved in virtually every aspect of the real
    estate business.
    Executive Summary
         Real estate is at least a duel sectored industry. Single
    family housing continues to be relatively healthy, as are the
    refinancing businesses and most real estate activities relating to the
    defense industry. Office, industrial, hospitality and retail are
    experiencing increasing weakness due primarily to continued weakness in
    demand for space and job growth in corporate business sectors.
         Catastrophic events--the technology bubble, September 11th
    attacks, accounting scandals, potential war with Iraq--have battered
    the economy to a point where normal market influences do not appear
    able to allow the economy to quickly assume an acceptable level of
    sustained growth.
         Recent monetary policies resulting in historic record low
    interest rates have helped to offset significant increases in operating
    expenses and reductions in rental income.
         Fiscal policy action is needed. We believe that any fiscal
    policy Congress decides to implement must be significant enough in
    scope and long enough in duration to cause a lasting effect on the
    economy. In the view of the Roundtable, a demand-led recovery that
    results in capital investment and long-term job creation is what
    Congress should be trying to achieve.
         Effective fiscal policy should help spur immediate
    consumption by quickly getting more after-tax cash in the hands of
    individuals. Also, businesses should be motivated by tax policies that
    reward near term capital expenditures as opposed to postponing those
    decisions to a later date.
         Real estate is extremely interest rate sensitive. Tax
    relief and spending decisions that lead to substantially higher long-
    term budget deficits run the risk of pushing interest rates higher.
    This could do more harm than good.
         Most investment real estate is held in single-level tax
    entities such as partnerships, limited liability companies and real
    estate investment trusts. Therefore, double taxation of dividends is
    not a direct issue. However, to the extent the dividend proposal
    benefits the capitalization and market value of companies operating as
    C corporations, real estate should indirectly benefit since these
    companies occupy as tenants a significant amount of leased space.
         The President's dividend proposal only applies to earnings
    on which a corporation has paid tax. The use of tax credits to reduce
    corporate level tax would reduce the amount of earnings eligible for
    dividend exclusion at the shareholder level. Corporate investment in
    low income housing tax credits and historic rehabilitation tax credits
    reduce corporate tax liability. The dividend proposal would diminish
    the value of such credits to corporations. This likely would diminish
    the amount of future affordable housing stock coming to market and
    historic rehabilitation development. This potential diminution in this
    type of activity should be addressed by policymakers.
    Real Estate Investment Market in the Current Economy
    General Outlook

        Capital investment in U.S. real estate exceeds $4.6 trillion. It
    generates one-third, or $2.9 trillion, of U.S. Gross Domestic Product,
    provides jobs for 9 million Americans and accounts for 70 percent of
    local government revenues.
        Residential and non-residential real estate have been pillars of
    the economy during this recent economic downturn. The single family
    residential sector has been particularly resilient.
        However, those pillars, particularly the commercial sector, are
    showing signs of weakness. We are the providers of work, shopping and
    living space to the other sectors of the economy. As such, the health
    of our industry is a reflection of the health of the users of our
    space. Because of long-term space leases, the timing of our economic
    health and that of our tenants' may not always be in sync. This has
    been the case in recent years when performance of many economic sectors
    dropped sharply and suddenly yet a downturn in real estate markets
    lagged. That lag time is now virtually eclipsed and real estate markets
    are now beginning to reflect overall economic weakness.
        Restrained consumer spending and flat demand for space from
    business tenants is eroding real estate fundamentals in many markets
    and sectors across the country. The result is softening prices, reduced
    sales volumes, rising vacancies, declining rents and mounting property
    expenses.
        Low interest rates have helped cushion the full effect of this
    erosion by reducing ownership and operating costs. However, interest
    rates are at near historic lows and have little room to move further
    downward. Until demand turns around, revenue growth will continue to
    decline, as ownership and operating costs increase. This is a situation
    which causes many in our industry deep concern.
        The single family housing market also is showing some early signs
    of softening. Recent new home sales dropped 15 percent in one month.
    Housing starts, however, did not drop. This means that the rate new
    homes are being built is outpacing the rate they are being sold.
    Existing home re-sales are continuing their record rate but, as an
    indicator they lag new home sales.
    Catastrophic Economic Events Overwhelm Marketplace

        In more typical environments, we believe the marketplace should be
    allowed to work without the Federal Government intervening with
    significant fiscal policies. For real estate, as with most industries,
    this means there will be a normal cycle of peaks and troughs.
    Additionally, real estate is not one homogeneous industry but in fact
    is comprised of several different sectors--office, multi-family,
    industrial, hospitality--in many distinct markets across the country.
    Therefore, different sectors in different regions of the country will
    go through normal phases of strength and weakness at different times.
        The existing economic environment, however, is not typical because
    of a confluence of unusual and dramatic occurrences extraordinary to
    normal market conditions. The economy is enduring the strain of a
    ``triple whammy'' comprised of:

         The bursting of the technology sector bubble,
         The widespread economic disruption caused by the September
    11th tragedy, and;
         The corporate accounting and governance scandals led by
    Enron but widely encompassing dozens of other major corporations and
    investment firms. These scandals have brought about not only the sudden
    and precipitous devaluation of those companies, but also a lingering
    dampening effect on investor confidence.

        Viewed individually, each of these events is responsible for
    serious, yet somewhat targeted, negative economic consequences. Taken
    collectively, their impact has caused damage across the economy.
        Adding further strain is the uncertainty and disruption posed by
    the ongoing threat of terrorism and the build up to an expected
    military conflict with Iraq. The latter has resulted in a surge in oil
    prices that is equivalent to an immediate tax on every business and
    person in the economy. Obviously, the Iraq situation also has created a
    sense of paralysis among businesses and consumers who are choosing to
    wait and see more clearly the outcome of the expected conflict and its
    consequences before proceeding with any spending, investing or hiring.
        Many in our industry are concerned, however, that simply moving
    beyond the Iraq situation will not by itself unleash new economic
    growth. There are still issues of worldwide over capacity in many
    businesses, lack of pricing power and a potential retrenchment of
    consumer spending in the face of falling consumer confidence.
        We question whether the marketplace can adjust quickly and
    effectively enough to these extraordinary influences to allow the
    economy to return to an acceptable growth rate. In time, of course, the
    marketplace will adjust to these events. How much time that will take
    is yet to be determined. In the meantime, the economy is likely to
    sputter and grow at an unacceptable rate enhancing the already
    considerable pain and suffering for just about everyone.
    Fiscal Policy Needed to Stimulate Economy During Adjustment Period

        Monetary policy and fiscal policy are the two major tools that the
    Federal Government has to effect economic performance. The Federal
    Reserve has repeatedly exercised monetary policy though reductions in
    the short term borrowing rate for banks. Interest rates are at historic
    lows and there is little room for the Federal Reserve to cut further.
        In 2001, Congress enacted the $1.35 trillion dollar Economic Growth
    and Tax Relief Act. While a large measure, it is phased in over 10
    years with much of the tax relief back end loaded. Being in only the
    third year of its implementation, we have yet to see the full effect of
    the measure reflected in the economy.
        The $33 billion Job Creation and Worker Assistance Act of 2002 is
    fully implemented but it is somewhat targeted and temporary and has not
    had a broadly discernable impact on the economy.
        Therefore, we believe that any fiscal policy Congress decides to
    implement must be significant enough in scope and long enough in
    duration to cause a lasting effect on the economy. In the view of the
    Roundtable, a demand-led recovery that results in capital investment
    and long-term job creation is what Congress should be trying to
    achieve.
        Effective fiscal policy should help spur immediate consumption by
    quickly getting more after tax cash in the hands of individuals. Also,
    businesses should be motivated by tax policies that reward near term
    capital expenditures as opposed to postponing those decisions to a
    later date.
        Currently, capital expenditure spending is very soft as business
    managers wait for signs that the economy is stabilizing. In the long-
    run, growing demand will result in resumed flow of capital spending,
    but right now policies that break this current holding pattern are
    needed.
    Effect of Budget Deficit on Interest Rates Important Consideration

        As lawmakers develop fiscal policy, they also should be mindful of
    the importance of low interest rates on every business and consumer in
    the country. Real estate is particularly interest rate sensitive since
    it is a relatively highly leveraged asset. Tax relief and spending
    decisions that lead to substantially higher budget deficits run the
    risk of pushing interest rates higher. This could do more harm than
    good.
        Although some economists argue there has been no recent direct
    correlation between deficits and interest rates, we urge policymakers
    to fully explore the history concerning at what point increased
    borrowing demand generated by federal deficits will crowd the market
    causing the cost of borrowing to go up.
    President Bush's Job Creation and Economic Growth Proposal
        We applaud President Bush for putting forth an economic growth
    proposal. Our economy needs bold fiscal policy if it is to get back on
    track. The President's action has spurred significant congressional
    activity, debate, and alternative proposals. This level of engagement
    and attention by congressional policymakers is essential to being able
    to reach consensus on an economic growth package in a timely and
    meaningful manner.
        We commend Chairman Thomas for introducing the Bush plan as
    legislation and proceeding without delay to hearings. Delaying the
    development of a recovery plan delays its implementation which, in
    turn, delays the recovery. The effect of delay is compounded by the
    fact that there is a built in lag time of about 12-18 months between
    passage of legislation and its impact. Therefore, we encourage all
    Members to Congress to work quickly and cooperatively.
    Rate Cut Acceleration
        The Bush proposal to accelerate the pending individual tax rate
    reductions for 2004 and 2006 is an effective way to increase after-tax
    cash to individuals that can be devoted to consumption and investment.
    Increased demand generated by an increase in disposable income is
    essential to reinvigorating the moribund economy. In addition, real
    estate and other small businesses, our commonly held in pass-through
    entities, such as partnerships and limited liability companies taxed as
    partnerships. Therefore, individual rate reduction as proposed would
    have the double benefit of directly helping these small businesses as
    well.
    Dividend Tax Exclusion
        Real estate companies and investors do not directly benefit from
    the President's dividend exclusion proposal because investment real
    estate is not widely held in C corporation form. Real estate is
    commonly held in single level taxed, pass-through entities, such as
    real estate investment trusts (REITs), partnerships and limited
    liability companies taxed as partnerships. Therefore the dividend
    exclusion proposal does not change the tax structure of owning real
    estate. However, to the extent the dividend proposal benefits the
    capitalization and market value of companies operating as C
    corporations, real estate will benefit since these companies occupy as
    tenants a significant amount of leased space.
    Value of Low Income Housing Tax Credit, Historic Rehabilitation Tax
            Credit Expected to Suffer
        The Internal Revenue Code contains numerous provisions which allow
    corporate taxpayers to reduce their taxes dollar for dollar with tax
    credits if they enter into certain prescribed activities. The Low
    Income Housing Tax Credit and the Historic Rehabilitation Tax Credit
    are among the better known activities. Neither of these tax benefits
    has arisen from what have been deemed ``abusive corporate tax
    shelters'' but are instead desirable activities encouraged by the
    government through the Tax Code. These credits leverage significant
    private-sector investment that stabilizes neighborhoods, creates
    businesses and jobs and boosts tax revenues.
        The President's dividend proposal could significantly compromise
    the value of these credits. No other alternative incentive programs
    exist. Also, corporations that invested in these credits and expect to
    receive their benefit for years in the future will find their
    investment decision undercut.
        The National Council of State Housing Agencies estimates that 35
    percent fewer housing credit apartments would be produced annually if
    the dividend exclusion proposal were enacted as proposed. Other studies
    indicate a more modest impact. Nevertheless, the available stock of
    existing affordable housing is inadequate. Our goal should be to
    increase the availability of affordable housing, not enact measures
    that could diminish it.
        The dividend proposal addresses a similar problem associated with
    foreign tax credits used by multi-national companies. The proposal
    treats the foreign tax credits as taxes paid thereby allowing earnings
    to be excluded from tax at the shareholder level. A similar approach
    should be taken concerning other corporate tax credits, such as the low
    income housing and rehabilitation tax credits. Such an approach would
    preserve the incentive for corporate investment in these areas.
    Conclusion
        The real estate industry has been among the best performing sectors
    of the economy during this three year economic downturn. However, it is
    now suffering from the widespread underperformance of the economy.
    Normally, we believe the marketplace should be allowed to work without
    the interference of government fiscal policy. But, our current economic
    circumstances are extraordinary due to the recent series of major blows
    to the economy--the bursting of the tech bubble, the September
    11th attacks, corporate accounting and governance scandals,
    and the uncertainty posed by the threat of terrorism and a possible war
    with Iraq.
        Therefore, we believe bold fiscal policy is needed to assist the
    economy through this difficult period. We applaud the President for
    putting forth a substantial growth package. Congress should move
    quickly and cooperatively on a package that induces long-term growth
    and permanent job creation.
        At the same time, Congress should be mindful of how such a package
    affects budget deficits and by extension interest rates.
        We are pleased to work with the Committee as it moves forward with
    its consideration of the President's economic proposal.

                                              Rebuild America's Schools
                                                   Washington, DC 20005
                                                      February 27, 2003
    The Honorable William M. Thomas
    Chairman
    House Ways and Means Committee
    United States House of Representatives
    Washington, DC 20515

        Dear Chairman Thomas:

        Rebuild America's Schools writes to express its strong concern that
    the Administration's proposal to eliminate double taxation of corporate
    dividends would have a severe negative impact on the Qualified Zone
    Academy Bond (QZABs) program. Rebuild America's Schools is a national
    coalition of education organizations, representing school boards,
    school administrators, PTAs, teachers, architects, and others--all
    helping local communities find the resources needed to provide children
    with modern classrooms.
        The QZAB program offers a new and innovative financial instrument
    to help schools in the poorest districts raise funds to renovate
    buildings, invest in equipment and technology while developing
    curricula to maximize these upgrades. Under the program, investors
    receive a federal tax credit equal to the amount of interest payable on
    the bonds thereby relieving local taxpayers and the municipality of the
    burden of paying interest. Since 1998, $2.4 billion in federally
    subsidized bonds have been allocated among the states, the District of
    Columbia (D.C.) and Puerto Rico. Localities in 44 states have already
    used the program's funds in 2002, and 39 states have distributed all of
    their annual allocations since the program was implemented in 1998.
    Given the early success of this program, the President's FY2004 budget
    proposes to extend the QZAB program with an additional $400 million per
    year in 2004 and 2005.
        Corporate investment currently makes up a significant percentage of
    the equity capital generated by the QZAB tax credit that enables
    affordable school modernization in many communities across America.
    Under the President's proposal, tax credits reduce the ability of
    corporations to increase dividends. If Congress enacts the dividend
    proposal in its current form, RAS is deeply concerned that many
    corporations may forgo QZAB credits in favor of maximizing the
    distribution of tax-free dividends to their shareholders. This would
    severely undermine the only federal tax credit available to assist
    school districts in upgrading their schools and curricula just at the
    moment this relatively new program is fully taking hold across the
    nation.
        In addition, the dividend exclusion will place an additional
    financial burden on states and localities by increasing their tax-
    exempt borrowing rates for school construction bonds. Investors will
    demand higher interest rates on these bonds in light of the potential
    new benefit of owning corporate stock that would provide tax-free
    dividends under the Administration's plan. This would be particularly
    painful at a time when states are already facing the most dire fiscal
    situation since World War II. According to the National Governor's
    Association, budget shortfalls are mounting--$50 billion this year and
    $60-70 billion next year.
        The recent passage of the No Child Left Behind Act (PL 107-110) and
    its strong emphasis on raising standards in America's classrooms
    reminds us that we can no longer overlook the fact that school
    facilities are an integral part of raising student performance. Given
    the overwhelming need for infrastructure assistance in communities
    across the nation, RAS believes that the Federal Government must do
    everything in its power to help school districts build and renovate
    their schools.
        This will increase the opportunity for all students to meet the
    achievement objectives of No Child Left Behind.
        The effect of the QZAB program--an initiative that the
    Administration has twice sought to extend--appears to be an unintended
    consequence of the new dividend proposal. RAS also believes the QZAB
    program supports the President's overall goal to improve our nation's
    educational system. We look forward to working with the Administration
    and your committee to ensure that the benefits of this program are
    preserved and extended as requested in the President's FY 2004 budget,
    as well as improved and expanded.
        Thank you for your thoughtful consideration of these issues and for
    your commitment to increasing assistance for our nation's public
    schools.
                Sincerely,
                                                         Robert Canavan
                                                                  Chair

      Statement of Charles G. Hardin, RetireSafe.org, Arlington, Virginia
        Mr. Chairman, my name is Charles Hardin, and I am here today
    representing RetireSafe.org, the nation's only retirement security
    group focused primarily on a pro-growth, free-market message for
    reform. We're a network of citizen activists, organized primarily
    through our website, who promote a supply-side vision of prosperity for
    all Americans and favor ending the bias against savers and investors in
    the tax code. RetireSafe.org is a project of the Council for Government
    Reform, an organization of over 1 million senior citizen supporters
    across America.
        I testify today in support of President Bush's jobs and growth tax
    package, focusing especially on the elements affecting savings in
    general and retirement security in particular.
    Ending the Double Taxation of Dividends
        Tax policy should be designed in a way to encourage people to save
    as much as they can, in a way that promotes ownership of assets and
    long-term economic growth. Fairness dictates that each dollar earned
    should be taxed once, and only once.
        Today, dividends are taxed twice--first, as a profit of the
    corporation issuing them, and second as income earned by the individual
    who receives them. The effect is staggering. Of every dollar a
    corporation issues as a dividend, only about 40 cents actually ends up
    in the shareholder's pocket after the corporate and personal income tax
    structures are imposed.
        About 35 million Americans receive dividend income. More than half
    of the recipients are senior citizens who rely on that income to
    supplement their meager Social Security benefits. Ending this double
    taxation will increase their income by almost $1000 a year.
        Ending the individual tax on dividends would pump about $20 billion
    into the U.S. economy in 2003, boosting both investor and consumer
    confidence. As more money flows through the economy, the value of the
    stock market could increase as much as 10% (according to former Council
    of Economic Advisors Chairman Glenn Hubbard), growing the dollars saved
    by hard-working Americans in 401(k)s and IRAs.
        The unfair double taxation of dividends is not only wrong--it
    stifles economic growth and the ability to save for retirement.
    President Bush has made ending the double taxation of dividends the
    centerpiece of his economic policy. Congress should follow his lead and
    act quickly to end this tax on America's retirement security.
    Creating New Oppportunities to Save
        All Americans should be given every opportunity to save for their
    retirement. Yet current rules needlessly restrict contributions to
    retirement accounts like Individual Retirement Accounts (IRAs) and
    401(k)s.
        IRAs and 401(k)s shield retirement savings from the multiple layers
    of double taxation present in ordinary investing. In 2001, Congress
    approved President Bush's plan to increase the amount people could
    contribute to these plans. However, there are still far too many
    restrictions that need to be lifted.
        In addition, the hodgepodge of employer-provided retirement plans
    urgently needs simplification, both to encourage their availability
    from small businesses and the active use of them by ordinary workers.
        That's why the President's plan to streamline all IRAs into new
    Retirement Savings Accounts (RSAs), and all employer-sponsored plans
    into new Employer Retirement Savings Accounts (ERSAs) is such good tax,
    economic, and retirement policy. We also are encouraged that the
    President would like to, at a minimum, accelerate the scheduled rise in
    contribution limits and remove some of the barriers to common-sense
    distributions in retirement.
        We are also very supportive of the new tax-advantaged account, the
    Lifetime Savings Account (LSA), which would remove the bias against
    savings and investment for any purpose, including retirement.
        We strongly urge the committee to adopt the President's plan to
    streamline and increase savings options for all Americans.
    Killing the Death Tax
        The Death Tax is one of the biggest impediments to retirement
    planning. Its uncertainty leaves seniors wondering whether they will
    leave their children and grandchildren a nest egg or a tax bill.
        In 2001, as part of President Bush's first major tax cut, Congress
    passed a phase-out and eventual elimination of the Death Tax. The
    amount of an estate exempt from the tax will gradually increase from $1
    million today to $3.5 million in 2009. In 2010, all estates, no matter
    what their value, will be exempt from the Death Tax. Unfortunately, due
    to Senate budget rules, the Death Tax will be reinstated in 2011.
    Grieving family members will once again get a visit from the tax man.
        Under this bizarre scenario, our tax code actually puts a far
    greater incentive on dying in one year rather than the next. The Death
    Tax is bad public policy. It shouldn't die a slow death only to be
    reincarnated as the Baby-Boomers enter retirement. We should get rid of
    it permanently. Better yet, we should speed up the phase-out. It only
    serves to saddle economic growth at a time when retirement security
    demands more growth.
        Permanently ending the Death Tax would:

         Allow communities to build wealth inter-generationally Not
    letting wealth build through generations stifles economic growth and
    prevents minorities and the poor from achieving the American dream.
         Prevent the devastation of family farms and small
    businesses The Death Tax devastates the children and families of
    property-rich but cash-poor small businesses and family farms, often
    leading to a sell-off of assets or the entire business to pay the tax
    man.
         Allow economic decisions in retirement to be based on good
    investment choices rather than flawed tax policy
         Eliminate another form of double taxation in our tax code
    The Death Tax is a particularly harsh form of double taxation, since
    the savings are taxed once when they are put away, and again at the
    owner's death.

        We support the President's call to make the tax cuts of 2001
    permanent, and encourage the Congress to do so.
    A Good First Step Toward True Retirement Security
        The President's Jobs and Growth tax package represents a quantum
    leap toward a system unbiased against savings and investment. Even if
    it all gets adopted, though, policymakers should keep their eye on the
    ball for true savings and retirement reform. In particular, the next
    few years need to yield:

         Voluntary Personal Retirement Accounts (PRAs) for Social
    Security, allowing younger workers to have choice and control over
    their retirement futures while preserving and protecting benefits for
    older Americans
         Free-market reforms of the Medicare system that give
    seniors the same choices and control over their health care decisions
    that members of Congress and all federal employees have (including a
    baseline guarantee of a prescription drug benefit)
         Elimination of the double taxation of retained earnings
    (capital gains), much in the same way that the President's plan
    eliminates the double taxation of distributed earnings (dividends)
         Elimination of the dual disincentives against productivity
    for older Americans--the early retiree earnings limit and the double
    taxation of Social Security benefits.

        These and other common-sense reforms will yield an America of
    prosperous families and burgeoning economic growth that will make the
    short-term ``costs'' of all these ideas pale in comparison. I urge the
    committee to expeditiously proceed with these needed enhancements to
    America's economic and retirement security.

                                      Small Business Survival Committee
                                                   Washington, DC 20036
                                                          March 6, 2003
    The Honorable William Thomas
    US House of Representatives
    House Ways & Means Committee
    1102 Longworth House Office Building
    Washington, DC 20515

        Dear Chairman Thomas:

        We are submitting the following as testimony into the official
    record of the House Ways & Means Committee Hearing on the President's
    Economic Growth Proposals:
        Some in the environmental community have begun to criticize certain
    provisions in the tax code that allow small businesses to expense
    vehicle purchases that meet certain weight requirements. From the
    perspective of the Small Business Survival Committee (SBSC) this merely
    represents another tired attempt by various groups to demonize sport
    utility vehicles, or SUVs, along with the people who drive them. The
    charges of these groups are without any factual basis.
        They also miss the larger issue in regards to the burdensome nature
    of taxes and regulation on America's entrepreneurial sector, and how
    government should encourage the growth of small firms. After all, they
    are currently shouldering the path back to robust levels of economic
    growth.
        The Sierra Club stated in a February 11th news release that, ``A
    long-standing provision of the tax code lets small business owners
    write off a portion of certain business expenses. Vehicles weighing
    over 6000 pounds are eligible, so that small business owners who need
    trucks and delivery vans can take advantage of the provision.'' This
    doesn't sound out of order, but the Sierra Club goes on to state, ``But
    many SUVs weigh over 6000 pounds, and since that loophole ... came to
    light last year, a growing number of individuals are using it to buy
    SUVs for what may be personal--not business--use.''
        This is an absurd claim. Where are their numbers to back up this
    charge?
        Under current law, small businesses can write off, or expense
    within the first year, capital investments or purchases up to $25,000.
    Really, how many small businesses can survive by throwing such sums of
    money into unnecessary vehicles for a tax write-off? Certainly not the
    vast majority of small businesses who perpetually struggle with
    escalating health insurance costs, access to adequate capital and a
    burdensome tax and regulatory system.
        The environmental movement, led by the Sierra Club, is
    ``concerned'' with the Bush Administration's proposal to increase the
    expensing amount to $75,000. However, this provision would be of great
    help to small businesses who struggle with capital expenditures, often
    limiting their ability to modernize, expand and create more jobs. But
    it remains unclear, other than vague charges of abuse, of why the
    environmental movement would be against it.
        Changing the expensing provision to allow small businesses to
    decide which capital expenditures to write-off gives them the
    flexibility to purchase smaller SUVs, light trucks and vans if they
    better suit their business needs, while treating them the same as the
    current ``6,000 lb.'' threshold. Some have argued in favor of
    increasing this ``6,000 lb.'' threshold to deter small businesses from
    ``exploiting the tax loophole.'' This is a wasteful and ludicrous
    proposal.
        First, small businesses are not in a position, given their size,
    economic and cash constraints, and regulatory burden, to abuse this
    provision. Second, why would the environmentalists want to encourage
    small businesses to purchase larger vehicles that consume more
    gasoline?
        Let's give small businesses a break.
        Small businesses are already hit hardest by government regulation.
    An October 2001 report from the Small Business Administration's Office
    of Advocacy estimated the costs of federal regulations on small,
    medium-sized and large businesses showed the burden of federal
    regulations hits small enterprises hardest: the per-employee cost of
    federal regulations for businesses with less than 20 employees reached
    $6,975 in 2000. That rate is 61% higher than the cost per employee for
    businesses with 20-499 employees, and 56% higher than large businesses
    with 500 or more employees.
        Not only do small businesses carry a disproportionate load of
    regulatory costs, but it costs them more per employee to comply with
    current tax law than larger firms. The per employee costs for firms
    with fewer than 20 employees topped the costs for firms with 20-499
    employees by 92% and for businesses with 500 or more employees by 114%.
        These regulatory and compliance costs take a toll on small
    businesses, their owners and employees, and the economy in general.
        The good news is that the Bush plan will work to bring some relief
    to small businesses. It calls for expanded expensing of capital
    investment for small businesses. Currently, a business with less than
    $200,000 in annual investment can elect to expense $25,000 of the cost
    in lieu of depreciation. The President's budget proposal would increase
    expensing to $75,000 for firms with less than $325,000 in annual
    investment, as well as index those levels for inflation going forward.
        This would be a very positive step forward for small businesses.
    Not only do we believe reforming the Section 179 expensing provision to
    encourage capital investment by small businesses would help them grow,
    but changing these rules has the added benefit of allowing small
    business owners more flexibility to purchase the vehicles that best
    suit their needs.
        Let's move forward with the President's proposal to increase
    Section 179 expensing to $75,000 for small firms. It will help give
    small businesses the relief they need to help drive economic growth for
    our country.
                Sincerely,
                                                         Karen Kerrigan
                                                               Chairman

            Statement of Douglass M. Tatum, Tatum CFO Partners, LLP,
                   Atlanta, Georgia, and Richard P. Trotter,
                       Governmental Affairs and Services
    Bridge Act Provides Needed Capital to Help Thousands of Entrepreneurial
            Businesses Grow and Create Over 600,000 New Jobs in First 3
            Years
    Introduction

        Mr. Chairman, my name is Douglass M. Tatum, Chief Executive Officer
    of Tatum CFO Partners, LLP, which is headquartered in Atlanta: 4501
    Circle 75 Parkway, Suite A-1164, Atlanta, GA 30339. (800) 828-8623, or
    (770) 226-0767; FAX, (770) 226-9397. Richard P. Trotter is National
    Partner, Governmental Affairs and Services, (619) 921-0119. Tatum CFO
    is a national financial services partnership, with offices currently in
    26 cities. Tatum CFO provides Chief Financial Officers (and Chief
    Information Officers) to firms throughout the United States. The tax
    deferral proposal discussed herein would not benefit Tatum CFO. Thank
    you for your consideration of this proposal.
        Mr. Chairman, we are focusing on the ``BRIDGE ACT'' (``Business
    Retained Income During Growth and Expansion Act''), a bipartisan bill
    introduced in the 107th Congress to allow growing small
    businesses (``emerging growth companies'') that produce most of the net
    new jobs in the economy to retain a portion of their own earnings for a
    period as a source of needed capital financing to help them keep
    growing at a time when outside financing is very limited. The House
    bill (H.R. 3062, 107th Congress) was introduced in October
    2001, by Representatives DeMint, Baird, Crane, Matsui, Manzullo,
    Velazquez, Toomey, Pascrell, Ron Lewis, and Hart. The Senate bill (S.
    1903, 107th Congress) was introduced in January 2002, by
    Senators Kerry, Snowe, Lieberman, Bennett, and Bingaman.
        We urge the Congress to include the provisions of this bill as part
    of any small business tax incentive and economic growth package. The
    Bridge Act is the result of extensive discussions with Members,
    Congressional staff, Administration officials, business executives and
    business trade groups, and two hearings before the House Small Business
    Committee (May 17 and June 26, 2001). Also, the proposal was discussed
    at a roundtable on entrepreneurship by the Senate Small Business and
    Entrepreneurship Committee (May 22, 2002), as well as at a roundtable
    on access to capital by the House Small Business Committee (March 1,
    2002).
    Summary

        In summary, the Bridge Act will allow growing, entrepreneurial
    businesses to defer a portion of their Federal income tax liability for
    a limited period, payable with interest, during a critical time when
    outside financing is extremely difficult and costly to obtain. The bill
    will provide additional needed capital to be reinvested in the firm's
    continued growth; this added capital source will help to create a
    potential of more than 600,000 new jobs during the first three years,
    thus, helping to reinvigorate the economy. The Joint Tax Committee
    staff estimated that the bill, as introduced (applicable for 2002-
    2005), would result in temporary revenue ``losses'' during the first
    four years, followed by revenue pick-up during the next six years--for
    a net revenue gain of +$1.1 billion for the 10-year period. Thus, the
    bill would provide important economic and job growth in the near term--
    when it is most needed--without a long-term revenue loss. We believe
    that the additional jobs and capital investment would result in more
    tax revenues in the long run.
    Background

        Tatum CFO initiated the legislative proposal in 2001, based on our
    firm's nationwide experience in providing chief financial officers for
    emerging growth businesses. We found that many small, growing and even
    profitable firms were encountering financial difficulty and cash flow
    problems as they transitioned between a small business to an ``emerging
    growth business.'' Tatum CFO published a booklet discussing these and
    related issues, entitled No Man's Land--Where Growing Companies Fail.
    We had numerous discussions with business executives and business trade
    groups, Members, and Congressional staff. We also met with
    Administration officials (staff of the Treasury Department, Department
    of Labor, National Economic Council, and Small Business
    Administration), and staff of the Federal Reserve.
        Several business trade groups have expressed support for the Bridge
    Act, including the National Association of Small Business Investment
    Companies, Small Business Survival Committee, and Small Business
    Legislative Council. These groups represent many thousands of small and
    emerging growth businesses. The proposal has also been endorsed by
    Patrick Von Bargen, previously the Executive Director of the National
    Commission on Entrepreneurship (see his June 4, 2002 testimony before
    the Senate Finance Committee), and by George Gendron, Editor-in-Chief
    of Inc magazine (see article in the Dec. 2001 issue). George Gendron
    stated that ``[T]he BRIDGE ACT is an ingenious, fiscally sound
    mechanism for keeping billions in the hands of a group [growth
    companies] that makes the most efficient use of capital.''
        According to recent studies by the Kauffman Center for
    Entrepreneurial Leadership, Kansas City, MO (Global Entrepreneurship
    Monitor, 1999, 2000) and Cognetics, Inc., Cambridge, MA (Who's Creating
    Jobs? 1999), the greatest growth in employment has been among small and
    mid-size entrepreneurial firms (principally, under 100 employees).
    Cognetics data indicate that 85% of net, new job growth for 1994-1998
    was in firms with under 100 employees.
    Bridge Act Provisions

        The Bridge Act is designed to address two significant financial
    problems for fast-growing, entrepreneurial businesses on accrual
    accounting. First, fast-growing companies quickly outstrip capital
    financing based on the personal credit of the entrepreneur and face a
    ``capital funding gap'' for business financing needs between about
    $250,000 and $1 million (see attached Capital Funding Gap chart). At
    about $10 million in sales, where capital needs may be $1 million or
    more, a company can more readily attract external financing at a more
    reasonable cost, based on the business assets, to support a $1 million
    or more credit line. Second, fast-growing companies on accrual
    accounting may be profitable for tax purposes but face an increasing
    negative cash flow as the company expends its cash on business assets
    and operations to keep up with growth demands. The faster the rate of
    sales growth, the more the company faces a negative cash flow under
    accrual accounting (see attached chart on Microeconomics of Growth).
        Most importantly, the Bridge Act will benefit the vital
    entrepreneurial sector of the economy, which has provided most of the
    net new job growth during the past decade, and is providing most of the
    new job growth in the current economy (as larger firms are downsizing).
    The Bridge Act will allow a firm growing by 10% or more above the
    average gross receipts of the prior two years with $10 million or less
    in gross receipts to defer (not deduct) up to $250,000 in Federal
    income tax liability for two years, and to pay the deferred tax over
    the following 4-year period. Interest is to be paid to the government,
    at the Federal tax underpayment rate, during the entire deferral
    period. Under the bill as introduced, the tax-deferred amount would be
    deposited in a trust account at a bank or other approved financial
    intermediary, and could be used as collateral for a business loan. The
    Bridge Act, as introduced, would sunset after 4 years, to allow a
    review by the Congress and a study by the General Accounting Office
    (GAO), in consultation with the Treasury Department and the Internal
    Revenue Service.
        Mr. Chairman, the Bridge Act is a bipartisan bill that will have a
    significant economic-job-tax revenue multiplier effect, which is needed
    in the current economic situation. The bill is very timely, and needs
    to be passed this year, in order to have the most impact on the
    sluggish economy and capital markets. It will benefit thousands of
    growing, job-producing entrepreneurial businesses (and their
    employees). According to a study by the National Commission on
    Entrepreneurship, High-Growth Companies: Mapping America's
    Entrepreneurial Landscape (July 2001), high-growth companies are
    located in all regions of the United States, including urban, suburban,
    and rural counties.
        Following is a summary of the Bridge Act and the economic reasons
    for the bill. Also attached are charts illustrating the ``Capital
    Funding Gap'' and the ``Microeconomics of Growth.'' Finally, there are
    attached summary interviews with four entrepreneurial CEOs on how the
    Bridge Act could benefit such growing companies: Harden Wiedemann,
    Dallas, Texas; Les Walker, Irvine, California; Eliot Weinman,
    Shrewsbury (Worcester area), Massachusetts; and Ed Rankin, Dallas,
    Texas.
    Summary and Reasons for the Bridge Act
        Bridge Act Summary: The Bridge Act would allow a deferral of up to
    $250,000 in Federal income tax for two years, with payment over a 4-
    year installment period and with interest paid on the deferral at the
    Federal tax underpayment rate. Businesses that grow at least 10% in
    gross receipts above the prior 2-year average would be eligible if they
    are on accrual accounting for tax purposes and have $10 million or less
    in gross receipts. The deferred amounts would be placed in a trust
    account at a bank or other qualified intermediary, for use as
    collateral for a business loan. The deferral (under H.R. 3062/S. 1903)
    would be effective for four years, with a GAO study (in consultation
    with the Treasury Department and Internal Revenue Service).
        Capital Needs of Growing Entrepreneurial Businesses: The Bridge Act
    would provide an efficient source of critically needed capital funding
    for entrepreneurial businesses to reinvest in continued growth of sales
    and jobs. Capital funding in the range of $250,000 to about $1,000,000
    is very difficult and costly to obtain for growing businesses. Limited
    capital availability limits the ability of the business to keep
    expanding sales and employment. A rapidly growing company can grow
    itself out of cash, unless it can obtain outside financing. The
    temporary tax deferral would allow the entrepreneur to utilize the
    funds in the business until it can grow large enough to obtain
    financing from more traditional sources at a more reasonable cost.
        Employment and Economic Growth: By providing needed capital to keep
    expanding the business, the Bridge Act would assist the entrepreneurial
    sector (the ``emerging growth companies'') that has created most of the
    new jobs in the U. S. economy in the past decade. A Cognetics, Inc.
    study, Who's Creating Jobs? 1999 (David Birch, Jan Gundersen, Anne
    Haggerty, William Parsons, Cambridge, MA), indicates that 85% of the
    net, new jobs for 1994-1998 were created by companies with under 100
    employees. There are indications that these rapidly growing companies
    are the only ones that are generating net new job growth in the current
    economic situation. The bill would help to reinvigorate the economy by
    offsetting employment cutbacks elsewhere in the economy. The Bridge Act
    would provide critically needed capital for these companies, which
    could help create more than 600,000 new jobs during the first three
    years, based on sample data from financial statements of profitable
    firms with $10 million or less in sales (database sample provided by
    Dr. Michael Camp, Economist and former Vice President of Research, the
    Kauffman Center for Entrepreneurial Leadership, Kansas City, MO.).
        A recent study by the National Commission on Entrepreneurship,
    High-Growth Companies: Mapping America's Entrepreneurial Landscape
    (July 2001), reports that rapidly growing companies (15% or more growth
    per year in their Census survey for 1992-1997) are in all industry
    sectors and in all Labor Market Areas in every State in the United
    States. For State data, see website (www.ncoe.org/lma).
        Timing of Income Tax Liability for Growing Small Businesses:
    Because of the microeconomics of rapid growth, an expanding business on
    accrual accounting that is experiencing increased revenues and book
    (accrued) profits can also be simultaneously experiencing negative cash
    flow due to reinvestment of the cash to fund continued growth of the
    firm. When a growing business, with negative cash flow, has to come up
    with immediate cash to pay an accrued tax liability, this can have a
    severe adverse financial effect on the firm's ability to survive until
    it receives more cash inflow. The bill would allow the realignment of
    the timing of the tax payment until the entity can more readily obtain
    the necessary capital to pay the tax, which would be payable in
    installments over four years after a 2-year deferral (with interest
    payable on the deferral at the Federal rate on tax underpayments).
                                     ______

                                     [GRAPHIC] [TIFF OMITTED] T1630EE.001

                            Microeconomics of Growth

        The following illustrations were built from an economic model that
    accounts for the typical asset growth characteristics of a rapidly
    expanding business on accrual accounting and transitioning through ``No
    Man's Land.''
    [GRAPHIC] [TIFF OMITTED] T1630FF.001

        [GRAPHIC] [TIFF OMITTED] T1630CC.001

        [GRAPHIC] [TIFF OMITTED] T1630DD.001

    Summary Interview Statement of Harden Wiedemann, CEO, Assurance
            Medical, Inc., Dallas, Texas
        In 1998, Harden Wiedemann's Assurance Medical, Inc., a company that
    outsourced drug-testing services, was on the fast-growth track with
    clients such as Frito-Lay and Southwest Airlines.
        By January 2001, unable to keep up with the capital requirements,
    Wiedemann was forced to sell Dallas-based Assurance Medical to First
    Hospital Corporation, based in Norfolk, Va.
        Today, Wiedemann shakes his head at the irony of the situation.
    ``It wasn't that the company went out of business. The problem was that
    we had too much business to service with the resources we had! We had
    more contracts and demands for services than we could fund out of cash
    flow.
        ``We needed several million dollars in working capital to take on
    AT&T and several other large companies as clients,'' Wiedemann said.
    ``We had to ramp up the telephone service center, hire more employees--
    lots of things that required upfront cash.''
        ``I tried everything,'' he said. ``I even looked at factoring. I
    could not get funding.'' The company had entered territory known as
    ``No Man's Land,'' the transitional period when a company is too big to
    be small, and too small to be big.
        ``We needed $2 million to $3 million. That was too much for early-
    stage investors and incubators, and not enough for the venture
    capitalists,'' Wiedemann said. ``We really beat the bushes. For a full
    year, that was pretty much all I was spending my time on.''
        Wiedemann laments that lost year. ``It takes you away from the
    operational aspects of the businesss. Customer service is the reason we
    got those companies--that started to slide when I couldn't keep my eye
    on the ball because I was spending all my time trying to find
    funding.''
        Wiedemann believes that legislation such as the proposed BRIDGE
    Act, which would allow entrepreneurial, rapidly growing companies to
    defer up to $250,000 in federal taxes, might have saved his business if
    it were in force at the time. ``It would have allowed me to ramp up my
    operation enough to bring those contracts on line, so we could have
    continued to grow out of internal cash flow. We could have closed the
    deal with AT&T and several other pending contracts.''
        He considers the BRIDGE Act solution superior to alternatives such
    as obtaining a loan through the Small Business Investment Company
    program. He found that process slow, exasperating and ultimately
    unsuccessful. ``It's unfathomably complicated and bureaucratic,'' he
    said.
        Frustrated at every turn, Wiedemann decided to re-create the
    company and transform Assurance Medical into a Web-based application
    service provider, rather than an outsourcing partner. ``We actually had
    a commitment from a venture capital group. If the migration had panned
    out, we had a commitment to merge with two other companies and get $5
    million. Then the e-commerce market started to erode, the venture
    capital company pulled out--and I went into high gear trying to sell
    the business.''
        The sale cost 20 employees their jobs. But more than that,
    Assurance Medical lost the opportunity to hire more workers and
    continue growing. ``We could have been as big as 50 to 100 employees
    and $20 million in sales if we had been able to get interim financing.
    We were on track to do that,'' Wiedemann said.
        ``When times are tough, small business creates the jobs,'' he
    concluded. ``When you cut off their air supply, it has an economic
    impact.''
        ``The BRIDGE Act could help businesses survive so they can continue
    to create jobs.'' (Interviewed by Tatum CFO)
    Summary Interview Statement of Less Walker, CEO, DocuSource, Irvine,
            California
        If capitalization weren't a problem, Les Walker, CEO of DocuSource,
    would be building his sales organization and aggressively seeking sales
    throughout Southern California, not just in Los Angeles and Orange
    counties. ``We would be placing sales branches in new marketplaces,
    signing more customers, hiring more service and field technicians, and
    even adding administrative support,'' Walker explained.
        Instead, DocuSource has trimmed its staff from more than 100 to
    only 70 employees, kept its focus largely on LA and Orange counties--
    and is even considering the sale of the company.
        ``We're in a vice where there is a tremendous market opportunity,
    but we're not in a position from a capital standpoint,'' Walker said.
    ``Instead of increasing revenue and employment, we're reducing our
    workforce so we can work within the realities.''
        DocuSource should be on top of the world.
        Consider: The fast-growth office equipment company has grown 700
    percent over the past eight or nine years, to more than 100 employees
    and $21 million in sales in 2001. It was ranked 159 in 1995 on Inc
    magazine's annual list of 500 fastest growing companies. The LA
    Business Journal has counted it among the fastest growing private
    companies in Los Angeles for six consecutive years. Although clients
    are primarily from Southern California, its national accounts include
    the prestigious CB Richard Ellis.
        ``We are a good example of an emerging growth company that has the
    ability to compete and provide alternative solutions to the largest
    players in our industry,'' Walker said. ``Our challenge is
    capitalization in order to sustain our level of growth.''
        Walker indicated that the BRIDGE Act would have been helpful to his
    company and others like it that are profitable but cash-poor. ``If we
    had had $250,000 in deferred income taxes that could be treated as
    capital from the bank's perspective, it would have cut our debt to
    equity ratio in half. We would suddenly have become a very bankable
    company. That would have had a tremendous impact on our ability to
    continue to grow the company and provide jobs.''
        Instead, Walker said, the company's current bank increasingly is
    cutting back on the firm's borrowing power. ``We're in a cash
    stranglehold with the current lender.'' Efforts to negotiate a line of
    credit from a replacement bank have been unsuccessful. ``Banks have
    tightened up their underwriting criteria,'' he said.
        DocuSource has been equally unsuccessful in its efforts to raise $1
    million in subordinated debt. ``We offered a 20 percent annual interest
    rate, and at this point have only raised about 40 percent of what we
    need, with half of that total coming from the owners.''
        Incorporated in 1990, the company ran into trouble in 1998, when it
    expanded its product line and its marketplace. From a one-product
    company in the Los Angeles County marketplace, it began to offer three
    product lines in a territory that included seven Southern California
    counties.
        The catalyst was Ricoh Corp.'s development of the first digital
    copier, which it sold through authorized dealers such as DocuSource.
    DocuSource seized the opportunity to sell the latest and best
    technology to a broad range of customers. The drawback: ``It took a
    tremendous amount of investment to bring it on. We had to train the
    sales staff, train or hire field service technicians, and expend
    capital to inventory the equipment, parts and supplies.''
        ``There's no question. If we had additional capital, we would build
    our sales organization and become aggressive with the other Southern
    California counties; we would be placing sales branches in those
    marketplaces,'' Walker said.
        Instead, DocuSource is reluctantly considering the sale of the
    company, which would undoubtedly lead to layoffs. ``The acquiring
    company probably does not need all the infrastructure that we have--
    which means that the economy would be better off with us as an
    independent company than if we're acquired and duplicate personnel are
    laid off.''
        (Interviewed by Tatum CFO)
    Summary Interview Statement of Eliot Weinman, entrepreneur, Shrewsbury,
            (Worcester area), Massachusetts
        Eliot Weinman has started two fast-growth companies in the past 12
    years, ramped them up to several million dollars in revenue--then was
    forced to sell both of them when capital needs outstripped cash flow.
        Weinman established the first company, Software Productivity Group,
    in 1989, working from his home. ``We produced magazines, ran
    conferences and performed analyst consulting services,'' he said. ``Our
    clients were large companies that were buying enterprise software and
    software development tools.''
        In 1990, the company's revenues totaled about $100,000. By 1993,
    the total had grown to $2 million and, by 1995, $3.8 million. By the
    time the company was sold in March 1996, it numbered about 25
    employees.
        ``It all sounds great,'' Weinman concedes. ``The problem is that,
    when you're growing, you've got to pay your payables. You can't push
    them more than 60 days.'' And Software Productivity Group's payables--
    primarily for printing and postage--were substantial. By contrast, cash
    receipts from accounts receivables were taking three to six months to
    come in.
        ``Then there are taxes,'' said Weinman. ``We were in the 40-percent
    tax bracket after the third year.''
        If the BRIDGE Act had been in force at that point, Weinman could
    have put the deferred taxes to good use. ``When a business is growing,
    you've got critical cash-flow needs. I wouldn't have minded paying
    taxes later--I would definitely have been able to hire more people,
    have grown more and, in the end, generated more revenue and profits,
    and thus, would have ended up paying more taxes to the IRS.''
        By the end of 1995, Software Productivity Group had grown to 25
    employees, had moved into a new office in June 1995, and was generating
    almost $4 million in revenue. ``We were on track to do almost $6
    million in 1996.''
        It wasn't to be. ``I needed to increase magazine circulation at a
    cost of over $400,000, expand and move the office again, and hire more
    people. The tax bill was going to be more than $300,000, and we needed
    working capital of at least $200,000. Since January and February are
    typically slow months in our business, we also had to fund about
    $150,000 in overhead through March 1996. Although I had set up a
    $100,000 revolving line of credit, I couldn't successfully grow my
    company on what was left,'' Weinman said.
        At that point, Software Productivity Group was approached by Ullo
    International, a privately held rollup company. ``Ullo was prepared to
    cash us out and invest $1 million in the company,'' said Weinman, who
    accepted the deal, albeit reluctantly. ``If we had been better
    capitalized, I would have kept the business,'' he said.
        Weinman founded another company in late 1997, with Intermedia
    Group, a high-tech conference and consulting business. This time he
    accepted $300,000 in venture financing from META Group, a publicly held
    company (Nasdaq: METG). On reflection today, Weinman said he might not
    have gone that route if the BRIDGE Act had been on the books as a
    potential option once his company achieved a measurable fast-growth
    position.
        One again, the company grew rapidly. It did $450,000 million in
    revenue in 1998, $1.9 million in 1999, and $6.2 million in 2000.
        ``We were a nice-sized company, doing business across the country.
    We had about $1.3 million in cash by the end of 2000.''
        However, this was barely enough to fund the fast-growing company's
    needs. Intermedia paid $750,000 in taxes and $300,000 in expenses
    during the slow months of December through February. It also had to
    begin funding the marketing expenses for the March and April
    conferences. With no conferences planned early in the year, income was
    minimal the first quarter. Weinman was left with about $250,000 in the
    once-hefty bank account. ``A quarter of a million in deferred taxes
    would have given us an important buffer,'' Weinman said. He added,
    ``Half a million dollars would have been even better.''
        ``If you have a quarter million, you can hire up to three or four
    people and begin funding the marketing expenses needed. That carries
    the growth you had in 2000 into 2001 and accelerates your business a
    great deal.''
        Again, with cash needs of at least $250,000-$500,000, Intermedia
    Group was a target for a takeover. ``When you are growing quickly in
    the $1 million-to-$10 million range, you start to compete with larger
    companies very quickly. Our competitors on the low end were $30 million
    to $40 million conference companies. On the high end, we were also
    competing with large, traditional information technology publishing
    companies whose annual revenue was greater than $1 billion.
        Instead of continuing to grow as an undercapitalized business,
    Weinman accepted an offer from Internet.com (now INT Media Group, Inc.,
    Nasdaq: INTM) to buy Intermedia.
        Weinman adds, ``Another benefit to the Bridge Act would be, as an
    entrepreneur, you could pay yourself a little more. I was pulling a
    salary of $30,000 at Software Productivity Group for several years.
    Some would-be entrepreneurs can't afford to do that. If an entrepreneur
    could pay himself or herself $60,000, it would provide more incentive
    to go into business, and then stick with it.''
        ``I believe it's better for a small company to grow big and succeed
    than to get sold. I would rather have a business. I think most
    entrepreneurs would.''
        (Interviewed by Tatum CFO)
    Summary Interview Statement of Ed Rankin, CEO, PeopleSolutions, Inc.,
            Dallas, Texas*
        If the BRIDGE Act had been in force when Ed Rankin's human
    management resource company began its rapid growth in 1996, things
    might have been different.
    ---------------------------------------------------------------------------
        * See Also statement of Ed Rankin, before the House Small Business
    Subcommittee hearing on June 26, 2001.
    ---------------------------------------------------------------------------
        ``If we had an extra $250,000 at several points in our growth, that
    would have meant the difference between night and day,'' said Rankin,
    founder and CEO of PeopleSolutions, Inc.
        ``When you're a new business, you haven't earned the right to have
    people pay in advance. They pay once you've billed them for the work. I
    might have to pay my people two, three or even four times before
    receiving the first payment from the client. We were always behind in
    cash flow.''
        The first cash crisis occurred as PeopleSolutions, Inc. entered its
    third year of operation, a period of unprecedented growth. ``Our
    clients, predominately large, U.S.-based multinational corporations,
    were asking us for more and more services. We were profitable. We were
    ranked among the 25 fastest growing companies in the Dallas-Ft. Worth
    area.
        ``And we had no cash.''
        Undercapitalized and delinquent on taxes, Rankin was forced to sell
    its receivables, at a discount, to an unregulated lender at high rates.
    ``I had no choice. I sold my receivables, collected my cash, paid the
    IRS, and stayed in business.
        By 1997, things were looking up. ``We had very strong gross profit
    margins and a backlog of receivables from a growing list of blue-chip,
    Global 1000 clients.'' A newly opened office in Austin became
    profitable in 90 days. The company was again ranked among the 25
    fastest growing privately held companies and among the 100 fastest-
    growing owner-managed businesses in the Dallas-Ft. Worth area. Revenues
    totaled $3.8 million.
        ``A large regional bank extended us a credit line to finance our
    receivables and a working capital loan, which was used to pay off some
    equipment leases and release us from the factoring agreement.''
        In 1999, Inc magazine ranked PeopleSolutions among the 500 fastest-
    growing companies in the United States. But cash flow was once again a
    problem, and Rankin began to consider selling the business. The newly
    merged bank complicated matters by rejecting a request to increase the
    company's credit line, and then forcing PeopleSolutions into the bank's
    factoring division, saddling the firm with an onerous repayment
    schedule. ``We had no cash to grow. It was all going back to the
    bank,'' Rankin said.
        PeopleSolutions was rescued later that year by a Small Business
    Investment Company (SBIC) lender. PeopleSolutions accepted a deal for
    $1 million in subordinated debt, which allowed it to grow from $4
    million in 1999 to $6.5 million the following year.
        Rankin is convinced that the BRIDGE Act not only would have
    lessened his woes considerably--it would also have accelerated
    PeopleSolutions' growth.
        ``If we had been able to take advantage of the tax deferral
    provisions of the proposed Bridge Act, I believe that the company would
    be at least twice as large as we are today,'' Rankin said. ``We would
    have added more people, who would be paying more employment taxes. And
    there's no question we would have created more jobs.''
        (Interviewed by Tatum CFO)

                   Statement of the U.S. Chamber of Commerce
        The U.S. Chamber of Commerce is the world's largest business
    federation, representing more than three million businesses and
    organizations of every size, sector, and region.
        More than 96 percent of the Chamber's members are small businesses
    with 100 or fewer employees, 71 percent of which have 10 or fewer
    employees. Yet, virtually all of the nation's largest companies are
    also active members. We are particularly cognizant of the problems of
    smaller businesses, as well as issues facing the business community at
    large.
        Besides representing a cross-section of the American business
    community in terms of number of employees, the Chamber represents a
    wide management spectrum by type of business and location. Each major
    classification of American business--manufacturing, retailing,
    services, construction, wholesaling, and finance--numbers more than
    10,000 members. Also, the Chamber has substantial membership in all 50
    states.
        The Chamber's international reach is substantial as well. We
    believe that global interdependence provides an opportunity, not a
    threat. In addition to the U.S. Chamber of Commerce's 94 American
    Chambers of Commerce abroad, an increasing number of members are
    engaged in the export and import of both goods and services and have
    ongoing investment activities. The Chamber favors strengthened
    international competitiveness and opposes artificial U.S. and foreign
    barriers to international business.
        Positions on national issues are developed by a cross-section of
    Chamber members serving on committees, subcommittees, and task forces.
    Currently, some 1,800 business people participate in this process.
        The U.S. Chamber of Commerce appreciates this opportunity to
    express its views on the President's Jobs and Economic Growth Plan. The
    U.S. Chamber is the world's largest business federation, representing
    more than three million businesses and organizations of every size,
    sector and region. This breadth of membership places the Chamber in a
    unique position to speak for the business community.
    THE ECONOMY AND THE PRESIDENT'S JOBS AND GROWTH PLAN
        Recently released data show the U.S. economy to be one that is
    still searching for confidence, balance, and momentum. Real GDP growth
    during the most recent 5-quarter period has averaged only 2.9%,
    insufficient to consistently generate new jobs. Indeed, over this time
    span, the U.S. economy has lost about 1.3 million jobs. Moreover, many
    economists have trimmed their forecasts for first half growth. Although
    some recent monthly data show enough incipient signs of improvement to
    keep the nation hopeful that the economy will accelerate in the future,
    policy initiatives are clearly warranted. With the Fed having cut
    interest rates about as far as possible, fiscal policy appears to be
    our only remaining choice. Fortunately, the President has proposed a
    bold program for economic growth that includes a host of proposals,
    including significant tax cuts, creation of broad new savings and
    retirement vehicles, targeted tax incentives, and permanent repeal of
    the insidious ``death tax.''
        The keystone of the President's program is his Jobs and Economic
    Growth Plan--a package of tax cuts designed to boost consumption and
    encourage investment. This proposal would accelerate marginal tax rate
    cuts, marriage penalty relief, the increase in the child credit, and
    the expansion of the 10 percent bracket passed in his landmark 2001 tax
    bill; enhance Section 179 capital asset expensing for small businesses;
    and eliminate the double taxation of dividends. This is a well-balanced
    package that will increase economic growth, both in the near term and
    for the long run.
        The White House understands that the biggest need of American
    businesses large and small, and in all sectors and regions, is
    customers with the will and the means to spend. Moreover, the best way
    to boost consumption is to increase disposable income and wealth. The
    President proposed a number of tax cuts that were passed by a
    bipartisan Congress in 2001, but were delayed full implementation for
    budgetary reasons. If these cuts were good policy then, they are even
    better policy now. Marginal income tax rate cuts, expanding the size of
    the 10 percent rate bracket, fixing the marriage penalty, and
    increasing the child credit will put more disposable income in the
    hands of American consumers immediately.
        The President's expansion of the lower income tax brackets makes
    the 10 percent bracket applicable to more income, which benefits all
    individuals who pay U.S. income taxes--and makes the 15 percent bracket
    applicable to more income of married couples. These measures will put
    more money in the hands of those most needing and prone to spend it,
    thus cycling it back into the economy, where it will do further good.
        This proposal is also good for business. Many smaller businesses
    are organized as flow-through entities, such as S corporations, whose
    owners pay taxes at the individual rates. They will see an immediate
    cash flow benefit from the lower marginal rates. The Section 179
    expensing provision will both triple the maximum deduction and
    introduce enhanced phase-out levels, stemming the erosion in the value
    of depreciation deductions that would otherwise occur over time. This,
    in turn, will further augment current cash flow and encourage and
    enable these companies to invest in new machinery and equipment,
    increasing their productivity and providing a further boost to the
    economic sectors that produce and service those items. In sum, these
    funds will be used to grow businesses and create new jobs.
        One of the most misunderstood and maligned, but nonetheless
    important, pieces of the President's package is the elimination of
    double taxation of dividends. When a business earns profits, those
    profits are subjected to corporate income tax. When those profits are
    subsequently distributed in the form of dividends, they are taxed again
    at the individual level--resulting in a second layer of tax on the same
    income. The President's proposal would allow corporations that have
    already paid tax on their profits to distribute those profits without
    further taxation on those same dollars.
        This piece of the package has received the most criticism, unjustly
    and erroneously challenged by some as an unnecessary and inefficient
    giveaway to the rich. Over 50 percent of Americans own stock and many
    of these stockowners are elderly retirees who must live off the
    proceeds of their lifetime of investments. It is simply unfair to tax
    them twice. Removing the inequity will leave more American taxpayers
    more of their hard earned money, and they will spend it, stimulating
    the nation's economic growth.
        While the direct benefits go to stockholders, indirect benefits
    will accrue to the entire economy. Removing the double tax will
    increase after-tax rates of return on investments, bolstering stock
    prices and lowering the cost of capital. Businesses will invest more,
    boosting economic growth and creating more jobs. While raising stock
    prices is not the main intent of the dividend proposal, we should not
    overlook its importance. Stocks are a major component of wealth and any
    improvement to beleaguered stock prices will surely help to mitigate
    the negative wealth effects of the last couple of years.
        Elimination of the double tax on dividends will have important
    salutary effects on corporate governance. Under tax law, debt financing
    has traditionally enjoyed a marked advantage over equity financing.
    While a distribution in repayment of debt financing allows for
    corporate tax deductibility of its interest component, a distribution
    of the return on equity financing, a dividend, does not. Put another
    way, corporate income that is associated with payment of interest is
    taxed only once--to the payee--as it is fully deductible to the
    corporation against that income. This is in clear contrast to the
    dividend, in which the corporation is fully taxed on the associated
    income and receives no deduction for the corresponding payment, while
    that income is fully taxed again to the recipient. This inequity
    disfavors equity financing, and results in tax-inefficient allocation
    of resources.
        Likewise, this causes an undesirable ``whipsaw'' effect. While
    payment of the return on equity financing, i.e., dividends, is subject
    to a tax disadvantage, corporations have routinely been permitted to
    hold onto their reported earnings, rather than being called upon by
    their stockholders to distribute them. Under current tax law, many of
    these stockholders enjoy a tax advantage by letting these dividends
    accumulate, thus boosting the worth of the company and the associated
    stock prices, which gives rise to more advantageous capital gains
    taxation when the shares are sold. Under pressure to buoy stock prices,
    corporate managers are more than happy to assent, and may become prone
    to ``manage'' corporate earnings--occasionally creatively--in an
    attempt to maximize them. At the same time, the gross inequity between
    dividends and interest may cause a run-up of debt in relation to
    equity, which some have credited with making the corporation more
    susceptible to default and bankruptcy.
        Elimination of the double taxation of dividend income will improve
    corporate governance by alleviating these inequities. Removal of the
    shareholder's incentive to let managers blindly accumulate or hoard
    corporate income will bring those earnings under closer scrutiny. In
    some cases, shareholders will demand distribution of some of those
    earnings, which will keep management more honest about their financial
    reporting, because while irregularities in reported earnings can
    sometimes evade detection for awhile, non-receipt of a dividend check
    is more easily and quickly recognized. Furthermore, the President's
    plan would allow an increase to the shareholder's stock basis for
    corporate income which could otherwise be distributed as tax-free
    dividends, but which is accumulated. Both the shareholders and IRS will
    get annual notification of these increases, hence more scrutiny. In
    all, the plan will create more transparency, make corporate earnings
    easier to monitor, and place equity financing on an economically
    healthier, more equal footing with debt financing.
        The President's plan also preserves the benefits of the foregoing
    provisions against encroachment by an antiquated Alternative Minimum
    Tax (AMT)--a tax that is increasingly hurting the middle class.
    Protection is provided to both single and joint filers via a limited
    amount of relief against the increase in AMT that would be
    automatically levied on taxpayers due to these tax changes.
        While businesses and the workforce are mobilizing for recovery and
    growth, the President's Personal Reemployment Accounts will assist many
    of those who are trying to recover from the economic downturn. These
    accounts will give a helping hand to people while attempting to find
    reemployment by giving them up to $3,000 to use for job training, child
    care, transportation, or to defray the costs of relocating. And the
    help doesn't necessarily stop there. As an added incentive, if a job is
    obtained within 13 weeks, the worker would be permitted to keep any
    unused funds remaining in the account.
    CONCLUSION
        The economic implications of the President's Jobs and Growth Plan
    are huge. Economic simulations done by the Administration suggest that
    passage of this package could boost real economic growth in 2003-2004
    by 0.8 to 1 percentage point per year and create 500,000 to 900,000 new
    jobs each year. Numerous private sector simulations have also been run
    to project the effects of the president's package on real GDP and
    employment growth. One private simulation concluded that passage of the
    package would yield an additional 0.5 to 1.0 percentage points of real
    GDP growth and 242,000 to 894,000 new jobs over 2003-2004. Another
    study found even greater positive results, projecting an additional 0.5
    to 1.8 percentage points of real GDP growth and 800,000 to 2.9 million
    new jobs.
        Even with these predictions of positive benefits, detractors have
    contended that these cuts are not needed. They claim that the economy
    is picking up steam on its own and that we don't need a tax cut that
    will increase budget deficits already swollen with additional spending
    for homeland security and war in Iraq. We believe they are wrong on
    both counts. The economy is growing, but it is still well below its
    potential. A well-designed tax cut is sound insurance--especially given
    the current geopolitical uncertainties--and good long-term public
    policy. As for the deficit issue, the best way to address the deficit
    is to control federal spending and lift economic growth to its job-
    creating potential with the President's timely, well-balanced tax plan.
        In sum, this plan is just what we need.