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8-9U.S. Senator Max Baucus (D–MT)

Tax Simplification Is No SimpleMatter

FRONT & CENTER

www.taxfoundation.org January–February 2002 Volume 46, Number 1

In this issue:

Report on Federal Budget 1TF Conference & Dinner 2Your Tax Dollar 4Who Pays Income Taxes? 6Baucus on Tax Complexity 8New Report on Estimating 10TF Books & Conference 11State Taxes 12Corporate AMT Report 14Foundation Message 15Tax Foundation in History 16

See FY 2003 Budget on page 5

Note to Subscribers:The December issue(Vol. 45, No. 6) wascombined with thisissue.

TAX FEATURESWartime Spending Heralds Return of Budget Deficit

Full report:www.taxfoundation.org/budget.html

With a spurt of federal spending inspired bythe war on terrorism, the President’s Budgetfor Fiscal Year 2003 requests $2.1 trillion intotal spending and anticipates $2.0 trillion in

total receipts, resulting in a modest deficit,according to “The President’s Fiscal Year 2003Budget,” a Tax Foundation Special Report byFoundation chief economist John S. Barry.

With its top priority the war on terrorism,President Bush’s budget defines national secu-rity broadly as having three primary parts:winning the war abroad, protecting America’s

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’05e’00’95’90’85’80’75’70’65’60’55’50’45’40

Defense and Non-Defense Spending as a Percentage ofTotal Outlays, Fiscal Years 1940–2007

Sources: Office of Management and Budget; U.S. Department of the Treasury.

Defense Spending

Non-Defense Spending

VietnamKoreaWWII

“homeland,” and reviving the economythrough increased economic security.

As a result, the Budget includes a largespending increase on defense, a near doubling

of funding for homeland security activities,and a host of new initiatives aimed at creatingjobs and providing Americans with economicsecurity.

Guns Versus ButterNon-defense spending dropped precipi-

tously during World War II and the KoreanWar, but it actually rose during the Vietnamwar, giving rise to the “guns versus butter”debate, with people questioning the will ofthe nation to win a war if it is unwilling tomake financial sacrifices at home (see chart).

This debate promises to be reargued inthe nation’s newspapers for the duration ofthe war on terrorism, because PresidentBush’s budget proposes dedicating a relativelyflat share of total federal spending to non-defense programs, ranging from 73.4 percentto 74.6 percent over the period 2003 through2007.

Present day budgeting is not exactly com-parable with Vietnam-era budgets, however,

2

College Classroom Project Brings StudentsTogether with Corporate And Capitol HillTax Policy Community at Annual ConferenceGenerous donations to sponsor theconference were made by:

♦ Baker & Hostetler, LLP♦ Microsoft Corporation

while other firms made per-studentcontributions to cover the cost ofbringing them to the Tax Founda-tion’s 64th National Conference.

At the conference, students metbusiness leaders, well-known analysts,and other prominent experts whoshape tax policy.

Donors who sponsored studentsto come to Washington were:

♦ Applied Materials, Inc.

♦ Chevron Texaco Corporation♦ Coors Brewing Company♦ Johnson & Johnson♦ PricewaterhouseCoopers LLP♦ Westvaco Corporation

Students who benefitted camefrom Bloomsburg University, GeorgeWashington University, George MasonUniversity, LaSalle University, MansfieldUniversity, Regent University, St. Tho-mas University School of Law (Miami,FL), and the University of Maryland –Baltimore.

Please contact Julie Burden(jburden@taxfoundation.org) aboutbecoming a sponsor next year.

64th National Conference Addresses U.S.International Tax Policy and Its DiscontentsAt noon on November 15th, Tax Foun-dation Executive Director Scott A.Hodge welcomed the large crowd atthe 64th National Conference.

Dozens ofstudents hadtraveled fromcolleges aroundthe region toparticipate inthe Foundation’sCollege Class-room Program(see box below).

Hodge out-lined the theme,“Globalizationand U.S. TaxPolicy: Is Ameri-

ca Losing Its Competitive Edge?” ex-plaining that the conference wouldpresent perspectives from Capitol Hill,

the Administra-tion, and taxpractitioners onthe question ofwhether the U.S.tax system undu-ly hinders U.S.firms from com-peting interna-tionally. He thenintroduced thekeynote speaker,Rep. Bill Thomas,Chairman of the

Ways and Means Committee.Chairman Thomas was followed by

Mark A. Weinberger, Assistant Secretaryof the Treasury for Tax Policy, whodescribed the Administration’s vision forinternational competitiveness.

Fred F.Murray, VicePresident forTax Policywith theNationalForeign TradeCouncil,moderated apanel of

economists discussing tax reform as itrelates to international provisions.Speaking to this subject were PeterMerrill, Principal Partner, Pricewater-houseCoopers; Daniel J. Mitchell, SeniorFellow, Heritage Foundation; and JaneGravelle, Senior Specialist at the Con-gressional Research Service.

A panel of four corporate execu-tives followedthe econo-mists with thetaxpayers’perspective.Mike Boyle,Vice Presidentfor Tax andAudit, Mi-crosoft Corpo-ration, moder-ated, and thespeakerswere: E. DanLeightman,Vice President - Taxes at Cooper Indus-tries; James McCarthy, Director of Na-tional Government Relations for Procter& Gamble; Robin Beran, Director of

Corporate Taxfor CaterpillarInc.; and Kat-rina Doerfler,Director ofExternal TaxAffairs forCisco Systems.

For thefinal panel,Joseph Luby,Jr., AssistantGeneral TaxCounsel, Exx-on-Mobil Cor-poration, in-troduced twospeakers whodiscussed how the Administration bal-ances tax and trade policy: InternationalTax Counsel Barbara Angus from theDepartment of the Treasury and Grant D.Aldonas, Under Secretary of Commercefor International Trade.

R. Glenn Hubbard, Chairman of theCouncil of Economic Advisers, wrappedup the conference with remarks on theprospects for tax reform.

Ways & MeansCommittee Chair-man Rep. Bill Tho-mas (R-CA) keynot-ed the conference.

Mark Weinberger,Assistant Secretaryof the Treasury forTax Policy

Grant Aldonas, UnderSecretary of Commercefor International Trade

Barbara Angus,International TaxCounsel, Departmentof the Treasury

R. Glenn Hubbard,Chairman of theCouncil of EconomicAdvisers

3

Tax Foundation Dinner Celebrates 64th YearDistinguished Service Awards Presented to Baucus and PerlmanSenator Max Baucus (D-MT), Chairmanof the Senate Finance Committee, ac-cepted a Distinguished Service Awardat the Tax Foundation’s 64th AnnualDinner, November 15 at the Four Sea-sons Hotel in Washington, DC.

Each year the Foundation honors apublic official and a private citizenwho have contributed notably to thenational discussion of sensible taxpolicies.

Senator Baucus shared the stagewith Robert H. Perlman, Retired Vice

President – Tax, Licensing and Cus-toms, Intel Corporation, a veteran taxexecutive whose frank testimony be-fore tax committees in Washington hasalways been noteworthy and some-times an occasion for spirited debate.

Senator Baucus has worked on theFinance Committee for over two de-cades and was honored by the TaxFoundation in 1991 for his reasonable,bipartisan approach to tax policy andfor his diligent work on complex areasof the tax code. Almost a decade later

At left, the Tax Foundation’s Private Sector Distin-guished Service Award recipient is Robert H. Per-lman, Retired Vice President, Tax, Licensing and Cus-toms at Intel Corporation and now Director, Price-waterhouseCoopers. Presenting the award is LarryLangdon, Commissioner, Large and Mid-size Busi-ness Division, IRS.

The Distinguished Service Award for the Public Sector was pre-sented to United States Senator Max Baucus (D-MT), Chairmanof the Senate Finance Committee (center). Presenting the awardon behalf of the Tax Foundation (at left) was John Connors,Chief Financial Officer, Microsoft Corporation. At right is theTax Foundation’s executive director, Scott Hodge.

he assumed the chairmanship of theCommittee.

His calm stewardship has broughthim once again to the forefront of taxpolicy leadership. In his remarks, hepromised to work toward tax simplifi-cation and urged corporate taxpayersto realize that Congress will not makeit a priority until taxpayers and theAdministration help Congress buildpolitical momentum for simplification.

See Senator Baucus’s completeremarks on page 8.

Old Friends Come Together To Toast Perlman and BaucusThe Tax Foundation thanks the gener-ous sponsors of our annual dinner.

Platinum Sponsors♦ Baker & Hostetler, LLP♦ Microsoft Corporation

Gold Sponsors♦ Citibank, N.A.♦ Koch Industries♦ KPMG LLP♦ Koch Industries♦ Philip Morris Management Corp.

Silver Sponsors♦ ExxonMobil Corporation♦ General Motors Corporation♦ Household International, Inc.♦ Intel Corporation♦ Metropolitan Life Insurance Co.♦ Northrop Grumman Corporation♦ PricewaterhouseCoopers LLP♦ USX Corporation♦ Washington Counsel/

Ernst & Young LLP

Dinner Sponsors♦ Anheuser-Busch Companies, Inc.♦ Arthur Andersen LLP♦ Caterpillar Inc.♦ Distilled Spirits Council of the U.S.♦ Gannett Foundation♦ Miller & Chevalier, Chartered♦ National Association of Manufacturers♦ Pfizer Inc.♦ Mr. James Q. Riordan, Esq.♦ The Rouse Company♦ Sutherland, Asbill & Brennan LLP

4

How the Federal Government Plans to SpendYour Tax Dollar in Fiscal Year 2003

National defense is a lower priority inthe President’s new budget than it wasin decades past, despite the significantspending increase over last year’s level,according to the Tax Foundation’s an-nual comparison.

In fact, the biggest change duringthe last four decades can be seen inhow much less Uncle Sam spends ondefense and how much more onhealth. The portion of federal spendingdevoted to national defense has fallenfrom 48¢ out of every tax dollar in FY1963, to 26¢ in FY 1983, to 18¢ in FY2003. Meanwhile, Uncle Sam spentonly 1¢ out of every tax dollar onhealth in FY 1963, and even after Medi-care and Medicaid had been enacted,that cost rose to only 7¢ on the dollarin 1973 and 10¢ in 1983. Those aresmall slices of the national pie com-pared to the 22¢ that is planned for2003 (see charts).

Assuming that Congress makes nodramatic changes in the President’s FY2003 budget, which is usually the case,59¢ out of every tax dollar will bespent on three areas — Social Security,health and medical, and income securi-

SocialSecurity22¢

Where the President Wants Your Federal Tax Dollar to Go in FY 2003

Notes: “Income Security” includes General Retirement and Disability, Federal Employee Retirementand Disability, Unemployment Compensation, Food and Nutrition Assistance, Supplemental SecurityIncome, Family and Other Support Assistance, Earned Income Tax Credit, Offsetting Receipts, andHousing Assistance. “Other” includes International Affairs, General Science, Space and Technology, Agriculture,Administration of Justice, General Government, Allowances and Undistributed Offsetting Receipts. Rounding may lead numbers not to equal $1.00.

Source: Tax Foundation calculations based on OMB data and projections in the President’s FY 2003Budget.

Veterans 3¢

Other 3¢

Education, SocialServices 4¢

NationalDefense18¢

NetInterest9¢

IncomeSecurity15¢

Health &Medical22¢

Transportation &Commerce 3¢

How Uncle Sam Has Sliced Up the Federal Pie in the Past

FY 1993 FY 1983

Environment &Energy 2¢

Other 3¢

Net Interest 11¢

Veterans 3¢Education &Social Services 3¢Commerce &Transportation 4¢

Energy &Environment 3¢

Income Security 15¢

Health & Medical 10¢

SocialSecurity21¢

NationalDefense26¢

Other 3¢

Net Interest 14¢

Veterans 3¢Education &Social Services 3¢

Commerce &Transportation 2¢

Energy &Environment 2¢

Income Security 15¢

Health & Medical 16¢

SocialSecurity22¢

NationalDefense21¢

5ty. These program areas are “mandato-ry,” so the federal government automat-ically spends a legally determinedamount of money.

Net interest payments on the fed-eral debt are projected to fall signifi-cantly in FY 2003 compared to tenyears ago, from almost 15¢ on a dollarin 1993 to slightly more than 9¢ in thecoming fiscal year.

The FY 2003 budget shows that

“discretionary” spending — such asdefense, education, agriculture, andtransportation — now plays a compar-atively minor role — only about 32¢on a dollar.

Mandatory spending and net inter-est now account for 68¢. In contrast,back in FY 1963, the portions werereversed: discretionary spending wasroughly 70¢ out of every federal taxdollar while entitlements and net inter-est payments took up about 30¢.

FY 1973 FY 1963

In the President’s FY2003budget, 59¢ out of everytax dollar will be spent onthree areas—health andmedical, Social Security,and income security.

because so much more of the socialservice spending in today’s federalbudget is mandatory. “Mandatory” inthis context refers mostly to entitle-ment programs whose spending levelsare not decided each year but legislat-ed into law as automatically increasing.In order to keep a flat line on non-defense spending, therefore, the Presi-dent’s Budget has to reduce the rela-tively small portion of social spendingthat is “discretionary,” i.e., part of eachyear’s appropriations process.

There is a lot more butter todaythan in the past, but lawmakers haveaccess to much less of it, even if theywant to sacrifice it in order to win awar.

Modest Budget Deficit PredictedFor the first time in four years, the

administration’s budget shows a cur-rent year deficit: $80 billion in FY 2003and $14 billion in FY 2004. The budgetpredicts a return to annual surplusesstarting in 2005 and continuingthrough at least 2007.

National SecurityThe President’s proposal to spend

$379 billion on defense programs dur-ing fiscal year 2003 represents 17.8percent of total spending and is an 8.9percent increase over estimated na-tional defense spending in fiscal year

2002. The $379 billion represents 3.4percent of GDP.

In fiscal year 1940, which endedbefore the United States entered WorldWar II, defense expenditures account-ed for just 17.5 percent of total federalgovernment spending, or 1.7 percentof GDP. Defense-related spending sky-rocketed to a peak of 89.5 percent offederal spending in fiscal year 1945,37.9 percent of GDP, before droppingback to 30.6 percent of total spendingin 1948.

Defense spending spiked again in1952 through 1954, reaching a high of69.5 percent of total federal expendi-tures in 1954, to fund the Korean War.Defense spending as a percentage oftotal federal expenditures decreasedover the following 45 years to its fiscalyear 1999 level of 16.2 percent, or 3.0percent of GDP. The majority of thisdecline in defense spending cameduring the cold war.

Between 1954 and 1991, defensespending dropped from 69.5 percentof total expenditures to 20.6 percent,only three times rising as a percentageof total expenditures and even thenthe increases were not large. The firstwas between 1965 and 1968, coincid-ing with our troop commitments inVietnam. The second was between1981 and 1987, during the last years ofthe cold war. The final period began infiscal year 2000 and continues throughthe present.

FY 2003 Budget from page 1

Other 8¢

Net Interest 7¢

Veterans 5¢Education & Social Services 1¢Commerce &Transportation 5¢

Energy & Environment 3¢

Income Security 8¢

Health & Medical 1¢

Social Security 14¢

NationalDefense 48¢

Other 5¢Net Interest 7¢

Veterans 5¢

Education &Social Services 5¢

Commerce &Transportation 6¢

Energy &Environment 2¢

Income Security 12¢

Health & Medical 7¢

SocialSecurity20¢

NationalDefense 31¢

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Latest IRS Data Show Top-Earning TaxpayersEarning and Paying MoreTop-Earning Twenty-five Percent of Taxpayers Paid Five Out of Every SixDollars Collected, Top One Percent Paid Over a ThirdAccording to preliminary data releasedby the Internal Revenue Service, the top-earning one percent of U.S. taxpayers(annual income over $293,415) made19.5 percent of the income earned in1999 and paid 36.2 percent of the totalfederal individual income taxes collect-ed that year.

The data are available in Tax Foun-dation Special Report No. 109, titled“Who Pays the Federal Individual In-come Tax,” by economist David Hoffman.See Publication Summary on page 7 andour web site at www.taxfoundation.org/prtopincome.html.

This surprisingly high fraction oftotal income tax collections paid by thetop one percent — well over a third ofthe total — is up from 25.2 percent tenyears earlier in tax year 1989 (data for1999 is the latest available).

At the other end of the incomespectrum, the bottom 50 percent of thenation's taxpayers earned only 13.3

Figure 1: Who Paid Income Taxes, 1999 and 1989

Top1%

Top5%

Top10%

Top25%

Top50%

Bottom50%

0 20% 40% 60% 80% 100%Percentage of Total Collections

1999

1989

Federal Individual Income Tax Data, 1999 and 1989

1999Number of Income Taxes Group’s Group’s

Income Returns AGI Paid Share of Share of Income AverageGroup (000) ($000,000) ($000,000) Total AGI Total Taxes Split Point Tax Rate

All Taxpayers 126,009 $ 5,909,329 $ 877,292 100.0% 100.0% – 14.8%

Top 1% 1,260 $ 1,152,820 $ 317,419 19.5% 36.2% above $293,415 27.5%Top 5% 6,300 $ 2,011,763 $ 486,464 34.0% 55.5% above $120,846 24.2%Top 10% 12,601 $ 2,652,835 $ 583,002 44.9% 66.5% above $87,682 22.0%Top 25% 31,502 $ 3,927,308 $ 732,890 66.5% 83.5% above $52,965 18.7%Top 50% 63,004 $ 5,126,164 $ 842,168 86.7% 96.0% above $26,415 16.4%Bottom 50% 63,004 $ 783,165 $ 35,124 13.3% 4.0% below $26,415 4.5%

1989Number of Income Taxes Group’s Group’s

Income Returns AGI Paid Share of Share of Income AverageGroup (000) ($000,000) ($000,000) Total AGI Total Taxes Split Point Tax Rate

All Taxpayers 111,313 $ 3,298,858 $ 432,838 100.0% 100.0% – 13.1%

Top 1% 1,113 $ 468,079 $ 109,259 14.2% 25.2% above $163,869 23.3%Top 5% 5,566 $ 918,421 $ 190,188 27.8% 43.9% above $76,933 20.7%Top 10% 11,131 $ 1,286,539 $ 241,458 39.0% 55.8% above $58,263 18.8%Top 25% 27,828 $ 2,054,478 $ 334,258 62.3% 77.2% above $36,839 16.3%Top 50% 55,656 $ 2,805,235 $ 407,599 85.0% 94.2% above $18,993 14.5%Bottom 50% 55,656 $ 493,623 $ 25,239 15.0% 5.8% below $18,993 5.1%

Source: IRS

percent of all income in 1999, but theypaid an even smaller fraction of the

federal individual income taxes collect-ed — 4.0 percent.

36.2%25.2%

55.5%43.9%

66.5%

55.8%

83.5%77.2%

96.0%94.2%

4.0%

5.8%

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Publication Summary

General: Tax Foundation Special ReportNo. 109; ISSN 1068-0306; 6pp.; $10 or$50/yr. for 6 issues on varied fiscal top-icsTitle: Who Pays the Federal IndividualIncome Tax?Author: David HoffmanDate: February 2002Subject: Publication of the latest IRSdata on the payment of individual in-come taxes by different segments of theincome spectrum. Income and tax datapresented for years 1980–1999.Tables: Who Pays Federal IndividualIncome Taxes, 1989 and 1999; Sharesof Adjusted Gross Income by IncomeGroup, 1980–1999; Federal IndividualIncome Tax Shares by Income Group,1980–1999

’99’98’97’96’95’94’93’92’91’90’89’88’87’86’85’84’83’82’81’80 ’99’98’97’96’95’94’93’92’91’90’89’88’87’86’85’84’83’82’81’80

Figure 2: How Much Did We Earn and How Much Did We Pay?1980–1999

100%

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Top 1%

Top 2–5%

Top 6–10%

Top 11–25%

Top 25–50%

Bottom 50%

Percentage of Individual Income Tax Collections PaidPercentage of Adjusted Gross Income Earned

The steady drop in the percentageof income tax collections paid by thebottom half of the income spectrumdoes not mean that all low-income tax-payers are paying less now than theywere ten year ago, just that their taxpayments have not increased as quicklyas those of high-income taxpayers. Sometaxpayers are actually paying less, andlow-income taxpayers with children willcontinue to pay less as the new refund-able child credit that was part of lastspring’s tax cut kicks in.

“Americans at the upper end of theincome scale continue to bear an in-creasing share of the total federal indi-vidual income tax burden,” observedHoffman.

“Economic growth was still verystrong in 1999, and in a progressive tax

system like ours, economic growth inev-itably results in a steady shifting of thetax burden up the income scale.”

As the table and figure show, boththe top five percent of income earners(adjusted gross income over $120,846)and the top 10 percent (adjusted grossincome over $87,682) are earning agreater share of the nation’s income andpaying a greater portion of the incometaxes than they did a decade ago.

In fact, the tax load has since shiftedupward so dramatically that whereas adecade earlier in 1989, approximately 55percent of all federal income tax collec-tions came from the top 10 percent ofincome earners, 1999 data shows thatpercentage is now paid by just the topfive percent.

8

FRONT & CENTER

Senator Max Baucus, Democrat ofMontana, is chairman of the SenateFinance Committee. This essay istaken from remarks the senatormade after receiving the Founda-tion’s Distinguished Service Award.

by U.S. Senator Max Baucus (D-MT)

Tax Code Simplification Is NoSimple Matter

Tax complexity is a challengethat every Congress has to dealwith because so many forces con-spire to make the tax code morecomplex. Congress itself is a majorculprit, especially the congressionalbudget process, but taxpayers alsocontribute to tax complexity.

It follows that tax simplificationis the business of every Congress,every Administration, and everytaxpayer. But as the last severalyears have proven, making the tax

code simpler is not a simple thingto do.

Let me begin by quoting a com-plaint about tax complexity:

“The nation will readily under-stand that it is not the fault ofthe Treasury Department thatincome tax payers are floodedwith forms to fill out, which areso complex that even certifiedpublic accountants cannot inter-pret them. No, it is squarely thefault of the Congress of the Unit-ed States, using language that noteven a dictionary or thesauruscan make clear.”

That indictment of Congress for

littering the tax code with complexprovisions was issued in 1943 byPresident Franklin Roosevelt.

President Roosevelt continued,“Taxpayers need simplification.Taxpayers engaged in an effort towin the greatest war this nation hasever faced are not in the mood tostudy higher mathematics.”

With all due respect to ourlongest-serving President, tax com-plexity is not solely the fault ofCongress — simplification is not

that simple. It has costs, it com-petes with other priorities, andlately it has not fared too well. Weall bear a responsibility for that:Congress, the Administration, andyes, taxpayers themselves.

For example, take the individual

alternative minimum tax. I havefavored repeal of the AMT, butwhen it came time to write the taxlegislation last spring, what did wedo? We devoted only $14 billion toAMT reform while we spent $875

billion to lower the tax rates. Wedid this even though we knew thatwhile it would cost quite a bit tofix the AMT then, it would costhundreds of billions of dollars moreto fix it later. But rate cuts had mo-mentum, and repeal of the individu-al AMT did not.

I do not mean to criticize lastyear’s tax bill. I supported it strong-ly. It was the right thing to do, andI’m proud of the bipartisan effortthat I and others engaged in to getit passed.

But it illustrates my point abouttax simplification. Last spring wasevidently not the right time for taxsimplification, and it is obvious toeveryone that if there had been aneconomic stimulus bill this spring,it would not have been the rightvehicle for simplification.

One area of the tax law that Ihave worked especially hard onover the years is the internationalarena. I have sponsored many taxbills to simplify the internationaltax law because it is so clearly

needed. And in connection with theeconomic stimulus bill, I was askedto include some changes to theforeign tax credit rules that wouldclearly simplify things for taxpayersand save dollars. But they wouldn’t

Congress itself is a major culprit, especially thecongressional budget process, but taxpayers alsocontribute to tax complexity.

Tax complexity itself is a kind of tax. It creates adeadweight loss in tax compliance costs —transactional complexities for taxpayers andburdens on tax administrations. So simplificationitself is a kind of tax cut.

9

The Tax Foundation invites nationalleaders from all perspectives tocontribute columns in Tax Features,generally alternating between themajor parties. The opinions expressedare not necessarily those of the TaxFoundation.

have fit that bill.Taxpayers should ask, Why

doesn’t simplification fit in? Webuilt momentum for tax cuts lastspring, and we built some momen-tum for economic stimulus. Whynot simplification?

The answer is that these otherbills made sense politically, and sadto say, simplification does not havepolitical momentum, at least notyet.

So if you want to simplify thetax code, it’s got to be done with abill that makes sense politically, andI don’t mean ‘politically’ in the cyni-cal sense but in the best sense ofthe word: convincing people whoare not directly affected that itshould be done for the good of thecountry.

It may take time to build a con-stituency. Some people say that willnever happen. And the reality isthat we do not now have a budgetsurplus to use for simplification.

Nevertheless, despite the obvi-

ous difficulty of the challenge, Iagree with advocates of simplifica-tion that it is a goal worthy of agreat effort. And so I challenge theCongress, the Administration andtaxpayers to make tax simplifica-tion a priority for the country.

How do we do that? Taxpayersmust urge the Administration toinclude simplification provisions inits budget proposals. They mustbuild coalitions to urge support forsimplifications proposals. Theymust urge Members of Congress toenact clear, simple rules that mini-

mize dispute. And most importantly,all the parties involved must thinkof creative ways to simplify thecode.

Of course, those creative ideashave to be realistic. We have reve-nue constraints. We need to becareful about creating winners and

losers. Those problems can createcosts. But ignoring the complexityof the code has costs too.

Tax complexity itself is a kindof tax. It creates a deadweight lossin tax compliance costs — transac-tional complexities for taxpayersand burdens on tax administrations.So simplification itself is a kind oftax cut.

As a source for ideas, the bestplace to start is the Joint Tax Com-mittee whose staff, led by Ms. LindyPaull, has produced a marvelouscompendium of ideas for tax sim-

plification. Volume I is an overviewof the tax system. Volume II con-tains the recommendations of thestaff of the Joint Committee onTaxation, and Volume III is a collec-tion of academic papers submittedto the Joint Committee on Taxationduring its deliberations. All areavailable on line at http://www.house.gov/jct. Speaking asChairman of the Committee, let meurge you all to read through thisexcellent work and give us yourthoughts.

As I began by quoting the taxcode complaints of PresidentRoosevelt, let me close on a morehopeful note, with apologies toRobert Kennedy.

Some see the tax code as it isand ask why. Others dream of thetax code as it should be and askwhy not. Let’s join the dreamersand try to make this tax code wor-thy of the great nation of taxpayersit is supposed to serve.

Simplifying the tax code must be done with a bill thatmakes sense politically, and I don’t mean ‘politically’in the cynical sense but in the best sense of the word:convincing people who are not directly affected that itshould be done for the good of the country.

10

Publication Summary

General: Tax Foundation Special ReportNo. 108; ISSN 1068-0306; 12pp.; $10or $50/yr. for 6 issuesTitle: Fiscal Forecasting: A Perilous TaskAuthor: John S. BarryDate: January 2002Subject: How over-dependence on theestimating process hurts our tax policy.Tables and Charts: CBO Estimates ofthe Fiscal Year 2001 Surplus/Deficit,1997–2001; House and Senate BudgetCommittee Estimates of Future Surplus/Deficit, Fiscal Years 2001–2011; Causesof Total Adjustments to the Estimates ofthe Fiscal Year 2001 Surplus/Deficit,January 1997 – August 2001; FederalFinance Data, 1940–2001; Ten-YearNominal Interest Rates and Publicly HeldDebt as a Percentage of GDP, FiscalYears 1953–2001; Ten-Year Real Inter-est Rates and Publicly Held Debt as aPercentage of GDP, Fiscal Years 1953–2001; Federal Debt Breakdown, FiscalYears 1940–2000

A new Tax Foundation Special Reportexplains why no one should be sur-prised by wild swings in long-rangeprojections of the federal govern-ment’s surplus or deficit.

Titled “Fiscal Forecasting: A Peril-ous Tax,” the new report by Tax Foun-dation Chief Economist John Barryprovides the background informationnecessary to put the CongressionalBudget Office’s new estimates intoperspective (see Publication Summary).

Saddled with the task of preciselypredicting something that’s virtuallyimpossible to foresee, CBO nowprojects a small deficit of $21 billionfor fiscal year 2002, contrasting sharplywith its projection last January that the

federal government would run a $313billion surplus. This drastic change inthe fiscal outlook has sent tails wag-ging throughout Washington, and Sen-ate Majority Leader Tom Daschle has

even asserted that last summer’s taxcut was the biggest reason.

The new Foundation study reviewsthe recent history of CBO estimates,finding dramatic revisions to be com-mon and the lion’s share of the revisionsto be caused by economic revisions and

technical corrections. This was the casein FY2002, with changes in spending thenext most important factor, followed bythe tax cut (see pie chart).

Barry’s report argues that tax legis-lation has become far too dependenton fiscal projections that are inaccu-rate even in the short term, and mereguesses in the long term. This depen-dence also results in the enactment ofunnecessarily complex provisions justso that the estimate of the bill’s impactwill match an arbitrary number.

Other conclusions of the report:♦ Sound tax principles, not high-

ly uncertain fiscal forecasts, shoulddrive tax changes. Tax simplification,tax neutrality, and tax stability are allvictims of the current process.

♦ Budgetary impact estimatesare time-sensitive. CBO’s January2002 numbers still depend upon a May2001 estimate of last summer’s tax cutwhich would certainly be lower ifrecalculated today.

♦ Budgetary impact estimatesare mostly “static.” For example, whenestimating a tax cut, they do not try tocalculate how much extra economicactivity will result from the tax cut.

♦ Over-dependence on estimatesguarantees abominably complex taxlegislation. Last year’s tax relief billcontains 108 instances of phase-ins,

CBO’s Revised Budget Projection Casts DoubtOn Critical Role of Estimates in Tax Legislation

Why Estimates of the FiscalYear 2002 Budget Changed

from Surplus to Deficit

AdditionalSpending15.9%($53 billion)

Tax Relief11.4%($38 billion)

Technical and EconomicChanges72.7%($242 billion)

See the full report atwww.TaxFoundation.org/

nosurplus.htmlThanks in part to role of estimates on legislation, lastyear’s tax relief bill contains 108 instances of phase-ins, phase-outs, changes in rates, scale-ups, scale-downs, phase-outs of existing phase-ins,accelerations of existing phase-outs, and sunsets.

phase-outs, changes in rates, scale-ups,scale-downs, phase-outs of existingphase-ins, accelerations of existingphase-outs, and sunsets. These unneces-sarily complex provisions are a drivingforce behind the record compliancecosts faced by American taxpayers,

projected to be nearly $200 billion thisyear alone.

♦ The common assertion thatfederal deficits drive up interest ratesis not supported by the data. In fact,there are reasons to believe that aprudent level of publicly held federaldebt may actually help keep long-termrates lower.

11

New Editions Forthcoming ofFoundation Reference BooksA Taxpayer’s Guide to FederalSpendingThe detailed account information andhistorical tables of the President’s 2003

Budget were justpublished in earlyFebruary 2002.

As anyonewho has examinedthe official Budgetof the U.S. Govern-ment realizes, it’s afrustrating docu-ment if you wantto determine ex-actly how thefederal govern-ment spends ourtax dollars.

The Tax Foun-dation makes iteasier with the

fifth edition of A Taxpayer’s Guide toFederal Spending. It uses the same termi-nology as the Budget, so you can refer to itwith confidence in official communica-tions. Organized by department, agency,program area, and individual expenditureaccount, and using piecharts to give concisepictures of how eachdepartment divides upits budget, the Taxpay-er’s Guide to FederalSpending boils 2,500pages down to one tenth of that size, butyou won’t miss a thing.

Facts & Figures on GovernmentFinanceWhen rhetoric about tax and spendingpolicies is so often full of sound andfury, it’s a relief to see a volume full offacts. Published regularly since 1941,

Facts and Figures onGovernment Financebrings together dataon public finance atall levels of govern-ment, with compari-sons of taxing andspending levels span-ning a century.

The 36th editionwill provide the datato answer:♦ Do the wealthypay their share ofincome tax?♦ Which states taxthe least?♦ What are thetrends in local prop-erty tax?

Facts and Figures on GovernmentFinance includes material from out-of-

print governmentdocuments and pri-vate sources. Forlibraries looking tofill the gap left by thediscontinuation of theCensus Bureau’s Gov-

ernment Finance series, nothing elsewill do as well.

Both titles shipping in May!Please call or e-mail to place

your order today!

Facts and Figureson GovernmentFinanceISSN 0071-367836th EditionSpring 2002, 345 pp.Ed. by David HoffmanHard: $65 (s/h inc.)ISBN 1-884096-14-XPaper: $45 (s/h inc.)ISBN 1-884096-15-8

A Taxpayer’sGuide to FederalSpending, FiscalYear 2003ISSN 1528-0381ISBN 1-884096-16-6Ed.: David HoffmanSpring 2002, 262 pp.Paper $40 (s/h inc.)

Tax Foundation, Baker& Hostetler, andPricewaterhouseCoopersWill Host 13th AnnualTax Policy Conference

On April 17, 2002, the Tax Foundationwill co-host the 13th annual Tax, Bud-get and Legislative Policy Seminarwith Baker & Hostetler LLP and Price-waterhouseCoopers LLP.

A sophisticated analysis of thenation’s regulatory, budgetary, andlegislative forces, the seminar featuresa line-up of many prominent U.S. Sena-tors and Representatives, the verypeople who will shape federal tax andbudget policy in the coming years.

Whether discussing the Presi-dent’s recently submitted Budget orreviving arguments about last year’stax bill, the perspectives presentedwill be as varied as the political spec-trum itself.

Speakers from the Democraticside of the Senate Finance Committeelast year included Senators Max Bau-cus (D-MT), Kent Conrad (D-SD) andJohn Breaux (D-LA). Senator DonNickles (R-OK) represented theMajority.

Four Members from the HouseWays and Means Committee alsospoke last year: Phil Crane (R-IL),Charles Rangel (D-NY), Clay Shaw (R-FL), and Benjamin Cardin (D-MD).

Assistant Treasury Secretary forTax Policy Mark Weinberger spokefrom the Administration.

Tax Foundation Web Site Adds Excise Tax Section; TaxSimplification Will Be Next AdditionExcise taxes were the nation’s firstdomestic taxes, and despite the addi-tion of massive income and payrolltaxes to fund government operations,the federal government still taxes spe-cific products. The most highly taxedare gasoline, tobacco, alcohol and tele-phone service.

The Tax Foundation’s web site willkeep current a table of federal excise

tax rates and collections, and we willsupplement that data with originalresearch on how much the peoplepaying those taxes earn. It is wellknow that almost all excise taxes are“regressive,” that is, they tax away amuch greater share of poor people’sincome.

But the federal government is notthe only source of excise taxes. States

tax fewer products but often withmuch higher tax rates than the federalgovernment. The new web page atwww.taxfoundation.org/excisetaxes.htmlwill track state rates and collections too.

As the mind-boggling complexity ofrecent tax legislation sinks in to the taxcode and the taxpayers, the Tax Founda-tion will also provide a web place fordata on tax simplification.

12

FY2000 State Tax Collections Grew 8 PercentSurplus State Receipts in 2000 Provided Cushion for Recession

State tax and fee collections were 8.0percent higher during FY2000 thanduring FY1999, according to “State TaxCollections and Rates,” a Tax Founda-tion Special Report by economist Dav-id Hoffman (see Publication Summaryon page 13).

Even adjusted for inflation, thegrowth in state-level tax collectionswas substantial, 5.7 percent, bringingto a close a string of years when tax

receipts were so plentiful that tax cutsor refund mechanisms were imple-mented by many states.

Ranking the StatesNationwide, the average per capita

collection was $1,899 in FY 2000, andthe average amount of tax collectedper $1,000 of personal income was$67.23 (see table on page 13).

Connecticut collected the mostper capita ($2,970), followed by Ha-waii ($2,724) and Minnesota ($2,683).South Dakota ranked 50th ($1,226),Texas ranked 49th ($1,286), and NewHampshire ranked 48th ($1,347), fin-ishing out of the 50th spot for the firsttime in recent memory because of ahuge shift of local property tax collec-tions to the state level. In FY’99, NewHampshire collected $897 per capitaat the state level.

Hawaii collected the most per$1,000 of personal income ($100.40),followed by New Mexico ($95.99) andVermont ($92.56). New Hampshire($43.42), South Dakota ($48.78), andTexas ($49.01) collected the least.

In wealthier states, a high per capi-ta tax collection sometimes translatesinto a moderate tax collection com-pared to personal income, and the re-verse occurs in poorer states. For exam-ple, New Jersey is 12th per capita but40th per $1,000 of personal income.

Mississippi, where income per capita is57 percent of New Jersey’s, ranks 37thper capita but 11th per $1,000 of per-sonal income.

Seven states have no individualincome tax, and two others excludewages and salaries from their incometax. Yet states without income taxesdid not necessarily rank as the leasttaxing states. Washington ranked 13thper capita ($2,099) and 24th per$1,000 of personal income ($69.97).

Tax Growth by SourceIndividual income taxes rose 12.9

percent between FY’99 and FY’00,continuing the trend that made it over-take sales taxes as the biggest sourceof state receipts in 1998.

Over the longer run, betweenFY’90 and FY’00, the fastest growingcategory was “other taxes,” a catch-allincluding amusement sales, pari-mutuelsales, documentary and stock transfertaxes and miscellaneous taxes thatrose at an average annual rate of 10.1percent. Property taxes rose at anaverage annual clip of 7.8 percent,while individual income taxes had anaverage growth rate of 7.3 percent.

Tax Growth vs. Income GrowthDespite many state-level tax reduc-

tions in recent years, the growth ofstate tax receipts has still outpacedpersonal income growth — by 1.8percent between FY’99 and FY’00, andby an average of 0.9 percent annuallysince 1990.

Of course, there were some stateswhere personal income grew fasterthan taxes. From FY’99 to FY’00, in-come growth outpaced tax growth by4.8 percent in Missouri, and the per-sonal income growth of Washington,West Virginia, Louisiana, South Carolinaand Florida residents all stayed aheadof tax growth.

States where taxes grew fasterthan income include Alaska, NewHampshire, Wyoming, Nebraska andCalifornia.

A New FrugalityWhile the Tax Foundation report

focuses on state revenue trends overthe past decade, new data has made itclear that the long period of overflow-ing state coffers came to an end in2001. In fact, tax revenue fell by 2.4percent in the third quarter after ac-counting for legislative changes, thefirst decline since the recession in theearly 1990s.

In another major turnaround, manystates are now enacting tax increasesfor FY 2002, ending a seven year streakof net tax reductions. For FY 2002,state governments have increased tax-es by an estimated $303.8 million.

Changes in State Tax RatesDuring 2001

When the nation’s economy fal-tered in 2001, many state governmentsresponded by enacting new tax laws.

Individual Income TaxesFive states and the District of Co-

lumbia made significant changes toindividual income tax rates in 2001.

• Hawaii reduced all nine of itsrates, cutting its top rate from 8.75 to8.5 percent and its bottom rate from1.6 to 1.5 percent.

• Idaho reduced all eight of itsrates, cutting its top rate from 8.1 to7.8 percent and its bottom rate from1.9 to 1.6 percent.

• North Carolina added a fourthtax bracket, with a new top rate of8.75 percent, a full percentage pointabove the old top rate of 7.75 percent.

• North Dakota introduced a newgraduated rate system with five taxbrackets, ranging from a bottom rate of2.1 percent to a top rate of 5.4 per-cent. It had been one of the few statesto spare its taxpayers the administra-tive burden of a complex calculationby charging a flat 14 percent of federaltax liability.

• Wisconsin reduced its bottomrate from 4.73 to 4.6 percent.

• The District of Columbia low-

See the full report atwww.TaxFoundation.org/

statefinance.html

13

State Tax Collections Per Capita and Per $1,000 of PersonalIncome With Corresponding Ranks

Fiscal Year 2000

Per $1,000 Rank

Total Per of Personal Per Per $1,000 of($Thousands) Capita (c) Income (c) Capita Personal Income

All States (a) $ 539,640,411 $ 1,899 $ 67.23 – –

Alabama $ 6,438,438 $ 1,442 $ 62.81 46 38Alaska 1,423,287 2,242 78.38 10 15Arizona 8,100,737 1,526 64.94 42 30Arkansas 4,870,561 1,809 84.27 25 8California 83,807,959 2,429 80.35 6 12

Colorado $ 7,075,047 $ 1,602 $ 52.74 39 47Connecticut 10,171,242 2,970 75.82 1 18Delaware 2,132,131 2,678 89.52 4 4Florida 24,817,263 1,514 57.26 44 45Georgia 13,511,275 1,612 61.19 38 39

Hawaii $ 3,334,743 $ 2,724 $ 100.40 2 1Idaho 2,377,251 1,800 80.12 27 14Illinois 22,788,799 1,826 58.89 24 43Indiana 10,104,353 1,652 63.37 36 36Iowa 5,185,394 1,774 68.78 28 25

Kansas $ 4,865,305 $ 1,806 $ 67.10 26 28Kentucky 7,694,610 1,893 81.22 19 10Louisiana 6,512,382 1,458 64.16 45 34Maine 2,661,080 2,068 84.16 14 9Maryland 10,354,447 1,926 59.78 17 41

Massachusetts $ 16,152,874 $ 2,532 $ 70.34 5 23Michigan 22,756,403 2,278 80.31 9 13Minnesota 13,338,532 2,683 87.62 3 5Mississippi 4,711,594 1,649 80.72 37 11Missouri 8,571,548 1,523 57.78 43 44

Montana $ 1,410,760 $ 1,560 $ 70.83 41 22Nebraska 2,981,047 1,740 64.46 32 31Nevada 3,717,255 1,765 64.22 29 33New Hampshire 1,696,085 1,347 43.32 48 50New Jersey 18,147,604 2,139 60.25 12 40

New Mexico $ 3,743,178 $ 2,046 $ 95.99 15 2New York 41,735,841 2,195 65.61 11 29North Carolina 15,216,066 1,859 73.16 20 21North Dakota 1,172,373 1,848 76.41 22 17Ohio 19,676,365 1,730 63.18 33 37

Oklahoma $ 5,851,814 $ 1,691 $ 73.78 35 19Oregon 5,945,675 1,712 64.41 34 32Pennsylvania 22,466,906 1,828 63.64 23 35Rhode Island 2,034,909 1,922 68.16 18 26South Carolina 6,381,391 1,571 67.92 40 27

South Dakota $ 927,245 $ 1,226 $ 48.78 50 49Tennessee 7,739,590 1,348 53.75 47 46Texas 27,424,142 1,286 49.01 49 48Utah 3,978,697 1,753 77.96 31 16Vermont 1,470,828 2,399 92.56 7 3

Virginia $ 12,648,071 $ 1,760 $ 59.48 30 42Washington 12,567,383 2,099 69.97 13 24West Virginia 3,343,266 1,855 86.55 21 6Wisconsin 12,643,015 2,340 85.81 8 7Wyoming 963,650 1,949 73.46 16 20

Dist. of Columbia (b) $ 3,197,087 $ 5,591 $ 158.46 – –(a) Does not include the District of Columbia.(b) Based on quarterly data.(c) Population and personal income figures adjusted into fiscal years.Source: Tax Foundation, based on data from the Department of Commerce, Bureau of the Census and Bureau ofEconomic Analysis.

Publication Summary

General: Special Report No. 110; ISSN1068-0306; 12pp.; $10 or $50/yr. for 6issues on varied fiscal topicsTitle: State Tax Collections and RatesAuthor: David HoffmanDate: February 2002Subject: State tax collections forFY2000 and selected tax rates as ofDecember 31, 2001Tables: State Tax Collections by Type,FY’90–’00; State Tax Collections andDistribution by Source, FY’00; State TaxGrowth Compared to Personal IncomeGrowth, FY’90–’00; State Tax Collec-tions Per Capita and Per $1,000 ofPersonal Income, FY’00; Individual In-come Tax Rates; Corporate Income TaxRates; Various State Tax Rates

ered all three of its rates, cutting itstop rate from 9.5 to 9.3 percent and itsbottom rate from 6 to 5 percent.

Corporate Income TaxesFour states and the District of

Columbia reduced corporate incometax rates:

• Arizona dropped its single cor-porate tax rate from 7.968 percent to6.968 percent.

• Idaho lowered its only rate from8.0 percent to 7.6 percent.

• Depending on budgetary condi-tions, Michigan is phasing out its 2.3percent single business tax (SBT) 0.1

percent a year. The phase-out began in1998, so the 2001 SBT was 2.0 percent.

• New York cut its single corpo-rate tax rate from 8.0 to 7.5 percent.

• The District of Columbia alsolowered its single corporate tax ratefrom 9.975 percent to 9.5 percent.

One state, New Hampshire, in-creased its corporate tax rate, from 8.0percent to 8.5 percent.

General Sales and Other TaxesCalifornia was the one state to

increase its sales tax rate in 2001, from5.75 to 6.0 percent, and Colorado wasthe one to reduce its rate, from 3.0 to2.9 percent.

Kansas raised its gasoline tax ratefrom 20 cents to 21 cents per gallon.Nebraska, North Carolina and Wiscon-sin all have indexed gas tax rates thatrise automatically.

Two states raised their cigarettetax rates: Pennsylvania went up a pen-ny from 30 cents to 31 cents per packwhile Washington almost doubled itsrate from 82.5 cents to $1.425. Thatmade Washington’s rate the highest inthe nation until January 2002 whenNew York scheduled a $1.50 rate to gointo effect in April.

Hawaii lowered its spirits tax ratefrom $5.98 per gallon to $5.92 pergallon, and two states changed theirtable wine tax rates. Colorado’s wentdown from 32 cents to 28 cents pergallon, while Montana raised its ratefrom $1.02 to $1.06 per gallon.

14

A new Tax Foundation BackgroundPaper on the corporate alternative mini-mum tax (AMT) examines the workingsof this appendix to the corporate in-come tax and recommends removal.

Titled “The Economic and PolicyImplications of Repealing the CorporateAlternative Minimum Tax,” the new re-port is co-authored by Terrence R. Chor-vat, Assistant Professor, George MasonUniversity School of Law and Michael S.Knoll, Professor, University of Pennsyl-vania Law School and The WhartonSchool (see Publication Summary).

The report lays out the history, struc-ture and calculation of the corporateAMT. It presents the arguments in favorof its preservation but argues for repeal.

The corporate AMT was enacted inits current form in 1986 in response toclaims that many large corporationsused deductions and tax preferences toeliminate their corporate income taxliability. Meant to ensure that profitablecorporations pay some income tax, thecorporate AMT instead raises little reve-nue, distorts investment incentives andimposes heavy compliance costs.

Over the last fifteen years, therehave been many calls for the repeal ofthe corporate AMT, but until last year,none ever resulted in legislation thatpassed either house of Congress. OnOctober 24, 2001, the House of Repre-sentatives passed, as part of a broadeconomic stimulus package, a provi-sion that would repeal the corporateAMT. The Senate did not follow suitwhen it considered its own version ofthe stimulus bill, and in December thePresident removed corporate AMTrepeal from the agenda in an ultimatelyunsuccessful attempt to get other pro-visions of the bill through Congress.

In 1998, the most recent year forwhich official data are available, 18,360firms paid an additional $3.4 billion intax because of the AMT. Future corpo-rate AMT collections are likely to belower, around $1 billion per year, due tosignificant changes enacted in 1997that took full effect in 1999. In compar-

ison, the regular corporate income taxraises about $200 billion annually.

The corporate AMT is a parallel taxstructure, meaning that any firm thatmay be affected must keep separaterecords specific to the intricacies ofthe corporate AMT in addition to itsregular tax and accounting records.

This requirement and the inherentcomplexity of the corporate AMT makecompliance inordinately expensive. Infact, compliance costs associated withthe corporate AMT are likely to exceednet receipts from the tax.

The corporate AMT has significanteconomic effects beyond the highassociated compliance costs. Due to itsspecial rules governing depreciation,foreign tax credits, and net operatinglosses—all intended to capture morecorporate income in the taxablebase—the corporate AMT actually dis-courages investment and misallocatesscarce resources. These distortionsultimately result in fewer jobs, lowerwages, higher prices, and slower eco-nomic growth.

Proponents of the corporate AMT,whether they recognize these distor-tions and costs or not, argue that thetax improves fairness, discouragesinvestment in tax preferred assets, andis necessary to prevent corporationsfrom using tax shelters to eliminatetheir income tax liability. However,there is no clear evidence that theAMT improves fairness or limits theability of corporations to avoid taxes.

The corporate AMT does not increase efficiencyor improve fairness in any meaningful way,nets little money for the government, imposescompliance costs that are likely to be largerthan collections, and encourages firms to cutback or shift their investments.

In any case, the corporate AMT is anextremely inefficient method of ad-dressing these perceived problems.Much better would be to address poli-cy concerns through the regular cor-porate income tax code and eliminatethe complexity and inefficiencies asso-ciated with the corporate AMT.

The corporate AMT does not ad-vance any legitimate purpose; that is,it does not increase efficiency or im-prove fairness in any meaningful way.It nets little money for the govern-ment—roughly $1 billion a year goingforward. It imposes heavy compliancecosts that are likely to be larger thancollections, and it encourages firms tocut back or shift their investments.The Congress’s bipartisan Joint Com-mittee on Taxation was undoubtedlycorrect in recommending that it berepealed.

New Background Paper Dissects Corporate AMTStaff of Joint Committee on Taxation Correct in Recommending Repeal

Publication Summary

General: Tax Foundation BackgroundPaper No. 40; ISSN 1527-0408; 16pp.;$10 or $50/yr. for 4 issues on variedfiscal topicsTitle: The Economic and Policy Implica-tions of Repealing the Corporate Alter-native Minimum TaxAuthors: Terrence R. Chorvat andMichael S. KnollDate: February 2002Subject: Discussion of the corporateAMT, how it works and why it workspoorly

15

FOUNDATION MESSAGE

Scott A. HodgeExecutive DirectorTax Foundation

The headline grabbing financialcollapse of the Enron Corporation(a small contributor to the TaxFoundation since 1996) has attract-ed Washington’s political culturelike a moth to flames. Politicians ofboth parties are promising to “get tothe bottom it” in order to punishthose responsible and protect thethousands of employees whose pen-sions are now bare.

Its too bad that these same poli-ticians can’t bring the same vigor toaddressing the severe financial prob-lems facing the federal government.

But in a welcome display ofcandor, President George W. Bush’sFiscal 2003 budget documents thealarming amount of financial mis-management in virtually every fed-eral agency in the government. Thebudget reports that “on average, ittakes agencies almost five monthsof heroic efforts to close theirbooks. And even then the overallgovernment has been unable topass its audit.”

In order to bring accountabilityto government agencies, the Admin-istration has announced that it willbegin keeping a Management Score-card based on a simple “traffic light”grading system — green for success,yellow for mixed results, and red forunsatisfactory. This year’s scorecardis a sea of red and yellow. Of the 26major agencies judged, the lonegreen award was given to the Na-tional Science Foundation for itsfinancial management system. Everyother agency is a dismal failure.

It should come as no surprisethat the most serious financial man-agement problems are found at thegovernment’s largest agencies: TheDepartment of Health and HumanServices (HHS), and the Department

of Defense(DOD). Ac-cording tothe Bushbudget,“HHS’s finan-cial management systems have beennon-compliant with federal laws andregulations since 1996, and its sys-tems remain inadequate to producereliable financial information.”

As a result of this financial mis-management, HHS — which willspend $400 billion this year on pro-grams such as Medicare and Medic-aid — made at least $12.5 billion inerroneous overpayments to provid-ers in the Medicare system alone.Medicare has been on the GeneralAccounting Office’s list of “HighRisk” programs since 1990.

When it comes to “High Risk”agencies, the Administration facesan even bigger challenge in fixingthe financial problems at Defensewhich first received GAO’s designa-tion in 1995. DOD has over 600different management systems totrack its finances, yet few of thesesystems are compatible. As a result,GAO reports that “no major part ofDOD’s operations has been able toprepare financial statements thatcomply with generally acceptedaccounting principles and pass thetest of an independent audit.” DODis expected to spend nearly $330billion this year, but with problemsthis severe how can we be sure?

But the award for financial in-eptitude sustained over the longestperiod of time clearly goes toAmtrak, the National Passenger Rail-road Corporation. According to theBush Budget, Amtrak has never post-ed a profit in its 31-year history.Indeed, Amtrak has accumulated

more than $20 billion in operatinglosses over the past three decades,an average of $660 million per year.Estimates have put the per-passen-ger subsidy at $47 per-ride, but it islikely much higher. Although Con-gress had ordered Amtrak to be-come self-sufficient by the end ofthis year, the railroad now claimsthat it not only cannot meet thisdeadline but needs more subsidiesto survive.

Troubling as these mismanage-ment issues are, they pale in com-parison to the government’s long-term liabilities. Of course, most tax-payers already know about the $3.4trillion in outstanding debt held bythe public because that figure getsso much public attention. But feware aware of the government’s otherliabilities, such as: nearly $2.8 tril-lion in pension, disability, and healthcare costs for current and retiredcivilian and military employees;$300 billion in expected costs toclean up environmental damage ongovernment properties; and $37billion in loan guarantee liabilities.And the biggest whopper of all,Social Security’s $24 trillion cumula-tive cash shortfall — in today’s dol-lars — over the next 75 years.

Why doesn’t this abuse of tax-payer dollars get the bold headlinesreserved for private scandals suchas Enron? One reason is that thecost of the government’s financialmismanagement is spread across125 million taxpayers. No one of ushas been “harmed” enough to makefor a compelling congressional hear-ing.

While it may be difficult to iso-late the victims, it should be fareasier to identify those responsibleand hold them accountable. ThePresident’s budget has given law-makers the road map. It’s up tothem to make protecting taxpayers’interests as important as protectingshareholders’.

Protecting Taxpayer InterestsJust as Important as ProtectingShareholders

16

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PAIDWashington, DCPermit No. 5229

TAX FEATURES©

Tax Features© (ISSN 1069-711X) is published bi-monthly by the TaxFoundation, an independent501(c)(3) organizationchartered in the District ofColumbia. Annualsubscriptions to thenewsletter are $15.

James C. Miller III, Ph.D.Chairman, Policy Council

Joseph O. Luby, Jr.Chairman, Program Committee

Michael P. BoyleVice Chairman, Program

Committee

Scott A. HodgeExecutive Director

Bill AhernEditor & Communications

Director

John S. BarryChief Economist

Alicia HansenStaff Writer

J. Scott MoodySenior Economist

David HoffmanStaff Economist

Vernetta ScottAdministrator

Tax Foundation(202) 783-2760(202) 783-6868 Faxwww.TaxFoundation.orgTF@TaxFoundation.org

To commemorate our 65th Anniversary, we willuse this page during 2002 to reprint items fromour archives. This opinion piece in the New YorkSun celebrated our 10th year in 1947.