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56–740—PDF 2008

S. HRG. 110–1044

CRACKING THE CODE:

TAX REFORM FOR INDIVIDUALS

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

MAY 13, 2008

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

DEBBIE STABENOW, Michigan

MARIA CANTWELL, Washington

KEN SALAZAR, Colorado

CHUCK GRASSLEY, Iowa

ORRIN G. HATCH, Utah

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

PAT ROBERTS, Kansas

JOHN ENSIGN, Nevada

JOHN E. SUNUNU, New Hampshire

RUSSELL SULLIVAN, Staff Director

KOLAN DAVIS, Republican Staff Director and Chief Counsel

(II)

C O N T E N T S

OPENING STATEMENTS

Page

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

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

Grassley, Hon. Chuck, a U.S. Senator from Iowa ................................................. 2

WITNESSES

Burman, Dr. Leonard, director, Tax Policy Center; and senior fellow, Urban

Institute, Washington, DC .................................................................................. 4

Gale, Dr. William, vice president and director of economic studies, The Brookings Institution, Washington, DC ....................................................................... 6

Entin, Stephen, president and executive director, Institute for Research on

the Economics of Taxation, Washington, DC ..................................................... 8

Foster, Dr. J.D., Norman B. Ture senior fellow in the economics of fiscal

policy, Domestic Policy Studies, The Heritage Foundation, Washington,

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

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

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

Bunning, Hon. Jim:

Prepared statement .......................................................................................... 31

Burman, Dr. Leonard:

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

Prepared statement .......................................................................................... 32

Responses to questions from committee members ......................................... 59

Entin, Stephen:

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

Prepared statement .......................................................................................... 71

Responses to questions from committee members ......................................... 91

Foster, Dr. J.D.:

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

Prepared statement .......................................................................................... 101

Responses to questions from committee members ......................................... 108

Gale, Dr. William:

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

Prepared statement .......................................................................................... 118

Responses to questions from committee members ......................................... 128

Grassley, Hon. Chuck:

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

Smith, Hon. Gordon H.:

Prepared statement .......................................................................................... 141

COMMUNICATION

Alliance for a Competitive Tax Policy .................................................................... 143

(III)

(1)

CRACKING THE CODE:

TAX REFORM FOR INDIVIDUALS

TUESDAY, MAY 13, 2008

U.S. SENATE,

COMMITTEE ON FINANCE,

Washington, DC.

The hearing was convened, pursuant to notice, at 10:04 a.m., in

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

(chairman of the committee) presiding.

Present: Senators Wyden, Salazar, Grassley, Hatch, Snowe,

Smith, Bunning, and Roberts.

Also present: Democratic Staff: Bill Dauster, Deputy Staff Director and General Counsel; Kathy Koch, Senior Advisor, Tax and Economics; and Tiffany Smith, Tax Counsel. Republican Staff: Mark

Prater, Deputy Chief of Staff and Chief Tax Counsel; Nick Wyatt,

Tax Staff Assistant; and Ellen McCarthy, Tax Counsel.

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

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. The hearing will come to order.

Yale Law Professor Michael Graetz has said, ‘‘The tax law is the

primary link between the Nation’s citizens and the government.

Many more people file tax returns than vote in presidential elections.’’ The numbers bear that out. For the last presidential election, 10 million more people filed income tax returns than cast

presidential ballots.

Individual income tax returns are the primary source of the Nation’s revenue. Individual income tax collections account for about

half of the revenues that the Federal Government collects. As the

former head of the Joint Committee on Taxation testified in 2001,

the burdens of complexity fall particularly on individual taxpayers.

So it is only fitting that today’s tax reform hearing focuses on tax

reform for individuals.

The IRS estimates that it takes people an average of 26.4 hours

to complete the individual tax form. That is more than a complete

day just to figure out how much you owe the Federal Government;

clearly too long. That is only the average. Some people take a lot

longer to figure out their taxes. That number does not count up all

the time actually spent. Most of us do not just sit down and work

out our taxes in one sitting. Most taxpayers spend a lot of time

gathering information. People spend days, even weeks, compiling

information before sitting down to fill out a tax form. On top of

that, many people have to calculate the Alternative Minimum Tax.

2

* For further information on this subject, see also, ‘‘A Reconsideration of Tax Expenditure

Analysis,’’ Joint Committee on Taxation staff report, May 12, 2008 (JCX–37–08), http://

www.jct.gov/publications.html?func=startdown&id=1302.

Why is filing your taxes so complicated? One reason is because

the tax code has multiple functions. The government raises revenue

with taxes, and then the government also uses the tax code to implement social policy, as well as economic policy. For example,

through the Earned Income Tax Credit, people are raised out of

poverty. Through college education credits and deductions, college

is more affordable and accessible. Through tax cuts, Congress can

give a boost to the economy during hard times.

As we begin the task of tax reform, we will have to determine

priorities: how can we make the tax code fairer? How can we make

it simpler? How can we reduce its drag on the economy? And can

we do all these things at the same time?

On April 15, I began this series of hearings with a broad overview of tax reform. Today we will consider what our priorities

should be in the individual area. Future hearings will address

small businesses, corporations, and international competitiveness,

among other topics.

So let us see if we can make the primary link between the Nation’s citizens and the government just a little less painful. Let us

see if we can make the primary source of the Nation’s revenue a

little fairer. Let us see how we might lessen the burdens of the tax

code on America’s individual taxpayers.*

Senator Grassley?

OPENING STATEMENT OF HON. CHUCK GRASSLEY,

A U.S. SENATOR FROM IOWA

Senator GRASSLEY. Thank you, Mr. Chairman.

Just about everybody agrees that the tax code is very, very complex. The tax form instruction book is probably the most unwelcome piece of mail many taxpayers get. The complexity means that

taxpayers cannot be confident that they received all the breaks

coming to them or that they have not paid more than they owe.

As last month’s tax filing deadline came to a close, millions of

hardworking American taxpayers knew about the complexity firsthand. As we note the complexity, we should also note a point one

of the key 1986 Tax Reform architects has made several times.

This is what Senator Packwood, then-chairman of the committee,

was fond of saying: ‘‘Many taxpayers accept complexity that favors

them.’’

When we consider the complexity of the regular tax system and

the creeping effect of the Alternative Minimum Tax, you have a

recipe for disaster. As an example of the problems from the AMT

side, if we do not extend the hold-harmless, or patch for 2008, 25

million tax filers, mostly families, will be affected by the AMT.

Twenty-five million families. Think about that. Because of the way

the AMT is structured with no indexing, the AMT problem grows

exponentially from year to year. The revenue loss for last year’s patch was $50 billion, and it grows to $65 billion this year, so we are facing a train wreck. So,

there is no question that we have big problems. It is a problem that

the committee should focus on. Let me say that I have no preVerDate 11-MAY-2000 14:51 Jul 12, 2010 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 56740.000 TIMD PsN: TIMD
3

conceived notions of which direction we should go, whether we are

talking about a flat tax, a national retail sales tax, a value-added

tax, or substantial modification of the current system.

Let me also note that more than 3 years ago I instructed the Finance Committee tax staff on our side to develop a simplification

proposal in all income tax areas. The staff have worked up some

proposals. While we all agree something should be done and we

should be open-minded about what reform would look like, I would

like to remind folks that there is a key premise to tax reform that

needs to be fleshed out. The premise I refer to is whether we assume current-year law levels of tax relief in effect or whether we

assume that the bipartisan tax relief plans of 2001 and 2003 expire.

If we use the latter assumption, which is that the post-2010

record-level tax increase goes into effect, then tax reform really becomes a historic tax increase. According to the latest figures from

the nonpartisan Congressional Budget Office, individual income

taxes will go up by more than 10 percent in terms of a share of

GDP. Said another way, American taxpayers will, on average, be

sending an additional 10 percent in taxes to Washington, DC for

Congress to spend instead of the marketplace deciding how it will

be divided up. That is simply because the bipartisan tax relief expires.

Now, it can be said yet a different way from the standpoint of

the typical worker. Everything else being equal, that worker will

see his or her take-home pay shrink by an extra 10 percent in

taxes. I raise this point because we are talking about individual income tax reform. If we are to enter the tax reform playing field,

we need to know the rules, including the size of the playing field

in revenue terms. Are we assuming tax reform is not possible without a record tax increase? This is a question that all policymakers

should have to answer.

This is a question that presidential candidates will have to speak

to before the end of the election. I hope the answer is that the goal

of a tax reform exercise ought to be to maintain the levels of taxation in effect before the Armageddon nearly every taxpayer faces

in 2011. If the goal is different—a record tax increase upwards of

10 percent on the American taxpayer—then I have very serious

reservations about whether we can—or more importantly should—

undertake the effort. So I look forward to the testimony of our distinguished panel today, and hopefully we can understand how this

possible tax increase works into tax reform.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator, very much.

Our first witness is Dr. Leonard Burman. Dr. Burman is the director of the Tax Policy Center and a senior fellow at the Urban

Institute. The second witness is Dr. William Gale. Dr. Gale is the

vice president and director of economic studies at Brookings. Next,

is Mr. Stephen Entin, who is president and executive director of

the Institute for Research on the Economics of Taxation. Finally,

Dr. J.D. Foster, who is a senior fellow in the economics of fiscal policy at The Heritage Foundation.

4

Thank you all for coming. Our usual practice is that each of you

will speak for 5 minutes, and your statements automatically will

be in the record.

Dr. Burman, why don’t you proceed?

STATEMENT OF DR. LEONARD BURMAN, DIRECTOR, TAX POLICY CENTER; AND SENIOR FELLOW, URBAN INSTITUTE,

WASHINGTON, DC

Dr. BURMAN. Thank you, Mr. Chairman, Ranking Member Grassley, and members of the committee. It is a real pleasure to be invited to speak about tax reform to this panel, in particular. I actually came to Washington in 1985 to work on what became the Tax

Reform Act of 1986, and I remember the pivotal role that this

panel played in developing that historic bipartisan legislation. I am

excited about the prospect of playing a similar role in our next tax

reform.

In the 1980s, there was a huge need for tax reform. Tax shelters

had gotten completely out of control. There were empty office buildings that were built just because of the tax benefits, and people

widely perceived the tax system to be unfair.

Arguably, right now there is an even greater need for tax reform,

for at least four reasons. One is the expiration of the tax cuts at

the end of 2010. I do not think anybody thinks that the tax cuts

should just be allowed to expire with nothing happening in their

place, but there is a real question as to what we can afford in

terms of future tax cuts. That is actually exacerbated by the AMT

problem which Senator Grassley referred to. We are counting on

the AMT to raise $1 or $2 trillion of revenue over the next 10 years

depending on whether the tax cuts are extended. If you take the

Bush tax cuts, AMT, all of the other things that are perpetually extended and you add them all together, plus the additional interest

on the debt, those would increase the national debt by the end of

2018 by $4.6 trillion.

Now, if revenue were pouring into the Treasury, that might not

be a huge problem, but in fact that would bring revenues well

below their historic levels, and at a time when there will be unprecedented demands on the government. The baby boomers are

starting to retire now, and they are going to be drawing Social Security and medical care that, over time, would basically lead us to

bankruptcy if our current revenues were continued.

Of course, the last problem which you referred to is that the income tax is a mess. It is complex, it is widely perceived to be unfair, and it is definitely not conducive to economic growth. So how

could we get tax reform? Obviously it requires presidential leadership. I think it is a good sign that in this campaign, both—or I

guess all three—of the presidential candidates are talking about

how they can work with people across party lines and how they can

get things done. The fact that this is a change election, I think, is

a really good sign. It obviously needs to be bipartisan. If one party

decides to run with tax reform, the other party will be able to

cream them because any kind of meaningful tax reform would raise

taxes on some people.

It needs to address the concerns of both parties. It needs to be

progressive. It needs to raise enough revenue to finance the governVerDate 11-MAY-2000 14:51 Jul 12, 2010 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 56740.000 TIMD PsN: TIMD
5

ment. If a Democrat is elected, it needs to dovetail with health reform. It needs to lower the tax burden on capital. We need to have

a credible way to control spending. Of course, it needs to be simple,

fair, and pro-growth.

I outline a proposal which I think would move forward in all of

these directions. I note—and I should have noted more clearly in

my testimony, that Senator Wyden has also been moving forward

with a similar proposal in many respects. One main element is to

have a value-added tax that is dedicated to paying for health care:

Medicare, Medicaid, and basically a voucher that will provide an

adequate level of health care for everybody. This would allow substantial income tax cuts.

One of the things that made the Tax Reform Act of 1986 happen

was that there was a big corporate tax increase, which most people

did not think they had to pay, and that made it possible to cut individual income taxes, which made tax reform much more palatable.

I argue that the VAT, the value-added tax, devoted to paying for

health care, could produce a similar kind of a trick. The details are

in my testimony; obviously I do not have time to go through them

in great length.

But the basic idea is that the new income tax system would have

a very broad base, it would be vastly simplified. Tax rates would

be cut dramatically. The top rate would be 25 percent, or possibly

even lower. Most people would not have to file income tax returns.

That is, withholding on wages, interest, dividends would be sufficient to determine tax liability at the end of the year. There would

be a small exemption for capital gains, so the people who had a

small mutual fund or something like that would not have to file

simply because of that. There would be a simplified refundable tax

credit for children and to encourage working, along the lines of

what Michael Graetz has suggested. I think you heard from him

a couple of weeks ago.

The VAT dedicated to health care would have a number of advantages. One is that, for the first time, everybody in the public

would see a connection between health spending and taxes. Everybody would have to pay the value-added tax. If health spending

continued to grow faster than the economy, the VAT rate would

grow over time. That would make it possible to do the kinds of sensible things to limit health care cost increases that might otherwise

be politically difficult.

It would help lower- and middle-income working families and

small businesses and would be a relatively efficient way to raise

revenues. Because we get rid of the exclusion on employersponsored insurance, it would bolster the Social Security trust

fund. So I do not pretend that I have the answers to all of our problems. I understand that these things are a lot more difficult than

I outline even in my written testimony. But I think, thinking along

these lines, we might be able to do something that would be of benefit, that would make the economy stronger, and make the tax system a lot simpler and fairer for most Americans.

Thank you very much.

The CHAIRMAN. Thank you, Dr. Burman. That was very interesting.

6

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

The CHAIRMAN. Dr. Gale?

STATEMENT OF DR. WILLIAM GALE, VICE PRESIDENT AND DIRECTOR OF ECONOMIC STUDIES, THE BROOKINGS INSTITUTION, WASHINGTON, DC

Dr. GALE. Thank you very much. Thank you for inviting me to

testify at this hearing on individual taxpayers and tax reform. I

think everyone agrees that the tax system needs reform. What I

would like to focus on are six over-arching goals or guidelines to

focus on or think about as we endeavor to change the tax system.

The first thing is, although it is good to focus on how taxes affect

individuals, it is important to realize there is not really a bright

line between taxes on individuals and taxes on businesses. So that

could be used to your advantage, as Len mentioned happened in

1986, but it is important to understand that the burden of the tax

ultimately does fall on individuals.

Any tax on a business ultimately burdens some individuals,

whether it is the shareholder, the worker, the customer, the supplier, et cetera. In short, you cannot reduce the overall burden on

individuals by shifting the collection of taxes to the business sector.

Ultimately it filters back to individuals.

The second point is, people will talk about a whole lot of issues

in tax reform, but there is one thing that needs to happen to reform the system, and that is to change the base of the tax system,

the tax base. There is a lot of talk about whether we go to a consumption tax or an income tax. In my view, either of those would

be better than the system we have right now. We call it an income

tax right now, but the thing that is taxed bears very little relation

to any economic notion of income.

So for argument purposes, let us focus on an income tax. The key

to reform is to broaden the base, to tax all income, tax it at one

rate, tax it at the full rate, tax it only once. So you do not want

double taxation, you do not want sheltering. You want a very comprehensive tax base where everything is taxed at the same full-rate

structure. This is not an argument for flat taxes, this is an argument for a broad base.

This does several things for the tax system and for the American

public. First, it levels the playing field, so it reduces the distortion

across different activities that come from taxing different activities

at different rates. Second, it allows you to reduce the overall rate

structure because the base is more comprehensive. That in turn

further reduces the extent to which taxes affect or distort economic

actions. Third, it makes taxes simpler. If you think about where

the complications in the tax system come in, it is all in the base,

figuring out which types of income are taxed at which rates, which

types of deductions and exemptions, et cetera, that people get to

use. So regardless of what you want to do in tax reform, fixing the

base is the first step, is the key step. It is not a sufficient step, but

it is a necessary step.

My third point. After that is done, after you have dealt with the

base, the third thing to do is think about the current structure of

exemptions, deductions, and exclusions, et cetera. Deductions tend

7

to be overly regressive, they tend to be overly expensive. They are

not justified, in most cases.

The only time a deduction is justified is if there is a reduction

in ability to pay taxes. If you look carefully at most of the deductions in our system, they do not relate to ability to pay taxes, they

relate to social goals. Those should be structured as refundable

credits so that everyone gets them rather than just high-income

taxpayers.

So that is an opportunity in terms of restructuring deductions.

That is an opportunity to save money, to be more efficient, to give

better incentives, and to be less regressive in the tax system.

The fourth point is that it is time to eliminate the AMT. We are

never going to have a partial reform of the AMT. As long as it is

there, it is going to be a mess. The AMT is really evidence of a failure in the underlying tax system. So when I say it is time to reform the AMT, there are two big caveats associated with that. One

is, you have to replace the revenue and the baseline that the AMT

generates, and the other is, you have to shut the loopholes in the

regular tax that would be there if the AMT were gone. But it would

be relatively simple to do that, and you could remove the whole

AMT structure with some relatively simple reforms.

The fifth point is just that a revenue system that is not adequate

to finance government spending will ultimately not be sustainable.

It will not be stable. We will end up with situations like we have

in 2010, where tax cuts expire and we have to figure out how to

deal with them.

The extension of this is, government spending is a tax issue. In

fact, it is the only reason that we have taxes, to pay for government spending. So, when we talk about Social Security or Medicare

reform, those are tax issues, and it may well be that the way to

get to tax reform is to put all those things in one big bowl and

come up with some grand resolution for the entitlement issue, the

tax reform issue, and the budget issue.

Along those lines, Len mentioned the value-added tax. Let me

just toss carbon taxes into the mix. There are both good environmental reasons and good revenue and efficiency reasons to consider

taxing carbon.

My last point—I will be real quick here—is that I cannot overemphasize the importance of making the system simpler. Tax policy, as you know, has enormous debates about how high taxes

should be, who should pay taxes, what should be subsidized. There

are all sorts of disagreements about tax policy. The one thing—the

only thing—that everyone agrees on is that the system is too complicated, yet every year the system gets more complicated. So,

when we head into tax reform, I think that is an important cautionary story, that, if you do not make simplification the most important thing, it will take a back seat and you will end up with a

more complicated system, which is how we got to where we are

now.

Thank you.

The CHAIRMAN. Thank you, Dr. Gale.

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

The CHAIRMAN. Mr. Entin?

8

STATEMENT OF STEPHEN ENTIN, PRESIDENT AND EXECUTIVE

DIRECTOR, INSTITUTE FOR RESEARCH ON THE ECONOMICS

OF TAXATION, WASHINGTON, DC

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

Grassley, and members of the committee. I thank you for including

me in the witness panel today to testify on tax reform.

It was one of the first issues I worked on when I came to Washington with Senator Bob Taft, Jr., in 1975 when I was his aide for

the Joint Economic Committee. It is still unfinished business, and

I would like to retire one of these days, so please let us get on with

it. [Laughter.]

There are good tax reforms and bad ones. The Kennedy-Johnson

corporate and individual tax changes of 1962 and 1964 got the

economy moving again, as did the 1981 Reagan cuts, and the 2003

Bush tax changes. In contrast, the 1986 Tax Reform Act savaged

saving and investment, especially real estate, and along with two

payroll tax hikes, contributed to the 1990–1991 recession. It did get

rid of some unwanted loopholes, but it went way too far in the taxation of capital.

The main focus of fundamental tax reform should be to end existing tax biases against saving and investment. Current tax law puts

heavier taxes on income used for saving and investment than on

income used for consumption. This reduces saving and investment,

which reduces employment of labor, productivity, and wages. It is

also the source of much of the complexity in the tax system.

Most of the tax burden on capital is shifted to labor in the form

of lower wages. A man operating a backhoe can dig a lot more ditch

than a man with a shovel, and is paid accordingly. Tax the backhoe, and you end up breaking the worker’s back and his wallet.

The workers would be much better off if these tax biases were

eliminated.

Of every additional dollar of GDP made possible by added investment, about 50 cents goes to labor income after taxes, about 33

cents goes to Federal, State, and local governments as taxes, about

12 cents goes for depreciation, and about 5 cents is left for savers

and investors after tax. Workers gain 10 times as much as capital

owners; governments gain 6 times as much.

There are two fundamental concepts of taxable income, which is

the tax base that Bill Gale has referred to: one is comprehensive

income, the other is comprehensive consumption. The committee

and the Congress should study the advantages of moving toward

a consumption base. If we want more growth and higher incomes,

especially for workers, we must settle on a consumption-based tax

reform.

A pure comprehensive income tax, even if evenly applied, would

tax individuals on the income that they save and also tax the returns to their saving. That is a basic bias of the income tax. The

income tax cannot be even; it is not saving-consumption neutral. It

would not allow pensions, IRAs, or deferral of tax on capital gains,

but in its purest form would at least adjust the gains for inflation.

It would employ depreciation instead of expensing of capital outlays. The U.S. version adds a corporate tax and estate tax to the

other two hits on saving.

9

A pure consumption tax would either tax savings or the returns

to saving, but not both. All saving would get pension or IRA treatment of one sort or another. It would not double tax corporate income, nor impose an add-on estate tax. Investment, productivity,

and wages would be higher under a consumption base for any

given amount of revenue raised.

The U.S. income tax has features of both systems. Some saving

is allowed pension or IRA treatment. Capital gains are taxed when

realized (but are not adjusted for inflation). Some investment is expensed. There is a partial offset to the double tax on corporate income from the 15 percent tax cap on dividends and capital gains.

Moves toward a comprehensive income base, as in the Tax Reform Act of 1986, reduce domestic saving, investment, productivity,

jobs, and wages. They also chase capital off-shore or cause it not

to be formed at all. Moves toward a consumption base, as in 1962,

1964, 1981, and 2003, tend to promote saving, investment, productivity, jobs, and wages, and attract capital from abroad.

There are several saving-consumption neutral taxes to choose

from. You have seen before you in previous proposals things such

as the business activities tax, a flat tax, a VAT, or a sales tax. My

favorite would be a consumed-income or cash flow tax. It would be

the most visible to the taxpayer/voter. It would be reasonably simple, and, with modest exempt amounts and reasonably low rates,

it would be eminently fair. By any reasonable measure, these taxes

are far simpler, far more efficient, and far fairer than the current

income tax system.

Moving to a consumption tax base could raise incomes across the board by between 10 and 15 percent, or between $5,000 and

$10,000 for middle-income families. That is a bigger benefit than

some of the credits and handouts we now give.

I hope you would acknowledge the revenue feedback from progrowth tax reform, but, if you do not want to do dynamic scoring,

at least please have the Joint Committee on Taxation compute for

you at every stage of your deliberations whether the tax bill you

are working on raises or lowers the tax at the margin on capital.

In particular, ask them to measure for you the service price of capital, the return necessary to make an investment possible on an

after-tax basis.

If your tax bill raises that service price, as in 1986, it will retard

economic growth and hurt workers. If it lowers it, it will be good

for the economy. If you do not have that guide before you, you will

not know as you work on the bill whether you are helping or hurting your constituents.

I hope you will also consider paying for the bill with spending restraint and not find other taxes to pile on and have a complex system where you would have many types of taxes in the mix. Bill

Gale has already told you that only people pay taxes. That is absolutely true. Taxes hidden at the business level make the voters

think they are not getting billed for government spending, and that

is bad in a democracy.

I would suggest to you that these things that promote growth are

also good for simplification. I do not think there is inherent conflict

there. I think if you got busy on a pro-growth tax reform, the Nation, and all of your constituents, would be better off.

10

Thank you.

The CHAIRMAN. Thank you. That was very interesting.

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

The CHAIRMAN. Dr. Foster?

STATEMENT OF DR. J.D. FOSTER, NORMAN B. TURE SENIOR

FELLOW IN THE ECONOMICS OF FISCAL POLICY, DOMESTIC

POLICY STUDIES, THE HERITAGE FOUNDATION, WASHINGTON, DC

Dr. FOSTER. Thank you, Mr. Chairman, Senator Grassley, members of the committee. I appreciate the opportunity to testify this

morning. I will be summarizing my written testimony.

The individual income tax is flawed in many ways, all of which

are known to the members of this committee. However, rather than

provide a catalog of problems and recommendations, I will instead

emphasize the threat to two broad principles and then turn to a

specific area, the taxation of education expenses.

Traditionally, tax reform discussions assume revenue neutrality,

imposing a very useful discipline on theoretical discussions to emphasize the centrality of trade-offs. Tax legislation, however, is not

a matter for the blackboard. Government must decide the level of

taxation and the tax structure, so, among the many issues before

the committee, I believe these two principles are paramount: first,

the level of individual income tax collection should be low, and the

marginal rates of tax imposed should be low.

The great risk for individual income tax reform is that both principles will be significantly violated. Over the next 2 years, Congress

will debate whether to impose or prevent a massive tax hike on the

American people, largely by raising marginal income tax rates.

Such a tax hike in individual income tax rates would be individual

income tax reform writ on a grand scale, moving entirely in the

wrong direction.

Whatever other reforms this committee considers and whatever

other benefits might follow therefrom, failure to prevent this tax

increase would be profoundly negative for tax reform, for the economy, and for American taxpayers. This arises, of course, because

tax cuts enacted at the start of the decade expire at the end of the

decade.

Some suggest that extending these tax provisions, provisions that

will then have been in the law for 8 to 10 years, is somehow a tax

cut; respectfully, but emphatically, no. Extending current policy, or

better yet making it permanent, prevents a tax hike.

This debate is muddied by a fundamental and longstanding flaw

in the way tax provisions are scored. The issue here is the construction of the Congressional Budget Office revenue baseline. As

it is always done under Republican and Democratic directors, the

CBO revenue baseline reflects current law. In contrast, CBO’s

spending baseline correctly reflects current policy. CBO assumes

current policy will extend throughout the budget window, even if

the authorizing law expires during the budget window.

Appropriated spending illustrates the propriety of the current

policy assumption. Should CBO assume no future appropriated

spending? Of course not.

11

This current policy assumption extends naturally to other major

programs such as SCHIP and the Farm Bill. In each case, spending

levels are assumed to continue in the baseline even though the program expires. This is sound practice, and it is consistent with current services’ budgeting principles.

In constructing baselines, revenue provisions and spending programs should be treated alike. Spending programs and tax provisions that expire should be assumed in their respective baselines

to be extended. They should both reflect current policy, not current

law. This is a matter of leveling the playing field, and it is a matter

of basic fairness. It is a matter of getting it right.

If revenue provisions and spending provisions are treated alike,

reflecting current policy, then scoring the extension of tax provisions would accurately show that, in terms of policy changes, nothing happens. And in terms of the ongoing deficit picture, nothing

changes.

The AMT patch demonstrates the problem. There is strong support for extending the patch. Many members acknowledge that allowing the patch to expire would impose a huge tax increase, yet

the revenue tables show extending the AMT patch to be a tax cut.

The revenue baseline assumes the patch expires, so the patch’s extension is shown as a revenue loss. The members are right, the

baseline is wrong. Correct the baseline, and extending the patch in

its current form would properly be shown to have no revenue consequences and no deficit consequences relative to current policy.

Let me turn now, if I could, to the issue of education. Education,

or human capital formation, is essential to our Nation’s future, and

so is physical capital formation. Tax policy presumes there ought

to be some deduction for investment in physical capital. This is

fundamental to the income taxation of business. Similarly, some

deduction for investments in human capital formation is fundamental to income tax levied on individuals.

The individual income tax already includes many provisions reflecting the importance of education. I note the Hope credit, the

Lifetime Learning credit, the recent higher education tax deduction, and a host of other provisions.

These provisions in total reflect Congress’s understanding of the

importance of tax policy for education. Unfortunately, there are

some tax policy voices who do not seem to understand this connection. I note a recent text from the Joint Tax Committee which

states, ‘‘Other subsidies for education provided by the tax code’’—

emphasis on the word ‘‘subsidies,’’ that is a critical errant term. Allowing a deduction for investment expenses is not a subsidy as a

matter of principle, whether the investment is in a piece of equipment or in the education of the individual who works that equipment.

This is an area of tax policy, I believe, in which conservatives,

moderates, and liberals can find common ground. We can find common cause for substantive individual income tax reforms that

would be good for families, for students, and for our long-term prospects for international competitiveness, wages, and jobs.

Thank you, Mr. Chairman.

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

The CHAIRMAN. Thank you all very, very much.

12

Clearly, if we are going to have significant reform, there is going

to have to be significant agreement. Dr. Gale made a point that,

if this becomes partisan, we are not going to get very far. I just

very much hope that this committee can lead the way in working

together to try to find ways to address how it would properly reform the code. A concern I have, frankly, is American competitiveness—which the last two witnesses touched on to a degree—and a

system which is biased against savings or not. I think it is an honest question.

On the other hand, we also want a system which is sufficiently

progressive, as well as simple, et cetera. So I am wondering, as you

all listen to each other, where is there some common ground? If

you did not anticipate that question, it would be hard to kind of

figure that out at this point. But where is there some common

ground if you stop and think about what we need to do? Because

I am trying to figure out a way where we can make significant

changes in a way that makes the most sense, makes the code simpler, helps promote growth, and has the requisite amount of social

policy that seems to make sense here.

I agree very much with basically the tenor of the witnesses,

mainly, we have an income tax base which is corroded. I mean, it

is just falling apart. We, Congress—the administration, too—makes

the code more complex every year, with all new changes, and so on

and so forth. It is hard to say no to groups, to come in and say,

well, the general rule might make sense but we are the exception.

We are a little different than the general rule. So let me just start

out by trying to figure out an area, and anyone who wants to can

go first, and where you think you all might want to agree. Where

do you think you might agree and start building toward some commonality here? Who wants to take it?

Dr. GALE. I will take a crack at that.

The CHAIRMAN. All right.

Dr. GALE. I think, knowing all the witnesses fairly well, I think

it is obvious we agree that the current system is a mess, particularly in two ways. One is that the complications that we have are

not worth the benefits. The issue is not, how complicated is the system. The issue is, are the complications that we have worth what

we get for it? J.D. talked about education. That is a perfect example of a mess. There is a separate education subsidy for every income level, basically. We do not need to have that. We ought to be

able to conform that. We ought to be able to clarify that.

The other area where I think we are in agreement is that the

uneven taxation of all sorts of things creates bad things. Steve

wants to go to a comprehensive consumption base. I would personally prefer a comprehensive income base. The difference between

those two views is nowhere near as big as the difference between

either of those systems and the current system, and so the current

system layers taxes more than once on some types of income, it

completely exempts other types of income or consumption. So I

think if you could get it simple and even, you probably would get

a long way toward consensus.

The CHAIRMAN. All right.

Dr. Burman, you had your hand up.

13

Dr. BURMAN. Yes. The other thing I suspect we agree on is, if you

could broaden the base and lower the rates——

The CHAIRMAN. First of all, on the last point, do the other three

of you basically agree with what Dr. Gale said?

Dr. FOSTER. I basically agree with him. The distortions we now

have in the tax code are not worth the price in terms of complexity

and lost economic growth. Ultimately, the debate will fall onto

whether or not we should have comprehensive consumption or comprehensive income as the starting point for our tax system. The

starting point is critical. But I think if left to our own devices, we

could probably come up with a fairly decent consensus that would

meet none of our preferences perfectly, but would be far preferable

to the tax code we have currently.

The CHAIRMAN. All right. Dr. Burman? I cut you off. Sorry.

Dr. BURMAN. One key point is, whatever tax system we have, if

you can broaden the base and lower the marginal rate—there is

probably some disagreement on this, but I would obviously like to

maintain a level of progressivity—but meeting those objectives at

a lower rate means that, whatever flaws there are in the tax system, it will have less of a cost on the economy. There is an economic theory that says that the higher the rate is, basically the

cost of the economy grows in proportion to the square of the rate.

So when you double the rate, the cost quadruples. You might

want to go to a comprehensive consumption tax, but if you have a

high rate there is a strong incentive to convert and make ordinary

income look like capital income and be exempt from tax. There will

be tax shelters under any system. Those take a huge cost out of

the economy. So whatever system you have, if you can keep the

rates low, the overall cost to the economy is a lot lower.

The CHAIRMAN. Mr. Entin?

Mr. ENTIN. I would like to talk a little bit more with Bill Gale

about exactly which elements of the uneven treatment of capital he

was willing to get rid of, and then if you could get a low rate, then

the difference between the income and the consumption base might

not be too bad, depending on how far he is willing to go in that

regard. He did mention the importance of getting the tax on capital

lowered.

You had mentioned whether this can be bipartisan. I do not see

why growth and higher wages are necessarily a partisan issue. In

1979 and 1980, when I was on the Joint Economic Committee staff,

Congressman Bud Brown, who was my boss, and Senator Lloyd

Bentsen, who was the chairman of the committee, got together, and

we had a 2-year bipartisan report. We were faced with a very serious inflation-related hit on capital formation in the country; productivity was falling and real wages were going down. That report

focused on the effect of inflation on the tax treatment of capital and

why we needed to reverse that in some way or other.

Now, Senator Bentsen preferred to give the reduction in the tax

on capital in the form of faster depreciation allowances to businesses when they actually did the investment. I think Mr. Brown

would have been just as happy dealing with it either at the business end or at the shareholder end, in the case of the corporation.

Of course with the proprietorship, they are one and the same. That

little difference apart—and I have to say I think markets make the

14

difference moot, because as has been pointed out, people pay taxes,

not businesses; businesses per se, are legal fictions—but they found

a way to do it, and they worked together on it. It had quite an impact on the political debate at that time. I think this is a good bipartisan, pro-growth issue.

The CHAIRMAN. Well, thank you all very much.

Senator Grassley?

Senator GRASSLEY. Mr. Entin, I am going to start with you because in 2001 you testified before this committee on the issue of

bracket creep, and I want to get back to that issue, as it might

come up in the future if taxes go up. I mentioned in my opening

statement that under current law, any discussion of tax reform

must contemplate the spike in tax burdens in the individual income tax system that will kick in in 2011. The rate system will

dramatically change and affect virtually every American taxpayer,

especially married couples.

In 2001, before the 2001 tax relief legislation was considered, you

mentioned marginal rates. You indicated that the rate structure

then in effect was bringing back a form of bracket creep. If we return to that rate structure in 2011, would you have the same concerns? And I would like to have you respond separately for the regular tax system, and also on the Alternative Minimum Tax.

Mr. ENTIN. In 1981 we enacted, and in 1985 it came into effect,

adjustments of the tax brackets for inflation. We did not go further,

however, to adjust the brackets for real income growth. Now, it is

true that the CPI slightly overstates inflation, but not by enough

to offset the real bracket creep that we get as people get richer over

time.

The more steeply progressive the system, the higher the rates

are, the worse that real bracket creep gets to be. We also failed to

adjust for inflation on capital gains. We do not adjust for inflation

on the depreciation write-offs, and there is a table in my testimony

to show how much we understate cost and overstate profit in the

corporate sector or in the small business sector by not having expensing.

On the other side, we do not adjust interest payments and receipts for inflation. So, yes, there is a good deal of real and inflationary bracket creep still in the system. You would not get that

in a consumption base because you would have expensing rather

than depreciation. You would mitigate it with a lower rate structure, and with the appropriate treatment of saving—that is, all

saving getting one form or another of IRA or pension treatment—

you would eliminate the inflation-related bracket creep, and the

real bracket creep to a considerable extent, in that system. So you

have much less of that in the consumption base. It would be much

worse if the old rate structure came back.

The AMT—and I have to confess, when that came in after 1986,

and with the confusing tax treatment of foreign-sourced income,

millions and millions of people had to go out and buy Turbo Tax

who had been doing their own tax forms. You just could not deal

with it. So if I answer your question on the AMT, I hope I am going

to get it right.

The AMT is sometimes described as a sort of low-rate, flat kind

of tax system. There are only two rates, and you have a lot of deVerDate 11-MAY-2000 14:51 Jul 12, 2010 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 56740.000 TIMD PsN: TIMD
15

ductions that are eliminated. But a deduction should not be eliminated if it reflects the cost of doing business and correctly measures your income.

I agree with J.D. Foster, education outlays ought to be a deduction. I happen to feel that State and local taxes which go largely

for education or other things relating to investment ought to be

continued as a deduction, and investment ought to be expensed.

There are some other cost-related things that ought to be done. The

AMT tends to eliminate a lot of deductions that are legitimately reflecting the cost of doing business, and that makes it misstate income. It is even worse, perhaps, if there is inflation going on.

There are really four rates in the AMT, because during the

phase-out range of the exempt amount you add another 25 percent

to the taxable incomes for each dollar that your income goes up. If

you earn one more dollar, you lose 25 cents in exemption and your

taxable income goes up by $1.25, and your rates are not 26 and 28

percent, they are 32.5 and 35 percent, which is right up there near

the top income tax rates under the ordinary income tax for a very

large number of people under the AMT. It is not a good alternative

tax system.

Senator GRASSLEY. Yes.

Dr. Foster, you will recall that the Treasury Department and

Joint Tax came down with different revenue estimates on the first

Bush administration’s proposed capital gains rate reduction. There

was a swing of $25 billion between the two organizations’ revenue

estimating. A similar level of difference occurred on the 20-percent

rate that was adopted by Congress in the Clinton administration

in 1997. It follows that the revenue-neutral capital gains rate will

differ once again between the two groups of estimators. Whatever

model we use, Dr. Foster, in analyzing tax reform plans, does it

make any sense to stipulate the rate at any point above revenue

neutrality?

Dr. FOSTER. No, Senator, I do not believe it does. The only conceivable purpose one would have for a higher capital gains tax rate

under those circumstances is if one wanted to exact a special penalty for people who invest wisely. That would not seem to make

much sense. Also, when we talk about revenue neutrality in the

sense of the quasi-static analysis revenue estimators currently employ, we need to be very careful and consider the estimated

revenue-neutral rate as an upper bound. It should be seen as an

upper bound, with the understanding that there is a vast degree

of uncertainty as to what the revenue-neutral rate would be in reality.

The estimators will provide a very specific revenue estimate associated with a proposed tax rate, but statistically there is an enormous confidence band around that point estimate. The estimators

could easily be off by 2, 3, 4 percentage points up or down, both

on the rate and in terms of the revenues received.

Furthermore, I would emphasize that, in terms of capital gains,

the upper bound for the revenue maximizing rate should not be regarded as a target. The target should answer the question: what

rate of tax can we impose on capital gains that will not have particularly bad consequences for the economy?

16

The capital gains tax, as we have seen time and time again, is

extremely important to the kind of high-risk, high-return investment necessary for real prosperity in our economy. When you have

a high rate of tax on capital gains, you are really going after the

most productive investments, and that is unfortunate. That should

not be the way we structure the capital gains tax. The rate should

be as low as possible so as to minimize economic consequences.

The CHAIRMAN. Thank you very much.

Senator Wyden?

Senator WYDEN. Thank you, Mr. Chairman.

I want to thank our panel. I think you have all been excellent.

Mr. Entin, I share your view: growth is certainly not a partisan

kind of concern. I am a huge fan of Dr. Burman’s, and constantly

look to his articles and his scholarship in this area.

I do want to pick up on this area that Dr. Burman touched on,

which is, it seems to me, that health care reform and tax reform

are two sides of the same coin. The fact is, with health care you

cannot get everybody covered without progressive reform of the

health provisions of the tax code. That is just a reality. I think the

only area where I have a bit of a disagreement, Dr. Burman, is on

this VAT tax proposal.

Now, last week Senator Bennett and I got some very good news

from the Congressional Budget Office and Joint Tax. They said

that our proposal would essentially be self-financing a couple years

in, and then in the third year we would actually start generating

some surpluses. Now, given the fact we have a long way to go and

we are going to have to do this in a bipartisan way with Chairman

Baucus and Senator Grassley and others, would it not be possible,

given what CBO and Joint Tax have said, to end up with the tax

reform, the simplification, the progressivity, and the pro-growth

without an additional tax hike or a VAT hike if we can change the

incentives and behavior along the lines of what we are trying to do

in the bipartisan bill?

Dr. BURMAN. I think that is right. Actually, I do not think there

is as much difference between your approach and the VAT, at least

from an economist’s point of view, as there might see. I actually

apologize for not citing it. I was busy with the gas tax for the last

2 weeks and I did not see the letter.

Senator WYDEN. No. We so appreciated your work.

Dr. BURMAN. But basically what you are proposing is to pay for

premiums out of payroll, kind of a payroll tax that is obviously

dedicated to actually paying for the cost of health care. Economists

have long known that a payroll tax and a VAT are actually very

similar in terms of long-run incidents. You would take the responsibility for financing those, as I understand it, out of income tax financing over time. The reason I think that is important is because

the fastest-growing element of the Federal Government, the one

that is the biggest concern over the long term, is spending on

health care. So having a plausible means of controlling the rate of

growth of health care inflation and getting that sort of 800-pound

gorilla out of the income tax, I think would be a good start.

Senator WYDEN. We are going to be asking your counsel, I know.

I just do not want to throw in the towel and say you have to have

a massive tax hike or huge amounts of additional spending, beVerDate 11-MAY-2000 14:51 Jul 12, 2010 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 56740.000 TIMD PsN: TIMD
17

cause I think what CBO and Joint Tax are saying is that, if we

could get the incentives right and start changing behavior, given

the fact we are already spending $2.3 trillion today—I mean, literally enough so that every seven families in the country could

have their own doctor—we can get health reform and also tax reform.

One last question for you. What is the sequencing of these two

issues? Because clearly, even a committee as able, with Senator

Baucus and Senator Grassley, can sort of take only one topic at a

time. How do you deal with the sequencing of health reform and

tax reform? Maybe we can even, if I can get it in, go right down

the row, starting with you, Dr. Burman, and get your thoughts on

how we ought to try to tee these up in a way that the digestive

system can really handle.

Dr. BURMAN. I think it is likely that some kind of health reform

is going to consume the attention of Congress after the next election, no matter who wins. The idea of doing health reform and tax

reform simultaneously is probably beyond any Congress to accomplish. The nice thing about doing health reform first and getting

that part of finances in order, is it might make it possible to make

some more sweeping reforms on the income tax. But it will be a

challenge.

Dr. Gale?

Dr. GALE. I am going to disagree with my colleague at the Tax

Policy Center here. I think, politically, you are going to get one bite

at the apple at the beginning of the next administration. I also

think that each of these issues, whether it is health or budget or

Social Security or tax, are sufficiently painful to certain groups,

that it is going to be very hard to do them individually because everyone will identify where they lose and contest that as opposed to

the areas where they win.

So I think the most likely scenario I can see is that the bigger

the problem that is addressed, the more likely some sort of grand

over-arching package gets put together. So, (A) these things are

interrelated, and (B) I think because of the one-bite rule, you are

going to have to deal with them as interrelated. So I would encourage you to think of them as related issues.

Senator WYDEN. Mr. Entin? Thank you, Mr. Chairman, to let

these two finish.

Mr. ENTIN. You are the best judge of what Congress can accomplish. I would second Bill Gale’s point about an over-arching situation here that needs to be coordinated. If you pick the wrong tax

reform for health care and find it conflicts with what you later

want to do on tax reform, you have created a problem for yourself.

If the committee, which has jurisdiction over both areas, can act as

sort of a committee of the whole rather than too many subcommittees taking too many pieces into separate corners, you might very

well come out with a much better situation.

Having gotten it straight in your minds where you want to go in

both cases, you might be able to get there incrementally in each

area, step-by-step. Knowing where you need to go and having the

basic principles in mind and the incentive arrangements that you

are talking about which are key to all of this, would give you a better chance of coming out in the right place.

18

It would be a lot of work. Not everyone has put in the hours that

you have on the health issue. I remember back in the late 1970s

when Senator Hatch sat down for hours and hours each week going

over the tax system and the economic models with the staff, much

more work perhaps than the average Senator would ever have

done. It is a lot of work to get it right. If the committee is willing

to do it, you could do an awful lot of good for the country.

The CHAIRMAN. Thank you, Senator.

Senator Bunning? I am sorry. I am a little concerned about time.

We have a vote coming up, and I want to make sure every Senator

is able to ask questions.

Senator BUNNING. Dr. Burman, you said in your testimony that

the percentage rate for your proposed VAT would depend on health

care spending. I believe you said that. It would go up if the cost

for your universal voucher went up. Would this not be inflationary?

How would you control health care spending?

Dr. BURMAN. Well, the idea—and I actually should give credit to

two other economists, Emanuel and Fuchs, who presented this at

Brookings a year ago—is that with the funding source, basically

the government is going to be paying for more and more health

care over time no matter what. I think it is actually likely that,

whether you like it or not, within the next 5 or 10 years government is going to be paying for virtually all health care.

So, I think it would be better to do it relatively sooner and think

about a way that would get the incentives right and build in incentives to constrain costs. The advantage, I think, of having the

value-added tax dedicated to health care is that people would see

a connection between what we are spending as a country on health

care and the prices they are paying.

Right now, people on Medicare, people on Medicaid, people who

are getting free health care—actually, a lot of people, I think, who

are getting insurance through their employers—do not really see

any connection between rampant health care cost inflation and the

taxes they pay or the costs to them, and I think that is a problem

because the things you would do that would control health care

costs over time would involve some pain. They will not be painless.

They basically have to say that some kinds of procedures, medicines, other things that have very, very low value would not be

paid for by insurance.

Senator BUNNING. Would they not be more aware if, in 2013,

Medicare started to drift into insolvency? Would that not raise a

red flag a little bit?

Dr. BURMAN. Well, I think it might. The problem is, how are you

going to deal with that with tens of millions of seniors who are up

in arms, writing letters and saying that you——

Senator BUNNING. Well, I know. But it sure would draw attention to the fact that what, who, and how we pay for it is inadequate

to cover the amount of money that is being expended.

Dr. BURMAN. Right.

Senator BUNNING. Dr. Gale, in your testimony you pointed out

that only people pay taxes. Who do you think would pay your proposed carbon tax, and how would you assure that the U.S. tax has

an impact on global carbon emissions levels? Wouldn’t China and

19

India take over all carbon-intensive industries and increase global

emissions if we did not have a universal, global agreement?

Dr. GALE. Right. I think when we talk about the difficulties of

implementing health reform and tax reform, and maybe budget reform at the same time, those difficulties actually pale compared to

the difficulties of getting global coordination on carbon or climate

change issues. I certainly do not have the answer to how you get

China——

Senator BUNNING. We were looking for you to specifically give us

an answer. [Laughter.]

Dr. GALE. Obviously it is an enormously complicated political

issue because there are literally hundreds of countries that have

their own sense of sovereignty, and the developing world does not

want to pay for what they think of as a developed world problem.

So I think everyone agrees—all economists agree, and I am going

to emphasize the word ‘‘economists’’ here for reasons that will be

obvious in a second—that taxes on energy need to go up in the long

term, not down. The solution to the energy situation is to make it

more expensive to use conventional energy, not less. How we do

that exactly, whether it is carbon tax, whether it is auction permits, whether it is something else, is still up in the air. But the

only way to get there from here is to make it more expensive to

use conventional energy.

Senator BUNNING. But there is a real problem when you do that

because you are pitting one State against another State in the

United States. In other words——

Dr. GALE. That is correct. Some States are energy consumers,

some States are energy producers.

Senator BUNNING. Well, all States are energy consumers, but

some produce energy a lot cheaper than others produce energy, because they have no natural resources in their States.

Dr. GALE. Right.

Senator BUNNING. So you do not have a solution for our carbon

problem?

Dr. GALE. Well, no. But all tax subsidies are like that. You pick

health, mortgage, or anything else, they are going to vary by State.

That is just something that you as the leaders of the country have

to deal with.

Senator BUNNING. Thank you very much.

The CHAIRMAN. Thank you, Senator.

Senator Roberts, you are next.

Senator ROBERTS. Well, this has been very fascinating, especially

the over-arching proposals by the witnesses and Dr. Gale’s tax reform proposal which we will, I guess, put in the mixing bowl. Staff

has prepared for me some very pertinent questions, but the current

conversation regarding energy intrigues me. President Clinton proposed the BTU tax back in 1994, which led to a Republican takeover of the Congress. I agree with Senator Bunning—this is going

to be a very difficult task.

The State of Kansas has determined that CO2 emissions are a

very dreadful thing and has closed down the possibility of a new

clean coal energy plant.

In the meantime, China is producing one plant a week, and I do

not see how you can get a BTU tax or a carbon tax unless in fact,

20

as has already been said by Senator Bunning, we somehow resolve

that. We now see all the nominees for President saying that there

has to be a CO2 standard. Well, if it is only followed by the United

States and not by others, let alone State-by-State-by-State quarrels, how on earth do we ever get to tax reform through the energy

tax? The same thing with health care. I am a little stunned by that

in regards to what you are saying about health care and universal

service. In 5 years, the government is going to pay the whole necessary thing. Right now, I am just trying to salvage what we have.

If you look at the Medicare reimbursement to a doctor, or to a

hospital, or a home health care agency, or an ambulance driver, or

to a druggist trying to implement Medicare Part D, we do not reimburse up to cost. So the consequence of that is, a lot of people are

not serving Medicare patients any more. We have specialty hospitals. It is a novel plan by CMS. It is a wonderful plan to reduce

Medicare spending. You just do not reimburse the cost to the provider, and the provider chooses not to provide Medicare. It is called

triage. It is called rationing.

So if we cannot solve that in terms of the one entitlement that

is probably going to become fiscally unsound sooner than anything

else, how are we going to go to a larger system that encompasses

a full-government universal service? I was trying to figure out how

we did tax reform, and all of a sudden we have these other two

items tossed in the mix. I understand that they are certainly integrated.

But for the witnesses, in 1 minute, there are a dozen proposals

that have been introduced in the Congress—I am not going to

name the sponsors—to revamp or reform the tax code, including

proposals for a fair tax, a flat tax, or some other form of consumption tax. How do we move to any of these systems when many of

them would do away with the popular exemptions and deductions,

such as the deductions for mortgage interest payments? We are

throwing tax credits at energy right now.

The same thing with the housing situation, with the proposals to

address the mortgages. Education—you have already mentioned

that. Charitable giving—we are not going to do away with that. We

have now been able to make time changes to the tax code on agriculture an art form due to the genius of the chairman and others,

which was the only thing we could do in regards to a Farm Bill.

I just do not know how we get all this done and move to a consumption tax, which intrigues me. You mentioned 1986. I was the

only member of the candidate’s delegation to vote ‘‘no,’’ and I

caught hell from Bob Dole for doing that. But it put agriculture

and the savings and loan industry and the housing industry right

in the ditch. I think the best suggestion I have heard is the suggestion that we go to the Joint Tax Committee to make sure whatever

we do does not impinge on our ability to raise capital and be competitive in the global marketplace.

And, Mr. Chairman, thank you very much for holding this hearing. I think it is intensely interesting. We are going to have to do

it—I do not know how—with energy, health care, and tax reform.

The CHAIRMAN. It is going to be interesting.

Senator Hatch?

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

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Mr. Entin, based on your testimony, it seems that you believe it

would be possible for us to greatly simplify the Internal Revenue

Code, but not do a very good job with tax reform. Would you say

that ensuring we keep effective incentives for saving, investing,

and economic growth are paramount to simplicity?

Mr. ENTIN. Yes. Most of the complexity in the code revolves

around the tax treatment of capital. I would have said 100 percent

a few years ago, but then we invented the EITC and some of the

child credits, which get a little complicated when you have five

definitions of a child. But really, most of it is in the treatment of

capital.

Senator HATCH. In your testimony you give the example of what

the effect of allowing the 2001 and 2003 tax cuts to expire would

be. It is obvious that you believe that not extending these tax cuts

would be a colossal mistake. What if only the middle-class portions

of the 2001 and 2003 tax cuts are extended, as some are saying,

and those most affecting higher-income taxpayers were allowed to

expire, as some were saying?

Mr. ENTIN. If you do the arithmetic, most of the increase in the

service price of capital would come from eliminating the 15-percent

caps on dividends and capital gains and raising the tax rates at the

top. The 10-percent rate that was carved out of the 15-percent

bracket affects, at the margin, less than 2 percent of the income

produced in the country and has a limited impact on that behavior.

Most of the change in activity comes from the other rate changes,

and in particular the 15-percent cap on dividends and capital

gains. So that would give you 99 percent of the adverse effect on

capital formation.

Senator HATCH. It seems to me that a lot of that would be small

business, too, would it not? It would affect them pretty drastically.

Mr. ENTIN. Yes. They would be affected by the rate hikes.

Senator HATCH. All right.

Now, Dr. Foster, in your testimony you mention two guiding

principles for tax reform. The first is, that the level of individual

tax collection should be low. Could you just elaborate a little bit

more on that idea? For example, low compared to what?

Dr. FOSTER. Well, Senator, thank you. I specifically chose that

language in order to avoid the trap of being in a position of having

to suggest what the target ought to be. I regard tax reduction and

reduction of tax rates, corporate as well as individual, as a little

bit like going on a diet. You know you want to lose weight, so you

pick an achievable target, and when you reach your goal you then

consider whether you want to weigh less yet.

Right now, the concern should be, keep the rates and level of individual income taxes from rising, as you were just discussing. Do

not allow the tax cuts from earlier in the decade to expire, and

then see how much further you can go. That would be real tax reform. Let us see if we can get the level of collections down further,

see if we can get the rates down further.

Senator HATCH. Well, one of the basic tenets of tax reform seems

to be that of fairness. Of course, fairness lies in the eyes of the beholder. Some believe a fair tax system is an extremely progressive

one, others believe that a flat tax is fair. The latest statistics from

the IRS indicate that the top 1 percent of income earners pays 39

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percent of all income tax, the top 10 percent pays 70 percent, and

the top 50 percent pays 97 percent. This, of course, means that the

other 50 percent only pays 3 percent of all income taxes.

My first question to each of you is—and maybe we will just go

across the table—is the current income tax system too progressive,

not progressive enough, or just right? I will start with you, Dr.

Burman.

Dr. BURMAN. The ideal thing would be to deal with the underlying distribution of income. Part of the reason that people on the

bottom pay so little tax is because they earned a tiny share of overall income in the country. And whether or not you think that is a

problem, it is likely to be a political problem over time because inequality is growing and the populace will call for things like trade

restrictions, which really could do damage. I think the income tax

is a relatively efficient way to mitigate some of the difference in

market outcomes. The Earned Income Tax Credit really helps lowincome people to feed their families. So I would say the current

level of progressivity, at least, is a good thing about our tax system.

Senator HATCH. Dr. Gale, then Mr. Entin?

Dr. GALE. You asked about whether the income tax was too progressive or not, or just the right amount. It is hard to answer a

question like that in the context of a specific tax. What we care

about is the overall system. A proportional system could have some

progressive, some regressive taxes.

The overall system we have right now is moderately progressive,

nowhere near as much as the income tax numbers suggest. I think

we could get more progressivity out of the system with lower rates

if we made the tax base more comprehensive. This comes back to

the very first thing I said in my testimony, that getting the tax

base right is the single most important thing. Once you do that,

you have a lot of latitude with the rate structure.

Senator HATCH. Mr. Entin?

Mr. ENTIN. I would prefer to see a proportional tax with aid to

the low-income people being handled through outlay programs that

are specifically targeted to them. I think the tax code would be

stronger and the incentives for growth would be greater if we could

move in that direction.

You can have a progressive consumption-based tax, as well as a

progressive income-based tax. That debate was held back in the

1930s, with Professor Simons and some other economists on the

other side of the fence. The problem with the income tax base,

where Dr. Simons said, let us tax saving and the returns to saving

to get more progressivity, is that it interfered with saving and investment. He acknowledged it would, and said, if you want to redistribute income, you probably will have to have a significant adverse effect on total income. But that is all right, he said, because

if saving gets depressed, we will have the government run budget

surpluses to offset the problem. He was a little naive. [Laughter.]

And it would not work for other reasons we do not have time to

go into here. But I would refer you to IRET Bulletin 88 on tax incidence and tax shifting.

There are two bad features of the income tax relating to progressivity and fairness. One is that producers are treated unfairly. Income is the reward for producing something worthwhile that people

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want to buy from you. If you have a steeply progressive tax system,

you punish people the more that they produce and the more they

contribute to the economy. That is not fair. That is why a proportional system is fair, in my view. Remember, people produce income. It is not just manna from heaven and the person with the

biggest shovel and the sharper elbows gets the biggest amount. You

have to produce the income. If we keep that in mind, we will have

a better system.

The CHAIRMAN. Dr. Foster, maybe in 30 seconds, please.

Dr. FOSTER. Thirty seconds, yes, sir.

Fairness. Asking an economist about fairness is asking them

about an issue outside of their training. We have no more insight

on fairness, necessarily, than we do on the Redskins’ prospects in

the coming year.

In terms of progressivity or proportionality, I agree with Stephen

that a proportional system would be better because, as Dr. Burman

noted, when you get a progressive system and marginal rates start

getting higher, the economic costs start growing very rapidly.

Senator HATCH. Well, thank you.

The CHAIRMAN. Thank you very much.

Senator Salazar?

Senator SALAZAR. Thank you very much, Chairman Baucus.

Let me ask you a question with respect to fiscal responsibility

and what we ought to be doing here in the U.S. Senate with respect to that issue. I look at the current national debt at $9, $10

trillion already, look at our annual deficit, running by some measures up to $650 billion a year, a war that we are fighting in Afghanistan and in Iraq, and we are not funding that war.

How, as we move forward with the discussion on tax reform,

should we factor in the need for us in the government to be fiscally

responsible? And why don’t we just come down the line and each

of you take 30 seconds or so to answer that question.

Dr. BURMAN. I think that is a fundamental question. I think the

government is going to need more revenues over time. I think we

need a tax system that is perceived as simple and fair that people

want to comply with. I think we should reduce the relative reliance

on taxes on capital, but I do not think we should eliminate it, because we need to preserve progressivity.

Now, if the Bush tax cuts were extended, we index the AMT and

extend all the other expiring provisions, we would add $4.6 trillion

to the deficit over the next 10 years, and taxes as a share of revenue would be below their historical norms at the same time the

demands on the government are increasing.

So you can talk about big cuts in spending as a way to balance

the budget, but it does not seem like that is feasible. We need to

have a tax system that is capable of meeting the revenue needs of

the country without impairing economic growth, because, if growth

slows down, all of our fiscal problems would get even worse.

Senator SALAZAR. Dr. Gale?

Dr. GALE. Thank you. Earlier in the hearing the chairman asked

the points of consensus among the four of us. I mentioned two of

them. I think there is a third one which I should add, which is, I

think, in the long run, the level of government taxes should be approximately the same as the level of government spending. So I

24

think everyone thinks in the long run we should be fiscally responsible.

What that means, though, is that, if we reduce revenues, we

have to be willing to reduce spending to match that. The extension

of the Bush tax cuts is a good example of how that would play out.

Congress rejected, in 2001, the notion that the tax cuts should be

permanent, even though the 10-year baseline surplus at that point

was $5.6 trillion.

In every year since then, the administration has proposed making those tax cuts permanent, and in every year since then Congress has said, no, they would not make it permanent. So it is not

obvious to me that Congress intends to cut spending commensurate

with the amount it would need to make the Bush tax cuts permanent.

To give you an example of what that number would be, if you

took out Social Security, Medicare, and Medicaid, which you are

going to have to cut anyway to bring them in balance, if you took

out defense and Homeland Security, which we do not seem to want

to cut because we are engaged in wars all over the world, and if

you take out net interest, which we cannot cut because that is

called defaulting, if you kept the rest of the government, you would

have to cut that by more than half to pay for making the Bush tax

cuts permanent. So, unless Congress is willing to make those kind

of cuts, it would be fiscally irresponsible to make the tax cuts permanent.

Senator SALAZAR. Mr. Entin?

Mr. ENTIN. One attribute of a good tax system is visibility. People should not think that taxes have been paid by somebody else

simply because they are hidden in the business sector. If you have

a visible tax base so people truly see what they are paying, they

will tell you how much government they want and how high a rate

structure they are willing to sustain. They are not two separate

issues. As long as you can borrow freely and hide the taxes somewhere else and people do not think they are paying for something,

they are going to want more government, which will eventually

mean a much higher tax rate structure. But they do not see it yet.

Make it visible.

I would say the same thing is true for medical costs. The government, a number of years back, took upon itself, and then committed future Congresses, to your pain, to funding a huge amount

of the outlays of the economy through the government. People do

not see the costs, so they over-consume it, and then you have to

levy taxes on them to get the money to do it, and the taxes further

discourage them from working, saving, and investing, which makes

it even harder to do. It is always better to have people buying

something for themselves than going through government, because

there is a double-whammy on the cost structure going through government, and it is going to put you in an impossible situation.

Senator SALAZAR. Dr. Foster?

Dr. FOSTER. Senator, as Bill Gale noted in his response earlier,

government spending is a tax issue. There is nothing inevitable

about the level of government spending. There is nothing inevitable

about the rise in government spending to which Dr. Burman was

alluding. You do have to be fiscally responsible. Fiscally responsible

25

does not necessitate raising taxes on the American people. You

have to make a choice, however, between allowing spending to be

high and rising or maintaining a modest level of tax, a more moderate level of tax, and pushing it further down. I side with cutting

spending.

Senator SALAZAR. My time is up.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator.

I am just curious of your thoughts, assuming the government

needs revenue, all things being equal, the most efficient way to

raise it. I know we talked about individuals, we talked about corporate, and capital, and so forth. We have to think about a lot of

issues here. But all things being equal, does there tend to be a

more efficient way to raise revenue compared to other ways?

Mr. ENTIN. Any of the saving-consumption neutral taxes would

have about the same economic consequence, which is less damaging

than using a tax system which taxes saving, taxes the returns on

saving, adds a corporate tax, and adds estate tax. The neutral

taxes do less damage per dollar of revenue raised.

The CHAIRMAN. And what would neutral be? An example of a

neutral tax?

Mr. ENTIN. The business activities tax, the VAT, the flat tax, the

sales tax, or the consumption-based income tax, where you put

down your income, subtract net saving, and pay tax on the difference, which is my favorite, as described in my testimony. Any

of those are really the same tax base.

The CHAIRMAN. All right.

Mr. ENTIN. But they are collected in different ways. Some would

have it collected at the cash register, some would have it collected

in stages as you pass from one level of production to another—that

is called a value-added tax. The flat tax is collected in a slightly

different way.

It is not the collection process that is the problem with the inefficiency in the tax system, it is the damage that the tax system does

for every dollar raised in discouraging saving, investment, and

work effort. The economic cost, for each dollar that you spend, is

about another $1.50. Every dollar of spending you do costs about

$2.50, even more if it is a tax on capital. That is the inefficiency

you need to address.

The CHAIRMAN. All right.

Dr. Gale?

Dr. GALE. Thank you. There is sort of a local answer and a global

answer. The global answer might be, if you could do anything you

want not subject to parochial constraints, then I think a lot of what

Steve said applies. If you are starting from the current system in

a world with parochial constraints and a variety of other concerns

that we have heard about, I think the best way to get to efficiency

is to remove the uneven taxation of similar activities.

What that means is going after forms of income that are sheltered, removing the shelter, going after forms of income that are

taxed two times, removing the double taxation, making sure everything gets into that base. I hate to sound like a broken record, but

that comes back to the first thing I mentioned again, which is that

26

broadening the tax base and then using that as an instrument of

reform is probably the most efficient way right now.

The CHAIRMAN. Dr. Burman, did you want to address that or

not?

Dr. BURMAN. Yes. I just wanted to say it would be easy to come

up with an efficient tax system, but it would not be fair. Steve

Entin made it sound like the reason that rich people are rich is because they work harder than poor people. I make 10 times as much

money as my dad ever did, and I do work hard, but so did he. I

was just lucky. I had great parents and got a good education. So

I think there is a role in the tax system for mitigating economic

inequality. That is really the trade-off.

The CHAIRMAN. And Dr. Gale, I am curious about how you would

merge payroll tax with the income tax.

Dr. GALE. You can do it in a number of ways. The basic idea, or

a simple way to do it is, if you do not want to merge the systems

because the payroll tax pays for Social Security benefits, you can

administratively get the same effect by offering a credit, a refundable credit in the income tax system for payroll taxes paid.

The CHAIRMAN. And do you think that is a good idea? Would you

suggest that?

Dr. GALE. I think it is in the testimony. Yes, I think that is a

direction that we should be looking at, reforming the system, in the

sense of taxing all income once and taxing it under the same sort

of low rate structure.

The CHAIRMAN. All of our discussion here has been assuming we

are in the confines of the United States of America. We will have

other hearings on international competitiveness. But give me any

of your thoughts about what we are doing as Americans versus the

degree we might be shooting ourselves in the foot. Should we be

paying more attention to how other countries structure their systems, as we have this discussion here today on the individual side?

Dr. Burman?

Dr. BURMAN. Yes. I think we do, but it is not so much that we

are competing with other countries on the tax side, it is that we

are affecting the efficiency of our own economy. So probably the

biggest area in which we fall short is that we have a corporate income tax system that has among the highest rates in the world,

and we collect relatively little revenue as a share of GDP because

there are so many loopholes, preferences, and deductions.

Economists would probably mostly agree that the ideal thing

would be to collect corporate tax, and basically collect it from individuals as an integrated tax system. But if we are not going to do

that, there seems to be a preference to have this two-level tax system in the U.S. The better thing would be to broaden the base and

try to lower the rates, and we could easily do that and bring it in

line with corporate taxes among our major trading partners.

The CHAIRMAN. Anybody else?

Mr. ENTIN. You have to be careful about base-broadening. If you

end up double-counting some income, you have said, all right, put

down your income on line one, double it on line two, and then send

in half the amount that you were sending in before as far as the

rate is concerned, and you have not done anything. So be careful

27

which of these loopholes that you close. We closed a lot of loopholes

in 1986, and I am not sure there are that many left.

On the international side, we are not really competing with other

countries. What we are doing, even if China did not exist, is living

with a tax system that is very much biased against anything using

physical capital, and to some extent against education and training. We are hurting ourselves that way.

If we went to a neutral system, we would have gone as far as

we need to go, both domestically and in the international arena. At

that point, the only thing we could do better would be to shed some

of our spending obligations so that we could lower the rates. But

if people want their spending to be done through the government,

they will have to have the higher rates.

The CHAIRMAN. One thing I can take away from all of you so far,

is base broadening: lower the rates, broaden the base in some way

or another. Is that right? Dr. Gale thinks that. Do others of you

think that? You talked about a consumption tax as a broad base.

Mr. ENTIN. I want to change the base from income, as Professor

Simons and others since have defined it, and get more toward a

consumption base. I will still make it progressive for you, but I do

not want the double-taxation and triple- and quadruple-taxation

you sometimes have on saving and investment. In a sense, I am

narrowing the tax base, but you get a bigger capital stock and you

get a bigger economy. In that sense, the base is broadened.

The CHAIRMAN. My time has expired, but the question I have is

transition costs, too, when you move from an income tax system to

a consumption-based system. Some suggest that that is an additional cost we just have to bear. I do not know how that is.

Senator Wyden?

Senator WYDEN. Mr. Chairman, you have been very gracious. I

know Senator Hatch probably has a question as well. I just wanted

to let you have a chance, Dr. Foster. Last round we did not get

there in terms of sequencing on health care and taxes.

Dr. FOSTER. Thank you. That is very kind of you, Senator. In

fact, I must say I was pleased to hear your emphasis on incentives

and getting incentives right. That is precisely what tax reform is

all about—getting the incentives right.

Health care and tax policy are obviously related. The tax policy

we have today is tremendously distortionary to incentives, especially in terms of people’s health care, how they purchase it, and

how they finance it. It is going to be very difficult, I think, to have

a grand plan that covers many issues comprehensively. I think

your concerns about the ability of this committee or the Congress

to handle so much material at once is right.

Nevertheless, it is important to have in the back of your mind

an over-arching vision. You do not have to move all the legislation

at once. You can move it sequentially over years, if necessary, but

all following the same vision. In that respect, I think tax policy is

going to have to be modified significantly if we are going to get

those incentives right.

Senator WYDEN. Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator.

Senator Hatch?

28

Senator HATCH. Well, we have to go vote, but let me just ask one

question. It is my understanding we are sending $600 billion a year

overseas for high-priced oil. I had a lot to do with putting both the

alternative vehicles tax credit and the production tax credit into

the tax law. Just this weekend, I attended the groundbreaking of

a new geothermal power plant that would not have been built without the production tax credit. There will be hundreds, if not thousands, of other geothermal plants and solar plants because of those

credits. What is your attitude towards doing things like that, giving

incentives through the tax code that basically get us to where we

should be, which we would not do otherwise? I mean, this is where

we get in trouble, I know.

Dr. BURMAN. I think it is certainly a good idea to do this kind

of research and development. The problem is that a lot of times the

government cannot figure out what the right technologies are to

subsidize. I think one example, which you might not agree with, is

that the ethanol tax credit has had a lot of undesirable——

Senator HATCH. I am figuring it out for them.

Dr. BURMAN. I beg your pardon?

Senator HATCH. I am figuring it out for them. They are moving

away from ethanol and moving into these renewable sources that

could help us alleviate that $600 billion a year that we are just,

in many ways, sending to our enemies.

Dr. BURMAN. One advantage of the carbon tax—and I understand

the political disadvantages—is that it would give incentives for the

markets to find ways to reduce carbon emissions and to do it in the

most efficient way. It would basically unleash market forces. If you

had to actually pay the cost of carbon emissions on the environment, then the market would figure out, it might be geothermal,

it might be windmills, it might be something we have not even

thought of. So that is why economists tend to favor that kind of an

approach.

Senator HATCH. I see. You are each going to have to answer very

shortly because we have to go vote.

Dr. GALE. The other advantage to the carbon tax is it generates

revenues which then can be used for purposes like investment in

geothermal or other options. So, I am completely on board with the

idea that we should be investing in alternative energy sources. One

of the advantages of taxing energy consumption, as well as subsidizing energy innovation, is you actually get the revenue and you

can use it for the same purpose.

Senator HATCH. Mr. Entin?

Mr. ENTIN. I am skeptical of the degree of damage from global

warming, and I would want to study it more before spending trillions of dollars. If it were just a market question on the oil, I would

say you can get oil two ways. You can produce it here, but, if that

is expensive, you might find it easier to grow a crop or produce a

manufactured good and sell it and get oil from abroad. That might

be the cheapest way of getting energy. The only problem I see is,

if there is a defense-related issue, then you might have to intervene, otherwise I would not.

Senator HATCH. But I am talking about incentives to get more

energy that would alleviate our dependency.

29

Mr. ENTIN. Well, in that case I wonder if we can act less expensively by removing obstacles to other forms of energy production

that are obviously cheaper, which is the drilling in the eastern

Gulf, the Atlantic, the Pacific, and the North Slope and offshore in

Alaska.

Senator HATCH. But, see, we concluded those are almost impossible to do with the current——

Mr. ENTIN. Well, I agree with you. But I would stand here and

yell at the Congress rather than spending money on something

that was overly expensive. I would first try yelling louder.

Dr. FOSTER. Senator, tax reform is already very difficult, so I am

reluctant to add further objectives to fairness, simplicity, and

growth. I would note that, while what you are suggesting is perfectly valid, it is really of a different kind of subject. It is not really

tax reform per se, it is energy policy, security policy, and so forth.

As we are going to go down that road, if we are going to have

an objective to reduce energy consumption and address environmental concerns, the number-one approach should be, aside from

transparency, simplicity.

We need to use the price mechanism in such a way that, as far

as possible, Congress avoids picking winners and losers. That is

why I would be concerned with any kind of a tax credit, for example, because then Congress must enumerate those things and activities which would qualify.

The CHAIRMAN. I am sorry. I am going to have to close this hearing down. We are way late for a vote and do not want to miss it.

Thank you, all four of you, very, very much. This has been very,

very stimulating.

The hearing is adjourned.

[Whereupon, at 11:37 a.m., the hearing was concluded.]

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