Senator ARMSTRONG. I really like your characterization of this as the Good Samaritan mileage bill. I have been calling it when I have spoken on it and described it as the charitable mileage deduction. But really, Good Samaritan sums it up so well, and I am going to borrow that notion from you.

Let me ask this. Some people who oppose this legislation make the argument that volunteers should not expect to be reimbursed for their cost. In effect, they say that if they are really good samaritans they would not care about this deduction issue. What is your response to that?

Representative MIKULSKI. Well, Senator, my response to that is that, No. 1, we are not reimbursing them for their time. We are reimbursing them for their out-of-pocket expenses. There is a precedence for that within the Federal Government in the way we reimburse those wonderful volunteers who work for CAB and the Coast Guard Auxiliary for their fuel expenses because that is the only way they can volunteer.

Second, one of the things that also emerges is that many volunteers really are on fixed incomes themselves. And the Meals on Wheels program in Baltimore, the average volunteer is over the age of 60, him or herself. And what we are talking about is reimbursing for expenses and not paying them for their time, which means we are not renting volunteers for their services, we are only reimbursing them for their out-of-pocket expenses.

And, Senator, I think maybe that would be a good argument when gas was 30 cents a gallon. When it hit 50, I think the argument got a little bit more shaky. I think now that it is up to $1.30 a gallon, of which we even posed an even higher gas tax on the volunteers to rebuild America's infrastructure, I think that argument just isn't valid any more.

Senator ARMSTRONG. Well, I certainly agree with your characterization of it. And, of course, all we are really permitting people to do in this instance is to deduct this from the computation of their tax. It isn't really a reimbursement in the sense that, for example, a salesman that might go to call on a hospital to sell medical supplies would actually be reimbursed for his expenses by his employer. We are just saying that a candy striper or some of the others that you mentioned ought to be able to take a tax deduction for a reasonable amount. And I understand that this mileage amount has only been raised twice in all the time it has been on the books. And so it is way beyond what is fair already. It has fallen far behind the rate of inflation.

Representative MIKULSKI. Well, that is exactly right, Senator. And you know, a volunteer undertakes not only gasoline expenses, but substantial insurance expenses on their own as they deliver meals or as they drive handicapped or ill people to needed services. One of the important services volunteers now do is drive people who have no other means to their chemotherapy, and cancer, and other life support mechanisms. So, yes, I would agree with your rationale as well.

Senator ARMSTRONG. I don't want to put you on the spot about it, but do you have any sense of what the sympathy of the House would be for legislation of this type?

Representative MIKULSKI. Mr. Armstrong, I believe that the House would pass such legislation if it could be brought before it. In the last session of the Congress we had over 100 cosponsors. And I believe we could up that even more.

In all candor to you, Senator, I am not as equally as optimistic about the Ways and Means Committee or the leadership on the Ways and Means Committee. We find that we can move tax deductions for megacorporations a lot easier than we can move mileage deductions for volunteers. But we find that that is true of any humanitarian orientation in the Tax Code.

However, the organizations who back this legislation I know are creating a major drive in the House, and we feel that when the House comes up with the new tax package, to begin, this will not stand on its own, but we could have a better opportunity at it. And I think also the groups will now be focusing more attention on it, and therefore, the Congress. You know, when those volunteers start-I don't think people realize how many people volunteer, Senator. There is a myth that somehow or another the volunteer is a rich, affluent woman, usually over the age of 48, who, when she is not gawking over her trust fund, comes out and does good. We don't realize the thousands, even millions, of people who volunteer at all income levels. When those veterans start writing for the volunteer mileage bill, and other groups in our society, I think the House will pay more attention to us.

Senator ARMSTRONG. You know, this isn't the time and place to get into it, and I don't want to take it too far afield, but I really share your enthusiasm for volunteers, not only for the literal value of the services they provide which are so urgently needed by many parts of our society, but more than that for the quality and the spirit that they bring to the communities. And I have seen so many specific instances in my own State of how the quality of life is enhanced for the whole community because of this outpouring of interest and concern and affection by volunteers who get involved in local community projects. And you can't measure that in dollars; it goes far beyond that.

Representative MIKULSKI. Right.

Senator ARMSTRONG. Well, I'll say the same thing to you that I did to Bill Archer. If you can get this included in a package from the House, I will fight for it over here. And when we are packaging up some things in the Finance Committee I will see if I can get it added to the list. I think there is substantial interest in this issue here in the Senate. And when we see a vehicle moving, I will try and get this aboard. Thank you very much for coming.

Representative MIKULSKI. Thank you very much, Senator. And thank you for your cosponsorship.

Senator ARMSTRONG. We are now pleased to welcome and invite the testimony of Mr. Ronald A. Pearlman, Deputy Assistant Secretary for Tax Policy from the Treasury Department. Mr. Secretary, we welcome you, and I hope that you will share the enthusiasm of our other witnesses for the proposals that are before the committee.

STATEMENT OF HON. RONALD A. PEARLMAN, DEPUTY ASSISTANT SECRETARY FOR TAX POLICY, DEPARTMENT OF THE TREASURY, WASHINGTON, D.C.

Mr. PEARLMAN. Mr. Chairman, it is a pleasure to be here. Thank you very much. My statement is rather lengthy and I am not going to bore you with it. We will submit it in its entirety, and I will try to summarize our views on each of these five bills before you.

Senate bill 1600, the capital gain indexing provision, would add to the Internal Revenue Code a new provision designed to prevent the taxation of inflationary increases in the dollar value of certain qualifying property. I think it is important, because of our evaluation of this bill, to point out that it is limited to only certain property, certain common stock and certain real property. For example, tangible personal property would not be subject to indexing.

We recognize and indeed are sympathetic to the argument that exempting inflationary gains from income tax is a desirable objective, but, unfortunately, we must oppose Senate bill 1600 based on three major concerns: First, that it is a limited approach to indexing for inflation, which we think will create economic distortions among investors in different types of assets; second, that the bill contributes a rather significant level of complexity to the law; and, third, that we think it would duplicate the effect of provisions that are already in the law to indirectly adjust for inflation.

Senate bill 1600 is a limited proposal. It indexes only certain assets at certain times for certain purposes. This partial indexing necessarily creates inconsistencies between the tax treatment of indexed and nonindexed assets. We think these inconsistencies would cause undue economic distortion. The bill indexes common stock and real property, but no other property. Bonds, tangible personal property, and all other property would be subject to taxation without regard to inflation. However, the measurement of gain or loss on the disposition of these other types of property is affected by inflation just as much as inflation affects gain or loss on common stock and real property.

The only way to really deal with this problem is to index all assets. When you don't index all assets you create a mismeasurement of income when you compare different types of property.

The bill also introduces a mismeasurement when you look at qualifying property that is leveraged. Although a debtor benefits as inflation reduces the real burden of debt, and although a creditor is detrimented as inflation reduces the amount of repayment, Senate bill 1600 disregards the effect of inflation on both the borrower and the creditor.

We think Senate bill 1600 is rather significantly complicated. The best example is the bill's treatment of conduit entities, namely, regulated investment companies, real estate investment trusts, and common trust funds. Here the bill splits ownership interests in these entities into an indexed portion and a nonindexed portion in proportion to the ratio of the qualified property these entities own to the nonqualified property, and then requires that these calculations be done on a monthly basis. Therefore, if an investor in a mutual fund, for example, owns stocks and bonds, sells his interest after owning the investment in the mutual fund for 10

years, he would be required to make 120 separate inflation adjustments to determine his tax on sale.

The distortions and complexity that would result from Senate bill 1600 are particularly troubling to us since current law does contain some provisions that soften the effect of inflation. The inflation adjustment would duplicate, for example, the approximate adjustment provided in current law by the preferential tax treatment of capital gains. As you know, noncorporate taxpayers currently are entitled to deduct 60 percent of their net capital gain in determining taxable income, and corporate taxpayers are entitled to a favorable 28-percent rate on capital gains.

Moreover, in the case of depreciable real property, the bill would duplicate to some extent the approximate inflation adjustment provided by ACRS.

We recognize the importance of trying to deal with the problem of inflation in the tax system. Unfortunately, we think Senate bill 1600 just addresses part of the problem, and that only a comprehensive solution to the inflation problem that indexes all assets and all liabilities for all purposes, including depreciation, can avoid the distortion and duplication inherent in any limited approach. Unfortunately, full indexation would substantially increase complexity in a tax system which is already criticized as being too complex. Consequently, we cannot recommend at this time indexing of basis as a solution to the problem of income mismeasurement resulting from inflation.

I do want to note that we do not think that our objection to Senate bill 1600 is inconsistent with our support of the rules enacted in ERTA relating to indexing tax brackets. The ERTA rules apply across the board and will not create economic distortions. Bracket indexing is simple, as it merely requires the IRS to make changes in the tax tables. We think the ERTA rules are sound fiscal policy.

I would like now to turn to Senate bill 1579, which deals with the increase in the standard mileage rates for charitable contributions. We acknowledge that a reasonable argument can be made for using the same mileage rate to measure the cost of using an automobile for charitable purposes as is used when using an automobile for business purposes. On the other hand, we think there are sound reasons for the different rates used under current law. Allowing the lower mileage rate for charitable purposes reflects the longstanding position that the only deductible expenses eligible for the charitable deduction are so-called out-of-pocket expenses. That is, under current law, the administrative position is that no deduction is allowed for a proportionate share of maintenance, general repairs, depreciation or fixed costs, such as insurance or registration fees. And there are several reasons, in fact, for this position. First, section 170 of the code requires that a contribution be paid to or for the use of a qualifying charity. Fixed or general expenses which would be incurred without regard to whether the vehicle were used for charitable purposes cannot be said to be paid to or for the use of the charity. Second, it is difficult to identify and quantify the amount of the indirect cost. And, third, it is difficult always to insure compliance in this area, even under current rules. And to

allow the deduction for these indirect costs would simply complicate the problem.

I would note also that the rationale underlying these limitations applies not only to the use of personal automobiles but to other problems. For example, there is a longstanding position that the rent-free use of nonbusiness real estate is not deductible for purposes of calculating the charitable contribution. Thus, mileage for automobiles are not treated inconsistently. In all cases, it is the position that fixed costs, such as depreciation, insurance, maintenance, and repairs, are not deductible.

We think that the current rules provide a proper measure of the charitable deduction. In most cases, the current rate is adequate to cover the incremental costs attributable to rendering a charitable service. And I think it is important to point out that if a taxpayer thinks that the standard mileage rate is inadequate to cover his actual expenses for gas and oil, the taxpayer is always eligible to show actual out-of-pocket costs to document those costs. I think much of the sympathy for this bill may well be coming from the fact that escalation and fuel costs might support an argument that the current mileage reimbursement rate is too long. And I would point out that if a taxpayer wishes to keep accurate records and provide actual information on fuel costs, then those actual fuel costs are deductible under current law, and the taxpayer simply will not, in that case, use the mileage rate.

Senate bill 108 provides certain tax incentives for postsecondary vocational educational programs. Section 1 of Senate bill 108 would allow a taxpayer a larger deduction in the case of contributions of inventory or certain other ordinary income property-which is tangible personal property, of course-to a public community college or public technical institution or other institutions of higher education if substantially all of the use of the property is for the training of students enrolled in a postsecondary vocational educational program.

We are opposed to section 1 of Senate bill 108. The bill would create a new open-ended Federal program funded by the Treasury but administered by private taxpayers to place equipment in schools for use in postsecondary vocational programs. The donor would decide both the property to contribute and the institutions to which the contributions would be made. But the direct tax benefit available to the donor would shift most, or all of the cost, of the gift to the Federal Government.

We believe there are sound policy reasons underlying the general rule that the deduction for gifts of ordinary income property should be limited to the taxpayer's basis in the property contributed. The bill would allocate resources to a particular form of education at a time of general fiscal restraints without a formal determination by Congress of whether this program is preferable to other worthy programs that cannot be funded.

Section 2 of the bill provides that taxpayers would be given a $100 tax credit for each postsecondary vocational training course taught by a qualified teaching employee of the taxpayer during the year. We likewise oppose section 2 of Senate bill 108. As in the case of section 1, section 2 would create a new subsidy for vocational education at a time when fiscal restraint requires cutbacks in