it's about corporate inversions, which are financial reorganizations that place u.s. firms under a foreign parent corporation. if you've been following the news in the last 24 hours or so, you see burger king is the latest example in a series of corporations that decided to do this. they like the fact canada has the queen on their currency. the republic that got its independence through a tax revolt has the highest corporate taxes in the world. now, there are two obvious solutions to this. one is to lower the corporate tax rate which would benefit workers, consumers and shareholders. if you're an elected official and want more public money to play with, you can call these people who engage in corporate inversions unpatriotic. so we have three scholars here today. two are here right now.

which will discuss policy responses, and after all is said and done, they may be tried for economic treason. they are dan mitchell with cato. david burton and ike bren. dan mitchell is an expert on tax reform. dan mitchell was a senior fellow and economist for senator bob pat with. he served on the 1988 bush/quayle team. he hole has a ph.d. of economic from george mason. dave burton focuses on administrative law issues at the heritage foundation. he was general counsel two years

prior to joining heritage. he received his degree from the maryland university of law. ike brannon is a growth fellow of the george w. bush institute. he is head of the savings and retirement foundation. prior to that director of economic policy as well as congressional relations for the american action forum. he served as economist for the john mccain campaign in 2008. he has a ph.d. in economics. with that, i'll turn it over to the policy guys. >> hello, the focus of my remarks is to explain how the

international tax system works. the united states taxes income within and outside the united states. there are smaller countries that do so, chile, israel and south korea are the three in the oacd. among major industrialized countries and virtually any european country, the canadians, australians, they all have some form of a territorial system where they simply tax the income of their businesses earned within their country. the united states provides foreign tax credit which is meant to avoid double taxation of income earned abroad.

in broadest principle, think of it as a reduction in the u.s. tax. you basically calculate the tax that would have been paid under u.s. tax and duct foreign taxes. it's the foreign taxes exceed the u.s. taxes, which is rare these days, then there is no u.s. tax due. if there is additional u.s. tax due, you have to write a check to the treasury. this requires you to figure out what's foreign source income and u.s. source income. there is a complex system of rules governing income sourcing and expense allocation for purposes of determining whether income is foreign source or a u.s. source. that employs a great many lawyers and accountants throughout the country working for multinational businesses. both u.s. businesses and foreign businesses doing business in the

united states. we do tax foreign businesses doing business in the united states. they can do it one of two ways. have a u.s. subsidiary or do business directly. which case they are taxed on income within the united states, even though they are a foreign corporation that is effectively connected with a u.s. trader business. that is a term of art. you have to figure out what that means. the foreign tax credit isn't so simple as i made it sound. it's subject to separate limitations. you have to calculate various types of income. high tax country income, noncsc subsidiaries. financial services income. it's divided up sometimes into literally hundreds of separate baskets. the foreign tax credit is applied separately. that's not the end of the complexity associated with our international tax system. we have various anti-deferal

regimes. these would include controlled corporation rules and income under those. so-called passive foreign investment company, foreign personal holding companies rules. presumably your eyes are starting to glaze over. unfortunately, the anti-deferal rules matter a great deal to the discussion today. you may have heard $2 trillion dollars being trapped offshore. what that means is the income earned by controlled foreign corporation is a foreign corporation, more than 50% owned by 10% or more shareholders. then if the cfc only to subparty of is tacked.

the money is in effect trapped overseas because if you bring it back, you have to pay the highest corporate income tax in the world. that gives you a sense of the extraordinarily complexity of it. the fact that the united states has the highest tax rate in the world, the fact the united states is the only major industrialized country that taxes its corporations on income earned throughout the world. and the fact that if you do it right, you can defer those taxes, but the money gets trapped offshore. we are talking about inversions. this isn't the first time we've been down this road. we went down the road in the 1990s. that give us 367-a. early in the bush administration in '04. that give us anti-inversion legislation that is now in internal revenue code 7874.

what the administration is proposing 7874 to be more strict. the bottom line is it's never really going to work unless we adopt the kinds of things dan and ike are going to be talking about. if you make it impossible to change the domcile, you can sell out to a foreign corporation, rather than where the management is really in the united states. do we want to create a tax system which is basically the equivalent of planting a big sign in the front lawn of the united states, saying, "please don't do business here." please don't head quarter your company here. do we want a tax system that basically treats foreign corporations better than u.s. domicile corporations that makes it economically irrational to

head quarter your multinational corporation in the united states. i think the answer to that should be no. i suppose the last thing i'll say, then i'll hand it over to dan and ike is a little bit on the economics of it. investors don't seek pretax returns. they seek after-tax returns. nobody really cares what the pre-tax return is. they are looking for how much money they can ultimately put in their pocket. you can see this in a simple way with respect to municipal bonds and corporate bonds. corporate bonds have a higher pretax return. generally with a credit rating adjusted basis, lower than municipals which is why money flows into municipals, even though they have a lower coupon. another way of looking at it is capital is like water. water flows downhill.

capital flows to the highest after tax rate of return if we make the tax cost of head quartering a business in the united states extraordinarily high, the markets will respond. the headquarters of the major multinationals around the world will leave the united states. in point of fact, that is precisely what's happening. i'll leave it to dan and ike to approach how to fix that. thank you. good afternoon. thank you to dan and cato for inviting me to talk. i thought what i would do is to dial it back a little bit and ask a simple question. why do we think u.s. companies operate abroad? that is a question we need to understand the current battle over inversions and how we tax u.s. corporations overseas income.

i think there are two different schools of thought and the truth is somewhere in between. i think the white house's position is most companies that have overseas operations do so primarily to exploit cheaper labor overseas. on the other side, i would say most republicans in congress think that most corporations have overseas operations do so to service local markets. the reality is somewhere in between. your perspective on this issue colors how you think we should tax overseas corporations. the administration thinks every dollar earned by a u.s. company whether they earn it here in the u.s. or elsewhere should be taxed at one same rate. in order to take away any single tax advantage that a company might have to take things overseas. people who believe the opposite would argue that we want to keep u.s. corporations as competitive as possible abroad.

because operating overseas also creates u.s. jobs. i'll give you a couple of examples. in the late '90s pepsico became active in eastern europe. they bought a lot of soda pop plants and potato chip factories and started doing a lot of production overseas. there's no conceivable way pepsi could service the overseas markets producing pepsi and lays potato chips in the u.s. and shipping them 3,000 miles overseas and telling them over there. the volume is too big to make any sense. i would argue that pepsi creates all kinds of jobs in the u.s. by having these jobs abroad. the alternative is some other company with no u.s. roots and no reason to hire u.s. workers to do back office management, i.t., marketing and stuff stuff like that. whole range of production activities in peoria, illinois.

they do a lot of production overseas as well. and the question is where do they do -- which kind of production do they do here, and which kind of production do they overseas? caterpillar does a whole range of production activities in peoria, illinois. they do a lot of production overseas, as well. the answer is simple. caterpillar does the very low margin, low cost production tractors. they do those overseas closer to the market. where that cost of shipment would be relatively large per portion of the total cost where they can't be that competitive to put a boat, ship it down the

river, and ship it across the ocean to asia or europe or africa or whenever. what they produce in illinois are the costly high margin tractors that get shipped all over the world. and the advantage to having operations in production operations in china and brazil and across the country is that across the globe is that it makes cat pillars huge markets and competitive there. one of the things we need to be cautious of. if we were to say screw this let's simply go back to a worldwide tax jurisdiction and get rid of all deferral and make u.s. corporations pay the same rate on every dollar they earn no matter what. caterpillar and pepsico will do less things overseas. they'll sell the operations and hurt jobs and production here in the u.s. as well.

in 2007 i was part of a team of economists who did a report for the u.s. treasury on corporate tax reform and one of my task was to talk to a bunch of ceos and senior tax officers from manufacturing company and ask them about why they locate certain operations overseas and more than one said we're located our headquarters are in the united states solely because of an historic accident. if we were starting out the huge company now would we locate a headquarters here because the tax advantage. and another fortune 500 company tax officer told me they estimate when they're operating in the e.u. their average tax disadvantage is about 5 percentage points. that's significant. that makes it more difficult for u.s. companies to compete. i think one other thing we need to ask ourselves when we're looking at our corporate tax rate which pointed out have a

lot of flaws in it. who actually pays the corporate income tax? i think the best way to look at it it's paid by bad evil corporations. it's has to be paid by one of three groups. the shareholders and the form of lower capital or the workers who get a lower wage rate because there's less capital they use and they're less productive, or paid by the consumers. because they have to pay higher prices because the tax. and i think in the last decade, preponderance of evidence on the left and the right suggests it's primarily bore by the workers. the liberal tax policy center suggests it's somewhere like that as well. so i think we need to be aware of these things when we're condemning companies for doing

these tax maneuvers. one other thing a company pointed out to me, when we talk about why companies do locate operations where they do, a lot of the drug companies put their operations not at low cost places but in switzerland. why? it's certainly not because there's cheap labor in switzerland. it's primarily because of tax reasons. so what is the answer? dan i think was going to wrap it up giving a couple of thoughts. i'm going to jump the gun bit. there's a proposal out there that was written about in the sunday "new york times" and getting a lot of traction by a tax law professor in new york, his argument is we need to go to something akin to a value added tax or sales tax. and generate the bulk of our revenue that way. and use that revenue to tb dramatically lower not just

corporate tax rate, which he would drop to something like 13 or 14% but personal rates as well. at least that's a more honest tax code because it would be taxing people it would be more visible. we know that taxing capital investment isn't a good thing. we would rather not tax effort but taxes consumption is a more efficient way to do it. and one swoop we would turn an uncompetitive tax code into something that would be the envy of the rest of the world. a thought to think about before dan gives you the answer to the universe. thanks, dan. thank you. when you're talking about exports, it reminded me at least back when we had the inversion fights in the 2000s, at that point in time, i assume it must be similar one-fourth of u.s. exports are sales from american companies to their foreign subsidiaries.

it makes a big difference the jobs exports in america to have american companies to compete for market share abroad. i want to put all this in context and wrap it up. inversions, as i indicated, were big lad decade and congress passed some legislation i think can be financial protectionism orifice call protectionism. that sort of slowed it down. but as david indicated, you can't completely stop inversion as long as you have free movement of capital, as long as you have a huge barriers in terms of companies operates around the world. now inversions become a big issue again because of cross border mergers. it makes sense for the reasons that have been discussed for these inversions to take place. with the foreign company becoming the official parent and the u.s. company become the sib side area. even though many n many cases the headquarters stays in the united states. let's look at a couple of slides

to put it in context. it shows the wave of inversions last decade and now today. here is a different look at it. the numbers aren't the same. this is from the democratic staff of the house ways and means company how inversions have taken off. it's clear a lot of them are happening. and the question is why. well, taxes are a dominant factor. it doesn't mean the only factor. it could be that tim horton and burger king would have reason to merge regardless of tax code. there's no doubt about it the investors at burger king, shareholders are looking at this saying we'll have a more profitable company if we can escape the worldwide tax system of the united states. and indeed, as david mentioned, we had the highest corporate tax rate in the industrialized world. some people say the entire world depending how you count a few countries. but the real problem is not just

that we have the high tax rate, we have a system of worldwide taxation which is a second layer of tax imposed on american companies for the income they earn abroad. never forget if you're an american company and earning money at some place like switzerland you're already paying the swiss corporate income tax. does it make sense to declare it a second time and pay tax? we have deferral, which a allows them to postpone it. but at the cost of locking up their capital and keeping it overseas. here is a map showing major countries and their corporate tax rates. who would thought that the united states would have a higher corporate tax rate even than france. you look at the major competitors and corporate tax rates are about half our level. if you look at this chart our friends from the tax foundation put together, you can see 30 years ago corporate tax rates were very high. we entered a virtuous cycle of

tax competition. the u.s. took the lead lowering our corporate tax rate during the reagan years. other countries caught up and passed us. our tax rate stayed relatively high. look what happened to the average of corporate tax rates for other countries. it's 25.1. they're down with the latest data to closer to 24%. so other countries are reacting to globalization they making sensible changes to make their business environments more friendly. the united states is sitting still. maybe we could have sat still in 1986 but other people continue to do the right thing now we're in trouble. here is a map showing high corporate tax rate. you don't want to be dark colored. the united states is dark colored, as you can see. the real key, as i said before, is not just the high rate. it's the worldwide taxation. countries around the world have

not only been lowering their corporate tax rates but territorial taxation. there are probably very few pure worldwide tax system. even the u.s. isn't. among the countries territorial often times they do have a few exemptions. it's more like a continuum. on that continuum, with bad policy being here pure worldwide taxation the u.s. is farthest in the wrong direction. here is a chart you won't be able to remotely understand but it was a study looking at corporate tax systems around the world and ranking them how business friendly they were and investor friendly they were. 100 countries and the united states came in 94th. this doesn't just look at the tax rate. it didn't just look at worldwide taxation. it looked like things like appreciation policy. but, again, you don't need to be able to read any of the numbers. just understand that 94 out of 100 is not a good place to be on that kind of chart. and if you look just at the countries that have some form of

worldwide taxation you see the united states stands out for having an extraordinarily high corporate tax rate. you'll notice that there aren't any major countries as david said where the only major country that has worldwide taxation. so now let's sort of ask ourselves the fundamental question. the purpose of the panel today. what are the reasons? the good reasons, i'm going to postulate zero. what are the bad reasons? desire for more revenue, financial protectionism, political demagoguery. let's look at this. well, okay, wait, it's a 10 year number. what are corporate tax revenues over ten years? here is a choort showing

projections from the congressional budget office over the next ten years. the bar you can't really see is the amount of money that is, quote, lost to inversions. and i think if you didn't do static revenue scoring you would see you wouldn't see that sliver of revenue compared to the $4.5 trillion that 19.5 billion wouldn't even exist. here is something i think is very important. here is another chart from our friends at the tax foundation. people don't understand that american companies pay a lot of tax over $100 billion to foreign government. what demagogues are saying this company they're not going to pay tax. that's wrong. they pay a lot of tax at their overseas operations to foreign governments. guess what? whether you invert or don't. whether you're an american domicile company or foreign domicile company if you earn income in the united states you owe to the american corporate income tax.

all that happens with an inversion is foreign-sourced income is no longer subject to double taxation by the united states government. let's finally address the run away plant man. some people say it's costing jobs. no, it's not. the headquarters stays in america the operations stay in america all that happens is you're making your charter at the filing cabinet in someplace like delaware and -- it happens electronically. i would assume david would know. he's a lawyer. not a bad guy, just a lawyer. all that what happens is the charter goes from an electronic filing cabinet in delaware to an electronic filing cabinet in someplace like london. in the long run though suggesting if we have a high corporate tax rate, guess what? there will be economic reasons for jobs and investment to go to other countries. that would be true whether

inversions exist or don't. that's a problem we have to address. the high corporate tax rate combined with worldwide taxation that's what creates the inversion problem which is just a small slice of the overall challenge that we face. here are a couple of points to close with. inversions are not tax evasion. it's not cheating at all. it's dealing with the law as it is. a flawed law and companies try to do their fiduciary responsibility. given the very bad state of play they are faced with by the political decisions here in washington. companies pay tax on the u.s. source income inversions simply deal with avoiding the extra layer of tax for u.s. based companies. morally speaking an inversion is no different from me deciding i work in washington i could live in maryland, d.c., or virginia. i chose to live in virginia because my taxes are lower. am i wrong or immoral to do

that? i suppose if i was a maryland politician i would say i was wrong and immoral. but i simply made a sensible decision based on my household just like companies make sensible decisions for their shareholders, workers, and consumers. the obama administration doesn't seem to understand it at all. you may remember from the 2008 campaign, obama was talking about bad companies that were registered in the cayman islands. he said it must be the biggest building or tax scam because there are 12,000. he was wrong it was 18,000. he was within 50% of the right answer. for a poll situation, that's pretty good. is there something wrong about 18,000 companies being registered at this one building in the cayman islands? i wish he asked his vice president. his vice president used to be a senator from delaware. here is a building in delaware unlike the house which is five stories tall. this is two stories tall. how many companies are registered in this building in

delaware? 221,000. i actually have a company in this building, it turns out! i didn't know it until i looked up the address on corporate documents. the key point to understand is that companies choose a place of domicile for legal registration purposes on the quality of the corporate of business and tax law. it has nothing to do with where their headquarters are. there are obviously not 221,000 businesses operating there. unless it has 150 stories underground. i'm pretty sure it doesn't. where a company operates fundamentally is going to be the on the basis of economic factors, market access and things like that. where they choose to domicile is a function of good business and corporate tax law. unfortunately the politicians don't seem to appreciate that. they prefer to demagogue the issue. thank you very much. we'll be happy to answer questions until we get close to 1:00.

>> can i say some things? i just want to mention a couple of things. moving to a territorial system is the way to go. but fundamental tax reform is where we want to get. and all the major fundamental tax reform proposals would solve this problem. that would include business transfer tax, national sales tax, where the income tax proposed by a number of folks, including the old usa tax and more recently by the heritage foundation. so there's more than one way to solve this. but all of them moved to a territorial in many cases border adjusted tax system. when you do that, so you to do a couple of things right. one is how you treat interest. and make sure that the interest is allocated correctly. you have to figure out what the

u.s. sources and foreign source income. the second thing you have to get right and chairman camp had a number of proposals in his international discussion draft that did so. the tax treatment of intangible. trademarks, patents, copyrights, that sort of thing. you're accurately measuring u.s. versus foreign source income. if you get those things wrong instead of entirely fixing the problem we end up having a system where businesses can gain where they allocate the expenses and therefore distort what their income in terms of u.s. versus foreign sources. one last thing talking about how business are unpatriotic because they're not paying more tax than the law requires. i don't believe i've seen any of the politicians send in charitable contributions to the federal government.

they also pay what is due under the law and no more. i suppose they're unpatriotic as well. >> as dan said, take some questions. yeah, in the back. [ inaudible ] are there ways to take advantage of lower tax by taking out loans from their foreign partner and paying interest? is that a possibility? >> i'll take that. yeah. it absolutely -- it's fairly unusual, but in effect it would become a multinational merging. but there wouldn't be as much gain to it because the primary

advantage getting from inversion is approved treatment of their foreign source income. >> could take advantage through -- >> right. the foreign partner contemplate a merger between a 100% u.s. company and foreign corporation that has no u.s. income. that foreign corporation is presently paying no u.s. tax on the income. and the u.s. corporation is paying tax on the u.s. income. after the kind of merger you proposed, there would be the same thing. the foreign source income would not be subject to u.s. tax. and hasn't been before. and the u.s. source income would be subject to tax. remember, in any of the inversions transactions the u.s. source income subject to tax. we arguing about the proper treatment of income earned outside the united states. and the united states is the only major country that asserts the right to tax income earned

outside of its borders. >> foreign company would be excluded from -- because it's a business expense and excluded from u.s. taxation? >> i think you're getting at the fact our base erosion rules aren't all that great. i think that's right. i think a lot of people have acknowledged that. if you do a comprehensive corporate tax reform. you have to fix so companies can't easily maneuver and push income that is earned the united states and abroad. i think that's right. i think it's a fair point. i think that's a question that dan alluded to that, as well. i think it's something that has to be dealt with in the context of doing some kind of fundamental corporate tax reform. i think the other thing i would argue is the proposal to drop the corporate rates down to 13, 14, or 15%. all of a sudden, that -- that's no longer something that becomes very attractive.

no one would have any incentive to do something like that. >> i'll add one thing. we already have an extensive and onerous set of rules that govern what you're talking about. whether companies try to gain the transactions between u.s. divisions and foreign divisions. people think that the transfer pricing rules are wrong, then the irs should modify them or legislation should be undertaken to force the modification. i tend to be a little bit skeptical as to whether or not we suffer from a problem with businesses being undertaxed in america. the point was fundamentally right. if we didn't have a high tax rate, companies would have no incentive to try to overstate their expenses here and understate their income here. if we were ireland it would be the other way around and companies would be trying to go through extraordinary efforts to declare their income here. that's where the high tax rate becomes a big issue.

i will disagree with one thing ike said. i don't like the proposal. it would give politician as value-added tax without getting rid of the personal income tax. 20 years from now we'll be france we do that. i don't trust giving politicians a new source of revenue. even though on paper the proposal clearly is better than the current system. it's just i worry about the long run. >> hi. i was at the conference in february i heard we'll probably have a carbon tax. i'm going to use that as a lead-in to my question. i've discussion of consumption taxes and flat taxes and all of these very, i mean, i have an

economic background. i get it. all the high minded but relatically realistically, former tax reform is going to be revenue neutral for political reasons. it may get more progressive getting down a lower rate while maintaining revenue will probably require depreciation schedules and making concessions. so given the preventions you disagree with. that's fine. given the premises what kind of tax reform would you anticipate being politically feasible? >> i think in the next two years there won't be any. i think the chass chasm between the senate and house is too deep.

i think it's telling michael who identifies himself as a democrat put out something that former republican assistant secretary for tax policy, a couple of former heads, republican heads of the council of economic advisers have spoken highly of that. it could be that i have no idea who is going to win. i could see a republican president pulling a nixon goes to china and being the one it does something like the proposal. i think the fact there are so many people who think who spend their day and nights thinking about tax policy who like this thing suggest to me there might be some possibility to do something like this. i think dan is right. fundamental tax reform will always be difficult. dan's former boss said before to me he thinks that 1986 was unique situation that allowed for some kind of fundamental tax reform. from now on we'll have to do something incremental.

i don't -- moving to something like what michael suggested is not a possibility at all. let me say something about the broader issue of taxing, quote, consumption versus the moderate style income tax. let's say you have an apple orchard. would it occur to you get your apples by chopping down the trees? that's what double taxing capital is about. in the long run with that example, we realize, wait that would be an insanely stupid way to harvest apples. you wouldn't have the capital, ie, the tree to produce apples in the future. and yet that's what the perverse double taxation and the american tax code does. when public finance economist moving to a consumption base tax. it doesn't mean a cash register tax. it means a tax where income isn't double taxed any more. we triple and quadruple tax. it's not a good way to harvest

the apple. assuming you want long run growth and higher wages. >> there is this quote by bob lucas who won the nobel prize in economics in 1997. he was asked what would you do in term of public policy? he would get rid of tax on capital income. he said it's the only free lunch he sees out there in the world these days. >> sure. over there. i'm going to stoke the fire a little bit. >> i was listening for it when you were giving your presentation. i don't know if i missed it or you didn't miss it. the corporate tax rate highest in the nationalized world. there's no mention of actual tax rate. the tax rate that corporations paid vis-a-vis other countries more importantly that's around the latest who say we're around 12 to 15% and how much we bring in per gdp compared to other world.

which is how much we bring in. that was about 2.6 or much lower than the other countries we compete with. when you say highest on paper, the actual meat of the argument is where the numbers matter. how much we're bringing in and how much we tax corporation. the legislation you mentioned 15% would be a little bit more. would be a tax raise compare. mr. coburn, i think mr. sanders put out and said it was 12.6% was our average in the corporate tax rate. i understand the logistics of saying it's a negative and nonstimulus and it causes companies to take advantage. i don't see how that compares to the realistic nature of what they're bringing in and what the money is. and i want to hear i guess you would say another version of the motivation you're saying that companies take advantage of an emergent because it can.

it's good for shareholders and thus consumers. but i guess to present the other side of the argument in a same fashion would be there's a pharmaceutical companies escaping me. they were going to take advantage until a press release that came out. the idea there was they were going do tax purposes abroad but there are many benefits they received by being here. obviously their company stays here you're saying it's just a complete paper thing. where they go abroad in terms of taxes. they don't move manufacturing. they double the manufacturing and stuff like that. the argue was the research and transportation infrastructure. you know the argument that goes into helping the companies that the american taxpayers. we expect a little bit back in profits. can you address those factors? which is more of a comprehensive rather than 35% on paper and. >> the first thing is that these companies don't avoid u.s. taxes. all that happens in an inversion is overseas taxes.

taxes on the income earned overseas instead of being deferred simply aren't taxed. so to suggest they're avoiding u.s. taxes is a canard. that's not how the world works. the second thing about the corporate income tax and the effective rate 12.5% is not what people cust mayor customarily think of it. omarily think of it. there's some kind of debate about what is the average tax rate that a u.s. corporation pays and it depends greatly on industry for retailers it's in the 30s. for energy manufacturers it's in the late high 20s higher 30s. the effective question is for every additional dollar profit that a company makes, what proportion of that do they have to pay in taxes? and it's true that the companies a lot of companies are able to get all kinds of tax breaks take depreciation. to duct interest effects and get down their effective tax bill. the point that remains every dollar a profit company makes

they to hand over 40 cents to the federal government. that's harmful. we would be better off if we had a lower tax rate.ad+kt getting rid of a lot of these deductions. >> i would emphasize, the margeal tax rate determines their decision to create new jobs. so the effect it's sort of like my effective tax rate as an individual might be x but my marginal tax rate is going to be whatever tax bracket i'm in. the other thing to understand about looking how much companies are paying in tax there are a lot of effects there. one of the reasons why ireland collects more taxes share of gdp in the u.s. is because their tax rate is so low. i think there was american surprise research did

research saying the tax rate was 25%. you ask five economists who get nine opinions. everyone seems to pretty much agree that we're losing revenue in the long run by having the corporate tax rate at the current level. and i think that's a strong example. >> any other questions? >> another way of putting that in formal economic terms is the lost output. the highest from the corporate tax. it's the most destructive tax in our system. we need to reduce it. >> the gentleman here from tax notes articulated a bunch of potential constraints how we move forward in tax reform. revenue neutrality on a stat base is sn on the corporate side is an egregious mistake.

we don't want to ignore the economic effect of improving our corporate tax system. it we improve the corporate track we'll get a strong growth effect. and that will benefit all americans. both in terms of creating jobs but also creating higher productivity and higher incomes for years to come. >> i'm curious about the distributional issues. it would result in people making less paying a higher percentage of their income than people who are making more. so i'm wondering if that is something you think needs to be addressed and if so, how. >> i'll answer it briefly since i think dan wants me to get away from it a little bit. it increases the minimal level for when you pay an income tax to $100,000. so 85% of all u.s. households wouldn't pay any income tax at all. he introduces a rebate for lower income americans to kind of like

an accelerated amped up income tax credit to soften the blow. >> other questions? >> sure. >> i want to follow up from two quarters earlier about the international comparisons as a gdp. i understand part of the reason the comparison may not be entirely accurate is a large percentage of our business income is taxed as individual income. and therefore compared to corporate income tax could be misleading. how accurate is that? >> you're right. a lot of american businesses sole proprietors, partnerships they pay tax on a 1040 tax rather than schedule c. david would have more knowledge on the specifics here. that is true. let's look at things such as international comparisons on dividend taxation.

if you look at what all the guys do when they do the international comparison, i think on capital gains we're the second highest in the world and dividend we're the fourth highest in the world. whether you are looking at the individual side how capital income is treated or looking on the corporate side, these international comparisons the u.s. doesn't look very good. and ultimately of course individuals are the ones who invest they make the decisions on foreign corporations how much to put in the corporations, how many to create. and the tax treatment is harvesting apples by chopping down the tree. >> in the united states and in canada, they are roughly half, i think, of business income. that would be llc, partnerships, s corporations as well as sole proprietors. they pay on schedule c.

others would come on schedule k on your 1040. the bottom line is those businesses are almost not exclusively but almost domestically. they wouldn't show up in the aggregate corporate tax revenues. you're absolutely right. there is a secondary point. the larger public traded partnerships are treated as c corporations. >> time for one or two more questions. >> i want to follow up with mr. -- doctor, i'm not sure what it is. >> mister. >> my dad is a doctor. so that works out. i want to ask following up on what you said on macroeconomic. and i guess doon i am dynamic scoring is the term. do you think that tax reform

wasn't constrained by a convention revenue score, do you think that would form more revenue? you see what i'm saying #? >> yeah, absolutely, i mean if you look at the form academic literature on excess burden or dead weight lost, it reaches a conclusion to where you want to get is to a consumption tax base the limits including the potential gains from that vary but if you were to go to a consumption tax base for poor people, the potential gdp gains over about a 10-year window are in the 10 to 20% of the gdp range, they're very, very large. that would mean that we could restore dine familiarism to the american economy, restore income growth, especially for the middle class, the american

economy. you really need to step back, i think, and say we have had many years of policies that basically did not improve the tax base, in fact made it worse, and raised marginal tax rates, but the economy certainly isn't growing very well, we all agree on that, and it's because of the tax system. and the tax system is one of the most effective ways to cause economic growth and lead to a renewal in our economy and broad prosperity. this shouldn't be controversial really. it's basic fundamental price theory, it's something that all economists disagree about. you can disagree as to how much growth you will get. and you can also disagree about what you might think of as the

tradeoff, if you have a particular view of what is fair or equitable, the tradeoff between equity and growth. but there's really very little disagreement in the economics community that hasn't been politicized about what is the right kind of tax system. sometimes it's worded as taking capital income out of the base, sometimes it's worded as co consumption tax, but there's very little difference of opinion about what the tax base should be and how positive the impact would be. >> let me add one thing to that because it ties into the the discussion we had of lower income people into a national sales tax. the reason growth matters is because growth is the only way that people enjoy higher living standards over time. i don't really care about the

gap between the rich and the poor, i care about whether the poor have a chance to have upward mobility. sometimes these people look at income -- because their co-efficient is better on the basis of some preexisting ideologic ideological bias. i would rather be a poor person in hong kong than be a poor person in france. when you're looking at these big issues about income distribution and tax policy. often times people make a mistake of assuming that the economy is a fixed pie, it's not, the reason we warm to make some of these changes because we want to pie to grow faster, not because we're concerned about bill gates getting richer, but we're concerned about everybody else in the economy getting richer. >> a study came out last year and it looked at the oec countries and what they have done to their corporate rate.

from 2000 to 2013, there were 14 tax rate cuts of .50% or more. of that number, only eight of those were paid for by some kind of con commitant tax increase somewhere else. if you look at what happens whenever oecd countries, mainly think about european countries when they cut their income tax rate. you see demon in addition for a year or two, and then it catches up and goes above and beyond. there's been a big argument about what's going on there and how that applies to the united states. part of what's going on in europe is that they have very closely integrated economies and so capital is very mobile between one country rand another so there's a lot more dinism the

world has changed in the last 50 years, capital has become a lot more mobile and i think you would expect that the united states revamp its corporate tax code and made it a lot move independent in regards to capital and investment. you should expect a lot more investment to come, not just in the united states, but a lot more slechlt around the world to come to the u.s. as well. this tie into the question we got over here. is it just a game where companies are taking an existing amount of money and moving it from one place to the other? well this chart that i showed earlier, corporate tax rates have come down dramatically around the world since 1980. they used to average 48%, but taxes on a corporate income in shares of gdp have not gone down. so if corporate income taxes had remained stable, but corporate

tax -- the same thing is try for individual tax rates, they used an -- #% to 68%. right now the average is about 42%. and yet we don't see a loss of heavy knew as a share of gdp. now we're closer to the revenue maximizing tax rate, not that i think the purpose of tax policy is to maximize revenue for government. i would like to continue going farther down the curve. right now the u.s. corporate tax rate is above the revenue maximizing tax rate, we should fix that, you fix that and maybe you don't even need to worry about the worldwide tax issue because countries might want to start declaring income here rather than ireland or switzerland.

>> i just want to say when dan made the comment that he doesn't think living in virginia makes him immoral. i would agree. i think we think you're immoral for many other reasons other than that. >> the aversions debate if you will, shows that we have a broken tax system. we can undoubtedly as i think ike mentioned, we're not going to fix it in the next two years, we're just going to put band-aids on it. i would hope that the band-aids or that whatever we choose over the next two years to do on the tax front won't be destructive. but the one fundamental point is that significant tax reform, fundamental tax reform has the ability to make life changing

differences to the average american, we need to fix our tax system. it's economically destructive. it makes our businesses uncompetitive internationally. it hurts smaller firms disproportionately to larger firms. basically our tax system is 3407k the worst on the planet and we need to address it in a constructive, positive way and we need to do the work over the next two years, to make it so that -- and it was a new&bff÷ congress and a new white house where perhaps more interested in doing what's good for the country than partisan gamesmanship, we can month forward and do what's right for the country. >> i was in my closing argument going to flatter ike because i play basketball with him, and i wish i was half as good as him. since he took a shot at me, i'll say he's a really bad basketball player.

instead i'll build upon what david said. our tax system is driving jobs out of the united states, it's driving investment out of the united states, it's making us poorer, even if politicians shut down inversions or as a matter of fact if they do shut down inversions, it's going to make the system worse, it's sending a signal to the world, to investors, it's sending a signal to companies around the world, that america -- i forget whether it was david or ike that made the comment that we have the same planet in the front yard saying investors keep away, our tax code should encourage -- assuming we want more growth and prosperity for the american people. thank you. >> on that happy note, thanks for coming and please join me in thanking our speaker.

coming up tonight onto cspan 3, american history in prime time with a look at the presidency. first how presidents make important decisions such as a change in their cabinet or a decision to go to war. also the connection between the white house and the cia, dating back to president harry truman. former defense secretary leon panetta led a discussion with former presidential advisors and chiefs of staff about the presidential decision-making process. each detailed their own relationship with their presidency served and their time in the white house. from the panetta institute for public policy, this is an hour and 45 minutes.