U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

74–868—PDF 2011

S. HRG. 112–464 

DOES THE TAX SYSTEM SUPPORT ECONOMIC 

EFFICIENCY, JOB CREATION, AND 

BROAD-BASED ECONOMIC GROWTH? 

HEARING 

BEFORE THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

MARCH 8, 2011 

( 

Printed for the use of the Committee on Finance 

COMMITTEE ON FINANCE 

MAX BAUCUS, Montana, Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

KENT CONRAD, North Dakota 

JEFF BINGAMAN, New Mexico 

JOHN F. KERRY, Massachusetts 

RON WYDEN, Oregon 

CHARLES E. SCHUMER, New York 

DEBBIE STABENOW, Michigan 

MARIA CANTWELL, Washington 

BILL NELSON, Florida 

ROBERT MENENDEZ, New Jersey 

THOMAS R. CARPER, Delaware 

BENJAMIN L. CARDIN, Maryland 

ORRIN G. HATCH, Utah 

CHUCK GRASSLEY, Iowa 

OLYMPIA J. SNOWE, Maine 

JON KYL, Arizona 

MIKE CRAPO, Idaho 

PAT ROBERTS, Kansas 

JOHN ENSIGN, Nevada 

MICHAEL B. ENZI, Wyoming 

JOHN CORNYN, Texas 

TOM COBURN, Oklahoma 

JOHN THUNE, South Dakota 

RUSSELL SULLIVAN, Staff Director 

CHRIS CAMPBELL, Republican Staff Director 

(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 

Hatch, Hon. Orrin G., a U.S. Senator from Utah ................................................. 3 

WITNESSES 

Auerbach, Dr. Alan, Robert D. Burch professor of economics and law, University of California Berkeley, Berkeley, CA .......................................................... 4 

Hubbard, Dr. R. Glenn, Dean and Russell L. Carson professor of finance 

and economics, Columbia University Graduate School of Business, New 

York, NY ............................................................................................................... 7 

Galbraith, Dr. James K., Lloyd M. Bentsen, Jr. chair in government/business 

relations and professor of government, University of Texas Austin, Austin, 

TX .......................................................................................................................... 9 

Graetz, Michael, Isidor and Seville Sulzbacher professor of law, Columbia 

Law School, New York, NY ................................................................................. 11 

ALPHABETICAL LISTING AND APPENDIX MATERIAL 

Auerbach, Dr. Alan: 

Testimony .......................................................................................................... 4 

Prepared statement .......................................................................................... 41 

Responses to questions from committee members ......................................... 50 

Baucus, Hon. Max: 

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

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

Galbraith, Dr. James K.: 

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

Prepared statement with attachment ............................................................. 58 

Responses to questions from committee members ......................................... 64 

Graetz, Michael: 

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

Prepared statement .......................................................................................... 74 

Responses to questions from committee members ......................................... 90 

Hatch, Hon. Orrin G.: 

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

Prepared statement .......................................................................................... 98 

Hubbard, Dr. R. Glenn: 

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

Prepared statement .......................................................................................... 100 

Rockefeller, Hon. John D., IV: 

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

(III) 

(1) 

DOES THE TAX SYSTEM SUPPORT ECONOMIC 

EFFICIENCY, JOB CREATION, AND 

BROAD-BASED ECONOMIC GROWTH? 

TUESDAY, MARCH 8, 2011 

U.S. SENATE, 

COMMITTEE ON FINANCE, 

Washington, DC. 

The hearing was convened, pursuant to notice, at 10:05 a.m., in 

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

(chairman of the committee) presiding. 

Present: Senators Rockefeller, Wyden, Menendez, Carper, Cardin, Hatch, Snowe, Coburn, and Thune. 

Also present: Democratic Staff: Russ Sullivan, Staff Director; Jon 

Selib, Chief of Staff; Lily Batchelder, Chief Tax Counsel; Holly Porter, Tax Counsel; Jeff VanderWolk, International Tax Counsel; and 

Ryan Abraham, Tax Counsel. Republican Staff: Mark Prater, Deputy Chief of Staff and Tax Counsel; Chris Campbell, Staff Director; 

Nick Wyatt, Tax and Nomination Professional Staff Member; Tony 

Coughlan, Tax Counsel; and Jim Lyons, Tax Counsel. 

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

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE 

The CHAIRMAN. The committee will come to order. 

Dwight Eisenhower once said, ‘‘Neither a wise man nor a brave 

man lies down on the tracks of history to wait for the train of the 

future to run over him.’’ 

That train of the future depends on a strong and growing economy, and today we face challenges to our economy on many fronts. 

Our economy is still recovering from the most significant recession 

since the Great Depression. U.S. debt as a share of the economy 

is at its highest level in 50 years, and it is projected to rise much 

higher in the coming years. At the same time, economic competition is stiffening, as the world economy grows increasingly globalized. 

In 1960, exports accounted for 3.6 percent of American’s GDP. 

Today they account for almost 12.5 percent. 

In the face of all these challenges, we cannot afford inefficiencies 

in spending programs or in the tax system. Our tax code must 

maximize job creation and widespread economic growth. It must be 

finely tuned to its objectives so we are driving that train of the future, not lying beneath it. 

Last year, we began a comprehensive review of America’s tax 

system. We held hearings to look at the history of the code. We 

2 

contemplated lessons learned from the last major revision of the 

tax code in 1986. We considered historical trends in income and 

revenue. And we analyzed how the code has swelled in the intervening years, often failing to adapt to our changing world. 

These hearings explained how we got to where we are today. 

Well, today, we begin a set of hearings asking, ‘‘Why do we need 

tax reform? Why?’’ These hearings will analyze what we expect our 

tax system to accomplish and whether it effectively meets those objectives. 

Of course, the tax code should raise the revenue necessary to finance the operation of the country. We also want our tax system 

to stimulate economic development, encourage business activity, 

and promote fairness and certainty. We want it to minimize compliance costs and administrative costs to taxpayers. 

So how does our current system rate? Today’s witnesses will help 

us answer that question. They will examine the tax code’s effect on 

job creation and broad-based economic growth. 

Today, we have 7.5 million fewer jobs than when the Great Recession started. These lost jobs have caused unimaginable family 

hardships, and high unemployment has also meant less Federal 

revenue and a worsening debt crisis. 

We need a tax code that supports putting Americans back to 

work. We also need a tax code that does all it can to ensure the 

long-term prosperity of our country. 

I will be asking our panelists if the tax code encourages investors 

to take healthy risks and make sound investments or does it encourage unhealthy risk-taking and investing in underperforming 

assets? 

For example, corporations currently receive a tax deduction when 

they pay interest, but not when they pay dividends. As a result, 

businesses may choose to obtain capital through borrowing rather 

than through issuing stock. 

We need to know whether these incentives cause businesses to 

become overleveraged in a way that hurts our economy. We also 

need to know whether the tax code encourages individuals to make 

positive decisions that strengthen widespread economic growth. 

For example, there are dozens of provisions in the tax code that 

incentivize individuals to save for major expenditures like retirement, education or health care spending. Incentives that help individuals save for specific expenses are the third-largest tax expenditure in the code. They cost more than $124 billion in 2011. 

A recent White House report found that this plethora of choices 

can actually have a negative effect on individual investment, because many people are intimidated and confused by the range of 

choices and complicated rules for each. 

So let us ask how the tax code is positively and negatively affecting individual and business decisions. Let us question what more 

we can do to incentivize job creation and widespread economic 

growth. And let us determine how we can ensure our tax system 

drives our economy into the future rather than putting the brakes 

on it. 

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

The CHAIRMAN. Senator Hatch? 

3 

OPENING STATEMENT OF HON. ORRIN G. HATCH, 

A U.S. SENATOR FROM UTAH 

Senator HATCH. Thank you, Mr. Chairman. I commend you for 

holding these hearings on tax reform. Tax reform is greatly, desperately needed by our Nation, and these hearings are a necessary 

first step in that reform process. 

I want to make it clear that I do indeed believe that the tax system supports job creation for CPAs and tax attorneys. I am also 

confident that the tax system leads to broad-based economic 

growth, at least in China. 

Our guiding principle for tax reform should be ‘‘do no harm.’’ As 

bad as our current tax code is, it could actually be worse, and that 

is an awful thought, I know. 

Now, these many hearings we will have on tax reform should reduce the chance of making the tax code worse and increase the 

chance of making it better. The topic for this hearing is economic 

efficiency, job creation, and growth. 

I am really looking forward to what our four witnesses have to 

say on these topics, and I am sure we will gain some very helpful 

insights. 

Allow me to first share, however, a few of my initial thoughts on 

this topic. There are necessary and proper functions for our Federal 

Government to perform, and these functions should promote economic efficiency, job creation, and growth. 

A good example of a necessary and proper function of our Federal 

Government is, of course, providing for the national defense. By 

creating a secure environment at home and abroad for Americans, 

the military promotes economic efficiency, job creation, and growth. 

Federal taxation exists to fund these necessary and proper functions. 

In general, I am inclined to believe that the effect of Federal 

taxes upon the taxpayer is to reduce economic efficiency, job creation, and growth, and I acknowledge that there may be very limited circumstances where taxes could reduce a given activity that 

has what economists call, ‘‘negative externalities.’’ 

Now, negative externalities exist when individuals sometimes engage in activity that, although helpful to the individual, has harmful consequences to society at large. Tax can discourage such harmful activity. 

That is, a tax applied to negative externalities could actually enhance economic efficiency. The circumstances where this would be 

the case probably are quite rare or very rare indeed, Mr. Chairman. 

I want to reiterate that, in general, the effect of taxes upon taxpayers is to reduce economic efficiency, job creation, and growth. 

Reduce them. But there still is a question of degree. Does one particular tax system reduce economic efficiency more or less than 

some other tax system? 

It is my belief that high marginal taxes or tax rates can discourage at the margin productive activity and encourage more leisure 

and consumption. Now, this can reduce efficiency and growth and, 

along with it, job creation. 

Many call for a more progressive tax system, and I think this 

just means higher marginal income tax rates for higher-income 

4 

people. If it means something other than that, I would like someone to just tell me. 

Higher taxes for high-income people can, in turn, mean that such 

people opt for consumption and vacation rather than investment 

and work. The investment such people would have done in new 

plant and equipment and new business ventures would have led to 

additional job creation for others. 

But because of progressive taxation, certain high-income persons 

will not invest. By not investing, some jobs that would have been 

created are not created. Some of these jobs would have been filled 

by lower-income people. 

So, ironically and sadly, progressive taxation sometimes may 

hurt lower-income people the most. And I am sure that is not what 

anybody wants, but that is an unintended consequence of progressive taxation, at least in my view. 

President Kennedy had it right when he said that, ‘‘A rising tide 

lifts all boats.’’ 

Again, Mr. Chairman, I want to thank you very much for this 

important series of hearings that you have called on tax reform. 

Thanks very much. 

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

The CHAIRMAN. Thank you, Senator. Now, let us go to work. I 

would like to introduce our witnesses. 

First is Dr. Alan Auerbach, professor of economics and law at the 

University of California at Berkeley. 

Next, Dr. Glenn Hubbard, dean of the Columbia University Business School. Dr. Hubbard is a professor of economics and finance 

at Columbia. 

The next witness is Dr. James Galbraith, professor of government at the University of Texas. Thank you very much for coming. 

And, finally, Michael Graetz, professor of law at Columbia University Law School. A lot of Columbia here. Thanks very much for 

coming, all of you. 

You know our drill here. We will introduce your statements into 

the record. Speak about 5 or so minutes. 

I encourage you, do not pull any punches. Let her rip. Say what 

is on your mind. Life is short. 

Dr. Auerbach? 

STATEMENT OF DR. ALAN AUERBACH, ROBERT D. BURCH 

PROFESSOR OF ECONOMICS AND LAW, UNIVERSITY OF CALIFORNIA BERKELEY, BERKELEY, CA 

Dr. AUERBACH. With that introduction, Mr. Chairman, thank you 

for the invitation to be here, Senator Baucus, Senator Hatch, Senator Rockefeller. 

It is a great pleasure to be here, I should say once again, to talk 

about tax reform, because this has often been an issue of importance before this committee. I think it is particularly important 

now. 

Now, some might ask why, given two very significant problems 

that we have in the U.S. economy right now, why we should be 

thinking about tax reform. Those two problems I am thinking of 

are the very high unemployment we still have that the chairman 

5 

mentioned, as well as the very high and growing national debt that 

we have to deal with soon. 

I think that tax reform is not necessarily inconsistent with economic recovery from the recession, and, perhaps of equal importance, I think it is complementary to dealing with the very large 

deficit problem we have, and I think there are three reasons for 

that. 

First, as Congress thinks about very substantial cuts in discretionary spending, as it has been recently, it makes sense to think 

about cuts in tax expenditures, too, because there are a lot of programs which one might call discretionary programs which occur 

through the tax code as well, and thinking about those programs 

at the same time as one thinks about direct discretionary spending 

I think makes sense. 

Second, additional economic growth can generate additional tax 

revenue. And, although that is not the most important consequence 

of economic growth, it is certainly something worth keeping in 

mind, given how desperately we need additional revenue. 

Third, if it turns out to be the case that we do have to raise taxes 

as part of the solution to our deficit problem, then we need to have 

as efficient a tax system as possible to do so. 

As I put it in my testimony, a bad tax system gets worse as we 

try to raise more revenue from it. So I think tax reform is certainly 

a relevant issue to be considering today, even in the face of our 

other economic problems. 

Now, there are many issues that one can contemplate in thinking 

about tax reform. I focus on two areas in my testimony: one, tax 

expenditures and, the other, the corporate income tax, because I 

think these are both areas of importance in thinking about tax reform. 

And with tax expenditures, I would just point out, first of all, the 

concept of tax expenditures has historically been somewhat controversial, because one person’s tax expenditure is another person’s 

normal provision or tax incentive. And I argue in my testimony 

that this dispute is really beside the point. 

We do not have to call it a tax expenditure. We can call it a tax 

incentive. We can call it a normal part of the tax code. Whatever 

we call it, it is still worth asking whether this provision, if it costs 

a lot of revenue, is worth having, given how scarce resources are 

in our government budget. 

Now, I give some examples where I think it is not, and one example I used is the home mortgage interest deduction. I do not 

mean to single that out as the worst or the only one, but it is just 

a good example. 

And there are two problems with tax expenditures like this. First 

of all, to the extent that we have them there to accomplish a certain objective, for example, home-ownership, this provision does so 

in a very expensive way. That is, we could accomplish—promote 

home-ownership much more cheaply than we do through the mortgage interest deduction. 

Moreover, the provision as it is currently structured does not 

simply cost too much to accomplish its objective, it actually leads 

to overinvestment in housing. 

6 

Now, you might say, ‘‘Well, what is wrong with housing?’’ Well, 

there is nothing wrong with housing, but, if it comes at the expense 

of investment in productive plants and equipment, it means lower 

productivity, lower wages in the economy. And so it comes at a 

cost, and that is true of any other tax expenditures, whether it is 

tax expenditures benefitting State and local governments, tax expenditures related to the exclusion of employer-provided health 

benefits, to mention a couple of other very large tax expenditures. 

So I think it makes no sense to leave tax expenditures unscrutinized when so much attention is being paid to direct discretionary 

spending. 

The other topic I focus on in my testimony is the corporate tax. 

There is no doubt that the U.S. corporate income tax right now is 

something of an outlier among leading economies. We have one of 

the highest corporate tax rates, and we are really the only leading 

economy that still attempts to tax the worldwide income of our 

resident corporations. 

Now, that has led many to suggest that we should adjust both 

of those aspects of the corporate tax, lowering the corporate tax 

rate, moving to a territorial tax system, and perhaps paying for it 

within the corporate sector itself by reducing corporate tax expenditures. 

I think there are a couple of problems in this approach. The first 

is that the corporate tax expenditures that might be reduced to pay 

for a rate reduction, moving to a territorial tax system, themselves 

might undercut the objectives of these reforms, and, particularly, 

raise the cost of capital. 

For example, if you were to scale back accelerated depreciation 

in order to pay for a corporate rate cut, you would not necessarily 

encourage investment. 

The second problem in moving to this kind of tax system is you 

would still leave many of the flaws of the corporate tax system in 

place. There would still be incentives for companies to engage in 

transfer pricing, shifting profits to lower-tax countries. In fact, that 

might even be exacerbated by moving to a territorial system. And 

there would still be the incentive for companies to borrow that the 

chairman mentioned associated with the interest deduction. 

So I think one needs to focus also on domestic reforms. I suggest 

in my testimony moving in the direction of a corporate cash flow 

tax, which would perhaps even eliminate the interest deduction, 

but also increase depreciation allowances, going all the way perhaps to full write-off of investment to maintain incentives for companies to invest domestically. 

And at the same time, one needs some sort of foreign tax provisions to deal with the transfer pricing problems which exist under 

our current system and would exist under a territorial system, as 

well. 

The 2005 bipartisan President’s Advisory Panel on Tax Reform 

suggested border adjustments for a cash flow corporate tax. In a recent paper I wrote, I suggested an alternative approach, which I 

think would have the same effect to discourage companies from 

shifting profits and perhaps investment abroad. 

In closing, let me say that I think both of the types of reforms 

that I have laid out in my testimony would be progressive in naVerDate Nov 24 2008 21:20 Jul 09, 2012 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 R:\DOCS\74868.000 TIMD
7 

ture, because many of the tax expenditures we have, if structured 

more properly and at lower cost, would be primarily benefits for 

lower-income individuals. 

A lot of the other benefits that we currently have through these 

tax expenditures are unnecessary. And, if we can reform the corporate tax to encourage more investment in the United States and 

less investment abroad, then that will help productivity, investment in the U.S., and ultimately lead to higher wages for American 

workers, which is certainly progressive, as well. 

Thank you. 

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

The CHAIRMAN. Thank you, Dr. Auerbach. That is very interesting. 

Dr. Hubbard, you are next. 

STATEMENT OF DR. R. GLENN HUBBARD, DEAN AND RUSSELL 

L. CARSON PROFESSOR OF FINANCE AND ECONOMICS, COLUMBIA UNIVERSITY GRADUATE SCHOOL OF BUSINESS, 

NEW YORK, NY 

Dr. HUBBARD. Thank you, Mr. Chairman and Senator Hatch, 

Senator Rockefeller. 

I think you are holding this hearing at a particularly important 

time. For all the reasons that Alan has already mentioned, tax reform is likely to accelerate in its importance, and, indeed, it is 

probably the most powerful tool that the Congress has to promote 

economic growth. 

Done right, I really cannot think of a single other area of public 

policy where you have that kind of significant potential to change 

the economy’s growth rate. And it is especially vital at a time 

when, as a Nation, we are going to have to make a fiscal adjustment. 

Most of the recent discussions of tax policy have centered too 

much, in my view, on the short term or debates over stimulus. A 

good tax policy is really about the long term, and getting the long 

term right affects our conditions in the short term, too. 

As part of a general story, the Nation needs to rebalance itself 

a bit toward a greater emphasis on saving and investment, and tax 

changes can facilitate that transition. And I would note, for the 

concern you raised, Mr. Chairman, about unemployment, as well, 

that higher rates of investment would be the best antidote for our 

unemployment problem in the country. 

So what I wanted to do briefly was just touch on three things 

with you: one, some benchmarks for thinking about this; two, some 

specifics about tax reform; and three, where to start. 

In terms of benchmarks, Alan and I were kidding each other at 

the beginning, what is the quickest way to sum up for you, and it 

is broaden the base and lower the rates; that is still sound advice. 

But to think about, more formally, what a benchmark is, it would 

be a tax reform where income is taxed no more than once. And 

there are income tax ways of doing this and there are consumption 

tax ways of doing this, but they share some features in common. 

Addressing the distinction between debt and equity that is made 

in the tax code that you raised, Mr. Chairman, in your opening reVerDate Nov 24 2008 21:20 Jul 09, 2012 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 R:\DOCS\74868.000 TIMD
8 

marks, relates to the way we treat investment spending and depreciation and to the corporate tax. 

Some specifics. Fundamental tax reforms typically share some 

basic things. One is that they tend to be a combination of a 

business-level tax—it could be a cash flow tax or a business income 

tax—and then a household tax. In an income tax version of that, 

we are trying to get depreciation right. In a consumption tax 

version of that, which I would urge you to consider and Alan has 

already mentioned, there would be complete expensing. So it would 

be a cash flow tax. 

The business-level tax in either case, in a reformed system, 

would not distinguish between debt and equity financing, and that 

is very important in removing the over-leverage incentives that we 

have in the tax code. 

Some examples of this, in the blended income and consumption 

tax, would be the President’s advisory panel growth and income tax 

plan. A pure consumption tax version of this is something like the 

flat tax from Hall and Rabushka. But moving anywhere in this direction is an improvement. 

So, how to start? I think for all the reasons Alan already mentioned and, Mr. Chairman, you raised and Senator Hatch raised in 

opening remarks, we need to focus first on the corporate income 

tax. 

It is not just the case that the U.S. statutory corporate rate is 

too high. Despite some complaints to the contrary, the U.S. effective tax rates are also out of line. The U.S. corporate tax simply 

is a problem for investment and job creation in the U.S. It needs 

to be changed. 

Estimates of revenue-maximizing corporate rates in industrial 

economies tend to be in the mid- to high-20s, suggesting that there 

are ways to cut the corporate tax without even a number of offsets, 

unless you want to really cut it to very deeply discounted levels 

from current law. 

The second piece I would urge you to start with is territorial taxation. Not only is the corporate tax itself a problem, the way we 

tax multinational corporations is a problem. It is costing the country income and jobs, and there is an easy way to deal with this by 

really just moving toward a more territorial tax system, particularly in the context of shifting to something like that growth and 

investment tax plan that I mentioned earlier. 

And the third step in how to start is doing what you are doing 

now, which is tackling fundamental tax reform with a series of 

hearings to build consensus, using reform of tax expenditures, as 

Alan mentioned, to assist both with the budget issues and with any 

distributional concerns that you rightly have. 

Bold entitlement reform also, I think, will give you flexibility to 

do more on the tax side. 

So to sum up, I commend you for these hearings. I would note, 

of course, that tax reform also requires presidential leadership, but 

you are starting in exactly the right place. 

It seems the tax policy at the moment is stuck in the familiar 

maxim of ‘‘in the long run, we are all dead,’’ but the long run really 

is not a rehab center for bad short-term policy. 

9 

Let me go to a non-economist to close, so what Thoreau said was, 

‘‘In the long run, men only hit what they aim at.’’ 

Thank you, Mr. Chairman. 

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

The CHAIRMAN. Thank you very much. 

Dr. Galbraith, you are next. 

STATEMENT OF DR. JAMES K. GALBRAITH, LLOYD M. BENTSEN, JR. CHAIR IN GOVERNMENT/BUSINESS RELATIONS AND 

PROFESSOR OF GOVERNMENT, UNIVERSITY OF TEXAS AUSTIN, AUSTIN, TX 

Dr. GALBRAITH. Mr. Chairman, Senator Hatch, Senator Rockefeller, it is an honor to be here. 

As you know, I hold the Bentsen chair at the LBJ school. 

The CHAIRMAN. I did not know that. Very good. 

Dr. GALBRAITH. It was very nice to see his portrait in the anteroom. 

The CHAIRMAN. That is wonderful. 

Dr. GALBRAITH. My statement has brief preparatory remarks on 

the deficit, and I argue that it is principally an outcome dependent 

on economic performance, and the goal, therefore, should be improved economic performance. 

This hearing is focused on efficiency, and so I will pass rapidly 

to that topic. 

As an opening remark, I should say I think there is no such 

thing practically as a neutral tax. The right question is not how to 

get rid of incentives, but which incentives are appropriate and for 

what purposes. 

The Tax Reform Act of 1986, to take an example, evolved from 

work in which I was involved as staff director of the Joint Economic Committee from 1981 through 1984. It was a remarkable reform of a code overgrown with deductions and loopholes, and it was 

an adroit, bipartisan effort that saved the income tax. 

But in the long run, I think we can see even from this effort at 

least two broadly undesirable and, I think, unintended effects. 

The first is that the structure of lower marginal tax rates, which, 

of course, dates back before the 1986 act, helped to foster the explosion of CEO compensation. The previous structure of high tax rates 

had been put in place in the second World War to deter that kind 

of pay structure. And when that deterrent was removed, the pay 

structures that we have now emerged, with serious consequences 

for corporate governance. 

Secondly, the compromise that left interest deductions in place 

only for housing, it seems to me, almost surely contributed something substantial to the overleveraging of American households, 

over-borrowing against their houses, and to the bubble, and to the 

subsequent bust, which has left a very large fraction of the American middle class essentially insolvent and under water on their 

mortgages. 

There is, I think, no compelling evidence, in retrospect, that any 

of the tax law changes of the 1980s delivered the promised longterm improvement of accelerated economic growth, and there is no 

real reason to think that they should have, when you consider that 

10 

the major factors determining long-term economic growth are demographic and technological. And even the overall rates of saving 

and investment do not seem to be terribly amenable to being influenced directly or sustainably by changes in the tax code. 

Going forward, therefore, I see very little reason from this experience to make lower marginal rates or the elimination of deductions, 

as such, goals for their own sake. Certain deductions which have 

remained in the code, the interest deduction on good mortgages, 

the earned income tax credit or the deduction for municipal bonds, 

it seems to me, serve important purposes well and should be preserved. 

There are, of course, other taxes that have important incentive 

effects. The payroll tax is, in my view, a nasty piece of work that 

penalizes job creation, fosters tax evasion, and promotes the gray 

economy. 

The estate tax, on the other hand, is a tax which has been part 

of our social architecture for a century and provides a powerful incentive to philanthropy, which has helped to build a sector in our 

country that exists, I think, practically nowhere else in the world 

and that provides about 8 percent of all of our employment. So 

much of the social tension that would otherwise be associated with 

very high levels of inequality is diffused by the vast amount of philanthropic activity that the estate tax helps to promote. 

I am a skeptic about simplicity for its own sake. I think that 

there are issues that should be considered very, very carefully in 

thinking about any major change in the tax code; in particular, the 

effect on State and local governments that have integrated their 

tax systems into the Federal system needs to be considered very 

carefully, particularly at this moment when States and localities 

are suffering from a major, major fiscal crisis. 

As far as the broad principle on which you may choose to proceed, what should be the objective? What should be the burden of 

taxation? 

The classical political economist felt that it should not be either 

labor or profit, either wages or profits, but rather in conceptual 

terms, economic rent. That seems to me to be a sound principle, if 

one can design a system that focuses on rents. 

Senator Hatch, in your opening statement, you noted that the 

tax system of China is effective in that way. One of the things that 

is interesting about China is that they do tax economic rent, principally because the government acts as a landlord and is able to do 

that, which gives municipalities and provinces in China access to 

resources that enable them to conduct massive investments without the distorting effects of sales or income taxes. 

Our priorities going forward, as my colleagues have said, are 

jobs. I believe we have an important problem with energy security, 

important environmental problems; the need to rebuild our infrastructure is extraordinarily urgent. 

We still need to address the problem of financial reform. I believe 

we have a problem of maldistribution of income and power. And all 

of these issues can be improved by suitable changes in the tax code. 

Thank you. 

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

11 

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

Mr. Graetz, you are the cleanup hitter. 

STATEMENT OF MICHAEL GRAETZ, ISIDOR AND SEVILLE 

SULZBACHER PROFESSOR OF LAW, COLUMBIA LAW 

SCHOOL, NEW YORK, NY 

Mr. GRAETZ. Thank you, Mr. Chairman. I appreciate being invited back here, particularly—— 

The CHAIRMAN. I do not know if your microphone is on. 

Mr. GRAETZ. Now it is on. 

The CHAIRMAN. Yes. Thank you. 

Mr. GRAETZ [continuing]. Particularly being the only mister on a 

panel of all of these doctors. 

It is clear that the question that the chairman put at the beginning of this hearing, which is ‘‘Does the tax system support economic efficiency, job creation, and broad-based economic growth?’’ 

has an answer that is so obviously in the negative that even a lawyer can answer it. You do not need an economics degree to know 

this. 

The one area of the economy where the tax system is a robust 

job-creating machine is the area of tax return preparation software, 

tax planning, tax controversies, and tax compliance. 

The distortions that our economist friends talk about are so numerous, so rewarding to the well-advised, and frequently so complex to comprehend and to comply with that they serve to produce 

millions of well-paying jobs that are immune from the ups and 

downs of the business cycle. So we and our students thank you for 

that, and your colleagues in the Congress. 

The tax distortions that we have talked about are important. I 

just want to say that I think that the task of this committee is 

much more complicated this time than it was in 1986, and, as you 

know, it was difficult enough then. 

Let me mention three points along that line. First, we have never 

faced such a dangerous ongoing imbalance between revenues and 

spending. Our debt has reached a level that it had not reached 

since the post-war era. During that time, we owed all of the debt 

we had borrowed, virtually 98 percent of it, in fact, to Americans. 

Europe and Japan were in a shambles. China was entering a dark 

communist era. And now the CBO projects that the debt will be in 

excess of $20 trillion in 10 years. If we are able to borrow at 5 percent, that is $1 trillion a year that we will be paying to other people. And so we really have to get our debt in order. 

That does not mean that we need to increase revenue in the first 

stage of tax reform. We can have a revenue-neutral tax reform, but 

we need to have a tax system that will promote economic growth 

and that will allow us in the future, if we need to, to produce more 

revenues without inhibiting economic growth. 

Secondly, as some of my colleagues have pointed out, the American system is currently producing very unequal rewards to the 

American people. Distribution of income and wealth is more 

skewed toward the top than it has been at any time since the 

1920s. 

So that fairness in tax reform requires that we not shift the tax 

burden down the income scale, and, in fact, it would be nice if we 

12 

could conceive of a system that would allow us to have an even 

more progressive system, at least on the top small percentage of 

the wealthiest in the country, without raising tax rates in the way 

that Senator Hatch has suggested would be so detrimental. 

Finally, the U.S. economy now has to compete for investment 

capital around the world, including not only Europe and Japan and 

China, but also Brazil and Russia and India and other countries. 

The United States needs domestic investment by both foreigners 

and U.S. citizens, and we are now in a situation where corporations 

and other investors, including sovereign wealth funds from countries that may not all be our friends, can move money quickly and 

easily around the world at the click of a mouse, and this makes it 

much more difficult for the United States or any sovereign nation 

to tax income and to do so in a way that ignores what is going on 

in the rest of the world. 

In fact, our international tax rules, which were designed in the 

early part of the 20th century, and the concepts of residence and 

source are now, where corporations are concerned, concepts built on 

quicksand. With the highest corporate tax rate in the world, we 

have an incentive for people to borrow here and shift income 

abroad. This is exactly backwards, in my opinion. 

And as my other panelists have said, the classical corporate tax 

system that we now have increases the cost of capital for U.S. companies, discourages new equity investments in corporate enterprise, 

creates incentives for share repurchases instead of dividend payments, and encourages the issuance of corporate debt instead of 

new equity. 

We have tried to solve some of these problems by reducing the 

tax on dividends at the individual level. Professor Hubbard and I 

were at the Treasury together when the proposal that the Congress 

ultimately adopted was designed. 

I say in my testimony—I am happy to answer questions about 

it—that this was wrong. It is wrong now. It may not have been 

wrong then, but it is wrong now. 

The way to get progressivity, the way to tax income from capital 

is no longer at the corporate level, in my opinion. It is at the individual level. And I suggest in my testimony a way to convert part 

of the corporate income tax into a withholding tax, a creditable, but 

non-refundable withholding tax on dividends and on interest paid 

on new corporate bonds. 

I also talk in my testimony about the effect not only of borrowing 

in the United States, but of the countries where the investment 

which is funded through that borrowing occurs not allowing an interest deduction. So that we are, in effect, giving a break to borrowing here under circumstances where China is taxing more than 

the income if the investment is there because of not allowing an 

interest deduction. 

Mr. Chairman, I think that one of the big differences between me 

and my colleagues—my economics colleagues on the panel—is that 

I believe that any tax reform that the U.S. engages in must fit well 

with international arrangements. 

The cash flow tax, which has been suggested by Professors 

Auerbach and Hubbard, would violate our trade treaties. It would 

violate all of our income tax treaties, and it will be difficult enough 

13 

doing a serious tax reform through the U.S. Congress and the 

President of the United States without having to renegotiate every 

trade and tax treaty with the rest of the world. 

I close my statement, as you know, Mr. Chairman, with a review 

of a plan that I have offered before, which involves imposing a 

value-added tax, using it to fund an exemption for $100,000 to remove 150 million Americans from the income tax altogether, lowering the corporate tax rate to 15 percent, and replacing the earned 

income tax credit with debit cards and payroll tax offsets. 

The Tax Policy Center is in the process of estimating the revenue 

and distributional aspects of that plan pursuant to a contract with 

the Pew Charitable Trusts, and they have allowed me just to suggest that their early efforts suggest that all you need is a 14- or 

so percent rate on the value-added tax, you can have a 15-percent 

rate on income above $100,000, a 25-percent rate on income above 

$250,000, and a 15-percent income tax on corporations, and be revenue and distributionally neutral. 

I know that there is great reluctance in the Senate of the United 

States and elsewhere to the idea of a value-added tax. It is used 

throughout the industrial world. We are the only OECD country 

that does not have one, but we are tying our hands behind our 

backs by relying only on an income tax. 

We are a low-tax country, but we are not a low income tax country. And if we want to succeed in the global economy, we need to 

be a low income tax country, but maintain our standards of fairness in the process. 

Thank you, Mr. Chairman. 

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

The CHAIRMAN. Thank you, Mr. Graetz. That was interesting and 

provocative. Lots of questions. 

One, just to begin, is the development of pass-through businesses 

in America. And, as we try to reform the corporate code, right 

away, you get into the question of pass-throughs, and that is the 

individual side. 

I would like all four of you to just kind of talk about this a little 

bit. Is that symptomatic of a problem, development of passthroughs, because we have many more—I mean, talking about 

large companies that are pass-throughs, not small, but larger. 

I have been to other countries, OECD countries, and I have my 

ideas of why it has developed. I would just like you to tell us 

whether that is a problem, is it not a problem, pass-throughs. 

You can approach it any way you want. 

Dr. HUBBARD. I think you are absolutely right, Mr. Chairman. 

Absent reform, it could well be a problem, particularly if the top 

marginal personal rate and the top corporate rate were to diverge 

in changes that you make. 

That is why in my remarks I said you should contemplate business taxation. So, whether you call something a pass-through entity, a C corporation, whatever you choose to call it, if it is engaged 

in business, it would face the identical tax structure. 

Otherwise, you do very much have to worry about the problem 

that you mentioned. 

The CHAIRMAN. Anybody else? 

14 

Dr. AUERBACH. Well, I would just say that it makes sense to— 

the U.S. is pretty unusual in having such a large and flexible provision for avoiding corporate tax by, for example, being an S corporation. And, if you were to reform the corporate tax and make the 

corporate tax less burdensome, first of all, I think it would lessen 

the problem of companies shifting out of C corporate form, but you 

also might contemplate extending the reformed corporate tax to 

large non-corporate businesses. 

Non-corporate businesses now account for nearly half of all the 

income—all business income earned in the U.S. That is a much bigger share than it was a few decades ago. And it does not make 

sense to have two very different tax systems applying to businesses 

that operate in similar fashion. 

Mr. GRAETZ. Mr. Chairman, two-tenths of 1 percent of the largest 

partnerships, which are those with over $50 million in revenue, accounted for 60 percent of all partnership income last year. And we 

like to think of these flow-through businesses as if they are small 

businesses. 

But, in fact, both foreign corporations and large entities that do 

not need access to the public capital market, but who can raise 

their capital in a private way, are foolish if they do not organize 

themselves as non-corporate businesses. 

So I argue in my testimony that we really ought to divide the 

world between large companies and small businesses, enable ourselves to really simplify the law for genuinely small businesses, but 

not allow the corporate tax to be elective for large businesses, 

whether they are domestically owned or whether they are foreign 

owned, so that new companies have the option whether to pay the 

corporate tax and where to pay the corporate tax. 

And my students would not get a passing grade if they said, let’s 

set up a new company that does not need public capital as a corporation, and they would not get a passing grade if they said, let’s 

set it up with headquarters in the United States instead of in a different country. 

The CHAIRMAN. Dr. Galbraith? 

Dr. GALBRAITH. I have nothing to add. 

The CHAIRMAN. Sorry? 

Dr. GALBRAITH. I have nothing to add, Mr. Chairman. 

The CHAIRMAN. So does the bias toward debt financing in this 

country have any effect on the development of pass-throughs or 

not? That is independent of whether you are a C corp or whether—— 

Dr. AUERBACH. Well, it actually reduces the use of pass-throughs 

because, to the extent that a C corporation is financed by debt, it 

effectively is a pass-through entity, because the earnings are only 

being taxed to the investors in the company, not to the company 

itself. 

That is not a good reason for keeping the current imbalance between debt and equity, but, given the distorted current tax system, 

it does lessen the incentive to move out of the C corp. 

The CHAIRMAN. Do you all four tend to agree it makes better 

sense to divide the tax system into two parts, those who have business income as opposed to non-business income, as Mr. Graetz suggests, irrespective of whether you are a C corp or a pass-through 

15 

or wherever you are? If you are big in your business, you should 

be taxed a certain way. If you are small, I guess to a business, that 

is a different way. And the third way, if you are just not in business, either large or small, then just be treated as an individual. 

Dr. HUBBARD. I absolutely agree with that, Mr. Chairman. As I 

said in my opening remarks, you really should have a business tax 

system that is uniform across businesses and essentially a household wage tax, and you could do that in a very progressive way. 

But I think keeping separate business taxes, distinctions between debt and equity financing, this is where you get the distortions in tax planning. 

The CHAIRMAN. My time is up. But I guess you all agree there 

is too much distortion between debt and equity. That is to say, current tax law encourages too much debt expense and too little equity 

financing. Would you tend to agree? Does anybody disagree with 

that? 

Mr. GRAETZ. Well, it encourages both debt—whether the tax 

law—let me say one thing. Whether the tax law encourages debt 

or equity depends on relationships and rates, and this is another 

reason that I do not think you can do corporate tax reform apart 

from individual tax reform. 

It depends on what your dividend rate is, what your corporate 

rate is, and what your rate on your taxation of interest is at the 

individual level. 

The current corporate tax certainly discourages financing 

through new equity compared to either retaining earnings or debt 

in the current system. And the debt problem is a serious problem. 

The difficulty is that the corporate tax is owned—the corporations are owned and receive capital from both tax-exempt U.S. 

shareholders and tax-exempt foreign shareholders. 

And so, if you reduce the corporate rate, you really are reducing 

the tax on those entities, which now pay tax on equity, which is 

not clearly a priority for tax reduction in this case. 

And so I think that you really have to think about a proposal of 

the sort—assuming you are not going to a cash flow tax, which I 

assume you are not, since no one else in the world has such a tax. 

But maybe you will. But, if you do not go to a cash flow tax or you 

deny an interest deduction—which, as I say, would conflict with all 

of our treaties and international arrangements—if you do not go to 

denial of interest deductions, then something along the lines of the 

withholding idea that I suggest in my testimony is designed to narrow the gap between equity and debt. 

The CHAIRMAN. Thank you very much. I am way over my time. 

Senator HATCH. Thank you, Mr. Chairman. I would like this 

question to go to the whole panel. 

The fundamental question that all of us have to answer is this 

one. Where do you think the top marginal tax rate should be? And 

we believe that efficiency is important in determining what the top 

rate should be. 

Assuming revenue neutrality against current policy as one of the 

ground rules for reform, would any of you think that a top rate 

higher than the current 35 percent would yield efficiency gains? 

I might as well start with you, Dr. Auerbach. 

16 

Dr. AUERBACH. I will speak for myself. I think it is obvious that 

it would not. Raising the marginal tax rates does not improve efficiency, certainly in this case. The argument for raising marginal 

tax rates would have to be based on a belief that it would lead to 

a more progressive tax system. 

We have lived with higher marginal tax rates in the past. I do 

not think the world would end if top marginal rates went up. But 

I would not view that as a measure to be taken in isolation. I think 

if that were to be done, it should be part of a much broader increase in taxes, if an increase in taxes is what you decided you 

need. And there are a lot of other places I would increase taxes, 

as well, if I were to increase taxes. 

Senator HATCH. Dr. Hubbard? 

Dr. HUBBARD. Well, Senator Hatch, I would begin and end my 

answer with the word ‘‘spending’’ and then I will put ‘‘tax’’ in the 

middle. Begin in the sense that your first instruction needs to be 

how big you want government to be. The tax system is going to pay 

for that. 

I think we are currently on a trajectory for a very, very large 

government, and that seems to me the first-order question for you. 

On the tax piece, I think it is important what kind of tax system. 

If we had a broad-based consumption tax in place, we could deliver 

progressivity with modest marginal rates on income for highincome people. That is not a problem. 

But, also, I want to close on spending on the progressivity side. 

Sometimes people talk about progressivity, speaking of only one 

side of the government’s ledger. The spending side matters, too. We 

can change progressivity by changing tax expenditures, by changing the distribution of Social Security and Medicare benefits. 

So I would urge you, as you think about how progressive you 

want the fisc to be, that you not lose sight of that. 

Senator HATCH. Thank you. 

Dr. Galbraith? 

Dr. GALBRAITH. Well, Senator, I think it depends upon what level 

of income the higher marginal rates kick in, to what levels they 

apply. 

When very high rates were instituted at the start of World War 

II, they were applied only to the very highest incomes, and their 

purpose was, in part, to deter entities from paying salaries that 

would be subject to those tax rates. 

As you know, the history of that period was one in which, after 

the war, these rates were eroded de facto with exemptions and deductions until such time as 1986, when we got to the point where 

we could have a revenue-neutral comprehensive reform with lower 

rates and a broader base. 

I think at the appropriate income level, there is no necessary efficiency loss to the economy as a whole with a higher marginal tax 

rate, and there may be reasons to go that way in the context of a 

broader package of reforms. 

Senator HATCH. Mr. Graetz? 

Mr. GRAETZ. Senator Hatch, I would try to keep tax rates low. 

I believe it is particularly important for the corporate rate, and I 

think if you get too big a disparity between the top individual rate 

17 

and corporate rates, people will move their income into the corporate form as a way of avoiding the high rate. 

So I think there are limits on what you can do about rates. I do 

think that, if we tax both spending and income at the top, we 

would have a chance to do so at lower rates than we do. And there 

are some very serious anomalies in the current system. 

The inability of the Congress, despite the Senate having passed 

it a couple of times, in my recollection, to tax carried interest of 

private equity as ordinary income instead of at 15-percent capital 

gains rates, for example, at the very, very top, seems to me to be 

very difficult to defend. 

So I think there are ways to get more progressivity in the system 

by reform, but I would urge you to try to do it keeping the top rate 

as low as possible. 

Senator HATCH [presiding]. Thank you. My time is up. 

Senator Rockefeller? 

Senator ROCKEFELLER. Thank you. Dr. Galbraith, I guess that I 

identify most with your testimony as written and given. 

I am not comfortable with a $14-trillion debt. I do not think you 

are either. I am not comfortable representing a State like West Virginia where the unemployment rate is out of sight. Social problems 

are really spiraling upwards—or downwards, however you want to 

put it. 

It is quite extraordinary to live there and watch what is going 

on. So I tend to look at things a little bit from that point of view, 

since I have been there for about 50 years. 

I want to ask you a provocative question. Everything in the way 

of conversation in the Senate and the Congress tends to be about 

reducing debt, reducing the deficit, but most importantly, cutting 

spending. You cannot separate those, of course, but cutting spending, cutting spending on the very things that sort of give promise 

to the future, the America Competes Act, Head Start, all kinds of 

things like that—— 

So I want to ask you what ought to be actually a difficult question for you to answer. It may be or may not be, but I am going 

to ask it anyway just to find out what you think. 

What, in your judgment, is a bigger threat to the American economy and its future: cuts to low-income programs like the earned income tax credit, which you mentioned, the child tax credit, which 

I think you mentioned, but I am not sure, or focusing, as appears 

to be the habit around here, virtually exclusively on reducing the 

deficit and debt? 

Dr. GALBRAITH. I think we have seen, Senator, an enormous decline in the economic security and, to some degree, in the living 

standards of the working population of this country in consequence 

of the Great Recession, the financial crash, the rapid decline in the 

value of housing. 

This is a problem which is going to be here with us for a long 

time, and I think it is playing with fire in important respects to 

aggravate that problem at this time by cutting those parts of the 

Federal programs which provide relief and assistance to working 

and low-income Americans. 

In terms of the functioning of our economy and the level of our 

national debt, I think the experience is that the debt goes up in reVerDate Nov 24 2008 21:20 Jul 09, 2012 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 R:\DOCS\74868.000 TIMD
18 

lation to GDP when our economy is functioning at sub-normal rates 

and comes down in periods of growth. It came down—as a result 

of the war, it was over 120 percent of GDP in 1946, much higher 

than the present levels, and declined consistently to about 33 percent of GDP by 1980. 

The way to achieve that is to have balanced economic growth, 

funded, in strong part, by a strong domestic financial sector. 

And the financial sector is precisely what was most severely impaired in the last 3 years, and without restoring it to the function 

that it should be performing of supporting economic activity and 

economic growth, I do not think what you do here with taxes and 

spending is going to effectively reduce the realized deficits. But I 

think they will more likely impair the functioning of the economy 

going forward, leaving you with just as large a debt, just as big a 

deficit or nearly so, as you would have had. 

Senator ROCKEFELLER. In essence, then, you could be saying that 

we can reduce the deficit by cutting all kinds of huge programs, but 

that, if we ignore the future aspirations and capabilities—and I am 

thinking of the America Competes Act, all the things of that sort— 

that in the long run, we do our country more damage. 

Dr. GALBRAITH. That is absolutely right, in my view, yes. 

Senator ROCKEFELLER. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

Senator Carper, you are next. 

Senator CARPER. Thanks, Mr. Chairman. 

Mr. Chairman, I do not know if you all have been watching movies much lately, but my wife and I went to a little theater in one 

of the old DuPont buildings. They have an auditorium there called 

Theater N, as in November. And we went the weekend before last, 

before the Academy Awards, and there was a movie—they were 

showing a movie, it was like a documentary called ‘‘Inside Job.’’ 

And how many times do we hold a hearing where we actually 

have as a witness, one of the stars of an Academy Award-winning 

film? 

Dr. HUBBARD. I did not get the statue, Senator. So I was concerned by that. [Laughter.] 

Senator CARPER. Well, maybe later on, like in subsequent years 

when you win your second Academy Award, you can—who was the 

gal who used to play Gidget? Sally Field. Remember Sally Field, on 

her second Academy Award, she said—she accepted it, and she 

said, ‘‘You really love me, don’t you?’’ And if it happens again, you 

can use that line maybe. 

But that was an interesting film. I think you are to be commended for appearing in it, although it probably was not the most 

fun. This has to be a lot more fun than going through the filming 

there. So thanks for that. Thanks for this, too. 

I want to go back to Mr. Graetz’s comments. You are the one person here who is a professor or a dean or something who is a mister, 

not a doctor. And why is that? 

Mr. GRAETZ. Well, I went to University of Virginia, and Mr. Jefferson insisted on being a mister. That is true, but I do not have 

a doctoral degree. 

Senator CARPER. Good. Well, neither do I. 

19 

Mr. GRAETZ. I have a law degree and not a doctoral degree. I 

think now it is called a J.D., and you can claim to be a doctor, but 

I have never thought that was appropriate. 

Senator CARPER. Well, you may not have a doctoral degree, but 

you have some interesting ideas. 

And I just want to ask our other three witnesses to take a 

minute and just think out loud with us about what he is suggesting 

about this value-added tax. It is not something I have ever been 

a big advocate of, but we are going to have to be thinking outside 

the box as we move forward on deficit reduction and we try to figure out how to reconfigure our tax structure in ways that are fair, 

in ways that promote economic development, in ways that provide 

certainty, in ways that support exports. 

And listening to you talk about this, it sounds to me like you 

think that the value-added tax could be constructed to actually do 

most of those things. 

So try to set aside how difficult this might be to get done politically. My guess is because it is so different, it would require some 

really heavy lifting. But I just want—I am going to start with our 

first witness. 

If you all would just tell us what is good about this idea or trash 

it, if you want to. Go ahead. 

Dr. AUERBACH. Again, at your suggestion, leaving politics aside, 

a value-added tax is one way of accomplishing a move toward consumption taxation. 

Unlike a personal consumption tax, a VAT tends to be a narrower base. That is the experience in Europe and other countries 

that have value-added taxes. A lot of consumption is not subject to 

taxation, which makes the tax raise less revenue and be less efficient. 

Nevertheless, I think it certainly is something worth considering. 

Whether to increase revenue, if you deem that necessary, or as a 

replacement for components of the income tax, as Professor Graetz 

recommends, it would be a big change, as you suggest. 

And it certainly is not the only way to go, but it is something 

that should be on the list of things that you consider. 

Senator CARPER. All right. Thank you. 

Dr. Hubbard? 

Dr. HUBBARD. I would broadly agree with what Alan just said, 

Senator. Indeed, when Michael and I worked at the Treasury together in the early 1990s, then Secretary Brady advocated this, 

with such a reform in the early 1990s. These ideas are still very 

good ones. 

I do not think the U.S. is likely to move toward a literal valueadded tax of the credit invoice, European variety, for the reasons 

Alan mentioned, but something like a subtraction method valueadded tax could be done right at the business level. It is just business receipts minus the purchases from other firms. 

But that is identical to the sum of a wage tax and a cash flow 

tax, which is exactly what Alan and I were talking about, and 

would make it much more flexible to implement. 

Michael and I were kidding each other in the back room—he 

claims this is not implementable, I claim it definitely is—if the U.S. 

20 

takes this position, I think there is definitely a way to make this 

compatible with our international treaties. 

But I think the notion of moving to consumption taxes as opposed to income taxes is one you definitely should take seriously. 

Dr. GALBRAITH. I would be concerned, Senator, about three 

issues. The first I think is one of the reasons why we have not 

moved to the value-added tax so far, which is that we are a Federal 

system and the value-added tax would exist alongside existing 

State and local sales taxes, which would complicate matters for 

them. 

Secondly, if it replaced the income tax, it would undermine State 

and local income taxation. State income taxation is keyed to the 

Federal tax system. 

So I think one needs to be very careful about the effects of a 

major change on the overall ecology of taxation in the United 

States. 

And the third issue concerns, if you did go this way, what would 

it replace and what would be the net effect on progressivity of that 

choice, and it seems to me that the tax to replace, if a tax is to 

be replaced, would be the payroll tax. Take one tax which is not, 

at best, moderately regressive and replace it with another one 

which is also moderately or, in many ways, substantially regressive. That would be a better choice. 

Senator CARPER. Mr. Chairman? 

The CHAIRMAN. Senator? 

Senator CARPER. Could Mr. Graetz have like 1 minute just to respond, please? 

The CHAIRMAN. Certainly. 

Mr. GRAETZ. Thank you, Senator. Let me say, in response to 

these questions, what they say is true about the European or old 

value-added taxes, but, if you look at the modern value-added taxes 

in places like New Zealand, Australia, Canada, South Africa, Indonesia, others, the base is actually quite broad. 

It is quite neutral across different forms of consumption and 

raises a lot of revenue at very low rates. The regressivity problems 

at the bottom and the progressivity at the top are issues that I 

really addressed very explicitly. I agree with them, I understand 

them, but they can be solved and still get a lot of people out of the 

income tax. 

Canada has shown that State retail sales taxes can operate very 

well alongside of a Federal value-added tax. Over time—it has now 

been a decade—the Canadian provinces have at their election 

moved to conform, and there are great advantages of them doing 

so. 

The State sales taxes are very burdensome, and, as they increase 

in rates, they are going to be extremely burdensome on businesses 

because they tax businesses multiple times. Some estimates are 

that a third or 40 percent of State sales tax revenue is multiple 

taxes on business income. 

Well, that is not productive of efficiency and growth. And so a 

value-added tax actually has advantages for the States, as the Canadian provinces have discovered over time. 

So I really think this is something that we ought to take a hard 

look at. 

21 

Senator CARPER. Good. Thank you very much. And thank you all 

for coming in here and giving us your thoughts. 

Mr. Chairman, I know I went over my time. Thanks for letting 

me have it. 

The CHAIRMAN. That is very interesting. 

Senator Coburn? 

Senator COBURN. Well, thank you, gentlemen. 

Going back to a consumption tax, what would be wrong with just 

a flat consumption tax at every level in this country, with a rebate 

back for the necessities of life to every citizen in the country? You 

would keep progressivity. You would eliminate regressive taxation 

in terms of the payroll tax. And you would also markedly advantage our exports. 

We are at a distinct disadvantage in this country today through 

our tax system in terms of being competitively viable internationally because of these embedded income taxes, where our European 

counterparts and several of the others do not have that, when we 

go to compete on the world market. 

Would you all care to comment on that? 

Dr. HUBBARD. Senator, I think you are exactly right that that 

would be a movement toward much greater economic efficiency. 

I think the way to address the problems of low-income families 

is less through rebates for necessities, if by that you meant different taxes on different goods, but more to do something like the 

late David Bradford suggested, which he called an X tax, which 

would be a consumption tax that would provide for payments to 

lower-income families. 

You could also add progressivity at the top to that with high-end 

wage taxes, if that were your preference. But I think you are absolutely right. The best answer on pure efficiency grounds for the 

country would be a broad-based consumption tax. 

Senator COBURN. But you would maintain a significant amount 

of progressivity, as the higher incomes actually consume more. Correct? 

Dr. HUBBARD. Well, the distribution of a consumption tax looks 

like distributions of lifetime consumption. So they are not regressive. You could add to progressivity, if that is your goal, by having 

high-end wage taxes on top of that, and you can address lowincome families—which I would urge you is the better progressivity 

goal to follow—by having direct payments. 

Senator COBURN. Any other comments on that? 

Mr. GRAETZ. Senator Coburn, I think there is a problem in moving to a sales tax and eliminating the income tax entirely at the 

top of the income scale. 

I understand that the rebate or prebate that you are referring to 

takes care or could take care of the bottom in the same way that 

the debit card that you swipe when you go through the grocery 

store in my proposal would take care of the bottom end. 

But I do not think this is the moment where one should really 

shift the burden from the very, very top of the income scale downward. It just does not seem to me that it is something the American people will or should regard as fair. 

And that is why I have retained some income tax at the very top 

of the system. The system I am talking about is a system that is 

22 

very much like the system that we had in effect before World War 

II, where we had consumption taxes for most people and income 

taxes only at the very top for the highest-income people. It was a 

small income tax, and it could be at much lower rates, because you 

are also taxing their consumption. 

But I do not believe that you can get rid of the income tax entirely without having a serious issue about fairness. 

Senator COBURN. You think it would be much more regressive in 

its ultimate effect? 

Mr. GRAETZ. I think that if you do not have some tax on income 

or wealth at the very, very top of the income scale, you are going 

to eliminate burdens on that top half of 1 percent, a quarter of 1 

percent which is earning so much of the income, owns so much of 

the wealth, at the expense—if you are going to have a revenue constraint—of raising taxes on people below that. 

And I do not think a value-added and a sales tax are basically 

the same thing, except for how they are collected. I do not think 

a sales tax alone can satisfy that issue. 

Senator COBURN. One other question. Would a consumption tax 

help us in terms of the misdirection of capital formation in this 

country? We have tax expenditures of $1.1 trillion right now, and 

I would contend that we are incentivizing misapplication and misdirection of capital, where it does not—we do not have capital formation that gives us the best benefit for our country as a whole. 

Would you all comment on that? 

Dr. AUERBACH. Senator, it would depend on how it was implemented. One of the things we observe in value-added taxes in Europe, for example, is that they exempt certain commodities that 

they deem socially beneficial. And, if you go down that road, then 

you can have the same kind of problem we have with the tax expenditures you cited. 

But taxing consumption rather than taxing income does not necessarily solve that problem. You still can have a broad-based tax 

or a narrower-based tax, depending on what tax expenditures you 

put in. 

Senator COBURN. Let me change the predicate. If you had no exceptions, would you, in fact, not have better capital formation? 

Dr. AUERBACH. Certainly. But that could be true under the current tax system, as well. 

Senator COBURN. If we eliminated tax expenditures. 

Dr. AUERBACH. Yes. 

Senator COBURN. Any other comments? 

Dr. GALBRAITH. I would just say, Senator, that I think we should 

be careful of our current context. We are, I think, in the midst of 

massively reallocating away from investment in housing as a result 

of the slump, and we have a huge deficit in public capital of the 

country which needs to be dealt with. 

And I think that anything that we do with respect to the tax 

code should keep those two facts very much in mind. 

Senator COBURN. I am out of time. Thank you. 

Mr. GRAETZ. Senator? I am sorry. I just wanted to say one word 

about border adjustments, if that is all right. 

You mentioned border adjustments, and it is the case that, under 

a sales tax or a value-added tax, we could tax imports and exempt 

23 

exports without renegotiating our trade treaties, and I think this 

is important. 

It would produce, at least under President Bush’s estimates, 

maybe $1 trillion over a 10-year period in the current situation. 

Now, at some point, this may reverse down the road when we are 

exporting so much and importing so little. But in the meanwhile, 

I think that this is a very important advantage of taxing sales in 

the way the rest of the world taxes them as opposed to taxing corporate income. 

The CHAIRMAN. Senator Wyden, you are next. 

Senator WYDEN. Thank you, Mr. Chairman. The four of you have 

done a lot of thinking about this issue. You have a lot of different 

approaches and a variety of creative ideas. And I want to go at it 

this way. 

For me, the single-biggest concern in this tax reform debate is 

job growth and job creation. And when you go back and look at the 

1986 legislation, in the 2 years after Democrats and Ronald Reagan 

came together in 1986, our country created 6.3 million new nonfarm jobs, twice as many as were created between 2001 and 2008. 

So there are a lot of issues that go into job creation, and I just 

want to ask you about the principles of 1986 and see if you think 

they are still a pretty good foundation, because I do. 

The principles of 1986 were, number one, eliminate as many of 

the preferences as you possibly could, because they tend to be narrow and they are for special interest groups. They walk off with a 

lot of money, and they are very narrow. 

The second one, Democrats and Republicans said you ought to 

broaden the base. That is going to be important, to generate as 

much growth as possible. 

And then, to their credit, they said we have to keep progressivity. 

So those were the three principles that, in my view, led to something that you would have to call historic, creating 6.3 million new 

non-farm jobs 2 years out of the box. 

In terms of the four of you, because you have a variety of different approaches and a variety of different routes, do you all think 

those three principles are still a pretty good foundation? Getting 

rid of preferences, broadening the base, and keeping progressivity. 

In fact, do any of you—the four of you, do any of you take exception to those being three of the key principles for the future; not 

the only principles, but three of the key principles. 

Any exceptions among you four? 

Dr. GALBRAITH. A moderate exception, Senator. As I said in my 

testimony, I was involved in the debates that led up to the enactment of the Tax Reform Act. In 1984, the Joint Economic Committee endorsed the Bradley-Kemp bill, which was the precursor to 

the Tax Reform Act of 1986. And I think the principles, as applied 

at that time, were, in fact, the correct principles. 

Speaking of preferences, I think the term that you used just now 

is an extremely important one to bear in mind. You spoke of narrow preferences. There are, I think, important preferences in the 

tax code now which are broad-based preferences: the earned income 

tax credit, the mortgage interest deduction, the municipal bond deduction. 

24 

I would, in going forward, be very careful about changes that 

would dramatically impact those functions. If you restricted the 

mortgage interest deduction dramatically, one should think about 

the consequences for housing prices, the consequences for the banking sector, of that step. 

A radical move would have potentially very serious consequences. 

So one should be very careful. 

Secondly, with respect—I think you were quite right in pointing 

to preserving progressivity, keeping the overall incidence of the tax 

by income class roughly where it was before and after 1986. It was 

the major feature of the Bradley-Kemp plan and of the final bill. 

That, I think, is a good principle and would weigh against the 

idea that one should always be going for a lower rate structure at 

the top. It seems to me there is room, if you, again, design the income levels at which higher rates apply effectively for a fairer sharing of the tax burden. 

Senator WYDEN. Let me see if I can get another question in. And 

I think your point is a valid one. Not all preferences are created 

equal, and it is a valid point. 

There is a lot of discussion now about, as the Congress looks at 

budget issues, that there be an enforcement mechanism put in 

place to make sure there is no backsliding and that you do not just 

go back on a spending spree after you enact major budget reform. 

But there is very little said about how to stop backsliding when 

you get to tax reform. And literally, I have been told, my staff has 

been told that, when the 1986 bill was passed, virtually as soon as 

the ink was dry, you went out and saw folks working to make 

changes. 

I think Chairman Baucus’s figure is jaw-dropping, something like 

15,000 changes, according to the chairman and his fine staff. So 

you get the thing done, you make this historic change—and the 

chairman is going to lead it. And what are you going to do to kind 

of come up with some way to prevent backsliding? This is hard. No 

current Congress can bind a future Congress. 

But if you look at the chairman’s figures on all these changes, 

at least we ought to be talking about it. You are a very distinguished group, and, if I have time, Mr. Chairman, they could just 

give an answer. I think your point is spot on. 

Gentlemen, how do we prevent backsliding so that you do not 

just end up with another Swiss cheese tax code a few years down 

the road? 

Dr. HUBBARD. Well, Senator, I think the greatest way to limit 

that—you will never avoid it, for all the reasons that you just correctly said—would be to have a very, very broad-based, modest-rate 

tax system. Where there are individual preferences involved and a 

lot of rate disparity involved, that is where games get played in the 

tax code, and that is where the pressure is. 

Something that has a limited progression in rates and a very, 

very broad base, I think is the issue. 

Mr. GRAETZ. Senator Wyden, the fat lady never sings in tax policy. I do not think that we are going to stop changing, but I do 

think that the point—I just want to emphasize a point that Professor Galbraith made earlier, which is that the big, large, difficultto-change tax expenditures are not the ones for narrow special inVerDate Nov 24 2008 21:20 Jul 09, 2012 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 R:\DOCS\74868.000 TIMD
25 

terests. They are the ones for the general public. The complexity 

of education incentives that we have that no one knows how to deal 

with in terms of planning, are an example, in addition to ones that 

have been suggested. 

I think the only way that you can have a tax system that does 

not have huge pressures for that, given the institutional arrangements in the Congress and in the president’s office, is that, if you 

remove a lot of people from the income tax—this is really the concern that led me ultimately—— 

When I first started writing about this particular proposal that 

I had been advancing, I was in your camp. I was going to broaden 

the tax base and lower rates in a repetition of the 1986 act. And 

having watched it unravel as it did so quickly and so dramatically 

with all of the additional tax expenditures, if you look at the 100 

or so that the joint committee last week said had been enacted 

since 1986—the ones that have real money in them are for general 

policies—many of them do not work. The energy tax credits, for example, are a perfect example of, I think, a very bizarre set of tax 

credits, but the goal was a broad public policy goal. 

And I think the only way you get there is to get a very, very low 

corporate rate, so that they are not worth any money to the corporations, and to get most Americans out of the income tax. 

The CHAIRMAN. Senator Thune? Thank you. 

Senator THUNE. Thank you, Mr. Chairman. 

Thank all of you for your expertise and for your willingness to 

share it with us. 

I want to ask you—maybe this question has been asked already, 

but it is just sort of a general question about what you believe are 

the most pro-growth tax reforms that we could put in place. 

If we want to see the economy take off again and grow—a more 

growth-oriented tax code—what are the elements or components of 

that, at least the top couple that you can think of? 

Dr. HUBBARD. I think, Senator Thune, I would begin with policies to encourage investment. The Nation has to pivot toward being 

less reliant simply on domestic consumption and more reliant on 

investment. 

The tax code is biased against many forms of investment. And 

so specifically where to start, if that is the problem you are going 

at, would be the corporate income tax and the financial biases that 

exist in the present tax code for debt financing, which tend to encourage a variety of unproductive investments. So I would definitely start there. 

To your question about what is the most pro-growth, I think a 

broad-based consumption-type tax, the type that has been talked 

about this morning, in many variants, would clearly be the end of 

the line answer. 

But if you were starting with something right now to focus on, 

I would say it would be the corporation income tax and investment 

incentives. 

Senator THUNE. Does anybody else want to add anything to that? 

Yes, sir? 

Dr. GALBRAITH. I would say, Senator, that the forces that drive 

investment are much broader than the tax code, and we face the 

problem now of the overhang of the financial crisis and the Great 

26 

Recession and the difficulty that companies have in seeing the 

basis for making profitable investments over the kind of time horizon that business needs to have. 

And the tax incentives are always going to be a very small contribution in relation to that. 

You could, I think, greatly improve job creation in the country 

by, as I said earlier, replacing the payroll tax. The payroll tax is 

a tax on jobs, and I think that Congress did something very sensible at the end of the last session in providing a 2-percent holiday 

on the payroll tax and holding the Social Security Trust Funds 

harmless. 

This is a clear-cut benefit for both employers and families in providing more jobs than they otherwise would. 

Mr. GRAETZ. Senator Thune, I think that the business tax, taxing 

business entities, is a bad way to get income economically. It is a 

bad way to try to get progressivity, because it can shift that tax 

to workers and to consumers. And, in the international economy, 

it is a bad way to attract capital to the United States. 

So a dramatically simplified and relatively low-rate tax on small 

business, coupled with a dramatically lower rate on large businesses, would be, I think, to the great advantage of the United 

States. 

The difficulty is that corporate taxes, in particular—in particular, large, multinational corporate taxes—are very popular politically and very easy for people to think are paid by somebody 

else, because they do not know who is paying them. So there is a 

political tension with the economic wisdom. 

Dr. AUERBACH. Senator, if I could just add one more point which 

I do not think has been mentioned. There has to be a lot of uncertainty now about what tax rates are going to be in the future because of our unsustainable budget situation, and I think that uncertainty contributes to the uncertainty that comes from other 

sources in discouraging businesses from investing. 

And having a more viable tax system that plays a role in a sustainable fiscal path, I think, can contribute a lot to economic 

growth and productivity. 

Senator THUNE. Thanks. I just want to ask you about the exclusion for employer-provided health insurance. You have talked 

about, and the focus of this hearing really was about distortions in 

the tax code. 

So let me ask you if you think that leads people to being tied to 

a certain employer? Does it lead to distortions in the labor market? 

And perhaps the final question, does it raise health care costs? 

Dr. AUERBACH. Well, Senator, I mentioned that specifically in my 

testimony, and I think it definitely does contribute to the purchasing of too much medical care by some. 

There is a very good justification for having some sort of benefit 

for the purchase of private health insurance, whether it be through 

an employer or directly, because individuals who do not have insurance will be cared for by the State or by charity care that comes 

at somebody else’s expense. 

But having an unlimited benefit or one that is very slightly limited, which will eventually come through last year’s health care legVerDate Nov 24 2008 21:20 Jul 09, 2012 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 R:\DOCS\74868.000 TIMD
27 

islation, goes way too far in terms of providing an incentive for 

health insurance. 

So it is not only expensive on its own, and an expenditure we 

cannot afford in our current budget situation, but it actually encourages the excessive purchase of health care. 

Dr. HUBBARD. I would definitely agree with that. Some recent 

work Dan Kessler at Stanford and I have done suggested you could 

have very large declines in U.S. health care costs as a level effect 

if you move toward capping the exclusion or, in the long run, eliminating it and replacing it with something else. 

As Alan said, so much of the benefits go to Cadillac plans and 

to very high-income earners. We can assist with basic plans for 

low-income people at a fraction of this cost, and actually help our 

health care problems, as well. 

It is a very, very big deal. 

Dr. GALBRAITH. I have always believed, Senator, that the rest of 

the industrial world has come to a better solution for financing 

health care than we have. They have systems which are generally 

very good, operate at a much lower share of GDP, and they do this 

by avoiding the element of private insurance in health care. 

Mr. GRAETZ. Senator, I just would like to agree. My statement 

describes the employer-provided health care as the Titanic of American domestic policy. I think it increases costs. It gobbles up the 

wages of individuals. It is inefficient. 

If we could have done one thing in a major health reform, if we 

could have weaned ourselves away from employer-provided and 

subsidized health care, I think we would have really had something 

over a long period of time that would have helped the American 

economy and the American fiscal situation. 

Senator THUNE. Thank you all. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

You were not on the committee at the time, but this committee, 

passing that health care reform, passed a cap on Cadillac plans. 

We felt it was just wrong and there should be a cap, there should 

be some limit. The current employer-provided exclusion should not 

be unlimited, and we were all agreed. The panelists agree on that 

one. But unfortunately, there is somebody else who did not agree, 

and we did not get that enacted. 

I have a couple more questions. One is, do you think that, to 

some degree, our current tax code tended to lead to the recession 

insofar as there is so much overleveraging either by the household 

sector or Wall Street and banks and so forth? Some of these banks, 

they were leveraged 34-to-1, as I recall, 35, maybe higher, maybe 

hedge funds. I do not know which. 

But to what degree might we have had this recession because of 

the ability to borrow so easily and deduct borrowing costs so easily 

in this country? Is that a factor or not? 

Dr. HUBBARD. I think it definitely is a factor. It is not the only 

one, of course, Mr. Chairman. But I think it is a factor because the 

tax incentives for leverage create what you would call an externality in the sense that I, of course, as the CEO of a company, 

think about the effect of any tax policy that I take advantage of on 

my own company, but I do not take account of the effects of my 

actions on all the rest of you. That is classic externality. 

28 

And there is very significant over-leverage. In the past 25 years, 

many business people thought we were in a great moderation, 

where big shocks just were not very likely anymore, and they tolerated very high levels of debt, and the tax code made it very profitable for them to do so. 

So, while it is not the only factor, it is certainly a significant one. 

And encouraging more reliance on equity financing is definitely 

something that you should consider quite strongly. 

The CHAIRMAN. Anybody else? Dr. Galbraith? 

Dr. GALBRAITH. I think the 1986 act helped to set the stage for 

the run-up in household debt burdens collateralized by housing. 

But I think the collapse that occurred over the course of the last 

decade was much more due to the de-supervision in the financial 

sector and the takeover of mortgage originations by entities that 

were essentially indifferent to whether those mortgages would ever 

be paid, and to borrowers who could not qualify and to houses 

whose values were systematically inflated by appraisers who were 

pressured to do so, and with the resulting instruments being sold 

off to the world financial market. 

If that de-supervision and effective undermining of the integrity 

of the housing finance system had not occurred, then I think the 

collapse would have been—it might have been avoided, but in any 

event, would have been far less serious than it has been. 

The CHAIRMAN. Thank you. Anyone else? 

Next question. I tend to agree with you, Dr. Galbraith, that most 

investment decisions and growth by American companies are due 

probably to the tax code, but there are a lot of other factors that 

dictate whether or not a company is going to invest and where, and 

so on and so forth. There are just a lot of factors. But the code really is important. 

But since we are now talking about the code, your thoughts 

about international competitiveness. We want our kids and grandkids to live in a system where we are prospering, we are growing, 

we have jobs, and incomes are higher than they are today. I cherish the thought. 

What do we do? How do we make our system be more forwardlooking so that we can deal with globalization and build products 

here? 

It is not totally relevant, but I am reminded of an article I read 

not too long ago by a former Intel CEO, Andy Grove, who was saying that, in Silicon Valley, there is a trend which he finds disquieting; namely, that—and some U.S. commentators are part of 

this problem, and think that the answer is in education and 

startups. Just let 1,000 startups boom, and we will develop all 

these new technologies in America. 

His point is that it is short-sighted, because the real question is, 

what happens after the so-called Valley of Death and so forth? 

Doing a start-up if it is a good idea, whether it is computer chips 

or whether it is Microsoft or whatever it is—the real problem is the 

next one, and that is sort of financing and staying power so the 

manufacturing is in the U.S., not overseas. Because a lot of venture 

capitalists today think, ‘‘Oh, gee, let us put a lot of this money into 

a start-up in’’—wherever it is, Silicon Valley, or whatnot—‘‘then we 

will develop it,’’ but they did not know the manufacturing would be 

29 

overseas. It would be in China and Taiwan. In fact, he mentioned 

the biggest company that makes something, I forgot what it was, 

is a Taiwanese company, never heard of it before. 

But the point is, we need incentives so that manufacturing is in 

this country, because, when manufacturing is in this country, there 

are a lot of trade-offs and symbiosis, and people just work together, 

develop new ideas. 

So it is probably the jobs, which is maybe the most important, 

but second, it is all the cross-cultural ideas that develop if manufacturing is here. 

You mentioned batteries, for example. We just gave up on batteries. We are not going to get battery technology back. The manufacturing is going to be overseas. 

That happened with solar panels. We developed solar panels 

here, but it is all overseas now. And he had some—as I recall, in 

the article, he wrote some fairly significant suggestions, even tax 

products that come into the United States and use that money to 

go back and finance job growth and manufacturing growth in the 

U.S., even if it is not legal. You have to find something. 

So my main question is, what do we do to stimulate job growth 

in this country with respect to international challenges so that 

there is not all this big incentive to develop new, best stuff, whether it is batteries or whatnot, that then is manufactured overseas? 

What do we do? 

Dr. AUERBACH. Senator, I am sympathetic to the view you have 

just expressed. I think we have to recognize that manufacturing 

employment has been declining in the United States for decades, 

and quite steadily. Not so much manufacturing output, because it 

has also become a more capital-intensive and efficient sector. 

I think the question is not any specific manufacturing activity 

and where it is located, but the ones that should be in the U.S.— 

and some of the things we have talked about in terms of reforming 

the corporate tax and encouraging more corporate activity in the 

United States, in conjunction with other policies that are not taxbased, such as making sure our educational system provides the 

workers necessary for more modern technologies, will keep important manufacturing and other production activities in the United 

States. 

There are going to be certain manufacturing activities for which 

it is just too compelling, given the cost differences, to locate abroad. 

That need not worry us if we have a tax system that is conducive 

to the location of domestic production in the U.S. and an education 

system that provides the workforce necessary for modern technologies as they develop. 

Dr. HUBBARD. I would say, Senator, that you are absolutely right 

that this is an issue. Corporate tax policy is a factor. I do not think 

it is probably the only or even the largest factor, but it is a significant one. 

To that list, I would add litigation and regulation as being areas 

that have hampered the domestic corporate sector versus its competition. 

I have a great deal of sympathy for what Mr. Grove says, in the 

sense that you lose something when you lose a shop floor. And 

while I agree with Alan that we do not want to keep all manufacVerDate Nov 24 2008 21:20 Jul 09, 2012 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 R:\DOCS\74868.000 TIMD
30 

turing in the United States, that is not what I am saying. In highvalued sectors, you lose clinical innovation when you are not doing 

it, when you are only investing in it somewhere else, and I do think 

that is partly our tax code, but these other things too. 

One other very large non-tax factor, though, I would mention is 

openness. I work in a university. My best non-American students 

no longer feel like they can work in the United States, and that is 

going to be a problem for us going forward. 

The CHAIRMAN. You are talking about the visa problem. 

Dr. HUBBARD. The immigration and visa problems to work for a 

company here. 

The CHAIRMAN. I hear this constantly. I hear that from so many 

people. 

Dr. GALBRAITH. Very much on similar lines, I think it has always 

been our place as an economy in the world to be at the cutting 

edge, to innovate, to use our imaginations, and to stay ahead by 

doing things that other countries were not yet capable of doing. 

A great deal of that happens because of the strength of institutions that are physically located here. The public sector, the Defense Department has played an important role, universities and 

other nonprofit institutions have played an extremely important 

role. 

One thing that we might focus on as the challenges become more 

diverse is to take the institutional models that we know have 

worked in the past and apply them to these areas. 

I think, also, that we should bear in mind that the physical conditions of the planet are changing, and energy, in particular, represents an extremely important challenge to us as an energyimporting country. It is going to affect the cost of everything that 

we do, and dealing with that as a strategic matter is both necessary for the competitiveness of our economy and to provide a stable framework for the private sector to make sensible investment 

decisions going forward. 

The CHAIRMAN. As a Texan, you will know of Symantec. 

Dr. GALBRAITH. Symantec? I was going to mention Symantec and 

MCC are important models of cooperative activity that were rooted 

in the U.S. 

The CHAIRMAN. That is my impression. 

Dr. GALBRAITH. Rooted in the U.S. 

The CHAIRMAN. Right. Thank you. 

Senator Cardin? I am sorry. My time is way, way over. 

Senator CARDIN. Thank you very much, Mr. Chairman. And let 

me thank you again for conducting these hearings. I find them very 

informative. 

I am going to follow up on a question that was asked or a comment that was made by Senator Carper as it relates to consumption taxes. But I want to put it into context first to this discussion 

about international competitiveness. 

If you are a manufacturing company and you deal in export, it 

is easier from the tax code to be in a country that relies on consumption taxes, which you know you can take off and have a border adjustment when your product enters the international marketplace, than in the United States, where we rely on income taxes 

31 

and the company cannot take that off in the international marketplace. 

But let me just give you another concern about the current tax 

code, and the chairman really got me interested in this when you 

mentioned, Mr. Chairman, that since 1986, we have provided 140- 

some provisions temporarily to the tax code that we have to extend 

every year or two. 

And I am thinking that, let us say we really reform the income 

tax code, and we do it this year. It seems to me, next year, we will 

start down that line again, because it is easier at times to get 

something done on the tax side than on the spending side. 

And I am concerned that, even if we clean up the tax code dramatically, we will be back in the same type of situation a few years 

down the road, because, in 1986, we supposedly cleaned up the tax 

code, and we saw what happened. 

So there are many reasons to consider a consumption tax, not as 

an exclusive tax, but as part of our tax code, to allow us to encourage more savings, to raise the same amount of revenue we would 

raise under the income tax that would take out the dollar number 

here. And, also, we can put provisions in, although it will make it 

a little bit less efficient, we can put provisions in to deal with progressivity, because I am committed to doing everything I can at the 

end of the day to make sure our tax code is more progressive than 

our current tax code. 

So, putting those issues as given, I would like to get your view 

as to whether we should be seriously looking at the consumption 

tax as part of the equation of tax reform in Congress. 

Now, let me just qualify that. I have one more thing. I asked the 

same question a few minutes ago to Erskine Bowles and to Senator 

Simpson, and I asked, ‘‘Why didn’t you consider it?’’ And their answer was very simple: ‘‘Congress took up a resolution in the Senate 

and passed it overwhelmingly against it.’’ I said, ‘‘Well, suppose I 

would have brought up a resolution that you can’t take up Social 

Security. I would have gotten 85 votes on the floor of the Senate 

on that resolution.’’ So I am not so sure that is a good enough answer. 

In fact, I got very complimentary responses as to the policy merits of that type of proposal. 

But while we have you all here, we would welcome your further 

comment as to whether it would make sense from a policy and efficiency point of view to consider a consumption tax, under the conditions that I laid out. 

Dr. AUERBACH. Senator, first, I do not want to suggest that you 

would be devious, but there are many ways of accomplishing a 

move toward consumption taxation, and they do not all have to be 

called consumption taxation. 

I mention in my testimony that a way of reforming the corporate 

tax would be to reduce the incentive to borrow by eliminating or 

cutting back interest deductions and, at the same time, preserving 

the incentive to invest by moving in the direction of immediate 

write-off of investment. 

Now, we could call that a reformed corporate tax or a corporate 

cash flow tax. In fact, it also would represent a logical component 

of a consumption tax. It is not the value-added tax that Professor 

32 

Graetz would like to see, which is recognized to be a consumption 

tax, but consumption tax principles apply to any tax that taxes consumption and does not tax income, and it would have the same 

characteristics. 

And I think that is important because, rather than get hung up 

on a particular tax and whether that tax is a consumption tax and 

whether a consumption tax has all the things we associate with it, 

some good and some bad, think about structural reforms that move 

in the direction that you want to go, and let others give a name 

to it. 

Dr. HUBBARD. I would agree with that, Senator Cardin. I think 

that if you move toward cash flow taxes and wage taxes, once you 

add them together, they are the same thing as a VAT. You are just 

breaking them up into pieces. You can have simpler, more flexible 

reform. It is easier to implement and, arguably, will not get you 

into the fights of special rating for different goods and services. 

And I would note that I actually questioned Erskine and Senator 

Simpson yesterday at the Economic Club of New York. I asked 

them the same question. I am delighted to report they gave the 

same answer. 

Dr. GALBRAITH. Senator, I have always been skeptical that we 

would gain anything serious by way of economic efficiency by moving to consumption taxes at the Federal level. 

I think we would lose a great deal in terms of fairness. I have 

to confess, I am somewhat intrigued by Professor Graetz’s proposal 

along these lines, which takes care of some of my concerns. But my 

general view is that the—it is not the worst thing in the world that 

the Senate Committee on Finance has to meet every year and deal 

with these issues. 

Problems change, and the tax code is one way of dealing with the 

challenges that you face from time to time. And I, as a general 

rule, would recommend proceeding very cautiously on large 

changes in the structure of taxation. 

Mr. GRAETZ. Senator Cardin, my economists, particularly on my 

far right, just coincidentally, are behaving as politicians and not as 

economists. That is, they are telling you that you could politically 

enact a strange consumption tax that does not look like one anywhere else in the world that they are willing to call corporate taxes 

or cash flow taxes or X taxes or growth and investment taxes or 

flat taxes. The names are endless. 

The point is that those taxes do not fit within our international 

trade or tax arrangements, and it is going to be difficult to come 

up with a system in the U.S. Congress and in the White House 

that taxes consumption, that allows us to make border adjustments 

and tax imports in the United States and not tax exports as they 

are exported under existing international trade arrangements without getting into a 25-year fight with the WTO, with trade responses and so forth or, worse, coming up with a consumption tax 

which maintains an origin-based tax, like our income tax. 

Professor Auerbach has produced a very creative corporate tax 

which he describes as an effort to come up with a border-adjustable 

tax by taxing only domestic items and allowing deductions only for 

domestic items. It is wonderfully creative. It obviously does not tax 

exports. It obviously taxes imports. It obviously allows a deduction 

33 

for wages and no deduction for interest, which violates the WTO 

existing agreements, which violates all of our income tax treaties. 

The President’s commission wanted to do the same thing. They 

called it a growth and investment tax. They studied it. They said 

it had to be border-adjustable. And they acknowledged that they 

were going to have to renegotiate all of these treaties in order to 

get there. 

So, in that sense, I think that that ground has been plowed. It 

has great political advantages to impose a consumption tax in a 

way that the American people find invisible. On the other hand, it 

is not a service to the American people not to let them know what 

is being taxed. The reason our corporate tax is as bad as it is today 

is the American people think somebody else is paying it. And they 

do not think they are paying it, and, therefore, a 35-percent rate 

or an excessive rate on investment in the United States by domestic and foreign taxpayers is fine, because it looks like it is a tax 

on somebody else. 

It is the classic example of Senator Long’s ‘‘Don’t tax you, don’t 

tax me, tax the man behind the tree;’’ and Dan Rostenkowski 

added the last verse, which said, ‘‘tax the corporations across the 

sea.’’ 

Well, the problem is that we have a system and we are creating 

incentives—and I think this is very important—we are creating incentives for the ownership of our intellectual property and the 

headquarters of our companies to be located somewhere else. 

To transfer the patents, to transfer know-how, to transfer technology, to transfer pricing is the everyday business of the tax bar 

and the corporate community. And you locate borrowing here and 

income and assets abroad, and, if the intellectual property is owned 

in Europe, then it is much easier to choose to build and invest in 

Europe. 

I think that the chairman’s earlier comments were exactly right, 

that there are many manufacturing and other activities that must 

be performed abroad. There are certain things you are not going to 

make here and ship to China. Diapers is always my favorite example from my friends at Proctor & Gamble. 

But there are things that we could be doing here, but our tax 

system is organized in a way that creates advantages for borrowing 

here and disadvantages for everything else. 

Senator CARDIN. Thank you. Thank you, Mr. Chairman. 

The CHAIRMAN. Thanks. 

I just have one question about savings, personal savings rates 

and all the provisions in the code which are designed to encourage 

personal savings, individual savings. We have 401(k)s, IRAs, and 

you name it, there is something there. 

Your thoughts about all of them. Do they actually increase personal savings? Do the benefits of saving go to those who most need 

to save, or are they preferences that simply steer higher-income 

savers from one form of savings to another? 

Some think there are just so many that it just causes confusion. 

I saw this very interesting article some time ago where psychologists point out that we have lots of choices. When you get to the 

point where you have too many choices, then nothing happens. PeoVerDate Nov 24 2008 21:20 Jul 09, 2012 Jkt 000000 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 R:\DOCS\74868.000 TIMD
34 

ple just get high-centered and stymied and they cannot go make a 

choice, because there are too many choices. 

Your thoughts about that? Incentives to save currently in the 

code and how you might change, modify, consolidate. What would 

you do about them? 

Dr. HUBBARD. A couple of thoughts. First, the psychologist is my 

colleague, Sheena Iyengar, whose book, ‘‘The Art of Choosing’’ I recommend to you. 

But your question could be broken, I think, into two parts, the 

adequacy of saving for many people and then overall national savings. 

I think savings incentives do have very positive long-term effects, 

but they are ridiculously complicated. We could do much better. 

Simple examples are in the President’s commission report, but 

there have been lots of reform proposals over the years for simplification, and I would urge you to consider that. 

But if the question is national saving, which is really important 

for the country, the best thing that the United States Senate and 

the U.S. Congress could do is to raise public sector saving, which 

would mean funding entitlement programs and bringing deficits 

under control. 

The CHAIRMAN. Other thoughts? 

Mr. GRAETZ. I would agree that we do not need as many as we 

have. And having spent a lot of time with my tax advisor and with 

a journalist at The Wall Street Journal going over the advantages 

and disadvantages of shifting from a regular IRA to a Roth IRA 

and how much and so forth, I can tell you, even the sophisticated 

who are prepared to try to choose cannot figure out what to do. 

So I think there is an awful lot of simplification that could be 

done. But I do think it is important that the savings incentives 

that we have are predominantly targeted to retirement savings and 

to education savings. And I think these are places where the savings is long-term. And people really are myopic; they really do underestimate their needs in retirement. 

And to the extent that there are going to be pressures, particularly for moderate- and higher-income folks, due to reductions in 

the Medicare provision for those people or more expenditures or 

more payments on their own for Medicare or similar things in the 

context of Social Security, in order to get those programs in balance, I think the tax provisions for retirement savings are very important. 

Now, unfortunately, they are not distributed necessarily in a fair 

way, because they are only used by the top half of the population, 

but they are broad-based. And the elimination of defined benefit 

plans by the employers of the country, the private employers of the 

country and, soon, the public employers of the country, puts more 

and more pressure on the need for individuals to have a pot of 

money that they do not have easy access to. 

So I would be reluctant, in fact, to say, ‘‘Well, we want to take 

this pot of savings and just have one savings incentive that you 

could use for anything you wanted.’’ I think there is a lot to be said 

for simplifying, consolidating, making them more broadly based, 

and more fair, but maintaining their emphasis on retirement needs 

after you are no longer able to go back into the workforce, and on 

35 

providing for the costs of education, which are very, very huge for 

most American families. 

Dr. GALBRAITH. Senator, very few—a great many working Americans get to the end of their working careers with no financial savings and go through retirement almost entirely reliant on Social 

Security. I think the number is something like 40 percent have no 

other significant source of income, and that tells you that these incentives for savings have had essentially no effect on the financial 

position of lower-income working Americans. 

A significant savings incentive that worked for a long time was 

in housing, because, if you put your funds into a house and the 

house price appreciated, then you came out at the end of the day 

with an asset that you could sell, and you ended up with some financial resources in retirement. 

That has been severely, obviously, impacted by the collapse of 

housing prices. The savings incentives have had no material effect 

on the private savings rate in this country, which has not, in fact, 

changed as we have enacted additional savings incentives. 

And just a final point on Dr. Hubbard’s comment. I think the accounting actually is the opposite of what he says, that the very 

sharp rise in savings that occurred immediately after the crisis was 

the accounting counterpart of the very big increase in public deficits. 

As the government takes in less in taxes and puts out more in 

spending, the private sector has more in income and less in obligations, and the cash gets built up in private accounts, and you can 

see that is very clear in the national income account data over the 

last few years. 

The CHAIRMAN. Have other companies in other OECD countries 

shifted away from defined benefit to defined contribution plans? 

Dr. GALBRAITH. Not to nearly the extent that we have. 

The CHAIRMAN. To what degree is the shift the cause of the problem in our country for employees who just will not have the benefits they otherwise might have? 

Dr. GALBRAITH. I think it has created huge instability, Senator, 

because those who retired when they could cash out effectively are 

okay. Those who retired a few weeks later after the markets 

crashed, with exactly the same earnings and savings activity over 

the course of their careers, ended up much less well-off, through 

events that are entirely beyond their control. 

Mr. GRAETZ. It has not only shifted risks to individual families 

away from large groups of employees, but it also creates difficulties 

during retirement, because, when you get a lump sum in retirement, the individual annuity markets do not work well. They do 

not protect you against inflation. There is a high risk of outliving 

your savings. 

And so they create risks for people in their retirement, as well 

as in building up to retirement. But there is no, I think, in the 

United States, going back to defined benefit plans in the private 

sector, and I think all of the movement in the public sector is in 

the direction of defined contribution plans. 

While I agree with Professor Galbraith that these have had no 

effect on the bottom 40 percent of the income distribution, they do 

36 

provide an important cushion and an important supplement to Social Security for the other 60 percent. 

The CHAIRMAN. My time has expired here. 

Senator Cardin, other questions? 

Senator CARDIN. Well, Mr. Chairman I just want to follow up 

very briefly on the point that you are raising here. 

To Professor Galbraith, I think your numbers indicate to me that 

we want to not only continue our current incentives for savings, 

but we want to make them stronger. We certainly do not want to 

make them weaker. 

And to me, the fact that that number of 40 percent is not growing—and I believe it is not growing, if I look to the most recent 

numbers, knowing that we have reduced our defined benefit plans, 

which are the strongest help for the low-wage workers that have 

now been diminished dramatically in this country—tells me that 

we have done better than we would otherwise have done but for 

the efforts we have made. 

And, if we did not have these supplements for retirement security and if we did not have the savings for college, the pressures 

on governmental programs would even be much greater than they 

are today. 

So I think that we have been successful, but not successful 

enough, I guess is my point. We tried with the saver’s credit to be 

able to really target to low-wage workers. We have the safe harbors 

that really help for low-wage workers. 

And when we look at a successful model, we do not have to look 

further than the Federal Government’s Thrift Savings Plan, because I can tell you by the participation of the Federal workforce, 

it has worked. It has caused a lot of low-wage workers to say, 

‘‘Look, there is money on the table. I am not going to turn it away.’’ 

And that is the psychology we have to encourage, Mr. Chairman, 

education and financial literacy education, because we find that the 

tax incentives alone will not motivate low-wage workers. 

But if there is money on the table, that is, their employer is putting money on the table or the government is giving a credit, then 

it is much more likely that the lower-wage worker will participate 

in a retirement savings effort. 

So I think your questions are right on. I think we need to take 

a look at it. It is way too complicated, the current number of savings incentives we have. And for a college professor to have to figure out whether they should go into a Roth IRA or not, then there 

is something wrong with the system on conversion. 

So I agree with the point the chairman has raised, and I really 

look forward to trying to figure out how we can increase our national savings, including reducing the government debt. 

Thank you. 

The CHAIRMAN. Thank you. 

Senator Menendez, welcome. Good seeing you. 

Senator MENENDEZ. Thank you, Mr. Chairman. I was here earlier and had to have another hearing. So I appreciate that you are 

still here in session. 

Thank you all for your testimony. I got to read it. So I appreciate 

your willingness to come forth. 

37 

I have one or two different lines of questioning. First, I look at 

the supporters of the 2001 and 2003 tax cuts who generally argue 

that the reason the cuts were weighted towards those with the 

highest incomes was to incentivize capital formation and investment. 

And, Dr. Hubbard, I noticed in your testimony you reference a 

2003 study showing that, hypothetically, had the 2001 and 2003 

tax cuts been enacted from 1987 to 1996, middle-class families 

would have benefitted from tax cut rates on affluent taxpayers because there would have been, in your view, substantial upward 

movement in tax brackets. 

And so, while I look at that in the theoretical world, I am wondering, in the real world experience, it seems to have played out 

quite differently over the last decade. 

According to the Census, real median household incomes are 

4 percent lower today than they were when the tax cuts passed in 

2001; 25 percent more Americans live in poverty today than in 

2001. 

Even during the height of the housing boom in 2006, 9 million 

more Americans were living in poverty than before the tax cuts 

were passed. 

So my question is, if a lower marginal tax income rate and lower 

tax rate on savings and investment really do lead to shared prosperity across the board, why has middle-class income been so stagnant, and why has poverty increased after we passed the 2001 and 

2003 tax cuts? 

Why is the record of a middle-class experience under these tax 

cuts so different than the theoretical studies done which show incomes rising and poverty falling? 

Dr. HUBBARD. You ask a very important question Senator. To 

take it in two parts, first, to your question about stagnation. There 

is a very important, if subtle, distinction between wages and compensation. 

Compensation in the United States has more or less kept pace 

with productivity, exactly like theory tells us. Wages have not. 

Now, is that a slight of hand? No. It is something called benefits, 

the difference between compensation and wages, and the very rapid 

growth in health insurance costs has indeed led, for many Americans, to see their wage income stagnate at time when compensation 

is rising. 

As to your questions about the tax cuts themselves, it is very 

hard to estimate effects of tax policy because you do not know what 

the counterfactual is. You do not know what would have happened. 

The argument for taxes and growth is through investment and 

productivity growth. The calculations that I referenced were really 

about the rate cuts. 

As you know, the 2001 tax cuts had a number of provisions that 

are very costly, and I would argue have very little to do with economic growth. But the bang for the buck of the real economic 

growth provisions, I think, is quite significant. 

As you know, a lot of things have happened in the world between 

2001 and the present. It is just very hard to do the kind of calculation that you are doing. 

38 

Dr. AUERBACH. I just wanted to say, Senator, that there are very 

strong forces at work leading to more unequal income distribution 

in the United States, as has already been pointed out. 

We have observed increasing returns to investment in education, 

higher-skilled workers benefitting, and others in the population 

benefitting much less. I do not think the specific changes in the tax 

code played a significant role in that. This has been going on for 

a few decades now. 

It is a very disturbing trend, and it is something that tax policy 

should focus on. But while tax policy should focus on it, I think 

that is different from saying that tax policy is responsible for it. 

Dr. GALBRAITH. I would just say, Senator, that I think what 

clearly happened in the last decade is that the broad American 

population funded itself and supported economic growth by taking 

on a completely unsustainable burden of debt, mainly against 

houses, and it was that process which had to do with the fact that 

incomes were not rising rapidly enough at the bottom and in the 

middle, and that credit was made too easily available and on terms 

that were highly destructive, that were essentially terms that were 

not going to be repaid in the way that ordinary credit relationships 

historically have been expected to function. And this is the system 

which collapsed in 2007 and 2008. 

And I do not think that we are in a recovery from that collapse. 

I do not think we have dealt with the underlying problem. We are 

still facing very highly indebted households, with housing prices 

that are continuing to fall, and this problem, this adjustment, I 

think—hangover, in fact, from the consequence of the policies that 

you have described and as I am just describing them—is going to 

continue for a long time. 

Senator MENENDEZ. Mr. Chairman, may I just pursue this a little bit further? 

So I appreciate your answers, and I have a sense of agreement 

with various items that you presented. My concern is the view 

within the context of tax policy that simply reducing the top marginal rates is going to have a ripple effect across the spectrum, particularly to middle-class and lower-income individuals, and I am 

not quite sure that that proposition has been made in a way that, 

at least for me, makes the case. 

So that is why I raise the question, because, as we are talking 

about what tax policy should be and what reform should be, I am 

concerned that that proposition, in and of itself, is one that does 

not necessarily produce the result that people suggest it does. 

Let me ask one other question, if I may, with the chairman’s indulgence. 

Dr. Galbraith, I have been concerned about our subsidies for oil, 

for example. In your testimony you point out that the House fails 

to address some of the most egregious subsidies the Federal Government bestows, such as to oil companies. And it seems odd to me, 

at a time of record oil profits, that Federal taxpayers are providing 

the industry with subsidies totaling over $3 billion a year. Former 

President Bush, former Shell CEO John Hofmeister, both agree 

that oil subsidies are simply not needed when oil prices are this 

high. 

39 

Are oil subsidies adding anything to our economic growth, or is 

it simply the case that, when oil prices are this high, there is plenty of incentive for them without the subsidies? 

Dr. GALBRAITH. I think that there is adequate economic incentive 

in the energy sector now, but I think the energy sector would benefit enormously from strategic guidance that it could rely on so that 

we had a strategy to deal with our dependence on oil, to deal with 

the alternatives that may or may not be viable and available, and 

to deal with the problem that the energy cost squeeze is not going 

to go away. 

Senator MENENDEZ. And a strategy would be, what is it going to 

be that our energy portfolio looks like, and what are we willing to 

do to incentivize that portfolio to accomplish—— 

Dr. GALBRAITH. Absolutely. Absolutely. And over the time horizon that businesses need in order to make investments that will be 

effective. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

The CHAIRMAN. As we flatten the rate and broaden the base. 

Thank you all very much. I appreciate all four of you very, very 

much for your testimony. Thank you very much. 

[Whereupon, at 12:16 p.m., the hearing was concluded.] 

(41) 

A P P E N D I X 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD


74868001.eps
42 


74868.002
43 


74868.003
44 


74868.004
45 


74868.005
46 


74868.006
47 


74868.007
48 


74868.008
49 


74868.009
50 


74868.010
51 


74868.011
52 


74868.012
53 


74868.013
54 


74868.014
55 


74868.015
56 


74868.016
57 


74868.017
58 


74868.018
59 


74868.019
60 


74868.020
61 


74868.021
62 


74868.022
63 


74868.023
64 


74868.024
65 


74868.025
66 


74868.026
67 


74868.027
68 


74868.028
69 


74868.029
70 


74868.030
71 


74868.031
72 


74868.032
73 


74868.033
74 


74868.034
75 


74868.035
76 


74868.036
77 


74868.037
78 


74868.038
79 


74868.039
80 


74868.040
81 


74868.041
82 


74868.042
83 


74868.043
84 


74868.044
85 


74868.045
86 


74868.046
87 


74868.047
88 


74868.048
89 


74868.049
90 


74868.050
91 


74868.051
92 


74868.052
93 


74868.053
94 


74868.054
95 


74868.055
96 


74868.056
97 


74868.057
98 


74868.058
99 


74868.059
100 


74868.060
101 


74868.061
102 


74868.062
103 


74868.063
104 


74868.064
105 


74868.065
106 


74868.066
107 

Æ 


74868067.eps