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THE NEED FOR PRO–GROWTH TAX REFORM 

HEARING 

BEFORE THE

COMMITTEE ON THE BUDGET 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

HEARING HELD IN WASHINGTON, DC, SEPTEMBER 14, 2011 

Serial No. 112–14 

Printed for the use of the Committee on the Budget 

( 

Available on the Internet: 

www.gpo.gov/fdsys/browse/committee.action?chamber=house&committee=budget 
(II) 

COMMITTEE ON THE BUDGET 

PAUL RYAN, Wisconsin, Chairman 

SCOTT GARRETT, New Jersey 

MICHAEL K. SIMPSON, Idaho 

JOHN CAMPBELL, California 

KEN CALVERT, California 

W. TODD AKIN, Missouri 

TOM COLE, Oklahoma 

TOM PRICE, Georgia 

TOM MCCLINTOCK, California 

JASON CHAFFETZ, Utah 

MARLIN A. STUTZMAN, Indiana 

JAMES LANKFORD, Oklahoma 

DIANE BLACK, Tennessee 

REID J. RIBBLE, Wisconsin 

BILL FLORES, Texas 

MICK MULVANEY, South Carolina 

TIM HUELSKAMP, Kansas 

TODD C. YOUNG, Indiana 

JUSTIN AMASH, Michigan 

TODD ROKITA, Indiana 

FRANK C. GUINTA, New Hampshire 

ROB WOODALL, Georgia 

CHRIS VAN HOLLEN, Maryland, 

Ranking Minority Member 

ALLYSON Y. SCHWARTZ, Pennsylvania 

MARCY KAPTUR, Ohio 

LLOYD DOGGETT, Texas 

EARL BLUMENAUER, Oregon 

BETTY MCCOLLUM, Minnesota 

JOHN A. YARMUTH, Kentucky 

BILL PASCRELL, JR., New Jersey 

MICHAEL M. HONDA, California 

TIM RYAN, Ohio 

DEBBIE WASSERMAN SCHULTZ, Florida 

GWEN MOORE, Wisconsin 

KATHY CASTOR, Florida 

HEATH SHULER, North Carolina 

PAUL TONKO, New York 

KAREN BASS, California 

PROFESSIONAL STAFF

AUSTIN SMYTHE, Staff Director 

THOMAS S. KAHN, Minority Staff Director 
(III) 

C O N T E N T S 

Page 

Hearing held in Washington, DC, September 14, 2011 ........................................ 1 

Hon. Paul Ryan, Chairman, Committee on the Budget ................................ 1 

Prepared statement of ............................................................................... 2 

Hon. Chris Van Hollen, ranking minority member, Committee on the 

Budget ............................................................................................................ 3 

Michael G. Wall, vice president of corporate tax, Case New Holland 

Inc. ................................................................................................................. 5 

Prepared statement of ............................................................................... 6 

Additional information supplied to Ms. Kaptur for the record .............. 72 

Scott A. Hodge, president, Tax Foundation .................................................... 12 

Prepared statement of ............................................................................... 14 

Diane Lim Rogers, chief economist, the Concord Coalition .......................... 23 

Prepared statement of ............................................................................... 25 

Response to question submitted for the record ....................................... 74 

Hon. Mick Mulvaney, a Representative in Congress from the State of 

South Carolina, question submitted for the record .................................... 74 

(1) 

THE NEED FOR PRO–GROWTH TAX REFORM 

WEDNESDAY, SEPTEMBER 14, 2011 

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON THE BUDGET, 

Washington, DC. 

The Committee met, pursuant to call, at 10:00 a.m., in room 210, 

Cannon House Office Building, Hon. Paul Ryan, [Chairman of the 

Committee] presiding. 

Present: Representatives Ryan, Garrett, Campbell, Calvert, 

Price, McClintock, Stutzman Lankford, Black, Ribble, Mulvaney, 

Huelskamp, Young, Amash, Woodall, Van Hollen, Schwartz, Kaptur, Doggett, Blumenauer, McCollum, Yarmuth, Pascrell, Honda, 

Ryan of Ohio, Wasserman Schultz, Moore, and Castor. 

Chairman RYAN. The hearing will come to order. Welcome all to 

an important hearing. Thank you. I will start with a brief opening 

statement and then turn it over to my friend, Mr. Van Hollen. And 

then we will listen to our witnesses. 

The purpose of today’s hearing, in conjunction with the conversation we had with Mr. Van Hollen, is to highlight the need for progrowth tax reform. Our economy is currently suffering from the reluctance of job creators to invest, expand, and hire workers in the 

United States. For several years, Washington has filed a now discredited playbook. If businesses will not invest, then the government should expand its reach. But letting the government pick 

winners and losers and the market only adds to the debt, wastes 

taxpayer dollars, promotes crony capitalism and ultimately fails at 

sustainable job creation. 

For evidence, look no further than Solyndra, a solar panel company that received $500 million in stimulus-funded loan guarantees. Last month, Solyndra filed for bankruptcy and laid off its employees. Another idea we have been trying for the last three years 

under first President Bush and then President Obama is shortterm tax rebates on the theory that these temporary windfalls will 

encourage people to go out and spend more money. 

Look, I do not object to letting people keep more of their own 

money. I clearly think that is a great idea. But one-time rebates 

and short-term tax policies do not give businesses the confidence 

that they need to make the kinds of long-term investments to create jobs. That is why, of all the proposals the president has put forward in his latest speech, the most encouraging was his support for 

making the corporate tax code fairer, simpler, and more competitive. This is a sign of encouragement. We should extend these reforms to the entire U.S. tax code. A world-class tax system should 

be fair, simple, and competitive. And right now, the U.S. tax code 
2 

fails miserably on all three counts. The World Economic Forum recently downgraded the United States from fourth to fifth in its annual competitiveness rankings. The reason? Under the section titled, Most Problematic Factors for Doing Business, our unfair, complex, and uncompetitive tax code was right there at the very top. 

We need to close loopholes that distort economic activity and those 

loopholes that also reward politically well-connected at the expense 

of the hard-working small businessmen and women of America. We 

need to simplify the tax code by reducing the number of brackets 

so that people spend less time and money figuring out how to comply with the tax code. And we need to lower rates to encourage economic activity, to allow our businesses to compete on a level playing field against those in countries where the corporate rates are 

much lower. Unfortunately that list includes every developed country except for Japan. 

There is a growing bipartisan consensus for this kind of common 

sense tax reform. The president’s bipartisan fiscal commission 

made very clear that a revamped tax code with a broader base and 

lower rates was critical to economic growth. That is one reason why 

House Republicans included in our budget these reforms in the 

path to prosperity: lower rates in a broader base to help get our 

economy growing again. Unlike the high-cost government spending 

proposals now circulating in Washington, fundamental tax reform 

could be done with no budgetary cost and it would provide many 

immediate and long-lasting economic benefits. 

In today’s hearing on the need for such a reform, we will hear 

from three terrific witnesses. In addition to experts Scott Hodge of 

the Tax Foundation and Diane Lim Rogers of The Concord Coalition, we have a witness today from the world of business, Michael 

Wall of Case New Holland, which is headquartered in Racine, Wisconsin. Mr. Wall can speak first-hand about the effects of tax policy 

on business decisions and job creation in the United States. I am 

looking forward to hearing from all of you on a topic that is critical 

to laying the foundation for sustained economic growth and job creation. With that, I yield to the ranking member, Mr. Van Hollen. 

[The prepared statement of Chairman Paul Ryan follows:] 

PREPARED STATEMENT OF HON. PAUL RYAN, CHAIRMAN, COMMITTEE ON THE BUDGET

Welcome all, to this important hearing. 

The purpose of today’s hearing is to highlight the need for pro-growth tax reform. 

Our economy is currently suffering from the reluctance of job creators to invest, 

expand, and hire workers in the United States. 

For several years, Washington has followed a now-discredited playbook: If businesses won’t invest, then the government should expand its reach. 

But letting the government pick winners and losers in the market only adds to 

the debt, wastes taxpayer dollars, promotes crony capitalism, and ultimately fails 

at sustainable job creation. 

For evidence, look no further than Solyndra, a solar-panel company that received 

$500 million in stimulus-funded loan guarantees. Last month, Solyndra filed for 

bankruptcy and laid off its employees. 

Another idea we’ve been trying for the last three years, under Presidents Bush 

and Obama, is short-term tax rebates, on the theory that these temporary windfalls 

will encourage people to go out and spend more money. 

I don’t object to letting people keep more of the money they’ve earned. But onetime rebates and short-term tax policies do not give businesses the confidence they 

need to make the kinds of long-term investments that create jobs. 
3 

That is why, of all the proposals the President put forward in his latest speech, 

the most encouraging was his support for making the corporate tax code fairer, simpler, and more competitive. 

We should extend these reforms to the entire U.S. tax code. A world-class tax system should be fair, simple, and competitive—and right now, the U.S. tax code fails 

miserably on all three counts. 

The World Economic Forum recently downgraded the United States from fourth 

to fifth in its annual competitiveness rankings. The reason? Under the section titled, 

‘‘Most problematic factors for doing business,’’ our unfair, complex, and uncompetitive tax code was right at the very top. 

We need to close loopholes that distort economic activity—and that reward the politically well-connected at the expense of the hard-working small businessman. 

We need to simplify the code by reducing the number of brackets, so that people 

spend less time and money figuring out how to comply with the code. 

And we need to lower tax rates, to encourage economic activity—and to allow our 

businesses to compete on a level playing field against those in countries where corporate tax rates are much lower. Unfortunately, that list includes every developed 

country except for Japan. 

There is a growing bipartisan consensus for this kind of common-sense tax reform. 

The President’s bipartisan Fiscal Commission made clear that a revamped tax code 

with a broader base and lower rates was critical to economic growth. 

That’s one reason House Republicans included similar reforms in our budget, The 

Path to Prosperity—lower rates and a broader base to help get our economy growing 

again. 

Unlike the high-cost government spending proposals now circulating in Washington, fundamental tax reform could be done with no budgetary cost, but would 

provide many immediate and long-lasting economic benefits. 

At today’s hearing on the need for such reform, we will hear from three terrific 

witnesses. 

In addition to tax experts Scott Hodge of the Tax Foundation and Diane Lim Rogers of the Concord Coalition, we have a witness today from the world of business, 

Michael Wall of Case New Holland, headquartered in Southern Wisconsin. 

Mr. Wall can speak first-hand about the effects of tax policy on business decisions 

and job creation in the United States. 

I am looking forward to hearing from all of you on a topic that is critical to laying 

the foundation for sustained economic growth and job creation. 

With that, I yield to the Ranking Member, Mr. Van Hollen. 

Mr. VAN HOLLEN. Thank you, Mr. Chairman. And thank you for 

bringing us together in this hearing. I want to thank all of our witnesses. You know, there are a lot of committees in Congress that 

just look at one subject matter area or several subject matter 

areas. You have got The Transportation Committee, you have got 

The Education Committee. The advantage of The Budget Committee is it allows us an overview of the budget. And we had a 

number of hearings in this committee, very important hearings 

that looked at some of the impact on the budget of the rising costs 

of some of the programs, health care programs in the country, 

Medicare, Medicaid, others due to changing demographics and 

other factors including the high cost of health care. And we have 

looked at a number of other parts of the budget. 

I think also as we look at the deficit situation that we are confronting, especially as it grows in the out-years, we have to look at 

the role of revenue and figure out what is the best way to raise and 

generate that kind of revenue as we approach a budget that deals 

with both the spending side as well as the revenue side of the picture. And I am glad the chairman mentioned the Simpson-Bowles 

Commission because I think they did put a lot of ideas on the table 

for how we can simplify our tax code. I would point out that at the 

same time they used a considerable part of the savings they generated through their tax reform to reduce the deficit which is obviously a very important component of our overall economic strategy. 
4 

Now, we had the first hearing of the so-called Joint Committee 

yesterday, and Dr. Elmendorf, the head of CBO, testified and he 

made two really important points. One was he reinforced the point 

of earlier hearings in this committee about the rising out-year costs 

that we face. He also made the point that if this Congress were to 

adjourn right now for 10 years and just let current law kick in, you 

would actually reduce the deficit by over $4.5 trillion simply by allowing the old Clinton tax rates to go into effect and a couple of 

other changes. And, you know, people talk about going big, let’s do 

something big, I just want emphasize the point if Congress packed 

its back and went into hibernation for 10 years, you would exceed 

the target of those bipartisan commissions. 

Now, I am not advocating that we do that, and I do not think 

anybody is. And Simpson-Bowles and Rivlin-Domenici did not. But 

I am advocating the fact that we need more revenue if we are going 

to avoid very deep cuts to things like Medicare. I mean, we have 

seen proposals that make dramatic impacts on Medicare beneficiaries. And I think that those are frankly asking Medicare beneficiaries to pay too big of a burden for things that they have already invested in. So the trick is to devise a tax system through 

tax reform that both encourages growth but also deals with the 

revenue piece and is done in a fair way and a balanced way. There 

is no doubt that the tax system is chockfull of special interest provisions, many on the corporate side. A lot of us do not think, for 

example, that some of the big oil companies should be getting big 

taxpayer subsidies at a time they are doing just fine and why do 

they need that extra handout from the taxpayer. You have a lot of 

other provisions in the tax code that are absolutely unnecessary 

and especially on the corporate tax side, there is a very strong argument to be made obviously in reducing the overall rate and 

somehow doing it in a way that expands the base. And I think 

there is room for common ground. 

On the individual side of the tax code, there is also room to look 

at those areas; Simpson-Bowles did. It gets even a little trickier on 

the individual side but some of the same arguments can certainly 

be made. So I hope this is actually an opportunity to try and find 

some common ground as we go forward, recognizing, again, that 

Simpson-Bowles, Rivlin-Domenici, Gang of Six, all these other bipartisan groups found a way to both reform the tax code that made 

it, I think, more efficient in many ways, but also recognized the 

role that the revenues play as part of a balanced approach to reducing our deficit. And after all, that is what this committee has 

spent a lot of time looking at is the out-year deficit situation. 

In closing, I would just point out that yesterday Dr. Elmendorf 

pointed out that there is absolutely no contradiction between trying 

to take measures in the short term to try and boost a very fragile 

economy and try and reduce the deficit over a longer period of time. 

And he specifically pointed out that a CBO study had found that 

if you look at different tax policy provisions, that providing relief 

at this point on the payroll tax holiday, on the employee side especially, would provide obviously a little bit more money in the pockets of consumers. And one of the main reasons businesses are not 

hiring is they do not have people out there purchasing their goods 

and services. So to the extent that people now have a little bit 
5 

extra cash in their pocket, that would help boost the economy along 

with other measure like the infrastructure investment. And again, 

that is not my testimony alone. That was also a point made by Dr. 

Elmendorf. 

So, Mr. Chairman, I am actually hoping that this discussion can 

actually steer us in the direction ultimately of some common 

ground on these issues. 

Chairman RYAN. Great. Thank you, Mr. Van Hollen. We will 

start with Mr. Wall, then Mr. Hodge, then Ms. Rogers. Mr. Wall? 

STATEMENTS OF MICHAEL WALL, VICE PRESIDENT OF TAX 

CASE NEW HOLLAND; SCOTT HODGE, PRESIDENT, TAX 

FOUNDATION; DIANE LIM ROGERS, CHIEF ECONOMIST, THE 

CONCORD COALITION 

STATEMENT OF MICHAEL WALL 

Mr. WALL. Good morning, Chairman Ryan, Ranking Member 

Van Hollen, and distinguished members of the committee. My 

name is Michael Wall. I am vice president of Corporate Tax for 

Case New Holland. I would like to thank you for this opportunity 

today to testify on behalf of CNH. I applaud your leadership in 

holding this timely hearing on the need for pro-growth tax reform 

that will increase the nation’s international competitiveness and be 

a driving force for job creation in America. 

CNH manufactures the tools used to shape the world, from machinery for building roads, and schools, for equipment for growing 

and harvesting food. CNH is perhaps the most geographically diversified manufacturer and distributor of agricultural and construction equipment in the world. We are present in approximately 170 

countries with significant operations in the United States. 

In 2010, CNH’s manufacturing in the United States accounted 

for over $7 billion in annual revenues. And CNH exported 34 percent of our U.S. production to global markets. CNH employs 10,800 

people in the United States, and we are a majority-owned subsidiary of FIAT Industrial. 

Given CNH’s unique perspective of having manufacturing, distribution, and research facilities across the world, we believe that 

substantially lowering the U.S. corporate tax rate, while preserving 

essential business growth incentives, will significantly improving 

American business competitiveness and incentivize foreign investment in the United States. 

Unfortunately, there is effectively a 14 percent incremental tax 

burden between combined 39.2 percent U.S. federal and state tax 

rate versus the 25 percent average tax rate for the OECD countries. In fact, virtually every industrialized country except the 

United States has lowered its corporate tax rate over the last 20 

years. These countries chose to lower their corporate tax rate to attract and retain capital and prove the competitiveness of its economies and provide pro-growth environment for job creation. 

CNH’s summary view is that the U.S. corporate tax reform 

should include the following key aspects. First, significantly lower 

the U.S. corporate tax rate. Second, consider appropriate modifications to certain corporate tax expenditures in a fiscally responsible 

manner. Third, adopt the territorial tax system for the United 
6 

States. In pursuing fundamental corporate tax reform, CNH believes it is imperative that corporate tax reform does not discriminate against U.S. subsidiaries or foreign-domiciled companies. Recognizing that foreign investment is an engine for job growth and 

economic recovery, President Obama recently issued a statement in 

June highlighting the importance of foreign investment in the 

United States and reaffirmed the United States longstanding commitment to open investment policies. 

CNH believes that the U.S. corporate tax rates should reduce to 

25 percent or lower to grow the U.S. economy and achieve a competitive corporate tax rate with our international trading partners. 

CNH greatly commends this committee for including a 25 percent 

corporate tax rate in its fiscal year 2012 budget legislation. I note 

that a 20 percent federal corporate tax rate combined with the average state tax rate would result in a U.S. corporate tax rate equal 

to the 25 percent average corporate tax rate in the OECD. 

CNH recognizes that a fundamental corporate tax reform providing for a reduced corporate tax rate may be coupled with modification of certain corporate tax expenditures in a fiscally responsible manner. As Congress considers specific corporate tax reforms, 

CNH believes that the retention of an accelerated tax depreciation 

and the tax credit for increase in research activities are vitally important for the sustainable U.S. economic growth and should be retained in any final corporate tax reform legislation. 

The United States is one of only eight remaining OECD countries 

and the only G-7 country that maintains a worldwide tax system 

that taxes U.S. companies on income earned and foreign countries 

on the repatriation of those earnings to the United States. The 

other seven OECD countries with a worldwide tax system have an 

average corporate tax rate of 21 percent, which is substantially 

lower than the U.S. corporate tax rate. CNH’s view is that the 

United States should adopt a territorial tax system with an exemption for dividends paid from active, foreign-source income to ensure 

the competitive tax system in line with our trading partners. 

In conclusion, CNH believes that significantly reducing the U.S. 

corporate tax rate in conjunction with the adoption of a territorial 

tax system will make the United States more competitive with 

other countries, significantly increase investment in the United 

States, and lead to much needed job growth for the American people. On behalf of CNH, I again thank you for providing this opportunity to share CNH’s view on fundamental corporate tax reform. 

CNH looks forward to working with this committee and the Congress in considering these vitally important issues. I am pleased to 

answer any questions the committee may have. Thank you very 

much. 

[The prepared statement of Michael Wall follows:] 

PREPARED STATEMENT OF MICHAEL G. WALL, VICE PRESIDENT OF CORPORATE TAX, 

CASE NEW HOLLAND INC. 

Good morning, Chairman Ryan, Ranking Member Van Hollen, and distinguished 

Members of the Committee. My name is Michael Wall and I am Vice President of 

Corporate Tax for Case New Holland Inc. (‘‘CNH’’). I want to thank you for the opportunity to testify on behalf of CNH this morning. I applaud your leadership in 

holding this timely hearing on the necessity of fundamental U.S. corporate tax reform that will increase the competitiveness of the U.S. corporate tax system to at-
7 

tract investment in a competitive global market and be a driving force for job creation in America. 

CNH manufactures the tools used to shape the world, from machinery for building 

roads, bridges, schools and hospitals, to equipment for growing and harvesting food. 

Formed in 1999 through the merger of New Holland and Case Corporation, CNH 

unites two renowned international companies with roots dating back to the 1800s. 

Today, CNH is one of the world’s leading manufacturers of agricultural combines 

and tractors as well as a leader in the markets for hay and forage and specialty 

harvesting equipment. In the construction industry, CNH maintains a top position 

in backhoe loaders and a strong position in skid steer loaders in North America and 

crawler excavators in Western Europe. CNH comprises the heritage and expertise 

of three agricultural brands: Case IH; New Holland Ag; and Steyr and three construction equipment brands: Case Construction Equipment; New Holland Construction; and Kobelco. 

CNH is perhaps the most geographically diversified manufacturer and distributor 

of agricultural and construction equipment in the world. CNH is present on six continents and in approximately 170 countries with a network of approximately 11,300 

dealers, including more than 2,000 dealers in the United States, as well as 40 manufacturing facilities located throughout Europe, North America, Latin America, and 

Asia. CNH has manufacturing, distribution, and research facilities in 32 countries, 

including the United States with locations in Arizona, California, Georgia, Illinois, 

Indiana, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, Oregon, 

Pennsylvania, Texas, and Wisconsin. CNH had global revenues of over $15.6 billion 

in 2010. CNH employs over 10,800 people in the United States; however, this number does not include the significant number of employees of our 1,300 plus U.S. suppliers and dealer network. CNH is a majority-owned subsidiary of FIAT Industrial 

S.p.A., a public company whose capital stock is listed on the Italian Stock Exchange 

(FI.IM). 

As an American subsidiary of a foreign domiciled company, CNH is representative 

of a large group of inbound corporations making substantial direct investments in 

the United States. However, because of our historic tax structure in the United 

States, we share many of the same policy goals and concerns as U.S. based multinational corporations. This hearing comes at a critical time when the United States 

is at an economic crossroads, facing serious fiscal challenges at home, historicallyhigh levels of annual federal deficits, excessive federal debt, and an increasingly 

competitive global landscape for attracting and retaining investment. As CNH and 

other American businesses make plans to invest and hire, we look to the United 

States to adopt sound economic and tax policies that will drive economic growth. To 

grow the United States economy, there must be comprehensive reform of the U.S. 

corporate tax system to make it more competitive with our international trading 

partners. 

This Congress’s work on fundamental tax reform is vital to ensure that the 

United States adopts a competitive corporate tax system to attract and retain capital in a global marketplace. While many of the United States international trading 

partners have substantially lowered their corporate tax rates to encourage business 

investment and job growth, the United States has the second highest corporate tax 

rate among the Organization for Economic Cooperation and Development (‘‘OECD’’) 

countries. 

CNH’S UNIQUE GLOBAL PERSPECTIVE

Given CNH’s unique perspective of having manufacturing, distribution, and research facilities in 32 different countries, we believe that substantially lowering the 

U.S. corporate tax rate, while preserving essential business growth incentives, will 

significantly improve American business competitiveness and incentivize foreign investment in the United States. In 2010, CNH’s operations in the United States accounted for over $7 billion in annual revenues and CNH exported 34% of our U.S. 

production to global markets. CNH’s U.S. operations are helping the United States 

reach the National Export Initiative goal of doubling exports by the year 2015. For 

example, our tractor plant in Racine, Wisconsin, exported 40% of its production so 

far this year. 

As CNH seeks to expand its global operations, the relative competitiveness of a 

country’s corporate tax system is a key financial consideration. Unfortunately, there 

is effectively a 14% incremental tax burden between the 39.2% combined U.S. federal tax rate of 35% and the additional 4.2% average state applicable tax rate, and 

the 25% average corporate tax rate for the OECD countries, which negatively impacts America’s ability to attract and retain capital in a competitive global marketplace. 
8 

Unlike the 1960s and 1970s, the United States is no longer the sole dominant 

global player and American businesses operate in a fiercely competitive global marketplace. While many of the U.S. international trading partners have substantially 

lowered their statutory corporate tax rates as an incentive to encourage business investment and job growth, the United States is burdened with an uncompetitive corporate tax system in this increasingly competitive global landscape. In fact, virtually 

every industrialized country except the United States has lowered its corporate tax 

rate over the past 20 years, but the United States has resisted this trend and actually increased its corporate tax rate, creating a less-hospitable environment for business and job creation. 

Although the United States has a vibrant commercial market and an exceptional 

labor force, an uncompetitive corporate tax system and the increasingly unpredictable regulatory environment are strong negatives that companies take into account 

when looking to expand their global operations. An indisputable fact is that the U.S. 

manufacturing base and jobs have been steadily decreasing over the last three decades due to a variety of reasons, which include extraordinarily high corporate income taxes. International trading partners have dramatically lowered their corporate tax rates in recent years, and these countries are winning the global competition to attract business investment and jobs. For example, the United Kingdom lowered its corporate tax rate from 28% to 26% in 2011, and over the next three years, 

the United Kingdom will further reduce its corporate tax rate by 1% each year until 

it reaches 23% in 2014. The United Kingdom explicitly chose to lower its corporate 

tax rate to improve the competiveness of its economy and provide jobs for its workers. 

While there is a general consensus in Congress to level the playing field and use 

the savings to lower the corporate tax rate, as expressed by President Obama in his 

2011 State of the Union address, there is a divergence of views as to the specific 

details to achieve this objective. CNH’s summary view is that U.S. corporate tax reform should include the following key aspects to stimulate Gross Domestic Product 

(‘‘GDP’’) growth and create jobs in the United States: 

Lower the U.S. corporate tax rate; 

Consider appropriate modifications of certain corporate tax expenditures to broaden the base; and, 

Adopt a U.S. territorial tax system. 

Recognizing that foreign investment is an important engine for U.S. job growth 

and economic recovery, President Obama recently issued a statement highlighting 

the importance of foreign investment in the U.S. economy and reaffirmed the United 

States’ longstanding commitment to open investment policies. This statement and 

the subsequent Executive Order to establish the SelectUSA initiative to attract 

greater business investment is a good first step in making the United States a better place for global companies to do business, but much more is left to be done, including fundamental reform of the U.S. corporate tax system. In pursuing reform 

of the U.S. corporate tax system, CNH believes it is imperative that the reformed 

corporate tax system not discriminate against U.S. subsidiaries of foreign domiciled 

companies, which would further reduce the levels of investment in the United States 

that might otherwise be available to enhance job creation. 

NEED TO LOWER THE U.S. CORPORATE TAX RATE

The United States has an extremely uncompetitive combined federal and state applicable tax rate of 39.2%, which is the second highest among the OECD countries. 

Japan is the only OECD country with a slightly higher corporate tax rate (39.5%) 

than the United States, although Japanese officials had announced Japan’s intention to drop its statutory corporate tax rate by 4.5% before the March 2011 earthquake caused the reduction to be deferred. Please see Exhibit A titled ‘‘OECD Corporate Tax Rates’’ for the combined corporate tax rates for OECD countries for the 

2010 tax year. 

The National Commission on Fiscal Responsibility and Reform narrative recommended lowering the U.S. corporate tax rate to a range of 23% to 29%. CNH believes that the U.S. corporate tax rate should be reduced to 25% or lower to achieve 

a competitive U.S. corporate tax system consistent with the 25% OECD average tax 

rate. In our view, the 25% U.S. corporate tax rate included in the House Budget 

Committee Fiscal Year 2012 Budget is necessary to achieve a competitive U.S. corporate tax system that will stimulate the U.S. economy and create jobs. An analysis 

by the Milken Institute in 2010, Jobs for America, concluded that reducing the U.S. 

combined federal and state corporate income tax rates to the average of OECD countries would increase real GDP by 2.2% (or $376 billion) and create 2.1 million private sector jobs by 2019. 
9 

CNH has substantial business operations in the United States, Australia, Brazil, 

Canada, India, and many countries in the European Union, including Austria, Belgium, France, Germany, Italy, Poland, and the United Kingdom. As CNH looks to 

expand its capacity to meet growing demand and create jobs, the after-tax earnings 

and cash flow from operations is a major factor in considering locations to expand 

operations. A comparative view of the combined national and sub-national corporate 

tax rates for 2010 for the major countries that CNH operates illuminates the significant lack of competitiveness of the U.S. corporate tax rate and highlights the inability of the United States to keep pace with its international trading partners to lower 

its corporate tax rate over the last twenty years. 

COMPARATIVE ANALYSIS OF OECD COMBINED NATIONAL AND SUB-NATIONAL CORPORATE TAX 

RATES FOR 2010 IN MAJOR COUNTRIES WHERE CNH OPERATES 

Country 1990 2010 Change in rate 

United States .......................................................................................... 38.7% 39.2% 0.5% 

Australia .................................................................................................. 39% 30% (9%) 

Austria ..................................................................................................... 30% 25% (5%) 

Belgium ................................................................................................... 41% 34% (7%) 

Brazil ....................................................................................................... 42% 34% 1 (8%) 

Canada .................................................................................................... 41.5% 29.5% (12%) 

France ..................................................................................................... 42% 34.4% (7.6%) 

Germany .................................................................................................. 54.5% 30.2% (24.3%) 

India ........................................................................................................ 63% 34% 1 (29%) 

Italy ......................................................................................................... 46.4% 27.5% (18.9%) 

Poland ..................................................................................................... n/a 19% ............................

United Kingdom ...................................................................................... 34% 28% (6%) 

1 Non-OECD country. 

The OECD average corporate tax rate has dropped by nearly 16 percentage points 

from 41% in 1990 to 25% in 2010. Whereas, the United States has actually increased its tax rate by 0.5% during this timeframe, principally from a one percentage point increase in the federal corporate tax rate in 1993 offset by a change to 

the average state applicable tax rate. It is important to note that even by lowering 

the U.S. corporate federal tax rate to 25%, the combined federal and state applicable 

tax rate would still be higher than the 25% OECD average tax rate, but within the 

range of a competitive corporate tax rate. 

As the Joint Committee on Taxation (‘‘JCT’’) staff has recently stated, ‘‘the best 

way to encourage increased investment in the United States (by foreign or domestic 

investors) is to increase the after-tax return to investment, and that outcome is 

more efficiently achieved by, for example, lowering the U.S. corporate income tax 

rate than by narrower policies such as the facilitation of earnings stripping.’’ Source: 

JCT, Present Law and Issues in U.S. Taxation of Cross-Border Income, September 

6, 2011, JCX-42-11, page 59. In a 2005 study, the JCT compared individual income 

tax reductions and corporate income tax reductions and concluded that a reduction 

in the corporate income tax had the greatest impact on increasing long-term economic growth, due to increased capital investment, and increased labor productivity. 

Further, recent research by the OECD concludes that the corporate income tax has 

the most adverse impact on economic growth than any other tax. 

CNH is equally concerned about the tax rates imposed on our suppliers, dealers, 

and customers. Although CNH is a Subchapter C corporation, many of our suppliers, dealers, and customers operate as Subchapter S corporations, partnerships, 

and limited liability companies, so that these pass-through entities pay U.S. taxes 

on their owners’ individual income tax returns. While some commentators advocate 

taxing large pass-through entities as Subchapter C corporations, CNH opposes subjecting pass-through entities to the ‘‘double-taxation’’ regime of Subchapter C corporations because this would be tantamount to a large business tax increase on an 

important segment of entrepreneurs that fuel U.S. economic growth. CNH’s view is 

that Congress should also lower U.S. individual tax rates and broaden the tax base 

as part of fundamental U.S. tax reform consistent with the general principles of the 

National Commission on Fiscal Responsibility and Reform report. 

ELIMINATION OR MODIFICATION OF U.S. CORPORATE TAX EXPENDITURES

CNH recognizes that fundamental corporate tax reform providing for a reduced 

corporate tax rate may be coupled in the legislative process with the elimination or 

modification of certain corporate tax expenditures in a fiscally responsible manner. 
10 

CNH, like many corporations, can accept the elimination or modification of certain 

corporate tax expenditures if necessary to effectuate a fundamental and fair corporate tax reform, but only to facilitate a 10 percentage point or more reduction of 

the U.S. corporate rate. Naturally, there is a divergence of views within the business community over which corporate tax expenditures should be modified. While 

Congress may be forced to make difficult choices in this process, it is of vital importance that the corporate federal tax rate be reduced to 25% or less. CNH strongly 

believes that the stimulus provided by a significant reduction of the U.S. corporate 

tax rate would spur U.S. business activity across all sectors of the economy, increase 

GDP growth, and have a significant beneficial impact on all aspects of the Nation’s 

economy. 

As Congress deliberates on fundamental corporate tax reform, CNH believes that 

retention of accelerated tax depreciation of property and the tax credit for increasing 

research activities are vital corporate tax expenditures that promote sustainable 

U.S. economic growth. It is important to note that many of our international trading 

partners’ tax systems also employ the accelerated depreciation and research tax 

credit incentives. CNH’s view is that maintaining accelerated tax depreciation encourages capital expenditures and demand for durable goods, which has been embraced by Congressional policymakers as sound pro-growth business tax provisions. 

Once a leader in promoting innovation, the United States now ranks 24th out of 38 

OECD countries in terms of the competitiveness of its research and development tax 

incentives. CNH’s view is that the permanent extension of the research and development tax credit is essential to encouraging domestic investment in cutting edge 

technology to keep the United States competitive in a global economy. According to 

the Milken Institute report, Jobs for America, if the research and development credit were strengthened and made permanent, total manufacturing employment would 

increase by 270,000 by 2019. 

ADOPTION OF A U.S. TERRITORIAL TAX SYSTEM

The United States is one of the eight remaining countries in the OECD that maintains a worldwide system of taxation that taxes U.S. companies on the income they 

earn in foreign countries upon repatriation of the earnings to the United States. 

Under current tax law, U.S. companies must factor in the higher rate of U.S. tax 

it will pay on its foreign earnings when these earnings are repatriated to the United 

States, which makes U.S. companies less competitive relative to the global competition. This can be exacerbated because although the United States allows a foreign 

tax credit, such that these repatriated earnings are not subject to ‘‘double taxation,’’ 

often times U.S. companies are unable to fully credit the foreign taxes due to the 

intricacies of the foreign tax credit calculation. A territorial system would tax U.S. 

companies only on the income they earn in the United States with an exemption 

for dividends received from foreign subsidiaries. 

CNH’s view is that the United States should adopt a territorial tax system with 

an exemption for dividends paid from active foreign-source income to achieve a competitive U.S. corporate tax system that is in line with our international trading partners and consistent with the recommendations of the National Commission on Fiscal Responsibility and Reform report. All other G-7 countries and 26 of the 34 

OECD countries have adopted a territorial tax system that largely exempts active 

earnings from home country taxation. The eight OECD countries that do not have 

a territorial tax system are Chile, Greece, Ireland, Israel, Korea, Mexico, Poland, 

and the United States. Excluding the United States, the other OECD countries that 

have a worldwide tax system with a foreign tax credit regime have an average corporate tax rate of 21%. In just the past two years, both the United Kingdom and 

Japan have switched to territorial tax systems to improve the competitiveness of 

their tax systems and provide more jobs for their economies. Please see Exhibit B 

titled ‘‘OECD Countries with Territorial Tax Systems’’ for the home country tax 

treatment of foreign-source dividend income received by resident corporations. 

Some commentators have expressed concerns that the implementation of a territorial system may create new incentives to move certain U.S. operations offshore. 

Based upon our considerable experience as an internationally based company with 

very extensive U.S. operations, CNH disagrees. We strongly believe that a territorial 

system coupled with a substantially lower U.S. corporate tax rate would provide tremendous incentives for increasing operations in the United States for both U.S. 

based and foreign based companies. 

CONCLUDING REMARKS

Many countries have aggressively reduced their corporate income tax rates in an 

effort to attract and retain high-quality job-creating investment, which U.S. policy-
11 

makers should keep in mind as they consider fundamental corporate tax reform to 

enhance American competitiveness and attract investment in the United States. 

CNH believes that reducing the U.S. statutory corporate tax rate to 25% or lower, 

in conjunction with the adoption of a territorial tax system, would make the United 

States more competitive with other countries, which would significantly increase investment in the United States and lead to much needed job growth. 

The broad uncertainty faced by American businesses today includes tax policy in 

need of reform and an increasingly unpredictable regulatory environment, which 

has led to a general lack of corporate confidence. Reforming corporate tax policy and 

removing regulatory uncertainty is necessary for long-term financial planning and 

capital investments, which are critical for job creation in the United States. 

I am pleased to answer any questions you may have, and thank you for this opportunity to share CNH’s views on fundamental corporate tax reform. CNH looks 

forward to working with this Committee and the Congress in considering fundamental corporate tax reform proposals that will increase America’s competitiveness, 

attract and retain capital in a competitive global market, and be a driving force for 

job creation in the United States. 
12 

Chairman RYAN. Thank you, Mr. Wall. Mr. Hodge? 

STATEMENT OF SCOTT HODGE 

Mr. HODGE. Thank you, Mr. Chairman, Mr. Van Hollen. I appreciate the opportunity to talk to you today about how fundamental 

tax reform can improve America’s long-term economic growth and 

our global competitiveness. 

Since 1937, the Tax Foundation has stood for the immutable 

principles of sound tax policies. Now taxes should be neutral to eco-
13 

nomic decision-making. They should be simple, transparent, stable, 

and they should promote economic growth. In other words, they 

ideal tax system should do only one thing, and that is to raise a 

sufficient amount of revenues to fund government activities with 

the least amount of harm to the economy. And by all accounts, the 

U.S. tax system is far from that ideal. In fact, Mr. Chairman, the 

economic research suggests that the U.S. corporate and individual 

tax systems are undermining the nation’s long-term economic 

growth. 

OECD economists have studied the impact of taxes on economic 

growth for the largest capitalist nations, and they have determined 

that high corporate income taxes and high personal income taxes 

are the most harmful taxes for long-term economic growth, followed 

by consumption taxes and property taxes. And this should be a red 

flag to all of us, because when it comes to corporate taxes, the U.S. 

has a Neiman-Marcus tax system while the rest of the world has 

moved toward a Wal-Mart model of corporate taxation. Not only do 

we have the second highest overall corporate tax rate among the 

leading industrialized countries at over 39 percent, but we were 

one of the few remaining countries, as Mr. Wall mentioned, that 

has a worldwide tax system. And the economic research tells us 

that cutting the corporate tax rate will not only help the country 

on a long-term growth path, but it will lead to higher wages and 

higher living standards. 

One of the reasons the Japanese moved to a territorial tax system is because they found out that a high corporate tax rate combined with a worldwide tax system creates a lockout effect that discourages the repatriation of foreign earnings. And so moving to a 

territorial system will break down the Berlin Wall that is keeping 

more than a trillion dollars in foreign profits abroad. 

Now, with all deference to Warren Buffet, OECD research has 

also found that the U.S. has the most progressive income tax burden among all the leading industrialized nations. The top 10 percent of taxpayers in the United States pays a greater share of the 

income tax burden than their counterparts in any other industrialized country. And our low-income Americans have the lowest income tax burden of any industrialized country. And I think it is 

also pretty well known that about half of all American households 

now pay no income taxes because of the generosity of credits and 

deductions in the code. 

And the research shows that the more a country tries to make 

an income tax system progressive, the more it undermines the factors that contribute most to economic growth. And that is such 

things as investment, risk taking, entrepreneurship, and productivity. 

And while it is easy to cartoon the richest fat cats, America’s rich 

are actually are successful entrepreneurs and business owners. And 

because of the growth in entrepreneurship over the past 30 years, 

there is actually more business income that is being taxed under 

the individual tax code than under the traditional corporate tax 

system. And so what that tells us is that cutting the top individual 

income tax rates for these dynamic individuals and entrepreneurs 

will lead to higher productivity gains, which then translate into 

higher economic growth. 
14 

Let me wrap up by saying that with deficit now at $1.5 trillion, 

it is tempting to look at closing loopholes and tax reform as an opportunity to raise more revenues for the government. But the primary goal of tax reform should be to promote long-term economic 

growth and to increase the living standards for all Americans, not 

just to raise tax revenues for the government. And if the byproduct 

of increased economic growth is more tax revenues, then that is a 

win-win. 

Now I understand there is clearly a tension in the United States 

between the desire for a simpler tax code and one that also ensures 

fairness and equity. So I would suggest that we develop a new way 

of thinking about equity and the tax code. We should strive to build 

a consensus around three basic concepts. First, an equitable tax 

system should be free of most of the credits and deductions, and 

it should not micromanage individual or business behavior. 

Secondly, an equitable tax system should apply a single flat rate 

on most everyone equally. And that way every citizen pays at least 

something to the basic cost of government. 

And lastly, an equitable tax code should be simple, and it should 

have dramatically lower rates than what we have today, in the low 

20s, I think, by most accounts. And the government could raise 

about the same amount of revenue that it does today. 

I believe that such a tax code would actually generate a more 

predictable and stable revenue stream to fund government programs as opposed to the roller coaster system that we have today. 

And, most importantly, such a tax code would be conducive to longterm economic growth and higher living standards for all Americans. And that is one of the keys of fixing the long-term fiscal crisis 

that is facing America today. 

And thank you very much. I appreciate the opportunity and 

would answer any questions that you have. 

[The prepared statement of Scott Hodge follows:] 

PREPARED STATEMENT OF SCOTT A. HODGE, PRESIDENT, TAX FOUNDATION

I am Scott Hodge, president of the Tax Foundation. Thank you for the opportunity 

to speak to you today about how comprehensive tax reform can boost America’s 

long-term economic growth and improve our global competitiveness. 

Founded in 1937, the Tax Foundation is the nation’s oldest non-partisan, nonprofit organization dedicated to promoting economically sound tax policy at all levels 

of government. 

We are guided by the immutable principles of economically sound tax policy which 

say that: Taxes should be neutral to economic decision making, they should be simple, transparent, stable, and they should promote economic growth. 

In other words, the ideal tax system should do only one thing—raise a sufficient 

amount of revenues to fund government activities with the least amount of harm 

to the economy. 

By all accounts, the U.S. tax system is far from that ideal. 

INTRODUCTION

The U.S. tax system is in desperate need of simplification and reform. Over the 

past two decades, lawmakers have increasingly asked the tax code to direct all manner of social and economic objectives, such as encouraging people to buy hybrid vehicles, turn corn into gasoline, save more for retirement, purchase health insurance, 

buy a home, replace the home’s windows, adopt children, put them in daycare, take 

care of Grandma, buy bonds, spend more on research, purchase school supplies, go 

to college, invest in historic buildings, and the list goes on. 

The relentless growth of credits and deductions over the past 20 years has not 

only knocked half of all American households off the tax rolls, it has made the IRS 

a super-agency, engaged in policies as unrelated as delivering welfare benefits to 
15 

subsidizing the manufacture of energy efficient refrigerators. I would argue that 

were we starting from scratch, these would not be the functions we would want a 

tax collection agency to perform. 

Ironically, but perhaps not surprisingly, the sectors suffering the biggest financial 

crises today—health care, housing, and state and local governments—all receive the 

most subsidies through the tax code. The cure for what ails these parties is to be 

weaned off the tax code, not given more subsidies through such things as the First 

Time Homebuyer’s Credit, Premium Assistance credits, or more tax free bonds. 

While tax cuts will always curry more favor with voters than creating new spending programs, Washington needs to call a truce to using the tax code for social or 

economic goals. Indeed, the tax base has become so narrow that trying to accomplish 

more social goals via the tax code is like pushing on a string. 

Washington can actually do more for the American people by doing less. The solution lies in fundamental tax reform—as has been suggested by parties as diverse 

as Chairman Ryan and President Obama’s National Commission on Fiscal Responsibility and Reform, chaired by Erskine Bowles and Alan Simpson. As many studies 

have shown, Americans could be taxed at lower rates—and the government could 

raise the same amount of revenue—if the majority of tax expenditures were eliminated. 

That said, the primary goal of fundamental tax reform should not be raising more 

money for government. The primary goal should be improving the nation’s long-term 

economic growth and lifting American’s living standards. 

Path breaking research by economists at the OECD suggests that the U.S. corporate and individual tax systems are a major detriment to our nation’s long-term 

economic growth. In a major study analyzing the impact of various taxes on longterm economic growth, they determined that high corporate and personal income tax 

rates are the most harmful taxes for long-term economic growth, followed by consumption taxes and property taxes. 

Unfortunately, as many of you many know, the U.S. has the 2nd highest corporate income tax rate among industrialized nations and, this may surprise you, the 

U.S. has the most progressive personal income tax systems among industrialized nations. 

The economic evidence suggests that cutting our corporate and personal income 

tax rates while broadening the tax base would greatly improve the nation’s prospects for long-term GDP growth while helping to restore Uncle Sam’s fiscal health. 

More importantly, these measures will lead to higher wages and better living standards for American citizens. And that should be the number one priority of any tax 

policy. 

Let’s consider corporate and individual tax reform one at a time. 

CORPORATE TAX REFORM CAN IMPROVE U.S. COMPETITIVENESS AND LIVING STANDARDS

When it comes to corporate taxes, the U.S. has a Neiman Marcus tax system 

while the rest of the world has moved toward a Walmart model of corporate taxation. In contrast to our high-rate, narrow base, and worldwide model of corporate 

taxations, the basic tenets of this new model are lower tax rates, a broader base, 

and the exemption of foreign earnings. 

In just the past four years alone, 75 countries have cut their corporate tax rates 

to make themselves more competitive. And, reports the OECD, ‘‘there has been a 

gradual movement of countries moving from a credit [worldwide] to an exemption 

[territorial] system, at least in part because of the competitive edge that this can 

give to their resident multinational firms.’’ 1

The U.S. remains far behind on both of these trends. Not only do we have the 

second-highest overall corporate tax rate among the leading industrialized nations 

at over 39 percent—only Japan has a higher overall rate—but we are one of the 

few remaining countries to tax on a worldwide basis. 
16 

Our largest trading partners—Canada, Great Britain, and Japan—have already 

taken steps to make themselves more competitive. For example, Great Britain lowered its corporate tax rate on April 1st of this year, from 28 percent to 26 percent 

as a first step toward the goal of having a 23 percent rate in 2014. On January 1st, 

Canada lowered its federal corporate tax rate from 18 percent to 16.5 percent. Next 

year the rate will fall to 15 percent. Japan was scheduled to cut its overall corporate 

rate by 5 percent until the tragic earthquake derailed the government’s legislative 

agenda. Japan’s move would have left the U.S. with the highest overall corporate 

tax rate in the industrialized world. 

As important as are differences in tax rates, however, all three of these countries 

have effectively moved toward a territorial or exemption form of taxing the foreign 

profits of their multination firms. Indeed, of the 34 OECD member nations, 26 have 

either a full territorial system or exempt at least 95 percent of foreign earnings from 

repatriation taxes. The U.S. remains the only country in the OECD with a worldwide system and a corporate rate above 30 percent. 

While some critics charge that U.S. corporations pay far less than the statutory 

tax rate because of the plethora of credits and deductions, a review of IRS data 

shows that the effective U.S. tax rate for all corporations averaged 26 percent between 1994 2 and 2008. The effective U.S. tax rate varied across years, ranging from 

27.5 percent in 1999 to 22.8 percent in 2008.3

However, these figures only account for U.S. income taxes paid on domestic profits 

and repatriated foreign earnings. When foreign taxes are included—U.S. corporations pay $100 billion annually in income taxes to other governments on their foreign profits—the overall tax rate on large multinationals is close to the U.S. statutory rate of 35 percent. Averaged for all corporations, the overall effective corporate 

tax rate is between 32.1 and 33 percent. 
17 

The benefits of making our corporate tax system on-par with the rest of the 

world’s systems cannot be understated. 

Here are just a few of the benefits of corporate tax reform: 

Cutting the U.S. corporate tax rate will help put the country on a long-term 

growth path. Economists at the OECD determined that the ‘‘corporate income tax 

is the most harmful tax for long-term economic growth’’ (emphasis added), not only 

because it increases the cost of domestic investment, but also because capital is the 

most mobile factor in the global economy, and thus the most sensitive to high tax 

rates. 

Indeed, the report found that ‘‘Corporate income taxes appear to have a particularly negative impact on GDP per capita.’’ 4 Lowering statutory corporate tax rates, 

they determined, ‘‘can lead to particularly large productivity gains in firms that are 

dynamic and profitable, i.e. those that can make the largest contribution to GDP 

growth.’’ 5 OECD economists speculate that this could be because these are the firms 

that rely most heavily on retained earnings to finances their growth.6 Higher taxes 

mean fewer retained earnings, which means less growth. 

Cutting the corporate tax rate will lead to higher wages and living standards. In 

a world in which capital is extremely mobile but workers are not, most studies find 

that workers bear 45 percent to 75 percent of the economic burden of corporate 

taxes. In one such study, an economist at the Federal Reserve Bank of Kansas City 

used cross-country data to study the effect of corporate taxes and their interaction 

on the gross wages of workers. She found that ‘‘labor’s burden is more than four 

times the magnitude of the corporate tax revenue collected in the U.S.’’ 7

According to her model, a one percentage point increase in the average corporate 

tax rate decreases annual gross wages by 0.9 percent. Translated to U.S. corporate 

tax collections and wages, this means that a $10.4 billion increase in corporate tax 

collections would lower overall wages by $43.5 billion.8

The overwhelming body of economic evidence suggests that cutting the U.S. corporate tax rate will benefit U.S. workers through higher wages, which translate into 

higher living standards. 

Cutting the corporate tax rate will boost entrepreneurship, investment and productivity. Studies show that the corporate income tax hinders entrepreneurship, 

risk, and investment. Indeed, a study by Jens Arnold and Cyrille Schwellnus supports the notion that corporate taxes are ‘‘success taxes’’ which ‘‘fall disproportionately on firms that are contributing positively to aggregate productivity growth.’’ 9

Perhaps a worrisome sign for the U.S., they found that firms in relatively profitable industries ‘‘have disproportionately lower productivity growth rates in countries 

with high statutory corporate tax rates.’’ 10 The corporate tax has the biggest impact 

on firms that are on the way up as opposed to those that have plateaued or are 

on the way down. In other words, companies that are ‘‘in the process of catching 

up with the technological frontier are particularly affected by corporate taxes.’’ 11

A key factor for the health of the overall economy is the extent in which investment leads to new technology which, in turn, improves productivity. But, ‘‘high corporate taxes may reduce incentives for productivity-enhancing innovations by reduc-
18 

ing their post-tax returns.’’ 12 Thus, if U.S. lawmakers want to increase the amount 

of innovation in the country, a good first step would be to cut the corporate tax rate. 

Moving to a territorial system will eliminate the ‘‘lock-out’’ effect. A significant 

amount of economic research has shown that the willingness of multinational firms 

to bring home foreign profits is highly sensitive to the level of repatriation tax rates. 

A 2007 study by Foley et al., found that repatriation tax burdens induce firms to 

hold more cash abroad.13 They determined that ‘‘the median firm facing above average [repatriation] rates holds 47% of its cash abroad, but the median firm facing 

below average rates holds only 26% of its cash abroad. This figure suggests that repatriation tax burdens increase foreign cash holdings relative to domestic cash holdings.’’ 14 It should be no surprise, thus, that by most accounts U.S. multinational 

firms are holding as much as $1 trillion in foreign earnings abroad, in part because 

of the high toll charge to bring the money back to the U.S. 

But in a finding that should particularly worry U.S. lawmakers, Foley et al. found 

that ‘‘technology intensive firms appear to be particularly sensitive to repatriation 

tax burdens,’’ as well as those with ‘‘strong growth opportunities,’’ and those with 

high levels of R&D expenditures.15 Thus, the ‘‘new economy’’ firms that contribute 

substantially to economic growth are those that are the most dissuaded from reinvesting their foreign profits back into the U.S. 

INDIVIDUAL TAX REFORM CAN BOOST ENTREPRENEURSHIP, PRODUCTIVITY AND GROWTH

President Obama has consistently called for higher tax rates on upper-income taxpayers. But the economic evidence suggests that this would be very detrimental to 

the country’s long-term economic growth. Indeed, OECD economists determined that 

high personal income taxes are second only to corporate income taxes in their harmful effects on long-term economic growth. And it will shock many Americans to learn 

that we already have the most progressive income tax burden among the leading 

industrialized nations. 

What that means is that the top 10 percent of U.S. taxpayers pay a larger share 

of the income tax burden than do their counterparts in any other industrialized 

country, including traditionally ‘‘high-tax’’ countries such as France, Italy, and Sweden.16 Meanwhile, because of the generosity of such preferences as the EITC and 

child credit, low-income Americans have the lowest income tax burden of any OECD 

nation. 
19 

Indeed, the study reports that while most countries rely more on cash transfers 

than taxes to redistribute income, the U.S. stands out as ‘‘achieving greater redistribution through the tax system than through cash transfers.’’ 17 Remarkably, the 

most recent IRS data for 2009 indicates that nearly 59 million tax filers—42 percent 

of all filers—had no income tax liability because of the credits and deductions in 

the tax code. 

With deference to Warren Buffett, the share of the income tax burden borne by 

America’s wealthiest taxpayers has been growing steadily for more than two decades. Figure 2 compares the share of income taxes paid by the top 1 percent of taxpayers to the share paid by the bottom 90 percent of taxpayers. 

The chart shows that, as of 2008, the top 1 percent of taxpayers paid 38 percent 

of all income taxes, while the bottom 90 percent of taxpayers paid just 30 percent 

of the income tax burden. By any measure, this is the sign of a very progressive 

tax system. 

What are the harmful effects of progressivity? The economic evidence is quite 

clear that there is a ‘‘non-trivial tradeoff between tax policies that enhance GDP 

per-capita and equity.’’ 18 Meaning, the more we try to make an income tax system 

progressive, the more we undermine the factors that contribute most to economic 

growth—investment, risk taking, entrepreneurship, and productivity. 

Individual Tax Reform Must Go Hand-in-Hand with Corporate Reform. It may 

surprise people to learn that the corporate tax system is no longer the primary tool 

for which we tax businesses in America. As Figure 4 below shows, more business 

income is currently taxed under the individual tax system than under the traditional corporate income tax system. It is also interesting to note that for the first 

time in the history of the tax code the top corporate tax rate and the top individual 

rate are the same (35 percent). These are key reasons why the individual and corporate tax systems should be reformed together. The neutrality principle dictates 

that the tax code not bias the way corporate and non-corporate businesses are 

taxed. 

There has been a tremendous growth in ‘‘flow-through’’ private businesses such 

as sole proprietors, S-corporations, LLCs, and partnerships over the past thirty 

years. Between 1980 and 2007, for example, the number of sole proprietors grew 

from 8.9 million to more than 23 million, and the number of S-corporations and 

partnerships (which include LLCs) grew at a faster rate from 1.9 million to more 

than 7 million. There are now three and one-half times as many pass-through firms 

as traditional C-corporations.19
20 

America’s ‘‘rich’’ are our successful entrepreneurs and business owners. While 

some people dismiss the effect of high tax rates on business by citing the fact that 

only 2 or 3 percent of business owners pay tax in the top two brackets, the more 

economically relevant question is how much business income is earned by those in 

the top tax brackets. 

While there are millions of small businesses in America, Figure 5 shows that only 

about 16 percent of all private business income is earned by taxpayers with adjusted 

gross income (AGI) below $100,000. Another 16 percent of private business income 

is earned by taxpayers with AGI between $100,000 and $200,000. 

However, fully 68 percent of private business income is earned by taxpayers with 

AGI above $200,000—the target range of President Obama’s proposed tax rate increases. Some 35 percent of all private business income is earned by taxpayers with 

AGIs above $1 million. 

Another way of looking at the distribution of business income is to see how many 

taxpayers at the highest tax brackets have business income. According to Tax Policy 

Center estimates, more than 74 percent of tax filers in the highest tax bracket report business income, compare to 20 percent of those at the lowest bracket. As Table 

1 below indicates, more than 40 percent of private business income is earned by taxpayers paying the top marginal rate. 

While these high-income business owners may be relatively few in number, the 

data makes it very clear that increasing top individual tax rates would directly impact America’s successful private business owners and entrepreneurs. 
21 

Cutting Individual Tax Rates Can Boost Productivity and Economic Growth. After 

extensive study of the impact of tax reforms on economic growth across the largest 

capitalist nations, OECD researchers determined that ‘‘a reduction in the top marginal [individual] tax rate is found to raise productivity in industries with potentially high rates of enterprise creation. Thus reducing top marginal tax rates may 

help to enhance economy-wide productivity in OECD countries with a large share 

of such industries * * *’’ 20

Indeed, OECD researchers find that lower tax rates and higher productivity gains 

translate into higher economic growth: 

For example, consider the average OECD country in 2004, which had an average 

personal income tax rate of 14.3% and a marginal income tax rate of 26.5%. If the 

marginal tax rate were to decrease by 5 percentage points in this situation, thus 

decreasing the progressivity of income taxes, the estimated increase in GDP per capita in the long run would be around 1%.21

With our large entrepreneurial and non-corporate sector, such studies suggest 

that the U.S. could see substantial productivity and GDP gains from lower personal 

income tax rates. 

Tax reform will also reduce complexity and dead-weight costs to the economy. In 

its 2010 Annual Report to Congress, the National Taxpayer Advocate identified tax 

complexity as the most serious problem facing taxpayers and the IRS, and urged 

lawmakers to simplify the system.22 It is estimated that tax compliance costs taxpayers an estimate $163 billion each year. The corporate tax system alone costs 

American businesses about $40 billion per year—roughly equal to the cost of hiring 

80,000 workers at $50,000 each. 

According to a recent Tax Foundation study, the ‘‘deadweight’’ costs, or excess 

burden, of the current individual income tax is not inconsequential, amounting to 

roughly 11 to 15 percent of total income tax revenues. This means that in the course 

of raising roughly $1 trillion in revenue through the individual income tax, an additional burden of $110 to $150 billion is imposed on taxpayers and the economy.23

One of the other ways that tax reform can lead to greater economic growth is by 

liberating taxpayers, businesses, and investors from these burdensome compliance 

and deadweight costs. 

CONCLUSION

The U.S. tax system is in desperate need of simplification and reform. To be sure, 

with the deficit now topping $1.5 trillion, many lawmakers may look at eliminating 

tax ‘‘loopholes’’ and simplifying the tax code as an opportunity to raise more revenues. But increasing the share of the economy going to tax collections should not 

be the primary goal of tax reform. The primary goal should be to promote long-term 

economic growth and better living standards for the American people. If the byproduct of increased economic growth is more tax revenues, then that is a win-win. 
22 

But there is a real tension in the U.S. between the desire for a simpler tax code 

and one that insures fairness and equity. To be sure, tax reform that broadens the 

base while lowering marginal tax rates could create the appearance of giving ‘‘tax 

cuts for the rich,’’ an anathema to many. 

As we move forward to overhaul the tax system, I suggest that we develop a new 

way of thinking about equity in the tax code. We should strive to build consensus 

around these basic concepts: 

• An equitable tax system should be free of most credits or deductions and not 

micromanage individual or business behavior. 

• An equitable tax system should apply a single, flat rate on most everyone equally. That way, every citizen pays at least something toward the basic cost of government. 

• An equitable tax code should be simple—which would save all of us time, money 

and headache and would save the economy the deadweight loss of the current system. 

• An equitable tax code should have dramatically lower rates than we have 

today—in the mid-20s by most accounts—and the government could still raise the 

same amount of revenues. 

I believe that such a tax code would actually generate a more predictable and stable revenue stream to fund government programs as opposed to the roller coaster 

revenues we have today. 

And, most importantly, such a tax code would be conducive to long-term economic 

growth, which is one of the keys to fixing the long-term fiscal crisis facing the country. 

Thank you, I’m happy to answer any questions you may have. 

ENDNOTES

1Tax Policy Reform and Economic Growth, OECD Tax Policy Studies, No. 20, OECD Publishing (2010), p. 138. 2This is the year the top corporate tax rate was raised from 34 percent to 35 percent. 

3William McBride, ‘‘Beyond the Headlines: What Do Corporations Pay in Income Tax?’’ Tax 

Foundation Special Report No. 194, September 2011, p. 2. 4 Asa Johansson, Christopher Heady, Jens Arnold, Bert Brys and Laura Vartia, ‘‘Tax and Economic Growth,’’ Organization for Economic Cooperation and Development, OECD Economics 

Working Paper No. 620., July 11, 2008. p. 43. 5 Ibid. p. 9. 

6Tax Policy Reform and Economic Growth, OECD Tax Policy Studies, No. 20, OECD Publishing (2010), p. 135. 7 R. Alison Felix, ‘‘Passing the Burden: Corporate Tax Incidence in Open Economies,’’ October 

2007, p. 2. 8 Ibid. p. 20. 

9 Jens Arnold and Cyrille Schwellnus, ‘‘Do Corporate Taxes Reduce Productivity and Investment at the Firm Level? Cross-Country Evidence for the Amadeus Dataset,’’ CEPII, Working 

Paper No. 2008—19, September 2008, p. 31. The concept of ‘‘success taxes’’ was first suggested 

by Gentry and Hubbard (2004). 10 Arnold and Schwellnus, p. 4. 11 Ibid. p. 10. 12 Ibid. p. 9. 13 C. Fritz Foley, Jay C. Hartzell, Sheridan Titman, Garry Twite, ‘‘Why Do Firms Hold So 

Much Cash? A Tax-Based Explanation,’’ February 2007, p. 3. 14 Ibid. p. 19. 15 Ibid. p. 16. 16 ‘‘Growing Unequal? Income Distribution and Poverty in OECD Countries,’’ Organization for 

Economic Cooperation and Development, 2008. p. 112. http://dx.doi.org/10.1787/ 

422013187855. Here income taxes refer to both personal and social insurance taxes. 17 Ibid. 18Tax Policy Reform and Economic Growth, p. 22. 19Scott A. Hodge, ‘‘Over One-Third of New Tax Revenue Would Come from Business Income 

if High-Income Personal Tax Cuts Expire,’’ Tax Foundation Special Report No. 185, September 

2010, p. 4. 20 ‘‘Tax and Economic Growth,’’ p. 9. 21 Ibid. p. 25. 22 National Taxpayer Advocate’s 2010 Annual Report to Congress. http://www.irs.gov/advocate/article/0,,id=233846,00.html 23 Robert C. Carroll, ‘‘The Excess Burden of Taxes and the Economic Cost of High Tax Rates,’’ 

Tax Foundation Special Report No. 170, August 14, 2009. 

Chairman RYAN. Thank you. Welcome back, Diane, a good friend 

and familiar face of the committee. The microphone is yours. 
23 

STATEMENT OF DIANE LIM ROGERS 

Ms. ROGERS. Chairman Ryan, Mr. Van Hollen, members of the 

committee, thank you for giving me the opportunity to testify before you today on the issue of pro-growth tax reform. I work for 

The Concord Coalition, a group that is been dedicated to the cause 

of fiscal responsibility for two decades now. As such, I feel that we 

cannot consider tax reform in isolation from the rest of the federal 

budget, especially within this committee. That being said, the 

views that I express today are my own and not necessarily the official position of the Concord Coalition. 

This hearing is titled The Case for Pro-Growth Tax Reform. Well, 

I think that is un-controversial. I am for pro-growth tax reform as 

well as my other two colleagues here today. The issue, I think, is 

what exactly does a pro-growth tax reform look like. And it is not 

so simple. I think that we are used to hearing that all we have to 

do to fix our fiscal situation is grow the economy and what it takes 

to grow the economy is lower taxes. But there is some causation 

that runs the other way, too. And unfortunately that makes the 

challenge of creating a tax reform that is good for the budget a little more difficult. 

Tax cuts all have benefits. Everyone loves tax cuts. Tax cuts are 

going to benefit some businesses, some households. The problem is 

that when times are tight like they are for us in terms of finding 

funds for the government to be able to conduct its business, when 

times are tough we have to weigh costs against benefits. So just 

having benefits from tax cuts is not enough. We have to know that 

it passes a cost-benefit test. 

Here are a few reasons, a few basic reasons, why it is not so easy 

to grow the economy by just cutting taxes and reducing revenues. 

The number one reason is because deficit financed tax cuts, they 

sort of like dig a hole into the ground first and with the hope that 

we will leap out of the hole from the growth that it produces from 

private sector activity. The hole that I am talking about is the decrease in public saving. National saving is the sum of public plus 

private saving. So if you deficit finance the tax cut, you start with 

a negative change to public saving, so you have to hope that there 

is enough of a positive change in private saving to more than offset 

that in order to get a net increase in national saving. National saving is the key to supply-side longer-term economic growth. So that 

is why, unfortunately, you start from a little hole, or a pretty big 

hole, because it is a dollar-for-dollar decrease in public saving as 

soon as you deficit finance a tax cut. 

Second, how the taxes are cut matters. What matters for supplyside incentive affects are marginal tax rates. So the structure of 

the tax change we are contemplating really matters in terms of 

how much economic growth over the longer term in terms of aggregate supply in the economy can you expect. The problem is that a 

lot of our tax cuts have more of a cut in average tax rates rather 

than tax rates at the margin. If we cut taxes at the margin, we 

have to ask the question, How big are the incentive affects likely 

to be? There is a lot of uncertainty about that. A lot of households 

and businesses do not even react to marginal tax rates as much as 

they react to cash flow. And yet, marginal tax rates and those in-
24 

centive affects on labor supply and savings are what matters for 

the kind of growth that I think we are all hoping for. 

Third, in an economy recovering from recession, the binding constraint in the economy in terms of making it bigger is not the supply-side of the economy because we have plenty of productive capacity right now. The binding constraint is that we are not putting 

enough of that productive capacity to work. So it is a demand side 

constraint. So unfortunately, right now, we have to figure out how 

to increase the demand for goods and services first before we can 

start to worry about how the tax code can encourage labor supply 

and saving. 

Our experience with the Bush tax cuts unfortunately has demonstrated each of these challenges well. Because we deficit-financed 

all of the Bush tax cuts, we have seen a huge decrease in national 

saving. Private saving did not increase dramatically to help offset 

that drop in public saving. 

Secondly, they have not been very effective at increasing the supply side of the economy. We have not seen big increases in the incentive for people to work or increase their personal saving. 

And third, the Bush tax cuts are really not a very good kind of 

tax cut in terms of short-term stimulus, in terms of providing a lot 

of increase and demand for goods and services. They do not have 

high bang for buck, as economists say. So if you look at CBO’s list 

of the kinds of tax cuts that are most stimulative to demand, you 

will find the Bush tax cuts are at the bottom of the list of tax cuts. 

Economists agree that the federal budget is on an unsustainable 

path and that for the continued health of the economy, deficits 

must eventually come down. Even if we do not reduce deficits right 

away in the next couple years as we are still recovering, a credible 

plan to reduce deficits over the next 10 years is really essential, not 

just to long-term economic growth, but for the short-term stability 

of the economy, the confidence of our global investors. 

Tax policy has to be part of the solution. It is true that the greatest pressures on the federal budget over the next several decades 

are certainly in the entitlement programs. That is very easy to see. 

It is very easy to understand. Medicare and Social Security are programs that go largely to the retirement age population. The retirement age population is growing, and on top of that, per capita 

health costs are growing. So we all know that story. We all know 

that is the driver of the long-term outlook. 

Unfortunately, it does not mean that we cannot bring taxes into 

the solution just because they are not responsible for the bulk of 

the problems going forward. It is very difficult for me to imagine 

that our society would actually be willing to cut spending enough 

to keep taxes at as low of a level as they are at currently or even 

historically over the past 40 years. 

The historical average level of revenues to GDP has very little 

bearing on what the right level of revenues is going forward. And 

those who oppose raising revenues as shared GDP are often convinced that this will increase the size of government. But I would 

urge you to look at the myriad of tax expenditures in our tax code 

that amount to over $1 trillion a year. And consider that unfortunately they are not just tax loopholes, but they are probably more 

appropriately considered tax entitlements. 
25 

There are many policies. I am going to urge you to stick to the 

current law baseline for revenue levels as a goal. As Mr. Van Hollen mentioned, that is way bigger than even a grand bargain would 

call for in the task of the super committee, but I urge you to set 

that as a goal because it would allow us to have some impetus for 

tax reform for a revenue-neutral type of tax reform relative to current law. If we wish to extend expiring tax rates, we can choose 

to extend that, but let’s try to pay for it by base-broadening or by 

finding spending cuts or revenue increases elsewhere. There are 

ways we can do it other than doing nothing. We can go the big 

route which is fundamental tax reform. We can go the do it to the 

rich route, which is raise taxes only on the right, but I think for 

the purpose of this committee concerned with pro-growth tax reform, what you want to do is focus on base-broadening tax reform 

that can keep rates low and stick to something closer to current 

law revenue baseline. 

So I elaborate on these points in my written testimony. And I 

thank you for the opportunity, and I am happy to take your questions. 

[The prepared statement of Diane Lim Rogers follows:] 

PREPARED STATEMENT OF DIANE LIM ROGERS, CHIEF ECONOMIST, 

THE CONCORD COALITION

Chairman Ryan, Mr. Van Hollen, and Members of the Committee: Thank you for 

giving me this opportunity to testify before you today on the issue of ‘‘pro-growth 

tax reform.’’ 

I work for the Concord Coalition, a group that’s been dedicated to the cause of 

fiscal responsibility for two decades now—through both the ‘‘thick’’ and ‘‘thin’’ of federal deficits! As such, I think tax reform should never be considered in isolation of 

the rest of federal budget policy, and that bias will be clear in my testimony. Nevertheless, the views I express here are my own and do not necessarily represent the 

official position of the Concord Coalition. 

This hearing is titled ‘‘The Case for Pro-Growth Tax Reform.’’ Well, the ‘‘case’’ for 

pro-growth tax reform is easy and non-controversial—as achieving a stronger economy makes pursuing any other social goals easier (deficit reduction, higher and fairer standards of living, greater investment in higher quality public goods and services, etc). 

The disagreement is over what makes a given tax reform ‘‘pro-growth.’’ 

Growing the economy through tax policy isn’t as simple as ‘‘cutting taxes’’ to reduce overall tax burdens. Tax cuts all have benefits, but the first thing one learns 

in an economics class is in a world of scarce resources, we maximize well being by 

weighing costs against benefits, and at the margin starting from where we are right 

now. Tax cuts that might benefit particular households and businesses don’t necessarily pass society’s cost-benefit test, even based on a narrower and naive goal of 

maximizing GDP because: 

(i) If deficit financed, the direct reduction in public saving will typically outweigh 

any positive response from private saving, so national saving and economic growth 

falls. This is the biggest factor preventing simple cuts in overall tax rates from 

being ‘‘pro growth’’ over the longer term. 

(ii) How taxes are cut matters: marginal tax rates are what matters for supplyside growth effects (increases in incentives to work and save), and those responses 

depend on how large the change in marginal rates (we’re starting from relatively 

low rates), how large the responsiveness (‘‘substitution effects’’) of households and 

businesses to those rates (often pretty small), and how other factors (such as ‘‘income effects’’) may swamp those responses to price changes. 

(iii) In an economy still recovering from recession, we have to worry about getting 

back to ‘‘full employment’’ (where we are putting all of our productive capacity to 

use) before turning to growing the productive capacity of the economy over the 

longer term. Tax policies that help increase demand for goods and services (and 

hence businesses’ demand for workers) can be quite different from those that increase the supply of labor and capital. 
26 

1Donald B. Marron, ‘‘How Large Are Tax Expenditures?’’, Tax Notes, March 28, 2011 (http:// 

www.urban.org/uploadedpdf/1001526-Expenditure-Estimates.pdf). 2See ‘‘The Concord Coalition Plausible Baseline,’’ updated August 2011: http:// 

www.concordcoalition.org/concord-coalition-plausible-baseline. 

Our experience with the Bush tax cuts has demonstrated each of these challenges, 

as their major contribution to record-high deficits clearly reduced national saving 

and economic growth, were not very effective at growing the supply side of the economy (even according to the Bush Administration’s own Treasury Department), and 

are not the kind of tax cuts that provide high ‘‘bang per buck’’ in a recessionary 

economy. 

Economists agree that the federal budget is on an unsustainable path and that 

for the continued health of the economy, deficits must eventually come down to levels lower than the growth rate of the economy (allowing the debt/GDP ratio to be 

stabilized). Even though a sizeable level of deficit spending over the next one or two 

years can be justified to support the economic recovery, a commitment to bring 

down deficits to lower, more sustainable levels over the next decade is essential not 

just for longer-term economic growth but for shorter-term economic stability (via the 

confidence of global investors in the U.S. economy). 

Tax policy has to be part of the solution. It is true that the greatest pressures 

on the federal budget in the decades to come are in the entitlement programs because of the aging of the population coupled with rising per-capita health costs. But 

it is hard to see how our society would choose cuts in real, per-capita benefits of 

the magnitude necessary to both achieve sustainable deficits and keep revenues at 

the historical average. And even if we would choose to do so, we would never do 

it very soon; entitlement reforms would have to be phased in much more slowly 

than tax reforms could take effect. 

The historical average level of revenues/GDP has very little bearing on what the 

right level of revenues is going forward. The right level of revenues is that which 

is adequate to pay for the government we desire. (And the right size of government 

is that which we are willing to pay for.) Given the dramatic changes in the structure 

of our population and the continued growth and evolution of our economy, it is difficult to see how what was right over the past 40 years—and it wasn’t even quite 

adequate then—could be right over the next 40 years. 

Those who oppose raising revenue usually assume higher revenues will lead to 

larger government. But the holes in our income tax base—the special exemptions, 

deductions, credits, and preferential rates—amount to over $1 trillion/year (about 90 

percent of this in the individual income tax and 10 percent in the corporate), nearly 

as much as all of discretionary spending combined.1 ‘‘Filling out’’ the tax base by 

reducing these tax expenditures would level out and support lower marginal tax 

rates (reducing the economic distortions caused by taxes), and reduce both the deficit and the effective size of government, all in a progressive as well as more generally ‘‘fair’’ manner. Thus, this type of tax reform—broadly applicable to both the 

individual and corporate income tax systems—is consistent with the goals of both 

Republicans and Democrats and ought to be the easiest area to find bipartisan 

agreement on policies to reduce the deficit. 

Adjusting the CBO current-law baseline to construct the Concord Coalition’s 

‘‘plausible baseline’’ (a ‘‘business as usual’’ projection) triples the ten-year deficit 

from $3.5 trillion to $10.4 trillion—with $5.7 trillion of the $6.9 trillion difference 

due to tax policy and the plethora of expiring, deficit-financed tax cuts in current 

law.2 The current-law baseline level of revenues achieves an economically-sustainable level of deficits over the next 10-20 years according to CBO. So whatever we 

do on the tax policy front, we should commit to achieving current-law revenue levels. 

There are many tax policies that would be consistent with the current-law baseline level of revenues. I have characterized the three main approaches as: ‘‘do nothing’’ (let the Bush tax cuts expire as scheduled at the end of 2012), ‘‘do it big’’ 

(broaden the tax base by reducing tax expenditures, paying for lower tax rates), and 

‘‘do it to the rich’’ (such as via a surtax on millionaires and/or large corporations). 

Each approach has different relative advantages regarding their economic effects 

and political attractiveness. The best economic effects would come from increases in 

revenue accomplished through progressive base broadening/reduced tax expenditures. We could do any combination of the approaches, and all would be encouraged 

in practice with a commitment to strict, no-exceptions, pay-as-you-go rules—on new 

or extended tax cuts and not just spending increases. This commitment is something 

the debt limit deal’s ‘‘super committee’’ could propose right away to get us on the 

path to sustainable deficits. 
27 

I elaborate on some of these points in the sections that follow, which draw largely 

from the recurring column I write for Tax Notes magazine, published by Tax Analysts. 

THE NITTY-GRITTY ON TAX CUTS AND THE ECONOMY

Constructing smart tax policy within the broader context of fiscal responsibility 

requires recognizing the connections and tradeoffs between tax rates, tax bases, revenues, public and private saving, and economic growth. The theory behind supplyside tax policy suggests that reducing tax rates encourages taxpayers to work and 

save and thus is good for the size of the tax base and for revenues. But in practice, 

tax cuts rarely pay for themselves, as the more extreme Laffer curve version of supply-side economics would suggest. We experienced higher revenues and budget surpluses following the tax rate increases enacted under the Clinton administration 

and lower revenues and high deficits following the tax cuts under the George W. 

Bush administration. In looking for economically efficient ways to raise revenue, 

there’s room to improve the existing income tax base before we play around with 

the rate structure or add new tax bases. A tax cut needs to do more than provide 

just some marginal benefit; there must be enough benefit to make the cut worth 

its cost, relative to competing demands. If reducing tax rates encourages economic 

activity but doesn’t pay for itself (such as with a rate cut that increases the deficit 

more than it encourages private saving), it’s not necessarily good for the economy. 

There is no policy area where conservatives and liberals are further apart than 

tax policy. Conservatives argue that tax cuts that raise returns to saving and investment, or increase the rewards for work, are always good for the economy, in good 

times and in bad. Liberals argue that tax cuts primarily raise the incomes of the 

rich and squeeze out benefits for the poor, and are the worst type of fiscal policy 

when the economy is in a recession. Both sides neglect the adverse long-term economic effects of any type of tax cut that is deficit financed. 

The debate is confusing because not all tax cuts are created equal, and the economic effects of those tax cuts differ across three dimensions: (1) the condition of 

the economy; (2) how the policy affects relative prices (substitution or incentive effects) versus real incomes (income or distributional effects); and (3) how the cost of 

the policy is paid for. When evaluating the effects of any particular tax cut on the 

economy, one should ask the following questions. 

A. WHERE’S THE BINDING CONSTRAINT?

In a cyclical downturn, increasing aggregate supply (the productive capacity of our 

economy) won’t do any good, because the problem isn’t too little capacity, but too 

much idle capacity. To increase the level of economic activity, or GDP, we need to 

increase demand for goods and services so that more of current supply is used. 

Think of the uses or demand side of the GDP equation—C + I + G + (X-M)—and 

contemplate what the government’s fiscal policy can do to increase consumption (C), 

investment (I), or net exports (X-M) indirectly via tax cuts and other subsidies, 

versus increasing direct government purchases of goods and services (G). In terms 

of the boost to GDP, tax cuts and subsidies are automatically handicapped relative 

to direct spending, and unless they produce multipliers of greater than 1, they will 

fall short of the success of dollar-for-dollar direct government purchases. 

But in a full-employment economy, fiscal policy is ineffective in increasing demand-side GDP because supply is the limiting factor. GDP can be increased only 

by encouraging growth in the stock of those productive resources—the supply side 

of the economy. In this case, we need to ask how we can use fiscal policy to increase 

incentives to work or to save. How can fiscal policy be reformed to reduce any of 

the preexisting disincentives and distortions to economic decisions created by current policy? 

B. WHAT KIND OF TAX CUT IS IT?

Tax cuts typically generate two types of effects on the microeconomic decisions of 

households and businesses: a substitution effect whereby relative prices are changed 

to encourage substitution into more lightly taxed activities and away from highly 

taxed ones, and an income effect whereby the higher cash flow to those receiving 

the benefits of the tax cut generates a change in their economic activity. 

1. Substitution effects and supply-side tax policy. In a full-employment economy, 

tax policy’s effect on relative prices is more important than it is in a recessionary 

economy. Marginal tax rates are what affect choices concerning the sources and uses 

of income. Tax cuts that reduce the marginal tax rates on labor or capital income 

will encourage substitution into greater labor supply or saving, boosting incomes 

and GDP. Tax cuts without any effect on marginal tax rates, in contrast, do not im-
28 

prove incentives at the margin. An example of a tax cut that reduces average tax 

rates and boosts average after-tax returns without reducing the marginal tax rate 

is that of raising the contribution or income limits on tax-preferred savings accounts. Because many higher-income taxpayers are already maxed out on the taxpreferred options, and might continue to be even after the higher limits, increasing 

the availability of the tax subsidy for those households can cause shifting of existing 

savings (moving money out of taxable accounts into tax-free ones) without necessarily creating any new savings. The policy would generate positive income effects 

for these taxpayers even without any substitution effects. 

Empirical research on the significance of substitution effects shows that higherincome households are more responsive to changes in marginal tax rates than lowerincome households, probably because they can fine-tune their work hours more easily, and because the relative price change itself is usually larger at higher income 

levels given the progressive, graduated rate structure of the federal income tax. In 

fact, many lower-income households are entirely exempt from the federal income tax 

and so are completely unaffected by changes in marginal income tax rates. This has 

encouraged economists to suggest that flat rate tax systems (with a single marginal 

tax rate above some exemption level of income) would generate positive and sizable 

supply-side effects on labor supply and saving. But hold that thought, because how 

much the tax cut would cost in terms of lost revenue and the deficit would affect 

the supply side of the economy as well. 

Increased supply-side incentives can also be achieved by reducing differences 

across marginal tax rates on different sources and uses of income. Broadening the 

income tax base by reducing tax expenditures would raise the overall average tax 

rate but would do so by raising marginal tax rates only on those sources and uses 

of income that are currently undertaxed in the definition of taxable income. By reducing the tax advantage to those currently undertaxed forms of income, the substitution effects away from higher-taxed income would actually be reduced and that 

type of income would be encouraged, even as the economy-wide average tax rate 

rises. 

Must one be a supply-side economist to believe in the existence of these supplyside types of responses? No. Economists of all stripes broadly agree in the theory 

that households and businesses respond to relative price changes when those agents 

are given the opportunity and have the capacity to do so. Economists also agree that 

marginal tax rates matter in terms of their incentive effects. The debate over how 

valuable to the economy supply-side tax policy can be is largely over how large those 

substitution/incentive effects are in the real world, relative to the other economic effects of tax policy. 

2. Income effects and demand-side tax policy. In a recessionary economy, the income effects of tax policy matter more. The distribution of the dollar benefits of a 

tax cut will affect how much the demand for goods and services is stimulated. Tax 

cuts focused on the top marginal tax rates don’t deliver anymore dollars to lowerincome households who have the highest propensities to consume. The effect on relative prices matters less than the effect on the levels and distribution of after-tax 

income. In fact, an economy-wide tax cut isn’t a prerequisite of a successful demandside tax cut. Consider a purely hypothetical and purely redistributive (income-effects-only) Robin Hood policy that increases taxes on the rich and gives the proceeds 

to the poor. This would increase aggregate demand in the economy by simply shifting income away from savers toward non-savers. Note that this is quite contrary to 

the optimal strategy in a supply-side tax cut designed to increase labor supply and 

saving. 

Perhaps even more curious, fiscal policies that might seem ineffective or unjustified in terms of incentive effects (such as Social Security cost of living adjustment 

makeups for seniors, tax breaks for new homeowners, and the ‘‘Cash for Clunkers’’ 

program) might nonetheless have a high bang per buck in terms of stimulating aggregate demand in a recessionary economy. Even if those policies actually do nothing to encourage the economic activity they’re ostensibly designed to, as long as they 

steer dollars to households with high marginal propensities to consume, they can 

nevertheless turn out to be pretty effective in stimulating demand. 

On the flip side, we shouldn’t worry much about higher taxes having large dampening effects on demand if those tax increases are mostly on higher-income households with low marginal propensities to consume. We also shouldn’t be too concerned about the potential recessionary effects from tax increases that would take 

effect only after the economy is back to full employment. 

The timing of tax cuts matters. At either the business level or household level, 

temporary tax cuts are likely to have a greater stimulative effect on the demand 

for goods and services than permanent tax cuts, because the timing of transactions 

is relatively easy to change—according to University of Michigan economist Joel 
29 

3 Joel Slemrod, ‘‘Tax Systems’’ in NBER Reporter, Summer 2002 (http://www.nber.org/reporter/summer02/slemrod.html) and ‘‘Income Creation or Income Shifting? Behavioral Responses to the Tax Reform Act of 1986,’’ American Economic Review, 85(2), May 1995 (http:// 

www.jstor.org/pss/2117914). 4William G. Gale and Peter R. Orszag, ‘‘Bush Administration Tax Policy: Effects on LongTerm Growth,’’ Tax Notes, October 18, 2004 (http://www.taxpolicycenter.org/UploadedPDF/ 

1000698—Tax—Break—10-18-04.pdf) and William G. Gale, ‘‘Five Myths about the Bush Tax 

Cuts,’’ Washington Post, August 1, 2010 (http://www.washingtonpost.com/wp-dyn/content/article/2010/07/30/AR2010073002671.html). 

Slemrod’s hierarchy of responses.3 A temporary tax cut will generate a large effect 

as the qualified activity is shifted forward whenever a tax cut has a deadline, even 

if the same tax cut, because it is only temporary, has a much smaller or negligible 

long-term effect on the components of aggregate supply. 

C. HOW IS THE TAX CUT BEING FINANCED?

1. Deficit financing sometimes helps and sometimes hurts. In a recessionary economy, deficit financing will increase the countercyclical stimulative effect of any particular tax cut on aggregate demand by promoting consumption of goods and services in excess of personal incomes. But that doesn’t mean any deficit-financed tax 

cut (or spending) makes for the best stimulus, because there are longer-term economic costs still associated with the deficit—the debt has to eventually be repaid 

in higher taxes or reduced spending in the future. That puts limits on the amount 

of deficit-financed stimulus that’s economically justified. We want to maximize the 

economic bang for the buck in deficit-financed stimulus, so fiscal responsibility requires that we determine a level of deficit spending we deem worth it, put high 

bang-per-buck spending or tax cuts at the front of the line (ranking fiscal policies 

from most effective to least), and draw the line at the credit limit we’ve implicitly 

established. 

In a full-employment economy, however, deficit financing represents a dollar-fordollar decrease in public saving, making it harder for the tax cut to increase national saving unless private saving is encouraged by more than the cost of the tax 

cut. This is not quite as high a standard as the tax cut paying for itself (as proposed 

by the Laffer curve)—which is 1/t times as hard (t being marginal tax rate on private returns to saving). This is why the Bush tax cuts have been evaluated as a 

net negative for economic growth by William Gale and Peter Orszag within the first 

few years of the Bush tax cuts, and by Gale more recently.4 It also explains why 

increased tax rates during the Clinton administration coincided with higher, not 

lower, economic growth. 

The choice to deficit finance now does not permanently avoid a tougher choice. 

Deficit-financed tax cuts do not pay for themselves, and they imply inevitably higher 

taxes or lower spending in the future. This intergenerational redistribution is another economic effect of the tax cut. 

2. On the other hand, paying for the tax cut sometimes hurts and sometimes 

helps. In a recessionary economy when the goal is increasing current consumption, 

offsetting the cost of the tax cut with spending cuts or tax increases will reduce the 

net stimulative effect on aggregate demand for goods and services. The more the offset affects lower-income households (those most constrained), the larger the negative 

effect. Paying for a tax cut going to primarily high-income households with a cut 

in spending that benefits primarily low-income households would likely be 

contractionary, not stimulative. 

In a full-employment economy, however, finding budgetary offsets to the cost of 

a tax rate reduction is likely to be better for encouraging aggregate supply and 

boosting GDP than deficit financing. That’s because the deficit reduces public saving 

dollar for dollar, while empirical evidence has shown that the adverse effect of the 

offsetting policy on private saving is likely to be something less than dollar for dollar. 

D. TAX CUTS MATTER, BUT AREN’T ONE SIZE FITS ALL

So are tax cuts good for the economy? It depends. As countercyclical policy during 

a recession, deficit-financed tax cuts can help stimulate demand, but deficit-financed 

spending is likely to be even more effective if it is deliberatively targeted toward 

lower-income households. As supply-side policy during periods of full employment, 

tax cuts are most effective if they increase incentives at the margin to work and 

save—that is, by reducing marginal tax rates or leveling rates across different forms 

of income—but any deficit financing is likely to produce a net negative effect on national saving. 
30 

That’s why a revenue-raising (relative to current policy) tax reform that reduces 

or levels out effective marginal tax rates and broadens the tax base at the same 

time is such a win-win-win formula: 

Win #1: It attends to the economy’s needs. In a full-employment setting, revenueraising tax reform encourages supply-side private-sector economic activity without 

generating offsetting reductions in public saving. In a recessionary economy, raising 

revenue primarily from higher-income households minimizes any dampening effect 

on short-term demand for goods and services, while supporting greater levels of high 

bang-per-buck fiscal stimulus. 

Win #2: It creates the right price incentives and distribution of income. By focusing on lower marginal tax rates and a broader, more neutral tax base achieved 

through reducing tax expenditures, it reduces the distortionary effects of tax policy 

on economic decisions, creating the right kind of substitution/relative price effects 

to maximize its economic effectiveness, while also generating income effects that can 

be helpful as countercyclical policy. 

Win #3: It doesn’t increase the deficit. As a deficit-neutral tax cut, it avoids the 

direct decrease in public saving that is harmful in a full-employment economy, without requiring alternative budgetary offsets that would reduce other and perhaps 

more stimulative forms of deficit spending when the economy is still recovering from 

a recession. 

Tax cuts are always an attractive option in the political world where budget constraints are often ignored. But in the real world and in real time—where budget 

constraints bind and opportunity costs matter—policymakers must be mindful of the 

fact that the effectiveness of any particular tax cut depends on our economic circumstances and goals and how those mesh with the structure of the tax policy. 

HOW REDUCING TAX EXPENDITURES WOULD MAKE FOR A

‘‘GRAND BARGAIN’’ ON TAX REFORM

The most basic role of taxation is to collect funds to pay for publicly provided 

goods and services, including subsidies for private-sector activities. But we also 

spend much of those public funds through the tax system via tax expenditures. The 

special provisions in our federal income tax code—exemptions, deductions, credits, 

or preferential tax rates—that reduce tax burdens on specific groups are economically analogous to direct spending and have a total cost of about $1 trillion per 

year—as much as all discretionary spending combined. If we are to bring greater 

fiscal discipline to the federal budget, we’ll need to carefully evaluate the structure 

of our tax system in terms of the economic merits of the various provisions, weighing costs against benefits, just as we do when evaluating spending-side programs. 

Are the tax expenditures justified as having higher net benefits than other spending 

programs that are being cut? In some cases, are we actually promoting specific activities via tax expenditures that run counter to other fiscal policy goals? If budget 

analysts started accounting for the longer-term growth of different types of tax entitlements just as we project the growth of different categories of more traditionally 

defined discretionary and mandatory spending, we would likely find these tax preferences are some of the fastest-growing components of federal spending. And because tax expenditures are created by cutting holes out of a progressive income tax 

base, their benefits go disproportionately to higher-income households, making them 

a more palatable target for cuts than most other forms of spending. 

Thus, reducing tax expenditures is a strategy that I believe is an essential component of any bipartisan solution to the deficit problem. 

Make a Venn diagram of all the specific proposals that the various deficit reduction commissions, study groups, and task forces came up with, regardless of their 

political leanings, and what does the intersection of the proposals look like? It’s big, 

fundamental, and worth lots of money. That intersection is the proposal to raise 

more revenue by broadening the tax base. Of all the ways to significantly reduce 

the budget deficit, base-broadening tax reform has the qualities most likely to appeal to Democrats and Republicans alike. 

Reducing tax expenditures is like the fiscal policy version of the old Miller Lite 

beer commercial: It tastes great and it’s less filling. Here’s why: 

Spending-side blame shouldn’t rule out tax-side solutions. Although the largest 

projected changes to the federal budget come from rapidly increasing spending on 

federal entitlement programs, once we consider the reasons for that increase it’s unreasonable to think the solution is to just stop it. Given the demographic pressures 

of an aging population (which we cannot change) and rising per capita healthcare 

costs (which we don’t yet fully understand how to change), a spending-side-only 

strategy would mean drastic cuts in real, per capita benefits, which I don’t believe 

either political party really wants. Given the level of real entitlement benefits that 
31 

5Marron, ‘‘How Large Are Tax Expenditures?’’, op. cit. 

6 ‘‘The Moment of Truth,’’ report of the National Commission on Fiscal Responsibility and Reform, December 2010 (http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/TheMomentofTruth12—1—2010.pdf). 7Donald Marron and Eric Toder, ‘‘Measuring Leviathan: How Big Is the Federal Government?’’, presentation for Loyola Law School conference on tax expenditure reform, January 2011 

(http://events.lls.edu/taxpolicy/documents/PANEL2MarronToderSizeofGovernmentpresentationFinal01-06-11.pdf). 8 Rosanne Altshuler, Katherine Lim, and Roberton Williams, ‘‘Desperately Seeking Revenue,’’ 

Tax Policy Center, January 2010 (http://www.taxpolicycenter.org/publications/ 

url.cfm?ID=412018). 

our society wants to maintain, the problem is as much that revenues can’t keep up 

as it is that spending is growing too fast. That means our historical experience with 

the level of revenues as a share of our economy (averaging 18 to 19 percent of GDP) 

is not a guide for what we will need in the future, especially considering that those 

past levels of revenues haven’t even proved adequate to cover spending and have 

recently sunk to historic lows of just 15 percent of GDP. 

Raising revenue by reducing tax expenditures would shrink, not expand, government. The Republican pledge on taxes has always been touted as a small-government stance. But some of the most fiscally conservative members of the Republican 

Party—including Senator Tom Coburn of Oklahoma—now recognize that there’s no 

simple correlation between the level of revenues and the size and reach of government, given the prevalence of tax expenditures. Federal tax expenditures currently 

total $1.3 trillion annually—almost exactly as much as all discretionary spending 

combined.5 While it’s not realistic to imagine eliminating all tax expenditures—or raising that $1 trillion-plus even if we could because of behavioral responses and 

the likelihood we’d see some eliminated tax expenditures appear on the direct 

spending side of the budget—the potential to cut significant levels of subsidies on 

the tax side of the budget is still huge. President Obama’s fiscal commission made 

that point when it proposed a ‘‘modified zero’’ approach to deficit-reducing tax reform, illustrating the trade-off between a broader tax base (the broadest of which 

would zero out all tax expenditures) and the marginal tax rates needed to achieve 

a specified level of deficit reduction.6

Reducing Tax Expenditures Both: 

‘‘Tastes Great’’ (Democrats like) and ‘‘Less Filling’’ (Republicans like) because it . . . 

Reduces deficit on tax side and Cuts government subsidies/‘‘tax entitlements’’ 

Raises revenue and Reduces size of government 

Enhances progressivity and Increases economic efficiency 

Avoids cuts in high bang-per-buck, short-term stimulus 

spending 

and Reduces longer-term deficit to encourage higher saving 

and economic growth 

And tax expenditures don’t just imply larger government because of the higher 

tax rates required to finance the rest of government; they expand government’s influence on the economy. Tax expenditures subsidize some economic activities over 

others. In recasting those tax subsidies in terms of what they would look like if they 

were run through the spending side of the budget, Donald Marron and Eric Toder 

of the Tax Policy Center (TPC) estimate that the implied level of government spending rises from roughly 18 percent of GDP to 24 percent.7 Republicans who continue 

to claim that any type of revenue increase would expand government are obviously 

missing this point. 

Reducing tax expenditures is a progressive solution that defies the equity-efficiency trade-off. Raising taxes progressively (a Democratic priority) does not have 

to mean raising marginal tax rates on the rich and increasing the distortionary effects of taxes on economic decisions (a Republican concern). A TPC analysis has 

shown that raising the needed additional revenues to achieve fiscal sustainability 

from only the top 2 to 3 percent of the population, without any base broadening, 

would mean that increases in the top federal income tax rates would have to be prohibitively large—getting to Laffer curve levels in excess of 75 percent.8

Because tax expenditures poke holes in a progressively structured income tax system (with graduated marginal tax rates), filling in at least a portion of those holes 

would raise revenue (and cut subsidies) progressively, while smoothing out, instead 

of exacerbating, the dips and bumps in the tax policy playing field. By reducing tax 

expenditures, we can achieve a progressive change in tax policy that would avoid 

the trade-off with economic incentives and growth. Moreover, the progressive rate 

structure that causes tax expenditures to disproportionately benefit the rich also ex-
32 

plains why these tax-side subsidies will grow dramatically in real costs over time 

as real incomes grow. Just as real bracket creep pushes more and more income into 

higher marginal tax brackets over time, it will push more and more economic activity into more-tax-preferred status. The single largest tax expenditure in the federal 

budget, the exclusion of employer-provided healthcare, will grow especially dramatically in cost over time—and the benefits will get more skewed toward higher-income 

households—as its value rises with the rise in per-capita healthcare costs as well 

as the growth in real incomes. 

Reducing tax expenditures is an inherently progressive policy strategy and can be 

made as progressive as we want it to be through the use of caps and phaseouts, 

such as in Obama’s proposal to limit the value of itemized deductions to a maximum 

28 percent rate. That makes it clear that reductions in tax expenditures are more 

easily tailored to the progressivity goal if they are modified via the personal income 

tax, a direct tax on households based on their directly observable levels of income. 

The healthcare reform bill’s approach to paring back the tax expenditure subsidizing 

employer-provided healthcare—by imposing an excise tax on high-end insurance 

plans to be paid by the insurance companies (but whose ultimate burden will be felt 

by households that purchase expensive insurance plans regardless of their income 

level)—is a prime example of how political concerns can turn good intentions into 

suboptimal policy. 

Reducing tax expenditures would address both near- and longer-term economic 

concerns. There are two sides to achieving fiscal sustainability: the ways we spend, 

and the means to pay for it. Just mechanically reducing the deficit by cutting spending or raising taxes in any old way is not enough. The policies that reduce the deficit must be thoughtfully crafted to promote a strong economy, both in the short 

term as we continue to need demand-side stimulus to speed the recovery from an 

unusually severe recession, and over the longer term, when we should focus on increasing our productive capacity, or the ‘‘supply side’’ of our economy. 

It’s difficult to find a deficit reduction strategy better suited to addressing both 

types of economic concerns than reducing tax expenditures. Because tax expenditures disproportionately benefit higher-income households, who are much less constrained and save large fractions of their income, paring back those benefits would 

be far less damaging to the short-term demand for goods and services than cutting 

other forms of government spending, which disproportionately benefit lower-income 

households. And because of the efficiency gains and reduced distortions that come 

from a broader tax base, reducing tax expenditures is a far better way to raise revenue and reduce the budget deficit (increasing public saving) while minimizing any 

adverse effects on private sector economic activity (which could come from the alternative of raising marginal tax rates). A base-broadening, tax-rate-leveling, revenueraising tax reform is a sure thing in terms of boosting national saving and longerterm economic growth through increases in both public and private saving. 

Cutting tax expenditures is the ‘tastes great and less filling’ approach to solving 

our fiscal problems. Even though achieving deficit reduction is naturally unpleasant 

business, there’s something for both sides of the aisle to like about doing it by cutting tax expenditures. Bottoms up! 

STICKING TO PAY-AS-YOU-GO RULES TO ACHIEVE SUSTAINABLE DEFICITS

For revenues to play any meaningful role in deficit reduction, policymakers will 

have to set a revenue target somewhere far closer to—ideally, precisely at—current 

law. The best outcome would be if policymakers agree to strict, no-exceptions, payas-you-go rules on expiring tax cuts, which by definition would require current-law 

levels of revenue. That would allow enough deficit reduction to achieve fiscal sustainability over the medium term of the next 10 to 20 years—long before any entitlement reforms would significantly affect spending levels. 

Achieving current-law levels of revenue does not necessarily require letting current law play out—which would be easy, by the way, because Congress and the administration could just go home and do nothing. Here are three broadly different 

tax policy strategies that could each be consistent with the current-law baseline: 

1. Do Nothing. Allow all expiring tax cuts to expire as specified under current law. 

That would mean reverting to Clinton-era marginal tax rates. 

2. Do It Big. Extend some or all of the marginal tax rates under the Bush tax 

cuts, but fully offset the costs of extending the low rates by broadening the tax base 

and reducing some tax expenditures (for example, limiting itemized deductions or 

reducing the exclusion of employer-provided health benefits). This is the fundamental tax reform approach. 

3. Do It to the Rich. Extend some or all of the Bush tax cuts—particularly those 

that affect middle-income taxpayers (lower tax rates, child tax credit, marriage pen-
33 

9Warren Buffett, ‘‘Stop Coddling the Super-Rich,’’ New York Times, August 14, 2011 (http:// 

www.nytimes.com/2011/08/15/opinion/stop-coddling-the-super-rich.html). 10 Bruce Bartlett, ‘‘Buffett May Be Right But the Top Tax Rate Is Wrong,’’ The Fiscal Times, 

August 19, 2011 (http://www.thefiscaltimes.com/Columns/2011/08/19/Buffett-May-Be-Rightbut-the-Top-Tax-Rate-is-Wrong#page1). 11 Altshuler, Lim, and Williams, op. cit. 12 Howard Gleckman, ‘‘Should We Cut Corporate Taxes By Raising Rates on Investors?’’ Tax 

Policy Center, TaxVox blog, March 29, 2011 (http://taxvox.taxpolicycenter.org/2011/03/29/ 

should-we-cut-corporate-taxes-by-raising-rates-on-investors/). 

alty relief)—and fully offset the costs by imposing an extra tax on the very rich, 

such as a surtax on households with incomes in excess of $1 million. 

How do the three strategies compare in terms of economic effects? Theoretically 

it seems they would not be as different in their effects on the shorter-term, demanddriven recovery as on longer-term, supply-side growth. Pursuing the second or third 

option might do less damage to near-term demand than the do-nothing approach. 

But none of those income tax increases would threaten the recovery as much as the 

alternatives of spending cuts or letting the payroll tax cut expire. 

All three tax policies would achieve the same amount of deficit reduction based 

on static revenue estimates. But are there potential differences in their dynamic effects on the economy’s productive capacity? The higher marginal tax rates under the 

do-nothing approach are not likely to have much of a disincentive effect on labor 

supply or saving—as we learned the last time we lived through the Clinton tax rate 

increases. Those marginal income tax rates, peaking at 39.6 percent, are still relatively low by historical and international standards. 

Option 2’s fundamental tax reform approach of keeping much of the marginal rate 

structure while broadening the tax base is best for supply-side effects and overall 

economic efficiency, because the distortionary effects of taxes on economic decisions 

would be minimized. Option 3’s strategy of raising rates just at the very high end 

of the income distribution means marginal rates at the top would have to go up substantially more, but it’s unclear that the economic incentives of the rich to earn 

more income would be changed that much as long as their marginal tax rate were 

still far from 100 percent. Warren Buffett certainly disputes this worry.9

Combining all three approaches is possible, too, and makes the revenue target 

easier to achieve without having to take any one option to an extreme. For example, 

we could let the top tax rates expire or at least come up a bit (rather than letting 

all rates expire), reduce some tax expenditures in progressive ways (without eliminating them), and even add a new top bracket around the millionaire level, as suggested by Bruce Bartlett,10 without having to raise the top rate to the problematic 

levels suggested by the Tax Policy Center’s ‘‘Desperately Seeking Revenue’’ analysis.11 Increasing the capital gains tax rate to something closer to that on ordinary 

taxable income could represent a combination of options 2 and 3—reducing a tax 

expenditure (the preferential rate) that disproportionately benefits the rich. In fact, 

various bipartisan deficit reduction groups, including both the Bowles-Simpson 

(President’s) commission and the Rivlin-Domenici (Bipartisan Policy Center) task 

force, have suggested raising capital gains and dividend tax rates under the individual income tax as a way of paying for lower marginal rates under the corporate 

income tax.12 This sounds like raising some tax rates to lower other tax rates, but 

in fact, it’s another application of the guiding principle of economically-efficient, fundamental tax reform: broadening the tax base—in this case by bringing more capital 

gains and dividend income into the definition of ‘‘ordinary’’ taxable income—to allow 

reductions in the highest marginal tax rates (here, the top corporate rate, now at 

35 percent). 

What are the potential differences among those paths politically? Of course, option 

1 emphasizes a do-nothing Congress (so why bother keeping them on their job?); option 2 (fundamental tax reform) means policymakers will have to work much harder 

at actual policymaking and requires more public education, engagement, and support of those efforts; and option 3 is susceptible to the class warfare and redistribution criticisms and partisan battles. I think the politics suggests that some combination of all three ways of getting to current-law baseline revenue levels is probably 

best. 

Must we go all the way to the current-law revenue baseline? Achieving the grand 

bargain on deficit reduction and going bigger than required with revenues would 

give us more of a cushion to allow for future waivers of pay-as-you-go rules for truly 

stimulative tax policies (or spending) that would better qualify as emergency spending. We need to change the question from, ‘‘Do we want the Bush tax cuts?’’ to, ‘‘Are 

the Bush tax cuts the best way to spend $2.5 trillion over 10 years—for any purpose, be it short-term stimulus or to encourage longer-term economic growth?’’ 
34 

Whichever way we get there, setting our revenue standards to the current-law 

baseline would get us the more balanced approach to deficit reduction that Americans desire, bring revenues high enough to keep deficits at an economically sustainable level over the medium term (while we continue to work on gradual entitlement 

reforms), and leave us more flexibility in tax and spending policy to better address 

and not worsen the ailments in the near-term economy. 

Note that revenue levels have huge potential in deficit reduction but aren’t the 

most important factor in determining tax policy’s role in stimulating (or contracting) 

the economy. Big overall revenue losses don’t necessarily translate into big increases 

in the demand for goods and services (and hence the creation or maintenance of jobs 

in a recessionary economy), if the tax cuts go disproportionately to high-income 

households and businesses that are least likely to immediately spend their tax cuts. 

Setting a goal of boosting revenues to current-law levels to be achieved by increasing the overall progressivity of the tax system is therefore likely to both reduce the 

deficit and provide more effective support for the still-fragile economy. In fact, if 

some combination of the different approaches to getting to the current-law baseline 

were taken, we could easily gain enough revenue to be able to apply it to both reducing deficits to economically sustainable levels and temporarily providing more 

stimulative deficit-financed tax cuts or spending. 

Thus, sticking to the current-law revenue baseline really isn’t that hard to do, and 

there are lots of opportunities for our policymakers to actually make better tax policy while doing it. It starts with a simple commitment to strict pay-as-you-go rules 

on expiring tax cuts, something very easy for members of the debt deal’s ‘‘super 

committee’’ to do right away. 

CONCLUSION: IMPROVING TAX POLICY AND THE FISCAL OUTLOOK AT THE SAME TIME

Politically arbitrary labels such as the choice of budget baselines matter a lot, because politicians need these simple metrics to demonstrate their success as policymakers. Republicans will always want to be known as the tax cutters, while Democrats will always push for more progressive taxation. Setting a goal of sticking to 

the current-law revenue baseline, which is achieved by base broadening rather than 

higher rates, is a way of honoring the seemingly inconsistent tax policy goals of both 

parties. It seems reasonable that policymakers should start from a current-law 

standard, because making changes relative to current law is their legislative responsibility, after all, even if the policy-extended baseline is a more accurate reflection 

of ‘‘business as usual.’’ 

Economically, however, it doesn’t matter if we view such tax policy as raising revenue relative to a current-policy baseline or as keeping revenue constant relative to 

a current-law baseline. All that matters is that the policy raises enough revenue to 

keep deficits at an economically sustainable level—where the economy’s growth has 

a chance to keep up with the growth of the debt—while minimizing the 

distortionary effects of taxation. 

No matter how one might choose to interpret it—as a policy change consistent 

with Republican goals of reducing tax rates and government’s interference with 

market decisions, or as one consistent with Democratic goals of reducing the deficit 

by progressively raising revenue as a share of our economy—this type of bipartisan 

tax reform will be crucial to achieving fiscal sustainability. Admittedly, a couple decades from now when the results of any entitlement reforms begin to materialize, we 

might discover that revenue neutral relative to current law still won’t be enough 

revenue for the long term. But for now I think it’s a big enough goal for the tax 

side of the budget to aspire to, while holding the spending side of the budget to a 

tight enough constraint to require and inspire some significant progress there, too. 

Chairman RYAN. Thank you, Diane. I appreciate it. 

If you could bring up Chart 1 for me, please. 
35 

In thinking about all of this, I think it is interesting to just look 

at some of the economic data. I think we are beginning to achieve 

a consensus that lower rates are conducive to economic growth. 

Here is where we are headed in 2013 under current law, current 

law as has been proposed by the president and passed by the president. So our top rate, on the individual side, is going from 35 up 

to effectively 44.8 percent. So we are seeing a steep increase and, 

as Mr. Hodge mentioned, the pass-through entities: sub’s s, LOC s, 

they are going to see a steep increase in their rates. 

Go to Chart 2, please. 
36 

And the thinking behind this is that the wealthy should pay 

their fair share, meaning pay more. Well, I think the evidence is 

pretty interesting here, which is take a look at the distribution of 

the tax burden before and after the 2001 tax cuts. In 2001, the top 

one percent, the top five percent paid less of the income tax burden 

than they do after those tax cuts. So looking at data from as a 

share of the tax burden with lower top margin rates, the top 5 percent, the top 25 percent, the top 15 percent, the top 1 percent, pay 

a larger portion of the tax burden than they did with higher income 

tax rates before those rates were reduced in 2001. I think that is 

just interesting data. 

Go to Chart 3, please. 

When we take a look at the data from post-World War II on, 

what we find is our revenues as a percent of GDP are remarkably 

stable. It is income tax revenues as a percentage of GDP, total tax 

revenues percent of GDP have been pretty much level. But take a 

look at our top income tax brackets, our top income tax rates. So 

those income tax rates do not dramatically call for the change in 

revenues. 

Go to Chart 4, please. 
37 

What really drives it is economic growth. If the economy’s growing, revenues are growing even at these lower income tax rates. 

And what we have learned is lower income tax rates is conducive 

to higher growth and therefore higher revenues. We are not saying 

everything pays for itself. That is not the case. What we are also 

showing is the higher income earners actually bear a larger proportion of the tax burden when we go down that path. 

If you could go to Chart 8. 

This is the one where I think there has got to be some area of 

bipartisan consensus here. This is the individual’s side. Who bene-
38 

fits from the, quote, unquote, loopholes or the tax shelters? Well obviously it is disproportionately to the side of the top one percent. 

The average is about $300,000 of those who are able to claim and 

benefit from shelters. So for every dollar that is parked in an income tax shelter, that is a dollar that is taxed at zero. If you take 

away the tax shelter but keep the rate really high, then we are 

hurting our economy from a competitiveness standpoint. But if you 

lower the rate and take away the loophole, that dollar that was 

parked in shelter taxed at zero is now taxed at something and you 

get more income from that income source, or from that taxpayer. 

So I think these are just interesting facts that ought to be worth 

considering. 

And so, let me ask you, Mr. Wall, on the corporate side of things, 

from the perspective of job creators, which is more beneficial? Temporary measures that attempt to stimulate demand over the short 

term or permanent reforms to incentivize and boost returns and job 

creation in places like Racine, Wisconsin, and throughout the U.S.? 

What do you think is better for your planning purposes as to 

whether or not to hire or not workers in Racine? 

Mr. WALL. Thank you, Chairman. From our perspective as a 

business, we are looking for stable, permanent, pro-growth tax reform. Temporary incentives are temporary as the name implies. 

When we look to make capital investments, we look at that return 

on investment, a five-year cash flow analysis. Right now there is 

so much uncertainty with the tax code, there is not a permanent 

structure to really make us make intelligent decisions on where we 

expand our operations. So, to answer your question, temporary is 

not helpful for us. We are looking for permanent, stable, fundamental reform. 

Chairman RYAN. If we did such as you suggest, bring our effective rate down to 25 percent, go territorial, would that encourage 

you to add jobs in your U.S. operations? 

Mr. WALL. Absolutely. If you saw my written testimony, for CNH 

we operate in 32 countries, and you see the comparative rates in 

my written testimony, companies choose to expand operations for 

a myriad of reasons or factors. Taxes are a significant component. 

The after-tax return on the earnings and the cash flow is an important consideration. So, to your point, if the U.S. were to lower the 

rate to 25 percent and go territorial, it would be incentive for us 

to expand capacity in the United States and add jobs. 

Chairman RYAN. Ms. Rogers, let me ask you, because we are 

talking about distribution so much these days, those calling for 

higher tax rates often stress the need to make the wealthy pay 

more, pay their fair share is how it usually is said. Well, first of 

all, for instance, under the president’s policies, deficits are set to 

rise by $9.5 trillion over the next 10 years, and that is the baseline. 

The top three percent of Americans by income, those earning 

$250,000 or more which we know more than half are these business, they have a total annual income of about $2.3 trillion. Even 

if the government confiscated 100 percent of that income, it would 

only fund the government for about six months this year. So, mathematically, is there any way to keep pace with the current spending promises by just raising taxes on this group of taxpayers? 
39 

Ms. ROGERS. Mathematically, possibly. I do not know. Economically, that would not be a wise strategy. There is a tax policy center analysis that was very useful, done about a year or two ago, 

called Desperately Seeking Revenue. And in that analysis, the Tax 

Policy Center asks the question, What if we tried to reduce the deficit to economically sustainable levels by just raising taxes on the 

rich? Okay, so you can take a look at that analysis, and what troubled me about that analysis was that if you just raised tax rates, 

if you were stuck with our tax base that is full of holes, which is 

a big qualification; I hope we do not have to be stuck with it. But 

if you were stuck with our tax code that is full of tax expenditures, 

loopholes, preferences, you would have to raise marginal tax rates 

in the upper brackets to the 70 to 80 to 90 percent marginal tax 

rate level. Now should we do that? No, I think all economists would 

say that is getting into dangerous territory. Even economists like 

me who do not consider myself a supply-side economist, but we are 

all supply-side economists to some extent in that we believe that 

incentives at the margin matter. When you get to rates that high, 

the disincentive affects start to outweigh the positive benefits of 

getting more revenue and reducing the deficit. So I do not suggest 

that you through it in that strategy. 

Chairman RYAN. What I am trying to get at, for instance, Dr. 

Orszag and Dr. Romor, after leaving the White House, said that 

higher taxes in the middle class are inevitable. And so, what I am 

trying to get at is are people being honest when they say we can 

keep pace with the current spending promises just by raising taxes 

on the rich? 

Ms. ROGERS. In my opinion, I do not think they are being smart. 

I think that mathematically it is possible to raise taxes just on 

those people above $250,000 by just raising marginal tax rates. Do 

I think that that is the best way to do it? No. 

Chairman RYAN. Mr. Hodge, real quick. Mr. Van Hollen and I 

are trying to keep our time limits so other members have time. 

Modeling: The rule of thumb around here with joint taxes, for 

every percentage point decrease in the corporate rate is about $10 

billion a year on an annual scoring basis; so, on a 10-year number, 

$100 billion per point. What do you think is more accurate from 

more of a reality-based, macroeconomic feedback models, what do 

you think the actual costs, assume the base stays the same for the 

sake of this, what do you think is more on the mark? 

Mr. HODGE. Far less, Mr. Chairman, I think that we are on the 

wrong side of the Laffer curve on the corporate tax rate and that 

even if we were to bring the federal rate down to around 25 percent, which would still, when you add state taxes, be higher than 

the OECD average, I think it would be a net gain for the United 

States Treasury. 

Chairman RYAN. Okay, thank you. Mr. Van Hollen. 

Mr. VAN HOLLEN. Thank you, Mr. Chairman. Just to the point 

you raised about the share that upper income earners pay, I would 

point out that the reason for that, the principal driving factor is the 

huge growth in incomes of the folks at the very top relative to the 

stagnant wages in the middle class. That is what is driving the fact 

that folks at the very high end are paying proportionately more 

now. And if you look at the charts, it is almost off the charts. And 
40 

that is an issue that I think we need to deal with from an economic 

point of view, because I think it actually has economic growth consequences as well as questions of tax fairness. 

Mr. Hodges, have you had a chance to look at the SimpsonBowles tax reform proposal? I assume you have. 

Mr. HODGE. Yes. Yes, I have. 

Mr. VAN HOLLEN. And what is—what is your reaction to that? 

Mr. HODGE. Well, I think it was a great document for moving the 

ball forward on both reforming some of our major entitlement programs as well as the tax system. I can pick nits with many of the 

specific proposals in there. I do not think that setting aside $80 billion a year in revenues from tax reform is the way to go, but I 

think in general principles, they did a fantastic job in moving the 

agenda forward in fundamental tax reform and entitlement reform. 

Mr. VAN HOLLEN. Okay, now with respect to their proposal on 

tax reform, one of the recommendations they made as part of bringing down the rates was also to harmonize the rates for capital 

gains and ordinary income. I assume you are agreeing with that as 

part of an effort to bring down the rates as well. 

Mr. HODGE. I would not, Mr. Van Hollen. I believe that capital 

gains and dividends are a double taxation on corporate income. In 

fact, if you look at OECD data specifically on dividend taxation, the 

United States has the fourth highest overall tax rate on dividends 

of OECD nations. And that is even after we have reduced individual rates over time. So I would prefer to keep taxes on capital 

lower and bring down those individual rates. 

Mr. VAN HOLLEN. That is interesting because the chairman made 

the point that the very wealthy benefit the most from these tax 

preferences and deductions. The primary reason that the wealthy 

benefit most is because of the capital gains treatment right now. 

In fact, if you look at the others, you have a lot greater impact on 

middle income taxpayers. So if you take that off the table as part 

of tax reform and harmonizing the rates, you do not get one of the 

major benefits that the chairman just talked about with respect to 

tax reform. 

Let me, Mr. Wall, if I could ask you what is the effective corporate rate that your company pays right now? 

Mr. WALL. The effective tax rate for Case New Holland in the 

United States is 39 percent. We generally are in the range of the 

high 30s. 

Mr. VAN HOLLEN. Okay. Are you organized as an’s corporation? 

Mr. WALL. No. We are a subchapter C corporation. 

Mr. VAN HOLLEN. Okay. Now, because I think there is a general 

agreement that the corporate tax rate in the United States at 35 

percent needs to come back down in order to be competitive, but 

I was also interested in your testimony, you talked about the importance of the number of the current deductions that are available, for example, the R&D tax credit and accelerated depreciation. 

So my question is have you looked at the Simpson-Bowles proposals with respect to corporate tax rates? And what, if any, of the 

deductions in the tax code would you be willing to give up as part 

of an effort to do this in a revenue neutral way? Or maybe you 

think we should do it by adding to the deficit? 
41 

Mr. WALL. With respect to the Bowles-Simpson report, I have 

looked at it. The 23, 29 percent rate that they are advocating, I 

think the 25 is the appropriate rate, as with my testimony. With 

respect to your question, which corporate tax expenditures should 

be modified in order to facilitate a 10 percent reduction in the rate, 

as I indicated in my written testimony, I think it should be done 

in a fiscally responsible manner. I have not seen a legislation package so it is very difficult for me to answer that question without 

seeing the totality of which corporate expenditures may be modified. 

Mr. VAN HOLLEN. Right. See, this is always the rub. I mean, this 

is the rub. Everyone wants to talk about this in general concept 

both on the corporate side and the individual side about lowering 

the rates and expanding the base. But I am just asking you as a 

businessman, since we should lower the rates which I agree with, 

but I am assuming you do not want to add to the deficits given 

where we are. Given your operations, which of the deductions 

would you be willing to get rid of? And if the answer is you need 

more time to look at it, I understand that. But that is what the 

Congress has to grapple with, and there are winners and losers in 

that. As we all know, GE, with huge profits, actually got tax rebates. So maybe Mr. Hodge, have you looked at the corporate tax 

proposals in Simpson-Bowles and which deductions if any would 

you be willing to eliminate or preference? 

Mr. HODGE. Well, the Treasury did a sort of a thought experiment a few years ago. And in their thought experiment eliminated 

all the corporate tax loopholes, and they are only about $100 billion 

a year in so-called loopholes for the corporate community, by the 

way. And the individual tax code has nine times as much. So we 

are talking about a pretty small amount. And they found that you 

could only reduce the corporate tax rate from 35 percent to maybe 

about 28 or 29 percent, which takes the United States from having 

the second highest overall corporate tax rate down to about the 

fourth. So that is a lot of pain for very little gain. We need to go 

much further if we are going to cut the corporate rate down to a 

competitive level. That means thinking outside of the box and moving away from a revenue-neutral concept here and think more 

broadly. 

There are a number of provisions in the corporate tax code that 

should be eliminated, and whether it is subsidies for windmills and 

so forth, but I should say that if you look at the IRS data, the effective corporate tax rate in the United States on average over the 

last 18 years has been about 26 percent on domestic and foreign 

repatriated earnings. And that does not include the taxes that corporations pay abroad which is about $100 billion a year. So the average overall effective tax rate is around 33 percent on average. 

Mr. VAN HOLLEN. Another question. First of all, I thought your 

testimony was very useful in making the point that when we are 

talking about’s corporations, not C corporations, that you mentioned two facts. One is the Joint Tax Committee data, which 

shows that only three percent of taxpayers are in the category, 

Over $250,000, right. And you do not dispute that figure? 

Mr. HODGE. No, there are only two percent of all taxpayers that 

have incomes above that amount. 
42 

Mr. VAN HOLLEN. Exactly. And you pointed out that despite the 

fact that there are only about two to three percent taxpayers in 

that category, it does account for a huge amount of the income. 

Mr. HODGE. Yes. That is our most successful private businesses. 

Mr. VAN HOLLEN. But, but most of them are not what we would 

consider small businesses or mom and pop s, right? 

Mr. HODGE. Nope. 

Mr. VAN HOLLEN. Okay. I just think it is an important point because we often hear in this Congress that changes in those rates, 

35 to say 39 percent, going back to 39 percent which is what it was 

during the Clinton administration, would somehow be hurting all 

these mom and pop small businesses. But, in fact, they include any 

businesses organized as’s corporations, which includes businesses 

like Pricewaterhouse, KBR, Bechtel, right? 

Mr. HODGE. Many of those are organized’s corps, yes. 

Mr. VAN HOLLEN. Right. I just hope we will put that aside and 

then we will discuss it based on those. Now, it is also a fact that 

the 39 percent rate was in place during the Clinton administration, 

beginning in the early 1990s. And we obviously saw a booming economic period. I am not saying increasing marginal tax rates somehow generates economic activity. Of course, it does not. Of course, 

it does not. But the fact is there are a whole slew of factors that 

people take into consideration when they are making their decisions. And, as the other testimony you heard suggests, and the evidence of history suggests that small changes in those tax rates do 

not make a big difference. Now, here is what I want to just ask you 

in closing. The territorial issue: I am going to read to you just an 

article from somebody who worked at Disney as a top executive. 

And maybe the two gentlemen could respond to this, being from 

the perspective of somebody who is in the business. Actually, if I 

could ask all three of our witnesses to respond. It says: 

I am a card-carrying Republican who thinks that the deferral tax 

loophole is bad policy for two reasons. It rewards companies for 

moving property and jobs overseas, and it is unfair to corporations 

that keep jobs in the United States and then must shoulder a disproportionate share of the cost of government. 

It goes on to point out that GE’s effective rate was 7.4 percent 

well below the U.S. rate of 35 percent, largely because of shifting 

around with their foreign operations. And then I am just going to 

read this paragraph and then ask you to respond. 

Now let’s compare the Walt Disney Company from which I retired in January. Disney, their most recent Form K shows an effective tax rate of 34.9 percent, dramatically higher than GE s. The 

reason is that unlike GE, Disney has kept its income-producing 

property and its jobs in the United States. Is not one of the dangers of going to a sort of pure territorial system that a U.S. company, rather than investing here in the United States, would 

choose to take that same operation overseas at a much lower tax 

rate? 

Mr. HODGE. No. In fact, the global trends have been in just the 

opposite direction. The reason actually that the United Kingdom 

moved to a territorial system is because companies were moving 

out of their country. And when they started moving toward a territorial system, those companies started coming back. And Japanese 
43 

have found, as I mentioned in my testimony, that their worldwide 

system created this lockout effect, trillions of dollars worth of yen 

were being locked out of their country. When they moved to a territorial system, those yen started flowing back. And the reason that 

we have more than $1 trillion sitting offshore in corporate profits 

is because we have this Berlin Wall that has been created by the 

worldwide system. 

Mr. VAN HOLLEN. I know my time is up, but the point that he 

was making was that you can address that issue by getting rid of 

the relaxed deferral agreement, but that is his point. I know my 

time is up. 

Mr. HODGE. Or it will put U.S. companies at a disadvantage and 

then a harmful effect on U.S. jobs will be immediate. 

Mr. VAN HOLLEN. I guess in the interest of time, I am going to 

ask the others. I will talk to you afterwards. Thank you. 

Chairman RYAN. Mr. Garrett? 

Mr. GARRETT. Thank you. Mr. Hodge, with regard to your corporate tax code, currently you said we are at number one or number two as far as corporate tax rates; corporate tax rates or tax 

burden? 

Mr. HODGE. Tax rates. 

Mr. GARRETT. Tax rates. Okay. 

Mr. HODGE. The top margin rate of 35 percent added to the state 

rate puts us over 39 percent, which is the second highest. 

Mr. GARRETT. So the pushback to that often is while we may be 

at the first or second in the top’s rate, but we are not necessarily 

be at the top tax burden because of all the corporate loopholes that 

are out there. So how do we compare, vis-a-vis the other countries 

as far as our overall corporate burden when you consider the fact 

you have $100 billion worth of corporate loopholes? 

Mr. HODGE. Well, the $100 billion actually does not lower the effective rate all that much. As I mentioned over the last 18 years, 

the average effective rate for all U.S. corporations has been about 

26 percent. And then when you add the taxes they pay abroad 

which is about $100 billion a year, their global effective tax rate 

is about 33 percent. So they are paying close to the U.S. statutory 

rate. 

Mr. GARRETT. Well, did you say if you did away with them, it 

would go all the way down to what? 

Mr. HODGE. You can only lower the rate maybe to about 28 or 

29 percent, and that includes bonus depreciation, which we would 

not want to eliminate. 

Mr. GARRETT. Okay. And so if we did that, our standing in the 

world would be approximately what? 

Mr. HODGE. We would be fourth highest in the OECD. 

Mr. GARRETT. Okay. As far as rates are concerned, but burden 

level basically remains the same because it is one shift to the 

other. 

Mr. HODGE. Right. I mean, the U.S. is collecting about three percent or about four percent of GDP is in corporate tax collections is 

below the OECD average; that is true. And so we have a high rate 

and low collections, which makes a lot of sense. That is why we 

have this Neiman-Marcus system. You know, Neiman-Marcus is 

very small. Wal-Mart is very big. And then they are doing it on vol-
44 

ume, whereas Neiman-Marcus is trying to do it on price. And you 

can see who won. 

Mr. GARRETT. Okay, thank you. Going to one of the chairman’s 

initially comments. He was commenting on what the president said 

that we do need to do corporate tax code reform, which is a good 

thing. The president spoke of, I think you said, fairness, simpler, 

and more competitive. And there was an article I think a week or 

two ago in National Review on this topic of competition and competitiveness, that there is too much focus on competitiveness. And 

I may not be saying it exactly correctly, but the focus should not 

be to try to make our economy more competitive, rather more productive. Because you can have a more competitive system simply 

by switching the tax code around to say that Mr. Wall’s business 

is more competitive vis-a-vis international trade by giving you additional corporate benefits or tax cuts, what have you. You are now 

more competitive versus your trading outside this country. But that 

is really not what we are trying to do here, right. We really need 

to not have competition, but increase of productivity for your company. Right? 

Mr. HODGE. Well, I think that by lowering the rate we will increase productivity. And so, by making the U.S. more competitive, 

U.S. companies will become more productive and more competitive 

as well. So what is good for the economy will be good for them as 

well. 

Mr. GARRETT. Okay. And Ms. Rogers, you were making the comment as far as what we need overall as far as our budget is concerned is some certainty even if not to be made now with regard 

to cost savings because of the economic morass that we are in but 

over the long period of time. And if you provide that certainty over 

the long period of time that that will provide what? More productivity and investment in the economy now? 

Ms. ROGERS. Well, I think it is important to get our budget outlook in control or the short term just because it increases the confidence of global investors in the U.S. economy and keeps interest 

rates low. 

Mr. GARRETT. I thought you said something about that maybe 

not making those cuts right now but rather as long as you have 

a plan in place, that over a period of time, so that provides the certainty. Maybe I heard you wrong. 

Ms. ROGERS. No, that is right. I mean, you might be surprised 

that The Concord Coalition, the deficit hawk organization is not demanding that deficits be cut right now, but we are not. We are demanding fiscal responsibility right now which might mean whatever deficit spending we are doing at the moment, that we make 

sure it has high productivity, high bang per buck in terms of the 

stimulus. And over the longer term, that we have got a plan in 

place to get to more economically sustainable deficits. 

Mr. GARRETT. Well, so two quick questions. One is there any history to show that if we make any projections now for the future as 

far as not making the cuts today but plan to do them in the future 

that they actually get implemented? 

Ms. ROGERS. No, we do not have a good track record on that. And 

that is why I am hoping that The Budget Committee can commit 
45 

to some serious budget discipline rules such as strict pay-as-yougo. 

Mr. GARRETT. And the second thing is as far as the short-term 

fixes that we do right now, both parties have done this. President 

Bush did this with tax package where we got what? Sent out 

checks basically of $250 or something like that to a family. The 

new administration is saying the same thing. Let’s do some shortterm tax fixes as far as payroll taxes, what have you. What is the 

history? Whether Republicans or Democrats tried to do this, do you 

see long-term results from this or are they just really blips in the 

economy of that period? 

Ms. ROGERS. No, I do not think that the payroll tax holiday, the 

payroll tax cut, is designed to be a long-term growth tax cut. It is 

designed to stimulate demand. So the reason why CBO lists payroll 

tax cuts as one of the more effective tax cuts to increase demand 

is because it tends to go to lower and middle income households 

who are most cash-constrained. So if you are trying to get more 

spending on goods and services immediately, you are best giving 

the cash to people who are constrained and will spend it all when 

they get it. 

Chairman RYAN. Mr. Blumenauer? 

Mr. BLUMENAUER. Thank you, Mr. Chairman. I always find these 

conversations interesting how they shift over time. I am not persuaded that the tax rates are the drivers when we look at how the 

economy performed so much better in era of higher taxes on business and, in fact, on individual rates. I think we would lust after 

economic productivity improvements that we saw, and we were involved with the 10-year experiment when Ronald Reagan harmonized capital gains. We have been involved in a 10-year experiment, and it has not produced stellar economic results, but I want 

to focus just on three items. 

One, dealing with the complexity; we talk about the tax loophole 

as only being $100 billion, but it seems to me that they contribute 

to a much higher cost. We have been told by this committee; we 

have been told before Ways and Means. It is $162 billion a year 

to comply with the tax system that we have now. And the leakage 

through evasion or purposeful forgetting or just that complexity is 

a couple hundred billion dollars every year. So those two numbers 

combined far exceed what our super committee friends are arm 

wrestling over for the next 10 years; $3.5 trillion, you would be 

happy people. And we would be breathing easier, and the economy 

would be working better. 

I am looking at two items that may get us a little faster, would 

look for brief response, because I do not have much time. The first 

deals with the value added tax, because those countries you are 

talking about that have lower statutory rates collect a lot of business income through a value added tax, and, in fact, pay more in 

overall tax than business in the United States in all but I think 

one of those countries. What is your reaction to a value added tax 

to kind of level the playing field and maybe buy some corporate tax 

reform? Any interest on any of the three of you? 

Ms. ROGERS. I will take that one first. I think eventually we are 

headed toward needing to consider new tax bases, including an add 

on value added tax, maybe carbon based taxation, but I think that 
46 

the first step in leveling the playing field of taxation is to look at 

the existing income tax code, so I think there is plenty of room to 

broaden the tax base. 

Mr. BLUMENAUER. I wanted to zero in on the other two gentlemen very briefly. Any interest in exploring a value added tax as 

a way to buy it down? 

Mr. HODGE. If the corporate income tax could be eliminated altogether, lye poured on it so it did not grow back up, then I would 

consider value added tax. 

Mr. WALL. Congressman, my comments on it would be as you 

can see where we operate, most of the jurisdictions we operate do 

have a VAT. I think it is important to note the United States has 

a consumption based tax at the state level, the sales and use tax. 

We would be happy to look at any type of reform proposal that may 

include that in order to achieve fundamental corporate tax reform. 

Mr. BLUMENAUER. Thank you. Let me put one other item on the 

table because there is one area in terms of user fees that would 

make a huge difference. Right now, we are beefing up our transportation trust fund. We have transferred $35 billion of general fund 

into it because it is in a downward spiral, and it is about to really 

collapse with electric vehicles, with hyper-efficient diesel. SimpsonBowles suggested raising the gas tax. A gas tax has been part of 

the Ronald Reagan; he actually signed a nickel a gallon in 1982. 

The Clinton 1993 had a gas tax. We have had the petrochemical 

tax on Superfund expire, and so that cost has been shifted to private business. Any interest in looking at user fees to try and fill 

some of this gap? 

Ms. ROGERS. Sure. 

Mr. HODGE. I prefer to see the Highway Trust Fund to turned 

back over to the states, along with the taxing authority to be able 

to fund it. 

Mr. WALL. The scope of my testimony is on corporate tax reform, 

so on a user fee at the individual; it is beyond the scope of what 

I will comment on. 

Mr. BLUMENAUER. Mr. Chairman, in fact, you have received a request to you and Mr. Van Hollen from Mr. Simpson and myself to 

perhaps have a little attention to user fees, the Highway Trust 

Fund. That is a deficit that is yawning and is going to create bigger 

problems in the future. 

Chairman RYAN. Happy to work with you. We have got a pretty 

busy fall schedule, but we would definitely be happy to work with 

you, just like this hearing was originated with the request from 

Mr. Van Hollen. 

Mr. BLUMENAUER. Super. Thank you, Mr. Chairman. 

Chairman RYAN. Mr. Calvert. 

Mr. CALVERT. Thank you, Mr. Chairman. I would like to focus a 

little bit on the backbone of America’s economy, our small business 

community or what exists of it today. As you know, small businesses provide 55 percent of all jobs in the private sector, produce 

roughly half of the privately generated GDP of this country. It does 

not take rocket science to understand that when small businesses 

grow and succeed, the entire economy as a whole benefits, including revenue. 
47 

As a person who was actually in small business, whatever, how 

you define small business in this country, I can tell you any smart 

business plan takes into account the current economic outlook, tax 

and regulation policy when you guide your decision process about 

how you are going to invest, how you are going to spend, and how 

many people you are going to hire. 

As we all know, the current outlook in the country on business 

is dismal, especially in California, where I come from. And I believe 

the administration’s tax policies are in effect contributing to a lack 

of confidence in the small business community because you cannot 

make long term decisions based upon knowing that taxes are going 

to be increasing in 2013 and other costs. In fact, according to the 

National Federation of Independent Businesses, their August report, the Small Business Optimism Index fell the sixth month in 

a row, and only 11 percent, 11 percent, of small businesses plan on 

hiring new workers over the next three months. I think that is 

about as low as it has ever been historically. 

Nearly 75 percent of small businesses pay taxes under, as you 

know, under the individual income tax system. Tax hikes aimed 

supposedly at the rich, as proposed by the Obama administration, 

would end up hurting successful small businesses because roughly 

50 percent of these small business profits are taxed at the top two 

individual tax rates. These questions are for everybody. Do you 

think raising taxes on these small businesses is the right strategy 

in a slow growth, high unemployment economy? And secondly, 

what are some of the best ways we can provide confidence and certainty to the small business community through tax reform? 

And I look at regulations as a form of tax also. We look at these 

increasing regulations taxing these small businesses in order to 

comply to these oncoming regulations, so we will start off with the 

gentleman from Case. 

Mr. WALL. Thank you, Congressman. With respect to your specific question on pass-throughs, subchapter S corporations partnerships, as you can see from our written testimony, we have 1,300 

suppliers and dealers that do operate as pass-throughs. From our 

perspective, we would not want to see more stress on our suppliers. 

My testimony also talks about there is some discussion on whether 

or not we should treat pass-through entities as subchapter C corporations, subject under the double taxation regime. We would not 

think that is advisable. 

Mr. CALVERT. Can I ask a question to you gentlemen on your 

suppliers? How many of your suppliers have gone bankrupt in the 

last two years? 

Mr. WALL. Congressman, I do not have the exact number, but we 

have suffered suppliers going bankrupt. There has been a number. 

I think you had two questions, right? One was in terms of confidence, I would say in my testimony, in terms of small business, 

I think tax reform; that certainty is really what we need. Some stable, certain, fundamental tax reform, and in terms of regulation, I 

will read the paper, look at the National Labor Relations Board, 

EPA. I do commend the Congress administration for looking closer 

at the regulatory burden, but that is, I believe, creating a crisis of 

confidence in the corporate community. 

Chairman RYAN. Mr. Hodge. 
48 

Mr. HODGE. Congressman, one of the things that sets our economy apart and our country apart from every other country is the 

dynamism of our non-corporate or pass-through sector, all of these 

private business owners. And as I mentioned in my testimony, 

more than half of all business income in America is now being 

taxed under the individual tax code, and as you mentioned, a lot 

of that is at the top marginal rate, and so by increasing taxes on 

those more dynamic entrepreneurs and businesses, I think would 

have a chilling effect on the economy for the long term. 

And it is just the opposite of what we should be doing. And according to all the economic research, including that of the OECD, 

looking across all countries, cutting those rates is the way to go 

right now and the way to spur those dynamic companies and to improve the overall dynamism of the country. 

Ms. ROGERS. I would just caution that while cash flow is needed 

by everyone in the economy right now, it has got to come from 

somewhere, and if we deficit finance tax cuts right now, it does not 

remove its cost. So the immediate cost is the drop in public saving, 

the increase in the deficit. If you care about long term growth, that 

is going to offset any benefit you get from increased private sector 

activity over the longer term. 

Mr. CALVERT. I would just make a point, Mr. Chairman, that 

cash flow is a nice concept, but I know a lot of businesses today 

that have a negative cash flow. They are going out of business as 

the gentlemen from Case pointed out. Bankruptcies are record high 

in this country. 

Chairman RYAN. Thank you. Mr. Honda. 

Mr. HONDA. Thank you, Mr. Chairman and Ranking Member 

Van Hollen. Thank you to our witnesses also for being here today. 

The irony of the challenges posed by our debt and deficits is that 

if Congress did nothing and allowed the current law to run its 

course, the deficit would be reduced by over $4 trillion. This would 

mean bringing rates roughly back to where they were during the 

Clinton presidency, a period when the economy added over 20 million jobs and we created a budget surplus. 

My question to Ms. Rogers is that it has been argued by my Republican colleagues that the only way to grow the economy is to cut 

rates even further. If this is true, then why is it that the country 

prospered under Clinton’s rates and then how would you explain 

that? 

Ms. ROGERS. I was actually on the Council of Economic Advisers 

the last year of the Clinton administration, and I wrote the section 

of his economic report that talked about the merits of fiscal responsibility. One thing we learned about the Clinton era tax increases 

is that while we were a little bit worried that that might have 

some adverse effect on private incentives to work and save, in the 

end, the increase in public saving far outweighed any slight decrease in private saving. It was very minimal, the adverse effect on 

the private sector. 

So the net result was an increase in national saving, and national saving is the key driver to longer term economic growth. So 

that is the simple reason why even though marginal tax rate increases do have a dampening effect on labor supply and saving, we 

did not see very much. Empirically, it turned out that that effect 
49 

was very small, relative to the increase in public saving, the reduction of deficits that turned to surpluses. That was very good for the 

economy. 

Mr. HONDA. So following up on that, the term of ‘‘fiscal responsibilities’’ seems to have been said by each of the witnesses. In your 

definition, how would you define fiscal responsibility? 

Ms. ROGERS. My definition of fiscal responsibility is getting the 

most we can out of the resources that we have in our economy, 

both publicly and privately, and so fiscal responsibility in the short 

term, in terms of the government sector, means that while we are 

trying to support the still-recovering economy, we are trying to get 

the most out of our money so that we are devoting our resources 

toward policies that will increase demand by a lot relative to their 

cost. Over the longer term, we need to come up with policies that 

reduce the deficit but are also favorable to economic incentives, so 

keeping marginal rates low by broadening the base. You can still 

raise revenue without hurting incentives for the economy to grow. 

Mr. HONDA. So following up on that, if you were out to allow the 

current law to run its course, to restart on that path again? 

Ms. ROGERS. That is an option. I have said that there are three 

ways to stick to the current law revenue baseline. One, do nothing. 

Two, do it big. Do fundamental tax reform that broadens the base 

if you want to pay to retain some of the Bush tax rates. And three, 

do it just to the rich. You know, raise marginal tax rates only on 

the rich. Those are three options, or any combination, and it is up 

to Congress to figure out what you can tolerate. All of them are 

taxing revenue increases is the point. 

Mr. HONDA. Thank you. 

Chairman RYAN. You left some time. Mr. Price. 

Mr. PRICE. Thank you, Mr. Chairman. 

Chairman RYAN. Dr. Price. 

Mr. PRICE. Thank you, and I want to thank the panelists as well. 

I think this is a helpful conversation and discussion. We are all interested in pro-growth policies. We have a difference of opinion 

about what results in growth in the economy. Ms. Rogers, I am 

struggling a bit with this payroll tax notion. You voice support for 

decreasing the payroll tax, supporting the president’s proposal for 

decreasing it on employers and employees, I understand. Is that 

right? 

Ms. ROGERS. I label it a relatively effective tax cut for increasing 

demand for goods and services. 

Mr. PRICE. And the payroll tax that is being paid by employers 

and employees that is referred to in these discussions, what is that 

money used for? 

Ms. ROGERS. Well, it goes to the Social Security Trust Fund. 

Mr. PRICE. Social Security Trust Fund 

Ms. ROGERS. But this is a transfer. If the payroll tax cut would 

be financed with the rest of the budget, so it is a deficit finance 

tax cut. 

Mr. PRICE. And I just heard you say that you do not support deficit financing for tax cuts. 

Ms. ROGERS. That is right. So I like the president’s proposal to 

offset the cost by broadening the tax base. 

Mr. PRICE. By increasing taxes. 
50 

Ms. ROGERS. By broadening the tax base, and increasing effect 

of tax rates but without increasing marginal tax rates. 

Mr. PRICE. Okay. I think it is important to point out that this 

payroll tax cut that is being talked about by the president and others is actually a shift. It is just a shift in who is paying for the Social Security benefits. 

Ms. ROGERS. Well, it is a shift in the tax burden, you are right, 

temporary shift in the tax burden, but actually, we could do a revenue-neutral shift in the tax burden. Not that I am proposing this, 

but if you raised taxes on the rich and cut taxes on the poor, that 

would actually be stimulative to the economy. That is not what I 

am proposing to do, but I am just illustrating the fact that you can 

keep average tax rates constant, and redistribute the tax burden 

and actually achieve one result in the short term, maybe a different result in the longer term. 

Mr. PRICE. Actually, that is more consistent with our budget did 

that we passed through this committee and through the House is 

we broadened the base and lowered the rates. I want to move on 

to the issue of territorial taxation because I think this is incredibly 

important and Mr. Wall, you mentioned that you are in Wisconsin. 

So overseas to you is not overseas, is it? Is it just over the border? 

Mr. WALL. Correct. 

Mr. PRICE. So competition that businesses see in states such as 

yours have to look to what the rate is in Canada and decide whether or not you are going to house a facility in Wisconsin or Canada, 

correct? 

Mr. WALL. That is an excellent point, Congressman. In my testimony, the countries that we operate in, as I mentioned before, 

when we look to expand capacity, it is a myriad of factors. Taxes 

is one of them. Logistical cost is another. When you are shipping 

large truckers and combines halfway across the ocean, you can 

imagine logistical costs are very high, but with respect to your specific point, you could put capacity in Canada and shipping southbound would not eat you up on logistical cost. 

Mr. PRICE. Right, and it is a whole lot easier, and their tax rate 

is about 10 percent less than ours. 

Mr. WALL. That is exactly right. 

Mr. PRICE. Yes. Mr. Hodge, I was interested in your comments 

about the consumption tax, and you appended your statement to 

say that if we did away with corporate income tax, that you would 

supportive of a VAT tax. Is a consumption tax not like a national 

retail sales tax? If we do away with all income tax for both individuals and corporations, is that not a way to truly invigorate the 

economy by aligning our taxation with our form of commerce? 

Mr. HODGE. Well, most economists would agree that we want to 

move toward a consumption base in our tax system, and there are 

many ways that we can do that. You can do it through an end 

stage retail sales tax, you can do it with a value added tax, but 

also, a flat tax, like a Steve Forbes style flat tax, is also a consumption tax because it has removed savings and investment from the 

tax base. So there are many ways you can sort of skin the consumption tax cat and get there. 

I would be more preferential to a flat tax than moving toward a 

VAT because I think that there as many problems with that as we 
51 

see in sales taxes at the state level, but we should certainly be 

moving away from income-based taxes toward a consumption base. 

Mr. PRICE. And let me revisit the territorial issue with you as 

well, because you said that actually having a territorial system of 

taxation increases business activity here, and can you expand on 

that and why that is? 

Mr. HODGE. I am sorry, say that again? 

Mr. PRICE. That having a territorial taxation would increase 

business activity in the United States. 

Mr. HODGE. Well, it would lead first and foremost to a great deal 

of repatriation of foreign profits that are now trapped abroad, and 

that companies are reluctant to bring back to the United States to 

pay this enormous toll charge that we have set up to bring their 

own money back and invest in the United States. So I think that 

moving toward a territorial system would bring a flood of dollars 

back to the United States. They could be invested here, creating 

jobs, and R and D, and what have you. It is their money, but we 

have set up such a toll system for them to bring it back that the 

incentives are just simply in the wrong direction. 

Mr. PRICE. Thank you. Thank you, Mr. Chairman. 

Chairman RYAN. Thank you, Dr. Price. And like we often say in 

Wisconsin: overseas, we refer to Lake Superior. It is Illinois. Ms. 

Schwartz. 

Ms. SCHWARTZ. Okay. Thank you. I appreciate this conversation. 

I wanted to bring it back to what I think is in some ways a bit of 

a broader view about tax policies. As we go forward, I think it was 

said by each of you that we are pro-growth. We think that economic growth is certainly very important to get ourselves out of 

where we are right now, but we need to understand what that 

takes. And to understand that, I think that the context within 

other issues we are dealing with, I think it was as Lim Rogers actually talked about the deficit reduction and the need for fiscal responsibility, so I would say we cannot really not talk about corporate taxes or even individual tax reform without an understanding of this broader context of the need for revenue and then 

the need to reduce the deficit. 

Certainly, the concept that if we just lower taxes for the wealthy, 

particularly for wealthy corporations, that will in fact create jobs, 

which is a point, very clearly. If in fact that had worked, we would 

not be in this situation we are in. And so the concerns that I would 

have about the notion that the unpaid for tax breaks that were 

given during the last decade, the Bush tax cuts as we refer to 

them. Tax cuts for the wealthy, tax breaks for corporations that 

they would produce jobs. This failed to materialize. The fact that 

there are large unpaid for tax cuts did not lead to jobs creation the 

last decade has given us a staggering wage stagnation, which has 

made a very big difference to consumer demand, which of course 

industry needs because if consumers are not buying your products, 

you do not make them. So that has had huge consequences. 

The lack of consumer spending and now, of course, the excessive 

borrowing that consumers are now saying, I cannot do anymore, 

which is a good thing, has actually created incredible stagnation in 

the economy. You could add to that the political uncertainty, the 

almost default on our debts created uncertainty in the investor 
52 

community. Investor confidence went to essentially zero. In August 

we had a stunning turnaround from what we had seen as job 

growth over the last year and a half. New jobs every month to zero 

jobs because the investor community, the corporate Americans, the 

people whose jobs said, We cannot risk it, we do not know what is 

going to happen, if in fact we are going to potentially see government default on our international loans. 

So, my question, particularly given what I have just heard from 

particularly Mr. Hodge and Mr. Ryan, is that the answer to this 

is to reduce corporate taxes and in fact, Mr. Ryan suggested quite 

deliberately and I think that Mr. Hodge did as well, the answer is 

to increase taxes for the middle class, that individual tax rates, 

eliminating tax provisions of deductions, for example. I think Mr. 

Ryan suggested that we reduce tax benefits for saving, retirement 

savings, that would be a way to pay for the lowering of the corporate tax rate. It seems that that would be the wrong way to go. 

And I support lowering the corporate tax rate and broadening it, 

getting rid of the special interest loopholes that in fact may do no 

good anymore and are certainly not stimulating the economy. 

So, my question is, in fact, and I will address this to Ms. Rogers, 

is it important for us to look at tax reform in the context of deficit 

reduction, in the context of how do we give middle class Americans 

more dollars to create that consumer demand so you can actually 

make products and sell it to them. And even as we look at corporate tax rates and international competitiveness, that we do that 

again in the context of what creates jobs in the short term. There 

was a great New York Times article this morning about the president’s jobs package, leading to potentially two percent additional 

economic growth and a couple million jobs. That is not something 

to put aside, so what can we do both in looking at the short term 

demands for job creation, the requirements for fiscal responsibility 

and the requirement of additional revenue is part of how we get 

out of the debt we are in. If you could in just a little less than in 

a minute, give us your opinion about whether that is the right context to be looking at this. 

Ms. ROGERS. Well, I think we absolutely have to be talking about 

the deficit effects on the deficit, even the short-term. I think that 

it is possible to broaden the tax base without overly burdening middle class households. Just because we are talking about looking at 

the tax expenditures within the individual income tax and those 

benefit all income tax payers, not just the rich. It does not mean 

we have to eliminate those tax expenditures, there are ways of limiting those tax expenditures in ways that are very progressive. So 

the president’s proposal to limit itemized items to 20 percent is an 

example of how you could pare back on some tax expenditures 

without burdening the middle class. 

Ms. SCHWARTZ. Thank you. 

Chairman RYAN. Thank you. Mr. Lankford. 

Mr. LANKFORD. Thank you. Witnesses, thank you all for being 

here. This is very helpful and this is a good conversation for us to 

have in a bipartisan manner, to be able to talk through the issues. 

This is something we kick around a lot on the floor, a lot in the 

hallways, and we need to be able to determine what does that 

mean by dealing with tax code and tax policy and broadening the 
53 

base and lowering the rates and all these things are great terms, 

but getting a chance to walk through some of the dynamics of that 

with you all is very helpful. So I appreciate the time that you all 

put into doing this. 

So let me continue on a conversation that has already started on 

the issue of repatriation. I have multiple questions on this and I 

have not had the opportunity to hear your comments on that. What 

are your initial comments on the territorial versus global system? 

And two issues, and I am going to come back to everyone on this, 

one is that one-year, two-year repatriation or just wiping it out 

completely and just moving to a completely territorial system 

versus global system on how we handle international business 

earnings. 

Ms. ROGERS. So, on international and corporate tax reform, I 

think it follows the same principles as the rest of the tax system 

in that if we are talking about ways to reduce the effective rates 

of taxation on businesses, we have to worry about what is happening to revenue levels. We cannot just count on the growth to 

make up for the loss of revenue. 

Mr. LANKFORD. Let me just clarify, because I do want to have a 

conversation with this, back and forth. That is assuming that companies are going to bring those assets back at some point and they 

will be taxed at the 35 percent rate or whatever rate it is. So, is 

that what you are counting as a loss? Is the assumption that they 

will eventually bring it back or is the assumption they made that 

money in Canada, they are going to leave it in Canada, it is never 

coming back? Which one is your assumption on that? 

Ms. ROGERS. Well, probably somewhere in between. I mean 

whenever we give a tax break to do anything, there is some incentive for the business to do what it is we are encouraging them to 

do. We do not know what their response will be and part of that 

lower tax receipt is a response to businesses shifting activity to 

lower tax activities. So, some of that tax cut is going to take effect 

in the form of lower revenue and we have to worry about that. 

Mr. LANKFORD. So would it be better to leave the higher rate and 

just let it play out and allow companies that have investments 

overseas to leave it overseas, maybe they will bring it back, maybe 

they will leave it there, but just allow it at the same rate, is that 

your recommendation? 

Ms. ROGERS. I do not know. I do not want to make a recommendation on that proposal. I just want to caution that it 

sounds to me like that is narrowing the tax base or reducing taxes 

and we have to worry about whether it is worth it is cost. 

Mr. LANKFORD. Thank you, that is fair enough, Mr. Hodge. 

Mr. HODGE. Well, I think we can learn some experience here 

from both Great Britain and Japan, which are the two largest and 

most recent countries to move to a territorial system, and for two 

very different reasons. One, Great Britain was actually seeing the 

flight of companies leaving Great Britain because they had a high 

corporate rate and a world-wide system. So they left to Ireland and 

Switzerland and Netherlands to seek some relief from that. And 

the minute that they moved towards a territorial system, they saw 

some of those companies intending to come back to Great Britain. 
54 

Japan had a very different experience, as I mentioned earlier. 

They saw this locking out effect, of which their world-wide system 

was keeping profits abroad, largely in Asia, some here in the 

Unites States, and when they moved to a territorial system, they 

saw some of those profits starting to come back to Japan. I think 

we suffer many of the same consequences that both of those countries are seeing and that is the reason we ought to move very, very 

swiftly to a territorial system. So that we can unlock that locking 

in effect that is trapping all of those profits abroad that should be 

here and invested in the United States. 

Mr. LANKFORD. Okay, let me make a follow-up, just take this 

back and forth. Several months ago Timothy Geithner was actually 

seated in that same seat, we had this same conversation. I know 

you are sitting in the secretary’s chair. We had the same conversation about territorial taxation or global taxation. The president was 

very impassioned in his state of the union address and dealt with 

corporate taxes, about lowering the rate and broadening the base, 

but had not talked about territorial versus global. I had asked the 

secretary about that. He did not give me an answer one direction 

or another on a preference on that. That was an interesting dialogue to me and I have still yet to be able to hear from the administration’s perspective on that. I do not know if anyone has heard 

the administration be able to state a perspective on this other than 

just lowering the rate and broadening the base. The issue comes 

down to what we were just talking about before. Is it a loss of tax 

revenues to be able to deal with repatriation issue, number one? 

And let me go ahead and skip to number two on that, is it better 

to do just permanent, or is it better to say until we can get to one 

or two year repatriation, just exemption? 

Mr. HODGE. Well, I am always reluctant to support any sort of 

temporary measures because I think whether it is temporary, backto-school holidays, sales tax holidays or payroll tax holidays, that 

is bad tax policy. It creates uncertainty in the tax system and it 

violates most of our principles of tax policy. But the sooner that we 

move to a territorial system, the better off the U.S. Economy will 

be and the more competitive U.S. businesses will be. 

Mr. LANKFORD. Okay, thank you Mr. Chairman, I yield back, and 

Mr. Hodge, I apologize for running out of time on that. 

Chairman RYAN. Ms. Moore? 

Ms. MOORE. I want to thank each and every one of you for your 

appearance here today. In particular, I want to thank Mr. Wall for 

being here. I have had many meals from the Case Company, my 

father worked there for 40 something years, my uncle has worked 

there for several years and I have a great affection for the Case 

Company. And I want to thank Mr. Hodge for being here and Dr. 

Rogers for being here as well. 

Let me get right in to my questioning with Mr. Wall. You are 

pushing for this territorial system and apparently Mr. Hodge 

thinks this is a good system as well. I guess my question would be, 

first of all, how much of this $3 trillion we hear about, 3 or $4 trillion, that companies have sitting on the side, how much would you 

say that Case has sitting on the side, waiting for tax certainty? 

Mr. WALL. Thank you Congresswoman. I think it is important we 

give a brief background. 
55 

Ms. MOORE. I do not want you to take up all my time. 

Mr. WALL. I will be very brief. 

Ms. MOORE. I want the number, the amount of money. 

Mr. WALL. Insignificant. Our structures, we have very few, a 

handful, of corporations beneath the United States. We are a foreign investment in the United States, so when I advocate territorial, it is not a significant benefit for our company. To me, it is 

our prudent tax policy, which I put it in my written testimony. 

Ms. MOORE. Okay, thank you so much. Mr. Hodge, I am really 

grateful to you for the $500 per child tax credit that you indicate 

that you pushed for in the contract for the people during the Newt 

Gingrich era. We have all seen reports as recently as today or yesterday that one in six people are poor in America. So I am wondering how your view of consumption based tax or flat based tax, 

how do you think that that will fair on the poor? And, indeed, children are the poorest among the population. How does that square 

with your view that we ought to move to consumption based taxes? 

Mr. WALL. Well, I think you probably know that half of all Americans pay no income taxes and many of those people actually get 

refundable tax credits through things like the $500 tax credit. We 

are giving out a little over $100 billion in refundable tax credits 

this year to people who pay no income tax. So that is actually a 

larger amount than all the corporate loopholes combined. 

Ms. MOORE. So if one in six people are poor, and they have to 

consume, they have to buy bread and washers and dryers and they 

have to have stoves and refrigerators, how would a consumption 

based tax, do you think, how would they fare under that proposal? 

Would they not be more poor people? What if we were to move to 

a flatter tax? 

Mr. WALL. I do not think consumption taxes would drive people 

into poverty, but I think anyone who consumes anything would pay 

a sales tax for the consumption. 

Ms. MOORE. Okay, thank you, thank you very much. Mr. Wall, 

I want you to respond to Dr. Rogers indication that if we were to 

move to a territorial system, that we could not be certain whether 

or not those dollars would actually be used to invest here in the 

United States. We would lose the revenue but there would be no 

certainty that those monies would be used for investment. Like 

now, money is sitting on the sideline, and corporations are profitable, but they are not re-investing. So what could you say to that 

point? 

Mr. WALL. Congresswoman, my response would be as Mr. Hodge 

indicated, the lock-out effect, trillions of dollars, if there was a patron holiday, or whatever Congress deemed appropriate, money 

would come back and companies are in the business of investing 

that money. 

Ms. MOORE. Thank you, thank you. Dr. Rogers, I have not been 

for the just tax for the rich thing; I say we let all of the Bush-era 

tax cuts expire and get rid of all of them. Can you respond to that 

economist model? 

Ms. ROGERS. Well, yes, I kind of agree with you, but I am speaking on my own behalf when I say that. The Bush tax cuts have a 

cost over 10 years of over two and a half trillion dollars without 

counting interest costs. 
56 

Ms. MOORE. And they do not help the poor as much as they do 

the rich. 

Ms. ROGERS. That is right, and that does not count the AMT relief that we needed to pass every year to offset some of the facts 

of the Bush tax cuts. So, put those together and the CPO says that 

is $4 trillion, over 10 years. 

Ms. MOORE. That would solve my problems right now. Get over 

George W. Bush. 

Ms. ROGERS. Or either, I mean, what I have been trying to stress 

is that sticking to that current law baseline does not require that 

we stick to current laws. So if there are parts in the Bush tax cuts 

that both Democrats and Republicans like and want to keep, what 

it suggests is that we just try to find a way to pay for it. If we really want to keep them, they must be worth off setting its cost with 

some other types of base-broadening tax reform. 

Chairman RYAN. Thank you Dr. Rogers, thank you Ms. Moore. 

Mr. Ribble. 

Mr. RIBBLE. Thank you, Mr. Chairman. Ranking Member Van 

Hollen, and thank you for calling for the hearing this morning. Mr. 

Wall, it is good to see you. I am from Green Bay. Feel free to expand up in the 8th District any time you like. 

Mr. WALL. No problem. 

Mr. RIBBLE. And so, it is good to be here. Ms. Rogers, was it last 

December that the Bush rates were extended? 

Ms. ROGERS. Yes. 

Mr. RIBBLE. So it is really the Obama rates, correct? 

Ms. ROGERS. Yes, you can call them the Bush-Obama tax cuts 

now. 

Mr. RIBBLE. Thank you very much. 

Ms. ROGERS. I have talked about them that way, in fact. 

Mr. RIBBLE. I mean, we seem to reinvent history here. Those 

rates were extended under President Obama, most recently. I do 

want to ask Mr. Hodge a question though. You mentioned in your 

testimony that the tax cut code ought to be simple, transparent 

and equitable. Those were the three words I think you said. Am I 

describing them accurately? 

Mr. HODGE. Well, not equitable. I talked about a new way of 

looking at equity, but the tax code should be transparent, it should 

be simple, it should be neutral to economic decision making. 

Mr. RIBBLE. Okay, this is the tax code, roughly 10,000 pages 

here. Would you say it is simple? 

Mr. HODGE. No, we have actually used that as a doorstop. 

Mr. RIBBLE. I have been using it as a paperweight in my office. 

But Ms. Rogers, would you call it simple? 

Ms. ROGERS. No. 

Mr. RIBBLE. No. Mr. Wall? 

Mr. WALL. It is not simple. 

Mr. RIBBLE. It seems to me that every time Congress, and I have 

only been here nine months, so I do not have all the historical perspective on how it got here, but it does seem like every time Congress decides to simplify it, we add 500 or 600 pages of complexity. 

Is that kind of how you see it too, Mr. Wall? 

Mr. WALL. Yes, Congressman. 

Mr. RIBBLE. Yes. Mr. Hodge? 
57 

Mr. HODGE. Absolutely. 

Mr. RIBBLE. And, Ms. Rogers? 

Ms. ROGERS. Yes. 

Mr. RIBBLE. Yes. Now, that is my fear, is that we are going to 

kind of nibble around the edges here, not really do any real true 

tax reform and we are going to end up in an effort to simplify 

something, make something more complex, more inequitable, more 

difficult for Americans to figure it all out. It just costs a God-awful 

amount of money for most Americans to even file their tax returns, 

now I cannot even imagine what it is like for a company like yours. 

But there is a tax on a tax. Who pays corporate taxes? I mean, 

where do you get the money the pay those corporate taxes from? 

Do you borrow it, or where do you get that money? 

Mr. WALL. Corporate taxes are levied out of the company’s profits. It is a tax on labor, it is a tax on capital formation. 

Mr. RIBBLE. So you get those profits from selling product? 

Mr. WALL. Absolutely. 

Mr. RIBBLE. And those profits build in the taxes into the cost of 

the products? Would you sell your products for less money if your 

taxes were at a lower rate? 

Mr. WALL. If our taxes were at a lower rate, the market advantage, probably. 

Mr. RIBBLE. Yes, I mean, at the end of the day, for the most part, 

really, consumers pay all taxes. Every dollar of tax that is paid, is 

paid by consumers. You are going to pass it on. I ran my own roofing company for years and years, and roofing costs more when 

taxes are higher, costs less when taxes are lower. 

Mr. Hodge, looking at the flat rate that you mentioned, equitable 

taxes should apply a single flat rate on most everyone equally. 

That way every citizen pays at least something toward the basic 

cost of government. I think Representative Moore makes a valid 

question here, not so much on the consumption side, but on a flat 

tax rate. How would you structure a flat tax rate so as to not penalize lower income or poor families? 

Mr. HODGE. Well, let me just premise that by saying that I think 

we have too many people right now who are not paying any income 

taxes whatsoever and thus not contributing to the basic cost of government. They are consuming government, they are reaping great 

benefits from it, but they are not contributing to it. And I think 

that is a problem both fiscally and also for our nation’s democracy. 

That more people benefit from our government than are actually 

contributing to it. And there are many ways to protect them and 

we do have a standard deduction and so forth, but we have simply 

knocked too many people off the tax rolls in recent years. The tax 

code has always protected the very poor, and that goes back to 

1913, but I do think right now we have too many people who are 

paying nothing and contributing nothing to the cost of government 

and actually they are getting a check back from the IRS. They are 

looking at April 15th as payday rather than tax day. 

Mr. RIBBLE. Thank you very much, and thank you to all three 

of you for spending some time with us this morning. Mr. Chairman, 

I yield back. 

Chairman RYAN. Mr. Pascrell. 
58 

Mr. PASCRELL. Thank you, Mr. Chairman. Mr. Chairman, I want 

to commend you and Mr. Van Hollen and the witnesses today, in 

both sides of the aisle, but what I consider to be one of the most 

civil discussions about a very serious topic. Neither party is privy 

to virtue one what we are trying to do. And the book that was held 

up before by the gentleman from Wisconsin, what percentage of 

that tax code is there to protect the very two or three percent of 

the people we are talking about at the top of the scale? They have 

hundreds and hundreds of attorneys. The average guy, like you or 

like me, somewhat, they do not have any lawyers to deal with 

these things. And I think that is something we ought to address. 

We are talking about increasing the number of pages in the tax 

code over the years, every president said they were going to shrink 

it, every Congressman is going to shrink it; it only got worse because they are a lot smarter than we are. Those lawyers have gotten all kinds of concessions and unless we address that, and you 

know what, Mr. Chairman? I got to give the tea party credit. As 

your wing of the party, we have our wings, you have your wings, 

and they brought this subject, if they only understand all the facts 

rather than just having blinders on, I think they would understand 

what we are dealing with and that is, the rich got richer and the 

poor got poorer. That is an oversimplification, Mr. Chairman, but 

that is true. 

My friend from Oklahoma, who talked about repatriation, we 

tried this in 2004: 105, 110, companies. Chamber Watch in April 

of this year was very specific about the fact that no jobs were created. None. Zero. In fact, of those 105 major companies who took 

advantage of that repatriation with five and a quarter percent coming back on tax, on what was coming back into this country. Many 

of them, not most of them, many of them had tax cuts. Not only 

did they have tax cuts they cut jobs. So, we need to put things in 

context to see how these things really turn out. 

Now, the other side, your side Mr. Chairman, cut taxes, we 

joined you in some of them, tax cuts in 2000, 2001, 2003 made predictions, just like Mr. Obama made predictions in his team, both 

of them totally wrong about what was going to happen if we cut 

taxes in 2001, 2003 how many jobs would be created. You had to 

create 5 million jobs and we know it was less than half of that. 

Both sides do not know what they are talking about. And I would 

rather listen to the people in this room, than the folks from Yale 

or Harvard who have been giving me advice over the last 12 years. 

I can learn more in this room, God Bless you, in terms of boots on 

the ground, in terms of boots on the ground than I can learn in a 

minute in any of those folks that we have been listening to. We 

have got the protocol and the models wrong. And if you look back 

into the Financial Times at those series of articles back in 2003, 

you will see what was predicted and what really came out. And 

that it is why it was very disappointing. And the Democrats were 

obviously happy that they did not create the jobs; I am being cynical now, back in 2001 and 2003, and just as many folks on your 

side hopefully do not see an increase in jobs, and we will get that 

guy in the White House, whatever it takes. I would rather listen 

to the folks in this room, Mr. Chairman. 
59 

Now, Ms. Rogers. Today, I think, contrary to common perception, 

federal taxes at the lowest level in over 50 years, federal state and 

local income taxes, and by the way, Mr. Hodge, you may not like 

it that 50 percent of the people are not paying income tax, but you 

take a look at all of the other federal taxes that those people pay. 

Look at it in context, and they pay a higher percentage of what 

they are worth than those people who are paying income taxes. 

Please put it in context. Please put it in context. Those people pay 

other federal taxes, do they not, Mr. Hodge? Do they or do they 

not? 

Mr. HODGE. They do but it is much smaller. 

Mr. PASCRELL. Do you know how much the percentage of what 

they are worth is? 

Mr. HODGE. Actually people in the lowest tax bracket, including 

all of their taxes are in negative effective tax rates. 

Mr. PASCRELL. Even when you include the income taxes? 

Mr. HODGE. When you include the refundable tax. 

Mr. PASCRELL. Well, that is not what I asked you. 

Chairman RYAN. Thank you, Mr. Pascrell. On that sunny bipartisan note, we will turn it over to Mr. Huelskamp. 

Mr. HUELSKAMP. Thank you, Mr. Chairman. I appreciate the opportunity to ask a few questions of the folks. And I want to come 

to Mr. Wall for the last question because I to hear from someone 

outside the room that is actually in the world of creating jobs. I 

particularly appreciate your testimony so far. One of the first comments and observation that I would like to make and ask a question of Ms. Rogers, is you were talking about sticking to current 

baseline by the estimates out of my office on January 1, 2013, if 

as Mr. Van Hollen indicated if Congress took a 10 year vacation 

and did nothing we would have about $5 trillion in tax increases 

over the next decade. That is the current baseline if nothing 

changes. Do you still support sticking to the current baseline and 

as far as its impact potentially on the economy: a $5 trillion tax 

increase that that is good for the economy? 

Ms. ROGERS. I think it is needed for the economy, for both the 

medium term and longer term and I think that it does not require 

reverting to Clinton era tax rates, despite the fact that I do not 

think that is also very bad for the economy kinds of tax rates. I 

think that it is an opportunity to commit to a strict version of payas-you go rules, which is just to say whatever you want to keep in 

terms of extended tax cuts you can pay for them, because right now 

in current law we have committed to an expiration of all the BushObama tax cuts at the end of 2012, so I am just asking that this 

committee, and Congress more generally commit to pay-as-you-go. 

Mr. HUELSKAMP. But you do not believe the president should 

commit to pay-as-you-go on his payroll tax proposals, is that correct? 

Ms. ROGERS. No, I support the idea of offsetting the cost of those 

as well. 

Mr. HUELSKAMP. I read the bill last night, and there is no offset, 

essentially it is borrowing money, debt payments is what will be 

the offset. There is no offset in the president’s bill; it is borrow and 

pay later, not pay-as-you-go. The question I would ask, we have $5 
60 

trillion tax increase potentially facing if we do not make some 

progress here. 

I appreciate the discussing today, but Mr. Wall, the question I 

would have for you, and as you talked about certainty, and temporary tax cuts, temporary tax relief, temporary measures as we 

have seen in Obama’s Stimulus 1, Bush Stimulus 1, Obama Stimulus 2. How many years do you need to say that is the kind of certainty I need, and my problem is, as a member of Congress and everybody here is that we cannot bind future congresses. We can try 

to tie them down into a constitutional amendment, on the balanced 

budget amendment, but how many years do you need of certainty 

to say I can make those investment decisions? 

Mr. WALL. Thank you, congressman, with respect your question. 

I would say permanent; what I am advocating is not temporary a 

stimulus if you will: permanent stable fundamental corporate tax 

reform. We talked about the corporate taxes that was waged on 

capital formation, labor and customers. Corporations have the jobs. 

If the tax rate could be lower, when look at our competitors the 

OECD would stimulate investment with the United States. I think 

that would be huge for investment or job creation. 

Mr. HUELSKAMP. So, if, by some political miracle, and maybe I 

am not optimistic enough, the House Republican Budget that presumes fundamental tax reform would pass and become law; and 

this is the only chamber that has actually suggested that, becomes 

permanent in this year sometime before January 2013, you would 

think that is a good enough signal that a future congress could 

come in on sometime in the next year or two or three or four or 

five, make changes again, but if you were told we passed it, hopefully it is going to stick, that would be permanent enough for you 

because that is the problem; they could change it in two years. 

Mr. WALL. That is absolutely right. I mean we need the message 

that it is stable, it is permanent, the other side of the equation I 

mentioned in my written testimony: regulatory reform. The burden 

of regulation is loosened up; that is the type of message I think 

that would instill corporate confidence. 

Mr. HUELSKAMP. I appreciate that, and Mr. Hodge, I appreciate 

you being here as well. What is your expectation of what would 

happen if we fully implemented the Obama stimulus plan Number 

2, how many jobs would that create in your best guess? 

Mr. HODGE. Few, if any. Jobs are not created out on temporary 

measures that can create long term expectations as we have been 

discussing. And right now, the long term expectations in the business community looking at the economy is very, very poor. And I 

doubt that even a small incentive would encourage someone to hire 

someone who could cost tens of thousands of dollars over the long 

term. If you get a $5,000 tax credit to hire a $25,000 a year worker, 

that person is going to cost $125,000 over the next five years, so 

that incentive is relatively small for that long term commitment. 

And so you ought to be absolutely sure that you have profits and 

business that is going to allow you to keep that person for the long 

term, and right now too few businesses have that certainty. 

Mr. HUELSKAMP. Thank you. Mr. Chairman and Ranking Member I appreciate the great panel today. 

Chairman RYAN. Ms. McCollum 
61 

Ms. MCCOLLUM. Thank you Mr. Chairman for the temperature 

in this room so you and I do not feel so homesick. It is freezing in 

here. I just want to go back and I think demystify what some of 

the conversation has been about what people pay for income taxes, 

who pays and who does not pay. And I am going to give my say. 

The data is from the Tax Foundation and it shows that in 2008, 

the average income for the bottom half of tax payers was $15,300. 

This year, the first $9,350 of income is exempt from taxes for singles and is $18,700 for married couples; that is slightly more than 

in 2008. And that means that millions of the poor do not make 

enough money to owe income taxes. It is not a question that they 

decided not to pay income taxes; many of them do not make enough 

money to owe income taxes. 

And as was pointed out, they do still pay plenty of other taxes: 

federal, payroll tax, which right now is a holiday for them, so that 

is the stimulative effect that Dr. Rogers was talking about. They 

pay gas tax. They are paying sales tax in their states. They are 

paying utility taxes and other taxes that they have no choice; they 

have no discretion. If you have water, if you have electric and there 

is a utility tax on it they are paying it. 

And then, when it comes to state and local taxes, the poor bear 

an even heavier burden than the rich in every state except 

Vermont; and that is the Institute of Taxation and Economic Policy 

that did a calculation on the data. Those are not my numbers or 

anything that has been cooked up. 

And this just troubles me. We throw out our good neighbor to the 

north: Canada. We talk about our strong ally in Asia: Japan. And 

when we talk about these economic comparisons, we are not talking about how they are fundamentally structured and function different within their business communities. In Canada, businesses do 

not have the burden of health care the way that your business does 

here. In Japan, the government decides it is going to work with its 

businesses to do R&D and by golly, they are going to have the best 

battery technology in the world and they help their corporations do 

it. 

So, when just kind of start throwing out countries, and Germany 

does the same thing, we sometimes shorthand things to make it 

work for the argument that we have. But here is my question. I 

am very concerned, and I did not vote for the Bush tax cuts, I did 

not vote for the Obama tax cuts, because I just thought we were 

too rosy with the scenario about what was going on out there and 

there was too much uncertainty and too much unpredictability. 

And here is my problem: I am willing to cut; I am willing to cut 

into programs that I think really make a different in investing in 

our future but we need to do something about our deficit. But what 

bothers me is when we talk about the income taxes, in particular, 

it is okay to go out and borrow the money on those. So, my question is, to the panel, do you have anything that shows, anything 

at all, any studies, that support the notion that tax cuts at this 

magnitude are ever going to pay for themselves, that will help reduce the deficit, or are we just going to continue to make no investments in our future? And we will start with Mr. Rogers and work 

down. 
62 

Ms. ROGERS. No, I mean, I actually do not think any economist 

would claim that the tax cuts would pay for themselves, so it has 

a cost, in other words. So we have to weigh the cost against the 

benefit, and I think you bring up an important point, which is that 

we have to start considering not do we like the tax cuts, but do we 

like them better than alternative uses of that money, because it is 

a lot of money and there are a lot of investments that government 

could make or other forms of spending they could make, and we 

should be weighing those trade-offs instead of just saying we like 

the tax cuts and we would rather keep them than lose them. 

Mr. HODGE. I would be happy to share with you some OECD research looking at the experience of other countries in cutting their 

corporate taxes while broadening their bases. 

Ms. MCCOLLUM. Mr. Hodge that goes to my point. What are 

those companies putting into R&D? What are those countries doing 

for health care? I think we need a balanced approach when we talk 

about that; if that includes everything then I would love to see it. 

Mr. HODGE. Well, this research is looking at what are the revenue losses from corporate tax reform and they find out that, generally speaking, that these kinds of corporate tax reductions do not 

lose as much money for the treasury as were expected and for some 

reasons it is because of the base broadening. 

Ms. MCCOLLUM. Mr. Hodge is referring to the individual income 

tax when he talked about the tax cuts. 

Mr. HODGE. I think that we should be broadening the bases we 

lowered individual rates as well. There is $900 billion worth of tax 

expenditures in the individual code; I do not think all of them 

should be eliminated, but many of them can while we cut those 

rates. I will be the first to start clicking off the tax expenditures 

we can eliminate. 

Chairman RYAN. Thank you. Mr. Woodall. 

Mr. WOODALL. Thank you, Mr. Chairman, and thank you all for 

being here. Mr. Hodge, thank you for the time you have invested 

in us in tax policy over the years in the 7th District of Georgia, I 

appreciate that. Dr, Rodgers, do you think it is important for everybody to have skin in the game? You talked a lot about incentives 

and that somewhere up there on the margin high rates matter; 

they affect people’s incentives. Low rates, I would argue, also matter. Do we, to keep this American experiment alive, do we all need 

skin in the game or is it okay to move folks off the tax rolls? 

Ms. ROGERS. I, personally, would prefer that most people be on 

the tax rolls but we already all have skin in the game in one way 

or another. I mean, I think that focusing our attentions just on who 

pays federal income taxes is a little bit of a narrow view of who 

has skin in the game. There are opportunity costs of how we use 

are funds, and so, in a sense, we all have skin in the game. 

Mr. WOODALL. I absolutely agree with you. I think we spend 

much too much time talking about the income tax, payroll tax is 

the largest tax; 80 percent of American families pay it and we 

spend very little time talking about that. Though, when we talk 

about looking at all of those stages I look at the CBO’s report, for 

example, an effective tax rates. To the point my colleagues were 

making earlier, yes, according to the CBO, the two bottom quintiles 

in America have a negative income tax rate. They do have a four 
63 

percent effective tax rate, but only because the CBO believes that 

the payroll tax that corporations pay on their employees behalf is 

actually a cost to the employee; only because the CBO believes that 

corporate income taxes are a cost to the consumer and making both 

of those conclusions folks still have skin in the game. Do you share 

those conclusions? That when we tax corporations with a payroll 

tax, that is really a cost to workers and when we have the corporate income tax that really goes lots of different places, but goes 

partially to consumer costs as well? 

Ms. ROGERS. The way CBO constructs effective tax rates is it assigns the burden of any tax to ultimately a real person. So you can 

tax corporations in a legal sense. You can tax businesses in a legal 

sense. But ultimately, it has to be traced down to some real person, 

an individual in a household that bears the burden. It can be bearing the burden because you are the employee of a firm that pays 

the taxes. It could be because you are the purchaser of a product 

that that corporation makes. Or it could be because it is an income 

tax directly on the household. 

So all CBO does is make certain assumptions based on empirical 

research about the demand and supply in certain markets to assign 

the burden to certain households. 

Mr. WOODALL. It all comes back to the only taxpayer we have in 

this country. 

Ms. ROGERS. Is real people, yes. 

Mr. WOODALL. I have always been interested in a symposium the 

joint tax committee did back in 1997 that you participated in. I 

think you were the non-supply sider there. They tried to bring in 

an entire spectrum of folks. 

Ms. ROGERS. Actually, I had a model that was very much a supply-side model. 

Mr. WOODALL. It was the Fullerton—what did they call it? 

Ms. ROGERS. The Fullerton-Rogers model. 

Mr. WOODALL. Fullerton-Rogers model. What I thought was interesting, and for folks who have not ever looked at that symposium, joint tax was trying to figure out how to model consumption 

tax economy because they just did not have a model that could 

handle fundamental tax reform, like the fair tax, for example. 

Economists do not always agree on a lot, but what I thought was 

interesting about the eight of those groups that participated with 

you in that study is that absolutely every group said if we moved 

to a consumption tax model from our current model, the economy 

would grow faster. That was the one thing you all agreed on. You 

differed on whether capital stock would grow a little or a lot. You 

differed on the labor effects, but every single group agreed that 

under a consumption tax, the economy would grow faster. 

Ms. ROGERS. Can I explain a little bit of that though? One thing 

we learned from that experiment was that when you move from 

our current income tax system to a broad base consumption tax, 

what you get a lot of benefits from is mostly the broader base, more 

than the switch from an income tax base to a consumption tax 

base. 

Mr. WOODALL. Though even the unified income tax that you also 

modeled that broadened the base did not report the same kind of 

growth that the consumption tax model with that broader base. 
64 

Ms. ROGERS. That is true. That is true. 

Mr. WOODALL. Now with my last 15 seconds, Mr. Wall, one of 

your big competitors, AGCO, is in my district, so I am interested 

in your industry succeeding, and I am interested in what one of my 

colleagues asked you earlier. Here we are, we have the president 

proposing about a half trillion dollars worth of stimulative policy, 

in his words. Is it your position that however it is that we would 

distribute that kind of volume of money, something temporary, less 

valuable to you than something permanent? We live in a give it to 

me now economy, but you are saying, ‘‘Give me something smaller 

that is permanent, rather than something big that is right now.’’ 

Mr. WALL. Congressman, we are in Georgia, as well. But with respect to your question, permanent, stable tax reform. These temporary incentives are not helpful; we look at investment and return. 

Mr. WOODALL. Thank you. 

Chairman RYAN. Mr. Yarmuth. 

Mr. YARMUTH. Thank you, Mr. Chairman. Thanks to all the witnesses. About four or five months ago, I represent Louisville, Kentucky, and we hosted through the Chamber of Commerce in Louisville, a White House business roundtable. There were 30 to 40 

businesspeople there, anywhere ranging from Humana to an individual restaurant owner. And for an hour and a half or so, they sat 

around and talked about what the federal government should do to 

stimulate the economy and job growth. 

In the course of that time, they talked about funding community 

colleges, investing in infrastructure, investing in R and D, other 

education spending, immigration reform. Only one person in that 

entire hour and a half from all those companies mentioned taxes, 

and he asked a question about property taxes, so obviously the federal government was not involved. Parenthetically, nobody else 

mentioned regulation changes. 

My question to any of you, particularly Mr. Wall, is why do you 

think that was the case? 

Mr. WALL. Why the gentleman mentioned the property taxes? 

Mr. YARMUTH. Why not one of them in an hour and a half, 35 

or 40 people, ever mentioned taxes? 

Mr. WALL. Obviously, I cannot answer for those gentlemen. Our 

view is we look to invest, it is a matter of circumstances or factors, 

and taxes is a significant component. 

Mr. YARMUTH. I do not know why they did not, either, but they 

did not. Now there has been a conversation, many people have 

mentioned it, this issue of planning and how hard it is to plan your 

business if you are subchapter, for instance, and if the rate may 

go from 35 percent to 39.6. I had this conversation with a constituent of mine, and so I asked him, is that the biggest variable 

in your business, that you cannot plan for the potential increase of 

39.6? You can know that is the outside that he is going to pay, and 

that all the rest of the variables in your business are more predictable than that. Would you say that in your business, that all the 

rest of the variables in your business are more than essentially 10 

percent in your tax rate? 

Mr. WALL. To your point, the other variables in our business are 

more variable than the taxes, but I think an important point when 
65 

my CFA asks me to do a discounted cash flow on an investment, 

it is a five year window, and I give them an asterisk saying that 

assumes the tax rate is going to be this, so. 

Mr. YARMUTH. But it would not be hard to assume that your tax 

rate is going to be a maximum of 39.6, and that gives you some 

parameters, would it not? If you are planning a business? 

Mr. WALL. That is correct. When we do analysis, we look at the 

statutory rates. 

Mr. YARMUTH. Thanks. Dr. Rogers, you mentioned, in a response 

to Mr. Honda’s question, you used the term ‘‘empirically’’ as to why 

job growth was phenomenal when rates were higher. Do I take that 

answer to mean that there are a lot of factors other than taxes that 

determine whether taxes actually resulted in job, higher or lower 

taxes resulted in another effect? That the higher tax rate could 

have a very different effect under certain other circumstances or 

different effect under other circumstances? Is that really the gist 

of what you were saying? 

Ms. ROGERS. Yes. Economists talk about taxes having two sorts 

of effects on economic behavior. There is the fact because you are 

changing relative prices that if you cut rates on certain forms of 

activity relative to others, that you encourage people to substitute 

into those lower tax activities, but then there are always income 

effects too, as well, which says what are you doing to people’s real 

incomes. So if you are cutting taxes, you are making them feel better off; if you are raising taxes, you make them feel worse off, and 

we change our behavior. Everyone changes their behavior if you 

have more income or less income. So it is hard to predict. 

Mr. YARMUTH. Right. Well, I am going to tell a little story, which 

is a true story. I have a brother who is in the barbecue restaurant 

business. Sonny’s Barbecue; I will give him a plug. I am an investor; I have to disclose, although I do not make the business decisions. And my brother is always Republican because he did not 

want to pay as much tax, and back in 2008, he called me, said, 

‘‘You know, John, I have decided to support President Obama this 

year, and all Democrats. I said, Well, that is great, Bob. What was 

your epiphany? And he said, ‘‘I finally decided that if nobody can 

afford barbecue, it does not matter what my tax rate is.’’ 

And he will tell you to this day that a marginal tax rate change 

of something of the magnitude that is being discussed, and he is 

a subchapter S, is the last thing he considers in making a business 

decision. He wants to know whether he can make more money, and 

then he will worry about how much taxes he pays. And he pays at 

the highest rate, so I throw that out just to validate what you said. 

Thank you very much, Mr. Chairman. 

Chairman RYAN. Thank you. Mr. McClintock. 

Mr. MCCLINTOCK. Thank you, Mr. Chairman. Mr. Hodge, we talk 

about taxes and deficits as if they are polar opposites, but are not 

they really identical twins? Is a deficit not simply a future tax? 

Mr. HODGE. Indeed, it is, and we are borrowing from our kids to 

the tune of $1.5 trillion a year, which by definition will mean they 

will pay higher taxes. 

Mr. MCCLINTOCK. Dr. Rogers, would you agree with that? 

Ms. ROGERS. Yes. 
66 

Mr. MCCLINTOCK. Are not taxes and deficits merely the only two 

possible ways to pay for spending? Is there any other way to pay 

for spending, other than to tax or a future tax? 

Mr. HODGE. I suppose the Fed could monetize it. 

Mr. MCCLINTOCK. Well, but even that is a tax on the economy, 

is it not? 

Mr. HODGE. Right. Yes. 

Mr. MCCLINTOCK. It is a tax on those holding dollars by reducing 

the value of the dollars that they hold. So those are the only two, 

so we are dealing then with identical twins here. It is not the question of taxes or deficits. It is a question of spending. I mean, apologies to the Clinton campaign, it is the spending stupid. 

We look at the Bush and Clinton administrations and the different approaches they took. Clinton raised tax rates, Bush cut 

them. The difference, though, I think, is Bush, while he was cutting tax rates, was also increasing federal spending dramatically by 

an astonishing two percent of GDP. Clinton, while he was raising 

taxes, was also cutting spending by a breathtaking three percent 

of GDP. 

When we look at all of these economic models, and I share Mr. 

Pascrell’s concern that the modeling seems to have been wrong, we 

ought to be looking at our own experience. Herbert Hoover increased spending dramatically, increased tax rates dramatically, 

did not work out well. Roosevelt did the same thing. Did not work 

out well. Harry S. Truman slashed taxes dramatically, slashed government spending even more dramatically, and we had the whole 

post-war economic boom. And we can go through each of the administrations. It seems to me that it is the spending stoop. Your 

thoughts? 

Mr. HODGE. I believe that we are spending far more than we can 

ever pay for and I do not believe that current tax policy can ever 

keep up, with this level of spending, especially health care spending. And I have looked at some of the European experience with 

value added taxes and those value added taxes are not growing fast 

enough to pay for their health care spending nor their future entitlements. So they are having to raise those rates as well, and even 

that is not enough. Tax revenues will not really grow any faster 

than the economy. So if you have government programs that are 

growing at three or four or five times the rate of economic growth, 

your tax revenues will never catch up. 

Mr. MCCLINTOCK. So revenue is very important but the healthy 

way of generating revenue is through economic growth, in fact the 

only source of revenue is prosperity. Is it not? 

Mr. HODGE. Indeed. 

Mr. MCCLINTOCK. Mr. Ribble touched on this, I want to amplify 

on this a little bit. Who pays business taxes? 

Mr. HODGE. Well business taxes are paid by people, and the 

same way that people pay tobacco taxes, cigarettes do not pay tobacco taxes. 

Mr. MCCLINTOCK. It seems to me that business taxes can only 

be paid in one of three ways: by consumers, higher prices, employees through lower wages and by investors, who lower earnings. 

Those are the 401Ks. So, really, it is not the middle class that 
67 

bears all the business tax increases that we have been talking 

about? 

Mr. HODGE. Well, all workers, to some extent, bear the cost of 

corporate income taxes and what we have learned in the global 

economy where capital is very mobile but workers are not, that 

workers are increasingly paying or bearing the largest share of corporate taxes. 

Mr. MCCLINTOCK. So when you increase the tax burden, in any 

way, on a business, ultimately it is paid for by consumers, by employees or by investors, mainly 401Ks. 

Mr. HODGE. That is correct. 

Mr. MCCLINTOCK. We have looked at the enormous amount of 

money that we spend through the tax codes to bribe people to make 

decisions that they would not make if they were making them on 

their own. Just our office came up with about $1.3 trillion, when 

you include everything. Is not that distorting the economy? Is that 

not sending dollars to their less productive use? 

Mr. HODGE. There is an incredible amount of what we call ‘‘dead 

weight loss’’ because of all of this in the economy. 

Mr. MCCLINTOCK. So should we not be doing away with those but 

at the same time, reducing the overall tax rates to assure that 

those taxes are not passed on to a middle class that is reeling 

under the economy? 

Mr. HODGE. We need to free up all of those wasted resources that 

are now going to either tax preparers or these unproductive activities. 

Mr. MCCLINTOCK. One more quick question on the pay roll tax. 

The tax cuts in December did not affect the tax rates, they maintained the tax rates in place. The change is the payroll tax cut. Is 

that help to the economy? 

Mr. MCCLINTOCK. I do not believe so. 

Chairman RYAN. Ms. Castor, you mind just sitting where Gwen 

was? 

Ms. CASTOR. Here we go. Thank you very much, thank you Mr. 

Chairman and Ranking Member Van Hollen for calling this hearing on tax fairness because I do not think folks at home think there 

is much fairness in the tax code right now. They see it as Swiss 

cheese, they look up at Washington and they think that the special 

interest folks who have the money to hire lobbyist have been able 

to carry the day and that those big special interests are not paying 

their fair share. While there are law-abiding citizens just trying to 

get by and pay the bills and pay their taxes in a fair way. 

One of the things I am hearing often is how can it be that the 

big oil companies, especially that are making the highest profits in 

the history of the globe, are receiving tax-payer subsidies. So American taxpayers are actually subsidizing, in this day and age of 

growing debt and deficits, that American taxpayers are having to 

subsidize those industries. And I know my GOP colleagues have 

supported that, have guarded that, but at the same time we see 

American jobs going wanting. And this, frankly, could be put to bed 

or used by investing in a robust jobs plan. But just so we put some 

numbers behind it, over the next 10 years, American taxpayers are 

scheduled to pay oil and gas companies more than $40 billion. That 
68 

is just to the big five alone, and the big five have reported over one 

trillion in collective profits over the past 10 years. 

Now the president’s bi-partisan fiscal commission that the corporate income tax is riddled with special-interest tax breaks and 

subsidies that are badly in need of reform and I would hold this 

up as the poster child for reform. These most lucrative companies 

should not be receiving taxpayer subsidies, especially when the future deficits are projected to be so high and the GOP has put Medicare on the table to end Medicare as we know it. That is not fair 

and that is not passing the smell test at home. 

The fastest and most effective way to reduce the deficit is put 

people back to work and address tax fairness and failing to address 

this job situation will compound our economic weakness and our 

debt and deficit. 

So I would like to ask you if we know we have got to move forward and combine a robust jobs plan with greater fairness in the 

tax code by eliminating these special-interest loopholes, first of all, 

tell me, if you had to pick one initiative to create jobs what would 

it be? Right now, if you said this would be the most effective in creating jobs right away. 

Mr. WALL. From my perspective Congresswoman, fundamental 

tax reform. I mean we talked about special-interest loopholes, a lot 

of those are corporate tax expenditures legislated by Congress to 

initiate certain economic activity. I am for simplification. Bringing 

down the rate, and reducing the expenditures in a fiscally-responsible manner. 

Mr. HODGE. I would concur with that. I think fundamental tax 

reform, both bringing down both corporate and individual rates 

while broadening the base, will do the most for the long-term 

health of the economy. Ultimately, that results in greater job creation. 

Ms. ROGERS. I would ask the Congressional Budget Office to 

come up with a list, whether it be spending increases or tax cuts 

that are most stimulative to demand, and I would pursue the ones 

at the top of that list, whether they be spending increases or tax 

cuts, and I would commit to pay for it by letting some of the highend Bush tax cuts, or all of the Bush tax cuts expire in the future. 

Ms. CASTOR. Okay so, as part of job creation you are pointing us 

back to the unfairness in the tax code. So I have highlighted one 

special-interest loophole that can go with this growing debt, the 

one for the big oil companies, $40 billion over the next 10 years, 

name another one. Give us some guides where—give us another 

loophole tax expenditure that could be closed. 

Mr. WALL. Congresswoman, as I have said before, it is very difficult for me to say that without seeing the totality of the package. 

Ms. CASTOR. Do you have a favorite out there? How about the 

gory video games? I mean, we believe in R&D tax credit, but do we 

cross a line where American taxpayers are subsidizing these violent, gory video games? You can not name one other? 

Mr. WALL. As I said Congresswoman, to me, I am for simplification, bringing down the rate, and eliminating the expenditures. 

Mr. HODGES. I would eliminate all the so-called subsidies for renewable energy: windmills, solar panels, all of that. Actually, there 

is about four times as much tax benefits for renewable energy right 
69 

now than there is for the quote big oil. And actually, I would eliminate, along with that, the tax expenditure for tax-free municipal 

bonds. There is about 10 times as much benefits going to municipal 

governments through the tax code than there is through big oil. 

Chairman RYAN. Thank you. Ms. Black. 

Mrs. BLACK. Thank you Mr. Chairman and again, panelists, 

thank you for being here today. I know we are little bit over our 

time, and thank you chairman and ranking member for allowing 

me to get my question in here. As we are talking about fundamental tax reform, I have been trying to understand, because it is 

a very complicated code, as seen by Congressman Ribble’s book 

here that it is quite complicated but I want to go to the nomenclature because we keep hearing words that are not defined. In 

particular, let me go to just what was talked about by Ms. Castor 

and when we are looking at definitions of whether a subsidy is the 

same as a tax credit, as a loophole, as a tax expenditure, as a deduction. Can each of you tell me what is the difference between the 

subsidy and what I think, if you take all those other words, the tax 

credit loopholes, expenditures and deductions, they seem to be in 

one pot, the subsidies seems to be in another. Can you give me a 

clear definition? Are all these the same, are they just synonymous, 

or do they really have a difference? 

Ms. ROGERS. Many of our tax, so-called, tax expenditures, which 

are the special preferences in the tax code are subsidies that encourage economic activity to be shifted into those sectors that face 

lower effective tax rates through the complications in the tax code. 

So I define a subsidy as something that gives a preferential rate, 

effective tax rate to certain industries or certain types of households or certain forms of income or certain ways of using income. 

Mrs. BLACK. So is the child tax credit the same as a child subsidy? 

Ms. ROGERS. It does not come close to really subsidizing the cost 

of having children, but it does help. It is not what I would called 

subsidy in terms of shifting resources in particular sectors of the 

economy. 

Mrs. BLACK. Mr. Hodge. 

Mr. HODGE. Well, certainly the child tax return was not intended 

to incentivize anything, it was just merely, purely family tax relief. 

But whether we called something a subsidy, a credit or deduction 

depends on what your ideal tax base is. And for many of us, things 

like the tax deductions for savings and so forth, capital gains preferences, are not considered subsidies, because we believe those 

should not be taxed in the first place, nor ideal tax base. A lot of 

it does come down to what you believe the ideal is, but there are 

clearly too many things in the tax code that are intending to 

incentivize or benefit certain industries over others and that is 

clearly a violation of tax principles. 

Mrs. BLACK. Mr. Wall? 

Mr. WALL. Congresswoman, the nomenclature that is used is corporate tax expenditures. My view is Congress legislating incentives 

to encourage certain types of behavior. Section 199 encouraged domestic manufacturing, so I used the terminology incentive. 

Mrs. BLACK. I do think, Mr. Chairman, that maybe that would 

be something good for us to have, is a list of some of these defini-
70 

tions of the words that we throw around so that we have a very 

clear idea about what we are really talking about. And I know I 

have very little time left, but I want to go to another group that 

we continue to hear, and yet I do not know that I know for sure 

what the definitions of that really is. When we talk about the rich 

or the wealthy, or millionaires or billionaires, or poor, do we have 

clear definitions that fit into the current codes that as we do reform, we have a clear idea about definitions of those words as well. 

Ms. ROGERS. Well there is no standard definition for who is rich 

or middle class. 

Mrs. BLACK. Okay, so when we hear folks talk about taxing the 

rich, or the wealthy, I mean, millionaires and billionaires are a little easier to define. If you are a millionaire, you are a millionaire. 

If you are a billionaire, we can say here is your income, we know 

that. So when we talk about the rich, when we talk about the 

wealthy, when we talk about the poor, it seems that it sets up a 

lot of the emotional feelings and brings about feelings about whichever side, class warfare or someone feeling like they are being singled out, they have been successful. Again, definitions here do not 

seem to be clear as we move forward with how we reform our tax 

code in knowing which poor, wealthy, whatever. 

Mr. Hodge, do you want to speak to that really quickly? I know 

we do not have much time. 

Mr. HODGE. I think we need to make a distinction between middle class and middle income. Middle class is a values system of 

which about 99 percent of all Americans believe that they are in. 

The middle income is a narrow definition of what middle income 

is. But most of us believe, and I think most of us rightly think of 

ourselves as middle class and that is a whole different thing. 

Mrs. BLACK. Mr. Wall. Well, Mr. Chairman, I guess I am out of 

time. 

Chairman RYAN. Lunch is coming up. Ms. Kaptur. 

Ms. KAPTUR. Thank you, Mr. Chairman. What America really 

needs is a pro-jobs in the U.S. Tax reform effort. From the figures 

I have, I am going to put some of these on the record, it has been 

a great year for corporate America. Caterpillar’s second quarter 

earnings shot up 44 percent to one billion. General Electric’s second 

quarter earnings were up 21 percent, 3.75 billion. Mr. Wall, Case 

New Holland has been no exception, your company had another 

great quarter. Hosted in July, profits show your net sales grew by 

24 percent and you brought in net sales of 4.9 billion. I mean, you 

have got to be proud of that. If we look at big oil, it is the same. 

I mean, BP made 5.6 billion, Chevron’s profit 7.7 billion, Exxon, another 10.7 billion. 

Now, we are told that these companies are the job creators, so 

my question is where are the jobs being created? Last month, there 

was zero private sector job growth. According to Bureau of Labor 

Statistics, there are 3.2 million job openings, different kinds, 

around our country, but 14 to 24 million people who are unemployed, who are discouraged, are working three part-time jobs and 

frankly, burned out, I have these people that I represent, I meet 

them all the time. We are being told now we need to cut taxes on 

companies despite their robust earnings and their disinterest in 

hiring in our country. Maybe some of the witnesses missed the re-
71 

porting recently that GE paid nothing in taxes. And I must question, how do you cut taxes of companies that pay nothing? This is 

a really interesting math problem. 

So, I think the system is somewhat unfair to the average citizen, 

in fact, very unfair. And it is unfair to small businesses and those 

who do pay their fair share. Tax avoidance is not just a factor of 

one company. In 2009 and 2010 the six largest banks that got 

America’s economy down, including Goldman Sachs, Wells Fargo, 

Bank of America, and JPMorgan Chase paid an effective tax of 11 

percent of their pre-tax earnings. And Goldman raked in $9.6 billion in profit. Its CEO received $64 million in compensation, he is 

willing to admit. Jamie Diamond at JPMorgan Chase earned $70.3 

million as his bank raked in over $17 billion. Yet we live in a world 

where funds managers like Warren Buffet point out they pay at a 

lower tax rate than their secretaries. Mr. Hodge, in your testimony, 

you claim we should lower U.S. statutory tax rates for corporations. 

I assume you acknowledge the great disparity between what a few 

companies on Wall Street pay and the tax rates paid by small businesses in places like I represent. Would you support an effective 

tax rate where those companies would pay the same, the largest financial firms, the GE’s of the world, as their hard work pays in my 

district? Or the bakeries, Strom’s bakery? All these different companies. I assume you are not arguing that those who have learned 

to not pay their fair share should be rewarded by allowing them 

to do so. 

And then, you could wait a second to answer that question. Mr. 

Wall, I noticed that your company employs over 10,000 people and 

I hope you agree that job creation needs to be our number one priority. Your company’s CEO testified before the House Transportation and Infrastructure Committee last year that every billion 

dollar spent on infrastructure projects by the government creates 

about 18,000 jobs. Do you agree with your company’s assessment? 

Do you believe we need to take on the deficit by growing the economy through investment and infrastructure in useful public works? 

So, first, Mr. Hodge, please. 

Mr. HODGE. Well, thank you, Congresswoman. I do not believe 

that there General Electric represents corporate America anymore 

than I think Leona Helmsley represents all of us. There are always 

going to be tax payers, private, personal, corporate that can configure themselves in such a way to minimize their tax burden. But 

I can look at the overall IRS data, in fact the tax foundation released a study last week looking at actual corporate IRS data. And 

we find that the effective tax rate for all corporations in America 

over the last 18 years is averaged around 26 percent. That is after 

taking all their credits and deductions and loopholes and everything else. And that does not count the taxes they pay abroad. 

Ms. KAPTUR. Does that include hedge funds, sir? 

Mr. HODGE. It includes all corporations. 

Ms. KAPTUR. Do they not pay an 11 percent rate? 

Mr. HODGE. In some cases, some hedge funds may pay, if you are 

talking about carried interest, which is a capital gain. They are 

paying at a 15 percent capital gains rate. 

Ms. KAPTUR. But the hardware in my neighborhood, they pay a 

35 percent rate, what is fair about that? 
72 

Mr. HODGE. That is the statutory rate which all corporations in 

America pay, whether they are C corps or’s corps. The top statutory 

rate is 35 percent for all of us. 

Ms. KAPTUR. You know the ones that have the big guns here in 

Washington always seem to push on it, and they make the biggest 

profits and the other businesses struggle out there. 

Chairman RYAN. Thank you, just in the interest of time, and Mr. 

Ryan. Not this Mr. Ryan, that Mr. Ryan. Thank you. 

Ms. KAPTUR. Mr. Chairman, excuse me, could I ask the unanimous consent that Mr. Wall answer my question on infrastructure 

for the records? 

Chairman RYAN. Without objection. 

[The information follows:] 

RESPONSE BY MR. WALL TO QUESTIONS SUBMITTED BY MS. KAPTUR

Congresswoman Kaptur, thank you for your question regarding investment in infrastructure and jobs. The Congressional testimony you refer to in your question 

was provided by James McCullough, CEO and President of the Case New Holland 

Inc. (‘‘CNH’’) Construction division, in his capacity as First Vice Chair of the Association of Equipment Manufacturers (‘‘AEM’’) at a hearing of the House Committee 

on Transportation and Infrastructure held on September 29, 2010. Mr. McCullough 

was representing the construction equipment manufacturing sector in his testimony. 

Mr. McCullough in his testimony cites a Federal Highway Administration study 

that found that every $1 billion invested in highway construction would support approximately 27,800 jobs. See ‘‘Employment Impacts of Highway Infrastructure Investment,’’ U.S. Department of Transportation, Federal Highway Administration, 

www.fhwa.dot.gov/policy/otps/pubs/impacts/index.htm (last visited September 23, 

2011). 

You mention in your question the possibility of taking on the deficit by growing 

the economy through investment and infrastructure and useful public works. As I 

stated in my written testimony for this hearing, CNH believes that reducing the 

U.S. statutory corporate tax rate to 25% or lower, in conjunction with the adoption 

of a territorial tax system, would make the United States more competitive with 

other countries, which would significantly increase investment in the United States 

and lead to much needed job growth. Reforming corporate tax policy and removing 

regulatory uncertainty are necessary for long-term and sustainable job creation in 

the United States. 

With respect to proposals to increase investment in infrastructure, CNH would 

need to review a specific infrastructure investment legislative proposal, along with 

any potential accompanying revenue offsets recommended as part of such proposal, 

in order to assess whether we believe such a program would enhance the Nation’s 

job and economic growth. 

Thank you for allowing me the opportunity to respond to your question. 

Mr. RYAN OF OHIO. Thank you, Mr. Chairman. You guys agreed 

that deficits are future taxes? You guys all agreed that deficits are 

future taxes. So, is high unemployment inevitably then a future 

tax? If we have high unemployment, we have deficits and so therefore at some point we are going to have future taxes, right? 

Ms. ROGERS. In that sense, yes. In terms of the economy and economic growth, yes. 

Mr. RYAN OF OHIO. Mr. Hodge, thank you. 

Mr. HODGE. Inevitably, we are going to be paying higher taxes 

because right now, no amount of revenue is catching up to all of 

the spending that we are doing. 

Mr. RYAN OF OHIO. No, I am just saying, in general, if deficits 

lead to higher taxes, high unemployment inevitably leads to deficits, so deficits lead to higher taxes so high unemployment leads to 

higher taxes, right? 

Mr. HODGE. Okay. 
73 

Mr. RYAN OF OHIO. Is that right? Am I wrong? 

Mr. HODGE. Sure. No, that is a complicated argument, but I will 

go with it. 

Mr. RYAN OF OHIO. It does not seem very complicated. If we have 

high unemployment, we have less revenue going into the Treasury. 

Mr. HODGE. Right, we have fewer people working, fewer people 

paying taxes, ergo, eventually we are going to have to make up the 

difference. 

Mr. RYAN OF OHIO. Okay. 

Mr. WALL. Congressman, I agree. Jobs, number one priority. I 

am advocating corporate taxes reform would be stimulative to the 

economy. 

Mr. RYAN OF OHIO. So, Mr. Wall, you talked about tax rates are 

a contributor to your decisions that you are making, right? Are not 

consumer demand and consumer spending also a big part of that? 

Mr. WALL. Absolutely, Congressman. As I mentioned, it is a myriad of factors: logistics, quality of labor, where is the market demand, taxes. 

Mr. RYAN OF OHIO. High unemployment, wages being stagnant, 

low consumer spending equals you are less inclined to then make 

investments. No one is going to buy your product. It just makes 

sense. 

Mr. WALL. I will let my colleagues answer the macro part of it. 

For our business agricultural equipment is doing well, so we have 

the demand and we are expanding capacity and jobs. 

Mr. RYAN OF OHIO. Regardless of the tax rate. 

Mr. WALL. No, actually as I was trying to illustrate in my written testimony, the United States is not a competitive regime. We 

look to expand capacity around the globe, taxes as I mentioned, is 

one of the factors. 

Mr. RYAN OF OHIO. Let me just ask Mr. Wall and Mr. Hodge. Are 

we in a liquidity trap now in our country? 

Mr. HODGE. In a liquidity trap? To some extent, certainly. But 

I think it comes back to the demand side, in which if no one is buying, if there is not market, there is no prospects of long-term consumer demand. People are just going to sit and wait, and wait for 

the economy. Even if you freed up borrowing, if they do not feel 

like they can expand to meet whatever demand, then they will not. 

Mr. RYAN OF OHIO. But if people went back to work, for example, 

we have a 20 percent unemployment in construction trades right 

now. If we got that down to five, six, even the national average, 

nine or 10, would that help us get out of this liquidity trap? 

Mr. HODGE. I do not know if any one sector can spur that. 

Mr. RYAN OF OHIO. Of course it would not be just one sector. If 

we got that number down significantly, and it is a large portion, 

and we hired those people, would that not help us get out of this 

mess we are in right now? 

Mr. HODGE. Well, I would like to see all sectors move up. 

Mr. RYAN OF OHIO. Well, I would too, obviously. 

Mr. HODGE. Well, I do not know how one would spur one industry over another. 

Mr. RYAN OF OHIO. Well, we can have a more direct effect from 

our end on putting people back to work, if we have a $2 trillion infrastructure deficit in the country. Work has to get done. 
74 

Mr. HODGE. Look, the Japanese tried to build infrastructure in 

order to try to stimulate their economy and it simply did not work. 

And I think that gold plating the nation’s highways is just not necessary. Someone has to pay for that eventually right? 

Mr. RYAN OF OHIO. Yes. So why not pay for it now? While we 

have high unemployment. Because high unemployment leads to 

deficits and deficits lead to higher taxes. It seems to me it would 

be better for us. We end up paying lower taxes if we made these 

investments now because we are going to have to pay higher taxes 

anyways, because there is unemployment and unemployment leads 

to deficits and deficits lead to higher taxes so the key to me to keep 

our taxes low would be to get unemployment down. 

Mr. HODGE. I hate to see our kids drive on nice highways but not 

have jobs. 

Mr. RYAN OF OHIO. I have 80 bridges in my district that are deficient, dangerous, all across the country. This is not a waste of 

money, this needs to get done anyway. So we are not gold-plating 

any highways. Come to Ohio, nothing is gold-plated, nothing will 

be. We are just tried to patch the potholes up. 

Chairman RYAN. Thank you, Mr. Ryan. 

Mr. RYAN OF OHIO. Thanks. 

Chairman RYAN. This was a fantastic hearing, I think a lot of 

members enjoyed the participation and I want to thank our three 

witnesses for your indulgence from going from 10:00 until past 

noon. We appreciate it and this hearing is adjourned. 

[Questions submitted for the record and their responses follow:] 

QUESTION FOR THE RECORD SUBMITTED BY HON. MICK MULVANEY, A

REPRESENTATIVE IN CONGRESS FROM THE STATE OF SOUTH CAROLINA

QUESTION FOR DIANE LIM ROGERS, CHIEF ECONOMIST, THE CONCORD COALITION

Ms. Rogers, I believe you made a statement during the hearing that increasing 

taxes on the rich, while also decreasing taxes on the poor by an equal amount, 

would boost GDP. 

If I heard you correctly, how would this revenue-neutral tax rate change on the 

rich and poor alter GDP, as defined by C+I+G+(X-M)? 

RESPONSE BY MS. ROGERS TO QUESTION SUBMITTED FOR THE RECORD

Response to Question Submitted Mr. Mulvaney (SC-05) 

Question: ‘‘Ms. Rogers, I believe you made a statement during the hearing that 

increasing taxes on the rich, while also decreasing taxes on the poor by an equal 

amount, would boost GDP. 

If I heard you correctly, how would this revenue-neutral tax rate change on the 

rich and poor alter GDP, as defined by C+I+G+(X-M)?’’ 

Answer: The statement in my testimony refers to a recessionary (less than full 

employment) economy, in which case the binding constraint in the economy is the 

lack of demand for goods and services. (Increasing the supply of productive factors 

to the economy won’t increase economic output because there is not enough demand 

for the products produced by those factors.) The demand side of the economy is represented as the sum of personal consumption expenditures on goods and services 

(C), investment purchases of goods and services (I), direct government purchases of 

goods and services (G), and net exports of goods and services (X-M). Consumption 

can be increased by cash transfers to households, but unlike the dollar-for-dollar effect of direct government purchases (where a dollar spent goes fully into higher 

GDP), a dollar of government transfers to households only translates to higher GDP 

according to the households’ marginal propensities to consume (how much of an additional dollar received they will spend). Because higher-income households have 

lower propensities to consume—i.e., they save larger fractions of their income than 

lower-income households—then taking a dollar away from a rich household and giving it to a poor household (thus, revenue neutral) would reduce the rich household’s 
75 

consumption less than it would increase the poor household’s consumption. Thus, 

total consumption in the economy is increased when a tax policy redistributes income from higher-income households toward lower-income ones. 

This is only valid in a recessionary economy, however. In a full-employment economy, the supply side of the economy becomes the binding constraint. A goal for 

longer-term economic growth might be to increase the rate of national saving, which 

increases the supply of capital in the economy. Then the opposite case for the effects 

of tax redistribution holds: a dollar taken away from a poor household and given 

to a rich household would likely decrease the poor household’s saving by less than 

it increases the rich household’s saving (because poor households hardly save anything). Of course, there are equity arguments that work against such a policy. 

[Whereupon, at 12:34 p.m., the Committee was adjourned.] 

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