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67–524—PDF 2010

S. HRG. 111–1048 

THE FUTURE OF INDIVIDUAL TAX RATES: 

EFFECTS ON ECONOMIC GROWTH 

AND DISTRIBUTION 

HEARING 

BEFORE THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

JULY 14, 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 ................................................. 2 

WITNESSES 

Markman, Carol, certified public accountant, Feldman, Meinberg, and Company, LLP, Syosset, NY ....................................................................................... 7 

Marzahl, David, president, Center for Economic Progress, Chicago, IL ............. 8 

Marron, Dr. Donald, director, Tax Policy Center, Urban Institute, Washington, DC ............................................................................................................. 11 

Holtz-Eakin, Dr. Douglas, president, American Action Forum, Washington, 

DC .......................................................................................................................... 12

Burman, Dr. Leonard, Daniel Patrick Moynihan professor of public affairs, 

Maxwell School of Syracuse University, Syracuse, NY ..................................... 15 

ALPHABETICAL LISTING AND APPENDIX MATERIAL 

Baucus, Hon. Max: 

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

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

Burman, Dr. Leonard: 

Testimony .......................................................................................................... 15 

Prepared statement .......................................................................................... 53 

Grassley, Hon. Chuck: 

Opening statement ........................................................................................... 2 

Prepared statement .......................................................................................... 66 

Holtz-Eakin, Dr. Douglas: 

Testimony .......................................................................................................... 12 

Prepared statement .......................................................................................... 70 

Markman, Carol: 

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

Prepared statement .......................................................................................... 85 

Marron, Dr. Donald: 

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

Prepared statement .......................................................................................... 93 

Marzahl, David: 

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

Prepared statement .......................................................................................... 107 

COMMUNICATION

Qualified Settlement Trusts for Asbestos Victims ................................................ 111 

(III) 

(1) 

THE FUTURE OF INDIVIDUAL TAX RATES: 

EFFECTS ON ECONOMIC GROWTH 

AND DISTRIBUTION 

WEDNESDAY, JULY 14, 2010 

U.S. SENATE, 

COMMITTEE ON FINANCE, 

Washington, DC. 

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

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

(chairman of the committee) presiding. 

Present: Senators Bingaman, Wyden, Stabenow, Cantwell, Nelson, Carper, Grassley, Hatch, Snowe, Kyl, Bunning, Crapo, Roberts, Enzi, and Cornyn. 

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

Tiffany Smith, Tax Counsel. Republican Staff: Jim Lyons, Tax 

Counsel; Tony Coughlan, Tax Counsel; Nick Wyatt, Tax and Nomination Professional Staff Member; and Chris Condeluci, Tax and 

Benefits 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. 

Arthur Godfrey said, ‘‘I am proud to be paying taxes in the 

United States. The only thing is—I could be just as proud for half 

the money.’’ 

In 2001, the Congress enacted legislation to let American families keep more of their money. We lowered income tax rates for all 

taxpayers. We doubled the Child Tax Credit from $500 to $1,000 

a child. We made the credit partially refundable so that more families could benefit. We increased the amount that families could get 

from the dependent care credit. That helps more working families 

make ends meet. 

We eliminated the marriage penalty. That way, married couples 

do not get higher taxes as an added wedding present. We recognized the importance of higher education. We made it easier to deduct student loan interest. We made a lot of tax law changes in 

2001 that have very broad support throughout the Congress. 

But now we face a problem. These tax cuts are not permanent. 

They expire at the end of the year. The big questions before us now 

are whether we should make some of these tax cuts permanent 

and, if so, which ones. 

2 

* For more information, see also, ‘‘Present Law and the President’s Fiscal Year 2011 Budget 

Proposals Related to Selected Individual Income Tax Provisions Scheduled To Expire Under the 

Sunset Provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001,’’ Joint 

Committee on Taxation staff report, July 12, 2010 (JCX–36–10), http://www.jct.gov/publications.html?func=startdown&id=3691. 

But that is not the only challenge. There is another elephant in 

the room, and that is the budget deficit, and that elephant is growing. Last year, the budget deficit was the largest share of the economy since World War II. And the nonpartisan Congressional Budget Office expects the deficit to exceed $1 trillion in 2010. And the 

Congressional Budget Office projects that deficits will remain high 

for the rest of the decade. 

That means that the Federal debt will keep growing. By the end 

of this year, economists expect Federal debt held by the public to 

reach 62 percent of the gross domestic product. That is also the 

highest share since right after World War II. 

When we passed the 2001 tax cuts, the Federal Government was 

running a surplus. When we passed the 2001 tax cuts, economists 

projected big surpluses for years to come. 

We face a different budget picture today. With today’s budget picture, it is no longer clear that we can afford large tax cuts for the 

most well-to-do. 

So today we will discuss the expiration of the 2001 and 2003 tax 

cuts. We will discuss the effect of these tax cuts on economic 

growth and on the distribution of income. We will consider whether 

these tax cuts should be made permanent and for whom. 

And so, let us begin the work of addressing the 2001 and 2003 

tax cuts; let us do so responsibly, with an eye on the budget picture; and let us endeavor to let working American families keep 

more of their money.* 

Senator Grassley? 

OPENING STATEMENT OF HON. CHUCK GRASSLEY, 

A U.S. SENATOR FROM IOWA 

Senator GRASSLEY. Congress is in Washington, DC, and Washington, DC is an island surrounded by reality. We find that same 

metaphor applying to the discussion of today’s hearing topic. Today’s topic boils down to a discussion of the merits of extending 

current law levels of taxation. 

In the various layers of the DC establishment, the discussion is 

framed solely from the perspective of an old phrase. The phrase is 

‘‘Tax cuts are not free.’’ Now, I am not disputing the notion that 

extending these tax relief plans scores, and emphasis on scores, 

under the conventions of our budget process under the Congressional Budget Act. 

So take a look at the pamphlet prepared by the nonpartisan official scorer for taxes, the Joint Committee on Taxation, for today’s 

hearing. Examine pages 42 and 43. These charts detail the multiple trillions of dollars of revenue at stake over the 10-year budget 

window. 

So in that sense, and only in that sense, tax cuts are not free. 

But in the fantasy world of this town, the roughly trillions locked 

up in extending current law entitlements are off the table, not subject to PAYGO, not really accounted for. 

3 

The same goes for appropriated spending. It is ignored over the 

long term, even though there are trillions of dollars in new spending baked into the fiscal cake; not subject to PAYGO, not really accounted for. The last time I checked, $1 spent equals $1 of foregone 

revenue. 

This double standard does not make sense. It seems like fiscal 

fantasy to scrutinize to the nth degree the revenue lost from extending current law tax policy and, at the same time, avoid acknowledging trillions of dollars of increased spending. 

Right now, I want to display another difference between tax relief and new spending. I am now holding up the legislative text of 

the tax relief acts, called the ‘‘Economic Growth and Tax Relief Act 

of 2001’’ and the ‘‘Jobs and Growth Tax Relief Reconciliation Act 

of 2003.’’ This is a total of 130 pages of legislative text, not exactly 

something that you take on a vacation to read, but certainly not 

an insurmountable task. 

Now, I hold up the legislative text of the ‘‘American Recovery and 

Reinvestment Act of 2009,’’ also known as the stimulus bill, along 

with the legislative text, in a consolidated print, of the ‘‘Patient 

Protection and Affordable Care Act’’ and the ‘‘Health Care and 

Education Reconciliation Act.’’ These are the bills through which 

health reform was enacted. These three massive spending bills are 

all from the 111th Congress and, as I have them here, represent 

a total of 1,314 pages of legislative text. If you tried to take them 

on a vacation to read, you would probably be charged an extra baggage fee. 

The policy in these two tax bills was very straightforward: cut 

rates for everyone, enhance the Child Tax Credit, provide some 

marriage penalty relief, and enhance tax incentives for education. 

When we leave this island and venture back to our homes all 

across America, we find that the tax increases that our constituents will pay, from their point of view, are certainly not free. 

Let me repeat that. Outside of this town, the folks paying the 10- 

percent across-the-board tax increase tell us it is not free. Tax cuts 

are not free. Tax increases are not free. Someone pays that additional tax, whether it is a hardworking American family or a small 

business owner or a senior citizen who is relying on dividends and 

capital gains from their retirement savings. Keep in mind, taxpayers are literally the folks footing the bill, and they will respond 

to an across-the-board tax increase. 

Today, we will look at some of those consequences. We will look 

at them short-term, and there are long-term consequences. On both 

sides of the aisle, we recognize the importance of this topic today; 

namely, the topic of what to do about the looming expiration of tax 

relief adopted back in 2001 and 2003. 

Let me remind everybody that these are not Bush tax cuts. Of 

course, under the Constitution, only Congress has taxing power, 

not the President. Indeed, in 2001, tax relief was bipartisan. My 

friend, the chairman, and I were partners in that venture. It was 

shaped by the bipartisan efforts of members of this committee. 

The conference report was supported by 25 percent of the then 

Democratic caucus. That bipartisan glue is why we are here today 

discussing growth and family tax relief. 

4 

A major theme of today’s hearing is growth. To address this 

topic, I would like to discuss marginal tax rates, hidden marginal 

tax rates, and, of course, the big issue out there of uncertainty. It 

was brought up to the President by all the CEOs that he called in 

last week to find out how come we are not creating jobs, and they 

listed 18 reasons why we are not increasing jobs, and most of those 

things are things that are on the President’s agenda. 

So, if you want to increase jobs, do away with the uncertainty. 

To illustrate the topics of marginal tax rates and hidden marginal tax rates, I would like to talk about a man named John. John 

is a real taxpayer, and John is his real name. In 2009, John had 

a low 6-figure salary. In early April 2010, John accurately calculated his taxable income. John could see that he was in, quoteunquote, the ‘‘official’’ marginal tax rate bracket of 25 percent, that 

is according to section 1 of the Internal Revenue Code. For an additional $100 of taxable income, John would be $75 

richer. It may or it may not be the case that John would decide 

that to only be $75 richer would not be worth $100 worth of effort. 

Perhaps John would have been willing to do $100 worth of effort 

if he became, say, $80 richer. But to only be $75 richer, he might 

decide it was better to engage in some other nontaxable activity. 

Thus, there could be a loss of productive activity from this 25- 

percent official marginal tax rate bracket. That is, growth to the 

economy could be harmed. 

At the end of 2010, however, the 25-percent tax bracket will become, under current law, 28 percent. So the disincentive from earning that additional $100 of income will be somewhat greater. But 

it is actually worse than that. Although John was in the official tax 

bracket of 25 percent, there was a hidden marginal tax rate of an 

additional 5 percent. This was because some of his tax benefits 

began to phase out at a 5-percent rate. So John was in a hidden, 

or effective, marginal tax rate of 30 percent, 25 percent plus the 

5 percent. So actually, for John to perform an additional $100 worth of effort would only make John 70 percent richer, not 75 percent, as 

John’s official marginal tax rate bracket would suggest. 

And again since, in 2011, the official tax rate of 25 percent will 

become 28 percent, John would be, under currently scheduled law, 

in the 33-percent tax bracket. That is 28 percent plus the 5 percent. The disincentives to productive activity will just be getting 

greater. 

There are enormous quantities of phase-outs of various tax benefits. One of our witnesses, Ms. Carol Markman, will discuss that 

in a more in-depth way. The best known of these phase-outs are 

the personal exemption phase-out, or PEP, and the limitation on 

itemized deductions (better known as the Pease limitation, after 

the member of the House, Don Pease, who came up with the limitation). 

There are several harmful effects from PEP, Pease, and other 

phase-outs. The first harmful effect is that they increase the marginal effective tax rate, thus increasing the disincentive to perform 

productive activity, harming growth. The second is they significantly increase complexity. The third harmful effect is that they decrease transparency. John thought he was in the 25-percent tax 

5 

bracket, but was actually in the 30-percent effective tax bracket. 

Fourth, these problems have the cumulative effect of increasing the 

tax gap, and that is a concern to all of us, particularly the chairman. PEP and Pease do not exist in 2010, although numerous 

other phase-outs still exist. Both PEP and Pease are scheduled to 

spring back in full force in 2011; thus, in that year, the various 

harmful effects of PEP and Pease will be there. 

Now, in my mind, I can already hear the objections. Those objecting might concede all these various problems I have just mentioned 

are indeed real, but would say that those problems are worth it so 

that we can get John to pay a high tax to help the Nation confront 

its significant deficit problems. That trade-off, so the argument 

goes, is worth it. 

But here is my response to that potential objection. I never said 

that John paid any tax. I told you that for 2009 he was in an effective marginal tax rate bracket of 30 percent, which, in 2011, will 

be 33 percent. 

The truth of the matter is that in 2009, John lawfully did not 

pay any Federal income tax. In fact, not only did he get all of the 

income tax his employer withheld from his paycheck back in a refund, but he actually got even more; additional money in his refund 

check from the IRS. This was made possible because of the expansion of refundable tax credits in recent years. 

So, in fact, the tax code has created the worst of all possible 

worlds in the case of John. It has significant disincentives from 

productive activity, as well as complexity problems, and does not 

raise one dime of revenue for the Federal Government. That is a 

pretty amazing stunt. You would at least hope that, if there are 

high marginal tax rates, there would be high amounts of tax paid 

to the government. 

In case you are wondering how John could have been in a 30- 

percent tax bracket, but actually have negative tax, and actually 

receive a check from the IRS rather than pay any tax, that is possible because, had John made an additional $100 of income, the 

amount of the check John received from the IRS would have gone 

down $30. So John still only got $70 of net benefit from $100 worth 

of productive activity. 

While John’s situation is more extreme than that of most, his situation does illustrate a number of problems with the tax code; and, 

again, these problems will only get significantly worse under the 

current law of 2011. And in one very significant way, John’s situation is actually less extreme than the problems faced by many; 

namely, the problem faced by taxpayers with more income than 

John. These upper middle-income taxpayers and above will face 

even higher disincentives from additional productive activity than 

John does and even higher complexity than John does. 

Finally, I will discuss uncertainty. There is a lot of uncertainty 

caused by the expiration of 2001 and 2003 tax relief. So, to the extent that taxpayers anticipate higher tax rates, this will itself create a disincentive to productive activity when people are planning 

their tax affairs. And yet, to the extent tax relief is ultimately 

adopted, the Nation will again face the unfortunate two-fer of high 

disincentives to productive activity, but low tax receipts to the Federal Government. 

6 

If you talk about extending some or all of the 2001 and 2003 tax 

relief only on a temporary basis, you still have the problem of uncertainty. The uncertainty is particularly relevant to small business, creating 70 percent of the new jobs. 

As folks say it, this issue is all about jobs, jobs, jobs. All parties 

also agree small business creates 70 percent of those jobs. Small 

business health and expansion are key to getting our unemployed 

constituents back to work. We all agree that we should not do anything to impair the health and vitality of small business. 

Where we disagree is on the effect of a substantial tax increase 

on the health and vitality of small business. Many of my colleagues 

on the other side do not believe that marginal rate increases of 17 

percent will matter to small business. 

On my side, we hear small business people loudly and clearly. 

They say they know their taxes are going up. They do not know 

how high the rates will go. They are reluctant to commit to expanding their business because of the hostile and uncertain environment related to a 17-percent marginal tax increase. 

Since this significant tax increase is set to kick in in a few 

months, small business owners are clearly anxious. Maybe in the 

fantasy world of Washington, DC, taxes are not the cost of doing 

business. Maybe some folks think that they will just magically be 

made up somehow. 

But the reality is, in the business world, that businesses must 

adjust. Increased tax costs need to be made up somehow, and that 

is a problem for creating jobs. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. You are kind of worked up 

there. Thank you very much for your statement. 

Now, I would like to introduce the panel. The first witness is 

Carol Markman. Ms. Markman is a certified public accountant 

with Feldman, Meinberg, and Company, LLP. 

The next witness is David Marzahl, who is the president of the 

Center for Economic Progress. The center provides tax and financial counseling to low-income families. 

The third witness is Dr. Donald Marron. Dr. Marron is currently 

the director of the Tax Policy Center with the Urban Institute. Dr. 

Marron previously served as a member of the President’s Council 

of Economic Advisers, acting director of the Congressional Budget 

Office, and executive director of the Joint Economic Committee. 

Our next witness is Dr. Doug Holtz-Eakin, who is the president 

of the American Action Forum and a former director of the Congressional Budget Office. 

Finally, we have Dr. Len Burman, who is the Daniel Patrick 

Moynihan professor of public affairs at the Maxwell School of Syracuse University. Dr. Burman previously served as a Treasury Deputy Assistant Secretary for Tax Analysis. 

As is our regular practice, I really want to encourage you to summarize your statements. We will put your statements in the record. 

They will automatically be included in the record, but I urge you 

to summarize your statements in the 5-minute neighborhood. 

Please begin, Ms. Markman. 

7 

STATEMENT OF CAROL MARKMAN, CERTIFIED PUBLIC ACCOUNTANT, FELDMAN, MEINBERG, AND COMPANY, LLP, 

SYOSSET, NY 

Ms. MARKMAN. Good morning, Senator Baucus, Senator Grassley, 

members of the committee. I am a tax preparer for a living. I have 

also served as president of the National Conference of CPA Practitioners. Accompanying me are two colleagues, the current chair of 

our tax committee, and the managing partner of Feldman, Meinberg, and Company, LLP and president of the Nassau chapter of 

the New York State Society of CPAs. 

The membership of NCCPAP is also tax preparers. It consists 

only of CPAs in public practice all over the country. We estimate 

that our members serve more than half a million businesses and 

individuals throughout every State, and we appreciate very much 

the opportunity to speak with you today. 

My topics, as Senator Grassley said, are the phase-outs of 

itemized deductions and personal exemptions. The rules for Pease 

and PEP do not exist for 2010, but will come back unless Congress 

acts to change the law. 

The current situation, where tax preparers do not know if Congress will act or what the law will be in 2011, creates uncertainty 

and makes tax planning very difficult. Until the Tax Reform Act 

of 1986, any deduction or credit in the code was available equally 

to almost every taxpayer, without regard to his or her adjusted 

gross income. 

TRA86 changed the rates from 15 brackets to two. The offset to 

this simple rate structure was the beginning of phase-ins and 

phase-outs of exemptions, deductions, and credits. 

Since 1986, the rates have increased to a maximum of 35 percent 

and the phase-outs have proliferated, effectively raising this high 

marginal tax rate beyond the current stated rate. As new benefits 

have been introduced, many have been limited by adjusted gross 

income. The public’s perception is that the tax code gives benefits, 

deductions, and credits with one hand and takes them away with 

the other. 

There are many phase-outs in the current code. Most are based 

on adjusted gross income and filing status. Others are different 

only for married-filing separately taxpayers. Some phase-outs have 

kept pace with inflation; others have not. Some phase-out ranges 

are $10,000, $15,000, $25,000 and more. The phase-out range for 

the alternative minimum tax can be as much as $183,000. 

And speaking of the AMT, this tax is the ultimate in phase-out 

provisions. The AMT first became effective in 1970 and was intended to target the rich: specifically, the 155 individuals with income over $200,000 who claimed so many benefits, like John, that 

they owed no tax. This was 1967. 

The initial AMT rate was 10 percent, and the rates have inched 

up every few years. The annual adjustments in the AMT exemption, not knowing if Congress will act, and sometimes the fix being 

enacted very close to the end of the year, are another source of uncertainty and anxiety for taxpayers, tax professionals, and even the 

IRS. I know this because I serve on the Internal Revenue Service 

Advisory Council, and we have talked about it there. 

8 

It is NCCPAP’s position that the AMT should be repealed. The 

AMT is too complex and it poses a large compliance burden, and 

still it does not tax the people for whom it was intended. The people who should pay the AMT are those who structure their lives 

to avoid tax, not those who have another child. 

One of the most serious problems tax professionals have in dealing with phase-outs is that even a very seasoned professional cannot sit down with a taxpayer and prepare a tax projection using 

only a pencil, paper, and a calculator, if their income is above a 

nominal amount. 

The code is so complex and provides for so many phase-outs, with 

different ranges, different beginning and ending points, that it is 

impossible to prepare a tax estimate and calculate the marginal tax 

rate without being armed with a series of worksheets, schedules, 

and charts. 

Some phase-outs limit the change annually; others do not. So the 

preparer is never sure of the applicable limits for specific phaseouts without resorting to numerous reference materials. 

The phase-outs have a corrosive effect on tax compliance and taxpayer confidence in the fairness of tax laws. Tax practitioners are 

forced to tell clients that many of the tax-saving provisions they 

read about in the press during tax season each year do not apply 

to them; they are rich, yet struggle to make ends meet, living an 

ordinary lifestyle. 

My colleagues and I think it would be more prudent to permit 

taxpayers to utilize the deductions and credits currently available 

in the tax law before focusing on keeping lower tax rates. The 

elimination of the phase-outs will simplify the law and make it 

more equitable. 

If the phase-outs must be continued, there should be uniform 

phase-outs for most provisions, and limits must be adjusted annually to reflect inflation and the costs in high-tax States. 

Thank you so much for your attention. 

[The prepared statement of Ms. Markman appears in the appendix.] 

The CHAIRMAN. Thank you, Ms. Markman. 

Mr. Marzahl, you are next. 

STATEMENT OF DAVID MARZAHL, PRESIDENT, CENTER FOR 

ECONOMIC PROGRESS, CHICAGO, IL 

Mr. MARZAHL. Thank you, Chairman Baucus, Ranking Member 

Grassley, and members of the committee. I am David Marzahl. I 

am president of the Center for Economic Progress in Chicago. And 

I put forth that we are no island; we do represent reality. 

My organization helps hardworking families move from financial 

uncertainty to financial security by providing them with free, highquality tax preparation and financial services. We operate entirely 

volunteer-driven tax sites in more than 30 Illinois communities, 

making our Volunteer Income Tax Assistance (VITA) program one 

of the largest programs in the country. 

As a founder and current steering committee member of the National Community Tax Coalition, NCTC, I am pleased to offer the 

views of leading community-based tax preparation and assetbuilding organizations from throughout the country. 

9 

NCTC is comprised of over 1,700 members that provide free tax 

preparation and asset-building services. Our local partners help 

working families claim tax credits they might otherwise overlook, 

ensuring they receive the full refund to which they are entitled. 

And for many, I put forth, that refund provides a once-a-year opportunity to pay down debt, purchase necessities, and to actually 

start building assets. 

Together, NCTC’s members are the Nation’s fourth-largest provider of tax preparation services, completing an estimated 3 million 

Federal tax returns each year for free. 

On behalf of our programs and the taxpayers we serve, we thank 

the committee for their efforts in passing the 2009 Recovery Act 

provisions. The Recovery Act, despite its complexity, achieved 

many of the reforms we have supported, including expanding the 

Earned Income Tax Credit for married couples and families with 

three or more children, and ensuring more parents have access to 

the Child Tax Credit. 

We are primarily concerned with the impact on the working families we serve if Congress fails to extend the 2009 Recovery Act provisions. The following provisions are scheduled to sunset this year 

and will have a direct impact on our constituency: the 10-percent 

tax bracket; the EITC with the 45-percent credit for families with 

three or more children and marriage penalty relief will sunset; the 

Child Tax Credit, as mentioned earlier, the maximum credit will 

fall from $1,000 per child to $500 per child, and the credit will no 

longer be refundable for the majority of tax filers; the American 

Opportunity tax credit, a partially refundable education credit with 

a maximum benefit of $2,500, will sunset; and the Making Work 

Pay credit. 

With all these provisions at risk, we respectfully ask the committee to consider the following: permanent expansion of vital tax 

credits. We feel that parents who work full-time should be able to 

support their families and provide a standard of living that prevents their children from living in poverty. 

The Recovery Act tax provisions targeting low-income taxpayers 

need to be made permanent to create sustainable economic growth 

and ensure a more equitable tax code. These provisions are helping 

build economic security through the EITC, the expansion of the 

EITC specifically for families with three or more children, which 

brought up an estimated $4.7 billion to those families; the Child 

Tax Credit, which, compared to 2008, meant 2.9 million more children in very low-income families were able to access the refundable 

portion of the credit—and, if I just may point out, nearly 100 percent of the $14.8-billion CTC credit goes to families making under 

$38,000 a year; and the American Opportunity tax credit, which 

makes college more accessible to workers. 

Tax credits are indeed a work incentive. The expanded EITC and 

Child Tax Credit provide an incentive for parents to work, while 

giving them the financial boost they need to support themselves 

and their children. 

Specifically, under the expanded Child Tax Credit, very lowincome families are given a much greater incentive to work fulltime to support their families. During the 2009 tax year, for example, a parent with two children who worked just 10 hours a week 

10 

at a minimum wage job received less than $100 from the Child Tax 

Credit. However, a parent with two children, working full-time at 

a minimum wage job, received a credit of $1,800. 

At the Center for Economic Progress and the clients that we serve, the average Child Tax Credit this past year was $1,300, reflecting precisely this dynamic, this focus on low-income, hardworking families. 

Other VITA sites and community programs around the country 

witness similar incentives at play. I want to highlight an organization in Pennsylvania that worked with a family of four, two parents, two children, both young preschool age, getting by on an income of $16,353. The father works as a cashier at a gas station, 

the mom stays at home with the children. Because of the stimulusrelated changes to the Child Tax Credit, their Child Tax Credit 

was the maximum $2,000. Under the prior law, they would have 

only received $540, a $1,500 difference. 

Tax credits also provide access to the financial mainstream. 

Thanks to changes that the Internal Revenue Service and Treasury 

have made to the tax form and the efforts of many of our programs, 

it is now becoming easier for clients to actually save a portion of 

their refund. 

Many of our programs are offering year-round financial coaching 

and asset-building opportunities and working with financial institutions to help taxpayers actually save a portion of their refund. 

A couple highlighted remarks here to close out. The typical taxpayer we serve has two to three W–2s. That means they are working several jobs in a given year. Despite their focus on securing and 

keeping work, 15 percent of our clients actually were unemployed 

at some point last year, 5 full percentage points above the national 

or the Illinois average. 

In this tough economy, with falling wages the norm, many of our 

clients still benefitted from taking part-time or lower-paying jobs, 

because they qualified for the partial or the full Child Tax Credit. 

As more and more of our clients return to work, and as the economy recovers and the more people are moving toward full-time employment, they will have an incentive to stay employed and increase their salary. 

A few final points as part of the hearing. I want to stress the importance of simplification, and that the complexity of the tax code 

causes many of our tax filers to pay hundreds and hundreds of dollars just to settle their tax bill with the Federal Government. 

There are some unfortunate perverse incentives with the private 

market, that the more tax credits that people claim, the more they 

are going to pay to actually file their tax form. 

And then just to close out, timely decision-making. One of the 

things that I put forward to this committee is to encourage you to 

move as quickly as possible and not wait until the very end of the 

year to make tax law changes. This causes—and I think my practitioner next to me, my fellow colleague, will tell you—delays in 

issuance of publications, problems in issuance of software, volunteers that work with our organizations struggling to correctly be 

trained and prepare tax returns, and taxpayers not fully understanding the tax code, because they do not have the information in 

a timely fashion. 

11 

I want to thank you very much for the opportunity to testify. I 

look forward to working with you so that all working families have 

access to the opportunities and resources necessary to sustain financial security. 

Thank you. 

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

The CHAIRMAN. Thank you, Mr. Marzahl. 

Next, Dr. Marron? 

STATEMENT OF DR. DONALD MARRON, DIRECTOR, TAX 

POLICY CENTER, URBAN INSTITUTE, WASHINGTON, DC 

Dr. MARRON. Thank you, Chairman Baucus, Ranking Member 

Grassley, members of the committee. It is a pleasure to be here 

today to discuss the 2001 and 2003 tax cuts. 

As this committee knows well, our Nation faces difficult economic 

and fiscal challenges. A year into the recovery, almost 15 million 

workers are unemployed, and millions more can find only part-time 

work. 

At the same time, budget deficits have rocketed to 60-year highs. 

Those deficits should narrow in coming years, as the economy recovers and as policy responses to the recession wind down. 

But our long-term fiscal outlook remains daunting. An aging population and rising health care costs will push up spending significantly faster than revenues over the next 25 years, putting our Nation deeper into debt. 

Today’s hearing thus comes at a time when you confront a challenging mix of economic weakness and fiscal imbalances. Against 

that backdrop, I would like to make six points. 

First, tax revenues are remarkably low today relative to the size 

of the economy, indeed, their lowest since 1950, but they are scheduled to increase very sharply in coming years. Under current law, 

revenues from the individual income tax, the topic of today’s hearing, will increase above record levels relative to the economy by 

2020 and keep rising thereafter. And that is not just because of the 

expected economic rebound and the scheduled expiration of the 

2001 and 2003 tax cuts. 

Other factors driving individual taxes higher include the expansion of the alternative minimum tax, real bracket creep, demographic changes, and the recent health care legislation. 

Second, full extension of the tax cuts and the AMT patch would 

slow the growth of Federal revenues, but not stop it. Individual income taxes would still rise to a projected 9.2 percent of GDP in 

2020, a full percentage point above their 40-year average, but well 

below the level that would be implied by current law. 

Third, full extension of the tax cuts and the AMT patch would 

provide larger tax reductions to higher-income taxpayers. At the 

Tax Policy Center, we have a model that basically tries to model 

all the different taxpayers at different income levels, and what that 

suggests is that, if you extend fully all the tax cuts, including the 

AMT patch, that the folks in the top fifth of income distribution, 

what we call a quintile, would see their effective tax rate decline 

by about 3 percentage points. The average cut in the middle quintile, right in the middle, 20 percent of taxpayers, would be about 

12 

2 percentage points, and then for folks in the bottom quintile, it 

would be about .6 of a percentage point, on average. 

Fourth, some of the tax cuts have been characterized as middleincome tax cuts: rate reductions in the bottom four brackets, marriage penalty relief, and expanded credits. And I think it is important to point out that those provide significant tax reductions not 

just for what you might colloquially think of as middle-income taxpayers, but actually reach up fairly high into higher-income folks. 

The higher-income folks benefit from those tax cuts as well, whereas the things that are often characterized as upper-income tax cuts, 

in particular, the top two rates, and PEP and Pease we have heard 

about, the primary impact of those would really be on people at the 

tippy top, at the top 1 percent of income distribution. 

Fifth, as you will hear from my colleagues on the panel here coming up in a moment, there is some disagreement about the potential economic effects of extending the tax cuts, both as a matter of 

stimulus and as a matter of long-run growth. 

Before they get started, I would like to emphasize that, whatever 

path you ultimately choose, the economic benefits are ultimately 

going to be the largest if Congress chooses to pay for those tax cuts; 

not immediately, because we have a weak economy, and you would 

not extend tax cuts for next year and then offset them immediately. 

That would make no sense, from a stimulus point of view. 

But whatever you choose to do, the best economic outcome would 

be if you then offset that by reducing unproductive spending or 

raising taxes in a way that does not undermine growth. 

Sixth, and finally, regardless of what happens with the expiring 

tax cuts, my recommendation is that you look for opportunities to 

do fundamental tax reform. In principle, there are opportunities to 

both improve economic performance and, if necessary, raise more 

revenues. 

For any given level of Federal spending that you are trying to 

hit, income tax rates can be lower if you take steps to broaden the 

tax base by limiting special credits and deductions and other tax 

expenditures. You can move to a more efficient tax system, even 

while raising more revenue. 

Another possibility to consider would be broad-based consumption taxes or possibly greater use of environmental taxes. 

Thank you. 

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

The CHAIRMAN. Thank you. 

Dr. Holtz-Eakin? 

STATEMENT OF DR. DOUGLAS HOLTZ-EAKIN, PRESIDENT, 

AMERICAN ACTION FORUM, WASHINGTON, DC 

Dr. HOLTZ-EAKIN. Chairman Baucus, Ranking Member Grassley, 

and members of the committee, it is a privilege to be here today. 

The impending sunsets of the 2001 tax law, the Economic Growth 

and Tax Relief Reconciliation Act (EGTRRA), and the 2003 tax law, 

the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA), are 

very important moments in the course of tax policy. 

In my written testimony, I discuss four aspects of that: macroeconomic impacts; the budgetary impacts; impacts on the distribution, the income, and well-being; and then, lastly, implications for 

13 

tax reform. And I want to just say a few words about each of those 

areas briefly in my time. 

First, on the macro impacts, I spend a fair amount of time encouraging the committee to frame this question correctly. The economy is now growing and has been. It is growing painfully slowly, 

and the millions of people looking for jobs know this. 

We are no longer in a position where we have a falling economy, 

where one might want to intercede with commerce or fiscal policies 

or stimulus, in the political parlance. We should think about this 

as a situation where we need a ruthless attention to pro-growth 

policies, and look at the extensions of EGTRRA and JGTRRA from 

that perspective. 

What is on the table there? Well, certainly, the recognition that, 

if you are going to get near-term economic growth, households have 

badly damaged balance sheets and weak income growth, and are 

too strapped to be the source. Governments are, arguably, in a 

worse position. We can belabor the budget issue. 

That leaves, by process of elimination, the business community 

and net exports as the places where you can make a difference, and 

you ought to think about the implications of the extensions from 

those perspectives. 

This is not a hearing about the corporate tax, which has a lot to 

do with international trade, so leave that aside. But there are a lot 

of small businesses taxed through the individual income tax, a lot 

of small business income. Marginal tax rates, and the low and 

equal treatment of returns to innovation and other capital investments, are important parts of economic growth. Capital cost recovery, section 179 expensing, things like that, are important aspects 

of economic growth. 

And so the ability to extend EGTRRA and JGTRRA fully and 

permanently would eliminate uncertainty, does not raise marginal 

tax rates, is an important aspect of business tax policy, and thus 

contributes substantially to the possibility of more rapid economic 

growth. 

The American Action Forum, where I work, teamed with Decision Economics to do some simulations of a temporary and partial 

extension of EGTRRA and JGTRRA, not extending it for those 

making more than $200,000, or $250,000 for joint filers, versus a 

permanent and full extension. And not only is the latter better 

long-run economic policy for growth, it has better short-run economic impacts, and the tables, I think, make clear that you get 

faster GDP growth and more employment. You get households’ 

ability to save and repair their balance sheets, and thus put their 

finances and ability to consume over the long-term, on a more sustainable path. These are the elements of transitioning out of this 

weak economic period into stronger, more sustained growth, and 

that is the most important thing our Nation faces right now. 

If we do not grow, our children will not get the economy we inherited. The burden of dealing with the outstanding debt will be 

harder, and I think there has to be an increasing attention to growing rapidly in the United States. 

Now, the initial comment, ‘‘Oh, you cannot afford this, we have 

to pay for it budgetarily;’’ I think you have to be very clear about 

this. The budget problem is a spending problem, and, if you want 

14 

to fix your budget problems, you have to fix the growth in spending, and that is simply the reality. 

I am concerned about two things. Number one, partial repeal, for 

example, is in the President’s budget, and, if you look at that budget as priced by CBO, we are still running enormous deficits. So the 

notion that somehow we have a partial repeal and it solves our 

budget problems is very deceptive. I do not want people to get 

tricked in that, and understand the magnitudes. 

And the second is, suppose you raise taxes a little bit, and somehow the budget pressures disappear temporarily. If you learn the 

wrong lesson and continue to try to repeat that trick, given the 

pace of spending growth, we will have taxes that will be extraordinarily high, 30 percent of GDP, and you do not have to be a 

Reagan supply-sider to know that is going to dramatically damage 

the economy. 

So the top priority in the budget has to be to control the spending. We can come back to that. 

The last two pieces are the distributional aspects. Chart 1 in my 

written testimony shows what happens to the effective marginal 

tax rates at each quintile, and there are a couple things to remember about this. 

I mean, I understand that this is a political football, and we are 

not going to resolve the EGTRRA/JGTRRA tax cuts for the rich debate today. But distribution happens on both sides of the budget. 

So, if you want to think about it clearly, think about what you do 

on the spending and the tax side. I go through that. 

Second is, who really pays differs from who sends in the check. 

And so, if you do distributional analysis from the point of who 

bears the effective economic burden, it looks very different, because 

of the shifting of tax on small business to workers through lower 

wages and less hiring—a lot of evidence on that front; because of 

the shifting of corporate taxes to individuals—corporations do not 

pay taxes; and a variety of things. 

The charts in my testimony take account of that, and what they 

really show is that everyone’s effective tax rates went down, it is 

true, but the one on the top, the effective tax rate in the top window, went down by something that is sort of typical of variations 

since 1979 when the CBO started putting these together. 

In the bottom four quintiles, the effective tax rate fell to the lowest since 1979. So the real story here is that the bottom four 

quintiles are at record low levels of taxation, not that there was a 

record tax cut for the rich. 

Then finally, on tax reform, I think you will get tremendous concurrence at this table that we dramatically need tax reform in the 

United States. The tax code is simply not up to the needs to raise 

revenue and promote economic growth. 

In thinking about extensions, then, you should think about how 

half the tax reform gets effected. Tax reform is about lower rates 

and a broader base. My preference would be for a consumption 

base, and that is a good discussion to have. But the kinds of extensions we hear being discussed, raising marginal rates and preserving exemptions from tax, are exactly the wrong direction, from 

a tax reform point of view, and I think you should avoid that error. 

It will just make tax reform harder in the long run. 

15 

Thank you. 

[The prepared statement of Dr. Holtz-Eakin appears in the appendix.] 

The CHAIRMAN. Thank you very much. 

Dr. Burman, you are the final witness. 

STATEMENT OF DR. LEONARD BURMAN, DANIEL PATRICK 

MOYNIHAN PROFESSOR OF PUBLIC AFFAIRS, MAXWELL 

SCHOOL OF SYRACUSE UNIVERSITY, SYRACUSE, NY 

Dr. BURMAN. Chairman Baucus, Ranking Member Grassley, 

members of the committee, thank you very much for inviting me 

to talk about extending the 2001/2003 tax cuts. 

When the law was enacted in 2001, with a sunset in 2010, a lot 

of people, including me, were a little bit skeptical about that as policy and thought it might have been a cynical budget gimmick. But 

in retrospect, I think it turned out to be brilliant, because it provides us with an opportunity to reexamine the policy, and I am 

glad that the committee is doing that. 

We have a very different fiscal environment now than what we 

had in 2001 or what we thought we had. In 2001, we were looking 

at a projection of $5.6 trillion of surpluses for the next decade. 

Right now, we are looking at projections of something like $10 trillion in deficits over the next decade. 

The baby-boomers are about to retire—actually, they have started to retire—and it is going to put unprecedented pressures on the 

budget. Spending is going to increase, and continuing current policy, where spending increases and taxes are low, will lead to a disaster. 

CBO projects that, when you account for the kinds of macroeconomic responses that would come from the rising national debt, 

the debt would be at 188 percent of GDP by 2027, 200 percent by 

2028. That would be a disaster. 

My colleague has said that low taxes are pro-growth, but low 

taxes, continuing current policies, is not pro-growth. It will lead to 

an economic catastrophe, and I actually think it could be worse 

than what CBO projected; that basically, we could become Greece, 

and nobody would want that to happen. 

In my view, making the tax cuts permanent would be a mistake. 

One is, we cannot afford to do it without reneging on promises we 

have made to seniors. Now, you can talk about how cutting spending is a solution, but the kinds of spending cuts you would need, 

while keeping tax revenues at less than 20 percent of GDP, would 

be draconian. 

Second, the income tax is a mess. As Dr. Holtz-Eakin said, everybody on this panel agrees that we need tax reform. It is complex, 

it is unfair, it is inefficient. Why would we want to carve that system in stone? 

Finally, we think that we cut taxes in 2001 and 2003, but my 

view is that taxes were not cut at all. They were just deferred. 

They added something like $3 trillion to the debt over the last decade, because spending was not cut to offset them, and that is going 

to have to be paid back with interest. 

All economists would agree that keeping tax rates stable at some 

level would be better than cutting them temporarily and then raisVerDate Nov 24 2008 17:50 Aug 24, 2011 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 R:\DOCS\67524.000 TIMD
16 

ing them to offset it in the future, because the higher the tax rate 

goes, the larger the economic cost is. So going from, say, 40 to 45 

percent entails more economic costs than the benefit you got from 

cutting rates from 40 to 35. 

That said, obviously, we are also in a recession, and a big tax increase now would be a mistake. What I propose in my testimony 

is extending the low- and middle-income tax cuts, but only for 3 

years, and have a rock solid commitment to tax reform over that 

period. 

Senator Wyden and Senator Gregg have been leaders in the tax 

reform effort. The one thing that I would encourage them to do 

would be, in the next step of tax reform, to come up with a plan 

that actually would raise enough revenue to pay for government. 

What we have been trying to do over the last decade is this idea 

of, we will cut taxes and somehow spending will follow. It has not 

worked. Starve the beast does not work. What has actually happened instead is that, if deficits are okay for taxes, deficits also 

seem to be fine for paying for a new prescription drug benefit 

under Medicare, or a bridge to nowhere, or whatever. It has actually stimulated a huge growth in government. 

I think the better thing to do would be to reform the tax system, 

design it so that it could actually pay for the government, and then 

take steps to control spending. Dr. Holtz-Eakin is absolutely right 

that the path of spending cannot go on as it is projected by CBO. 

But in my view, the solution is going to be a combination of more 

taxes and lower spending, and that is what we need to work on. 

So why not just extend everything? Well, first of all, we cannot 

afford it. The second thing is that I think by only extending the 

middle-class tax cuts, it would help maintain support for tax reform. The idea of tax reform, as my colleagues have said, is a low 

rate and broad base. 

Well, right now, we have a low rate and a narrow base, and the 

people who benefit from that think that is just a dandy system. I 

want to bring those people to the table and say that, if you want 

to lower rates, you want to have a tax system that is more conducive to growth, you have to participate in the tax reform debate. 

There is an issue of, well, won’t the higher top rate stifle the recovery? I would say no, and for a couple of reasons. One is that 

higher-income people do not spend more when you cut their taxes, 

and they are not going to spend less in the short-term if you raise 

their taxes. People with incomes over $200,000 spend about a third 

of their income, whereas lower-income people spend all of their income. 

There is an issue about small businesses, and I am certainly 

sympathetic to the concern of the committee to not do things to discourage small businesses and entrepreneurship. In the short run, 

the effect of raising the top marginal tax rates would have very little, probably negligible effect on small businesses. 

First of all, only 3 percent of small businesses—I know, a very 

broad definition—are in those top brackets. Second of all, when 

they are making decisions about things like hiring, if hiring an additional worker is profitable when you get to keep 65 percent of the 

profit, it is also going to be profitable if you get to keep 60 percent 

of the profit. 

17 

The Congressional Budget Office concluded that raising marginal 

tax rates would not have any effect on small business hiring in the 

short term. 

The fact is, also, that the higher income taxes—higher income 

tax rates—actually encourage entrepreneurship. The reason is that 

entrepreneurs get to take deductions that regular people do not 

take, and those deductions are more valuable at a higher rate than 

a lower one. I am not arguing for high rates generally, but I am 

just talking about the short-term impact. 

One very valuable thing that small businesses have is an option 

that, if their businesses turn out to be profitable, they can incorporate and benefit from the lower 15-percent corporate tax rate. 

And then there is risk-sharing between the government and the 

businesses. Basically, you get to deduct your losses and pay tax on 

the gains. That is actually a very valuable option. I would be happy 

to talk more about this in the Q and A. 

My goal would be to try to repeat the trick of the 1986 tax reform: low rates, broad base. But the current system could not be 

farther from that ideal, and I think reform is necessary. And not 

extending the tax cuts permanently, but only doing it for a short 

time period over which you would commit to putting together a tax 

reform plan that could be voted on, would be the best option. 

I look forward to your questions. Thank you. 

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

Senator GRASSLEY [presiding]. Senator Baucus was called out, so 

I will go ahead with the first question. And I could direct this to 

everybody on the panel, but I think that will take too long. So I 

would like to have Dr. Holtz-Eakin, on one hand, and another point 

of view from Dr. Burman, to this question. 

On page 10 of the pamphlet prepared by the Joint Committee on 

Taxation, we have this quote: ‘‘Fifty percent of the approximately 

$1 trillion of aggregate net positive business income will be reported on returns that have a marginal rate of 36 percent or 39.6 

percent.’’ 

So 50 percent of flow-through business income will get hit with 

President Obama’s proposed tax hike, since they have proposed to 

raise the top two tax rates. This is especially harmful to small businesses, because they operate on flow-through income. 

Republicans and Democrats agree that small business creates 70 

percent of the net new jobs. With unemployment at 9.5 percent, is 

it a good idea to raise taxes on half of the flow-through business 

income? 

Let’s start with you, Dr. Holtz-Eakin, then Dr. Burman. 

Dr. HOLTZ-EAKIN. I think this is a bad idea, and I think there 

are a couple important points. First is it is the magnitude of economic activity that you are taxing that matters, not the number of 

tax returns that get filed. So the fact that there are only 3 percent 

of tax returns there does not mean anything. 

If you look at the corporate tax, there are very, very many corporations that pay no tax, probably over half. There are a few corporations that get affected deeply by the corporation income tax, so 

we do not think the corporation income taxes are irrelevant, and 

18 

we know they have very big implications for our competitiveness 

and growth. 

So counting tax returns is not the way to do this. Fifty percent 

of the $1 trillion is what matters. 

The second thing is, it has very significant effects. My own research says that, if you raise the top rate from 35 to effectively 42 

percent, given all the phase-outs, you are going to lower the probability of a small business hiring by about 18 percent; and, for 

those who already have people on the payroll, payrolls are going to 

grow 5 percent slower than they would otherwise. 

The tax has to come from somewhere, and it is going to show up 

as less hiring and lower wages for workers, and, in that way, it 

gets shifted onto them. That is where the real burden is going to 

be. 

Senator GRASSLEY. Dr. Burman? 

Dr. BURMAN. It is absolutely true that you want to look at the 

amount of economic activity, but a lot of that income actually does 

not represent what we think of as small business, and it is probably relatively insensitive to taxes. 

Lawyers, doctors, bond traders, members of corporate boards 

show up as small businesses on the tax data, but they are unlikely 

to be affected by the increase in the tax rate. 

The second thing is, what would the effect on hiring be in the 

short term, and, as I said in my testimony, if somebody is going 

to be—if a new hire is profitable at a 35-percent tax rate, it would 

also be profitable at a 40-percent tax rate or a 42-percent tax rate. 

The fact is that higher tax rates offer lots of incentives for people 

to choose to become small businesses. 

One thing that the committee probably does not want to talk 

about, but it is true, is that small businesses are notoriously noncompliant. They have a 57-percent error rate. The amount of income they report to the IRS is off by 50 percent from what the actual income is. 

The fact is a lot of people use small businesses as a tax shelter, 

and the value of the tax shelter goes up when the rate goes up. 

Senator GRASSLEY. Dr. Burman, I want to challenge you on one 

of your—some of your testimony. In your testimony, regarding the 

top two tax rates, you said that, ‘‘Employers will hire a new worker 

if they expect the value of the worker’s output to exceed what he 

or she is paid.’’ 

You went on to state, ‘‘If the hire is profitable before tax, it 

doesn’t matter whether the employer gets to keep 60 or 65 percent 

of that additional profit.’’ 

So my question is, if it does not matter whether the employer 

gets to keep 60 or 65 percent of that additional profit, then would 

it also not matter whether the employer only gets to keep 10 percent of that additional profit? That is, would it distort employment 

decisions if we had a 90-percent tax rate? 

Dr. BURMAN. As a practical matter, if you said that the next hire 

would be taxed—the profit on the next hire would be taxed at a 90- 

percent rate rather than a 35-percent rate, it would still be profitable after tax. Obviously, high marginal tax rates entail economic 

costs. 

19 

Actually, I came to Washington to work on the Tax Reform Act 

of 1986. I think low tax rates and a broad base, maintaining progressivity is a really good idea. The problem is we have a very porous tax system, and there are a lot of loopholes and deductions 

built into the tax, and those become more profitable at a higher 

rate. Those allow for all sorts of tax sheltering opportunities. 

So the solution is to enact tax reform, to broaden the base and 

to cut the rates in a way that raises enough revenue to pay for the 

government, but does not create all sorts of tax shelter opportunities. 

The CHAIRMAN [presiding]. Thanks, Senator. I regret I was out, 

was unable to listen to some of the earlier discussion. I want to get 

back to, I think, one of the subjects, and that is the assertion that 

so much of small business activity is in the top two rates. I say assertion, because the fact is, it is not. 

It is true that 50 percent of business income is with respect to 

taxpayers at the top two rates. That is big business. It is not corporate big business, it is pass-through big business. 

We are not talking about small business. We are talking about 

the top two rates. We are talking about big business, and big business is hedge funds, it is other professional corporations, it is large 

law firms, it is large accounting firms. And over 70 percent of the 

so-called 50 percent is big business, whereas 97 percent of small 

businesses, in terms of numbers, are not in the top two rates. 

So I think we should make it clear what the facts are here. It 

is true that 50 percent of business income is the top two rates, but 

that is not the small business. By and large, that is big business. 

It is not corporate big business, it is individual big business, passthroughs that organize themselves that way so that they can avoid 

the corporate income tax. 

In fact, it is getting abused. A lot of, say, hedge funds are going 

public. They really should be corporations, because they are publicly traded. So, in effect, they are corporations, even though they 

take advantage of partnership law. 

So I just want to ask anybody if I am accurate with my basic assertion. I will start with you, Dr. Burman. Is what I said, by and 

large, basically true? 

Dr. BURMAN. It is absolutely true. 

The CHAIRMAN. Thank you. 

Dr. Marron, do you agree or disagree? 

Dr. MARRON. I would agree and just elaborate that, right, in the 

top two rates, there is a lot of pass-through income, as you say. 

Some of it is from big businesses and some of it is from things that 

you would not really even recognize as being business activity, but 

it is just labor income that is characterized that way. 

The CHAIRMAN. The figure I saw, that was accurate. I even think 

it is in the pamphlet. It is 70 percent of that 50 percent that is big 

business, and the remainder might be categorized as all business. 

But still, we are talking about 3 percent of businesses, which is a 

very small number. 

My guess is that the real job creation is with the 97 percent of 

small businesses, and, with the smaller businesses, it might be up 

in that 50-percent category. That is the small business that creates 

jobs. 

20 

If you are truthful about it, all these law firms are letting people 

go. I do not know if accounting firms are, but I know a lot of law 

firms are letting a lot of their associates go. It is just you cannot— 

do not hire. There is not much job creation in these big law firms, 

which are partnerships. 

I know you really want to speak, Dr. Holtz-Eakin, so I will let 

you speak. 

Dr. HOLTZ-EAKIN. Thank you, Mr. Chairman. I am puzzled, actually, by your observations from the point of view of tax policy. 

Benchmarks for tax policy used to be that the tax code was designed to discriminate as little as possible among alternative activities, small or large business. 

And so it seems odd, from a tax policy point of view, to somehow 

be aiming at the big business and not the small business, when—— 

The CHAIRMAN. That is not the point. No, no, no. 

Dr. HOLTZ-EAKIN. And then the second—— 

The CHAIRMAN. Let us stop right there, and you can—that is not 

the point. The point is just trying to let the facts speak for themselves. And the facts do speak for themselves, and the fact is that 

it is true that 50 percent of business income is the top two brackets. That is true. 

But it is also true that the vast majority of those are big, passthrough, professional organizations, not what one would ordinarily 

think of as a small business. 

Dr. HOLTZ-EAKIN. The second point, just an observation about 

the debate on tax policy. And I think there is another benchmark 

we used to aim for and was heavily part of the 1986 reform, and 

that was the notion of integrating the corporate and individual 

taxes, because in the end, people pay all taxes, and pass-throughs 

were viewed as a desirable thing, because they allowed us to tax 

all business income, small and large, of an individual at the appropriate—at the individual’s appropriate rate. 

So I think that we ought to remember, since we need tax reform, 

that this issue of taxing small and large business income on the individuals was a goal of tax reform, and that we should recognize, 

as a result, the implications of individual taxes for business activity. 

The CHAIRMAN. Well, clearly, we need reform. There is no doubt 

about that. You have all touched on that, and we will work on that 

soon. I do not think there will be significant tax reform this year. 

If we could, frankly, I would like whatever action we take today 

on the 2001/2003 tax cuts to be at least a step toward reform, not 

backwards. 

And I think one of you, it might have been you, Dr. Holtz-Eakin, 

or someone suggested—I am sorry. Can I have order, please, on the 

committee? To be courteous to our witnesses, please. Thank you 

very much. 

One of you said that a step—it might be improper to just plain 

extend the rates and not do much else, because that might be a 

step backwards from reform. But I am hoping we can find some 

way to at least take a step towards reform in whatever we do. 

Thank you very much. 

We have enough Senators here, so we could conduct some business, actually, as minor as it is. 

21 

As is our usual practice, the committee plans to have meetings 

to discuss the committee’s agenda. And I would like to, as is our 

customary practice, do that next week. And as is our usual practice, I ask consent that it be a closed meeting. Without objection, 

so ordered. 

Senator Bingaman? 

Senator BINGAMAN. Thank you all very much. Let me just simplify the discussion a little bit. As I understand, the argument that 

is being made for extending the tax cuts that were enacted in 2001 

and 2003, the main argument is that this will contribute to economic growth and job creation. 

I think, Dr. Holtz-Eakin, you made that point, and I think others 

might have, as well. 

It is my impression that you get more bang for the buck from extending middle-class tax cuts than you do from extending the tax 

cuts for folks with higher incomes, because the middle class is more 

likely to spend the money that they obtain through those continued 

tax cuts. 

Let me ask you, Dr. Burman. Is that an accurate way to think 

of it? 

Dr. BURMAN. That is certainly the traditional way economists 

have thought about the effects of tax cuts on the economy in the 

short term. 

Senator BINGAMAN. I guess the other concern I have is that if, 

in addition to extending the middle-class tax cuts, we also were to 

choose to extend the reduced top two rates or the tax cuts for folks 

with incomes over $200,000 or couples with incomes over $250,000, 

the loss of revenue to the Treasury over the 10 years is about 

$1 trillion. 

Going forward, I can understand the philosophical argument that 

we ought to be trying to make that $1 trillion up through cuts in 

spending, but I do think it makes sense to recognize early in the 

process we are going to have to do both. We are going to have to 

cut some spending, just as we did in 1993 when President Clinton 

came into office, and we are going to have to raise some revenue. 

And, if we cannot raise revenue in this way, I do not know where 

we will raise revenue. So I do not know. Again, Dr. Burman, do you 

have any thoughts on that? 

Dr. BURMAN. It is absolutely right that, even if we limited the 

tax cuts to what is defined as low- and middle-income people up 

to $250,000, we would still be running substantial deficits over the 

next 10 years, and there is going to be a need for both more revenues and spending restraint. 

The point I made in my testimony is that, if we cut taxes on high 

income people now, given the long-term budget projections, eventually taxes are going to have to go up anyway, and they will have 

to go up by more because of the tax cuts that are being granted 

in the short term. 

The Congressional Budget Office, when Dr. Holtz-Eakin was the 

director, and the Treasury Department looked at the effect of tax 

cuts that are financed by deficits, and their conclusion was that 

they ultimately led to higher taxes; that they actually left the economy worse off than if the taxes had not been cut at all. 

22 

So I would say that, as a practical matter, unless you can accomplish some kind of spending reductions that we have never seen in 

our history, the effects of the tax cuts right now, at best, if there 

are any economic benefits, will be short-lived and that, over the 

long term, we would be worse off. 

Senator BINGAMAN. Let me ask, Dr. Marron, do you have any 

thoughts on any of this? If you do, I would be anxious to hear 

them. 

Dr. MARRON. Certainly. I guess the first is I would like to emphasize the traditional economists’ distinction between the short 

run and the long run. As you said in your opening remarks, your 

opening question, in the short run, if you are worried about stimulus, tax cuts that are more oriented towards people who will 

spend the money rather than save it are likely to have a bigger 

bang per buck effect. 

Over the long run, though, you have heard all of the economists 

on the panel here say that one of the key things to have for long 

run growth is lower rates. And so you have this tension, when you 

think about the top two tax brackets. 

Those are ones that, in my view, are not crucially essential one 

way or the other when you are thinking about stimulus. But the 

rates in those are quite important when you think about long-run 

growth. And you have this tension that, for the economy, it would 

be good to have lower rates, but it would also be good to have a 

smaller deficit and to have greater revenue, and you would like to 

find a way to fund it. 

In that regard, I would just like to point out that the tax reform 

proposal that Senators Wyden and Gregg have put forward, which 

has this attribute—my organization scored it. And we found, if you 

look at just the individual income tax component of it, what happens under it is that it raises somewhat more revenue relative to 

a baseline of extending all the tax cuts. 

So it raises somewhat more revenue. It lets you keep the top tax 

rate of 35 percent, and it makes a more progressive tax system. 

And the way it does that is by trying to fill in some of the Swiss 

cheese of our existing system and broaden the base. 

And I think from an economic growth point of view, if you want 

to do things on the tax side, that is the right direction to look: 

lower rates and then fill in the base. 

Senator BINGAMAN. But if we are not going to this year fill in the 

Swiss cheese, then are you suggesting it still makes sense to cut 

the rates? 

Dr. MARRON. I think it then becomes an issue of how concerned 

you are about the possibility that the economy may take another 

downturn in the next year or two, because there is this race between the fact that this would provide—extending them provides 

some additional stimulus, but not as much as the middle-income 

tax cuts or things like extending unemployment insurance, but it 

would provide some incremental stimulus. 

Senator BINGAMAN. Thank you, Mr. Chairman. 

Senator GRASSLEY [presiding]. Again, sitting in for the chairman, 

I call on Senator Hatch. 

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

23 

Dr. Holtz-Eakin, let me just ask you this question. In your testimony, you said that more rampant economic growth will be essential to minimizing the difficulty of slowing the explosion of Federal 

debt to a sustainable pace. 

Would you elaborate on that idea and, also, discuss the role that 

tax rates have in dealing with the deficit and our overall debt? 

Dr. HOLTZ-EAKIN. I think the first point is very simple. The projected growth of Federal debt is unbelievable. It is projected to be 

$20 trillion of debt in the hands of the public by 2020. 

The larger is the economy by that time; thus, the more rapidly 

we grow, the easier it will be to carry the burden of both that debt 

and the interest payments on it, and provide a satisfactory standard of living. 

So growth is paramount at this point in time. Tax policy is one, 

not exclusively, but one important part of the environment for 

rapid growth, and, in that regard, I think when Senator Bingaman 

was asking, geez, how do you get more revenue to make sure that 

you add up the budget, well, the answer is exactly what Dr. Marron said—broaden the base and keep rates low. 

In terms of the language of this discussion, no one here has proposed—I do not think a tax cut is on the table for anyone. We are 

trying to keep rates where they are. And so this is a question about 

whether you do the wrong thing, from a tax policy point of view, 

raise taxes, marginal tax rates at the top, raise taxes on dividend 

income, provide unequal treatment of different kinds of equity investments. Those are all anti-growth provisions. 

So tax policy is going to matter a lot. 

Senator HATCH. Well, you mentioned that CBO is projecting that 

we will suffer a reduction in GDP growth of about 1.4 percent in 

2011 if the 2001 and 2003 tax acts are allowed to sunset. 

Now, would that likely also lead to further job losses? 

Dr. HOLTZ-EAKIN. Yes, it would. It would be a large negative fiscal shock in the short term, and it would have detrimental longrun growth consequences. 

Senator HATCH. In your testimony, you said that our dire longterm budget outlook is not the result of a shortfall of revenues. It 

seems to me that in the short run, however, we do have a shortfall 

of revenue, and it is from the economy not performing up to its potential. 

Would not more economic activity generate more revenue simply 

because more of the unemployed would be earning again and paying taxes, and more capital gains and dividends and bonuses would 

be generated, which, in turn, would lead to higher revenue collections? 

In other words, if we want more revenue in the near term, do 

we not need to enact the kind of policies that will lead to more economic growth? And finally, would not tax rate increases lead to just 

the opposite of this effect, which is less economic growth? 

Dr. HOLTZ-EAKIN. Tax rate increases will not help economic 

growth; they are a mistake from that perspective. We do need the 

economy to recover not just for the Federal budget, but for the people who are unemployed. It is imperative that we focus on more 

rapid growth both in the near term and over the long term. 

24 

So I think there should be a ruthless attention paid to the 

growth prospects in this economy. 

Senator HATCH. Beginning on page 7 of your testimony, you outline the difference between a permanent extension of the 2001 and 

2003 tax acts compared with a 1-year limited extension. 

Now, if we assume that Congress extends only the limited provisions of the acts a year at a time for 10 years or even longer, how 

would this compare in economic growth and other benefits to a permanent extension of the full acts? 

Dr. HOLTZ-EAKIN. One-year extensions over that kind of period 

would retain the detrimental uncertainty that we have right now. 

People do not know the future of the tax code. They cannot do adequate tax planning. It would interfere with businesses’ ability to 

make sensible investment decisions. 

There is nothing good about having the tax code up for grabs 

year after year after year. Settling it and allowing people to plan 

appropriately is entirely desirable. 

And if I could, I want to emphasize for the committee the nature 

of the experiment that I put in table 1. I am well-aware of the debate over stimulus and multipliers and all of that. It is important 

to recognize those are model-based debates. That is not about reality. 

All of that discussion by Dr. Zandi and the others who have been 

featured so heavily are based on their, quote, ‘‘models.’’ There is a 

lot of evidence those models are wrong. And there is a very nice 

piece by Greg Mankiw that summarizes that evidence. 

My point was, even in the context of those models, and we used 

one like that, it is better to do the permanent full extension than 

the temporary and limited extension from a near-term economic 

growth perspective. So even in the context of stacking the deck 

against the policies I prefer, they come out ahead. 

Senator HATCH. I just have a few seconds left. Well, at the end 

of your written testimony, you spend some time discussing the concept of who really pays the tax. Would you elaborate on the idea 

that the incidence of an increase in tax of the top two rates may 

not be borne by those whose names are actually on the tax returns 

that report the income that would be taxed at these new levels? 

In other words, to what extent might employees or others who 

are not the business owners be affected by an increase in these tax 

rates? 

Dr. HOLTZ-EAKIN. As I mentioned before, it was viewed as desirable to have business income taxed on the individual’s returns. So 

individual rates matter for business decisions. 

In the research I have done with a variety of coauthors, we find 

that increasing marginal tax rates lowers the probability that businesses will make a hire, lowers the size of payroll growth, lowers 

the probability they will buy new capital equipment, and lowers 

the amount they buy if they do buy it. 

In each case, that reaction pushes the incidence of the tax, the 

economic burden, onto someone else, either onto laborers or onto 

their suppliers, and the real cost is not borne entirely by who sends 

in the return. It is borne elsewhere in the economy. 

25 

Senator HATCH. Mr. Chairman, I have to leave, but I want to 

come back. I have questions for the rest of the panel, as well. So 

I will try to get back, but, if I cannot, I will submit them. 

Senator GRASSLEY. Senator Wyden? 

Senator WYDEN. Thank you, Senator Grassley. It has been an excellent panel. 

As you all know, tax compliance is one of the country’s biggest 

industries. It comes to about $193 billion a year. The American 

people are, of course, furious about all this tax compliance water 

torture. Everybody in politics says it has to be fixed, and then what 

happens is people are skeptical that it will, and everybody goes 

back to tinkering with the tax system again. 

There were 500 changes in tax law in 2008. It comes to more 

than one for every working day. This has been the case for years 

and years. 

So here is my question. And I was very pleased about Chairman 

Baucus’s comment about tax reform. Let us get you, Dr. Burman, 

and you, Dr. Holtz-Eakin, on this first and bring in others at the 

end. 

What is going to force tax reform onto the agenda? In other 

words, I am not sure what the mechanism is to actually get this 

out there and with the bipartisan support you are going to need to 

get it done. 

Now, to me, the best opportunity coming up is the Deficit Commission. That would give us a chance to bring Democrats and Republicans together around principals like real tax relief for middleclass folks, say, tripling the standard deduction, wiping out the alternative minimum tax, and also promoting the kind of growth you 

are talking about, Dr. Holtz-Eakin; for example, lowering the corporate rate so that we could get American manufacturing, highskill, high-wage jobs in our country again. 

What do you think is going to be the mechanism, the two of you, 

to force tax reform onto the agenda? 

Dr. BURMAN. Well, as you know, Senator Wyden, it is very, very 

hard to do this. You have been trying for a long time, and I applaud you for your leadership on this. 

I was thinking about what led to tax reform in 1986, and a big 

part of it was that the tax system was viewed by almost everybody 

as a total mess. Proliferation of tax shelters was a big factor. It is 

getting to that point again. 

And the further problem we have now that we really did not 

have in 1986 was that tax revenues are clearly inadequate to pay 

for the promises that we have made, particularly to seniors 

through Medicare and Social Security. 

So I agree that the Deficit Commission is a good opportunity. 

What I am hoping is—and the 1986 tax reform was revenueneutral, and that made sense at the time. 

I think, given that taxes have to increase, it would make sense 

to say that what we are going to do is throw out this irrational tax 

system that most people perceive to be unfair and replace it with 

one that people can understand, the practitioners can deal with, 

and that people perceive to be fair, so that there is an equal sacrifice going around. 

26 

So I think, actually, the need for more revenues could provide a 

big impetus for tax reform, or at least I hope it does. 

Senator WYDEN. Dr. Holtz-Eakin, what gets tax reform on the 

agenda? 

Dr. HOLTZ-EAKIN. Well, ultimately, it is a political question, and, 

since my track record in politics is pretty rotten, I do not know why 

you would ask me. But I do want to say that the first and most 

important ingredient is leadership, and you and Senator Gregg are 

to be commended for putting out a bipartisan plan that attempts 

to lower rates, broaden bases, make us internationally competitive. 

I view those as imperatives, as you know. 

The second thing I would say is that I would concur that the deficit outlook is one that everyone recognizes is threatening and must 

be dealt with. I have strong feelings about sort of sharp tax increases in the near term, which ameliorate that deficit and delude 

people into thinking we do not have to deal with the spending side. 

But, if I can be assuaged that that delusion does not take place, 

then that is the vehicle to make this happen. 

Senator WYDEN. One last question. And thank you both, and I 

am looking forward to working very closely with you, as I know the 

chairman is. 

Dr. Marron, let me get you into this. One of the most bizarre aspects of today’s tax system is that, as long as you are tinkering, 

the Congress inevitably starts pushing permanent tax increases to 

solve temporary problems, like, particularly, the alternative minimum tax. 

In other words, every year, the Congress comes in and tries to 

put another patch on the alternative minimum tax, which is a killer tax; talk about hitting the middle-class folks that Senator 

Stabenow does a great job of championing. That is just a killer tax. 

Should Congress not get away from the idea of applying another 

permanent tax increase to solving a temporary problem? Because 

I think that alone is a pretty strong indictment of what happens 

today and why we ought to reform the system. 

Dr. MARRON. That is a fine question. It is something you see in 

a lot of contexts. There is something similar that happens with the 

doc fix in Medicare, where you have basically temporary things, 

and the only way to deal with them is to pay for them, if you pay 

for them, as you described. 

The answer to that is to solve your first question of having some 

forcing moment to get together and design a rational tax system, 

one that can eliminate the AMT, eliminate these other features, 

and raise the right amount of revenue, as Len says, and promote 

growth. 

So I view the answer to that problem as being basically the answer to your first problem. 

Senator WYDEN. Fair enough. Colleagues are all waiting. Mr. 

Chairman, Senator Bunning is next. Should we just recognize him? 

Senator GRASSLEY. Yes. 

Senator WYDEN. Senator Bunning? 

Senator BUNNING. Thank you very much, Senator Wyden. 

This question could be for Dr. Marron or Dr. Holtz-Eakin. I realize that this hearing is not supposed to be about capital gains and 

27 

dividend rates, but some of you mentioned them in your written 

testimony, and they certainly have an impact on economic growth. 

I am already hearing from dividend-paying companies that stock 

analysts have downgraded their stock because of the likelihood of 

a 40-percent tax rate on dividends next year. This has already 

raised the cost of capital for them. 

Dr. Holtz-Eakin, what impact does raising the cost of capital 

have on the economic growth and job creation? And the same question for Dr. Marron. 

Dr. HOLTZ-EAKIN. There are two big impacts. Number one, you 

will see a higher cost of capital, diminishing investments in physical capital and new technologies, and that will diminish the productive capacity of the economy. 

The second, and I think the one that has not been discussed 

enough, is the fact that, under the proposal, the dividend rate 

would now vastly exceed the capital gains rate, which we capped 

at 20 percent. That differential means that there are now big distortions in corporate financial policy between not only debt and equity, but within equity. 

So dividend-paying firms will have an incentive to stop paying 

dividends—and most of those are going to be going to seniors—and 

instead will be holding on to retained earnings and distributing 

their returns in the form of a capital gain. 

It is a standard channel they use, and that means you would 

have a lot more buyback activities, and there is no value to that. 

That is a true waste. 

Senator BUNNING. But what if the capital gains rate goes from 

15 to 40? 

Dr. HOLTZ-EAKIN. If you equalize the two treatments, you will 

get less of the pure financial engineering, but you will have even 

more dramatically bad impacts on overall economic growth, from 

the investment sense. 

Senator BUNNING. Dr. Marron? 

Dr. MARRON. The piece that I would particularly like to pick up 

on is the differential between the dividends and the capital gains, 

where I have been unable to come up with any rational tax policy 

reason why you would want to tax dividends higher than capital 

gains. 

For a variety of reasons that Doug touched on, if you tax dividends a lot, it is basically an incentive for corporate management 

to hoard cash, and I am sufficiently cynical that I do not think that 

is a good thing for tax policy to do. At the margin, I think it is good 

for the profits to be redeployed to investors, who can then decide 

the best place for them to go. 

And so, separating out from the level question, I would like to 

emphasize that, in my opinion, it is very important to have those 

rates be equalized. 

Senator BUNNING. Does anybody here remember Dan Rostenkowski and Bill Archer? In 1992, Ron, we had a retreat on the 

Ways and Means Committee to do exactly what you are attempting 

to do presently with our colleague from New Hampshire, and we 

had maybe 40 really good suggestions come out of that retreat. 

Do you know how many have been enacted? Zero. None of them. 

Now, what kind of incentives can you give us to change tax policy, 

28 

not incrementally, but significantly, to make it really—in other 

words, how can we get to the entitlements? How can we get to the 

things that really cost money without just incrementally changing? 

Yes, go right ahead, anybody who wants to. 

Dr. HOLTZ-EAKIN. The traditional obstacle to tax reform in the 

United States is the business community. That is the problem, because they have an enormous vested interest in rifle shot provisions, and some have old capital and others are startups and they 

would like to get expensing for new capital, and so they tear apart 

any attempt to broaden bases and lower rates. 

So the best way to get to something like Wyden-Gregg or a tax 

reform that a tax economist would be proud of will be to lock the 

business community out of the room. 

Ms. MARKMAN. One of the things I would really like Congress to 

consider—— 

Senator BUNNING. I have one more question, so let me make 

sure—— 

Ms. MARKMAN [continuing]. Is to eliminate the zero capital gain 

rate. It distorts income tax for people, and it does not make any 

sense. I have seen people with significant income, because it comes 

from dividends, qualified dividends, paying no tax, and that makes 

no sense. 

Senator BUNNING. I have one more question, because I want to 

read something. Here is the significance of the estate tax. George 

Steinbrenner died yesterday, in 2010. If he had died in 2009 or 

2011, there would have been a $500-million tax liability to his estate in 2009, and, in 2011, under the proposal that we have, there 

would have been $600 million. Because he was smart enough to die 

in 2010, there is zero tax liability to the estate. 

Now, should that kind of estate tax exist presently, or should we 

propose it? 

Dr. BURMAN. It does show that people respond to incentives. 

[Laughter.] 

Senator BUNNING. Amen. 

Dr. BURMAN. I think the estate tax serves as an important backstop to the income tax. There is actually a lot of income that is 

never taxed because of the various kinds of tax shelters that are 

available in the code. 

I think actually extending something like the 2009 law and, generally, creating certainty would be a huge advantage. The fact 

that—I was actually amazed that the estate tax was allowed to 

lapse for at least part of the year and that—— 

Senator BUNNING. So far, it is the whole year. 

Dr. BURMAN. In 2001, when the original legislation was passed, 

I made up this satirical timeline of what would happen as a result 

of the incentives in the law. And I suggested in 2007, the company 

that invented the artificial heart would come up with an estate tax 

saver, where they would keep people alive until 2010; and I said, 

of course, in 2010, they were all turned off, but the big surprise 

was then all these seemingly healthy people walked off into the 

sea, saying, ‘‘It’s for the children.’’ 

You should fix this. 

Senator BUNNING. I agree with you 100 percent. 

The CHAIRMAN [presiding]. Thank you, Senator. 

29 

Senator Stabenow, you are next. 

Senator STABENOW. Well, thank you, Mr. Chairman, for holding 

the hearing, and to all of our witnesses. 

And I want to start by saying I wholeheartedly support our efforts on tax reform that I know we will be involved in over the long 

run, and the comments of Senator Wyden on the AMT and other 

issues that we need to address. 

I do want to start with a couple of comments, though, that reflect 

what I believe the real world is for the majority of Americans and, 

certainly, the majority of the people who live in the State of Michigan. 

We, a decade ago, saw the largest budget surpluses in the history 

of the country, coming off a time when actually rates were higher, 

but there was a real focus on economic growth and jobs and so on, 

in the 1990s. 

A big question was what to do with the largest budget surpluses 

in the history of the country, when I came here in 2001 and sat 

on the Budget Committee, and the answer was that, because of 

policies, including the tax cuts that were passed, they turned into 

the biggest budget deficits in the history of the country. And that, 

unfortunately—and this is a comment, Dr. Burman, I think you 

made—left the economy worse off. 

I know it left the economy worse off for the people I represent. 

I wish it had worked. I sincerely do. I think we have a different 

view on what works and what does not, what the reality is for the 

majority of Americans. I think we have very different views on this 

committee, and I respect the differences. 

But I have to say that coupling a focus on supply-side economics 

with tax cuts at the top to trickle down—which did not, coupled 

with a number of things that happened in terms of two wars not 

being paid for and other spending not being paid for, and then, 

frankly, the recklessness on Wall Street, which, since that time, 

has cost 8 million jobs—has put the people that I represent and the 

majority of the country into a situation where they are looking at 

this debate, I believe, and saying, ‘‘What are you guys talking 

about?’’ in terms of what is happening to real people. 

And to add insult to injury, we hear arguments that say we 

should not worry about deficits when extending the tax cuts in the 

top two rates, we should not worry about deficits then, but, if you 

are trying to help people out of work, then we have to worry about 

deficits. 

So this just does not compute for the folks I represent. And when 

we look at the fact that extending the tax cuts will account for 

nearly 60 percent of the deficit in 9 years—and I am for, in fact, 

focusing on middle-class tax cuts and the things that affect the majority of Americans, including upper-income people who benefit by 

those. 

But I just want to say for the record that at a time when people 

are losing their jobs, working part-time jobs, seeing their wages go 

down, and the incomes of the wealthiest 400 people in the country 

have gone up about 400 percent in the last decade and a half and 

their tax rates have been cut in half, for the majority of Americans, 

that does not compute. That is just not fair. 

30 

And so on the issue of fairness to people in this country, I believe 

one way to deal with that is the middle-class tax cuts, focusing on 

what has been talked about by many people here in terms of the 

family credits and child credits and so on, but not giving the extra 

help to the top 1 percent. 

Dr. Burman, I wonder if you might speak to whether or not allowing the top two rates to expire would address some of the inequities that the majority of Americans feel today. 

Dr. BURMAN. I certainly agreed with your statement that there 

has been this issue that incomes at the top have been exploding; 

and, obviously, they took a hit over the last few years, but at the 

same time, we have been cutting taxes disproportionately at the 

top. 

I think that our tax system plays an important role in terms of 

mitigating some of the inequities that come out of the market system. Basically, the people at the bottom, working as hard as they 

can, have a hard time taking care of their families, and some of the 

tax credits that have been enacted helped them to be able to pay 

their bills. 

Now, the debt, I think, should be a serious concern for the people 

of Michigan and everybody else, because one thing that we do not 

focus on is that a lot of our debt is—your debt is financed by foreigners. Basically, as a country, we are spending much more than 

we are producing. 

People outside the United States lend us money, and we use it 

to buy their stuff. So basically, we are paying for imports. The imports directly track the growth of the debt. 

So dealing with that, which I think means actually dealing with 

the middle-class tax cuts eventually, as well as the ones at the top, 

is really important, and the best way to do that would be in the 

context of a tax reform that preserved the fairness and made the 

tax system simpler. 

Senator STABENOW. Thank you. I have other questions, but I see 

my time is up. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

Next is Senator Roberts. 

Senator ROBERTS. Thank you. 

Dr. Burman, I am struck by this—this is apart from my questions, and I am going to be wasting some time here, but maybe not. 

I did not know that you were that involved in the 1986 tax bill. 

I was the only member of the Kansas delegation who voted no. 

I heard directly from Bob Dole after that. I thought he did that. 

I did not realize you had played such a large role in that. 

That Tax Act put the real estate industry in the ditch, put agriculture in the ditch, the oil and gas industry in the ditch, put Kansas in the ditch, and, for 5 years after that, at town hall meetings, 

people were still complaining about it, and I could raise my hand 

proudly, and I said, ‘‘I voted no.’’ 

I do not know what all that means, except to say that I was very 

interested in your comments about that. And the way I view it, in 

terms of what happened in the real world, in Kansas, as opposed 

to what was proposed and what was hailed at the time as a historic 

tax measure—I am not asking you to reply, and I apologize if I 

have stepped on your toes. 

31 

Dr. Holtz-Eakin, can you discuss in greater detail which provisions of EGTRRA are most important to extend if you want to provide tax relief? Note, I did not say tax cut. Every time you say tax 

cut, our friends across the aisle say ‘‘for the rich.’’ And so, if you 

say tax relief, there is a whole different connotation. 

But I would like for you to say, if you can, which provisions of 

EGTRRA are most important to extend if you want to provide tax 

relief to the job creators and those who will contribute to economic 

growth? And you might touch on which aspects of EGTRRA are 

less effective. 

Dr. HOLTZ-EAKIN. So from a pure growth perspective, the key 

elements are keeping marginal rates low, so not allowing the sunsets of the top two rates, in particular; keeping equal and low taxes 

on the return to innovation investments, dividends, capital gains; 

and capital cost recovery. 

There are section 179 expensing provisions that came in actually 

in JGTRRA, as well, that allow small businesses, in particular, to 

fully expense the cost of their equipment in the year they acquire 

it. Those are all very important pro-growth policies. 

There are many others that are there not for the purpose of 

growth. They were there for other tax policy objectives, whether it 

is fairness, marriage penalties, helping targeted constituencies, refundable child credits. And some of those actually end up imposing 

these very high implicit marginal tax rates on low-income workers 

as they acquire more income. 

So it is a very hard tax policy question in that, if you care deeply 

about growth, and I, again, would argue that has to be the key consideration, you have to tailor your tax policy toward that at the expense of using it for other tools. 

Senator ROBERTS. I appreciate that. 

Ms. Markman, I think you said something about estate taxes and 

the fact that some people paid no taxes. It occurred to me that I 

was in California this past weekend meeting with all sorts of business leaders. One person pointed out that, in California, 49 percent 

of Californians do not pay any State or any Federal income tax— 

49 percent—and that is 16 percent of America’s population. 

My point is, I think everybody ought to pay at least some tax. 

The CHAIRMAN. I think the national average is about 40 percent. 

So California may not be too far off. 

Senator ROBERTS. At any rate, can you expand—and I am talking, again, to Dr. Holtz-Eakin—on the impact of the tax increase, 

and we are talking about capital gains and dividends increases 

that have been talked about here, and their impact on seniors? 

What do you think about the impact of this tax specifically on seniors? Are the seniors in the two top income tax brackets the only 

ones who would be impacted by this change, or would higher taxes 

on dividends also impact middle-income seniors? 

Dr. HOLTZ-EAKIN. If the top rate goes to 39.6 percent and the 

second rate goes up, as well, dividends will be taxed at that rate, 

and the clear evidence is that firms will pay fewer dividends, and 

they pay fewer dividends to everyone. They do not discriminate on 

which shareholder gets them. 

So you will see a reduction in dividend payments. Dividends are 

disproportionately received by the elderly, and so all elderly would 

32 

see fewer dividends—that sort of regular dividend income—and instead they would have to realize their—somehow manage their 

cash flow while they waited for firms to do buybacks and other 

ways to get cash out, if firms took the effort to get the cash out. 

And I want to echo Dr. Marron’s comment that I do not think 

it is a good idea to have a tax policy that incentivizes corporations 

and their executives to sit on hoards of cash. 

Senator ROBERTS. I appreciate your answer. 

Mr. Chairman, I am way over time, but I would point out that 

I think you have created a new or at least a different definition, 

perhaps more restrictive, of what a small business is. 

The SBA definition of a small business is somebody with 500 or 

fewer employees. Even if there are larger businesses in the top two 

brackets, small businesses would still be harmed, it seems to me, 

would still be subjected to higher taxes if the top two tax rates are 

increased. 

So I think this is the wrong approach. We just have a difference 

of opinion. 

I thank everybody for their patience. 

The CHAIRMAN. Senator Enzi, you are next. 

Senator ENZI. Thank you, Mr. Chairman. 

I particularly want to thank Ms. Markman for her testimony and 

her expertise. And I will not have time to ask you all the questions 

that I would like to. I want to take advantage of that, so I will provide some of them in writing. 

Very seldom do we have anybody appear before our committees 

who has actually been in business, and, as the accountant of the 

Senate, I know that you are in a lot of businesses, because you do 

the accounting for them, and that gives you a little different perspective. 

I know when we are talking about tax reform, I have often been 

accused of trying to protect accountants so they would have more 

work. And when we talk about reform, I know that accountants 

would like to have reform, because they have so much liability 

hanging out with all the complexities. 

But they do not urge reform because, every time we have tried 

reform, what we have done is made it more complicated. And so 

we need expertise from people like you so that, when we do reform, 

we make it simpler and fairer. 

I just wish we had more accountants working on that sort of 

thing. But one of the things that concerns me is the health care 

reform bill that we passed, because one of the provisions in that 

is a new requirement on filing form 1099s. And that probably does 

not seem like a big deal to most people, but now, instead of just 

services, we are going to have to file on goods. 

And so probably we are going to go from 10 1099s a year for a 

business to 200 or 2,000; I am not sure. 

Do small businesses understand the paperwork burdens that are 

coming down the road, even if Congress does not increase taxes? 

Ms. MARKMAN. No. I do not believe that they do. I think that this 

1099 issue is hidden. It is sort of the gorilla in the room, because 

a lot of small businesses, particularly the very smallest, do not 

keep their records contemporaneously. They should, but they do 

not. 

33 

And at the end of the year, they will add up their payments for 

various things and provide us with information. But they are not 

in a position, and they do not pay attention to the fact that before 

you would have—under the bill, they would have to keep track contemporaneously. 

Before they paid someone, they would have to get their relevant 

information, and I do not believe that they do understand that at 

all. 

I know that there is a bill before Congress to undo that provision. I do not know where it is going. But I do not believe small 

business understands that at all. The CPAs do. We have been talking about it at great length, and it is really a question of what is 

the right thing to do, because many small businesses deal with 

other small businesses, and they do not want the reporting. 

The recipients do not want it. There are many clients who will 

come to their preparer with their 1099s, particularly if they are 

professionals who sell their services, they will come to their preparer with their 1099s, and we will say to them, ‘‘Well, is this all 

your income?’’ ‘‘It’s all I have 1099s for; it’s all I have to report.’’ 

I say, ‘‘No, that’s not the answer.’’ But many times, that is all they—if they got small payments for less than $600, that is sort 

of ignored because there is no record of them having received it. 

Senator ENZI. It is my impression that most of us have the feeling that every business is simple, but we do not really get the 

chance to kind of scratch below the surface some of the decisions 

that they have to make. And I think there are probably a lot of 

other things in the health care reform bill that are going to add a 

few accounting expenses, whether they are meeting the Federal 

mandate or not. 

But I want to get to a topic that we have talked about a little 

bit here, whether it is 3 percent of small businesses that will have 

to pay a higher tax or 50 percent of businesses that will have to 

pay a higher tax, a lot of that is definitional. 

I know that the truly rich whom we keep talking about can afford tax and investment planning and have done that to reduce 

their taxes. 

But I know, having been a small businessman—we were in the 

shoe business—that, if I am in that 3 percent, I would feel that it 

was the 100 percent. It would affect me very, very drastically. 

And I also know that when you are in small business, although 

you are showing great income, if you do not put that back into the 

business pretty quick, you do not have a business. So it provides 

an extra burden there. And should we not be expecting the same 

reinvestment by small business owners across the country? 

Raising taxes is going to provide some uncertainty for them and, 

also, eliminate reinvestment that they might make in their business. 

With the businesses that you work with, the small business definition, whether it is $50 million or 500 employees, you work with 

a lot of small businesses and—— 

Ms. MARKMAN. Much, much smaller. Our typical clients might 

have 10, 15, or 20 employees. The American Institute of CPAs calls 

people who work with businesses like that ‘‘micro’’ businesses. 

Senator ENZI. Yes. 

34 

Ms. MARKMAN. And I think that there, where they are operated 

as partnerships or S corporations and the income is tax at the individual level, many of the business owners, if they reinvest in a 

business, have what we call phantom income. They are paying tax 

on money that they cannot take out of the business. It is invested 

in inventory. It is invested in property, plant, and equipment. 

That is why the section 179 is important, if the businesses have 

the money to buy the equipment. 

But the answer is, yes, I think it will. But the businesses we deal 

with are not in those top two brackets. 

Senator ENZI. Is the uncertainty that we are providing keeping 

them from expanding their businesses or hiring additional people? 

Ms. MARKMAN. I think right now, it is cash flow, it is funding, 

it is not having the ability to have the funds available, and not 

being able to get credit. 

The CHAIRMAN. Senator Carper? 

Senator CARPER. Thank you, Mr. Chairman. 

To our witnesses, welcome, one and all. It is nice to see you come 

by and share your insights with us today. 

Today, we are discussing whether or not it is the right thing to 

do to extend all or at least a part of the series of tax cuts that were 

enacted almost a decade ago, I think in my first year in the Senate. 

So I think it makes sense to take a look at the history of these 

tax cuts. We have done some of that already, but I would like to 

go down that road just a little bit further. 

So I recall between 1993 and 2000, when I was Governor of Delaware, we created a lot of new jobs not just there, but all over the 

country. I think maybe 20 million new jobs were created during 

that period of time. 

And the 8 years, we balanced our budgets, we balanced the Federal budget I think a couple years in a row near the end of the 

Clinton administration. But we began, I think, almost every year 

of the Clinton administration, starting 1993, 1994, 1995, almost 

each of those years began with the expectation and ultimately with 

the realization we were going to have budget deficits of about close 

to $200 billion, and we did. 

Fast-forward to 2000. The estimate is that we are going to have 

budget surpluses for as far as the eye could see. In fact, I remember having a hearing my first year in the Senate on what we ought 

to do about tax cuts, and one of the witnesses raised the alarm that 

we faced a real threat by reducing deficits, paying off our debt too 

soon. It is kind of ironic, sitting here today, is it not? 

And in response, to reduce a surplus that some considered too 

large, tax cuts were enacted in 2001, as we know, that provided tax 

relief to all ends of the income spectrum, particularly those at the 

high-end brackets. 

And in the years following these tax cuts, we experienced 8 years 

of subpar economic growth, weak job creation, low savings rates, 

and, as we know now, exploding deficits. I think we racked up as 

much new debt between 2001 and 2008 as we did in the previous 

history of our Nation. 

I want to invite the entire panel, if you would, but particularly 

Dr. Marron, Dr. Burman, and Dr. Holtz-Eakin, to comment on 

whether and how can we possibly justify extending all of those tax 

35 

cuts in light of the dismal economic and budget results that I just 

outlined? 

Do you want to go first, please? 

Dr. BURMAN. Thank you, Senator. I think it would be a mistake 

to extend all the tax cuts, because there is not any way we can 

come close to paying for the government. And this is a basic factor, 

that we are looking at $10 trillion of deficits over the next decade 

and then exploding beyond that. 

You are right that the effects of taxes on the economy are actually pretty subtle. I would not say necessarily that the 2001/2003 

tax cuts were responsible for subpar economic growth, but the history, as you note—— 

Senator CARPER. I would concur with you. So there was a housing bubble in there somewhere. 

Dr. BURMAN. And I think one of the big things behind the 1993 

act, which was so hard to get enacted, but which ultimately led to 

the balanced budgets at the end of the decade, was Chairman Alan 

Greenspan, who said—who understood that the debt was a huge 

threat to the economy. It tends to push up interest rates, raises the 

cost of capital for businesses, and I think it is very important to 

deal with that. 

Senator CARPER. Thank you. 

Dr. Holtz-Eakin? 

Dr. HOLTZ-EAKIN. Well, as you know, I believe we should keep 

rates low, including the top rates, for growth purposes, because 

that is our real obligation to out-of-work Americans and for the 

children. I think at this point, we are dangerously close to handing 

them an economy that is broken and a lot of debt along with it, 

and I think we should have a real focus on growth. 

The other thing we need to reestablish, which was present in the 

1990s and which has been absent for a decade, is real spending discipline. If you look back to that era, with PAYGO rules, discretionary spending, I mean, we had real PAYGO rules that were 

much tougher. 

Yes, it helped to have the dot-com bubble; yes, it helped to have 

the peace dividend; but there was also an ethic toward controlling 

spending that needs to be reinstated. 

Senator CARPER. Thank you. 

Dr. Marron? 

Dr. MARRON. I guess what I would add to that is I think—I 

mean, I have the liberty of doing big think from the think tank 

world—that really the discussion we need to ultimately have is a 

question about how big a government we want, and then how are 

we going to finance it. 

Earlier in my testimony, I mentioned the trajectory we are on is 

that, if we do nothing, so if we do nothing on taxes, taxes are going 

to rise very rapidly relative to the size of the economy, up to levels 

we have not seen before. 

That might be the right decision, it might be the wrong decision, 

but I do not think we have yet had that discussion about where do 

we actually want to end up, and then, conditional on that, what is 

the right way to design the tax code around that. 

So obviously, actually, the priority—as we have heard through 

several lines of questioning today—is really to make decisions 

36 

today that put the Congress and the American people in as good 

a posture so that, whenever it is the time to make those decisions, 

there is a forcing event, so we actually confront those issues, answer them, and design a plausible tax system to finance what we 

want to do. 

Senator CARPER. Thank you. Most of you probably know Mark 

Zandi, founder of Moody’s economy.com. I updated, last year, his 

estimates of what he calls his ‘‘bang for the buck’’ chart of different 

economic recovery ideas—I guess, for every $1 of cost to the Treasury, how much economic growth is expected. 

His calculations suggested that the 2001 and 2003 tax cuts, particularly the top two brackets, would generate something like 29 

percent of economic growth for every $1 of lost revenue. 

In contrast to his analysis, other studies, I am told, show that 

tax cuts that would primarily benefit the middle-income and lowincome Americans produce a significantly higher bang for the buck. 

Dr. Zandi’s findings suggest that there is an economic case for 

extending the middle-income and middle-class portion of the tax 

cuts, but at the same time, a strong case against extending the tax 

cuts that benefit the most affluent 3 percent of Americans. 

If possible, I would like for each of you to just comment on that. 

If we could, start with Dr. Burman and just walk our way down, 

and that will be it for me. 

The CHAIRMAN. Briefly, please. Thank you. 

Dr. BURMAN. I completely agree with Dr. Zandi. In terms of bang 

for the buck, the middle-class tax cuts, in the short term, are going 

to have the biggest effect. 

Senator CARPER. All right. Thank you. 

Dr. HOLTZ-EAKIN. I want to point out, first of all, I am the man 

who made Mark Zandi famous. So let me just say that I hired him 

for the McCain campaign, and he is a wonderful data analyst, but 

this is not a finding. This is not going into the real world and discovering an economic truth. 

This is what he puts into his model, and this is exactly what he 

gets out. So it is not a finding. It is an assumption. And as I laid 

out in great detail in my written testimony, there is good reason 

to question whether those models are well-formulated and whether 

to place a lot of policy reliance on using them for this purpose. 

Senator CARPER. I would like to thank you for making him famous. Go ahead, please. 

Dr. MARRON. So I guess I will agree with both Len and Doug, 

which is to say that I think the mainstream conventional economic 

view is as you described and as Mark describes it. But again, Mark 

is not discovering that. He is just reporting that using models. 

And then ultimately, the decision that you all face is going to be, 

if you line everything up in terms of bang per buck, as Mark would 

suggest, you would start with extending unemployment insurance. 

You would work through middle-class tax cuts, and then you would 

have the question about whether to do the upper-income tax cuts. 

And the question you really face is, well, how much stimulus is appropriate? 

The CHAIRMAN. Thank you very much. 

Senator Cantwell? 

Senator CANTWELL. Thank you, Mr. Chairman. 

37 

The CHAIRMAN. I am going to have to leave. Senator Wyden, 

would you mind sticking around and chairing? Thanks. 

Senator CANTWELL. Mr. Chairman, thank you. I wanted to ask— 

I know we are talking about individual tax rates and the effect on 

growth and distribution. But one of the things, it seems to me, that 

is looming out there that is going to affect incomes across America 

is this issue of EPA’s action on climate and the regulation of pollutants under the Clean Air Act, and that is going to take effect in 

January. 

Companies are going to have to start looking at best available 

control technology, and that is going to be an expense. Later, in 

July, they are going to have the full scope of covering facilities that 

are going to have to make upgrades on emissions, and that cost is 

going to get passed on to the individual consumers, and that is an 

expense. That is an expense that is going to affect people moving 

forward. 

And I wondered, Dr. Holtz-Eakin, I know you have talked about 

proposals like we have proposed that would help to try to lessen 

the impact on consumers. Do you think legislation is a better path 

to reducing the cost on the consumer as opposed to just letting EPA 

act? 

Dr. HOLTZ-EAKIN. Regardless of one’s views on the merits of climate legislation, it is widely recognized that to have the EPA go 

back to a command and control regime, with as many point sources 

as there are for carbon emissions, is economically irrational and destructive. 

There is not one good reason to do this. If you want to take care 

of carbon emissions, then you should use market forces, as your bill 

with Senator Collins does, so that there is a price on carbon and 

people will respond appropriately to innovate with new technologies that do not emit carbon and substitute away from those 

that do. That is a much more rational course. 

Senator CANTWELL. And is there not a way to help keep consumers whole during that process? 

Dr. HOLTZ-EAKIN. I think, personally, my opinion is you should 

not use this as an excuse to grow government. So you should set 

the price, and the literature says you should cut other taxes, pay 

old taxes or corporation income taxes or, in your case, return the 

funds to as great an extent as possible back to the American people. 

Senator CANTWELL. What do you think that the cost of this will 

be moving forward? I mean, just letting EPA regulate without acting. 

Dr. HOLTZ-EAKIN. Regulation is a disguised tax, and getting the 

price tag on this is impossible at the moment, because it carries 

with it, first, the burden of uncertainty: when will the EPA actually 

be able to finish rulemaking and impose this? It is being litigated, 

as you know. 

So there is a real uncertainty cost to businesses. They have no 

idea what investment choices to make, and they are standing there 

as a result. 

Second is, if we go this route, become certain that they will do 

the rulemaking, there will be tremendously inefficient choices 

38 

made about how to deal with this problem, and that will bear a big 

cost on the economy. 

I do not even know how to calculate it, but it is a terrible idea, 

and it is harming the business outlook. 

Senator CANTWELL. I am one who has talked to many attorneys 

about this, and I think the Supreme Court’s ruling is pretty definitive on what has to happen. 

And so the fact is that there are two choices: one that is command and control, as you say, or something that allows the market 

to make better decisions for us. I think there are some estimates 

that an auction could generate somewhere between $80 billion and 

$100-plus billion a year. I would assume that that would be revenue that could be better allocated to, again, lessen the impact on 

consumers. 

Dr. HOLTZ-EAKIN. I guess the number I can come up with is, you 

could auction and you could return to consumers, and so the net 

of that would be zero. The alternative—I mean, that is just a transfer. 

But the real question is, if you did the command and control, 

how much would you impair growth; how much would you lower, 

as a result, wages and incomes in the economy; and that is, I think, 

a potentially very large number that we should know. 

Senator CANTWELL. I think definitely there is a more predictable 

path. So, thank you very much. 

Thank you, Mr. Chairman. 

Senator WYDEN [presiding]. Thank you, Senator Cantwell. 

I believe Senator Crapo is next. 

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

I would like to go for a moment into the question—in fact, Dr. 

Holtz-Eakin, I am going to focus on you. I apologize to the others. 

It is primarily because I know you best, and I do not really have 

time in my 5 minutes to go through 5 witnesses. 

But I want to focus on the issue—really, the big pressure that 

we are seeing here in Congress is to raise taxes. It is one of the 

big issues that we are dealing with right now, because of the explosion in spending, the explosion in debt, and the fiscal circumstances that we face. 

The question is, what role does tax policy play in our response 

to that, and should we raise taxes? And the first thing I want to 

make clear, just as a statement, is we keep talking about the 2001 

and 2003 Bush tax cuts, but the issue here is whether we are going 

to allow taxes to spring back, in other words, to go up. 

And I think a lot of the time, in the discussion, we think that 

we are talking about a tax cut here. What we are really talking 

about is whether to extend current tax law and keep taxes where 

they are or whether to have yet, again, another tax increase in response to our fiscal circumstances. 

I understand generally, Dr. Holtz-Eakin, that you do not believe 

that an increase in taxes at this time is the proper response to our 

economic circumstances. Is that correct? 

Dr. HOLTZ-EAKIN. That is correct. 

Senator CRAPO. I did not intend to do this when I came in, because I have a number of other questions about the 2001 and 2003 

tax cuts, but there is so much being said about the fact that the 

39 

Bush tax cuts are the cause of our current economic malaise and 

that the deficits that we face right now and the national debt are 

all a result of these terrible tax cuts, most of which went to the 

wealthy. 

There was an article in the Wall Street Journal yesterday in which the author went through literally about an $11.7-trillion 

swing that we had seen from proposed surpluses in the neighborhood of $5.6 trillion in 2001 to now deficits that are being looked 

at in the neighborhood of $6.1 trillion. 

And this author’s point was that, even if you do not give any dynamic scoring to the tax relief of 2001 and 2003, it still is only 15 

percent of those numbers. There is something else and a lot more 

going on here, and this author says that what is going on—by the 

way, I do not agree that tax cuts are static. In other words, I think 

that they do have a positive impact on the economy. 

And so it will be a much smaller number than that in terms of 

their actual impact on deficits. But this author indicated that he 

thought that—well, he actually gave percentages to the numbers. 

The economic and technical revisions that we have seen were 33 

percent of that new deficit; other new spending, 32 percent of it; 

increasing interest on the debt, 12 percent of it; and the 2009 stimulus bill all by itself was 6 percent of it, with other tax cuts 

amounting to 3 percent of it. 

So my question to you is, really, could you comment on these 

numbers and this analysis and give us your perspective on what 

really is the cause of this huge swing that we have seen since 2001 

from projected surpluses in the $5-plus trillion range to now projected deficits over $6 trillion? 

Dr. HOLTZ-EAKIN. So there are several components. Component 

number one is simply the original forecasts were wrong, and I 

spent a lot of time as CBO director explaining how could we be so 

badly wrong, and the answer was always that about half of the 

swing was pure economic and technical changes. 

So my predecessors implicitly extended the dot-com bubble as far 

as the eye could see, which was bad forecasting. 

Senator CRAPO. But it was not caused by the tax cuts. 

Dr. HOLTZ-EAKIN. No. And then the rest was caused by legislative changes on the tax or spending side, and the minority was on 

tax. In my time, it broke about 20 percent tax and 30 percent 

spending. Since then, there has been more spending. 

So those numbers are in the range of the kinds of exercises we 

did at CBO during my tenure. 

Now, the other way to look at it going forward is, we have known 

that we were going to end up, if we went on current law, at a debtto-GDP of 62 percent; we just thought it would take longer to get 

there. We were going to go off on this unsustainable course no matter what. 

All that really happened is we spent a decade not fixing the problem, and then with the financial crisis and recession, we ate up our 

cushion. And so it is here now. 

Senator CRAPO. So just to make sure that I am summarizing 

your testimony accurately, those causes of the swing that you talk 

about and the incorrect projections, that was not caused by the 

2001 and 2003 tax cuts. 

40 

Dr. HOLTZ-EAKIN. No. They contributed, but were not a majority, 

by any means. 

Senator CRAPO. And in terms of our current policy moving forward, would you agree that now is not the time to allow the taxes 

to spring back to a higher level? 

Dr. HOLTZ-EAKIN. I would agree both from the short-run perspective, but also from the longer-run notion that we are going to need 

a tax reform. I believe that tax reform will have to be markedly 

pro-growth if we are going to meet all our obligations, and that the 

kinds of things being proposed in letting this sunset are exactly the 

wrong direction from both of those perspectives. 

Senator CRAPO. And if Senator Wyden will allow me one more 

quick question. Senator Wyden, in fact, earlier mentioned that we 

do have a President’s commission dealing with these fiscal policies. 

I happen to be one of the Senators appointed to that commission. 

And the question I have for you is, leaving aside the question of 

trying to just raise or lower taxes, do you believe that reform of our 

code could be a helpful exercise for us, a helpful action for us to 

take, that would actually generate a stronger and more dynamic 

economy and a more competitive economy for our country and, 

thereby, obviously, increase revenues? 

Dr. HOLTZ-EAKIN. Absolutely. We have a tax code that is just 

really a disgrace, by modern standards, and interferes with our 

ability to succeed as an economy. 

So tax reform is essential, but the level of taxes that will ultimately be raised is going to be determined by the spending side, 

and we know the difficulties there. 

So I think one of the things to make very clear is that suppose, 

for example, from the other House, you drop Congressman Ryan’s 

plan—even under his plan, spending is at 20 percent of GDP and 

it is hard to get it down to that. 

If you are going to balance the budget, it means you have to raise 

20 percent of GDP, and I would stipulate I do not think anyone 

thinks it is a good idea to use this tax system to raise 20 percent 

of GDP in taxes. So it would interfere badly with the economy. 

Senator CRAPO. Thank you very much. 

Senator WYDEN. Thank you, Senator Crapo. 

Senator Grassley is next. 

Senator GRASSLEY. Thank you, Senator Wyden. 

Dr. Holtz-Eakin, your testimony on macroeconomic simulations 

that you cite reached different conclusions than Dr. Zandi’s ‘‘bang 

for the buck’’ analysis. Could you explain why your data indicates 

a permanent extension of the 2001/2003 tax relief plans provides 

more bang for the buck than a temporary extension of a portion of 

the 2001/2003 tax relief plans that apply to taxpayers earning 

under $200,000 and $250,000? 

Dr. HOLTZ-EAKIN. So both of these exercises, Mr. Zandi’s and the 

one that I did with Decision Economics, used fairly conventional 

macroeconomic models. The difference here is that there are actually present, in our analysis, households with real balance sheets, 

and those balance sheets are badly damaged at the moment. Many 

of the homes are under water. 

41 

In the course of the financial crisis, they lost $11 trillion in net 

worth. And it is important to them to repair their balance sheets 

and put themselves in the capacity to spend on a sustained basis. 

Our exercise captures that and, as a result, our households save 

more, and that savings stimulates more investment. Then Mr. 

Zandi would get his pure cash flow model. If you throw money at 

a household, they spend it, in his model. That is not what is going 

to go on out there in these circumstances. 

Senator GRASSLEY. I have another question for you. If the tax 

rates are allowed to expire, then this would mean that, come January 2011, people will notice their paychecks will be smaller, because their employer will be withholding more. They will not notice 

for the first time that 2011 taxes went up when preparing their returns in April 2012. Do you think that this could cause a fairly immediate ‘‘tax shock’’ to the economy, or would any harmful growth 

effects be more gradual? 

Dr. HOLTZ-EAKIN. I think a full sunset would be a tremendous 

tax shock. The CBO estimate is it would cut economic growth by 

1.4 percentage points. That is an analysis that does not have any 

sort of forward-looking effects. 

So businesses who look at the full sunset and realize that their 

business environment is worse as far as the eye can see might 

react even more strongly than that. So I think it is a highly detrimental prospect. 

Senator GRASSLEY. And I would end, Senator Wyden, with just 

a statement I would like to make to follow-up on Senator Roberts’s 

comment on the more restrictive definition that was put forward 

earlier today in a discussion of the impact of the margin rate increases on small businesses. 

The definition was tied to the small business bill that was before 

the Senate earlier this week. Everyone should know that there is 

no single definition of small business in the Internal Revenue Code. 

As Senator Roberts noted, the generally accepted definition of 

small business is 500 or fewer employees. If our bipartisan focus 

is to do the least harm to small business, then we ought to use the 

most comprehensive definition. If all small business creates 70 percent of new jobs, why would we cut back on the universe of job creating units? Also, as I said earlier, small businesses are dependent 

on owners for capital, whether debt or equity. The owners are sensitive to tax rates on their activity. If we care about jobs, we should 

be careful. 

Senator WYDEN. Thank you, Senator Grassley. 

Let me ask a few questions of all of you about the tax reform 

issue, and I want to get, again, just some principals. I think you 

all have already heard my hope that the Deficit Commission will 

come forward with a bipartisan kind of effort. And I want to just— 

and any panel member who chooses to get into it can participate 

in this. 

In 1986, Ronald Reagan, a big group of Republicans, and a big 

group of Democrats, essentially agreed on a theory, and it strikes 

me that theory is still sound, and I want to assess your views on 

it. 

What they said is, let us keep progressivity, because that ensures 

fairness; let us hold down marginal rates, because the tax on the 

42 

last dollar of income that is earned is a big deal; and, if we do 

those things, Democrats and Republicans can come together and 

take a machete to the preferences, this blizzard of deductions and 

exemptions and credits. 

That strikes me as still a very sound theory today. You can debate which bill, whose idea, and the rest. But the theory that, in 

my view, would promote growth—Dr. Holtz-Eakin talked about it— 

is the fairness that I and other Democrats feel so strongly about. 

These kinds of principals are still valid today, and we had a lot of 

discussion off and on about the 1986 bill. 

Just in terms of the principals, I would be interested, Dr. Burman, Dr. Holtz-Eakin, Dr. Marron, and the other two are welcome 

to chime in, as well. 

Do you think the theory behind it is still sound? Dr. Burman? 

Dr. BURMAN. I think the theory behind it is sound. I think the 

thinking that happened in 1986 that made it easier was that most 

people do not think like economists, and there was a big corporate 

tax increase that made it possible to cut taxes for individuals. So 

a lot of people thought they were getting tax cuts who probably 

were not. 

Taking a machete to the preferences, I think, I say great idea, 

but you know better than I do how hard that is, because there is 

such a strong constituency for every one of those. 

I think the thing you need to get across to people is that the system we have now is that, right now the tax system takes a lot of 

your money to start, and then you have to do a whole lot of paperwork to get it back. 

It would be a lot simpler to say, well, we will take a little bit less 

to start, and you will not take all those deductions, so you will not 

have to jump through the hoops. 

Ms. MARKMAN. One of the flaws, I think, in the 1986 Tax Act 

was a failure to deal with AMT. It was calculated in that AMT 

would raise money that the ordinary rates would eliminate. 

And so what happened is that you had a shifting, which we have 

seen clearly now, that more money is raised by AMT, in some estimates, almost certainly at the higher income levels, than the ordinary tax. And the failure to index it, the failure to deal with it at 

that level, I think, in my opinion, was the biggest flaw in the 1986 

Tax Act. 

Senator WYDEN. Dr. Holtz-Eakin? Any others? 

Dr. HOLTZ-EAKIN. I think that, first of all, I agree with the basic 

premise. The settings are, again, similar. The 1986 act came after 

a period of extended poor economic performance, and it was widely 

perceived that the tax code was, at least in part, responsible for 

that, and it was interfering with America’s ability to grow and, in 

a bipartisan way, people got together to fix that. 

We are at that position again. We have had subpar economic performance on a sustained basis, and people are seeing it. 

In the interim, when the economy was growing more rapidly, it 

became easy to toss another tax credit here, throw a special exemption there, and it became littered with things which now are interfering with our ability to grow. 

43 

We need to go back to the notion that the job is way more important than any tax credit could possibly be and clean up the code 

and have low rates. 

The second thing that I think ought to be recognized is that Dr. 

Burman’s observation is correct. The 1986 act was built on cuts for 

individuals, increases for corporations, and that is why they do not 

want to have tax reform, because the last time, they were viewed 

as the guys to pay for it. And so that is the key political obstacle 

that I mentioned earlier. 

The last piece is, the 1986 reform did not survive long. It was 

unwound very rapidly, and I think there is a lesson there, which 

is that we went for the wrong kind of reform. Its effort to tax capital income comprehensively at the moment it was earned, adjusted 

for inflation, is too hard, and it became administratively impossible 

to reach that objective. 

So we need to think smart about reforms that I think go to consumption bases, because they are easier to enact and fit my philosophical underpinning, which is people should be taxed on the 

basis of what they take out of this economy, not what they contribute in the way of their labor, their energies, their innovation, 

and their capital. 

Senator WYDEN. Other panel members who would like to chime 

in? 

Mr. MARZAHL. I will jump in very quickly here. I think your principals are absolutely correct. I think the concept—if you go back to 

1986, if we just want to look at the refundable credits, all there 

was was the earned income credit. Everything else has been added 

since then, and the core premise of many of our other credits, in 

some ways, is the same as the Earned Income Tax Credit. 

It is to reward work; it is to provide an incentive to families with 

children; and it is to ensure general progressivity. We have added 

all these other credits and, from the perspective of the consumer, 

of the taxpayer, I think we would both agree there is absolute 

rampant confusion. It creates distrust in government. It creates 

enormous problems for all of you to defend when you are running 

for office in terms of talking about things. 

I think the concept of simplicity, having a core set of principals, 

and finding a way to weave some of these elements that reward 

work, that provide the kind of refunds that low-income working 

families deserve, but to simplify it and to couple it with corporate 

tax changes and other treatments that are more fair, I think, definitely would pass muster with the American people. 

Dr. MARRON. So, just to round up by echoing what other folks 

have said. The usual mantra is, there are three principals for tax 

reform, which are pro-growth, fair, and simple. So pro-growth 

would be primarily lower rates; fair would be suitable progressivity; and simple would be (A) using the machete and then (B) getting rid of things like the AMT, which I think are both—they are 

problematic. From a simplicity point of view, it is a nuisance to 

deal with them, and I think, frankly, they also undermine some 

Americans’ faith in the tax system, that there are sort of surprises 

when they discover things that apply to them or they thought 

apply to them do not apply to them. 

44 

Then, if you can make the system more simple, it will be both 

better economically and better from a fairness point of view. 

Senator WYDEN. The second question is, how would reformers 

use radical simplification as a way to jumpstart tax reform? 

What is striking about all this is virtually every reform proposal 

comes in with a 1-page 1040 form. Comes in with a 1-page 1040 

form. 

The Bush proposal during President Bush’s terms, I think, was 

32 lines. Everybody is between 30–34 lines, close enough for government work, to say everybody is on the same page. 

How might reformers use radical simplification to jumpstart reform? Because it is an area people agree on and, inevitably, to get 

to radical simplification, you have to start making some of these 

changes that are being discussed here. 

Any thoughts on that, Dr. Burman? 

Dr. BURMAN. I completely agree that simplification ought to be 

a part of anything that qualifies as reform. And I also echo the copanelists that getting rid of the AMT, which your plan would do, 

is clearly essential. 

One thing that I actually proposed in a paper, in the Virginia 

Tax Review, is to go with a system where most people would not 

have to file tax returns; where the withholding that is taken from 

their income by their employers and maybe withholding by banks 

on interest would be final, and that there would not have to be this 

reconciliation at the end of the year. 

I think that would get a lot of people’s attention. It would be a 

radical change in the way the tax system worked. Michael Graetz 

has a proposal where most people would just pay a value-added tax 

and would not pay an income tax. I have some issues with that, 

but it certainly would get—I think it has gotten a lot of attention. 

So I think a level of simplification that real people can perceive 

is important, and just going to a 1-page tax return will not do it. 

If you just start telling people how to fill out their taxes by now 

putting in all the detail, that does not make things simpler; but 

getting rid of all the things that go in on those lines, it is important 

and a real contribution. 

Senator WYDEN. Any thoughts on how radical simplification 

might jumpstart a bipartisan effort? I have been struck—if you 

think about the applause George Bush got at one of those presidential conventions, the crowd went berserk, the same thing is true 

for every Democrat, and, particularly, ideas on how radical simplification might jumpstart bringing the parties together. 

Any panelist can chime in on this. Yes, go ahead. 

Dr. HOLTZ-EAKIN. So it will be a shock for you to find out I disagree with Len, and here is why. This has always been a Nation 

whose tax compliance is voluntary, and that is an important part 

of the way we should think about this problem. 

If people saw a very simple tax form that they could fill out and 

did fill out to file their taxes, they would be much more confident 

in the tax system being fair, because they were filling out the same 

thing as the other person, and they could do those comparisons. 

And Americans have a deep fundamental sense of fairness, and 

they like progressive tax systems. They want to see that. 

45 

If you do not make them fill it out, if you hide it, they will be 

more suspicious and less willing to support the reform than if they 

see it is fair, and I think visibly demonstrating the fairness is important. 

So all these notions of having people not fill out their taxes, I do 

not think that works. I think you jumpstart reform by demonstrating that, by having people be able to fill out their taxes, not 

people filling out their taxes and afraid they are getting a better 

break because they can hire tax preparers and things like that. I 

do not think that works. 

We really need to have the public care about this issue, and it 

is a compliance issue at its core. They want to support this tax system. 

Senator WYDEN. Any other panelists want to chime in? You are 

not required to do it, because I have a couple of other questions. 

Mr. MARZAHL. I actually would agree with, in some ways, Dr. 

Holtz-Eakin. I do not think that the issue of removing the filing obligation or removing filling out the paperwork is necessarily the 

starter. I think a starter is creating the simplicity, and I think putting forward a radical set of core concepts, maybe saying, let’s get 

it all on the 1040, makes a lot of sense. 

I go back to—I think all of the refundable credits have enormous 

value to them, but from a practitioner perspective, when you sit 

down and you try to even begin to explain to a taxpayer what these 

mean, their eyes glaze over. They have no way of understanding 

it, and I think that does, again, feed into this just absolute core distrust of IRS, of government all together. 

So I think there are some huge opportunities here, but someone 

has to have the political courage to move forward on it. 

Senator WYDEN. Let me ask one other one. If you think back to 

1986 and what happened, one of the aspects that has been most 

troubling to reformers is, as soon as you get to a tax reform bill, 

everybody says, ‘‘Fine, let’s start unraveling it. Let’s come back and 

make this change and that change,’’ and you can go back and add 

all kinds of exemptions and deductions and start, once again, having a huge lobbying bonanza, because every one of those exemptions and deductions has a lobbyist. 

What might be done as part of tax reform to say, when you get 

tax reform this time, you will make it harder to unravel it? 

Now, given the fact that no current Congress can ever bar a future Congress from acting, I am not trying to suggest some absurd 

kind of drill that would in any way address that, but it seems to 

me that, as part of tax reform this time, everybody ought to learn 

from 1986 and at least try to see if there are some sensible ideas 

for figuring out how you can make sure that, once the bill was 

passed, as soon as the ink is dry, everybody is not out trying to unravel it again. 

Any panelist member have some thoughts on that? Dr. Burman? 

Dr. BURMAN. Martin Feldstein had a paper in the 1980s called 

‘‘On the Theory of Tax Reform,’’ and what he said was that frequent tax reforms, whatever your tax system is, just raise costs. 

They create a lot of uncertainty and, of course, there is huge pressure on policymakers to come up with new tax breaks to show— 

new tax changes to show they are working for their constituents. 

46 

What Feldstein suggested was that maybe you should have a 

limit for some period of time, 5 years or something like that. All 

you could do would be to adjust rates, if you need to adjust revenues. You could not enact new deductions or credits or whatever. 

And you are right that current Congresses cannot bind future 

Congresses, but the Senate has done a pretty good job of making 

rules that future sessions agree to. And you could have a supermajority requirement for changes other than changes in rates and 

then have a jubilee every 10 years or something or every 6 years, 

where you might look at the tax code and think about it in a systemic context rather than just having a lot of rifle shot provisions. 

Senator WYDEN. Let us finish this question. I see my friend and 

colleague has come, and let us finish this one, and then I want to 

recognize Senator Hatch. 

Others on the question of how you might make it tougher to unravel a tax reform bill that picked up bipartisan support and was 

signed into law by the President, big signing ceremony? How do 

you make sure that 4 weeks later, everybody is not starting to plot 

to unravel it? 

Dr. HOLTZ-EAKIN. So, you have a menu to choose from. You have 

process-style reforms, rules, and things that Len mentioned, and 

then you have the substance of the reform. And I think the simpler 

it is, so it is really clear what the tax code is, so that once one 

changes it, you notice, is step number one. 

Step number two, one of the reasons I favor things that look like 

cash flow taxes, consumption-based cash flow taxes, is that everything happens this year, and you cannot hide preferential tax 

treatment in, for example, depreciation allowances and other 

things that are about timing so that you can always hide them. 

That is a great way for a lobbyist to get what they want, and you 

just do not see it. So turn everything into cash flows, have some 

bright lines, make it simple. Then when someone else gets a break, 

everyone knows it. 

Senator WYDEN. Any others? Dr. Marron? 

Dr. MARRON. Yes. Just building on Dr. Holtz-Eakin’s last point, 

I think one of the structural issues you face is what tax base to 

choose, and I think what we have learned is, if you go with an income tax base, which has a lot to suggest it, you create all these 

difficulties of coming in saying, ‘‘Well, measure my income differently and give me a tax break.’’ 

If you go with something like a broad-based consumption tax, I 

am not going to say you cannot tweak that, but my suspicion is 

that it is a harder thing to tweak and get special treatment in. 

Certainly, if you go with a carbon tax or something like that, it 

is clear if you are emitting carbon or if you are not. We have long 

experience in this country with the payroll tax. The payroll tax has 

very few strange exemptions from it, unlike our income tax. 

I am not saying we should increase the payroll tax, but I am saying it is an example that, if you choose your base well, you can protect it from a lot of these special pleadings. 

Senator WYDEN. Others? We will let you pass. 

Senator Hatch? 

Senator HATCH. Well, thank you, Senator Wyden. I appreciate it. 

47 

Dr. Marron, you discuss in your testimony the six factors why 

revenues from individual income taxes are expected to increase 

over the next 10 years. The first, as I viewed it, was the recovery 

of the economy. 

Compared with the other factors, how significant is that first 

point that you made? 

Dr. MARRON. So here I should emphasize I am quoting numbers 

from the CBO’s most recent long-term projections. Over the short 

term, it is relatively significant. Over the long term, actually, only 

moderately. 

Over the 25 years, CBO sees individual income tax revenues rising by about 6.5 percentage points of GDP, in geek speak, and the 

recovery of the economy is about 10 percent of that. 

Senator HATCH. In your testimony, you mention that, if both the 

tax cuts and the AMT patch were extended permanently, revenue 

growth would be slower. What would be the effect of a permanent 

extension of the tax cuts on economic growth, if you could tell me? 

Dr. MARRON. So, a permanent extension of the tax cuts, on the 

one hand, would reduce marginal rates, which would promote 

growth and, on the other hand, would, all else equal, lead to bigger 

deficits and a growth of debt. And my best guess of what the net 

of that is is that, in the first few years, you would see, on net, more 

growth, but that the growing debt and the growing deficit would 

eventually undermine that as you get into later years. 

Senator HATCH. Dr. Holtz-Eakin, do you agree with that? 

Dr. HOLTZ-EAKIN. I agree that the best thing you can do is keep 

rates low and then do the spending reductions so that you do not 

run into the deficit. In fact, that is the best economic growth policy. 

Senator HATCH. What about his point that we might increase the 

deficit by keeping the—by a permanent extension of the tax cuts? 

Dr. HOLTZ-EAKIN. I do not believe tax cuts pay for themselves instantly, so, yes, the deficit will be larger. But in this case, the top 

priority has to be on growth, and, in the end, the deficit problem 

is a spending problem. So, if you want to solve that, go to the 

spending side and solve it. 

Senator HATCH. I see. 

Now, Dr. Marron, in your testimony, you state that extending the 

tax cuts would provide some demand-side stimulus to the economy. 

Could you elaborate on how much stimulus that might provide, and 

would it provide more stimulus than government spending, for instance? 

In other words, does a $1 tax cut stimulate the economy more 

than $1 of spending? 

Dr. MARRON. Sorry, I do not have specific numbers in front of 

me, but the numbers I have looked at most recently are ones that 

were, again, put out by CBO earlier this year. 

It did basically a benchmark scoring of various types of provisions you might use in order to stimulate the economy. And the one 

that appeared the highest on that was extending unemployment insurance, just on the premise that you are giving money to people 

who would be likely to spend it; and, again, in the short run, that 

provides stimulus, whereas the various tax provisions came somewhat lower down the list, but clearly provided some stimulus. 

48 

Senator HATCH. You also note that the amount of stimulus would 

be greater if the tax cuts were extended on a permanent basis rather than just a year or two. Now, would you explain why this would 

be so? 

Also, how would you compare the effectiveness of a permanent 

extension to a series of, say, temporary extensions? 

Dr. MARRON. So, if you do it on a permanent basis, the beauty 

of that, from a short-term growth point of view, is that, first of all, 

the classic Keynesian demand-side effects would be larger, because 

people will perceive that the money they are getting from lower 

taxes will be something that is going to be persistent and they can 

spend. So they do not have this issue about how much do I save, 

because it is just a temporary tax rebate. 

Then in addition, to the extent that you get some positive supplyside effects from the tax cuts being permanently lower, you would 

be likely to see those, as well. If you are just kind of cutting and 

slicing a year at a time with tax cut extensions, the supply-side 

story about how the lower tax rates are going to encourage working, saving, and investment do not work very well. That argument 

works best when those things are permanent. 

Senator HATCH. There has to be some consistency and some ability to rely on what is going on. 

Dr. MARRON. Exactly. So, if you are making an investment or 

saving decision, you have some sense about what the trajectory of 

taxes is. But again, you have to weigh against that the fact that, 

if we did permanent extension of the tax cuts and did not do anything on the spending side or on other taxes to offset it, we would 

have larger debts in the future, and that would start to weaken our 

economy down the road. 

Senator HATCH. Dr. Burman, I do not mean to keep you. I know 

that you have been here a long time. But let me just ask a couple 

more, and then I will get out of your hair. 

Dr. Burman, thank you for your very interesting testimony. I appreciate all of you being here. I have enjoyed your testimony. It has 

been very good. 

Now, a major thing, Dr. Burman, in your remarks, which fairly 

screams because of its prominence, is that our tax system is not 

producing nearly enough revenue. 

Now, is it your belief that we should raise revenues to match the 

spending levels of Congress and the President, no matter how profligate the Congress and/or the President may be? 

Dr. BURMAN. We have tried the other way, which is keeping revenues low and hoping that spending would follow. I do not think 

that has worked out very well. 

I think if we actually raise taxes to pay for the level of spending, 

that that would actually build support for doing sensible things to 

slow spending. 

Right now, people have the sense that we can wage wars, we can 

have a massive expansion of Medicare, we can do all sorts of 

things, and taxes only go down. It makes it sound like government 

is free or even better. And I agree that we have to restrain spending. 

49 

But just this idea that—this kind of field of dreams theory that, 

well, we build this edifice that is suitable for a small government, 

and eventually a small government will come, is not working. 

Senator HATCH. Well, how do we control spending when we have 

Medicaid, Medicare, Social Security, et cetera, et cetera, that are 

basically entitlements that go on and on and on and generally increase and increase and increase? 

Dr. BURMAN. It is going to be a challenge, obviously. You are 

going to have to come up with ways to slow the rate of growth, 

more with Medicare and Medicaid. There are various options. One 

is, you could budget for it. You could set up something like a voucher, where if you pay—actually, Congressman Ryan has proposed 

something like this. 

I think the voucher is probably at too low a level to actually provide adequate health insurance. But the concept that you just mandate benefits and then come up with however much money is needed to pay for them, that is not sustainable either. 

But I think most people who look at this see the long-term problem as one that is a combination of too much spending and too little revenue. So you are going to have to deal with it on both sides. 

Senator HATCH. Is it true that one of the strongest turbines of 

our economic engine is consumer spending? You indicated in your 

testimony that a tax increase would result in less spending, which 

would ripple through the economy, costing jobs and threatening the 

recovery. 

Would our economy recover faster if we extended these expiring 

tax cuts? 

Dr. BURMAN. I think it is a good idea to extend most of the expiring tax cuts. Where I disagree with Dr. Holtz-Eakin is that I think 

there would be relatively little cost to letting the high-end tax cuts 

sunset as scheduled, and I think it would actually build some impetus for tax reform. And actually, if more stimulus was needed, you 

could do some of the other things on CBO’s list, like extending unemployment benefits, or maybe providing some more aid to States, 

which are engaging in a lot of tax increasing and spending cuts 

right now, which is threatening the recovery. 

Senator HATCH. Dr. Burman, you indicated in your testimony 

that a major tax increase would slow the economic recovery, at 

least that is the way that I interpreted it. 

Does this mean that you believe that higher taxes affect economic growth and, if so, how would allowing the tax cuts to expire 

affect the economic growth over, say, the next 10 years? 

Dr. BURMAN. Over the short term, just allowing the tax cuts to 

expire would certainly have a negative effect. It would reduce consumption and could very well prolong the recession. 

Over the long term, we have talked about whether we should 

have permanent tax cuts or temporary tax cuts. I do not think permanent tax cuts are even plausible if we do not radically cut 

spending. 

One of the things Dr. Holtz-Eakin talked about was the critique 

of the standard economic model, which does not take into account 

how people perceive the effects of current policies, what future consequences of those policies will be. 

50 

I think anybody who is rationally looking at a tax system that 

was raising 19 or 20 percent of GDP and spending was running 

much, much higher than that would see that future taxes were 

coming, and probably at a much higher level than the tax rates 

were before. 

So over the long term, if we make permanent the tax cuts and 

we cannot radically cut spending, I think that would actually leave 

the economy in a much worse position than you would be if they 

were allowed to expire. 

Senator HATCH. And one more for you, Dr. Holtz-Eakin. On the 

question of narrowing the definition of small businesses, some on 

the other side of the table suggested restricting the definition of 

small business in terms of the impact of the marginal rate increase. If we want more jobs, and small business is the source of 

70 percent of the new jobs, why would we employ a narrower definition? 

Dr. HOLTZ-EAKIN. I am not in favor of a narrow definition. I am 

mystified by the notion that somehow it is desirable to raise these 

taxes, in any event, and, if somehow there are tax analysts who believe that you can draw a line in the tax code and identify jobcreating tax returns versus non-job-creating tax returns and an appropriately designed policy, I have yet to meet that person. 

Senator HATCH. Well, I want to thank the whole panel. I apologize to you folks on the end of the table, because I had some questions for you, too, but I just feel like we have gone on long enough. 

And I just want to thank you all for your testimony. It has been 

very enlightening, as far as I am concerned. 

Thank you. 

Senator WYDEN. Thank you, Senator Hatch. You all have been 

very patient, been with us for 3 hours or thereabouts. And it seems 

to me, what you have helped to highlight, at least for me, is that 

this tax debate is, in effect, at a fork in the road, and there is a 

choice. 

One approach involves more tinkering and nipping and tucking 

here and there, which will inevitably add to scores of additional 

provisions, 500 I mentioned; 500 tax changes in 2008 alone, and I 

think that will inevitably be a partisan debate. 

The alternative path is to try to come up with a bipartisan approach where, in effect, Democrats can secure changes that they 

have long sought: relief for the middle class and fairness; and Republicans can look to a number of the incentives for business, a 

number of incentives for American industry; and you can marry 

principals that both sides feel strongly about. 

What I come away with is that that second approach, bipartisan 

and an opportunity to bring the country together, would also help 

deal with the uncertainty in the economic inefficiency of continuing 

to tinker, which is going to put the brakes on economic growth. 

So I think you have helped give us additional ammunition for 

that point of view. Unless you all feel particularly strongly at this 

point about adding anything else, we will excuse you at this time. 

The Finance Committee is adjourned. 

[Whereupon, at 12:50 p.m., the hearing was concluded.] 

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