[Congressional Record Volume 147, Number 74 (Friday, May 25, 2001)]
[Senate]
[Pages S5681-S5683]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
TAXES
Mr. BENNETT. Madam President, we are all waiting for the conferees to
come back to us with the tax bill. As we do that, I thought it might be
appropriate for me to talk a little bit about some of the rhetoric that
has surrounded the issue of taxes in the time we have together.
If I may, I will be a little personal because I have experience with
the issue of marginal rates which might be of some value to this debate
and which I would like to share.
As many Members of this body know, I was one of the founders of a
business that started in what the pundits have come to call the decade
of greed; that is, the 1980s. In that period of time, that which has
been most commented on and most decried by the pundits is the fact that
the top marginal tax rate was 28 percent.
We are talking now about an attempt on the part of President Bush to
bring that tax rate down to 33. It is pretty clear from the
conversations I have had with the conferees that that is not going to
happen. I think it will be somewhere in the neighborhood of 35.
Someone said: Why does Michael Jordan need a tax cut? Why does Ross
Perot need a tax cut? Why does Donald Trump need a tax cut? Isn't it
proper that they continue to pay the lion's share of the taxes in this
country? And they do. The people in the top 1 percent pay most of the
taxes. To put it in another statistic: The top 400 taxpayers--this is
less than 1,000 tax returns--pay more than 40 million of the taxpayers
down below; 400 pay more taxes in dollars received than 4 million
people down below.
Why do those 400 need a tax cut? They have plenty of money. That is
the argument we hear.
I will concede that I don't think Michael Jordan needs a tax cut; I
don't think Donald Trump needs a tax cut; and I don't think Ross Perot
needs a tax cut. But under the Constitution, we have equal protection
of the laws, which means if you provide a tax cut for someone, for a
good and logical reason, someone else who happens to be in the same
boat, even if he is rich, gets the same equal protection of the law and
gets the same tax cut. So it is the side effect, if you will, that
Michael Jordan gets a tax cut.
Here is the experience I had which I think gets ignored over and over
and over again in the rhetoric that is thrown out with respect to tax
rates. As I say, my associates and I started our business during the
decade of greed when everybody was saying it was so terrible that the
top marginal tax rate was 28 percent. We used, as most businesses did
at that time and many businesses still do now, a provision of the tax
law that is known as section S of the tax law. Those who use it are
known as S corporations as a result of their election.
All that means simply is that the profits of the corporation are not
taxed at the corporate level. They flow through, as the Tax Code
provides, to the individual tax returns of the shareholders.
We had five principal shareholders. That meant that as the
corporation earned money, that money flowed through to our tax returns.
If I can be fairly dramatic, in terms of the impact on me, I was
earning my salary as the CEO of that company, which I and my wife
thought was a relatively modest salary, but I filed a tax return
showing that I had earned more than $1 million. Why? Because my share
of the profits of the corporation showed up on my tax return.
Now it made absolutely no difference whatsoever to my take-home pay,
which was tied to my salary, because the corporation did not give me
any money beyond the money necessary to pay my share of the taxes. Why
would we do that?
There are two reasons we made the S corporation. The first and
primary reason is that we wanted to avoid double taxation. If the
corporation earned $1 and paid corporate taxes on it--and let's take
the corporate rate at the time, which I believe was 38 percent--if the
corporation earned $1 and paid 38 cents of that dollar to the Federal
taxes and then gave the resulting money to the shareholder, the
shareholder would then have to pay taxes a second time on the money
that came as a dividend. If you make an S corporation, you only pay
taxes once instead of twice. That is the primary reason people make the
S choice.
The second reason was that if we did the S choice, we only paid 28
percent on that $1 earned instead of 38 percent on that $1 earned.
Naturally, we wanted to save the extra 10 percent, 10 cents on the
dollar.
Many people have the idea that when you earn money, you buy yachts
and you take vacations and you waste the money overseas in what the
Scriptures would call ``riotous living.'' In fact, of course, when you
are growing a business, you need every penny. It goes into inventory.
It goes into accounts receivable. It goes into capital investments. If
the business is growing--and our business was doubling every year; it
did that for about 6 years running--you are always behind.
Indeed, I say to the students in business school, when I am asked to
talk to them about this, the most terrifying thing you can do in a
start-up business is make a profit, because then you owe taxes. Uncle
Sam shows up and wants his tax money in cash.
You don't have it in cash because, as I say, your profits are all
tied up in inventory, all tied up financing your growth. You end up, in
most instances, borrowing cash from the bank in order to pay your
taxes.
We paid a marginal rate of 28 cents out of every dollar we earned,
and we plowed every one of the remaining 72 cents back into that
business to make it grow. Our salaries did not increase. My take-home
pay actually went down when that extra $1 million showed up on my tax
return, because then I was being treated, as far as the Federal
Government was concerned, as if I were a basketball star earning that
$1 million, and that wiped out all of my deductions. That may not
matter much to some people, but we had six children at the time, and
that constituted a fairly significant amount of deductions that all of
a sudden we couldn't take because we were ``rich.''
My take-home pay on my W-2 pay hadn't changed. The amount of money I
was being paid by the corporation had not changed.
All that had changed was the bookkeeping entry on my tax return.
Well, I am not complaining because the business was successful--so
successful that we could look back on it now and realize that that
business started literally in somebody's basement, with 2 employees, a
husband and a wife, that then doubled to 4 employees, and that is how
many they had when I joined them; I made No. 5. That business is now
employing about 4,000 people. They are paying literally millions of
dollars in Federal taxes, both the corporation taxes, the income taxes
of the payrolls that have been generated with those 4,000 folks, plus
the suppliers, plus all the rest of it. It is a fairly typical American
success story.
The point of all this is not to bother you with details of my
experience, but to point out that the difference between the top
marginal rate of 28 percent that we pay and the current effective rate
of 42 percent is 50 percent of the original amount; 14 points out of
the 28 percent have been added on to the 28 percent. I suggest to you
that if we were trying to start that business today, we would not have
been able to finance it.
Many of the people who looked at this business said to us: How are
you doing this? This growth is phenomenal. How are you creating these
jobs?
We said we did it with internally generated cash. We didn't sell
stock; we didn't go to the bank, although we had a credit line at the
bank, of course. But we did it because we were able to save enough of
the profit dollars we earned to pay for the growth of that business and
create those jobs.
You can never say anything with certainty with respect to
hypotheticals, but it is my conviction that if we were starting that
business today, facing an effective tax rate of 42 percent, we would
not succeed. We could not afford to do it. Therefore, we would not have
created the 4,000 jobs that exist now.
The point I want to make with respect to the top marginal rate is
that it does not just apply to the Michael Jordans and Donald Trumps of
this world. That marginal rate applies to
[[Page S5682]]
the entrepreneurs who are trying to do the same thing my associates and
I were lucky enough to do--start a business, create jobs, add to the
growth of this country, and discover as they go along that they need to
hang on to every penny they earn to finance that growth, and every
additional percentage point that we in the Congress put on the marginal
rate hampers the opportunity of people to do that.
Senator Grassley, chairman of the Finance Committee, has offered the
statistics of how many hundreds of thousands of small businesses trying
to become big businesses are affected, how many hundreds of thousands
of them, with their subsequent millions of employees, would be
benefited by the kind of tax relief at the top brackets that President
Bush is urging us to pass.
We never hear that from the folks in the national media. Sometimes I
wish that some of the people who are the talking heads on the shows on
Sunday, who pontificate with such certainty about economic matters,
might just take a few weeks off from their situation in front of the
cameras and come out into the real world and try starting a business,
try employing people, try creating jobs, and discover that life is a
little different. Some in this Chamber have that experience.
Comments were made by one of the more distinguished Members of this
Chamber who ran for President in 1972--the Democratic nominee, Senator
McGovern. He was firmly and solidly in the camp of those who insist
that top marginal rates should be higher and higher and Government
should regulate more and more. He tells the story of how, after his
political career was over, he still had enough notoriety left over that
he could give some speeches and earn some money for those. As he was
paid honoraria for the speeches, he accumulated some money and he
decided: Now is the time for me to relax a little. I will buy a
business.
He bought an inn in New England. Maybe he watched Bob Newhart's show
and he thought that would be a nice thing for him to do--whatever. He
has come back and said: If I had had the experience actually running a
business in the real world before I became a Senator instead of
afterwards, I would have been a very different kind of Senator. I would
have had a very different view about regulations and taxes and the way
the Government interferes with people's lives.
This came from a man who at the time was labeled the most left of all
of the Presidential nominees put up by either party in a generation.
Coming back from the actual experience, he finds things are really
different in the real world than they are on the Sunday talk shows, and
sometimes as they are portrayed in the Senate.
So while it may sound too personal for me to share this experience, I
think it may have some value because we need to understand, as we are
voting on this marginal tax rate, that we are talking about something
far more than just the amount of taxes Michael Jordan or Donald Trump
or Ross Perot may pay. We are talking about hundreds of thousands of
businesses in this country that have been slowed in their growth,
slowed in their ability to create jobs by seeing a jump in the
effective rate go from 28 percent, which it was prior to 1991, to an
effective rate of 42 percent now. And then people are beginning to
wonder why there are some slowdowns in the economy.
There is another point I want to make about this issue and the
rhetoric that has gone around about it. We are told over and over again
that the primary benefits go to the top 20 percent and the folks at the
bottom 20 percent don't get anything out of this. That is terrible, we
are told, and we must somehow find a way to use the Tax Code to take
the money from the top 20 percent and make it available to the bottom
20 percent.
There are several things that need to be said with respect to this
argument. The first is the statistically obvious one. As long as you
are dealing with 100 percent and dealing in percentages, you are
dealing in what the mathematicians call a zero sum game; that is, you
take a sum from this side, it must be added to that side, and
everything in the end, one subtracted from the other, gives you zero,
because everything equals.
The economy is not a zero sum game. Neither is society. If you are
talking about the top 20 percent, you will always have a top 20
percent. You can't have a 100-percent scale without statistically and
mathematically having a top 20 percent. So the top 20 percent will
never disappear. No matter how much you make an attempt to take money
from the top 20 percent and put it in the bottom 20 percent,
mathematically, somebody else will always show up in the top 20
percent.
The second point, however, is the more important one, and that is, in
America, more than in any other economy and any other society in the
world, there is fluidity all up and down the economic scale.
If I may be personal once again, let me demonstrate that. I have been
in the bottom 20 percent. I am an entrepreneur. I start businesses.
Most of the businesses I have started have failed. That is the way
entrepreneurs live. I sat down when I got an award as entrepreneur of
the year and said: Am I really?
I did a little calculation, and up to that time I had been involved
in 11 different businesses that would be considered startups or
turnarounds, 11 different entrepreneurial activities. Of those 11, 4
failed outright--just flat died. Four we managed to sell before there
was any profit or loss; we broke even and got out. Only three of those
businesses survived. Of the three that survived, only two really were
major successes. One of the three was a minor success that was on a
plus, so I have to include it. So there is the track record: Out of 11,
basically there are 2 success stories.
While I was in one of the others that was not a success story, I was
in the bottom 20 percent. Indeed, I was in the bottom of the bottom. I
was getting no income. I was dipping into my savings, and when the
savings were gone, I was going into debt. I was paying the payroll of
the business on my American Express card, and then my American Express
card got canceled because I hadn't made the payments on it.
Statistically, I was in the bottom 20 percent. It was not 5 years
after that somewhat dispiriting experience that I was in the top 20
percent. One of those entrepreneurial efforts hit, and when it hits, it
hits rapidly, at least in my experience. I went through the bottom 20
percent, the next 20 percent, the next 20 percent, the next 20 percent,
up to the top 20 percent pretty fast.
Did I get from the bottom 20 percent to the top 20 percent because
the Government took money from the top 20 percent and gave it to me
while I was in the bottom 20 percent? No, I got there because the
American economy makes it possible for entrepreneurs to have this kind
of success story.
Quite frankly, since I have been in the Senate, I have gotten out of
the top 20 percent. I have started coming back down again. That sort of
fluidity happens to us all the time.
I have used the name of Donald Trump. Donald Trump has been from the
top to the bottom to the top again as his real estate ventures go good
and go bad.
The problem is not the statistical one of where people are at any one
moment in time. I have six children. Right now some of them are doing
pretty well. I have one child who, with her husband, probably is pretty
close to the bottom 20 percent. He is not earning anything, and my
daughter is supporting him. Gee, isn't that terrible, until you find
out he is a student at the Harvard Law School and has pretty good
prospects of good earnings once he gets out. He is going into debt now.
He is in the bottom 20 percent, but when he gets his degree from the
Harvard Law School, I believe he is going to be in fairly high demand
with people dangling $125,000 a year starting salaries in front of him,
and he will move very rapidly from one to the other.
The problem we should be talking about is not the dry statistics of
income, it is the reality of skills. The income gap in this country is
not something that can be addressed with the Tax Code. The income gap
in this country is a skill gap and has to be addressed through a series
of educational initiatives, retraining initiatives, both government and
private, and a recognition that the people who have the skills in the
freedom of the American economic and environmental system have the
opportunity to move up. But
[[Page S5683]]
when they move up, they will always be replaced statistically with
someone who is earning less than they are who ends up in the bottom 20
percent.
Interestingly enough, when we had hearings before the Banking
Committee on the issue of the Tax Code and tax relief, and Alan
Greenspan was testifying before us, one of the members of the committee
said to him: Mr. Chairman, with respect to the good economy we are
enjoying, tell us who has benefited the most in terms of the economic
strata of the United States, which group has gotten the greatest
benefit out of this good economy?
Knowing the political orientation of the Senator who asked the
question, I think he was expecting and hoping that Alan Greenspan would
say: Well, this economy has mainly benefited people at the top and the
people at the bottom have not gotten anything out of it.
I think the Senator was a little surprised when Alan Greenspan said:
Without question, the people who have benefited the most from this good
economy are the people at the bottom of the economic scale.
Then he was asked how can that be because statistically the top 20
percent has gotten richer than the bottom 20 percent. But Alan
Greenspan pointed out a great truth: It probably does not make any
difference--I am not quoting him now; this is my summary--it probably
does not make any difference whatsoever to Bill Gates whether his
portfolio is $60 billion or $80 billion in terms of his lifestyle. He
still has his big house at $60 billion. He still has all of his
opportunities at $60 billion. His life has not changed at all if it
goes from $60 billion to $80 billion.
However, someone who cannot get a job, who suddenly finds that he or
she can and become gainfully employed for the first time in his or her
life sees an enormous change, and that, indeed, has been the primary
impact of this good economy. It has virtually, at least for a period of
time, eliminated unemployment.
I can remember when we thought structural unemployment in this
country was about 6 percent, and when we got down to 6 percent, we had
functional full employment. We saw unemployment go down below 4 percent
at times in the recent boom situation, and who got those jobs? People
who were unqualified for the jobs that were available when unemployment
was higher.
I remember visiting with employers in my State and asking them: What
is your biggest progress in this booming economy?
They said: We cannot hang on to workers. We will take any warm body.
We need workers.
I said: Will you take the unskilled?
They said: Absolutely, we will take the unskilled and we will spend
the money training them; we will spend the money making them skilled
because we have to have people.
One employer said: We have a job fair opening where we rent a room
and ask people to come in. They come in, we make a presentation to
them. Say there are 30 or 40 people in the room. We make a presentation
for an hour. We break for coffee and only 10 of them come back
afterwards. All 40 of them are unemployed and want a job, but 30 of the
40 decided they did not like the way we made the presentation. And they
can always walk down the street and get a job someplace else.
That is the impact of a booming economy on the people at the bottom.
It gives them an opportunity that will make a more dramatic change in
their lives than the change in the lives of the people at the top. That
is what Alan Greenspan was talking about when he said in terms of the
impact for good on people's lives, there is no question whatsoever but
that the booming economy we are having has affected for good more
people at the bottom than it has people at the top.
Yet from the rhetoric we hear around this Chamber, we are told over
and over that if we do not somehow take money away from the people at
the top and shift it to the people at the bottom, we are going to
destroy American democracy.
This class warfare kind of rhetoric simply does not jibe with
reality. It does not jibe with what we have experienced in the last 10
years. It does not jibe with what the economists tell us is reality,
and it certainly does not jibe with that which the small business man
and small business woman will tell you in terms of actual job creation.
Of course, the statistic we need to keep in mind is that the great
job-creating machine in this country is not the Fortune 500. The great
job-creating machine that is creating new jobs is not headed by Exxon,
General Motors, Ford, and DuPont. No, the jobs are being created the
way the jobs were created in the circumstance of which I was fortunate
enough to be a part: A company started in a basement by a husband and
a wife that within a decade has created 4,000 jobs, and in the process
of creating those 4,000 direct jobs, among the suppliers, there are
another 2,000 to 3,000 to 4,000 jobs as people are hired to produce the
articles that our company has to buy in order to provide its product to
its customers.
As we wait for the report to come in from the conferees as to where
they are going to put the marginal rate, I wanted to take the time to
make it clear that the political rhetoric that flows around this issue
really has little or no connection with reality.
In reality, a lower marginal rate primarily helps small businesses to
grow. A lower marginal rate is crucial to the rate by which small
businesses grow. The rate at which small businesses grow is the most
important dynamic in terms of how the economy is growing, and for those
who get statistically hung up on the gap between the top 20 percent and
the bottom 20 percent, they must remember and recognize that in
America, more than any other society in the world, the freedom to move
both up and down the ladder is greater than anywhere else.
If we can understand those things, we can come to a more intelligent
decision with respect to where the marginal rate will be. I have no
illusions that the conferees will bring the marginal rate in at the
level that I would like, but I hope that once it comes in, in future
Congresses we can keep all of this in mind and take another bite at the
apple at some particular point.
My desire would be to bring the top marginal rate back down to where
it was during the decade of greed where, quite frankly, we sowed the
seeds of the great economic expansion about which we are all excited
and for which politicians of both parties have been taking credit when,
in fact, they have had little or nothing to do with it.
I think the work I did at the Franklin Company before I came here had
more to do with creating jobs than anything I have done since I have
been here. I want to get the marginal rate back down so others who are
trying the same kinds of things we did will have the same opportunity
that we did.
I yield the floor.
The PRESIDING OFFICER (Mr. Hagel). The Senator from Michigan.
Ms. STABENOW. Mr. President, I ask unanimous consent to speak up to
15 minutes in morning business.
The PRESIDING OFFICER. Without objection, it is so ordered.
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