some estimates suggest that if you went to a flat rate tax, you could increase long run gdp by 6 to 9% in the long run. the size of the economy would be 6-9% larger. the estimates would be smaller and when i say a progressive consumption tax, that replicates the current distribution of the tax burden. something that is as progressive as the high level for the top one, five and ten%. those groups would pay the same amount in taxes as they pay today based on treasury estimates for the 2005 tax reform panel. in the long run the size of the

economy would be that much larger. another aspect of our tax system is that a lot of flow through is funneled through the taxes s subject through the individual tax rates. there is a lot of resistance in raising the tax rates. it is generally thought to be subject to the tax rates and so that is a consideration in terms of evaluating the economic costs to the economy of raising the top rates how will that affect the employment hiring decisions of entrepreneurs and how will that affect the growth rate for

small businesses. all of those things are considerations. so i think you need to think about at what cost. i will go back to the point that i started with and that len ended with in terms of thinking about the distribution of the tax burden. what is the distributional effect of the federal government not just the tax side. len has the paper where he makes the case where a lot of the tax expenditures that has run through the tax code should be thought more of as spending as opposed to part of the tax system and should be evaluated along the lines of spending programs. those effects have profound effects on the tax burden does. they are factored into tables

produced by treasury. we should think carefully about how the spending programs affect the distributional footprint of the government. tax reform, there are reasons to do tax reform. but one of the reasons, there is a strong focus today, in order to do entitlement reform, we will have to do reform to get it onto the table. there is a lot of reform and a lot at stake for the nation. it is probably a bigger issue

for the nation than tax reform for the nation. where the reform of the tax code probably has to be part of that discussion in in order to get reform to work. at the same time we ought to be talking about the distribution about the entitlement programs. i think it would be still abridge too far, but it would be interesting to see tables that factored in both spending and the tax side. please raise your hand. and remember to state your name. especially those who know me and i know you. that is harder for you. >> i want to respond to things

that bob said. i want to say that people should get bob's book. people have talked about the flat tax for a long time. those are crazy propose ales because they don't account for -- they would make the tax more aggressive. the fair tax couldn't be administered in a sensible way. you can write to me. but the economists have liked the idea of that. we don't think we should have a tax penalty of savings. most of the savings is down by high income people and the tax which they write about, takes very seriously the fairness concerns. the issue of the costs of taxation and the issue of growth

versus fairness is trade off. and when republican ares talk about it all they talk about is economic growth. most people who are not drinking water out of the potomac would say there is something of a trade off. if it goes to a tiny sliver of the population it is not a good thing. if you achieve fairness by bringing everybody down that is not a good thing either. the best way to do this is by broadening the base. i should point out, one conclusion, in a paper, is that if you broaden the base you lower the cost of tax rates

themselves. the logic is that you have a huge incentive to take advantage of the loopholes. if you have a lot of them, high tax rates entail smaller costs because it is harder for them to avoid them. the biggest loop hole in the tax code is a lower code on capitol gains. if you look at the simpson plan and the bipartisan plan, one way they were to achieve the plan is by taxing capitol gains. right now the rate is 15%. top income rate is 35%.

you save 20 cents on the dollar and this has produced this whole industry whose job it is to come up with deductions that shelter your income tax and pay you back in the form of gains. this is a huge waste. they don't make sense from a chick perspective. second, there are a lot of smart people working on the shelters who could be doing useful work. remember, right, bob.carole -- no. we can't tax capitol agains at 35% rate. but if you can lower income tax rates and tax capitol gains at

the same rate, that is a reasonable trade off. it produced this tax system with radically lower rates. the thing that saved tax reform in 1986 was when bob packwood came up with the 27% solution. the thing that made it work was taxing capitol gains. it eliminated a lot of opportunities for tax shelters. the second or third thing said would clear up the spots. and then i would make a broader point. i do take issue with what len said. i think if one is looking at capitol beggains, i think one ns

to think about the entire system in it's totality. i think len would agree with this perspective. here is looking at investment you ned to look at both layers of tax imposed on intments and the investor level taxes. when you do that, the current tax rate on capitol gains, depending on how you do the math, and the corporate income tax and deferral, and generally, if you look at the top tax rate, you would calculate that top tax right to be in the mid 40s including state income taxes not the 15% federal rate and so in

that sense, when you are thinking about tax reform, i think most -- many economists would agree that with a comprehensive income tax if you believe that, you should have a comprehensive income tax which is where len would be. which i might lean towards more of a consumption tax. but in any case, if you wanted to tax all income, you would still tax income once, no more than once. with respect to capitol gains where a corporation can choose to retain the capitol gain, or if they choose to pay out those corporate earnings, it is taxed

a second time. the tax rates are probably in the mid 40s and are around 50% in 2013, the integrated tax rates on capitol gains will rise to 50% if not higher because the capitol gains right is scheduled to rise to 20% and then another 3.8% under the medicare tax legislation the capitol gains the medicare tax will apply to uneasterned income in the u.s. the dividends tax will rise as well. lower than that 50% on an integrated basis. again, i think of investment, you need to think about the

double tax and think about the income tax and so that i can a very important issue. as len indicated looking at a capitol gains income tax, both joint committee would tend to view the rate on capital gains in the neighborhood of 28% that is what they would still assume. and then the other point i would make is, i think when you look at the income tax system, or the tax system generally, i think you need to be careful i think to not fall into the trap that it is the cause of income and equality. i think it is an important

policy tool. i think it is important when one is talking about the issues to focus on what do we think is the source of the increase of income and equality over the last 15 or 25 years and it seems to me that, that is an important discussion to have because that might lead us down a different path. so if we think the stagnation of wages for those in the middle is perhaps due to globalization and due to lower skilled labor in the u.s., having to compete with low skilled labor in emerging market countries in other places and when u.s. low skilled labor is competing in a global market. it puts downward pressure in

those markets, then i think the high skilled market is getting lower returns. it leads you down a different path. it is something that is a long-term investment in education. it is probably a very, very important thing that we out to be focusing on and the tax system is important, you know, i think most people in the room would agree that we need to have a tax system. >> you want 30 second to respond? >> yes, i could go on for hours. i agree with bob that we should tax capitol income once. there is actually an art kal in

tax notes 2003 i wrote in 2003 basically it says that i like bob's -- were you the dis when the capitol gains? >> i was at the council of economic advisors i liked your first proposal better than the one that was enacted. >> i don't disagree. >> okay. >> this gentleman here and then scott i will go to you. >> i want to go back. >> name? >> steve hankin, i was a used to be an attorney with the irs i'm retired now. i want to go back to the statement made about fairness and how that is the major concern. you seem to have accepted the notion that everybody agrees that this income tax system and

particularly with the progressive rates is fair. i would like to submit to you that taxing the rich is essentially taxing a person based on his status. it is not much different than taxing a person based on his religion or his ethnic group. the difference of course is that it gets the amount of revenue in that if you tax people who are wealthy. that is a big source of income. but the fact remain that is it is -- you are taxing somebody based on their status. their wealthy status and our country never wanted to have these distinctions based on status. from what i commit submit to yo say that is fair to tax somebody based on their statd tus.

i don't think ha is fair at all. you are starting off from a point of saying that must be fair when it is not. >> i think you are probably talking about me because i said that fairness was always so central. i'm going to say, you cannot like what i say but that is the way that it was. i think that is my answer. your position is fine. and in fact fully sconsistent with what my point is. there are plenty of reasonable arguments to be made. that the rates are not fair. but the fact does remain that historically americans have found them to be pretty fair. assuming that you have found data to be reg haven't. the incom tax has been with us for 100 years.

if people don't think it is fair it is remarkable that it lasted so long. >> if i could respond to that. people are going to want to tax the rich and they are going to say that is fair because 98% of the people aren't rich so they are going to say yeah, that is fair. that word fairness is loaded with all kinds of -- >> it is true that there is not universal agreement. i write a blog on forbes and i hear all the time how you are punishing the job creators. first of all, it is a value judgement. to say that as a matter of fact more progressive tax is fair, you are right. but it is not all of them. the question is, do you decide

what the fair distribution of tax burdens is based on what your economic status is, or is the right way to decide based on not knowing, this is the notion john rawles' series of justice. when you decide distributional issues it should be behind not knowing whether you're going to come out rich or poor. for my own experience, i grew up pretty poor, and now i'm doing reasonably well. and i think, you know, from my perspective, having people like my parents pay little or no taxes, and having me pay a substantial amount of taxes makes perfect sense. but i'm probably not going to change your mind or a lot of other people's. it's just a lot easier for me to pay a substantial tax bill than for my parents who at times my mother wasn't eating because she didn't have enough food to put on the table. and saying she should pay more tax when my decision is about

whether to take a second vacation or not, from my perspective, it seems pretty easy. >> let me jump in here for a quick second, because the theme of the conference is what the rich should pay and why. and whether it's fair to tax the rich. so i'm certainly not assuming that it's fair to tax the rich. i'm not assuming anything. that's what we're here to discuss. >> that's to your point. >> exactly, exactly. >> i just wanted to ask a follow-up on that question. i wanted to ask joe something, because i sort of agree with you, by the way. and i wanted to ask joe, you say the people -- i think you said that people have long -- david bernard, by the way, tax analyst. people have long supported the idea of progressive taxation as being fair, i think you said. but isn't it true that people support the idea of progressive taxation at income levels above

what they make? that it's like oh, sure, progressive taxation as long as it's kicking at more than what i make, and whether i make $10,000 or $100,000 or a million dollars, with the exception of len, who apparently does not mind paying higher taxes right now. but most people would say yeah, progressive taxation is great, as long as it's not me. which then doesn't it turn it into a big redistribution mechanism? >> don't tax me, tax that man behind the tree. >> right. >> so you may be all for taxes as long as it's not me. >> the nasty way to put that is it's all about endy, and that you're going after these guys in a punitive way. the less nasty interpretation is everybody has a self-interest bias. and so sure, on balance, i'd like to keep my money. >> right. you'd rather keep your money in your pocket. >> yeah. >> and if we need money to fund whatever it is we're paying for, let's tax those guys over there.

>> although increasingly what you see is raising tax burdens for people beneath your own economic status as well. so it's really everybody, every tree. >> there actually are -- there is a significant group of millionaires who have been arguing for more progressive taxation. so it's not purely selfish. >> it's not. and i love those guys, but really, they are out-liars. >> let me get to scott here. i'm the moderator, so i'm supposed to be moderate. so you're not alone, len. i'm in the len camp. when i started out not doing well, and i'm a great believer in progressive taxes, and then i'll go back to being the moderator. scott? >> one more. >> quickly. >> okay. >> please. a lot of people want to talk. >> in terms of fairness, if you go to the store and you buy a product, and they said to you we have one price for rich and another price for poor, everybody in this room would say

that's ridiculous. that's not -- but yet when the government taxes you, what are they taxing you? the major purpose of a tax is to raise revenue for paying for government services. and so why should one person have to pay more for government services because they're rich than another person who is poor? and that's essentially what an income tax, and particularly a progressive income tax does. >> scott, you want to jump in here? i've kept you waiting too long. >> scott hodge with the tax foundation. it seems like we really haven't had enough baseline discussion about the progressivity of the current system. and according to an a oecd report, the u.s. has the most progressive personal income tax system of any industrialized country. we rely more heavily on the top 10% than any other industrialized country. our poor people have the lowest income tax burden of any industrialized country. in fact, last year we had a record, record number of

americans who paid no income taxes since 1940. and yet at the same time, the top 1%, 2% pays roughly 51% of all the income taxes. so i'd like to ask the panel what do we consider to be least fair, more unjust, the fact that we have roughly half of all americans who pay no income taxes, or the fact that we are the top 1 or 2% that pay 51% of all the income taxes? >> i'm going to let bob go first. but let me point out scott brought along some handouts from the tax foundation, and you should all have them. if you don't, we'll figure out how to get you some. thanks. >> so i'm really happy that scott made the point about the comparisons here to the european economies. this oecd study has been popularized to some extent that the u.s. has the most progressive tax system. and a it's really kind of

interesting. and the way i kind of think about that, and the way i kind of explain that is that the europeans don't need to have as progressive a tax system to have as progressive a footprint of their governments -- the government sectors because they have much bigger government sectors and they do a lot more distribution on the spending side. so that's why i think it's so important when we have the discussion on the income and equality and how the government should address that or not address that, it's so important to not only focus on the tax side. it's critically important that we also focus on the spending side. the european economies have pretty exclusively public health care programs. ours is split where we have a public program for the elderly and primarily a private system for everyone else except for poor children. they tend to have much more extensive public retirement

plans than we do. they run a lot more of their economies through the government sector than we do on the spending side. they have a lot more redistribution than we do. so it's really -- probably shouldn't come as that much of a surprise that we have a more progressive tax code, and they have a less progressive tax code, because they're just doing more of the heavy lifting on redistribution on the spending side. and so that's at least the way i kind of reconcile the eocd study. but then i think one of the things you can draw from that is that where is the discussion on the -- that we are having on the distribution of spending programs? and how does that affect how we view the distributional footprint of federal government activity? >> i agree with what bob said. on the issue of the progressivity of the tax system, is there are a couple of charts in my handout showing the distribution of overall taxes. and the income tax is very progressive, that we actually

run -- the largest cash assistance for working age americans is your earned income tax credits. it's bigger than tanf. in most years it's bigger than food stamps now. but the biggest tax that most americans pay isn't the income tax. it's the payroll tax. and that's pretty regressive. it's a flat percentage of earnings, and it's capped at about $110,000. people find out that the benefits paid under social security are progressive, gets back to bob's point, you should look at benefits as well as taxes. americans do pay a substantial amount of taxes. i reduced a chart on data where they looked at not just federal taxes but state and local taxes which tend to be more more regressive. if you look at the overall system that the top two -- the tax system is somewhat progressive, but the top two

quintiles basically from the 60th percentile up to the top basically have a flat tax system there is actually a decline in the overall effective tax rate at the very top, primarily because of capital gains. bob's absolutely right that we -- we run a lot of our social welfare system through the income tax, much more than european countries do. and actually it would be -- i've argued in -- i argued in one paper that had putting in place a value-add tax, which is a progressive trade-off overall. and that wouldn't show up in the distribution tables because we only look at the tax part. the fact is we don't do very much on the spending side compared to european countries. >> the income tax is the primary tax to fund the basic functions of government like national defense and so forth. so one could say when you've got half of all americans with no skin in the game, they really have no stake in the basic functions of goven