ays about a few issues. what does it say about the unpredictability of fed policy? i appreciate your testimony that effective communication is critical and transparency is desirable. doesn't the fact we are below 6.5% unemployment for almost a year and a half and you haven't raised rates doesn't that undermine the commitment to transparency and the commitment to communication? >> well i want to make clear that the 6 ..5% was never a target that we said we -- we never said we intended to raise rates when unemployment fell to 6.5%. instead, we said it was a threshold. if unemployment was above that level and inflation was well under control, we would not raise rates. once unemployment fell below that level we would then begin to consider whether it was appropriate to raise rates.

we have followed that policy. and we never said that it was a target, which we would -- >> i understand that. i appreciate the kauvcaveats. you're very good at caveats, i appreciate that. that brings me to my second point. a full six and a half years after the recovery, as you acknowledged there is slack in the labor market and there are significant weaknesses in the labor market, in the overall economy. in fact, a recent investors' business daily article said the over all group has been 13.3%. that's less than half the average growth rate in the previous ten recoveries since waurld world war 2. if it had been average, gdp would by had $1.9 trillion larger today.

you recognized this in your report saying the measure of labor under utilization remains relative. that would explain why you've invoked that caveat and haven't raised the rates even though you came below that 6.5%. i understand the analysis. let's talk about the cause of that underlying weakness. it's clearly not monetary policy from the -- your standpoint because you've engaged in these extraordinary measures, six years of zero rates. very accommodative policy. quantitative easing shouldn't we start looking at fiscal policy? obamacare, with cbo says is contracting employment by 2.5 million jobs. the 30 hour work week is forcing people to go part-time. 8,000 lost coal minors in my state. we're losing employment by the day. over the next ten years dodd

frank will reduce by a trillion dollars regulations may be a factor in liquidity markets. the federal reserve has gone to extraordinary lengths to produce economic growth yet we see this lag and this slack as you say. shouldn't we start diagnosing the problem differently? this is a fiscal policy disaster? >> of course it's appropriate to look at why we've had such a slow recovery. it really has been pain stakingly slow getting the economy where it is now. remember we had a devastating financial crisis. it took a huge toll of households, left many of them struggling with debt, with massive losses in wealth underwater on their morgetages. they've been trying to get the

debt under control. businesses have been cautious about investing -- >> i've got 15 seconds left. >> -- from that crisis -- >> one final point. low rates are not the problem. in fact what i'm concerned about now is because we've delayed raising rates below that 6.5% unemployment rate we have no tools left. what's your response now if we go back into recession with a $4.5 trillion balance sheet and zero rates. we have no tools to address the next recession. >> the time of the gentleman has expired. the chair recognizes the gentleman from florida mr. murphy. >> thank you mr. chairman. chair yellen, thank you for being here. i think one of the biggest problems we have in this country is the disappearing middle class. one of the factors that isn't addressed is housing. in florida, you go to areas like miami, coral gables there's a lot of growth. a lot of the numbers there for growth are through the roof way

better than ever expected. but, unfortunately that is for folks that have the 700 plus credit scores and the middle to lower middle income families, especially a lot of the minority communities are not experiencing this bounce back or building equity that's important to getting to the middle class. my question relates to regulation. and i'm curious as to when you think the federal reserve will be able to finalize its list of domestic systemically important banks so this committee can have a better idea better than just the $15 billion line. which american banks are the vanilla, making that 30 year fixed rate mortgage and the small business loans, versus the ones that are the most risky? >> i'm not sure exactly what

you're -- >> when do you intend to finalize the list of domestic systemically important banks? >> we have eight domestic banks that have been designated. there are among the banks that are over $50 billion and subject to the enhanced prudential standards in dodd frank. those banks we have, frankor example subjected to a higher leverage requirement than other banks. we supervisor them in a different process. we will be proposing enhanced capital standards or surcharges for those eight systemically important banks. others that are not in that group, also are important and have systemic significance and are subject to enhanced

prudential standards and separation. >> will you be putting the list out? >> well, i'm not sure -- what list? i mean. >> for what i just said. there's benen a lot of conversation of whether it's a $50 billion what i would say arbitrary line that's being considered versus things like interconnected derivatives, suitability, et cetera. if that's going to be taken into consideration? >> well, we give special attention to all banks that are over that threshold. but they differ in terms of their characteristics. we have tried throughout tailor separation and regulation to the systemic footprint of the bank. there is no list of banks that

meet this criteria. there are several that have been designated by fsock or subject to enhanced separation. >> okay. switching gears a little bit -- we've had discussion on this as it relates to employment. 5% it full employment right now it's at 5.3%. we're pretty close there. why do you think we haven't had and felt the wage growth yet and what do you think needs to be done to feel that? >> first of all, i think there is more slack in the labor market than you would think by the 5.3% measures somewhat more. i pointed to the very high levels unusually high and we detail this in the monetary policy report. the fact that involuntary part-time part-time employment is unusually high given the unemployment rate. that's one factor.

in addition, i think that labor force participation it's mainly declined for demographic reasons, there remains some components of depressed labor force participation that those reflect a weak economy, labor market that more people would rejoin the labor market if it were stronger. to my mind, the u 3, the 5.3%, somewhat over states just how strong the labor market is. there are also lags in the time the labor market strengthens in wage growth picks up. >> what rate do you think policymakers should use -- >> the time of the gentleman has expired. chair now recognizes gentleman from pennsylvania mr. rothis. >> last week the federal reserve approved the merblger of $188 million bank.

in the federal reserve's final order it analyzed the financial stability implications of the merger. the federal reserve notes the merger did not present a meaningful greater risk to the stability of the united states financial sector. in analyzing the stability implications the federal reserve used a factor based model. chair yellen based on the analysis in the final order should we consider this an endorsement of the federal reserve? >> so the -- staff looked at the detailed circumstances surrounding the characteristics of this particular mergeer. and tried to arrive at a judgment taking different factors into account of whether or not this would create a financial stability threat. and -- didn't use just a formulate aic approach. >> the factor based model worked

in this case? >> listed a number of factors that they took into consideration. and that's a useful list. but then -- >> thank you. chair yellen as you know this month marks five years since the enactment of the dodd frank act. at the signing ceremony president obama proclaimed tha law would help lift our economy and lead all of us to a stronger prosperous future. since that time the law resulted in 400 new government mandates which research has shown will reduce gross domestic product by $895 billion over the next decade or $3,046. these costs are large reason why 17 million americans are still unemployed. why the percentage of adults are looking for work is 62% and why bernie sanders has admitted an honest assessment of real

employment of the u.s. is 10.5%. in your speech in cleveland last week, you said growth has averaged only 2.25% a year since 2009, about one percentage point than the average rate seen over the 25 years preceding the great recession. i would note by comparison the gdp growth rate for comparablye rate during the reagan was 4.8%. considering that average 2.25% per year since 2009 that number hides quarters where we contracted. in both the first quarter in 2014 and the first quarter in 2015 the economy shrank is that correct? >> according to theistics we have yes. >> in light of the negative growth i'd like to draw your attention to the slide that's been shown by my colleagues from

across the aisle. i don't see any negative growth quarters in there. is this an accurate reflection of the economy's gdp growth? >> well, it looks like the numbers you have on this chart are year over year numbers rather than quarterly numbers. >> counting the bars between 2011 and 2015, i see more than four bars there i see quite a few bars. it's hard to see what is represented here. what i don't see are the negative quarters that we've had in there. >> so i don't know -- this isn't my chart. but. >> would you agree the chart does not show the negative quarters? >> i don't see the negative quarters i see your label says year over year. >> you see more than four or five years there between 2010 and 2015 or more bars that would -- >> year over year often means the fourth quarter of one year

over the fourth quarter of the previous year or the third quarter of the third quarter of the previous year. and because negative quarters are infrequent -- >> negative quarters in year zero quarters which we missed. >> given these anemic numbers when you compare the grow ethsince 2009 and your own acknowledgment that's a percentage less, this is a more accurate slide that shows the near zero growth in some of the quarters. given that anemic growth 2.25%. you consider the lower tax environment in the 1980's do you think dodd frank has lifted the economy? >> i think dodd frank has led to a stronger and more resilient financial system. and the years that you showed on

your previous graph that were negative and year over year negatives that was what we suffered in the financial crisis a huge loss in output and in jobs. and to have a stronger more rusilient financial system means the odds -- >> time of the gentleman has expired. the chair recognizes the gentleman from washington mr. heck. >> thank you, mr. chairman. and thank you so much for being here. i'm aware there's an accumulating amount of research and scholarship, matter of fact kind of tracking the long term decline of entrepreneurship and business formation. fewer businesses are being started and fewer are living past the five -- surviving past the first year. as we all know there's a declining number of community banks in this country. my question to you is what can

you do, and what can we do to help community banks serve their local economies? >> well community banks are really vital to local economies. i've seen this first hand when i was in san francisco and president of the reserve bank there. it's something we're very focused on at the federal reserve. we want to see community banks thrive. and know that for many different reasons this is a very difficult environment for community banks. the slow pace of economic growth and recovery that we've had, the low interest environment is squeezing their margins. and the regulatory burdens that they face have been really quite high in their struggling with

it. for our part, we're looking in the way that we supervise community banks to do everything within our power to reduce the regulatory burden. i could give you a list of things that we are doing to try to minimize the burden more offsite exams more special tailoring of our exams to the risk profile of the bank. >> if i could reclaim my time. >> sure. >> kind of in the spirit of this congresswoman beatty asked what you could do specifically to help communities of color who have disproportionately high unemployment rates. i would inkrblg you and others to take note of recent research

done by a graduate student that indicates when community banks branches leave census tracks where there is a concentration of low income or communities of color, that local business lending declines precipitously. even when there are other national or international bank branches retained in that community. he tracks that it's not true with mortgage lending but it is true with small business lending. with all due respect madam chair, you have mother-in-lawerger approval authority oftentimes when community banks are purchased and could make conditional the continuing presence of branches in those neighborhoods where we have begun to document a decline. so the little amount of time i have left, i'm always interested

in your opinion about what you see as the threats to our continuing recovery. and i will use this opportunity to suggest that i don't think it's as arerobust as it can be. you and i have had the conversation about the need for the reserve to think of itself differently. i'm not going to go there with you today. what do you see as the threats that could induce -- or the factors that could contribute to another downturn in the community? what are you worried about? what keeps you up at night? >> let me first start by saying i do think the economy has improved a great deal. and in a way i'm focused on the economy strength and its good performance rather than mainly lying awake and worrying about a further downturn. >> the fed has reduced the

projected growth rate of the gdp by 20% in the last few years from 2.5% to 2.5% to 2.3%. that's a material downward projection. but the question still is what's out there that worries you? >> let me just say that the writing down for projections on growth, in part reflects the fact that productivity growth is consistently disappointed now for a number of years. so our unememployment projections have proven more accurate. in essence we've had decent and better job growth that you would have anticipated where we would have anticipated with weaker growth. in part, it's a reflection of quite disappointing productivity growth. >> the time of the gentleman has expired. the chair recognizes the gentleman from arizona mr.

swigart. >> first on a personal basis you've been very kind to me, particularly on some of the more abtract questions i have thrown at you. in a couple of the conversations here, there's been the discussion of interest rate policy ultimately what it does to us and our fiscal policy. and momc meeting, does it ever reach the level of conversation of as interest rates go back to some level of normalization what it actually means to our debt and deficit, and you know, the projection of our financing costs? >> there is something that our staff looks at and i've looked at. it's -- we -- congress should expect -- this is embodied in cbo projections that as the economy recovers, short term interest rates will rise. long term interest rates already reflect that. and as the years go by, if short

term interest rates do, indeed rise with a recovering economy, long rates will move up further. this will affect the interest burden of the debt. and other things will add to deficit. that's clear. but it's also true that a strengthening economy means stronger tax receipts. so -- >> you and i see that somewhat as obvious. but i see many of the discussions around here when we're looking at an environment where the reports are telling us in just a few years interest will equal our entire defense budget. that's with the new normal interest rate models we're heading towards. so my great fear is, current monetary policy ultimately emboldens us to engage in bad fiscal policy. and we're going to pay a price for that. i think that future, particularly if we keep seeing the revisions in our gdp growth we may have to deal with this

much sooner than later. >> you should be aware that interest rates are likely to rise. and that that will raise the interest cost of the debt that should be part of the calculation that you're making. >> i'm sort of a one off type question. you and i touched on this earlier. you were very kind to engage in conversation with me. i have an interest in the distortion of the price of money. and more than just what the fed does in its liquidity and bank reserves and the purchase it's what we do tax policy wise of what interest is deductible, what isn't. what's guaranteed. we sat down with some fed folks a while back and were telling us the vast majority of total debt in this country has full faith or implied credit. are we in the time of an absolute distortion of the price

of money, and does that make your job much more difficult to use money as a communication of activity in the marketplace? >> it's absolutely true that when -- whether it's a student or a business or a household, considers what the relevant cost of borrowing your debt is to them they look not only at the interest rate they have to pay, but what the other terms are of that borrowing. and if, for example, it's tax advantage that has an impact on what the relevant cost of money is to them of course it's true that many things other than just the headline interest rate matters in the incentives facing borrowers. >> but my thesis on that is that ultimately it hits to your concern of our savings rates. we've created distortion in the price of money that we

disincentivized proper savings and frugality. you've been asked a couple of questions. you've been good at bringing up entrepreneurship. one of the things that seems to be working is the alternative to access to capital platforms. whether they be crowd sourced lending or equity, much of the regulatory environment is about systemic risk and a cascade effect to the banking financial systems. when they're crowdsources have no cascade effect. do you believe the fed will take a light regulatory touch to the financing models out there that are much more egalitarian reaching into our smaller communities and in many ways are much smaller? >> happy to see innovation in the financial sector that makes

new forms of financing available, i'm not aware of regulatory issues at this point that affects those vehicles, but i can get back to you with -- we do have concerns. >> thank you, madam chair. >> time of the gentleman is expired. the chair recognizes the gentleman from california mr. sherman. >> thank you mr. chairman madam chairman i've got five minutes to try to convince you not to raise interest rates till the spring. spring is when things naturally are risen. it's when plants come out of the ground. it's a better time than winter to -- and i -- there is some reasons that i think you're already aware of. the imf study argues things should be delayed until early next year. you've got more economic experience than all of us in this room, of course.

but on the political side, you should not under estimate the ability of politicians in europe to screw things up. you should not underestimate the ability of politicians in washington to screw things up. you need to price in the prospect that we do not pass all the appropriations bills that we do not raise the debt limit. china, i'm sure you factored in but it's not just beijing and washington that you need to worry about. you feed to worry about norwalk connecticut. i mentioned this to you when you were here a few months ago, and i'm hoping that you can get your staff to do a study on this. both for two purposes. one, to let the country know how important this is and what its economic effective will be. and the second to inform your own decision so that if this

prospective terrible decision does occur you factor in the fact it's going to shave half a point away from our economic growth at least. i'm referring to the argument that we're going to capitalize all leases. this would all $2 trillion to the corporate balance sheets liabilities of america. $2 trillion increase in liabilities. not because anything's happened in the economy but just because, as a matter of theological esoteric accounting thinking that i have to confess i actually understand and no one should but for no benefit to our economy, we may add $2 trillion. when you do that you throw the balance shoot ratios out of whack. you force companies to try to retrench and make their balance sheets look better.

and you strongly disincentivize entering into long term leases. companies will say yes you can open the stopping center. why don't we sign a one year lease for the anchor store. if you factor all those reasons in, maybe that will push you in the right direction. but there are more. the reason to raise interest rates -- well, the one other that you are already aware of, that is our unemployment rate doesn't capture those who have dropred out of the labor market. we have a low labor rate, when you adjust that the unemployment rate does not just define increase. the reason given to raise interest rates is to deal with the prospect of inflation. inflation is very low. you've got a 2% target.

you're not hitting it. you've got to keep interest rates to keep that target. but that's too low a target. economics have argued for even a 4% rate. it's in real business where things stick. where you may have an employee who gets fired who might not good fired if there was an easy way to reduce their cost by 2% or 3%. and then, finally you have all the baby boomer retirees. i will point it's not in your mandate but its in the declaration of independence, a desire for happiness. there are economists and cpa's for whom a 1% real interest rate is always a 1% real interest rate. that's way less than 1% of the people. for everyone else they live in a nominal world. if you're a retiree in a zero inflation rate 1% real interest

rate world you're living on 1%. because you're psychologically cannot invade principle if you're in a 3% inflation, 4% interest rate, you are deliriously happy. you're earning 4% and you're not invading principle. this works for everybody except economists and krrbscpa's. please do -- give -- wait till spring. >> time of the gentleman has expired the chair recognizes the gentleman from colorado, mr. tipton. >> thank you mr. chairman thank you chair yellen for taking the time to be able to be here today. we've heard comments from our colleagues across the aisle of the impact we're seeing for minority communities. i'd like to expand on what

it seems to be that through dodd frank, it's a matter of shoot then aim. and now we're trying to be reactive. but at home our people are feeling the pain of bad policy that's come out of dodd frank. and what we're feeling -- what are you going to be doing to be able to alleviate this? >> we are very focused on community banks. we want to -- >> that's what they're worried

about, by the way. >> we formed a council called cdac. they come to see us twice a year, the entire board meets with them. there are also in each of the 12 federal reserve districts versions of -- on a regional scale of a council to advise the reserve banks on factors affecting community banks. we are listening. we are taking seriously the complaints that we hear and the specifics about our separation and trying to be responsive. >> i appreciate that. if i can put a little exclamation point on this. i sat down with community banks in my district. they feel they are no longer working as a banker, but they are working for the federal

government. they are working just for -- to be able to comply with regulations that are currently in place. and while we may have hearings they don't feel that anyone is actually listening because this stagnating growth in those community banks. >> we are listening and we are taking a series of steps that are meaningful to reduce burden including reducing the amount of time we spend in these banks disrupting the other activities that they want to be doing by reducing our demands for documentation, taking a more risk focused approach to reduce the burdens of exams. we try to make clear to the community banks what is relevant to them. and so many of the regulations under dodd frank, we've put in effect, only affect larger banks

and -- >> you do recognize that a lot of our community banks de facto feel they still have to be able to comply with the dodd frank regulations even though you're saying we're going to look the other way. it doesn't really apply to you. they're still feeling the impacts that are coming out of dodd frank. >> there are some things that dodd frank imposed on all firms, for example, the volka rule could envision their community banks being exempt from volka. we're trying to tailor our implication of volka to minimize the burden on community banks. thereabout there might -- >> we just introduced explanation for that. we've got to be able to get the economies moving in rural america and our minority communities. when we're looking at the 5.3%

and talking about real unemployment level that 10.5%, it's part of the problem when you aren't raising interest rates right now is what you're really saying is our economy stinks right now. we are just not seeing real movement because -- what tools do you have left in the toolbox to be able to stimulate this? >> i would say we've gotten our economy -- our economy is in a much better state. low interest rates have facilitated it. and a decision on our part to raise rates won't -- the economy doesn't stink. we're close to where we want to be and we think the economy cannot only taolerate but needs higher rates. i want you to know that we share the goal of minimizing burden on

community banks. and we'll remain very focused on it. we have the process that is in play at the moment. and it is focusing particularly on burdens -- >> time of the gentleman has expired. the chair recognizes the gentleman from minnesota, mr. el ellisson. >> thank you mr. chair thank you chairwoman yellen for being here. is it regulation from dodd frank that's keeping our economy for the people who haven't been able to benefit from the economy and the recovery is it regulation that's causing the problem? >> well, to my mind there has been an increase in regulatory burden on banks what we're doing is trying to create a healthier, safer sounder financial system that will keep

credit flowing through the economy. particularly if we ever experience a stress situation where, in this financial crisis, we saw banks just withdraw credit for the economy which took a huge toll on economic activity by having more capital and liquidity and a safer and sounder financial system. we hope that we are preventing future episodes like the devastating one that we just lived in. and if there is some burden that's associated with that and some costs the benefit is a far reduced chance of a financial crisis that we'll take the kind of toll you just described. >> thank you. it's been pointed out we have a high labor -- low labor participation rate. is it because of dodd frank?

>> no. and, also, there are very -- we are going to have over time a declining labor force participation rate. first and foremost, because we have an aging population more individuals in the retirement years. this is going to continue. now, i've said in my colleagues have that over and above that we think there is something holding labor force participation back that reflects weakness in the economy in that as things strengthen we would expect some people who have been too discouraged to look for work to move back into employment. the major reason we're seeing a trend downward in labor force participation is because of demographic and it will continue. >> has the cfpb been harmful to

the u.s. economy and the recovery? >> well, i mean, congress created the cfpb to enhance consumer protection. they've been very focused on doing that. >> i ask because some of my good friends, you know they complain about it a lot. you know, i just trying to get an expert opinion on whether it's a good or bad thing for our economy. >> so it is addressing potential consumer abuses and trying to enhance consumer protection. >> does that help -- does addressing consumer issues like say, the problems that the mortgage issues that we saw in the 2008 period of time and before that, does that help the overall economy? does that strengthen -- help markets operate more accurately? does it help employment? >> well, we certainly saw the

subprime crisis where there was irresponsible lending had a harmful effect of the economy. and on low income communities and that burden continues to exist. so we're going through a period in which we're trying to address all of the issues including improper securitization and mortgage underwriting practices that led to that devastating experience. it's difficult to get the balance right and to figure out what the best way is to design regulations. there are always consequences in terms of unintended effects of regulation. we need to be vigilant about trying to address that. >> what about student debt? you know how big it is. is it drag on the overall functioning of the economy? >> it's increased enormously.

i am worried about the high levels of student debt. and it's debt that if an individual can't repay, it never goes away. it can't be written off in bankruptcy. on the other hand, education is critical to succeeding in this economy. it's critically important to make sure that students have access to quality education so they can get ahead. they need good information about programs and their success rates in order to avoid mistakes. >> time of the gentleman has expired the chair recognizes the gentleman from texas, mr. williams. >> thank you, mr. chairman and thank you for being here today. i'm a small business owner from texas. i'm a main street guy. i'm a car dealer. one of your favorites. and i can tell you small business is hurting. main street america is hurting.

it's hurting because regulations which you have talked about today are choking the heart out of small business. and i think too, that we talked earlier about inequalities. competition in business takes care of any qualifies, not the federal government. my colleague was asking for an expert opinion on whether dodd frank is good for the economy. i can tell you they're bad for the economy. the worst. with that being said in 2014 in comments before the joint economic committee -- i'll be repetitious he, i think it's important that we remind you. you stated from questions from senator quotes my own discussions with business yz hear exactly the same things that you were citing. concerns of regulations about

taxation and fiscal policy. there is more work to do to put fiscal policy over the next several years a. combination of demographics the structure of in entitlement programs, we can see over the long term deficits will rise to unsustainable levels. my constituents in texas are concerned about the health of our economy. it's not good. in texas, we got great things going. it still can be better. in texas a state that is somewhat recovered since 2008 you have 115 fewer community banks, 105 fewer credit unions. tons of consolidation. my question is what do you say to those community based institutions that former fdic chair bernanke characterized by saying we're being penalized by policies that have failed to

produce meaningful economic growth in the communities those institutions serves which erodes their profitability? >> well, what i've said is we're trying to do everything we possibly can to relieve burdens on community banks. they've been through very difficult times, first of all. a period that's been very rough for the economy and a slow recovery and that's taken a toll on the -- their profitability. and that of the businesses as you noted and in a low interest rate environment, a net margin tends to be low. i think that the low interest rate environment we've had and the accommodative monitory policies have serviceed to help our economy. if you compare the united states

with any number of other economies that also suffered in the aftermath of the crisis we're among the leaders in terms of how we're doing economically. and other countries are now pursuing the same kinds of monetary policies that we put into place earlier. which in a way is an endorsement of their effectiveness. >> it still is very hard to borrow money for small businesses. i can tell you banks as you probably heard this are having to hire more compliance officers than loan officers. al that takes money out of the system that can be loaned to people like me that can hire and create jobs. i asked cordray if he would slow down the dodd frank because we're losing banks. he said we're going to go 100% to take a look at it.

that's a bad policy. you stated community banks shouldn't face the same scrutiny. you said that today. i agree. if the fed will reduce regulatory burden -- in 2014 i heard you say i had community bankers in my office just yesterday from what you said i heard today from community bankers asking me what do i do. we say the right thing, but what do we do? they're fearful of things that can happen of what they may not do. they don't know what to do. what would you tell these people? we talk a good game but don't come through. >> we're trying to make sure our supervisory expectations and work carefully with them to know what rules and regulations apply and how and what don't. and to try to shield them from many of the things that larger banks have to -- >> it's very vague. i hope you'll understand. >> time of the gentleman has expired chair now recognizes the gentleman from maine, mr.

peloquen. >> everybody wants the same thing. we want more jobs, we want higher paying jobs. i'm a business owner like other folks in this room y. love talking to other business owners because they grow our economy, and create opportunities for our kids. if you were in my district and you're telling me the owners oa paper mill or convenience store, they say they are spending so much time and so much money to comply with government regulations that they can't afford to grow their business and hire more workers. now, the competitive enterprise institute calculates that the cost of businesses in america in one year to comply with just federal government regulations is $1.9 trillion. $1.9 trillion. these businesses pass on the

cost of these regulations in the price of their products. our families pr spending about $15,000 a year for businesses to comply with government regulation. i'm sure we can agree, ms. chair, that businesses need to be fairly regulated but when they -- those regulations are killing jobs, that's just not right. several years ago, with a highly partisan vote with very little republican support, the 2,300 page dodd frank bill was passed. since then there have been mountains and mountains of regulations and rules that are starting to smother our financial services industry. one part of dodd frank that's a great concern of mine, is the two big to fail regulation. the sifi designation.

what should be designated as too big to fail, it means the taxpayers if they fail will have to step in and bail them taxpayerers will have to step in and bail them out. we all know there is a huge difference between large money banks with all kinds of tentacles running through our economy and mutual function pension fund managers that handle the retirement savings for millions of americans with no systemic risk to the economy. now the former director of the nonpartisan congressional office says if they have to comply with too big to fail with no systemic risk imposed to the market it will drive up the cost of their operations to the extent with the long term rates return that they can generate for millions of americans in this country who are saving for their retirements

will be dinged by about 25%. i don't know about you but where i come from 25% is a lot of money. can't we agree chair yellen, right now it doesn't make any sense for nonbank institutions that pose no systemic risk to the market like asset managers they should escape this dodd/frank that penalizes. >> identifying threats to the financial stability of our country. the public notice look at what they are going to do not firms but asset management activities that could pose risks. >> i appreciate that. >> let's focus. >> okay.

i would like to switch gears if i can in my remaining minute. on a number of occasions you stated you are concerned about unsustainable deficit spending in this country, how it might impact economic growth and job creation, and i agree. everybody knows if you're on a family budget or small business, you can't spend more than you take in for long periods of time, borrow up to a make up the difference without getting in trouble. that's exactly what congress has done. that's why we have an $18 trillion national desk. we have some folks coming before our committee including mr. lou here a few weeks ago said $500 billion annual deficit is no big deal because it's only 3% of our gdp. i disagree with that and i bet you do too. high levels of public debt caused by long periods of deficit spending can do great damage to our economy because we

need to pay the interest. this year we're spending about $230 billion interest payments on that debt. in 10 years, $800 billion more than we pay to defend our country. can't we agree it's about time you help us and congress getting its act together when it comes to reducing our deficit and debt. >> well, did i did indicate my concern about the sustainability of the debt path that the united states is on. >> and i hope you use your influence in this town chair yellen -- >> time. >> -- to make sure. >> the time of the gentleman has expired. the chair anticipates clearing two more members in the queue. mr. hill and mr. lucas.

at this point, i anticipate adjourning the hearing. mr. hill is recognized. >> thank you, chairman. chair yellen, thank you for being here today very much. a couple of items i wanted to bring. the harvard study everyone has read the last few months. one out of five counties particularly rural counties, no longer have physical presence of a bank. it's not a branch of a national bank but not even the presence of a commercial bank. that's concerning. it speaks to eus point. two things i want to bring to your attention. one is the herfendahl index, adopted back in the 60s as bank mergers became subject to anti-trust rules discriminate against rural areas. i think the idea of using county designations and using deposits

as the sole member of business as a trade area is incorrect. and i can give you many examples of this. i would invite the board staff to reconsider how to do bank mergers, not basing them on the herfendahl. the second is is the comment on mergers. mergers -- between bank holding companies, if there's no comment, you have a 56-day approval process. if they get one comment letter, it extends to 206 days for approval. it reduces proficiency and productivity. i would like to see comment letters and distinguish between real comment letters from the geographies from the mergers and phishing expedition and let the reserve banks have more power.

i'm going to write but this. you don't need to comment on it today. i would like you to comment on labor force especially. because my reading of the cohorts that you mentioned a while ago is younger people dropped out. people over 55 are working more than ever before. and i really take issue with your point that those of us in the baby boom generation retiring. i think if you go back and look a lot those numbers, you'll find it's actually younger people being forced out -- or not having the opportunity to participate in the labor force. >> so i agree with you that younger cohorts of retirees are working more than their parents and grandparents did. that's absolutely true. it is just that there is such a substantial dropoff in the labor

force participation when people retire that when you look at the joint effect of an aging population, more people in each brackets where they do retire that the working more is only an offset. it's not the same order of magnitude as the demographic effect of the aging. i don't disagree with what you have said about that. >> let me change subjects and go back to liquidity. secretary lou, when he was here, talked about the factors, including technology regulation, and competition of reducing liquidity in the markets in his testimony. he said traditional broker/dealers have changed with some broker/dealers reducing securities inventories and exiting certain markets. notwithstanding the october

study, the chairman had a roundtable last week in which a participant, jpmorgan i believe, stated in the treasury market, you could be able to do a $5 billion trade and not have a spread, the market would not move. now her estimate is it's down to $192 million. so there's some indication of the treasury. the most liquid market we have significantly reduced liquidity. and on page 68 securities holdings shows sense the crash and since dodd/frank, treasury holdings have gone up to high levels. and all other categories corporates and even agency securities have dropped which implies people are holding treasuries, holding liquidity and not making a market in that. and i really think regulation is being short changed here in its impact. i would like you to comment on

the liquidity rules all working together that are causing a lack of liquidity. >> on that ruling you have the possibility that regulations could play a role here. simply we have not been able to understand. there are a lot of factors. we need to sort out what's going on and what the different influences are. i'm not ruling that out. >> chair now recognizes the gentleman from oklahoma, mr. lucas. >> thank you, mr. chairman. i appreciate your indulgence at the end of the hearing. i will try to move in an expeditious fashion. my part of the country is very economically dependent on oil and gas industry. i'm hearing concerns on those involved in energy about regulatory pressure. praoufrpb reserves during the period of crisis. i'm concerned if they have less

flexibility in dealing with these companies in this sector, that a cumulative impact of all the factors as we move towards the end of the year, could lead to bankruptcy filings, loans being defaulted on. so i just ask that we be understanding of the nature of those proven barrels in the ground. second question -- or second observation of the question. the last time we were together before this committee we discussed the basel three regulation rule as it relates to the treatment of segregated margin. and i appreciated your response in addressing the matter of on balance sheet accounting treatment. i would like to go just a little further today and specifically talk about the basel ratio now extending to off balance sheet exposures that are not driven by accounting rules. in this off balance sheet context, why is customer margin collected by a bank a affiliated member of a clearinghouse being treated as something the bank

can leverage. when congress very explicitly required such margin be segregated away from the bank's own resources. for the benefit of my colleagues, i suspect we are probably talking a couple -- 200 million -- $200 billion and resources on any given day. could you enlighten us a little bit on that chair, please? >> the leverage ratio was meant to be a very simple nonrisk based measure that pertains to all assets that are carried on a bank's balance sheet. that includes derivative transactions. it's not clear it is what's binding. rather risk-based capital standards in many cases. but this is something we're having a look at. i recognize it's a concern.

it's something that the basel committee is discussing and trying to gather additional information on what impact it's having. and it is something that is very useful to put on the agenda that we will have a close look at. >> that's all i can ask, chair, that you work with your friends here at ctfc to come one a sensible approach. $200 billion that can't be touched by the banks. but yet they have to have extra resources to cover seems like the net effect would be more cost and more strain on those trying to use these resources. i appreciate your comments. with that, mr. chairman, out of character, i yield back. >> the gentleman yields back. chair yellen thank you for your testimony before the committee. we look forward to having you back soon separate and away from

your hump freed hawkins appearances. please respond as promptly as you are available. a all members will have five legislative days with which to submit extraneous materials to the chair for inclusion in the record. this hearing stands adjourned. coming up here on c-span3 a conversation on tax reform from the heritage foundation in washington. in three hours an interview with ohio governor john kasich who will announce he's running for president. and missile defense and the

capabilities. making him the 16th candidate for the republican presidential nomination. governor kasich is making the announcement at ohio state university in columbus at 11:00 a.m. eastern. you can see it live here on c-span3 c-span3. >> he's always to the right and almost always in the wrong. >> they talk about their documentary best of enemies on the 1968 debates between conservative william f. buckley and liberal duvall over war, politics, god, and sex. >> there's not someone in there

very unlike today. today i believe someone is saying you know, the numbers are dwindling. talk about hot topic, hot, salacious topic number two. whereas, then i don't think that was the norm in tv at the time. and i don't think these guys need it. these guys didn't need that. >> you mentioned as moderator, who was a distinguished newsman who i think was really kind of embarrassed by this. and he was moderating. but he disappears for sometimes five or more minutes at a time. today you wouldn't have a moderator not jumping in every 30 second. everybody at a abc just stood back and let the fire burn. >> sunday night at 8:00 eastern and pacific on c-span's q&a. >> the heritage foundation today hosted a discussion on proposals to change the u.s. tax code.

economists looked at plans from presidential candidates hillary clinton and rand paul. and the group heard from arthur laugher whose theory was the basis for tax cuts signed into law by ronald reagan in the early 1980s. this is three hours. >> we remind everybody inside check that cell phones have been muted. hosting our opening discussion and parts of it today paul winfrey of toc as rowe institute for economic policy study. paul returned to heritage this year after serving director of income security policy at the u.s. senate commit on the

budget. prior to that, he sevened here as simulations in our center for data analysis. he has served on world economic forum commission to study alternative measures of economic performance. he also specializes in health economics and applied econometrics. please join me in welcoming my colleague paul winfrey. paul. [ applause ]. >> thanks, john. we're pleased and honored to have with us today dr. tkpwaourb qaa. having served on president reagan's task force. he is also part of the flat tax. he has a bachelor from st. louis. please join me in welcoming the

doctor. [ applause ]. so thanks. we've got a -- allen and i will engage in a little bit of a discussion here. then we will open it up for questions. but, you know, first of all, i'd like to welcome david to our tax reform talk show. i'm sorry. we don't have a live band to play. but if you want to play some games, like smashing eggs on our foreheads, i'm open. so let's get this thing kicked off. in your book on flat tax you wrote economist and politicians of all persuasions have three main points. one, federal income tax is not simple. two, federal income tax is not costly. three, federal income tax is not fair. can you elaborate on these points for stphus. >> sure. >> for those who may be interested or haven't seen any

of the versions of the books bob and i have done. we put it into four pages largely self-explanatory which meets a minimum of regulations. we're 60,000, 70000, 80,000 pages. so anybody who thinks that's simple is missing the point. some of these stories over the years, some entrepreneur, not too complicated takes the tax return to seven different tax offices and gets seven different tax results. so that should be a problem for tax professionals. and then all the difficulties in interpreting things makes for enormous complexity. and then all the various gray lines. every time there is another tax measure to simplify and clean it up, it gets worse. among my favorite phrases was archer, bill archer who kept talking about tearing the income tax by its roots. by the time he got done it was

larger, deeper and sucking more water. the problem is it keeps getting worse and worse and worse. what does it cost us? i was invited in 1984 to serve on the american bar association commission on tax payer compliance. we had three former commissioners, some professor, some tax experts. and we produced this report over two years. it was 100 pages long single spaced. we had a staff of experts to help us out. we walked through every single thing we could figure out to figure why there are $300 billion of taxes owed but not paid. it's very hard to prove in any way scientifically what the main cause is. we could all agree on one thing. the lower the rate, the less the noncompliance. the only qualified with no hesitations of the task force was, have lower rates. if you think about costs, what do we have? we have, i don't know how many

hundred billion dollars in unreported income because people are trying to avoid taxes by under reporting income or exaggerating deductions. we have tax lawyers tax accountants. my favorite statistic when we wrote the first book in 1983 is the number of people who practice law in new york city versus washington, d.c. and we found in the early '80s that the number in washington had grown so rapidly they caught up with the number in new york city. except the number in washington didn't practice law. they practiced various of advising people on taxes. so we had this massive industry. in silicon valley before the bust, i was talk to go 400 financial planners. all but two or three said with tax rate of 19%, they would have to look for other work. because we had high rates and

50%, basically remember a dollar save in taxsis $2 of producing income. way better to concentrate on saving taxes than producing income. there's some margin where you can choose one from the other. so simplicity, complexity, cost, rates, the whole package. and it's not fair either. if you think about it, we have a wonderful legal system in this country that is gradually evolving. you're not supposed to. legally not supposed to discriminate on the basis of age, sex gender, race religion ethnicity handicap. but tax policy discriminates against every single person by affording each individual different kinds and different amounts of deductions and exemptions and rates. we have a tax code that is the very essence of discrimination which is in the face of the fourteenth amendment. that's a good way to begin discussion. >> it seems like there's a tremendous opportunity cost

through the capital that goes into evading and avoiding taxation. it's not just the tax accountants and lawyers and everybody else in d.c. how many folks in here -- probably most people in here work in the tax world. but how many are tax lawyers or accountants or jds and work in the policy world? so not as many as i thought. just david over here. that's a big enough of an opportunity cost in and of itself. >> i should also mentioned problem with high taxsis that we can't quantify foregone opportunity. for example, under a simple flat tax, i'll give it a shot. under a complex system, c corp. person and i pay personal income tax rate, it may not be worth the effort to try to go into business on my own. if i succeed they are going to grab such a large chunk of it. so we end up deferring opportunities. and they are unknown and invisible. we can just try to estimate what

they might be if you had a lower rate. there's a whole range associated with the current code. >> so let's talk about this issue of fairness for a minute. many on the left and right think that the graduated marginal income tax rate system today is progressivity. it is marginal rates not average rates. can you go over how it is more ex tablquitable. >> i did have one set of numbers that i did want to bring with me. i did 202 political jurisdictions around the world to see every single one of their income tax systems. here's what i found. 16 have no personal income tax. the oil sheikhs off-shore havens. 45 have a rate of about 36 or 37 we can trace from our books. i've got a desk in my office

where you have flags from all the flat tax countries. it's a nice picture. 23 have two rates. 118 have three rates. so -- not only that but they are not the same. they are different everywhere and they change over time. so if someone wants to tell me what's a fair tax, i want to know how you pick out which of these 218 is the fairest. this is just rates. not base, not deductions, not exemptions. so the notion that a particular system is fair and all the others aren't is just a matter of your personal choice at the end of the day or what you can politically get away with and enforce. fairness. the way i like to think about fairness is that you can have a progressive tax on a single uniform rate. so i did the numbers at one point to illustrate this. so let's just take for example and say an individual has $20,000 exemption. so $20,000 of income do you

have? zero. then if you go to $40,000, you're paying 10%. and you go all the way up until you're making about a million dollars and pay 19.9999. so you run your way up from zero to just about 20 depending on your level of income. so you can vary the personal allowance, make it higher. that way you would have a greater degree of progressivity. or lower it and make it a smaller degree. but at the end of the day, as long as there's a personal allowance or deduction in there, it is progressive. so the question is what degree of progressivity do you want? well if you decide to have tax rates going all the way to 50%, you canning sure to respond that the congress will because it always has if high income people special treatment because people don't pay 50% tax rates. very few do. so what happens as those rates go up is you end up with a tax

code that gives special deductions to start-ups special deduction toss various sectors and industries. and when you talk about fair, through marginal rates you have to deal with the fact that you're in different entities from personal people to professional corporations to business enterprises and the like. so my view of this is it's impossible to consider a flat rate with no deduction where everybody starts the first dollar of income. once you hit the threshold, the flat rate allows you to have a progressive consumption tax. there's a lot packed in there. i'm sure we will talk a lot about it. it goes from consumption tax base.

without double taxation. i think that's the beauty of having just two postcards to do it. the reason for two. but on fairness, then under that situation, will treat people pretty much the same pause everybody is taxed the same on their last marginal dollar of income. and everybody, depending on family circumstances, receives the same personal allowance. now you may think you want to give precedence to one group over the other. fine. vote for it openly on the budget and financial transfers. you're on the record of voting for spending money. but if you hide it in the tax code, you're not on the record voting for spending money. it's way more complicated to say you're the equivalent of spending money by providing tax deductions to narrow the tax rates. i think one can make the argument the flat tax or any flat rate system really is about as fair as you get in terms of treating people equally. some people don't want to treat people equally. that's their political view.

>> in your book you have this great -- speaking of this in your book you have this great quote on the theory of justice how expenditure tax applied across the broad case base is probably the most equitable base imaginable. john walls i think is safe to say is not necessarily a conservative. and anyway, i thought that was very -- >> ignorance if you don't know what your life is going to be why not everybody have exactly the same tax system they're going to face rather than determine in advance what tax you're going to face. >> you spoke a little bit about consumption base. how it is important to have a consumption base. for folks in the room who maybe aren't as familiar with that, basically a consumption tax is a tax on income spent on consumption. not income saved or invested. can you explain or go into a

little bit of detail why having a consumption base is so important? >> basically or the way i have to think about it, you just use the very simple formula, the gross domestic product equals consumption, plus investment and government services, which is small. and then a add exports. so what's investment? it's whatever you do that you invest to make your business activity more productive. and having first year write-off of investment spending gives you the maximum to make that in the first place. and then also changes the tax base to purely consumption. so economists generally across the board agree that you get better performance in the economy by taxing consumption and not taxing new investment. so that's the basic core argument on that. there's always going to be differences as to how much

better the economy will perform. will it be 1/10 of 1%, half a percent, 2%? i'm not sure of anybody who says it's negative. we don't know what the scope is, small, middle, large or the coefficient. in the long run if we accumulate capital we get more productive worker wages rise and so forth. and so you do get a benefit over the longer run. so imagine that if you could compound growth at 4% instead of 3% how much more rapidly you would double real income. so it becomes very useful to think in terms of long run rates of growth. and you will get them on a consumption base. >> can you talk why marginal tax rates are so important? >> people work for themselves, not for the government. i know very few people, especially rich people, who sit

down these days and say what can i do to reduce the national debt. i'm going to write a check. there's a special office of the treasury where you can send that check to. it's called paying down the national debt. every now and then they get a check. most people work for themselves which is quite fascinating. think of this. you have billionaires, billionaires, who go out of their way to make sure they're not paying ordinary income but carry interest on certain transactions that i think should be taxed a as ordinary income. that's schumer's district and he gets a lot from that to survive for the time being. as the tax rate rises they figured it out very early. by the time they were paying 91% so he quit working the last six months of the year. there's a lot of situation when your tax rate goes up you begin to think a little bit about is

it really worth it? now, it may be worth at at 50% on the dollar. the higher the rate the more likely you are to avoid and even evade and so one is and one isn't. and the line between the two is off in a thin judicial decision. so one of the things we discovered in marketing around europe and we discovered this in romania, bulgaria and elsewhere, they used to enjoy high marginal rates of 20 30 40. they made some estimates about the underground economy. and they figured out, well so much is underground. they can buy insurance and get bank loans. they estimated in the first year they had so much revenue. they typically got it in the first nine months. because you had such a response to people coming on board and only paying 10%, 15%, 16%.

high marginal rates really create all kinds of problem for all kinds of people. and so the lower the rate the higher the return. and most people, as i say, work for themselves not for the government. >> so there are a lot of congressional staff in the room. one of the issues being debated right now in congress is the highway trust fund. one of the ways the senate and the house have proposed to pay for the shortfall is through additional tax compliance measures which would increase the complexity of the tax code. what would you tell a member of congress looking at additional compliance measures relative to say a overhauling the code altogether? >> well, generally speaking, i would tell them go on a broad base reduces the incidence to avoid or evade taxes. and add simplicity to that and you have less need of compliance.

the united states is a pretty good country for people paying taxes. and we get a really good response with lower rates. we get not as good with higher rates. so any measure that will increase complexity is going to make people more unhappy with every expect about taxes. there is a story i like to tell. if you're in a residential neighborhood and there's a lot of small kids and somebody speeds through 60 miles per hour and you catch the license plate, your going to call the police and try to get that person apprehended apprehended. but if everybody else is more or less paying taxes and a neighbor found a way to cut them by half nobody tells the irs or goes and asks how he does it. this is how people respond to the irs. generally speaking, when you sit around a bunch of people at a tax conference irs conference, after hours in the bar, what

have you found? you have a lawyer that's found some special thing for you, how are you avoiding the high inheritance tax. we don't talk about let's go march for more compliance. >> saw on the white house website, president obama laid out a series of principles for tax reform. they include one lower marginal rates. two, eliminate unfair tax breaks. three, be part of a deficit reduction effort. four increase job creation. five, remain progressive. >> well, as i said the flat task is a fully integrated, broad based low rate consumption tax that over time to the extent it aids economic growth and reduces noncompliance will generate additional revenue. if we can somehow or another step the congress and president from spending every dollar it gets and 10 cents more, it would over time reduce the deficit that is a faster performing

economy and a less rapidly growing government will give you additional revenues. so i say they're all terrific. but governments don't create jobs. they get in the way of job creation. individuals form their own. i wouldn't focus on the deficit reduction part of it. i would just try to freeze spending. because if you try to focus on cutting things you end up with all kinds of people tell you why you shouldn't. but otherwise, i think it's right on the mark. it's just too bad they don't do what they say. >> so basically you are -- so the president's comments don't poison the well on tax reform? >> no, they don't. but i've noticed mrs. senator secretary clinton today is proposing too. i will leave that to later questions and answers.

i would just put it this way. she couldn't be more wrong if she tried in raising capital gain rates and in particular holding long-term investments. in silicon valley, nine out of ten feel. we're not interested in long-term preferences. we're interested in getting in and getting out. so the whole notion that somebody is going to sit around and hold things five years to get a lower rate is just plain silly. >> so one of the really significant and sort of inside the beltway accomplishments that congress has had in the last six months is the adoption of the dynamics rule by the congressional budget. you wrote in the past to dispute higher rates is to repaoud date the law of demand which stipulates prices and qualities are inversely related. how do you think or do you think that the new dynamics rule that has been adopted by congress

is -- does it help the eventual passage of the flat task or acceptance of the flat tax? >> there are probably 50 different factors that would go into getting it passed. there is going to obviously be a huge debate and quarrel as there already has been on what the degree of response will be. small, medium, large. so we're pretty sure there is going to be some response. i think in this notion of income -- people get rich quicker, they stop working. but i don't think there's any doubt there will be a lot more people working investing and doing things to get richer in the first place. -- it is not overexaggerating the benefit just as a political measure but take some small --

(inaudible). it's just going to have a long term cumulative impact. >> a few minutes for questions. if anybody hosni. there's a microphone -- couple of microphones. just please state your name and a affiliation and then state your comment in the form of a question. >> hi. i'm nick farmer. can you comment on the idea of having a pure consumption tax, sales tax, whatever you want to call it. flat replacing all other taxes, business, corporate personal, payroll tax. and keeping the progressivity of our current system with a rebate

to individuals to replace all of the various income transfers that are imbedded in the federal budget. do you think that concept would work well and be much more efficient? >> what you've got of course, is just described the fair tax. and we had governor huckabee two weeks ago. bob hall and i tried to budge him off of it a little bit in favor of the flat tax and didn't get anywhere. i wrote a piece called a friendly case against a fair tax. why it's not as good for america but great for me. i want to give you a couple features of that. in the 1960s, there were 12 europeans countries with a sales tax. by 1980, zero. all fell into value added tax. the reason is value added tax is more of a self enforcing up the chain. so you can collect it. retail sales tax is prone to cheating.

i will tell you my early personal story in 1981 i was having dinner at a restaurant in rome. on the way out the cashier said listen, we're not charging a value added tax. but police are outside the restaurant checking the seats. so if we see someone coming up to you, go ahead and check the receipts. one of us will go out the door as fast as we could. i'm sorry, sir, we gave you the wrong receipt. after a while it turns out proprietors get very good at doing this kind of thing. so you're going to lose a whole lot of revenue in that process. retail sales taxes are very hard to enforce across a whole country. now a second matter is we have a retail sales tax in some of the states as well. cap that on and you'll have a fancy rate. but there's a number of other

aspects that are kind of small. i'll start with the joke. if i may. i hope all of you have seen the various "star trek" series. my favorite character is the prophet. and i have this book called 216 rules of accusation. rule 183, if i remember, is only fools pay retail. so that was one. the second thing is that i don't know how many of you come from jewish or other immigrant families. but there was always an uncle who said, no, no no i will get it for you wholesale. and you have small set up businesses to become a c corp. or whatever and get your sales tax license from the state. so you don't pay sales tax on your inputs. in the worst economic situation in belgium in 81 there was a proliferation where people were eating at restaurants. they weren't paying tax on the food they consumed. and next is my house is paid

off, car is paid off, i have consumer durables. and my kids are in the same situation. there's another aspect of this. when you add a sales tax increase to any state or entity, it goes to cpi, consumer price index. what you end up getting is -- you get a value added tax. you get the equivalent but it looks like income tax and doesn't have any effect on price index and so on. this is just a bunch of things that get in the way and complicate it. you have to know who is eligible for it. how are you going to know that? anyway, what i think is, my biggest fear, if you were to do that the probability would

overnight swap one for the other. and the answer would be let's start 3% and see how it works. and when we hit 30 we'll get rid of the personal income tax. no european country has done that. not japan not korea not taiwan. they all start low. they haven't produced income tax. so it's no accident that in europe they spend 50% of gdp and we spend 35%. you end up not with a replacement. it's hard. there are so many programs you need to finance that congress would never agree to an overnight swap. by the way transition, the very first book in 1983 it became a big problem. so we had transition subsequent. the rule varied is five years. so you can have five years to

cling to the old system if you have a lot of unused depreciation. do it right away. we figured out 80% of all enterprises would go right away. and at the end of the five years there's not going to be much depreciation worth anything or more. i'm not persuaded not influenced. there was an 80-page review of the national retail tax. there's a lot of problems that they add to it. only if there was 100% simultaneous replacement. otherwise, i would be nervous. >> i was just going to say i just learned that i can move to rome start a business, print fake restaurant receipts and

make some money. >> that's why 25% of the country is estimated to be underground. oh, 50% of the entire population between 15 to 24 is unemployed. >> hi. i was wondering if you wouldn't mind going into a little bit of detail contrasting the flat tax with hillary clinton's proposed tax plan and why the flat tax would be better. >> i don't know what a tax plan is because she hasn't spelled it out. she's hinted at what it will be. it will be higher taxes on the weighty. and i think 50% marginal rate over those over a million. let me digress here and throw a little cold water on that. the best-selling economic book in what, 50 years, thomas pickety. he organized a letter signed by 250 french economists in 2012 saying they supported french

hollande because he wanted a 75% income tax on those over million. lo and behold, january 1, 2013 he did. and the end of 2014 and he lets it expire. what? a socialist? pickety turns down the french medal of honor. to make matters worse, he resigns from that which he himself founded. he moved where they are open to this stuff. words in theory did not practice. the british labor party was running against cameron. and it showed even even, even, until the last day. they got slaughtered of course. and just a week or two ago, the new leader, whom you've never heard of from the labor party tax issue settled. no more talk bit. 50% marginal rate. we're happy with 45. let the rate go to 18 for

corporate. and we may see some rate reductions. out there in the real world, people who have either tried it or are advocating it gave it up. and don't want to talk about it anymore. so there's not much stomach for actually doing this stuff. and i think it's really important to remember why it went down so high. under senator eisenhower, nobody paid it. 92% of the people were paying like 20%. we're talking about a tiny tiny fraction. not a third of the middleclass paying these high rates a that will hit them today. she's talking about high rates of tax and capital gains. it is just a tax. if it's in the form of dividends, it is a tax lawn after tax profits that are distributed. if it's on capital gains it's an after tax gain profit on the

higher priced earnings. but in any case as we approach creating a tax base, we need gdp. for those of you who know how that is constructed, you don't have tax in gdp. there is no place for capital gains. you end up in double taxes. so we went out to the lowest rate. now, if you had, say, a 9% rate and another 9% on capital gains then the double tax rate would only be 16% and it would be prohibitive. if you're going to start talk building 39.6% or 50% or california, new york, 60%, and talk about 50% on capital gains i don't know, 25% on dividends, and you earn a million dollars you're paying 75%, 80% marginal tax rates. that's when companies start buying cars for everybody. because sit a deductible

expense. and we go back to martini lurches. it's just the wrong way to do it. >> i have a technical question. i think it is a technical question. you mentioned that you figured that 80% of businesses would choose expensing given the option. where did you get that figure. >> this went back to early 1980s. just looking at the nature of investment. for example, we had drawn up depreciation schedules for construction for buildings. imagine you can put up a shopping mall and write the whole thing off in the first year. what they're going to have is

all new investment. spending will certainly come under the new tax code. then look at the value of unused depreciation. for some there may be some calculation where you have to think about if you're going to make new investment the benefit of writing it off, versus maybe losing some of the depreciation of your old investment. the people who benefit for those who were absolutely stagnant. not planning much in the way of investment and they're going to slowly depreciate their old on investment. and that was based on our assessment as a small minority. certainly in the tech world there is no case where the depreciation goes to first year write off. since most jobs are created with small business i don't remember the exact number 80%, something like that you're certainly going to to get a better stimulus and jobs growth by having full investment spending.

section 179 is basically what we're proposing for the entire tax code. it's across the board section 179 for all new investment. but interestingly enough, if you look at investment and physical plant equipment, we're producing more with us. manufacturing. the output is smaller than it was when it was bigger. so we're getting into a situation where it's almost going to be obvious to anyone that you want to take the expensing route. after five years it's going to be pretty hard to find very many businesses, if anything, in those six seven, eight, nine in terms of writing off the rest of their depreciation. so i think that's the principal benefit. not only that, and i should tell you a little bit how the senior and steven simms were involved in the bill. the democrat family controlled

property. 48 separate properties to 48 separate companies. they were all under 48 separate depreciation schedules. you mean i can tie all of these together and put one line on a tax form? i said yes. he said sign me up. that's how we got democrats in 1982, there were more democrats supporting our plan than republicans. as a joke the wall street -- no. it was "the new york times" came out april 15th 1982 and wrote a strong positive endorsement of our flat tax. but anyway, so i have the extra quotation from the "washington post", wall street journal, new york times in 1982. then the story changed later. but i want to make one other point which the questions haven't brought up. economists think more about efficiency. they think about equity too, but they think about efficiency. they took about neutrality and

not favoring one industry over another. and as i look back over 34 years of doing this stuff and marketing all over the world, what i would say is that in the united states we may have understated or under played the importance of simplicity. where as when you look at lithuania, latvia and central and eastern europe, they regard simplicity and compliance and understanding and online reporting in the same way they regard low rates conducive to their strong revenue growth. and i think typically among economists we can't stop talking about efficiency. and we don't talk about simplicity. that is ease of understanding. ease of compliance. ease of collection. ease of promotion of the idea that you should pay and low rate and simple -- first book was

called low tax, simple tax, flat task. we changed it to flat tax because people couldn't keep three things in their mind. it's the old walk and chew game at the same time. but simplicity is really important. i think any of you who want to get on the band wagon it is important to stress we've got to keep it simple. otherwise, all we're going to have is increase in complexity. >> if folks want to know more, how can they do that? >> the good news is you can get the flat tax book free online. the easiest way is to google my name. you will see in the brief description about me in the first paragraph. the words flat tax are underlined. if you click on that you will

go to uber press page where you will see the flat tax book. each chapter can be downloaded and printed free of charge, as many as you would like. print 1,000 and give them to your friends. on my same home page there is a link to my flat tax blog. and what you will find is i private chronicled the history of the flat tax movement all over the world. there are 45 jurisdictions that now have it. and i have written every one, the latest updated lists which i just put up of the 45. and it goes back to 2008. there's 120 posts. so if you really want to follow it go back and read all 120. and you will know the entire history of the glass tax movement all over the world. every time there is a change anywhere i put it up. i usually put an ends-of-year update on it. you will also see a picture of

the flat tax book. so if you couldn't find it click on the book. free of charge. it won't look like that because it is the newer hard cover version with introduction explaining how it spread to 25 countries. by the way, just a short note on that why is it the baltic countries went to a simple flat tax? under command and control of communism, the state gave out the money and collected all the revenue. when the wall came down and they needed to go quickly the easiest thing was a short simple thing you could do online. and they needed to collect revenue on the market economy literally in year one. and then some of the countries wanted to follow western europe czech republic and russia and others. after seven or eight years, they went threw in the towel. when russia went to 13% they tripled taxings on real inflation. that's when the bandwagon started all over the world.

so i'm still trying to market this big movement in italy. it's my great hope we will see something happen in western europe. anyway, that's how to get it. and the best way to reach me if you're media or you want to talk is e-mail me with questions. and i'll take the time to answer them. but the back of the book, the last chapter has 66 questions and answers. they were the 66 most common questions that we heard over 15 20 years of interviews. they are one to three paragraphs and designed for quick, easy understand of things. if you don't want to read the plan, read the questions and answers and you'll get it. if you come up with a new question, you get bonus points. >> the q&a section of that book is fantastic. i encourage everybody to go out and download a copy or a thousand. >> and give them away on the

corner. >> everyone please join me in thanking the doctor. [ applause ]. >> thank you. that was great. and at this time we'll have the next panel come on up.

>> so i would like to introduce my colleague david burton. david is a senior fellow in economic policy at the thomas. a roe institute where he focuses on tax matters, security law, entitlements and regulatory administrative law institutes. his career in financial matters include posts partner in the group. vice president forcouncil of new england machinery. manager of the u.s. chamber of tax policy and general council of the small business association. burton received the gd, and apparently you are the only lawyer here from the university of maryland's law school. he also holds a bachelor of arts degree from the university of chicago. please join me in welcoming david to the podium. >> good morning.

the purpose of this panel so to discuss the essentials of good tax policy. and we have a very trong panel today with five of the country's leading experts and proponents of fundamental tax reform. each panelist will make a presentation of about ten minutes, and then we'll have questions and answers from the audience. the entire session will last about an hour and 15 minutes. the broad principles of tax reform are something that most informed conservatives and libertarians generally agree about. the economic principles are driven by the findings of the public finance literature the optimal tax literature, and price theory and micro economics. and those principles could be summarized as the tax system should raise the amount of money necessary to fund a limited amount of gov in the least economically destructive way.

and in more formal economic terms, in the way that minimizes the deadweight loss or debt burden associated with raising a given amount of money. what this effectively means is a flat rate consumption tax. as you'll hear about in some detail by the panel, there are four types of flat rate consumption tax that have been proposed by conservative politicians over the years. a flat tax is one version of that we just heard about. there's also what is sometimes called the new flat tax, consumed income tax cash flow tax, and that also has been introduced in congress. although not in the current congress, i believe. there's two other methods. one is called a business transfer tax. and the other is of course a national retail sales tax. the best known of which is the fair tax. now the magnitude of economic gains to be head from moving

towards any of these approaches is very, very large. steven in particular is going to address this subject. but fundamental tax reform has the ability to positively transform the landscape. it's probably the economic policy program that has the most -- represents the greatest opportunity to improve the standard of living of the the american people and to recreate prosperity in the united states. a second principle is the tax system should have the least negative impact on the core institutions of civil society. that would include the family, but also voluntary associations such as our religious charitable and civic institutions. -- have written and persuasively about the importance of these types of institutions to the success of a free society. and a third is to help preserve

the rights of life, liberty and property, and to further the cause of fairness and justice, the tax system should impose no unreasonable burdens on individuals and apply consistently to all americans with special privileges for none. should also respect taxpayer rights to due process. our three papers have been made available to you today. and those of you who are watching either on c-span or on the web cast, the papers are four conservative tax plans with equivalent economic results and examines the various tax proposals. the second is a tamt reform for the 2016 presidential candidates. and it walks through the various design elements anyone must con front. and the third is how congress should reform business taxes and

looks in detail at the shoe of taxing businesses and proposes both intermediate and long-term recommendations. all three of these papers are available on our website. let me quickly introduce our speakers. first we have dr. dan mitchell. he's a senior fellow at the cato institute. he was a senior fellow here at the heritage foundation before he lost his way and went to work for the other think tank. he previously worked for senator bob packwood, i believe before he was chairman of the senate finance committee, and he's one of the nation's leading proponents of a flat tax and a tireless advocate for economic freedom. steven is a senior fellow at the tax foundation. he and his colleagues at the fax foundation have created the best and most transparent tax model in the country. prior to joining the tax foundation, he was for many

years with the institute of research on the economics of taxation. he was also deputy assistant secretary of economic policy at the treasury department during the reagan administration and worked for both the jc and the kim commission. dr. jason figner is a senior research fellow at. also a professor of economics at georgetown, at john hopkins cool of advanced studies and virginia tech center for economic policy. jason was explaining to me before he came here that his students actually like his courses, so i'm hoping we'll have a similar presentation today. jason served as deputy commissioner of social security and chief economist and associate commissioner for retirement policy at the social security administration.

he zeshed asserved as senior economist. he sometimes calls himself a recovering tax attorney. but that means he brings to tax policies discussions of a practical awareness of real world problems with the current tax system. i think it's fair to say no one has done more to improve the public's understanding of fair tax and need for tax reform generally than steve. curtis dubai is senior research at the heritage foundation. previously structured international transactions as part of the accounting firm's transfer approaching group. he also served on the fax foundation where he authored three widely recognized reports. state local tax blurds and state business tax climate index. both curtis and jason are among the very best of their

generation of free market tax policy experts. we're going to go in the order that people are seated, and please join me in welcoming dan mitchell. mitchell. >> let's just do this sitting down. i think that might make more sense than people getting up and down. thank you, david, for introducing the panel. and it's good to be back here at heritage. i used to represent the conservative wing of the heritage foundation during my days. i'm glad now that you're upholding that important role. i want to make one basic comment, that i think underscores the importance of everything we're going to be talking about. and you sort of got this of course, from alvin, and you'll hear it later on today as well. but tax rates matter. and while what really frustrates me is politicians understand us when they want to. a lot of times we see politicians, federal state, local level banging their fists

saying we need higher taxes on tobacco because we want people to smoke less. i'm a libertarian think tank. i don't think it's government job to try to control our choices. but i give those politicians an a-plus for economics because they're right. the higher the tax you put on something, the less you're going to get of it. you'll also get cigarette smuggling and other negative side effects. but the fundamental point is right. high tax rates discourage what's being taxed. my frustration is many of the same politicians forget the lesson when it comes to taxes on work, saving, investment risk taking entrepreneur ship, the things that help our economy grow the the things that create jobs and make us competitive. so that's really what tax reform, in my find, i try to you know, make it as simple as possible. that's what it is about. we want more growth and