and another saying 500,000. these are monthly variatis and we shouldn't get too concerned about necessarily the low numbers and we should be looking at the multi-month trend. the multi-month trend, though, is still low on employment gains. let us just _ that. if we don't start creating over 100, 200, even over 300,000 jobs a month, the unemployment rate will be high for a long time. that is e question that i will be addressing over the course of today's discussion. is it possible by april we could be seeing 300,000 or more a month? i would argue lukewarm. we will see what happens next month. the unemployment rate going to ninth -- going to 9% was pretty dramatic. i would not be surprised to see it rise the next couple of months.

these are statistical issues. these are not precise numbers. even employer surveys, w we survey changes because of small companies that are forming and falling apart. none of the numbers are rock- solid. host: where is the fulcrum as to where the economy is right now question of guest: what we know is the recession still -- recession set up by a financial crisis takes longer to get back on track. >> are we getting back on track? guest: at this moment the indicators are positive. one of the more positive indicators is companies have $2 trillion in their coffers in cash. if confidence were to be regained, it would be surprising hofast we could start to have employment go up. it has been a dicey thing. companies have been staying on

the sideline. it is like, who goes first? demand for somebody else's product -- they can expand, which creates demand for my product. it is called a virtuous cycle. as the economy grows, it is just wonderful to watch. we just don't know when it will start. for instance, if you go back to the last time we had 10% unemployment,hich was in 1983, they were predicting that was going to stay for a year or two because they did not expect a lot of job growth but then all of a sden the economy started to grow and employment growth, which would be the equivalent of 400,000 jobs a month in the middle of 1983. host: one more issue on the table. i really want people to get to your calls. we will put another line on the screen because we have a line just for job-seekers. those who have been looking and have been unsuccessful. tell us your concerns or your observations. we invited you in because in "

the washington post" -- lots of jobs but fewer workers with skills to fit them. what do you see happening? guest: i think that is a bit of an exaggeration. employment is always -- there are rough spots and there are miatches, as to call them, of skills versus seekers and everyone likes to believe that the stories about when walmart announces they will have a 500 jobs, and line of 5000 people waiting for them. but that does not always happen that way. and when it doesn't happen that way -- that is, you have a situation where there is a large number of unplayed -- unemployed and seemingly jobs better not filled it becomes news because it is unusable. why n't these be built? the best estimates i have seen -- a friend of mine at northeastern did a study for the federal reserve board. he argued the bass -- that the

responsibility of tch match of the unemployment rate was about a percent and have or two -- 2%. about 20% of the unemployed don't have the right skills to get the jobs. but most jobs, there are people looking. this is a recession. and the long term, i would argue we obviously need to upgrade the skills of the labor force. but i think that most of the unemployment was due to the recession rather than a mismatch of skills. host: stephen rose, sr. prof. -- he has written a book "rebound: why america will emerge stronger from the financial crisis." we are talking about jobs and the economy. lagrange, ky.

good morning to my, who is a job seeker. caller: i think a lot of these corporations are sitting on the trillions of dollars until they get the right politicians. if we start taxing on this money until the startnvesting maybe we will get jobs. that is my comment. thank you very much. have a nice day. host: tax policy and job creation. guest: tax policy is pretty neutral to job creation. i did not think we will need to tax them anymore. corporate tax reform is on the agenda. the worst of both worlds, high marginal rate but lots of loopholes, and that may change in this congress, and that would be a good thing that i think, again, it is a business cycle of fact. our taxes, compared to our competitors in europe, are lower, so i really dinot see it as a major effect. host: milwaukee, nancy,

independent line. caller: has that ever been a survey done on older workers, say, over 45. the ones who did not grow up with computers, who are trying to compete with the younger workers. it is impossie. i am 50. i have friends over 50 and it is almost impossible for us to find work anymore besides pushing carts at wal-mart and there are not that many cards anymore. host: are you looking for a job right now? >> yes, i am. i found a job and fired after two months because i was not fast enough. i am at a loss. host: what job had you been working at, the major job, that you lost? caller: ne customer service type of job. there are lots there but the older workers are getting laid off, they are getting replaced by the younger workers, and what are we going to do? host: are older workers having a

harder time? caller: 100% true. this is a weakness of when you have the deep recessions and restructuring, companies -- all but workers tended be more expensive. as the caller said, sometimes are not as familiar with the newest technology. when you are in the family and have a computer problem, it will be the 14-year-old that will help you rather than the mother or father. there are many studies and it is clearly confirmed that when somebody over 50 gs laid off, it is much harder to get re- employed. this is just weakness we have -- weakness. maybe we need safety net programs and more special programs for older workers. host: phenix city, alabama. this is charles. republican minority caller: good

morning, mr. rose. ho: yes sir, we can hear you. caller: i said good morning, mr. rose. guest: good morning. caller: i have a question and nobody seems to want to touch it. if we go here and track back of loss -- this country basically was billed as a blue-collar country. the loss of blue caller -- blue- collar jobs of was a result of nafta and wto. if this thing was reversed, jobs would come back. put tariffs on these products coming in, revenue comes in. why does everyone refused to acknowledge this? these job exits have been going on since 1994, which was mr. clinton and his democratic party. i will rate -- wait for your answer. guest: free-trade hat -- free trade has more support among republicans than democrats. nafta certainly was passed under the clinton administration but it acted with a majority of republican votes. that said, after nafta passed,

e should remember ross perot ran an 1992 on the great sucking sound thatould happen if nafta passed. i was with the clinton administration at the time at the department of lab and starting in 1994 -- again, it took time. when clinton first came on and the first 18 months it was caught the jobless recovery but once it started to take off there was remarkable job growth -- 21 million net new jobs created. by the end of 1999, the highest unemployment rate of the population that we ever had in the history of the country. certainly, nafta in the short run can't be said to have caused job loss. the terms of trade -- it is easy to look at and say we could have done that, and why couldn't -- stop that and produce it at home. by and lge, what happened is productivity advances. if we look at coal proction or

steel production, it can be measured quite easily. millions of metric tons. we actually produce the same amount of coal and steel today as we did in 1960. we do it with one quarter of the labor force. in fact, world wide, manufacturing empyment as a share of uneloyment is down significantly and that every country. this is what productivity does. it frees up what is required in the past, workers are needed to produce and allows us to go and other things. so, while i think we need to clearly negotiate trade agreements with labor conditions and we have to be wary of situations like the chinese artificially keeping their currency very low, i think this is a small effect. the notion we can grow our way back on the basis of manufacturing is unfortunately i think a myth. host: this is a tweet --

guest: home foreclosures is indeed a negative factor. one of the reasons it is taking so long for us to get bacon our feet. in a recession, let's say in the 1950's and 1960's, a lot of people said they were really driven by housing and auto, the drivers of economic growth. one of the things the u.s. economy is good at is reacting quickly to things. therefore, when the housing market was strong, we really expanded housing production. unfortunately, when you expand housing production and then the housing market craters, what you are left with is a lot of inventory. it will take a while before we can clear the inventory and start getting construction going again. foreclosures, obviously, is a drag on christ -- prices, puts more units on the market. this is one of the reasons why

it is taking so long for this recovery to get off and start going strong. host: talking about jobs and the economy with a doctor stephen rose from georgetown university, nationally recognized labor economist and his later -- latest book is "rebound." georgia. jim is a republican. caller: i really wanted to talk to senator bingaman -- guest: i will do my best. caller: my company went out of business two years ago. employed nine people. the federal government has done absolutely nothing to help the small businessman stay in business. host: what kind of company did you have? caller: grappling business -- over 60 years. host: why did it go out of business? caller: pricing as much as everything -- oil, hangers,

anything you bought was doubling in price in the last two or three years. it was just a losing proposition. my business is not the only one. there have been a half a dyfed -- doesn't cleaners that closed up. host: and hit in 2008 by people cutting back on dry cleaning in a bad economy. caller: you are rht. host: you said you want more federal writ -- support. what could the federal government have do? caller: could put up small business loans to the people who wanted to stay in business but they have not done that much. the obama administration and the democrats have cut more jobs than we can shake a stick at. they are in contempt on oil drilling -- and how many jobs that would produce, i don't know.

guest: one of the virtues of ou economy is flexibility. on for -- fortunately it has an upside. when market forces change, you can go out of business. when an economy is working well, about a million jobs each month are being created and slightly less than a million are being let go. so we have aibrant, churning economy. both democrats and republicans are committed to small businesses. there is only so much you can do. theba is funded and there are loans available, but obviously when you apply for these loans, they will be looking at the market and how viable these things are. i know politicians a committed to this. and again, this is an effect of the recession and hopefully we will turn the corner soon. host: for stephen rose,

brooklyn, a democrat. caller: to may, the real number of unemployed is closer to 30 llion if you count those off the rolls and not being counted. taking a couple of years to bring back jobs. i want to know how dr. rose feels about unemployment expenses particularly for the 99ers. guest: this has been an important issue for the administration and pushed hard to get extensions passed and passed again. surveys asked a lot of detailed questions. as the caller notes, there are various ways to measure unemployment. other categories, change if -- to change it closer to 17% is involuntary part-time, people will want to work full time but can only find part-time jobs. that is the main number. then another number call

discouraged workers. people who say they are not looking but have given up because they just don't think there are jobs out there. the reason why we know these numbers is because we ask a lot of detailed questis. over the years, the census bureau has really tried to tease out this issue. they have produced for many years since unemployment rates, including various definitions to address this issue so we are fully aware of this. host: the next question for stephen rose comes from -- sorry, let us move on to the next one. tennessee. this is dave. republican line. you are on, david. caller: good morning. i own a small business, and to make, at least what i am seeing, is the financial underpinnings of the economy are good. consumer debt paid off and massive quantities. we have divided government, which typically is helpful. but the overreach of the

federal government in the last two years and the tax implications have been so profound that what i am saying is it is a psychological thing but the american public. they are absolutely scared t death of of what is going on in this economy. the weirdest thing is if obamacare was repealed, i think it would be a huge stimulus to the economy. not a tax cut, just a repeaof an existing federal mandate. host: what kind of business do you have and how many employees? caller: 9 employees, and the fireside and gas grill business. guest: this is a very political issue. by and large, economists don't find that doing away with obamacare would be a big positive jolt to the economy. first of all, very few of the provisions were put in effect and the notion that somehow or

another people making decisions about what wi happen at 18 months from now is something most of us did not think what is happening. in terms of taxes, obama under the administration, taxes are lower than when obama came in. it is a little hard to say he has taxed the recovery away. this is a recession brought by a deep financial crisis set up by a series of blunders by wall street. let us be clear that was initiated th. a lot of people took part. theeople who bought homes in which -- how can i afford this? gee, if you have to say how can i afford this, you probably can't. there were appraisers, people trying to get the fast buck. everybody thought it was going to continue -- based on a use of cards.

wall street started off. the only industry that could really bring the economy down the way it did, because it is the center of every other industry. every other industry makes its plans and the basis of using loan funds for interim projects, to deal with costs over a long time. would not have as much of their own money at stake if they could uslines of credit. we are in the midst of a financial crisis. everything looks buyer now. thin seemed to be turning around. we are at a turning point. not where we want to be, not economically strong. a lot of people are hurting and we will see what happens in the future. host: michigan pettitte rebecca -- michigan, rebecca. job seekers. caller: i am calling for my husband because he refuses to discuss it any more. do you hear me?

[laughter] i am sorry. i wanted to make something real clear. they always cut me off before i can finish. my husband is not laying around on the couch doing nothing. he is depressed, yes. he has been on those bills, you know, on a lot of pills since he got laid off all but now we cannot afford to pay for them anymore. he worked for 29 years at a foundry and was laid off and for the first year he applied everywhere -- everywhere but grocery stores, wal-mart, ok? he was making $29 an hour. but he never even got a callback for 19 months.

and he had four call backs that month -- got in, he was one of four -- chosen and did not get the job. the fit job he was offered, he took. he is now working at a gas station for minimum-wage. and to tell you the truth, he loves , as far as being able to get out and have a job. but it is not enough to pay our bills and we don't have insurance anore. we have bills -- he has shots he needs for ms that are $1,000 a month that he has not taken and he is getting wobbly and it will get worse. one more thing -- is 56.

host: what is the moral of this story or the question you want people to understand based on what you experience? caller: what i want them to experience is -- here is a man who has given his whole life to a company and all of the sudden, they just throw them away and he can't get a job anywhere else because of his age. everyone -- this man, too -- am not criticizing you. but we have had so many people, the show saying, that is right. over 50, it is kind of tough. and that is the end of it. aboutn't you do something it? guest: obviously your husband is one of the casualties of the winds of economic change. it sometimes happensven when there is a strong economy. obviously it happens much more when there is a weak economy. the only kind of programs for

people likyour husband are really based on western european models of a very strong safety net. they have higher taxes but they replace up to 80% of prior earnings and retrain 50 year olds for a long time. i notice you are from a republican line. what would help your husband is for us to be more light europe. that is not on the agenda in the united states and something the republicans have no interest for voting for. host: we are out of time. it would begin as may be imminent -- a minute. guest: economies are funny things. when they are working, everyone is making their individual decisions. and all of these individual decisions lead to strong growth and income.

when they are knocked off their moorings, as in the financial crisis, it is hard to get back. once the virtual cycle starts -- and i don't know when it will start. it could start as early as this spring and then we will be seeing strong growth this year. it could start next year. it may be very anemic growth this year but the consensus view overwhelmingly among economists is that it will start in the next 24 months, and certainly by a number of years out it will be strong. somef us believe it will be

quorum call:

mr. reid: mr. president? i ask unanimous consent the call

of the quorum be terminated. the presiding officer: without objection. mr. reid: mr. president, i ask unanimous consent that on monday, february 7, at 4:30 p.m. the senate proceed to executive session to consider the following nominations. calendar numbers 3, 6 and #, there be one hour of debate equally divided in the usual form, that upon the use or yielding back of that time, calendar number 8 be confirmed and the senate proceed to vote without intervening action or debate on calendar numbers 3 and 6 in that order. the motion to reconsider be considered laid on the table with no intervening action or debate and that no further motion be in order, any of the nominations or any statements related to the nominations be printed in the record and president obama be immediately notified of the senate action. the senate then resume legislative session. the presiding officer: without objection. mr. reid: mr. president, i ask unanimous consent that when the senate completes its business today it adjourn until monday at 2:00 p.m., february 7. following the prayer and pledge, the journal of proceedings be approved to date, the morning

hour deemed expired, the time for the two leaders be reserved for their use, and following leader remarks the senate proceed to a period of morning business until 3:00 p.m. with senators permitted during that hour to speak for up to ten minutes. following morning business the senate resume consideration of the federal aviation administration authorization bill and at 4:30 the senate proceed to executive session as provided under the previous order. the presiding officer: without objection. mr. reid: mr. president, we hope to process amendments to the f.a.a. bill during monday's session. senators have amendments to the bill, they should contact the bill managers. under the previous order, there will be two roll call votes at 5:30 p.m. on confirmation of calendar number 3, paul holmes of arkansas, and calendar number 6, diana saldan, texas, to be a united states district judge for the southern district of texas. if there is no further business to come before the senate, i ask that it adjourn under the previous order.

the presiding officer: the senate stands adjourned until

>> earlier this week the senate budget committee looked at possible changes to the u.s. tax code and how that might impact the federal budget deficit. witnesses include former high level economic advisors to president george w. bush. north dakota senator kent conrad chairs the hearing. this is two hours and 20 minutes. >> committee will come to order. want to welcome, everyone to the senate budget committee today. today we focus on tax reform and the important role that many of us believe it can play in addressing our nation's long-term budget challenges. we're fortunate to have four outstanding economists with us this morning. who are deeply knowledgeable

about tax reform. dr. gene sterling, senior fellow at the urban institute. gene has been before this committee many times. somebody that enjoys credibility on both sides of the aisle. dr. donald marron. director of urban brookings tax policy center. someone very familiar to the committee as well. we very much respect higgs advice. dr. roseanne aushculer. testified before the president of's fiscal commission as didded dr. marron. dr. larry lindsey, president and ceo of the lindsey group. very well-known in economic circles as well. we thank all of you for agreeing to give us some of your time. we deeply appreciate it. let me just begin by reviewing the state of our fiscal affairs. last week the congressional budget office released its

annual out look report. that report should serve as a wake-up call to everyone concerned about the nation's finances. the chart depicts cbo's new 10-year baseline projections with additional policies add the in. those policies most likely to be adopted. we all know cbo does not do a forecast what might not be adopted. they do a forecast based on current law then we try to add to that things that are most likely to be adopted to get the most realistic look where we're headed. that shows due to passage of the tax extension package and the slow pace of economic recovery, cbo is now expecting to see deficits of more than a trillion dollars a year continuing through at least 2012. it then shows the deficits will briefly fall before rising again as the bulk of the baby boom generation begins to retire and health

care costs continue to climb. if this isn't a sobering picture of where we're headed, i don't know what would be sobering. make no mistake. we are at a critical juncture. we are borrowing 40 cents of every dollar that we spend. spending is at the highest level as a share of our economy in 60 years. revenue is at its lowest level as a share of our economy in 60 years. many of us believe that tax reform must be part of an approach to addressing our physical problems. the current state of the tax code is simply indefensible. our tax code is out of date, and clearly hurts u.s. competitiveness. number two, it is hemorrhaging revenue. the tax gap, tax havens,

abusive tax shelters undermined the effectiveness of the tax code, depriving of the esh interestry of revenue. i believe the combined effect of the tax gap, offshore tax havens, abusive tax shelters is leading us to lose more than $500 billion a year. more than $500 billion a year. in addition the tax code is riddled with expiring provisions. this creates enormous uncertainty for citizens and businesses, making it difficult for them to plan. if we took steps to simplify and reform the tax code, we could reduce tax rates below where they are today and still get more revenue. let me repeat that. if we were to broaden the base, and fundamentally reform the tax system, we could actually lower rates, helping america be more competitive, and, generate more revenue.

along with lower tax rates the tax reform would then allow us to increase revenue to help reduce the deficit. i think we also need to be realistic about what is necessary to meet the needs of the nation and return the nation to a sustainable long-term fiscal trajectory. looking at revenues, has led some to argue that revenues should be held at the historic level over the past 40 years, about 18% of gdp. revenues, i want to point out, at that level would not have produced a single balanced budget in all of that time. because spending exceeded 18% of gdp in every year. in fact, on the five occasions when the budget has been in surplus since 1969, revenues have ranged between 19.5% of gdp, and

20.6% of gdp. it is this higher level of revenue that i believe provides a more useful guidepost for what is needed if we hope to dig ourselves out of the fiscal hole and set the budget on a sustainable path. let me indicate that would mean we would have to have very significant cuts on the spending side because we are well over 21% of gdp on the spending side. we're over 24% of gdp on the spending side. tax reform gives us an opportunity to lower tax rates at the same time we are raising revenues. tax reform achieves this goal by broading the tax base, by eliminating or scaling back so-called tax expenditures. tax expenditures are all of the deductions, exclusions, credits, set-asides in the tax code. they're costing the treasury more than a trillion dollars in revenue a year.

that matches all of domestic discretionary spending. many are no different than traditional spending programs. they are simply spending through the tax code. here's how well-known conservative economist martin feldstein described tax expenditures in a recent piece in the "wall street journal.". and i quote. this is again from martin feldstein. cutting tax expenditures is really the best way to reduce government spending. eliminating tax expenditures does not increase marginal tax rates or reduce the reward for saving, investment or risk-taking. it would also increase overall economic efficiency by removing incentives that distort private spending decisions and eliminating or consolidating the large number of overlapping tax-based subsidies would also greatly simplify tax filing. in short, cutting tax expenditures is not at all like other ways of raising revenue. i think this is a critically

important point. the president's fiscal commission of which i was a member issued its report last december and i believe that tax reform may be the most important component of the fiscal commission's plan. here are the key elements of tax reform included in the fiscal commission's plan. one, eliminates or scales back tax expenditures and lowers tax rates. this promotes economic growth and dramatically improves america's global competitiveness. it makes the tax code more progressive. the commission's report included an illustrative tax reform plan that demonstrates how eliminating or scaling back tax expenditures can lower rates. instead of six brackets for individuals, the plan includes just three brackets of 12, 22 and 28%. the corporate rate would also be reduced from 35 to 28%. helping improve the competitive position of the united states.

capital gains and dividends are taxed at ordinary rates. the mortgage interest and charitable deductions would be reformed, better targeting these tax benefits. the child tax credit and earned income tax credit would be preserved to help working families. and the alternative minimum tax would be repealed. that is the kind of tax reform that i believe we need to adopt. the commission plan was also important because it showed how to reduce the deficit and debt in a balanced way. it included cuts in discretionary spending entitlement reform and tax reform. you need to have those three fundamental components to be successful, at least, i believe that's the case. in total, about 2/3 of the deficit reduction between 20712 and 20 to in the plan resulted from reductions to spending. the proposed spending cuts were significant.

i would even argue, on the domestic side, probably went too far. taking revenues out of the equation would have made it impossible to obtain the desired deficit reduction goals. cutting spending alone or some would suggest, only cutting non-defense discretionary spending would require such draconian reductions that they simply could not be sustained. let me just conclude on this chart. chairman lyons's road map that he has laid out, this is the chairman ever of the house budget committee, he believes proves the point that revenues have to be part of the plan to reduce the deficit and the debt. he proposes discretionary mandatory and spending cuts but actually makes things worse on the revenue side. the result is, that his plan increases the debt as a percentage of gdp for the next 30 years. in fact he doesn't achieve balance for 53 years.

he does not achieve balance for 53 years. he dramatically increases the debt, both in dollar terms and as a share of gdp. to solve the long-term challenge it will require real compromise and a great deal of political will. we need everyone at the table and we need to have both sides, democrats and republicans, willing to move off their fixed positions in order to achieve a result important for the nation. we can not continue to put this off. we need to reach an agreement this year. it is time, i believe, for the administration, leaders of congress, democrats and republicans, to sit down and hash out a long-term plan. i will now turn to senator sessions for his opening remarks. i apologize to my colleagues for the length of that

introduction but i thought it was important in light of the subject we have before us today, senator sessions. >> thank you, mr. chairman. i'm glad to see your passion and leadership showing itself on this issue because we've got to do some things. we can not continue business as usual. the article in "the wall street journal" in which the international monetary fund, i believe it was in the "washington post", in which the international monetary fund called on the united states to get its house in order like other nations in the world. used the phrase that, all the other developed nations who are facing debt crises, and most of them are, are entering into a dialogue with their people to explain to them why changes have to occur. so i have been critical of the president's state of the

union address in which he spent very little time in an honest, direct, open, way, discussing with the american people why business as usual can not continue. i so much appreciate your statement that this committee, it may be where with the leadership has to come and i'm, i would be there with you. i am totally appreciative of the concept that you, senator wyden and deficit commission and others, conservatives, writers, intellectuals who favor tax simplification. mr. lindsey, i was really, i hope you don't mind me quoting from your remarks but, you quote a number of economists who say that sensible, sensible

revenue-neutral tax reform could result in five to 10% of gdp, more, five to 10% more of gdp growth over 10 years in one study. 18% increase in gdp output, larry summers found, former, recent former advisor to president obama. and another study there were 19% more growth. this is stunning numbers. so i mean, we would leave that on the table. frankly i doubt they're that high, but if we could get close to that, get a third of that, that would be marvlous for us because it would be, as you indicated sort of free money, mr. chairman. in other words, without, it would create more growth which would create more revenue. i, president obama in his state of the union address said, for example, over the

years, a parade of lobbyists have rigged the tax code to benefit particular companies and industries. those were the accountants, lawyers, to work the system can end up paying no taxes at all but all the rest of us are hit with one of the highest corporate tax rates in the world. it makes no sense and has to change. so tonight i'm asking democrats and republicans to simplify the system. get rid of the loopholes. level the playing field and use the savings to lower the corporate tax rate, for the first time in 25 years, without adding to the deficit. it can be done. well, i think if we simplify the corporate tax rate properly, we can, in revenue neutral way, could probably create more revenue. let me tell you the problem is far more serious than that. we have, and, even, in the real rate terms, one of the

highest, if not the highest corporate rate in developed world. corporations are making decisions every day where to expand, where to hire workers. we learned things in airports. i happen to be on a plane with a very impressive ceo of an international corporation. ceo of north america. had an alabama plant and he was so frustrated and i ended up with a empty seat and he came by and sat down by me. he told me a story and this is the story he told me. they completed in their plants worldwide in this big company to do a new chemical process that would create 200 jobs. they had worked extremely hard at the alabama plant and had won the competition. he submitted in. they had the lowest cost per gallon of chemical stuff, and the plant was going to be expanded in alabama. we were going to gain 200

jobs. until the people back in europe said, we've got to calculate the taxes. and they recalculated the bid based on taxes. we lost 200 jobs. this is not academic. this is going on every day. we have a unemployment rate that is unacceptable and to have the highest corporate tax rate virtually in the world, and other nations are seeing the light and reducing it and we remain high. so even if we eliminate certain deductions and have a flat rate that appears lower, it seems it my simple mind that we got no less real burden on the corporate community than we had before. so i think we need to figure out a way to reduce the rates. and if it has to be paid for by some tax increase in some other area, i'm willing to consider doing that.

so i believe we need to simplify but i also think it would be a big mistake if we don't reduce the rates. of course the u.k. is reducing their rates. canada i understand is going to 16%. so if we're at 28, 27, after we have adjusted we are still way above that. and a company making a decision of where to produce a product might well choose another country than our own country to produce that product and cost us jobs. so, mr. chairman, that's kind of where i am. i don't think i'm prepared to support just a tax simplification of the corporate rate because i believe the entire world is recognizing that the corporate rate is a job factor, a big job factor. and i think in terms of the laugher factor, if you want to call it that -- laffer,

factor, if you want to call it that. reducing the corporate rate, one of our colleagues said the other day, a study came out and shown that if you reduce that rate you get more economic growth than you would in almost any other place in the economy. thank you for your leadership. thank you for this good hearing. i look forward to the testimony of our compel pent -- excellent panel. >> thank you very much, senator sessions. we'll turn to the panel. we'll start with gene stehrle. welcome back to the panel and proceed. >> thank you, mr. chairman and members of the committee. many tax and budget reforms know no ideological or party boundaries. no one favors unequal justice inefficiency and complexity we see in our tax code today. neither does anyone favor the way tomorrow's scheduled deficits threaten our economy and our children. you have asked that i concentrate my remarks on what makes reform most likely.

reform often starts from a common consensus that a variety of fixes would be better than what we have. bipartisan agreement led to past successful tax reforms such as in 1986, 1969, and 1954. such bipartisan consensus also informed close to 2/3 of the members of president obama's own debt commission. such agreement i would suggest with admitted bias is displayed by the panel before you. three of us are from the tax policy center. former deputy assistant secretaries and heads of cbo and senior economists on advisory panels, appintees by both republicans and democrats often come to very common conclusions. we're not led by any party identification. the more general point is that good government at either 17% or 23% of gdp trumps bad government at both levels. with the mythical founder king of athens went into the will be rent to slay the

half bull minotaur he was only able to escape following a ball of string back to where he entered. if we're ever to escape the tax will be rent we journmided like him we follow the strength along four dimensions that define our budgetary problems. we must move to era of more fundamental reform. a simple explanation of the tax code's evolution in recent decades is broke away from its narrow revenue-raising foundation and began to evolve much like the spending side of the budget. yet large systemic reforms require fundamentally different strategies than the tax cuts and benefit expansions that seem to only identify winners. many domestic reforms like social security reform in '83 and tax reform in '86 are heart bingers of doctor harbingers of the type of reform government must increasingly engage. second we muslim hough any congress can commit to the

future before the future arising. i no longer divide the budget balance sheet to spending and taxes but giveaway and takeaway. especially after the 1990 and '93 budget agreements. both political parties increasingly become to believe it is political suicide to operate on the takeaway side of the budgets, to balance the sheets. it shows that in 2009 for the first time in u.s. history, all revenues were committed before the new congress even walked in the door. third, we must account for and report to the public in more honest way. right now, for instance, tax subsidies show up in the budget as a reduction in taxes when they are bigger government in disguise. and fourth we must cut across institutional boundaries. even today tax reforms are unable to replace an education tax credit with a higher pell grant or housing tax credit with a housing voucher.

at the same time i believe that serendipity arises playing the odds in the right way. tax reforms probability much success can be increased by the following steps. first we must cease today's and not yesterday's opportunities. yesterday's included a large individual tax shelters, very high tax ritz and every increasing taxation of families with children, on children and the poor. today's include the deficit, high corporate rates, and the extraordinary complexity of the tax system. second, we must base reform on well-established principles of public finance. principles like equal justice have powerful appeal and lead logically to a whole host of reforms. third we must comprehensively tackle the problem. yes, reforms creates headlines over who loses some subsidy and who pays more tax but the size of the headline is often indifferent to the size of the reform.

if one is going to take a political hit, one ought to achieve something valuable such as simpler tax code or a more sustainable budget. fourth, we need to shift the burden of proof. let opponents argue why they oppose a standard based on equal justice or simplicity when the standard is current law, the burden of proof resides with reformers who appear to be picking on particular groups. fifth we must form coalitions on based on legitimate liberal and conservative principles. tax reform in '86 for instance in no small part was supported by two broad coalitions pro-poor and pro-family and lower rates and reductions in tax shelters. sixth, we must seek better ways to present information. in+++o1

the political decision making held off until later. finally, at the political level, we must encourage elected officials to lead, to be accountable and be empowered. in 1986 tax reform, dan ng not to cricize each by agr some by the failure to enact tax bei reform. at the same time tax reform faie succeeded because leader course and power to extract execute a strategic plan as they moved through thewered o political minefield. thank you, mr. chairman.

>> thank you.u, mr. excellent testimony. doctor, good to have you back. >> thank you, mr. chairman, ranking members. it is a pleasure to be here to ralk about the important issue of fundamental tax reform. echoing some of the things thatf have already been said, americans tax system is clearly broken, elicit complex,arly economically harmful and unfaire .hil's at its most basic task ir which is raising enough money tt pay for the government and unpredictable with large temporary tax cuts in individual income tax but also corporate,nl apparel, and estate taxes.x for allbut those reasons are sym cries out for reform. such reform could follow manyem paths. for orm. analysts recommend the introduction of new taxes such as a value added tax, national retail sales tax or pollutiontae tax to supplement or replace ou current system. those ideas are worthreplace discussion, but in today's. testimony i would like to focus on a more traditional approach,o

on asigning income tax. i would like to make seven main gndesi points.tax. first, as has already been mentioned, a tax preference purveys the tax code. these total more than 1 trillio annually, which is almost as much as we collect from th individual and corporate income taxes bowline -- combined.ome narrow the tax base to reduceths bavenue, distort activity, complicate these system, force rates higher than they would econ teherwiseom be and are oftentaxa unfair. second, the first step in any tax reform should be to broaden the tax base by reducing or eliminating tax preferences. doing so would help level the playing field among different economic activities, reduce the degree to which taxes distortac, economic behavior and make taxew ecomicr to file and the minister. ma third, policy makers can use the resulting revenue, potentially hundreds of billions of dollars. each year, to lower tax rates t reduce future deficits, or both. lowering tax rates would further reduce the economic distortions

created by the tax system and would encourage economic growth. reducing future deficits wouldod help tame our debt which threatens to grow to defic unsustainableit levels and thust poses a significant risk to our economy.bl fourth, manye plerveeferences s effectively spending programs run through the tax code which poses a challenge for how we talk about tax reform and the e. size of government. in the cats to these the spending-like preferences will increase revenues, but reduceda the government's influence overe economic activity. advocates of smaller governmentr are skeptical of proposals that would increase federal revenues. when it comes to us paring backl spending like tax preference for an increase in revenues means the government's role is getting smaller.o pfth, other tax preferences, however, are not spending programs. more and more observers have embraced the idea that they resemble spending through the tax code. that is a promising developmento e.fortunately that enthusiasmf d has sometimes led to theing

misconception that all items a t identified as tax preferences to are akin to spending. understandable given these areto called tax expenditures, but not correct. preferential tax rates are andur admitted the imperfect effort to limit the double taxation that can occur when the investment income is subject to bothon that personal and corporate taxes. such positions will be viewed as tax measures. six, many tax preferences provide benefits to millions of taxpayers. they're not just tax breaks fors special interests. ecial ree largest tax preferences or the exclusion foe employer provided health prefere insurance, preferences forclusir retirement saving, and mortgage interest deduction.r re toti greet the benefit of tax r and lower rates, simpler taxes, and a more vibrant b economy, ty will need to give a popular taxt omy, t. seventh, policy makers should reevaluate the design of any tax preferences that decide to keep.

some are needlessly complex ande could be simplified. that is true for the preferences aimed at low-income workers and. families.that's tru aiat lowight operate more efficiently as credits and deductions or exclusions. credits can provide more uniform incentives for particular activities, for example, home ownership. deductions and exclusions depends on whether a taxpayerhoe itemizes and what bracket darren. bottom line by reducing, liminate, or redesigning tax preferences policy makers can make the tax system many simple more fair.stem raise revenues across the board tax cuts and much-needed deficit pros reduction and improve therevenud efficiency and fairness of remaining preferences. fairss of an delacorte to questions.y >> thank you. now we go to dr. alter. welcome. >> think you. it is an honor to appear today d to discuss the need for and benefits of fundamental tax to reform. building the case for tax refort is easy.benefif

.he current system is riddledrem with tax provisions favoring one activity over another or riddl providing targeted tax benefits to its limited number of taxpayers. these provisions createanother. complexity, generate large crealiance costs, brith perceptions of unfairness, create opportunities for tax avoidance, ending currency avefficient use of economic resources. the many changes, more than 4400 have made the income tax evene e over the pcult for taxpayers to understand, less stable, andomex increasingly unpredictable.xpays e aseem to have forgotten the ol creasinglyl purpose of our tax system is to raise revenues towe fund government. reducing the deficit to an is to economically sustainable levelee as we must do will require bothf a scaling back of expenditure mt programs and an increase in taxk revenue. the question i addressed todayos is how best to reform the tax system so that it can raise revenue in a minute that is simple, efficient, and fair. s now make three broad points.

the fiscal challenges aheadsimp require we reform our income tax system or turn to new revenues rising significantly more turn revenues from the contract system is politically unfeasible and would be damaging tohe economic growth.y i second, we must broaden the bas of our income tax.the ba this type of reform istax implemented will. of developed in countries over thei past 30la years. the third current u.s. approacht to international corporate taxation is to be a mcrib takeht -- updated to reflecto the competition. widening the base and lowering the weight are essentials andd straightforward for steps to international tax reform. we should also consider updatine our system to reflect thetax international tax rules used by our major trading partners.our y the remstainder of my testimony elaborates. before considering fundamentalpr reform you might ask, can we test dial up the current system increased its tory marginal taxe

rates to raise the revenue required to bring the deficit under control? the 2010 tax policies center dei suggests the answer is no.2010 reconsidered illustrative changes to theic current system aimed at reducing the deficit to an average of 3% of gdp. anverageriefly summarize the results, it can be done. we cannot reduce the deficit toe itsustainable level with personal income trees is alone. we let the revenue raised by proportional increases in all of the current marginal tax rates. if the system we have today were extended we would have toincree. increase of statutory rates by 50 percent to reach our deficit target, all steps toward rates. what if we try to protect low and middle income taxpayers toi back this would result in top rates that would stifle economi activity.increases they would need to rise, to 84 and 89%. it's shocking, and we did not rs even take individual behavior it's account.

changes must be made if we hopee to raise more revenue from the current system.de to what athboute the corporate tax? an it raise significant revenut for us, significantly more thans now? in my written testimony thatgnin in med the answer istly no. the aevenue from today's corporate income tax fnsor comes from corporations that are revee competing in a global market. increasing the rate is problematic given how high our the corpora in 2010 the average combined national and state corporate tax cote was 25%. the u.s. rate was 39, second%. only to japan.ate wa don'ts worry, on april 1st that japan will reduce its corporate rate by five percentage points wi reducell have the dubious honor of in posing the highest corporate tax rate in the oecd.f highest mind any increase can be expected to induce tax avoidancn through transplanting. expected induce tax avoidance through transfer methods. this leaguage in revenue along with the small role played by

the corporate tax suggests that corporate rate increases can at best move the deficit towards the sustainable path. our fiscal challenges require more comprehensive income tax reforms or new sources of revenue. what are the economic benefits of base broadening reforms? the income tax imposes efficiency costs on the economy. when taxes distort the economic decisions of individuals and businesses and divert resources from productive uses. economists call the efficiency cost the excess burden. economic theory shows while it's hard to understand that roughly speaking if you dublt the tax, you quadruple the excess burden. the burden on the economy increases more than proportionally. it's easy to understand that raising a set amount of revenue with a narrow base requires higher tax rates. what is often ignored is the drag on the economy created by higher rates. the national commission on fiscal responsibility and reform demonstrated that cutting backs

tax preferences an brondening the base, by doing so, the current system could generate revenues of about 21% of gdp with top individual and corporate statutory rates of 28%. stripping away tax provisions that distort economic activity and lowering the rates would leave us with a system that is less costly to our economy. it would be fairer than the current system, less complex and easier to administer. senators widen and greg have a plan that shares these attributes. let me focus on the corporate base for a second. broadening the base and lowering the rate could reduce a number of distortions caused by the current system. it won't be easy to cut corporate tax preferences, however. while some preferences benefit only a limited number of businesses, we hear about those a lot, others cut taxes for a broader set and in addition lower the cost of domestic investments. it's not possible for us to stay competitive and grow our economy with a tax rate that's 14 percentage points above the oacd

average. one often hears that the statutory rate is not -- the fact that it's high is not important since our narrow rate reduces the tax rate. this ignores the important rule the rates play in business decisions. they influence where corps railingses do business, action how they finance investments, how much they invest and their incentives to shift income to avoid taxes. retaining a corporate rate that is significantly out of line with our competitors is not a viable path for increasing u.s. investment, jobs and economic growth. what about the international tax system? you won't be surprised to hear ours is very complex and induces inefficient behavior responses. under our system, all income of u.s. corporations is subject to u.s. corporate tax, whether it's earned at home or abroad. a number of reform proposals have recommended a territorial tax system which would exempt foreign sourced income. all other g-7 countries have adopted territorial tax systems.

abandoning our worldwide approach would be a major policy move and it deserves cavill analysis. we should be doing this analysis now. the fiscal challenges ahead are daunltsing. instead of spending the next two years engaging in an endless debate of whether to extend the 2001 and 2003 tax cuts, i urge you to instead if he can us on designing a base broadening reform of the current system that can reduce our debt burdens and enhance the u.s. growth economy. thank you. i look forward to questions. >> thank you very much. dr. lindsay. thank you for coming and please proceed. >> thank you, mr. chairman. i appreciate your invitation and that of the members of the committee. it's amazing listening to my colleagues that i have to tell you, we did not collaborate in writing our testimonies, and i will change what i'm going to say in part to avoid redundancy.

as senator sessions pointed out, there's a broad consensus in the economics profession that substantially more economic growth can be had through a sensible tax reform. i would add to that that in addition to the growth issues, it's important to take a look at the static behavioral issues that my colleague, professor aultshuler mentioned. she observed the excess burden of a tax doubles -- is proportional to the square of the square. you quadruple the excess burden. >> what does that mean? >> it supports the taxpayers' behavior. you make them worse off on top of the rate he has to pay. you not only have to send a check to the government but because you face the high rates, you got to do things you wouldn't ordinarily do to comply with the tax code. to put it into context. in the current income tax, when

you add all taxes in, including things like the medicaid tax, we're now debating whether we should be at 40% or 50%. when you go in that range, the burden on the taxpayer, the total -- the tax check he has to pay and the excess burden is about 1.70 for every dollar he collects. when you go over 50%, the numbers become quite high. you make the taxpayer four times as worse off as you make the government better off. there's no sensible person should think let's make the government as well off as we can simply by taxing the population when we know we're making the people we're taxing one and a half, two times, three times, four times worse off than we're making the government better off. that is not the way to ebb hans the wealth of a nation. where i would separate myself from my colleagues and i certainly endorse their ideas of trying to make the income tax

better, i think looking at the problem here, we really have to move away from an income tax based system towards something else. the current high economic costs of the tax system is due to a number of factors that i think lead me to that conclusion. the first is complexity. a lot of the tax code is really a judgment call about what income should be taxed and what should not. in the context of our various financial problems in the last two decades, a line came up that we should all bear in mind. cash is a fact. income is an opinion. in our income based system, a tax system is really about creating an opinion about what should be taxed and what should not. we have a lot of opinions out there. there's gaap accounting, generally accepted accounting

principles. those aren't fixed over time. they change. the sec has certain modifications to gaap accounting to get another opinion about what income is. and then our tax code has a third opinion about what income is. that changes over time. it seems a little bit odd that the government at one time is rendering three or more different opinions about what income is. we have to move toward a cash based system. let me give a very simple example. i have a small company, and just one of the peck allarities i face every year has to do with my health insurance premiums for my company. i'm obviously an employee of my company. that cash item is considered deductible. it's a business expense for my employees. i'm in exactly the same health system. it is not considered a business expense, what i pay for myself

and my family. and then, when i take that, it's considered an adjustment on the income tax but it's fully taxed on the payroll tax side but not to my employees. here you have one cash item, identical across the board, two different taxes, have a different opinion about it and they have a different opinion depending on whether you're the owner of the company or whether you're an employee of the company. that leads to the second problem which people have talked a lot about, horizontal inequality. because you have all these different taxes and each has a different opinion, essentially similarly placed individuals pay radically different amounts of tax. i know mr. buffett is often up here talking about tax refor. he has admitted that his taxes are too low. he has an average tax rate of about 16%. that's about half what other entrepreneurs have. how do you fix that?

you don't fix it by raising the taxes on the other entrepreneurs. you fix it by moving toward a system that defines the income he gets in a way that's similar to what others receive. that's why i think we have to move to a cash based system. the third problem has been touched on by a number of comments. that is our income based system, because of the nature of the opinions that it rendsers about what should be taxed encourages economic activity to go abroad. for example, an item that's manufactured in china but purchased in america has a cost structure that involves no u.s. income or payroll taxes on its labor content or on the profits that is rendered. china, of course, does have a tax system, but its rates are quite low relative to ours. the chinese individual income tax produces 1.2% of gdp. ours produces 7%. our income tax burden is six times what china's is.

the largest tax in china is the value added tax which produces a third of their revenue and is rebated on the exports they send here. so having an income based system, while most other countries in the world, including europe, canada, are moving away from an income based system and toward value added taxation or indirect taxation, puts us at a competitive disadvantage. we complain a lot about the advantages the chinese give themselves through their exchange rate, but we have a major self inflicted wound that we cause ourselves because we have income based axation. again, i don't believe these fundamental problems with our tax structure can be adequately addressed by changes to the income based system. rate reductions within the current system have been economically successful because the excess burden within that is so great. further revenue reductions are not possible. america must move away from its income based system toward a

cash flow system. this should not be done as an add-on. we do not need extra complexity. we need simplification. adding another layer of complexity is inappropriate. goods that are imported from abroad, even those that find their way into products produced here would not have to pay american business receipts tax, so would not be available for such a deduction by an importing firm. governments and nonprofit entities could be given separate treatment so only the labor component of their expense structure would be covered by the tax. the problems of horizontal inquality in such a estimate would be minimized by having all receipts taxed once and at a single source regardless from where they were derived. issues of vertical inequality, making sure the rate was higher could be accomplished with a two

tier business receipts tax system where the higher tax rate exempted employee compensation below a certain amount. the problem with encouraging lower taxes for very low income people could similarly be incorporated in there. we certainly need to address our budgetary challenges, but i don't believe we can move forward tackling those issues with a tax system that imposes such high economic costs when we raise rates to produce additional revenue. our tax system is limiting american prosperity through needless complexity, horizontal inequits. a switch to a cash flow system such as a business receipts tax or a value added tax would greatly facilitate our ability to address these budgetary challenges. thank you very much. >> excellent testimony, mr. lindsay. all of the members, i think,

have made a real contribution at the beginning of this discussion. let me go, if i could, to a concept that was proposed by professor grets at yale. i think he's now at columbia. he made a proposal that we go to a system that's really a hybrid, which is what most countries do. he proposed we go to a consumption tax with the vast majority of people, take 100 million people off the income tax system completely. substantially, reform and reduce the corporate rate, broaden the base, and he argued that this would dramatically improve the efficiency of collection, that is that we would have less leakage in the system. number two, that it would make america far more competitive.

let me just go down the line and ask if you have looked at dr. gretz's work and what you think of his proposal and what it would mean for both helping us reduce the deficit and at the same time improving the competitive position of the united states. doctorsterly? >> i tried to outline briefly in my testimony. i think there are a variety of fixes that would be better than current law. i would say what michael gretz suggests is better than what we have now. my question is what would be wao have in adding on what is a value-added tax which is the basic tax he would use to collect revenues for the majority of people. my principle concerns with with mr. grets's proposal is at the very bottom and the top and not the middle. he simplifies a lot in the

middle. at the bottom i don't think he's grappled with the tough issue of how you integrate earned income credits and child credits, with food stamps and tanif and health subsidies that fades out when your income goes up. we have all these indirect tax systems at the bottom based on income and i don't believe we've solved that at the bottom. at the tox he leaves the deductions and credit. the notion of high income people getting a deduction and low income people not getting subsidy for the housing seems to not work either. the core of the proposal, would you consider replacing a sir any can't portion of the current tax with a value added tax? i think a lot of economists would agree this isn't the reform they would favor. i think they would say it's better than the current law. >> how do you -- if you are to move in that direction, dhou you

protect the most vulnerable among us? how do you protect those who are at the lowest end of the income scale? >> well, this is a subject that has not gotten much attention lately. as i say, we now have low and moderate income taxpayers in so many phase-outs of so many programs, that their marge cal tax rates are the highest in the nation, some face 70%, 80% rates. you lose your food stamps. in the new health law there's a ten cent or more phase-out of your health benefit. you lose your earned income credit, child credit. all these phase-outs add up and then you add on the social security and income tax rate, i think we have to think about reform of what we want to do at the bottom of the income distribution, the top and the middle. we take the progressivity issue at the side, we decide how much we're going to give and then simplify for each group.

i think that requires a reform effort that goes beyond what we're discussing today. >> dr. mayor? >> my approaches say there are several things we're trying to accomplish. one is to raise as much revenue, the revenue we need to pay for the government without harming the economy. the best way to do that is go towards a consumption tax. one of the other things we would like to do is achieve certain progressivity goals. tax is a very important way we think about the distribution of after-tax income in the united states. frankly, income taxes tend to be a better lever for doing that. what the grats proposal is trying to do is provide a compromised sweet spot that is recognizing for the economy as a whole it's better to have more of the tax base be consumption base. that's why he introduced a vat. then recognizing if you want what is wildly held as a fair distribution, you'd eel need

income tax to do that. my sense is he succeeds in the sense of cry ating a tax system that would strengthen the economy, be beneficial for competitiveness. as gene says, there are a lot of difficult details about how you implement that and accomplish all the goals throughout the income distribution. as a basic structure, it's an interesting one to think about. >> dr. altshuler? >> i agree with donald. i'm a fan and i very much believe that all roads lead to a v vat. adding a vat onto the system would allow for lower rates. you get the benefits for the lower rates. you have a system that's much less complicated, much less of incentives for income shifting. it's implementable. we can do this. canada -- all other countries in the oecd have a vat. this is how they raise their

revenue. virtually every other country in the world has a vat. so it is something that could be done. >> but how do you protect those who are at the lowest end of the income distribution, those who are the most vulnerable among us? how do you protect them in that system? >> that is the difficulty. that's what gene and donald have also talked about. now, remember that you're going to be retaining the income tax. so you can run refunds and transfer programs through the income tax. so by retaining the income tax. >> you could keep the earned income tax credit and child care credit? >> exactly. you can help the distributional consequences of moving to a vat through the income tax system. i know -- i believe the tax policy center is studying this right now, and as gene said,

with more study into this, i do think that we could get the distributional consequences to be something that we desire. i think what we need to remember is that we are keeping the mechanism of the income tax so that's going to help us out at the bottom of the income distribution. >> dr. lindsey? >> first of all, i think we all agree that almost anything is better than what we have. that would be what i think about mr. grets's comment. i also agree, as i said in my testimony, we have to move towards a business receipts tax or vat. i would reject retaining the income tax along with it because i see we're adding yet another definition of income or another calculation everyone has to do as a net gain. i think within the context of a business receipts tax, you can have substantial progressivity. for example, you could have a base, business receipts tax rate, call it 20%. >> explain that for those

listening and for the members of the committee. what do you mean by that? how does that work? >> well, a business receipts tax or vat are very similar concepts, essentially the base would be total receipts by the company minus what was paid and taxed to a different company. so, for example, if i'm making a car and i buy steel, i send the steel company a check to buy the steel and the value-added tax on that steel is part of that. so to avoid double taxing, if i can show that i have -- basically it's called an invoice. i have an invoice that says you paid tax on that once, you don't have to pay tax on it a second time. the base would be all the money coming in minus the cash going out that you paid a tax on.

now, if i bought that from -- steel from china, i didn't pay a vat on it, business receipts tax, no deduction, so we'd be leveling the playing field between purchases of goods here and purchases of goods from overseas. >> that would hell the competitive position of the united states vis-a-vis taxes with respect to one of our toughest competitors and owl of our competitors who have a similar system? >> absolutely. if you think of it as a central issue -- i think it really is our central economic issue -- you have to say why wouldn't i want to throw as much -- if i'm going to move to that system anyway, why wouldn't i want to move as much of our tax base into that system as possible if i know i'm going to gain competitiveness by doing it, why would i only want to gain competitiveness on half my tax system and not all of my tax system? that's why i would move to the

one tax. >> this takes us right back to this fundamental question. if you do it all on that side of the ledger, how do you maintain progressivity in the system so that those -- especially those who are the least vulnerable who benefit from the current tax system through the earned income tax credit, child care tax credit, how do you maintain that support for that end of the spectrum? >> sure. let me mention the high end as well. there's no reason why -- again, you have the business filling out its tax form. they do the calculation on the base i just said. then you have a second line that says subtract the first $10,000 a month you paid to every employee, in other words, wages up to $10,000. get another line, put another tax on top of that so that high-end wages and profits including interest and dividends would be subject to the higher

rate. i think that's how you get progressivity on the higher end. on the low end, this is not a problem. there's no reason why you can't have wage subsidies built into an eic -- eitc. right now we incorporate the eic right into the payroll checks of most companies. i think it's called prepaid -- pre -- there's a way. we have it in the tax system where you can get. you don't have to wait for april 15th to get your earned income tax credit. you can get it in every paycheck you file. no reason why you can't do that in the vat system either. the other aspect of the help for people on the lower end of the income distribution, it's been pointed out that right now we've got among the most complicated set of rules because we have different rules for food stamps, for health care, for what have

you. so that is something that you can reform separately. you can run it through the tax system. you can run it through a direct payment system which is what a lot of what we do now is when you think about, quote, welfare in the old day, vs, it had nothing to do with the tax system. it was a direct payment to people based on their income and the number of children they have. i don't see where there's an obstacle toward providing progressivity by moving the a value added tax. >> senator sessions? >> i would yield my time to senator portman. i would note that we have three new senators that have joined our committee. senator portman was, of course, at omb which is a heartbeat of federal money management and

member of the ways and means committee in the house for a number of years. senator toomey on the budget committee in the house for a number of years and a businessman. senator johnson, who is not with us now, is a full-time career businessman and got elected to the senate. i think they all three are going to add some really experience and perspective to our debate. senator portman, thank you for being with us. i yield my time to you first round. >> thank you, senator sessions. i appreciate your yielding your time. we've got all got four or five things going at once so i'll have to step out after my questions. i enjoyed the testimony. we need to get michael grats here next time so he can talk about his ideas. i did read his book. i'm intrigued by his concepts. i will tell you i think in the politics of today and with the urgency of addressing our fiscal

crisis, i'm not sure we're ready to make that leap. i will also say to the chairman's question that one of the thoughts that came up in relation to the grats ideas was to deal with progressivity among lower income workers by offsetting the payroll tax which is a good way i think to both simplify the tax code and also provide relief because most low income workers are working and pay payroll taxes. those who don't, there are other ways to do it as the panelists have talked about. i want to take us back to the kinds of proposals that the commission has looked at and the kinds of proposals that the white and gregg legislation would indicate. that is simplifying the current code, again, as interested as i am in what dr. rind sees and others are talking about and moving to a vat tax, i'm not sure i see that as viable in the short term. perhaps we can move to something that has fur economic distortions, that moves us toward eventually looking at

some of the more dramatic changes in terms of a consumption-based tax. a couple of questions for you. one, what should the corporate rate and the individual rate be? there's a study we talked about in the last hearing out recently by alex bruin and kevin has sich from aei indicating we're leaving money on the table. they say the optimal corporate rate is in the mid 20s, and the point has been made here this morning that we're not competitive with our oecd trading partners, japan is going to relinquish first place to us in terms of the highest corporate rate come april. this is a jobs issue. what should the rate be and what should interaction be between the individual rate and the corporate rate? the question i, of course, have is given the fact that most businesses in america don't pay their taxes at the c rate but rather at supp chapter s or partnerships or sole pro pry tors, what kind of behavior

would result if the corporate rate were at, say, 26% and the individual rate were relatively high sner would you see the shift back to the c corporations? is that good for taking the economic distortions out of our system? i don't think so. then you'd have more double taxation on the corporate side. i will start with you, gene, if you don't mind, and go down the panel, if you can tell me in a realistic scenario of getting a corporate rate down, what's the right corporate rate be and what should the right top rate be for individuals? >> thank you, senator portman. it's great to work with you on this side of the congress this time. let me answer your second question first. i think the individual rate and corporate rate should be fairly near to each other. that's the conclusion we came to in the mid '80s and i think it's the right conclusion today. if you asked me personally where i would come, i would actually try to keep the rates down into the -- perhaps into the high 20s. here is my dilemma.

i believe that the effective rate of tax on the public is equal to the spending rate. and the spending rate right now is about 24%, 25% of gdp. the typical tax base, income tax, social security, value added tax is really only about half of gdp. if you add in how you come in the back door, social security taxes, phase out this and phase out there, most people are facing 40%, 50% rates if you really look through the system. so the statutory rate is hiding the effective rate that they're facing from being phased out of all these programs, from having all these combined tax systems. so it's very hard for me to give you a rate in the individual and the corporate tax that get balanced. the system is so out of balance -- one thing, mr. chairman, i hope you will consider is ways to report to the public better. i think one way to get at the deficit issue to start reporting the the public that the tax rate is equal to the spending rate.

what we're spending now as a society now and in the future is the taxes we're collecting. as a household, if we're spending $100,000 and borrow 50, we're still paying $10. we need to report the unidentified pair, the person who has to pay for the deficit, we need to report that as a tax or burden. to answer the question, i would put the rates near to each other but i have to solve the question of where you want the system as a whole to come out. i think the rate of tax we pay should be equal to the spending we promised the public as a way to get the deficit in order. even if that makes the tax rate way too high for what i want government to be, at least it's an honest system and we're not trying to hide the rates in the deficit. >> we need to do both on the spending side as well. dr. marron? >> perhaps not surprising, i'll be in a similar place as gene. on the corporate side, the pressures are such that the

world is moving attacks rates that have a two in the beginning of them. that seems to be the way united states ought to go. you would like the individual rate, the personal rate to be near that. i'm not sure they need to be necessarily identical. it could be somewhat higher. you'll want them to be similar. you the challenge that gene said which we have to pay for the government that we're going to have and whether that's going to be possible with those lower rates. i would say going back to my testimony and the 'em fa says on the tax preferences that how one feels about bringing the rates down by a sizable amount i think is going to depend a lot on how aggressive folks can be in rolling back tax preferences, both in finding what will count as revenue, although often i think is effectively spending to offset any budget impacts from that. also if you're concerned about the distributional impacts, if you're bringing down top rates, you'll want to look at the tax preferences in particular that benefit those folks as an offset to them. >> let me ask dr. altshuler before you answer, a simple yes or no. does it make sense to reduce the

corporate rate which i think there is a broad consensus on now without dealing with individual rates? yes or no? the answer is no. >> it's going to be difficult. >> if you have a top rate at 35% and reduce the corporate rate to mid 20s --oh. >> i think there's going to be a problem, yes. >> so yes, no. >> i guess the answer is no. and can i go on? >> yes. >> now i'm confused as to what yes and no mean. i think -- just guesting back to your -- to the question that you asked me directly, i think it's going to be hard through revenue neutral corporate income tax reform to get the corporate rate down to 25%. so i don't really see that -- i would love to be able to do that, but just looking at corporate tax expenditures and just cleaning up the base, i don't think we get to 25%, and i think that's where we do need to

go. so in answering your question, it makes sense to try to get to the oecd average because of the competitive pressures that we face that aren't going away. other countries have -- besides japan, canada and the uk are also lowering the rates. i'm not saying we should engage in a race to the bottom. i don't think that's good for the world either. but the reality is that our rate is 14 percentage points higher than the oecd average right now. as donald said, the two rates don't have to be identical, but they shouldn't be too far apart. you have -- what you're pointing out is absolutely right. if you have a corporate tax rate that's much lower than the individual tax rate, then all of the sudden the corporation becomes a tax shelter for high-income individuals and there are tax lawyers who are going to jump all over that and advise people how to deal with that. you should keep in mind that

once i incorporate myself to get money out, i'm going to be paying the corporate rate along with the individual rate, and that's why there's room for there to be a little bit of a difference between the two rates. how do we get to these rates that begin with a two? i think we've all been saying the same thing, and the commission showed us, broaden the base, take a deep breath, broaden the base. >> larry? >> the answer to the question is i think you do have to lower the rate. what has increasingly happened since s corporations have become common is that the corporate rate is really a way to purchase -- it's a convenience for the business organization to be structured that way. and the only people for whom it really makes sense anymore are

large institutions that are internationally competitive. so i actually think that although it would be ideal to lower both, the damage done would probably be manageable in part for a reason that professor altshuler mentioned which is, if you're now a subchapter s and switch over to a c, you pay the 25% rate that a c corp rate would be, but then your money is stuck in the firm. i don't view to take it out somehow. if you take it out, you're subject to the personal rate. this gets back to the main point that an income-based tax system really doesn't make sense because you get into all these complexities, is it going to be taxed once, twice, 2 1/2 times, three times? i know it's politically difficult, but in the end as rosanne said, all roads will lead to a vat. if we intend to be competitive,

that's where we're going to end up. >> thank you, chairman, for your time. let me say to colleagues, we're at 11:10. we have a good turnout, more colleagues coming. we'll have to go to five dib minute rounds. we'll start with senator widen. senator portman was on senator sessions' time. >> thank you. as far as i can tell, reforming the federal income tax is the only major policy response with an actual track record, an actual track record of creating millions of private sector jobs without adding to the deficit. here are the numbers. two years after a big group of populist democrats and ronald reagan worked together, the economy created 6.3 union none-farm jobs.

that is twice as many, twice as many jobs as were created between 2001 and 20008, the period of time when tax policy was partisan. so my question particularly for you, mr. steuerle, because you have this great history of '86, is there any reason why the principles of tax reform that were pursued in 1986 wouldn't be once again an engine for job growth? the heritage foundation scored senator gregg's proposal with me as creating 2.3 million new jobs per year. that's in the here and now. we've got to create more good-paying jobs. and because of your history, the first thing i want to ask is, do you see any reason why the principles of '86 tax reform wouldn't be an engine for job

growth again? >> well, you sort of set me up, senator wyden. i agree with your conclusion, tax reform, lowering the rate, broadens the base is good for the economy. how far and facet goes, i'm one of the people always reluctant to make that type of prediction. but it's in the right direction. and i believe that there's so many areas of tax and budget reform where we know what to do, and if we do them and move in the right direction, we often get surprised. what actually happened in '86, we actually thought that perhaps there was a transition period where we might have actually had a little bit of a slow growth to be able to compensate for the reform. you may remember by '86 we were already into about the third or fourth year of an expansion, the time when we often slowed down. instead, what happened after tax reform, things actually sped up. yes, i think tax reform especially is good for long-term

growth. what happens in the short term is hard to predict. but the lessons of '84 to '86 are fairly positive. >> those numbers are just stunning. i mean twice the job growth in the two years after bipartisan tax reform compared to the whole period between 2001 and 2008. that's a matter of public record. the second question i want to ask will get you, professor marron and professor altshuler, how find it pretty alarming how short shrift is getting in this p gregg and i get the rate down to 20%. that's a matter of public record. but small business, that's 80% of the businesses in this country, sole proprietorships and partnerships and the like. and it seems in much of the

discussion small business is almost getting to be an afterthought. i'm going to do everything i can to keep that from happening. i wonder what your sense is about how small business is fitting into this discussion, professor marron and professor altshuler. >> the first point which i think where you're going, as was discussed before, we now have many businesses structured so they pay their taxes through the individual income tax and that as pass-throughs as you think about tax changes that may make life easier for businesses to create jobs, you want to think not just about corporate tax reform but the benefits of lower rates and whatnot on the individual side. the caveat with that is while many, many companies and businesses show up on personal income taxes, the really, really large ones and the multi national ones are still over on the corporate side. then with the security and safety of being a think tank and academic guy, i will inject the one thing, there's been a lot of

interesting research on what are the key things for creating jobs and moving the economy forward. it turns out that small business isn't exactly the slice that drives it. it turns out there are a lot of small businesses that don't grow -- perfectly respectable businesses we like. if you're interested in what are the job creators, it's a small subset that turn out to be the gazelles that create a lot of johns. how do you design things in particular to help those? >> i would only say -- i'm going to get you into a different area professor altshuler because i know my time is up. that's where most of them are. and certainly small businesses can become big businesses because of the entrepreneurial eng newt. that's why i don't want them forgotten. question for you professor altshuler and dr. lindsey, more than 90 u.s. senators voted against vat. as far z i can tell, the only

surprising part is it wasn't more than 90. i think the big concern for those who have been for that is there's a sense it's a back door plan to hike taxes, particularly taxes that are seen as regressive. since both of you are for there, how would you deal with the politics today of more than 90 united states senators coming out against this concept and, of course, the voelker commission didn't bring forward a proposal in favor of it. i look back at the bush proposal and they said, well, you can talk about it. they certainly didn't come out for it. how would you deal with trying to bring people around to your point of view given that recent senate vote and certainly the product of the other reports? i thank you for this extra time, mr. chairman. >> let me say very clear five-minute round is not going to work. we'll go to seven-minute rounds. >> thank you, mr. chairman.

>> senator wyden, thank you for the question. the answer is perseverance, education, education, education. helping people understand that the current income tax is broken and that we -- that the vat is an efficient tax and it is not necessarily a money machine. this is what people are afraid of. there's this idea that it's a hidden tax. it absolutely does not have to be a hidden tax. we put it on the receipt like canada did, speak about the canada experience. they're just north of us. they adopted a federal vat. it's not a perfect vat. but if you talk to canadian policymakers, they will say it works very well for them. i think education. the problem is that when you support a vat, it's politically very difficult. >> my time is up. but dr. lindsey, the people of my state have voted against a

vat something like 850 times which is barely an exaggeration. you should know your education challenge will be great. mr. chairman, you've given me lots of time. can dr. lindsey respond quickly? >> go ahead. >> thank you. first of all, if it were an add-on vat, in other words, adding it on to what we already have, i think the 90 senators were correct. why do we want to add another layer of complexity? i do think in the end, if you want to regain competitiveness, that is going to be the only avenue that is available. senator toomey. we'll go to seven-minute rounds now. >> thank you, mr. chairman. i want to follow up on a point that dr. steuerle made earlier with which i fully agree, the idea that we ought to equate and think about the total tax burden by looking at the total amount of spending. ultimately all spending has to be funded, all going to come

from taxes, whether at any given point in time there's a combination of debt and taxes. the real measure of the burden on the economy is the level of taxes. to just connect a few dots here, it's also interesting to hear the discussion about how there is a disproportionate negative impact. in other words, the negative impact from higher taxes exceeds the revenue benefit to the government from an increase in taxes. if we're saying the taxes are essentially equivalent to spending, then what we're saying is that as government spending rose and, therefore, the corresponding taxes, we're doing harm to our economic growth which is i think we're well within the range at which increases in spending are doing negative consequences to our economy. the question i have is also about the vat. dr. lindsey has argued against a combination of income taxes and vat. i think if i understand you correctly, it's because of a concern about an additional

layer of complexity. but i wonder about something else, also, that concerns me. if we had both, we could at least initially have both at what would appear to be nominally relatively low rates since you have two different sources of revenue. i worry that that would make it easier politically to raise rates and increase the total tax burden on the economy which we have already established from this panel has a disproportion nally negative impact on economic growth and, therefore, job creation. so i wonder if those of you who i think you might support a combination of a vat and an income tax, if you share that concern that it could lead more easily to a higher total tax burden and, therefore, poorer economic performance and lower job creation. >> senator, again, part of the dilemma is our spending rate is so much higher for our tax rate. for every $2.00 be collect in taxes e ear spending $3.00 now.

the spending goes up in the future because we have mandatory spending program that is have growth rates faster than the economy and they're unsustainable. as well, by the way, the number of tax subsidies as well that have high growth rates. g've got a dilemma >> the dilemma for botho political parties is that there is a sense that if they don't control the future that the party will. for so republicans, if they raiseif rates 't control the future, the other party will. for republicans, if i raise rates to balance the budget, all that's going to happen is that's going to keep spending higher. for democrats, my experience is, if we get spending under control which some of them believe they did in the 1990s, then all that happens is we end up financing these tax cuts. actually i think both parties are right. technical academic language they're in what i call a classical prisoners dilemma. basically, you always want to

argue for one side. if you don't, sbopd i else is going to take advantage of you. it's an unsustainable situation. to me t answer to your question which goes beyond tax policy, you have to come up with budget rules that limit both political parties whether they're in power or not in power from controlling the future so that, yes, if the public bants to vote for higher spending in the future and finance with a higher vat, then they get it they can't do it in a way that votes for higher spending now that forces the taxes to go up. similarly on the other side of the aisle, you can't vote for tax cuts now that basically try to force spending cuts into the future because of these deficits. what both political parties have succeeded in doing is creating this -- not only this enormous deficit, but boxing themselves in so much that, as i say, we've got a government where when you walk into the office -- when you walk into the congress, both this congress and the last congress, every dollar of revenue already committed. you didn't have a single dime to

spend on discretionary spending or do reform because it had been committed to your colleagues on the past. >> i wonder if we could focus on the narrower question i'm trying to pose, the increasing danger of increasing -- >> the bottom line is yes, i think the danger is on both sides of the aisle unless you can figure out ways to constrain both parties as to how much deficit they can do now, that they push the tax rate up or spending rate down. >> dr. marron? >> am i getting a green light? a couple thoughts. first, as rosanne said, i would invote the example of canada as an important one to keep in mind, they introduce add vat at a 7% rate, made it very visible. eventually over time they brought it down to 6% and i believe 5% which shows a country relatively similar to ours in many regards was able to sbro a

vat and not let it grow. some of what gene said, the challenge is we have to afford the government we're going to choose. what you discover if you look internationally is societies that have chosen to have larger governments tend to choose more efficient tax systems. they tend to do more consumption taxation in relative terms and less income taxation in relative terms. i think the reason folks here have been talking about a vat as a possibility is we think that given the pressures of an aging population and rise in health care spending, that may be what the future looks like for the u.s. rather than paying for that by ratcheting up income taxes, it would be more going to a mix rather than the consumption end. >> i don't think i can add more to what donald just said. i agree with everything he just said. i think the idea that by having a vat you automatically have a bigger government is based on this idea that it's a hidden tax and people will just let that

tax go up and up because they don't feel it or because they don't see it. i just don't see that as being the case. >> dr. marron did seem to be suggests there is at least a correlation between big governments and a vat. my concern is ever bigger government, however you fund it leads to slower economic growth and lesser job creation and the lower standard of living. dr. lindsey, i wonder if you could comment. >> i think you're exactly right on the hybrid system. because you have lower rates, it makes it easier to raise one and then the other. i think you're right. i was struck by senator wyden's question. i had an answer that i'll direct to you on the political issue. there's a large movement in the country for something called a fair tax. i personally don't think that's as effective as what i'm suggesting, but the economists

disagree. there's an example of something that's close to a vat that has a large political constituency for it in a place you wouldn't expect. i don't think it's at all an impossible task. >> thank you. let me go to senator coons. senator coons i want to welcome to the committee. he's a new member here. actually filling out the term of senator biden who was a founding member of the senate budget committee. and senator coons was the county executive of newcastle, the largest county in delaware. so he has actually balanced budgets and worked on ways to promote economic growth. we're delighted to have you join the committee, senator coons, a graduate of amherst, bachelor of science in chem tree and political science. holds a graduate degree from yale in law and divinity.

maybe we can get spiritual guidance as well. it would be valuable to the budget committee. the first truman scholar to serve in the senate. senator coons, welcome to the committee. >> thank you very much, chairman. thank you for your leadership on these very important issues. i very much look forward to working with you and with senator sessiontion. as you both said in your opening statements, we recognize across the partisan divide of the congress and broadly across the country regardless of region, background, experience or education that we have as this panel has so uniformly and compellingly testified as simply unsustainable and unworkable tax system in the united states. we face a crushing national debt burden, a challenging deficit. you have all worked clearly very hard in putting together a series of proposals. as the questioning so far has surfaced, one of our big challenges is taking insightful, detailed thorough proposals and actually moving them into

political reality. we have very real challenges doing that. in my role as county executive, as you mentioned, chairman conrad, i did balance six budgets. it was not easy. i required broad recognition of a need for shared sacrifice, both in reductions in spending and broadening the base and increasing revenue. i spent time as in-house counsel of one of delaware's most innovative manufacturers. i'll focus my question on corporate taxes. i'm interested in how we might successfully encourage or incentivize, increase corporate investment in r&d, manufacturing and new hiring in the united states and in what our longer-term trajectory for it ought to be on treating corporate tax rates. i'm more interested in this exchange in larger corporations who have significant offshore balances. one of the comments that was made i think was by dr. marron

was about the distorting effect of temporary tax programs. as a participant in the lame duck session i was disappointeded we made large tax moves that were for one year, as someone long concerned about the r&d tax credit, it makes no sense to me it's here, gone, here, gone. we do not do long-term sustainable tax policy. if i might, to every member of the panel, please, i would really appreciate a response. if we're in a global situation where, as i've heard from you most of our competitors are at a vat style system, cash system rather than income system, and we do have or will have the honor as of april of having the highest of the oecd countries combined corporate income tax rate, what is the best path forward to incentivize both in the shorter term the repatriation or mobilization and deployment of capital from american-led corporations, and in the longer term, what is the

balance that makes us most competitive as a national economy given the political realities pointed to by the panel of the difficulty of moving easily to a vat? is it to dedicate the vat to particular purposes? is it to apply it only to narrow classes of economic activity? some have proposed a repatriation of foreign earned profits holiday or for limited purposes. how do we strike a balance here that allows us to most effectively access and mobilize the innovative capital reserves of the american corporate sector please? >> senator coons, i confess because of international, i don't think there's ever a perfect answer. you start with inconsistent tax systems because different countries are different tax systems. you never can get all the neutrality you want. you start with inconsistency and try to minimize some of the distortions that result.

i can only make some suggestions that move in the right direction without giving you a perfect solution. i should comment in tax reform in '84, i went around to every staff member -- 20 modules, several hundred pieces, there are thousands of provisions we're talking about and talking in a very shorthand basis. they ended up suggesting something we got into the proposal. three weeks later they said we don't think we got that right again. so ever since then i've been sceptical about getting a perfect solution. my colleagues, especially rosanne altshuler, if you lower the rate, you move in the right direction. that really helps a lot. lower the rate moves in the right direction. the repatriation issue i think is a bit of a bogus issue. basically that's where people put a check mark of where they're keeping their account. the money is accessible in a lot

of different ways regardless of whether they repat at. i do think we haven't given much attention in the way the current system allows people to arbitrage, moving debt abroad. individuals do it, too. that's one way of getting at some of it i think there are several things we can do to move in the right direction. i'm less enamored -- >> dr. altshuler said we should haven't a race to the bottom in terms of lowering corporate rates. this is obviously a hypothetical. is there a point below which you shouldn't keep reducing income tax rates for corporate income? >> is this a question for me? >> sure. >> is there a rate? boy, then what you're thinking about is, we're all in this together as a world and how are we all going to behave as a world and i think that you're not going to get --

>> exactly. you're not going to get corporation. the point is, to answer your original question in terms of what can we do, as gene pointed out. step one, lower the rate. step two, look at that rate. if the rate is low enough, then it really doesn't matter if you're tear torl or if you're worldwide. that becomes less important. getting the rate to that level is going to be very difficult. you shouldn't do it without a vat. so step three is deciding -- is stepping back and saying, incremental reform at this point doesn't work anymore. we can't do a repatriation tax holiday. as gene mentioned, it doesn't -- it doesn't necessarily lead to firms bringing back money and then investing it in the economy. it's just -- it keeps us going down this temporary tax holiday path that is very unhealthy, unpredictable and not good for

the economy. it's time for us to sit down and get the information that we need to decide whether or not territorial would be good for us, that does depend on what rate we get down to. or should we go to a worldwide system? for instance, that gets rid of defraud. we need to be thinking about fundamental reform of the international tax system, not incremental reforms. >> thank you. any other comments from the panel in response to that? >> i think we better, in fairness to the leagues that are here, we should go. senator whitehouse? i'm sorry. wait a minute. senator sessions. he'd conceded his time initially. so we have to go back and forth here. >> i'll follow up on senator coons' excellent line of questioning. it's something i don't fully understand. mr. lindsey, you didn't get to comment on it.

maybe you could start. i understand we're one of the very few nations that tax outer territory income, and is this good for jobs in america? is it good for the economy? and do you have any comments to follow up on senator coons' question? >> i'm going to give you an answer that you're going to hate and i hate. the answer is it depends. i think that was the comment about whether or not we should move to a territorial system. we set it up that way. remember, we tax everything, but then we give a credit against the foreign income taxes paid. and then we tax the money when it's repatriated. it gets to be very complicated. if one looks at why we did what we did when we did it, it was really a decision post world war ii to encourage the global

participation of american firms in the rebuilding of the world. at that point it made sense because we didn't have competition. it makes less sense now. i think senator sessions, the theme you heard here was the single first thing you can do here is lower the rate and as evidence, in all of the agony that ireland has gone through recently, the one thing they refused to give on with all the pressure was the 12.5% corporate rate. because for them that is a key competitive advantage. it underscores the importance of us lowering our rate as a first step if that's what you're going to focus on. >> i heart it stated, some might suggest, that that low rate was a problem in causing their economic difficulties. i've been told that's really not so. do you have an opinion on that?

>> well, they had -- most of their problems are self inflicted and has to do with their financial system. but what they have been able to do is attract a lot of headquarters for manufacturing companies, particularly the european headquarters by offering that low rate and it's of enormous competitive advantage to ireland. we're not ooir land. i think lowering the rate would be the consensus, first thing you could do. again, there's a lot of evidence that you could raise revenue without broadening the base simply by lowering the rate here so something more of an international norm. >> a lot of people don't realize how close the competition is among businesses in the world for market share. let's say canada goes to 16.5 as i think they are, and we were to reduce our rate to 28 or 27. companies seeking to build a

plant along the border, would that be a factor in whether or not they built that plan in the united states or in canada? >> it certainly would be a factor. it might be a decisive factor. >> a lot of factors. but i don't think it's any doubt that it has the potential to cost economic growth in our country, a corporate tax higher than the national -- the worldwide rate is a threat to us, and at this point in history, job creation is so important. everybody is saying the corporation is doing pretty well. this is happening, the stock market is doing well. but jobs are not moving much, and we can't have tax policies that adepress job creation. briefly let me ask you committee members, as part of complexity,

should not we consider the uncertainty of our tax situation, the temporariness of it. for example, we've got the rates just for two years. the death tax is set for two years. the amt comes up every year. nobody never knows -- physicians are worried over their doctor fix on medicare. are those factors that have an adverse impact on our economy, the uncertainty of what will be in the future. ? . >> mr. sessions, the answer is clearly yes. i think everybody at the table will say that. i'll give one caveat. sometimes people say let's deal with the uncertainty by making permanent everything in the code. there is this tendency to look at mandatory spending and say, gee, we've got all this stuff on automatic pilot. we need to get it off of automatic pilot. i think we have to be careful. we talk about getting rid of the uncertainty. we don't want to put everything

in the tax code, including a lot of things we don't like, five educational subsidies instead of one or none, to put those on automatic pilot, too. so when you go towards certainty, that doesn't mean you have to make something permanent and permanently growing. you may put it on a five-year fix or ten-year fix or something like that. i'm hesitant of solving that problem -- >> i recognize that's a fair point, but i think all of you would agree that that uncertainty is another negative factor for our economy. >> if i can, absolutely, as i said in my opening remarks, i think it's quite striking today that every single significant component of the u.s. federal tax code has significant temporary tax cuts in it. that's not something we should aspire to in the long run. everyone understands what the tax code is. as gene said, make sure you have a system in place to review important provisions periodically to see if they make sense. allow people to have some notion of what's coming.

the one caveat i would put on that is just the elephant in the room is the unbalanced fiscal situation we have which even if we allegedly pass a permanent tax system today, unless we have some solution to that so that we're going to be able to avoid the unsustainable build-up of debt, there's still uncertainty about where we're going. part of solving the fiscal challenges is part of eliminating uncertainty. >> mr. lindsey, you've been there in the government. to do tax reform and deficit reduction all at the same time sounds almost unthinkable, but in a way politically sometimes it may come together better in a crisis than in a noncrisis. do you agree, mr. chairman? >> i do. >> would you agree with that, mr. lindsey? >> yes, i think we have no choice, and sometime in this decade economic circumstances are going to force us into solving our problems. >> briefly, let me just say, mr. chairman, i think senator toomey

is correct. for you thinkers, the reality politically is that not that american people oppose something like a value-added tax, the borts, neal borts fair tax idea is very popular with a lot of average american people. but what they believe, and i think they are correct, if we make another revenue stream possible for the government to extract a larger percentage of their wealth to send to washington, they're not happy about it. so mr. lindsey, you suggest you could solve that problem. briefly -- maybe we shouldn't go there, mr. chairman. you think you could do it in a way that would give confidence that we weren't just adding a new way to extract more money

from for the american people? >> i'm not the expert at the politics of it. it would seem to me one of the concerns is, if you add on another tax, not only is it bad from an economic point of view because of complexity, but you also have the issue that you're talking about. so again, i would stress getting rid of all of the current taxes. i would add the payroll tax as well. one of the -- if we're disadvantaging american workers because we don't have or adjustability, you want to make everything border adjustable, throw all the taxes into something that is at the -- >> you think that's doable? we could actually accomplish such? >> well, members of the panel might be able to think it's doable. we don't have to run for re-election. >> all right. senator whitehouse? >> thank you, chairman. i noticed the other day that the

irs had reported that the 40 top income earners in the country who averaged income each of $344 million in the year that they were reporting had paid -- paid total federal taxes of 16.6%. so i asked my staff to tell me at what point in the income level an ordinary working american got to start paying 16.6%. it turns out it's $28,1 00. i said what are regular jobs in that area? a hospital orderly in providence, rhode island, earns $29,100 a year. if you look at our current tax system and start with the average taxpayers who makes

$60,000 a year and pays about 20% in taxes into the system and then you drop to my orderly who makes less, and so he pays less, he pays 16.8% it turns out, then you drop to the 4 highest income earners in the country who pay less still, they pay only 16.6% and then you drop to general electric which on $11 billion in income paid 14.3%, then you drop to prudential financial which on three-plus billion in income, five-year averaging here, paid 7.6%. and if grou go to the ryan plan, those $344 million earners will drop to around 0%, maybe one or two percent at highest because of elimination of the capital gains, i cannot help but agree

that the facts show we have a tax system that is upside down and the better off you are and the more powerful you are the less taxes you pay as a percentage of your income with the poor hospital orderly in providence, rhode island paying a higher percentage of his income than the average of the top 400 income earners in the untri at $344 million a pop. i applaud your direction. i think we have to go there. in evaluating the vat tax which a great number of you have talked about, my question is this, could you tell me a little bit more about the trade and competitiveness effect of the vat tax, particularly in light of how many other nations have gone to one and given what appear to be its trade and competitiveness benefits? do you believe that the huge

move by other nations which export a great deal into our economy was done strategically to take advantage of those trade and competitiveness effects? in a nutshell are there competitive effects to a vat tax and do you think other nations who have gone to it did it with that purpose? >> i think most economists would argue that competitiveness is not driven by whether you have a vat. the competitive -- if you want to call it the competitive advantage of a vat is it keeps you from raising high tax rates to an income tax -- >> let me give you an example. >> if to a hike income tax if that makes sense. >> let me give you an example. let's say you have a car made in sweden or germany. they have a v.a.t. tax. the revenue never attaches to that product. it leaves their country tax free and it comes over to our country and is sold tax free here in our country, in effect from their home tax burden. we, on the other hand, have home

companies that pay corporate income tax and various other taxes. that tax burden gets put into the price of the car, so when the ford comes up against the volvo in the american market, the volvo is, in fact, tax advantaged versus the ford because sweden chose to collect revenue in a v.a.t. tax which we choose to collect in a corporate tax. the v.a.t. tax does not go into the price of their product. the corporate tax does go into the price of our market. and if that's accurate, does that not create a competitive disadvantage? >> again, your analysis is correct, i think the higher tax rates and the income tax do create some minor competitive disadvantages. i don't want to overstate the case, however, because i do -- i do want to emphasis that a lot of issues of competitiveness have to do with wage level, have

to do with entrepreneurship, education levels. so i just don't want to overemphasize -- the advantage of the v.a.t. i see -- i do favor a v.a.t. for those reason, but i see the main advantage is it keeps you from raising rates outside the v.a.t. it's not that putting on a v.a.t. gives you a competiti competitivenecompetitive advantage. >> let me answer the question of why other countries had a v.a.t. when you look back at history, what happened was they had very inefficient cascading retail sales taxes, and they -- the reason that they went to the v.a.t. was to replace those retail sales taxes with a more rational system, a v.a.t., is a more efficient sales tax. if you look at canada, and i've looked at that experience, it really was, we've got a big deficit problem, we need this revenue. i don't think that us adopting a v.a.t. on its own is going to

have hunl competitiveness. if we were to just take the system today and add a v.a.t. on, what would happen is over time, exchange rates would adjust and we wouldn't -- it wouldn't add to competitiveness. what happen gene said is exactly right. what the v.a.t. would allow us to do is buy down the v.a.t. in combination with broadening the bags would allow us to buy down our corporate income tax rate and that would have a big competitiveness impact for us. and do have keep in mind that oe corporate income taxes also. it's not that they don't have corporal income taxes. they do. >> thank you very much. >> senator sanders. >> thank you very much. these hearings are like a narcotic to me. i could be here all day. i get hooked on these things because they're absolutely fascinating and i appreciate the panelists that are here.

as we mentioned the other day, i do applaud the panelists, but they do have a perspective. and i hope someday we can bring in economists who have somewhat of a different perspective. i think dr. sterling made a point that you can't just look at one -- if you're talking about international competitiveness, for example, you just cannot look at tax rates. i live an hour away from canada, and i'm -- my canadian friends would be very impressed by the degree to which you laud canada today. canadian health care system costs about half of what our health care system does. by the way, do you think that moving to a single payer national health care system as they have in canada would help our economy? if we're going to talk about the canadian government and their policies. they have health care and spend half per capita than we do. how's the health care in canada

should we adopt that? >> i wouldn't necessarily say canada is successful because -- but they have a lower spending right -- >> right. >> they can keep a lower tax rate, which is an advantage. >> and everybody who understands the issue understands if we want to go to a low health system, we need to go to a single payer. would you suggest that? >> this is a budget committee. we always have a debate over what the health system we adopt. no matter what we adopt, it should be within a budget. >> that's not my question. >> you can't have an open-ended system. >> you talked about the canadian tax system and lauded certain provisions. should we look at the canadian single payer system that provides health care to all of their people at about half the cost of the american -- >> i'm trying to find the right words to wiggle out of this question the same way gene did. it's absolutely true there's a

lot of waste and spending on health care in the united states if we could eliminate that, that would be -- >> you wiggled out of it. >> i am not an expert on health care. >> but economically, you would all agree that health care is a huge burden on our economy, no one disagrees with that. canadians seem to have done substantially better. dr. lindsay, something we should look at? >> we should look at everything. what really decides competitiveness is cost effectivene effectiveness. i mean, the worst thing you can have is a high tax, low benefit system. if you have a state, for example n the united states with, you know, relatively modest taxes but efficiently delivered public services, those states are the ones that are gaining population and jobs. so i don't think you can look at anything in isolation. but we need to improve efficiency. >> and that's my foint. i think we look at -- for

example, we can talk about canada. again, i live an hour away from canada. when wall street collapsed here, their banking system did not collapse because of much heavier levels of regulation, right? >> senator, i -- that's something i do know something about. i would not wish the canadian banking system on america. >> all i'm saying is on these issue, you can't isolate -- if you're talking international competitiveness, not to talk about wanls or environmental protection or trade policy, they're all lumped together. i don't think anyone disagreed with that. the other point i wanted to make, not to talk about a canadian single-payer system, what i haven't heard discussed, while taxes are enormously productive, everybody agrees our current system is not working, needs fundamental reform, we have to look at it within other contexts as well.

for example, during the bush years, we saw substantial tax reductions given to the wealthiest people in this country and yet we had perhaps the worst record of job performance at anytime since herbert hoover. so it's not quite so clear -- other factors may be involved in that. but under bush in eight year, we lost 500,000 private sector jobs. we gave tax breaks to the very wealthy, gentlemen, we lost jobs. dr. steriling? >> well, senator, there are a lot of factors involved. >> sure. >> the end of the bush year, we went into a recessions. when politician pligss brag about the job growth they've had, 90% of what they've talked about is the influence of demographics, and what we've dodged for several decades is when we moved into -- after 2008 and we have all these people starting to retire almost at the

rate we're bringing people into the work force, it's going to dramatically decrease the amount of jobs. >> and i'm not arguing -- i'm just saying -- my only point was these things are complicated. >> as a matter of revenues, i have emphasized that it's something that has been hard to get into the budget calculus, but if we can figure out ways to get older workers to work, who i think are the largest group of potential workers, the most -- largest pool of underutilized human capital in our economy, people 55 to 75 to 85, it has a revenue effect right now we do not score. >> when we have such a -- when we talk about revenue. there are other reforms that can talk about revenues. >> that's what i mean i get hooked. we could go on for many hours. dr. lindsay, you mentioned it might be advantageous to eliminate the payroll tax. you just said that a few minutes ago if i heard direct krektly.

>> what i said was if you go to a value-added tax, you want to roll everything into it. the value-added tax goes back to the competitive issue and how it plays out, if you go to the competitive advantage, why wouldn't you want to do it for all our taxes? >> because we live in the real world and as of today, to the best of my knowledge, social security is completely funded by the may roll tax. do you believe in social security? >> of course. what i'm suggesting is if you're going to take advantage of tax reform, you want to roll as much of the tax code as you possibly can into the most efficient tax you can. and obviously you would continue to fund social security with that new tax. i don't see where there's any inconsistency there at all. >> hold it, hold it, i don't

have a whole lot of time. so let me just ask you the questions, okay? my point is right now, we're having a major debate about the future of social security. >> yes. >> and social security is funded independent of the u.s. treasury by the payroll tax. lumping -- let me finish -- lumping all you can -- you can certainly fund a retirement program for the eldererly in ways other than the payroll tax. i'm not arguing that. but right now the strength of the payroll tax in terms of protecting social security has nothing to do with the deficit. if you lump everything together, and there are guys around you that say well, eve got to make cuts. you will agree with me one of the areas that could be cut if you're funding a retirement program for seniors out of the general treasury could be programs for the elderly. is that a fair statement? >> this congress has cut social security any number of times, even though it's funded by the payroll tax. so there is no linkage between

how a program is funded and whether or not it's cut. >> oh, i wouldn't say that. >> '81, '78. those would be two good dpampls. changes in the tax on social security benefits, i forget which year it was passed. >> '83, i think. >> there are many, many times we have adjusted social security. >> adjusted social security, yes. >> we cut social security benefits without changing payroll taxes one bit. >> actually, we raise the payroll tax in 183 so it is now a viable program. i don't want to belabor the point. i guess i've run out of time. >> senator merkley. >> thank you. i want to have congratulate my colleague from oregon, senator

wyden for bringing up this issue. we have a very high marginal rate then tons of exceptions in terms of deductions and credits. a few years ago when i was in the state legislature, i went to the portland development agency, i said, you know, oregon is 47th in the nation, in other words, one of the lowest states in terms of the tax burden it places on business. is this a selling point in attracting business to the state of oregon? and the answer was no, it's not. i said well, we're 47th, one of the lowest effective tax in the country, why isn't it a selling point? well, we have a very high marginal rate and companies largely look at that marginal rate. they don't count on getting the exceptions and the deductions and the credits, so it's proved of little value in attracting business to our state. so i said well, wouldn't it make a lot more sense then for us to be 47th with a very low marginal

rate and fewer deductions and credits and wouldn't that prove more attractive? and the answer was yes, that would be ha mu would be a much better sell. i think the united states has a parallel problem. i would like you to comment on this question of whether we become much more attractive to companies deciding whether to site themselves overseas. >> just a quick answer, absolutely. and that's what i wrote about in my testimony. you hear a lot of people saying well, you know, the statutory rate is really high, but once you take all of those credits and deductions and loopholes into account, the effective tax rate is really low. so we really don't have to do anything about the statutory rate. two problems with that.

one is that if you look at effective tax rates, they're not as low as you may think. they're not that much lower than the statutory tax rate, but most importantly, it's very individual firm specific. the statutory rate is an important factor, as you just pointed out. it affects location decisions, it affects financing decisions. it affects how much wasteful tax planning you do. it affects how much you invest. so it's a very important policy lever, and it does make sense to lower the corporate tax rate. >> anyone else want to comment on that? >> well, senator, i think we would all agree. i have somewhat tangential point, but a lot of the discussion we've had at this table have gone to issues like international tax which can be complex. but i would like to bring us back to where it's maybe all our

testimony began, which is there are a whole variety of tax changes that appeal to both sides of the aisle that are not -- when we have these deb e debates on taxes, remember, the entire revenue side of the budget and a quarter of the expenditure. we're talking about thousands of programs. there are so many things that cut across the aisle that both sides would agree, we don't need five educational subsidies, we don't need ten capital gains tax rates. we could include the burden as the tax deaf fit we're putting on them. senator wyden showed, you can start the narrow in which there's a consensus and build out to where there's not a consensus. to the extent we broaden the base and lower the rate, there's a certain point where that doesn't work because there's certain rate reductions that's hard to have finance.

that wasn't mean you can't go as far as you can. start where we can agree and hold off on the issues where there's more controversy across the aisle. >> let me turn to another topic. when i was here in 1976 as an intern, there was a tax reform that addressed a lot of various exemptions, deductions, credits. and so folks from oregon were writing in with all their perspectives on could their home office be deducted and blah, blah, blah and so forth. a lot of anxiety over each and every one of those potential changes. but a number of changes were made. and in 1986, senator packwood led a major effort, a much larnler effort to do the same to simplify in large degree. but it appears to me between '86 and now, we basically have had a 24-year period where we haven't

gone back. instead of having ten years of handing out credits and deductions and okay, let's come back to some sort of sanity, we've had 24 years where we've been handing out complexities in the tax code without coming back. are we long overdue for this major top of discussion? >> yes, absolutely. i think going back to one of the issues i raised in my testimony, i think one of the things that's driven that over the last 25 years is that you can dress up special eductions, exemptions and tax cuts which are more politically palatable instead of spending increases. you're using the federal government to direct resources to a certain kind of activity, but political they have looked to be tax cuts. going back to one thing that gene has emphasized several times, there's a challenge in the way we talk about these issues. and clarifying will be part of the steps towards addressing

them. >> i would point out we took the top statutory rate up from 28 to 39.6 over that same period of time and the two go hand in hand. reversing both is i think on the table. >> one final question. >> when i look at the number, what's increasingly happened over the years is congress has increasingly gone to what i call the giveaway side of the budget. both tax cuts and spending increases. the challenge always for a budget committee is you recognize there's the other side of the ledger and we've got to figure out a way to raise the importance of what that means. we can't let deficits as if they're free money when we do spending increases and tax tut kuts. . >> i think i'm out of time. would there be a possibility of one more question? >> yes, sir. >> okay, thank you. i've asked my team to help identify specific examples of how our tax code exports manufacturing or jobs overseas,

and one specific example they have put forward is that when an american company decides to build an overseas factory, if they take their loan out to build that factory in the united states, the interest becomes tax deductible. so essentially the american taxpayer is therefore subsidizing the financing of the overseas construction that then incentivizes the shifting of jobs overseas. is there a rational argument for this, or is this just a crazy thing to do to subsidize the construction of factories that compete with american factories. >> do you have an hour to get into this? and a lot of headache medicine? >> it sounds like we're going to have a follow-up discussion. >> yes. it's not -- it's not the case that all corporations are able to deduct all of their interest expenses that support foreign

investment from the u.s. rate. we do have a system where interest on domestic lending is allocated abroad so that you are not allowed to deduct 100% of your interest on foreign domestic interest to -- you're not allowed to deduct 100%. there are interest allocation rules. they're very, very complicated. we have a better rule that actually is on the books to be enacted, but we just keep pushing it out. it's called worldwide if you think -- fungibility. it's been pushed out to, what, 2028 now? >> if a firm can deduct interest

on loans to build a company abroad, they generated themselves a negative marginal effect of tax rate, which means we're subsidizing their investment abroad. the difficulty of this is understanding the extent to which this is happening to specific corporations. it's complicated. >> but it is happening. i mean, i have had people come to me from multifinancial accounting firms who had clients doing this. it so troubled them they came to me. they would not divulge the compani companies, but they show med very specifically, companies from the united states developing a net marginal

negative tax rate, and in effect being subsidized by american taxpayers to put jobs overseas. and i think this is a bigger problem than has been acknowledged. it is according to people who come to me from very large accounting firms, they believe a rapidly growing problem as people figure out this mechanism. just as a factual matter, earlier on, we were talking about canada's deficits so i asked to look into that, they were at 101.7% of gdp in 1996. they brought that back down to 69.7% of gdp. partially with the institutional of a v.a.t.

it was not exclusively v.a.t., but they used a v.a.t. in combination with other taxes. you don't see many countries that have exclusively a v.a.t. almost always they are hybrid systems, part income tax, part v.a.t. and there was an earlier question from senator whitehouse with respect to the competitiveness advantage. one part of a competitive advantage is those taxes are rebatable at the border. and so the example that senator whitehouse was giving is white accurate. we have our our taxes built into our products that we're trying to compete with foreign countries. they have a tax that at least partially is rebatable at the border, so when those goods come into this country, they haveless of a tax burden on them. that confers a competitive advantage. now, we have tried to counter that with disk and fisk and how many it rations. mr. lindsay, you would probably

know. and the problem is, we keep getting ruled ill leet egal on things we try to do to level the playing field. many of us believe we are on a course here that at some point we're going to lose our ability to try to make our people competitive. that is we're going to get ruled g.a.t. illegal, we're not going to be able to fix it and then we're going to fiesace a 20%, 2 advantage going to the foreign manufacturer. so one of the reasons we wanted to hold this hearing today -- i mean, these are serious, serious matters for this country's competitive position. and i don't think we want to allow ideology of either side here to get us away from the practical reality of what we confront as a country. and that is a competitive

position of the united states. senator white? >> thank you very much, mr. chairman. i think you make an important point and my friend and colleague 23r6 oregon, senator merkley does as well. these international questions are enormously important. and i thank my colleague for making it. that was the one i wanted to ask you about and that's transfer pricing. just to kind of put this in a little built of context. senator greg and i went after the tax issue week after week for two years in order to get where we were essentially, a modernized version of '86. my guess is we could have spent another five years working through the territorial and the international situation. and i think the -- we got to where we were by asking the '86 question, which was how low would you have to get the business rate to be in order to get rid of some of what you're doingen in terms of deferrals

and credits. that's how we got to a corporate rate of 24% and junked a lot of what currently goes on internationally in terms of deferral reform tret krets. -- credits. transfer pricing takes this to a whole different level. and here's a question for you, dr. shueller. you can create paper transactions between subsidiaries of the same company to allocate expenses and profits to selected companies. what we found is people like ed kli fl ebarg, head of the koint tax commission said look, if all you do iebarg, head of the koin commission said look, if all you do inebarg, head of the koint tx commission said look, if all you do is is go to the transfer

pri -- territorial pricing, it will be a big problem. i appreciate the time the chairman is giving me. do you agree essentially with that theory that pure territorial tax approaches as constituted today wouldn't do anything about transfer pricing, could make the problem worse, and if you do, what would you do about it? because that's where we bog down and a lot of my colleagues clearly are interested in this. i want to be responsive to this. if you agree with that theory, what would you do about it in order to bring folks together like you did in '86 and get stuff done. >> this is a tough one. going to a territorial tax system does increase transfer pricing pressures, income shifting pressure, but only to the extent to which the

repatriation tax is a burden in the first place. let me be simple. yes, income shifts incentives will go up with the territorial tax system. how much they go up is an open question, which, again, i guess i'm saying yes to you. and the question that i have these days is how much worse does income shifts and transfer pricing get if we go territorial and lower the rate to 24%? because the studies that i've been looking at and the studies that have been done in the past always look at territorial with the 35% rate. but if you're lowering the rate to 25%, you're taking some of the pressure off. of course, there's still 0, you know, there's still 0% taxes out there.

both solutions to the international tax problem are not perfect. i like your solution quite a bit. i wrote a paper on it. it is elegant, because by getting rid of deferral, you get rid of the transfer pricing problem faced by with u.s. multinationals. that doesn't mean -- but there's -- there are two problems that we have and territorial has problems, too. but just to bring them up. what i worry about is, if we were to get rid of deferral and what we would be doing is going in the -- and i'm playing the two-handed economist here. okay? so if we were to get rid of deferral going in the opposite direction of other countries yes, we get rid of this transfer pricing problem with our u.s. multinationals. but we're still at, you know, this 24% rate.

the oecd average is 25%. are we going to lose headquarters? in other words, you're going to have foreign multinationals that are going to be able to enjoy our lower rate, okay, but not face worldwide taxation. so do we lose u.s. headquarters? and i don't have an answer to that question, but i think it's really important. >> chairman, you've given me a lot of time. and i think it's a really appropriate point as we wrap up. the whole exercise is about incentives for an economic renaissance that this country wants so much at this time. if you go to a labor union meeting oer a business meeting, you can get applause for a 24%

rate, you're junking jobs overseas to get red, white and blue jobs in america for incentives for bringing those kinds of operations back and having the headquarters you're talking about. mr. chairman, thank you so much for your time. >> let me just say, i used to be a tax commissioner. i used to be chairman of the multistate tax commission. i engaged in negotiations in the reagan administration on the question of multinational -- these multinational jurisdictional issues. when i was tax commissioner, we found some amazing things. i'll never forget, we followed transactions of a major grain company and found that one ship of grain changed hands eight times before it left the continental united states before we lost track of it offshore. i saw other examples, not in my tax work, but in conjunction with the revenue service where a company showed no profits in the

united states, series of transfer prices, showed $20 million of profits in the cayman islands, with unemployee. i always said that one employee was the most efficient worker in the world to produce $20 million of profits and he actually produced nothing. the only thing he produced was tax returns and corporate statements showing they had periodic board meetings to meet the requirements of that. so look, these are enormously complex subjects, but we have an obligation to short through them. i also want to commend my colleague senator wyden. i said this in another forum. there are very few members who have come up with such significant contributions, operating with just his own

staff. not a committee staff, not a committee chairmanship. and really sweep iing well thoughtout, bipartisan proposals. and he deserves krems credit for that, and i'm glad we pursued the questions here today. i thank this panel so much. you've been terrific and thought provokin provoking. the committee will stand in adjournment.

>> the whole environment of politics had come apart. it had become polluted and destroyed and violent.

>> q&a sunday documentary producer nicolette on hubert h. humphrey, the art of the possible. >> part of the reason for doing the documentary was to show another side of this because everyone just remembers someone who is linking lyndon johnson's boots and head mob minded his own and people didn't understand the pressures he was under which is vice presidency in 260 a. >> q&a sunday night at 8:00 on c-span. >> next former british foreign secretary jack straw testifies before the british iraq war inc. angry for the third time. during the four-hour hearing, mr. straw covered several details on the lead up to the war including his reservations about president wishes axis of evil state of the union speech in 2002. and conversations with within prime minister tony blair on the legality of invading iraq.

>> good morning everyone.go i am sorry we have started a few minutes late this morning. a this is because of a technical and we are now ready to start hearing.o the hearing this morning from the right honorable jackg. stra mp who served as foreign secretary from june 2001 until may, 2006.y, we heard evidence from mr. straw into half-day sessions in january and february last year and he also sent the inquiry written statement in advance of each of those hearings. in preparations for thisfor morning's hearings we askedw mr. straw to produce a further statement in response to a number of reticular questions

from the inquiry and we are grateful p for that.gr is now being published on our web site.d we are also a comp wishing ashi number of other documentsts, including some which aresome relevant to mr. straw's statement for this morning's hearing. now this morning we shalla concentrate only on those areas where there are specific points we wish to explore withpo mr. straw.sh we are not addressing all the areas for which he was responsible as foreign secretars and which we may wish to address in our report. as they say on each occasion ort. as i say on each occasion we've recognized that witnesses give evidence based on their recollection of events, and we of course check what we hear against the papers to which we have access and which we are still receiving. finally, i would remind each witness on each occasion he will later be asked to sign the transcript of his evidence to the effect of the evidence given his truthful, fair and accurate. with those preliminaries out of the way i will turn to search roderic lyne.

>> has said, we don't need to repeat our earlier discussions, but i would like to seek clarification on a few specific points as the strategy towards iraq and evolved after the ninth of september, 2001. now, last year we discussed the policy of containment in some detail. and as you say in your latest statement, this was a policy the was difficult to sustain. is it right that, as we have heard from other witnesses, containment remained the government officially stated policy at least until september of 2002? >> well, it's right that in a sense depending what you mean exactly by containment, but if you mean by containment as i set out in my latest statement, containing and of removing the problem of saddam hussein's failure to comply with the united nations obligations, then containment remained the overall

strategy of the government right up to the time when we took the decision to use military action, because in a sense 1441 was a continuation of a series of policies by the united nations security council to secure the compliance of saddam hussein and to ensure that all his wmd had been removed, his programs and capabilities had been broken up. as i said repeatedly, and it was absolutely exquisite the time, if saddam hussein had done that, then he would have stayed in the post. the regime change regime was never an objective of the british government, and if the 4041 had been complied with, which was my hope, then in a sense, containment issues within

four to 41 would have been a successful policy. >> i think we will come back to one aspect of that later on. very soon after 9/11, there was talk in the united states him quite a lot of speculation in the british media that there would be a phase two of the war of terror and that the fees to might include as a priority target military action of some kind against some hussein's regime. on the 26 of november, 2001, president bush and a press conference made some remarks about iraq which boosted that speculation and then there was quite a lot of speculation following on from that in the of the british press about whether the military action against iraq was being contemplated. in his recent evidence to us, the lord wilson who was the cabinet secretary at the time has richard nixon told us mr. blair had played an

important part of the 9/11 in dissuading the americans from taking action against iraq at that time or from thinking of it, and indeed on the 27th of november, to those of one, the minister brad shaw told the house of commons that it was in the policy of the government to extend the military action to other states and that there was no evidence of the involvement of the state's other than afghanistan in 9/11. so is it right to think that in the autumn of 2001, and indeed come into the early part of 2002, that the government was seeking to dissuade the a united states administration from targeting iraq in the second phase of the war against her? >> was certainly the case that at that period we were seeking to persuade the united states government to put off any significant consideration of the

issue, because in november 2001, we were completely immersed in afghanistan. i mean, that was the overriding preoccupation for the british government and indeed for the americans. there was and remained a serious problem in iraq, but it was not one that we have to deal with that day, that week or that month, and that indeed eventually became the case. then if i can just explain, and to some extent this is brought out by richard willson's evidence, we have afghanistan going on. them on december 13th, 2001, there was the attack by islamic terrorists against the lok sabha in delhi. that led to a series of events which over the following months led to a mobilization of

conventional forces by india and pakistan and the possibility that they might begin to threaten each other with their nuclear forces. i got completely immersed in that. with colin powell, with his deputy, with david manning we were dhaka were sued for words to india and pakistan throughout the period to persuade and cultural the indians and pakistanis to pull back from a military confrontation. so that was our preoccupation. yes, iraq was there, but if you are asking me, sir rod, when iraq really started to come right to the surface, i can tell you exactly as far as i was concerned, and that was the day that president bush gave his state of the union speech which was on the 23rd, 24, towards the end of january 2002.

i happened to be in washington that the day and could sense the sort of came change that his statement led to. you made it clear in your evidence to us last year that you thought that patrician made what he called a profound mistake in the state of the union speech by linking together three separate countries, which you did not see as being linked. so in this period ought to at least the state of the union, the axis of evil speech, we are saying to the americans the priorities are afghanistan, this very serious situation in india. iraq is not implicated either and 9/11 for of course in the attack of the lok sabha we're

seeing that is not the priority right now. that is correct is it for the record? >> yes, if i could put it in a slightly different way we are saying it is a priority but we don't have -- we have to consider it now. we have much more -- >> like north korea? >> we have to deal with this, but we don't -- but there is an issue of capacity apart from anything else. from my point of view, it wasn't really possible to deal with them because we were dealing with afghanistan, and we were dealing hour by hour with the india pakistan issue to demonstrate what i mean by hour by hour, is a matter of the family record now that i was supposed to be cooking the sunday lunch -- the christmas lunch and i served the first course on christmas day and the rest of the time was spent on the telephone talking to colin powell and others about the indian pakistan thing.

so this was completely dominant. iraq was a problem, but it was a problem we didn't have to deal with there and then. >> may i sort of just if i may respectfully pick you up on one thing that you said i said about the access of evil speech? i had no difficulty about president bush highlighting the problems of iraq and north korea, although i wouldn't have used the axis of evil analogy because i didn't eat it was an access. i have profound objections to him bracketing iran with iraq and north korea because i didn't think it was justified, and because it undermined the reformist president khatami's efforts to reach out to the west it profoundly damaged his standing within his own country. >> what you said to us last year was exactly that. you said i was concerned about the way that he had sought to

link these three very different problems together. so they are problems. iraq is a problem, north korea is a problem and iran is a problem and they are not the problem some like the one interrupting your christmas dinner. there are other ones you have to deal with that particular moment. now, on the third of december in a letter that he was quoted in your latest statement to us and which is being classified call your office, you told us previously that he personally approved this briefing to the prime minister, your office replied to a request from the prime minister for a note of the options for dealing with iraq, and if i can to doubt four points from the advice that he gave in that letter your letter said, your private secretary's letter said there are no interest grounds for the military actions against iraq. it said a strategy to deal with

the wmd thread will require gracia to of containment and is a military intervention for the purpose of the regime change would be equal and of course you have consistently argued as you did last year the regime change couldn't be an objective of the u.k. foreign policy. finally, it concluded we should find out what the americans had in mind and test the viability of any plans. so you saw sir david manning's mission he was about to go to washington with sir richard as being an exploratory mission rather than one in which we were certainly are giving for the regime change, which you said was illegal. were you aware that around the same time that you were offering that advice that jonathan paul was riding the pie minister anno

about encouraging people in iraq to resist that and i know he described in his evidence. >> i don't think i was aware of that note to self because the private sector and jonathan powell are sufficient were entitled to their own private boats. my private secretaries did to me, sending the murder of the office -- sending them devotee office. i don't think that is necessarily inconsistent with a clear policy and legal requirement that the british government couldn't be committed to the regime change as an objective and i don't like this regime if there had been a magic wand by which it could have been removed or replaced by democracy

so you can have the wish and the desire to see a regime change may also within clear limits wish to encourage that, but it couldn't be and it actually wasn't an objective of the british government policy, and that particular briefing went to david manning on the third of december was obviously to get him back crowd, but also to set up what i saw it as the paralysis of any overall strategy and i actually think the deduce brothers stood the test of time. >> you were of course aware that number ten also commissioned a briefing in parallel at the same time of the secret intelligence service, and you saw the peter's or use of the two papers that they sent to number ten. these papers of course have not been declassified, but they have

been described to us and evidence sessions, transcript, of which have been published. the first paper that sis ret for number ten began what can be done about iraq if the u.s. heads for the direct action have we any ideas that could divert them from an alternative course? and that paper warned of the hazards, and as described to us it argued for caution, circumspection and awareness of what they have the matter iraq could prove to be. then there was a second paper from the same source from the same author which pointed in the opposite direction, at the same time or within days of each other, sent to you at the same time under the same covering letter. the second paper discussed, and i quote, how could we come upon an objective of regime change in baghdad with the need to protect

important regional interests? that second paper put a much broader case for the regime change than dealing with the threat of wmd. hope your office received the speakers and said he wrote to number ten if the papers or perceptive and that you hope the prime minister would read them. were you concerned that number ten was seeking advice of this kind from the sis? >> i think number ten were fully entitled to -- >> policy advice, is that normally what sis this? >> rac. sorry. >> this is not intelligence. >> welcome if you asked me was i surprised, no, i wasn't, we were in a position where we were

seeking the best advice that was available in respect of an issue which prior to my 11 -- 9/11 haven't had the attention that it should have been. so it was getting people to think about the "what ifs" of the situation. i apologize for this, but i have not refreshed my memory about the content of those papers and wasn't aware i was going to be asked about them, but i have a recollection of them. my view was that both were contributions to an important, if a very private, discussion which was taking place at the time about we did about iraq, it just as important, what advice we gave the americans and i had been having some parallel discussions with colin powell about this as well as i recall.

.. you just committed the papers and they were very perceptive. why did you come commend the papers setting out a route map for regime change? >> you have to forgive me, i was given no notice that you are going to raise this. i have not seen the papers, but for a long time. i also have not seen the scribbles i put on the papers but with respect, because they think in his private office the secretary states i would have read these papers late at night i would have scribbled on them. these are very perceptive to make sure number ten sees themen and that would have been translated into an official note d from an official note from a

private secretary. that does not mean i endorse the policy within those papers. >> i was curious to get back to the second paper pricing regime change can't be an object is. of the prime minister. >> i was not only my view, but it couldn't be. >> you said that he would out in your own device. so your voice has gone to the prime minister, saying can't be regime change. and many see it paperthin yesterday exploring it. >> without seeing the documents and i'm perfectly happy since you a supplementary note, we were going to have a textual of what they put on them. if you've ever seen how you've heard evidence from me on the issue of regime change.

i don't think what point to a single occasion where it departed from the very clear view. >> that's precisely what the question arises. >> perhaps i can ask you. >> if you have expressed publicly his but if expressed privately that regime change was not a good idea for us to pursue. as an objective and in any event, it was publicly illegal and you will be aware from documents that have been declassified and quite a number which has been not on more than one occasion. >> perhaps i can ask you about some other papers of that period, which i hope you will have a chance to refresh your memory of and which were discussed in the recent evidence given by mr. blair on may 21 of

january. and these are the record of the conversation with president bush on the third of december 2001. the paper which he sent to president bush, which was dated the fourth of december and was entitled the second phase of the war against terrorism. and then, the record of the talks, which sir david manning and sir richard gere was held with their opposite numbers on the sixth of december 2001, when they delivered the paper of the fourth of december. the talks were held and there were these three records of exchanges between number 10 on the white house between the prime minister in the president and made faces. these records are classified in the book we discussed with

mr. blair on the 21st of january. have you had a chance to refresh your memory? >> i've read obviously the transcript of mr. blair's evidence. >> to want me to recall a paragraph in this document? >> no, we hope to get a chance to reread the documents before coming here today. >> i've spent a very large part of the last six weeks free reading all sorts of papers. i'll do my best to answer your questions. if i can't have an instant recall of her particular documents, i will send you a supplementary note on this. >> thank you. do you know if you saw the note that the prime minister sent to president bush by hand is sir david manning before it was sent? >> i can't be certain whether it did. i think i did, but i am not certain at this stage. sometimes within a dashed the prime minister's note at the

row, the personal ones he wrote to the president, a key should only i advance. so far as i know, i always saw them after they had gone and he would normally talk to me about david. the issue in hand and they were very personal notes which he wrote himself into an offense took his his own advice on. >> at these exchanges be described as the prime minister seeking to dissuade the americans from setting iraq as a target for face to action at this time? >> well, how i perceive it, with the prime minister was doing, he said publicly he felt profoundly privately and so did we and his grace to stand shoulder to shoulder with americans after this deed, of 9/11.

and he bluntly also wanted other things that have a close relationship with president bush, including those from the middle east peace process. we ran in the event part of the coalition in afghanistan, so working very closely with them, and the largest contributor to that after the americans. and what i perceive the prime minister is seeking to do was to get on the side with president bush on the issue is at work on some demanded to be done about iraq, but what needed to be done had to be very carefully thought through. and just deciding saddam hussein needed to be taken out and taken out rather quickly, was not a sensible option for the united states and also not a possible option for the united kingdom.

>> in on the side of president bush, but not presumably get ahead of president bush on this issue or encourage president bush to push it ahead out high-speed. >> certainly not as far as i can perceive. >> certainly not, because as you said earlier, the priorities at that time were dealing with afghanistan and dealing with its very dangerous situation in the indian sub continent. iraq was not today's problem. from your recollection of these papers was the endpoint, the strategic objective that mr. blair set out in his mouth, which was about iraq, was that the removal of wmd or was the removal of the regime? do you recall that no? >> sorry? do you recall the note? >> not directly, but look, the

prime minister note was no evidence to you and he was always clear that the removal of the regime is highly desirable. there's no question about that. but he also accepted that this is not a legitimate lawful objective for the british government. nor was it a practical one either. but his evidence was given a think on the 21st of january and you will recall it. if i may say so, what needs to be seen is that this was part of what mr. blair said to president bush through the medium of that note in many conversations was part of a continuing process

which had the good effects of persuading the americans in the late summer of 2002 to go down the u.n. route, which could easily -- that was my hope and everybody else has come easily have resulted in a full compliance by saddam hussein with these u.n. obligations at which point our involvement in the any military involvement would've been impossible. >> i like to come unto the u.n. route in a minute. what mr. blair said to us on the 21st of january was that this thing was going down a track to regime change. do you recollect these exchanges and this note and what he said to the president on the third of

december is arguing for a strategy of regime change, arguing for building of a strategy, working towards regime change in iraq? >> i didn't see the british prime minister on his fourth regime change. that was not. >> the way to write a note about it? >> he give you evidence. you have to ask him that question. but what i've tried to do is to describe the context if i thought it and which he was talking to president bush. and as i've said, if there had been some means by which saddam could have been replaced by a democratic card without military action, so much the better. and if you see now what is happening elsewhere in the middle east, one of the things that all of us are looking at are the ways in which a popular uprising could be encouraged. why not? and the difficulty there with

that many of the people in iraq felt they'd been encouraging to popular uprising post the gulf war and then they been left high and dry in many of them had been murdered and consequences. but i say all of this should give you it would've been great to see the back of saddam hussein in his vicious unpleasant regime if he was related to that. how did you achieve that and could we have a regime change? >> and you don't recall it the agreement in these exchanges set up a joint group tween us in the u.s. administration to take the issue of iraq forward? >> i think there was. i say i can't directly recall. >> so in a situation in which in the letter sent by your private secretary, as we've noted, you've advised the grant for

stage two military action against iraq. he advised the containment should be ratcheted up in the military intervention for regime change would be the legal. so affect lee, had to replace them followed in exchanges with the white house? >> well, this was part of a process of discussion in the end, my face wasn't to be followed. >> well, it's part of a process i had confidence in the prime minister. i knew how he was comporting himself at the president. and income in these two people with -- representing very different parties and political traditions. the president bush had been suspicious of prime minister blair for his very close

relationship with president clinton and our natural allies he was a democrat. so sir, i had confidence in what he was doing. he was doing it in his own way, which is what i ministers do. there wasn't a decision point on the third, fourth, fifth and sixth of 2001 berlin for regime change in for an extended position of containment. there is a discussion. i mean, this is part of a lengthy process. and you've seen something in all the records of the writ amendments, which i sent to the dirt. two things of which i am pleased. one was that we were committed to the prime minister was able to use his considerable skills to get the americans to go down that route, which essentially the same hot containment.

second was that the prime minister agreed that the decision on any military action should that be nice if they been made by the british house of commons, which was very significant and they welcomed moved. >> soaring to a discussion at this very early stage two and half months after 9/11 about iraq. he said part of it for discussion but not a decision. speaking of a slightly leaky. calmly said to us last year to regime change is the purpose of foreign policy was off the agenda infers the united kingdom is concerned it would not have gotten my support. but my question is, was regime change off the agenda -- of the uk's agenda in these exchanges with the white house in early december of 2001, four months

before the period in which he said it was off the agenda? >> yeah, i wasn't present at the discussions. it was david manning. richard dearlove -- >> juicing the record? >> i set out the position of the british government. i've set up my position. what is also the cases that when prime minister blair made his speech on the occasion of that visit, he was very careful himself, not to say regime change was an object to. i was struck when i was looking at a summary of the press, of the american press for prime minister blair's visit, that they too were very clear distinction between what president bush was talking about, which was regime change and prime minister blair saying that his object to was compliance with security council

resolution removal and disarmament of iraq. and i'm very happy to push that summary to the secretary. because what the prime minister was making clear that crawford did not go unnoticed, especially in the american press. >> what mr. blair said to us about crawford on the 21st of january was the issue is very simple. he, meaning saddam come either had a change of heart or regime change was on the agenda. i'm puzzled as to whether he said of his own agenda. you see off the agenda. >> i think we may be in different terms about the same thing. >> we were using coercive diplomacy. it was diplomacy that is a threat the possible use of force. and the object it was a disarmament of saddam hussein and the iraqi regime.

the first method was diplomacy. if that method failed, but with military action, consequence of military action was found to be regime change. that's how it works. the point we're trying to get across to saddam and his allies was that he had every opportunity to comply with united nations obligations, without his regime having to be changed. i may buy ideas, but he thought that was a very high incentive to come into early compliance. >> i mean, your objective as you told us last year, your final sentence to a slasher was the first of the action was not regime change. i hoped we would've resulted peacefully and we would just have to manage saddam after that, but he would have been disabled. mr. blair said there were two views.

there were those that thought iraq would be managed and he disagreed with that and he was discreet to view that iraq was in a situation which could be managed. we had to confront it. so, he is saying change of heart or regime change. and he wasn't expecting this change of heart as these made clear. and we have to confront it. your objective is getting to a situation where we didn't have to confront the military regimes. weren't you in the prime minister actually aiming for different strategic object gives throughout this process? >> look, we are different people. >> he said that. >> and far be it a secret that i came at this issue from a different perspective. however, i ended up at the same point that the prime minister. but they make that clear that the decision ip in the cabinet and the house of commons made to

take military action to miss the british cabinet that time with people who fought for themselves. and that's what i thought to do. and i thought to offer the prime minister i do. i guess it's true as a different of a difference between the prime minister, he was further out on the issue of what was most desirable with me. however, we were posed to the summer of 2002. and then when president bush made the important statement he did to the general assembly on the 12th of september. and then again in 1441. we were down the track of the strategy, which i say listen containment.

and at that point, it was up to saddam hussein as to whether he wanted that strategy to proceed or whether he wanted his regime to be removed. i have thought he was slightly naïve in thinking he is choosing easier options. he chose a much more difficult and ultimately fatal option for him and his regime. and had that been the case, sir rod, the consequence for the united kingdom was there as a possibility of taking military options. it's also matter of speculation to think that if there had been full compliance with the requirements of 1441 and performance of the security council, it would've been extremely extremely difficult for the united states and the president to go to war because it would have been on the basis.

it's hard to judge that, but i don't have the military action would've taken place. the overall complements consequences where i wanted to be. but given that your object is all along was to see the disarmament of saddam by peaceful means as possible and that you felt that afghanistan and india-pakistan with a high priorities in december 2001. when he saw the records of these exchanges with the white house at this stage, did she not think it necessary to take some action that the prime minister what the risks of the strategy heading towards regime change unlikely military action. >> and the opening months of

2002 and going right forward to july. but you've got to take account of what else is going on at the time. just in terms of the practicalities of the, there was a real world going on. there is afghanistan going on and plenty else going on. soon after this exchange in the records came back of what was discussed. that then became the preoccupation that it was overwhelming for three or four months. the issue then as i've explained was warming up in parallel. we had the axis of evil as the

ministers of conversation when i got back from washington after that in expressing my reservations about the approach president bush is taken. which crawford were at any prime minister can be criticized for in that speech he made was intact says. it was getting president bush to go down the u.n. route. whatever query in december 2001, he and i were on the same page. and in the early months of 2002. and he went to persuading the americans with great skill and determination and succeeded. and i think he needs to be given credit for it.

>> in 2000 to come you certainly didn't seem to be on the same page as the americans. >> i mean, i was never on the same page as vice president cheney. both be clear about this. we have a kind of accommodation. >> you said the minutes which has been declassified in the eighth of july expressing particular concern that the americans were at the uk's conditions in the side of the middle east peace process at the u.n. from the legal basis, we can tell it in analysis, note that apparently given the day after scenarios, all rather important points. but you are concerned about the route to prime minister was deploying. you are concerned about the route the americans were deploying. >> look, there was a process of debate going on and i was seeking to persuade the prime minister of my view, not least through the prison meant -- my criticism of the americans.

anyway, there was a consequence at that time which i regarded the satisfied three -- the prime minister was on board for the u.n. resolution. he encouraged me to go and see the secretary. >> would discuss that last year. >> he was not reluctant about the u.n. he was very keen on it. >> i want to come back to bed at two seconds. one more point before we leave the subject. in this diary at the 10th of may 2006, chris mullen recalled saying that your use of the word nuts in relation to a possible invasion of iran had been deliberate. and he was saying the one thing

i learned in iraq was once the process start eroding, it is very difficult to stop. at what stage? >> no, it's not imply that because i think the action we took was justified and the circumstances were different. but the research and dead if you embark on the process of diplomacy, which we did come in the may work, you're left having to resort to manipulation. and i've want to remain clear that in dealing with iran, a process of strong diplomacy, backed by a increase of

sanctions is an essential one. i happen to believe the process is coercive to diplomacy with military action is not sensible. and i was extremely anxious to put my own lines in the sand on that. and in any event, this was a nuclear strike on iran remains nuts. i thought about the use of that term very carefully on the way to the studio because i just thought i need to make it clear that i disagreed with it. >> right. you talked about cost containment. in may of 2002, we finally succeeded in getting -- and we let this process is smart sanctions resolution. it is one in which mr. beyers

argued had no chance of working because the provisions originally anticipated for tighter monetary of iraq's borders have been dropped before the resolution was adopted. if the resolution wasn't going to work because it didn't have the monitoring, why did we go ahead with? why didn't we just pull it? >> you know, not trying to become second. it is something i've thought about a lot. first of all, in may of 2002, we didn't know what else is going to have been. the future was full of to be trite, full of uncertainties. i think if we had not gone for the past security council resolution we could, inadequate as it was, then the message that would've been sent out to sydney

and as we basically abandoned containment itself. bear in mind there was a lot of evidence, which is still available about the decay of the sanctions regime, the way it underlined in all sorts of respects and so on. one of these -- obviously we didn't know what was going to happen next in respect of iraq and much depended on trying to get an international consensus. in the end we did for 1441. the two abandoned going for that resolution, we frankly would've been crazy because it would've set a message to the other p5 partners we never bothered about iraq. we were trying to get a really

strong sanction regime, but we tried very hard in the previous year, but frankly got no traction. even after 9/11 we have to go in november 2001. but it said something to the frame for the international communities to come together to make out what we did we of course on how to develop that. >> if we make clear to the communities, the other members of the security council the alternative to the strong sanctions regime that they were resisting was going to be less likely to be military action, wouldn't that is given a summary of which? >> if i may say, assuming we had complete foresight -- >> we're planning military action by may. the mac with respect, that's very different. from being in a position where that could be deployed in knowing what the circumstances

were. as of may 2002, we did not persuade the americans to go down the u.n. route. it would not condone the u.n. route, there is no prospect in my judgment on the british government being involved in any kind of military action and making the threat that we couldn't follow through. >> couldn't we said the only way to stop the americans going down the military refused to have early effect of sanctions? we had evidence from comrades who is an official in our nation at the u.n. coordinated, determined and sustained action to prevent illegal exports and target saddam's illegal revenues would've consumed tiny proportion of the effort and resources of the war and fewer allies that could have provided real alternatives. isn't a valid? >> amine, trying to contain the leakage from sanctions was very, very hard indeed.

in fact, i didn't agree with mr. ross on that. i mean, it was that easy, we would have done it. the problem was that up until 9/11 -- >> it would've been easier than going to work. >> while of course. >> what we got to them to them so far as i understand what you're saying is the point i.t. is seeking by the agency of fortune 41. and it would've been very easy for saddam to have complied with 1441. and then if he complied and verde has said he is complying, we would've then been down a path, which is laid out also in the may resolution of the gradual lifting of sanctions, that he would've state imposed. yes, he would've been exposed to his neighbors or someone who didn't any longer have camelot will biological weapons. but he would've been there.

and sanctions would've been lifted lifted rather quickly. so i don't think there's any consistency actually between what he is saying as far as i understand what he seen them what what we actually did. >> okay, i'll come back to 1441 later on. he said earlier you hadn't had a chance earlier to refresh your memory in december and might wish to write to us about it when you've had a chance to do so. and you know, i leave that out with you. >> thank you. you think would like to turn out to some of the cabinet discussions. >> sir martin, we'll come back to later on. the actual operation of cabinet member to focus specifically on the meeting that took place in march 2002. luke wilson in a seven and two is described as seventh of march

cabinet as a uniquely full discussion showing real anxiety about american policy in the need to keep the issue in the united nations. he also told us that it was requested by david lang kits and robin cook. is that juror selection? >> i think so. >> he also said that the prime minister concluded by saying that quote management has been going crazy and i think they quoted the press not long after the cabinet meeting. i do think he felt the need to say that? >> i think because there was a high suspicion by members of the cabinet about the intention of the president bush administration. i mean, it seemed quite early

days in the bush administration in the context that we had a right wing republican administration in the state. a new labor, but a left wing labor party here in the natural allies in the u.s. about the democrat are not the republicans and there also have been soft and cuddly republican administrations, but this is not one of them. there is great anxiety about the intentions of the bush administration. i mean, bear in mind really from the time of the access of evil address in late january, british newspapers were full of debate, discussions, warnings about iraq. there is a context of this is slow. and every member of the comments

was being constantly pressed, not only by colleagues in the house of commons, but by their constituents parties and public about what was going on all the time. that was the background. >> the united states hasn't gone crazy. >> i think being cited by members of the cabinet was the prime minister -- he was slightly less left wing than most members of the cabinet shall we say. had he decided himself to take a different view from the prevailing sentiment in the cabinet, who let the discussion in the cabinet that day?

>> i can't directly recall. we may need to look at the minute. what normally happens in discussions on iraq was that the prime minister -- either he would introduce a subject or i would or vice versa. i suspect on allocations he probably began on the night and there would be windups. >> do you remember what line you are tawindups. >> do you remember what line you are taking? >> i can't quote, that's why i'm asking you. >> i know what i was thinking of the time, but i would've been fairly certain that respect in the context of cabinets. i mean, i wouldn't have thought about all the things. not least because i was concerned about the matter of

the king underscored wilson pointed out sadly, a good part of the discussion at sadly, a good part of the discussion at sadly, a good part of the discussion at was the next day and never part of my style to say things, which could have been seen as this ablation to colleagues that got leaked. >> i mean, what sort of thing is rethinking the minutes would metellus? >> really i party set out in extensive in which an oral evidence to the inquiry, which was .. pect of iraq, that military action in each be very much a last resort. i certainly never dismissed the idea of coercive diplomacy. not for a second. and what we above all needed to do was get the united states down the u.n. route and we were

seeking to do that. >> robin cook's recollection of my cabinet meeting described for the first time i can recall in five years, tony was out on >> and the balance of discussion point is stronger in the reverse direction to his intentions. is that your recollection? >> i think that's his point at end, i have not gone mad or whatever it was. nearly reflected that. and it may have been that that debate served up in his mind the need to convince the united states to go down the u.n. route. and i think it's getting the sequence right that -- was that just? i don't remember the exact dates in proximity to kay crawford. >> it was two or three weeks.

>> i don't remember about what he was trying to say to me. i seem to think about what prime minister wanted. but do you think his approach to the cabinet in the future he realized that you need to manage these debates? from i don't think that did. i think the fact of the meeting did. that was depressing. i mean really depressing. and any prime minister faced with leaks that like is bound to take appropriate alternative action. that was the difficulty. as you said, there's been a lot in the press at that time. and the members the cabinet were picking up exactly what they have heard around them. this seems to have led to become an interest in the media strategy in the presentation of policy.

how important did you see that not from the government as a whole, but in particular, in your own personal role? >> well ---[papers shuffling] >> developing a media strategy with a capital m capital s. i didn't pay a great deal of attention to. but my approach to the media on the whole was to work out what argument i was trying to convey, and then to make it. i always tended to believe that if you've got the argument, then people will tend to follow you. and if you haven't, then the amount of media strategy is going to fill in that substantive vacuum. i don't recall at that time

having the discussion with people about aid and capital s and capital m media strategy. and john, the press secretary, apparently admitted to being in there somewhere. we had a discussion in early september 2000, when the things becoming for the whole debate was becoming more structured. but i was seeking to do at that time was to manage -- it was quite a feet inside the parliament party in parliament. which is one the reasons why we've produced the parliament, the brevet -- the brief to the parliamentary party. you mentioned it circulated to your cabinet colleagues, the paper that michael williams produced for the parliamentary party. at the time, as you know, the options paper was being prepared. i think it came out the day

before. but i and your officials would know of the work of the auction paper which was the government document. why circulate the parliamentary labour party rather than a piece of work by the foreign office or cabinet office? >> they went with respective policies. and what papers go to cabinet is a metaphor for the prime minister. and that's been the case kind of forever. it's not for the agenda of the cabinet. it's controlled by the prime minister. but one the things i've been trying to get across to inquiry is that the debates about iraq were very open. and members of the cabinet were often members of the parliament and handling the parliamentary

colleagues and having to respond to very great concern of their constituents and in their own constituency parties as well. so what i felt that it would be good for them to have a brief which they could use publicly if necessary. they could simply split a copy and send it on to constituents. , labour party members who were concerned about it. serving a very different function from an auctions paper which -- this was not particularly to nor the cabinet discussion. but to -- as a tool -- >> i hope you did inform the cabinet discussion. i thought it was -- i could say i thought that it put the background and sort of current problems rather than well. and, in fact, useful briefing, i

thought. the alternative to the cabinet. >> without that paper, it wouldn't have been anything else. and i mean it was a feature of a lot of these cabinet discussions on the papers. >> would that be true of most issues of foreign policy at this time? >> it was a feature of the way the prime minister and cabinet, that most deficients were made on the basis of oral briefings. having been sort of precooked through the process of the -- of cabinet committees. and, you know, a lot of government business. as the lord pointed out in his evidence, the cabinet committee structure was extensive, and on the whole, worked. pretty well. and it did. so that's where you got the precooking of decisions. cabinet, particularly under mr.

blair, less under gordon brown was used more for a briefing of cabinet colleagues and discussion of that kind, rather than for acute decisions. it mean it depended on the issue. >> we'll talk about some of those issues later on. also lord believed to have -- william wilson -- william's find, yes, this all become lord's eventually. as then dr. william noted in his statement, there was, for some reason, you say he was very residual, no reason to doubt that, though the text hadn't been prepared with the proliferation department in the foreign office. there was quite a discrepancy between the standard intelligence line as it were and

the -- what was said. this particularly revolved around the question of the five years in which iraq could get nuclear weapons in the parliamentary level party statements paper it was stated that this could just happen whereas rather than critically, policy terms it could only happen in the assessment staff's view if sanctions had been listened or ended. were you aware at time of that discrepancy? >> no. i wasn't aware at all. >> now, there was also an article that you wrote for the "the times" on the 5th of march. it was a couple of days before. in which you said quote there's evidence of increased weapon in

nuclear technology that research and work has begun again. with an article like that, would that have been cleared through the foreign office process? >> yes. and the article almost certainly would have been drafted by the foreign secretary's speechwriter i can't be absolutely certain, because it was a long time ago in the papers. but it would have been drafted almost certainly by the speechwriter and then cleared with officials and lawrence, i was never in the habit of putting my name to articles of any kind as seen most unless they were checked. i had no interest whatsoever in sees things which were inaccurate. >> the question is a problem through all of the public presentations of intelligence in the assessments which is given

the medium of the short newspaper article, the qualification and the caveats can get lost. i see the assessment on the iraqi wmd which was produced on the 15th march said on the nuclear program we do not know if large scale development work has yet recommenced. so it's the parties -- there's just a problem here of as things move from the world of intelligence assessment to the world of public presentation, you can lose some of the nuance of the qualification. >> yes, i accept that. and the other side of this, however, is the overall context in which we were debating iraq. which was the record of saddam hussein. he was the man who had argued these very extensive chemical

biological weapons and the nuclear program and had ensured the use of chemical weapons and, for example, as we know had concealed biological weapons for years. and he came out by happen chance with him. and the inspectors -- the -- in my positions as i try to bring out in the first written statement that i gave to the inquiry, was one. profound concern about having this man continued unchecked in that position. but also getting across to those who might have forgetten about it, what his record was. >> i'm not interested in the focus on the nuclear side of things. because if you look at the

intelligence assessments, as you have indicated, there's a lot of confidence. about, at the time, about the biological weapons programs. these are being reconstituted. it's easy to see why ministers would have pushed that forward. there's a not more hesitation on the nuclear side. there's a difference of weapons of mass destruction between a nuclear program and a chemical and biological weapons program. so it's really -- is there need in public presentation to constantly remind people about the nuclear side as well? because that is what really makes the difference in terms of being a broader threat to the international community. >> well, provided that it was accurate, there certainly was a

need. and, you know, i think looking at the results of the iraq survey group, it wasn't unreasonable to predict that saddam left to himself and would have been developing all of these programs without any question. quite clear about that. >> you discussion the cabinet office option papers internal meeting on the 18th of march, although the right to the prime minister before crawford in the left of 25th of march has been declassified and published on our web site. we also understand at the meeting -- >> can you please repeat that? >> it was also at this meeting that we understand you are commented on the country paper which at that stage covered iran, north korea, libia, as well as iraq, instead should have just focused on solely on

iraq. can you remember why you took that decision? >> yes, i can. and -- i just thought it would -- they were different. and i already expressed to roderick about my concern of lumping iran, iraq, and north korea in labeling the axis of evil. i thought if we were to say the full con -- full country analysis, of us adding another country to the access -- axis of evil. we have one running in iraq. we have four running. it would become manageable. and then we'd be asked were we about to attack libia and so on

and north korea? i just didn't think it was going to add anything to the strategy for dealing with those problems. perhaps to be clear it wouldn't. >> there's another argument, the argument is certainly in the papers. there's another argument which is the material on iraq would look thin by comparison without some of the other countries. >> yes, i understand that. and i wouldn't use the word thin. i mean it certainly didn't necessarily look stronger than the other countries. but if you take north korea that had to be dealt with on a different practice as far as libia was concerned where as it's often ignored, the intelligence which is less developed turned out not inaccurate, but underestimating the scale of the libyan nuclear weapons program. we were in the event, able to

deal with that threat. by the proxy of war in iraq. but i didn't know that at the time. but i was in any event clear that whatever the kind of relative position of iraq, what distinguished iraq from these other countries was iraq's record. the fact that they have invaded neighbors. depending on how you count, at least nine or ten. chapter 7 security council resolutions requiring them to stop doing things and to do things which they probably failed to do. >> over time, the foreign office seems to be taking the lead on issues of publication of the dossier which is in plan, and

carried on over april. was your expectation through this period that the foreign office would be the lead part when it comes to these big issues of public presentation? >> as a general rule, yes, the foreign office would be the publisher of documents. i mean, as you are aware, the sort of dossier idea, now famous or notorious document took off as an idea in the summer. in august and september of 2002. and it was done in response to very great pressure, including from the foreign affairs committee. that was the problem of it. and i think -- by then the prime minister had decided that he had to consult him to get right on

top of the issue and be the person who as it were fronted the document. i didn't object to that. >> but in john william's statement, mr. williams, he told us that you and michael j. were under shooting when it came to the drafting of the september dossier that this should be a foreign office responsibility. so why was that? i mean what -- >> well, i prefer to do it in house. i thought we could have better control. i think the final product might have been a bit better. maybe not. sir -- anyway, there were however some practical problems about the timing which was that this key preparation period of the dossier coincided with the united states general assembly and not just i, but including john williams.

he came to new york. it was a practical problem. that said, you know, it would have been better win think in retrospect if it have been handled by the foreign office. >> john williams seems to imply it was a general loss of control of the foreign office over the development of policy at this time. did you -- >> no, i read that. and i -- i didn't feel there was a lot of control. what i felt was that as a matter of british governments, that as prospect of military action by british forces became more likable to put on the table. there was bound to be a shift in focus from one side of downey

street to the other from the foreign office to number 10. because the prime minister did determine a recommendation to cabinet about whether military action should be taken. and not directly for the foreign secretary. that's how it's always been. so foreign secretary is in a very difficult position from the head of a domestic department. i mean that's the same secretary, that did other things. from time to time, i got bilaterals and make sure the policy i was pursuing was where the prime minister wanted it to be and he would certainly be basically and go on with it as i did with lord chancellor and justice secretary. he ran the show. that wasn't a day-by-day contact. the foreign secretary, it's inevitable, it's going to be a great flow across downing street. as i say, the more acute foreign

policy he's become, the more of prospect of military action is. the more affect that it's going to shift to the other side of downing street. i cannot resent that. it's just the way that government operates. >> do you feel there was a risk in all of that? leaving aside your own personal position because you clearly were in the loop, the key people in the foreign office were not in the loop. >> there was a risk in that. i accept that. your inquiry is about lessons learned. howhow -- were there ever been a power situation, it wouldn't be a particular situation. there's an important lesson about how you certainly come together both sides of downing street and the related issue of what you do with the manning war figure. which side were the green bay door they are.

that's quite an important issue in my view in terms of how you run government. there were many advantages in having david manning on the downing street side of that door. but there were also downsides as well. >> i think that's something that we want to look at. can i ask you one more question finally on this period? in september, while you were on leave, the 10 commission briefing, -- sorry, 2002, why the number 10 commission briefing from the department before the prime minister sedgefield conference in september? >> yes, certainly. >> i think it was the start of september that it was commissioned. >> anyway, the briefing which was produced has been declassified and is on the inquiry's web site. again, the earlier plp paper,

there's some areas where the briefings appeared to be more than the evidence at the time suggested. rather than stark to the opening question, does iraq have wmd begins clearly with the word yes. did you review this at all? this paper? >> i don't think so is the answer. you'll be aware that that's a huge traffic. >> yes. >> briefing documents. but it came from officials. >> yeah, it did come from officials. >> you know, i don't think it was polluted by special advisors or people in number 10. it came from completely 24 carat gold office officials. >> the question of acknowledging qualification and uncertainties and caveats. if briefings such as this can go back to the pressures on public presentation, all of this contribute to the conviction

that the prime minister expressed of the iraqi wmd beyond a doubt. >> i think the problem was everybody thought it was beyond a doubt. you know, this was not just the view of the british government. it was the view of the international community. 4041 would never have been agreed with that opening pretty am buy already paragraph about why iraq had the weapons of mass destruction, unless the prevailing judgment across the world. with respect, we were in good company. we couldn't have known then what we know now. from my point of view, examining the record of saddam, his

activities after the gulf war, and then the fact that he had effectively cleared out the respect -- the inspectors in late '98, reading that final record from butler, i think in february 1999. and adding it all the circumstances together, i do was in no doubt he had these problems. indeed if i had doubt, i would never have pursued the strategy in which i did. but, of course, at end of day, it may look slightly odd 37 where we were at the time and where everybody else, no one came to the debate with the partners in september and october, and in november 2002 and, indeed, then in the beginning of 2003, no one was saying you haven't got this stuff.

the issue is how you dealt with it. >> i don't want to dwell because we talked about it a lot before. can i impose one question to you on that? which is going back into the intelligence assessment, the issue at this time is on public presentation and how -- and the big issue with the dossier in how you bring assessments into the open and public them. was there another question that could have been put to jic at that time, given that we were now pushing very hard to get the issues into the united nations and inspectors might come back. which would be are you absolutely sure of this case? would it not having sensible to commission work from the intelligence agencies to just go over what they knew and ask the question if this inspector do get back, what is it really that

maybe there. how convinced of this? >> well, i mean -- one of -- i'm sure one the lessons from what you are going to say in your inquiry, if i was sitting on your side of the table, if i was drawing, that would be sensible with the benefit of hindsight, of course. what i'm trying to do is to tell you i felt at the time which was that that further look wouldn't have been necessary if it has been necessary, it wouldn't have produced any different of a result. because a -- the last time the inspectors said anything about the authorities was in the turn of 1998, 1998. which was alarming. at this point, people think we made up the idea that there was wmd in iraq. it was all sort of convection to

justify military action. this around the world, remember the paragraph of 40-41. what it -- sorry three. recognizing the threat iraq was not in compliance with the resolutions and weapons of mass destruction and long rail missiles poses to international peace and security. it's not saying we think it might pose a threat, it does pose it. >> the issue of whether or not it was made up. again, if it was ever an issue we'd be coming back to, which is challenge and testing. >> but could i also just add this? because i mean, you know, i've thought about this a great deal. and you could make the allegation, i don't, but we were subject to group think. but bare in mind that this -- these discussions in further government were taking place in a framework of huge debate that was occurring worldwide as well

as. and others are coming in with their own assessments of whether iraq posed a threat or not. now, for example, i think on the 9th of september, 2002, two weeks before the dossier of the british government was published wiiwss published which further saying we don't think it's a problem. as you went rather than further, than the british government's own assessment. so you had these other independent benchmarks which were not raising the questions which maybe now with the benefit of nine years of hindsight, should have been raised. everybody was in the same place. >> yes. we'll take a short break. then we'll come back to 1441 after the break. >> thank you very much. [inaudible conversations] [inaudible conversations]

[inaudible conversations] [inaudible conversations] >> well, let's assume. and again on to 1441 and robert, to you. >> i'd like to pick up the point you are making earlier about the importance of the u.n. route of us persuades the americans or helping persuade the americans to follow it. going down the u.n. route is one

thing. the question that really arises then is where is that route intended to lead? in july of 2002, a paper was produced which was entitled iraq conditions for military action. that was a cabinet office paper, aversion of which has appeared in the public domain. and that paper asked ministers to agree that the uk engaged the u.s. on i quote from the public domain, no, i don't, i quote not from the public domain, now in the public domain, i have to get these things right. a realistic political strategy which includes identifying the succession to saddam hussein and creating the conditions necessary to justify government military action which might include an ultimatum for the

return of u.n. inspectors to iraq. on the 14th of september, you sent the prime minister a paper entitled iraq, pursuing the u.n. route, and you wrote in summary we should deliver a more intrusive inspection regime. so what was the purpose that we were aiming for in what became resolution 1441? was it to ensure the return of the weapon inspectors to iraq, or was it to quoting the cabinet office paper, create the conditions necessary to justify government military action? >> i mean the purpose of 1441 was as it stated. it was to secure compliance by saddam hussein with the obligations imposed on him by the security council. i mean the resolution means what it says, roderic. it's clear and as i've said, to

the point. had saddam complied with the resolution, he would have stay in post. and at the very minimum, it would have been impossible for any british government to have taken part in any military action. but i don't believe military action would have been taken place. >> the purpose was to secure compliance and avoid military action. it wasn't to be an ultimatum that would then as it were facilitate military action. >> wasn't as an excuse of military action. that's certainly not. and in my first statement to the inquiry in january of last year, i quoted saying that what the affects, i can find the exact quotation if you want. sometimes diplomacy has to be backed by the threat and if necessary the use of force.

it's a well known quotation. this is true. you are familiar with this. as an experienced diplomat yourself. it was to use the jargon, it was based on the idea of coercive diplomacy. but it's purpose, was to secure compliance. essentially the dissolvement of iraq. that's what we set about achieving. >> i mean it was certainly your second written statement to the inquiry last year that you could see no prospect of cabinet or parliamentary approval for military action in the absence of you being successful in going down the u.n. route. which makes it sound as if getting approval for military action by going down the u.n. route was what we were trying to

do. >> your office wrote in august of 2002 to david manning says we've now done further work on the possibility of the security council ultimatum to iraq. mr. blair said to us in his evidence the other day that instead of action immediately, ultimatum first, in which we were referring to the period before the americans agreed to the u.n. route, then ultimatum with the u.n. sanction. your office is talking of an ultimatum, mr. blair interpreting to us last week was talking of this as ultimatum with the u.n. sanction. so is this not actually seen as a step in the direction of military action? that being the objective that the united states and the united

kingdom had in going through the u.n. route in the autumn of 2002? >> well, no, with respect. i think it's to turn up the purpose of 1441, and to turn on what i had said. this resolution, contained if you like, an ultimatum. i mean it talks about an final opportunity. it then in op13 talked about serious consequences. which explains everyone knows means military action if there was not compliance. so it contained there an ultimatum. the point about ultimatum, sir roderic, they offer the object of the ultimatum alternative. there were two doors. in the case of saddam, there was

one marked survival of your government and of you. the other alternative meant military action against him and the consequences which fellatorred. the history of diplomacy is complete with examples of final opportunities or ultimatum of one kind or another. there's no objection to that, indeed evident where diplomacy is possible to avoid war. that's what i was seeking to do and what the resolution thought to do. >> we'll come back a bit later on to the question of whether the timetable for military action was constructed in such a way and handled in such a way as to encourage him to go through the door to compliance or the other door.

you talked earlier about coerciveness in hope that he would replay. from mr. blair was coming from -- wasn't it the case as the witness from sis put it to us in his evidence, it was clear that nothing sort of decisive action in iraq was going to satisfy the americans. so in signing up to the u.n. route, what was in their mind? wasn't that why they were determined that it was going to do nothing to better their ability to take military action or to require the second resolution? >> i don't think you can generalize about the americans. not even about the american administration. i think you make a profound error if you do that. there was a phrase, a gleam in the eye of some members of the

administration about military action. but my experience -- >> including the president. >> no, let's not say that. no, my experience with president bush was that he -- in the end when faced with decisions was much more thoughtful than he's often credited for. and not -- and he was subject, of course, to very strong and conflicting pressures. but they are all fixed and sort of external realities facing even the u.s. president. and whatever their wishes of richard pearl or john or the near outright of the administration to change the whole world.

there were realities. and the reality was that if saddam had complied with 1441, the inspectors would have been set that, it would have been public, the security council which could not conceivably have had the debates it had in the early part of 2003, because we would have been celebrating a compliance within there would have been inspectors all over iraq. as i said, there would have been no possibility of the uk being involved in the military of action at all. i don't believe even if president bush had been ill advised enough to want to go to war, he wouldn't have done so. what were the cause of war during the circumstances when he himself said they didn't like the regime or the legal theory.

the regime change was their objective. but he's made the case for regime change on the threat posed by saddam. the inspectors were then saying the route by he president bush himself had enforced that the threat had gone. was does he then say? he's got to make the case to congress. and his own troops. >> there were many who was arguing, and to us by some witnesses, the threat wouldn't have gone as long as adam was there. let's part the prime presses. we discuss the legal work very extensively last year. i don't want to go through that again, but i do want to ask about certain points that have come out in evidence, either in declassified material or either

from witnesses since he last met you. michael wood in the lesson to edward chapman of the 17th of october which was copied to your office, a minister to the chaplain would have been warned the resolution would not give authorization based on the authority to use force in resolution 67a. then on the 18th of october, lord goldsmith telephoned you to make exactly the same point. this wouldn't authorize the missing force. on the 31st of october, also reiterated the advise of the period of time then in contemplation did not authority the use of force. on the 6th of november, michael wood wrote to your office, just two days before the option of 1441, to state that it did not itself authorize the use of force or revive the

authorization to use force in resolution 678. given that as we had started the negotiation, and we've heard this too from witnesses, it was a central objective of the british government that the resolution should revive the authorization to use force in resolution 678 without the need for a further security council resolution. >> what impact did this advise that we not achieve that objective have on the policy for concluding the negotiations and where did it leave us at the end of the negotiations? >> the -- mike woods' distinguished lawyer, he wasn't going to be the person making the decision. and he in any event as i understand it, was not that involved in the process and wasn't aware fully of the

negotiating history. it's also the case that the foreign office lawyer who was involved in the crowd took a different view about the effects of 1441. and i now know, i didn't know this, john, when i was here before, that was the only foreign office lawyer who took a different view from michael wood. indeed, he authorized me to give you his name in practice. one thoughtful foreign office lawyer told me he took the same views in the cloud. and that his view was that a significant number of foreign policy lawyers also took the same view. so there was -- i'm not for a moment suggesting that elizabeth won't claim that all foreign office lawyers was the same

opinion was made in -- other than in good faith. but my information is different from hers. and i believed this. that we were intent on negotiating a self-contained resolution. the -- and peter goldsmith said in his own evidence explaining himself, i think it was last year, explaining why he'd come to a decision that in the circumstances, 1441, did authorize use of force. one the reasons he said, was that he knew that the, quote, the only red line of the americans was that it should be a self-contained resolution. the americans would never ever agree to a resolution that was not self-contained. i would say everybody else we were negotiating with took the same view. as they pointed out, if we had been ready to accept a

resolution which simply required another resolution, he would have got that within a week. we didn't have to argue the conjunctions, my view namely history what i said it was absolutely clear. it did revive 678, recalling it's resolution. >> you were being given contrary advise by senior legal authority in the government, lord goldsmith, the senior legal authority in the foreign office, so michael wood, you said you've subsequently heard the foreign office lawyers -- >> i did. >> these were not the people advising you. ian mccloud was not advising you at the time. >> looking we were seeking to get the best resolution that we could. in my view, we did. as i said, it is -- yes, i knew

what michael woods view was. the final decision which the attorney general came to came from a real resolution was to say that military action was lawful. not to say it wasn't lawful, he was going to be the arbitrary. our view shared -- our view it was a self-contained resolution which appropriate circumstances had authority for military action was shared by the press. now the industrial out there which suggests that this was all unlawful and just ignores the fact that not only do we think this and the americans, but the french thought it too. and you have on the record what ambassador told the council in late 2003. i mean it's a long point, sir roderic, they knew what they were negotiating. they knew, great respect, they had put forth all sorts of

alternatives in the draft to water it down and require a second resolution. they also knew we find it unacceptable. which is how we got to the conjunction of ap412, 10, 11, 12, and 13. that was the central architecture of it. >> yeah. i was trying to understand the situation. at the time in the light of the advise that you were being given, am i right in thinking that when 1441 was adopted, you told the cabinet the second resolution would not be necessary? >> i think i did. yeah. >> the girlfriend that telephoned you on the 18th of october so say unless the circumstances change, we would need a second resolution to authorize the use of force. what was it without the forces being reconciled -- >> i took the advise. if you recall from the record, actually, follow his record, not his record of that conversation, it was also he accepted that

it's an external use. we couldn't possibility start talking about the possibility of requiring a second resolution. it would have rendered the strategy worthless. peter understood that. i don't know if he was or wasn't a member of the cabinet, but i remember him raising an objection to the way i was putting the point. and subsequently, i might also say, my belief -- i might be accused of naivety, although it's not often that accusation is made against me. i believe because of the force of 1441, the international consensus behind it, we'd be able to resolve it briefly. the issue of the second resolution or not would not arise. that was my hope and belief. thank you. >> well, let's turn on now to the military timetable and inspections.

>> what was the question of the military timetable? we were told the cabinet was repeatedly promised the discussion about military options, but this never happened. why do you think that was? >> i think it was two things. one, excuse me. it was prime minister's style. and two, his cabinet for briefing purposes more than for decisions. and i note some say it didn't happen. my reading it happened to a significant extent with margaret thatcher's cap net. -- cabinet. the related point about military leaks. if you were looking at a related plan, you have to keep matters pretty tight.

>> understood. do you think the cabinet members were aware in much of 2002 and 2003 was one the options that was seriously considered was supporting the united states if it came to military action, without using major forces and components? >> they would have been to be deaf, dumb, and blind not to be aware of this. i found even more evidence on this. this was the issue. there were 00 -- were 100 people that signed the early day issue in march of 2002. warning against military action. just to make this point, over the summer of 2002, there was a build up of concern about iraq. where are we going to battle the

americans without any united nations security council resolution. because not resolved until president bush made his statement to the general assembly on the 12th of september. and the consequences of that was that the prime minister decided to recall parliament and air brushed out of this. so the decision to go to war was made by a couple of people in a field room. it wasn't. and parliament was recalled. it was to parliament that the dossier was presented. and that debate too was about the possibility of military action. >> my question was not about the possibility of military action, it was about the type of military action that we might take. >> i don't think that any member of the cabinet was unaware for a second that there was a possibility of the united kingdom being involved in very significant military action. >> where they aware there was a

possibility of being involved in military action supporting the united states but not putting a major land component into the field? >> i think they were aware of too. i'm sorry. this is -- you'd have to ask them if you wanted to get a precise assessment of their opinion. i know you you already had evide from margaret beckett and john reed who said they were fully aware of what was going on. i might also say that subsequent to steven moore's evidence, i've had former members of the cabinet, colleagues at the time, coming up to me to express astonishment that he thought they were unaware of the alternative and were not brief briefed. that's absolute astonishing. >> they were briefed on the military options as well? >> yeah, you'd have to ask them and the prime minister.

because obviously i was completely in the loop on all of this. those that wanted -- my understanding is, and this is secondhand, they wanted briefing about military options or indeed the intelligence. they received it. >> i knew that anything. i wasn't aware of this. i was in a different position than most members of the cabinet >> mr. blair told us in the statement last month it was clear from the continuing discussion in the u.s., late 2002, early 2003, that march was the likely date for military action. was that also clear to you at that time? >> yes. was date was he talking about? well, late 2002, early 2003. >> my recollection was that initially there was talk of military action for the desired

date being january. and then it moved forward to february. and then it moved to march. i mean that's -- that's what happened. we were trying to push it to the right. >> yeah, as i said, the timetable within which. >> there was a timetable. yeah. >> and there's also discussed both mr. blair and jonathan powell, pressure from the uk in early march about this, as you put it, moving it to the right. under some time, it was given, it was a week rather than more than a week that it was being requested. do you recall -- were you part of that? did you talk about it with colin powell? >> i talked about with it colin powell as i recall. i have complete trust in him and his judgment. i was relying not only on his

diplomatic experience, but obviously as his position as the chief of the joint chiefs of staff. chairman of the joint chiefs of staff. and my recollection is that what he said to me, you could delay it a bit. you couldn't delay the start of any military action for too long. you'd either have to move or to stand them down. and there was anxiety as i think you were aware. it was about the time of the year. whether it was going to turn and get extremely hard themselves. >> did you receive any briefing yourself on how long the uk forces thought they would last without having to -- without maintaining combat readiness? >> not -- i think i had formal briefing. i would talk sometime to the senior military people who in the margins of meetings.

excuse me, about that. and in what was very clear was that they were concerned about the moral of troops, and not just leaving them in limbo. >> were you aware, i think on the 15th of january briefing that the prime minister got from our chiefs of staff that certainly it was suggested that it was impossible to main tear -- maintain our forces after the middle of march? >> i think i was aware of that. and there was, you know, -- certainly would have been possible. there's no doubt about that. it was sort of a combination of factors. >> lord boyd from the defense staff confirmed to us last week that the uk be such a significant component of frontline forces of 30% that remained battle ties that the

american would have significant difficulties, certainly delays, in their ability to start military options if we had pulled out. which obviously rated the question to the degree of leverage that we had. again, were you aware of sort of growing dependence of the americans on uk frontlines? >> yes, i was. because that followed in part from the decision of the government of turkey not to allow, so that closed off that route which would have made a different strategy. it also goes to my point, if there has been compliant with 1441, not only would we have not taken part in military action, but it would have been -- easily the americans have been determined to have authority to take military action, it would have delayed their action. so if we had -- >> did you discuss