taxation of families on children and the poor. today's include the deficit, high corps rate rates and the extraordinary complexity of the tax system. second, we must base reform on well established principles of public finance. principles like equal justice have powerful appeal and lee logically to a whole host of rerms. third, we must comprehensively tackle the problem. yes, reforms create headlines over who loses som subsidy and who pays more tax, but the size of the headline is often indifferent to the size of the reform. if one is going to take a political hit, one ought to achieve something valuable, such as a simpler tax code or a more sustainable budget. fourth, we need to shift the burden of proof, let opponents argue why they oppose a standard based on equal justice or simplicity when the standard is current law, the burden of proof resides with reformers who

appear to be picking on particular groups. 5th, we must form coalions based on legitimate liberal and conservative principles, tax reform in '86 was supported by two broad coalitions, pro-poor and pro manufactu-family. sixth, we must seek better ways to present information. in 1986, the old way of presenting tax burdens would have treated those with tax shelters as those with poor people with large tax increases. >> we must empower nonpartisan staff to navigatehe complexities. the tax reform acts of '86 and 1969 came out of studies the treasury department that were conducted mainly with nonpartisan staff with most of the political decision making held off until later. finally, at the political level, we must encourage elected

officials to lead, to be accountable and be empowered. in 1986 tax reform, dan roftencould youski led by agr agreeing not to criticize each other. someone was always held acuntable and feared being shamed by the failure to enact tax reform. at the same time, tax reform succeeded because leaders were empowered to execute a strategic plan as they moved through the political mine field. thank you, mr. chairman. >> thank you, gene. excellent testimony. >> dr. marin, good to have you back. >> thank you, mr. chairman. ranking member sessions, it's a pleasure to be here to talk about the important issue of fundamental tax reform. echoing some of the things that have already been said. america's tax system is clearly broken. it's needlessly complex, often

unfair. it fails at its most basic tax is raising enough money to pay for the federal government. and it's unpredictable with large, temporary tax cuts not only in the individual income tax but in corporate payroll and estate taxes. for all of those resons, our tax system cries out for reform. such reform could follow many paths. some analysts recommend the introduction of new taxes, a value added tax, pollution taxes to supplement or replace our current system. those ideas are worth serious discussion, but in today's testimony, i would like to focus on a more traditional approach, redesigning our incomes tax. island like to make seven main points. first is as already been mentioned, tax preferences pursuant vad the tax code. these preferences total more than one trillion dolrs annually which is what we collect from individual and corporate income taxes combined. these preferences narrow the tax base, reduce revenues, distort economic activity, complicate the tax system, forcetax rates

higher than they would otherwise be and are often unfair. second, the first step in any tax reform should be to broaden the tax base. doing so would help level the playing field among different economic activities, reduce the degree to which taxes distort economic behavior and make taxes sim you are pler to file and administer. third, policy makers can use the resulting revenue, potentially hundreds of billions of dollars to lower tax rates, reduce future rates. i would encourage economic growth. reducing future deficits would help tame our federal dt which threatens to grow to unsustainable levels in coming years. fourth, many tax references are effectively spending programs run through the tax code. that poses a challenge for how we talk about tax refor and the size of government.

any cuts to these spending preferences will increase federal revenues but will reduce the government's influence over economic activity. advocates of smaller government are skeptical about this. when it cos to pairin back taxes, means the government's role is getting smaller. 5th, more and more observers have embraced the idea of the tax code. that's a promising development. unfortunately, that enthusiasm has led to the misconception that all ideas are akin to spending. that's understandable given these items are called tax expenditures. preferential tax rates are an admittedly imperfect effort to limit the uble taxation that can occur when investment income is subject to both personal and corporate taxes. such provisions should be viewed and evaluated as tax measures

not as hidden tax programs. sixth, many tax preferences provide benefits to millions of taxpayers. they aren't tax breaks for special interests. for example, the three largest tax preferences are the exclusion for employer provided health insurance, preferences for retirement saving and the mortgage interest deduction. americans should understand that to get the benefits of tax reform, lower rates, simpler taxes and a more vibe rant economy, they need to give up popular tax breaks. seventh, policy makers should reevaluate the stien is of tax preferences they decide to keep. some could be simplified. that's true of the preferences aimed at low income workers and families. other preferences might operate more efficiently as credits rather than deductions. credits can provide more uniform incentives to particular activities, than deductions or ex clues whose value depends on whether a taxper itemizes.

what tax bracket they are in. >> by redining many tax preferences, policy makers can make the tax system simpler and fairer to america's future prosperity, raise revenues and much needed deficit reduction and improve the efficiency and fairness of any remaining preferences. thank you. look forward to any questions. >> thank you. now we'll go to dr. aultshuler. welcome. >> it's an honor to appear today to discuss the need for and the benefits of fundamental tax reform. building the case for tax reform is easy. the current system is riddled with tax provisions favoring one activity over another. these provisions, as you know, create complexity, generate large compliance costs, breed perceptions of unfairness, create opportunities for tax avoidance and encourage the inefficient use of our resources. the changes we have made to the tax code, more than 44 hundred

over the past ten years have made the income tax more difficult for taxpayers to understand, less stable and increasingly unpredictable. we seem to have footten that the fundamental purpose of our tax system is to raise revenues to fund government. reducing the deficit to a sustainable level as we must do will require both a scaling back of expenditure programs and an increase in tax revenues. the question i address today is how best to reform the tax system so it can raise revenue in a manner that is simple, efficient and fair. the fiscal challenges ahead require that we reform our income tax system or turn to new revenue sources. raising more revenue from the cuent tax system is politically infeasible and damaging to economic groegts. we must broaden the base of our income tax. although politically difficult, this type of reform is implementable and follows a wave of similar base broadening rate

reducing rate reforms that have been developed. the u.s. approach to ternational corporate taxation needs to be updated to reflect the increased competition or u.s. multi nationals face from foreign based corporations, broadening the base and lowering the rate are essential to international tax reform. we should also consider updating our system to reflect the international tax rules used by our major trading partners. the remainder of my testimony elaborates before considering fundamental reform, you mht ask can't we dial up the current ystem, increase statutory marginal tax rates to raise the revenue required to bring the deficit under control. a 2010 tax policy control suggests the answer is no. we considered illustrative changes to the current system aimed at reducing the deficit to an average of 3% of gdp. let me summarize the results. it can't be done.

it's not feasible. we looked at the revenue raised by proportional increases. if the system we have today were extended we would have to increase all statutory rates by 50% to reach our deficit target. all statutory rates whachlt if we try to protect low and middle income taxpayers from the marginal tax increases, this would result in top rates that would stifle economic activity. the top rates would have to raise to 84 and 89%. it's shocking and we didn't take individual behavior into account. changes must be made to the tax base if we hope to raise much of more revenue from the current system. what about the corporate tax? can it raise significant revenues for us significantly re than now? in my written testimony, i argue that the answer is no. most revenue from today's corporate income tax comes from corporationshat are competing in a global market, increasing the corporate rate is problematic given how high our rate is. in 2010, the averaged combined

national and state corporate tax rate was 25%. the u.s. rate was 39.2%, second only to japan. don't worry, on april 1st, japan will reduce its corporate rate by 5 percentage points and will have the honor of imposing the highest corporate tax rate in the oacd. any increase in the corporate tax rate can be expected t induce tax avoidance through transfer methods. this leaguage in revenue along with the small role played by the corporate tax suggests that corporate rate increases can at best move the deficit towards the sustainable path. our fiscal challenges require more comprehensive income tax reforms or new sources of revenue. what are the economic benefits of base broadeng reforms? the income tax imposes efficiency costs on the economy. when taxes distort theconomic decisions of individuals and businesses and divert resources

from productive uses. economists call the efficiency cost the excess burden. economic theory shows while it's hard to understand th roughly speaking if you dublt the tax, you quadruple the excess burden. the burden on the economy increases more than proportionally. it's easy to understand that raising a set amount of revenue with a narrow base requires higher tax rate what is often ignored is the drag on the economy created by higher rates. the national commission on fiscalesponsibility and reform demonstrated that cutting backs tax preferences an brondening the base, by doing so, the current system could generate revenues of about 21% of gdp with top individual and corporate statutory rates of 28%. stripping away tax provisions that distort economic activity and lowering the rates would leave us with a system that is less costly to our economy. it would be fairer than the currt system, less complex and easier to administer. senators widen and greg have a plan that shares these

attributes. let me focus on the corporate base for a second. broadening the basand lowering the rate could reduce a number of distortions caused by the current system. it won't be easy to cut corporate tax preferences, however. while some preferences benefit only a limited number of businesses, we hear about those a lot, others cut taxes for broader set and in addion lower the cost of domestic investments. it's not possible for us to stay competitive and grow our economy with a tax rate that's 14 percentage points above the cd avere. one often hears that the statutory rate is not -- the fact that it's high is not important since our narrow rate reduces the tax rate. this ignores the important rule the rates play in business decisions. they influence where corps railingses do business, action how they finance investments, how much they invest and their incentives to shift income to avoid taxes. retaining a corporate rate that is significantly out of line with our competitors is not a viab path for increasing u.s.

investment, jobs and economic growth. what about the international tax system? you won't be surprised to hear ours is very complex and induces inefficient behavior responses. under our system, all income of u.s. corporations is subject to u.s. corporate tax, whether it's earned at home or abroad. a number of reform proposals have recommended a territorial tax system which would exempt foreign sourced income. all other g-7 countries have adopted territorial tax systems. abandoning our worldwide approach would be a major policy move and it deserves cavill analysis. we should be doing this analysis now. the fiscal challenges ahead are daunltsing. instead of spending the next two years engaging in an endless debate of whether to extend the 2001 and 2003 tax cuts, i urge you to instead if he can us on designing a base broadening

reform of the current system that can reduce our debt burdens and enhance the u.s. growth economy. thank you. i look forward to questions. >> thank you very much. dr. lindsay. thank you for coming and please proceed. >> thank you, mr. chairman. i appreciate your invitation and that of the members of the committee. it's azing listening to my colleagues that i have to tell you, we did not collaborate in writing our testimonies, and i will change what i'm going to say in part to avoid redundancy. as senator sessions pointed out, there's a broad consensus in the economics profession that substantially more economic growth can be had through a sensible tax reform. i would add to that that in addition to the growth issues, it's important to take a look at the static behavioral issues that my colleague, professor aultshuler mentioned. she observed the excess burden of a tax doues -- is

proportional to the square of the square. you quadruple the excess burden. >> what does that mean? >> it supports the taxpayers' behavior. you make them worse off on top of the rate he has to pay. you not only have to send a check to the government but because you face the high rates, you got to do things you wouldn't ordinarily do to comply with the tax code. to put it into context. in the current income ax, when you add all taxes in, including things like the medicaid tax, we're now debating whether we should be at 40% or 50%. when you go in that range, the burden on the taxpayer, the tota -- the tax check he has to pay and the excess burden is about 1.70 for every dollar he collects. when you go over 50 the numbers become quite high. you make the taxpayer four times

as worse off as you make the government better off. there's no sensible person should think let's make the government as well off as we can simply by taxing the population when we know we're making the people we're ting one and a half, two times, three tes, four times worse off than we're making the government better off. that is not the way to ebb hans the wealth of a naion. where i would separate myself from my colleagues and i ceainly endorse their ideas of trying to make the income tax better, i think looking at the problem here, we really have to move away from an income tax based system towards something else. the current high economic costs of the tax system is due to a number of factors that i think lead me to that conclusion. the first is complexity. a lot of the tax code is really a judgment call about what income should be taxed and what should not.

in the context of our various financial problems in the last two decades, a line came up that we should all bear in mind. cash is a fact. income is an opinion. in our income based system, a tax system is really about creating an opinion about what should be taxed and what should not. we have a lot of opinions out there. there's gaap accounting, generally accepted accounting principles. those aren't fixed over time. they change. the sec has certain modifications to ap accounting to get another opinion about what income is. and then our tax code has a third opinion about what income is. that changes over time. it seems a little bit odd that the government at one time is rendering three or more different opinions abo what income is. we have to move toward a cash

based system. let me give a very simple example. i have a small company, and just one of the peck allarities i face every year has to do wh my health insurance premiums for my company. i'm obviously an employee of my company. that cash item is considered deductible. it's a business expense for my employees. i'm in exactly the same health system. it is not considered a business expense, what i pay for myself and my family. and then, when i take that, it's considered an adjustment on the income tax but it's fully taxed on the payroll tax side but not to my employees. here you have one cash item, identical across the board, two different taxes, have a different opinion about it and they have a different opinion depending on whether you're the owner of the company or wheer you're an employee of the

company. that leads to the second problem which people have talked a lot about, horizontal inequality. because you have all these different taxes and each has a different opinion, essentially similarly placed individuals pay radically different amounts of tax. i know mr. buffett is often up here talking about tax refor. he has admitted that his taxes are too low. he has an average tax rate of about 16%. that's about half what other entrepreneurs have. how do you fix that? you don't fix it by raising the taxes on the other entrepreneurs. you fix it by moving toward a system that defines the income he gets in a way that's similar to what others receive. that's why i think we have to move to a cash bed system. the third problem has been touched on by a number of comments. that is our income based system, because of the nature of the opinions that it rendsers about what should be taxed encourages economic activity to go abroad.

for example, an item that's manufactured in china but purchased in america has a cost structure that involves no u.s. income or payroll taxes on its labor content or on the profits that is rendered. china, of course, does have a tax system, but its rates are quite low relative to ours. the chinese individual income tax produces 1.2% of gdp. ours produces 7%. our income tax burden is six mes what china's is. the largest tax in china is the value adde tax which produces a third of their revenue and is rebated on the exports they send here. so having an income based system, while most other countries in the world, including europe, canada, are moving away fm an income based syst and towar value added taxation or indirect taxation, puts us at a competitive disadvantage. we complain a lot about the

advantages the chinese give themselves through their exchange rate, but we have a major self inflicted wound that we cause ourselves because we have income based axation. again, i don't believe these fundamental problems with our tax structe can be adequately addressed by changes to the income based system. rate reductions within the current system have been economically successful because the excess burden within that is so great. further revenue reductions are not possible. america must move away from its income based system toward a cash flow system. this should not be done as an add-on. we do not need extra complexity. we need simplification. adding another layer of complexity is inappropria. goods that are imported from abroad, even those that find their way into products produced here would not have to pay american business receipts tax, so would not be available for

such a deduction by an importing firm. governments and nonprofit entities could be given separate treatment so only the labor component of their expense structure would be covered by the tax. the problems of horizontal inquality in such a estimate would be minimized by having all receipts taxed once and at a single source regardless from where they were derived. issues of vertical inequality, making sure the rate was higher could be accomplishedith a two tier business receipts tax system where the higher tax rate exempted employee compensation below a certain amount. the problem with encouraging lower taxes for very low income people could similarly be incorporated in there. we certainly need to address our budgetary challenges, but i don't believe we can move forward tackling those issues with a tax system that imposes such high economic costs when we raise rates to produce

additional revenue. our tax system is limiting american prosperity through needless complexity, horizontal inequits. a switch to a cash flow system such as a business receipts tax or a vae added tax would greatly falitate our ability to address these budgetary challenges. thank you very much. >> excellent testimony, mr. lindsay. all of the members, i think, have made a real contribution at the beginning of this discussion. let me go, if i could, to a concept that was proposed by professor grets at yale. i think he's now at columbia. he made a proposal that we go to a system that's really a hybrid, which is what most countries do. he proposed we go to a

consumption tax with the vast majority of people, take 100 million people off the income tax system completely. substantially, reform and reduce the corporate rate, broaden the base, and he argued that this would dramatically improve the efficiency of collection, that is that we would have less leakage in the system. number two, that it would make america far more competive. let me just go down the line and ask if you have looked at dr. gretz'work and what you think of his proposal and what it would mean for both helping us redu the deficit and at the sa time improving the competitive position of the united states. doctorsterly? >> i tried to outline briefly in my testimony. i think the are a variety of fixes that would be better than

current law. i would say what michael gretz suggests is better than what we have now. my question is what would be wao have in adding on what is a value-added tax which is the basic tax would use to collect revenues for the majority of people. my principle concerns with with mr. grets's proposal is at the very bottom and the top and not the middle he simplifies a lot in the middle. at the bottom i don't thk he's grappled with the tough issue of how you integrate earned income credits and child credits, with food stamps and tanif and health subsidies that fades out when your iome goes up. we have all these indirect tax systems athe bottom based on income and i don't believe we've solved that at the bottom. at the x he leaves the

deductions and credit. the notion of high income people getting a deduction and low income people not getting subsidy for the housing seems to not work either. the core of the proposal, would you consider replacing a sir any can't portion of the current tax with a value added tax? i think a lot of economists would agree this isn't the reform they would favor. think they would say it's better than t current law. >> how do you -- if you are to move in that direction, dhou you protect the most vulnerable among us? how do you protect those who are at the lowest end of the income scale? >> well, this is a subject that has not gotten much attention lately. as i say, we now have low and moderate income taxpayers in so many phase-outs of so many programs, that their marge cal tax rates are the highest in the nation, some face 70%, 80% rates. you lose your food stamps.

in the new health law there's a ten cent or more phase-out of your health benefit. you lose your earned income credit, child credit. all these phase-outs add up and then you add on the social security and income tax rate, i think we have to think about reform of what we want to do at the bottom of the income distribution, the top and the middle. we take the progressivity issue at the side, we decide how much we're going to give and then simplify for each group. i think that requires a reform effort that goes beyond what we're discussing today. >> dr. mayor? >> my approaches say there are several things we're trying to accomplish. one is to raise as much revenue, the revenue we need to pay for the government without harming the economy. the best way to do that is go towards a consumption tax. one of the other things we would like to do is achieve certain progressivity goals. tax is a very important way we

think about the distribution of after-tax income in the united states. frankly, income taxes tend to be a better lever for doing that. what the grats proposal is trying to do is provide a compromised sweet spot that is recognizing for the economy as a whole it's better to have more of the tax base be consumption base. that's why he introduced a vat. then recnizing if you want what is wildly he as a fa distribution, you'd eel need income tax to do that. my sense i he succeeds in the sense of cry ating a tax system that would strengthen the economy, be beneficial for competitiveness. as gene says, there are a lot of difficult details about how you implement that and accomplish all the goals throughout the income distribution. as a basic structure, it's an interesting one to think about. >> dr. altshuler? >> i agree with donald. i'm a fan and i very much believe that all roads lead to a

v vat. adding a vat onto the system would allow for lower rates. you get the benefits for the lower rates. you have a system that's much less complicated, much less of incentives for income shifting. it's implementable. we can do this. canada -- all other countries in the oecd have a vat. thiss how they raise their renue. virtually every other country in the world has a vat. so it is something that could be done. >> but how do you protect those who are at the lowest end of the income distribution, those who are the most vulnerable among us? how do you protect them in that system? >> that is the difficulty. that's what gene and donald have also talked about.

now, remember that you're going to be retaining t income tax. so you can run refunds and transfer programs through the income tax. so by retaining the income tax. >> you could keep the earned income tax credit and child care credit? >> exactly. you can help the distributional consequences of moving to a vat through the income tax system. i know -- i believe the tax policy center is studying this right now, and as gene said, with more study into this, i do think that we could get the distributional consequences to be something that we desire. i think what we need to remember is that we are keeping the mechanism of the income tax so that's going to help us out at the bottom of the income distribution. >> dr. lindsey? >> first of all, i think we all agree that almost anything is better than what we have. that would be what i think about mr. grets's comment. i also agree, as i said in my

testimony, we have to move towards a business receipts tax or vat. i would reject retaining the income tax along with it because i see we're adding yet another definition of income or another calculation everyone has to do as a net gain. i think within the context of a business receipts tax, you can have substanti progressivity. for example, you could have a base, business receipts tax rate, call it 20%. >> explain that for those listening and for the members of the committee. what do you mean by that? how does that work? >> well, a business receipts tax or vat are very similar concepts, essentially the base would be total receipts by the company minus what was paid and taxed to a different company. so, for example, if i'm making a

car and i buy steel, i send the steel company a check to buy the steel and the value-added tax on that steel is part of that. so to avoid dble taxing, if i can show that i have -- basically it's called an invoice. i have an invoice that says you paid tax on that once, you don't have to pay tax on it a second time. the base would be all the money coming in minus the cash going out that you paid a tax on. now, if i bought that from -- steel from china, i didn't pay a vat on it, business receipts tax, no deduction, so we'd be leveling the playing field between purchases of goods here and purchases of goods from overseas. >> that would he the competitive position of the united states vis-a-vis taxes with respect to one of our toughest competitors and owl of

our competitors who have a similar system? >> absolutely. if you think of it as a central issue -- i think it really is our central economic issue -- you have to say why wouldn't i want to throw as much -- if i'm going to move to that system anyway, why wouldn't i want to move as much of our tax base into that system as possible if i know i'm going to gain competitiveness by doing it, why would i only want to gain competitiveness on half my tax system and not all of my tax system? that's why i would move to the one tax. >> this takes us right back to this fundamental question. if you do it all on that side of the ledger,ow do you maintain progressivity in the system so that those -- especially those who are the least vulnerable who benefit from the current tax system through the earned income tax credit, child care tax credit, how do you maintain that support for that end of the spectrum?

>> sure. let me mention the high end as well. there's no reason why -- again, you have the business filling out its tax form. they do the calculation on the base i just said. then you have a second line that says subtract the first $10,000 a month you paid to every employee, in other words, wages up to $10,000. get another line, put another tax on top of that so that high-end wages and profits including interest and dividends would be subject to the higher rate. i think that's how you get progreivity on the higher end. on the lownd, this is not a problem. there's no reason why you can't have wage subsidies built into an eic --n the tax system where you can get. you don't have to wait for april 15th to get your earned income tax credit. you can get it in every paycheck you file. no reason why you can't do that in the vat system either. the other aspect of the help for

people on the lower end of the income distribution, it's been pointed out that right now we've got among the most complicated set of rules because we have different rules for food stamps, for health care, for what have you. so that is something that you can reform separately. you can run it through the tax system. you can run it through a direct payment system which is what a lot of what we do now is when you think about, quote, welfare in the old day, vs, it had nothing to do with the tax system. it was a direct payment to people based on their income and the number of children they have. i don't see where there's an obstacle toward providing progressivity by moving the a value added tax. >> senator sessions? >> i would yield my time to

senator portman. i would note that we have three new senators that have joined our committee. senator portman was, of course, at omb which is a heartbeat of federal money management and member of the ways and means committee in the house for a number of years. senator toomey on the budget committee in the house for a numb of years and a businessman. senator johnson, who is not with us now, is a full-tim career businessman and got elected to the senate. i think they all three are going to add some really experience and perspective to our debate. senator portman, thank you for being with us. i yield my time to you first round. >> thank you, senator sessions. i appreciate your yieldg your time. we've got all got four or five things going aonce so i'll

have to step out after my questions. i enjoyed the testimony. we need to get michael grats here next time so he can talk about his ideas. i did read his book. i'm intrigued by his concepts. i will tell you i think in the politics of today and with the urgency of addressing our fiscal crisis, i'm not sure we're ready to make thatleap. i will also say to the chairman's question that one of the thoughts that came up in relation to the grats ideas was to deal with progressivity among lower income workers by offsetting the payroll tax which is a good way i think to both simplify the tax code and also provide relief because most low income workers are working and pay payroll taxes. those who don't, there are other ways to do it as the panelists have talked about. i want to take us back to the kinds proposals that the commission has looked at and the kinds of proposals that the white and gregg legislation would indicate. that is simplifying the current

code, again, as interested as i am in what dr. rind sees and others are talking about and moving to a vat tax, i'm not sure i see that as viable in the short term. perhaps we can move to something that has fur economic distortions, that moves us toward eventually looking at some of the more dramatic changes in terms of a consumption-based tax. a couple of questions foryou. one, what should the corporate rate and the individual rate be? there's a study we talked about in the last hearing out recently by alex bruin and kevin has sich from aei indicating we're leaving money on the table. they say the optimal rporate rate is in the mid 20s, and the point has been made here this morning that we're not competitive with our oecd trading partners, japanis going to relinquish first place to us in terms of the highest corporate rate come april.

this is a jobs issue. what should the rate be and what should interaction be between the individual rate and the corporate rate? the question i, of course, have is given the fact that most businesses in america don't pay their taxes at the c rate but rather at supp chapter s or partnerships or sole pro pry tors, what kind of behavior would result if the corporate rate were at, say, 26% and the individual rate were relatively high sner would you see the shift back to the c corporations? is that good for taking the economic distortions out of our system? i don't think so. then you'd have more double taxation on the corporate side. i will start with you, gene, if you don't mind, and go down the panel, if you can tell me in a realistic scenario of getting a corporate rate down, what'she ght corporate rate be and what should the right top rate be for individuals? >> thank you, senator portman. it's great to work with you on this side ofhe congress this time. let me answer your second question first. i think the individual rate and

corporate rate should be fairly near to each other. that's the conclusion we came to in the mid '80s and i think it's the right conusion today. if you asked me personally where i would come, i would actually try to keep the rates down into the -- perhaps into the high 20s. here is my dilemma. i believe that the effective rate of tax on the public is equal to the spending rate. and the spendin rate right now is about 24 25% of gdp. the typical tax base, income tax, social security, value added tax is really only about half of gdp. if you add in how you come in the back door, social security taxes, phase out this and phase out there, most people are facing 40%, 50% rates if you really look through the system. so the statutory rate is hiding the effective rate that they're facing from being phased out of all these programs, from having all these combined tax systems. so it's very hard for me to give you a rate in the individual and

the corporate tax that get balanced. the system is so out of balance -- one thing, mr. chairman, i hope you will consider is ways to report to the public better. i think one way to get at the deficit issue to start reporting the the public that the tax rate is equal to the spending rate. what we're spending now as a society now and in the future is the taxes we're collecting. as a household, if we're spending $100,000 and brrow 50, we're still paying $10. we need to reporthe unidentified pair, the person who has to pay for the deficit, we need to report that as a tax or burden. to answer the question, i would put the rates near to each other but i have to solve the question of where you want the system as a whole to come out. i think the rate of tax we pay should be equal to the spending we promised the public as a way to get the deficit in order. even if that makes the tax rate way too high for what i want

government to be, at least it's an honest system and we're not trying to hide the rates in the deficit. >> we need to do both on the spending side as well. dr. marron? >> perhaps not surprising, i'll be in a similar place as gene. on the corporate side, the pressures are such that the world is moving attacks rates that have a two in the beginning of them. that seems to be the way united states ought to go. you would like the indidual rate, the personal rate to be near that. i'm not sure they needo be necessarily identical. it could be somewhat higher. you'll want them to be similar. you the challenge that gene said which we have to pay for the government that we're going to have and whether that's going to be possible with those lower rates. i would say going back to my testimony and the 'em fa says on the tax preferences that how one feels about bringing the rates down by a sizable amount i think is going to depend a lot on how aggressive folks can be in rolling back tax preferences, both in finding what will count as revenue, although often i think is effectively spending to offset any budget impacts from

that. also if you're concerned about the distributional impacts, if you're bringing down top rates, you'll want to look at the tax preferences in particular that benefit those folks as an offset to them. >> let me ask dr. altshuler before you answer, a simple yes or no. does it make sense to reduce the corporate rate which i think there is a broad consensus on now without dealing with individual rates? yes or no? the answer is no. >> it'sgoing to be difficult. >> if you have a top rate at 35% and reduce the corporate rate to mid 20s --oh. >> i think there's going to be a problem, yes. >> so yes, no. >> i guess the answer is no. and can i go on? >> yes. >> now i'm confused as to what yes and no mean. i think -- just guesting back to your -- to the question that you asked me directly, i think it's going to be hard through revenue

neutral corporate income tax reform to get the corporate rate down to 25%. so i don't really see that -- i would love to be able to do that, but just looking at corporate tax expenditures and just cleaning up the base, i don't think we get to 25%, and i think that's where we do need to go. so in answering your question, it makes sense to try to get to the oecd average because of the competitive pressures thate face that aren't going away. other countries have -- besides japan, canada and the uk are also lowering the rates. i'm not saying we suld engage in a race to the bottom. i don't think that's good for the world either. but the reality is that our rate is 14 percentage points higher than the oecd average right now. as donald said, the two rates don't have to be identical, but they shouldn't be too far apart. you have -- what you're pointing

out is absolutely right. if you have a corporate tax rate that's much lower than the individual tax rate, then all of the sudden the corporation becomes a tax shelter for high-income individuals and there are tax lawyers who are going to jump all over that and advise people how to deal with that. you should keep in mind that once i incorporate myself to get money out, i'm going to be paying the corporate rate along with the individual rate, and that's why there's room for there to be a little bit of a difference between the two rates. how do we get to these rates that begin with a two? i think we've all been saying the same thing, and the commission showed us, baden the base, take a deep breath, broaden the base. >> larry? >> the answer to the question is i think you do have to lower the rate. what has increasingly happened since s corporations have become common is that the corporate

rate is really a way to purchase -- it's a convenience for the business organization to be structured that way. and the only people for whom it really makes sense anymore are large institutions that are internationally competitive. so i actually think that although it would be ideal to lower both, the damage done would probably be manageable in part for a reason that professor altshuler mentioned which is, if you're now a subchapter s and switch over to a c, you pay the 25% rate that a c corp rate would be, but then your money is stuck in the fir i don't view to take it out somehow. if you take it out, you're subject to the personal rate. this gets back to the main point that an income-based tax system really doesn't make sense because you get into all these

complexities, is it going to be taxed once, twice, 2 1/2 times, three times? know it's politically difficult, but in the end as rosanne said, all roads will lead to a vat. if we intend to be competitive, that's where we're going to end up. >> thank you, chairman, for your time. let me say to colleagues, we're at 11:10. we have a good tunout, more colleagues coming. we'll have to go to five dib minute rounds. we'll starwith senator widen. senator portman was on senator sessions' time. >> thank you. asar as i can tell, reforming the federal income tax ishe only major policy response with an actual track record, an actual track record of creating millions of private sector jobs

without adding to the deficit. here are the numbers. two years after a big group of populist democrats and ronald reagan worked together, the economy created 6.3 union none-farm jobs. that is twice as many, twice as many jobs as were created between 2001 and 20008, the period of time when tax policy was partisan. so my question particularly for you, mr. steuerle, because you have this great history of '86, is there any reason why the principles of tax reform that were pursued in 1986 wouldn't be once again an engine for job growth? the heritage foundation scored senator gregg's proposal with me as creating 2.3 million new jobs

per year. that's in the here and now. we've got to create more good-paying jobs. and because of your history, the first thing i want to ask is, do you see any reason why the principles of '86 tax reform wouldn't be anngine for job growth again? >> well, you sort of set me up, senator wyden. i agree wit your conclusion, tax reform, lowering the rate, oadens the base is good for the economy. how far and facet goes, i'm one of the people always reluctant to make that type of prediction. but it's in the right direction. and i believe that there's so many areas of tax and budget reform where we know what to do, and if we do them and move in the right direction, we often get surprised. what actually happened in '86, we actually thought that perhaps there was a transition period where we might have actually had a little bit of a slow growtho

be able to compensate for the reform. you may remember by '86 we were already into about the third o fourth year of an expansion, the time when we often slowed down. instead, what happened after tax reform, things actually sped up. yes, i think tax reform especially is good for long-term growth. what happens in the short term is hard to predict. but the lessons of '84 to '86 are fairly positive. >> those numbers are just stunning. i mean twice the job growth in the two years after bipartisan tax reform compared to the whole period between 2001 and 2008. that's a matter of public record. the second question i want to ask will get you, professor marron and professor altshuler, how find it pretty alarming how shorshrift is getting in this

p gregg and i get the rate down to 20%. that's a matter of public record. but small business, that's 80% of the businesses in this country, sol proprietorships and partnerships and the like. and it seems in much of the discussion small business is almost getting to be an afterthought. i'm going to do everything i can to keep that fro happening. i wonder what your sense is about how small business is fitting into this discussion, professor marron and professor altshuler. >> the first point which i think where you' going, as was discussed before, we now have many businesses structured so they pay their taxes through the individual income tax and that as pass-throughs as you think about tax changes that may make life easier for businesses to create jobs, you want think not just about corporate tax reform but the benefits of lower rates and whatnot on the individual side.

the caveat with that is while many, many companies and businesses show up on personal income taxes, the real, really large ones and the multi national ones are still over on the corporate de. then with the security and safetyf being a think tank and academic guy, i will inject the one thing, there's been a lot of interesting research on what are the key things for creating jobs and moving the economy forward. it tur out that small business isn't exactly the slice that drives it. it turns out there are a lot of small businesses that don't grow -- perfectly respectable businesses we like. if you're interested in what are the job creators, it's a small subset that turn out to be the gazelles that create a lot of johns. how do you design things in particular to help those? >> i would only say -- i'm going to get you into a different area professor altshuler because i know my time is up. that's where most of them are. and certainly small businesses

can become big businesses because of the entrepreneurial eng newt. that's why i don't want them forgotten. question for you professor altshuler and dr. lindsey, more than 90 u.s. senators voted against vat. as far z i can tell, the only surprising part is it wasn't more than 90. i think the big concern for those who have been for that is there's a sense it's a back door plan to hike taxes, particularly taxes that are seen as regressive. since both of you are for there, how would you deal with the politics tay of more than 90 united states senators comi out against this concept and, of course, the voelker commission didn't bring forward a proposal in favor of it. i look back at the bush proposal and they said, well, you can talk about it. they certainly didn't come out for it. how would you deal with trying to bring people around to your

point of view given that recent senate vote and certainly the product of the other reports? i thank you for this extra time, mr. chrman. >> let me say very clear five-minute round is not going to work. we'll go to seven-minute rounds. >> thank you, mr. chairman. >> senator wyden, thank you for the question. the answer is perseverance, education, education, education. helping people understand that the current income tax is broken and that we -- that the vat is an efficient tax and it is not necessarily a money machine. this is what people are afraid of. there's this idea that it's a hidden tax. it absolutely does not have to be a hidden tax. we put it on the receipt like canada did, speak about the canada experience. they're just north of us. they adopted a federal vat.

's not a perfect vat. but if you talk to canadian policymakers, they will say it works very well for them. i think education. the problem is that when you support a vat, it's politically very difficult. >> my time is up. but dr. lindsey, the people of my state have voted against a vat something like 850 times which is barely an exaggeration. you should know your education challenge will be great. mr. chairman, you've given me lots of time. can dr. lindsey respond quickly? >> go ahead. >> thank you. first of all, if it were an add-on vat, in other words, adding it on to what we already have, i think the 90 senators were correct. why do we want to add another layer of complexity? i do think in the end, i you want to regain competitiveness, that is going to be the only avenue that is available. senator toomey. we'll go to seven-minute rounds

now. >> thank you, mr. chairman. i want to follow up on a point that dr. steuerle made earlier with which i fully agree, the idea that we ought to equate and think about the total tax burden by looking at the total amount of spending. ultimately all spending has to be funded, all going to come from taxes, whether at any given point in time there's a combination of debt and taxes. the real measure of the burden on the economy is the level of taxes. to just connect a few dots here, it's also intesting to hear the discussion about how there a disproportionate negative impact. in other wds, the negative impact from higher taxes exceeds the revenue benefit to the vernment from an increase in taxes. if we're saying the taxes are essentially equivalent to spending, then what we're saying is that as government spending rose and, therefore, the corresponding taxes, we're doing harm to our economic growth which is i think we're well

within the range at which increases in spending are doing negative consequences to our economy. the question i have is also about the vat. dr. lindsey has argued against a combination of income taxes and vat. i think if i understand you correctly, it's because of a concern about an additional layer of complexity. but i wonder about something else, also, that concerns me. if we had both, we could at least initially have both at what would appear to be nominally relatively low rates since you have two different sources of revenue. i worry that that would make it easier politically to raise rates and increase the total tax burden on the economy which we have already established from this panel has a disproportion nally negative impact on economic growth and, therefore, job creation. so i wonder if those of you who i think you might support a combination of a vat and an income tax, if you share that concern that it could lead more easily to a higher total tax

burden and, therefore, poorer economic performance and lower job creation. >> senator, agai part of the dilemma is our spending rate is so much higher for our tax rate. for every $2.00 be collect in taxes e ear spending $3.00 now. the spending goes up in the future because we have mandatory spending program that is have growth rates faster than the economy and they're unsustaible. as well, by the way, the number of tax subsidies as well that have high growth rates. we've got a dilemma here. i go into linebacker brat ways in my testimony a little bit. the dilemma for both political parties is there's a sense if they don't control the future, the other party will. for republicans, if i raise rates to balance the budget, all that's going to happen is that's going to keep spending higher. for democrats, my experience is, if we get spending under control which some of them believe they

did in the 1990s, then all that happens is we end up financing these tax cuts. actually i think both parties are right. technical academic language they're in what i call a classical prisoners dilemma. basically, you always want to argue for one side. if you don't, sbopd i else is going to take advantage of you. it's an unsustainablesituation. to me t answer to your question which goes beyond tax policy, you have to come up with budget rules that limit both political parties whether they're in power or not in power from controlling the future so that, yes, if the public bants to vote for hier spending in the future and finance with a higher vat, then they get it they can't do it in a way that votes for higher spending now that forces the taxes to go up. similarly on the other side of the aisle, you can't vote for tax cuts now that basically try to force spending cuts into the future because of these deficits. what both political parties have succeeded in doing is creating

this -- not only this enormous decit, but boxing themselves in so much that, as i say, we've got a government where when you walk into the office -- when you walk into the congress, both this congress d the last congress, every dollar of revenue already committed. you didn't have a single dime to spend on discretionary spending or do reform because it had been committed to your colleagues on the past. >> i wonder if we could focus on the narrower question i'm trying to pose, the increasing danger of increasing -- >> the bottom line is yes, i think the danger is on both sides of the aisle unless you can figure out ways to constrain both parties as to how much deficit they can do now, that they push the tax rate up or spending rate down. >> dr. marron? >> am i getting a green light? a couple thoughts. first, as rosanne said, iwould invote the example of canada as

an important one to keep in mind, they introduce add vat at a 7% rate, made it very visible. eventually over time they brought it down to 6% and i believe 5% which shows a country relatively similar to ours in many regards was able to sbro a vat and not let it grow. some of what gene sa, the challenge is we have to afford the government we're going to choose. what you discover if you look internationally is societies that have chosen to have larger governments tend to choose more efficient tax systems. they tend to do more consumption taxation in relative terms and less income taxation in relative terms. i think the reason folks here have been talking about a vat as a possibility is we think that given the pressures of an aging population and rise in health care spending, thatay be what the future looks like for the u.s. rather than paying forthat by ratcheting up income taxes, it would be more going to a mix

rather than the consumption end. >> i don't think i can add more to what donald just said. i agree with everything he just said. i think the idea that by having a vat you automatically have a bigger government is based on this idea that it's a hidden tax and people will just let that tax go up and up because they don't feel it or because they don't see it. i just don't see that as being the case. >> dr. marron did seem to be suggests there is at least a correlation between big governments and a vat. my concern is ever bigger government, however you fund it leads to slower economic growth and lesser job creation and the lower standard of living. dr. lindsey, i wonder if you could comment. >> i think you're exactly right on the hybrid system. because you have lower rates, it makes it easier to raise one and then the other. i think you're right.

i was struck by senator wyden's question. i had an answer that i'll direct to you on the political issue. there's a large movement in the country for something called a fair tax. i personally don't think that's as effective as what i'm suggesting, but the economists disagree. there's an example of something that's close to a vat that has a large political constituency for it in a place you wouldn't expect. i don't think it's at all an impossible sk. >> thank you. let me go to senator coons. senator coons i want to welcome to the committee. he's a new member here. actually filling out the term of senator biden who was a founding member of the senate budget committee. and senator coons was the county executive of newcastle, the largest county in delaware. so he has actually balanced budgets and worked on ways to

promote economic growth. we're delighted to have you join the committee, senator coons, a graduate of amherst, bachelor of science in chem tree and political science. holds a graduate degree from yale in law and divinity. maybe we can get spiritual guidance as well. it would be valuable to the budget committee. the first truman scholar to serve in the senate. senator coons, welcome to the committe >> thank you very much, chairman. thank you for your leadership on these very iortant issues. i very much look forward to working with you and with senator sessiontion. as you both said in your opening statements, we recognize across the partisan divide of the congress and broadly across the country regardless of region, background, experience or education that we have as this panel has so uniformly and compellingly testified as simply unsustainable and unworkable tax system in the united states. we face a crushing national debt

burden, a challeing deficit. you have all worked clearly very hard in putting together a series of proposals. as the questioning so far has surfaced, one of our big challenges is taking insightful, detailed thorough proposals and actually moving them into political reality. we have very real challenges doing that. in my role as county executive, as you mentioned, chairman conrad, i did balance six budgets. it was not easy. i required broad recognition of a need for shared sacrifice, both in reductions in spending and broadening the base and increasing revenue. i spent time as in-house counsel of one of delaware's most invative manufacturers. i'll focus my question on corporate taxes. i'm interested in how we might successfully encourage or incentivize, increase corporate investment in r&d, manufacturing

and new hiring in the united states and in what our longer-term trajectory for it ought to be on treating corporate tax rates. i'm more interested in this exchange in larger corporations who have significant offshore balances. one of the comments that was made i think was by dr. marron was about the distorting effect of temporary tax programs. as a participant in the lame duck session i was disappointeded we made large tax moves that were for one year, as someone long concerned about the r&d tax credit, it makes no sense to me it's here, gone, here, gone. we do not do long-term sustainable tax policy. if i might, to every member of the panel, please, i would really appreciate a response. if we're in a global situation where, as i've heard from you most of our competitors are at a vat style system, cash system rather than income system, and wedo have or will have the honor as of april of having the

highest of the oecd countries combined corporate income tax rate, what is the best path forward to incentivize both in the shorter term the repatriation or mobilization and deployment of capital from american-led corporations, and in the longer term, what is the balance that makes us most competitive as a national economy given the political realities pointed to by the panel of the difficulty of moving easily to a vat? is it to dedicate e vat to particular purposes? is it to apply it only to narrow classes of economic activity? some have proposed a repatriation of foreign earned profits holiday or for limited purposes. how do we strike a balance here that allows us to most effectively access and mobilize the innovative capital reserves of the american corporate sector please?

>> senator coons, i confess because of international, i don't think there's ever a perfect answer. you start with inconsistent tax systems cause different countries are different tax systems. you never can get all the neutrality y want. you start with inconsistency and try to minimize some of the distortions that result. i can only make some suggestions that move in the right direction without giving you a perfect solution. i should comment in tax reform in '84, i went around to every staff member -- 20 modules, several hundred pieces, there are thousands of provisions we're talking about and talking in a ry shorthand basis. they ended up suggesting something we got into the propos. three weeks later they said we don't think we got that right again. so ever since then i've been sceptical about getting a perfect solution. my colleagues, especially rosanne altshuler, if you lower the rate, you move in the right

direction. that really helps a lot. lower the rate moves in the right direction. the repatriation issue i think is a bit of a bogus issue. basically that's where people put a check mark of where they're keeping their account. the money is accessible in a lot of different ways regardless of whether they repat at. i do think we haven't given much attention in the way the current system allows people to arbitrage, moving debt abroad. individuals do it, too. that's one way of getting at some of it i think there are several things we can do to move in the right direction. i'm less enamored -- >> dr. altshuler said we should haven't a race to the bottom in terms of lowering corporate rates. this is obviously a hypothetical. is there a point below which you shouldn't keep reducing income

tax rates for corporate income? >> is this a question forme? >> sure. >> is there a rate? boy, then what you're thinking about is, we're all in this together as a world and how are we all going to behave as a world and i think that you're not going to get -- >> exactly. you're not going to get corporation. the point is, to answer your original question in ter of what can we do, as gene pointed out. step one, lower the rate. step two, look at that rate. if the rate is low enough, then it really doesn't matter if you're tear torl or if you're worldwide. that becomes less important. getting the rate to that level is going to be very difficult. you shouldn't do it without a vat. so step three is deciding -- is stepping back and saying, incremental reform at this point doesn't work anymore. we can't do a repatriation tax

holiday. as gene mentioned, it doesn't -- it doesn't necessarily lead to firms bringing back money and then investing it in the economy. it's just -- iteeps us going down this temporary tax holiday path that is very unhealthy, unpredictable and not good for the economy. it's time for us to sit down and get the information that we need to decide whether or not territorial would be good for us, that does depend on what rate we get down to. or should we go to a worldwide system? for instance, that gets rid of defraud. we need to be thinking about fundamental reform of the international tax system, not incremental reforms. >> thank you. any other comments from the panel in response to that? >> i think we better, in fairness to the leagues that are here, we should go. nator whitehouse? i'm sorry. wait a minute.

senator sessions. he'd conceded his time initially. so we have to go back and forth here. >> i'll follow up on senator coons' excellent line of questioning. it's something i don't fully understand. mr. lindsey, you didn't get to comment on it. maybe you could start. i understand we're one of the very few nations that tax outer territory income, and is is good for jobs in america? is it good for the economy? and do you have any comments to follow up on senator coons' question? >> i'm going to give you an swer that you're going to hate and i hate. the answer is it depends. i think that was the comment about whether or not we should move to a territorial system. we set it up that way. member, we tax evrything, but then we give a credit against

the foreign income taxes paid. and then we tax the money when it's repatriated. it gets to be very complicated. if one looks at why we did what we did when we did it, it was really a decision post world war ii to encourage the global participation of american firms in the rebuilding the world. at that point it made sense because we didn't have competition. it makes less sense now. i think senator sessions, the theme you heard here was the single first thing you can do here is lower the rate and as evidence, in all of the agony that ireland has gone through recently, the one thing they refused to give on with all the pressure was the 12.5% corporate rate. because for them that is a key competitive advantage. it underscores the importance of

us lowering our rate as a first step if that's what you're going to focus on. >> i heart it stated, some might suggest, that thatow rate was a problem in causing their economic difficulties. i've been told that's really not so. do you have an opinion on that? >> well, they had -- most of their problems are self inflicted and has to do with their financial system. but what they have been able to do is attract a lot of headquarters for manufacturing companies, particularly the european headquarters by offering that low rate and it's of enormous competitive advantage to ireland. we're not ooir land. think loweri the rate would be the consensus, first thing you could do. again, there's a lot of evidence that you could raise revenue witht broadening the base simply by lowering th rate here so something more of an international norm. >> a lot of people don't realize how close the competition is

among businesses in the world for market sare. let's say canada goes to 16.5 as i think they are, and we were to reduce our rate to 28 or 27. companies seeking to build a plant along the border, would that be a factor in whether or not they buil that plan in the united states or in canada? >> it certainly would be a factor. it might be a decisive factor. >> a lot of factors. but i don't think it's any doubt that it has the potential to costconomic growth in our country, a corporate tax higher than the national -- the worldwide rate is a threat to , and at this point in history, job creation is so important. everybody is saying the corporatiois doing pretty

well. this is happening, the stock market is doing well. but jobs are not moving much, and we can't have tax policies that adepress job creation. briefly let me ask you committee members, as part of complexity, should not we consider the uncertainty of our tax situation, the temporariness of it. for example, we've got the rates just for two years. the death tax is set for two years. the amt comes up every year. nobody never knows -- physicians are worried over their doctor fix on medicare. are those factors that have an adverse impact on our economy, the uncertainty of what will be in the future. ? . >> mr. sessions, the answer is clearly yes. i think everybody at the table will say that. i'll give one caveat.

sometimes people say let's deal with the uncertainty by making permanent everything in the code. there is this tendency to look at mandatory spending and say, gee, we've got all this stuff on automatic pilot. we need to get it off of automatic pilot. i think we have to be careful. we talk about getting rid of the uncertainty. we don't want to put everything in the tax code, including a lot of things we don't like, five educational subsidies instead of one or none, to put those on automatic pilot, too. so when you go towards certainty, that doesn't mean you have to make something permanent and permanently growing. you may put it on a five-year fix or ten-year fix or something like that. i'm hesitant of solving that problem -- >> i recognize that's a fair point, but i think all of you would agree that that uncertainty is another negative factor for our economy. >> if i can, absolutely, as i said in my opening remarks, i think it's quite striking today that every single significant

component of the u.s. federal tax code has significant temporary tax cuts in it. that's not something we should aspire to in the long run. everyone understands what the tax code is. as gene said, make sure you have a system in place to review important provisions periodically to see if they make sense. allow people to have some notion of what's coming. the one caveat i would put on that is just the elephant in the room is the unbalanced fiscal situation we have which even if we allegedly pass a permanent tax system today, unless we have some solution to that so that we're going to be able to avoid the unsustainable build-up of debt, there's still uncertainty about where we're going. part of solving the fiscal challenges is part of eliminating uncertainty. >> mr. lindsey, you've been there in the government. to do tax reform and deficit reduction all at the same time sounds almost unthinkable, but in a way politically sometimes it may come together better in a crisis than in a noncrisis. do you agree, mr. chairman?

>> i do. >> would you agree with that, mr. lindsey? >> yes, i think we have no choice, and sometime in this decade economic circumstances are going to force us into solving our problems. >> briefly, let me just say, mr. chairman, i think senator toomey is correct. for you thinkers, the reality politically is that not that american people oppose something like a value-added tax, the borts, neal borts fair tax idea is very popular with a lot of average american people. but what they believe, and i think they are correct, if we make anoth revenue stream possible for the govnment to extract a larger percentage of their wealth to sen to

washington, they're not happy about it. so mr. lindsey, you suggest you could solve that problem. briefly -- maybe we shouldn't go there, mr. chairman. you think you could do it in a way that would give confidence that we weren't just adding a new way to extract more money from for the american people? >> i'm not the expert at the politics of it. it would seem to me one of the concerns is, if you add on another tax, not onlys it bad from an economic point of view because of complexity, but you also have the issue that you're talking about. so again, i would stress getting rid of all of the current taxes. i would add the payroll tax as well. one of the -- if we're disadvantaging american workers becauswe don't have or adjustability, you want to make everything border adjustable, throw all the taxes into

something that is at the -- >> you think that's doable? we could actually accomplish such? >> well, members of the panel might be able to think it's doable. we don't have to run for re-electio >> all right. senator whitehouse? >> thank you, chairman. i noticed the other day that the irs had reported that the 40 top income earnersin the country who averaged income each of $344 million in the year that they were reporting had paid -- paid total federal taxes of 16.6%. so i asked my staff to tell me at what point in the income level an ordinary working american got to start paying 16.6%. it turns out it's $28,1 00. i said what are regular jobs in

that area? a hospital orderly in providence, rhode island, earns $29,100 a year. if you look at our current tax system and start with the average taxpayers who makes $60,000 a year and pays about % in taxes into the system and then you drop to my orderly who makes less, and so he pays less, he pays 16.8% it turns out, then you drop to the 4 highest income earners in the country who pay less still, they pay only 16.6% and then you drop to general electric which on $11 billion in income paid 14.3%, then you drop torudential financial which on three-plus billion in income, five-year averaging here, paid

7.6%. and if grou go to the ryan plan, those $344 million earners will drop to around 0%, maybe one or two percent at highest because of elimination of the capital gains, i cannot help but agree that the facts show we have a tax system that is upside down and the better off you are and the more powerful you are the less taxes you pay as a percentage of your income with the poor hospital orderly in providence, rhode island paying a higher percentage of his income than the average of the top 400 incomearners in the untri at $344 million a pop. i applaud your direction. i think we have to go there. in evaluating the vat tax which a great number of you have talked about, my question is this, could you tell me a little bit more about the trade and

competitiveness effect of the vat tax, particularly in light of how many other nations have gone to one and given what appear to be its trade and competitiveness benefits? do you believe that the huge move by other nations which export a great deal into our economy was done strategically to take advantage of those trade and competitiveness effects? in a nutshell are there competitive effects to a vat tax and do you think other nations who have gone to it did it with that purpose? >> i think most economists would argue that competitiveness is nodriven by whether you have a vat. the competitive -- if you want to call it the competitive advantage of a vat is it keeps you from raising high tax rates to an income tax -- >> let me give you an example. >> if to a hike income tax if that makes sense. >> let me give you an exmple.

let's say you have a car made in sweden or germany. they have a v.a.t. tax. the revenue never attaches to that product. it leaves their country tax free and it comes over to our country and is sold tax free here in our country, in effect from their home tax burden. we, on the other hand, have home companies that pay corporate income tax and various other taxes. that tax burden gets put into the price of the car, so when the ford comes up against t volvo in the american market, the volvo is, in fact, tax advantaged versus the ford because sweden chose to collect revenue in a v.a.t. tax which we choose to collect in a corporate tax. the v.a.t. tax does not go into the price of their product. the corporate tax does go into the price of our market. and if that's accurate, does that not create a competitive

disadvantage? >> again, your analysis is correct, i think the highetax rates and the income tax do create some minor competitive disadvantages. i don't want toverstate the case, however, because i do -- i do want to emphasis that a lot of issues of competitiveness have to do with wage level, have to do withentrepreneurship, education levels. so i just don't want to overemphasize -- the advantage of the v.a.t. i see -- i do favor a v.a.t. for those reason, but i see the main advantage is it keeps you from raising rates outside the v.a.t. it's not that putting on a v.a.t. gives you a competiti competitivenecompetitive advantage. >> let me answer the question of why other countries had a v.a.t. when you look back at history, what happened was they had very inefficient cascading retail sales taxes, and they -- the reason that they went to the v.a.t. was to replace those retail sales taxes with a more

rational system, a v.a.t., is a more efficient sales tax. if you look at canada, and i've looked at that experience, it really was, we've got a big deficit problem, we need this revenue. i don't think that us adopting a v.a.t. on its own is going to have hunl competitiveness. if we were to just take the system today and add a v.a.t. on, what would happen is over time, exchange rates would adjust and we wouldn't -- it wouldn't add to competitiveness. wh happen gene said is exactly right. what the v.a.t. would allow us to do is buy down the v.a.t. in combination with broadening the bags would allow us to buy down our corporate income tax rate and that would have a big competitiveness impact for us. and do have keep in mind that oe corporate income taxes also. it's not that they don't have

corporal income taxes. they do. >> thank you very much. >> senator sanders. >> thank you very much. these hearings are like a narcotic to me. i could be here all day. i get hooked on these things because they're absolutely fascinating and i appreciate the panelists that are here. as we mentioned the other day, i do applaud the panelists, but they do have a perspective. and i hope someday we can bring in economis who have somewhat of a different perspective. i think dr. sterling made a point that you can't just look at one -- if you're talking about international competitiveness, for example, you just cannot look at tax rates. i live an hour away from canada, and i'm -- my canadian friends would be very impressed by the degree to which you laud canada today. canadian health care system costs about half of what our health care system does. by the way, do you think that moving to a single payer national health care system as they have in canada would help our economy?

if we're going to talk about the canadian government and their policies. they have health care and spend lf per capita than we do. how's the health care in canada should we adopt that? >> i wouldn't necessarily say canada is successful because -- but they have a lower spending right -- >> right. >> they can keep a lower tax rate, which is an advantage. >> and everybody who understands the issue understands if we want to go to a low health system, we need to go to a single payer. would you suggest that? >> this is a budget committee. we always have a debate over what the health system we adopt. no matter what we adopt, it should be within a budget. >> that's not my question. >> you can't have an open-ended system. >> you talked about the canadian

tax system and lauded certain provisions. should we look at the canadian single payer system that provides health care to all of their people at about half the cost of the american -- >> i'm trying to find the right words to wiggle out of this question the same way gene did. it's absolutely true there's a lot of waste and spending on health care in the united states if we could eliminate that, that would be -- >> you wiggled out of it. >> i am not an expert on health care. >> but economically,ou would all agree that health care is a huge burden on our economy, no one disagrees with that. canadians seem to have done substantially better. dr. lindsay, something we should look at? >> we should look at everything. what really decides competitiveness is cost effectivene effectiveness. i mean, the worst thing you can have is a high tax, low benefit

system. if you have a state, for example n the united states with, you know, relatively modest taxes but efficiently delivered public services, those states are the ones that are gaining population and jobs. so i don't think you can look at anything in isolation. but we need to improve efficiency. >> and that's my foint. i think we look at -- for example, we can talk about canada. again, i live an hour away from canada. whenall reet collapsed here, their banking system did not collapse because of much heavier levels of relation, right? >> senator, i -- that's something i do know something about. i would not wish the canadian banking system on america. >> all i'm saying is on these issue, you can't isolate -- if you're talng international competitiveness, not to talk about wanls or environmental protection or trade policy, they're all lumped together. i don't think anyone disagreed with that.

the other point i wanted to make, not to talk about a canadian single-payer system, what i haven't heard discussed, while taxes are enormously productive, everybody agrees our current system is not working, needs fundamental reform, we have to look at it within other contexts as well. for example, during the bush years, we saw substantial tax reductions given to the wealthiest people in this country and yet we had perhaps the worst record of job performance at anytime since heert hoover. so it's not quite so clear -- other factors may be involved in that. but under bush in eight year, we lost 500,000 private sector jobs. we gave tax breaks to the very wealthy, gentlemen, we lost jobs. dr. steriling? >> wl, senator, there are a lot of factors involved. >> sure. >> the end of the bush year, we

went io a recessions. when politician pligss brag about the job growth they've had, 90% of what they've talked about is the influence of demographics, and what we've dodged for several decades is when we moved into -- after 2008 and we have all these people starting to retire almost at the rate we're bringing people into the work force, it's going to dramatically decrease the amount of jobs. >> and i'm not arguing -- i'm just saying -- my only point was these things are complicated. >> as a matter of revenues, i have emphasized that it's something that has been hard to get into the budget calculus, but if we can figure out ways to get older workers to work, who i think are the largest group of potential workers, the most -- largest pool of underutilized human capital in our economy, people 55 to 75 to 85, it has a revenue effect right now we do not score. >> when we have such a -- when we talk about revenue.

there are other reforms that can talk about revenues. >> that's what i mean i get hooked. we could go on for many hours. dr. lindsay, you mentioned it might be advantageous to eliminate the payroll tax. you just said that a few minutes ago if i heard direct krektly. >> what i said was if you go to a value-added tax, you want to roll everything into it. the value-added tax goes back to the competitive issue and how it plays out, if you go to the competitive advantage, why wouldn't you want to do it for all our taxes? >> because we live in the real world and as of today, to the best of my knowledge, social security is completely funded by the may roll tax. do you believe in social security? >> of course. what i'm suggesting is if you're going to take advantage of tax

reform, you want to roll as much of the tax code as you possibly can into the most efficient tax you can. and obviously you would continue to fund social security with that new tax. i don't see where there's any inconsistency there at all. >> hold it, hold it, i don't have a whole lot of time. so let me just ask you the questions, okay? my point is right now, we're having a major debate about the future of social security. >> yes. >> and social security is fund independent of the u.s. treasury by the payroll tax. lumping -- let me finish -- lumping all you can -- you can certainly fund a retirement program for the eldererly in ways other than the payroll tax. i'not arguing that. but right now the strength of the payroll tax in terms of protecting social security has nothing to do with the deficit. if you lump everything together, and there are guys around you that say well, eve got to make cuts. you will agree with me one of

the areas that could be cut if you're funding a retirement program for seniors out of the general treasury could be programs for the elderly. is that a fair statement? >> this congress has cut social securityny number of times, even though it's funded by the payroll tax. so there is no linkage between how a program is funded and whether or not it's cut. >> oh, i wouldn't say that. >> '81, '78. those would be two good dpampls. changes in the tax on social security benefits, i forget which year it was passed. >> '83, i think. >> there are many, many times we have adjusted social security. >> adjusted social security, yes. >> we cut social security benefits without changing payroll taxes one bit. >> actually, we raise the payroll tax in 183 so it is now a viable program. i don't want to belabor the point. i guess i've run out of time.

>> senator merkley. >> thank you. i want to have congratulate my colleague from oregon, senator wyden for bringing up this issue. we have a very high marginal rate then tons of exceptions in terms of deductions and credits. a few yea ago when i was in the state legislature, i went to the portland development agency, i said, you know, oregon is 47th in the nation, in other words, one of the lowest states in terms of the tax burden it places on business. is this a selling point in attracting business to the state of oregon? and the answer was no, it's not. i said well, we're 47th, one of the lowest effective tax in the country, why isn't it a selling point? well, we have a very high marginal rate and companies largely look at that marginal

rate. they don't count on getting the exceptions and the deductions and the credits, so it's proved of little value in attracting business to our state. so i said well, wouldn't it make a lot more sense then for us to be 47th with a very low marginal rate and fewer deductions and credits and wouldn't that prove more attractive? and the answer was yes, that would be ha mu would be a much better sell. i think the united states has a parallel problem. i would like you to comment on this question of whether we become much more attractive to companies deciding whether to site themselves overseas. >> just a quick answer, absolutely. and that's what i wrote about in

my testimony. you hear a lot of people saying well, you know, the statutory rate is really high, but once you take all of those credits and deductions and loopholes into account, the effective tax rate is really low. so we really don't have to do anything about the statutory rate. two problems with that. one is that if you look at effective tax rates, they're not as low as you may think. they're not that much lower than the statutory tax rate, but most importantly, it's very individual firm specific. the statutory rate is an important factor, as you just pointed out. it affects location decisions, it affects financing decisions. it affects how much wasteful tax planning you d it affects how much you invest. so it's a very impornt policy lever, and it does make sense to lower the corporate tax rate.

>> anyone el want to comment on that? >> well,senator, i think we would all agree i have somewhat tangential point, but a lot of the discussion we've had at this table have gone to issues like international tax which can be complex. but i would like to bring us back to where it's maybe all our testimony began, which is there are a whole variety of tax changes that appeal to both sides of the aisle that are not -- when we have these deb e debates on taxes, rememberthe entire revenue side of the budget and a quarter of the expenditure. we're talking about thousands of programs. there are so many things that cut across the aisle that both sides would agree, we don't need five educational subsidies, we don't need tecapital gains tax rates. we could include the burden as the tax deaf fit we're putting on them. senator wyden showed, you can start the narrow in which there's a consensus and build

out to where there's not a consensus. to the extent we broaden the base and lower the rate, there's a certain point where that doesn't work because there's certn rate reductions that's hard to have finance. that wasn't mean you can't go as far as you can. start where we can agree and hold off on the issues where there's more controversy across the aisle. >> let me turn to another topic. when i was here in 1976 as an intern, there was a tax reform that addressed a lot of various exemptions, deductions, credits. and so folks from oregon were writing in with all their perspeives on could their home office be deducted and blah, blah, blah a so forth. a lot of anxiety over each and every one of those potential

changes. but a number of changes were made. and in 1986, senator packwood led a major effort, a much larnler effort to do the same to simplify in large degree. but it appears to me between '86 and now, we basically have had a 24-yea period where we haven't gone back. instead of having ten years of handing out credits and deductions and okay, let's come back to some sort of sanity, we've had 24 years where we've been handing out complexities in the tax code without coming back. are we long overdue for this major top of discussion? >> yes, absolutely. i think going back to one of th issues i raised in my testimony, i think one of the things that's driven that over the last 25 years is that you can dress up special eductions, exemptions and tax cuts which are more politically palatable instead of spending increases. you're using the federal

government to direct resources to a certain kind of activity, but political they have looked to be tax cuts. going back to one thing that gene has emphasized several times, there's a challenge in the way we talk about these issues. and clarifying will be part of the steps towards addressing them. >> i would point out we took the top statutory rate up from 28 to 39.6 over that same period of time and the two go hand in hand. reversing both is i think on the table. >> one final question. >> when i look at the number, what's increasingly happened over the years is congress has increasingly gone to what i call the giveaway side of the budget. both tax cuts and spending increases. the challenge always for a budget committee is you recognize there's the other side of the ledger and we've got to figure out a way to raise the importance of what that means. we can't let deficits as if they're free money when we do spending increases and tax tut

kuts. . >> i think i'm out of time. would there be a possibility of one more question? >> yes, sir. >> okay, thank you. i've asked my team to help identify specific examples of how our tax code exports manufacturing or jobs overseas, and one specific example they have put forward is that when an american company decides to build an overseas factory, if they take their loan out to build that factory in the united states, the interest becomes tax deductible. so essentially th american taxpayer is therefore subsidizing the financing of the overseas construction that then incentivizes the shifting of jobs overseas. is there a ration argument for th, or is this just a crazy thing to do to subsidize the construction of factories that compete with american factories. >> do you have an hour to get into this? and a lot of headache medicine?

>> it sounds like we're going to have a follow-up discussion. >> yes. it's not -- it's not the case that all corporations are able to deduct all their interest expenses that support foreign investment from the u.s. rate. we do have a system where interest on domestic lending allocated abroad so that you are not allowed to deduct 10 of your interest on foreign domestic interest to -- you're not allowed to deduct 100%. there are interest allocation rules. they're very, very complicated. we have a better rule that actually is on the books to be enacted, but we just keep pushing it out.

it's called worldwide if you think -- fungibility. it's been pushed out to, what, 2028 now? >> if a firm can dect interest on loans to build a company abroad, they generated themselves a negative marginal effect of tax rate, which means we're subsidizing their investment abroad. the difficulty of this is understanding the extent to which this is happening to specific corporations. it's complicated. >> but it is happening. i mean, i have had people come to me from multifinancial accounting firms who had clients

doing this. it so troubled them they came to me. they would not divulge the compani companies, but they show med very specifically, companies from the united states developing a net marginal negative tax rate, and in effect being subsidized by american taxpayers to put jobs overseas. and i think this is a bigger problem than has been acknowledged. it is according to people who come to me from very large accounting firms, they believe a rapidly growing problem as people figure out this mechanism. just as a factual matter, earlier on, we were talking about canada's deficits so i

asked to look into that, they were at 101.7% of gdp in 1996. they brought that back down to 69.7% of gdp. partially with the institutional of a v.a.t. it was not exclusively v.a.t., but they used a v.a.t. in combination with other taxes. you don't see many countries th have exclusively a v.a.t. almost always they are hybrid systems, part income tax, part v.a.t. and there was an earlier question from senator whitehouse with respect to the competitiveness advantage. one part of a competitive advantage is those taxes are rebatable at the border. and so the example that senator whitehouse was giving is white accurate. we have our our taxes built into our products that we're trying to compete with foreign

countries. they have a tax that at least partially is rebatable at the border, so when those goods come into this country, they haveless of a tax burden on them. that confers a competitive advantage. now, we have tried to counter that with disk and fisk and how many it rations. mr. lindsay, you would probably know. and the problem is, we keep getting ruled ill leet egal on things we try to do to level the playing field. many of us believe we are on a course here that at some point we're going to lose our ability to try to make our people competitive. that is we're going to get ruled g.a.t. illegal, we're not going to be able to fix it and then we're going to fiesace a 20%, 2 advantage going to the foreign manufacturer. so one of the reasons we wanted to hold this hearing today -- i

mean, these are serious, serious matters for this country's competitive position. and i don't think we want to allow ideology of either side here to get us away from the practical reality of what we confront as a country. and that is a competitive position of the united states. senatowhite? >> thank you very ch, mr. chairman. i think you make an important point and my friend and colleague 23r6 oregon, senator merkley does as well. these international questions are enormously iortant. and i thk my colleague for making it. that was the one i wanted to ask you about and that's transfer pricing. just to kind of put this in a little built of context. senator greg and i went after the tax issue week after week for two years in order to get where we were essentially, a modernized version of '86. my guess is we could have spent

another five years working through the territorial and the international situation. and i think the -- we got to where we were by asking the '86 question, which was how low would you have to get the business rate to be in order to get rid of some of what you're doingen in terms of deferrals and credits. that's how we got to a corporate rate of 24% and junked a lot of what currently goes on internationally in terms of deferral reform tret krets. -- credits. transfer pricing takes this to a ole different level. and here's a question for you, dr. shueller. you can create paper transactions between subsidiaries of the same company to allocate expenses and profits to selected companies. what we found is people like ed

kli fl ebarg, head of the koint tax commission said look, if all you do iebarg, head of the koin commission said look, if all you do inebarg, head of the koint tx commission said look, if all you do is is go to the transfer pri -- territorial pricing, it will be a big problem. i appreciate the time the chairman is giving me. do you agree essentially with that theory that pure territorial tax approaches as constituted today wouldn't do anything about transfer pricing, could make the problem worse, and if you do, what would you do about it? because that's where we bog down and a lot of my colleagues clearly are interested in this. i want to be responsive to this. if you agree with that theory,

what would you do about it in order to bring folks together like you did in '86 and get stuff done. >> this is a tough one. going to a territorial tax system does increase transfer pricing pressures, income shifting pressure, but only to the extent to which the repatriation tax is a burden in the first place. let me be simple. yes, income shifts incentives will go up with the tritorial tax system. how much they go up is an open question, which, again, i guess i'm saying yes to you. and the question that i have these days is how ch worse does income shifts and transfer pricing get if we go territorial and lower the rate to 24%?

because the studies that i've been looking at and the studies that have been done in the past always look at territorial with the 35% rate. but if you're lowering the rate to 25%, you're taking some of the pressure off. of course, there's still 0, you know, there's still 0% taxes out there. both solutions to the international tax problem are not perfect. i like your solution quite a bit. i wrote a paper on it. it is elegant, because by getting rid of deferral, you get rid of the transfer pricing problem faced by with u.s. multinationals. that doesn't mean -- but there's -- there are two problems that we have and territorial has problems, too. but just to bring them up. what i worry about is, if we were to get rid of deferral and what we would be doing is going in the -- and i'm playing the

two-handed economist here. okay? so ife were to get rid of deferral going in the opposite direction of other countries yes, we get rid of this transfer pricing problem with our u.s. multinationals. but we're still at, you know, this 24% rate. the oecd average is 25%. are we going to lose headquarters? in other words, you're going to have foreign multinationals that are going to be able to enjoy our lower rate, okay, but not face worldwide taxation. so do we lose u.s. headquarters? and i don't have an answer to that question, but i think it's really important. >> chairman, you've given me a lot of time. and i think it's a really appropriate point as we wrap up. the whole exercise is about

incentives for an economic renaissance that this country wants so much at this ime. if you go to a labor unn meeting oer a business meeting, you can get applause for a 24% rate, you're junking jobs overseas to get red, white and blue jobs in america for incentives for bringing those kinds of operations backand having the headquarters you're talking about. mr. chairman, thank you so much for your time. >> let me just say, i used to be a tax commissioner. i used to be chairman of the multistate tax commission. i engaged in negotiations in the reagan administration on the question of multinational - these multinational jurisdictional issues. when i was tax commissioner, we found some amazing things. i'll never forget, we followed transactions of a major grain company and found that one ship of grain changed hands eight

times before it left the continentaunited states before we lost track of it offshore. saw other examples, not in my tax work, but in conjunction with the revenue service where a company showed no profits in the united states, series of transfer prices, showed $20 million of profits in the cayman islands, with unemployee. i always said that one employee was the most efficient worker in the world to produce $20 million of profits and he actually produced nothing. the only thing he produced was tax returns and corporate statements showing they had periodic board meetings to meet the requirements of that. so look, these are enormously complex subjects, but we have an obligation to short through them. i also want to commend my

colleague senator wyden. i said this in another forum. therare very few members who have come up with such significant contributions, operating with just his own staff. not a committee staff, not a committee chairmanship. and really sweep iing well thoughtout, bipartisan proposals. and he deserves krems credit for that, and i'm glad we pursued the questions here today. i thank this panel so much. you've been terrific and thought provokin provoking. the committee will stand in adjournment.

>> at 10:40, washington institute forum looked at the anti-government protests in egypt. and today's white house briefing included what's happening in egypt. the anti-government protests there and president obama's latest remarks on the situation. this is about an hour.

>> what is the president's reaction? >> the president has been updated throughout the morning on this, both as a part of his p.d.b. and written updates throughout the morning on some of these images.

obviously if any tft violence is incity debated by the government, it should stop immediately. that has been our message throughout this. i think this underscores precisely what the president was speaking about last night and that is the time for a transition has come and that time is now. the egyptian people need to see change. we know that that meaningful transition must include opposition voices and parties being involved in this process as we move toward free and fair elections. but that process must begin now.

>> we are watching as people throughout the world what is happening today. we continue to urge restraint -- i will say what the president said last night, i do think that the role -- that had been played by the military was exceedingly important in what i think many people thought might happen late last week. again, it is imperative that the violence that we're seeing stop. and that the transition that was spoken about last night begin immediately. >> on that point, he talks about the transition must be begin now, a phrase you repeated today. can you explain how this situation moves from president

obama talking about change now and president mubarak talking bp september. how is it possible to make that happen? >> let's be clear that these are very fluid and dynamic events. i think what we have seen happen over the course of the past many days quite honestly are events that many people have not seen -- nobody has seen in their lifetime. i think you heard the president last night pretty clearly and i'm certainly here to say that the conversation that the president had with president mubarak was direct, it was frank, it was candid and without getting into exactly what was said, i think the message that the president delivered clearly to president mubarak was that the time for change had come.

>> i guess i'm trying to get at the core question what this president can do about that. >> i think change in all of these instances -- what we have seen transpire over the course of many days as a result of change that's needed to happen from within the country -- i think you have seen statements throughout the world in both in the region and outside of the region where president obama and leaders have been clear about what needs to happen. many of these changes are going to have to happen on the ground in egypt and only those in egypt can determine when those demands have been satisfied. but it is clear that the egyptian people need to see

progress and change immediately. >> and finally, we have not had a chance to ask president obama questions since this crisis began. there were releases that were open to the press and why we haven't been able to ask him questions? >> you will be able to ask him questions when prime minister harper is here. we have had occasions where there are still photographers only. those are part of the coverage plans that had been in place for a bit now in terms of those events. i will say this, i think we have, like you all watched a series of rapidly moving events. you have heard from the president in what's happening in egypt and we'll continue to keep you up to date as best we can on what goes on, knowing quite honestly that some things in foreign policy have to be done

away from tv cameras. those are the types of direct and frank talks that the president had with president mubarak. >> will we be able to ask questions on egypt? >> i want to take the questions. first and foremost, these are very quick, rapidly moving events and we are watching them like you are. the questions specifically on aid, as i said i believe last friday, we will evaluate the actions of the government of

egypt in making and reviewing decisions about aid. that continues. >> hillary clinton said that wasn't under discussion. >> that's not what she said. go back and read the transcript. and said had a decision to be made to cut off and i would say no. she also said later in that answer that we certainly review our assistance posture and that's what we are doing. >> if the president said he wants mubarak to begin the transition now, would that mean leaving before september or speed up the election process? >> some of these are decisions that are going to be -- as you heard the president say, need to be made in concert with a whole host and full range of voices on the ground in egypt. i'm not going to get into a

greater level of specification as to the direct nature of the conversation that was had except to reiterate what the president said in terms of that transition beginning now. >> what's the level of contact now, is the president speaking to mubarak and has the ambassador had contact or meetings? >> he remains in the country. i do not know of plans, as i walk out here to speak with president mubarak today. i know the president did end his call by telling the president that he would remain in contact and would feel free -- president obama would feel free to call at any time if he needed to speak directly with president mubarak. obviously, there are a range of conversations that are happening throughout our government at

many levels. we have a very, very capable embassy and an ambassador there. and working on a full range of these problems. >> i assume since the crisis developed, the president and the national security team are looking at the possible outcomes each step of the way? >> i think we have done that as events have transpired and as events have changed. i will say this, i would go back again and look at what this administration or this president has said specifically about changes that need to happen to respect the universal rights that we have spoken of, both in egypt and throughout the middle east. and i would point you to secretary of state's speech in doha in outlining a series of

steps. >> what's the best case scenario here and what's the worst case scenario? >> i don't want to get into a series of hypotheticals. >> you are getting into hypotheticals. >> i'm not going to get into them here. we are planning for a full range of scenarios. i think it's important to understand -- i think it is hard to even imagine several days ago the events that happened yesterday. events across this landscape are happening very quickly and we're watching those events and planning for those events. there is a meeting that starts very shortly where we will get -- they will get into a whole range of issues. obviously we're concerned about violence that i talked about. we're concerned about reports of

food and fuel shortages in some of the cities and the ability to get what might be certain entry points and ports over to people that are in desperate need of them. >> do you think that mubarak is a dictator? >> i think that -- >> more importantly, does the president think mubarak is a dictator? >> he has a chance to show the world exactly who he is by beginning this transition that is so desperately needed in his country and for his people now. >> does the president have any regrets that when this crisis began to unfold eight days ago, his public statements were not more in line with the speech he gave in cairo in 2009? in other words, the initial comments were a lot more

pro-mubarak, cautioning demonstrators not to engage in violence? >> let me be clear, eight days later, we don't think violence -- we don't want to see violence on protestors, we don't want to see looting. >> the protestors were an inspiration. the comments on friday, they have the right to do what they're doing but shouldn't engage in violence. >> and that continues to be our posture. >> certainly -- >> i think for us to not acknowledge -- again, i don't know what you guys from a coverage standpoint predicted would be what we would be looking at last wednesday on thursday. again, we are watching events that have not transpired as they have in this region of the world in thousands of years. we have a considerable amount of

staff time that has been spent on this. some of the president's time obviously has been dedicated to watching -- watching, taking note of and responding to the events that have transpired. again, what we're watching is history being made. >> but no regrets that it was more in line? >> i think -- i think the notion that wap we have said in public and in private at all levels of our government to all levels of the egyptian government to governments throughout the middle east have not been in line with the cairo speech is simply wrong. we, in the cairo speech the president stood up for a universal set of values and actions that had to be taken by

governments. as you heard him say, they have to be responsive to their people. that is precisely what the president believes. these are not going to be determinations and i have said a few days ago, these aren't going to be made by us. no one will determine freedom of assembly and freedom of speech for those in egypt. and i don't think those are looking for us to gauge what the fence posts are on those freedoms. >> i think they want the president to be standing up for them and less for mubarak. at least that's the report any way. >> i don't know the degree to which they have heard everything the president said. i think the notion that the president has somehow shifted from one side to the other is

completely inaccurate. >> how define now, now, do you mean today, not september? >> now means yesterday, because when we said now, we meant yesterday. >> it means now ? >> now means now. the transition -- there are things that the government needs to do. there are reforms that need to

be undertaken and there are opposition entities that have to be included in the conversations as we move toward free and fair elections that we have advocated for quite some time. >> the white house then satisfied with mubarak in power until september? >> again, i'm not going to get into all the details of what they discussed, the conversation was frank and the transition must begin now. >> what was the major event that caused a shift in this administration, a week ago talking about egypt being a stable government seemingly supporting mubarak and now -- >> i don't know -- i have not been in editorial meetings at cnn. i don't know what you guys thought we would be seeing a week from now. you are asking if events changed

over the course of the week and the answer is of course. >> what is the one event that caused the shift? >> there had been a series of events on the ground that i think shifted quite frankly -- when you shift anchors into the region, that is based on things happening on the ground. events have moved enormously quickly in a very volatile region in the world. and the likes of which, we have not seen in our lifetime. that demands that we continue to watch and continue to ensure that we're taking the steps to communicate directly with all of the entities of their government about what we expect in terms of nonviolence, what the world expects in terms of nonviolence

and the steps that need to take place in order to see that transition. >> maybe i'm futting too much in here but the president talked about transition and must begin now and when you talked in, the time for a transition is now. were you ratcheting it up more by not parting the word begin in there? >> i think the events of yesterday began that transition yesterday, and i think that's -- i think that is what -- that's what the people of egypt expect. and i think -- i think the people of egypt need to see progress.

>> i'm not going to get into putting out the specifics of the conversation that was had. progress and change must come to cairo. progress and change must come to egypt and fleads needs to happen quickly. >> is there going to be a time line other than september that he has to get out if the protestors are going to continue to be in the street? >> i assume those are discussions that are being had by the top levels of their government. >> top levels by our government? >> a full range of scenarios and a full range of events are being watched and discussed in many buildings throughout washington. >> including putting more pressure on mubarak to get out? >> again, i point you to what

the president said last night. >> were you in the room with the president when he was on the phone? >> i was. >> was there some frustration on the part of the president? >> i don't want to get into reading out some of that stuff. >> do you believe president obama's communication to mubarak will have that kind of power in that situation? >> i would say we have been clear with the government of egypt about the steps that needed to take place. i think we have communicated publicly and privately important steps and important reforms that need to take place. i think it is important to understand that we are obviously

watching -- we are watching some -- we are watching the events based on what is happening on the ground there. and as i said earlier, i think the world is watching and the world is commenting on what we have seen happen and what we know must take place over the next many days and weeks. >> as far as what president mubarak did and what he will do in the future, is president obama basically calling the shots? >> again, i don't know the direct answer in terms of that, chip. again, i think at each juncture of this, we have, again, made public and private comments about the situation and what needed to have happened. i think you will hear this administration, whether it's at

the pentagon, state department, inside of this building, again continue to communicate with both the government of and people of egypt about what the world expects. >> do you have evidence or indication that some of this violence is being started by the government? >> i have not seen the latest on that in terms of whether or not we do. i don't know the answer. >> suspicion? >> i shouldn't -- again, i think what's important is that the message must be that the violence stop and that in the event -- in the event that any entity or any government entity is behind any of this, it must stop. >> some of the reporting out there indicates it is government

thugs who are responsible. >> i understand. >> did the president ask mr. mubarak to supervise the transition, did he ask him, don't lead, supervise the transition? >> again, i'm not going to get into the specifics. i think the president was clear and i think the president was clear publicly that the transition must begin now. >> senator kerry of massachusetts had suggested about a caretaker government. does the president support that? >> i have not seen exactly what he suggested. and i'm happy to take a look at that. >> did the president give any indication to mubarak that there was going to be a crackdown today? >> no. >> i understand you can't talk about hypotheticals, but did the president make clear to mubarak

that there were consequences in the america-egypt relationship if he did not take the president's suggestion? >> we have been clear with the government and the president was clear on continued stand on violence. we wouldn't have accepted anything less. again, i think we have -- i think we have made it fairly well known what we think needs to happen and what is and what is not accepted. >> have we made it clear that there are consequences if they do not? >> we talked late last week about the posture and i think first and foremost, chuck, i

think those are -- that's precisely what's happening on the ground right now. i think the people of egypt need to see change. the people of egypt need to see progress. and that's what the world needs to see. >> is there a fear that you will lose if pushing mubarak too hard, you will lose the ability to influence him? >> again, i would go back to what i said earlier, we evaluate a whole range of activities and scenarios. >> one more time, seems like you are avoiding the words. are there -- are there consequences on the table that mubarak is aware of? >> there are limits to what i

can say about all of the private conversations. >> is it clear -- >> i don't think the president could have been clearer with the president of egypt last night. >> the president last night praised the professionalism of the egyptian military. right now the military is being criticized for not intervening or helping protestors that are being brutalized. is there a sin of omission by the military and would the u.s. government called for the egyptian military -- >> i don't want to get over -- let me see if i can get a direct answer from some of the military .

>> what is the status of that review? >> i said that we would -- that review would be based on actions going forward and i have not gotten greater guidance on it from there but see if there is any review. >> you mentioned before the role of violence. do you think what is happening today is important in this review of egypt? >> any violence is and any role that entities play will take part in that. i do not want to -- i don't have anything to announce on that. and obviously, we will evaluate what has happened and the images that we see based on that. and a full range of options

going forward. i do want -- if i can just be clear and reiterate we have said this from the very beginning. the president has said this at every opportunity and every official in our government in speaking with officials in the egyptian government have used every opportunity first and foremost to reiterate that any steps that are taken must not include violence. we reiterate that call today. i think the people of egypt, they do not want to see deployments or speeches, but see concrete action by their government. and i think that's what the world waits for. >> and since the uprising, you called the egyptian government

-- the president called for the shutdown of the internet to stop. the foreign minister says he doesn't want to stop and that this could lead to more violence. do you think your message falls on deaf ears? >> not just president obama but leaders throughout the world have in many ways signaled the same call that we've made. i know this was a topic that has been discussed in some of the calls that he's had with leaders in and outside of the region. there is no acceptable excuse for not turning back on the internet, getting people the

ability to talk on cell phones, accessing social networks, and the president in calls with the government of egypt, those are part of the basic human freedoms that people everywhere should enjoy. >> do you think the government of egypt will respond? >> i think given the reports that internet reception remains spotty at the very best, they have not yet done what needs to happen as it relates to fulfilling that individual and basic right. >> following up on a question, what was your motivation for bringing up or raising the specter that the egyptian government may have been involved in incity debating trouble today? >> i think in all levels, we want to ensure that the message that is sent and the reason i

said the first message is talked about in what we say, what i say and what you see others say is the need to -- the need to respect the rights of individuals and to ensure that this is done in an orderly and peaceful way. i just want to make sure that everyone understands that the violence at any level is unacceptable. >> there are reports that the administration does have evidence that someone in authority in the mubarak government gave the go-ahead to these people. >> i'm not ready to go into this and the last meeting i was in on this was earlier this moaning. so i can go see if there was anything that i know of. >> excuse me, you have had a lot

of questions. you listed a number of things that the deputies were taking up in this meeting. would it be safe to assume they are going to talk about the very stability of the egyptian government? >> yes. i think -- we have talked throughout this process about the transition as i mentioned a second ago being peaceful and orderly. and i think stability in the country in and around the region is tremendously important, most importantly for the people. >> will there be an orderly transition? >> i'm not going to get into picking either transitional or future leaders of egypt. i think that's something that the people of egypt and a broad

cross-section of those in political entities are going to decide for their country. >> are you preparing any sort of package? >> the president said last night, we stand ready to, and i think as i mentioned earlier, one of the topics that was likely to be discussed this afternoon was what assistance needs or could be provided to meet some of the basic needs of the egyptian people, what processes can we undertake as i said, to see if there is a way to move some of those resources from entry points or ports into cities and areas that are in need of those resources. >> any idea on specifics? >> nothing that i have. >> and who else in the region

has the administration been in contact with? >> the president spoke late last evening with king abdullah of jordan. i don't know of any other calls he made today. >> can you talk about that? >> let me see if i can get more information on that. >> was the president meeting with senator mccain? >> senator mccain has a whole host of issues that arranging from domestic to foreign policy that i anticipate the two will discuss. the president mentioned ending earmarks and the actions that he would take to veto something if it came with earmarks. i remember two people standing up and clapping, senator mccain

and senator mccaskill. it was a little bit of a lonely group in that part of the speech. but i know they'll talk about that as obviously you have seen announcements made on the senate side that it appears as if we have seen the end of earmarks. senator bingeaman plays an important role in the development of ideas around clean energy and i think a large part of that conversation will center around the proposals that the president outlined to increase the amount of electricity that we create using clean energy, research and

development around clean energy and the manufacturing jobs it can create. >> the president going to make changes in the health care law? >> i think the president -- i think the president outlined in the state of the union some adjustments to the way small businesses are treated, particularly around the 1099's. but we are not not going to go back and fight the battles of the previous two years and we are certainly happy to talk to those who want to see the law improved. but we're not going to go backwards but move forward. >> do you think the president believes this is helpful for

this and the president going to speak about other dictators in the future? >> let me speak broadly to this in the sense that you have heard the president now on two occasions talk quite clearly about what is happening in egypt. the obligations and responsibilities that those in power have to those that they represent. i think you can go through a whole host of our discussions on both a public and a private level with leaders throughout the world about steps that we believe need to be taken to improve human rights, to improve basic rights and to uphold

individual liberties. those are discussions that the president will continue to have in public and private with leaders throughout the world. >> wicky leaks has not been -- >> i'm sorry? i'm not a document veer asity person. >> in the election, the president would like to see if they were truly free and fair, islamic fundamentalists come to power. >> we are getting way ahead of the process and -- we need to get the transition going to get

to the point of free and fair elections. i don't want to get into hypotheticals about what if. i think what we would like to see is a continued stable partnership with a country that has played an invaluable role in providing some stability to a volatile region in the world and that we would expect that a government -- whatever government comes next, that that government respect the treaties that it has with the previous egyptian governments have entered into. >> be careful what you wish for here? >> again, we are looking at a lot of different scenarios. >> on israel, do you have any special concern with particular

coordination with israel and still pushing for the peace accords? >> first and foremost, consultations -- we have had consultations, as you know between the president and the prime minister over the weekend. our position has not changed about either our involvement or the benefit of comprehensive peace in the middle east. >> when you talk about your support for a transition, is this based on what people want on the ground. if you listen to the chants, they are saying president mubarak has to go, not in september, but tomorrow. >> again, i'm not going to get into the very specifics of what

president obama and president mubarak talked about. i would direct you to what he said about the timing of that transition and as he has mentioned now, both in washington, speaking about cairo and in cairo speaking about the broader middle east that we hear and respect the aspirations of those throughout the world to seek greater opportunity, to seek greater freedom and the promise that it holds for them and their families. >> one more thing regarding the ambassador, are they still in touch with president mubarak? >> he is still in touch with all levels of the egyptian government. >> does he need to go back and talk to president mubarak?

>> he will speak with all levels of the egyptian government. we asked him to go. he is an -- a respected ambassador and provides us an opportunity to to speak directly with the president. >> two other things. was the president angry this morning when he saw the violence in cairo? it does seem that there has been some change in marching orders to the police on the ground? >> i think the president found -- found the images outrageous and deplorable. everybody did. >> and do they seem to be a message of some kind about the interactions between the administration and mubarak yesterday?

>> i don't understand. >> is it a reaction to the president's remarks? i need to follow up on what you said about the message to the allies or u.s. friends in the region. is there a suggestion in these conversations that there is a template for other relationships between the u.s. and leaders in the region in what has transpired between president obama and president mubarak? is the message that, look, these ideals are important to the people. you just said -- you were talking about the obligations of those in power? is that part of the message? >> as i have said here for many days, i don't want to -- you have different countries throughout the region and different stages of their political development.

but regardless of that, as the president has said and as i have said, there's a responsibility to be responsive to those that you represent. the conversations that the president has had with allies or partners in the region have continued to reiterate what we have said in bilateral meetings or in conversations that the president has had previously about the important steps that need to take place to honor and adhere to the individual freedoms that the president has talked about. and those have continued to take place, but haven't started as a result of this. and again, i think it's an earlier what the president has said in these individual meetings and particularly what secretary clinton said in her

recent speech. i think provides you some pretty good road maps to what our feelings are as it relates to what countries need to do to respect those human rights. >> robert, you used the word transition about 15, 20 times today. in terms of a definition of that term, is the definition of the term transition a government that does not include mubarak? >> i think what president mubarak said yesterday. he is not going to be the next leader of egypt. i think that was clear. >> now versus september transition. does now mean -- >> i'm not going to get into more specifics about what the two presidents spoke about. >> you mentioned a couple of times that we are having discussions with all levels of the egyptian government.

are we speaking with leaders in the army and what are we talking to them about? >> as i have talked about over several days, admiral musclen has spoken with his counterpart, secretary gates has spoken with his counterpart. officers throughout the command ranks have spoken to their counterparts. the importance of robust military-to-military contact. being able to have the relationships and the knowledge of who you're talking to and who you need to talk to in times of great crisis. and i think it's safe to say, again, each and every one of those conversations starts out with a conversation about restraint and nonviolence. and that's what the president

spoke about yesterday. >> do you think those contacts have helped restrain? >> i do believe they have. >> following up on questions, the military-to-military communication, were they in communication when the military could or should step in? >> i'm not going to get into that? >> with emotions so high, realistically what do you think is the time line? >> i don't know the answer to that. i know it is within the power of all of those involved to step away from that violence. that -- and i said very early on in this that the legitimate

concerns and grievances of the people of egypt are not going to be addressed with violence or by violence. and it is our hope that we saw today we won't see tomorrow, friday or into the weekend. obviously, this is -- this is going to take -- this is not all going to be wrapped up in a matter of hours. it's going to take some time, regardless of the amount of that time. it is tremendously important that restraint and nonviolence carry the day during this important transition. >> and also domestically, we are seeing a major storm hitting this country. could you talk to me about

economic impacts, what americans should be expressing, power is out in some places? >> i would say a couple of different things. each of the past two days, the president has spoken directly with fema director on the preparations that we are assisting with across a number of states that have been affected by the breadth of this winter storm. i think you got a readout yesterday that indicated that fema had coordinateors on the ground across the arc in the country of where we were predicted to see that winter weather. they spoke again today. the president received another update. i believe the fema director was going to do a briefing on camera today to talk about some of the

preparations that have been had as we assist state and local entities and as we help businesses deal with the repercussions of losing power. obviously, we anticipate that we could see appeals for disaster declarations, again, which come from the state level, up to the federal level. i think at this point, it's hard to make some broad macroeconomic determinations about the impact of this storm. obviously, we have had tricky weather for this time of the year for many weeks, how that affects some economic statistics or hiring certainly remains to

be seen. >> airlines shutting down -- >> i would point you to d.o.t. and f.a.a. for the particulars of that. obviously, some of the pictures that you see in places that are used to dealing with pretty tough weather dealing with snow on the magnitude of 20 inches. it's a stunning thing. >> president talk about chicago today? >> he did remark -- my son gets excited any time it turns cold because there is a decent chance he won't have school. [laughter] >> he did remark this is the first time in 12 years that kids are sharing that same feeling across the city of chicago.

[inaudible conversation] >> i wouldn't rate that answer. margaret. walk outside of the -- >> you think rahm is going to -- >> if you are listening. >> does president mubarak say how he would commit to nonviolence? >> the president reiterated that any action -- any event should take place with the same restraint and nonviolence that we have seen. as i have said to chuck, we received no indication on that call about any action that might

take place. >> either he didn't explicitly commit or you don't feel comfortable saying. >> again, the president reiterated our strong call for nonviolence. >> my second question, was there any debate internally yesterday about whether president obama should come out and make public his remarks? and what do you hope that we can do domestically that we know internationally what the source of his message is and what does president obama want americans to hear about his leadership, about his command of foreign policy and anything that happens affects us? >> the three scenarios that you just outlined, i have not heard the discussion in the first two in terms of dealing with events. we have had -- and we have

talked about this. we have had an extremely important partnership the past many years with egypt, providing the cornerstone for stability off of the camp david accords. so i think there is a great imperative that the relationship that we have with egypt and with countries throughout the middle east, again, those are important relationships. we seek to bring again stability and peace to that region and we seek to engage all of those entities in bringing about comprehensive peace to the region. i think that outweighs any particular administration and i think that's what people

throughout the world expect to see. >> i don't want to take a lot of time. if you look at the polls, do you think that the average american makes a connection between the state of egypt and the state of the united states? and what is that connection? >> you know, margaret, i don't think -- i don't think anything that's happening is going to change that whether it is their personal economic situation -- somebody just asked about the weather that is a great cause of concern for a huge swath of this country. but we understand what peace and stability and we understand what uncertainty and instability

bring to the global economy and the global economic recovery. so i think this is an administration that obviously has spent a considerable amount of time working on the storm, on egypt, but continues probably the majority of what we're doing, to work on aspects of the economic recovery. >> one of the partnerships with egypt is counterterrorism. is there concern that this is going to undermine security in that area? >> we have an important partnership with them. and with a number of countries throughout the region. and obviously not just that, but a whole host of issues like that. we are monitoring very closely.

>> there was a report giving rather extensive descriptions of the builtup of the crisis over the last few decades, indicating the deregulation and particularly the revolting of the legislation which built a firewall between commercial banking and investment banking was the cause of the buildup of this bubble. given the fact that you did not go back to the legislation even though there was discussion in congress and large number of congressmen who were supportive of that, given to believe that the house and white house leadership was not in favor. now that the report is out, now that the unambiguous conclusions are drawn, would it not be feasible to go back and relook at this to create the kind of firewall? >> i think that the steps that

this administration has taken and the time that we have dedicated to the passage of financial reform in enshurg that there are commonsense regulations that thing never happens again, i think the report underscores that well do that. we have put in place resolution authority. you have seen the beginnings of the consumer protection bureau, the volcker