My name is Lawrence Chimerine. I am Managing Director and Chief Economist of the Economic Strategy Institute, and Senior Advisor to the WEFA Group. I appreciate the opportunity to testify before the Joint Economic Committee on key issues relating to U.S. tax policy.

      In sum, my views are as follows:

• Although economic growth has slowed in the U.S. on a trend basis, this in great part reflects demographic factors and measurement errors. The economy is not doing so poorly that huge tax cuts or other drastic changes are necessary.

• The tax cuts enacted in the early 1980s did not produce the incentive supply-side effects that were predicted, and has actually been counterproductive for long-term economic growth. Furthermore, they did not even come close to paying for themselves.

• Large tax cuts would even be more harmful now than they were in the 1980s, and thus are highly unwise. This is especially true in view of the poor long term budget outlook, and our already huge and rising trade deficit and foreign debt.

• The evidence overwhelmingly suggests that the disparity in income and wealth has grown in recent years, partly as a direct result of shifts in the distribution of the tax burden.

• In view of the poor deficit outlook, any tax cuts that are enacted in the next several years should be targeted rather than broadbased, should limit the revenue loss on a long term basis, should focus both on the amount and mix of investment, and should not widen income disparity even further.

• An across-the-board capital gains tax cut would not meet these criteria and, thus, should be rejected. Instead, consideration should be given to adopting a sliding-scale capital gains tax structure, or only reducing the rate on long-term, productive investment.

• At some time in the future, major tax reform that would shift the reform system away from income toward consumption but would simplify the tax code and be fair and progressive, should be considered. In my judgment, the best current reform proposal is the USA Tax originally introduced by Senator Domenici and former Senator Nunn.

INTRODUCTION

      There is currently a wide range of opinion regarding appropriate tax policy in the United States. Some are advocating large, supply-side oriented tax cuts, much like those in the 1980s, as a way of increasing what is alleged to be an anemic economic growth rate, and because, in their view, the tax cuts of the 1980s were beneficial for the economy. Others take the opposite view, that given the extremely poor long term deficit outlook, any tax cuts now are ill-advised. Many are in between, suggesting that some targeted tax cuts, particularly those that affect either the level or mix of investment, would help the economy. as long as they are cost effective. In this testimony, I will lay out my views on these key issues, including what I believe to be the appropriate guidelines for any tax changes in the years ahead.

WHAT REALLY HAPPENED IN THE 1980s

      Most advocates of large tax cuts, such as those proposed by Republican presidential candidate Bob Dole in 1996, base their support not only on the alleged success of the Reagan tax cuts, but also on their belief that such cuts would work even better this time. A careful reading of the evidence, however, leads to the opposite conclusion.

      In the early 80s supply-side economics promised that cuts in marginal tax rates would increase economic incentives so dramatically that savings, investment, and work effort would rise sharply, leading to a spurt in economic growth. The evidence indicates that this did not occur, and that the long 1980s expansion did not result directly from the incentive-creating policies that have been labeled supply-side economics.

      In the first place, the labor force did grow fairly rapidly during much of the 1980s, even faster than population growth. Yet the increase in the participation rate (the percentage of the population actually working or looking for work) was no greater in the 1980s than in previous decades. Participation rates for adult men remained flat, but the rates for women continued to rise sharply, extending a longterm trend deeply rooted in social factors and economic pressures. In fact. female participation continued to rise in the 1980s in part because job cuts, a loss of high-paying jobs, wage freezes and give-backs, and other factors created a real-earnings squeeze for many families during the decade. Thus, many women, and probably some teenagers, joined the labor force for reasons other than supply-side incentives that, through a lower tax rate, increase the after-tax return from working. Rather, it was stagnant real incomes that forced many families to seek a second income source, in order to maintain the living standards to which they had grown accustomed.

      What these trends actually imply is a downward-sloping supply curve for labor -lower tax rates may reduce labor supply by enabling families to earn the same after-tax income with less work. More important, there is no conclusive evidence from the experience of earlier years that reduced tax rates boost labor supply. Thus, the so-called incentive effects for labor were not a significant factor in the expansion of the 1980s.

      Perhaps the supply-siders' most notable prediction was that a sharp reduction in marginal tax rates would substantially boost household savings. Yet exactly the opposite occurred. U.S. personal saving rates during the 1980's were far below not only those in virtually every other major industrialized country, but far below the U.S. average for the 1945-80 period. This trend is even more remarkable considering several other developments. For instance. the extraordinarily high real interest rates of the 1980s should have stimulated more savings by increasing the after-tax return on such savings. The introduction of IRAs, Keoghs, 401 Ks, and other savings vehicles, the phasing out of the deductibility of consumer interest, and other tax changes should have had the same effect. Yet the personal saving rate plummeted. This not only suggests that savings is not positively affected by the after-tax returns on such savings, but that the reverse may be the case-just as it may be for workforce participation. Many people may base their savings behavior on achieving a targeted level of savings at some time in the distant future. If so, a higher after-tax return would actually reduce the amount of new savings necessary to reach the target. Again, the evidence is mixed. Neither the data nor the experience of the 1980s support the supply-side view that the savings supply is strongly positively sloped and that supply-side incentives actually work the soundest conclusion seems to be that the tax system has little or no effect on savings patterns and that savings for most families are more of a residual rather than determined by a direct decision. In effect, the weakness in real incomes, coupled with the desire of many families to maintain and improve their living standards, actually caused a decline in personal savings in the 1980s, despite the new incentives.

      If investment in the long term is largely determined by the amount of savings, then the savings drop-off must have curbed the growth of business investment during the 1980s. Therefore, supply-side incentives not only failed to deliver on their promise of a big increase in personal savings, but by creating enormous budget deficits, supply-side policies also caused the sharp decline in the supply of national savings that made a big increase in investment impossible. Indeed, the 1980s was not a period of strong investment, despite the long expansion. In fact, the decline in national savings and the relatively high real interest rates caused by supply-side policies apparently deterred net investment.

      Supply-siders also predicted that their incentives would revive productivity growth. Yet, as is now well documented, productivity growth continued to lag in the 1980s. The latest data show that productivity rose from the 1979 peak to the 1989 peak by only 1 percent a year. During the Reagan expansion, it rose by only 1.5 percent a year, a very slow performance for an up cycle.

      Supply-side theory also promised that lower marginal tax rates, by stimulating savings, investment and productivity, would improve America's competitive position in world markets and ultimately enhance national economic security. Unfortunately, the 1980s witnessed the largest trade deficits in U.S. history and losses of market share in virtually every manufacturing industry. The supply-siders remained undaunted. True, they acknowledge they did not anticipate these deficits, but they turned the tables and actually portrayed the trade gap as a sign of supply-side success. The deficit allegedly reflected the strength of demand in the U.S. economy plus the higher returns on investment in America made possible by lower tax rates and other supply-side incentives. This is a complete misreading of U.S. trade performance and competitiveness in the 1980s.

      The erosion of U.S. trade reflected a deterioration in U.S. competitiveness, not American success. U.S. productivity and technology advantages were so large during the early postwar years that the United States could maintain dominance in world markets and generate large ongoing trade surpluses despite funding much of the free world's defense, keeping its markets open, and tolerating cultural and trade barriers erected by other nations. These basic advantages narrowed dramatically during the 1970s and 1980s, primarily because of rapid productivity growth among traditional foreign competitors and the emergence of many highly productive new competitors. These developments reflected:

• The speedier transfer of U.S.-developed technology to the rest of the world;

• A more rapid rate of innovation in many other countries than in earlier years;

• A strong foreign emphasis on product quality and design;

• High saving and investment rates abroad;

• The replacement of World War II - ravaged infrastructures with modern equipment (and the increased use of such equipment in the newly industrializing countries);

• The increased mechanization of foreign agriculture;

• The lower base from which many foreign countries started;

• An emphasis on policies that fostered rapid growth, both domestically and in exports, in order to generate the higher profits necessary to fund additional investment and research and development.

      During the same time, productivity growth in the United States was slowing compared to the earlier postwar years. In fact, average productivity levels in many tradable-goods industries in the United States actually fell behind those in Japan and some other countries (although not on an overall economy basis because U.S. productivity levels remained higher in various other industries). As a result, relatively high U.S. wage and capital costs could no longer be offset by productivity differences and became an enormous competitive disadvantage.

      The combination of these developments ended U.S. dominance in world markets for most manufactured and agricultural goods and spurred massive trade deficits and rapidly growing foreign debt. These trends were aggravated by the enormous U.S. budget deficits, the overvalued dollar and slow growth overseas in the early 1980s, and the Third World debt crisis.

      The decline in fundamental competitiveness (i.e., in relative productivity) and its likely effect on economic growth were unrecognized for several reasons. First, the ratio of manufacturing output to GNP (in real terms) remained relatively stable, suggesting that the United States did not deindustrialize. Yet the apparent stability of manufacturing output as a share of real GNP during the 1980s should be viewed in the context of the rapid rebound in the demand for manufactured goods (relative to total demand) in the United States, reflecting the large turnaround in consumer durables and the procurement-dominated military buildup. In effect, the surge in demand for goods in the early 1980s was so strong that it prevented the manufacturing output/GNP ratio from declining despite the loss of U.S. global market shares and the related influx of imports and slowdown in exports. Without the change in relative competitiveness, the manufacturing output/GNP ratio would have risen sharply during the 1980s. This also explains why manufacturing output grew more rapidly in America than in the rest of the world during the initial stages of the recovery - the U.S. market, in which American producers had a relatively large (but declining) share, simply grew much more rapidly than markets overseas.

      Second, while the faster economic growth in the United States during the 1980s relative to some other industrialized countries increased the trade imbalance in some years, it does not account for the sharp rise in import penetration rates and the decline in U.S. exports in real terms after 1980. These shifts combined to cause the sharp decline in the U.S. share of worldwide production in most industries referred to earlier, and of overall world trade, during much of the decade. Further, the U.S. trade imbalance continued to rise even as U.S. demand and overall economic growth slowed in 1985 and 1986.

      Third, the onset of massive trade deficits coincided with large budget deficits, indicating to many that the budget imbalance, by pushing up interest rates and the dollar exchange rate, caused most of our trade problem. Yet, as most clearly shown by the large increase in the U.S. trade deficit with Japan and the steady decline in the U.S. dollar relative to the yen and other industrialized-country currencies, our trade problems were developing well before the 1980s. The full extent of deteriorating competitiveness at that time was temporarily masked by the surge in exports to Latin America (financed by unsustainable U.S. bank lending, much of this, in turn, tied to exports), rising exports to OPEC countries, and the relatively weak dollar. Large U.S. budget deficits clearly made the trade deficits worse in the early 1980s, both by pushing up the U.S. dollar and by directly stimulating import demand. Yet foreign competitive pressures would have mounted even in the absence of unbalanced U.S. fiscal policies. The bottom line is that the prediction that U.S. competitiveness would improve as a result of supply-side economics was flat wrong.

      Perhaps the strongest indictment of supply-side economics is the questionable strength of the 1980s recovery itself. Despite the seven-year expansion in the middle of the decade, average economic growth during the decade as a whole actually lagged behind growth in each of the three preceding decades, including the stagflation years of the 1970s. Moreover, as will be discussed further below, the long expansion to a great extent simply represented a catch-up following back-to-back recessions in 1980 and 1982. Consequently, the expansion benefited from an extremely low starting point and was followed by very weak growth in the late 1980s.

      In sum, there was no supply-side miracle in the 1980s. Other explanations are required for the long but relatively modest economic expansion over those years. Moreover, contrary to the supply-siders' expectations, the budget picture has been a disaster. Reagonomics brought massive deficits, not healthy surpluses. Nor can the deficits be blamed on excessive spending by Congress. Nondefense discretionary expenditures were reduced by approximately 2 percent of GDP in the 1980s and were about $100 billion less in 1990 than they would have been had they retained their 1980 share of GDP. Further, total spending did not significantly exceed the administration' s budget requests during the 1980s. What changed was simply the mix between defense and nondefense programs - the former swelling, the latter shrinking. Supply-siders now offer the excuse that the large deficits were caused by the absence of significant spending cuts, but the real causes were the excessively optimistic economic growth and tax revenue forecasts, plus the huge increase in interest expense as the deficits began to feed on themselves.

      Finally, in one or more efforts to defend their poor history, supply-siders now argue that tax revenue as a share of GDP remained constant during the 1980s, so the deficits cannot be blamed on the tax cuts. They neglect to mention the huge social security tax increases enacted early in the decade to ensure future trust-fund solvency. Income tax revenues as a share of GDP were considerably lower at the end of the decade than in 1980, exactly as most conventional economists had predicted when the tax cuts were enacted.

      The bottom line is that the supply-side tax cuts of the 1980s were not a success. They have proven to be harmful for the economy and have put a huge and unconscionable burden on future generations.

ARE LARGE TAX CUTS APPROPRIATE NOW?

      A new round of tax cuts now is likely to be even more damaging than were the cuts of the 1980s, as reflected in the following considerations:

• The economy is much closer to full utilization now than it was in 1981. Both financial markets and the Federal Reserve believe the economy is essentially at full employment and, in fact, is on the threshold of overheating. Thus, huge tax cuts - without clearly defined matching spending cuts--would trigger higher interest rates, which, in turn, would offset most or all of the direct short-term stimulative impact of the tax cuts.

• Discretionary, non-defense spending has already been cut sharply. Unfortunately, those cuts were swallowed up by increases in interest payments and public health programs, so that overall spending has continued to grow. Additional cuts in education, export promotion, technology, research, and other such investment programs, even if politically possible, would prove counterproductive by reducing potential long-term economic growth.

• The long-term deficit outlook is far worse than it was in 1981. Virtually all credible projections show that the deficit will start rising again this year. Even worse, it will begin to accelerate at a dramatic rate in about 10-15 years, in response to huge increases in spending on the health and pension entitlements as the baby boomers begin to retire. Extremely large spending cuts will be needed to reduce those deficits even without any new revenue losses.

• The national debt is now five times higher than it was in 1981. Because the debt is already so large, policies that cause higher interest rates would produce a much larger absolute and relative increase in interest expense than occurred in the 1980s, creating an even steeper upward spiral. Also, because so much of our debt is now held by foreigners, much of that interest would leave the country, reducing U.S. incomes.

• Income disparity in the United States has increased significantly over the past 15 years. Large tax cuts would make the problem even worse because it would produce larger absolute and relative increases in after-tax income for individuals and families in the upper income levels. Also, the higher interest rates that are likely would generate a significant increase in income for generally well-to-do bond holders, at the expense of other income groups.

• We already are experiencing an investment-led recovery. This largely reflects a number of economic forces, including the high level of economic activity, strong growth in corporate profits, relatively low interest rates and, most important, the sharp decline in the budget deficit in recent years. Pushing the deficit up could well reverse the upward trend in business investment.

• The trade and current account deficits are still huge, and are rising again. These deficits have held down economic growth by shifting the mix of economic activity away from relatively high-wage, high-value-added industries toward industries with lower average productivity. New, large tax cuts, and the added budget deficits they would likely produce, would make our international accounts even more unbalanced by reducing national savings and investment and creating upward pressure on the dollar exchange rate. In the process, U.S. competitiveness would deteriorate.

      The bottom line is that large, across-the-board, consumption-oriented tax cuts are now ill-advised and potentially very dangerous to the long-term health of the economy. At most, they would provide a small boost to the economy in the very short term, but the larger deficits and higher interest rates they would cause would actually reduce long-term economic growth. A better approach would be targeted tax cuts that stimulate job creating long-term investment (see below).

      Nor would a large across-the-board capital gains tax cut, such as the 50% tax exclusion of capital gains, coupled with indexation of capital gains for inflation in the future, now being proposed, be helpful for long term growth. Supporters argue that such a cut would stimulate substantial investment and new enterprise, promote additional economic growth and create millions of new jobs. Furthermore, the combination of increased economic activity and the unlocking of existing assets will purportedly produce higher, rather than lower, tax revenue.

      The evidence strongly suggests that none of this will be achieved, and that instead, an across-the-board capital gains rate cut would encourage more speculation in the markets and more tax shelters designed to shift ordinary income to capital gains.

      Further, sizable tax revenues will be lost in the long run, mostly benefiting the same high-income, wealthy individuals whose share of the economic pie has already increased markedly in recent years.

      The goals of stimulating productive investment and the creation of new enterprises are important, especially since the U.S. still underinvests relative to virtually all of our major foreign competitors. Also, despite the recent cyclical bounce, productivity growth still lags behind earlier decades. However, because most capital gains result from the purchase and sale of existing assets -- primarily stocks, bonds and real estate -- a straight capital-gains tax cut would provide a huge windfall on assets currently being held without stimulating new investment. At the same time, contrary to the assertion of those pushing for the indexation provision, current capital-gains tax rates are often quite low, even though gains resulting solely from inflation are now taxed. This is because capital gains are accrued tax-free until they are sold, dramatically reducing the effective rate. Compare this with interest on savings accounts and most other types of income that are taxed on an annual basis as earned income. Moreover, much of the capital gains now earned by pension funds are not taxed at all. Thus, effective capital gains tax rates are very low already, and are not an impediment to saving and investment.

IS THE ECONOMY REALLY ANEMIC?

      Many advocates of large tax changes, as mentioned earlier, are basing their case on the claim that the economy is underperforming, as witnessed by the economic growth rate in recent years of approximately 2 1/2 % as compared with 4% or more in the first three decades after World War II. However, the economy is doing far better than this comparison would suggest.

- Much of the slower rate of economic growth experienced in recent years is actually a continuation of a trend that began in the mid-1970s -- in fact, as indicated earlier, the 1980s was the slowest growth decade since World War II, even with the big Reagan tax cuts. Thus, singling out the 1990s is misleading.

- Much of the slowdown in the trend rate of growth over the last 20 years reflects demographic factors, including the sizable slowdown in population growth, a slower rate of increase in labor participation rates for some groups, and a flattening in average educational payment. These factors by themselves count for at least 2/3 of the decline in economic growth from over 4% during 1945- 1973 to about 2.5 % since that time. These changes have led to slower growth not only because of the direct effect of slower population and labor force, but because they have contributed to the slowdown in productivity growth.

- The immediate post World War II period was also helped by huge pent-up demands which were created during the war, especially for housing, consumer durables, and business equipment, and by the fact that the United States dominated the world economy during that period, and had huge advantages in productivity, technology, and product quality. These conditions have obviously faded.

- Thus, even under the best of conditions, there is no way that the economy in recent years could have come close to matching the growth rate in the golden years after World War II. Furthermore, there is growing evidence that recent growth rates have been understated as a result of the overstatement of the price indexes. In particular, anecdotal evidence, and the huge increases in corporate profits and the stock market, suggest that productivity growth in recent years has been much stronger than indicated by government official statistics.

      In sum, while there are some problems, the U.S. economy is not doing as poorly as many supporters of large tax cuts suggest. While it certainly is possible that it could be doing better, drastic changes of the type that some tax cut advocates are proposing cannot be justified on the grounds that the economy is doing so badly that drastic actions are the only sensible approach.

WHAT SHOULD WE DO?

      There are other considerations that also should be taken into account in the debate on tax cuts, in addition to the fact that the economy is far from anemic, as some people have described it. These include the following:

      First, as mentioned earlier, despite the progress in recent years, the long term budget outlook remains disturbing. Regardless of whether we balance the budget in the year 2002, it is clear that deficits will build very sharply starting in less than 15 years as a result of the upward pressure on the health and pension programs that will be caused by increases in the number of retiring baby boomers. In fact, without major reform to these programs, annual deficits will be so large that they will make the deficits of the 1980s look small, both in absolute and in relative terms. In my opinion, it would be foolish to enact tax cuts that would widen longer term deficits over and above what they are already projected to be -- this would be counterproductive in two ways. First, higher deficits would push up interest rates and hurt our international competitiveness, offsetting the impact of any supply-side effects. Second, they would probably force more cuts in various spending programs, most likely the very same programs which have already been cut sharply, and which are important for long term economic growth. These include infrastructure, education, research and development, trade promotion, and other essentially investment programs, as distinct from consumption-oriented government programs.

• The evidence overwhelmingly suggests that the disparity in both income and wealth has grown sharply in recent decades. While most of the growing disparity has occurred at the pre-tax level, shifts in the distribution of the tax burden in the last 15 years have exacerbated the problem. In fact, some estimates indicate that about 20% of the widening inequality in after-tax incomes reflects the direct impact of shifts in the tax burden, while the other 80% has taken place in before-tax incomes. In my opinion, any tax changes that would widen the distribution of income even further would be unwise. This would not only be unfair, but would probably be counterproductive for economic growth because purchasing power would be even more concentrated.

• As indicated earlier, experience in recent decades clearly suggests that many economists dramatically overstate the impact of tax changes on consumer and business decisions. In particular, not only did the predicted impacts of the 1980s tax cuts not occur, but the doom and gloom forecasts made several years ago after the increase in the top marginal income tax rate in the Clinton economic program have obviously been proven wrong. Quite the opposite, in view of the fact that this has been the strongest investment-led expansion in many decades, that the stock market is setting record highs regularly, that the personal saving rate is now moving higher, and that new business start-ups are growing rapidly, it is difficult to make the case that either high capital gains or marginal income tax rates are stifling investment and innovation. Yet this is exactly what was predicted by supply-siders and their supporters just 3 1/2 years ago.

• We should not be lulled into using dynamic revenue scoring in the budget process, for a number of reasons. First, revenue feedback from tax cuts comes primarily from standard income effects -- very little comes from so-called supply-side effects. However, adding substantial additional revenue from these mythical supply-side effects to those from the demand side will result in huge revenue overstatements. Second, spending cuts, by reducing taxable income, also have revenue effects -- this seems to have been overlooked by proponents of dynamic scoring. Thus, dynamic scoring at it is now being proposed would create a huge upward bias to the federal deficit, and would amount to "assuming our way out of the deficit" much like what occurred in the 1980s.

      With these in mind, I propose the following guidelines for any tax cuts in the next several years:

• No tax cut should be enacted that will significantly increase long term deficits, based on static revenue estimates.

• No tax cuts should be enacted that will make the tax system even less progressive that it currently is.

• Tax cuts should focus on increasing long term savings and investment, with investment being broadly defined to include research and development, infrastructure and human capital.

• Tax cuts should also be designed to shift the investment mix, which is also important for long term growth. In particular, stimulating more investment is not all that helpful if most of it goes toward mergers, acquisitions, stock market speculation and non-productive fixed investments. And, even though investment designed to cut costs and improve efficiency can be very desirable in the short run, investments with a more long-term view, and that helps create new jobs, are better for the economy in the long term.

• Tax cuts should thus be targeted rather than broadbased, and should be at the margin, where possible, rather than across-the-board. One example of a tax change that would fit these criteria is a sliding scale capital gains tax structure in which the tax rate would be increased from the current rate on short-term gains, with the rate declining as the holding period is increased (to near zero after perhaps seven years). The resulting large difference in the tax rates between short-term and long-term gains, and between long-term capital gains and ordinary income, would provide major incentives for both new business formation and for investments in growth companies and new technologies. A change in the tax rate from 28 percent to 14 percent is not large enough to encourage such a shift because it does not come anywhere close to compensating for the high risk in most long-term investments. The impact on the deficit would be minimized with a sliding-scale structure because it avoids revenue losses on investments already made, and also because higher revenues from short-term gains still taken even at the higher rate would offset some of the revenue lost on longer term investments. Finally, a sliding-scale capital-gains structure would help unlock some of the investment already in place, thereby contributing to economic efficiency. Investors would no be able to benefit from the lower rate unless they liquidate existing holdings and reinvest those funds.

      Given the urgency of reaching a budget compromise as soon as possible, a restructuring of capital-gains taxation may not be possible at the present time. However, it is possible to move in the right direction by enacting a large reduction in the capital-gains tax rate only on new, long-term investment, or only on new investment in small businesses. Other tax changes to consider include the elimination of the alternative minimum tax on corporations, which in my view has depressed investment. This can perhaps be paid for by phasing out the interest deduction on mergers and acquisitions, which would provide an additional incentive for real fixed investment.

      Even though this is not the focus of this hearing, I urge the committee to begin looking at broad tax reform sometime in the future. The tax reform debate in recent years has centered largely on finding good, or best, taxes - and while opinions vary widely, almost everyone agrees that a good tax should be fair, as simple as possible and effective in raising revenues to pay the bills. Most would also argue that a good tax system should promote individual savings and investment and should not put our exports at a disadvantage in global markets.

      No tax system has yet been offered that meets all of these goals. Our present federal system - a mix of individual and corporate income taxes, plus a payroll (Social Security) tax - is supposed to be fair because it is progressive. But because the corporate income tax may be passed on to consumers in a nonprogressive manner, and because the ever rising payroll tax makes no pretense of progressivity, our current system is less progressive than many believe.

      There are, thus, many reasons to consider significant modifications to the existing tax system. All of us who wrestle with Form 1040 will certify that it is certainly not simple. And, unfortunately, it appears that our current system may have already reached the outer limits of its effectiveness.

      There is a new proposal that would correct some of the problems with the existing structure but at the same time would avoid the extreme regressivity implicit in the flat tax. It is called the "unlimited savings allowance" tax - which produces the acronym USA Tax - recently introduced by former Senator Sam Nunn and Senator Pete Domenici. It is a consumption tax, meaning that it applies only to income that is spent, not saved. Since it can accommodate a progressive rate structure and in addition provides for exemptions for low-income earners and a credit for the payroll tax, it can claim good marks for progressivity. In addition, the USA Tax would eliminate the efforts of high-income earners to protect their income through nonproductive business arrangements; all they would have to do is save it. And although taxpayers would need more than a postcard, as in a pure flat tax, it is far simpler than the present system - more than 75 percent of the 700 sections of the present income tax code would be dropped.

      Those who are concerned about international trade will be pleased that the USA Tax is border adjustable. In other words, export sales are exempt from the tax, but importers have to pay. Our trading partners, through their value-added taxes, have benefited from this for many years.

      Those concerned with stimulating long-term growth should also be pleased that the tax gives a free ride to savings while it taxes borrowing. Hopefully this will encourage more Americans to save and invest more of their income.

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