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U.S. Chamber of Commerce 2/24/92 [OA 7568] [1]
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U.S. Chamber of Commerce 2/24/92 [OA 7568] [1]
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U.S. Chamber of Commerce 2/24/92 [OA 7568 [1]
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THEIR
THE WHITE HOUSE
Office of the Press Secretary
For Immediate Release
February 24, 1992
REMARKS BY THE PRESIDENT
TO THE U.S. CHAMBER OF COMMERCE NATIONAL ACTION RALLY
Constitution Hall
Washington, D.C.
10:55 A.M. EST
THE PRESIDENT: May I, at the outset of these remarks,
thank the Colonel and this wonderful Marine Band. They are
sensational. And I think I speak for all when we say we've enjoyed
the music. Thank you. (Applause.)
And I want to salute your incoming Chairman Bill Lurton,
and your President Dick Lesher, so well-known to everyone and doing a
superb job for the Chamber. And of course, your outgoing Chairman,
my friend, Pete Silas.
Let me tell you something -- just a little word about
Pete. Last week there was a newspaper report that more and more
American business leaders are hailing this recent and somewhat
controversial mission I took to Asia -- they're hailing it as a
success for opening markets, for creating more American jobs. But
let me say this to all of you in the Chamber, no one did more to make
that mission a success than Pete Silas. He gave the trip the same
leadership he's given this organization -- a forceful and effective
presentation, taking our case for open markets to Japan and Korea.
And I am very, very grateful to him. And I can see why you entrusted
your leadership to him.
Pete, thank you very, very much -- (applause) -- for
that leadership that makes us so proud.
Well, today we're noting an anniversary of sorts. One
year ago almost to the hour our troops began punching through Iraqi
lines to liberate Kuwait. We mobilized our strength and won that war
with an all-volunteer force including tens of thousands of
reservists. Many of you had to do without key personnel during the
reserve call-up. Some of you answered the call yourselves. And as
your Commander-in-Chief, I want to express deep thanks to our
businessmen and women for playing a proud role in America's world
leadership. I think it is fitting a year later to take note of those
historic events. (Applause.)
But I came here now to ask support on another matter. I
need your help to meet yet another challenge -- renewing the freedom
and strength of our economy.
Four weeks ago, I spoke to the Congress and the American
people. In my State of the Union address, I announced a set of
urgent measures that I would take to unshackle our economy. And I
asked Congress of the United States to do its part -- and to meet a
deadline. Most important, I asked Congress to cut the high taxes on
job creation and investment -- and to do this by March 20th. Well,
my plan will get our economy moving again. And we need to liberate
private enterprise from a government that's grown too big and spends
too much. (Applause.) And we need to do this without raising taxes.
(Applause.)
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- 2 -
In my State of the Union address, I instituted a 90-day
freeze on federal regulations that affect economic growth -- and I
asked major-departments and agencies to carry-out an unprecedented
top-to-bottom review of all existing and proposed regulations.
Within those 90 days, we will accelerate new rules that promote
business growth and, whenever possible, halt those that would impede
growth. Already, we've seen results.
Today, for example, I am announcing major new ground
rules for regulation of biotechnology. Bill Reilly, the EPA
Administrator, I understand is with you all today. He'll have a
major responsibility for making our new rules work to foster economic
growth. This is a $4-billion industry. And it should grow to $50
billion by the end of the decade if we let it. The rewards we will
reap include new medicines and safer ways to clean up hazardous waste
and a revolution in agriculture. The United States leads the world
in biotechnology, and I intend, through sensible regulation and, in
some instances, deregulation, to keep it just exactly that way.
(Applause.)
We've taken new actions to ease the credit crunch. For
example, for healthy banks, we've changed overly strict definitions
of bank capital creating more access to capital. We're cutting
red tape for healthy banks and thrifts. In these tough real estate
markets, we've issued common-sense, realistic valuation guidelines.
We're making it easier for small businesses to get
capital from securities markets. We're increasing the maximum for
small public offerings that get simplified handling by the S.E.C.
from $1.5 million, raising that to $5 million. We're cutting
paperwork and we're simplifying securities registration for small
businesses.
We've also cut the cost of compliance with the payroll
tax system. We've cut paperwork and increased access for small
business to electronic payment systems. Instead of heavy-handed
enforcement, we're helping small firms meet their obligations.
The few steps that I've just outlined -- I know they're
technical, but these few steps will provide billions of dollars in
additional capital to the nation's economy. But we won't stop after
90 days. We'll turn up the heat against over-regulation -- rule by
rule and industry by industry.
We'll take the case to Capitol Hill: For every
unreasonable regulation we can't change through executive action,
we'll introduce reform legislation -- and we will push the Congress
to do its job and put an end to over-regulation. (Applause.) I want
the regulators and the Congress to remember one thing: If it doesn't
make sense, if it hurts the economy, don't do it. (Applause.)
One of my prime responsibilities as President is to open
up world markets -- that's what this trip was about -- open up world
markets, unlocking new opportunities for American workers and.
businesses. Free trade has come under attack these days -- and that
makes no sense whatsoever. Our exports are at record levels --
guaranteeing millions of American jobs. With your help, we're going
to open up the tremendous market opportunities of Mexico sooner, not
later. (Applause.) With your help, we'll win global trade reforms
for agriculture, services and intellectual property.
By protecting our freedoms, by opening markets here and
abroad, and by pushing the envelope of excellence, I want to improve
the quality of life for every man, woman and child in this country.
And I mean everyone. Some politicians want to divide us -- divide us
into economic classes. They're keen on defining people as "poor" or
"rich" or "middle-class." They don't bother to ask you how you see
MORE
- 3 -
yourselves or what your aspirations are. The Capitol Hill liberals
have already made up their minds where everyone fits in some
politically-correct caste system.
Well, that's not the way I see America. I don't apply a
means test to the American Dream. I want to increase opportunity for
everyone. That's what fairness means. (Applause.)
And once again, I could not have had better allies in my
fight than the U.S. Chamber of Commerce. Chamber members share a
sense of responsibility to your families and your firms and your
communities and your nation. You take your responsibilities
personally -- in your homes, among your families. You know, it's not
so important what happens in the White House, it's what happens in
your house. My administration's strategies for fighting drugs and
improving our schools are sound because they join government's
efforts to the responsibilities of parents and families. We know
we'll win the battle against drugs through the moral grounding that
begins and ends in the family.
We'll renew education by giving parents more freedom and
responsibility to choose their children's schools -- (applause) -- to
get involved in their kids' education. You carry these values into
managing your business. The kind of values that say when the
company's losing money, the boss doesn't take home a seven-figure
bonus.
Your companies get involved in the community because
you're good neighbors. Big government didn't make this country
great. You did it. Our nation's strength and generosity flow from
private enterprise and voluntary initiative. It comes from seeing a
problem, taking charge, getting involved, and not taking no for an
answer. The Partnership for a Drug-Free America is a brilliant
example of this. This business group -- many of you may participate
in it -- voluntarily produces a million dollars a day in pro bono
advertising to warn our kids about drugs. And we're making progress
in that front. I am very pleased that the drug use for these
teenagers is substantially down.
Freely undertaken, corporate responsibility is one of
the strongest fibers in our social fabric. So it's only natural that
you should expect government to serve the people responsibly -- not
to behave as an arrogant ruler. On this I faced a big fight. Time
and again I fought to get members of Congress to apply to themselves
the same laws they impose on everyone else. (Applause.) Laws on
ethics, on equal pay, on civil rights for women and minorities. Each
time Congress drags its feet. They're slow learners up there on
Capitol Hill -- but you and I can make them learn. And that's just
what we must do.
As you know -- and here's where I need you -- I've sent
the Congress a short-term plan to get our economy moving -- as well
as a longer-term program for economic growth. I've given Congress a
deadline of March 20th to act on our most urgent needs, to pass this
short-term plan. We need to lower those sky-high taxes on new jobs
and investment, and that means that we must cut the tax on capital
gains. And we ought to do it now. (Applause.)
We need changes in the alternative minimum tax and a 15-
percent investment tax allowance to encourage businesses to buy
equipment, upgrade their plants, and start hiring again. We need new
incentives to build and buy real estate -- through changes in the
passive loss rules for real estate developers -- (applause) -- and we
need a $5,000 tax credit for first-time homebuyers and penalty-free
IRA withdrawals for first-time homebuyers. (Applause.) This is not
all that controversial. I want to sign these reforms on March 20th.
And I do need your help working with the United States Congress.
MORE
- 4 -
We all know that this is a political year. We know
Congress hates to make real decisions in election years. But that's
why I see this March 20th deadline as fair and realistic. It gives
us a window in which to get this plan passed and put it into action
-- and most economists will tell you it will stimulate immediately.
And it still leaves everyone then more than seven months for this
traditional partisan politicking before election time.
Today is the 27th day, the halfway mark of my 52-day
deadline for action on that economic growth plan. So it is time for
a midterm report card. The stark and sorry fact is Congress so far
deserves an F; they deserve a failing grade. (Applause.)
The Ways and Means Democrats considered my plan for two
hours, a hefty two hours. And then, on a straight party-line vote,
they said no to these seven progrowth proposals. And they said no to
first-time homebuyers. And they said no to letting people keep more
of their capital gains earnings. And they said no to helping new
businesses write off their investment. And they said no to each of
these vital proposals to create jobs now and get this economy moving.
They said yes, though, to politics as usual. They went
behind closed doors -- you ask your people here in Washington -- they
went behind closed doors to design what they think is clever
politics. Now the door is opening. And they have proposed a bill
that raises taxes and, just as incredibly, breaks the budget
agreement of a year ago.
They not only want to take away your income, they want
to dream up new ways to spend it -- to take the restraints off
government spending. Take off those caps. Take off the brakes.
Take off the spending controls that are so essential.
They want to saddle America with permanent tax hikes --
all to pay for a temporary tax cut of 25 cents per person per day.
What's worse, some of them have a bidding war in mind. To pay for
that, they'd have to raise tax rates on people making more than
$35,000 a year. Any economist will tell you that the last thing this
economy needs is a tax increase. (Applause.)
The contrast between my economic growth plan and the
Democrats' new tax-increase scheme could not be more plain. Our plan
will cut taxes on investment and job creation -- for all investors,
for all homeowners, for all entrepreneurs. And it will do it without
increasing the deficit.
So to the Congress at this halfway point before the
deadline, I'll say it again: Pass my plan. Let's get America moving
again.
Come March 20th, if the Democrats send me the message
they' talking about now, I will send it right back. I will veto it
and send it back. And I don't want to veto a bad bill, I want to
sign a good bill. (Applause.) And Congress has a responsibility to
give the American people a growth bill right now. (Applause.)
As Pete Silas knows and a handful of you others old
enough to remember, my path to office as a chief executive of the
United States began in the world of small business. Fresh out of
college, I joined a couple of partners and started a little business
out in Midland out in west Texas. It was there that I saw firsthand
what the Chamber does to translate business efforts into community
achievements. As businessmen we knew freedom's benefits would be
stronger if we joined hands to meet our responsibilities as citizens.
Those days, government wasn't quite as big or rapacious.
But even back then, we learned that we had to work together to keep
government growth and interference with free enterprise in check.
MORE
- 5 -
That's what I'm asking that we do today -- to do it -- urgently. I
have a solid plan to get America moving again -- and keep it strong
for the long haul.
So when you go up to Capitol Hill, give your congressmen
and senators a message from me: Get moving or get out of the way.
(Applause.) Let me tell you something, and I say this not out of
flattery, but you, you men and women in this room really can make a
difference. There's never been a more urgent moment to win a victory
for jobs for all Americans. We've won battles before, and we'll win
this one, too. Together we can get our country moving swiftly and
surely to a better future.
Thank you all for what you are doing. And may God bless
the United States of America. Thank you. (Applause.)
END
11:29 A.M. EST
*02/18/92 18:35
202 272 3912
SEC CHAIRMAN OFC
002
STATES STATE AND EXCHANGE S
$
MCMXXXXX
REMARKS OF
RICHARD C. BREEDEN, CHAIRMAN
U.S. SECURITIES AND EXCHANGE COMMISSION
NATIONAL PRESS CLUB
WASHINGTON, D.C.
FEBRUARY 18, 1992
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
02/18/92 18:36
202 272 3912
SEC CHAIRMAN OFC
003
FINANCING AMERICA'S GROWTH
REMARKS OF
RICHARD C. BREEDEN, CHAIRMAN
U.S. SECURITIES AND EXCHANGE COMMISSION
NATIONAL PRESS CLUB
WASHINGTON, D.C.
FEBRUARY 18, 1992
Ladies and Gentlemen. It is a very great pleasure for me to
be with you this afternoon for my maiden voyage before the National
Press Club. As such, this is a somewhat daunting occasion, as I
have been used to the luxury of sitting where you are sitting, and
waiting for the speaker to carry the ball. On the other hand, no
matter how critical the audience, I am pleased that I have gotten
this far. I understand that after my press conference last week
on our new rules for executive compensation, an anonymous CEO
called offering to cater the lunch -- for the head table only.
What a time to be caught with your food taster on vacation and your
kevlar vests at the cleaners.
When thinking about the missions of the SEC, the subject of
investor protection is invariably the first thing that comes to
mind. That is an appropriate reaction, for protection of the more
than 40 million Americans who own securities directly -- more than
50 million if you count participants in stock mutual funds -- is
unquestionably the first and foremost assignment of the SEC.
Protecting investors against fraud and manipulation is a task that
02/18/92
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2
is deeply ingrained in the traditions of the agency, and it is a
mission that is every bit as important today as it was when the
nation's federal securities laws were first enacted in the 1930s.
Indeed, since the percentage of the U.S. population (21%) that
is investing in the equity securities markets and the value of
their investments (more than $4 trillion at current values) have
never been higher in our history, just perhaps we have been doing
something right for the last 59 years. Indeed, with ownership of
roughly 50% of the value of the equities of over 12,000 public
companies in the hands of individual investors, the U.S. has by far
the widest dispersion of ownership among the general public of its
productive base of any developed country. That is a major asset
for our economic future.
To be sure, there are a few academic theorists out there who
believe that the development of modern techniques for hedging, and
new financial instruments, have eliminated the need for the SEC.
of course that theory requires that you overlook newspaper accounts
of BCCI, Robert Maxwell, Salomon Brothers, Nomuragate, Michael
Milken and a few other situations that suggest that fraud and
investor rip-offs may not have disappeared from human history.
Indeed, this view is a bit like arguing that the development of
high performance cars, for which I have a weakness, has eliminated
the need for traffic cops, for whom I have infinite respect.
02/18/92 18:37
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SEC CHAIRMAN OFC
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3
A second critical mission of the SEC is to promote market
stability, and the integrity of the critical operating systems that
today handle trades of hundreds of millions of shares -- and
settlement of tens of billions of dollars of transactions --
worldwide everyday. These systems have to be efficient, reliable,
and ready to absorb sudden and massive surges of trading volumes.
As important as these responsibilities for investor protection
and market stability are, I would like to spend the remainder of
my time today on our third critical assignment. That is, quite
simply, overseeing the capital-raising activities of a securities
market that last year provided approximately $700 billion in public
and private offerings of all types to meet the financing needs of
America's economy. Last year's financings in the securities market
exceeded the largest total in our history by around 50%. In public
offerings, every individual sector showed enormous gains such as:
Equity securities ... UP 185%
Convertible debt --- UP 56%
Investment grade debt --- UP 84%
Several factors other than sheer volume were significant. One
was that we saw a net formation of new equity in U.S. businesses
for the first time since 1983, with an estimated total of around
$35 billion. However, at last year's pace, it will be around the
second quarter of the year 2007 before we replace the one-half
02/18/92
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4
trillion dollars in equity that was retired during the years 1984-
1990. Therefore, we need not a year, but a generation of equity
building in the private sector. From my perspective, the three
point plan for our national economic future ought to be:
1. Invest.
2. Invest.
3. Invest.
Numerous changes, including a tax system that does not consistently
reward the issuance of debt and penalize the holding of equity
investments, will be needed if we are to come anywhere near to the
investment levels that will be needed.
of all the sectors that require investment, the financing of
America's small businesses is especially critical. Indeed, this
challenge represents no less than the financing of our economic
future.
The roughly 20 million small businesses in the U.S. economy
employ more than half our labor force and produce about half our
gross domestic product. Firms with less than 20 employees created
4,016,000 new jobs during 1988-1990, while firms with more than 20
employees lost 1,352,000 jobs during the same period. Small firms
also accounted for a disproportionate share of new technology and
productivity growth.
02/18/92
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While the statistics tell one part of the story, if anything
they significantly understate the importance of small businesses
and particularly brand new startup companies -- in our economy.
These small businesses keep our economy dynamic, provide new
technologies, and indeed, create whole new industries.
Indeed, many of the new technologies that have revolutionized
our lives have come from startup companies of individual
entrepreneurs. For example, few among us today could imagine a
world without convenient air transportation for people and goods,
yet the entire aviation and air transport industries sprang from
a bicycle shop run by two brothers in Dayton, Ohio.
Though the Wright Brothers have passed on, the spirit of Kitty
Hawk is still to be found in tiny companies across this country.
This speech was prepared on the omnipresent contribution of another
pair of small business entrepreneurs -- the personal computer. Who
knows where my kids would learn math if Steve Jobs and Steve
Wozniak hadn't started Apple Computer by soldering circuit boards
in their parents' garage, and if Wozniak hadn't been willing to
sell his VW bus to help raise their initial seed capital.
The good news about financing small businesses is that the
securities markets are providing very significant flows of equity
capital. Last year more than $16 billion was raised in initial
public offerings, a nearly three-fold increase over the $4.6
02/18/92
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6
billion in 1990. Hawk Marine Power, Precision Optics, Candy's
Tortilla Factory, Osteotech, Inc., Au Bon Pain, Laser Pacific
Corp., Platinum Technology, Dianon Systems, Marvel Entertainment,
and many, many others were able to offer their common stock to the
public last year through IPOs.
The bad news about financing small businesses is that the
number of startup businesses every year has fallen since 1986, with
about 70,000 fewer new businesses formed in 1991 than in 1986. In
addition, the number of companies that survive the challenge to
grow large enough to be a candidate for a NASDAQ or AMEX listing
may be in the process of shrinking still further. This is due to
the impact of changes in financing opportunities at early stages
of company growth.
Typically, a newly formed company begins operations using the
savings of his or her founder, and often investments from parents,
family and close friends or acquaintances. Once the resources of
these early investors are exhausted, the startup firm must
typically finance its growth through venture capital firms and
commercial banks. Both of these sources of funds tend to be very
expensive (reflecting the high risk of these enterprises), and bank
financing has become increasingly difficult for small firms to
obtain. Indeed, the disparity between the financing channels for
small firms and those of large companies, with access to commercial
paper funded by money market funds and other institutions, as well
'02/18/92
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7
as medium and long term securities of all types, has never been
greater.
This situation is not one that should be ignored, as it
represents a significant increase in the obstacles that face the
very firms that have traditionally provided the greatest component
of U.S. economic strength. Here regulatory costs due to non-
financial programs like environmental laws can also have a very
damaging impact on startup and small businesses. Though the SEC
does not have the ability to address many aspects of the broader
problem, there are a number of areas where I believe that it may
be possible in the short term to reduce the costs and other
barriers to access to capital markets for small firms without
weakening the protection of investors.
SEC's Small Business Initiative
The current process for registering securities that will be
offered to the public is carefully designed to provide analysts and
investors with the information that they need to make informed
decisions concerning investment. Small companies often involve
large risks, and investors must have the information that they need
to evaluate risks carefully. If this information was not provided,
liquidity for financings would most likely disappear. Similarly,
if the information that is provided proved misleading and
inaccurate, investor willingness to commit funds could well be
'02/18/92 18:41
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8
sharply diminished, and the cost of financing would inevitably
rise. Certainly the lessons that we learned the hard way with
respect to penny stock frauds cannot be ignored in any review of
the overall system.
While any system must continue to provide a high quality of
disclosure and vigorous antifraud efforts, there are many aspects
of the current system that may add to the difficulty of raising
capital without necessarily contributing to good disclosure. For
example, under the current system, a company may have to spend
$200,000 or more just to prepare the mandated disclosure forms and
financial statements without knowing whether there would be any
investor interest in the company. For a company whose shares are
already trading in the public markets, the existence of a market
for its shares is already established, thereby making the pre-
offering expenses reasonably certain to be recoverable in an
ultimate offering.
To improve this situation, I intend to propose that the
Commission issue proposed rule changes that would significantly
increase flexibility in structuring early stage securities
transactions. Final action, of course, will depend on formal
action by the Commission acting as a group, and each of our
Commissioners will have to give careful consideration whether or
not to support these ideas. Nonetheless, I believe they make
sense. These steps would include:
'02/18/92
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9
allowing issuers conducting an offering of "seed capital"
securities under Rule 504 to issue up to $1 million
dollars per year in unrestricted securities, and to
broadly canvass the public for interest from investors.
raising the annual ceiling for use of Regulation A, which
is a limited public offering using a simplified
disclosure document, from $1.5 to $5 million dollars per
year. This would utilize existing statutory authority.
allowing use of a simplified "Q&A" form for Reg. A
offerings, and streamline existing procedures.
allowing pre-offering publication of factual information
about the company and its business prior to filing actual
Reg. A disclosure documents; provided that any such
material, which would be subject to antifraud
requirements, is filed with the SEC simultaneously to its
first use.
In addition to simplifying the Regulation A and Rule 504
offering processes, the SEC will propose to create new forms for
the registration of securities by small companies, and for their
ongoing disclosure requirements. At present, the SEC utilizes
"Form S-18" for small offerings. This is a more simplified form
02/18/92
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10
than the traditional S-1, but it is only available for an IPO of
up to $7.5 million, or repeat offerings within the same year of the
IPO.
Under the new system, the SEC will create a new form for small
companies, rather than small offerings. This new "Form S-B" would
be available for IPOs and repeat offerings by any company below a
specified size, such as a market capitalization of $20 or $25
million. To go with the new streamlined offering document, the SEC
will also propose to create a new "10-K Junior" and a "10-Q Junior"
for the periodic disclosures of smaller companies. While these
forms would still require the use of audited financial statements
and disclosure of all material information, the complexity of the
forms will be streamlined to reduce significantly the filing costs
for smaller companies.
To accompany these proposed changes in the requirements of the
1933 and 1934 Acts, I believe that the SEC should also propose
changes in the Investment Company Act of 1940 designed to make it
easier for investment companies to invest in the securities of
smaller companies, as well as to form specialized financing devices
tailored to small business financing without registration as a
mutual fund where this is not necessary to protect investors.
Among other things, I will suggest that the Commission should
consider:
02/18/92
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raising the eligible volume of "illiquid" holdings of
open-end mutual funds from 10% to 15%. This would enable
significant new investments in U.S. small businesses,
whose securities are by nature less liquid, without
creating risks to the safety of funds choosing to utilize
this flexibility.
seeking public comment on allowing funds to be organized
in a way that would, subject to full disclosure, allow
"redemptions" at intervals less frequent than the daily
requirement under current law. This would enable funds
to be created with a much greater orientation to venture
capital-style investments; and
seeking public comment on raising the current limitations
on funds that can be raised by Small Business Investment
Companies and Business and Industrial Development
Companies.
In addition to these rulemaking initiatives, the SEC should
also consider proposing several legislative steps to Congress. One
of the most important of these proposals would be to create a new
class of venture capital fund that would be exempt from
registration as a mutual fund so long as all its investors are
highly sophisticated individuals or entities such as pension funds
02/18/92
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12
or insurance companies.
Securitization
For the longer term, the SEC also needs to help those who are
attempting to find ways to securitize the receivables of small
businesses into debt securities that can be sold into a liquid
secondary market. Here the objective is to develop an ability to
pool the securities of smaller firms into larger packages that can
be underwritten and purchased by large institutions and other
purchasers. To be successful, techniques of standardizing
documentation and credit underwriting that are now widely utilized
in mortgage-backed and other asset-backed securities, with
inevitable adaptions and modifications, will have to be utilized.
This would represent a big change from current practices.
However, these problems have been faced - and overcome - before.
Huge volumes of securitizations of mortgages, credit card
receivables, auto loans, boat loans, aircraft leases and other
assets prove that these hurdles can be overcome.
Indeed, though the first mortgage-backed securities were
offered as early as the 1880s, the "modern" use of the mortgage-
backed security did not arise until the first GNMA pools were
issued in late 1970, barely 20 years ago. From a tiny beginning,
that market has grown to include over $1.1 trillion in mortgage-
backed securities outstanding, representing interests. in over 40%
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13
of all U.S. single family homes.
By seeking to adapt the techniques of securitization to small
business loans -- especially short term debt instruments, we have
an opportunity to facilitate a market that will improve the
availability, and hopefully reduce the cost, of capital for small
firms. Indeed, by giving banks the option to obtain liquidity from
their small business loans, such a new market could help allow many
banks to remain more active small business loan originators, with
fewer capital and other constraints.
Adapting the techniques of securitization to small business
instruments is a long term project. To help facilitate the
process, however, I believe that the SEC should propose to expand
the use of shelf registrations under Rule 415 for investment grade
securities backed by non-mortgage assets. Necessary relief under
the Investment Company Act should also be designed to help achieve
a coordinated regulatory response to developments in the
securitization field.
Conclusion
The steps that I have outlined today represent in some cases
a significant new approach to the registration procedures in use
today. For the long run we should seek to maintain investor
protection and the quality of disclosure, while cutting costs,
reducing barriers and improving flexibility. Certainly we will
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weigh public comments carefully as we move forward, and I'll be
working closely with my fellow Commissioners as we consider each
of these ideas.
Less than one month ago, the President put forward a wide-
ranging program of steps his Administration proposed to take to
curtail unnecessary regulatory costs that can stifle economic
growth. Indeed, regulatory costs often fall heaviest of all on the
small firms least able to afford non-productive expenses. Several
of the steps that I have outlined today were included in the
President's message. Of course the ultimate decision on all of
these proposals will rest with the full Commission, acting in its
independent capacity. However, it is worth noting that lowering
the cost of capital and seeking to facilitate financing for the
small businesses of America is a challenge that is of great
importance, and one that Republicans and Democrats, Legislative and
Executive branches, should work together to meet.
In a very real sense, the small companies of today represent
the gnp of the year 2000. Without the innovation and energy of
newly formed companies, our economic future will indeed be
different than we might wish. By mobilizing our talents to make
sure that new companies have a chance to obtain the capital that
is essential to fueling their development, we will be taking
critically important steps to build a strong and prosperous
economic future. Thank you.
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DRAFT
DRAFT 8 - "sbfacts" - CV - 2/18/92
SMALL BUSINESS INITIATIVE
In connection with the State of the Union address, the
Administration announced that Chairman Breeden would be proposing
for consideration by the full Securities and Exchange Commission
a series of initiatives designed to ease access to capital
markets by small businesses. Following up on that announcement,
and as part of the top-to-bottom review of existing regulations
and programs Chairman Breeden has launched in response to the
President's request, the SEC today announced its Small Business
Initiative.
At present, the federal regulatory process for startup and
small businesses raising capital from the public creates
significant costs and other barriers to market access. To
facilitate more flexible and less costly procedures, the Small
Business Initiative includes numerous proposals to modify
current SEC requirements. At the same time, these proposed
changes are carefully designed to avoid compromising the
integrity of the capital raising process and the protection of
investors.
As part of the Small Business Initiative, a number of steps
also will be proposed to facilitate the ability of investment
companies to make investments in small businesses. Several of
these initiatives would facilitate capital formation generally,
while others would be specifically directed towards the capital
needs of small business. The Commission would also be initiating
regulatory changes in the treatment of asset-backed securities
under the Investment Company Act to diminish the constraints the
Act may impose, on, among other activities, the securitization of
loans to small businesses.
I.
Capital Formation
Today, a small businessman who needs capital beyond his or
her resources and that of his or her family and close friends is
faced with an array of regulations that require law and
accounting degrees even to understand. Under current procedures,
an entrepreneur who wants to tap outside savings has to incur the
full costs of preparing the mandated disclosure and financial
statements -- costs that frequently exceed $200,000 -- without
knowing whether there is any interest in investing in his or her
business.
There are, of course, exemptions for limited offerings to
more sophisticated professional investors that may reduce or
avoid these compliance costs. The restricted nature of these
offerings, however, does not replace the advantages of having
access to the public marketplace in seeking capital, and the
potentially greater liquidity that publicly offered securities
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- 2 -
enjoy. The Small Business Initiative, therefore, focuses on
facilitating access to the public market for startup and
developing companies. It is also designed to lower the costs for
small businesses that undertake to have their securities traded
in the public markets.
Seed Capital - Startup Companies
Currently, under Rule 504, the Commission exempts from
registration annual offerings of up to $1 million of securities
by companies that are not reporting companies under the
Securities Exchange Act of 1934. 1/ While Rule 504 does not
restrict the kind or number of investors, it does limit the
company's ability to engage in general advertising or other
general offering activity, and results in the investor receiving
restricted securities, unless the securities are state
registered. Similarly, state registration is required to rely on
the exemption for securities offered in excess of $500,000.
The Small Business Initiative would revise Rule 504 to
permit:
unconditional use of the $1 million exemption;
unlimited ability to solicit investors; and
free transferability of securities by investors.
of course, these offerings would continue to be subject to
antifraud prohibitions.
Pre-NASDAO - Developing Companies
Many developing companies have not reached a size or stage
of development at which they would be able to make a successful
initial public offering (IPO), or may not believe that they could
raise sufficient funds to justify the very significant costs of
an IPO. In addition to offerings under Rule 504, any such
company currently has the option to make a limited private or
intra-state offering, or to make a limited exempt public offering
under Regulation A. In order to utilize Regulation A, a company
must file with the SEC and deliver to investors a simplified
disclosure document. However, the company does not become
obligated automatically to file 10-K and other periodic reports
1/
Under the Securities Exchange Act of 1934, any company with
500 record holders of a class of equity securities and $5
million in assets must register its securities under the
Exchange Act and file annual and other periodic reports.
2
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on an ongoing basis. Regulation A offerings are currently
limited to an annual $1.5 million.
Under the Small Business Initiative, revisions to Regulation
A would be proposed to:
raise the ceiling to the full $5 million authorized by
Section 3 (b) of the Securities Act;
allow use of a simplified, user-friendly form in a
question/answer format; and
streamline procedural requirements
To address the problem of a company having to incur the full
costs of compliance before knowing whether there is adequate
investor interest, the initiative would allow a company to "test
the waters" prior to filing its required offering document.
Under this proposal, companies undertaking a Regulation A
offering would be allowed to publish factual information about
the company and its business, and to solicit indications of
interest in investing, prior to preparing the mandated
disclosure. If no one is interested, the company could avoid
incurring unnecessary legal, accounting, and other compliance
costs. Any such soliciting material would be submitted to the
Commission at the time of its first use and would be subject to
antifraud prohibitions.
In view of the proposed simplification of registration and
reporting for small businesses and the increased offering
ceiling, the proposal would revise Regulation A so that it would
not be available to companies already reporting under the
Exchange Act. It also would not be available for commodity fund,
investment partnership or blank check offerings.
Securities Act Registration and Reporting for Small Business
Since 1979, the Commission has provided a simplified
registration form for small IPO's -- Form S-18. Form S-18 is
currently available only to register up to an aggregate of $7.5
million in an IPO and subsequent offering in the same fiscal
year. Form S-18 permits the company to go to market with:
GAAP rather than the more detailed s-x financial
statements;
two rather than three year financial statements; and
simplified business disclosure.
3
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Issuers can file S-18 registration statements with the regional
offices of the Commission.
New Small Business Registration and Reporting System
Recognizing that smaller businesses are disproportionately
affected by complexities in the disclosure requirements for both
initial registration of securities and ongoing periodic
disclosure, the Small Business Initiative includes proposals of a
new set of forms under both the Securities Act and the Exchange
Act tailored expressly for small businesses.
Securities Act. In this new system, old Form S-18 would be
eliminated and replaced with a new small business registration
form. This new form would be useable by a small business for
both its IPO and subsequent offerings. There would not be any
dollar limitation on the amounts registered on the new Form,
unlike the current Form S-18.
Exchange Act. For small businesses, periodic disclosure is
certainly important, but the requirements should be and can be
simplified, without loss of basic material information to
investors. There would be proposed for public comment new "10-K
Junior" and "10-Q Junior" forms. These forms would require small
business issuers to provide investors with clear, concise and
straightforward disclosures as to material information concerning
the company. Audited financial statements and all material
information would still be required without diminution in the
quality of information disclosed to investors.
Eligibility for Small Business Filings. Public comment will
be specifically solicited on the appropriate definition of small
business. A likely starting point in developing the definition
will be the $25 million market capitalization standard used in
the Small Business Investment Incentive Act of 1980.
Shelf Registration to Facilitate Securitization Efforts
In a companion proposal to the Investment Company Act
initiatives to reduce impediments to securitization of small
business loans, shelf registration would be made available to all
investment grade asset-backed financings. Offerings of mortgage
related securities are already entitled to full use of shelf
registration. As part of the initiative, the shelf registration
rule, Rule 415, would be revised to permit issuers to register
investment grade asset-backed securities well before specific
financing needs arise, and to sell those securities from time to
time in the future when market conditions are favorable without
further SEC preclearance.
4
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Currently, most non-mortgage asset-backed offerings are made
by special purpose financing entities such as grantor trusts or
limited purpose subsidiaries that do not qualify for the
registration form entitled to use the shelf registration
procedures. Consequently, before each offering by an issuer of a
series of nearly identical asset-backed securities (such as
multiple series of securities backed by pools of car loans or
credit card receivables), a new registration statement, subject
to prior Commission review, must be filed. Under the revised
shelf rule, the issuer would be able to register in a single
registration statement the aggregate of all the series of the
asset-backed securities it intends to offer from time to time
over the next two years. At the time of each offering, it would
deliver a prospectus, supplemented with the terms of the
offering, including the composition of the specific pool, and
file the supplemented prospectus with the Commission. No
Commission preclearance of the supplemented prospectus would be
required.
2.
Investment Company Act Initiatives
Investment companies are particularly well suited to allow
investors to invest in small businesses because they offer the
twin benefits of professional management and diversification of
risk. In mutual funds ("open-end" funds) alone, there are
approximately 1800 equity and corporate bond funds with aggregate
assets of $475 billion that potentially could invest in greater
amounts of the securities of small businesses. There are also
tens of billions of dollars invested in so-called "closed-end"
funds.
Open and closed-end companies differ in the way they price
and redeem securities. Open-end companies must price their
shares daily and pay redemption proceeds to investors within
seven days of redemption. So that a fund may always be able to
meet the possibility of redemptions, the Commission historically
has required that at least 90% of the fund's securities be
invested in liquid securities. Closed-end companies, whose
shares are traded in the marketplace like those of any public
company, do not redeem shares directly from investors.
Therefore, they may invest in less liquid securities. Their
shares, however, tend to trade at a discount from net asset
value, which makes them unattractive to many investors,
particularly those who would purchase in the initial public
offering.
In addition to traditional investment companies, there are
private and public investment companies that specialize in small
business investing. These include:
5
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o
Private "venture capital" pools: These are
partnerships organized privately for limited numbers of
primarily institutional or sophisticated investors to
make venture capital investments.
Business and Industrial Development Companies (BIDCOs)
and Intrastate Investment Companies: BIDCOs are
created and regulated under state laws designed to
promote local economic development. Currently, forty-
five states have these laws. Current law, enacted in
1940, only allows intrastate companies with total
outstanding securities of not more than $100,000 to be
exempt from registration under the Investment Company
Act.
Small Business Investment Companies (SBICs) SBICs are
licensed and regulated by the Small Business
Administration to provide capital to businesses with
net worth of $6 million or less, and an average net
income after taxes in the preceding two years of $2
million or less. Typically, SBICs issue SBA-backed
debentures (of up to three times their equity capital)
and loan the proceeds to, or invest in, small
businesses. There are approximately 350 SBICs with
total assets of $4 billion, most operating as private
investment companies. Only thirteen, with total assets
of $200 million, are registered investment companies.
Business Development Companies (BDCs) : BDCs are public
venture capital companies that invest in small
companies and make available significant managerial
assistance to companies in which they invest. BDCs are
regulated as closed-end investment companies, that is,
their shares may not be presented back to the issuer
for redemption, but the Investment Company Act has been
modified to permit these companies to meet modified
requirements concerning leverage and conflicts of
interest.
Certain provisions of the Investment Company Act of 1940
make it more difficult for investment companies to invest in
small businesses. Some of these provisions are appropriate where
the company is owned by small investors, but are not necessary to
protect sophisticated investors. Others simply have not been
updated to reflect changes in the structure or practices of the
market since 1940.
6
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Securitization:
The present treatment of securitized offerings under the
Investment Company Act is largely the result of historical
accident. Certain securitized pools, because the assets in them
primarily are mortgages or receivables generated from the sale of
goods or services, are not investment companies under the Act.
These kind of receivables historically were the assets of factors
or mortgage finance companies. Trusts created for the special
purpose of receiving these sorts of assets were largely unknown
fifty-two years ago.
Today, whether these trusts are investment companies,
requiring a full board of directors, strict rules against
transactions with affiliates, and other provisions of the Act,
depends on the fortuity of whether the assets they hold are the
sort exempted from the act half-a-century ago. The Act thus
distorts the operation and growth of the securitized (or
"structured") finance market by enforcing distinctions that do
not reflect economic reality. This problem will be addressed by:
0
Proposing to adopt a new exemptive rule that would
exempt structured financings from the Act, subject to
requirements that would address the potential investor
protection concerns presented by these financings. For
example, the proposed rule would require that the
securities issued be in the highest two ratings
categories and be subject to separate custodial
requirements.
Registered Investment Companies:
The requirement that open-end funds redeem shares daily for
payment in seven days, makes it almost impossible for these
popular mutual funds to invest in somewhat illiquid securities
such as those often issued by small businesses. The Commission
will address this problem by:
o
Proposing to adopt a new exemptive rule permitting new
variations on the open-end form, offering alternative
redemption and offering procedures to investors. These
companies would be either "extended payment companies,"
which would redeem shares continuously but take longer
to make payments than seven days, or "interval
companies," whose shareholders could redeem at regular
intervals, such as quarterly, or semi-annually.
The liquidity requirements for open-end investment companies
may also be constraining investment by these funds in the
securities of small businesses. Giving mutual funds limited
7
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- 8 -
additional flexibility to hold illiquid securities can provide
needed capital to small businesses without significantly
increasing the risk to any mutual fund. To address this problem
the Commission will:
Consider raising the informal limit on mutual fund
investments in illiquid assets from 10% to 15%. While
the Commission will impose no requirement that the
additional 5% be devoted to investments in U.S. small
businesses, this additional investment flexibility will
make significant new small business investments
possible.
Private Investment Companies:
The creation of private venture capital pools is at present
constrained by a provision in the Investment Company Act (section
3 (c) (1)) that prohibits these pools from offering their shares
publicly, and limits them to 100 or fewer investors, no matter
how sophisticated the investor and how unnecessary the
protections of the Investment Company Act. Section 3 (c) (1) also
generally constrains investment in these companies by registered
(public) investment companies. To make it easier for venture
capital funds to be organized and to raise funds from
institutional investors, legislation will be proposed to:
O
Create a new exclusion for investment companies sold
publicly or privately to an unlimited number of
investors, so long as they are highly sophisticated
investors such as pension funds, insurance companies,
and mutual funds.
o
Amend section 3 (c) (1) to make it easier for
corporations and registered investment companies to
invest in these companies.
BIDCOs and Intrastate Investment Companies:
At present, for BIDCOs to be exempt from registration under
the Investment Company Act, they must obtain exemptions on an
individual basis from the Commission. This process is frequently
time consuming and costly. For intrastate companies the current
cap of $100,000, set in 1940, is much too low. These problems
would be addressed by:
O
Proposing to create an automatic exemption for BIDCOs
whose operations are subject to regulation in the state
in which they operate.
8
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DRAFT.
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Raising to $10 million the cap for intrastate
investment companies.
Small Business Investment Companies:
While certain restrictions on investment company leverage
are modified for public SBICs, and they can use simplified
procedures to offer their securities (Regulation E), the amount
of capital they can raise pursuant to these simplified
procedures, $5 million per year, is insufficient in today's
marketplace. This problem would be addressed by:
Proposing to amend Regulation E to permit SBICs to
raise the amount of securities they can offer from $5
million to $15 million annually.
Business Development Companies:
The Investment Company Act was modified in 1980 to give
greater flexibility to BDCs. Nonetheless, certain provisions of
the legislation have proven to be impediments to the successful
use of BDCs to raise capital for small business. These problems
would be addressed by proposing legislation to:
o
Modify the requirement that BDCs make available
significant managerial assistance to at least 70% of
the portfolio companies.
Modify certain 1940 Act requirements to allow BDCs more
flexibility to issue public debt and options, rights
and warrants.
Permit BDCs to acquire securities from companies other
than the portfolio companies in which they invest.
This would permit BDCs to purchase the securities of
small businesses from the financing companies that
often provide initial financing to these businesses.
The foregoing proposals taken in full will provide a variety
of ways to stimulate the flow of capital from pooled investments
into small business. Some proposals seek to make investment in
these issuers more attractive to managers of investment pools.
Others seek simply to remove unnecessary constraints on capital
formation generally.
9
1991 Legislative Action
Forums
A grassroots legislative action program led by the national
federation of the U.S. Chamber of Commerce consisting of
state/local chambers of commerce, trade/professional
associations and businesses.
BUILDING
THE
NATIONAL
BUSINESS
LEGISLATIVE
AGENDA
Philadelphia, Pennsylvania
September 24, 1991
Host Organization
The Greater Philadelphia Chamber of Commerce
Philadelphia, Pennsylvania
8:15 a.m. Registration/Lower Level Foyer
9 a.m.
General Session/Exhibition Hall, Lower Level
Call to Order
William T. Archey, Senior Vice President, Policy, U.S. Chamber of
Commerce
Welcome
Robert McClements, Past Chairman, Greater Philadelphia (Pennsylvania),
Chamber of Commerce; Chairman and CEO, Sun Company, Inc.
"Building the National Business Legislative Agenda"
C.J. "Pete" Silas, Chairman of the Board, U.S. Chamber of Commerce;
Chairman and Chief Executive Officer, Phillips Petroleum Company
Breakouts: Objectives/Format
William T. Archey
9:45 a.m. Breakout Sessions
Issue Areas:
#1 BUDGET & TAXES/Grand Ballroom A
Chair: William J. Short, CCE, President, Worcester (Massachusetts) Area
Chamber of Commerce
Facilitator: Ronald E. Zooleck, CCE, Executive Vice President, South Shore
Chamber of Commerce, Quincy, Massachusetts
Issue Information: Dr. Richard W. Rahn, Vice President and Chief
Economist, Economic Policy, U.S. Chamber of Commerce
#2 GLOBAL ECONOMICS & TRADE/Constitution A
Chair: James P. Gifford, Executive Vice President, New York Chamber of
Commerce
Facilitator: Walter M. Lee, III, President, Jacksonville (Florida) Chamber of
Commerce
Issue Information: Willard A. Workman, Vice President, International, U.S.
Chamber of Commerce
#3 BUSINESS & GOVERNMENT REGULATION/Adams Ballroom A
Chair: John S. Dexter, Jr., President, Maine Chamber of Commerce and
Industry
Facilitator: Harry L. Cowan, Manager, Southern Region, U.S. Chamber of
Commerce
Issue Information: Jeffry L. Perlman, Manager, Legal and Regulatory Affairs,
U.S. Chamber of Commerce
#4 ENVIRONMENT & ENERGY/Franklin 1&2
Chair: Jim Sinclair, First Vice President, New Jersey Business and Industry
Association
Facilitator: Steven E. Woolley, Manager, Eastern Region, U.S. Chamber of
Commerce
Issue Information: Dr. Harvey Alter, Manager, Resources Policy Department,
U.S. Chamber of Commerce
#5 WORKFORCE & LABOR ISSUES/Constitution B
Chair: Charles Krautler, Senior Vice President, Maryland Chamber of
Commerce
Facilitator: Daniel C. Witmer, President, Lancaster (Pennsylvania) Chamber
of Commerce
Issue Information: Damon Tobias, Manager, Labor and Human Resources
Policy, U.S. Chamber of Commerce
#6 WAGES, COMPENSATION & BENEFITS/Adams Ballroom B
Chair: Bev Smalt, Executive Director, Hamburg (New York) Chamber of
Commerce
Facilitator: Richard E. Loomis, Director, Chamber Services, U.S. Chamber
of Commerce
Issue Information: Lisa M. Sprague, Manager, Employee Benefits Policy,
U.S. Chamber of Commerce
#7 HEALTH CARE/Grand Ballroom B
Chair: James C. Moford, Vice President, Governmental Affairs, New Jersey
State Chamber of Commerce
Facilitator: Lee R. Weimer, Senior Public Affairs Manager, Western Region,
U.S. Chamber of Commerce
Issue Information: Jeffrey H. Joseph, Vice President, Domestic Policy
Division, U.S. Chamber of Commerce
12 noon Break
12:15p.m. Working Lunch/Grand Ballroom C&D
Presiding
William T. Archey
Introduction
Charles P. Pizzi, President, Greater Philadelphia Chamber of Commerce
"1992 Washington Outlook"
Dr. Richard L. Lesher, President, U.S. Chamber of Commerce
Luncheon/Table Discussion on Breakouts
1:20 p.m.
Break
1:40 p.m.
General Session/Exhibition Hall, Lower Level
Presiding
William T. Archey
Summary Reports on Breakouts
Discussion/Consensus
3 p.m.
Call to Action
C.J. "Pete" Silas
3:15 p.m. Adjournment
William T. Archey
National Action Rally
American businesses nationwide are participating in Building the
National Business Legislative Agenda to develop a unified
business voice to make a major difference in Congress and with
the Bush Administration in 1992.
The regional Legislative Action Forums are STEP 1.
STEP 2
is the National Action Rally at which businesses will join their
state delegations in Washington on February 24 to announce
the Agenda.
STEP 3
involves State Delegation Visits to Capitol Hill where businesses
will meet — immediately after the National Action Rally- with
their legislators to present personally the Agenda.
You'll want to participate in all three steps of Building the
National Business Legislative Agenda to ensure that the Bush
Administration and your Senators and Representatives hear
what you have to say.
Thank you
Thanks to Xerox Corporation for making
possible the immediate printing and
distribution of the Breakout Session reports.
Thanks also to the Greater Philadelphia
Chamber of Commerce for helping to
organize this Action Forum and ensuring the
success of Building the National Business
Legislative Agenda.
US. THE # CHAMBER SPIRIT OF ENTERPRINT
of
®
U.S. Chamber of Commerce, 1615 H Street, N.W., Washington, D.C. 20062
pusey
Wed Feb 19 09:14 page 1,
SLUG
ANCHOR WRITER
CREATED
STATUS TIME
RALLY TAPE
KUSH
Tue Jan 21 09:16 READY 5:56
NATIONAL BUSINESS AGENDA SCRIPT:
VO NARRATION:
OUR NATION, AND THE AMERICAN BUSINESS COMMUNITY, CONFRONT PROBLEMS AND
CHALLENGES UNLIKE ANY IN OUR HISTORY.
1600 BUSINESS MEN AND WOMEN CAME TOGETHER UNDER THE U. S. CHAMBER
FEDERATION'S BANNER LAST FALL TO PLAN A PROGRAM OF ACTION TO MEET THESE
CHALLENGES.
IN SIX PIVOTAL MEETINGS ACROSS THE COUNTRY, THESE BUSINESS LEADERS RAISED
CONCERNS AND IDENTIFIED THE REAL PROBLEMS BUSINESS FACES TODAY.
THESE FORM THE CORE OF THE NATIONAL BUSINESS AGENDA.
IT IS THE AGENDA OF THE BUSINESS COMMUNITY.
IT IS YOUR AGENDA!
pusey
Wed Feb 19 09:14 page 2
AS WE APPROACH THE START OF A NEW CENTURY, WE FIND THAT MUCH OF THE WORLD
HAS CHANGED IN FUNDAMENTAL WAYS:
THE LONG COLD WAR BETWEEN EAST AND WEST IS OVER. THE THREAT OF A GLOBAL
NUCLEAR WAR HAS RECEDED. COMMUNISM HAS COLLAPSED THROUGHOUT EUROPE AND SCORES
OF NATIONS ARE NOW EXPERIENCING DEMOCRACY AND MARKET-ORIENTED ECONOMIES FOR THE
FIRST TIME IN DECADES. FOR SOME, THE FIRST TIME EVER.
OUR WORLD IS RAPIDLY SHIFTING FROM MILITARY TO ECONOMIC COMPETITION. THE
EUROPEAN COMMUNITY CONTINUES TO UNIFY AND EXPAND
JAPAN AND OTHER ASIAN
NATIONS ALSO CONTINUE TO AGRESSIVELY EXPAND THEIR TRADING MARKETS.
AMERICA'S ABILITY TO COMPETE IN WORLD MARKETS HAS BEEN CRIPPLED BY THIS
RECESSION AND GOVERNMENT POLICIES THAT CONTRIBUTE TO ECONOMIC STAGNATION. AFTER
EXPERIENCING 92 MONTHS OF GROWTH SINCE 1982, THE NATION'S ECONOMY WENT INTO
RECESSION IN JULY, 1990. UNFORTUNATELY, THIS RECESSION HAS TURNED OUT TO BE AS
DEEP AND LENGTHY AS PREDICTED BY THE U.S. CHAMBER.
*IT HAS BEEN COMPOUNDED BY A MAJOR RESTRUCTURING OF AMERICAN BUSINESS
*DRIVEN BY INTERNATIONAL COMPETITIVE PRESSURES
*RECORD NUMBERS OF BUSINESSES, LARGE AND SMALL, ARE DECLARING BANKRUPTCY
*VIABLE, WELL-MANAGED BUSINESSES ARE FINDING IT DIFFICULT TO GET CREDIT
*CONSUMER CONFIDENCE IS FALLING
pusey
Wed Feb 19 09:14 page 3
*GROWING NUMBERS OF AMERICANS ARE PESSIMISTIC ABOUT THEIR FUTURES
*FORECASTS INDICATE THAT OUR ECONOMY WILL NOT EXPERIENCE ROBUST GROWTH SOON
UNLESS OUR ECONOMIC POLICIES AND PRIORITIES ARE CHANGED.
CONGRESS AND THE BUSH ADMINISTRATION CONTINUE TO DEBATE PROPOSALS TO DEAL
WITH THIS RECESSION, STIMULATE ECONOMIC GROWTH AND IMPROVE OUR ABILITY TO
COMPETE MORE EFFECTIVELY IN WORLD TRADE MARKETS.
WHILE THE DEBATE CONTINUES, THE AMERICAN PEOPLE INCREASINGLY DEMAND REAL
SOLUTIONS TO REAL PROBLEMS. THEY WANT ACTION, NOT PARTISAN RHETORIC OR
PARALYSIS IN GOVERNMENT.
TO DEAL WITH THESE VERY REAL CHALLENGES TO AMERICA'S FUTURE, THE U.S.
CHAMBER OF COMMERCE FEDERATION DEVELOPED A COMPREHENSIVE BUSINESS AGENDA FOR
the PRESIDENT AND CONGRESS TO CONSIDER.
REGIONAL MEETINGS WERE HELD IN PHILADELPHIA
CHICAGO
DENVER
SAN
FRANCISCO. DALLAS AND ATLANTA.
ALL ELEMENTS OF THE U.S. CHAMBER FEDERATION PARTICIPATED: STATE AND LOCAL
CHAMBERS OF COMMERCE; LARGE AND SMALL ASSOCIATIONS AND COMPANIES: CONCERNED
CITIZENS AND PUBLIC OFFICIALS.
PEOPLE WHO EXPERIENCE THE REAL PROBLEMS FACING AMERICA.
pusey
Wed Feb 19 09:14 page 4
FROM THESE FORUMS, AUGMENTED BY INPUT FROM CHAMBER POLICY COMMITTEES,
MEMBERSHIP SURVEYS AND OTHER SOURCES, EMERGED A PLAN FOR BUILDING A STRONG
AMERICAN FUTURE:
FIRST, ESTABLISH A NEW FOUNDATION FOR ECONOMIC GROWTH
*AVOID SHORT-TERM INITIATIVES DESIGNED TO "JUMP START" THE ECONOMY.
INSTEAD, CHANGE THE TAX CODE TO STIMULATE SAVINGS AND INVESTMENT
*REDUCE WASTEFUL FEDERAL SPENDING
*REMOVE EXCESS REGULATION OF BUSINESS
*AND MODERNIZE AND REFORM OUR DEPOSIT INSURANCE SYSTEM, TO PROMOTE SOUND,
EFFICIENT BANKS.
SECOND, DEVELOP OUR MOST PRECIOUS ASSET THE AMERICAN WORKER CREATE A
HIGHLY MOTIVATED, TRAINED WORK FORCE ORIENTED TOWARDS LIFETIME EDUCATION.
*ESTABLISH AN AFFORDABLE AND ACCESSIBLE HEALTH CARE SYSTEM, AND MORE
EFFECTIVE AND EFFICIENT WORKPLACE SAFETY PROGRAMS.
THIRD, ENCOURAGE BUSINESS, GOVERNMENT AND ACADEMIC INSTITUTIONS TO
COOPERATE IN DEVELOPING NEW TECHNOLOGIES.
FOURTH, CREATE THE BEST TRANSPORTATION INFRASTRUCTURE IN THE WORLD. AND,
DEVELOP AN ADVANCED NATIONAL TELECOMMUNICATIONS INFORMATION NETWORK THAT
DRAMATICALLY IMPROVES THE DELIVERY OF EDUCATION, HEALTH CARE AND BUSINESS
pusey
Wed Fab 19 09:14 page 5
SERVICES.
FIFTH, THE NATION NEEDS A COMPREHENSIVE AND BALANCED ENERGY POLICY, WITH
ENVIRONMENTAL POLICIES THAT ARE SCIENCE-BASED AND COST-EFFECTIVE.
SIXTH, AGREE ON POLICIES TO ENHANCE AMERICA'S ABILITY TO BETTER COMPETE
IN INTERNATIONAL TRADE MARKETS
*
PRESS FOR A SUCCESSFUL CONCLUSION TO THE G.A.T.T. WORLD TRADE TALKS
*
CREATE AND IMPLEMENT A NORTH AMERICAN FREE TRADE AGREEMENT
*GAIN MORE ACCESS TO MARKETS IN JAPAN AND OTHER NATIONS
*ENCOURAGE MORE U.S. EXPORTS,
*AND HELP THE BALTIC NATIONS, COUNTRIES IN EASTERN AND CENTRAL EUROPE, AND
THE FORMER SOVIET UNION TO MAKE SUCCESSFUL TRANSITIONS TO DEMOCRATIC
INSTITUTIONS AND MARKET ECONOMIES.
SEVENTH, MAKE OUR LAWS AND GOVERNMENT PROCESS MORE RESPONSIVE TO OUR
NATIONAL NEEDS
*STOP STATE AND LOCAL GOVERNMENTS' MOMENTUM IN IMPOSING NEW LAWS AND
REGULATIONS THAT IMPEDE INTERSTATE COMMERCE.
*REDUCE EXCESS PAPERWORK AND REPORTING REQUIREMENTS
pusey
Wed Feb 19 09:14 page 6
*REFORM THE ELECTORAL AND LEGISLATIVE PROCESSES AND THE FEDERAL BUDGET
PROCESS, AS WELL AS GOVERNMENT CONTRACTING AND PROCUREMENT PROCEDURES
THE U.S. CHAMBER FEDERATION, REPRESENTING HUNDREDS OF THOUSANDS OF
BUSINESS PEOPLE, CALLS UPON THE PRESIDENT AND CONGRESS TO ACT ON THESE
RECOMMENDATIONS.
BUT THE WORK OF THE FEDERATION DOES NOT END WITH A CALL FOR ACTION, NO
MATTER HOW FIRM AND CLEAR. THE AGENDA IS ALSO A PLAN FOR ACTION. WE ALL FACE
THE SAME PROBLEMS AND OPPORTUNITIES. WE MUST WORK TOGETHER TO IMPLEMENT OUR
AGENDA AND CREATE A BETTER FUTURE FOR AMERICA.
THE NEW ERA IN WHICH WE LIVE CALLS FOR UNPARALLELLED COOPERATION AMONG
BUSINESS, LABOR, CONSUMERS, AND GOVERNMENT.
WE MUST JOIN TOGETHER TO ESTABLISH POLICIES THAT WILL STIMULATE LONG-TERM
ECONOMIC GROWTH AND HELP AMERICA COMPETE MORE EFFECTIVELY IN WORLD TRADE
MARKETS.
LET US BUILD A FUTURE THAT WE, OUR CHILDREN, AND THEIR CHILDREN CAN BE
PROUD OF.
USE THIS NATIONAL BUSINESS AGENDA TO RESTORE LONG-TERM PROSPERITY TO
AMERICA AND THE WORLD.
OUR FUTURE IS TRULY WHAT WE MAKE IT. THE TIME TO BUILD THAT FUTURE IS NOW!
National Business Agenda
EXECUTIVE SUMMARY
I. LAYING A NEW FOUNDATION FOR ECONOMIC GROWTH
1- A New Foundation: An Overview
To provide a new foundation for economic growth, secure enactment of a four-part economic growth
agenda -- involving taxation, regulation, spending, and infrastructure - which will increase the average
annual real growth rate of the economy by 1.5 percentage points per year (from the expected 2.5 percent
trend. to 4 percent) during the next five years, thus returning the economy to its historical post-World War II
(In addition to those topics addressed under LAYING A NEW FOUNDATION FOR
ECONOMIC GROWTH, the new foundation Includes Foreign Tax Provisions (under
SUCCEEDING IN INTERNATIONAL MARKETS) and Transportation (under REBUILDING
AMERICA'S INFRASTRUCTURE)
2- Alternative Minimum Tax
Secure repeal or comprehensive reform of the corporate and individual alternative-minimum tax
provisions of the Internal Revenue Code, and oppose any attempt to Increase the alternative-minimum
tax rates for individuals and corporations.
3- Cost of Capital
Secure enactment of legislation that reduces the cost of capital by reducing the capital-gains tax and
establishing a neutral cost-recovery system.
4- Cost of Labor
payroll tax rate.
Secure enactment of legislation that reduces the cost of labor by reducing the Social Security (FICA)
5- Deposit Insurance
Secure enactment of revisions to the deposit-insurance system which will promote stability within the
banking system, remove taxpayers from future liability for failures of depository institutions, free up
capital, alleviate the credit crunch, and help the economy by creating sound, efficient banks.
6- Expiring Tax Provisions
Secure the permanent extension of selected expiring tax provisions, including the Research and
Experimentation tax credit and allocation rules, the educational assistance exclusion, and the 25 percent
deduction for health insurance for the self-employed.
II. HUMAN DIMENSION OF ENTERPRISE
1- Education
Develop and implement a community-based, coordinated, and comprehensive plan to Improve
dramatically elementary and secondary education and provide incentives for life-long learning. Support
these goals by further mobilizing business leaders and chamber executives for education reform at the
local level.
ix
United States Chamber of Commerce
tional Business Agenda
2- Health Care
V. E
Secure enactment of legislation emphasizing key incremental reforms, and promote public policies which
support private-sector initiatives to increase access to health care, control costs, and maintain quality
1-
of care, while opposing government-mandated coverage.
3- Occupational Safety and Health Act
Secure enactment of legislation to further improve health and safety in the workplace while ensuring a
balanced regulatory approach that protects the legitimate interests of employers and employees.
4- Striker Replacement
Prevent enactment of the Strike Bill, and thereby maintain the right of employers -- union and nonunion
-- to hire permanent replacement employees when their employees engage in a work stoppage or strike
over economic issues.
2-
5- Workplace Drug Policies
Create a Center on Workplace Drug Policies to assist small and mid-sized firms in the development and
Implementation of effective, affordable drug- and substance-abuse programs.
3-
LAUNCHING FUTURE TECHNOLOGIES
1- Business/Government Cooperation
Encourage collaboration and cooperation among business, government, and academic institutions in the
development of technologies and production processes.
2- Production Joint Ventures
4-
Secure the amendment of the National Cooperative Research Act of 1984 to relax the legal restraints on
collective manufacturing efforts.
REBUILDING AMERICA'S INFRASTRUCTURE
VI. S
1- Telecommunications
Relying on state and local chambers of commerce, ensure that development of an advanced national
1-
information network meets the needs of businesses and communities at the local level. The goal: a
dramatic Improvement in the delivery of education, health care, and business services.
2- Transportation
Monitor closely the implementation of the 1991 Surface Transportation Act to remedy any deficiencies.
Should it become clear that the Act as implemented will not meet the nation's surface-transportation
2- (
needs, secure enactment of legislation which will do so, and secure enactment of airport/airway
infrastructure legislation to repair, improve, and expand that system as needed to improve the overall
productivity of the economy. Funds already exist for these purposes. It is projected that by the end of
1992 the Airport and Airways Trust Fund will have an uncommitted surplus of some $7.5 billion. Monies
in this Trust Fund are currently being used to offset the federal budget deficit. The Highway Trust Fund
balance is approaching $16 billion, and grows by $2 billion annually. Trust fund monies should be used
3- I
only for their intended purposes, not for deficit reduction.
nited States Chamber of Commerce
X
National Business Agenda
V. ENVIRONMENT AND NATURAL RESOURCES
1- Environment: Solid Waste, Water Quality, Global Climate Change
Secure enactment of legislative initiatives which provide for environmentally sound, market-driven
solutions to problems of solid-waste management and water-quality improvement. Such legislation
should be based upon sound scientific evidence and incur the least possible economic cost. In 1992,
reauthorization of the Resource Conservation and Recovery Act (RCRA) and the Federal Water Pollution
Control Act (Clean Water Act) will serve as the principal vehicles for legislative activity. To address the
uncertain threat of global climate change, public policies should promote global cooperation, be based
on sound scientific analysis, and encourage voluntary measures that make sense in their own right, such
as reforestation and greater energy conservation and efficiency.
2- Food Safety
Secure enactment of legislation to achieve national uniformity in the regulation of food production,
distribution, and marketing. Support legislative and regulatory reforms to harmonize and modernize food-
inspection systems and achieve scientifically sound methods of risk assessment.
3- National Energy Policy
Secure enactment of energy legislation that promotes development and distribution of adequate supplies
of energy at affordable prices. Toward this end, promote 1) the streamlining of licensing procedures for
natural gas pipelines and nuclear power plants; 2) greater access to traditional energy sources on federal
lands; 3) clean-coal and renewable technologies; and 4) voluntary, cost-effective conservation measures.
Also needed is opposition to 1) federal conservation mandates; 2) government interference in the
marketplace to promote one fuel over another; and 3) energy taxes and required set-asides.
4- Superfund
Develop comprehensive recommendations for a major overhaul of the federal toxic-waste site cleanup
program (Superfund) that results in the quicker cleanup of a large number of such sites at the least
economic cost to business and taxpayers.
VI. SUCCEEDING IN INTERNATIONAL MARKETS
1- Access Mature/Strategic Markets: GATT Uruguay Round
Secure the strengthening of international trade rules through 1) adoption of more effective dispute-
settlement provisions; 2) expansion of the scope of the General Agreement on Tariffs and Trade (GATT)
to intellectual property, investment, and trade in services and agriculture; and 3) improvement of existing
GATT rules.
2- Commonwealth of Independent States (Former USSR)
Secure the removal of residual U.S. government impediments to doing business with the countries of the
former USSR. Secure expansion of U.S. government assistance to enable American firms to succeed
in these markets. Support U.S. government technical-assistance programs that accelerate the transition
of these countries to market economies.
3- Economic Relations with Asia
Secure increased access to Asian markets for U.S. investors and exporters through reductions in the
discriminatory impact of Asian trade and business practices, with particular emphasis on structural
impediments.
xi
United States Chamber of Commerce
National Business Agenda
4- Economic Relations with the New Europe
Assist U.S. companies in pursuing increased trade and investment opportunities in the evolving new
European market. Continue to encourage the completion of the single-market program of the European
Community and the establishment of an open pan-European trading area. To this end, support the
political and economic transformation to market economies by the Central and Eastern European
countries through the extension of the Support for East European Democracy Act.
5- Export Enhancement
To Increase U.S. exports, secure the strengthening of the Export-Import Bank and the expansion of
public/private cooperation in export promotion, and help make foreign assistance more supportive of
U.S. business interests.
6- Foreign Tax Provisions
Secure amendments to the foreign provisions of the Internal Revenue Code to enhance the competitive
standing of U.S. businesses in global markets.
7- North American Free Trade Agreement
Secure enactment of a North American Free Trade Agreement consistent with the Chamber's criteria:
comprehensiveness (agriculture, Investment, services, intellectual property, rules of origin, and tariff and
non-tariff barriers); appropriate phase-in periods; and temporary safeguards and adjustment assistance.
VII. MAKING GOVERNMENT RESPONSIVE
1- Federal Budget Process
Se
Achieve reform of the federal budget process through amendment of the Constitution and existing laws
so as to restrain the unchecked growth of federal taxation and spending. This includes presidential line-
item veto power, tax/spending limitation and a balanced-budget amendment, and elimination of
deceptive federal budget accounting procedures.
2- Federal Government Contracting: Procurement/Acquisition
Secure the simplification and streamlining of the federal-government contracting process through
legislative and/or regulatory reforms. Key features of such Initiatives will include: 1) the federal
government's use of less-costly, commercial-style procurement practices and 2) increased purchasing
of "off-the-shelf" commercial products.
3- Government Process
Secure enactment of legislation to reform the congressional committee system and federal campaign
laws, and extend uniform coverage of federal law to the entire federal government, in particular Congress.
4- Litigation and Product Liability
Obtain legislative and judicial reforms to control costs of litigation and excessive liability claims.
5- Paperwork Reduction
Secure enactment of a Paperwork Reduction Act which will reduce costly, burdensome federal
paperwork and reporting requirements.
6- Preemption/Uniformity of Law
Facilitate interstate commerce by securing enactment of legislation which preempts certain conflicting
or non-uniform local and state laws, targeting those areas in which the proliferation of differing
regulations has created barriers to Interstate trade.
7- Voter Registration
Promote the election or reelection of members of Congress sympathetic to the concerns and needs of
American business by encouraging voter registration among members of the business community.
United States Chamber of Commerce
xii
01.08.91 08:07AM US OHA
P O 2
November 14, 1990
OFFICERS AND DIRECTORS
of the
U.S. CHAMBER OF COMMERCE
1990. 1991
Chairman of the Board of Directors
Senior Council
James K. Baker
Frank L. Morsani
Chairman and Chief Executive Officer
President
Arvin Industries, Inc.
Precision Enterprises, Inc.
One Noblitt Plaza, Box 3000
Magdalene Center
Columbus, Indiana 47202-3000
15438 N. Florida Street, Suite 204
Tampa, Florida 33613
President
Dr. Richard L. Lesher
Edward Donley
U.S. Chamber of Commerce
Chairman, Executive Committee
1615 H Street, NW
Air Products and Chemicals, Inc.
Washington, DC 20062
7201 Hamilton Boulevard
Allentown, Pennsylvania 18195-1501
Vice Chairman of the Board of Directors
C.J. Silas
Oliver H. Delchamps, Jr.
Chairman and Chief Executive Officer
President
Phillips Patroleum Company
Delchamps Associates
18 Phillips Building
Post Office Box 564
4th and Keeler
Point Clear Place, Suite G
Bartlesville, Oklahoma 74004
Point Clear, Alabama 36564
Chairman of the Executive Committee
William S. Kanaga
John L. Clendenin
Retired Chairman
Chairman of the Board
Arthur Young
BellSouth Corporation
277 Park Avenue, 24th Floor
1155 Peachtree Street, NE #2000
New York, New York 10172
Atlanta, Georgia 30387-6000
John L. Clendenin
Treasurer
Chairman of the Board
William C. Marcil
BellSouth Corporation
President and Publisher
1155 Peachtree Street, NE #2000
Forum Publishing Company
Atlanta, Georgia 30367-6000
101 North 5th Street
Fargo, North Dakota 58102
Regional Vice Chairmen
David M. Chamberlain
John J. Murphy
President and Chief Executive Officer
Chairman, President & Chief Executive Officer
Shaklee Corporation
Dresser Industries, Inc.
444 Market Street
1600 Pacific
San Francisco, California 94111
Dallas, Texas 75201
H. William Lurton
Frances Shaine
Chairman and Chief Executive Officer
Chairman
Jostens, Inc.
SPM Manufacturing Corporation
5501 Norman Center Drive
28 Appleton Street
Minneapolis, Minnesota 55437
Holyoke, Massachusetts 01040
01.08.91
08:07AM
US
CHA
PO3
2.
DIRECTORS OF THE U.S. CHAMBER OF COMMERCE
Robert M. Andrews
Edwin I. Colodny
Chairman & President
Chairman
Viktor Weyand Travel Service, Inc.
USAir
2640 Aero Park Drive
Crystal Park Four
Traverse City, Michigan 49684
2345 Crystal Drive
Arlington, Virginia 22227
Carol L. Ball
Co-Owner, Publisher and
Raymond F. Farley
Chief Executive Officer
President & CEO (Retired)
Ball Publishing Company
S.C. Johnson & Son, Inc.
114 West George Street
4061. North Main Street
Arcanum, Ohio 45304
Racine, Wisconsin 53402
William O. Bourke
Dr. William F. Ford, Dean
Chairman and Chief Executive Officer
College of Business Administration
Reynolds Metals Company
University of Denver
6601 West Broad
University Park
Post Office Box 27003
Denver, Colorado 80208
Richmond, Virginia 23261
James A.D. Gaier
Thomas P. Brock, CPA
Chairman
President
Cincinnati Milacron
Brock, Buchholz & Stow
RiverCenter - Suite 800
First National Bank Building
50 East River Center Boulevard
401 North Main Street
Covington, Kentucky 41011
Longmont, Colorado 80501
Ivan W. Gorr
Robert Burnett
Chairman and Chief Executive Officer
Chairman
Cooper Tire and Rubber Company
Meredith Corporation
Lima and Western Avenues
1716 Locust
Findlay, Ohio 45840
Des Maines, lowa 50336
Gerald Greenwald
M. Anthony Burns
Chief Executive Officer
Chairman, President and
United Employees Acquisition Corporation
Chief Executive Officer
1285 Avenue of the Americas, Room 2135
Ryder System, Inc.
New York, New York 10019
3600 Northwest 82nd Avenue
Miami, Florida 33166
Charles M. Harper
Chairman and Chief Executive Officer
Clyde C. Cole, CCE
ConAgra, Inc.
President
ConAgra Center, 1 ConAgra Drive
Metropolitan Tulsa Chamber of Commerce
Omaha, Nebraska 68102-5001
616 South Boston
Tulsa, Oklahoma 74119
01.08.91 08:07AM US CHA
P 0 4
3.
Dr. Earl H. Hess
Wallace J. Jorgenson
President
Executive Vice President
Lancaster Laboratories, Inc.
Hubbard Broadcasting, Inc.
2425 New Holland Pike
14499 North Dale Mabry, Suite 160
Lancaster, Pennsylvania 17801
Tampa, Florida 33618
Jeanine S. Hettinga
Stephen K. Lambright
President, Chief Executive Officer
Hettinga Equipment, Inc.
Vice President and Group Executive
2123 NW 111th Street
Anheuser-Busch Companies
One Busch Place
Des Moines, lowa 50325
St. Louis, Missouri 63118
David S. Hollingsworth
Steven D. Lebowitz
Chairman and Chief Executive Officer
Real Estate Developer
Hercules Incorporated
SDL Properties Inc.
Herculas Plaza
439 North Bedford Drive
1313 North Market Street
Beverly Hills, California 90210
Wilmington, Delaware 19894
Ellsworth McKee
Harold S. Hook
President
Chairman and Chief Executive Officer
McKee Baking Company
American General Corporation
10260 McKee Road
2929 Allen Parkway
Post Office Box 750
Houston, Texas 77019
Collegedale, Tennessee 37315
William J. Hybi
Will F. Nicholson, Jr.
Vice Chairman
Broadmoor Hotel, Inc.
Chairman of the Board and President
10 Lake Circle
Colorado National Bankshares, Inc.
Post Office Box 5168
Colorado Springs, Colorado 80906
Denver, Colorado 80217
Allen F. Jacobson
Richard de J. Osborne
Chairman and Chief Executive Officer
Chairman of the Board
3M Company
ASARCO, Inc.
3M Center, Building 220-14W-04
180 Maiden Lane
St. Paul, Minnesota 55144-1000
New York, New York 10038
J.L. Johnson
Robert E. Patricelli
Chairman and Chief Executive Officer
GTE Corporation
President and Chief Executive Officer
One Stamford Forum
Value Health Incorporated
22 Waterville Road
Stamford, Connecticut 06904
Avon, Connecticut 06001
John W. Johnson
A. Barry Rand
President
American Collectors Association, Inc.
President, U.S. Marketing Group
Xerox Corporation
4040 West 70th Street
Xerox Square
Minneapolis, Minnesota 55435-4199
Rochester, New York 14644
01.08.91 08:07AM US CHA
POS
4.
Bert W. Rein
William A. Stone
Partner
President, Owner and
Wiley, Rein & Fielding
Chief Executive Officer
1776 K Street, NW
Louisville Plate Glass Company
Washington, DC 20006
1401 West Broadway
Louisville, Kentucky 40203
Corbin Robertson, Jr.
President
James N. Sullivan
Quintana Minerals Corporation
Vice Chairman of the Board
601 Jefferson Street, 40th Floor
Chevron Corporation
Houston, Texas 77002
225 Bush Street. 18th Floor
San Francisco, California 94104
James E. Rogers, Jr.
Chairman and Chief Executive Officer
David S. Tappan, Jr.
PSI Energy, inc.
Chairman of the Board
1000 East Main Street
Fluor Corporation
Plainfield, Indiana 46168
3333 Michelson Drive
Irvine, California 92730
Herman J. Russell
Chairman and Chief Executive Officer
Frank J. Tasco
H.J. Russell and Company
Chairman of the Board
504 Fair Street, Southwest
Marsh & McLennan Companies, Inc.
Atlanta, Georgia 30313
1166 Avenue of the Americas
New York, New York 10036
Lary R. Scott
Former President and Chief Executive Officer
Daniel P. Tully
Consolidated Freightways, Inc.
President & Chief Executive Officer
3187 Alexis Drive
Merrill Lynch & Company, Inc.
Palo Alto, California 94304
Merrill Lynch World Headquarters
North Tower, 32nd Floor
Dennis W. Sheehan
World Financial Center
Chairman, President and
New York, New York 10281-1220
Chief Executive Officer
AXIA Incorporated
122 West 22nd Street
Oak Brook, Illinois 60521
Jan E. Smith
President
Jan Smith & Company
Suite 210 Riverview Center
1111 Third Avenue West
Bradenton, Florida 34205
Photo Copy Preservation
THE WALL STREET JOURNAL WEDNESDAY, FEBRUARY 12, 1992
A21
Which Boss Should a Poor Regulator Believe?
It's easy to dismiss President Bush's
comply with Mr. Bush's regulatory mora-
90-day moratorium on federal regulations
torium or his order to review their current
question. The difficulty has been finding a
and quasi-administrative. Those who be-
by predicting a superfat edition of the Fed-
way to get one of these cases before the
rules. Rep. Dingell warned against being
Supreme Court.
lieve the government interferes in the lives
eral Register on Day 91. Maybe. It's also
"impeded, subtly or otherwise
volun-
Regulated businesses might be able to
of Americans too much already aren't real
possible, though, that 90 days can become
tarily or not, at the urging of the White
happily ever after. Intentionally or not,
House." The Dingellgram also warned
go to court to oppose burdensome regula-
crazy about any of those agencies, whether
Mr. Bush has created the greatest chance
tions that remain on the books after the 90
it's the FDA or the FCC or I mean, just go
agency heads not to consult with "anyone
days are up. Or the Bush administration
down all the alphabets."
in years to bring political, accountability to
in the executive branch about this letter or
could take the opportunity of quasi-compli-
His point is that limiting independent
the "independent regulatory agencies."
the content of your reply."
ance with a presidential order by quasi-
agencies would limit regulatory interven-
Mr. Bush announced a freeze on regula-
So independent agencies are supposed
constitutional regulatory agencies to re-
tion. "We are not capable of determining
tions and ordered a review of all existing
to be independent of the president, but not
whether or not there should be .005 parts
federal rules in his State of the Union. His
solve the question. Whether or not the ad-
of the chairman of the House Commerce
ministration planned a confrontation with
per billion of a carcinogenic substance in
Committee. This isn't how the constitu-
Congress on who, if anyone, controls the
the effluent of a factory coming out of the
Rule of Law
tional system was supposed to work. The
regulators, Mr. Bush's Justice Department
wall of a factory," Sen. Biden told Mr.
Founders set out three branches-legisla-
should be ready if called.
Barr. If Congress is "held up to that,
By L. Gordon Crovitz
tive, executive, judicial. There is no refer-
The confirmation hearings for Attorney
which is part of the scheme that you may
ence to a quasi-anything branch of govern-
General William Barr in November were
not be part of, or part of the intellectual
ment. Even FDR, who created many of
SO affable that few noticed an important
construct that's under way, then that obvi-
these agencies, eventually complained that
order, styled "Memorandum for Certain
exchange on this question between Sen. Jo-
ously is going to tie us up SO long, in such
they "constitute a headless 'fourth branch'
mire and detail, that we're not going to be
Department and Agency Heads, Subject:
of the government, a haphazard deposit of
If Regulators Answer
able to make policy judgments."
Reducing the Burden of Government Regu-
irresponsible agencies and uncoórdinated
The President's Call
In other words, Congress can't regulate
lation," is addressed to cabinet officers,
powers" that "cannot be controlled by the
SO broadly or deeply into the economy as
but also to the heads of agencies such as
president."
President Bush's State of the Union called for
the independent agencies do. The problem
the Securities and Exchange Commission,
There are few constitutional questions
a 90-day moratorium on new federal regulations.
is that Congress also refuses to put the
Federal Trade Commission and Environ-
as stark as whether these agencies fit in
It also ordered a review of all existing regulations,
agencies under the control of the executive
mental Protection Agency.
our constitutional system. Theodore Olson,
which he said should be repealed unless they:
branch. The Founders, who envisioned a
This is key because if these "indepen-
a former Reagan Justice Department offi-
Include benefits that clearly outweigh the costs
much less intrusive federal government,
dent" regulators fail to comply, we could
cial, has a telling anecdote. He recalls he
finally get a challenge to their constitution-
Use performance standards, not command-
might have said that if no politically ac-
was perplexed when he looked up the rules
and-control edicts
countable body can regulate, then no one
ality. No one thinks any agency will spon-
of succession when President Reagan was
should.
sor a bonfire of its inanities, but Mr. Bush
Use market mechanisms
shot, only to see that his pocket copy of the
The key exchange occurred when Sen.
set up an intriguing test of his control over
Constitution was printed before adoption of
Provide clarity and certainty to avoid need-
Biden said, "Well, if the president asked
the bureaucracy if agencies fail to comply,
less litigation
the 25th Amendment. "So when I started
you to pursue a litigation strategy that
as the EPA already threatens. At the end
thinking about independent agencies and
would challenge the constitutionality of in-
of the 90 days, Mr. Bush expects a written
could not find a fourth branch of govern-
seph Biden and Mr. Barr. Mr. Biden, who
dependent agencies, how would you re-
report from each agency that includes "a
ment mentioned in my Constitution," Mr.
during the Clarence Thomas hearings pub-
spond?" The diplomatic Mr. Barr said,
summary of any regulatory programs that
Olson said in a recent speech, "I thought
licized the Takings Clause and property
"I'd have to see if we could make reason-
are left unchanged and an explanation of
that maybe I had another defective Consti-
rights, also drew attention to this area of
able, good-faith arguments."
how such programs are consistent with the
separation of powers.
tution, or perhaps that two of the pages
Sen. Biden cited Justice Scalia for the
regulatory standards" excerpted nearby.
had become stuck together."
There is a whole, well-informed, artic-
One congressman is already gunning for
ulate school of thought that argues that the
good-faith argument that Mr. Bush's law-
For years, Mr. Olson and other strict
yers could bring. "I will promise you that
a constitutional High Noon. John Dingell
present regulatory agencies, which I be-
constructionists have wanted the Supreme
before the next several years are out,
wrote a dozen agency heads, including
Court to review the legal status of indepen-
lieve If they got before the court, adopting
Sen. Biden said, "there's going to be a di-
Richard Breeden at the SEC and Alfred
Scalia's rationale, would all be declared
dent agencies. Justice Antonin Scalia has
rect constitutional attack on the constitu-
Sikes at the Federal Communications Com-
unconstitutional," Sen. Biden said. "I can't
said in several opinions that the constitu-
tionality of a number of the independent
mission, warning that they'd better not
tionality of these agencies remains an open
think of a single administrative agency
regulatory agencies."
that isn't quasi-judicial, quasi-legislative
Maybe sooner, not later.
4
U.S. SPIRIT CHAMBER OF OF COMMUNITY ENTERPRISES
Statement
of the
THE
4
U.S. Chamber
of Commerce
ON: THE U.S. ECONOMY AND PROPOSALS FOR
LONG-TERM ECONOMIC GROWTH
TO: HOUSE COMMITTEE ON WAYS AND MEANS
BY: DR. LAWRENCE A. HUNTER
DATE: FEBRUARY 5, 1992
The Chamber's mission is to advance human progress through an economic.
political and social system based on individual freedom.
incentive. initiative. opportunity and responsibility.
Milton E. Mitler
Richard E. Loomis
Director, Chamber Services
Office of Chamber of Commerce Relations
THE ENTERPRISE OF COMMERCE
CHAMBER SPIRIT OF
Vice President, Public Liaison
Special Assistant
To The President
COMMERCE THE
CHAMBER OF
ENTERPRISE OF
U.S. CHAMBER OF COMMERCE
U.S. CHAMBER OF COMMERCE
1615 H Street, N.W.
1615 H Street, N.W.
Washington, D.C. 20062
Washington, D.C. 20062
202/463-5580
202/463-5427
202/887-3446-FAX
The U.S. Chamber of Commerce is the world's largest federation of business companies
and associations and is the principal spokesman for the American business community.
It represents nearly 185,000 businesses and organizations, including 2900 local and state
chambers of commerce, 1200 trade and professional associations, 64 American Chambers
of Commerce Abroad, and 11 bialateral international business councils.
More than 93 percent of the Chamber's members are small business firms with fewer
than 100 employees, 60 percent with fewer than 10 employees. Yet, virtually all of the
nation's largest companies are also active members. We are particularly cognizant of the
problems of smaller businesses, as well as issues facing the business community at large.
Besides representing a cross section of the American business community in terms of
number of employees, the Chamber represents a wide management spectrum by type of
business and location. Each major classification of American business - manufacturing,
retailing, services, construction, wholesaling, and finance - numbers more than 10,000
members. Yet no one group constitutes as much as 32 percent of the total membership.
Further, the Chamber has substantial membership in all 50 states.
The Chamber's international reach is substantial as well. It believes that global
interdependence provides an opportunity, not a threat. In addition to the 61 American
Chambers of Commerce Abroad, an increasing number of members are engaged in the
export and import of both goods and services and have ongoing investment activities.
The Chamber favors strengthened international competitiveness and opposes artificial
U.S. and foreign barriers to international business.
Positions on national issues are developed by a cross section of its members serving on
committees, subcommittees, and task forces. Currently, some 1,800 business people
participate in this process.
TESTIMONY
on
THE U.S. ECONOMY AND PROPOSALS FOR LONG-TERM ECONOMIC GROWTH
before the
HOUSE COMMITTEE ON WAYS AND MEANS
for the
U.S. CHAMBER OF COMMERCE
by
Dr. Lawrence A. Hunter
February 5, 1992
I am Lawrence A. Hunter, Acting Chief Economist of the U.S. Chamber of
Commerce. On behalf of our 185,000 member businesses, associations and state and local
chambers of commerce, we thank the House Ways and Means Committee for this
opportunity to present our thoughts on the U.S. economy and proposals for long-term
economic growth.
The House Ways and Means Committee should be commended for holding these
most important hearings. As stated in the committee press release of November 27, 1991,
"these hearings will be an effort to understand the magnitude of the problem and sort out
various proposed legislative responses." The Chamber supports this effort, including the
committee's objective of developing a consensus on the fundamental problems confronting
the economy and the necessary remedies to enhance long-term economic growth.
The debate over growth legislation should begin with one thought clearly understood:
We cannot fashion a growth package if the ultimate measure of the package is taken to be
its ability to redistribute income. Changes in tax policy affect incentives. The task is to
improve incentives to invest, save, work and produce so the economy will improve and
everyone will benefit. In short, we must pursue any policies that improve long-term economic
growth. Tax rate increases do not improve these incentives and should be avoided. We
view tax rate increases to be a clear back-tracking from our current national policy of low
marginal tax rates available to both individuals and corporations. Low marginal rates reduce
the bias against work, saving and investment, and promote long-term economic growth. The
soundness of a low tax-rate policy is highlighted by the fact that the tax reform movement
has spread worldwide. Tax increases would only serve to undercut any growth package and
lead to further economic stagnation for the nation.
Since 1989, the economy has been virtually stagnant. This is an abrupt shift from six
years of strong economic growth from 1983 through 1988. There is only one other period
of stagnation like we have now since the end of World War II: The economy was also
virtually stagnant from 1979 through 1982. Pro-growth policies worked to bring the economy
back in 1983 and must be considered again. We find that:
The economy is not going to recover robustly under current policies. The
economy's resilience -- or its innate bounce-back capacity - has been lost.
As a consequence, a considerable growth gap - the difference between what
would have happened if the postwar trend in Gross Domestic Product was
maintained and actual GDP -- has been created and is increasing.
The origin of this recent period of slow growth and recession is mistaken
federal tax, spending, regulatory and monetary policies. The underlying
economy is still strong, but has been battered and held down by anti-growth
policies that continue to mount.
Recent studies show that federal government policy changes could be adopted
with the effect of raising growth potential by one full percentage point. This
would result in economic growth of 4 percent beginning in 1993 and lasting
until the growth gap is closed.
2
Based on the results of these studies, the Chamber believes it has developed
a significant comprehensive program for economic growth. The recommended
policies would reduce the cost of capital and labor and spur more investment,
savings, work and production.
The President's proposals are designed to help the expected 1992 recovery
along. Elements of other legislation already introduced in Congress could be
added to the President's proposal to generate improved long-term growth
potential.
Resilience Lost
We believe the American economy entered 1992 as it entered 1991 - in recession.
Throughout the fourth quarter of last year, major economic indicators pointed to a
deteriorating economy: employment fell, unemployment rose, consumer expenditures
dropped and industrial production plunged downward. Although the initial report on GDP
shows a 0.3 percent fourth quarter rise, we expect revisions will reduce that number and put
it in slightly negative territory.
As 1992 begins, Americans are gloomy. Consumer confidence, as measured by the
Conference Board's Consumer Confidence Survey, plunged to a recession level of 50.4 in
January. According to the U.S. Chamber's "Business Ballot" for December 1991, the
predominant view among the business community is that over the first six months of 1992
the economy will continue its decline, sales will fall, and employment will drop. The
Chamber's index of over 8,000 respondents' confidence, nearly 60 in June, was at 39.4 in
December.
However, the major problem of the economy is not that the current recession is long
nor that the recovery is slow to come about. Rather the key problem is a deterioration in
long-term economic growth. Since the beginning of 1989, the economy has been virtually
stagnant resulting in an amount of real Gross Domestic Product that lies far below the
amount consistent with postwar trend economic growth. This gap is growing. If the
economy grows no more than the optimistic Bush administration forecast of 2.2 percent in
1992, the gap by the end of this year will again widen.
In its recent forecast of the economy, the Congressional Budget Office indicates that
this growth gap will get wider over the next several years. A major reason for this is CBO's
reduced estimate of growth potential in the 1990s, down to 2.1 percent. Such low growth
potential, an estimate of the upper limit of long-term economic growth, is a result of anti-
growth federal policies and not a failure of our private economy to grow. Low potential
growth estimates greatly limit economic forecasts. CBO forecasts that real GDP will rise at
an average annual rate of about 26 percent over the next six years before falling down to
meet potential. If we accept the notion that growth potential lies this low, the growth gap
is a measure of output that is lost forever.
At the beginning of the 1980s, growth potential estimate was lowered from 3 percent
to 2.5 percent. After pro-growth policies were enacted in 1981, growth potential increased
back to 3 percent and the economy was able to get above its potential for several years to
close the growth gap that had opened up after the 1981-82 recession.
The Bush administration is no more optimistic than the CBO. Instead of moving
rapidly back to the trend amount of real GDP as in past economic recoveries, the economy
is projected to grow slower than the postwar trend of about 3 percent during this decade,
or at about 2.5 percent. This seemingly small difference in growth rates adds up to hundreds
of billions of dollars in lost output over the course of ten years. Indeed, growth potential
estimates among many prominent forecasters are currently falling. We estimate that growth
potential under current economic policies is somewhere between 1.5 percent and 2.0
percent. It is such low growth potential estimates that need to be addressed. By raising
growth potential, both short-term and long-term economic growth will rise.
3
Origins of Recession and Slow Growth
In Each decade, from the 1950s to the present, government spending as a proportion
of Gross Domestic Product has grown. Averaging 18.2 percent in the 1950s, it grew to 19.2
percent in the 1960s, 20.7 percent in the 1970s, reaching 23.2 percent in the 1980s. In 1992,
federal spending will hit over 25 percent of GDP. Empirical studies show that, as
government spending increases as a share of the total economy's output, economic growth
rates tend to slow. Countries in the world with smaller shares of government spending as
a percent of GDP have tended to grow more rapidly.
Over the past two decades, both government spending and regulation have grown
faster than the U.S. economy. Despite a doubling of tax revenues throughout the 1980s, the
federal government continues to run a persistently high and growing budget deficit. And
because of the record tax hikes passed in 1990, direct tax burdens continue to increase, as
do regulatory "taxes" on businesses forced to comply with costly mandates.
Federal spending on its programs and federal regulation of business are viewed by
program and regulation proponents as exceedingly helpful to the economy. Proponents
argue successfully to expand their favored programs by citing the alleged benefits. When
government attempts to pay for these programs directly, the impact on the economy can be
dramatic. For example, the 1986 Tax Reform Act greatly reduced the return to businesses'
capital investment. The economy has since lost approximately $300 billion in growth-creating
investments in the private sector. More specifically, by raising the cost of capital,
government policy has discouraged the formation of new businesses by making investment
too costly and less rewarding.
When the economy is growing at a healthy rate, entrepreneurial spirits are generally
very high. Although new businesses continue to fail and mature businesses seek to
restructure under policies that keep the cost of capital low, new business growth more than
compensates for the losses of jobs and output resulting from failing and stagnant enterprises.
As a result, overall business and consumer confidence remains high even though major
restructuring and normal business mistakes are causing certain sectors and areas of the
country to contract. In a market economy, resiliency is not assured by government-managed
stability, but by the prospects for and pursuit of new opportunities according to new
discoveries and shifting consumer demands.
The problem is not the private economy's failure, but rather the failure of
government policies. The 1986 Tax Reform Act was not only strongly anti-growth toward
investment, but it led to declining real estate values. With the retroactive disallowance of
passive losses and increased capital gains tax, real estate, especially commercial real estate,
has declineed in value and created a crisis in banking by reducing the value of collateral
behind business loans. Of course, stringent regulatory enforcement has also contributed to
this "collateral crunch."
In 1988, the Federal Reserve embarked upon an ill-conceived plan to deliberately
slow credit growth. Its intent was to reduce economic growth in order to quell inflationary
fears. However, history shows that inflation is lower when economic growth is above trend
so that the supposed trade-off between inflation and growth is just bad theory. The Fed's
job is to provide enough money supply to facilitate maximum economic growth without
adding inflationary pressures in the economy. The job is not to act as a brake or accelerator
to counter movements in employment and production. It is obvious that Fed policy has
failed to help the economy in any way. Inflation, as measured by core rates, is no lower than
it was in 1988. The Fed has had to reverse its 1988 course entirely by dropping short-term
interest rates to 14-year lows as the recession hit and continued. Unfortunately, the long
episode of Fed misdirection has added to the series of anti-growth fiscal and regulatory
policies and cannot by itself get the economy going again.
In 1989, federal regulation, after years of being held in check, began to accelerate.
In 1992 alone, we estimate that federal regulation will add $70 billion to business compliance
costs, thereby cutting productive investments and output and raising the price level further.
The 1990 tax increases, coming at a time when the economy was already in recession, also
contributed to poor economic growth performance. In 1992, federal, state and local taxes
are scheduled to rise by approximately $50 billion, further dampening any hopes for
significant recovery this year.
But the largest anti-growth policy has been the increasing burden of federal spending
in the economy that diverts resources from their most productive use in the private sector.
Since 1988, federal spending has grown at an average annual rate of 8.0 percent while the
economy has stagnated. More taxes, more borrowing and more money supply have been
necessary to fund these excessive spending increases. That means less has been available
for private sector investment and production. Projected spending in 1992 will be a full four
years ahead of an equivalent amount of revenues. Revenues won't hit this year's spending
amount until 1996. Unfortunately, nothing in the budget agreement reduces this amount of
overspending. In fact, the newest budget estimates show that projected spending growth is
far outstripping projected revenue growth, and the structural deficit has been ratcheted up
dramatically over the past three years.
What the federal government must do now to promote long-term growth is reduce,
and eliminate where possible, the burdens of past policy mistakes on market processes to
restore economic growth. This entails cutting taxes, reducing the rate of growth in federal
spending sharply, holding the line on new regulations and keeping the Fed from wandering
off on its own again following suspect theories of how the economy works. This means
Congress should jettison the 1990 budget agreement and pursue policies that hold the
promise of actually enhancing long-term economic growth and providing a boost in short-
term business and consumer confidence.
How To Raise Economic Growth
The Chamber held a conference last month to hear from four prominent economists
who were asked to use their economic models to determine what government policies serve
to raise long-term economic growth. These models are the best economists have, but they
are limited in their ability to simulate many policy changes. For example, it was not possible
to obtain estimates of the impact of regulation in these models. However, these models can
readily address changes in fiscal policies.
A strong consensus emerged from these studies. Long-term economic growth could
be enhanced by increasing depreciation allowances for investment, cutting the capital gains
tax sharply and indexing gains, and by reducing the rate of growth in federal spending. The
first two policies are tax cuts aimed at increasing investment because in the longer-term what
is important to the economy is the supply of goods and services. Investment is the key to
raising supply and propelling productivity growth upward.
The latter policy, spending control, is often used differently, especially for short-run
stimulus of the economy. That is, many analysts argue for more federal spending to
stimulate demand in the economy. The researchers indicated, however, that while overall
spending growth should be reduced, the priorities in federal spending should change toward
public investment. Thus, over the long-term and perhaps in the short-term, policy makers
should focus on ways to increase infrastructure spending and reduce all other types of
expenditures as a proportion of total federal spending. By limiting the overall growth in
federal spending, the deficit could come down over time.
These studies zeroed in on the only method by which the federal government could
reduce its deficit: more sustained economic growth coupled with severe spending restraint.
This is a prescription that almost everyone now understands will work. What we lack is the
political will to keep spending under control. And, in acknowledgement of that shortcoming,
the political process is quite unwilling to give up any revenue in the short-term by fashioning
tax cuts for fear of exposing that failure.
5
Comprehensive Strategy For Economic Growth
Building upon the results of this research, the Chamber has fashioned a
comprehensive strategy that would lay a new foundation for economic growth. The goals
of such a comprehensive strategy for economic growth and opportunity should be to raise
economic growth on average to 4 percent for the remainder of the 1990s and to enhance
long-term growth potential to at least 3 percent, the postwar average. A coordinated set of
actions by the federal government involving tax changes, regulatory relief, spending restraint,
and measures to bolster the financial system should be implemented to correct the course
of the economy.
Tax Policies
Key building blocks of the new foundation consist of a capital gains tax cut to reward
investment and raise asset values, reform of the capital cost recovery system to permit full
and quicker write-offs of investment in plant and equipment, reform of the Alternative
Minimum Tax to eliminate the disincentives to invest, payroll tax relief, reinstatement and
expansion of Individual Retirement Accounts and other savings incentives, and permanent
extension of various expiring tax provisions, such as the R & E tax credit.
Spending Restraint
These tax changes should be accompanied by budget changes to bring federal
spending in line with revenues. Spending must be reduced from 25 percent of GDP a
peacetime high - to rates far more conducive to stronger economic growth. If tax cuts are
enacted, part of the work will be done. That is to say, tax cuts will spur more GDP growth.
However, current federal spending is three years ahead of projected federal revenues. To
move quickly to get spending in line with what the economy can afford, discretionary
spending can be "frozen" at 1992 levels for a few years or held quite a bit below projected
increases in economic growth. This is relatively easy to accomplish since $150 billion can
be cut from defense spending over the next five years.
Another way to contain federal spending growth is to cut waste. This is easy to say,
but difficult to do. As P. J. O'Rourke has observed in Parliament of Whores about our
government, "It takes enormous effort and elaborate planning to waste this much money."
Waste can be cut if federal spending is shifted away from purely consumption activities into
investments. Over the long-term, the federal government must cut the growth in the fastest
growing programs. Accordingly, a commission to reform entitlement spending should be
established to alleviate the increasing burden on unaffordable future federal expenditures.
Regulatory Relief
Until economic growth targets are reached, the federal government should adopt a
moratorium on new regulations and create a sound process for evaluating regulations in the
future. In 1992 alone, regulations that will cost business approximately $70 billion to comply
with are already in the pipeline. Halting their implementation and requiring an economic
growth impact statement for these and all future regulations would improve the prospects
for long-term economic growth. In addition, the federal government should allow business
immediate expensing for any capital investment necessitated by mandated actions to meet
current and future regulatory requirements.
Infrastructure Investment
By way of expanding government investment, the federal government should
accelerate funding to repair and expand specific components of the nation's transportation
infrastructure where required to improve the overall productivity of the economy. The
money for infrastructure improvements is available without having to increase taxes. The
Airport and Airways Trust Fund has an uncommitted surplus of some $8 billion that is
6
currently being used to fund other federal government programs. The Highway Trust Fund
balance is approaching $16 billion. Currently, the annual increase in this fund is $2 billion.
Evaluating the Administration's Program
The administration has recommended a number of useful policies to improve
economic performance. The outline of the President's initiative can serve as a fine starting
point for Congress. We need to go beyond the specific details of the administration's plan,
however, if we hope to achieve the long-run economic policy objectives laid out above.
Incentives aimed toward investment should be broad based and permanent, not temporary.
Changes to the tax code should be made with an eye to improving the supply side of the
economy, i.e., reducing the cost of capital and labor, not jump starting aggregate demand.
As the Ways and Means Committee develops its growth initiative, the Chamber
recommends that the committee give strong consideration to the measures contained in two
bills. The first bill is (H.R. 960/S. 381) "The Economic Growth and Jobs Creation Act,"
introduced by Representative DeLay (R-TX) and Senator Wallop (R-WY). Representative
Weber (R-MN) and Senator Kasten (R-WI) are the authors of the second bill - (H.R.
3744/S. 1920) the "Economic Growth and Family Tax Freedom Act." These bills, which
share a number of similar provisions, should enhance the long-term portions of the
administration's proposal sufficiently to raise growth potential.
Incentives in the housing industry appear quite strong and helpful to the economy.
A major part of the economy's problem in this recession is that asset values, especially real
estate values, have been falling. Along with capital gains tax rate reduction and reform of
passive loss rules, other proposals by the administration should work to keep asset values
from falling. Of course, this isn't enough for a recovery plan which is why Congress's efforts
must be focused on raising investment over time.
The major shortcoming of the administration's plan is a lack of tax cuts for working
Americans and small businesses. Cutting the payroll tax rate by 1 percent for employees and
1 percent for employers would provide much needed tax relief. Since for many workers the
payroll tax is now higher than the income tax, this cut will be particularly welcome. Unlike
other proposals, taxpayers would realize the benefit immediately through lower payroll tax
withholdings. It would eventually provide increased incentive to work, especially among
lower income people. Moreover, the cut in the payroll tax would be significant relief for
small businesses which must pay this tax regardless of whether they earn a profit. Like
cutting any cost of operation, a payroll tax rate cut would increase funds available for
business expansion.
Two years ago the administration projected $160 billion more revenues for 1993 than
they now anticipate. The only reason for this shortfall is much lower than then anticipated
economic growth in 1990 and 1991. In addition, growth in 1992 is now projected to be 1
percentage point lower than it was in January 1990. The record increase in taxes in the
budget agreement has been totally wiped away by slow economic growth. However, federal
spending projections for 1993 are now $185 billion higher than they were two years ago.
Evidently, the budget agreement had even less impact on holding down spending increases.
The administration now projects a budget deficit for 1993 that will be $345 billion
more than the deficit they predicted for 1993 just two years ago. This is not merely a large
error. It is symbolic of why Americans are so fed up with the federal government. It does
no good to defend this error by noting that OMB was $150 billion off the budget deficit
estimate for 1993 in its report just one year ago or about $100 billion from last July's
estimate. Revenue estimates for 1993 have dropped $65 billion and spending adjusted
upward by $35 billion since the Mid-Session review last July. It makes little sense to the
American public that the economic leadership that produced such glaring errors should be
trusted with the task of turning things around when it is apparent that over the past three
years neither Congress nor the administration has had any idea what needs to be done.
7
One point upon which all of the economists who worked on the Chamber's economic
growth project agreed was that in the long run we must strengthen the supply side of the
economy. Efforts to correct the long-run problems of the economy by artificially stimulating
the demand side of the economy will only lead to inflation and an inefficient allocation of
resources throughout the economy.
Concluding Remarks
The following appendix presents specific arguments and evidence in support of the
Chamber's long-term growth package. The recent research performed for the Chamber
indicates that one change alone will not promote increased long-term growth. It is the
combination of key elements working together that adds to increased productivity and
growth potential.
This result is clearly in keeping with what we believe is the underlying problem facing
the economy today -- a plethora of federal policy mistakes. If we can reverse those
mistakes, changing anti-growth policies into pro-growth policies, the economy should return
to a long period of expansion and all Americans would benefit.
8
APPENDIX
CAPITAL GAINS
The Omnibus Budget Reconciliation Act of 1990 reduced the top capital gains tax
rate from the then high rate of 33 percent to 28, percent effective beginning in 1991. Even
at 28 percent, the U.S. still taxes long-term capital gains at a higher rate than nearly all of
its major Asian and European competitors.
The current level of capital gains taxation discriminates against capital income,
discourages venture capital formation, impedes job creation, and hinders U.S. international
competitiveness by raising the cost of capital relative to that of its competitors. Lower
capital gains tax rates would stimulate the economic growth, promote technological
innovation, and create new opportunities. A lower capital gains tax rate would increase
asset values, improve the solvency of financial services institutions, cut the costs of the
savings and loan bailout and stimulate economic growth.
The imposition of a tax at rates higher than the growth-maximizing rate not only
punishes entrepreneurial success, it imposes what Gerald Scully calls a "growth tax" on every
individual participating in the economic process. If the tax is too high, as is the current
capital gains rate, taxpayers are discouraged from investing in capital assets which begins a
chain reaction where everyone loses. The nation loses because economic growth is
constrained due to a shift in investment to nonproductive assets. Middle income individuals
lose because of the loss of actual, or forfeiture of potential jobs. The Treasury loses because
it receives less revenue not only from decreased capital gains realizations but because of lost
income tax receipts from foregone jobs and economic expansion.
There is a negative relationship between capital gains tax rates and economic growth.
Empirical evidence from a number of studies indicates that the revenue-maximizing rate for
capital gains is in the short run between 9 and 20 percent. However, as Dr. Lawrence
Lindsey, Federal Reserve Board Governor and formerly Associate Director of Domestic
Policy at the White House, has persuasively argued, "the revenue-maximizing [rate] is far
from being optimal. It is better described as the point at which the taxpayer is being soaked
for as much money as possible. Indeed, the capital gains tax rate that maximizes revenue
indicates the point at which increased revenue is most expensive to society." The long-run
growth-maximizing rate may well approach zero. Surely, it is significantly lower than the
current capital gains tax rates of 28 percent for individuals and 34 percent for corporations.
One of the unjust aspects of the present method of taxing capital gains is that much
of the gains from the sale of a capital asset is attributable to inflation. When gains are due,
in part or entirely, to inflation a capital gains tax serves to confiscate existing wealth
generated from past income that has already been taxed at least once. The taxation of
inflationary gains is economically counterproductive. In fact, Congress recognized that it was
wrong to tax inflation when the income tax brackets were indexed for inflation in 1981 and
the personal exclusions and standard deductions were indexed as well.
The taxation of illusionary gains is no minor point. If, for example, a taxpayer bought
$1,000 of stock invested in the Standard and Poor's 500 index in 1970, that stock would have
sold for $3,677 in late 1990. This would have resulted in a taxable capital gains of $2,677.
At the current 28% tax rate, the taxpayer pays $750 in tax. However, inflation since 1970
has been over 218%. This means the taxpayer's real gain was only $257. He was taxed $750
on a real gain of $257, an outrageous tax rate of 292%.
Under the current law, all capital gains are subject to taxation, but capital loss
deductions are limited to $3,000 per year. Congress recognized years ago that businesses
should be taxed on net revenue, not gross capital proceeds; however, many members fail to
see the inherent inequity of limiting capital losses. The capital loss limitation introduces an
asymmetry into the taxation of risky ventures that discourages investment in new firms. In
effect, the government is saying: heads I win, tails you lose. If we wish to avoid discouraging
9
people from investing in what are often risky start-up ventures and abide by fundamental
fairness, the treatment of capital losses and gains must be symmetrical.
Many opponents of a rate reduction want us to believe that this debate is about tax
breaks for the wealthy. They resort to the politics of envy and use statistics designed to give
the appearance that those who realize capital gains are overwhelmingly wealthy.
Few myths are as enduring as the belief that reductions in the capital gains tax rate
redistribute the tax burden to the benefit of the wealthy. Data used by opponents of a rate
cut overstate the extent to which the truly wealthy realize gains. This is because such data
include the nonrecurring capital gains of those normally in the lower- and middle-income tax
brackets. These people appear to be temporarily quite wealthy. For example, when a
middle class business owner retires and sells a business or when a retired person sells a
family home, his income that year may increase several hundred thousand dollars. They are
"rich" for one year. The next year, however, they are back among the middle class. Realized
capital gains tend to be nonrecurring events. Yet, when combined with a taxpayer's income,
those gains appear to be realized predominantly by wealthy people.
A more realistic picture of the capital gains benefit distribution is portrayed by using
data based on levels of ordinary income. IRS data show that capital gains realizations are
actually spread quite evenly throughout ordinary income groups. In 1987, over 70 percent
of those reporting capital gains had ordinary income under $50,000. Another important
point is that over 14 million Americans reported a capital gain in 1987, and 26 percent of
these taxpayers were elderly. One fourth of the taxpayers with ordinary incomes between
$20,000 and $50,000 reported a capital gains at least once during the five year period 1979-
1983.
International Competitiveness
By pursuing the politics of envy, we not only harm lower- and middle-income
Americans, we also imperil America's economic position in the world economy. At a time
when most of the industrialized world have no or minimal taxes on capital gains, America
is moving in the opposite direction. In an increasingly competitive and global economy,
America cannot afford to pursue foolhardy economic policies.
Our nation's tax policy has been well chronicled by other countries. According to the
article entitled "Taxes on Individuals' Equity Investments", the Quality of Markets Review,
the London Stock Exchange, Summer 1991, "Equity investors are most heavily taxed in
France and the USA. It is particularly surprising that the USA, as the nation which has the
most consistently adopted the capitalist ethic, currently treats its equity investors so harshly."
The London Exchange article also points out that among the so-called G-7 countries,
Japan offers the most attractive fiscal environment for most types of investors. For example,
while Japan leaves high net worth taxpayers with 88 percent of their real gains, France,
Canada, and the U.S. provide the worst fiscal environment. In these three countries, high
net worth investors retain approximately 50 percent of their real gains. When comparing
low net worth investors, the U.S. still treats its taxpayers the harshest of all G-7 countries.
This is because the U.S., alone among all G-7 countries, does not provide for a capital gains
tax threshold below which investors do not pay tax on capital gains.
A recent study conducted by Arthur Anderson & Co. for the Securities Industry
Association demonstrates that U.S. capital gains tax rates are among the highest in the
industrialized world. As Table I shows, Germany, Italy, the Netherlands, Belgium, Hong
Kong, Taiwan, South Korea, and Singapore all completely exempt long term capital gains
in stock investments from taxation. Even France and Sweden tax long-term capital gains at
16 percent and 16.80 percent, respectively.
10
Table I
International Comparison of Individual Capital Gains Rates
Short Term
Long Term
Holding Period/
Country
Capital Gains
Capital Gains
Long Term Gains
United States
28.00
28.00
1 Year
Australia*
49.25
49.25
1 Year
Belgium
0.00
0.00
N.A.
Canada
19.33
19.33
N.A.
France
16.00
16.00
N.A.
Germany
56.00
0.00
6 months
Hong Kong
0.00
0.00
N.A.
Italy
0.00
0.00
N.A.
Japan**
1.00/20.00
1.00/20.00
N.A.
Netherlands
0.00
0.00
N.A.
Singapore
0.00
0.00
N.A.
South Korea
0.00
0.00
N.A.
Sweden
42.00
16.8
2 years
Taiwan
0.00
0.00
N.A.
United Kingdom*
40.00
40.00
N.A.
Source: Data Compiled by the American Council for Capital Formation, 1990
(Rates apply to the sale of securities)
. Long-term capital gains indexed for inflation
**Tax is the lesser of 1% of the sales price or 20% of the capital gain.
The Revenue Impact of a Rate Reduction
The effect on tax revenues of changes in the capital gains tax rate is a major point
of contention between proponents and opponents of a rate reduction. Yet the historical
evidence and a number of recent academic and government studies indicate that revenues
will increase significantly following a rate reduction.
Those who have predicted revenue losses from past capital gains tax cuts have been
proven wrong. The Joint Committee on Taxation (JTC) estimated that the 1978 rate
reduction would cost the government more than $2 billion annually. It did not. Revenues
actually increased.
What evidence we do have only underscores the fundamentally flawed methodology
of the JTC. In 1989, Senator Bob Packwood (R-OR) asked the JTC to estimate the
revenues produced by a 100 percent confiscation of all of the income of all those individuals
earning over $200,000. They responded with a 1989 revenue estimate of $104 billion. Even
more amazing, they also estimated that figure would increase to $204 billion in 1990, $232
billion in 1991, $263 billion in 1992, and $299 billion in 1993. In Senator Packwood's words,
the JTC's models "do not account for any behavioral response. [They] assume people will
work if they have to pay all their money to the Government. They will work forever and pay
all of the money to the Government, when clearly anyone in their right mind will not."
Despite the dire predictions of the JTC that a capital gains tax cut would result in
a loss of revenue, capital gains tax revenue rose following the 1978 cut. The increase was
not simply in the year following the rate cut but continued in successive years. Capital gains
tax revenue rose from $9.1 billion in 1978 to $11.7 in 1979 and $12.5 billion in 1980. JTC
projections missed the mark by over $4.4 billion in 1979 and $5.3 billion in 1980. The 1981
rate reduction brought about a similar increase in revenue. Revenue rose from $12.7 billion
in 1981 to $26.5 billion in 1985. In 1986, when taxpayers saw the capital gains tax increase
coming, tax revenue exceeded $49 billion.
Dr. Lawrence Lindsey has examined the relationship between tax rates and capital
gains. His findings confirm the negative effect of high capital gains taxes on federal
revenues and indicate that large revenue gains are likely from a reduction in the capital
11
gains tax rate. Dr. Lindsey based his findings on a review of five of the recent leading
academic and government investigations of capital gains taxation. The methodology used
in all but one of the studies predicted revenue losses from the 1986 capital gains rate
increase. Dr. Lindsey estimates that a reduction in the capital gains rate to 15 percent
would increase revenue by nearly $15 billion over three years. Data from the Internal
Revenue Service (IRS) show that following the rate increase in 1987, capital gains
realizations dropped significantly, yielding revenue of $32 billion. Preliminary 1988 and 1989
IRS data indicate the trend of lower realizations continued, generating revenues of $38
billion and $37 billion respectively.
In 1988, the Department of the Treasury published an updated version of its 1985
study of the revenue effects of capital gains taxation. The 1985 Treasury study, using
statistical evidence available at that time, concluded that the 1978 act caused a substantial
increase in revenue in the first year after the tax cut and in the long run either increased or
slightly decreased federal revenue. Similar conclusions were drawn regarding the 1981
capital gains rate cut. The 1988 update, entitled "The Direct Revenue Effects of Capital
Gains Taxation: A Reconsideration of the Time Series Evidence," written by Michael Darby,
Robert Gillingham, and John Greenlees, extended the sample used in the 1985 study and
corrected several flaws in that earlier study. The update concludes unequivocally that both
the 1978 and 1981 capital gains tax changes significantly increased revenue.
Even a 1988 Congressional Budget Office study on the historical effect of a rate
change on revenue, often cited by opponents of a rate reduction, found that changes in tax
rates on capital gains produced a significant change in behavior on the part of investors.
That study concluded that the revenue-maximizing rate was probably below the current top
rate of 33 percent. The study made four point estimates of the revenue-maximizing rate.
They were all below the present top rate. Equally important, the study did not rule out,
based on the data, that 15 percent was the revenue-maximizing rate.
Several economists have released "studies" purporting to demonstrate that a higher
capital gains tax rate would lead to higher revenues. Regretfully, all of these studies ignore
increased capital gains caused by higher economic growth, which ultimately produce higher
tax revenues.
History shows that rate reductions increase revenue. Even if revenue did not
increase, it seems clear that a revenue-neutral tax policy change that encouraged investment
and savings, reduced the cost of capital, and increased jobs would be a wise policy change.
The President's Proposal
President Bush has renewed his call for a capital gains tax cut. The Administration's
capital gains proposal is based on a sliding scale. The proposal provides for a 15, 30, or 45
percent exclusion for one, two or three years respectively. The holding period requirements
would be phased in over three years. The proposal applies only to individual capital gains,
but includes a broad range of capital assets, including stocks, bonds, real estate, and timber.
The Department of the Treasury estimates that the Bush Administration's capital gains
proposal will raise a total of $6.9 billion through 1997.
Although the Chamber finds the Administration's proposal is a step in the right
direction, it believes that a number of changes should be made. A simple exclusion
approach with one short holding period is preferable to the sliding scale. An exclusion is
less complex and does not involve lengthy and unwarranted holding periods. In order for
a rate cut to be a significant incentive for investment, the exclusion should yield an effective
rate of between 15 percent and 20 percent and the holding period should be no longer than
one year.
The proposal should apply to all capital assets but, most importantly, it should cover
corporate as well as individual capital gains. Corporate income is already subject to double
and sometimes triple taxation. Failure to provide a capital gains differential for corporations
12
would exacerbate existing distortions and inequities. All of the sound economic arguments
that favor a capital gains tax cut apply to corporations as well as individuals.
Traditionally, a significant amount of funding for the organized venture capital
market has been supplied by corporations. Venture capital support financed by corporations
would be stimulated by a corporate capital gains rate reduction, and corporations would be
encouraged to fund their own "spin-off" ventures. In addition, lowering capital gains tax
rates on corporations as well as individuals would reduce the attractiveness of debt finance
and encourage equity finance. Many argue that a corporate capital gains rate reduction
would cost the Treasury a great deal of revenue. This analysis is often based on the limited
response to the two percent corporate capital gains rate cut from 30 to 28 percent effective
in 1979. In 1986, corporations realized 94 percent more capital gains in response to the
1987 six point rate increase in the 1986 act. The conclusion that should be drawn from this
data is that if the incentive is substantial, corporations will alter their behavior just as
individuals do. Therefore it is unlikely that a substantial corporate rate reduction would lose
revenue. To the contrary, if the rate differential is substantial, a corporate capital gains
reduction is likely to be self-financing.
Reform of The Capital Cost Recovery System
Although the Tax Reform Act of 1986 was pro-growth with respect to the cut in
marginal tax rates for individuals and corporations, the Act greatly raised the cost of capital
and stifled economic growth. The 1986 Act was designed to raise business and corporate
taxes by approximately $120 billion over five years. By limiting proper deductions on capital
investment, the Act raised taxes on capital-intensive industries - the backbone of the U.S.
export business. Thus, even though the 1986 Tax Act contained numerous positive elements,
the law was anti-growth and harmful to the competitiveness of U.S. industry.
By repealing the investment tax credit and slowing depreciation, the Tax Reform Act
dramatically raised the average effective tax rate on capital. The Department of the
Treasury's Office of Tax Analysis has calculated that the average effective tax rate on
investment in the corporate sector has increased from 38.7 percent prior to tax reform to
44.4 percent after tax reform. 1
Dr. John Shoven of Stanford University has studied the cost of capital in the United
States relative to Japan. His research shows that for a typical piece of equipment financed
with equity and having a five-year life, the cost of capital in 1988 in the United States was
10.4 percent, compared to 4.1 percent in Japan. The U.S. cost is 153 percent above the
Japanese cost. Similarly, U.S. plants financed with equity face a cost of capital 147 percent
above Japanese plants. The low cost of capital in Japan is one reason why the Japanese
have such a high level of investment relative to the U.S. 2
In order to improve U.S. competitiveness in world markets, we should adopt policies
which encourage, rather than discourage, business investment. This can best be done by
enacting tax code provisions that reduce the cost of capital acquisition. President Bush has
proposed one such measure as part of his 1992 economic recovery program. His proposal
calls for a temporary increase in the first-year depreciation allowance for new investments.
The depreciation measure is structured so that companies subject to the alternative
minimum tax would benefit.
By making sure that companies subject to the AMT also benefit from his
depreciation proposal, President Bush shows an appreciation for the perverse nature of the
AMT rules. Should Congress enact any type of new investment incentive as part of the
individual or corporate income tax systems, it is essential that similar relief be added to the
1 "Economic Report of the President," (January 1989), Pg- 92
2 Shoven, John B., "Consumption Taxes VS. Income Taxes for Deficit Reduction and Tax Restructuring,"
(October 1989).
13
AMT rules. Without offering similar relief under the AMT, the perverse nature of the
current AMT will make the relative position of AMT taxpayers worse, thereby short-
circuiting the positive effects of the growth package.
The Administration's depreciation proposal is a step in the right direction.
Nevertheless, we believe the adoption of a neutral cost recovery system (NCRS) would be
a more powerful stimulus for economic growth. NCRS would hold investment harmless for
the time value of money and protect tax depreciation write-offs against inflation. The
Chamber supports proposals to adjust current depreciation schedules each year so that at
the end of the depreciation period companies would be able to recover the inflation-adjusted
replacement value of the asset. This system would ensure that companies are allowed to
recover the present value equivalent of expensing the total amount of the investment. This
system would ensure that companies are allowed to claim the present value of the amount
of depreciation. Neutral cost recovery has a minimal short-term revenue impact because it
adds only a small amount to the tax depreciation that would have been written off under
existing law and because it will be more than offset by economic growth.
As the Bush Administration and Capitol Hill continue discussions on growth
initiatives in 1992, considerable attention is being given to a temporary, targeted, or
incremental investment tax credit. Congress is correct to be looking for ways to lessen the
tax burden on investment in plant and equipment. But temporary, targeted or incremental
investment tax credits would do little to address fundamental long-term growth needs.
Unless carefully crafted, such an ITC would distort economic decisions and lead to an
inefficient allocation of resources.
If an ITC is to be part of a package to promote long-term economic growth, it should
be permanent, broad-based in terms of the type of qualifying assets and applicable to the
full investment. We need only to look at the effects of the nearly annual rite of expiring tax
provisions to understand how temporary measures distort long-term business planning. A
targeted plan discriminates against industries outside the narrow target segment. An
incremental credit fails to generate investment over the long-term and penalizes those firms
which maintained their levels of investment.
An investment tax credit is a cumbersome way to go about providing necessary tax
relief, and is particularly subject to political manipulation. If policy makers are serious about
enacting effective capital cost recovery measures, they should consider permanent changes
to the Tax Code, such as NCRS. Currently, investors are only able to recover through
depreciation approximately 85 percent of the true cost of capital acquisition. To be
competitive, our capital cost recovery system must allow the present value of expensing. A
neutral cost recovery system, by indexing depreciation schedules, would allow investors to
recover the value of their investments over the life of an asset.
Corporate Alternative Minimum Tax
The 1986 Tax Act significantly raised the cost of capital for U.S. companies through
repeal of the investment tax credit and the lengthening of write-off periods for depreciable
assets. Congress also raised the cost of capital for American firms by inclusion in the 1986
Act of the alternative minimum tax (AMT). The corporate AMT has had a substantial
negative impact on the international competitiveness of U.S. companies.
Prior to 1986, corporations paid an add-on minimum tax of 15 percent on certain tax
preference items to the extent the aggregate amount of the preferences exceeded the greater
of regular tax paid or $10,000. The 1986 Act broadened the corporate minimum tax base
and dramatically increased the complexity of complying with the law. The AMT was
intended to ensure that corporations with significant economic and accounting income would
not be allowed to escape tax liability through the use of exclusions, deductions, or credits.
The AMT is in essence a second complete and parallel corporate income tax system.
The international competitiveness of large segments of American businesses has been
14
hurt by the AMT, especially capital-intensive and rapidly expanding industries. During the
recession, as the economy slows and corporate profits decline, even more corporations will
be subjected to minimum tax treatment as the effect of AMT preferences becomes
magnified when applied to a shrinking income base. This is particularly true for those
companies who are long-term AMT taxpayers and are therefore prevented from utilizing the
AMT credit. Thus, when profits decline, although total tax liability is reduced, the rate of
decline in tax liability is smaller that the overall decline in profits. Relative corporate tax
burdens would be increased at a time when businesses are least able to absorb the cost.
Aside from increased tax liability, the AMT has several negative economic impacts
on business. For companies which are subject to it, the AMT significantly increases the cost
of capital. The AMT discourages investment in productive capital assets by treating
accelerated depreciation as a tax preference. This can further push companies into, or
increase, minimum tax treatment -- penalizing companies for past investment and making
them more wary of future investment. For these reasons, the Chamber strongly recommends
that the Congress adopt measures in 1992 to achieve comprehensive reform of the corporate
alternative minimum tax.
Cutting the Social Security Tax
The U.S. Chamber was one of the earliest advocates of cutting the Social Security
payroll tax and returning the system to a pay-as-you-go basis. In 1987, the Chamber's Board
of Directors fully endorsed the recommendation of the 1986 White House Conference on
Small Business to freeze FICA taxes. Since that time, the Social Security tax burden has
increased substantially.
In 1990, the Chamber's Board reaffirmed its support of a reduction of the payroll tax
rate and urged that the study of private alternatives to ensure the long-run soundness of the
nation's retirement system be accelerated.
Reducing the Social Security tax burden is all the more important this year because
of the current stagnant economy. Jobs have been lost and incomes are suffering. In a 1990
study co-sponsored by the Chamber, economist Gary and Aldona Robbins estimated that
by lowering the cost of labor, a cut in the payroll tax would stimulate much-needed economic
growth, substantially increasing GNP and creating thousands of jobs. As authors of a study
released on March 14, 1991 by the Institute for Policy Innovation, the Robbins's have
reaffirmed these earlier results, finding that a reduction in Social Security taxes on both
employers and employees would produce 650,000 new jobs and a $226 billion increase in
GNP by the year 2000.
The Chamber's Board once again went on record last year in favor of a payroll tax
cut. At that time, the Chamber's Board made it clear that it opposes rasing the Social
Security taxable wage base. Raising the wage base to $82,200 in 1996 from the current law
projection of $69,300 in 1996, for example would cut the number of new jobs created by the
tax reduction in half. While such a proposal still contains a net tax reduction, large numbers
of workers would receive only a tiny tax cut, and the macroeconomic benefits would be
substantially less than those generated by cutting the payroll tax rate without tampering with
the wage base.
Chairman Rostenkowski has introduced H.R. 3730. The bill provides for a two-year
refundable income tax credit for 20 percent of Social Security and Medicare payroll taxes
paid by employees. H.R. 3730 caps the credit at $400 for joint returns, and $200 for all
other individuals. While we commend the Chairman for recognizing the insidious burden
that payroll taxes place on the economy, we believe a more simple, straight-forward
approach would be to cut the payroll taxes directly.
A properly crafted reduction in the Social Security payroll tax will create much-
needed new jobs and substantially boost economic growth. However, we vigorously oppose
any attempt to restrict the cut to those taxes paid by workers. Such a proposal would offer
15
no incentive to businesses to hire more workers and would break the historical linkage of
equal contributions by employees and employers. The Rostenkowski proposal must be
viewed in this fashion.
Savings Incentives
Business growth depends largely on the availability and cost of capital. By curtailing
Individual Retirement Accounts (IRA's), lowering 401(k) plan contribution limits, and
denying 401(k) plans to organizations that are tax exempt under Section 501(c) of the
Internal Revenue Code, the Tax Reform Act of 1986 reduced incentives for saving and
capital formation.
Since 1974, over $200 billion has been deposited in IRAs. In 1986, 15 million tax returns
reported $38 billion in IRA contributions -- almost a third of all personal saving that year.
But in 1987, only 7 million returns reported IRA contributions and these totaled only $14
billion.
IRA deposits consist largely of new saving. Based on data they have collected and
reviewed, Steven F. Venti and David Wise estimate that 80 percent of IRA contributions are
new saving.³ A 1989 Study By Daniel Feenberg and Jonathan Skinner and earlier study by
Martin Feldstein and Daniel Feenberg support the assertion that IRAs consist largely of new
saving.4 As the Feenberg and Skinner study states:
E
[W]e find little or no evidence
which favors the view that IRAs are funded by cashing out existing taxable assets."⁵
The Venti and Wise study estimates that over half of each marginal IRA dollar came
from reduced consumption; another 20 to 30 percent from reduced taxes; and at most 20
percent from other saving. The study further concludes that IRAs were not largely financed
by borrowing.
The Chamber supports H.R. 1406, the IRA legislation introduced by Representatives
Pickle and Thomas. This bill would remove the income restrictions placed on IRAs by the
1986 Tax Reform Act and allow Americans to make fully deductible IRA contributions of
up to $2,000 annually. In the alternative, taxpayers would not receive a deduction for their
IRA contribution, but would be allowed to withdraw all earnings after five years, tax-free.
This alternative approach is called the back-loaded IRA. We also support H.R. 960 and
H.R. 3744 which include a number of pro-growth initiatives, including a back-loaded IRA.
H.R. 1406, H.R. 960, and H.R. 3744 would increase the national savings rate and
promote long-term economic growth. This is critical because most of our trading partners
have higher savings rates than the U.S. These high savings rates translate into ever-
increasing standards of living and greater economic strength for our foreign competitors.
To ensure a more competitive and prosperous America, we must adopt policies designed to
encourage personal savings. These House bills would help accomplish that objective.
Employer-sponsored 401(k) plans are another incentive for saving. These plans allow
employees to save for their retirement via a tax-favored plan, which may or may not feature
employer contributions as well. They are extremely popular with employees, and indeed are
the fastest-growing segment of the nation's private retirement system. The Tax Reform Act
³Venti, Steven F. and David Wise "IRAs and Saving" in M. Feldstein (ed.) Taxes and Capital Formation,
University of Chicago Press, (1986). Have IRAs Increased U.S. Saving?: Evidence from consumer expenditure
surveys' National Bureau of Economic Research, Working paper No.2217, (April 1987). The Evidence on
IRAs,' Tax Notes (January 25, 1988).
"Feldstein, Martin and Daniel R. Feenberg, "Alternate Tax Rules and Personal Saving Incentives:
Microeconomic Data and Behavioral Simulations" in M. Feldstein (ed.), Behavioral Simulation Methods in
Tax Policy Analysis, Chicago: University of Chicago Press, (1983).
⁵Feenberg, Daniel and Jonathan Skinner, "Sources of IRA Saving," National Bureau of Economic
Research, Working Paper No.2845, (February 1989).
16
eliminated from 401(k) eligibility organizations that are exempt under Section 501(c) of the
Internal Revenue Code and did not have plans in place prior to July 1, 1986. President
Bush has proposed to permit tax-exempt employers to adopt 401(k) plans for their
employees. The Chamber strongly supports this proposal and urges Congress to restore
retirement equity to employees of 501(c) organizations.
Research and Experimentation Tax Credit
Industrial progress depends on the development of innovative products and methods.
Research and Experimentation (R&E) conducted by business is the primary means by which
innovation is generated. Scientific developments are transformed into new products and
processes that result in increased productivity, improved living standards and sustained
economic growth.
According to the Administration's fiscal year 1992 budget, the federal government
funds about 50 percent of total national investment in R&E. Industry performs over 70
percent of total national R&E.
These statistics highlight the Chamber's viewpoint that a successful national R&E
policy is best served through reliance on private R&E expenditures. The Chamber,
therefore, strongly supports a permanent R&E tax credit.
A permanent R&E credit is necessary to ensure that the U.S. remains the largest
investor in absolute size regarding R&E expenditures and to ensure that American business
remains competitive abroad. A 1989 National Science Foundation report on national R&E
resource patterns indicates that the United States spends more money on R&E activities
than France, West Germany, the United Kingdom and Japan combined.
These statistics mask the real trends on an international basis. For example, although
the same National Science Foundation Report states that U.S. R&E expenditures (on a
combined civilian and defense basis) were roughly comparable to West Germany and Japan's
expenditures as a proportion of Gross National Product (GNP) during the late 1980's, the
statistics dramatically diverge when compared on a civilian R&E basis. On a civilian basis,
the U.S. spent about 1.7 percent of GNP on research and experimentation during the same
time period. In contrast, Japan and West Germany spent approximately 2.8 percent and 2.6
percent of GNP, respectively, on civilian R&E in the late 1980s.
Other National Science Foundation statistics elaborate on the international
competitiveness issue. The U.S. had the highest proportion of scientists and engineers
engaged in R&E per 10,000 population until the mid-1980s. From 1964 to 1985, the U.S.
had roughly 64.7 scientists and engineers per 10,00 population. In contrast, Japan nearly
tripled their number of these technical professionals during the same time period. West
Germany has more than doubled its percentage of these technical persons on a population
basis since the mid-1960s as well.
The research and experimentation credit is an important component of a productivity
growth strategy, especially when weighted against the dramatic slowdown in the rate of
productivity growth which began in the mid-1960s, and became progressively worse from
1973 to 1981. There is a virtual consensus that rapidly growing R&E is a prerequisite of
rapid productivity growth. John W. Kendrick, a recognized expert on productivity with the
American Enterprise Institute, has emphasized that the slow-down in R&E spending was a
major contributor to the decline in productivity growths from the mid-1960s through 1981.
By enacting the R&E credit into law in 1981, Congress recognized the need to maintain U.S.
competitiveness with major trading nations and the importance of reversing the dismal
productivity trends of previous years.
Corporate R&E spending produces benefits to society as a whole beyond the private
rewards reaped by the companies involved in the R&E operation. The excess social gains
accrue both to consumers and to firms that compete with the companies conducting the
17
R&E. consumers benefit from lower prices on products as a result of cost-saving
innovations and from the availability of new products. Competing firms are able to develop
their own applications of innovative technology.
These is a substantial gap between the social and private rates of return for R&E and
innovation. As a result, without an incentive such as the R&E tax credit, businesses will
spend less in the U.S. on R&E than would be desirable from the prospective of society as
a whole. The nation's R&E shortfall cannot be cured in a short period of time. R&E is
inherently long-range. In industries such as electronics product cycles can last three to five
years. Each cycle also builds on earlier cycles. In other high technology industries, such as
aerospace, product cycles can last 10-15 years. In either case, high levels of R&E must be
performed each year. American industry is committed to undertaking the necessary efforts.
But to enable this, it needs sensible and stable policies.
By extending the R&E tax credit it is estimated private companies will increase their
R&E investment more than $18 billion between now and 1995. To maximize the benefits
from the R&E tax credit for both businesses and society as a whole, the Chamber urges
making the R&E tax credit permanent. Research and experimentation is an investment in
the nation's future. The uncertainty surrounding the future existence of the credit no doubt
leads to businesses reducing commitment to long-term R&E projects, and in turn reduces
the social benefits from R&E spending to all Americans.
Allocation of U.S. R&E Expenditures to Foreign Source Income
A U.S. corporation's foreign tax credit is limited to 34 percent of the company's
foreign source taxable income. Sections 861, 862 and 863 of the Internal Revenue Code
were created to define whether the source of income was within or outside the United
States. Treasury regulation Section 1.861 requires that indirect expenses be apportioned to
the sources of income. Presumably, if this defining process is properly carried out, that
which is U.S.-source income will be taxed in the U.S. and that which is foreign-source
income will be eligible for the relief provided by the foreign tax credit mechanism.
The allocation of indirect expenses to foreign-source income, without a corresponding
foreign deduction, has the inherent effect of taxing the same earnings twice as a corporation
runs up against its foreign tax credit limitation. Under the Tax Reform Act of 1986,
multinational corporations are likely to face such a double-taxation scenario. This, of course,
defeats the very purpose of the foreign tax credit, which is to prevent double taxation.
Double taxation results or can result, depending on the particular circumstances,
because the U.S. expenses allocated under the Section 1.861 regulations to foreign-source
income are not deductible in any foreign jurisdiction. No other country treats its domestic
research and experimentation as if it were conducted elsewhere, and U.S.-incurred expenses
allocated to foreign-source income are not deductible in foreign jurisdictions. Thus, a U.S.
taxpayer in effect has its foreign tax credit limitation proportionately reduced to the extent
that it conducts U.S. R&E.
The allocation rules are a disincentive to domestic research and experimentation.
As a result, some companies have moved their R&E activities abroad. The Section 861
allocation regulations have discouraged domestic research, encumbered U.S. multi-national
companies with higher overall tax burdens than those of their foreign competitors, and made
it difficult, if not impossible, for companies to implement long-range R&E plans.
The Chamber believes that R&E expenses incurred in the U.S. should be 100 percent
allocated to U.S.-source income. Short of that, the Chamber believes a permanent extension
of the moratorium on the Section 861 regulations is a good step forward.
Passive Losses
The Tax Reform Act of 1986, in an effort to curb abusive tax shelters, subjected all
18
rental real estate activities to the passive loss rules. Under current law, all rental real estate
owners are deemed to be passive investors regardless of their day-to-day involvement in the
real estate business. The result of this application is that real estate professionals are subject
to tax on the gross income of their overall real estate operations and not on their net
income, as other types of businesses.
There is no question that the passive loss rules have had a negative impact on all
segments of the real estate industry. The resulting declines in asset values have exacerbated
the problems of the nation's financial institutions and had spillover effects on the overall
health of the economy. The President has proposed to amend the passive loss rules to
eliminate this unfair distinction for rental real estate. The Chamber strongly supports this
effort.
THE WHITE HOUSE
WASHINGTON
DATE: 2/7/92
TO:
Speechwriting
FROM: J. FRENCH HILL
Special Assistant to the President and
Executive Secretary to the
Economic Policy Council
Room 228, OEOB, x7968
FYI - These are the latest pieces on the
credit curnch and banks not lending.
AMERICAN BANKER
Tuesdav. February 4, 1992
Treasury Official Calls for Pickup in Lending
By STEPHEN KLEEGE
SAN DIEGO - Speaking to
more than 1.000 commercial
real estate specialists on Mon-
day. Deputy Treasury Secre-
tari John E. Robson stepped
up pressure from the Bush ad-
ministration for increased
bank lending.
"Frankly. it's about time
came out of hibernation
and started lending." Mr. Rob-
son said here at the Mortgage
Bankers Association's annual
conterence on commercial real
estate.
John E. Robson
'This Is Not Banking'
Banks in 'hibernation'
"I don't think that federal
bank reform. saying Depres-
and state agencies charter
sion-era restrictions prevent
these institutions simply to
the banking industry from be-
take deposits and invest them
ing competitive.
in U.S. Treasury securities.
That is not banking."
Kemp Criticized
Mr. Robson's remarks drew
The one association plank
a muted response from bank-
the President failed to include
ers in the audience. many of
was an easing of federal hous-
whose institutions wrote off
ing. administration rules. said
huge amounts of bad real es-
Angelo R. Mozilo, president of
tate loans last year.
the group.
Nevertheless. many attend-
ees expressed guarded opti-
Mr. Mozilo said Housing
mism about the commercial
Secretary Jack Kemp has tight-
market in wake of President
ened requirements for FHA
Bush's State of the Union mes-
loans. hurting apartment de-
sage and budget plan. which
velopers.
included many of the key ob-
Despite authorization to use
jectives of the Mortgage Bank-
outside contractors to build
ers Association of America.
federal housing projects. Mr.
In addition. to providing a
Kemp "has done zero
to
stimulus for residential mort-
bring multifamily projects to
gage lending. the President's
fruition." Mr. Mozilo com-
package called for the rollback
plained.
of tax laws that the association
and other real estate industry
Many in the audience ex-
lobbyists complained have
pressed disappointment at the
made real estate a less attrac-
lack of detail in Mr. Robson's
tive investment.
address.
Mr. Robson said the admin-
For example, only a plan to
istration also supports changes
allow direct electronic pay-
in regulatory law to allow the
ment of payroll tax by small
Office of inritt Supervision to
business and another plan to
grant extensions to those
allow for a single tax force for
thrifts that have not set aside
state and federal payroll de-
the required capital for real es-
posits were offered as exam-
tate subsidiaries.
ples of steps to reduce regula-
And he renewed the call for
tory burdens.
1155
RFN-bf U.S.-TREASURY'S-ROBSO
f3214
R
U.S. TREASURY'S ROBSON URGES MORE RATE CUTS
LAS VEGAS, Jan 27, Reuter - Deputy Treasury Secretary John
Robson told a builders' conference recent interest-rate cuts
will help the economy but said more reductions should be
considered.
"
With inflation in check, there would seem to be room
for even additional easing of interest rates," he told the
National Association of Home Builders in Las Vegas, Nev.
A text of his address was released in Washington.
Robson said the economy now was "unsatisfactorily
sluggish," partly because consumers and businesses are working
off debt from the 1980s.
"The debt workoff and restructuring hurt us now but will
make the economy stronger in the long run, " he said.
Robson said construction executives will like President
Bush's scheduled State of the Union address Tuesday night.
"The President's plan will include measures helpful to your
industry because we realize that home building is one of the
keys to a solid economic recovery and robust long-term growth,"
he said.
"I can tell you, quite specifically, that the President's
plan will provide incentives for homebuyers to enter the
market," Robson added.
The Treasury official also promised continued efforts to
ease the "credit crunch" that builders have faced in getting
credit and critcized bankers for being timid.
"Frankly, banks are just not performing the function they
were put in business to perform if they continue their timid
approach to lending," Robson said.
Bankers should be "stepping forward" to lend, not just
taking deposits and buying U.S. Treasury securities, he said.
REUTER
Mon Jan 27, 1992 13:50
3564
DOW-ZB TREASURY"S ROBSON SAYS CREDIT
E1136
CRUNCH ISN"T OVER, BUT LIFTING
SAN DIEGO - (DJ) -- JOHN ROBSON, THE DEPUTY
SECRETARY OF THE TREASURY, SAID HE IS SEEING
SIGNS THAT THE CREDIT CRUNCH IS EASING.
HE SAID BANK REGULATORS ARE GETTING FAR
FEWER LETTERS OF COMPLAINT AND CITED INCREASED
COMMERCIAL AND INDUSTRIAL LENDING AFTER SEVERAL
MONTHS OF DECLINE.
BUT ROBSON, SPEAKING TO REPORTERS AT THE
MORTGAGE BANKERS ASSOCIATION MEETING HERE, SAID
THAT "BANKS ARE USING EXAMINERS AND REGULATORS
AS A CONVENIENT SHIELD FOR LOANS THEY DON"T WANT
TO MAKE."
"THE CREDIT CRUNCH ISN"T OVER. IT ISN"T,"
HE SAID. BUT "I BELIEVE REGULATORS, EXAMINERS
AS CONTRIBUTORS TO CREDIT UNAVAILABILITY HAS
GREATLY DIMINISHED."
REGARDING THE BUSH ADMINISTRATION"S HOPES
FOR ADOPTION OF LEGISLATION, ROBSON SAID HE WAS
OPTIMISTIC THAT SOME PARTS OF THE PLAN COULD BE
ADOPTED BY MARCH 20. "IT OUGHT NOT TO BE HELD
HOSTAGE TO POLITICAL CLASS WARFARE THAT THE
DEMOCRATS WANT TO ENGAGE IN," SAID ROBSON.
-0-
Mon Feb 3, 1992 16:23
12228
DOW-ZB BUSH"S REVIEW OF BUREAUCRACY
E1358
GIVES QUAYLE GREATER POWERS
BY CARL JOHNSTON
DOW JONES STAFF REPORTER
WASHINGTON - (DJ) -- PRESIDENT BUSH"S
LATEST MOVE TO HOLD A 90-DAY REVIEW OF NEW
REGULATIONS GIVES BROAD POWERS TO VICE PRESIDENT
DAN QUAYLE"S COUNCIL ON COMPETITIVENESS TO PUSH
THROUGH A BROAD RANGE OF POSSIBLY CONTROVERSIAL
REFORMS THAT AFFECT FINANCE AND BUSINESS.
IN HIS STATE OF THE UNION ADDRESS, BUSH
CALLED ON REGULATORS TO IMPLEMENT A 90-DAY
REVIEW OF THEIR REGULATIONS AND MAKE CHANGES TO
CUT BACK ON BUREAUCRATIC BURDENS.
AT THE END OF THE 90 DAYS, THE COUNCIL ON
COMPETITIVENESS WILL REVIEW AND ENDORSE PROPOSED
CHANGES COVERING A BROAD SWATHE OF ECONOMIC
ACTIVITY, FROM BANKING TO BIOTECHNOLOGY. THE
COUNCIL IS CHAIRED BY QUAYLE AND MEMBERSHIP
COMPRISES MOST OF PRESIDENT BUSH"S CABINET WITH
ECONOMIC RESPONSIBILITIES.
THE REVIEW COMMITTEE WITHIN THE COUNCIL
WILL BE HEADED BY THE CHAIRMAN OF THE COUNCIL OF
ECONOMIC ADVISERS MICHAEL BOSKIN AND WHITE HOUSE
CHIEF COUNSEL C. BOYDEN GRAY.
THE ADMINISTRATION HOPES THE REFORMS COMING
OUT OF THE REVIEW PROCESS WILL BE SUBSTANTIAL
AND HOPEFULLY BUILD ON PREVIOUS EFFORTS TO GET
RID OF REGULATORY BARRIERS THAT CAUSE PROBLEMS
SUCH AS THE CREDIT CRUNCH.
"OVERZEALOUS REGULATORS, YOU"VE MET THE
ENEMY, AND IT"S CALLED THE COMPETITIVENESS
COUNCIL," VICE PRESIDENT DAN QUAYLE TOLD A GROUP
TODAY CALLED TO THE WHITE HOUSE COMPOUND TO
DISCUSS THE REVIEW.
BUT MANY OF THE CHANGES BEING CONSIDERED
ARE ALREADY CONTROVERSIAL, AND THE COUNCIL
ITSELF IS UNDER FIRE BECAUSE IT OPERATES WITHOUT
STATUTORY AUTHORITY OR CONGRESSIONAL OVERSIGHT.
THE NEW REVIEW ALSO INVITES CRITICISM THAT
THE ADMINISTRATION IS OPENING A BACKDOOR TO
SHORT-CIRCUIT THE REGULATORY PROCESS.
SOME PROPOSALS MAY ALSO BE TAINTED BY
CHARGES OF ELECTION-YEAR POLITICS.
NEVERTHELESS, THE COUNCIL"S DIRECT LINK TO
THE WHITE HOUSE MIGHT BRING OUT MORE DARING NEW
PROPOSALS ON HOW TO CUT BACK ON GOVERNMENT
WASTE, AND GIVE EXTRA IMPETUS TO AMBITIOUS
REFORMS ALREADY IN THE PIPELINE THAT SEEMED
HEADED FOR TROUBLE.
AT A BRIEFING, DEPUTY TREASURY SECRETARY
JOHN ROBSON SAID TREASURY, FOR EXAMPLE, INTENDS
12228
TO PUSH AHEAD WITH A CONTROVERSIAL IDEA TO ALLOW
BANKS TO COUNT A PERCENTAGE OF PURCHASED
MORTGAGE SERVICING RIGHTS AND CREDIT CARD
RELATIONSHIPS AS PART OF THEIR SO-CALLED TIER
ONE CAPITAL.
THE IDEA IS TO EXPAND BANKS" CAPITAL BASE
AND THEREBY MAKE MORE OF THEIR ASSETS AVAILABLE
FOR LENDING AND HOPEFULLY ALLEVIATE THE CREDIT
CRUNCH.
Thu Jan 30, 1992 18:38
3294
DOW-QA US TREASURY"S ROBSON/FED -3: SAYS "TIME IS THE ENEMY"
E1050
O-DJI
DEPUTY TREASURY SECRETARY ROBSON, IN HIS REMARKS TO
THE MORTGAGE BAMKERS ASSOCIATION MEETING IN SAN DIEGO,
POINTED OUT THAT "ALL THE NATIONS THAT ARE AMERICA"S
PRINCIPAL ECONOMIC COMPETITORS HAVE A CAPITAL-GAINS TAX
DIFFERENTIAL.
"IT IS ABOUT TIME CONGRESS GOT WITH IT AND PROVIDED
ONE FOR THE U.S., " ROBSON SAID.
THE TREASURY OFFICIAL CALLED ON THE MORTGAGE BANKERS
ASSOCIATION TO STAND BEHIND THE BUSH ADMINISTRATION"S
ECONOMIC PROPOSALS.
"TIME IS THE ENEMY OF GETTING AN ACCEPTABLE GRWOTH
PROGRAM ENACTED BY CONGRESS," ROBSON SAID. "YOU, AND MANY
OTHER AFFECTED GROUPS, MUST DECIDE WHETHER YOU WILL JOIN
US AND GET FULLY BEHIND THE ADMINISTRATION"S PLAN, OR
ATTEMPT TO PRESS FOR CHANGES THAT, IF OTHERS DO THE SAME,
RISK PRODUCING LEGISLATION THAT CANNOT GET THROUGH
CONGRESS OR, IF IT DOES, CANNOT BE SIGNED BY THE
PRESIDENT."
-0-
Mon Feb 3, 1992 14:57
DEPARTMENT
OF
THE
TREASURY NEWS
TREASURY
epartment of the reasure
Washington, D.(
elephone 566-2041
PREPARED FOR DELIVERY
Contact: Anne Kelly Williams
EMBARGOED UNTIL 1:00 P.M. (EST)
202-566-2041
January 27, 1992
The Honorable John E. Robson
Deputy Secretary of the Treasury
Remarks to the
National Association of Home Builders
Las Vegas, Nevada
January 27, 1992
Good morning, and thanks for inviting me here to discuss
with the nation's home builders a number of important economic
issues that affect not only your industry but the economic
vitality of the entire country.
I think it is hard to overstate the importance of home
building and home ownership to the economic and spiritual well-
being of American society. That is why the Bush Administration
has shared your deep concerns about the recent condition of the
residential real estate markets, why we have already done some
things to help the industry, and why we are committed to doing
even more.
Right now we would have to characterize the overall economy
as unsatisfactorily sluggish. This is due in part to
transitional factors such as consumers and businesses working off
debt that was piled up during the 1980's and some fundamental
restructuring of U.S. business that is going on. The debt work-
off and restructuring hurt us now but will make the economy
stronger in the long run.
The statistics are mixed. For example, consumer confidence
is weak and SO are retail sales. Unemployment is higher than any
of us want. And diminished state and local government spending
has removed that stimulus from the economy.
On the other hand, exports and inventories are up and the
trade deficit is down. And of course we all welcomed the recent
encouraging news on December housing starts. Inflation is well
under control at just a hair over three percent and only about
half of what it was a year ago. And interest rates are
significantly down.
NB-1637
2
The President, the Secretary of the Treasury and others in
the Administration recognize the importance of low interest rates
to the real estate markets as well as the overall economy. That
is why we have been continuously urging the Fed to bring down
interest rates. Finally, after a year of taking quarter-of-a-
point-baby-step decreases, the Fed dropped the discount rate a
full point last December and we now have the prime rate down to a
more attractive level and mortgage interest rates at a fourteen-
year low. However, with inflation in check, there would seem to
be room for even additional easing of interest rates.
But even though there are some positive economic signs --
signs that have led the Congressional Budget Office, the Federal
Reserve and a number of private economists to forecast a pretty
sturdy economic recovery by about the middle of this year -- the
Bush Administration is not content to simply let nature take its
course. Therefore, when President Bush delivers his State of the
Union Address tomorrow, he will present a comprehensive series of
actions to foster more economic growth. And you home builders
are going to like what is in the President's plan.
The President's plan will include measures helpful to your
industry because we realize that home building is one of the keys
to a solid economic recovery and robust long-term growth. If you
look at the past three recessions, slow or declining housing
starts preceded the economic downturn and an upturn in housing
starts preceded and helped drive the post-recession recovery.
So we know that a strong homebuilding market has a lot to do
with the strength of the overall economy. And, we know that five
million jobs -- carpenters, electricians, architects, plumbers,
painters, and many others, are directly supported by the
homebuilding industry, and that there are many other businesses
whose fortunes are directly affected by homebuilding.
Having formed a certain affection for my job at Treasury, I
shall leave to the President the announcement of the details of
his economic program. However, there are some things I can tell
you today about what his economic growth program will contain and
what it will not.
I can tell you that the President's plan will contain
actions to provide both short-term economic stimulus and long-
term economic growth. Indeed, the President's program will rest
firmly on what I consider to be the four pillars of long-term
economic growth: savings, investment, education, and health.
I can tell you that the President's plan is designed to
stimulate the investment needed to create jobs, bolster real
estate values, increase home sales, make American business more
competitive, and continue our efforts to control the federal
deficit.
3
I can tell you, quite specifically, that the President's
plan will provide incentives for homebuyers to enter the market.
We want to help families capture their part of the American dream
by buying their first home. And we want to boost home values
which will help millions of Americans who have much of their
entire wealth in their homes.
And the President's plan will also address other concerns
and objectives of the real estate community.
For example, the President will propose a reduction in the
capital gains tax, something to which this Administration has
been committed since it first came to office. But for three
years running, Congress has stymied a capital gains tax reduction
even though it would encourage business investment and
entrepreneurship, and help create new jobs. All of the nations
which are America's principal economic competitors have a capital
gains tax differential and it is about time Congress got with it
and provided one for the United States of America.
So I'm confident you will find the President's program far
reaching, promotive of economic growth both in the short and
long-term, and entirely responsible.
That word "responsible" is important -- because there are
some ideas being promoted out there that sound good but are going
to create bigger problems. We are simply not going to recommend
actions that will damage our economic future.
For example, we will not propose actions that blow a big
hole in the federal budget and create an increased burden for
you, your children and your grandchildren to pay off in future
decades. In 1990 we got an enforceable budget agreement that for
the first time imposes some fiscal discipline and starts getting
a handle on our big deficit that is siphoning money away from
productive investment. We are going to stick with the principles
embodied in that agreement.
Moreover, if we go on a budget-busting binge we risk raising
interest rates, which is about the worst thing we can do to your
industry and to business investment generally.
And the Administration's plan will be responsible because
we're not going to propose fly-by-night programs that have short-
term political sex appeal but don't make long-term economic
sense. And we are not going to walk down the primrose path of
trade protectionism that is going to lose American jobs and hurt
American consumers.
So I think you will like the President's economic growth
plan.
4
However, we are not going to rest on our oars with just the
State of the Union in our efforts to foster economic growth and
help the homebuilding and real estate industries. There are
other things that we will do.
For example, we are going to continue and intensify our
efforts to alleviate the credit crunch. As many of you in this
room know, we have been working hard at this problem for well
over a year now, often hand in hand with representatives of the
homebuilding industry.
The credit-crunch problem has a number of causes, but the
result is an environment in which many businesses and individuals
are unable to borrow, and many bankers are reluctant to lend.
No one knows this better than you home builders who haven't
been able to get the credit when you needed it. We don't want
situations where the demand for new housing is there but the
capital to build it is not.
Frankly, the banks are just not performing the function
they were put in business to perform if they continue their timid
approach to lending. Just last week I saw statistics showing
that, while bank loans fell $47 billion for the year ending
September 30th, bank portfolios of Treasury securities grew $27
billion. Folks, the federal and state regulators don't charter
these institutions to take deposits and invest them in U.S.
Treasury securities. That isn't banking. They charter banks to
make loans.
Banking is a business where reasonable risks are taken to
make capital available to businesses and consumers so that
economic activity can be fostered. And bankers should be
stepping forward now -- as President Bush, Secretary Brady and
many others of us have been saying for many months -- to make
loans to worthy borrowers.
I'm delighted to see others stepping forward to provide
financing for homebuilders that they can't get from banks. Just
across the border in California the state pension fund plans to
invest $220 million for the development of new homes. Perhaps
other pension funds will do the same.
But our goal isn't for the banks to lose good business. Our
goal is to create a confident lending environment where banks are
making loans to worthy borrowers. That is why Treasury has been
working with the leadership of the bank and thrift regulatory
agencies to make sure that over-regulation of financial
institutions is not causing the lack of credit and dampening
economic growth. We want the regulators to be part of the
solution, not part of the problem.
5
I hope you've heard of the "credit crunch guidelines".
These changes and clarifications in the instructions to bank and
thrift examiners -- over 30 in number and more than a year in the
making -- are the product of the four regulatory agencies. The
goal is to promote balance and good judgment in bank and thrift
examinations with straightforward commonsense ideas that simply
need equally commonsense application in the field.
For example, it makes sense for bank and thrift examiners to
encourage lenders to work with borrowers experiencing temporary
problems. And it makes sense for examiners not to assume
doomsday scenarios. Our economy will turn around, and so will
troubled credits. That's common sense and responsible
regulation.
The guidance to bank and thrift examiners addresses a number
of important issues that affect the real estate community.
For example, examiners are instructed to take a reasonable,
long-term view of real estate values. We want them to get away
from a rigid mark everything to market attitude that assesses
real estate loans based on liquidation values in markets that are
simply not functioning normally. Examiners are instructed to
look out beyond the immediate market conditions and expect some
return to normalcy over time.
We have also seen a tilt toward conservatism in the
appraisal process, so the credit crunch guidelines address these
issues as well. I might add that I met with a large group of
appraisers last year and we specifically discussed the importance
of environment. balanced appraisals in restoring confidence in the lending
Another important issue in the credit crunch guidelines is
the injunction to examiners to distinguish between commercial and
residential real estate in portfolio examinations. We don't want
the concerns of examiners or bankers about overbuilt commercial
real estate markets to penalize lending for residential building.
We have also tried to improve communication among the
regulators, the bank and thrift management, borrowers and
businesses. We want to make sure the credit crunch message gets
through and that the guidelines are faithfully applied. In the
past year we held over 200 meetings around the country to discuss
credit crunch issues and to improve the understanding and
implementation of the credit crunch guidelines.
Besides that, there are two changes in regulatory law that
we believe will help credit availability for your industry and
which we support. The first will give OTS some flexibility in
granting extensions relating to the need for thrifts to set aside
6
capital against their investments in real estate subsidiaries.
And the second is a proposal that will reduce the amount of
capital thrift institutions must hold against certain residential
construction loans. Tim Ryan, will address these issues in his
remarks.
Finally, let me say a word about the continuing need for
fundamental reform in the banking industry. One of the main
reasons we have a credit crunch is because the banking system is
weak. And the main reason the banking system is weak is because
it operates under antiquated laws that prevent it from becoming
financially healthy. Last year, the Bush Administration
submitted a comprehensive bank reform bill to Congress. But
Congress totally failed to adopt anything resembling the needed
degree of reform. Instead, they passed flawed legislation that
imposes more regulation, higher costs, and offers no opportunity
for the banks to strengthen themselves financially. If we don't
correct the fundamental problems in the banking system we are
going to unnecessarily expose the American taxpayers to the costs
of a potential bank cleanup.
And if we get fundamental bank reform, we'll have a banking
system that will be able to make credit available to you
homebuilders in good times and bad, and we won't be confronting
these credit crunches.
We think fundamental bank reform is so important that we are
going to keep pushing it forward this year and see if we can get
Congress to act responsibly on that urgent national problem.
Ladies and gentlemen, I hope I have been able to convey to
you just how important we believe the homebuilders are to the
economy and the country. We intend to convert that belief into
continued actions to promote home ownership and homebuilding and
to a continuing commitment to work with you to achieve our common
goals. Thank you.
REASURY NEWS
Department of the Treasury
Washington, D.C.
Telephone 566-2041
AS PREPARED FOR DELIVERY
Contact: Anne Kelly Williams
EMBARGOED UNTIL 8:45 A.M.
202-566-2041
The Honorable John E. Robson
Deputy Secretary of the Treasury
Remarks to the
Mortgage Bankers Association
February 3, 1992
San Diego, California
Good morning, and thanks for inviting me here to join you to
discuss some important economic issues that affect not only your
industry, but the economic vitality of the entire country.
I'm glad to be here because, for one thing, the Bush
Administration recognizes that a stronger real estate industry
will provide a major boost to the economy and help to ensure
robust growth over the long term. We know the real estate
industry supports close to ten million people -- architects,
builders, brokers, engineers, plumbers, carpenters, and building
managers to name a few -- and that many other businesses depend
on it. And I'm also glad to be here because we recognize that
machine. you mortgage bankers are a vital cog in that powerful economic
I know very well how tough things have been in the real
estate industry and for those tied to it. But, today, economic
problems extend well beyond real estate, and we would have to
characterize the entire economy as unsatisfactorily sluggish. In
part. this is caused by forces of the business cycle. But there
are also some strong transitional factors at work. Consumers and
businesses are working off debt piled up during the 1980's --
which means less money is being spent by consumers and invested
by businesses. And there is also some permanent restructuring c:
American business going on.
The economic statistics are mixed and sometimes appear
contradictory. Consumer confidence and retail sales are weak.
Key sectors such as the automobile industry have been hit
extremely hard. New home sales and the leading indicators are
reported down. And unemployment is higher than any of us want.
So, a lot of American businesses and American people are hurting.
On the other hand, the stock market is up and exports have
been strong. December housing starts were up. The trade deficit
is down, which helped lead to positive growth for the last
quarter. Inflation is well under control at just about three
percent -- only half of what it was a year ago -- and interest
rates are down significantly.
NB-1647
2
As to interest rates, let me just say that the President,
the Secretary of the Treasury and others of us in the
Administration appreciate fully the importance of low interest
rates to the real estate markets -- as well as the overall
economy. That's why we have been continuously pressing the Fed
to bring the rates down. Finally, after a year of taking
quarter-point baby step decreases, the Fed dropped the discount
rate a full point last December. Now, the prime rate is down to
a much more attractive level and mortgage interest rates are at a
fourteen-year low.
But with inflation so clearly under control, there may well
be room for even further easing by the Fed to stoke the fire of
our slow-burning economy.
However, with the economic signals mixed, and despite some
signs of improvement -- signs that have led the Congressional
Budget Office, the Federal Reserve Chairman and a number of
private economists to forecast a pretty sturdy economic recovery
by about mid-year -- the Bush Administration is not content to
simply let nature take its course.
Last week, the President announced his plan to accelerate
job-creating economic growth right now, while at the same time
establishing a solid path for future growth. It is a balanced
and comprehensive plan. There are no gimmicks. It 16 a plan
that rests firmly on what I consider to be the pillars of long-
term economic growth: savings, investment, education, and health
-- and fiscal discipline.
Most important to this group, the President's plan should
bolster real estate values and strengthen real estate markets.
First, President Bush's plan proposes some passive loss
relief to put the real estate development business on a more
level playing field with other businesses that net their gains
and losses for tax purposes.
Second, the President's plan proposes to facilitate real
estate investments by pension funds. With nearly $2 trillion in
assets, America's pension funds are a major capital source. And,
by modifying existing tax impediments, we can hope that pension
funds will pursue newfound opportunities in commercial properties
-- following in the direction of the California State Pension
fund, which has announced its plan to invest $225 million in the
development of new homes.
And for those in the multi-family sector, we propose
extending the low-income housing tax credit to stimulate private-
sector construction and refurbishing of rental housing for lower-
income Americans.
3
But the President's growth package does more: it proposes a
deep cut in the capital gains tax -- down to as low as 15 percent
for assets held three years or more.
Since this Administration came to office, it has proposed,
and Congress has stymied, a capital gains tax reduction. It's
time to unlock the American financial resources that are
imprisoned by punitive capital gains tax rates. It would
encourage business investment, entrepreneurship, create new jobs,
and strengthen real estate values. All the nations that are
America's principal economic competitors have a capital gains tax
differential, and it is about time Congress got with it and
provided one for the United States of America.
Another focus of the President's plan is residential real
estate, and it's worth noting that homebuilding and home buying
have played major roles in fueling the recoveries after the past
three recessions. Here, we propose a $5,000 credit and penalty-
free IRA withdrawals for first-time home buyers -- plus the
deduction of losses on personal home sales.
Other features of the President's growth plan include tax
incentives to foster new business investment, enterprise zones to
promote entrepreneurship in distressed areas, and a permanent
research and development tax credit to help foster the new
technology upon which America's long-term prosperity depends.
The President's plan will also uphold the fiscal discipline
necessary to ensure long-term growth. Today, the limits on
spending and the pay-as-you-go features of the budget agreement
are working to restrain Congress' appetite to spend and spend and
spend. We want to keep it that way.
Besides, if we go on a budget-busting binge, we risk raising
long term interest rates -- which is about the worst thing we can
do to your industry and to business investment generally.
American investors, and our foreign trading partners, are
counting on us to keep the deficit under control, and we will.
But our economic growth efforts should not stop at the State
of the Union message. And they won't. As many of you know, we
at Treasury have been working on the credit crunch problem for
well over a year now -- often hand in hand with representatives
of the real estate and mortgage banking industries.
There has simply been too little credit available to finance
the needs of your industry and of business generally. The credit
crunch has a number of causes. But the result is an environment
in which too few are able to borrow, and too many are reluctant
to lend. And, frankly, it's about time the banks came out of
hibernation and started lending.
4
Recently I saw some statistics showing that -- while bank
loans fell $47 billion for the year ending last September 30th --
bank portfolios of Treasury securities grew by $27 billion. I
don't think that federal and state agencies charter these
institutions simply to have them take deposits and invest them in
U.S. Treasury securities. That is not banking.
Banking is the business of making loans to provide capital.
It is not risk-free and not intended to be SO. And bankers
should be stepping forward now to make loans to sound borrowers.
I know many of you work with banks and thrifts on a limited
basis and that your funds come primarily from other sources such
as insurance companies and pension funds. And I know it isn't
just banks that are holding back real estate credit. But in
numerous ways your sources of funds are affected by general
economic conditions, as well as factors peculiar to the real
estate markets -- and both of those are directly affected by the
credit crunch.
That is why the Administration has worked hard to create an
environment where banks are once again taking appropriate risks.
And that' is why Treasury has been working with the leadership of
the bank and thrift regulatory agencies to make sure that over-
regulation of financial institutions is not contributing to the
lack of credit. We want regulators to be part of the solution --
not part of the problem.
I hope you've heard of the "credit crunch guidelines."
These instructions to bank and thrift examiners -- over 30 in
number and more than a year in the making -- are the product of
the four bank regulatory agencies. The goal is to promote
balance and good judgment in bank and thrift examinations with
straightforward commonsense ideas that simply need equally
commonsense application in the field.
The guidance to bank and thrift examiners addresses a number
of important issues that affect the real estate community. This
includes guidance on mini-perm loans 80 banks can prudently
refinance these vital commercial real estate credits without fear
of regulatory retribution.
Examiners are also instructed to take a reasonable, long-
term view of real estate values. We cannot have examiners
hanging a scarlet letter on real estate. We cannot have
examiners taking a rigid, formula-driven approach to real estate
concentrations.
And, we want examiners to get away from a mark-everything-
to-market attitude that appraises real estate loans based on
liquidation values in markets that are simply not functioning
normally. Examiners are instructed to look out beyond the
5
immediate market conditions and expect some return to normalcy
over time. The same is true of real estate appraisals.
Frankly, we hope someone is giving these same perspectives
on real estate to the insurance companies and their regulators
and rating agencies.
We want to make sure the credit crunch message gets through
and that the examiner guidelines are faithfully applied in the
field. So, in the past year we held over 200 meetings around the
country -- including more than 75 with developers and mortgage
bankers -- to discuss credit crunch issues and to improve the
understanding and implementation of the credit crunch guidelines.
And we are working on other credit crunch fronts as well.
For example, we support two changes in regulatory law that we
believe will help credit availability for the real estate
industry. The first will give OTS some flexibility in granting
extensions relating to the need for thrifts to set aside capital
against their investments in real estate subsidiaries. And the
second is a proposal that will reduce the amount of capital
thrift institutions must hold against certain residential
construction loans.
We have worked with the Environmental Protection Agency to
get a sensible rule for Superfund lender liability. And we have
pushed forward on a number of regulatory changes to help lending
institutions raise or maintain capital levels -- such as
including purchased mortgage servicing rights and credit card
relationships in Tier I bank capital, and changing the risk
rating on certain residential construction credits.
One of the main reasons we have a credit crunch is because
the banking system is weak. And the main reason the banking
system is weak is because it operates under antiquated laws that
prevent it from becoming financially healthy and internationally
competitive.
Last year, the Bush Administration submitted a comprehensive
bank reform bill to Congress. But Congress totally failed to
adopt anything resembling the needed degree of reform. Instead,
they passed flawed legislation that imposes more regulation,
higher costs, and offers no opportunity for the Sanks to
strengthen themselves financially.
If we don't correct the fundamental problems in the
financial services system, we are going to unnecessarily expose
the American taxpayers to the costs of a potential bank cleanup.
That's why we're going to try again this year to get fundamental
bank reform.
6
Finally, let me say a word about an Administration-wide
effort to take a hard look at what we are doing as regulators and
to strip away or modify as many regulations as possible that
retard economic growth or impose unnecessary burdens on business.
This is being done intensively throughout the entire government
under a 90-day regulation moratorium declared by the President.
Let me give you a couple of examples of what we're doing at
Treasury:
One is to simplify and make less costly the payroll tax
deposit system for small businesses by allowing direct electronic
payment without a bunch of paperwork. And another is to require
only a single tax form that serves the payroll deposit needs for
both state and federal purposes.
There are countless examples of opportunities for large or
small regulatory relief that doesn't take Congressional action.
You know better than anyone where the shoe pinches or where some
government regulation seems senseless. Let us know where you
think something can be done. We'll listen. We may not always
agree, but we really want to hear from you. I urge you, do not
pass up this opportunity!
All of us must do what we can to get the economy on the
right track. President Bush has put forward his proposals to
boost the economy now and to strengthen long-term growth. We now
look to Congress to cooperate. And your support will be
essential if we are to accomplish our mutual goals.
I know there are elements of the President's plan you would
like to see improved, expanded, or changed -- passive loss and
depreciation recapture for example. But let me just observe that
time is the enemy of getting an acceptable growth program enacted
by Congress. You, and many other affected groups, must decide
whether you will join us and get fully behind the
Administration's plan, or attempt to press for changes that -- 16
others do the same -- risk producing legislation that cannot get
through Congress or, if it does, cannot be signed by the
President.
Economic growth must come first. We all share in a
commitment to secure growth for our nation. Now, I hope we can
work together to fulfill that commitment.
Thank you.
ORAL STATEMENT
BY
LAWRENCE A. HUNTER
ACTING CHIEF ECONOMIST
ON BEHALF OF
U.S. CHAMBER OF COMMERCE
BEFORE THE
HOUSE WAYS & MEANS COMMITTEE
FEBRUARY 5, 1992
THANK YOU, MR. CHAIRMAN. ON BEHALF OF OUR 185,000 MEMBER BUSINESSES,
ASSOCIATIONS AND STATE AND LOCAL CHAMBERS OF COMMERCE, THANK YOU FOR THIS
OPPORTUNITY TO PRESENT OUR VIEWS ON THE NATION'S CURRENT ECONOMIC
DIFFICULTIES AND ACTIONS NEEDED TO REMEDY THEM.
UNLESS BOLD NEW POLICIES ARE ENACTED, THE UNITED STATES FACES A
DECADE OF SLOW ECONOMIC GROWTH. SINCE THE BEGINNING OF 1989, THE ECONOMY
HAS SWERVED SERIOUSLY OFF COURSE, AND THE ECONOMY NOW SITS WELL BELOW THE
LEVEL OF REAL OUTPUT IT WOULD PRODUCE IF IT HAD GROWN SINCE 1989 AT ITS
HISTORIC TREND RATE OF ABOUT 3 PERCENT. THIS DIFFERENCE BETWEEN TREND
GROWTH AND ACTUAL GROWTH CONSTITUTES A GROWTH GAP. THE GROWTH GAP IS
PROJECTED TO WIDEN IN COMING YEARS.
CONGRESS HAS AT ITS DISPOSAL THE MEANS TO PREVENT THIS ECONOMIC
STAGNATION IF IT WOULD CHANGE POLICIES THAT THWART ECONOMIC EXPANSION AND
HOLD DOWN GROWTH. AMERICAN BUSINESSES AND WORKERS DO NOT NEED
EXTRAORDINARY HELP FROM GOVERNMENT. ALL WE NEED IS FOR GOVERNMENT TO
REMOVE THE OBSTACLES IT HAS PLACED IN OUR PATH. THE TIME FOR CONGRESSIONAL
ACTION IS NOW, AND WE BESEECH CONGRESS TO ACT WITH DISPATCH TO REDUCE
TAXES ON ALL AMERICANS AND RAISE THEM ON NO ONE.
IT WOULD BE WRONG FOR CONGRESS TO MISTAKE THE SHORT-RUN RECESSION,
AND ITS ACCOMPANYING FALL OFF IN DEMAND, FOR THE LONG-RUN SICKNESS
INFECTING OUR ECONOMY -- AN ASPHYXIATION OF CAPITAL. GOVERNMENT POLICIES
2
ARE LITERALLY SUFFOCATING BUSINESS EXPANSION AND JOB CREATION BY LEVYING
BURDENSOME AND DISTORTING TAXES; BY ACCELERATING REGULATIONS THAT BRING
FEWER AND FEWER SOCIAL BENEFITS AT SKY-ROCKETING COST TO BUSINESSES AND
CONSUMERS; AND BY EXTRAVAGANT PUBLIC SECTOR SPENDING THAT DIVERTS
DESPERATELY NEEDED RESOURCES FROM THE PRIVATE SECTOR WHERE NEW JOBS AND
BUSINESSES GO WANTING.
A RECENT STUDY CONDUCTED BY THE RESEARCH DIVISION OF THE LONDON
STOCK EXCHANGE COMPARES TAX POLICIES ON EQUITY INVESTMENT AMONG THE G-7
NATIONS AND CONCLUDES THAT THE UNITED STATES HAS ONE OF THE MOST CAPITAL-
UNFRIENDLY TAX SYSTEMS AMONG DEVELOPED NATIONS. THE AUTHORS PUT IT BEST:
IT IS PARTICULARLY SURPRISING THAT THE USA, AS THE NATION WHICH HAS
MOST CONSISTENTLY ADOPTED THE CAPITALIST ETHIC, CURRENTLY TREATS ITS
EQUITY INVESTORS so HARSHLY.
JAPAN OFFERS BY FAR THE MOST
ATTRACTIVE FISCAL ENVIRONMENT TO MOST TYPES OF INVESTOR.
IF WE HOPE TO BE COMPETITIVE IN THE 21ST CENTURY, SOMETHING MUST BE DONE TO
REMEDY THIS SITUATION.
THE CHAMBER RECENTLY COMPLETED A PROJECT ON ECONOMIC GROWTH IN
WHICH WE ASKED FOUR PROMINENT ECONOMISTS TO ADDRESS THE QUESTION: WHAT
POLICIES WORK TO INCREASE LONG-RUN ECONOMIC GROWTH. A STRONG CONSENSUS
EMERGED ON WHAT IS TO BE DONE: CUT THE CAPITAL GAINS TAX SHARPLY AND INDEX
IT TO INFLATION; INCREASE DEPRECIATION ALLOWANCES FOR CAPITAL INVESTMENT so
THAT FIRMS CAN RECOVER THE FULL ECONOMIC VALUE OF THEIR INVESTMENT; AND
REDUCE THE RATE OF GROWTH IN FEDERAL SPENDING.
Now, MR. CHAIRMAN, I KNOW THE CAPITAL GAINS TAX ISSUE HAS BECOME
CONTENTIOUS AND HIGHLY POLITICIZED, BUT IT IS TIME TO LAY ASIDE PARTISAN
RHETORIC AND SEE IF THERE IS SOME COMMON AREA WHERE WE CAN COME TO
AGREEMENT TO HELP THE COUNTRY. RATHER THAN US CONTINUING TO ARGUE THE
UNRESOLVABLE, LET ME OFFER AN APPROACH THAT I HOPE CAN BRING BOTH SIDES
TOGETHER. EVERYONE NOW AGREES, I BELIEVE, THAT WE NEED TO INCREASE CAPITAL
INVESTMENT. AND, AS THE FAMOUS BANK ROBBER WILLY SUTTON SAID WHEN ASKED
3
WHY HE ROBBED BANKS, YOU GO WHERE THE MONEY IS .. TO GET MORE INVESTMENT,
YOU HAVE GOT TO GIVE INCENTIVES TO THOSE WHO HAVE THE INCOME TO INVEST.
THE OPPONENTS OF CUTTING THE CAPITAL GAINS TAX HAVE ARGUED THAT DOING so
WILL NOT INCREASE INVESTMENT, IT WILL ONLY GIVE RICH PEOPLE A WINDFALL TO
FUEL THEIR CONSUMPTION. WELL, MR. CHAIRMAN, LET'S DEFUSE THIS ISSUE BY
CHANGING THE LAW IN A WAY THAT GUARANTEES PEOPLE WILL REINVEST. CUT THE
RATE TO SPUR REALIZATIONS, ALLOW INVESTORS TO REINVEST CAPITAL GAINS
REALIZATIONS WITHOUT HAVING TO PAY THE CAPITAL GAINS TAX, AND INDEX THE
BASIS FOR INFLATION TO GIVE AN INCENTIVE FOR LONGER TERM HOLDINGS. THIS
PROPOSAL WILL NOT ONLY GIVE INVESTORS AN INCENTIVE TO UNLOCK CAPITAL GAINS,
IT WILL ALMOST DICTATE THAT MOST OF THOSE GAINS BE ROLLED OVER INTO NEW
INVESTMENTS, WHICH IS PRECISELY WHAT IS NEEDED TO RAISE LONG-TERM ECONOMIC
GROWTH.
CONGRESS MUST ALSO REDUCE THE COST OF LABOR, AND CUTTING THE SOCIAL
SECURITY TAX FOR BOTH EMPLOYERS AND EMPLOYEES IS THE BEST WAY. As SENATOR
MOYNIHAN HAS so ELOQUENTLY STATED, THE CURRENT SOCIAL SECURITY SURPLUS
IS NOT SAVED TO PAY FUTURE BENEFITS - -- IT IS PILLAGED BY THE TREASURY TO PAY
CURRENT GOVERNMENT BILLS THEREFORE CUTTING THE TAX WILL NOT AFFECT THE
PAYMENT OF FUTURE BENEFITS ONE WHIT!
I CANNOT EMPHASIZE ENOUGH HOW PERNICIOUS PAYROLL TAXES ARE. THEY
ARE A DIRECT EXCISE TAX ON JOBS. AND, AS ANY ECONOMIST WILL TELL YOU, THE
MORE YOU TAX SOMETHING THE LESS OF IT YOU GET. PAYROLL TAXES ARE
PARTICULARLY DESTRUCTIVE DURING HARD ECONOMIC TIMES WHEN MANY SMALL
BUSINESSES ARE STRUGGLING TO SURVIVE UNTIL THE ECONOMY IMPROVES AND SALES
PICK UP ONCE AGAIN. PAYROLL TAXES MUST BE PAID REGARDLESS OF WHETHER OR
NOT A BUSINESS IS PROFITABLE.
FINALLY MR. CHAIRMAN, WE URGE CONGRESS TO ENACT A NEUTRAL COST
RECOVERY SYSTEM TO INDEX THE DEPRECIATION SCHEDULE FOR INFLATION so THAT
FIRMS CAN REALIZE THE PRESENT VALUE EQUIVALENT OF EXPENSING. VIRTUALLY
EVERY ECONOMIST WILL TELL YOU THAT EXPENSING OR ITS PRESENT VALUE
4
EQUIVALENT IS THE APPROPRIATE MANNER TO TREAT CAPITAL INVESTMENT. THE
BEAUTY OF THE NCRS APPROACH IS THAT IT ACHIEVES THE ECONOMIC OBJECTIVE
WITHOUT RADICALLY ALTERING THE TAX SYSTEM, AND THE BUDGETARY COST CAN BE
KEPT UNDER CONTROL.
IN SUMMARY: CUT THE CAPITAL GAINS TAX RATE AND INDEX IT TO INFLATION
BUT CHANNEL THE CAPITAL GAINS REALIZATIONS RIGHT BACK INTO NEW INVESTMENTS
BY ALLOWING TAX-FREE ROLLOVERS; CUT THE SOCIAL SECURITY PAYROLL TAX FOR
BOTH EMPLOYEES AND EMPLOYERS TO LESSEN THE EXCISE TAX BURDEN ON JOBS; AND
INDEX THE DEPRECIATION SCHEDULE FOR INFLATION BY ADOPTING A NEUTRAL COST
RECOVERY SYSTEM.
THE QUESTION, OF COURSE IS WHAT WILL THESE POLICY CHANGES "COST," AND
CAN WE AFFORD THEM? WE CANNOT AFFORD NOT TO MAKE THESE CHANGES.
MR. CHAIRMAN, I WOULD ASK THAT THE TABLE I HAVE DISTRIBUTED TO THE
COMMITTEE BE INTRODUCED INTO THE RECORD AT THIS TIME. WHAT THIS TABLE
SHOWS IS AN ESTIMATE OF THE FIVE YEAR BUDGETARY EFFECTS OF THE INITIATIVE I
HAVE JUST OUTLINED. ALL OF THE REVENUE ESTIMATES ARE TAKEN FROM EITHER THE
JOINT TAX COMMITTEE OR THE CONGRESSIONAL BUDGET OFFICE -- NOT BECAUSE WE
BELIEVE THEM, BUT RATHER TO DEMONSTRATE HOW POWERFUL AND PRACTICAL THIS
INITIATIVE IS EVEN UNDER THE MOST STRINGENT ASSUMPTIONS.
THE JOINT TAX COMMITTEE ESTIMATES THE FIVE YEAR REVENUE LOSS OF THE
NEUTRAL COST RECOVERY SYSTEM TO BE $58 BILLION AND THE FIVE YEAR COST OF A
1.8 PERCENTAGE POINT REDUCTION OF THE SOCIAL SECURITY PAYROLL TAX TO BE $254
BILLION. IN THE CASE OF CAPITAL GAINS, WE HAVE BEEN DOUBLY CONSERVATIVE BY
ASSUMING, UNREALISTICALLY, THAT NO CAPITAL GAINS ARE EVER REALIZED FOR
CONSUMPTION THUS COMPLETELY ELIMINATING CAPITAL GAINS AS A SOURCE OF
FEDERAL REVENUE. WE ALLOW FOR A FIVE YEAR STATIC REVENUE LOSS OF $165
BILLION FOR THE CAPITAL GAINS COMPONENT.
THE COMBINED FIVE YEAR COST OF THE PROGRAM COMES TO $462 BILLION
UNDER THE REVENUE ESTIMATING METHODOLOGY USED BY CONGRESS. Now LET'S
LOOK AT THE OTHER SIDE OF THE LEDGER. FIRST, WE HAVE ADOPTED CBO's
5
ESTIMATE OF THE LARGER OF TWO POTENTIAL "PEACE DIVIDENDS." WE ASSUME
DEFENSE SPENDING IS PARED TO $250 BILLION BY 1997, WHICH YIELDS A SAVINGS OF
ABOUT $143 BILLION. SECONDLY, WE PROPOSE THAT CONGRESS TAKE A PAGE FROM
CORPORATE AMERICA'S BOOK AND FACE THE REALITIES OF THE '90s. IT IS TIME FOR
CONGRESS TO BEGIN RESTRUCTURING AND DOWNSIZING THE FEDERAL GOVERNMENT.
WE PROPOSE A MODEST FIRST STEP THAT ANY CEO IN THE COUNTRY WILL TELL YOU
IS EMINENTLY FEASIBLE IN ANY ORGANIZATION WITH A LITTLE WILL POWER. WE
PROPOSE THAT CONGRESS SIMPLY REDUCE THE RATE OF INCREASE IN NONDEFENSE
FEDERAL SPENDING [EXCLUDING SOCIAL SECURITY AND NET INTEREST] BY 5 PERCENT
BELOW THE CBO BASELINE. THIS AMOUNTS TO A FIVE YEAR SAVINGS OF $110 BILLION.
FINALLY, WE REFER BACK TO THE FINDINGS OF OUR PROJECT ON ECONOMIC
GROWTH. THERE WAS GENERAL AGREEMENT THAT A DRAMATIC REDUCTION IN
CAPITAL GAINS TAXES COUPLED WITH SUBSTANTIAL IMPROVEMENT IN THE CAPITAL
COST RECOVERY SYSTEM WOULD, IF ACCOMPANIED WITH A SIGNIFICANT REDUCTION IN
THE GROWTH RATE OF FEDERAL SPENDING, INCREASE THE ECONOMY'S GROWTH
POTENTIAL PERMANENTLY ON THE ORDER OF ONE FULL PERCENTAGE POINT PER YEAR.
IF ENACTED SWIFTLY, SUCH A PROGRAM WOULD RAISE AVERAGE ANNUAL REAL
GROWTH IN EXCESS OF ONE FULL PERCENTAGE POINT A YEAR IN THE NEAR TERM AS
THE ECONOMY REGAINED LOST GROUND AND SOUGHT ITS NEW GROWTH POTENTIAL.
AGAIN, TO BE CONSERVATIVE WE HAVE USED CBO's OWN RULE OF THUMB TO
ESTIMATE THE DEFICIT REDUCTION THAT RESULTS FROM A PERMANENT ONE
PERCENTAGE POINT INCREASE IN REAL GROWTH. WE ESTIMATE AN ECONOMIC GROWTH
DIVIDEND AMOUNTING TO $236 BILLION IN DEFICIT REDUCTION OVER FIVE YEARS.
THUS MR. CHAIRMAN, AS THE TABLE DEMONSTRATES, THE INITIATIVE I HAVE
SUGGESTED SHOULD ON BALANCE ACTUALLY REDUCE THE FIVE YEAR DEFICIT
SLIGHTLY. WE ESTIMATE IT WOULD CREATE 1.2 MILLION JOBS BY 1996 AND SPUR
INVESTMENT THAT WOULD INCREASE THE STOCK OF U.S. CAPITAL BY $3.9 TRILLION BY
1996.
IN 1961, JOHN F. KENNEDY SET AN AMBITIOUS NATIONAL GOAL: PLACING A MAN
ON THE MOON AND RETURNING HIM SAFELY TO EARTH BY THE END OF THE DECADE.
6
IN 1992, IT SEEMS A MODEST GOAL BY COMPARISON TO LAUNCH THE ECONOMY OVER
THE COURSE OF THE DECADE BACK TO NORMAL LEVELS OF HEALTH -- BOOSTING
ECONOMIC GROWTH, ACCELERATING PRODUCTIVITY INCREASES, BRINGING INFLATION
DOWN TO EARTH AND RETURNING AMERICANS SAFELY TO WORK.
THANK YOU, MR. CHAIRMAN.
Bob Simon
Page Two
I have the Midland, Texas Chamber of Commerce researching the question of
whether President Bush was ever a member of their organization. Once I hear
from them, I will let you know.
Bob, I'm pleased to provide you with this information and encourage you
to give me a call if you have any questions or need any additional material.
I will follow-up with you with the other information very soon.
I look forward to working with you and Bob Duggin on this speech.
Delegations from the U.S. Chamber Federation
Speaking Out in Washington/February 1992*
At press time, these delegations from the U.S. Chamber of Commerce Federation are scheduling events in Washington, D.C.,
in conjunction with the National Business Action Rally on February 24.
We encourage more of our members — chambers of commerce, associations and businesses to make plans to meet with
their Senators and Representatives either individually or as part of a delegation.
If you need help in developing your delegation or in arranging your trip to Washington, contact Bill Mitchell, Manager of the
Office of Chamber of Commerce Relations, at 202/463-5580.
State
Organization
Event
Contact
ALABAMA
Chamber of Commerce
Individual Briefings
Victor Cross
Executives of Alabama
Monday, February 24
205/298-3639
ARIZONA
Arizona Chamber Executives
Individual Luncheons
John Parrott
602/453-3444
ARKANSAS
Arkansas State
Reception, 6 p.m.
Ron Russell
Chamber of Commerce
Dinner, 7 p.m.
501/374-9225
Monday, February 24
Marriott-Crystal City
CALIFORNIA
California State
Luncheon, 12:30 p.m.
Dave Kilby
Chamber of Commerce
Monday, February 24
916/444-6670
Hyatt Regency Washington
DELAWARE
New Castle County
Luncheon, 12 Noon
Fred Rohm
Chamber of Commerce
Monday, February 24
302/737-4343
Dirkson Building
FLORIDA
Florida Chamber of Commerce
Luncheon, 12:30 p.m.
Frank Ryll
Monday, February 24
904/222-2831
B-339 Rayburn Building
GEORGIA
Georgia Chamber of Commerce
Luncheon, 12 Noon
Evelyn Lanier
Monday, February 24
404/223-2267
ILLINOIS
Illinois State
Individual Briefings
Jim Beaumont
Chamber of Commerce
217/522-5512
INDIANA
Indiana State
Luncheon, 12:30 p.m.
John Walls
Chamber of Commerce
Monday, February 24
317/264-3110
216-Hart Building
KENTUCKY
Kentucky Chamber of Commerce
Luncheon, 12:30 p.m.
Ken Oilschlager
Monday, February 24
502/695-4700
S-151 U.S. Capitol
LOUISIANA
Louisiana Association
Briefings, 2-4 p.m.
Dan Juneau
of Business and Industry
Monday, February 24
504-928-5388
1416 Longworth Building
MARYLAND
Maryland State Chamber of Commerce
Luncheon, 12 Noon
Tom ller
and Maryland Business for Responsible
Monday, February 24
410/547-1295
Government
Willard Inter-Continental
MICHIGAN
Michigan State
Dinner, 6:30 p.m.
Phil Guyeskey
Chamber of Commerce
Sunday, February 23
517/371-2100
Wardman Tower -
Sheraton Wahsington
MINNESOTA
Minnesota Chamber of
Luncheon, 11:30 a.m.
David Olson
Commerce and Industry
Monday, February 24
612/292-4650
Loyal Opposition Restaurant
MISSISSIPPI
Mississippi Economic Council
Luncheon, 12:30 p.m.
Bob Pittman
Monday, February 24
601/969-0022
S-138 U.S. Capitol
Reception, 5:00 p.m.
Monday, February 24
Hugh Scott Room, U.S. Capitol
State
Organization
Event
Contact
MISSOURI
Missouri Chamber of Commerce
Individual Briefings
Neil Coffin
Monday, February 24
314/634-3511
MONTANA
Montana Chamber of Commerce
Luncheon, 12 Noon
Buck Boles
Monday, February 24
406/442-2405
Senator Conrad Burns
Dining Room, U.S. Capitol
NEBRASKA
Nebraska Chamber of Commerce
Luncheon, 12 Noon
Jack Swartz
and Industry
Monday, February 24
402/474-4422
B-340 Rayburn Building
NEW ENGLAND
New England Association of
To Be Announced
Ron Zooleck
AREA
Chamber of Commerce
617/479-1111
Executives
NORTH CAROLINA
Triangle Chambers of Commerce
Dinner, 7:30 p.m.
Rebecca McKenzie
Sunday, February 23
919/467-1016
Holiday Inn Crown Plaza
Luncheon, 12:15 p.m.
Monday, February 24
188 Russell Building
NORTH DAKOTA
Greater North Dakota Association/
Luncheon, 12 Noon
Dale Anderson
State Chamber of Commerce
Monday, February 24
701/237-9461
628 Dirksen Building
Reception, 5:30 p.m.
Monday, February 24
S-207 U.S. Capitol
OHIO
Ohio Chamber of Commerce
Individual Briefings
I. John Reimers
614/228-4201
OKLAHOMA
Oklahoma State Chamber of
Luncheon, 11:45 a.m.
Dick Rush
Commerce and Industry
Monday, February 24
405/424-4003
Washington Court Hotel
PENNSYLVANIA
Lebanon Valley
Luncheon, 12:15 p.m.
Steve Vegoe
Chamber of Commerce
Monday, February 24
717/273-3727
Quality Hotel Capitol Hill
TEXAS
Texas Chamber of Commerce
Luncheon, 12 Noon
Larry Milner/Art Roberts
Monday, February 24
512/472-1594
Hyatt Regency Washington
800/223-3443
VIRGINIA
Virginia Chamber of Commerce
Luncheon, 12:30 p.m.
Win Luther
Monday, February 24
804/644-1607
Sheraton Carlton
WEST VIRGINIA
West Virginia
Individual Briefings
John Hand
Chamber of Commerce
304/342-1115
*This list does not reflect information received after February 6, 1992.
U.S. Chamber of Commerce
Washington, D.C. 20062
February 14, 1992
TO: BOB SIMON, WHITE HOUSE
FR: Richard E. Loomis Rechard E. Lomin
U.S. Chamber of Commerce
RE: Speech by President Bush to the U.S. Chamber's National
Business Action Rally - February 24, 1992
Bob, it was good to speak with you this morning and review suggestions
for the president's speech to the U.S. Chamber's National Business Action
Rally.
We anticipate more than two thousand business leaders representing small
and large businesses, local and state chambers of commerce, and trade and
professional associations will attend the Rally. They will be come from
virtually all fifty states.
The program will feature the launching of the 1992 National Business
Agenda. A summary copy is enclosed. It is the result of several regional
meetings held last Fall with our members. More than 1,500 business people
attended. A promotional flyer and regional meeting program is enclosed for
your background. Our policy committees and other key constituencies also
contributed to development of the Agenda.
Following the Rally, many of our participants will attend congressional
functions sponsored by local and state chambers of commerce. A list of those
functions is enclosed. We will add several other states in the next few days,
and I will advise you of any changes. During and following these functions
members of Congress will be presented with copies of the Agenda.
The Chairman of the U.S. Chamber, C.J. "Pete" Silas, Chairman and Chief
Executive Officer, Phillips Petroleum, Bartlesville, Oklahoma, will preside at
the Rally. Mr. Silas was among the business executives who accompanied
President Bush on his recent trip to Japan.
The incoming Chairman of the Chamber, to take office later in the day on
the 24th, is H. William Lurton, Chairman and Chief Executive Officer,
Josten's, Inc., Minneapolis, Minnesota.
Richard L. Lesher is president of the U.S. Chamber. He is the chief
operating officer of the organization.
We would appreciate recognition of these individuals incorporated in to
the President's remarks.
U.S. CHAMBER OF COMMERCE
1992 NATIONAL ACTION RALLY TIMELINE
DAR CONSTITUTION HALL
MONDAY, FEBRUARY 24, 1992
FINAL DRAFT
START
END
ACTION
8:00
Doors to Constitution Hall open.
8:45
9:30
Marine Band plays a musical program for 45
minutes as audience is seated; musical
program closes with "American Pageant."
9:30
9:32
Silas comes on stage and calls the Rally to
order; introduces Reverend Merrow.
9:32
9:35
Reverend Merrow's invocation. Silas stands
off to the side.
9:36
9:42
Following Silas's and Merrow's departure from
the stage, the presentation of colors take
place, with the Marine Band and Marine Color
Guard.
9:42
9:46
Silas comes back on stage and welcomes the
audience. Silas thanks the Marine Band and
introduces Col. Bdurgeois and Master Gunnery
Sergeant Ryan. Past Chairmen are introduced
as a group and Silas spotlights accredited
chambers in attendance.
9:46
10:00
Marine Band musical program, closing with the
"Marine Hymn."
10:00
10:02
Silas introduces Denis Mullane and the
Connecticut Mutual awards.
10:03
10:15
Silas leaves the stage while Mullane presents
the Connecticut Mutual awards.
10:15
10:16
Silas returns to the stage and introduces the
Old Guardrmy
Fife and Drum Corps.
2, 2,500 people
10:16
10:30
Musical program by the Army Fife and Drum
Corps. Silas is offstage.
10:30
10:31
Silas returns and thanks the Army Fife and
Drum Corps, and introduces its director.
10:32
10:33
Silas introduces the agenda film.
10:33
10:40
Agenda film is shown.
10:41
10:56
Silas's keynote address follows the film.
10:56
11:08
Silas departs the stage to greet President
Bush. Marine Band musical program for 12
minutes, concluding with "Stars and Stripes
Forever" and flag drop.
11:08
11:10
Introduction of President Bush and Silas as
Marine Band plays' "Hail to the Chief."
Bill
11:10
11:11
Silas introduces Lurton and the President.
11:12
Agenda is presented to President Bush.
11:13
11:33
President Bush's address
11:33
11:35
Silas thanks the President; both men leave
the stage.
11:40
Offstage announcer adjourns the meeting.
2
7281
THE WHITE HOUSE
Office of the Press Secretary
(Dallas-Ft. Worth, Texas)
For Immediate Release
December 18, 1991
STATEMENT BY THE PRESIDENT
Today I am pleased to sign into law H.R. 2950, the "Intermodal
Surface Transportation Efficiency Act of 1991." This law provides
a new structure for our Federal surface transportation programs --
highway, highway safety, and transit -- and authorizes funds for
those programs for the next 6 years.
H.R. 2950 is landmark legislation. It will carry the Nation
into the post-Interstate era and help provide the transportation
infrastructure for improved economic productivity and enhanced
international competitiveness. In the short term, this bill means
jobs for working Americans. It provides more than $11 billion
that can be used this fiscal year to build highway projects.
During the coming year, those funds will provide jobs for over
600,000 Americans. The law will continue to support jobs in the
highway and transit construction industries over the next 6 years.
When we submitted to the Congress our proposal for
reauthorization of Federal surface transportation programs earlier
this year, all those involved with the Nation's surface
transportation system recognized that it was time to redesign
these programs. The Interstate System -- the largest public works
project in history -- is very near completion, and this law
provides the final funds to finish it. The Interstate System has
fundamentally changed transportation in America. It has become
easier and cheaper to move goods, and virtually all Americans
benefit from the speed and efficiency with which they can move
from place to place on our interstate highways. But our focus
must now shift from major highway construction to better
maintenance, management, and use of our existing highway and
transit facilities.
A key element of our proposal was the National Highway System.
Ours was not a call for a major new construction program, but
rather for identification of those key highways throughout the
country that are the arteries for interstate and interregional
travel or roads that link those routes to major ports, airports,
and other critical transportation facilities. It was a call for
dedication of sufficient funds to the National Highway System to
ensure that projected traffic increases on those highways can be
accommodated without deterioration in their physical condition or
ability to move traffic. This new law establishes the National
Highway System and provides the funds necessary to keep it
performing efficiently.
Another major element of our proposal was to provide State and
local officials unprecedented flexibility. We proposed to give
those officials the discretion to use a major portion of their
Federal surface transportation funds on the improvements that
would best meet local needs, whether highway projects or public