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



 
   PRESIDENT'S FISCAL YEAR 2005 BUDGET WITH AN OFFICIAL OF THE U.S. 
                       DEPARTMENT OF THE TREASURY

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

                                HEARING

                               before the

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

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 11, 2004

                               __________

                           Serial No. 108-38

                               __________

         Printed for the use of the Committee on Ways and Means







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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

Advisories announcing the hearing................................     1

                                WITNESS

U.S. Department of the Treasury, Hon. Pamela F. Olson, Assistant 
  Secretary for Tax Policy; accompanied by Gregory F. Jenner, 
  Deputy Assistant Secretary for Tax Policy......................     6

                       SUBMISSIONS FOR THE RECORD

Coalition for Fair International Taxation, statement and 
  attachment.....................................................    39
Credit Union National Association, Inc., statement...............    42
Equipment Leasing Association of America, Arlington, VA, 
  statement......................................................    44
National Association of Realtors', Jerry Giovaniello, 
  letter.........................................................    46
R&D Credit Coalition, statement..................................    48


   PRESIDENT'S FISCAL YEAR 2005 BUDGET WITH AN OFFICIAL OF THE U.S. 
                       DEPARTMENT OF THE TREASURY

                              ----------                              


                      WEDNESDAY, FEBRUARY 11, 2004

                     U.S. House of Representatives,
                             Committee on Ways and Means,
                                              Washington, DC.

    The Committee met, pursuant to notice, at 11:10 a.m., in 
room 1100, Longworth House Office Building, Hon. Bill Thomas 
(Chairman of the Committee) presiding.
    [The advisory and revised advisory announcing the hearing 
follow:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
February 04, 2004
FC-14

                      Thomas Announces Hearing on

              President's Fiscal Year 2005 Budget with an

            Official of the U.S. Department of the Treasury

    Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways 
and Means, today announced that the Committee will hold a hearing on 
President Bush's fiscal year 2005 budget tax proposals. The hearing 
will take place on Wednesday, February 11, 2004, in the main Committee 
hearing room, 1100 Longworth House Office Building, beginning at 10:30 
a.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. The 
witness will be an official of the U.S. Department of the Treasury. 
However, any individual or organization not scheduled for an oral 
appearance may submit a written statement for consideration by the 
Committee and for inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    On January 20, 2004, President George W. Bush delivered his State 
of the Union address in which he outlined numerous budget and tax 
proposals. The details of these proposals were released on February 2, 
2004, when the President submitted his fiscal year 2005 budget to the 
Congress.
      

FOCUS OF THE HEARING:

      
    The Treasury official will discuss the details of the tax proposals 
in the President's budget.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person or organization wishing to submit written 
comments for the record must send it electronically to 
hearingclerks.waysandmeans@ mail.house.gov, along with a fax copy to 
(202) 225-2610, by close of business Wednesday, February 25, 2004. In 
the immediate future, the Committee website will allow for electronic 
submissions to be included in the printed record. Before submitting 
your comments, check to see if this function is available. Finally, due 
to the change in House mail policy, 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. 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 WordPerfect 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. All 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.

                                 

                   * * * NOTICE--CHANGE IN TIME * * *

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
February 05, 2004
FC-14-Revised

                     Change in Time for Hearing on

              President's Fiscal Year 2005 Budget with an

            Official of the U.S. Department of the Treasury

    Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways 
and Means, today announced that the Committee hearing on the 
President's fiscal year 2005 budget with an official of the U.S. 
Department of the Treasury, scheduled for Wednesday, February 11, 2004, 
at 10:30 a.m., in the main Committee hearing room, 1100 Longworth House 
Office Building, will now be held at 11:00 a.m.
      
    All other details for the hearing remain the same. (See full 
Committee Advisory No. FC-14, dated February 4, 2004.)

                                 

    Chairman THOMAS. Good morning. We must not have any out-of-
town visitors. As soon as I sat down, everybody rushed to their 
seat and quietly anticipated the beginning of the hearing. So, 
welcome, all you old-timers. Today we welcome Assistant 
Secretary for Tax Policy Pamela Olson, who is accompanied by 
Mr. Jenner.
    I want to tell you how much I have appreciated your know-
how, comprehension of tax policy, the way you have been open to 
the Committee when we have needed information.
    I welcome Gregory Jenner, and let me say that oftentimes we 
often forget that public service, while it is important, is 
also something that is very difficult in today's society, one, 
because if you find someone competent and capable in that 
public service, the private sector can be very alluring, 
because they have the ability to outbid us in every instance; 
but in addition to that we see each other as Members and 
witnesses, Assistant Secretary and Members, when, in fact, we 
are real people, we have families, loved ones, and 
responsibilities that are sometimes extremely difficult to 
juggle as we think our family is entitled to while we pursue 
sometimes very demanding, but almost always enormously time-
consuming careers.
    So, for all of those reasons, I believe Ms. Olson has 
decided to terminate her current activity in the public sector. 
I want to wish you well in the private sector and in your 
ongoing and growing teenage and preteen family 
responsibilities.
    Once again, we are faced with the whole tax agenda, 
including several tax relief initiatives from the President in 
his budget for individuals and job creators. The President's 
aggressive economic policies have produced record growth, and I 
note unemployment now has dropped over the last 5 months faster 
than it has in the last 10 years.
    A number of important tax relief measures are set to expire 
this year, and everyone says it is difficult to do things 
during an election year, but I do think not addressing some of 
these programs, not necessarily all of them, but some of these 
programs, would be a real disservice to the economy, to 
individual commercial sectors, to employees, and a number of 
other ramifications.
    I know that we have not finished our business with 
corporate America. There may be some questions directed toward 
that area, Ms. Olson, in terms of studies that you have taken. 
The public has seen only the tip of the iceberg in terms of 
investigations of corporate misbehavior, and, as we wind our 
way through the justice system, it always seems to take longer 
than anyone realizes, but we are anxious to wait, if necessary, 
to get the kind of information necessary to pass good law, if 
law seems to be necessary in this particular area. Mr. Jenner 
will, in all probability, be involved as we move forward in 
looking at ways in which, in deed as well as word, people who 
assume significant fiduciary responsibilities, if they do not 
have the internal moral compass to drive them, can at least 
face an objective public one. It is going to be difficult, but 
I think it still needs to be done.
    The other thing that I am very much concerned about is the 
fact that we are fast approaching March 1st, which is, I think, 
the last possible time the Europeans can back up in fulfilling 
the World Trade Organization (WTO) requirement that we deal 
with foreign sales corporation (FSC) language. I am concerned 
that we are running out of time, and that as we slip into 
exposure to retaliation for our failure to repeal this 
provision, it is absolutely the wrong time in our economic 
timing and certainly for the world's economic timing to not 
address this in a forthright way. Anything you can do to assist 
us in perhaps a packaging concern would be very helpful.
    You have some loophole closing; other people call it tax 
increases. I am pleased to have you before us because, although 
we do appreciate the view of the President's budget and tax 
policies from 30,000 feet, we are, in essence, the House's foot 
soldiers, and we are on the ground, and we need to ask you some 
questions about both tactical and topography aspects as we move 
forward.
    So, with that, I will recognize the gentleman from New York 
for any statement he may 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, we welcome the Treasury Department's Assistant 
Secretary for Tax Policy, Pamela Olson, for her final appearance before 
this Committee. Ms. Olson, we appreciate the know-how and comprehension 
of tax policy you brought to the Treasury Department and the insights 
you shared with this Committee. We wish you luck as you move forward. 
Also joining us is Gregory Jenner, who will serve as the acting 
Assistant Secretary for Tax Policy after Ms. Olson's departure. 
Welcome, we look forward to hearing your testimony.
    Once again this year, we are faced with a full tax agenda, 
including several tax relief initiatives for individuals and job 
creators. The President's aggressive economic policies have produced 
record rates of growth, which in turn will channel increased federal 
revenues into the Treasury--helping to reduce the deficit and bring 
balance to our federal budget.
    A number of important tax relief measures are set to expire in 
2004. Congress must make these tax cuts permanent to prevent a tax hike 
on Americans and their families. This tax relief not only gave back 
American workers some of their hard-earned money, but also was 
impeccably timed to help get the U.S. economy back on track after 
facing recession, corporate scandals, and the horrific acts of 
terrorism on September 11, 2001. Allowing this tax relief to expire--
when our economy is resuming strong, steady growth--would reverse the 
positive economic changes tax relief has delivered.
    We are also quickly approaching March 1st, the European Union's 
target date to begin billions of dollars worth of retaliation against 
some of America's most sensitive industries. Last year, the Committee 
passed legislation to not only prevent a trade war, but also create 
American jobs and make U.S. companies and workers more competitive. The 
House must now act to ensure U.S. farmers and manufacturers are not the 
brunt of this retaliation.
    Ms. Olson, we look forward to discussing these proposals, as well 
as Treasury's initiatives to close loopholes and improve tax 
compliance. However, before we begin, I would like to recognize the 
gentleman from New York, Mr. Rangel, for any opening statement he has 
at this time.

                                 

    Mr. RANGEL. Thank you, Mr. Chairman. Good luck to you, 
Secretary Olson, in whatever you do in the private sector. It 
is a little disappointing for me to hear that you are leaving, 
because Secretary Snow spoke in such broad general terms about 
how some of these problems would be handled. He said not to 
worry about the specifics, that you will be here to guide us 
through this, so that we have cut the budget in half, created 
more jobs, and have America back in line with the prosperity 
that we enjoyed in prior Administrations, but at least you can 
share with us in your testimony the direction in which you 
would like to see this Committee go.
    Some of the problems that we had was with the alternative 
minimum tax (AMT) exemption. As you know, there has been no 
specifics as to how the Administration will handle this. The 
Secretary said he wanted revenue-neutral; I think the figures 
used were some $700 billion. So, it helps us, especially in the 
Minority, to hear what the Administration would want, because 
it is sometimes very difficult to find out from the Majority. 
So, I know you have some specific ideas and guidance to give 
the Committee as to how we would raise this $700 billion and 
where it would come from.
    Another problem we have is the Administration's position in 
providing incentive for offshore jobs. There was something in 
the paper where the President's adviser is indicating that this 
is a good thing to have jobs offshore, and that we should have 
even more incentives, which brings us around to the WTO ruling 
on the FSC and the extraterritorial income (ETI).
    The Chairman has a proposal where it supports the 
President's belief, if indeed it is the President's belief, as 
shared by his economic adviser, that we have to provide more 
incentives overseas, and I think that is the proposal that came 
from the Majority.
    As you well know, some of us believe that the savings we 
should have in revenue should be creating more jobs here on the 
mainland, but I do not think it has ever been clear to us where 
the President's office comes from in this tax policy, and it 
certainly should not be coming.
    When I talked with the trade representative, he said this 
was a tax issue, so I think that would be in your shop.
    We would have a lot of questions as to where we are going, 
and I do not know how long you are going to be with us so that 
you can guide us through these perilous political waters, but I 
am glad that you have been with us this far. I wish you luck 
for the future, and I do hope you will be able this morning to 
at least share with us what Secretary Snow could not, and that 
is specifically what will you be recommending in terms of 
making the tax cuts permanent, what happens with AMT, and where 
are we with the WTO problems that we have? I thank you very 
much.
    [The opening statement of Mr. Rangel follows:]
Opening Statement of the Honorable Charles B. Rangel, a Representative 
                 in Congress from the State of New York
    Last week, Secretary Snow had the luxury of speaking in broad 
generalities, leaving the specifics of the budget proposals for others.
    Today's witnesses are faced with a more difficult job, actually 
helping this Committee understand the specifics of the tax proposals in 
the President's budget.
    Secretary Snow's testimony left me with many questions.
    For example, last week he testified that failure to extend a 
current tax benefit is, in effect, a tax increase. But he failed to 
explain why the President's budget did not extend the current level of 
the AMT exemption.
    By Secretary Snow's definition, the President's own budget 
advocates a large tax increase that will hit families from high tax 
states such as New York, California, and many midwestern states the 
hardest.
    Last week, Secretary Snow spoke of a revenue neutral solution to 
the problem of the expanding alternative minimum tax. I am hopeful that 
our witnesses today may help this Committee understand where the needed 
$700 billion will come from.
    I agree with Secretary Snow's testimony last week that we need to 
comply with the WTO ruling on our FSC/ETI international tax provisions. 
I am hopeful that the witnesses today will provide Treasury's position 
concerning the bill previously reported by this Committee and the bill 
reported by the Senate Finance Committee.
    Last year, the President's budget recommended that all of the 
revenue from repeal of the current FSC/ETI benefits should be used to 
expand tax benefits for the offshore operations of U.S. multinationals. 
Essentially, the Bush Administration was recommending a tax increase on 
U.S. manufacturers in order to fund benefits for companies that have 
moved their manufacturing and other operations offshore.
    Since this is now an election year, this year's Administration 
budget concerning FSC/ETI is not as clear. However, the President, in 
his budget, continues to argue that our companies need more tax 
benefits for their offshore operations. Last Week, Treasury Secretary 
Snow testified that enacting these offshore tax benefits remains an 
important goal for the Administration.
    I was surprised to find that the Economic Report of the President, 
as reported by the L.A. Times, ``endorses . . . outsourcing high-end, 
white-collar work to India and other countries.'' And the Chairman of 
Bush's Council of Economic Advisors says that ``Outsourcing is just a 
new way of doing international trade'' and that ``More things are 
tradable than were tradable in the past. And that's a good thing.''
    If outsourcing is a result of natural economic forces, I hope you 
will explain why the Administration feels it is so important to give 
companies additional tax incentives encouraging outsourcing and the 
relocation of jobs off-shore.
    I look forward to your testimony and your responses to questions on 
the specifics of the President's budget.

                                 

    Chairman THOMAS. Thank the gentleman. Your written 
testimony will be made part of the record, and you can address 
us as you see fit in the time that you have.

STATEMENT OF THE HONORABLE PAMELA F. OLSON, ASSISTANT SECRETARY 
FOR TAX POLICY, U.S. DEPARTMENT OF THE TREASURY; ACCOMPANIED BY 
  GREGORY F. JENNER, DEPUTY ASSISTANT SECRETARY FOR TAX POLICY

    Ms. OLSON. Thank you. Mr. Chairman, Mr. Rangel, 
distinguished Members of the Committee, I appreciate the 
opportunity to appear before you today to discuss the tax 
proposals included in the President's fiscal year 2005 budget. 
I am going to give a fairly brief statement, and then we will 
leave plenty of time for you for questions on some of the 
specific issues.
    Over the last 3 years, the President and Congress have 
responded with courage to the recession and to external crises 
that put an extraordinary strain on our economy. The bursting 
of the high-tech bubble, the revelation of corporate accounting 
problems, September 11th, the uncertainties of the war on 
terror and global conflicts have contributed to the recession 
and prolonged the weakness in the economy. Those came on top of 
the remarkable global political, economic and technological 
changes that have occurred during the past 15 years.
    Fiscal policy has played a crucial role in responding to 
these events. In 2001, many doubted that the legislative 
process could move fiscal policy rapidly enough for the effects 
to have an impact on an economic downturn. You have proved them 
wrong. The tax cuts enacted in 2001 were an important factor in 
making the downturn one of the shallowest on record, providing 
support to a weakening economy in a critical juncture.
    The stimulus bill enacted in 2002 provided vital support to 
the economy in a key area of weakness, corporate investment. 
The temporary bonus depreciation provision, for example, 
provided the needed incentive for new corporate investment at 
just the right time.
    The 2003 tax cut provided the needed lift to help the 
nascent recovery to continue and gain strength. Immediate 
support to the economy was provided through the acceleration of 
lower tax rates, expansion of the child credit, and marriage 
penalty relief.
    Weakness in corporate investment was addressed by reducing 
the double tax on corporate income. This change lowered the 
cost of equity capital and provided an important stimulus to 
corporate investment. The increase in small business expensing 
and bonus depreciation provided additional stimulus to 
corporate investment.
    These changes are leading to a robust economic recovery, 
and the recovery is beginning to put Americans back to work. 
Moreover, the tax cuts enacted will continue to spur economic 
growth. The tax changes have also laid the groundwork for 
strong economic growth in the future. The lower tax rates 
improve incentives. After-tax rewards from working are now 
substantially higher. The rewards to innovation and risk-taking 
are greater. The cost of equity capital and investing has been 
reduced. More risk-taking, investment, and innovation mean 
higher productivity and greater capital accumulation. A larger 
capital stock translates into higher living standards for all 
in the future.
    The tax cuts enacted have been fair and balanced, and now 
we must turn to eliminating the economic uncertainty created by 
their temporary nature by making them permanent.
    In addition, we must take steps to address other national 
priorities: increasing the personal savings rate, making health 
care more affordable, reducing the barriers to home ownership, 
simplifying the tax laws, ensuring the integrity of the tax 
system by preventing abusive transactions, and responding to 
the WTO decision on the ETI provisions.
    The savings provisions in the budget further promote an 
ownership society by removing barriers to savings, reducing 
complexity and improving fairness by providing the benefits of 
tax-preferred savings to everyone regardless of financial 
sophistication or capacity to save for the very long term. The 
single-family housing tax credit would similarly reduce the 
barrier to an ownership society by increasing construction or 
rehabilitation of affordable homes for lower-income 
individuals.
    In addition, the President's budget reflects the importance 
of preserving defined benefit pension plans and the benefit 
they provide to workers and their families regarding this form 
of pension coverage.
    We must address the rising costs of health care, and we 
must expand access to health insurance. These are complex 
issues for which there is no single solution. The President's 
proposal for a refundable, advanceable health insurance tax 
credit would help make insurance more affordable for lower-
income individuals. The credit amount under the proposal would 
vary with family size, mirroring the relationship of actual 
health insurance premiums.
    Health savings accounts (HSAs) are a significant step 
toward promoting cost-consciousness through greater reliance on 
individual choice and high-deductible plans. The President's 
budget includes above the line deductions to purchase the high-
deductible health plans necessary to have an HSA, helping to 
level the playing field for a segment of the population that 
does not have employer-sponsored coverage.
    The present tax system imposes compliance costs on 
taxpayers, estimated to range from $70 billion to $100 billion 
per year, just from the individual income tax. The complexity 
undermines confidence in the system, and the compliance costs 
represent a serious loss to the economy. For these reasons it 
is crucial that we begin efforts to simplify the tax laws. The 
President's budget includes several new simplification 
proposals that would address complexities borne by individuals 
and families. We look forward to working with the Committee on 
this effort.
    Confidence in the tax system is also undermined by the use 
of abusive transactions to avoid taxes rightfully owed. For the 
past 3 years, the Administration has acted aggressively to 
restore confidence in the tax system by halting the promotion 
of abusive transactions and bringing taxpayers back into 
compliance with the tax laws. The President's budget builds on 
these efforts and information gathered through the Internal 
Revenue Service (IRS) compliance programs. The new legislative 
proposals close loopholes and target identified abusive 
transactions and practices.
    One proposal deserves particular mention. The 
Administration has proposed to limit certain types of abusive 
leasing transactions, known as sale-in, lease-outs (SILOs). 
These arrangements are entered into with tax-indifferent 
parties, such as foreign governments, domestic municipalities, 
and tax-exempt organizations. They purport to be leasing 
transactions, but, in substance, provide no financing to the 
tax-indifferent party aside from a fee for the claimed transfer 
of a tax benefit.
    The SILOs represent a threat to the viability of the 
corporate tax base. It is essential that Congress address this 
issue promptly, but do so without interfering with leasing 
transactions that involve legitimate financing or refinancing 
of assets. We believe the proposal in the President's budget 
leaves legitimate transactions unscathed, while preventing 
abusive lease transactions from going forward.
    Honoring our WTO obligations requires repeal of the ETI 
provisions. At the same time, meaningful changes to our tax law 
are required to preserve and enhance the competitiveness of 
U.S. businesses operating in the global marketplace. We look 
forward to continuing to work with the Congress on prompt 
enactment of legislation that brings our tax law into 
compliance with the WTO rules.
    Thank you, again, Mr. Chairman, Members of the Committee, 
for the opportunity to appear before you today. I appreciate 
the opportunity that I have had to work with Committee Members 
and staff over the past 3 years, and I can assure you that I am 
leaving the Office of Tax Policy in very good hands and with a 
very talented staff. Thank you.
    [The prepared statement of Ms. Olson follows:]
Statement of the Honorable Pamela F. Olson, Assistant Secretary for Tax 
  Policy, U.S. Department of the Treasury; accompanied by Gregory F. 
           Jenner, Deputy Assistant Secretary for Tax Policy
    Mr. Chairman, Congressman Rangel, and distinguished members of the 
Committee:
    Thank you for the opportunity to appear before you today to discuss 
the tax proposals included in the President's Fiscal Year 2005 Budget.
    Over the last three years, the President and Congress have 
responded with courage to the recession and to a number of external 
crises that put additional, extraordinary, strain on that economy. The 
end of the high-tech bubble and its consequences for the stock market, 
the revelation of years of wrong-doing on the part of certain 
corporations and their executives, the impact of the September 11 
attacks, and the uncertainties of the war on terror and the conflicts 
in Afghanistan and Iraq, are all at the root of the recent economic 
difficulties. These events worsened and prolonged the weaknesses in the 
economy.
    Fiscal policy has played a crucial role in responding to these 
events. The tax cuts enacted in 2001 were an important factor in making 
the downturn one of the shallowest on record. Together with an 
expansionary monetary policy embodied in a series of deep interest rate 
cuts, the tax cuts provided support to a weakening economy at a 
critical juncture. The stimulus bill enacted in 2002 provided vital 
support to the economy in a key area of weakness--corporate investment. 
The temporary bonus depreciation provision, for example, provided the 
needed incentive for new corporate investment at just the right time.
    While the tax cuts of 2001 were essential to keep the recession 
from deepening, the 2003 tax cut provided the needed lift to allow the 
nascent recovery to continue and gain strength. Immediate support to 
the economy was provided through the acceleration of the lower tax 
rates, expansion of the child credit, and marriage penalty relief. 
Weakness in corporate investment was addressed by reducing the double 
tax on corporate income through the lower tax rate on dividends and 
capital gains. This change lowered the cost of equity capital and 
provided an important stimulus to corporate investment. The increase in 
small business expensing and bonus depreciation provided additional 
stimulus to corporate investment.
    With these vital changes in tax policy, we now have a robust 
economic recovery with strong economic growth and tightening labor 
markets that are beginning to put Americans back to work. Moreover, the 
tax cuts already enacted will continue to spur economic growth. The 
Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) will put another 
$146 billion into the economy this year with $100 billion in the first 
half of the year.
[GRAPHIC] [TIFF OMITTED] 93793A.001

    But the tax changes enacted over the past three years have done 
much more than address and respond to the economic difficulties and 
crises we have faced. They also laid the ground work for strong 
economic growth in the future. The lower tax rates improve incentives. 
After-tax rewards from working are now substantially higher. The taxes 
paid by entrepreneurs, who tend to pay taxes through the individual 
income tax, are now lower. The rewards to their innovation and risk-
taking are greater. The cost of equity capital and investing has been 
reduced. More risk-taking, investment, and innovation mean higher 
productivity and greater capital accumulation. A larger capital stock 
translates into higher living standards for all in the future.
    Moreover, the tax changes enacted over the past several years have 
been fair and balanced. Without the tax cut, the bottom 50 percent of 
taxpayers would have paid slightly more than 4 percent of individual 
income taxes. As shown on the chart below, now they pay even less--3.6 
percent. In contrast, the top 5 percent of taxpayers pay a larger 
share--52.8 percent of individual income taxes rather than 50.2 percent 
without the tax cuts. The same is true for the highest income 
taxpayers--the top 1 percent.
[GRAPHIC] [TIFF OMITTED] 93793A.002

    This group now pays 32.3 percent of all individual income taxes, 
rather than 30.5 percent before the tax cuts were enacted.
    Much remains to be done, however. Making the tax cuts enacted in 
2001 and 2003 permanent, promoting savings, making health care more 
affordable, reducing the barriers to home ownership, simplifying the 
tax system, ensuring the integrity of the tax system by preventing 
abusive transactions, and responding to the WTO decision on the 
extraterritorial income exclusion (ETI) provisions are all important 
priorities reflected in the President's budget proposals. I will focus 
on each of these priorities in turn.

Permanence: A Stable, Certain Tax Code

    The tax reductions made in the Economic Growth and Tax Relief 
Reconciliation Act of 2001 (EGTRRA) and JGTRRA proved essential for 
promoting economic growth and will help to ensure higher living 
standards in the future. If these provisions are allowed to sunset, 
taxes will increase: for many individuals after 2004, for many small 
businesses in 2006; for investors beginning in 2009, and again for most 
taxpayers beginning in 2011.
    An uncertain tax code imposes real costs on the economy. 
Uncertainty makes it difficult for workers and businesses to plan for 
the future and increases investment risk. The possibility of higher 
taxes increases the cost of equity capital to businesses and reduces 
individuals' after-tax rewards to working and investing. A higher cost 
of equity capital and lower rewards to workers and investors dampen 
long-run economic growth.
    Permanent extension of the tax cuts enacted by the President and 
the Congress will provide a more certain tax environment for workers 
and businesses to plan and invest, both reducing complexity and 
continuing to support a growing economy. The revenue cost of making the 
tax cuts permanent ($989 billion) is only a small percentage of the 
revenue of the federal government over the 10-year budget window. 
Moreover, the cost is only a tiny fraction of the United States economy 
over this same period.
    In addition to uncertainty, failure to make the tax cuts permanent 
will inflict a real blow to the economy. Allowing the tax cuts to 
expire amounts to nothing more than a massive tax increase on the vast 
bulk of individual and business taxpayers.

Towards a Long-Term Solution to the AMT

    The expected growth in the individual alternative minimum tax (AMT) 
is a major problem in the tax code that must be addressed. The AMT was 
first enacted in the late 1960s to target a small number of very high 
income taxpayers who paid little or no tax. The stage was set for the 
AMT's growth when the regular tax was indexed in the early 1980s but 
the AMT was not. Other changes throughout the 1980s and 1990s 
compounded the problem.
    Now the AMT is a tax that is beginning and will continue to affect 
increasing millions of taxpayers. It will reach into the ranks of the 
middle class, potentially denying taxpayers the benefit of many of the 
deductions, credits and lower tax rates available under the regular tax 
system. The AMT also significantly increases the complexity of tax 
filing for taxpayers subject to the AMT and for millions of additional 
taxpayers who must complete AMT forms only to determine they are not 
subject to the AMT.
    The AMT's future growth must be addressed. The President's budget 
extends through 2005 the temporary increase in the AMT exemption 
amounts and the provision that allows certain personal credits to 
offset the AMT. These temporary provisions will keep the number of 
taxpayers affected by the AMT from rising significantly in the near-
term. More importantly, they will allow the Treasury Department the 
time necessary to develop a comprehensive set of proposals to deal with 
the AMT in the long-term. Because of the revenues involved and the 
number of taxpayers affected, any long-term solution to the AMT could 
well require significant changes to the regular income tax. The 
Treasury Department looks forward to its task and to working with this 
Committee to find a long-term solution.

Simpler Savings Options for All

    Americans continue to save at a very low rate relative to 
historical standards and our major trading partners. The President has 
put forward in this year's Budget a modified version of his savings 
proposal to help address this low rate of saving. The proposal 
carefully balances the need for a simpler approach for providing 
accessible tax-preferred savings options to all Americans and 
preserving the employer-provided pension system, which has been the 
foundation for meeting the retirement savings needs for millions.
    Saving is made simpler by replacing the existing web of tax-
preferred saving options with two new savings vehicles: Retirement 
Savings Account (RSAs) and Lifetime Savings Accounts (LSAs). These 
savings vehicles allow everyone to contribute regardless of age or 
income. The simplicity of these new savings vehicles will help 
encourage individuals, especially lower income individuals, to save.
    Lower income individuals often do not have the resources to save 
for the distant future and are unwilling to take the risk of locking up 
their savings in tightly restricted accounts. In addition, these 
individuals tend not to have access to the sophisticated advice needed 
to navigate the complex, and often conflicting, rules that govern the 
existing savings vehicles. LSAs have been designed to make the decision 
easy: it is a savings vehicle accessible for all, especially low and 
moderate income individuals. Any money contributed can be withdrawn at 
any time without penalty. Treasury believes that these more relaxed 
rules will encourage individuals to save who might otherwise not do so 
in targeted savings plans because of restrictions on and penalties for 
withdrawals. As individuals learn to save, and become comfortable doing 
so, they will do more of it. The lower $5,000 contribution limit, as 
compared to the proposal in the FY 2004 Budget, will minimize the 
effect of these proposals on employer plans.
    The proposal for RSAs would simplify the range of choices for 
taxpayers saving for retirement. The proposal takes the easy to 
understand Roth IRA and makes it available to all. Any taxpayer can 
contribute up to the lesser of $5,000 or their earned income. Unlike 
current law, however, withdrawals could only be made for retirement, 
beginning at age 58. RSAs are the perfect complement to LSAs: targeted, 
tax-favored savings coupled with savings for any reason.
    The proposal for Employer Retirement Savings Accounts (ERSAs) would 
consolidate six different types of employer contributory plans into a 
universal account. The proposal has been modified from the previous FY 
2004 Budget proposal to enhance flexibility and encourage small 
businesses (10 or fewer employees) to fund an ERSA by contributing to a 
custodial account, which is similar to a current-law IRA.
    A third proposal would credit Individual Development Accounts 
(IDAs) to encourage and assist lower-income individuals to save. This 
proposal would provide dollar-for-dollar matching contributions of up 
to $500 targeted to lower income individuals. Matching contributions 
would be supported by a 100 percent credit to sponsoring financial 
institutions.
    Together, these proposals further promote an ownership society by 
removing barriers to savings, reducing complexity, and improving 
fairness by providing the benefits of tax preferred savings to 
everyone, regardless of financial sophistication or capacity to save 
for the very long-term.

Reducing Barriers to Homeownership

    A significant barrier to homeownership continues to be the supply 
of affordable housing for lower income individuals. To address that 
need, the President has proposed a $2.4 billion ($16 billion over 10 
years), 5-year Single-Family Affordable Housing Tax Credit of up to 50 
percent of the project costs of rehabilitation and construction of 
affordable homes, provided they are offered to homebuyers with incomes 
of not more than 80 percent of area median income. The tax credit would 
eventually result in an additional 200,000 affordable single-family 
homes becoming available through construction or rehabilitation.

Affordable Health Care is a Priority

    Expanding access to health insurance remains an important goal of 
the President and is reflected by his continued commitment in this 
area. The lack of access to affordable health insurance is a complex 
problem that requires a comprehensive approach focusing on different 
segments of the uninsured with policies tailored to meet their needs. 
There is no one size fits all solution; a policy that excels in one 
dimension may do poorly in others. The high and rising cost of health 
insurance is a key factor that limits access. Policies that help 
control costs will make insurance more affordable through lower 
premiums.
    Health Savings Accounts (HSAs), enacted as part of the recently-
passed Medicare Reform legislation, are a significant step towards 
promoting cost consciousness through greater reliance on individual 
choice and high deductible plans. HSAs, now part of current law, are 
complemented by a new proposal in the President's Budget for an above-
the-line deduction for premiums to purchase the high deductible health 
plans (HDHP) necessary in order to have an HSA. The proposal generally 
helps level the playing field for a segment of the population that does 
not have employer-sponsored coverage.
    The proposal for a refundable, advanceable health insurance tax 
credit would help make insurance more affordable for lower income 
individuals. The credit amount under the proposal would vary with 
family size, mirroring the relationship of actual health insurance 
premiums. The credit is targeted to low-income individuals and 
families, who are the least likely to have employer-based health 
insurance, resulting in the efficient use of the subsidy. Together, 
these policies promote affordability and access, and help encourage 
greater cost consciousness by giving individuals a greater stake in 
their health care choices.

Protecting Defined Benefit Plans and Promoting Fair Treatment for
 Older Workers in Conversions to Cash Balance Plans

    The President's budget reflects the importance of preserving 
defined benefit pension plans and the benefits they provide to workers 
and their families. In addition to the proposal to fix the flawed 
interest rate used to determine the amount of contributions a plan 
sponsor must make to its defined benefit plan, the budget contains 
three interrelated proposals that recognize the importance of cash 
balance plans in providing retirement security to millions of 
Americans. The first proposal would ensure that companies converting 
from a traditional defined benefit plan to a cash balance pension 
include a fair transition for older workers. A five-year hold harmless 
provision would be required in a cash balance conversion, so that 
workers would continue to earn benefits under the greater of the prior 
plan formula or the cash balance formula for five years after the 
conversion. The second proposal would clarify that cash balance plans 
do not violate the age-discrimination rules that apply to pension plans 
as long as they treat older workers at least as well as younger 
workers. This would remove uncertainty created by inconsistent federal 
court decisions and would ensure the future of cash balance plans. The 
final proposal would eliminate the ``whipsaw'' effect, which acts as an 
effective cap on the interest credits that cash balance plans can 
provide to workers. This would permit companies to give higher interest 
credits, allowing larger retirement accumulations for workers.

Simplification of an Overly Complex Tax Code

    In a sophisticated economy, a tax code with complex provisions may 
be unavoidable. It is the price we pay to ensure fairness, to limit 
government interference with personal and business decisions, and to 
prevent abuse. On the other hand, unnecessary complexity imposes 
tremendous burdens on honest taxpayers simply doing their best to 
comply with the law. The present tax system imposes compliance costs on 
taxpayers estimated to range from $70 billion to $100 billion per year 
from the individual income tax alone. Compliance costs also are onerous 
for business taxpayers, especially small businesses, while the typical 
Fortune 500 company spends almost $4 million a year on tax matters.
    For these reasons, it is crucial that we continue efforts to 
simplify the tax laws. The 2005 Budget includes several new 
simplification proposals. All of these proposals address complexities 
borne by individuals and families. They do not represent an exhaustive 
list; instead, they serve as examples of the many steps that can and 
should be taken to make the tax code easier to understand and comply 
with. The Treasury Department looks forward to working with this 
Committee to identify other areas where significant improvements can 
and should be made.

Stopping Abusive Transactions

    Voluntary compliance with the tax laws is undermined when taxpayers 
use abusive transactions to avoid paying the taxes they rightfully owe. 
For the past three years, the Administration has acted aggressively to 
restore confidence in the tax system by halting the promotion of 
abusive transactions and bringing taxpayers back into compliance with 
the tax laws. The President's Budget builds on these efforts and 
information gathered through IRS compliance programs. The new 
legislative proposals close loopholes and target identified abusive 
transactions and practices. As other abusive transactions are 
identified, the IRS will challenge the transactions in audits, and the 
Treasury Department and the IRS will work with Congress to enact any 
legislation necessary to address such transactions.
    One proposal deserves particular mention. The Administration has 
proposed to limit certain types of abusive leasing transactions, known 
as SILOs. These arrangements are entered into with tax-indifferent 
parties, such as foreign governments, domestic municipalities, and tax-
exempt organizations. They purport to be leasing transactions but, in 
substance, provide no financing to the tax-indifferent party aside from 
a fee. These arrangements have no meaningful financial or economic 
utility other than the transfer of tax benefits to a U.S. taxpayer (by 
means of a purported ``sale'' of property) in exchange for the payment 
of an accommodation fee to the tax-indifferent party.
    Although Treasury has been aware of SILOs for some time, the extent 
of the problem has only recently come to light. Our data indicates that 
as much as $750 billion dollars of SILOs have been done in just the 
last four years. We have every reason to believe that, left unchecked, 
this trend will continue and grow. Because these transactions 
essentially involve no risk to either party, and require very little in 
the way of actual cash investment, corporations seeking to reduce their 
U.S. tax liability will face no economic bar to seeking out these 
arrangements on an increasing basis.
    SILOs represent a threat to the viability of the corporate tax 
base. They present a ready-made tool for self-help tax relief for large 
corporations and consortiums of smaller ones. Indeed, the magnitude of 
SILO transactions is such that the Treasury Department had to re-
estimate and reduce its baseline estimate of corporate tax receipts 
over the ten-year budget window. It is essential that Congress deal 
with this issue. Otherwise, any corporation with the wherewithal to do 
so could plan itself out of the corporate income tax. The American 
citizenry rightfully expect their government to ensure that all 
taxpayers pay the taxes they owe, unreduced by artificial transactions. 
Congress should act promptly to ensure that SILOs are not permitted to 
continue.
    At the same time, in addressing the SILO problem, it is not our 
goal to interfere with garden variety leasing transactions that have 
been entered into for many years and that involve legitimate financing 
or refinancing of assets. The detailed SILO proposal in the President's 
budget permits legitimate lease transactions to continue. We look 
forward to working with this Committee to ensure that legislation is 
enacted that leaves legitimate transactions unscathed while preventing 
abusive lease transactions from going forward.

Responding to WTO Decisions on ETI Provisions

    The Extraterritorial Income (``ETI'') provisions of our tax law, 
like the prior-law foreign sales corporation provisions, have been 
found to be inconsistent with World Trade Organization (WTO) rules. The 
WTO has authorized the imposition of trade sanctions against U.S. 
exports up to the level of $4 billion per year, and the European Union 
has adopted a plan providing for sanctions to be phased in beginning 
next month if the ETI provisions remain in the law.
    Honoring our WTO obligations requires repeal of the ETI provisions. 
At the same time, meaningful changes to our tax law are required to 
preserve and enhance the competitiveness of U.S. businesses operating 
in the global marketplace. Thus, the necessary repeal of the ETI 
provisions should be coupled with other tax changes that promote the 
competitiveness of American manufacturers and other job-creating 
sectors of the U.S. economy. Tax law changes that would provide a 
benefit to these vital contributors to the U.S. economy include across-
the-board corporate tax rate reduction, expansion and permanence of the 
research credit, improvements in depreciation rules, extension of NOL 
carryback rules, AMT reform, business tax simplification, and 
rationalization of the international tax rules. The Administration 
intends to continue to work with this Committee and the Congress on 
prompt enactment of legislation that brings our tax law into compliance 
with WTO rules and makes changes to the tax law to enhance the global 
competitiveness of American businesses and the workers they employ.

Conclusion

    Thank you again, Mr. Chairman and members of the Committee, for the 
opportunity to appear before you today. We look forward to working 
together with this Committee and others in the Congress to promote tax 
policies that continue to provide a sound foundation for economic 
growth.

                                 

    Chairman THOMAS. I thank you very much. One of the reasons 
some of us like these sessions is so we can get into details 
quickly and expect answers.
    On the leasing proposal that you outlined, pretty 
obviously, it is fairly broad and getting broader. Whenever I 
see more of something, it is because it is a good deal for 
somebody.
    I am very much concerned about the idea that an indifferent 
party is able to do something with a, quote/unquote, benefit it 
cannot use in transferring it to someone else. We had a major 
internal debate over that very same concept in the energy bill 
when the term at that time was tradable credits, and I find it 
kind of interesting that you cannot use it, but if you can 
trade it to someone else, they get to use it, which, in a more 
fundamental sense, brings into question the whole concept of a 
tax credit as an appropriate vehicle in which to make 
decisions. We will leave that for another day.
    In some of these business transactions that I have looked 
at, one, it is very, very complicated and very clever. 
Everybody is a whole lot more familiar with leasing than they 
used to be 10 years ago. Most people are probably familiar with 
leasing of relatively expensive items like automobiles, where 
you get away from a significant front-end payment. Your monthly 
payments are lower, because you are not trying to amortize the 
cost over a period of time. Maintenance is usually thrown in, 
and if you are going to be making monthly payments anyway, why 
not walk away from a 3-year-old car in 3 years and get a new 
one and continue to make payments? The commitment, of course, 
is that you are going to continue making payments for the rest 
of your life.
    So, I do think there are legitimate reasons to lease in 
your analysis you go through, and I think as we look at them in 
some details, some of them make sense. However, now you take 
the money, invest it for payback over a period of time, a 99-
year lease is currently defined as ownership. Does that need to 
be changed?
    There are just a whole lot of hinge points, I think, that 
we need to get into detail, because Members' first reactions 
from cities, counties, States, special districts are that we 
are into this up to our eyeballs, and please do not stop it.
    The one, the fifth one, is the one that I do not fully 
understand. I want you to spend just a minute or two at least 
explaining how you would arrive at it, because the fifth 
criteria or test that you advocate is the lease is not 
identified as abusive in a U.S. Department of the Treasury 
regulation.
    My first reaction is Potter Stewart's definition of 
obscenity: ``I cannot define it, but I know it when I see it,'' 
so show me one of these, and then I will look at it to decide 
whether it's been abusive or not.
    What can we hang onto in terms of more objective criteria 
that Treasury will begin to look at as to what is abusive or 
not? If I normally make a 15-percent profit on arm's-length 
business, leasing transactions, if I only make a 2-percent 
profit, is the amount of profit reaching an abusive point where 
it is not really a profit, but an attempt to show that I have 
met the letter of the law, certainly not the spirit? Where are 
we going to know when Treasury thinks the transaction is not 
abusive?
    I guess ultimately what I am going to ask for is a 
continuum where I am sure that you could come up with leases 
that would be legitimate, and we could all come up with leasing 
arrangements that are not legitimate. The ones that are 
legitimate and the ones that are not legitimate on the far ends 
of the spectrum are obviously the ones we should be less 
concerned about. It is when you get to that point where there 
are a whole lot of new ones out there, and what is your 
observation; what are you going to use to decide that one is 
abusive, the other is not, notwithstanding these criteria which 
I am quite sure very clever corporate attorneys and others will 
begin to change the playingfield as we begin to examine it?
    It is a little open-ended, but it is going to be a major 
point of controversy if for no other reason that you are 
laying, in a very difficult budgetary time, somewhere between 
$25 and $35 billion on the table, which many people would like 
to take from the table, but they are concerned with the 
consequences of taking that concept from the table.
    Ms. OLSON. Mr. Chairman, the leasing bar has been described 
by many as among the most creative group of attorneys in the 
country, and I concur in that assessment.
    The fifth criteria that you refer to is merely authority 
for the Treasury and the IRS to address holes in the first four 
exceptions to the proposal; to the extent that the leasing bar 
finds ways to work around it, to achieve results that are 
similar to the results that they are achieving today, so that 
the effort would be focused on making sure that we do not 
inadvertently leave things out that are economically the same 
as the things that we propose to cover, and to make sure that 
the leasing bar does not find ways to work around it.
    Chairman THOMAS. Well, that is another way of just saying 
trust us. Although I happen to say I may be more inclined to do 
that in an Administration of my own party than another one, I 
am not inclined to do that with anybody in which the results 
will go far afield from where we thought they were going to go 
based upon our discussions.
    I just want to underscore this is an important area. If we 
do not lay down some kind of a bright line, it will only 
increase, in my opinion, the idea of going into a city and 
finding out that all of the municipal buildings and all of the 
vehicles and all of the assets of the city are not really owned 
by the city, but the city owned them and is leasing them back, 
and entered into more leasing arrangements; and then to find 
out it is not only domestic, but it is also international, and, 
given the complexity of tax rules, you may be able to lease the 
same item in three different countries three different ways is 
something of very great concern. In hard-pressed times, people 
do conduct, behavior, that would not ordinarily be assumed to 
be rational, and when you call them on it, who gets to do it 
and who does not is going to be a very, very sensitive 
political issue. How do you grandfather in some that are--how 
do you stop them if they are almost or just like something that 
has already occurred?
    Those are all problems that we are going to have to 
address, and, Mr. Jenner, you are going to inherit some of this 
and whoever follows on. We have to be completely open, as 
honest as we can, using specific examples, so that Members can 
understand what you are talking about in today's world, because 
there is a lot of leasing going on that I believe is totally 
legitimate for good business reasons in not having to maintain 
capital employees and others to maintenance that leasing 
activities.
    There are also, as this information comes to light, some 
amazing arrangements that are hard for somebody to say with a 
straight face are legitimate and appropriate, if not impossible 
to explain, except for the fact, quote/unquote, it happens to 
be my municipality or my major city, and so go somewhere else.
    That is going to be a very difficult problem to resolve, so 
as you identify the problems and as you work on the solutions, 
you are going to have to work very closely with us so that we 
have a comfort level in going forward. Gentleman from New York?
    Mr. RANGEL. Let me underscore: if you do not work very 
closely with us, then we Democrats have no one to work with at 
all, and so we are depending on the Administration to give us a 
little guidance so we know what is going on.
    Now, the Secretary has indicated that this AMT problem will 
cost about $700 billion in a tax increase if we do not do 
anything. Would you agree to that estimate?
    Ms. OLSON. There are a fairly wide range of estimates.
    Mr. RANGEL. What would yours be?
    Ms. OLSON. It depends on what you think a tax--depends on 
what you think making a change or not making a change would 
mean.
    Mr. RANGEL. Do you think we should make a change?
    Ms. OLSON. Yes, Mr. Rangel, I think we do need to make a 
change because right now----
    Mr. RANGEL. Do you know what that change would be?
    Ms. OLSON. No. We are not in a position to recommend what 
that change should be. We have been studying the AMT.
    Mr. RANGEL. Do you believe it should be revenue-neutral?
    Ms. OLSON. There are ways in which the AMT problem can be 
addressed that would produce revenue-neutral results. You could 
make changes to produce almost any result you want, but there 
are ways in which it could be done.
    Mr. RANGEL. Well, the Secretary suggested it should be 
revenue-neutral. Do you agree with the Secretary?
    Ms. OLSON. I think what the Secretary is referring to was 
the fact it could be done on a revenue-neutral basis, and if he 
said it should be done, I think he probably just slipped a 
couple of words. It can be done on a revenue-neutral basis.
    Mr. RANGEL. Well, if it is not done on a revenue-neutral 
basis, where would we raise the money to give the relief that I 
think you and I and the Congress believes that these people 
should get, because we are really talking about working 
families receiving a dramatic increase in taxes and also the 
fact that some of them come from high-tax States like New York 
and California, so that if we do not do anything, we are 
involved in increasing taxes, which I think we can agree that 
the Administration and the Congress would not want that to 
happen. If you are just saying that it is some way down the 
line we will find some answers to it, but we do not know what 
the Administration would want, then I will accept that, except 
that we have thought that your Department would be a little 
more specific.
    What about the problem we have with the WTO? So far, I 
haven't gotten any direction from the Administration. You talk 
with the trade ambassador. He says he is not a tax expert, that 
that is Treasury's department, not a trade department. You talk 
with the Chairman of the Committee, and he does not talk with 
you, so you talk with people on the other side that will they 
come up with something, and that is rejected.
    It might make it a lot easier for us if we found out where 
is the Administration; do you support the Chairman; do you 
support alternatives; are you involved in this at all? What do 
we say to our foreign friends when they threaten us with a $4 
billion increase in tariffs against our manufacturers? What do 
we say, that Treasury hasn't made up their mind, trade hasn't 
made up their mind, and we have a political dispute on the 
Committee?
    Ms. OLSON. Mr. Rangel, there are a number of things that 
could be done to address issues in the Tax Code with the 
revenues that will come from repealing FSC and ETI. We have 
outlined a number of those options in the budget. Many of those 
options would inure to the benefit of manufacturers in 
particular.
    I would note the AMT changes that are discussed in there. 
Manufacturers bear a particular burden from the AMT because of 
the capital-intensive nature of the business and because of the 
cyclical nature of the business. The same is true with changes 
to the net operating loss rules.
    There are a variety of things that we could do that would 
improve the tax system for manufacturers and make them more 
competitive.
    Mr. RANGEL. Madam Secretary, there is a lot of controversy 
involved in whether or not we use the revenues that we save by 
correcting the FSC problem as to whether the incentive should 
be given to American businesses that are offshore, or whether 
we should have a more equal distribution of this tax benefit, 
because by removing it the way the WTO would want, you would 
agree with me that this would be a substantial increase for our 
exporters.
    So, it is a very difficult political question, and I know 
there are many ways to do it, and, if you are saying that in 
the future, after you leave, somebody else has got to give us 
some guidance, I accept that. The Secretary was specific in 
saying that your shop was the one that dealt with these type of 
things, so we are not getting any answers from you on these 
sensitive questions.
    It is a political year, and it would be very helpful if the 
President and his Cabinet at least say that this is what I want 
you to do, but you try to work it out, because, after all, you 
are the legislators; but, if you are just going to have us have 
a food fight over these things politically, I do not really 
think the country or the Administration benefits from not 
dealing with these specific questions because they are so 
difficult politically. Thank you.
    Chairman THOMAS. I thank the gentleman. The gentleman from 
Illinois wish to inquire?
    Mr. CRANE. Thank you, Mr. Chairman.
    Chairman THOMAS. Would the gentleman yield briefly?
    Mr. CRANE. Yes, indeed.
    Chairman THOMAS. One of the things I would hope we would 
all learn from the AMT situation was that in 1986, in the tax 
bill, there was an attempt to, quote/unquote, get a group of 
people, and then in the 1993 tax bill there was a failure to 
index the way in which we were going to get a certain group of 
people.
    One of the lessons I would hope we would learn from this is 
that when we do not go back to fundamentals and we do not 
change the way in which we decide to define groups and tax 
them, you are going to find yourself in these kind of 
situations. We should have done it more fundamentally back in 
1986 and indexed it in 1993, and the consequences of not doing 
so are the current situation that we are in.
    I do want to remind people that we were not in charge at 
that time, and my hope is that whenever we do these kinds of 
tax changes, that we deal with fundamentals and not be driven 
by the desire to, quote/unquote, get certain people.
    Mr. RANGEL. Mr. Chairman, Mr. Chairman, I respect the 
prerogatives of the Chair, and I do not want to do anything to 
diminish it because I still believe that one day I will be 
Chair, but having said that, there should be some basic rules 
involved as to whether or not the Chair believes it has to 
politically respond to everything that the Minority says, 
because we have had some discussion on this subject matter, and 
that would give you about 20 much more times to pontificate 
than the rest of us. So, at some point, and perhaps not openly, 
we ought to agree on how we ought to handle that.
    Chairman THOMAS. Tell the gentleman I recognized the 
gentleman from Illinois, asked for him to yield to me, and the 
time that the Chair was speaking was on the gentleman from 
Illinois's time. The Chair recognized the gentleman from New 
York, and it will not come out of the gentleman from Illinois's 
time.
    Mr. RANGEL. I appreciate that.
    Chairman THOMAS. If the gentleman or any other Member 
yields on a request for time and I will utilize that time, that 
is wholly within the rules, has been in the rules, and will be 
in the rules.
    Mr. RANGEL. Well, let me apologize to the Chair, and I am 
sorry that both of us has utilized all of Mr. Crane's time.
    Chairman THOMAS. I think you will find that all of Mr. 
Crane's time has not been utilized, and I want to thank the 
gentleman from Illinois for yielding to me.
    Mr. CRANE. I most certainly appreciated the opportunity to 
yield some time, and I want to express my appreciation to Madam 
Secretary for your tour of duty. We think you have done an 
outstanding job, and we know that you look forward to going 
back to the real world for a change, too.
    Ms. OLSON. Thank you, Mr. Crane.
    Mr. CRANE. One of the things you mentioned in your 
testimony dealt with the leasing issue, and I just want to say, 
as a matter of my personal convictions, any retroactivity in 
taxes, to me, is totally unacceptable. If there are reforms 
that are called for, that is one thing, but there is no 
retroactivity being contemplated, is there?
    Ms. OLSON. We have proposed that the provisions take effect 
the first of this year, so there is a little bit of 
retroactivity, about 2 weeks' worth.
    Mr. CRANE. The first of this year?
    Ms. OLSON. Yes.
    Mr. CRANE. Okay. All right. One of the major issues to me, 
of course, is the repeal of the ETI and being WTO-compliant. We 
have that deadline that has been extended to March 1st, and 
starting March 1st, if we do not act, we are going to start 
taking a hit, the beginning of a hit, that could amount to on 
an annual basis over $4 billion to our manufacturers that are 
trading abroad. One of the worrisome things is we are almost 
halfway through the month already now, and we are about to have 
a full week off during the President's break. I hope that the 
Administration is working to try and get action taken.
    Action has been taken in Committees, both the Senate and 
the House, and while there are differences there, I think we 
can negotiate over the differences and hopefully get that 
reconciled. We really need a full court press by the 
Administration; otherwise, to me, there are some very serious 
concerns about what could happen after March 1st, and it is not 
just taxes. It is tariff protectionism.
    Ms. OLSON. I certainly recognize that concern, Mr. Crane. 
We have been spending a lot of time on this issue. I think 
there are probably more similarities between the bills that 
have passed the Senate Finance Committee and the Committee on 
Ways and Means than differences, and I think we can get 
together to get them reconciled and get legislation passed. We 
are certainly encouraging Congress to do so and are certainly 
willing to do whatever we can to help move in that direction.
    Mr. CRANE. Well, I appreciate that, and I would hope that 
we could make an outreach to some of our colleagues on the 
other side of the aisle who are basically on the right track, 
but need a little bit of encouragement.
    The other thing, the provisions in the Tax Code that are 
scheduled to sunset, some as soon as the end of this year, what 
would likely happen if we failed to extend that 10-percent 
bracket, the marriage penalty, and other tax relief that is set 
to expire in 2004?
    Ms. OLSON. Well, we would have a very quick increase in 
taxes on lower- and moderate-income folks; in particular, the 
ones who benefit from the child credit, the ones who would 
benefit particularly from expansion of the 10-percent bracket, 
and those who benefit from marriage penalty relief, which is a 
complete elimination of marriage penalty at the lower end, 
moderate-income levels. So, we would see increases across the 
board there.
    Mr. CRANE. Thank you very much, and good luck to you, Madam 
Secretary.
    Chairman THOMAS. Thank the gentleman, and thank him once 
again for his willingness to yield. Gentleman from Michigan 
wish to inquire?
    Mr. LEVIN. Thank you, Mr. Chairman. Welcome. Just a minute 
on the earned income tax credit (EITC) changes. As I read the 
budget proposal, it includes some efforts to simplify the EITC 
for working--poor working families. Do you consider these 
simplification provisions important ones?
    Ms. OLSON. Yes, we certainly do. We believe that a lot of 
the problems that we see with errors in the EITC area stem from 
the fact that the rules are complicated and difficult to 
follow, and that the changes that we propose would go some 
distance to eliminating those problems.
    Mr. LEVIN. Thank you. On the AMT, you mention there was a 
range of estimates. Tell me what the range is. The Secretary--I 
do think Mr. Rangel is right--mentioned $700 billion. What is 
the range?
    Ms. OLSON. Dealing with the AMT issue, I think, is going to 
require us to take a very significant look at the underlying 
underpinnings of our tax system on the individual side, and 
that is what we are undertaking right now at the Treasury.
    I believe that if we simply extended the patches and 
current law, that cost would be something north of $400 billion 
over a 10-year budget window. Depending on how you scale those 
things up, you could go higher; you could go lower.
    Mr. LEVIN. So, $400 billion is some figure that people 
could work with? We have to have some idea.
    Ms. OLSON. It depends on what you want to do, Mr. Levin. 
Our recommendation would be that we not continue to patch the 
system, but rather that we take a more significant look at the 
tax system, because right now the fact that there are two 
separate tax systems adds considerably to the complexity of the 
system. It means a loss of transparency for people in terms of 
understanding how the system works, what their tax systems are, 
and for making plans for taking provisions for various things 
in the Tax Code that are intended to provide various things 
like education benefits. So, we would like to step back and 
take a very significant look, long-term look, at the system, 
not just to continue patching it, but rather to bring the two 
systems together.
    Mr. LEVIN. Okay. So, patching it would cost at least $400 
billion, more or less?
    Ms. OLSON. That is my recollection.
    Mr. LEVIN. Okay, and a more basic set of reforms, what are 
the ranges of cost there?
    Ms. OLSON. It depends on how far you want to go, Mr. Levin.
    Mr. LEVIN. Well, give us some idea.
    Ms. OLSON. We will be doing it on a revenue-neutral basis, 
as the Secretary suggested, to something far in excess of $400 
billion.
    Mr. LEVIN. How long has the Treasury been working on this?
    Ms. OLSON. We have been looking at the AMT issue for as 
long as I have been at the Treasury.
    Mr. LEVIN. How long has that been?
    Ms. OLSON. Three years, Mr. Levin, and so far we have 
proposed only patches, but we really do need to stop just 
patching the system and go back and take a harder look at it.
    Mr. LEVIN. See, here is the problem: you have been working 
on this for 3 years. What is proposed in the budget is minimal, 
just a temporary addressing of it, and so it pushes the whole 
issue of cost off another year.
    It is pretty clear to most people it is going to be costly 
to fix it. There is no provision for that in this budget, which 
already has huge deficits. It is that kind of failure to kind 
of come clear, if not clean, that leads people to be very 
skeptical about the candor.
    I was reading a comment of former Treasury Secretary--
someone who is not a Secretary, but in the Reagan 
Administration, William Niskanen, and he said this about this 
budget, ``I despair''--this is in quotes--``I despair about 
this budget. I do not think Bush is being honest with the 
world. I am not sure he is being honest with himself.''
    We need to tell the American people that changing the rules 
as to AMT is going to cost considerable moneys. You have 
already been working on this for 3 years. A patch is $400 
billion. There is no indication that we can go beyond that in 
the immediate future, and so there is that huge hole there that 
isn't filled.
    We have got to be sure that there isn't an increased 
credibility gap, and this budget is just filled with gaps in 
terms of credibility, and the AMT is clearly one of them.
    Ms. OLSON. Mr. Levin, we have been working on a lot of 
other things for the last 3 years as well. It has been a busy 
time---
    Mr. LEVIN. I know.
    Ms. OLSON. In the tax policy area, and I can assure you 
that we are going to continue to be working on it, and that we 
do intend to propose our level best.
    Mr. LEVIN. When?
    Ms. OLSON. Our goal is to have something ready for the 
budget next year.
    Mr. LEVIN. Not this year.
    Ms. OLSON. Well, we passed the budget for this year 
already, but we are looking forward to something--something in 
the budget next year, and we are looking forward to working 
with the Committee to finding a solution to the AMT issue that 
is fair and appropriate for all.
    Chairman THOMAS. The gentleman from Louisiana, Mr. McCrery 
wish to inquire?
    Mr. MCCRERY. Yes. Thank you, Mr. Chairman. Ms. Olson, I 
would like to add to the Chairman's comments that I very much 
appreciate the service you have given the Bush Administration 
and the American people. You have been very professional and 
forthright in your dealings with us, this Committee, both in 
your appearances and hearings and in meetings that we have had, 
and I want to add my commendation to that of the Chairman of 
your efforts on our behalf. So, thank you very much. We will 
miss you.
    Ms. OLSON. Thank you, Mr. McCrery.
    Mr. MCCRERY. I would like to get back to this leasing 
question. The retroactive date does concern me. This Committee 
has in the past, on occasion, stated unequivocally--in the 
case, for example, of a change in the capital gains rate, if we 
change the capital gains tax rate, then it will be effective as 
of this date, and we do that so that there will not be 
distortion in the capital markets. I think that is a very valid 
reason to set an arbitrary date, even without full legislative 
action.
    In the case of the leasing provision, though, it seems to 
me we risk having just the reverse reaction in the market if 
you set an arbitrary date before any action is taken. It seems 
to me that could put a chill on the market and perhaps distort 
market activity, and perhaps even slow down or even prevent 
what you and I might regard as legitimate leasing activity that 
should be--have some tax advantages.
    So, I am concerned about the retroactivity, and I hope the 
Chairman of the Committee on Ways and Means will join me in 
stating unequivocally that this Committee does not intend to 
enact a retroactive date of application. In fact, we will wait 
until at least this Committee takes some definitive action and 
crafts a proposal that does what the Chairman said, draws that 
bright line, so that we can distinguish the policing 
arrangements that we think are appropriate for favorable tax 
treatment and those that are not.
    Chairman THOMAS. Gentleman yield on that point?
    Mr. MCCRERY. Yes, sir, be glad to.
    Chairman THOMAS. You clearly outlined a concern about 
chilling the marketplace, but I think there is some concern as 
well, since this is a bit amorphous in that we haven't been 
able to create that spectrum and draw that line, that there 
will be a number of people who will rush to judgment in putting 
together a number of deals that may, in fact, fall on the 
abusive side of the spectrum and then argue they should not be 
reproached because that would be retroactive.
    I do think, notwithstanding the leasing attorneys, it 
probably takes some time to put these deals together, that we 
have a window of opportunity, one of the reasons I urged we 
move fairly quickly on looking at the structure. I do want to 
support your argument. It makes no sense that we would draw 
some date from the previous year or January 1st as the date 
that we would operate with, but if the gentleman brings this 
subject matter up, my desire would be to act as 
contemporaneously as possible.
    We have product and we indicate that henceforth that 
activity would not be allowed based upon the legislation that 
we draw, but it underscores the haste at which we need to come 
together on this legislation.
    Mr. MCCRERY. I agree with the Chairman's assessment of what 
would be appropriate in terms of the timing of this.
    Ms. OLSON. Mr. McCrery, we did give careful thought to the 
effective date on the market, and we did try to put within the 
scope of the changes we propose that had things that we think 
really are problems and that you would not want to go forward 
on any basis. There are certainly room on some of the changes 
as you look at them that you might conclude that what you need 
is a split effective date; that some of the provisions should 
be effective as of the first of this year, whereas others might 
be effective as you move forward with legislation.
    Mr. MCCRERY. Thank you. One more question, it is switching 
subjects here, to the international tax reform. This Committee, 
as you know, passed out legislation last year that not only 
repealed FSC/ETI, but made a number of changes in our 
international tax provisions, and some critics of those changes 
have claimed that the effect of those changes would be to 
encourage jobs to move overseas. Would you comment on that? 
What is your opinion and Treasury's look, because you 
recommended some of those changes?
    Ms. OLSON. Yes, we did recommend some of those changes, Mr. 
McCrery.
    One of the concerns has been that we are taking the FSC/ETI 
benefits and we are giving them to people who are moving jobs 
offshore, which is sort of a line that has been used, but right 
now the current FSC/ETI beneficiaries are by and large in 
multinational companies. Those multinational companies have 
businesses offshore not because they are manufacturing over 
there and then shipping things back, but because it is 
important for them to be there to serve the local market.
    A lot of their offshore activities that would be benefited 
by some of the international reforms that we have talked about 
and this Committee has considered would allow them to more 
efficiently market U.S.-made products. So, we do think that it 
is important for us to look at international reform. Right now, 
we are driving around in a 1960 Chevy pickup, and everybody 
else is working in virtual reality. We need to reconsider our 
rules.
    Mr. MCCRERY. Thank you.
    Chairman THOMAS. Thank the gentleman. The gentleman from 
Maryland, Mr. Cardin wish to inquire?
    Mr. CARDIN. Thank you, Mr. Chairman, I do. First, let me 
thank Ms. Olson for your public service. We very much 
appreciate working with you and the Committee.
    Ms. OLSON. Thank you.
    Mr. CARDIN. Yesterday, Secretary Thompson was before the 
Committee, and he made a statement that was rather dramatic, 
and that was that he believed the President's proposals would 
cut the number of uninsured for health insurance by 50 percent. 
The tools that the President has in his budget all fall within 
Treasury, so let me take a chance, if I might, to inquire as to 
Treasury, as to the numbers that you have; first of all, the 
number of people who currently do not have health insurance, at 
least your numbers in that regard, and how you believe the HSAs 
that were included in last year's medical bill would reduce 
those numbers. Then the additional tools that you have in this 
budget for the deductible savings accounts and the credits, how 
that will impact the number of uninsured?
    Ms. OLSON. Thank you, Mr. Cardin. First I am pleased to say 
that there are some proposals that fall outside of Treasury's 
bailiwick. I think there are some proposals on the State 
Children's Health Insurance Program (SCHIP) and some proposals 
on associated health plans that are both outside of Treasury's 
bailiwick, and both of those I believe Secretary Thompson 
believes would contribute to reducing the number of uninsured.
    There is a fairly wide variation in the estimated number of 
uninsured in this country. The number that we typically work 
with is something north of 40 million. The budget proposals 
that we put together, we believe, would reduce the number of 
uninsured on the tax side, the tax budget proposals, by 
something of 4 or 5 million. The low-income health insurance 
tax credit in particular would help a good segment of that part 
of the market be able to get health insurance which currently 
cannot.
    The HSAs are targeted at a different problem, which is 
trying to introduce some more cost-consciousness into the 
health care market with the goal of making people consume less. 
So, that is the direction that the HSAs go, and the high-
deductible health insurance premium deduction along with that; 
again, to try to put some of this back into the control of 
consumers to make them more sensitive about it.
    Mr. CARDIN. I appreciate that. So, when you're dealing with 
the number of uninsured, the 4 to 5 million that you believe 
would be on the tax side would be in primarily the credit?
    Ms. OLSON. That is correct.
    Mr. CARDIN. I thank you for that, and we will question 
Secretary Thompson more how the SCHIP program and the others, 
the association plans, will, I guess, equal another 20 million 
somewhat.
    Ms. OLSON. He does believe very strongly that those are the 
answers to that, and part of the answer to the health insurance 
tax credit allows people to work with the State pools, which 
again he believes very strongly there is a solution.
    Mr. CARDIN. Those numbers do not seem credible, but we will 
go back and look at that. We have done a lot to advance these 
issues, and they have had minimal impact of reducing the number 
of uninsured in our health system.
    I want to touch on the defined benefit comment that you 
made, that you are concerned about the defined benefit plans, 
as we are concerned about it. I personally believe it is the 
preferred source for retirement security because it is a 
guaranteed benefit for individuals, and it is one that is 
generally better managed than individuals' defined contribution 
plans.
    So, what is the Administration's position on the 
replacement now, 30-year Treasury? We have a bill that is 
moving through the Senate and one through the House. We have a 
2-year temporary bill that substituted a corporate bond mix. I 
saw that you issued a veto threat on the Senate bill. Is there 
a specific position that the Administration has now?
    Ms. OLSON. We support the temporary fix that the House has 
passed. We would like to see that enacted into law, and that is 
an issue that has to be addressed fairly quickly for the 
corporate community. So, we would encourage you to move forward 
with that.
    The bill that has passed the Senate side includes some 
deficit reduction contribution (DRC) relief for a couple of 
specific industries and then with a rather amorphous permission 
to the IRS to grant other relief. We are very concerned about 
the DRC relief just continuing to exacerbate the problem with 
underfunded plans, and that is what has caused the concern.
    Mr. CARDIN. I share your concern, but I would point out the 
urgency to try to resolve this. Mr. Chairman, we are going to 
run into a situation where the well-funded plans are the ones 
that are going to be freezing or converting or leaving the 
defined benefit market, and we will be left with more and more 
plans that are underfunded because they have no opportunity to 
do much other than that. I wasn't happy with the 2-year fix, 
but it was a temporary fix, but it was a better option than 
doing nothing, and I would hope that we would be able to get 
the bill to the President's desk that he can sign as soon as 
possible.
    Chairman THOMAS. I thank the gentleman. Gentleman from 
Pennsylvania, Mr. English wish to inquire?
    Mr. ENGLISH. Thank you, Mr. Chairman. I do. I would also 
like to congratulate Secretary Olson on her extraordinary 
service and the activism that she has brought to this job, 
which is so refreshing.
    Madam Secretary, I have heard concerns from companies in 
Pennsylvania about a proposal in the Senate Finance Committee 
ETI bill relating to what is called the economic substance 
doctrine. My constituents are concerned that this doctrine 
should be left to the courts, and attempting to write it into 
statute would interfere with ordinary business transactions. In 
a region that has seen, I dare say, more than its share of 
difficult economic times, we see this as another potential 
burden on the global competitiveness of certain companies. What 
is the Administration's view of this proposal?
    Ms. OLSON. Thank you, Mr. English. We have had considerable 
concern about the attempts to codify the economic substance 
doctrine as well, because although we think there are very 
serious compliance issues out there that need to be addressed, 
we don't think the economic substance doctrine--the 
codification of the economic substance doctrine would be 
particularly effective in addressing those.
    The statutory provisions that have been drafted are very 
complicated. I think it would be very difficult for the IRS to 
apply, which would mean they would not be particularly 
effective as a tool for the IRS, and they have the potential of 
hitting a number of transactions or chilling a number of 
transactions that really aren't the intended target of it. We 
spent a lot of time looking at this issue in trying to find 
ways to direct the effort into the things that actually cause 
us concern, and I think that is a more fruitful direction to 
go.
    Mr. ENGLISH. Do you believe that the proposals in the 
President's new budget on combating abusive tax avoidance 
transactions will be sufficient to address the serious problem 
of abusive tax shelters?
    Ms. OLSON. We believe that we have made a real dent in the 
marketing of abusive tax transactions over the course of the 
last 3 years with much more aggressive enforcement activities 
by the IRS and with the regulatory changes that we have made. 
What we could really use is some statutory changes that would 
allow us to complete the web of information that the IRS relies 
on in order to combat abusive transactions. The statutory 
provisions that we have requested changes for would allow us to 
do that, and we would urge the Committee to go forward with 
those.
    Mr. ENGLISH. Thank you. Finally, I have noticed there have 
been discussions so far in this hearing about the individual 
AMT, which is certainly a very serious and growing problem that 
the Administration, I think, is clearly building some 
particular capital to deal with. Certainly your predecessors 
did not address this problem, and it has been out there since 
the eighties growing in force.
    The issue that I wanted to finally ask you about is the 
corporate AMT, probably the most perverse provision, I think, 
in the entire corporate code. When I first came to Congress, I 
introduced a bill to repeal it because I think it is a dead 
drag on the competitiveness of the manufacturing economy. In 
your view, can you explain why the AMT might be, on the 
corporate side especially, stifling to manufacturing and how 
its repeal might boost manufacturing?
    Ms. OLSON. Certainly. We did include in the budget 
discussion of the FSC/ETI repeal three specific items with 
respect to the corporate AMT that the Committee ought to 
consider if it wants to improve the climate for manufacturing 
in this country. One of them is the depreciation differential 
that exists between regular tax and the corporate AMT. The fact 
that that provision is in the AMT increases the cost of 
capital, which is a particularly significant item for 
manufacturers who tend to have high capital investment. So, 
getting rid of that provision would be a significant positive 
for manufacturing.
    The other two items that we specifically refer to in the 
budget are the limitation on net operating losses and the 
limitation on foreign tax credits that exist in the AMT. Both 
of those, likewise, have a particularly bad effect on 
manufacturers. Manufacturers, because of the cyclicality of the 
industry, are more likely to get caught by the AMT because that 
is when the AMT tends to kick in--when the economy is down.
    Mr. ENGLISH. It is the ``kick them when they are down'' 
tax.
    Ms. OLSON. There you go. Anything we can do to reduce that 
effect would be a positive for manufacturers.
    Mr. ENGLISH. As Co-Chairman of the Zero AMT Caucus, which 
is gearing up its efforts now, we really appreciate your 
suggestions on some incremental steps to begin to reduce the 
impact of the corporate AMT with an eye toward its eventual 
abolition.
    Chairman THOMAS. Gentleman from Washington, Mr. McDermott 
wish to inquire?
    Mr. MCDERMOTT. Thank you, Mr. Chairman. Ms. Olson, if I 
applied for a 501(c)(3) status for an organization that I 
created, and the public planning of that organization was a 
fundraising event which provided access to the Democratic 
leadership at the next Democratic convention, do you think that 
would fall within the guidelines for 501(c)(3)?
    Ms. OLSON. Doesn't sound like it to me.
    Mr. MCDERMOTT. Didn't sound like it to me when Mr. DeLay 
did it either. When I wrote a letter to them, they said that 
the IRS has not received--has not recognized--the children's 
fund is exempt from Federal income tax. We have no record of a 
Celebrations for Children, Inc. (CFC) filing on a Form 990. So, 
it sounds like he is telling people he is a tax-exempt 
organization, but, in fact, he has no status with the IRS.
    Now I will enter into the record the brochure of the 
organization, but I assume that if the CFC has an application 
that is still pending, I have a question. Will the contributors 
that contribute to that organization be allowed to have a tax 
deduction this year for money they contributed to the 
organization under the belief that it was going to be a 
501(c)(3)?
    [The information is being retained in the Committee files.]
    Ms. OLSON. I am sorry, Mr. McDermott, that is an area I am 
not familiar with, and I will be happy to take the question 
back and get you an answer.
    Mr. MCDERMOTT. You can't tell me whether--you start an 
application for an organization, and you have an application 
in, and you start collecting money, you can't tell me whether 
people get the tax exemption or not?
    Ms. OLSON. My guess is that the answer is no, you don't, 
but I believe there are some exceptions to that rule, and I 
don't want to answer the question without having the rules in 
front of me to be able to answer it definitively.
    Mr. MCDERMOTT. I will tell you that the IRS liaison to the 
Congress says, yes, you do get the deduction. You can take the 
deduction even though it is pending. The question is, how does 
Treasury go back and get the taxes if they deny the 501(c)(3) 
status?
    Ms. OLSON. I don't know the answer to that question either, 
Mr. McDermott. I would be happy to get you an answer to the 
question, but I can't answer it today.
    Mr. MCDERMOTT. I think it is a question we really ought to 
look at. I think the Republican leadership setting up this 
shadow 501(c)(3) and going out and collecting and telling 
people they are going to get a tax exemption and don't have to 
disclose who gives the money, no requirement for a 501(c)(3) to 
declare where they got the money from or how much, and it then 
could be denied after the election, and lo and behold, 
everybody would have taken the tax deduction. How will the 
Treasury go back and find them? Will they bill them, or will 
they audit these people if a tax deduction or if a tax 
organization loses its fight for an exemption?
    Ms. OLSON. I don't know the answer off the top of my head. 
I will be happy to go and get one for you.
    Mr. MCDERMOTT. Well, I think it is something that the 
Committee ought to take up, Mr. Chairman. I think when the 
leadership of the Republican party is setting up what I believe 
is an operation to use the Tax Code as was used by the previous 
Speaker and then--he collected money from Mr. Callaway, a 
former Member of Congress from Georgia, and then the exemption 
was taken away, and then the Department never went after the 
money. They reversed their decision a second time. So, they 
granted a tax exemption, took it away, and granted it back. 
There is nobody on this Committee that can get the papers from 
the IRS.
    That is a travesty of the Tax Code, because it allows all 
kinds of foolishness and deception to go on. I really think 
this is an issue that ought to be taken up by this Committee. I 
yield back the balance of my time.
    Chairman THOMAS. The gentlewoman from Connecticut, Mrs. 
Johnson wish to inquire?
    Mrs. JOHNSON. Thank you, Mr. Chairman, and thank you, the 
Honorable Assistant Secretary Pam Olson, for your excellent 
service to the Treasury and also to this Committee. I 
appreciate the very clear presentation you just made of the 
impact of tax changes adopted in recent years on the recovery. 
It was clear and concise, and people need to understand how 
important tax policy is to the strength of our competitiveness 
and of our economy.
    I am also pleased with the President's willingness to go 
ahead in very difficult times to address the problem of the 
uninsured. Indeed, the presence of so many uninsured is pulling 
down all of our provider organizations. So, it is important we 
move forward on that, and it is a suggestion we can build on.
    The loophole closing and the AMT discussions are ones that 
I support, but I would have to say that I feel the 
Administration has been somewhat lackadaisical in their 
attitude with this problem with Europe. I know you talked about 
it, but this is big. There is $14 billion in product that can 
be cycled through. For a soft economy, if this starts March 
1st, this is a big issue. I am concerned that there hasn't been 
more emphasis on it; and furthermore, there hasn't been more 
willingness to say since the last time we made big changes in 
our tax law, we made our corporate rate the lowest in the 
world, we now are the second or third highest in the world in 
every avenue, whether it is research and development (R&D), 
corporate taxes, or capital gains or whatever, we are behind.
    Not only do our business taxes not fall off our exports 
like they do from Europe, but the tax burden our products carry 
into the competitive world market is higher than most 
countries. If our global companies are to survive, and if we 
are to begin stemming the offshoring of component parts to 
countries like China, we have to help them be competitive.
    I think using this opportunity not only to address the FSC/
ETI problem, but also to strengthen the competitive positions 
of our businesses is the biggest thing we can do to protect 
existing jobs and to bring jobs back to our country. It is just 
so bizarre that if you invest profits overseas, you don't get 
taxed. If you bring them back here, you do.
    To me, jobs and the economy is the whole thing. If we don't 
deal with this, jobs and the economy--jobs are going to go, and 
the economy is going to suffer. I don't mean to be 
disrespectful, but I do feel a lack of urgency and the lack of 
sort of big picture thinking on this issue. I think this 
Committee--and I commend the Chairman on this, and Mr. Crane 
worked with him, and many Members did, on the comprehensiveness 
on this bill. It pains me to think that it is complicated, that 
we can't move forward. What it did for small manufacturers in 
America we never thought about doing. We never come close. We 
have to depreciate like the rest of the world does. So, we have 
to encourage investment and inventory and machinery and 
equipment.
    I just needed to say that, and thank you for your good 
service and your testimony. I hope the Administration will get 
out there with us and push hard. To me that is much more 
important than making the tax changes permanent. I understand 
the need for some to be made permanent now, but this is the 
biggest issue, the job protection issue, I think, we face.
    Ms. OLSON. We do have a couple of provisions in the budget 
that should be made permanent that definitely move in that 
direction for companies that are trying to produce more jobs 
here in the United States. Among them would be section 179. We 
need to make that permanent. Of course, the research and 
experimentation (R&E) credit, which expires on the 30th of June 
of this year.
    Mrs. JOHNSON. How long do you extend that for?
    Ms. OLSON. We would like to see it made permanent.
    Mrs. JOHNSON. Do you fund making it permanent in your 
budget?
    Ms. OLSON. No. We think it should just be extended.
    Mrs. JOHNSON. For how long?
    Ms. OLSON. We would like to see it made permanent. The 
point you are making is exactly right. There is a tremendous 
competition worldwide for R&E today, and R&E is our future, and 
we have to invest in R&E. If we don't make the credit 
permanent, then what we continue to do is leave companies 
uncertain about whether they should be making the R&E 
investments here or making them somewhere else. I think we need 
to move forward with that.
    Mrs. JOHNSON. Thank you.
    Chairman THOMAS. If you want to make something permanent 
that costs money, you have to show us where you are going to 
get the money. It is out there. Gentleman from Massachusetts, 
Mr. Neal wish to inquire?
    Mr. NEAL. Thank you very much, Mr. Chairman. I am going to 
suggest where we can get $5 billion pretty quickly. Again, as 
the other Members stated, thanks very much. You were 
particularly helpful on a couple of constituent issues that 
appeared to be lost causes. You and your staff did a great job 
of really helping out on an individual basis, and I have not 
lost sight of that.
    Ms. OLSON. Thank you, Mr. Neal.
    Mr. NEAL. I still can't leave you off the hook on AMT. 
Isn't it fair to argue that the tax cuts over the last 3 years 
have exacerbated the AMT situation?
    Ms. OLSON. The lower tax rates--because of the way the AMT 
functions, the lower tax rates have become a preference, but 
that has been the case since the rates increased back in 1993. 
I can recall meetings with my predecessors back in the 
nineties, and the complaint that we got at the time was that 
there were too many AMT forms being filed. We, at the time, 
said, this is your future. You need to do something to address 
the fact that the AMT is not indexed, and the problem is going 
to get worse because of the increase in the rates.
    Chairman THOMAS. Would the gentleman yield briefly on that 
point? The reason I don't believe we have exacerbated the AMT 
is because every time we have passed a tax bill, we have vetted 
the hold harmless aspect of the AMT, and it has been tens of 
billions of dollars to try to not have the problem that you are 
concerned about happen. So, I believe we have held them 
harmless, but at an enormous cost to tread water. This won't 
come off the gentleman's time.
    Mr. NEAL. There obviously is a difference of opinion as it 
relates to this issue between the Administration and the 
Chairman's perspective on this, but let me take this a step 
further and maybe make reference to the Chairman's opening 
comments as well.
    I accept the responsibility on our side for what happened 
in 1986 and 1993, but can we not make the argument that the 
Majority has now been in charge of this institution for 10 
years, and trying to get around to fixing this issue ought to 
have priority status? It strikes me it was so easy to proceed 
with tax cutting, but not to address the attending issue of 
what the tax cutting has done.
    I heard Members speak earlier today of the notion of what 
we are going to take care of the marriage penalty down the road 
and other issues that had such sex appeal here, and the problem 
is that the taxpayers, as they begin to take advantage of these 
opportunities in the Tax Code, what we give to them on one hand 
with some tax preference we are going to ask back to the 
Treasury because of AMT. Is that a fair statement?
    Ms. OLSON. For some part of the population, yes.
    Mr. NEAL. Exactly, yes. That is the point I am trying to 
make. I would suggest that as much as we talk about this--and I 
understand the Chairman's sentiments that we do provide that 
patchwork, but it doesn't escape notice here that the problem 
still gets worse.
    Ms. OLSON. It hasn't escaped notice at the Treasury either, 
and I can assure you we have been looking very long and very 
hard at this. That is why there is a another 1-year patch, as 
opposed to a permanent patch. We think that we need to look at 
more significant structural changes to the income tax, because 
we don't think leaving the AMT in place is necessarily the 
right thing to do. We are not sure that it serves the purpose 
for which it was initially enacted. We need to take a harder 
structural look at the income tax, and then come to you with a 
proposed solution.
    Mr. NEAL. I appreciate the sentiments you have offered, and 
you share my conclusion, if not some of the other information I 
put forward. If we continue down the road of making the Bush 
taxes permanent and don't do anything with the AMT, we end up 
with doubling the problem over the next decade. As sincere as 
you might be today, I think we are going to be back with 
another 1-year fix next year and the year after.
    The Chairman talked about how we might raise some revenue 
from time to time. The most annoying problem I have had perhaps 
now in the 12 years I have been on this Committee is the whole 
issue of Bermuda. For us to have 134,000 troops in Iraq and to 
let these folks off the hook who, for a $25,000 to $27,000 post 
office box address, they are allowed to escape supporting these 
troops, men and women who have performed brilliantly, it 
strikes me as being odd that that would not be one of the 
things we could come up with a firm recommendation on. They 
should be paying their fair share. I have had estimates by the 
Joint Committee on Taxation and others here that suggested that 
we could pick up $45 billion if we would simply close the 
Bermuda loophole.
    Ms. OLSON. Well, we certainly agree with you that we need 
to take steps in that regard. I assume you are referring to the 
inversion activity in particular?
    Mr. NEAL. Safe assumption.
    Ms. OLSON. The issue that we saw when we did our inversion 
study 2 years ago that was really driving people offshore was 
the ability to reduce their U.S. taxes, taxes on U.S.-earned 
income, by leveraging those operations. We have taken--we have 
put forward a legislative proposal, and I know this Committee 
has passed a legislative proposal that would take the juice out 
of those transactions.
    We have acted on the regulatory front in two different 
ways. We issued regulations providing for information reporting 
on these transactions because our belief was that some of the 
transactions were going forward without the shareholders 
recognizing that they had a tax liability as a result of the 
transaction, and that that tax liability may not have been 
paid. We have also gone forward with changes in section 482 
regulations, which would be another way for companies to move 
intangibles offshore and then charge royalties back to the 
United States, which would again reduce the U.S. taxable income 
of these companies.
    We have gone forward with changes in the section 482 
regulations that begin to address those issues, and then we 
have been working hard on the treaty front as well. I think you 
know, there is one treaty in particular that has been used not 
to eliminate double taxation, but rather to eliminate all 
taxation. We have been working hard to get that treaty reformed 
as well.
    Mr. NEAL. One last question. Do you believe that Tyco is a 
Bermuda-based company, or do you believe that Tyco is an 
American corporation?
    Ms. OLSON. I am not sufficiently familiar with the Tyco 
structure to know where they belong.
    Mr. NEAL. They are incorporated in Bermuda.
    Ms. OLSON. I am aware they are incorporated in Bermuda, but 
don't know enough about the structure. One of the things we 
have to consider in these is that the transactions of moving 
offshore are taxable transactions. They are going to be taxed 
either at the corporate level or the shareholder level. If the 
transactions go forward on that basis, then we have to give 
some recognition to what has occurred, or we shouldn't be 
taxing the company or the shareholders. We shouldn't just be 
saying, you didn't leave, you are still here. I know some of 
the things that you have been thinking about are also some of 
the things we have been giving serious consideration to as 
well.
    Chairman THOMAS. The gentlewoman from Washington, Ms. Dunn 
wish to inquire?
    Ms. DUNN. Thank you very much, Mr. Chairman. I want to add 
my congratulations to Secretary Olson for a job well done. 
During our lives, those phases we go through every now and 
then, we see where attention needs to be directed in a new 
direction or different direction. I think you have picked up on 
that, and I congratulate you.
    What I wanted to chat with you about today is the effects 
of the estate tax on the economy of the United States. The 
Economic Report of the President, the one that we saw on 
Monday, mentions that--it talks about the negative impact of 
the estate tax, and it says, quote, ``it is likely to take the 
form of a reduction in capital accumulation.'' Then it goes on 
to say that part of the long-run burden of the tax is likely to 
be shifted to workers through a reduction in wage rates. I 
wanted to ask you a couple of questions and listen to your 
response.
    First of all, have the economists in Treasury attempted to 
evaluate the effect of the economy--of the depressing effect on 
the economy of the estate tax? Have you been able to estimate 
for this Committee the positive impact of eliminating the tax 
permanently? On the cost of repeal, lots has been discussed 
about the loss of the revenues from this tax, but none of the 
estimates that I have seen take into consideration the 
diversion of working capital to the costs involved in complying 
with producing this tax.
    There was an economic report that was completed last year 
by the CONSAD Research Corporation that indicated that 
permanent repeal would free up capital. So, my additional 
question is: don't you think we need a more accurate picture of 
the actual effects of the repeal of this tax on our economy? 
Would you conclude as a result that this tax, if it were 
permanently repealed, could actually end up as budget-neutral?
    Ms. OLSON. Thank you, Ms. Dunn. Treasury has spent a lot of 
time looking at the economic effects of the estate tax, and 
obviously now, as the Council of Economic Advisers has 
indicated by the report they released on Monday. We would 
certainly concur in their conclusion that the estate tax is an 
additional tax on capital, and as an additional tax on capital, 
the logical effect is that you end up with less of it, and it 
translates through to reduced capital for workers and reduced 
wages, a ripple effect through the economy.
    The tax is also unfortunate because it is in many way a tax 
on virtue. It is a tax on those who are trying to leave a 
legacy to those they leave behind, and that is another 
unfortunate feature of the tax.
    One of the things that we analyze when we analyze the 
repeal of the estate tax was the income tax effect, because in 
some ways the estate tax and gift tax has served as a backstop 
to the income tax. So, that is one of the things we have to 
take into account as we look at what the costs of repeal are.
    Ms. DUNN. What about my question on budget neutrality?
    Ms. OLSON. That was my intended response to the question, 
that there are other effects besides just the revenues from the 
estate tax. It is the effect that it has on the backstop on the 
income tax that has produced some of the size in the revenue 
estimates.
    Chairman THOMAS. Gentleman from Texas, Mr. Johnson wish to 
inquire?
    Mr. JOHNSON. Pam, I just want to congratulate you on a job 
well done. You have been responsive to the Members on every 
occasion, and I just want wish you well in whatever endeavor 
you choose from here on.
    Ms. OLSON. Thank you.
    Chairman THOMAS. The gentleman from North Dakota wish to 
inquire?
    Mr. POMEROY. Thank the Chairman. Let me add my best wishes 
to Secretary Olson. Been a pleasure for a North Dakota boy to 
work with a Minnesota girl in this position you have held.
    Chairman THOMAS. You betcha?
    Mr. POMEROY. You betcha. That isn't to say we ever quite 
agreed on several important matters, and I would say especially 
the savings issues. The Secretary, when he was here the other 
day, spoke of studies within the Treasury that supported the 
savings programs advanced in the budget. I have not read the 
studies. I have not been aware of studies in circulation. I 
asked the Secretary for them, and he indicated that you would 
be coming up to talk to me about those studies. Are there 
studies that have been reduced to writing that we can circulate 
for evaluation?
    Ms. OLSON. We have done a lot of analysis. There is one 
study that is out on the Treasury website that has been out for 
a couple of years on the effect of complexity on savings. The 
others are not reduced to formal studies.
    Mr. POMEROY. The lifetime savings account (LSA) proposal 
isn't 2 years old yet. I am interested in whatever study might 
be in support of this significant reform. I find it somewhat 
amazing a statement in your testimony on page 5, LSAs have been 
designed to make the decision easy. It is a savings vehicle 
accessible to all, especially low- and moderate-income 
individuals. Let us talk about that for a minute.
    The LSA, as I understand, lets you put $5,000 in every year 
per family member, correct?
    Ms. OLSON. In every year, and every year that you can 
afford it, of course, and one of the things with low- and 
moderate-income folks is that they can't afford to every year. 
So, whenever they have the ability to sock money away, we would 
like make sure they have the ability.
    Mr. POMEROY. Accessibility really relates to affordability. 
If you have wealth to invest, then you can access this savings 
vehicle. If you don't, then you can't.
    Ms. OLSON. I don't think Mr. Gates cares about an LSA, but 
I think a lot of constituents would benefit greatly from it.
    Mr. POMEROY. We will talk about that, but let us get to 
this accessibility versus affordability. If you don't have the 
money to put in it, you can't access it. If a family of four 
every year can put $20,000 in an account and never be taxed on 
that money again, to suggest that that is going to be a vehicle 
principally used by moderate- and low-income people is, in my 
opinion, specious and false, because moderate- and low-income 
people don't even make $20,000--low-income people, they don't 
have the aftertax money to put into these accounts.
    Now it concerns me a lot that you have done away with 
savings incentives that have been in the marketplace and have 
proven themselves. You and I have a fundamental difference. You 
take the position complexity is a key bar to getting moderate- 
and low-income people to save. I went on the Internet and 
pulled down some individual retirement account (IRA) 
applications. Here is a 3-pager. Couldn't be more simple. There 
are 36 million households with traditional IRAs.
    Ms. OLSON. Only 8.5 percent of the population participated 
in 2001.
    Mr. POMEROY. Eight and a half percent is pretty good. You 
repealed this traditional IRA.
    Ms. OLSON. That is 8.5 percent for all kinds of IRAs.
    Mr. POMEROY. There are 36 million traditional IRAs, and you 
repealed them in the Tax Code.
    Ms. OLSON. Many of those rollovers.
    Mr. POMEROY. Madam Secretary, with respect, I have to 
finish my point here. I think what you need to get people to 
save when they are under very tight financial circumstances is 
some powerful incentives to save. The saver's credit is showing 
some strong early promise in that regard. It is on the books. 
It passed this Committee, and in the year 2002 we had 3.5 
million people participating. You wiped that one out, too. The 
tax-deductible IRA is gone. The saver's credit, which matches 
savings by a partial credit for moderate- and low-income, gone. 
In exchange for that, you have got this account that 
disproportionately benefits those that can afford to put in up 
to $20,000 a year for a family of four.
    In my opinion, you have taken away the incentives that 
benefit low- and moderate-income. You have added a very 
substantial additional tax shelter. You seem to create a 
picture that when you talk about ownership society, essentially 
what you are talking about is taxes will be on wages, taxes 
will not be on investments. Is that where we are headed?
    Ms. OLSON. Where we are headed is in the direction of 
rewarding people who say--this Minnesota girl is a farmer's 
daughter. My father was a sharecropper, and all four of us went 
to college. Three of us have at least one advanced degree. We 
can save if we want to. What we want to do is encourage people 
to do more of it. That is the goal of this proposal, and 
complexity does get in the way.
    Of those 36 million IRA accounts, we are not wiping any of 
them out. People will be able to keep that on a going-forward 
basis. We haven't looked at the saver's credit yet. As you 
know, it doesn't expire until 2006.
    I want to point out to you last year when we were here, you 
complained to the Secretary that we hadn't done anything about 
the qualified tuition deduction, and in our simplification 
proposals we have taken that into account and making that 
permanent as part of the credit. We will continue to look at 
this and look forward to working with you on it because we have 
the same goals.
    Mr. POMEROY. As always our conversations are always 
stimulating.
    Chairman THOMAS. The Chair would recognize those 
individuals who may wish to make a brief statement rather than 
take their full 5 minutes, with the full understanding that the 
gentlewoman from Ohio will be recognized. The Chair is very 
cognizant of the time and the need to move to other activities 
and prepare for the Director of the Office of Management and 
Budget (OMB), who will testify at 2:00 p.m. Anyone who wishes 
not to go into a questioning at this time will be recognized at 
the beginning of the OMB Director's time rather than waiting 
for additional time. With that, anyone want to take me up on my 
offer? The gentleman from Florida.
    Mr. SHAW. Thank you, Mr. Chairman. I just want to join and 
make a comment similar to Mr. Johnson's comment that you 
certainly are going to be missed. Been a pleasure to have you 
before this Committee. You seem to bring civility into the room 
with you, and we wish you all the best. I understand you are 
taking a respite here for all the right reasons, and I 
compliment you for it.
    Ms. OLSON. Thank you, Mr. Shaw.
    Chairman THOMAS. Gentlewoman from Ohio.
    Ms. TUBBS JONES. Ms. Olson, as much as I would like to ask 
you questions since you are leaving me, I would like to ask the 
next speaker more questions. I wish you success in your new 
position, and I will see you out in the street somewhere.
    Chairman THOMAS. Any additional Members wish to take me up 
on the offer? You want to ask a question, don't you?
    Mr. HOUGHTON. I will be very, very brief. Look, I have a 
question about the R&D tax credit, and the regulations are 
fine, they are doing a good job. However, there is the glitch 
here in terms of making progress in developing rules for 
service companies. The only thing I am going to ask is would 
the Treasury be willing to work with the Committee to clarify 
the internal software rules?
    Ms. OLSON. Yes, Mr. Houghton, we would be delighted to, and 
that is a very complex area and have had a hard time dealing 
with it, and that is why we haven't been able to finalize that 
part of the regulations.
    Chairman THOMAS. Software is hard. Gentleman from Illinois.
    Mr. WELLER. Thank you, Mr. Chairman. As I understand, if we 
would like to ask a question now, we are deferring our 
opportunity to the next panel.
    Chairman THOMAS. You will be taken in order at the next 
panel if you wish to inquire at this time.
    Mr. WELLER. Based on that understanding, I do have a 
question I would like to ask Ms. Olson.
    Chairman THOMAS. Gentleman from Illinois is recognized.
    Mr. WELLER. Thank you, Mr. Chairman and Madam Secretary, 
and wish you well in your future endeavors. You have been a 
great asset for the Bush Administration as well as all of us in 
the Committee. Thank you for the assistance you have given each 
of us.
    I would like to make a comment and then a question 
regarding a provision that we included in the jobs and economic 
growth package that the President signed into law last year. It 
is clear that the President's jobs and economic growth package 
is working. We are seeing economic growth and have seen 300,000 
new jobs created. Unemployment is dropping, and we have seen 
record levels of capital investment; in fact, the highest level 
ever recorded in history. Much of the credit for that capital 
investment is given by the most pro-manufacturing provision 
that was in the jobs and economic growth package, and that was 
the bonus depreciation provision. Manufacturing sector, general 
aviation seen a 38-percent increase for demand for their 
products; electronics technology, over a 40-percent increase in 
demand for their products; and the credit, the bonus 
depreciation as not only being a contributing, but a deciding 
factor.
    I noticed in the Administration's budget that you submitted 
the expiring provisions at the end of this year. Bonus 
depreciation was not one of them. Can you share with us the 
thinking? Here is something that is clearly working, it is 
driving the economy and providing an incentive for business to 
invest. It is pro-manufacturing, and it is a sensitive area for 
all of us, and I was wondering why the Administration did not 
include it as part of the tax provisions in the Administration 
budget?
    Ms. OLSON. Thank you. It was included in the 2002 and 2003 
legislation with the Administration's full support as a short-
term stimulus, and we think some of the benefit from it has 
come from the short-term nature of the provision. That is why 
we have not proposed extending it.
    Mr. WELLER. How would you feel, though, if we were to 
extend it? Would the Administration support or oppose that 
initiative?
    Ms. OLSON. We have included in the budget a permanent 
extension of section 179, but our view at this point in time is 
that we would not be supporting--can't tell you this is a 
definite position that the Administration has taken--but I 
believe the view would be that we would not extend a portion of 
the 50 percent.
    Mr. WELLER. I was wondering, like many of my colleagues, as 
an advocate of the bonus depreciation because it works and in 
driving economic growth, I feel that short-term economic 
stimulus, if you want to use that term, needs to be long-term 
economic growth. Clearly, reforming how we depreciate assets 
and moving toward expensing is a key part of that effort. I 
would like to work with your successor and our friends in the 
Administration to work toward that goal. I also would once 
again advocate extension of the bonus depreciation because, 
again, it is working, it is driving investments, and it is 
creating jobs.
    Chairman THOMAS. Any other Member wish to curry favor with 
the Chairman with a brief farewell? The gentleman from 
Colorado.
    Mr. MCINNIS. I have been quickly putting on my pad 
whether--the plusses and minuses of questioning now or later, 
but I would like to ask a question now. I will complete it 
before the yellow light goes on. First of all, Madam Secretary, 
I, too, join the rest of the people to thank you for the 
excellent job you have done.
    Chairman THOMAS. The mike is not on. Use the one next to 
you. The Chair would like to convey the sincere appreciation of 
the gentleman from Colorado.
    Mr. MCINNIS. I will make a brief statement and not even a 
question. The fact is, you have done an excellent job here. I 
have in my hands a report which greatly concerns me. The report 
indicates that a deal was recently done which allows the same 
assets to be depreciated on three separate continents and 
countries at the same time, Australia, the United States, and 
France. The report essentially brags about this fact. Have you 
heard about this, and if so, are you also concerned about these 
transactions?
    I know you will have great success when you go.
    Ms. OLSON. We are similarly concerned about the triple 
depreciation option.
    Mr. MCINNIS. Thank you.
    Chairman THOMAS. We all want to thank you for your service. 
I know that this isn't just a job for you, and that we will be 
able to work together on problems of common interest. I 
appreciate the service you have given the country.
    If there are no further questions, the hearing is 
adjourned.
    [Whereupon, at 12:45 p.m., the hearing was adjourned.]
    [Additional questions submitted by Representative Wally 
Herger to the Honorable Pamela F. Olson, and the response 
follows:]

                                               Washington, DC 20515
                                                  February 12, 2004

Ms. Pamela F. Olson
Assistant Secretary for Tax Policy
U.S. Department of the Treasury
1500 Pennsylvania Avenue, Room 3120
Washington, D.C. 20220

Dear Ms. Olson,

    Thank you for taking the time to testify before the Committee on 
Ways and Means on February 11, 2004 regarding the tax proposals in the 
Administration's FY05 Budget. As a follow-up to your testimony, I would 
appreciate the Treasury Department's views on the issue of donated 
conservation easements.
    The Administration's FY05 revenue proposals include efforts to 
ensure that patents, intellectual property and automobiles are valued 
correctly when donated to charity. I appreciate Treasury's willingness 
to address these important issues. However, I am concerned that there 
is potentially much greater fraud and abuse in the area of land 
conservation and specifically concerning the donation of conservation 
easements.
    In 1976, Congress made donations of conservation easements tax 
deductible in an effort to encourage land conservation. Easement donors 
can claim Federal income tax deductions for any loss of property value 
caused by the restrictions on future development. The value of these 
tax deductions is generally established by appraisers hired by the land 
donor.
    How do we know that these appraisals are accurate? The Washington 
Post, in a series of articles last year, cites a case in North Carolina 
2 years ago where luxury home builders bought over 4,000 acres in the 
Great Smoky Mountains for $10 million, developed less than a third of 
the land, and claimed a tax writeoff of $20 million. So while I 
appreciate the Treasury Department's efforts to ensure that donated 
patents and automobiles are valued correctly, I am concerned that you 
may be missing a much larger area of abuse.
    A 1984 IRS study examined 42 deductions for easement donations and 
determined that all but one appeared inflated, resulting in 
overvaluations totaling nearly $32 million. According to a General 
Accounting Office report on this study, taxpayers generally overvalued 
their conservation easement deductions by an average of about 220 
percent. The revenue implications of this study are immense, 
considering that today there are an estimated 12,000 easements 
nationwide.
    Has Treasury looked at this problem recently? What data does the 
federal government have on the amount of fraudulent deductions that are 
occurring?
    Finally, Treasury's revenue proposals this year once again include 
a 50-percent exclusion of capital gains for land sales for conservation 
purposes. I continue to respectfully oppose this proposal as misguided 
tax policy. Already, more than 50 percent of my district is largely off 
limits to future development because it is owned by the Federal 
government.
    I would appreciate an explanation as to why the federal income tax 
system is an appropriate mechanism by which to encourage land 
conservation, especially in light of the tax abuses that appear to be 
occurring in the area of donated conservation easements.
    I sincerely hope that Treasury will be willing to work with me and 
other concerned Members of Congress to gather comprehensive data 
regarding conservation easements, and to formulate appropriate 
legislative proposals to address the tax abuses that are taking place.
    Again, thank you for your testimony before the Committee and for 
your meritorious service as the assistant secretary for tax policy. I 
would appreciate answers to my questions at your earliest convenience.

            Sincerely,

                                                       Wally Herger
                                                 Member of Congress

                                 

    This is in response to your follow up questions regarding 
the issue of donated conservation easements. We share your 
concern about improper deductions being claimed for donations 
of conservation easements. We are reviewing valuation and 
compliance issues relating to donations of all types of 
property, including conservation easements. We are considering 
actions to ensure accurate valuation and compliance with 
applicable law.
    Under current law, a charitable deduction is allowed for 
the donation of a conservation easement only if the donation is 
made to a qualified organization exclusively for statutorily 
defined purposes. As you know, the value of the donation is the 
fair market value of the easement at the time of the 
contribution, which may be measured by the difference in the 
value of the restricted property before and after the granting 
of the easement. Treasury regulations provide that these values 
should take into account not only the current use of the 
property but an objective assessment of how immediate or remote 
the likelihood is that the property, absent the easement, would 
in fact be developed, as well as any effect from zoning or 
conservation laws that already restrict the property's 
potential highest and best use. In addition, the amount of the 
deduction must be reduced by the amount of any financial or 
economic benefit to the donor or a related person, including 
any resulting increase in the value of other property (whether 
or not the property is contiguous) owned by the donor or a 
related person. It is the taxpayer's responsibility to obtain 
qualified appraisals as required to substantiate any deduction 
claimed. The Administration's Budget includes a proposal to 
require all taxpayers (including corporations) to obtain a 
qualified appraisal for donated property worth over $5,000, and 
to attach a copy of the appraisal to the taxpayer's return if 
the deduction claimed exceeds $500,000. This proposal to 
require qualified appraisals would apply to donations of 
conservation easements, as well as other types of property.
    Further, your letter notes that the Administration's Budget 
includes a proposal to exclude from income fifty percent of any 
capital gain from the voluntary sale of land for conservation 
purposes. The proposal defines conservation purposes in the 
same way as existing law, complementing the charitable 
contribution deduction by encouraging the sale of land to 
charitable organizations having conservation as their primary 
purpose. We believe this proposal will strengthen the ability 
of charitable organizations to compete with other buyers of 
appreciated, environmentally sensitive land. Conservation 
purposes would be served, under the proposal, by voluntary 
sales of property rather than by government regulation of land 
use.
    Your letter asked for an explanation why the Federal income 
tax system is an appropriate mechanism by which to encourage 
land conservation. In enacting the charitable deduction 
relating to property preservation and conservation for a 
historical as well as ecological goal, ``Congress believe[d] 
that the achievement of this goal is largely dependent upon 
whether private funds can be enlisted in the preservation 
movement.'' Staff of the Joint Committee on Taxation, General 
Explanation of the Tax Reform Act 1976 (Pub. L. 94-455) at 643. 
This legislative history may explain Congressional intent in 
using the Federal income tax system as a mechanism by which to 
encourage land conservation.
    Thank you for your expression of willingness to work with 
the Department of the Treasury in gathering data on 
conservation easements and in formulating responsive proposals. 
We look forward to working together to ensure that charitable 
deductions serve their intended purposes.
    [Submissions for the record follow:]
         Statement of Coalition for Fair International Taxation
    The Coalition for Fair International Taxation (``C-FIT'') is a 
group of over two-dozen U.S. employers representing a broad cross-
section of industries that supports the modernization of the U.S. 
international tax law to ensure that U.S. companies can effectively 
compete at home and abroad. (Please see the attached list of 
companies.) We appreciate the opportunity to submit our views to the 
Committee.

                              Introduction

    We applaud the Bush Administration's Fiscal Year 2005 Budget for 
its continued recognition of the necessity of reforming the nation's 
international tax provisions as an appropriate response to the World 
Trade Organization (WTO) rulings invalidating the Foreign Sales 
Corporation (FSC)/Extraterritorial Income Exclusion (ETI) provisions.
    The WTO has now ruled definitively in a case initiated by the 
European Communities (EC) that the FSC/ETI rules violate U.S. 
international trade obligations, and has authorized the EC to impose up 
to $4 billion in annual trade sanctions against U.S. exports. EC 
officials have announced their intention to begin imposing tariffs by 
March 1, 2004 if the United States does not comply with the WTO 
decision. The Administration again makes clear in its FY 2005 Budget 
its position that the United States should comply with the WTO ruling 
through the passage of legislation repealing ETI. It is imperative that 
the Congress pass ETI replacement legislation in order to avoid the 
crippling economic effects of a trans-Atlantic trade war.
    As described in more detail below, C-FIT strongly supports 
legislation approved by the Ways and Means Committee, the American Jobs 
Creation Act (H.R. 2896). The legislation brings the United States into 
compliance with its international trade obligations as well as meets 
the charge laid out to Congress in the Administration's Budget that the 
``ETI provisions should be replaced with tax law changes that preserve 
and enhance the global competitiveness of U.S.-based businesses and 
American workers.'' \1\
---------------------------------------------------------------------------
    \1\ General Explanation of the Administration's Fiscal Year 2005 
Revenue Proposals, Dept. Treasury (February 2004), p. 187.
---------------------------------------------------------------------------

 FSC/ETI Replacement Legislation Should Advance U.S. Economic Interests

      In responding to the WTO FSC/ETI ruling, the Congress 
must take account of the vital role that U.S.-based multinational 
operations play in increasing U.S. exports.

    U.S. multinational corporations play a vital and leading role in 
the U.S. economy, and are responsible for:

      23 million American jobs
      9 million of the 16 million U.S. manufacturing workers
      21% of U.S. GDP
      56% of U.S. exports
      $131 billion in annual U.S. R&D spending and
      49% of U.S. corporate income tax payments

    Moreover, foreign direct investment by U.S. businesses helps create 
markets for American products. This leads to sales in foreign markets 
that likely would not happen by simply exporting goods. For example, 
Wal-Mart, a member of C-FIT, has expanded its global reach by opening 
stores in foreign markets and providing additional markets for the U.S. 
products it sells. As a result, more U.S. products--most of them from 
small businesses--find their way onto foreign shelves. Small U.S. 
producers have a much tougher time getting onto the shelves of Wal-
Mart's foreign competitors, like Carrefour, a French company.
    A recent study by the Organization for Economic Cooperation and 
Development (OECD) found that each dollar of outward foreign direct 
investment led to two dollars of additional exports and a $1.70 
increase in the U.S. bilateral trade surplus. The Commerce Department's 
``Survey of Current Business'' indicates that in 2000 (the most recent 
year for which data are available), U.S.-based multinationals accounted 
for about two-thirds of overall U.S. merchandise exports. Foreign 
affiliates of U.S.-based multinationals purchased $203 billion of goods 
from U.S. sources, while domestic operations of U.S.-based 
multinationals exported $236 billion to other foreign customers.

      The nation's tax and trade policies should work in tandem 
to strengthen the U.S. economy, including by retaining headquarters of 
companies in the United States.

    In recent years, Congress and the Administration have recognized 
the economic importance of trade liberalization measures by enacting 
sweeping tariff reduction agreements. The domestic benefits of free 
trade are not only challenged by overseas trade barriers but are also 
being frustrated by an outdated U.S. international tax regime that acts 
as a trade barrier in its own right--however, this is a trade barrier 
we impose on ourselves.
    The increasingly interdependent global economy has largely been a 
good thing for the U.S. economy. As the President's Council of Economic 
Advisors observed in 2003, ``The U.S. economy is increasingly linked to 
the world economy through trade and investment. Domestically based 
multinational businesses and their foreign investment help bring the 
benefits of global markets back to the U.S. by providing jobs and 
income.'' \2\
---------------------------------------------------------------------------
    \2\ U.S. Council of Economic Advisors, Economic Report of the 
President, 2003, p 208.
---------------------------------------------------------------------------
    U.S. international tax rules have been cited as a factor in the 
loss of U.S. headquarters jobs, one that may create an incentive for 
foreign multinationals to acquire the U.S. operations of American 
companies. These transactions are likely to result in the relocation of 
U.S. headquarters to foreign countries. A 2002 Treasury report on 
corporate inversions notes the growth in foreign acquisitions of U.S. 
businesses in recent years: $90.9 billion in 1997, $234 billion in 
1998, $266.5 billion in 1999, and $340 billion in 2000. The relocation 
of headquarters abroad poses a serious long-term risk to the U.S. 
economy, to the extent that management functions move out of the United 
States and foreign overseers make future U.S. versus foreign investment 
and employment decisions. Decisions made by companies regarding the 
location of their headquarters affect the creation and retention of 
jobs in management, marketing, R&D, information technology, and other 
high-wage, high-skill areas. It is therefore critical that we not adopt 
policies that encourage companies to locate their headquarters 
overseas.

      Thousands of small U.S. businesses participate in the 
global economy as suppliers to U.S.-based multinational corporations.

    Thousands of small businesses support and depend on the global 
operations of U.S. firms. As the Small Business Administration found in 
a report discussing the role of small businesses in the global economy, 
``smaller firms can conduct international expansion on their own, or by 
collaborating with a multinational firm. The intermediated form of 
international expansion has certain advantages. The small firm benefits 
from having access to the multinational firm's global market reach. 
From the large firm's perspective, the arrangement enhances the value 
of its existing contributions to internationalization.'' \3\
---------------------------------------------------------------------------
    \3\ SBA Office of Advocacy, ``The New American Evolution: The Role 
and Impact of Small Firms'' (June, 1998).
---------------------------------------------------------------------------
    Accordingly, reforms that increase the international 
competitiveness of large U.S. based companies will have a positive 
impact on U.S. small businesses.

      Congress must act to support the competitive efforts of 
American companies that operate in the global marketplace.

    The challenge for U.S. companies to remain competitive on an 
international basis has never been greater than it is today. One 
significant factor limiting our competitiveness is the basic structure 
of the U.S. international tax regime. That regime was enacted over 40 
years ago when the U.S. economy dominated the world and 18 out of the 
top 20 global companies were headquartered here. At the time, the 
United States accounted for over half of the world's multinational 
investment. Today, to remain competitive and fuel U.S. economic growth 
and jobs, domestic companies must compete against foreign-owned firms 
for clients and customers that are located around the globe.
    Defects in the Subpart F and foreign tax credit regimes cause U.S. 
companies to face discriminatory tax burdens not borne by their foreign 
competitors. Present law, in general, allows the deferral of U.S. tax 
on foreign earnings of U.S. companies. The Subpart F rules 
inappropriately impose current U.S. taxation on many types of active 
business income earned by U.S. companies through their foreign 
subsidiaries. This premature U.S. tax places the U.S. owned foreign 
subsidiary at a disadvantage relative to its competitors. The U.S. 
rules should permit active business income of foreign operations to be 
taxed when the earnings are paid as dividends to the U.S. parent 
company.
    Similarly, the FTC was enacted to prevent the double taxation of 
income earned by U.S. companies overseas--that is, by both a foreign 
country and the United States. Unfortunately, the FTC has numerous 
arcane rules that cause double taxation of foreign-source income. The 
improvements to the foreign tax credit rules in H.R. 2896 go a long way 
toward eliminating the prospect of double taxation of foreign source 
income. The goal of U.S. international tax policy should be to allow 
U.S. companies to pay roughly the same burden of income tax as their 
competitors do in markets both at home and abroad.

       C-FIT Supports the American Jobs Creation Act (H.R. 2896)

    Briefly, the Ways and Means bill would repeal ETI over three years 
and replace it with a host of business tax reforms that would provide 
crucial benefits to all sectors of the American economy, spur the 
economic recovery, and create new jobs.

      Improves International Competitiveness. To fuel U.S. 
economic growth and jobs here at home--H.R. 2896 would reform 
antiquated U.S. international tax rules that undermine the 
international competitivenessof domestic companies.
      Provides crucial benefits for small businesses. According 
to the National Federation of Independent Business (NFIB), several 
provisions of H.R. 2896 would prove extraordinarily helpful to 
America's small businesses: reduced 32% rate for small employers; 
restaurant and leasehold depreciation shortened from 39 to 15 years; 
increased exemption from the corporate alternative minimum tax; reduced 
depreciation period for manufacturing equipment used in the United 
States; and extension of the 50% bonus depreciation for an additional 
year. Importantly, these benefits would flow to all small businesses: 
firms that do and do not export.
      Delivers Immediate Relief. Small businesses would receive 
many of the benefits included in H.R. 2896--AMT relief and depreciation 
reform--as early as this year, providing a critical and timely boost to 
the economy.
      All Businesses Qualify. The Ways and Means Committee bill 
takes account of the full range of American employers that export and 
compete in the global marketplace for worldwide business. The bill does 
not limit its benefits to corporations and thus includes small 
manufacturers operating as sole proprietors or partnerships. H.R. 2896 
provides all sectors of the U.S. economy--including the valuable 
services and manufacturing sectors--with needed job-creating 
incentives.

                               Conclusion

    The United States must comply with the WTO's FSC/ETI ruling, taking 
into account the interests of all American businesses and their 
workers. ETI replacement legislation should also ensure that U.S. 
businesses and workers are not placed at a disadvantage in relation to 
their foreign competitors. The WTO-mandated changes to U.S. tax law 
should include much needed reforms to our outmoded international tax 
regime because these reforms will ensure that U.S.-based companies can 
continue to compete globally against foreign-based companies operating 
under more advantageous tax regimes.
    C-FIT supports the Bush Administration in its efforts to replace 
the FSC/ETI provisions with reforms to the international tax laws of 
the United States. Accordingly, we enthusiastically support the 
American Jobs Creation Act (H.R. 2896) because it meets the high bar 
set by the Administration: honoring the nation's WTO obligations and 
enhancing the competitiveness of U.S.-based businesses and American 
workers. We stand ready to work with the Congress and the 
Administration to achieve passage of this important legislation.
                                 ______
                                 

                        LIST OF MEMBER COMPANIES

3M
Agilent Technologies
Cargill
Cisco
Citigroup
Coca-Cola
Coca-Cola Enterprises
Deere & Company
Dow Chemical
EDS
Exxon-Mobil
Ford
General Mills
General Motors
Georgia Pacific
Hewlett-Packard
International Business Machines Corporation
Johnson & Johnson
Kodak
Mars, Inc.
McDonald's
Praxair
Procter & Gamble
Texas Instruments
Wal-Mart

                                 

          Statement of Credit Union National Association, Inc.
    The President's 2005 Budget, which was transmitted to the Congress 
on February 2, 2004, contains a number of proposals that the Credit 
Union National Association (CUNA) supports. CUNA represents over 90 
percent of the nation's approximately 10,000 state and federally 
chartered credit unions and their 84 million members. We are pleased to 
provide comments for the record in connection with the February 11, 
2004, hearing of the House Committee on Ways and Means on the 
``President's Fiscal Year 2005 Budget.''
    The Administration's FY 2005 budget plan would, among other things, 
create an Individual Development Account (IDA) tax credit and simplify 
personal saving by replacing existing tax-preferred saving options with 
Lifetime Savings Accounts (LSAs), Retirement Savings Accounts (RSAs) 
and Employer Retirement Savings Accounts (ERSAs).
    IDAs are matched savings accounts that may be opened by persons who 
meet a net worth test and are eligible for the Earned Income Tax Credit 
or Temporary Assistance for Needy Families. The accounts are restricted 
to three uses: 1) buying a first home; 2) funding post-secondary 
education or training; or 3) starting or improving a small business. 
They were first authorized by the Personal Work and Responsibility Act 
of 1996 (P.L. 104-193). In 1998, the Assets for Independence Act (P.L. 
105-285) established a five-year $125 million demonstration program 
administered by the Department of Health and Human Services to evaluate 
the effects of savings incentives on persons of limited means.
    Currently, contributions are not deductible but are matched by 
contributions from a program run by a state or a participating 
nonprofit organization. Matching contributions and their earnings are 
not taxed to the individual. The Administration's IDA proposal would 
provide dollar-for-dollar matching contributions of up to $500 
supported by a 100 percent transferable tax credit to sponsoring 
financial institutions. An additional $50 per account per year would be 
available to offset administrative costs and expenses associated with 
providing financial literacy training.
    In this connection, CUNA notes that H.R. 7, the ``Charitable Giving 
Act,'' passed by the House on September 17, 2003, by a vote of 408-13 
and S. 476, The Charity, Aid, Recovery and Empowerment (CARE) Act of 
2003, passed by the Senate on April 9, 2003, by a vote of 95-5 both 
contain IDA expansion provisions and await further congressional action 
in conference. We urge you to include the transferable tax credit 
provision included in the Senate bill in the final agreement reached on 
this most important legislation.
    Under the Administration's Lifetime Savings Accounts proposal, 
individuals of any age or income could contribute up to $5,000 annually 
(nondeductible) to a LSA, regardless of whether they had any earnings 
that year. Investment earnings and distributions from the account would 
be tax-free. There would be no required distributions from LSAs during 
the account owner's lifetime. Coverdell Education Savings Accounts 
(ESAs) and Section 529 Qualified State Tuition Plans (QSTPs) could be 
converted to LSAs up to December 31, 2005.
    We agree that these more relaxed rules could encourage individuals 
to save who might otherwise not do so in targeted savings plans because 
of restrictions on and penalties for withdrawals.
    The Administration's Retirement Savings Account proposal would 
allow individuals of any age or income to contribute up to $5,000 per 
year \1\ (nondeductible) from earned income to a RSA. Qualified 
distributions \2\ would be tax-free. All other distributions would be 
subject to tax on amounts exceeding contributions. Current ``Roth 
IRAs'' would be renamed RSAs and would be subject to the rules for 
RSAs. Owners of traditional IRAs could convert them to RSAs.
---------------------------------------------------------------------------
    \1\ For a married couple, the maximum contribution would be the 
lesser of annual earned income or $10,000.
    \2\ Qualified distributions would be those made after age 58 or if 
the account owner died or became disabled.
---------------------------------------------------------------------------
    We agree that RSAs would simplify the range of choices for 
taxpayers saving for retirement by making the Roth IRA concept 
available to all taxpayers. Any taxpayer could contribute up to the 
lesser of $5,000 or their earned income. Unlike current law, however, 
withdrawals could only be made for retirement, beginning at age 58. 
RSAs would address a key component of retirement--personal savings.
    By eliminating income restrictions, the RSA could become a strong 
vehicle for retirement savings, particularly for those who are within a 
decade of beginning to retire.
    The Employer Retirement Savings Accounts proposal would make many 
of the employer plans easier to understand. Beginning in 2005, 
Sec. 401(k), Sec. 403(b), Savings Incentive Match Plans for Employees 
(SIMPLE plans), Simplified Employee Pension (SEP) plans and 
governmental Sec. 457 plans would be consolidated into ERSAs, which 
would be available to all employers. Qualification rules under the 
Internal Revenue Code would be simplified.
    LSAs, RSAs and ERSAs could provide additional encouragement for all 
taxpayers to save. However, we urge you to also include and expand the 
current law SAVER's tax credit in the provision.
    American's private savings rate remains low and many low--and 
middle-income individuals continue to have inadequate savings or no 
savings at all. Lower income families remain more likely to be more 
budget constrained with competing needs such as food, clothing, 
shelter, and medical care taking a larger portion of their income. 
Applying the SAVER's credit to RSA and ERSA contributions would provide 
a needed additional tax incentive that would enhance their ability to 
save adequately for retirement. We believe the credit should also be 
made refundable to be available to individuals who might not have to 
pay tax in any particular year.
    CUNA urges Congress to pass tax legislation that would encourage 
all Americans to increase personal savings. We understand that Congress 
may address other tax matters, either as a part of this package or 
later in this session. Should such an opportunity arise, we request 
that you consider legislation that would:

      Simplify the Earned Income Tax Credit;
      Create Farm, Fish, and Ranch Risk Management Accounts 
(``FFARRM'' accounts);
      Permanently extend the retirement and savings provisions 
of the Economic Growth and Tax Relief Reconciliation Act of 2001 
EGTRRA;
      Permit tax free withdrawals from IRAs for charitable 
contributions;
      Provide a tax credit for developers of affordable single-
family housing;
      Permanently extend the disclosure of tax return 
information for administration of student loans; and
      Extend the protections of section 7508 of the Code to all 
Armed Forces reservists and National Guardsmen called to active duty.

CONCLUSION

    CUNA appreciates having this opportunity to present our views on 
the revenue provisions contained in the President's fiscal year 2005 
budget proposal. We look forward to working with you in the future on 
these most important matters.

                                 

   Statement of Equipment Leasing Association of America, Arlington, 
                                Virgina
    This statement is submitted on behalf of the 800 member companies 
of the Equipment Leasing Association of America (ELA). ELA is a non-
profit association representing the equipment leasing and finance 
industry.
    Equipment leasing is used by eight of every ten organizations, 
including tax-exempt entities, to acquire productive assets and raise 
capital. In 2004, the leasing industry will provide over $220 billion 
in equipment investment through lease products. Organizations of all 
types utilize leasing for all kinds of equipment and financing needs. 
In an econometric study released February 3, 2004, the preeminent 
research firm, Global Insight, determined that over the period 1997-
2002, equipment leasing produced between $100-$300 billion additional 
real GDP. The study, The Economic Contribution of the Equipment Leasing 
Industry to the U.S. Economy, indicates that equipment leasing produced 
between $227-$229 billion in additional real equipment investment and 
created between 3-5 million additional jobs.
    The ELA expresses its strong opposition to certain ``anti leasing'' 
tax proposals in the Administration's FY 2005 budget. The 
Administration is proposing a major tax increase on the leasing 
industry and constitutes a major policy change in this area. The 
ostensible policy justification for the proposals is to address 
``unintended'' leasing transactions and practices. The tax principles 
involved in leasing, however, have been developed and reviewed by the 
Congress, successive Administrations and courts over decades in 
legislation, regulations and court decisions.
    It has long been the policy of the Congress to use tax depreciation 
to incent investment in productive assets. Leasing has played an 
important role to insure that these incentives worked efficiently for 
private companies that were currently not profitable and for tax-exempt 
entities by more readily allowing them to acquire productive assets and 
raise capital.
    In 1984 and 1986 Congress specifically addressed the use of leasing 
by tax-exempt entities.

      Congress spelled out the reduced rate of tax depreciation 
available for leases of tax-exempt use property--the so-called ``Pickle 
rules''.
      Congress created an exception from the ``Pickle rules'' 
for short-term leases.
      Congress created an exception for Qualified Technological 
Equipment to promote acquisition and deployment of technology.
      Congress adopted special rules to encourage investment in 
a range of assets, including solid waste disposal through service 
contracts.

    Current and historical public policy regarding leasing to tax-
exempts has provided a reduced investment incentive for the lessor as a 
result of a lower rate of tax depreciation if the lessee is a tax-
exempt customer such as a hospital, city, education facility, public 
transit authority or foreign entity. Congress has recognized that it is 
contrary to sound public policy for the cost of capital for cities, 
hospitals, public transit systems and other tax-exempts be 
substantially higher than that of private entities. The proposed policy 
changes would effectively take away the option of leasing for tax-
exempt entities by changing this long held value of stimulating 
investment in capital goods.
    Specifically, the Administration's proposals would remove the 
exemption for qualified technological equipment (QTE) from the``Pickle 
rules'' for depreciation. There is no description in the 
Administration's proposal or any Treasury literature of any abuse 
associated with the exemption for QTE. Qualified technological 
equipment and computer software are essential to the productivity of 
any organization and the quality and cost of services provided. A tax-
exempt hospital would have to pay $38,000 more a year to lease a CAT 
scan machine. A newly mandated emergency communications systems would 
cost a city substantially more and a public transit authority that 
needs to upgrade its signaling and control systems would similarly 
incur higher costs.
    No modern organization, whether private or tax-exempt, can operate 
efficiently and effectively without investment in technology. In 
addition, technology equipment and software are major sectors of the 
U.S. economy. Reducing demand conflicts with objectives to grow the 
economy and related jobs. Congress has a consistent history of 
encouraging and incenting research and the development and deployment 
of technology. While Treasury can properly define technology for QTE 
purposes it is poor public policy to impose a blanket penalty on all 
technology equipment acquired by a tax-exempt entity.
    The Administration's proposals include aggregating potential 
subsequent service contract periods with initial lease periods for 
purposes of computing depreciation. The proposal has been rejected in 
prior Congresses and ignores the very real differences that exist among 
the parties in a service contract versus those that exist among the 
parties in a lease. The proposal also would undermine the policy 
considerations that led to the service contract distinction that 
currently exists in the Internal Revenue Code.
    Treasury also proposes to limit deductions for leases to tax-
indifferent parties. The proposal sets forth five ``safe harbor'' 
requirements from application of the proposed limits. The first four 
``safe harbor'' requirements are too complex to address in this 
testimony. However, the association wishes to express its willingness 
to address the implications of each of the requirements with Treasury 
officials and the Congress. A central concern is that any regulation or 
policy take into account the realities of risk management and credit 
enhancement in today's capital markets. The fifth requirement is so 
broad that we are unable to comment. However, to unintentionally 
foreclose practices or structures commonly used in capital markets just 
because the customer, the lessee, is a municipality or a hospital or a 
water treatment authority or other tax-exempt entity would be unfair.
    As a result of the Treasury's proposals in the FY 2005 budget, 
however, there will be at least three serious consequences for tax-
exempt entities.

      The options available to tax-exempt organizations for 
acquiring equipment and raising capital are reduced. This loss of 
flexibility makes efficient management more difficult. Strategies such 
as privatization and public-private financings will be severely 
limited.
      The cost of acquiring equipment and raising capital will 
increase for tax-exempt entities. The results will include delayed or 
deferred capital expenditures, personnel layoffs and increases in 
fares/costs for services.
      Tax-exempt entities, organizations that make up a 
significant portion of the economy and provide needed services, will 
not have the necessary access to productive modern equipment.

    CONCLUSION. As it has for over forty years, the association is 
prepared and willing to work with Congress as it considers legislation 
in the tax-exempt leasing area. No major policy change with broad 
effect should be made without careful consideration of the impact on a 
significant sector of the economy, the people who rely on tax-exempt 
organizations for quality service, on a major financial services 
industry and on the manufacturers of equipment and software.
    The value of leasing is that it makes what Congress intended work--
investment--productivity--growth--jobs. Congress has never said:

      ``We want to incent investment, but not for tax-exempt 
organizations.''
      ``We want a free market with business and financing 
options and alternatives, but not for tax-exempt organizations.''
      ``We want to encourage the development and use of 
technology in our economy, but not for tax-exempt organizations.''
      ``We want American businesses to be more global, to 
export what they make or do, but you cannot use the traditional 
elements of the tax code to do it.''
      ``We want to encourage public-private partnerships, but 
let's so unlevel the playing field they will not work.''
      ``We want to encourage and even mandate upgrades and 
improvement in public safety systems, but increase the cost to the 
agencies who have to do it.''

    The association wishes to express its appreciation to the Congress 
for its serious attention to these comments. For those who have an 
interest in greater information we recommend that they go to the 
following web sites.

        http://www.elaonline.com/GovtRelations/Federal/
        http://www.elaonline.com/Leasing4USA/

                                 

                       National Association of Realtors'
                                               Washington, DC 20001
                                                  February 26, 2004

Honorable Bill Thomas
Chairman
Committee on Ways and Means
1100 Longworth House Office Building
Washington, D. C. 20515

Dear Mr. Chairman:

    Pursuant to your request for comments on the President's FY 2005 
Budget, the NATIONAL ASSOCIATION OF REALTORS' (NAR) wishes 
to draw your attention to two proposals of interest to our members. NAR 
represents nearly one million Realtors' who are engaged in 
real estate activities such as sales, leasing, property management, 
brokerage and commercial property investment. Realtors' also 
are active in their communities and seek to expand homeownership 
opportunities in them.

Affordable Housing

    The President's budget proposal recommends a tax incentive designed 
to spur the production of affordable housing. Despite the vigor of the 
housing market in recent years, one category of purchasers has been 
underserved. There is a shortage of housing stock available for 
purchase by individuals and families below the median income level for 
their communities. In many cases these individuals are the teachers, 
firemen and police officers who provide significant services to 
communities they cannot afford to live in. One Realtor' has 
characterized the problem succinctly: ``We are losing our stock of 
entry level housing.''
    President Bush has proposed a tax credit designed to attract 
housing capital to areas where, under current market conditions, the 
cost of constructing or rehabilitating properties exceeds the amount 
that could reasonably be charged as a fair market purchase price for 
the community. For example, in an older, inner-ring suburb, the cost to 
develop housing units might be $130,000 per unit, but a fair market 
value purchase price might be $105,000. The President's proposal would 
provide a tax credit designed to cover the gap. The tax credit would be 
administered by state housing agencies. The pay-out period for the 
credit would be five years.
    The President's proposal follows the model of the very successful 
Low Income Housing Tax Credit (LIHTC) of Section 42. The General 
Accounting Office has audited many LIHTC projects and has found the 
program to be efficient, effective and, as a general matter, not 
susceptible to fraud. The President's proposal provides significant 
safeguards to assure that housing is constructed where it is needed and 
where it will contribute to community renewal objectives.
    A coalition of 40 groups has come together to seek enactment of 
this proposal, embodied in H.R. 839. This bill was originally 
introduced by Messrs. Portman and Cardin and several other members of 
your Committee. As of February 20, 2004, the bill has 250 cosponsors 
that represent the full range of perspectives across the entire 
political spectrum. Companion bills in the Senate (S. 875 and S. 198) 
together have more than 40 cosponsors, again reflecting bipartisan 
support. Bipartisan majorities of the Ways and Means Committee, the 
Senate Finance Committee and of the House and Senate Committees with 
jurisdiction over housing programs are represented among that wide 
cosponsorship.
    NAR recognizes that the President's proposal carries a substantial 
revenue estimate. An NAR representative serves on the steering 
committee of the coalition supporting the credit. NAR has discussed 
with other coalition members ways to reduce the cost of the proposal. 
NAR is eager to work with you, your staff and other coalition members 
to address revenue concerns. Our highest priority is to facilitate the 
prompt enactment of the President's proposal.
    Under the terms of H.R. 839, projects could be undertaken in 
central cities, suburbs and rural areas. Projects in census tracts that 
satisfy certain demographic requirements are eligible to apply to the 
state housing agency for an allocation of the tax credit. The agencies 
would grant allocations based on statewide needs. The allocation 
requirements and numerous other features of the legislation are 
designed to prevent abuses. The goal is to provide a mechanism that has 
numerous safeguards that is nonetheless flexible enough to attract 
capital to neighborhoods where it is currently difficult to attract 
housing capital.
    Realtors' have a significant stake in this legislation. 
For the past few years, Realtors' have found that it is 
easier for a family of modest means to qualify for a mortgage than it 
is for that family to find a suitable house to purchase. The financial 
marketplace has worked efficiently to design mortgage products that 
those of modest means can afford. The housing marketplace, however, has 
not provided sufficient amounts of housing, either newly-constructed or 
rehabilitated, to meet the needs of qualified lower-income buyers. 
Realtors' are committed to expanding homeownership 
opportunities for all Americans. The ideal of homeownership will remain 
out of reach for a substantial group of otherwise qualified Americans, 
however, if the available supply of decent, affordable housing is not 
increased.
    Polling data demonstrate both the widespread concerns about the 
availability of affordable housing and the willingness of voters to 
support affordable housing initiatives for their communities. When 
asked ``How concerned are you about the cost of housing in your area?'' 
two-thirds of respondents said that they were very concerned or 
somewhat concerned. When asked to evaluate the statement ``I would like 
to see government place a higher priority on making housing--both for 
renters and homeowners--more affordable in my area, a total of 71% 
agreed with the statement. Notably, 51% of respondents said that they 
strongly agreed with the statement. Two-thirds of respondents said that 
commitment to affordable housing would be an important determinant of 
their choices of candidates.\1\
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    \1\ Survey conducted by Public Opinion Strategies, August 2003.
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    NAR urges the Committee to act on President Bush's proposal and 
H.R. 839. There is a great need for this tax incentive as a mechanism 
that would increase the available inventory of affordable and entry-
level housing.

Capital Gains

    President Bush recommends a change to the computation of 
depreciation recapture as a component of capital gains measurements. 
NAR wishes first to express its ongoing and fervent opposition to the 
depreciation recapture changes that were made in 1997. Prior to 1997, 
previously-allowed depreciation deductions on both residential and 
nonresidential property were treated as capital gains when a property 
was sold. The capital gains rate was applied to gain in excess of the 
adjusted basis. (Before 1986, when capital gains were partially 
excluded from income, the depreciation recapture amounts were eligible 
for the same exclusion as all other gain.) Since 1997, however, the 
depreciation deductions are treated as neither capital gains nor 
ordinary income and are taxed at a fixed rate of 25%. NAR continues to 
believe that the appropriate treatment of these amounts is to afford 
them capital gains treatment.
    The President's proposal would reclassify the depreciation 
recapture amount. One-half would be treated as capital gains income and 
one-half would be treated as ordinary income. The effect of this change 
is that taxpayers in the top income tax bracket (currently 35%) would 
experience no change in the effective tax rate on the recapture amount. 
That rate would remain 25%. Taxpayers in brackets below 35% would 
experience a very modest reduction in the effective tax rate on their 
recapture amounts.
    So far, so good. We note, however, that if, at any time, marginal 
tax rates on ordinary income exceed 35%, individuals who sell 
investment real estate will experience a tax increase on their 
recapture amounts. NAR is concerned about this possibility. Not only do 
we believe that current law related to depreciation recapture is 
incorrect, but we see the possibility under current law that the tax 
rate on recapture would increase should the Bush tax cuts expire. 
Moreover, we see the President's proposal as one that offers either a 
half-full or half-empty glass to real estate. In bifurcating the 
recapture amount into ordinary and capital gains amounts, the proposal 
presents an opportunity to future Congresses to either restore capital 
gains treatment to the full recapture amount (which we would eagerly 
support) or to treat the full recapture amount as ordinary income 
(which we would oppose).
    NAR will not oppose the President's proposal. We do wish, however, 
to make the Committee aware of the long-term implications of the 
concept. Our members viewed the reduction of the capital gains rate to 
15% as a positive development, but remained disappointed that the 
recapture tax rate was not reduced by a commensurate amount. This 
proposal would create the possibility of increased recapture burdens 
should tax rates change.
    The NATIONAL ASSOCIATION OF REALTORS' appreciates this 
opportunity to present its views to the Committee. We look forward to 
working with you and your staff.
            Sincerely,
                                                  Jerry Giovaniello
                                         Sr. VP, Government Affairs

                                 

                     Statement of the R&D Coalition
    Chairman Thomas, Ranking Member Rangel and members of the 
Committee:
    The R&D Credit Coalition appreciates the opportunity to share its 
views with the committee on the provision in President Bush's proposed 
FY 2005 Budget that would make permanent the federal R&D tax credit.
    The R&D tax credit is key to the ability of companies to continue 
creating jobs in the United States. Growth in jobs and in the economy 
depend on growth in U.S. R&D spending. This important tax credit, which 
encourages companies to create more R&D jobs in the U.S., should be 
permanent, and the Coalition applauds the President for again 
demonstrating a strong commitment to making the credit permanent. Many 
members of Congress share this commitment and a permanent extension of 
the R&D credit has long been championed on a bipartisan basis by 
members of this committee.
    First, and foremost, it is imperative that Congress act to extend 
and strengthen the R&D credit before its scheduled June 30, 2004 
expiration. Expiration of this credit, even with a retroactive 
extension, is extremely disruptive to businesses with research projects 
in the pipeline. Further, the effect of an expiration of the credit 
could be felt in the financial markets this year as companies adjust 
their financial statements to factor in a higher cost of their research 
projects.
    The President's budget proposal, in addition to recommending the 
permanent extension of the credit, also acknowledges the need to assess 
whether modifications to the credit are necessary and directs the 
Treasury Department to study the credit and ways to improve its 
incentive effect. The Coalition looks forward to working with the 
Treasury Department and the Congress in this endeavor.
    We submit for consideration in this regard the following 
recommendations that the hundreds of research-intensive businesses and 
organizations in the Coalition strongly support. We believe that an 
extension of the R&D credit coupled with the changes we recommend will 
address the most pressing concerns that face the business community now 
and will help ensure that as we continue to strive for the ideal 
research incentive we do not disrupt research projects already 
underway.

Recommendations

    The Coalition's members--who are unified in support of a permanent 
and strengthened research tax credit--recommend that, first, the R&D 
tax credit be made permanent and that the current Alternative 
Incremental Research Credit (AIRC) rates be increased to improve the 
effectiveness of the AIRC. The Administration pointed out in its 
budget, and we want to underscore, that permanence is essential to the 
effectiveness of this credit.
    Research and development projects typically take a number of years 
and may even last longer than a decade. The continued uncertainty 
surrounding the credit has induced businesses to allocate significantly 
less to research than they otherwise would if they were assured the tax 
credit would be available. This uncertainty undermines the purpose of 
the credit and has stifled its full potential for inducing research 
spending. For the government and the American people to maximize the 
return on their investment in U.S.-based research spending, this credit 
must be made permanent.
    In addition, we recommend a new alternative simplified credit that 
will allow taxpayers to elect to calculate the R&D credit under 
computational rules. Although the current-law regular R&D tax credit is 
still an effective incentive for many companies, the combination of the 
base period and business cycle changes, has resulted in many companies 
that incur significant research expenditures being unable to claim any 
credit. To help solve part of this problem Congress enacted the AIRC in 
1996 and our recommended alternative elective credit will help address 
the rest of that problem.
    Under current law, both the regular credit and the AIRC are 
calculated by reference to a taxpayer's gross receipts, a benchmark 
that could produce certain anomalous results. For example, many 
taxpayers are no longer able to qualify for the regular credit, despite 
substantial R&D investments, because their R&D spending relative to 
gross receipts has not kept pace with the ratio set in the 1984-88 base 
period, which governs calculation of the regular credit. This can 
happen, for example, simply where a company's sales increase 
significantly in the intervening years, where a company enters into a 
new line of business that generates additional gross receipts but 
involves little R&D, or where a company becomes more efficient in its 
R&D processes.
    We recommend that taxpayers be permitted to elect, in lieu of the 
regular credit or the AIRC, a credit that would equal 12 percent of the 
excess of the taxpayer's current year qualified research expenditures 
(``QREs'') over 50 percent of the taxpayer's average QREs for the 3 
preceding years. Unlike the regular credit and the AIRC, this credit 
calculation does not involve gross receipts.
    The R&D Credit Coalition is committed to working with the Bush 
Administration and the Congress to achieve the important goal of growth 
in the economy that comes from growth in R&D spending and the high-wage 
jobs that are created in the United States.

                                 
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