MAISONS-ALFORT, France (AP) — The French government, awaiting an appeal to the European Union, is facing a delay in its plan to reduce the sales tax that restaurant patrons pay, a top official said Sunday.

President Jacques Chirac and his conservative Cabinet have urged the European Union to allow France to lower the value-added taxes paid in restaurants from 19.6 percent to 5.5 percent.

French restaurant owners have pressed for the change, arguing that they want a level playing field with fast-food chains that are subject to the 5.5 percent sales tax.

Fast-food chains, among other businesses, benefit from an EU exemption from the higher tax because they are classified as labor-intensive.

Raymond Dutreil, secretary of state for small- and mid-sized businesses, said the government will not be able to include the planned tax cut in France's upcoming 2003 budget because of EU rules.

"We have to get the agreement of all European (Union) countries, and that agreement will only follow negotiations that haven't started yet," Dutreil said. "So we just don't see how we can do it this year."

He was speaking at a conference led by Prime Minister Jean-Pierre Raffarin in suburban Paris.

Raffarin plans to travel to Brussels "in the coming days" to discuss the matter with EU Commission President Romano Prodi, Dutreil said.

Chirac, during his successful re-election campaign earlier this year, pledged to champion the effort to reduce the VAT, as the tax is known. In June, Finance Minister Francis Mer wrote to the EU Commission to apply for the cut in the VAT.

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September 9, 2002
Capital gains tax drag on economy
Bruce Bartlett
CREATORS SYNDICATE

Following his Waco economic conference, President Bush told reporters about several tax initiatives that he may soon propose to aid beleaguered investors. Although he did not specifically mention cutting the capital-gains tax rate, it is almost certain that some action in this area will be included. Final decisions have not been made, but a final proposal is expected soon after September 11.

I hope the administration will avoid making purely pragmatic arguments for cutting the capital-gains tax, which should be cut. While such arguments worked in 1978, they have been much less successful since. What is desperately needed is a principled case for why capital gains should not be taxed at all.

While it may seem commonsensical that capital gains are a form of income just like any other, in fact this is not the case.

As the great economist Irving Fisher once explained, it confuses the fruit and the tree. Trees grow and they also produce fruit.

The fruit is income and is justly taxed. But growth of the tree is an increase in capital. More capital will produce more income in the future, which will be taxed, but taxing the capital itself is counterproductive.

We already tax income very heavily. This includes taxes on wages, rent, dividends and interest. Alternatively, we could say that we are taxing the returns to human capital, real estate, corporate stock and saving.

Since we do not tax increases in the stock of human capital, such as when someone acquires new skills or education, taxing wages is a single tax. But if we tax increases in the value of real estate, stock or bonds, while also taxing rent, dividends and interest, then it is a double tax.

As Professor Fisher would say, we are taxing the tree and the fruit, when we should only be taxing one or the other. Taxing capital gains is like chopping limbs off of trees. We only end up with less fruit in the future. Not taxing capital gains — not chopping limbs — would allow the tree to grow, which will produce more fruit in the future and increase government's take of it.

Therefore, in principle, capital gains should not be taxed at all. Capital gains are not income, except in the minds of those incapable of complex thought. The present 20 percent maximum tax rate on capital gains, while the top rate on wages is more than twice that, is not a preference or giveaway, but the mitigation of something that is wrong in the first place. Viewed in this light — a position once held by the U.S. Supreme Court in the case of Gray vs. Darlington (1872) — cutting the capital-gains tax is simply the redress of an illegitimate form of taxation.

This is not to say that cutting the capital-gains tax will not also have beneficial economic effects. Indeed, the experience of the 1969 and 1986 increases in the capital-gains tax, and the 1978, 1981 and 1997 reductions, strongly suggests that capital-gains realizations will expand by more than enough to actually raise federal revenue.

According to the Treasury Department, there is almost an exact inverse relationship between the long-term capital gains tax rate and realizations as a share of the gross domestic product. When the rate goes up, realizations go down. When the rate goes down, realizations go up. Generally speaking, the magnitudes are such that the government makes money when the rate is cut and loses money when it is increased.

Ironically, the principal argument against cutting the capital-gains tax is that it will primarily benefit the rich.

But if revenues are rising, how can this be the case? The answer is that revenue estimators assume the same assets would have been sold anyway at the higher tax rate. No matter how much evidence is presented to the contrary, they refuse to acknowledge that higher taxes on the rich are in fact higher taxes on the rich. Somehow, they always make it look like a tax cut.

Among those most consistent in their belief that capital-gains taxes are wrong in principle is Federal Reserve Board Chairman Alan Greenspan, who has said so on many occasions. "I've always been supportive of either lowering the capital-gains tax or preferably eliminating it completely," Mr. Greenspan told the Senate Banking Committee a few years ago. "There's no question in my mind that a capital-gains tax cut would be helpful with respect to the issue of property values and economic growth," he added.

Given current economic and financial conditions, the latter point undoubtedly means more to most people than the theoretically correct approach to capital-gains taxation.

President Bush should not be shy about making both arguments.

Copyright © 2002 News World Communications, Inc. All rights reserved.

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September 10, 2002
TAX FACTS: Senate Finance Crafting Business Tax Bill
By JENNIFER CORBETT DOOREN and ROB WELLS
Of DOW JONES NEWSWIRES

WASHINGTON -- The Senate Finance Committee is crafting a $15 billion package of tax breaks to benefit small businesses who've taken a hit during the recent economic slowdown.

A committee aide said items under consideration include a tax credit for broadband Internet and telecommunications services and FFARRM accounts, which allow farmers and fishermen to contribute funds into tax-advantaged accounts to help manage operations in poor times. The FFARRM account legislation is cosponsored by Sen. Charles Grassley, R- Iowa, and Senate Finance Chairman Max Baucus, D-Mont.

The aide said also under consideration is a bill sponsored by Sen. Orrin Hatch, R-Utah, to make it easier for small banks to elect "S corporation" status, which allows companies to be taxed similar to partnerships rather than as regular corporations.

Simplification of excise taxes, such as the repeal of the special occupational tax, and accelerated depreciation for properties in rural areas that are losing residents are also being discussed, said the aide, who spoke on condition he would not be identified. Lawmakers are also looking at possibly increasing deductions for business meals and boosting increasing a deduction for small business equipment purchases.

When asked about what was ultimately going to be in the business tax bill, Baucus said all of the items were under discussion. "It's on the table," he said.

Lawmakers are looking at using revenue from a House bill that aims to shut down the use of tax shelters to avoid taxes as to way to help pay for the business tax bill.

The committee could vote as early next week on the measure.

Daschle: Will Push For Minimum Wage Boost

Another item that could be attached to the business tax bill is a $1.50 boost in the federal minimum wage, although lawmakers haven't decided exactly which bill to use. Another vehicle is pension legislation that is scheduled for Senate action later this month.

"One way or the other we are going to take up the minimum wage," said Senate Majority Leader Thomas Daschle, D-S.D.

Sen. Edward Kennedy, D-Mass., introduced a bill earlier this year that would raise the minimum wage $1.50 per hour by 2004. Congress last voted to raise the minimum wage from $4.25 to the current $5.15 per hour in 1996.

IRS Corrects Hybrid Vehicle Tax Information

The Internal Revenue Service corrected information it released last week about two additional hybrid gas-electric vehicles it certified as being eligible for a clean-burning fuel deduction.

Purchasers of a new Honda Insight for model years 2000, 2001 and 2002 as well as purchasers of a Honda Civic Hybrid for model year 2003 will be able to claim a one-time tax deduction of $2,000 for the first year the car was put into use. The IRS had incorrectly said the Insight for model years 2001 through 2003 was eligible for the tax deduction.

Last month the IRS certified the Toyota Prius as being eligible for the clean-fuel tax deduction.

Treasury Names Hubbard Tax Legislative Counsel

The Treasury Department announced Tuesday that Helen Hubbard has joined the department's tax policy office as tax legislative counsel.

Hubbard previously was a partner at Ernst & Young LLP in the national tax department where she specialized in accounting and tax issues. Hubbard was also previously an adjunct law professor at Georgetown University were she taught courses in income tax accounting.

Copyright © 2002 Dow Jones & Company, Inc. All Rights Reserved

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September 11, 2002
Tax Report
by Tom Herman
The Wall Street Journal

States May Need to Raise Taxes As Declines in Revenue Persist

While Congress considers tax cuts, many states face pressures to raise taxes.

A report to be issued soon underscores the severity of state-budget woes. According to the Nelson A. Rockefeller Institute of Government in Albany, N.Y., state-tax revenues tumbled 10.4% in the April-to-June quarter from a year earlier. That was the largest quarterly drop since the institute began keeping score in 1991 and the fourth quarterly decline in a row, says Nicholas W. Jenny, the report's author.

"This sustained revenue decline, which appears to be accelerating, is causing widespread and severe stress in state budgets across the country," Mr. Jenny reports. He paints a grim outlook: There is "little in the underlying collections data or the employment situation to suggest that the revenue situation is going to get much better in the near future."

Some states already have said they don't expect to hit revenue targets in their latest budgets. "If revenue weakness continues, other states will surely join this list," Mr. Jenny concludes. "Moreover, as the list grows, we can expect to see deeper budget cuts and additional tax increases."

With elections looming in early November, lawmakers are struggling to avoid even discussing the possibility of tax increases. Instead, states have been dipping into rainy-day funds, cutting spending and raising excise taxes, notably those on cigarettes, says Corina Eckl, fiscal program director at the National Conference of State Legislatures in Denver.

"Lawmakers are in a tight spot," Ms. Eckl says. "There is tremendous resistance to raising taxes because citizens don't want to pay higher taxes. But, at the same time, taxpayers don't want their services drastically reduced, so there is great pressure to raise additional revenues. Now, the question is: Will states be more inclined to look at broad-based tax increases to fund services? We know several states already have created special task forces to examine taxes."

Mr. Jenny's new report strongly indicates that states are running out of options and that more eventually will focus closely on tax increases. Among the report's findings:

• Far Western states fared the worst during the second quarter, posting a 21.2% decline in total tax collections.
• States reported a 22.3% decline in personal income-tax revenues, the fourth straight quarterly decline. The report also says 39 of 41 states with a personal income tax experienced declines in personal income-tax revenues during the quarter.
• Corporate income-tax revenues fell 11.7%, the seventh quarterly decline in a row.
• Sales-tax revenue rose 1.5%. This increase represents "the only positive sign in state revenue this quarter," the report says. "Since most of the increase was the result of tax hikes, however, it does not reflect true underlying revenue strength."
• States with the largest tax-revenue shortfalls: California, Oregon, Massachusetts, New York and Connecticut.

Budget woes are so deep and widespread that tax-increase talk appears inevitable. "Nationally, there's certainly more desire to cut services than to raise taxes," says Verenda Smith of the Federation of Tax Administrators in Washington. "Elected officials certainly don't want to raise taxes, but there has to be discussion of it. How it gets sorted out -- my crystal ball doesn't see that far."

ELECTRIFYING NEWS: Buyers of two more hybrid gas-and-electric cars are eligible for a special tax deduction.

Purchasers of a new Honda Insight for model years 2000, 2001 and 2002, or a Honda Civic Hybrid for the 2003 model year, will be able to claim a $2,000 deduction. This one-time deduction "must be taken in the year the vehicle was first used," the IRS says.

Last month, the IRS certified another hybrid gas-and-electric car, the Toyota Prius.

Taxpayers can claim this deduction whether or not they itemize their deductions. That's important since seven out of 10 returns take the standard deduction, instead of itemizing. "Individuals take this benefit as an adjustment to income," the IRS says. "They do not have to itemize deductions on their tax returns to claim it."

To claim this deduction for a previous year, file an amended return.

NOTABLE AND QUOTABLE: Many of the nation's wealthiest people strongly oppose total repeal of estate and gift taxes, even though it would greatly benefit their families. Instead, they suggest sharp increases in the basic exclusion, now $1 million, so that only the super-rich are affected.

Among those strongly opposed to total repeal is Edgar M. Bronfman, the former head of Seagram who now is an author and president of the World Jewish Congress, among other posts.

"Oh, I feel very deeply that eliminating the estate tax is wrong," Mr. Bronfman said at the 92nd Street Y, a New York cultural and educational institution on Manhattan's Upper East Side. "It doesn't affect that many people. The very, very rich can afford to pay taxes."

"You have to do the fair thing in life, not just what suits you," Mr. Bronfman said.

BRIEFS: Who's News: The Senate confirms Pam Olson as assistant Treasury secretary for tax policy. Ms. Olson is a former head of the American Bar Association tax section and also a former partner at the Skadden Arps law firm. ... Moving on: Robert P. Hanson, Treasury's tax legislative counsel, is leaving government after three years to return to the private sector. Helen M. Hubbard, formerly a partner at Ernst & Young, takes over as acting tax legislative counsel. ... Who Was News: An IRS Web site page still lists W. Val Oveson as the National Taxpayer Advocate, an office designed to help taxpayers resolve problems with the IRS. But Mr. Oveson left the post in 2000. His successor, Nina E. Olson, took over early last year. "This is so ridiculous," Ms. Olson says. "We keep trying to get it fixed, to no avail."

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September 12, 2002
US IRS To Focus More Audits On High Income, Evasion Plans
DOW JONES NEWSWIRES

WASHINGTON (AP)--The U.S. Internal Revenue Service plans to focus more attention on high-income individuals and those involved in tax- avoidance schemes such as credit cards issued by offshore banks.

The intent of the new audit strategy announced Thursday is to uncover methods taxpayers use to avoid taxes and hide income from the IRS, rather than simply checking returns that are filed for mistakes or relatively simple omissions.

IRS Commissioner Charles Rossotti, while insisting the agency is "not giving anybody a free ride," said the aim is to free up auditors to focus on such things as tax shelters, offshore credit cards used to hide income, wealthy people who fail to file returns and other major problems.

"The real world is such that we have limited resources," Rossotti said. "We are trying to figure out as best we can where is the most threat to the system."

The IRS estimates the nation's "tax gap," the difference between income taxes that should be paid and what is actually collected, at $207 billion annually. Not all of that lost revenue is due to cheating, but evaders do make up a significant portion.

Much of the unpaid tax bill comes from income that is never reported to the IRS. To get at this problem, the IRS has developed a new statistical method of selecting returns with a high probability of unreported income.

The previous formula used, Rossotti said, "did not focus on what was not on the return, on income that might not have been reported at all."

Among the tax-avoidance schemes to be targeted for audits are promoters of nonexistent slavery reparations, who make frivolous arguments to avoid filing returns, abusive tax shelters and trusts and employment schemes such as paying in cash and filing false payroll tax returns.

Rossotti said the IRS already has 150 ongoing audits of tax shelter promoters, with another 150 in the beginning stages of an audit.

Focusing more audits on higher-income taxpayers would also alter the perception that the IRS pays greater attention to the modest-income people than to the rich. While calling that perception unfair, Rossotti did say that because 60% of income taxes are paid by those earning $100,000 an up, it was important to concentrate on them.

The move also comes as the IRS struggles to increase the number of returns it audits, which rose slightly to 732,000 last year - about 1 in every 173 - but remains far below the 1.9 million audited in 1996. The IRS is in the midst of a project, its first since 1988, of randomly auditing about 50,000 of this year's returns to gather research on tax filing and errors.

"The really big point is that we're trying to maintain the faith that the honest taxpayer has in the system," Rossotti said. "We know that when people abuse the system, it tends to reduce that faith."

Copyright © 2002 Dow Jones & Company, Inc. All Rights Reserved

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SEPTEMBER 12, 01:38 ET
Divided GOP Considers More Tax Cuts
By CURT ANDERSON
AP Tax Writer

WASHINGTON (AP) — Absent clear direction from President Bush, Republicans in Congress are divided about whether to push for another round of tax relief as an election-year response to continued economic weakness and investor losses.

In the crush of last-minute business facing Congress before adjournment, it seems most likely that no bill will become law.

Bush's enthusiasm in August for more tax relief appears to have waned amid White House disagreement about its political and economic wisdom. One senior administration official, speaking on condition of anonymity, said the plan was "on life support," although a White House spokeswoman insisted the president was still examining options.

"The president has not made any decisions," said spokeswoman Claire Buchan. "He continues to review ideas."

Some key lawmakers, notably House Majority Leader Dick Armey, are arguing to press ahead with a measure that would center on two key items.

One would increase the amount of capital losses that can be deducted on tax returns, now limited to $3,000. The other would allow people to save more in 401(k) accounts and other retirement plans — many depleted by the stock market swoon — and raise the age threshold, currently 70 1/2 , at which people must begin withdrawals from these accounts.

"I am just talking about what helps real people in their real lives," said Armey, R-Texas.

Others, including House Ways and Means Committee Chairman Bill Thomas, have reservations about whether such a proposal would be large enough to do much good in a $10 trillion economy and whether increasing savings would provide meaningful help immediately.

"If you're going to do something, try to affect spending now, not savings — that would be counter what you want to do," Thomas, R-Calif., said Wednesday.

Thomas also said he was "anxious" for guidance from the White House, adding that individual lawmakers should not "go off volunteering whatever it is they think" should be in the package.

"I think there needs to be some consideration of people who are knowledgeable in this area," said Thomas, whose committee writes tax legislation.

GOP leadership aides, however, said House Speaker Dennis Hastert, R- Ill., favors taking some action, particularly with economic worries foremost in the minds of many voters heading into the November elections. Control of both the House and Senate is at stake.

Rep. Charles Rangel, senior Democrat on the Ways and Means Committee, said, "Hastert and Thomas, they always seem to fight each other when it comes to policy." But Rangel said he expected the House GOP to eventually unite around a plan before adjourning later this fall.

"That's just what they do," said Rangel, D-N.Y. "I really think they don't care what the deficits are or what the policy is. They just want to say they decreased every tax they could."

Democrats argue that tax relief beyond the 10-year, $1.35 trillion cut passed last year will exacerbate the federal budget deficit, drain away money that could be used for other priorities and go primarily to wealthier taxpayers. These arguments have political resonance that could have an impact in tight re-election campaigns.

"It's going to be a much tougher row to hoe this time around," said Martin Regalia, chief economist at the U.S. Chamber of Commerce. "This is not the type of atmosphere where you would try to push a tax package through."

Even if the House settles on a plan and Republicans win its passage, there is little chance the Senate would have the time or inclination to follow suit. Even Minority Leader Trent Lott, a reliable tax cutter, said more tax relief could be blocked by the press of other business in a Senate where Democrats have a slender majority.

"I have my doubts," said Lott, R-Miss. "Primarily, it's just concern about how we put it together and get it done in the time we have left."

The Senate may get a chance to vote on a much different package being developed by Finance Committee Chairman Max Baucus, D-Mont. That plan would be aimed at small businesses and rural needs and could be linked to an unspecified increase in the minimum wage.

Items under consideration for a plan expected to cost about $15 billion over 10 years include a tax credit for companies that extend broadband Internet service to underserved areas; an increase in the investments small businesses can immediately deduct from taxes; and a series of tax breaks for farmers and ranchers.

————

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Congress: http://thomas.loc.gov

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SEPTEMBER 12, 08:25 ET
EU Has U.S. Trade Sanctions List

BRUSSELS, Belgium (AP) — U.S. products ranging from cereals to nuclear reactors are on a draft list prepared by the European Union's head office for potential trade sanctions totaling up to $4 billion.

The list, to be published by the European Commission Friday, follows a ruling last month from the World Trade Organization which authorized the sanctions after finding the United States gave illegal tax breaks to its companies operating abroad.

Designed to maximize pressure on Washington, the list includes politically sensitive farm exports such as oil seeds and wheat gluten, as well as iron and steel exports — already the subject of a separate trade spat.

But it's far from certain that the EU will actually impose the sanctions, which would be 20 times bigger than any previously allowed. Experts said the EU would likely use it as a bargaining chip to force Washington to amend its law quickly.

"This issue has been and will be more valuable as a threat," said Richard Cunningham, a trade expert at Steptoe & Johnson in Washington. "It tends to emasculate U.S. initiatives against Europe," in such other trade disputes such as the EU ban on biotech foods.

President Bush has promised to work with Congress to comply with WTO obligations, and the EU is following the progress.

"We trust that they'll abide by their commitment," said Commission spokeswoman Arancha Gonzalez. "If they don't, and we see that there's no work in progress, we'll activate the list."

Individual EU governments and industries now have two months to comment on the list, which gets pared down and becomes final in early November.

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SEPTEMBER 12, 15:26 ET
House Delays Education Tax Vote
By JIM ABRAMS
Associated Press Writer

WASHINGTON (AP) — House Republican leaders, facing fierce opposition from Democrats, on Thursday decided not to risk a vote on legislation that would have provided tax relief to lower income families to help them pay for education costs.

Withdrawal of the administration-backed bill highlighted the deep divide over the wisdom of further tax cuts in a period of budget deficits and over how education dollars should be spent. Democrats said the GOP bill would shift money from public to private schools and that financing school construction should be a higher priority.

The bill would have allowed couples with an income of $40,000 or less — or $20,000 for single parents — to claim up to $3,000 in above-the-line deductions for K-12 educational expenses for public, private, religious or home schools.

The tax break, already enjoyed by parents with higher-education expenses, could be used for tuition, tutoring, supplies, transportation, computers and other school-related expenses.

"It is a benefit poor families don't get today," said the measure's sponsor, Rep. Bob Schaffer, R-Colo. "Those that say spending $5 billion over 10 years is too much to spend on the poor children of America, I say shame on you."

But Democrats, who blame the 10-year $1.35 trillion tax cut enacted last year for the government's return this year to deficit-spending, said it was foolhardy to advance more tax cuts and that Republicans behind the bill know it doesn't have a chance of getting through the Democratic-controlled Senate.

The bill, said Rep. Louise Slaughter, D-N.Y., "will not improve the education of a single child because it is designed to make a political point and not become law."

Democrats also characterized the legislation as another effort to bolster private schools — sponsors said 90 percent of beneficiaries would be public school parents — at the expense of public schools.

Republican aides said the bill was pulled because it was unclear that they had enough votes to defeat a Democratic substitute that would have provided $25 billion in interest-free funds for school construction and pass the tax cut measure.

The education bill is one of several tax-related measures that the White House and Republicans are considering in the run-up to the November elections to differentiate their party from Democrats and to stimulate the faltering economy. But differences over what shape that tax package should take have made it less likely the House will act on major tax cuts in the waning days of this session.

House Majority Leader Dick Armey, R-Texas, suggested Wednesday that they should concentrate on two items, increasing the amount of capital losses that can be deducted on tax returns, now limited to $3,000, and allowing people to save more in 401(k) accounts and other retirement plans.

The Senate Finance Committee did approve a smaller tax bill Thursday aimed at giving relief to military personnel and their families. The measure would make it easier for military families to claim a capital gains exclusion when they sell their homes and exempt from taxes the $6,000 death benefit paid to the families of those who die on duty.

The measure also contains a provision to impose a one-time capital gains tax on the property of those who renounce their U.S. citizenship to avoid paying taxes.

———

The education tax relief bill is H.R. 5193.

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Congress: http://thomas.loc.gov

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SEPTEMBER 13, 08:33 ET
EU Warned Against Trade Retaliation
By PAUL GEITNER
AP Business Writer

BRUSSELS, Belgium (AP) — Business groups warned the European Union on Friday that it could harm consumers and industry at home unless it acts "responsibly" in choosing U.S. imports that could be hit with $4 billion in trade sanctions.

Any retaliation by the EU for illegal U.S. subsidies must be effective, said Xavier Durieu, secretary-general of Eurocommerce. But he insisted care must be taken to avoid hurting European industry "in its ability to deliver to consumers products of the best price and quality."

The EU published a wide-ranging, multibillion-dollar list of potential targets for sanctions Friday, from soap to live animals to nuclear reactors.

The World Trade Organization authorized the sanctions last month after finding the United States gave illegal tax breaks to its companies operating abroad.

But officials and business leaders on both sides of the Atlantic fear the potential impact on trade if the EU imposes the full $4 billion allowed.

Sanctions hurt U.S. producers by making it harder for them to sell their products in Europe. But they can also backfire by pushing up prices or disrupting production if other suppliers can't be found.

"Sanctions are a last resort," said Monique Julien, spokeswoman for another business lobby, UNICE.

Ralph Kamphoener, international trade adviser at Eurocommerce, pointed to another trade dispute as an example: the still-looming EU threat to retaliate for U.S. punitive duties on steel.

Among the products on that hit list are Florida oranges and grapefruits, which Kamphoener noted would be difficult for European importers to replace.

"The price might increase, and consumers in the EU wouldn't get to enjoy fresh, Florida orange juice," he said.

EU spokeswoman Arancha Gonzalez said care was taken in preparing the list to include only products where the United States represents less than 20 percent of imports. That should prevent "excessive harm" to EU businesses, she said.

The EU also is allowing an unusually long, 60-day consultation period before it draws up the definitive list.

"This prepares the ground for due consideration of traders' concerns and, as a result, for retaliating responsibly," Durieu said.

Both sides have been anxious to avoid actually imposing the sanctions, and Gonzalez reiterated Friday that the EU would prefer to see Washington change its legislation.

President Bush promised last May to comply with WTO obligations, but it was uncertain whether a bill introduced in the U.S. Congress would be passed this year.

Gonzalez refused to say how long the EU would wait, but said the EU was monitoring the situation.

"If the work is not progressing, we will not have patience," she said.

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SEPTEMBER 13, 10:28 ET
Britain Gov't Backs Off Memorial Tax

LONDON (AP) — The government has backed down from a demand for $15,500 in taxes on the restoration of a war memorial, according to a Friday newspaper report.

In July, the British taxing authority demanded payment of value-added tax, in part because the Royal Marines 1939 War Fund could not prove that the monument would not be used for business purposes, the Daily Telegraph reported.

"This is the third national memorial we have acted for recently and in each case Customs have conceded on a different argument," said Peter Ladanyi, a specialist in charity VAT cases with accountants Chantrey Vellacott DFK.

The century-old memorial, in the center of London, honors Marines who fought in the Boer War and the Boxer Rebellion.

It was renovated two years ago following a public appeal for funds by the Royal Marines 1939 War Fund, and an inscription was added to honor more than 10,000 Marines killed in the last century.

Ladanyi called for a change in policy on memorials, in line with the government's recent decision to grant VAT relief to churches for restoration projects.

"The taxation of war memorials is unacceptable and in my view in most cases wrong in VAT terms," he said.

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SEPTEMBER 13, 16:32 ET
Sanction List May Force Tax Repeal
By CURT ANDERSON
AP Tax Writer

WASHINGTON (AP) — The release Friday of a lengthy list of U.S. products targeted for sanctions by the European Union could provide a new spark for efforts in Congress to repeal corporate tax laws ruled an illegal subsidy, a key lawmaker says.

"There was a lot of hope that this would go away," said Rep. Bill Thomas, R-Calif., chairman of the tax-writing House Ways and Means Committee. "We now know the hard, cold facts."

The $4 billion in sanctions were authorized last month by the World Trade Organization, which ruled that the United States gave illegal tax breaks to its companies that operate abroad. The list published Friday includes a wide range of products, from asparagus to peppers, furnaces to fax machines, diesel engines to calculators.

No sanctions on these U.S. exports, which would increase their costs abroad, are expected immediately. EU officials have given repeated assurances that the United States will have time to bring its tax laws into compliance before launching what would be the largest trade war in history.

Legislation sponsored by Thomas to make more than 20 changes in the tax laws in question has been sharply criticized since it was introduced in July. Some large exporting companies, notably Boeing Co. and Kodak, have argued it will cost them billions of dollars, might lead to layoffs and could encourage more corporations to move operations overseas.

Republicans and Democrats have expressed skepticism, particularly those representing the companies and economic sectors most affected. Thomas said Friday that the EU sanctions list will make clear to all these critics that neither the tax breaks nor a slight modification will survive WTO scrutiny.

"We can't go back to an illegal subsidy. It's over," Thomas said.

The top Democrat on the Ways and Means Committee, Rep. Charles Rangel of New York, said efforts should focus on a bipartisan solution that includes ideas from the Democratic-led Senate and the Bush administration, as well as renewed emphasis toward a negotiated settlement.

"In sum, I want to make clear that no one should use the threat of retaliation or any possible confusion generated by the EU draft list as a pretext to press a partisan agenda," Rangel said in a letter to Democratic lawmakers. "We have already seen the failure of one plan, because it was developed by a small group of legislators with no bipartisan input."

Thomas released two letters Friday that bolster his case, including a formal expression of support for his bill from the Treasury Department.

Pam Olson, the acting assistant Treasury secretary for tax policy, said in her letter that an alternative suggested by industry groups would not pass WTO muster and that the Thomas bill "would satisfy the dual goals" of meeting those obligations while aligning U.S. corporate tax laws more closely with those of other countries.

"We should be moving in the direction of simplifying our international tax rules, not further complicating them," Olson wrote.

The other letter of support was from the International Tax Working Group, which includes U.S.-based multinational firms such as Wal-Mart Stores Inc., Coca-Cola, General Motors, ExxonMobil Corp., Texas Instruments and Johnson & Johnson.

In this election year, Thomas said it was unlikely Congress could complete action on such a complicated bill before adjourning later in the fall. But he said lawmakers could be ready to move quickly once the new Congress convenes in January.

Besides overhauling the corporate tax laws, the Thomas bill would curb tax shelters and attempt to halt relocation of U.S. corporate headquarters to Bermuda and other tax havens. These measures would raise money to so that the new tax laws cause less pain for companies losing their old tax breaks — measures that could be taken by other lawmakers to raise revenue for other programs.

"If there is a clock, it is already ticking," Thomas said.

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The bill is H.R. 5095.

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On the Net:

Congress: http://thomas.loc.gov

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