to decide what's in the local plan and what's out of the local plan. at the same time, having a presumption in favor of sustainable development will cut another bureaucracy in our system but we're not changing the rules for greenbelt, for anob's, for special scientific interests and all the rest of it and i do think people need to focus on that because what we need to happen is sensible sustainable development to go ahead without the bureaucracy and the top-down system today but with all the reassurances people need. >> thank you, mr. speaker. last week the prime minister told this house that a number of young people not in education employment or training was coming down. in actual fact the public figures show the last three-quarters it has risen. will the prime minister like the opportunity to correct the record? >> i think what he'll find the number of 16 to 18 years old who are not in employment education or training has come down. and indeed they have come down. and that is a step forward but if you look at the overall

number of youth unemployment and that has gone up and that is unacceptable and that's why we need the work program, we need the more apprenticeships, we need the more university places and it's that that this government is putting its money into. >> simon kirby. >> thank you, mr. speaker, will the prime minister join me in congratulating all the winners in last night's women in public life awards including the excellent mary makers and brighton holms. >> i will certainly join my honorable friend in doing that and congratulating the winners. i said to my honorable friend the member from madeston we need to do more to promote women in public life whether in politics or local government, this party took some steps and, frankly, i think we do have more to do and there's many organizations we do not have equality and opportunity where we need to have that equality of opportunity and it's not enough to open the door and it's maeri

crattic and you need to take credible action to get it done. >> mr. speaker, now that the prime minister has committed himself to backing the boundary changes which will reduce the number of m.p.'s in this house and ensure that prime minister's questions will reflect the subject in the last few days, will the prime minister now commit on delivering on the other pledge that he and his colleagues made before the election which is to deal with the scandal of non -- people from your elected to this house who do not take their seats and yet who continue to be paid millions of pounds in allowances including the equivalent of short money which they can use for party political purposes whilst we have to use short money for parliamentary purposes. please give us is vote today with that scandal. >> first of all, let me say on the boundary review, what we are looking at here is trying to make sure a basic fairness, which is that every seat in the

house of commons should be the same size. and today what we have is you've got some seats that have as many as 90,000 voters and some seats including some in wales that have as few as 40,000 voters. how can that possibly be fair? on the issue in terms of northern ireland and the issue he raises i haven't changed my view and think it's an issue that needs addressing. >> the father of my constituents mr. oliver tibiaert was killed and his mother was kidnapped. what will the prime minister do of the return of mrs. it beet? >> well, we are doing everything we can on this desperate case and i want to make sure we're coordinating everything the government does. my right honorable friend the foreign secretary has met with the family today. i think on some of these cases it's not right to air all of these issues in public but i can reassure him, the family and all

that know the tabbet family to do everything to help. >> order, ten minute rule motion. ..

>> james planes lost in 1884, but he changed political history. he is one of the 14 men featured in c-span's new weekly series, the contenders, live from the blaine house friday at 8 p.m. eastern. learn more about this series and our upcoming programs at c-span.org/thecontenders. >> former federal reserve chairman alan greenspan warned

u.s. lawmakers tuesday that underestimate the federal budget crisis could be devastating to the financial markets. he urged congress to eliminate unnecessary tax breaks and gain new revenue while reforming the tax code. here's part of his testimony me to set finance subcommittee. >> good afternoon. and thank you. we are looking forward to this star-spangled panel that we have. you know, this week three years ago was the collapse of lehman brothers. and we have yet to recover. if this congress does not get serious, then the structural

budget imbalances facing this economy could permanently reduce the labor productivity and economic growth for years to come. a launching point for getting our fiscal house in order should be the overhaul of the federal income tax code. and if that means lowering tax rates, eliminating tax expenditures and other loopholes, and simplifying the tax code, then so be it. we hear a lot about entitlement programs, social security and medicare in particular. what we don't hear a lot about is the 250 entitlement programs hooked into the tax code.

tax expenditures, the various tax credits, deductions, and exclusions grafted onto the tax code, our entitlement programs, pure and simple. and if you're eligible, you can claim the benefit. and it's an expenditure. there's no application process in order to get this benefit. and there's no annual or even periodic review of those expenditures efficiency by the congress. so tax expenditures our entitlement spending without accountability. some of these tax expenditures, particularly those relating to oil and gas, they date back to the early 1900s. and might have outlived their justification. the last time congress tackled

the tax expenditures in a systematic way with 25 years ago, in the tax act of 1986. i voted for that. were you in the house at the time? [inaudible] >> but you would have. that legislation took a hatchet the special interests and lowered the top individual tax rate from 50 to 28%, but the special interest came back and stronger than ever. and since 1986, according to the joint committee on taxation, congress has enacted 158 new tax expenditures. is it right for an oil company, that they can reap an $11 billion tax windfall from the worst environmental disaster

in our history in the gulf oil spill? i think that's questionable. and i don't think oil spill cleanup cost, due to the negligence of the parties that were drilling, should be treated as an ordinary and necessary business expense. and that's just one tax break. is it right at large, multinational corporations can report record profits, yet still pay no federal income tax? and, of course, the example that has been out in the news quite a bit is general electric, which had worldwide profits of over $14 billion, and they paid zero in income tax. well, that doesn't seem to be right. doesn't seem to be fair.

when you need a tax system that is embraced by the population as being fair, these are examples that strikes the everyday american as a system that is very unfair. well, is it right that wall street executives can avoid millions in taxes using complex deferred compensation schemes while that average taxpayer can put no more than $5000 a year into their roth ira? or, is it right that a special tax will allows oil and other commodities speculators to treat a portion of the short term profits as long-term capital gains subject -- in order to have a lower tax rate? in fiscal year 2008, tax

expenditures such as these totaled $1.2 trillion in lost revenue. that's in one year. that some in -- that's some is greater than the entire amount raised by individual tax rate in that same year. it's also greater than all federal discretionary spending in that same year of 2008, and it's twice as much as all nondefense discretionary spending. between 1972 in 2008, the number of tax expenditures more than quadrupled from 60 to 247. and over 25 year period from 1974 to 2008, tax expenditures climbed from 5.7% to 8.6% of

gdp. if we simply reverted to the 1974 level of tax expenditures, we could wipe out more than $400 billion off our annual deficit this year, and more than $4 trillion over 10 years. so tax expenditures can be characterized more accurately as taxes earmarked, because they represent a resort particular interest that is revenue that is not come into the system that has to be made up somewhere else by the average american taxpayer. and so tackling tax expenditures and not just about deficit reduction and increasing revenue. it's also about getting rid of distortions that act as a drag on investment and economic growth. and over the last two decades, our foreign trading partners have moved rapidly to modernize their tax systems to make them

more relevant in a global economy where capital moves at the touch of a button. the click of a mouse, where intellectual property is easily transferred, and goods are manufactured in global production chains that transcend the borders. here at home, the united states plots along with an antiquated tax system in which the rules for taxing international trade and investment were developed in the '20s. and this time for tinkering has now passed, and we need to overhaul the way that we tax u.s. companies that operate around the world. so, we're going to focus today on the subject of examining whether there is a role for tax reform in comprehensive deficit

reduction and u.s. fiscal policy. one of the things is tackling tax expenditures, to make the tax code simple, fair, and equitable. the code is so complex that so many taxpayers simply throw up their hands. they spent an estimated 7.6 billion hours each year complying with filing requirements. and that means it's roughly $140 billion in 2008. 60% of the taxpayers pay tax prepares to fill out their forms. i could go on and on, and i will submit for the record the rest of the testimony here. let me just, before i send it to my colleague, senator crapo, i

want to say that we do have a panel that is extraordinary to speak on this subject. the first witness, alan greenspan, manage u.s. monetary policy under four presidents during the five terms as chairman of the federal reserve, and during that time he -- the united states grew from a 5 trillion to a $13 trillion economy. and john taylor served as a member of the council of economic advisers in the george h. w. bush administration, and as undersecretary of treasury for international affairs in the george bush administration. and he is a professor of economics at stanford. martin feldstein served as chairman of the white house council of economic advisers in the reagan administration.

and dr. feldstein has written more than 300 research articles in the field of economics, founded the national bureau of economic research, and is currently as a professor at harvard. john engler, president of the business roundtable, three term governor of michigan. mr. engler, governor engler was president and ceo of the national association of manufacturers. and edward kleinbard, chief of staff of the joint committee of taxation from 2007 to 2009. he has 20 years of experience practicing tax law in new york, and is currently a professor of law at the university of southern california. this is an extraordinary panel. thank you for honoring us with your presence.

senator crapo? >> thank you, mr. chairman. i appreciate your holding this hearing as well. i want to focus right at the outset on one of the early comments. that is any part of the important needed changes that we need to be making in america today with regard to economic and fiscal policy, tax reform, is one of the key pieces that we must not allow to be ignored. as you know, i've been working with a group of six, called again. i know that you've been working in other context. senator wyden as well, has to proposal of his own. but the one area of agreement that i think we have among us and among many others is that in addition to controlling the insensitive spending appetite of washington and getting our spending under control, which is undoubtedly an important and necessary piece of the reform of our fiscal policy, we also need

a pro-growth on our fiscal policy and economic policy. and if you're going to do with the issues that america faces properly, we will focus not only on the austerity and the proper fiscal policy relating to expenditures and has been a, but also with regard to those kinds of reforms that i think are started at the foundation for fundamental reform of our tax code that will generate a progrowth opportunity for america and help us to build and strengthen our economy. today's hearing focuses on the issue of tax reform and as you have said we have an outstanding panel here to discuss this with us. the notion that tax reform is needed is hardly in dispute i think in the united states today. but there are a tremendous number of ideas about how we should do it. you have identified a number of pieces of the complexity of the tax code where i think i got the feeling you felt we could

simplify. as you know the group that i have worked with proposed dramatic reduction of the complexity and our tax code, and i know that senator wyden's proposals are similar in that regard. and undoubtedly we will have to engage in the discussion and debate over these very specific aspects of our tax code. and there will be disagreement about the integral pieces and a policy justifications but we must engage in that debate. i have said many times if we were to go about creating a tax code that is more unfair, more complex, more expensive to comply with, and more anti-competitive the u.s. business interests, we would be hard-pressed to do it. i think we have done it with our code. some may argue with me. i don't think they would argue we dramatically need to flatten our code, improve it, make it much less complex, much more friendly to growth into business development in america. some have called for a combination of raising tax rates

and modifying and a limiting tax expenditures as a way to raise revenue that would be dedicated to deficit reduction. others like myself have disagreed with the notion that we should stay in what i considered to be the age of old boxer battling over whether we should raise taxes on those who are particularly identified as the wrong people in america to receive tax benefits. raising taxes on the wealthy or whatever, and we need to move out of the box into a debate in this country over how to reform the tax code. a proposal i supported, the proposal many others have proposed of their own all have similar elements. and that is they look at simplifying and reducing the complexity in the code here most focus on reducing tax rates in accordance with that. in building the economy. and that's definitely the approach that i think would be music to the ears of those seeking to engage in capital formation, and business

development. a byproduct of the economic growth that i would hope that would come from tax reform would be the additional kind of revenue that we do not now currently see in our economy. not because current tax rates are too low, but because our economy is not going. history has shown that our annual total revenue as a percentage of gdp is about 18.2%. this has been the case whether the top tax rate was 70% or 28%, or 35%. in boom times losing temporary revenue spikes and at times of slow growth and high unemployment as we have in recent years seen, we have seen kids in the total revenue. but over time with always in revenues return to the historic average. regardless of what congress has done to the tax code. in fact, and a run is only exceeded 20% of gdp three times in the last 70 years. two of those times where the end

of world war ii when our nation was still running high deficits. the other time was in 2000, when the annual revenue, 20 points 6% of gdp, took place at the height of the stock market bubble. this temporary spike in revenue was bound to come down as soon as the bubble popped, edited. which also coincided with other, the post-9/11 recession that occurred. in fact other than one year, 2000, of the other 11 times since 1940 when the budget has been in surplus revenues were less than 20% of gdp, and in seven of those 11 years, revenue was below 90% of gdp. it's also important to note our budget has never been imbalance when the federal spending exceeded 19.4% of gdp. along those lines i appreciate that many of our witnesses today note in her prepared testimony that tax form is an important goal for congress, under the entitlement reform must also be of primary goal for congress. as it is the largest driver by

far of our long-term fiscal shortfall. nevertheless even if we do that trillions of dollars of spending which we must do, so long as our economy remains in the tank and unemployment remains persistently high, policies that will generate the kind of robust economic growth that is currently nowhere to be found must also be a priority. it is for this reason i support the inclusion of attacks ago as a part of comprehensive fiscal reform plan that also includes fundamental entitlement reform and strict enforcement mechanisms that will keep congress from violating those guidelines and those requirements. i'm very pleased, mr. chairman, do not have been working so closely together on these kinds of issues. as i've noted the other senators here on the panel, we all have to some extent different ideas about exactly how to achieve it. but there is a huge overlap in

our commitment to achieving this kind of fundamental tax reform. hearing we're holding today is evidence of that. so can track to other for to what our witnesses here have to tell us an afford to working with you and our other colleagues in congress in developing a progrowth agenda for our economy as we also move forward to do with our spending excess. thank you. >> thank you, senator crapo. chairman greenspan. >> thank you, mr. chairman. mr. chairman, senators, i very much appreciate the opportunity to testify before this committee. it's an extremely important subject and i'm glad that the congress is taking a very pronounced effort to come to grips with it. tax reform is a major part of any program of fiscal reform. it will contribute to the restoration of american competitiveness and the vibrant economy that goes with it. the fiscal success we've

achieved in the early 1990s was essential to contain budget that seems inherently prone to excess. but the great irony of those years was that the surpluses that emerged from 1998-2001 as a consequence of that success thoroughly undermined fiscal prudence. we have now come full circle to a point where as much as i wish it were otherwise, there is no credible center of addressing our current fiscal problems without inflicting economic pain. we have been procrastinating far too long in coming to grips with the retirement of the baby boomer generation, a fiscal problem that has been visible for decades. by 2006, with chronic surpluses already a distant memory, the medicare trustees indicated,

according to calculations by the council of economic advisers, that the medicare program does not have enough projected revenue to cover projected future spending. a reduction in medicare part a. expenditures by 51% would be necessary to make the medicare trust fund solvent. but rather than repairing the huge shortfall and a lesser one in social security, we expanded entitlements still further without a matching source of revenue. our major problem is not only that any has been rising rapidly, but that it has been men in the form of entitlements rather than of discretionary outlays such as more spending, more bridge building, that ceased when the activity comes to an end. entitlements, however, once

bestowed a very difficult to rescind. the growth of our economy in the years ahead is bound to slow. our civilian labor force, short of a major change in immigration, should parallel a slowing in the growth of the working age population, most of whom are already born. professor gordon of northwestern university has concluded that is most we sent 20 year forecast of the growth rate of per capita real gdp, as he put it, represents the slowest growth of the measured american standard of living over any two decade interval recorded. since the inauguration of george washington. in the years ahead become increasing entitlements will be pressing against shrinking

economic growth. my preference going forward, as i have noted often, if something that came to the budget recommendations of paul ryan, the chairman of the u.s. budget committee. i regret, however, for now at least that ryan's budget lacks the votes for passage. and as european current experience underscores delays in implementing policy reform can be destabilizing. our politically feasible budget proposals on the table, that proffered by bowles-simpson national commission on fiscal responsibility and reform appears the most substantial. what impressed me most of all bowles-simpson is that it addresses tax expenditures, cuts in tax expenditures mostly

subsidies, can be alternatively structured and viewed as cuts in outlays rather than a reduction in revenues. subsidies of what ever stripe distort the optimum functioning of markets, and ultimately the standard of living society as a whole. i do not know where the to u.s. budget crisis is immediately on the horizon, or is years off. what i do know is that if we presume that we have a year or two before starting serious long-term restraint, and we turn out to be wrong in that optimism, the impact on financial markets could be devastating. if we are wrong in the overly fiscally cautious in years ahead, that is a problem that is readily solvable. into mr. chairman. >> thank you, chairman greenspan.

dr. taylor. >> thank you, mr. chairman. members of the committee, for holding this hearing on the role of tax reform and u.s. fiscal policy. most important thing for our economy right now is to have higher growth and, therefore, lower unemployment. and comprehensive reform of fiscal policy is a big part of that. i think for the past several years we have focused more on moore temporary targeted types of interventions, and in my assessment they have not been effective and so that's why it's so important i think to move towards a more comprehensive strategy. there's two elements of that strategy. one is the budget strategy, and second is the tax reform strategy. and they are intimately linked together. i would like to refer to a craft that i just distributed in my testimony, which is in front of you. this graph, confident, illustrates i think the way to go about this in a sensible way. you would start with the budget

control act this summer, the budget control act of 2011. while criticized by many it has accomplished a reduction in spending growth compared to the original budget submission of the president. if the joint select committee comes up with the additional spending reductions, it will take the spending levels by 2021, from 20.2%, to 22% to 22.2% was in the budget president. it will come to 22 if action is taken. but i think we need to go further, and what did just that we take spending levels back to where they were in 2007, as a share of gdp, levels will be higher of course. that level is 19.5% of gdp. there are two big advantages of that strategy and i will show you in the graph in a minute. one is it allows tax increases to be taken off the table, which

is a stimulus to economic growth. two, it will allow a revenue neutral tax reform, meaning lower and marginal rates and broadening the base, the classic definition of tax reform. those advantages are i think essential for raising economic growth. the tax reform strategy of course should just do that, reduce marginal rates as the base is broadened, and you've indicated many ways, mr. chairman, how to do that. it can be done both in the corporate side and on the personal site. i think both should be part of this. i'd like to choose in the last couple minutes try to work through my graph to illustrate this, because the numbers are very important. but if you look at page five of my testimony, page five of the testimony, you will see a graph that shows federal spending, federal outlays as a share of gdp. from 2000-2021.

the history is most remarkable because it shows really a gigantic increase in spending as a share of gdp from 18-point you in 2000, two over 20 now. the president original budget didn't do with that spending problem as we all know, and it is shown in the graph. it would've had spending at 24.2% of gdp by the end of the budget window. with the budget control act, plus the continued resolution of 2011, and with the extra work the joint select committee must do, you can see that has been, the picture has changed dramatically, assuming you'd take spending to 22% of gdp. but as you can see, if you really want to have a budget strategy that doesn't entail a tax increase, you've got a little ways to go. and what i would suggest is with

the tax reform proposals, and other reform, it's quite feasible to get to choose where we were in 2007. that was 19.6% of gdp. i have drawn in my graph a way to do that. there are other ways to do that. chairman greenspan referred to another one. but this would be the way to have a comprehensive budget strategy, a comprehensive tax reform strategy, and one which would do a great deal of good to the american economy with high growth and lower unemployment. thank you. >> thank you, dr. taylor. dr. feldstein. >> thank you very much, mr. chairman. i'm very pleased to have this opportunity to testify. i've been talking about tax expenditures and about program of tax reform for many years, even before i served as chairman of the council of economic

advisors for president reagan. so i was really very pleased to hear your opening comments, and those of senator crapo. i both the testimony that i submitted before i heard president obama's speech to the congress the other day, and his plan to finance his new stimulus package. if you have looked at my testimony you know that i, like yourselves, favor reducing tax expenditures. but i must say i do not favor the way president obama proposes to limit tax expenditures. i think there are two reasons why his proposal are bad ideas. first, it uses the revenue to finance his new collection of government spending programs. when we need that revenue from reduced tax expenditures to reduce future budget deficits and to lower marginal tax rates.

second, as you know, the president would limit the tax expenditure reductions just to higher income taxpayers, those with more than $200,000 in income. but long-term deficit reduction requires that everyone shared in that burden. if congress were to pass the president's proposal to reduce tax expenditures just for high income individuals, i think it will be very difficult to revisit that at a later time and to extend it to the entire population of taxpayers. with that said, let me return to the testimony that i submitted. and again, i said as both of you said, and as the two previous big country and speakers, the tax form, the focus is not a substitute for the fundamental reform of social security, of

medicare, of medicaid, the primary sources of the future growth of government spending. i think the key to those reforms is to reduce gradually the growth of the projected government benefits and to supplement those benefits with the universal investment pays annuities and private health spending. doing that would protect the future incomes and health care of older americans without requiring higher future tax rates. but let me turn to tax reform, where i come in the prepared testimony, emphasize what you both have spoken about. and that is, the role of tax expenditures. tax expenditures which as you said our substitute for direct government spending. i think that the key to favorable tax reform is to limit the revenue lost because of these tax rules, and to use the

resulting extra revenue to reduce current and future marginal tax rates. today's marginal tax rates are typically close to 50% for a middle-income family, because of the combined impact of the income tax, payroll tax, and state taxes. these high marginal tax rates reduce the incentive to work, require more skills, to start or expand a small business, to save and to invest. they induce individuals to seek their compensation in nontaxable forms and fringe benefits, and to spend money the ways that generate tax reductions. so limiting tax expenditures and using the resulting revenue to lower marginal tax rates would produce a double win. it would reduce wasteful behavior directly, and would strengthen incentives for

increased economic growth. and, of course, that can be made a triple win by using some of the resulting revenue to reduce budget deficits. although limiting tax expenditures produces additional revenue, it is, as chairman indicated, really a way of cutting government spending, government entitlements. the effect shows up in the revenue side of the budget, but it is really a cut in spending. the accounting rules make it look like a tax increase, but the economic effect is the same as any other reduction in government outlays. let me be more specific about how i think that cutting or the limiting of tax expenditures might be approached. because i think it can be done without actually eliminating any of the tax expenditures, or even putting limits on specific tax

expenditures, like the size of the mortgage deduction. i think a better and fairer way to reduce the revenue laws caused by tax expenditures is to allow individuals to use all currently available tax expenditures, but to limit the total tax benefit that each individual can get from those tax expenditures, to limit that tax benefit to a percentage that individuals adjusted gross income. for example, limiting the revenue loss from the itemized deductions, and from the exclusion of employer payments for health insurance, to 2% of each individuals adjusted gross income would raise more than $275 billion a year at current income levels, and more than $3 trillion over the next decade.

the size of the tax gap could of course be started with a high rate and gradually reduced to a 2% cap. even a 5% cap would generate more than $100 billion of additional annual revenue at current income levels. a key point to stress about this idea is that the 2% cap is applied to the tax expenditure benefit, and not to the total amount deducted or excluded. for example, someone with a 30% marginal tax rate who pays an annual mortgage interest of $5000 would receive a tax expenditure benefit now of $1800, and that 2%, 5% cap would apply to that. it also would generate tremendous simplification, 2% cap on tax expenditure benefits would cost nearly 75% of

individuals who now itemize their deductions to shift to the standard deduction, which would indeed be an enormous simplification. i've said a little bit about corporate tax reform, basically lowering tax rates and shifting to the territorial system that is used by virtually every other industrial country. but i will stop there, and look forward to questions after the other speakers. >> thank you, dr. feldstein. governor engler. >> thank you, mr. chairman developed a writeup on the corporate tax reform that dr. feldstein. thank you the committee for holding this could meeting today. i might mention that in my credential a guess as a three term governor, after 25 years we were able to get michigan back to aaa rated state. so, i appreciate the challenge in front of the committee. my testament today focuses focuses on the critical relationship among business tax reform, economic growth, and deficit reduction.

business tax reform should be designed to maximize economic growth over time, while creating permanent jobs that had jobs with good wages but we believe congressional action to improve the ability of american workers to compete in the hypercompetitive world economy. such action to sustain economic growth would have the additional benefit of reducing the burden the nation's current debt imposes on our economy. if sound corporate tax reform along with other reforms including broad regulatory reforms includes economic growth by even a half percentage point we can generate millions of new jobs for americans. mr. chairman, you and the committee could not be holding more timely hearing than today's session. our companies are disadvantaged today by u.s. corporate tax system. that is an outlier at a time when capital is more mobile in the world economies are more interconnected than at any time in history. your opening statement focused on that and recognized that our current tax system in paris the

ability of u.s. companies to compete abroad, and discourages capital investment in the united states. the u.s. corporate tax system is quite possibly the least tax system in the oecd family. i put a chart of to show what's happened over a period of time because it is important we do that. again you noted that. we have an antiquated tax code, developer a different era. this chart, 25 years ago shows where we made changes and we are in a more competitive posture. today we need a simpler, flatter, lower rate system, allow american business and your constituents, america's workers, to compete and win. the two primary reforms, business roundtable endorses, or a competitor real tax system and a significant reduction of the u.s. statutory corporate tax rate. verse, territorial tax system under which foreign earnings are

exempted from domestic tax are the predominant practices again within the oecd. territorial tax systems allow domestically headquartered company to compete on a level playing field in foreign markets where they do business. the table here that kind of shows just how dominant the practice is. and then second, as the other chart which when we had a one's statutory competitive statutory tax rate we no longer do. rate reduction over the past 20 years have resulted in u.s. corporate right now being 50% greater and again the average of the oecd countries. i believe that the proposals we bring today would boost worldwide competitiveness of american companies can't increase jobs for american workers, increase wages, promote long-term economic growth with united states, and help pay down our debt. it if i win because adopting digital and it's important to consider the cost relative the

revenue stream that government would've otherwise collected. in doing so i urge congress to recognize that many provisions in the tax code, although they may have statutory explorations, have routinely been extended year after year. i can tell you sort of mentioned that in your opening, to the r&d tax credits, choose one for example, a temporary provision now for 30 years. provisions that had been repeatedly extended are realistically part of the baseline. against which the rent for a reform tax system must be measured. someone argued business tax increases should be now. still others will argue business tax increases should be used for reduced spending by the business roundtable argues that any business tax changes should be used to come as the president said to the caucus the other night, on thursday, lower. clearly given the deficit in everyone's decide to be fiscally

responsible, coupled with everyone's desire in the u.s. unemployment rate come down, we must guard against any diversion of corporate tax revenues, going to break, and eliminating the unfair worldwide tax system. comprehensive tax reforms a challenge. not give these your assembly for piecemeal changes in the tax base or succumbing to the targeting that you spoke of for specific industry. success will come when we address the fundamental tax reform that can help achieve a higher u.s. standard of living. i look forward to working directly with congress, passing tax reform to provide sustained economic growth and sustained job creation. we did bring one other chart. i will close with a company that a because it is kind of important, and it shows where the tables are today. this once gone a little bit of attention, but that's what we need to change, tax reform and help move those numbers on the

employment side to positive direction. thank you, mr. chairman. >> thank you, governor. mr. kleinbard. >> thank you, mr. chairman, and distinguish numbers for inviting me to testify. the u.s. today is an extraordinarily low taxed country by world's norms. the fourth lowest in the oecd. and given by our own standards we're collecting historically low levels of tax, below 50% of gdp for the last three years. at the same time, we are spending outliers into large respects. spending, tax revenues that we require, i need to say one quick word about them. first, we spend much more on health care per capita than does any other country. and our per capita government share of this thing is the second highest in the world. if the u.s. were to spend a per capita what no way does on health care, our aggregate health care is being would immediately declined by $800 billion a year.

second, the u.s. spends as much on its military as to the next 14 countries combined. 42% of the entire world military expenditures. our current revenue base cannot be reconciled with our outsized spending on health care and defense. moreover, whatever the long terms set of government income and spending policies we transitioned to, we will need to finance the costs of getting there, and that in turn means higher tax revenues than those we currently collect. the u.s. can afford to increase its total tax collections as a fraction of gdp. just a decade ago the country ran budget surpluses and enjoy both robust economy and job growth while tax collection exceeded 20% of gdp. the cbo budget baseline assumes that the so-called bush tax cuts will all expire at the end of 2012. extended of temporary tax discounts would add some $4.6 trillion to our deficit over the next 10 years.

we therefore have no practical choice but to treat the cbo baseline as the tax reform base case at our tax reform goals should be to raise about the same revenues as the cbo baseline but to do so in a smarter way. this means we must abandon our nostalgia for the tax reform act of 1986. that taxes from ever was revenue neutral because it couldn't afford to be. it also was preceded and followed by major tax increases. the fact that we have to raise revenue today means this tax effort will look different, not that it is impossible. in particular, this tax reform will need to tackle some of the deliver congressional subsidy programs which is to say, tax expenditures. of all of these the most important to address are the personal itemized deduction such as deduction for home mortgage interest, child care contributions in state and local taxes. they are extraordinarily costly, about $220 billion a year in

foregone tax revenues. they are inefficient in that silly to me to miss allocations of economic resources, particularly in the housing sector. they are poorly targeted in that the government subsidies go to individuals who would have behaved the same without them, and they are unfair in that they're upside down subsidies. they subsidize high income americans more than low income once. tax policy center has estimated that eliminating the subsidies for personalized itemized deductions would increase tax revenues in the neighborhood of 1.5% of gdp over and above the last of the temporary tax discounts. this is an enormous revenue pickup. elimination would simplify the code and increase its productivity. i fully recognize that the personal itemized deductions invariably are described as political sacred cows. if they are sacred cows that we can no longer afford to maintain. b-to-b of the mideast sacred cows are we allowed them to stampede over us.

tax reform must address the corporate income tax. i agree with the governor into that it is 35% rate is too high by current world norms. but at the same time u.s. multinationals are adept at gaming the current u.s. tax system and those of other high tax countries their production of what i call stateless income. income that is tax essentially nowhere. the u.s. corporate base is being systematically eroded through these stateless income tax planning strategies. and the territorial system along the lines advocated by the business roundtable would make these problems worse in every dimension. a revenue neutral corporate tax reform package could be fashioned along the following lines. first, eliminate business tax expenditure. second, reduce the corporate tax rate to something in range of 25-27%. and, finally, tax multinationals currently under worldwide income. the result in corporate system would represent a huge competitive boost for american domestic firms, would attract inward investment into the u.s., and would provide a fair tax

environment to us-based multinationals. thank you, mr. chairman. >> thank you, mr. kleinbard. senator, i'm going to ask one question. i'm going to then turn to you, your questions. gentlemen, how much revenue could congress expect realistically to be generated by broadening the tax base, eliminating texas pitchers, and closing the loopholes? let's just go right down the list. >> it's a very extraordinarily large number, but i wouldn't put the issue that way because because what we are dealing with is a major problem in this country in which what we are promised in the way of

entitlements is in physical volume terms, more than i think the size of the american economy can produce. and so it's not an issue of raising revenue per se, it's a question of our spending is already committed to more than we have the capacity of achieving. so i would say that the focus has got to be fundamentally on the issue as to why, for example, as i mentioned in my earlier remarks, the trustees of the medicare fund several years ago found that we were very significantly underfunding medicare, and unless and until we understand our problem is spending and not taxes, i think we will be, we will lead ourselves astray. finally, let me just say, mr. chairman, that there is no question the level of taxation is a very major factor in

determining the level of economic activity. and the issue that i think we ought to focus on is that we are in a period of very sluggish economic activity. there seems to be no real potential for change in that materially. no, and the revenues were going to engender, irrespective of the tax code, are going to be much less that i think is currently being projected, either by cbo, omg, or number of private economists. if that is the case, we have to recognize that we have a major problem among the expenditure side, and what i would define it is this is not discretion spending which is very easy to end. it is very difficult to cut entitlement spending. and i think unless and until we put our focus on the issue, and then determine what it is we

need to raise in revenues after we determined what we're going to spend is, from my view, and the appropriate way to focus on tax policy. taxes are there to fund spending, and the lower the level of spending, the less the problem of funding. >> if it's just a matter -- >> hold on. i want to follow up with chairman greenspan. just focusing on tax expenditures, it's an item worth $14 trillion over 10 years. what do you think is realistic for the congress to squeeze out of that 14 trillion of tax expenditures? >> well, mr. chairman, i'm one of those, and i suspect you may be as well, who thinks tax expenditure should not exist in our fiscal system. and that as far as i'm

concerned, what the bowles-simpson commission essentially did it started off with the presumption that tax expenditures would be zero, and then work back from there. i like that premise. in fact, i realize it's going to be very difficult to avoid having to keep some of that in place. but as far as i'm concerned, the sooner we can get rid of the whole concept of tax expenditures, the better we would be. i would like to see all expenditures go through the appropriation process, rather than go through tax credits or other things which i find is merely a mechanism to get around the ultimate choosing process which the congress, in my judgment, has got to do. >> so get rid of 14 trillion, and then build from there? >> i would say if you start with the assumption that tax expenditures are in

inappropriate means of raising revenue, and then work back from there, i think we are in the right direction as the bowles-simpson commission recommends. >> dr. david? >> i think if you want to just eliminate the tax expenditures and i consider it, along with tax reform, which is really adjusting the marginal rates, then you'll be disappointed about how much extra revenue you raise. if we have a stronger growing economy, say like we had after the recession in the early '80s, 6% a year, 6.5% a year, rather than two, 2.5, the same share of taxes, we got a lot more revenue. we could do a lot more things. so it's the growth that is most important. so i would say when you are thinking about the zero in terms of tax expenditures, you better be simultaneously thinking about

the marginal rate reductions that are going to go along with that. >> which is precisely what we have set up here. now, dr. feldstein, you proposed 2% cap on any individual, and i assume corporate amount of tax expenditure. and if i recall your testimony, that was about $3 trillion over 10 years. that we don't have to pick and choose which ones you want and don't want. >> that's right. but let me be clear. that was just on the personal side. it's hard to think about what the equivalent of percentage of agi is for the corporate side, but i haven't looked at that. ..

>> economists not esteemed columnists like my colleagues here. i'm not able to put a number on this. but let me just remind the committee of something that virtually every member was a part of back in '95 and '96 we were doing the welfare reform and that was one of the singular accomplishments in the last century but we saw in that -- when the incentives got changed we had people going back to work who said they would never go back to work. where everybody on public assistance was working and that was channeling how we handle

income disregards. and to restore our animal instincts of our entrepreneurs and to get the incentives lined up, the kind of changes that are being talked about here are going to yield additional revenue over a ecstatic analysis over at some cbo corner of the room would come up with and the dynamism of this tax code is not to be underestimated if we get it right. and what we, i think, we have to be focused on what manufacturers and business round table members deplore is the lack of economic growth in this country. we need to be a jobs engine again as a nation. and our policies should be coordinated to get there and your topic today can help. >> mr. kleinbard? >> well, you know, as the former chief of staff of the joint committee on taxation, it's, i guess, incumbent on me to do what you've always suspected my old group did and pull a number

off the top of my head. i come up with about -- i'm rounding here about $4.5 trillion and the way i get there is, first, the itemized deductions. it's somewhere in the neighborhood of $2.5 trillion in '2010. the employee sponsored health insurance i would not put a cap on that the waymart way -- marty has proposed. this is one tax expenditure which also has a tax expenditure effect on our social security tax payments, our payroll taxes and that's about a trillion dollars over 10 years. so regardless what we do on the income tax, if we included employee sponsored insurance as part of our fica tax base for payroll purposes we'd be talking about another trillion. and then there's over a trillion dollars, 1.2 or 1.3 trillion in business tax expenditures. those need to be reversed. every country that's lowered its

rate has also broadenend its corporate base by getting rid of accelerated depreciation. that's a fair trade. and that would put over a trillion dollars which in my view should be employed to reduce the corporate tax rate. having said that when we're talking about fundamental changes like this, like eliminating the personalized itemized deductions, it's important to remember a metroplex mum the chairman bachus told me you have to boil the frog solely. we could simply wake up tomorrow with no home mortgage interest deduction and i confess that my numbers don't reflect any transition rules. >> the frog is still dead i would point out which is one of the problems. >> so your proposal is 4.8 billion dollars a year or multiplied times 10 years? >> an aggregate of over 10. >> 4.8? >> trillion over 10, yeah. >> over 10. >> senator crapo?

>> thank you very much, mr. chairman. and i assume by the way that that number, mr. kleinbard, would be 4.8 trillion that there is now in the tax code. >> by way of -- >> and most of those would be on the capital income side that marty referred to on retirement plans. >> and i would like to ask the entire panel very quickly in the bowles-simpson with regard to the income tax rate are being proposed on a revenue neutral base and should the reforms be revenue neutral? mr. kleinbard? >> i don't disagree with that except to note that some business tax expenditures are to some extent claimed by noncorporate businesses. the bulk -- about 80% are

claimed by corporations. >> all right. thank you very much. getting back to the question -- whatever the level of adjustments that can be made in the internal revenue code in terms of flattening the code and reducing the tax expenditures -- and i think there's no disagreement among any element here with regard to the fact that in some way we should do that, the bottom line -- it seems to me that there is a big debate over how that revenue savings to the federal government should be utilized. as i see it, it can be used in three ways. it can be used to reduce rates. it can be used to justify more spending. and it can be used to reduce the deficit or to pay off debt. and there may be other ways to use it that i haven't thought about it but in a broad sense it seems to me those are the three options. in my mind, reducing rates would be the most effective

utilization of those kinds of savings but i would like to have just from each member of the panel your observation as to how we should approach that? >> senator, ordinarily i would agree with you, but we are in such precarious shape fiscally at this stage that i think it is essential that we get the level of the deficit down as quickly as possible because remember, every day that deficit sits out there at a trillion plus annual rate we are adding to the debt. and in order to reduce that debt, we have to run a surplus and leaving aside the issue of stabilizing the fiscal system by seeing -- making sure that the level of debt relatively to the gdp is some stable number, that is an economist's fiction because what can happen very readily in that context is interest rates can go up and that whole thing breaks apart. i think the combination of, one,

a slower rate of growth and, therefore, a fundamental revenue creation coupled with the issue of the very considerable difficulty we are having in cutting spending leads me to conclude that the very first thing we ought to address is get the deficit down. once the deficit is down, then i think we approach the issue of cutting spending and having cut spending then cut taxes. i don't believe it makes sense except in very extraordinary circumstances to cut taxes funded by borrowed money. i don't think at the end of the day, that works. so i think we underestimate in all the calculations we are making how severe this problem is and the mere fact that everybody seems to agree on the baseline of this and the total revenues on that which, in fact, tends to be the case. omb and cbo tend to come out

reasonably even in all areas. they make the same fundamental assumptions about the long-term economic outlook. and as a consequence that's a major driver of revenues. and so my judgment is let's get our house in order. let's remember that taxes are there for the purpose of funding spending and decide what level of spending this country can afford, not what it would like, but what it can afford. >> i'm in strong favor for that and qualifications on your first approach which is to use reduced rates which to me is the classic definition of tax reform, expanding the base and lowering the rates in a revenue neutral way. the strategy or the plan for the budget i outlined orally at the beginning and in my written testimony has that built into it and i think that's one of the real advantages of a credible gradual reduction in this very

high level of spending that we recently just achieved. number 1 it seems the way to do this. >> thank you, dr. feldstein? >> i would split the revenue between the two uses, and i thought that the bowles-simpson proposal which does do that probably puts too much into deficit reduction -- sorry, into rate reduction, into rate reduction and not enough into deficit reduction. i think we do have to get back to annually balanced budgets, not every year, but over the business cycle as quickly as possible. here's the good news, after world war ii, we had a debt to gdp ratio of 110%. in 15 years later it was down under 50%. and that happened because over those 15 years, on average, there was no deficit. some years plus, some years

minus. but the fact that the economy grew 2.5, 3% and we had inflation 2.5, 3% meant that nominal gdp kept growing while the total debt remained unchanged. and so we got back from this very high debt to gdp ratio to something that we then lived with for several decades until recently. >> thank you. governor engler. >> i was going to mention simpson-bowles in terms of the structure but from the business side, i think it's very important the image -- the concept of revenue neutrality. it would be the right baseline. that's why i wanted to put that in my spoken testimony today because that alter things a lot depending on how you play that but what i would see on the business side a rate reduction which i think has a positive effect then in terms of economic growth and deficit reduction.

i think the only thing you clearly got to be very clear is no increased spending because that needs to go in the other direction. >> thank you. mr. kleinbard? >> well, i thought chairman greenspan was quite persuasive. milton friedman famously once said that to spend is to tax. so it's really spending that drives the question of how much revenues we need. and here, i think, we are all perhaps not keeping on the table this inescapable demographic fact that the country is getting older. just look at this panel in front of you as proof. and the result of that is that our health care expenditures are rapidly growing at a rate that greatly exceeds our growth in gdp. so we need to rethink our spending patterns, our long-term

entitlement patterns. those have to be phased in slowly. we have to boil the frog slowly in terms of changing those entitlement rules to a more sustainable one. and in turn, whatever's left we have to finance and we finance that through taxes. so, you know, the medium term i do not see any prospect other than higher taxes being used to help to reduce the deficit or the minimum not increase it as we make a transition to a different spending pattern. >> thank you. senator bingaman? >> thank you very much. and i thank you all for being here to talk to us today. i guess a question i'd just still like a little more clarification on as congress approaches this whole idea of tax reform, do we need to raise

additional revenue? and i gather, mr. kleinbard says we do need to raise additional revenue. i understand chairman greenspan to be saying we do. i believe that's my interpretation. i believe the rest of you have said, we do not or maybe we do. i don't know. dr. feldstein maybe you could clarify -- you're nodding your head. >> my view is that if we eliminate or cap, which is my preference tax expenditures, we should use -- y'all should use some of that money to reduce deficits and some of it to reduce marginal tax rates. >> so we should raise additional revenue and it's just a question of how we use the additional revenue? >> well, if you eliminate tax expenditures you automatically raise revenue. >> right. >> the question is, do you give it all back in the form of lower rates? or do you use some of it -- >> and your view is we should give some of it back in the form

of lower rates but not all of it? >> exactly. >> dr. taylor, your view is we should -- we should do the reforms but we should use the revenue that we achieve from those reforms to cut rates as i understand it? >> yes. it would be analogous to what we did in the 80s. the '86 reform. >> so you would not want us to do an increase? >> i think growth is so important. economic growth and that's where -- if you think the revenues will -- classic tax reform is what i would suggest. >> but am i correct, chairman greenspan, that your view is, as i think you put it, deficits are so important we first need to bring down deficits which means that we are going to have to raise revenue until we get back toward a balanced budget. is that your position?

>> it is, senator, but very specifically what i would recommend is a recognition of the bush tax cuts of the 19 -- of the year 2001 and 2003 essentially rested on the concept of looking at for a large period surpluses. an unbelievable amount of surplus as some of the analysts put it back at that time, as far as the eye can see. and i always envisaged the bush tax cuts as essentially being one means by which we could take advantage of that. meaning, get the tax cuts and reduce the surplus. i would think at this particular stage, that what we ought to do is go back to the tax structure of -- that what existed prior to 2001 and then start again. meaning, that we want to get the

level of taxes down which you can only do it if you bring expenditures down and so i think the primary objective of policy -- to get ourselves to a stable position and allowing the bush tax cuts -- all of the bush tax cuts to be -- to be rescinded. we will start to get to a point where we begin to get balance in the system and remember that -- as i pointed out in my prepared remarks, this is not like the end of world war ii with 110% ratio of debt to gdp. that was very easy to cure. you just stop world war ii and all of a sudden, spending went down. and if you have a lot of

discretionary spending, that is easy to cut. but we are locked in with entitlements which everyone who receives them believes the government says this is your right. and there's a consequence rescinding them, something politically very difficult to do. my view has always been that we have -- we are in the process of promising more to people who are maybe 55 years of age a level of medicare benefits in real terms for, say, the year 2030 which i don't think our economy is going to be able to deliver. and basically not being -- not delivering what is promised by government is the worst thing that government itself can do because that person who's 55 years of age can -- if it knew what an actual benefit size was going to be in medicare, for example, they could perhaps work a year or two longer than they

ordinarily would have expected because they had retired on the assumption that those benefits were real. and i think they are not. and i think that unless and until we recognize that we have a very serious problem, this is going to be a very tough road to mow to get ourselves back to fiscal stability. >> thank you very much, chairman. >> thank you senator bingaman. senator wyden? >> dufor your leadership on this. this is an important topic in my view and i commend and you senator crapo for the work that you're doing. i want to zero in on the jobs issue with respect to this topic and start with you, if i could, dr. feldstein. as you know, i'm very sympathetic to the basic kind of proposals and ideas you're advancing in this area.

when we looked at the bureau of labor statistics figures in the two years after the '86 reform bill, the country created 6.3 million new jobs. and i keep zeroing in on that almost like the old record player that just never stops. 6.3 million, you know, new jobs. and it seems to me the study that you did on the '86, which to a great extent has affected my thinking over these years, the bipartisan bill i had with senator gregg and now senator coats look with marginal rates while keeping progressivity and you're on a path to stimulating the economy and creating family wage jobs. do you continue to feel that those principles are sound? >> absolutely, yes. >> okay.

second question and maybe we can get mr. kleinbard and any of you who would like to participate. on the question on the corporate rate. senator coats and i in our proposal have it at 24% which is actually the lowest on offer right now. most of them are between 25 and 27. but the point is everyone is moving in the tax reform debate towards the same kind of figure. the question is, how do we make sure that in corporate tax reform, we get as many jobs as possible here in the united states? because what a typical citizen is saying look at these tax breaks. you got tax breaks for shipping jobs. overseas, we need jobs here. well, a lot of companies would like to put their focus, you know, here so the question then becomes, where do we need to go

to get that done? it seems to me what you're saying in your testimony, mr. kleinbard, is if you cut corporate rates to the mid-20s -- and i'm certainly open whether it ought to be 22 or this or that percentage amount, your theory is that could create jobs here in the united states for companies that are already here, number 1. companies that are looking around the world to invest here. and for multinationals. in other words, it would allow us to run the table and do everything as far as tax policy that's needed to have progrowth tax reforms. is that essentially true? >> senator wyden, that's an excellent summary. i believe quite strongly that the corporate rate is too high. i also believe, frankly, that

too much attention has been paid to the plea of multinational firms for a territorial system which would, in fact, work for technical reasons to erode the domestic corporate base even further. domestic firms have been sort of left out in this discussion. the right approach is to lower the rate on domestic business operations, to attract jobs, to attract inbound capital, more jobs as a result of that and then to offer multinational firms a fair system in respect of their international operations. but when you look at the tax rates in oced countries where they actually operate, where the large economies are, those rates are still in the high 20s at the moment. and so if we were to offer u.s. firms a worldwide rate in the mid-20s, we would be smack dab in the middle of where the

oecd -- the g7 major economies are today with respect to their mainly income. we have this tendency to throw in state and local taxes. the fact is, that multinational firms don't pay state and local tax on their foreign income. and so we're fougnot talking ab 39% growth rate and we need to get it down at 35. and when you talk about win-win and fair environment international. >> dr. feldstein on this question of where you get that sweet spot in order to increase growth to the greatest degree possible and get as many american workers employed as we can. i want to get your thoughts on the territorial issue. senator gregg and i spend a

quadrillion hours on this and that's barely an exaggeration and i came back with all the issues with respect to territorial systems that involved gaming where somebody generates a profit over here and books it over there and the like and i came to the conclusion that competitive rates solve a whole lot of problems and our bills 24 -- maybe it should be something else and i'm open to all that and i'm open to look at a territorial system. is it fair to say -- and it seems to be in line of your '86 rates, the competitive rates will solve a lot of problems here. >> of course, my work on the '86 tax cut was about the personal tax cuts rather than the corporate. >> right. >> i was the coordinator of the president's economic recovery

advisory board for president obama's tax study. and we spent a fair amount of time looking at the -- and listening to witnesses and talking to treasury officials and others on this question. and i refer to the section of that in my written testimony. i was struck every time, though, by the fact that the united states -- i think with one exception is the only oecd country that does not have a territorial system. and when i think how easy it is for a french company or a german company to do cross-border investing after all, they've got all their neighbors there and yet they do it and they find it favorable and they create manufacturing jobs in their own economy. so i can see the pros and cons.

i can see the complexity of it. and yet i'm struck by the fact that all of these other countries have chosen to go the territorial route. >> let me ask one other question, if i might, and this one for you, mr. engler. this summer i was just struck by how many businesses said that what they really want for growth and investing is some certainty and some predictability and some measure of permanence. the "wall street journal" said today the only thing about the permanent thing about the tax system is impermanent. you can fix one band-aid one temporary proposal or another. isn't there an urgent need if we're going to have significant economic growth to get some certainty and some predictability that you can only get if you have real tax reform?

>> i think so. and i think many of our companies think that as well. i believe that that certainty -- certainly, i mentioned regulatory reform in a number of other areas. it's across everything today. but you're completely correct in terms of the tax code. let's whatever we do make it permanent and the complexities of scoring things, of how long this is in effect or not and affect what we've done at amp and all of that needs to go away. we need to make some decisions. that is the job of the congress. and direction's important. transition rules are important. i mean, we can go to a very good place over a period of time and that's another permutation on our discussion today. if i know where we're going and it's permanent and i'm going there, the path has