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70–976—PDF 2010

S. HRG. 111–1107 

TAX REFORM: HISTORICAL TRENDS IN 

INCOME AND REVENUE 

HEARING 

BEFORE THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

DECEMBER 2, 2010 

( 

Printed for the use of the Committee on Finance 

COMMITTEE ON FINANCE 

MAX BAUCUS, Montana, Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

KENT CONRAD, North Dakota 

JEFF BINGAMAN, New Mexico 

JOHN F. KERRY, Massachusetts 

BLANCHE L. LINCOLN, Arkansas 

RON WYDEN, Oregon 

CHARLES E. SCHUMER, New York 

DEBBIE STABENOW, Michigan 

MARIA CANTWELL, Washington 

BILL NELSON, Florida 

ROBERT MENENDEZ, New Jersey 

THOMAS R. CARPER, Delaware 

CHUCK GRASSLEY, Iowa 

ORRIN G. HATCH, Utah 

OLYMPIA J. SNOWE, Maine 

JON KYL, Arizona 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

PAT ROBERTS, Kansas 

JOHN ENSIGN, Nevada 

MICHAEL B. ENZI, Wyoming 

JOHN CORNYN, Texas 

RUSSELL SULLIVAN, Staff Director 

KOLAN DAVIS, Republican Staff Director and Chief Counsel 

(II) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Baucus, Hon. Max, a U.S. Senator from Montana, chairman, Committee 

on Finance ............................................................................................................ 1 

Grassley, Hon. Chuck, a U.S. Senator from Iowa ................................................. 3 

WITNESSES 

Elmendorf, Dr. Douglas, Director, Congressional Budget Office, Washington, 

DC .......................................................................................................................... 5 

Barthold, Dr. Thomas A., Chief of Staff, Joint Committee on Taxation, Washington, DC ............................................................................................................. 8 

Mazur, Dr. Mark J., Deputy Assistant Secretary, Tax Analysis, Department 

of the Treasury, Washington, DC ....................................................................... 10 

ALPHABETICAL LISTING AND APPENDIX MATERIAL 

Barthold, Dr. Thomas A.: 

Testimony .......................................................................................................... 8 

Prepared statement .......................................................................................... 31 

Responses to questions from committee members ......................................... 105 

Baucus, Hon. Max: 

Testimony .......................................................................................................... 1 

Prepared statement .......................................................................................... 129 

Elmendorf, Dr. Douglas: 

Testimony .......................................................................................................... 5 

Prepared statement .......................................................................................... 131 

Responses to questions from committee members ......................................... 159 

Grassley, Hon. Chuck: 

Testimony .......................................................................................................... 3 

Prepared statement .......................................................................................... 178 

Mazur, Dr. Mark J.: 

Testimony .......................................................................................................... 10 

Prepared statement .......................................................................................... 181 

(III) 

(1) 

TAX REFORM: HISTORICAL TRENDS IN 

INCOME AND REVENUE 

THURSDAY, DECEMBER 2, 2010 

U.S. SENATE, COMMITTEE ON FINANCE, Washington, DC. 

The hearing was convened, pursuant to notice, at 10:07 a.m., in 

room SD–215, Dirksen Senate Office Building, Hon. Max Baucus 

(chairman of the committee) presiding. 

Present: Senators Conrad, Bingaman, Wyden, Schumer, Nelson, 

Menendez, Grassley, Hatch, Snowe, and Enzi. 

Also present: Democratic Staff: Bill Dauster, Deputy Staff Director and General Counsel; Lily Batchelder, Chief Tax Counsel; John 

Merrick, Tax Counsel; Mary Baker, Detailee; Andrew Fishburn, 

Detailee; and Ryan Abraham, Professional Staff. Republican Staff: 

Mark Prater, Deputy Chief of Staff and Chief Tax Counsel; and 

Tony Coughlin, Tax Counsel. 

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR 

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE 

The CHAIRMAN. The hearing will come to order. 

A tax system expresses a society’s values. America is always 

changing; that is one of our strengths. That change also means 

that periodically we need to consider whether our tax system continues to express the values that we want to put first. 

To consider where we want our tax system to go, we need to understand where we are and understand where we have been. In 

September, the committee kicked off a series of hearings on tax reform. We examined the environment that produced the 1986 tax reform. Today, we look at historical trends in income and in taxes. 

This will give us a useful background as we roll up our sleeves for 

tax reform. 

First, we need to examine where Federal revenue comes from. 

The composition of Federal revenue has changed significantly since 

World War II. As a percentage of total revenue, Social Security 

taxes have increased and corporate and excise taxes have decreased. 

For example, in 1950, corporate income taxes provided 30 percent 

of Federal revenue; by 2009, they made up only 7 percent. In the 

1950s, excise taxes produced 19 percent of Federal revenue, and by 

2007 they comprised only 3 percent. Over the same period, social 

insurance taxes like Social Security and Medicare taxes more than 

quadrupled. In 1950, they provided about 10 percent of Federal receipts; by 2009, they generated 42 percent. 

2 

Why has the composition of Federal revenues changed so dramatically? Should we be concerned that the share of revenue raised 

by the corporate income tax has declined by more than 75 percent? 

Is that a result of an increasingly global economy? Is it because the 

corporate tax base is too narrow? Or is it linked to the fact that 

the share of business income, subject to the corporate income tax, 

as opposed to the share of tax on a pass-through basis, has fallen 

from about 70 percent to about 43 percent over the past quarter 

of a century? 

Is it a cause for concern that fewer businesses are structuring 

themselves as corporations? Did more businesses structure themselves as corporations—I am referring to C corporations—in the 

past because corporations were used as tax shelters, or was it because we now tax corporations too heavily? Answers to questions 

like these will help us know where we are going on corporate tax 

reform. 

Second, we need to understand the distribution of income in Federal taxes. In 1980, the richest 1 percent of Americans received 

about 9 percent of total income; by 2006, the share more than doubled, to about 19 percent. Meanwhile, the share of total income received by the 20 percent of households with the lowest incomes fell 

from about 6 percent to about 4 percent. 

Over this period, average tax rates fell for all households, including the richest 1 percent. The share of Federal taxes paid by the 

top 1 percent grew, but this group’s share of income grew even faster. As a result, over the past quarter of a century, the share of 

after-tax income received by the richest 1 percent has doubled, 

from about 8 percent to 16 percent. Meanwhile, the share of aftertax income declined for almost all other households. For example, 

the share of the middle fifth of taxpayers fell from about 16 percent 

to 14 percent. 

Why are these trends occurring? Are highly paid workers working harder relative to other workers than they did in the past, or 

are changes in the economy failing to benefit low- and middleincome workers? Has the tax code kept up with these broad 

changes in the economy? We need to understand how tax burdens 

are allocated and how they have been allocated in the past. 

Third, we need to look at how America compares with our global 

competitors. We need to have a tax code that encourages companies 

to locate and grow in America. We need to help to create American 

jobs. We need to ensure that America maintains our global competitiveness, enhances it, and increases it. American companies 

will win when competing with foreign companies, provided they 

compete on a level playing field. We also need to ensure that the 

tax code promotes the growth of our economy and the creation of 

jobs. 

I often hear that we need to change the tax code to level the 

playing field for American companies. Today we will ask how our 

tax system compares with our major competitors. 

So let us consider the way that the American economy has 

changed, let us think about whether we need to change our tax system as well, and let us seek to ensure that our tax system expresses the values that we as a society want to put first. 

3 

[The prepared statement of Chairman Baucus appears in the appendix.] 

The CHAIRMAN. Senator Grassley? 

OPENING STATEMENT OF HON. CHUCK GRASSLEY, 

A U.S. SENATOR FROM IOWA 

Senator GRASSLEY. Thank you, Mr. Chairman, for this very important hearing. 

With so many extremely important tax matters before Congress, 

it is good to take a step back and think about tax policy broadly. 

When I use the term ‘‘tax reform,’’ I mean that term to be revenueneutral. Tax reform, to me, means a restructuring of the tax code 

so as to decrease inefficiencies and decrease complexities. It does 

not mean a grab of more revenue by the Federal Government. So 

revenue neutrality means setting a target of revenue that ties to 

current tax policy. 

Why do we not like high taxes? One is that the economy is growing globally outward. The Fortune 500 is no longer almost completely comprised of U.S. companies. U.S. companies now must 

compete with foreign companies. Thus, if average tax rates that 

U.S.-headquartered companies are subject to are higher than the 

average tax rates of foreign-headquartered companies, we should 

not be surprised to find that fewer and fewer global businesses are 

headquartered in the United States. 

Furthermore, if the marginal tax rate that a U.S. business has 

is higher than that of a foreign business, we would find that the 

cost of capital for U.S. businesses would be higher than for foreign 

businesses, obviously putting the U.S. businesses at a competitive 

disadvantage. 

From those conclusions regarding America’s position in the global economy, it follows that efforts to reduce complexity and tax burden on flow-through businesses need to be enhanced, not reversed. 

Most of the business growth since the 1986 Tax Act has been in 

the flow-through sector; raising marginal rates and applying complex business tax rules to this sector will retard that growth. Not 

only can high taxes fund a too-large Federal Government, but also 

they may harm the private sector and make the free market not 

so free. 

Income taxes create a disincentive from earning taxable income, 

thus distorting decision-making and stifling the economy. I believe 

this to be true, no matter what the level of taxation is. Obviously 

some minimum level of revenue is necessary for the Federal Government, and so some minimum level of taxation is necessary. 

But to raise a given amount of revenue, there are various harmful ways to raise it. On the other hand, there are ways that only 

cause minimal harm to the free market. Statistics show that the 

average tax rate is, for a given set of taxpayers, important. Even 

more important, though, than the average tax rate are the marginal tax rates. 

Marginal tax rates show what a taxpayer will pay on the next 

dollar of income. Most decisions are made on the margin. That is, 

generally taxpayers will not decide, in response to high taxes, to 

simply not work. Admittedly that does happen some, especially in 

the case of a spouse rejoining the workforce. Most people need inVerDate Nov 24 2008 17:22 Dec 02, 2011 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 R:\DOCS\70976.000 TIMD
4 

come, and thus most people need to work. But what is common is 

making the decision whether to do an extra or marginal amount 

more of work to make marginally more income. 

Too high a marginal tax rate can disincentivize work. It is fundamental to understand this, yet back in July of this year this committee actually had a witness who was very okay—yes, okay—with 

the idea of a 90-percent marginal tax rate. He was of the opinion 

that, since such a taxpayer could keep 10 percent of the return on 

his effort, it was still worth his while to make the effort. 

But to me, that is nonsense. If one can only keep 10 cents for 

every dollar of income, a person will probably decide that he does 

not need the additional income after all, and maybe it is just a 

good time to take a vacation. Or instead of earning additional taxable income to, say, hire contractors to build a garage next to your 

house, high marginal tax rates could lead you instead to build the 

garage yourself. 

Let us hypothetically suppose that a flat income tax rate with a 

20-percent tax rate raised sufficient revenue for the government. Of 

course, such a flat rate structure could be made progressive by getting rid of the flat 20-percent rate and having a 10-percent rate for 

taxable income below a certain amount and a 30-percent tax rate 

for taxable income above such amount. 

Note that for people making a low enough income, their marginal 

tax rate would be 10 percent rather than 20 percent. This would 

increase such persons’ incentives to make additional income. However, for higher-income people, they would find their incentive to 

earn more money has gone down. That is, their marginal tax rate 

would no longer be 20 percent, but would be 30 percent. 

So it may seem that the two sets of rate structures somehow net 

out. That is, under the progressive rate structure with tax rates of 

30 percent and 10 percent, some taxpayers have more incentive— 

as compared with a 20-percent flat rate—to make additional income, but others would have less incentive. 

As far as incentive effects to earn additional income, the two rate 

structures may net out, but obviously that is not telling the full 

picture. The full picture is this: many taxpayers who would be in 

the 30-percent tax bracket may have income that they think they 

do not need. They have their needs met without additional income, 

so they may easily decide not to earn more. Of course, for lowerincome workers, they often need the additional money, and so a 

lower marginal rate, 10 percent instead of 20 percent, does not as 

much encourage additional work because they likely already wanted and needed additional income. 

On a related point, on July 14, this committee held a kick-off tax 

reform hearing. At that hearing, I spoke about a taxpayer named 

John, a real-world case, where John had a high marginal rate of 

30 percent, but actually paid no tax at all, and even received a 

small check from the government. That is, John had a high disincentive for making additional income, but the government got no 

more money from John—the worst of both worlds. 

One final word, Mr. Chairman. When it comes to the topic of tax 

reform, we will inevitably hear a lot of statistics. Of course, that 

is good and proper, given the subject matter. However, it is also 

worth keeping in mind what a great conservative leader, Benjamin 

5 

Disraeli, had to say on this topic. He said, ‘‘There are three kinds 

of lies: lies, damned lies, and statistics.’’ That is worth keeping in 

mind, as there are a lot of statistics we will undoubtedly hear on 

tax reform. 

In particular, the United States has changed demographically. 

There are fewer joint filer households, and many more singles and 

heads of households. That demographic change has tended to make 

joint filers look so-called richer than they would otherwise, simply 

because of the mechanics of the measurement. As a result, we get 

a lot of studies showing a growing income cap with no accounting 

for this demographic shift. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

[The prepared statement of Senator Grassley appears in the appendix.] 

The CHAIRMAN. Let us turn to our witnesses. We are very honored to have all three of them here. First, Doug Elmendorf, Director of the Congressional Budget Office. Thank you very much, Dr. 

Elmendorf. Tom Barthold, Chief of Staff for the Joint Committee 

on Taxation. Thank you, Dr. Barthold. Also, Mark Mazur, Deputy 

Assistant Secretary of the Treasury for Tax Analysis. We thank 

you, sir, for also attending. 

Our usual practice, as you all know, is to put your statements 

in the record and for you to summarize them in roughly 5 minutes. 

We will give you a little leeway, but do not take advantage of that. 

[Laughter.] Close to 5, please. 

Dr. Elmendorf? 

STATEMENT OF DR. DOUGLAS ELMENDORF, DIRECTOR, 

CONGRESSIONAL BUDGET OFFICE, WASHINGTON, DC 

Dr. ELMENDORF. Thank you, Chairman Baucus, Senator Grassley, and members of the committee. 

The CHAIRMAN. And I might note, this is a very august panel, 

because all three of you are doctors, so that means you all got 

Ph.Ds. 

Dr. ELMENDORF. As my children would say, not the useful kind 

of doctor. [Laughter.] But we appreciate it nonetheless. 

The CHAIRMAN. It all means you know something. 

Dr. ELMENDORF. My testimony today addresses three issues in 

tax policy: the revenues collected by the Federal Government, how 

taxes affect economic activity, and who bears the burden of the tax 

system. Other aspects of the tax system, such as its complexity, are 

also important but are not included in my testimony. 

Let me summarize the written remarks you have received, beginning with revenues. This picture is the second exhibit from the 

written testimony. Over the past 40 years, Federal revenues have 

ranged from nearly 21 percent of GDP in fiscal year 2000 to less 

than 15 percent in fiscal years 2009 and 2010. 

The CHAIRMAN. If I might, Dr. Elmendorf, I assume that is in 

your materials here. What page? 

Dr. ELMENDORF. Yes. That is Exhibit 2. 

The CHAIRMAN. Two? 

Dr. ELMENDORF. In the prepared testimony, Mr. Chairman, that 

is on page 7, I believe. 

6 

The CHAIRMAN. Seven? 

Dr. ELMENDORF. I am sorry. Six. Page 6. 

The CHAIRMAN. Six? All right. Thank you. I have it. 

Dr. ELMENDORF. So Federal revenues have averaged 18 percent 

of GDP over the past 40 years. Under current law, revenues will 

rise significantly from their recent low relative to GDP as the economy recovers from the recession and the tax reductions enacted in 

2001, 2003, and 2009 expire. 

We project that, under current law, Federal revenues will reach 

21 percent of GDP in fiscal year 2020, just above their peak share 

10 years ago. We also project that, under current law, Federal 

spending will reach nearly 24 percent of GDP in 2020, slightly 

lower than the peak level of almost 25 percent in fiscal year 2009, 

but well above the average of roughly 21 percent over the past 4 

decades. 

Compared with that historical experience, the components of 

Federal spending that are projected to be unusually large relative 

to GDP by 2020 are the expenditures for Social Security, and especially the Federal health programs. Other non-defense spending is 

projected to roughly equal its historical share of GDP, and defense 

spending is projected to be a smaller share of GDP than its average 

over the past 40 years. 

Therefore, even with a projected substantial increase in revenues 

under current law, deficits between 2015 and 2020 will range between 2.5 and 3 percent of GDP. If the Congress extended most or 

all of the 2001 and 2003 tax cuts and made no other changes to 

taxes and spending, revenues would be lower and deficits would be 

significantly larger. 

The CHAIRMAN. I am sorry. So that assumes these tax cuts are 

extended or not extended? 

Dr. ELMENDORF. No. This is based on current law, the rules that 

govern CBO’s baseline. Under current law, the deficit in 2020 

would be about $700 billion. If all of the 2001 and 2003 tax cuts 

were extended and the AMT is indexed to inflation, then the deficit 

would be about twice as large in 2020, about $1.4 trillion. 

The CHAIRMAN. All right. 

Dr. ELMENDORF. Let me turn, next, to the effect of taxes on economic activity. Taxes raise the price of taxed activities and therefore lower the relative price of other activities. In particular, the 

income tax and payroll tax reduce the returns from working, and 

the income tax reduces the returns from saving. One measure of 

the effect of taxes on the returns from working and saving is, as 

Senator Grassley noted, the marginal tax rate, that is, the tax paid 

per dollar of extra earnings or dollar of extra income from savings. 

In this slide, which is Exhibit 4 from the written testimony on 

page 9, the highest marginal income tax rate, the rate that applies 

to the highest tax bracket, was as high as 70 percent as recently 

as 1980, although a lower maximum rate applied to earnings in 

that year. 

Since 1988, the highest marginal income tax rate has ranged between 28 and 39.6 percent. For a representative family of four with 

median income—and this picks up the next slide, Exhibit 5 from 

the testimony—the marginal tax rate on earnings, combining the 

7 

rate for both income and payroll taxes, has remained at about 30 

percent since the mid-1980s. 

Provisions in the tax code can also affect economic activity by 

subsidizing certain types of spending. Revenues foregone because of 

certain special features of the tax code are known as tax expenditures. The two largest tax expenditures—and this now turns to Exhibit 7 on page 12 of the testimony—are the deductions for mortgage interest on owner-occupied residences and the exclusion of 

employers’ contributions for health insurance premiums from the 

individual income tax. 

There are significant corporate tax expenditures as well. Tax expenditures have helped to accomplish various goals, but, because 

they reduce the base on which tax rates apply, tax rates must be 

higher to collect the same amount of revenues that would be collected in the absence of those subsidies. 

Third, let me turn to the tax burden and who bears it. Households generally bear the economic cost, or burden, of the taxes they 

pay directly, but also taxes paid by businesses. One measure of the 

tax burden is the average tax rate, which simply equals taxes paid 

as a share of income. Federal taxes are progressive—this is from 

Exhibit 11 in the prepared testimony on page 17—meaning that 

average Federal tax rates generally rise with income. 

In 2007, households in the bottom fifth, or quintile, of the income 

distribution paid about 4 percent of their income in Federal taxes, 

while the middle quintile paid 14 percent, and the highest quintile 

paid 25 percent. 

Individual income tax, in particular, has average tax rates that 

rise rapidly with income. Payroll taxes have average tax rates that 

vary little across most income groups, but fall for the highest quintile because earnings above a certain threshold are not subject to 

Social Security payroll tax and because earnings represent a smaller share of total income for that highest quintile. 

The average social insurance tax rate is higher than the average 

individual income tax rate for all income groups, except to the 

highest quintile. Between 1979 and 2007, the average tax rate for 

Federal taxes declined for all income groups. The share of taxes 

paid by the top fifth of the population grew sharply between 1979 

and 2007. Almost all of that growth can be attributed to an increase in that group’s share of before-tax income. 

If one turns in the testimony to Exhibit 17, you can see the share 

of total before-tax income and total Federal tax liabilities in 2007. 

In 2007, households in the highest quintile earned 55 percent of 

before-tax income and paid almost 70 percent of Federal taxes. For 

all other quintiles, the share of Federal taxes was less than the 

share of income. 

I will stop there. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Dr. Elmendorf, very, very much. 

[The prepared statement of Dr. Elmendorf appears in the appendix.] 

The CHAIRMAN. Dr. Barthold? 

8 

STATEMENT OF DR. THOMAS A. BARTHOLD, CHIEF OF STAFF, 

JOINT COMMITTEE ON TAXATION, WASHINGTON, DC 

Dr. BARTHOLD. Good morning, Mr. Chairman and Senator Grassley. Your staff asked me to provide a descriptive overview of the 

Federal tax system over the past 35 years, and our staff has provided you with the description of the Federal tax system over that 

period in JCX–51–10, which we offered as our formal testimony. I 

will offer a very brief review. 

The Federal tax system is comprised of five components. Figure 

6, which is on page 69 toward the back of the hearing pamphlet, 

is on the chart over here to my right. We have the individual income tax, we have the employment payroll taxes, we have the corporate income tax, estate and gift taxes, and excise taxes. 

Now, the key elements of any tax, of course, are defining the tax 

base and determining the tax rates, so I will give you just a brief 

review of some of the history of that. We will turn to the next figure, which is our Figure 1 on page 6 of the document. 

What Figure 1 does—it is with respect to the individual income 

tax—is it describes the evolution of the top bracket of the individual income tax over time. So what this figure just captures for 

you is the top marginal tax rate and the entry point in terms of 

real, constant 2010 dollars of income at which that marginal tax 

rate applies. 

In terms of reading the chart, the larger the bubble means a 

greater amount of income. So what you basically see is, since 1975 

to today, that the bubbles have dropped down to the right and gotten smaller, which means that the marginal tax rate for the top tax 

bracket has declined over time and that the entry point of the top 

tax bracket has declined in real-dollar terms. That is the top end. 

Figure 2, which is on page 7, looks at the entry point for taxpayers. Now, remember, we have always had in the individual income tax a standard deduction and personal exemptions which define a zero bracket amount for individuals, and so what this picture 

then does in the same format is say, at what income level, using 

adjusted gross income as the measure, does the first tax bracket 

and the lowest tax rate apply? As you can see, the bubbles in this 

picture, through time, are fairly stable. 

But of course, historically that is not the whole story, because the 

Congress, over the past 35 years, has enacted some significant provisions providing tax credits so that one could, at first calculation, 

be in any one tax bracket, or in particular in the lowest tax bracket, and then be eligible for a tax credit, reducing that tax liability— 

in fact, often reducing that tax liability to zero. 

The prominent tax credits that have been enacted over the past 

35 years are the Earned Income Tax Credit, the Child Tax Credit, 

and most recently, the Making Work Pay Credit. I note those three 

because they are all, in fact, refundable, so the simple picture that 

I have presented in Figure 2, of course, does not really represent 

what is happening in terms of taxes at the lower end of the income 

scale, but it does tell you the entry point and the marginal tax 

rates. 

Now, more generally, the whole trend in the individual income 

tax system is not just about the tax brackets themselves and the 

marginal tax rates, but it keys very importantly on the definition 

9 

of the tax base, an issue that Doug Elmendorf broached just a moment ago. We have had significant changes over the period in both 

directions, both broadening the base and narrowing the base. 

As an example, in terms of broadening the income tax base, we 

have twice included partial inclusions of Social Security benefits. In 

1975, there was no inclusion of Social Security benefits. Since that 

time, we have made two different inclusions of Social Security benefits, increasing the individual income tax base. 

However, in the other direction, over this period we have had a 

growth in pension benefits and pension exclusions, so that many 

workers have seen lower taxable income because they receive from 

their employer pension benefits. We have also both increased and 

then scaled back the individual retirement arrangement provisions, 

which increase and then contract the individual tax base. And of 

course there have also been different limitations in terms of 

itemized deductions, which again help define the individual tax 

base. 

Employment taxes, as noted by the chairman, are the secondmost important component of the Federal tax system. Again, it is 

defined by the base, by tax rates. The FICA base, in real-dollar 

terms, since 1975, has nearly doubled. The HI base, the health 

base, which used to equal the FICA base, has been uncapped over 

the period, so has seen a substantial increase in terms of the dollars that are subject to tax under the payroll taxes. At the same 

time, over the past 35 years, the employee side of the tax rates has 

risen, from 5.85 percent in 1975, to the present day, 7.65 percent. 

The next major component of the Federal tax system: corporate 

income tax. Again, I have presented just a bubble diagram. As you 

can see from the bubbles, the rate is generally down, but the level 

at which the rate applies—— 

The CHAIRMAN. What page is that? 

Dr. BARTHOLD. Oh, I am sorry. That is page 22, Mr. Chairman. 

The CHAIRMAN. Thank you. 

Dr. BARTHOLD. I apologize. 

The CHAIRMAN. Thank you. 

Dr. BARTHOLD. But again, to really understand the changes over 

time, we would have to look at changes in the tax base. This would 

involve various changes in both directions in terms of treatment of 

cost recovery, accounting methods, and there is also the issue of 

the growth of the business income that is reported through flowthrough entities, which the chairman mentioned in his opening 

statements. 

That is my brief description. I am happy to answer any questions 

that the members might have in greater depth, and there is plenty 

of detail that the staff provided in JCX–51–10. 

The CHAIRMAN. Yes. Thank you. There is a lot of detail. 

[The prepared statement of Dr. Barthold appears in the appendix.] 

The CHAIRMAN. All right. 

Dr. Mazur, you are next. Thank you. 

10 

STATEMENT OF DR. MARK J. MAZUR, DEPUTY ASSISTANT SECRETARY, TAX ANALYSIS, DEPARTMENT OF THE TREASURY, 

WASHINGTON, DC 

Dr. MAZUR. Good morning. I would like to thank Chairman Baucus and Ranking Member Grassley for holding this hearing. I believe tax reform is an important topic. I am pleased to be part of 

a thorough consideration of all aspects of undertaking tax reform. 

Today’s topic is historical trends, which provides a backdrop for 

consideration of tax reform. My goal today is to discuss trends and 

patterns that have occurred over the last 3 decades or so to help 

frame how we should view the U.S. tax system as it exists today, 

and how perhaps it should be modified. 

I want to start by making a few points about the overall economy, then I will turn my focus to the U.S. tax system and how it 

has shifted over time. I will try to make a few observations comparing the U.S. system to others around the world, and I will conclude with a few implications for possible future efforts on tax reform. 

With respect to trends in the overall economy, I just want to 

make a half dozen points. First, the U.S. is, and has been, the 

world’s dominating economy, responsible for about a quarter of the 

world’s economic output, while having less than 5 percent of the 

world’s population. 

The second point is that the global economy has become more integrated in recent decades. The trade sector, if you take exports 

plus imports, has grown in the U.S. by about one-fifth over the last 

3 decades, and is growing even more in some emerging countries 

like, say, India. In addition, cross-border investments, say in the 

form of corporate stocks held in other countries’ companies, have 

increased 5-fold or more in the U.S. and in other G–7 countries. 

The third point to make about the overall economy is that the 

pre-tax income distribution in the U.S. has shifted over the past 3 

decades. The chairman talked a little bit about this. An increasing 

share of income is going to the most well-off. The top 1 percent of 

Americans doubled their share of total income from 1980 to 2007, 

and this concentration continues further up the income scale as you 

slice narrower and narrower. 

The fourth point is that the last 3 decades have seen changing 

patterns of business entities. The chairman noted this as well. The 

traditional C corporation, subject to corporate income tax, made up 

about one-sixth of all entities and accounted for 87 percent of all 

receipts in 1980. By 2007, these fractions had changed to less than 

6 percent of all entities and less than two-thirds of all receipts. 

Since 1980, the U.S. Federal budget deficit has also changed 

quite a bit. You saw the CBO director’s charts on this, that budget 

deficits persisted throughout the 1980s, were addressed in the late 

1980s, early 1990s, leading to a budget surplus for a couple of 

years around the turn of the century, and now the Federal Government is facing large budget deficits which need to be addressed in 

the medium and long term. 

The final point to make about the overall economy is the changing pattern of household living arrangements. Ranking Member 

Grassley referred to this a little bit, that there are larger numbers 

11 

of single-parent families and multi-generational households than 

we had seen, say, in 1980 or before. 

Now I would like to turn from the overall economy to changes experienced by the U.S. tax system. One key point is the shifting mix 

of revenues. Dr. Barthold pointed out there has been a shift in the 

share of individual income taxes. They now make up a smaller 

share of overall revenues, as do excise taxes, while social insurance 

taxes that fund Social Security and Medicare have increased over 

time. 

A second point is the changing rate structure. For individual income tax rates, the top rate dropped from 70 percent in 1980 to 35 

percent today. In the corporate area, the maximum statutory rate 

was 46 percent in 1980 and is 35 percent today. But that rate has 

not seen an across-the-board drop since the 1986 Tax Reform Act. 

Over the last 30 years, the Alternative Minimum Tax has shifted 

from a separate tax system that affected a relatively small number 

of taxpayers to one that affects several million taxpayers, and generally not the most well-off taxpayers, nor the ones who make the 

greatest use of tax preferences. The rising size and number of tax 

expenditures has increased over time. In real dollars, this form of 

government support has more than doubled over the past 3 decades. 

Fifth, the tax code has become ever more complex in the past 3 

decades. There have been 30 major tax laws passed since 1980, and 

the changing laws, plus the use of sunsets and phase-outs, has 

made compliance difficult for taxpayers who rely on various features of the tax code, and made tax planning difficult as well. 

Given this, it is no surprise that over half of taxpayers today rely 

on a paid preparer to do their tax return, and only about oneseventh do their returns the old-fashioned way with paper and pencil, perhaps sitting at the dining room table. 

I would like to sum up with just some observations for possible 

tax reform. The U.S. faces this situation from a position of 

strength. We have a strong economy and tax policy choices can 

matter, and we know that, but they are not the dominant force in 

people’s decisions. Tax policy choices matter more at the margin. 

As Senator Grassley said, they can have an effect, but the effects 

tend to be relatively small and, as I said, on the margin. 

Second, Federal budget deficit concerns are likely to lead the call 

to raise additional revenue in the future. An idea of revenueneutral tax reform, that is a big lift. That is hard to do. If you are 

raising revenue as well, it probably increases the challenge of that 

task. 

The third point is, tax policy needs to balance a number of factors: efficiency, equity or fairness, and administrability, as well as 

burden on taxpayers. Simplifying the tax code, as simplicity matters here, makes it easier for taxpayers who want to comply to actually comply with the tax law and makes it easier for the Internal 

Revenue Service to administer the law. Taxing businesses is more 

challenging today than in the past with the rise of flow-through entities and an increasing reliance on intangible assets. 

On the individual tax side, the tax policy must confront the Alternative Minimum Tax, which has really grown in size and scope. 

All these challenges can be dealt with, but it will take wisdom and 

12 

the will to do so. I look forward to working with this committee on 

this important and needed effort. Thank you. I look forward to taking your questions. 

The CHAIRMAN. Thank you, Doctor, very much. 

[The prepared statement of Dr. Mazur appears in the appendix.] 

The CHAIRMAN. I obviously have a lot of questions. Just focus a 

little on the trend, whether there is a reduction proportionately in 

C corporations in the guise of pass-throughs, and the question is 

why? Why has that happened? Has that happened because, say, 

back in 1986 C corporations had a lower tax rate compared with 

the individual rate, and so individuals would shelter some of their 

income in C corporations? That is not the case today, the rates 

have changed so much. Is that one possible reason? 

Or is another possible reason for the rise of LLCs so that proprietors could reduce some of their liability without using the C corporation structure, and also avoid the so-called double taxation? 

But the real question is, why this big shift? It is very remarkable 

that there has been this shift, and I would like to ask each of the 

three of you if you could comment on the reasons why, and so 

what? Is that important or not important? 

Dr. BARTHOLD. I will lead off, Mr. Chairman. Why? I do not 

think there is firm, empirical analysis that explains why. You have 

offered two of the leading candidates for reasons. As you noted, in 

the mid-1970s, the top tax rate on individuals on investment-type 

income was 70 percent, and the top C corporate rate was 46 percent. 

So that gave incentives for people to perhaps leave income in a 

C corporation, even though it would be taxed at a 46-percent rate. 

It was better than having it come out and be taxed at a 70-percent 

rate. It could be deferred, and then it would be possible actually 

to liquidate the C corporation and ultimately get most of that income out tax-free. 

Now the Congress, in response to that sort of, if you want to call 

it stuffing, or just holding of income within a C corporation, did 

enact personal holding company rules and some other anti-abuse 

rules. Now, of course, the 1986 Tax Reform Act lowered the top corporate rate to 34 percent, which is a significant reduction, and lowered individual rates at the same time, but it made it much less 

attractive to keep money within corporations. And also changes in 

terms of the General Utilities doctrine made it harder just to liquidate and get money out of a corporation. 

So one reason is the rate play. Another reason is the legal structure that changed along with the tax law. You also noted that the 

rise, probably beginning in the late 1980s, early 1990s, of State law 

developments in terms of limited liability corporations, made it 

easier to have essentially the same kind of structure taxed as a 

pass-through entity for Federal purposes. 

I think it is probably not just the case that State law changed, 

but also the ability of financiers and the financial markets to aggregate capital for investment outside of a New York Stock Exchange or a NASDAQ or the American Stock Exchange—in other 

words, without having to go public. It became significantly cheaper 

to raise funds for business entities, so the combination of sort of 

financial innovation, or let us just say the increased liquidity in the 

13 

U.S. financial system, combined with the ability to do limited liability partnerships, limited liability corporations, probably affected 

that. 

The CHAIRMAN. My time is expiring. 

Dr. BARTHOLD. I did not mean to filibuster you. I apologize. 

The CHAIRMAN. No problem. No problem. 

Dr. MAZUR. Just to add two points to that. One, I think that the 

State tax law changes actually were a big driver in this, and it became much more acceptable for entities to establish themselves in 

that form and maintain it, and they were able to attract the financing that Dr. Barthold talked about. In addition, there are the 

‘‘check the box’’ rules that basically allow taxpayers to determine 

for themselves how they would like to be taxed, as a pass-through 

or as a corporation. That also has helped. 

The CHAIRMAN. What about the basic question: does it matter? 

So what? Should we be concerned? 

Dr. BARTHOLD. I will jump back in. I mean, the theoretical notion 

is, there have long been tax reformers who have said you should 

integrate completely business taxes with individual taxes and just 

treat it all as income to the owners and then apply whatever rates 

that the Congress thinks are appropriate, and that that would increase efficiency because it would remove double taxation, it would 

remove bias against a C form, so there could be a lot of benefits. 

Now, in the opposite direction, of course, it is a significant 

change in terms of the tax base, so it would mean you would have 

to have different tax rates at the individual level, and there would 

be a lot of trade-offs involved. It is obviously not a bad thing, theoretically, to have people integrating business taxes into the individual tax system themselves. 

The CHAIRMAN. Thanks very much. 

Senator Grassley? 

Senator GRASSLEY. Dr. Mazur, you are the only one here appointed by the President, so I ask you this question. I also ask it 

because, in my opening paragraph, I spoke about tax reform bringing in about the same amount of revenue we get now. Also, because 

the 50-year average of the Gross Domestic Product coming in 

through taxes has been about 18.2 percent. 

Then I am going to quote a very short paragraph that was written during the last campaign, August 14, 2008, by Jason Furman 

and Austan Goolsbee, ‘‘The Obama Tax Plan.’’ It says, ‘‘Overall, 

Senator Obama’s middle-class tax cuts are larger than his partial 

rollbacks for families earning over $250,000, making the proposal 

as a whole a net tax cut and reducing revenues to less than 18.2 

percent of GDP—the level of taxes that prevailed under President 

Reagan.’’ 

So a very simple question: do you think this is still the policy of 

the administration, to end up with about the same amount of taxes 

coming in, about 18.2 percent of GDP, a 50-year average? 

Dr. MAZUR. I think the policy of the administration is to develop 

a revenue stream that supports the services that the Federal Government should deliver to taxpayers, so, whether that is a decision 

by Congress and the administration that the size of government 

should be 18 percent of GDP or some other number, is a different 

matter. 

14 

I think what Dr. Goolsbee and Jason Furman were talking about 

during the campaign was that they were not proposing a broad, 

across-the-board tax increase, but actually were trying to maintain 

some reasonable level of taxation. If you look at where revenues 

are now, they are around 15 percent of GDP. So I think you are 

actually looking at a significant gap between what we are raising 

as a government and what we are promising to pay, or what we 

are paying out in terms of expenditures. Reducing that gap is important to do. 

Senator GRASSLEY. Yes. But you would expect that gap, would 

you not, to be reduced simply because the economy improves. We 

are still in a recession. When the economy improves, you would get 

it back up to 18.2. In fact, under existing tax law, if we did not 

change it at all, it looks like after 10 years we would be at about 

19 percent. 

Dr. MAZUR. Under current law, I think Dr. Elmendorf showed it 

was somewhere around 20 percent by fiscal year 2020. 

Dr. ELMENDORF. Around 21 percent by fiscal year 2020 under 

current law, Senator Grassley. 

Senator GRASSLEY. Right. Yes. 

Dr. MAZUR. That is current law, with the 2001 and 2003 tax cuts 

expired, and so on. 

Senator GRASSLEY. All right. 

So then when I was saying 19 percent, that would be if we would 

extend existing tax policy where it has been the last 10 years, if 

we extended it. 

Dr. ELMENDORF. In particular, our estimate is based on numbers 

from the staff at the Joint Committee on Taxation, that a permanent extension of the expiring 2001 and 2003 tax cuts, combined 

with indexing of the Alternative Minimum Tax, would put revenues at about 19 percent of GDP in 2020. 

Senator GRASSLEY. All right. 

I have a question for Dr. Barthold and Dr. Mazur. There is some 

evidence showing—and you alluded to this, Dr. Mazur, about my 

comment on it—that the top quintile of earners today earns a significantly larger share of the national income than would have 

been the case, pick a year, but I pick 1960. 

In particular, I am interested in knowing how much this reflects 

marriage trends. The Finance Committee had a witness back in 

2007 who pointed out that if two middle quintile income people 

marry each other but still remain at their pre-marital salaries, 

they would then, as a taxpaying unit, be in the top quintile as they 

now would be filing jointly. 

Also, marriage rates have fallen, particularly in lower-income 

people. So share your thoughts about how to interpret the data regarding top quintile income earners earning a larger share of national income today with what it may have been decades ago, making sure that we are accounting for different marriage rates today 

versus 50 years ago. 

Dr. MAZUR. I think generally the distribution tables that we have 

used, and you noted this, do not account for family size or type. 

However, you can adjust for family size, basically looking at per 

capita income, or as CBO does, looking at poverty level multiples 

of income, and you get about the same story, that the distribution 

15 

of pre-tax income has changed over time, with more income going 

to higher-income households. 

Dr. ELMENDORF. Senator Grassley, I can just add that the calculations that we do traditionally of the distribution of the tax burden look at households, so to that extent people who are living in 

one housing unit independent of their official marital status would 

be grouped as a household, and we adjust for household size to reflect the fact that there can be economies of scale in living together. 

But we do not actually have numbers ourselves that are broken 

down by types of filing units in the way that you have asked the 

question. 

Senator GRASSLEY. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

Senator Hatch? 

Senator HATCH. Well, thank you, Mr. Chairman. 

I appreciate all three of you coming. I appreciate the work that 

you do. I have worked with Dr. Elmendorf and Dr. Barthold pretty 

extensively and have a lot of regard for both of you. Dr. Mazur, we 

think very highly of you as well. 

My questions this morning are for all of our witnesses; whoever 

wants to answer first, or second, or third is fine with me. Dr. 

Mazur’s testimony points out that, after 1986, our corporate tax 

rate was relatively low compared with that of other developed nations. Now, since then, however, other countries have cut their corporate tax rates, leaving ours near the highest in the world today— 

in fact, the highest, I think. 

Dr. Mazur further points out that, in terms of revenue raised as 

a percentage of GDP, the U.S. corporate tax rate is about equal to 

the OECD average. Now, do you think global corporations looking 

around the world to invest are concerned whether a country’s corporate tax brings in about the same in terms of GDP as other countries? Do you think they care more about the tax rate that they are 

going to pay? 

Dr. MAZUR. I think actually it is a complex decision. When a 

company is deciding where to locate an investment, they look at 

taxes, but it is not just the maximum statutory tax rate. They look 

at the entire tax system, so the various preferences that are available for investment, various incentives to do activities like hiring, 

R&D, and so on. That is a tax component, but it is even a broader 

decision than that. They look at labor markets, and so on. 

Senator HATCH. I agree with that. There are all kinds of considerations. But I am limiting my comments to the tax world. Let me 

just expand on that. Do you think that our high corporate tax rate, 

when combined with our international tax regime, which is now— 

or soon will be—the only major system that taxes businesses on 

their worldwide income, has anything to do with the fact that the 

U.S. is now home to only 16 of the top 50 corporations in the world, 

whereas in 1980 we had 39 of the top 50 corporations in the world? 

Do you think it has had anything to do with that? 

Dr. MAZUR. I think the effect would be pretty marginal on that. 

Senator HATCH. You actually think that? Then why are we so 

stupid that we are losing all these major corporations, if it is not 

the way we are treating them from a tax standpoint and otherwise? 

16 

Dr. MAZUR. I guess I would say it is not that we are losing these 

corporations, it is that the worldwide economy has become much 

more global than it was, say, in 1980. So larger companies are 

growing in various parts of the world, some in the U.S. and some 

elsewhere. 

Senator HATCH. Do you two agree with that? 

Dr. ELMENDORF. Senator, I would just say, from our perspective, 

we agree that it is the tax rate that corporations face that will affect their decisions, not the overall revenue collected. But as Mark 

says, it is not just the statutory rate, it is also all the features of 

the tax code. 

Senator HATCH. I agree with that. But I hear from these corporations that the tax rate is very, very important to them. The deferral laws are very, very important to them. There are a whole raft 

of other things very important to them as far as the taxing system 

is concerned. I also know corporations that are leaving. I have 

talked to a number of the corporate leaders in this country who 

said, look, if these rates stay the same, we are going to leave. We 

just have to. 

Of course, it is not just because of the corporate tax rate. There 

are a lot of factors in addition that have made it unpleasant to 

really do business in the United States of America. I predict that 

over time, businesses are going to flee California because of the 

high regulatory burdens, and so forth that they place on them. We 

are doing the same thing, to a degree, the way we have operated 

over the last number of years. 

So I do not want to make it so simplistic, but do you believe that 

these higher corporate tax rates are part of the reason then—let 

me be a little more specific—why we are losing some of these businesses? I mean, it used to be that the United States was the preferred place to do business because we are the go-go Nation. Now 

it seems like we are starting to lose that status in this world. 

Dr. ELMENDORF. So, I think, Senator, that corporate tax rates 

and the corporate tax system are a significant factor in business 

decisions. 

Senator HATCH. I hear it all the time. In fact, that is the 

number-one thing they always tell me. Of course it is not the only 

thing that is causing them to leave. Our over-regulatory nature is 

causing this as well. The whole ungodly tax code is causing it. It 

is a lot more than just the rates themselves. But the rates themselves are what I am interested in in these questions. 

Dr. Barthold, do you have any comments on this? 

Dr. BARTHOLD. I do not know if I have anything significant to 

add compared to Mark or Doug. As you have, we are—— 

Senator HATCH. Would you continue—— 

Dr. BARTHOLD. What I was going to add is, there have certainly 

been cases that the Congress is aware of, and it has been quite 

clear, where companies have chosen to invert and become a foreign 

corporation. One of the rationales that they have given their shareholders is that they will be able to increase their after-tax cash 

flow to the shareholders by having a lot of their foreign operations 

not under the U.S. worldwide system. So, I believe that would be 

consistent with the points that you are making. 

17 

The one additional thought that I would add to that is, you had 

noted that the U.S. used to be viewed as the go-go place, as the 

place to do business. In the debate about foreign corporations or 

whether you are a domestic corporation, it does not obviously mean 

that you are not doing business in the United States. So in the inversion situation, it is, where do you claim that you are headquartered? Now, there are a lot of important issues in terms of 

having headquarters, because does headquarters bring skilled jobs 

with it that other sorts of operations do not? 

But it is certainly the case that the U.S. is still a very vibrant 

and desired place for foreign business to be. Foreign auto manufacturers have located in the United States, substantial investments, 

substantial amounts of jobs. They do a substantial amount of their 

research. The question is, would more be done if these were U.S. 

businesses? 

Senator HATCH. Thank you. 

Mr. Chairman, I have to leave, but would it be possible for me 

to ask one more question? 

The CHAIRMAN. Yes. Briefly. 

Senator HATCH. It will be brief. 

You mention that we need to solve this AMT problem that has 

jumped from 155 people to 23–26 million, by some counts. We need 

to solve the Research and Development Tax Credit. Both of them 

should be solved. That should be made permanent so that would 

also help keep businesses. I hope you agree with me on this, or at 

least tell me where you think you are. 

I would get rid of those two problems by making R&D permanent 

and by getting rid of the AMT, even without offsets. Now, the SGR, 

the fix, we do have $500 billion that the Democrats have taken out 

of Medicare, and we have been told that $282 billion of that would 

fix that for the next 10 years, or permanently, really. I think that 

would be an offset that makes sense. 

But would it not be good to do that and to do those things and 

get rid of this awful AMT that is eating us alive, where we have 

to patch it every year and it keeps going up every year and gets 

worse and worse and worse, and just face that problem? Then also 

give our businesses the certainty of having the R&D tax credit that 

Senator Baucus and I have worked our guts out on, and other 

members on this committee over the years, to try to keep our hightech world the best in the world. 

Dr. ELMENDORF. Senator, as you know, CBO does not recommend 

or endorse any particular policy. 

Senator HATCH. I know. 

Dr. ELMENDORF. But I agree, and I think most analysts would 

agree, that greater predictability on the part of households, businesses, physicians, about the nature of the tax rules and spending 

rules that they will face would be an important contributor to their 

ability to plan for the future. 

Dr. MAZUR. Clearly, you are right. On the first two issues, you 

are right where the President is. The President proposed a permanent R&D credit. We are there. 

Senator HATCH. Why do we not do it? 

Dr. MAZUR. The President proposed to index the AMT exemption 

for inflation permanently. We are there. So on those two, I think 

18 

that they would provide the kind of certainty that businesses and 

individuals need. 

The CHAIRMAN. Thank you, Senator. 

Senator HATCH. Thank you. 

The CHAIRMAN. Just one comment. I cannot let it go by. We are 

not re-litigating health care reform, but you said Democrats took 

$500 billion out of Medicare. That is not—— 

Senator HATCH. Well, we did not do it, I will tell you that. 

The CHAIRMAN. If I might continue. 

Senator HATCH. Go ahead. But we did not do it. 

The CHAIRMAN. If I might continue. That leaves the impression— 

incorrect, I might add—that beneficiaries are being cut. That is not 

the case. 

Senator HATCH. Well, it sure as hell is! I mean, what do you 

think the Medicare Advantage program is doing? 

The CHAIRMAN. Core benefits are not cut. I just do not want partisan shots in this committee. 

Senator HATCH. There is a difference, I admit. 

The CHAIRMAN. Other subjects are not before us right now. 

Senator Wyden? 

Senator WYDEN. Thank you, Mr. Chairman. 

Gentlemen, anybody with a television set knows that the Congress is now in the middle of a debate about whether to keep the 

Bush tax cuts for everybody or to have some alternative, perhaps 

for some fraction of the population. 

My question, and I think perhaps for you, Dr. Mazur, and you, 

Dr. Elmendorf—you are welcome to chime in as well, Dr. 

Barthold—would either of the approaches that are being debated 

now not perpetuate what I believe certainly you, Dr. Mazur, and 

you, Dr. Elmendorf, have talked about, and that is a growing ominous trend towards the increasing cost of special interest tax expenditures that distort the incentives a free market economy needs 

to grow? Dr. Mazur? 

Dr. MAZUR. Well, first, if you are talking about the 2001 and 

2003 tax cut extension, that has nothing to do with the tax expenditures. So you are right, it is a separate issue. It does nothing to 

address the growing tax expenditures. As my colleagues pointed 

out, over time they have doubled in real terms over the last 3 decades, so they are separate issues and probably should be handled 

separately. 

Senator WYDEN. All right. 

Dr. Elmendorf, given the fact that this debate does not touch 

what the Fiscal Commission, you, and Dr. Mazur have talked 

about—I thought you made a very good point, where you said the 

fact that we have all these tax expenditures that reduce the income 

on which taxes are levied, means tax rates have to be higher because of tax expenditures. Does this not make the case for having 

tax reform move to the point where it is done sooner rather than 

put off for years and years, given the fact that you all have just 

outlined this ominous trend? Is that not an argument for going to 

tax reform sooner? 

Dr. ELMENDORF. Again, Senator, we do not advocate policies—— 

Senator WYDEN. I am just talking about economics. 

19 

Dr. ELMENDORF [continuing]. But I think it is a widespread view 

among tax experts that the current U.S. tax code does not collect 

revenue in nearly the most efficient available way, and I think it 

is a widespread view among tax experts that, if tax expenditures 

were reigned in in some way, that would enable the government to 

collect the same revenue at lower tax rates, or collect more revenue 

at the given tax rates, and would in either case allow for revenue 

to be collected with less distortion of behavior, and thus in a more 

efficient way. 

Senator WYDEN. Let us talk—and you touched on it in your testimony, Dr. Mazur—about the historical trend towards complexity. 

As far as I am concerned, this system is just insanely complicated. 

To have Americans spending close to 8 billion hours a year filling 

out these forms, nearly 10,000 sections of code, we go through $190 

billion a year just trying to comply with the tax laws, and you, it 

seems to me, note, particularly in the last 30 years, that we are 

on the ascent to yet more complexity. 

In other words, we had less after we did the 1986 tax reform. 

Then shortly after it was passed, we went back on a trend towards 

yet more complexity, more cost, more time, more market distortions. Is that not something policymakers again ought to be looking 

at and saying, we have to move quicker rather than just putting 

it off for years and years more? 

Dr. MAZUR. Well, it is all a balancing act. I think the balancing 

act is, you want to get the appropriate amount of revenues in as 

effective and efficient a way as possible. You want to have a tax 

system that is fair. You want to have one that does not impose incredibly large administrative and other tax burdens on taxpayers. 

So you balance all those things out. And you are right to note that 

1986 was probably the high point over the last, say, 50 years or 

so in terms of reforming the tax system and making it less complex. Since then, the trend has been toward more complexity. 

Senator WYDEN. I thought your point towards the end of your 

written testimony on simplification has to be one of the historical 

trends people pay attention to. Year in, year out, this gets denser, 

it gets thicker. The instruction book, the number of regulations, the 

percentage of individuals filing their tax returns with paid preparers has gone up exponentially just in the last 15 years. 

So whether it is tax expenditures, whether it is complexity on 

count after count, if you look at the relevant measures that we 

need for growth, for fairness, for what the economy needs, it argues 

for moving more quickly rather than just putting this off again for 

years and years while the special interests gather outside this room 

and try to persuade the Finance Committee to go further. 

Again, Mr. Chairman, I want to to just close my questions by 

thanking you for making it clear that we are really going to dig 

into this. I mean, we have already had a number of hearings. You 

have your hands full. I just want you to know, I really appreciate 

the fact that you are committing us to looking at this. 

The CHAIRMAN. Thank you, Senator. 

Well, I think you can tell this is a very popular subject by the 

attendance here. [Laughter.] 

I would like to ask just about income disparity in America. There 

are all kinds of statistics, but generally I think it is agreed that 

20 

over the last, say, 20 years, approximately, that the pre-tax income 

and the after-tax income of the most wealthy has increased as a 

share, I guess, of, what? 

Dr. ELMENDORF. Total income. 

The CHAIRMAN. Total income. That is right. Thank you. Whereas, 

other income earners, that is not the case. So the basic question 

is: to what degree is that caused by the tax code? I am assuming 

that is not a good thing, that it is widening at such a rapid rate. 

To what degree is that caused by the code, to what degree is that 

caused by other factors? Just being honest about it, often this gets 

to be a big, partisan political debate on the floor, and sometimes 

here. People use statistics to try to score political points. But I am 

trying to get away from all that. I am trying to figure out what is 

going on, what is causing this maldistribution of income. What are 

the basic causes, and does the tax code have anything to do with 

it? 

Dr. ELMENDORF. I can start, if you would like. Actually, Mr. 

Chairman, if you turn to the last exhibit, the last page of the written testimony—I did not bring a big poster for this—Exhibit 18 on 

page 24 shows the shares of before-tax and after-tax income by income quintile in 1979 and 2007. The picture shows that, between 

1979 and 2007, the share of before-tax income fell from each income group, except for the highest quintile. 

The share of income received by the highest quintile rose from 

46 percent to 56 percent over that period. We note, but do not show 

in the picture, that the share of before-tax income for the 1 percent 

of households with the highest income more than doubled, from 9 

percent to 19 percent. And you also can see in the picture that 

after-tax income is distributed a little more evenly than before-tax 

income because the Federal tax code is progressive, but not a lot 

more evenly. 

There is substantial literature on the sources of this change in 

income over time. We have done some work for this committee and 

are in the process of finishing two other studies for this committee, 

documenting the changes in the distribution of earnings and income over time, and reviewing the literature about the explanations. 

I think the leading cause, in the assessment of most analysts, is 

increasing demand for workers with high skills, particularly high 

levels of education. Over the course of the entire last century, there 

has been an ongoing increase in demand for workers with more 

education, and, at different points over that period, the supply of 

workers with more education has also increased. Obviously we 

have many more people graduating from high school and many 

more from college than we had decades ago. 

During periods in which the supply of those workers with higher 

skills has grown as rapidly, or more rapidly than the demand, then 

we have tended to see the wage differences narrow. In periods in 

which the supply has not grown as rapidly as demand, we have 

seen the wage differences widen. It is the basic story of supply and 

demand for different sorts of labor. 

In fact, over the past few decades, the educational achievement 

of the U.S. population has not been increasing the way it had in 

the past. It has basically plateaued in terms of the share of people 

21 

graduating from college. So, supply has not kept up. The supply of 

highly educated workers has not kept up with the demand for 

them. I think most people view that as the leading source of the 

widening of the earnings distribution and the overall income distribution. 

Now, there are other factors as well. There is a vigorous debate 

about the role that increased international trade has played. I 

think most analysts think that has not been as important a factor, 

but it is hard to know for sure. There have been changes in the 

structure of the economy, so the financial sector is a sector which 

has grown rapidly and is a sector that has a wide dispersion of 

earnings levels. 

That has been set back at least over the past few years, but what 

will happen going forward is less clear. So there are a lot of possibilities and probably a lot of things have played some role, but I 

think most people would agree that the biggest role has been 

played by just the increasing demand for workers with a lot of education and high technical skills, and our, as a society, not providing 

the extra supply to keep pace with that. 

The CHAIRMAN. Dr. Barthold? 

Dr. BARTHOLD. I do not know that I have anything really to add 

to Doug’s point. The question on the role of the tax system would 

be to perhaps think about the effectiveness of some of the policies 

that the members have enacted to try to increase human capital 

formation, things that we have done for the education sector and 

for training. Since productivity depends upon capital, perhaps there 

is some role for how investment in the United States is affected by 

the tax system. 

But in terms of the broad—I am not aware of really any evidence 

that has laid at the tax code’s doorstep failure to see more educational achievement. U.S. investment has been fairly strong for 

the past several decades, so capital formation has been fairly 

strong, too. So that would probably not explain the trends that 

Doug described for you. 

The CHAIRMAN. Dr. Mazur? 

Dr. MAZUR. Just two other points to add to that. I think, one 

trend over the last, say, 50 or so years, there has been a decline 

in the role of unions, and that has kind of, I think, helped shift or 

change the shift of income a little bit, especially away from the 

middle quintiles. Then at the very tip-top of the income distribution, there has just been a rise in basically a winner-take-all mentality, that, if you look at pro athletes, entertainers, top financial 

sector participants, the returns that they get on an annual basis 

are just astronomical compared to what they were, say, 30 or 40 

years ago. That may reflect an ability to exploit larger markets, 

worldwide markets, say, than they could in the past. 

The CHAIRMAN. Thank you. 

Senator Menendez, you are next, if you want to go next. 

Senator MENENDEZ. I am happy to go, Mr. Chairman. 

The CHAIRMAN. Good. 

Senator MENENDEZ. Gentlemen, thank you for your testimony. 

Dr. Elmendorf, let me ask you, your organizations have done a 

lot of good work in modeling which policies have the most direct 

effect on short-term job creation. Not surprisingly, your reports 

22 

have shown both Unemployment Insurance and tax breaks for 

middle-class families and businesses who hire topping the list. 

I found that, at the bottom of the list, the proposal that creates 

the least amount of jobs, according to that study, is extending the 

Bush tax cuts for the wealthiest. Why is that? 

Dr. ELMENDORF. First, let us make sure we are clear on the results. As you said, Senator, on our list, which was ordered by the 

‘‘bang for the buck,’’ so not the total effect on economic activity, but 

the effect per dollar of budgetary cost, on the top of that list was 

increasing aid to the unemployed, and below that were several alternative ways of establishing a payroll tax holiday that would both 

encourage spending and encourage businesses to hire. At the other 

end of the list is the extension of the expiring 2001 and 2003 tax 

provisions. 

The reason that falls low on the list is because we think that a 

temporary extension of those provisions of the sort that we studied 

would not induce a very large amount of extra spending per dollar 

of budgetary cost. Now, we have also done analysis of different 

ways of extending the expiring tax provisions. In testimony I gave 

to the Senate Budget Committee at the end of September, we 

looked at four different ways of extending the provisions that had 

been discussed. 

One was a permanent extension of all the provisions, one was a 

permanent extension of all the provisions except those focused on 

higher-income taxpayers, one was a temporary extension of all the 

provisions, and the fourth was a temporary extension of all the provisions except those affecting the highest-income taxpayers. 

All four of those alternatives would, in our judgment, increase 

spending in output and employment during the next few years, because they would basically put money into taxpayers’ hands, and 

thus the taxpayers would spend some share of that and that would 

raise the demand for goods and services, and thus output and employment. We also said that, over a longer period, by 2020 and beyond, all four of those options by themselves would lower economic 

activity because of the effects of the crowding out of private capital 

due to the extra government debt that would offset the positive effects of the lower tax rate. 

Senator MENENDEZ. So in your listing, they do not create the 

greatest bang for the buck, so to speak. They do create some, but 

they do not create the greatest bang for the buck. 

Dr. ELMENDORF. That is exactly right. 

Senator MENENDEZ. So, to the extent that we are looking at tax 

policy as a creator of short-term job growth, you would want to go 

for the greatest bang for the buck. To the extent that, while creating the tax cuts for the wealthiest in the country in the short 

term can be part of that at the bottom of your list, in the long term 

they have serious consequences if you seek permanent extension of 

them. 

Dr. ELMENDORF. Yes, that is right, Senator. 

Senator MENENDEZ. All right. 

Dr. Mazur, I gleaned from your testimony that the experience of 

the last 30 years of cutting taxes for the wealthiest has not led to 

increased prosperity. The top tax rate has been cut in half over the 

last 30 years. During that same time period in which the top tax 

23 

rate has been cut in half over the last 30 years, incomes from the 

majority of American families have stagnated. So I look at that as 

a tax policy that cuts for the wealthiest in the country and has not 

really ultimately dramatically increased the value of paychecks for 

middle-class families. 

But I often hear from my colleagues on the other side that that 

is the way in which we are going to create prosperity for all. In 

fact, some of my colleagues suggest that nothing else should happen in what is left of this Congress until we do that. So do you believe that, based upon the historical record, that tax cuts for the 

wealthiest have a significant effect on wages and job creation? If 

your answer to that is yes, then how come that is not borne out 

by the last 30 years of experience? 

Dr. MAZUR. First, the administration’s budget proposal did have 

the tax cuts from 2001 and 2003 expiring for people with incomes 

over $250,000. So I think the administration’s position is pretty 

clear, that the bang for the buck, or the benefit of doing that is less 

than the benefit of the revenue that would be raised by imposing 

those taxes. 

I think, if you look at the history of tax rates over time, you 

would see how taxpayers react to rates is several-fold. The first 

thing taxpayers can do if rates change is change the timing of their 

benefits; so, if tax rates were going to go up next year, you would 

see bonuses accelerated from 2011 to 2010, if possible. You would 

also see taxpayers engage in paper transactions, to take income 

that is one form, highly taxed, and transform it to another form 

that is somewhat less taxed. 

Kind of far down the list is where people change their real economic behavior in response to marginal changes in the tax rates. 

The tax rates for all of us have dropped over the last 5 years. I do 

not think any of us have really increased our work effort in a credible amount over the last 3 years. 

Senator MENENDEZ. If I may, Mr. Chairman, just to follow up on 

this. 

The CHAIRMAN. Fine. Go ahead. 

Senator MENENDEZ. So we have gone from, 30 years ago the top 

rate was in the 70th percentile, and it is now in the 30 some-odd 

percentile. So, half over the last 30 years has not—what I am trying to see is the correlation that some suggest exists between the 

dramatic cut in the top tier and what that means for the rest. The 

rest have not ultimately achieved any significant result as it relates to that. Is that a fair statement? 

Dr. MAZUR. I think you just cannot look at changing one tax rate 

and say changing that tax rate is going to drive the entire economy. It is much more complex than that. I think that is the takeaway from that. 

Senator MENENDEZ. All right. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. 

Senator Wyden, you are next. 

Senator WYDEN. Thank you, Mr. Chairman. 

Dr. Barthold, let me continue this discussion about tax expenditures, and particularly the exponential growth. It now comes to 

$1.1 trillion, so in effect, when Americans fill out these tax forms, 

24 

have that joyous day in April when they send it in, that money 

goes to Washington, DC, out the door it goes for tax breaks. 

On the Finance Committee, when we hold a mark-up of a piece 

of legislation and a particular Senator has a proposal for a tax 

change, a tax break for what is almost always a good cause, you 

all do a cost analysis and you give that to the chairman and you 

give it to the ranking minority member, and we all get it. 

I am curious as to whether you have information as a result of 

doing that cost analysis that would also tell us what benefit the 

American people would get out of it so that we could at least start 

bringing to this discussion the opportunity to have a broader debate about what it is the American people are actually getting for 

this trillion-plus dollars of tax breaks that they are paying for. 

The reason I am asking you this is, this is something that could 

be very helpful to the debate about taxes, and possibly something 

that we could actually start bringing in to our debate. It would not 

be water torture for you, because my question is, do you have some 

of that information now because of what you have had to do to put 

together the costing analysis that you give us, as you always have 

traditionally? 

Dr. BARTHOLD. That is a really tough question, Senator. 

Senator WYDEN. The question is, how do you get to the cost question without knowing the benefits? 

Dr. BARTHOLD. Well, the benefit, as you well know, in the policy 

design, the benefit is not always just about, I have reduced somebody’s tax liability. If I can choose one—and this is not to say anything negative about the Congress’s decisions—the section 45 production credit creates tax benefits for a number of alternative energy resources. 

Now, there is one sense in which you can measure the benefit. 

You can say, ah, producer A’s tax liability is lower by X amount 

of dollars because they have done this thing that is consistent with 

the tax expenditure that was created. But from talking to the members and their staff, I know that the benefit that the members actually want assessed is, well, how much, if it is a windmill, for example, fossil-fired electricity was displaced by the wind? 

Well, we can make an assessment. I mean, our revenue estimates are based, in that situation, on assessments of the amount 

of electricity that will be generated by the windmill, in my hypothetical example. But that in itself does not define what the policymakers, what you and your colleagues, see as the benefit from perhaps displacing a different energy source. There are multiple different ways that people may assess that. 

Now, one simple way is, we can look at the cost of—let us compare the wind to perhaps a coal-fired power plant. We could look 

at the cost of procuring the coal. But generally, I think the members have wanted to say, well, it is not just the cost of the coal. 

There might be pollution that comes out of a stack, and that can 

have some health harms. Well, maybe we could measure the health 

harms. We do not do that as part of a revenue estimate. 

Another consequence is, people have been concerned about pollution in terms of global warming. Well, that is not a health harm, 

per se, but that is another cost. We just do not collect all that information. 

25 

Senator WYDEN. Right. I can see why, in areas like energy, and 

if you use one source you are displacing another, that to get at an 

extensive benefit analysis of what you get for the money, could be 

hard. I just at least think we could get some information, for example, about how many jobs would be created with some of these 

changes that we are asked to consider. I will not prolong this; my 

time is up. I just have come to the conclusion that, when we ask 

you to cost something out and you send us that piece of paper that 

says it will cost X, that calculation you have made has to be based 

on a number of activities you think are going to take place. 

Mr. Chairman, I just would like to talk with you about this further, because I think it is an idea that at least would give us more 

information. In other words, it would not change the authority of 

the committee and the members as we go forward. It might just 

give us a little bit more context in that piece of paper, and I would 

like to talk with you some more about it further. 

The CHAIRMAN. You bet. More information usually helps. Thank 

you. 

I am a little bit curious on another issue. Let us talk a little bit 

about worldwide and territorial. There are some—in fact, many— 

members of Congress who currently believe that the U.S. worldwide system is an impediment to the growth of jobs in the U.S. 

They point out that, because of the deferral regime, that a lot of 

companies keep their earnings and their control of corporations, 

subcorporations, overseas. If they were brought back to the U.S., 

they would have to be brought back at the current rate. 

So the argument is, those companies just keep their earnings 

overseas. That creates jobs overseas and reduces jobs in the U.S. 

Some of the thinking is, it is not directly related, but others suggest we go to a territorial system because our current system 

makes us less competitive, the argument goes, because we tax all 

our income worldwide. Under territorial, other countries just tax 

income earned in their own country and do not tax income earned 

in a foreign country. 

I just am curious of your thoughts generally on all this talk 

about converting to territorial as opposed to worldwide, because I 

guess the U.K. has recently converted. Others point out to me that 

actually most of this is not black and white, that each system has 

its exceptions, and so on and so forth. 

So I guess, two questions. One is general, which is: what do you 

think about the degree to which moving more toward territorial 

would help American competitiveness? That is one question. The 

other is more specific. That is, the degree to which it would help, 

or hurt on the margin, in creating jobs in the U.S. Who wants to 

start? 

Dr. MAZUR. I will just start with, the administration’s budget 

proposals were intended to strengthen the worldwide system, and 

so I think we believe that the worldwide system is workable and 

that it is not a major impediment to U.S. competitiveness. 

Just to note, there are pluses and minuses to all these tax systems. A territorial system would put more pressure on transfer 

pricing, would put more pressure on dealing with the role of intangible assets. The current tax system puts some pressure on it, and 

26 

I do not think we deal with it particularly well. Putting more pressure on it does not seem like that is a great plan. 

The CHAIRMAN. What do you mean, ‘‘put more pressure on transfer pricing’’? Do you mean, put more pressure on—— 

Dr. MAZUR. Well, think about if you earned income abroad. 

Under a territorial system, if you are a U.S.-based multi-national 

and you earn income in Belgium, under a territorial system it is 

not taxed. 

The CHAIRMAN. Right. 

Dr. MAZUR. You would like to find a way to put more income in 

Belgium. 

The CHAIRMAN. Correct. 

And while you are answering, you can talk about the Dutch 

sandwich. [Laughter.] 

Dr. MAZUR. Yes, you could. I think the other thing to keep in 

mind is just that a territorial system can be very tight and can potentially raise about as much revenue as the current system, or it 

could be quite loose. I think that, when you hear the business community talk about a territorial system, they are not looking at one 

that raises more revenue than the current system. 

The CHAIRMAN. All right. 

Dr. Barthold? 

Dr. BARTHOLD. Well, I would fall in the camp that you described 

as ‘‘not black and white.’’ Mark pointed out an important consideration for members. Under our present system, where we permit deferral of earnings that are actively reinvested, the simple mathematics of present value say that, if you keep it permanently offshore and reinvest it, then the effective U.S. tax rate on that income is zero. So that means that, on the investment abroad, the 

only income tax paid by the investor would be the foreign tax paid, 

which means, in that sort of limited case, it is a territorial system. 

So our current system, with elements of deferral, has sort of elements of territoriality. Now, what a lot of issues then come down 

to in terms of design, I think, are a little bit of what Mark was 

broaching: well, how do we treat some of the allocation of costs 

within the system? 

I mean, one thing that the Congress has wrestled with, and I 

know it was important to you, to your considerations over the past 

several years, was interest allocation. If the interest is—if we borrow in the U.S. to invest abroad, how do we allocate that interest 

expense? Do we allocate it all against a U.S. tax base; do we allocate some against the foreign tax base? That ends up affecting the 

net return to the investment abroad. So those are a couple of important considerations. 

A couple of the broader considerations that you asked about really go to an issue on which there is a growing body of economic literature that is not all one-sided, and that is the extent to which 

foreign investment is a substitute for domestic investment or a 

complement of domestic investment. I think the key in thinking 

about that is a little bit the question that you are asking when you 

asked about the competitiveness of the U.S. economy. 

A lot of times we will hear members’ constituents come in, and 

they think of competitiveness as, I would like a higher after-tax return for myself. Well, that does not necessarily mean that the U.S. 

27 

economy is growing, and so a broader sense of competitiveness is, 

you might say, well, what is the ability of the U.S. economy to 

grow, of the U.S. capital base to deepen, of the U.S. labor force to 

have better tools or better education, so that we see growth for U.S. 

citizens and U.S. residents? 

That is not necessarily the same as saying one or two particular 

U.S.-based enterprises can improve their position in their markets 

worldwide. So that is a little bit about the question of, when are 

things a substitute to foreign investment in the United States as 

opposed to a complement for investment? I hope that gives a sense 

of the grayness that I want to bring to you. 

The CHAIRMAN. Doug? 

Dr. ELMENDORF. I would just add, Mr. Chairman, that we are in 

the process of doing substantial analysis of alternative ways of addressing international taxation, and we hope to bring that to you 

and to others soon. 

The CHAIRMAN. I am very interested. Yes. 

Dr. ELMENDORF. We are working very hard on that. 

In response to your second question about jobs—— 

The CHAIRMAN. Right. 

Dr. ELMENDORF [continuing]. I would just highlight a point that 

Tom made. Location of investment may affect the number of jobs, 

but it also importantly affects the nature of those jobs, the quality 

of the jobs, the rewards that are provided to the workers in those 

jobs. I think you and other members, when you talk about jobs, 

sometimes it sounds like it is numbers. I know what you actually 

mean is that, what is important is not just the number of jobs, but 

also the nature of them. But analyzing the effects of a sweeping 

change in U.S. corporate tax structure on the things that you and 

others care about is very challenging. 

The CHAIRMAN. Well, it is also very important because the world 

is changing so much. We just have to make sure we are not falling 

behind, or even treading water, and maybe we can get ahead of the 

game. It takes a lot of work to figure that out. 

Senator Wyden? 

Senator WYDEN. Only one other, Mr. Chairman, just to follow up 

on your point. 

Dr. Mazur, I would be interested in a little more of the administration’s thinking on this question the chairman has raised, the 

question of what kinds of policies are needed, as it relates to global 

competitiveness, and how we are going to take on China and India 

in these tough markets. Is the administration interested? 

I mean, it seems to me, going to the point that was just made 

by Dr. Elmendorf, that if, for example, you made changes in deferral, which creates an incentive to do business overseas, and took 

those very same dollars and used those dollars to reduce rates in 

the United States, you could, for example, give a very strong boost 

to American manufacturing, which strikes me as going to the point 

that Dr. Elmendorf said to the chairman: it relates to the kind of 

jobs that you might have. 

So to pick up on the chairman’s question, what are the administration’s current thoughts about tax policy as it relates to how we 

achieve that increased competitiveness in global markets, and parVerDate Nov 24 2008 17:22 Dec 02, 2011 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 R:\DOCS\70976.000 TIMD
28 

ticularly use those changes to create more good-paying jobs here in 

the United States? 

Dr. MAZUR. I think, if you look at the administration’s budget 

proposal for fiscal year 2011 and then subsequent announcements 

by the President, you would see a number of themes there. One, 

I think that on the international side, there were some proposals 

to strengthen the international tax system and actually raise some 

additional revenues from U.S.-based multi-nationals. 

I think, second, you saw proposals to have a bonus depreciation 

regime in place for investments in the U.S., and equipment. The 

President then proposed to expand that to have expensing, 100 percent expensing for qualified investments, through the end of 2011. 

In addition, you see a proposal for a permanent R&D credit, and 

even an enhanced one, which again would focus attention on doing 

those high-value activities within the United States. So taken together, I think you have a framework for focusing attention on 

doing high-value activities within the United States. That is consistent with the President’s goal of doubling U.S. exports. 

Senator WYDEN. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. 

Just following on that question a little bit, I will ask each of the 

three of you: what are the three major changes you can recommend 

in the tax code, individual or corporate, that will—well, let us keep 

it on the business side—enhance and create more jobs in the U.S., 

all things being equal, changes in tax policy? 

Dr. ELMENDORF. Mr. Chairman, as you know, I do not do policy 

recommendations. And when one says, ‘‘all else being equal,’’ it depends just on what else one is doing to make it equal. I mean, in 

terms of the corporate tax code—— 

The CHAIRMAN. Like that. What changes would make the most 

difference? 

Dr. ELMENDORF. I am just still stuck on the whole ‘‘we do not 

make policy recommendations,’’ Mr. Chairman. 

The CHAIRMAN. I am unsticking you. [Laughter.] 

Dr. ELMENDORF. Well, sorry, it is not that easy. We are pretty 

stuck on that, for 35 years and in statute. I think my lawyers 

would advise me not to go further. 

I think one theme that has come out of the presentations that 

we have made today and some of these discussions is that the tax 

code that carves out pieces of a base and then tries to raise the 

same amount of revenue through higher tax rates is likely to be 

distorting the decisions of individuals or businesses in a way that 

makes the raising of that revenue less efficient than would be the 

case if the base were broader and tax rates were lower. 

Now, raising money efficiently is not the only objective of tax policy. Provisions that are in there that narrow the base of the corporate or individual tax are there for reasons that you and your 

colleagues have been attracted to over the years. 

So this is not a recommendation to take those things out, but I 

think many analysts would say that those provisions should be 

scrutinized carefully, because they may appear, individually, to be 

subsidies for activities that you would like to subsidize. They are 

equally penalties for other activities that are not subsidized 

29 

through special provisions and end up facing higher tax rates in an 

effort to raise the amount of revenue that you choose to raise. 

The CHAIRMAN. Dr. Barthold? 

Dr. BARTHOLD. Well, as you know, Mr. Chairman, I also have to 

at least figuratively bob and weave. Lower tax rates are better 

than high tax rates. There is a budget constraint, so you cannot 

just lower tax rates. The members have to choose. I am not going 

to offer a recommendation, but what I will offer is what the Joint 

Committee staff always offers, which is our best effort to provide 

you with information so that you and the members can make assessments. 

Now, one of the things that Senator Wyden pointed out, and a 

couple of the other members, and actually the co-panelists pointed 

out, is, if you would look at some of the different provisions that 

are labeled as tax expenditures, it may create inefficiencies because 

certain investments may get treated better than other investments. 

Members have had reasons for doing that, so you want to assess, 

as Senator Wyden was suggesting, what is the benefit for the costs. 

One of the costs might be the inefficiency. 

Mr. Chairman, as you and I spoke about, I think it was a couple 

of months ago now, the House of Representatives, in a tax bill that 

they passed that the Senate has not had the opportunity to address 

yet, would, by statute, require our staff to review and provide the 

members with information on cost, benefits, efficacy of a number— 

in fact, a very large number, I might add—of the expiring tax provisions. 

Our staff stands ready, to the limit of the number of hours that 

we have available, to provide that information to the members of 

the tax-writing committees so that you can make the assessments 

so that I think we can achieve what members on both sides of the 

aisle would like, which is a system that is as efficient as possible 

with the lowest rates possible. 

The CHAIRMAN. Thank you. 

Senator Wyden, any final points? 

Senator WYDEN. No. 

The CHAIRMAN. Thank you, all three, very much. This is just the 

beginning of a much greater, in-depth series of tax reform hearings. But thank you very, very much for helping to frame some of 

the basic questions. Thank you very much. 

The hearing is adjourned. 

[Whereupon, at 11:46 a.m., the hearing was concluded.] 

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Æ 


70976167.eps