FROM THE OFFICE OF PUBLIC AFFAIRS

I am very happy to be here at your annual conference. There has always been a strong tie between TEI and Treasury. You give us important feedback on policies and procedures, and you have been especially helpful to us in the ongoing reorganization of IRS.

This conference is just one of an array of educational programs in every area of tax practice and policy your Institute organizes, both in Washington and in the states. It is the responsibility of your members to look at tax issues from the standpoint of your companies, their stockholders and their customers. It is our job to represent the national interest as we see it and as Congress has directed us. In many cases, our goals are consistent and we appreciate our partnership in these matters. The creative dialogue between us has been going on for a long time, and I hope it will continue.

I want first to touch on some issues of special importance to you. As you know, earlier this month the World Trade Organization issued a final decision holding that our foreign sales corporation regime constituted an impermissible export subsidy that violates two WTO agreements. The decision requires the withdrawal of the FSC tax exemption as of October 1, 2000. I share your disappointment with this decision. From the time we learned that the European Community might bring a case against the U.S. over our FSC rules, the Administration has committed substantial resources and done everything possible to defend these rules. Our strategy and legal positions have been developed with the involvement and advice of interested members of Congress and the private sector. We will continue to commit the resources necessary to evaluate the opinion and assess the prospect of an appeal and other available options. Our goal is a level playing field for United States companies. I appreciate and welcome any assistance that TEI can offer us in evaluating our options.

Let me also just briefly discuss subpart F, which deals with the taxation of the income of U.S.-majority controlled foreign corporations. This part of the tax code provides that certain income of such corporations will be taxed currently as part of the income of the corporations' U.S. shareholders. As many of you know, Treasury has been working on a study of this area to determine whether subpart F is still fulfilling its original purposes, whether those purposes are still valid, and whether any recommendations for change should be made. This report should be released soon.

The taxation of foreign income is an important issue in an era of globalization. Our system has to strike the right balance. We should not impose inappropriate burdens on U.S. businesses when they invest abroad. But we should not unduly favor investment abroad, which may mean that domestic businesses and individuals will bear a greater tax burden. Once our study is published we hope that you, and others, will discuss with us ways to improve subpart F. I should also mention that we are currently looking at the tax issues raised by new technologies and by new paradigms of conducting business, including of course the Internet and electronic commerce. These new technologies increase the distance across which a transaction can be easily and speedily conducted and have decreased the distance between producers and their ultimate customers, by reducing the need for intermediaries. The stakes in approaching these new issues are high. Forrester Research projects that on-line retail sales in the US should reach a staggering $185 billion by 2004. Although Forrester estimates that would be only seven percent of total retail sales in the US, state and local governments perceive this growth in electronic sales as a threat to their sales tax revenue base. At the same time, electronic commerce is spurring growth in the US and so the economic cost could be high if it were subject to discriminatory taxation here or abroad.

It is for these reasons that we supported the Internet Tax Freedom Act and its three-year moratorium on the imposition of discriminatory new taxes on the Internet. The Administration, for the same reasons, worked with our international trading partners to secure the temporary moratorium on the imposition of tariffs on telecommunications transmissions and seeks a permanent moratorium on tariffs on electronic transmissions for as long as possible.

Through our ongoing participation in the Federal Advisory Commission on Electronic Commerce and the Organization for Economic Cooperation and Development (OECD), we will continue to work toward ensuring that commerce conducted by these new means is not subject to discriminatory taxation and that any solutions adopted take account of the global nature and other special characteristics of this new commerce. Our view, endorsed by the OECD, is that any taxation of the Internet or electronic commerce be neutral, non-discriminatory, simple, certain, fair and flexible.

From the time the Sixteenth Amendment became part of the Constitution, eighty-six years ago, our national tax policy has reflected the nation's social goals and economic strategies. The first Revenue Act, passed in 1914, established the principle of progressive taxation-although the maximum individual rate was only seven per cent. The Revenue Act of 1932 was based on the assumption that a tax increase would stimulate the economy. In more recent decades, this goal was sought through tax cuts. Over the years, we have seen the tax laws used to encourage and discourage all manner of social and economic activities. Indeed, some of the fundamental issues we have faced as a nation-education and poverty, housing and health care, economic isolation or international involvement-have all presented themselves in the form of changes in the Code.

The Administration has set out four criteria by which we evaluate all tax policy proposals:

• Are they fiscally responsible?

• Do they promote fairness, especially for working families?

• Do they promote economic prosperity and growth, and

• Do they make it simpler for ordinary taxpayers to comply with the law?

Our commitment to the first criterion of fiscal responsibility should be very clear. Reducing the Federal budget deficit has been a centerpiece of this Administration's economic policy. We made difficult, and sometimes unpopular, choices in 1993 and 1997, and those choices--together with strong economic growth--have turned the unified budget deficit into a budget surplus. In 1992, the deficit was $290 billion and projected to rise; in 1998, the surplus was $69 billion, and tomorrow we will announce the surplus for the fiscal year just ended, which we project to exceed $115 billion.

Building on this remarkable achievement, the President has now set a higher standard: to balance the government's books excluding the surpluses generated by the Social Security system. In the Mid-Session Review of the Budget in June, the Administration presented a framework that dedicated the projected on-budget surpluses to four priorities: saving Social Security, reforming and modernizing Medicare, maintaining prudent levels of discretionary spending, and providing a large tax cut for retirement savings. Even after meeting these priorities, the framework left a balanced on-budget.

Today the President will submit legislation to Congress to implement this plan, and he has emphasized his desire to work with Congress to pass this legislation. The proposal would protect the Social Security surpluses, make transfers to Social Security equal to the interest savings from debt reduction achieved by locking away the Social Security surpluses, and reserve one-third of the on-budget surplus over the next 10 years for Medicare. The bill would also extend the discretionary caps and pay-as-you-go budget enforcement rules.

The President's budget framework would pay off the federal debt by 2015, helping to spur economic growth and keep interest rates down. It would extend the solvency of both Social Security and Medicare. And it would provide the crucial government services on which the American people depend-without the budget gimmicks and the potentially damaging across-the-board spending cuts being proposed.

The across-the-board cut now being discussed sounds like a fairly small change.

But it would reduce the number of military personnel in the current fiscal year by 39,000; the number of women, infants and children who receive food assistance from the WIC program by 100,000; and the number of children in the Reading Excellence program by 14,000. Moreover, if one rejected all budget gimmicks, such as labeling the 2000 Census an "emergency," the across-the-board cut needed to balance the on-budget in their plan would be over 6 times as large.

Thus, as the budget process continues this fall, the Administration will continue to focus on these issues:

• the importance of protecting the Social Security surplus and extending the solvency of Social Security;
• the importance of devoting part of the projected on-budget surpluses to Medicare reform rather than an unaffordable tax cut;
• and the importance of an honest and disciplined approach to federal budgeting.

The second test, fairness or equity, has long been recognized as an important tax policy goal. The purpose of a tax system is to raise revenue in a fair and equitable way. It is vital to any tax system, but particularly to a voluntary one like ours, that revenue be raised in a fair way; that it be perceived as being administered in that way and that the tax base be protected from avoidance and evasion. In that connection, I want to commend Commissioner Rossotti and the IRS for all they are doing to comply with the directives of Congress in the IRS Restructuring and Reform Act of 1998, in making the Service more responsive to the needs of the taxpayer.

It is not difficult to determine which of the proposals currently under discussion meet the test of fairness. The Earned Income Tax Credit certainly does. It entered the Code during the Ford Administration, but was greatly strengthened by the 1993 Act. The EITC reduces the burden of Federal taxes for 20 million low and moderate-income working families. In 1998, it lifted 4.3 million persons above the poverty line. The proposal made recently to delay EITC payments next year fails the fairness test. In order to help avoid a fiscal 2000 deficit it would impose an unfair tax increase on up to 20 million working families who expect to receive the full amount of the credit when they file next winter and spring. No other group of taxpayers is being asked to delay receipt of their tax refund.

The proposed long-term care credit in the President's budget meets the test of fairness. It is available to people who must pay out a large portion of their income because they are incapacitated and also to people who are primary caregivers for someone in their families, and who forgo the opportunity for other income in order to care for them. Two million taxpayers-most of whom are elderly-would benefit from this proposal. An above-the-line deduction for individually purchased health insurance fails the test.

Larger benefits would accrue to high-income taxpayers most able to afford insurance. A disproportionate number of low-income workers have no health insurance, and would gain nothing from this proposal.

Any proposed increases in tax incentives for retirement savings must also meet the test of basic fairness. Our tax preference for pensions is designed to encourage retirement benefits for moderate and lower-income families, who need them most to supplement their Social Security benefits. Proposals to raise the maximum dollar limits for pension contributions, whether by employer or employee, fail that test. These initiatives -- and related proposals to weaken anti-discrimination and top-heavy safeguards that protect lower- and middle-income Americans -- represent a regressive, "trickle down" approach that could actually lead to reduced retirement benefits for millions. The fair alternatives are incentives-- based, for example, on the President's universal savings accounts proposal -- that are targeted to the segment of our work force that needs it most.

Third is prosperity and economic growth. No tax initiative has done more in recent years to promote these goals than the R&E tax credit. It underpins the technology sector, which has been responsible for creation of the majority of the new jobs in our economy in recent years. It needs to be extended. Measures to encourage retirement savings, such as our proposed new USA accounts, would increase savings, making more funds available for private investment, and spurring growth.

Our prosperity is also enhanced to the extent that investment decisions are based on business considerations, not tax considerations. In that connection, as Secretary Summers told you last March, curbing corporate shelters is a high priority at Treasury and within the Administration. The recent proliferation of shelters undermines the integrity of, and poses a significant threat to, our self-assessment tax system. We are pleased with the recent court decisions in the Compaq and Winn-Dixie cases. They confirm a central judgment we made in preparing our corporate tax shelter proposals-that a strong, coherent economic substance doctrine is critical in addressing these transactions. Litigation, however, is an inefficient and expensive tool to deal with this problem. Significant resources are being expended to address and combat these transactions. Our budget proposals -- by codifying the economic substance doctrine, requiring advance disclosure of these transactions, and increasing penalties on both participants and promoters -- properly ensure that taxpayers do not ignore the need for meaningful economic substance in analyzing potential transactions before engaging in them. Our Corporate Tax Shelter White Paper took up many of the concerns that had previously been raised regarding our proposals. We look forward to working with TEI on this important problem and would welcome the opportunity to speak with any of you regarding remaining concerns you may have.

Simplicity is our fourth tax policy goal. Clear and simple tax rules foster respect for our tax system. They facilitate voluntary compliance and improve the ability of the IRS to administer the Code. The more complex a rule, the less likely it is to be applied and enforced. The Administration's budget this year advanced simplification by proposing to extend for two years a provision effective in 1998 which allows personal credits to offset the tentative Alternative Minimum Tax. This will save about 960,000 taxpayers from having their personal credits reduced, and millions more taxpayers having to undertake complex calculations to determine if they come under AMT. The increased exemption of up to $500,000 in capital gains on home sales, written into law in 1997, ensured that 99 percent of homeowners will not have to pay capital gains on the sale of their home.

Other provisions of the 1997 Act ensured that over 95 per cent of corporations will not have to worry about the alternative minimum tax; and that children claimed as dependents on their parent's return need not file a tax return simply because they have a modest amount of unearned income. This will relieve over one million children from the burden of filing. And as part of the ongoing effort to restructure the IRS, we have made significant progress in increasing the use of electronic filing, which simplifies tax preparation and filing for taxpayers, reduces errors and the need for subsequent follow-up by the Service, and reduces IRS processing costs. This year, 25 per cent of all returns were filed electronically, an increase of nearly 5 million over last year.

I appreciate the opportunity to state our principles of tax policy and some of the measures we propose to carry them out. They are part of the agenda for negotiation and resolution in Washington both this fall and next year. They will also, I am sure, be the subjects of debate and discussion at the many meetings this organization will hold in the future. I am glad to have had this chance to talk to you about them today and we will continue to seek your help and support as much as possible in the months ahead.