[Congressional Record Volume 142, Number 47 (Monday, April 15, 1996)]
[Senate]
[Pages S3271-S3274]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




              THE UNLIMITED SAVINGS ALLOWANCE TAX PROPOSAL

  Mr. NUNN. Mr. President, much attention has been paid in recent days 
to proposals for fundamental tax reform. By fundamental tax reform, I 
mean the replacement of the current tax on individual and business 
income with a better alternative.
  A significant share of the debate over fundamental tax reform has 
occurred in Congress. Last year, Senator Domenici and I introduced, 
along with Senators Kerrey and Bennett, S. 722, the unlimited savings 
allowance tax, or the USA tax. Senator Shelby and Congressman Dick 
Armey have introduced legislation proposing a flat rate tax. We have 
all heard considerable debate about that in the Presidential campaign. 
Senator Lugar and Congressman Archer have argued for a national sales 
tax. Other proposals, perhaps variations on these ideas, will appear in 
the coming months.
  If we are to have fundamental reform, this sort of congressional 
debate and activity is absolutely necessary-- necessary, but not 
sufficient. The American people must be involved in this discussion, 
and the sooner the better. They must decide this matter in the long run 
because they and their children will live with the results.
  None of us can be absolutely certain what our fellow Americans would 
choose if fully aware of the various tax reform proposals now before 
the Congress. Not enough debate has occurred for that awareness to take 
place throughout our country, and certainly there has not been enough 
publicity giving the details and analyses of these various proposals. 
It may be that after inspecting alternative ideas, in spite of being 
frustrated with the existing Tax Code, Americans may decide to stick 
with the current tax regime regardless of its serious faults. I hope 
not.
  But whatever the decision, one must be made. Public apathy and its 
close relative, public cynicism, are not appropriate to the challenge 
of fundamental tax reform, which I, for one, believe is essential for 
the Nation.
  If citizens are to make a reasoned judgment about the merits of 
various proposals, they must have recourse to a set of constant 
standards upon which to rely. This is the only commonsense approach 
that is possible and effective, and it applies to the evaluation of tax 
reform proposals even more than to other areas.
  When the summer Olympics comes to Atlanta this year, athletes from 
all over the world will be competing against each other and against the 
record book. It would really not matter if, say, the pole vault event 
were measured in feet or in meters, provided the standard of 
measurement is consistently applied, and applied to all. But an athlete 
would have every right to cry foul or unfair if his pole vaults were 
measured in meters while the vaults of his rivals were measured in 
feet. The standard has to be the same. That is how you determine the 
best.
  So it is with tax reform. If the American people are to evaluate the 
varying proposals that have been presented, they need us to talk with 
them about our ideas in a way that makes those ideas readily 
comparable. If proponents of reform and the media covering this debate 
do not do that, then citizens will be trying to compare apples with 
oranges, rather than apples with apples. I am afraid that is what has 
occurred thus far in this debate.
  Let me offer several examples about what I mean.
  First, for purposes of fair comparison, all tax reform proposals 
should be designed to raise the same amount of money. That amount 
should equal what is now raised by the part of the Tax Code that 
reformers want to replace. In other words, all the proposals should be 
revenue neutral compared to the current code.
  This is an important discipline. Indeed, it is a very critical 
discipline. Low rates are attractive. Accordingly, some reformers 
assume heroic cuts in

[[Page S3272]]

Federal spending and Federal tax requirements when they calculate their 
proposed tax rates. By doing so, they can present proposals with rock-
bottom rates. If one proposal is going to have that advantage, then 
every one should have that. Why not propose a 10-percent flat rate 
instead of a 17-percent?
  It is easy to see how we would have debate that completely obscures 
and, I think, brings no clarity to the issue if we do not have the same 
rules. This strategy is like selling a suit three times too small on 
the assumption that the customer will lose 30 pounds. Maybe the diet 
will work, but if it does not, or even if it is not quite as successful 
as hoped, the suit will not fit and the customer will be unhappy.
  All of us believe that our proposals will accelerate economic growth 
and the standard of living of the American people, or we would not be 
promoting fundamental change. But if the proponents of one plan are 
permitted to use dynamic estimates even in their debate and 
presentations to the public, and the resulting lower tax rates, while 
other areas use conventional estimates and the result is higher tax 
rates, then this is not real debate. Rather, it is an exercise in 
creative arithmetic.
  I have long worked for reductions in Federal spending. I hope the 
current budgetary impasse can be broken. We can and we should put the 
Nation on a path toward a balanced budget. But this process, as I view 
it, must be separated from tax reform. It is imprudent to model a tax 
reform plan based on rosy revenue assumptions that have yet to be put 
into place.
  There is also the matter of what share of the tax should be collected 
from individuals and what share should be collected from businesses. I 
believe that all tax reform proposals should be modeled to collect from 
business and individual revenues in the same proportion as what the 
current code extracts from both.
  There is nothing magical about that proportion. From an apples-to-
apples perspective, however, we must guard against the temptation, in 
modeling tax reform proposals, to shift the tax burden from individuals 
to businesses, or vice versa, in order to play shell games with the 
rates. You can make a tax proposal sound very attractive if you lower 
the individual rates dramatically and increase the rates on business. 
But that, in my view, unless it is clearly spelled out as to why you 
are doing it and what the philosophy is and why that is going to 
improve the lives of the American people, it makes no sense.
  Just as all the tax reform proposals should be revenue neutral, so 
too should they provide enough detail to allow people a fair chance to 
assess them in their entirety. Architects of fundamental tax reform 
plans need not draw up a complete set of blueprints with every single 
detail. The goal is to furnish enough of the foundation and framework 
to permit citizens to understand how the entire structure would 
function and to suggest ideas for its improvement.
  Often when a proposal seems simple in concept, it does so because its 
advocates have not explained how it would apply to the many economic 
transactions that occur every day in our very complicated and complex 
economy.
  Transition issues are a good illustration. Replacing much of the 
current code with an alternative system will entail more than just a 
one-time transition cost. Over many years and using after-tax dollars, 
Americans have amassed trillions of dollars in savings. Businesses have 
invested trillions of dollars in plant and equipment. That has already 
been done.
  If and when we move to a new tax system, what will happen to that 
savings and investment? Some tax reformers are silent on that issue. 
Does their silence mean that senior citizens, our best savers, will 
find their savings taxed yet again under the new regime? Suppose 
somebody saved all of their lives and they have $100,000 in liquid 
assets, and they are in their golden years and plan to retire. If you 
pass a 20-percent sales tax and do not have a fundamental transition, 
then you have said to that senior citizen, ``You have $100,000 which 
you saved all your life, and you paid taxes on it. These are after-tax 
dollars, but now, as you spend that money, we are going to levy a 20-
percent tax on everything you spend in the latter years of your life.'' 
Does anybody really believe that is fair? Yet, those matters have not 
yet been discussed by many of the proponents of some of the plans.
  Will businesses that invested in productivity-enhancing equipment be 
penalized for their foresight because they will be unable to amortize 
fully these investments? Is that the way we want to increase new 
productivity, by penalizing previous modernization efforts for 
productivity that have been made without a new code?
  When Senator Domenici and I drafted our USA tax proposal, we devoted 
much of our attention to solving the transition problems. I do not 
claim we have solved every one of them, but we have gone a long, long 
way. Under the USA tax, pre-transition savings would not be taxed and 
businesses would be given an opportunity to write off their previous 
investments.
  Proponents of other reform plans have criticized the USA tax's 
transition rules as overly complicated. That is easy to do if you do 
not have any in your own proposal, and if you have not thought about 
the results of not having any. Perhaps so; we welcome any suggestions 
for improvement. But, to use an old poker expression, you can't beat 
something with nothing. Proposals for fundamental tax reform that do 
not address transition are not simple--they are simplistic because they 
are not complete. They have avoided the hard questions and the hard 
work which are essential for meaningful tax reform.

  Transition is only one of the many details that require elaboration. 
Farmers must know how tax reform proposals will treat cooperatives. 
Bankers and insurance companies will ask how financial and service 
organizations are to be taxed. When you give them an answer and you 
have not really thought about that, and you say, ``Well, we will have 
to have a transition rule,'' that means your proposal is going to get 
more complicated and more complex. That is inevitable. But when you 
have not thought about these issues, it makes comparisons for the 
public--and even for the news media people who follow it on a regular 
basis--almost impossible.
  Wage earners will wonder if fundamental tax reform will address the 
very regressive payroll tax, which is one of our most regressive taxes 
and is one of the reasons why our American average working person has 
been hit so hard in the 1980's and even in the 1990's while people get 
up and talk about the overall rates having come down. Yes, income tax 
rates have come down. Of course, they came back up again 2 years ago. 
But they have come down substantially when measured over the last 10 or 
12 years--very substantially. But guess what has happened during the 
same time? The Social Security tax, which has more effect on many of 
our working people making lower incomes, that tax rate has gone up 
dramatically, and, therefore, many working people, during the Reagan 
years where everybody talked about taxes going down, many working 
people have seen their taxes go up.
  Wage earners will not be the only ones who ask about that. There is 
not a small business person in America who is not vitally interested in 
the same issue because the payroll taxes for small businesses have also 
gone up dramatically in the last 10 or 15 years.
  Advocates of fundamental tax reform must address these and many more 
matters openly and early-on. The pass-it-now-and-fix-it-later 
philosophy of tax legislation will not work. A lack of candor at the 
beginning of the process invites precisely the public cynicism that now 
surrounds the current Tax Code.
  This issue of candor and thoroughness brings me to the final and most 
important apples-to-apples issue. Those of us calling for fundamental 
change must explain why we think the Nation should embark upon such a 
large project. Only by knowing our motives and why we think change 
needs to be made can citizens evaluate fairly whether our plans are 
likely to succeed.
  My own sense is that the authors of the various tax reform plans have 
many goals in common. Those goals have little to do with tax rates and 
even allowable deductions. I am not

[[Page S3273]]

saying tax rates and deductions are unimportant. They are of course 
important. But changing the tax rates or altering the number of 
deductions does not require fundamental reform.
  In 1986, Congress lowered tax rates and eliminated certain deductions 
without replacing the Tax Code. If it so chooses, Congress could today 
enact a flat or single rate individual income tax with minimal 
tinkering with the rest of the tax system. As a matter of fact, while 
Senator Domenici and I have offered a fundamental tax reform plan with 
a progressive rate structure, we could easily adapt our proposal to a 
flat rate system if citizens so demanded without changing our essential 
purpose.
  Mr. President, the debate on flat tax loses a great deal in terms of 
the understanding that is required. You could take the current Tax Code 
with all of its headaches, with all of its deductions, with all of its 
complexities, with all of its perceived unfairness, and you could apply 
a national flat income tax rate to the current code. It is just a 
matter of arithmetic. You take the amount you need to produce a break-
even with the current revenue today, you take the rate that would be 
required to apply to the taxable income, and you apply it. Instead of 
having four, five, or six individual income tax rates, you could have 
one. That could be done in just a few hours. You could have a national 
flat tax rate with the current code. But you would not have solved the 
problem that is frustrating the American people in terms of complexity, 
unfairness, and the problem that bothers so many of us because you 
would not have changed the basic disincentives to save and invest which 
are required if we are going to increase productivity and if we are 
going to increase the average income for our American citizens.

  Our essential purpose is to change what we tax. This is true for the 
flat tax and the national sales tax as well as the USA tax and all the 
other proposals based on these models.
  All of these plans aim to correct the bias in the current code 
against saving and investment. Marginal changes in the Tax Code cannot 
eliminate that bias. It is ingrained in our current system. If you want 
to remove the bias in the tax base, you have to replace large parts of 
the code.
  What do we mean by bias some ask? Here is a simple example. If you 
take $200 and buy a television set, you are not again taxed for 
whatever enjoyment or enlightenment you may receive by watching it. If, 
however, you take that $200 and put it in a college savings account for 
your children to go to school, all the interest you earn is subject to 
tax.
  The act of consumption--using the $200 to purchase a television set--
is taxed once, as income. The act of saving--putting the $200 away for 
future education expenses--is taxed twice. The original $200 has 
already been taxed as income. The returns to that $200, in this case, 
interest, is taxed again. Saving $200 for tomorrow is more expensive 
than consuming it today.
  So we have an inherent bias built into our tax system that tilts us 
toward consumption and away from savings and, therefore, away from 
investment, productivity, and a higher growth standard with higher 
income.
  Millions of middle-class Americans own stock or shares in mutual 
funds that own stock. They rely on this saving for retirement, health 
care, and other future expenses.
  I wonder if most realize how double taxation reduces the return on 
their investments. Because our tax law regards corporations and their 
investors as separate entities, it taxes corporate earnings twice: once 
as corporate income and again as dividends received by individuals. In 
contrast, because corporations may deduct interest payments if they 
borrow, holders of corporate bonds are not penalized by double 
taxation.
  The current Tax Code says to citizens: faced with a choice between 
buying today or saving so that you can buy more tomorrow, then you 
should buy now. It says to corporations: faced with the choice of 
building a strong foundation through equity financing or borrowing to 
the hilt, borrow to the hilt.
  This bias against saving is a bias against our future. We see its 
crippling influences in our economic data. The saving rate in this 
country is at historically low levels. Because our savings are low, our 
investment has been correspondingly low. Continued low saving 
inescapably means continued low investment. Low levels of investment 
mean low productivity gains. Low productivity gains means stagnant 
wages and, therefore, little or no growth in our standard of living. We 
have been on this treadmill for long enough--too long.
  All of the major proposals for fundamental tax reform--the national 
sales tax, the flat tax, and the USA tax of Senator Domenici and 
myself--would rid the Tax Code of its bias against saving. That is 
their central, core characteristic. While we debate the differences, 
this core characteristic should not be overlooked. It is this focus 
upon the tax base that distinguishes fundamental reform from the 
incremental changes of previous years.
  Although many of the details of the national sales tax proposal 
remain sketchy, its basic mechanism is familiar to most Americans. The 
sales tax is paid on purchases. Saving remains untaxed until spent. In 
theory, every dollar of wages or salary is taxed once and only once at 
the point of consumption.
  The flat tax would be administered in much the same way as the 
current income tax. The key difference is that capital income--that is, 
money earned as the result of saving and investment--is not taxed at 
the individual level.
  For example, citizens would not be taxed on interest earned on a bank 
savings account. Nor would they be taxed on income from dividends, 
interest on corporate paper, or capital gains. Corporate income would 
still be taxed at the corporate level; by not taxing it again at the 
individual level there would be no double taxation. While I certainly 
understand the theory behind this proposal, I would have a hard time 
ever explaining why the wealthy owner of a yacht living off of 
investment income would have to pull up to shore to let his captain off 
to file an income tax return each April 15 while the owner remains on-
board watching television and playing cards.
  That is a burden I do not want to assume. So the theory has validity, 
but the application seems to be, and I think would be perceived to be, 
very unfair.
  Senator Domenici and I took another tack. Like the flat tax, our USA 
tax proposal is administratively similar to the current income tax. 
Some people, of course, do not like that. But our method for relieving 
the current code's burden on savings and investment departs in 
considerable and very significant degree from the flat-tax approach.

  A major, perhaps insuperable, problem with the flat tax is the 
failure to treat all income alike. An individual with only wage income 
would file a tax return while his neighbor, with only capital income, 
would not.
  Now, it is true that the capital income would already have been taxed 
at the business level. Dividends, for example, would have been taxed at 
the business level as corporate income, but I am afraid that would be 
far from obvious to the wage-earning neighbor. Such a lack of clarity 
would inevitably lead to a lack of public confidence.
  When we designed the USA tax, we wanted to make the proposal as 
understandable and fair as possible so we chose to avoid the complex 
and confusing distinction between wage and capital income.
  The USA tax is indifferent to the source of income. It is concerned 
with how the income is used. In every taxable year, the amount of money 
a taxpayer chooses to save would not be taxed. The taxpayer would be 
taxed only on the amount he or she spent during the year. This removes 
the double taxation of savings. Note, too, that no dollar ever escapes 
taxation. Over a lifetime, every dollar would be taxed once and only 
once in the year it was spent.
  The USA tax grants to all America a power that today is reserved only 
for the wealthy: the ability to lower their tax obligations. Exercising 
that power does not require an army of tax lawyers to ferret out 
loopholes in the tax system. Merely by saving, taxpayers can reduce how 
much of their wages is subject to tax in any given year.
  Under the USA tax, everyone will have the tools to take greater 
economic responsibility for themselves

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and for their families. At a time when we must moderate the growth of 
entitlement programs, this sort of change, I believe, is absolutely 
essential.
  I know that many of us in America do not think we can afford to save. 
My response is that we have no real choice. Savings must become a 
greater priority in every household budget, just as it must in the 
Federal budget by lowering the deficit. It is Government's 
responsibility to help our citizens by providing a tax code that does 
not penalize them when they try to do what is best for their future and 
for their children's future.
  Mr. President, I believe the U.S.A. tax offers a superior path to 
fundamental tax reform. Its savings deduction is understandable and 
equitable. Those who take the time to acquaint themselves with our 
legislation--which we tried to write in plain English in the hope that 
Americans will read it--will also see how the U.S.A. tax would simplify 
both the business and individual tax; encourage American exports by 
offering a tax rebate on sales or exports from this country; it would 
include vital deductions for education, charitable giving and retain 
the home mortgage interest deduction; and it would provide taxpayers 
and businesses with a credit for the payroll tax they must pay, which 
is enormously important to our small business community and, most of 
all, to our average working people.
  Ultimately, however, neither Senator Domenici nor I see ourselves in 
some sort of fundamental win-or-lose conflict with advocates of the 
flat tax or a national sales tax. Fundamental tax reform must be a 
collaborative process. There are tremendous forces in favor of keeping 
the Tax Code as it is. They are already well along in their job of 
scuttling change. We assist these defendants of the status quo when we 
focus only on our differences and neglect what we have in common.
  For all the conferences, column inches, research reports, and 
speeches devoted to fundamental tax reform over the last year or so, 
the truth of it is that those of us who want fundamental change stand 
at the beginning of a very long road. We must begin to travel that road 
together. We have to speak with the American people regarding what is 
really at stake in fundamental reform. We must solicit their views 
rather than stir up their passions. We must challenge our critics to 
help improve our work, and when we offer proposals for reform, we must 
employ similar revenue estimates and provide a comparable degree of 
detail about what we wish to do. We must begin to make apples-to-apples 
comparisons if people are going to be able to understand the debate and 
participate in it. Then and only then can the people of America decide, 
and the people will have to decide in the long run.

  As we enter the Presidential election cycle, it is evident that the 
American people are restive and uncertain about our collective future. 
They wonder about which direction our country should take.
  At another time of great national uncertainty, Abraham Lincoln 
offered some very practical advice. Quoting him, ``If we could first 
know where we are and whither we are tending, we could then better 
judge what to do and how to do it.''
  Those of us who believe that fundamental changes in the Tax Code are 
one important element, a very important element, in getting the 
country's house in order should heed Lincoln's advice. Let us work 
together to encourage a public understanding of where we are 
economically and how our current Tax Code constrains us and prevents us 
from fulfilling the American dream of a better life for all of our 
citizens. If we can do that, we may safely leave it to the public to 
judge what to do and how to do it.
  Mr. President, I yield the floor.
  Mr. LIEBERMAN addressed the Chair.
  The PRESIDING OFFICER. The Senator from Connecticut is recognized.
  Mr. LIEBERMAN. I thank the Chair.
  Mr. President, before I proceed with my remarks, let me just offer my 
thanks and appreciation to my dear friend and colleague from Georgia 
for the statement he has made, for the leadership he has given on this 
issue. He is known best, I suppose, for the extraordinary leadership he 
has given on matters of national security now for more than two decades 
in the Senate, but he has been a courageous leader in other areas, 
including this one of tax reform. It reminds us about why we will miss 
him next year and why I hope he will continue to push us in the 
direction of reform from the private sector. I thank my friend for his 
superb words.
  Mr. NUNN. I thank the Senator.

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