[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











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91-630                            WASHINGTON : 2004
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                      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 
[email protected], 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 
[email protected], 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.
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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.
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            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 
[email protected]. 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

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 ------------------------------------------------------------------------
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
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Douglas Harris                              Ann Horowitz
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------------------------------------------------------------------


                                

    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.
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    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
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    \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
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    \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.
                                 ______
                                 
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    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)
[email protected]
 Nancy Andrews
Low Income Investment Fund
1330 Broadway, Suite 600
Oakland, CA 94612
510-893-3811
510-893-3964 (fax)
[email protected]
 Michael Banner
Los Angeles LDC, Inc.
1055 West 7th St., Ste. 2840
Los Angeles, CA 90017
[email protected]
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)
[email protected]
 Bill Bynum
Enterprise Corporation of the Delta
308 East Pearl Street, 4th Floor
Jackson, MS 39201
601-944-1100
601-944-0808 (fax)
[email protected]
 Art Campbell
Federal Home Loan Bank of Atlanta
P.O. Box 105565
Atlanta, GA 30348-5565
404-888-8000
404-888-8558 (fax)
[email protected]
 Annie Donovan
National Cooperative Bank
1725 Eye Street, NW, Suite 600
Washington, DC 20005
202-336-7700
202-336-7804 (fax)
[email protected]
 Bill French
Rural Community Assistance Corp.
3120 Freeboard Drive, Suite 201
West Sacramento, CA 95691
916-447-2854 Ext. 102
916-447-2878 (fax)
[email protected]
 Mary Nelson
Bethel New Life
4950 W. Thomas
Chicago, IL 60651
773-473-7870
773-473-7871 (fax)
[email protected]
 Ron Phillips
Coastal Enterprises, Inc.
P.O. Box 268, 36 Water Street
Wiscasset, ME 04578
207-882-7552
207-882-7308 (fax)
[email protected]
 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)
[email protected]
 Lisa Richter
National Community Investment Fund
205 Washington #409
Santa Monica, CA 90403
310-458-5542
773-753-5880 (fax)
[email protected]
 Buzz Roberts
Local Initiatives Support Corporation
1825 K Street, NW Suite 1100
Washington, DC 20006
202-785-2908
202-835-8931 (fax)
[email protected]
Ellen Seidman
Shorebank Advisory Services
1730 Rhode Island Ave. NW
Washington, DC 20036
202-822-9100
202-822-9176 (fax)
[email protected]
 Kerwin Tesdell
Community Development Venture Capital Alliance
330 7th Avenue, 19th Floor
New York, NY 10001
212-594-6747
212-594-6717 (fax)
[email protected]
 Stockton Williams
The Enterprise Foundation
415 2nd Street, NE, 2nd Floor
Washington, DC 20002
202-543-4599, Ext. 15
202-543-8130 (fax)
[email protected]

                                

  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.

                                
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