FROM THE OFFICE OF PUBLIC AFFAIRS

Good afternoon.

I am quite pleased to speak to you this afternoon. The Tax Foundation is an important forum, especially for the Treasury, which has a profound interest in the quality of our income tax rules and procedures.

I want to talk to you about the three main components of President Bush's tax policy:

• tax relief, or reduction;
• tax code simplification; and
• tax law enforcement.

I will discuss each of these, with my emphasis on our new simplification proposals.

First, tax relief.

I don't have to remind this audience how important the President's historic tax program is. The June 2001 Economic Growth and Tax Relief Act put $36 billion of tax refunds into the hands of consumers last summer and fall - just when we needed it the most, at the nadir of the slowdown. It cut the 15 percent income tax bracket to 10 percent, benefiting every worker who pays income taxes. As the full package phases in over the next few years, all marginal tax rates will fall - this is the first, across-the-board tax cut since the World War II.  Further, over the next 10 years, the child credit will double, up to $1,000 per child, and the marriage penalty will be dramatically reduced.  The death tax will be completely abolished.

All told, 104 million individuals and families will get an average tax cut of about $1,040.

This year, we reduced taxes further. Last month, the President signed into law new tax incentives for companies to invest in new plants and equipment, to speed the economy's return to strong growth.

This historic reduction in taxes is important because of what it means for our economy. It increases incentives for growth by allowing individuals to keep more of the fruits of their labor. It also allows businesses to allocate more of their resources toward the most rewarding investment opportunities, thereby increasing productivity and growth potential.

As you know, this tax reduction is only temporary. After ten years, the high rates, the estate tax, and the marriage penalty will spring to life, Lazarus-like. As the President said on Monday, in Cedar Rapids, that doesn't make sense. 80% of businesses in this country pay taxes at the individual rates. How can a family business plan for the future, how can it make investments in productivity-increasing technology, when it doesn't know what its tax rates will be 10 years from now? We should make the tax relief permanent.

Tax complexity imposes high compliance costs on taxpayers. Some compliance costs arise out of the very nature of an income tax and its need to measure people's income. Other compliance costs are due to the use of the income tax to achieve various social and economic policies. The process of recording and calculating on tax forms is only one dimension of complexity and taxpayer burden. Another is the record-keeping that must occur throughout the year in many cases. Collecting receipts and maintaining files are certainly not beyond the abilities of the vast majority of taxpayers. But the amount of such activity, along with the other dimensions of tax complexity, reach onerous levels few taxpayers find acceptable. Thus, tax complexity threatens to diminish taxpayer compliance.

Tax complexity also raises the cost of administering the tax system, and taxpayers pick up the tab. The IRS must devote additional resources to provide help for taxpayers, develop regulations, and audit and otherwise correct mistakes in taxpayers' returns. These additional costs are paid for by taxpayers. Many taxpayers must resort to assistance from lawyers, accountants, and other services just to wade through the morass of the tax code. Assuming that it is OK for the well-to-do, how is it justified for the poor, such as those who cannot wade through the 52 page instruction booklet for the byzantine earned income tax credit. Complexity also erodes the ability of the IRS to enforce the tax laws by focusing on real problem areas, and leaving honest taxpayers alone.

Americans pay in other ways, as well. Every business and employer, large or small, must bear the cost of tax code compliance - the paperwork, the accounting bills, and the lawyer's fees. And the products we all buy might well be cheaper, better, or more plentiful if the compliance costs could be reduced.

In addition to the direct costs associated with tax complexity, namely the compliance and administrative costs, tax complexity imposes a substantial drag on the economy in other ways. For example, as tax complexity increases, taxpayers are less likely to predict accurately the tax consequences of their decisions. An inability to predict tax consequences confidently leads to a greater sense of uncertainty about those decisions. This uncertainty can affect important business and family decisions, such as buying a home or car, hiring a new worker, or saving for retirement or for education.

For these reasons, we support tax simplification proposals that meet four essential principles:

Fairness. Americans want to know that the person down the street or across town is paying his or her fair share.

Simplicity. Average taxpayers should not find it necessary to hire a tax preparer. Nor should they miss deductions and credits because they don't know about them or because they are too complicated, with all the phase-out rules, to evaluate.

Clarity. People want to understand their tax obligations and know exactly what they owe. The tax code and the tax burden should be clear to the taxpayer, without the need for extra help.

Ease. The tax code costs too much to comply with and too much to administer. This burden is a drag on the economy and costs jobs. We need a tax code that is simpler, easier to understand, and less costly.

To simplify the tax code means to:

• Reduce taxpayer compliance costs and paperwork.
• Reduce IRS administrative costs.
• Reduce tax distortions that impair economic growth.
• Improve the readability, predictability, objectivity, and transparency of the law.
• Reduce the need for interactions between taxpayers and the IRS to resolve disputes.
• Improve taxpayers' compliance with and confidence in the tax system.
• Eliminate outdated provisions or rules.

This week, we began releasing a series of proposals to simplify the tax code. These proposals will first focus on individuals. Subsequent proposals will focus on businesses.

The first group of proposals will address the tax treatment of families and children. Topics will include:

• Uniform definition of a qualifying child,
• Determining taxpayers' filing status (e.g., head of household),
• Earned Income Tax Credit, and
• Taxation of dependents.

The first proposal, which we released earlier this week, concerns a unified definition of "child." In the current Code, there are five major provisions that provide tax relief to families with children, and there are five different definitions of a qualifying child.

The five provisions are:

• the dependent exemption,
• the definition associated with Head of Household filing status,
• the Child Tax Credit,
• the Dependent Care Tax Credit, and
• the Earned Income Tax Credit.

To see how complexity and conceptual redundancy can confuse a taxpayer, consider the example of a shared household. Now it is possible for three different family members, who live together for a full year, to claim the same child for at least four different tax benefits:

• The grandmother who provides more than half the costs of maintaining the home in which the child resides could claim head of household filing status;

• The child's aunt who provides over half the child's support and cares for the child as her own may claim the dependency exemption and the child tax credit; and

• The child's mother may claim the EITC.

Yet, none of these women may claim the child and dependent care tax credit, even if they work and pay for the care of the child. To claim that credit, one taxpayer must both support the child and maintain the household in which she and the child reside. Under our proposal, the child's mother (or if the family prefers, the grandmother or aunt) could claim all four tax benefits.

In the coming weeks, we'll be releasing additional proposals to simplify the tax code, both for individuals and for businesses. Businesses spend countless hours battling the IRS over timing of deductions -- not whether or not a cost is deductible, just whether the deduction can be taken this year or next. As with most regulations, the burden falls disproportionately on smaller business owners, who can't afford a whole tax department to muddle through these questions.

As we reduce the tax burden on our economy, and simplify the code, we are taking new steps to make sure that all taxpayers are paying their fair share.

We have already started introducing proposals to combat abusive tax avoidance, strategies that deliberately violate the spirit of our laws. These transactions are unfair to the vast majority of taxpayers, who do their best to comply with the code, even with its difficulties.

Tax policy is a high priority for this Administration, and for the United States Treasury in particular. We hope to bring to the United States taxpayers the kind of tax rate, tax code, and enforcement fairness that they deserve.

Thank you.