in the irs today, is a huge agency with the power to destroy lives and businesses. and it is targeting americans based upon their political beliefs. that's not acceptable. so we propose to bust it up. redesign it in three, much smaller, much focused unit. focused on business with tax experts on business to accurately and quickly answer business questions and resolve disputes for our businesses, large or small. another unit to do the same for families. focus on customer service. i don't know how many tried to call the irs lately, but you didn't get through. if you spoke to three people, you got three different answers

with your tax question. that level of customer service or lack of it, that's not acceptable in your organization, it's not acceptable in that agency. we propose customer service, timely accurate answers to our tax questions. finally, because i've grown so tired in my home, i didn't move to washington, i live in the community the woodlands just north of houston and for years i have heard from families and small businesses. they get in a tax dispute in the irs. sometimes a relatively minor one. they will spend years and years, thousands of dollars. even when they win, they've lost. so we're proposing a small unit independent of treasuring the irs like small claims court so americans can get disputes heard and resolved without having to

spend thousands of dollars on attorneys and accountants. that's how we propose to redesign the irs in the 21st agency with a singular mission of customer service. so as you look at those three proposals, you may be thinking, this sounds too good to be true, but it's not. we've designed this to break even within the budget, considering the economic growth that will come with it. it's the only way to do that, the only way to lower rates for everybody is to eliminate the hundreds of special tax provisions for some. so that's what we're proposing to you, significant trade-offs to move to this. for example, in business, we're proposing not to duct your net interest costs. it is a change from where we are today. there's good policy reasons for doing that. allowing full expensing where we

write off things immediately the first year and carry that forward. if you're borrowing to do that and writing off that interest, this point we're giving you a negative interest rate. we are paying you to buy stuff. we're not going to do that. eliminating that as well allows us to go to a dramatically more pro-growth tax growth overall. that's a big change from what we do today. which is why we are asking businesses large and small to test drive this new blueprint including those trade-offs. to give us feedback as we work to improve this at every step. for families and individuals, for example, so there are hundreds of provisions. in our case we adopted our two boys. it's the biggest blessing we could have. we didn't take advantage of the tax credit. but that's important to people.

what we are proposing to the american people, rather than have hundreds of those provisions that apply to some at some point in their life. >> don't we lower the tax rates for everybody. americans usehose dollars for the priorities in their life. that's a change from where we're at today. another. we propose for those who itemize, 2/3 of americans who itemize, that we don't duct the state and local income sales and property taxes, which is a big change from where we're at today. we keep your taxes high. you send your money to washington. you hope you can claw some of it back to offset local taxes. what's going on, everyone is subsidizing each other. middle class taxpayers are subsidizing higher earners. low tax communities and states are subsidizing high tax

communities and states. our proposal is this. rather than high tax and everyone subsidize each other, why not lower the taxes and everyone pay their own? the added benefit is the federal tax code will no longer subsidize higher taxes at the local level. we think that's mirror to that. that is a big change from where we are at today. that's why we are asking the american people to consider the post card, look at this and deductions in the provisions that count to them and bring us that feedback as well. so jim, i want to stop to take questions from the audience. but i will make the same request to you as we do to everyone we meet, and i've done more than 40 town hall meetings on this back home, traveled the country to do the same, coast to coast to lay out the growth tax foreign plan as well. test drive this. test drive this proposal and bring us back your feedback.

don't take one provision out of this like interest deductibility and drive it like it's that old clunker of a tax car we're in today. what we are proposing is a new car. it has different features. it drives much differently. most economists believe drives much faster than the tax code we are in today. test drive the new proposal. bring us back that feedback, help us improve at every step. the time table for us is to continue to listen to this feedback through the end of the year. our tax teams are writing key provisions of this as we speak. we are getting feedback to make this better as we work toward introducing this early in 2017. and now because we have a president willing to lead on tax reform in mr. trump. while we don't know where this

fits, we are ready to deliver pro growth tax reform that leap frogs america back into the lead pack and grows wages and jobs and salaries. jim, with your permission, may i stop and take some questions? yes, sir? >> thank you, chairman brady. association of equipment manufacturing. wanted to thank you for being here today and commend your staff for being incredibly easy to work with. >> thank you. >> just looking for your thoughts on the opportunity to include or somehow mirror infrastructure investment with tax reform. >> yeah. so there is an interest by some to use the repatriated earnings

to fund infrastructure in some form or fashion. we took the earnings from the $2.5 trillion of stranded u.s. profits, bring back to the united states. those earnings pile back into more competitive tax codes. to lower the rates, redesign it to compete and win anywhere, especially here at home. others would like to use that for an infrastructure related approach. so we'll listen to those ideas. i think at the end of the day, the strong economy we have, the more certainty and resign that actually grows the economy is awfully important for investments and infrastructure or anything else. we know we'll be having these discussions going forward. thanks.

>> larry hart with hart strategies. the work you've been doing on this is terrific and headed in a direction that we've waited to go for a long time. i think the question that occurs to me in reading about this is whereas in the house, this is the direction you're going, the senate doesn't seem to be on the same planet when we talk about this stuff. the big question comes down to is tax reform going to be done through the reconciliation process? when i think that you would be able to come up with a bill very much along the lines you're talking about, along with working with the administration on details and things like that, or whether at least in the senate they're going to quote/unquote have a bipartisan bill. while, you know, reconciliation only takes, you know, it's only

good for ten years, and if they do that, if they wind up again as they did a few years ago in the house prenegotiating with the democrats on a bill, i can guarantee you there will be no abolishment of the death tax. something that we have, some of us have worked on for many years and some other provisions. it will be something more like a democrat bill. how do you see that resolving? >> while a lot of people now are brain storming the process and sequencing and timing, ways and means committee is focusing on the product. developing the most pro growth, competitive tax reform proposal we can, rather than the process of moving forward. and while reconciliation may be the only -- ultimately may be

the only option, we're going to start differently. i'm inviting our democrat members of the house to engage on tax reform. bring us your best idea on how to grow the economy. bring us your best idea on how to make the tax code fair and simple again for families. that's the best idea, your best ideas and how to redesign the irs is something we'll be focused on customer service. we'll listen to those ideas. here's why i think we absolutely ought to, because our democrat members of congress, i mean their communities are suffering, too. their college kids aren't finding those jobs. they're seeing the same companies we see considering moving their jobs and research and innovation headquarters overseas. they can't be happy with the status quo today. so we're going to offer a wide open opportunity for our democrats to bring their best ideas forward and engage on tax

reform. how that plays out and if they'll take that opportunity, i don't know yet, but we're going to open that door in a major way. so that's the approach i'm going to take. by the way, you start out with something about this proposal. did i tell you, we incorporated the ideas of more than 50 law makers in this tax reform proposal. we looked at the thinking of think tanks, pro growth organizations, presidential candidates. this is not, this is not, this is not just a tax proposal, it is ours from the sense we took the best ideas on growth simplicity we can identify. which is why this is in the house the first consensus tax reform blueprint in more than 30 years. it's why it makes it more real going forward, and i think we've got a head start on making sure we can deliver this in 2017.

>> thank you, chairman brady. if you could take me a minute and point out similarities or differences between your tax plan and mr. trump's tax plan and things we should focus on, that might be helpful. >> i think the tax proposals are 80% the same and the differences are more than manageable. we can find common ground here. we go all in for expensing. it's incredibly pro growth along main street america. that's one change. we are very aggressive on the international tax reform. and on eliminating the incentives to locate overseas, the border provision eliminates

it. it reverses that magnet back toward the u.s. we think that's important to growth. we're hopeful the trump team will take a look at proposals like that. we have similar tax brackets as well. i do think in recent days i've heard one thought about the wages and taxes of the top 1%, but here's my thought. no american should be stuck with the obama tax rates. they certainly haven't grown the economy. this is the worst recovery in 50 years. certainly hasn't reduced income inequality, it's grown under this president. and that's sort of old time thinking. high tax rates, hundreds of provisions and try to phase them out or limit them. our proposal is much different. on the post card, we're

proposing everyone know exactly what each other's deductions are. we lower those rates so the help you get from home and charity, kids in college, everyone knows what they are because they're exactly the same for everybody. so we're thinking differently about how you address tax reform at every tax bracket including those at the 1%. >> tim brown. i want to say i appreciate your comments. i'm representing myself. i'm a citizen and taxpayer and a voter. it sounds good to me. you allowed to one point i would like you to amplify on. i'm aware the highest tax rates are on people at a welfare standard if you look at welfare effects as a tax.

can you say more about how the tax program will help the poorest of the poor have an incentive to work? >> sure. so there is no quicker path out of poverty than a job, even faster, a good-paying job. it's one of the missing ingredients in the obama recovery in a major way. not just those on welfare, young people, middle class, all but the elderly, frankly, their percentage has shrunk within the work force. this aims to reverse that, create more good paying jobs, which is really key for those trying to work their way up the economic ladder. so we think that's the ultimate answer. coupled with regulatory reform so businesses are creating more of those mainstream jobs. a couple in my view with searching for more customers for american products around the

world, better, enforcible, productive trade agreements are important as well for trading jobs here in the united states. and in the better way agenda, we propose a new way of looking at welfare. today, think about this, there are more people on welfare than are working full time. take every man, woman and child in 24 states total, that's the number of americans in poverty today. it's stuck there. it's not getting better and it won't improve unless we rethink the way we address welfare. so in our better way agenda, we lay out four key principles that are game-changing but we know work at the local level starting with requiring and expecting work for these welfare benefits because that's the key access point out of there. so it won't be achieved, my answer is it won't be achieved merely through a fair and

simpler and more pro-growth tax code but it can be if we think differently about how we address the issue. chairman brady, thanks for being here today. i want you to know how much we appreciate the attention and acknowledgement we need for rate reduction across the board that. will be hugely important to bringing back the jobs and investment we need here at home. i was wondering if you could talk a little bit begin how much work you will have in congress coming in early next year about the timeline and sequencing will be for tax reform. >> it's difficult to know now. we want to know where -- the trump team has just been a few weeks. they deserve the chance to fill the team out, think about the first 100 days to get their feet on the ground there. so we'll continu -- we're engaged with them no we'll continue to stay engaged with them as we work out sort of

some finding common grounds on issues like tax reform and learn more about their timing. what i'm here to say is that we're not focused on the process in this timing, we are focused whenever that is set, we are going to be ready to deliver pro growth tax reform. so that's exactly where we're at right now. i get your point about the expensing and the interest factor. if you take that extension over to home mortgages and allowed to write off the home mortgage interest, would you not be allowed to write off commercial property interest on a commercial loan? >> we are proposing not to do that. we are actually sort of putting

the home mortgage deduction in a separate category. because as we look at the post card, i think while some would like to have fights over individual provisions in the tax code, the debate that we're looking for in america is whether americans want something this fair and this simple and this understandable and are willing to make the trade-offs to get there, or we want to stick with the status quo? overwhelmingly complex tax code, who know one knows how provisions are applied. we are proposing a game-changing approach how we address that. for many families a home mortgage deduction is something they count on. so that is why it will stay -- we're proposing to you to keep it within the tax code.

for real estate or any industry, economy growing at better than 3% or closer to 4% is dramatically better than 1.5% and 1.75% we've got today. lower tax rates allows them to continue to keeponey invested locally. the ability to not just grow the economy but productivity and wages for workers is awfully important whether you're in commercial real estate or that donut shop owner. i keep coming back to that. so we're hoping and asking that every industry take a look at the entire blueprint, including the provisions that change that economy in a very positive way and look at the impact it has on the industry. we want that feedback. we're looking to improve and make this better at every step

so engage with us. i'll finish with this. we can do this. it's been 30 years. i think the biggest challenge the tax reform is most americans have given up hope it will ever happen. what's occurring today is what is occurring -- occurred for president reagan. three major changes happening in america today. one as with president reagan's reform, the american public was sick of the tax code. too complex, too costly, loopholes for everybody, headaches for them, they had enough. that's where we're at today. secondly, they were bold ideas on tax reform by law makers. and others. then it was the jack kempe and bill bradley. today we've got fair tax, flat tax, abc tax, we have provisions, smart ideas on tax reform. we have the same dynamic. third dynamic then we had a president willing to lead on tax reform. today we have a new president

coming into office willing to lead on tax reform. those dynamics that existed for the '86 reforms have reoccurred again in a major way. this is a unique opportunity for us to do what most americans have given of hope ever will happen. it's a dramatic opportunity to leap frog america back in the most competitive place on the planet to create that new job. we are determined to deliver on that. thank you very much for having me here today. >> if our panel would like to join us here on the stage, we'll continue this discussion. and i will turn the program over to my colleague david burton. when we are talking congress, i always want to call you dan

burton for some reason. excuse me if i slip into that. david burton is our senior fellow in thomas a. rowe institute for economic policy studies and he will lead the rest of this discussion. david? >> it's my pleasure to introduce three very high quality panelists. i've asked them to each speak for about 10 minutes and we'll have a question and answer session and a discussion. we're going to go first with jason then steve benton then dan mitchell. jason is a senior research fellow at the mercada center george mason university and teaches economics at the johns

hopkins and virginia tech. he is a former acting assistant commissioner at social security administration and chief economist there. served as joint economic committee as an economist and is a very fine public finance economist working both in tax policy and entitlements. stephen is a senior fellow at the tax foundation. he went to the university of chicago as did i, but steve unlike me actually learned something while he was there. he served in the reagan treasury, was at the institute of research on economics of taxation for many years, and after norm died served as its president. he is an extremely fine tax economist and he and his colleagues and foundation put together computable tax policy

model there that is second to none, actually probably more better, it's the very best in the united states. dan mitchell is a senior fellow at the cato institute. he is, when advocating for tax reforms, he doesn't know the meaning of the word fear, but in some respects, that should be unsurprising because there are lots of words dan doesn't know the meaning of. >> you can see why i come here all the time. i get nothing but praise. >> dan worked for senator packwood during the '86 tax reform act the last time we got substantial positive tax reform done. he once upon a time worked here at the heritage foundation. it's my understanding before i was here. it's my understanding dan here

people have since repressed their memories of his stay here. we have a very fine panel. before we get to that, i want to take two or three minutes and discuss tax reform, the opportunity we have to get something very positive done for the american people and a few thoughts about what that might be. it's well established that if you're trying to create economic growth and opportunity you want to reduce marginal tax rates and move towards a consumption tax rate. in micro economic terms that means that you should reduce marginal tax rates and move to a tax base so you reduce what economists who call dead weight loss or excess burden. that is the lost economic output because of the effects of tax policy. this is something anybody who's

had the joys of introductory price theory can do. the most important thing to remember about that is that the benefit of reducing marginal tax rates increases with the square of the tax rate reduction and the converse is also true, the economic losses increase with the square of the increase in the tax rate. optimal tax theory is the same result. if you look at optimal tax literature going back and its analysis of intertemporal choices, you want to have a consumption base which most major tax reform proposals lead you to. the finance literature leads to the same conclusion. if you want to have a tax system that's neutral with respect to all the factors of production, you move to con sums base, income tax double, trouble and sometimes quadruple taxes. capital and therefore leads to an inefficient, unproductive tax

system. we want to eliminate tax preferences. why? there's two basic tax preferences. tax preferences for various producers distort the economy and lead to an inefficient production process and noneconomic choices by the producers. it shrinks the production possibilities frontier. on the consumer side when you alter people's choices for comparable reasons, you get an inefficient ability of the economy to satisfy consumer wants. you want to have a tax system that taxes all production once that doesn't double, trouble or quadruple tax capital. we have the opportunity now, i believe, to achieve a substantial move toward those basic criteria what is good tax

reform. chairman brady's proposal, which is being fleshed out as we speak is an extremely positive step towards lower marginal tax rates and a tax base that no longer double or triple taxes capital income. similarly, the trump proposal reduces marginal rates dramatically and makes positive steps on the tax base side. so i think we have the best opportunity and quite literally three decades to get a very positive, pro growth tax reform done. tax reform has the potential if it's done truly correctly of as much as increasing gdp by 15% over a decade. this will lead to an extraordinarily positive economy in which wages increase and incomes grow and opportunities are once again available to the

american people. with that, i'll turn it over to jason. >> do you want us to sit or stand up there? >> up to you. >> what do you want to do? majority rules. >> stay here. >> nice and easy. >> good morning, everyone. thanks for coming today. i'm sure most people going up to the election probably thought that hillary clinton was going to win the election, be fighting the same tax battle we've been fighting the last eight years. i made many vacation plans which we now have to cancel. the trade-offs we make for another chance to have good tax policy. let's just start with the basic for a moment about what any tax reform proposal the next congress should address by making three points first. first of all, the united states tax code severely distorts market decisions and allocation of resources. it impedes potential economic growth and potential tax revenue. make no mistake, it is in need of reform. we must do this and the time is

now. second, economists generally prefer a broader tax base with lower marginal rates and brady's plan does that. the tax rates that drive the decision at the margin of what to do next, more work, more saving, more investment, plant labor, equipment, intellectual property, more research and development, a broader base is more efficient because you're not treating some forms of income or expenses differently from others and creating a bias. i say economists generally prefer a broader tax base but base-broadening shouldn't be traded off for other provisions in a vain attempt of revenue neutral that would undo all the benefits of lower marginal tax rates on businesses. we don't want to increase the length of appreciation schedules. i was pleased to see both senator brady's plan and president-elect trump plans have expensings. many previous discussions we had in the past years is trying to figure out how to do lower rates

extending the appreciation schedules. that's not the way to go. focusing on the right policy provisions brings in my third point which is provisions that tinker around the edges like patent box, innovation box, anti-invasion erosions will only exacerbate existing problems evident with our current corporate tax code. there is an old saga montgomery tax economists, the road to tax hell complexity is paved with good intentions. chairman brady made a good point betsieing out he wants to broaden the base and lower the rates. lowering the rates are very important. put it on a post card. you want to add all these extra provisions people want as their favorites, i've got to raise the tax rates back up again. that disextorts decisions and economic behavior. make up revenue somewhere. we have trade-offs to make. let's avoid complexity and keep it simple. we need to focus on the causes

of the policy problems, not just the symptoms. efforts to attempt to treat the symptoms and not the causes, efforts that tinker around the edges are doomed to fail and only exacerbate the existing problems and further the complicity and create equity-owned businesses using the tax code to wic winners and losers. u.s. competitiveness will continue to languish and create troublesome results. a further loss of american jobs, sale of u.s. companies to foreign multinationals, a further erosion of the corporate tax base and a continuation of the harmful tax policies biased against savings, investment, job creation and economic growth. the united states tax code currently distorts market decisions and ole kags of resources. the tax code hampers job creation, impedes growth and tax policy and one thing we keep this discussion going and we talked this morning and also with the discussion on the brady and trump plans, please keep in mind that only people pay taxes.

corporations don't pay taxes. they are legal constructs with a statutory responsibility of submitting taxes, but the burden of paying taxes fall on people. we hear opposition saying it's a cut on business. cuts taxes for businesses not people. that's not true. businesses are made up of people. the ultimate burden of taxes fall on people. we are cutting business taxes, cutting taxes on labor, cutting taxes on savings. that's important. many developed countries are reducing their tax rates. now there is a chance to do something and be more competitive. beginning next year, finally we'll have both a new president and congress serious about tax reform. that's why a lot of us are so excited. exhausted economic research proves mostasic effect, the more you tax capital o labor, the less you get of it. incentives matter.

one thing we should not do, which i think is off the table going into next year, not raise tax rates. united states corporate tax rate is one of the highest in the industrialized world this now increases business flight to lower tax countries taking their job, money and tax dollars with them. while it's not going to solve all our problems, one of the biggest we have is lower the tax rate on the corporate side individual. lowering the corporate tax rate gives so many incentives to move businesses and jobs overseas. it's important income be taxed once and only once. there is much concern those who report significant earnings pay a lower tax rate than those with ordinary income. taxes are taxed first at the corporate level then the individual level. my two colleagues on the tanl will get into that. policy makers need not fly blind when it comes to defining

principles and goals key to a successful revenue system. research suggests a successful revenue system should include the following. they should be simple. it's hard to understand that, but we have a very complex code and makes it difficult and costly to comply with. makes it easier to scam. congress should make the tax code as simple and transparent as possible to increase compliance. it should be equitable. we talked about it being fair. these policies result in immeasurable unintended consequences. tax fairness would reduce the number of provisions that favor one group over another. the tax code should be efficient because the tax code alters market decisions and such work, savings, investment and job creation and impedes economic growth and tax revenue. it must provide sufficient revenue to fund the government services and changing tax payer

behavior. it should be predictable. there are a lot of questions that use reconciliation which allow for a ten-year window. negative effects are not just from what it does today but what it may do in the future. such uncertainty deters economic growth, require the tax code provides near and long-term predictability. more we can do that locks benefits into the tax code forever, the better off we'll be. to sum up and conclude, there is a broad consensus as to which policies are most likely to provide growth and revenues and which are likely to fail. lower rates. exhaustive research, the more you tax something, the less you get. if you want more labor, work, saving, more investing, more job creation, tax them less. broaden the base and make loopholes. one of the keys to successful fiscal reform is move away from a spending tim that depends upon easily manipulated tax system.

tax reform should have lower rates, broaden the base and close loopholes and this leads to added employment and most likely increase revenues. we shouldn't have double taxation and reduce bad tax incentives. fortunately the plans follow many of these principles and policies we'll talk about further with my two colleagues. thank you. >> thank you. >> thank you for having us today. i was impressed with chairman brady's remarks. the house has done enormous amount of work understanding these issues and trying to deal with them. what i would like to go through today what's wrong with the current system and then compare the current system to an ideal system and then look at how the brady plan moves in that direction to a considerable extent. many people often say wouldn't it be nice if we had a pure

income tax with no deductions and everything treated evenly. the dirty secret about the income tax is it was set up biased against saving and investment. the object was to redistribute wealth. if you had a perfect income tax it would not be neutral. it would treat consumption items neutrally but penalizing saving for future consumption. that is the problem that we faced. there we go. if you earn income and pay tax on it, you can buy a loaf of bread and jar of peanut butter and we don't tax you again. there are a few excises on cigarettes and gasoline, but generally we don't tax after-tax income when you consume it. but if you buy a bond to buy interest payments in the future, we tax the interest. if you buy a corporate stock to get a dividend we tax the dividend if you put it into your small business we tax the earnings on the business, even if it's after tax money.

that's a second layer of taxes. second bias of income tax savings. next step a corporate tax to tax those dividends and capital gains distribution even before you get them. that's a third layer of tax that is not imposed on consumption. if you have enough money in your bank balances toward the end of life, which you set aside in case you need to go into a nursing home that, would eat up the exempt amount and anything over that is hit by the estate tax. so that's the fourth layer of tax. a heavy bias. the next problem with the tax system is they don't even measure income correctly to begin with. if you're a business and you buy $100 machine, you've spent $100. we don't let you write it off. we make you stretch it out over many, many years. if there is a nonzero cost of time value of money, which there is, and if there is inflation, that write-off is not worth the whole $100. you've spent more than we let you write off in present value

and we are overstating your income the entire time. so that means the tax rate's actually higher than it appears to be. and finally, we have the problem of trying to tax income from what's already been taxed abroad and we have a complicated foreign tax credit to avoid the double taxation which doesn't always work. a tax system that overstates the system and taxes several times. it's because of these problems many people researched how to put together something sometimes called personal expenditure tax or consumption tax that can be progressive but doesn't have this added bias against saving and investment. what would that look like? in the first place, would you have to do something about the double taxation of saving. would you tax the saving upfront and not tax the returns, which we do with roth iras and

municipal bonds or you would put the tax on the income when you first -- you would not put the tax on the income if you put it into saving. that's a regular ira, pension or 401(k). then tax it when you take it out. but you taxed the original amount and interest built up. all saving would get that treatment. not just limited amounts you take out by a certain time and follow certain rules on distributions. no. all saving would get that treatment. the next step, businesses need to stop double tax. businesses get to duct the dividend or integrate the two systems so business is taxed at the business or individual level but not both. then we have to get rid of that estate tax. because that's an added layer of tax on income that's already been saved. every penny in an estate has been taxed, either when you first earned it and saved it or put it into an investment and it earned income and was taxed again. even in an ira where you

postponed the tax on the saving, the heir has to start paying tax on it. it's been taxed already, sometimes more than once or it's about to be taxed and the other provisions of the income tax always double taxation. the next step you need to get rid of that long depreciation life and create expensing so that people get to duct the full value of what they actually spent on the machine. not just some reduced value. finally, have a territorial tax system like most of our trading partners. income earned abroad where foreign governments provided the water and sewer and police protection, it's taxed over there, stuff that's produced here is taxed here. we don't get into each other's sand boxes and try and grab each other's toys. that's not the right way to do a global tax system. with all that in mind, let's

take a look at how the house blueprint stacks up. it reduces tax rates for individuals and businesses. this partially reduces the tax of the business level and the added tax on dividends and capital gains. it doesn't eliminate one or the other. it's still a double tax. rates on both of them are lower. so there's less of a double tax system. in the process, they do eliminate the deductibility of interest while continuing to tax it at the recipient's level. the right way to tax interest is to duct the interest then tax the recipient or not duct interest and not tax the recipient. they are eliminating the deduction but continuing to tax the recipient which is a mistake. >> at half. >> at the reduced capital gains and dividends rates. there is some problem with that. the senate has an interesting proposal to eliminate the double taxation of corporate income. the dividend is paid out, it's deductible but there is

withholding tax recipient can claim. it's something that can be worked out. both methods yield a very large amount of additional income because many recipients of tax exempt. the plan ends the death tax and gift tax, i believe. that's one of the key points in moving toward a neutral tax system. it adopts expensing. the other key point on the business side for moving toward a neutral tax system. it adopts the territorial structure that a neutral tax system would have ending the anti-u.s. bias against producing here and selling abroad. these are big improvements. i give four out of five stars. i have to tell you, it's much better than what was done in 1986. what you in 1986, we did a lot of the cuts that were in effect in 1981. '86 actually moved toward this pure income tax with longer

asset lies, got rid of investment tax credit, made it harder to use iras and pensions. damaged real estate by messing around with the depreciation allowances. and it did lower the corporate rate but the other features were so great raising taxes on capital relative to consumption when you lowered the rates you didn't make up to it. that was a move back to the pure income tax. this is a move in the general direction of a neutral tax where saving and investment are treated on par with consumption and that bias is largely eliminated. why do you want to do it? because with the bias, as much as the old people back there where they wanted to redistribute wealth thought they were helping the poor, there are fewer machines bought, fewer farms operating, fewer mines, factories are fewer and you have older machines and work force is less productive and wage is depressed. this sort of plan moving in this direction raises pretax wages

and that's where the big gains to the work force come from. not just the tax cut. when you run it through our model and calculate how much additional capital would be formed and how much wages would go up, we get dramatic results. this plan, even though it doesn't go completely toward a neutral base, is so far along that line that it gives you about a 9% boost in gdp, the capital stock will be almost 30% larger, wages will be almost 8% larger, there will be a couple percent more people working. the total increase in the economy of 9% will be split on the wage side between higher wages per worker and more workers working. you get a big improvement in the wage earnings and wage bill. the parent initial cost of almost $2.4 trillion would be offset to a very large measure by the growth effects of the plan and we figure over the decade it would only be losing

about $190 billion which is peanuts. and then further out you get even more revenue coming in. >> some people have some sense over that ten-year period the federal government is projected to collect about $45 trillion. so that $2 trillion static loss should be looked at in that context. >> yes. it wouldn't actually happen because you get most back from the growth. there is almost no revenue loss over the ten-year window and improvements further out. if you look at the distribution tables on a static basis, if you're lowering the tax rates on noncorporate business and capital gains and dividends, a lot goes to the top. if you factor in the wage growth, it looks like a much more even distribution. the total after-tax incomes that we project would be 8.7% higher on average. that would be between 8.4% and 9.3% higher for the bottom 99% of the population and would be

about 13% higher in the top 1%, but the benefits to the 99% are huge and the benefits to the labor force are huge, and that's why you to do this kind of a reform. thank you. >> thank you, steve. dr. mitch. >> steve, can you pass me the clicker? first thing i want to say, david, did you notice i dug out my old heritage tie from my closet? it's lost its power pipz didn't want to persecute victimless crimes? i didn't want big government conservatism. i'm still a libertarian. i'm joking. it's good to be back here. what i want to do after we've had two very good presentations here from jason and steven, i want to touch on a few additional issues so that we can wrap this thing up assuming, of course, i can actually figure

out how to work the thing. we've heard the principles of good tax policy. i probably don't need to reiterate that. but i want to add one thing i think that jason and steve and david would agree with. you can't have good tax policy if you don't control the growth of government spending. i have a lot of faith given what the house has done for the last several years and their budget resolutions that the house is serious about controlling the growth of government spending and therefore, enabling and creating breathing room to do good tax policy. i'm not quite sure what we're going to see out of the new president. the new president has said things that make me worry that he might not want to reform entitlements. if we don't reform entitlements, i worry we'll never have the chance to have good sustain sustainable long-runtach policy. even though it's not technically a principle of tax policy, if we don't control spending we're

never going to achieve those things all the other panelists have already talked about. in terms of those things they've talked about, let me reinforce a couple points. politicians actually understand that tax rates matter when they want to. they say oh, we need to higher taxes on tobacco and alcohol because we want people to smoke less. they're right. i would give them an a plus for economics. but then the same politicians oftentimes turn around and say, oh, it doesn't matter if you have high tax rates on entrepreneurs on investors and things like that. of course, it matters. people respond to incentives. we want to have the tax rates on productive behavior as low as possible. i want to also emphasize what the other panelists have said about the importance of reducing double taxation. this is where i thought chairman brady took the good work of former chairman kemp and put

together a fax reform plan and turbo charged it by breaking out some of the barriers that kemp imposed upon himself and came up with a plan that's even better. but the key thing, and then echo what's steve in particular was reinforcing is reducing double taxation. i want to show you something that i think actually gets this idea across to politicians. i sometimes ask them, if you had an apple orchard, you spent all those years planting the trees, tending the trees, keeping away pests, pruning the trees, and finally your apple trees have matured, you have a good crop of apples. it's the fall. you're ready to harvest the apples, what's the best way to harvest the apples? do you pick them from the tree or chop down the tree? even politicians it realize wait, it wouldn't make any sense to chop down the tree because then i wouldn't have ands next

year. but that's exactly what we do in our tax code with the double, triple and quadruple taxing. . we're not confiscating all the capital but in this example i have here, the tree is the capital, the apples are the income. yes, tax the apples if you want at a low rate and things like that. do not saw off branches of the tree because it means have you fewer apples next year. that's what steve was talking about when he's referencing the fact we're going to lower people's income and there's going to be less income in the future for ordinary workers if we destroy capital in our economy with bad tax policy. and the good news is that in general, trump is pushing in that direction. there's no question brady is pushing in that direction. there's even some movement on the senate side where normally people joke that's where good ideas go to die. there's a lot of reason for optimism. i want to raise something that

we need to think about as people are friendly to the idea of tax reform and that's the sort of destination-based order adjustable part of the tax reform plan. it's not in trump but before i get to that, here's my little chart i put up. i have the flat tax as the gold standard. lower rate, no double taxation, pure no loopholes and then i compare it to trump and i compare it to brady or the better way plan, however you want to call it. you can see both trump and brady are moving significantly in the right direction. i'm a purist. but i'm not under any delusions that we're going to get perfection out of the political system. and so when i'm giving them bs and b pluses that's a tremendous poof into the right direction that they've done. you'll notice on the lower right, i have these question marks under things like political risk, pro competitive it, territority, because what

the house plan is doing is really radically different. it might turn out to be acceptable but i think we are obligated to give some serious thought about what this means. because you're exempting all export related income. you're not allowing any deduction for foreign-produced inputs. is that protectionist or not? is it going to be come compliant with the wto? for those of us who have some gray hair, we remember back when you had the fisk eti issue. and we eventually after years and years were forced to change it. will the wto do the same thing? is this an indetect tax under wto even though it's a corporate tax structure? you know, we have to think about those issues. and what worries me, and this is why i sort of have a question

mark under political risk, the one thing i really fear for fiscal policy is having a value added tax added on top of our current income tax. in effect, the destination-based border adjustable cash flow tax you have in brady's plan is a vat but it's not because wages are deduckedable. if the wto rules against it, i worry, would politicians in washington especially if maybe they're not as good as ones we hopefully have right now so this it would happen like five years in the future by the time the cases get processed? what happens if the politicians in the future who might not have the same interest of limited government get a wto decision and see the six way to deal with this is to make wage noz longer deductible, make it a vat because in theory even though it will be a sub traction method, the wt op would probably approve it. that i think you may, as well just fold up shop because our chances can of crowing the size of government would be very, very low.

this is something we need to seriously think about. but also, we have to think about the implications for tax competition which i think is one of the few good things on our side controlling the agreed of the political class. the better way plan in some sense is based on a plan by alan you're back published by the center for american progress which is not exactly organization that is friendly to limited government and low tax rates. the first sub title in his prap was "avoiding the race to the become," and that's a term that the left uses because they don't like tax competition. ireland cut taxes. other countries are cutting taxes. reagan and thatcher cut taxes. other countries had to cut taxes. i think that's wonderful. left uses it as a race to the bottom. if alton wants to avoid a race to the bottom, that to me suggests uh-oh, we'd better be very careful about doing this because if people who don't like tax competition want that approach, that worries me a lot.

by the way, i don't want to get into technical boring tax things, but this is a destination-based system which is the exact same thing that underlies the so-called streamlined tax proposal, in other words the internet sales tax cartel that state governments want because they don't want tax competition. brady's plan is great. but this is a very new different thing. i think we need to think about whether or not that would be good in the long run and then two final points that are political. when you do a destination-based system, in effect, the goal is to maximize the taxes paid by americans and having nothing tax levied on foreigners. politically, that doesn't make sense. so i sort of wonder about it. the other political thing i wonder about, normally all the things being talked about in these various plans, lower rates, less double taxation, territority, these are things the business community can deserve united behind. when you do the destination

based cash flow tax, you're in effect saying to every company that does a lot of importing, think about walmart or something like that, you're going to make them very strong opponents i assume of the plan. if republicans are doing something where you to go up against the left, the media, a lot of opponents that are doing the usual fanning the flames of class warfare, do you want vo-to-have part of the business community against you? i think the better way plan is great. it's the best thing to come out of congress in a long time. i think there's been a huge amount of very serious good work done on it. when we're thinking about medding the better way plan with the trump plan, i worry about this one provision. i don't know than enough thought has been given to it. these are concerns since everybody else covered the main things about reducing rates, less double taxation. i figure i would close by raising a few warning flags because this is something we need to think about. thank you very much. >> thank you, dan.

jason, do you want to have, say anything one or two minutes, three, whatever in response to anything the other panelists said? >> yeah, a few things. i think we're all in ingredient up here. to two things dan said. one was controlling the growth of spending. is he completely right. and i ignored it in a sense as looking at what is good tax reform. one of the problems going forward is because spending is so high, one of the opposition complaints to tax -- it does not raise enough revenue. we keep raising spending. so dan's right. we have to get spending under control. that's long-term entitlement control so we can avoid -- we need to define the ideal tax system which raises enough revenue to support the things we want but not overspending. he also mentioned something called the fisk which i have less gray hair but still old enough to remember what it is. fics.

you would set up some sort of subsidiary at a nice tax haven that had a lot of sunshine and i dert some of your sales through there to get a break on your sales from the u.s. exports. and it was called going fisking. if you're going on holiday. a lot of the tax planner would set up sales corporation taz ta minimize u.s. tax obligations. the whole point of why that was being done is the u.s. tax rate is too damn high. at 35% tax rate, you give incentives for corporations to be more competitive by shifting business activity someplace else than the u.s. so again lowering the tax rate is one of the biggest things we can do to improve growth and job creation. steve mentioned the idea about how much job creation economic growth will come out of this these tax reform plans if they go somewhere in the direction they're planning it right now. you might hear some debates and criticism about this dynamic

versus static modeling. don't worry about it. get it out of your head. let's not focus if it loses money. the baseline we're going under, the assumptions used for the baseline are wrong. we see a declining labor force participation. wages are, people working are going down, income from wages will go down in the future. corporations are leaving the united states and business activity in the united states takes tax revenue out. she is assumptions of revenue going up or static are wrong. we don't want a static basis when you do reform. we're going to get better growth and turn around the problems we're having now and reverse the declines. hopefully get more work, more investment, more savings, that will lead to more revenue. let's not focus on whether static or dynamic is wrong. whether we go from 2% to 4% or 1.5 to 3, we're declining. we have to turn it around. these tax reforms will get us

there. >> steve. >> some of us have enough gray hair to remember the disk that came before the fisk. >> domestic income sales corporation. >> the bulk of the growth from the blueprint is going to come from the expensing. followed by the rate reductions. the added phillip that you get from the border adjustment is perhaps the least worthwhile to press for if you're getting a lot of pushback and it's going to cause you trouble. i wouldn't worry too much about it. but dan's right to raise the question, is this going to be a wto acceptable. the spending side of the budget is critical. area wasting a lot of resources spending on junk. this infrastructure notion that it's going to salvage us and somehow be counter cyclical in the short good and raise

productivity by a huge amount, most of what we need to spend on infrastructure is maintaining what we have. that's not going to add to the capital stock. and infrastructure increases are into the going to be a real panacea. we're not in a recession. we've been growing much too slowly. we're at equilibrium and it's too low. to get that fixed you need an increase in the private sector capital stock that's been depressed all these years by taxes and regulatory burdens. that's where most of the growth will come from. do the infrastructure only if it's going to yield a very high return because it's very important. build a bridge to somewhere and not nowhere and make darn sure you've done a good cost benefit analysis before you start. some types of spending will naturally decline. the number of people needing public assistance will go down and people needing help with health care will go down as incomes go up. that's something we need to take

account of in addition to the enacted spending reductions. the -- model results that i've shown are fairly dramatic. and some people think we can't get there from here because there won't be enough saving here to fund all this added investment. if you put this plan in place, there will be. first of all, the business tax cuts increase retained earnings which are part of saving. lower rates encourage more people to save. lower rates in the united states encourage more foreigners to invest here. and importantly, we spend a lot of our savings lending to other countries. and that can stay home. models that are con strapd by not having enough saving to allow this growth to occur are simply wrong. they're closed economy models and nonsense. you hear this out of treasury and the tax committee sometimes if they quote you from a closed economy model, the results are

to be ignored. finally, our model is not robust enough in many ways. there are a lot of people who have left the workforce that we show a labor response based on the number of people still in. what if the people who are out cop back in droves? we are about 17% below the trend rate of growth since the 1960s. the recessions have knocked us down and the weak recovery has not allowed us to get back there. we have never not gotten back there in the past. it's because of increased tax and regulatory burdens holding us back. we've got a huge amount of potential growth out there unutilized. we're only showing we're recapturing about half of it with the changes. if we made the tax changes and regulatory changes, i think we would get the other 9%. we can doing this. we just need the will and the house to act. we need to the administration to go along with it, and we need to

the senate not to just sit there. >> all right. i'd like to say a couple quick things. then we'll move on to questions from the audience. dan is a very fine economist but he occasionally loses his way. and as sort of exhibit a in that, i'll bring to your attention that he roots for the university of georgia football team. i think everyone here probably can agree that that's a mistake. and in any event. >> a way ward youthing. > on, i wanted to say a couple things on the destination principle aspects of this plan. first off, i agree with what steve said is that the most important thing by far are the rate reductions and move towards expensing and that the border tax adjust captain issue be secondary importance. that said, he think it's significant important what, chairman brady has put together

on the business side is fundamentally similar to the old who are ra buse cas flaxt with one difference. it the way it treats exports and imports. and beak the income tax taxes it production in the united states and whether the goods are utley exported and in some cases services or sold in the united states and if you produce things abroad and bring the goods into the united states, the income tax imposes no tax on the value added abroad. a destination principle consumption tax is different. it imposes the same tax on goods consumed in the united states whether they're produced abroad or produced in the united states and doesn't purport to impose any tax on goods produced in the united states but consumed abroad. the easiest example to see that is a sales tax but european type credit invoice vats are like

that and so would be a sub traction method v.a.t. sometimes called a business transfertach or business flat tax or business consumption tax. so the question becomes do you want to affirm production of receives or do you want a set tax system that is neutral with respect to producing things in the u.s. or abroad. i think the answer to that is almost certainly you want a tax system that no longer encourages you to move production offshore and that you wap a tax system that is neutral in that decision. and chairman brady is moving in that direction. dan is absolutely correct, i believe it was dan ta said that, that this will be undoubtedly litigated at the wto. the wto draw the distinction on the economically irrational basis it's permissible to have a border tax adjustment if it's an indirect tax.

and it's impermissible to have a bta if it's a direct tax. so indirect, direct, indirect it's okay. direct it's not. we know that an income tax is direct under wto decisions. we know that a credit invoice type value added tax is indirect. we know a retail sales tax is indirect. we don't know the utley what the wto would determine with respect to a hora bus cas type value added tax. this is an open question legally. the of economic question i think is different. so the long and short of it is that i think dan -- concerns on this matter are misplaced. i think steve's economic judgment based on his model and the economic theory he goes into is correct that it's of

secondary importance but not of any importance. there's a little point here, too. there's a lot of concern about trade. and i think everyone on this panel would agree that protectionist policies are economically destructive and counter productive where you treat foreign production more adversely than domestic production but bta enables people to address that concern politically in a way that's constructive and neutral between u.s. and foreign producers. with that, let's open it up to questions. we have time for a few questions if people have any. >> while we're waiting for a question, can i ask you a question, david? >> absolutely. >> if i'm a business and i want to buy an input from an american manufacturer, i get a deduction for it which, of course is proper because that's a business cost. but if i buy that same in you the from a foreign producer, i get no deduction at all.

that's not treating equally. i mean it, why is that not just on the face of it protectionist that you have much worse tax treatment of foreign produced inputs than u.s. produced inputs? >> because the value of the good that was deducted has already been taxed whereas the value of the foreign good produced has not been taxed by the united states. it would be as if you had a retail sales tax that said, if you produce something abroad, we don't impose any sales tax on it. but if you produce it in the united states, we're going to impose a sales tax on it. that's in effect what the current system does. that's what any origin principle tax does. i mean, i assume you would agree that the business input had been taxed. >> it does ultimately come down to a debate over destination

base versus origin based taxation which counsel bore 99% of the people in the world to death. >> it is very, very important. >> but that's why i raised it. i think it's important for our side to hash through these issues before we get too far down the path. >> we will promise to do so, but i think the boring remark was correct. we move onto the next question. >> we do have a question. >> again, i'm tim drown, citizen taxpayer. can i address you doctor, profess professor? >> whatever you'd like. jason is fine, too. >> you made a comment in passing and as a citizen tam pair i would say something back to you and to the heritage foundation as an organization with some political not political, some public policy outreach agenda. you said static scoring versus dynamic scoring forget about that and i would say don't forgetting about that. what you must not forget about

is ha in the public perception, you open up the newspaper, you read an article and you say look what those idiots on capitol hill and the white house are doing. they're going to send us into deficit land forever ever and ever and ever. what's missed is the difference between static and dynamic scoring i'm talking public outreach. i'm all on the side of dynamic scoring. i understand the issues but in terms of outreach and public policy communication, i don't think one person in 100 understands the difference in how important that is. >> this is not a disagreement. i'm with you on the importance. the concern that i have is you know, this town's a bubble. we've seen that from the election results that we're in a bubble. when you go outside and talk to the american people and start talking on the differences of static and die fam mick, you've already lost them. what tends to happen especially with today's media, they'll find where the criticisms are and the differences and focus on that too disparage the entire plan. if you go out and say our job's

going to create 4 million job and maybe it creates 3 can 5 million. it's not to say that the dynamic scoring of the model is wrong, but you're going to have people on the left with the tax policy center, people from brookings, center of american progress, they're going to come out if they haven't already starting to attack the tax foundation model and say it's wrong. not that the dynamic scoring is the wrong thing to do. now even tax policy center is going to have a dynamic model. they'll start quibbling on the differences. i want to focus on the fact ta static is wrong and say the way we're doing things is wrong. it's wrong because they're not counting for participation or increased growth and because of that it's wrong, why is it wrong? because they're not counting for these things. the tax plans will fix that. that the american people understand. if we talk about static dynamic, we're going to lose them.

>> five ten years ago, the press was never picking up on the numbers. now they are. the house was not requiring dynamic scoring out of the joint tax committee. now it is. they're trying. treasury is trying. the press's own boar is on boar. it's working. but there's another reason for looking at the dynamic numbers. it's to teach them what the proposal is likely to do. if i have two proposals one of which is not going to create growth and one of which is going to create growth and they're both the same dollar amount statically, the house might think they're both equally good. but one is going to get you a lot more growth. dynamic scoring process which first has to calculate the growth will give them that information that they would not have if they just tossed out on a static basis and didn't look any deep per. we had almost a republican

candidate coming to us to ask us to score their plans not because they wanted our advice as to how to change their plans. we didn't push them around like that. we said this is what we think will happen to your plan. some would come back and say i want more growth than that. what if i substitute this provision for that provision. some of them came back 40 and 50 times. but it educated them as to what their likely outcome would be and they were able to target their growth and budget hit more efficiently by using a model which gave them that feed back. i think that's one of the biggest reasons for doing dynamic scoring is to lead to the better policy. >> called dynamic scoring -- reality based scoring. in some respects, i think it is better that we're talking about it takes into account economic

reality that tax changes affect economic. >> we could start saying there's proper modeling versus improper. transparent versus misleading. if we do that, everyone will go that's what we should do. that's a good point to change our language. >> there's a question over here. >> return to the. >> i don't think the mike's on. maybe i'm wrong. let's try that. >> yes. >> can you hear me? i just want to return to the foreign input discussion because i didn't find it boring. is a manufacturer who has a foreign input and pays a tariff on that input because there's no domestic source, how is -- i believe that would have a negative impact on them. say you've got a 5% tariff on an input. have you no domestic source. you're saying you would pay on that again. >> not sure i understand the question. >> so you're a mafer in the united states and have foreign inputs. you pay tariffs on those inputs.

>> no one's talking about a tariff here. >> it already exists. this bill is not going to get rid of foreign tariffs, is it? >> i see what you're saying. you're saying the 5% tax isn't part of the internal revenue code but the part of the harmonized tariff schedule? so then what's your follow on question from that? >> so my question is, i believe that i kind of am agreeing with dan here that foreign inputs if they are not treated the same as domestic inputs is not fair to domestic manufacturer who are trying to keep production in the united states. >> well, since david isn't jumping in, i'll jump in. that's one of the reasons why as i'm looking at this and i'm thinking, we have not paid enough attention to this issue and we need to. now, it might be that as we go down the road, one month, two months that maybe my concerns will be aced but right now, i just can't help but look at it

if i'm buying from a supplier overseas i get no deduction which means in effect the tax rate that exists is going to be akin to a tariff on that foreign input. >> he's already paying a tariff more than likely. >> but there will be a new tariff which is akin to whatever the final corporatetach rate turns out to be. i think we need to -- those of us who want tax after rewere fo -- it looked like hillary bass going to be elected. it was the house plan was simply a statement of principles. that's in effect all it was. now that all of a sudden this is a real issue and we might have a chance to do some real things, and by the way, you know, no matter what, 80%, 90% of what brady wants to do is going to be things i like. i'm just looking at this one provision and just worried, well, you know, maybe the trump

trump's approach on this even though he gets rid of deferral which i don't like. maybe we can mitch the two plans and get rid of everything i don't like and have nothing but things i do like which seems perfectly reasonable to me. >> i guess the problem as you describe it is the 5% tariff and the tariffs vary depending on the source country and the product. not the proposed tax treatment which is to treat u.s. production and foreign production identically. instead of what is done currently which is u.s. production is attached and foreign production is not. so. >> part of the confusion in this area and it's intense even among economists even among very experienced professors at leading universities when they get together and talk about this, they get kind of jumbled up. it depends on whether you're looking at the taxes passed back to the producers or that's being

paid by the consumers. and if you're only one country in the world it doesn't matter which way you look at it. if you've got more than one country, the earning point in your assumption where the tax falls can lead to opposite conclusions which is why eventually the economists threw up their hands and said the twoout comes have to be the same. now, in a situation where you have france and germany and they both have a v.a.t. of the same size, none of this matters. if you view it as being paid by the consumers, it doesn't make any difference. it's a 10% tax on all the consumers in both countries. if you're thinking it's being regarded on the producer side, then if you've got the export from france and they forgive their tax, the germans impose the same tax and the same thing producers in france and producers in germany are paying the same tax in jaerp, no problem again. what you have here is a little different. you see, they have a corporate

tax. it used to be the same size as ours or a little hi and they had a v.a.t. on top of it. forgiving the v.a.t. on their export didn't hurt us they've cut their corporate taxes and substituted an increase in the v.a.t. they may have an advantage there if you view taxes an as being on the producer. it gives them a competitive advantage. if you view it on the consumer it, probably doesn't matter very much. if however, we take our whole corporate tax and convert it into what amounts to a kind of vattish thing it, then we are getting the advantage back on everything because we don't have a v.a.t. on top of the corporate tax. and they might look at that and say, well, we'd have to abolish our corporatetach and enlarge our v.a.t.s to be everything in order to compete with what the united states has just done. to some extent importers would feel some of that pain, too. i need to think this true much

more carefully than i've been able to do because this is confusing. which end is the tax get imposed on, producer or consumer. and it is complicated. you will have push back from the wto. and dan's right. we have to think this through a bit more. i'm sure there's an answer out there. i don't think we have it yet. >> unless you make extremely extreme for lack of a better word assumptions about elasticities that the truth of the matter is the sentence is going to be somewhat on the producers and somewhat on the consumers. you wrote a fine paper, i forget the name of it on sentence analysis that people are interested if the subject might want to review. what's the name of it? >> it's in the heritage book public square private chamber and it's also on the old iret website under bulletin 88. i don't remember what i called it. >> there was a book that was a heritage book called "the secret

chamber of the public square." you can buy it for $5 or less on amazon because there's a lot of used copies floating around. and it addresses a number of issues we've been discussing, one of which is sentence, another which is the dynamic versus static modeling and also jason did a paper on distributional analysis. to those of you who want to take a deep dive into some of these things that, book is probably one of the best things out there. >> it's free. >> the paper. >> that's vicious price competition there. >> marginal cost electronically is zero. >> if you want the rest of the masterpieces, you have to spend $3 on amazon. >> it's a good book. >> any other questions before we close this out? thank you all very much for coming. this session is closed. >> always a pleasure, sir.

if you missed any of what congressman kevin brady had to say or any of this forum, it will be available later today in the c-span video library. go to c-span.org. we're going to go live now to a hearing on the testing and deployment of small close to shore naval vessels. cost overruns and performance issued have occurred over the last seven years. this hearing began about 45 minutes ago. >> to come back with a proposal for what was referred to as capabilities consistent with the frigate. we did that review in in the

2015 time frame. in fact, we briefed the defense committees and invited them to participate in some of the outbriefs. and the plan going forward that we then presented in our subsequent budget was to take the asw mission package capabilities, plus the surface warfare mission package capabilities that are currently planned for the lcs and combined them and permanently install them on the lcs platform to give it the multimission capabilities, trade away mot duarity but to give it multimission capabilities, add to that over the high ror zon missile and add to that jerusalem upgrades to electronic warfare and decoys specifically our nulca decoy, in effect using existing capabilities or capabilities that we already have in development that the ship is already designed to

accommodator. thely install them on the plat polymer to give the multimission capability referred to as a flig gatt. that work was done. of the chartered in 2014, done in 2015, shared with the defense committees at least at the staff level included in our budget, the capabilities development document has gone through the j rock for validation of the requirements. and the shipyards have been turned on to do the design associated with permanently sbeg congratulating those existing capabilitiesing into their platforms. that design effort is going on today. the competitive down select for that future frigate design that rfp is planned to go out next summer. we'll be doing those design reviews and as i described in my opening statement, we will invite your staffs to look at

the process, look at the products, look at the criteria, and provide beak your oversight and we want to show that you have the insight before we go further forward. >> and will that plan include a block buy of the fraying gatts or a block buy of another group of lcss? >> today that is the plan. we don't have a formalized -- we haven't finalizes the acquisition strategy with the 18 budget. we'll be bringing that formal acquisition strategy over to present to the congress for your review and ultimately for your an probable. i do think it's important to make a comment. first, i fully appreciate all of paul francis's comments in his opening statement. and we work closely together. i do need to point out when we talk about a block buy versus talking about a multiyear,

effectively what we're describing with the competitive down select is the competitive down select will be based on best value, associated with the detail design by the ship builders and what we're telling them is somebody is going to win this, one is going to win this and they will get 12 ships of this frigate design. the details in terms of whether that's one plus options, whether that's 12 options or whether we convert that a multiyear in the future, that is not decided today. but we do want to get to ensure we procure those ships as affordably as possible when we go through that competitive down select. >> again, just to get my perspective, it appears that the lcs program is moving into the frigate program. is that fair? >> yes, sir, we went from 52 lcss. we determined -- >> thank you. dr. gilmore points out that one

of the things we have to consider is this ship gets heavier literally with the systems placed on it that it will be lower maximum sprint speed as he describes it, less fuel endurance. the loss of sfrint speed will therefore affect its success and ability to keep up with a carrier strike group. i've heard that the present ships have a difficult time keeping up with the carrier strike groups and therefore, are not available when needed. let me ask you, my time is limited. if you have a quick response. >> yes, sir. first we will be adding capability which will add weight to the ship. however, the impact on speed is marginal. today, the requirement is 40 plus knots. these ships will still it be faster than any other combatant or warship that we have today with the added weight. second, a part of our in this

requirement cycle requirement and design cycle we are not trading oven durns. in fact, as we look at our the competitive strategy we're going to put out there and our best value criteria, we're not going to just not trade oven durns, we're going to place a premium on being able to increase endurance. endurance is not going to go down and speed affected only at the margins. >> thank you very much. i might have written question hes for other panelists. >> senator inhofe. >> thank you, mr. chairman. you know, we've heard this before in the eight years i spent on the house armed services committee and the 22 years on this committee. we're always talking about cost overruns and increase. the cost and delays. i actually sat next to b 1 bob and some of you may remember b 1 bob and all the problems we went through there. then the b 2 came along.

we went through the fcs, future combat system. same problems but work the out when gates canceled it. then the f-35. we've had testimony. it's not just the navy. this is a problem, mr. francis. it's all over. but just in terms of the navy, mr. secretary, the -- how does this compare to the other problems like the ddg zumwalt in terms of delays and the things we've been talking about in this committee hearing? >> yes, sir. i think all the previous discussion and testimony regarding delays on the program, the lcs delays have been unacceptable. and frankly, when we think about going forward and what we're doing different, lcs, ddg 1,000, il add cvn 78 to the mix,

there's a period of time where the navy went forward with all clean sheet designs, high risk, a lot of new development wrapped up in the lead ships. that's in our -- we're still working through those lead ships but that approach is in our reviewer mirror. weigh are not going forward with that approach today and in the future. so when we talk about lcs transitioning to a frigate, we are leveraging mature designs, mature systems and that gives us ability to compete this ship, this future ship under a fixed price contract. lcs and ddg 1,000 were on a cost plus. >> you don't need to elaborate on that because the fact that in 2013, five of the eight lcs delivered to the navy have experienced significant engineering casualties. and then it gets worse and

worst. "uss montgomery. we've talked about all this. mr. francis, you've been an the gao for how long? >> 42 years. >> 4 years. you've been doing the same types of things, evaluating military systems and so forth? >> i have to keep doing it till i get it right, senator. >> no, i'm serious about this because you've watch all this. and one of your recommendations was "there are a lot of good recommendations in your final part of your at the same time. it says congress should consider not funding any requests lcs in fiscal year 2017 and should consider requiring the navy to revise its acquisition strategy for the frigate. is this one of your representdations? >> yes, sir. >> what do you think about that recommendation, mr. secretary? >> i don't propose to halt production of the lcs in 2017. and as it relates to the frigate, i listened carefully to mr. francis's comments and i'm

taking notes. what i welcome is the committee, the gao, to sit down and look at the neighbor's plan and whether or not it can be i proved upon. we will take premdations to improve upon it. but in terms of the fundamentals of locking down a requirement, stable design, insuring that we have a competitive fixed price approach to the frigg grat, i think all those fundamentals that you all would want to us do we've got in place. >> what do you think about that spec recommendation? >> i agree with the secretary. in his approach. >> so you don't agree with that recommendation in carrying out that recommendation as part of a solution to the problem that we're discussing? >> i'm sorry, sir? >> i'll read it again. congress should consider not funding any requests lcs in the fiscal year 2017 and consider require the neighbor to revise

its acquisition strategy. >> i would disagree with that recommendation. >> well, for the record, i would -- i'd kind of like to have both of you elaborate on what is wrong with that and what is a better solution. i know we've had a long hearing here and heard a lot of things. but you know i read these things. when it comes from someone doing this for such a long period of time. i would also say, mr. francis is, i would like some time to sit down with you not just on this stuff we're talking about on this committee but some of the others we have had to suffer through and all that. thank you, mr. chairman. thank you. >> senator? >> thank you, mr. chairman. i'd like to follow up on some of mr. francis's suggestions to this committee. this is probably a question that can be respondsed to by either the secretary or the admiral. the one of mr. francis's suggestions is that we not okay

the block buy strategy for the frigates. i'd like to know, what would that kind you have strategy or are our not okaying this bligh block buy and what would that give to the neighbor's acquisition strategy in other programs? >> let me start by trying to describe a little bit about what the block buy itself is. we are going to go out and down select the frigate to a single ship builder. we plan to procure 12. we want that ship builder to go out to its vendor base and secure long-term agreements with its vendors as best as possible. so that pricing and stability across the industrial base will support the program. >> so mr. secretary, if i can get a cleary indication then, the concern with the block buy is that it doesn't really interject the kind of competition that mr. francis thinks would be warranted.

was that your point, mr. francis? >> well, actually, senator i think the competition could be done under the detail design phase. my concern is oversight for this committee. once au problem the block buy, now the navy will execute and i would believe they would do a good job of trying to lay out a program. but your opportunity to influence what gets done is going to be largely compromised once au problem the block buy. so your ability in the future to make changes is going to be limited. >> so mr. secretary, you -- your explanation seems to go to the competition aspect of the suggestion. but apparently, it has much more to do with our ability to provide oversight. and when we okay a block buy, then we are letting go of the oversight responsibilities that

this congress has. can you respond to that aspect? >> i disagree you're ren ling wishing any of your oversight responsibilities. a block buy is still annual procurement of each ship in the block buy. there is no termination liability or cancellation ceiling that the congress is taking on responsibility for. and you will have absolute insight and oversight of the program each step of the way. >> i'm sorry. you know, that's all well and good, but the entire history of this program has been that yes, we've always had that decision making capability but you go down a path and next thing you know, a ship is costing twice what it originally starred because we've gone down a particular path. i think we're at the point from listening to all of this testimony we want to have reassurances going forward that we're not going to just throw more money into a program that is going to continue to haunt us

with lack of capability and unreliability and all the other factors that have been brought to light. and i realize you sit here and you reassure us that's been the case at every hearing with regard to this program. but i'm looking for something very concrete that we can do that enables us to get the kind of product that the taxpayers with paying for. aside from your reassurances, is there something very spec that you are going to do that is going to result in the kind of product that we're paying for? >> let me just start to go down the list. we're unlike the start of this program, we're not going to suffer through requirements churn and instability. we're not going to introduce new design late in production that's going to cause costs to go through the roof. we're not going to put these

ships under contract in a cost plus environment where the government owns responsibility for the cost itself. i think mr. francis's concerns about a milestone, i would be happy to sit down with the committee staff and walk through what you need to ensure that you do in fact, have confidence that all of the statutory requirements in terms of cost estimates in terms of acquisition program baselines in terms of requirements documentations, just like a milestone b. we will prepare that for you. we will prepare that for you. and we will walk through it with you and if we need to establish a pseudomilestone b or milestone b, i don't hesitate to do that, ma'am. >> thank you. i think it's really important we have those kinds of very specific items that you're going to follow just as the initial testimony was that this, these ships would cost some 200 million dollars. you have been asked to justify

the kind of changes. so yes, it would be good for us to have some very specific items that we can check off as we go forward if we go forward with this plan. thank you very much. >> i recommend i work with the committee staff and come up with the agreed plan in that regard going forward. >> thank you. >> if i may, i would say while these are modifications, they are rather significant at least $100 million per ship. and that will cost hasn't been independently validated yet. my thinking is if we're that close to being able to have everything ready for a milestone b, let's have the milestone b. although there aren't real legal requirements for you to approve ships under a block buy, if past history is any indication, if you tried to alter the plan, try to reduce the number of ships, you'll be told you're going to jeopardize our prices and you're going to affect the industrial base. so pressure will be brought to

bear to keep things the way they are. >> i understand. thank you, mr. chairman. >> mr. francis. >> i totally agree and i've seen that movie before. and this idea of a block buy before it's a mature system is absolutely insane. and again, $220 million per ship, secretary sackly, you say that was really bogus. we can only go by the numbers that we're given. again, who save us that? do you know? do you know who gave us the $220 million per ship instead of the $478 million that it costs today. >> do you know who that unknown bureaucrat was? >> sir, i believe it was uniform leadership of the navy at that time. >> it was all the uniform navy that was responsible for it. i didn't know that the uniform neighbor was responsible for this kind of acquisition.

i thought it was the civilian side. senator ayotte. >> thank you, chairman. i just want to thank the chairman for his very important focus on the issues with the lcs. and i want to also thank mr. francis for his very good insight as to how we could try to really bring back some real oversight over this and the cost overruns. so i thank you for that. dr. gilmore, i want to on a different topic wanted to ask you, right now, ot & e is currently plan agf-35 versus a-10 comparison test. i also want to thank the chairman for the work that we've done together to make sure that there's not a premature retirement of the a-10 because of its important capacity to provide close air sport for our troops on the ground and the importance of that close air

support. so i've been getting some mixed signals between what has been happening with the air force the air force secretary testified before this committee that the a-10, that the f-35 won't replace the a-10. so this comparison testinging for what happens in terms of close air support is very, very important and in fact, i want to thank the chairman, as well for working. it was an honor to work with him to make sure that there are provisions in the nda which we are going to consider shortly, hopefully next week, that will make sure that this comparison test is done before there is any retirement of the a-10. so i want to ask you where the comparison test process is and also how that process will be conducted in a thorough way. >> i in conjunction with the commander of the neighbor's operational test and evaluation force and the commander of the

air force operational test and evaluation center, the three of us approved a detailed plan for all of the testing in f-35 operational tests this past summer including in particular a comparison test. so there's a detailed design that's on the record that the three of us have approved. doesn't mean that my successor might not change that but it's a good plan and i hope that that won't occur. the test design includes comparison testing with the a-10 and the f-35 conducting close air support, combat search and rescue and air controller airborne missions. and it's a rigorous test. and if it's conducted, it will provide excellent information on how well the f-35 can conduct those kinds of mission in comparison with what the a 10 can do. we'll be doing other testing surface attack with the f-18. and again the justification for all of these tests, these

comparison tests comes back to the requirements that the air force chief of staff has approved. and those include specifically as i think i said in the last time that i approved appeared before the complete where i read them from the requirements document that the a-10 is meant to take, or excuse me, the f-35 is meant to take on the role of the anxiety 10. that's unambiguously stated in the requirements document. i understand there's been debate and testimony that's confusing about it, but you can refer to that document and it's there in very plain english. >> that's excellent because we're going to find whether that measures? >> with regard to conducting that test, my projection is that the operational test for the f-35 which will include this comparison test will not begin in all likelihood until late calendar year 2018 or early calendar year 2019. because my estimate is that mission systems testing is not going to end until july of 2018.

and at that point, you could get a fleet release of the mission systems capability software together with the mission data file which enables the aircraft deal with the threat environment and the joint program offices own projections are that mission data file won't be ready until the summer of 018. you can't do meaningful testing until that time. >> does that mean that the f-35 is not ready to engage in combat? >> until it has a mission data file that's verified and accredited, it would not have the capability to deal with the threats that we're spending $400 billion to have a deal with. and -- >> we're dealing with isis in syria and iraq as we speak, using the a-10. >> correct. that's not why we're buying the f-35. >> is the f-35 ready to assume that role? >> there are people who argue it could. i kind of wonder about that

argument because right now the capability that the f-35 is two air-to-air missiles and two bombs with limitations and close air support that actually are discussed, that are significant and discussed in detail in the air force's own ioc readiness assessment which states clearly that the current f-35 with the block 3i software does not provide the close air support capability that our existing fourth generation aircraft provide. that's a quote from the report. i have written esal wagss that are consistent with that quote. so and then there are the problems with the f-35 availability, the fleetwide availability is at best 50%, sometimes bottoming out 20% or 30%. why it is a commander would send an aircraft, two bombs, low availability to fight isis is i think -- >> and the cost --

>> -- a question. >> the cost of an f-35 is per copy roughly? >> you know, i hesitate to give a number. it's well over the initial cost estimates. i think it's up around, it's between $80 million and $100 million and coming down. >> and the cost of an a-10? >> mr. mr. chairman, i don't know. >> the a-10 has the lowest cost per flying hour. i don't think we'll have the lowest cost per flying hour with the f-35. >> i believe the a-10 is $15 million. >> may i follow up briefly chairman on one other issue with regard to the a-10? so given the timing we're hearing this comparison testing one of the provisions that also if the nda is passed, which we hope it is, that has been publicly released, is that the secretary, one of the issues i've been going back and forth with the air force on has been the actually removal of not ensuring that the a-10 continues to be viable, and the 2018

budget request makes sure that the air force cannot remove any active inventory of a-10 from flyable status due to unserviceable wings or other components. i think this is really important, given the timing that you have just talked about, about this comparison test and what the a-10 is doing right now against the fight against isis. >> so let me just be as clear as i can be about the timing. so if i'm correct, we wouldn't start training for the operational test until mid 2018, which takes about six months, then the test would be conducted beginning in very late 2018 or early 2019 and by the test is over and the reporting is done another year has gone by, so the report that's mandated in the bill would not be until the end of 2019, early to 20. >> thank you. >> senator king? >> thank you, mr. chairman. as i listen to this discussion

it strikes me it would profit us to talk about a broader issue. mr. stackley i start with the premise that nobody involved in this proo process was malicious or meant to do harm, and i want to say that you're one of the most capable officials that i've met in this business. however, we could have had the same hearing today and you cross out lcs and put in f-35, you cross out f-35 and put in the new class of carrier, you cross out the new class of carrier and put in the future combat systems. it seems to me there's a more, a deeper issue going on here, and it strikes me that it's our desire to have the latest and greatest new technology as soon as possible and at the same time control costs and do it on time. we're trying to invent things while we're building them.

could you comment on this larger question? >> senator, i think you nailed it right there we spebts a lot of time reviewing programs that either have failed or have just gone out of bounds in terms of cost and schedule, and almost invariably, there are common themes. one of them is a lot of concurrency in terms of developing multiple technologies and trying to integrate them at the same time on a major weapons platform or major system, and there is, and there has been written a number of reports, there is an inclination to underestimate the cost. >> particularly of something that's never been built before. >> yes, sir. yes, sir. then when you get into that contract environment and you get started, it is difficult to stop. you press forward.

now, on the other hand, if you stop and say we're going to fully test, build a prototype and fully test, then that's going to lengthen your employment window, and that conflicts with the need of the navy or the air force or the army to have these weapons to meet current threats. >> yes, sir. and just to you know we are co-chairing requirements reviews, design reviews, production readiness reviews, program reviews and we are challenging every requirement, every specification in terms of do we absolutely have to have that or is there another way a lower risk way to deliver the ultimate capability that we've got to have. i point out a couple of xarmz. the decision to frankly trunkate the ddg-1000 and to revert back to the ddg-51, with the recognition in the 2009 time frame that we had overreached in terms of technology versus what

we really needed in terms of war fighting capability. so we go back to the tried and true ddg-51. >> but that decision made that likely only building three ships in one class would make them more expensive. the first ddg back in the '80s was expensive >> it avoided -- it recognized the cost that was coming in terms of completing that program, and then going back to the 51 and incrementally introducing the capabilities that we need to keep pace with the threat, particularly in the 51's mission. >> the key word is incrementally. >> absolutely. >> we had a hearing on carriers and as i recall what we learned was we were trying to do too much. >> that's right. the original concept was incremental over three ships and collapsed on to a shingle hull, cbn-78 and we are paying the current price on the development

of shah ship. >> how do we avoid this in the future? we have the b-21 down the road. >> we have the amphibiousship the xlr. we took the lp-17 hull form and tailorring that ship to meet the requirements associated with replacing the lsd-41. that was a year-long effort with the commandant and the c&o to get down to a design that we're confident it's mature enough, not introducing unnecessary risk, we understand the cost and ready to put it into the -- >> it seems to me one of the things, i know i'm running out of time, how to design these weapons systems in a way and i hesitate to use the word modular because that's not a good word in today's hearing but modulated so they can be upgraded instead of having to rebuild the whole thing. >> we're getting there. it's open architecture that, general term. if you look at the vertical

launching system on the ddg-51, that's an open system design, so it started off with the sm-2, it now handles the sm-3 and handles the sm-6, the tomahawk and the sea missile. now we can develop the missiles in their environment and bring them to the ship and then we deal with the upgrades to the software at a land-based system. >> so the whole system isn't built from scratch? >> yes, sir. >> mr. chairman, thank you very much for holding this hearing and i look forward to future hearings and i hope we can continue this broader discussion of why does this keep happening. thank you. >> mr. chairman, could i follow up for a moment with mr. kick? so mr. king, i think you're right on about the broader problem, and we have done quite a bit of work. i think what we have is an age-old acquisition culture problem where there are strong incentive when a program is

getting started to overpromise on its abilities to perform and underestimate cost and schedule. >> and to load requirements on. >> especially if you're only going to have platforms once a generation you better get everything on that platform you can. we have to look at the int is enives what they are and some as competition for funding in the pentagon and if you show any weakness, your lunch is going to get eaten, your program is not going to go forward. you have to be a try dent supporter of those programs going through. we have to learn where to take risk and how to take risk and i would say it's before that milestone b decision, where we really need to make investments and try things out and be willing to put money there, and you're right, there's an aversion if we take time to do that, that's going to delay the capability of the war fighter and we find that to be unacceptable, but when we've approved the program and then