you could look at the gross domestic product and instead of looking at it as consumption expenditures, look at in terms of how long the asset that is spent will last. in an extreme case, a hair cut last a month. the software will last three to five years. industrial structures, 30 years. residential, much longer than that. all of the weakness in the american economy at this stage what that is is if you take -- if you think in terms of structures, it's around 8% of gdp and you cut it in half, you have 3% or 4%. those percentage points

translate into the unemployment rate explains the whole difference of what this whole weakness in jobs is. the problem is the assets under 20 years are behaving pretty much the way they always have in every recovery in the post world war two time frame. >> can you prepare the market for those assets or incentivize for the building of those assets? >> i think they tried to do too much of it has been counterproductive. before i got into government, i used to do a lot of work for major corporations and capital investment projects. what we used to do with it the project managers where new projects were needed and finance people what estimate the average expected returns.

as a result of that, we quickly throughout projects that did not get the right return for a corporation. that moved into step to which was the big determinant. if you are expecting an average rate of return of 20%, it varies between -10 and + 50, that project was invariably shop. if we look at the cash flow american corporations and the proportion they choose to invest in long term in a liquid assets, that ratio is at the lowest

level since 1935. >> is that investment going abroad? is the issue when all our cities crisis and recovery we're dealing with not only globalism but a reaffirmation have investment pushed abroad? >> very little. investment has been doing well in american affiliates abroad but it has not accelerated to cannot readily take the orders of magnitude we are looking at in the united states and ascribe them to being shifted abroad. >> if i look at the unemployment, the spikes up we have seen, they would tend toward less educated individuals. how would they fit into incentivizing business to make sure those structures -- we've missed a lot of construction jobs. >> it not only construction

jobs which are very substantial , but it's all of the secondary and tertiary issues. when you bring the level of building down by half, it has an impact on the whole multipliers. it shows up not only in construction, but in a whole series of other industries whose general level had been brought down by the fact that construction costs impact in consumption and other investment has been so profitable for us. >> how you propose we jump-start this? >> the first thing you do is stop doing what we're doing and let the markets calm down. the endeavor to actually try to support markets is counterproductive.

when you have an unbalanced market, whether it's stocks, bonds, copper, zinc, whenever, the market will readjust one way or another. if you try to support it, you delay the adjustment process. it's instructive that one of the only areas in which we endeavor to support -- we have not endeavor to try to support prices or values in one way or another in the stock market. the stock market is the particular area of the economy that has been done trust -- which has been untouched and which has come back the most. and it is not an accident. we have to learn that leaving things alone and letting markets work is the way the system is supposed to function and the way it has and will. >> if we can tread delicately

and at not ask about the fed target rate, i was talking the other day about the asymmetric challenges any central bank faces. in your book, you say you did not received any phone calls from politicians or presidents looking for you to raise interest rates. it's a substantially asymmetric universe that any central bank works in. how do you fold the asymmetric realities into desire of inflation targeting? >> first of all, what i actually said is that in all of my years, i got bushels full of mail and i can't recall a single request from congress or any other political figure that said raise rates.

every single one of them. it wasn't even asymmetric, it was zero. that is still the case because the political system seeks the short term solution and the fending off of any semblance of pain. you cannot run a complex society in which the average age of assets is 25 years with everything being short term. there are occasions when the war -- when the wise thing to do is to let the markets work. the best example i can give is the actual experience we had and the resolution trust corporation. i was on the oversight board and had to sit in on the meetings. that't think we could do

job today. what they did was 800 savings and loans and failed. this was 20 or 30 years ago. all the assets delta air resolution trust corp. to get rid of. it was easy to get rid of mortgages and liquid assets, but then there was a large trust of assets, 13-hole golf courses, 40 story skyscrapers of which eight had been built. and we could see the erosion and maintenance costs of maintaining all the stuff eating away and needing taxpayer dollars going down the drain. they chose to bundle all of this stuff -- a billion dollars back then was a lot of money. they hit the market and

basically said we are going to sell them and we expect 50 cents on the dollar and we got less than 50 cents on the dollar. >> why can we do that now? >> because congress was up in arms back then. but one interesting thing happened -- all the people on wall street are looking at this process whereby these voucher funds were bought cheap and they were all of a sudden macon a ton of money. -- making a ton of money. the inventory of unsalable assets was cleaned out in a matter of months. that particular action probably saved american taxpayers a very large amount. >> could we do that today? >> i have no evidence of any political willingness on the

part of either party to move in that direction. >> you got away from monetary policy there. let's get back to central bank policy. there was an op-ed that talks about the task of central bankers being arduous. in the path forward for central bankers, do they need to say to other institutions that we are not going to do this and you are going to find the courage to do this? we need institutional courage. does the central bank's just have to say no to the task at hand? >> central banks were prohibited from doing certain types of things.

i would say there are certain things that ought to be done by governments, not by central banks. one thing i thought was very unfortunate was when the interventions of 2008 occurred, these once in 100 years of events that require that sort of action, the only vehicle available to act quickly was the fed's actual legal authority to end to anybody -- to lend to anybody under any condition. it was an amendment to the federal reserve act which was very rarely used. it was the only vehicle that would enable a quick response to occur. the federal reserve has the fiscal luncheon of the treasury and has accumulated a lot of

assets on its balance sheets. when i hoped would happen very quickly is that the treasury would take over those assets on to a treasuries -- treasury subsidiary. they did not because it would require appropriated funds which is ridiculous because it's one of the flicks and the budget accounting system -- one of the flukes in the budget accounting system. it does not require appropriated funds, but the same use of soft and resources by the treasury does. the only difference of whether the assets are held and the federal reserve or treasuries balance sheet is the fact of the incumbent procedure. the unwillingness of the treasury department to go up to the hill to get appropriations for that is what created a big

problem for the federal reserve. they were involved very obviously in fiscal actions which is not what the role of the central bank should be. >> you were criticized for not raising rates and jeffrey lacquer says you did get out in front with preemption. at the global central bank debate today about when we raise interest rates, what data, and he is a great student of data, what data should in the central bank study to know when to raise interest rates? >> there is necessity involved in the forecast. all central bank options -- the impact of monetary policy drags

out over time and you have to try to infer what is going on. the question of lowering rates in 2003 i think was the right thing and still think it is the right thing as an insurance against the type of deflationary forces we're looking at now. it but it never had any impact on the money supply and at zero impact on long-term rates and no effect whatsoever in retrospect that i can see. even a student and critic of the federal reserve, milton friedman, said the performance of the federal reserve from 1987 through 2005 was extraordinarily excellent. >> did it fuel the leverage that led to the housing boom? the housing boom comes from

low interest rates that -- it was low long-term interest rates. housing is a long-term asset and it bought mortgages are long term. it is not affected by overnight rates. what caused this extraordinary housing boom was the remarkable change that occurred after the fall of the berlin wall and all of these very large third world countries under one form of socialism or another, what they did was essentially decided looking at what happened to the soviet system, they switched and china became the most capitalist economy and the world and the extent of growth in china is a tribute to capitalism, if i may

put it that way, which is odd for a chinese communist government. what that was is essentially doing is creating a huge increase in income. the rate of increase in the developing world gdp after 1991 for word, especially from 2000 forward, that was a huge increase in the developed world gdp which got developed and they could not spend it. it was all savings that went into the marketplace. >> 75 basis points? >> far more than that. what is important to recognize is the housing boom is not an american phenomenon. we were somewhere in in the middle. there were 20 countries with big housing booms.

the question has nothing to do with the united states. >> i believe there is a job opening at the bank of england. jim o'neill is being considered to be the governor. would you accept the job if it was brought up now? >> i would ask the current governor, is a good friend an extraordinarily good central banker to stay in place. >> we have a few great questions submitted to us and i will try to squeeze one are two in year. movement on the risk curve are obvious as people search for yield and the potential for wealth destruction is real as buyers are not aware. does the bursting of the bond bubble at the potential to be broader than the 2008 implosion? >> it is extraordinarily difficult to get to something

that was worse than the impact of the market that followed september 15, 2008. bond prices cannot move like equity prices can move. the sizes of the capital gains cannot be equivalent in that respect. that's not the same. if you are going to look for the criteria of what kind of things were looking at, look at 1979 and 1980. >> this is the shabby secret of the welfare state -- it's a scheme for the confiscation of wealth and gold stands in the way of this process and stands as a protector property rights. if one grasps this, one of the difficulty understanding this date is and antagonism toward

the gold standard. the writer says you wrote these words 45 years ago. looking back over 45 years, could you give us your thoughts on that as they today. >> i thought was very perceptive myself. [laughter] >> it did ron paul like that question? what that was not submitted by ron paul. >> i had a very interesting conversation with ron paul when he was complaining at the hearing that the federal reserve should be going back on the gold standard and i said look, the american people but chosen to have a fiat standard because they want a welfare state. you cannot have the gold standard and welfare state at same time. yet to make the choice. we made a decision as a society that we will be dealing with the welfare state. i also told him that the loan premise of the central bank is to replicate the action the gold

standard used to do before world war one and i think the markets today are telling us something very important. namely that gold is a currency. it has to be a zero sum game, but gold is the only m-1 that does not require companies credit. there is no name associated with gold. gold it is acceptable for reasons in all of the years that i have watched it that i have never understood. what does that tell us about human nature about this battle that goes back to antiquity and has never changed? >> i have asked my wife that question.

chairman greenspan, thank you. this conversation will continue on bloomberg television in just a moment. >> the white house counsel of economics adviser says the european debt crisis could pose risks to the economy. he spoke about unemployment at the event held by bloomberg on wednesday. this is just under 30 minutes. >> thank you very much. i probably don't have to introduce my guest, but i will. he is probably one of the handful of most distinguished labor economist in america. he was in the clinton administration and taught at princeton and came back to washington and then came back to washington and again. a second claim to fame is he is a fabulous tennis player.

when he left the treasury, there was an open and bite when he joined -- we can to speculate as to when that 3 will be. but even more than that, he is really smart because he has played tennis for years with larry summers and is much more athletic than dr. summers and a better tennis player. as a student and pier, he never defeated larry summers in tennis which shows you how smart he is. >> when i was a student, i never lost to larry. >> let's start off talking about the economy. are we going through a prague spring or is this just a temporary lull after the first quarter? >> the first quarter was very

strong. we do not have much data for the second quarter. there is a tendency to overreact to the latest number. if you do it professional economists do, which is to sift through the data, i think the signs are still good. we are on a much better trajectory than we were on when i first came to the obama administration. when i left the first time, i said the economy was looking a lot better. first quarter job growth was well over 600,000. the numbers are very volatile and we will have some ups and downs. that is the nature of economic recoveries. but i think we are on a stronger path. >> we can rule out a double dip recession? >> i think the odds are significantly lower than they

were when i first joined the administration. there are lots of signs the private sector is feeling from a big recession. construction grew 19%, residential construction, that is four quarters in a row we have had residential construction increasing. we have had that since 2005. we have a lot of damage caused by the financial crisis and a lot of over building took place. a lot of it just needed to happen and we're headed in the right direction. a lot more needs to be done, but we can feel more confident going forward we are on a better path. >> has the housing market hit bottom and is slowly on its way up? >> we should look at the housing market regionally. it will be different in different parts of the country. there are signs we are

stabilizing. the price index was positive for the first time in several years. some parts of the country are going to see a strong rebound than others. we had a lot of access building. in the mid-90s, we did a forecast of what housing demand would be based on demographics and income growth. plot that against what is actually built and you see an enormous amount of extra billing and we have been working our way through that. that process should be coming to an end and in some parts of the country, you will see housing coming back more strongly. >> you spent a great deal of your life looking at the labor market and manufacturing jobs. the president keeps talking about manufacturing jobs gains as companies bring back or from overseas. but it tends to be mostly

anecdotal. do you have any data beyond anecdotes about manufacturing jobs returning? >> when you step back, manufacturing went through a set of problems that was really unique. we have been losing manufacturing jobs as a share of the economy for 50 years. we always stayed between 16,000,020 million jobs. that meant we would have a recession and manufacturing would come back and outside of that, we would have job growth. we fell out of that range and manufacturing plummeted. we lost 3.5 million jobs in manufacturing before the recession began from 2000-2007. another 2 million were lost in the recession. manufacturing was under stress

that it had not been in our history even of the rest of the economy was growing more strongly in terms of job creation. over the last 25 months, we have added 470,000 manufacturing jobs. of those have been particularly strong. 30% of the increase has been driven by autos. that andbroader than that's a good side. the cost of producing in the u.s., a lot of countries are gonna take a second look and say it's better off -- a lot of companies are going to take a second look and say it's better if we reach shore. >> in autos, that picture is brighter than it was but are you bullish about the prospects over the long run? can we really compete? >> i think we are competing and numbers are coming out today for auto sales.

the auto industry, when you step back and look at it, on those are key for a cyclical rebound. the fact that president did make the decision to rescue the auto companies from collapse and importantly, to send a lifeline to suppliers, one thing people do not often appreciate is the auto parts suppliers were failing at an alarming rate in 2008 and to of mine. there was a clever structure set up where lot of companies were given funds for a lifeline to give advances to the parts manufacturers. they got to decide who their key suppliers were. had that not been done, we would not be anywhere close to where

we are in autos. but summer, we had the tsunami an earthquake in japan which disrupted out of supplies -- disrupted auto supply chains. at american suppliers not been given a life line, the industry would not be where it is and the economy would not be where it is today. one striking statistic -- autos contributed half of gdp growth to less quarter. gdp growth was 2.2% and if you add up the contribution of auto output, it was 1.1%. autos are helping the economy and that is helping the world. >> is it realistic to look for or anticipates manufacturing job levels could return even to 2006 levels?

>> i don't want to put a particular year or quantity. >> you have pointed out that they lost 3 million before the recession began. i wonder if we could go to the pre 3 million lost level. >> i think they can make a significant contribution. if we look at the manufacturing sector and the deep hole we are in, the big jobs deficit that we have that started before the recession, the decline in manufacturing with a big contributor. we know parts of the economy outside of manufacturing has to grow but it can be a significant contributor. >> i traveled a bit with barack obama in 2008 and i heard him say frequently the middle class with getting the shaft under the bush economic policies, they

were the ones and rate -- wages were stagnant and income was down. yet there was a piece this morning which says under barack obama, under the last 2 1/2 years, real median income for people under 65 was down around $4,000 and for the wealthiest 1%, those republicans, real income was up 105,000. that is the polar opposite way the debate is going, but it looks like the middle-class has not done well in the last couple of years and the rich have done quite well. under obama. >> the middle class has not done well for the last 10 or 20 years. if you look at the stress the middle class has been under, that started long before the recession and the recession made it much worse.

we needed to end the recession. the first thing was to get the recovery going. allaw in the 1990's when parts of the american distribution group together. the economic growth is necessary if not sufficient. the prerequisite for helping the middle class -- the earnings growth tends to lag or send real earnings into decline when the economy is weak and starts to improve after the economy is improving. it's premature to judge how the middle-class has been doing.

they are doing quite a bit better because the economy has turned around. i think is going to take a while. before the recession, if you think about how the education -- that's one of the reasons the middle class has been under stress. that's not going to turn around overnight. >> why has the 1% done so well? >> there are lots of numbers on income. the official demonstration has quite a lag. one of the reasons people are doing better is because the financial sector is doing better. that has people who that -- that helps people who have financial

wealth and that helps, but we have seen a big rebound in equity markets and that has contributed to some of these statistics your siding. >> you have written about income inequality. apart from the effects has socially, does it matter if we have a growing robust society? >> absolutely. the arrows point in both directions. it helps -- >> we have had a decent economy prior to the recession and the income gap widened quite a bit? >> it did not grow quite as well as it did in the '90s. other factors have been causing inequality to rise. one of the points we tried to stress is the fact that so much

of our national income has shifted to the very top. in the long run, people tend to spend their wealth but it takes awhile for that to arrive. when you have the estate tax, people at the top of a stronger incentive to not spend their incumbent for several generations down line. one of the problems is week aggregate demand. one of the things that has led to our macro economic policy led to excess borrowing. our country does much better when that middle-class is doing well. >> if you have that as an economist, you can do two or three things that would alleviate and mitigate income

inequality, what would it be? >> we would need to do a better job with education, starting with k through 12, where secretary duncan has done a number of innovative things that leads to a race to the top. it also impose high school education, particularly community colleges. that's a secret weapon in the u.s.. >> community colleges are focused on the economy. their role is to help students get into jobs and they have a better thing her on the pulse of the economy than most ivy league schools where training students will go on to graduate school. that is one area where the president put a lot of emphasis in trying to make a transition

to tailor their curriculum to the types of jobs growing in those areas. >> i should point out that you have to harvard degrees, something you share in common with mitt romney. president obama said that means they are both snobs. >> i could not get a ph.d. without getting a master's degree first. >> >> that was a joke. what affect does it have on the federal regulation? >> it depends on how high they are and how they are structured.

there was a nice piece today pointed now our taxes are low compared to the rest of the world and if you look at a higher tax rates, you don't see lower employment rate in those countries. we have moderately higher rates on top income earners and much faster job growth. i think it's much more important to get the conditions right for businesses to prosper and workers to be well trained to provide the kinds of services and products the economy demands. >> if you look at the late nineties, the solid years, and you have a chronic deficit problem, why not get rid of all

bush tax cuts and address the deficit problem? why wouldn't we do well with those rates over the next five years? >> the president has made clear that he wants to maintain a middle-class tax cuts that have been put in place. he proposed a balanced approach which would raise the top two grades in america and make smart cuts in the budget that's away to have a stronger economy. >> let me ask you about the corporate tax rate how much lower could you make the

corporate tax rates? what would be the two or three major preferences you would address so that it is revenue neutral? >> having worked at treasury, i learned not to step too much on the assistance tax policy job. one thing that would be very helpful is to take the production tax credit which has a work -- which has morphed into a broader tax credit and focused on advanced manufacturing. that is what the president proposed. you have to scratch your head and say this doesn't make much

sense. they are knocked the types of industries where they could easily move offshore to tax havens. concentrating the relief on manufacturers who are more geographically mobile and sensitive to tax rates makes sense. >> you were here in the clinton administration, but hall has -- how does washington different today? i'm talking about the climate and the politics and the environment. >> that the good question and i will answer it in two ways. it feels very similar to when i was in the labor department. when you look at the job market, i was in the clinton administration and 1994 and 1995. it took longer back in 19903

that it did in the current recovery, yet people were worried about diminished expectations for the future. there were ups and downs, but we were on a better path. in this recovery and the past two recoveries, we are having very closely to the line from the early '90s. we are doing a lot better than in early 2000. it is important we stay on at higher kerf. i remember the bank at that time and it's magnified because of the changes in the industry because of new media outlets. one of the places we have seen job losses is newspapers.

we have -- every chapter had one box on data. in one chapter, we've got some information about the hottest fields and which are the least talk. newspapers were the least hot. i think the media is changing and now it is around the clock. i think it is a problem for the public because the data are bought tile and the nature of the economy is it's a very diverse and there is not one sector that tells you the whole story for the economy. even though we have very large samples and the unemployment rate has sampling variability, there is a margin of error to those and i think it is important to sift through the data and not overreact to the latest number and paint a

picture of how it is doing. >> we have some questions from our audience. why was the president so negative on it since and bowls? what's the way forward? >> i don't think the president was negative on simpson-bowles.. the president is trying to balance the spending reduction and wanted a broader base for taxes. that is exactly where the president is. if you look at the military cuts

compared to what the president agreed to, simpson bowls goes even further. i think the president has been influenced by that and i think the president's approach is balanced. there is a lot to be said for the president's approach. >> what warnings have you given the president about the situation in europe and the situation that poses currently to the u.s. economy? >> any good adviser will tell you not to repeat the advice you give to your boss. i won't say specifically what advice i have given but the developments in your pose some risks to the u.s. and world economy.

the situation had improved over the last few weeks, we have seen the rise in some interest rates in some countries, but it's still a lot better than last summer and it remains to be the case that countries in europe have the capacity to address the problems and i think it is important that they act as swiftly as they can to address them. the problems will only be worse the longer they the way implementation. >> you have been terrific, patient and forthcoming. let's close with an easy one. what will the unemployment rate be in october? [laughter] >> it is an easy one because i can tell you what our processes for making forecasts. >> we really prefer a number.

>> wheat and the treasury department and office of management and budget make forecasts twice a year. we will have a new forecast this summer. the last forecast we made was for the fourth quarter. we do not do it month by month. for the fourth quarter of 2012, it was 8.9%. we made that forecast when the unemployment rate was 9.1. when we released a forecast in january, the unemployment rate had come down to 8.5 at that time. we acknowledge our forecast was no longer relevant. i would recommend looking at the consensus of private sector forecasters or what the fed has been forecasting.

if you look at the median forecaster, that does it better and i would try to inform my forecast by -- but you will have to wait for our next official one. >> thank you very much. >> tonight, -- >> i don't regard this as just the biography of lyndon johnson. i want each book to examine a kind of political power in america and say this is a kind of political power, seeing what we can do in a time of great crisis and what can we do to get legislation moving? that's the way of examining power. i want to do this in full. i'm supposed to take 300 pages and i said let's examine this. >> the years of of lyndon

johnson -- a multi-year biography of the president. that's tonight at 8:00. look for our second hour on sunday, may 20. >> this past week, the congressional executive commission on china held an emergency hearing on the ongoing human rights abuses there and the case of the chinese activist who spoke by phone during the hearing. >> i am afraid of our family members' lives and have installed seven video cameras and even with an electric fence. those security officers in my house basically said we want to see what else he can do.

>> watched the entire hearing on line. it's archived and unsearchable. >> the former treasury secretary, lawrence summers, and chief economic adviser to ronald reagan, martin feldstein, discussed tax reform. they debate the capitals -- the capital gains tax -- capital gains tax. this is about one hour and 20 minutes. >> good morning. i'm bob rubin, and behalf of my colleagues, let me welcome you this morning to our program which will be a discussion entitled economic facts about taxes, rates, revenues, and

reform options. the project began about six years ago and brought together a distinctive group of policy experts, and practitioners. we do not endorse specific ideas but we organize serious discussions around issues critical to our economy and in that respect, we have events like we have today with academic and policy experts and practitioners. when we have papers, they are subject to rigorous peer review. we believe the objectives of economic policy should be growth and competitiveness, broad-based expansion of living standards and opportunities and economic security. we also believe they can be mutually reinforcing and we support market-based economics but equally it is vital to have

a strong government to perform those functions that markets will not perform. the hardship many americans have been experiencing and continue to experience requires a serious commitment by policy makers and hamilton project has had a number of discussions and events around short-term policy challenges. our primary focus continues to be long term economic policy. we believe our country is well positioned to transform the global economy and over the course of our long-term strengths, we believe in order to realize that potential, we need to put our fiscal situation of a sound basis and have strong investment in areas critical to our economy and we need reform in the areas so central to our economic success, including health care,

emigration, and tax reform. that takes us to today's program. there is widespread agreement that our tax system is badly flawed and badly in need of reform for the future of our economy. beyond that, the agreement breaks down. there are many different views as to the purposes of tax reform and the changes necessary to accomplish these purposes. our objective is to understand these views and a the various proposed tax reforms and criteria for evaluating tax reform. in that respect, let me make a few brief comments as framing observations with respect to the discussions to follow. number one, major changes in our tax structure and the level of taxation, for example, increased

revenue that increased confidence could promote growth , reduce inequality, and it contributes substantially to establishing a sound fiscal trajectory. that was my point about increase revenues contributed to that the reduction, with from four critical public investment. number two, there are vigorous debates on what purpose is tax reform should have, what the effects should be, and what level of taxation should be. number three, and the substantial tax reform will have major winners and major losers. that creates a difficult substance with respect to tax reform and very difficult politics. no. 4, any substantial tax reform will inevitably have multiple effects on our fiscal

position, on inequality, and growth. finally, as we all know, the post-election time of 2012 and the first few months of 2013 will pose fiscal issues of enormous importance. whether that leads to constructive action or the political system kicks those issues down the road remains to be seen. it is our view that tax reform at least has the potential for helping catalyze a constructive response. it could play an important role in that response. let me outline our program and introduce our panel members. this is a truly remarkable step of the individuals. remarkable maybe an overused word but it is applicable to the group we have today.

i will not go into their resumes because you have the materials. we will begin with the well received and eliminating paper, a dozen economic facts about tax policy. the paper will be presented by the policy director of the hamilton project and one of the nation's leading experts on the economics of tax policy. if you look at the extraordinary working group on the front page of the paper, it will give you a sense of the distinctive strength of the hamilton project in being able to bring together such an extraordinary group. then we will turn to our first round table this is a remarkable group for this discussion. the discussions will be martin feldstein from harvard

university, president emeritus of that national bureau of economic research and former chair of the council of economic advisers. and lawrence summers, charles w. eliot professor at harvard university, former secretary of treasury and former assistant to the president's for economic affairs. the moderator is the economics editor of the economist. i said i would not comment on the participants resonate -- resumes, but i would like to make a few comments. they are friends with whom i have had the opportunity to discuss economics with for many years and decades. both are excellent listeners, a challenging. but they are also exit -- excellent listeners to process what they year and are open to

changing their minds and give you recent conclusion of with strong grounding. they are exceedingly well suited to the reason discussion tax reform needs so badly but seldom gets. i have had the privilege to be on panels with power and size of a moderator, she frequently knows more about the subject at hand than the people discussing them. when i am on hand, she certainly knows more. the second round table is key principles for a successful reform effort. the discussion includes the former governor of the state of michigan and the president and chief executive officer of the national bureau of economic research and professor of economics at mit. john podesta, the chairman and

counselor of the center for american progress and the former chief of staff of the white house and the senior fellow from the brookings institution's and director of office of management and budget and vice president of the federal reserve board. the moderator is the director of hamilton projects and senior fellow at the brookings institution and a professor of environmental economics at mit and chief economist of this feat p a. i would like to make a couple of personal observations. john was a committed republican but worked effectively across the aisle with both parties. that's the spirit we are going to need both to accomplish tax reform and move forward on the issues of our country. i was in the clinton administration with john podesta and chief of staff is arguably the most difficult job other than president.

he was not standing chief of staff and has been a major force for serious policy i had the opportunity to serve with alice. she was she was always an effective and topple colleague and has long been a voice for what has arguably been our country's most fundamental economic policy change, and that is, reestablishing sound fiscal conditions. jim has and what is thought by many to be the most important job in the american economic profession. and he has accomplished the enormous challenge of successfully seceding -- succeeding a giant in professor martin feldstein, and succeeding a giant is never an easy task. and by the way, the president

of economic research been the most important job in the u.s.. marty was that and i estimate it was the most important and he said yes. [laughter] finally, michael greenstone at hamilton project. and he's also provided frequent tutoring for meat and many other members. he's done a remarkable job, as you can tell from this morning's program. today's program will give all of us the opportunity to listen to and engage with preeminent a thought leaders on the economic issues of our country. for developing the and the luttrell contract and bring in this project together, i would like to thank in particular michael greenstone, karen anderson the director of the oleson project, and adam livni. -- adam linney. i would also like to thank the

former assistant secretary to the tax policy at the treasury. and he has always to the work of the hamilton project, i thank the enormously talented, committed, and hard-working staff of the hellickson project, without which nothing that we do what happened. with that, adam, i turn the podium over to you. thank you very much. [applause] >> thank you for that warm introduction. since the last major tax reform since 1986, the tax court has become more complicated, less efficient, and increasingly viewed as less fair. advocates for tax reform would tell us that by broadening the tax base we can have a simpler system with lower rates. but increasingly, that is not all they tell us. some tax reform is an

opportunity to reinvigorate economic growth, unleash economic and activity, to create jobs, a way to boost revenues without raising rates and help solve our deficit problems. a way to do all those things of the same time. today, we want to provide a foundation for what tax reform should accomplish, but also to put a guard rail on that conversation, to keep it grounded in the essence of what tax reform realistically can accomplish. i've been drawing on the expertise of the many distinguished tax experts and its advisory council. i hope you have all picked up a copy on your way in a starting point is the observation -- on your way in. our starting point is the observation that it is more challenging than in previous

eras. and that is not just a statement about the political situation or the decisions we have to make by the end of this year. it is also a fact that we have to read long term economic issues relating post -- closely to tax policy. rising concerns about growth and competitiveness, and rising income inequality. any tax reform is likely to be judged at least in part on how it performs with those issues. the first issue -- if i can get to it. the daunting all look for the federal budget. the basic purpose of the tax system is to raise revenues to pay for governments services, and in that regard, the system comes up short. for instance, in 2013, the federal government is expected to spend about $400 per person, but to receive only $197 per

person in revenues. that comparison understates the challenge as an aging population and continued rises in health care costs will increase federal spending well above historical levels. it is difficult to envision a scenario in which revenues are not part of the solution to the deficit problems, and to that end, to broaden the role of the broader fiscal debate. it examines how various tax reform options affect revenues and contrasts the scale of popular budget options to the magnitude of our future deficits. a second long-term economic issue is that increasing economic business activity, the rise of more capable forces are on the world and other economic changes have contributed to

reduced economic opportunities for many americans and challenges at many businesses. one impact of this trend -- these trends is a stagnation in earnings. for many american workers are the past several decades concerns about competitiveness have encouraged greater scrutiny of how the rules, regulations, and tax provisions affecting or impede economic activity. and tax reform has widely been touted as an opportunity to boost economic growth. in the document, we summarize economic evidence regarding how the tax system distorts or impedes economic activities and how we can improve our economic prospects. finally, there's the issue of growing income inequality and its relation to the tax code. pre-tax incomes have risen by more than 250% since 1979. for households in the top 100 --

1% of this distribution. at the same time, middle and bottom have experienced much weaker growth. the very people who have received the biggest income gains have also seen the largest tax cuts. it is already quite clear that issues related to inequality will be paramount in discussions about the tax system. and to inform that debate, we provide evidence on how to reform options affect the progressivity of the tax schedule. the document provides the statistics on if you for areas. just to pique your interest, i highlight just two. nine different tax rates affect the employment and earnings of differ workers. -- a different workers.

a key consideration in tax reform is how much tax rates hold back the u.s. economy. how much lowering rates would spur economic gains, and whether those increases in income can help offset losses from lower rates. the figure in your text illustrates how a 10% cut in marginal rates would affect the labour supply and decision of a typical american family drawing on the evidence of 23 published studies. the evidence suggests that this family would increase the pretax earnings by $450 off the bases of about $70,000. it is an increase of about 0.1%. in short, the evidence suggest that type of tax cut has large effects on revenue, but relatively modern -- moderate the effects on labor supply.

this broadens the limits of what the base can form. we often hear 20%, 15%, even 9- 9-9. but those plans are sometimes light on details of how they affect revenues or how they change the tax burdens that all on different groups. we put together a cheat sheet that starts with the constraints of maintaining both current tax revenues and a current progressive tax structure. and from that starting point, then asks how low tax rates can go under alternative broaden proposals. tax rates are scheduled to rise about 40%. if you skip to the punch line, it is only through dramatic tax reforms, eliminating all tax expenditures, including those

for health insurance, retirement savings, owner occupied housing, capital gains and dividends, that one raychem lower even to 20%. -- someone rate can lower even to 20%. it illustrates how difficult it is to achieve the efficiencies in enhancing lower rates. if revenues fall, the tax code becomes progressive. i encourage you to look over the dozen faxed -- the doesn't? in future conversations. thank you and i look forward to future conversations. [applause]

>> figuring out a few technical issues. you should sit on the left here. this is the appropriate place to be. >> that is okay. >> welcome to this first panel. the subject of tax reform has been on the u.s. agenda since i started following u.s. economic data, which is now getting on to two decades. in listening to debates over the past decade of a flat tax,

wholesale reform, and the south for the 1986 tax reform, but it has got more complicated as politicians have added more pages to it and more deductions to it. it seems that the debate today is taking place in a whole new context. it is taking place in a wide deficit from a weak economy, widening in the disparities in the economy. not only is tax reform back on the agenda, but in a way that may result in action. this has an importance and urgency that cannot be exaggerated. we have two of extraordinarily well-placed individuals to discuss what sort of tax reform we should be doing. y'all know them. -- you all know them.

larry summers. a former student of and former boss of marty feldstein. [laughter] marty, let's start with you. what should be the priorities for tax reform today? tax reform has all kinds of good priorities. people talk about what will improve growth, competitiveness, raising revenue. many of these are at odds with each other. and depending on what your priorities are, you would put forward different kinds of print -- reform. can you lay out what should be the priorities? >> you began by saying that larry and i come at it from different perspectives, and that is probably not quite right. we come at it from different

political party affiliations, but larry and i have been talking about raising taxes for 30 years. i hope that comes out as we are talking about specific issues we've got a serious, cyclical problem now, but i think the tax codes that we put in place that i hope congress put in place next year, we have to be bought for the long term. there is, in a sense, conflict among them, but there are always trade offs. it is a question of picking things that do better at these different goals. i've been there are four basic goals one of them is to raise

some revenue. how much we raise will depend on how well congress does in limiting the growth of entitlements. that is not today's agenda. raising revenue can be done in ways that has good side effects or ways that have bad side effects. that brings us back to the discussion about tax expenditures. the second goal, in addition to raising revenue is reducing waste. one economist would call them efficiencies or dead weight losses. the tax system hurts productivity in a variety of ways by hurting savings and investment and by hurting labor. this is just a small part of that, but also affects the way in which people take their compensation.

everything from fringe benefits that have been excluded from taking taxable income to things that are less valuable to us, but on a net or tax bases are more attractive. and it also affects the kind of spending americans do because some types of spending our tax favored. the third thing is simplicity. you mentioned that people are just overwhelmed with the complexity of the tax law. it makes compliance more difficult and makes people feel that probably everybody else is getting a better deal than they are. everyone has figured out some deduction today, some credit to take, some ways of changing their behavior that lower their taxes. we need a simpler tax code. and finally, there is the important issue of fairness. that is more than just a question of productivity or tax

rates. it is also the tax base. fortunately, inflation is low now. ,ven at today's low inflation even when there are real losses. i think people like we feel that is unfair. i think there are a lot of ways about which income is defined for taxable for purposes, which add to the era of unfairness. correct in that order? >> i do not think of it that way. i will not say that we get revenue and it does not matter what fairness we get or we get fairness and it does not matter will -- what it does to revenue. you have to think about any kind of change in terms of what it will do for each of these four things. >> on the question of fairness,

do you think that in light of the fact that pretax income inequalities have widened so much, the goal of narrowing them should be a goal of tax reform? >> not particularly. i noticed in the background material that one of the things suggested was combating inequality. my feeling has been for a long time that our problem in the income distribution area is poverty. we should be concerned about combating poverty, not about combating inequality. if a couple makes $250,000, which is really not hard to do at the hamilton project or harvard university, that is not something, to me, that needs to be combated. >> larry, do you have a similar set of priorities? but overlapping.

-- >> overlapping. i would begin by saying that although it is not our subject today, whether we get this expansion to a sustained, reasonable growth rate, that is consistent with a 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 and the world if we do not achieve that. and therefore, maintaining the momentum and expanding the momentum of demand has to figure centrally in any economic policy discussion going forward and passed to have a very large affect on any thinking about timing and phasing in any set of reforms with respect to the tax system or with respect to entitlements. but that is not our primary subject today.

to take your objectives, you cannot rent them, but you can give some indications of their importance. i would agree with marty on the central importance of revenue raising. doug elmendorf, the director of the ceo, gave a very effective presentation at harvard 8 -- recently and after going through a lot of stuff he reduced it to othe following statement. in order to get to a stable debt to gdp ratio, not a balanced budget, but the relatively modest goal of a stable debt to gdp ratio, after making what he regarded as being at the edge of credible, optimistic assumptions about discretionary spending

cutting, and making extremely optimistic assumptions about the climate divans, his conclusion was that you need to your reduce all entitlement spending by about one-quarter or raise all revenue collection by 16 if you want to get to the goal. -- by 16 if you wanted to get to the goal -- by 1/6th if you want to get to the goal. i do not think it is as bad as that. i do not think we are going to reduce entitlement spending by anything like a quarter. and therefore, relative to the baseline -- therefore, i think it is a near certainty that we will need a significant increase in revenues. and it seems to me that any discussion of tax policy needs to start there. and it seems to me that to suggest that from current

baselines, 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 pubc discourse. there is room for debate about what the balance is between the quarter on spending and the sixth on tax increases, but the idea that we can be cutting taxes, which implies cutting entitlements by more than a quarter, i think is unlikely. here is where we have a

difference in orientation. i think we need to address the questions of progressivity. and we do need to address the questions of fairness in a central way. there has been a major change in the pre-tax income idistribution that has been generated in the last 25 years. roughly speaking, a generation ago, the top 1% by 10% of the income. today, the top 1% its 20% of the income. and if anything, that trend is accelerating. it seems to me that 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. for themargie's concern port, but that, to me, is not the only valid concern. it seems to me that something about the health of a society 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 ceo wages to average worker wages. and conservative thought in this area actually surprises me a bit. i would have thought april market view to take was to let

-- a pro-market you did was to let the market right out whatever distribution it does. not interfere with the workers of the market. and then the tax system, as it collects revenue, should be based on ability to pay in a way that raises the burdens on those who are getting most fortunate, given what is happening in the income distribution. the idea that you should be reducing the taxes on those who are most fortunate seems to me to be a quite surprising one. when marty talked about simplicity, he referred to issues of legitimacy. i think live -- 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 iris emblidge or maybe it is the double irish dutch sandwich are paying their

fair share of taxes. it comes to complicity verses complexity. i would come next to fairness. i would come third to questions of economic efficiency and neutrality. but here, i think i would put less emphasis on these questions right now in the united states that i would have over most of the last 20 or 30 years. in the next few years, our economy is going to be demand constraint rather than supply constraint. if the economy is demand constrained, increasing the willingness to work, if not everybody who wants a job can get one, it is not actually going to increase the total level of employment. moreover, whatever has been true in the past, in the current -- current world of 2% interest rates, it slightly strains

credulity to believe that excessive capital costs represents a major in addition to investments in the way that i suspect was true to an important degree at various points in the past. yes, we should level the playing field. 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 than in our current low cost complex. finally, simplicity. how can you be against simplicity? but i would caution that much of what has been said about base broadening and simplicity is itself an oversimplification. people always think of base broadening as being about reducing tax expenditures.

if you do not have a tax expenditure, you have a simpler form and the whole thing works better. in fact, much of base broadening is about eliminating exclusions from income that increased complexity. for example, the vast majority of base broadening proposals include the -- include the repeal of the provision that says if you sell your owner- occupied house, you do not have to pay capital gains taxes as long as you have a capital gain of less than $500,000. it may be a good portion or a bad one. i promise, if you repeal it and everyone who sells a house has to go back and look at what they paid for it, calculate all the improvements they put into it, and do the calculations, you are significantly increasing the complexity of the tax code. that is not an isolated example. i am in favor of various things that assure that all taxation is

compensated, that all income is compensated, club memberships, free martini lunches, all of it. we ought to go after all of that, but we should not kid ourselves that we will have a simpler tax code if we did. i am so that it to ideas that are part of tax reform proposals to convert deductions into credits, so that they can be claimed at the rate of mortgage interest. for example, 50 percent -- 15% for some, a 35% for others and 15% for others. they will use that instead of a standard deduction and it will find a calculation of their taxes more complicated. and i could proliferate these examples. it is just wrong to assert that base broadening and said litigation are objectives that

-- and simplification our objectives i go in tandem. more likely, base broadening is a complex of fire. my sense of the reality -- is a complexifier. my sense of the reality of the issue is that nearly everyone has some software or pays someone to do it with software. and in that context from -- context, it adds essentially no complexity. you put the information into the software and the software puts the number out. i do not believe that many of these traditional concepts of simplicity are exactly right. i do not believe that what -- that much of what is advocated is actually in the simplification. and i think that we would be better off recognizing simplification for an issue in the way that marty framed it

which is about creating a system that has more perceived fairness. and i think a system that has more perceived fairness, i do not find that implausible that ins -- that simply increasing payments to the poor will entirely satisfy the objectives 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 well. >> it is not clear that you agree on that much, but i do see where you both agree. you both put revenue-raising first. why is the debate as narrow as it is in the u.s.? one could say that a crude caricature of the u.s. system is that it basically just taxes a

narrow window of income. if revenue raising is so high on the agenda, shouldn't be tax reform debate be much more efficient than the one going on in washington now? but by consumption -- >> if by consumption in a value-added tax or something like it, the reason i do not like a value-added tax, if you had one, it would simply make it so much easier for congress not to deal with controls on spending. i think there is a consensus now that we have to do in addition to raising revenue, we have to slow the growth of various entitlements and look for other savings in the discretionary part of the budget.

if we could put 4% to 6% of gdp in a value-added tax, we would be alright. >> what do you think? >> we have not had it because conservatives like marty think it is a money machine for government and progressive think it is not the progressive spirit and we will -- is not that progressive. and we will only get it when progresses' decided is a money- making machine for government and work to have it. [laughter] i don't expect that day to come and feature prominently in the next debate. i think whether we get a value- added tax in the united states or not over the next 10 or 15 years will hinge on a question

that i do not think anyone should believe 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 moving forward? the truth is, it is not going to be possible to control public health care costs vastly more severely than private health care costs, because if you do, the public programs will not work, and it will not work when half the doctors opt out of medicare. the success in controlling public health care costs is ultimately will be hostage to the success in growing overall health-care costs. and given the interplay and 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 do not know how rapidly health care costs will grow over the next 10 to 15 years. if they continue to grow at rates that we've had and we continue to treat health care as -- to an important extend as public obligation, i suspect there will not be allowed to consumption and value-added taxation. if efforts to contain health- care costs are successful in keeping health care costs at rates growing only slightly greater than gdp, even with an aging society, then i suspect the debate will play out in these terms because there will not be a taste for consumption taxes to pay for broad new government initiatives. and i am uncertain as to what

our success will be has to contain health-care costs. >> larry is right, there is no way to beat certain about it. i think the issue comes down to how much middle and upper middle income people or the continuing rising upper middle class -- the upper middle class continue rising. it does not mean the government finance health care costs have to rise that much more rapidly. and the bowles-simpson struck me as a good one for government finance health care costs lowered by 1%. that means i would have to pay more out of pocket either from my insurance or for health care, or both of those are separate

issues from what we are discussing. >> absolutely, we could have been even longer discussion about health care reform. if health care costs are growing, then maybe the political environment for the value added tax changes. simplified.k to the when this tax expenditures and the other is capital. there is also the question of reduction of rates. >> let me say one more thing on the value-added tax that i do not think is contentious. it does not make any sense to have a value added tax that raises less than 2 or 3% of gdp. it just does not make any sense unless you're going to have 2% or 3% of gdp. we will not do it until and

unless there is a political consensus for a meeting that much revenue. and there is not any political consensus for raising that much revenue now. that is why i'm saying the value added tax is not an important part of art -- >> and then you could continue raising revenue. let's go to the current debate, and particularly taxation in the capital. many economists are saying zero taxation of capital will be pro- growth. and yet, we had an article in sunday's "new york times" that said this was full of loopholes. and then there is the taxation of capital gains for personal levels. first with corporate tax, how much your problem is the u.s. corporate tax and what needs to be done with it?

the corporate tax rate is higher than any other. there are a lot of special features that make the special corporate tax rate. what strikes me is that we economists do not have a clue about who will pay for the corporate tax. how much of that is borne by shareholders, how much of that is borne by capital more generally. we understand that in a world where capital can easily leave the corporate sector to go into other things, housing, and incorporated businesses, the rest of the world than the corporate tax is not borne by shareholders, or may not even be borne by -- it may be borne by

workers rather than by the capital owners. but the perception that is borne by corporations or by their owners makes it a very hard tax to give up. every country in the world has a corporate tax. what distinguishes our corporate tax from others is that we tax a very inefficient way. we tax worldwide in comes 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 do not. we now see that more and more multinational u.s. corporations earn profits through their producing and the rest of the

world, don't bring the profits back to the united states because of this extra tax that they would have to pay. and that is 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 oecd country does, that is, to have what is called a territorial tax system, which says you can bring the funds back to the u.s. paying a relatively small tax, 3% or 4%, as long as you pay your tax wherever you burn it in the rest of the world. that is what all other -- you have earned your income and the rest of the world. -- that you pay your tax where you earn it in the rest of the world. that is what all the other countries do. >> i would make three points. first, yes, the incidence of

corporate tax is complicated, but corporate executives seem very little in doubt about it. nobody ever comes and argues for a major cutting the payroll tax. but there are literally thousands of people employed in this city by corporations with the objective of reducing the tax rate on corporations. which suggests a fairly strong view on their part that burdens corporations and shareholders. i think over a reasonable run, that is a good approximate. it is not clear that our corporate tax system is very burdensome and all. if i consider advertising, which will build lybrand, which will pay off over time, -- will each

will build my brand, which will pay off over time. i spend a dollar and it only cost me 65 cents a share. 35 cents are shared with the government. whatever maximizes my profits, if there is no tax, will also maximize 65% of my profits. the same argument works with respect to research and development. and what about with respect to putting in place a new factory or a new building? in the last couple of years with respect to a new factory, we have let you write that a vast and often the first year. we do not do that going forward. we require you to appreciate it. there is a sense in which the government is sharing more of your profits than it is sharing of your costs. and that was a really big deal in the old days when the interest rate was high. but in the current world where

the interest rate is 2%, the fact that you have to defer your depreciation tax for five years really does not reduce very much its value at all. it is far from clear that the corporate tax is operating as a major deterrent to investment right now. the most vexing issues do involve, as marty said, the question of international allocation, offshore in come, all of that. there you have to decide what your philosophical approach is. we are probably caught in a bad middle right now. there are basically two approaches that the world can take. one is, you can basically give up. right now, you say that with a

lot of trouble and effort you can do investments abroad and not pay any taxes on them and it is not worth it to have -- not pay much taxes on them and it is not worth it because you're not paying taxes on your foreign income. the alternative view is that we ought to attempt to crack down on the allocation of income. we ought to raise questions about deferral. we ought to cooperate with other countries so we do not head toward a world where multinational in come is taxed at a very low rates because of their ability to pick one jurisdiction against another, given the distribution of that income. it seems to me that right now, the u.s. tax system is like a

library. when you are running a library, the single dumbest thing you can do is to let everyone think there will be amnesty on overdue books and then not actually ever have the amnesty. then you are sure that no books are ever going to come back. and they will always and not bring back the book waiting for the amnesty, and you never get the money. nobody in their right wind -- right mind would bring in money right now when they do not know what is going to happen in the next election and there might be some kind of repatriation. my hope thawould be that there a clarity of effort to collect and taxed as income rather than avoid this in come. but clarity in a different direction would be better than

the current place, which assures that the money will not be a drawback -- not be brought back and it does not ? it and generates all the complexity. >> you would have to persuade every other industrial system -- country to give up this territorial system and crack down on their companies. larry was very careful to say something about short run verses long run in terms of the corporate executive. yes, profits of corporations in 2012 will not depend on the corporate tax rate, pretax profits, and it is probably true in 2013. and therefore, it is not surprising that if i'm the ceo of a corporation i would like to see those profits taxed at a lower rate. the real issue is over the long

run. as economists, we do not know where that tax burden is going to fall. therefore, relying on the corporate tax is, to make my very strange way of raising revenue -- to meet, it very strange way of raising revenue. >> there is an issue that you have to think about, which i do not know what the percentage is -- i guess, something on the order of 4% -- 40% are shares that are owned by endowments in ways that there is no individual income tax paid. it is one thing to say you will eliminate the corporate tax, but the individual will be taxed anyway by capital gains. it is another thing to say the income is going to be held by the nebraska pension fund or the harvard endowment and there

is no individual taxation on that ever. and what actually feels like a corporation not paying taxes, ultimately, because there was so much more accumulation, profit is going to be higher and wages will be higher. and ultimately, cutting the tax will benefit workers. >> there is clearly a division here. move to the personal taxation of capital, capital gains and dividends, where one argument might be in 1986 they were equalized. what direction should capital gains and taxation at the personal level go? >> the question should be, do you want to? not just capital gains and dividends, but interest as well?

do you want to tax a return to savings. we have a mixed system. we say, you put your money into an ira and we give you a deduction for savings. you put your money into m. ross ira and you do not get a deduction. -- into a ross ira and you do not get a deduction. but we do not tax the income. we have a system that in my judgment, correctly doesn't tax the savings itself. i think there're two vintages of that. one is, pure fairness. i liked in allies' demand larry might like chocolate ice cream, -- i might like bonilla ice cream and larry might like chocolate ice cream, but we would both think it is very unfair if i had a higher tax rate on my flavor of ice cream. but it is similar to whether i

get my income today and whether i want to set it aside and david for the future or spend it. -- save it for the future or spend it. taxes for people who want to consume their income later, save now and consume it later, it taxes them at a higher rate than the fellow who wants to consume his income now. from a pure neutrality and fairness point of view -- >> you could say that the fellow who gets all of his income in dividends paid a lower tax rate at then the fellow gets his way to in tax revenue. save some of it, consume some of it now, the interest i get by postponing it to is just a

question of the timing of the spending of that income. just like the division of my income between vanilla and chocolate. the tax law would be neutral to that. >> it depends on what level you choose. and marty is point about the double taxation savings is a fair one. but it is not the only one you can imagine. imagine that you started the next facebook. in your garage you have some ideas and you get your friends to loan you some money and it makes an investment and you own one-third of this thing in your garage. the motive -- the moment you get the one-third it is not giving you in, because it's not really worth anything. at the end of it is worth $100 billion and you are worth $33

billion. many of us should feel that you should pay some taxes. but under the law, you make -- you pay no taxes. you might think that at some point you will want to diversify. you'll want to sell your facebook stop. but actually, if you are half confident -- competent, you will find ways to borrow money and you will spend every one of your $33 billion without incurring any tax liability. what happens if 60 years from now you diane give the money to your children? -- you die and give the money to your children? will they pay capital gains tax? answer: no, they will not. -- answer, no, they will not.

when you have a small percent of the people with the majority of the wealth, you have to factor in that discussion. i am not in favor of the idea that we should not have capital in come taxation for reasons that go to fairness. we cannot as a country figure out that a guy who runs a private equity company is earning income by working. in a country where we cannot figure out how to do that, if we cut the capital income tax rate to 0, there will be massive erosion of progress city. i have not bought into that agenda at all. >> conversely, i think you have to be realistic about these things with capital gains. in our current world where we

tax them only when they are realized, when we allow them to entirely as escape taxation if they are passed on through the states. -- throughout the states, the estimates are the revenue as the rising tax rate is about 30%. raising up from 3% to 40%, you actually wrote lose revenue. follows that raising the rate from 25% to 30%, you will impose a very large burden on people per dollar of revenue that you will generate for the government. i think a thoughtful approach to capital gains taxation does involve recognizing the realization behavior. and it does lead you to lower capital gains rates then

certainly the rates we imposed now. i am less seized with the case for reductions in dividend taxes, because you do not have issues like that realizations issue and because you do need to find ways of raising revenue. i do think that this whole area avoidance --osion, all of that -- does require more attention. and i'm told by those who advise people much wealthier than i that with good advice, the capacity to substantially avoid

an estate taxation is quite substantial. and reforms that address that issue would, it seems to me, the constructive, without requiring higher marginal rates. >> i talked about the fairness, but there is also an efficiency decisionting people's to consume now or in the future. that affects not just capital gains, but interest. it is worth distinguishing between the person who in the back rog start a new business and then has a capital gain -- back perata and then start a new business and then has a capital gain. we do that with ira's and 41 k's and roth ira's. the question is if they should have some kind of ceiling or if the people want to postpone the taxation be able to put it into

an ira l. or pay the tax and not put it into capital gains by putting it into a roth ira. i think there is an argument for fairness for allowing that. and then there is the separate issue that you should be able to take time off your koerner work to work on the -- off of your current work to work on taxation. that is what the -- is designed to do. >> one last thing we have not covered is the question of tax expenditures. from your initial remarks, larry, i'd saenz you did not assign a lot of priority to limiting tax expenditures. and the whole debate about whether to cap them or limit them or you give them credit,

what types of expenditures ought to be got rid of? but if you heard me that way, i misspoke. -- >> if you heard me that way, i misspoke. i suggested that i did not believe that substantial base broadening done in the likely ways would produce is substantially simpler tax code. i do believe it would be a substantially better tax code because it would be more fair. this is a place where marty and i would be in agreement. marty has put forward a variety of a pope -- of proposals. the obama administration has put forward some that are somewhat less ambitious than his that are directed at limiting the full use of all of the existing deductions. i think the premise of both efforts is a political strategy

that you are better off attacking deductions and exclusions as a group that you are trying to choose which ones to go after. i think that is a good thing to do. with respect to most of them, but not all of them, there is an oddity that if an affluent individual gives an -- gives a dollar to charity, they get a 35 cent deductions. it's a middle income person gives money to charity, they get a 15 cent deduction. why would they both favor the conversion of deductions into credits and then some limitation on the deductions? i would be very much in support of base broadening. . .

to have a bigger health insurance policy, but we don't write you a check for that, we let you excluded or deducted. it seems to me republicans and democrats ought to be able to come together around that. democrats say we want to raise revenue and republicans say they 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 a outlay side of the budget.

therefore, what we ought to do is get the extra revenue we need by cutting back on spending. there shouldn't be a political division between those who want to cut spending and those who want to raise revenue. it's no way we get the revenue -- if the way we get there is cutting expenditures. the way we should do it is say we should keep all of the current tax expenditures that we have, all of the deduction and exclusion of health insurance and you just can't be too greedy about it. you can't take too much tax saving from at. you add up what the savings would be from all the scheduled deductions, one line on the tax return, and your health insurance exclusion. if that exceeds a percentage of your adjusted gross income, that access is not allowed.

everyone gets to keep all of the current tax expenditure benefits but only up to a certain amount. i have done the calculations on that, putting the cap on that, producing roughly the same percentage extra tax everybody just gross income tax. it does not change the progressivity of the system that produces an enormous amount of revenue. you could start with a less binding cap and save it up over time. i would not put it in for the next year for the reasons larry said because of the concerns about the cyclical situation in the united states. >> let's go to questions. i know we have very little time left. if you could wait for the microphone.

>> being a retired individual, i'm very concerned about that. what i think is unfair is that long-term capital gains, whether it houses, stocks or farms are not indexed to inflation. i would be curious to hear some comments about that. >> i did say in my opening remarks that i thought one aspect of the unfairness of this would take into account inflation in the capital gains. that would not be hard to do if we continue to have the capital gains tax. >> i think you are right in principle on capitol games. a capital gains. there's more enthusiasm for recognizing the inflation rate -- inflation component than there tends to before recognizing the inflation component of interest deductions. on the same principle that one

should do a for interest deductions of want as our capital gains and i think there's reasonable case for doing it. it would be surprising if a country thought about doing this and decided not to have a moment we have 5, 6, 8% inflation and it will now gravitate to this issue at a moment when inflation is very low. in principle, you are right. >> next question -- >> i heard a lot of talk about base broadening and i've like to know if you favor taxing the harvard endowment as part of the base broadening effort? a nice tax expenditure there. >> i would not call that a tax expenditure. we have decided it's i taxable

entity, a question of the measurement of the taxable income but whether or not their income should be taxed. there's a broader question which is how we should treat nonprofits in this country. should we allow contributions to harvard or museums or sympathies -- there are two choices. we can do it the way we do in this country or we can do it the way europeans do and make the universities, museums, symphonies and so on -- i think the diversity and way we do in this country is preferable. >> a great many republican legislators signed up on pledges not to increase taxes and it

includes filling in loopholes in anything other than a revenue- neutral way. given what you said today, does that worry you, do you see our way of finessing it? >> some republicans i've talked to think that even know they signed up for that kind of agreement, if there is a tax reform that is pro-growth, which is tax-rate lowering, even though it raises revenue, they could go along with it. i hope once we get past the election and people move from their hardened positions both with respect to entitlements on the democratic side and with respect to tax revenue on the republican side, we will see an operational way of dealing with this problem. >> i am afraid we are out of time and i think that's an appropriate place to end. it seems to me we have had an

extraordinarily interesting discussion but one that shows from two different perspectives, there is a lot of agreement. hopefully the next panel will put some more concrete flashed on that in terms of what we get to and the next few months in terms of a concrete tax reform plan. thank you very much. >> on "newsmakers" the president of the afl-cio talks about the job numbers. labor's relationship with the president. that's "newsmakers" today at 6:00 eastern on c-span. >> tonight -- >> i don't regard this just as a biography of lyndon johnson. i want each but to examine a kind of political power in america. this is a kind of political

a presidentg what's can do in a time of great crisis and what does he do -- that's the way of examining power in a time of crisis. i want to do this in full. i just said let's examine this. >> the years of lyndon johnson -- a multi-volume biography of the president, tonight at 8:00. look for the second hour of conversation with the author on sunday, may 20. >> on thursday, the combating terrorism center released some of the documents retrieved during the osama bin laden rate last year. what they reveal about him and al qaeda -- from today's washington journal

. host: let's begin with some of the news of the day -- here is how it is it playing out. "evil on trial" and whining and 9/11 teens turned terror trial into a circus. from below the fold -- detainee's refuse to speak. details this morning on the front page of the "new york times." host: what is going on?

guest: they are going to use this as a forum to demonstrate american justice is biased away from muslims. we will see episodes of silence and episodes of unfortunately pretty eloquent arabic, talking to the muslim world about the problems of american justice. i think that is what we are seeing. in many ways, it is a self- imposed problem. we have insisted now for 15 years that these people are not prisoners of war and you get what you pay for. now we have given them a forum into the judicial system and they will take advantage of it either passively or aggressively. host: this is the trial the white house considered moving to new york city. that was quickly nixed even by chuck schumer and mayor

bloomberg. with that change anything? >> it would have made it worse. the military has an ability to keep order in the courtroom. there would have been a disruptive crowd inside and outside in new york. the safest thing for america would just be to declare them prisoners of war, put them in a stockade, and let us decide when the war is over, no trial. >> the next hearing will be in june and the trial of at least a year away. guest: yesterday, the possibility was raised -- one of them said don't think i will commit suicide purify if i die, it will be because the americans killed me before the trial could come about. there are very clever. these people know our system very well and their trade to fight not only on the battlefield but from the courtroom. host: bell leader of all of this

looks quite different today than when he was captured six months after 9/11. guest: he does indeed. he was a kind of cosmopolitan guy who was anything but what you would think that that's a good muslim. he was a traveler, a drinker and womanizer and seems to have found the straight and narrow in prison. >> we are talking about the new documents on osama bin laden. you can join our conversation or send us an e-mail. let's go to the documents. these are the writings of osama bin laden as found by western officials inside pakistan. he said this about president -- killing --

guest: they were afraid of obama at first because he made the speech in cairo and made a couple of other speeches that looked like we were changing our policies in the middle east. there were very eager to get rid of him. but until osama bin laden died, had backed off a little bit on that. words were not followed by deeds by the american government in terms of our policy in the middle east. host: how big was getting bin laden? >> it was big. there are 17 of 6000 and there are only for written by him. when you read those documents written by him, you come away with the idea there was no incompatibility between the seventh century religious zealot and etui for centuries ceo.

there are a small group of letters very consistent with his attitude since 1988. i it's very important we killed him and there is a very steady hand and intelligent hand at tiller. he established an order by which the jihad should proceed. first was to drive us out of the middle east and then go after israel and then go after that shia. he tried to maintain that in these documents at keep the focus on what's you call the head of infidelity. host: these are his words --

host: what is he referring to? guest: he is referring to what they call the caliphate, the one islamic entity around the world that would not have borders. just one group of muslims. has to start from somewhere, from some geographical position. they viewed afghanistan as the start of that, a base from which to build the caliphate. now they believe when we go and we said that we are going, that muslims under the islamists will take power again, which is very likely. did you have the land based. afghanistan is very important. it does not seem there is much realization within the american government in either party about how important getting beaten in afghanistan is. >> this is the most often asked question but i'm interested to be your perspective. what motivates anyone to go i suicide mission, including

those involved in the planes that the world trade center and do it for a some of the modern? what kind of control and charisma did he have that motivated these individuals to do what they did and those who remain in guantanamo? guest: first, he's an entirely unique individual. there are a lot of people who talk the talk but not everybody does walks the walk. bin laden gave up the life of a billionaire to fight alongside the mujahedin and was wounded in action. he is a man of extraordinary personal skills and it really lived the life he preached. it in the muslim world where poverty is so endemic, the idea and and give up the billionaires' lifestyle is an extraordinary thing. what causes them to drive planes into the world trade center?

if you believe president bush and president obama, it is a hate women and beer. is nonsense. what motivates these people as they believe they are fighting for their faith. whether we agree with that or not is largely irrelevant. they believe their faith is under attack by u.s. foreign- policy and the foreign-policy it of our allies, whether it support for the saudi police state and its presence of the arabian peninsula, the bombing of libya and yemen and support for the israelis, these are substantive issues and we have a situation where the united states government identifies the motivation of our enemy as if deborah. they hate women going to school. the enemy tells us repeatedly, we don't care how you live in north america. we care about getting you up our backyard. the drive of these people is the inspiration of but lawton the

person -- of osama bin laden the person and the idea that u.s. foreign policy is an attack on islamic civilization. host: 1 other excerpt from the words of osama bin laden. he said -- guest: he is very conscious about getting the truth out about himself. he resented the example of the book by -- i can't remember his last name, the biography. there was stuff in there about him being a pliable and and talented man. bin laden very often try to get out his own story villa

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