[Congressional Record Volume 141, Number 150 (Monday, September 25, 1995)]
[Senate]
[Pages S14147-S14151]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                               TAX REFORM

  Mr. BENNETT. When I recently congratulated our colleague from 
Delaware, Senator Roth, on his ascension to the chairmanship of the 
Finance Committee, he was gracious enough to tell me that he would 
welcome my ideas as the committee begins to deal with tax reform. I do 
have some ideas I would like to share with Chairman Roth, and I will 
take the opportunity within the morning business period 

[[Page S 14148]]
this morning to share them with the Senate as a whole.
  I say quickly that many of these ideas are similar to those that were 
expressed recently by Senator Dole when he addressed this topic in 
Chicago.
  First, Mr. President, we will start with a little history, and I call 
your attention to this chart.
  We have learned from the 1992 campaign you cannot talk about taxes 
without a chart, so I decided to get with the program.
  Here on the chart you have a red line, and that red line matches the 
left-hand side of the chart. It shows revenue to the Federal Government 
from the end of the Second World War until now. It is expressed as a 
percentage of the total economic output of the Nation, or what the 
economists call gross domestic product [GDP].
  See how exciting that red line is, Mr. President. It is flat, 
unchanging, unwavering. Now let us look at the green line up here. This 
green line shows the top personal tax rates, and the chart showing that 
is on the right-hand side. Back here, at the end of the Second World 
War, the top marginal tax rate was 91 percent, and it has moved around 
in the time from then until now.
  You will notice there was this one bump. You may remember that, Mr. 
President. That was the Lyndon Johnson surcharge for the Vietnam war, 
when everything was left as it was but there was to be a 10-percent 
increase added after you had fixed your tax return. Interestingly 
enough, that is the only time that you see any correlation between the 
top personal tax rate and the Federal receipts as a percentage of GDP. 
This has gone from 91 percent under Harry Truman down to 28 percent 
under Ronald Reagan and back up to 40 percent under Bill Clinton, but 
the impact on receipts has been negligible, if not zero.
  That should put to rest the notion that it was the Reagan tax cuts 
which caused the deficit to soar. The Reagan tax cuts did not impact 
the percentage of GDP that came into the Government in that period of 
time.
  No, Mr. President, no matter how many tax reform bills were passed, 
no matter how much Congress tinkered with the tax rates, the amount of 
money the Federal Government received as a percentage of the economy 
did not move more than a point. Why? Because every time Congress 
reformed the system, taxpayers adjusted their behavior in response to 
that reform and the percentage of their aggregate income coming to the 
Federal Government stayed about the same. As I said, one exception is 
this 10-percent surcharge blip that happened before they had an 
opportunity to adjust.
  Now, what did change--I will talk about this later on--is the rate at 
which the economy grew. In these years, the Reagan years, we had a 
period of high economic growth, indeed, the longest sustained period of 
high economic growth that we have had in this century.
  Now, that is important to keep in mind because you look at this flat 
19-percent result. Nineteen percent of a big economy produces more 
money for the Government than 19 percent of a small one. So what we 
really want most of all is growth. Now, as I said, I will get back to 
that later on.
  As I reflect on all of the debates held over the years on tax policy, 
I realize that there is one word that comes up over and over again--
fairness. Every time we make a change in the tax law, we are told that 
it is necessary to make things more fair. Franklin Roosevelt pushed for 
a 91-percent tax rate in the 1930's in the name of fairness. ``Share 
the wealth.'' That was the cry. Sharing, means being fair. Well, 91 
percent is by itself not fair. If it was fully enforced on everyone who 
had money to invest, it would shut down the economy. People would move 
out of the United States as they have moved out of the European 
countries that have tried these kinds of confiscatory rates. So to 
offset the impact of this confiscatory rate, Congress enacted a series 
of deductions and exceptions, each one with its own fairness rationale.
  What we have done, Mr. President, is this: tip the Tax Code this way 
to encourage that activity or tip it that way to discourage the other 
one. And every time we do this, the code gets bigger and more complex. 
The rich hire more accountants and advisers to help them stay rich, or 
worse, they refrain from investments that create more jobs and more 
economic growth in order to avoid the impact of the latest reform.
  Do you remember the windfall profits tax? With oil prices going 
through the roof and inflation gathering steam back in the 1970's, 
people decided that it was not fair that oil companies, by selling 
proven reserves already in the ground, would make more money than they 
had planned on--windfall profits. So in order to be fair about it, 
Congress put an extra tax on those profits. Well, new domestic oil 
drilling dropped off, jobs went overseas, and gaslines formed. Congress 
eventually had to repeal the windfall profits tax after it had done its 
damage. And at the time of the debate on the repeal, it was argued 
again that the tax was not fair.
  During the recess, Mr. President, back home I sat down with my 
accountant. It was time to finally file my income tax. I had gotten an 
extension on the 15th of April. And that was up on the 15th of August.
  As we went over the details of my tax return, we got into a 
discussion of this very issue. And my accountant, unprompted by me, 
made an interesting comment. He said, ``Senator, the present system is 
not fair to anybody.'' I find that a great irony, Mr. President, that 
we have in the name of fairness for some created a system that is 
unfair to everybody.
  So, I say to Senator Roth, as he asked for my suggestions, I start 
with this one. Let us get out a clean sheet of paper and repeal the 
present Tax Code in its entirety. Let us abolish the IRS as it 
currently stands. Let us stop the tinkering and create a new system 
based on the principle that the purpose of taxes is to raise money to 
run the Government, not to set priorities in the economy. I will repeat 
that, Mr. President, because it is the heart of what has been wrong and 
what we must do to make things right. The purpose of taxes is to raise 
money to run the Government.
  Now, the new word that we should enshrine in every tax debate is 
neutrality. Neutrality is easier to define than fairness because we can 
test in advance whether a tax system is neutral. We cannot test whether 
or not it is fair because fairness is in the eye of the beholder. 
Neutrality means that the Tax Code should not be used to punish the bad 
guys and reward the good guys. We have other laws for that. The Tax 
Code should be used to collect money for the Government in as neutral 
and nonintrusive a way as possible leaving the marketplace free to set 
economic priorities based on true economic demand.
  Neutrality also means that payment for labor and capital would have 
the same tax rates. When you look at it this way, some interesting 
things start to happen. A tax code that is neutral can also be simple; 
anyone can figure it out, and the goal of a 1040 on a postcard becomes 
achievable. One that is neutral and simple is also one that can be 
stable; it need not change. We regress the way we do it now.
  Now, there is great power in this idea. With a stable tax code, you 
will be able to start a business and know that the tax laws will not 
change on you midstream. You will be able to buy a house, take out a 
loan, put money aside in a savings account or make any other investment 
you want and know that there will not be a nasty surprise coming after 
the next election.
  A tax code that is neutral, simple, and stable--that should be 
America's goal for the 21st century. And if we get it, I believe there 
will be an added bonus. A system that is neutral, simple, and stable 
will also be the system that comes the closest to being fair.
  Now, I hear the question: ``Does this mean, Senator Bennett, that you 
are endorsing a flat tax?''
  I want to see the recommendations that will be coming from the tax 
study commission that Senator Dole and Speaker Gingrich appointed, the 
one headed by Jack Kemp, before I lay out any specifics. But, yes, I do 
endorse the concept of a flat tax as one way to get a system that is 
neutral, simple, stable, and fair. There may well be others. I am a 
cosponsor of the Nunn-Domenici proposal, but I salute the Kemp 
commission for looking at all of them, as I know they are doing.
  Now, the purists will say, to be completely neutral a flat tax should 
have no deductions. Theoretically they are 

[[Page S 14149]]
right. However, I want to be sure that in making the transition from 
the present to a better tax system, we do not permit American 
homeowners to be adversely affected by higher mortgage interest 
burdens. Home mortgage interest rates currently reflect the value of 
the existing tax deduction. If we wipe out that single deduction in a 
single step and leave fixed interest rates where they are, we will 
penalize everyone who has a mortgage. The deduction should be phased 
out and only after homeowners can refinance their mortgages at rates 
that are more advantageous to them than are the existing rates with the 
tax deduction. And until that happens, I endorse leaving the home 
mortgage interest deduction as it is.
  On the question of charitable contributions, I point out that we are 
constantly asked in this Chamber on the Federal level to take care of 
people who are in trouble, to support educational institutions, 
research projects, the arts, or all other kinds of good works in 
society. Right now much of the burden in these areas is being 
shouldered by good-hearted Americans who want to help through churches 
and other charities beyond just paying their taxes. These charities are 
usually better run and more efficient than the Government.
  We should find a way to encourage those Americans who voluntarily 
give beyond their tax payments to engage in these kinds of activities 
and thus save the Government money. So I support a continuation of the 
charitable deduction. And I assume that at least Elizabeth Dole will 
agree with me on this one.
  Now, the deductibility of State and local taxes in Federal income tax 
systems is, for me, an issue with constitutional overtones. I believe 
that States have an equal standing with the Federal Government under 
the Constitution and income should only be taxed once. That is a 
principle. As I have said, I will wait for the Kemp commission to 
report on specific rates and levels for a flat tax, but I do ask the 
Kemp Commission to consider fully the impact of any proposal on the 
deduction of mortgage interest, charitable contributions and State 
taxes.

  I want the Commission to explore all approaches, just so long as they 
are neutral, simple, stable and fair.
  Let me repeat my longstanding support for indexing the tax rate for 
capital gains as an immediate improvement in the present system. Taxes 
should be on real income, not paper income. Our present system of 
taxing paper profits as if they were real is not only a drag on the 
economy, but, in my view, it is contrary to the fifth amendment 
prohibition against taking.
  In terms of purchasing power, many Americans have experienced such a 
loss of their property through the tax law; the Government has taken 
it. Here is an example.
  Suppose, Mr. President, you invested $10,000 in a business in 1975, 
just before the great inflation of the 1970's. Say the business 
survived till now but has paid you no dividend and no interest, no 
return at all on your money. Your $10,000 has been locked up in that 
investment for over 20 years.
  Finally, last year you found a buyer who paid you 20,000 1994 
dollars. In purchasing power, you had a loss. To break even, you would 
have had to sell for $27,540 because your 10,000 1975 dollars lost more 
than half their value in that timeframe. But in tax terms, you owe 
Uncle Sam $2,800 for so-called capital gains.
  You not only lost $7,540 in purchasing power on the principal, you 
lost an additional $2,800 in taxes. The unindexed capital gains tax 
confiscated a portion of your investment, not your gain. In real terms, 
there was no gain. As I said, Mr. President, to me, that constitutes a 
taking in violation of the spirit of the fifth amendment. It is time to 
stop it, stop taxing inflationary imaginary gains.
  Our system of double taxation of corporate profits, if the profits 
are paid out as dividends, tilts the investment community away from 
equity investment and toward debt. A system that is truly neutral, 
simple, stable, and fair would avoid this tilt.
  The taking on of huge debt by corporate America in the 1980's was not 
driven by the fabled greed of the Reagan years that some commentators 
talk so much about. It was driven by the nonneutrality of the Tax Code.
  As I said at the beginning, the principal economic goal that we 
should have is growth. If the tax system produces--back to the chart--
19 percent of GDP as revenue to the Government and the economy grows 
faster than Government spending does, it is clear we can do something 
positive about our national debt. An expanding GDP allows us to reduce 
the deficit with increased revenue and not depend on spending cuts 
alone.
  Mind you, I am not saying we do not need to make the cuts, because 
clearly we do and for a whole series of reasons. However, if we try to 
solve the deficit problem entirely with spending cuts and ignore the 
growth side of the equation, we are turning our backs on our biggest 
opportunity for financial stability in the years to come.
  I have seen economic studies that show that if we can increase the 
rate of growth by simply one-half of 1 percent per year--in other 
words, if we can grow at around 3 percent a year instead of 2.5 percent 
a year, the additional tax revenue that will come from that one-half 
percent, combined with the cuts we propose in Government spending, will 
allow us to balance the budget in less than 7 years. That is what 
Senator Dole was talking about in Chicago a few weeks ago.
  Some say the way to get this growth is to have the Federal Reserve 
devalue the currency. I disagree. We have seen the dollar drop 
significantly in recent years, reducing America's share of control of 
the world's goods, but it has not brought the growth we need. We cannot 
inflate our way to prosperity, nor can we devalue our way to 
prosperity, as we learned in the stagflation years of the seventies. We 
need sound money with price stability tied to a neutral, simple, 
stable, and fair Tax Code. That is the key to our achieving the higher 
rate of real growth, combined with discipline on the spending side, 
that will give us what we need in our fiscal future.
  Those are the ideas I would share with the new chairman of the 
Finance Committee, Mr. President. I believe that the Senate author of 
the Kemp-Roth bill, who is that chairman, will be receptive to this 
recommendation.
  If I can recap at this point, our financial future depends on the 
following principles:
  First, we need a tax system that is neutral, simple, stable and fair, 
based on the concept that its purpose is to raise the money we need to 
run the Government and not to set economic and social priorities.
  Second, income should only be taxed once.
  Third, phantom income should not be taxed at all.
  Fourth, our deficit problems should be attacked by both spending cuts 
and revenue growth, with the recognition that true revenue growth 
derives not from higher rates but from a stronger economy.
  These are the principles that are the root to the solution of our 
economic ills. I salute Senator Dole and Speaker Gingrich for their 
leadership in creating a commission to focus on economic growth and 
intelligent tax policy for the next century, and I look forward to the 
commission's report with great anticipation.
  Now, Mr. President, since I prepared these remarks, we have had a 
very busy schedule in the Senate, and I was unable to deliver them in 
the timeframe that I had anticipated. As often happens, events overtake 
you, and there are some other things that have occurred since I 
prepared this presentation that I would like to share with you at this 
time.
  On September 13 in the Wall Street Journal, Robert L. Bartley, who is 
the editor of the editorial page of the Journal, produced a piece 
called ``Giving up on Growth.'' I am dependent upon Mr. Bartley for the 
first recognition of this 19-percent reality, as he has highlighted 
that again and again on the pages of the Journal.
  I will not take the time to read all of his editorial ``Giving up on 
Growth,'' but he talks about many of the same things I talked about 
here. How, if we could only get the economy to grow at the same rate it 
did during the Reagan years, during the years, Mr. President, when the 
marginal tax rate was down here rather than up there, that we could 
solve most of our deficit problems, because the income would be so 

[[Page S 14150]]
much higher in an economy growing at 3 percent plus than it will be at 
an economy growing at 2.5 percent that it tips the equation favorably 
in our balance.
  He points out that the Clinton administration has resigned itself, if 
you will, to 2.5 percent as the highest possible growth we can achieve 
into the next century, turning their backs on the Reagan experience and 
the empirical evidence of the Reagan years.
  However, whenever this is brought up, people immediately turn to the 
deficit issue, and we are confronted with the next chart, Mr. 
President, the chart showing the red ink, the sea of deficits, if you 
will. Here in nominal dollars is the record of the amount of deficits 
we had in the last century, so small at the beginning that you cannot 
even find them on this chart. This little bump is the First World War. 
We have the Second World War. But here we are, ``You see, when Ronald 
Reagan is elected President, look at the deficits. How can you stand 
there, Senator Bennett, and say that we must go back to the Reagan 
years of high growth when the price we paid for that growth was the 
tremendous explosion of deficits?''
  Then to really scare us, we are shown the next chart, when all of 
these deficits are accumulated in the form of the national debt, and 
the national debt goes up to the point where it is projected by the 
year 2005 to be $9 trillion.
  This is a chart that scares everybody today. Well, Mr. President, let 
me comment briefly on this chart, before I move to the others, and take 
an experience out of my own lifetime.
  When I was hired as the chief executive officer of the company that I 
headed for half a dozen years, we had some debt. It was $75,000. Today, 
that company has debt in excess of $7.5 million. If you were to put 
that debt on a chart like this, it would be even more dramatic than 
that. Clearly, you need to do something, Senator, this company is 
headed for bankruptcy because the debt has soared from a mere $75,000 
to $7.5 million. But, of course, that does not tell the story.
  When we had a debt of $75,000, our total sales were $250,000. Our 
debt was more than 25 percent of our total sales. Today, a debt of $7.5 
million on a company with sales of close to $300 million is an 
insignificant issue indeed. But while we happen to have debt on the 
balance sheet of about $7.5 million, we have cash on the balance sheet 
of close to $60 million. You may ask why do you not pay off the debt? 
Well, it is left over from mortgages on buildings that were built at 
the time when we did not have that much cash, and there is a prepayment 
penalty attached to it. That debt is in no way threatening the 
existence of the corporation; whereas, the $75,000 debt caused us some 
sleepless nights. So it is not the nominal amount of the debt that we 
should look at, but the debt in relation to something else.
  Let us go, for a clearer picture, to the next chart. Here is the 
chart of deficits listed in dollars that are adjusted for purchasing 
power. What in the previous chart was a mere blip for the Second World 
War now, in purchasing power, makes it clear that the highest deficit 
we have ever had in our history was in the Second World War, and none 
of the subsequent deficits have come close to it. What has happened to 
the economy? How big was the economy during the Second World War 
compared to the economy now?
  So on the next chart we have computed the debt not as a piling up of 
nominal dollars, but as a percentage of GDP, or a percentage of the 
economy. And now you see that in the Second World War, the debt was 
close to 130 percent of total output. That is, we were spending 30 
percent more than the entire economy was producing in the days of the 
Second World War, as the debt soared. And as soon as the war ended, the 
debt, as a percentage of GDP, began to fall, and fall dramatically, all 
the way down to during the 1970's, at roughly 30 percent of the 
economy. From 130 down to 30--a very different picture than the 
skyrocketing red ink on the previous chart.
  So if you look at it in historic terms, Mr. President, today the 
debt, as a percentage of the economy, is roughly what it was when 
Dwight Eisenhower was President of the United States. We did not feel 
that the economy was in danger of political collapse and financial 
collapse during the Eisenhower Presidency. But there are differences. 
Obviously, the major difference is this one. It is growing now. In the 
Eisenhower Presidency, it was shrinking.
  Let us look at the nature of the budget. In the Eisenhower 
Presidency, roughly 50 percent of the budget was devoted to defense. 
Today, I wish I could ask the distinguished occupant of the chair to 
respond because he serves on the Armed Services Committee and could 
give us a more correct answer. But the defense budget is about 6 
percent--no, it is less than that, of the GDP and falling. And it is a 
relatively small percent of the total budget. What happened here--
referring to the chart--that did not happen here? Well, in Eisenhower's 
time, there was no Medicaid, there was no Medicare, there were no 
middle class entitlements. As I say, the defense spending constituted 
about 50 percent of the budget.
  What has happened is that entitlement spending has taken hold, 
regardless of whatever else is happening in the economy, and 
entitlement spending, as we have seen from the Commission headed by the 
Senator from Nebraska [Mr. Kerrey], is going to take us over the cliff.
  Are we in danger of immediate financial distress? No. When you look 
at it in this historical context, no. Do we need to do something about 
our financial circumstance right now, however? Yes, because these lines 
are going up instead of down. This is the first time in our history, 
Mr. President, that the lines have been going up in peacetime. Always 
before, when the lines went up, it was because of a war, and then they 
came down. Well, the cold war is over and the lines are still going up.
  Now, Mr. President, as I said earlier, there are two parts of this 
line. One has to do with the amount of debt, and the other, since it is 
a percentage, has to do with the size of the economy. You can start 
these yellow lines moving down if you cut spending. But you can also 
start them coming down if you increase the size of the economy. We are 
back to growth, as one of the major solutions--one of the ignored 
solutions--to our fiscal circumstance.
  Robert Bartley asks the question in his editorial:

       Have the Republicans given up on growth?

  He says, talking about the importance of growth:

       Such discussion ought to start with the heirs of Ronald 
     Reagan, the President who presided over our last period of 
     acceptable growth. But with the withdrawal of Jack Kemp, no 
     strong growth message comes from any of the GOP Presidential 
     contenders, and even the newly ascendant Republicans pitch 
     their rhetoric toward sacrifice rather than hope.

  I object to his characterization of the majority leader's position. I 
think his statement in Chicago, which is in concert with the statement 
I have just made here, makes it very clear that he at least is 
determined to support growth as a major goal should he accede to the 
Presidency. Steve Forbes has just entered the Presidential list, 
calling for growth as the major goal of the Forbes administration. So 
there are contenders who, contrary to Mr. Bartley's comment, are 
focusing on growth. But as a general rule, his criticism, I think, is 
well taken.
  He goes on:

       Even Representative Dick Armey's flat tax, in fact an 
     incentive-boosting and investment-oriented initiative, has 
     been promoted so far with arguments about simplification. It 
     is almost as if Republicans are ashamed to promise growth.
       Despite their congressional triumph, that is, Republicans 
     are still spooked by rhetoric about ``the rich'' and a 
     ``decade of greed.'' In the off-year elections, President 
     Clinton's every campaign appearance was marked by assaults 
     against the 1980s; when votes were counted, the 1980s won. 
     The Republicans could boost their own fortunes, and give the 
     nation a badly needed psychological lift, if they started to 
     claim their own birthright, to promise a return to the 
     economic growth of the Reagan years.

  I conclude, Mr. President, by going back to the original chart once 
again, which has been up for so much of my presentation but needs to be 
looked at again. We have been told ad nauseam that the reason we are in 
deficit now is because of the disastrous tax cuts of the Reagan years. 
The fact is, the tax cuts of the Reagan years have no impact on the 
percentage of the economy that came to the Federal Government.
  As Mr. Bartley points out, they had a tremendous impact upon the rate 
at which that economy grew. Nineteen 

[[Page S 14151]]
percent of a rapidly growing economy produces more money for the 
Government than 19 percent of a stagnant economy.
  Mr. President, I certainly support spending cuts. We need to enforce 
spending cuts for a whole series of reasons.
  I conclude by saying that the Republicans in this Senate need to 
recognize, as Senator Dole called on us to recognize in his speech in 
Chicago, that our main goal for the economy should be long-term 
sustained growth in excess of the 2.5-percent rate for which the 
Clinton administration is prepared to settle.
  If we can do that, Mr. President, if we can get the growth rate back 
up to where it was in the Ronald Reagan years and then with spending 
cuts get some control over the runaway entitlement pressures, we will 
see this line of yellow bars begin to move back down as it has done 
throughout our history.
  We will leave to our children not only a Federal debt that is under 
control but an American economy that is growing rapidly enough to 
create the number of jobs and job opportunities that our children and 
grandchildren so richly deserve.
  I apologize for the length of this presentation. As I say, we have 
opportunities only so often in morning business in which to give them, 
so I have combined several topics here in a single presentation on a 
Monday afternoon.
  I thank the Chair for his attention. I yield the floor. I suggest the 
absence of a quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The legislative clerk proceeded to call the roll.
  Mr. FORD. Mr. President, I ask unanimous consent that the order for 
the quorum call be rescinded.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. FORD. Mr. President, I understand that the distinguished Senator 
from North Dakota [Mr. Dorgan], has the balance of the time of 15 
minutes. I ask unanimous consent that I have a portion of his time, if 
not all of it.
  The PRESIDING OFFICER. The Senator from North Dakota, by previous 
order, was to be recognized for up to 15 minutes.
  Without objection, the Senator from Kentucky is recognized.

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