[Congressional Record Volume 140, Number 9 (Friday, February 4, 1994)]
[House]
[Page H]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: February 4, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
          STATEMENTS ON INTRODUCED BILLS AND JOINT RESOLUTIONS

      By Mr. DORGAN (for himself, Mr. Conrad, Mr. Daschle, Mr. 
        Pressler, and Mr. Burns):
  S. 1827. A bill to terminate the North American Free-Trade Agreement 
as it applies to Canada and the United States-Canada Free-Trade 
Agreement and to impose additional duties on grain imported from 
Canada, until the United States and Canada renegotiate the provisions 
of the agreements regarding the importation of Canadian grain; to the 
Committee on Finance.


        united states-canada grain trade settlement act of 1994

  Mr. DORGAN. Mr. President, I will speak today about an exasperating 
problem that is wreaking economic havoc on farmers in North Dakota and 
neighboring States, and only continues to worsen. The problem is unfair 
trade practices that have led to an unrelenting flood of grain imports 
from Canada.
  That is why I am introducing today the United States-Canada Grain 
Trade Settlement Act of 1994. This bill will require action on behalf 
of many thousands of farmers who have lost hundreds of millions of 
dollars, and who have waited for more than 4 years for Government 
officials to correct the very harmful Canadian trade practices. My bill 
would also put United States officials in a much stronger position in 
current negotiations with Canada on this issue.
  Mr. President, Canada exported virtually no Durum wheat, and very 
little other grains, to the United States before the United States-
Canada Free-Trade Agreement [CFTA] was completed in 1988. Since that 
time, however, farmers in North Dakota and other grain-producing States 
have lost millions of dollars each month as a result of gaping 
loopholes in the CFTA. The loopholes have allowed and encouraged the 
Canadian Wheat Board and other Canadian shippers to export a flood of 
subsidized Canadian grain, which pours into our market and depresses 
prices.
  In many towns near the Canadian border, United States farmers can't 
sell their grain at any price because Canadian grain has filled local 
elevators and plugged the market pipeline.
  According to the latest information from the Canadian Grain 
Commission, Canada is setting records again this year in spring wheat, 
Durum, and barley exports to the United States. Canadian barley 
shipments, at 15.2 million bushels in the first 5 months of this 
marketing year, are almost five times the volume shipped a year ago. 
Shipments of Canadian Durum, at 8.9 million bushels, and spring wheat, 
at 26.6 million, both have increased sharply. With Government subsidies 
and unfair pricing, Canada has captured a fourth of our domestic Durum 
market.
  The fact is, it's unfair trade and it must be stopped. I've run out 
of patience. It's time to act.
  Mr. President, my bill would do three things.
  First, if the President is unable to certify within 6 months that 
Canada has halted its unfair practices, the bill will direct the 
President to repeal the United States-Canada Free-Trade Agreement, in 
accordance with the provisions of the CFTA. The CFTA allows either 
party to terminate the agreement with 6 months' notice. That means the 
CFTA would end 1 year after enactment of my bill.
  Second, my bill would immediately impose a 50-percent tariff on all 
imports of wheat, Durum, and barley. This is the same remedy available 
under the emergency procedures of section 22 of the Agricultural 
Adjustment Act of 1933. The United States has started an investigation 
of the Canadian trade practices, under the nonemergency procedures of 
section 22, but the evidence already is clear and calls for immediate 
action. My bill would legislate the 50-percent tariff.
  Third, the bill would allow the President to rescind the sanctions 
and avoid repealing the CFTA if Canada ends the unfair trade practices. 
The President would have to certify that Canada has: First, ended 
Government subsidy of rail shipping for grain exported to the United 
States; second, fully reported the prices of grains Canada exports to 
the United States; and third, stopped sale of grain into the United 
States at prices less than the exporters' actual full cost of producing 
the grain.
  This bill is action--not talk. After more than 4 years of 
consultations, arguments, and negotiations, I believe farmers deserve 
action now.
  I have searched long and hard with our farmers for solutions to the 
flood of Canadian grain. Farmers in the North Central and Northwest 
States have lost hundreds of millions of dollars because of grain sales 
lost to subsidized Canadian grain. The surplus foreign grain has added 
about $600 million to the cost of our own Federal farm program, the 
U.S. Department of Agriculture estimates.
  Mr. President, the flood of Canadian grain has created the following 
situation. The U.S. Treasury pays to place Export Enhancement Program 
bonuses on grain exports to counter European export subsidies. This is 
necessary to complete sales of U.S. grain and avoid accumulation of 
surplus supplies. Canada, meanwhile, is paying a huge subsidy for rail 
transportation to ship grain into the United States, where Canadian 
grain joins United States grain in our export market channels. The net 
result is that EEP bonuses are, in effect, going to subsidize the 
export of Canadian grain along with United States grain.
  For 4 years, throughout the past administration, grain farmers from 
the northern States and some of us in Congress pressed our Government 
officials to deal with a worsening problem. Our free trade agreement 
with Canada, and related documents, prescribed a framework for working 
out problems of Canadian subsidies on exports to the United States and 
clear reporting of export prices to allow monitoring of the agreement. 
For most of the years since the CFTA was completed, however, our 
demands fell on deaf ears.

  The Clinton administration, especially our United States Trade 
Representative and Secretary of Agriculture, are actively working to 
resolve this problem and bring some measure of fairness to our grain 
trade with Canada. They have initiated an investigation, which could 
lead to tariffs or tariff-rate quotas on Canadian grain until we can 
establish fair trade with the Canadians. However, we cannot expect any 
action to come from this investigation until this summer, and the 
administration has declined to take immediate, emergency action to 
restrict the unfair Canadian exports.
  Mr. President, the time for action by our Government is past due. It 
is time for Congress, representing the producers and working people of 
this country, to take hold of this matter and force a conclusion.
  I hope my colleagues, especially those from grain-producing States, 
will join me in cosponsoring this bill. Also, I ask unanimous consent 
that the text of my bill be printed in the Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                S. 1827

       Be it enacted by the Senate and House of 
     Representatives of the United States of America in 
     Congress assembled,

     SECTION 1. SHORT TITLE.

         This Act may be cited as the ``United States-Canada Grain 
     Trade Settlement Act of 1994''.

     SEC. 2. FINDINGS.

       The Congress makes the following findings:
       (1) As a result of unfair and incomplete provisions in the 
     United States-Canada Free-Trade Agreement (hereafter referred 
     to as the ``CFTA'') and the North American Free Trade 
     Agreement (hereafter referred to as the ``NAFTA'') affecting 
     exports of Canadian grain to the United States--
       (A) Canadian exports of durum wheat, spring wheat, and 
     barley have increased beyond the level that such exports can 
     be absorbed into the United States market;
       (B) these exports have depressed domestic grain prices, 
     causing severe financial losses to American farmers and 
     increasing the costs and difficulties of implementing 
     domestic farmer support programs; and
       (C) Canadian grain exports continue to increase without 
     bounds, increasing the damage to United States farmers each 
     year.
       (2) The Congress approved the CFTA subject to--
       (A) the statement in the Statement of Administrative Action 
     that the United States would ``pursue consultations with 
     Canada regarding the price setting policy of the CWB 
     (Canadian Wheat Board) as it affects goods exported to the 
     United States....directed toward establishing a method to 
     determine the price at which the CWB is selling agricultural 
     goods to the United States and the CWB's acquisition price 
     for those goods''; and
       (B) the provision of the implementing legislation requiring 
     that ``the President will enter into immediate consultation 
     with the Government of Canada to obtain the exclusion from 
     the transport rates established under Canada's Western Grain 
     Transportation Act of agricultural goods that originate in 
     Canada and are shipped via east coast ports for consumption 
     in the United States,'',

     yet to date there has been no resolution of these 
     consultations.

       (3) United States trade negotiators agreed not to reexamine 
     the CFTA while negotiating the NAFTA based on the assumption 
     that the Uruguay Round talks of the General Agreement on 
     Tariffs and Trade would address the subsidy and dispute 
     resolution concerns and would be completed before the 
     enactment of the NAFTA.
       (4) The failure of the United States successfully to pursue 
     the consultations described in paragraph (2) led to a flawed 
     binational panel decision that renders meaningless the 
     plain language of Article 701(3) of the CFTA (which was 
     incorporated by reference in the NAFTA), which states that 
     ``Neither Party, including any public entity that it 
     establishes or maintains, shall sell agricultural goods 
     for export to the territory of the other Party at a price 
     below the acquisition price of the goods plus any storage, 
     handling or other cost incurred by it with respect to 
     those goods.''.
       (5) Imports of wheat and barley have increased 
     significantly as a result of substantial changes in Canada's 
     support programs. Some of the changes were made with declared 
     intent to increase imports to the United States. The 
     increases in imports constitutes grounds under Article 705.5 
     of the CFTA for use of import restrictions by the United 
     States.

     SEC. 3. TERMINATION OF AGREEMENTS AND IMPOSITION OF 
                   ADDITIONAL DUTIES.

       (a) In General.--
       (1) Termination of nafta and cfta.--Notwithstanding any 
     other provision of law, the President shall provide written 
     notification to the Government of Canada of the intent of the 
     United States to terminate the CFTA and the NAFTA, as such 
     agreement applies to Canada, unless the President provides 
     the Congress with a certification described in subsection 
     (c). Such notification shall be given not later than the date 
     that is 6 months after the date of the enactment of this Act 
     and shall provide that the agreements shall terminate not 
     later than 1 year after the date the enactment of this Act in 
     accordance with the terms and conditions of the respective 
     agreements.
       (2) Imposition of duty.--Notwithstanding any other 
     provision of law, the President shall immediately impose a 
     duty at the rate of 50 percent ad valorem or the specific 
     rate equivalent to articles imported from Canada described in 
     the following headings of the Harmonized Tariff Schedule of 
     the United States:
       (A) heading 1001.10.00 (relating to durum wheat),
       (B) heading 1001.90.10 (relating to seed wheat),
       (C) heading 1001.90.20 (relating to other wheat),
       (D) heading 1003.00.20 (relating to malting barley), and
       (E) heading 1003.00.40 (relating to other barley).
       (b) Negotiations.--The President shall immediately pursue 
     negotiations with the Government of Canada to--
       (1) establish a method for determining the sale price of 
     Canadian grain exports to the United States and the Canadian 
     Wheat Board's acquisition price for such grain;
       (2) establish procedures for obtaining the data necessary 
     to implement the method described in paragraph (1);
       (3) eliminate all transportation subsidies on agricultural 
     goods that originate in Canada and are shipped for 
     consumption in the United States; and
       (4) clarify the meaning of the term ``acquisition price'' 
     in Article 701(3) of the CFTA (and any other provision 
     accompanying such agreement or the NAFTA) so that such term 
     includes--
       (A) the value of any transportation subsidy applied to 
     grain entering the United States;
       (B) all direct payments to producers made by the Canadian 
     Wheat Board or any government agency for grain entering the 
     United States; and
       (C) any other payments or subsidy incurred by the Canadian 
     Wheat Board, any government agency, or any private interest 
     in the acquisition, handling, storage, and transportation of 
     the grain.
       (c) Certification by the President.--At such time as the 
     President certifies to the Congress that the Government of 
     Canada has entered into an agreement with the United States 
     with respect to the requirements described in subsection (b), 
     the President may terminate the duties imposed under 
     subsection (a)(1) and take action to reinstate the CFTA and 
     the NAFTA with respect to Canada. An agreement entered into 
     under this Act shall supersede the corresponding provisions 
     of the CFTA and the NAFTA and shall be incorporated in and 
     become part of such agreements as reinstated.

  Mr. BURNS. Mr. President, I rise today to cosponsor the bill being 
introduced by Senator Dorgan of North Dakota.
  Let there be no question, I support free trade. Yet, Montanans want 
equity, and certain segments of Montana's economy are not being treated 
fairly under the Canadian Free-Trade Agreement. All of Montana's 
industries deserve the right to operate under free and fair trade. But, 
under this agreement, fair trade has not always been the case.
  Montana does have a positive trade relationship with Canada. We 
export more goods than are imported. Yet certain segments of our 
economy are being hindered by unfair trade practices. Montana's grain 
producers want fair trade and open markets--but currently, we don't 
have fair trade.
  The bill which my colleagues and I are introducing does three 
important things: First, it directs the President to repeal the United 
States-Canada Free-Trade Agreement if unfair trade practices are not 
halted. Second, it would impose a 50-percent tariff on imports of 
wheat, Durum, and barley. This would be the same as if a section 22 
were imposed. And third, the bill would allow the President to end the 
sanctions and avoid repealing the Canadian Free-Trade Agreement if 
Canada ends unfair trade practices regarding rails subsidies, 
disclosure of export prices, and ends the sale of grain at prices below 
the actual cost of production.
  The American Government must show the Canadian Government that we are 
going to protect our producers from unfair trade. Montanans want free 
and fair trade-but we don't have this now. Something must be done to 
level the playing field regarding Canadian wheat and barley dumping on 
Montana's market. This is a matter of fairness.
                                 ______

      By Mr. HATCH:
  S. 1829. A bill to amend the Internal Revenue Code of 1986 to provide 
tax incentives to encourage small investors, and for other purposes; to 
the Committee on Finance.


                 small investors tax relief act of 1994

  Mr. HATCH. Mr. President, I rise today to introduce the Small 
Investors Tax Relief Act of 1994. This bill is designed to accomplish 
two purposes. First, it will strengthen this Nation's precarious 
economic condition by stimulating economic growth and creating new 
jobs. Second, it will bring a measure of common sense and fairness to 
the tax burdens of the 80 to 90 million American small investors who 
are the lifeblood of our economic system.
  The Small Investors Tax Relief Act of 1994 is very simple. It has 
only three provisions. First, it would exempt from Federal taxation the 
first $2,000 of interest and dividend income earned annually by 
individuals. Second, it would exempt the first $50,000 of an 
individual's capital gains from Federal income tax annually. Finally, 
it would index capital assets held for at least 1 year so that 
investors no longer would be required to pay taxes on gains caused by 
inflation.
  Mr. President, the economic health of our Nation is in serious 
trouble. Some of my colleagues may be surprised to hear me say this 
when all about us are signs of economic growth and revival. After all, 
interest rates are at their lowest levels in many years, inflation 
seems to be under control, and it seems that the stock market is 
setting new records each day. All around us, we hear the sounds of a 
great economy stirring from its slumber.
  I will not deny that there is much good news on the economic front 
lately. I fear, though, that this news may lead us into the complacency 
of believing that all is well in our fiscal house. This is simply not 
true.
  Much, if not most, of the economic growth our Nation has lately 
experienced is due to consumer spending. While consumer spending can do 
wonders for the short-term economic prognosis, it will most likely not 
be sustainable. The evidence is that consumers are borrowing from the 
future to spend more now.
  The Wall Street Journal reported last December that not only are 
consumers charging more purchases to their credit cards, they have let 
their savings rate slide lower and lower. From a 5.2-percent rate in 
1992, the savings rate for 1993 was just over 4 percent as of November. 
And, the savings rate is dropping further now because our spending is 
growing faster than our income. Moreover, the new withholding rates 
from last year's record tax hike for higher income, bigger spending 
Americans have now taken effect, which will surely put a crimp on how 
much wealthier consumers save.
  The new tax law will also hurt the savings rate another way. One of 
the provisions of that bill limits the amount of income that can flow 
tax free into certain defined benefit plans. Savings programs such as 
401(k) and Keogh plans are also limited by this change, further 
reducing savings rates.
  The result, Mr. President, is that our savings rate is dropping into 
the danger zone. As my colleagues know, the U.S. savings rate has been 
far below that of our major competitors since the 1970's, when it was 
in the 9-to-10 percent range. In fact, our savings rate is currently 
the lowest of all of the G-7 countries. In 1991, Germany's savings rate 
was 4.3 times ours and Japan's was nearly 9 times as high.
  Why is too low a savings rate bad for the economy? Basically, it is 
because it raises the cost of capital, forcing the Government and 
businesses to pay more for the use of money and putting the United 
States at a disadvantage internationally. The cost of capital has a 
direct bearing on the formation of businesses and on the creation of 
new jobs. If we want long-term prosperity, Mr. President, we need to 
address the savings rate.
  My bill is designed to reverse this downward trend in the savings 
rate. It will encourage Americans to save more money. By allowing 
individual investors to exclude the first $2,000 of interest and 
dividend income, an investor or potential investor will find that 
currently lackluster CD rates will become attractive. Average 
Americans, leery of the stock market and until now unimpressed with the 
after-tax savings rates at financial institutions, will take another 
look at putting their money in banks. The result will be more capital 
available for business formation.
  This dividend and interest income exclusion in the bill also promotes 
tax fairness, Mr. President. Under the current law, corporate dividends 
are taxed twice--once to the corporation that earns the income, and 
again to the individual investor when that income is distributed. This 
is not fair and tends to lead investors away from traditional, dividend 
paying stocks. The $2,000 exclusion would help give taxpayers some 
relief from the detrimental effects of double taxation.
  The idea of excluding interest and dividend income for investors is 
not new. Until the 1986 Tax Reform Act repealed the provision, the Tax 
Code allowed individuals to exclude up to $200 of interest and dividend 
income annually.
  This bill will go a long way toward encouraging young people to learn 
to work and save their money. Our current tax law does just the 
opposite. A young person who is claimed as a dependent on his or her 
parent's tax return must pay tax on the first dollar of interest or 
dividend income if he or she has as little as $600 in earned income. 
Thus, a teenage girl with a paper route who earns more than $600 is 
taxed from the first dollar on any interest that she receives from 
putting her earnings in the bank to save for college. What kind of 
incentive to work and save is this, Mr. President? We should be 
teaching our children from a young age the virtues of work and saving 
money for the future. But, instead, our tax code is teaching people to 
avoid taxes by spending.

  The Small Investors Tax Relief Act of 1994 also features two other 
provisions to encourage individuals to invest in a growing America. The 
first of these is an annual exclusion from Federal income tax of the 
first $50,000 of an individual's capital gains income. The second is a 
provision to index capital assets to the rate of inflation.
  Mr. President, the debate over the taxation of capital gains has been 
long and very partisan. Both sides of the issue have repeatedly stated 
their positions and cited statistics to back them up. This debate has 
mostly focused on three points of disagreement--fairness, economic 
benefit, and the revenue effect of a reduction of the tax on capital 
gains. I would like to address each of these points.
  Opponents of a lower tax on capital gains have told the American 
people that such a change would be a huge tax break for the wealthy in 
our nation, at the expense of the lower and middle classes. They have 
pointed to studies that purportedly demonstrate that more than 60 
percent of the benefits of a capital gain tax reduction will be claimed 
by taxpayers with income of more than $200,000 per year. Many of the 
statements I have heard that are based on such studies are downright 
misleading. The income figures used in these studies are comprised of 
the entire income of the taxpayer, including the capital gain.
  Let me give you an example. An elderly couple living in Cache Valley, 
UT, has been farming on land they have owned for 40 years. The land was 
purchased for $50,000 in 1950. For health reasons, they have decided to 
sell the farm and retire to St. George, a city in the southern part of 
the State with a warmer climate. They sell the farm for $250,000. This 
couple has never reported more than $35,000 of gross income on their 
tax returns. But in the year of the sale, they report more than 
$200,000 of gross income. Are these people among the very wealthiest 
income earners in our nation? Of course not. But opponents of a capital 
gains tax cut would say that this family is extremely wealthy. In 
reality, this one-time capital gain represents the effects of inflation 
and the urbanization of our country. It is totally misleading to 
classify this couple as being in the upper income brackets simply 
because, for this one year only, they sold their major asset.
  A far more accurate study of the distribution of capital gains 
benefits would include only recurring, or ordinary, income. One study 
using such methodology shows that 65 percent of taxpayers with capital 
gains have ordinary income under $50,000, and that over 25 percent of 
taxpayers with capital gains have ordinary income of under $20,000. 
Moreover, only about 5 percent of taxpayers with capital gains have 
incomes above $200,000. These studies show that it is the average 
American who is, to a large degree, paying taxes on capital gains. I 
will repeat, Mr. President, studies that indicate that a reduction in 
the tax on capital gains will only benefit high income taxpayers are 
misleading.
  Another important factor in this argument about the fairness of 
capital gain taxation is the so-called lock in effect. This effect is 
caused by investors holding on to their capital assets because they do 
not want to pay what they perceive as too high a capital gains tax upon 
the sale. by holding on to the asset and allowing it to appreciate in 
value, rather than selling it and paying the tax, many Americans can 
avoid paying the capital gains tax. This has made the capital gains tax 
largely a voluntary tax for many affluent Americans.
  Studies by the Congressional Budget Office show that it is the 
wealthier taxpayers who are holding on to their capital assets to avoid 
paying the tax. One CBO study found that when the capital gains tax was 
over 40 percent in the mid-1970's, taxpayers in the top 1 percent of 
income accounted for just 33 percent of all taxable capital gains. But 
when the capital gains tax rate was cut to 20 percent in 1981, the top 
1 percent accounted for 55 percent of all realized capital gains.
  Low- and middle-income Americans more often do not have he luxury of 
waiting for a more favorable tax rate in order to sell their stock 
holdings, small business, farm, or home. These taxpayers often need the 
cash immediately and will sell and pay the higher tax while their rich 
counterparts wait until the tax rate drops.
  The evidence gathered since the passage of the 1986 Tax Reform Act 
shows that capital gains paid by the wealthy have declined. In 1985, 
Americans with incomes over $500,000 per year paid $12 billion in 
capital gains taxes. This amount had dropped to $10 billion in 1991, 
adjusted for inflation, confirming that wealthier taxpayers are holding 
on to their assets.
  Unfortunately, Mr. President, proponents of a reduction in the tax on 
capital gains have not prevailed. Those who inaccurately portray an 
incentive rate on capital gains as a tax break for the wealthy have 
been able to stop legislation lowering the tax from going forward in 
the Congress. Therefore, my proposal offers a new approach.
  Instead of cutting the tax rate on capital gain income, my bill 
starts from the bottom up by helping the lower and middle income 
investors first. It encourages young people to start savings accounts. 
It encourages average citizens to start their own businesses and their 
relatives and friends to invest in those new businesses. It encourages 
everyone--young, old, and middle-aged, urban and rural, newly married 
or newly retired--to invest in the stock market, buy some real estate, 
or open up an account at the local bank.

  What it does not do, Mr. President, is unduly reward those at the top 
of the income spectrum. The very wealthy will get the same exemption 
for capital gains income as everyone else--and no more.
  Some critics of this proposal may point out that our Tax Code already 
offers incentives for low- and middle-income individuals to save and 
invest. These incentives take the form of individual retirement 
accounts [IRAs] and employer sponsored pension, profit sharing, and 
401(k) plans. Most low- and middle-income taxpayers do not take full 
advantage of these plans. The major reason for this is these 
individuals are hard pressed to put away money in long-term savings 
accounts when they know there are significant penalties for withdrawing 
it before retirement.
  My bill will help convince these individuals that they should begin 
or add to their savings programs now. People who automatically spend 
all of their discretionary income on consumption will be encouraged to 
sock some of it away to help secure their family's future without 
having to worry about putting their money out of reach for decades.
  By excluding the first $2,000 of dividend and interest income and the 
first $50,000 of capital gains income, my bill offers a tremendous 
incentive to lower- and middle-income taxpayers. Current laws imposes a 
tax rate of 15 percent, 28 percent, or even higher on the first dollar 
of investment income. Lowering this rate will encourage more savings. 
Eliminating it for all but the wealthiest taxpayers, like my bill does, 
will do even more.
  My bill would help restore tax fairness in two ways, Mr. President. 
First, by excluding the first $50,000 of an individual's capital gain 
income from taxation each year, wealthy taxpayers would be much less 
hesitant to hold on to their capital assets. This would unlock billions 
of dollars of assets currently frozen in place, including assets with 
gains of more than $50,000, which would be generally taxable at the 28-
percent rate.
  Thus, the wealthiest taxpayers would be the only ones paying the 
capital gains tax, and they would be much less hesitant to do so. 
Second, by indexing capital assets for inflation, my bill removes one 
of the unfairest features of our current tax system--the taxing of 
inflationary gains.
  There is nothing fair about having to pay tax on inflationary gains. 
The tax on inflationary capital gains is not a tax on income or even on 
the increase in the real value of the asset. It is purely a tax on 
capital very much like the property tax, but only assessed when the 
property is sold.
  Many leading economists have spoken out in favor of capital gains 
indexing as a way to spur economic growth and promote fairness in the 
Tax Code. In fact, Federal Reserve Chairman Alan Greenspan testified 
before the Joint Economic Committee this week that if taxes are to be 
imposed on capital gains at all, they should be levied only on profits 
accrued over and above the underlying inflation rate.
  My bill would help achieve these goals and make more capital 
available by indexing prospectively the bases of capital assets held 
more than 1 year. Thus, assets sold after this year would not be taxed 
on that portion of the gain due solely to inflation occurring after 
this year.
  Mr. President, I would like now to address the issue of the economic 
impact of the taxation of capital gains. One the most basic rules of 
economics is that you get less of whatever it is that you tax. Thus, a 
tax on capital is going to result in less capital available. The higher 
the tax, the less capital. If you lower the tax, you get more. Capital 
mobility is essential to growth and job creation in every sector of our 
economy; but, the current tax treatment of capital gains does 
absolutely nothing to promote this goal.
  Studies show that, since the late 1960's, every time that the tax 
rate on capital gains his risen, the amount of capital gains realized 
by taxpayers has fallen. Conversely, every time that rates have fallen, 
realizations of capital gains have gone up. To illustrate this, 
consider that revenues from capital gains dropped from $41 billion in 
1987 to $26 billion in 1991, despite the fact that the top tax rate on 
capital gains went from 20 percent to 28 percent.
  There are two reasons for this realization effect. First, high rates 
of capital gains taxation creates the lock-in effect I discussed 
earlier. This tends to induce holders of unrealized capital gains, 
especially wealthier ones, to hang on to their assets until such time 
that a more favorable tax rate is available. Since the recent history 
of capital gains tax rates has been up and down and up again, many 
taxpayers feel that it is just a matter of time before they go down 
again.
  Second, high capital gains tax rates depress economic activity. This 
is because a high capital gains tax rate acts as an artificial 
impediment to the natural flow of capital. An investor who might want 
to invest in a new venture may hesitate to do so because he or she does 
not want to pay the high tax on realizing the gain where his or her 
capital is now located.
  In addition, that investor will have a higher hesitancy to invest in 
a risky venture knowing that his or her ultimate reward may be greatly 
diminished because of the high capital gains tax rate. These factors 
impede investors from moving their money into other ventures that may 
offer a higher rate of return and contribute more to the Nation's GDP. 
The higher the capital gains tax, the greater the disincentive. Or, to 
say it the other way, the greater the risk of the investment, the 
greater the profit potential has to be. The capital gains tax eats into 
the profit potential.

  Opponents of a reduction in the taxation of capital gains do not 
believe that such a reduction will result in economic benefit to the 
Nation commensurate to the loss of revenue. Our recent history with 
changing the capital gains tax rates suggests otherwise.
  Investing in capital assets is a form of saving. Capital gains are 
the rewards investors receive for the risks of their investment. Taxing 
those capital gains creates a bias against saving and toward 
consumption. This, of course, discourages saving and encourages 
consumption. This trend is the pathway to disaster. Things may look 
fine today; but, a decade from now, we will be paying the price for our 
failure to save.
  At the risk of repeating myself, Mr. President, increasing the 
Nation's savings rate reduces the cost of capital. This leads to a 
greater amount of capital available for the formation of new ventures. 
New ventures lead to new jobs, and new jobs generate new revenues.
  When the capital gains tax rate jumped from 20 percent to 28 percent 
in 1987, a terrible thing happened. Seed capital for new businesses 
began to dry up. Between 1986 and 1991, venture capital financing of 
small businesses fell from $4.2 billion to $1.4 billion. In 1986, 1,512 
firms received venture capital financing. By 1991, that number was down 
to 792.
  It is clear that the willingness of investors to take risks on new 
ventures is tied to the tax on capital gains. We must never forget, Mr. 
President, new businesses create new jobs. And capital creates new 
businesses.
  It is no secret that our major trading partners tax capital gains 
more lightly than we do. Over 50 nations do not tax capital gains at 
all. These nations generally enjoy a significantly higher savings rate 
than does the United States. By reducing the disincentive to saving, 
these nations find that capital is more readily available. I ask my 
colleagues, are we not being shortsighted by encouraging consumption 
rather than saving?
  Mr. President, I realize that the Joint Committee on Taxation [JCT] 
will likely score this bill as a major revenue loser. I have requested 
an estimate but, as of today, have not yet received it. However, I do 
not want to place undue emphasis on the importance of this estimate.
  Unfortunately, this body has allowed the estimation of the revenue 
effect of a capital gains tax reduction to stand in the way of taking 
action that would have greatly benefited our economy. In 1989, the 
House of Representatives, passed a capital gains tax rate reduction. 
Action in the Senate, however, was blocked by a filibuster. Opponents 
of the measure cited CBO revenue estimates that predicted losses of 
about $11 billion over 5 years. This estimate was a major factor in the 
debate.
  Actual tax collection data since 1989, however, shows us how 
inaccurate CBO and JCT predictions have proven to be. In January 1990, 
the CBO estimated capital gains realizations to be $269 billion for 
1991. JCT had earlier predicted that 1991 capital gains realizations 
would be $285 billion. The actual amount of capital gains realized was 
only $108 billion. Both estimates were off by more than $150 billion.
  How could these estimates be so out of whack, Mr. President? The 
answer is quite simple. The estimates did not take into account the 
full effect that the capital gains tax rate has on individuals and on 
the economy. When the capital gains tax rate was increased, the 
sensitivity of investors to the higher rate was clearly misjudged. They 
held on to their assets and economic growth was far less that it would 
have been had they sold them.
  Likewise, the methodology employed in estimating the revenue effects 
of a lower tax on capital gains is inaccurate because it only considers 
the unlocking effect produced when investors are induced to sell their 
assets because of the lower tax.
  There are at least two other factors that would increase revenue to 
the Government if the capital gains tax were lowered, yet are not 
considered in estimates of the revenue effect. One is referred to by 
economists as the valuation effect. Because all capital assets obtain 
their value from the income they generate, the valuation effect 
increases the value of all capital assets when the tax rate is reduced. 
This is only common sense, Mr. President. By decreasing the tax rate, 
the net gain to the investor is increased. Increasing the potential net 
gain from an asset is going to increase that asset's value, which, in 
turn, increases the sales price and the amount of capital gains that 
are realized.
  The second effect that will increase revenue from a capital gains tax 
reduction is the ``base broadening'' that would occur as a result of 
the increase in economic activity that comes from more accessible and 
cheaper capital. This economic activity will lead to more jobs, and 
more jobs will lead to higher revenues.
  Can I guarantee that these economic effects will bring in enough 
extra revenue to the Treasury to offset the revenue lost by my bill's 
provisions? Of course not, Mr. President. No one can be certain in 
predicting the revenue effect of tax bills--not even CBO or JCT.
  The history of the economic effects of capital gains tax rate changes 
suggests that lowering the tax on capital gains increases revenue to 
the Treasury. The opposite certainly seems to be true--the evidence 
indicates that raising the tax rate results in lower revenue. In 1990, 
the Treasury took in 10 percent less revenue at the 28 percent capital 
gains rate than it did in 1985 at the 20 percent rate. In 1991, the 
Government collected 22 percent less from the capital gains tax than it 
did in 1985.
  Mr. President, there is an estimated $8 trillion of unrealized 
capital gains in the United States. For the most part, taxpayers can 
choose when they want to unleash this tremendous amount of capital. Our 
tax policies are obviously holding them back, to the detriment of our 
economy. Let us find a way to harness these resources and reap the 
benefits.
  I encourage my colleagues to take a close look at this bill. I 
believe it would go a long way toward setting this Nation on a path of 
solid economic growth. It would increase our savings rate, make capital 
must more readily available and cheaper, and lead to job creation. 
Moreover, it would promote fairness in our tax code and allow small 
investors keep more of what they have saved.
  It is time, Mr. President, that we in Congress stopped treating these 
capital assets as a cash cow for the Government. The gains on the 
savings and investments of all Americans are theirs--derived from their 
own risks. It is time we stopped penalizing people for making prudent 
savings and investment decisions. It is time we stopped penalizing them 
for thinking ahead--for putting away money for retirement, college, 
buying a home, or unexpected family emergencies. It is time for the 
Government to recognize that saving and investment is critical for our 
economy. It is time for the Government to help resurrect that important 
virtue of saving and investing.
  Mr. President, I ask unanimous consent that the text of the Small 
Investors Tax Relief Act of 1994 and a summary of the bill be printed 
in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                S. 1829

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.

       (a) Short Title.--This Act may be cited as the ``Small 
     Investors Tax Relief Act of 1994''.
       (b) Amendment of 1986 Code.--Except as otherwise expressly 
     provided, whenever in this Act an amendment or repeal is 
     expressed in terms of an amendment to, or repeal of, a 
     section or other provision, the reference shall be considered 
     to be made to a section or other provision of the Internal 
     Revenue Code of 1986.

     SEC. 2. EXEMPTION OF CERTAIN INTEREST AND DIVIDEND INCOME 
                   FROM TAX.

       (a) In General.--Part III of subchapter B of chapter 1 
     (relating to amounts specifically excluded from gross income) 
     is amended by inserting after section 115 the following new 
     section:

     ``SEC. 116. PARTIAL EXCLUSION OF DIVIDENDS AND INTEREST 
                   RECEIVED BY INDIVIDUALS.

       ``(a) Exclusion From Gross Income.--Gross income does not 
     include the sum of the amounts received during the taxable 
     year by an individual as--
       ``(1) dividends from domestic corporations, or
       ``(2) interest.
       ``(b) Limitations.--
       ``(1) Maximum amount.--The aggregate amount excluded under 
     subsection (a) for any taxable year shall not exceed $2,000 
     ($4,000 in the case of a joint return).
       ``(2) Certain dividends excluded.--Subsection (a)(1) shall 
     not apply to any dividend from a corporation which, for the 
     taxable year of the corporation in which the distribution is 
     made, or for the next preceding taxable year of the 
     corporation, is a corporation exempt from tax under section 
     501 (relating to certain charitable, etc., organization) or 
     section 521 (relating to farmers' cooperative associations).
       ``(3) Indexing for inflation.--In the case of any taxable 
     year beginning after 1995--
       ``(A) the $2,000 amount under paragraph (1) shall be 
     increased by an amount equal to--
       ``(i) $2,000, multiplied by
       ``(ii) the cost-of-living adjustment under section 1(f)(3) 
     for the calendar year in which the taxable year begins, 
     except that subparagraph (B) thereof shall be applied by 
     substituting `1994' for `1992', and
       ``(B) the $4,000 amount under paragraph (1) shall be 
     increased to an amount equal to twice the amount determined 
     under subparagraph (A) for the taxable year.

     If the dollar amount determined after the increase under 
     subparagraph (A) is not a multiple of $100, such dollar 
     amount shall be rounded to the next lowest multiple of $100.
       ``(c) Special Rules.--For purposes of this section--
       ``(1) Distributions from regulated investment companies and 
     real estate investment trusts.--Subsection (a) shall apply 
     with respect to distributions by--
       ``(A) regulated investment companies to the extent provided 
     in section 854(c), and
       ``(B) real estate investment trusts to the extent provided 
     in section 857(c).
       ``(2) Distributions by a trust.--For purposes of subsection 
     (a), the amount of dividends and interest properly allocable 
     to a beneficiary under section 652 or 662 shall be deemed to 
     have been received by the beneficiary ratably on the same 
     date that the dividends and interest were received by the 
     estate or trust.
       ``(3) Certain nonresident aliens ineligible for 
     exclusion.--In the case of a nonresident alien individual, 
     subsection (a) shall apply only--
       ``(A) in determining the tax imposed for the taxable year 
     pursuant to section 871(b)(1) and only in respect of 
     dividends and interest which are effectively connected with 
     the conduct of a trade or business within the United States, 
     or
       ``(B) in determining the tax imposed for the taxable year 
     pursuant to section 877(b).''
       (b) Clerical and Conforming Amendments.--
       (1) The table of sections for part III of subchapter B of 
     chapter 1 is amended by inserting after the item relating to 
     section 115 the following new item:

``Sec. 116. Partial exclusion of dividends and interest received by 
              individuals.''

       (2) Paragraph (2) of section 265(a) is amended by inserting 
     before the period at the end thereof the following: ``, or to 
     purchase or carry obligations or shares, or to make deposits, 
     to the extent the interest thereon is excludable from gross 
     income under section 116''.
       (3) Subsection (c) of section 584 is amended by adding at 
     the end the following new sentence:

     ``The proportionate share of each participant in the amount 
     of dividends or interest received by the common trust fund 
     and to which section 116 applies shall be considered for 
     purposes of such section as having been received by such 
     participant.''
       (4) Subsection (a) of section 643 is amended by inserting 
     after paragraph (6) the following new paragraph:
       ``(7) Dividends or interest.--There shall be included the 
     amount of any dividends or interest excluded from gross 
     income pursuant to section 116.''
       (5) Section 854 is amended by adding at the end the 
     following new subsection:
       ``(c) Treatment Under Section 116.--
       ``(1) In general.--For purposes of section 116, in the case 
     of any dividend (other than a dividend described in 
     subsection (a)) received from a regulated investment company 
     which meets the requirements of section 852 for the taxable 
     year in which it paid the dividend--
       ``(A) the entire amount of such dividend shall be treated 
     as a dividend if the aggregate dividends and interest 
     received by such company during the taxable year equal or 
     exceed 75 percent of its gross income, or
       ``(B) if subparagraph (A) does not apply, a portion of such 
     dividend shall be treated as a dividend (and a portion of 
     such dividend shall be treated as interest) based on the 
     portion of the company's gross income which consists of 
     aggregate dividends or aggregate interest, as the case may 
     be.

     For purposes of the preceding sentence, gross income and 
     aggregate interest received shall each be reduced by so much 
     of the deduction allowable by section 163 for the taxable 
     year as does not exceed aggregate interest received for the 
     taxable year.
       ``(2) Notice to shareholders.--The amount of any 
     distribution by a regulated investment company which may be 
     taken into account as a dividend for purposes of the 
     exclusion under section 116 shall not exceed the amount so 
     designated by the company in a written notice to its 
     shareholders mailed not later than 45 days after the close of 
     its taxable year.
       ``(3) Definitions.--For purposes of this subsection--
       ``(A) the term `gross income' does not include gain from 
     the sale or other disposition of stock or securities, and
       ``(B) the term `aggregate dividends received' includes only 
     dividends received from domestic corporations other than 
     dividends described in section 116(b)(2).

     In determining the amount of any dividend for purposes of 
     subparagraph (B), the rules provided in section 116(c)(1) 
     (relating to certain distributions) shall apply.''
       (6) Subsection (c) of section 857 of such Code is amended 
     to read as follows:
       ``(c) Limitations Applicable to Dividends Received From 
     Real Estate Investment Trusts.--
       ``(1) In general.--For purposes of section 116 (relating to 
     an exclusion for dividends and interest received by 
     individuals) and section 243 (relating to deductions for 
     dividends received by corporations), a dividend received from 
     a real estate investment trust which meets the requirements 
     of this part shall not be considered as a dividend.
       ``(2) Treatment as interest.--In the case of a dividend 
     (other than a capital gain dividend, as defined in subsection 
     (b)(3)(C)) received from a real estate investment trust which 
     meets the requirements of this part for the taxable year in 
     which it paid the dividend--
       ``(A) such dividend shall be treated as interest if the 
     aggregate interest received by the real estate investment 
     trust for the taxable year equals or exceeds 75 percent of 
     its gross income, or
       ``(B) if subparagraph (A) does not apply, the portion of 
     such dividend which bears the same ratio to the amount of 
     such dividend as the aggregate interest received bears to 
     gross income shall be treated as interest.
       ``(3) Adjustments to gross income and aggregate interest 
     received.--For purposes of paragraph (2)--
       ``(A) gross income does not include the net capital gain,
       ``(B) gross income and aggregate interest received shall 
     each be reduced by so much of the deduction allowable by 
     section 163 for the taxable year (other than for interest on 
     mortgages on real property owned by the real estate 
     investment trust) as does not exceed aggregate interest 
     received by the taxable year, and
       ``(C) gross income shall be reduced by the sum of the taxes 
     imposed by paragraphs (4), (5), and (6) of section 857(b).
       ``(4) Notice to shareholders.--The amount of any 
     distribution by a real estate investment trust which may be 
     taken into account as interest for purposes of the exclusion 
     under section 116 shall not exceed the amount so designated 
     by the trust in a written notice to its shareholders mailed 
     not later than 45 days after the close of its taxable year.''
       (c) Effective Date.--The amendments made by this section 
     shall apply with respect to amounts received after December 
     31, 1994, in taxable years ending after such date.

     SEC. 3. INDEXING OF CERTAIN ASSETS FOR PURPOSES OF 
                   DETERMINING GAIN OR LOSS.

       (a) In General.--Part II of subchapter O of chapter 1 
     (relating to basis rules of general application) is amended 
     by inserting after section 1021 the following new section:

     ``SEC. 1022. INDEXING OF CERTAIN ASSETS FOR PURPOSES OF 
                   DETERMINING GAIN OR LOSS.

       ``(a) General Rule.--
       ``(1) Indexed basis substituted for adjusted basis.--Except 
     as provided in paragraph (2), if an indexed asset which has 
     been held for more than 1 year is sold or otherwise disposed 
     of, then, for purposes of this title, the indexed basis of 
     the asset shall be substituted for its adjusted basis.
       ``(2) Exception for depreciation, etc.--The deduction for 
     depreciation, depletion, and amortization shall be determined 
     without regard to the application of paragraph (1) to the 
     taxpayer or any other person.
       ``(b) Indexed Asset.--
       ``(1) In general.--For purposes of this section, the term 
     `indexed asset' means--
       ``(A) stock in a corporation,
       ``(B) tangible property (or any interest therein), which is 
     a capital asset or property used in the trade or business (as 
     defined in section 1231(b)), and
       ``(C) the principal residence of the taxpayer (within the 
     meaning of section 1034).
       ``(2) Certain property excluded.--For purposes of this 
     section, the term `indexed asset' does not include--
       ``(A) Creditor's interest.--Any interest in property which 
     is in the nature of a creditor's interest.
       ``(B) Options.--Any option or other right to acquire an 
     interest in property.
       ``(C) Net lease property.--In the case of a lessor, net 
     lease property (within the meaning of subsection (h)(1)).
       ``(D) Certain preferred stock.--Stock which is preferred as 
     to dividends and does not participate in corporate growth to 
     any significant extent.
       ``(E) Stock in certain corporations.--Stock in--
       ``(i) an S corporation (within the meaning of section 
     1361),
       ``(ii) a personal holding company (as defined in section 
     542), and
       ``(iii) a foreign corporation.
       ``(3) Exception for stock in foreign corporation which is 
     regularly traded on national or regional exchange.--Clause 
     (iii) of paragraph (2)(E) shall not apply to stock in a 
     foreign corporation the stock of which is listed on the New 
     York Stock Exchange, the American Stock Exchange, or any 
     domestic regional exchange for which quotations are published 
     on a regular basis other than--
       ``(A) stock of a foreign investment company (within the 
     meaning of section 1246(b)), and
       ``(B) stock in a foreign corporation held by a United 
     States person who meets the requirements of section 
     1248(a)(2).
       ``(c) Indexed Basis.--For purposes of this section--
       ``(1) Indexed basis.--The indexed basis for any asset is--
       ``(A) the adjusted basis of the asset, multiplied by
       ``(B) the applicable inflation ratio.
       ``(2) Applicable inflation ratio.--The applicable inflation 
     ratio for any asset is the percentage arrived at by 
     dividing--
       ``(A) the CPI for the calendar year preceding the calendar 
     year in which the disposition takes place, by
       ``(B) the CPI for the calendar year preceding the calendar 
     year in which the asset was acquired by the taxpayer (or, in 
     the case of an asset acquired before 1995, the CPI for 1993).

     The applicable inflation ratio shall not be taken into 
     account unless it is greater than 1. The applicable inflation 
     ratio for any asset shall be rounded to the nearest one-tenth 
     of 1 percent.
       ``(3) CPI.--The CPI for any calendar year shall be 
     determined under section 1(f)(4).
       ``(4) Secretary to publish tables.--The Secretary shall 
     publish tables specifying the applicable inflation ratio for 
     each calendar year.
       ``(d) Special Rules.--For purposes of this section--
       ``(1) Treatment as separate asset.--In the case of any 
     asset, the following shall be treated as a separate asset:
       ``(A) A substantial improvement to property.
       ``(B) In the case of stock of a corporation, a substantial 
     contribution to capital.
       ``(C) Any other portion of an asset to the extent that 
     separate treatment of such portion is appropriate to carry 
     out the purposes of this section.
       ``(2) Assets which are not indexed assets throughout 
     holding period.--
       ``(A) In general.--The applicable inflation ratio shall be 
     appropriately reduced for calendar months at any time during 
     which the asset was not an indexed asset.
       ``(B) Certain short sales.--For purposes of applying 
     subparagraph (A), an asset shall be treated as not an indexed 
     asset for any short sale period during which the taxpayer or 
     the taxpayer's spouse sells short property substantially 
     identical to the asset. For purposes of the preceding 
     sentence, the short sale period begins on the day after the 
     substantially identical property is sold and ends on the 
     closing date for the sale.
       ``(3) Treatment of certain distributions.--A distribution 
     with respect to stock in a corporation which is not a 
     dividend shall be treated as a disposition.
       ``(4) Section cannot increase ordinary loss.--To the extent 
     that (but for this paragraph) this section would create or 
     increase a net ordinary loss to which section 1231(a)(2) 
     applies or an ordinary loss to which any other provision of 
     this title applies, such provision shall not apply. The 
     taxpayer shall be treated as having a long-term capital loss 
     in an amount equal to the amount of the ordinary loss to 
     which the preceding sentence applies.
       ``(5) Acquisition date where there has been prior 
     application of subsection (a)(1) with respect to the 
     taxpayer.--If there has been a prior application of 
     subsection (a)(1) to an asset while such asset was held by 
     the taxpayer, the date of acquisition of such asset by the 
     taxpayer shall be treated as not earlier than the date of the 
     most recent such prior application.
       ``(6) Collapsible corporations.--The application of section 
     341(a) (relating to collapsible corporations) shall be 
     determined without regard to this section.
       ``(e) Certain Conduit Entities.--
       ``(1) Regulated investment companies; real estate 
     investment trusts; common trust funds.--
       ``(A) In general.--Stock in a qualified investment entity 
     shall be an indexed asset for any calendar month in the same 
     ratio as the fair market value of the assets held by such 
     entity at the close of such month which are indexed assets 
     bears to the fair market value of all assets of such entity 
     at the close of such month.
       ``(B) Ratio of 90 percent or more.--If the ratio for any 
     calendar month determined under subparagraph (A) would (but 
     for this subparagraph) be 90 percent or more, such ratio for 
     such month shall be 100 percent.
       ``(C) Ratio of 10 percent or less.--If the ratio for any 
     calendar month determined under subparagraph (A) would (but 
     for this subparagraph) be 10 percent or less, such ratio for 
     such month shall be zero.
       ``(D) Valuation of assets in case of real estate investment 
     trusts.--Nothing in this paragraph shall require a real 
     estate investment trust to value its assets more frequently 
     than once each 36 months (except where such trust ceases to 
     exist). The ratio under subparagraph (A) for any calendar 
     month for which there is no valuation shall be the trustee's 
     good faith judgment as to such valuation.
       ``(E) Qualified investment entity.--For purposes of this 
     paragraph, the term `qualified investment entity' means--
       ``(i) a regulated investment company (within the meaning of 
     section 851),
       ``(ii) a real estate investment trust (within the meaning 
     of section 856), and
       ``(iii) a common trust fund (within the meaning of section 
     584).
       ``(2) Partnerships.--In the case of a partnership, the 
     adjustment made under subsection (a) at the partnership level 
     shall be passed through to the partners.
       ``(3) Subchapter s corporations.--In the case of an 
     electing small business corporation, the adjustment under 
     subsection (a) at the corporate level shall be passed through 
     to the shareholders.
       ``(f) Dispositions Between Related Persons.--
       ``(1) In general.--This section shall not apply to any sale 
     or other disposition of property between related persons 
     except to the extent that the basis of such property in the 
     hands of the transferee is a substituted basis.
       ``(2) Related persons defined.--For purposes of this 
     section, the term `related persons' means--
       ``(A) persons bearing a relationship set forth in section 
     267(b), and
       ``(B) persons treated as single employer under subsection 
     (b) or (c) of section 414.
       ``(g) Transfers To Increase Indexing Adjustment or 
     Depreciation Allowance.--If any person transfers cash, debt, 
     or any other property to another person and the principal 
     purpose of such transfer is--
       ``(1) to secure or increase an adjustment under subsection 
     (a), or
       ``(2) to increase (by reason of an adjustment under 
     subsection (a)) a deduction for depreciation, depletion, or 
     amortization,

     the Secretary may disallow part or all of such adjustment or 
     increase.
       ``(h) Definitions.--For purposes of this section--
       ``(1) Net lease property defined.--The term `net lease 
     property' means leased real property where--
       ``(A) the term of the lease (taking into account options to 
     renew) was 50 percent or more of the useful life of the 
     property, and
       ``(B) for the period of the lease, the sum of the 
     deductions with respect to such property which are allowable 
     to the lessor solely by reason of section 162 (other than 
     rents and reimbursed amounts with respect to such property) 
     is 15 percent or less of the rental income produced by such 
     property.
       ``(2) Stock includes interest in common trust fund.--The 
     term `stock in a corporation' includes any interest in a 
     common trust fund (as defined in section 584(a)).
       ``(i) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the purposes of this section.''
       (b) Adjustment To Apply for Purposes of Determining 
     Earnings and Profits.--Subsection (f) of section 312 
     (relating to effect on earnings and profits of gain or loss 
     and of receipt of tax-free distributions) is amended by 
     adding at the end thereof the following new paragraph:
       ``(3) Effect on earnings and profits of indexed basis.--

  ``For substitution of indexed basis for adjusted basis in the case of 
the disposition of certain assets after December 31, 1994, see section 
1022(a)(1).''
       (c) Clerical Amendment.--The table of sections for part II 
     of subchapter O of such chapter 1 is amended by inserting 
     after the item relating to section 1021 the following new 
     item:

``Sec. 1022. Indexing of certain assets for purposes of determining 
              gain or loss.''

       (d) Effective Date.--The amendments made by this section 
     shall apply to dispositions after December 31, 1994.

     SEC. 4. REDUCTION IN CAPITAL GAINS TAX FOR INDIVIDUALS.

       (a) General Rule.--Part I of subchapter P of chapter 1 
     (relating to treatment of capital gains) is amended by adding 
     at the end thereof the following new section:

     ``SEC. 1203. CAPITAL GAINS DEDUCTION FOR INDIVIDUALS.

       ``(a) In General.--In the case of an individual, there 
     shall be allowed as a deduction for the taxable year an 
     amount equal to the annual capital gains deduction (if any) 
     determined under subsection (b).
       ``(b) Annual Capital Gains Deduction.--
       ``(1) In general.--For purposes of subsection (a), the 
     annual capital gains deduction determined under this 
     subsection is the lesser of--
       ``(A) the net capital gain for the taxable year, or
       ``(B) $50,000 ($100,000 in the case of a joint return).
       ``(2) Coordination with exclusion for gain from small 
     business stock.--For purposes of paragraph (1)(A), net 
     capital gain shall be determined without regard to any gain 
     from the sale or exchange of qualified small business stock 
     (as defined in section 1202(c)) held for more than 5 years.
       ``(3) Certain individuals not eligible.--This subsection 
     shall not apply to any individual with respect to whom a 
     deduction under section 151 is allowable to another taxpayer 
     for a taxable year beginning in the calendar year in which 
     such individual's taxable year begins.
       ``(4) Annual deduction not available for sales to related 
     persons.--The amount of the net capital gain taken into 
     account under paragraph (1)(A) shall not exceed the amount of 
     the net capital gain determined by not taking into account 
     gains and losses from sales and exchanges to any related 
     person (as defined in section 267(f)).
       ``(5) Indexing for inflation.--In the case of any taxable 
     year beginning after 1995--
       ``(A) the $50,000 amount under paragraph (1)(B) shall be 
     increased by an amount equal to--
       ``(i) $50,000, multiplied by
       ``(ii) the cost-of-living adjustment under section 1(f)(3) 
     for the calendar year in which the taxable year begins, 
     except that subparagraph (B) thereof shall be applied by 
     substituting `1994' for `1992', and
       ``(B) the $100,000 amount under paragraph (1)(B) shall be 
     increased to an amount equal to twice the amount determined 
     under subparagraph (A) for the taxable year.
     If the dollar amount determined after the increase under this 
     paragraph is not a multiple of $1,000, such dollar amount 
     shall be rounded to the next lowest multiple of $1,000.
       ``(c) Section Not To Apply to Estates or Trusts.--No 
     deduction shall be allowed under this section to an estate or 
     trust.
       ``(d) Special Rules.--
       ``(1) Deduction available only for sales or exchanges after 
     december 31, 1994.--The amount of the net capital gain taken 
     into account under subsection (b)(1)(A) shall not exceed the 
     amount of the net capital gain determined by only taking into 
     account gains and losses from sales and exchanges after 
     December 31, 1994.
       ``(2) Special rule for pass-thru entities.--
       ``(A) In general.--In applying this section with respect to 
     any pass-thru entity, the determination of when the sale or 
     exchange occurs shall be made at the entity level.
       ``(B) Pass-thru entity defined.--For purposes of 
     subparagraph (A), the term `pass-thru entity' means--
       ``(i) a regulated investment company,
       ``(ii) a real estate investment trust,
       ``(iii) an S corporation,
       ``(iv) a partnership,
       ``(v) an estate or trust, and
       ``(vi) a common trust fund.''
       (b) Conforming Amendments.--
       (1) Subsection (a) of section 62 is amended by inserting 
     after paragraph (15) the following new paragraph:
       ``(16) Capital gains deduction.--The deduction allowed by 
     section 1203.''
       (2) Paragraph (2) of section 172(d) is amended by inserting 
     ``and the deduction provided by section 1203'' after 
     ``1202''.
       (3)(A) Section 220 (relating to cross reference) is amended 
     to read as follows:

     ``SEC. 220. CROSS REFERENCES.

  ``(1) For deduction for net capital gains in the case of a taxpayer 
other than a corporation, see section 1203.
  ``(2) For deductions in respect of a decedent, see section 691.''
       (B) The table of sections for part VII of subchapter B of 
     chapter 1 is amended by striking ``reference'' in the item 
     relating to section 220 and inserting ``references''.
       (4) Paragraph (4) of section 691(c) is amended by inserting 
     ``1203,'' after ``1202,''.
       (5) The second sentence of paragraph (2) of section 871(a) 
     is amended by inserting ``or 1203'' after ``1202''.
       (c) Clerical Amendment.--The table of sections for part I 
     of subchapter P of chapter 1 is amended by adding at the end 
     thereof the following new item:

``Sec. 1203. Capital gains deduction for individuals.''

       (d) Effective Date.--The amendments made by this section 
     shall apply to sales or exchanges after December 31, 1994, in 
     taxable years ending after such date.
                                  ____


            Small Investors Tax Relief Act of 1994--Summary


                              What it does

       The Small Investors Tax Relief Act of 1994 (SITRA) has 
     three provisions:
       (1) Exempts the first $2,000 of an individual's interest 
     and dividend income, annually. This threshold would be 
     indexed for inflation. Would be effective for income received 
     after December 31, 1994.
       (2) Exempts the first $50,000 of an individual's capital 
     gains income, annually. This threshold would be indexed for 
     inflation. Would apply to sales or exchanges after December 
     31, 1994.
       (3) Indexes capital assets to avoid taxation on 
     inflationary gains. This would remove the current law's 
     unfair taxation of illusory gains for assets held for more 
     than one year. Would apply on a prospective basis from 1993's 
     index on to assets sold or exchanged after December 31, 1994. 
     Thus, gains incurred before 1993 on assets owned before then 
     would not be indexed.


                          What are the goals?

       The bill will encourage Americans to invest more. Our 
     national savings rate is dropping to dangerously low levels. 
     The long-term prosperity of our economy depends on the 
     availability of low cost capital for business formation and 
     job creation.
       The bill promotes tax fairness by partially alleviating the 
     double taxation of dividends.
       The bill teaches young people the value of work and savings 
     by removing the current law's bias against young workers' 
     savings.
       The bill would stimulate the economy and spur job creation 
     by encouraging investors to sell capital assets and invest in 
     new business enterprises that create new jobs.
       The bill would make the United States more competitive 
     internationally by lowering our capital gains tax rate closer 
     to the rates of our major trading partners.


                            Economic Factors

       In the 1970s, our savings rate was in the 9 to 10 percent 
     range. By 1992, it had dropped to 5.2 percent. As of November 
     of last year, it was down to around 4 percent, a level many 
     economists believe is in the danger zone. All of our major 
     trading partners have savings rates significantly higher than 
     ours.
       According to the Treasury Department, 65 percent of 
     taxpayers with capital gains have ordinary income under 
     $50,000 and over 25 percent have ordinary income under 
     $20,000. Only about 5 percent of taxpayers with capital gains 
     have incomes above $200,000. The benefits of this bill are 
     targeted to taxpayers in the lower and middle income classes.
       The current high tax on capital gains encourages wealthy 
     taxpayers to hold on to assets with unrealized gains. When 
     the capital gains rate was over 40 percent in the mid-1970s, 
     taxpayers in the top 1% of income accounted for just 33 
     percent of all taxable capital gains. When the capital gains 
     tax rate was cut to 20% in 1981, the top 1% accounted for 55% 
     of all realized capital gains.
       In 1985, Americans with incomes over $500,000 per year paid 
     $12 billion in capital gains taxes. This amount had dropped 
     to $10 billion in 1991, adjusted for inflation.
       When the capital gains tax rate jumped from 20 percent to 
     28 percent in 1987, seed capital for new businesses began to 
     dry up. Between 1986 and 1991, venture capital financing of 
     small businesses fell from $4.2 billion to $1.4 billion.
       There is an estimated $8 trillion of unrealized capital in 
     the United States. Taxpayers can generally choose when they 
     want to unleash this tremendous amount of capital. Our tax 
     policies are holding them back, to the detriment of economic 
     growth and job creation.


                          What About Revenue?

       We have requested, but not received, an estimate on the 
     revenue effect of this bill from the Joint Committee on 
     Taxation (JCT). It will likely be scored as a revenue loser, 
     JCT estimates, however, do not take into account the entire 
     macroeconomic effect of lowering the effective tax on capital 
     gains. By unlocking billions of frozen assets, this proposal 
     will lower the costs of capital and make it much more readily 
     available. The increased economic activity resulting from 
     this will certainly broaden the tax base and increase 
     revenues. At a minimum, this ``feedback effect'' will 
     partially, if not fully, offset revenue losses.
                                 ______

      By Mrs. FEINSTEIN (for herself, Mr. Inouye, Mr. Bumpers, Mrs. 
        Boxer, Mr. Moynihan, Mr. Pell, Mr. Kerry, and Mr. Levin):
  S. 1830. A bill to authorize funding for the small business defense 
conversion program of the Small Business Administration, and for other 
purposes; to the Committee on Small Business.


     small business defense conversion guaranteed loan act of 1994

  Mrs. FEINSTEIN. Mr. President, if I may, today I rise to introduce 
legislation along with Senators Inouye, Bumpers, Boxer, Moynihan, Pell, 
Kerry, and Levin to expand the Small Business Administration's loan 
guarantee program and to target loans to businesses and individuals 
adversely impacted by base closure and defense downsizing. This bill 
would take $100 million from the President's proposed $20 billion 
defense conversion program to fund a targeted small business loan 
guarantee program. This would leverage nearly $4 billion in private 
sector loans, and it would create or maintain 400,000 jobs, according 
to estimates by the Small Business Administration.
  In essence, this program would link the most dynamic job creation 
segment of the economy, small businesses, to one of the Nation's most 
important needs: defense conversion. But best of all, no new Federal 
bureaucracy is needed to administer this program.
  In my view, the 7(a) program is one of the best Federal programs 
available, and yet it has run out of money in 3 of the last 5 years.
  Reductions in defense spending in the last 2 years have cost my 
State, California, 250,000 jobs. By 1998, estimates indicate that 
650,000 jobs will be lost in the State as a result of defense 
downsizing.
  Mr. President, just this morning January's unemployment statistics 
were released, and they were amazing to me. California's unemployment 
rate soared to 10.1 percent, nearly 3\1/2\ percentage points higher 
than the national average of 6.7 percent. Because the unemployment 
survey has been revised, we expected a small jump in the unemployment 
rate, about a half of a percentage point. But for California, the 
unemployment rate jumped 1.4 percentage points, compared to just three-
tenths of a percent for the Nation. So the rate jumped triple what was 
expected by the adjustment in the methods of the accounting survey.
  The double-digit unemployment rate means that over 1.5 million 
Californians continue to seek, and are unable to find work. 200,000 
more men and women are out of work this month than last month. So these 
figures indicate that California is clearly not producing enough jobs.
  I believe that this small business loan program can make a 
significant difference. Since 1990, nearly 40 percent of all job loss 
in the Nation occurred in California. Forty percent in one State 
alone--California. And one in every five jobs lost in the entire United 
States were lost in six southern California counties.
  Without question, this Nation must provide workers and students with 
better education and workers with job retraining to enable them to 
adjust to this new post-cold war economy. But all of the training in 
the world means nothing unless there is a job available after they 
complete the training. This is where I think all the talk of retraining 
falls on deaf ears, especially in the largest State in the Union.
  The best way to minimize the economic disruption caused by defense 
downsizing is to target programs to the areas most in need. It is the 
areas of defense downsizing and base closures where access to capital 
for small businesses is particularly limited. Bankers are constrained 
by regulations and by economic uncertainty from making loans to the 
very communities that need the capital the most.
  One executive from Orange County, CA, wrote to me saying this:

       With the closure of our two Marine bases and the cutback in 
     defense spending, our area has been negatively impacted. An 
     increase in the SBA 7(a) Loan Program is greatly needed and 
     can be a strong vehicle to allow small business in our area 
     to retrofit their operations to nondefense related 
     enterprises.
       It is estimated that 85 percent of the new jobs created are 
     generated through small businesses. Thus increased funding 
     for the 7(a) Program would stimulate the economy and lead to 
     the needed job growth in our State.

  Another executive from California wrote:

       Southern California has been hard hit by the recession and 
     deeply depressed real estate market. Defense conversion and 
     the announced base closures could not have come at a worse 
     time, economically and psychologically. While other areas of 
     the country have shown some improvement, our situation has 
     worsened.

  And these figures bear that out.

       Expanded SBA funding will go a long way toward keeping 
     small business alive now and for the next several, troubled 
     years.

  The bill I am introducing today effectively targets defense 
conversion funds to those communities that have been adversely 
impacted. It will not only stimulate small business expansion, but it 
will also result in good, long-term investments.
  Of all the defense programs available, small business loans provide 
the best bang for the buck.
  As a matter of fact, this program would create or maintain each job 
at an average of just $250. Tell me one program that matches that.
  No program of which I am aware can claim these figures.
  Mr. President, I ask unanimous consent that the text of this 
legislation be printed in the Record immediately following my remarks.
  I urge my colleagues to support the legislation, and I yield the 
floor.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                S. 1830

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Small Business Defense 
     Conversion Guaranteed Loan Act of 1994''.

     SEC. 2. AUTHORIZATIONS.

       Section 20 of the Small Business Act (15 U.S.C. 631 note) 
     is amended)--
       (1) in subsection (l), as added by section 405(3) of the 
     Small Business Credit and Business Opportunity Enhancement 
     Act of 1992--
       (A) by striking ``(l) There'' and inserting ``(3) There'' 
     and indenting appropriately; and
       (B) by striking ``subsection (k)'', and inserting 
     ``paragraphs (1) and (2)'';
       (2) by redesignating subsection (k), as added by section 
     405(3) of the Small Business Credit and Business Opportunity 
     Act of 1992, as subsection (l);
       (3) in subsection (l), as so redesignated, by inserting new 
     paragraph:
       ``(2) The Administration is authorized to make not more 
     than $4,000,000,000 in loans on a guaranteed basis, in 
     accordance with section 7(a)(21), such amount to remain 
     available until expended.'';
       (4) in subsection (n)--
       (A) by striking ``(n) There'' and inserting ``(3) There'' 
     and indenting appropriately; and
       (B) by striking ``subsection (m)'' and inserting 
     ``paragraphs (1) and (2)'';
       (5) in subsection (m), by inserting after paragraph (1), 
     the following new paragraph:
       ``(2) The Administration is authorized to make not more 
     than $4,000,000,000 in loans on a guaranteed basis, in 
     accordance with section 7(a)(21), such amount to remain 
     available until expended.'';
       (6) by redesignating subsection (o) as subsection (n); and
       (7) in subsection (p)--
       (A) by striking ``(p) There'' and inserting ``(2) There'', 
     and indenting appropriately; and
       (B) by striking ``subsection (o)'' and inserting 
     ``paragraph (1)''.

     SEC. 3. TECHNICAL CLARIFICATION.

       Section 7(a)(21)(A) of the Small Business Act (15 U.S.C. 
     636(a)(21)(A)) is amended by striking ``under the'' and 
     inserting ``on a guaranteed basis under the''.

     SEC. 4. REACHING ADDITIONAL SMALL BUSINESS CONCERNS.

       Section 7(a)(21)(A)(i) of the Small Business Act (15 U.S.C. 
     636(a)(21)(A)(i) is amended--
       (1) in subclause (I), by striking ``or'' at the end; and
       (2) by adding after subclause (II), the following new 
     subclause:
       ``(III) a substantial reduction in the revenues of the 
     small business concern due to an overall reduction in 
     economic activity within the community from which such small 
     business concern derives revenues, if such reduction in 
     economic activity is a direct result of the factors described 
     in subclause (I) or (II); or''.

                          ____________________