something that was parallel to the corporate income tax, once some thought might be given to how to separate the returns from the capital investment to the return to labor, it's kind of related to a point that len was making. some of the nordic countries have actually attempted to do this and have tried to have separate systems for some of their pass-throughs, particularly in a partnership form. and it turns out to be extraordinarily complicated. so that's kind of one of the issues. if you did it just for the net income of the flow-throughs, then you may be providing that more favorable rate treatment to in a sense the return to labor that's accruing to the owner of those flow-throughs which would create kind of the friction that len was describing. that said, going back to a point that len made, a lot of the flow-through income is subject

to the top two rates. the numbers i've run myself and have seen others run tends to be in the 40 to 50% range of the flow-through income is subject to the top two rates. so from an economic perspective, that's kind of what you would focus on. it is true that most of the people, most of the business owners, if you counted them up, when you count up the business owners because -- well maybe not because it's including people like len. he may be further up the income distribution based on what he said earlier. but a lot of the business owners may well be in the lower tax brackets. that sort of dichotomy between counting people and counting income is very similar to the capital gains debate from the early 1990s where one side was counting people and the other side was counting income. and i think len usually tries to count the income is my impression. focused on the income, that's because that's where the economic effects would accrue from. >> i think they're both -- they're both important, but they're different questions. >> right.

>> with the tax foundation. i'm going to echo the gentleman who asked the question in the audience a little bit, because i think the panelists have been very generous in one regard, and that's what is in the way of tax reform. now, you know, we can come up with all the wonderful tax plans that we can design that achieve progressivity. len mentioned the bowles/simpson plan, which i viewed very favorably and positively. but there is a group out there that hated it a lot. and it was not really grover norquist and his accolades. it was some progressive activists, because all they care about is the rate, the top rate. so the bowles/simpson plan which raised revenue, which made the system more progressive, i know what they called it. they called it the cat food commission. and my job takes me all the around the country. and during the occupy country, i took time out of my day to go and talk to occupy protesters. and they don't care about any of this. the talk show on progressivity

and structures. no, none of it matters. all that matters is the top rate. and what they said about the bowles/simpson commission is it cut taxes on the rich. we all know it didn't do that. but that's all they care about is the rate. so i mean this is why we have every congressional bill from that side of the aisle proposing a new spending program. they pay for it by new taxes on the rick. ccpb and ctnj, they propose tax proposals. it's not that everybody needs to pay higher taxes, no no, no. there is one group of people they think should be paying higher taxes. luckily the person people, including the good citizens in washington which is not the red estate in the country, they generally don't go in for that. they are very critical solve some rich people, the crony capitalists, the beneficiaries bailouts, the beneficiaries of the government largesse. for those people who have rolled up their sleeves and worked hard, they want nothing but the success for them. i don't know if people here ever

watched the west wing. they had a character on there, sam seaborn, very liberal, but very sensible in many ways. in one of the scenes he is arguing with one of his people on his side of the aisle who keeps arguing how the rich need to pay their fair of the share. he said look, i used to be a lawyer. i made $400,000 a year which means i paid 27 times the national income tax. i paid my fair share and the fair share of 26 other people. now i'm happy to because it's important that people get to go to school and drive the roads. but i don't get 27 votes on election day. the water doesn't come out 27% hotter. the top 21 pay for 22% of this country. let's not call them names while they do it is what i'm saying. >> the gentleman back here. >> david? >> listening to this, it seems like this argument. >> could you give us your name,

please? >> david broselle. i work for a large government agency. [ laughter ] >> this discussion is really heavily depends on the framing of the questions and the discussion i'm hearing. there -- everybody seems to be assuming here that income measures are the appropriate measure by which one should measure regressivety, progressivity. we could also use consumption i think on very good arguments. and another way i think len mentioned you -- we need to trade off efficiency and equity or fairness that sounds good, but we -- efficiency we have very good economic theories what we mean by efficiency. on the fairness side we have no idea what that means. and no one can agree. everyone has different motives

for arguing one way or another. in fact, it doesn't even rise to the level of pornography where at least with pornography you know it when you see it. and here i don't think we can identify a state of affairs where everyone could agree that that is fair, or most people would say it's fair. you ask those in favor of raising rates on the -- on higher income folks that ask them well how high do we have to go to be fair, and usually you don't get an answer for that, because there is no answer. for that. one could go back to i think it was 1934 when fdr said that no one should be making more money than $30,000. or should be able to keep that. find a statement. i think he moved away from that very quickly. but i think he didn't want babe ruth earning more than he did probably. but the point is we cannot define this. and there is different motives

behind arguments for one rate. we can't even define fairness here, whether we're talking about the people at the low end or at the upper end. the conference was on whether we are supposed to raise taxes on rich people, but you know, there it's just envy or whatever other motives might come in to play it seems to me. so my question is fairness art or pornography, i guess. >> i'm sorry, fairness. >> art or pornography? can you identify it? >> so david raise as good point, which is that there are huge measurement issues. and there are disagreements as to how we would even define the base conceptually. if we decide it's income, how do you measure income? and the thing that is income on tax returns isn't very closely related to what economists would call income. you know, the fact is that there are measuring problems both in terms of defining fairness,

progressivity. there are measurement problems in efficiency as well. our measures of efficiency come at a very highly stylized economic models. and the fact that we can't measure it perfectly doesn't mean that it's not an issue. but it is -- fundamentally, it is an issue that the political process, as joe pointed out, should be working out, and not something that economists or each people in this room ought to be deciding. that the tax system ideally should reflect, you know, the best we can, what is consistent with our values. and i think almost everybody would agree that some notion of fairness is related to taxation. it might be that everybody ought to pay the same thing. it might be the notion of horizontal a equity. but even for that you would have to have a measure of income that we agreed was -- that we was agreed was consistent. but fact that we can't measure perfectly doesn't mean that we shouldn't consider it. >> we cannot address this

analytically in a sense because no one can agree how to say, as you say, measure fairness. >> but there are whole bunch of articles that do try there is tax literature that they do deal with it. the measures of fairness are just as stylized as the measures of the economy that generate the efficiency conclusions. >> this goes to joe's point. >> i think that's -- that's what i really think people should do is sort of embrace the arbitrary nature of it. we shouldn't -- i don't think we should tie ourselves in knots trying to come up with theories of fairness when it is really an intuitive political decision. and we may not like that, but, you know, government makes all sorts of intuitive political decisions all the time that address fairness issues in realms far removed from tax. and as earlier was pointed out, people always want to tax the rich, and that's true. and maybe that's sordid and terrible. and if so maybe that's just a problem with democracy.

it is just not avoidable. there is no way to duck this argument and to replace it with something that is nice and scientific and clean. there is no owners manual for government. no one will tell you how much is enough. you can learn how much gas to put in your car to fill up your tank, but you can't figure out how much to tax the rich. to me, that's the beginning of an argument, not the end of one. that's what the issue is really about. so i'm interested in all the questions of efficiency and administrativability and other things. and they affect my views of this. but ultimately they're second level issues. honestly, even in the large development of tax policy, there are often second tier issues too. for all the complaints that economists have been offering about say, taxing income rather than consumption for decades now, you still see -- the voters still seem to embase the idea of taxing income, right or wrong. >> i think there are some very important questions we can ask to better frame the debate.

we can provide measures of the progressivity of the tax code. that's something we can offer up. len has some very good charts in his hand. let's say average tax rates by income class, and it gives us some sense at least where we are by some standard. and you can produce other standards that would give you a somewhat different result. but that's very important. i think joe's point that this really narrow focus on the rates i think is really problematic because it's the rates that really contribute significantly to the economic costs of the tax code and the notion that progressivity is defined by how high the rates are i think, one, it's not accurate, and two, it's very counterproductive. i think it leads us down the wrong path, the wrong discussion. so i think that's a problem lately to bear. >> i would agree with that.

and it's -- just to retreat to the history for a minute, what is striking is how powerful those rates have always been. you know, that those high-end rates, even when they were in many ways meaningless. in one of the great studies of fdr's tax policy is called "the limits of symbolic reform." >> i think the rates are very easy to understand. i think people with, you know -- can easily underequate progressivity with the rates. and i think it's something that an important public service we could all provide that i hope is being provided with this forum and others that that's really just a piece of the bupuzzle. >> we haven't really talked about this, but this is a more meaningful issue is a question of brackets and where they start and where they end and how many we have. because, you know, 90% of rates on very small numbers of people are really truly meaningless. there was a rate in 1935 that applied to one person because the bracket was so small.

the question, i think it is a relevant question. i'm not endorsing the idea, but the idea that we don't have enough brackets, and the difference between somebody making $350,000 a year and somebody making $350 million a year is meaningful. i think that is a reasonable argument to have. and the fact that we have relatively few brackets in historical terms right now is unusual and not necessarily permanent i don't think. >> but then again, the focus on the brackets is a focus on the rates and not the progressivity of the tax system or the progressivity of the federal government's footprint. another point len mentioned optimal tax theory. the road that ooptimal tax theory would lead you down is those income sources that have the highest elasticities, the most responsive, that are most mobile, things like capital income in the international setting or across time.

optimal tax theory would generally lead you down the road of if you want to follow an optimal tax system, you would tax capital income a lot less. it's one of the rationales for consumption taxes is a capital income across international boundaries or across time tends to be responsive to -- much more responsive to changes in its tax treatment, the rate at which it's taxed relative to labor income. so if one wanted to go use that standard, that's kind of way of trying to introduce this notion of what is the progressivity at what cost. and, you know, how progressive should the tax code be. my own sense that most people view -- their view is we ought to have a progressive tax code. then the question is if you made it a little more progressive, is that where you would stop, or would there always be pressure to make it more progressive. and that is one of the reasons i think there is some reluctance to add additional progressivity, because it's not the end point.

>> my blind side here. i apologize. i didn't see this hand here. and then we'll go over here. >> bill worth. i'm a tax lawyer with some private and public experience. i was wondering do tax-exempt owners of capital count as rich? i mean syracuse rich? >> typically, we think of businesses and nonprofits as that -- actually, this is actually kind of an interesting question. we allocate, we allocate the income of corporations to the shareholders. nonprofits are kind of in this other world that is mostly ignored. i mean if the fact is you could very well argue that universities and arts institutions and other things are to some extent basically providing services for high-income people who also send the to be the major donors.

syracuse for the record isn't rich. if you would like to make a contribution, i think that would be just awesome. >> i think you focus on a lot -- marty lobel. >> you're next. go ahead, i'm sorry. >> we've been focusing on the trees, not the forest. picking up on len's initial comments, the income mall distribution in the united states right now is reaching a crisis proportion, which is why we're focusing on tax reform. we only really reform the tax code when there is a crisis, because by and large, and i worked on the hill for a few years, the only ones who get a voice are those who can afford to pay for it, either by hiring lobbyists or by making campaign contributions. the public is focused in on the rates paid by the very rich and by the large corporations who, you know, a lot of people are getting really unhappy about the

tax subsidies we're providing to the multinationals which puts them at a great advantage over domestic companies. we haven't had a word about that in terms of tax rates. now who are the beneficiaries of these tax subsidies? usually very, very wealthy people who are now i think in the public's mind using their money to influence public policies for their benefits. you on the right the coke brothers and on the left you have george soros. you have a situation where the public right now i think is acutely aware of the massive shift of income from the middle class to the very, very wealthy. we focused on the top 1 or 2%. no, no, no. we ought to be focusing on the top 1/10th of 1%, because there is a big difference between a lawyer who may be earning a million dollars or two million as a partner in a major firm and someone like john paulson who earned what, $3 billion in one

year and didn't pay taxes on it, by the way, because it's all earned in the caymen islands, and he only pays taxes on it when it comes back to the united states. the public takes a look at these examples and says wait a minute. this is a democracy. we're entitled to have some relief. and that's the benefit of a democracy. it provides a method of relieving tensions in the public before it reaches explosive stages. you know, they're asking questions like i was at a recent meeting and someone said well why are american ceos making ten times what british ceos make. didn't have an answer. i don't know. but the people are becoming more and more aware of it because they're hurting economically. this last meltdown has acutely raised awareness in the public. and unless congress, as diane points out, takes some action to alleviate the tax inequities,

and i think we all agree that the tax code is far too complicated and is riddled with tax subsidies and needs to be cleaned up, but until the public reaches that explosive stage, and it may be this year, it may be because of tax armageddon, or it may be in 2014, we're really not going to have the kind of relief we want, because i got to tell you, we got the best congress money can buy. >> under the theory of don't tax you, don't tax me, tax the person behind the tree, i'm all for cutting tax rates for lawyers. i'm going to go over here, and then over here, and then i'll let the panelists have the last word. if i cut anybody out, i apologize. got to try to end a little before 11:00. so one, two, and i'll ask each of you to quickly make a final statement. that okay? okay. >> from aarp. i just ask a couple of questions. first of all, we're talking about fairness.

but there is also an issue of self-interest. when we look at the situation in europe today or in central america, for example, it may be perfectly individual for each individual to be willing to pay more fact that if you don't pay today as a society we face one of those, you know, undesirable options. so it may be perfectly reasonable if i have the capacity and flexibility to buy insurance today by making higher tax payments and prevent any of the crisis, you know, 20 years from now. i don't see there is some sort of ir rational thing. some people have short-term goals. some people have long-term goals. what's wrong with that? another point i want to make between the connection of nonpayment of taxes and involvement in the government, which i could really never understand. let's take 1941. income tax applied to 2% of

people. government was sponsored by tariffs. and somehow people went to war the next month. so, or another example. a person receives $3,000 in earned income tax credit and a person pays $10 in income tax. i don't see this point as, what's the evidence behind this assertion basically? >> one more here? and i will go in reverse order with you guys? >> retired from the international monetary fund. joe started with an important point this morning that we have difficulty designing what we mean by fairness. this question of taxing the rich more comes in a question in part of fairness but a lot of the discussion today morphed to the other issue of should we tax income or consumption? economists often make a strong efficiency argument for taxes

consumption. sometimes also a fairness argument that you are taking -- you are taxing what people take out of the pot, not what they contribute to the pot through producing goods and services. we also get the fairness argument that if i have high income i pay taxes for 27 other people and i only get one vote. i also have a lot more influence in the election by being able to give unlimited amounts to the campaigns, as we see this year. so if we are going to tax consumption, we have to remember a lot of what economists think of consumption may not represent my total power that i have if i have high income because i get on the symphony board. i get to have buildings named after me at the syracause university. i can give $20 million if i find a man i'd like to run for president.

so there's a lot that comes with having high income that may not be taxed under the consumption tax. i think the charts we have today are very helpful. i think when you think of fairness, maybe we can't define it but we with look over time what has happened. we can look across countries to see what happens. there are clearly countries where our sense of fairness and wanting a progressive tax isn't given the same weight as it seems to be given in the united states. they will adopt a flat-rate income tax even with no exempt or zero bracket amount. a few countries have done that. they said it wasn't important. the first dollar should be taxed. the first zulle lotty or something. and then we look at what is happening in this own country. at least the last chart, prepared by tax justice, shows

that it almost goes back to what we used to call at the brookings institution the joe peckman whale diagram. when you showed the distribution of income and average effective tax rates the diagram begins to look like a whale. it has a blunt front end because at the very highest level it was no longer progressive. it was actually regressive. the highest percentile pays a lower rate than the group below that. so, you can say now does that seem reasonable? though we don't know how progressive the tax should be i think we should be informed what is happening over time and across countries. i think here the economists have a lot they can contribute to the debate, recognizing that ultimately the decision of how progressive a tax should be and how we should get there, through broadening the base or changing rates is primarily a political decision, hopefully informed by

good analysis and some economic judgment. thank you. >> thank you. i want to give everybody a quick last word. going in reverse order than we started. >> again, thank you very much to tax analyst and chris for putting this together. obviously it is a very important subject, very important to tax reform and tax policy generally. the only point -- i'm not going to take much time on my closing remarks. i have no idea what the right distribution of the tax burden is. i don't claim to have -- the hand of god has not come down and told me what that is. i think as an important part of the debate is to really understand that the tradeoff between progressivity and the cost of progressivity in terms of economic terms, terms of efficiency lost, the other point i would make is i think it is important to distinguish between the graduated tax rates schedule and base broadening.

>> again, thank chris. i think this is a great forum. i think i would have paid -- well. >> be careful. >> think some people made the point it is not just the rich. we are not going to solve our budget problems just by raising taxes on the rich people, particularly by raising tax rates and the idea that you can hit people with incomes over a quarter million dollars, it is empa thet call to tax reform. there's no sensible tax reform that only applies to people at the very top. so i would leave you with that thought. >> i think i would echo that. the comments of both of my copanelists up here. you know, we talked so much about rates on the rich and on these narrow issues about what these guys are paying. the real issue going forward is

really a question of just enough. i think, again, to offer advice to the progressives in the room, i think the rules lose sight of that and there are historical reasons why they have, why they have been fixated on the upper end, on the high rates, on the upper brackets. there's a reason why we're here and still talk that way and it is historical because we started down this road 75 years ago. ultimately, that overfixation on progressive taxation i think has gotten in the way of progressive government and that it forces us to, again, try to look at the whole picture. it's a much more meaningful picture. in europe and the rest of the world has done that. to end this discussion on taxing the rich, it should be about the vat which is the else vant fant that's not in the room. that is really the question. every other country uses it in this larger debate over what con city constitutes progressive

government and i think that's where we are going. >> first let me thank this excellent panel. you were fantastic and let me note the conferences require a lot of work by the staff of tax analyst and not me. let me thank the staff of tax analyst that did a great job and let me thank you all for being here. i hope this was as educational and fun for you as it was for me. please give yourself a round of applause. [ applause ] nice job. next on c-span 3, tavis smiley is hoetsing a forum on women, children and poverty. officials from denver and

pittsburgh talk about strategies for promoting their local economies and dish network founder charles ergon talks about the future of broad band internet. kenya, indonesia, hawaii, kansas, chicago, and washington. this weekend on book tv, follow david maraniss walking in a president's footsteps. sunday at 6:00 p.m. eastern, a video record of his travels and then live at 7:30 david maraniss takes your calls and questions and joan that goldberg blames liberals for an ongoing war on ideals using the tirnny of cliches. >> american politics have been distorted by the idea the further you move from the left the closer you get to bad things. one word we use for bad things is fascist, racist, homophobic, sexist. in some working definition it is