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April 13, 2000, Thursday

SECTION: CAPITOL HILL HEARING

LENGTH: 22764 words

HEADLINE: HEARING OF THE HOUSE WAYS AND MEANS COMMITTEE

SUBJECT: OVERHAUL OF THE TAXATION SYSTEM

CHAIRED BY: REP. WILLIAM ARCHER (R-TX)

WITNESSES: FRANK LUNTZ, PRESIDENT AND CEO, LUNTZ RESEARCH COMPANIES; JEFREY POLLACK, PRESIDENT AND PRINCIPAL, GLOBAL STRATEGY GROUP INC.; WILLIAM HELMING, PRESIDENT AND OWNER, BILL HELMING CONSULTING SERVICES, INC.; JAMES L. POWELL, OWNER, POWELL CATTLE COMPANY; ALDONNA ROBBINS, SENIOR RESEARCH FELLOW AND VICE PRESIDENT, FISCAL ASSOCIATES, INSTITUTE FOR POLICY INNOVATION; GREG THEBEAU, NATIONAL GRAIN TRADE COUNCIL;

1100 LONGWORTH HOUSE OFFICE BUILDING, WASHINGTON, D.C.

10:30 AM. EDT THURSDAY, APRIL 13, 2000

BODY:
REP. BILL ARCHER (R-TX): The committee will come to order. Today is the final day of our hearings on structural reform and I believe it's going to be an interesting one. We begin by receiving testimony from our own colleague, Mr. Portman, who has a deep interest in tax reform. Then, we will hear from two pollsters, one Republican and one Democrat, on what the American people are thinking about structural reform. Thirdly, we will receive testimony from a Mr. William Helming, and one of my long-time friends, Jimmy Powell, about a very interesting tax reform proposal that Mr. Helming has developed. Finally, we will hear the views of the U.S. Chamber of Commerce and testimony on the death tax and on the elements of fundamental tax reform. Mr. Rangel. REP. CHARLES RANGEL (D-NY): Thank you, Mr. Chairman. I don't know how we slipped up and let a Democrat get on one of these panels, but I'll have to stick around and see that. But, I think this is going to be the most exciting hearing because my dear friend and fellow committee member, Mr. Portman, will be testifying. I say that not just out of sense of affection, but because realistically he probably is the only one who will be around here, as it relates to witnesses, in order to do something about the tax code. Most of the other people are just giving some ideas of their frustrations before April the 15th.

But I've known about Mr. Portman's concern about the structure of our code, and the constant contributions he makes to make it a better instrument to guide the collection of revenue. And, so, I really look forward to his testimony this morning and look forward to working with him no matter what the political composition will be of this committee next year. Thank you.

REP. ARCHER: Mr. Portman, welcome to a new position at the witness table, but not to a new presence in this room. We'll be happy to receive your testimony. REP. ROB PORTMAN (R-OH): Thank you, Mr. Chairman. It's a little daunting, but I appreciate your words and Mr. Rangel's. And to my colleagues who have the patience and fortitude to be here this morning, I'm delighted to get a chance to testify briefly. I have sat through, as you know, a number of the witnesses' testimony with this series of hearings on tax reform. I think it's been very informative and I think it's been very thoughtful, and I want to commend the chairman for having these hearings and opening up a discussion.

I've learned a lot about various alternatives, and I guess what I hope is that we can at least all agree that we must replace our current code with one that is simpler, one that is fair, and one that is less intrusive. This morning, Mr. Chairman, I'd like to switch gears a little bit, even from the testimony I'd planned to present, and talk a little bit more about why we need to change our process -- how to get to structural tax reform, rather than focusing so much on why a specific tax reform plan does or doesn't make sense.

I think over the next two to five years, we have a tremendous opportunity to move forward on tax reform. Unlike some in this room and elsewhere, I believe it can happen. In fact, I believe it must happen if America is to be prosperous in the increasingly competitive new century. In '96 and '97, thanks to the chairman's support and others, I had the opportunity to serve as chairman of the National Commission on Restructuring the IRS. I served on that with Bill Coyne, who's with us this morning. It was a panel of experts, as you know, convened by Congress, to recommend reforms to improve taxpayers' service at the IRS.

I want to touch on this commission, only because I think it relates to the topic here today in two regards. First of all, the commission in its work found that complexity of the tax code was one of the major, and I would say, the major problem facing the Internal Revenue Service, though it was very much -- it's consistent with hearings that we had and the focus of the committee on tax reform. Second, because I think it says a lot about process, that is, how to achieve reform. In the commission, we rolled up our sleeves and spent literally a year auditing the IRS, kind of turning the tables and getting to the root of the problems at that agency. It was a complex and very difficult task.

But, after careful and thorough review, we recommended the most comprehensive overhaul of the IRS in 45 years. And although some of those recommendations were viewed as controversial at the time, and although the administration was initially opposed to our findings, at the end of the day, I think based on the commission's work and the credibility that the commission's research brought, we were able to enjoy broad bipartisan support and we got these important reforms enacted into law. Throughout our work on the IRS Restructuring and Reform Commission, there was one crosscutting problem that kept resurfacing. And, of course, I'm talking about complexity of the tax code.

It was an evolutionary process. When we first started out, folks weren't focused much on the complexity. We were focused more on the inner workings of the IRS. But, on a bipartisan basis, Mr. Chairman, commissioners came to conclude that the code itself was the greatest problem facing a very, very troubled agency. This isn't news to members of this committee, but it provided, I think, a clear basis for reform because we found convincing evidence that there were enormous organizational challenges that the tax code poses to the IRS. And, again, although tax simplification was not our mandate, I think we pushed the envelope a bit in our recommendations because the problem was so pervasive.

As you know, our recommendations included the tax complexity analysis because of that -- which subjects all prospective tax bills to a Joint Tax Committee analysis to determine complexity for the taxpayer and for the IRS. We also recommended getting the IRS formally involved in the tax writing process to comment on the administrative challenges, which we're trying to get even today from the IRS, as an independent agency looking at this issue.

We also made recommendations -- some members of this committee will remember those, because some were controversial -- on 60-odd specific code sections that could be simplified, including the alternative minimum tax to reduce needless complexity.

Some of these reforms, incidentally, were included in the 1997 Taxpayer Relief Act. And, finally, we recommended and passed in law that there be an annual meeting of the seven committees with IRS oversight coming together with Ways and Means and Finance, on both sides of the Capitol, to insure that the agency gets more consistent guidance from the hill. So, these reforms underscored the connection we saw between the problems at the IRS and the complexity of the tax code. Now, my thinking today is, you know, how do we get from point A to point B? How do we get to this fairer, simpler tax code?

I think a Tax Reform Commission makes a lot of sense. And the purpose of this commission would be to keep the ball rolling, to help educate the public about the problem, and Mr. Rangel talked about that yesterday, and the alternatives. And, also, take some of the rough and tumble partisan politics out of the process, to bring some nonpartisan expertise to bear on the problem in a focused way, with a specific timetable. I do urge my colleagues to support the legislation on the floor today because it does have this commission as part of the so-called "sunset the code" idea. I think it's a much more responsible piece of legislation this year as a result of that. It's an 18-month commission.

I know, again, some commissions have had a checkered past in this town, but others have worked very well. And the IRS commission is the model upon which the commission we'll vote on today is based -- 15 members appointed by both parties, both houses, and the president, a short timetable, and a report to Congress. It does not take away, in any case or in any sense, the responsibility of the Ways and Means Committee or the Finance Committee to work through a tax reform. Just like the IRS commission, it makes a recommendation. We then go through normal procedures, in subcommittee and committee, to come up with a proposal that the Ways and Means Committee and the Finance Committee think is appropriate to bring to the floor.

But, I think we need to have this kind of outside expertise brought to bear on this issue. Obviously, before you even have this recommendation, the committee has a lot of work to do and is doing it well this week, in laying out the framework for tax reform we can all agree on. I think part of this framework must be broad support, and that means it must be bipartisan. And this is really for two reasons. First, it's reality. It's going to be very difficult for either party to ramrod a tax reform plan through Congress on its own. But, second, and very importantly, is stability. We need to ensure that future Congress' and administrations don't throw out the tax code every time party control switches.

And I think if there's anything in the code that's worse than the complexity, it's the changes to the code. We've seen thousands of them since 1986, and people are looking for certainty and consistency. So, that kind of a broad based two-thirds type support I think is absolutely critical. Revenue neutrality. I would just urge that any tax reform plan we come up with must deal with the current revenue estimates. And, we've heard, as you know, Mr. Chairman, lots of testimony here this week of various estimates of what rates could be, but I think we've got to be able to compare apples to apples, which is let's deal with the issue of reducing the scope and size of the government separately, which I support. But, with regard to tax reform, I think we ought to focus on keeping it revenue neutral, and how do we come up with the best way to raise the revenue to meet our needs.

And, finally, of course, fairness. I think we have to recognize the progressivity of the current code. It is extremely progressive when the top ten percent pays 60 percent of the income taxes in this country. And, for political reasons, I think a very regressive tax has no chance of passing. So I don't think that we can throw the distribution tables too far off. At the same time, we must deal with the reality that our current code does penalize savings and investment. Our current code does add enormous complexity, which is a waste of time, and money, and energy.

This is where, frankly, we have I think the most potential to make a huge difference in terms of economic growth in this country. And, again, moving into the next century with prosperity. I think, Mr. Chairman, again, all of us have different ideas. You know I have some specific ideas on tax reform. I thought about talking about them today, but I think that's less useful, frankly, than it is talking about process at this point and moving the ball forward. I appreciate your allowing me to testify here today. I urge us to take that next step, move forward on a bipartisan basis to put together a plan for reform. I thank you for your patience this morning.

REP. ARCHER: Thank you for your input. The committee, I think, on a bipartisan basis, welcomes it. I have no questions. Mr. Rangel.

REP. RANGEL: I'm a little afraid of the idea of a commission having such broad powers in determining philosophically how we should collect the revenues that would run our country. With Social Security, I joined with the chairman in believing that a commission is the right way to go, because philosophically I don't think there's that much diversity in terms of how do you fund a system that you've already decided the healthcare that you want to provide. But whether we're talking about value-added tax or federal sales tax or the progressive income tax, I think we're elected to make those types of decisions.

But, I am attracted to the idea of bringing together groups of professionals, excluding members of Congress, and to have them review the different systems that have been offered to the Congress to analyze those and to report back to the Ways and Means Committee, the pros and cons of it. But, it just seems to me that I would not want presented to the Ways and Means Committee or to the House, or however you work this out, something that philosophically may be diametrically opposed to. I think what should be happening, or what members who are elected to express the views of their constituents, that we would not know what direction this commission would be going.

But there's enough good ideas in what you are saying that I think that your presentation is positive because we should have more outside views, so that we don't waste a lot of time just with hearings, where experts can come together, study a situation, and then report back to the Congress. I want to thank you for your thoughtfulness, and we'll continue to rely on you for direction and assistance as we hopefully move forward and bring a resolution to this problem.

REP. PORTMAN: Thank you, Mr. Rangel. I would just make one quick comment, and that is the educational element to this that you mentioned, I believe it was at yesterday's hearing, I think would be a tremendous benefit that would come from a commission. In the IRS commission case, as Mr. Coyne knows, we held hearings around the country and I think that would be appropriate. And a lot of it is going to be exactly what you say, which is bringing experts in and also bringing people from every day life who are affected by these massive changes that are being recommended, to talk about the impact it would have on our businesses, on individuals, families.

So there would be an educational aspect to this, and there would also be a lot of analysis. And, at the end of the day, there may not be a consensus recommendation. It may be just that. It may be just information that Congress can use. And, ultimately, as I said earlier, which is obvious, this committee and the elected representatives would have the final say.

REP. RANGEL: Thank you.

REP. ARCHER: Does any other member wish to inquire? Mr. Neal.

REP. RICHARD NEAL (D-MA): Thank you, Mr. Chairman. Mr. Portman, you know of my regard for your opinions, and I'm delighted with much of your testimony. But, let me ask you a couple of specific questions that I think might focus part of this discussion. A certain amount of the tax reform debate relies upon the old notion that the grass is always greener on the other side of the fence. Certainly the retail sales tax supporters found that out when Joint Tax, Tuesday, estimated that it would take a 60 percent sales tax to replace all federal taxes.

I react favorably to Mr. English's philosophy when he said yesterday, that the last thing we need is to enact reform that is so radical and experimental that Congress will be faced with revamping it all over again in but a few years. Let me ask you this. I know you have an interest in simplification, especially in the pension area. I've introduced a bill, which even Mr. Archer has commented on favorably, that would eliminate 200 lines from individual income tax forms. Mr. Houghton has another version of that, and has worked on international tax simplification as well.

Do you think it's really possible that the committee, or at least some of us, could hammer out a practical, reasonable, wide-ranging tax simplification proposal? And, do you think that would satisfy many of the complaints about complexity in the current system? The 1986 Tax Act was intended to promote fairness, simplicity, and economic efficiency regardless of how well the committee achieved any of this goal. It has spent the last 15 years unraveling at least part of it. Do you think that we would be any more successful this time, or do we need a completely different tax system?

REP. PORTMAN: I guess I think both. I'm a typical politician. I've always believed that it is worth the committee's time and the oversight subcommittee's, in which I serve, to focus on simplification. Every day we ought to be trying to simplify the tax code. At the same time, Richard, and I think this gets to your question maybe more directly, if we just do that, we will not have done enough. Because of the forces in this town and elsewhere to find special breaks and provisions in the tax code that helps individuals and helps businesses, we will end up with the same complexity problems, which is why we need also to have debate on and movement toward a more fundamental tax reform measure, which would, indeed, replace the current code.

I also think we have to realize that as long we're just taxing income, we are, in effect, taxing success and taxing productivity. And, all the economists with whom I've talked and you've talked -- right, left or center -- agree that moving toward something that penalizes savings and investment and the next dollar earned less, and taxes consumption more, wouldn't make sense from an economic perspective. And, our current code, with all the simplification you or I might want to do, can't get us that economic reality. What we can get at is the compliance costs, which I salute you for and I think your bill is a movement in that direction. But, I think we need to go on both tracks.

REP. NEAL: Thank you, Mr. Portman. Thank you, Mr. Chairman.

REP. ARCHER: Mr. Thomas.

REP. BILL THOMAS (R-CA): Thanks, Rob. One of the concerns I have is that all of our focus is on the hated IRS for a lot of good reasons, and a lot of the programs look at the domestic picture and the internal role of the tax code because we've structured ourselves so long in that way. You and I and others know that our tax code vis- -vis other countries has significant impact on trade. It used to be that no one really wanted to look out Medicare or other major federal programs because it was, as they used to say, "the third rail."

Although President Clinton probably doesn't want to have credit for starting the debate by putting out a plan that was examined in great detail and wound up being found lacking. I think a significant education process went on among Americans, and those institutions, the media, and others, in examining an area that had not been at the forefront of exploration -- the Medicare system, and beyond that, the healthcare system, and the delivery structures that go with it. My concern about not wanting to put something forward, and you always do the best you can, is not so much to worry about failing, but that absent something concrete around which debate could turn, we aren't going to get the kind of educational process among the American people that I think we need.

A sterile, academic discussion of options isn't the same as, "This is what we have. This is what you're going to get. What do you think of the difference?" That focuses the debate. And the fact that we would fail, say, the first time around, is less important to me than how far have we advanced the American people's understanding that we need something new, not withstanding what it was (they just lost?). And, any reaction to the idea that, having been on a commission recently dealing with Medicare -- yours was a bit more successful than ours. We nevertheless, I think, elevated to a degree the discussion, because we put forth a specific plan.

Commission, us, somebody -- esoteric, academic debates don't create the intensity to choose. Something out front that could be an alternative does. Reaction?

REP. PORTMAN: I couldn't agree with you more. It's an action- forcing event. Let me say, I didn't use Thomas-Breaux, which was the Medicare Reform Commission, as my example. I used the IRS only because I'm closer to it. But, it's a perfect example of what I'm talking about. The major difference, as you know, between the IRS Commission and Thomas-Breaux was the two-thirds requirement. Wasn't it a two-thirds requirement for the recommendation to be made from the commission?

REP. THOMAS: Yes. It was 11 out of 17.

REP. PORTMAN: And, you know, we had a different set of rules in which we worked. Now, in the end, we did get a two-thirds majority. But I think it was too bad that at the end that effort was torpedoed by representatives from the administration. But, by the same token, it certainly focused debate, and it certainly moved the ball forward.

And I think it's a good example. People, again, say commissions don't work. Well, they have a checkered past. Some have. Some haven't. But I can tell you, these two examples of the IRS commission and the Medicare commission, I think, would lead us to be favorably disposed toward a commission approach to this.

IRS reform is difficult and Medicare reform is extremely controversial and can become very political. But nothing is bigger than tax reform, because it's going to affect every single person in America, every business, and how we transact every business transaction. And, as Mr. Rangel said, it's fundamental government -- how we collect our taxes. I think Chairman Archer has, through the last few years, done incredible work in moving the ball forward, because we wouldn't be here at these hearings. We wouldn't have the headlines that we are getting. But, we need to now move it to the next level. I think it's helpful to take it out of this politically charged environment. Frankly, the administration hasn't been able to come to the plate on it.

If you look at the history of tax reform, it's always been led by Treasury. They have the expertise. They have the ability to understand how it would be implemented. This administration has not taken the lead on that, unlike the Reagan Administration in '86. That may or may not happen in the next administration. The wonderful thing about this commission is, while it includes the Treasury Department, and actually the Secretary of the Treasury would make an appointment, and includes the administration, it does not rely on them. Instead, it relies on Congress and the administration, bipartisan, moving in on it. So, I agree with your observation, and I think the Medicare commission is another good example.

REP. ARCHER: Mr. Portman, thank you very much. Our next panel is Frank Luntz and Jefrey Pollock. Welcome, gentlemen. If you will identify yourselves for the record, you may proceed with your testimony. And, if possible, we would appreciate your holding your verbal testimony to five minutes, and your entire printed statement, without objection, will be inserted in the record. Dr. Luntz.

MR. FRANK LUNTZ: Mr. Chairman, for the record, my name is Frank Luntz, and it is an honor to be here, having had the opportunity to present to a number of you in your offices and in various places on the hill, and now being before this tremendous chamber, I can tell you that distance only makes the heart grow fonder. I'm sorry that the ranking member is not here. I would've informed him that in our polling for New York, on more than one occasion, he is the most popular and respected political figure in the state. And when we asked them why, the number one answer was his voice. I was looking forward to hearing his voice after we spoke today.

I begin with a single finding from my firm -- REP. ARCHER: Dr. Luntz, would you identify your official position in our world for the record before you commence?

MR. LUNTZ: My official position is the President of the Luntz Research Companies. I begin with a single finding from a survey my firm completed just last week. When asked to choose the one government agency or institution Americans hated the most, it should come as no surprise that they chose the IRS. In fact, the IRS was chosen more than every other government agency combined. Mr. Chairman, that's just one reason why up to 80 percent of Americans want fundamental tax reform, and why so many Americans want to rid themselves of this complicated, confusing, and corrupt tax system.

I ask the members of this committee to answer one question that we ask the American people.

Which would you rather have happen to you? Have your wallet or purse stolen or be audited by the IRS. Forty-five percent of Americans chose the wallet or purse stolen. Forty-five percent chose the IRS audit. And, 10 percent actually said they couldn't tell the difference between the two. Now, if you ask the American people to set a fair tax rate, most Americans would agree to something around 20 percent. But what frustrates Americans most is not the income tax rate so much as it is the complexity of the system, and the perception that the rich have expensive tax attorneys and fancy accountants to navigate the IRS code.

In public opinion research we have done in terms of tax reform, Americans have four essential requirements. Number one, fairness. Americans want to know that the family with the expensive mansion on top of the hill is paying his or her fair share. Fairness does not mean soak the rich, but it does mean the wealthy must pay their fair share. Number two is simplicity. People do not want to pay accountants to prepare their taxes, yet an increasing percentage of working class families now need to because the system is so complicated and so frustrating. Number three, uniformity. Working families dislike having tax advantages parceled out to those who hire expensive lobbyists and tax lawyers. Americans want a federal tax system that treats billionaires like Bill Gates exactly the same as bus drivers like Ralph Cramden. Consistency. Americans hate how the tax code changes from year to year. With all due respect, they want a tax code that you all up there can't tinker with from year to year. Tax reform is a middle- class issue because it is the middle class who work the longest and hardest, and feel the most shortchanged by not finding all the tax deductions they are entitled to. I ask you to think about just how often you all are affected by the tax code. When you wake up in the morning and drink your first cup of coffee, you pay a sales tax. You start your car, you pay a gas tax. You drive to work, you pay an automobile tax. At work, you pay an income tax. You turn on the lights, you pay an electricity tax. You flush the toilet, you pay a water tax. You get home at night, you pay a property tax. You turn on your TV, you pay a cable tax. You make a phone call, you pay a telephone tax. Even when you die, you pay a death tax. Two-thirds of Americans believe that they are overtaxed and they want a break. That's why tax reform, Mr. Chairman, is so universally popular, and that's why, in particular, they want an end to the marriage penalty and an end to the death tax. It doesn't matter whether you are Republican or Democrat, Americans believe that a recently married couple should not pay more in taxes just simply because they decided to get married. It's one of the most sacred and important institutions in our society, and you're going to find a difficult time finding anyone who believes that they should have to pay more just because a man and a woman tied the knot.

Similarly, it was Benjamin Franklin, my favorite Founding Father, who said there are only two certainties in life, death and taxes. But I don't even think Ben Franklin would've known that both those occurrences would have come at the same time. My colleague, Jeff Pollock, has more numbers to share with you, so I will close with the following observation. Most Americans believe you can fix the tax code, instill fairness and consistency, and still maintain and strengthen programs like Social Security and Medicare. They believe you've got the power to do it all, and they want you to do it all.

And the people that I've polled are not the internet paper billionaires. They're not the high priced lawyers. They are struggling to make ends meet. The sacrifice their own needs and give everything they can to their children. All they want to know is that you hear them and that you care. So prove it with a new tax code that is consistent, flat, fair, and tinker proof. Thank you, Mr. Chairman.

REP. ARCHER: Thank you, Dr. Luntz. Mr. Pollock.

MR. JEFREY POLLOCK: Thank you, Mr. Chairman. My name is Jeff Pollock. I'm the President of Global Strategy Group, a public opinion research firm. We're the Democrats.

REP. : Jeff, would you speak directly into the mike? They're very unidirectional.

MR. POLLOCK: Not a problem. Hemlines go up. Hemlines go down. Los Angeles has forsaken the martini lunch for a sobering shot of oxygen. Public opinion waxes and wanes. But, what's the one thing everyone has consistently agreed upon since Truman beat Dewey? Taxes, Mr. Chairman, are too high, and the system we endure is too complex. Over 40 percent of Americans have considered federal income taxes to be too high since the 1940's. And, for the last 30 years, that figure has risen to 60 percent, though admittedly it is down from its high of 69 percent in 1969.

How much is too much? As my Republican colleague, Dr. Luntz, has stated, almost two-thirds of Americans say the highest percentage we should have to pay for all taxes combined, that's federal, state, and local, should be less than 20 percent of their income. And who's getting their free ride? According to most Americans, it's the rich. Fully two-thirds of the nation believe that those in the upper income bracket pay too little in taxes, and almost half of all Americans say this is the aspect of our tax system that bothers them the most.

Still, on a more personal level, less than half of the population believes that the amount of taxes they will pay this year is quote, unquote, "fair." Americans are focused on their persistence that our tax code needs overhaul. Dr. Luntz is correct to demonstrate that Americans are frustrated with their increasing reliance on accountants. The middle class think they're being squeezed by a complex system. An impressive 61 percent of Americans believe the federal income tax system needs major changes or a complete overhaul.

The components of this overhaul encompass cutting taxes, simplifying the process, and regulating the power of the IRS. But while these suggestions sound succinct, they come with strings attached, further complicating the process of reform. Simplicity. Two-thirds of Americans find the federal system too complicated. Yet, although the system of taxation is considered too complex, Americans are unwilling to give up deductions to simplify it, and they oppose, by a 57 to 34 percent margin, replacing this system with a simpler nationwide sales tax.

Regulation. A vast majority of Americans -- 68 percent -- believe the IRS has more power than it needs. There is no, quote, unquote, "other side" to this issue. Right or wrong, they feel the IRS should be better regulated. Tax cuts. Americans are equally in support of a tax cut for all Americans, as well as a cut for moderate to low-income households. However, while 72 percent of Americans favor a cut in federal income taxes, it is not their highest priority. A plurality, 39 percent, place a high priority on Congress passing a significant federal income tax, but only 21 percent say it's the top priority. And, more than a third, 38 percent, say it should be a low or not a priority at all.

In addition, when our firm, Global Strategy Group, frames the question pitting tax cuts against generic spending, Americans prefer tax cuts. But when you ask people about cutting tax as opposed to spending on programs, Americans choose, of course, to fund the programs they most enjoy. So, although they are concerned about their own purse, the point of contributing to the government's coffers is clearly understood and accepted. The task that lies before you all is great. Americans are not happy with the current tax system. And, although they do offer solutions, the solutions are not without their own complexities.

While Americans overwhelmingly want reform, they do not want it at any cost. They will not trade tax reform for a cut in specific spending programs. And, they will not sacrifice deductions for a simplification in the tax code. However, they will likely be receptive to a discourse on how to reform the code, and we can be pretty certain they will embrace a plan to equalize the tax contributions of all Americans, and certainly to reduce the power of the IRS.

As we approach April 15th, Americans are struggling to complete their tax forms accurately and on time. There is no better time to reassess the tax code and deliver a simple, fair system that addresses the perceived inequality of taxation and the inappropriate power of the IRS. Let's put last century's opinion on this issue to rest forever. Thank you, Mr. Chairman.

REP. ARCHER: Thank you, Mr. Pollock. If I may inquire, where did you grow up?

MR. POLLOCK: I grew up in Mr. Coyne's home state of Pennsylvania, in northeast Philadelphia.

REP. ARCHER: Well, as a Texan, I greatly enjoyed your statement that the task that lies before ya'll is great, and I thought perhaps you might have grown up in Texas.

MR. POLLOCK: Too many clients in the south, Mr. Archer.

REP. ARCHER: I'd like to ask both of you what, if any, difference exists between the polling data that each one of you has been able to put together?

MR. LUNTZ: I would say that, for the most part, it's actually quite similar, though on some of the details it does differ because the focus does differ. I would acknowledge to the members that depending on how you word the question, you can get a different result. I think we would both agree that the IRS is quite unpopular. I think we would both agree that the public does support the concept of tax reform. The question is always in the details of that tax reform.

Today, more than at any other time, Americans believe that there should be a consistent rate, rather than this progressive rate, and that did not exist -- that opinion did not exist five years ago, but it has existed for about the past two or three years. And that opinion continues to grow. I think we also would agree that the public does want to ensure that any tax reform not subject programs like Social Security and Medicare to any kind of disruption.

MR. POLLOCK: I would agree with Dr. Luntz, and say that the devil is in the details. When you look at questions about things like a flat tax, for example, that's when things get very complex. Because when you ask Americans straight out, they tend to like it. But once you ask them any single question that starts to whittle away at deductions, they basically flip out. They say, no, forget it. And, so, it just takes one little push to push them over the edge. So, the simplicity sometimes is deceptive in the questions.

MR. LUNTZ: And the surprise is actually Republicans and Democrats alike, whenever we test the death tax, it's one of the taxes that Americans hate the most, even though it's a tax that very few Americans feel that they will ever face, and that's what makes it quite interesting. They're not responding from their own personal benefit, they're responding from the principle belief that Americans should not be taxed at death.

REP. ARCHER: I am a little bit curious as to what appears to be a dichotomy between the results that Americans don't think higher income people are paying enough, number one, and the comment that today a majority of them don't like the progressive rate structure. I mean, how do you explain that difference?

MR. LUNTZ: It's very easy actually. It's all the deductions that you all have passed for various people that frustrate Americans, not the rate. It's the idea that the rich will have accountants and lawyers and people that can find them the loopholes within the current tax code that enables them to avoid having to pay taxes.

MR. POLLOCK: And, it's interesting, Mr. Chairman, that 45 percent of Americans says that the taxes that they pay are fair. So, it's not as if it's 70 percent saying that it's unfair or something like that. I would agree with Dr. Luntz that it is the deductions, and that's the complexity that they feel. And, Frank had a very good line about Bill Gates and Ralph Cramden, that Bill Gates has all these attorneys and accountants, et cetera, who can get him out of taxes. I'm not picking on him particularly, but that is the concept that Americans feel.

REP. ARCHER: Thank you. Mr. Thomas, then Mr. Neal.

REP. THOMAS: Actually I believe it was Bart Simpson, wasn't it?

MR. POLLOCK: Yeah. But, I thought Ralph Cramden -- REP. THOMAS: But Ralph Cramden is someone I recognize. I figured you were trying to go for the "now" generation with Bart Simpson. Thanks to both of you. But I, too, like the chairman, am kind of puzzled by the presentations. And, I'm curious about why and how questions are asked. Do you have any relevant poll data if you asked American people are happier than poor people?

MR. LUNTZ: In fact, sir, we have looked at that, and the most happy people in America are the middle class.

REP. THOMAS: And, would you said that people worth a million dollars define find themselves in the middle class often?

MR. LUNTZ: The people who are worth a million dollars would probably define themselves as being upper middle class.

REP. THOMAS: Well, you can put all kinds of descriptive terms in front of us, but I think even Bill Gates thinks he's middle class. But, difficult again to deal with that kind of description. Do you think people believe that the rich people get breaks? That is, it's easier to beat the system if you're rich rather than poor?

MR. POLLOCK: Absolutely.

REP. THOMAS: You get the point. You can go through a series of stereotypical statements and people will ascribe certain profiles to the rich. I think I could save you a lot of money and tell you, without polling, that people think rich people don't pay their fair share of the taxes. Okay. Looking at this other chart, and I'm using yours because yours is PowerPoint and it has a few more. That's the only reason. Although Americans don't like the income tax system, they oppose replacing part of it with a nationwide sales tax.

Well, I don't like one, and now you're going to give me two. Did you try a question that said replacing it in its entirety? And either or question, rather than if you don't like one, how about two.

MR. LUNTZ: It's a good question. To be very clear, none of these are -- I'm pulling from independent polling data, so as you'll see, this is Gallop or -- REP. ARCHER: Yeah, but it's the same fraternity.

MR. LUNTZ: That is true. I'd agree.

MR. : Yes, but Mr. Chairman, you know that fraternities right next to each other never get along.

REP. THOMAS: And then, of course, as you said, Mr. Luntz, in terms of the way you asked the question. If I said, "Would you like to get rid of the income tax, which would do away with the IRS and replace it with the different tax," you've now loaded the question, I think, sufficiently that people would go for whatever the rest of the sentence was, if you threw in getting rid of the IRS. So, I'm just kind of curious as to what you could provide us with that would be slightly less entertaining perhaps, but a bit more enlightening.

Because when people don't like the current tax system, don't like the complexity, don't like the IRS, but want to hang onto their deductions, you kind of just say, don't wet your finger. We better sit down and build the best scientific, economic revenue package we can. And then go out and have people all agree that the unknown is not as acceptable as the known, notwithstanding the fact that I absolutely hate the known. So you folks are going to be in the boat with us, and we're going to be using you.

I'd really love to see somebody try to cipher a series of questions with pull-out sections that substitute back in. That, in essence, asks the same question with variables and then repeat it in different circumstances to try to begin to build a base of at least relative directional signals. To your knowledge, has anyone begun doing this, or are we going to have to pay for it?

MR. LUNTZ: We have done this to some degree, and what we get, quite frankly, are mixed signals.

That the public is frustrated with what they have now. They are scared about what you may give them. The problem, quite frankly, is their lack of faith in people here to give them a system that truly is flat, simple, and fair. They believe that because of the outside influences, they're afraid that the actual new product might be more disruptive than what they have now, even though they fundamentally don't like what they have now.

REP. THOMAS: Well, Mr. Luntz, you made the assumption that flat tax is the one that we would look at. What about one that got rid of all of income taxes and allowed us to be competitive in the arena of today's, and especially tomorrow's world trade?

MR. LUNTZ: I used the word flat to indicate both a sales tax and an income tax. I am not speaking just of the income tax. Flat rate means that everybody pays the same rate, regardless of whether it collects it based on what you spend or what you earn.

REP. THOMAS: Even that, from a semantical point of view, makes it difficult because of the identity of the various plans and the terms that we use, so we're even more into a semantical jungle. Thank you very much, Mr. Chairman.

REP. ARCHER: Just very quickly, to piggyback on the line of questioning of Congressman Thomas, I noticed in one of the charts that you have given us, Dr. Luntz, you asked the question, "Should Congress completely overhaul the federal tax system that includes abolishing the IRS -- abolishing the IRS -- and replacing the five different income tax rates with a single rate." And, it seems to me that that is an oxymoron because if you've still got an income tax, even with a single rate, you still have the IRS. I don't know how you can do both.

MR. LUNTZ: We were trying to get at not making a choice between the income tax and the sales tax. By the way that you've read the question, you've assumed that it is an income tax rate. One of the challenges in polling and to present to you all, is to be neutral in terms of the income tax or the sales tax, and try to judge the public's generic support for a fundamental overhaul of the system. So, perhaps we have not achieved that by the questions -- REP. ARCHER: But, if I were to answer this question and, as you know, I want to abolish the income tax, which I have publicly stated for a long, long time, and I wanted to get the IRS completely and totally out of every individual's life. But if I were to answer this question and say that the IRS forever will be out of my life, and only have to pay a single income tax rate, I might be intrigued to embrace that. But, I can't get both. I can't have a single income tax rate and have the IRS out of my life, because I've still got to keep the records for seven years and they're still going to audit me. I've still got all of the exposure, although in a more simple form than the current code. Mr. Neal.

REP. NEAL: Thank you, Mr. Chairman. Dr. Luntz, I agreed with much of your testimony, but I want to ask you a question. You said the American people view the IRS as corrupt. Did you use that term when you tested the question?

MR. LUNTZ: No.

REP. NEAL: No.

MR. LUNTZ: We asked them what institution do you dislike the most. What federal government institution or agency do you dislike the most?

REP. NEAL: Let me, just if I can, address that question and the use of that term, "corrupt." That word did more to poison the way we talk to each other in this institution than any other word I've witnessed in the 12 years I've been in the House. That word was used to poison the well of the institution across the way, and the way we talk and treat each other in the House. Now, if we used that word all of the time around here to speak to each other or to use that word when we wished to change an institution and its behavior, we only bring the debate to a new low. And that's the danger of using that term.

I would recommend to everybody here, Joe Klein's piece in The New Yorker about a year ago. It's "The Town That Ate Itself," in which he went back and talked to Republican members who used that word and now say they regret using that word because of what happens in the institution. So, if we didn't test that word, I don't know why we would throw that word into the testimony today.

MR. LUNTZ: Because, Mr. Congressman, I would invite you, because this is not a partisan issue, to join me in focus groups and face-to- face sessions with members, and the word that they use, not to describe the IRS, but to describe the tax code.

REP. NEAL: Right. I don't dispute that. I don't dispute that, doctor. It's the word.

MR. LUNTZ: But it's the word that's used by the American people to describe what they perceive as a system that is out of control. I invite you to join me to -- REP. NEAL: I would like to do that. But let me ask you a quick question here. There is a Wall Street transaction called exchange funds that exactly accomplished that. Ralph Cramden's wife, Alice, has to sell her stock and then pay capital gains tax. What happens when Bill Gates goes into an exchange fund, and in effect, trades stock and pays no tax. Is this exactly the situation you referenced when you were speaking earlier about the way the American people perceive the tax code?

MR. LUNTZ: No. I was merely using Ralph Cramden as a pop culture figure, although I would correct you. Ralph Cramden and Alice were so poor that they could never own stock, so they could never sell it and have to pay the capital gains. REP. NEAL: Well, they were just blue-collar Democrats.

MR. LUNTZ: No, actually, they were the first blue-collar Republicans. They were just before the Reagan Democrats came into being.

REP. NEAL: I would suggest, Mr. Chairman, that the transaction that I made reference to -- or maybe Mr. Pollock could comment on it, if he would.

MR. POLLOCK: There's no doubt, Congressman Neal, that there is a feeling that the rich do get benefits. I don't think that that's exactly -- I mean, in terms of questioning, that's not something that hits them. When you do focus groups, and I'm sure you've seen this up north, that people, especially the middle class more and more, are angered by the capital gains tax and that it is no longer a tax on the rich exclusively. But, from a rhetorical battle, if we were taking it out of the policy and into the rhetoric, it hasn't crossed the threshold yet where they say, oh, yeah, that's a tax where we the middle class really need to change it.

But it's coming. It's coming. There's no doubt about it. And with every increasing AmeriTrade, where the middle class and everybody is getting involved in trading, you are absolutely correct. That tax increases in prominence to them. REP. NEAL: I'll close on this note, Dr. Luntz, that the Reagan Democrats, which I represent, have come back home. Thank you.

REP. ARCHER: I'm hoping that we can wrap up this panel before we go to vote so that when we come back, we can take the next panel. Ms. Thurman has requested time and Mr. Coyne has requested time, and Ms. Dunn. Alright. I guess we can't do that. Alright. Ms. Thurman.

REP. KAREN THURMAN (D-FL): I'll try to make this quick, and maybe you all can just give us these answers in writing. One, I'd like to know from both of you what the demographics were of your poll -- who the people were that you polled, income, where they are -- MR. LUNTZ: They're all nationwide.

They're all general populations, you know.

REP. THURMAN: But it would be good to have that information available to us.

MR. LUNTZ: Sure.

REP. THURMAN: Secondly, Mr. Pollock, when Dr. Luntz made the statement that everybody agreed that we ought to rid of the death tax, your polling does not show that. Can you give me just a brief explanation of what you found, because it also would be counter to what Dr. Luntz has shown about the high paying person? MR. POLLOCK: They're not mutually exclusive, unfortunately, and unfortunately one question doesn't cover it. What Dr. Luntz is talking about is in a series of questions when you ask people would you like to get rid of "x" tax, "y" tax, "z" tax -- when you put them all together at once, you'll see that inheritance taxes and also the marriage penalty, both of which Americans favor in general getting rid of, they don't rank higher of course, than getting rid of an income tax or getting rid of a local property tax, which bothers them much more than do those. Of course, they hurt them a lot more financially so it makes sense.

So, it's not dichotomous. You can have both in Americans' minds. It's just when you put them all together, if I have to choose one or two, inheritance tax or, as they like to call it, death tax, and the marriage penalty, they're not going to be number one and two. But, when you ask them individually, certainly people do think it's unfair. The marriage penalty, to me, when I've seen things, tests even more egregiously where people say just because I'm getting married, doesn't mean I should have to pay more in taxes. Did that adequately address -- MR. LUNTZ: And I would just say that we actually have tilted the questions because I could not believe that Americans would actually believe that someone like Bill Gates should not have to pay a higher percentage of his savings and investments. And, we tilted questions so anti-death tax. But if you go out, and again, I invite you as well, to come to these sessions that I do, Americans just believe it's a matter of principle that even if you are rich, you should not lose up to half of your savings in income just because you die.

REP. THURMAN: I think maybe taking off on Mr. Archer's question, this last one when he talked about the different -- getting rid of the IRS, and then the different income tax rate. But, also, then to the polling that Mr. Pollock saw that says, but don't take away my deductions. So, rate would be one issue. And, then, if you added into that same question, do you think you would get a different result if you said, but don't take away my deductions as well?

MR. LUNTZ: When you start to mention deductions, home deduction being the most popular of all, you start to -- REP. THURMAN: House credit?

MR. LUNTZ: Yes. You start to see people begin to peel away. But in the end, they're prepared to pay more if you could simplify the system. If you could say to Americans that we will guarantee that this will take you either no time, in the case of a sales tax, or 15 minutes in the case of -- REP. THURMAN: As long as it only goes to 20 percent.

MR. LUNTZ: Once you start getting above 20 percent in taxation, you start to have Americans chafe at it. That is correct. But simplification is so important.

REP. THURMAN: I think we all agree on simplification. I think that is the one thing we do agree on.

REP. ARCHER: We are clearly not going to have time for the members who do wish to question to do that. So, the chair is going to have the committee stand in recess so that we can go vote, and then we'll return.

(Vote recess.) REP. ARCHER: Please take your seats and we will resume. We apologize for the interruption, but that's the way this place is run. And I now would like to yield to our distinguished colleague from Pennsylvania, Phil English.

REP. PHILIP ENGLISH (R-PA): Thank you, Mr. Chairman, and I appreciate the chance to pursue a line of questioning that occurs to me, reading with interest the testimony of these two witnesses. You've provided some very interesting insight on how the public views tax reform and where it sees it as a potential priority. I wanted to get a sense if whether either of you had done any polling on international taxation. I know that, Mr. Luntz, you've done more polling on trade issues than I think anyone in your profession of my acquaintance.

So, I'm wondering, have you polled on the idea of a fair and equal tax on the imports, and stop taxing exports? In other words, border adjustability?

MR. LUNTZ: Yes. Of course, no American will understand it as border adjustability. It's much too complicated. But when you begin to explain to them the defensive position that our products are put in by the federal tax code and the advantage that foreign products have, again because of our tax code, not only do they become frustrated with it, they demand immediate change. I would acknowledge that it is not one of the highest priorities, but in terms of your question, the public believes that, at a minimum, our products should not be put at a disadvantage, and preferably, our products should have an advantage over foreign products. And nothing in our federal tax code should undermine that advantage.

REP. ENGLISH: Mr. Pollock?

MR. POLLACK: I wish I had more to add, Congressman English, but Dr. Luntz has done much more on the subject than I have.

REP. ENGLISH: Let me say, one of the keys to broadening the debate and broadening the support for fundamental tax reform in my estimation is starting to include international tax issues framed in terms that working people understand. Now, my colleague, Mr. Traficant, who testified yesterday, I think has done a good job of taking that message back to Youngstown, Ohio. I've tried to do the same thing in Pennsylvania. I think that international taxation, specifically border adjustability, moves people.

I've gotten that sense from discussing it at town meetings and actually, unscientifically, trying to get a reaction in terms of a show of hands. I would invite both of you to consider polling on this point, and also polling on the question of, as Dr. -- I'm sorry -- one of our witnesses yesterday, testified. My proposal specifically would end the tax incentive for runaway plants. And I think that is something that would resonate very much with the general public. On a separate point, Dr. Luntz, I see from the polling that the Luntz Group did that the fairness quotient of the taxation of alcohol and beer is perhaps in a different category from other taxes. Only 20 percent feel the taxation of beer is unfair.

I wonder in polling, have you communicated to the people you poll, the fact that 43 cents on every dollar that they pay for a draft of beer in a place like Erie, Pennsylvania, is tax. This gets to the question of the visibility of taxation. I wonder if people are aware of what the level of excise tax is, would those numbers change?

MR. LUNTZ: They probably would change, and in fact, in my presentation in my testimony, I spoke of all the different areas that we are taxed. Mr. Congressman, most Americans aren't aware that from the moment they wake up in the morning and until the moment they go to sleep at night, everything they do, everything they consume, every part of their lives are taxed. If they were made aware of just how much they were taxed, they would say to heck with everything.

REP. ENGLISH: And do you think that insight would convert into opposition potentially to a value-added tax, if it were applied? Most people don't know what a VAT is, but if it is described to them, how would you expect them to react, or do you have any polling on this point, imposing a very broad and visible tax on the public?

MR. LUNTZ: In fact, if it were consistent, if it were obvious, if it were clear, if it were applied evenly, and if it got rid of the IRS, the American people would support it. Anything that simplifies, makes more consistent, makes flatter and fairer, any type of tax like that would be supported over the current system.

REP. ENGLISH: So people don't view it as a priority to know how much they're being taxed as long as they have a sense that the tax system is fair?

MR. LUNTZ: One of the great reforms that I would wish this committee would consider would be to remove withholding. If Americans knew exactly how much they paid in taxes, this committee would be cutting taxes every single year.

REP. ENGLISH: Thank you, doctor.

MR. POLLOCK: Congressman, I've done focus groups in Westmoreland, close to your home, and in that county I've talked to people about tax. And, the fact is, we also have to remember that there's mass confusion about what all of their taxes are. I don't know what I'm paying -- add the property tax into this mix, which is to many people extraordinary egregious. Property tax, income tax, sales tax, whatever it is, they're confused as to what tax they're paying at any given time. So, certainly they don't know that 43 cents of their draft is going to a tax.

REP. ENGLISH: Very good.

REP. ARCHER: The time of the gentleman has expired. Dr. Luntz, I have given up on alcohol, but I have escalated my consumption of sugar, but that's still a better deal, right? Tax wise?

MR. LUNTZ: I'm not sure how much they put on sugar. I do know that people have paid millions of dollars to keep that sugar tax either lower or higher than it is today.

REP. ARCHER: Okay. Ms. Dunn.

REP. JENNIFER DUNN (R-WA): Thank you very much, Mr. Chairman. I wanted to make one comment based on Mr. English's question, and that is that politics has become so personal these days and communicating is also required to be personal for people to be able to connect government policy to what really happens in their everyday lives. And it seems to me that if we ever began talking in terms of the number of dollars that people pay in taxes, whether it's that huge gas tax, or the beer tax, or property tax or death tax, and we got people thinking about what they could purchase for their family's better quality of life with those dollars, that we could end up with a mutiny. And I hope that never happens.

But it is shocking, Mr. Luntz, when you go through your list of the taxes that people pay. I mean, if they're confused about what taxes they pay, they pay every tax on everything, ever hour of every day. It's really gotten to be way too much, I think. I want to ask you a couple of questions. One, I would like to ask you gentlemen what you have learned, either from your survey research, or from focus groups, on what single people are thinking about our tax system. For example, we've succeeded in reducing taxes in lots of areas. We have provided for education credits when dollars are set aside in education accounts for their children. We've provided for capital gains taxes to be relieved on the purchase of a house.

For a single person, that house is still the same amount of money and it still takes the same number of people mowing the lawn and trimming the trees, and to pay for all of the costs of owning a home. We've provided for a child tax credit. We've provided for a childcare credit. We've provided for an end to the marriage penalty. And it goes on and on and on what we've done for families who have children. Aren't the singles starting to feel a little left out on this tax system?

MR. LUNTZ: Well, Congresswoman, you've done a lot for hardworking taxpayers and I can assure you that they appreciate it. The great frustration for single taxpayers now can be summarized in two words -- payroll tax. And that Americans, particularly those who are just starting off their careers, are shocked when they find out just how much money is taken out of their paycheck every two weeks, and how little confidence they have that they will actually get that money back at the end of their careers when they are receiving Social Security or other benefits.

It is not surprising that more Americans believe in the existence -- more young Americans believe in the existence of UFOs than believe that Social Security will exist by the time they retire, and that payroll tax every two weeks is a frustration to them and they would like some relief.

MR. POLLOCK: There's also the current -- I wish Congresswoman Johnson were here, because the current fad, of course, is to talk about the gas taxes. And when I say fad, it's only to say that they're eager to talk about it right now. People really want to talk about the gas tax. It's impacting them. They're seeing it. They're seeing it on a daily basis. In Connecticut, people were seeing prices over two dollars. And, so, the gas tax right now, which single people are looking at also because many of them are commuters, young people using a lot of their car, the gas tax is something that bothers them. It bothers them more on a state level though, certainly.

REP. DUNN: Well, if I could have one change in our tax system, and the chairman is not here right now to hear this, but for all singles, of whom -- of the group of which I am one, I wish we could just make one exemption for the sale -- in capital gains for the sale of a home. Because the huge difference between $250,000 and $500,000, which is what the couple gets. It means that somebody like me, if I choose to sell my house, and there are many of me's around this nation, that we pay a capital gains, especially if we've been living in an inflationary period for any length of time.

Okay. Let me just ask you, to augment what you both have said about the death tax. I'm very interested in public perception of this, and I'm very intrigued by the fact that folks you have researched are fair about this tax. And, I'm wondering if, as we consider whether this should be brought up as a stand alone bill and somebody every now and then will question the Bill Gates' factor, I wonder if you could talk more in depth on why death tax needs to die.

MR. LUNTZ: We have done this specifically. And, in fact, because of the challenges that have been raised by people in both parties, we attempted to weight the question as strenuously against the death tax as we could, emphasizing that these people probably avoided taxes, that they've gotten high priced accountants and lawyers to help them avoid taxes, that they're so rich that they can afford not to have to pay it. No matter how hard we weighed it, by 2 to 1, at a minimum, Americans want to get rid of this tax because they just don't understand why you should be prevented from handing down the things that you have saved and invested to the next generation of Americans, and how in this country, you should have to lose up to half of your savings and investments just because you've been successful.

Congresswoman, I can't weight it any more against it. By at least 2 to 1, people want the total elimination of the death tax.

MR. POLLOCK: It's more of a commonsense thing for Americans. When they're thinking about the death tax and also, as I brought up before, the marriage tax, it just seems to them to be silly. Why? Why on "x" occasion, one of great happiness and one of great sadness, does the government get the opportunity to then come in and tax them on that occasion? And in that respect, that's where Americans are looking at it and saying, you know, this just isn't fair.

Whereas the other things, as I point out, Americans will say, okay, we understand we have to fund government programs. We understand that our taxes do go to something. But those in particular, stand out as things that just don't seem right.

REP. DUNN: Thank you very much.

REP. ARCHER: Thank you. Mr. Coyne.

REP. WILLIAM COYNE (D-PA): Thank you, Mr. Chairman. Dr. Luntz, I was wondering, does it surprise you that your findings of last week indicate that the least liked government agency is the IRS, when politicians of every stripe, in order to make political points, continue to malign the work and the function of the nation's revenue collection agency? Does that surprise you?

MR. LUNTZ: It has nothing to do, quite frankly, with what is said here or with politicians. It has to do with the fact that when Americans get that IRS tax form, it scares them.

REP. COYNE: So, that's your explanation of this?

MR. LUNTZ: That Americans are afraid of the IRS -- absolutely. They are scared of the IRS. Even today, even with the work that you have done to change the system, Americans are still afraid of the IRS.

REP. COYNE: So, if people were to say things about you going around the country, that you were stealing money out of their pocket, and they were overloading the US Treasury by their collections, how popular do you think you would be? MR. LUNTZ: Maybe a little more popular than I am without people saying that.

REP. COYNE: Well, I just think it is, in large part, a result of the maligning of the function and the role of the collection agency in this country that they are the least popular agency in the government, if that's what your findings show.

MR. LUNTZ: I think I should make this as a formal offer to this committee, that I would be happy, and we can't do it within the beltway, we have to go a little bit outside, but maybe a place like Baltimore, which American Demographic has labeled as the most representative city in America. I and my colleague will make this offer to you at our own expense, to bring you to the public and have you listen to how they articulate their fear of the IRS. It is not the way, in this case, the way that we word the questions, and it is not what you say about them.

It is how Americans fundamentally believe that there is an agency that can penetrate their lives, and do things to them that they have no control over, in an unjust and immoral fashion. And I would invite this committee, for each of these issues, the death tax, the marriage penalty, the IRS, to bring members out there so you can watch from behind the mirror as real live people respond to these question. I think you might find it useful.

REP. COYNE: Yeah. Well, it might surprise you to know that everyone in this Congress goes back to their districts every weekend, and that we mix with the people and we know what the people are saying. And, we know that, as you pointed out in your testimony, no one likes to pay taxes, but most people -- the majority of the people -- recognize that it is a necessity if we're to have any kind of civil society. And that when you continually malign, whether it's the IRS or the Defense Department, or whoever it is, it seems to me naturally they're not going to have a very high rating in public opinion polls.

Mr. Pollock, in your testimony, you cite Dr. Luntz's survey showing that two-thirds of Americans say that the highest percentage we should have to pay for taxes combined, all taxes combined, should be less than 20 percent of income. Do you know of any survey that tells us what services taxpayers are willing to give up to achieve a 20 percent rate?

MR. POLLOCK: Congressman Coyne, that's an excellent question, and the point of course, is nothing. Americans are hypocritical in public opinion. There's no doubt about it.

MR. POLLACK: And they don't make that rationalization. They want cuts, but not at the expense of their government programs. So, the question is correct and unfortunately that is the way that the American public responds.

REP. COYNE: Well, do you have any specific programs that Americans choose to fund rather than getting a tax cut in your surveys?

MR. POLLACK: Absolutely. Absolutely the ones that have been bandied about and I believe that these have become prominent because, as you're pointing out, politicians all over are talking about them. By truing up Medicare and Social Security certainly come before a tax cut in the voter's minds, improving spending on education. For example, as long as it's targeted spending, as long as it makes sense and is not wasteful spending on education and certainly some spending on health care.

Those are the four that have come up that I have seen in the last six months in terms of both surveys and focus groups where people are saying, okay, we've got to spend on these things no matter what.

REP. COYNE: Does either of your polling show what are some of the reasons that Americans oppose a national sales tax?

WITNESS: No, I haven't seen any.

REP. ARCHER: Thank you. Mr. Portman.

REP. ROB PORTMAN (R-OH): Thank you, Mr. Chairman and I want to thank Frank Luntz for the information that he's giving us today and has given us over the years on this and other issues because it is very helpful when these polls and focus groups do focus us a little bit more on what the key issues are and what our constituents care about. I want to ask a question about tax reform. That's the focus of the hearing.

And understand that when you ask people whether they agree or disagree that overall of the federal tax system, including the abolishing of the IRS and replacing five different income tax rates and (inaudible) people agree with. But when you do your polling, Frank, about what people care about tax reform never shows up near the top. Why is that? I mean, is it the good economy? Is the sense of frustration that they know nothing will happen with it or is it that, for most people, it's just not an important part of their lives?

MR. LUNTZ: Half of it is the good economy, but the other half, and it bothers me, it troubles me to even say this, but they've heard about tax reform and they've heard about tax cuts for long that they feel that they'll never receive it. That we talk about these things and make these promises and when we don't deliver, it undermines the credibility of the institution and the promise.

So that most Americans believe that if the president or Congress were to offer them a tax cut or tax reform, it would never actually happen. And it's one way that you could instill a sense of confidence in this institution and in this body to actually deliver on making their lives easier, simpler and providing them with more money at the end of the day than they otherwise would have had.

REP. PORTMAN: Over the last few years, you know, as we have helped to provide some relief, including the child tax credit significantly, we have in essence begun to push the progress of the code even further so that the top 10 percent of income earners were paying something like 60 percent of the federal income tax now. Again, it doesn't include payroll taxes and that's also somewhat progressive because of the cap. But it's an issue that, frankly, Republicans, I think, are probably of two minds about.

One is you want to provide tax relief for low-income Americans but second is, as you increasingly move middle Americans to a lower and lower federal income tax rate and you increasingly move folks who are at the bottom of the economic ladder off the tax roles all together, I think there are about six million Americans that don't pay income taxes who did a few years ago because of the changes that we've made.

And as you enrich the EITC program where more and more folks were getting a refund rather than paying not just payroll taxes but income taxes, and some folks as you know are paying income tax, payroll tax then getting a check from the government in the form of EITC that covers both of those, plus, they're actually getting something back. So, you begin to loose kind of a constituency for tax reform or at least for tax relief.

I don't know if my question to you is do you agree with me or not on that? I guess that would be one question, I guess.

You know, is that one reason that there isn't as much interest in tax reform as well as maybe tax relief? And the second is, what does that mean for the prospect of tax reform going forward?

MR. LUNTZ: Americans tend to respond to big ideas in times of great change and it seems very difficult to ask Americans to accept the same tax structure today that they had 50 years ago when we have new technology and great inventions that are changing the way things operate. That Americans would expect that their laws and the things that govern them would be updated as times change.

If you can attach yourself to that outlook towards the future, I think you'd be much more successful. Support for tax reform will increase significantly in our next economic downturn as Americans become frustrated and their wallets and purses become tighter. It would be nice if you could pass tax reform before they were demanding it out here.

MR. POLLACK: To be very clear about one thing that Frank said is this concept that Americans are upset that or when they think about the concept of a tax cut, they don't actually believe it'll happen. There's s a lot of talk of it but it doesn't happen. I come back to bunches of groups of folks in Connecticut where Governor Roland gave back to all Connecticut individuals basically, per child you got $50 a head. And even though it seems like a trivial amount and even the voters were saying that, you know, it's silly to get a $50 check.

They were all incredibly satisfied just because somebody had actually delivered upon giving them a check, getting them an actual refund and they gave him a lot of credit for it even though they thought the amount was trivial. So I think Frank is absolutely right when he says it's about 50 percent good economy and 50 percent they don't believe it's going to happen.

REP. PORTMAN: OK, well again, thank you all very much and we look forward to continuing to get you input as we try to pursue reform and simplification. Thank you.

REP. PHILIP M. CRANE (R-IL): Well, Dr. Luntz and Mr. Pollack, we appreciate your testimony and I think that is, unless Ms. Thurman has a question yet.

REP. KAREN L. THURMAN (D-FL): Did you all test the debt versus taxes at all? It just has not been talked about much and I'm kind of curious how that plays in the - - MR. LUNTZ: I have not done it but it has been done and the public right now is more concerned about the debt.

MR. POLLACK: Right now when you look at it, the public will take paying off the national debt over tax cuts on a numerical level. And if you need the numbers, I can get them to you.

REP. CRANE: Very good. Well, we thank you for your presentations and that will terminate this panel and the committee, however, will now stand in recess until 1:00 p.m.

(Recess) REP. ARCHER: The meeting will come to order. And our next group of witnesses, chair apologizes for being a couple of minutes late, but we will commence at this time and I welcome each one of you. We're delighted to see you and we'll look forward to your presentation. Mr. Helming, would you lead off?

MR. WILLIAM HELMING: I'd be more than happy to, Mr. Chairman. I assume it's appropriate to suggest that my written document will be submitted for the record and I'll just - - REP. ARCHER: Without objection, your entire written statements will be included in the record and you can synopsize verbally if you will.

MR. HELMING: Yes I will do so. Well, it's indeed an honor and a pleasure to be here. I'm a self-employed for 27 years business consultant and economist. I work out of my home along with my wife in Olatag (ph), Kansas. We've been working on this tax plan, the Helming National Consumption Tax Plan, for 16 years. We've been advancing it with the help of a lot of people, including two other panelists here and literally thousands of people across the country.

We've been working at it as private citizens, paying our own bills to get it done. I think the most important introductory thing, Mr. Chairman, would be that as a practical matter I've been conducting focus groups for 16 years, literally a major cross-section of the U.S. public, finding out what they liked and what they didn't like about this plan and the other plans.

Bottom line why fundamental tax reform? Basically, the present Tax Code penalizes or greatly restricts success, hard work in human capital, saving and investment, economic growth, productivity, risk taking and the transfer of family-owned and small businesses from one generation to the next. I've designed this plan to try to send the right signal and to reward each of those things as opposed to penalizing them.

As you know, Mr. Chairman, the marginal tax rate on labor under the current federal Tax Code is 35.6 percent. When you put it all into one pot, it's 35.6 at the margin. The Helming two-tiered consumption tax plan is 30.4 or 15.2 on tier one, 15.2 on tier two, times two is 30.4. That's basically a 15 percent differential. I tend to be real conservative and let's say it's a 10 percent differential.

That means that the economy would double in growth in 10 years compared to the delay we operating now under the present Tax Code or the cost of goods and services would come down by 10 percent. In the real world, it would be some combination of the two.

Basically, the major benefits of such an approach would be a stronger growth economy, more jobs, higher real wages, more take home pay, lower cost of goods and services, lower interest rates by a significant margin, 15 to 25 percent, eliminates the IRS from the wage earner's perspective, major simplification and major advantages, in this case, competitive advantages in the global market and trade arena and a very visible tax.

Why is this possible? Well, it's very fundamentally because under such a plan we're no longer double taxing income, investment or savings while at the same time, we're taxing labor and capital pretty much equally, which Aldonna's going to speak to in a few minutes. Which obviously under the present tax system, we do not do. It's also possible when you get these many benefits for the economy and the working Americans of this country because it has a much broader tax base and a uniform tax rate.

The Helming NCT plan is specifically designed to achieve all of these specific benefits. This will particularly benefit middle and lower income wage earners. I have come to the conclusion some time ago and certainly believe it strongly today, that the status quo in terms of our current tax (inaudible) is unacceptable. If we can accrue such tremendous benefits for the common working person in America and the working families as well as for the business community then it's clearly time to seriously embrace fundamental tax reform.

Very honestly, all of these competing plans are going to have essentially the same impact on the economy in terms of favorable benefits. Where the difference is going to come in is how they're structured as it relates to how they specifically are perceived to impact businesses and wage earners and consumers and that comes in the structure. So basically, the Helming NTC plan represents an excellent and viable compromise, Mr. Chairman, and a common ground for real fundamental tax reform because of its structure.

It reflects many of the best aspects and strengths of the other competing proposals while avoiding their weaknesses relative to perceptions and clearness, political viability, simplicity and compliance issues. Very simply stated, my plan is two-tiered and tier one is a uniform and partner adjustable activities tax at 15.2 percent wherein the tax is levied on what businesses output, i.e., internal labor costs and the return to capital or profit.

It applies to all businesses, self-employed, nonprofit organizations and institutions and all federal, state and local government agencies and accounts for 57 percent of all federal government revenues raised. Tier two is a 15.2 percent sales tax levied at the consumer purchase level, except for the necessities of life, which I'll be talking briefly in just a moment.

The two-tiered sales tax raises 43 percent of the total. I also want to emphasize that this plan envisions the entire repeal and replacement of the complete Tax Code as we know it today, all income taxes to payroll taxes to self-employment tax and all excise, railroad, retirement, gasoline. In other words, nothing is left out. And it's essentially revenue neutral at two levels at 15.2 times two to raise the same amount of revenues.

John Maharge (ph) just informed me today that the joint tax did score the plan and their numbers came out very close to the numbers that we've been using. We deal with activity specifically by exempting the necessities of life and I define those as food at the grocery store, food marts and vending machines, all prescribed medical costs and all home purchases and/or those who rent.

On the business side, all capital purchases and exports would tax exempt for the business. The competitive position of U.S. businesses and the U.S. economy in the global market place would be substantially improved over what it is now. The reason for this is that we would be exempting exports and taxing, as I know you well understand, on a border adjustable basis, imports. That itself would raise 10 percent of the total revenues.

Basically, it would encourage multi-national companies to come home, stay home and hire more U.S. workers. Progressivity and freedom of choice are primarily an outcome of how much and when consumers choose to spend, save, invest or reduce debt, but their income over and above the necessities of life. Bottom line, Mr. Chairman, in terms of my verbal comments, and I'm looking forward to any possible questions that you might want to ask, I come to this conclusion.

If we can benefit the U.S. economy in such a dramatic way, and as a common wage earner in the United States, the working families of America, which clearly all the studies, including Aldonna and her husband Dr. Robbins and a number of others that have helped with this long evolved process in helping me get to this point, then you know I simply ask a rhetorical question.

If so many people can be benefited then why don't we embrace fundamental tax reform along these lines? Thank you very much.

REP. ARCHER: Thank you, Mr. Helming. Mr. Powell, we'd be pleased to receive your testimony.

MR. JAMES L. POWELL: Yes, sir. Mr. Chairman, I come here today as a live stock producer. My interest in the Helming National Consumption Tax is to seek its passage and produce change in the method that federal, state governments tax the hard earned incomes and lifetime savings of individuals and families.

Unless income, state, gift and capital gains taxes are eliminated the small business, small business owner, the family farmer will continue to be liquidated at a precipitous rate. The evidence provided by the U.S. Census Bureau, the USDA National Statistical Service each decade is compelling. These numbers bear serious consideration. In 1940, the rural population, those living in communities of 25,000 or less citizens was 43.5 percent of the total. In 1990, the rural population was 24.8 percent of the total.

The employment status of civilian workers employed in agriculture in 1940 was 17.1 percent of the total workforce. By 1990, the number of agricultural employees had decreased to 1.6 percent of the total population. The number of farms producing agricultural products had been reduced by 65 percent from 1940 to 1990. The size of those farms had increased 163 percent. Corporate farms are on the increase.

In the last five years, those farms have increased .6 percent while the individual, family and partnership farm have decreased in number. This benign trend began in the 1930s and will continue until some time in the future. Population increases in this country and disruption of foreign nations that import agricultural products into the U.S. will create the beginning of food shortages much like the oil shortage that developed in the 1950s.

The loss of population in agriculture and large increase in size of farms reflect a deterioration in U.S. agriculture. There are a number of indicators of deterioration. It is clear that agriculture is not the preferred choice of many youths. The minimum economic unit today in my area is about 6,000 acres, a value of $1,800,000. In 1940, the minimum economic unit was about 2,250 acres, a value of less than $50,000.

Today to transfer this unit to errors after exclusions requires a heavy estate tax. An education can equip the young heirs with an opportunity for employment in industry that now offers a much higher income than agriculture. That is more appealing to them than coming back to the farm for an inheritance that will burden them with an enormous estate tax after they have paid a hefty income and/or capital gains tax.

This country is losing its agricultural young as is shown by the increase of the average age of the person in agriculture from 53.3 years to 54.4 years of age in only five years from 1992 to 1997.

Another indicator of deterioration of agriculture is the parity index of farm commodities. The index is based on farm goods sold in 1914 equaling 100. That index has declined in the last eight years from 51 in 1990 to 42 in 1998, a reduction in the dollar return on goods produced of five percent.

That loss of income and persistent demand for payment of death taxes has caused the operating debt of the farm community to increase from $77 billion in 1980 to $80 billion in 1997, an increase of three percent. Yet another indicator is an increase in agricultural imports for consumption. Food imports have increased 63 percent during the current administration from 1990 to 1995.

Imports will compete with domestic products and require those products to sell at a price close to below production cost. The future of this company's food supply will gradually become questionable. With these negative trends confronting agriculture, it is easy understand the excess of productive people from family farming and subsequent development of corporate farming and increased importation of farm products to supply the U.S. consumer.

The solution for agriculture and small business to the problem that has just been described is the National Consumption Act. It will release the unbearable income, estate capital gains tax from those few who now pay and place the tax more fairly on a much broader base of the population. All imported products will bear a fair share of the tax burden and release all U.S. exports, agricultural and industrial, from taxes. Thereby stimulating the economy.

All the citizens of the United States would be better served by state and federal govenments if the Helming National Consumption Tax were implemented. If I might be permitted, may I quote one brief vignette? Before coming here this week, an employee after hearing the explanation that my mission was to encourage the elimination of the income, state capital gains taxes so that many of us would not eventually join the ranks of the defunct said to me, tell them I never received a paycheck from a poor man. Thank you.

REP. ARCHER: Thank you, Mr. Powell. Ms. Robbins.

MS. ALDONNA ROBBINS: Thank you, Mr. Chairman. I'm Aldonna Robbins, Vice President of Fiscal Associates and senior research fellow at the Institute for Policy Innovation. Want to thank you for the invitation to appear at these hearings. As the committee has heard during the last two days, there are lots of ways to implement fundamental tax reform.

While the proposals have important differences, I would like to focus on some of what they have in common. First, the tax bases of most reform proposals are basically the same. Now, someone might say, wait a minute, doesn't a sales tax, tax consumption, a business tax business and income tax income? The short answer is yes, but those distinctions really refer more to where the tax is collected than to what is ultimately being taxed.

Government gets its revenue by taxing the income going between households which provide labor and capital services and businesses which provide goods and services. Because of the two flows, the value of the goods and services that businesses produce and the value of the labor and capital services provided by households are made up of the same dollars, all taxes can be viewed as being paid out of income earned by labor and capital.

A second area of commonality is the tax rate. To raise a given amount of revenue and holding exemptions constant, most reform proposals should yield similar effective rates. What is more those that look to replace federal revenues should likewise end up with average rates close to the current system. I'd like to highlight some findings from a project in which we have rearranged the national income and prodded accounts to analyze the current tax system as well as alternatives, on the basis of factor income.

Currently, the effective average federal tax rate, and this includes all federal taxes, on the income of private business labor and capital is 26 1/2 percent. The marginal rate on factor income is 36.2 percent. Suppose we were to replace the entire system of federal taxes with a comprehensive sales tax, which provides every family with a refundable credit equal to the poverty line.

In that case, the effective average federal tax rate on the income of private business, labor and capital would be about 24 percent and the marginal rate would be about 29 percent. What about a generic business cash flow tax with or without border adjustments and the same refundable credit? Again, the average rate on factor income would be about 24 percent and the marginal roughly 29 percent. The effective rate of the alternative are lower than current law because the proposals have broader, more uniform tax bases and a single rate. The rates of the alternatives are the same because they both end taxing the same dollars but at different collection point. Compliance is assumed to be the same as under current law, the effective tax rate would be the same regardless of what the stated rate might be.

If the Joint Tax Committee says that the required rate is really going to be 30 percent instead of 24, it simply means the current law rate must be higher than the 26 1/2 percent that we calculated. Doing so would not change either the conclusions, however, regarding the effective rate or the relative comparison. I'd like to close with some comments about economic effect. There are efficiency gains to be had in reform of the current system, both capital and labor pay higher rates on the next dollar of income than on the average dollar. And although I didn't present verbally these results, they are on my written remarks, capital is taxed more heavily than labor.

A single rate, which would treat capital and labor the same as well as lower marginal rates, would encourage greater saving and investment, lead to a more efficient use of resources and result increased output. There are, to be sure, important differences among competing proposals for fundamental tax reform. But we should not loose sight of the fact that the economic ramifications of proposals that broaden the base, remove the bias against capital and lower marginal rates are essentially the same. Thank you.

REP. ARCHER: Thank you, Ms. Robbins and the chair applauds and congratulates and is grateful to each of you for the work that you've done, for coming to the committee today and sharing with us your ideas. But Gary and Aldonna Robbins have been known to me for many years and do excellent work in modeling what impact our decisions are going to have on the economy and on jobs.

And James Powell is a tough Texan, rancher, kind of vibrant individual this country was founded on. And Bill Helming, you have spent many years in the vineyards developing your program and without any desire for personal gain but to do something for the good of this country and I respect all three of you and I'm grateful that you're here before us today.

Mr. Helming, let me ask you a couple of questions, and I don't have time to examine all the details, we have it in writing and we can at another time look through it. But can you synopsize why you believe your plan is better than AFT? MR. HELMING: Mr. Chairman, better than what?

REP. ARCHER: Than the Americans for Fair Taxation that we heard the first day of this week.

MR. HELMING: I would simply say two major reasons, and again, from the perceptions of the common person that I interface with, Mr. Chairman. Number one the rate differential is a dramatic difference in terms of the perception on the part of the taxpayer. And then secondly, the consumer in the JC Penney level, they're under the impression and rightfully so that, well hey businesses aren't paying their fair share.

I mean, that's the perception and that's a major problem from a structural standpoint not from an economic standpoint from a structural standpoint in terms of political viability of what I'm proposing versus what is being proposed there. Those are two major critical issues.

REP. ARCHER: All right, thank you very much.

MR. HELMING: Could I provide just add one thing?

REP. ARCHER: Sure.

MR. HELMING: In my finding over the last 15 or 16 years when it's all said and done taking the typical taxpayer across America, it's very clear to me after that period of time that the removal of the entire Tax Code, including the FICA payroll and getting the IRS out of the lives of the wage earner, not the business owner, but the wage earner those to things are very popular among the common people in this country.

REP. ARCHER: All right, thank you. Now, I'm going to ask you a more difficult question. What are the flaws in your program?

MR. HELMING: Well, AI think perhaps a potential concern that might be raised would be the exemptions that I built in to deal with regressivity. In other a potential concern or question it might be, well if we start out with food and shelter and medical, then who's to say that your committee and others in Congress might suggest something else.

Well, my response to that is as follows: First of all, there's a very well established precedent at the state level, basically 50 states, for some time at the state level exempt the very things I'm talking about. So, it's a well-established precedent. Secondly, I would envision that the tax, if you go to manipulating if you will through social engineering, and you say okay, we're going to build in another exemption or another two or three. Well then, that's going to raise the rate.

And every American from Watts to Harlem is going to know that that's being taken under consideration and there'll be a lot of negative response to that. And lastly, to the potential negative concern that you asked me, my response would be that, my suggestion would be that any change and a new federal Tax Code be required by a super majority of the U.S. Congress.

REP. ARCHER: Well, I think you've been very up front. I know when I talk about structural tax reform in my town meetings, I have to say up front there's no tax system that is perfect.

MR. HELMING: That's right.

REP. ARCHER: No matter how we collect taxes there are going to be objections, there are going to be flaws, there are going to be problems. And one day when I spoke very strongly, as I do, about the need to get rid of the income tax in one of my town meetings, and suggested the concept of an alternative. A man got up in the back of the room, raised his hand and I recognized him. And he said, I don't like your idea and that's the first time anybody had ever said that to me.

And I said, well I'm curious why? And he said because we still have to pay taxes. (Laughter.) And I said, well you're right. We'd love for that day to come when we didn't have to pay taxes but the government has bills to pay and therefore, we have to pay taxes. So we should continue to seek the best way and I thank you for your input and I am now going to recognize Mr. Coyne for any questions that he might like to make.

And also I've got to excuse myself for a very few minutes in the back and if you'll preside during my absence I'll return shortly.

REP. COYNE: Thank you, Mr. Chairman. Ms. Robbins, your testimony notes that the fundamental proposals for tax reform do not make poor families pay more taxes.

What about middle-class and high-income families, what happens with their total tax bills, the middle-class and upper-income families?

MS. ROBBINS: When I refer to proposals I'm really talking about the example we structured here with the refundable credit up to the poverty line. I don't have distributional information with me at this point. I think, as you know, Congressman, when we're talking about broadening the base there are going to be some deductions that are going to be lost and some people are going to be worse off. Others will be better off.

I think overall though the objective of tax reform is to try to get out as many of the distortions that exist in the system and broaden the base, bring down the tax rate and generate more, ultimately the greater growth that would result, I believe, from tax reform would long run make everyone better off. But certainly starting out of the gate there are going to be winners and losers.

REP. COYNE: So, you have no data that would show that middle- class - - MS. ROBBINS: We have not constructed that information as yet. I think as this project is still underway so we will eventually have distributional tables. REP. COYNE: Okay. The economy is in its longest period of expansion in the nation's history and the current tax system doesn't seem to have hampered that amazing achievement for all of us or most of us. Do you think a sudden fundamental change to the Tax Code could threaten that prosperity that we've been experiencing?

MS. ROBBINS: I've done some looking at the current recovery and have compared it, for example, to the '60s, which up until February when we passed, I think, 106 months in the 1990s, the '60s had been the previous longest expansion. And it's interesting on the tax issue that the average tax rate in the 1990s are higher than they were in the 1960s and that's because we have programs like Social Security and Medicare that are larger today.

And also because the state and local governments has expanded over time. So, the average rates in the '60s were actually lower. But what was interesting is that during the '90s, the marginal tax rates had been lower than they were in the 1960s but they have been trending up. So, right now, we are getting close to marginal rates of where they were in the 1960s.

And I guess what I'm concerned about and keeping an eye on are leading indicators such as the stock market and investments to see if perhaps this recovery might not be starting to stall. And if it is then I think the tax rate issue is certainly one area that needs to be revisited. And I would argue that anything you can do to bring down marginal rates will be added insurance to keep this recovery going even further.

REP. COYNE: Well, I guess I'm not speaking so much of rates as I am any structural change in the code that would come about by saying that in the year 2003 or 2004, we are going to have an all together different method for revenue collection.

MS. ROBBINS: Right.

REP. COYNE: And you know aside from the progressive income tax that has served us very well over the years.

MS. ROBBINS: I guess again it would matter on what kind of disruptions that are being discussed. Although I think if you look historically that when there have been changes to the Tax Code that the economy is remarkably resilient and does make adjustments pretty quickly.

REP. COYNE: Thank you.

MS. ROBBINS: You're welcome.

REP. ARCHER: I thank the panel and we'll call the next panel. I'm sorry, John.

REP. JOHN TANNER (D-TN): I'm sorry I got here late. Mr. Helming - - MR. HELMING: Yes, sir.

REP. TANNER: - - I was reading your proposal and in it, we had a hearing two days I guess it was and there was a proposal for a national sales tax.

MR. HELMING: Yes, sir.

REP. TANNER: That would apply to the cities and counties and states in this country on not only their purchases but also on the wages paid as service and I was reading yours. Is yours similar to that? Do you tax local (inaudible)?

MR. HELMING: No, sir. The plan that you have before you and that I presented here today is for the federal level only, but I can speak to the state level if you'd like me to. The 15.2 raised at tier one and tier two applies revenue neutral to raising the same amount revenues as we do now. A marginal rate. I don't know if you were here when I spoke to that.

The marginal tax rate on labor under the current code is 35.6 percent and under this plan it's 30.4, okay, about a 14 percent differential. If you were to take the same formula and apply the tier one and tier two to be revenue neutral, in other words strip out all income for those states that have income tax and sales tax, property and real estate taxes, you would basically have a 7.6 percent total or divided by two, 3.8. So, you'd add 3.8 to 15 point, you'd basically have a 19 percent rate. You see what I'm saying and that would replace all federal, state taxes.

REP. TANNER: I think I heard you say that you favor the super majority bill to raise taxes.

MR. HELMING: Well, to change anything in the Tax Code.

REP. TANNER: To change anything.

MR. HELMING: I mean what I'm suggesting is assuming our nation and our American people are so fortunate to have a fundamental tax reform embraced, my suggestion would be that in the part of the law in which you and your colleagues would be writing would be a requirement that any structural change or change in the rate in any manner would require a super majority of the U.S. Congress.

REP. TANNER: What about borrowing money, raising the debt ceiling? Would you also favor a super majority to do that?

MR. HELMING: I'm sorry. I'm having a hard time hearing you.

REP. TANNER: To borrow money to raise the debt ceiling, would you favor a super majority to borrow money?

MR. HELMING: I guess I probably would but I haven't thought about that one near as much.

REP. TANNER: Well, would you agree that there's pressure in the here and now to not raise taxes more so than the pressure in the hearing from those yet unborn who are getting the debt that we're leaving them to just simply borrow more money rather than paying for our consumption today? Would you have a problem with that?

MR. HELMING: Yes, sir, I sure would.

REP. TANNER: So, if one believed that the pressure to not raise taxes today is greater than the pressure from those that are not here yet to not borrow from them, it seems to me the super majority that we ought to be talking about with relation to the Tax Code ought to be to borrow money rather than to pay for what we do today. I think we should think about the empathy of what we're doing with respect to our nation's debt rather than what we're doing with respect to the Tax Code as it relates to the here and now.

MR. HELMING: I guess my emphasis, Congressman, is that when we look at a structural change and a fundamental change and a revamping of the current Tax Code, as many others have already said and as I've been saying for some time, if it's done properly, you know, everybody in the economy essentially wins. I mean certainly the common wage earner is going benefit from a faster growing economy, lower interest rates, lower cost of goods and services.

REP. TANNER: I agree. I agree.

MR. HELMING: And so, you know, I don't think we can walk away from that. I mean as long as we can do it and raise the required amount of money to stay within the budget limitations, it seems to me we ought to be doing it.

REP. TANNER: I agree. I just, it's curious this super majority thing keeps coming up.

MR. HELMING: The reason I bring that up is that, you know one of the very nice features about the structural aspect of this two-tier system is that it's levied across the entire economy, the business sector and obviously the consumer sector. And if Congress decides, for whatever reasons or reasons at some point assuming we were to implement such a plan, that it wanted to change it, it seemed to me that that ought to require a major hill to climb before it was changed. That's all I'm trying to suggest.

REP. TANNER: I understand the super majority thing. The process though has always intrigued me because nobody talks about it in relation to borrowing money. They only talk about it in relation to raising taxes. Would you require a super majority to declare war?

MR. HELMING: Well, I think the Constitution says that's up to the president in one sense and it's really up to the Congress.

REP. TANNER: When you go down that road what about a super majority to elect people to come here to make these decisions? I mean when you start talking about super majorities, we had a vote on it this week, and I don't want to argue about it, but it's just always caught my attention when people talk about a super majority as it relates to the Tax Code but not to borrow money or do anything else around here.

MR. HELMING: I wouldn't quarrel with you the super majority conceptually is a good idea.

REP. TANNER: You think it is?

MR. HELMING: Yes, sir, I do.

REP. TANNER: Well, that's an interesting conception. I yield back the balance of my time.

REP. ARCHER: Mr. Coyne, thank you for presiding in my absence and again thank all three of you for coming and presenting your proposal. It is clearly a well thought out proposal and it's going to be very helpful to us as we try to find our way through to the final solution of what we can get passed in structural tax reform.

MR. HELMING: Mr. Chairman, my next step is to get it introduced into Congress, but it's a pleasure to be here.

REP. ARCHER: Thank you so much. You're excused. Our next panel is Dr. Regalia, Ms. Saldano and Mr. Entin. You come to the witness table. Ms. Saldano, I apologize I put an E an your name when I pronounced it and it isn't there.

MS. PATRICIA M. SALDANO: That's okay, Mr. Chairman.

REP. ARCHER: We're glad to have all three of you with us today. And I think you probably, having sat in the room, know the general format which we try to follow, which is that your entire written statements will be put in the record without objection. And if you'll attempt to synopsize verbally within a five-minute limit, we would appreciate it.

And Dr. Regalia, if you would start off, we'd be pleased to receive your testimony.

MR. MARTIN REGALIA: Thank you very much. Mr. Chairman, my name is Marty Regalia. I'm vice president and chief economist of the U.S. Chamber of Commerce. The Chamber appreciates the opportunity to comment on fundamental tax reform and I will summarize my testimony briefly.

Over the years, dissatisfaction with the federal tax system has resulted in the enactment of significant code changes, I think, in about 11 of the last 25 years. And even these changes, however, have not really fixed anything and the discontent over the code continues. The current tax system is plagued by a number of shortcomings. The system is cumbersome and excessively complex and results in high compliance costs and produces a perception of unfairness as well as a lack of trust that not only undermines compliance with the law but respect for the government.

The system levies multiple layers of tax on income, capital acquisitions, savings and investment. And as such, it is biased against savings and investment that is crucial to our continued economic growth. It contains relatively high marginal rates, which are economically distorting, foster tax avoidance and reduce compliance. It suffers from a multitude of exclusions, exemptions, deductions and credits which often cause decisions to be tax driven rather than made on the basis of sound economic reasoning.

Clearly the system is in need of substantial reform or even replacement. The Chamber's members are currently evaluating a number of the proposals. And while they have not yet selected a single approach or endorsed a specific proposal, they believe that whatever system is developed, it should address as many of the following issues as possible: the tax system need to be simple and clear, understandable and relatively easy to apply.

It should eliminate or substantially reduce the incidence of confiscatory multiple levels of taxation on capital savings and investment and productivity growth. The system should have low marginal rates, which imply a relatively broad base with relatively few exemptions. It should level the playing field in terms of our international competitiveness. It should do this by avoiding duplicate of taxation and other jurisdictional problems and by adopting a territorial approach that is border adjustable.

Fundamental changes for a tax system must also be accompanied by appropriate, sensible transition rule. It must be clear cut, of sufficient duration to allow a chance for the change to be properly interpreted, understood and applied and they provide an orderly movement into the new tax structure without the application of undue cost. The business world and our whole economic environment are rapidly involving in part due to new technologies and electronic commerce.

Whether the system is reformed or replaced, it must be consistent with this new economy and afford sufficient flexibility to accommodate change with a minimum of tinkering. The task of designing and implementing a new reform is daunting but the rewards are continued economic growth and a higher standard of living. We look forward to working with you and the other members of the committee to achieve this end. Thank you.

REP. ARCHER: Thank you, Dr. Regalia. Ms. Saldano will you now give us your testimony?

MS. SALDANO: Sure. Mr. Chairman, Patricia M. Saldano, Center for the Study of Taxation. I'm here today as president for the Center for the Study of Taxation, but more importantly as someone who's heard from numerous families about the effect that the gift of state and generation skipping tax, also called the death tax, has had on them and their businesses.

Allow me to share some death tax facts and some horror stories with you today. To pay a tax because someone dies is the highest rate in our tax system on assets that have already been taxed before is the reason that 69 percent of the general public believes that the death tax is unfair. More unfair than payroll tax, income tax, gasoline tax, sales tax, property tax, cigarette tax, alcohol/beer tax and even capital gains tax.

Why is the death tax so unpopular? Because it's tax on the American dream. Hardworking entrepreneurs who build their family businesses and support our nation's economy hope that some day they will be in a position to will their life's work to their children and not pay a 55 percent tax.

Within the last few years, new voices have called for the elimination of the death tax, including the National Association of Women Owned Businesses, the National Black Chamber of Commerce, National Indian Business Association, U.S. Hispanic Chamber of Commerce, U.S. Pan Asian American Chamber of Commerce, National Association of Neighborhoods and the Texas Conference of Black Mayors.

These minority groups have just started to build their businesses and they want to be able to pass on their assets to the children in the benefit of hard work without a 55 percent tax or an 80 percent generation skipping tax if they wish to give to their grandchildren. And these people are represented by 47 percent of the female members of Congress who have supported repeal of the death tax as co-sponsor of the bipartisan Dunn-Tanner bill.

And I would like to thank Congressman Dunn and Congressman Tanner on their work on H.R. 8 and their tireless effort to repeal the death tax. These women and minorities are real people who are adversely impacted by the death tax. Money that they could use to send their children to college or pay their family's expenses is instead snatched by Washington.

One unlucky victim of this tax is Lynn Rehoopengardner (ph) of West Hollywood, California who writes to me, "My family's recently experienced a triple tax. My grandfather paid income taxes on his income when he earned it. When he passed away two years later, it was taxed again. My mother then suddenly passed away this past spring and it was taxed again, effectively an 88 percent tax."

In addition to the inherent unfairness and inappropriateness of the death tax, it actually costs the American economy in jobs. Yes, the death tax does eliminate jobs. How many? In a survey recently done by the Center for the Study of Taxation and the Policy Institute of New York, 365 businesses responded to a survey that they had already lost 14 jobs in the last five years due to the cost of planning for this tax and after paying that tax.

That's 5,100 jobs in the last five years just within this 365 survey base. In the next five years, they anticipate losing an average 80 jobs. And 80 jobs for 365 business, that's 16,000 jobs in the next five years. In a recent survey of the National Association of Women Business Owners, NAWBO, there were similar results.

Within the survey respondents of 272, on average 39 jobs had been lost in the last five years, again, for the paying and planning for this tax. And in the next five years on average 103 jobs will be lost. That's 28,000 jobs just within that survey respondent group.

Herrie Bell (ph), a NAWBO member, who owned a business in Oklahoma City, wrote in her response to us, "I just settled my father's estate and paid three-quarters of the total estate for taxes and fees, sold all of our stock and bonds and had to borrow. When I die there are no more disposable assets left so the business will have to be sold."

The death tax also impacts our global competitiveness. When the United States has the second highest death tax rate of any country in the world, second to Japan at a 70 percent rate, which you should know doesn't kick in until a $15 million exemption. The death tax effects the competitiveness of U.S. companies. Family businesses have to plan for the death tax by buying expensive life insurance, selling assets, borrowing or restructuring their business.

It's expensive, time consuming, energy wasting and constant year after year. Many mid to small size businesses sell out early to corporations who are not faced with the death tax ending the opportunity of the family to carry on the business and the livelihood of the family.

In closing, I would just like to tell you the story of Ida Pritchard (sp) of Seattle, Washington. In her own words, she writes, "I am 77-years old. My history of work, thrift and efforts to save money is unbelievable. Here is my reward. All of my Social Security plus more goes for income taxes. I live off my teacher's pension as I do not want to cash my investments. If I died today, I'd pay about $200,000 in death tax. I am helping a great niece go to college. I have two great nephews coming up; all are bright children. I'd like to help them not the IRS. I had a newspaper route in college. I worked for 50 cents an hour doing office work under the program of President Roosevelt. I've lost money in investments. I went to work when I had a death sentence with lung cancer in 1967. I didn't miss a day when I was told that I was only going to live three months. I am still working. I have never had a bill I didn't pay. The way things are now, what the nursing home doesn't get if I'm that unfortunate, the IRS will. What did I make all this effort for? Our laws need to be changed but I have no clout."

Gentlemen and gentlewomen of this committee, I urge you to appeal the death tax. As the committee continues to actively reform the tax system, I urge the committee to recognize that out right appeal of the death tax should be a principle component of any proposal. Let's show the American people that their government has a heart. Let's show the hardworking American people like Ida Pritchard they can pass away knowing that their hard work will benefit their family.

And finally, let's show them, the so-called little guys, that they do have clout and their government is listening. Thank you.

REP. ARCHER: That lady sounds like my kind of American. Mr. Entin.

MR. STEPHEN J. ENTIN: Thank you, Mr. Chairman, members of the committee. My name is Stephen Entin. I'm the president of the Institute for Research on the Economics of Taxation. Thank you for this opportunity to discuss fundamental tax reform. I'm speaking on my own behalf, but I will present to you today, a tax system developed by the institute's late founder, Dr. Norman B. Tourette (sp). It is a simple saving deferred, cash flow tax for individuals, which he called the Inflow/Outflow Tax.

It has two chief attributes. First, it gets the tax base right using the correct measure of income for tax purposes, one that maximizes the economic efficiency and yields the optimal growth of income. Second, it shows the taxpayer the cost of government more clearly than any other system. Other advantages of the tax are that it uses concepts familiar to most taxpayers, it easily incorporates tax relief for the lowest income citizens and it greatly simplifies the tax system.

A good tax reform would have two main objectives, namely, economic neutrality and high visibility. The current income tax is biased against saving and investment. The bias depresses productivity in wages and keeps people's income from 10 percent or more below their potential. Neutrality requires that the tax system treat saving on a par with consumption in one of two ways.

Savings should be tax deferred until it is withdrawn for consumption as with the deductible IRAs and pensions. Alternatively income savings should be taxed but the earnings should be tax free as with Roth IRAs and tax exempt bonds. All savings should get one or the other treatment.

In addition, the extra layers of tax on saving imposed by the corporate income tax and the state and gift tax must be eliminated. Visibility requires that the tax system show the voting public what they are paying for government so that they may make an informed decision as to how much government spending to support. Ideally, all citizens, except the very poor, should pay something to help fund the outlays of the federal government in order that they understand that the resources used by the government are not free or costless.

Taxes should be collected directly from individuals not be hidden at the business level. In fact, all taxes are paid by individuals not businesses and not by goods. There should be an annual filing that lets taxpayers see their total tax payments for the year. People will not know their total tax bill if it is collected in drips and drabs at the cash register.

Of the several tax plans you have looked at this week, an individual tax flow tax is the best way to achieve the dual objectives of neutrality and visibility. The inflow/outflow tax is based on a few clear principles that determine what is and is not taxed. The tax would be imposed on individuals at a flat rate with a basic exempt amount to protect the poorest citizens.

There would be deductions to assure a neutral treatment of saving and to properly attribute income for tax purposes to the people who ultimately receive and consume it. All forms of labor compensation would be taxable. You could follow along on the tax form in the back of my testimony if you wanted. All forms of labor compensation would be taxable, saving would be deductible; it is tax deferred. And the reinvested earnings would grow on a tax deferred basis.

All distribution from savings would be taxed at the individual level when the saver or the heir sold the assets to raise money for consumption.

Transfer payments made to other people either voluntarily as with gifts or charitable contributions or involuntary as with alimony payments or state and local taxes would be deducted from the payer's taxable income. Gifts and transferred payments received would be added to the recipients taxable income.

Cost of acquiring human capital, such as tuition and other costs of earning income, would be deductible. The inflow/outflow tax would be far simpler than the current tax system. Expensing savings and taxing all returns would eliminate capital gains calculations. There would be no corporate income tax or a state tax. Investment by unincorporated businesses would be expensed not depreciated eliminating complicated capital cost recovery rules.

The tax would be territorial both for simplicity and to end the tax disadvantages that American firms encounter when they compete abroad. Saving invested abroad would not be deductible. There would be no tax on foreign source income and no complicated foreign tax credit. Fundamental tax reform should replace the individual and corporate income taxes, the estate tax and the excise tax.

The payroll tax should be addressed by Social Security reform. The two reforms would reinforce one another. Social Security reform would increase private savings. Tax reform would encourage the investment of the added saving in the United States rather than abroad giving Americans the twin benefits of greater income in retirement and higher productivity in wages while they are working. Thank you.

REP. ARCHER: Thank you, Mr. Entin. Are there inquiries of this panel? Mr. Coyne. Mr. English.

REP. PHIL ENGLISH (R-PA): Thank you. Mr. Chairman, I'm sorry I wasn't here for the entire testimony, but I did read the written testimony previously and I must say this is an enormously distinguished panel. Dr. Regalia, I was particularly intrigued by your comments on border adjustability and I am especially pleased to see the Chamber's support of border adjustability given the fact that I sense that the business community is not monolithic on this issue.

But your testimony, I think, points the way that on balance trade fairness is an important component in tax reform. Would you care to elaborate on that? MR. REGALIA: Well, Congressman English, I think having worked for the Chamber for seven years, the one thing that I could testify to unequivocally is that the business community is not monolithic on anything. But on the area of border adjustability, I think that the recent problems that have occurred with the FISK (ph) and the WTO have heightened the concern of this issue tremendously.

And that there is perhaps a greater understanding now of the issues that lack of border adjustability to conflicts between a worldwide tax system and a territorial tax system and the implications that that can have not just for the businesses that trade directly abroad but for everyone that deals with those businesses and with businesses that deal with those businesses.

It is truly a broad-based economic issue at this point. And I think that all of the business community are waiting to hear with bated breath what solutions will be proposed to the current situation and I think we're heartened to see in many of the specific tax proposals that are out there, the willingness of all the authors of those proposals to address this problem in a very clear-cut and economically-sound manner.

REP. ENGLISH: Mr. Entin, I saw you took the contrary position. And given your public policy pedigree that should give me second thoughts about my own support for border adjustability. Why is it that you feel that taking the tax off of exports, the embedded tax and placing it on imports tilts the playing field in any way? Doesn't it level it?

MR. ENTIN: I have discussed territorial tax in my plan, but I haven't explicitly stated anything about border adjustability. This has to do with the point of collection. For example in your plan, you have a business level of collection and an individual level of collection. Your business level collection is border adjustable. It's natural when you have taxes on that level that it be border adjustable.

If, however, you're taxing the individual before the individual goes to the store, it is natural for it to not be explicitly border adjustable because the very mechanics of where you've collected it more or less arrive at the same point. Let me explain that a little bit more clearly. These taxes are generally taxes on income less saving, which equals consumption.

Or if it's at business level, it's on revenues minus investment, which equals consumption. To measure consumption by impacting individuals, I want you to take your income, subtract your savings, pay tax on your consumption then take your asset tax money to go shopping. And when you arrive at the store, you may buy a domestic product or an imported product but there's no added tax on either one. I'm being neutral.

If, however, I make the individual make until he goes shopping to take out my tax, he's taking his pretax money to the store and at that point I levy a consumption tax on the sum of his purchases of domestic goods and his purchases of imports. The two together equal again the amount he's consumed and I'm taking the exact same tax from the exact same people.

So, I'm being neutral in either case. And whether something's border adjustable or not in an explicit manner depends on where you have chosen to make the collection point more than anything else.

REP. ENGLISH: I guess my concern is when you show up in a store and there are two products on the shelf and one of them has, in the pricing, the invented tax of doing business in the United States and the tax of whatever jurisdiction you're in and the other item does not have those taxes built in, isn't there at least some price advantage to the foreign produced product as opposed to the domestically produced product?

MR. ENTIN: I don't think so for three reasons and the length of time I'm not sure I can go through all three.

REP. ENGLISH: I'm chairing the meeting so I'll give you a little extra time. I'm very interested.

MR. ENTIN: If you're dealing or thinking about Europe and it's that. They have a corporate tax, a personal income tax, payroll taxes and the VAT (ph). If you take out the VAT, what's left is still as big as our total tax burden because they tax a whole lot more than we do. So there's still taxes embedded if you want to think of it that way in the import.

If, however, you take a slightly different look at what's going on in the production process, you have to realize that workers work for an after-tax wage. Let me take two workers. One works for Boeing with planes that are exported and one works in the corner grocery store and sells to the local population. They both know they're paying tax when they go to the store. When you put a sales tax or a consumption-based tax, either one, they know they're paying tax on what they consume.

Since they want to work for an after-tax wage, they have conveyed that attitude from their employer and they have asked for a wage that reflects that when they go shopping they have to pay tax and that's as true for the export worker as for the domestic worker. So, there's taxes embedded in exports even with a border adjustable tax. All of this stuff gets passed around.

I come back to the basic point I made earlier. If I'm taxing an individual's income minus his savings either before he goes to the store or after he goes to the store, I'm probably taking just the same tax liability from the worker under the two systems. The third point is that with border adjustability sooner or later the exchange rates adjust and the thing washes out.

I think if you remove the tax on business that added layer of tax on capital formation that occurs when you tax the corporate level and the individual level and you end the bias against saving and investment, I think we're going to be a lot more competitive because we're going to have much investment in plant and equipment in this country, we're going to be the most efficient producer of a lot of things.

REP. ENGLISH: But suppose we did become the most efficient producers of a lot of things, would we be running a big trade surplus?

MR. ENTIN: No because for people to buy our goods they'd have to sell to us. The objective of tax reform should be to make us very, very efficient, very productive and give us very high wages and very high income standard and that's true whether we were the only country in the world or whether there were other countries with which we were trading across the border.

REP. ENGLISH: And Mr. Entin, I have to say, on that particular point, I entirely agree with you and this is a side of trade policy that really doesn't get introduced into the debate. Dr. Regalia, would you like to respond to Mr. Entin's point with regard to border adjustability?

MR. REGALIA: Well, I not having reviewed all of them in detail I would have to say I think I probably agree with them. I think that the issue of order adjustability comes up more when you have two vastly different tax systems if you were to institute a truly territorial tax system, the U.S. tax income once and only once, that there would be less of an issue of order adjustability given the various taxing points.

REP. ENGLISH: I agree.

MR. REGALIA: But when we go down the point of two very different tax systems, two very different or multiple collection points, many of which are layered on top of each other, that then these issues become, you know, much more important. As you start to correct one issue I think it helps to correct the other and I think that I will not disagree with what - - REP. ENGLISH: I have one concern on the exchange issue and I'm not sure I can articulate this very well, but I am concerned that that tax burden falls disproportionately on certain sectors of the economy. For example, tax differentials have more an impact on manufacturing in certain kinds of manufacturing than they do on certain kinds of services.

And that whereas much of the economy might not be affected dramatically by the border adjustability issue, I who represent a largely manufacturing district still, have got to be concerned that manufacturers, where you produce a large volume of products with very thin profit margins, would be particularly sensitive to tax differentials. And the border adjustability arguments might be stronger in arguing that this is a policy we need in order to maintain our manufacturing base.

I hope that's an articulate argument. Do you care to react to it? Does that make any sense?

MR. REGALIA: I think you're right to point out that we have been seeing a shift away somewhat from manufacturing towards services and that some of the manufacturing industries have appeared to be struggling. That's a valid point. I think one of the reasons they are struggling, aside from just the general drift of technological advance being perhaps stronger in the intellectual property area than in the heavy manufacturing, is that we have a tax bias particularly against heavy manufacturing.

The depreciation allowances that we have in place today are so seriously damaging, the investment incentive for long-life assets, the very source of assets that deal in railroads and the manufacturing sector, the traditional manufacturing sector employ, that we put a bias on the economy against producing those goods in this country in favor of importing them.

If you move to any of the consumption based taxes where business investment is expensed rather than depreciated and where the corporate tax layer's stripped off, you would be moving to a system where the change from current law is greatest toward those heavily impacted sectors. I think they would improve more than the other sectors under this type of tax reform. That may solve your problem. REP. ENGLISH: That's an interesting argument. One of the common points that I've seen between a number of the leading tax reform proposals, Mr. Army's flat tax, for example. I have a simplified U.S.A. tax. One of the common points is moving to expensing as an alternative to depreciation. Would both of you agree that this expensing issue may be probably one of the most important things we do from a competitive and growth standpoint impacts reform?

MR. REGALIA: I would think it would and also think that it's going to be one of the areas that require the most innovation when it comes to transition rules because of the relationship between old capital and new capital.

REP. ENGLISH: That's right.

MR. REGALIA: When old capital is so disadvantaged if you were then to remove the impediments to the new capital you would create a situation where you could, you know, significantly impair the ability of the older firm to grow. And I think it's one of the areas that's most important.

I think if you, and I looked through much of the testimony the last couple of days, almost everybody mentions the savings and investment disincentives in our current code. One of the primary things that you want to fix and it's one of the most, as I say, will require the most innovation in construction transition rules to address that.

REP. ENGLISH: I have always adhered to the radical thesis that the savings rate would be affected by changes in tax policy. Do all three of you agree with that?

MR. REGALIA: I think contrary to a long bit of what I've read in economic theory, I think in practice I'd have to say, yes. I think it would affect the savings rate and I think when we empirically have been unable to verify that, it's a result of the fact that we are drawing our sample from a system that has had this corruption for years and years and years. And so the data is unable to tell us the real answer.

I think it would make a difference. I think we saw that with IRAs. Originally, when I worked at the Federal Reserve Board, we contended that IRAs would change how you save but not how much you save. And I think we've seen over the years that even the very small IRAs that we've allowed for have probably boosted savings even more than we thought early on.

And that after an initial phase, we'd have to say the switching was minimal and the amount of net new savings was more than we had anticipated and I think that would be prudent for fundamental innovations to the Tax Code as well, that we would improve savings more than any of our economic models would lead us to believe.

REP. ENGLISH: Ms. Saldano any comment?

MS. SALDANO: Congressman English, our issue is death taxes only. It's the only thing that our organization focuses on.

REP. ENGLISH: And I agree with your position and I recommend to you the writings of one of my constituents, Professor Hans Senholdz (sp), retired from Grove City College, whose book, "Death and Taxes" is still the most succinct argument and one of the best for repealing the tax.

MR. ENTIN: One reason that economists fail to understand the effect of the tax burden on savings is that they got mixed up between levels of saving and the rate of saving. If saving goes up, the level of saving goes up, income thrives and as income thrives so does consumption. Both saving and the consumption tend to rise and the rate may not be so much higher, but the level of saving is going to be a great deal higher under these tax systems. And for some years, the rates will be higher as well.

So, I think economists got confused between the levels and rates then a lot of the people who said this would not be a significant incentive are simply mistaken. You would see a result.

REP. ENGLISH: Go ahead, doctor.

MR. REGALIA: I was just going to say one of the most, I think, interesting aspects of the simplified U.S.A. taxes is the deduction for investment in human capital not just physical capital. And in today's economy there's a whole field of economics on indigenous growth theory that speak to this issue of saving rate and growth rates in the economy versus levels of savings and levels of growth in the economy.

And I think that one of the things that we're beginning to see is that the new economy, the Information Age if you will, which uses and relies so heavily on intelligence, training, human capital attributes, will find that the benefits to increasing our human capital may exceed even the benefits from increasing our physical capital. And I think that's a very innovative and important aspect of some of these proposals that are outstanding right now.

REP. ENGLISH: Thank you. And I think not only is it good economics but it is also good as a selling point for the plan. I want to thank all three of you for participating today. I've just had an experience similar to what Mr. Archer had on a November morning in 1994. I have awakened to discover myself chairing the Ways and Means Committee. So, I want to take this opportunity to adjourn. Thank you very much.

END.

LOAD-DATE: April 26, 2000

Document 19 of 46.


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