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75–674—PDF 2011

S. HRG. 112–546 

TAX REFORM OPTIONS: MARGINAL RATES 

ON HIGH-INCOME TAXPAYERS, 

CAPITAL GAINS, AND DIVIDENDS 

HEARING 

BEFORE THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

SEPTEMBER 14, 2011 

( 

Printed for the use of the Committee on Finance 

COMMITTEE ON FINANCE 

MAX BAUCUS, Montana, Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

KENT CONRAD, North Dakota 

JEFF BINGAMAN, New Mexico 

JOHN F. KERRY, Massachusetts 

RON WYDEN, Oregon 

CHARLES E. SCHUMER, New York 

DEBBIE STABENOW, Michigan 

MARIA CANTWELL, Washington 

BILL NELSON, Florida 

ROBERT MENENDEZ, New Jersey 

THOMAS R. CARPER, Delaware 

BENJAMIN L. CARDIN, Maryland 

ORRIN G. HATCH, Utah 

CHUCK GRASSLEY, Iowa 

OLYMPIA J. SNOWE, Maine 

JON KYL, Arizona 

MIKE CRAPO, Idaho 

PAT ROBERTS, Kansas 

MICHAEL B. ENZI, Wyoming 

JOHN CORNYN, Texas 

TOM COBURN, Oklahoma 

JOHN THUNE, South Dakota 

RICHARD BURR, North Carolina 

RUSSELL SULLIVAN, Staff Director 

CHRIS CAMPBELL, Republican Staff Director 

(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 

Mehiel, Dennis, chairman of the board, U.S. Corrugated, Inc., New York, 

NY ......................................................................................................................... 6 

Entin, Stephen J., president and executive director, Institute for Research 

on the Economics of Taxation, Washington, DC ................................................ 9 

Rys, Bill, tax counsel, National Federation of Independent Business, Washington, DC ............................................................................................................. 11 

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

Maxwell School, Syracuse University, Syracuse, NY ........................................ 13 

ALPHABETICAL LISTING AND APPENDIX MATERIAL 

Baucus, Hon. Max: 

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

Prepared statement .......................................................................................... 37 

Burman, Dr. Leonard E.: 

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

Prepared statement .......................................................................................... 39 

Responses to questions from committee members ......................................... 57 

Entin, Stephen J.: 

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

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

Responses to questions from committee members ......................................... 81 

Hatch, Hon. Orrin G.: 

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

Prepared statement .......................................................................................... 88 

Mehiel, Dennis: 

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

Prepared statement .......................................................................................... 92 

Rys, Bill: 

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

Prepared statement .......................................................................................... 99 

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

COMMUNICATIONS

Alliance for Savings and Investment ..................................................................... 111 

American Farm Bureau Federation ....................................................................... 115 

Center for Fiscal Equity .......................................................................................... 118 

National Small Business Association ..................................................................... 122 

U.S. Chamber of Commerce .................................................................................... 129 

(III) 

(1) 

TAX REFORM OPTIONS: MARGINAL RATES 

ON HIGH-INCOME TAXPAYERS, 

CAPITAL GAINS, AND DIVIDENDS 

WEDNESDAY, SEPTEMBER 14, 2011 

U.S. SENATE, 

COMMITTEE ON FINANCE, 

Washington, DC. 

The hearing was convened, pursuant to notice, at 10:08 a.m., in 

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

(chairman of the committee) presiding. 

Present: Senators Bingaman, Wyden, Nelson, Menendez, Cardin, 

Hatch, Grassley, Snowe, and Kyl. 

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

Batchelder, Chief Tax Counsel; and Tiffany Smith, Tax Counsel. 

Republican Staff: Chris Campbell, Staff Director; Jim Lyons, Tax 

Counsel; Maureen McLaughlin, Detailee; and Jeff Wrase, Chief 

Economist. 

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

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE 

The CHAIRMAN. The committee will come to order. 

Abraham Lincoln once said, ‘‘That some achieve great success is 

proof to all that others can achieve it as well.’’ 

Our country is built on the principle that everyone can succeed 

by working hard and playing by the rules. It is the American 

dream. But lately, more and more folks are finding that, as hard 

as they try, their success is further from their grasp. In fact, since 

2007, Americans’ real median household income has fallen by 6.4 

percent. More than that, median household incomes in America fell 

last year to levels last seen in 1997. I think the New York Times 

today phrased it as ‘‘the lost decade.’’ 

I read a statistic that about 21 percent of American children now 

live in poverty. This is the United States of America, folks. 

We are facing a struggling economy and record deficits. We need 

to do something to tackle these problems, but to do so in a balanced way that creates jobs in the process. But in tough economic 

times like these, taking on these problems involves difficult choices, 

and these choices are clear. 

Putting the full load of deficit reduction on seniors, on veterans, 

and middle-class families, for example, when the wealthiest can afford to pay a little more, simply does not make sense. 

With limited resources, however, it does make sense to allow 

these lower tax rates for the wealthiest in our society to expire 

2 

rather than making major cuts to Social Security or Medicare. And 

it sure makes sense to let those rates expire rather than increase 

taxes on lower- and middle-income families. 

Over the past 3 decades, the incomes of the richest 1 percent of 

Americans have risen much more rapidly than the other 99 percent 

of Americans, and that gap continues to widen both before and 

after taxes. During that time period, the after-tax incomes of the 

top fifth of taxpayers grew more than 8 times faster than those in 

the bottom one-fifth. 

I introduced legislation last year to allow the current top two rates to expire for those with incomes above $200,000 and married 

couples with incomes above $250,000. This proposal would mean 

that the top income tax rates of 33 and 35 percent would return 

to 36 and 39.6 percent. 

Historically, the top tax rates have been much higher than the 

current rates. In fact, over the last century, the average top rate 

has been 59.2 percent. That is the average, 59.2 percent. 

The lower tax rate for capital gains and dividends further complicates the picture. A Washington Post article this week noted that 

many of the richest Americans pay taxes at a lower rate than 

middle-class families do, because much of their income comes from 

capital gains and dividends. This partially explains why the gap 

between the wealthy and the rest of the country continues to 

widen. 

Capital gains and dividends are generally taxed at a rate 20 percentage points below the top income tax rate that high-income 

workers pay on their wages. And earnings from capital gains and 

dividends constitute a larger share of income for high-income taxpayers than for most Americans. In fact, capital gains make up 57 

percent of the adjusted gross income for the richest 400 taxpayers. 

Low capital gains and dividends rates helped these extremely wealthy taxpayers, who had an average income of $345 million in 

2007. That is their average income. They pay an average tax rate 

of only 17 percent, a rate far lower than many middle-class families 

pay. 

There are important reasons why it might make sense to tax capital gains at lower rates than ordinary income, for example, if the 

gain is on stock in a company that has already paid corporate income tax. But is it fair for someone with $345 million in yearly income to pay income tax at a rate lower than many middle-class 

families? 

So, in these tough economic times, we must make these choices. 

Will we be forced to make real changes to programs that seniors 

depend on, like Social Security and Medicare? Will we be forced to 

cut programs or raise taxes on veterans, servicemen, women, 

middle-class families, or should we ask some of the wealthiest in 

our society to contribute? 

We need to make the right choices to get America on sound economic footing, and the choice here seems clear. We began this summer by making real progress in cutting spending by $900 billion 

over 10 years. But more work remains to be done to get our economy back on track. 

We need to make choices that will create job growth and expand 

our economy without throwing millions of Americans into further 

3 

* For more information, see also, ‘‘Federal Tax Treatment of Individuals,’’ Joint Committee on 

Taxation staff report, September 12, 2011 (JCX–43–11), https://www.jct.gov/publications.html? 

func=startdown&id=4356. 

economic turmoil. We cannot let politics get in the way of commonsense solutions for our economy. We just must do what is right. 

So let us make those right choices. Let us approach deficit reduction in a fair and balanced way. Let us set the top tax rates in a 

way that is appropriate for our current economic situation. Let us 

work to create jobs and provide opportunities for success for all 

who work hard.* 

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

The CHAIRMAN. Senator Hatch? 

OPENING STATEMENT OF HON. ORRIN G. HATCH, 

A U.S. SENATOR FROM UTAH 

Senator HATCH. Thank you, Mr. Chairman, for holding today’s 

hearing. It is the latest in a critical and informative set of hearings 

that this committee has had in preparation for comprehensive tax 

reform. 

I think we need to be clear with the American people, however, 

about what is really being considered at this hearing. The question 

that is raised by the witnesses’ testimony today is whether we 

should raise marginal rates, as well as the rates on capital gains 

and dividend income. 

Unfortunately, I think I know what the answer is from many of 

my friends on the other side of the aisle. I certainly know where 

the President stands on this question. Having already enacted over 

$1 trillion in new taxes through his health care law, he is ready 

for more. 

Just the other day he offered up over $400 billion in new taxes 

to pay for his latest spending proposal, and, of course, he is intent 

on causing the Bush- and Obama-era tax rates to go up on small 

business owners and others in the top two tax brackets. That is 

over the objection of many in his own party. 

President Obama said that he is tired of the same old accusations that Democrats are tax-and-spend liberals. But to borrow 

from the old saying, if it looks like a tax-and-spend liberal and 

talks like a tax-and-spend liberal, it is probably a tax-and-spend 

liberal. Or to borrow from Jeff Foxworthy, if you think the only 

problem with the first stimulus was that it was not big enough, you 

might be a tax-and-spend liberal. 

If you talk about a ‘‘balanced approach’’ to deficit reduction, you 

might be a tax-and-spend liberal. And, if you argue that ‘‘revenues 

must be on the table’’ to bring down spending-fueled deficits and 

debt, you are definitely a tax-and-spend liberal. 

There is a reason for these euphemisms. Those who promote tax 

increases do not come right out and announce their support because they know that the American people rightly believe that 

their taxes are heading higher than they have been historically. 

Even without any new tax increases, taxes are already heading 

higher than they have been. 

As we debate the additional tax increases that the President and 

his congressional allies would like to enact, the American people 

4 

deserve a clear reckoning of just how high our taxes are heading, 

even if current tax policy is permanently extended. 

Even if all of the Bush- and Obama-era tax rates are extended 

permanently, revenues as a percentage of gross domestic product 

will be 18.4 percent, according to the nonpartisan official scorekeeper for Congress, the Congressional Budget Office. 

According to CBO, those revenues of 18.4 percent of gross domestic product are substantially higher than their recent historical average, which was 18 percent from 1971 to 2010. 

So the question the American people are asking is: if taxes are 

already heading higher than they have been historically, should we 

raise them even more? From my perspective, the answer is a resounding ‘‘no.’’ 

In the short term, the tax increases that are already set to come 

online due to the President’s policies are a significant drain on economic growth. Adding even more to the mix would only be a further drain on our economy, curbing growth in the economy and jobs 

both in the short term and the long term. 

With unemployment at 9.1 percent, over 2.5 years after the 

President promised a stimulus bill would keep unemployment 

below 8 percent, should we really increase taxes on exactly half of 

all flow-through business income? Is that really a good idea, considering the fact that even the President agrees that small businesses 

create two-thirds of the new jobs in our economy, and small businesses employ 54 percent of American workers? 

A truly informative debate about the impact of tax increases has 

to include facts like those above. Unfortunately, it is often easier 

to resort to talking points from wealthy liberals who seek to raise 

marginal rates, adversely impacting the small businesses that will 

be the engine of our economic recovery, because they feel guilty 

that they are not paying their fair share, I guess. 

Instead of trafficking in economic reality and cutting to the effectual truth for small businesses, if we raise marginal rates, the 

President talks about raising rates on wealthy people like himself, 

because he has money he really does not need. 

In addition to betraying a very odd understanding of how a modern economy works, talking points like these fail to present taxpayers with the real world tradeoffs that come from increasing 

marginal rates and rates on capital gains and dividends. 

I think that this obfuscation is intentional. If tax hike proponents 

actually engage in a factual debate over whether taxes should be 

raised, even though they are already heading higher than their historical average, I am confident that they will lose. 

The fact that congressional Democrats have not passed a budget 

in well over 800 days is all the evidence that we need of the 

unpopularity of the tax increase agenda. Democrats know that they 

have to, at least in theory, support deficit reduction and a balanced 

budget. But the left will not allow them to make any meaningful 

spending reductions, and the vast majority of taxpayers would revolt if the left came clean about the tax increases that would be 

necessary to finance the level of spending President Obama has 

signed onto. 

So, caught between a rock and a hard place, my friends on the 

other side of the aisle have just declined to pass a budget for years. 

5 

The American people want Washington to get its spending under 

control, not to tax them more. 

Those who promote tax increases deny that they want to raise 

your taxes. They are only ever interested in raising someone else’s 

taxes. They only want to raise taxes on the so-called rich. Those 

who would advocate this course, in my opinion, are not being forthcoming. 

Those who promote tax increases know that they simply cannot 

raise enough money to pay for their spending priorities only by taxing individuals and small businesses in the top two brackets. It 

does not come close. The tax hikes necessary to pay for the level 

of government spending that President Obama and most congressional Democrats want would be extremely large and extremely 

widespread. 

To balance the budget through tax increases alone would mark 

another clear violation of the President’s pledge not to raise taxes 

on the middle class. 

Outlays shot up in this administration by over 4 percent of GDP 

in 2009 and now total 25 percent of our Nation’s total output—a 

quarter of everything that we produced. OMB estimates that, in 

2011, outlays will be over 25 percent of GDP, higher than any year 

aside from those surrounding World War II. 

The disease that Congress needs to address is government spending. We need to stop looking to treat the symptom, which is the 

deficit, with a band-aid called tax increases. 

As Congress considers proposals to raise taxes, the question for 

taxpayers is whether they are personally willing to pay a lot more 

in taxes to sustain current levels of government spending. 

I know where I stand on that question. Taxes are already heading higher than they have been historically. I can confirm that 

many in Utah agree with me, and I suspect that the vast majority 

of Americans do as well. 

Now, I appreciate the work of the chairman on this hearing 

schedule and on this hearing, in particular, and the testimony of 

our witnesses. This is an important discussion. These are important issues. There are differing points of view. 

It is central, this discussion, to the key questions about economic 

growth and the proper size of government that the American people will have their say on in a little more than a year. 

From my perspective, we have a government spending problem, 

and we cannot solve that problem by giving government more 

money to spend. That being said, if President Obama or any of his 

friends want to pay more in taxes, I am very happy to provide 

them with the IRS address where they can send their checks, or 

they can just Google it. 

Thank you, Mr. Chairman. 

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

The CHAIRMAN. Thank you, Senator. I think, clearly, in these 

challenging times, it is imperative that we really work together in 

a balanced way—— 

Senator HATCH. Well, I would like to do that. 

The CHAIRMAN [continuing]. That we work together, because only 

by working together are we going to find some solutions here. 

6 

I find—I know you do, too, in your home State; I was home last 

weekend and, also, the preceding weekend—people want us to get 

this debt under control, and they want to do it in a fair, balanced 

way. They do not like all the squabbling back here. They do not 

like all the partisanship back here. 

It is amazing to me the difference between Washington, DC and 

the rest of the country. And it is important for us. I am not trying 

to tell you something you do not already know; in fact, you know 

better than I. But while we are here, it is just really important we 

work together to get all this solved. 

Senator HATCH. Well, I intend to work with you, Mr. Chairman, 

and I hope we can do it. 

The CHAIRMAN. Thank you very much. 

I will introduce the witnesses. Mr. Mehiel, thank you for joining 

us. Mr. Mehiel is the principal shareholder and chairman of U.S. 

Corrugated Company. Thank you very much, Mr. Mehiel, for being 

here. 

Our second witness is Dr. Stephen Entin, currently president 

and executive director of the Institute for Research on the Economics of Taxation. Mr. Entin, thank you very much. 

Our third witness is Bill Rys. Mr. Rys is tax counsel for the National Federation of Independent Businesses. 

Finally, Dr. Leonard Burman, who is the Daniel Patrick Moynihan professor of public affairs at the Maxwell School of Syracuse 

University. 

Thank you, gentlemen. Your prepared statements automatically 

will be included in the record. I ask each of you to proceed and try 

to summarize your statements in about 5 or 6 minutes. And I also 

urge you, do not pull any punches. Say what you think, say what 

is on your mind, all of you. 

Mr. Mehiel, why don’t you proceed? 

Mr. MEHIEL. You want to start with me, Senator? 

The CHAIRMAN. You bet. Thank you. 

STATEMENT OF DENNIS MEHIEL, CHAIRMAN OF THE BOARD, 

U.S. CORRUGATED, INC., NEW YORK, NY 

Mr. MEHIEL. Well, first of all, my thanks to you as chair, to the 

ranking member, to the other Senators, and the committee for providing me an opportunity to participate in your deliberations. 

I concur with both Senators. We are at a watershed. We have, 

obviously, some very fundamental and threshold decisions to make. 

It is my view that the tax code, as well as the expenditures that 

you deliberate on and undertake, are, at their core, an expression 

of our values as a country. Now, I am absent the formal education 

of my colleagues here. I make boxes. I run factories. And, because 

I make boxes—I am talking about brown boxes that you would find 

in the A&P—I am at the beltline of the manufacturing economy 

and have been for many, many years. 

So my views are shaped not by education, but by my experience, 

and I do not say that to diminish at all how important it is that 

there is study and understanding of these issues by people who are 

very well-educated and understand the impacts of the decisions 

that you make with the code. 

7 

But what I can share is my experience. And I understand your 

focus today is the marginal income tax rates on so-called high earners. In my case, that is a relative expression, right? We always figure the other guy is the high earner and we are personally always 

generally struggling a little bit. 

But my income comes from earned income, so-called; that is to 

say, money that I earn for managing a business: from real estate 

that I own; from dividends, capital gains, and interest; and investments. 

So what we do is going to affect across the entire spectrum of the 

decisions you make, which are going to impact me personally. And 

I think I understand what would happen if my recommendations 

were adopted. And although they are in the record, I am going to 

say them very briefly. 

I believe that marginal rates in our income tax system should be 

restored to those that prevailed after 1994. I think we should create a new marginal rate above that, about 4 points or so higher, 

maybe about 43 percent on adjusted gross income above $1 million, 

which would be a new category. 

I think the carried interest treatment for what really amounts to 

earned income for many financial professionals in our financial 

services industry, so-called hedge funds and so on, is an egregious 

loophole that makes absolutely no sense. The 15-percent tax rate 

there is—the theory behind it is that they have capital at risk and 

should enjoy the long-term capital gains treatment of their earnings. But they do not have the capital at risk. And so that should 

be rectified. 

The long-term capital gain rate should go up. It should be maybe 

half, at a minimum, half the highest marginal income rate, and we 

have had that situation in the past more than once. 

And outside of today’s focus, but I will just drop it in, I believe 

that, when it comes to incentives, the 10-percent investment tax 

credit that was enacted, I remember, back in the 1960s and had 

a significant impact on decisions I made then as a small businessperson, is something we could look at reintroducing as distinguished from accelerated depreciation, which I think is more of a 

timing issue on taxes. 

And I think the corporate income tax rate, which we are not here 

to talk about, should be lowered. It ought to come down to maybe 

27 percent. But that would have to be part of a very, very thorough 

elimination of all of the distortions in the corporate tax code, and 

I do not need to elaborate on those. 

I will concede, to Senator Hatch’s point, that, if we did everything I just said, it will not eliminate the structural deficit that 

this country faces, and it is clear that you have many responsibilities on the expenditure side of the ledger. 

But what we hear a lot of is that small business needs to be protected, and job creators and so on. So I just want to go through one 

example. 

If a small businessperson is earning half a million dollars a year 

and is being taxed through the process, as we understand it, at 

personal rates, and his taxes go up 4 percent, then, on average, if 

he is already paying maybe $150,000 or $160,000 in taxes, he will 

pay another $10,000. 

8 

It is inconceivable to me that any businessperson with a small 

business earning half a million dollars a year would refuse to invest in growth in that business, which would then create hiring, 

because his taxes went from $145,000 to $155,000 a year. 

It simply does not stand up to logic, and I have made many of 

those decisions over the years about whether to invest. And I must 

share with you that how much tax I might pay if I earn a profit 

was never a significant consideration, in my mind, as I looked at 

business opportunities and how much I had to invest and what the 

outcome might be. 

Lastly, we should turn to the issue of fairness. What is fair? Over 

the last 7 decades prior to the recent 7, 8, 9 years, our country had 

a progressive tax system. Higher earners paid a larger percentage. 

And that system, I believe, was one of the principal reasons that 

this country created an enormous middle class with enormous purchasing power that became the envy of the world. It just became 

the envy of the world. 

That was the platform of demand of goods and services from that 

middle class that allowed people like me to succeed. So we can suggest that our success in business or industry is somehow in a vacuum and does not rely on the overall economy within which we operate, but I think that is quite foolish. 

So, if we do not do the things necessary to repair that system, 

and we continue to diminish the middle class and reduce their purchasing power, never mind what happens to the people at the bottom of the economic ladder, which is much more severe. Then on 

what platform is the next person like me going to build a manufacturing business or a service business or whatever it may be? 

So I believe that fairness and equity say that those who have 

benefitted the most from the conditions that exist in this great 

country ought to pay a little more. And by the way, it is in our selfinterest, because, if we do not do it and the result is that we continue to place the large majority of the population under this significant economic pressure, then our own businesses are going to 

suffer as a result. 

So that is my point of view. I admit, I like the U.S. Government. 

I got in business because you loaned me $8,000. I had to sign a 

paper to pay $144 a month for 7 years personally. And when we 

were failing and I knew about that payment stream, I was highly 

motivated to stay in business month to month to month as long as 

I could make those payments. And, absent that support from the 

government, which, by the way, only came after every bank rejected our application, even with a 90-percent government guarantee, they would not lend us the money. 

But we did, in fact, succeed. We have employed thousands of people. We have paid tens of millions of dollars in taxes over the years. 

So I like the Federal Government, with all its failings, and I 

think we ought to continue to appropriately fund our activities as 

a society as a whole. 

Again, I thank the committee for the opportunity. 

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

The CHAIRMAN. Thank you, Mr. Mehiel. I think you have had a 

pretty good education, frankly. 

9 

Mr. MEHIEL. Thank you. 

The CHAIRMAN. Mr. Entin? 

STATEMENT OF STEPHEN J. ENTIN, PRESIDENT AND EXECUTIVE DIRECTOR, INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION, WASHINGTON, DC 

Mr. ENTIN. Chairman Baucus, Ranking Member Hatch, and 

members of the committee, thank you for the opportunity to testify 

today. 

I will address two issues. First, what would raising tax rates on 

upper-income taxpayers do to the economy and the budget? Second, 

what is genuine tax reform and does it include such policies? 

My conclusions are that higher marginal tax rates on any group, 

especially those already paying the highest rates, would reduce 

GDP and incomes across the board, not just for the people paying 

the initial tax bill. 

Increasing the double taxation of corporate income by raising tax 

rates on capital gains and dividends would reduce capital formation 

and wages and would not raise the expected revenue. 

Neither tax change has any place in real tax reform. It is not 

who you tax, it is what you tax. We should not repeat the Tax Reform Act of 1986, which tried to perfect the broad-based income 

tax. Rather, we should adopt a different tax base that is more neutral in its treatment of saving and investment relative to consumption. 

It is important that any tax reform promote economic growth, because lack of growth is the source of lower incomes, higher unemployment, and much of the current deficit. Tax increases that raise 

the service price or hurdle rate of return on capital have been observed to reduce the capital stock; perhaps not in every company, 

but on average, over the economy, that is what they do. 

That reduces wages and employment across all incomes. Taxing 

capital hurts labor. When you consider a bill, make the Joint Tax 

Committee tell you the effect on the service price. Otherwise, you 

will not know what the bill is going to do. 

I estimate that raising the two top tax rates on ordinary income 

to 36 and 39.6 percent would knock half a percent off private sector 

output and labor income across the board, cut a percent off the capital stock, and lose about 40 percent of the expected revenue. 

Raising the top tax rates on capital gains and dividends to 20 

percent would be 2.5 times worse. It would virtually raise no revenue and cost more income and jobs. 

Allowing the tax rate on dividends to revert to ordinary income 

tax rates, which might happen if nothing is done, would be hugely 

damaging. Revenues would fall instead of rise. And do not forget 

the 3.8-percent tax imposed by the Health Care Reform Act, which, 

if you add it to the 20-percent rate case on capital gains, would further reduce GDP and eliminate the revenue gain. 

Tax reform must be done right to fight the deficit while improving the economy. The income tax is heavily biased against saving 

and investment. More neutral, growth-friendly tax alternatives 

exist, such as the cash flow tax in the report of President Bush’s 

Advisory Panel on Federal Tax Reform or the flat tax or others of 

that ilk. 

10 

Real tax reform will take a few key steps to fundamentally shift 

the tax base from broad-based income to consumed income or cash 

flow, which are better measures of actual income. First, as in pensions or IRAs, either defer tax on all saving, or tax the saving up 

front and do not tax the returns. Second, adopt expensing or something of equal value. It could involve an investment tax credit instead of depreciation. Third, do not tax corporate-sector income 

twice. Fourth, eliminate the estate tax. And, fifth, move to a territorial tax system. 

The Bowles-Simpson Deficit Reduction Commission plan merely 

patches the income tax. It plays ‘‘close the loophole’’ with the tax 

expenditure tables of the Treasury and Joint Tax Committee. 

Many items on the list of tax expenditures are partial offsets to 

biases in the income tax that would otherwise destroy jobs and investment. These offsets include all the pension, retirement, and 

education savings arrangements, accelerated depreciation and expensing provisions, lower tax rates on capital gains and dividends, 

and most offsets to the corporate income tax and estate tax. These 

are not tax expenditures in a neutral or consumption-based tax. 

The Commission’s avocation of a 28-percent top tax rate for individuals and corporations is not nearly low enough to offset the 

damage done by some of the changes it would make to pay for it, 

including the taxation of capital gains and dividends at the same 

rate as other income, and the elimination of expensing with a move 

to longer asset lives. 

The Commission’s plan would slash GDP by about 3 percent and 

lose most of the $80 billion it hopes to raise. They are trying to 

mimic the Tax Reform Act of 1986, but this is not 1986. The starting point is very different. 

The Tax Reform Act of 1986 was an income tax patch, not a shift 

to a neutral base, and it slightly reduced potential output. Nonetheless, TRA–86 cut the corporate rate 12 points. Bowles-Simpson 

would cut it about 4 to 7 points. TRA raised the top tax rate on 

capital gains from 20 percent to 28, but lowered the top tax rate 

on dividends from 50 percent to 28. It reduced the double tax on 

corporate income. Under Bowles-Simpson, both would rise from 15 

to 28 percent. 

TRA–86 eliminated the investment tax credit. Bowles-Simpson 

would eliminate the current expensing prevention—equally bad. 

The Bowles-Simpson Commission changes would be far more damaging than TRA–86. The Commission should have asked Treasury 

and Joint Tax for an estimate of what they would be doing to the 

cost of capital. They did not. 

To compete in the global economy, the United States needs a tax 

system that is not anti-investment and anti-growth. Japan triggered its lost generation by adopting an anti-growth tax reform in 

the 1980s that mimicked our 1986 act, but went even further. 

China now has a growth-friendly tax system on the mainland, as 

well as in Hong Kong, which is doing better. 

The Nation needs a tax change to a better tax system with a better tax base, more neutral in its treatment of saving and investment. If Congress is not able to provide that, it should extend the 

current tax cuts and stick entirely to spending cuts for deficit reVerDate Nov 24 2008 17:46 Oct 18, 2012 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 R:\DOCS\75674.000 TIMD
11 

duction. Otherwise, you are going to be hurting the very people you 

are trying to help. 

Thank you. 

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

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

Mr. Rys? 

STATEMENT OF BILL RYS, TAX COUNSEL, NATIONAL 

FEDERATION OF INDEPENDENT BUSINESS, WASHINGTON, DC 

Mr. RYS. Good morning, Chairman Baucus, Ranking Member 

Hatch, and members of the committee. I am pleased to be here on 

behalf of the National Federation of Independent Business as the 

committee continues to look at options for tax reform. 

In particular, I appreciate the opportunity to discuss individual 

tax rates, an especially important issue for small business owners. 

NFIB is the Nation’s leading small business advocacy organization, representing over 350,000 small business owners across the 

country. Taxes and tax rates are regularly a concern for small business owners. In fact, in our latest small business problems and priorities survey, tax rates ranked third on a list of 75 issues, so very 

high. 

Individual rates are especially important to small business owners, because a majority of them, about 75 percent, structure their 

businesses as pass-through businesses. Business owners choose the 

pass-through business structure for a variety of reasons—liability 

and tax issues mostly. 

The Tax Reform Act of 1986 and subsequent changes to tax laws 

promoted the growth of pass-through businesses and specifically 

the single layer of tax. A recent study highlights the role passthrough businesses play in the U.S. economy. Based on 2008 data, 

pass-through businesses represented 95 percent of all business entities. These businesses employed a majority—54 percent—of the 

total private sector workforce. 

Pass-through businesses also report a considerable amount of income. Between 2004 and 2008, individual owners of pass-through 

businesses reported 54 percent of all business net income. 

So how are small businesses impacted by individual tax rates? 

Small business owners fall into all of the current six individual income tax brackets. In 2001, the individual tax rates were lowered 

across the board, providing all small business owners with some 

tax relief. Extending some of these tax rates has received broad 

support, and that is a step in the right direction. 

At the same time, some have proposed raising taxes on those 

pass-through businesses reporting more than $200,000 or $250,000 

in income. The owner of a pass-through business may report a 

higher amount of income on their return than they actually take 

home. The income is money that is kept in the business and used 

to reinvest. 

So exactly who are the businesses most likely to be impacted by 

an increase of higher individual tax rates? An NFIB Research 

Foundation poll, combined with U.S. Census Bureau statistics, indicates that the businesses most likely to face a tax increase are 

businesses that account for a substantial portion of the workforce. 

12 

The NFIB survey shows that, looking at overall small businesses, 

about 10 percent of small business owners are going to report 

about $250,000 in income, but the businesses most likely to report 

income above that threshold are firms with between 20 and 250 

employees. In fact, it would be well over 30 percent of those firms 

that would be impacted by a tax increase. 

In 2007, these businesses accounted for over one-quarter of the 

U.S. workforce, employing about 33.5 million workers. So the businesses most likely to be hit with a tax increase are successful growing businesses. 

To create jobs in our economy, these businesses need the profits 

they earn to make new investments and hire new workers. A tax 

increase on these businesses, especially as they are growing, could 

have a negative impact on new investment and job growth. 

The committee is focused on individual tax rates as an important 

part of tax reform. Much of the discussion around tax reform has 

focused on the corporate tax rate, and this is a very important 

issue. But any tax reform plan that wants to encourage economic 

growth should include individual rates and pass-through businesses. Focusing simply on the corporate rate could put the owners 

of pass-through businesses at a distinct disadvantage. 

With a potential rate increase and a potential loss of business deductions, pass-through business owners could see a substantial 

change in their current tax position. Tax reform should support 

those business owners, making it easier to run their businesses, 

providing opportunities to grow and make new investment. 

In addition, tax complexity and the cost of compliance is a major 

problem faced by all small business owners. Some of the complexities in the tax code are in deductions and credits. Simplifying the 

code by examining these credits and deductions provides Congress 

with the opportunity to possibly lower rates. This means small 

business owners could keep more of the money they earn and make 

the kind of investments that are best for their business. 

Adding to the complexity are the constant changes in expiration 

dates in the tax code. Business conditions change, and business 

owners have to work through good times and bad. But they should 

not have to face these kinds of ups and downs because of constant 

changes in the tax code. 

Finally, Congress should work to keep the capital gains tax rates 

low. Keeping the capital gains rates low is an incentive to invest 

in capital assets, with the certainty that any gain realized on that 

investment will be subject to lower tax rates. 

Tax reform is an opportunity to address the major tax impediments that impact small business owners and to strengthen the 

overall economy. The current tax code is a challenge for all taxpayers, small and large businesses, as well as individual taxpayers. 

The committee’s focus on individual rates, capital gains, and dividends is an important step in examining the entire tax code. 

We look forward to working with the committee to minimize the 

tax burden on small business and establish a simplified, more 

growth-oriented tax system. 

Thank you. 

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

13 

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

Your are batting cleanup, Dr. Burman. Why don’t you proceed? 

STATEMENT OF DR. LEONARD E. BURMAN, DANIEL PATRICK 

MOYNIHAN PROFESSOR OF PUBLIC AFFAIRS, MAXWELL 

SCHOOL, SYRACUSE UNIVERSITY, SYRACUSE, NY 

Dr. BURMAN. I am going to swing away. Chairman Baucus, 

Ranking Member Hatch, and members of the committee, thank you 

for inviting me to testify on tax reform options affecting highincome taxpayers. I applaud the committee for its year-long work— 

actually, longer than that—on tax reform. I am honored to be 

asked to contribute. 

I should just point out that I am not speaking for anybody but 

myself. 

The question before the committee today is whether we should 

raise revenue by raising top ordinary income tax rates and rates 

on long-term gains and dividends. 

In my view, the best option would be classic tax reform. Broadening the base and lowering tax rates could raise revenue while 

making the tax system simpler, fairer, and more conducive to economic growth. 

There are several good models for that approach, including the 

Bipartisan Policy Center plan that I contributed to, and the 

Bowles-Simpson proposal. 

I should point out to Dr. Entin that the Bipartisan Policy Center 

plan reduced the burden on capital, but in a progressive way. 

Now, tax reform might not be feasible now. I know it is hard, you 

know it is hard. But I believe that there is a strong argument for 

raising tax rates on the affluent, taxing capital gains and dividends 

more like ordinary income, and closing corporate loopholes while 

cutting corporate tax rates. 

The argument for raising tax rates is that demographics and rising health care costs will put unprecedented pressure on Federal 

finances. 

There was a discussion about tax-and-spend liberals. I am not on 

the spend side, but there are enormous pressures on spending, and 

they do not have anything to do with runaway government. What 

they have to do with is that we have made a lot of promises to seniors, and there are going to be a lot more senior citizens in years 

to come. 

Even if we are enormously successful in cutting spending on 

health care, which is a big part of the problem, overall spending 

will increase without any increase in the size of government. 

The Congressional Budget Office did calculations that show that 

spending would reach 23–24 percent of GDP even if health care 

costs could be kept to the rate of growth of the economy. So somehow we are going to have to pay for that. 

I will point out that current top tax rates are very low, by historical standards, and people with high incomes are the best able to 

bear additional tax burdens. I think tax reform is a good idea, and 

allowing top tax rates to rise could sustain support for traditional 

tax reform. 

I like the idea of broad-base low rates. Right now we have 

narrow-base low rates, which, from a perspective of high-income 

14 

people, is way more attractive. I think raising rates gets them interested in more systemic reform. 

Some of the other panelists have raised concerns about the economic consequences of higher rates. In my view, those concerns are 

overblown. The Clinton-era tax rates clearly did not derail the 

economy, and the rate cuts in the last decade did not unleash robust economic growth. 

That does not mean that tax rates do not affect growth—I think 

they can—but simply that other factors are more important. 

Growth is important, but it is not sufficient to guarantee that 

middle-income people prosper. Trickle-down does not work. 

Higher tax rates could mitigate economic inequality, which has 

grown markedly over the past 30 years, as the chairman pointed 

out. Obviously, taxes are not the whole solution. Expanding opportunities for success by investing in education, for example, is also 

important. But the tax system plays an important role and might 

forestall more costly populist responses to inequality, such as trade 

restrictions, if we do not deal with the growing gap between rich 

and poor. 

Furthermore, it would be hard to justify tax increases on the 

middle class right now for several reasons. First, the middle class 

has been in a 30-year recession. While top incomes have exploded, 

middle incomes have stagnated. 

Second, tax increases now would cut middle-income family 

spending, which would be the worst thing to do during a recession. 

In contrast, tax changes affecting high-income people are more likely to come out of savings rather than current consumption. 

Some would like to raise taxes on low-income households, but 

that would put an undue burden on working families struggling to 

get by, and it would not raise as much revenue. Those people are 

poor. 

There is concern about how the affluent would respond to higher 

taxes. As I explain in my written testimony, their labor supply responses appear to be quite small. It is likely, however, that higher 

tax rates would encourage more tax avoidance, and the best way 

to deal with that would be to clamp down on tax shelters. And the 

biggest driver of individual income tax shelters is the lower tax 

rate on capital gains. 

I have written an enormous amount about this, but the point 

that the arguments for lower tax rates seem to miss is that a lower 

tax rate on capital gains—20 percentage points lower than the tax 

rate on ordinary income right now—provides a huge incentive to 

make earnings look like gains rather than fully taxable compensation. 

The poster child for such avoidance is the carried interest loophole, but that is just the tip of the iceberg. There is a whole tax 

shelter industry devoted to converting ordinary income into capital 

gains. The geniuses that come up with these deals might otherwise 

be doing socially productive work, like figuring out how to produce 

products that people want to buy. 

Eliminating or reducing the incentive to devote productive resources into wasteful tax shelters would boost the economy. And, 

since capital gains are heavily concentrated among the affluent, it 

would also make the tax system more progressive. 

15 

There has been discussion about small businesses. I can tell you, 

from the academic literature, it is certainly a mixed bag. First of 

all, as Mr. Rys has pointed out, relatively few are in the top brackets. 

The big impediment to small businesses right now is not tax 

rates, but a lack of demand, and the thing we have to do is get the 

economy going, and, if raising some revenue would allow the government to do some things that would boost overall demand, that 

would be helpful. 

And also, raising top income tax rates makes going into business 

more attractive, and I would be happy to talk about that in Q&A, 

if you would like. 

I will say something about the corporate rate and dividends. I 

think the best thing to do would be to close loopholes and use some 

of the revenue raised from taxing gains and dividends more like ordinary income to cut rates on corporations. It would remove much 

of the incentives for firms to relocate their activities overseas and 

could improve overall competitiveness. 

Obviously, there is a lot more that I would like to talk about— 

it is in my written testimony—but I look forward to your questions. 

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

The CHAIRMAN. Thank you, Dr. Burman. Thank you all. 

I would like to explore a little bit the ordinary income/capital 

gain differential. You have touched on it, Dr. Burman, suggesting 

that, to a large degree, it causes a lot of the shelters and a lot of 

the game-playing, if you will, of just trying to convert ordinary to 

capital income. 

Back in the Clinton years, for a period anyway, there was no differential between the two. And one can do anything with the figures, but there was a lot of job growth, et cetera. 

I would like the panelists to just explore a little bit that phenomenon; that is, getting capital gains to ordinary income, closer 

to ordinary rates. The trouble is, if we raise the upper limits, it is 

going the other direction. 

But how important is it to try to move toward a system where 

there is no differential between the capital gains and dividends or 

to get that gap down pretty low so there is a lot less, if you will, 

game-playing? 

Mr. Mehiel? 

Mr. MEHIEL. Well, Senator, my understanding of this, and my 

experience with it over the years, is that it came into being to reward long-term investment and holding periods. 

I concur with my colleague over here that it has given rise to a 

great deal of opportunity for abuse. However, if the committee felt 

that the capital gains rate needed to go substantially higher, then 

I would argue that the marginal earned income rate would have to 

come down a little bit. 

My view is that if we were to impose that—I am suggesting 43 

percent at the margin—on very high earners and to have no differential between that and the return on invested capital that is legitimately invested and held over time, I am not sure I could support that. The number would have to be lower. 

16 

To the extent we could eliminate that differential, we certainly 

would eliminate an awful lot of incentive for abuse. Only you can 

measure the capability to get a change like that done at a moment 

in time when we clearly have to act. 

The CHAIRMAN. Mr. Entin, is that advisable or not to move in 

that direction? 

Mr. ENTIN. No, I do not think so. First of all, let me mention 

something about the Clinton years. The Clinton marginal tax rate 

increases were fairly modest, and we were coming out of a downturn. The growth was going to look good anyway. 

But please remember that President Clinton did sign the capital 

gains tax reduction in 1997, and a lot of the growth in that decade 

was due to that reduction in the cost of capital and to lower inflation. It dwarfed the adverse effect of raising the marginal rates. 

Capital gains is part of the structure of the service price, and 

that has a major impact on capital formation, which is more sensitive to taxation than the labor force effects of the broader rate 

change. That is how you got that balance in the Clinton years. 

I think it needs to be pointed out that capital gains is a double 

tax, even when there is no corporate tax involved. The corporate 

tax is really a triple tax, not a double tax. You must take the corporate rate into account in addition to the capital gains rate when 

you talk about a shareholder paying tax at too low a rate. He is 

paying both taxes on the same income. It is not two separate pieces 

of income, it is one. 

But capital gains is a form of double taxation even without the 

corporate-level tax. An asset’s value today is the present value—the 

discounted value—of its future earnings after tax. If there are increases in future earnings, they will be taxed in the future. 

If you currently tax the shadow of that—the present-value reflection of that future added income—that will be taxed as a capital 

gain, and you are double-taxing that future income. 

Capital gains taxation is double taxation right from word one. 

There are abuses where ordinary income can be translated into 

capital gains. Those largely disappear in consumption-based or consumed income or cash flow taxes, and Treasury does have to enforce those restrictions. But do not let the tail wag the dog. 

The CHAIRMAN. I hear you. My time is quickly expiring. 

Mr. Rys? 

Mr. RYS. I think from the perspective of our members and small 

business owners, on the side of keeping capital gains rates lower, 

I think, is the element of risk. 

There is a risk involved in starting your business. If you eventually sell that business, you are going to pay a capital gain on the 

increase in that. 

One of the things we have seen with small business owners that 

we have really learned out of this recession is that they have been 

heavily invested in real estate, and the value of that real estate 

has gone down considerably in the last couple of years. 

So they took the risk, and now they are going to have to deal 

with the fact that their balance sheets are much lower than they 

would have been. 

So I think that lower capital gains does help compensate for 

some of the risks that our members—— 

17 

The CHAIRMAN. Dr. Burman, your thoughts? 

Dr. BURMAN. A few points. One is, you probably cannot raise the 

top rate, the capital gains rate, to 36 or 39.6 percent. The JCT 

would score that as losing revenue. You could certainly raise it to 

28 percent, which is what it was during the Clinton years. 

Dr. Entin and I just disagree about the incentive effects of taxation. I looked at the relationship between capital gains and gross 

domestic product over 40 or 50 years, both current and with lags. 

There is zero correlation. 

If there is a relationship between the capital gains tax rate and 

the economy, it is really subtle. It does not just jump out of the 

data. 

The argument that taxing capital gains constitutes a double tax 

is an argument that savings are double-taxed, because you tax the 

earnings when you get them and, also, the rate of return when you 

make the investment. That is true, and there is an argument for 

the consumption tax. The argument against it is that, it is hard to 

maintain the kind of progressivity we want if we did it. 

But taking one step towards a consumption tax does not make 

things better. What it does is it creates a giant loophole, and it encourages you to take all sorts of income and make it look like capital gains. All sorts of investments—it would make no sense without taxes—become profitable even though they are not the kinds of 

things we would want to put our money into, and all sorts of resources go into that. 

If we cannot have a kind of 1986-style reform, where you cut 

rates and tax capital gains the same as other income, a good compromise would be raising capital gains tax rates to levels they were 

in the 1990s. 

The CHAIRMAN. Thank you. 

Senator Hatch? 

Senator HATCH. Thank you, Mr. Chairman. 

This question will be for Mr. Entin and Dr. Burman. President 

Obama and most congressional Democrats support raising the top 

two tax rates from 33 and 35 percent to 36 percent and 39.6 percent, respectively. 

Now, this would subject 50 percent of all flow-through business 

income to a tax increase, according to the nonpartisan official 

scorekeeper of Congress and the Joint Committee on Taxation. 

Now, this is especially harmful to small businesses, because the 

vast majority of small businesses are organized as flow-through entities. The President and I agree that small businesses create twothirds of the new jobs in our economy. 

Therefore, with 9.1-percent unemployment, why do President 

Obama and most congressional Democrats want to impose what I 

consider to be these job-killing tax increases on the job creation engine of our economy? And what do they propose to do to shield 

small businesses from their job-killing tax increases? 

So far, I think their silence has been deafening. If they are proposing these tax increases, should not the burden be on them to 

shield small businesses, which they say they support, from their 

own tax increases? At least that is the question I would like to ask. 

Mr. Entin, you first. 

18 

Mr. ENTIN. Raising those tax rates would increase taxes on entities that are, in part, providing labor services and capital services 

to the production process. 

Senator HATCH. That is what I was wondering. 

Mr. ENTIN. The effect on capital is higher than on labor. It is not 

quite as harsh an effect as raising the capital gains and dividends 

rates. It is, nonetheless, a negative. We estimate that it would 

knock about a half-point off the economy, and that would include 

a depression of wages all across the spectrum, not just for the business owner, and a reduction in employment. 

Most of these taxes on capital and small businesses ultimately 

get shifted to the workforce in the form of lower hours and lower 

wages. So it does not just fall on the people you are pretending to 

impose the tax on. 

These dynamic effects in the economy are not captured in the 

revenue-estimating methodology of the Joint Tax Committee. So 

they appear to raise revenue. They probably would raise revenue 

from the small business owners. They would probably lose revenue 

from the people not employed because of the reduction in capitalformation and hiring. 

So that added effect is simply not addressed in the revenue estimates, and these increases appear to be more beneficial to the 

budget than they really are. 

Senator HATCH. Dr. Burman? 

Dr. BURMAN. A couple of points. One is that actually the Treasury Department just put out a recent study on the percentages of 

the amount of income that would be subject to the higher rate. It 

is still significant, but it is about half as much. And the reason is 

that a lot of people who report small business income are actually 

people like the people at this table who have maybe some consulting income or might be on boards of directors, but do not actually hire employees. 

But the fundamental point about how raising taxes on small 

businesses would affect hiring is an important one, but the important thing is that labor costs are deductible. 

So, if a worker can produce as much as it costs to hire him or 

her, it is worth doing because, after tax, they would still make 

money. 

The big problem small businesses have right now is that there 

is not demand. It is not the tax regimen. Now, these increases 

could have some effect on investment over the long term, but I 

think those effects are small. When I read what Mr. Entin writes, 

I have this feeling that, if you believe this, you would think you 

had to have an absolutely perfect tax system to have the economy 

grow at all. And, if that were the case, we would be in really big 

trouble. 

I think the fact is that we are much less responsive to tax rates 

than you might think from these theoretical models where people 

have very, very long horizons and are completely rational. 

Senator HATCH. Mr. Rys, why don’t you—I see you chomping at 

the bit there. 

Mr. RYS. I am sorry. A couple of things on that. When you look 

at the Treasury Department study, one of the things they do is 

19 

they cut an income line at $10 million. And for the businesses that 

are most likely to be impacted, that is fairly low. 

So that is one challenge, that the businesses—the smaller businesses that you are likely to capture are the businesses that are 

growing, the businesses that are bringing in more revenue. 

So one of the challenges with drawing those lines is, some of that 

is difficult to do in trying to figure that out. 

What we have done is, when we have talked with business owners, when we looked into the survey, we have been able to speak 

directly to the business owners and ask, how much income did you 

take out of the business, and that shows us where the lines are 

drawn. And it is these businesses that employ a substantial number of employees, because they have the revenue coming in, because they have the demand to hire new workers. 

And to get to Dr. Burman’s point on the problems, the numberone problem facing small business owners in our survey is sales, 

and sales consistently. But when we found out what the number 

two problem is, it is taxes, and I do not think those two things are 

mutually exclusive, because, if you have less money to spend, you 

have less money to spend on whatever it is you are going to buy, 

which means the consumption continues to go down. 

And the businesses that fall into the small business sector are 

providing the services and the goods that are going to drive that 

kind of demand. So their sales are way off. 

So there are sort of two sides to this problem that work against 

one another. 

Senator HATCH. My time is up, Mr. Chairman. 

The CHAIRMAN. Thank you. 

Senator Bingaman, you are next. 

Senator BINGAMAN. Thank you, Mr. Chairman. Thank you all for 

being here. 

Obviously, the threshold question that I think we are all sort of 

jumping past is whether or not, if we do tax reform, should it be 

revenue-neutral or should it raise revenue. 

And I take it, just trying to understand each witness’s testimony, 

Mr. Mehiel, you are saying it should raise revenue. 

Mr. MEHIEL. Absolutely. 

Senator BINGAMAN. Right. And, Dr. Burman, you are saying it 

should raise revenue. 

Dr. BURMAN. Yes. 

Senator BINGAMAN. And Mr. Rys and Mr. Entin are saying it 

should not. Is that accurate? 

Mr. ENTIN. It should not necessarily raise revenue, in a static 

sense. It should improve the economy and let the growing economy 

raise the revenue. 

Senator BINGAMAN. Right. You think tax reform, in and of itself, 

would be a good thing on a revenue-neutral basis. 

Mr. ENTIN. If done right. 

Senator BINGAMAN. Right. 

Mr. RYS. I think tax reform is an opportunity to help support the 

economy. If we have more jobs, if we have more employees, we are 

going to see more revenue from that. I think that should be the 

goal of tax reform, and a number of people have stated that. 

20 

Senator BINGAMAN. But you do not believe that we should make 

changes in the tax code that the CBO would tell us will raise additional revenue. 

Mr. RYS. Like I say, I think the focus needs to be on growing the 

economy. I think that is where revenue is going to come from. 

Senator BINGAMAN. And you do not believe raising rates or eliminating a lot of the deductions that are being discussed for elimination would, in fact, grow the economy? 

Mr. RYS. I think there is a balance there. If you are taking away 

a deduction or you are increasing a rate, it is less income that that 

business has. It is taking away a business decision they are going 

to make based on that deduction. 

So I think there needs to be a balance struck between how you 

get towards the tax reform plan that promotes growth and promotes economic development. 

I think one of the real challenges facing the economy is long-term 

confidence. This is an opportunity to create some long-term confidence. We have a real confidence problem in the small business 

sector among consumers. 

Senator BINGAMAN. Well, we had a hearing yesterday, and Chairman Greenspan was one of our witnesses, and he said that he 

thought the concern about confidence in the economy was a real 

one and that, therefore, the top priority should be to bring down 

the deficit. And for that reason, he favored going back to the tax 

rates that were in place prior to the 2001 and 2003 cuts. 

I gather, Mr. Mehiel, you said you agree with that. You agree 

with Chairman Greenspan on that. 

Mr. MEHIEL. Absolutely. 

Senator BINGAMAN. Dr. Burman, you said you think it would be 

a mistake to go back to those rates for the middle class at this 

point. 

Dr. BURMAN. Right now, just because the economy is so weak 

and they would have less money to spend, it would exacerbate the 

demand problem Mr. Rys was talking about. 

Senator BINGAMAN. And by right now, you mean at the end of 

2013, when the current tax provisions would expire? 

Dr. BURMAN. Unless the economy recovers much better than 

most economists think that it will. 

Could I make just a point about the—— 

Senator BINGAMAN. Certainly. 

Dr. BURMAN. One of the issues about cutting tax rates and its 

effect on the economy, this was actually looked at by CBO, JCT, 

the Treasury—all under Republican-appointed leadership—and 

they all concluded that, if you cut tax rates and could not control 

the deficit, so that ultimately tax rates had to be much higher than 

they would be otherwise, that the economy would be much worse 

off than if you just actually raised rates enough so you could raise 

enough revenue to pay for the economy. 

One basic point is that there is this asymmetry that, when you 

raise rates by a lot, the cost of taxation goes up disproportionately. 

So it would be better to keep them steady at a level that is actually 

adequate to pay for the government. 

So in other words, that is basically, I guess, another way of saying Chairman Greenspan’s point that, if you could relatively quickVerDate Nov 24 2008 17:46 Oct 18, 2012 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 R:\DOCS\75674.000 TIMD
21 

ly raise enough revenue to stabilize our public finances, that could 

forestall bigger tax increases in the future, and it would be good 

for the economy. 

Senator BINGAMAN. That is all I have, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

Next in line is Senator Kyl. 

Senator KYL. Thank you. 

And that assumes Congress will not spend the money generated 

by the extra taxes, which history suggests is not the case. 

Chairman Baucus, in his opening statement, discussed the 400 

highest earners in the country. He suggests that we should ask 

them to pay a little bit more, which is, I think, a nice way to say 

we would put this in the income tax code. 

But the problem is that the top two rates apply today to about 

3.6 million filers, and, in order to get real money, that is the folks 

you have to get. That is folks like Mr. Mehiel, I suspect. There are only 319,000 who report $1 million of income or more. 

So you are not just hitting the millionaires and billionaires. You 

are hitting an awful lot of folks whom I think Mr. Mehiel was describing as the real productive middle class in the country, the 

small business entrepreneurs who create businesses, hire people, 

and so on. 

And this brings me back to the point Mr. Entin was making, 

which I take it is, if you want to hurt the unemployed even more 

and put a big, wet blanket over the economy, then raise taxes on 

the job creators. 

The reason people earn money and then pay taxes on it as dividends, capital gains, or in the top brackets is because they have invested it in businesses, the very folks who create jobs. And the economic theory of the chairman here that we should raise taxes because they can afford it, I think ignores the effects that raising the 

taxes would have on economic growth and on the unemployed and 

on job creation. 

And here is one sentence from Mr. Entin’s testimony. ‘‘The real 

concern about the tax system is not who sends the checks to Treasury, but what is being taxed and how that affects growth, employment, wages and income from savings.’’ 

Now, Mr. Entin, your research suggests that, if the top marginal 

rates are increased from current levels, we will pay an economic 

price of lower economic growth, less capital formation, lower wages, 

fewer hours worked, and less than expected revenues, and that the 

economic damage is even more pronounced when taxes on dividends and capital gains go up, as they are scheduled to do under 

existing law. 

Why do rate increases on upper-income earners and increases in 

capital gains and dividends taxes, for example, reduce the income 

earned by average workers and harm economic growth? 

Mr. ENTIN. Because they are not tax increases on upper-income 

workers. They are tax increases on saving and investment and capital formation. And, even if we all had equal incomes and we started taxing capital more heavily, there would be less capital. And 

with less capital, there is a lower level of productivity and demand 

for workers and, therefore, there are fewer hours worked, and the 

workers receive lower hourly wages. 

22 

And since they are producing less and everyone is producing less, 

there is less income and, therefore, less demand. We do not start 

out driving things by demand. We start out by increasing the incentives and rewards for production; then, when people produce, 

they are paid, and they turn around and buy their products. 

Demand alone is not an independent tool. Again, it is not whom 

you tax, it is what you are taxing and what the base is. You can 

have a progressive, neutral tax. You do not have to beat up on capital formation to have a progressive tax system. 

In chart 2, I mention that it depends on what you are doing, not 

whom you are doing it to. 

We had a tax cut enacted in 2001 supposedly to avert a downturn. Most of the rate cuts were delayed. The first effect of it was 

to have a 10-percent bracket and a $600 rebate reflecting it. 

We had a rebate under Ford that did not work. We have had two 

rebates since. They have not worked. Investment kept sliding, and 

that is what drove that recession. 

Now, in 2003, we cut the tax rate on capital gains and dividends, 

went up to 50 percent bonus expensing, and brought all the rate 

cuts forward that had not been put in effect yet. That is when 

equipment spending, which was eligible for the expensing, turned 

around and soared, and that is when we began creating jobs. 

It was what we were taxing, not who we were taxing, and it 

makes a difference. A junk tax cut will not stimulate demand, and 

spending increases will not stimulate demand if you have to borrow 

the money to pay for it. You are taking away with one hand what 

you are giving out with the other. It is how you are arranging the 

incentives to produce and whether the government is in the way 

with taxes and regulations. 

Senator KYL. So it is not correct then that the 2003 reductions 

in certain taxes were not effective in helping job creation for a good 

part of the remainder of that decade? 

Mr. ENTIN. Correct. 

Senator KYL. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

Senator Menendez? 

Senator MENENDEZ. Thank you, Mr. Chairman. Let me thank the 

panelists for their testimony that I have read with interest. 

Dr. Burman, it simply amazes me that many conservatives still 

prefer placing the burden of taxation on a worker’s labor or a family’s consumption over an investor’s profits. 

Unfortunately, when you look at the numbers, it seems as 

though this theology is winning. In 2008, the average New Jersey 

family earned about $65,000 and paid 27 percent of their income 

in Federal taxes. The richest taxpayers in America, on the other 

hand—those who earned an average of $270 million in one year— 

paid about 18 percent of their income in Federal taxes, so a 9- 

percent differential between the $65,000 and the $270 million. 

Is there any tax break that is more critical to creating this imbalance than the preferential tax treatment of investment income? 

Dr. BURMAN. No. I think that the lower tax rate on capital gains 

is the single-most important factor. If you look at the table of the 

400 highest-income people, the big factor—and Mr. Buffett made 

this point, as well—is they are taxed at 15 percent, yet middleVerDate Nov 24 2008 17:46 Oct 18, 2012 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 R:\DOCS\75674.000 TIMD
23 

class people in New Jersey pay 15 percent in payroll taxes, between their share and the employer’s, plus 15 or 25 percent in income taxes on top of that. 

Senator MENENDEZ. You note that, in comparing recent tax reform proposals put forth by several bipartisan groups, as well as 

President Reagan’s Tax Reform Act of 1986, they all had in common the tradeoff of lowering income tax rates across the board and 

ending the preferential tax rates on investment income. 

That is, tax rates were lower, but the government would no 

longer pick favorites between a worker’s salary and an investor’s 

profit. 

As this committee continues to debate tax reform, in your opinion, do you believe that equalizing the tax treatment of earned income and investment income would be an important piece to any 

balanced tax reform proposal? 

Dr. BURMAN. I think a 1986-style reform makes a lot of sense, 

especially if you can figure out a way to make it stick. 

One advantage of taxing capital gains in full is it allows you to 

lower tax rates on ordinary income, on small business income, 

while maintaining the overall progressivity of the tax system. It 

also makes the tax system a lot simpler. Tax lawyers tell me that 

half of the Internal Revenue Code is devoted to policing the boundary between capital gains and ordinary income, and you could potentially eliminate most of that complexity if you taxed them the 

same. 

Senator MENENDEZ. Mr. Entin, let me ask you this. I am sure 

your economic models are well thought out, but your predictions almost hearken back to those that I heard from Newt Gingrich and 

my colleagues then in the House when President Clinton had the 

Deficit Reduction Act. 

Here is a direct quote from former Speaker Gingrich about raising the top rate. It basically paraphrases your testimony. He said, 

‘‘I believe that that will, in fact, kill the current recovery and put 

us back in recession.’’ 

Here is a quote from Chris Cox, who went on to be our SEC 

chair, from the same debate: ‘‘This is really the Dr. Kevorkian plan 

for our economy. It will kill jobs, kill businesses, and, yes, kill even 

the higher tax revenues that these suicidal tax increasers hope to 

gain.’’ 

Now, I was there in the Congress at the time, and I saw the 

President’s Deficit Reduction Act lead to the first balanced budget 

in a generation, record surpluses, low unemployment, low interest, 

low inflation, and the greatest peacetime economy we have seen in 

a generation. 

Do you believe those arguments came to fruition in the 1990s? 

Mr. ENTIN. We discussed this a bit before you were able to come 

in. I have never expressed anything that strongly or in quite that 

exaggerated a tone. 

The reductions in output and jobs that I am predicting would be 

the ultimate outcome over about a 5-year period of adjustments in 

the economy. This would not suddenly happen, but you would end 

up, longer-term, with a bit less capital formation and a bit lower 

employment if you have the higher rates. 

24 

Those rate changes in the top rates clearly would not completely 

pay for themselves. They are not 100-percent offset because of lost 

revenue when it is in the top rates. They would lose about 40 percent of their revenue—not 100 or 200 percent, not on the top rates 

going up. But you do lose some jobs because of it. 

It is not the most efficient way to promote growth, but it does 

hurt you if you raise those top rates. 

Mr. Clinton did raise the top rates. We were coming out of a bad 

patch, and the economy was growing fairly strongly at the time. So 

the damage was limited. These were small rate hikes. 

However, he also signed a capital gains tax rate reduction which 

lowered the cost of capital considerably and gave considerable 

oomph to that decade. On balance, it was a pro-growth tradeoff. 

And so just simply saying, let us go back to Mr. Clinton’s plan— 

the economy was growing—is not going to cut it. 

From where we are today, if you raise those capital gains and 

dividend rates and the top rates, you are going to raise the cost of 

capital and give us a smaller capital stock than we are setting off 

to have right now under current rules. It depends on where you are 

starting. 

Going in that direction is going to slow the economy down and 

give you less growth in capital and employment over time. 

Senator MENENDEZ. Well, on the individual rates, I just see that 

the reality was that we had a much different result. 

The final question, if I may, Mr. Chairman. 

Mr. Mehiel, thank you for joining us today. Did you start taking 

half-days and laying off workers because of the Clinton tax policies? 

Mr. MEHIEL. No, no. The changes that came in the early 1990s, 

the effects on my business were actually quite stark. What happened is that the cost of capital declined, not so much in Treasury 

rates, but we would borrow generally as a spread to Treasuries. 

I think the capital markets just kind of said, ‘‘Wow, the government is going to pay its bills,’’ you know. The deficits are going 

down. Indeed, there came a time when there were surpluses. 

The cost of capital came down. Therefore, I could borrow more. 

Therefore, I could invest more. My business went from employing 

1,200 people to employing 12,000 people between 1993 and 1998– 

1999. So it was exactly the opposite. 

Senator MENENDEZ. Thank you. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. 

Next, Senator Snowe? 

Senator SNOWE. Thank you, Mr. Chairman. 

Mr. Rys, your organization, obviously, is the largest voice for 

small businesses in America. What has been your response to some 

of the proposals that have emerged from Congress and also the 

President, for example, on raising taxes on those who earn more 

than $250,000, since we have all heard here today about 50 percent 

of that income above $250,000 is attributable to flow-through entities? 

Mr. RYS. Respective of our membership, there has been a lot of 

concern about tax increases on those levels, because that is the operating capital that the business has to function on from year to 

year. 

25 

Cash flow is often a problem for small business owners. So, if you 

pull out the profit of the business, you are going to be taxed on it 

as income, yet you are going to save that money to meet your expenses from year to year. And this is something we hear from our 

business owners regularly and something that we have seen especially right now in what have been really tough economic times. 

Senator SNOWE. Well, it would be 50 percent or $1 trillion of 

business income above $250,000 that would be taxed at the top two 

tax rates. 

And that has been the difficulty, I think, in this whole discussion 

nationally when we are talking about whom we are taxing, because 

there is no distinction made between those individuals and small 

businesses that are paying the individual tax rate. 

Mr. RYS. Correct. And I think it gets back to a point Senator Kyl 

and Mr. Entin made, which is what are we taxing, which is the 

profits of the business, which is the money you are going to use to 

run the business in down years. 

I have heard examples from many of our members who said, ‘‘I 

had a great year in 2006 or 2007, and I saved for tough times, and 

I didn’t have to lay off any of my workers over the course of the 

last couple years because I had that money that I saved,’’ because 

they were able to save that money. 

They were able to offset the loss that they had in economic productivity because they had fewer sales, fewer customers, the economy just took a nosedive. So it is important to make sure that 

small business owners have those reserves to be able to work with. 

Senator SNOWE. Another proposal that had been offered by the 

administration was with respect to their version of corporate tax 

reform and to require these conversions from S corps to C corps, 

the conversion to C corps and paying double taxation. 

How damaging would that be? 

Mr. RYS. I think it is a large concern for small business owners. 

They have had a lot of success being able to set up their businesses 

as pass-through structures. It is a much simpler tax system, it is 

a much simpler business structure. 

Really, under the current code, no tax structure is simple, but in 

comparison, it is certainly easier. And I think some of the concern 

our members have is, if you reduce deductions to pay for that, that 

is also going to have a negative impact on those pass-through businesses, because their tax rate is going to go up; not only because 

their tax rate is higher, but they have also lost a deduction that 

they may have relied on. 

So it really puts those pass-through business owners on an unequal footing. And when we look at these pass-through businesses, 

they really do produce a lot of the private sector employment in 

this country. It is 54 percent right now. In fact, there are six States 

that have over 60 percent, including Maine and Montana. Montana 

is the highest in the country at 69 percent. 

So there are a lot of workers, a lot of employees working in these 

businesses, and it is a structure that has worked very well for 

small business owners. 

Senator SNOWE. And, as I understand it, it would be 20 million 

workers who would be affected by these higher tax rates. 

26 

Mr. RYS. The top tax rates—well, it would be a substantial number of the workforce. When we have looked through our survey 

data, the businesses most likely to get hit are those businesses 

with between 20 and 250 workers, and those businesses accounted 

for a quarter of the American workforce, 33.5 million workers. 

These businesses are generating jobs. These businesses have— 

across the sector, they have hit a rough patch, but these businesses 

are generating jobs. They are generating opportunities. They are 

providing economic growth. And that is going to be diminished if 

tax reform is done in a way that increases their rates and reduces 

the deductions that they rely on. 

Senator SNOWE. Well, on this whole issue of tax reform, I happen 

to believe we should do tax reform this year. I think it is crucial, 

rather than putting out pieces here on the margin and approaching 

it in a piecemeal fashion, that we should have a comprehensive 

overhaul, without question. 

I think that is one issue that might address certainty and might 

be the very issue that could resuscitate this economy for the long 

term. 

I know Dr. Burman says it is a lack of demand, but I think that 

this does dovetail with those issues because, in talking to my constituents—and primarily small businesses and businesses across 

the country—as ranking member of the Small Business Committee, 

I can assure you the issues I hear the most about are taxes and 

regulatory reform, both of which really do have a profound effect 

on running a business and on surviving in this economic climate. 

So I am hearing all of these ideas about tax reform, but I am 

concerned about doing it in a piecemeal fashion. Rather, we should 

be doing it in a comprehensive fashion. 

Do you think it is possible this year to do that? 

Dr. BURMAN. Tax reform this year? 

Senator SNOWE. Yes. 

Dr. BURMAN. It is hard. I actually came to Washington to work 

on what became the Tax Reform Act of 1986 at the Treasury. I actually lived in Maine when I moved here. 

But I completely agree with you that fundamental tax reform is 

really sorely needed. The tax system is a mess. It is extremely complicated. 

People perceive it as really unfair. There are all these things that 

people get through credits and deductions, but people think they 

are not getting their fair share, and they do not really understand 

how it affects them. 

So I think, actually, tax reform—my perspective is that tax reform ought to be a way to help deal with the budget problems 

along with significant spending cuts. And I think if people saw it 

as some sense of shared sacrifice so that we could leave the economy not a basket case for our children and grandchildren, that 

they would be willing to participate in that. 

Senator SNOWE. Thank you. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

Mr. Rys, you got my attention when you said, what, 69 percent? 

Mr. RYS. Yes. Of the employees who work in Montana, 69 percent of them work at pass-through businesses. That is the highest 

in the country. 

27 

The CHAIRMAN. That makes sense, because we do not have a lot 

of big companies. 

I will not intrude on your time, Senator, very much here, but my 

understanding is that, nationwide, 3 percent of pass-through income is income where the taxpayers are in the top two brackets, 

or half of income was 3 percent of taxpayers. 

Mr. RYS. When we have surveyed on this, we have found overall, 

on small business owners, it is around 10 percent. But I think the 

question becomes—— 

The CHAIRMAN. So my figure is wrong. 

Mr. RYS. I think the figure is low, because I think, when we have 

looked at the 3 percent number, there are too many businesses—— 

The CHAIRMAN. I am taking Senator Cardin’s time here. 

Senator Cardin, you are next. 

Senator CARDIN. I appreciate the point that you are making, Mr. 

Chairman. And let me thank all of our witnesses. I found this 

panel to be very interesting. 

Mr. Mehiel, first of all, I found your testimony to be not only 

credible, but very understandable, and I thank you for that. 

Mr. MEHIEL. Thank you. 

Senator CARDIN. I am not surprised, because your business roots 

are in Maryland. 

Mr. MEHIEL. That is true. We started my business in Baltimore. 

Senator CARDIN. I am well-aware of it. I remember when you had 

a lot fewer employees than you have today. Believe me, I visited 

your plant at that time. 

But let me just point out the very simple fact that you make, and 

that is the advantage of progressivity when we are trying to stimulate growth in our economy. 

The point that you made about, when you received a tax increase, it did not affect your consumption—I am not picking on 

your income right now, but it did not affect your consumption. And 

when you got a tax cut, it still did not affect your consumption. So, 

if we really want to use the tax code to help grow our economy, 

then we have to concentrate on those who are at the marginal 

rates where it makes a huge difference to them to have more 

money in their paychecks. 

Which brings me to, I guess, one of the fundamental problems of 

capital gains taxation. The truth is that those who take advantage 

most of capital gains on their personal tax rates are those in the 

higher incomes. 

So, when you look at what we are trying to do to help grow our 

economy, the side effect is that we are giving tax relief to those 

whose own decisions are not going to be very much impacted by the 

tax rate itself. And your proposal deals with that by creating an 

additional rate and giving preference to capital gains, but making 

the tax code more progressive in the balance. 

I thought that was a fair way of looking at trying to deal with 

this inconsistency. If we are not able to raise rates beyond perhaps 

the pre-Bush years, what do you believe is the appropriate tax rate 

on capital gains? 

Mr. MEHIEL. I probably would argue to bring it up to 28 percent, 

where it was. And what drives that, Senator, is my fundamental 

belief that the Federal Government needs more revenue and, if we 

28 

believe that we no longer have the capacity to borrow on an unlimited basis, if there is going to be a limit to what we should or can 

borrow—and I believe that day is coming—then the question becomes, if we collect some more revenue, what is happening to it? 

What is happening to it is the government is going to send it back 

into the economy, and the people who ultimately get it are, in fact, 

going to spend it, and we are going to drive economic opportunity. 

But we have to—I mean, it is clear we have to address the fiscal 

imbalances and find a way to bend that expense increase curve 

over time, no question about it. 

But right now, if you raise the rates, capital gains rates, which, 

generally speaking, those are rates that affect people at the upper 

end of the income ladder, so to speak. That is a generalization, and, 

clearly, there are exceptions. But if you do that, and if you raise 

the marginal rate on earned income, as it is called, it is my fundamental belief—and I am convinced of this—it is going to have zero 

impact on the personal spending decisions and consumption of the 

people who are hit with those increases. 

In addition to that, I am not surprised that, in the organization 

that Mr. Rys surveyed, everybody said, ‘‘We don’t want to pay any 

more taxes.’’ I do not want to pay any more taxes either. Nobody 

wants to pay more taxes. But I do not subscribe to the theory that 

this modest increase in flow-through income is going to have any 

dampening effect on the ability of small business to invest and 

grow. 

If it was going to 80 percent, 90 percent—we have experienced 

those rates in the past—certainly, those kinds of rates would have 

an enormous impact on decision-making. 

But going from 35 to 39, the businessperson is going to do what 

is the interest of the business and worry about paying the extra 3 

percent later. 

Senator CARDIN. I think your point is very well-taken. If we were 

to ask the public how they feel about the deficit, they want to 

eliminate it. And if you ask them if they want to pay more taxes, 

they are going to say ‘‘no.’’ 

Mr. MEHIEL. Of course. 

Senator CARDIN. We know that that is an intuitive answer. But 

I think Chairman Greenspan underscored the point that you made, 

that predictability in getting our deficit under control has a much 

more important impact on our economy than either the psychological or real impact of revenues. 

So I think that point—and it has been, of course, shown during 

the Clinton years, where we did make tough decisions. We reduced 

spending, and we did bring in more revenues, and we did reduce 

the deficit, and we had an incredible job growth. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

Next, Senator Wyden. 

Senator WYDEN. Thank you, Mr. Chairman. Another very good 

hearing. 

What was striking to me yesterday about Mr. Greenspan’s testimony is, I asked the panel—I essentially started with Governor 

Engler—about the toll that the uncertainty and the lack of predictability has brought to our economy. 

29 

And Governor Engler, Mr. Greenspan, the entire panel talked 

about this, because, of course, we are just lurching from kind of one 

change to another, and the main thing that business needs is some 

predictability. 

Do all of you essentially share that view? 

Mr. Mehiel, you are trying to grow a business. How do you make 

investments for the next 5, 8 years when the Congress is talking 

about yet another temporary patch or another temporary band-aid? 

Mr. MEHIEL. Senator, I concur with Chairman Greenspan’s point 

of view, as you have relayed it to us and as we heard earlier. 

The uncertainty—it is sometimes intangible—but I know right 

this minute, I am considering where I am in the development of 

the business: should I be selling, should I be selling off a major portion to a larger enterprise and kind of taking chips off the table? 

And I do feel driven to give a lot of consideration to that, because 

it is not clear to me that we have our house in order or that we 

are going to have our house in order anytime soon given the enormous disparity and polarization in the points of view that we hear 

articulated from the responsible members of our government here 

in Washington. 

So that is a very serious issue. Whatever we do, I think that, on 

a real-time basis, it ought to be clear, it ought to be comprehensive, 

and people should believe that that is going to be the regime for 

an extended period of time, and they will then adjust their behavior and their decisions to whatever that protocol is. 

Senator WYDEN. Your thoughtful response took me right to Dr. 

Burman on this question of polarization because, to me, what is so 

appealing about the 1986 model which cut marginal rates but kept 

progressivity is, it brought together Republicans and Democrats. 

And we went and looked at the Bureau of Labor Statistics’ numbers, and, in the 2 years after the 1986 tax reform legislation, our 

country created 6.3 million new jobs. 

So, obviously, it stimulated activity, which helped to put people 

to work. That is the number-one concern of our constituents today. 

Dr. Burman, because you have been a supporter of the 1986-type 

approach, as many of us have, is there any reason to believe that 

a similar kind of approach would not stimulate economic activity 

again? It puts dollars into the pockets of middle-class people. So it 

responds to the demand agenda that you are talking about, and 

will increase the competitiveness of American businesses in global 

markets. Would we not get growth again? 

Dr. BURMAN. It is actually hard to—from an economist’s perspective, it is hard to tie growth to a particular activity. But the one 

reason that economists find the 1986-style tax reform to be particularly attractive is that, conceivably, you could raise revenue to help 

deal with the deficit, along with spending cuts, without raising 

marginal rates, even cutting marginal rates and eliminating a lot 

of the loopholes and preferences that lead to inefficient tax avoidance behavior, not to mention a great deal of complexity. 

So both of those things actually would be pro-growth, and you 

can do them in a progressive way. You have been a great leader 

in the tax reform effort in the Senate, and I applaud what you are 

doing. I think it would be tremendously important. 

30 

But the real challenge—well, it will be hard to get tax reform to 

begin with. The real challenge will be figuring out how to make it 

stick, and I have not entirely figured that one out myself. 

Senator WYDEN. And no current Congress can ever bind a future 

Congress, clearly. I have had at least some preliminary discussions 

with Chairman Baucus about this, because, clearly, if we get tax 

reform, we have to figure out a way to at least make it tougher to 

unravel it. 

Dr. BURMAN. Actually, the Senate does have a good track record 

of setting rules that they agree to follow from one Senate to the 

next. So, conceivably, you could have rules. 

And one thing, I came across this table or chart that the JCT, 

Joint Committee on Taxation, has on their website showing the 

numbers of requests for estimates, revenue estimates, since 1986. 

In 1986, there were something like 440 revenue estimates. In 2009, 

there were 7,000. 

So I think there has to be—to some extent, there has to be a 

change in mentality that maybe we should figure out how to fix the 

tax system and leave it alone and move on to other things. 

Senator WYDEN. I had one other question, Mr. Chairman, but I 

will wait for the second round. 

The CHAIRMAN. Go ahead. 

Senator WYDEN. Mr. Rys, let me ask you a question about the 

business rates, because you, of course, have many of the passthroughs that the chairman talked about as your members, 8 to 10 

employees, and we have been trying to figure out a way to come 

up with a competitive rate structure for the three major kinds of 

businesses. 

We have American businesses, large businesses that operate in 

the United States, we have small businesses that operate in the 

United States, and then we have the multinationals. And it seems 

to me competitive rates would help in all three brackets, and one 

way to do it is to chip away some of those tax breaks—there are 

hundreds of billions of dollars for, in effect, the businesses that operate overseas—and use that money to dramatically slash rates for 

businesses here in our country. 

So, for example, one of the areas you have been interested in is 

being able to expense permanently in the first year for small business. We could do that while, at the same time, giving a competitive rate somewhere in the low- to mid-20s for all the other businesses. 

Would something like that not make sense for you all? 

Mr. RYS. Yes. I mean, I think it depends. We certainly would 

have to look at where the deductions come from and what impact 

that is going to have as well. So I think there is a balance that 

needs to be taken there. 

But I think you are headed in the right direction; we do need to 

look at this holistically. One of the challenges that we have seen 

going forward, and you talk about certainty and confidence, is, 

when we hear talk about tax reform, it has been, we are going to 

reduce all your deductions and reduce the corporate rate. 

Then a lot of that has been followed by, we are going to raise certain tax rates, but we are also going to eliminate those deductions. 

So some of the smaller businesses, even if they are below the inVerDate Nov 24 2008 17:46 Oct 18, 2012 Jkt 000000 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 R:\DOCS\75674.000 TIMD
31 

come thresholds that have been targeted for having their taxes 

raised, could see their tax rates go up because now they have lost 

deductions. 

So there does need to be a balance to this, both on the passthrough side and the corporate side. So I think that does kind of 

make sense, and you have to look at what those deductions are. 

If I could comment, just really quickly, on expensing. I think the 

real—I am way over the time, so I apologize—the real advantage 

there is not only that it puts the money back in the business immediately, but it also simplifies the tax code. And the tax code is just 

such a confusing monstrosity for small business owners to wrap 

their arms around. 

What expensing does is, it eliminates some of the depreciation 

rules. So it just makes it easier to manage your business, to manage the paperwork, and deal with your accountants. 

So, not only does it promote the investment side of things, but 

it also simplifies things, and that is an important double benefit. 

Senator WYDEN. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. 

Senator Hatch? 

Senator HATCH. Thank you, Mr. Chairman. 

Mr. Rys, it is true that Mr. Mehiel’s business was a C corporation, not a flow-through corporation. So would the business have 

been hit with the Clinton tax hikes on the top 2 percent? 

Mr. RYS. It depends on what kind of income he takes out of it. 

Senator HATCH. No. But, I mean, his—— 

Mr. RYS. Depending on what kind of income—— 

Senator HATCH [continuing]. Business would not have been hit. 

Mr. RYS. His business would not have been, and I think that 

is—— 

Senator HATCH. Well, that is what I am—— 

Mr. RYS [continuing]. That is the challenge. And I think, going 

back to that, the 1990s, we had a dot-com boom, we had Y2K, a 

lot of money being spent there. So we had much stronger economic 

winds pushing—— 

Senator HATCH. I agree. 

Mr. RYS [continuing]. Pushing in a way we do not have right 

now. 

Senator HATCH. I agree, but my point is—— 

Mr. RYS. That is going to be a challenge. 

Senator HATCH. My point is, this was not a flow-through business. 

Mr. RYS. Right. 

Senator HATCH. Which is what we are talking about here. 

Mr. RYS. Absolutely. 

Senator HATCH. Now, in the bill sent to Congress this week, 

President Obama proposes capping the value of itemized deductions at 28 percent for families making over $250,000. 

Now, let us be clear. This is a tax increase on millions of American taxpayers. Right now, these taxpayers get a deduction equal 

to their marginal tax rate of 33 or 35 percent. 

Now, under this proposal, the value of itemized deductions—I am 

going to ask you this, Mr. Entin. Under this proposal, the value of 

itemized deductions would be reduced 20 percent down to 28 perVerDate Nov 24 2008 17:46 Oct 18, 2012 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 R:\DOCS\75674.000 TIMD
32 

cent, and they will get even worse if the President and congressional Democrats are able to raise these rates to 36 percent and 

39.6 percent. 

Now, the Obama 28-percent limitation would reduce the benefit 

of the home mortgage deduction, which would put downward pressure on home prices, it seems to me, at a time when it is very difficult for homebuilders and that particular industry. 

The Obama limitation would also reduce the benefit from the 

charitable contribution deduction, and this would reduce the 

amount of contributions people would make to churches, soup 

kitchens, universities, et cetera. 

Now also, this administration that tries to boast about how 

transparent it is, it certainly did not make clear that it was proposing to tax health insurance benefits of workers in the top two 

brackets. 

It is odd that President Obama would propose such a thing, since 

he ran one negative campaign ad after another against Senator 

McCain for a very similar proposal. 

Now, this seems to me to be another attempt by the administration to raise taxes on the American people to support more of the 

same old proposals that have been offered by this administration 

before. 

Now, Mr. Entin, can you please comment on the likely economic 

effect of this proposal? It is a broad question, I have to apologize. 

Mr. ENTIN. I think the question ought to be, what is the appropriate tax base? I think it is proper, if you are giving money to 

someone else, for it to come off of your tax return and go onto the 

recipient’s return. If that recipient is deemed too poor to owe tax 

or is a tax-exempt organization, as determined to be in the national 

interest by the Congress, so be it. They should receive it tax-free. 

To then turn around and raise the tax on the giver simply because 

of whom you are giving it to is simply not correct. 

Income should be taxed where it is finally available for consumption. If I give money to someone else, it should be off my return 

and on theirs. 

I think that curbing the charitable deduction has the effect of implicitly raising the marginal rate, because more of the income is 

being taxed. I do not know what the tradeoff would be in the form 

of a lower rate for the elimination of the deduction or the health 

insurance exemption. So it is hard to say how it would come out 

economically. 

But you really need to get your tax base straight and then let 

the rate fall where it should be to fund what government is supposed to be doing. And I think most of these transfers from one 

person to another should be deductible. 

Curbing the home mortgage deduction would have an impact on 

home prices. It is one of the very few areas in the tax code where 

we just about have it right. We are treating the house as it would 

be treated in, basically, a cash flow tax, and I would not want to 

see that interfered with. 

Might I have a second to comment on capital gains? 

Senator HATCH. Sure. 

33 

Mr. ENTIN. The 1986 Act raised the capital gains rate from 20 

to 28 percent. There was a rush to take gains before it took effect, 

and then there was a collapse in gains afterwards. 

There is a table and a chart in my testimony. 

CBO and the Treasury routinely suggest that those little timing 

effects all around a rate change are temporary and then you get 

back to your normal realizations of gains. 

The economic effect, however, that is calculated on what the tax 

rate change does to capital formation and the cost of capital and 

how much capital we want to have and on the price of assets, suggests that the effect on gains and tax revenue is more permanent. 

After 1986, capital gains realizations collapsed below 1985 levels 

as a share of GDP for a decade until President Clinton signed the 

tax reduction on capital gains and it became effective in 1997. 

The effect of the rate changes was not temporary. You are not 

going to get a dime raising the capital gains rates up to 20 or 28 

percent. 

Where is the revenue maximizing rate? Feldstein has it in the 

mid-teens. A paper that was done by Paul Evans of Ohio State recently suggested it was slightly below 10, and that was just on the 

realizations, not on the economic cost. 

I would be cautioning you not to rely on raising capital gains 

rates for revenue. 

The CHAIRMAN. Let me ask a question that—— 

Senator HATCH. Mr. Chairman, my time is up. 

The CHAIRMAN [continuing]. Senator Wyden talked about, and I 

think it is on the minds of a very great number of people. That is, 

how do we reform the code in a way that is fair and balanced, et 

cetera—and everybody talks about broadening the base, lowering 

the rates—but in a way where there is more certainty and more 

predictability? 

In fact, I have forgotten who it was, maybe Dr. Burman mentioned it, there are like 7,000 requests for revenue estimates or 

something like that, and, my gosh, that is appalling. 

Do we need to change our system gradually? Where are we going 

to end up? That is, in the long run, we are all dead. But the next 

10, 15, 20, 30 years? Other countries have their own systems, some 

have territorial corporate systems, but we do not. Other countries 

have consumption taxes. We do not. 

If we are going to be competitive 10, 15, 30 years from now, 5 

years, 10 years from now, and we are going to hopefully have a little more predictability and a little more certainty, is it worth thinking about going in a different direction here or not? 

We do not have a lot of time here. I just raise the question, because I think we are kind of at a semi-crossroads here in our country. And with the debt as high as it is, we have this supercommittee created to try to reduce the deficit, and it is all about 

this question of how we do it and so forth. 

There is an opportunity to perhaps go in a little bit different direction, if that makes sense. 

Dr. Burman? 

Dr. BURMAN. I think it is a great question. The Bipartisan Policy 

Center put together a proposal—and this was a bipartisan group 

of Republicans and Democrats and wonks—and their proposal actuVerDate Nov 24 2008 17:46 Oct 18, 2012 Jkt 000000 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 R:\DOCS\75674.000 TIMD
34 

ally had a value-added tax as a way to lessen the burden on capital 

and allow lower tax rates on ordinary income, but in a way that 

was progressive. 

I have written that I surely think it would be a good idea to have 

a value-added tax that was dedicated to paying for health care. 

Every other developed country in the world has one. 

A lot of people are concerned that if we had a value-added tax, 

it would be a money machine. 

The CHAIRMAN. Right. 

Dr. BURMAN. It would cause an enormous growth of government. 

I think if you actually had an earmarked tax, just like payroll taxes 

that are earmarked for Social Security now, if it were earmarked 

to pay for health care, it would make it very apparent to people the 

consequences of not controlling health care costs, because the rate 

would go up. 

And I think that would actually build support for limiting the 

growth of government, and it certainly could allow for radical reductions in other income taxes. 

The CHAIRMAN. Mr. Rys, what do you think? 

Mr. RYS. I think it is a broad question, and I do not know if right 

now, with a lot of economic uncertainty, that a major change and 

a different direction is the way to go. 

I think what our membership is really looking for is some kind 

of certainty, to know what the tax rates are going to be a year from 

now, 2 years from now. And I think, when you look in the different 

provisions of the code, as well, some of the provisions that they rely 

on most tend to phase in and out. I think we get back to section 

179; it jumps all over. 

The CHAIRMAN. There is so much variation. Rates are up and 

down. I mean, it is just incredible, and all these tax extenders. If 

I were a businessman, I would ask myself, ‘‘Holy America, what 

are those guys going to do next?’’ It would make it very difficult, 

it would seem to me. 

Mr. Entin? 

Mr. ENTIN. Certainty would certainly help. But if you are in the 

emergency room and a loved one is taken behind the curtain and 

you do not know what the outcome is going to be, it is not just the 

certainty you are concerned with. It is the outcome. 

I think if we certainly and definitively raise taxes substantially 

on capital, we would end up in trouble. I think if we certainly and 

definitively lowered taxes on capital and promoted investment and 

job creation, we would be better off. 

So which way you go to create the certainty—— 

The CHAIRMAN. So, in answer to my question, you think we 

should just lower taxes on capital, period. That would create the 

certainty. 

Mr. ENTIN. I think people who are trying to invest need to know 

whether the taxes are going to go up or down on capital. And, if 

they go up, there will be less, and, if they go down, there will be 

more. 

The CHAIRMAN. Mr. Mehiel? 

Mr. MEHIEL. Senator, I think if we could begin to migrate a significant portion of our collection of revenue toward a consumption 

tax over time, that would be a very good thing. Obviously, there 

35 

are a lot of details around that and what is it and where are the 

exemptions and how does it affect people in different economic circumstances. 

I mean, there is detail behind that that would have to be sorted 

out, but if we could tax consumption and, thereby, reduce taxes on 

capital that is invested and reduce tax rates on so-called ordinary 

income and move in that direction, I think that, over time, that 

would be a huge benefit to the Nation. 

The CHAIRMAN. That is very interesting. 

I think that is enough for today. Thank you all very, very much 

for coming. I appreciate it very much. Some of you have come great 

distances. You have all worked hard to prepare for this hearing, 

and I thank you very much for your time. It is very much appreciated. 

The hearing is adjourned. 

[Whereupon, at 11:53 a.m., the hearing was concluded.] 

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