Sep 29 2004
On Thursday of last week, both houses of Congress voted overwhelmingly to extend three tax cuts aimed at the middle class, along with a number of business tax breaks. This extension included the $1,000-per-child tax credit, continued tax breaks for married couples and the extension of law that would prevent the ten percent tax bracket from slipping down to smaller amounts of earned income. These tax breaks translate into real money for working families, and I am pleased that Congress was able to extend the law in a bipartisan fashion. It has been a tremendous four years for tax relief. Working closely with Congress, President Bush has been able to accomplish almost his entire first term tax agenda - worth almost $1.9 trillion to Americans. This savings translates into increased investment and has laid a solid foundation for growth, and I remain encouraged by signs that the economy has turned a corner and is poised for continued expansion.
I was very encouraged by the President’s recent remarks regarding not only tax relief, but comprehensive tax reform. President Bush believes, as I do, that America’s taxpayers deserve, and our future economic prosperity demands, a simpler, fairer, pro-growth system - and he has pledged to lead the effort to simplify the tax code in his second term. I applaud the President for his initiatives, and I will strongly support his efforts in the Senate. As the President noted, America’s taxpayers spend more than six billion hours every year on paperwork and other headaches trying to navigate our convoluted and complex tax code. Our current tax code is a complete waste of resources both from the taxpayer perspective and for the federal government. Because the tax code is so complex, even the IRSs’ own experts are often uncertain of what is required to be in compliance with the current law.
When Congress passed the $330 billion tax cut in June of last year, an initiative that I would have preferred to have been even larger by the way, I introduced legislation - as I have advocated since 1984 - that would replace our current tax system in favor of the flat tax. My legislation would require all taxpayers to pay at an equal rate - seventeen percent. No more unfair special interest deductions, or unclear provisions, or painstaking forms to fill out. The flax tax simplifies every part of the taxpaying process, while providing a more fair system for all Americans to follow. Rather than wade through stacks of complicated IRS forms and instruction manuals, under a flat tax, taxpayers will file a simple postcard size return. I agree with President Bush that the time for major reform is now.
The flat tax would also return the Internal Revenue Service to its core mission - collecting revenue for the federal government. Our tax code should be efficient and focused, not used as a means for dictating social policy. Under a flat tax, income would be taxed only once. The death tax and the capital gains tax would be eliminated. The savings in resources by the taxpayer and the government both in expenditures and manpower would be immense.
On the capital gains tax reform front, I am a co-chairman of the bipartisan and bicameral Zero Capital Gains Tax Caucus, along with Senator Zell Miller, and Representatives David Dreier and Ralph Hall. The goal of this caucus is to promote capital gains tax reform and the beneficial effects it will have on capital formation and economic growth in our country, with the ultimate objective of eliminating the tax. According to the Congressional Budget Office, capital gains receipts account for approximately 3% of total federal revenue. I believe that the economic benefits of eliminating the capital gains taxes would offset any loss in federal revenue. Even a reduction in the capital gains rates would have a positive effect on our economy. While comprehensive reform of our tax system is a heady challenge, I remain committed to looking at every possibility to not only reduce the burden on the American taxpayer, but also the reform the complex morass that is our current tax code.
In addition to my work on tax reform, I have also been active as Chairman of the Senate Banking Committee. As we began the year, two issues dominated much of the Committee’s attention: Examining abuses in the mutual fund industry and creating a new and credible regulator for the housing Government Sponsored Enterprises. While there continue to be new developments in both areas, I have been much more pleased by the success that has been made on the mutual fund reform front. Through the Spring of this year, the Banking Committee held comprehensive hearings with a wide variety of participants to consider such mutual fund problems as market timing, late trading and exorbitant management fees. For close to one hundred million Americans, mutual funds have provided an opportunity to participate in the stock market. The revelations of abuses threatened to erode investor confidence in an area that has traditionally been considered a safe vehicle for retirement and other savings. At the conclusion of our hearings, Chairman William Donaldson of the SEC pledged to the Committee that they would act decisively and thoroughly - and he has continued to deliver on this promise. The SEC’s aggressive actions have gone a long way toward reforming the industry and restoring investor confidence. Although the SEC has completed the bulk of its rulemakings, it still has several issues to address, including final rules regarding late trading and point-of-sale disclosure and proposed reforms regarding soft dollars and 12b-1 fees. As the SEC continues its efforts, the Committee will closely monitor their progress and make sure that the SEC has the tools it needs to fully reform the industry.
The SEC is also very active in another investment area, that of hedge funds. Concerns have been raised regarding the “retailization” of hedge funds---that is the perceived availability of hedge funds to less sophisticated investors. Although statutory and regulatory requirements have traditionally made hedge funds the domain of wealthy, sophisticated investors, concerns have been raised that retail investors are exposed to hedge funds through pension plans and through so-called “funds of hedge funds.” Although I do not care to see ordinary investors directly investing in unregulated investment pools, I also believe that hedge funds play an important and beneficial role in our capital markets by promoting market efficiencies and enhancing liquidity. While I admire and support Chairman Donaldson as he leads the SEC in this area, I hope that the SEC acts carefully. A number of leading experts in capital market operations, including Chairman Greenspan, have urged caution as the SEC proceeds in creating a new regulatory scheme for hedge funds. I share this cautionary approach for such an important liquidity provider in our capital markets.
Another issue that has received a great deal of attention lately is the debate over the expensing of stock options. This is an area that I, along with Ranking Member Paul Sarbanes, Fed Chairman Alan Greenspan and SEC Chairman Donaldson believe should be left for the experts at the Financial Accounting Standards Board to determine. There are currently several legislative initiatives in Congress that would attempt to override the experts at FASB, who have determined that stock options should be counted as an expense. This would be a monumental mistake. The market credibility of the U. S. is at stake in this debate. If we are to retain credibility in the global marketplace, then it is critical that Congress resist the temptation to put politics ahead of principles. If anything other than sound accounting principles becomes the basis for FASB’s rules, then our markets will become less certain and lack credibility. International standards already require expensing, and the U. S. risks falling behinds. If our standards are seen as inadequate, U. S. companies may suffer the consequences of less liquidity and restricted access to capital. From the collapse of Enron and Worldcom, we learned the value of accurate financial information based on independent and objective accounting standards. It seems to be that some in Congress are trying to pre-empt the very action that we encouraged only two years ago during Sarbanes-Oxley. We need investors to be able to trust our markets, and this can only happen with honest accouting. Congress has treaded down this road before. In the mid-90's, FASB proposed the expensing of stock options. When Congress threatened to revoke its authority to set accounting standards, FASB withdrew its proposal and adopted a rule requiring footnote disclosure of stock-option values, failing to treat options as an expense. I do not want to see Congress make the same mistake twice. While there are differing opinions on the effect expensing options would have on business, a recent study of 300 firms that voluntarily expensed options found that their share prices were not affected by the change – a sign that the markets may weigh options efficiently. Indeed, not only have companies such as Coke, Exxon and Walmart decided to expense options, but also technology companies such as Amazon, Microsoft, IBM and Netflix.
It is always a pleasure to come and visit you. I believe that we have a great opportunity ahead to ensure that our markets remain competitive and that our regulatory and tax system continually evolve to reflect this. Thank you.