that starts with the constraint of maintaining current tax revenues. from that starting point and then ask how low the tax rate can go under alternative base-broadening proposals. under current law, as you can see in the top row of the table, the tax rates are scheduled to rise to a level of about 40%. skip to the punchline. only through dramatic tax reforms. revenues fall so i encourage you to look over the facts and we hope it's useful to

you in your future conversations. thank you and i forward to a very interesting first panel. [applause] >> mary, i think you should sit on the left here from the audience. seems to be an appropriate place to be. marty, here. sorry. i put you in the wrong seat. >> that's ok.

>> welcome of this first panel. something of tax reform has been on the agenda in washington pretty much for as long as i've been following u.s. policy which i hate is going on for two decades. the complexity of the u.s. tax code is a distortion, how again and again brought calls for reform. there's been debates over the past decades of flat tax, tear up the whole code, wholesale reforms, but ion that has happened, the tax code has gotten more complicated. the debate today is taking place in a whole new context. it's in the context of large deficit, a weak economy, widening of inequality and immediate spur to action with the expiration of the tax couple.

this conversation has an importance and an urgency that really can't be exaggerated which is why this discussion is very important and we have two extraordinary well placed individual of different perspectives to discuss what sort of tax reform we should be doing to debate what sort of tax reform we should be doing. you all know them. marty feldstein, president of marriages, former chair of the economic advisors. larry summers former treasury secretary, former student and former boss of marty feldstein. [laughter] so i think marrty, let's start with you. i want to start this conversation by actually working out what should be the priorities of the tax reform today? the tax reform has all sorts of good priority. people talking about boosting

growth, simplying the growth, raising revenues. but many of these are somewhat at odds with each other and depending on what your priorities are, you would put towards different types of reform. can you lay out what should be the priority. >> larry and i come from different perspectives but that's not quite right. we come from different party affiliation but larry and i have been talking about taxes for 30 years and so it's not too surprising that there's a lot of agreement. i hope that that comes out as we talk about this specific -- the specific issues. i think about tax reform in terms of its long-term impact. we've got a serious cyclical problem now but i think the tax code that we put in place, i hope that congress puts in place next year. we have to think about for the

long term. what are the things that has to accomplish? you're right that there's a conflict among them, but there are always zwraved and so it's a question of picking things that do better at these different goals. one of the goals is to raise revenues. adam's chart shows we need to raise some revenue. how much we raise will depend on how well congress does at limiting the growth of entitlements but that's not today's agenda. and raising revenue can be done in ways which have good side effect or ways that have bad side effect and that brings us back to the discussion about tax expenditures. so the second goal is reducing waste. what economists would call official sis or deadweight

losses. it hurts labor supply broadly defined, the picture that adam showed us about how it affect ours is just a small part of that, it also affects the form in which people take their compensation. we're induced by all fringe benefits are excluded from taxable income to taking compensation in ways that are less valuable to us, but on a net of tax basis are more attractive and it also affects the kind of spending that americans do because sometimes spending are tax favored. a third thing is simplicity and you mentioned that when people are just overwhelmed with the complexity of the tax law, it

makes compliance more difficult and it makes people feel that probably everybody else is getting a better deal than they are. everybody else has figured out some deductions to take, some credits to take, some ways of changing their behavior that lowers their taxes. so we need a simpler tax code and there's the important issue of fairness. and fairness is more than just, in my judgment, more than just a question of productivity or tax rates. it's also the tax bay. fortunately, inflation is low now but even at today's low inflation, individuals pay capital gains taxes on phenomenal gains even when there are real non-gains or real losses. i think people rightly feel that that's unfair. so i think there are a lot of ways in which income is defined for taxable purpose which is add

on the fairness of the system. but that's my opinion. >> in that order? >> i don't think of it as in any order. i'm not going to say we get revenue and it doesn't what kind of fairness we get. you have to think about any given change in terms of what does it do for each of these four things? >> a question of fairness. do you think in the light of the fact that pre-tax income and equalities have widened so much the goal of narrowing them should be a goal of tax reform? >> not particularly. i noticed in the background material one of the things that was suggested was combating inequality. and my feeling has been for a long time there are problem in the income distribution area as property and we should be concerned about combating poverty, not about combating

inequality. if a couple makes $250,000 which probably not hard to do at the hamilton project or harvard university, that's not something to me that needs to be combated. >> i so. larry, do you have a similar sort of priorities or do you have a different set? >> overlapping. while it's not our subject today, whether we get this expansion to a sustained reasonable growth rate, it is consistent with the return to full employment is the single most important economic issue facing the united states and we will not achieve any other objective whether it is sustained fiscal health, the ability to combat poverty, the ability to be strong in the world if we do not achieve that.

and therefore, maintaining the momentum and expanding the momentum of demand has to figure valley in any economic policy discussion going forward and has to have a very large affect on anythinging about timing and phasing in any set of reforms with respect to the tax system or with respect to entitlements. but that's not our primary subject today. to take your core objectives, as marty points out, you can't rank them but you can give some indications of their importance. and i would agree with marty on the central importance of revenue raising. the director of the c.b.o. gave a very effective presentation at harvard a month or two ago on the long-term fiscal situation in which after going through a

lot of stuff, he reduced it to the following statement. that in order to get to a stable debt-to-g.d.p. ratio, not a balanced budget, but the modest goal of the debt to g.d.p. ratio, after what he thought was at the edge of credible, optimistic assumptions about discretionary spending cutting and making the extreme -- a very optimistic assumptions about the capacity to cut defense. his conclusion was you need to reduce spending by a quarter or raise all revenue collection by a section. if you wanted to get so the goal or you needed some combination of those two things. for a variety of reasons, i think his assumptions are a little optimistic. so i think it's a little worse than that.

i don't think it's on this planet that we are in a decade going to reduce entitlement spending by anything like a quarter. and therefore, relative so the baseline, and therefore, i think it is a near certainty that we are going to need a significant increase in revenues. and it seems to be any discussion of tax policy needs to start there. from current baseline, it is possible to cut taxes substantially and pay for it with as yet unidentified spending cuts is close to inconceivable and do not represent claims that should be taken seriously in the public discourse. there's room for debate about what the balance is between the quarter on spending and the

sixth on tax increasing but the idea that we can be cutting taxes which implies cutting entitlements by more than a quarter, i think is frankly laughable. so revenues are at the center, number one. second, and here's where marty and i would have a difference, you know, in orientation. i think we do need to address the questions of progressity -- progressivity. and we do need to address the question of fairness in a central way. there has been a major change in the pre-tax income distribution that has been generated over the last 25 years. roughly speaking, a generation ago, a top 1% got 10% of the income.

today, the top 1% gets 20% of the income. and if anything, that trend is accelerating. now it seems to me reasonable people can argue about whether in the face of a change of that kind the tax system should operate to offset it or not offset it, but the view that it should operate to reinforce it, cutting taxes by more at the high end than in the rest of the distribution seems to me very hard to justify on any way of thinking about it. it has something to do with the

ratio of what those who are most fortunate are earning relative to those in the middle class what is sometimes reduced in the public debate to the ratio of c.e.o. wages to average worker wages. in conservative thought in this area -- and conservative thought in this area surprises me a little bit. the right pro market view was you should let the market grind out whatever distribution it does, not interfere with the workings of the market and then the tax system as it collects revenue should be based on the ability to pay in a way that raise he is to burdens on those who are getting most fortunate, given what's happening in the income distribution. the idea seems to be a quite surprising one.

when marty talked about simplicity, he referred to issues of legitimacy. i think the legitimacy of the tax system and the legitimacy of the government on which it depends depends much more on a perception of fairness, depends much more on the idea that those who are in a position to take advantage of the double dutch irish sandwich are paying their fair share of taxes than it does questions of simplicity vs. complexity. so i would come next to fairness. i would come third to questions of neutrality and economic efficiency. i would put less emphasis than i would have over most of the last 25 or 30 years for a couple of reasons. for the next few years, our

economy is going to be demand constrained rather than supply constrained. if the economy is demand constrained, increasing the willingness to work, if not everybody who wants a job can get one isn't actually going to increase the total level of employment. moreover, whatever has been true in the past in the current world of 2% interest rates, it slightly strainsa dullity to believe that excessive capital costs represents a major inhibition to investment in the way that i suspect was true to an important degree at various points in the past. yes, we should reduce various kinds of tax biases that are present and it would be desirable, but i would put less emphasis on that in our current

demand constrained low capital cost con detection. finally, i would just caution that much of what is said about base broadening and complexity is oversimplification. people think of base broadening as reducing tax expenditures. so for example, the strasburg majority of base broadening proposals include the repeal of the provision that if you sell your own occupied house, you don't have to pay capital gains taxes as long as you have a capital gain of $500,000.

if everyone who sells a house has to go back and look at what they paid for it, calculate all the improvements they've put into it and do the calculation, you are significantly increasing the complexity of the tax code. that is not an isolated example. i am in favor of various things that assured that all taxation -- that all income is compensated. free martini lunches, all of that. we ought to go after all of that but we shouldn't kid ourselves that we you've simpler tax code if we do. i am for converting detuxes to credits so they can be claimed for the same rate. it's 15%. for everybody, not 35% for some

people and 15% for others. but the result will be that more americans will be able to take advantage of the credit. they'll use that instead of the standard deduction and they will find the calculation of their taxes more complicated. have a and i can proliferate these examples. it is just wrong to ascertain that base broadening and oversim accumulations are objectives that go in tandem. my reality, my sense of the reality is that almost everyone who has any complexity associated with their tax return either does it themselves are software or does it -- or pay somebody to do it with software. and in that context, things that once would have been substantial complicaters, the existence of many different rates, for

example, add no complexity. you put the information in the software, the software puts the numbers out. so i don't believe that many of these traditional concepts of simplicity are exactly right. i don't believe that what has advocated in the name of simplicity is simplification. and i think that we would be better off recognizing simplification for an issue in the way that marty framed it which was as about creating a system that has more perceived fairness and i think a system that has more perceived fairness, i don't find it plausible that simply increase payments to the poor will entirely satisfy the objective of achieving fairness as long as there is a justified perception that those who are most fortunate often are most successful in escaping taxation

as belt. >> you both put revenue raising at first. you both agree that it needs to be a top goal. why is the debate then, as narrow as it is in the u.s.? for someone with my accent could say a crude caricature so the u.s. system is that it taxes a narrow base of income. it relies less on consumption tankses and pretty much less on environmental taxes. why aren't we, if revenue raising is so high on the agenda, shouldn't the tax reform debate be a much more ambitious debate? >> by consumption, you mean a valued tax or something. and the reason that i don't like the idea of a value added tax, i think that if you had a value

added tax, it would simply make it so much easier for congress not to deal with controls on spending. i think there's a consensus now that we have to slow the growth of various entitlements and look for other savings in discretionary part of the budget. if you could pick up four or five or 6% of g.d.p. with a value added tax, everybody could relax. and i think that would be here to stay. larry? issue >> we haven't had it because conservatives like marty thinks it's a money machine for government and progressives think it's not that progressive. and we'll only get it the day that progressives decide that it's a money machine for government and they want more

government and conservatives like marty decide it's the least distortionry tax and i don't think that day has quite yet come. and i don't expect it to figure prominently in the next couple of -- in the next debate. whether we get a value added tax or not is going to hinge on a question which i don't think anyone really should believe that they completely know the answer to. which is this. what is the structural increase in health care costs going to be? and how successful are we going to be in controlling it? the truth is it's not going to be possible to control public health care costs vastly more severely than private health care costs. because if you do, then the public programs won't work and

it won't work when half the doctors opt out of medicare. so the success and control in public health care costs is ultimately going to be hostage to the success and controlling overall -- in controlling overall health care costs and given the interplay of technology, given that an increasingly affluent society probably is right to want to devote more resources to health care, given the kinds of relative price changes that take place between health care and other things, i don't know how rapidly health care costs will grow over the next 10 to 15 years. if they continue to grow at the kind of rates that we've had and we continue to treat health care as a -- to an important extent, a public obligation, i suspect the pressures for more revenue are going to be such that there's not going to be a viable alternative to consumption and value added taxation if efforts

to contain health care costs are successful in keeping health care costs at rates only growing at rates only slightly greater than g.d.p. even with an aging society, then i expect the debates will pilot in these terms because there won't be a taste for consumption taxes to pay for broad new government initiatives. and i am uncertain as to what our success will be in containing health care costs. >> larry is right, there's no way to be certain about it, but i think the issue comes down to how much will middle and upper-middle income people are continually rising, affluent middle class pay for their own health care and how much of it will be fans financed by the government? even if it grows more rapidly than grningsd it seems likely but doesn't mean that government

financed health care costs have to rise that much more rapidly and the proposal struck me as a good one of limiting the growth of government financed health care costs to grow a g.d.p. plus 1%. that means that i will have to pay more out-of-pocket either for my -- from my insurance or from my health care or both. but those are separate issues from one of our focus. >> absolutely. we could have a long discussion about health care reform but let's not. so i take your point now. if health care costs are ongoing, maybe the political environment for value added tax changes. but let's go to here and now where the debate is to simply about two issues. one is tax shendtures and the ours is the taxation of capital.

>> let me say one more thing on the value added tax. i don't think is contentious. it doesn't make any sense to have a value added tax that raises less than 2% or 3% of g.d.p. it doesn't make any sense unless you're going have 3% of g.d.p. so we won't do it until and unless there's a political consensus for needing that much revenue and there isn't any political consensus for raising that much revenue now. and that's why i'm saying the value added taxes isn't an important part of it. >> let's go to the current get and particularly the -- debate and particularly the taxation of capital. a traditional thinking is zero

taxation is more pro-growth and yet, we have a corporate tax here which is if you saw the article in the sunday "new york times" clearly full of loopholes and there's a taxation of capital gains on the personal level. start with the corporate tax. how much of a problem is the u.s. corporate tax and what needs to be done with it? >> well, the common proposition correctly about the u.s. corporate tax is that the margin of corporate tax rate is higher than any other country, any other industrial country at 35%. there are a lot of special features that make the effective corporate tax rate lower than that. the thing that strikes me about the corporate tax rate is that we economists don't have a clue about who ultimately pays the corporate tax. how much of that is born by maria sharapova holders?

how much of it is borne by capital generally? in a world where capital can easily leave the corporate sector to go into other things, housing, unincorporated businesses, the rest of the world than the corporate -- then the corporate tax is not borne by shareholders or may not even be borne by capital and ultimately, it is borne by the workers rather than by capital owners. so we don't really understand that. but the perception of the corporate tax that it's borne by corporation or by their owners makes it very hard tax -- a very hard tax to give up so every country in the world as he corporate tax. what distinguishes our corporate tax from others is that we tax in a very inefficient way. we tax worldwide income of

american corporations, but allow those corporations to pay their u.s. tax only if and when they bring those funds back to the u.s., which they don't. so the net of it all is that we now see that more and more multinational u.s. corporations earn profits, do their producing in the rest of the world, but they bring the profits back to the united states because of this extra tax that they would have to pay. and that's why one of the key reforms that i think would be a good one would be for the u.s. to join what every other country does and that is to have what's called a territorial tax system, which says that you can bring the funds back to the u.s. paying a relatively small tax, 3% or 4%, and as long as you pay

your tax, wherever you've earned it in the rest of the world. and that's what all other countries are doing and it would eliminate a lot of the game playing that that story in the "new york times" and that goes on more generally. >> what about you, larry? >> i guess i make three points. first, yes, the incidents of the corporate tax is complicated but corporate executives seem in very little doubt about it. nobody ever comes and argues for a major cut in the payroll tax, but there are literally thousands of people employed in this city by corporations with the objective of reduce the tax rate on corporations, which suggests at least some fairly strong view on their part that that burdens corporations and their shareholders.

and i think over the reasonable run, that is a good approximate. second, i think it's important to understand that on marginal investments, it's not clear that the corporate tax system is very burdensome at all. if i consider advertising, which will build my brand, which will pay off over time, if i spend a dollar advertising, i deduct a dollar and so it only costs me 65 cents, 35% of the cost is shared with the government, 35% of the profits that i earn is consequence of the advertising are shared with the government. whatever maximizes my profits if there is no tax, will also maximize 65% of my profits. same argument works with respect to research and development what about with respect to putting in place a new factory or a new

building? over the last couple of years with respect to the new factory, we've let you write that investment off in the first year. going forward, we require you to depreciate it. and so there is a sense in which the government is sharing more of your profits than it's sharing of your costs. and that was a really big deal in the old days when the interest rate is high. but in the current world where the interest rate is 2%, the fact that you have to defer your tax -- your depreciation tax for five years really doesn't reduce very much its value at all. so it's far from clear that the corporate tax is operating as a major deterrent to investments right now. the most vexing issues do involve as marty said, the questions of international

allocation, off-shore income, all of that. and there, you have to decide on what your philosophical approach is. we probably are caught in a batted middle right now -- bad middle right now and there are two approaches that the world can take. one is you can basically give up. and right now, you say that with a lot of trouble and effort, the irish dutch sandwich and stuff, you can do investments approach and not pay much taxes on them and it's really not worth to have people go through that effort and we have to make it official that you don't have to pay taxes and that's a reasonable argument. the alternative view is that we ought to attempt to crack down in serious ways on the allocation on income. we ought to raise questions

about deferral. we ought to cooperate with other countries. and so we don't head towards a world where multinational income is taxed at a very low rate because of their ability to pit one jurisdiction against another , given the distribution of that income. and so it seems to me that right now, the u.s. tax system is like a library. the single dumbest thing you can do is announce that you're going to have -- is have everybody think that there's going to be an amnesty on overdue books. but then, not actually ever have the amnesty. because then you assure that no books are ever going to come back. and they're always not bringing back the book waiting for the amnesty to come and that's what the debate is right now. nobody in their right mind would bring in the money with who

knows what's going to happen after the election? even if you thought you had to bring the money home, you would be waiting right now so this is a debate which my hope would be that the clarity comes more in the direction of internationally collaborative efforts to tax this income rather than the avoidance of this income. but clarity in a different direction would be better than the current place which assures that the money will not be brought back and doesn't tax it and generates all the extra complexity. >> we would have to persuade every other industrial country to give up the territorial system and to crack down on their companies. this seems very unlikely. can i say one other thing about -- larry was very careful to say something about short run versus

long run in terms of corporate executive. yes, the profit offense a corporation in 2012 are not going to depend on the corporate tax rate and that's probably true in-and-if i were the c.e.o., i would like to see those profits taxed at a lower rate. that's where as economists, we don't really know where that tax burden is going to fall. and therefore, relying on the corporate tax is to me, a very strange way of raising revenue since we don't know who's ultimately playing. >> i need to move on from the corporate taxes. so briefly. >> there is an issue that you have to think about which is i don't know what the percentage is. my guess is on the order of 40% of u.s. corporate shares are

owned by pension funds or endowments or foreigners in ways where there's no u.s. individual income tax paid. and so it's one thing to say you should eliminate the corporate tax, but the income's going to be taxed anyway by dividends in capital gains. it's another thing to say that when the income is going to be held by the nebraska pension fund or the harvard endowment, and there's going to be no taxation ever on that income, you can say that actually what feels like corporation isn't paying taxes ultimately because there's so much more capital accumulation, profitability is going to be less in the economy and wages are going to be higher in the economy and so ultimately, cutting that tax is going to benefit workers, but that's an argument with a lot of steps. >> let's move to -- this clear -- there's clearly a division here. let's move to territorial crackdown. we move to the personal taxation

of capital. capital gains and dividends where one argument might be that as in 1986 they were equalized and there's now a pretty big gap. is that -- what direction should the taxation of capital gains and dividends at the personal level go? >> so i think the fundamental question is do you want to tax? not just capital gains and dividends but interest as well, do you want to tax the returns to saverings? and we have a kind of mixed system. if you put your money toon i.r.a., you get a deduction. if you put your money on the roth i.r.a., you don't get a deduction but we don't tax those incomes from the savings. for a lot of people, we have a system that in my judgment correctly doesn't tax the return to savings or doesn't tax

savings itself. i think and there are two stroongs that. one is the kind of pure fairness advantage. we would think it unfair if we have a higher tax rate on one ice cream than to another. since i'm the guy who likes the vanilla ice cream. but that's similar when i get my income, i want to skimet today or set it aside and consume it in the future. unless you're in an i.r.a. situation or a 401k, tax people who want to consume their income later, who want to save now and skimet later, taxes them at a higher rate than the fellow who wants to consume his income now. from a pure fairness point of

view -- >> could you put it in another way that the fellow gets all his incomes in dividends gets a lower tax rate than the fellow with the wage income? >> i want to start with the wage income to become. if i saved some of it, consumed some of it now, the interest, the dividends, the capital gains that i get by postponing it is just a question of timing of the spending of that income just like the division of my income. the tax law ought to be neutral. >> larry? >> it depends on what examples you choose and marty's point about the double taxation of savings is a fair one. but it's to the only kind of example you can imagine. imagine that you start the next

facebook. in your garage, you've got some idea. you get your friends to loan you some money, make some investment and you own a third of this thing that's in your garage. and at the moment you get the third, there's no income because the thing's not really worth anything and your thing ends up being worth $100 billion and you end up being worth $33 billion. many of us would feel that you should pay some taxes. but under the law, you pay no taxes. now you might think that at some point, you will want to diversify. you will want to sell your facebook stocks, but actually, if pure half competently advised, you will find ways to borrow money, you will be able to spend $31 billion of your $33 billion without incurring tax

liability. you might ask what will happen if 60 years from now, you die and give the money to your children? will -- and then your children you know, they don't care about the fannie book, they sell the stocks. will they pay capital gains taxes? no, they would not. so you have an issue around great fortunes. and in a moment when the top 1% or 2% of the people own the health, and you have to factor that into the discussion of capital income taxation. so i do not favor the idea that we should not have capital income taxation for reasons that go crucially to fairness. we can't as a country figure out that a guy who runs a private equity company is earning income by working. we've got -- let him call his income capital gains. and so in a country where we

can't figure out how to do that, if we cut the capital income tax rate to zero, there will just be massive erosion of fairness and progressivity. so i have not bought into that agenda at all. >> so -- >> hang on for a second. conversely, i think that you do have to be realistic about these things with capital gains. in your current world where we tax them only when they're realized and where we don't try to -- where we allow them to entirely escape taxation, if they're passed on through a state -- estate, the estimate of a treasury are that the revenue maximizing tax rate is about 30%. raising the rate from 30% to 40%, you actually lose revenue. if the revenue maximizing rate is 30%, it sort of follows that raising the rate from 25% to

30%, you're going to impose a very large burden on people per dollar of revenue that you're going to generate for the government so i think a thoughtful approach to capital gains taxation does involve recognizing these elasticities of real accusation behavior and does lead you to lower capital gains rate than the rates we now impose. the top rates that we now imposed. nts unless with the case of reduction dividend taxes because you don't have an issue like that realization of issue and because we do need to raise -- we do need to find ways of raising revenue.

i do think that this whole area of escape, erosion, avoid advance, all of that does require more tension and i am told by those who advise people much wealthier than i that with good advice, the capacity to very sparblely avoid a state taxation is quite substantial and reforms that address that issue would be constructive without priring higher marginal rates. >> i want to come back to the savings. >> briefly. >> i talked about the fairness but there's also the inefficiency of distorting people's decisions about whether to consume now or consume in the future. and that effect not just capital gains, but dividends and interests. so i think it's worth distinguishing between the

person who in the back garage starts a new business and then has a capital gain and people whose capital gains dividends and interests come from savings out of income and we do that with i.r.a.'s and roth i.r.a.'s and the question is should they have the kind of ceiling that they have now or should individuals who want to postpone the taxation of income be able to put it into an i.r.a. or pay the tax and then not be taxed on the dividends, capital gains and interests by putting into a roth i.r.a. and i think that's a both fairness case and an efficiency case for allowing that. and then there's the separate issue of whether you should be invented to take time off from your current work to work on the facebook technology by giving you the chance to get very rich from that innovation and that's what think current law is designed to do.

>> i'm going to open to questions in a moment. but one last topic which is the question of tax expenditures. and from the -- from your initial remarks, it seemed you didn't assign a enormous priority to limit tax venture and the whole debate about should you get rid of them? convert them into credit? how high should a priority should that be and what tax expenditures ought to be getting rid of? >> if you heard me that way, i misspoke. i -- >> or i misunderstood. >> i suggested that i did not believe that sparble base broadening done in a likely ways would produce a substantially simpler tax code. i do believe it would produce a substantially better tax code because it would be fairer and would avoid a variety of kinds of distortions that we have and

i'm -- there's a place where marty and i would be in agreement. marty has put forth a variety of proposals the backup administration has put forward ones that are somewhat less ambitious than marty's that are directed at limiting the full use of all the existing deductions and i think the premise of both efforts is that political strategy that you're better off attacking deductions and exclusions as a group than you are trying to choose which ones to go after and i think that's a good thing to do. i think with respect to most of them, but not all of them, there's an oddity that if an affluent individual gives a dollar to charity, they get a 35 cent deduction and if a middle income individual gives money to charity, they get a 15 cent

deduction. so i would for the most part favor the conversion of the deductions into credits and then some limitations on the deductions. how best to do that, you can debate the technical means but i would be very much in support of base broadening. >> so when i talked about raising revenue, i said there are good ways and bad ways. i think raising tax rates, raising marginal tax rates is a bad way because whatever distortions there are in the tax law, it exacerbates and whatever disnevadas there are, it makes worse as well. so i would think should be done is to cut back on the tax expenditures, what bo simpson calls spending through the tax code and since it is spending, since it is the government saying we would like to encourage you to have a bigger house, a bigger mortgage, a bigger health insurance policy,

but we don't write you a check for that. we let you exclude it or deduct it. somehow, it seems to me republicans and democrats ought to be able to come together around that. democrats saying we want to raise revenue. republicans saying we want to cut spending. and marty saying to his republican friends that is spending. it just happens to go through the tax code rather than the side of the budget. and therefore what we ought to do is get the extra revenue that we need by cutting back on that spending so there shouldn't be a division, political division between those who want to cut spending and those who want to raise revenue if the way we get that revenue is by cutting tax expenditures and the specific way that i think we should do it is to say you can keep all of the current tax expenditures that you have, all of the deductions, the exclusion of health insurance, but you just

can't be too greedy about it. you can't take too much of a tax saving from it. so you add up what the tax savings would be from all of the scheduled deductions, one line on the tax return and your health insurance exclusion and if that exceeds some percentage of your adjusted gross income, that excess is not allowed. so everybody gets to keep all of the current taxes -- expenditure benefits but only up to a certain amount. and i've done the calculations on that, putting a cap of 2% and that produces roughly the same percentage extra tax at every broad adjusted gross income class. so it doesn't change the progressivity of the system. but it includesen -- produces an enormous amount of revenue. we could start with a less

binding cap. you could phase it up over time. i wouldn't put it in next year for the reasons that larry said because of the concerns about the cyclical situation in the united states. >> and it avoids the fights between which types of tax benefits. >> that's right. >> let's go to questions. are there any questions? gentleman in the fourth row on this side. if you could just wait for the microphone. >> i'm very concerned about inflation flaffers my net worth and in my corner is long-term capital gains whether it's houses or stocks or firms as well as the middle class taxes and i would be curious to hear some comments about that. >> i thought that one aspect of the unfairness of this, we don't take into account inflation in the -- and the definition of

capital gains. that wouldn't be hard to do if we continue to have the capital gains tax. >> i think you're right, the principle on capital gains. i've noticed over time there's rather medicine enthusiasm for recognizing the inflation component of capital gains than there tends to be for recognizing the inflation of interest deductions. and of course on the same principle that one does it for capital gains, one should do it for interest deductions and there's a reasonable case for doing it. it would be surprising to me if a country having thought about doing this and decided not to do it at a moment when we had five, six, 8% inflation in the 1970's and 1980's will now gravitate to this issue, a moment when inflation is very -- inflation is very, very low. >> cheaper now. >> cheaper to do it.

next question. gentleman there. >> i heard a lot of talk about base broadening. do you both favor taxing harvard and harvard endowment as part of our base broadening efforts. nice tax expenditure there. >> i wouldn't call that a tax expenditure. [laughter] because we've decided it is not a taxable entity. so it's not a question of the measurement of their taxable income, but whether or not their income should be taxed so there's a broader question which is how we should treat non-profits in this country. should we allow contributions to harvard to museums, to symphonies and all that and there are two choices. we can do it the way we do it in this country or we can do what europeans do and make those government financed organizations. the universities, the museums,

the symphonies, and so on. and i think the diversity and the way we do it in this country is preferable. >> gentleman here. yes. second row. >> thanks. a great many republican legislature have signed up with pledges not to increase taxes and as i understand it, those who promote the pledge include filling in loopholes and anything other an the revenue. given what you said today, a, does that worry you, b, do you see a way of finessing it? >> some republicans that i've talked to think that even though they signed up for that kind of an agreement, if there's a tax reform, which is pro-growth, which is tax rate lowering, then even though it raises revenue, they can go along with it.

so i hope that once we get past the election and people move from their hardened positions both to the respect to entitlements on the democratic side and with respect so the tax revenue on the republican side, we will see an operational way of dealing with this problem. >> i'm afraid we're out of time. i think and that's actually an appropriate place to end. it seems to me that we've had an extraordinarily interesting discussion but one that shows that from two different effects. there's a lot of agreement. there's a lot of difference in emphasis but a lot of agreement and hopefully, the next panel will put some more concrete flesh on that in terms of what we actually get to in the next few months in terms of a scon concrete tax reform so thank you very much indeed. [applause] >> thank you. [captioned by the national captioning institute --www.ncicap.org--] >> and coming up in a few hours,

a debate between barney zprank william kristol. that's at 9:30 a.m. eastern on c-span2. and our camping 2012 -- campaign 2012 coverage continues with the libertarian party national convention. that's live here on c-span at 9:00 p.m. eastern. and in 45 minutes, former comptroller general david walker talks about the latest unemployment numbers and the economy. he will discuss washington economic policy going forward. and then house intelligence committee ranking member jane harman discusses u.s. foreign policy and the evolving situation with chinese situation with chinese activists.