unrealistic politically, how much that can happen. there's another factor here, revenue. if we're going to solve our debt and deficit we have to look at revenue. have to look at revenue. mathematically, there's no escape. we have to. but my major point is my remarks, namely, that's all very interesting, it's a goal, but let's see what we do to get growth. let's see what we can do to make our country more competitive. let's see how to make our country even more innovative. one major advantage we have in america is our creativity and innovation. as wages worldwide fall, china's aren't falling, they're coming back up again a little bit, the major -- then a lot of manufacturing goes to other countries. most doesn't come back to the u.s., it goes elsewhere. major advantage we have is our creativity. there's a reason why google,

microsoft and apple and facebook were american companies, and we have to maintain that. you hear it constantly, travel around the world, you constantly hear that, it's the one advantage we have today as a country. we've got to really make sure we maintain that and keep it. and it's growth. rising tide does raise all boats. we have to find a way to get growth in this country. the code can't do it all, i grant you. the code can't only address the mal distribution of income in our country. can't do it all. but we can certainly, the code is a useful tool and a terrific opportunity to address growth, innovation and try to in some way deal with maldistribution. >> thank you very much, mr. chairman. appreciate it very much. >> thank you very much. thank you for all you do here. >> my name is steve bell.

i'm senior director of economic policy here. our moderator for the next portion of this is going to be kristin roberts, the national journal's managing editor for budgeting and economy. before she joined the national journal, she worked as reuters' washington-based news editor. she joined reuters in 1998 and she has had the opportunity in 2006 to spend a lot of time doing pentagon coverage, including her trips with robert gates, donald rumsfeld and war policy visits herself. so it's with great pleasure i introduce kristin roberts. >> thank you very much. so i've got an excellent panel here that truly deserves no introduction but i'm going to give you an introduction anyway. dr. alice rivlin, cochair of the bipartisan policy center's tax reduction tax force, widely

recognized as one of the most foremost experts on the issues we're talking about today. senator bob packwood, chairman of senate finance committee, he was one of the architects of the 1986 reform. congressman bill thomas, another chairman, chairman of the ways and means committee. widely seen as one of the smartest and toughest guys to ever walk the halls of congress, one of the main proponents of the tax cut bills of the last decade. and we've got robert greenstein, founder and president of the center on budget and policy priorities, an expert on a wide range of domestic policy issues including tax and social safety net programs. let's start, dr. rivlin, on mr. baucus' speech. lacking in some detail, some specifics that i know some of my colleagues in the press wanted. did it change or shift the debate at all? did it move the needle? >> i was very glad to hear him say several things that he said. one, clearly we're going to need more revenue as we address the long run deficit problem.

and he stuck with progressive rates, didn't go for flat tax. he's a cautious man. i'm a more radical -- i'm a centrist but a radical centrist. i would go for a more dramatic tax reform. but i thought he laid out many of the reasons that we need tax reform and laid them out well. >> bob, did you gain any insight from his comments about where the two parties might find areas of consensus or was there just not enough there? i'm sorry. mr. greenstein. >> more than one bob. >> that's true. there really is. >> i was deferring. there were several questions asked by journalists to try to hone in on specifics, and i thought chairman baucus' answers

were i want to avoid laying out any specifics around which there would be partisan division before the election. i thought there was a consistent theme there that there need to be behind the scenes discussions now to lay a framework for more intensive discussions when the election was behind us. so while on the one hand, i don't think there were necessarily specifics that suggested further bipartisan progress as a result of the speech, i actually thought the more significant development was that there was nothing in what he said that impedes bipartisan cooperation and frankly, lots of statements that get made these days do have things in them that impede bipartisan cooperation, so i would rate it as a plus on that front. >> chairman thomas, is this the right strategy? >> i'm like alice rivlin, i'll tell you where i come from, and

that is i'm a pragmatist. you need to get a majority of people saying yes and the atmosphere has been such that you're not able to at this time. senator baucus is a creature of the senate. the senate deals in concepts. i'm a creature of the house. the house deals in specifics that have to be written up ahead of time and scored before we vote. i think one of the important things that we need to stress is people shouldn't sit around making lists of what they will not do. that automatically limits your ability to move. secondly, this panel is described as the tax part of the debt problem. coming from the ways and means committee, the tax part is the debt problem, because social security is a tax. the medicare, part a, is a tax.

medicare part b is the general fund which goes back to see number one, the income and corporate tax. so addressing that broad tax question, not splitting it up into entitlements, a social network, if you want to make sure, and i agree with alice, the system needs to be progressive, why, because you can't vote, you will not get enough people to vote yes if it isn't. but if you're looking to take someone's income or wealth and use it smartly, as senator baucus said, you can talk about making changes in social security, bringing tax money from the wealthy into the social security system and by the way, solve the social security problem. you can deal with the tax portion that goes to medicare and do it in a way that you take care of people's medical and social needs but allow people

who have wealth to spend their own money on what they want beyond what medicare would provide. so i'm a strong believer that the taxes need to be addressed in a much broader and smarter way. and secondly, i firmly believe you can talk about goals all you want, but we have put up stop signs, we have put up stop lights and none of it ever changes congress' behavior. i believe going is the goal. what can we accomplish, don't have too many moving parts, address the fundamentals but don't talk about what the world is going to look like in 2025 or 2030 with what we're doing today. make sure you don't make it harder to solve our problems, but get people to yes on a simple plan that encompasses a very creative approach to dealing with the problems in the system. >> let's -- chairman packwood.

>> well, separate entitlements and social security. all the commission, anybody that has studied it, knows the spending part of that is a problem but the tax reform part, you have to remember what a miracle it was in 1986. if you don't believe in miracles, you're not a realist. this whole tax reform bill in the senate was really put together in six days. from the time that i had lost total control of the committee and went out for two pitchers of beer with my chief of staff and we came back and called the head of the joint tax commission and said give us a tax bill with a 25% rate top, he said okay. i have to get rid of the mortgage interest deduction. i said what about 26. but he came back, this is a friday, he comes back on tuesday and he's got 25%, 26%, 27%, here's what you have to do to get there. the outlines of it are given to the finance committee the

following thursday. and kind of, gee, lower rates, you can give a lot if you can get those kind of lower rates. i left encouraged. so that weekend i thought how am i going to do this. all right, i'm going to put together a group i know i can work with on the democrat side, moynihan, mitchell, bradley. on the republican side, chaffee, danforth and waller. the formal meetings of the finance committee come later and most of them secretly at night but we were doing all this work in the morning and by saturday night, we had reached, seven of us, a conclusion. it was the outlines of the bill. and the only thing i had to change is at the last moment, the oilees came and wanted an exception on passive losses we had taken away from everybody else. i could have beaten them about

13-7 in committee but i thought i'm going to need them on the floor on i.r.a.s because i could see that problem coming, we d dramatically cut the i.r.a.s so i gave them what they wanted. literally ten days after the committee even first heard anything about it, it was passed. but it was done in secret and done quickly and it was done at least with the intellectual leadership of both the republican and democratic members of the committee. >> let's talk about the lame duck session. is there any benefit to attempting to do tax reform in lame duck or do we need to do, as kim dixon asked, ask congress to force the next congress to deal with this issue? >> but you mean force in what sense? a statute? >> something as part of the fiscal cliff agreement. >> stop sign, stop light? >> i think -- i don't think this will happen but i think a

possible approach with something like what the gang of six proposed last summer, where basically, no one thinks you're going to rewrite the whole tax code and do the tax reform bill in the lame duck. the tax code's very complicated and frankly, it will be even more complicated than in '86 because '86 was revenue neutral. in fact, there was a reduction on the individual side offset by an increase in revenue on the corporate side. >> one thing, bob, nobody realized how much fat there was. in 1985, the top corporate rate was 46%. the bill cuts it finally to 33% in the senate, raises $140 billion in taxes on business even though we cut the rate and we used that to offset a lot of the cuts in the individuals and two-thirds of the business community supported what we had done raising $140 billion over five years from them. >> the difference here is while i think there would probably be broad agreement that a tax code that has a broader base and

lower rates is economically more efficient than the opposite, the literature suggests the economic gains are relatively modest, greatly outweighed by the economic gains or losses by dealing or failing to deal with our serious long term fiscal problems which are the much bigger threat to the economy. as chairman baucus said, there is no real solution if there isn't a substantial contribution from both spending and revenue. so i was glad to hear him say really, as far as i'm concerned, by far not the only but the first goal of tax reform is unlike '86, it's going to have to raise significant revenue. none of that's going to happen in lame duck. i think the possibility which i hope will happen, i think it won't, would be a framework agreement like the gang of six where you lay out a target for revenue, you lay out a target for reductions in health entitlement spending, other areas, and you set out a time

frame, you do legislation that does this, and you tie them all together for down the road. the revenue, the entitlement cuts don't take effect unless the revenue increases take effect. the revenue increases don't take effect unless the entitlement reduction targets are hit. you tie it all together and you try to lock something in you can make happen in 2013. >> dr. rivlin? >> i agree with bob. i think it's not just a stop light. we can make light of these things but the fiscal cliff is a real cliff. it would be very bad for the economy and very bad for a lot of things people care about if we let all of the tax cuts expire all at once and the alternative minimum tax and all of the things that are in the cliff, as well as this big sequester, so that making a framework agreement for say six

months, you come back with a better, real tax reform and entitlement reform, and if you don't do that, the cliff is still there. there is a very real reason for addressing these problems and postponing or giving the congress more time like six months seems to me reasonable, after all, these guys did it in six days -- >> we rested on the seventh day. >> seems to me quite a reasonable thing to do. it's called kicking the can down the road. it shouldn't be. it is moving the fiscal cliff for a few months. it's still there. >> i'm not making light of it when i use the term stop sign or stop light. that was a statute that was passed that was designed not to have what occurs, occur.

bob, chairman packwood did a terrific job on the '86 bill. lowered the rates, took away a lot of the very things that senator baucus was talking about in terms of tax expenditures and the rest. guess what happened the day after the bill passed? they started working on putting those right back in the code. and you look five and six years later, and the problems came back. okay? so let's be pragmatic. i'm sorry. i can't tell you what's going to happen in the lame duck unless you tell me who controls the senate following the november election. i can't tell you what's going to happen in the lame duck unless you tell me who wins the presidential race. because those two factors more than anything else will shape, in my opinion, what happens in the lame duck. probably nothing.

but when the senator said i'm going to put everything on the table, did he mean social security, did he mean medicare. i know he means defense spending. it's just like the flat tax. there's always a bump in it somewhere. i really think that you've got to look at the situation we're in and the problem these congresses have, not the congress in '86, not the congress in '96 or 2006. this congress cannot have too many moving parts. it will be very hard to keep it together. you can't just deal in concepts. you're going to have to deal in specifics or there are going to have to be stakes in the ground on the major issues to see if you can begin to address them. i think the more you pressure them to come up with a down

payment, with a structure they're going to follow after everyone raises their hand and gets sworn in, at least in the legislature, on the 3rd of january, 2013, and january 20th at the white house, you're going to run into problems. i think everybody knows what the options are. we've seen it in the commissions. we've seen it in the domenici-rivlin. you're going to see it in other plans that are being presented, presidential candidate romney has one. you can pick and choose. the question is, is there the will to pick and choose. that's what's been lacking. not the stuff, not the substance, not the specifics. it's the will to make it happen. any artificial deadline imposed on creating the will to make it happen is just that. it will be artificial. >> mr. greenstein, something to add? >> two quick points. i want to clarify, certainly what i think should be done and

i presume alice will agree with this. i'm not certain. i think it would be a huge mistake, one of the biggest we could make, to just kick everything down the road, even six months. a framework agreement that sets up time to do things like tax reform, health changes and so forth, there is no reason it can't and it should have some provisions up front, namely, in my view, we should in extending tax cuts, not extend those above 250 and in return for that, there should be some specific entitlement changes that are made up front. you do certain things up front and for the rest, there's a process. do i think that will happen by january 1st? probably not. i think we should also understand that there really isn't, despite the huge use of the term, there really isn't a fiscal cliff. it is an incline. in other words, cbo says if all these things happen, sequestration, all the tax cuts expire, et cetera, et cetera, et

cetera, over the first half of 2013, we'll probably go into a mild recession. we don't go into the recession on january 2nd. you don't pull all the aggregate demand out of the economy on the first day or first week or firs week or first month. the reason i mention that is i've been thinking lately of the government shutdown in 1995 where neither side would move. there was a shutdown. the pressure was so intense on both sides that in three weeks we had a deal. i think there's potential that we go over the side on january 1st. the pressure is intense and in january there is potentially some kind of a frame work deal, hopefully with some up front stuff, that is retro active to january 1st on whatever they agree to and has frame work for the rest. one final point there's agreement on both parties that you need a period of time to rewrite the tax code. what some members on the supercommittee came to understand that i hope more members on the hill will as they

get into this is changes in health care are almost as complicated as changes in taxes and just as you need a number of months to get that right, you really need a number of months to figure out changes in health care as well. there could be a parallel time for both tax reform and health. >> you mention the mortgage interest deduction. this congress and this president have been almost completely unwilling to talk about tax expenditures in any detail at all. what expenditures absolutely need to be on the table for consideration for killing frankly. >> for what? >> for killing. eliminating. >> max said earlier and is right. think about your result. you wanted a top rate of 25% and you wanted to keep as much progressivity as you could. you would have to have three rates. 19% to 22%, 25%, and it would

not be bad but to get there, you would have to tax all fringe benefits. you had to eliminate charitable deductions and eliminate mortgage interest deduction and you had to tax inside buildup in life insurance. all of these -- state and local. you add them all together and you can get to a top rate of 25% and reasonable progressivity and the reason i say reasonable is the man or woman that's working at a wage does a 1040, they don't have a lot of deductions. the people you hit with deductions are rich people that give paintings to metropolitan museum and contributions to the symphony. a few modest changes in the rates at the bottom. you will have to decide on the rate first and then say what do we have to do to get to that and keep the current progressivity and will that be attractive

enough to put together the coalition to do it and the low rates are an amazing attraction. >> with all due respect to the senator, you can't come close to maintaining reasonable cost at a rate like 25 unless you also do what he did in '86. you must eliminate the differential for capital gains and dividends. >> we did that in '86. >> if you maintain it, it turns out when you analyze tax expenditures, once you move gains and dividends to the side, the remaining tax expenditures are proportional. they don't help people at the top because of things like exclusion for employer health insurance. if you settle one rate and maintain capital gains differential, you have a huge rate of regressivity. >> you say this must happen or this must happen under your frame work because you look at protecting entitlements and other areas. the reason the government shut down in '95, '96 and came back

together so quickly is because it was a temper tantrum over a relatively modest argument. the reason we haven't been able to come to agreement is we have a potential for a fundamental decision in this system. reversing some of the things that have been done. both in terms of what the republicans want and what the democrats want. that is the reason it's difficult. and i don't think you can solve it by separating income and corporate taxes from the fica tax or the h.i. medicare trust fund tax. there are ways to deal with it in a broader based tax structure. >> in 1986, the reason everything fell apart and then we opened the government again was because tom and sally, the kids, could not get into the washington monument and they were on television every night and congress couldn't stand that kind of pressure.

>> exactly. >> can i come back to progressivity. you use the word eliminate the home mortgage deduction, for example. you don't have to do that. you could make the advantages to homeowners much more progressive in the tax reform. what we did was to convert the home mortgage deduction to a tax credit at our lower rate, which was 15%. we had two rates. 15 and 28. and if you do that, you give a lot more benefits to people who don't now take the deduction because they don't itemize. those are moderate income people who own houses. it is hard on high income people with expensive houses and you

would have to grandfather the existing ones but we just built a lot too many very expensive houses and it's not obvious this wouldn't be better. >> what you did is not unlike what they did in the fair tax taking reductions at the lowest rate and not highest rate and for somebody who is in 40% tax bracket taking deductions at 40% could only take them at 14% was a big difference. >> wouldn't you say a credit is even better? >> yeah. there's a score of ways you can get to where we're all talking about. >> and about progressivity, my friends, the liberals, in this does not include bob because he understand this. lower rates make it easier on rich people. not so. so many of these provisions like home mortgage advantage upper income people so you could have a more progressive system with lower rates and raise more

revenue into the bargain. >> there's nothing behind the curtain. everything is behind the curtain now in terms of tax credits and exemptions. >> that's right. pete and i put it out in front. >> there's issues of concept of basic math. if you do an across the board rate cut, the math is clear, it has an regressive effect for high income people than low income people. to maintain progressivity, the tax expenditures changes have to be progressive. i'm strongly in favor of the kind of thing alice is talking about on credit. senator baucus made a really important point with regard to education. for example, tax expenditures for higher education or retirement saving for that matter or homeown ownership, ar biggest for people that would afford and do those things any way and smallest for people for whom the incentive would have

the biggest effect. from economic efficiency standpoint, it's upside down. the mathematical difficulty is that the larger the rate reduction, the bigger the tax expenditure changes must be and the more severely progressive they must be in the political difficulty mounts. my earlier point was when you do the math, it is virtually impossible to get rates down to 29 let's say and maintain progressivity without eliminating the capital gains dividend differential which is part of the political difficulty here. my own view is that i worry that if the first thing set is the rate that if there is a revenue target, then when the tax reform is done and people see what they have to do, members of both parties, to mortgage and the employer health exclusion, that they will blanket the revenue target giving way. the preferable way to go is

agree up front on revenue target and say to members, you want to lower rates? great. how low you get the rates depends on how far you're willing to go in closing the tax expenditures and hit the revenue target, which then gets accompanied by a spending reduction target to help get us to our deficit reduction goals. >> i know you are itching to respond. while he's responding, can we get mikes out and ready because we probably only have time for one or two questions maximum. >> this is what i meant by getting out of the box we currently operate under. progressivity, progressivity, all that means in the tax code is rich pay more. you shouldn't just look at it in terms of the income tax on progressivity. why not look at it in terms of medicare? right now the biggest cost of medicare is becoming part b which is the general fund which causes problems with