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70–694—PDF 2010

S. HRG. 111–1093 

TAX REFORM: LESSONS FROM THE 

TAX REFORM ACT OF 1986 

HEARING 

BEFORE THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

SEPTEMBER 23, 2010 

( 

Printed for the use of the Committee on Finance 

COMMITTEE ON FINANCE 

MAX BAUCUS, Montana, Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

KENT CONRAD, North Dakota 

JEFF BINGAMAN, New Mexico 

JOHN F. KERRY, Massachusetts 

BLANCHE L. LINCOLN, Arkansas 

RON WYDEN, Oregon 

CHARLES E. SCHUMER, New York 

DEBBIE STABENOW, Michigan 

MARIA CANTWELL, Washington 

BILL NELSON, Florida 

ROBERT MENENDEZ, New Jersey 

THOMAS R. CARPER, Delaware 

CHUCK GRASSLEY, Iowa 

ORRIN G. HATCH, Utah 

OLYMPIA J. SNOWE, Maine 

JON KYL, Arizona 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

PAT ROBERTS, Kansas 

JOHN ENSIGN, Nevada 

MICHAEL B. ENZI, Wyoming 

JOHN CORNYN, Texas 

RUSSELL SULLIVAN, Staff Director 

KOLAN DAVIS, Republican Staff Director and Chief Counsel 

(II) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

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

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

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

WITNESSES 

Gephardt, Hon. Richard A., president and CEO, Gephardt Government Affairs, Washington, DC .......................................................................................... 5 

Archer, Hon. William R., Jr., senior policy advisor, PricewaterhouseCoopers, 

Washington, DC ................................................................................................... 7 

Chapoton, Hon. John E., strategic advisor, Brown Advisory, Washington, 

DC .......................................................................................................................... 10

Weiss, Randall D., Ph.D., managing director, economic research, The Conference Board, New York, NY ............................................................................. 14 

ALPHABETICAL LISTING AND APPENDIX MATERIAL 

Archer, Hon. William R., Jr.: 

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

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

Responses to questions from committee members ......................................... 40 

Baucus, Hon. Max: 

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

Prepared statement .......................................................................................... 45 

Chapoton, Hon. John E.: 

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

Prepared statement .......................................................................................... 47 

Gephardt, Hon. Richard A.: 

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

Prepared statement .......................................................................................... 56 

Grassley, Hon. Chuck: 

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

Prepared statement .......................................................................................... 60 

‘‘The Obama Tax Plan,’’ Wall Street Journal article by Jason Furman 

and Austan Goolsbee, August 14, 2008 ....................................................... 62 

Weiss, Randall D., Ph.D.: 

Testimony .......................................................................................................... 14 

Prepared statement .......................................................................................... 65 

Responses to questions from committee members ......................................... 69 

COMMUNICATIONS

American Public Power Association (APPA) ......................................................... 73 

Johnson, Calvin H. .................................................................................................. 76 

(III) 

(1) 

TAX REFORM: LESSONS FROM THE 

TAX REFORM ACT OF 1986 

THURSDAY, SEPTEMBER 23, 2010 

U.S. SENATE, 

COMMITTEE ON FINANCE, 

Washington, DC. 

The hearing was convened, pursuant to notice, at 10:12 a.m., in 

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

(chairman of the committee) presiding. 

Present: Senators Wyden, Nelson, Carper, Grassley, Hatch, 

Snowe, and Bunning. 

Also present: Democratic Staff: Holly Porter, Tax Counsel; Michael Grant, Detailee; and Lily Batchelder, Chief Tax Counsel. Republican Staff: Tony Coughlan, Tax Counsel. 

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

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE 

The CHAIRMAN. The committee will come to order. 

Jeffrey Birnbaum, who wrote the book on the 1986 tax reform, 

said this: ‘‘The tax code is like shrubbery—the more severely it’s 

pruned, the bigger and stronger it will grow back.’’ 

In 1986, Congress pruned the tax code pretty severely, but it has 

grown back bigger and stronger and, once again, it needs to be 

pruned. The tax code is now about 70,000 pages long. 

A recent article in The Economist reported that Americans collectively spend more than 7 billion hours filing returns. That is the 

equivalent of nearly 4 million workers toiling full-time, year-round, 

just to handle the paperwork. 

The Tax Reform Act of 1986 was a landmark law. It affected 

every American family, every American business. It significantly 

reduced taxes for individuals. It eliminated many tax benefits for 

special interests. 

The 1986 tax reform leveled the playing field. No longer could a 

wealthy individual escape taxes by buying into a shelter. No longer 

could a clever investment strategy get investors out of paying their 

fair share. No longer could businesses participate in notorious tax 

shelters. Similar taxpayers paid similar taxes. 

But since 1986, Congress has made more than 15,000 changes to 

the code. Congress made these changes with the best intentions; 

some to collect revenue, some to stabilize the economy, others to 

further certain social objectives, all made for legitimate reasons. 

But each change created additional complexity, and each change 

created the potential for exploitation. 

2 

Once again, just as in the 1980s, many can largely avoid paying 

taxes if they know how to manipulate the code. A long list of deductions, credits, and exclusions is available to help avoid taxation. 

Those who do not have a savvy accountant and refuse to participate in tax games often end up paying more. Many honest taxpayers end up feeling like chumps. 

During his effort to reform the tax code in 1985, President 

Reagan said this: ‘‘The American people are always willing, even 

eager, to do their duty, but you quite naturally resent it when you 

see others shirking theirs. It rankles to know that your taxes are 

so high because others who can afford high-priced lawyers and tax 

consultants are able to manipulate the system to avoid paying their 

fair share.’’ 

Millions of Americans dutifully and honestly file their tax returns. They just want a fair shake. They expect to pay the same 

tax as their neighbor who earns the same money. They expect not 

to feel like a sucker if they do the right thing, and that is not too 

much to ask. 

Some may wonder why we are holding this hearing. They may 

assume that Congress, especially in these times, cannot tackle tax 

reform. They may think times have changed, Congress will not 

compromise or work together, and special interests are too strong. 

That attitude is harmful to our country, it is harmful to the 

American people, and to our democracy. Tax reform is not just 

about the tax code. It is about one of the most direct relationships 

that citizens have with their government. It is important that we 

try to make that relationship as fair as possible. 

Now is exactly the time to talk about tax reform. I am committed 

to tackling it. It is what our constituents sent us here to do. It is 

the right thing to do. They sent us here to meet challenges, not to 

shy away from them. They sent us here to make difficult decisions, 

not to ignore them. 

Our continued prosperity, our international competitiveness, and 

many other factors rest on facing these challenges. 

This is just the beginning. Today we ask, what lessons can we 

learn from the 1986 tax reform? Our witnesses today played a huge 

part in shaping that historic legislation. 

We have a lot to learn from all of you. Thank you very much for 

taking the time to be here. This is an extremely important undertaking to begin, and thank you very much for coming to help us 

accomplish it. 

We will follow up with other hearings, obviously, and we will dig 

into other areas of the code. This will be quite exhaustive over a 

significant period of time. Nothing will be off the table. But this is 

the beginning, and thank you all so very much. 

So let us prune back the code. Let us restore fairness to this fundamental relationship with the government, and let us start today. 

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

The CHAIRMAN. Senator Grassley? 

3 

OPENING STATEMENT OF HON. CHUCK GRASSLEY, 

A U.S. SENATOR FROM IOWA 

Senator GRASSLEY. Thank you, Mr. Chairman. This is a very important subject to be discussing, something we probably should 

have been discussing for a long period of time; not just under your 

chairmanship, but a lot of chairmanships. 

Thanks to the panel for coming. 

There is a consensus among the people of this country that the 

tax code is too complex and ought to be replaced. The problem 

comes with what to replace it with. 

Senator Packwood was fond of saying, ‘‘Many taxpayers accept 

complexity that favors them.’’ When we consider the complexity of 

the regular tax system and the creeping effects of the AMT, you 

have a recipe for disaster. Because of the way the AMT is structured, with no indexing, this AMT problem grows exponentially 

from year-to-year and more and more people are pulled into this, 

and that begs for a permanent solution. 

So there is no question that we have a big problem. It is a problem the committee should focus on, and thank you, Mr. Chairman, 

for doing that. 

While we all agree something should be done, the key premise 

that needs to be fleshed out is whether we assume current law levels of tax relief remain in effect, or whether we assume that the 

bipartisan tax relief plans of 2001 and 2003 have expired. 

If we use the latter assumption, that the post-2010 record-level 

tax increases go into effect, then the tax reform reality becomes a 

historic tax increase. 

President Obama campaigned on the, quote-unquote, ‘‘current 

policy’’ as opposed to a, quote-unquote, ‘‘current law’’ baseline. In 

an editorial appearing in The Wall Street Journal on August 14, 

2008, Obama advisers Jason Furman and Austan Goolsbee wrote, 

‘‘The Obama plan is a net tax cut—his middle-class tax cuts are 

larger than the rollbacks he has proposed for families making over 

$250,000. Senator Obama would pay for this tax cut by cutting 

spending.’’ 

Whatever one’s opinion of the specifics of this tax policy, I think 

most taxpayers and certainly this Senator support the idea of lowering the overall level of taxation and are certainly opposed to increasing the overall level of taxation beyond that 50-year average 

of 18.2 percent of gross national product coming into the Federal 

Government for 535 members of Congress to spend. 

Since January 2009, Dr. Furman has been Deputy Director of the 

National Economic Council. Since last week, Austan Goolsbee has 

been Chairman of the Council of Economic Advisers. 

As the Congressional Budget Office noted this past June in a 

publication titled ‘‘The Long-Term Budget Outlook,’’ revenues or 

taxes collected by the Federal Government have averaged around 

18.1 percent, compared to the 18.2 percent I just stated from my 

own memory, as a percent of gross national product over the past 

40 years. 

My reading of Dr. Furman’s and Dr. Goolsbee’s quote is that 

Candidate Obama was elected, in part, upon a promise to not increase the level of taxation. 

4 

An important question that must be answered before tax reform 

can be attempted is whether reformers are committed to holding 

taxes at or below the historical level of taxation of that roughly 18 

percent of gross domestic product. 

Given President Obama was elected, in part, upon a promise of 

a net tax cut, I do not see how any reform could contemplate increasing the historic levels of taxation. 

As I have noted in the past, I believe that, for fundamental tax 

reform to truly succeed, it would require the full support of a White 

House in possession of an unambiguous mandate directly from the 

American people. 

What this means is that a president must campaign and be elected, in part, on his vision for our tax system, as President Reagan 

was. Unfortunately, we are not able to speak with President 

Reagan anymore on his role in enacting the Tax Reform Act of 

1986. But because of his absence, we should not take the importance and responsibility of the executive branch for granted in this 

process as we move forward. 

Aside from creating the political clout necessary to get a complicated bill enacted into law, if a candidate sticks to the principles 

of tax policy he campaigned on and, of course, won on, it is more 

likely that the American taxpayer will see reform as beneficial and 

support it. 

So, Mr. Chairman, I raise the point because, if we are to enter 

a tax reform playing field, we need to know the rules, including the 

size of the playing field and the revenue terms. Are we assuming 

tax reform is not possible without a record tax increase, is my basic 

question. 

Thank you very much. 

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

The CHAIRMAN. Thank you, Senator. 

I will begin with our witnesses; first, with Mr. Gephardt. Mr. 

Gephardt is recognized for many roles that he has played: Speaker, 

certainly, of the House of Representatives, but also as a primary 

co-author of Bradley-Gephardt, I think it was 1982, to kind of help 

really get the ball rolling here. Thank you very much, Dick, for taking the time and giving us your insights. 

Next, Bill Archer. Bill Archer was the chairman of the House 

Ways and Means Committee. And when we passed the 1986 law, 

I think, Bill, you might have been the ranking member of the committee. I cannot recall exactly what your capacity was, you will tell 

us. 

Buck Chapoton, Treasury Department. This committee has a 

very fond regard for you, Buck, and your advice over the years, and 

you have always been straight, just telling it like it is, never any 

political slant to it, just solid policy. 

The same with you, Randy, obviously. Randy Weiss was Deputy 

Chief of Staff for the Joint Committee on Taxation. Randy brought 

a smile along with his expertise, with a sense of humor, as well. 

So, we thank you all so very much. 

So, Dick, why don’t you begin? Obviously, we want to hear, from 

your perspective, how it was put together, some of the challenges 

5 

you faced, how you overcame them, and we will just take it from 

there. 

STATEMENT OF HON. RICHARD A. GEPHARDT, PRESIDENT 

AND CEO, GEPHARDT GOVERNMENT AFFAIRS, WASHINGTON, DC 

Mr. GEPHARDT. Thank you, Mr. Chairman, very much. I thank 

the ranking member, Senator Grassley, and other members of the 

committee who have been so effective and important on these tax 

questions. And I really want to first say that I admire you for taking on this important subject. It is important now, it always has 

been important, and it can be done, because we were able to do 

something in the late 1980s. 

My name is Dick Gephardt, and I am honored here to testify 

about the 1986 landmark legislation. I represented Missouri’s third 

congressional district for 28 years and served as Democratic Leader 

of the House for 14 years. On my first day in Congress, I was appointed to both the Ways and Means Committee and the Budget 

Committee. I was fortunate. 

From my first day here until my last, I truly believed that a fair, 

simple, and transparent tax code was important for our country 

and our people. We advanced that goal in 1986, and I believe that 

today, tax reform can still play an important role in restoring public trust in our government and our country. 

In 1982, Senator Bill Bradley and I introduced the Fair Tax Act. 

We proposed to simplify the code, making it easier to understand 

and clear that it was designed to benefit all Americans, not just 

one group or another. 

We targeted shortsighted special interest loopholes. Let me give 

you a prime example—super dairy cows. There was a large tax 

break for investing in high yield dairy cows; yet, due to Federal 

dairy programs, there was already a glut of milk. There was so 

much milk, in fact, that cheese was spoiling in Federal warehouses. 

Yet, the code still pushed millions of dollars into this dairy tax 

shelter. 

Once we put the bill in, we then reached across party lines. Congressman Jack Kemp and Senator Bill Roth were proposing an alternative, but important Republican tax reform proposal. We 

worked closely with them to promote reform and regularly debated 

each other to draw attention to the issue. 

We also had leaders like President Reagan who were genuinely 

willing to negotiate with the other party. These were leaders who 

were true champions of conservatism and liberalism, but who were 

not hamstrung by partisan extremists who vilify compromise and 

promote obstruction. 

On tax reform, President Reagan came to the same conclusion 

that we did—that the best approach was to reform the current income tax system and not abandon it or go to a completely new system, such as a consumption tax. 

The House and Senate tax committees then held comprehensive 

hearings, like you are today, that built a solid understanding of the 

workings of the tax code. It was critical for Congress and the public 

to really understand what was happening and why it was happening. 

6 

Education of the members and the public was critical to reaching 

the bipartisan consensus we were finally able to reach. 

I see many parallels today to what we faced in 1986. In 1986, 

memory of the deep recession of the early 1980s was fresh on 

everybody’s mind, as well as the energy crisis of the 1970s, increased international competition, and the sharp rise in unemployment. All of these factors exist even more starkly in 2010. And just 

as in 1986, the public’s faith in our government was at a low. 

So it is time for us to look again at simplifying the tax code. We 

need to look at every provision and ask, ‘‘Is this really for the 

greater good? Is this the best way to grow the economy? Can we 

really afford provisions that only benefit one group or another?’’ 

You now face an even greater fiscal challenge. Today’s deficit is 

twice as large as a percentage of the gross domestic product. In 

1986, the deficit was projected to stabilize and decline. Today, the 

best estimates have it growing substantially, particularly at the 

point when the vast pool of baby-boomers are retiring. 

A responsible tax policy will contribute to solving the debt problem. 

Not only must we keep the deficit in mind, we must also be 

aware that, by simplifying and closing loopholes, we are joining the 

larger debate about the distribution of tax benefits and burdens. If 

the effort to reform the code is undertaken, I would recommend 

these four quick lessons from 1986. 

First, the process has to be transparent and open so that the 

public is aware step-by-step of what is happening. 

Second, it needs to be a studied process. In 1986, the committees 

conducted hundreds of hours of hearings, not for grandstanding, 

but for learning and for getting information in front of everybody. 

Third, it has to be bipartisan. We worked with the White House, 

even though we were Democrats and the President was Republican. We understood from the start that any final agreement was 

going to be a compromise and not a plank out of our party platforms. 

Fourth and last, perhaps most important, nothing can be off limits. The tax code is a powerful tool for good policy, such as promoting job creation, or putting homeownership within the reach of 

American families. 

Let us make certain, however, that every section is so justified. 

Remember, until 1986, super dairy cows were considered a sacred 

part of our tax code. 

So we simplified the code. The widespread stories about wealthy 

people and big corporations gaming the system to pay no taxes disappeared. Today, special provisions are back, and the American 

people, conservatives and progressives, are more skeptical than 

ever that their government is working. 

Real tax reform can send a powerful signal that we, the people, 

still own our government. 

Thank you for letting me be here, and I look forward to the questions. 

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

7 

The CHAIRMAN. Thank you very much, Mr. Gephardt, I appreciate it. 

Mr. Archer? 

STATEMENT OF HON. WILLIAM R. ARCHER, JR., SENIOR POLICY ADVISOR, PRICEWATERHOUSECOOPERS, WASHINGTON, 

DC 

Mr. ARCHER. Mr. Chairman, I would start out by saying that I 

can associate myself with your statement and with that of Senator 

Grassley, and that would probably knock out a big part of my own 

statement. 

The CHAIRMAN. Repetition usually works pretty well. 

Mr. ARCHER. But I do appreciate your holding this hearing and 

your commitment to tax reform, which I think is essential to a better country, fairness, growth, jobs, and making us competitive in 

the global marketplace—and that is one thing that I would accentuate. 

Today, we are in a very different environment globally than we 

were in 1986. And in my opinion, we need to be able to not only 

compete, but to win the battle of the global marketplace, and taxes 

are an extremely important part of that. 

But as you requested, I am going to focus on the key factors that 

led to the Tax Reform Act in 1986 and the challenges that Congress faced. 

Please note that, although I am now associated with PricewaterhouseCoopers, I do not speak for them. I speak on behalf of 

myself, and what I say is my own view and should not be attributed to PWC. 

For 30 years, I represented the 7th district of Texas in Congress 

and was fortunate to be on the Ways and Means Committee for 28 

years, and to be chairman of that committee for the last 6 years. 

There were a lot of factors that led to the reform in 1985–1986. 

But I am convinced, as Dick Gephardt said, that President Ronald 

Reagan played the single most important role in bringing about the 

passage of the 1986 act. But I am not the first person to believe 

that. 

Tax reform requires presidential leadership. It did then, and it 

is my opinion that it is true today. 

Reagan was passionate about individual tax rates, and he often 

recounted that, in World War II, his income from acting was taxed 

as high as 91 percent, leaving him with only 9 cents of each additional dollar of work, and he understood from this experience that 

high rates discourage people from working harder and undercut 

economic opportunity. 

He was discussing his situation with Chairman Rostenkowski 

about the 91-percent rate that he endured during World War II, 

and it is reported that Rostenkowski showed surprise and quickly 

replied that he did not think Reagan was a good enough actor to 

be in the highest tax rate, adding a bit of levity to the whole consideration. [Laughter.] 

As Dick Gephardt said, bipartisanship is essential, and the bipartisanship of the congressional leadership at that time was critical to the ultimate passage of the bill. 

8 

Both Chairman Rostenkowski and Senate Finance Chairman Bob 

Packwood demonstrated strong leadership, as did other committee 

members, such as Dick Gephardt, who was then on the Ways and 

Means Committee, and Bill Bradley, who was on the Senate Finance Committee, which was really important to the ultimate success. And when tax reform seemed to stall, Chairman Rostenkowski initiated a dialogue with the American people that was entitled ‘‘Write Rosty’’ in a public outreach campaign. 

Treasury officials were absolutely essential, and Secretary Baker 

worked tirelessly day after day with the members of the committee 

in working out compromises and seeing that there was ultimate 

success. 

His presentation of Treasury II became the basis for all of the 

discussions for tax reform. So I think it is extremely important that 

Treasury be involved. 

Other factors, of course, contributed. The public became very, 

very critical of what they perceived as an unfair tax code. And numerous press accounts revealed that some in society who paid low 

levels of tax compared to their income were selling losses to others 

and engaging in other schemes to avoid tax. 

These concerns of fairness caused many Americans to support 

tax reform, and I think fairness is the most important issue to establish in order for any tax reform, even today. 

The U.S. had come out of back-to-back recessions in the early 

1980s, and tax reform provided an opportunity to promise longterm economic growth. So growth became the second major goal in 

1986. 

Mr. Chairman, as you mentioned, even then, the tax code had become too complicated, and it was such a complex document that 

simplicity became the third goal of tax reform then. It was interesting that, the day before the Ways and Means Committee was to 

hold a hearing on Treasury II, Secretary Baker appeared before our 

committee. And the day before, we had been delivered a 500-page 

summary of Treasury II. I did not have time to read it in detail, 

but I scanned through it and found that, in the chapter on taxation 

of foreign source income, international taxation, I could not believe 

my eyes, because it read, ‘‘The current law is complex and difficult 

to administer. Our proposal will make it more complicated and 

more difficult to administer.’’ 

So in the hearing, I asked Secretary Baker about this, and I read 

that statement in the summary to him, and I said, ‘‘How can you 

claim that this is simplicity?’’ And he said, ‘‘Well, Congressman Archer, that’s why we put simplicity third in the order of things.’’ 

Later on, when I was talking to him privately, I got on him again 

a little bit about simplicity. He said, ‘‘Well, we knock 6 million people off the rolls, and that certainly is simpler for them.’’ And I said, 

‘‘Yes, for them; but for those of us who continue to do our tax return, it’s a heck of a lot more complicated,’’ and it was. And I was 

doing my own tax return, even when I became chairman of the 

Ways and Means Committee. I was very conscious of the complexities in the code. 

But mindful of the budget deficits in 1982–1983, Reagan insisted 

that tax reform be revenue-neutral, and that became a rule that 

everyone operated under. 

9 

Unfortunately, revenue neutrality makes it very difficult to create sound tax policy, and you also create winners and losers, and 

losers inevitably are going to scream very, very loudly against what 

you are doing. So that is something that you are going to face in 

your current-day tax reforms. 

In the end, I opposed the 1986 tax reform bill. Going in, I had 

really wanted to support lower rates, but I found that the offsets, 

to me, were creating a bigger problem than the benefits from the 

lower rates. 

One thing I would encourage you to do is to be very careful about 

what the economic consequences will be of what you do and thoroughly consider that, because I was convinced that the retroactive 

changes in real estate taxes were going to undermine the value of 

real estate, which would, in turn, undermine the savings and loans; 

and, unfortunately, that happened at a cost of somewhere between 

$100 billion to $200 billion to the American taxpayer, which most 

of us remember with the Resolution Trust Corporation and the savings and loans. So that is very important to consider—what are the 

economic consequences of what we do—and to thoroughly understand that. 

In addition, I think it is important to understand the cost of enforcement, the cost of compliance, both to the IRS and to the individual taxpayers, because that can be a drag on the economy. And 

unfortunately, compliance became much more costly after the 1986 

act. 

I have more in my statement, Mr. Chairman, but I am already 

over my time. 

The CHAIRMAN. Mr. Chairman, go ahead. If you have some more 

to say, we want to hear it. 

Mr. ARCHER. Even though the 1986 act was revenue-neutral 

overall, the corporate sector suffered a $120-billion net tax increase, and those moneys were used to offset a reduction in individual rates. But in my view, this 25-percent increase in corporate 

tax payments was a deterrent to job creation and was not in the 

best interest of the country. And, Lord knows, today, jobs are a 

major item that have to be a concern in whatever you do. 

I mentioned the real estate taxes were made retroactive, and 

would strongly urge you to not have any retroactivity in your final 

product. Retroactivity is a violation of promises to the American 

people and should be avoided at all cost. It was a major, major defect in the 1986 bill, not just on real estate, but the retroactive 

cancelation of the investment tax credit, which affected jobs. 

I want to accentuate again that you should end up, in my opinion, with a tax code that permits us to be competitive in the global 

marketplace. I do not believe that we can remove ourselves from 

the global marketplace, and I think we will rise or fall in the future 

depending on how well we do competing. And we not only need to 

be competitive, we need to win, and our tax code is a major, major 

item in determining whether we win or lose in the global marketplace. 

The ultimate international tax system, in my view, should be one 

that at least is on a level playing field, the way foreign countries 

tax their corporations; and, if it is not, we will lose the battle of 

the global marketplace, and we will watch the loss of high-paying 

10 

jobs, as our companies are bought out by foreigners who have a 

lower tax rate with their corporations. 

Simplicity is an incredibly noble goal, but it fights equity, and it 

fights what is perceived as fairness by a lot of people, and I, like 

Dick Gephardt, encourage you to look at every one of the complexities in the code and find out whether they really are beneficial and 

not whether they help some special interest group. 

When I was chairman of the Ways and Means Committee, I was 

so concerned about tax credits cluttering up the code that I just 

drew a line and said there will be no new tax credits while I am 

chairman, and there were not. 

Since 1986, over 70 new tax credits have been added to the code. 

And, Mr. Chairman, I sympathize with you, because you are trying 

to extend expiring provisions. And I have looked at your proposal, 

your tax proposal, and, frankly, I did not realize all of the expiring 

tax credits and tax provisions that are in there to help out the most 

minute parts of our economy. 

The Budget Act has contributed to that, too. The Budget Act basically has brought about a sunsetting of provisions for revenue 

purposes, and then you have to come back and try to renew those 

instead of making them permanent in the code. 

Another thing I would say that is important is to try to create 

certainty in whatever your ultimate product is. 

So I thank you for taking this on—what I think is a very ambitious undertaking—and I wish you well. And I also will be happy 

to be available to you as the process unfolds in any way that I can 

be helpful. 

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

The CHAIRMAN. Well, thank you very much, Mr. Chairman. You 

have been very candid with your comments, and it is deeply appreciated. 

Buck Chapoton? 

STATEMENT OF JOHN E. CHAPOTON, STRATEGIC ADVISOR, 

BROWN ADVISORY, WASHINGTON, DC 

Mr. CHAPOTON. Thank you, Mr. Chairman. It is really my pleasure to appear before this committee again. 

For the record, I am a tax lawyer. I was assistant secretary for 

tax policy in the first Reagan term. I am now with the investment 

firm of Brown Investment Advisory. 

I should also state I am from Houston, TX, and Mr. Archer was 

my Congressman for many, many years, and I was well represented; and, of course, we worked closely together when I was at 

Treasury and he was on the committee. 

So I am delighted to be here, delighted to be with this very distinguished panel, all of whom I have known quite well in the past 

and worked with. And I would really compliment the committee, 

the chairman and the ranking member, both of whom I have 

worked with extensively many years ago, for holding this hearing. 

I want to join my comments with Mr. Gephardt and Mr. Archer 

in the importance of this entire undertaking and the importance of 

the tax code to America. 

As I have stated many times, filing tax returns is the most important contact, in most cases, the only contact most Americans 

11 

have with their Federal Government. And so it is very, very important that we get it right and they feel like they are being dealt 

with fairly, and I suggest that is not the case today. 

In my summary, I want to do four things. I want to describe 

briefly what I call the five stages of tax reform in the mid-1980s. 

Each had its own political and substantive impact. I want to list 

what I think were the two or three basic achievements in the final 

legislation. 

I want to mention a couple of unusual factors that might have 

facilitated the development and enactment of this historic legislation. And then I want to describe some lessons that I think would 

be as important today as they were in the mid-1980s. 

Now, the five stages of tax reform, I think it is sort of interesting—if you read ‘‘Showdown at Gucci Gulch,’’ you know them. 

But, first, you had, in December of 1984—and I will bypass the 

President’s very important statement in his January 1984 State of 

the Union Address that really got the ball rolling. 

But then Treasury, in response to that direction, produced what 

we would commonly refer to as Treasury I in December of that 

year, which started the ball rolling. It was a comprehensive and 

theoretically pure, nonpolitical proposal. It redefined taxable income in terms of economic income. It focused on equal treatment 

for equals, a comment the chairman made a minute ago. It was 

massive elimination of tax expenditures. Capital gains were indexed, depreciation was indexed, and capital gains were taxed as 

ordinary income, by the way. 

It was basically an economist’s dream and, some said, a politician’s nightmare. The White House was, I would say, startled and 

kept its distance. 

The next phase was Treasury II in May of 1985. This was after 

the switch in jobs by Don Regan and Jim Baker. Treasury II toned 

down many aspects of Treasury I. It made political concessions at 

the front end, reflecting, I think, Secretary Baker’s pragmatic approach, but it was still a very historic, revolutionary—almost revolutionary, you might say—proposal in the tax world. 

The third stage was a Ways and Means bill, December of 1985. 

It was a ‘‘soak the corporations’’ bill, almost no base-broadening for 

the individuals, and corporate incentives were greatly reduced. And 

it came out with lower tax rates. All these bills came out with 

lower tax rates. But it had a top tax rate for individuals of 38 percent and for corporations of 36 percent. 

The fourth stage was the Senate Finance Committee bill, May of 

1986. You will remember this very well. It was the mirror image 

of the Ways and Means bill. It reduced or eliminated virtually all 

major deductions for individuals and repealed relatively few corporate incentives. But the effect was to enable the committee to 

produce a bill that reduced tax rates for individuals to 27 percent 

and corporations to 33 percent. 

The Senate Finance Committee bill passed this committee unanimously, an incredible event, and I think most people think that 

was the turning point in the legislative effort on tax reform. 

In the meantime, we had the conference agreement in August of 

1986, where it, not surprisingly, followed the Senate bill more 

12 

closely on individuals, reduced those benefits, and it followed the 

House bill on corporations and reduced benefits for corporations. 

As Mr. Archer has mentioned, it contained a dramatic shift, or 

it effected a dramatic shift, in the tax burden from individuals to 

corporations, and it came out with top tax rates of 28 percent for 

individuals and 34 percent for corporations. 

When we look at what basically was accomplished by the final 

legislation, I just would summarize it in a few sentences. It reduced individual tax rates dramatically. The top rate, remember, 

was 50 percent in 1985. And by the way, remember, it was 70 percent in 1980, when the Reagan team came to town. So it was 50 

percent in 1985. The tax bill, the Reform Act, dropped it to 28 percent, and that was paid for by base-broadening, eliminating individuals’ deductions. 

The three that were kept were charitable deductions, full charitable deductions, the state income taxes, and the home mortgage 

interest deduction. Virtually everything else was affected. And it 

reduced, as everyone said, it reduced tax expenditures quite significantly. 

On the business side, it restored market incentives in business 

and investment decision-making and did remove most of the major 

tax incentives for investment, and that was the one of the primary 

goals of tax reform, to return business incentives, non-tax incentives in business and investment decisions. But, of course, in doing 

that, it eliminated the investment tax credit. It lowered marginal 

rates for corporations, as well as individuals, and tax shelters were 

very significantly curtailed. 

At the same time, as Mr. Archer alluded to, the after-tax cost of 

capital was increased, to the consternation of many in the administration and many in the business community. And this was a dramatic reversal of the tax-based investment policy contained in 

President Reagan’s inaugural tax bill in 1981, which had instituted 

the investment tax credit and the major investment incentives, 

particularly the investment tax credit, and greatly accelerated depreciation. You remember the 10–5–3 write-off proposal of 1981. 

So that was a major change in policy, and, certainly, investment 

incentives will be a major consideration for this committee when it 

undertakes this task. 

What permitted development of this historic legislation? You can 

read all the political scientists talking about it. It was a very interesting aspect of the legislation, and I would just say, who really 

knows? But I do point to—or I am impressed by the suggestion 

made by several people that a factor could have been the unusually 

tight control of the process at each stage. 

The circumstances initiating the process, the presidential promise in the State of the Union in January, in an election year, permitted development and publication of the first draft to be handled—that is, Treasury I—to be handled by a relatively small 

group and all within the Treasury Department. The work was kept 

very much under wraps, and there were really no leaks in the process. Political considerations were basically ignored in that process. 

Thereafter, relatively few people had a lot to say about how the 

legislation progressed. In the House Ways and Means Committee, 

Dan Rostenkowski and his staff, to a large extent, controlled 

13 

events. Excuse me. First of all, I should say Jim Baker and the 

Treasury Department controlled the development of Treasury II, 

the presentation, the position taken before the Ways and Means 

Committee. Then, as I said, Chairman Rostenkowski controlled 

events, to a large extent, in the House. When he got to the Senate, 

Chairman Packwood was in significant control and kept the process 

moving along. 

As I describe in my written statement, each of these leaders 

seemed to take personal ownership of the legislation. They did not 

want it to fail on their watch. 

I think the purity, if you will, of the initial product and its stated 

objectives allowed proponents to maintain the high ground 

throughout the process. Duplicating these conditions would be very 

difficult. 

Finally, let me mention the lessons that we might take from the 

1986 act that would be relevant today. First of all, to even consider 

undertaking fundamental tax reform, the proponents have to be 

certain of the public’s overriding disgust with the current system. 

I think both Mr. Archer and Mr. Gephardt had mentioned that factor. I think we have reached that stage, but that is a very important factor. 

Secondly, I would say establishing principal goals of a reform effort at the outset, and making sure they are contained in the initial 

product, is essential. It allows the proponents to receive the high 

ground and maintain it throughout the process, if they stick to 

those principals. 

Taxpayers losing deductions need assurance that they are not 

being singled out and that a fair process is in effect, and I certainly 

associate myself with the prior remarks that it has to be open and 

very, very much above-board. 

One of the clearly stated goals to me has to be revenue neutrality, which was constantly stated in the 1986 act process; not 

only revenue neutrality, but revenue neutrality within each economic segment of taxpayers. 

The public cannot think that what is being foisted upon them is, 

in secret, a tax increase. If future tax increases are needed, a reformed code would be a vehicle that does much less damage to the 

economy in raising taxes than would be done if we had to use our 

present Internal Revenue Code to increase revenues. 

Finally, let me mention the fact that has also been mentioned before. The Nation’s chief executive is going to have to use all of the 

resources available to the President, both political and substantive, 

if this effort is going to be successful, and the President just has 

to be committed to the process. 

So let me stop there. It is an interesting subject. We never get 

tired of thinking about it, and it is disturbing how far we have 

come since 1986. One of the things you asked us to address was 

what might have caused that, and, frankly, Mr. Chairman, it is 

hard to say. I think we all have our thoughts on it, but it is really 

hard to say. But it happens in a free society and with a Congress 

that is making the decisions, and it is going to happen in the future. But that does not mean we should not bring the system back 

now into a very fair system that we can be proud of and, frankly, 

that can lower rates and lower disincentives in our economy. 

14 

Thank you very much, Mr. Chairman. 

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

The CHAIRMAN. Thank you, Buck, very, very much. I very much 

appreciate that. 

Mr. Weiss? 

STATEMENT OF RANDALL D. WEISS, Ph.D., MANAGING DIRECTOR, ECONOMIC RESEARCH, THE CONFERENCE BOARD, 

NEW YORK, NY 

Mr. WEISS. Chairman Baucus and members of the committee, 

thanks very much for inviting me to testify at today’s hearing. It 

is really a great honor to be sitting at this table, not as a staff person, but as someone whose experience you are looking to draw 

upon to help you in this very important effort. 

As the committee did in 1986, it is really important for Congress 

to periodically review the income tax, which generates the major 

share of Federal tax revenue, in order to raise that revenue as fairly and efficiently as possible. And the big advantage of a comprehensive tax reform effort is that many tax provisions can be 

changed at the same time, so that you can shape a package that 

accomplishes these objectives and balances out many competing 

considerations. This is very difficult to do, as you know, if you are 

working with tax bills that only deal with a few provisions at a 

time. 

What I would like to do in my remarks today is just to focus on 

a couple of aspects of the 1986 act that I think were responsible 

for generating the large appeal that it did. And when you look at 

the votes that occurred and realize that versions of the bill passed 

by 20–0 in the Finance Committee and in the full Senate by 97– 

3, you realize that there were aspects that made this very popular 

and cut across party lines. 

I think that there are two features of the act that were critical; 

one, the substantial rate reduction that it achieved; and, two, the 

significant improvement in the public’s perception of the fairness of 

the tax. 

Also important were two other aspects of shaping the act—revenue neutrality and de-emphasis on adjusting taxes’ distribution by 

income class. I believe all of these considerations would be important for and allow success of a tax reform effort in the current environment. 

Now, let me elaborate a bit on these items. An important part 

of the Congress’s ability to produce legislation that accomplished 

these objectives was the experience that it had had in tax legislation immediately before the 1986 act. 

The popularity of low tax rates had been demonstrated during 

the elections and tax debates of the early and mid-1980s. Taxes are 

very complicated, but most people understand how important rates 

are in determining how much they pay to the government. 

President Reagan had made tax rate cuts a focus of his 1980 

election campaign, and the subsequent Economic Recovery Tax Act, 

ERTA, of 1981 featured large individual tax rate cuts and indexing 

of their brackets. 

15 

Congress learned that tax rate reductions were very popular. The 

public’s perception that the income tax was unfair, driven by countless stories of high income individuals and large corporations that 

paid little or no tax, was pervasive during the 1980s. 

The unfairness problem had become so serious and the act’s attack on it sufficiently compelling that even members who were not 

enthusiastic about the substance of the act felt they had to avoid 

being blamed if it failed to become law. 

During my work during the 1986 act, talking to many members, 

I had very similar conversations. They said, ‘‘This may be causing 

problems. I have constituents who may be harmed, but this is 

something that I can’t be seen to be blocking, to seem to be an obstacle to the progress of this act.’’ 

Both of these key features of the act, low rates and perceived 

fairness, were accomplished by substantial broadening of the tax 

base, and that was really the key, the mechanism by which these 

objectives were accomplished. 

So deductions, exclusions, and credits were scaled back so that 

tax liability more closely related to taxpayers’ actual income. 

Now, by the time the 1986 act was being debated, members of 

both political parties in both houses had already become familiar 

with and comfortable with enacting base-broadening provisions. 

Right after the 1981 passage of ERTA, substantial budget deficits 

were projected as far as the eye could see, which is an interesting 

parallel to the current situation, and both the administration and 

Congress embarked on a series of acts to reduce the deficit. 

President Reagan insisted on low tax rates, but he did not object 

to raising revenue. Indeed, his administration proposed substantial 

base-broadening measures that were incorporated in the 1982 and 

1984 tax legislation. 

Although many of these provisions met with substantial opposition, this experience allowed Congress to understand that broadening a tax base would not lead to some of the dire consequences 

that some had predicted. I think this experience with basebroadening was really important in helping members feel comfortable with what was being done in the 1986 act. 

Now, the question arises, of course, will these features of a new 

tax reform act generate substantial support today, and I believe the 

answer is yes. I think tax rate reduction is still critical and popular, and I think that that would be an important part of any future tax reform effort. 

Fairness has become an issue again, and it is not so much that 

there are numerous stories of people avoiding all their tax, but that 

there are so many overlapping incentives in the code that, along 

with the alternative minimum tax and people’s increasing delegation of their tax preparation to tax professionals and computers, it 

is very difficult for many people to understand how their tax liability is determined and to make decisions accordingly. 

A perception of fairness requires that people see that their tax 

liability is determined according to some logical principals, and 

sometimes currently it is hard to do that. 

Another issue that would be also addressed by tax reform is the 

extraordinary amount of uncertainty in today’s tax rules and tax 

16 

environment. One way to measure this is to count the number of 

expiring provisions. 

As of early 1989, just a few years after the act, there were 14 

provisions that expired either that year or the previous one. In contrast, as of early this year, there were 141 provisions that expired 

last year or will expire this year, and these include some fundamental aspects of the tax system, such as the rate structure and 

the existence of the estate tax. 

This uncertainty is causing grave concern among a wide variety 

of taxpayers and may be inhibiting economic growth. Tax reform 

would be an effective process for Congress to actually deal with 

these expiring provisions and make decisions about their long-term 

fate. 

In conclusion, I would like to congratulate the chairman and 

members of the committee for beginning to consider how to make 

another round of tax reform happen in the near future. 

I will be happy to answer any questions. 

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

The CHAIRMAN. Thank you, Mr. Weiss, very much. 

A question I have is—it seems, in your testimony, that the perceived and actual unfairness in rate structure was a major driver 

back in that earlier era. But the individual rates are a lot lower 

now than they were then. 

But I do think your last statement raised another prospect, 

which I think is stronger, maybe stronger now than it was back 

then, and that is uncertainty. I just sense that the public, whether 

individual side or business side, is uncertain about whether to hire 

new people, invest or purchase something or whatnot, not sure 

what the lay of the land is going to be 4, 5, 6 months or a couple 

years from now. 

Some of that is implementation of health care reform, some of 

that is maybe implementation of financial regulatory reform, but I 

think some of it also is related to the tax code, especially the business side. Is this expiring provision going to be here next year or 

not? 

I guess my first question is, do you agree that that is a greater 

driver today, this uncertainty, than it was back then, and is it 

strong enough to replace, if you will, a perceived unfairness? 

I may be wrong, and this would mean that unfairness in rates 

anyway is less of an issue today than it was back then, but I just 

wonder if you could address how we take advantage of people’s concern about complexity; that is, their tentativeness by not knowing 

how to predict the future. 

To what degree is that a driver we can capitalize and take advantage of? 

You, Randy, or anybody who wants to answer that. 

Mr. WEISS. I will start off. Yes. As I mentioned, I certainly do 

think that the uncertainty of what the tax rules will be next year 

and in the future is really important. 

People make commitments or decisions that really depend on 

knowing what the consequences will be in the future in terms of 

how they will be taxed. And so I think clearing up that uncertainty 

would be very helpful and would be appreciated by many. 

The CHAIRMAN. It drives me nuts, frankly. [Laughter.] 

17 

We have all the expiring provisions and it just—we have become 

an extenders Congress, even a maintenance Congress, and we did 

not come here to do that—at least I did not. 

So it is not only the public, which is far more important, I think, 

that is uncertain about the future. But I can just tell you that 

many of us in the Congress are very frustrated with trying to deal 

with all the expiring provisions, too. It is a big problem, greater 

problem than earlier. 

Dick, were you going to say something? 

Mr. GEPHARDT. I think part of the reason that we get into that 

is that it has to do with the deficit and the budget. 

Congress does not want to make something permanent, because 

you get these 10-year, even beyond 10-year forecasts, and, if you 

leave things permanent, then you run into budget problems. 

So I suppose that is the reason. It may be that tax reform gives 

you a counter-reason to clear that up and make your decisions on 

what you want to put in the code and keep in the code and what 

you are going to throw out. 

I want to associate myself with the remarks that have been made 

here on certainty. Just take the R&D tax credit. I think companies 

are really not using it to the extent they should today, because it 

is uncertain, and you can go down the list. I think it is really an 

important factor. 

So I think it is something to look at, and it may be something 

that you can do in tax reform as you go through this big change. 

The CHAIRMAN. Another question. How critical is revenue neutrality in achieving success? 

I mean, like you said, it is critical, and I think maybe you, Bill, 

I think you may have mentioned it, as well. We have these huge 

budget deficits. Yet, revenue neutrality is certainly something the 

public will see as, ‘‘Well, gee, maybe it is revenue-neutral, it is not 

a backdoor way to tax us more.’’ 

But yet, we have these big budget deficits, and maybe the answer partly is what you said, Buck. If you are going to have to 

raise revenue sometime, the predicate, the precondition of having 

already achieved tax reform might make it easier, if it is necessary 

to later raise revenue. 

Mr. CHAPOTON. Mr. Chairman, I think that is a strong argument 

for tax reform. There is going to be a lot of pressure to raise revenue, and we just should not do it with what we have now. 

The CHAIRMAN. Any other comments? 

Mr. ARCHER. I agree with that, but I think, politically, it makes 

it a lot more difficult. If you could assume some loss of revenue, 

you can then bridge a lot of problems that are created, and those 

problems had to be bridged in 1986, and it was not easy to get over 

a lot of them. 

As I mentioned, some of them were not bridged, and, if you do 

not take into account the economic consequences, you will live 

through some very, very bad situations. And I mentioned in my 

testimony—and I was very concerned then and I was going back 

over, interestingly enough, the comments that I had made on the 

floor and statements that I had made in the Congressional Record 

at the time. 

18 

To retroactively eliminate the passive loss rules under which people invested in real estate, assuming that they would get that, 

caused them to have to dump their real estate projects, and that 

dramatically undermined the value of real estate and thereby undermined the security of the savings and loans, creating a massive 

problem for this country. 

So revenue neutrality, I think, is essential. I do not believe you 

can do it without revenue neutrality, but, boy, it is fraught with 

a lot of problems. 

The CHAIRMAN. Thank you. 

Senator Grassley? 

Senator GRASSLEY. I am only going to have an opportunity to ask 

one question, because mine is as involved as the chairman’s was 

involved. 

I have a second question that I want to leave for answer in writing, and I hope that each of you will give it the same consideration. 

Before I ask a question, I would continue where Representative 

Gephardt left off on the lack of certainty of the future and not 

using the R&D credit. I find that to also be true for a lot of the 

alternative energy tax incentives that we have, whether it be wind 

or biodiesel. There are currently 23,000 people unemployed in biodiesel, as just an example, and solar and other sources of renewable energy. 

The extent to which we could give more certainty to them, I 

think we would get people employed tomorrow, the day after we 

pass the bill. 

I would like to address this question to all members of the panel. 

One of the key preliminary questions regarding tax reform is 

whether it should be done on a revenue-neutral basis. Revenue 

neutrality is usually determined from current law. 

The revenue baseline from current law includes a large spike in 

revenue from the expiration of tax relief in the bipartisan Tax Acts 

of 2001 and 2003. You can see the spike for projected revenue data. 

CBO, for instance, shows individual income tax revenues shooting up by 10 percent and trending upward. You can see the spike 

by taking a quick look at how widespread the 2001 and 2003 tax 

rate relief plans are. Virtually every American income taxpayer 

would face a significant tax increase. 

So, if we were to undertake individual income tax reform with 

the assumption that the reform plan would have to be revenueneutral, it would mean a tax increase of at least 10 percent on individual income taxpayers in 2011. 

All of you were involved in developing the tax relief policy during 

1984–1986, as I was. I am pretty certain that some of you would 

agree that the revenue neutrality test ought to be employed assuming the bipartisan 2001/2003 tax relief plans were permanent. 

So the question. Would you care to comment on whether and/or 

why revenue neutrality ought to be applied, assuming current law 

levels of taxation are in effect in 2011? 

I will just go across, starting with you, Congressman Gephardt. 

Mr. GEPHARDT. Thank you for the question. It is a really good 

question, and you have in front of you now issues on the tax code 

that we did not have in 1984 and 1986. You have this question of, 

should the 2001/2003 tax changes be made permanent or not? 

19 

I want to associate with all who have said that tax reform is 

really hard to do on its own. And, if you get into a quarrel also 

about distribution and deficit reduction in the midst of it, I think 

you cripple the effort. I just do not see how, politically, you can get 

through all of that. 

So I would, I guess, think that maybe you have to decide this 

question of the 2001/2003 tax cuts, make a decision on that, if the 

Congress can and the President can, and then get into tax reform, 

because there is an old song, ‘‘Breaking Up Is Hard To Do.’’ Tax 

reform is hard to do, and, if you complicate it further, it gets even 

harder. 

Senator GRASSLEY. Chairman Archer? 

Mr. ARCHER. I agree with that, but I would say that, in the practical sense, you are not going to be doing this, Senator Grassley, 

in the next year. It took 18 months from the time Reagan totally 

committed to tax reform and started the ball rolling before it actually happened. 

By the time you have any reasonable expectations to reach a 

final product, you will have resolved the 2001/2003 tax situation, 

and you will know what your base is and you will know what your 

projections are. 

But you are absolutely right that that needs to be the case. And, 

frankly, I am happy that I do not have to make those decisions. 

Senator GRASSLEY. Secretary Chapoton? 

Mr. CHAPOTON. I agree with both things that have been said. 

Keep in mind that, if you look at what happened in Treasury I, the 

rates were the last thing put on the table. In other words, you 

made the change, then you went to the computers and you saw 

what the rate structure would be based on the new tax base you 

created. 

So you set those rates, I would say, to raise whatever revenue 

is then raised under the then-present tax law. If you can afford 

to—and I do not see how this would be possible—but, as Mr. Archer says, if you can afford to give away some revenue, it sure 

would solve a lot of problems in enacting tax reform, and I do think 

I would associate myself with him about the concern of the retroactivity on real estate, because of the demand that it not lose revenue. So, if you can lose some, it becomes easier. 

Senator GRASSLEY. Mr. Weiss? 

Mr. WEISS. I totally agree that bringing deficit reduction into a 

tax reform effort where you have significant changes in the distribution of tax liability by income class would cripple the effort. 

I totally agree with that. 

I think, as a procedural matter and a process matter, I think the 

1980s showed that Congress can do deficit reduction and tax reform at the same time, and that effort succeeded by separating 

these efforts. 

Congress raised tax revenue in 1982 in a big way, 1983 in the 

Social Security amendments, 1984, and then turned around right 

after the 1986 act and had yet another revenue increase bill in 

1987. 

Deficit reduction was a big focus in the 1980s. The GrammRudman bill, which had that deficit trigger, was enacted just in the 

20 

middle of the House Ways and Means markup on the Tax Reform 

Act of 1986. 

So, again, I think as far as structuring a tax reform process, I 

think revenue neutrality is really an important discipline and will 

help promote the success of the effort. 

Senator GRASSLEY. I thank all of you. Thank you. 

The CHAIRMAN. Thank you. 

Senator Carper? 

Senator CARPER. Thanks, Mr. Chairman. Again, it is great to see 

all of you and thank you for your service to our country and thanks 

for your willingness to serve us again. 

We have spent a lot of time in this room in the last year and a 

half, with folks sitting at this table talking to us about things that 

we might do, but the issue might be health care, and things that 

we might do to improve outcomes, to improve health care outcomes 

for Americans, but to do so for less money. 

A number of the ideas that were suggested by witnesses at this 

table were ideas that later on we tried to get CBO to score. And 

some of the measures that we are convinced would save money, a 

lot of prevention stuff and wellness ideas, instead of it being scored 

to save money, they actually scored it to cost money. 

It was just counterintuitive, but that is the way they did their 

scoring. 

Mr. Chairman, I am trying to think of how we reconcile the advice that we are getting here for deficit neutrality, how do we 

somehow square that with the fact that we have huge deficits, and 

they are not getting any smaller; in fact, over time, depending on 

what we do with these expiring tax cuts, they could get even 

larger. 

I am trying to figure out, how do we somehow be consistent with 

the advice that you are giving us, that is, deficit neutrality, and, 

at the same time, look at the size of these deficits that we face 

today and could face even more later. 

I just want to throw this idea out here, and I just want to ask 

you fellows to respond to it. If we were to adopt ideas, tax ideas, 

that, in the end, are deficit-neutral, at least that is the way they 

are scored by CBO, but in our hearts and in our minds, we know 

they are going to generate more economic activity, stimulate the 

economy, and grow revenues, if that might be a way to thread the 

needle here. 

I just send that generally as an idea. I just want to put it there 

on your tables and ask you to respond to that. 

The CHAIRMAN. I want to add, first, it is Joint Tax that is going 

to be doing most of the estimating, not CBO. 

Senator CARPER. I am sorry. 

The CHAIRMAN. And all apologies to Randy. And not to take all 

your time, but I think we are going to have an easier time agreeing 

with the estimates of Joint Tax than we did with CBO, because of 

the nature of the beast. They are just very different. 

Senator CARPER. Good. So I would like to ask each of you to respond. We face a conundrum here, I think. 

Mr. GEPHARDT. Well, one of the things I think you can do is go 

back and look at the estimates that were made in 1985 and 1986 

and then look and see what happened. 

21 

Let me take you over to health care in CBO for a minute. I am 

told, I did not investigate this, so I may be wrong, that some of the 

estimates that CBO gave us on some of the cuts in Medicare that 

were made in 1987 were too low, that the actual experience was 

much better than they said it was going to be. 

So I encourage you to—I do not know what the facts are, but I 

really encourage you to look. I have always believed that tax reform would increase economic activity, more people would comply 

with the code than do today, et cetera, et cetera. 

So you have a case model in front of you, and I urge you to look 

at the history of this and see what happened. 

Mr. ARCHER. I think your point is very well taken, Senator Carper, and I struggled with this as both chairman of the Joint Committee on Taxation and chairman of the Ways and Means Committee, because I was not satisfied that we were getting accurate 

estimates. 

To me, that is what ought to be talked about, not whether it is 

dynamic or anything, but is it accurate? And I think Congressman 

Gephardt’s point is well-taken. We could never get them to go back 

and say this is what we estimated, now here is what actually happened. And, of course there are things other than taxes that determine how the economy is going to work. So that is difficult to do. 

But I would suggest to you, Mr. Chairman, to the degree that 

you have the power to do so, that you reform the estimating process. And that is not easy, I know, because I struggled with it. 

But at the time I was chairman, the CBO determined the baseline, and then the joint committee could only make its estimates 

on top of what that baseline was. And there was no consideration 

of what you said, Senator Carper, that what you are doing may increase growth and may increase revenue by having a better economy—no consideration of that. 

I think you have to pull together the baseline and the independent tax revenue estimates so that, if you have a major change 

in the tax code, which you would in tax reform, that you force there 

being a change in the baseline at that time, too, to represent what 

is going to happen to the economy as a result of what you have 

done in the tax code. 

Senator CARPER. Mr. Chairman, my time has expired. Could the 

other two witnesses respond to my question, please? 

The CHAIRMAN. Yes. 

Senator CARPER. Thanks. Please. 

Mr. CHAPOTON. When I was at Treasury, we did spend some 

time, early on particularly, on sort of a look-back analysis, and I 

think Randy can go through this a lot more effectively. But the revenue estimators operate under constraints, as well, and Mr. Archer 

has referred to some of them. They cannot change the estimate of 

GDP, for example. 

But I just sort of think back at Treasury. At Treasury, we had 

two staffs in my office. We had the staff lawyers and the staff 

economists, which included the revenue estimators. 

I have to say the lawyers always thought they knew the revenue 

estimate better than the economists did, but the economists always 

won. 

Senator CARPER. Mr. Weiss? 

22 

Mr. WEISS. I would just like to say that the revenue estimating 

process is very difficult. The estimators are faced with making projections about changes in the tax law for which often there is very 

little evidence. 

Some are easy. So you can look at tax returns and say, ‘‘Well, 

if I change the rate, this rate is this much revenue.’’ But items 

where there is not direct measurement of the tax provision and for 

which the behavioral response, which is taken into account in the 

revenue estimates, has not been the subject of detailed study, it is 

very difficult to do. 

I believe, certainly, when I was on the joint committee, and I am 

sure that this is the case, the estimators take their best shot at giving an estimate that they believe is reasonable and realistic. 

I actually wrote an article on trying to go back and look at revenue estimates and see how close the outcome had been to the estimate that was given. I guess the first thing you realize is that, in 

many cases, it is very difficult to answer that question, because the 

estimate assumed that the economy would behave in a certain way 

or there would be a certain amount of investment that was going 

on, and then for reasons totally different and totally extraneous to 

the tax process, those assumptions did not play out. 

So to really know whether an estimate was accurate, you really 

would have to know what the economy would have been hypothetically if the tax provision had not taken place. So it is a very 

difficult exercise in many cases. 

Senator CARPER. Thank you. Thank you all. 

The CHAIRMAN. Senator Wyden? 

Senator WYDEN. Thank you, Mr. Chairman. Mr. Chairman, let 

me also commend you for holding this hearing. And I also want you 

to know how much I appreciate your strong leadership in getting 

the committee into tax reform. I think this is absolutely key. 

The CHAIRMAN. Thank you. 

Senator WYDEN. Gentlemen, as you know, we are having a heated debate right now about the tax policies of former President 

Bush, George W. Bush, or passing the new proposals of President 

Obama. 

I am of the view that this is the wrong debate to be having right 

now, because either of these approaches would, in effect, write this 

flawed, discredited tax system into stone. And, it seems to me, the 

more relevant debate is to look at how our economy grew when 

Democrats and Republicans worked together on tax reform in the 

1980s to make the code fairer and more pro-growth and simpler, 

and how it grew much more slowly after the tax changes of the last 

decade. 

My old leader, Dick Gephardt, I think talked about a case study. 

Bill Archer is absolutely right. These are relative, because you can 

never precisely determine what tax changes had to do with an 

economy. 

But during the 1980s, when Democrats and Republicans worked 

together on taxes, 16 million new jobs were created, and there was 

a 17.6-percent expansion in payrolls. By comparison, from 2001 to 

2008, 3 million jobs were created, and there was only a 2.3-percent 

expansion in payrolls. 

23 

So there are some numbers that ought to be looked at to show 

that making the code more pro-growth and fairer and simpler really does redound to this question of generating more employment. 

So what I would like to do for my first question, for you, Leader 

Gephardt, is to talk about the area we have not gotten into today, 

and that is the international side of the debate. 

The American people, as we know, are all completely disgusted 

with this idea that you get tax breaks for doing business overseas. 

The companies come back, on the other hand, and say, ‘‘We have 

to have those tax breaks because our rate is high relative to everybody else.’’ 

My question for you, Leader Gephardt, is, would it not make 

sense now, on a bipartisan basis, to talk about taking away those 

tax breaks when American companies do business overseas and use 

those very dollars to lower rates here in our country, to make 

American manufacturing more competitive in tough global markets? 

Would that not conceptually be a good idea for Democrats and 

Republicans to look at now? 

Mr. GEPHARDT. That is one of the real benefits of going through 

this process is that you—as I said in my statement—get to look at 

each provision that is in the code, really study its effectiveness, 

study whom it helps and whom it does not help, and then make 

a judgment on whether you want to leave it in or not. 

I have not really fully analyzed it, obviously, but you could look 

at the whole array of things that help companies that are doing 

work abroad and see if you could get rid of some of those that do 

not make sense, and then use that revenue, as has been said by 

some of the speakers here, to lower the corporate tax rate for all 

corporations, including those that do business abroad and those 

that do not. 

So that is the kind of tradeoff and balancing that you can do in 

this process. It is, obviously, a compromise, and there will always 

be some who are not happy with your outcome. But, if you can help 

the whole economy grow faster and help American businesses succeed better, then that is something you really have to look seriously at. 

So I commend you for that kind of analysis. 

Senator WYDEN. Let me ask our panel one other question that 

I have come to think is a serious matter, and particularly when you 

look back at the history of what happened in 1986. 

In 1986, you passed this exciting transformational set of changes 

in tax law and, virtually, as soon as the ink was dry, all the special 

interest groups came back and started trying to jam in to the tax 

code various things to unravel the transformational reform you had 

made. 

Now, no current Congress can ever bind a future Congress. It 

seems to me that, as part of this tax reform debate, at least there 

ought to be a discussion that, when we get real tax reform, under 

the leadership of Chairman Baucus and all Senators working together, are there ideas that might be considered to make it tougher 

to go back and unravel it this time when you actually get it done? 

I think this issue has to get out on the table. Do any of you want 

to get into that? 

24 

Mr. ARCHER. I think that is an excellent point, but I do not know 

how you implement something like that, because, as you said, one 

Congress can say it is statutory, so it can be easily changed. 

Gramm-Rudman was supposed to have great benefits to the deficits, and you know what happened there. It got waived every time 

it began to look like it was going to take effect. 

So I am not sure you can do that. But I would like to just jump 

in on your first question, if I could, for a minute or two. 

Senator WYDEN. With the chairman’s leave. 

The CHAIRMAN. Certainly. 

Mr. ARCHER. I think you do have to go back to determine not just 

whether this sounds good—and the way you described it, it sounds 

good. The way you described it, I think the majority of the American people would likely say, ‘‘Okay, we agree.’’ 

But the real question is, what will that do in the long term to 

our corporations’ ability to compete overseas with their foreign 

competitors? And one of the things that is so tough to do politically 

is to determine that your tax code on international income or foreign source income really needs to be in symmetry with the way 

our foreign competitors are taxed by their countries, not in symmetry to the way domestic corporations are taxed for activities in 

the U.S., because taxes have an enormous impact on ability to compete. 

Taxes are a major cost of doing business. And it is why we have 

seen, in my opinion, many U.S. corporations having to be taken 

over by foreign corporations in order to compete in the world marketplace. And now we have an even greater complexity that has entered the arena, and that is country corporations, not just private 

corporations, that have the rules of taxation of their foreign country, but you have the Chinese who have their own corporations, 

government-owned corporations that are competing in the world 

marketplace. 

So this is going to get more complex and more difficult. But, if 

you want to save the really high-paying jobs that are part of our 

multinational corporations’ activities, you must let them compete 

on a level playing field with their foreign competitors. 

Bankers Trust is now Deutsche Bank, because our tax code put 

extra costs in the way of Deutsche Bank becoming Bankers Trust. 

And I worry tremendously about the growth of this, which I think, 

in the long term, will not be in the best interest of this country. 

I compliment you on your broad-based tax reform proposal that 

you and Senator Gregg put together on a bipartisan basis. It is a 

major move forward to address an awful lot of things. 

But what you brought up on deferral is one of the things that 

I worry tremendously about and what its ultimate economic impact 

will be on our ability to compete in the world marketplace. 

Senator WYDEN. Mr. Chairman, you have given me way too 

much time. Can I just make one other quick point? 

Mr. ARCHER. That is my fault, not yours. 

The CHAIRMAN. One point. Go ahead. I was going to follow up on 

deferral, so go ahead. 

Senator WYDEN. And I think Chairman Archer makes an important point. The question, I think, for our policy consideration is 

asking companies, how low does the American rate have to go in 

25 

order to make you competitive so you can give up some of these 

considerations, and I think the only question I was raising with the 

chairman is how do we get into that debate. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you all. 

Senator Bunning? 

Senator BUNNING. Thank you, Mr. Chairman. 

I want to welcome my two former colleagues from the House of 

Representatives, the distinguished majority leader and my chairman, when I was on the Ways and Means Committee for about 6 

or 8 years, I think, who allowed me to head up a lowly subcommittee called the Social Security Subcommittee, and greatly 

helped me in getting passed my pet project of repealing the unfair 

Social Security tax on seniors, which is, I guess—the people who 

are 65 and older are thankful that you were chairman at the time. 

You succeeded, also, Chairman Archer, in lowering the capital 

gains tax rate, providing death tax relief, and accomplished a 

whole lot of other goals that we worked with you on. And you always did it with grace and dignity, and I thank you for that. 

Dick Gephardt, I want to thank you for all your years of service 

and your leadership in recognizing that tax rates should be lower 

to help boost economic growth, because you believed that very 

strongly when you were the leader in the House of Representatives. 

The 1986 tax reform was passed the year before I came to Congress. So I cannot take any credit or blame for it. But I think we 

need to take an honest look at whether the 1986 act was really a 

success, as people seem to think it was. 

For example, the real estate market, as has been said, had struggled for years after the law passed. For about 6 years, the commercial real estate market was in the tank because of the 1986 tax 

changes. 

Hundreds of pages of special tax breaks have been added to the 

code since 1986, hundreds. God, I cannot believe the amount. Twothirds of the taxpayers hire someone else to do their taxes, including me. And Chairman Archer was the only person on the Ways 

and Means Committee, when I served, who continued to try to do 

his own tax returns, and I guess he succeeded, because he is still 

here. 

Mr. ARCHER. I guess so, because they have not—— 

Senator BUNNING. Come after you. 

Mr. ARCHER. That is right. 

Senator BUNNING. People still believe that the tax code is unfair. 

American people believe the tax code is unfair, no matter what 

bracket they are in. And individual tax rates are creeping up to 

near the levels they were in 1986. 

Half of the American people pay no taxes, none, no income tax. 

They pay the payroll tax. And many of them actually get extra 

money from the Treasury that they never paid into the income tax 

system. 

Every developed country except one has a corporate tax rate that 

is lower than ours. Only one country has a higher tax rate than 

ours. 

The alternative minimum tax, AMT, God bless it, was not indexed for inflation in the 1986 act, and the AMT will soon be stealVerDate Nov 24 2008 19:50 Oct 28, 2011 Jkt 000000 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 R:\DOCS\70694.000 TIMD
26 

ing more money from taxpayers than the regular income tax that 

we have. 

So my question to the panel is a very easy one. Is the 1986 act 

really a success? 

Leader Gephardt, would you like to try it? 

Mr. GEPHARDT. I think it was. Senator Baucus, in his opening 

statement, said that—he quoted someone who said the tax code is 

like shrubbery or a shrub that you whack it back and then it grows 

back even bigger and stronger. 

The history of taxation among human beings is that, whenever 

a tax is imposed anywhere, immediately you have special pleaders 

come in and say, ‘‘It should not apply to me, because I do something that is really important for society,’’ and then we grant these 

special favors. 

That is human nature, and I do not know that you can change 

that, to go back to Ron’s question. Maybe there is a way, once you 

get it in place, to say, ‘‘Okay, if you want to have that special 

pleading to be granted, then we have to raise the rates to accommodate that,’’ kind of a pay-as-you-go tax program that might be 

able to be constructed. 

But my answer to your question, Senator, is I think it did succeed. I agree with the statement about the real estate industry. As 

I remember it, in the last stages of tax reform in 1986, some of the 

Senators wanted to get a top rate of 28 percent. That was really 

important to them. And they took that retroactive action in order 

to pay for that, because that is what you had to do to make it 

revenue-neutral, and we have talked about that. I think that was 

a mistake. 

So it was not perfect. I have never seen a piece of legislation that 

was. 

Senator BUNNING. Granted. 

Mr. GEPHARDT. But it did accomplish its major goals. It did get 

rates down for almost everybody. It did create a perception and the 

reality of greater fairness. And it did create some simplicity. But 

as usual, the shrub grew back, and we started—it is easy to get 

up and say, ‘‘I think we need a tax break for X, because the country 

really needs that now,’’ and it is very easy to grow this thing back. 

So, if I had one admonition here at the end, it would be to try 

to work out a procedure that would make that harder to do. 

Senator BUNNING. Bill? 

Mr. ARCHER. I do not disagree greatly with what Congressman 

Gephardt said, but I do not think it has been a massive success. 

I think the devastation to the S&L industry, single-handedly, was 

probably the biggest negative in the economy during the time I was 

in the Congress, if looked at just by itself. 

In addition, President Reagan, and I have said this over the 

years, he was mesmerized by the rates. His goal was to get the 

rates down, and they got the rates down. But at what cost? At 

what cost to complexities? 

I was talking to my childhood friend—Jimmy Baker and I grew 

up together in Houston, TX—and I said, ‘‘How can you claim simplicity in this?’’, because I was still doing my income tax. And he 

said, ‘‘Well, we knocked 6 million people off the rolls, and that’s 

simpler.’’ And I said, ‘‘Yes, for people who don’t have to do an inVerDate Nov 24 2008 19:50 Oct 28, 2011 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 R:\DOCS\70694.000 TIMD
27 

come tax, I won’t argue that it’s simpler. But for those of us who 

have to keep doing it, it’s a heck of a lot more complicated.’’ 

I can remember, for example, during the deliberations in the 

Ways and Means Committee, Andy Jacobs, Democratic Congressman from Indianapolis, just threw up his hands, and he said, 

‘‘Well, I can see what’s happening here. By the time you get 

through doing all the worksheets that you have to do before you 

can go to the income tax forms, it’s Miller time.’’ And I will never 

forget that. 

So it did not simplify, and in the foreign area, it made it far more 

complex. Simplicity was not achieved, but people were knocked off 

the rolls, and that is one reason why, today, almost half the people 

pay no income tax, as you mentioned. 

Mr. Chairman, one of the things that I think is going to create 

difficulty for you in this process is to mobilize enough individuals 

to feel like whatever you are going to come up with is better than 

what they have today. 

Now, if they do not pay any income tax, and if a big percentage 

of them are actually getting a check back from the government, as 

Senator Bunning said, which is true, you are going to have a hard 

time selling them that any new program is really going to be better 

for them. And I have worried about that over the years. 

We, as Republicans, were more responsible for knocking people 

off the rolls than the Democrats were, but that is what you have 

to deal with today, because you have to mobilize enough of the 

American voters to really believe in what you are doing to be successful, and that is going to be another part of your challenge. 

The CHAIRMAN. Senator Hatch? 

Senator HATCH. Well, it is great to see you folks back, I will tell 

you. Dick and Bill, you have been great people, as far as I am concerned, all the time I have known you. John Chapoton, it is so nice 

to see you again. We appreciate your service. Mr. Weiss, your Joint 

Tax service was very important up here. We appreciate all four of 

you. So this is interesting to me. 

Chairman Archer, let me just start my questions with you. You 

emphasize in your testimony how critical to the success of tax reform was the role played by President Reagan. Now, you further 

asserted that successful tax reform today would also require presidential leadership. 

To succeed, then, do you believe that tax reform would need to 

be the President’s number-one domestic priority or just one on a 

list of things that we would like to see happen? 

Mr. ARCHER. Well, that is a matter of opinion. I think it is going 

to be so difficult that it likely will have to be his number-one priority. It was for President Reagan, and I think that was extremely 

important in getting the job done, and I think all four of us agree 

on that. 

But interestingly enough, too, Mr. Chairman, you are starting 

out with total bipartisan support here from all four of us. I hope 

you can keep that until the end. 

Senator HATCH. Well, you and the other witnesses all mentioned 

that the centerpiece of the 1986 Tax Reform Act was a broadening 

of the tax base and a lowering of the rates. I agree that this repVerDate Nov 24 2008 19:50 Oct 28, 2011 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 R:\DOCS\70694.000 TIMD
28 

resented significant and comprehensive tax reform. But my question is, was it fundamental tax reform? 

I very clearly recall the persuasive arguments that you made, 

that you, in particular made, when you were chairman of the Ways 

and Means Committee, that we needed to tear the tax system out 

by its roots so it can never grow back to this new monstrosity, as 

it has since 1986. 

Now, do we need a more fundamental reform, such as some sort 

of consumption tax or flat tax, or can we achieve that kind of tax 

system that literally would not allow the re-growth—the bush to 

grow even further? 

Of course, America, in my opinion, needs—by broadening the 

base and the rate-lowering approach, would that be the way we 

should go once again? 

Mr. ARCHER. Well, I think, if you are going to keep the income 

tax, you are going to have to broaden the base. And the only thing 

that—again, a caveat is that, as you broaden the base, you have 

to be very careful that you do not do it retroactively and that you 

know what the economic consequences are likely to be. 

Frankly, I would hope, too, that there would be a thorough analysis of what the compliance costs are going to be, which are an unnecessary burden on the economy, in my view. 

But unfortunately, and, again, these are my own opinions and I 

was not part of the majority, but I came away from 1986 very disillusioned as to whether you could ever fix an income tax. 

I welcome the effort that you are undertaking, Mr. Chairman. I 

hope you can. I think it is desperately needed. But I came to the 

conclusion, as you mentioned, Senator Hatch, that we needed to 

tear it out by its roots and replace it with something that, number 

one, would not be a magnet to pull in all kinds of special interest 

provisions and all the things, Mr. Chairman, that you complained 

you have to deal with with the extenders. 

The income tax is just a magnet to bring in those things from 

people who want to say, ‘‘Oh, yes, but my deal is important, so give 

me a special exception,’’ and it undermines ultimately the effort. 

So my views were there in writing, and the dissenting views and 

the statements I made on the floor and everything else, but they 

were not sympathized with by the majority, and I lost. 

However, it is very interesting to note that I was designing a motion to recommit with instructions that would have fixed some of 

the truly egregious things that I saw in the 1986 act, and I am convinced there were a majority of votes on the floor of the House that 

would have voted for that motion to recommit with instructions. 

On the eve of that, I was called into Bob Michael’s office, and 

Bob Michael said, ‘‘Well, the White House is calling me, and they 

have to take away your motion to commit with instructions.’’ And 

he said, ‘‘I’m going to have to take it away from you and offer just 

a straight motion to recommit.’’ 

In the end, rather than violating tradition and procedures, I 

agreed to go ahead and just offer a simple motion to recommit, 

without instructions. We still got 160 votes against the bill. 

But I am convinced that, had we been able to send it back and 

make four or five changes, it would have been a success, Senator 

Bunning. So anyhow, that is just my opinion, Senator. 

29 

Senator HATCH. Thank you. Mr. Chairman, if I could ask one 

more question. 

The CHAIRMAN. Yes, fine. 

Senator HATCH. Mr. Chapoton, you played a major role at Treasury in developing the Treasury proposals now known as Treasury 

I and Treasury II. How important a role did these proposals play 

in the process of moving the Congress towards the 1986 Tax Reform Act, and can and must Treasury play a similar role in developing the underpinnings of a viable tax reform plan in the future? 

Mr. CHAPOTON. Senator, I think, as I have said in my written 

statement, I think they played a pivotal role, because they—— 

Senator HATCH. Could you also cover—as I recall, you discussed 

the fact that a flat tax proposal was considered and rejected in the 

early 1980s because of the effect such a tax would have on redistributing tax burdens, if you could address that, as well. 

Mr. CHAPOTON. Well, as I mentioned—well, first of all, to answer 

the first part of your question—I do think it was the work of the 

Treasury, and I think Randy hit on some points that—the whole 

process from 1981 to 1984 was instructive and helpful in the 1982 

and 1984 acts that he mentioned. The fact that they did broaden 

the base, that they did raise revenues, certainly, without raising 

rates, was an important step in the overall consideration of the 

process in 1984. 

In 1982, Treasury was asked to testify on flat taxes, and I testified, and I alluded to that in my written statement. And the problem that we were concerned about—we talked in the testimony 

about a lot of the efficiencies and the end simplicity if you go to 

a truly flat tax, but the overriding showstopper, if you will, was the 

redistribution effect of the tax burden from upper-income to lowerincome. And we give some dramatic examples in the testimony. 

But that was a serious concern, and I do not think the flat tax 

entered into the serious consideration in the tax reform effort in 

1984. 

Senator HATCH. Thank you, Mr. Chairman. 

The CHAIRMAN. A question that comes to my mind is, how important is it or how much of a problem is it if individual income tax 

and capital gains—must they be the same as in 1986? Since then, 

capital gains has been a lower rate to spur growth in the country. 

Must there be a differentiation between the capital gains rate 

and income rate or not? Anybody want to take that on? 

Mr. GEPHARDT. Well, it has been a raging debate as long as I can 

remember, and we will all have different views according to how 

we come to this question. I think that, if you can get tax reform 

done and get income tax rates down, you kind of lessen the controversy. 

I am not saying it will go away, but you make it a less controversial question. When the income tax rate is at 70 or 90 percent top 

rate, then there is real fire in the side that says there has to be 

a differential. 

So we always thought in 1986, the lower we could get that top 

rate, then the less differential you would have to have, and you 

lessen the emotion and the difficulty of that debate. 

The CHAIRMAN. Anyone else? 

30 

Mr. ARCHER. Yes. Mr. Chairman, in the late 1990s, the Joint 

Committee revised its computer revenue estimating process on capital gains and, for the first time, put in behavioral response. And, 

if you want more revenue from capital gains, you cannot have them 

above 20 or 25 percent. 

If your individual rate is higher than that, and you put the capital gains rate up there, you are going to lose revenue on capital 

gains, and that—it is interesting to me that ABC, in one of the debates, asked Candidate Obama about that and even said, ‘‘Well, 

don’t you understand that, if you raise the rate, you are going to 

get less revenue?’’ The reporter asked him that. And he did not 

argue with that. 

It was subsequent to that that he revised his proposals and said, 

‘‘Well, the capital gains rate will only go back up to 20 percent.’’ 

So I think, when you are concerned for revenue, and you will be 

in tax reform, that you need to take into account how you are going 

to get more revenue from the capital gains tax. 

The CHAIRMAN. How important is it to pursue tax reform given 

our system, as we know it, or specifically pursue consumption tax, 

VAT tax, other systems? 

Mr. GEPHARDT. I have always believed—we went through all that 

discussion in 1984 and 1986. We looked at VAT taxes, we looked 

at a totally consumption-based tax, a flat tax, a flatter tax, which 

is what we came up with, and my conclusion then, and it is probably still my conclusion, is that all of those other systems are a 

bridge too far. 

It is almost like perfection in someone’s eyes meeting reality. 

This is a complicated country. It is a large country. It is a diverse 

country. You have many, many different views of what is fair and 

right. 

I simply do not believe you can find a consensus that moves to 

a flat tax or a consumption tax. I understand the arguments that 

people make for that, and I tend to agree with those arguments. 

But putting that aside, I just do not think you can find a consensus in anything other than amending or reforming the code that 

we have. 

The CHAIRMAN. Anyone have a contrary view? Do you want to 

speak? 

Mr. WEISS. I was just going to agree. I think one of the important aspects of the income tax is that it is progressive; that higherincome individuals pay a higher percentage of their income in tax 

than lower-income individuals. And I would be very surprised if the 

public were to accept a change that did away with that characteristic. 

The CHAIRMAN. Mr. Chapoton? 

Mr. CHAPOTON. As I have said, I think the basic flat tax or partially flat tax does not work; it is not going to fly. You are going 

to have a graduated, consumed income tax, but the problem is you 

have a smaller base, by definition, if you tax only consumption, and 

you have a much higher rate. 

So I think that makes it—and when you get into perceptions of 

fairness, it does not look as good, frankly. And so I think I would 

encourage you not to—I do not think it would work. 

31 

The CHAIRMAN. Clearly, our goal is to make sure American companies can compete on a level playing field with other countries, 

companies, et cetera. 

Chairman Archer, you talked a bit about this. I hear a lot about 

moving away from worldwide to territorial. I guess the U.K., and 

maybe another country, has recently moved to territorial, ostensibly for that reason. You hear from the business community in the 

U.S. that our corporate rates should be lower. 

Your thoughts on what we need to do to maintain and enhance 

and, Chairman Archer’s view, even out-compete other countries as 

we move to tax reform? 

Mr. CHAPOTON. I would just say that is a real issue, a very complex issue because, as Mr. Archer said, the complexity of the international provisions is immense. And I think he really articulates 

quite well the conflicting views. 

I do think—I have always thought that we should really look at 

a territorial tax. And I think politically, it would be tough to go 

there, but it might make a lot of sense, for the reasons he states. 

They are competing in another—our companies are competing in 

another market, and, if there is a different tax system in that other 

market, then they are competing with one arm tied behind their 

back. 

The CHAIRMAN. Anybody else? 

Mr. ARCHER. Yes. I would just revert back to what I said earlier, 

that a territorial system may be the way to get us competitive in 

the world marketplace. But we have to be very careful as to how 

it is contrived and how it is conceived and the details of it. 

The important thing is to go back to what I said. We must have 

taxation of our foreign source income that is on a level playing field 

with our foreign competitors, and we will win if we are on a level 

playing field. 

But when we are going into the arena with one hand tied behind 

our backs, we are not going to win ultimately, and we are going 

to lose our corporations, and they will become run by foreigners, 

and all the high-paying jobs will be in other parts of the world. 

The CHAIRMAN. Randy? 

Mr. WEISS. I think this is a difficult balancing act. I think it is 

really important to keep in mind that a big part of the international competitiveness of the U.S. is to make it very attractive 

for companies to do business in the U.S. And so that involves really, not the taxation of U.S. companies abroad, but rather the tax 

rates on income that is earned in the U.S., by both U.S. and foreign 

corporations. 

So there is clearly a balance. On the one hand, it is definitely important that U.S. companies have the ability to expand their markets and drive innovation around the world. On the other hand, it 

is important to be able to attract and stimulate activity here at 

home and attract foreign investment, as well, which has been increasingly important. 

The CHAIRMAN. As we proceed with our hearings, obviously, we 

are going to have to set up an agenda and schedule. Some subjects 

are going to have to come ahead of others. But one of the—Chairman Archer or somebody mentioned hours and hours, hundreds of 

hours of hearings to begin to get—to educate members of the comVerDate Nov 24 2008 19:50 Oct 28, 2011 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 R:\DOCS\70694.000 TIMD
32 

mittee and Congress and so forth. It is somewhat the same approach that we took in health care reform. 

In 2008, this committee had many hearings on our health care 

system, to the degree we have a system; how does it fit together, 

how does—we had no ideological axe to grind, just the facts so we 

hopefully knew what we were talking about. 

Would you give us some sense of what the order of subjects were 

that you addressed and any guidance you might have in what we 

might look at first, second, or third, anyone? 

Mr. GEPHARDT. I think you have to start where you are, which 

is the concept, the overall tradeoff concepts that you are dealing 

with so that people can start to see what is involved here, that it 

is not a simple exercise, that there are lots of side roads you have 

to go down and things that have to be looked at, and then delve 

into each of these areas we have been talking about in greater detail, because they are the subparts that make it up. 

Let me just mention the international business thing is one of 

the areas you really have to spend some time on. From this discussion, I think it is clear, part of the reason that we put things like 

deferral and other things in the code was because the corporate 

rate here, as Bill Archer said, got ahead of, or more than it was 

in many of our competitive countries. 

So the international corporations came in here and asked for special treatment. They asked for a special way to deal with it. 

If you could trade that off—and I do not know if you can, but 

that is what I think you have to look at—to get that rate down, 

is that a better overall outcome than what you have? And that just 

takes hard work, analysis, discussion, getting people to really look 

at the tradeoff and understand it, and see where you are. 

The CHAIRMAN. Thank you. Anyone else? 

Mr. CHAPOTON. That is a tough assignment, Mr. Chairman, but 

I certainly agree. Starting here is a starting point, and you might 

take a lesson from the organization at the Treasury Department 

when it had to undertake the same effort; where do you start and 

what do you look at first. 

The CHAIRMAN. Well, basically, you—you have all been terrific in 

giving us lots of ideas, and I think the answer to my question is 

we just have to start somewhere. We just start, and then we will 

know what the next step is after that. This is not rocket science. 

It will be difficult to find solutions, but I think it will not be too 

difficult to find the subjects to pursue. 

Senator Wyden? 

Senator WYDEN. Thank you, Mr. Chairman. 

I just had one other policy question, and it reflects the point you 

made at the beginning about how complicated this is and the thousands and thousands of pages, and that everybody has to get a preparer and buy software, and then you go through this April filing 

blues after you have done all of this. 

What has left me confident that there still is a real opportunity 

for bipartisanship here is, when you look at some of the recent proposals for simplifying the code, there is a lot of common ground. 

You all recall that the commission that George W. Bush put together that was chaired, I think, by Senator Breaux and Senator 

33 

Mack, they came in with a 1-page 1040 recommendation. I think 

it is like 33 lines long. 

Then when you look at everybody else’s ideas, they all go between like 29 and 35 lines long. And that’s pretty good for government work. There are a lot of opportunities for compromise here. 

There is one idea that has come to light I would be interested 

in your opinions on, because I think it could be a real boon for taxpayers if it was laid out as an option. And that is the idea of saying 

that, if Americans opted for this, nobody would be required to do 

it, it would be completely voluntary. Americans could, in effect, say 

to their government, the IRS, you have all of this information that 

is being reported anyway, about retirement, savings, and a variety 

of areas where information is collected, dividends and the like. If 

people chose it, they could have the government, in effect, take that 

information, do their taxes for them, and then mail it to them, and 

then an individual could revise it. So the people, if they chose it, 

could get out from under some of the hours and hours and hours 

that were devoted to it. 

I think it is an attractive idea. I would be interested—do any of 

you have thoughts on this? And emphasize an option, a question 

of whether taxpayers, come April, could say, ‘‘You fill it out. Send 

me what amounts to a draft kind of code, I’ll make some adjustments, and I’ll mail it in.’’ 

Leader Gephardt, any thoughts, any of you, on this? 

Mr. GEPHARDT. Obviously, anything you can do to make it easier 

for people is a good thing. I take it you are probably looking at people who would be in the most simple return, short form or whatever. 

Senator WYDEN. Right. 

Mr. GEPHARDT. And maybe it could work for them. I have doubts 

that it would work for people who have a little more complication. 

And as you heard, you do not have to get very high up to have a 

lot of complication with today’s code. 

But if you simplify it and you get more people onto a simpler 

form, maybe that is something that could be looked at. 

Mr. ARCHER. Well, I compliment you on your creativity and your 

determination to do something about this, and I mean that very 

genuinely. But I tend to agree with Congressman Gephardt. 

When I was doing my own return, it took me more time to get 

ready to go to the form than it did to complete the form. And so 

I do not think that having the IRS complete the form would have 

been of any benefit to me. 

Senator WYDEN. I only bring it up because apparently there has 

been interest in this concept, as well, with the taxpayer advocates. 

So it seems to me that we will continue the discussion. 

Chairman Baucus has been great to let this go so long. 

The point, it seems to me, and Leader Gephardt makes the point, 

what we want to do for people is start with a 1-page 1040 form. 

Every single objective analysis, whether it is President Bush’s 

commission or the various proposals that are out there, they are all 

between 28, 29, and 35 lines long. We ought to, on a bipartisan 

basis, be able to do that. 

34 

Then, it seems to me, that some of the additional ideas—California has started this concept that I have described on a trial 

basis. It seems to be well-received. 

Leader Gephardt has made the point that not everybody, obviously, is going to use it. We ought to be looking at trying to give 

people tools to get out from under this idea that they spend their 

entire spring, when they would rather be with their family, wading 

through all this stuff. 

Mr. Chairman, again, thank you for all your leadership. It has 

been a great way to start. 

The CHAIRMAN. Thank you, Senator. You have lots of energy and 

imagination, as Chairman Archer has said. 

I just want to thank you all very, very much, on behalf of the 

whole committee and, frankly, the country. As Senator Carper said, 

you are all great public servants, and you still are serving. We are 

deeply indebted to you. Thank you so very much. I have a hunch 

we are going to be talking to you several times more on this very 

subject. 

The hearing is concluded. 

[Whereupon, at 12:15 p.m., the hearing was concluded.] 

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