more than other products, perhaps because they prevent deaths or help people with severe disabilities, then the supply of such drugs provided by the private market might be much smaller than the optional amount, and a case for a subsidy could be made. The credit equals 50 percent of qualified clinical testing expenses, and provides a subsidy for one aspect of the process of bringing a drug to market. By reducing the cost of making the drug available, the expected profitability of the drug is increased, making it more likely that a firm will undertake the necessary investment in research and development of these drugs, despite the small potential market. Efficiency issues The efficiency of the orphan drug program can be evaluated on at least two levels. First, one could determine the cost, both government and private, of developing the drugs per life saved or per life improved. Then one could compare this figure to the maximum that society would pay to save or improve a life. 17 This comparison would provide an indication of the cost effectiveness of the credit. A second analysis could address whether the credit is itself too generous, providing a larger subsidy to firms or individuals (if the subsidy is reflected in the price) than would be necessary to encourage the development of the orphan drugs. This second analysis would compare the amount of orphan drug development that occurs with the present-law credit to the amounts that would occur with various credit levels (including zero). The appropriate credit would provide just enough of a subsidy so that the socially optimal number of orphan drugs is produced. In general, drug companies can be expected to develop those drugs that yield the highest expected after-tax profits. These are not necessarily the drugs with the highest social value. A tax credit available for all qualifying expenses permits the firm developing the drug to determine which research projects to pursue, based on the available subsidy for qualified testing expenses. In contrast, a program that directly subsidizes the cost of testing specific orphan drugs may better target benefits to those drugs that have the highest social value. Some commentators have called for a recapture of the tax subsidies provided under the orphan drug tax credit when the recipient firm develops a drug that is unusually profitable. This recapture would treat a company's orphan drug activity much like a regulated utility, where an upper bound is put on the allowable rate of return for certain investments. Reducing the potential profits of firms that successfully market orphan drugs would reduce the incentive of firms to develop and test these drugs. However, this reduced incentive could be offset by an increase in the value of the credit. It is possible that the combination of a higher credit and certain recapture rules would be better able to target the development of drugs that would not be developed in the private market. 17 While some people may hesitate to address the issue of the value of a life, there is some amount of resources that society would not be willing to pay in order to save lives, although that amount may be hard to determine with precision. 4. Contributions of publicly traded stock to private foundations (sec. 170(e)(5) of the Code) Present Law In computing taxable income, a taxpayer who itemizes deductions generally is allowed to deduct the fair market value of property contributed to a charitable organization. 18 However, in the case of a charitable contribution of short-term gain, inventory, or other ordinary income property, the amount of the deduction is limited to the taxpayer's basis in the property. In the case of a charitable contribution of tangible personal property, a taxpayer's deduction is limited to the adjusted basis in such property if the use by the recipient charitable organization is unrelated to the organization's tax-exempt purpose (Čode sec. 170(e)(1)(B)(i)). 19 In cases involving contributions to a private foundation (other than certain private operating foundations), the amount of the deduction is limited to taxpayer's basis in the property (sec. 170(e)(1)(B)(ii)). However, under a special rule contained in section 170(e)(5), taxpayers were allowed a deduction equal to the fair market value of "qualified appreciated stock" contributed to a private foundation prior to January 1, 1995. Qualified appreciated stock was defined as any stock of a corporation for which (as of the date of contribution) market quotations are readily available on an established securities market and which is capital gain property. The fair-market-value deduction for qualified appreciated stock donated to a private foundation applied only to the extent that the cumulative aggregate amount of donations made by the donor to one or more private foundations of stock in a particular corporation did not exceed 10 percent in value of the outstanding stock of that corporation. For this purpose, an individual was treated as making all contributions that were made by any member of the individual's family (as defined in Code sec. 267(c)(4)). Legislative Background The special rule for gifts of publicly traded stock to private foundation (i.e., sec. 170(e)(5)) was enacted as part of the Deficit Reduction Act of 1984, effective for donations made after July 18, 1984, and prior to January 1, 1995. Analysis Under present law, gifts of stock to public charities entitle the donor to a deduction in the amount of the fair market value of the stock. Therefore, the expiration of section 170(e)(5) raises the ques 18 The amount of the deduction allowable for a taxable year with respect to a charitable contribution may be reduced depending on the type of property contributed, the type of charitable organization to which the property is contributed, and the income of the taxpayer (Code secs. 170(b) and 170(e)). 19 As part of the Omnibus Budget Reconciliation Act of 1993, Congress eliminated the treatment of contributions of appreciated property (real, personal, and intangible) as a tax preference for alternative minimum tax (AMT) purposes. Thus, if a taxpayer makes a gift to charity of property (other than short-term gain, inventory, or other ordinary income property, or gifts to private foundations) that is real property, intangible property or tangible personal property the use of which is related to the donee's tax-exempt purpose, the taxpayer is allowed to claim the same fair-market-value deduction for both regular tax and AMT purposes (subject to presentlaw percentage limitations). tion whether it is appropriate to distinguish for tax purposes gifts of stock to private foundations from gifts of stock to public charities. If section 170(e)(5) is not reinstated, then taxpayers with appreciated stock will have an added incentive to make gifts of such stock to a public charity rather than making gifts to a private foundation. In the Tax Reform Act of 1996, ("1996 Act") Congress adopted the section 170(e) rules to limit the deduction to the amount of a taxpayer's basis in donated property in cases of certain gifts of property to public charities (e.g., property the use of which is unrelated to the charity's function), and all gifts of property to private foundations. Gifts of appreciated property were a concern, because such gifts produced potential tax benefits significantly greater than those available with respect to cash contributions. At the same time, private foundations were viewed as presenting potential tax compliance problems compared to public charities, because the former are often controlled by a small group of individuals (sometimes the same individuals who control a corporation the stock of which is donated to the foundation). The limitation imposed regarding all gifts of property to private foundations paralleled the rules adopted for some gifts of property to public charities, but was also part of a number of special rules enacted to govern private foundations in particular. As part of the 1969 Act, Congress also adopted provisions to impose excise tax penalties on private foundations that fail to make a required amount of grants or other distributions for charitable purposes, or that engage in certain prohibited selfdealing transactions with insiders. Since 1969, compliance with tax laws by private foundations generally is considered to have improved. In 1984, therefore, Congress liberalized the charitable contribution rules governing private foundations by adopting section 170(e)(5), which applied to only donations of publicly traded stock and included other limitations designed to minimize the potential for abuse, including overvaluations. If, as most observers believe, private foundations generally now are at least as compliant with tax laws as are public charities, and assuming that the minimum distribution requirements for private foundations are adequate to ensure that donations received enter the charitable stream, there may be little reason to treat gifts to private foundations less favorably than gifts to public charities, particularly in cases involving assets (such as publicly traded stock) that generally do not present valuation problems. With respect to charitable gifts of appreciated property in general, any tax deduction or credit reduces the price of an activity that receives the tax incentive. For example, for a taxpayer in the 36-percent tax bracket, a $100 cash gift to charity reduces the taxpayer's taxable income by $100 and thereby reduces tax liability by $36. As a consequence, the $100 cash gift to charity reduces the taxpayer's after-tax income by only $64. In such a case, economists would say that the "price of giving" $100 cash to charity is $64, because by making the gift the taxpayer gives up only $64 of other possible consumption. With contributions to charity of appreciated property, the cost of giving may be even lower. Because capital gains that are unrealized generally go untaxed (and because a gift to charity is not considered a realization event), if a fair market value deduction is allowed for a donation of capital gain property, the price of giving $100 worth of appreciated property may be as low as $36.20 In principle, a lower price of giving should result in more charitable giving. The amount of charitable giving that results from lowering the price of giving determines the efficiency of the tax deductions. If taxpayers do not increase their charitable giving significantly in response to a charitable contribution deduction, the revenue lost to the government because of the tax incentive may exceed the benefits of additional contributions that flow to charitable organizations as a result of the deduction. Economists have not reached a consensus as to whether the deduction for charitable donations is efficient in the sense that the cost to the government in lost revenue is more than offset by additional funds flowing to charitable organizations.21 The aggregate data on charitable donations also present a mixed picture of the effect of tax deductions on gifts of appreciated property. Although gifts of appreciated property substantially declined after enactment of the Tax Reform Act of 1986, the total value of gifts to charity has continued to grow since that time, despite the fact that the reduction in marginal tax rates should have reduced the incentive to give. Thus, to the extent that gifts of appreciated property have declined, the decline has been largely offset by increases in cash gifts. 20 This example assumes that the property has a basis of zero and is computed as follows: $100 minus $28 (tax avoided from non-recognition of built-in capital gain) minus $36 (tax saved from deduction for fair market value) equals $36. This "price of giving" figure assumes that the taxpayer would sell the appreciated property (and pay tax on the built-in gain) in the same year of the donation if the property were not given to charity. However, a higher "price of giving" would be derived if it is assumed that, had the taxpayer not donated the property, he would have retained the asset until death (and obtained a step-up in basis) or obtained benefits of deferral of tax by selling the asset in a later year. This example does not take into account the benefit to the taxpayer of being allowed a deduction for charitable contributions for State income tax purposes, which would further reduce the effective price of giving. 21 See Charles T. Clotfelter, Federal Tax and Charitable Giving, (Chicago: University of Chicago Press) 1985, for a comprehensive review of this literature. A review of more recent empirical investigations is found in Kevin S. Barrett, "Panel-Data Estimates of Charitable Giving: A Synthesis of Techniques," 44 National Tax Journal, Sept. 1991, at 365-381. A recent empirical investigation of individual giving concludes that average contributions increased during the 1980s despite tax changes that generally made it less favorable to give to charity. The study found that corporate giving appeared lower than might have been predicted. See Gerald E. Auten, James M. Cilke, William C. Randolph, "The Effects of Tax Reform on Charitable Contributions," 45 National Tax Journal, Sept. 1992, at 267-290. 5. FUTA exemption for temporary alien agricultural workers (sec. 3306(c)(1) of the Code) Prior Law Generally, Federal Unemployment Tax ("FUTA") is imposed on farm operators who (1) employ 10 or more agricultural workers for some portion of each of 20 different days, each day being in a dif ferent calendar week or (2) have a quarterly payroll for agricultural services of at least $20,000. An exclusion from FUTA was provided, however, for labor performed by an alien admitted to the United States to perform agricultural labor under sections 214(c) and 101(a)(15)(H) of the Immigration and Nationality Act. This exclusion was effective for labor performed before January 1, 1995. For these purposes, the term agricultural labor generally has the same meaning (except for certain cooperative organizations) as used for FICA tax purposes. Legislative Background The Unemployment Compensation Amendments of 1976 provided the exclusion for certain agricultural labor performed before January 1, 1980. The Unemployment Compensation Amendments of 1978 extended the exclusion to labor performed before January 1, 1982. The Tax Equity and Fiscal Responsibility Act of 1982 extended the exclusion to labor performed before January 1, 1984. The Federal Supplemental Compensation Amendments of 1983 extended the exclusion to labor performed before January 1, 1986. The Omnibus Budget Reconciliation Act of 1985 extended the exclusion to labor performed before January 1, 1988. The Alien Farmworkers Tax Exclusion Act of 1986 extended the exclusion to labor performed before January 1, 1993. Most recently, the Unemployment Compensation Amendments of 1992 extended the exclusion to labor performed before January 1, 1995. Analysis Under prior law, the wages of alien agricultural workers were not subject to FUTA taxes, and the individuals received no benefits under the Federal Unemployment Tax Act should they become unemployed. While FUTA taxes are imposed on employers, it has been long understood that the individuals who are liable for making tax payments to the Government (in this instance, the employer) may not be the ones burdened by a tax. Instead, the incidence of the tax will depend upon the conditions of supply and demand in the market. Economists conclude that the burden of payroll taxes, even if nominally paid by employers, generally is borne by employees in the form of lower wages. This conclusion is based on the fact that payroll taxes are broad based, and on the evidence indicating that aggregate labor supply is not very responsive (i.e., has a low supply elasticity) to changes in net wage rates. This might suggest that eliminating FUTA taxes with respect to aliens working in the agricultural sector would lead to an increase in cash wages for such aliens, with the total labor costs of employers (wage and payroll tax payments) remaining unchanged. However, the supply of labor to |