leadership to articulate the demands and symbolize the hopes of the people. even gorbachev said that without the drug yeltsin, we would not have made the transition there. i think the u.s., when the ambassador reached out to elbaradei yesterday, beginning to try to let them -- legitimize a leader who the military and the opposition could negotiate with. just because we blessed does not mean that the people themselves will accept it. the challenge now as long as the situation persists, it is leading fort maximum demands on the part of the protesters. even at leadership emerges, he cannot reach a deal with the regime. .

the national democratic party and voices of the ministry of the interior -- they will not go quietly into the night. if you look at the transitions

in central and eastern europe as well as the former soviet union, the communist party was wise to have a strategic retreat, reconstitute itself, renamed itself, try to secure economic opposition to the economy, and if you look across the region with respect to the former soviet union, piquancy have his forces were able to reconstitute themselves and, over time, we assert themselves. this regime and bodies -- embodies an mdp and does not think that this is over. what we see today with the ministry is that they are trying to win over the military.

they are trying to provoke greater violence and instability -- the military has allowed pro-mubarak protesters to seize military vehicles. what happens if they are saying -- what happens if they start firing on crowds? what if the military is no longer seen as being neutral? can it be a legitimate partner for the people of egypt? i will close with my bottom line. i think time is running out for the military to make the decisions they need to take. i think they have already fought through some of these things. their credibility is on the line. they had to move farther and faster and make it clear to all egyptians that the mubarak era is over.

otherwise, i think, is it will slide increasingly into violence and instability. thank you. >> thank you. >> hello, everyone. thank you for the kind introduction. i am here to qualify the situation. the dynamic is changing at the speed of light. bear that in mind. let me give you an overall idea of how things stand which is evolving very quickly. you are seeing protestors -- we have to qualify that. i am it sure many of you have been falling the political landscape are aware of some of

the egyptian ministry of interiors tactics. what we are seeing in the streets unfold today is a manifestation of some of those tactics. i think everybody has a hand out. it is an official ministry of the interior document. this is essentially tactical instructions for security forces that tell how to deal with the protesters. some of the things to highlight here include employing a number of thugs by central security forces to intervene in the protests to confuse the situation as far foreign media. cutting off all means of communication. we have seen internet service

extremely spotty at best. even mobile phone service has been cut. it is back on today. our main state security agents and police forces youth -- use sticks, nice, and iron rods. they cannot be identified as police. new the qualifier that production abort protesters often use these elements. that is what we are seeing on the street today. i want to give you a picture of the players on the ground right now. first we have the national association for change which is the umbrella organization founded by the former chief of the atomic energy association.

he is a well-known to the international community. there are some reservations about his claim to plead egypt both nationally and internationally. he is potentially lacking in charisma. internationally, some of his positions when he was in the i.a.b.e. he is someone who can be a consensus builder at this time. you may recall the opposition leader was subsequently imprisoned. the koptic leader of the mass movement that led major street protests in 2004.

the national association for change has been in existence for a couple of years. most of what they have been doing before this disaster is petitioning for basic constitutional amendments. they gathered around 1 million signatures for that petition. that was superseded by the events of last week. you also have to be aware of the people's parliament. it was supposed to be a parallel parliament that was set up in 2010. it was designed as a protest parliament to respond to the great deal of fraud concerning the national democratic party. it is comprised of 100 members.

it consists of some of the traditional opposition players. it also includes the muslim brotherhood. you have an opposition coalition that is being performed as we speak. this includes -- i am get calls and information on this. this includes some of the traditional opposition players and some of the opposition parties that may be viewed as proactive. they have been tolerated within the parliament four years and years. that includes the leftist party and the national association for change. so far, not the muslim brotherhood.

that could be changing very quickly. what is this opposition coalition doing? they are trying to reach consensus over who can negotiate with president mubarak and how we should do so. we are already beginning to see changes in the movement. they are calling for immediate negotiations with president mubarak's son. they are insisting there will be no negotiations until mubarak departs. they are specifically requesting that mubarak hand over power now and proceed to dissolve the parliament, which is seen as illegitimate. that is what they want. there is another group forming

of 10 public figures including a businessman and billionaire and other public figures. they are calling for the dissolution of parliament and for new elections. what does this all mean? how does this resonate with what is actually going on in the streets? the protest by in egypt, with the exception of today, have been by and large peaceful. you are seeing a response to orchestrated violence. they have been by and large spontaneous. they lack central leadership. this is simultaneously a weakness and a strength. they will have to some time evolves into a political panel.

how did they come about? these mass movements started with organizational and tactical support by central media. it is not clear at this time just to the masses in the street support. it is not clear that they are embracing this opposition coalition that is being formed. the opposition coalition could be turning a profit, riding a wave of something they themselves did not initiate. this is generally viewed as a people's movement. some of the figures are not people that the people trust. this is a problem.

right now, mubarak has a essentially promised for thanks. to not run again during the scheduled elections in september. he does not want to dissolve parliament. there are reasons for this. if a new parliament is elected, it is likely they will withdraw conference from the government and the president. this is why he does not want to dissolve parliament at this time. he has, however, promised to look into things that have been submitted to parliament. this is important. what he is essentially a promising is that there could be a shake-up of the parliament right now, resulting in a third of the seats going to the opposition.

this is not insignificant. he has also promised, with the new parliament and the contested seats going to the opposition, to amend the constitution. specifically, he has promised to amend article 76, the governing the proposition to run for president and instituting a presidential term limits. this, again, is not insignificant. he wants to ease the conditions for independent candidates to be able to run. finally, he has promised to hold free and fair elections. personally, i believe the current prime minister will be running to ensure some continuity. as i already told you, the

security thugs, if you may call them that, are back out on the street. they see it as an imperative to deflate the protest on the street. this would certainly ease the situation. they have had to play a very delicate balancing game. they do not what the board to lose its credibility in the eyes of the people. as scott told you, every minute where violence is being made outside the regime -- the military's stance by and let this happen. the situation becomes very volatile. this is forcing them into a corner. the continuation of strong and mass protests after mubarak's

speech does the military in a very tight spot. i know there are a lot of concerns and questions about the government's role. like many of these traditional opposition figures, they are seen as riding the wave a little too late. they are taking advantage of what has been a people's revolution that has focused on national demand, economic progress, political reform. we have seen very little in the way of religious protest. we are hearing reports that it is quite the opposite. calls and slogans have been rejected, largely by the people.

what is the muslim brotherhood doing right now? >> they are being cautious. they are standing by and watching the situation unfold. they are possibly hedging their bets by maintaining their independence by refusing to join the opposition coalition i discussed earlier and waiting to see how things play out. they may join the opposition coalition. we do not know. so far that has not happened. it is in their interest to wait and except mubarak's confession and try to regain sees in the parliament so they have a voice that way. the association for change is saying they are not willing to negotiate with mubarak because

they do not trust him. he has said he would try to reassert himself and his security forces. the security apparatus of the state remains in place as does the parliament. the shakeout that mubarak has proposed in parliament is insufficient. i will leave it there. i will entertain any questions you have. thank you very much. >> thank you very much. david? >> we are pleased to be with you here today. i have been updating my study on egypt in transition. that there is any word to describe the inner workings of the egyptian armed forces, it is hate. we talked to a former u.s.

military attache. he says the simply -- he says the same thing. the u.s. has little visibility in the egyptian armed forces. egyptian officers are quite disciplined. as a result, even though there have been dozens of u.s. officers working at the embassy, even though they have conducted large-scale military exercises, even though we have seen hundreds of egyptian military officers every year, we still do not have a great sense of what the egyptian army is thinking. this does not mean we do not have good relationships. until recently, i do not think we have had much idea of the military's thinking on the future direction of egypt.

since the deployment of the military in the aftermath we have learned a few things. not surprisingly, the army has not opened fire or taking -- or taken other repressive measures. the military is not general security. it is the most respected of egyptian institutions and they want to keep it that way. as time goes on, it is becoming more tenuous. second, the army is in charge. i do not think that is a big secret. it is the only functioning national institution in egypt. it is not president mubarak, it is not a marked so and then -- it does not owe momar suleiman.

as such, the military will be in a key position. they will be the arbiters of here. it is difficult to imagine that president mubarak could have given his speech like he did yesterday knowing the negative response without the backing of the military. the armed forces col of protesters to go home for the sake of bringing back stability. these things we know. other important questions about the military remained unanswered. what are the sympathies of the rank and file?

they faced the same frustrations as any egyptian. will they follow the chain of command? the egyptian molitor it -- military is not a monolithic. they may not respond uniformly. historically speaking, cohesion within the military has been considered the strength of the egyptian armed forces. how far will the senior military leadership go to protect president mubarak? there is a long, residual oil to mubarak. the military benefits a lot from the current regime. when will the military pull akinesia it? we will late -- when it will be military pull a tunisia? how will they respond if new --

if mubarak least but the demonstrators continued to reject omar cell and thsell the? the minister of defense served by it -- served as chief for 20 years. he participated in a meeting with the president and his new government on january 31. he has largely stayed out of the public eye with the exception of a brief visit to the square on january 30. he has stayed below the radar. according to the gulf newspaper, he told the soldiers,

according egypt needs you." p.s. 75-years old. chances are he is probably too close to the regime to survive the transition period in terms of the military leadership, the real story has been anan. one leftist paper wrote a profile and noted he was a top candidate in egypt. in addition, sulieman was too close to the pentagon -- pentagon, to close to the cia, to close to israel, and had too much animosity towards ham as. many in egypt credit anan with

been the driving force for neutrality. according to a paper, anan refused a border from mubarak. he fought during the war of attrition in 1973. he is widely held for his role in leading a unit that establish security for the area. anon was appointed head of the air force in 2001. he was chief of staff in 2005.

the general suleiman was recently appointed to be vice president. he is not a member of the mubarak party. it is likely that he may not survive the transition. that is if the opposition goes with the maximum. in many ways, the least well known of the key personnel is the former air marshal to recently served as the minister for civil aviation in egypt. in april 2010, an article caused a stir when it mentioned him as a potential successor. this was in april. in addition to being respected by the business community for

overhauling the cairo airport, he served in the war of attrition. spicing up his resonate, while serving in italy in 1985, it appears he orchestrated and -- the extraction of terrorist from the nato air force base and gave him up to be removed. in october 2010, he also reestablished egyptian air links to tehran that had been severed for 30 years. he also may be tainted should the regime finally collapse.

during much of his 30 years in power, the deputies around mubarak have been military. ties run deep on a personal and professional level. their commanding officer could potentially prolong this process. at the same time, without new board, they are likely concerned about the opening of egyptian political system for free elections. some leaders have resigned and gone into exile. it is unclear whether sunday the party will be resurrected. as such, the standoff on the

nile may persist even if mubarak does. thank you. >> thank you, david. to state the obvious, there has been a breathtaking speed of evolution in u.s. policy towards egypt. the secretary of state said that did mubarak regime was stable just two weeks ago. president obama says the transition these to start now. this is not only the most serious foreign-policy challenge for the administration, it was unforeseen and unlikely. it is not some crazy north korean actions or a terrorist attack, both of which we prepare and plan for. this, the swift, almost

overnight demise of the mubarak presidency and possibly this fundamental change in the regime -- this is a challenge that was not really on anybody's radar screen just two-weeks ago. in that context, i think president obama and his advisers generally deserve high marks. at a time when we have been caught off balance in some of our statements -- we can get into that later if you like -- on balance, we have to find a policy and see it through. at its core, this is an evolving situation, the course of which the united states can only effect on the margins. if anything, it is that principle where we are testing

american standing an american statements. it may be a bit risky. we have seen the president and his advisers advice and implement plans, revise their plans to changes on the ground, and we have seen a two-fold step. it is bold and risky. let's look at where we stand. should embark stay or go? that question -- should mubarak stay or go? the question has been answered with outstanding clarity. he should go. there is no feature any longer for him as president of egypt. there is also a question of time. mubarak has asked for eight more months. the president's statement stopped short of saying he should resign immediately.

he said the transition needed to begin now. in my view, however, mubarak said at 6:00 he would stay for eight more months and the president said the transition needs to start now -- it is more powerful than the new lots of words. -- nuance of words. the word "now" will translate very simply into arabic. that is the message i think people in egypt would take away. however it may have been intended -- in that sense, every

day that president mubarak stays in office, starting with today, is a rebuke to president obama. president mubarak may decide he wants to stay a little while longer to make the point that president obama cannot push him out. this leads to another question -- the role of the military my colleagues have focused on so much. i have been following this issue quite unsatisfactory for more than 20 years. i read this massive tome in 1988. the basic point is that mubarak changed the role of the army. sadat made the army a much less important political feature.

mubarak change that. the rejuvenated the army and made it central. as the one commonly respected institution left in the country. as david schenker said, it is still true that this is an institution of which we know remarkably little. we did the egyptians billions and billions of aid. there are huge parts of this institution that had been off- limits to americans -- contractors that have been totally off-limits. we need to taste a huge dose of modesty with any claim that we know where the egyptian army is going and whether there is unit

loyalty and discipline up and down the ranks. still, the military is an institution that is respected. this is why there is a tug-of- war for the control of the military. army, air force, intelligence -- bringing the service is closer to him. the military has refused to shoot on citizens. the -- our president praised the military for their restraint and behavior. each side is appealing to the military. for one, stay the course. for the other, do the right thing.

the military needs to decide cent. every day there is no action, the institution is implicated deeper and deeper into the regime and they lose their teflon image. every day without change erodes america's weakened image even further. the nisei word that u.s. aid. some have argued for suspending all aid now. i understand the objective, but i disagree with the prescription. the best agent for peaceful change is the military. this is simply the reality. this is the institution we want to stay in contact with and what to and influence. the idea that we gain influence by cutting off assistance may sound convincing, but i assure you, it does not translate well

into arabic. i think the administration is correct in maintaining economic assistance and military assistance until we have clarity on the ground. there is always a moment. the moment may be coming sent. if the military decides it will shoot protesters, that it will side with mubarak, there is always a moment in which these decisions are being made. to suspend aid before them only deprives us of the limited leverage we may have to move the situation in a better direction. what this transition name? this is a question with no clear answer. i am sure it is something different for sulieman that it

is for the muslim brotherhood. someone who is neither from the national security establishment or someone who is not a pro- regime public figure, i find it difficult to see a non-raceme figure to emerge -- and non- regime figure emerge as the national leader. david just mentioned the prime minister. perhaps they are focusing on the question of whether or not mubarak will go so that when the decision is made, a sigh of relief will enable one of their kind to fill the void -- there will be greater risk --

acceptance of one of the pro- regime members to fill in during the transition. a word about the bigger picture -- this is huge. even before this week's events, the united states was on a losing streak -- 119, syria, the peace process, which president obama claimed was a top priority, was stuck in neutral. it does not stack up against that monolithic of embarrassments and defeats.

then comes this, shaking the foundation of our pillars. i am not of the view that this is the disaster in egypt that some fear, nor is it necessarily the dawn of a new day that some hope. on the plus side, the protests have been anti-mubarak, not anti-u.s. or anti-peace. all the negative, the leadership for the opposition could open the avenues for more radical elements to fill the void. the muslim brotherhood is not the march of dimes that some analysts make it out to be. they will exploit opportunities with the opportunities are available for them to be exploited. it is not as though they have renounced violence or their goals to change the political

system in egypt voluntarily, but only as the result of the regime's compulsion. they may not result as a dominant force. we certainly should not base our policy on that expectation less a come to pass. some changes are surely in order matter what happens. the most important of these changes is that the certainty of egypt to play a regional role in the acceptance of egypt as america's pillar. there is no arab state capable or willing of projecting power more with us. it is true that is a's projection of influence has grown. no other state could come close to egypt. perhaps with the right

transition to a new leader, one that sees value in a partnership with the united states, and especially one who has the support of the majority of its people, we can marry those two principles. i do not think that is impossible. perhaps it could be rejuvenated. but it will take time. in the intervening time, other events, as the british prime minister once said, other events will occur and we will be without someone we counted on for 30 years. this focus on more specific issues during the question and answer period. please make your questions brief. the microphones are on the table in front of you.

>> two quick questions for anyone who wants to give a response, one is a regional implications beyond your last comments about u.s. pillars. there have been comments from some muslim brotherhood officials, let's say an olive branch to the regime -- what do you make of the idea that silly mulieman --

>> let me say one thing about the regional. it is easy to fall into the notion that there is a series of dominoes falling, heading eastward. i think that analysts look at this country by country and get the local situation to assess the ss the regime has, the nature of the opposition. there is certainly a regional context to what is going on. i think that we should -- cooler heads should prevail in terms of our analysis.

in that regard, the situation is different than what happened in tunisia. in egypt, -- i think that accurately sums up the situation. it is different. the human situation is very important. people are focused on it. it is not of the same level and depth of popular protest. the regime has other assets at its disposal. the yemeni situation is very different than egypt. my sense is that other countries

to look for are the republics rather than the monarchies. i will look at sudan and algeria for potential for these other sorts of actions. last weekend, protesters were arrested well in advance of the protest. that is a whole different discussion. >> the muslim brotherhood is reacting to mubarak's speech

where there was an implicit threat. he said it would not be open indefinitely. the brotherhood knows that they are the ones the regime could come down hard on. they want to make sure they get a piece of the pie, too. they understand that this revolution of the street is not about them. they also understand that the world, and especially the west, fears of them. they understand that the military has not defended mubarak. what does that mean? it means the mubarak scenario will play aout.

they will want seats in the parliament. they will want to win part -- wind power that way. >> i just added -- one to add one thing. the muslim brotherhood has a need to see the military discredited. by taking up a flexible position, they may be extending this. >> mubarak has been credited for keeping the peace with israel for 30 years. what do you foresee with a new

government dealing with these issues? >> on the peace process, first of all, this is total speculation -- my sense is i doubt that the successor government will see the abrogation of the treaty. national security is to build-up in maintaining the auspices of war with its neighbor to the north east. other than maintaining the cold peace, there are a few other things that could change. two that might is the opposition of the q.i.z. if it benefits to a great degree.

one could argue that if you have an egypt looking to maximize its own interest, they would maintain it. opposition to the sale of gas is one of the very few items that egypt's opposition parties all agree on from left to right. they have all called for the cessation under oil to israel. the biggest place we may see a change is on gaza. the egyptian government has been a quiet partner with the government of israel in maintaining tight control of gaza. it is been heightened significantly by the egyptians in the last couple of years. there has been a much improved effort that border control. ever since the episode of

february 2008 when the border opened and a couple hundred thousand palestinians came in and scared the daylights out of the egyptians, they tried much harder to maintain security at the border. generally the idea of what the egyptians is -- the common view among egyptian elites is we should do everything we can to stop the import and export of weaponry. there will be an effort that will cause a great deal of concern among the israelis. they are thinking about different ways to deal with the border-security regime. there's an expectation of change on the egyptian side. >> regardless of what happens,

this is a country that will be remarkably internally focused. my opinion is that this is a state that has been dramatically weakened in recent years. whether you are referring to egyptian and fuss over palestinians, it is practically nonexistent in recent years. egypt can no longer intimidate a state like rwanda for giving them the nile water. this is a different -- we're talking about.

-- this is a different egypt we are talking about. >> [unintelligible] i am asking about the likely israeli policy reaction. the government and spokesman have been worse-casing it. will they take advice from time friedman? -- tom friedman? >> the israelis were quite quiet on the public realm. privately, they were expressing great concern about egypt.

the president releases for statement on the subject yesterday. i think the likely israeli view is not to be risk-taking on other fronts when the southern front is, itself, just become a question mark for the first time. i think it is more likely than not that the israelis wait to assess what this impact has on the overall picture for israeli national security. i should say that from the israeli perspective, the importance of an egypt that continues to meet international obligations is eminently usable and disrupting the israelis project abroad.

the israelis were quite smart in not being public about what is happening in cairo, but the idea that whatever regime is it's the international commitments is something we should all be concerned with. i think the israelis will follow advice, hawker down, and dust the files on what the egyptian front looked like 30 years ago and see if they had to make their own security decisions. >> i would also add that regardless of what the successor regime is whether it be liberal or islamist, egypt and israel

have shared quite publicly this common thread to the point that in recent years egypt has allowed the passage of the israeli missile cruiser to go from the mediterranean into the red sea. we wonder whether that type of cooperation will continue. >> in the back. >> thank you, very much. >> could be speaking to the microphone. >> [unintelligible]

omar sulieman is 62. the chief of staff is 54. all of them are students of mubarak. i was told yesterday that no one will tell mubarak that he is over. [unintelligible] the you expect the guy that can make this process much easier? >> i do not have any special insight. mubarak said in his speech that he would die in egypt.

whether he stays in egypt to die on allied ground is a concern. there is going to ultimately be a realization or agreement among all the top commanders. egypt is degenerating into chaos. it is not necessarily because of the regime. it is because the army had been baking bread for the last two years. egypt is the world was the

leading wheat importer. the underlying problems of egypt are exacerbated by what is happening right now. definitely somebody will ultimately step in. who knows? maybe dina knows better than i. >> i have no idea. >> nothing has changed. nothing fundamentally, structurally has changed yet. i think the fact that mubarak -- this is just another survival strategy. if you give him another eight months and the regime another eight months, trust me, you'll see people hugging mubarak and the regime will reassert itself. nobody has been killed yet in the regime. mubarak is not dead.

sulieman is not dead. the protesters have remained largely peaceful. this is a critical moment. the united states is now on the record for a transition to happen. >> i only have time for a couple more questions. yes. . .

the united states was doing very little with anyone. this emerge quite spontaneously. i am very thankful we have been investing in this sector.

last night. it had to be on the presumption face on the analytical conclusion that a senior element in the military war on the verge of taking over president mubarak. it was based merely on the help that the military would be taking the measures sometime sen. it might even be shooting a bullet prematurely. i can only assume this.

they were on the press of this of that step. the encouragement of the president would be one added measures to help them make back. they said they can stand the virus taking place. we repeat our call for restraint. we will not even in debating the need for action. we are at that moment. i'm going out on a limb.

>> we will see whether turnoffs our partners filled irresponsibility we hope they will fill. thank you for joining us today. [captioning performed by national captioning institute] caller: [captions copyright national cable satellite corp. 2011] >> the ceo of dell and ibm give their recommendations of cutting the budget fide.

we will talk did the national journal correspondent about this. the university of pennsylvania law professor and the possibility of state governments declaring bankruptcy. "washington journal" begins live at 7:00 a.m. eastern on c- span. this is all available to you on television, and social media networks. we take c-span on the road with our digital vehicle. it is washington your way. it is now available in more than 100 million homes after hearing

the budget committee about possible changes, it includes them. they are knowledgeable about tax

reform. they enjoy credibility. the director of the tax policy center is someone that is familiar as well. we expect his advice. the professor of economics testified before the fiscal commission. in the ceo of the lindsay the group. let me give by reviewing the state of our fiscal affairs.

there are additional policies at it in. additional policies added in, those policies that are most likely to be adopted. we all know that cbo does not do a forecast of what might be adopted. they do a forecast based on current law. then we try to add to that things that are most likely to be adopted to get the most realistic look at where we're headed. that shows that due to passage of the tax exception package, cbo is now expecting to see deficits of more than a trillion dollars a year continuing through at least 2012. it then shows the deficits will briefly fall before rising again as the bulk of the baby boom generation begins to retire and health care costs contue to

climb. if this isn't a sobering picture of where we are headed, i don't know what would be sobering. make no mistake, we are at a critical juncture. we are borrowing 40 cents of every dollar that we spend, spending is at the highest level as a share of our economy in 60 years. revenue is at its lowest level as a share of our economy in 60 years. many of us believe that tax reform must be part of an approach to addressing our fial problems. the current state of the tax code is simply indensible. our tax code is out of date and clearly hurts u.s. competors. number two, it is hemorrhaging revenue. the tax gap, tax havens, abusive tax shelters undermine the

effectiveness of the t code, depriving the treasury of revenue. i believe the combined effect of the tax gap, offshore tax havens, abusive tax shelters is leading us to lose more than $500 billion a year, more than 500 billion already dollar a year. in addition, the tax code is riddlewith expiring provisions. this creates enormous uncertainty for citizens and businesses making it difficult for them to plan. if we took steps to simplify and reform the tax code, we could reduce tax rates below where they are tod and still get more revenue. let me repeat that. if we were to broaden the base and fundamentally reform the tax system, we could actually lower rates helping america be more competitive and generate more revenue.

along with lower tax rates, tax reform wou then allow us to increase revenue to help reduce the deficit. i think we also need to be realistic about what is necessary to meet the needs of the nation. and return the nation to a sustainable, long term fiscal trajectory. looking at revenues has led some to argue that revenues should be held at the historic level over the past 40 years. about 18% of gdp. revenues, i want to point out, at that level, would not have produced single balanced budget in all of that time. because spending exceeded 18% of gdp in every year. in fact, on the five occasions when the budget has beenn surplus since 1969, revenues have ranged between 19.5% of gdp and 20.6% of gdp.

it is this higher level of revenue that i believe provides a more useful guide post for what is needed. if we hope to digurselves out of the fiscal hole and set the budget on a sustainable path. let me indicate that would mean we would have to have very significant cuts on the spending side, because we are well over 21% of gdp on the spending side. we are over 24% of gdp on the spending side. tax reform gives us an opportunity to lower tax rates at the same time we are raising revenues. tax reform achieves this goal by broadening the tax base, by eliminating or scaling back so called tax expenditures. tax expenditures are all of the deductions, exclusions, credits, set jasides in the tax co. they are costing the treasury more than a trillion dollars in revenue a year. that matches all of domestic

discretionary spending. many are no different than traditional spending programs. they are simply spending through the tax code. here's how well known conservative economist martin feldstein described it, "this is from martin feldstein, cutting tax expenditures is really the best way to reduce government spending, eliminating tax expenditures does not increase marginal tax rates or reduce the reward for saving, investment or risk taking. it would also increase overall economic efficiency by removing incentives that distort private spending decisions. and eliminating or consolidating the large number of overlapping taxased subsidies would also greatly simplify tax filing. in sort, cutting tax expenditures is not at all like other ways of raising revenue." i think this is a critically

important point. the president's fiscal commission of which i was a member issued its report last december. i believe the tax reform may be the most important component of the fiscal commission's plan. here are the key elements of tax reform included in the fiscal commission's plan. one, eliminates or scales back tax expenditures and lowers tax rates. this promotes economic growth and dramatically improves america's global competitiveness. it makes the tax code more progressive. the commission's report included an illustrative tax reform plan that demonsates how eliminating or scaling back tax expenditures can lower rates. instead of six brackets for individual the plan includes just three brackets of 12, 22 and 28%. the corporate rate would also be reduced from 35 to 28%. helping improve the competitive position of the united states.

capital and gains and dividends are taxed at ordinary rates. the mortgage interest and charitable deductions will be reformed better targeting these tax benefits. the child tax credit, earned income tax credit would be preserved to help working families, and the alternative minimum tax would be repealed. that is the kind of tax reform that i believe we need to adopt. the commission plan was also important because it showed how to reduce the deficit and debt in a balanced way. it included cuts in discretionary spending, entitlement reform and tax reform. you need to have those three fundamental components to be successful. at least i believe that that i the case. in total, about two-thirds of the deficit reduction between 2012 and 2020 in the plan resulted from reductions to spending. proposed snding cuts were significant. i would even argue on the

domestic side, probably wentoo far. taking revenues out of the equation would have made it impossible to attain the desired deficit reduction goals. cutting spend iing alone or as some wld suggest, only cutting nondefense discretionary spending would require such draconian reductions that they simply could not be sustained. let me just conclude on this chart. chairman ryan's road map that he has laid out, this is the chairman of the house budget committee, i believe proves the point that he revenues have to be part of a plan toeduce the deficit and the debt. he proposes discretionary and mandatory spending cuts but actually makes things worse on the revenue side. the result is that his plan increases the debt as a percentage of gdp for the next 30 years. in fact, he doesn't achieve balance for 53 years.

he does not achieve balance r 53 years. he dramatically increases the debt, both in collar terms and as a share of gdp. to solve the long term challenge, it will require real compromise and a great deal of political will. we need everyone at the table, and we need to have both sides, decrats and reblicans, willing to move off their fixed positions in order to achieve a result important for the nation. we cannot continue to put this off. we need to reach an agreement this yr. it is time, i believe, for the administration, leaders of congress, democrats and republicans, to sit down and hash out a long term plan. we'll now turn to senator sessions for his opening remarks. i apologize to my colleagues for the length of that introduction, but i thought it was important

in light of the subject we have before us today. >> thank you, mr. chairman. i'm glad to see your passion and leadership showing ielf on this issue, because we've got to do somethings. we cannot continue business as usual. the article in the wall street journal in which the international monetary fund, i believe it was "the washington post," in which the international monetary fund called on the united states to get its house in order like other nations in the world, used the phrase all the other developed nations who are facing debt crisis, most of them are, are entering into a dialogue with their people to explain to them why changes have to occur. so i have been critical of the president's state of the union address in which he spent very

little time in an honest, direct, open way discussing with the american people why business as usual cannot continue. i so much appreciate your statement that this committee, may be where the leadership has to come. i would be there with you. i am totally appreciative of the concept that you, senator widen, deficit commission and others, conservatives, writers, intellectuals who favored tax simplification. mr. lindsay, i was really -- i hope you don't mind me quoting from your remarks, but you quote "a number of economists who say that a sensible revenue neutral

tax reform could result in 5 to 10% -- 5 to 10% more of gdp growth, 18% growth in gdp output. larry summers found, the recent former adviser to president obama, in another study, there were 19% more growth. this is stunning numbers. i mean, we would leave that on the table. frankly, i doubt they're that high, but if we could get close to that, if we could get a third of that, that would be marvelous for us, because as you indicated, it would be sort of free money, as you indicated, mr. chairman. it would create more growth which would create more revenue. president obama, in his state of the union address, said, for example, over the years, a

parade of lobbyists have rigged the tax code to benefit particular companies and industries, those with accountants or lawyers who worked the system can end up paying no taxes at all but all the rest of us are hit with one of the hiest corporate tax rates in the world. it makes no sense and has to change, so tonight i'm asking democrats and republicans to simpli the system, get rid of the loopholes, level the playing field and use the savings to lower the corporate tax rate for the first time in 25 years without adding to the dicit. it can be done. well, i think if we simplify the corporate tax rate properly,e can, in a revenue neutral way, could probably create more revenue. let me tell you, the problem is far more serious tn that. we have, and even in the real rate terms, one of the highest, if not the highest corporate

rate in the developed world. corporations are making decisions every day, where to expand, where to he workers. we learn things in airports. i happen to be on the plane with a very impressive ceo of an international corporation, ceo north america at an alabama plant. he was so frustrated. i ended up with anmpty seat. he came by and sat by me and told me the story. this is the story he told, that they had competed within tir plants worldwide in this big company, to do a new chemical process that would create 200 jobs. they had worked extremely hard at the alabama plant and had won the competition. they submitted in, they had the lowest cost per gallon of chemical stuff, and the plant was going to be expanded in alabama, we were going to gain 200 jobs until the people back

in europe said we've got to calculate the taxes. and they recalculated the bid based on taxes. we lost 200 jobs. this is not academic. this is going on every day. we have an unemployment rate that is unacceptable and to have the highest corporate tax rate virtually in the world and other nations are seeing the light and reducing it and we remain high. even if we eliminate certain deductions and have a flat rate that appears lower, it seems to my simple mind, that we've got noess real burden on the corporate community than we had before. i think we had need to figure out a way to reduce the rates. if itas to be paid for by some tax increase in some other area, i'm willing to consider doing that.

so believe we need to simplify, but ilso think it would be a big mistake if we don't reduce the rates. of course the u.k. is reducing their rates. canada, i understand is going to 16%. so if we're at 28, 27, after we've adjusted, we are still way above that, and a company making a decision of where to produce a product might well choose another country than our own country to produce that product and cost us jobs. mr. chairman, that's kind of where i am. i don't think i'm prepared to support just a tax simplification of the corporate rate, because i believe the entire world is recognizing that the corporate rate is a job factor, a big job factor. and i think, in terms of the laugher factor, if you want to call it that, reducing the corporate rate, i believe, is as

one of our colleagues said the other day, a study has come out if you reduce that rate, you get more economic growth than you would in almost any other place in the economy. thank you for your leadership. thank you for this good hearing. i look forward to the testimony of our excellent panel. >> thank you very much, senator sessions. now we'll turn to our panel. wel start with gene sturly. welcome back and please proceed. >> thank you, mr. chairman, mr. sessions and members of the committee. many tax and budget reforms know no party boundars. no one favors the unequal justice, inefficiency and complexity we see in our tax code today, neither does anyone favor the way tomorrow' scheduled deficits threaten our economy and our children. you have asked that i concentrate my remarks on what makes reform most likely. reform often starts from a

common consensus that a variety of fixes would be better than what we have. bipartisan agreement led to past successful fax reform such as in 1986, 1969 and 1954. such bipartisan consensus also informed close to two-thirds of the members of president obama's debt commission. such agreement, i would suggest with admitted bias was displayed bay the panel before you. three of us are from the tax center where former heads of cbo appointees by both republicans and democrats often come at a very common conclusions. we're not led by any party identification. the more general point is that good government either 17% or 23% of gdp trumps bad government at both levels. with the myth cal king of athens went in to slay the ull, he was

april able to escape the ball of string. if we were to escape the tax levee, i suggest we follow the string back along four dimensions that define our larger budgetary problems. first, we must move to an air of more fundamental reform. a simple explanation of the tax code's evolution is it broke away from its nar woe revenue racing foundation and began to evolve like the spending side of the budget. large systemic reforms for our fundamentally different strategies than the tax cuts and benefit expansions that seem only to identify winners. many domestic reforms, like tax reform in 86 are the hash, inc.ers are the types of tradeoffs that modern government must increasingly engage. second, we must limit how much any congress can commit to the future before that future

arises. i no longer divide the budget balance sheet into spending and taxes, but to give away and take away, especially after the 1990 and 93 budg agreements. it is political suicide to operate on the takeaway side of the budget to balance the shts. the consequence of fiscal democracy i have developed shows that in 2009, for the first time in u.s. history, all revenues were committed before the new congress even walked in the door. third, we must account for our report to the public in a more honest way. rit now, for instance, tax subsidies show up in the budget as a reduction in taxes when they are bigger government in disguise. fourth, we must cut across institutional boundaries. even today, tax reforms are unable to replace an education tax credit with the higher pell grant or housing tax credit with a housing voucher.

at the same time, i believe that serendipity arises by playing the odds in the right way. tax reforms, probability of success can be increased by the following steps. first we must seize todays and not yesterday's opportunities. yesterday's included large individual tax shelters, high tax rates and every increasing 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 reforms. third, we must comprehensively tackle the problem. yes, reforms create headlines over who loses some 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. four, we need to shift the burden of proof, let opponents argue why theyppose 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 coalitions 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 navigate the 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 d by agr agreeing not to criticize each other. someone was always held accountable 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 essions, 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 corpora payroll and estate taxes. for all of those reasons, our tax system cries out for eform. 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 dollars 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, force tax 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 venue, 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 federa debt which threatens to grow to unsustainable levels in coming years. fourth, many tax rerences 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 comes to pairing 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 effor to limit the double taxation that can occur when investnt income is subject to both personal and corporate taxes. such provisionshould 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, polic 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, an deductions or ex clues whose value depds on whether a taxpayer itemizes. what tax bracket they are in. >> by redining many tax preferences, policy makers can make the tax system simpler and fairer to america 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 goo 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 encourag 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 forgotten 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 tu to new

revenue sources. raising more revenue from the current 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 international 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 alsoonsider updating our system to reflect the international tax rules used by our major trading partners. theemainder of my testimony elaborates. before considering fundamental reform, you might ask can't we dial up the current system, 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. l statutory rates whachlt if we try to protect low and middle inco 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. wh about the corporate tax? can it raise signicant revenues for us significantly more than now? in my written testimony, i argue that the answer is no. most revenue from today's corporate income tax comes from corporations that are competing in a global market, increasing the corpote 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 ly 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 ra in the oacd. any increase in the corporate tax rate can be expected to 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 st 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 broadening reforms? the income tax imposes efficiency costs on the economy. when taxes distort the economic 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 that 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 amot of revenue with a narrow base requires higher tax rates. what is often ignored is the drag on the economy created by higher rates. the national commission on fiscal responsibility and reform demonstrated that cutting backs tax preferences an brondening the base, by doing so, the current system could genera 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 current 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 second. broadening the base and lowering the rate could reduce a number of distortions caused by the current system. it won't be easy to cut corporat tax preferences, however. while some preferences benefit only a limited number of businesses, we hear about those a lot, others cut taxes for a broader set and in addition lower the cost of domestic investments. it's not possible for us to stay competitive and grow our economy with a tax ratehat's 14 percentage points above the oacd average. 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 the 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. vestment, 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 adted 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 engagg 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 a please proceed. >> thank you, mr. chairman. i appreciate your invitation and that of the members of the committee. it's amazing 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 doubles -- 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 tax, 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 total -- 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. u make the taxpayer four times as worse off as you make the government better off. there's no sensible pern 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 taxing one and a half, two times, three times, four times worse off than we're making the government better off. that is not the way to ebb hans the wealth of a nation. where i would separate myself from my colleaes and i certainly 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 concsion. 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 gaap 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 about what income is. we have to move toward a cash based system. let me give a very simple example. have a small company, and just one of the peck allarities i face every year has to do with 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 payor 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 whether 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 hf 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 based 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 resers 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 times what china's is. the largest tax china is the value added 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 from an income based system and toward value added taxation or indirect taxation, puts us at a competitive disadvantage. we complain a lot abou 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 structure 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 eat. further revenue reductions a not possible. america must move awa 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 inappropriate. 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 ceipts 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 accomplished with a two tier business receipts tax system where the higher tax rate exempted employee compensation below a certain amount.

the problem with encouraging wer 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 pruce 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 value added tax would greatly facilitate 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 efciency of collection, that is that we would have less leakage in the system. number two, that it would make america far more competitive. let me just go down the line and ask if you have looked at dr.

gretz's work and what you think of his proposal and what it would mean for both helping us reduce the deficit and at the same time improving the competitive position of the united states. doctorsterly? >> i tried to outline briefly in my testimony. i think there 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 he 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'think he's grappled with the tough issue of how yo integrate earned income

credits and child credits, with foodtamps and tanif and health subsidies that fades out when your income goes up. we have all these indirect tax systems at the bottom based on income and i don't believe we've solved that at the bottom. at the tox 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 rk 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. i think they would say it's better than the 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 the's a ten cent or more phase-out of your heah 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 prosal is trying to do is provide a compromised sweet spot that is recognizing for the economy a whole it's better to have more of the tax base be consumption base. that's why he introduced a vat. then recognizing if you want what is wildly held as a fair distribution, you'd eel need income tax to do that. my sense is he succeeds in the sense ofry 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 ha 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. this is how they raise their revenue. 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 aret 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 hve also talked about. now, remember that you're going to be retaining the income tax. so you canun refunds and transfer programs through the income tax. so by retaining the income tax. >> you could keep the earned income tax credit a child care credit? >> exactly. you can help the distribution 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 arekeeping 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 substantial 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 andhe value-added tax on that steel is part of that. so to avoid double 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 hell 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 onomic 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, how do you maintain

progressivity in the system so that tse -- 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 filli 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 progressivity on the higher end. on the low end, this is not a

problem. there's no reason why you can't have wage subsidies built into an eic -- eitc. right now we incporate the eic right into the payroll checks of most companies. i think it's called prepaid -- pre -- there's a way. we have it in 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 inted out that right now '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 isomething that you can reform separately. you can run it through the tax

system. you can runt 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 ha three new senors that have joined our committee. senator portman was, of course, at omb which is a heabeat 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 number of years and a businessman. senator johnson, who is not with us now, is a full-time career businessman and got elected to the senate. i think they all three are going to add some really exrience and perspective to our debate. senator portman, thank you for being with us. i yield my time to you first rod. >> thank you, senator sessions. i appreciate your yielding 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 that leap. 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 amg lower income workers by offsetting the payroll tax wch 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 of proposals that the commission has looked at and the kinds proposals that the white and gregg legislation would indicate. that is splifying 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 for you. 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 corporate 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, japan is 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 dow what's the right corporate rate be and what should the right top ra be for individuals? >> thank you, senator portman. it's great to work with you on this side of the 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 conclusion 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 spending 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. 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 syst is so out of balance -- one thing, mr. chairman, i hope you will consider is ways to report to e 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' spending $100,000 and borrow 50, we're still paying $10. we need to report the 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 individual rate, the persal rate to be near that. i'm not sure they need to be necessarily identical. it could be somewhat higher. you'll want them to be similar. you the chaenge 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's going 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 utral 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 that we face that aren't going away. other countries have -- besides japan, canada and the uk are also lowering the rates. i'm not sang we should 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 isbsolutely 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 incorporatemyself 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, broaden 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 firm. 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? i 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 turnout, more colleagues coming. we'll have to go to five dib minute rounds. we'll start with senator widen. senator portman was senator sessions' time. >> thank you. as far as i can tell, reforming the federal income tax is the only major policy response with an actual track record, an actual track record of creating millions of private sector jobs without adding tohe 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 we 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 an engine for job growth again? >> well, you sort of set me up, senator wyden.

i agree with your conclusion, tax reform, lowering the rate, broadens the basis good for the economy. how far and facet go, 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 growth to be able to compensate for the reform. you may remember by '86 we were already into about the third or fourth year of an expansion, the time when we often slowed down. instead, what happened after tax reform, things actually sped up. yes, think tax refm especially is good for long-term growth. what happens in e 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 short shrift 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, sole 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 from happening.

i wonder what your see is about how small business is fittininto this discussion, professor marron and professor altshuler. >> the first point which i think where you're 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 th may make life easier for businesses to create jobs, you want to 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 really, really large ones and the multi national ones are still over on the corporate side. then with the security and safety of being a think tank and academic guy, i will inject the one thing, tre's been a lot of interesting research on what are the key things for creating jobs and moving the economy forward. it turns 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 desi 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 today of more than 90 united states senators coming 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. chairman. >> 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 receip like canada did, speak about the canada experience. they're just north of us. they adopted a federal vat. it'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. rst 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, if 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 poi 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 interesting to hear the discussion about how there is a disproportionate negative impact. in other words, the negative impact from higher taxes exceeds the revenue benefit to the government from an increase in taxes. if we're saying the taxes are essentially equivalent to spending, then what we're saying is tha 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 beuse 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 diffent 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 fom this pan h 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, again, 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

unsustainable. as well, by the way, the number of tax subsidies as well that have high growth rates. wee got a dilemma here. i go into linebacker brat ways in my testimony a little bit. the dilem 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 unstainable situation.

to me t answer to your question which goes beyond tax policy, you have to come up with budget rules that limit both politica parts whether they're in power or not in power from controlling the future so that, yes, if the public bants to vote for higher spending in the future and finance with a highervat, then they get it they can't do it in a way that votes for higher spending now tha forces the taxes to go up. similarly on the other side of the aisle, you can't ve 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 deficit, 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 and 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 botm 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, i would 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 ought 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 said, 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, that may be what the future looks like for the u.s. rather than paying for that 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 task. >> 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 ofnewcastle, 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 cm 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 committee. >> thank you very much, chairman. thank you for your leadership on these very important 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 badly 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 challenging 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 dgets. it was not easy. i required broad recognition of a ne for shared sacrifice, both in reductions in spending and broadening the base and increasing revenue. i spentime as in-house counsel of one of delaware's most innovative 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 we do 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 the 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 holida 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 because different countries are different tax systems. you never can get all the neutrality you 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 dection without giving you a perfect solution. i should comment in tax reform

in '84, i went ound to eve staff member -- 20 modules, several hundred pieces, there are thousands of provisions we're talking about and talking in a very shorthand basis. they ended up suggesting something we got into the proposal. 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 e several things we can do to move in the right dirtion. i'm less enamored -- >> dr. altshuler said we should haven't a race to the bottom in term of lowering corporate rates. this is obviously a hypothetical. is there a point below which you shldn't keep reducing income tax rates for corporate income? >> is this a question for me? >> 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 terms 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 -- it keeps 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. senatowhitehouse? i'm sorry. wait a minute. senator sessions. he conceded his time initially. so we have to go back and forth here. >> i'll follow up on sator 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 this 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 answer 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. remember, we tax everything, but then we give a credit against the foreign income taxespaid. 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 of the world. at that point it made sense

because we didn't have competition. it makes less sense now. i think senator sessions, the eme 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 that low rate was a problem in causing their economic difficulties. i've been told at'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. i think lowering the rate would be the coensus, first thing you could do. again, there's a lot of evidence that you could raise revenue without broadening the base simply by lowing the 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 share. 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 built 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 potentialto cost economic growth in our country, a corporate tax hgher than the national -- the worldwide rate is a threat to us, and at this point in history, job creation is so important. everybody is saying the corporation is 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 everytng in the code. there is this tendency to look at mandatory spending and say, gee, we've gotll 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 evything 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 teyear fix or something like that. i'm hesitant of solving that problem -- >> i recnize 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 tuation 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 uncertaty. >> 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 another revenue stream possible for the government to extract a larger percentage of their wealth t send 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, notnly is 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 because we 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-election. >> all right. senator whitehouse? >> thank you, chairman. i noticed the other day that the irs had reported that the 40 top income earners in 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 th area? a hospital orderly in providence, rhode island, earns $29,100 a year. if you look at our current tax system and start with th average taxpayers who makes $60,000 a year and pays about 20% 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 to prudential 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 milon 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 income earners in the untri at $344 millio 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 effectf 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 not driven 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 m give you an example. 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 the 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, think the higher tax rates and the income tax do create some minor competitive disadvantages. i don't want to overstate 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 with