Frist Offers Relief for Disabled Persons' Trust Funds

TAX FAIRNESS FOR SUPPORT OF THE PERMANENTLY DISABLED ACT

S. 1012. A bill to amend the Internal Revenue Code of 1986 to use the Consumer Price Index in addition to the national average wage index for purposes of cost-of-living adjustments; to the Committee on Finance.

BRACKET CREEP CORRECTION ACT

S. 1013. A bill to amend the Internal Revenue Code of 1986 to promote lifetime savings by allowing people to establish child savings accounts within Roth IRAs and by allowing the savings to be used for education, first time home purchases, and retirement, to expand the availability of Roth IRAs to all Americans and to protect their contributions from inflation, and for other purposes; to the Committee on Finance.

CHILD SAVINGS ACCOUNT ACT

S. 1014. A bill to amend the Internal Revenue Code of 1986 to reduce the rate of the individual income tax and the number of tax brackets; to the Committee on Finance.

10-20-30 ACT

Mr. FRIST. Mr. President, today is Tax Freedom Day -- the day that reflects how many days into the year a taxpayer must work in order to pay taxes. In 1913, when Congress first levied an income tax, Tax Freedom Day was January 30, and only 6 years ago, Tax Freedom Day was April 30 -- today it is two weeks into May before the taxpayer can stop working for the Federal Government and start working for him or herself.

It is thus fitting that I introduce today the Frist tax package -- four tax bills that I believe will go a long way toward pushing Tax Freedom Day back toward January. This tax package is based on a set of core principles:

(1) Taxes are too high.

(2) The tax code is too complex.

(3) The tax code punishes taxpayers for working longer and smarter.

(4) The tax code does not promote savings for people of all ages and incomes.

We all know that taxes are too high. At a time when our tax burden as a percentage of GDP is at a post-World War II high and we are working longer and longer just to pay taxes, I believe that it is time for some tax relief for hard-working Americans. Taxes -- federal, state, and local taxes combined -- account for nearly 40% of the typical American family's budget -- the single largest expense. All of this at a time when the federal budget is beginning to run a surplus. What that means to me is that the federal government is overcharging the taxpayer for the services it is providing.

If the monetary cost of paying taxes isn't high enough, consider that it takes almost 11 hours to correctly fill out the 1040EZ form. Taxpayers spend almost 5.4 billion hours filling out the forms that they send to the IRS. And those are the taxpayers that do their own taxes -- 54% of Americans pay someone else to do their taxes for them. In my own State of Tennessee, ever year approximately 1.1 million taxpayers utilize a professional tax preparer in order to file their tax returns.

The tax code is also too complex. Our current tax code and its regulations are 17,000 pages long and contain over 5 and a half million words -- seven times more than the Bible. Since 1981, the tax code has been changed 11,410 times. And one paragraph of law can take 250 pages to explain. With tax laws this complicated, it is no wonder that ordinary Americans have a tough time figuring them out.

Unfortunately, the trend in Congress is to add further complexity to the tax code -- tax credits for one worthwhile cause or tax deductions for another, tax relief for certain segments for the population, but not for others. Because of all of this tinkering, by 2007, 8,000,000 more Americans will be subject to the alternative minimum tax (AMT), a provision that forces taxpayers to calculate their income two ways and then pay the government the higher of the two amounts.

The tax code punishes taxpayers for working harder and smarter. One of the reasons that Congress has been able to balance the federal budget is that revenues have been rising steadily -- last year by 11 percent. Part of the reason for that rise is that our strong economy has resulted in Americans making more and more money which, in turn, has propelled them into higher and higher tax brackets. According to economist Steve Moore at the Cato Institute, over the past five years, higher incomes have pushed millions of middle-income families out of the 15 percent marginal tax bracket and into the 28 percent bracket, and out of the 28 percent bracket and into the 31 percent bracket, and so on. While federal tax revenues have risen by 11 percent, income has only risen by 6 percent. The reason for this real income bracket creep is our graduated income tax system.

The tax code does not promote savings for people of all ages and incomes. In fact, in many ways our tax code discourages people from saving. America has one of the world's lowest national savings rates. The personal saving rate in the United States averaged only 4.9 percent during the 1990s compared to 7.4 percent in the 1960s and 8.1 percent in the S50551970s. In 1998, we actually had negative savings rates. And it is no wonder -- as I mentioned previously, the average family pays close to 40% of their income in taxes. In addition to a high tax burden which often is applied twice to savings, the rules for opening and investing in an IRA account of any kind are complex and restrictive. IRAs are tax-preferred retirement accounts -- tax- free for certain purposes like education expenses, first-time home purchases, health care and retirement. But because a person must have earned income to open an IRA, children are not eligible to have them. Additionally, the maximum contribution amounts have not been indexed since 1981 -- they are still at $2,000 per year. If the maximum contribution had been indexed for inflation it would stand at close to $5,000 today.

Increasing the national savings rate is even more important when coupled with our impending Social Security collapse. As it currently exists, Social Security is not sustainable for the long term unless taxes are significantly raised or the program is reformed. Even so, the return that a taxpayer gets on his or her Social Security investment via the payroll tax has diminished every year since the program's inception. In fact, the predicted rate of return at retirement for those age 24-50 is somewhere between .34 percent and 1.7 percent. The rate of return on an average IRA investment is between 7 and 11 percent.

The four bills that I am introducing today -- on Tax Freedom day -- collectively present a program that will lower taxes, simplify the tax code, correct for bracket creep, and provide increased savings opportunities for all Americans regardless of age and income level.

The 10-20-30 tax plan will consolidate the five tax brackets of our current tax code into just three -- 10, 20 and 30% -- both lowering the tax burden and simplifying our tax code at the same time. The bill will also increase the income threshold for the lowest tax bracket -- currently just over $25,000 for individuals -- to $35,000 -- all of which will be taxed at a much lower rate -- 10%. In my own state of Tennessee, nearly 85% of individual taxpayers make $35,000 or less and will now pay at this lower rate. For married couples, the threshold for the lowest bracket is currently $42,000. Under my bill, this amount would increase to $60,000 and be taxed at 10%. Instead of 15 or 28 percent, the majority of taxpayers would pay only 10% under my plan.

I know that this bill will not get passed this year, nor is it likely to get passed anytime in the near future. I introduce this bill, however, as my vision for where I think the tax code should ultimately end up. If we use a plan such as this as our compass and work incrementally to widen the brackets and reduce the tax rates whenever possible, we will be headed in the right direction.

The "Child Savings Account Act" would amend the Internal Revenue Code of 1986 to promote lifetime savings by allowing people to establish child savings accounts -- or CSA's -- within Roth IRAs and by allowing the savings to be used for education, first-time home purchases, and retirement. The bill will also expand the availability of Roth IRAs to all Americans, regardless of income, and will index contribution limits to inflation.

For low-income taxpayers, there are two important provisions which will help families with less disposable income save. First, up to $100 of each $500 child tax credit may be refundable to those qualifying for the Earned Income Credit. This refundable credit must be deposited in a CSA. Second, any person may contribute to a child's CSA. This means that churches and community groups could contribute to young people's CSA accounts as a birthday present or on a special occasion.

These Child Savings Accounts will arm our children for the future and decrease their reliance on the federal government. As a subset of the Roth tax-favored IRAs, Child Savings Accounts are available to new-born children from cradle to grave. In an increasingly complex tax world, CSAs are a sort of "one-stop IRA shopping" that allow for certain tax-free withdrawals and tax-free accumulation of retirement income.

If a parent, and then the child himself, contributed the maximum amount for his lifetime, the Child Savings Account would be worth nearly $5 million at age 65 and over $7 million by age 70. And that is using conservative estimates of return. Even if a parent could only contribute less than $10 a month for the first 18 years of a child's life, and the child then gradually increased his or her contribution up to $2000 per year by the time he or she turned 40, the account would be worth $460,000 at age 65 and $672,000 at age 70. Even if the parent or grandparent or church or guardian put only $100 in the account in only one year, the account would still be worth almost $50,000 at retirement age. The power of compound interest is incredible. Giving more Americans -- and all of our children -- access to this power is imperative.

The Bracket Creep Correction Act would index the tax brackets for real income growth. Tax brackets were not indexed for inflation until 1981 when Ronald Reagan was President. Indexing for real income growth is a logical and necessary next step. None other than Milton Friedman has announced his support for indexing tax brackets for wage growth. In addition to correcting for inflation, the tax code would also adjust for income growth -- thus ending the squeeze that many taxpayers have felt as their tax burdens have risen at a faster rate than their incomes.

A fourth bill that I will introduce will address a tax inequity that has existed for some time and was made worse by the large tax increases of 1993. The "Tax Fairness for Support of the Permanently Disabled Act" would change the tax rates for the taxable income of a trust fund established solely for the benefit of a person who is permanently and totally disabled. Instead of being taxed at the highest tax rate (39.6%) for amounts over $7,500, the income of this fund would be taxed at the tax rates that would normally apply to regular income of the same amount. In essence, trust fund income would be treated as personal income for a permanently disabled person.

Mr. Nicholas Verbin of Nashville, Tennessee called my office about this problem a year or so ago. The problem was that he had established an irrevocable trust for his son Nicky, who is completely disabled, unable to work, and totally dependent on his dad to provide for him. Mr. Verbin has spent his whole life building up this trust fund so that his son can live off this lifetime of hard work after Mr. Verbin is gone. Mr. Verbin does not want his son to have to go on welfare or become a ward of the state. Instead, he has built up this fund so that his son can be self-sufficient after he dies. Apparently, the federal government would rather have Nicky on its welfare roles than have him take care of himself.

Instead of taxing the interest that Nicky's trust accumulates every year as simple income, which it is since Nicky has no other form of income, the IRS taxes the interest at the highest rate allowable -- 39.6%. Instead of helping this sum grow into a sort of pension fund for Nicky, the IRS has milked it for all its worth. If Nicky's trust earns more than $7,500 in interest in a year, the federal government takes $2,125 plus 39.5% of the amount above $7,500. Meanwhile, even Bill Gates does not pay 39.6% on the first $275,000 of his income. We are taxing disabled children at a rate that we don't even tax multimillionaires!

I believe that we should not punish Mr. Verbin for his foresight, nor should we punish Nicky for his disability. While a case could be made that Congress should eliminate the tax on this type of trust altogether, I have simply proposed that the interest income be treated like normal income for those disabled boys and girls, men and women who cannot work for themselves and depend on this interest as their only source of income.

Mr. President, the Budget Resolution that we recently passed calls for a reconciliation bill this year of $778 over 2000-2009 (and $142 billion 2000-2004) in tax relief. Even with the military operations in Kosovo and other emergency appropriations, a tax cut is not only possible but necessary to keep our economy growing.

While many tax credits and deductions are attractive, they further complicate our already complicated tax code, subject additional taxpayers to the alternative minimum tax, and pit one group of taxpayers against another. I believe that Congress should enact across the board tax relief -- like what I have outlined in my 10-20-30 bill -- as the on-budget surplus allows. We must work toward lowering the tax rates on every bracket, widening the amounts subject to each bracket and correcting for bracket creep in order to make the tax code fairer, flatter and less complex.

We must also build more wealth in this country and encourage Americans to save. The Child Savings Account bill is a great savings vehicle for both rich and poor and has enormous potential for increasing retirement savings. Instead of being dependent on Social Security, sock some money away in an IRA and get set for life.