FROM THE OFFICE OF PUBLIC AFFAIRS

Thank you. I am glad to be here again.

Yesterday Americans completed an annual ritual that none of us enjoy, but is of central importance in our civil society: the filing of our personal tax returns. Tax Day provides an valuable opportunity for us to think about what it means to think about how we should manage the government's our finances in a fiscally responsible way that serves us all.

I would like to talk today about the fiscal progress we have made as a nation since 1992, and the fiscal choices that lie ahead and how we ought to make them.

Because the American economy has grown so rapidly in recent years, and because we have successfully reduced government outlays to their lowest ratio to GDP in a generation, this Administration has been able to reduce taxes in many, many ways, including through a much expanded Earned Income Tax Credit, a Child Tax Credit, and targeted educational credits. As a result, the tax burden for most American families is at its lowest in a generation.

Consider:

• For a family of four with half of median income - about $29,000 - Federal income and payroll taxes are a smaller share than at any time since 1977.
• For a family with median income family of four - the about $59,000 - Federal income plus payroll taxes are now a smaller share of income burden is lower today than at any time since 1978, and their Federal income taxes alone burden alone is are the lowest smallest share since 1966.
• Even a family with double the median income - about $117,000 - pays less in Federal income taxes as a share of their income than at any time since 1974. I note that 90 percent of American families have incomes below $117,000.

It is true, as some have noted, that tax collections are rising as a share of GDP. But this does not reflect increases in tax burdens on particular categories of taxpayers. Taxable incomes have risen as a share of GDP because of the effects of a rising stock market. Capital gains are not a part of GDP. Therefore, any increase in capital gains drives the ratio of taxes to GDP higher without raising the share of income paid as taxes by families. In addition, higher-income families and corporations have been earning an increasing share of GNP, and they are taxed at a higher rate. All these factors have boosted tax revenues without raising the tax bills of the vast majority of American families.

There is another sense in which we have reduced the tax burden on American families: by shrinking our national debt.

In the same way that a purchase still reduces one's income, whether you pay cash or buy it on a credit card, the contemporaneous tax burden understates the full tax burden during periods of budget deficits, both in terms of the annual interest cost, and the eventual cost of paying off the debt. This is precisely what happened in the 1980s and early 1990s. Conversely, when the national debt is decreasing, as it is today, it makes the deferred tax burden that much smaller.

Consider:

The virtuous circle of rising budget surpluses and declining levels of public debt has enabled us to lower the future tax burden on Americans. Of course, the reverse is also true: increasing the level of national debt, as governments did in the 1970s and 1980s, was simply an indirect way of increasing

• In 1983, when the Federal government incurred a budget deficit of $208 billion, the average American family was effectively saddled with future income and payroll taxes that were equal to 35 percent of the taxes they actually paid.
• When the Administration took office in 1993, the deferred tax amounted to 22 percent of the income and payroll taxes paid.
• In 2000, the estimated $167 billion budget surplus effectively reduces the future tax burden on American families by 9 percent of income and payroll taxes that will be paid this year.

In other words, as a result of the deficit reductions we have achieved, the total tax burden inclusive of deferred taxes on the typical American family has fallen by a third since 1983: from 32 percent to 21 percent of income, or the lowest since 1974.

Furthermore, reducing the volume of national debt maintains downward pressure on interest rates, and thereby helps reduce payments on home mortgages, car loans and other forms of credit. Every one percentage point fall in long-term interest rates reduces the cost of mortgages for American families by $250 billion over a decade. We estimate that, as a consequence of our new path of fiscal discipline, a typical American family with a mortgage of $100,000 would save around $2,000 a year on mortgage payments. Lower interest payments function like a tax cut by putting more disposable income in their pockets.

So the quantitative tax burden has fallen for most Americans during this period. But one other dimension of the tax burden that is perhaps on all of our minds the day after Tax Day is its quality: our experience of the IRS and the level of service that it provides.

Under the leadership of Commissioner Rossotti, we are working to make improvements both to the customer service that taxpayers receive and compliance with the tax code. For example:

• Electronic tax filing has hit a new record this year with more than 30 million taxpayers filing electronically - a 17 percent increase over the same period last year. And the number of taxpayers filing self-prepared tax returns from their home computers has almost doubled to 3.8 million this year. The Administration has proposed a refundable tax credit to encourage more taxpayers to file electronically. In addition, the number of recorded hits on the IRS website has risen by 15 percent to over 791 million this year. This makes the IRS site one of the most frequently visited sites on the Internet.

At the same time, we are working to provide greater fairness for all taxpayers, by strengthening compliance, most recently through new measures to shut down abusive corporate tax shelters.

It is crucial for us in government to consider our fiscal decisions carefully as we confront the opportunity and responsibility implied by large projected budget surpluses.

The enormous progress that we have made in our fiscal position has come through responsible budgeting. The President's budget proposals, I believe, carry on that tradition:

• First, by planning for the long term.
• Second, by using realistic discretionary spending plans.
• And third, by taking advantage of this moment of opportunity.

The recent Congressional Budget Resolution must give pause on all three counts. In that sense, I am concerned that it carries many of the risks that arose in connection with last year's Congressional tax cut bill that the President was forced to veto.

Specifically:

By setting policy on a 5-year instead of a 10-year basis, the Budget Resolution obscures the long-term fiscal consequences of its proposed tax cuts. Over the first five years, the Resolution requires tax cuts of $150 billion, it specifically permits additional tax cuts of $25 billion, and would allow for further cuts of up to $40 billion, depending on the size of any upward revision to current surplus estimates by CBO, for a total of $215 billion. But reasonable projections have been made that the 10-year costs, including interest, could possibly escalate as high as $1 trillion - which would be even more than the cost of the tax cuts that were vetoed by President Clinton last year.

This is a reasonable prospect, based on legislative history.

• The House and the Senate both passed significant tax cuts last year, and in each case the 10-year cost was at least five times the cost over 5 years. For example, the tax bill reported out of Conference cost $156 billion over 5 years, but escalated sharply to $792 billion over 10 years. Applying the same ratio to this year's Resolution would suggest that the 10-year cost would exceed $1 trillion.
• More to the point, the House has already passed tax cuts this year of more than $100 billion over five years, which over ten years would cost in the region of $375 billion. While the ratios are somewhat smaller than last year's tax bills so far, these and other tax cuts that have already been passed this year point to a realistic prospect of tax cuts in excess of $750 billion over 10 years.

It is standard practice for the Joint Committee on Taxation and the Congressional Budget Office to project the effect of tax and spending proposals 10 years in advance to take account of changes that are to be phased in over time. It must be even more crucial today, at a time when we are facing long-term problems, such as the retirement of the baby boom generation and the long-term solvency of Social Security and Medicare that require equally long-term solutions.

Moreover, without 10-year estimates, proponents of legislation have often understated the true cost of their proposals by phasing them in slowly or not even starting them until after the fifth year. Without the discipline of 10-year horizons, it becomes easy to adopt policies that are appealing today, but could raise serious risks over the longer-term.

While the President's budget provides significant investments in essential priorities, including education, law enforcement and science and technology, the Congressional Budget Resolution incorporates unrealistic proposals to reduce non-defense discretionary spending. It would cut critical funding for core government, such as law enforcement, and vital investments like Head Start and job training dramatically cut these priorities. The Resolution's allocation for has non-defense discretionary spending in for FY 2001 of $289 billion - is $7 billion below equivalent spending in 2000 and $20 billion below the level needed to maintain current program levels. If Congress continued spending cuts at the same rate as 2001-05, then the cut in domestic priorities would grow to about 25 percent by 2010.

After taking into account programs where the Resolution seeks to maintain spending in real terms, all other non-defense discretionary spending programs would have to be cut by about 10 percent in 2001. For example, the proposed $845 million cut to the President's budget request would force Head Start to provide services to approximately 70,000 fewer children in FY2001 than would otherwise be served. Moreover, the proposed spending path after 2001 does not keep pace with inflation, pointing to even larger cuts down the road. Spending cuts of this nature would risk seriously undermining the government's capacity to fulfill core functions.

History suggests that unrealistic discretionary spending assumptions threaten fiscal discipline in much the same way that unrealistic economic forecasts threaten fiscal discipline. They can lead to fixed commitments that lead to problems when the lack of realism in the assumptions becomes apparent.

Finally, the Budget Resolution misses an historic opportunity to continue to lower the deferred tax burden on Americans that is implied by the national debt. The Resolution also ignores our long-term responsibilities to tomorrow's retirees.

• Even assuming that the Resolution's optimistic spending assumptions are met, it would set aside just $12 billion of the non-Social Security surpluses for debt reduction over 5 years, compared to the $90 billion that CBO has estimated for the President's budget. On the plausible assumption, based on past experience, that spending cuts of this magnitude will not be enacted, their resolution would channel none of the non-Social Security surpluses into debt reduction.
• The Resolution proposes no funds to extend the solvency of Medicare or Social Security by even a single day. In contrast, the President's proposals would devote a substantial share of the projected on-budget surpluses to extending Medicare solvency beyond 2030 and Social Security solvency to at least 2054.

I emphasize the importance of debt reduction as the best use of taxpayer resources and the importance of realistic long-term budgeting today, because fiscal discipline has rarely, if ever, been more important to the future of our economy. The unprecedented nature of the investment opportunities that information technology is opening up means that the benefits of raising national savings, reducing capital costs, and increasing investment have never been greater.

The growing importance of our trade and current account deficits as economic issues mean that increasing national savings so that we can reduce those deficits, without cramping investment in our economic future, is now particularly important. And now, at a time of great strength of demand in our economy, the right focus for policy is on stimulus to savings and the economy's supply capacity which is what debt reduction and fiscal discipline represent. Thank you.