Max Baucus

Mr. BAUCUS

Mr. BAUCUS. If I might respond, the answer is no, not formally. I suggest that after about 15 minutes or so, we put the request again. At least we can go through a couple amendments now, then renew the request in 15 minutes.

Mr. BAUCUS

Mr. BAUCUS. Madam President, I ask unanimous consent that the pending amendments be temporarily set aside so the Senator from Washington can offer an amendment.

Mr. BAUCUS. Madam President, I appreciate what the Senator said, and he is correct. We have had all kinds of theories, and it is hard to tell what is the most accurate. Maybe we should just not pass this bill because we are going to make the Code that much more complex by passing this legislation, and so we will at least be giving the commission a bit of a break. I appreciate what the Senator has said.

Mr. BAUCUS. Madam President, I think the Senator from Ohio is on target. It makes excellent sense for the United States to set up some kind of a tax commission to take a good, hard look at our tax structure. As I listened to the Senator's amendment being read, one thought came to my mind, though. That is, commissions sometimes work and sometimes they don't work. And the goal here, clearly, if we do this, is to make it work. That begs the question, how do you make it work? How do you make it worthwhile, not just some outfit drawing conclusions that are put on the shelf to gather dust. Most commission recommendations are put on the shelf to gather dust. The one commission that comes to my mind that really has worked--and I can think of many that have not--is the commission on Social Security back in the early 1980s, when President Reagan nominated Chairman Greenspan to head the commission on Social Security. Various Senators were on the commission. Senator Dole was on the commission, and Senator Moynihan. They had a job to do, and they did a pretty good job. It was not political. The President, both bodies of Congress, both political parties, all got together and worked with members on the commission to come up with recommendations to save Social Security. Two points: One is, the membership is people who really want to do a good job. They work together. There is not any political sniping, no partisan rhetoric. They work together. And it is very important that the composition of the commission be people who do want to work together; that is, the commission not be stacked. The second point is at that time there was a crisis. Social Security was about to go belly up. A crisis generally creates solutions and results. The complexity of the U.S. Tax Code and the increasing complexity of the Tax Code may have become a crisis in the nature of Social Security back in the early 1980s; I don't know. I am saying to the Senator from Ohio: It is a good amendment. As most things in life, it is the followthrough that counts, the followup that counts. It is making sure that if we do this, the right people are appointed. I say that in part because when I listened to the Senator, he mentioned two members appointed by the majority leader, one by the minority leader, three by the President, and also the House. It has the possibility of being a stacked deck, possibility of being a partisan commission. That is the last thing we need around here is a partisan commission on tax reform. I would like to work with the Senator, and I know other Senators would like to work with him, to do the very best we can to make sure this is not a stacked deck, and it is not therefore a commission whose recommendations collect dust on some shelf somewhere but rather something that makes good sense. One other point I might mention while the Senator from Ohio is here. I know the Senator is wondering, just as I think most Senators in this body are wondering, what is the real effect of dividend exclusion. What effect does it really have. There are a lot of people who have lots of ideas. A lot of economists have spoken on the effect of excluding dividends from income. I think in theory most of us agree there is some inequity between the taxation of equity and the taxation of debt with respect to companies' decisions as to whether to invest or investor decisions as to whether to invest. One point that often rises in the debate is the wealth effect. What is the wealth effect of a significant reduction in dividend income? Who knows, really? There are all kinds of analyses; different people have different points of view. We are trying to do our best to try to get opinions of people who really don't have an axe to grind, of people who really, as far as we can tell, are pretty straight, who have their heads screwed on straight and they are trying to give us the right recommendation rather than spoon-feed us some political agenda from any side. I am trying to do the best I can by trying to find people who are probably neutral. The three organizations I looked at that have analyzed the wealth effect of the President's dividend proposal are Brookings Institute, McKinsey & Company, and Goldman Sachs is the third. Let me go through first the Brookings analysis briefly. I think it is instructive. The total value of equities held by households in the United States is $10 trillion. That is, the total value of all equities held by households is $10 trillion. I will get to institutional investors in just a moment. The reasonable estimate of the stock price increase due to the President's dividend proposal, according to Brookings' analysis, is 5 percent. The increase in value effect of equities held by households as a result of the stock price increase is about $500 billion. The next question is what is the wealth effect, how much effect of that increase, if it is 5 percent, is going to be translated into spending in the economy. The Brookings analysis is that the wealth effect--that is, the percent of wealth increase that is consumed rather than saved by households--will be 3 to 5 percent. So that means the increase in consumption as a result of the wealth effect is about $15- to $25- billion, which is about .14 percent to .23 percent of GDP. We all know that usually to have a real stimulus in the economy you need somewhere between 1 and 1.5 percent; and .14 and .23 is certainly very small compared with 1 percent or 1.5. That is the Brookings analysis. The McKinsey Company's analysis is very similar. I want to read a quote from the McKinsey analysis. I think it is instructive. It says: But the proposed tax cut (eliminate tax on dividends) isn't likely to have a major lasting effect on US share prices, primarily because the key investors who drive them are already exempt from taxes. What little impact the proposal may have was probably reflected in the 2.2 percent gain in the S&P 500 the day before it was announced. Continuing on to quote: Those who believe otherwise draw on classic finance theory. In a world without taxes, theory suggests, shareholders would be indifferent to whether a corporation paid dividends, since the funds to do so would come at the shareholders' own expense. In a world with taxes, shareholders may face different tax rates on, for example, dividends as opposed to capital gains. They would care whether a company retained its earnings or distributed those earnings as dividends, because this would affect how much they got to keep. If all investors paid taxes on dividends, yes, share prices probably would rise if the tax were eliminated. The fact, however, is that tax-paying US individual shareholders own a minority of all US shares-- That is, about 28 percent. That is, individuals own about 28 percent. whereas tax exempt US institutions and individuals who hold shares in tax-exempt accounts own 61 percent. (The remainder was in foreign hands.) For the most part, tax-paying individual shareholders don't drive share prices, whereas nontax-paying institutional investors do: the trading activity of a company's top 40 to 100 investors--again, usually big institutional investors--accounts for 70 percent of its stock price movement. Since these investors are indifferent to the issue of taxes on dividends [because they are tax exempt] they are unlikely to set in motion the kinds of changes in their portfolios that would drive up share prices. I will soon yield to the Senator from Ohio. The third reason Goldman Sachs gave in their review is that it would generate no more than a 5 percent increase in stock prices. That is the Goldman Sachs view.

Mr. BAUCUS. Madam President, I ask unanimous consent all pending amendments be temporarily set aside and the Senator from Michigan be recognized for the purpose of offering an amendment.

Mr. BAUCUS. I yield whatever time the Senator from Washington desires.

Mr. BAUCUS. Madam President, it is my understanding that all Senators who wished to speak on the Collins amendment have spoken. I ask unanimous consent that all pending amendments be temporarily laid aside so the Senator from Washington can offer her amendment.

Mr. BAUCUS. Madam President, I, too, am pleased we are going to be voting to increase aid to the States. Earlier this year, I offered legislation to cut taxes, but its centerpiece was aid to the States. In fact, I suggested $75 billion in aid to the States. That sounds like a pretty large sum, but I suggested in the introduced legislation to provide up to $75 billion because, in my judgment--and I think it is the judgment of most economists--dollars that are spent to help States to balance their budgets will significantly help the economies in those States. Unfunded mandates by the U.S. Federal Government has caused some of the problems the States are facing. No Child Left Behind has been mentioned, and there are others, such as IDEA and special education. There are various unfunded mandates. We in the Congress have said that the States must provide these services, but the President and the Congress have not provided the money to the States so they can provide these services. So the States have had to figure out how to pay for these services because that is Federal law, they must do so. In the meantime, as we all know, States have suffered dramatic reductions in revenues because the economy has been down. States all across the country have not received near the amount of revenues they expected in their last budgets. When you add to that rising health care costs in the country, which are averaging 12 to 13 percent higher each year, this is a huge increase to the States' Medicaid budgets and other health care budgets. So it is very important to give increased aid to the States. I am disappointed, frankly, that this bill provides only $20 billion when the need is so great. I remind our colleagues also, as the occupant of the chair knows well--particularly because her father is Governor of a State--States have to balance their budgets. That is not true for the Federal Government. When States face all these unfunded mandates and a reduction in revenue, they have huge budget deficits, which they have to somehow solve, and they can only do so by raising taxes or by cutting various State services, such as Medicaid--their share--and whatnot. So that is why we are here today and why so many Senators have spoken out in favor of aid to the States. We are soon to have an amendment offered by the Senator from Washington, which I support. She is going to suggest even more aid to the States. This $20 billion is merely a drop in the bucket. As we all know, the budget deficit in California is $35 billion alone. This bill provides just $20 billion. One State alone is much more than that. My State of Montana is running a budget deficit of about $260 million. We are a small State, but $260 million in deficit is a lot for my State with a population of 19,000 people. So I join in the chorus, and I particularly thank the Senator from Maine and the chairman of the committee. I also thank the other Senators who are working to put this together. I must say I will support it, but I wish we were a little wiser, frankly, and providing more aid to the States. Certainly $20 billion is low, but if that is all we can get, that is what we face. I thank all my colleagues who have worked on this. Madam President, I now yield 3 minutes to the Senator from New York.

Mr. BAUCUS. Madam President, I yield such time as the minority leader himself may use.

Mr. BAUCUS. Madam President, I ask unanimous consent that the pending amendments be temporarily laid aside so the Senator from Ohio may offer an amendment.

Mr. BAUCUS. Madam President, I ask for the yeas and nays on the amendment.

Mr. BAUCUS. I ask for the yeas and nays on the amendment.

Mr. BAUCUS. Will the Senator from Washington yield me 10 minutes?

Mr. BAUCUS. Mr. President, I have the highest regard for my friend from Iowa, but for him to characterize this as a job-killing amendment is just beyond the pale. The fact of the matter is that less than 5 percent of small businesses are in the top bracket that will be repealed under the amendment. That is a very conservative estimate. Second, when we are talking small businesses under terms of this amendment, we are talking about law firms, we are talking about partnerships of all kinds. We are talking about dental partnerships and doctor partnerships. When people use the word ``small business,'' it conjures up a 15 or 20-person operation that is working hard to make ends meet. When we talk about small business, however, we must be clear as to which small businesses are in that top rate. Less than 5 percent of all small businesses pay that top rate, so we are not hurting small business with this amendment, by any stretch of the imagination. Second, this roughly 5 percent of small businesses includes the mom- and-pop small businesses we have all talked about, but also the partnerships like law firms and dental partnerships. I do not think the latter really conjures up what we are talking about when we talk about helping a small business. Maybe we are, but I think most Americans are not. That is a fact I want to get in the record, that really so few small businesses are in that top rate. I ask unanimous consent that the pending amendments be temporarily set aside so that the Senator from Arkansas may offer her amendment.

Mr. BAUCUS. Madam President, this amendment is designed to take effect earlier rather than later and provide substantially more benefits than the tax bill that is presently before us. It is designed to help stimulate the economy with more wallop, more punch, earlier rather than later. How does it do that? Two ways. First, it would speed up the dividend tax relief. It would make it take effect earlier rather than later. Second, it would simplify the mechanism that will be sending checks out to people who qualify for the child tax credit. So, there are two ways that this amendment will help provide more income relief, more quickly, to more Americans, than what is contained in the bill. It is an improvement upon the bill. First, with respect to speeding up the dividend relief, the dividend proposal in this bill is not effective until the year 2004. Many provisions of this bill take effect in 2003, but the dividend provisions of the bill do not take effect in 2003; rather, a year later, in 2004. I suspect it is to save revenue. There will be no dollars injected into the economy, as a consequence of the dividend proposal, in the year 2003. It will be later, in 2004, and even then it is going to take some time for Americans to change their tax returns to take advantage of this change. As I stated earlier, we are here today because the economy demands that we act quickly to help our anemic economy. Let's see what we can do to help create more jobs. To rebuild the economy. To rebuild America. In my State of Montana, we desperately need jobs. Many of our high school and college graduates are leaving Montana. Why? Because they cannot find a job in the State. They go elsewhere. There is a better chance of finding a job in one of the larger cities. But, even that is difficult. Lack of jobs is a national problem, it is not just a problem in Montana. I think over 2 million jobs have been lost in the last couple of years because of an anemic economy. We want to get moving quickly. We want to get moving earlier than we otherwise would. We should seek policies to help the economy grow as soon as possible. I disagree with the current dividend proposal for several reasons. One, it creates a three-tiered regime. It makes the Tax Code even more complex. It creates a three-tiered regime for investment income. Interest income would be fully taxed, as it is today. Capital gains would be taxed at about half the rate of ordinary income, as it is today. But we now add a third complexity of taxation of investment income, and that is dividend income which would fall to the new regime; that is, the first $500 of dividend income would be excluded from one's income tax, and then, beginning in later years, in 2004, the next 10 percent of dividend income would be excluded, and then in the year 2008, 20 percent of dividend income would be excluded. A new layer, a new complexity, certainly with respect to investment income. My point is, if we are going to include a dividend proposal in this bill, why not make it take effect earlier? Our economy needs the boost right now, not when taxpayers file their returns in 2005. The dividend provision takes effect in 2004 but, frankly, it does not really take effect until 2005 when people file their tax returns. The dividend proposal has no stimulative effect in the year 2003. Most people do not even get the benefit in 2004. Most individual taxpayers will have to wait until they file their tax returns in 2005 to reap the benefit of a dividend exclusion in the bill. My amendment will advance the effective date of the dividend provision in the bill to January 1, 2003--this year. This means taxpayers will get relief for dividends they receive this year. I have my doubts whether the dividend tax relief has much stimulative effect generally, but some will praise the economic virtues of dividend tax relief. I ask, if there are virtues, why wait? Make the proposal effective for 2003 at least to provide the possibility that the economy will see some benefit. The second provision in my amendment will get more dollars to families by simplifying the distribution of the increased child credit that we passed this year. The President has proposed accelerating the full $1,000 child credit to 2003. It is currently $600. The President has proposed accelerating that, the full $1,000 to take effect this year, 2003. Instead of making taxpayers wait until next spring when they file their tax returns to get the credit, the President has proposed sending the checks out this summer for the $400 increase in the credit. That is the same provision which is included in the Finance Committee bill. I support the acceleration of this credit for working families. It is the right thing to do. I think sending this increase out to taxpayers right away also makes good economic sense. Why wait? This gets money into the people's hands immediately so they can spend it. This will spur consumption and boost the economy, which is exactly what we should be doing in this bill. My concern, however, deals with the millions of families who will not receive the full $400 check due to refundability limits. I might remind our colleagues that a couple of years ago, when we sent out the so- called $300 check for individuals and the $600 check for married couples, a lot of people did not get the $300; married couples did not get the $600. Why? Because of the tax brackets the taxpayer happened to fall into when they did the calculation to find out what portion of the $300 an individual might receive. If the taxpayer had a lower income, the taxpayer might not receive the full $300. It was a mess. Some got the full $300, some did not. It was a mess. Under current law, the credit is partially funded. Families can take part of the credit if they pay payroll taxes but do not have income tax liability. Not the whole credit, but part of it. The amount that a low- income family can get refunded is to increase in 2005. The President's proposal did not accelerate the refundability of the credit. Fortunately, during consideration of the bill, the Finance Committee adopted an amendment offered by Senator Lincoln. Her amendment was to accelerate the refundability of the credit. This will allow many low- income families to see some benefit from the increased tax credit. However, even with the inclusion of the refundability amendment, many low-income families will not be eligible to receive the full $400. Millions of working families who have incomes between $10,000 and $20,000 will not get the full $400 check. They will receive a partial check. Again, people are not getting what they are promised. We are increasing the child tax credit from $600 to $1,000 to take effect in 2003 and telling people they get an additional $400 in 2003 and many will not get it. We tell them that is the law, but they will not get it because their incomes are in certain brackets. Those whose incomes are between $10,000 and $20,000 will get less than the full $400 and receive only partial checks, and they will not know how much unless the IRS tells them how much the following year. That does not make sense. The families who are most likely to spend the check, those who spend most of their income, will not get the full amount. My amendment guarantees each and every working family eligible for the child credit would get the full $400 check. This fulfills two of the goals of the stimulus package, getting more money out of the door immediately and getting it to the people who will spend it, lower income people. These two changes to the bill will inject an additional $15 billion into the economy in 2003 and 2004, more than provided for in this bill. That makes sense. The additional dollars in the next 2 years will help create more jobs, help boost demand, and help rebuild the economy. To pay for the modifications, my amendment merely eliminates the increase of the dividend exclusion from 10 percent to 20 percent in the year 2008. To repeat, in the bill, the 10 percent exclusion is increased to a 20-percent exclusion, and does not take effect until 2008. I say that is too far off. Let's repeal the increase that is scheduled to take effect in 2008 and take that $15 billion and dedicate it to the working families. That will take effect in the early years, 2003 and 2004. We could make the dividend proposal, therefore, effective now, not later. The current provisions in the bill provide that the dividend exclusion does not take effect until 2004, not 2003. This amendment leaves in place the 10-percent exclusion that is still in place but takes effect a year earlier; that is, 10 percent above the $500 goes in. We are simply saying that the exclusion in 2008 will still be 10 percent. That is so far off. Why schedule an increase that does not take effect until 5 years from now? I urge my colleagues to support this amendment. Briefly, it moves money upfront. It does not change the total amount of the bill but moves it upfront a little more so there is more stimulative effect in the short run. Thus, the bill does what it is purported to do, which is to create more jobs. I yield the floor.

Mr. BAUCUS. Madam President, I yield myself 5 minutes off the bill. For the record, I want to make a correction. I know it was an oversight by the Senator from Iowa when he mentioned that the Medicare trust fund will be somewhat in jeopardy in future years. That is true, but I know it was an oversight when he failed to state that, under the terms of our amendment, the trust fund will be made whole through transfers from the general fund over to the Medicare trust fund, so it will be made whole or kept whole and held harmless under this amendment. I know that was an oversight, but I wanted to say that for the record.

Mr. BAUCUS. Mr. President, I ask unanimous consent that the following staff of the Joint Committee on Taxation be granted the privilege of the floor, and I send the list to the desk. We worked out an arrangement so they rotate.

Mr. BAUCUS. I yield 5 minutes off the amendment to the Senator from Illinois.

Mr. BAUCUS. Mr. Chairman, I yield 5 more minutes to the Senator from Illinois.

Mr. BAUCUS. I ask unanimous consent that the pending amendment be set aside and the Senator from Arkansas be recognized to offer her amendment.

Mr. BAUCUS

Mr. BAUCUS. Mr. President, I ask unanimous consent that all pending amendments be temporarily set aside so that the Senator from New York can offer an amendment.

Mr. BAUCUS. Mr. President, under our informal agreement, we had been switching back and forth. The Senator from South Carolina is now recognized.

Mr. BAUCUS. Mr. President, tomorrow, an amendment will be offered--I am not sure by whom; it may be Senator Nickles from Oklahoma--which accelerates the dividend exclusion provisions considerably beyond the provisions that are in the Finance Committee bill. Our understanding is it is a 50 percent exclusion in the first year, 2003, and 100 percent up through 2006, and after that the provision will be sunsetted. I will make a couple of comments because we will not have time to comment on it tomorrow at any length. One is that this is a significant increase from the committee bill, which costs $80 billion. My understanding is that this amendment will cost in the neighborhood of $124 billion. How is the $40 billion difference going to be paid for? Clearly, there is going to have to be cutting back on other tax cuts--whether it is the marriage penalty or whatever--to bring that to the attention of Members who may believe it is better to have a child tax credit or a marriage penalty and whatnot. And I have not seen the amendment, so I am not exactly sure of the provisions, but from all indications, it will eliminate the provisions in the President's dividend exclusion, which will require that before a dividend can be paid, a company would have to pay income taxes in the prior year. If that provision is eliminated, that is going to mean that we are not only ending double taxation of dividends, in many cases we will be ending single taxation of dividends, which, in a sense, will mean dividends will be tax-free. All American wages will be taxed, interest income will be taxed, and other ordinary income is going to be taxed. But if a company did not pay taxes in the prior year, then the company will be basically giving dividends to shareholders, and there will be no tax on them, not at the individual level or the corporate level. That, I think, is a gross miscarriage of justice. For that additional reason, I hope the Senate does not adopt that provision when we vote on it tomorrow.

Mr. BAUCUS

Mr. BAUCUS. In addition, in the consent request there were two Burns amendments. I ask unanimous consent that be modified so there is only one Burns amendment, and that is amendment No. 593.

Mr. BAUCUS. There is a correction on the vote sequence. Landrieu amendment No. 579 in the consent request should be amendment No. 619. I ask unanimous consent that change be made.