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Nume
F.Y.I.Bai FAX TRANSMISSION John
DEPARTMENT OF THE TREASURY
1500 PENNSYLVANIA AVE NW, ROOM 3422
WASHINGTON. DC 20220
THE
202-622-1906
FAX: 202-622-0073
To:
Goody Marshall
Date:
October 27, 1997
Ben Johnson
Rob Weiner
From:
Michael Froman
Pages:
7, including this cover sheet.
Subject: IRS hearing 10/28
COMMENTS: Attached is the testimony that Charles Fowler, newly appointed National Direcor
of EEO and Diversity for IRS, will give tomorrow (10/28) before the Subcommittee on Civil
Service of the Government Reform and Oversight Committee. Please note that this is the same
testimony that was originally submitted in September.
Oct-27-97 05:40P IRS-Leg. Affairs
STATEMENT OF
INTERNAL REVENUE SERVICE
SUBMITTED FOR THE RECORD
for the
Subcommittee on Civil Service
Committee on Government Reform and Oversight
Employment Discrimination in the Federal Workplace
September 25, 1997
The Internal Revenue Service (IRS) appreciates the opportunity to sul: nit this statement
for the record of the hearing on the topic of employment discrimination in the Federal workplace.
Our statement discusses equal employment opportunity at the IRS.
Equal employment opportunity issues often are related 10 workforce C imposition.
Currently. more than 67% of our workforce is female and more than 35% is 1 om minority
groups compared to 61% for females and 30% for minorities just 11 years age. The percentage
of female IRS executives has increased from 9.7% in 1988 to 23.6% in 1997 The percentage of
executives from minority groups has risen from 10.4% to 13.1% over the san = period. We have
had similar changes in the composition of our workforce in the higher pay gri des. The
percentage of females in the GS/GM 13/14/15 positions was 22.9% in 1988 :1 d 32.9% in 1997
For minorities. the numbers rose from 12.2% to 16.9%.
A number of factors have produced this changing workforce composit ion. The "baby
boomers" who came 10 the Service in large numbers after 1970 began the ch: age in the ethnic
and gender mix of the IRS. Advances in civil rights and educational opportu itics. as well as
Oct-27-97 05:40P IRS-Leg. Affairs
changing societal mores and economic necessity also provided the IRS labor 1 orce with
increasing numbers of professionally skilled women and minorities. By the la e 1980s. the IRS
experienced significant changes, not only in its workforce, but also with respe 1 10 fulfilling its
primary mission (to administer the tax laws), and as an employer. Changes in workforce
diversity were important in the IRS planning process. They also were import nit as we sought to
facilitate changes to our work environment and new business requirements by adopting a
strategic approach to planning and management that focused on long- and sho t-term business
objectives.
Our planning process focused on four strategic areas, one of which wa "Enhancing
Recruitment and Retention of Employees." In this arca. the IRS undertook 1: initiatives and
studies. One study reviewed the status of women and minorities in the IRS. hat study (A
Design for Organizational Diversity: Report of Strategic Initiative ERR-16: st linorities and
Women Within JRS (December 1989)) (F.RR-16) has been provided to this S. bcommittee and
probably is the most relevant study in connection with this Subcommittee's r: cent hearings.
F.RR-16 addressed a number of equal employment opportunity issues within he Service. For
example. it addressed the underrepresentation of women and minorities in m. nagement and
leadership positions, as compared to their numbers in the total workforce. It is clear from the
study that the IRS was concerned that the concept of equal employment oppc tunity was clearly
refected in our recruitment efforts, but was reflected far less clearly in advan ement. The study
also addressed the IRS training and development programs and their adequac and relevance to
the Service's increasingly diverse workforce.
2
Oct-27-97 05:40P IRS-Leg. Affairs
ERR-16 defined the strategic direction the IRS was taking in this area as follows:
The Internal Revenue Service at all levels will be representati e of
the public it serves and committed to a leadership role that ens ires
racial, ethnic, and (sexual) gender equality. The IRS culture will
be free of barriers which limit opportunity for minoritics and
women.
To claborate on this strategic direction. we articulated strategies in fiv : areas:
Strengthening Management Accountability;
Achieving Progress through Education;
Improving the EEO Functional Support to Management:
Ensuring Effective Recruitment, Retention. Development, and Advancement; and
Developing Reliable Workforce Information Systems
ERR-16 called for the IRS to look beyond actions that only remedied :xisting
representational imbalances and to pursue a comprehensive strategy to under tand, and be
strengthened by. the diversity of its human resources. ERR-16 challenged th: IRS to become an
organization in which equal employment opportunity was not considered a P" gram for a few
designated groups, but a way of doing business that would ensure that all em loyees were treated
equitably and were not advantaged or disadvantaged by their racial or ethnic I ackground or by
their gender. It has never been the policy of the IRS to use quotas to achieve liversity. We
wanted to remove barriers to advancement so that any IRS employee who wa. qualified for a
position would be given a fair chance to attain it. This was our objective in t) = late 1980s. and
we think it remains a good objective today.
3
Oct-27-97 05:40P IRS-Leg. Affairs
The IRS acted in good faith to achieve this objective, and took many a. tions to provide
opportunities for all employees. We were not alone in our efforts to provide (I oportunities for all
employees. The concept of equal opportunity in federal employment had beer reaffirmed over
the years by the executive and legislative branches of the federal government nd in Supreme
Court decisions. It was against this backdrop that the IRS and other federal di partments and
agencies developed affirmative employment programs and policies. We belie e that our
programs and policies have served us well. Recent court decisions in the Adc 'und' and Byrd
cases have caused us to review how we strategically approach or evaluate pro Tess toward our
objectives in the areas of equal employment opportunity for all employees.
In April 1997. a federal district court found, in an interlocutory decisio n, in Byrd that
ERR-16 violated the Fifth Amendment equal protection clause. The plaintiff: four white male
GS-12 revenue officers, alleged that they had been subjected to age, race, and gender
discrimination in connection with specific personnel actions taken by the IRS The plaintiffs
contended that ERR-16 encouraged institutional discrimination against white nale employees.
because its objective was to increase representation of women and minorities n managerial and
executive positions through employee development and advancement strateg S.
After Adarand, government actions related to race or ethnicity that are challenged under
the Equal Protection clause are examined under what is called a "strict scrutir y" standard. Under
the strict scrutiny standard. the government prevails if it shows that its progra n or policy serves a
I Adurand Constructors Inc V Fend. 115 S.C.t. 2097 (1995).
John A. Byrd v. Kobert E. Rubin. Civ. Action No. 95-1280 (W.D. La. April 9.1997).
4
Oct-27-97 05:41P IRS-Leg. Affairs
compelling governmental interest and that it is narrowly tailored to serve that interest. In Byrd,
the Court held that ERR-16 encouraged of authorized preferential treatment of minority and
female employees. and that. accordingly, the strict scrutiny standard must be applied to the
Service's initiative. The district court then concluded that diversification of the Service's
workforce was not a compelling governmental interest sufficient to justify the agency's use of
race and gender criteria in decision making.
Byrd is one of the first federal court decisions in which a federal affir native action
program was found unconstitutional. It was an interlocutory decision on a m tion for partial
summary judgment which could not be appealed until the trial on the merits I ad concluded.
After that decision and before a final judgment on the merits. the case was se ded by the parties
under an agreement not to disclose the terms of the settlement.
The Acting Commissioner, in an August 19, 1997, Memorandum For All Executives and
Managers, temporarily suspended portions of two standards in individual per ormance plans and
two measures used in the Business Review (copy attached). The temporary $ ispension applies
only to these performance measures -- not the affirmative action program. ) 1 consultation with
the Justice Department and IRS Chief Counsel, we are working to redesign t) e elements and
standards of the performance plans for executives and managers for FY 1998 The redesigned
elements and standards will ensure that all managers and executives are evalu ated on their efforts
to develop and promote all employees in accordance with affirmative action lans that are
consistent with current law and Administration policy.
5
TOTAL P.07
In a September 22. 1997 memorandum. the National Director, Personnel Division.
reiterated the changes to 1998 performance plans which had been described it the Acting
Commissioner's memorandum. The memorandum also described new. Trea:- ary-mandated LEO
performance elements and standards for all supervisors and managers to be in :luded in the
Executive/Managerial Performance Plan for the FY 1998 performance apprai al period (copy
attached.) The IRS has not terminated its affirmative action program and, inc eed, remains
committed to doing everything permitted under law to achieve a diverse worl. force.
In concluding. the IRS remains committed to providing equal opportu ities for all
employees and to maximizing the benefits of having a diverse workforce. The : IRS is awarc of
its affirmative employment responsibilities under Management Directives pri mulgated by the
Equal Employment Opportunity Commission, and will work with the Commi sion in
maintaining a lawful affirmative employment program.
6
THE NATIONAL SALES TAX: Who Bears the Burden?
10 manc Echoule 3P
FYI - Rick Swafz Page 1
Cato Policy Analysis No. 289
December 8, 1997
I have Full
study to
Policy Analysis
you wish
use deto
The National Sales Tax
Who Bears the Burden?
by Gilbert E. Metcalf
Gilbert E. Metcalf is an associate professor of economics at Tufts University and
an economist with the National Bureau of Economic Research.
Executive Summary
A leading criticism of a national sales tax replacement for the income tax is that low-income households
would be harmed by the regressivity of the tax. This study uses data from the Bureau of Labor Statistics'
Consumer Expenditure Survey (CES) to measure the lifetime incidence of a shift from the current income tax
to a national sales tax.
The incidence of the tax burden under this reform depends in important ways on the measure of household
well-being. If annual income is used to rank households, the tax reform looks very regressive. If lifetime
income is used to rank households, the tax reform continues to look regressive, though much less so than
when the annual income approach is used. If a universal rebate tied to poverty thresholds is coupled with the
national sales tax, as is the case in the Schaefer-Tauzin bill (H.R. 2001), the sales tax is about as progressive
as the current income tax. Alternatively, if a payroll tax rebate is provided to low-income families, the new
system is only slightly less progressive than the current income tax system.
There are two essential messages of this paper. First, how we rank people--by annual or lifetime
income--makes a big difference when we measure the progressivity of a national sales tax. Second, a national
sales tax replacement for the income tax is not inherently regressive; it is relatively easy to construct a sales
tax that protects the poor from paying any tax and is roughly as progressive as the current income tax. The
universal rebate option is a good example of how one could adopt a non-regressive national sales tax.
Introduction
Dissatisfaction with the current income tax continues to generate interest in broad-based tax reform. In
particular, there is considerable interest in moving from our current income tax to a consumption tax. In the
104th Congress there were approximately a dozen proposals for substantive tax reform, falling into three
broad categories: flat tax, consumer income tax, and retail sales tax. [1]
A major concern with any of the consumption tax proposals is that they are perceived to be highly regressive
DEC-10-97 WED 13:43
THE NATIONAL SALES TAX: Who Bears the Burden?
Page 2
relative to the current income tax. Much of that perception follows from the idea that, because rich people do
most of the saving, any move to a consumption tax will release a substantial share of income from taxation.
Incidence studies using annual income support that view; distributional tables for a shift from an income to a
consumption tax show that the reform would be highly regressive. [2] A major problem with annual incidence
studies of consumption taxes, however, is that life-cycle income and savings patterns distort the measured
incidence of a consumption tax in a pronouncedly regressive direction.
The goal of this study is to indicate the biases resulting from measuring the incidence of a consumption tax
using an annual incidence approach and to show incidence results for a national sales tax using a lifetime
income approach that I have used elsewhere. [3] In addition, I consider two of the leading proposals to make
the national sales tax more progressive: 1) provide a family rebate equal to the poverty level times the sales
tax rate; or 2) provide a $2,000 per worker refund on payroll taxes. If the sales tax includes a universal rebate
tied to poverty thresholds, the sales tax looks nearly as progressive as the current income tax measured by the
lifetime incidence approach. [4]
How Should We Measure Tax Incidence?
An incidence analysis attempts to answer the question, Who bears the burden of a particular tax? Any attempt
to evaluate the "fairness" of a tax (or a change in the tax system) requires knowing whose disposable income
is changed and by how much in response to the tax. Economists often refer to taxes as "regressive" or
"progressive," but the confusion over the terms' meanings requires careful definitions. The definitions that
most economists use rely on the average tax rate, that is, the ratio of tax liabilities to income. [5] A tax
is
regressive if the average tax rate falls with an increase in income, proportional if the average tax rate is
constant, and progressive if the average tax rate rises with income. Simply put, low-income people pay a
higher fraction of their income in taxes than wealthier people if the tax is regressive and a lower fraction if the
tax is progressive.
Early tax incidence studies used economic models to inform judgments about relevant incidence results from
tax changes. In effect, economists used existing research results to generate plausible assumptions about the
incidence of specific taxes. The late Joseph Pechman of the Brookings Institution is a classic example of that
type of economist. [6] Using a one-year time frame for analysis, Pechman assumes that consumption taxes
are passed forward and borne by consumers in proportion to their expenditures, finding that consumption
taxes are quite regressive. [7] A recent study by Brookings Institution economists Gale, Houser, and Scholz
confirms this view. [8] In an analysis of a shift from the current income tax to a flat tax, they find that the
lowest-income group would see their average tax rate increase by 2.2 percentage points (81 percent increase)
while the highest-income group would see their average tax rate decrease by 7.1 percentage points (17
percent decrease). [9] Similarly, economists from MIT and the National Bureau of Economic Research find
that there would be a substantial shift in the tax burden to the poor occasioned by changing from the income
tax to a retail sales tax. [10]
An alternative approach uses estimates of lifetime income as a measure of the taxpayer's economic
well-being. Economists, taking into account both Milton Friedman's permanent income hypothesis and
life-cycle considerations, have long recognized that annual income may not be a very good measure of an
individual's potential to consume. [11] For purposes of measuring tax incidence, individuals should be
grouped by income according to the present discounted value of earnings plus any gifts received.
The lifetime income theory makes the difficulties with the annual incidence approach readily apparent. People
tend to earn the highest incomes in their lives around middle age and the lowest incomes in their youth and
old age. Consequently, in a cross-section annual analysis, lower-income groups are likely to include some
young and elderly people (and some people with volatile incomes) who are not poor in a lifetime sense.
Similarly, higher-annual-income groups are likely to contain some people at the peak of their age-earnings
P. 02/03
DEC-10-97 WED 13:43
THE NATIONAL SALES TAX: Who Bears the Burden?
Page 3
profile for whom peak earnings are a poor measure of annual ability to consume.
To see why a lifetime approach makes a difference, imagine a world with identical people who have identical
skills and identical earning patterns over their lifetimes. Figure 1 illustrates the lifetime income and
consumption paths of a typical person in this imaginary society. Income, initially low and rising to a peak in
the middle years, falls as this worker gradually cuts back on work and enjoys more retirement leisure.
Consumption, however, is constant over the lifetime. In early years individuals borrow against future income
to finance consumption that exceeds income. Savings occurs in the middle years, first to repay borrowing
from the early years and then to finance consumption in the retirement years. In this stylized example, I
assume that all savings are consumed so that at death there are no assets remaining.
Figure 1. Annual Income versus Annual Consumption
over Lifetime of a Typical Worker
Income
Consumption
wo
Age
Co
to
Next, assume that there is one person of each age in this identical society. Figure 1 now has an additional
Tl
interpretation. In addition to indicating consumption and income patterns over an individual's lifetime, it also
shows income and consumption patterns for our society of individuals at any given point. Now consider an
ir
annual incidence analysis of a national sales tax. Since consumption is constant across all individuals, tax
payments will also be constant. But since income varies over a lifetime, the average tax rate (taxes as a
fraction of annual income) will fall as income rises, and the tax will look very regressive. But this is clearly
wrong. Individuals are exactly the same in this hypothetical society and over their lifetimes will earn exactly
the same amount of income and pay exactly the same amount of taxes. A lifetime incidence analysis will
correctly conclude that this tax is proportional.
Measuring Lifetime Income
Lifetime income is more difficult to measure than annual income. National Bureau of Economic Research
economist James Poterba has proposed using consumption as a proxy for lifetime income, arguing that since
household consumption tends to fluctuate less from year to year than income, total annual consumption is
likely to be a better measure of household well-being than total annual income. [12] Using data on total
expenditures from the CES, Poterba finds that excise taxes on alcohol, tobacco, and gasoline are much less
regressive than they appear when viewed in an annual income framework. Following this approach, I find that
the system of state and local taxes is less regressive when consumption is used as a proxy for lifetime income.
[13] Feenberg, Mitrusi, and Poterba also use the consumption proxy for lifetime income in a detailed analysis
of a shift from the current income tax system to a national sales tax. [14] This comprehensive work considers
personal income tax, corporate income tax, and estate tax. Using consumption as a proxy for lifetime income,
the authors find that the regressivity of the shift measured using annual income is substantially reduced and
that the shift can in fact be made progressive through straightforward measures (e.g., lump sum grants or
making certain categories of spending exempt from the tax base).
P. 03/03
DEC-10-97 WED 13:44
P. 01/01
DEC-02-97 TUE 09:40
TAX
CAPITAL GAINS
Washington the rest. But why should a
state work its butt off to collect for the
Feds? Conceivably. it could net more
YADDA YADDA
money (and leave its citizens richer) by
raising its own tax and shrugging off
federal tax evasion.
Tax evasion. Tauzin says that sales taxes
TAX REFORM
are a cinch to collect, even without tax
reporting and automatic withholding. But
the International Monetary Fund's Vito
Tanzi begs to differ. An IMF study of high
sales taxes in countries that used them
Congress stumps for simplification. But who
found serious tax-dodging once the rate
topped 10 percent.
just passed that new, mind-bending law?
Federal revenues. The Schaefer-Tauzin
sales tax is supposed to raise the same
amount of money that the income tax does.
But with so radical a change, who сал be
BY JANE BRYANT QUINN
sure? David Burton of the Argus Group, a
Washington law and lobbying firm, thinks
ET'S SEE, NOW. THIS SUMMER, A ROASTFUL CONGRESS
the planned tax rate is high enough. Not so,
L
passed 824 new income-tax changes, most of them cuts.
if you believe a study by Daniel Feenberg
They1 require thousands of regulations, a couple of
of the National Bureau of Economic
dozen new lines on your tax return and Cliffs Notes for
Research in Cambridge, Mass.
tracking the weird eligibility rules.
Feenberg thinks a 17 percent rate would
Yet hardly were the photo ops over when that very same
work only if cheating gets no worse, all
Congress denounced "the government" for the tax code's
retail transactions are taxed (no exemptions
deranged complexity. Shaking their fists, they' swearing to pull
for college or basics such as clothing and
the entire system out by its roots. Sounds like the classic cry from
food) and no exceptions are made for the
the murderer: "Stop me before I kill again."
poor. Schaefer-Tauzin, however, gives
I'd love to, believe me. But the history of this sort of thing isn't
every worker a tax credit regardless of
promising. Back in 1986, the tax-reform crowd pushed through a
income- to cover as much as a poverty-level income could buy. To
bill that simplified tax returns for the average person. It wiped out
cover this revenue loss, Feenberg says, the sales tax would have to
some popular deductions (like those for credit-card interest) and
rise at least to 22 percent Burton disagrees. I can't referee this, but
used the savings to reduce personal income-tax rates. Had we
the country runs a big risk of red ink if Burton et al. are wrong.
continued along those lines, fewer mouths would be frothing now.
Winners and losers. High-income folks would save a fortune in
But tax breaks are America's addiction of choice. Every interest
total tax-something I haven't noticed the public clamoring for. In
group in the country-business, labor, farm. consumer,
the middle brackets, gains and losses are mixed, says economist
nonprofit-hires lobbyists to try to tweak the tax code its way. The
William Gale of the Brookings Institution. The working poor
most tweakable legislators harvest dollars and votes. No surprise.
would be 10 put it technically Their incomes would
then, that new deductions and credits crept back in.
drop, because the earned-income rebate would be snatched away.
Today's tax-reform crowd isn't interested in gradualism.
Growth might accelerate, although by how much is just a guess.
Having wrecked the old code almost beyond saving, they want us
There are unknown transition costs. Older people spending after
to trust them to build one from scratch. There are two main camps.
tax savings would be taxed a second time. But if you have years to
One says, "Quit taxing incomes; pass a national sales tax instead."
tax-defer money, you'll do fine. Fewer employees would get health
The other says, "Tax only earnings, at a simple flat rate." Neither
insurance, because companies couldn't write off the cost.
camp would tax personal interest, dividends, capital gains or
The flat tax: Pushed by Rep. Dick Armey of Texas, the flat tax
inheritances. Roughly speaking, here's what they want:
comes closer to tax reform's traditional shape. All current
The sales tax: The bill on the table comes from Republican
deductions and credits would vanish-gifts to charity, mortgage
representatives Dan Schaefer of Colorado and W.J. (Billy) Tauzin
interest, state tax deductions, child-care credits. There's a tax-free
of Louisiana. You'd be taxed on most goods and services bought at
allowance, depending on family size. On everything else, you'd
retail-food, clothing, insurance. cars, doctor bills, homes. rent,
owe 20 percent the first two years, then only 17 percent. The
banking and brokerage (although college tuition would be exempt).
working poor lose their income-tax rebate. The biggest winners
In theory, you could afford the extra cost, because you're not
are those who already have money income to spare.
paying income taxes any more. The price of goods might even tall.
As proposed, the flat tax raises less revenue than the income tax
In real life, however, some of us would pay more and others less.
does today. That's political gaming: Armey needs that low rate to
How high is the tax? You have no idea how long it look me to get a
cul taxes for the middle class. To balance the budget, this bill re-
straight answer. The press relcase says 15 percent, but that's based
quires deep program reductions beyond those passed so far.
on a weird calculation you don't want to know about. At the cash
As much as anyone, I'd like to see the tax code cleaned up, but
register, the actual markup comes to 17.6 percent. State taxes are
separately from the bloody battle over reducing government
extra. The Feds may count them as part of the item's price, which
spending. Maybe an Armey-type tax with a couple of brackets (to
would increase their dollar take even more. Some other issues:
raise enough revenue) and a promise not to throw the working
Collectibility. Schaefer and Tauzin crow that their plan
poor to the sharks. The 1986 disappointment convinced me that
eliminates the IRS. Retailers and service providers would capture
tinkering won't work. But neither will a riverboat gamble that
the tax, keep half a percent of it for themselves and remit the rest
wrecks the fiscal discipline that we've worked so hard to win.
to the states. The states would keep 1 percent of the tax and give
Reporter: TEMMA EHRENFEED
Post-it* Fax Note
7671
Date
# of
12-02-97
pages
DECEMBER 8, 1997 NEWSWEEK 57
To Maria Echaveste
From Rick Swartz
Co/Dept. White House
Co.
FYI
DEC-01-97 MON 11:30
P. 02/02
Toy
Washington Outlook
EDITED BY OWEN ULLMANN
File -Tax Pepan
Fox to
TAX REFORM: GET READY
Dick- white
FOR A CLASSIC CLINTON TURNABOUT
Home istollate
to we
f there was one thing Bill Clinton was sure of, it was
Leader Dick Armey (R-Tex.) and a national sales tax em-
this: He held the high ground in the tax-reform debate. By
braced by House Ways & Means Committee Chairman Bill
casting Republicans as defenders of the rich-and trum-
Archer (R-Tex.). Republicans say their plans would simplify
peting his tax breaks for the middle class-the President
taxes and spur economic growth, but Clintonites insist both
thought he could keep all those crazy flat-taxers and income-
plans favor the rich.
tax bashers in their cages.
Clinton could lift key elements from plans offered by Sen-
But congressional hearings into Internal Revenue Service
ate Budget Committee Chairman Pete V. Domenici (R-N.M.)
abuses made electrifying political theater, catching Clinton off
and House Minority Leader Richard A. Gephardt (D-Mo.),
guard and forcing him to accept Republican proposals to re-
considered Gore's chief rival in 2000. Domenici backs a con-
form the IRS. And if that wasn't enough, tax issues helped the
sumption tax, and Gephardt's proposal would set a 10% rate
GOP sweep key elections on Nov. 4.
for families earning $60,000 or less.
That's why Administration complacency has been replaced
Afraid that he'll find him-
by near panic. Despite Treasury Secretary Robert E. Rubin's
self alone among candidates
reluctance, Clinton may do an about-face. "Rather than op-
defending the status quo,
posing change, he is now looking to promote his own version
Gore has been a major cata-
of reform, perhaps as soon as in his State of the Union Ad-
lyst for the White House's
dress in January.
new-found interest in tax re-
"WE'VE GOT TO RESPOND." Just by getting in the game,
form. By the time the Veep hits
Clinton vastly increases the odds of a tax restructur-
the primary trail, he needs w
ing before he leaves the Oval Office in 2001. With-
have a plan of his own. "It's
out the President's backing, tax reform would
close to an imperative," says
be a hot issue in 1998 and 2000 cam-
one Gore insider.
paigns-but it would go nowhere.
SHIFTING SANDS. But first the
"Fundamental reform has to be bi-
Vice-President and other tax-
partisan," says Barry K. Rogstad,
reform advocates will have to
president of the American Busi-
win over in-house skeptics. Some
ness Conference, a group of
White House politicos still hope a
midsize companies. "You
bitterly divided GOP will fail to
need a chief executive
reach consensus on a reform pro-
to take this to the
posal, allowing Clinton to duck
American people."
his own tough choices. "Maybe we'll
What's behind
all agree to just debate this in the ab-
Clinton's abrupt
stract until 2000," says one strategist.
change? Al Gore,
Clinton no longer wants to take that
for starters. The
chance, however. And with marching or-
Vice-President's
ders coming directly from the Oval
potential rivals
Office, even the Treasury
for the 2000
Secretary is going along.
Presidential
"He is not wildly for reform,"
nomination, eager to counter the COP clamor for 8 new tax
says a White House aide. "But he has agreed to see what they
code, already are pushing their own plans. And congressional
can come up with." For now, Rubin says, "Whether the Pres-
Democrats, worried about their '98 races, are eager to stake
ident will have anything to say in the State of the Union is
out a position.
very much unresolved." But down the road, he could live with
"After the IRS debate, there was a fierce determination not
a plan like the Tax Reform Act of 1986, which cut rates and
to get stuck with the short end of the stick," says a senior
dumped loopholes but preserved the income-tax framework.
White House official. "We've got to respond to the tax de-
For now, the best bet is that the President will reprise the
bate." So a team of Clinton advisers-led by Deputy Treasury
strategy that worked 60 well for him in the halanced-budget
Secretary Lawrence H. Summers and National Economic
debate. Once he senses public support for reform, Clinton will
Council Director Gene Sperling-is working up options.
try to get ahead of the GOP with a middle-of-the-road plan of
"We're marching through every reform idea," says Sperling.
his own while painting the Republican alternatives as "radi-
While New Democrats and Republicans agree on many eco-
cal." To set the stage for such a step, he could use his State
nomic issues, Clinton's version of reform could be very dif-
of the Union address to issue a call for a tax code based on
ferent from the COP alternatives. He's likely to focus on mak-
the principles of progressivity and simplicity-with details to
ing the tax code simpler while preserving progressivity.
come later. By just embracing the concept, Clinton will go a
That puts the President at odds with two leading GOP
long way toward turning tax reform talk into reality.
proposals-a 17% flat tax championed by House Majority
By Howard Gleckman, with Mike McNumee
CRAIER
BUSINESS WEEK / DECEMBER 8. 1997 49
DEC-01-97 MON 10:35
P. 01/02
Toy
RICK SWARTZ & ASSOCIATES, INC.
1869 Park Road, N.W., Washington, D.C. 20010
Telephone: (202)328-1313 Fax:(202)797-9856
Email: [email protected]
FAX
DATE:
December 1ˢᵗ, 1997
TO:
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OF:
The White House + NCLR
FAX #:
FROM:
Biek Swartz
RE:
Immediate Response Requested:
Yes
No
TOTAL NUMBER OF PAGES, INCLUDING THIS COVER PAGE:
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wall
St.
Journel
A22
File Town
11/29/87
REVIEW & OUTLOOK
Max Tax Choice
Taxes clearly are going to be on the
such heretofore untouchables as the
political agenda next year, and if
mortgage-interest deduction.
there's anything resembling a consen-
One of the great attractions of this
sus on this issue right now it's that
proposal is that it has the potential to
somehow there has to be a better way.
depopulate Gucci Gulch, source of so
For instance. tax specialists have
many upscale Beltway incomes. If
come to regard the vaunted Taxpayer
homeowners stop claiming the mort-
Relief Act of 1997 as a particularly
gage-interest deduction voluntarily.
egregious exercise in inefficiency.
suddenly the Realtors. mortgage
Mainly, it looks the a Tax Preparers
bankers, homebuilders and the like
Relief Act.
will find they have no constituents to
Now along comes an idea with the
subsidize their lobbying. When fewer
potential to point us toward dawn. It is
seniors claim the credit for the elderly
known as the Max Tax, or Alternative
and disabled, the AARP will find it
Minimum Tax. First described by
more difficult to practice the scare tac-
Stephen Moore of the Cato Institute on
tics we saw in the 1996 elections. With-
these pages last spring, the Max Tax
out high tax rates to make their muni
plan is a simple one. Come tax time,
exemptions so desirable. the munici-
the IRS would mail two forms to each
pal bond entrepreneurs will no longer
household: the traditional 1040 and a
be able to maunder on about helping
Max Tax postcard. Taxpayers could
little old ladies. There would be a lot
then decide for themselves what form
fewer tax attorneys grumbling about
to use. They could claim all their
"transition." Next thing you know. the
beloved deductions. exemptions and
nation would be a whole lot closer to
exceptions. Or they could skip all that,
something recognizable as tax reform.
fill out the postcard and a pay a flat
We'd of course expect President
räte of 25% on gross income. Mr.
Clinton to instinctively veto anything
Moore's plan should prove attractive
with choice in it, as he did with vouch-
to lower earners, even those whose
ers for the District's academically
current statutory rate is below 25%.
drowned school children. But we find
That is because it allows them a credit
the Max Tax philosophically attrac-
against their Social Security (12.3%)
tive for another reason. It's our con-
and Medicare (2.9%) taxes. creating,
viction that people almost always
de facto, a 10% rate.
make the right decision when they get
Not every tax geek or lawmaker is
their hands on enough pertinent infor-
going to like this idea. For one thing it
mation. In the 1980s. new information
hasn't been "scored" for revenue
technologies helped political dissi-
"losses" virtue, to our mind, but a
dents from East Berlin to Alma-Ata to
negative in the eyes of Washington.
China communicate with one another
Then there is the matter of its flat rate
and the West. That knowledge of al-
format. House Ways and Means Chair-
ternatives made them confident
man Bill Archer. for example, now
enough to force change on their cloth-
seems to favor doing away with the IRS
eared regimes.
altogether and installing a national
We've noted something similar gu-
sales tax. House Majority Leader Dick
ing on in the way Americans use com-
Armey wants a flat tax. but one with a
puters to study pocketbook reforms.
lower rate of 17% and without the
such as those for Social Security and
Moore payroll tax credit. Dick
now the tax code. These days hun-
Gephardt wants a multi-rate flat tax.
dreds of thousands of citizens use on-
whatever that is. Still. the Max Tax has
line calculators at Websites of organi-
found support from Congressmen and
zations such as Americans for Tax Re-
Senators: GOP Rep. Vince Snowbarger
form ("ATR.org") or the Tax Founda-
of Kansas has introduced a Max Tax
tion
("TaxFoundation.Org") to
bill in the House. In the Senate, Orrin
calculate what their tax liability would
Hatch has said he likes it; Michigan's
be under various different tax and So-
Spence Abraham will sponsor legisla-
cial Security arrangements. Dick
tion called "the Alternative Flat Tax."
Armey's staff reports that his flat tax
What these fellows grasp is that the
site, "Flattax.gov," has received up to
attraction of the Max Tax is the choice
200,000 hits a month. Mr. Moore's Cato
it permits between paying through the
Institute offers a Social Security cal-
current tax system or the Max Tax al-
culator of its own: shortly its Max Tax
ternative. Most taxpayers, one senses,
calculator ("Cato.org") will be up and
will be interested enough to run the
running. Tax reform from the top has
numbers under both arrangements.
faltered often in the past. Don't be sur-
When they do they'll likely discover
prised if support this time for ideas
they are better off under the Max
such as the Max Tax emerges from
Tax seven though R dispenses with
thousands of linked taxpayers.
DEC-01-97 MON 10:37
P. 01/09
RICK SWARTZ & ASSOCIATES, INC.
1869 Park Road, N.W., Washington, D.C. 20010
Telephone:(202)328-1313. Fax:(202)797-9856
Email: [email protected]
FAX
DATE:
December 1ˢᵗ, 1997
TO:
Maria Echaveste + Gustavo Mohar
OF:
FAX #:
FROM:
Rick Swartz
RE:
Prospects for legal immigration debate
in 98 99
Immediate Response Requested:
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No
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DEC-01-97 MON 10:37
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NOV 26 '97 04:57AM
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Re prospects for
Subj: High-tech pushes for more guestworkers
Date: 97-11-25 10:56:05 EST
legal impetion
debote m 98-799
Visa cap limits high-tech workforce
Industry to press for more skilled workers
San Jose Mercury News, Friday, November 21, 1997 For to Echaveste
Gastavo mohan
BY MIRANDA EWELL
Mercury News Staff Writer
At the end of August, a promising Stanford Ph.D. from Asia with expertise in compound
semiconductors was forced to leave the payroll at Hewlett-Packard Co.'s optoelectronics
division in San Jose because the national visa allotment for skilled foreign workers had run
out.
Aside from the personal suffering the engineer had to bear, her company also suffered:
Because she was the only member of her team with the particular skills for transferring a
new technology from R&D to manufacturing, the project she was working on went into
limbo, the company says.
Similar situations throughout Silicon Valley raised a red flag this fall for the high-tech
industry, which is struggling with a critical shortage of technology workers in all categories.
The U.S. government issues 65,000 work visas for skilled foreign workers each year -- a
total that for the first time this year was filled by the end of summer. Industry associations
say they intend to push for new legislation that will increase the yearly visa allotment or
eliminate visa caps altogether.
"We have made this our No. 1 priority," said Susan Marshall, vice president of
information technology services for Information Technology Association of America, an
association of IT companies.
The Immigration and Naturalization Service stopped issuing H-1B visas in late August,
when the allotment for the year ran out. Nationwide hires of foreign workers came to a
sudden halt with urgent consequences for industry.
Designed to allow U.S. companies to hire foreign workers with special expertise, the H-1B
visas are used heavily by the high-tech industry to hire highly specialized engineers, often
graduates of U.S. universities with advanced degrees. The 65,000 limit was placed on H-1B
visas in the 1990 immigration reform bill.
The INS started issuing H-1B visas again this month, the start of the new visa year. Pent-up
demand for visas meant 3,500 applications had already been processed and were ready to go
at the start of the month. That has led to expectations that the cap next year will be reached
even earlier -- possibly as early as May.
"There's a real concern next year that everyone will anticipate the cap and every company
DEC-01-97 MON 10:38
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NOV 26 '97 04:58AM
P.14/33
that can hire early will do that and it will become a self-fulfilling prophecy," said Mary Dee
Beall, government affairs manager for HP.
High-tech companies say the foreigners they bring in on H-1B visas are often key technical
engineers who develop new technologies that, in turn, spawn more jobs for U.S. workers.
At Intel Corp., a senior technical marketing engineer, a legal immigrant, was part of a
two-member team that developed Intel's desktop video-conferencing system, an advance that
created 500 new jobs, Intel attorney Coeta Chambers told a forum in Palo Alto this week.
The forum, conducted by U.S. Sen. Spencer Abraham, R-Mich., chairman of the Senate
Commerce subcommittee on manufacturing and competitiveness, was organized by
Technology Nerwork -- a coalition of Silicon Valley companies.
"High-tech companies like Intel competing in the global economy need a global
workforce," Chambers said.
If the cap on visas forces skilled engineers to remain outside the United States, Chambers
warned, companies will follow. "I don't want to make it sound like a threat but we do need
that talent," she said.
The H-1B visa issue comes against a backdrop of acute labor shortages in the technology
industry. Conservative estimates peg current vacancies nationwide in IT positions at
190,000, according to an ITAA study. At the workforce forum, Tony Vickers, director of
Computer People Inc., cited Bureau of Labor statistics that IT employment now stands at
three times that of the auto industry and 10 times that of the steel industry.
"In the knowledge revolution, skilled people are our basic raw material, just as iron ore
was for the industrial revolution." Vickers said. "This problem impacts the entire U.S.
economy."
The senator suggested that the next step would be to hold a formal hearing in Washington,
D.C., to educate legislators on the issue. But he warned listeners that sentiment on Capitol
Hill, if anything, was to "restrict legal immigration further."
"There's very little support for expanding any category," Abraham said.
Industry spokesmen acknowledge it will be hard to convince legislators to overturn the visa
cap. But companies believe they can be persuasive if they present the issue as one of U.S.
competitiveness.
"What we're interested in is being able to compete in a global economy and the
immigration laws hinder our ability to do that," said Brian Raymond, manager of domestic
programs for the American Electronics Association. "This is one part of the competitive
puzzle that needs to be fixed."
The AEA board, which met in September in San Jose, also voted to make the H-1B visa one
of its top priorities for the coming year. Raymond said.
When the INS began issuing visas again in November, the HP worker in optoelectronics
finally was able to return to work. But her absence forced a delay in the transfer of the
technology her team had worked on and tied up R&D funds.
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"In fact, even now we are still trying to recover from problems that could have been
resolved sooner," said Jeff Rogers, the team's process engineering manager.
DEC-01-97 MON 10:38
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P.5/9
Legislators put focus on fences, not jobs
The San Diego Union Tribune, Monday, November 3, 1997
Marcus Stern
Copley News Service
WASHINGTON - Last year, Congress quietly made a crucial choice in its battle to stem
illegal immigration. It decided to hire more border guards and build more fences, rather
than try to keep undocumented immigrants from getting jobs once they're in the United
States.
The choice was precisely the opposite of what immigration commissions have been
recommending for decades. But it allowed the lawmakers to appear responsive to voter
concerns about illegal immigration without upsetting powerful special-interest groups.
The reluctance of Congress -- and successive presidents - to seriously tackle the jobs
magnet is rooted in one of the grim realities of electoral politics: Politicians are afraid to
defy business lobbyists and influential blocs of voters.
"The people who take advantage of the weakness in the law want to maintain that
weakness," said former Sen. Paul Simon, D-01., a longtime member of the Senate's
immigration subcommittee.
"You have some within the immigrant community who basically don't really want to slow
down illegal immigration. While they would not admit it, clearly they don't want to see
anything that stems the tide of Hispanics or Poles or Irish coming into the country.
"And you have employer groups who are making money off of these illegal immigrants. and
they don't want to see any kind of real sanction there. The combination is enough to make it
difficult to pass legislation."
But since 1951, one immigration commission after another has told Congress that jobs fuel
illegal immigration.
"Reducing the employment magnet is the linchpin of a comprehensive strategy to reduce
illegal immigration," the U.S. Commission on Immigration Reform concluded in a
September 1994 report.
More specifically, it said, "A computer registry to verify that a Social Security number is
valid and has been issued to someone authorized to work in the U.S. is the most promising
option for climinating fraud and reducing discrimination while protecting individual
privacy."
The commission said, in essence, "It's the jobs magnet, stupid." But Congress and President
Clinton largely spurned the advice.
Immigration-law showdown
DEC-01-97 MON 10:39
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The first real showdown over last year's immigration law came in September 1995 when the
House Judiciary Committee approved pilot projects to test whether something as simple as a
phone call to the federal government could sharply cut illegal immigration.
Employers would make the toll-free call to verify the Social Security number of every new
employee, making it harder for unauthorized workers to get jobs. It was a key to curbing
the flow, supporters said.
But later, behind closed doors, House Majority Leader Dick Armey gave other key House
Republicans a warning.
The immigration bill would die, the Texas Republican said, unless it was endorsed by small
business. And that wouldn't happen if even one employer was required to take part in an
employment verification pilot project. Small businesses are the principal employers of illegal
workers.
Rep. Lamar Smith, R-Texas. the bill's main architect, began secret negotiations with the
National Federation of Independent Business (NFIB), which represents small businesses. Just
before the bill went to the floor, Smith announced that it had been altered to make the pilot
projects entirely voluntary for employers. Then the House passed the bill.
Smith had never disclosed Armey's threat or the NFIB's virtual veto-control over the
immigration bill.
"So many of the Republican freshmen were elected on planks of being vociferous supporters
of small business that when they heard that the National Federation of Independent Business
would not be amenable to mandatory verification, they knew they had to do something," said
a Republican congressional staffer.
"The leadership lives in mortal fear that something will be done against the interests of small
business and it will show up in the form of negative
(NFIB) ratings of Republican members at the end of the year." Armey's little-known
election-year threat to scuttle the entire immigration
bill because business groups, including the National Restaurant Association, opposed the
verification provision was telling. Even though members of Congress frequently use forceful
rhetoric in declaring their intention to curb illegal immigration, there are limits to what
they're willing to do. Alienating business groups isn't one.
"He's always been opposed to anything that might lead to a national data base," Armey
spokeswoman Michelle Davis said in explaining the majority leader's opposition to
verification.
But Smith's proposal relied only on existing immigration and Social Security databases.
Verification debate
On the other side of the Capitol grounds, the Senate Judiciary Committee conducted its
verification debate in March 1996. Sen. Patrick Leahy used the occasion to describe a brush
he'd had with the U.S. Border Patrol. As the Vermont Democrat told it, he was driving
about 60 miles from the Canadian border a few years ago when he was stopped at an
immigration highway checkpoint. A patrol agent stepped up and asked him to prove he was
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in the country legally.
Leahy erupted.
"I've never had to prove my citizenship in my own country to anybody and I
have no intention of proving it to you," he thundered.
When the agent's superior noticed the senator's VIP license plates, the incident ended. But
Leahy's anger endures.
"I'll be damned if I want to have to go out and have to prove to anybody that I'm an
American," he said during the verification debate. As it turned out, Leahy was preaching to
the choir.
By the time the Illegal Immigration Reform and Immigrant Responsibility Act
of 1996 became law, Congress had gutted the verification proposal. It had
agreed to pilot projects, but they would be carefully limited and voluntary
for employers.
For those who have followed the nation's long-running debate over illegal
immigration for some time, it was a moment of deja vu. Congress had authorized voluntary
pilot projects 10 years earlier without much result.
"What a pale shadow the new pilot system is of what we recommended," said
Larry Fuchs of Brandeis University and the Commission on Immigration Reform. Congress
created the commission to provide advice on immigration policy. "You could call it a gutting
of it."
Nor did Congress seriously tackle the problem of document fraud. Lawmakers rejected
requirements for tamper-resistant birth certificates and
driver's licenses. And they opposed significant increases in the number of
labor and immigration work-site inspectors.
Congress did, however, add more Border Patrol agents.
For desperate immigrants, getting in would be tougher. But they would still
be lured by the continuing temptation of jobs and eager employers. "There's a lot of
hypocrisy on this issue," Fuchs said.
Jobs draw millions
Jobs continue to draw millions of desperately poor people to the United States. They travel in
buses up Mexico's west coast from starting points in
the country's impoverished interior, or from farther away in the jungles of
Central America. Some land in Baja California None crammed into the hulls
of rusting trawlers sailing from mainland China. Others fly from Eastern Europe to Mexico
City as "tourists" and trek north.
Those who arrive in Tijuana today stare across a 10-foot-high steel fence
at a row of Border Patrol vehicles. Beyond the agents, the sprawling U.S.
job market beckons like a giant thirsty sponge eager to soak them up. Because security has
been beefed up on the border in San Diego, the crossers have shifted eastward to the rugged
outlying mountains and deserts. Already this year, dozens have died in this forbidding
landscape,
including a young woman whose husband carried her body out in his arms. For the
migrants, the costs of doing business in the United States have always been high. But, with
jobs waiting, the flow continues. The employers aren't altruists.
"We get nothing but absolutely glowing reports from the companies about these Hispanics
working for them," said Mike McAltin of the Mississippi Poultry Association. "They come
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P.8/9
in with a great work ethic. They have a real tenacity about working, It's the law that we hire
only legal people.
And we try to enforce that. But it can be tough."
"They're an employer's dream." said a San Diego employer. Enforcement difficulty
Lawmakers took their first stab at shrinking the job market for illegal immigrants in 1986 by
making it illegal to intentionally hire them. But fraudulent birth certificates, driver's licenses
and immigration documents
made enforcement impossible because the government couldn't prove employers
knew they were hiring illegal workers.
Employers were given no way to check if a Social Security number, driver's
license or birth certificate is valid.
"It's easy to pass a law and say, 'OK, all your workers must be legal,' "
said William T. Roenigk of the National Broiler Council, a trade group representing chicken
plants. "And then someone else says, 'Well, yes, but
you can't ask this question, you can't ask that question. And you can't examine the
documents beyond whatever or it leads to discrimination.' With so much ambiguity,
enforcement of the law quickly waned. "The '86 law is dysfunctional because we didn't
want it to work," said Sidney Weintraub of the Center for Strategic and International Studies.
"We
passed legislation (in 1986) that we knew was unworkable because we aren't
willing to take the steps of identifying who is an illegal. The (members of
Congress) knew that when they did it."
When Congress took up the issue again last year, lawmakers put out a blizzard of press
releases proclaiming the bold steps they were taking during an election year. But their
releases invariably failed to note Congress' retreat from any kind of verification proposal or
document reform.
Sen. Dianne Feinstein implored her colleagues on the Judiciary Committee to
approve some sort of system to ensure that birth certificates, driver's licenses and
immigration documents are real.
"Gentlemen." the California Democrat said, "as sure as I'm sitting here now, the result of
continuation of a non-system, the ostrich-like head-in-the-sand attitude, the constant rejection
of any efforts to solve
this problem. will produce an Armageddon in the American population in those states where
there is a big problem."
Opponents said a worker-eligibility system would infringe on civil liberties and would
conflict with America's abhorrence of big government.
It would be bad for business and wouldn't work, they said. "Using a national verification
system to stop illegal immigration is to me
like trying to fix a wristwatch with a pickax and a sledgehammer," said Sen. Russell D.
Feingold, D-Wis.
Feinstein and former Sen. Simon said political pressures sometimes compel
lawmakers to pass feel-good legislation. That way, they're able to placate
the public without upsetting special interests.
For example, Congress doubled the size of the INS budget over the past five
years and hired additional Border Patrol agents. But little has been done
to devise a workable verification system and secure documents. The public doesn't
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understand the nuances of the complex issue. but the special interests do, said Simon. And
they know how to work Congress, build
broad coalitions and use the media to assist in their campaigns. "You face this dilemma
from time to time when you're a member of the House
or the Senate," he said. "Do you serve the public good when the public at
large doesp't really understand the issue? Or do you serve a very small constituency that
understands the issue and is going to respond?"