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S. HRG. 112–290 

COULD TAX REFORM BOOST BUSINESS 

INVESTMENT AND JOB CREATION? 

HEARING 

BEFORE THE

JOINT ECONOMIC COMMITTEE 

CONGRESS OF THE UNITED STATES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

NOVEMBER 17, 2011 

Printed for the use of the Joint Economic Committee 

( 

(II) 

JOINT ECONOMIC COMMITTEE 

[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress] 

SENATE 

ROBERT P. CASEY, JR., Pennsylvania, 

Chairman 

JEFF BINGAMAN, New Mexico 

AMY KLOBUCHAR, Minnesota 

JIM WEBB, Virginia 

MARK R. WARNER, Virginia 

BERNARD SANDERS, Vermont 

JIM DEMINT, South Carolina 

DANIEL COATS, Indiana 

MIKE LEE, Utah 

PAT TOOMEY, Pennsylvania 

HOUSE OF REPRESENTATIVES 

KEVIN BRADY, Texas, Vice Chairman 

MICHAEL C. BURGESS, M.D., Texas 

JOHN CAMPBELL, California 

SEAN P. DUFFY, Wisconsin 

JUSTIN AMASH, Michigan 

MICK MULVANEY, South Carolina 

MAURICE D. HINCHEY, New York 

CAROLYN B. MALONEY, New York 

LORETTA SANCHEZ, California 

ELIJAH E. CUMMINGS, Maryland 

WILLIAM E. HANSEN, Executive Director 

ROBERT P. O’QUINN, Republican Staff Director 

(III) 

C O N T E N T S 

OPENING STATEMENTS OF MEMBERS

Hon. Kevin Brady, Vice Chairman, a U.S. Representative from Texas .............. 1 

WITNESSES

Mr. Stephen J. Entin, President and Executive Director, Institute for Research on the Economics of Taxation (IRET), Washington, DC ....................... 5 

Dr. Chad Stone, Chief Economist, Center on Budget and Policy Priorities, 

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

Mr. Dan R. Mastromarco, Principal, The Argus Group, Arlington, VA .............. 9 

Mr. Seth Hanlon, Director of Fiscal Reform, Doing What Works, Center 

for American Progress, Washington, DC ............................................................ 10 

SUBMISSIONS FOR THE RECORD

Prepared statement of Vice Chairman Kevin Brady ............................................ 30 

Prepared statement of Mr. Stephen J. Entin ........................................................ 32 

Prepared statement of Dr. Chad Stone .................................................................. 52 

Prepared statement of Mr. Dan R. Mastromarco .................................................. 64 

Prepared statement of Mr. Seth Hanlon ............................................................... 91 

(1) 

COULD TAX REFORM BOOST BUSINESS 

INVESTMENT AND JOB CREATION? 

THURSDAY, NOVEMBER 17, 2011 

CONGRESS OF THE UNITED STATES, JOINT ECONOMIC COMMITTEE, Washington, DC. 

The committee met, pursuant to call, at 10:07 a.m. in Room 216 

of the Hart Senate Office Building, the Honorable Kevin Brady, 

Vice Chairman, presiding. 

Senators present: Casey, DeMint, and Coats. 

Representatives present: Brady, Campbell, Duffy, and 

Mulvaney. 

Staff present: Gail Cohen, Will Hansen, Colleen Healy, Jesse 

Hervitz, Brian Phillips, and Ted Boll. 

OPENING STATEMENT OF HON. KEVIN BRADY, VICE 

CHAIRMAN, A U.S. REPRESENTATIVE FROM TEXAS 

Vice Chairman Brady. Good morning everyone. On behalf of 

Senator Casey and myself, I want to welcome you to this morning’s 

hearing on ‘‘Could Tax Reform Boost Business Investment and Job 

Creation?’’ Senator Casey will be with us in a few moments. We are 

joined by Congressman Mulvaney. 

There is no question that President Obama inherited a poor 

economy, but after three years his policies have made it worse. The 

massive stimulus failed to jumpstart the economy and restore consumer confidence as he promised. 

In fact, today there are 1.3 million fewer payroll jobs in America 

than when the first stimulus began. And now, 25 million Americans can’t find a full-time job or any work at all. Hardworking taxpayers have paid a steep price in this Obama economy. 

After exploding America’s national debt in his first round of stimulus, the President now is out campaigning to raise income taxes 

on hardworking, successful Americans and local small business 

owners to pay for yet a second round of stimulus spending aimed 

at jobs in the government sector. 

It is a basic principle of economics that if you want less of something, ‘‘tax it more’’; and if you want more of something, ‘‘tax it 

less’’ or not at all. Common sense tells us that Washington taking 

more of what investors earn will only reduce investment in new 

jobs, research and expansion. 

History proves that it’s business investment in new buildings, 

equipment, and software that drives jobs along Main Street. One 

glance at the chart behind me, if you take a look at the chart here, 

which tracks business investment and private-sector job creation 

2 

for the past 40 years in America, it clearly shows that job creation 

in America will not rebound unless private investment rebounds. 

While government spending in America is still above the level 

when the recession began, it is jobs and real business investment 

that have not recovered to their pre-recession levels more than two 

full years after the recession officially ended. 

Putting Americans back to work—not taking more from small 

businesses and successful professionals—is the most effective way 

to grow federal revenues. Instead of increasing marginal tax rates, 

how about permanently lowering marginal rates to encourage business to invest and hire more workers? Or how about creating a 

21st Century tax code based on flatter rates and a territorial tax 

regime like our global competitors? 

Why not consider a transparent, straight-forward retail sales tax 

that replaces the income, business, payroll, gift, and death taxes 

and finally eliminates much of the complexity, burden, and special 

interest provisions that comprise our current mess of tax laws. 

If lower rates, for example, were accompanied by the removal of 

many of the complicated provisions that have been added to the tax 

code—often because marginal rates are so high—we would kickstart investment and jobs creation by the private sector while naturally generating additional tax revenue to lower future federal 

budget deficits. A consumption-based tax could do the same. 

Consider our high corporate tax rate and the requirement that 

U.S. companies pay that high rate when bringing home profits that 

were earned and taxed overseas. We should lower or remove that 

tax gate to allow an estimated $1 trillion in stranded profits overseas to flow back into America to fund new jobs, research, buildings, and expansions. It is a free-market stimulus that does not 

cost federal money—but rather, generates it. 

Many of my Democratic colleagues charge that lowering tax rates 

would favor the ‘‘rich.’’ But nearly half of American families already pay no federal income tax and the top one percent of wage 

earners already shoulder nearly 40 percent of the income tax burden—the top 10 percent over 70 percent. 

America already has one of the most progressive tax codes in the 

world, and now the highest corporate tax rate among our global 

competitors. How much more should Washington take? 

As for job creation, capital income is subject to multiple layers 

of taxation in the form of corporate income, dividend, and estate 

taxes. Business taxation is inordinately complex and imposes economic distortions and compliance costs that have no offsetting benefit to society whatsoever. 

Yet, history proves that lowering the marginal tax rate on capital 

income increases business investment. In turn, more investment 

creates new private sector jobs. More investment means higher real 

wages for American workers. This happened in the 1960s and the 

1980s and can happen again. 

A common myth has arisen surrounding the so-called Buffett 

rule. But an analysis by my Joint Economic Committee staff of IRS 

taxpayer data prove President Obama’s campaign assertions to be 

untrue: high-income Americans on average pay income tax rates 

three times higher than the middle class, more than 60 percent of 

their income is ordinary income not passive investment income, 

3 

and the 400 highest income earners in America are not the same 

people year to year, but a constantly changing set of taxpaying 

Americans. 

That last point is important. For 17 years—from 1992 to 2008— 

the 400 highest income returns each year were comprised of 6,800 

returns in total representing 3,672 different taxpayers. Of these 

taxpayers, only one-quarter appeared more than once, and only 15 

percent appeared twice. 

In any given year, on average about 39 percent of the top 400 

adjusted gross income returns were filed by taxpayers that are not 

in any of the other 16 years—not any. Only 4 of the more than 

3,000 taxpayers made the top 400 all 17 years. 

That is because America is the land of opportunity. Anyone, anywhere, regardless of your birth or your station in life, you can earn 

your way into the wealthiest taxpayers in the Nation. 

Mr. President, what is so wrong with that? Why are you intent 

on dividing our Nation, pitting one American against another because of their success? 

Americans who work hard and play by the rules want productive 

jobs and a fair shot at success. They do not want handouts, bailouts, stimulus, or temporary make-work jobs. They understand 

that paying taxes is part of citizenship. 

Americans should be able to find a good job and be able to make 

some contributions to the cost of the Federal Government. But for 

American workers to win in the global economy, American entrepreneurs must risk their capital to create the tools that American 

workers need to succeed. 

If Washington is intent on growing the government rather than 

growing the economy and insists on taxing those hardworking taxpayers who supply the opportunities and the jobs at high rates, in 

the end it is the American workers who will be worse off. 

Today we have before us witnesses who are advocates of major 

tax reforms designed to generate revenue for the Federal Government with a minimum of economic interference and allowances for 

very low-income families. What both ideas share is a commitment 

to reduce the after-tax cost to making job-creating, income-producing investments here in the United States. And that is what the 

American economy needs to kick-start the engine of job creation. 

I look forward to hearing the testimony of the witnesses today. 

Let me introduce our panel: 

Stephen J. Entin is currently President and Executive Director 

of the Institute for Research on the Economics of Taxation, a profree market economic public policy research organization based 

here in Washington. He advised the National Commission on Economic Growth and Tax Reform, the Kemp Commission; assisted in 

the drafting of the Commission’s report, and was the author of several of its support documents. He is a former Deputy Assistant Secretary for Economic Policy at Treasury. He joined the Treasury Department in 1981 with the incoming Reagan Administration, and 

participated in the preparation of economic forecasts in the President’s budgets, the development of the 1981 tax cuts, including the 

Tax Indexing Provision that keeps tax rates from rising due to inflation. He has a great deal of other experience in a wide variety 

of areas. 

4 

Mr. Entin, thank you for joining us. He is a graduate, by the way 

of Dartmouth College and received his graduate training in economics at the University of Chicago. 

Dr. Chad Stone is the Chief Economist at the Center on Budget 

and Policy Priorities, where he specializes in the economic analysis 

of budget and policy issues. Dr. Stone was the Acting Executive Director with the Joint Economic Committee in 2007. Before that, he 

was staff director and chief economist for the Democratic staff of 

the Committee from 2002 to 2006. He held the position of chief 

economist for the Senate Budget Committee in 2001 to 2002. Previously he had served on the President’s Council of Economic Advisers as senior economist, and chief economist from 1996 to 2001. 

His other Congressional experience includes serving as chief 

economist to the House Science Committee. Dr. Stone has also 

worked at the Federal Trade Commission, the FCC, the OMB, and 

was a senior researcher with the Urban Institute, and co-authored 

the book entitled ECONOMIC POLICY IN THE REAGAN YEARS. 

He earned his Ph.D. in economics at Yale University. 

Dr. Stone, thank you for joining us. 

Dan Mastromarco was founder of the Argus Group, a public policy law and economic consulting firm for more than 16 years. He 

is a partner in the Mastromarco firm based in Michigan. He has 

counseled clients ranging from Fortune 500 companies to not-forprofit organizations on tax, trade, and labor issues. 

In his Washington career he served as counsel to the U.S. Senate’s Permanent Subcommittee on Investigations under the Chairmanship of Senator Roth. He also served as Assistant Chief Counsel for Tax Policy with the U.S. Small Business Administration. He 

was a special U.S. trial attorney with the Department of Justice in 

the Tax Division. He also worked as the Director of the Trade and 

Tax Division of the Jefferson Group, then one of the largest public 

affairs firms in Washington. 

He has written extensively about tax reform, publishing more 

than 100 articles in a wide variety of outlets from law reviews to 

The Wall Street Journal. His latest book, entitled THE SECRET 

CHAMBER OR THE PUBLIC SQUARE: How Washington Makes 

Tax Policy, was published by the Heritage Foundation as a constructive critique of the tax policymaking process, particularly the 

process of revenue estimating and distributional analysis. 

He attended Albion College where he earned his BA, Georgetown 

University Law Center, and the London School of Economics. 

Welcome, Dan. 

Mr. Seth Hanlon is Director of the Fiscal Reform for the Doing 

What Works Project at American Progress. His work focuses on increasing the efficiency and transparency of tax expenditures in the 

federal budget, and on tax issues generally. 

Prior to joining CAP, he practiced law as an associate with the 

Washington, D.C., firm of Kaplan & Drysdale, where he focused on 

tax issues facing individuals, corporations, and nonprofit organizations. 

Before law school, he served on Capitol Hill for more than five 

years as a legislative and press aide to Representative Harold 

Ford, Jr., and Marty Meehan of Massachusetts. 

5 

Mr. Hanlon also worked at the Initiative for a Competitive Inner 

City in Boston. There he was part of a team that partnered with 

Inc. magazine to launch the inaugural Inner City 100, a list of the 

fastest growing companies located in inner cities. 

Mr. Hanlon received his bachelor’s degree in history and literature from Harvard, and his J.D. from Yale Law School. 

Gentlemen, thank you very much for joining us today. We have 

reserved five minutes for opening comments. We will submit your 

entire testimony for the record. 

Mr. Entin, you are recognized. 

[The prepared statement of Representative Brady appears in the 

Submissions for the Record on page 30.] 

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

Mr. Entin. Thank you, Mr. Brady, and thank you Members of 

the Committee: 

Prior to Treasury I was on the staff here for five years, so it is 

a little like coming home, except this building was not built when 

I was working here. 

I thank you for the opportunity to testify today on tax changes 

that would generate investment and growth for the economy while 

being affordable for the federal budget. 

The growth-in-jobs element in this exercise is critical. If we look 

only at the federal budget effects of tax proposals and forget about 

the economic consequences, we will miss what is most important: 

the public welfare—and we will get the budget numbers wrong. 

To summarize, taxes affect the economy by altering incentives to 

work, save, and invest—not by handing out money to spend, or taking it away. Forget anything you have heard about Keynesian multipliers and the need to stimulate spending. 

The income tax is heavily biased against saving and investment. 

True tax reform would remove the biases not just between industries but between saving and investment versus consumption. That 

is absolutely key to restoring growth. 

The amount of capital—plant, equipment, and buildings—is highly sensitive to its tax treatment. Higher tax rates on capital shrink 

the capital stock, shrink the productivity of labor, reduce employment output, and income. The burden of higher taxes on capital 

formation falls largely on labor in the form of lower wages and 

hours worked. 

The definition of the tax base—the income that we tax—is at 

least as important as the tax rate. Overstating business income by 

under-counting investment expenses leads to less investment and 

lower wages. 

Trading away legitimate costs of production for a broader tax 

base may mean higher tax rates at the margin, even if the statutory rate is cut. That is what happened in the Tax Reform Act of 

1986, which was bad for growth and should not be a model for any 

current reform effort. 

We should not repeat the Tax Reform Act of 1986, which tried 

to perfect the broad-based income tax by supposedly evening out 

treatment among industries. Rather, we should adopt a different 

6 

tax base that is more neutral in its treatment of saving and investment relative to consumption. That is a much broader shift. 

Mindless base-broadening is simply not the answer to our deficit 

problem. Expensing is the right approach to measuring the cost of 

investment. The current expensing provision if made permanent 

would boost GDP by 2.7 percent and would more than repay its 

static revenue cost. It is the most efficient way to encourage additional investment. 

A 25 percent corporate rate would raise GDP by about 2.3 percent, almost as much as the expensing provision. It would cost 

more—about $25 billion more—in static terms, and require more 

offsets to make up the difference, if you go by static scoring. 

But the corporate rate cut, too, would more than recover its revenue over time by raising wages and employment. Do not swap expensing for lower corporate rates. Do both. You do not have to 

choose. Neither costs you any revenue over time. 

Expensing favors capital-intensive manufacturing and rapidly 

growing businesses, and corrects a mismeasurement of income that 

penalized them relative to other industries in the past. A corporate 

rate cut is preferred by businesses with intellectual property instead of physical property, and by established slower growing businesses that want higher returns on capital that they’ve already 

bought. They also get the benefit of expensing as they replace that 

old capital over time. 

You can satisfy both by keeping expensing and, if necessary, 

phase in the corporate rate cuts to reduce the static revenue score. 

It is better to do a dynamic score and cut the rate faster. If the 

Joint Tax Committee is not able to provide a dynamic score, get 

one from a major academic and modeling outfit and use that. The 

budget rules permit that. 

Increasing double taxation of corporate income by raising tax 

rates on capital gains and dividends to 20 percent, for example, 

would cut GDP by about 1.2 percent and would wipe out the expected revenue gain. In addition, realizations would collapse as 

they did after the 1986 Act and you would get less revenue out of 

the existing gains because people simply wouldn’t take them. 

Raising the two top tax rates back to 36 and 39.6 would cut GDP 

by about half a percent and lose about 40 percent of the expected 

revenue. 

I have to say, with some regret, that the Bowles-Simpson Commission Proposal, and the Wyden-Coats bill, were not examined for 

their effects on the service price of capital. That’s the required pretax return on capital needed to pay its taxes, cover the costs, and 

leave a normal return to the investor. 

The proposals did not cut tax rates enough to offset the longer 

tax depreciation lives and the higher tax rates on capital gains and 

dividends, and they would both reduce GDP significantly. 

It is important that any tax reform proposal promote growth because, as I explained in the testimony, we are at about 12 percent 

below trend GDP, and that plus the added spending we did in the 

vain attempt to get out of the stagnation is responsible for well 

over half the deficit. 

Every tax bill that you consider should be examined for its effect 

on the service price of capital. If the Joint Committee of Taxation 

7 

and the Congressional Budget Office can’t do that right now, again, 

go outside and get an outside estimate. They should always report 

that calculation to you when you’re considering a bill. 

If you cut the service price, you are going to get more investment 

and jobs. If you raise it, you are going to get less. And you really 

ought to know what you are doing to your constituents before you 

hold that final vote. 

Thank you, very much. 

[The prepared statement of Mr. Stephen J. Entin appears in the 

Submissions for the Record on page 32.] 

Vice Chairman Brady. Thank you, Mr. Entin. 

Dr. Stone. 

STATEMENT OF DR. CHAD STONE, CHIEF ECONOMIST, CENTER ON BUDGET AND POLICY PRIORITIES, WASHINGTON, 

DC 

Dr. Stone. Thank you, Vice Chairman Brady, and other Members of the Committee: 

I guess I should say: And now for something completely different. 

My bottom line is that tax reform is unlikely to be an effective 

tool for speeding up economic growth in the short run. Tax reform 

could be a useful tool for enhancing growth in the long run, but 

only in the context of a sound, overall program for achieving longterm fiscal stabilization, and not if it is used as an excuse to avoid 

the revenue increases that must necessarily be a part of any credible, sustainable deficit reduction plan. 

In my testimony I have a chart that illustrates the distinction I 

want to make between the short run and the long run. I’m sorry 

we don’t have a chart, but it is figure one in my written testimony, 

which shows the growth path of the economy if we were producing 

at full employment with full utilization of our existing capacity, 

and the actual GDP. 

We know that the economy is in a deep hole and growing very 

slowly. That is why we have 9 percent unemployment. 

So I want to distinguish between policies that would move the 

actual GDP line in the chart and policies that would move the potential GDP line in the chart. 

So talking about the short run, the most compelling explanation 

to most economists for why we have a 9 percent unemployment 

rate, tame inflationary expectations, and a large output gap, is the 

textbook one: weak aggregate demand. 

Businesses are not able to sell all the goods and services they are 

capable of producing right now. Putting more customers in their 

stores, and giving those customers more money to spend is a far 

better way to encourage businesses to expand and hire more workers than giving a tax break when their stores are still half empty. 

Measures the President has proposed, like extending Federal 

Emergency Unemployment Insurance, extending and expanding 

the Payroll Tax holiday, relatively quick-acting infrastructure investments like repairing schools, and help to relieve pressure on 

state and local governments so they won’t lay off more teachers, police, and fire fighters, are the policies that are likely to be most effective at getting the economy back on its feet and operating at full 

capacity, because they operate on the demand side and they don’t 

8 

make long-term deficit problems materially worse because they are 

temporary. 

Policies like corporate tax reform, and cutting top marginal rates 

for individuals, add to the budget deficit without generating much 

new spending in an economy with a huge output gap, high unemployment, and too much idle productive capacity, because they operate on the supply side. And right now we have plenty of potential 

supply, but not enough actual demand. 

Looking at the long run, policies to move the blue line—this is 

where tax reform can come in. The longer term question is: What 

are the best policies for raising the economy’s capacity to produce 

goods and services? 

Here are my key points: Tax rates in the range we’re talking 

about as part of a credible and sustainable debt stabilization plan 

are less harmful to growth than budget deficits of the kind we are 

projecting in the absence of such a plan. Reducing deficits in fact 

is a more potent way to increase long-term growth than cutting 

taxes, and revenue-neutral tax reform is not good enough because 

we need to raise revenue. With all due respect, supply-side fantasies and dynamic scoring pipe dreams won’t cut it. That does not 

mean we should not embrace the enduring principle of tax reform 

that a broader tax base allows rates to be lower than a narrower 

tax base. 

But we also have to ensure we have enough revenue to pay for 

the things we want government to do, ranging from national defense to an adequate safety net. 

The debate should be about what we want government to do and 

how we should pay for it. Setting arbitrary limits on spending or 

revenue does not advance that debate. 

I want to touch briefly on a couple of other topics. The first is 

the repatriation of foreign earnings. We tried a repatriation tax 

holiday in 2004 and it did not work. There were no effective mechanisms to ensure that repatriated earnings would be used for their 

intended purposes of investment in the United States, and just as 

economic and finance theory would predict the earnings multi-national companies brought back under the tax holiday ended up 

being returned to shareholders largely through stock repurchases. 

There is scant evidence of any new investment having been generated. And indeed, many of the firms that repatriated large sums 

during the holiday actually laid off workers subsequently. Doing 

the same thing again—which is what CBO and other analysts and 

the Joint Committee on Taxation has scored—would add to the 

budget deficit without doing much, if anything, for the jobs deficit. 

The 2004 model is not a good model. 

On small businesses and the question of higher marginal tax 

rates: Unlike large corporations, which are for the most part flush 

with cash, small businesses appear to still face difficulty financing 

expansion. That may justify short-term measures that target job 

creation in small businesses that would respond to such an incentive, but it does not justify costly and poorly targeted measures like 

keeping the current very low top marginal tax rates from expiring 

as scheduled. 

9 

Three quick points: The number of truly small businesses that 

would be affected by the top marginal tax rates is greatly exaggerated in most discussions of the issue. 

Second, in many cases the effective tax rate on small business income is likely to be zero or negative regardless of reasonable 

changes in marginal tax rates because of the valuable array of tax 

subsidies that small businesses receive. Finally, the justification for 

those subsidies should be examined more carefully. The best recent 

research indicates that it is important to distinguish between 

young firms, start-ups, which are the main source of job creation 

and dynamism in the small business sector and other more established small businesses. 

Thank you, and I look forward to discussing these issues further. 

[The prepared statement of Dr. Chad Stone appears in the Submissions for the Record on page 52.] 

Vice Chairman Brady. Dr. Stone, thank you. 

Mr. Mastromarco. 

STATEMENT OF MR. DAN R. MASTROMARCO, PRINCIPAL, THE 

ARGUS GROUP, ARLINGTON, VA 

Mr. Mastromarco. Yes, Mr. Chairman, thank you. 

You know, there is an old adage that if we could line up all the 

economists end to end on Pennsylvania Avenue and make them 

hold hands, they still would not reach a conclusion. 

[Laughter.] 

And I think you can say that that is true when you juxtapose the 

testimony today of Drs. Stone and Entin. But in reality, they 

should sing with the harmony of chorus girls when they are asked 

about the principles that should guide tax reform. 

Economists ought to tell you an optimal tax regime imposes minimum costs for maximum voluntary compliance. But that is not 

what we do. We waste $431 billion in compliance only to endure 

a tax gap that is equally large and growing. That is the dollar 

value of all the finished goods and services in the State of Virginia, 

and 41 other states—resources unavailable for payroll, plant, or 

equipment. 

The IRS embroils Americans in 72,000 litigation actions, 7 of 10 

involving small firms, only to enforce a system that is apparently 

so confusing not even the Treasury Secretary, or two former Members of the Ways and Means Committee, can fully understand it. 

Economists say an optimal system applies low marginal rates on 

a base neutral toward savings and investment. That is what Dr. 

Entin said is so important. But that is not what we do. 

Our corporations pay a national statutory marginal rate of 35 

percent on that chart. That is the highest in all of the OECD countries; a dubious distinction. These rates impose efficiency costs, according to the GAO, of as high as $728 billion. And if Dr. Stone 

has a problem with that analysis, he should talk to the Government Accountability Office about that. 

After all, that explains why our 9,000 code sections of gibberish 

have been cobbled together by America’s finest lobbyists, not America’s finest economists. 

10 

Economists tell you an optimal system would not favor imports 

over exports, or discourage repatriation of profits. But that is not 

what we do. 

The U.S. is alone in applying punishing rates—the highest in the 

OECD, and 50 percent higher than the average OECD rate at 23 

percent—to domestic and foreign earnings alike, and in refusing to 

adopt a border-adjustable tax system. 33 of 34 OECD countries impose an average border-adjustable VAT of 18.5 percent. It is as if 

Congress is urging global producers: invest in overseas plants and 

facilities. Hire those foreign workers. And then market your products back to the American consumer who is punished for saving 

and rewarded for consumption. 

Don’t take my word for it. Look to the World Bank. They rate 

us the 124th worst nation for total tax cost, behind the Russian 

Federation. 

Mr. Chairman, the FairTax, which replaces income and payroll 

taxes with a single-stage consumption tax, addresses these infirmities. It eliminates an estimated 90 percent in compliance cost, 

relieving individuals and nonretail businesses from filing returns 

or paying taxes. It would impose the lowest marginal rates on the 

broadest base of any plan that does not tax income more than once. 

Laurence Kotlikoff estimates that this increases capital stock 

over the century by 96 percent, 44 percent by 2030, increasing real 

wages by 17 percent over that same period rather than the projected decline of 8 percent. 

It would transform the U.S. from one of the least to the most taxfavored jurisdictions for business, meeting the challenges of borderadjustable regimes by exempting foreign consumption of U.S. goods 

from taxation, while imposing the FairTax on foreign goods consumed here just as we do on domestic goods—complete neutrality. 

A zero marginal rate on productive income is better than a territorial tax because it issues our competitor nations an ultimatum: 

Reduce your tax rate on savings and investment, or lose that investment to America. And that sparks global tax competition. 

By not taking the fruits of our labor until consumed, the FairTax 

gives taxpayers control over their tax obligation, which in turn lubricates upward mobility—what Chairman Brady was talking 

about earlier—and it proves we do not need to trade growth for equity. 

Now I know I am running out of time, but with—with permission, I will just take a few more seconds of the Committee’s time? 

Vice Chairman Brady. If we may, Mr. Mastromarco, because 

we want to stay within the five-minute limit, I will ask you a question if you want to make a point to finish up. 

Mr. Mastromarco. Very well. 

[The prepared statement of Mr. Dan R. Mastromarco appears in 

the Submissions for the Record on page 64.] 

Vice Chairman Brady. So, Mr. Hanlon, you are recognized. 

STATEMENT OF MR. SETH HANLON, DIRECTOR OF FISCAL REFORM, DOING WHAT WORKS, CENTER FOR AMERICAN 

PROGRESS, WASHINGTON, DC 

Mr. Hanlon. Thank you, Vice Chairman Brady, Chairman 

Casey, and the Members of the Committee: 

11 

Thank you for the opportunity to testify. It is a privilege to be 

here. This morning I will focus on four points that I discuss at 

greater length in my statement for the record. 

First, tax reform, if done right, has the potential to improve economic growth over the long term, but it is not a solution to the urgent jobs crisis we face today and therefore should not come at the 

exclusion of immediate measures to boost demand and create jobs. 

In this regard, I would associate myself with Dr. Stone’s analysis. 

Second, one of the most important things tax reform can do to 

boost long-term growth prospects is to adequately fund our needs 

as a country—including investments that will keep us competitive. 

Under any realistic fiscal scenario, that will require substantially 

more revenue than our current tax code raises. 

For the last three years, federal revenues were less than 15 percent of GDP, the lowest since 1950. And if we maintain current tax 

policies, revenues will average just 17.7 percent of GDP over the 

next decade, not nearly enough to prevent continued deficits even 

under the house-passed budget, which brings federal spending 

down to about 20 percent by the end of the decade only by shifting 

health care costs onto seniors and dramatically reducing the public 

investments that are needed for long-term growth. 

Recognizing these realities, all of the major bipartisan proposals 

to reduce the deficit—Bowles-Simpson, the Bipartisan Policy Center, the Gang of Six—raise revenues to 20 percent of GDP or higher. 

With revenues at that level, the U.S. would still be a very low 

tax country. We now have the fifth lowest revenues among the 

more than 30 countries in the OECD, one-quarter less than the 

OECD average. 

In the current fiscal context, tax reform cannot just be revenue 

neutral; it has to raise revenues. 

Third, tax reform should not shift more of the tax burden onto 

middle class and low-income Americans who have experienced almost none of the real income gains in recent years, which is why 

we should let the Bush tax cuts expire for top income earners. 

There is little reason to believe that requiring the highest-income 

2 percent of Americans to pay the modestly higher tax rates that 

they paid only a short time ago would slow economic growth. 

Lest we forget, business investment, job growth, and real income 

growth were all stronger under the post-1993 tax code. 18 million 

private sector jobs were created in 6 years after 1993, compared to 

job growth of just 4.7 million in the corresponding period after the 

first Bush tax cuts were enacted, which does not even count job 

losses from the recession. And small businesses created jobs more 

than twice as fast. 

That is not the only reason to doubt that small businesses will 

be harmed. About 97 percent of them are not in the brackets that 

would see any change. And 92 percent of the total benefit of extending the high-end tax cuts would go to high-income people who 

are not small business employers. 

My fourth and final point is that the corporate tax code is in 

need of reform. But Congress should not finance corporate tax cuts 

either with regressive tax increases or additional debt. We often 

12 

hear that the U.S. has the second-highest statutory corporate tax 

rate among major economies, pending what Japan does, which is 

true. But given the wide variety of tax preferences and loopholes 

that exist in the code, effective rates are the better measure. 

In a recent analysis of 280 public company financial statements 

by Citizens for Tax Justice and the Institute for Taxation and Economic Policy, it was found that these large U.S. corporations paid 

an average effective rate of 18.5 percent over 2008 to 2010, just 

over half of the statutory rate. 

We also often hear that the U.S’s corporate tax system is a drag 

on our multi-national corporations’ ability to compete in global 

markets. Again, however, corporate financial statements tell a different story. 

Researchers studying the effective rates of the 100 largest U.S. 

companies and 100 largest EU companies over the last decade 

found that the American companies paid lower income taxes on average than the European rivals. And a 2007 Treasury Department 

report also found that the average tax rate of U.S. corporations was 

below the OECD average. The U.S. raised 2.2 percent of its GDP 

in corporate taxes—well below the OECD average of 3.4 percent. 

And so an accurate picture of the corporate tax burden in the 

U.S. leads to the conclusion that fiscally responsible tax reform 

should raise revenue from the corporate income tax by broadening 

its base, and at the very least be revenue neutral. 

Thank you again for this opportunity and I look forward to your 

questions. 

[The prepared statement of Mr. Seth Hanlon appears in the Submissions for the Record on page 91.] 

Vice Chairman Brady. Thank you, Mr. Hanlon. We are joined 

by the Chairman of the Joint Economic Committee, Senator Casey. 

He is recognized for his opening statement. 

Chairman Casey. Mr. Vice Chairman, thank you very much. 

I want to make two points. 

First of all, when people across the country—no matter where 

you are from—when they look at Washington, they have said two 

things to us. Number one is they want us to create jobs and deal 

with deficits and debt. That is the substantive message. 

But they also want us to work together and come up with bipartisan solutions. What they want to see in the context of that is 

what we are doing today: Having what we will have, and I can tell 

by the opening statements, it is plainly evident that we will have 

a good, robust debate about tax policy, and that is good. People like 

that. What they do not like is when we do kind of the usual namecalling in Washington. 

So this is a very constructive process that we are undertaking 

today. I think when we talk about the basics of this agreement, 

number one is there is broad agreement in this room and across 

the country that we need tax reform, and a lot of it. Whether we 

get that or not in the next couple of weeks remains to be seen, but 

I think that is at least one thing we can all agree on. 

Secondly, what concerns me about some of the ideas that have 

been and will be presented today is what are the effects on at least 

two basic priorities? Number one is: What will happen to the middle class? And what will happen to deficit and debt? 

13 

I think they are two basic concerns that I have. But I think the 

Vice Chairman has done a very good job of gathering us together 

and getting some very smart folks to help us better understand 

what our challenges are and what some of those solutions can be. 

So I really appreciate the work that he has done to make this hearing possible. 

Thanks, very much. 

Vice Chairman Brady. Mr. Chairman, thank you. 

We will begin the questioning. 

Mr. Entin, thank you—this is a comment more than a question— 

thanks for making the point that the goal of tax reform is not simply broadening the base, or the effect on demand, but ought to be 

measured by the incentives to invest. Because that drives job creation consistently in this country. 

Mr. Mastromarco, the FairTax seeks to replace a number of 

taxes—the personal income tax, the corporate tax, payroll taxes, 

gift and death taxes—with a single-stage retail sales tax. 

Since the title of this hearing is ‘‘Can Tax Reform Boost Business 

Investment and Job Creation?’’ can you talk a moment about what 

you believe will be the impact on our economy as a result of the 

FairTax and who would be impacted by the change to that system? 

Mr. Mastromarco. [Inaudible]. 

Vice Chairman Brady. If you could hit your microphone and 

make sure that it is on. 

Mr. Mastromarco. The FairTax would unleash significant 

growth. In a way we can think of the FairTax is as being a Roth 

and a regular IRA all combined, where the earnings are not taxed. 

Think about investment in business—it is both pre-payroll and preincome tax—where then the business can grow with its earnings 

tax-free. The business can then be sold tax-free. What it does it go 

back to a theory of Dr. Irving Fisher many years ago that income 

really is not income until it is consumed. The FairTax does not tax 

productive income. 

And so let me show a chart, if I may, that we have that was done 

by Beacon Hill Institute. The FairTax, Chairman Brady, is a proposal that has been the most researched plan, I venture to say, in 

the history of the United States—certainly one of the most popular 

plans. These are the economic effects according to David Tuerck of 

the Beacon Hill Institute. Real GDP grows in all of the years—year 

five, year one, year ten; jobs increase; investment grows, and wages 

rise. 

The chart that you looked at earlier showed that wages increased 

as a result of capital investment. Here capital stock grows and that 

is what increases wages. Farmers are not more efficient today than 

they were at the turn of the Century because they work harder 

hours, longer hours; they are more efficient because they have tractors, and capital to work with. And this capital comes in the form 

of investment, and it comes in the form of intellectual capital. 

What the FairTax does is relieve the tax on that capital entirely. 

Vice Chairman Brady. Thank you. And can you address for a 

moment the revenue-neutral issue? We sometimes see all sorts of 

numbers fly around about what their tax is from a revenue-neutral 

standpoint. Can you address that? 

14 

Mr. Mastromarco. I will address that. And I appreciate that 

question. 

I think it is a very large question, because it opens the door to 

a criticism of the way in which revenue-estimating and analysis is 

done in this country. You know, the raison d’etre of tax reform is 

supposed to be economic growth, real wages; the things we are 

talking about today. 

And yet, when the Joint Tax Committee comes up with their estimates such as the rate of the FairTax, we close our eyes to the economic growth. We say we do not want to hear this. We want to just 

look at the static estimates. 

We do not know whether the Joint Tax Committee has analyzed 

the FairTax because the Joint Tax Committee operates with secrecy that rivals the CIA. 

They should be disclosing to you their spreadsheets. They should 

say: Here is how we came up with it. We are scientists. We believe 

in our answer. We came up with the right answer, so we can accept 

the criticism of it. That is the way the Joint Tax Committee should 

function. And the Joint Tax Committee should not function by simply giving you a static estimate as if all tax cuts and increases are 

created equal, which they most certainly are not. 

Vice Chairman Brady. May I ask—and we are closing out on 

time—but is the 23 percent rate in the FairTax revenue neutral? 

Mr. Mastromarco. It is, sir. As a matter of fact, if the FairTax 

had been adopted last year, we would have $267 billion more dollars in our federal coffers than we do today. 

Vice Chairman Brady. Thank you, sir. 

Chairman Casey. 

Chairman Casey. Thanks very much. 

Dr. Stone, I wanted to start my questioning with a very basic 

question to you. How do you evaluate the proposal that was enunciated just a moment ago in terms of the analysis presented by the 

chart? What is your assessment of that proposal? 

Dr. Stone. Well, the FairTax proposal is—— 

Chairman Casey. Oh, the mike. Yes. 

Dr. Stone. The FairTax proposal is a version of a consumption 

tax. There are all kinds of consumption taxes: a value-added tax, 

a consumption tax like the FairTax—but we know the characteristics. They tend to be regressive compared with the current system. 

I know the FairTax proposal has something to address what is 

going on at the bottom. But in terms of economic efficiency, you 

mentioned Dr. Kotlikoff, there are economists who looked at the efficiency of moving to a consumption tax. And what you learn is 

that almost all of the efficiency gains come as a result of taxing existing capital: people who have saved, already paid income taxes on 

the money they saved. They have to pay again when they consume. 

And so in that situation what you do is you decide you had better 

work harder and you better invest more. It is like a natural disaster that knocks down a building. You have lost wealth, but you 

work harder to repair that wealth and you save more. That is 

where almost all the efficiency gains come from is the taxation of 

old existing capital in the FairTax proposal. 

15 

There is also a question of transition. You can have lots of transition rules to avoid those problems, but that takes away most of the 

efficiency gains. 

Chairman Casey. I started in my statement with a concern 

about the impact on the middle class. Can you assess that? 

Dr. Stone. The FairTax proposal does attempt to deal with folks 

at the very bottom, but like all consumption taxes very high income 

individuals get a much bigger break than the middle class. And so 

it would shift benefits towards—it has unattractive distributional 

characteristics if you think that a lot more after-tax income going 

to the very top of the distribution is not a good idea. The middle 

class gets hurt compared with the rich. 

Chairman Casey. I wanted to ask as well, and I know we have 

limited time, there is a 2010 analysis by the Citizens for Tax Justice. Corporate taxpayers and corporate tax dodgers in the calendar 

year 2010, manufacturers paid 23.2 percent of their profits in taxes 

compared with 2.2 percent for IT companies, and 5.2 percent for 

telecom companies. 

On average, the tax rate for the companies in their study was 

17.5 percent. 

Is anyone on the panel familiar with this data? Give me your assessment of those differentials. 

Mr. Hanlon. Sure, I can jump in. I mean, Citizens for Tax Justice and ITEP have been doing this kind of analysis for basically 

30 years. Actually one of their reports was one of the impetuses behind the 1986 Tax Reform Act when President Reagan read and 

saw the number of companies that were not paying—profitable 

companies that were not paying federal income taxes and said they 

have to do something about this. 

So it is an analysis of only profitable companies. They screen out 

the ones that are not profitable. And it looks at their overall effective rate. And I think you had mentioned those—you know, it was 

very interesting, the disparities among industries, and in particular 

manufacturing being a 23 percent rate. 

I think another thing that is masked in the way they do it is that 

there is also a differential between domestic manufacturing and 

foreign manufacturing, which I think is another distortion created 

by the tax code, and an important one, that we have to address. 

So I think, you know, overall as you may—— 

Chairman Casey. Are you talking about the manufacturing 

being adversely impacted? 

Mr. Hanlon. Right, the domestic manufacturing. 

So I think the study on the whole survey undermines the notion 

that corporations are over-taxed in general compared to other countries, and certainly would lead to the conclusion that we need a 

base-broadening that levels the playing field among competing industries. 

Chairman Casey. I know I am out of time but, Mr. 

Mastromarco, I know you will get rebuttal time. 

Mr. Mastromarco. No, I appreciate the opportunity. I do not 

know whether Dr. Stone has actually had the opportunity to read 

the FairTax, but it is the only plan that completely untaxes the 

poor. Through its rebate mechanism it makes sure that no one 

pays their FairTax to meet the sustenance in life. 

16 

The amount that is at the poverty level is completely untaxed. 

That is not what we do today. Under the Earned Income Tax Credit, for example, in order to escape poverty we impose some of the 

highest marginal rates on those individuals. And that keeps them 

in that position. It is very bad. 

In terms of equity, here is what the data of Dr. Kotlikoff showed 

when he looked at 42 family sets and ran his simulation model. He 

said that the lifetime average effective rates would decrease for 

lower-income taxpayers 86 percent over what it is today, and 42 

percent for upper income folks. In other words, these are highly 

progressive results. And his study shows that the welfare gains are 

equally progressive. 

Twenty-seven percent of the welfare gains go to low income individuals. Eleven percent go to the middle income, and five percent 

to the upper income. 

Here is the problem, Mr. Chairman. We assume here—— 

Chairman Casey. I did not mean to give you this time. Can you 

hold that so we can move—— 

Mr. Mastromarco. Absolutely. 

Chairman Casey. Can you hold that? 

Mr. Mastromarco. Yes. 

Chairman Casey. Thank you. 

Vice Chairman Brady. Thank you very much. 

Mr. Mulvaney. 

Mr. Mulvaney. Thank you, Mr. Vice Chairman. 

Mr. Mastromarco, I appreciated your comments at the outset 

about how all too often it is difficult to get economists to agree between various groups. I am always stunned at the number of times 

they do not seem to be able to agree with themselves. 

Since we have been up here today I have heard now that tax reform will not create jobs, but in the next breath folks will extol the 

payroll tax cut, which is designed supposedly to do exactly that. 

I have heard that we are seeking to increase aggregate demand, 

and in the next breath suggesting that the Bush/Obama tax cuts 

expire, which unequivocally will have the exact opposite impact on 

aggregate demand. 

What is more frustrating is the number of economists who seem 

completely able to ignore the real world. It is like we have moved 

away from Adam Smith’s worth, his beautiful insight into the real 

world, and human nature, and what actually existed outside of 

these walls, to Samuelson’s text which I read in college which 

was—I always wondered if the guy actually ever wandered outside 

of a classroom. 

And what it leads us to is a situation where today still some of 

you are arguing that infrastructure spending is the best way to 

spur adequate demand—despite the fact that we have tried that 

and it did not work; that you are still here today, gentlemen, some 

of you, pushing for an extension to things like Unemployment Benefits and extension to the payroll tax cuts when we already have 

unequivocal evidence that it did not work. 

And I am just wondering if we have not learned anything from 

this most expensive economics lesson that anybody has ever received? We spent $800 billion to try to put exactly what you—Mr. 

Hanlon and Dr. Stone especially—have extolled here today, and the 

17 

only possible conclusion you can come to in the real world is that 

it did not work. But that is my comment, and here is my question: 

Dr. Stone, you mentioned something I want to come back and 

talk to a little bit, which is about the base, broadening the tax 

base. And here I am talking about not the size of the income that 

we have available to tax, but the number of people who are actually participating in that tax base. 

One of the numbers you hear a lot is that half of the folks in the 

country who make money, who earn money, do not pay the income 

tax. I am just wondering if you think that is fair, or needs to be 

changed? 

Dr. Stone. I am not sure that the statistic is fair. The high figure that you cite is for a particular period. It is lower in years 

when the economy is not so weak. 

But more importantly, people do pay federal taxes. Most people 

do pay federal taxes. They pay payroll taxes, and they pay income 

taxes. And to simply focus on the income tax is to miss the fact 

that people are paying taxes. 

Mr. Mulvaney. But the payroll tax, I’ve always—since I got my 

first check when I was 14 or 15 years old, you know, my Dad laid 

out to me, this is the income tax, and then this is FICA. And what 

that is is that is Social Security—isn’t that a segregated fund, supposed to be at least in theory? When you pay payroll taxes, you are 

paying for what people perceive to be their own benefits in the future, their Social Security, their Medicare. They are not paying for 

defense, USDA food safety, they’re not paying for the FAA, they’re 

not paying for the FBI. Correct? 

Dr. Stone. The FICA tax is—is—goes into the Social Security 

Trust Fund, but revenues are all mixed together, and spending is 

all mixed together. It is not as though it is completely segregated. 

It says, this—it is an indication of promises to pay future benefits. 

Mr. Mulvaney. No, I understand that we raid the Trust Fund. 

I understand how that works, and that we buy nontradeable public 

debt. I understand all that. But the point of the matter is, if you 

are only paying payroll tax you are not paying for national defense, 

are you? 

Dr. Stone. You’re 

Mr. Mulvaney. I’m what? I’m right? 

[Laughter.] 

Dr. Stone. It’s more complicated than that. Nobody’s dollar is 

going to national defense versus going to paying for Medicaid. It is 

all one pot. 

Mr. Mulvaney. Do you think everybody should pay something 

towards national defense? Everybody in the country? 

Dr. Stone. I think the people should pay taxes in proportion to 

their ability to pay, and receive benefits in proportion to their—to 

what they—to how they benefit. 

Mr. Mulvaney. I’ve heard that before. I heard that before. I 

read that someplace. It’s called: From those according to their abilities to those according to their needs, isn’t it? 

Dr. Stone. It’s—It’s about—it’s about the system that we have 

had in the United States for a long time of a progressive tax and 

benefit system. That’s what we have. 

18 

Mr. Mulvaney. Thank you, sir. 

Thank you, Mr. Chairman. 

Vice Chairman Brady. Mr. Duffy. 

[Pause.] 

Excuse me, Senator, you are recognized. 

Senator Coats. Thank you. I have got a little bit of a time constraint, so I appreciate the yielding of the time. 

First of all, thank you for your testimony. A lot of very interesting questions have been raised. I happened to co-sponsor a bill, 

a bipartisan bill, along with Senator Wyden, and it was really 

crafted by Senator Wyden and Senator Gregg over about a threeyear period of time. 

I got the baton handed off to me when Senator Gregg retired 

from service. I have worked with Senator Wyden tweaking some of 

the provisions of the plan. What we have both said—what he said 

with Senator Gregg and what he and I are saying today is, this is 

not the be-all and end-all of tax reform. These are some ideas and 

some thoughts based on some basic principles that have been invented over about a three-year period of time by a number of organizations, and we still leave the door wide open for suggestions for 

improvement, or even major changes to it if we can find adequate 

substitutes that better lead us toward the goals that we all are trying to reach with tax reform. 

Clearly there is a growing consensus that we need this reform 

and need it badly. And I am hopeful that that consensus will lead 

to actual reform, and obviously we want to do it the right way. 

In the limitation of time, let me just focus on one aspect of the 

Wyden-Coats provision. That is, addressing the corporate tax rate, 

which was mentioned and was on the chart. 

We see that as a strong impediment to the competitiveness in a 

global economy. There is a difference of opinion as to how much of 

an impediment it is, but there is pretty much a consensus that we 

do not need to be at the top of the 36 OECD countries in tax rate. 

And then being at least at the average level would be a benefit to 

the United States. 

And so ours brings it down to 24, but we are looking for ways 

to actually bring it down to 21 or 22. And we do that by eliminating a lot of the exclusions, exemptions, subsidies, and so forth 

that has been said by the panel, some of the more effective lobbyists have been able to insert into the tax code through—actually 

the Congress did—but through some effective lobbying by some corporations than others. 

Now I met with and talked to a lot of heads of multi-national 

companies. Almost exclusively I have heard two things. One, well, 

our company does not have a problem with that because we have 

been able to use the X, Y, Z subsidies, credits, et cetera, et cetera, 

and that brings our rate down to a level where we are competitive. 

And others say, you know, this is very unfair because those who 

have more—who have been successful with the tax-writing committees get a break at the expense of the others. And many have said 

to me: Look, if you could get us down into the low to mid 20s, I 

don’t care what exemptions I have, or what breaks I will take, I 

will take that over having to go through the process of continuing 

19 

to work to save my subsidies, save my credit, save my exclusion, 

or get a new one, or whatever. 

So I would just love to get rid of all that effort, all that time, all 

that cost, all that uncertainty, just give me a rate where I am competitive with my competitors. 

Any problems with that goal in mind? And if any of you have examined our particular legislation, any comments you could provide 

for us, that would be helpful and would be appreciated. 

Mr. Entin. Senator, a good friend of mine who in fact used to 

intern with us, was one of the staff people who worked with Senator Gregg on this bill, and I asked him as he was putting it together: Are you checking the rate cuts versus the offsets? And Joint 

Tax was not providing decent information. 

In two areas there is a problem with the bill. First, the increase 

in taxes on capital gains and dividends is not a good idea. 

Second, they really—— 

Senator Coats. I happen to agree with that, even though it is 

my own bill. 

Mr. Entin. Okay. But Joint Tax gave you estimates and notions 

on depreciation that really were extraordinarily harmful and 

wrong. You have been put back to asset lives that Kennedy used, 

but not the double-declining balance that he used, so you have the 

worst tax treatment on depreciation of capital since the Eisenhower 

Administration. 

Some industries do not care about that. If you have nothing but, 

for example, royalties and software, perhaps without any big manufacturing costs, that will not bother you, you prefer a lower tax 

rate. But if you have got manufacturing equipment and other capital intensive industries, that will cause a great deal of trouble. 

We tried to measure the relative effects of these changes, and in 

our model it comes out very badly. 

One of the points that you need to note is that you will have of 

course in your bill an elimination of the domestic production or 

manufacturing credit which already lowers the corporate rate to 

some extent for those companies, and that means that the rate cut 

you are apparently giving is not as big as it appears to be. 

So the depreciation then weighs very heavily against what is in 

fact not quite a big-enough corporate rate cut. If you can get the 

corporate tax rate down to the very low 20s, or 19, with that depreciation schedule you might make up for it. But I think you are 

going to have a great deal of trouble getting a lower service price 

of capital in the structure that you have. 

I also think that if you have a revenue problem, and cannot keep 

the expensing, you can still keep the depreciation allowances just 

as valuable by switching to a neutral cost recovery system. Keep 

the longer asset lives, but pay an interest rate, a respectable one 

like a long-term return on capital of about 3 percent plus inflation 

on the unused balances going forward. 

The present value would be the same as expensing, but it would 

give you enough time to get all the added capital into place before 

you actually had to have the bigger depreciation writeoffs over 

time. This mismeasurement of the cost of investment in the bill is 

causing it real problems. 

20 

Now there are many other subsidies to the corporate sector that 

can and should be closed to lower the rate, and in that general 

framework I would agree. But when you have these specific provisions which hit at the service price of capital, it does not come out 

quite right. 

Senator Coats. Well thank you for that. I take that as a constructive suggestion. I guess what I would ask of you is that you 

have the individual who wrote that who now works for you issue 

a mea culpa and send me details of what you just said, and we will 

go to work on it. 

[Laughter.] 

Mr. Entin. He was an intern 20 years ago, but I will get in 

touch with him again. 

[Laughter.] 

Senator Coats. Your suggestion is very helpful. My time is up. 

Thank you. 

Vice Chairman Brady. Senator, thank you. And now, Mr. 

Duffy. 

Mr. Duffy. Thank you, Mr. Chairman. And I appreciate the 

panel coming in today. 

If you look at what has changed over the last 50 years, is it fair 

to say that as we look at the global marketplace we compete with 

China, India, Mexico, Vietnam, Brazil, Canada, at a far greater 

rate today than we even did 10 years ago? Or more than 40 years 

ago? Is that correct? 

Mr. Entin. Yes. 

Mr. Duffy. Would you all say that capital is pretty free-flowing? 

It goes to the best home possible? Right? I mean it is kind of like 

as we look at our own spending habits, Wal-Mart has become successful because people want their dollar to go as far as possible, 

right? They go to Wal-Mart instead of maybe another store that 

does not provide the best value? 

[Panelists nod in the affirmative.] 

Is capital kind of the same way? It goes to the best place? Am 

I right on that? 

[Panelists nod in the affirmative.] 

You are shaking your heads ‘‘yes.’’ 

Mr. Entin. Yes. 

Mr. Duffy. And so if we look at raising taxes in America, doesn’t 

that make us less competitive on this global stage? I mean, is it 

not as good a home for capital as some of the other OECD countries that were put up in the chart? 

Mr. Entin. Yes. 

Mr. Duffy. Okay. I guess, I don’t know if you guys looked at 

Switzerland, Ireland, Germany, Canada, Chile. Are those countries, 

Mr. Stone, is there a movement within those countries to create 

economic growth by raising their tax rates right now? 

Dr. Stone. There is not, although right now their short-term economic problems are so great that the question of attracting investment is less important to them than getting their budgets in order 

and worrying about high unemployment. 

On the question of capital mobility, yes, capital is mobile, and 

yes, we are competing with more people. But there is an awful lot 

of considerations that go into whether it is worthwhile to be proVerDate Nov 24 2008 08:53 Mar 09, 2012 Jkt 071698 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 C:\DOCS\71698.TXT DPROCT
21 

ducing in, you mentioned Vietnam, versus producing in Pennsylvania or in Texas. And there’s a lot more considerations. 

The United States still enjoys many advantages of producing 

right here in the United States. Capital is not flying all the way 

out. And capital is not quite as mobile as we all nodded our heads 

to. There are some limitations. 

Mr. Duffy. And maybe your thinking is different than I do, but 

when I am talking to business leaders they all tell me it is not the 

only consideration. They look at the American workforce, its productivity, its intelligence, but they also look at the tax code. 

Do they tell you something different than what they are telling 

me? 

Dr. Stone. No, no. I am saying all these things figure in. 

Mr. Duffy. Right. And so isn’t it fair to say, if you guys are advocating raising taxes, you are too advocating for a less competitive 

American economy? 

Mr. Hanlon. So I think, you know, we need to balance the fiscal 

priorities. You mentioned that one of the factors in our competitiveness is our workforce, and certainly other factors are infrastructure 

and the strength of the consumer base in the United States. 

And so I think we need to balance, you know, the concern about 

statutory rates with the need to fund the investments that are 

going to maintain our competitiveness. In particular, if we think 

about workforce, education, investing in our infrastructure, and I 

think those things are indispensable to long-term economic growth 

and competitiveness. 

Mr. Duffy. And I might not have the right number for this, but we are sitting at about a $98 trillion in unfunded liabilities? Is that 

roughly the right number? Anyone? 

Dr. Stone. That is the number I have heard. We have large deficits in the future, yes. 

Mr. Duffy. Do you think we can tax our way out of these unfunded liabilities? Or at some point do we have to say: 

What promises have we made? If you look at the expansive 

growth of government, at some point, instead of going we have to 

tax more to meet the obligations, should we not at some point say 

we have too many obligations? We have to cut back. We have to 

scale back. Instead of adding, you know, more onto the unfunded 

liabilities this country has. 

Mr. Stone. 

Dr. Stone. Our long-term budget deficit problem—unfunded liabilities is one measure. It is a little bit of a shaky measure. But 

there is no question that we have big budget deficits in the future. 

It is almost exclusively driven by rising health care costs. Health 

care costs are rising faster than other costs in the economy, faster 

than GDP, and that is happening not just in the government programs but it is happening in the private programs as well. 

If we find a way to get a handle on those costs, our budget deficit 

problem down the road becomes much more manageable. It is not 

about Social Security being out of control. It is not about discretionary spending being out of control. It is—— 

Mr. Duffy. One quick question before I have to turn it over. Am 

I correct that there is not an historic correlation between tax rates 

and revenue as a percentage of GDP? The actual correlation of revVerDate Nov 24 2008 08:53 Mar 09, 2012 Jkt 071698 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 C:\DOCS\71698.TXT DPROCT
22 

enue to the federal coffers will actually correlate with GDP growth? 

So the basic point is, if you grow your economy so too do you grow 

revenues to the federal coffers, as opposed to raising taxes, doesn’t 

necessarily bring in the growth that would be projected? 

Dr. Stone. Well, we did in the 1990s have a very strong economy, raised a lot of revenue, brought the budget deficit down, produced surpluses, and then we gave it away. 

Mr. Duffy. My time is up, and I hope we will have a second 

round and I will yield back. 

Vice Chairman Brady. Thank you, Mr. Duffy. I would point 

out that from 1981 to 2001 we actually lowered the size of our Federal Government from about 23 percent of the economy to 18 percent and during that period grew about 37 million jobs. So there 

is no—in the private sector, predominantly, so there is no question 

there is a correlation between the size of government and job 

growth. 

Mr. Campbell. 

Mr. Campbell. Thank you, Mr. Chairman. 

And to Mr. Mastromarco’s opening comment about economists 

holding hands, I agree with some of what each of you said, and disagree with what some of each of you said. So I guess I am in that 

same camp. 

But Mr. Hanlon, first for you. You mentioned about repealing the 

Bush tax cuts for higher income individuals. Okay, let’s assume we 

do that. It’s done. It’s all done. That does not come close to closing 

the deficit. So are there other tax increases that you believe we 

ought to have? 

Mr. Hanlon. Sure. No, I agree. It is certainly a first step, and 

it is not the only thing. And I would think, just in response to the 

questions before, I mean there is no doubt we need to do things on 

both the spending and the revenue side. I mean, I am not advocating for only raising taxes, and particularly health care. We need 

to get health care costs systemwide under control. 

And so—but in terms of what else we can do to raise revenues 

beyond that, I think we do need to do that. I think the best way 

is to broaden the tax base and look at the tax expenditure budget. 

In particular, tax expenditures that provide a greater benefit for 

high income people because of what is called the upside-down effect, that people who pay higher marginal rates benefit more from 

the various incentives that are in the tax code. 

There is a proposal to—— 

Mr. Campbell. Sorry, no, what I’m getting at is, there is a lot 

of rhetoric around this town these days about taxes on high-income 

individuals, but even if you do that it still is not that big an 

amount of money relative to the problem. 

So my question is—and you have said there ought to be some 

stuff on the spending side as well. I understand that. But let’s say 

we do whatever for high-income, raise the rate to whatever, do 

whatever you think ought to be there, do you also believe that as 

a part of this that there should be tax increases on—or reductions 

in tax expenditures, whatever, on people who are not high-income, 

or not? 

Mr. Hanlon. So have a—we developed a plan called the—it’s 

called ‘‘Budgeting for Growth and Prosperity,’’ and it is basically a, 

23 

it was the challenge to basically balance the budget over a 20- 25- 

year time frame. And we tried to do that by avoiding tax increases 

on middle class people. 

I mean, I think one way—you know, something we need is to put 

a price on carbon emissions, which solves two problems. I think you 

definitely want to protect low-income people from that. But that is 

another potential revenue source that can help in the long term. 

Mr. Campbell. But that obviously hits middle class taxpayers. 

Mr. Hanlon. Sure, it could, depending on how you structure it; 

yes. 

Mr. Campbell. Okay. All right, Mr. Mastromarco, FairTax. One 

of the things you did not mention in this argument, one of the arguments that a lot of FairTax people say is we can get rid of the 

IRS. There has to be a whole lot less enforcement, et cetera. 

My concern has always been, if you take—and I do not know 

what number of a FairTax you have, but I have heard 23 percent 

or something. Let’s just take that. I am from California. You add 

to our 10 percent sales tax, state sales tax. You are now up to 33 

percent effectively consumption tax. 

The incentive to avoid that tax and to take transactions and 

things underground would be enormous. And I have always 

thought that one of the problems with the FairTax is that it would 

be the opposite. You would actually need a much more intrusive 

enforcement mechanism than currently exists on the income tax. 

What are your thoughts on that? 

Mr. Mastromarco. Right. I really couldn’t disagree more with 

that statement. And this is from somebody who has experience 

both as a tax practitioner and also has worked in tax—— 

Mr. Campbell. And by the way, I am a CPA and did tax returns 

for a living, and have a Masters in Taxation. 

Mr. Mastromarco. So we should be kindred spirits on this. 

Mr. Campbell. We should be. But like you say, joining hands 

and don’t agree. 

Mr. Mastromarco. Well, but part of it is defining the problems. 

That’s the beginning, you know, and that’s the good thing about 

what this Committee is doing, is to ask the right questions that 

lead to the right answers. 

The good news is tax reform is coming. The bad news is, it is undefined. 

There has been a lot of good work that Ms. Nina Olson, the National Tax Payer Advocate, has done, and through various reports, 

concerning what causes the tax gap; what causes this massive tax 

gap? Is it under-reporting. 

What are the influences that deal with evasion? The first thing 

you have to understand, Congressman, is that the tax gap is really 

four different elements: 

Honest taxpayers; 

Confused taxpayers; 

Game players; and 

Evaders. 

Under the FairTax, you pretty much eliminate the game players 

and the confused. I mean, it reduces the 9,000 code sections into 

how much did you sell the consumers? That is a pretty basic, easy 

24 

question. So it divides the line between evaders, game players, and 

those with excuses, pretty well. 

All right, so then we look to evaders. What influences that? The 

number of taxpayers, they diminish by about 90 percent. 85 percent of the consumption taxes are paid by about 15 percent of the 

retailers. The opportunities they have for evasion in the code diminish. I could drop the code on the floor, you could too, and we 

could tell people how to avoid the taxes on any page. This is a very 

simple plan. 

Third, marginal rates—and that is where you were focusing on— 

marginal rates; marginal rates under the FairTax are the lowest of 

any conceivable plan that could be developed. The base is twice 

that taxable income—23 percent—as opposed to 15.3 percent payroll taxes under the current system, plus. Let’s take a taxpayer at 

28 percent; that’s 43 percent. 

So if you’re going to rob a bank, the question is: Do you rob the 

one with gold? Or do you rob the one with iron ore? 

Mr. Campbell. Yes. And I think the Chairman is saying my 

time is up, so this will be a continuing discussion. But my concern 

is that you turn—it is like prohibition. You turn a lot of honest people into dishonest people because of the size of the benefit of becoming someone who does not pay taxes. But my time is over. 

Thank you, Mr. Chairman. 

Vice Chairman Brady. Thank you, Mr. Campbell. We normally 

conclude at the end of the first round, but let me quickly offer the 

chance for a follow-up question from any of the members here on 

the panel. 

Mr. Duffy. 

Mr. Duffy. If I could just quickly. Mr. Hanlon, I think you indicated you would support a carbon tax? Is that right? 

Mr. Hanlon. Some kind of price on carbon emissions. 

Mr. Duffy. Is that so we would have a cleaner environment and 

less carbon emissions? 

Mr. Hanlon. Yes. 

Mr. Duffy. Okay. And you would admit that if you tax carbon, 

you get less of it? Less carbon emission, right? 

Mr. Hanlon. Sure. 

Mr. Duffy. And we tax cigarettes, as well, because we want people to smoke less, too, right? 

Mr. Hanlon. Um-hmm. 

Mr. Duffy. And so if we extend this argument out, if you tax income, if you tax capital, you will get less of that, as well? Right? 

Mr. Hanlon. I see where you’re going. I mean, certainly—— 

Mr. Duffy. Why does it work for carbon and it does not apply 

to every other principle we have talked about today? 

Mr. Hanlon. Well it does apply, but you need to look at, you 

know, for example—we’ve talked about savings a lot, but we need 

to look at our national savings rate. And when we—— 

Mr. Duffy. But I think the point is, when we talk about taxes, 

I think you made the exact point. You tax carbon because you want 

less of it. You want to tax income, you want to tax capital, and you 

are going to get less of it. And if you look at the issues in the country today, it is an issue about the economy and jobs. 

25 

We want to see investment in America. We want to see expansion in America which will in the end lead to economic growth, and 

job creation. But here you sit here and advocate for greater taxes, 

and we will get less of that when we increase taxes. And that is 

my concern with the two of your positions, Mr. Stone and Mr. 

Hanlon. 

I know that you guys have probably followed what we have done 

in the House. We have tried to, in our budget, make a proposal for 

tax reform where we are going to take the top rate from 35 to 25 

percent and do away with quite a few of the loopholes, make it fairer, flatter, simpler. We’re not quite where Mr. Mastromarco is with 

a FairTax, but we are going in that direction. 

Would you all agree that that is a better system? Was anyone opposed to what we were trying to do in our budget with tax reform? 

Dr. Stone. Sure. I’ll be the devil’s advocate here. 

Mr. Duffy. I thought you would be. 

Dr. Stone. The problem is that when we talk only about the 

problems with marginal tax rates affecting activities that we value, 

there are also government activities that only government can do— 

defense, some kinds of infrastructure—for the size of government 

that we need. And the problem that we have with most of the proposals in the House is that they just set the level way too low for 

the revenue that they are trying to raise relative to what is realistic in our political system, what is realistic in terms of our aging 

population and our needs. 

And so if you—the principle is fine. It is just that the level of 

spending and revenue does not seem as though it will work. 

Mr. Duffy. Mr. Entin. 

Mr. Entin. If you get the tax base right, you are going to get 

some added growth. Then the needs may go down. If you get the 

tax base right, people will see the full cost of government instead 

of having it hidden here and there. And they might not want as 

much government. 

You don’t know what you need until you get things right. So that 

needs to be done. 

Second, the burden tables that people talk about—this tax falls 

on this person, this tax falls on that person are misleading. If the 

tax is changing the size of the economy and the level of wages, it 

is bound to be shifted to the middle class. If you do something that 

depresses wages, they are going to be hurt even if it is not on the 

burden table. 

The burden tables are nonsense. They do not take the effect on 

the economy into account. 

Mr. Duffy. Right. 

Mr. Entin. The tax expenditure list is a problem. In the late 

Bush Administration, right up through the 2009 budget, they had 

a chapter on tax expenditures. That is required. But in those years, 

they put in the tax expenditures as they would appear under the 

so-called broad-based income tax, and then another set of tax expenditures as they would appear under a neutral tax system. And 

most of the major tax expenditures simply vanished because under 

a neutral tax system they are not tax expenditures, they are the 

right treatment. All pension plans under a consumed income tax— 

where you put down your income, subtract your saving, and pay 

26 

tax on what is left, and when you withdraw from a pension you add 

it to your income—are the norm. But they are viewed as a big tax 

expenditure under the income tax. That misperception goes away 

under the consumption base. 

The same is true as you go down through all the major tax expenditures, even in the housing sector. OMB got that one wrong. 

They messed that up. Under current law, even housing is treated 

correctly as it would be under a consumption tax base. 

When you look at tax expenditures as they are commonly presented, you get a bad idea for tax reform because you are going to 

start raising taxes on capital. Capital responds more to taxes than 

labor. I am not an advocate of higher tax rates. But if I had to 

choose one thing in the Bush plan to let go, I would say let the two 

top rates go up. They hit CEOs. They hit high-paid attorneys. They 

hit high-paid athletes. They hit entertainers. And they also hit 

some entrepreneurs. But give the entrepreneurs expensing in exchange on a permanent basis and they will be held harmless. 

If you want a lot of revenue, you are going to have to tax middle 

class workers. But if you tax them on consumption instead of income, at least they will be free to save and invest and try and get 

out from under it and have a decent retirement. Watch your base. 

That is more important than almost anything else. 

Mr. Duffy. And it is fair to say that is why we went from not 

just millionaires and billionaires, as the President talked about, he 

actually went to those who made $200,000, $250,000 because that 

is where the money is at. The lower you go, the more people you 

hit. 

Mr. Mastromarco. Yes. But you will not just hit them. There 

will be less capital formation, and then everybody will have a lower 

wage, including all the way down the income scale. 

Mr. Duffy. Absolutely. I yield back. But I appreciate the panel 

coming in. I think it is a great discussion, seeing a couple of different sides of you and everyone sitting nicely and engaging. I appreciate you guys. 

Mr. Campbell. Holding hands. 

Mr. Duffy. Holding hands, yes. 

Vice Chairman Brady. Well I want to follow up on that. I want 

to thank our witnesses for being here today. You know, some experts believe the 1800s was the British Century. 1900s was the 

American Century. And this is the China Century. I am not convinced we need to cede the strongest economy in the world to our 

Asian competitor. 

Part of that competitiveness and retaining that is a tax code for 

the 21st Century, that makes us competitive, that rewards that investment, that boosts our economy. Today we heard both pros and 

cons on how best to do that, but I think the lawmakers today who 

believe this is perhaps, along with getting our financial house in 

order, the strongest reform and change we can make to keep the 

world’s largest economy are right. This is critical to get the broad 

range of debate about this. I want to thank our witnesses for being 

here today, and your insights on the various areas. I want to thank 

our lawmakers for taking time again to focus on the most important issue before us in the economy. And with that, the hearing is 

adjourned. 

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[Whereupon, at 11:21 a.m., the hearing was adjourned.] 

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