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71–637—PDF 2011

S. HRG. 112–184 

EXAMINING WHETHER THERE IS A ROLE FOR 

TAX REFORM IN COMPREHENSIVE DEFICIT 

REDUCTION AND U.S. FISCAL POLICY 

HEARING 

BEFORE THE

SUBCOMMITTEE ON FISCAL RESPONSIBILITY 

AND ECONOMIC GROWTH 

OF THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

SEPTEMBER 13, 2011 

( 

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 

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 

BENJAMIN L. CARDIN, Maryland 

ORRIN G. HATCH, Utah 

CHUCK GRASSLEY, Iowa 

OLYMPIA J. SNOWE, Maine 

JON KYL, Arizona 

MIKE CRAPO, Idaho 

PAT ROBERTS, Kansas 

MICHAEL B. ENZI, Wyoming 

JOHN CORNYN, Texas 

TOM COBURN, Oklahoma 

JOHN THUNE, South Dakota 

RICHARD BURR, North Carolina 

RUSSELL SULLIVAN, Staff Director 

CHRIS CAMPBELL, Republican Staff Director 

SUBCOMMITTEE ON FISCAL RESPONSIBILITY AND ECONOMIC GROWTH

BILL NELSON, Florida, Chairman 

MAX BAUCUS, Montana 

KENT CONRAD, North Dakota 

JEFF BINGAMAN, New Mexico 

MIKE CRAPO, Idaho 

TOM COBURN, Oklahoma 

RICHARD BURR, North Carolina 

(II) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Nelson, Hon. Bill, a U.S. Senator from Florida, chairman, Subcommittee 

on Fiscal Responsibility and Economic Growth, Committee on Finance ........ 1 

Crapo, Hon. Mike, a U.S. Senator from Idaho ...................................................... 3 

WITNESSES 

Greenspan, Hon. Alan C., president, Greenspan Associates, LLC, Washington, 

DC .......................................................................................................................... 6 

Taylor, Dr. John B., Mary and Robert Raymond professor of economics, Stanford University, and George P. Schultz senior fellow in economics, Hoover 

Institution, Stanford University, Stanford, CA ................................................. 7 

Feldstein, Dr. Martin S., George F. Baker professor of economics, Harvard 

University, Cambridge, MA ................................................................................. 9 

Engler, Hon. John M., president, Business Roundtable, Washington, DC ......... 11 

Kleinbard, Edward D., professor of law, U.S.C. Gould School of Law, Los 

Angeles, CA .......................................................................................................... 13 

ALPHABETICAL LISTING AND APPENDIX MATERIAL 

Crapo, Hon. Mike: 

Opening statement ........................................................................................... 3 

Prepared statement .......................................................................................... 33 

Engler, Hon. John M.: 

Testimony .......................................................................................................... 11 

Prepared statement .......................................................................................... 35 

Feldstein, Dr. Martin S.: 

Testimony .......................................................................................................... 9 

Prepared statement .......................................................................................... 46 

Greenspan, Hon. Alan C.: 

Testimony .......................................................................................................... 6 

Prepared statement .......................................................................................... 51 

Kleinbard, Edward D.: 

Testimony .......................................................................................................... 13 

Prepared statement .......................................................................................... 54 

Nelson, Hon. Bill: 

Opening statement ........................................................................................... 1 

Prepared statement .......................................................................................... 87 

Taylor, Dr. John B.: 

Testimony .......................................................................................................... 7 

Prepared statement .......................................................................................... 90 

COMMUNICATION

Bindner, Michael ..................................................................................................... 97 

(III) 

(1) 

EXAMINING WHETHER THERE IS A ROLE FOR 

TAX REFORM IN COMPREHENSIVE DEFICIT 

REDUCTION AND U.S. FISCAL POLICY 

TUESDAY, SEPTEMBER 13, 2011

U.S. SENATE,

SUBCOMMITTEE ON FISCAL RESPONSIBILITY

AND ECONOMIC GROWTH, 

COMMITTEE ON FINANCE, 

Washington, DC. 

The hearing was convened, pursuant to notice, at 10:16 a.m., in 

room SD–215, Dirksen Senate Office Building, Hon. Bill Nelson 

presiding. 

Present: Senators Bingaman, Wyden, Nelson, Crapo, and 

Coburn. 

Also present: Democratic Staff: Ryan McCormick, Staff Director, 

Subcommittee on Fiscal Responsibility and Economic Growth. Republican Staff: Mike Quickel. 

OPENING STATEMENT OF HON. BILL NELSON, A U.S. SENATOR 

FROM FLORIDA, CHAIRMAN, SUBCOMMITTEE ON FISCAL RESPONSIBILITY AND ECONOMIC GROWTH, COMMITTEE ON FINANCE 

Senator NELSON. Good afternoon and thank you. We are looking 

forward to today’s star-spangled panel. 

This week marks the 3-year anniversary of the collapse of Lehman Brothers, and we have yet to recover. If this Congress does 

not get serious, then the structural budget imbalances facing the 

economy could permanently reduce labor productivity and economic 

growth for years to come. 

A launching point for getting our fiscal house in order should be 

the overhaul of the Federal income tax code. And if that means 

lowering tax rates, eliminating tax expenditures and other loopholes, and simplifying the tax code, then so be it. 

We hear a lot about entitlement programs, Social Security and 

Medicare, in particular. What we do not hear a lot about are the 

250 entitlement programs cooked into the tax code. 

Tax expenditures, the various tax credits, deductions, and exclusions grafted onto the tax code are entitlement programs, pure and 

simple. And, if you are eligible, you can claim the benefit. They are 

expenditures, and there is no application process in order to claim 

the benefit. And there is no annual or even periodic review of tax 

expenditures’ efficiency by the Congress. 

2 

So tax expenditures are entitlement spending without accountability. Some of these tax expenditures, particularly those relating 

to oil and gas, date back to the early 1900s and might have outlived their justification. 

The last time Congress tackled the tax expenditures in a systematic way was 25 years ago in the Tax Reform Act of 1986. I voted 

for that. That legislation took a hatchet to special interests and 

lowered the top individual tax rate from 50 to 28 percent, but the 

special interests then came back stronger than ever. And since 

1986, according to the Joint Committee on Taxation, Congress has 

enacted 158 new tax expenditures. Is it right that an oil company could reap an $11 billion tax 

windfall from the worst environmental disaster in our history in 

the Gulf oil spill? I think that is questionable. And I do not think 

oil spill cleanup costs due to the negligence of the parties that were 

drilling should be treated as an ordinary and necessary business 

expense. And that is just one tax break. 

Is it right that large multinational corporations can report billions in profits, yet still pay no Federal income tax? And, of course, 

the example that has been out in the news quite a bit is General 

Electric, which had worldwide profits of over $14 billion and they 

paid zero in Federal income tax in 2010. 

Well, this does not seem to be right; it does not seem to be fair. 

We need a tax system that is embraced by the population as being 

fair, but these are examples that strike the everyday American as 

a system that is very unfair. 

Well, is it right that Wall Street executives can avoid millions in 

taxes using complex deferred compensation schemes, while the average taxpayer can put no more than $5,000 a year into their Roth 

IRA? Or is it right that a special tax rule allows oil and other commodity speculators to treat a portion of their short-term trading 

profits as long-term capital gains in order to have a lower tax rate? In fiscal year 2008, tax expenditures such as these totaled $1.2 

trillion in lost revenue. That is in one year. That sum is greater 

than the entire amount raised by the individual income tax in that 

same tax year. It is also greater than all Federal discretionary 

spending in that same year of 2008, and it is twice as much as all 

non-defense discretionary spending. 

Between 1972 and 2008, the number of tax expenditures more 

than quadrupled from 60 to 247. And, over a 25-year period from 

1974 to 2008, tax expenditures climbed from 5.7 percent to 8.6 percent of GDP. 

If we simply reverted to the 1974 level of tax expenditures, we 

could wipe out more than $400 billion of our annual deficit this 

year and more than $4 trillion over 10 years. 

So, tax expenditures can be characterized more accurately as tax 

earmarks, because they represent favors for a particular interest. 

That is revenue that is not coming into the system that has to be 

made up someplace else by the average American taxpayer. And so 

tackling tax expenditures is not just about deficit reduction and increasing revenue. It is also about getting rid of distortions that act 

as a drag on investment and economic growth. 

And, over the last 2 decades, our foreign trading partners have 

moved rapidly to modernize their tax systems to make them more 

3 

relevant in a global economy where capital moves at the touch of 

a button, the click of a mouse; where intellectual property is easily 

transferred; and goods are manufactured in global production 

chains that transcend borders. 

Here at home, the United States plods along with an antiquated 

tax system in which the rules for taxing international trade and investment were developed in the 1920s. The time for tinkering has 

now past, and we need to overhaul the way that we tax U.S. companies that operate around the world. 

So, we are going to focus today on whether there is a role for tax 

reform in comprehensive deficit reductions and U.S. fiscal policy. 

One of the things is tackling tax expenditures to make the tax 

code simple, fair, and equitable. The code is so complex that so 

many taxpayers just simply throw up their hands. They spend an 

estimated 7.6 billion hours each year complying with filing requirements. Tax compliance cost taxpayers roughly $140 billion in 2008. 

Sixty percent of taxpayers pay tax preparers to fill out their forms. 

I could go on and on. But I will submit for the record the rest 

of the testimony here. 

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

Senator NELSON. Let me just, before I turn to my colleague, Senator Crapo—I want to say that we do have an extraordinary panel 

to speak on this subject. 

The first witness, Alan Greenspan, managed U.S. monetary policy under four presidents during his five terms he served as Chairman of the Federal Reserve. And during that time, the United 

States grew from a $5-trillion to a $13-trillion economy. 

John Taylor served as a member of the Council of Economic Advisors in the George H.W. Bush administration and was Under Secretary of Treasury for International Affairs in the George W. Bush 

administration. And he is a professor of economics at Stanford. 

Martin Feldstein served as Chairman of the White House Council of Economic Advisors in the Reagan administration, and Dr. 

Feldstein has written more than 300 research articles in the field 

of economics, founded the National Bureau of Economic Research, 

and is currently a professor at Harvard. 

John Engler, president of the Business Roundtable, was a 3-term 

Governor of Michigan. Mr. Engler, Governor Engler, was president 

and CEO of the National Association of Manufacturers before his 

current position. 

Edward Kleinbard served as Chief of Staff of the Joint Committee on Taxation from 2007 to 2009. He has 20 years of experience practicing tax law in New York and is currently a professor 

of law at the University of Southern California. 

It is an extraordinary panel. Thank you for honoring us with 

your presence. 

Senator Crapo? 

OPENING STATEMENT OF HON. MIKE CRAPO, 

A U.S. SENATOR FROM IDAHO 

Senator CRAPO. Thank you, Mr. Chairman. I appreciate your 

holding this hearing, as well. 

4 

And I want to focus right at the outset on one of your early comments, that, as any part of the important needed changes that we 

need to be making in America today with regard to our economic 

and fiscal policy, tax reform is one of the key pieces that we must 

not allow to be ignored. 

As you know, I have been working with a group of six—it has 

been called a gang. I know that you have been working in other 

contexts, and Senator Wyden, as well, who has a proposal of his 

own. But the one area of agreement that I think we have among 

us and among many others is that, in addition to controlling the 

excessive spending appetite of Washington and getting our spending under control—which is undoubtedly an important and necessary piece of the reform of our fiscal policy—we also need a progrowth element of our fiscal policy and of our economic policy. 

And, if we are going to deal with the issues that America faces 

properly, we will focus not only on the austerity and the proper fiscal policy relating to expenditures—to spending—but also with regard to those kinds of reforms that I think are started at the foundation, with fundamental reform of our tax code that will generate 

a pro-growth opportunity for America and help us to build and 

strengthen our economy. 

Today’s hearing focuses on the issue of tax reform, and, as you 

have said, we have an outstanding panel here to discuss this with 

us. And the notion that tax reform is needed is hardly in dispute, 

I think, in the United States today, but there are a tremendous 

number of ideas about how we should do it. 

You have identified a number of pieces of the complexity of the 

tax code where I think I got the feeling you felt we could simplify. 

As you know, the group that I have worked with has proposed dramatic reduction of the complexity in our tax code. And I know that 

Senator Wyden’s proposals are similar in that regard. 

Undoubtedly, we will have to engage in the discussion and the 

debate over these various specific aspects of our tax code, and there 

will be disagreement about individual pieces and their policy justifications. But we must engage in that debate. 

I have said many times that if we were to go about creating a 

tax code that is more unfair, more complex, more expensive to comply with, and more anticompetitive to U.S. business interests, we 

would be hard-pressed to do it worse than I think we have done 

it with our code. 

Now, some may argue with me on that, but I do not think that 

they would argue that we dramatically need to flatten our code, improve it, make it much less complex, much more friendly to growth 

and to business development in America. 

Some have called for a combination of raising tax rates and 

modifying and eliminating tax expenditures as a way to raise revenue that would be dedicated to deficit reduction. Others, like myself, have disagreed with the notion that we should stay in what 

I consider to be the age-old box of battling over whether we should 

raise taxes on those who are particularly identified as the wrong 

people in America to receive tax benefits, raising taxes on the 

wealthy or lowering taxes on this category or whatever, and we 

need to move out of that box into a debate in this country over how 

to reform the tax code. 

5 

The proposal that I have supported, the proposals that many others have proposed of their own all have similar elements, and that 

is they look at simplifying and reducing the complexity in the code. 

Most focus on reducing tax rates in accordance with that and building the economy. And that is definitely the approach that I think 

would be music to the ears of those seeking to engage in capital 

formation and business development in the United States. 

A by-product of the economic growth that I would hope that 

would come from tax reform would be the additional kind of revenue that we do not now currently see in our economy, not because 

current tax rates are too low, but because our economy is not growing. 

History has shown that our annual total revenue as a percentage 

of GDP is about 18.2 percent. This has been the case whether the 

top tax rate was 70 percent or 28 percent or 35 percent. 

In booming times, we have seen temporary revenue spikes, and 

in times of slow growth and high unemployment, as we have in recent years seen, we have seen dips in the total revenue. But over 

time, we have always seen revenues return to their historic average, regardless of what Congress has done to the tax code. 

In fact, annual revenues have only exceeded 20 percent of GDP 

three times in the last 70 years, and two of those times were at 

the end of World War II, when our Nation was still running high 

deficits. 

The other time was in 2000, when the annual revenue of 20.6 

percent of GDP took place at the height of the stock market bubble. 

And this temporary spike in revenue was bound to come down as 

soon as the bubble popped, and it did, which also coincided with 

the post-9/11 recession that occurred. 

In fact, other than one year, 2000, of the other 11 times since 

1940 when our budget has been in surplus, revenues were less 

than 20 percent of GDP; and, in 7 of those 11 years, revenues were 

below 19 percent of GDP. 

It is also important to note that our budget has never been in 

balance when the Federal spending exceeded 19.4 percent of GDP. 

Along those lines, I appreciate that many of our witnesses today 

note in their prepared testimony that, while tax reform is an important goal for Congress, fundamental entitlement reform must 

also be a primary and immediate goal for Congress, as it is the 

largest driver, by far, of our long-term fiscal shortfall. 

Nevertheless, even if we do cut trillions of dollars of spending, 

which we must do, so long as our economy remains in the tank and 

unemployment remains persistently high, policies that will generate the kind of robust economic growth that is currently nowhere 

to be found must also be a priority. 

It is for this reason that I support the inclusion of pro-growth tax 

reform as part of a comprehensive fiscal reform plan that also includes fundamental entitlement reform and strict enforcement 

mechanisms that will keep Congress from violating those guidelines and those requirements. 

I am very pleased, Mr. Chairman, that you and I have been 

working so closely together on these kinds of issues. As I have 

noted, the other Senators here on the panel, we all have, to some 

extent, different ideas about exactly how to achieve it, but there is 

6 

a huge overlap in our commitment to achieving this kind of fundamental tax reform, and the hearing that we are holding today is 

evidence of that. 

So, again, Mr. Chairman, I look forward to what our witnesses 

here have to tell us and look forward to working with you and our 

other colleagues in Congress in developing a pro-growth agenda for 

our economy as we also move forward to deal with our spending 

excess. 

Thank you. 

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

Senator NELSON. Thank you, Senator Crapo. 

Chairman Greenspan? 

STATEMENT OF HON. ALAN C. GREENSPAN, PRESIDENT, 

GREENSPAN ASSOCIATES, LLC, WASHINGTON, DC 

Mr. GREENSPAN. Thank you, Mr. Chairman. Mr. Chairman, Senators, I very much appreciate the opportunity to testify before this 

committee. 

It is an extraordinarily important subject, and I am glad that the 

Congress is taking a very pronounced effort to come to grips with 

it. 

Tax reform is a major part of any program of fiscal reform. It will 

contribute to a restoration of American competitiveness and the vibrant economy that goes with it. The fiscal success we achieved in 

the early 1990s was essential to containing budgets that seemed inherently prone to excess. But the great irony of those years was 

that the surpluses that emerged from 1998 through 2001 as a consequence of that success thoroughly undermined fiscal prudence. 

We have now come full circle to a point where, as much as I wish 

it were otherwise, there is no credible scenario of addressing our 

current fiscal problems without inflicting economic pain. 

We have been procrastinating far too long in coming to grips 

with the retirement of the baby-boomer generation, a fiscal problem 

that has been visible for decades. 

By 2006, with chronic surpluses already a distant memory, the 

Medicare trustees indicated, according to calculations by the Council of Economic Advisors, that the Medicare program does not have 

enough projected revenue to cover projected future spending. A reduction in Medicare Part A expenditures by 51 percent would be 

necessary to make the Medicare trust fund solvent. 

But, rather than repairing that huge shortfall and a lesser one 

in Social Security, we expanded entitlements still further, without 

a matching source of revenue. 

Our major problem is not only that spending has been rising rapidly, but that it has been mainly in the form of entitlements rather 

than of discretionary outlays, such as war spending or bridge building, that cease when the activity comes to an end. The entitlements, however, once bestowed, are very difficult to rescind. 

The growth of our economy in the years ahead is bound to slow. 

Our civilian labor force, short of a major change in immigration, 

should parallel a slowing in the growth of the working-age population, most of whom are already born. 

7 

Professor Gordon of Northwestern University has concluded that 

his most recent 20-year forecast of the growth rate of per capita 

real GDP, as he put it, represents the slowest growth of the measured American standard of living over any 2-decade interval recorded since the inauguration of George Washington. 

In the years ahead, increasing entitlements will be pressing 

against shrinking economic growth. 

My preference going forward, as I have noted often, is something 

akin to the budget recommendations of Paul Ryan, the chairman 

of the House Budget Committee. I regret, however, that for now at 

least, that Ryan’s budget lacks the votes for passage. And as European current experience underscores, delays in implementing policy 

reform can be destabilizing. 

Of the politically feasible budget proposals on the table, that 

proffered by the Bowles-Simpson National Commission on Fiscal 

Responsibility and Reform appears the most substantive. What impressed me most about Bowles-Simpson is that it addresses tax expenditures. Cuts in tax expenditures, mostly subsidies, can be alternatively structured and viewed as cuts in outlays rather than a 

reduction in revenues. 

Subsidies of whatever stripe distort the optimum functioning of 

markets and ultimately the standard of living of society as a whole. 

I do not know whether a U.S. budget crisis is immediately on the 

horizon or is years off. What I do know is that if we presume that 

we have a year or two before starting serious long-term restraint 

and we turn out to be wrong in that optimism, the impact on financial markets could be devastating. 

If we are wrong in being overly fiscally cautious in the year 

ahead, that is a problem that is readily solvable. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Greenspan appears in the appendix.] 

Senator NELSON. Thank you, Chairman Greenspan. 

Dr. Taylor? 

STATEMENT OF DR. JOHN B. TAYLOR, MARY AND ROBERT 

RAYMOND PROFESSOR OF ECONOMICS, STANFORD UNIVERSITY, AND GEORGE P. SCHULTZ SENIOR FELLOW IN ECONOMICS, HOOVER INSTITUTION, STANFORD UNIVERSITY, 

STANFORD, CA 

Dr. TAYLOR. Thank you, Mr. Chairman, other members of the 

committee, for holding this hearing on the role of tax reform in 

U.S. fiscal policy. 

The most important thing for our economy right now is to have 

higher growth and, therefore, lower unemployment, and comprehensive reform of fiscal policy is a big part of that. 

I think for the past several years, we have focused more on more 

temporary targeted types of interventions, and, in my assessment, 

they have not been effective. And so that is why it is so important, 

I think, to move towards a more comprehensive strategy. 

There are two elements of that strategy. One is the budget strategy, and second is the tax reform strategy, and they are intimately 

linked together. 

8 

I would like to refer to a graph that I have distributed from my 

testimony, which is in front of you. This graph that I will come to 

in a minute illustrates, I think, the way to go about this in a sensible way. 

You would start with the Budget Control Act of this summer, the 

Budget Control Act of 2011. While criticized by many, it has accomplished a reduction in spending growth compared to the original 

budget submission of the President. 

If the Joint Select Committee comes up with the additional 

spending reductions, it will take the spending levels by 2021 from 

24.2 percent to 22 percent—24.2 percent was in the President’s 

budget; it will come to 22 if that action is taken. 

But I think we need to go further and would suggest that we 

take spending levels back to where they were in 2007. As a share 

of GDP, levels will be higher, of course. That level is 19.5 percent 

of GDP. 

There are two big advantages of that strategy as I will show in 

the graph in a minute. One is, it allows tax increases to be taken 

off the table, which is a stimulus to economic growth; two, it will 

allow for revenue-neutral tax reform, meaning lowering marginal 

rates and broadening the base, the classic definition of tax reform. 

Those advantages are, I think, essential for raising economic 

growth. The tax reform strategy, of course, should just do that— 

reduce marginal rates as the base is broadened, and you have indicated many ways, Mr. Chairman, how to do that. 

It can be done both on the corporate side and on the personal 

side. I think both should be part of this. 

I would like to just, in the last couple of minutes, try to work 

through my graph to illustrate this, because the numbers are very 

important here. But, if you look at page 5 of my testimony, you will 

see a graph that shows Federal spending, Federal outlays as a 

share of GDP from 2000 to 2021. 

The history is most remarkable because it shows really a gigantic 

increase in spending as a share of GDP from 18.2 percent in 2000 

to over 24 percent now. The President’s original budget did not 

deal with that spending problem, as we all know, and it is shown 

in the graph. It would have had spending at 24.2 percent of GDP 

by the end of the budget window. 

With the Budget Control Act, plus the continuing resolution of 

2011, and with the extra work the Joint Select Committee must do, 

you can see that has been—the picture has changed dramatically, 

assuming you did not go ahead with these. It takes spending to 22 

percent of GDP. 

But, as you can see, if you really want to have a budget strategy 

that does not entail tax increases, you have a little ways to go. And 

what I would suggest is, with the tax reform proposals and entitlement reform proposals and other reform, it is quite feasible to get 

to just where we were in 2007. That was 19.6 percent of GDP. 

I have drawn in my graph a way to do that. There are other 

ways to do that. Chairman Greenspan referred to another one. But 

this would be the way to have a comprehensive budget strategy, a 

comprehensive tax reform strategy, and one which will do a great 

deal of good for the American economy, with higher growth and 

lower unemployment. 

9 

Thank you. 

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

Senator NELSON. Thank you, Dr. Taylor. 

Dr. Feldstein? 

STATEMENT OF DR. MARTIN S. FELDSTEIN, GEORGE F. BAKER 

PROFESSOR OF ECONOMICS, HARVARD UNIVERSITY, CAMBRIDGE, MA 

Dr. FELDSTEIN. Thank you very much, Mr. Chairman. I am very 

pleased to have this opportunity to testify. 

I have been talking about tax expenditures and about pro-growth 

tax reform for many years, indeed, even before I served as chairman of the Council of Economic Advisors for President Reagan. So 

I was really very pleased to hear your opening comments and those 

of Senator Crapo. 

I wrote the testimony that I submitted before I heard President 

Obama’s speech to the Congress the other day and his plan to finance his new stimulus package. If you have looked at my testimony, you know that I, like yourselves, favor reducing tax expenditures. But I must say I do not favor the way President Obama proposes to limit tax expenditures. 

I think there are two reasons why his proposals are bad ideas. 

First, they use the revenue to finance his new collection of government spending programs, when we need that revenue from reduced 

tax expenditures to reduce future budget deficits and to lower marginal tax rates. 

Second, as you know, the President would limit the tax expenditure reductions just to higher-income taxpayers, those with more 

than $200,000 in income. But long-term deficit reduction requires 

that everyone share in that burden. 

If Congress were to pass the President’s proposal to reduce tax 

expenditures just for high-income individuals, I think it would be 

very difficult to revisit that at a later time and to extend it to the 

entire population of taxpayers. 

With that said, let me return to the testimony that I submitted. 

And, again, I said, as both of you said, and as the two previous 

speakers have said, tax reform, although it is the focus of this 

hearing, is not a substitute for the fundamental reform of Social 

Security, of Medicare, and of Medicaid, the primary sources of the 

future growth of government spending. 

I think the key to those reforms is to reduce gradually the 

growth of the projected government benefits and to supplement 

those benefits with universal investment-based annuities and private health spending. Doing that would protect the future incomes 

and health care of older Americans without requiring higher future 

tax rates. 

But let me turn to tax reform, where I, in the prepared testimony, emphasize what you have both spoken about, and that is the 

role of tax expenditures; tax expenditures which, as you said, are 

substitutes for direct government spending. 

I think that the key to favorable tax reform is to limit the revenue lost because of these tax rules and to use the resulting extra 

revenue to reduce current and future marginal tax rates. 

10 

Today’s marginal tax rates are typically close to 50 percent for 

a middle-income family because of the combined impact of the income tax, the payroll tax, and State taxes. These high marginal tax 

rates reduce the incentive to work, to acquire more skills, to start 

or expand a small business, to save, and to invest. They induce individuals to seek their compensation in non-taxable forms and 

fringe benefits, and to spend money in wasteful ways that generate 

tax reductions. 

So, limiting tax expenditures and using the resulting revenue to 

lower marginal tax rates would produce a double win. It would reduce wasteful behavior directly and would strengthen incentives for 

increased economic growth. And, of course, that can be made a triple win by using some of the resulting revenue to reduce budget 

deficits. 

Although limiting tax expenditures produces additional revenue, 

it is, as the chairman indicated, really a way of cutting government 

spending, government entitlements. The effect shows up in the revenue side of the budget, but it is really a cut in spending. The accounting rules make it look like a tax increase, but the economic 

effect is the same as any other reduction in government outlays. 

Let me be more specific about how I think the cutting or the limiting of tax expenditures might be approached, because I think it 

can be done without actually eliminating any of the tax expenditures or even putting limits on specific tax expenditures, like the 

size of the mortgage deduction. 

I think a better and fairer way to reduce the revenue loss caused 

by tax expenditures is to allow individuals to use all currently 

available tax expenditures, but to limit the total tax benefit that 

each individual can get from those tax expenditures, to limit that 

total tax benefit to a percentage of that individual’s adjusted gross 

income. 

For example, limiting the revenue loss from the itemized deductions and from the exclusion of employer payments for health insurance to 2 percent of each individual’s adjusted gross income 

would raise more than $275 billion a year at current income levels 

and more than $3 trillion over the next decade. 

The size of the tax cap could, of course, be started with a higher 

rate and gradually reduced to a 2-percent cap. Even a 5-percent 

cap would generate more than $100 billion of additional annual 

revenue at current income levels. 

A key point to stress about this idea is that the 2-percent cap is 

applied to the tax expenditure benefit and not to the total amount 

deducted or excluded. For example, someone with a 30 percent 

marginal tax rate who pays an annual mortgage interest of $5,000 

would receive a tax expenditure benefit now of $1,500, and that 2- 

percent, 5-percent cap would apply to that. 

It also would generate tremendous simplification. A 2-percent 

cap on tax expenditure benefits would cause nearly 75 percent of 

individuals who now itemize their deductions to shift to the standard deduction, which would, indeed, be an enormous simplification. 

I have said a little bit about corporate tax reform; basically, lowering tax rates and shifting to the territorial system that is used 

by virtually every other industrial country. 

11 

But I will stop there and look forward to questions after the 

other speakers. 

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

Senator NELSON. Thank you, Dr. Feldstein. 

Governor Engler? 

STATEMENT OF HON. JOHN M. ENGLER, PRESIDENT, 

BUSINESS ROUNDTABLE, WASHINGTON, DC 

Mr. ENGLER. Thank you, Mr. Chairman. 

I will pick right up on the corporate tax reform where Dr. Feldstein left off. 

Thank you to the committee for holding this meeting today. And 

I might mention in my credentials, I guess, as a 3-term Governor, 

after 25 years, we were able to get Michigan back to a AAA-rated 

State. So I appreciate the challenge in front of the committee. 

My testimony today focuses on the critical relationship among 

business tax reform, economic growth, and deficit reduction. Business tax reform should be designed to maximize economic growth 

over time, while creating permanent jobs with good wages. 

We believe that congressional action can improve the ability of 

American workers to compete in the hyper-competitive world economy. Such action to sustain economic growth would have the additional benefit of reducing the burden the Nation’s current debt imposes on our economy. 

If sound corporate tax reform, along with other reforms, including broad regulatory reforms, improves economic growth by even 

half a percentage point, we can generate millions of new jobs for 

Americans. 

Mr. Chairman, you and the committee could not be holding a 

more timely hearing than today’s session. Our companies are disadvantaged today by a U.S. corporate tax system that is an outlier 

at a time when capital is more mobile and the world’s economies 

are more interconnected than at any time in history. 

Your opening statement focused on that and recognized that our 

current tax system impairs the ability of U.S. companies to compete abroad, and it discourages capital investment in the United 

States. 

The U.S. corporate tax system is quite possibly the least competitive tax system in the entire OECD family. And I put a little chart 

up just to show what has happened over a period of time, because 

I thought it important that we do that. And, again, you noted that 

we have an antiquated tax code developed for a different era. 

This chart 25 years ago shows where we made changes, and we 

are in a more competitive posture. Today, we need a simpler, flatter, lower-rate system that allows American businesses and your 

constituents, America’s workers, to compete and win. 

The two primary reforms Business Roundtable endorses are a 

competitive territorial tax system and a significant reduction in the 

U.S. statutory corporate tax rate. 

First, territorial tax systems, under which foreign earnings are 

exempted from domestic tax, are the predominant practice, again, 

within the OECD. Territorial tax systems allow domestically headquartered companies to compete on a level playing field in foreign 

12 

markets where they do business. I have a table here that kind of 

shows just how predominant the practice is. 

And then, second, as the other chart was showing, we had a once 

statutory—competitive statutory tax rate, we no longer do. Rate reductions over the past 20 years have resulted in the U.S. corporate 

rate now being 50 percent greater than, again, the average of the 

OECD countries. 

I believe that the proposals we bring today would boost the 

worldwide competitiveness of American companies, increase jobs 

for American workers, increase wages, promote long-term economic 

growth for the United States, and help pay down our debt. 

In evaluating the cost of adopting these reforms, it is important 

to consider their cost relative to the revenue stream the government would have otherwise collected. 

In doing so, I urge Congress to recognize that many provisions 

in the tax code, although they may have statutory expirations, 

have routinely been extended year after year. Again, you sort of 

mentioned that in your opening comments. The R&D tax credit, to 

choose one, for example, has been a temporary provision now for 

30 years. 

Provisions that have been repeatedly extended are realistically 

part of the baseline against which the revenue from a reformed tax 

system must be measured. 

Some will argue that instead of tax reform, business tax increases should be used for deficit reduction now. Still others will 

argue that business tax increases should be used for new spending. 

But the Business Roundtable will argue that any business tax 

changes should be used to, as the President said to the Congress 

the other night, on Thursday, lower one of the highest corporate 

tax rates in the world. 

Clearly, given the deficit and everyone’s desire to be fiscally responsible, coupled with everyone’s desire to see the U.S. unemployment rate come down, we must guard against any diversion of corporate tax revenues, lowering the rate, and eliminating the unfair 

worldwide tax system. 

Comprehensive tax reform is a challenge. It will not get any easier by settling for piecemeal changes in the tax base or succumbing 

to the targeting that you spoke of for a specific industry. Success 

will come when we address the fundamental tax reforms that can 

help achieve a higher U.S. standard of living. 

On behalf of the Business Roundtable, I look forward to working 

directly with Congress on passing tax reform to provide sustained 

economic growth and sustained job creation. 

And we did bring one other chart. I will close with that. Leave 

that up, because it kind of is important, and it shows where the 

payrolls are today. This one has gotten a little bit of attention, but 

that is what we need to change, tax reform, and help move those 

numbers on the employment side in a positive direction. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Engler appears in the appendix.] 

Senator NELSON. Thank you, Governor. 

Mr. Kleinbard? 

13 

STATEMENT OF EDWARD D. KLEINBARD, PROFESSOR OF LAW, 

U.S.C. GOULD SCHOOL OF LAW, LOS ANGELES, CA 

Mr. KLEINBARD. Thank you, Mr. Chairman and distinguished 

members, for inviting me to testify. 

The U.S. today is an extraordinarily low-tax country by world 

norms, the fourth lowest in the OECD. And even by our own standards, we are collecting historically low levels of tax, below 15 percent of GDP for the last 3 years. 

At the same time, we are spending outliers in two large respects. 

And since spending determines the level of tax revenues that we 

require, I need to say one quick word about that. 

First, we spend much more on health care per capita than does 

any other country, and our per capita government share of this 

spending is the second highest in the world. If the U.S. were to 

spend per capita what Norway does on health care, our aggregate 

health care spending would immediately decline by $800 billion a 

year. 

Second, the U.S. spends as much on its military as do the next 

14 countries combined, 42 percent of the entire world’s military expenditures. Our current revenue base cannot be reconciled with our 

outsized spending on health care and defense. 

Moreover, whatever the long-term set of government entitlement 

spending policies we transition to, we will need to finance the costs 

of getting there, and that, in turn, means higher tax revenues than 

those we currently collect. 

The U.S. can afford to increase its total tax collections as a fraction of GDP. Just a decade ago, the country ran budget surpluses 

and enjoyed both a robust economy and job growth, while tax collections exceeded 20 percent of GDP. 

The CBO budget baseline assumes that the so-called Bush tax 

cuts will all expire at the end of 2012. Extending those temporary 

tax discounts would add some $4.6 trillion to our cumulative deficit 

over the next 10 years. 

We, therefore, have no practical choice but to treat the CBO 

baseline as the tax reform base case. Our tax reform goals should 

be to raise about the same revenues as the CBO baseline, but to 

do so in a smarter way. 

This, in turn, means that we must abandon our nostalgia for the 

Tax Reform Act of 1986. That tax reform effort was revenueneutral because it could afford to be. It also was preceded and followed by major tax increases. 

The fact that we have to raise revenue today means that this tax 

reform effort will look different, not that it is impossible. In particular, this tax reform will need to tackle some of the deliberate 

congressional subsidy programs baked into the tax code, which is 

to say tax expenditures. 

Of all of these, the most important to address are the personal 

itemized deductions, such as deductions for home mortgage interest, charitable contributions, and State and local taxes. They are 

extraordinarily costly, about $220 billion a year in foregone tax revenues. 

They are inefficient in that they lead to major misallocations of 

economic resources, particularly in the housing sector. They are 

poorly targeted in that the government subsidies go to individuals 

14 

who would have behaved the same without them, and they are unfair in that they are upside-down subsidies. They subsidize highincome Americans more than low-income ones. 

The Tax Policy Center has estimated that eliminating these subsidies for personal itemized deductions would increase tax revenues 

in the neighborhood of 1.5 percent of GDP over and above the lapse 

of the temporary tax discounts. 

This is an enormous revenue pickup. Their elimination also 

would simplify the code and increase its progressivity. 

Now, I fully recognize that the personal itemized deductions invariably are described as political sacred cows, but they are sacred 

cows that we can no longer afford to maintain. Either we eliminate 

these sacred cows or we allow them to stampede over us. 

Tax reform also must address the corporate income tax. I agree 

with Governor Engler that its 35-percent rate is too high by current world norms. But at the same time, U.S. multinationals are 

adept at gaming the current U.S. tax system and those of other 

high-tax countries through the production of what I call stateless 

income, income that is taxed essentially nowhere. 

The U.S. corporate base is being systematically eroded through 

these stateless income tax planning strategies. And a territorial 

system along the lines advocated by the Business Roundtable 

would make these problems worse in every dimension. 

A revenue-neutral corporate tax reform package could be fashioned along the following lines. First, eliminate business tax expenditures; second, reduce the corporate tax rate to something in 

the range of 25 to 27 percent; and, finally, tax multinationals currently on their worldwide income. 

The resulting corporate system would represent a huge competitive boost for American domestic firms, would attract inward investment into the U.S., and would provide a fair tax environment 

for U.S.-based multinationals. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Kleinbard appears in the appendix.] 

Senator NELSON. Thank you, Mr. Kleinbard. 

Senators, I am going to ask one question. I am then going to turn 

to you for your questions. 

Gentlemen, how much revenue could Congress expect realistically to be generated by broadening the tax base, eliminating tax 

expenditures, and closing the loopholes? Let us just go right down 

the list. 

Mr. GREENSPAN. It is a very extraordinarily large number, but 

I would not put the issue that way, because what we are dealing 

with is a major problem in this country in which what we have 

promised in the way of entitlements is, in physical volume terms, 

more than I think the size of the American economy can produce. 

And so it is not an issue of raising revenue, per se. It is a question of our spending being already committed to more than we have 

the capacity of achieving. So I would say that the focus has to be 

fundamentally on the issue as to why, for example, as I mentioned 

in my earlier remarks, the trustees of the Medicare Fund several 

years ago found that we are very significantly underfunding MediVerDate Nov 24 2008 20:46 Jan 06, 2012 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 R:\DOCS\71637.000 TIMD
15 

care. And unless and until we understand that our problem is 

spending and not taxes, I think we will lead ourselves astray. 

Finally, let me just say, Mr. Chairman, that there is no question 

that the level of taxation is a very major factor in determining the 

level of economic activity, and the issue that I think we ought to 

focus on is that we are in a period of very sluggish economic activity. There seems to be no real potential for changing that materially, and the revenues we are going to engender, irrespective of the 

tax code, are going to be much less than I think is currently being 

projected either by CBO, OMB, or a number of private economists. 

If that is the case, we have to recognize that we have a major 

problem on the expenditure side and that the way I would define 

it is that this is not discretionary spending, which is very easy to 

end. It is very difficult to cut entitlement spending, and I think unless and until we put our focus on that issue and then determine 

what it is we need to raise in revenues—after we determine what 

we are going to spend is, to my view, the appropriate way to focus 

on tax policy. 

Taxes are there to fund spending, and the lower the level of 

spending, the less the problem of funding. 

Dr. TAYLOR. If it is just a matter of—— 

Senator NELSON. Hold on, Dr. Taylor. I want to follow-up with 

Chairman Greenspan. 

But just focusing on tax expenditures, it is an item worth $14 

trillion over 10 years. What do you think is realistic for the Congress to squeeze out of that $14 trillion of tax expenditures? 

Mr. GREENSPAN. Well, Mr. Chairman, I am one of those, and I 

suspect you may be, as well, who thinks tax expenditures should 

not exist in our fiscal system and that, as far as I am concerned, 

what the Bowles-Simpson Commission essentially did is started off 

with the presumption that tax expenditures would be zero and 

then work back from there. 

I like that premise. In fact, I realize that it is going to be very 

difficult to avoid having to keep some of that in place, but as far 

as I am concerned, the sooner we can get rid of the whole concept 

of tax expenditures, the better we would be. 

I would like to see all expenditures go through the appropriation 

process rather than go through tax credits or other things, which 

I find is merely a mechanism to get around the ultimate choosing 

process which the Congress, to my judgment, has to do. 

Senator NELSON. So get rid of $14 trillion and then build from 

there. 

Mr. GREENSPAN. I would say, if you start with the assumption 

that tax expenditures are an inappropriate means of raising revenue and then work back from there, I think we are in the right 

direction, as the Bowles-Simpson Commission recommends. 

Senator NELSON. Dr. Taylor? 

Dr. TAYLOR. I think if you want to just eliminate the tax expenditures and not consider it along with tax reform, which is really adjusting the marginal rates, then you are going to be disappointed 

about how much extra revenue you raise. 

If we have a strongly growing economy, say, like we had after 

the recession in the early 1980s, 6 percent a year, 6.5 percent a 

16 

year rather than 2 or 2.5, with the same share of taxes, we get a 

lot more revenue. We can do a lot more things. 

So it is the growth that is most important. So I would say when 

you are thinking about zero in terms of tax expenditures, you better be simultaneously thinking about the marginal rate reductions 

that are going to go along with that. 

Senator NELSON. Which is precisely what we have said up here. 

Now, Dr. Feldstein, you proposed a 2-percent cap on any individual and, I assume, corporate amount of tax expenditure. And if 

I recall your testimony, that was about $3 trillion over 10 years. 

And that way you do not have to pick and choose which ones you 

want and do not want. 

Dr. FELDSTEIN. That is right. But let me be clear. That was just 

on the personal side. It is hard to think about what the equivalent 

of a percentage of AGI is for the corporate side, but I have not 

looked at that. 

I do know that if you look at the tax expenditure analysis by the 

joint committee, much, much more of the tax expenditures are on 

the personal side than on the corporate side, although the things 

you mentioned are important and on the corporate side. 

There is also a question of how one ought to treat incentives for 

saving and investment. Under a broad income tax measure, you 

would say contributions to individual retirement accounts or the interest earned within 401(k) accounts are tax expenditures and 

should not be allowed. 

But I would disagree with that. I would say—and the numbers 

that I mentioned assume that pro-saving items in the tax code, prosaving features of the tax code like IRA deductions and the nontaxation of the inside buildup in IRAs, would continue to be allowed. 

So that $3 trillion over 10 years comes just from the personal deductions and the exclusion of employer payments for health insurance, putting a 2-percent cap on that. 

Senator NELSON. Governor? 

Mr. ENGLER. Well, being only a very mediocre agricultural economist, not an esteemed economist like my colleagues here, I am not 

able to put a number on this. But let me just remind the committee 

of something that virtually every member of this committee was 

part of back in 1995 and 1996 when we were doing welfare reform. 

And I think that still stands as one of the singular accomplishments in the last part of the last century. 

But we saw in that, when the incentives changed, we had people 

going back to work whom people said would never work. We had 

entire counties where everybody on public assistance was working 

somewhat, and that was as simple as changing the way we handled 

income disregards. 

I would simply argue that to restore sort of the animal instincts 

of our entrepreneurs and to get the incentives lined up, the kind 

of changes that are being talked about here are going to yield additional revenue beyond what, say, a static analysis over in some 

CBO corner of the room would come up with and that the dynamism of this tax code is not to be underestimated, if we get it right. 

And what we, I think, have to be focused on and what manufacturers and Business Roundtable members deplore is the lack of 

17 

economic growth in this country. We need to be a jobs engine again 

as a Nation, and our policies should be coordinated to get there, 

and your topic today can help. 

Senator NELSON. Mr. Kleinbard? 

Mr. KLEINBARD. Well, as the former Chief of Staff of the Joint 

Committee on Taxation, it is, I guess, incumbent on me to do what 

you have always suspected my old group did and pull a number off 

the top of my head. I come up with about—I am rounding here—about $4.5 trillion, 

and the way I get there is, first, the itemized deductions—it is 

somewhere in the neighborhood of $2.5 trillion over 10. Second, the 

employer-sponsored health insurance, I would not put a cap on that 

the way Marty has proposed. We can talk about that in more detail. But what we tend to forget is that this is one tax expenditure 

which also has a tax expenditure effect on our Social Security tax 

payments, our payroll taxes, and that is about $1 trillion over 10 

years. 

So regardless of what we do on the income tax, if we included 

employer-sponsored insurance as part of our FICA tax base for payroll purposes, we would be talking about another trillion. So I could 

see about $3.5 trillion. 

And then there is over $1 trillion, $1.2 or $1.3 trillion in business 

tax expenditures. Those need to be reversed. Every country that 

has lowered its rate has also broadened its corporate base, in particular, by getting rid of accelerated depreciation. That is a fair 

trade, and that would put in over $1 trillion, which, in my view, 

should be employed to reduce the corporate tax rate. 

Having said that, when we are talking about fundamental 

changes like this, like eliminating the personal itemized deductions, it is important to remember a maxim that Chairman Baucus 

taught me, which is that you have to boil the frog slowly, that we 

cannot simply wake up tomorrow with no home mortgage interest 

deduction, and I confess that my numbers do not reflect any transition rules. 

Mr. ENGLER. The frog is still dead, though, I would point out, 

which is one of the problems. [Laughter.] 

Senator NELSON. So your proposal is $4.8 billion a year or multiplied by 10 years—— 

Mr. KLEINBARD. Well, it is about $4.8 trillion, aggregate, over 10, 

yes. 

Senator NELSON. So 4.8—— 

Mr. KLEINBARD. Trillion over 10, yes. 

Senator NELSON. Over 10. 

Senator Crapo? 

Senator CRAPO. Thank you very much, Mr. Chairman. 

And I assume, by the way, that that number, Mr. Kleinbard, 

would be $4.8 trillion out of the 14 or so trillion dollars that there 

is now in the tax code. 

Mr. KLEINBARD. By way of tax expenditures, yes. 

Senator CRAPO. It would mean there would be about $9 trillion 

left in the tax code as part of the tax expenditure system. 

Mr. KLEINBARD. Yes. And most of those would be on the capital 

income side that Marty referred to, retirement plans and things 

like that. 

18 

Senator CRAPO. Thank you. And I would just like to ask the entire panel, very quickly: in the Bowles-Simpson approach and I 

think in the administration’s approach and others, at least the proposals that are out there with regard to the corporate income tax 

rate, are being proposed on a revenue-neutral basis. 

Is there any disagreement that on the corporate side, the reforms 

should be revenue-neutral? Does anyone disagree with that? 

Mr. Kleinbard? 

Mr. KLEINBARD. I do not disagree with that, except to note that 

some business tax expenditures are, to some extent, claimed by 

non-corporate businesses. The bulk, though, are claimed by corporations. About 80 percent are claimed by corporations. 

Senator CRAPO. All right. Thank you very much. Getting back to 

the question of whatever the level of adjustments that can be made 

in the Internal Revenue Code is in terms of flattening the code and 

reducing the tax expenditures—and I think there is no disagreement among any element here with regard to the fact that, in some 

way, we should do that—the bottom line is, it seems to me, that 

there is a big debate over how that revenue savings to the Federal 

Government should be utilized. 

As I see it, it can be used in three ways. It can be used to reduce 

rates, it can be used to justify more spending, and it can be used 

to reduce the deficit or to pay off debt. And there may be other 

ways to use it that I have not thought about yet, but in a broad 

sense, it seems to me that those are the three options. 

In my mind, reducing rates would be the most effective utilization of those kinds of savings. But I would like to have, just from 

each member of the panel, your observation as to how we should 

approach that. 

Mr. GREENSPAN. Senator, ordinarily I would agree with you, but 

we are in such precarious shape fiscally at this stage that I think 

it is essential that we get the level of the deficit down as quickly 

as possible because, remember, every day that deficit sits out there 

at a $1 trillion-plus annual rate, we are adding to the debt. And 

in order to reduce that debt, we have to run a surplus. 

And leaving aside the issue of stabilizing the fiscal system by 

making sure that the level of debt relative to the GDP is some stable number, that is an economist’s fiction, because what can happen very readily in that context is interest rates can go up and that 

whole thing breaks apart. 

I think the combination of, one, a slower rate of growth and, 

therefore, of fundamental revenue creation coupled with the issue 

of the very considerable difficulty we are having in cutting spending, leads me to conclude that the very first thing we ought to address is get the deficit down. 

Once the deficit is down, then I think we approach the issue of 

cutting spending, and, having cut spending, then cut taxes. I do not 

believe it makes sense, except in very extraordinary circumstances, 

to cut taxes funded by borrowed money. I do not think, at the end 

of the day, that works. 

So I think we underestimate in all the calculations we are making how severe this problem is. And the mere fact that everybody 

seems to agree on the baseline of this and the total revenues on 

that, which, in fact, tends to be the case—OMB and CBO tend to 

19 

come out reasonably even in all areas—they make the same fundamental assumptions about the long-term economic outlook, and, as 

a consequence, that is the major driver of revenues. And so my 

judgment is, let us get our house in order, let us remember that 

taxes are there for the purpose of funding spending, and decide 

what level of spending this country can afford, not what it would 

like, but what it can afford. 

Senator CRAPO. Dr. Taylor? 

Dr. TAYLOR. I am in strong favor, without any qualifications, of 

your first approach, which is to use it to reduce rates, which, to me, 

is the classic definition of tax reform, expanding the base and lowering the rates in a revenue-neutral way. 

The strategy or the plan for the budget I outlined orally at the 

beginning and in my written testimony has that built into it, and 

I think it is one of the real advantages of a credible gradual reduction in this very high level of spending we have recently just 

achieved. 

So it seems to me, number one is the way to do this. 

Senator CRAPO. Thank you. 

Dr. Feldstein? 

Dr. FELDSTEIN. I would split the revenue between the two uses, 

and I thought that the Bowles-Simpson proposal, which does do 

that, probably puts too much into rate reduction and not enough 

into deficit reduction. 

I think we do have to get back to annually balanced budgets, not 

every year, but over the business cycle, as quickly as possible. 

Here is the good news. After World War II, we had a debt-toGDP ratio of 110 percent, and 15 years later it was down under 

50 percent, and that happened because over those 15 years, on average, there was no deficit. Some years plus, some years minus, but 

the fact that the economy grow 2.5, 3 percent and we had inflation 

2.5, 3 percent, meant that nominal GDP kept growing while the 

total debt remained unchanged. 

And so we got back from this very high debt-to-GDP ratio to 

something that we then lived with for several decades until recently. 

Senator CRAPO. Thank you. 

Governor Engler? 

Mr. ENGLER. I was going to mention Simpson-Bowles, as well, in 

terms of the structure. But from the corporate, the business side, 

I think it is very important, the image, the concept of revenue neutrality, that it would be the right baseline. That is why I wanted 

to put that in my spoken testimony today, because that can alter 

things a lot depending on how you play that. 

But I would see, in the business side, a rate reduction, which I 

think has a positive effect in terms of economic growth and deficit 

reduction. I think the only thing you clearly have to be very clear 

on is no increased spending, because that needs to go in the other 

direction. 

Senator CRAPO. Thank you. 

Mr. Kleinbard? 

Mr. KLEINBARD. Well, I thought Chairman Greenspan was quite 

persuasive. Milton Friedman famously once said that to spend is 

to tax. So it is really spending that drives the question of how 

20 

much revenue we need. And here I think we are all perhaps not 

keeping on the table this inescapable demographic fact that the 

country is getting older. 

Just look at this panel here in front of you as proof. And the result of that is that our health care expenditures are rapidly growing at a rate that greatly exceeds our growth in GDP. 

So we need to rethink our spending patterns, our long-term entitlement patterns. Those have to be phased in slowly. We have to 

boil the frog slowly in terms of changing those entitlement rules to 

more sustainable ones, and, in turn, whatever is left we have to finance, and we finance that through taxes. 

So, in the medium term, I do not see any prospect other than 

higher taxes being used to help reduce the deficit or, at a minimum, not increase it as we make a transition to a different spending path. 

Senator CRAPO. Thank you. 

Senator NELSON. Senator Bingaman? 

Senator BINGAMAN. Thank you very much. And thank all of you 

for being here to talk with us today. 

I guess a question I would just still like a little more clarification 

on is whether or not, as Congress approaches this whole idea of tax 

reform, we need to raise additional revenue. 

And I gather Mr. Kleinbard says we do need to raise additional 

revenue. I understand Chairman Greenspan to be saying we do. I 

believe that is my interpretation. And I believe the rest of you have 

said we do not or maybe we do. I do not know. 

Dr. Feldstein, maybe you could clarify your—you are nodding 

your head. 

Dr. FELDSTEIN. My view is that, if we eliminate or cap, which is 

my preference, tax expenditures, we should use—you all should use 

some of that money to reduce deficits and some of it to reduce marginal tax rates. 

Senator BINGAMAN. So we should raise additional revenue, and 

it is just a question of how we use the additional revenue. 

Dr. FELDSTEIN. Well, if you eliminate tax expenditures, you automatically raise revenue. 

Senator BINGAMAN. Right. 

Dr. FELDSTEIN. The question is, do you give it all back—— 

Senator BINGAMAN. Right. 

Dr. FELDSTEIN [continuing]. In the form of lower rates, or do you 

use some of it—— 

Senator BINGAMAN. And your view is we should give some of it 

back in the form of lower rates, but not all of it, by any means. 

Dr. FELDSTEIN. Exactly. 

Senator BINGAMAN. Dr. Taylor, your view is we should do the reforms, but we should use the revenue that we achieve from those 

reforms to cut rates, as I understand it. 

Dr. TAYLOR. Yes. It would be analogous to what we did in the 

1980s, the 1986 reform. 

Senator BINGAMAN. So you would not want us to do an increase. 

Dr. TAYLOR. The reason is because I think growth is so important, economic growth, and that is where you think the revenues 

will come from. Classic tax reform is what I would suggest. 

21 

Senator BINGAMAN. But am I correct, Chairman Greenspan, that 

your view is, as I think you put it, deficits are so important, we 

first need to bring down deficits, which means that we are going 

to have raise revenue until we get back toward a balanced budget. 

Is that your position? 

Mr. GREENSPAN. It is, Senator. But very specifically, what I 

would recommend is a recognition that the Bush tax cuts of the 

years 2001 and 2003 essentially rested on a concept of looking at, 

for a large period, surpluses, an unbelievable amount of surplus, as 

some of the analysts put it back at that time, as far as the eye 

could see. 

And I always envisaged the Bush tax cuts as essentially being 

one means by which we could take advantage of that, meaning: get 

the tax cuts and reduce the surplus. 

I would think, at this particular stage, that what we ought to do 

is go back to the tax structure that existed prior to 2001 and then 

start again, meaning that we want to get the level of taxes down, 

but you can only do it if you bring expenditures down. 

And so I think the primary objective of policy ought to be, one, 

get ourselves to a stable position and allow the Bush tax cuts, all 

of the Bush tax cuts, to be rescinded. We will start to get to a point 

where we can begin to get balance in the system. 

And remember that, as I pointed out in my prepared remarks, 

this is not like the end of World War II with 110-percent ratio of 

debt to GDP. That was very easy to cure. You just stopped World 

War II, and all of a sudden spending went down. 

And if you have a lot of discretionary spending, that is easy to 

cut, but we are locked in with entitlements, and everyone who receives them believes the government says, this is your right. And 

as a consequence, rescinding them is something very difficult politically to do. 

My view has always been that we are in the process of promising 

more to people who are maybe 55 years of age, a level of Medicare 

benefits, in real terms, for, say, the year 2030, which I do not think 

our economy is going to be able to deliver. And basically, not delivering what is promised by government is the worst thing that government itself can do, because that person who is 55 years of age 

can—if they knew what an actual benefit size was going to be in 

Medicare, for example, they could perhaps work a year or two 

longer than they ordinarily would have expected because they had 

retired on the assumption that those benefits were real. 

And I think they are not, and I think that unless and until we 

recognize that we have a very serious problem, this is going to be 

a very tough row to hoe to get us back to fiscal stability. 

Senator BINGAMAN. Thank you very much, Mr. Chairman. 

Senator NELSON. Thank you, Senator Bingaman. 

Senator Wyden? 

Senator WYDEN. Thank you, Mr. Chairman. And thank you for 

your leadership on this. This is a particularly important topic, in 

my view, and I commend you and Senator Crapo for the work that 

you are doing. 

I want to zero in on the jobs issue with respect to this topic, and 

start with you, if I could, Dr. Feldstein. 

22 

As you know, I am very sympathetic to the basic kind of proposals and ideas you are advancing in this area. When we looked 

at the Bureau of Labor Statistics’ figures, in the 2 years after the 

1986 reform bill, the country created 6.3 million new jobs, and I 

keep zeroing in on that almost like the old record player that just 

never stops—6.3 million new jobs. 

And it seems to me the study that you did on the 1986 bill, 

which, to a great extent, has affected my thinking over these years, 

the bipartisan bill I had with Senator Gregg and now with Senator 

Coats is really based on that, which is look to lower marginal rates 

while keeping progressivity, and you are on a path to stimulating 

the economy and creating family-wage jobs. 

Do you continue to feel that those principles are sound? 

Dr. FELDSTEIN. Absolutely, yes. 

Senator WYDEN. The second question—and maybe we can get 

Mr. Kleinbard and any of you who would like to participate in 

this—is on the question of the corporate rate. 

Senator Coats and I, in our proposal, have it at 24 percent, which 

is actually the lowest on offer right now. Most of them are between 

25 and 27. But the point is, everyone is moving in the tax reform 

debate towards the same kind of figure. 

The question is, how do we make sure that in corporate tax reform, we get as many jobs as possible here in the United States? 

Because what the typical citizen is saying is, ‘‘Look at these tax 

breaks.’’ You have tax breaks for shipping jobs overseas. We need 

jobs here. 

Well, a lot of companies would like to put their focus here. So the 

question then becomes, where do we need to go to get that done? 

It seems to me what you are saying in your testimony, Mr. 

Kleinbard, is that, if you cut corporate rates to the mid-20s, and 

I am certainly open to whether it ought to be 22 or this or that percentage amount, your theory is that that could create jobs here in 

the United States for companies that are already here, number 

one, companies that are looking around the world to invest here, 

and for multinationals. 

In other words, it would allow us to run the table and do everything as far as tax policy that is needed for pro-growth tax reform. 

Is that essentially true? 

Mr. KLEINBARD. Senator Wyden, that is an excellent summary. 

I believe quite strongly that the corporate rate is too high. I also 

believe, frankly, that too much attention has been paid to the plea 

of multinational firms for a territorial system which would, in fact, 

work for technical reasons to erode the domestic corporate base 

even further. 

Domestic firms have been sort of left out in this discussion. The 

right approach is to lower the rate on domestic business operations 

to attract jobs, to attract inbound capital, more jobs as a result of 

that, and then to offer multinational firms a fair system in respect 

of their international operations. 

But when you look at the tax rates in OECD countries where 

they actually operate, where the large economies are, those rates 

are still in the high 20s at the moment. And so, if we were to offer 

U.S. firms a worldwide rate in the mid-20s, we will be smack-dab 

23 

in the middle of where the OECD, the G–7 major economies, are 

today in respect of their domestic income tax. 

One last little footnote. When we make these comparisons, we 

have this tendency to throw in State and local taxes. The fact is 

that multinational firms do not pay State and local tax on their foreign income. And so we are not talking about a 39-percent rate. We 

are starting with 35. We need to get it down to 25, and at that 

point it is a win-win domestically and a fair environment internationally. 

Senator WYDEN. Dr. Feldstein, on this question of where you get 

that sweet spot in order to increase growth to the greatest degree 

possible, get as many American workers employed as we can, I 

want to get your thoughts on the territorial issue. 

Senator Gregg and I spent a gazillion, quadrillion hours on this, 

and that is barely an exaggeration, and I kept coming back to all 

the issues with respect to territorial systems that involve gaming, 

where somebody generates a profit over here and books it over 

there, and the like. And I came to the conclusion that competitive 

rates solve a whole lot of problems. 

Our goal is 24. Maybe it should be something else, and I am open 

to all that, and I am open to continuing to look at a territorial system. 

But is it fair to say—and this seems to be in line with your study 

of the 1986 bill, the effect of marginal rates while keeping progressivity and the like—that competitive rates will solve a lot of problems here? 

Dr. FELDSTEIN. Of course, my work on the 1986 tax cut was 

about the personal cuts rather than corporate. 

Senator WYDEN. Right. 

Dr. FELDSTEIN. I was coordinator of the President’s Economic Recovery Advisory Board for President Obama’s tax study, and we 

spent a fair amount of time looking at the—and listening to witnesses and talking to Treasury officials and others on this question, 

and I refer to the sections of that report in my written testimony. 

I am struck every time, though, by the fact that the United 

States, I think with one exception, is the only OECD country that 

does not have a territorial system. And when I think how easy it 

is for a French company or a German company to do cross-border 

investing—after all, they have all their neighbors there—and yet 

they do it, and they find it favorable, and they create manufacturing jobs in their own economy. 

So I can see the pros and cons. I can see the complexity of it, 

and yet I am struck by the fact that all of these other countries 

have chosen to go the territorial route. 

Senator WYDEN. Let me ask one other question, if I might, and 

this one is for you, Mr. Engler. 

This summer I was just struck by how many businesses said that 

what they really want for growth and investing is some certainty 

and some predictability and some measure of permanence. 

The Wall Street Journal said the other day the only thing permanent about the tax system is it is impermanent, and you keep 

lurching from one fix, one band-aid, one temporary proposal or another. 

24 

Isn’t there an urgent need, if we are going to have significant 

economic growth, to get some certainty and some predictability 

that you can only get if you have real tax reform? 

Mr. ENGLER. I think so, and I think that many of our companies 

think that, as well. 

I believe that that certainty, certainly—and I mentioned regulatory reform in a number of other areas. It is across everything 

today. But you are completely correct in terms of the tax code. Let 

us, whatever we do, make it permanent and be done. 

The complexities of scoring things, of how long this is in effect 

or not, and, in fact, what we have done with AMT, I mean, all of 

that needs to go away. We need to make some decisions. That is 

the job of the Congress. And direction is important. Transition 

rules are important. 

We can go to a very good place over a period of time, and that 

is another permutation on our discussion today. If I know where 

we are going and it is permanent that I am going there, the path 

has some options at least that exist. 

But I think from the competitive standpoint, it just makes no 

sense for me, if I might just finish this thought, to have a system— 

a German-headquartered company, a U.S.-headquartered company, 

we both sell in China. The German company pays whatever the tax 

rate is in China and takes some money home. The U.S. company 

pays the China tax, leaves the money over there because, if they 

bring it home, they pay another tax. 

Why would we not want the money to come home, just on the 

off chance we might spend it here once it gets here versus leaving 

it out there? 

Senator WYDEN. My time is up. I think you make an important 

point with respect to the example. I made the judgment, with Senator Coats, that, if we are going to a permanent tax reform change, 

it does make sense to have some sort of one-time repatriation so 

that you make it attractive for people to bring that amount home. 

I just think that, as we get into this, as was done in 1986—and 

that was what I was alluding to with respect to your analysis—is 

that Democrats, who are plenty liberal, and Ronald Reagan made 

a judgment that competitive rates plus progressivity solved a lot of 

problems. 

And Dr. Feldstein today confirmed my thinking that that still 

makes sense. And beyond that, I am very open to working with 

your organization and others with respect to what those rates 

ought to be. At 24 percent, Senator Coats and I have what is the 

only bill, the only bill that has been scored, with the lowest rate 

on offer. 

It may not be the right one, and we are prepared to work with 

you to get the right one. But what we need to do, picking up on 

what Dr. Feldstein found after 1986, is accept these principles that 

have been proven to create jobs and proven to create jobs in the 

United States, which is what Mr. Kleinbard has so eloquently said. 

Mr. ENGLER. I know I am out of time, as well, but if I can just 

finish the thought on—to take my example and stretch it a little 

bit further. 

We used to have an investment tax credit in this country, a 10- 

percent credit. We now, in effect, with the way territorial works— 

25 

in my little example, the German company and the U.S. company, 

with the China money, the German company has that income and 

buys something here. If we bring our money home and buy something here, we first take a hit, a tax hit on that before we can 

make a purchase. Thus, that is why the Clydesdales get bought by 

ImBev, not the Clydesdales owning ImBev. 

Senator WYDEN. Mr. Kleinbard, do you want to respond to that? 

Mr. KLEINBARD. Yes. This is a very difficult issue, and I have 

spent the last 2 years working on this very issue. I agree with Governor Engler. We want the money to come home. We do not want 

a system that has $1.4 trillion of money trapped overseas, as is the 

case today. 

That is silly. The current system is silly in that respect. But 

there are two solutions. One is a territorial system. The other is 

worldwide tax consolidation, because then you have already been 

taxed and you bring the money home. There is no extra cost. 

So, for example, if you were to reduce tax rates to 24 percent, 

well, from memory, and I may be wrong here, but from memory, 

China’s tax rate is 25 percent. So the worldwide tax consolidation 

would add no burden to a United States firm doing business in 

China. 

The trouble with a territorial system is not the theory, but the 

practice. And, in fact, when you start looking at what sophisticated 

territorial countries like Germany have done, they have imposed all 

sorts of limitations, for example, on the deductibility of interest all 

over the world, including the parent company in Germany, that the 

member firms of the Business Roundtable would find extremely 

distressing. 

So a well-designed territorial system that is robust to gaming, in 

fact, would raise revenue compared to current law in ways that 

would be viewed as troublesome to multinational firms. 

Senator WYDEN. Mr. Chairman, my time is up. And I just want 

it understood that my goal is to reconcile these two viewpoints, because I think it is going to be necessary to pass a bill. 

I can recall a conversation I recently had with a CEO who said, 

‘‘I really like your bill. I love the fact you and Coats are doing it. 

If you get the corporate rate run down to 21 percent, we are on 

board.’’ 

I said, ‘‘Well, gosh, I’m kind of not in charge of this. Chairman 

Baucus is in charge. The President of the United States is in 

charge.’’ 

And we are going to have to have a lot of negotiations with respect to trying to find that sweet spot where we can be competitive 

and create family-wage jobs in this country. 

I mean, maybe you know this off the top of your head, Mr. 

Kleinbard, but I think Singapore has a rate of like 10 percent or 

something like that. 

Mr. KLEINBARD. It is something in that neighborhood, yes, sir. 

Senator WYDEN. So businesses come to me and say, ‘‘We are not 

going to get the rate down to 10 percent.’’ But we can walk out of 

this debate with a competitive rate and then get to where you just 

described, Mr. Engler, which is some semblance of certainty and 

predictability so your businesses around the country can plan, beVerDate Nov 24 2008 20:46 Jan 06, 2012 Jkt 000000 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 R:\DOCS\71637.000 TIMD
26 

cause that is what I found this summer: all they said is, just get 

away from this 1-year or another kind of thing. 

And, colleagues, I think if we do not get the kind of cooperation 

Chairman Nelson and Senator Crapo are talking about, we will 

have a debate in the lame duck session of 2012 that is just along 

the lines of the lame duck session of 2010. We will be right back 

talking about extending a dysfunctional, broken system rather than 

getting the kind of family-wage jobs that these outstanding witnesses would have. 

So I really encourage the work of you, Chairman Nelson and 

Senator Crapo, and look forward to working with you all in a bipartisan way. 

Senator NELSON. This is clearly a moment in time in which we 

could get something done with the Super Committee. 

Senator Crapo? 

Senator CRAPO. Thank you, Mr. Chairman. I appreciate you letting me go next and out of order, because I have to run to another 

engagement. But with this group of experts present, I cannot resist 

asking this one last question. 

There has been a lot of discussion by every member of the panel 

today about the fact that we have to get our deficit under control 

and that we may have some differences among us as to what portion of that problem relates to overspending versus the tax code or 

what-have-you. 

But we now have a special committee operating, and it is working to get about $1.2 trillion, minimum, of additional deficit reduction from where we have already gone in this Congress. 

I am one of those who believes that that is not enough, and the 

reason I believe that is, as you know, I served on the BowlesSimpson Commission. Its proposal would have reduced the deficit 

over 10 years by about $4.7 trillion, leaving aside how you get 

there, the spending and the other policies. 

The broader picture of, how far do we need to get is the question 

I am asking. If you took the $4.7 trillion figure and played it out 

for 10 years, assuming Congress did not get around it somehow 

and that it worked, even after that was all done, we have barely 

just kept our head above water, as I understand the facts, meaning 

that our debt-to-GDP ratio would be about the same as it is today, 

although it would not have skyrocketed like it will with no action. 

Our national debt would still be $12 trillion or more. 

And the point I am making is that it seems to me that our Nation, in terms of setting a target, needs to be looking at somewhere 

at least in the $4 trillion to $5 trillion neighborhood of deficit reduction now in terms of our plan for the next decade. 

And I would just like to ask each member of the panel if you 

could quickly react to that in terms of what you think our target 

ought to be or how bold do we need to get in terms of our deficit 

reduction as we try to work on some of these proposals. 

Mr. GREENSPAN. Senator, I think the $4 trillion is a minimum, 

and one of the reasons I believe that is I think that the current 

services budget projections are not—the current services projections of the deficit are too low and that what we do know, when 

you look at history, is that there is a tendency on the part of anyVerDate Nov 24 2008 20:46 Jan 06, 2012 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 R:\DOCS\71637.000 TIMD
27 

body who does budget analysis in government to be optimistic, and 

the problem is it does not work out that way all the time. 

And just taking a second to comment on this issue of uncertainty. One of the measures that I find very riveting is the fact 

that currently, if you look at non-financial corporations in the 

United States, usually, they will spend approximately what their 

cash flow is. 

Today, they are at the lowest level of investment in long-term illiquid assets of any time relative to cash flow since 1940. 

The whole level of uncertainty is also reflected in equity prices 

in the sense that the equity premium, which is a measure of the 

extent of what those who issue stock require in order to sell an 

issue, that equity premium, according to JP Morgan, is at the highest level in 50 years. 

So the level of uncertainty is deep. It is partly related to the tax 

issue and especially the permanence issue, because you can almost 

argue that it is the impermanence of the tax code which creates degrees of uncertainty, which makes investment in 20-year assets 

very difficult to do. 

Before I was in government, I served on innumerable corporate 

boards in which I was involved in making projections of long-term 

capital investment procedures, and I will tell you that the degree 

of stability of long-term tax expectations played a very important 

role, not in the average expected rate of return on a particular investment, but its variants. And once you start putting variants on 

a number of these investments, the risk premiums become prohibitive. 

So I think that a focus of this committee and, indeed, the whole 

process has got to be, for once and for all, let us get a structure 

of taxation which is not constantly subject to change and is not 

constantly subject to things such as tax expenditures which are 

funding every single thing you can think of, because it is more difficult to get it through the appropriations process. 

Senator CRAPO. Thank you. 

Dr. Taylor, what should our target be? 

Dr. TAYLOR. I originally estimated it would be $6.2 trillion relative to the President’s first budget. 

I think if the Joint Select Committee gets its 1.2, there will still be about $3 trillion left to do. And what I mean by that, the 

amount that—if it is on the spending side, it takes spending to 19.5 

percent of GDP. 

In fact, I would suggest that some of this dialogue be transformed back into discussions, because these trillions over 10 years 

are a little much for people out there to really fathom. 

But the idea of holding our spending, Federal spending to the 

same level it was in 2007, 19.5 percent, is something most people 

can understand, and it does add to the certainty. I would recommend that. But there is a long way to go. 

On this uncertainty, predictability, permanence, I mean, 2 years 

ago, over 2 years ago, when the case was being made for temporary, targeted, timely tax cuts, I testified in the Budget Committee and said, ‘‘No, we need permanent, predictable, pervasive 

tax cuts,’’ and created a little joking about alliteration, but that is 

where we had come to. 

28 

And you articulated very well, Senator, I think, the other position here is very important to remember. 

Senator CRAPO. Thank you. I know I am out of time, but if the 

other three of you could quickly respond, I would appreciate it. 

Dr. FELDSTEIN. If I remember correctly, the CBO number is that 

we are on a course now which would take us to about a 90-percent 

debt-to-GDP ratio. I think a reasonable goal would be to get it 

down to 60 percent and stabilize it there—it would be better to 

have it lower—but doing that requires taking out 30 percent of 

GDP over this period of time, and that means, roughly, $6 trillion 

less debt than is currently projected. 

And then you have to, in order to stabilize it at 6 percent, you 

would need to get the budget deficit down to about 3 percent on 

an annual basis. 

Senator CRAPO. Thank you. 

Mr. ENGLER. And I would just say the employers are ready to do 

their part to try to get the growth rate up a little bit; that, if we 

are going to have a 9.2-percent unemployment rate, a GDP that 

can hardly get to 2 percent, we cannot cut enough for tax, and we 

will probably get ourselves out of the hole over the horizon. 

Senator CRAPO. Thank you. 

Mr. Kleinbard, you get the last word on this question. 

Mr. KLEINBARD. CBO estimates that deficits at 2021 would run 

in the neighborhood of 1.5 percent of GDP, and that is, I think, in 

the ballpark of where we need to be. 

The trouble is that, in doing that, CBO assumes the expiration 

not just of the individual tax cuts, but also all the business extenders. And when you add all that up, CBO is assuming $5.5 trillion 

more in tax revenue than we are collecting today. 

What is more, and this is a point that I take Chairman Greenspan to have been emphasizing, the CBO also assumes constant 

growth. There are no hiccups in the CBO baseline. 

So, if you want to build in a rainy-day fund on top of that, you 

are, unfortunately, talking about some number, compared to current policy, in excess of $6 trillion. 

Senator CRAPO. Thank you. 

Senator NELSON. Dr. Feldstein, what do you recommend that we 

do with the Bush tax cuts? 

Dr. FELDSTEIN. Tell me what the economy is going to be like. I 

am afraid the economy is going to be very weak and, therefore, 

when I think about deficit reduction and reform, I think that we 

have to do the timing such that we do not take a weak economy 

and push it down even more. 

I think there is, unfortunately, contrary to a lot of the both private and public official forecasts, I think that there is a 50-percent 

or better chance that we are going to go into a new recession. 

I think consumers and businesses are not, under current circumstances, inclined to spend. And so I am afraid that, if that is 

where we are, it would be a mistake to let those tax cuts lapse. 

Senator NELSON. Anybody on the panel, I would like you to opine 

on this. Do you have any favorites among the tax expenditures that 

you would like to get rid of that you particularly think are a drag 

on the economy, and where we can get the most effect in helping 

29 

not only the deficit situation, but the overall economy by eliminating that particular tax expenditure? 

Mr. GREENSPAN. If you want me to just list one, the obvious one 

is ethanol, which, to an agricultural economist, would make a good 

deal of sense getting rid of that. 

It strikes me that we have an impossible problem of a sluggish 

economy and the need to get more revenues. I do think we ought 

to keep in mind the studies that have been made with respect to 

reducing the problems of excess of, say, fiscal problems over the 

years. 

Most who study this issue, including the IMF and a lot of academics, have come to the conclusion that, yes, an increase in taxes 

as a possible solution does contract economic activity, and, also, a 

cut in spending does, but nowhere near as much. 

In fact, I think the actual verbiage that the IMF used was that 

the decline in GDP as a consequence of a reduction in spending 

was not significant in a statistical sense. 

So I think we have to recognize that raising taxes is a problem. 

If somebody could say to me that we will cut spending by the 

amount of the Bush tax cuts, I would say that is great, because remember that the issue with the Bush tax cuts is not that they are 

sacrosanct in any respect, but that, if we go back to where we were 

before they were enacted—and, in fact, their enactment, in my 

judgment, was mistaken because there was a judgment there that 

the surpluses were going to continue indefinitely, and, in fact, they 

stopped in the third quarter of 2001. 

And dealing with that sort of thing, you realize that you have a 

very tough decision to make. If we could find a way to cut spending 

enough to allow the tax cuts to go up—rather, to prevent the tax 

cuts from going up, that is the best of all possible solutions. 

But in my judgment, as bad as the problems are, I think they 

would be worse if we find, as a consequence of this very sluggish 

period, we are going to end up with 110 percent of debt to GDP 

or something like that, which is going to be very difficult to pare, 

because paring is not simple when you are dealing with entitlements. 

You cannot cut them in the way you can cut other spending, and 

it is going to be a very tough row to hoe. So my judgment is, let 

us—I grant you that enabling all of the tax cuts to lapse overnight 

is probably more than I would wish to see the economy taking, but 

at least put in place a phased-in program. 

At the same time, try to really understand that the purpose of 

taxation, as I said before, is to fund spending, and unless and until 

we get spending down, all the discussion of the appropriate level 

of taxation is irrelevant. 

Senator NELSON. Anybody else with a favorite tax expenditure? 

Dr. FELDSTEIN. I would just make a point that follows on what 

Alan was saying. The studies that show that cutting spending is 

less contractionary or not contractionary at all relative to raising 

taxes, generally, those tax increases are increases in marginal tax 

rates or increases in business taxes, very different from reducing 

tax expenditures. 

So I have asked the authors of these studies, do they have an answer? Does a tax expenditure reduction have the macroeconomic efVerDate Nov 24 2008 20:46 Jan 06, 2012 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 R:\DOCS\71637.000 TIMD
30 

fects of a spending cut or the macroeconomic effects of a tax increase of a traditional sort, raising tax rates? And they say, ‘‘Well, 

we just don’t have the experience to answer that.’’ 

But my hunch is that eliminating tax expenditures does not have 

the same kind of adverse effects, because it does not hurt incentives. 

Mr. ENGLER. The only thing I could fall back on a little bit is 

some of the experience I had as a Governor where we, at the time 

I became Governor in Michigan, had some taxes that other States 

did not, and we had had a study done, and one of the things that 

it showed pretty clearly is that people were mobile and we were 

losing people. 

And I think there has been some evidence lately in other States 

that tax increases have resulted in the relocation—the taxes on certain classes of people or income levels or whatever resulted actually 

in less revenue as they relocated residences to other States. 

In fact, a good Oregon constituent is now a Las Vegas resident. 

Apparently, the legislature did some tax changes up in Senator 

Wyden’s home State. 

I think on the tax expenditure side, we are kind of presenting 

unprecedented testimony maybe today to say, look, let’s put them 

all on the table, but let’s then use them to achieve what, again, 

Senator Wyden mentioned: get that rate low. 

If you start losing these—and I think the Finance Committee 

has—we are counting on you to champion to fight the poaching of 

these by other spenders or other interests around the Congress 

who have not studied the issue the way you have. 

But you have to protect them in order, I think, to drive the rate 

down. If you lose them, you cannot go as low with the rate, and 

then you get a lot of different distortion and I think unequal effects. 

None of these tax expenditures got here by themselves. They 

were voted in because somebody was persuaded they were a good 

policy decision at the time. But now we are saying, let us all come 

to the table, put everything on the table, and see if we can just flat 

out get a permanent, more competitive structure, and I think that 

is an interesting conversation, and I applaud you for holding the 

hearing. 

Dr. TAYLOR. It seems to me there is a lot of agreement, uniform, 

that the focus on reducing spending growth should be the highest 

priority. 

Chairman Greenspan indicated you should not worry too much 

about going too far with that. But even the proposal I laid out, 

which takes spending to 19.5 percent of GDP, spending keeps growing. There are no cuts in the sense that the Federal budget keeps 

growing. 

And so I do not think it is a problem to—it is not draconian. It 

is not austerity. It is just something I think the American people 

want to have happen. 

So the highest priority, it seems to me, is to do what Chairman 

Greenspan would like to do—he seems skeptical about the possibility that we will get there—go as far as you can on that and then 

worry about the extra revenues. 

31 

But in the meantime, the 1986 tax reform, revenue-neutral, lowering rates to stimulate growth is really what the aim should be. 

Senator NELSON. At the same time, you have to have a tax code 

that people consider to be fair. 

Any other comment about tax expenditures here? 

Dr. FELDSTEIN. I would not eliminate the so-called tax expenditures for savings and investment. We talked about that. And, similarly, I would not eliminate it for charitable contributions. 

The President’s proposal to limit the charitable deduction to a 

28-percent marginal tax rate—I did a calculation based on the extensive research that has been done on how charitable giving responds to the cost of giving to the taxpayer and, yes, the government would get additional revenue by putting that cap on. But, basically, every dollar that the government got came from the charities; the taxpayers would not have any less money available to 

spend on other things, because they would cut back their charitable 

giving by an equal amount. 

That strikes me as a bad one to change because, unlike a lot of 

other tax expenditures which distort spending in a bad way, I put 

the charitable contribution, along with saving and investment, as 

something that we as a country ought to be in favor of. 

Mr. KLEINBARD. Thank you, Senator. I just want to reiterate the 

point that Dr. Feldstein made in his earlier comments that not all 

tax increases are the same, and, in fact, some tax increases are 

spending cuts. That is the whole point of this tax expenditure discussion. 

So, yes, we need to cut spending, but the way to cut spending 

is through eliminating tax expenditures. And, as Dr. Feldstein 

said, it is just an accident of accounting that we call that a tax increase. 

The personal itemized deductions are not going to change the behavior. Eliminating those will not change behavior in the same way 

that raising marginal rates will, which is why I keep coming back 

to the idea that they, for better or worse—and I am sympathetic 

to the charitable contribution deduction—but for better or worse, 

they need to be eliminated as a way of doing the least amount of 

damage to economic incentives, to raise the revenue sufficient to 

support the spending path that we are already embarked on. 

Senator NELSON. Chairman Greenspan? 

Mr. GREENSPAN. There is one issue that I think needs to be addressed on this whole question of tax expenditures. 

The experience following the 1986 tax legislation was very dispiriting, because I recall elaborate discussions with respect to 

bringing the marginal—expand the base, bring marginal tax rates 

down, and that was achieved in the 1986 bill. 

The problem is, almost immediately we began to erode that process. And so, there is something inherent in our political process, 

which means that we need two things—one, get rid of a lot of 

issues of tax expenditures and other such things and broaden the 

base, but find a legislative vehicle which prevents it from eroding 

thereafter, because, if you have the same processes going today 

that existed post-1986, we may solve the problem now and find out 

we are back in 10–15 years having another cut at this problem. 

32 

Senator NELSON. You recall, at the outset, I mentioned how 

many new tax expenditures had been enacted since 1986. 

Mr. GREENSPAN. As I recall, Mr. Chairman, it did not take very 

many days for a number of those things to come back in place 

merely because it was so easy to get them through, because they 

were relatively small and no one recognized what they really were. 

Senator NELSON. Senator Wyden? 

Senator WYDEN. I had nothing else, although I just wanted to 

say I very much share your views on that last point, Dr. Greenspan. No current Congress can ever totally bind a future Congress, 

but we sure can find some hoops that anybody who wants to unravel tax reform would have to go through once you get it passed, 

and there has been a lot of work done looking at some of those possibilities. And any ideas that you or panel members have would be 

very much appreciated. 

I mean, literally, when you look at what has happened since 

1986, there have been some studies that have shown there has 

been almost one change for every working day, year in, year out, 

which gets to the question that I asked Governor Engler and that 

you touched on very thoughtfully, which is the impermanence of it 

all. 

But I think this has been an excellent hearing, Mr. Chairman. 

I have probably gone to about as many tax reform hearings as anybody around, and yours is really one of the best, and I appreciate 

it. And I appreciate all of the excellent testimony from our witnesses. 

Senator NELSON. Well, Senator, we are at a moment in time that 

the body politic is poised to allow us to get out of our individual 

selfish interests, and I do not use that word derogatorily, because 

we have to, to look at the common weal, the common good. 

And, if this hearing in any way serves to advance that possibility 

this year, then it has been a worthwhile 2 hours. 

And to all of our panelists, we are deeply grateful to you for lending your expertise. 

Thank you, and the hearing is adjourned. 

[Whereupon, at 4 p.m., the hearing was concluded.] 

(33) 

A P P E N D I X 

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