TAX

':FOUNDATION

TAX FEATURESwww.taxfoundation.org

September-October 2001 Volume 45, Number 5

elation to Honor Bau and Perto Keynote National Conference

FowTho

Senator Max Baucus (D-MT) will accept a Dis-tinguished Service Award at the Tax Founda-tion's 64th Annual Dinner,November 15 at the FourSeasons Hotel in Washing-ton, DC .

Each year the Founda-tion honors a public offi-cial and a private citize nwho have contributednotably to the national

discus-sion ofsensi-ble taxpoli-cies .Senator Baucus will sharethe stage with Robert H .Perlman, Retired Vice Pres-ident - Tax, Licensing an dCustoms, Intel Corpora-tion, a veteran tax execu-tive whose frank testimo-ny before tax committee sin Washington has alwaysbeen noteworthy and

sometimes an occasion for spirited debate .Senator Baucus has worked on the Fi-

nance Committee for over two decades an dwas honored by the Tax Foundation in 1991

for his reasonable, bipartisan approach to ta xpolicy and for his diligent work on complexareas of the tax code . Almost a decade later inJanuary 2001, he rose to the level of RankingMinority Member, and last June he assumedthe chairmanship of the Committee .

His calm stewardship has brought himonce again to the forefront of tax policyleadership .

International Tax Policy Conferenc eAlso Features Hubbard and Weinberge r

Ways and Means Committee Chairman Bil lThomas (R-CA) will keynote the Tax Founda-tion's 64th National Conference beginning atnoon the afternoon of November 15 .

Titled,"Globablization and U .S .Tax Policy :Is America Losing Its Competitive Edge?" th econference will present perspectives fro mCapitol Hill, the Administration, and tax practi-tioners on the question of whether the U.S . taxsystem unduly hinders U .S . firms from compet-ing internationally.

Chairman Thomas will be followed at 12 :5 0by Mark A . Weinberger, Assistant Secretary of th eTreasury for Tax Policy to describe the Adminis-tration's vision for international competitiveness .

At 1 :30, Fred F. Murray, Vice President fo rTax Policy with the National Foreign TradeCouncil, will moderate a panel of economist s

See Conference on page 8

Robert H. PerlmanRet. Vice President,Tax, Licensingand Customs ,Intel Corporation

US. Senator MaxBaucus (D-MT)Chairman ,Senate FinanceCommitte e

FRONT & CENTE RDinner and Conference

1A Menu for the Stimulu s

Package

2Corporate AMT Repeal

3Rep . McCrery on Economic

Stimulus

4Corporate Tax Collections

6Hodge on Tax Simplification 7Prebates and Freebates

8

Business T Reforms Will HelpAmerica Recover

US. Representative Jim McCrery (R-LA) 4-5

2

Pe

ent T. Relief Urged. Over Tem.~cMeasures in Economic Stimulus PackageIn a Fiscal Policy Memo dated the sec-ond of October and addressed to ta xpolicy makers on Capitol Hill and theAdministration, the Tax Foundationurged that sound principles of tax poli-cy guide the selection of tax codechanges in the economic stimulus pack-age currently being formulated .

Lawmakers were urged to adoptpermanent tax code improvementsover targeted, temporary measure sbecause sustainable economic growthrequires permanence . Temporary taxrelief and tax holidays reduce the ta xburden of affected individuals and com-panies in the short run, but they do no tchange long-run economic behavio rand therefore do not promote sustain -able economic growth .

A Menu of Pro-Growth TaxPolicies

Since the Tax Foundation views al ltaxes, whether "business" taxes as tax-es ultimately borne by individuals intheir capacities as consumers, employ-ees and owners of capital, a mixture ofcommendable tax reforms on the indi-vidual and business sides of the taxcode were recommended to the na-tion's taxwriters .

Accelerate Depreciation SchedulesIdeally, all corporations should be

able to expense all investments . Themost ambitious step in this directionthat is politically possible should be atop priority. Congress and the Presiden tshould not pick and choose industries .An across-the-board acceleration ofdepreciation is the best method of de-livering immediate pro-growth tax re -lief without further discriminatin gagainst any sectors or industries .

Eliminate the Corporate AMTLong considered one of the most

complex areas of the tax code, the cor-porate alternative minimum tax hit scompanies when they can least affordit, during an economic downturn . Infact, it is likely that the continued exist-

ence of the Corporate AMT would pro -long the current economic downturn .(See page 3 and McCrery, page 4 . )

Reduce Marginal Rate sMake immediate the marginal rate

cuts scheduled to go into effect in 200 4and 2006. Reductions in marginal rate sare key to any pro-growth tax relief.Marginal rate reductions provide imme-diate relief to all taxpayers subject t othe income tax and promote long-term ,sustainable economic growth .

Reduce Payroll Taxes and Taxe son Saving s

If payroll taxes were loweredenough to eliminate the Social Security"surplus," all workers would get imme-diate tax relief, including those that donot face an income tax liability.As acompanion measure, Congress and thePresident could make immediate th epension and IRA provisions of the Eco-nomic Growth and Tax Relief Reconcili-ation Act of 2001, increasing the limitson allowable contributions to conven-tional and Roth IRAs and other retire-ment savings programs . Private saving sand investment should increase, poten-tially making long-term reform of Socia lSecurity more likely.

Reduce Transportation Excis eTaxes and Spending

A reduction in transportation-relat -ed excise taxes could be coupled witha reduction in wasteful transportatio nspending, especially a limitation onCongressional earmarks for demonstra-tion projects .

Make the Provisions of the 2001Tax Cut Permanen t

All the provisions passed as part ofthe Economic Growth and Tax ReliefReconciliation Act of 2001 sunset by atleast December 31, 2010 . Making all theprovisions permanent will enhance thepro-growth characteristics of the billbecause people will change their funda-mental patterns of behavior.

Permit Cash Method of AccountingAdopt the Joint Committee on

Taxation's recommendation to permi ttaxpayers with less than $5 million o faverage annual gross receipts to use thecash method of accounting . Expand thi srecommendation to include all sol eproprietorships and partnerships .Thiswill complement the acceleration o fdepreciation schedules, which benefit scorporations by granting similar treat-ment to small and medium size busi-nesses .While large corporations tend t omake the news, small and medium siz ecompanies drive the economy. Thesebusinesses will be as affected, if no tmore so, by the terrorist attacks an dshould not be overlooked as a new taxrelief package is crafted .

Reinstate the Internet TaxMoratorium

The Internet tax moratorium ex-pired on October 21, 2001 .This is n otime to increase taxes or open the doo rfor new taxes . Reasonable solutions tothe unlevel playing field are in develop-ment, but imposition of sales taxes onInternet-based commerce is a complexproposition, and a temporary moratori-um should be reinstated .

Reduce Capital Gains Taxes andEliminate Holding Periods

Ideally, all taxes on capital gain sfrom previously-taxed investment sshould be eliminated . Short of this, rate sshould be reduced as far as possible ,and holding period restrictions shouldbe eliminated .

* * *

The Tax Foundation also urge dlawmakers to resist the urge to increasespending beyond what is necessary fo rfighting the war against terrorism . Gov-ernment spending is a poor alternativeto tax relief as an economic stimulusbecause it takes money out of the pro-ductive private sector. 0

3

There is much confusion surroundingthe corporate alternative minimum tax(CAMT). Rep . Jim McCrery's discussionon page 4 is an excellent exposition ofthe issue .

The bottom line is that the CAMTraises little revenue, distorts investmen tincentives, imposes compliance coststhat exceed the amount of collections itproduces, and does not improve thefairness of the tax system .

Briefly, the CAMT is a parallel taxsystem to the regular corporate incometax structure created in 1986 as a re-sponse to charges that some companie swere avoiding the corporate incometax altogether by combining legitimateexclusions, deductions, and credits .Ironically, these provisions were enact-ed in the first place to spur investment .

Now the code contains both invest-ment incentives and a cumbersomealternative minimum tax as a brake onthe effectiveness of the incentives . It i slike driving a car with the emergencybrake engaged. Or as former Senato rBill Bradley stated, to have both invest-ment incentives and the CAMT is " . . . anadmission of failure . It demonstratesnot only that the system is broke, butalso that Congress doesn't have the gut sto fix it ."

Frequently Asked Questions

Q: What corporations are affectedby the corporate AMT?

The IRS says 18,360 corporationspaid $3 .4 billion in CAMT in 1998, th emost recent year for which official dat aare available . By law, all corporationswith annual revenues of $7 .5 millionmust go through the CAMT calculation ,but a recent report by the IRS's Officeof the Inspector General found tha tover 2,100 corporations smaller thanthis paid $25 million in CAMT in 1999 .

Particularly hard-hit are :• Capital-intensive, low-margin

companies like air travel, heavy manu-facturing, mining, and energy produc-tion, because the depreciation sched-ules under the CAMT are less generous .

• Expanding corporations, espe-cially those competing in internationalmarkets, accumulate deductions an dcredits by making new and productiv einvestments but can't use them underthe CAMT.

• Corporations with slumpingrevenues relative to deductions, typica lduring an economic downturn, are hi tparticularly hard by the CAMT, with th eresult that some firms with a loss forthe year end up owing taxes .

Q: How significant is the corporateAMT to federal tax collections ?

CAMT collections account for onlyabout 0 .67 percent of total corporateincome tax collections and 0 .05 per-cent of total federal tax collections .

Q: Why is the AMT unfair ?The CAMT introduces a level o f

discrimination between firms in other -wise similar economic circumstances ,distorting capital distribution and lead-ing to economic inefficiencies .

Q: How would repealing it reduc ecomplexity and compliance costs ?

With the CAMT, corporations reallyhave to keep three sets of tax records ,one for the regular income tax, one fo rthe AMT, and one to determine adjuste dcurrent earnings (ACE), a concept usedin calculating which tax the corpora-tion will ultimately have to pay .

The Joint Economic Committee ha sestimated that CAMT compliance cost scan be 16.9 percent of a company' scosts of filing federal income taxes .Applying this percentage to a recent Ta xFoundation calculation of the direct cos tfor all corporate income tax compliance ,the CAMT costs roughly $6 .81 billionannually, far more than collections . 0

New and. Forthcoming Background Papers from the Tax Foundation .

Publication Summary

General : Background Paper No . 37 ;ISSN 1527-0408 ; 12pp . ; $25 or $60/yr.for 4 issues on varied fiscal topic sTitle : The Economics of Governmen tSubsidies : The Case of Rural Electri cCooperatives and the Propane Ga sIndustryAuthor: William P. Orzechowski, Ph .D .Date : November 200 1Subject : Explains and quantifies th edamage to the competitive, private -sector propane market caused by th eentry of government-supported rura lelectric cooperatives .

Publication Summary

General : Background Paper No . 38 ;ISSN 1527-0408 ; 16pp . ; $25 or $60/yr .for 4 issues on varied fiscal topic sTitle : A Primer on the Corporate Incom eTax : Incidence, Efficiency and EquityIssue sAuthor: Michael L . Marlow, Ph .D .Date : December 200 1Subject : Explains how the economi cburden of the corporate income tax fall son capital and labor, how the distributio nof this burden varies by industry andover time, and how this economi cknowledge changes the fairness debate .

Publication Summary

General : Background Paper No . 39 ;ISSN 1527-0408 ; 16pp . ; $25 or $60/yr.for 4 issues on varied fiscal topic sTitle : Fundamental Tax Reform andBorder Tax Adjustments : An Introductio nAuthor: William P. Orzechowski, Ph .D .Date : December 200 1Subject : Explains how international taxsystems use border tax adjustments t oequalize tax burdens on products avail -able worldwide. Shows that fundamen-tal tax reform in the U .S . could accom-modate this system but questions th enecessity of doing so .

4

~' mess T •Refo WillHelp ericaRecover

by US. Representative Jim McCrery (R-LA)

Recently, the Department of Commerc eannounced that America's Gross Domes -tic Product declined in the third quarterof 2001 . That comes as little surprise t othe hundreds of thousands of American snow looking for work .

Economists can debate whether w eare truly in a recession—defined as tw oconsecutive quarters of negative growth .Fortunately, there is consensus in Con -gress that we don't need to sift throughRome's ashes tomorrow to know that itis burning today.

Recognizing the gravity of the situa-tion as documented by experts fro macross the political spectrum and newlyunemployed citizens across the nation ,the U.S . House of Representatives ap-proved an ambitious yet responsibleeconomic stimulus package (H .R. 3090)on October 24. Combined, the provision swill help businesses with liquidity prob-lems, stimulate capital expenditures, ai ddisplaced workers, and put money in th ehands of consumers .

Among the many beneficial provi-sions of the bill, the repeal of the corpo-rate alternative minimum tax and th epermanent extension of the exemptio nfrom Subpart F for active financial ser-vices income merit more thoroughexplanations .

Contrary to popular opinion, th ecorporate AMT does not increase taxcollections so much as it speeds them up ;it is the prepayment of future taxes . Cotn-panies subject to theAMT receive credits ,which have economic value and whichcan be used to offset future regular ta x

Jim McCrery is a member of the Hous eWays and Means Committee, and he isthe Chairman of the Subcommittee onSelect Revenue Measures.

liability. As a result, the corporate AM Tmight more properly be called an inter-est free loan to the government, which i srepaid by Uncle Sam to offset futureregular tax liability.

The insidious nature of the corpo-rate AMT lies in the fact it strains cash-flow and threatens employment whe nthe economy is weakest . During theeconomic downturn from 1989 to 1991 ,nearly half the largest companies inAmerican were paying the AMT.

The non-partisan Joint Tax Commit-tee recently estimated 23,000 companiesin America will be AMT payers in tax year2001 and that repeal would save them a naverage of $1 .1 million, money whichcould be better spent on capital invest-ments or avoiding layoffs . In fact, theJoint Tax Committee's estimate of theone-year cost of a simple repeal of theAMT has nearly tripled since April, re-flecting their belief that the economicslowdown is pushing more and morestruggling businesses into the AMT.

As if that were not enough, the cor-porate AMT's complexity imposes signifi-cant burdens on all companies, eve nthose who have no AMT liability. Thi scomplexity led the Joint Tax Committe eto recommend repealing the corporat eAMT earlier this year as a way to simplifythe tax code .

Moreover, leaving in place the cor-porate AMT would undermine our oth-er efforts to stimulate the economy.Two of the most common paths to AMTliability stem from its different treat -

ment of depreciation deductions andnet operating losses . It would be ashame if we allowed the corporate AM Tto negate the benefit of these economicstimulus provisions included in theHouse-passed measure .

Finally, the House bill properly com-bines AMT repeal with an immediateredemption of the interest-free loansbeing held by the government (als oknown as AMT credits) . It makes no

FRONT & CENTE R

sense to strip from the hooks this ill-designed provision only to continue it sstranglehold on businesses who haveaccumulated billions in pre-paymen tcredits . The redemption provision in theHouse bill will immediately provide $2 5billion in liquidity to cash-strapped busi-nesses . This is not a retroactive tax cut ;rather, it is an overdue repayment ofinterest free loans held by the govern-ment. The immediate stimulative effec tof this provision is clear.

By comparison, proposals whichrepeal the corporate AMT but allow accu-mulated credits to be redeemed only tooffset future tax liability provide muchless liquidity in the short-run, yet cos talmost the same over ten years .

Also included in the package was apermanent extension of the exemptionfrom Subpart F for active financial servic-es income . The provision, which has beenfrequently mischaracterized in the las tfew weeks, merits a more thorough expla-nation . One critical point, in particular, hasbeen lost in this debate . The provision inthe House bill does not confer some ne wtax break on this industry ; rather, it is anextension of current law and is supportedby a broad, bipartisan coalition .

The current Subpart F exemptionlevels the playing field for U .S . financialservices companies . Under current law,

American businesses competing overseasmay defer federal taxes on their interna-tional income until the money is re-turned to the United States . While tha tprovision in our tax code is permanen tfor all other applicable business sectors ,the deferral rules for active financialservices income are subject to the on -again-off-again vagaries of the extenderprocess . Because our foreign competitorsdo not pay current taxes on their over -

The insidious nature of the corporate AMT lies in th efact it strains cashflow and threatens employmentwhen the economy is weakest.

5seas income, deferral is critical if U .S .financial services companies are to com-pete on level footing with their foreig ncounterparts .

And, if the Congress fails to extendthe current Subpart F rules for activefinancing income, currently set to expir eat the end of this year, it will result in asubstantial and targeted tax increase onthe already burdened financial service ssector. Another temporary extension ,similar to those passed by the Congressin past years, would avoid a tax increase ,but it would also continue to force finan-cial services companies to fight uphillagainst their international competitors.

Today, financial services companie spricing a long-terra deal cannot assum ethat active financing Is a permanent fix-ture of the tax code .The impact is easyto see . Assume France has an effectivetax rate of 25% . If Citibank and DeutscheBank are competing for the same busi-ness in France, Deutsche Bank prices it s

Permanent exemption from Subpart F rules for activefinancing income is not just a matter of convenienceand predictability; it is critical to the competitivenessand vitality of American financial services companies .

offer knowing it will pay current French

manufactured in the U .S . Sixteen thou-

taxes at the 25% rate (German tax law, as

sand Caterpillar jobs are directly relatedwell as the law of most other industrial-

to export sales, and 32,000 supplierized nations, provides for permanent

jobs are tied to these export sales . Ifdeferral) . By contrast, Citibank will make

Caterpillar cannot offer competitivean offer which assumes that it will pay

financing abroad, their ability to thrive

the 25% French tax in the first 'ear or

in a global marketplace is diminished .two and then, when the current deferral

In short, U.S . jobs are at stake .

regime is scheduled to expire, that it will

The importance of making this pro -

pay the 35% U .S . rate . Permanent deferral vision permanent can also be seen in th e

is therefore critical to financial service

flavor of mergers of multi-national finan -

companies, especially since their prod-

cial services companies . Between 199 8and November 2000, there were 40 merg-ers/acquisitions involving a U .S . and aforeign financial service company. In 32of those cases, it was a foreign acquisi-tion of a U .S . financial services company.This trend must be reversed . Providingfinancial services companies the sametreatment given other U .S . companies i spart of the solution to a tax code whichencourages companies to move off-shoreand instantly become more competitive .

Fortunately, a broad, bipartisan ma-

jority of the Ways and Means Committeejoined me in advocating a permanen textension of the rules for financial servic-es companies . While there are other ex -tenders in the bill, many of which hav eadvocates who have pushed permanency ,the case for Subpart F is vastly different .Making the provision permanent is notjust a matter of convenience and predict-ability ; it is critical to the competitive-ness and vitality of American financia lservices companies .

I applaud Ways and Means Commit -tee Chairman Bill Thomas (R-CA) fo rincluding this provision in the economicstimulus tax package . Like the bill's bipar-tisan cosponsors, he recognized tha tmaking the deferral rule permanent forfinancial services companies as it is todayfor other industries is critical to interna-tional competitiveness .

There are, of course, many othe rprovisions in the House-passed bil lwhich will help give life to our sputter-ing economy. And there are good ideaswhich did not make it into the House bil lbut which the Senate may include i ntheirs . But one thing is sure—the econo-my needs a shot in the arm ; hopefully,our colleagues in the Senate will recog-nize that and work with us and wit hPresident Bush to enact a meaningfu leconomic stimulus package by the end ofthis month .The time for rhetoric an dposturing has long-since passed . e

The Tax Foundation invites nationa lleaders from all perspectives tocontribute columns in Tax Features,generally alternating between the majo rparties . The opinions expressed are no tnecessarily those of the Tax Foundation.

Without a permanent exemption fro mSubpart F for active financing income, i tis difficult for Caterpillar to negotiat ecompetitive contracts looking severa lyears into the future .To give you a nidea of the potential impact on U .S .jobs, Caterpillar sells abroad approxi-mately one half of all of its machine s

nets are priced to reflect themulti-yearnature of these contracts .

Permanent extension is not jus timportant to international finance com-panies . It is also critical to Americanmanufacturing jobs . Consider Caterpil-lar, which sells and leases high dollarproducts around the world and require scompetitive financing to completethese transactions . Many of these dealsare multi-year supply contracts fo rwhich Caterpillar provides financing .

6

New Report on Co)ws Rising Coll

rate Income Ting S Corps

America's corporations have paid moreincome taxes every year since 1992 ,and federal collections are estimated totop $200 billion in 2000, according to anew Tax Foundation Special Report,

"The Corporate Tax Burden ."According to Tax Foundation Chief

Economist John S . Barry, author of thestudy, "Every dollar in taxes paid b yAmerican business actually comes ou tof the pockets of customers, employeesand shareholders — all of whom need aboost right now. "

The report calls the corporate in-come tax "one of the most burdensomeand economically inefficient taxes inthe code ."

In addition to extracting over $20 0billion in federal corporate incom etaxes, the corporate income tax als oimposes on workers, owners, and cus -

tomers the indirect costs of complyingwith the Internal Revenue Code's mos tcomplex sections .

The Rise of S Corporation sThe report also notes the prolifera-

tion of S corporations and other corpo-rate structures that do not pay the cor-porate income tax . Like regular C cor-porations, S corporations give owner slimited liability and freely transferableownership rights .

But S corporations are allowed t opass income through the corporatestructure tax-free, reporting their earn-ings on the personal tax returns ofowners, escaping the double taxationthat shareholders of C corporationssuffer when their companies pay th ecorporate income tax and they paypersonal tax on dividends .

Publication Summary

General : Tax Foundation Special ReportNo . 107 ; ISSN 1068-0306 ; 12pp . ; $1 0or $50/yr. for 6 issues on varied fisca ltopicsTitle : The Corporate Tax BurdenAuthor : John S . BarryDate : October 200 1Subject : Compilation of the latest dat aand trends on federal corporate tax col-lections, accompanied by general discus-sion of corporate tax incidence .Tables : Federal Corporate Income TaxReceipts in Constant and Constan tDollars, FY 1970-2000; Federal Corpo-rate Income Tax, 1950-Present ; Averag eEffective Tax Rate on Corporate Profits ,FY 1970-2000 ; Corporate Profits as aPercentage of National Income BeforeTax, FY 1970-2000 .

Federal Corporate Income Tax Receipts in Constant 2000 DollarsFiscal Years 1934-200 0

$ 300

$ 275

$ 250

$ 225

'34 '36 '38 '40 '42 44 '46 '48 '50 '52 '54 ' 56 '58 '60 '62 '64 '66 '68 '70 '72 '74 '76 '78 ' 80 '82 ' 84 '86 '88 '90 ' 92 '94 '96 '98e ' 00e

Source : Survey of Current Business, Department of Commerce ; and Tax Foundation calculations .

$ 200

$ 175

$150

$ 125

$100

$ 75

$ 50

$ 25

$0

7

:TimeTo Raise the Noise Level

For nearly 65 years, the Tax Foundatio nhas argued that the tax code should b esimple, stable, neutral, and favorable t oeconomic growth . At a recent lun-cheon we hosted in New York, we dis-cussed how far the tax code has drifte daway from that ideal .

Titled "Tax Simplification : How toMove From Study to Action," the pur-pose of the luncheon was to ask theleading experts on the tax code's com-plexity to identify the areas of the taxcode most ripe for simplification and t odiscuss ways in which lawmakers coul dbe motivated to simplify the code . Whatwe learned is that there is broad agree-ment on which parts of the tax codepose the most complexity for taxpayers ,but little agreement on what it will taketo get Congress to act . As one partici-pant noted,"There is no constituenc yfor tax simplification ."

Last year, however, Congress took asmall step in the right direction byinstructing its own tax experts at th eJoint Committee on Taxation °CT) toconduct a study on the tax code's com-plexity. This spring, the JCT delivered amassive three-volume, 1,300 pagestudy—itself a testament to the code' scomplexity.

The Committee's staff director,Lindy Paull, told our audience that ther eis no single source of complexity in th etax code . Rather, tax complexity i sbrought on by a combination of forces ,including : (1) the law's lack of clarityand readability ; (2) the use of the Feder-al tax system to advance social policies ;and, (3) the interaction of Federal taxlaws with State laws and the laws offoreign countries .

Leading the study's list of tax codeprovisions that deserve elimination o rreform is the individual and corporateAlternative Minimum Tax (AMT) . Creat-ed in response to charges that a handfu lof wealthy individuals and corporationswere able to avoid paying income taxes

by using vari -ous deduc-

Scott A. HodgeLions and cred- Executive Directorits, the AMT

Tax Foundation"no longerserves thepurposes for which it was intended,"says the Committee . Indeed, within 1 0years,"the number of individual taxpay-ers required to comply with the com-plexity of the individual alternativeminimum tax will continue to grow . . .[reaching] more than 11 percent of allindividual taxpayers ."

Another serious problem facingindividual taxpayers is the lack of astandard definition for what is a "quali-fying child ."Taxpayers who try to deter -mine whether or not they are eligibl efor the dependent exemption, th eearned income credit, the child credit ,the dependent care tax credit, and thehead of household filing status, all facea different definition of what is a "quali-fying child ." Simplifying these defini-tions would benefit millions of taxpay-ers who claim these various credits anddeductions .

Speaking for the Bush Administra-tion, Pamela Olson, Deputy Assistan tSecretary of the Treasury, reported thatthey are developing a three-pronge dstrategy to promote tax simplification .First, they are looking for steps they cantake to weed out needless complexitywithout waiting for Congress to pas slegislation .They have found a good dea lof complexity resulting from regula-tions, rules, and court decisions thatcould be corrected by executive order.

They are also compiling tax simpli-fication measures to include in nex tyear's budget submission to the Con-gress .The challenge the Administrationfaces, however, is what can be don ewithin the constraints of the now dwin-dling budget surpluses . Ironically, manyof these simplification measures wouldbe "scored" as losing revenues for the

Treasury even though they would béne-fit millions of taxpayers . As Wall Stree tJournal Editor Robert L . Barley wrylyobserved in a column about our round -table discussion,"Congress won't abol-ish the outmoded AMT because, well ,the more of the middle class it traps th emore revenues it raises ."

For the long term, economists atthe Council of Economic Advisers arestudying a number of proposals to fun-damentally overhaul the tax code, in-cluding the flat tax and the nationalretail sales tax . Any Administrationaction on these proposals will have t owait for a second Bush term .

Echoing the findings of these pub-lic sector studies is an important jointproject of the American Bar Association ,the American Institute of Certified Pub-lic Accountants, and the Tax Executive sInstitute . The significance of thi sproject should not be missed . Themembers of these organizations are th elawyers, CPAs, and corporate tax profes -sionals who make a good living navigat-ing the tax code on behalf of their em-ployers and clients . If the Code is socomplex that even they can't agree o nits meaning, then it's too complex foreveryone .

Last year, they issued their own setof recommendations for simplifying keyareas of the tax code . Like the Joint TaxCommittee, these professionals calle dfor eliminating the individual and cor-porate AMTs, simplifying the definitio nof dependent children, eliminating thephase-outs of numerous tax provisions ,and simplifying the taxation of capitalgains .

As we've seen in Washington allyear, tax debates typically generatemore rancor than harmony. So it's heart-ening to see that tax experts inside andout of government are in such agree-ment over where to simplify the taxcode . But Washington will not act toreform the tax code until the nois elevel from average taxpayers become stoo great to ignore . It's time to startshouting . t,

8

TAX FEATURES©

Tax Features@ (ISSN 1069 -711X) is published bi-monthly by the TaxFoundation, an independent501(c)(3) organizatio nchartered in the District o fColumbia . Annualsubscriptions to th enewsletter are $15 .

James C . Miller III, Ph .D .Chairman, Policy Counci l

Joseph O . Luby, Jr.Chairman, Program Committee

Michael P. BoyleVice Chairman, Program

Committe e

Scott A . Hodg eExecutive Directo r

Bill Aher nEditor & Communication s

Director

John S. BarryChief Economist

Alicia HansenStaff Writer

J . Scott MoodySenior Economis t

Vernetta Scot tAdministrato r

Tax Foundation(202) 783-276 0(202) 783-6868 Faxwww.ThxFoundation .orgTF@TaxFoundation .org

Conference from page 1

discussing tax reform as it relates to inter -national provisions . Speaking to this subjectare Peter Merrill, Principal Partner, Pricewater-houseCoopers ; Daniel J . Mitchell, Senior Fel-low, Heritage Foundation ; and Jane Gravelle ,Senior Specialist at the Congressional Re -search Service .

The Taxpayers' Perspective

At 2 :15, a panel of four corporate execu-tives will present the taxpayers' perspectiveon U.S . international tax policy. Mike Boyle ,Vice President for Tax and Audit, MicrosoftCorporation, will moderate, and the speaker s

will be : E . Dan Leightman,Vice President -Taxes at Cooper Industries ; James McCarthy,Director of National Government Relations fo rProcter & Gamble ; Robin Beran, Director o fCorporate Tax for Caterpillar Inc . ; and KatrinaDoerfler, Director of External Tax Affairs fo rCisco Systems .

The Administration's PerspectiveAt 3 :15, Joseph Luby, Jr.,Assistant General

Tax Counsel, Exxon-Mobil Corporation, wil lintroduce two speakers who will discuss howthe Administration balances tax and trad epolicy : International Tax Counsel Barbara An-gus from the Department of the Treasury, an dGrant D. Aldonas, Under Secretary of Com-merce for International Trade .

Finally, former Director of the Office ofManagement and Budget James C . Miller II Iwill introduce R . Glenn Hubbard, Chairman o fthe Board of Economic Advisers, who wil lspeak on the prospects for tax reform .

Rebates, Prebates, andNow Freebates

Recent events have made Americans mor esympathetic to the work performed by civi lservants like firemen and postal workers . Nowadd IRS workers to the list .

Congress's idea of rebating, in advance, thetax relief that would come from the new 1 0percent tax bracket (hence prebates instead o frebates) forced the IRS to send out 93 millio nchecks and 93 million separate letters explain-ing what was going on .

They got those colossal mailings out ontime, but apparently that was not enough grieffor weary IRS employees already consume dwith putting together the more than 1,00 0forms, instructions, and worksheets necessaryfor next year's tax returns .

Lawmakers are now getting set to offe rfreebates—checks to people who paid noincome taxes in 2000 and won't owe any in

2001 . If the new proposal becomes law, theIRS would have to go through the same rigam-arole all over again, sending out checks toeveryone who wasn't sent one before, and alsoto everyone who got a check for less than themaximum amount .

That's about 50 million more checks, an dprobably 50 million more separate letters . Isn' tthe anthrax disaster a sufficient burden on th eU .S . Postal Service right now ?

If Congress and the White House are com-mitted to putting cash in the pockets of low-income workers who do not pay income tax -es, they can spare postal and IRS employees bycutting the payroll tax and allow workers t okeep their own money in the first place . f,!

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