ripon forum spring 2001
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Publisher
The Ripon Society
Pn:1>dent
H on. Bill Frenzel
Executive Di rector
Lori HlI.~u
Cornrnaniaarion Oiftcrw, Edi tor
fuhleigh Roberti
Design! An Direction
Christina F. Vali,
Cover Photognph
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Cl 2001
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THE
RIpON F ORUM
Contents VOLUME 36 · NUMBER I · SPRING 2()() !
New Beginnings .. ......... ... ...... ... ......... .... ........ .. .... ............ .......... ... 3 A R ipon E ditorial
Burying the Death Tax .... ...... ...... .................... ..... ........ ... ....... ... ... 4 US. R epresentative Jennifer D unn
A Ripon Interview with Arlen Specter The Power of The Pardon ....... .... .. .... .. ............ ... .... .. ..................... 6 A shleigh R oberts
Congressional Inaction Threatens U.S. Companies ... .. ...... ...... ... .. 9 Kenneth j Kies
The Global Agenda ............. ............. ... .... ............................ ........ 12 Us. Trade R epresentative R obert Z oellick
A Ripon Interview with Senate Majority Leader Trent Lott A 50-50 Senate: Will It Work? ................................. ... ... ... .... .. .... 17 A shleigh R oberts
Putting People First ... ... ..... ... ...... .... ...... ... ................................... 20 US. R epresentative J im Kolbe
The Ripon F"qrllm (1SN 0035-5526) is published quarterly byThe Ripon Society.
The Ripon Society is a research and policyorganiution. It is headquartered in Washington, D.C., with National Associate memben throughout the United Statcs. Ri pon is suppon ed by chapter dues, individual con tributions, and re\'Cnues from its publications.
Comments, opinion edi torials and lcltcn to the magazine should be: addressed to: The Ripon Forum, SOl Capi tol Court, NE Suite 300, "'Vashington, D.C. 20002 or may be: transmi tted e1ectroniully to: [email protected]
New
Beginnings
subtle. but significant change has occu rred in
Washington. The Republican Party is growing up. The
back-bench bomb throwers ate gone, replaced by thin
but determined Republican majorities. T he l07,h
Congress exhibits a quiet maturity. marked with new
confidence and a long-overdue sense of unity.
By moving quickly on President Bush's tax plan, Repub
licans have demonstrated the strength with wh ich they plan
to govern. l'vlcmbers are focusing more on inclusion and less
on the divisions that have derailed Republican efforrs in the
pas!. This style is highl ighted by the COP's se rious effor! to
support its President and to enact the cornerstone of the Bush
agenda.
The newfound Republican unity is a sign to the country
and the world that the Grand Old Party is ready to govern. By
late March, the U.S. House of Represematives had passed unani
mously the centerpiece of President Bush's budget plan, a 5958
billion l O-year across-the-board cut in income tax rates. Shortly
thereafter, it passed the second portion of Bush's plan and ap
proved a 5400 billion tax cur for married couples, including the
child tax credit.
The bill quickly moved to the U.S. Senate. While the
chamber surprised some when it passed a S1.28 tri ll ion bud
get resolu tion, observation of the legislative process teaches
that compromise usually accompanies reform and relief. Sen-
Ripon Fon..m • Spong 2001
are acrion was no different, and our working majority provided a
Republican victory.
Compromise is a natural part of " II legislation, and Republi
cans still have much to be happy about. T he fact rhat Democrats
acknowledge that a tax cut will be enacted is a testament to a
more mature Republican Party. The tax debate is no longer a de
bate whether Americans will have tax cuts. It is now a discussion
over how much and what kind of tax relief will he enacted.
Republicans have struggled long enough with thei r message
and their differences. And, it appears as though the internal shake
down is over. The Republican unity that was able to pass signifi
cant tax rel ief in both houses underscores the Party's discipline
and readiness to lead the nation.
T he message is simple. When Republicans work tOgether,
they can drive public policy. T he diversity and independence of
Republicans makes unity difficult, but the lO7'h Congress has so
far proved it is not impossible.
That's good news for Anlcrica. Adult leadership in both the
executive and legislative branches will do much to restore the
public's fa ith in government. The new Republican marurity is
producing a major win for the Parry and for America.
Maintaining that unity will be the key to
legislative victories in the 107m Congress. If
the trend is continued, America has great
things ahead in this legislative session.
J
CA1/grwwomu1/ }mniftr DU1/1/
on Root is the principal owner of GM Nameplate, 2n equipment supply company based in Seattle, Washington.
Over the last four decades, he and his partners employed hard work, perseverance, risk and skill to turn a 14~
employee business into an enterprise that supports 1,000 workers and their families.
He has paid his fair share of taxes and is an active participant in the community.
Yet, at 65, eve rything he has built is threatened by the estate tax, better kn own as the death tax, which will be levied against the value of hi s busi~ ness above $675,000 at a confisca tory 55 percent rate. H e wou ld like to pass the business along to his chi ldren, but
since he cannot afford the estate plan that would be required to pay this high tax he is not optimistic.
I t shou ld not come to this.
Bernreen t 797 and the late t BOOs, the death tax was instituted on three separate occasions to fund wars. In each case, it
was quickly repealed. ]n 1916, however,
the death tax reappeared to help finance World War I and has remained with us ever since. As is the case with ~tempo~
rarl taxes, the federal government con~
tinues to justifY the death tax by redefining its social intent.
What was once a temporary tax [Q
fund a war became a means to prevent the accumulation of wealth or [Q meet
other government ob ligations. The t ruth is that there is no social value to the death tax because it underm ines the principles on which our country was founded and the principles on which our country has thrived: hard work, risk~taking and saving.
President George W. Bush ad~
dressed the nation in February and pre~ sen ted his plan to relieve the tax burden on American families. Central to
this plan is the elimination of the death tax, which looms like a sword of
Damocles over family-owned businesses and fa rms. Those who suppOrt the confiscation of a person's legacy are already working to keep this unfair tax by argu-
Ripon Fonm • Spring 2001
LEGISLATIVE UPDATE
On ApriI4, lOOI'" U.s."-., .... ",,1IIi ... possed ........ fa If ...... tioo Ad. fiIItti&IIt IIIMocnu joiooI ll6 ......... in Ioadci" ... ,..,.w 10 pIoaIIy npaI'" III ~ 1011. PftIi· doot .... issoood • ,taI'.' ....... 1hI 11410 154 Haase .... -. ¥icsIry lor lair· ""'and ..... Iar_icpuwdL· The bill ... heatIs 10 IhI !nit.
mg thal its repeal will jeopardize re
sources needed for other gove rnment
programs, result in the n:-e mergcnce of
a permanent oligarchy, or threaten con
tributions to charities. They are wrong
on an points.
Eve n after funding all programs of
gove rnm en t and accoun ting for
inflationary adjus t men ts. the
federal gove rnmen t will run a 55.7
trillion surplus over the next tcn years.
If one sets aside $3. 1 trillion for debt
reduction, Social Security and M edicare,
as the president and Congress have
agreed to do already, that leaves 52 .6
trillion in overpaid taxe s from
Americans. Only those who reflexively
support hi g h taxat ion and higher
government spen ding can argue that
resources do not exist to eliminate the
unfair death tax.
Ripon Fon.m • Spring 200 j
Recen tly, a group of ou r nation's
wealthiest fam ilies began a cam paign to
save the death tax on the grounds that
it is needed to prevent Ihe accumula
tion of wealth. BUI , what would the),
suggest the children of the fami ly-busi
ness owner or farmer do to pay this tax?
Should they sel1 part of the busi ness or
farm? How many people do they sug
gest be laid off for the sake of this re
distribution of wealth ?
Of course, the owner can simply sell
the business before he or she dies and
then have to pay the 20 percent capital
gai ns tax. This is what thc Frank Russel l
Company in Tacoma, Washington and
Ben Bridge Jewelers in Seattle, Wash
ington dccided to do after calculating
their death tax li abilities. As Mr. Root
will attest, there is no societal benefit
in any of these scenarios.
To bolster their case fo r the death
tax, some have also argued that its re
peal would threaten charitable contri
butions. Aside from the fact that
argumen t implicitly questions the mo
tives of our nation's mOst ge nerous citi
zens, there is simply no evidence to sup
pon this. Time and again, A mericans
have shown that more discretionary
fu nds resuit in more charitable giving.
With the increas ing number of
businesses being created, the apprecia
tion in home values and the prevalence
of 401 (K)s and other retirement savings
plans, more and more middle- income
people arc being forced to pay rhe un
fair death tax. I believe its time the
American Dream is honored, not
taxed.
In March, Jen nifer Dunn introduced the Death Tax Elimination Act 0/2001 (HR-
8) along with U.S. Representative John
Tanner (D- Tenn.). The bill pham out the
death tax over ten years. Dunn passed
similar legislation last year. It passed both
hoults States Congress by majoritits, but died
5
The Power of The Pardon A R ipon Interview with Senator Arlen Specter
By Ash Icigh Ilobcrts
a passion for justice and a candid demeanor,
many Americans know Arlen Specter for his
ualous questioning during U.S. Senate
confirmation and investigation hearings. The three
term Republican from Pennsylvania has a comp licated political legacy that has provoked the ire of
conservat ives and liberals alike. He offers a mix of fiscal conservatism and sociallibcrtarianism. H e is known for his tough
stances on crime and spending. But the Senator is also a dedicated
advocate for women's rights and works tirelessly to secure funding
for women's programs.
As a former district attorney of Philadelphia, fighting crime
has always been his passion. On March 15,2001, Senator Specter
discussed his latest investigation on fo rmer President Clinton's
controversial pardons and how they wiU affect future Presidents.
RF: Throughout your Senate career, many have referred to you
as the Senate "Perry Mason." Ou t of 311 of your invcstigations,
which ones stand out in your mind?
Smalor Ar/~n Sperter: When I was an assistant D istrict Attorney,
I conducted an investigation of corrupt teamster offici31s in Phila
delphia. I started off with evidence compiled by the McClellan
Committee in the Senate, when Bobby Kennedy was their gen
eral counsel. After further investigation, I convicted them all and
sent them to jail.
In the Senate, my most interesting investigation dea1twith Ruby
Ridge. A man named Randy Weaver was charged with gun viola
tions and they sent a virtual army up to Ruby Ridge. They had a
firefight, a deputy marshal was killed and Weaver's wife and son
6
were killed. By the time we got all of the facts together, we made the
FBI change their rules on the use of deadly force:.
RF: In fonne r President Clinton's recent op-ed response to the
Marc Rich pardon and others, he said his pardons were no more
questionable than other presidenti31 pardons. H e cited George
Washington's pardon of the leaders of the Whiskey Rebellion,
Nixon's commutation of the sentence ofJames Hoffia and Carter's
pardon of Vietnam War draft resisters. Senator Specter, do you
agree with former President Clinton or is there something that
makes these pardons different?
Senator Spltler ta/h 'With RF Editor Ashleigh Roberts.
Ripon Forun • Spring 200 I
Senator Arlen Specter: No, I don't agree
with him at all . When you have
Washington's pardons that you re
ferred to, he was trying to bring the
cou ntry together. There were dispar
ate factions at work. That was really
one of the purposes of the pardon .
You could forgive transgressions and
bring the country together. When
President Nixon pardoned Jame s
Hoffa, Hoffa had served hi s sen tence.
He wasn't a fugitive like Marc Rich .
On the Vietnam pardons, that was a
time of great controversy in America
with a very unpopular war. Carter was
t rying to reunite the country. I think
what President Clinton said was a
very lame excuse .
~ -"
Another statutory provision that
I am going to push will require public
disclosure of contributions or pledges
of S5,OOO or more to presidential
libraries. So there is a vel)' important
purpose when taking a look at these
last minute pardons.
RF: So would you agree that there is a
need for a Constitutional amendment?
SenatorArien Specter: Myinc1ination
is to favor one. The objections that
were raised at the hearing were that
they would politicize the process. But
Senators and members of the House
are representatives of democracy and
they are supposed to pay attention to
what their constituents want.
It is ve ry hard to get a two-
thirds vote to override the president
~ on legislation. I believe we only
'" overrode President C linton once,
RF: Since Presidential pardons are an
un reviewable Co nstitutional power
granted to the president, what was the
original purpose of the Congressional
hearings? Smator Arlen Specter discussu the pardon pr()((ss. and I know that we only overrode
President George Bush once on
about 25 or 30 vetoes he issued between 1989 and 1993. Senator Arlen Specter: First of all, there was consideration to
whether there might be a Constitutional amendment. A very
interesting Constitutional amendment had been proposed by then
Senator Walter Mondale in about 1975, to overturn a presidential
pardo n on a two-thirds vote in bot h the U.S. House of
Representatives and the U.S. Senate. We held a hearing in the
Senate Judiciary committee on that point. The general fcelingwas
RF: Some experts say the Constitutional framers were more
worried that Presidents would pardon those convicted oftrea
son rather than with the sale of pardons for money, favors or
votes. Do you think your legislaton will curtail what some
have called a co nstitutional loophole?
that PrcsidentClinton's pardon was so
aberrational as not to go so far as to
have a Constitutional amendment. But
that still could come up.
The investigation has really been
taken over by U.S. Attorney
Mary Jo White in the
"I think that Congress will probably pass legislation like I am suggesting. I think that there will be a very heavy black mark on President Clinton's record."
southern district of New York. A constitutional amendment still
could be a consideration. I am also about to propose legislation
that could affect the pardon process by requiring people like
Jack Quinn, Hugh Rodh am or Roger Clin ton to register as
lobbyists. They tried to do everything very secretly. H ad they
been registered as lobbyists, people would have known what
they were doing and there would have been such a public protest
that I think Clinton would n't have ac tuall y
done that.
Ripoo f orum · Spring 200 I
Senator Arlen Specter: The founding fathers did not rule out
bribery. That is still very much in place. I t would be very
hard to prove because a quid pro quo bribe has to be a pay
ment of something of value in return fo r an official act. It is
figuratively referred to as the Latin expression quid pro quo, so that would be hard to prove, but that is very definitely a
possibility. The power of impeachment does not preclude pros
ecuting a President for crimes. I don't think you can do it during his te rm, although that 's never been decided. But you
7
can certainly prosecute him for criminal conduct after he leaves
office.
RF: Would not the logical solution have been fo r the president
simply to come before the committee and testify as former Presi
dent Ford had done when he pardoned Nixon?
Smator Arlm Spttter: I think he should have. I made the sugges
tion a couple of times. On the Ford model, the committee was
reluctant, really unwilling, to invite him in because of the sensi
tivity of calling a former president. After consulting with Senator
Lott, Senator Hatch and some of my colleagues on the Judiciary
Committee, I wrote to the president and suggested that he submit to questioni ng by myself and a Democratic Senator on the
Judiciary Committee. I suggested in my letter to President Clinton
that this would avoid the circus-like atmosphere of a public hear
ing with a lot of television cameras. It would be done in a profes
sional way in a private office, his office if he wanted. And after
we had a chance to review the transcripts, we would make them
public. We weren't going to keep this a secret, but we would do it
in a more professional way than these highly-publicized Con
gressional heuings.
RF: What do you think is going to happen ? When everything is
said and dOlle, what is the logical outcome of this situation?
Smator Arlm Speller: I think that Congress will probably pass
legislation like I am suggesting. I think that there will be a very
heavy black mark on President Clinton's record. It will be a warn-
8
ing to furure presidents not to be reckless, which I think Clinton was
reckless in pardoning a guy who was a fugitive and then keeping it
a secret. Beth Dozorer-L, the fonner finance director for the Demo
cratic National Committee, was told about the pardon at 11:00 pm
on January 19'i't 2001. The pardon attorney, Roger Adams, didn't
even find out about it until 1:00 am. When he called the White
House to get information about Marc Rich and Pincus Green,
he was told they were, 'traveling abroad.' When that was men
tioned in the hearing room, a loud laugh erupted. You don't ex
actly say that fugitives are on a pleasure cruise or traveling
abroad.
And then Mary Jo White might fi nd something. It will be tr icky water when she talks to Denise Rich and wants to
grant her immunity. It will be the same when she talks with
Beth Dowren and Hugh Rodham. What did Hugh Rodham
say to President Clinton? What did Roger Clinton, the president's
half-brother say to President Clinton? When I was a District
Anorney and ran grand juries, we frequently would find people
willing to implicate higher ups. I think that is candidly unlikely, I"'!"I but it's possible. I.tr.I
AJhleigh Rob"tJ ;J the editor o/The Ripon Forum.
VITAL STATS: ARLEN SPEaER
Birth Date: ftbnwJ 12, 1910
Pony: !epublian
Political Philosophy: Consemtiw DO K ..... ia; liberal DO SO<iaI issues. Hot I.sue: (rime
Home: Philadelpll~ FamllJ: IIarried to Joan L Ie¥y; 2 diIdron IIeIIpn: jewisb
Educadan: UoMristy oIl'toosJMoia.l.A. (1151); IaIo uw !dIooI.lU. (1956)
....... 1IanaI ~. s.n.U.!.lenut(I98I. ,......); District ~ PIoiIadeIpioia (1966-74); Auimnt c-.I. Wamo Conomissioo (1964); Assimnr Disrricr ~ Philadelphia (1159-61); UJ. Army (1951·51)
E-mail Addna: ....... _spemr@spemr ........ ""
Ripon FO!'\IITl • Spring 200!
Congressional Inaction Threatens U.S. Companies US. financial services companies face legislative obstacle
Ily Kennelh J. Kics
he ability of US. fi nancial services companies to compete
in the global economy will depend, in no small pari, on a
seem ingly obscure - bur extremely important -
provision of the Internal Revenue Code that is scheduled
to expire at the end of this year.
T he issue involves the timing of US. tax on income earned
abroad by U.S. financial services companies. Without action by
Congress, U.S. financial services companies after 2001 will begin
to be taxed on income earned overseas by their affi liates, regard
less of when this income is repatriated.
This change is contrary to longstanding tax policy principles
and would create an unwarranted distinction between US. finan
cial services companies and all other types of American businesses
whose US. tax liability on overseas income will continue to be
deferred until the income is repatriated.
The principle of deferral has been imbedded in the United
States corporate income tax since its inception more than 90 years
ago. In 1986, however, a significant lapse in tax policy logic re
sulted in the repeal of deferral for financial services companies.
Congress corrected this mistake in 1997. but only on a tempornry
basis.
Globally engaged U.S. banks, securities firms, insurers and
fmance companies are pushing hard for legislation to make per
manent the application of deferral to the acrive financial services
RJ pon Fon.m • Spnng 2001
income. They stress that the uncertainties created by the tempo
rary narure of Ihe rules has hindered their ability to compete with
foreign-based financial services companies in overseas markets.
The home coumries of these foreign-based companies generally
do not impose tax on income earned abroad. Disrurbing new
data support these competitiveness concerns.
THE 1986 LAPSE From the inception of the corporate income tax in 1909 un
til 1962, income earned by foreign affiliates of US. companies
was not subject to current U.S. tax until the foreign earnings were
distributed to the United States. This rule of deferral applied
regardless of whether the income was derived by manufacturing
operntions or by active financial services operations.
In 1962, Congress enacted a regime - referred to as Qsub
part F~ - that sought to narrow the scope of deferral in response
to revenue concerns. Specifically. Congress was concerned that
some taxpayers might be able to shiff easily moveable assetS off
shore and use those assets to generate passive income that would
escape current U.S. tax. The subpart F rules opernTe to tax cur
rently passive income earned overseas. T here was no intention at
that time to interfere WiTh the availability of deferral in situations
involving income earned overseas through active business opera
tions.
,
I n 1986, Congress amended subpart F to treat all types of
financial income as if it wefe passive, thus eliminating the prin
ciple of deferral for active financial services income. No compel
ling policy justification was advanced at the time in support of
this change. Congress did not scale back the deferral rules that
continued to apply to manufacturing or to other services income
earned overseas.
(
ongress in 1997 recognized the error of the 1986 changes
and restored the historic treatmem of active fi nancial services
income, providing that subpart F does not apply to income
derived overseas by a U.S.-controlled foreign corporation in the
active conduct of an insurance, banking, financi ng, or similar
business. The Clinton Administration at the time acknowledged
that the "primary purpose of the provision was proper. ~ However,
due to revenue constraints, the provision was made effective for
only one year.
The U.S. financial services community fought hard to have
the subpart F provision extended again in 1998 and 1999. In
conjunction with these extensions, Congress enacted substantiaJ
safeguards to ensure that the subpart F active financiaJ services
provision applies only to active business income and cannot be
circumnavigated to defer current tax on passive-type income. The
extension enacted in 1999, as discussed above, expires at the end
of this year.
RUNAWAY HEADQUARTERS FinanciaJ services providers are subject to intense world\vide
competition. U.S. and foreign- based financial services compa
nies compete to provide services to globaJ customers on a global
basis, and must be able to provide these services on razor-thin
profit margins.
Tax costs can materially impacr profit margins. If a U.S.
based company bears a significantly higher tax burden than a
German- based fi rm with respect to its operations in South
America, for example, then the U.S.-based company will be
squeezed out of this market. In the absence of the subpart F
provision for active financiaJ services income, U.S. companies rou
tinely will face a h igher tax burden than their fore ign counter
parts, most of which are not taxed at all by their home countries
on their overseas earnings.
The ~on-again, off-again~ nature of the subpart F provi
sion, in many important respects, is nearly equivalent to no
provision at all. T he pattern of temporary extensions has
meant that U.S. financial services companies cannot plan their
activities - which are long-term in nature and not easily
stopped and started on a year-to-year basis - with any cer
tainty. Meanwhile, foreign-based com panies can depend on
not being taxed by their home countries on activities under
taken ove rseas.
u.s. TAXATION OF FOREIGN ACTIVE FINANCIAL SERVICES INCOME:
10
IIOt
HISTORICAL SUMMARY
Sobpart F Ena<I1d
1961
'-~---------------...."..-Fortip ActiYt FiAancial Servim IIKOIIIe
8m Subject To Current U.S. Tu
Foreicn ActM filancial lomas ,_ SubjKt To eu ... , U.t 1M IoaI Tu
~
I I I 1916
./ '"7 2001
Ly--J Hiuoric: TrtalmeRllemnd F" hRip laM FiIwIciaI
Senices II'ICOIIf
Ripon Forum • Spring 200 I
COMPANY CROSS-BORDER ACQUISITIONS OF FINANCIAL SERVICES COMPANIES
(TRANSACTIONS OVER $500M)
Item Number
2000 ACQUISmONS (JANUARY - NOVEMBER)
Foreign acquisitions of U1 12 Financial services compatlfes
U.S. acquisitions of foreign 4 Financial services companies
1999 ACQUISmONS
Foreign acquisitions of U.S. 8 financiil services companies
U.S. acquisitions of Foreign FinalKial services companies
1998 ACQUISmONS
fomgn acquisitions of U.S. financial services companies 12
U.S. acquisitioRS of Foreign Financial services companies 1
A reflection of the increasingly competitive and globalized financial services industry is a dramatic growth in cross-border merg
ers and acquisitions. Recent data show that U.S. -based financial
services companies arc being taken over by foreign competitors at
an alarming mte. Of the 16 cross-border acquisitions of financial
services companies that occurred in the first 11 months 0(2000, thn:c
quarters involved foreign acquisitions of U.S. finns. Results from 1999
and 1998 are similarly disrurbing. The upshot is that there are fev,rer and
fC\VCf U.S.-headquartered financial services companies.
The life insurance industry illustrates this trend. Today, 13 of
the top 50 United States life insurance companies are foreign
controlled. Moreover, today on ly 9 of the top 30 life insurers
worldwide are based in the United States.
This "runaway headquarters~ phenomenon may be explained
in part by the specter of uncertainty over the subpart F active
financial services provision. Investors may be concerned about
the prospect that a U.S.-headquartered global financial services
firm will be subject to U.S. tax on its overseas operations. Head
quartering a combined firm outside the Uni ted States generally
eliminates this tax cost with certainty.
p,jpon Fon.m • Spring 2001
% of Total Total Value ($M) % of Total Value
7S.0 $48,091 79.8
2S.0 Sl2,140 201
88.9 Sll,796 96.1
ILl SI ,l70 1.9
80.0 SII,l16 76.1
20.0 Sl,SSI 2J.9
ACTION IN 2001 In light of these concerns, the U.S. financial services in
dustry is strongly advocating a permanent subpart F provi
sion for active financial services income and is committed
to seeking its passage thi s year. In this regard, the indus
try was pleased by a recent show of support by the Bush
Administration for the sub part F active financial services
provISIon.
It is up to Congress to act, to make permanent what has
been a staple of the law fo r most of the corporate income tax's
history. A permanent rule will mean more financial services
companies will be headquartered in the United States, which
will support more high-value U.S. jobs and ensure criti- r."I cal financing for U.S. ventures abroad. ...
Ken Kin is a Managing Partner of the PricewaterhouseCoopers
Washington Nfltional Tax Services office and Chair of the firms
FedemlTax Policy Group. Prior lojoining PricewaterhouseCoopers
in 1998, Mr. Kies served as Chief of Staff of the Congressional
Joint Committee on Taxation.
"
u.s. Trade foreign policy
By Robert Zoellick
Edilori Nolt:Prior to being nominated and
conjirmdhylhe US. Sma/em tJxnro; Trade
R1>resenlative for 1m Un;ltd Statts, Robert Zoel/id: gave the optning addms for the
Trans-AI/an/it Polity Ne/work in Vtniu,
Ila!yin Dtctmba ManyobJerwn nQ'Wv;n.v
his Temar/iS as a lorunst for fhe Bush
Adminislralions national security, trade and
foreign poliry. The highlights of his spmh
follow:
he President will need to devote
much attention to building the
basis for governing at home. But,
the world will intrude. Indeed, the
calendar o f already scheduled
events will require President Bush to have
an active foreign policy and nalion al
security agenda.
According to lhe calendar, the Presi
dent wiU attend summits in three regions
of principal st ra tegic inte rest for the
United States: the Americas, Europe and
East Asia. The fourth region that is criti
cal to America's strategic posture, the
Middle East and the Persian Gulf, is on
the brink of sliding into deep dangers that
witi also command President Bush's atten
tion.
"
THE AMERICAS: GETTING SERIOUS ABOUT HEMISPHERIC FREE TRADE
First, the countries of the Western
Hemisphere will convene the Summit o f
the Americas in Qaebec City in April. The
American neighborhood ofTers great op
portunities for the United States, but
troubles are brewing there as well.
Over the past 15 years, much of Latin
America has moved towards democracy
and more open economies and societies.
But democracy and market economies arc
,
still on trial. The Andean region has been
engulfed in crises. Throughout all of Latin
America, elected governments arc strug
gling to show results for their citizens.
Unforrunately, Latin America can no
longer rally support to face these problems
by pointing to a vision of hemispheric free
trade because the Free Trade of the Ameri
cas (FTAA) has slowed to a crawl. When
the western hemispheric leaders meet in
OJlebec City within the new U.S.
Administration's first 100 days, the Latin
Americans will be watching closely for
signs of commitment from Presidem Bush.
They will be most interested in th e
Presidem 's willingness to proceed with a
legislative effort to regain trade promotion
authority (TPA), as the prerequisite to re
storing the free trade negotiations.
Movement on the trade agenda is the
vital sign for the Latins. First, historically,
even dating back to the early 19th cenrury,
U.S. interest in free t rade with Latin
America has been the cornerstone of a
broader u.s. policy of respect for, and interest
in, the region.
Second, within Latin America, hemi
spheric trade initiatives have been inte-
Ripon Fon.m • Spnng 200 I
grally linked to overarching goals of pro
moting economic growth and political re
form. Third, the Latins will wonder, with
some justification, that if the United States,
with all its advamages, is unwilling to face
vested interests that are opposed to open
markets, how can they and other develop
ing democracies be expected to do so.
As a result, if President Bush comes to
Quebec City with good intentions
but without a commitment to TPA
and a trade agenda, the Latin Americans
will be polite, but conclude that the United
States is not serious. Of course, a new
pres idential t rade agenda will require
working closely wilil Congress, including
attendees at this meeting.
Over the past years, the basis for bi
partisan support for trade has been present
in the US. Senate, but has been eroding
in the US. House of Representatives. I ex
pect that the next Congress will want the
President to outline a broader trade strat
egy, extending beyond Latin America. The
Administration will need to thread the
needle on issues such as training and ad
justment assistance, enforcement of agree
ments, protecting the environment, and
support for labor concerns within the
United States and abroad.
EUROPEAN ALLIES
Second, President Bush will take one
or perhaps even two trips to Europe next
Ripon Forun • Spring 200 I
year. First, there is the semi-annual EU
US. summi t during the Swedish presi
dency.1 t is in the first half of the year, when
it is the turn of the EU to be the host. 1
would guess that if President Bush makes
this trip, he would also try to arrange a
stop at the North Atlantic Trade Organi
zation (NATO). The other trip is haly's
G- 7 economic summit in Genoa next
summer.
These summits will give the President
an opportuniry to outline his views and to
hear directly from America's closest allies,
on both economic and securiry topics.
A NEW ECONOMIC RELATIONSHIP Let's look fust at the economic agenda
with Europe. 1nevitably the negotiations,
or worse, the legal conflicts on individual
cases (such as bananas, beef hormones, or
the Foreign Sales Corporation legislation)
will influence the tone and context of the
U.S.-European economic relationship.
TIlese cases loom larger than the value of
trade involved. They go to the heart of the
political reliance on the World T Tade Orga
ni'l..ation (WID) dispute resolution systems.
The real issues in the transatlantic
economic relationship, or course, extend
far beyond these cases. The corporate re
structuring taking place, especially in Eu
rope, is helping to create a de facto, inte-
grated transatlantic market. For example,
last year, European firms announced S241
billion in merger.; and acquisitions deals
with the United States, and U.S. firms re
ported S97 billion dollars of activity in
Europe.
TIle new executives in Europe are n..x:
ognizing that a strong strategic position
requires a foothold in both the United
States and Europe. European companies
not only want the link to U.S. business,
consumer and financial markets, but they
need to stay abreast of the American ad
aptation to make use of these new tech
nologies. Yet we do not know whether the
transatlantic political leadership will work
together to get ahead of, or even catch up
with, the social dislocation and anxiety
created by this deeper integration. These
concerns are often lumped under the term
globalization, bur the changes stem from
technology and fmance as much as global
competition and integration.
Therefore, I believe the larger trans
atlantic economic agenda has three com
ponents. First, we still have the challenge
of overcoming some of the traditional trade
barriers: tariffs, quotas and the use of al
legedly defensive laws that slip into pro
cess protectionism. Agricultural trade still
remains very constrained by barrier.; and
subsidies. Second, we wiU have to deal with the
intersection of deeper economic integra
tion \vith topics that our governments have
traditionally considered areas of domestic
regulation. These might include competi
tion policies, health and science regulation
and privacy protection.
Once differences in these areas slide
into conflicts with political battle lines
drawn, it becomes very hard to work out
compromise arrangements that can meet the
core objectives of numerous parties and con
stituencies on both sides of the Atlantic.
EU Commissioner for Tmde, Pascal
Lamy, has made a similar observation. He
has called for anticipatory efforts to iden
tifY and possibly address these issues. For
13
example, the U.S.-EV safe harbor on in
fonnation privacy may offer an example
of negotiating a solution before a conflict.
Others can contribute to this problem
solving approach, including transatlantic
businesses and legislative groups. For example, it will be difficult to over
come the European fearof genetically modi
fied organisms (CMOs) as long as Euro-
Similarly, with the fall of Milosevic,
the EU and the United States have a real
opportunity to reintegrate the Balkans and
reconnect it with the democratic and eco
nomic trends with the rest of Europe. I
am not saying this will be easy. Countries
like Romania pose se ri ous problems.
Given the antipathy between the Serbs and
Kosovars. the region will remain a secu-
"Frankly, the tougher security questions in the transatlantic relationship will pertain to Europe's periphery."
pean publics have cause to distrust their own
health and regulatory authoritics.
Third, the U.S. and the EU will need
to decide whether their larger, global in
terests in an open, dynamic world system
warrant cooperation to set standards for a
global agenda. Obviously, a new global
neg06ating round in the WTO has little
prospect of success if the United States and
EV cannot agree on how to lead together
while still addressing their specific politi
cal and economic considerations.
FOCUSING ON SECURITY President Bush will also have a signifi
cant security agenda to discuss with his
European colleagues. The European issues
on that agenda will necessitate care, but I
believe they can be handled successfully.
For example, most American officials
recognize the possible benefits of the Eu
ropean Rapid Reaction Force if the plans
are matched by real resources. European
armies need these resources to acquire the
military capabilities necessary to become
more mobile forces. Increasingly, Ameri
cans will look to Europeans to take the
responsibility of insuring that the Euro
pean military force supports, and does nOt unde rmine , NATO cooperation and
interopcrability.
14
rity protectorate fo r many years.
But if the EU can act coherently and
follow through on practical policies con
nected to a long-term strategy, the mag
netic pull of the EU can be powerful.
These countries want to be part of the new
Europe.
Frankly, the tougher security ques
tions in the transatlantic relationship will pertain ro Europe's periphery. Indeed, a
characteristic of the post-Cold War world
is that U.S. attitudes toward Europe will
be increasingly influenced by the narure
of European cooperation with, or opposi
tion to, U.S. ap -
proaches toward prob
lems outside of Eu-
rope.
NEW LEADERSHIP
IN RUSSIA The first case is
perhaps an in-between exa mple: Ru ss ia.
President Putin may
not have a clear strat
egy, but he is demon
strating some strong
inclinations and in
stinct, not surpris-
ingly, related to the oullook inculcated
by the KGB.
While he wants to strengthen the
Ru ss ian state, it is probably through the mistaken means of re
centralization at a time when the rest of
the world is moving toward distributed and
intcgra.ted networks. President Putin also
wants to reassert Russia's influence over
its neighbors. But it is probably without
the Itt:ognition that Russia would be bener
off with independent, secure and
prosperous neighbors.
He also signals that he wants to re
vive Russia's economy, but probably
without giving up prerogatives of state
control. True democratic competition
and a free press are, unfortunately, prob
ably impediments to Putin's plan to restore Russia. President Putin's attacks
on media are not a good sign.
Nevertheless, Putin and his ilk are
hardheaded and practical men. They
recognize Russia's problems. They don't
want a con front ation with the United
States and Europe because they cannot
afford it, and because they appreciate that Russia's economy needs ties to the
wider world.
As a result, I expect President Putin
to seize openings to advance his inter-
flopon Forum • Spong 2001
(SIS in a calculating fashion. But he can
be influenced, especially if the U.S. and
EU aCI together to signal that Russia
will pay a price for ce rtain actions. For
the United States, and I hope the EU,
one of the most sensitive topics will be
Russian support for the proliferation of
weapons of mass destruction and missiles.
MISSILE DEFENSE The subject of missiles raises what I
expect will be the security issue that will
require the most sensi tive handling be
t\vecn the Uni ted States and Europe in
2001: missile defense. J recognize that
some European s only associate missile
defense with President Bush and the Re
publicans. bur I think this is a misrakcn
assumption. Especially with Iran's missile
America might not have been able to rely
on European support if London, Paris,
Berlin and Rome were potential targets for
Saddam H ussein's missiles. And we might
not have been able to win Congressional
amhorization (it was a close vote in the
US. Senate) if it involved the risk of a
nuclear attack on the US. by a Saddam
H ussein with his back against the wall.
Recall the anxiety and dangers in Is
rael caused by Iraqi scud missiles armed with
conventional weapons during the GulfVVar
and multiply it many fold. That is why Is·
rael takes missile defense very seriously, and
has developed with the U.S., an effective
missile defense system called the Arrow.
Given this strategic logic for missile
defense, the U.S. needs to develop systems
that can reduce the threat to US. forces
"Missile defense is not motivated by an American fear that a dictator will wake up one day and decide to take out a U.S. city."
abroad, our allies and at
home. It is not enough
just to defend the U.S.
Funhermore, we
need to examine the pros
peets for diffcrcm types of
missile defense systems,
such as sea- based and
dc\'c1opmcll(, reports from Iraq and (he
turmoil in the greater Middle East. Any
American administration will press ahead
on missile defense.
On the other hand, I believe that the
US. has not done a good job explaining
the strategic logic for missile defense.
Missile defense is not motivated by an
American fear that a dictator will wake up
one day and decide to take out a U.S. city.
Instead, the concern is that some fu
ture Saddam Hussein, or even the present
one, will threarcn security interests in a key
location and then use missiles anned with
weapons of mass destruction to checkmate
a U.S. responsc.
IfSaddam Hussein had had lo ng
range missiles armed with bio logical
or nuclear weapons 10 yea rs ago, we
cou ld have nOt rel ied on plans to bring
half a million troops though Saudi ports.
Ripon Forum • Spong 200 I
boost-phase defenses. These systems
might be more appealing to allies and oth
ers, because they ca n target defenses
against localized dangers and help protect
allies.
I also think it would help to place
missile defense in a larger context by mov
ing more quickly to cut offensive weap
ons. The U.S. and Russia are no longer
nuclear enemies. We don't need huge ar
senals to fulfill targeting plans based on a
balance of terror. There cerrainly are signs
from Russia that it would like to cut of
fensive nuclear forces rapidly, betlusc it
cannot afford its current strategic rocket
forces. And Russia may also have an in
terest in boost-phase missile defense.
In sum, I believe the President will pUI'"
sue missile defense, but he can do so much
more adroitly with Europeans and Russians.
VVe may not agree fully, but the U.S can ex-
plain its strategy better and perhaps meet
some European and Russian concerns.
CHINA: U.S. PDLlCY BEYDND WTD
The President 's third major trip will
be to Shanghai in November for the APEC
summit. This visit will enable the Presi
dent to meet the Chinese leadership with
out all of the formalities and expectations
associated \vith a one-on-one state visit. It
also sets a time frame within which the
Administration will need to shape its
China policy.
Both countries can "map bacbvards"
to plan what actions they might take to set
up the summit. 1 can assure you thar Chi
nese diplomats arc already thinking precisely
in these terms. There is a need for a new
framework for Sino-Amcrican rclations. fu the Members of Congress can tell you, both
parties and Members across the whole political spectrum, have a strong interest in U.S.
policy towards China.
President Bush is going to need [0 build
his China policy on the foundation
of support from a core bipartisan
group in Congress. In doing so, he will no
longer be able to employ China's accession
to wro as a rallying point for a positive
counterweigh t. In fact, the inevitablc
complaints about China's implementation
of in 'NTO agreement are likely to produce
frictions.
Therefore, the Administration will
need to consider how to adjust the alli-
15
anee relations with Japan and South Korea,
given the changes taking place in both coun
tries. It will also have to consider how the
adjustmems with these fWO kt.'Y parOlers will
relate to security relalions with C hina.
I also suspect that uneasy relations
between Taiwan and Beijing will con
tinue to create tension between Wash
ington and Beijing. T he good news is
that Beijing is no longer maki ng threat
eni ng sounds towards Taiwan and its
new President, Chen Shui- Bian. T he
bad news is that Beijing does not trust
C hen or h is party, the O PP, and is try
ing to wea ken both so tha t the O PP will
fail in next year's legi slative elections.
A more flexible and self-confident
leadership in Beijing could have picked up
on Chen's early offerings. They could have
then moved beyond them to reshape rela
tions and created a reciprocal process in
areas like arms control, economic and even
international political relati ons. But
Beijing is limited by its own poli tics of
political succession leading up to the 16m
party in congress in 2002.
INCREASING TENSIONS IN THE
MIDDLE EAST AND PERSIAN GULF Finally, President Bush will face un
happy prospects in the M iddle East and
Persian G ulf region. Anti-American and
Anti- Israeli sentiment is intensifYing in
the Arab countries.
A recent poll conducted by Bir Zeit
University reported that 73 percen t of
Palestinians support some sort of military
operations against U.S. targets in the
region. Th is sentiment has spread to
varying degrees in the Arab world, a world
that is weakened by its stagnant economies'
continued reliance on oil prices, and
internal challenges to legitimacy.
On the other hand, the Israeli public
has undergone a number of blows, the
implications of which will be clarified in
next year's election in Israel. After ten
years of difficult debate, Israel's democracy
"
had come to term s with the idea of a
Palestinian state and a withdrawal from
Lebanon.
Israelis were then shocked by Araf.n 's
unwilljngness to Baf2k's offers, the
outbreak of vio le nce , and mos t
significantly, the hostility of Arabs within
Israel irsel£ No one will do the Palestinians
any favors by suggesting that the United
Nations, or anyone el se, will save the
Palestinians from the need to make hard
compromises.
aity, circumvented mOst of the sanctions
and eroded the international coalition.
Then: arc regular reports about its missile
program. Iraq's nuclear program only lacks the necessary fissionable material. And re·
glonal instability serves Saddam's interests.
THE NEED FOR PARTNERSHIP It is hard to believe that the next four
years will not witness a major challenge to
peace and security in the Middle East,
Persian Gulf, or both. W hich brings me
"It is hard to believe that the next four years will not witness a major challenge to peace and security in the Middle East, Persian Gulf, or both."
I have begun to wonder whether the
Palestinians face even a bigger problem.
Unlike Israel, whose democracy debated
these issues and provided a basis o f le
gitimacy for comprom ise, the Palest in
ia ns do not have a legitimate political
process through which the public can
participate, debate and resolve differ·
ences peacefully.
As a result, the Palestinian leaders are
wary of the reaction, or even violence, from
their own public. Furthermore, the public
has no sense of civic responsibility to com
promise, which is developed through par
ticipatory politics.
In lran, the forces associatt.-rl with Presi·
dent Khatami have been embattled on do·
mestic issues and certainly have not chal
lenged Iran's foreign and serurity policies.
Iran conlinues to deny Israel's right to exist,
and it conlinues to develop long-range mis
siles and nuclear weapons. Iran also refuses
talks with the United States despite an offi·
cial offer. Indeed, Iranian fundamentalists
arc quick to attack anyone who suggests im·
proved relations with the United States.
I n I raq, Saddam H usse in ha s
thrown ou t the inspectors without pcn-
back to my principal point about the Presi
dent and Europe.
President Bush will face a number of
international economic and security chal
lenges in key regions around the globe,
starting early next year. H is relations, and
indeed America's relations with Europe
will increasingly be based on U.S. - EU abil
ity, o r inabi lity, to frame common ap
proaches to this global agenda.
Good transatlantic relations arc nec
essary, but not sufficient.
As Europe's capabilities grow, as I
believe they will, and as regional economic
and security issues become more intercon
nected around the world, the EU and the
United States will need to do more to
gether. They will need to become partners,
or at least cooperative colleagues, on
a global agenda. m Rohut Zot/lick was rtuntly appointtd
Unittd Statts Tradt Rtprtstntati'IJr. Brfort
acupting this position, IN was a follow attht
Gtrman Marshall Fund, a Washington think
tank (1999-2001) and str'fJtd as fht CEO
drsignate lor (ht Center oj Straltgic and
Intt matioua! Sludits (1998-99).
Ro pon Forun • Spnng 2001
A 50-50 Senate: Will It Work? A Ripon Interview with Majority Leader Trent Lott
Ily Ashlcigh Ilobcrls
he 50-50 split in the United States Senate is unprecedented in modern political history. Last month,
The Ripon Forum discussed the historic power-sharing
agreement with Majority Leader Trent Lott (R-Miss).
M any have touted the broad framework. which equally
split committee space, staff and funds ben'lccn Republicans and
Democrats, as the bellwether on how the 107'h Congress will operate.
RF: Mr. Leader,howwouldyoudefine me 50-SO split as it stands
today? What does it mean in practical tenns?
Majority Leader Lott: What it really means is that every vote in
the United States Senate will be a challenge for both sides of the
aisle to come up with a winning margin. Just yesterday, on the 6'"
of M arch, we voted on an important disapproval resolution to
stop a ~ri~s of regulations that Former President Clinton imple
ment~d right before he left office. The regulations were not based
on good science and were going to cost the country's business and
industry sector billions of dollars.
We w~re able to pass that resolution by a bipartisan vote,
with aliSO Republicans and six Democrats. So, as you can sec, it's
tough to make it work. But, in a unique way, it may force the
Senate to work together more than we have in the past when one
side or the other had a signifi cant margin.
RiJXln FQo'UTl • Spring 200 I
MQjrm'ty !JudO' Tunf Loll disCI4m fix 107fh JtJsion.
RF: Press accounts described the process by which you reached
an agreement as difficult, with strong opposition from both par
ties. W hat is your recollection with a month's hindsight?
Majority L tadtr L oti: It was very difficult. It was probably
one of the two or three most difficult things thai I have had
to do since becoming M ajority Leader. When J was first
elected Senate Majority Leader back in 1996, the U.S. Senate
was com pletely balled up. It was a presidential election year.
17
Our Leader, Bob D ole, was running
for Presiden t and the Democ rats did not want him to have any suc
cesses. Nevertheless, we were trying to move his agenda and basi
cally everything was just completely stopped.
"In my opinion, the trial should have resulted in the removal of the President from office, but that did not happen and more to the point, I knew it was not going to happen."
Part of the p roblem and, the
key legi slative iss ue, was what should be done with minimum wage. I had to find a way to get the Senate not only back up and standing, but also
moving forwa rd in order to deal with thi s difficult issue. We needed to do the right thing and figure out what
amount could be passed. The year before last , the Senate had to get through
the Impeachment trial in a way that fulfilled our Constitu tional respon
sibi liti es . We had to find a way to
reac h a reasonable conclusion wit hout doi ng dam age to the Senate or dragging the matter our endlessly.
In my opinion, the trial should have resulted in the removal of the President from office, but that did not happen and more to the poim, I knew it was not going to
happen. So, I had to figure out a way to do my job, protect the Senate and fu lfill the requirements of the United States Constitution. I think we did that, not to everyone's satisfaction, but I think we did that.
"
The third toughest thing that I have had to deal with since I've been Leader brings us back to the current 50-50 divide and
how you pass a system of rules that permit the Senate to function as a legislative body in a politically JUSt way. Frankly, a lot of our people didn't want to deal with it. Some were in denial that
we had lost some seats, that in fact we were in a temporary minority and that we were going to have to deal with the Democrats in a different way than we had in the past.
Wile everyone else was worrying about the Presidential election results, I worked for weeks and months trying to figure out the best course of action for the Senate. I
was reading the rules, writing papers and exchanging proposals
with Minority Leader Tom Daschle, and trying to come to grips with what we were going to have to do. When I presented
that to the Republican Senate Conference, they did not like what
they heard nor did they want to pursue our current course of action. There were quite a few people who said, 'No, we'll do it our way and the Democrats will just have to like it.' WeU, that wasn't going to be possible.
Ripon Forun • Spnng 2001
u.s. Senator Trent lott is the Senate's 16th Majority leader. He is the first Mississippian ever to hold the Senate' s top leadership post. Senator lott was elected Majority leader on Wednesday, June 12, 1996.
] was also concerned that an inside the beltway rules fight
in the Senate would be a distraction from our new Presiden t 's
agenda. I did not want to open the United States Senate's 10Th
session with a rules fight and a filibuster over Rule 25, part h.
I thought a meaningful discussion ahout education, defense,
tax relief, social security and other issues the American people
really care about was in order.
There were a few good men and women in the confer
ence that stood up and said, 'Let's get rC:l1. This is where we
arc. This is what we arc going to have to do, whether we like
it or not, and the most imponanr thing is how we are going
to pass the agenda of the President, the Congress and the
American people.'
I think that we did the right thing. And, I think that even
the people who resisted at that rime, in retrospect, realize
that I did the best I could given the political hand we were
dealt. It was the right thing to do.
RF: Has thi s new arra ngement made "political gridlock"
more difficult and how is it working with regard to the indi
vidual committees and their legislative timetables?
Majority Leader Lott: It has changed the process. Again, we
must have unity and reach across the aisle. That takes a lot of
work. If we do that it may well be we wil l have less gridlock
on the big issues and keep the little ones off the table. It 's
going to be difficult. Every committee is divided 50-50, with
some more partisan than others. While it won't be easy, t be
lieve we can make it work.
RF: How will the 50-50 divide affect the Bush agenda?
Majority L eader Lott: Well first, to even co nsider President
Bush's agenda, we had to p:l.SS the rules, the committees had
to come to agreement regarding funding and then there were
their individual rules. I think now, with that behind us, it will
al low us to con tinue to focus on the substantive issues and
the president's education and tax relief initiatives.
Ripon Fon.rn • Spnng 200 I
RF: Are you as optimistic with regard to the budget and the
proposed tax cut?
Majority !..Lader Loll: I think the fact that we dealt with this prob
lem tllkes that disagreement and fight off the tllble and allows us
to focus on the tax cut. Without question, having a 50-50 Senate
will make the tax cut debate and the results very difficult to achieve.
That is not because of what we did with the rules., but because we
have a 50-50 Senate. With the Vice-President we actually have a
51-50 Senate. But, t believe that if we can get Senators to do their
work and focus, then we can win these tough issues.
RF: Is there an understanding that the current agreement is in
place for the remainder of this session, regardless of possible
change in the Senate?
Majority Lead" IAtt: No. there is not. If the numbers change, ei
ther way, then the rules could very wcll have to be fC-vis ited. Some
committees, however, have reached an agreement for the balance of
this session. Who knows what providence will provide. good or bad. 'The bst time we had a similar siruation, there were nine senators who
died in the next two years and yet the majority never changed hands.
RF: Will you be that lucky?
Majority Leader Lott: Wcl1, we'U just have to see.
Ash/~jgh Rohtrls iJ lhe editor of The Ripon Forum.
............. t, 1IifI ..... , ,,. 'Rhl
•••• 11-11 .. .:: II ... ... ,.." .... ·~IIIIIIIiJllltIIfiIJ .. ;;. F - . .................. JtJi , ~ .
'-d '-, --Sf ' In 1i • ..,IIIIiIi"_I-,;1II ...... I a a,
m
"
Putting People First Congressman Jim Kolbe pushes to modernize the nation's outdated and inefficient Social Security program.
By u.S. Itcprcsenlalivc Jim Kolbe
Congressman}im Kolin
20
or too long, my colleagues and
predecessors have cons idered
Social Security the Third Rail of
politics. My experience, both as a
Member of Congress and as Co
Chairman of the National Commission
on Retirement Policy, has convinced me
that [he American public is ready and
willing to discuss the need to modernize
Social Security, albeit in a constructive,
responsible manner.
It is essen tia l that we address not
on ly the financial shortfal ls looming
in Social Secur ity, but that we al so
modernize the program so that Social
Security is as good a deal for today's
worke rs as it was for yesterday's work
ers. Soc ial Security's benefit struc
ture is based on an outdatt!d portrait
from tht! 1930s: a husband as tht! so le
wage t!a rnt!r with a dept!ndt!nt wife
who remains a t home. As two-carner
househo lds becomt! the norm and the ~typ i cal" family becomes harder to de
fine, Social Security has not adapted.
Thi s failure has resulted in gla ring
inequalitie s between si ngle and dual
earne r fam il it!s , younger and ol dt!r
workers, and among married, divorced
and widowed retirees.
PERSONAL ACCOUNTS ARE
A POWERFUL TOOL As the co-architect ofhvo Social Se
curity reform proposals, I know first
hand how persona l accounts, when
structured prope rly, can be a powerful tool in reducing the financial burden
Social Security will impose on our chil
dren. Moreover, personal accounts are
an effective way to reduce and/or elimi
nate the generational and familial in
equitit!s perpetuated by the current sj'i
tern. SpecificalJy, personal accounts art!:
Flexibl t! - Unlike the current So
cial Security program, with personal
accounts your retirement savings
work for you while you are working or staying at home .
Equitable - A modernized Social
Ripon Fon.xn • Spring 200 I
Security system incorporating pe rsonal accounts wou ld correct many
of the inequalities co nce rning di vorce, dual-earner families and wid
ows' benefIts.
Portable - Personal accounts go
with you as you change jobs, change spouses and enter and exit the workforce. Empowering - Personal accounts provide low- income Americans the
opportunity to create wealth by using their exist ing tax dollars. They also insulate retirement benefits
from political risk. Finally, personal
accounts would establis h pro perty
rights to a portion of your Social Security benefits.
Safe - Every pe rsonal account plan introduced in Cong ress provides workers with the choice to invest in safe, ri sk- free Treasury securit ies.
No one should be fo rced to invest
in the stock market. F iscally responsible - Using cur
rent payroll taxes to pre- pay a por
tion of future benefits will help reduce the $11.3 trillion and currently unfunded obligation looming over
Social Security.
While individual accounts are not a magic bullet, they can be a
powerful tool in restoring fiscal stability and ge ne rational equity to the
Social Security program. T he bipartisan leg islation I have introduced with
Representative Charlie Stenholm (DTexas), H R 1793,establishes personal accounts that are carved out
from existing payroll taxes, enhances the
p rogressive benefit formula of the curre nt sys tem and
actually strengthens the government safety net by increasing the defined benefit for low-income workers. Our plan
Ripon Forum • Spong 200 I
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21ST CENTURY RETIREMENT SECURITY ACT
A Bipartisan Plan to Save Social Security Congressman Jim Kolbe (R-Ariz.) and
Charlie Stenholm (O-Teus)
The Higt1ligt1ts of the Bill
Scored by the actuaries of the Social Security Administration as restoring 15-year solvency to the Social Security program.
Has bipanisan, bicameral support.
Contains no tax increases.
Preservts the existing benefit promises for current and near retirets.
Increases the rate of return for all workers.
Enhances the government safety net.
Reduces Social Security's S1.4 trillion unfunded liability betwetn 2014-2034 by more than 50 percent.
Dots not rely on accounting gimmickry.
Does not rely on projected surpluses to create new general fund liabilities.
Establishes the opportunity for all Americans to create wealth.
Provides individuals with ownership of and control over their retirement assetsincluding the freedom to invest in safe, risk-free Treasury securities.
Rewards work.
preserves current law benefits for existing
and near- retirees, eliminates publiclyheld debt by 2014 and places Social
Security on sound fiscal footing in
perpetuity.
duce our obligation in the future.
The 21st Century Retirement Security Act provides payroll tax relief for all working individuals under the age
of 55 by diverting two percent of Federal Insurance Contributions Act (FICA) taxes into personal Ind ividual
Security Accounts. Wo rkers would be allowed to make additional voluntary co ntributions of up to 52,000 a year to
their individual account. The legisla tion also provides a savings subsidy to help low-income workers build their
individual accounts.
WHAT IS THE
KOLBE-STENHOLM PLAN! The Kolbe-Stenholm Social Security reform
plan is based on the concept of "pre-funding."
Currently, the federal govern
ment is running a surplus of Social Security. This bill would use the
surplus to pre-pay a portion of future benefits to workers now, and thereby re-
The individual accounts in our plan would be modeled on the federal government's Thrift Savings Pl an
21
A RESPONSE TO ISSUES AND CONCERNS
Q. Why is it bfttfr [0 allow indiYiduais to inmt in tht sUKk marktt~ Why not Itt dtt pmmflll ilMSt tht S«QJ Securiry trust fund in the marttt~
A. Government investment dots not addrm the national cry for pmonal ownership and conlfol. Polls demonstrate that Americans want their own stake in the U.S. Kanomy, and more (ontrol oyer their retirement brodin. The current symm provides only a statulory right to benefits that (ongrm may adjust at any lime. Only penonal iccounu offer workers ownmhip of (onnitutionally protemd property.
"oreovu, inmting the trun fund in equities would cauu risk to permute the en· tire ,ynem. This is &tUUSf the symm's solvency, and the ability to provide basic Social Security btnefits. will rise and fall with the performance of the nock market If the market suffers a downturn in a year in which the trust fund ratio already is low, the ability of the Social St<urity symm to provide benefits would be jeopardized.
Undel the 21n Century Retirement Act, the Social St<urity Trun Fund's ability to provide bene fin is not afft<ttd, enn if the market has a bad year.
Once the federal gonrnment's balance shut depends on the performance of the equities market, influencing the market up will become an unavoidable aspect of day-to-day t<onomic decision making in Washington. Political influences will be brought to bear on the choice of Social Security investments. Acquiring significant ownmhip stakes in a large number of corporations has significant consequenm. Moreover, government innnment in private companies would conflict dirtctly with the federal government's role as a regulator of industry.
lastly, simply moving the Irun fund into equities to duck tough choices will not add to national savings. If Social Security did get a higher rate of relUrn , it would be at the COil of lower rates of return in the private savings symm. In other words. it would jun be a hidden til on other invtstments 10 fund current benefit promises of the federal government.
(TSP). In TSP, individuals pe rsonally choose investmen t options, including a stock index fu nd, a bond index fund and
a Treasury securities index fund. Unlike other proposals, our plan would provide individuals with owne rship and con trol over their retirement assets, including the freedom to invest in safe, ri sk-free Treasury securities. It does not force anyone
to invest his or her Social Security funds in the stock market. It 's your money, it's you r choice.
The b ill also strengthens Social Security's safety net by creating a guaranteed minimum benefit that is
more substantial than what the current law provides low- income workers. Moreover, thi s benefit is given
regard less of other factors. Consequently, any inco me from the indi
vidual accounts would supplement, not replace, the enhanced guaranteed Soc ial Secu rity benefit fo r low-income workers.
Our plan makes chan ges in the defined benefit, but in a progressive
manner that in sulate s vu lnerable populations. These benefit adjustments large ly affect mid-to - high income
individuals who would benefit
di sproportionately from the individual accounts.
POli cyma kers may debate the details of the perfect solution for Social Secu rity, but all of us mu st share
a commitmen t to address ing the issue he ad-on. There are few issues more important for C o ngr ess and the
p resident to tac kle than finding a b ipa rt isan consensus to s tr engt hen Social Security for our ch ildren and the
ge nerations that will follow. No matter where one stands on these ideas, we
must begin to tal k honestly a nd
directl y, without resorting to partisan attacks and demagoguery.
If Congress an d the Wh ite H ouse do noth ing, by 2030 the annual cash
defi ci t in Social Security will reac h $814 billion (in 1999 dollars). To help
close thi s gap, th is legislation slowly phases in other changes that would reduce the cash shortfall and eliminate
over 50 perce nt of the 57.4 trillion unfunded liability. While some of these provisions involve some tough choices, as a recent Government Accounting Office report illustrated, they are necessary to ensu re that Social Security
survives for the next generation of r."I ret irees and beyond . ....
us. RtprmntativtJim Kolbt isa Rtpublican
rtprmnting tht fifth District of Arizona. Ht
urvtS as a mtmbtr of tht Appropriations Commit/U.
RJpon Fon.m - Spring 2001
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Because every day, we work with our mortgage lender
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B(' a Part of till' Bipoll So('i(·t~
The annual Rough Riders Award Dinner is May 1, 2001 at the Willard Hotel in
Washington, D.C. Ripon is proud to award Senator Don Nickels, HHS Secretary
TommyThompson, Congressman Michael G . Oxley and Congresswoman Nancy Johnson
with the Teddy Roosevelt Rough Rider saber for their achievements in public service.
QmK"mman Clay Shaw (R-FIIl.) sharts highlighls.from fix Ripon 'fIiial, "Rt!al PlOplt. Rial Progrw" with Ripon mtrnMrs.
THE
RIpON F ORUM 501 Capi/ol Court, NE, Sui/e 300
Washington , D.C. 20002
Clara NdxJI, un altn7lllltdtltgalt.from NnDJrruy. lath with Congrasiof/al Athlisf)ry Board mt!mbffS &nattlr Susan Collins (R-Maint!) Qnd Congrtu'WOmanJenniJtr Dunn (R-Wash.) a/lhe 2000 IUpublieon National Conwntion.
Sma/or Chuck Hagrl (R-Ntb) disctmes flrrign pdirywilh.formn' &prtsn/tQliw and Ripon Srxi(ty Pmidml Bill Frenul.
SECOND-CLASS
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