TAX FEATURESwww. .taxfoundation.org

November 1997 Volume 41, Number 10

For 60th Anniversary, Foundation Bringsual Conference and Dinner to D .C.

Sinc e193 7

TAXFOUNDATION

_Kenneth Kies, Chief of Staff at theJoint Tax Committee, will provide a noverview at the National Conferenceof how theJr(' views the issue of dy-namic scoring.

For the first time in its 6 0years of monitoring fiscal policies ,the 'Iax Foundation brings its An-nual Dinner — with National Con-ference in tow — to the nation'scapital . Scheduled for Thursday,November 20, the annual black-tieevent will be held at the Four Sea-sons Hotel in the Georgetown sec-tion of Washington, D.C .

This year, the Tax Foundatio nhas chosen to honor Senator JohnBreaux (D-La .) with its Public Sec -tor Distinguished Service Award ,and GTE Corporation Chairmanand Chief Executive Office rCharles R . Lee with its Private Sec -tor Distinguished Service Award .

The service awards are pre-sented annually at theFoundation's Annual Dinner. (Seerelated story, page 2 . )

Senator Breaux, who joine dthe U.S . House of Representative sin 1972, was elected to the Unite d

States Senate in 1984 to fill Senator RussellLong's seat . A senior member of the Fi-nance Committee, his Democratic col -leagues elected him to serve as ChiefDeputy Whip in 1993, a position he contin -

ues to hold today.Mr. Lee assumed the position of Chair-

man and CEO at GTE in 1992. Prior to that,he had served as President, Chief Operatin gOfficer, and a Director of the corporatio nsince 1988. Mr. Lee joined GTE in 1983 ,leaving his position as Senior Vice Presi-dent-Finance at Columbia Pictures Indus -tries, Inc . Before joining Columbia, he ha dbeen Senior Vice President-Finance at Pen nCentral Corporation .

Earlier in the day, Executive Directorand Chief Economist J.D. Foster, Ph .D., wil lpresent the Tax Policy Service Award — re-named the Norman B . Ture Award for Ser-vice Towards Sound Tax Policy, after the far-sighted late economist — to syndicated col-umnist James Glassman for his promotion ofsound tax policies in the media .

The topic for this year's National Confer-ence, scheduled for the afternoon of the An-nual Dinner, is "A Progress Report on Dy-namic Revenue Estimating ." The issue ofrevenue estimating — or, more particularly,how to make official revenue estimate smore accurate — has become more impor-tant in recent years, clue to the strict budge trules binding every tax bill . The Treasury

Annual Dinner continued on page 3

Senator John Breaux (D-La.) 4-5

The Tax Code as Scape GoatDon't Scrap It —Fix It!

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A 60-Year Tradition of Honoring U .S. LeadersFrom Byrd to Breaux, Taft to Ture, a Distinguished List

When Senator John Breaux (D-La .) and Charles R. Lee, Chair-man and Chief Executive Officer of GTE Corp ., receive the Ta xFoundation's Public and Private Sector Distinguished ServiceAwards at the Annual Dinner in Washington this month, they wil ljoin a long and distinguished list of award recipients . Over thepast six decades, the Tax Foundation has used its annual dinner t ohonor some notable American business and political leaders wh ohave worked toward building a sensible tax system .

Two U .S . Presidents have been honored : Herbert Hoover i n1948 (for his role as head of the Commission on Organization ofthe Executive Branch) and Dwight Eisenhower in 1960 . Numerou sSecretaries of Treasury have been honored, including Henry Fowle r(1966), George Shultz (1974), William Simon (1975), and Jame sBaker III (1985) . Some of the most notable congressional leadersto accept the Tax Foundation award include Senator Robert Taft(1949), Chairman of the House Ways & Means Committee WilburMills (1958, 1968), Senator Everett Dirksen (1965), and the father-son team of Senator Harry F. Byrd (1941, 1955) and Senator Harr y

E Byrd, Jr. (1973) .In addition, fou r

Chairmen of the FederalReserve System havebeen honored by theTax Foundation at itsAnnual Dinner : Willia mMcChesney Martin, Jr.(1961), Paul McCracken(1971), and Paul Volcker(1980), and AlanGreenspan (1992) .

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Many members ofthe private sector havealso taken leadershippositions in promotin gsound tax policies ,thereby earning th eesteem of the TaxFoundation . In 1951 ,Lewis Douglas, Chair-man of Mutual Life

4_ `1

1

Insurance Co ., was+~

l € :

recognized for hisaccomplishments .

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ik Similarly, AT&T Chairma nFrederick Kappell (1967), GM Chairman Richard Gerstenberg (1972), GE Chair-man Reginald Jones (1977) have been recognized at the Annual Dinner. In recentyears, such distinguished business leaders as Alcoa Chairman Paul O'Neill (1991 )and Mobil Chairman Alan Murray (1992), and Hewlett-Packard Chairman Joh nYoung (1994) have been honored for their contributions to the national fisca lpolicy discussion .

Last year, the Tax Foundation chose to honor Dr. Norman 'Pure, long one of thenation's most respected public policy analysts, and a major driving force behin dthe 1981 tax cut . Dr. Ture passed away earlier this year. S

Martin Feldstein, Chairman of Presi-dent Reagan's Council of EconomicAdvisors, receives the DistinguishedService Award at the `83 Dinner.

Secretary of Treasury George Shultzwas the Tax Foundation honoree a tthe Annual Dinner of 1974.

Tax Foundation Annual Award WinnersSelected Years

194 119481949195419561960196 11962196 51968197 1197319741975197619771980198 1198 219831985198 719881989

1990

199 1

1992

1993

1994

1995

1996

1997

U .S . Senator Harry F. Byr dPresident Herbert C . Hoove rU .S . Senator Robert A . TaftSec . of Agriculture Ezra Taft Benso nWhite House Chief of Staff Sherman Adam sPresident Dwight D . Eisenhowe rFed Chairman William McChesney Martin, Jr .Gov. Nelson A . Rockefelle rU .S. Senator Everett M . DirksenU .S . Rep . Wilbur Mill sCEA Chairman Paul W. McCracke nU .S . Senator Harry E Byrd, Jr .Sec . of Treasury George P. SchultzSec . of Treasury William E. Simo nU .S . Senator Russell B . Lon gGE Chairman Reginald H . JonesFed Chairman Paul Volcke rSec . of Defense Caspar W. Weinberge rU .S . Rep . James R . Jone sCEA Chairman Martin FeldsteinSec . of Treasury James A . Baker Il lU .S. Senator Daniel Patrick Moyniha nU .S . Rep . Bill Arche rUSX Chairman David Roderic kU .S . Senator Lloyd Bentse nYoung & Co . Chairman William S . KanagaU .S . Senator Bob Packwoo dAlcoa CEO Paul H . O'Neil lU .S. Senator Max Baucu sMobil Chairman Allen E . MurrayFed Chairman Alan Greenspa nUSX Chairman Charles A . CorryU .S . Rep . Sam M . GibbonsHewlett-Packard Chairman John A . YoungU .S . Senator William Rot hTexaco Chairman Alfred C . DeCrane, Jr.U .S . Senator Sam Nun nDr . Norman Tur eU .S . Rep . Phil CraneU .S . Senator John Breau xGTE Chairman Charles R . Lee

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Conference and Dinner Come to Washington

Informing the Public for Six Decade s"Facts & Figures" Has Symbolized Foundation 's Mission

Keeping the public informedabout national, state, and loca lfinances was one of the primar ypurposes for the launch of the TaxFoundation in 1937 . To that end, theorganization decided early on t omake publicly available aone-step referenceguide to importantgovernment tax andexpenditure data . Thefirst Facts & Figures onGovernment Finance —titled Tax Facts & Figures —was published in 1941 . Forthe first time, widely scatteredfacts on tax collections, publicexpenditures, and public debtwere assembled in one conve-nient and concise handbook — aboon particularly to federal, state ,and local policymakers, to editor sand reporters, and to professors and

students . Readers quickly learned t oappreciate the incorporation of bot hhistorical and intergovernmental

aspects of government finances . Forexample, for the first time theycouldpick up one reference book andsee that federal tax collections between1913 and 1940 had jumped from $668

million to $4 .73 billion (or 607%)— and that state tax

collections had climbedeven more, from $30 0

million to $3 billion (o r909%) . (Several tables

later, they could learn tha tunemployment compensa-

tion taxes were the primar yreason for the soaring state tax

burden . )For many years, Facts &

Figures was published biennially,though in recent years the Tax

Foundation has updated the dat aannually. The 32nd edition, edited

by Scott Moody, will be available i nearly 1998 . sf

Annual DinnerContinued from page 1

Department and the Joint Committeeon Taxation (ITC) have long relied o na "semi-static" method of estimatingrevenues, one which assumes that taxpolicy has little impact on human be-havior. Many economists have urgedthe government to adopt what theybelieve is a more realistic, "dynamic "method, which would take into ac -count taxpayer reactions in consump-tion and saving patterns that taxpolicy changes induce .

Since the Republicans captured theHouse and Senate in 1994, political ana -lysts have noted an increased likelihoodthat such a methodological change mayoccur. In fact, in 1996 the JTC estab -lished a panel to consider how and i nwhat circumstances a greater range o ftaxpayer-feedback effects can be rea -

sonably incorporated into the estimat-ing methodologies .

The half-day conference November20 will explore the pluses and pitfall sof the Treasury Department and the JTCturning to a dynamic revenue estimat-ing model .

Former Director of the Office ofManagement and Budget James C .Miller III will kick the conference off askeynote speaker at 12 :45 p .m ., with anaddress that focuses on "Straight Shoot-ing: The Important of Accurate RevenueEstimates" Dr. Miller is now Counsello rat Citizens for a Sound Economy an dCo-Chairman of the Tax Foundation'sPolicy Council .

Kenneth J . Kies, Chief of Staff ofthe Joint Tax Committee since 1995 ,will follow Dr. Miller with a "View fro mthe Joint Tax Committee . "

The remainder of the afternoo nwill feature two panel discussions :

• Panel One, titled "What We'veLearned and Where We're Going," willbe moderated by Arthur Andersen'sGerald Godshaw, Ph .D., and will in-clude three JTC analysts : Senior Econo -mist Peter Taylor, Ph .D., who has bee ninvolved in JTC's Tax Modeling Project;and Senior Economist Bill Sutton andEconomist Pamela Moomau, Ph .D . ,both of the JTC's revenue analysis staff .

• Panel Two will focus on "SomeFriendly Advice : A View From the Out-side." Moderated by Coopers &Lybrand's John C. Wilkins, the speakerswill include Gary Robbins of Fiscal As-sociates, creator of a respected generalequilibrium econometric model ; EricEngen, Ph .D., a Senior Economist in theFiscal Analysis Section of the Board o fGovernors of the Federal Reserve Sys-tem; and Jane Gravelle, Ph.D., a SeniorSpecialist in Economic Policy at theCongressional Research Service . 0

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The Finance Committee hearingsearlier this fall highlighted publi cdissatisfaction with the operation of th eIRS . It was particularly troubling tohear that one citizen agreed to pay$50,000 to the IRS because it would b echeaper than proving his innocence .Even if these situations are isolated,given the two percent audit rate, wecannot afford to ignore them . In fact ,Congress has already begun its work torestructure the IRS and reform itsmanagement .

Many in Congress are also usin g

By Senator John Breaux (D-La .)

these cases of IRS mismanagement topush for drastic changes in the federa ltaxation system. They are correct insaying that the complexity in ourcurrent tax code has enabled these IRSmanagement problems to fester. Theyare also correct in saying that simplifi-cation would go a long ways toward seliminating that problem.

"Scrapping the code" entirely andgoing to a one size fits all" approach

The TaxCode asScape GoatDon't Scrap It—Fix It!

"[S]crapping the code" entirely is neithe rthe most simple nor the most effective

way to reduce the complexity in our taxcode and reform the IRS. Infact, th e

economic and- social costs ofdoing somay far outweigh the benefits sometaxpayers might gain under aflat ornational sales tax. the current system.

does seem fair and simple on paper.With the flat tax, the selling point isthat everyone would pay the samepercentage of tax on their taxableincome and filing taxes would be a seasy as filling out a postcard . One ratedoes not solve all of the problems ,however. The complexity in our taxsystem does not occur because we hav edifferent rates . It is simple to apply anytax rate to taxable income . Thedifficult part is determining whatconstitutes taxable income .

FRONT & CENTE R

With the national sales tax . spend-ing, not working, would be taxed . Intheory, this would reverse the negativeeconomic implications that can b eassociated with a narrow-based incometax .

In reality, however, "scrapping th ecode" entirely is neither the mostsimple nor the most effective way toreduce the complexity in our tax codeand reform the IRS . In fact, the eco-nomic and social costs of doing so mayfar outweigh the benefits some taxpay-ers might gain under a flat or nationalsales tax .

The transition costs of scrappingour current code would be great an dcould undermine any economi cbenefits gained through a pure flat taxor national sales tax . For example ,switching to a consumption tax couldresult in taxes on existing savings andexisting capital . Any portion of existin gsavings used to finance consumptio nwould be taxed more under thes eproposals than under the currentsystem. Similarly, existing capital couldnot be further depreciated once th enew consumption tax was imple-mented. Owners of capital would haveto pay on their gross, rather than thei rnet, return on investment .

Because these investments weremade without prior knowledge that theoverall system would be changed ,lawmakers would be compelled toprovide relief to taxpayers . A numberof exemptions, including an exemptionon all existing savings and capital ,could be used for transition relief .However, transition relief wouldnarrow the tax base leading to in-creased tax rates and an erosion of th eeconomic benefits expected under aconsumption-based tax system. Oncesubjected to the legislative process, it isinevitable that the new tax syste mwould be less than uniform and les sthan comprehensive .

Assuming a flat or sales tax could

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be implemented in a way that avoide dthese transition costs and increasedAmerica's long-run growth rate, not al lAmericans would benefit from the newsystem. For example, the current flattax proposals repeal the earned incometax credit, deepening the poverty

among millions of working families .Moderate income families may

benefit from a flat tax because of theexpanded exemption for initial income .These benefits would be reduced ,however, by the loss of persona ldeductions for such things as mortgageinterest, pension contributions and

state and local taxes . All progressiveelements of the current tax systemwould be repealed under the nationalsales tax, leading to an even moreregressive tax system. New saving andinvestment would be tax free, a largerbenefit for wealthier families than for

poor and moderat eincome Americanswho must spendthe majority of theirincome on con-sumption fo rcurrent needs. Inshort, none of thecurrent economicstudies of either theflat or national sale stax can accuratelypredict whether theeconomic gainsunder these propos-als are great enoughto offset the losse sfor poor andmoderate incometaxpayers .

Most importantly, many studiesshow that simplification of the curren tincome tax system could lead to thesame economic benefits of a pure flator national sales tax without theinevitable costs of trying to scrap theentire code. Congress began t osimplify the code in the 1986 tax act .

Congress should return, with increase dvigilance, to this goal . We shouldcontinue to broaden the tax base andreduce the loopholes and specialinterest provisions . Through furthertax simplification, we can reduce th enegative intrusion in the economicdecisions of workers, families, an dbusinesses . We can achieve the samegoals of more savings, more work, an dmore investment without the burden-some costs and uncertainty of "scrap -ping the Code" .

The American economy hasprospered as never before despite th ereal and perceived inefficiencies in th etax code . As lawmakers, we should b eresponsible in addressing the problemswith the tax code but we should alsobe careful not to make a politica lscapegoat out of our tax system .Federal revenues depend on th evoluntary compliance of America ntaxpayers . We, as member of Congress,are the trustees of that system . 0

The Tax Foundation invites a nationa lleader to provide a `Front and Center "column each month in l'ax Features. Theviews expressed in these columns are notnecessarily those of the Tax Foundation .

Many studies show thatsimplification of the currentincome tax system could lead tothe same economic benefits ofapureflat or national sales taxwithout the inevitable costs oftrying to scrap the entire code.Congress began to simplify th ecode in the 1986 tax act.Congress should return, wit hincreased vigilance, to this goal

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TaxConcepts that Made a Difference

"Tax Freedom Day" and "Tax Bite in the Eight HourDay" Help Americans Understand Level of Taxation

Since 1937, the Tax Foundation has relied on a variety of analyses and symbols to help Americans better understand the

role taxes play and the changing level of taxation in society — all with varying levels of success .

One of the first such efforts revolved around the story of "Henry Subur-

ban" (seen at right), introduced in 1948 and featured every few years for a

quarter-of-a century. Henry's role was to demonstrate the many ways that

ordinaryAmericans encounter direct and hidden taxes on a daily basis .

Yet no Tax Foundation creation has had a greater long-term impact on

public perceptions than that of "Tax Freedom Day" and the "Tax Bite i n

the Eight-Hour I)ay. "The Tax Bite was first introduced in 1954 (see box below), to provide

a way for Americans to better visualize that portion of the budget dedi-

cated to taxes . The Foundation has updated the Tax Bite in the Eight-Hour

Day annually since then . (In recent years the Tax Bite analysis has bee n

included within the annual Tax Freedom Day study.)The concept of Tax Freedom Day actually precedes the Tax Bite by six years : Its origin can be traced to Florida business-

man Dallas Hostetler, who devised the idea in 1948 and registered it with the U .S . Copyright Office in 1953. When he retired

in the early 1970s, he assigned the concept to the Ta x

Foundation, which started publicizing the date in 1972 (se e

article below) .The date represents an average effective tax rate for the

nation as a whole, which is arrived at by dividing total taxe scollected (at all levels of government) by Net Nationa l

Product . The calculation is then depicted as a portion of the

calendar year. Thus, with the nation's tax rate projected at

35.2 percent in 1997, 35 .2 percent of 365 days is 128 days .

The 129th day — May 9 — represents Tax Freedom Day . t,

Monthly Tax Features, Vol. 16, Number 4April 1972

Taxes Take More Bread Tha nFood, Clothing and Shelte r

Tax Freedom Day, some -thing less than a national hol -iday, will come earlier thi syear, on April 27, says Ta xFoundation .

By that date the averag eAmerican will have earne denough to pay his Federal ,state and local tax bills fo r1972 .

On a daily basis, the Foun -dation calculates the averag etaxpayer this year is puttin gin 2 hours and 34 minutes o fhis eight hour day to pay fo rgovernment, about three min-utes longer than he works topay for food, clothing an dshelter combined .

On a weekly basis the bit eon the average America nthrough withholding taxes ,sales taxes and hidden taxe sin the price of most things hebuys, as well as his weekl yshare of property and othe rtaxes, takes 12 hours and 3 0minutes worth of his 40-hou rpay .

For the man who likes to ge tthe heavy job out of the wayfast, he can, suggests Ta xFoundation, work straigh tthrough until April 27 . By theend of the first 117 calenda rdays of the year, his pay wil lcover his 1972 tax bill .

Monthly Tax Features, Vol. 1, Number 1August 195 4

THE TAX BITE IN THE 8-HOUR DAYAre you shocked by the fact that all government—Federal, state an d

local will collect about $90 billion in taxes this year? Probably not ,because that figure is just too big for most of use even to understand .

How about this one : would you be shocked to discover that you wor kmuch longer to pay taxes than you do to buy food ; that you work nearl ytwice as long for taxes as you do for your housing costs, and four timesas long for taxes as for your clothing or your transportation ?

Putting the tax burden on a daily work basis for the first time, the Ta xFoundation (a private research organization) as discovered that it takes a$4,500-a-year man 2 hours and 35 minutes of his eight-hour work day t oearn enough to pay for taxes . The taxes included are both direct an dindirect, not forgetting the taxes hidden in the cost of many things webuy .

In contrast to this heavy tax burden, the same man works only I hou rand 37 minutes to pay for food for his family . He works I hour and 2 4minutes of each day for housing costs, 36 minutes for clothing, and 4 2minutes for transportation .

Here is how his eight-hour work day is divided :

Toearn money for

Needed Tim e

Taxes 2 hr. 35 min .Food 1 hr. 37 min .Clothing 2 hr. 24 min .Transportation 36 min .Medical and personal care 23 min .Reading and recreation 20 min .Other goods and services 23 min .

T(nAI 8 hr.

If you wonder where thee recent Federal tax reductions fit into thepicture, here is the answer: last year this man worked 2 hours and 4 0minutes to pay for his taxes . On that basis we might guess that he save sabout two minutes of the time spent working for taxes whenever the gov -ernment knocks a billion off its tax take.

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"The City of New Orleans "Meets the Golden Fleece

Senator Proxmire, where are youwhen we need you ?

Bill Proxmire, as many will hopeful-ly remember, was a Democratic senato rfrom Wisconsin who, among his otheraccomplishments, periodically handedout a Golden Fleece award . The GoldenFleece signified an exceptionally egre-gious waste of taxpayer money by thefederal government .

Why do we need Senator Proxmiretoday? Why indeed! The Congress i ssupposedly now under the control o fthe party of less government, less spend-ing, lower taxes, and the free market.

If Senator Proxmire were still in office today, he would no doubt be pre -paring to award the U .S . Congress col-lectively for their fleecing of the Ameri-can taxpayer. What is their sin ?

On Friday, November 7, the Senatepassed a measure bailing out Amtrak

once again. The House is expected t odo the same. The amount involved i s$2 .3 billion. The vehicle was a tax break .Specifically, Amtrak is now entitled todeduct its current losses from incometax paid by freight railroads in the year sbefore Amtrak was formed in 1971 . Inother words, Amtrak has been given a26-year plus net-operating-loss carry -back to apply against the taxes actuallypaid by companies that no longer exist .

Will this make Amtrak solvent? Ap-parently not . According to publishedreports, Amtrak will still need to bor -

JD. Foster, Ph.D.Executive Director& Chief Economis tTax Foundation

row to meet payroll and pay expenses .In other words, Amtrak is and will re -main a black hole financially, and Con-gress is about to toss $2 .3 billion of thetaxpayer's money down that blackhole . A classic Golden Fleece .

A few basic facts on the economic sof the rail : Slow-speed trains are highlycompetitive in areas of high populatio ndensity and over relatively short dis-tances . Hence the strength of th enortheast corridor for Amtrak .

Why is Amtrak in trouble? While la-bor costs and other factors get much o fthe attention, the primary reason i sAmtrak maintains routes that canno t

compete with the airlines on afull-cost basis, such as those toTexas from the East Coast . De-pending on details, it wouldcost between $285 and $1,00 0to take the train from Washing-ton to Dallas ; it costs betwee n$352 and $1,342 to fly. So farso good . The train ride wouldtake about two days, the fligh tabout two hours . Game. Set .Match for the airlines .

Amtrak obviously must hol dfares down to compete with the

airlines for travelers on long trips suchas Washington to Chicago and Chicag oto Dallas . But how can it keep its fareslow when its costs for these long runsmust be enormous? Answer : It usesprofitable lines such as the northeastcorridor to cover some of the losses inthe unprofitable lines . Fortunately forthe northeast corridor consumer, thereare viable alternatives to rail in the in-cluding bus, car, and plane . ThusAmtrak is limited in the amount it cangouge its northeast passengers to subsi-dize passengers heading elsewhere .

Why does Amtrak keep these un-economical lines running? Certainly noprivate company would do so voluntari-ly. Enter the U .S . Congress . Congresscompels this irrational and failure -bound fleecing of the taxpayer becaus eall those money-losing lines reach intothe districts and states of some verypowerful Members of Congress, manyof whom are in the Republican an dDemocratic leadership . Let me intro-duce you, for example, to the Republi-can leader in the Senate,Trent Lott .

The strangest element in this sa dtale is the role of Senator Bill Roth (R-Del .), Chairman of the Senate FinanceCommittee . As Chairman of the com-mittee with jurisdiction over taxes, Sen-ator Roth knows full well this is bad ta xpolicy. A 26-year tax loss carrybac kagainst taxes paid by companies thatno longer exist? (As stalwart defendersof the Code, the Committee staff mus tbe absolutely gagging over this proposal .)

As a well-known conservative an dall-around sensible legislator, Senato rRoth's continued support for this fail-ing government-supported busines swould be hard to explain except tha this state is criss-crossed with Amtraklines . But wait! His state is also rightin the middle of all those profitabl enortheast corridor routes that subsidizethe unprofitable routes in the rest ofthe country. In other words, the citi-zens of Delaware are subsidizing al lthose folks who like the romantic two -day trip to Dallas .

Republicans celebrated a big elec-toral victory on the Tuesday before theSenate vote to pour more taxpayer dol-lars down the Amtrak drain . They evenwon the northeast trifecta: Governor-ships in Virginia and New Jersey andthe New York City mayor's race . Andthey held onto the hotly contestedNew York congressional seat vacated b ySusan Molinari . National Republicanswould probably like to ballyhoo thes evictories as signifying the popular as-cendancy of their ideas of a smaller, lessintrusive government . But that's kind ofhard to do when the showcase at theRNC is stocked with Golden Fleeces . G

If Senator Proxmire werestill in office today, hewould no doubt bepreparing to award th eU.S. Congress collectively

for their fleecing of th eAmerican taxpayer.

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New Studies Explore Regressivity of Sin Taxes, International Tax and Trad eTAX FEATURES ©

Tax Features© (ISSN 0883 -1335) is published 10 time sa year by the Tax Foundation ,an independent 501(c)(3 )organization chartered inthe District of Columbia .Annual subscriptions to th enewsletter are $15 .

Co-Chairman, Policy CouncilDominic A . Tarantino

Co-Chairman, Policy CouncilJames C . Miller III, Ph .D.

Chairman, ProgramCommitteeJoseph Luby

Vice Chairman, ProgramCommitteeE . Noel Harwerth

Executive Director andChief Economis tJ.D . Foster, Ph .D .

Tax CounselLynda K . Walker

Director, CorporateDevelopmen tRenée Nowland

Editor and AssociateDirector/Communication sDirectorStephen Gol d

Tax Foundation(202) 783-2760 Te l(202) 942-7675 Faxwww. taxfoundation . or gtaxfnd@intr.net

Two new Tax Foundation BackgroundPapers, released this month, focus on the un-derlying causes of market distortions associat-ed with specific U .S. tax policies — one i n

the area of international tax policy and th eother in the area of excise tax policy .

"Promoting Trade, Shackling Our Traders,"Background Paper No. 21, by J.D. Foster,

Ph.D, Executive Director and Chief Economis tof the Tax Foundation, challenges the ratio-

nale behind the current U .S. policy of world-

wide taxation. The policy, observes Dr. Fos-ter, was developed and adopted long ago, be -

fore the principles of free trade were widel yaccepted, before international trade had be -

come an important dimension of the U .S .economy, and before the development ofhighly efficient international capital markets .

Policymakers enacted such policies as a re-sponse to the fear that American firms woul d

flee the U .S. if the tax playing field were tilte d

in favor of foreign investment .Using examples of different methods o f

taxing foreign-source income that Congresscould adopt, Dr . Foster shows how currentU.S . worldwide taxation often places a typicalmultinational American company at a compet-itive disadvantage against foreign-based busi-nesses .

Dr. Foster likens the arguments underly-ing current policy to those favoring trade bar-riers against more effective foreign competi-tors . "It is irrelevant whether a foreign loca-tion offers a more competitive environmen tdue to lower wages, lower energy costs, low-er regulatory costs, or lower taxes . Domesti cpolicies designed to offset these advantage sare protectionist in nature and counterpro-

ductive to prosperity in practice ."Just as expanding international trade

opens markets, increases consumer choice ,and ultimately contributes to stronger econom-ic growth, moving U .S . tax policy away fromworldwide taxation towards "territoriality" —i .e ., allowing income to be taxed solely in th ecountry where it is earned — would havethose very same consequences, concludes Dr.Foster. "It makes little sense," he says, "to pur-sue a policy of improving the opportunities fo rU .S . companies to compete abroad throughtrade policy, only to shackle them againthrough tax policy."

"The Regressivity of Sin Taxes : The LifetimeTax Burden of Taxes on Alcohol and Ciga-rettes," Background Paper No . 22, by AndrewLyon, Ph.D., and Robert M . Schwab, Ph.D . ,

compares annual distributional analysis to five -year and lifetime distributional analysis for tax -

es on alcohol and cigarettes .

Their research challenges that the standardview that transitory shocks to income and life-time consumption smoothing lead to an over -estimate of the regressivity of taxes on con-sumption of goods . When controlling for tran-sitory changes in income, their lifetime simula-tions found that incorporation of the full life -cycle does not alter the regressivity of taxes o ncigarettes relative to the annual analysis .

In the case of alcohol, Professors Lyon andSchwab found that controlling for both transi-tory effects and life-cycle effect reduces theregressivity of taxes relative to annual mea-sures . However, the alcohol tax remains firmlyregressive, with the lifetime poor spending a40 percent larger share of their income on al-cohol than the lifetime rich . of

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