June 30,2005

Baucus Hearing Statement: ''Encouraging Savings and Investment: Stay the Course or Change Direction?''

Statement of U.S. Senator Max Baucus
United States Senate Finance Subcommittee on Taxation and IRS Oversight
Hearing: “Encouraging Savings and Investment: Stay the Course or Change

(WASHINGTON, D.C.) - U.S. Senator Max Baucus submitted the following statement for
the record at today’s United States Senate Finance Subcommittee on Taxation and IRS
Oversight’s hearing titled “Encouraging Savings and Investment: Stay the Course or Change

The statement follows:

Mr. Chairman and Mr. Jeffords, thank you for calling this hearing today on the
potential extension of certain expiring tax provisions and ways to encourage savings and
investment. I think we can find common ground on many of these ideas, starting with the
Saver’s Credit.

Today, we will hear from a representative of H&R Block, a company which has seen
first-hand how millions of low-income taxpayers have started these retirement savings
accounts with a matching contribution in the form of a tax credit. As Congress debates ways
to get more Americans saving for the future, this is surely one success story we should study.
We will also hear testimony today from a small business owner who has utilized the
enhanced incentives for investment in business equipment and machinery. I look forward to
hearing his testimony about how this additional expensing for investments has helped his
business become more competitive and more successful.

Our subcommittee will also hear testimony on a potential extension of the capital
gains and dividends tax cuts. On this issue, we will hear divided opinions of the efficacy of
these cuts, the distribution of the benefits, and the negative impact on some forms of
qualified pension plans.

Mr. Chairman, the pamphlet prepared by the Joint Tax Committee for this hearing
shows that 84% of capital gains are reaped by taxpayers making over $200,000, while
taxpayers earning less than $50,000 only have 1% of all capital gains for calendar year 2005.
The total amount of capital gains earned in 2005 by those making over $200,000 was $275
billion, while those earning less than $50,000 saw only $4 billion. Further, almost half of all
dividends are received by those making over $200,000, while only 12% of the total goes to
those earning less than $50,000. From these statistics, it does not appear that the 2003
incentives have done much to change what we thought the distribution of these benefits
would be.

Even putting aside the distribution, only 7% of all American households filing returns
show any capital gains and only 14% have dividends, with a significant crossover between
the two groups. The numbers are little better in my home state of Montana, with 22% of
returns with capital gains income and 26% with dividend income, but still not what I would
have thought given the promises that these cuts would raise savings and investment across
the board.

Now, what can we learn from these facts? This Committee will be faced with some
hard choices on priorities this year and this hearing today provides just such a comparison.
Joint Tax has estimated a permanent extension of the Saver’s Credit will cost only $10
billion. However, a permanent extension of the dividends and capital gains cuts would cost
almost $160 billion over the next decade even though the current cuts do not even expire
until 2009. It is my hope that our experts today can help us answer these questions of how
best to allocate our scarce resources for tax incentives.

I would also like to add another concern as we debate the appropriate level of tax for
savings and capital. I understand that a proposal being considered by the President’s tax
reform panel is one that would shift our tax system to a wage-based tax. One step towards
such a system would be a zero rate of tax on capital gains and dividend income. I would hope
that this Committee would consider any such proposal by not only looking at the static
revenue impact, but also at what such change means for our economy and for the American

I believe that one of the most important things to keep in mind in any tax reform
effort is fairness. I will not raise taxes on working families in Montana – or across the nation
– under the guise of tax simplification. I believe in our progressive tax system. And any
proposal that would shift the lion’s share of the tax burden onto the backs of the American
worker would not be a welcomed change. The farmers and ranchers in my home state of
Montana already struggle under significant tax burdens. Shifting more of the burden onto
working families simply because they receive a paycheck is the wrong way to go.

Thank you, Mr. Chairman and Mr. Jeffords. I look forward to the testimony.

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