Introduction

Mr. Chairman and members of the committee, it is a great privilege to have the opportunity to appear before you today. My name is Eric Engen. I am a resident scholar at the American Enterprise Institute in Washington, D.C. where my research focuses on the effects of tax and budget policy on the economy. Prior to joining AEI, I was a senior economist and section chief at the Federal Reserve Board of Governors.

My testimony provides perspectives on some of the tax policy reforms discussed in the Economic Report of the President and proposed in the President's recent budget. I In particular, I focus on the investment and saving incentives provided by the tax relief for corporate earnings and the tax-free saving accounts.

My principal conclusions are as follows:

• The taxation of capital income, sometimes at very high marginal rates, in the U.S. tax system stands in marked contrast to the implications of optimal tax theory in the economics literature, which has generally concluded that the optimal tax on capital income is zero. Capital taxes reduce saving and investment, and a smaller capital stock reduces the productivity and wages of workers.

• The proposal to remove the "double taxation" of corporate earnings would lower the cost of investment for firms and increase the after-tax returns to savers that hold corporate equity, thus stimulating capital formation, boosting the productivity of workers, and raising wages and income.

• Exempting corporate profits from personal income taxation reduces the tax incentives for corporations to retain earnings instead of paying dividends. Higher dividend payouts would help improve the allocation of corporate capital and assist stockholders in monitoring corporate managers.

• Exempting corporate profits from personal income taxation reduces the tax incentives for corporations to finance investments with debt instead of equity. Less corporate debt reduces the probabilities of default and bankruptcy in an economic slowdown and thus would lower the risk premium included in the cost of financing corporate capital.

• The United States has the second highest corporate tax rate among its economic competitors and is one of only three countries in the OECD that does not provide dividend tax relief. Although the corporate tax rate would still remain relatively high, eliminating the double taxation of dividends would improve the competitiveness of U.S. firms in the global economy.

• The President's proposals for expanding tax-free savings accounts would continue the trend seen for more than twenty years of moving the personal income tax towards a consumption tax base.

• The Retirement Savings Accounts (RSAs) would be the most likely to increase personal saving as it would significantly increase the contribution limits associated with Roth IRAs, which RSAs would replace. The higher the contribution limits for these accounts then the greater the economic incentives for households to increase saving.

• The Employer Retirement Savings Accounts (ERSAs) typically do not increase the contribution limits that employees will receive from similar types of current plans401(k) and 403 (b) accounts, for example- and thus would not be expected to increase marginal saving incentives more than current plans. However, the simplification and lower compliance costs of ERSAs should increase the availability of employer- based retirement accounts, particularly for small-business employees.

• The effects of Lifetime Savings Accounts (LSAs) on aggregate personal saving are harder to estimate and more likely to be mixed, although they would probably be the most popular owing to their lack of withdrawal restrictions. Particularly in early years after the introduction of LSAs, households would have the incentive to merely shift assets from currently taxed bank accounts and mutual funds into an LSA. For lower- and middleincome households, eventually existing assets would be exhausted and marginal incentives to increase saving would start to become effective. For higher-income households, this process would take longer.

Background

Capital income, which reflects the returns to saving and investment, can face substantial rates of taxation, particularly if generated by corporate businesses. The federal corporate income tax rate for most corporations is currently 35 percent, and state corporate taxes add, on average, another 4 to 5 percent to the effective corporate tax rate. When corporate income is delivered to shareholders, it then often faces combined federal and state personal income tax rates on dividends that can exceed 40 percent. Thus, the overall marginal tax rate on distributed corporate income can easily be over 60 percent. Even if corporate earnings are retained but ultimately dispersed to shareholders through the redemption of stocks that give rise to capital gains, which are typically taxed at a 20 percent rate in the personal income tax, the tax bite on the return from investment in corporate capital is still quite sizable. The high rates of taxation on capital income in the United States stand in marked contrast to the implications of optimal tax theory in the economics literature. Numerous economic studies have concluded that an optimal tax system in most scenarios will not include a tax on capital. This conclusion reflects the highly distortionary effects of capital income taxes over long time periods-a distortion that "explodes" or "compounds" even with a small capital income tax.

Economic growth and a higher standard of living in the United States are ultimately achieved by increasing the productivity of U.S. workers. Increased productivity requires investment, which is funded by saving. Thus, the economic burden of capital income taxes is not just born by high-income capital owners. The lower level of capital accumulation that results from high capital income taxes also has adverse effects for workers. Less capital makes workers less productive. If worker productivity is lower, then wages are lower. Therefore, even if workers owned no capital-a description that is increasingly less appropriate for households in the United States, more than half of whom own corporate stocks-then workers would still be better off with no tax on capital because their wages would be higher.

When compared to our primary economic competitors, such as countries in the OECD, the United States has a relatively high corporate income tax rate and, unlike most of these competitors, does not provide relief for the "double taxation" of corporate income.' The combined U.S. federal and local corporate income tax rate is almost 40 percent, second only to Japan, while the average corporate income tax rate for other OECD countries is closer to 30 percent. Moreover, the United States is one of only three OECD countries that do not have provisions in its tax code for some relief from the double layer of taxation of corporate dividends. Switzerland and Ireland do not provide dividend tax relief but their corporate income tax rates are among the lowest in the OECD- 21 percent and 12.5 percent, respectively.

The global economy is expanding rapidly. It is vital to the growth of the U.S. economy for U.S. businesses to be internationally competitive. Higher taxes in the United States on the returns to corporate capital inhibit the competitiveness of U.S.-based companies in foreign markets. As financial markets become more global, U.S. investors may tend to be more willing to invest in foreign-based rather than U.S.-based companies. Mergers may be more likely to be set up as a foreign acquisition of a U.S. corporation. Transactions where a foreign subsidiary acquires a U.S.-based parent company may become more frequent. The high rates of taxation on the return from corporate investment can tend to make the United States a relatively unbecoming location for the headquarters of a multinational corporation, which can, in turn, cause U.S. multinationals share in the global market to shrink.

President's Proposals for Tax Reform

I. Reduction of the tax on corporate earnings

There are several different methods in which relief could be provided for the double taxation of corporate dividends in the United States. One would provide a shareholder credit for corporate taxes paid. When a corporate shareholder receives a taxable dividend, the shareholder would be entitled to a credit against their taxes for the corporate taxes effectively paid on the dividend income. Many countries that have tax relief for double taxation of dividends use a form of the shareholder credit. However, the Treasury Department advised against this approach in a 1992 report because of the complexity of actually implementing the shareholder credit. In its report, Treasury recommended instead that dividend tax relief could be better implemented if a shareholder was allowed to exclude from gross income the dividends received from a corporation. The President's proposal is consistent with Treasury's earlier assessment that this dividend exclusion framework is simpler than a shareholder credit, and could be implemented with less structural change to the tax codes It also accounts for the fact that about half of dividend payments are currently not taxed, and thus removes the economic distortion of disproportionate taxes on dividends with a smaller reduction in federal revenues.

The President's proposal not only removes the double taxation of corporate earnings distributed to shareholders, it also removes the double taxation on corporate earnings that are retained. The retained earnings of a corporation should be reflected in an increase in the value of corporate shares, which when sold generate taxable capital gains. Although the advantages of deferral and preferential tax rates mean that the second layer of taxation on these capital gains is smaller than the tax on dividends, the tax is still positive. If the President's proposal only exempted dividends from personal taxation then dividends would be tax-advantaged compared to retained earnings. However, under this proposal, the tax treatment of all corporate earnings is equal.

There are a number of economic benefits that could be attained by having corporate earnings taxed only once. Taxing corporate earnings only once would lower the cost of investment for firms and increase the after-tax returns to savers that hold corporate equity, thus stimulating capital formation, boosting the productivity of workers, and raising wages and income. Although economists are not in complete agreement about the effect of dividend taxes on investment, typically the empirical results suggest that a reduction in the tax on dividends would markedly increase investment.

The effect of reducing the tax on corporate earnings can also potentially raise stock prices. A fundamental determinant of the value of a share of corporate equity is the present discounted value of all future after-tax dividend payments. Thus, a reduction in taxes on dividends could lead to higher corporate stock values. However, if the reduction in dividend taxes stimulates new investment, then some of this new investment may be done by new firms that enter into markets and compete away the profits of existing firms, thus inhibiting increases in stock prices. The more (less) new investment then the less (more) likely that stock prices rise.

Exempting corporate profits from personal income taxation reduces the tax incentives for corporations to retain earnings instead of paying dividends. Higher dividend payouts would help improve the allocation of corporate capital because this proposal would remove the "lock in" effect caused by the current tax incentives that make it easier for a firm to keep and reinvest corporate earnings. Instead, there would be no tax disincentive for corporate earnings being reinvested in capital with the highest expected return, whether it is in the same firm or in another business venture. Moreover, a higher payout of dividends would assist stockholders in monitoring corporate managers. Dividends can only be paid with "real" earnings and thus corporate managers could not hide behind a tax code that discourages dividends while they generate only "paper" profits.

Exempting corporate profits from personal income taxation reduces the tax incentives for corporations to finance investments with debt instead of equity. Less corporate debt reduces the probabilities of default and bankruptcy in an economic slowdown and thus would lower the risk premium included in the cost of financing corporate capital.

II. Tax-free savings accounts

Retirement Savings Accounts. Of the three saving account proposals, RSAs would be the most likely to increase personal saving as it would significantly increase the contribution limits associated with Roth IRAs, which RSAs would replace. The profusion of asset shifting seen when IRAs were initially introduced on a universal basis over two decades ago has probably been exhausted. The higher contribution limits allowed by these accounts would result in a greater number of savers facing increased marginal incentives for saving. These marginal incentives for saving would tend to be more prevalent for lower- and middle-income households.

Employer Retirement Savings Accounts. ERSAs typically do not increase the contribution limits that employees will receive from similar types of current plans-401(k) and 403(b) accounts, for example- and thus would not be expected to increase marginal saving incentives beyond those available in current employer-based plans. However, the simplification and lower compliance costs of ERSAs should increase the availability of employer-based retirement accounts, particularly for small-business employees. The costs and complexity of setting up retirement plans are frequently cited by small business owners as reasons for not offering a pension plan to their employees.

Lifetime Savings Accounts. The effect of LSAs on aggregate personal saving are harder to estimate and more likely to be mixed. Particularly in early years after the introduction of LSAs, households would have the incentive to merely shift assets from currently taxed bank accounts and mutual funds into an LSA. For lower- and middle- income households, eventually existing assets would be exhausted and marginal incentives to increase saving would start to become effective. For higher-income households, this process would take longer. Moreover, because LSAs have no withdrawal restrictions then these accounts would be more likely to attract saving done for more short-term purposes than retirement saving, such as precautionary saving. Models of household saving typically imply that precautionary saving is less sensitive to changes in the after-tax return than longer-term retirement saving. For this reason, even if an LSA provides a marginal tax incentive for a household to save more, it may not induce as much increased saving as an RSA or ERSA which focuses on retirement saving.

In general, the RSA and ERSA proposals are merely extensions of recent trends to increase the contribution limits to tax-favored retirement accounts and to simplify the provision of employer provided retirement accounts. Essentially, increasing the contribution limits for retirement accounts moves the personal income tax increasingly towards a consumption tax base as it exempts an increasing share of capital income from taxation. LSAs would be a much newer saving vehicle and would be a significant step further towards a consumption tax. LSAs would probably be quite popular since they do not have withdrawal restrictions. However, partly because the contribution limits prohibit households that save greater amounts from having a marginal incentive to save more, estimating the impact of LSAs on saving would be more speculative.

Another important issue in evaluating the potential net saving effects of these accounts is the possible interaction with household borrowing- in particular, tax-deductible mortgage borrowing. To the degree that households that own a house essentially use increases in tax deductible mortgage debt to essentially finance tax-favored saving, without having to reduce spending, then net personal saving does not increase. A complete shift to consumption tax treatment at the personal income tax level entails exempting all capital income received from taxation and also not allowing interest paid for borrowing to be tax- deductible. Both of these features are important for getting the full benefits of increased saving by switching to a consumption tax. To the degree that these saving accounts limit contributions, and since the tax deductibility of mortgage interest remains available, then the positive effects on personal saving from these accounts are less than what would be expected from a complete switch to a consumption tax base.

© 2003 by Federal Document Clearing House, Inc.

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March 5, 2003
Reform Not an Option: FairTax Restores the American Dream
Press Release
Americans For Fair Taxation

HOUSTON, TX--(INTERNET WIRE)--Our tax code is an eight million-word mess. It's and beyond any fundamental or any other type of reform and is unfair to every American. We are reminded of this every time we receive a paycheck.

But change may be coming since President Bush has suggested it may finally be time to replace the income tax with a consumption tax.

Several commissions, including The National Commission on Economic Growth and Tax Reform, on which I served, have all concluded that a replacement tax system should satisfy six principles:

1. Economic Growth
2. Fairness
3. Simplicity
4. Neutrality
5. Visibility
6. Stability

The FairTax, a national sales tax on consumption, meets all requirements. It has been extensively researched, analyzed and documented by some of the most respected business people, economists and academicians in the country and was introduced into Congress as The FairTax Act of 2003 (H.R. 25). However, without the insistence of millions of voters, it will be stuck in congressional committees, going nowhere.

The FairTax is a single rate of 23 percent inclusive on all retail purchases, which would replace all personal and corporate income taxes, payroll taxes and death taxes. It eliminates all loopholes, which would generate more revenue to fund our government.

The FairTax unleashes the full economic potential of our economy. It eliminates hidden taxes and allows people to save more. The FairTax untaxes the poor by providing every American household a "prebate" for taxes on necessities before they buy, not after. It also untaxes education, which is one of the keys to an improved standard of living. Additionally, it would not punish "sweat equity." Working harder and longer would allow people to save and invest without double and triple taxation. The FairTax is simple and highly visible.

Americans just want to pursue their dreams. If we want to remain the greatest nation in the world, we must succeed at restoring hope in the hearts of every working American.

The president has shown courage to suggest that it is time to solve the problem. We must have the insistence to make sure change occurs.

The voters are still in charge. It's our move.

Commentary By: Herman Cain, Chairman of Godfather's Pizza, Inc. and Chairman of the Tax Leadership Council for the Americans for Fair Taxation: www.fairtax.org.

Contact: Amy Summers
Title: Media Contact
Voice: 813-881-0862
Email: asummers@tampabay.rr.com

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March 5, 2003
Internet Tax Revolt
By Dr. Lawrence Hunter and Shaun Small
techcentralstation.com

At the winter meeting of the National Governors Association (NGA) Senator Byron Dorgan, D-ND, urged Congress to pass a sales tax "streamlining" bill this year. He argued that, "The tax is old, it's just not collected," referring to the use taxes due on out-of-state purchases. There's just one little problem with collecting that 'old tax'; it's unconstitutional.

States have been trying for more than three decades to tax people and businesses that are located out-of-state for one simple reason: non- residents can't kick the taxing scoundrels out of office. The issue of taxing remote sales started when states tried to tax catalogue sales, arguing that such "favorable" tax treatment put brick-and-mortar companies at a disadvantage.

The Supreme Court finally settled that dispute in 1992 in Quill Corp. v. North Dakota. That decision barred the state of North Dakota from requiring an out-of-state mail order company to collect taxes on sales made to customers inside the state unless the business had a "substantial presence" within the state. In addition to finding no sufficient taxing "nexus" the Court also found the state tax scheme was too complex for remote sellers and thus created an "undue burden" on inter-state commerce?rendering the taxing scheme unconstitutional and settling the issue, albeit temporarily.

With the advent of the Internet in the mid-1990s and the growth of e- commerce, the states and the NGA found a new hook for their 'old tax' collecting problems and, more importantly, they think they have stumbled upon the proverbial golden goose.

The new electronic medium has created infinite new and creative opportunities for entrepreneurial taxing schemes. By 1998 the debate reached a fever pitch but the fight was temporarily stayed for three years with the passage of the Internet Tax Freedom Act (ITFA). This Act barred post-1998 access taxes on the Internet as well as multiple and discriminatory taxation on e-commerce.

In 2001, when the ITFA was set to expire, the fight to permanently or temporarily extend the moratorium on Internet taxation reached a crescendo as Senators, Byron Dorgan (D-ND) and Mike Enzi (R-WY), held hostage any extension of the Internet tax moratorium unless Congress allowed for some type of national sales tax cartel. In November, almost two months after the original moratorium had expired; the Senate finally passed a clean two-year extension of the Internet tax moratorium. The Senate rejected the Dorgan-Enzi amendment, an amendment that could have led to future collection of state taxes on Internet sales by a 57-43 vote. The Dorgan-Enzi Amendment would have preauthorized a national sales tax compact if a mere 20 states agreed to the "harmonized" sales tax regime. This national sales tax would then be levied collectively by all the states and would only be alterable if individual state legislatures acquired the approval of a "consensus board" of non-elected bureaucrats?so much for representative democracy. The latest extension of the ITFA is set to expire in October of this year and another round of the great Internet tax debate will surely ensue.

During the first two rounds of the Internet tax debate the NGA argued the central issue was "fairness." Supporters of Internet tax "harmonization" obfuscated the issues insisting that somehow the moratorium barred taxation of Internet sales leaving brick-and-mortar industry at a disadvantage to commerce conducted electronically; that could not be farther from the truth. As noted above, the Internet tax moratorium only bars access fees and multiple and discriminatory taxation. It's the U.S. Constitution, not the moratorium, that imposes the restrictions on the ability of state and local governments to tax remote sales.

This year, with most states running deficits, the NGA has a new strategy. Instead of talking about "fairness" they are talking about "fiscal responsibility." A recent New York Times article quoted Frank Shafroth of the NGA lamenting "if only states could tax online sales they could plug 30-50 percent of the state budget deficits this year and next." But Shafroth fails to acknowledge that the states could just as easily "plug" budget shortfalls by cutting bloated state budgets.

It's important to remember that throughout the 1990s when the states were "losing" revenue for their failure to tax online sales state budget coffers were overflowing with revenue from the growing economy. State revenues grew on average by more than 48% during the 1990s. So what happened to the money? From '95-'2000 state spending grew even faster approaching 50%. The need to authorize a national tax cartel at the expense of the economic growth, Supreme Court precedent and the Constitution in an effort to balance budgets and eliminate deficits is a red herring.

If the tax harmonizers are serious about fairness then let's talk about how fair it is to increase the tax burden on citizens when their tax burden currently exceeds 40% of all wages and earnings. And, how fair is it to tax individuals and corporations that have no recourse at the ballot box? The fairness issue is not about brick-and-mortar industry versus e-commerce, but rather the age-old issue of taxation without representation. Moreover, should the sales tax cartel, as envisioned by the NGA and advocated by the likes of Senator Dorgan, become law it would directly conflict with our federal system, which not only allows, but encourages, states to innovate and compete within their borders.

As Congress begins anew debating the issue of Internet taxation and contemplates the authorization of an Interstate sales-tax cartel they should keep in mind three principles: 1) be aware of the total tax burden on citizens, not merely new means of taxing non-residents; 2) tax competition between states is not only good, but necessary for economic growth and the health of the national economy; and 3) be Constitutional; the Compact Clause exists to prevent states from creating "quasi-governmental" entities that intrude on the supremacy of the United States.

In that vein, Congress should permanently extend the current Internet tax moratorium on access taxes and multiple and discriminatory taxation of e-commerce, and, more importantly, they should put the kibosh on the NGA's machinations of a national sales tax cartel.

Dr. Lawrence Hunter is the chief economist and Shaun Small is the senior policy analyst at Empower America.

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March 6, 2003
Tax Report
By Tom Herman
The Wall Street Journal

IRS Unleashes Random Audits; Here's What to Do When Tapped

Watch your mailbox -- and pray you haven't been chosen.

Internal Revenue Service officials have begun sending letters to taxpayers chosen largely at random for special audits later this year and next year. These audits, the first of their kind in more than a decade, are designed to give agents a fresh look at how much cheating exists, what types, how to spot it and how to reduce unnecessary audits in the future.

Only about 2,000 victims have received letters so far. The other letters will go out in coming months. The bulk of the audits will come later this year.

How much trouble should you expect if you get one of these letters? It depends. Some people may have to do relatively little. Others will have to hire lawyers or accountants to defend nearly every line on their tax return.

LEVELS OF PAIN   There are four degrees of intensity when it comes to random audits. Blind Audit -- Audits your tax return without you knowing about it. By Mail -- Asks you to clarify issues or provide documents. Interview -- Makes you explain certain areas of return. Intense Interview -- Questions most lines on returns.   WHAT TO DO IF YOU'RE AUDITED IRS random audits this year will affect about 47,000 households, but that's just the tip of the iceberg.The IRS audited more than 731,000 households for various reasons on returns filed in 2000. Mail Audits: The IRS will send you written questions, and you'll have to provide written answers or additional documentation. Often you can handle these on your own. In-person Audits: Consider hiring a lawyer, accountant or enrolled agent (someone licensed to represent taxpayers at the IRS) to represent you at the audit. If the IRS Rules Against You: The first step is to appeal with the IRS. If that doesn't work, you can appeal to the federal courts. You Bear the Burden of Proof: Don't forget this isn't a court of law where you're innocent until proven guilty. The IRS has the right to require you to verify anything on your return.

Think of the program as four circles of pain. The audits will target a total of about 47,000 taxpayers, but the information garnered will affect a far larger group because it will be used to determine who gets audited in the future.

In the outer, least-painful circle, involving fewer than 7,000 households, taxpayers won't even know they have been picked, an IRS spokesman says. The IRS can get everything it needs in these cases by comparing material on documents they already have received against what those people reported on their returns.

But the picture will be very different for the 40,000 households who get letters.

In the case of another 7,000 taxpayers, the IRS will send questions by mail and ask for written replies. If you have adequate documentation to answer all the questions, you can probably handle this on your own.

The pain gets a little rougher for the next circle, which includes some 32,000 households. Here, the letter will indicate what areas the IRS is looking at in your return and ask you to call for an appointment. Depending on the complexity of your return, consider hiring a tax professional.

In the inner circle, the most painful, the IRS is picking about 1,700 people for what are known as "calibration" audits. These unlucky taxpayers will be required to field questions about nearly every line on the return. If you get picked, dig into your records and come up with as much documentation as you can. You will almost surely need to hire a professional. Lawyers say taxpayers confronted by IRS agents often tend to get nervous and talk too much, blurting out unnecessary details or becoming overly emotional and arousing needless suspicions. Letters for the calibration audits probably won't go out until late May, an IRS official says.

Even the calibration audits will be "less intrusive and less burdensome on taxpayers" than the last round of random audits in 1990-1991, which were based on 1988 returns, an IRS official says. In those old audits, taxpayers typically had to verify each line on the return. A reader of this column once described that experience as equivalent to an autopsy without the benefit of death.

"We are using a common-sense approach on this," the IRS official says. "The new calibration audits will examine many lines of the return but won't be as far-reaching as the previous study."

IRS officials say agents won't do what critics used to refer to as "lifestyle" audits. For example, agents won't visit a taxpayer's home to investigate whether the taxpayer's reported income is high enough to afford such a fancy home, an IRS spokesman says.

Instead, the IRS will use other sources to try to ferret out unreported income or phony deductions. For example, IRS examiners would want to investigate a return where the amount deducted for mortgage interest deduction is very high relative to reported income.

Not everybody is convinced that this will be a kinder, gentler audit. Some critics fear overly aggressive IRS random audits will lead to a wave of angry taxpayer complaints and a political firestorm in Congress. Others say the program involves too few audits to produce meaningful statistical results.

IRS officials maintain they are striking just the right balance. "We are using a statistically valid sample group," a spokesman says. "So we are comfortable with the sample size we are using."

Officials say the audits are badly needed to generate fresh data that will improve their audit-selection process. The new data are needed to update the computerized system that the IRS uses to score each tax return based on its likelihood of having questionable items. The IRS declines to elaborate on how it determines such scores.

Because of outdated information, the IRS acknowledges it's now auditing far too many people whose returns turn out to be perfectly accurate. Officials estimate the new program will produce information that will result in eliminating about 15,000 "no-change" audits each year.

SALES-TAX RATES continue to rise in many states, counties and cities, a new report says.

Average state and county rates rose last year to their highest levels in the more than two decades covered by a survey by Vertex Inc., a tax software and research company in Berwyn, Pa. For example, the average state rate rose to 5.217% from 5.151% in 2001. In 1981, the average rate was only 4.101%.

The average county rate rose last year to 1.607% from 1.565% in 2001. The average city and district rate climbed to 1.572% from 1.560% -- but down from a peak of 1.623% in 1998.

Government officials are raising rates primarily in response to severe budget woes. Recent reports indicate the long-awaited turnaround in state and local tax-collection growth is nowhere in sight. More tax increases are expected this year. Vertex says about 7,915 state, county and city jurisdictions in the U.S. charge a sales tax.

Vertex is making the study available on the company's Web site (vertexinc.com).

BRIEFS: About 47.1 million returns were filed as of Feb. 28, up 0.5% from the prior year. Average refund: $2,136, up 2%. ... Moving up: Dale Hart, who has been with the IRS since 1967, will take over as acting commissioner of the small business and self-employed division. She will succeed Joe Kehoe, who plans to leave in early April.

Copyright © 2003 Dow Jones & Company, Inc. All Rights Reserved

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March 7, 2003
France Vows to Press Tax Cut Plans

PARIS (AP)--French finance minister Francis Mer on Friday vowed to press ahead with a round of tax cuts to spur the economy despite facing disciplinary procedures from the European Union's head office over excessive deficits.

"The planned tax cuts in the 2003 budget will be carried out," he told RTL radio. But he also said the government would impose stricter controls on public spending.

Mer said he respected the European Commission's decision to launch proceedings against Paris.

"When there are rules of the game, they are made to be respected," he said. "And given the declaration's I made yesterday ... it is normal that the Commission would play its role of arbiter."

Mer on Thursday said France's 2003 budget deficit will be 3.4 percent of gross domestic product, breaking the E.U.'s 3 percent upper limit. This comes after the French deficit already came slightly above the threshold last year.

He said the prospects for economic growth would become clearer once the Iraqi disarmament crisis had been successfully resolved.

The Commission said France has one year to bring its deficit below the limit or face possible fines.

Budget Minister Alain Lambert, meanwhile, indicated it was more important for France to avoid a recession than to reach a balanced budget.

"Returning to a balanced budget is a requirement but not sliding into recession is another requirement, and that is our preoccupation," Lambert told Europe-1 radio.

"I also think our European partners don't have any interest in seeing a country like France ... enter into recession," he said.

Copyright 2003, The Associated Press.

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